#64 The Non-Genocidal Face of Sudan

Sudan, Africa's largest country, is best known for the crisis (others would call it genocide) in Darfur. But there is another story to Sudan as well. A much more positive one. Sudan happens to be one of Africa's fastest growing economies and, ironically, one of the more stable as of late. What's more, Sudan is currently also one of the world's fastest growing economies.

Sudan's President Omar Al-Bashir announced recently that the country's economic growth rate reached 8% in 2006, adding that the growth rate is expected to increase to between 9-13% in the next year. In fact, according to IMF figures, real GDP growth has reported an average of 6.7% over the past seven years: 8.4% in 2000, 6.2% in 2001, 6.4% in 2002, 4.9% in 2003, 5.2% in 2004, 7.9% in 2005 and 8% in 2006. Other sources put the GDP figure even higher at an average annual growth rate of slightly more than 7% over the past seven years. GDP in 2005 stood at US$ 6,747,748, compared to a mere US$4,950 in 1980. This is remarkable given the grave situation in Darfur and the economic blockade imposed by a large number of nations, as well as the long North-South Civil War that ended with the official signing by both sides of the Nairobi Comprehensive Peace Agreement on 9 January 2005, granting Southern Sudan autonomy for six years, to be followed by a referendum about independence.

Not surprisingly, two major factors in the growth equation are China and oil. Oil revenues have become a major part of GDP, contributing to 49% of the total GDP in 2004, compared to 5.9% in 1999. China imported 81% of Sudan's entire oil exports to the world, while oil accounted for 98.8% of Sudan's exports to China. Of Sudan's total exports to the world in 2003, 40.9% went to China. China is indeed by far Sudan's most valuable trading partner, as, according to the OECD, Sudan's main partners 2004 were China (64.3%), Japan (13.8%) and Saudi Arabia (3.7%). In terms of Sudan's importance for China's economy, Sudanese oil accounted for no more than 5.5% of China's total imports of oil in 2004. Sudanese activist Ali Askouri has gone so far as to proclaim Sudan "The first country to become a Chinese colony."

Another interesting fact that is very much worth noting is that Arab investments in Sudan surged by more than 15 times from US$657 million in 2004 to US$2,341 in 2005. Despite all this, however, we should hope that the crisis in Darfur is not permitted to fade any more into obscurity than it already is. If the figures provided by the United Nations are correct, more than 200,000 people have been killed and two million displaced in the fighting. This should not be worth an economic boom. Khartoum says only 9,000 people have died, but this is not taken seriously by many. In any case, China, for one, does not seem inclined to budge even one inch from their principle of non-interference in the affairs of other countries (a policy that was established more than 50 years ago by then foreign minister Zhou Enlai). Without China, little can be done in Darfur. Without China, little economic growth would be witnessed in Sudan. China reigns supreme.

#63 The Energy Champion

Every time we hear about Russia in the news in reference to oil and gas, it seems to be about Russian muscle flexing. In the past few years alone, Russia has used her vast energy reserves as a weapon in times of disagreement against not only the European Union, but also Georgia, Ukraine, her ally Belarus and, most recently, Estonia. But credit must be given where credit is due: Moscow is in a league of its own when it comes to securing her energy interests.

The proof? Just today (May 12, 2007) Russia announced an agreement with Kazakhstan and Turkmenistan to build a new natural gas pipeline north from the Caspian Sea, carrying gas from Turkmenistan through Kazakhstan to Russia. This is a major smack in the face of the EU, which had hoped to lessen their dependence on Russian gas by finding an alternative supplier in the form of Turkmenistan. This was to be done by creating a new pipeline under the Caspian Sea that would go through Turkey to Europe, thereby bypassing Russia. The gas routes as they stand today can be seen in the picture above (source: the Economist).

Even if the idea proposed by the EU were to take hold, some analysts doubt whether it would make a significant difference. ICG energy analyst Charles Esser pointed out that the EU could count on at most 20bn cubic metres of gas per year from a Caspian pipeline, which amounts to no more than 4% of EU consumption in 2004. Nevertheless, given the fact that the exact amount of gas present in Turkmenistan is unclear, a significantly high number could lead to the expansion of current plans and seriously reduce EU dependency on Russian gas in the long term. In any case, the deal announced today is a clear victory for Russia, as it effectively means that Turkmen and Kazakh gas will only be exported to Europe via Russia, putting the Europeans at the mercy of Russian caprice more than ever before.

China will no doubt see this deal as a loss as well, since they too were vying for direct control of Turkmen gas in their global quest to secure their energy needs in the most far-flung of places. In April 2005, deceased Turkmen President Saparmurat Niyazov had blessed the construction of a pipeline to China that would send 30 billion cubic meters of gas to China starting in 2009. Whether this deal will now go through is uncertain, though it seems unlikely that the Russian-Turkmen agreement will affect it. It does, however, give Gazprom and Russia a powerful bargaining tool in any future discussion, negotiation or conflict with China.

Say what you will of the Russian mafia-like monopolizing tactics, but effective they most certainly are.

#62 Economic Darwinism in the Market Place through Hedge Funds and Private Equity

The notion of "survival of the fittest" is not only something attributable to the development of species, but, in a more contemporary sense, to world markets as well. The defragmentation process of regional markets that has been set in motion by the followers of those who advocate closer integration of global markets is a force to be reckoned with.

In the past regulation created barriers that protected regional and national firms from the more efficient and competitive adversaries that operate in more capital efficient and less regulated environments, where capital is allocated to the most productive parts of the economy. This is increasingly changing today, with hedge funds and private equity groups jumping at the new found opportunity to take advantage. Hedge funds and private equity are in fact the aquarium algae eating fish that take out the dirt and keep the water clean for the other fish. This is not to say that firms targeted by private equity directly equate to fish guano. No, these firms are simply more able to asses the true value of a firm, albeit like a skeleton being sold off bone by bone to piecemeal investors.

When firms perform less than optimal, the question amongst shareholders - which can include private equity groups or hedgefunds - is whether management resources have been utilized optimally to achieve maximum utility in comparison to capital market benchmarks. As hedge funds often operate with long-short positions, performance or under-performance is crucial. It is no surprise, therefore, that hedge funds are perhaps the most shortsighted investors in terms of their investment horizons. They often propagate and support the shedding of assets, business, or other holdings if it contributes to short term operational results.

With hedgefunds as shareholders, it becomes essential for the firm to not only "know thy self" but also "know thy shareholders." Shareholders are not a homogeneous group; a pension fund, for instance, may have a longer term perspective and subsequently influences firm management in that direction. Hedgefunds have a different investment and return horizon. By their very nature they are required to give high returns in a relatively short time period. This can create a conflict of interest with regards to the strategy and horizon between firm management and a disparate group of shareholders.

This makes the concept of value difficult to grasp for the management of firms, as they have to deal with a heterogeneous group of investors with different time horizons. This destroys any homogeneous expectations of value and allows for arbitrage based on different views on time, value and strategy. The key word, really, is arbitrage: a key pricing component in the pricing of assets. By means of shareholder activism, buyouts, long-short strategies and others, hedgefunds and private equity improve market efficiency through re-pricing. Hedgefunds reprice through long-short strategies and private equity reprice via financial engineering and other management strategies. Technically hedgefunds can do the same by pressuring management. Either way, the end result is the same.

The power of shareholders in efficient, unconstrained capital markets is a key component in the arsenal of hedgefunds and private equity groups alike. Without transparency and various takeover and management defense mechanisms, shareholders would not be entitled to the influence they deserve as owners of a firm. Yet for years many firms in the Netherlands enjoyed the benefit of various defense constructions against hostile takeovers. This in the end suppressed the value of firms so notably that the phenomenon became known as the Dutch discount.

What empowers private equity and hedgefunds even more is the world of cheap capital that we live in. Low interest rates and low spreads on many forms of debt (excluding subprime market) is stocking the weapons arsenal of hedge funds and private equity alike. The bitter reality of this low interest world in which we live in consequentially empowers the lashes of capital and market efficiency through the empowerment of hedge funds and private equity. In terms of the functioning of markets, I would argue that it is a good thing.

Unfortunately, hedge funds and private equity do not spend much time on press relations, and whenever there is talk of hedge fund activity or private equity, it is equated with some evil power bent on selling off assets and mass firings. The truth is that if management of firms under question such as ABN-Amro had performed more adequately, the scenario we are seeing today would have been less likely. In the end the question is often whether a company is worth more as a whole than the sum of its parts. If the sum of its parts is more valuable than the whole, then management must have failed its shareholders in creating significant value.

Furthermore, management could be accused of empire building and not shedding assets that would be to the benefit of its shareholders. Management has the same tools available as private equity; the difference is the perspective on value. The time window for performance delivery has also narrowed in recent decades, in part due to increased accounting transparency that enables more financial performance benchmarking. This, in tandem with increased integration with global markets, has helped to create enormous "peer" pressure to perform.

This should by no means induce us to feel sorry for management, as performance is more than handsomely rewarded. It is the common employee of the firm who stands to lose the most in this hyper-competitive world. Employees bear the burden of under-performance and often gain, relatively speaking, little when performance is good. Except perhaps for the continuation of job security and perhaps performance. This is not a picture that top management would adhere to. It is a bitter reality. I can imagine ABN-Amro employees being more than a little disgruntled if the management leaves with a nice big bonus due to a hostile take over and all they are left with is uncertainty. ABN is in that regard comparable to the titanic: the only rescue vessels available are for the captain, the shareholders and a select group of officers. The bulk of the crew are left behind in an ocean of uncertainty. This is not entirely fair, as a good captain should go down with his ship, instead of being rewarded for steering the ship into an ocean of icebergs.

#61 A Beleaguered Ethiopia

Ethiopia has had a busy year so far and it's starting to shape up to be a rough one. After invading Somalia back in July 2006 in order to crush the Islamic insurgency, the Ethiopian troops swiftly proceeded to defeat the enemy and reach Mogadishu by the end of December. Victory was clear and it was time to leave and let the African Union (AU) or the United Nations send the necessary peace keepers. But this did not happen. Instead, the AU did not make good on its pledge to send 8,000 troops (only 1,200 have been deployed), leaving the much reviled Ethiopians to face an increasingly resurgent enemy that can bank on local support when it comes to opposing what many Somalis see as invading Ethiopian forces.

While contending with the troubles in Somalia, tension with another neighbor is starting to flare up. Ethiopia has consistently accused the Eritrean government of supporting and sponsoring various terrorist groups and elements such as Al-Qaeda backed Al-Shabat, operating in Somalia. Ethiopian Prime Minister Meles Zenawi said recently that one of the main goals was to defeat Eritrean-backed groups in order to "make it difficult for Eritrea to take the option it has taken thusfar - destabilizing through sending elements to Ethiopia and the horn." He said putting Eritrea's accomplices "out of the game" will leave Eritrea with one option: aggressing Ethiopia on its border - a step deemed unlikely, given the result of the 2000 border war with Ethiopia and the likely backlash from the international community (perhaps most importantly from China).

Eritrea, on it's part, released eight Ethiopian citizens who were kidnapped in the northern Afar region in March. Five Europeans had also been kidnapped, but were released 12 days after their capture. Despite this gesture of apparent goodwill, it appears most east African states support Ethiopia and the transitional government of Somalia, while Eritrea openly supports the Islamists. This, in part, has led to Eritrea leaving the Intergovernmental Authority for Development (IGAD), signaling increased instability in the region. Eritrea released a document explaining their decision to suspend their membership of IGAD, accusing Ethiopia and the U.S. of intentionally causing havoc in the Horn of Africa in order to restore U.S. dominance in the region.

Besides the escalating conflict in Somalia that is starting to entrap the Ethiopians and has caused a massive refugee problem, Ethiopia was rudely awakened by a massive shooting rampage in Abole, a small town about 120km (75 miles) from the regional capital, Jijiga, in the Somali (not to be confused with the country, Somalia) region. Gunmen from the Ogaden National Liberation Front (ONLF) killed at least 74 people in an attack on an exploratory drilling site run by a subsidiary of the Chinese government-owned giant oil company, Sinopec. Sixty-five of the dead were Ethiopians and nine were Chinese oil workers. Seven Chinese were also taken captive. Ethiopia has launched a rescue operation to try and secure the release of the Chinese, accusing Eritrea of backing the ONLF in the process. The safety of Chinese interests in Ethiopia is crucial for the African nation, since China is Ethiopia's largest trading partner, with trade worth $450 million in 2006.

China is sure to learn lessons from this attack as well, as the killing of 9 Chinese and the abduction of 7 others comes on the backdrop of 16 Chinese oil workers being kidnapped in Nigeria and a Chinese engineer being killed and another injured in Kenya this year alone. This poses a major dilemma for China, that swears on her policy of non-interference. Until the recent murders and kidnappings of Chinese civilians, this policy has worked very much in China's favor, allowing it to gain access to resources in far flung regions where unsavory types run the show. But once the Chinese themselves become targets, the feasibility of such a policy is brought into question. Perhaps the recent stunning discovery of 2.2 billion barrels of oil in Bohai Bay (northeastern China) will temporarily quench China's thirst for foreign oil and gas, though this is highly unlikely.

#60 A Warrior Pur Sang

Do you remember the Watergate scandal? Or the Missile Crisis pitting US President John F. Kennedy and Soviet leader Nikita Khrushchev? What about the Vietnam War or the recent Iraq invasion? I'm sure all our readers know Venezuelan President Hugo Chavez, U.S. President George Bush Sr., Jr. and Iranian President Mahmood Ahmadinejad. Do they also know the leaders of a time long passed, such as Chile's Salvador Allende, China's Mao Zedong and America's Dwight D. Eisenhower? Most probably you do. So what is it that all these events and people have in common?

The answer is: Cuban President Fidel Castro has been in power to witness and deal with each and every one of these episodes and leaders, as well as scores of others. And despite the vast reports claiming his time has now finally come, it seems he might be around for a while longer.

It is unclear which illness (he suffered from intestinal bleeding and is believed to suffer from diverticular disease) the Cuban President is battling exactly, but there is little disputing his resolve and ability to deal with whatever challenge is thrown at his entity. Castro has survived numerous attempts on his life, prompting the British newspaper The Guardian to write an article about the matter and Channel 4 to make a documentary. They came to the conclusion that 638 ways have been devised by various parties - most notably the CIA - to assassinate him (for an interesting read on the 638 ways attempted to kill Fidel Castro, have a look at the Guardian's article on the subject). These include an exploding cigar, a poisonous ballpoint pen and a jar of cold cream containing poison pills. Castro fittingly responded to these numerous attempts by making what has become a legendary comment; "If surviving assassination attempts were an Olympic event, I would win the gold medal."

Attempts on his life haven't managed to kill him, old age doesn't seem to damage him too much and now it appears disease has failed as well. After what was considered to be a series of life threatening operations, rumours of Castro's death spread like wildfire. But little by little, pictures and videos emerged of a recovering Castro at the side of his main ally, Venezuelan President Hugo Chavez. Last week Castro even published an article denouncing U.S. plans to turn corn into ethanol as a means to create an alternative energy supply to oil. The most recent and puissant proof that Castro is on his way back to leading his country is the meeting he held with Wu Guanzheng, a member of the Chinese Communist Party's Politiburo.

The meeting with Wu is all the more substantial given that Castro received a letter from Chinese President Hu Jintao that delved, amongst other things, into economic issues. According to Chinese officials in Cuba, trade between the two countries has blossomed in recent years, growing to $1.8 billion last year, double that of 2005. Most of this trade is accounted for by Cuban imports of Chinese buses, locomotives and farm equipment and supplies. Cuba would very much like to capitalize on China's booming economy and overall growth, providing it with a golden opportunity to get the Cuban revolutionary engine back on steam.

Castro's Cuban revolutionary movement has survived many catastrophes - the most notable being the collapse of the Soviet Union - but survived them all. This is very much due to the unique leadership abilities of El Commandante. When it comes to Fidel Castro, never say die.

#59 Divisive Ethanol

Ethanol has become the new "it" thing in terms of energy fashion. Whether you are a proponent of expanding ethanol production for energy use, believe it would be a disaster to do so, or if you could not care less about the topic, one thing is for sure: you have something to say about it. The scope of discussion on the topic extends far beyond merely energy, encompassing a wide array of sectors such as food, agriculture, energy, trade and the environment. No matter in what context ethanol is debated, it has become a particularly divisive topic.

The environmental field is one such area. High profile politicians, scientists and lobby groups such as the Renewable Fuels Association - the largest Washington ethanol lobby group - are touting it as a 'green' alternative to the heavy pollutant, gasoline. Others, such as Stanford University civil and environmental engineering professor Mark Jacobson, loudly dispute this claim. Jacobson conducted a study analyzing the environmental effects of switching to ethanol and concluded "It's not green in terms of air pollution...If you want to use ethanol, fine, but don't do it based on health grounds. It's no better than gasoline, apparently slightly worse." Green or not, ethanol has set the stage for a tough debate worthy of competing with the ever contentious notion of Global Warming.

At the top of the world's political echelons, ethanol has garnered a prominent and cosy space for itself as well. Venezuelan President Hugo Chavez, following the words of Cuban President Fidel Castro, has issued a stark warning against the use of ethanol as a main source of energy, warning there is a lack of arable land and arguing it will lead to food prices skyrocketing, subsequently causing mass starvation among the world's poor. Bush, on the other hand, has hailed ethanol as a fitting alternative to the American addiction to foreign oil, sealing a bilateral deal with the world's largest ethanol producer, Brazil. The fact that these two leaders disagree on something is far from surprising, of course. What is noteworthy, however, is the effect that ethanol is having on Chavez's relationship with Brazilian President Luiz Inacio Lula da Silva (Lula), who Chavez considers to be a close ally.

At a Venezuelan hosted energy summit involving eight Latin American nations, Lula responded to Chavez's comments regarding massive production of ethanol in an unprecedentedly stark manner, saying “The truth is that biofuel is a way out for the poor countries of the world...Obviously there is no possibility of competition between food production and biofuel production...No one is going to stop planting rice to plant biofuels. The problem of food in the world now is not lack of production of food. It's a lack of income for people to buy food.” Chavez was seemingly taken aback by these statements, softening his position afterwards by insisting that his real objection is to the U.S. corn-based variety of the biofuel – not Brazilian ethanol produced with sugar cane. Nevertheless, ethanol has managed to become the first topic to create public disagreement between the two leaders.

Let's just hope that either the proponents of ethanol as a substitute or additive for oil are correct, or that other, cheaper, cleaner and less divisive methods will be found in the meanwhile. Divisive ethanol must not become a distraction for the real reasons - which are a plenty - that we are seeking alternatives to oil.

#58 The North African Breeding Ground for Radical Islam

The daily suicide bombings in Iraq have become so frequent that they barely generate more than a blink of the news watcher's eye. That is, if it actually makes the news, for a mere 15 people dead has become too common to report on. Perhaps if about 100 people die at the account of a suicide bombing (or any other form, for that matter), some hearts will skip a beat, causing short-term grief and a quick thought for the victims.

This phenomenon might simply be explained by the fact that such bloodshed is no longer shocking, simply because it occurs on a daily basis. It made me wonder, however, how come such little attention has been paid to the recent bombings by and clashes with Islamic terrorists in North Africa? There seems to be an eerie silence when it comes to the risks posed by radical Islamists in countries like Morocco, Algeria, Tunisia and, to a lesser extent, Egypt (the bombings in Cairo, the resort towns of Dahab, Sharm el-Sheikh and Taba in the last 3 years that killed scores of Westerners generated great media interest). Perhaps the fact that Westerners are directly effected by the occasional bombings in Egyptian resorts might explain for the relatively large attention given to these bombings when compared to those in neighbouring countries.

Few people know that in January this year, 12 militants were killed in Tunisia after a fierce gun battle with security forces. The Tunisian authorities said they were militants who had crossed the border from Algeria. Equally few people know that just last March 11, a man entered a cafe in the Moroccan city of Casablanca in order to use the Internet, but when the cafe's owner refused him permission to log on to radical websites, he detonated the explosives that he had hidden under his clothes, killing 1 person and wounding 3 others. Or even more recently, on April 10, Casablanca was the site of a major security operation against suspected Islamic militants, resulting in three suspected militants detonating their suicide belts in order to prevent arrest. A fourth was shot dead by police as he tried to detonate his device. The police claim to have foiled a plot to target foreign and strategic interests by these suicide bombers.

The most deadly of bombings in the region this year occurred in Algeria's capital Algiers, where two bombs killed at least 33 people and injured a couple hundred, just a few days ago, on April 11. I barely recall the bombings getting any mention in the press headlines. The bombings were the work of the Salafist Group for Preaching and Combat (GSPC), which changed its name to the al-Qaeda Organisation in the Islamic Maghreb in January. The group's aim is to establish an Islamic state in Algeria and was a major player in the Civil War of the 1990s (and part of the 21st Century as well) in which some 150,000 people died. Finally, last Saturday, April 14, Casablanca was once again the scene of a suicide bombing. Two brothers blew themselves up near the US consulate and its cultural center, injuring one passer-by.

Not only were the two brothers wanted in connection with the March Internet cafe bombing, but the police also found another explosives belt that linked the brothers with the men who blew themselves up on April 15. What's more, officials stated that one of the three suspected militants who blew themselves up during the police raid is the brother of the Internet cafe bomber. All men are thought to have played key roles in the 2003 terror attack in Casablanca, where suicide bombers killed more than 40 people and are believed to belong to the Algerian group mentioned before - the al-Qaeda Organisation in the Islamic Maghreb, formerly known as GSPC. The group has also been said to be active in Tunisia and Mauritania, thus uncovering an interconnected and well-organised Islamic terror group/cell in North Africa.

With Westerners seemingly only able to understand an immediate threat or one that is too late to act against, it is worth putting all this into a socio-geographical perspective. For one, there are no non-European nations closer to Europe than Morocco, Tunisia and Algeria. Furthermore, of the estimated nearly 20 million Muslims in Europe, only Turkey has more emigrants in Europe than Algeria and Morocco. Ignoring the increasingly visible threat posed by Islamic terrorists is tantamount to Europe begging for problems. The Tunisian, Moroccan and Algerian authorities must be helped by strengthening political and economic ties. This does not mean pandering to the whim of Dictators against the will of ordinary people, but it does mean standing up for what you believe is right and aiding those who seek the same results.