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Wednesday, 20 January 2010

Building Brics: In depth news, commentary and analysis on the Bric economies - Brazil, Russia, India and China - from the Financial Times

A week long series of articles on BrazilRussiaIndiaChina

Al-Khorafi Claims Sarasin Provided ‘Negligent’ Advice

Rafed Al-Khorafi, chairman of the Kuwait-based A.M. Al-Khorafi business group, is seeking $225 million from Bank Sarasin & Cie., alleging in a lawsuit that the Rabobank Groep NV unit provided “negligent investment advice.”

Al-Khorafi and his family lost about $75 million after Bank Sarasin-Alpen (ME) Ltd. and its parent recommended they invest in complex financial products instead of capital-protected instruments as they requested, according to a claim filed Dec. 9 in the court of the Dubai International Financial Center and obtained by Bloomberg News. The claim seeks triple damages because of the alleged negligence.

Al-Khorafi said he borrowed funds to invest in capital- protected products that would provide income to meet interest payments on the loans and generate a surplus. Instead, the bank recommended interest-bearing products that didn’t guarantee the capital, according to the claim. All of the products were issued and distributed by Rabobank and Sarasin, Al-Khorafi alleged.

Dubai World Removes Istithmar CEO Jackson Amid Crisis

Dubai World replaced the chief executive officer of its private equity unit Istithmar World, the owner of luxury retailer Barneys New York, as the state- owned company seeks to renegotiate about $22 billion of debt.

David Jackson was replaced by Istithmar’s chief investment officer Andy Watson, who was appointed acting chief executive with immediate effect, Dubai World said today in an e-mailed statement. Watson is a former director at Barclays Capital.

“Today, Istithmar World is focused on the steady-state management of existing assets to maximize value rather than on private equity investment,” Dubai World’s Chief Restructuring Officer Aidan Birkett said in the statement.

Istithmar and Dubai World struggled last year on investments including Barneys and CityCenter, an $11 billion project in Las Vegas. Istithmar bought Barneys in 2007 for $942.3 million. Abu Dhabi, the wealthiest member of the United Arab Emirates, provided a $20 billion bailout last year for Dubai as the emirate struggled to meet payments on debt used to finance real-estate projects.

Dubai, the second-biggest of seven states that make up the U.A.E., and its state-owned companies borrowed at least $80 billion until 2008 to transform the emirate into a tourism and financial hub. The seizure of debt markets after the onset of the global credit crisis led to a 50 percent decline in property prices in the city and hampered the ability of Dubai-based companies to raise new loans to refinance maturing debt.END

Kuwait Parliament Approves Market Regulator Bill

Kuwait’s parliament gave preliminary approval to a capital markets bill allowing the creation of the emirate’s first stock market regulator.

The bill, passed unanimously in the first round of voting today, stipulates the establishment of an independent capital market authority comprised of five members who will be appointed by emiri decree, according to a copy of the bill.

“This bill will put the Kuwait Stock Exchange on a par with stock exchanges in developed countries,” Commerce Minister Ahmed al-Haroun told parliament before the vote. “It will be a push towards comprehensive financial and economic development in Kuwait.”

Kuwait Needs a Capital Markets Authority

Recently, I have seen a company in the Kuwait Stock Exchange that has been among the best performers for days. Then after a week or so of stellar performance, the stock’s momentum reversed and it become one of the worst performing stocks in the KSE. The company I’m talking about is called Nafais Holding which is listed in the Services industry. I was baffled by what had happened and tried to research the company. I couldn’t find anything useful, their website is useless, and since I don’t cover Kuwait and the Gulf at work, I left it at there.

Today, Al-Qabas newspaper had an article about some kind of insider trading, and how a person told his “Diwaniya” friends to buy the stock. Driven by buy-orders from two “Diwaniya” portfolio managers, the stock surged. Then, all of a sudden, new investors started to see their capital decline as the stock price plummeted and their “friend” had no explanation.

My question is where are the authorities? Why don’t they launch an investigation on what happened? Nafais is a company that is barely traded on regular days (volume is usually in the area of KD 10,000 per week). Out of no where, the volume shoots up to more than KD 3.5 million in one day! This type of activity should raise red flags. I guess these types of deals laminate our desparate need in Kuwait for a Capital Markets Authority. Until then, beware of getting caught in a “Diwaniya” insider-scheme!

Dubai eyes Oman unit stake sale: sources

Dubai Group, an investment vehicle owned by Dubai's ruler, is in informal talks to sell its stake in Oman National Investment Corp Holding (ONIC) ONIC.OM, three sources familiar with the matter said on Wednesday.


Dubai has been at the center of a debt storm since its flagship conglomerate, Dubai World DBWLD.UL, rocked global markets on November 25 with a request to creditors for a standstill agreement on $26 billion worth of debt.

Dubai Group, whose parent company Dubai Holding is undergoing a transformation to help it weather the crisis, is seeking to sell its 41-percent stake in the Omani business, the sources said.

In October, Dubai Group said it would reassess its investment strategy and that it was reviewing its options to sell its stake in Malaysia's Bank Islam. In December, it sold a 7 percent-stake in Egyptian investment bank EFG Hermes (HRHO.CA) for $120 million.

"We expected some rethinking on the strategy and on which assets to divest and this is proving to be consistent with that," said Ali Khan, managing director and head of brokerage at Arqaam Capital.

"We will likely continue to hear about other assets being divested that don't fit the group's strategy."

The talks with ONIC are in the preliminary stage and no written mandate has been agreed upon, the sources said.

Executives at Dubai Group and Onic declined to comment.

Dubai Holding bought a 35-percent stake in the Omani firm in 2007 from Shuaa Capital SHUA.DU through its investment arm, Dubai Financial, a unit of Dubai Group.

Based on the share price of 0.544 rials at 0745 GMT, a 41-percent stake in ONIC is worth slightly more than $90 million.

Dubai Holding has about $1.9 billion of debt maturing in the first half of 2010END

If you care about Dubai email this man and request that he enforce the law.

In my previous post I mentioned a real estate investor who was suing Damac in DIFC court. I think he has no shot because there is a good argument to be made that he has no standing in the DIFC. I’ll tell you what though, there is a group of people who sure as hell do have standing to sue in DIFC court: the Damas Shareholders.

There has been quite a lot of news out about Damas and the Abdullah Brothers. It seems that Damas is close to negotiating a standstill agreement with its creditors. An informal agreement has been in place for some time and the company and its creditors are working to formalize it. Damas needs to do this because its balance sheet was obliterated by a series of “unauthorized transactions” executed by its majority owners. These transactions consisted of the 51% owners withdrawing funds from the company and purchasing assets with them in their own name. This constitutes an outright theft from the shareholders.

There are three Abdullah Brothers. One of them was the CEO and on his resignation one of the other Abdullah brothers became the MD. Then the former CEO negotiated a repayment plan with the current MD, that is to say that the Abdullah brothers agreed with themselves how they would repay the money. What they came up with is this: the Abdullah brothers will pay the company back the missing $165 million over the next 18 months otherwise the brothers will hand over 35% of the company (worth around $70 million) back to the company. Of course this is not really possible because so many other Emiratis have (wisely) sold out of their Damas shares that the company would then be effectively owned by non-Emiratis in contravention of the UAE companies law. The plan was never put to a vote of shareholders, the Abdullah Brothers agreed it with themselves. Then there are articles about how they have now sold a hotel and that this is a good sign that the company is moving past all this unpleasantness.

There is an lengthy and quite good article in the National about how the Abdullah Brothers stand to lose control of the company founded by their grandfather as a single storefront long before Dubai became what it is today. There is much discussion of what a tragedy this is for the Brothers Abdullah and how difficult this must be for them, and I’m sure it is. They’re a close family living in a compound in Jumeriah and go on traditional fishing trips on the weekends. This has come as quite a blow to the family. Apparently the brothers have put one of their three yachts up for sale. This is a noble gesture to be sure but they have three, why not sell them all? Why are they even deciding which yachts to sell? Why is there not a receiver or liquidator hitting bids all over Dubai with the personal property of the Abdullah Brothers in order to pay back the shareholders who have been defrauded and lost nearly $200 million between them? Where are all the shareholders yachts?

The investing public are cautioned against being prejudicial. Public ownership of family companies is new to the region and this requires a period of adjustment. “The Damas case, and a number of recent cases involving regional families and businessmen, highlight some of the challenges that regional business leaders face as they tap capital markets, which demand a higher degree of transparency and accountability,” said Nasser Saidi, an economist and the executive director of the Hawkamah Institute for Corporate Governance. (from the article in the National.) How quaint. “some of the challenges.” Like not appropriating the money the shareholders gave you in return for equity in the company to your own personal account? Is that a challenge? I beg to differ, I think they knew perfectly well what they were doing.

Let me posit a hypothetical. Let’s say that instead of selling a stake to international investors the Brothers Abdullah sold $270 million worth of equity in their company to Sheikh Mohammed the Ruler of Dubai. What are the chances that they would then withdraw Sheikh Mohammed’s money and deposit it in their own accounts and invest it in Turkish shopping malls and London hospitals in their own name? The chance of that would be zero because if they robbed Sheikh Mohammed blind they would be in prison or worse. No, they know all about what it means to do right by your shareholders if those shareholders have the power to put you in prison. But the poor suckers who bought shares in the Damas IPO don’t have the power of Sheikh Mohammed, they have the DFSA to look after their interests. And what do the Brothers Abdullah think of the DFSA? Well, they’re there’s no independent DFSA inquiry, no legal action, they get to decide which yachts they sell, and walk around Dubai as if they did not steal $200 million from unsuspecting foreigners. What does it look like to you?

So what is the DFSA doing? According to the article and the DFSA website they are “closely monitoring the investigation at Damas to find ways to improve corporate governance, especially at family-owned companies that issue shares to the public.” They’re closely monitoring the investigation at Damas? The Damas investigation is trying to locate the missing funds and value the assets purchased with them, not determine whether the funds are missing. It is known and admitted that they are missing and that they were withdrawn by the Abdullah Brothers. So, the DFSA is looking to improve corporate governance especially at family owned companies that issue shares to the public. I have an idea. HOW ABOUT ENFORCING YOUR OWN LAWS AND BRINGING CHARGES AGAINST THE ABDULLAH BROTHERS!?!

Don’t get me wrong. I know the people at the DIFC and the DFSA. They’re not bad guys. I can even tell you why they appear to be doing nothing. The Abdullah Brothers are a powerful merchant family in Dubai. From the DIFC perspective the Abdullah brothers supported the DIFC by conducting their IPO in the center. Given the prominence of the Abdullah family in Dubai I am sure that the powers that be in the DIFC consider this a political issue. The DFSA has not a single Emirati in its senior ranks and therefore they view their decision as standing aloof from a “political” issue.

I cannot tell you how many times I have met with European technocrats in the Arab world who when you describe how some terrible thing is about to happen will say something along the lines of “well that’s a political issue” and then go on to say “I view my role here as providing technical expertise, I’m trying to stay above the politics.” In the Arab world whenever a person says “I try to stay above the politics” what he is really saying is “I intend to achieve nothing.” The Arab world is a world in which you cannot always rely on the law. As a result everything gets done on the basis of personal trust built up over time, on relationships, on triangulating interests, in short on politics. To say you are above the politics is to say you are not in the game at all. Dubai desperately needs the DFSA to be in the game. They created the DFSA for precisely this reason.

The best hope for Dubai now is some kind of standstill agreement from the banks that will allow it to conduct an orderly liquidation of its assets in order to repay the creditors and avoid a default. To do this the international investors need to have confidence that if push comes to shove their disputes will be adjudicated fairly in an environment in which foreigners will have equal protection with locals. To that end Sheikh Mohammed established a tribunal inside the DIFC to adjudicate any insolvency or other litigation between Dubai World and its creditors. The Damas scandal, by standing aside from a $200 million fraud is shaking the confidence of investors that they will get a fair shake for their $20 billion. Indeed, lenders are already giving up before the game even begins and seeking to offload their loans which will the be bought at a huge discount by vultures like the Nakheel Sukuk and drive a tougher bargain with Dubai which as with Nakheel can lead to disaster.

I have been inspired by Martin Luther King Day yesterday, enough cursing the darkness. Let’s light a candle. If you are an Emirati or you care about the success of Dubai in any way. If you want to see the country remain as a commercial hub and emerge more strongly from this crisis, If you have any interest in a positive outcome for Dubai I ask you to join me and tak action. There is no way for Dubai or the entire Arab world for that matter to move forward without confidence in the rule of law. I ask you to do more than read my blog and hope for the best.

Email the CEO of the DFSA, Paul Koster and ask him to not rely on the deal the Abdullah Brothers have made with themselves but to conduct an independent investigation and if the brothers Abdullah have in fact misappropriated corporate funds to bring charges against them in DIFC court. If not then at least someone other than the Abdullah Brothers will have looked into this whole thing. As readers of my blog there are only a few hundred of you but you are disproportionately influential. Let’s see if you can make a difference or at least get a response. According to the DFSA website you can reach Paul Koster at END

Oversupply of 150,000 houses in Dubai by 2011

Dubai’s real estate market will have an oversupply of 150,000 residential units by the end of 2011, Swiss bank UBS estimated in its latest research note.

The oversupply of housing and commercial properties is expected to be 40 to 50 percent within two years, the bank said on Tuesday, reiterating that real estate prices will drop a further 30 percent.

“We estimate total Dubai housing supply by the end of 2011 to be roughly 360,000 with oversupply potentially at 150,000 residential units,” said Saud Masud, the Middle East head of research.

Property prices in the city, which once led the regional construction, boom have dropped more than 50 percent since their 2008 peak.

Sale should put firm on road to recovery

Investing in a hotel at the height of the market and selling it near the bottom is not a move any investor would relish.

But in effect, this is what the Abdullah brothers, the founders and senior executives of the troubled retailer Damas International, have been forced to do.

On the plus side, by selling the Angsana Hotel and Suites, Damas shareholders will get back some of the money raised from the company’s initial public offering (IPO) in 2008 that was funnelled into this project.

Abdullahs sell tower to pay back Damas debt

The Abdullah family has sold one of its twin high-rise towers on Sheikh Zayed Road in Dubai to raise money to pay back part of the US$165 million (Dh606m) it owes shareholders of the jewellery giant Damas International for “unauthorised” investments.

The sale of the tower, to a private investor, marks the first efforts by family members to meet their debt payment schedule, which requires them to pay Dh200m by April this year. The unauthorised investments were made with company money.

The two 49-storey buildings were known as Angsana Hotel and Suites until late last year, when Damas Hotels cancelled its contract with Banyan Tree Hotel and Resorts. Banyan Tree said in a statement at the time that the building would be “converted to residential use” and sold.

The story of the Brics (Originally published 15th January, 2010)

On the desk of Jim O’Neill, chief economist for Goldman Sachs, stand four flimsy flags. They look out of place among the expensive computer terminals of the investment bank’s plush London office, like leftovers of a child’s geography homework or cheap mementos from backpacking trips to exotic parts of the world. But these flags hint at a more interesting story – of the latest way in which money and ideas are reshaping the world. The small scraps of fabric are pennants for big countries: Brazil, Russia, India and China. And almost a decade ago, O’Neill decided to start thinking of them as a group – which he gave the acronym Bric.

It was a simple mental prop. The bolder move was to predict – publicly, and in Goldman’s name – that by 2041 (later revised to 2039, then 2032) the Brics would overtake the six largest western economies in terms of economic might. The four flags would come to represent the pillars of the 21st-century economy.

At the time, many scoffed at this idea. The predictions turned conventional western wisdom on its head; and O’Neill hardly seemed an obvious champion of the concept. A large man with working-class Manchester roots, he does not exude the aura of any globetrotting elite. His office is decorated with splashes of cherry red memorabilia from Manchester United Football Club, and he still speaks with the thick, flattened vowels of his childhood. Indeed, when O’Neill coined the term Bric in 2001, he had never properly visited three of the four countries (the exception was China), and spoke none of their languages. Yet, notwithstanding those unlikely beginnings, in the past decade, Bric has become a near ubiquitous financial term, shaping how a generation of investors, financiers and policymakers view the emerging markets: companies ranging from Nissan to media group WPP have developed Brics business strategies; several dozen financial institutions now run Brics funds; business schools have launched Brics courses; and this April Phillips de Pury will be holding a Brics-themed auction. “The Brics concept … that O’Neill created … has become such a strong brand,” says Felipe Góes, adviser to the mayor of Rio de Janeiro, who is organising the first Brics think-tank.

As Emerging Markets Get Pricey, Frontier Zone Could Pick Up

It's been a tough ride for equities in far-flung frontier markets since their heyday in 2007, and even as global stocks shoot up, it's going to take time for money to come back to this asset class.

Traditionally seen as the riskiest areas within the emerging markets spectrum, frontier market stocks, as tracked by MSCI, have gained about 21% in the last year. The MSCI Emerging Markets measure, meanwhile, has more than doubled.

The numbers highlight the fact that even as investors look for access to the developing world, they haven't been willing to take on the extra risk tied to these fringe markets. That could change as money continues to flood into larger emerging markets, prompting fears of high valuations and talk of asset bubbles.

"Right now, there is still enough growth to be had in emerging markets, but as they get more and more overpriced, investors may start looking elsewhere," said Wasif Latif, an equity portfolio manager at USAA Investment Management.

Sabic Profit Surges as Plastic, Chemical Demand Rises

Saudi Basic Industries Corp., the world’s largest petrochemicals maker, said fourth-quarter profit surged more than expected as the global economic recovery lifted demand and prices for plastics and fertilizers.

Net income increased to 4.58 billion riyals ($1.22 billion), from about 310 million riyals a year earlier, Riyadh- based Sabic said today in a statement today. That beat the average estimate of seven analysts surveyed by Bloomberg for a 3.55 billion-riyal profit.

“The petrochemical and fertilizer pricing environment has shown an improvement in the fourth quarter of 2009,” Laurent- Patrick Gally, vice president of research at Shuaa Capital PSC, said before the announcement. He has a “buy” rating on the shares.

News from Dubai

So there has been a tidal wave of news out from Dubai. The most interesting thing to me is that Abu Dhabi has clarified that when it said it was bailing out Dubai with another $10 billion the night before the Nakheel Sukuk was due what it really meant was that it was just adding $5 billion to the $5 billion that had been lent by Abu Dhabi banks on the day that Dubai asked for a debt standstill and touched off a global selloff. I’m not sure what to make of this. It seems to me that this is kind of an important reversal but though Dubai debt has traded off today people are not thinking this represents a major change in policy for Abu Dhabi and the markets still seem to think that AB will be there when Dubai runs out of cash again in May.

Bourse Dubai announced that it will roll its debt another year. I’m not sure if this is mandatory on the banks or not. Bourse Dubai, as mentioned in an earlier post, borrowed the money near the peak of last cycle to buy shares of the London Stock Exchange and NASDAQ OMX both of which have been roughly cut in half. It’s not clear to me whether it is mandatory for the banks to roll the debt or not. It may not turn out to be a big deal anyway. A lot of the debt is held by UAE banks which are subject to political pressure and can lend money against the DFM state of Bourse Dubai which is more than enough to cover the loan.

To me the most interesting story is about a “VIP Investor” by the name of Lothar Hardt who is suing Damac, a Dubai real estate developer, for not actually building the real estate he bought off. Allegedly Mr. Hardt was duped into parting with almost $10 million by Damac to buy apartments that had not yet been built in developments that had not been registered on land that Damac did not own. Oh boy.

Personally I have no sympathy whatsoever for Mr. Hardt. Interestingly the non-existence of these non-registered developments on unowned land did not stop Mr. Hardt from signing agreements to rent them out to third parties so presumably he is also liable. I think it’s pretty likely that he has flipped more than one off plan apartment before. He knew the game and the game was million dollar game of musical chairs. You had to flip your non-existent, non-registered apartments built on land you did not own before the global liquidity music stopped. When the music stopped Mr. Hardt did not have a chair and now he also does not have his millions. I’m sure many investors are aware that the reasons you get better return in emerging markets is that the chances that your money vanishes altogether are much higher. Sorry big man. You pays your money you takes your chance.

There are a lot of people in Mr. Hardts position but most of them are taking it like a man. Mr. Hardt is taking it like an American and he is going to court, and this is where it gets interesting. Hardt has decided to sue in the DIFC rather than the UAE proper. Damac has a finance company registered in the DIFC and the DIFC has is a UK common law based jurisdiction as opposed to the Sharia based UAE. Clearly he hopes that he will get a better deal in this jurisdiction than he would in the UAE proper and if the DIFC courts agree to hear the case he almost certainly will. Clearly it would be a fiasco for Dubai if Mr. Hardt were to win this case as there would then be a deluge of similar cases but my guess is that the contracts he signed contain a lot of boilerplate disclaimers which would crush him in either jurisdiction. I think he is using the need for the DIFC to be seen as a reasonable jurisdiction for the Dubai World tribunal to get a quick settlement. The trouble for Mr. Hardt is that there is a pretty good case to be made that his contracts were all signed in the UAE proper with UAE based agents so my guess is that the DIFC courts will remand his case back to the UAE proper where he will get nothing and like it.

I’ll tell you what though, there is a group of people who sure as hell have standing to sue in the DIFC and so far have not. If you have been reading my blog you know who they are: the Damas Shareholders.

This is a partial post, I'll put the rest up when I finish it.

Middle East Plan to be Leader in Renewable Energy

Away from international headlines, Saudi Arabia, the world’s leading oil producer and exporter, took a significant step towards cleaner and greenery energy this week with the announcement that it would join IRENA, the International Renewable Energy Agency.

Although it is not the first Gulf nation to join the fledgling body, the addition of the Arab and energy world heavyweight is the clearest indicator yet that the Middle East is serious about committing petrodollars to bring to market cleaner, cheaper, more accessible and renewable sources of energy for the world.

Despite cynical suggestions that this is yet another way for Arab oil producers to expand their grip on global energy supplies, the case for renewables in this part of the world comes down to pure economics. Why burn finite hydrocarbon resources for yourself, after all, if you can save them and sell them? Opportunity cost at its best.

Banker's 12-month ordeal as 'hostage' of Qatari sheikh

With a new Porsche in the drive, a multi-million dollar salary and matching lifestyle, banker David Proctor had few regrets about moving to Qatar.

The Cambridge-educated financier – with 25 years’ experience in banking around the globe – was head-hunted to launch a new bank in the hugely wealthy Gulf state.

But now his friends say he has been held ‘hostage’ for almost a year in the country’s capital Doha, apparently caught in a power struggle within Qatar’s ruling elite over the emirate’s fast-growing financial sector.

Mr Proctor, 49, has been denied a visa to leave and is separated from his family in Singapore. He has seen his four-month-old son for just two weeks, when his wife Trinh visited last October.

The world’s top 280 energy projects

Here’s an exhaustive view of the energy projects that are likely to change the world according to Goldman Sachs.

In fact, the bank says there are 280 such projects currently under development or in the process of exploration. And here’s how they’re positioned

(Click to enlarge):

Now, it’s worth noting that Goldman thinks smaller companies invested in these assets could be prime acquisition targets in the future.

And, having screened the companies according to size, viability, materiality and growth, it identifies the following possible targets:

On this basis, Tullow, Soco, Cairn India, OPTI (not covered), Hess, Heritage, Nexen and St Mary Land & Exploration (not covered) screen attractively. Of the companies whose EVs are over US$25 bn, OGX and BG also screen attractively.

Markets Live addicts take note: there’s no mention of Gulf Keystone Petroleum or its Shaikan block.

In fact this is what they say in respect to Kurdistan generally (our emphasis):

We add eight new projects to the database with this publication to account for the new development contracts signed with IOCs in Iraq during the year, and to capture the start-up of two fields in Kurdistan.

The Iraqi fields increase the resource captured by the database by 30 bnbls although we believe that with perfect execution this figure could increase. We believe it is unlikely that the contractors will hit the production targets implied in their contracts. Although the scale of the resource is enormous, and could allow a ramp-up to the 9+ mnb/d level of incremental production implied by the production targets of the contracts, we believe that a number of problems exist that will likely limit ultimate production including, security, water supply, political risks and the structure of the contract which we believe encourages firms to bid to high production targets without substantial economic penalty in the event of failure.

We note, however, that the scale of the proposals is significant. A ramp-up of the proportions targeted, even assuming some shortfalls in delivery, will require thousands of wells to be drilled together with significant investment in new gathering, processing and power generation infrastructure.

And ultimately:

Economics suggest that capital is better employed elsewhere