entrepreneur.com May 05, 2003 By Joshua Kurlantzick

Economic indicators aren't too optimistic, particularly for small companies. But if the past few years have taught us anything, it's that the news isn't all bad.

In March, as the U.S. military began its invasion of Iraq, many American businesses feared the impact of the battle on commerce. Yet they hoped a quick victory would provide a post-war boost to the economy. An end to the war, they hoped, would prompt exuberant and relieved consumers to open their wallets, depress the price of oil, lead to increased spending on domestic travel, and allow companies to more easily make plans for capital spending.

Unfortunately, it does not appear that a post-war boom is likely. In fact, many economists and businesspeople now worry that America actually is headed for another recession--one that could prove the final blow to many small companies already struggling from more than two years of economic weakness.

The signs are not good. A well-known index of economic indicators, the Conference Board report, fell in March; meanwhile, March's index by the Institute of Supply Management, the nation's leading forecaster of manufacturing activity, dropped below 50, signifying that the manufacturing sector is contracting, and employers eliminated more than 100,000 jobs in March, after slashing nearly 300,000 the month before. Overall, companies are hiring at their slowest pace in more than a year. "It does appear increasingly likely that we're headed for another recession," says Robert E. Scott, an economist at the Economic Policy Institute, a Washington, DC, think tank.

"It's one of the most difficult periods I've ever seen," concurs Al T. Lubrano, president of Technical Materials Inc., a Lincoln, Rhode Island, company that manufactures specialty metal products. "Where's the hope on the other end?"

Unlike in the past, economists say, this war has not--and will not--provide much stimulus for U.S. economic growth. "Despite the defense spending for the Iraq war, the amount of spending this time is still quite small, proportionally, compared to previous conflicts," says John Nye, an associate professor of economic history at Washington University in St. Louis, Missouri.

What's more, the end of the war in Iraq has not significantly reduced the uncertainty felt by many Americans--an uncertainty that keeps consumers from spending as much as possible and prevents businesses from making long-term plans. Although the price of oil has dropped, America still remains dependent on potentially unstable nations--Nigeria, Venezuela--for a considerable percentage of its petroleum.

Many U.S. businesses and consumers remain unconvinced that another war is not on the horizon. "The victory in Iraq hasn't resolved this uncertainty, because we don't know it will be the last conflict," says Joel Marks, executive director of the American Small Business Alliance, a Washington, DC, trade group. "Given the fact that we're continuing to fight against terrorism, we don't know that we won't have a conflict soon with Syria, or Iran, or North Korea."

Numbers Don't Lie Indeed, the Federal Reserve's weekly assessment of lending to businesses dropped throughout April, suggesting that most companies are holding off on new investments. As Craig Thomas, an economist at West Chester, Pennsylvania, forecasting organization Economy.com, notes: "Why would anyone want to invest in equipment [right now]? I just don't see it."

Meanwhile, housing construction fell in March, suggesting that American consumers, who are carrying higher levels of personal debt than they did during the 1991 Gulf War, also are becoming more cautious. In the past, the government was able to stimulate spending and growth by slashing interest rates, but the Federal Reserve has cut rates 12 times since 2000, to its current rate of 1.25 percent.

The arrival of SARS in North America has further heightened uncertainty. Already, Stephen Roach, chief economist at Morgan Stanley, has predicted that the world will fall into recession this year, in part because of SARS. "Right now, SARS is in Toronto, and we've seen how it's decimated the economy of that economically powerful city," says Marks. "Tomorrow it could be in Des Moines."

SARS, the possibility of future conflict and the continuing threat of terrorism also are complicating shipping logistics, cutting into companies' profits. For example, over the past six months, freight rates have risen by more than 30 percent for companies shipping through the Middle East, as marine insurance companies raised rates on shippers since the Iraq war by as much as 50 percent. In fact, according to marine insurance companies, shipping rates have been pushed to their highest level in years.

More expensive logistics, along with increased tension between Europe and the United States due to friction over the Iraq war, is putting a damper on global trade. "The pace of free trade expansion has slowed drastically," says Scott. "If we engage in more conflicts in the Middle East, that could further alienate Europe, which is already hurting economically, and damage trade." Indeed, unlike in the wake of the 1991 Gulf War, when Europe and Asia were growing and helped pull the American economy out of recession, today Europe and Japan are struggling on the verge of their own recessions.

America's burgeoning deficits--its national deficit and trade deficit with other nations--also are constraining the economy. The federal government will run a 2003 deficit of at least $200 billion, and states also are facing their biggest deficits in ages. Many states are taking almost laughably drastic measures: In Missouri, the governor has ordered every third lightbulb unscrewed in state buildings. At the same time, as the American trade deficit has grown, the U.S. has become increasingly dependent on foreign capital to finance growth. If that capital pulls out, it could shave as much as 10 percent of U.S. growth and drastically weaken the dollar, Scott says.

Small Companies Bracing Themselves As all these signs of economic weakness build, small companies have the most to lose. Thus far, small firms have largely been shut out of contracts for post-war reconstruction in Iraq, though the Bush administration has promised to share the wealth. And according to Marks, many small companies do not possess the kind of cash reserves to deal with another prolonged period of economic downturn, since banks have become more willing to turn away small clients than they have larger companies. "Small companies have spent down much of their cash already, in the previous recession, and they didn't have time to build it up again," Marks says. "There's numbness out there in the small-business community, wondering whether they can hold on to the cash they have and numbed by each economic shock."

Lubrano agrees. "I look at competitors in the field, and I see many of them are going bankrupt," he says.

Meanwhile, small companies rarely have the capital needed to create the redundant, alternative supply chain networks that can allow goods to bypass world hotspots and generally avoid logistical problems. And owners of small companies often are ill-prepared to deal with the effects of continued anxiety and uncertainty on their workers, since few have the kind of dedicated in-house counseling services large companies employ.

Small companies also usually are more reliant on obtaining business from other entrepreneurs. "Unlike bigger companies, small firms usually depend on getting paid by a large number of small clients, many of whom can't pay now," says Marks. "Small companies can't extend them the kind of credit they need to last until an upturn that big corporations could."

Always a Silver Lining But not all signs of the economic future are negative. In the immediate aftermath of American troops arriving in Baghdad, stock markets, which can be leading indicators of economic expansion, posted stronger gains than they had since September 11. What's more, since the beginning of the Iraq war, the price of oil has fallen by more than 25 percent. A decrease in the value of the dollar actually could help American entrepreneurs, as it would make them more competitive with companies from the developing world.

And despite high levels of debt, American consumers often prove willing to keep shopping. Corporate credit became slightly easier to obtain in March. The fact that companies have spent so little over the past three years ultimately will leave them with no option other than to increase business spending. Last week, Federal Reserve Board Chairman Alan Greenspan told Congress the economy is poised for growth even without further tax cuts--though the Bush administration continues to push for a $550 billion, 10-year tax-cut plan that may or may not stimulate the economy. (In February, a group of 10 Nobel Prize-winning economists concluded that the tax cuts would not have a significant short-term stimulus effect--some leading economists worry that further tax cuts could exacerbate federal and state deficits.)

Perhaps most important, small companies have internalized lessons from the 2000-2001 recession to prepare themselves for more economic turbulence. "Small companies that are around now are leaner than they were two years ago, and they've learned how to cut fat or adjust in other ways--merging with competitors, going into niche markets, renegotiating their contracts, conserving cash," says Marks. "Three years ago, two guys and an idea could raise capital; today those guys are living in their parents' basements."

"If you haven't already prepared for economic tough times, either by cutting all extraneous things or moving into niche markets where you can survive a downturn," says Lubrano, "after all we've been through the last few years, you have yourself to blame."

Forging Ahead Nothing's certain in today's economy, but it appears business owners aren't letting a potential recession stop them from seizing opportunities for growth, according to an OPEN Small Business Network 2003 Monitor from American Express. While the number of small businesses reporting that they foresaw growth opportunities for their companies in the next six months fell to 56 percent, down from 64 percent last fall, growth remains their number-one priority.

These business also plan to add jobs--35 percent of those surveyed indicated they would hire full- or part-time staff within the next six months. The reasons for the additional new-hires are varied, with 48 percent saying it's to help drive business volume increases; 34 percent, for new business ventures; and 10 percent, to fill a vacancy that's been open for a long time.

And there's more good news: While these companies position themselves for growth, they're also cutting costs, with 30 percent cutting back on expenses and 24 percent cutting back on personal spending. Fewer businesses (57 percent) are reporting cash-flow woes than they were in the fall (63 percent).

From: Jessica Rosenberg Date: Jueves, 08 de Mayo de 2003 02:48:51 p. To: jessica@obraweb.com   El Arca de Noé Ricardo Ball   Domingo, 4 de mayo de 2003   Aparte de nuestro gusto por las arepas, los venezolanos distamos mucho de ser un pueblo homogéneo. Tenemos gustos distintos y gracias a Dios, todavía gozamos de la libertad para escoger. El sistema democrático es un corolario de nuestro comportamiento.   Los argumentos a favor del candidato único son muchos, pero el más contundente parece ser que sin éste el presidente Chávez es imbatible. Desafortunadamente, si eso es así el ganar unas elecciones con el sólo propósito de sacar a Chávez del poder no es una solución duradera en el tiempo y asegura un retorno del mandatario al poder.   La experiencia en este país, las recientes elecciones primarias en Argentina y las ultimas encuestas en el Perú, nos demuestran la cantidad de ex presidentes en Latinoamérica que resucitan principalmente debido a que los gobiernos que los siguieron fueron incapaces de revertir las malas políticas impuestas por ellos. Como muchos somos nostálgicos por naturaleza, nos parece que el pasado fue mejor y caemos en el engaño de elegir líderes que en un momento fueron considerados como fracasados, pero que en vista de las nuevas realidades son investidos con aura de libertadores.   La Coordinadora Democrática ha sido una solución para enfrentar un problema coyuntural. Sin embargo ha sido el pueblo Venezolano quien ha dictado la pauta y los ha obligado en varias ocasiones a modificar sus planteamientos. Sin embargo, la Coordinadora Democrática no ha sido electa. Es una organización que acoge a todos los sectores descontentos de la realidad venezolana y que entre sus miembros distan mucho en estar de acuerdo en sus soluciones. El hecho de que muchos de sus integrantes hayan sido miembros de gobiernos anteriores no los descalifica ya que ellos y otros líderes que han emergido han hecho un extraordinario trabajo y han demostrado su capacidad individual de lograr la creación de un cuerpo que mal que bien ha canalizado el llamado de la oposición al cambio.   Sin embargo el hecho de que haya sido una pieza importante en esta época de protesta publica hacia el régimen, ello no implica que sean el vehículo que gobernará el destino de la nación. Si bien es importante la unificación de los factores de oposición para que el referéndum sea exitoso y lograr parar la onda expansiva de la Revolución Bolivariana, la solución no está en seleccionar a dedo un vehículo o una persona sino en lograr que la propia población se convenza y vote por el líder que desea.   Pareciera que en la medida en que existan más candidatos u opciones para la oposición, en esa medida se diluyen los votos lo cual evidenciaría un triunfo para el Presidente Chávez. Desafortunadamente si eso es así, habrá que respetar los resultados. Por eso es muy importante que la oposición y sus integrantes, del bando que sean, presenten sus respectivos proyectos económicos, políticos y sociales con suficiente antelación y darle la potestad al electorado de elegir el programa que más los convence. Ya sabemos cual es el camino que quiere tomar el Presidente Chávez. Pero aparte de sacarlo democráticamente del poder, la oposición no maneja de sus líderes ninguna información coherente sobre las políticas a seguir si acaso llega a tomar las riendas del poder y eso es algo que a muchos no los convence.   (*): Economista   email: ricardo_ball@hotmail.com   www.analitica.com  

Newswatch (Lagos) May 5, 2003 Posted to the web May 5, 2003 Phillip Oladunjoye

Nigeria's dependence on aid as main revenue earner may be broken as exploitation of bitumen promises billions of naira in annual revenue

It is a big boost for the Nigerian economy. A large deposit of bitumen estimated at 42 billion barrels in Agbabu, Ode-Irele community in Ondo State currently being explored and exploited will fetch at least N155 billion annually.

C. O. Akubueze, an estate surveyor and valuer, said the local market alone in Nigeria is estimated at about N20 billion annually while it is also projected to pump into the economy N135 billion annually from its exportation, he said.

Oyewola Oworu, special technical adviser to the minister on solid mineral development, said the communities where bitumen was being explored would also benefit from the exploitation and exploration of the bitumen. According to him, the communities would have equity in the project, where the compensation due to the communities would be re-invested in the project. This investment, he said, would yield streams of income for the development of the communities. "There is a proposal on ground that the communities might have to invest in the exploitation of the bitumen. The proposal has been presented to the two firms authorised to mine bitumen in the country," he said.

The two firms authorised to mine bitumen in the country are Beecon Limited and Nisand Limited. The companies, however, have promised to employ 20,600 Nigerians before the end of July this year.

President Olusegun Obasanjo also promised to develop a seaport in Ondo State based on the success of the bitumen project. This, he said, would serve as motivation for the commencement of mineral mining in other parts of the country.

Modupe Adelaja, minister of solid minerals said the bitumen project would enhance industrialisation of the country. Newswatch gathered that commercial activities in major cities in Ondo State have improved as a result of the bitumen project. Rents in major towns like Akure, Ondo , Ore and Owo have gone up sharply in anticipation of the commercial exploration and exploitation of bitumen. A two-bedroom bungalow in the highbrow residential areas in the state capital now attract an annual rental income of at least N150,000, from between N30,000 and N40,000 it attracted some years back.

The state capital has witnessed an avalanche of banks with colourful edifice in recent time. In anticipation of increased commercial activities, Biola Olaseinde, chairman, Nigeria Institute of Estate Surveyors and Valuers, NIESV, Ondo State branch, said the state had already started feeling the impact of the project. "Akure and other cities are growing, so are our commercial and business activities. Both the federal and the state governments are providing infrastructure because of the bitumen project, and these will, no doubt, attract more foreign investment to the state. We are already feeling the effect of the project on residential and commercial properties," he said.

In spite of the benefits of the project in the state, the communities have expressed fear over the adverse impact the exploration might have on the people. A community leader in Ode-Aye, who pleaded anonymity, said the community was not opposed to the project but demanded that thorough environmental impact assessment survey be carried out so that the people would know the potential socio-economic losses that might follow the implementation of the project. "We are not opposed to this project which has a lot of potentials, for the country in terms of foreign exchange earnings as well as employment opportunities for our youths, but we are concerned about the safety of lives and properties and the future of the present generation of youths and those yet unborn," he said.

Adebayo Adefarati, governor of Ondo State , had recommended that adequate compensation be paid to those that would be affected in the exploitation. "There cannot be a peaceful exploration of bitumen without the payment of adequate compensation to those that will be affected," he said.

Akubueze opined that the individuals within the mineral-producing communities should be developed to avoid conflict between the communities and the companies carrying out the mining project. 'In mineral-producing areas, the emphasis is centred on the provision of infrastructure for economic growth only. But this should not be so. For sustainable development, the authorities concerned must foster the development of each human being. Failure to do this will generate conflict as experiences in oil-producing areas have shown," he explained.

But the Federal Government seems to have made provision in its new national policy on solid minerals to allay the fears of the communities where solid minerals are being mined. The policy provided for adequate preservation of the environment. It also analysed health and safety measures that must be followed in the mining industry.

The policy states in part that "issues connected with environments, health and safety form an integral part of development. It follows, therefore, that the environmental impact, health and safety measures need to be incorporated from the beginning in any development project.

Oworu affirmed that the ministry of solid minerals had embarked on a strategy which would be endorsed by all stakeholders in the mining industry to avoid the repeat of the Niger Delta experience where disagreement over cash compensation has always led to hostilities between the communities and the oil companies. Newswatch gathered that the bitumen deposit in Ondo State is the second largest deposit of bitumen in the world. Venezuela is said to be the largest producer of bitumen.

Bitumen was first discovered in Nigeria by the Germans in 1901. Nigeria has 42 billion barrels of bitumen resources which stretches over an expanse of land covering Ondo, Edo , Lagos and Ogun states.

Bitumen is said to have about 44 by-products that are vital for industrial production. The tar-sand, which is the major by-product of bitumen, is a main raw material for road construction. Bitumen can also be used to produce fuel, oil, asphalt, and insecticide.

President Olusegun Obasanjo had inaugurated the bitumen project implementation committee, August 28, 2000 , to look into the modalities of exploring the product in commercial quantities. The committee was headed by Julius Ihonvbere, a professor. The committee, however, prepared the groundwork within two years for the commissioning of the bitumen project. Obasanjo described the bitumen project a launch pad for the Federal Government's plan to diversify the economy.

azcentral.com-Chicago Tribune May. 5, 2003 07:50 AM

RIYADH, Saudi Arabia - Faced with Iraq's return as a major oil producer, Saudi Arabian officials fear more pressure on prices - and on their already struggling economy. To some observers, such as Said al Sheik, chief economist in Jeddah for National Commercial Bank, Saudi Arabia cannot afford to sit back and wait to see how oil prices will play out. "The war has been positive for the economy," said al Sheik, referring to the run-up in oil prices, and increased oil output by Saudi Arabia. "But down the road, there are huge challenges," he said. Their worst fear is that Iraq will not only return to its pre-invasion production, but will go far beyond - to levels even higher than those reached before the first Gulf War more than a decade ago. Before the American-led invasion, the Iraqis were pumping out about 2.5 million barrels daily. But if cash-hungry Iraq wants to rebuild its economy in a hurry, it could press for a return to the 1990 level of 3.5 million barrels per day, oil industry experts say. It has the capacity to do so: Iraq's oil reserves are second only to Saudi Arabia. "If they want to prices to stay steady, (OPEC) will have to cut back on production, or on the other hand, they could pump up volume and accept lower prices," said Leonidas Drollas, chief economist for the Centre for Global Energy Studies in London. He agrees with other experts who predict the stiff competition for petroleum dollars in the coming years could lead "to the unraveling" of the 43-year-old oil cartel, which has managed to keep prices steady for the last few years. But that is not the official Saudi line. Saudi officials such as Foreign Minister Prince Saud bin Feisel have calmly put down such a dire possibility, saying OPEC has endured many crises over the years and survived intact. Still, Saudi officials do not discount the coming challenges their oil industry is likely to face. Saying it is almost impossible to accurately predict oil prices, Hamad Saud al Sayari, governor of the Saudi Monetary Authority, the Saudi equivalent to the Federal Reserve, conceded that he was "cautiously pessimistic" about the fate of oil prices in coming years. "Yes, the chances of some pressure on oil prices are high," added the U.S.-educated economist. The problem is, when the Iraqis rejoin the oil market in full production in a few years, a gush of oil is also expected from the Russians as well as from the Caspian region, possibly producing a price-reducing glut on the world oil market, industry experts say. "A lot of it depends on how the Iraqis view the market," said a Saudi oil company official. "If they want to see high oil prices, they will think twice before embarking on any actions that will bring down the house." "They'll be rational folks, and live like the rest of us," he added. Newly found oil money, largely because of Iraq's decreased oil output over the years, has been salvation for Saudi Arabia's troubled economy, which barely limped along in the 1990s. Since last November the Saudis have boosted their daily production from about 7 million barrels a day to more than 9 million barrels daily to make up for Iraq's production cutbacks as well as production problems in Venezuela and Nigeria, oil experts say. The higher oil prices and production hike have reportedly brought in million of dollars weekly. Likewise, after the first Gulf War in the early 1990s, the Saudis stepped up their production to make up for the cutbacks in the Iraqis' oil output. In both cases, the money has helped the Saudis deal with growing deficits and government expenditures. Saudi Arabia's economic problems, as he and other Saudi experts explain, are many. The country has not used its wealth to diversify, especially building a stronger industrial base, they say. Industries account for only six percent of Saudi Arabia's gross domestic product. The country has been slow to privatize businesses. And it has not updated its educational system to churn out workers needed for a competitive economy. In the meantime, it has one of the highest rates of income dependency. For every wage earner there are six who depend on the salary, according to a National Commercial Bank study. The global average is about two persons per wage earner, bank officials said. They also estimate the nation's unemployment rate at between 15 to 18 percent. Regularly updated figures are not available from the government. Debt, too, is increasing. Until now, Saudi Arabia has mostly borrowed locally to pay for its debt, according to al Sheik. The government's domestic debt is about $170 billion, according to news accounts. But al Sheik fears that Saudi Arabia will soon have to look outside for loans, forcing it to face the same kind of international pressures as Argentina and other countries that have ran into problems paying off their bills. Without major economic reforms, the future scenario is quite troublesome to economist Nahed Taher, also with the National Commercial Bank in Jeddah. Reduced oil prices combined with Saudi Arabia's internal economic woes could eventually drive Saudi Arabia's per capita further downward, she said. From a per capita income of $18,000 over 20 years ago, the number has dropped to about $7,500 today, she explained. And if a number of things go wrong for the Saudi economy, such as decline oil prices, the figure could plummet to about $3,000 by 2010, she predicted. That, incidentally, was the same amount for pre-war Iraq. "If we don't diversify our economy, this is likely. If we depend on oil revenues, and Iraq reaches 5 million barrels (per day) in five years, and the Russians and Caspians increase, then we are really in a dilemma," she said.

<a href=www.globes.co.il>Israel' Business Arena Oren Persico   5 May 03   09:49

Israel manufactures and exports a great many weapons. The subject almost never arises in public debate, and when it does, people yawn, as if the Jewish people have always been arms manufacturers and merchants.

After all, a nation living under the threat of war naturally makes weapons, and a country that makes weapons naturally looks for foreign markets for them. How large is Israel’s arms industry and how much does it export? Government ministries classify this information as privileged, but it is possible to learn about the extent of exports from foreign institutes and publications that monitor the international arms market.

“Defense News”, one of the world’s most respected journals covering the arms market, recently reported that Israel is now the world’s third largest arms exporter, after the US and Russia, with arms exports worth $3.7 billion in 2002.

Israel’s ranking jumped from its previous position in the bottom half of the top ten arms exporters. In 2001, Israel’s arms exports totaled only $2.6 billion. Israel’s arms exports rose 40% in 2002, and the country overtook Germany, UK, and France, to become a global arms power.

The nature of Israel’s arms deals in recent years can be found in the Stockholm International Peace Research Institute (SIPRI) publications. SIPRI’s yearbooks report large-scale arms deals, among other things. Following are some prominent Israeli arms deals in the 1990s: 96 Barak air-to-ground missiles to Singapore; 100 Popeye air-to-ground missiles to the US; six Kfir jet fighters to Ecuador; 15 Kfirs to Sri Lanka for use against the Tamil Tiger rebels; ten rocket launchers to Chile; 18 radars to Singapore; 130 anti-tank missiles to Estonia; ten anti-ship missiles to Chile; 18 155-mm artillery pieces to Slovenia; 100 unmanned aerial vehicles (UAVs) to South Korea; 15 tanks to Uruguay; 600 Python air-to-air missiles to Singapore; 46 Popeye missiles to Turkey; five 155-mm towed-artillery pieces to Botswana; ten radars to Chile; 48 Python missiles Ecuador; 28 UAVs to Switzerland; eight 155-mm towed artillery pieces to Cameroon; 960 Spike anti-tank missiles to Romania; six UAVs to Finland; two UAVs to the Philippines, for use against the Abu Sayyaf and other Muslim guerillas; 54 Barak missiles to Venezuela; 84 Python missiles to Chile; a landing craft (LCT) to Eritrea; a Bell helicopter to Argentina; and four Skyhawk jets to NATO.

Israel Aircraft Industries VP Corporate Communications Directorate Doron Suslik says IAI signed $3 billion worth of new contracts in 2002. Assuming that almost 60% of the amount consists of arms exports, IAI exported almost $1.8 billion worth of military equipment last year.

The Golda Meir era is over

SIBAT - Foreign Defense Assistance and Defense Export Organization deputy director Meir Shalit declines to either refute the truth of SIPRI’s figures or to comment about specific deals. He estimates there are 150-200 Israeli defense exporters, ranging from major government companies to tiny two-man firms. 50,000-60,000 people work in Israel’s defense industry, and they generate up to 25% of Israel’s annual exports. It is a huge industry that maintains a low profile.

IAI president and CEO Moshe Keret praised his marketing staff at IAI’s latest marketing convention. Yet, in the arms market - Israel’s largest exporter - advertising and marketing are largely irrelevant compared with political calculation and proven battlefield effectiveness.

Shalit says the time when politics played the dominant role is over, “In the 1960s all the countries in the world exported arms as part of their foreign policy, but that has passed. The defense market is just like any other market now. Sometimes it’s a buyers market, and sometimes it’s a seller’s. The customer buys the best product at the best price, because there’s an over-supply. Many companies from many countries compete for the large-scale tenders in an attempt to expand their market share. This is because, except for last year, due to the impending US-Iraq war, the defense market has been shrinking.”

Shalit admits, however, that Israel’s foreign policy dictates to whom its defense industries can sell arms. In his book “A Double-Edged Sword. Israeli Defense Exports in the 1990's" (Am Oved, 1992. In Hebrew), Prof. Aharon Klieman wrote, “Arms transfers are a dual-purpose political-security tool, essential for Israel’s security position, and an unavoidable critical component of foreign policy. Consequently, Israel’s diplomacy of arms exports is a kind of extension of Israel’s general approach to foreign affairs.”

This means that in its largest export market, Israel plays by very different rules than in every other sector. Arms customers are usually sovereign states, and purchasing calculations are not always based on advertising or marketing, but on a wide range of influences and pressures.

IAI has an extensive marketing deployment with offices or local representatives or agents in 85 countries. Suslik says IAI budgets $1.6 million a year for advertising in foreign publications, such as “Defense News”, “Aviation Week”, and “Jane’s Defense Weekly”, and on pertinent websites. That is only a fraction of IAI’s annual budget, but the advertising is mainly directed at creating market awareness about the company, rather than actually trying to convince a customer to buy the company’s products.

Suslik says, “We use integrated marketing tools, including traditional advertisements in journals, and participating in fairs and exhibitions. But the moment the Israel Air Force revealed, in April 2000, the Arrow anti-ballistic missile system in a public ceremony at Palmachim in the presence of the US ambassador, IAI executives, the Air Force commander, and Israeli and foreign media, and announced it was adopting the system for the country’s defense, it gave us an extraordinary first-class marketing edge.

“If I obtain pictures from the Ofek 5 reconnaissance satellite a few days after launch, and Minister of Defense Benjamin Ben-Eliezer then shows pictures of Iraq at a cabinet meeting, and the story is leaked to Hebrew daily “Yediot Ahronot” the next day, we get an exceptional marketing boost.”

Psst! Wanna buy an air-to-air missile?

Advertising for IAI and Rafael (which SIPRI ranked as the world’s 43rd largest arms exporter in 2000) is handled by an ad agency that prefers to remain anonymous and uncredited for this article. The reticence might be out of moral consideration, and what agency would like to be associated with ads that encourage the consumption of weapons that might kill innocents, or even boomerang to hit Israeli targets. Or the reticence might be out of professional considerations, since some of the ads provide a healthy dose of humor in a very serious industry. An ad for Rafael’s device to break down doors, for instance, shows a picture of a soldier firing and a huge explosion, with the caption, “Open Sesame”. Another ad for Rafael’s Spike anti-tank missiles shows a missile and a massive explosion, with the caption, “Spike was here”. The pictures are accompanied with systems’ technical details and advantages written as if for a sophisticated radio: “Easy to use, easy to assemble, fire and forget.”

Rafael marketing director Dr. Eitan Yudilevich says weapons have to sold like toothpaste. For him, the company’s ads meet their purpose. Rafael spokesman Noah Shahar says marketing weapons is different than marketing ordinary products.

Shahar says, “Let’s be honest, if I were to simply advertise an air-to-air missile, no one would buy it. You don’t buy air-to-air missiles in the supermarket. So why do I advertise? I’ve argued with the company’s executives and financial managers about this for years. I show them that companies like IBM (NYSE:IBM) and Coca-Cola (NYSE:KO) advertise constantly. The question is whether that’s appropriate for defense products, too.”

War as sales promotion

“Globes”: What is the concept behind the advertising? Will an admiral leafing through the magazine see the ad and say, “Ah, ha!”?

Shahar: That’s the million dollar question. I don’t have an answer, but magazines are full of ads for major players like Boeing (NYSE:BA) and Lockheed-Martin (NYSE:LMT). Are products bought on the strength of these ads? I don’t know, but my advertising concept is show that we exist; we’re on the map.”

It often seems like the advertising efforts are dwarfed by battlefield results. Suslik tends to concur, “Some of IAI’s products have combat reputations, which gives them a marketing boost over competing systems. The defense industry makes weapons, and weapons must be tested on the battlefield. That’s their real test.”

So the Iraq War was a superb sales promotion campaign.

“Unfortunately, during the run-up toward the war and during the war itself all intelligence, UAV, and command and control systems get a major push. If this were peacetime, countries would still be examining their operational and financial needs for procuring weapons systems, as these are not cheap, the examination and procurement processes would take longer. Since this was a time of war, and countries were worried about missile attacks from Iraq, the feasibility studies about the Arrow anti-ballistic missile system or UAVs, for instance, took on a whole new urgency.”

Shimon Peres’s mettle

Klieman’s book “Double-Edged Sword” is one of the most thorough analyses of Israel’s arms exports. He concludes quite simply every Israeli government since Ben Gurion has supported arms exports. Israel’s governments have invested vast sums in the country’s defense industries, and encouraged manufacturers to export. Klieman writes, “The question whether Israel should participate in the arms export business as a matter of principle was never discussed, nor is there any evidence that the various aspects of this question has ever been a matter for serious public debate.”

The only time an arms deal aroused a storm of controversy and Knesset debate was in 1959, when it was revealed that Israel had sold mortar bombs manufactured by Soltam to the Federal Republic of Germany. The debate was not about the fact of arms sales in general, but the particular customer, only a few years after the Holocaust. In his defense of the sale, Prime Minister David Ben Gurion revealed the protocol of the cabinet meeting in December 1958 that decided to give the Ministry of Defense the authority “to sell arms to foreign states in all cases where the Ministry of Foreign Affairs does not object.” Ben Gurion told the Knesset, “In all matters of foreign affairs, we ask ourselves one simple question: ‘What is best for Israel?’ If it is good, then all my emotions and Jewish instincts, and all my Jewish pride and humanity tell me, ‘Do what is best for Israel and what is necessary for its defense.’”

Arms exports had actually begun several years previously. In August 1954, Israel sold $1 million worth of Spitfires and $700,000 worth of rifles to Burma. That same year, Israel also sold artillery shells to the Netherlands, and other defense products to Belgium, Turkey, Italy, Ceylon (now Sri Lanka), Nicaragua, and the Dominican Republic. The customer list has grown longer since then.

As Ben Gurion’s protégé, Shimon Peres was an enthusiastic supporter of Israeli weapons development. While serving as Ministry of Defense director general and Deputy Minister of Defense in 1953-65, he encouraged military technology development. As Minister of Defense in the first Rabin Government in 1974-77, he completed a plan he had personally prepared a decade earlier. Kleiman quotes Peres as saying, “The defense relations of some countries do not necessarily conform to their ordinary foreign policies… and we must recognize this fact.”

Guns and avocados

Israel’s arms exports surged after the 1973 Yom Kippur War. Unprecedented global demand, the lifting of arms sanctions on Israel, and the IDF’s combat experience in two critical wars pushed Israel’s defense manufacturers into international markets. In the years after the war, Israel’s arms exports grew almost geometrically. The exports were frequently described as forced on Israel by circumstances. In 1982, then-Minister of Defense Ariel Sharon told Hebrew daily Ma’ariv, “We’d be delighted if Israel’s exports consisted solely of flowers, avocados, tomatoes, computers and advanced medical devices. But that is not enough to ensure what is necessary and essential… With all due respect to those who what to make moral considerations paramount, there is no choice but to recognize a matter that touches on our very existence and survival… Israel must therefore develop military research and exports.”

In “Double-Edged Sword”, Klieman writes in depth about the necessity of developing Israel’s defense industry. In addition to government encouragement and the inexorable inertia of local manufacturing leading to exports, another factor behind the accelerated development of Israeli weapons was arms embargos imposed at various times by the UN, US, France, and others that blocked sources of needed weapons systems.

The problem is that the expanded arms production intended to supply the IDF without relying on foreign sources was not achieved. Israel is also one of the world’s largest arms importers, and needs US military aid to help pay for it. More seriously, increased arms production combined with reduced procurements by the Ministry of Defense necessitated the search for foreign markets. Otherwise Israel’s defense industries would collapse and its tens of thousands of employees laid off. Moreover, the international arms market is not exactly stable, and it suffers from unpredictable fluctuations in demand. Consequently, Israel also has to consider its potential arms customers in terms of market fluctuations and jobs of thousands of its citizens.

Export or die

Former Ministry of Foreign Affairs director general Alon Liel puts his finger precisely on this dilemma and its consequences. “The overall picture is that since the 1970s, we’ve had an arms industry that would die if it didn’t export. Consequently, there is intense pressure to find customers, because without them there are no arms for the IDF either. Every serious arms industry must be large-scale, otherwise you become obsolete and non-competitive. A small arms industry cannot survive, especially for heavy arms and aerospace. For the same reason, there cannot be a small car industry. You’re either big or dead. If you’re big, you need a market, and the IDF isn’t a big enough customer for the defense industry. The IDF procures a third of Israel’s defense industry’s output, which means two-thirds must be exported.”

Haim Tal, today a documentaries film director who in the past worked on the Arrow’s development, adds, “It sometimes happens that the Ministry of Defense and IDF’s interests diverge. The defense industries want to supply work and the IDF wants to deliver security, and these are not necessarily the same thing. The IDF’s combat doctrine is now derived from the tools at its disposal, not the threats or advantages it could create.

“Take the Merkava tank for example. The Merkava is too big for the IDF and the country, because there are weapons systems much more effective than endless columns of tanks. Consider the potential enemies: Syria’s tanks are obsolete, and the Palestinians have homemade Qassam missiles. A couple of months ago, at the height of the Ministry of Defense caterwauling over its budget, IDF GOC Army HQ Maj.-Gen. Yiftah Ron-Tal said at a press conference after a training exercise that the situation was critical. The IDF is beginning to procure the Merkava Mk. 4 tank, but probably cannot afford it, with the result that a lot of people will lose their jobs. Why should an army commander be concerned about Ministry of Social Services matters?”

Another dilemma arising from the manufacturing paradox is that Israel frequently sells arms to regimes of dubious reputation.

Liel says, “This wasn’t a problem until the 1970s, but when you start large-scale arms manufacturing, exports are essential for the industry’s survival. You have to find a major new customer every 5-10 years. This is how we found all our major customers like Iran, South Africa, Turkey, and India. Whether the regime is democratic or not is irrelevant, because it’s a matter of survival. If you have ones arms order for $1.5-2 billion, even if it’s spread over several years, you can barely keep your head above the water, and if you don’t have a customer like that, you’ll drown.”

Iran, South Africa… who’s next?

Liel says, “The defense establishment tends to develop special relationships with major arms buyers. Iran and South Africa were examples of non-democratic countries that were customers for Israeli arms. It’s actually easier to sell to democracies, because you can do so openly. We sell openly to India and Turkey. But there are always smaller customers in the shadows, and you convince the Ministry of Foreign Affairs that the deal is important. If the Ministry of Foreign Affairs concludes that the deal won’t cause diplomatic complications and will help the defense industry, it usually approves the sale.”

Liel once wrote Hebrew daily “Ha’aretz” stating his objection to the sale of riot control vehicles built by Beit Alfa Technologies to Zimbabwe’s dictatorial President Robert Mugabe, who has imposed a regime of terror against political and tribal opponents, most notably the country’s white farmers, including Jews.

Pinochet is too hot to handle

As Liel hinted, Israel’s relations with some of the world’s less salubrious regimes have long been a source of worldwide obloquy. The clearest examples of dirty arms dealing are with the Apartheid regime of South Africa (whose sophisticated arms industry began selling Israeli-based arms to Israel’s Arab enemies after the Apartheid regime fell in 1994), and the Shah of Iran before the 1979 revolution. The 1973-90 dictatorial regime of General Augusto Pinochet of Chile is another example.

Not all Israeli arms sales are conducted by defense companies’ sales reps. Arms merchants sometimes broker deals between manufacturers and potential customers. These brokers usually get a percentage of the deal as a commission, which they sometimes use to bribe the potential buyers to choose Israeli arms. Another sales method is a direct official approach by the Israeli government to a foreign one. The most bloodstained of the three sales methods is usually the use of independent arms brokers, because they offer the government plausible deniability for transactions that cannot receive official sanction.

The arms sales to Pinochet’s Chile were official and aboveboard. In 1978, then-IDF Chief of Staff Lt.-Gen. Mordechai Gur visited Chile to promote defense sales, and claimed that allegations of large-scale torture and murder by the regime were untrue. Israeli arms sales to Chile at the time included three missile boats for $100 million, maintenance equipment for air-to-air missiles, anti-tank missiles and radars.

International embarrassment

Another dubious customer was Angola. The Angolan Civil War between the MPLA government and UNITA rebels, which had been ongoing since independence from Portugal in 1975, broke out anew in 1994 after a recently-signed peace agreement broke down. The UN Security Council imposed an arms embargo on the region, but foreign reports claimed that Israel had sold millions of dollars of light arms and ordnance, two helicopters, and a reconnaissance plane to the Angolan government. Israel also helped maintain and upgrade Angola’s Russian-built tanks and MiG fighters.

Israel also reportedly sold arms to UNITA, including anti-tank RPG bazookas, munitions, and 2,000 AK-47 Kalashnikovs.

Israel suffered another international embarrassment in 1989, when it was revealed that Hod Hahanit (Spearhead), a company headed by Yair Klein and Col. (res.) Yaakov Biran had trained Colombian drug cartel death squads.

Shalit stresses that things are different now. “Arms sales to dictators are a thing of the distant past. The approval procedure for arms sales is a two-stage process. First, the manufacturer applies for a permit to open negotiations. This includes the preliminary stages that precede negotiations, such as sales promotions, exhibitions and advertising. Manufacturers apply to SIBAT, whose procedure includes committees of experts from the Ministry of Defense, IDF, and other organizations. The committee decides whether or not to approve the permit, and under what conditions.

“At this point, the customer gets a permit that stipulates the name of the manufacturer, marketer, product, ID number, and end-user. There is no room for error. After the contract is signed, comes the actual export. The customer again applies to SIBAT for an export license. We again check the application, to see if there has been a change in policy or parameters.”

What are the parameters?

Shalit: “Israel’s defense export policy is based on several cornerstones. The Ministry of Foreign Affairs gives the first input. Then there are UN resolutions. We are members of the UN, so we comply with all [Security Council] resolutions regarding arms exports. Israel fully complied with the UN arms embargo on Yugoslavia [during the civil wars of 1991-95]. Israel also complies with international inspection regimes, even when it is not a member of them, as well as with legislation by foreign countries that block follow-on exports.”

Can you cite an example of Israeli arms exports that were blocked because the customer might use them in an unacceptable manner?

“A few years ago, we gave a permit to a certain company to negotiate with Rwanda. They applied for an export license after the contract worth tens of millions of dollars was concluded. SIBAT refused because Rwanda began throwing children out of helicopters, and the UN also imposed an embargo. The manufacturer accepted the loss and didn’t export the munitions.”

The Rwanda affair

Meanwhile, “Financial Times” reported that Israel was a source of arms shipments to the Rwanda government responsible for the genocide of almost a million minority Tutsis and moderate Hutus in one of the most brutal campaigns of mass murder in human history.

“ Financial Times” claims that the arms were sent from Tel Aviv to Albania, where they were trans-shipped to Rwanda in April-July 1994, when the genocide was at its height. The Ministry of Defense was almost certainly unaware of the deal, which was a gross violation of international treaties.

In 1998, it was reported that then-Prime Minister Benjamin Netanyahu decided not to cancel a deal to sell upgraded MiG 21s to Ethiopia, despite its ongoing border war with Eritrea. Eritrea’s ambassador to the UN condemned the deal. Netanyahu’s media advisor Aviv Bushinsky said the deal had been approved because the planes would have been delivered only a year later, in the hope that a peace agreement would be worked out in the interim.

If that were not enough, there is the 1986 Irangate affair, which proved that Israel’s arms sales to Iran did not end with the 1979 Khomeini revolution. Then there was the case of PAD Ltd., owned and managed by Avihai Weinstein, which is suspected of involvement in the sale of military products to Iran, including US-made rubber pads for M-113 APC tracks. The shipment was seized by German customs in August 2002. PAD Ltd. naturally did not have a SIBAT export permit for Iran.

Tal says, “SIBAT can decide to sell arms to a dictatorship, and there is no one sufficiently sensitive to notice, because there are no peaceniks on its committee, only former combat veterans who were comrades in arms. They’re the ones who sell military know-how and weapons. If it were up to me, I’d sever SIBAT from the Ministry of Defense, and subordinate it to the Ministries of Foreign Affairs and Justice, which would be much more logical. I’m sure they comply with all the sales criteria, but something always reeks over there. Greasing the wheels is an inseparable and acknowledged part of the deal. A lot of money goes to all kinds of characters, without tax receipts, in order to promote sales. A sale is declared at a particular price, but in practice, part of the money is kicked back to the buyer. No one talks about it; it’s part of the rules of the game.

“There are also a lot of back-scratching. If you’re a slick and well-connected arms trader, you’ll find the connections to make a deal. The Karine A [an arms shipment to the Palestinian Authority seized by Israel in January 2002] had permits, bills of lading, etc. Israelis can’t do the same thing? You can always find a legitimate customer who resells the arms to a third party. I doubt if SIBAT will scrupulously send agents to investigate the end user of an arms shipment.”

Last, but not least, are Israel’s arms sales to China. In early 2002, the world saw pictures of Chinese F-8 fighters carrying Rafael Python 3 air-to-air missiles, taken by US planes, after a Chinese jet and US reconnaissance plane collided off the Chinese coast. Israel also contracted to sell to China IAI’s Phalcon AWACS, equipped with Elta Electronics Industries’ sophisticated electronics, until heavy pressure by the Clinton administration lead to the cancellation of the deal in July 2000.

Tal says, “When I spoke with Keret after the deal fell through, he told me, ‘Look, if we were talking about a deal worth a few million dollars, $50 million, or even $70 million, I’d worried. But when we’re talking about a $250-500 million deal, I’m less worried, because it affects both of us. Understand? It’s on both our accounts.”

These are only a few of the details known to anyone who bothers to seek them out. This is not an investigative tale or a scoop, merely a selection of the inevitable consequences of Israel’s large-scale arms exports. The question of whether it is justifiable to invest so much money in developing an Israeli arms industry is no longer relevant. The industry exists and employs tens of thousands of people who build some of the best weapons in the world.

The question that remains to be asked is why all this doesn’t lead Israelis to question their country’s arms industry.

Published by Globes [online] - www.globes.co.il - on April 29, 2003 Next article:   Drunk with success