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When entrepreneurs get together, they inevitably start trading war stories—the times they did not think they would make it, and the times they kept going when everyone told them to give up. The reality is that it is incredibly difficult to start, sustain, and grow a business. Of the half million or so new businesses started each year in the United States, only 45% will last five years, only 30% will last 10 years, and between 65-75% will have no growth in headcount after getting established. However, there is a narrow set of superstars within these new companies that will not only survive but thrive. A handful will even change the way we work, eat, shop, learn, and play. The founders and CEOs of this high-growth, high-impact firms are the subjects of a recent paper by Credit Suisse (From David to Goliath: How Entrepreneurs Overcome the Challenges of Company Growth.)

People: Successful entrepreneurs point to their “people choices” as more important than any other factor in their success. This is the “There is No ‘I’ in Team” Principle. Despite the stereotype of the cowboy entrepreneur who rides alone, these business leaders make it a priority to surround themselves with smart people, listen to their input, and build high-performing teams. Those entrepreneurs who formed strong advisory teams give tremendous credit to those teams for helping them anticipate and overcome challenges to growth, while those who lacked advisors consider it a mistake or a lesson learned.

Financial Resources: While every entrepreneur must overcome the initial hurdle of raising capital to start a business, high-growth entrepreneurs also face the unique challenges of funding periods of rapid expansion. The “Bird in Hand” Principle of financial resources is that high-growth entrepreneurs are extremely creative and resourceful at fundraising, as well as very skilled at running lean, efficient operations. To fund rapid growth, many of our entrepreneurs did of course eventually utilize external funding. They stressed the importance of finding the right investors — holding out for smart money rather than taking whatever is offered.

Business Networks: Successful entrepreneurs maintain vibrant personal and professional networks that support their company’s growth. The “It Takes a Village” Principle is that expert entrepreneurs view customers, suppliers, and sometimes even competitors as co-creators of their market, vital to achieving and keeping their place in the market. Where established firms usually set up transactional relationships with their customers and suppliers, successful entrepreneurs tend to view such relationships as strategic partnerships. Customers, suppliers, and sometimes even competitors are seen as co-creators of the firm’s market.

Environmental Jolts: The “Lemonade” Principle refers to the way high-growth entrepreneurs recover from major outside shocks that threaten their business. High-growth entrepreneurs do not focus on predicting or preventing shocks; rather, they take setbacks as par for the course, continually reacting, adjusting, re-tooling, and moving forward. Where traditional management approaches stress the importance of predicting the future and avoiding surprises, experienced entrepreneurs clearly excel in turning the unexpected into the profitable.

By Lloyd Greif Center for Entrepreneurial Studies (White Paper ‘From David to Goliath’)

The Russians are Coming

One cannot fail to notice the increased activity within the Russian financial industry in recent years. Leading Russian investment banks, with the blessing of the Kremlin, have sets their sights on international expansion. The significance of Vladimir Putin choosing to make a keynote speech at a Sberbank event in Moscow earlier this month should not be underestimated, acknowledging as it did the crucial role Russia’s financial institutions have to play in modernising the country’s economy and attracting overseas investment. The forum provided the perfect platform for the Russian leader to elaborate on his plans for economic liberalisation as he looked to stoke further his presidential campaign.

Russia’s two state-owned banking behemoths, Sberbank and VTB, and their investment banking arms in particular, have a critical role to play in helping Putin keep his promise to open up Russia to foreign investors.

For Andrei Sharonov, deputy mayor in the Government of Moscow for Economic Policy and a former banker, the success will hinge on three major issues being addressed. Sharonov said: “First of all, it is a matter of the business environment. It is impossible, if you have problems with property rights, with the independent court and corruption to the extent we face in Russia, to be a reputable financial centre. Second, he said, Moscow must develop specialised financial infrastructure, favourable taxation and ensure a supply of available and qualified personnel. The third, and perhaps the most critical issue, is quality of life: “If you have a good business environment, and the best stock exchange with brilliant specialists, but you have a dirty, dangerous congested city, it is impossible to imagine people will spend a part of their life here, when they have opportunities to do it in London or New York or Warsaw or Helsinki.

Recently Sberbank, the number one lender and accounting for 27 per cent of the aggregate banking industry, completed its planned $1.4bn takeover of investment bank Troika Dialog. Given the political and financial clout of state-controlled Sberbank, the deal was never in any doubt. Sberbank now becomes the largest universal banking institution in Russia, which includes significant wealth management activities. The dominance that Sberbankhas over its local retail and corporate lending market is staggering. It has more than a quarter of the entire Russian banking sector’s assets and 40% of the system’s entire profits. It holds 47% of retail deposits, with one in two Russians banking with the company.

The merger will allow Sberbank to attain a “new level of client service” providing high-quality financial advisory services and an extensive choice of investment strategies, the firms said in a statement. Moreover, the integration process will create a new division called the Corporate Investment Bank, which will provide services to the largest Russian and foreign corporations and financial institutions, ultimately forming part of the corporate business unit, to be managed by Andrey Donskih, deputy chairman of Sberbank’s management board.

 “We have ambitious goals: in 2014 we expect to double income from investment banking activity. At the moment we are already working on over 70 investment banking deals,” said Herman Gref, chief executive and chairman of the management board of Sberbank. Gref added that the merger will enable the bank to “modernise the Russian financial industry.”

Sberbank is now endeavouring to extend that dominance into investment banking. The combined Sberbank and Troika operation has made a number of high-profile hires in recent months, including Rob Leith, the former chief executive of corporate and investment banking at Standard Bank, and Todd Berman, the former global co-head of media and telecoms at Bank of America Merrill Lynch.

Anton Karamzin, deputy chairman of the management board at Sberbank, said: “Investment banking for us is a relationship-enhancing proposition. It is more focused on flow trading and fees and commissions, and virtually none of the proprietary risk taking. RoEs in our core businesses are good enough [at 30%] for us not to be desperate and bet capital on the roulette. We’re going to push from very low penetration in the Russian market, where there are only about 1,000 companies that use investment banking services, to the next 20,000 to 50,000, out of the 1.5 million that we bank.”

Ruben Vardanian, previously chief executive of Troika Dialog and now co-head of the corporate and investment bank at Sberbank, said: “It is very important for us to build a big franchise in this area. This will be a key driver, not just in terms of revenue but in terms of relationships. Clients in crisis only want money and loans, and in better times they want other services to help them grow over the long term. Our first goal is to be the dominant player in Russia, but we also need to go international. We see big potential for that. Now is a good time to look at opportunities, whether that be establishing new offices and organic growth or going to buy somebody. It is all on the table.”

VTB Capital International, ranked top of the investment banking fee league table for Russia in 2011, has also set its sights on hiring, having appointed Merrill Lynch alumni Damian Chunilal and former Nomura banker Makram Abboud to run regional operations last month.

Atanas Bostanjiev, chief executive for VTB Capital UK and former Goldman Sachs partner said that while hiring at a senior management level in the international business was 80% complete, total hiring was only 40%-50% finished. He said: “The whole international strategy we are building outside of Russia, its main purpose is to enhance the position of VTB within Russia, and support our main goal, which is to help Russian clients, Russian corporates and, ultimately, the Russian economy.”

Bostanjiev sees that building the client franchise is of utmost importance to compete with foreign banks. Bostandjiev said: “The second part of the mission statement is that when we become the leading Russian financial institution across corporate and investment banking, we will seek to become the leading emerging market investment bank too. The reason why the two make sense is because Russia is all about natural resources, and we need to follow the energy trail around the world.”

Meanwhile, Otkritie Capital, best known for providing hedge funds and other proprietary trading firms with high-speed access to Russian markets, is looking to expand its traditional sales and trading team and take its technology global. It opened an office in New York late last year and plans one in Hong Kong sometime this year.

The Russians are indeed coming and they are coming quickly. As recently as 2009, VTB Capital’s slogan was “Think Russia. Think VTB Capital”. Today, it reads “Think Global. Think VTB Capital”.

By Louay Al-Doory (excerpts from WealthBriefing, FT and Financial News)

In recent years the banking industry has experienced a marked increase in regulatory burden, spiralling costs in compliance and reduced commissions related to lower client activity. Systemic problems require systemic solutions.

Most private banks have been forced to rethink their overall strategy in terms of cost structure, regional focus and product shelf. In particular, some Swiss private banks have sought greener pastures, shifting their regional focus from European offshore to Emerging Markets offshore. However, increased expenditure in developing these markets and a lack of differentiation between competitors suggests that investment returns may be a long time coming.

Equally poignant is the slow demise of traditional products and services, which are proving much harder to sell to weary clients; recent financial scandals have diminished trust and reduced appetite for risk and product complexity. Even the flagship discretionary portfolio augmented by thematic investment satellites has lost its appeal in the latest market turmoil; which emphasises the reality that asset class diversification has its limitations and is less reliable for the foreseeable future.

Thus, the proverbial sticky money has become unstuck. With cost/income ratios pushing towards 80% and the lack of a Unique Selling Proposition amongst competitors, the wealth management industry is in a quandary.

In this context, financial institutions must look beyond mere survival mode, accept that the facts have changed and focus on achieving a sustainable competitive strategy for tomorrow’s altogether new playing field.

Road Ahead

  1. The long-term shift in financial firepower from the West to the East has been accelerated by the financial crisis, as liquidity has dried up and the credibility and strength of primary financial centres has been severely damaged.
  2. Moreover, as the West reduces consumption in order to increase saving, the East is saving less to consume more; the new patterns of world trade and investment that emerge from this fundamental rebalancing will look very different from the old US-centred system.
  3. Emerging Market business will invest where they need to in order to increase their market share and global positioning; this will include more regional investment and direct investment in natural resources.
  4. Thus, it is the dawn of a multi-polar world where the Western financial centres and established market players are likely to be bypassed.
  5. Emerging Markets are set to dominate the UHNW space for the foreseeable future. Successful globalisation has always followed its customers and, as such financial services companies must follow these new-era trade routes.
  6. The new banking system will be smaller and more tightly regulated. Larger parts of the shadow banking system will be dismantled; and there will be a movement back towards a more comprehensive service offering and diversified business model.
  7. Over the last decade, the extraordinary growth of single and multi family offices globally has been striking; representing manifest dissatisfaction with traditional financial advisors and the need for bespoke wealth solutions.
  8. Small specialist wealth managers that relied heavily on cross-border European flows will eventually capitulate and yet large financial superstores remain too bulky to navigate successfully the new industry dynamics.

The industry mantra of providing services “in the client’s interest” must now be finally lived. Being focused and nimble has a clear advantage in today’s changing and challenging business climate, where size and brand carry less weight than in previous years.

By Louay Al-Doory

What was going on nearly ten years ago represented the first indication that the health of Swiss private banking was beginning to suffer. Back in the early noughties, two originally family-owned Swiss banks called Vontobel and Bank Sarasin sought outside shareholders to bolster their ailing balance sheets. Both banks had been hurt by the bursting of the tech bubble and needed new investors to get them through a tough period. Beyond talk at the time from a few consultants that difficulties at the banks would herald in a period of consolidation in Swiss banking, not much thought was given to the wider implications of what was going on at Sarasin and Vontobel.

That’s largely because less than a few months later in the back end of 2003 up until, and including, much of 2008 Swiss private banks started again to siphon up accounts from the newly minted rich from all around the world and charge fat fees for the privilege. All seemed well in the world of Swiss private banking.

But what was going on nearly ten years ago represented the first indication that the health of Swiss private banking was beginning to suffer. The boom in between only covered up the widening fault lines.

With news that one of Switzerland’s supposedly more sober private banks is facing US charges against it for allegedly helping Americans evade paying taxes, those fault lines are beginning to look exposed again. Wegelin, based in the out-of-the-way town of St Gallen in eastern Switzerland, always seemed to come across as a sensibly run institution. Indeed, it was conservative, not exposed to the toxic financial products like some of its Swiss counterparts – no doubt helped by being tucked away from the more aggressive financial centres of Zurich and Geneva.

But analysts are now beginning to question whether Wegelin can come through the court case in one piece. More alarmingly, they are also thinking, if it could happen to Wegelin then is any bank in Switzerland safe?

The concerns are palpable, and are being fuelled by other problems besetting Swiss finance. The recent scandal at the country’s central bank, leading to the resignation of its president, coupled with the sale of a majority stake in Sarasin to the Brazilian Safra Group, are prompting further questions over the health of the sector.

Although they aren’t about to admit it, most Swiss banks are having a torrid time in their home market. The ongoing pressure on the legitimacy or otherwise of offshore bank accounts held by Americans and Europeans in the Alpine nation isn’t going away. Most of this money is leaving – whether because of regulatory reasons, or generational attitude changes – for its home markets and becoming legitimate. The recent case against Wegelin suggests that pressure on offshore accounts isn’t going away.

That’s going to leave the wealthy asking questions like if they can’t keep their money in Switzerland and evade taxes anymore, then why continue to keep money there?

True, Switzerland will continue to attract offshore money from countries where taxing the rich is less of a contentious issue, and political and economic instability plays a bigger role in reasons to have an offshore bank account. And that’s a lot of the world, including much of the Middle East and a fair few countries in Eastern Europe, Latin America and Asia.

But even this money is likely to stay more at home in the years ahead as economic conditions improve, or at least be deposited more with regional offshore centres like Singapore and Dubai. Some Swiss banks have been very good at seeing this trend and are moving resources to these countries.

There’s little doubt that the cache of having a Swiss bank account will continue to have its allure – like a Swiss watch has considerable appeal, so too will an account at a Swiss bank. And the high level of expertise and specialist knowledge in the country’s financial sector makes the country one of the most financially sophisticated centres in the world.

But the trend that first saw its beginnings nearly ten years ago with Vontobel and Sarasin seeking outside help isn’t going away. Swiss private banking will be a completely different (smaller) animal in ten years time.

By CampdenFB

ALPHA vs. BETA (Round 3)

Passively-managed vehicles such as exchange-traded funds are increasingly featuring in investors’ portfolios, but there is a danger clients may be lulled into a false sense of security and strong asset allocation is still important for delivering returns, according to a white paper from Momentum Global Investment Management.

 

The report, issued in conjunction with the Scorpio Partnership consultancy, said that in the last three years, more than half of wealth advisors had introduced a passive investment approach in clients’ portfolios.

The debate on whether “active” or “passive” investment management is best is a constant theme in wealth management. With active management, where people pay a higher fee to a manager in return for acquiring market-beating returns, it is argued this approach is less effective in large, efficient markets where mispricing is harder to sustain; passive management is a lower-cost approach.  

The issue of what is the most cost-efficient way for investors to express their views in a market comes at a time when the issue of costs and fees is rising up the agenda. The UK reform program to financial advice – the Retail Distribution Review – is forcing managers to be more transparent on their fees and encouraging some advisors to farm out discretionary wealth management. The issues are complex – there is no “right” or “wrong” answer to what is the most suitable way to invest, the report said. “Whether to go active or passive is just one decision when managing a portfolio. This decision is an output of a much larger decision tree, and for us is very context-dependent,” the report said. “Essentially, the active versus passive debate for us is partly an implementation question. We aim to find the most efficient way to get the exposure that we want. At times the most efficient way might be to use passive strategies, while in others the best route may be active management,” it said.

On asset allocation, the report argued that “going passive” requires investors to get asset allocation policy correct.

“A passive solution may not save you from market crashes. Whether you are in an active equity fund or a passive equity fund, if markets fall by 20 per cent you are likely to suffer material and painful losses,” it said.

The report also argues that while passive investing is generally less expensive than active investing, this is not always the case. In the credit markets, such as in high yield and loans, passive can often be more costly. The costs of an active portfolio in loans ranges from 40 to 100 basis points, compared with an average of 83 per cent for passive funds.

With passive funds, cost issues can arise depending on the nature of an index that a passive vehicle tracks. For example, the report said that hedge funds arbitraging the rebalancing and membership of an index such as the FTSE index comes at the expense of performance of passive strategies. A strict tracker fund must buy stocks after they have appreciated and sell others after they have fallen.

By WealthBriefing, MGIM White Paper

Additional Resources FundQuest White Paper (When Active Management Shines vs. Passive – June 2010)

See Post September 29, 2011: ALPHA vs. BETA (Round 2)

See Post April 1, 2010: Consistent Alpha

Wealth management profitability is being squeezed on a number of fronts and the industry faces some of the pressures hitting the mass market for overseeing client money, according to Deloitte. Risk-shy investors, rising regulatory costs and growing demand for low-margin, passive fund vehicles has the asset management sector in a vice, requiring big changes on how firms do business to survive, Deloitte says. On current trends, fees will be under downward pressure, it says. And these points also apply to wealth management, Deloitte argues.

While there are clear differences between the financial dynamics of wealth and asset management, Deloitte said its comments, issued a few days ago, to an extent apply not just to the mass market in funds, but also to firms serving high and ultra high net worth individuals.

“I have always found it interesting that this [fund management] service is a market in some ways that is retail, and yet a shopkeeper can understand the profit he or she makes, say, on every tin of beans on the shelf that gets sold, but wealth and asset managers may have far less idea of the profit they make in their market,” Eliza Dungworth, lead investment manager partner at Deloitte, told this publication.

A number of firms have already squeezed their fees; more may do so, Deloitte citing the example of Schroders, which is launching a Z share class for its UK-domiciled funds, carrying a management charge but no fees for platforms or advisor rebates. Another example is Vinculum, a new UK investment house started last year that charges no management fees at all.

Deloitte predicts that the big regulatory development sweeping the UK market – the Retail Distribution Review – will, on its own, drive down fees. It will reduce the management fee paid to investment managers by between 50 to 75 basis points. (The RDR is designed to stamp out sales commissions and raise the quality of professional advice, which is seen as driving up barriers to entry into the advisory market). Other regulatory forces include the European Union’s Alternative Investment Fund Managers Directive and legislation such as FATCA, the US measure to crack down on cross-border tax evasion. 

Lipper, the fund research company, made a similar point last year: “Today the RDR looms large over the industry and the change expected to impact on the way intermediaries are remunerated being one of the key elements on which the initiative is based. The proposed changes to the way funds are distributed are such that the previously glacial pace at which apparent price wars had been fought over the previous twelve years has begun to quicken, with US low-cost giant Vanguard – 10 years after it entered the European industry – setting up UK-domiciled funds in 2009.”

But while the overall impression is one of tight, or tighter, margins, precise data for the industry as a whole can be hard to find, especially in wealth management. A lack of clear data on how much profit is made on specific service offerings is only one aspect of a problem in wealth management. Information about fees and what rival firms charge for specific services is often unobtainable.

Profits under pressure

The urgency of the profitability problem was underscored by a number of industry reports last year. PricewaterhouseCoopers’ biannual report on global wealth management found that the average cost-to-income ratio is 71 per cent: only 28 per cent of respondents reported cost-to-income ratios of less than 60 per cent, while only nine per cent also achieved revenue growth in excess of 10 per cent.

Scorpio Partnership, in its 2011 survey, had a higher average cost/income ratio figure of almost 80 per cent, a record figure, it said. (Some differences in the type of answers to questions may explain some of the cost-income ratio differences between the PwC and Scorpio figures.)

In some parts of the world, such as Switzerland, the older, lower cost/income ratio business of handling secret bank accounts and doing relatively little work for it is being edged out by a more expensive, labour-intensive model as Swiss bank secrecy comes under international assault.

With asset management, cost/income ratios, or, to put it another way, margins, can on average be lower than for some wealth management offerings, depending on whether the funds carry high fees (as in the cast of hedge funds with their classic “2 and 20” management and performance fee structures), or very low ones, as in exchange-traded funds. Each end of the market – those seeking “Alpha” or capturing market “Beta” – resemble what Morgan Stanley analyst Huw van Steenis has dubbed the asset management “barbell” . One end of the barbell is a low-margin business, the other is a higher-margin one.

By WealthBriefing (modified by Louay Al-Doory)

 

Letter from Dubai

The pulsating economic jewel of the Middle East is beginning to look a little tarnished. Unshakable during the Arab Spring, Dubai has never been shy about publicising its glitzy attractions, which mostly come down to a property-owning paradise for the wealthy and aspirational.

And yet is trouble brewing within the most senior ranks of the establishment? The United Arab Emirates security forces became quite exercised last month when no less an organisation than the International Bar Association – the legal industry body – reportedly came under scrutiny amid fears that some items on their agenda could serve as fuel for those unhappy with the more restrictive aspects of Middle Eastern life. Some agenda items, including discussions on human rights, the death penalty and migrant workers, were reported to have been hastily amended or dropped. This apparent paranoia about the possibility that the Arab Spring might spread to Dubai suggests that an uneasy status quo could yet be disrupted. So far, it has been easier to think of Dubai as a safe haven amid the chaos that engulfs much of the region.

Cash-rich millionaires from India, Pakistan and Russia are still buying properties in areas of Dubai such as Emirates Hills, where the gated communities and shrub-lined roads bear more than a passing resemblance to parts of Arizona or Palm Desert in the US.

But its aspiration as the financial centre of the Middle East is suffering setbacks.

Last month Dubai stocks reached a seven-year low, weighed down by the eurozone debt crisis and problems closer to home when its largest investment bank, Shuaa Capital, said it would cut jobs and scale back its brokerage business.

Goldman Sachs recently cut its 2011-13 earnings estimates of the Dubai Financial Market, the local stock exchange, by about 40 per cent, reflecting the weak volumes and a slow recovery in earnings of constituent stocks. Goldman also slashed its target stock price on the DFI, the only listed bourse in the Middle East, and reiterated its sell rating on the stock.

Before the global financial crisis struck, Dubai’s economy had been expanding. But by the end of 2009, it was forced to warn that its largest government-related entity, Dubai World, needed to freeze repayments on $26bn of debt, triggering fears of a sovereign default long before such a thing became widespread. Its gross domestic product contracted 2.4% that year.

But Dubai has recovered well. GDP was up 1.7% in 2010 and is projected to rise by more than 3% this year, according to the Institute of International Finance.

As a centre for banking, Dubai is still young. Just 40 years have passed since the UAE first introduced a currency. At that time, Lebanon was the financial hub of the Middle East, but when the civil war began in 1975 most banks fled to Bahrain.

For tourists, Dubai still delivers what is expected: ridiculously green golf courses surrounded by desert, an eight-lane highway nose to tail with the world’s most expensive cars, immaculately dressed people and implausibly tall buildings – even though some are only half finished. The shopping malls would still make Westfield Stratford shopping centre in East London look like a corner store.

But outward trappings of wealth and the influx of millionaires aside, Dubai and other gulf states could face significant challenges and are vulnerable to regional tensions. Dubai’s proximity to Iran is beginning to play larger in the minds of investors than the money that could once be made in the property market.

By Anuj Gangahar Financial News

U.S. troops are in the process of completing their withdrawl from Iraq by the end of the year. Iran has been preparing for the U.S. withdrawl. While it is unreasonable simply to say that Iran will dominate Iraq, it is fair to say Tehran will have tremendous influence in Baghdad to the point of being able to block Iraqi initiatives Iran opposes. This influence will increase as the U.S. withdrawal concludes and it becomes clear there will be no sudden reversal in the withdrawal policy.

 

The situation in Syria complicates all of this. The minority Alawite sect has dominated the Syrian government since 1970, when the current president’s father — who headed the Syrian air force — staged a coup. The Alawites are a heterodox Muslim sect related to a Shiite offshoot and make up about 7 percent of the country’s population, which is mostly Sunni. The new Alawite government was Nasserite in nature, meaning it was secular, socialist and built around the military. When Islam rose as a political force in the Arab world, the Syrians — alienated from the Sadat regime in Egypt — saw Iran as a bulwark. The Iranian Islamist regime gave the Syrian secular regime immunity against Shiite fundamentalists in Lebanon. The Iranians also gave Syria support in its external adventures in Lebanon, and more important, in its suppression of Syria’s Sunni majority.

Syria and Iran were particularly aligned in Lebanon. In the early 1980s, after the Khomeini revolution, the Iranians sought to increase their influence in the Islamic world by supporting radical Shiite forces. Hezbollah was one of these. Syria had invaded Lebanon in 1975 on behalf of the Christians and opposed the Palestine Liberation Organization, to give you a sense of the complexity. Syria regarded Lebanon as historically part of Syria, and sought to assert its influence over it. Via Iran, Hezbollah became an instrument of Syrian power in Lebanon.

Iran and Syria, therefore, entered a long-term if not altogether stable alliance that has lasted to this day. In the current unrest in Syria, the Saudis and Turks in addition to the Americans all have been hostile to the regime of President Bashar al Assad. Iran is the one country that on the whole has remained supportive of the current Syrian government.

There is good reason for this. Prior to the uprising, the precise relationship between Syria and Iran was variable. Syria was able to act autonomously in its dealings with Iran and Iran’s proxies in Lebanon. While an important backer of groups like Hezbollah, the al Assad regime in many ways checked Hezbollah’s power in Lebanon, with the Syrians playing the dominant role there. The Syrian uprising has put the al Assad regime on the defensive, however, making it more interested in a firm, stable relationship with Iran. Damascus finds itself isolated in the Sunni world, with Turkey and the Arab League against it. Iran — and intriguingly, Iraqi Prime Minister Nouri al-Maliki — have constituted al Assad’s exterior support.

Thus far al Assad has resisted his enemies. Though some mid- to low-ranking Sunnis have defected, his military remains largely intact; this is because the Alawites control key units. Events in Libya drove home to an embattled Syrian leadership — and even to some of its adversaries within the military — the consequences of losing. The military has held together, and an unarmed or poorly armed populace, no matter how large, cannot defeat an intact military force. The key for those who would see al Assad fall is to divide the military.

If al Assad survives — and at the moment, wishful thinking by outsiders aside, he is surviving — Iran will be the big winner. If Iraq falls under substantial Iranian influence and the al Assad regime — isolated from most countries but supported by Tehran — survives in Syria, then Iran could emerge with a sphere of influence stretching from western Afghanistan to the Mediterranean (the latter via Hezbollah). Achieving this would not require deploying Iranian conventional forces — al Assad’s survival alone would suffice. However, the prospect of a Syrian regime beholden to Iran would open up the possibility of the westward deployment of Iranian forces, and that possibility alone would have significant repercussions.

Consider the map were this sphere of influence to exist. The northern borders of Saudi Arabia and Jordan would touch this sphere, as would Turkey’s southern border. It remains unclear, of course, just how well Iran could manage this sphere, e.g., what type of force it could project into it. Maps alone will not provide an understanding of the problem. But they do point to the problem. And the problem is the potential — not certain — creation of a block under Iranian influence that would cut through a huge swath of strategic territory.

It should be remembered that in addition to Iran’s covert network of militant proxies, Iran’s conventional forces are substantial. While they could not confront U.S. armored divisions and survive, there are no U.S. armoured divisions on the ground between Iran and Lebanon. Iran’s ability to bring sufficient force to bear in such a sphere increases the risks to the Saudis in particular. Iran’s goal is to increase the risk such that Saudi Arabia would calculate that accommodation is more prudent than resistance. Changing the map can help achieve this.

It follows that those frightened by this prospect — the United States, Israel, Saudi Arabia and Turkey — would seek to stymie it. At present, the place to block it no longer is Iraq, where Iran already has the upper hand. Instead, it is Syria. And the key move in Syria is to do everything possible to bring about al Assad’s overthrow.

In the last week, the Syrian unrest appeared to take on a new dimension. Until recently, the most significant opposition activity appeared to be outside of Syria, with much of the resistance reported in the media coming from externally based opposition groups. The degree of effective opposition was never clear. Certainly, the Sunni majority opposes and hates the al Assad regime. But opposition and emotion do not bring down a regime consisting of men fighting for their lives. And it wasn’t clear that the resistance was as strong as the outside propaganda claimed.

Last week, however, the Free Syrian Army — a group of Sunni defectors operating out of Turkey and Lebanon — claimed defectors carried out organized attacks on government facilities, ranging from an air force intelligence facility (a particularly sensitive point given the history of the regime) to Baath Party buildings in the greater Damascus area. These were not the first attacks claimed by the FSA, but they were heavily propagandized in the past week. Most significant about the attacks is that, while small-scale and likely exaggerated, they revealed that at least some defectors were willing to fight instead of defecting and staying in Turkey or Lebanon.

It is interesting that an apparent increase in activity from armed activists — or the introduction of new forces — occurred at the same time relations between Iran on one side and the United States and Israel on the other were deteriorating. The deterioration began with charges that an Iranian covert operation to assassinate the Saudi ambassador to the United States had been uncovered, followed by allegations by the Bahraini government of Iranian operatives organizing attacks in Bahrain. It proceeded to an International Atomic Energy Agency report on Iran’s progress toward a nuclear device, followed by the Nov. 19 explosion at an Iranian missile facility that the Israelis have not-so-quietly hinted was their work. Whether any of these are true, the psychological pressure on Iran is building and appears to be orchestrated.

Of all the players in this game, Israel’s position is the most complex. Israel has had a decent, albeit covert, working relationship with the Syrians going back to their mutual hostility toward Yasser Arafat. For Israel, Syria has been the devil they know. The idea of a Sunni government controlled by the Muslim Brotherhood on their north eastern frontier was frightening; they preferred al Assad. But given the shift in the regional balance of power, the Israeli view is also changing. The Sunni Islamist threat has weakened in the past decade relative to the Iranian Shiite threat. Playing things forward, the threat of a hostile Sunni force in Syria is less worrisome than an emboldened Iranian presence on Israel’s northern frontier. This explains why the architects of Israel’s foreign policy, such as Defense Minister Ehud Barak, have been saying that we are seeing an “acceleration toward the end of the regime.” Regardless of its preferred outcome, Israel cannot influence events inside Syria. Instead, Israel is adjusting to a reality where the threat of Iran reshaping the politics of the region has become paramount.

Iran is, of course, used to psychological campaigns. We continue to believe that while Iran might be close to a nuclear device that could explode underground under carefully controlled conditions, its ability to create a stable, robust nuclear weapon that could function outside a laboratory setting (which is what an underground test is) is a ways off. This includes being able to load a fragile experimental system on a delivery vehicle and expecting it to explode. It might. It might not. It might even be intercepted and create a casus belli for a counter-strike.

The main Iranian threat is not nuclear. It might become so, but even without nuclear weapons, Iran remains a threat. The current escalation originated in the American decision to withdraw from Iraq and was intensified by events in Syria. If Iran abandoned its nuclear program tomorrow, the situation would remain as complex. Iran has the upper hand, and the United States, Israel, Turkey and Saudi Arabia all are looking at how to turn the tables.

At this point, they appear to be following a two-pronged strategy: Increase pressure on Iran to make it recalculate its vulnerability, and bring down the Syrian government to limit the consequences of Iranian influence in Iraq. Whether the Syrian regime can be brought down is problematic. Libya’s Moammar Gadhafi would have survived if NATO hadn’t intervened. NATO could intervene in Syria, but Syria is more complex than Libya. Moreover, a second NATO attack on an Arab state designed to change its government would have unintended consequences, no matter how much the Arabs fear the Iranians at the moment. Wars are unpredictable; they are not the first option.

Therefore the likely solution is covert support for the Sunni opposition funnelled through Lebanon and possibly Turkey and Jordan. It will be interesting to see if the Turks participate. Far more interesting will be seeing whether this works. Syrian intelligence has penetrated its Sunni opposition effectively for decades. Mounting a secret campaign against the regime would be difficult, and its success by no means assured. Still, that is the next move.

But it is not the last move. To put Iran back into its box, something must be done about the Iraqi political situation. Given the U.S. withdrawal, Washington has little influence there. All of the relationships the United States built were predicated on American power protecting the relationships. With the Americans gone, the foundation of those relationships dissolves. And even with Syria, the balance of power is shifting.

The United States has three choices. Accept the evolution and try to live with what emerges. Attempt to make a deal with Iran — a very painful and costly one. Or go to war. The first assumes Washington can live with what emerges. The second depends on whether Iran is interested in dealing with the United States. The third depends on having enough power to wage a war and to absorb Iran’s retaliatory strikes, particularly in the Strait of Hormuz. All are dubious, so toppling al Assad is critical. It changes the game and the momentum. But even that is enormously difficult and laden with risks.

We are now in the final act of Iraq, and it is even more painful than imagined. Laying this alongside the European crisis makes the idea of a systemic crisis in the global system very real.

By STRATFOR

Is GREED still Good?

With great sadness, I have sold my beloved and well-enjoyed Bentley GT.

Ah, the reasons I have loved that motor car might take a book to describe. It was gorgeous in appearance, sublime to sit in and quite magnificent to drive – whether in town or on the open road. Perhaps best of all, other people reacted to it with real emotion. It was, for example, the only Bentley in the car park at the V Festival and I thought, even feared, that I might be in for some abuse from other festival-goers. But not a bit of it, as the couple in the VW Combi next door told me, it was the most beautiful vehicle to be seen almost anywhere and particularly in a field of indifferent Nissans and SUVs.

But somehow, selling it seemed the right thing to do given the headlines each day about how Europe is on the verge of extinction or the squeezed middle class wants to wage war not only on the benefit-claiming lower class but also on the class claiming the most benefits – which turns out to be us bankers and City folk. And so it’s gone, replaced by a humble and practical BMW 3-series, which is one of Britain’s best-selling cars. What better way to blend in with the moral masses – of course mine has a fancy engine and trim but who can tell? But, and here perhaps is the lesson from this tale, while giving up ostentatiousness and becoming ordinary has satisfied my inner puritan, it turns out that my new, smaller road presence is worse than the old extravagant one. It’s certainly much less pleasant to spend time in – gone are the opulent leathers and woods, now replaced with fake carbon-fibre trim that feels just a bit cheap. The crushing road presence of the old has been replaced by a lightweight that skits over every bump in the road – and worst of all, gone are the cheery waves and nods of respect from pedestrians and other drivers. All in all, my conclusion is that, while smaller and more efficient sounds good on paper, it doesn’t deliver in the real world.

My symbolic gesture of selling a prized possession of the fat-cat era acknowledges an empathy with the general mood in the City, which is one of austerity, caution and sobriety. But is my disappointment with the benefits of change a lesson for the financial services industry, which is at present so very keen to shed its affluent image and slim down to something more in keeping with the times?

Might it be the case that leaner businesses are not nearly as good to work in and therefore don’t attract the talent? That tighter regulation simply stifles innovation? That smaller organisations have less clout and global presence and so are less effective? And in short that the new banking world we are starting to build doesn’t do the job half as well as the old one that the world now finds distasteful? Time – no doubt – will tell, but if my experience of trading in the Bentley is an indicator, we are going to sorely miss the old world.

By Financial News

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