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The Middle East peace talks are at a deadlock. Negotiations between Israel and the Palestinians to move ahead with the plan established by the so-called Quartet - the US., U.N., EU and Russia -- have faltered and come to a complete standstill. Continuing with this inertia will have a long-term negative effect on the future of the region both from a political point of view as well as from a business perspective. With the exception of a few risk-takers, what company or business executive would be willing to invest in the Middle East once the region plunges onto the abyss amid renewed violence?

And whenever trouble brews in the Middle East it tends to spill over into other parts of the world. The risk that Mideast violence could spread to nearby Europe might have been one of the reasons that pushed Italian Prime Minister Silvio Berlusconi to say that Israel should be admitted into the European Union earlier this week. Berlusconi made the statement during an official state visit to Israel. Berlusconi, of course, is one of Israel's strongest supporters.

Regardless of that the question remains does Israel belong in Europe?

Does Israel joining the European Union make any sense? And is this proposal likely to carry any weight? The idea has been floating around for a number of years. And if Turkey feels it belongs in the EU, then why not Israel, where a large portion of the population has direct ties to Europe.

The knee-jerk reaction from much of the Arab world will most likely be to throw a temper-tantrum. There will likely be anti-Italian demonstrations, threats to boycott Italian goods (which will be short-lived given the Middle East's attraction to pasta) and in the extreme case, some maniacs will attempt to carry out terrorist acts against Italy. But anyone with an ounce of logic should jump on the Italian bandwagon. Support the initiative.

To what end? Why?

A great - and still growing - divergence appeared in 2009 between public statements by leaders and their public performance. The politicized, romanticized theater of increasingly populist "democratic" leaders and media seemed to be of a different planet from activities taking place in the real world.

While a large part of the global population appears still transfixed by words, there is a growing perception that great fissures already rend the global strategic architecture.

This is a trend which will compound during 2010.

There is a widespread belief that the world has "ducked the strategic bullet" of global economic collapse, but this is merely the delusionary euphoria of the severely wounded patient. Severe structural damage has occurred to the key driver of global economic stability, the United States. Most major economies of Western Europe and Asia, although in plight, have been protected in their fall by a complex web of structures and the fact that they were not, in many respects, as leveraged as the US. Britain and Japan, however, remain leveraged in their debt-to-asset ratio, to a death-defying degree.

All of this has been long in coming, and brought to a speedy climax by the unprecedented recklessness of inflationary spending by US Pres. Barack Obama, and, in the UK by Prime Minister Gordon Brown. The modern world (East and West, but prompted by the West) is at a junction point in a long process of constantly growing -- but poorly-defined -- obsession with "rights" (entitlements). This had its origins with the halting, but consistent, rise in global prosperity which began with the early stages of the Second Industrial Revolution (1700-1900).

Thus, a butterfly flutters its wings in 18th Century Britain and a tsunami engulfs the world in the early 21st Century.

Managing the now-overwhelming sense of entitlement in what we call modern democracies has become, because of the power of a comprehensive, but ill-informed electorate, an exercise in mob control, and an opportunity for populist demagoguery.

Pres. Obama's statement of January 25, 2010, that he would now curb US Government spending was, like most of the statements of the past year, self-serving and had nothing to do with reality. His plan to push through a State-dominated healthcare system at a reputed cost in excess of $1-trillion (quite apart from other discussions about a new "stimulus package" of spending) makes a mockery of the pre-election posturing of fiscal moderation (that is, his posturing before the 2008 and the 2010 elections). In any event, a review of the statistics of the US shows that his proposed "freeze" on a small part of US Government spending would be, compared with his profligacy and reduction of private sector productivity and capital formation ability, a derisory diversion.

Without dwelling, for the purposes of this estimate, on the cumulative impact of ever-broadening the electoral franchise -- which creates an automatic disposition of an electorate to demand increasing benefits without attendant increases in productivity -- the Western economies are probably at a point where they must attempt to create fairly draconian, centralized power structures to rule more by diktat than by "democracy". That is the only recourse to stem the growing dysfunction of government brought about by the "democratic" necessity to pander to a restive populace.

In a report on March 20, 2009, I noted: "the 'professional politician' will morph into new forms of Cæsarism or Bonapartism. This is already underway, as 'leaders' with no practical experience of the world increasingly fear the uncertainties of markets and the confidence of those who can actually create, manage, and build. Thus, the 'new socialism' is a system built by leaders who demand central control of societies and who genuinely fear freedom."

The new circus includes the pandering to newly-created pseudo-scientific religions, such as "climate change", which have so greatly distracted governments, the media, and populations from their daily work as to have already hampered the chances for economic viability in the near future. Those, however, who live by the sword of populism -- mob rule -- must ultimately answer to that same fickle crowd, which, as Elias Canetti noted in Crowds & Power, has no mind, only wants.

Gazprom faces regular opprobrium for its bullying ways of using energy as a pressure and political tool. Seen by some, mostly Russians, as the symbol of a successful and strong Russia, others see it as a dominating juggernaut, economic right arm of the Kremlin implementing, or should we say, imposing its policies by using energy as a weapon.

Just like Louis XIV used to say "L'Etat c'est moi" (I am the State), Gazprom could say the same in light of its commercial power and the unconditional governmental backing it enjoys. However, just like Monsanto generates passionate debates with its genetically engineered seeds, Gazprom's activities cannot be simply labeled as right or wrong and subject to final judgments.

Though far from being an angel, Gazprom is not necessarily a demon either. It is easy to point fingers and to forget that oil & gas is a merciless sector where every major is trying to position itself for the next 20 to 30 years and secure predictable supply and demand at home and abroad. After all, large Western energy companies were not born nice and proper. It took decades for codes of conduct, tacit or written, to be adopted and enforced. It is also easy to forget that all energy companies have in mind the interests of the country they come from.

Why would it be any different for Gazprom? And why should Gazprom take upon itself to act differently if it can get away with what it does and not be sanctioned by its own government?

The main issue with Gazprom could be summarized by using the famous quote of U.S. Secretary of Defense Donald Rumsfeld who said about Iraq "there are known unknowns. That is to say, there are things that we now know we don't know. But there are also unknown unknowns. These are things we do not know we don't know." Because of all the things we do not know about Gazprom, sensitivity to what Gazprom does is greater because ultimately what it decides to do today and how it does it will impact energy supplies for years to come and how the game is played.

The lack of information on the personal relationships between the business and political world, on its exact ownership structure, on the exact identity and role of business intermediaries, on the flow of money through a labyrinthine network of offshore and shell companies, and on the overall exact modus operandi of Gazprom is what leads Gazprom to be subject to greater scrutiny and interrogations. It efforts to maintain an export monopoly for gas flowing to Europe and Asia at a huge cost, possibly over-committing dwindling resources at a time of lower energy prices and lower needs from consumers is another concern as would happen if Gazprom was to fail?

Inside Beltwayistan, a number of Bushevik oil patch zombies still roam the recession-blasted landscape mindlessly chanting their Caspian mantra, "Happiness is multiple pipelines" - with the caveat that they flow westwards and bypass both Russia and Iran. They've now added a new word to their vocabulary, "Nabucco," and worse, have bitten a number of Obama administration officials and visiting European politicians, who have joined their shuffling ranks.

Their thinking remains somewhat clouded by primordial memories of Bush's "fuzzy math," as the statistics about Nabucco are contradictory, to say the least. State Oil Company of the Azerbaijani Republic (SOCAR) vice president Elshad Nasirov is now threatening to start selling Azerbaijan's natural gas, currently Nabucco's sole projected provider of throughput, to Asian countries if Europe further postpones Nabucco's construction.

Construction of the 56-inch, 2,050-mile pipeline, first proposed in 2002, is tentatively slated to begin next year and scheduled for completion by 2014. At a cost initially estimated at $11.4 billion and rising, Nabucco will be the most expensive pipeline ever built, more than three times the cost of the 1,092-mile Baku-Tbilisi-Ceyhan (BTC) oil pipeline. Raising such a significant sum in a time of global recession would be an article of faith at best.

Even assuming that Nabucco's boosters manage to assemble a coterie of deep-pocketed suckers - er, investors, the only promised current volume for Nabucco's proposed 31 billion cubic meters (bcm) annual throughput is Azerbaijan's future offshore Caspian Shah Deniz production, estimated at 8 bcm. Even if Shah Deniz does end up supplying Nabucco, its currently promised throughput leaves a deficit of 23 bcm, leading to the question of exactly whose natural gas will Nabucco carry if SOCAR drops out, a worst case scenario requiring the Nabucco consortium to scrounge not 23 bcm, but all 31 bcm per annum, especially as Washington's geopolitics invalidate the participation of either Russia or Iran?

For those with knowledge of energy history in the post-Soviet space, the 419-mile, $500 million Odessa-Brody oil pipeline, completed in 2001, provides a cautionary tale to building pipelines without throughput guarantees. The Ukrainian government rashly built the self-financed line without foreign investment, stretching from its Black Sea port to the Polish border to provide Central Europe with oil despite not having firm commitments from a single oil producing nation for export throughputs. After the pipeline remained unused for three years, a reluctant Kiev was forced in 2004 to agree to transport Russian oil southwards in the opposite direction, for export from Odessa rather than northwards to Central European markets as originally envisaged.

Further complicating the picture are the differing proposed transit and pricing policies of the countries that Nabucco will pass through. The biggest geographical hurdle impacting the bottom line is the fact that, if as some Nabucco boosters aver, Turkmenistan can be persuaded to contribute natural gas, the seabed of the Caspian has yet to definitively be delineated amongst the sea's five riparian states. The question remains unresolved 18 years after the implosion of the USSR dashed the 1920 and 1941 Soviet-Iranian bilateral treaties covering the issue of offshore waters. Building a pipeline across seabed whose ownership is in dispute will enrich maritime lawyers, but few others.

The issue of competing claims over Caspian national waters and seabed is hardly a pedantic exercise. In July 2001 Iran dispatched military aircraft and a warship to intimidate two Azerbaijani survey vessels contracted by BP to leave the Alov-Araz-Sharg field, a site that Azerbaijan claimed was well within its national sector, but disputed by Iran. It seems unlikely Russia and Iran would stand idly by as trans-Caspian sub-sea pipelines, which exclude them, are constructed.

It is often assumed that what preoccupies military planners is their attempts to define the shape of future warfare so that they can adequately prepare equipment and doctrine ideal to meet the threat. Evidence, however, shows that what most occupies their attention is how to adapt existing force structures and systems to react to emerging conditions.

The vast bulk of their attention, inevitably, is on the massive capital investment in weapons systems which last, often, a half-century -- longer than the span of most political eras -- and force structures and doctrine which have accumulated over decades, or longer. There is little scope for innovative, clean-sheet thinking, and even when that occurs, there is little ability to bend the vast bulk of the military and national machinery to the emerging requirements.

Anyway, absent a firm and demonstrable capability change from a threat area, any planning for change, unless it is with offensive weapons, is based on supposition and guesswork. Inevitably, then, change occurs almost entirely as reaction.

The International Strategic Studies Association (ISSA), undertook studies in recent years into how US forces failed to adequately anticipate, and even to react to, emerging patterns of warfare against them by irregular forces in Iraq. The use by these forces of improvised explosive devices (IEDs), and later guerilla rocket attacks, should have been anticipated from warfare patterns in Chechnya and in the Arab-Israeli wars, but the US was unwilling to learn lessons from these theaters for a variety of cultural reasons.

The result of these unexpected opposing tactical methodologies by Iraqi (and later, Afghan Talibani) irregular forces, was to be of strategic importance. US military planners initially responded to the threat -- which they had not fully anticipated -- by up-armoring light vehicles. The result was that the full, two stages of blast were not addressed. Slam-down (ie: the second stage of a blast event) caused a significant proportion of the deaths, even though up-armoring the vehicles had protected occupants from some of the first-stage blast. But the severity of injuries of those who survived slam-down was unprecedented in terms of numbers and outcome, and the cost of injuries to taxpayers was even more than the cost of deaths.

Worse, mission success was minimized, and the political cost of the deaths, injuries, and slow mission achievement caused US voters to oppose the war. The Coalition's adversaries merely needed to wait for political pressures at home to undermine the entire war effort. Thus did the outcomes of poor tactical reaction, and lack of vision, have strategic consequences. US approaches to mine-protected vehicles, despite their failure, began to dominate international thinking. Failure on a grand scale became the model for modern militaries.

The ISSA research, however, began to seep through the US Congress, which began putting pressure on the US Defense Dept., and some changes gradually began to occur. Energy-absorbing (EA) seating and restraint systems began to find their way into US vehicles, but even so, the up-armoring of those vehicles still caused a massive distortion of their intended capabilities. Mission success continued to play a poor second priority to personnel survivability, and even that "priority" was poorly addressed.

BAGHDAD - What was once considered a pipe-dream could become reality: after decades of dictatorship, war and international sanctions, Iraq's massive oil reserves are set to be tapped proper and the country once known for two overflowing rivers could be crowned oil king.

If the seven oil projects awarded to foreign oil companies this weekend, and the three from an auction earlier this year, develop as planned, within eight years, Iraq will see its oil production capacity leap to more than 12 million barrels per day (bpd).
"We think it is a big victory for Iraq to be able to be a leader in the world," Iraqi Oil Minister, Hussain al-Shahristani, said after the auction.

Saudi Arabia, the world's largest producer at 8.18 million bpd, has a capacity of just over 11 million bpd today, after slower demand growth halted plans to expand to 12.5 million bpd by the end of this year.

Iraq - behind Saudi Arabia and Iran - has the world's third largest proven oil reserves, with potentially more remaining to be found. Currently, however, its 115 billion barrels below ground pump at just 2.4 million bpd, with production hampered by political, structural and security problems that could moot the enthusiasm from this weekend's auction.

Out of the 10 oil projects on offer during the two-day auction, seven were awarded to a dozen companies. Three fields up for grabs in a June 30 auction were awarded, with one deal already finalized. And there are more than 60 fields discovered but not yet developed. These include two that the ministry is negotiating directly with foreign companies outside of an auction process.

Currently, Iraq relies on oil revenue for 95 percent of its revenue. This will increase if the fields develop as planned. Only after, however, Iraq reimburses companies for their investment and pays them a relatively small fee per barrel of increased output.

But this is Iraq, where, aside from this weekend's bidding round, it seems nothing goes according to schedule.

Since late 2006, a new oil law to replace current oil governance - an often vague and conflicting mix of the 2005 Constitution and laws left from previous eras - has been delayed by political squabbles. Laws reestablishing the national oil company, reorganizing the oil ministry and formalizing revenue redistribution, are also languishing.

Iraq's Kurds, who favor heavy decentralization, and nationalist Arabs, who want strong state control, have both questioned Shahristani's oil deals. Some have called them illegal.

In press conferences and speeches before the auction, both Prime Minister Nouri al-Maliki and Oil Minister Shahristani, reiterated the government's pledge that the deals would remain valid - no matter what happens in the March 7 national election.

Argentina signed an agreement with the Bahamas Thursday to share banking information as the country tries to tighten the noose on Argentines with cash hidden in overseas tax havens. Similar agreements were recently signed with Costa Rica, Andorra and Monaco. The deals are designed to stop tax evasion and fraud by exchanging tax information, lifting banking secrecy and allowing agents to conduct investigations overseas.

Continue reading: Argentina, Bahamas Sign Banking Information Agreement

Bermuda Signs Tax Agreement with Belgium

Bermuda has reached an agreement with Belgium to exchange information about criminal and civil tax matters. Benefits for the island from this tax information exchange agreement (TIEA) is a commitment by Belgium to conclude a series of mini double taxation agreements.

Continue reading: Bermuda Signs Tax Agreement with Belgium

As multinational military forces have left Iraq, international petroleum companies have eagerly descended - seduced by the long-term potential of vast oil reserves off-limits to foreigners for decades. Yet lingering violence, legal questions and political uncertainty make doing business in this country a gamble.

In the first international oil auction held last June, widely seen as a failure, the Iraqi government awarded a firm contract to only a consortium of British Petroleum and the China National Petroleum Co. to further develop the Rumaila field over 20 years. Iraq recently forged an initial agreement with a group comprising Exxon Mobil and Royal Dutch Shell to develop the West Qurna field, and one with an ENI-led consortium of Occidental Petroleum and Korea Gas for the Zubair oil field.

Under ratified deals, firms stand to gain a mere $2 profit on each barrel added to production because the Iraqi government wants to convey "they're not going to let the oil companies take over," said Robert Ebel, a senior adviser in the energy and national security program at the Center for Strategic and International Studies (CSIS), a Washington-based think tank.

The operator of each 20-year service contract, which may be extended for five years, "will still make a rate of return in the double digits," said Ruba Husari, founder and editor of the Web site Iraqoilforum.com, via e-mail from Baghdad. The country's proven oil reserves were last estimated at 115 billion barrels. These massive reservoirs, and the low costs linked to such an uncomplicated operation, essentially make it "easy oil" for firms, Husari said.

Iraq will boast some six million to 10 million barrels a day over the next several years, analysts tell Oilprice.com. This scenario illustrates why oil companies perhaps are now more willing than last summer to gain an initial foothold in the industry on the government's strict terms and thus build a long-lasting relationship that may lead to a production-sharing contract "for some discovered-but-yet-undeveloped oil field," Ebel said. "It's a hopeful assumption; I don't know how realistic it is."

Yet as companies salivate over Iraq's potential, legal and political issues are still problematic to doing business. The war-ravaged country's "weak and ill-defined legal structures," and uncertain moves by the next government slated to be elected in January, may result in canceled service contracts, warned David Bender, an analyst in the Middle East practice of the Eurasia Group's Washington office.

While many Western investors remain fixated on somehow acquiring a slice of Turkmenistan's natural gas riches, despite a recent scandal over the country's actual reserves, there is another country further east whose energy and mineralogical reserves have been overlooked - Uzbekistan.

While a number of factors are responsible for this oversight, including relative geographical isolation (Uzbekistan, along with Liechtenstein, is one of the world's doubly landlocked nations, requiring crossing two other nations to gain access to the oceans), which currently limits energy exports available for the global market, there are a number of pluses that the country has for investors willing to "think outside the box."

With a population of 27 million, Uzbekistan is Central Asia's most populous and dominant power. A conservative fiscal policy since 1991, including inconvertibility of the national currency, the som, has shielded its citizens from the hyperinflation that ravaged other former Soviet republics, but the policy previously diminished potential foreign investment.

Since the global recession that began a year ago, however, Uzbekistan's fiscal conservatism, previously dismissed by the foreign investment community, has looked more and more like a pragmatic policy that isolated the country from the worst aspects of the recession in stark contrast to other post-Soviet states that fervently embraced free market capitalism like Lithuania, whose economy contracted 18.1% this year and is expected to shrink further by 3.9% in 2010. In a move certain to be welcomed by foreign investor Uzbekistan is slowly moving towards making its currency convertible but whenever it happens, for the present the country offers a fiscal stability unmatched by many of its more free-market neighbors.

Macau was both the first and last European colony in China. Gambling in Macau was legalized in 1850, under Portuguese rule, and since that time it has been known as the "Monte Carlo of the Orient." In recent years Macau's economy has enjoyed strong growth on the back of its expanding tourism and gaming sectors. After opening up its locally-controlled casino industry to foreign competition in 2001, the territory attracted tens of billions of dollars in foreign investment, transforming Macao into the world's largest gaming center.

By 2006, Macau's gaming revenue surpassed that of the Las Vegas strip, and gaming-related taxes accounted for 75% of total government revenue. In 2008, government revenue from gaming was set to double 2006 collections. The expanding casino sector, and China's decision beginning in 2002 to relax travel restrictions, reenergized Macau's tourism industry. This city of just over 500,000 hosted more than 30 million visitors in 2008. Almost 60% came from mainland China despite increasing restrictions on travel the combined total brought $13.7 billion in gross gaming receipts. Macau's currency, the Pataca, is closely tied to the Hong Kong dollar, which is also freely accepted in the territory.

Uruguay bank secrecy hangs delicately poised after conflicting statements of intent from rival candidates ahead of October presidential elections.

Just a week after Frente Amplio candidate Jose Mujica signalled his intent to discuss bank secrecy within the Mercosur group in an interview with an Argentinian newspaper, opposition candidate Luis Alberto Lacalle apologized for his rival's remarks at a lunch given by the Uruguay-Argentina chamber of commerce.

When questioned on the issue of bank secrecy, Lacalle stated categorically that he would not hand over bank secrecy if he won the election. He further backed up his statement with the following reasons (translation from an article in Uruguayan newspaper el pais).

- Uruguay politics should be geared towards maximising the nation's comparative advantages.
- Financial activity generates wealth and employment
- For Uruguay to act like small countries such as Luxemourg and Switzerland is completely legitimate.
- It is hypocritical for large countries to try and impose policy in this way when in places like the US state of Delaware ''they wash, iron, and dry'' money (a reference to the number of secret companies formed in that state).
- In the cases where it is called for bank secrecy can still be lifted.

With just weeks to go until the country decides, Mujica looks better placed to win the election.

Wegelin & Company have been Private Bankers since 1741. Recently they provided some insightful commentary about the agreement between the USA and Switzerland related to the 4,450 UBS clients.

What we need to do now, sine ira et studio, (and putting aside all politically motivated window-dressing, all genuine, or merely nominal, moral issues) is to analyze the situation, draw conclusions and, where necessary, act upon them. This is exactly what we intend to do in what follows, by taking a closer look at two important components of American tax law. And, surprise, surprise: the next round of fiscal enforcement staged by the Americans will be devoted not the American super-rich, but to non-Americans who never in their lives had any intention of evading taxes.

Continue reading the wegelin_article.pdf

Swiss private bankers will in future insist that their clients are tax compliant, if remarks made by banking heads at a private banking conference in Zurich are anything to go by.

According to some estimates, Switzerland holds around a third of the $7 million believed to be held in offshore accounts worldwide. In addition to a reputation for reliable banking services, Switzerland's strict bank secrecy is what has compelled so many to open offshore bank accounts in the country.

But attacks on Swiss bank UBS, double-taxation treaties with other european countries like France, and reinterpretations of the line between tax evasion and tax fraud, mean that top swiss private banks are reconsidering the way they do business.

Pierre de Weck, head of Deutche bank private wealth management, indicated that his banks efforts would increasingly focus onshore, saying, "Cross-border onshore accounts will become much more important in the years ahead."

Exactly how the cross-border onshore account will differ from the offshore account I guess we will see, but that the accounts should be 100% tax compliant seemed to be most important.

The heads of Credit Suisse and Julius Baer, two of Switzerland's largest banks that also have offshore operations were indicating the same thing in as many words. ''"Banking secrecy will continue to exist, but not for tax reasons. Private banks will have to offer services on a fully compliant basis.", said Boris Collardi, chief executive of Julius Baer.

Yet separately, private banks which limit their operations to within Swiss borders have been praised for their efforts to maintain bank secrecy. Unlike the global private banks mentioned above, Switzerland's oldest bank, Wegelin has indicated it will no longer accept US clients, in order to preserve bank secrecy even in tax cases.

Source: Wealth Bulletin

A preliminary agreement has been reached in the tax evasion dispute between Swiss Bank UBS and US authorities.

UBS has agreed "in principle" to hand over records of 5'000 of the biggest accounts that allegedly conceal unreported wealth.The agreement diffuses a potentially embarrassing conflict between Swiss and US authorities.

Although the US government originally sought up to 52'000 names, the expectation that these accounts will reveal the most blatant offenders allows them to save face.

The worry for offshore account holders now, is whether this tentative agreement will serve as the launch pad for further probes into other offshore banking centers.

Swiss officials maintain that this development does not compromise the country's bank secrecy laws.