Thursday, December 6, 2012

How China won the Iraq War

How China won the Iraq War

New fracking technology is going to make the US the number one oil producer by 2017
Baghdad Invest - Baghdad.
It seems the answer to the question “who won the Iraq war?” is – China. India might also be deemed an acceptable answer. But China looks like the real winner of the Iraq war. How come? Because if the point of that war was oil, as many critics have asserted, then China looks like coming away with the lion’s share of that oil – and without having to fire a shot.
According to the International Energy Agency, Iraq has loads of undiscovered oil, and unlike other countries in the region has opened up exploration to foreigners, many of them from China. Not only is the oil plentiful in Iraq, it’s also cheap to get at – 15 times cheaper than extracting Russian oil, 30 times cheaper than Canadian Oil sands.

In the view of the IEA, Iraq is going to become the number two oil exporter over the next couple of decades. And 90% of those exports are going to go to Asia – mostly China, then India.
Indeed much of the oil in the Middle East seems destined for Asian markets in the coming decades, setting up an interesting three way power relationship between Baghdad, Beijing and Delhi. That has profound geopolitical implications, according to the Chief economist at the IEA, Dr Fatih Birol, who gave a fascinating presentation of this year’s World Energy Outlook to the Institute of International and European Affairs in Dublin last week. Trade and Defence policies have a habit of closely tracking energy policy.
So what about the Americans, who did most of the fighting in Iraq? It seems they are headed for virtual energy self sufficiency – thanks to fracking. The controversial new extraction technology is going to make the USA the number one oil producer by 2017, according to the IEA. It may even start exporting oil.
The same fracking technology is also unleashing vast reserves of gas from shale deposits in the US, so much so that it may overhaul Russia in gas production sometime in the next decade.
But already fracking has had a major impact on the American – and world – energy scene. Firstly the spectacular rise of shale gas has led to massive price drops for gas users in the USA. So much so that electricity producers there have converted power stations from coal burning to gas burning to such an extent that two things have happened – over the past five years, the IEA says the US has seen the biggest drop in CO2 emissions of any country in the world – pretty amazing for a country with no climate change policy. Secondly, the price of coal has fallen to such an extent that Europeans have started importing cheap American coal to fire their own power stations. Europe has seen the second highest growth in coal imports in the world after boomtime China.
There has been one significant policy driver in the US which is also impacting on the global energy scene, and that is the CAFÉ fuel efficiency standards the Obama administration has gotten through the legislative mill. This will lead to a big average improvement in fuel consumption of the US vehicle fleet, reducing pollution and making their increasing fuel reserves last longer.
Up until recently, the Middle East region was exporting oil to both the East and the West on a 50/50 basis, but the IEA sees this shifting to a 90/10 split in favour of the East.
Meanwhile, the Chinese have become more concerned with energy import dependence, and are increasingly turning to alternative sources of energy and energy efficiency. Such is the vast scale of the Chinese market that, according to Dr Birol, when China decided which technology it will adopt, it will become the global standard because the scale effect will mean prices for that technology will plummet.
China, India and Europe are increasingly becoming dependent on imported energy: Japan has already reached 100% dependence on imports. Only North America is heading in the opposite direction, and moving towards self sufficiency.
The gas revolution – led by the US, Canada and Australia – is bad news for traditional gas producers like Russia and Algeria, who export to Europe in particular. Europeans are paying five times more for their gas than Americans (the Japanese pay eight times more!), largely because the contracts link gas prices to the price of oil. But the fracking revolution has decoupled those prices in the US. This price gap has been a present to European governments from the US , who now have some leverage to negotiate prices down. Which is, of course, bad news for the Russians and Algerians.
Not only will this major energy shift have implications for diplomatic and military relations between different regions of the world, they will also have big economic implications, especially for energy intensive industry.
The IEA estimates EU electricity prices will be 50% higher than US electricity, and three times higher than Chinese prices.
Why? For three reasons - firstly natural gas is more expensive. Secondly, Europe has significant subsidies for renewable energy sources like wind power. And thirdly, EU states have carbon taxes. The subsidies for renewable energy may be justified in building the critical mass needed to shift more production to this sustainable sector, and the Carbon Tax is driving technological change towards more climate friendly energy consumption patterns. But they do add to costs for energy intensive businesses in Europe, which may find themselves disadvantaged in their home market.
Indeed the high cost of energy was specifically mentioned by German chemical giant BASF and Bayer in recent decisions to increase investment in the low cost USA last month.
The IEA has taken a special look in this year’s report at Energy Efficiency, treating it as a fuel source in its own right. This is particularly important for European Countries like Ireland, which are very dependent on imports (and Ireland is one of the most dependent in the EU). The EU has a policy aimed at achieving a 20% improvement in energy efficiency by 2020. This involves all sorts of things, from low energy lightbulbs and electrical appliances to the virtual rewiring of the European electricity grid. But the promised gains are immense – a 20% improvement in efficiency would, according the European Commission, save the equivalent output of 1,000 coal fired power stations or half a million wind turbines. In cash terms, the annual saving is equivalent to the GDP of Portugal.
Ireland is pushing ahead with renewable energy investments, mainly in windpower. The Government is also trying to ramp up retro-fitting of Ireland’s housing stock to make it more energy efficient. Energy Minster Pat Rabbitte says the plan is to phase out direct grants for things like external insulation and more efficient gas boilers. Instead the Government and industry are working on a pay-as-you-save scheme, with the power utilities funding efficiency measures while consumers pay off the costs over the long term through savings in their monthly bills.
But according to the IEA, Europe’s ambitious policies only unleash about one third of the potential that energy efficiency has to offer. If the big energy using regions of the world went all out for efficiency by simply removing the barriers to using economically viable efficiency measures, energy demand would start to fall from the end of this decade. And it says the savings could push economic growth. The IEA thinks a $12 trillion investment in efficiency technologies would produce an $18 billion boost to GDP out to 2035. The biggest gainers in terms of economic growth would be India, China, The US and Europe.
And it would lead to cleaner air and might – just might – help to keep global warming within tolerable limits.

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Baghdad Stock Broker

Shwan Taha is chairman and sole owner of Rabee Securities, a brokerage that handles 80 percent of stock trades by foreign investors on the Iraq Stock Exchange.
Baghdad Invest - Baghdad.

It was exceptionally cold in Sulaymaniyah, a city in northern Iraq's Kurdish region, Shwan Taha was sitting in the airport lounge with a bag of gifts, waiting to get back to his wife and children at home in Istanbul.
Just before boarding, he got a call on his mobile phone from Rabee Securities, the Baghdad-based brokerage he owns, Bloomberg Markets magazine reports in its December issue. The manager was on the line to report that a car bomb had exploded next door at the government anti-corruption agency.
Taha hung up. Fortunately, the last trading day of the year had been two days earlier, so none of Rabee’s 16 employees were in the office. He tapped out an e-mail to Rabee’s clients that said in part:

“All client information is safe in multiple locations inside and outside Iraq. Praying for a peaceful New Year.”

Recalling his firm’s brush with danger six months later, Taha says such incidents are a hazard of doing business -- and making money -- in one of the world’s most dangerous frontier markets.

“I’ve always told people the major risk of running Rabee is, one day it may blow up, not Lehman style but physically,” Taha says, spreading both arms to suggest an explosion. “What can you do?”

Biggest Brokerage

Taha, who’s 6 foot 2 inches (1.88 meters) tall and has dark curly hair, is sitting in his office in Istanbul, where he spends a third of his time. The 43-year-old smiles and points to his iPhone case emblazoned with a morale-boosting exhortation made famous by a World War II-era poster in the U.K.:

“Keep calm and carry on.”

That’s what Taha has had to do for years as chairman and sole owner of the biggest stock brokerage tailored to foreign investors in postwar Iraq. Born in Baghdad to Kurdish parents and raised in the city, he bought Rabee for a small, undisclosed sum in 1998 to handle his personal trades in Iraqi stocks.

It now handles about 80 percent of all share transactions by foreigners on the Iraq Stock Exchange (ISX), says Taha, whose selling point to his clients is that he’s an Iraqi with a decade of experience working at different times for investors Mark Mobius and George Soros. Other Baghdad brokers deal mostly with Iraqi clients.

‘Smart Money’

“Rabee stands out from all Iraqi brokers because Shwan understands how things work with Western investors,” says Geoffrey Batt, a partner at New York-based Euphrates Advisors LLC, an Iraq-focused hedge fund with about $27 million under management.

Taha estimates Rabee has funneled about $200 million in investments through the ISX since 2008, when the brokerage began attracting non-Iraqi investors. A broker in Baghdad would typically earn a 2 percent commission on a two-way trade.

“It was not easy to start with,” Taha says. “People got scared just hearing the word Iraq. Now, we see more and more smart money coming.”

Taha is on the verge of his biggest deal ever. Along with HSBC and Morgan Stanley, Rabee is managing the initial public offering of Asiacell Communications PJSC, Iraq’s first mobile phone service provider and one of its largest companies.

Asiacell had about 10 million customers and $1.8 billion in revenue in 2011. According to two people with direct knowledge of the IPO, the share launch of up to $1 billion could happen as early as the end of this year and would value Asiacell at about $4 billion, doubling the Baghdad exchange’s total market capitalization, which was $4 billion as of June 30.

Economic Potential

“Asiacell’s IPO will be a milestone for Iraq and its believers,” says Henrik Kahm, investment analyst at Stockholm- based Fund Management Group, which operates an Iraq fund of about $20 million.

Taha became a believer earlier than most. From 1997 to 2008, he worked as a money manager in the Middle East, first for Mobius’s Templeton Emerging Market Group and then for Soros’s Quantum hedge fund. He says he was particularly struck by Iraq’s economic potential just ahead of the global credit crunch in 2008, when he noticed that Iraqi shares were mostly trading at about half their book value while stock markets across the region were booming.

Taha figured Iraq had nowhere to go but up after the devastation wrought over two decades by the Iran-Iraq War, the Gulf War and the Iraq war.

Hitting Bottom

He timed his entry well. Since hitting bottom at $13.6 billion in 2003, the year U.S.-U.K. coalition forces invaded Iraq, gross domestic product has soared. It grew about 10 percent, to $108.4 billion, last year and is expected to expand even faster in the three years through 2014, according to data compiled by the International Monetary Fund and the Washington- based Brookings Institution.

One reason for optimism is the relative decline in sectarian violence, which fell to four civilian deaths a day last year compared with 95 a day in 2006, according to the Brookings Institution.

Oil production, Iraq’s main industry, reached 2.6 million barrels a day in 2011, making Iraq the world’s ninth-largest producer, according to the International Energy Agency.

In 2003, it had collapsed to 1.3 million barrels a day, less than half of its peak production of 2.9 million barrels per day in 1989, according to the U.S. Energy Information Administration.

Understandable Caution

On the strength of rising production, Prime Minister Nouri al-Maliki plans to double the government’s $100.5 billion 2012 budget by the end of 2016 and spend $9.8 billion on roads, bridges and housing, according to Construction and Housing Minister Mohammad Saheb al-Darraji.

While Taha’s small corner of the economy has also grown -- trading by foreign investors in Iraqi equities tripled to $147 million in 2011 from a year earlier, according to the ISX -- many big investors remain wary.

New York-based Black Rock, the world’s largest asset manager, invested just 3.4 percent of its Frontier Investment Trust, or about $4 million, in Iraq, according to a Feb. 29 fact sheet.

Such caution is understandable. The Baghdad exchange is 1/16 the size of the market capitalization of Istanbul’s benchmark ISE National 100 Index. The economy of the United Arab Emirates, with a population of 5.1 million compared with Iraq’s 33 million, is three times larger than Iraq’s.

What’s more, Iraq sits in the middle of a region wracked by instability.

Beyond Bombs

To the east, Iran is pursuing a nuclear development program that Israel, among other countries, says could lead to outside intervention, if not war. To the west, a civil war flares in Syria, home to more than 750,000 Iraqi refugees, according to the United Nations High Commissioner for Refugees.

Iraq is further hobbled by an underdeveloped legal system and overdependence on oil, says Emma Sky, a visiting professor in the War Studies Department at King's College London and a former adviser to the U.S. military in Iraq.

Taha says he’s been able to see beyond the image of a bloodied and bombed Iraq. The carefree Baghdad of his childhood as the son of a prominent doctor bears little resemblance to the shellshocked capital of today.

Skyrocketing oil prices in the 1970s made many Iraqis rich, and he didn’t feel the sting of war until the mid-1980s, when he was a teenager and the conflict with Iran was escalating.

Wrong Turn

One day he took a wrong turn into an unfamiliar neighborhood and wound up driving down a street eerily decorated in black banners signifying mourning.

“There was one house with four banners,” Taha says. He recalls turning down the blaring car radio out of respect. “These things you don’t recover from,” he says. “War forces you to grow up. You are not surprised by things any more, death or whatever. It happens.”

After high school, Taha went to Case Western Reserve University in Cleveland in 1986 to study biomedical engineering.

As graduation approached in 1990, he was getting ready to go home when Saddam Hussain invaded Kuwait. The United Nations slapped sanctions on Iraq. The economy started to shatter. Taha got a call from his father telling him to stay in the U.S. It wasn’t easy. To earn a living, he worked as a waiter at La Dolce Vita Bistro in Cleveland.

Gradually, Taha’s fortunes took a turn for the better in the early 1990s. With money borrowed from family friends, he enrolled in a master’s program in business administration at George Washington University.

Lacking Pretense

He also turned to the Internet, which many people hadn’t even heard of then. He created, a now-defunct website that gathered information about privatization in the Middle East and North Africa.

The potential he saw led him into finance. His own career began with a distinct lack of pretense. The office he opened for Templeton in Dubai in 1997 was in an apartment above a children’s store called Mummy & Me.

“Some brokers, after seeing my address, called up Templeton to see if I was for real,” he says.

In 2006, he went to work for Soros, co-managing a hedge fund out of Istanbul. While he was on vacation the following year, a small jet he was traveling in made an emergency landing and had to be rescued by the Greek coast guard.

“I felt my life could go away any minute,” Taha says. “If I want to do something,” he remembers thinking, “I better start now.”

Going Home

He resigned and returned to Baghdad to transform Rabee from a personal investment vehicle into what it is today.

Someday, Taha says, he may move his Turkish wife, Ipek Tem Ceha, a businesswoman and former TV journalist; their two daughters, 9 and 10; and a 4-year-old son back to the city of his childhood. Not now.

“It’s not because of the bombs that I wouldn’t want my kids to live there; it’s the mentality,” he says. “There’s one thing that takes a long time and real effort to repair: the hate brought by the war, between Shiite and Sunni, Kurds and others, rich and poor, you name it.”

In the meantime, he will do what he’s always done: keep calm and carry on.

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Iraq Investment Concerns

Baghdad Invest - Baghdad.

Iraq investment concerns remain as trade fair ends.
BAGHDAD: Nuri al-Maliki may have trumpeted Iraq last week as the top destination for investment in the region, but experts warn that myriad problems keep it from being a good choice for all but the most adventurous.

Excessive red tape, rampant corruption, an unreliable judicial system and still-inadequate security, as well as a poorly trained workforce and a state-dominated economy all continue to plague Iraq, which completed its biggest trade fair in 20 years last week to much domestic acclaim.

The various difficulties of doing business in Iraq cast doubt on efforts to raise $1 trillion (788 billion euros) in investment income over the coming decade that officials say is needed to rebuild its battered economy.

“If you want to attract capital, if you want to attract firms, you’ve got to make it positive,” complained one Western diplomat, who spoke on condition of anonymity. “You’ve got to provide the incentives to invest here, and there are already so many disincentives.”

A recent World Bank report listed a litany of problems: a tiny private sector, limited access to loans, an exodus of educated Iraqis, decades of isolation from global trade, destroyed infrastructure, unsteady power and water supplies and a poor transport network.

“In addition to securing and stabilising the country, these key challenges must be addressed in order for Iraq to truly fulfill its economic potential,” it noted.

A survey of firms conducted by the bank, which ranks Iraq as the 165th worst country in the world to do business, listed the three biggest obstacles as poor electricity supply, political instability and corruption.

Overall, Iraqi firms lose around 22 percent of their sales to what the World Bank classes as “investment climate weakness,” a greater figure than losses suffered by companies in Yemen, Lebanon, Libya, Egypt, Jordan or Morocco.

Iraqi officials say they are in the early stages of reforming the economy into more of a market-driven system, but counsel patience with a country that only recently emerged from a decade of conflict and isolation.

“People are impatient; they want you to almost create miracles... and I fully sympathise with them,” said Sami al-Araji, head of Iraq’s National Investment Commission.

Araji insisted that reforms to Iraq’s bloated state-owned enterprises, antiquated banking sector and Byzantine legal system were all in the works, but acknowledged that the country’s bureaucracy was averse to wide-scale changes.

He said he hoped mooted reforms would remove “all these different chains that have handcuffed” Iraq.It is widely agreed that the country has vast potential rewards for firms that manage to negotiate the various difficulties.

A swathe of industries are seen to represent good prospects, including electricity, transportation, construction, housing, agriculture, healthcare and defence, as well as energy.“You’re talking about 30 million people, with an infrastructure that needs to be almost re-done,” Araji said. “Not very many countries have that potential.”

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Investing in Iraqs Dinar

A customer counts Iraqi Dinars at a money changer in Baghdad
Baghdad Invest - Baghdad.

The U.S. stock market almost wiped out his retirement account, but retired pilot Ronald Scarpa hasn't lost his taste for risk. Lately he has turned to one of the chanciest investments in the world - the Iraqi dinar.

"It's not a question of if, but when Iraq revalues its currency," said the Las Vegas-based Scarpa, who keeps dinars in his retirement account. "The dinar will eventually have substantial value, possibly the highest in the world."
He's not alone in risking his money on an investment that can charitably be described as a long-term turnaround project that will pay off only for the extremely patient. Thousands like Scarpa in America are buying the dinar, hoping someday the war-torn nation can revalue a currency worth just a fraction of a penny.

The fundamentals for buying the dinar are precarious. The United States invaded the country in 2003 and has only recently removed most of its troops. The country's political situation remains unstable, and destabilization in the Middle East - most recently with rockets fired between Israel and the Gaza Strip - could undermine the fledgling republic further.

U.S. retail investors' interest in Iraq's currency is part of a broad push for investment opportunities that will give some yield. Most of them cite near-zero interest on their U.S. savings and certificates of deposits as a reason for buying dinars and other exotic currencies.

The dinar, worth just a tenth of one U.S. cent, is experiencing additional downward pressure as a result of international economic sanctions imposed on neighbouring Iran and Syria.

Also, buying the dinar is a task in and of itself. The currency is only traded in Iraq, so it can only be purchased by U.S. customers through a handful of dealers around the U.S. who get their dinars from Iraqi banks. If a customer wants to sell his dinars, the dealer will only buy it back at a 30 percent discount - so no quick trades here.

But Scarpa said he is prepared to wait. The country has the second-largest oil reserves in the Middle East and exports 3.4 million barrels of oil per day, making it one of the world's largest oil producers.

"If the dinar rises to just even a penny, you would have realized a profit of 900 percent," Scarpa said.


In the last four years, the dinar has barely moved. Since 2008, it has appreciated by just 5 percent against the dollar, and at a tenth of a penny, the Iraqi dinar is the weakest currency among oil-producing Arab nations.

The Kuwaiti dinar is worth about $3.50, while Saudi Arabia's riyal is equivalent to roughly 26 U.S. cents.

The old dinar was worth $3.20 before the United Nations embargo that followed Iraq's invasion of Kuwait in 1990. By August 2002, the dinar had plummeted to a fraction of a penny.

Speculators are betting that given Iraq's potential as an oil-driven economy, the dinar could rise to a value of $1 to $3.

"I looked at the risks and I decided that this is not going to bankrupt me," said 35-year-old Ryan Williams, a former sheriff in Bakersfield, California.

"You invest a couple of hundreds or a couple of thousands of dollars and even if it just appreciated by 10 to 15 percent a year, that's still a lot better than investing in certificates of deposits here."

The Iraqi central bank sells dollars daily at a fixed price of 1,166 dinars through two state-run financial institutions and some private lenders Those institutions set the market rate through sales to customers. The current market rate is 1,215 dinars to one U.S. dollar.

Hassnain Ali Agha, founder of Las Vegas-based currency dealer Dinar Trade, is the biggest U.S. market-maker in Iraq's currency. He also sells other exotic currencies such as Afghanistan's afghani and the Libyan pound.

The United States is a huge market for Agha's firm, which has nearly 900,000 customers, 90 percent of which have purchased dinars. His customers are U.S. mom-and-pop investors - teachers, police officers, and construction workers. He also sold dinars to many U.S. soldiers coming back from Iraq.

Agha, who formerly traded at the Chicago Mercantile Exchange and New York Futures Exchange, himself holds more than $2 million in dinars, he said.

In 2011, Agha said, his firm sold about $577 million in dinars to U.S. customers, most of whom hold dinars for investment purposes.

"People in the U.S. really feel that Iraq is the next frontier market to make money on," said Agha. "There will come a time when the Iraqi government will have to adjust the dinar exchange rate given the country's oil exports. That will start fuelling the fire."

Agha sells dinars in 1 million lots for $1,120. For the U.S. investor, however, it has to be a long-term holding. Dinar Trade will buy Iraqi notes at $850 per million, so the dinar would have to appreciate by about 30 percent before an investor could sell and break even.


In Iraq, prices are quoted both in dinars and dollars, but many prefer the greenback, locals interviewed by Reuters said.

Saja Majeed, a 30-year-old civil servant in Baghdad and a mother of two, said she carries dollars in her wallet because it is safer and she sees little opportunity for the dinar to rise.

"There is no industry in Iraq except oil. The dinar is linked to oil, but oil will run out one day," Majeed said.

Revaluation will only happen once the Iraqi government stabilizes. Iraq's central bank hopes to make one dinar equal to $1 at some point through redenomination and central bank-induced appreciation.

Iraq's deputy central bank governor Mudher Kasim told Reuters that process could take three years.

America investors are remaining patient.

"The big question is: where do you put your money in the U.S.? You can't get any interest in your money. Banks give you almost nothing on deposits," said Donna Simko, a real estate agent in her mid-sixties in Riverside, California.

"The gold rush into Iraq is just getting started."

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