Day: June 26, 2017

The promotion of Saudi Arabia’s top economic reformer to crown prince has cheered business leaders who believe it will open up new opportunities. But they worry about officials’ ability to implement reforms and about geopolitical tensions in the region.

The Saudi stock market jumped 7 percent in the two days after Mohammed bin Salman, previously deputy crown prince, was appointed last week to be first in line for the throne.

Part of the market’s rise was due to a decision by index compiler MSCI to consider upgrading Riyadh to emerging market status. But much of the euphoria was political; shares in companies closely linked to Prince Mohammed’s reforms were the top performers.

National Commercial Bank, the biggest lender, which is expected to play a big role handling financial transactions related to the reforms, surged 15 percent.

Miner Ma’aden soared 20 percent; Prince Mohammed has labelled mining a key sector in his drive to cut Saudi Arabia’s reliance on oil exports. Emaar the Economic City, builder of an industrial zone which the prince hopes

to develop as an export industry base, gained 16 percent.

Solid political move

Business leaders said the promotion of Prince Mohammed, 31, removed political uncertainty by confirming a smooth shift of power from an older generation of Saudi leaders to a young generation represented by the prince.

“The political transition was very smooth — we expect the reforms to continue,” Muhammad Alagil, chairman of Jarir Marketing, a top retailing chain, told Reuters.

He said Jarir, which has 47 stores, some 39 of which are in Saudi, would open at least six this year and a similar number next year, mostly inside Saudi Arabia.

Fresh opportunity

To some in business, Prince Mohammed represents fresh opportunity in the form of a $200 billion privatization program and state investment to help kick start new industries such as shipbuilding, auto parts making and tourism.

Some executives predicted the progress of these plans, which are still largely on the drawing board a year after Prince Mohammed announced them, would accelerate after his promotion.

“I didn’t see a risk of the reforms stalling or being reversed before, given the political backing behind them. But now the reforms can go ahead with more strength,” said Hesham Abo Jamee, chief executive at Alistithmar Capital.

He added that social initiatives in the reforms would help the economy by stimulating consumer spending.

For example, developing an entertainment sector, in a conservative society which has so far shunned many forms of public entertainment, would create jobs. The government plans an entertainment zone south of Riyadh with sports, cultural and recreational facilities.

Increasing the role of women in the workforce would boost family incomes and could accelerate creation of small businesses such as restaurants, Abo Jamee said.

Repatriation

Prince Mohammed is also architect of a tough austerity policy, including spending cuts and tax rises, that aims to abolish by 2020 a budget gap which totaled $79 billion in 2016.

The austerity has slowed private sector growth almost to zero.

But many in business see austerity as inevitable in an era of low oil prices and are pleased by the prince’s willingness to moderate it to avoid a worse slowdown. To mark his promotion, Riyadh retroactively restored civil servants’ allowances at a cost it estimated at around $1.5 billion.

Privately, many executives expect Prince Mohammed to persuade or pressure wealthy Saudis to repatriate some of the billions of dollars which they are believed to have transferred overseas for safe-keeping.

Other issues

It is not clear what tools he would use — moral suasion, legal action or financial incentives — but his promotion may have given him the political capital for such a sensitive step. Businesses remain worried by two other issues, however.

One is the competence of the bureaucracy to carry out the complex reforms. The government talks of partnerships between the public and private sectors to finance projects, for example, but has not released legal frameworks for such deals.

“Many of the reforms are in name only — nothing has happened. They’re struggling with the details,” said a foreign economist who advises the Saudi government.

Military intervention

The other big worry is rising tensions around Saudi Arabia — tensions in which Prince Mohammed has been closely involved in his role as defense minister for two years.

In addition to its military intervention in Yemen, Saudi Arabia is locked in a diplomatic confrontation with Iran, its allies are struggling in Syria’s civil war, and early this month it cut diplomatic and transport ties with Qatar.

For some in business, these tensions are at best a distraction for the government at a time when it needs to focus on the economy, and at worst risk a more serious regional crisis that could deter foreign investment and endanger the reforms.

 
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The Federal Reserve’s little-known role housing the assets of other central banks comes with a unique benefit to the United States: It serves as a source of foreign intelligence for Washington.

Senior officials from the U.S. Treasury and other government departments have turned to these otherwise confidential accounts several times a year to analyze the asset holdings of the central banks of Russia, China, Iraq, Turkey, Yemen, Libya and others, according to more than a dozen current and former senior Fed and Treasury officials.

The U.S. central bank keeps a tight lid on information contained in these accounts. But according to the officials interviewed by Reuters, U.S. authorities regularly use a “need to know” confidentiality exception in the Fed’s service contracts with foreign central banks.

The exception has allowed Treasury, State and Fed officials without regular access to glean information about the movement of funds in and out of the accounts, those people said. Such information has helped Washington monitor economic sanctions, fight terror financing and money laundering, or get a fuller picture of market hot spots around the world.

Some 250 foreign central banks and governments keep $3.3 trillion of their assets at the Federal Reserve Bank of New York, about half of the world’s official dollar reserves, using a service advertised in a 2015 slide presentation as “safe and confidential.”

The Bank for International Settlements, other major central banks and some commercial banks offer similar services, and clients usually have more than just one account. But only the Fed offers direct access to U.S. debt markets and to the world’s reserve currency, the dollar, making the U.S. central bank the top provider of this so-called custodial banking business.

In all, the people interviewed by Reuters identified seven instances in the last 15 years in which the accounts gave U.S. authorities insights into the actions of foreign counterparts or market movements, at times leading to a specific U.S. response.

In one relatively recent case, data from these foreign accounts offered U.S. authorities a sense of the mood in Moscow in March 2014, after Russia’s invasion of Crimea prompted the United States to respond with economic sanctions.

When foreign holdings at the New York Fed plunged about $115 billion, U.S. officials confirmed what others could only suspect, according to two former Fed officials: Russia’s central bank had pulled its funds.

While the Kremlin’s public response was defiant, Fed and Treasury officials concluded Moscow feared the United States would freeze Russia’s assets even though the account was not included in the narrow scope of the sanctions, according to one former official.

After about two weeks, Russia’s central bank returned most of the money to its Fed account, but the incident made officials monitor the account more closely for signs the sanctions had forced Moscow to draw down its reserves, the same source said.

It was unclear what effect the sanctions had.

The Bank of Russia said it would not comment on “details of its operations and interaction with partners.” The Russian Embassy in Washington did not respond to an emailed query.

No promise

The Fed acknowledged the practice of disclosing account intelligence, but declined to comment on individual clients.

“While our account agreement does provide for the sharing of information with the U.S. government in limited circumstances, we require a clearly demonstrated need for the information and a commitment that the information will be treated confidentially,” said a New York Fed spokeswoman. “This exception has been used on rare occasions and on a limited basis for such issues as compliance with sanctions requirements and anti-money laundering principles.”

The insights into the Fed operation come at a time when U.S. President Donald Trump threatens new economic sanctions on countries that could again be monitored through the foreign accounts. It also comes as U.S. intelligence-gathering has come under intense public scrutiny, with agencies investigating Russian meddling in last year’s election and possible collusion with Trump’s campaign. The Senate this month backed new sanctions on Russia in part to punish it for the meddling, while the Treasury added individuals and entities to those sanctioned over Moscow’s actions in Ukraine.

According to a draft account agreement the New York Fed published online last year, the Treasury or any other U.S. government agency or Fed bank must have “a need to know such information” to access it.

Seven people with direct knowledge of instances in which this exception was used told Reuters there was no working definition of the “need to know,” and that New York Fed lawyers would usually decide case by case.

The level of scrutiny by U.S. authorities and lack of clarity over what would constitute a “need to know” surprised some former foreign central bankers who spoke to Reuters.

The Bank of France, which also maintains foreign accounts, guarantees “full confidentiality” for its clients unless information is needed in a criminal investigation, said Christian Noyer, who was governor from 2003 to 2015. “It’s only in that case,” he said in an interview. “It’s not just to look at them and to know that.”

Less surprising was the fact that the United States leveraged the Fed’s position at the center of global finance, they said.

“The kinds of powerful central banks that can offer these services … will want to use that power in ways that benefit their public remit,” Patrick Honohan, governor of the Central Bank of Ireland from 2009 to 2015, told Reuters.

Edwin Truman, who headed the Fed Board of Governors’ international finance division for more than two decades before joining the Treasury in 1998, said the Fed’s clients should not expect absolute secrecy.

“There is no promise to clients that the information in their accounts will not be shared with U.S. official circles,” Truman, now a fellow at the Peterson Institute for International Economics, said in an interview.

A Treasury spokesman said the department monitors transactions and collects data from all financial firms “both routinely and in the course of investigations [and] has the ability to request information from banks beyond the ‘need to know’ provision.” He declined to comment on interactions with the New York Fed.

Treasury calling

The U.S. officials interviewed by Reuters included executives and division heads, and people directly involved in discussions in which the confidentiality exception was used to analyze accounts that otherwise only a select group of Fed officials monitors.

Most spoke on the condition of anonymity. Day to day, a team of about a dozen New York Fed analysts oversees the accounts. This low-profile unit, called Central Bank and International Account Services (CBIAS), came under the spotlight last year when it transferred $81 million from the Bangladesh central bank’s account into the hands of hackers in one of the largest cyber heists ever.

The unit manages mostly Treasury and agency debt. It also oversees more than 500,000 gold bars that have accumulated in underground vaults since the New York Fed first opened accounts for Britain and France a century ago.

The requests for information became more frequent after the passage of the 2001 U.S. Patriot Act, mostly from the Office of Foreign Assets Control, a Treasury division enforcing sanctions and targeting terrorist financing, money laundering, and weapons and drugs trafficking. The Department can also subpoena confidential information.

Among the requests since then have been inquiries about the accounts belonging to Turkey, Iraq, Russia and others, often to help determine whether official funds were being used to finance sanctioned groups or individuals, according to three of the sources. A few countries of keen interest to the U.S. government have little or no funds at the New York Fed — such as Iran, which is sanctioned, and Saudi Arabia, which is not.

An official at Turkey’s central bank said “operations are routinely carried out according to a correspondent banking agreement with the New York Fed, which is the standard operational procedure in correspondent banking.”

Iraq’s central bank stands out among those subject to U.S. scrutiny because of the extent of cooperation between Baghdad and New York. Earlier this month, based on information and instructions from the Fed’s foreign accounts team, the Central

Bank of Iraq blacklisted a money exchange firm suspected of ties with Islamic State and al-Qaida. The Al-Kawthar money exchange firm, from the town of Qaim near the Syrian border, had its assets frozen in the action.

Fed officials rely on meetings and conference calls to advise the Iraqi central bank on how to track and freeze out local firms suspected of terrorist connections or of helping Iran bypass sanctions, an Iraq central bank official told Reuters.

“We have direct contact with the foreign assets monitoring office in the Fed,” the official said. In freezing the assets of Al-Kawthar, Iraq’s central bank followed Fed “verification procedures,” added the official, who declined to be named.

The U.S. Treasury announced the sanctions against Al-Kawthar on June 15, citing $2.5 million in money transfers it allegedly made to a firm linked to Islamic State facilitators. The owner of the money exchange firm was not available to comment.

Sometimes, a peek into the Fed accounts has provided the Treasury insight into market upheaval. At the height of the global financial crisis in 2008, Treasury officials asked the New York Fed whether one of its clients was behind plummeting demand for short-term debt of mortgage giants Fannie Mae and Freddie Mac, according to a former CBIAS official.

An analysis of the accounts showed that China’s central bank had curbed purchases, and that intelligence factored into the U.S. government’s decision to seize the agencies in September 2008, the person said.

The People’s Bank of China declined to comment.

In some cases, the Fed team handling the foreign accounts would activate the “need to know” clause if it spotted something unusual, two former Fed officials said.

Since the 2010 Arab Spring uprisings, for example, the New York Fed has made several inquiries with the State Department about Yemeni and Libyan assets, according to one of these officials.

The Fed team, which ranks accounts by levels of risk, sought clarity on whether the governments or insurgents were in control of those countries’ central banks, the official said.

A State Department official said it “maintains contact with counterparts in the Federal Reserve system to share information on political and security developments” so they can “better evaluate and understand foreign governmental structures, leadership, and financial risk.”

Representatives of Libya’s and Yemen’s central banks, as well as Yemen’s embassy in Washington, did not respond to requests for comment.

 
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A study by aviation experts says the number of non-military drones will grow very quickly over the next 10 years, as investment soars and capability improves. Drones are unmanned aircraft, remotely controlled by a person on the ground, rather than a pilot on board the vehicle.

The Teal Group says around $2.8 billion will be spent on non-military drones globally this year, growing to $11.8 billion by 2026. The report says easing airspace regulations, major investment, and work by major technology companies means the civil drone market is ready “to take off.” While many drones are used by hobbyists, commercial drones are the fastest growing part of this market.

Commercial drones are used for aerial photography in real estate, university research, and for shooting Hollywood movies. Farmers use drones to get a perspective on which parts of their fields are short of water or fertilizer, and use other unmanned aircraft to spray chemicals. Construction and utility companies use unmanned aircraft for inspections, and some companies are working on solar-powered high-altitude drones that can park in the sky and serve as platforms for internet services in undeserved areas.

Drones cost less to operate than manned aircraft, and that is why some traditional aviation tasks as well as some new kinds of work are opening up to these vehicles. Drones are cheaper because they are usually smaller than traditional planes and cost far less to buy, maintain and fuel.

It takes less time and money to train people to operate drones. Flight instructors say it takes many months and tens of thousands of dollars to earn a license to operate manned aircraft for pay.

Alan Perlman, founder of Drone Pilot Ground School, said a commercial drone operator can earn a credential for a few hundred dollars in a few days. Perlman’s company trains new operators, and he told VOA that there are probably more than 40,000 licensed commercial drone pilots in the United States. Based on enrollment in his school, he thinks the number is growing rapidly.

In the United States, traditional manned aircraft are flown by more than 250,000 professional pilots, including both commercial and airline pilots, according to the Federal Aviation Administration. The government’s Bureau of Labor Statistics projects that jobs flying manned aircraft will grow about 5 percent annually over the next decade. The FAA says it does not have studies under way to examine the impact of drones on employment.

Press reports say airline traffic is growing and increasing the demand for the highly trained and experienced pilots who fly airline passenger planes. Some stories describe a global shortage of these experienced pilots as demand grows for air travel, particularly in Asia.

It may be a different story for commercial pilots who fly manned aircraft for aerial photography or to spray chemicals on farmers’ fields. Drones have already been used for some of those activities, and as these devices become more capable, they may expand their reach. Government experts at the BLS are working to update the outlook for these and other kinds of jobs, but those studies will not be published until October.
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China and Vietnam face a stiff new test in avoiding a showdown over undersea oil drilling after Beijing cut short a high-level meeting last week, but experts say the two sides will eventually patch things over.  

Fan Changlong, vice chairman of China’s Central Military Commission left early from a “defense border meeting” in Vietnam Thursday due to “working arrangements,” the official Xinhua News Agency in Beijing reported. Fan had met earlier in the week with Vietnam’s Communist Party general secretary, president and prime minister.

Talks cancelled 

Neither side is saying officially whether something else led to the cancellation. Analysts who track Vietnam believe it comes down to a disputed South China Sea oil exploration tract in Vietnam’s hands as well as Hanoi’s recent contact with Chinese rivals Japan and the United States.  

“Most analysts believe China was either sending Vietnam a signal about its deepening ties with the U.S. and Japan or pressing it to stop exploring for oil near China’s nine-dash line or maybe both,” said Murray Hiebert, senior fellow at the Center for Strategic and International Studies think tank in Washington.

China claims most of South China Sea

China claims more than 90 percent of the sea, citing a so-called “nine-dash” demarcation line, though a world arbitration court rejected the legal basis for that claim in 2016.

“Unless Hanoi reads the signal correctly and makes the changes China demands, we can expect Beijing to send more warning shots across Vietnam’s bow in the months to come,” Hiebert said.

Beijing claims to the 3.5 million-square-kilometer sea overlap Vietnam’s exclusive economic zone 370 kilometers off its east and south coasts.

Vietnam explores for oil

China probably pulled its general out of the talks to warn Vietnam about oil exploration at block 136, said Le Hong Hiep, research fellow with ISEAS Yusof Ishak Institute in Singapore. The block lies southeast of mainland Vietnam and near a nine-dash line that China uses to mark its maritime claims stretching from Brunei and Malaysia past the Philippines to Taiwan.

Before cutting short his visit, the Chinese general told Vietnamese leaders the South China Sea islands had belonged to China “since ancient times,” Xinhua said. China uses historic usage as a basis for its maritime claims. 

“From the Vietnamese perspective, it’s on the continental shelf of Vietnam and Vietnam has sovereign rights over that area, and furthermore after the ruling last year by the arbitral tribunal, China does not have any legitimate claim over that area,” Le said.

Other reasons for the general to leave 

China probably bristled further when the Vietnamese prime minister met U.S. President Donald Trump in May and a group of Japanese politicians the following week. China resents Japan and the United States for offering military aid for Southeast Asian claimants to the disputed sea.  

Oil exploration disputes have caused previous confrontations in the volatile China-Vietnam maritime rivalry, giving the latest disagreement a risky edge.

Past incidents 

In 2011, Chinese vessels, in the same region in question today, cut a cable being placed underwater by a Vietnamese survey crew, the government in Hanoi said then. In 2014, vessels rammed one another as China’s chief offshore driller positioned an oil rig in waters claimed by Vietnam.

Disputes over maritime sovereignty led to deadly clashes between Vietnam and China in 1974 and 1988, as well.

Hanoi’s state-owned oil firm Petrovietnam says on its website that in 2013 it had signed a contract to explore for oil again at block 136. 

“But China insists it’s still a disputed area and they believe that Vietnam is violating a common understanding between the leaderships of the two countries,” Le said. “In the background there is some resentment against Vietnam’s recent rapprochement with the U.S. and Japan as well, so I think there are a few things at work here.”

Reconciliation expected 

Vietnam will probably try to put aside the Chinese general’s sudden departure to get along with China, experts say.

“Vietnam cannot afford to have permanent antagonistic relations with China or to go out of their way to antagonize China because they have to sleep with their eyes open every night,” said Carl Thayer, Southeast Asia-specialized emeritus professor of politics at The University of New South Wales in Australia. China has the world’s third strongest armed forces after the United States and Russia.

Calculated exchange 

Exchanges over border issues work for both sides, he added. “One, it’s a positive step, but two it also served propaganda functions for both sides to beam back into their country, to netizens who hate each other, cooperation of a positive nature.” 

Vietnam and China stepped up dialogue after the world arbitration ruling. Border defense talks had been in place since 2013. Senior leaders also met in January to discuss maritime cooperation that could include a joint search for undersea oil or gas. Both countries also value the sea’s fisheries. 

China, for its part “has attached high importance to the development of military relations with Vietnam and is willing to join hands with the Vietnam side to further push forward the ties,” Xinhua quotes the Chinese general saying last week. 

“Both countries know that they will have to continue to work towards finding a balance where they can both benefit economically and co-exist politically,” said Jonathan Spangler, director of the South China Sea Think Tank in Taipei.
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Japanese air bag maker Takata Corp. has filed for bankruptcy protection in Tokyo and the U.S., overwhelmed by lawsuits and recall costs related to its production of faulty air bag inflators that are linked to the death of at least 16 people.

The company announced the expected action Monday morning Tokyo time. Takata confirmed that most of its assets will be bought by rival Key Safety Systems, based in suburban Detroit. Key will pay about $1.6 billion (175 billion yen), according to an announcement by the two companies.

Takata’s defective inflators can explode with too much force when they fill up an air bag, spewing out shrapnel. Besides the fatalities, they’re also responsible for at least 180 injuries, and touched off the largest automotive recall in U.S. history. So far 100 million inflators have been recalled worldwide including 69 million in the U.S., affecting 42 million vehicles.

Under the agreement with Key, Takata’s manufacturing of inflators will be kept separate in order to keep manufacturing inflators used as replacement parts in recalls. The recalls, which are being handled by 19 affected automakers, will continue.

Key also said it won’t cut any Takata jobs or close any of Takata’s facilities.

At the end of April, only 22 percent of the 69 million recalled inflators in the U.S. had been replaced under the recalls, leaving almost 54 million on the roads, according to the National Highway Traffic Safety Administration website. This means more inflators will likely explode and more people will be hurt in the future, lawyers say.

Takata’s troubles stem from use of the explosive chemical ammonium nitrate in the inflators to deploy air bags in a crash. The chemical can deteriorate when exposed to hot and humid air and burn too fast, blowing apart a metal canister.

Key, a Chinese company with international operations, makes inflators, seat belts and crash sensors for the auto industry. It is owned by China’s Ningbo Joyson Electronic Corp. Its global headquarters and U.S. technical center is in Sterling Heights, Michigan.

At least $1 billion from the sale to Key is expected to be used to satisfy Takata’s settlement of criminal charges in the U.S. for concealing problems with the inflators. Of that amount, $850 million goes to automakers to cover their costs of the recalls. Takata already has paid $125 million into a fund for victims and a $25 million fine to the U.S. Justice Department. 

Attorneys for those injured by the inflators worry that $125 million won’t be enough to fairly compensate victims, many of whom have serious facial injuries from metal shrapnel. One 26-year-old plaintiff will never be able to smile due to nerve damage, his attorney says.

The Takata corporate name may not live on after the bankruptcy. The company, founded in 1933, says on its website that its products have kept people safe, and it apologizes for problems caused by the faulty inflators. “We hope the day will come when the word `Takata’ becomes synonymous with `safety,”‘  the website says.
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