Marketplace Middle East - Blog
The power of capital

I was fortunate enough to have covered the fall of the Berlin Wall 18 years ago this month and the domino effect it had thereafter, not only on communism but also on investment.

The fall of the wall unleashed pent up demand for reconstruction, partly out of pure capitalist opportunity and partly out of obligation in a drive to rebuild East Germany after 50 years apart from their German brethren.

I still have a vivid picture in my mind of going to a paint factory during the first unified elections and watching a group of West German investors observing the decrepit state of affairs: dye on all the walls, machinery that did not work, workers themselves who decided not to show up until their future would be clarified. Or another stark example, where East German workers elected to paint the hammer and sickle on the last refrigerator they made under communist rule. Both factories were bought out and built up, actually expanding operations and adding jobs.

Far away in California workers on the Raytheon Aerospace production line were forced to re-train and adapt to realities of a peace dividend and re-tool for the future. They did so after a painful five-year transition. Arguably, the entire U.S. economy benefited from diversification and a lower dependence on defence.

As leaders met in Annapolis trying to rekindle the peace process, one cannot help but draw historical parallels, knowing that opportunity is waiting and money is sitting on the sidelines. Three years ago there was a whiff of peace in the air and it unleashed a wave of privatisation, with the Palestine Securities Exchange of 33 companies moving up 8-fold in a span of a year. After a change in power, that opportunity and optimism dried up.

So, let's not get overly excited just yet, but at the same time let’s size up the potential and some of the initiatives that are on the table. It is encouraging that Saudi Arabia wanted to be present in Annapolis. This reflects their greater say within the Gulf Cooperation Council and the Arab League, plus the opening up of their economy to investment. I also find encouragement in the Industry for Peace initiative running in parallel, driven by Turkey's Union of Chambers and Commodity Exchanges, to revive the Gaza Industrial Zone.

While Turkey’s path to European Union membership remains unclear, the role it can play as a secular non-Arab Muslim nation and an ally of Israel is unique and potentially promising. Less encouraging were the immediate protests we all witnessed as leaders met in the U.S. Palestinian President Mahmoud Abbas is struggling with Hamas for control of territory. Hamas, which currently controls Gaza, opposed the talks at the U.S. Naval Academy.

But there is a lot to be said about the power of capital. One wave leads to the next and carry with them momentum for change, company creation and, most importantly, job creation to a population that for too long has been isolated and unemployed.

Four out of ten Palestinian people live below the poverty line; 40 percent remain unemployed. Without peace, don’t expect those numbers to go down or the money which was in full force three years ago to come off the sidelines again.
The dollar’s slippery slope
It was an active few days on the ground where I was in place to chair panels for the annual “Leaders in Dubai Forum”.

The event gathers some big names including Nobel Laureates Kofi Annan and Muhammad Yunus, plus top corporate leaders from inside the region.

While the central theme of the business forum was “Networking for the Present, Ideas for the Future”, the sub-theme was eroding confidence in the U.S. economy and more importantly the fall of the U.S. dollar.

Concerns were shared equally from those representing the East and West. I chaired the CNN CEO Debate and conducted two one-on-one interviews over the two days; one with Forbes Editor-in-Chief Steve Forbes and the other with Sallie Krawcheck, CEO of Citi Global Wealth Management. When I used the analogy that the sub-prime market crisis in America feels similar to being in a lift (or elevator) wobbling between floors, she quickly replied, it is more like an elevator in free fall.

That is not a great confidence builder from someone who manages $1.8 trillion in assets. Her concern is shared by others on Wall Street, where the dollar has hit a record low against the Euro and oil continues to knock on the door of $100 a barrel.

While pessimism reigned about America’s woes, confidence remained buoyant for prospects within the region. The Middle East is growing 7 percent, but that is posing a real problem for loyal followers of the U.S. dollar. Most members of the Gulf Cooperation Council (GCC) have kept their currencies pegged to the U.S. currency. Last May, Kuwait left that relationship and is linked to a basket of currencies like the Euro, British pound and the Japanese yen. It looks like others, namely Saudi Arabia, Qatar and the United Arab Emirates may follow suit. The GCC will gather in Doha in early December to discuss financial matters – i.e. the dollar peg.

Historically, being linked to the dollar was a sure fire way to combat inflation – since their economies were basically in the hands of the U.S. Federal Reserve. But with a weak dollar, fast growth and a flood of money from oil revenues, GCC countries are importing record inflation. It is running at 9 percent in the U.A.E. and 14 percent in Qatar.

But there is yet another sub-theme playing out. Weakness in the dollar is leaving Washington open to criticism about global economic leadership. At the OPEC Heads of State meeting in Riyadh tensions spilled over about using the dollar as the benchmark currency to price oil.

Leading the charge against the dollar were Hugo Chavez of Venezuela and Mahmoud Ahmadinejad of Iran. Chavez boldly stated, “God willing, with the fall of the dollar, the deviant U.S. imperialism will fall as soon as possible, too."

Saudi Arabia, the summit host and the largest producer within OPEC resisted pressure to mention the dollar in the final communiqué. But if it does not find a floor soon, don’t expect long-term political allies to remain loyal followers of the once mighty U.S. currency.
MTV muscles in on Mideast music market
It took us a half hour to drive from Sheikh Zayed Road in the center of Dubai to the Al Quoz Industrial Area where you'll find the headquarters of Arab Media Group or AMG. Their three-letter acronym will soon have a very familiar three-letter brand running right along side it, MTV.

The one you know is celebrating the launch of its 60th channel this weekend, 53 of those outside the United States. The other, AMG, gets a chance overnight to play in the big leagues of global media, with its 10-year partnership agreement.

A great deal has been said already ahead of the launch, but let me boil it down into three headlines:

· MTV is ready to enter a market of 50 music channels in the region
· Their lead music channel will be built around Hip Hop
· Two-thirds of the population in the Arab World is under the age of 25, so there is room to grow

What is equally important but often overlooked in the excitement about edgy programming and the rush for advertising dollars or in this case dirhams is what I call the third ‘D’, dialogue.

MTV sees itself as something much more than music television. It is a platform for debate to discuss drugs, health issues and can be a great vehicle to exchange cultures, music and ideas. Bill Clinton and Tony Blair jumped into MTV town hall meetings for the same reason advertisers choose this platform, to reach youth in their space.

Bill Roedy, MTV’s global ambassador since 1989, not only gets excited about rap music emerging out of Saudi Arabia, but the potential to break down barriers. “ I think often there are stereotypical views about the Middle East,” Roedy says, “And this will give us a chance to reflect this great culture and what I think is going to be a great product.”

His counter-part in the venture, Abdullatif Al-Sayegh the 30-something CEO of AMG, did the interview with me in the traditional Arab tobb, against the MTV graffiti studio backdrop. He talks about listening to the Arab youth and engaging them through entertainment.

“Just go with the language they understand, with the language that they believe in, with the way that they can understand you better. I am sure we can fill a lot of gaps between the West and the Arab World if we do this.”

Sounds worthy, but possible. How about the backlash against the message coming from what is clearly a western brand? Not a problem. The Virgin music store we went into was filled with a mix of Arab and western expatriate youth, thumbing through the latest offerings and perusing New York Yankee baseball caps. Downstairs in the shopping mall, teenagers and their parents lined up at Starbucks to get their iced lattes and blended fruit drinks.

So the lesson we may all learn out of the latest launch of MTV, is that many on the streets of the Middle East may not agree with U.S. policies in the region, but they do trust American brands and what they stand for – openness, edginess, and can we say it? Being hip. See this week's show.
The New Silk Route
Beijing, November 8, 2007

My inbound overnight flight from Kuala Lumpur had me landing into Beijing at 0630. From one economy growing at a very respectable 5.5 percent to another growing at 11.5 percent, I could feel the energy of that expansion once you go through the airport exits.

In a jet-lagged haze you are subject to a rush of western style marketing by Citigroup, Starbucks and not to be outdone by China Mobile with the long arm of basketball giant/product endorser Yao Ming offering easy telephone connections. The other advertisement that catches my eye is CNPL, the China Post company which handles everything from simple post to giant container shipments into and outside this vast market of more than a billion people. CNPL is one player on what I like to call “The New Silk Route”.

The Silk Route conjures up romantic images of the past and historic trade links from the Levant countries to China. In 2007, we are witnessing a new era in trade and investment between the Middle East and China, the Gulf and Southeast Asia, China and Central Asia. While the languages and religions in many cases serve as barriers, they share a common DNA for business.

This was abundantly clear at the 11th annual Business Week CEO Forum in Beijing that I chaired. Fifteen percent of the 600 delegates attending were from the Middle East. They were led by some pretty sizable hitters such as Prince Turki Al-Faisal of Saudi Arabia, David Jackson of Istithmar, Sheikh Mohammed Al Khalifa of the Economic Development Board of Bahrain, Robert Johnson of Dubai Aerospace and Yousuf Alireza of Xenel Industries. (Read and watch the interview with Victor Chu, CEO of Chinese investment firm First Eastern Investment Group.)

Prince Turki provided an eloquent historical brief of the Silk Route which was vibrant from Baghdad to Beijing through World War II. The route was dormant for 60 years thereafter, but has come back to life looking like a superhighway.

Trade between the Middle East and China has surged ten-fold in the past five years and now tops $50 billion dollars. Foreign Direct Investment (FDI) is going in many different directions. Bahraini banks have opened up operations in China. Saudi Arabia is establishing refineries. Chinese factories are scattered throughout the Middle East. We visited one in Jordan for our CNN special from Beijing, a sprawling operation by Haier the white goods manufacturer.

But the Silk Route will likely cover much more territory in the 21st Century. In my view it is a giant arc which starts in North Africa loops through the GCC, into South and Central Asia, up to China and bends down into Southeast Asia. The recent investment by a Gulf consortium into a Malaysian special economic zone two months ago underscores my point. And don’t overlook the countries in between. Chinese Premier Wen Jiabao was in Turkmenistan this week vowing closer ties. This is energy diplomacy at its finest under the banner of East-East trade.

There a couple of subtle but important sub-plots in this re-construction effort. With a third of the world’s population on this Silk Route, it will be an important driver of global economic growth in the next quarter century. A second, and I believe very important, theme is the economic tide rising as a result of China and India lifting the boat of prosperity for different countries on the old Silk Route overlooked in the Soviet era. Premier Wen visited Uzbekistan as well this week, preceded by a deal signed before between China and Kazakhstan for a pipeline to deliver energy.

The final observation on this journey is the power of eager youth. After seeing their parents struggling for opportunity, they are eager to learn, eager to travel West and very likely benefit from the re-creation of something that is just beginning to re-appear on the world map, the Silk Route.
Unusual Reunion
November 2, 2007

Another week, another record surge in oil prices as the benchmark for a barrel of crude rose above $95.

The recent surge led me to the annual Oil & Money conference, a fixture in London for the last 27 years. Two things struck me at this year’s gathering. Number one, the gains of $3 to $7 a barrel a week surprise even the most seasoned observer. The other surprise was one of those unexpected encounters on the road as a journalist.

I call it the “perfect storm” in the energy markets, where a confluence of events hit at the same time to push prices higher and higher. Despite the U.S. Federal Reserve cutting interest rates again to counter a drop in demand and concerns over a credit crisis, other countries in the world continue to see explosive growth and therefore more demand for energy. Top of the list of fast-growing stars: India and China.

The other two fronts of the storm are a falling dollar (oil is priced in dollars) and continued tensions in the Middle East, linked to Iran and problems on the border between Iraq and Turkey. In sum, these factors combined make the job pretty simple for the current and former oil ministers, analysts and consultants who meet every year to make their predictions.

I sat down with the former Iraqi oil minister, Issam Al-Chalabi who had a lot to share about today’s market and the country he left behind shortly after the invasion by Saddam Hussein of Kuwait in August 1990. The ex-minister is a trained mechanical engineer educated at University College London and a respected consultant in the energy business.

His biggest concern now is not the rising tensions between Iraq and Turkey, but between Iran and the United States. Al-Chalabi seems to take the view that a military strike on Iranian facilities and retaliation by Tehran are a real possibility and could jeopardize the flow of oil out of the Arabian Gulf. In that case, he said in a matter of fact tone, “don’t be surprised if you get $150 or even $200 a barrel.” That is saying something. Don’t forget he lived through the eight-year war between Iraq and Iran.

What perhaps may be more interesting and to be continued over a coffee “another time” is what wasn’t said during our first encounter in 17 years. What was it like reporting to Saddam Hussein, when did you decide your time in government was up and where have you been since 1990?
John Defterios’ blog accompanies the weekly business program, Marketplace Middle East (MME) that is dedicated to the latest financial news from the Middle East. As MME anchor, John Defterios talks to the people in the know, finding out their opinions on the big business moves in the region, he provides his views via this weekly blog. We hope you will join the discussion around the issues raised.
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