Friday, July 23, 2010

Emerging Markets: the privileged relation between China & Sri Lanka

The 30 years old conflict between the government of Sri Lanka and the LTTE (Liberation Tigers of Tamil Eelam, often simply called Tamil Tigers) ended on May 2009.

Since then the country has been often in the Western newspapers due to the investigations of the alleged abuses committed during the last months of the war.
The investigations over alleged war crimes and the tones of Western diplomats during the last phase of the war have strained the relations with Western countries.
Please refer to this article from the BBC to witness the status of the relationships between the Sri Lankan government during the last phase of the war in 2009 (BBC:

As the West stepped up the amount of conditions for aid, and limited any military support, China stepped in filling the void with a much lower profile set of demands for the Sri Lankan government. With fresh support from the East the Sri Lankan government was able to hold firmer in front of the Western demands.

As a country Sri Lanka holds a strategic geographical position and it is a country that is host of good natural resources waiting for strong partners to be developed, now that the north is under direct control of the government this entire area of the country is in desperate need for basic infrastructure: roads, power plants, railways, etc.

Further, the Indian Ocean is not the largest ocean on this planet but is, by far, the busiest. Countries around the Indian Ocean produce 40% of the world's oil. Seventy percent of the world's oil shipments and 50% the world's container cargo go across this Ocean. One hundred years ago, the US Admiral Alfred Maher rightly said, 'Whoever controls the Indian Ocean, dominates Asia'

The Times said: "Sri Lanka signed a classified $37.6 million deal to buy Chinese ammunition and ordnance for its army and navy ... China gave Sri Lanka — apparently free of charge — six F7 jet fighters last year, according to the Stockholm International Peace Research Institute, after a daring raid by the Tigers' air wing destroyed ten military aircraft in 2007."

It isn't hard to see China's motivation. The Times said: "China is building a $1 billion port that it plans to use as a refueling and docking station for its navy, as it patrols the Indian Ocean and protects China's supplies of Saudi oil.
The Chinese say that Hambantota is a purely commercial venture, but many US and Indian military planners regard it as part of a “string of pearls” strategy under which China is also building or upgrading ports at Gwadar in Pakistan, Chittagong in Bangladesh and Sittwe in Burma.

The strategy was outlined in a paper by Lieutenant-Colonel Christopher J. Pehrson, of the Pentagon’s Air Staff, in 2006, and again in a report by the US Joint Forces Command in November. “For China, Hambantota is a commercial venture, but it’s also an asset for future use in a very strategic location,” Major-General (Retd) Dipankar Banerjee of the Institute of Peace and Conflict Studies in Delhi said.
"Ever since Sri Lanka agreed to the plan, in March 2007, China has given it all the aid, arms and diplomatic support it needs to defeat the Tigers, without worrying about the West."

As the influence of China grows in Asia, its sphere of influence, it is likely going to be harder for Western companies to secure government related projects and tenders unless there is a major realignment of interests in the region. It is clear that India has a much larger role to play to balance the power equation.

Supporting materials:

Thursday, July 15, 2010

Iran sanctions - update, unilateral sanctions from the USA

The Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 (“CISADA”).
Cisada is amending the Iran Sactions Act ("ISA") to create additional activities that could subject non-US firms to sanctions.

The additional activities that are now subject to sanctions include those that support the production of refined petroleum products and the one that involve the importation of refined petroleum product into Iran.
Further, in line with the most recent UN sanctions, the new law targets all financial institutions that support Iran's development of its nuclear program and the activities of the Revolutionary Guard Corps.

The implication of this legislation can be far reaching as it now involves the operations of non-US subsidiaries or affiliates  and non US business partners. 

The new amendments targeted investments of US $1M or more or an aggregate market value of US $5M or more in a 12-month period. Prior of this latest amendment the targeted investment were US $20M or more.

Specifically, the Amendments sanction the sale, lease or provision to Iran of:

"goods, services, technology, information, or support that could directly and significantly facilitate the maintenance or expansion of Iran's domestic production of refined petroleum products, including any direct and significant assistance with respect to the construction, modernization, or repair of petroleum refineries"; and

refined petroleum products or "goods, services, technology, information, or support that could directly and significantly contribute to the enhancement of Iran's ability to import refined petroleum products," including activities such as underwriting, insuring, reinsuring, financing, brokering, or providing ships or shipping services.

According to the "ISA" investigations into this matter are initiated by the President upon receipt of credible information.
If the President determines that sanctions must be enacted according to the previous "ISA" directive the President had to impose 2 out of 6 sanctions:
  • Denial of Export-Import Bank loans, credits or guarantees; 
  • Denial of licenses to export military or militarily useful technology;
  • Prohibition on U.S. financial institutions making loans or providing credit of more than US$10 million in any twelve-month period (with minor exceptions);
  • Prohibition on obtaining U.S. Government procurement contracts;
  • Restrictions on imports into the United States; and
  • If the violator is a financial institution, prohibition on being designated as a primary dealer in U.S. Government debit and/or prohibition on acting as an agent for U.S. Government funds.
With the new Amendments the ISA now requires the President to apply 3 out of the 9 sanctions available. 3 additional sanctions have been added and would prohibit:
  • Foreign exchange transactions in the United States; 
  • Transfer of credits or payments by financial institutions in the United States; and 
  • Dealings in property in the United States.
The Amendments also expand the definition of "person" and "petroleum resources":

The definition of "person" now includes: financial institutions, insurers, underwriters, guarantors, and other business organizations. 
The definition of "Petroleum resources" is now defined to include "petroleum, refined petroleum products, oil or liquefied natural gas, natural gas resources, oil or liquefied natural gas tankers, and products used to construct or maintain pipelines used to transport oil or liquefied natural gas."


The Amendments take effect immediately. The Amendments provide a one-year grace period for the launching of investigations of persons engaging in activities related to the production or importation of refined petroleum products, however. Such persons are subject to investigation only for sanctionable activities that commence on the one-year anniversary date of the Amendment's enactment, or thereafter.