The boil has been lanced and the contagion is not spreading. The London market has recovered its poise and the big UK banks, which lost heavily on Monday amid fears that they would lose billions in Gulf quicksand, were all smiles on Tuesday.
Even bank stocks in overborrowed Greece, which is rapidly earning the reputation of Dubai on the Aegean (lots of ruins but no skyscrapers), gained ground. The cost of credit default swaps, insurance against the default of a borrower, narrowed right across the Middle East and Asia after widening on Monday and, at the Eurogroup meeting yesterday, finance ministers were sanguine about the chaos in the Gulf.
Are they overconfident, or can we detect a faint smirk in the normally dour faces of Europe’s bean counters? The stock markets of the Gulf tanked again yesterday — Dubai fell another 5.6 per cent, Abu Dhabi fell 3.6 per cent and Qatar dropped 8 per cent. In such illiquid markets, the ride is always bumpy and that is the point. Dubai’s debacle has reminded the world that the emerging markets have not yet fully emerged.
When the Government of Dubai said on Monday that it was not minded to stand behind Dubai World, its own commercial vehicle, it was a moment of truth: the emperor had no clothes, the fine wine was cheap plonk. Almost overnight, genuine concern in London and New York that the world’s financial markets would migrate to low-tax jurisdictions in the Gulf and further east began to evaporate. Thousands of Britons may lose jobs in Dubai — expatriate lawyers, accountants and bankers, who box-ticked the prospectuses for the financing of a swath of grand emirate projects, will run home, their tails between their legs.
Their loss will, in the end, be the City of London’s gain. Dubai’s financial centre may never truly fly and it will now take decades for Abu Dhabi to replace Dubai with a credible alternative.
It’s not the losses that matter; it is governance. We are once again learning that, from Moscow to Shanghai, financial markets stand and fall, not on liquidity but credibility. When, as in Russia, gangsters can suborn the legal system, or, as in China, the purpose of law is to assert the power of the ruling party, markets can thrive only temporarily. Transparency matters more than trading volume and without sound laws and due process, finance becomes fantasy.
In Russia, business corruption has deepened to a level where senior civil servants in collaboration with gangsters are systematically looting the state treasury. Lawyers who dare to challenge officials are beaten up, prosecuted, imprisoned and left to die. Last month, Sergei Magnitsky, a Russian lawyer who acted for Hermitage, a London-based fund management group, died in prison after being refused medical treatment. He was arrested after testifying against government officials, accusing them of stealing hundreds of millions of dollars in fake tax rebates, and spent a year in prison without trial.
If Russia is seen by many as a ruined house where only powerful oil companies dare to enter, China still beckons. The enormous pull of the Chinese market is almost irresistible and several big British companies, including HSBC and Standard Chartered, are anxious to raise funds and list on the Shanghai Stock Exchange. There are signals that the first IPOs could be launched next year, but regulation has been a headache. Agreement over Chinese accounts is one hurdle, as is the repatriation of funds — China wants foreigners to invest, not export capital.
But foreign companies need to look beyond regulation. They need to consider what legal regime lies behind the rules, what legal process would enforce them and what courts would enforce them. China is backtracking from judicial reform in ways that are beginning to impinge, not only on the rights of individuals but on businesses. Communist Party rule is being imposed on the judiciary.
Xiao Yang, a reformist judge, has been replaced as president of the Supreme Court by Wang Shengjun, a former policeman with no judicial experience. According to Trusted Sources, an emerging markets consultancy, China’s courts are now guided by “Three Supremes”. First, the interest of the Party; second, the people; and third, the Constitution and the law. Chairman Wang urges the judicial system to “maintain national financial security”, an approach unlikely to help foreign companies to enforce contracts. Danone was forced to sell out after it struggled to prevent Wahaha, its Chinese partner, from setting up a parallel distribution business. Five Rio Tinto iron ore negotiators are still in detention, accused by Chinese authorities of spying.
London still has its uses, because financial centres are more than a pile of cash. A former chairman of Dubai’s financial regulatory authority said as much. Ian Hay Davison was sacked in 2004 for objecting to the conflicts of interest of his employer.
He later wrote: “Like so much in Dubai, the appearance is often the point, and the appearance of having a regulatory environment exhibiting the highest international standards was seductive. The reality behind creating such an environment was perhaps too much to absorb.”
carl.mortished@thetimes.co.uk
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