Tycoons and Monopolies. Ze’evi.21.04.13

Tycoons and Monopolies. Ze’evi. – Part II 21.04.13

by

Howard Adelman

Before I took time off to write blogs on films showing at the Toronto Jewish Film Festival, in my economic series on Israel, I wrote on tycoons and billionaires to get a sense of many of the top individuals who have driven their own stories of rags to riches as well as the story of Israel’s rise into the top tier of developed countries. In the first one of this series, I wrote about the political and social as well as economic impacts of a dozen or so Israeli billionaires — including Shari and Micki Arison, the Ofer brothers, David Azrieli, Noam Gottesman, Arnon Michan, Meir Doron, Joseph Gelman, Marc Rich, and Haim Saban, many of whom live outside of Israel and made a good part of their fortunes outside Israel. I also wrote about two impressive but very different Mizrachi billionaires, Shilvan Eliahu and Yitzhak Tshuva. Today and tomorrow I want to concentrate on a smaller group of Israeli billionaires who also made their fortunes primarily in Israel, but come from an Ashkenazi or Sabra background. On Tuesday, I will write about the East European Israeli billionaires.

Gad Zeevi is an Israeli born tycoon who was accused of stock fraud and money laundering in 2006, disappeared from the public eye, went through a long trial until the judge declared him NOT guilty in March of 2011, finding that the sale of his shares “was neither false nor unreasonable”. As Judge Daniela Cherizli concluded, “There was no conspiracy, and I therefore acquit the accused of all charges in the indictment.” I begin at the end of the story because if you read the ruling, it becomes clear that when there is smoke, sometimes there is no fire. There is just deep suspicion about people who are worth billions. Some rich people are certainly guilty of making their money through fraudulent means. But making money is not itself fraudulent. Further, even the ultra rich can be subject to bullying by zealous prosecutors convinced that something was amiss.

Further, bureaucrats sometimes interfere with entrepreneurial activities and initiatives even when they are not against the law. In the 1990s, when Gad Zeevi made a move to acquire the controlling interest in Bank Mizrachi, though there was no law at the time against his effort, Ze’ev Abeles, the supervisor of banks, kept insisting that he had to inquire further into the Zeevi group of companies activities in Africa, endlessly postponing a decision, until Zeevi just gave up. As it has been said, the problem in Israel is not one of a normal bureaucracy with too many rules and too many levels of decision-making, but government functionaries who are as entrepreneurial about their duties as any businessman. They make up the rules as they go. Israel is burdened with an anti-bureaucracy bureaucracy, where bureaucrats practice the art of creative decision-making.

This occurs at all levels. When I was in Israel in the late seventies as a Lady Davis Visiting Professor at Hebrew University, I knew I had to get my VW camper van out of Israel before a year was up or I would be subject to a huge tax. I was due to leave with my oldest son from the Port of Haifa two days after my year was up. So I drove the camper van down to Haifa two days before the expiry of the period, just to be safe, and put it into the export area from which I could drive it onto the ship when I was leaving four days later. When I did this, the port authorities informed me that a small licensing fee had been due at six months and that I should go to the Jerusalem office where I lived to pay the fee and when I showed them the receipt, I would be permitted to take the VW van out of Israel.

The official was very helpful and gave me instructions on where to go on King George Street in Jerusalem and how much I would be required to pay. I had two days to accomplish this task as well as complete our packing and preparations to move three days hence. Early the next morning – at 7:00 a.m. – I stood in line on King George Street. I was second in line when the office opened at 8:00 a.m. By the time it opened, there were about twenty people waiting to get in. When the door opened, I asked the person where to go and she directed me to the second floor to pay license fees. I scurried up and was no longer second in line but about sixth and it took me until 9:45 a.m. to get to the front of the wicket.

I then showed my license and had the exact amount of lira (money had not yet been changed to the new Israel shekel) in hand to pay. The clerk condescendingly told me that a license fee was not due, but an import duty was. That office had moved two years ago. She tersely gave me an address. It was in a new industrial area of Jerusalem. I ran outside and grabbed a cab. It took twenty minutes to get there.

The line had about sixteen people in it when I got there at 10:22. I despaired, but quickly cheered up when it seemed to be moving reasonably quickly. I learned later that the reason the line moved so quickly was that most people were sent away to get more documents in order to complete the transaction. Further, the son of the Imam from Jerusalem was standing behind me in line and we struck up a very enjoyable and interesting conversation. When my turn came – it was then 11:30 a.m. – I handed over the license and my money through the wicket – only it was not quite a wicket.

Curtly, the clerk asked what this was for. I answered that it was to pay the foreign vehicle fee that was due at six months and that I had not know about previously. The clerk asked for the ownership papers for the vehicle. I told the clerk that I was required to leave the ownership papers at the Haifa Port. He said that I could not pay the fee without the ownership papers. I told him my situation and that I was in a Catch-22. I was leaving in another two days and could not get my vehicle out of the port any longer nor retrieve the ownership papers that had to be left with the vehicle. Yet I could not get the vehicle again to leave until I paid this fee.

He said, “Next.” In Hebrew, of course! I said I was not leaving the line until I could pay the fee. The Imam’s son encouraged me. This was his third time back in line because each time he was sent away and asked to bring another paper. The Israelis further down the line, instead of telling me to get out of the way, yelled, “Start a sit in.” I seemed to have the whole line behind me totally sympathetic to my plight and supporting me. The clerk announced that he was going on a tea break and closed the wicket.
He returned in twenty minutes – I was getting desperate because I knew government offices closed at 1:00 p.m. for the day. It was now almost noon. The clerk, without looking up, said I would have to go upstairs. He directed me to an official upstairs. That person would take care of the problem. I ran up the stairs, found the room, and was ushered in right away to see this official. I explained my plight. He asked, “What size of engine did the VW have?” I said I had no idea. He said that VW vans had either a 1200 or a 1600 cc engine. Again I said I had no idea. When he kept insisting on my trying to recall a figure, I said it must have been the larger figure because the VW I drove had lots of oomph. He asked whether I was sure. I said that I was not sure at all, but thought that must have been the case. He asked again whether I was sure. After the third time, to get the matter over, I said that I was pretty sure. So he gave me a signed slip with instructions and told me to go to the front of the line and see the clerk. I would not have to line up again.

I went to the front of the line – it was now 12:25 – and waited until the person being served finished. The Imam’s son was no longer there and I hoped he had received his license this time. No one in the line objected to my jumping the queue. I handed over my license, the money and the signed slip I had been given. He took the papers, counted the money and said that it was not enough. I said that was the amount I had been told in the port. He said that that was the amount for a 1200 cc engine. I had a 1600 cc engine. The amount required to be paid for a 1600 cc engine was three times the amount for a 1200 cc engine.

I despaired at my stupidity and failure to get the hints of the official upstairs. I asked in despair, “What can I do?” I had traded in all my excess lira and would have to go a bank and exchange more money and come back and I was not even sure I had that amount of cash freely available as I had transferred most of my assets back to Canada already. He said, wait a minute. I, and everyone else in the line, waited ten minutes. I was so embarrassed. I knew that those near the back of the line – there were about eight still lined up – could not possibly get served by 1:00. When he returned he told me that he would reduce the fee by half. I still did not have enough lira. There were no ATM machines then and the nearest bank was probably a mile away – we were in the boondocks.

I agreed to return the next day. He told me I would not have to line up. And true to his word, after I went to the bank first thing in the morning to obtain the extra lira I needed, I went right to the front of the line and within two minutes I had paid the fee and had the longed for stamped slip I needed. I left amazed at both the initiative of the bureaucrats and their obduracy. They could not and were not cowed by academics, imams or, as we shall see, billionaires. They were equal opportunity obstacles and innovators.

Gad Zeevi was a multi-billionaire. He owned part of Haifa’s Grand Canyon Mall, and real estate throughout Israel, Eastern Europe and the USA, owns the largest and best equipped private hospital in Israel and has been a pioneer in health tourism. He has investments in the media and in new hi-tech apps. He runs the largest import and freight forwarding agency with offices throughout Africa, Eastern Europe and America. He has been an importer and gained control of Japanauto in the late nineties to become the dominant importer of cars and trucks into Israel. The Ze’evi group is also onto the production, refining, distribution and sales of petroleum products both in Israel and the USA as well as in the construction and management of electric power stations. He has been, nevertheless, treated with much more bureaucratic interference than I was fitting to his wealth. And, possibly, sometimes more help. In some ways, however, Israel, in spite of now ranking with countries with the greatest gap between rich and poor, is still an egalitarian society.

When the Berlin Wall came down and Eastern European states initiated the privatization of their assets, Eastern European groups with money turned to pick up those assets at bargain basement prices. The Polish Group (Bagsik and Gasiorowski) was one of them. They decided to sell off their assets to do so. One was Paz Oil in Israel. They approached Gad Ze’evi to see if he was interested. They offered Paz to him at US$10 million less than they themselves had paid a year earlier because they saw much greater and faster profits in Eastern European assets then for sale. Ze’evi put a down payment of US$7.5 million and agreed to pay for the balance in equal installements every six months over the next four years. A contract was signed.

But it did not work out. During the due diligence period, Ze’evi claimed that something was amiss and refused to close the deal. Instead of backing off and absorbing losses for the work put in, Ze’evi took the Polish Group to court for refund of his deposit and legal costs. The issue went first to an arbitrator as provided in the contract and then to the courts and, as usual, dragged out for three years. Paz was tied up and the Polish Group sufered significant opportunity cost losses in not having the funds to gain control of Polish government assets. At the same time, Ze’evi had his $US7.5 million tied up and very large legal fees. The Polish Group lost even more, not only the lost opportunities to make large sums in other ways, but they finally sold Paz at one-quarter of the price that Ze’evi had agreed to pay. Both sides were huge losers.

The losses were not only financial. Although both sides poured money into public relations as part of their legal suit, both sides’ reputations suffered enormously. Gad Ze’evi was portrayed in terms bordering on antisemitic stereotypes. Further, his legal troubles had just begun. In March of 2001, he was arrested, along with others, and charged with fraud by the Israeli International Crimes Unit in what was called the Bezeq Affair. When Ze’evi purchased his 17.6% stake in Bezeq from Cable and Wireless for US$600 million in 1999, he evidently, as required by law, did not properly disclose his source of financing from Mikhail Chernoy who had come onto a large stash of cash when he sold control of the Bulgarian cell phone company to MobilTel. (I will have more to say on Mikhail Chernoy and his connection with Avigdor Lieberman in my last blog on Tycoons and Monopolies focused on the Eastern European Israeli billionaires.)

In 1999, Ze’evi had borrowed US$643 million from a consortium of Israel’s six largest banks led by the First International Bank of Israel. US$500 million of the loan was secured by the shares that he had purchased as well as a guarantee provided by a Swiss account controlled by Mikhail Chornoy for US$143 million. Evidently Mikhail Chernoy had not been disclosed as the one providing the guarantee. The banks claimed that, had they known, they would not have approved the loan.

When Ze’evi could not meet the terms of the loan, largely because of his losses in the Paz affair, the banks in 2002 put him into receivership and he lost control of the Bezeq stake. The receiver sold the shares in Bezeq for NIS 4.7 billion for a healthy profit, repaid the banks in full, repaid Chernoy US$107million ($36million had already been repaid in 2000) and enough held in trust until the courts settled the amount of interest owing to Chernoy. The balance went to Ze’evi. The criminal action, on the other hand, dragged on until 2009. Then, Tel-Aviv District Judge Oded Mudrik instructed that the Prosecutor settle since no criminal intent was uncovered in Cherney’s loan to Ze’evi.

There are several lessons to be learned from this affair. First, as I have written before, when there is smoke, there is not always fire. Second, becoming involved with intelligent, persistent and suspicious prosecutors in Israel is dangerous to one’s health. Third, any business person has to do due diligence, not only on the business financial aspects of a deal but on the personalities involved. Fourth, the financial costs of slip ups are enormous. Hence the huge amounts entrepreneurs pay legal firms to minimize possibilities of exposure to possible mistakes. Legal costs and potential legal costs constitute a significant, but largely unproductive cost of engaging in business transactions. Any actions the state can take to ensuring financial deals are totally above board while also minimizing exposure to risk can be one of the most important contributions that the state can make both to the efficiency and integrity of business transactions.

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Leonid Nevzlin.01.05.13 01.05.13

Leonid Nevzlin 01.05.13

by

Howard Adelman

Leonid Nevzlin is from Moscow. As I shall explain, he is probably no longer the billionaire listed in Forbes in 2003, but he is included in this series because of the explanation. Nevzlin graduated from the Gubkin Institute of Oil and Gas in Moscow as a software engineer and worked as a computer programmer for the Foreign Trade Association (ZarubezhGeologia) in the Soviet Ministry of Geology. In 1987, he partnered with Mikhail Khordorkovsky and became Deputy Director of the Youth Centre for Scientific and Engineering Creativity just when Mikhail Gorbachev began his restructuring of the Soviet economy. He also headed the Center of Interdisciplinary Scientific–Technological programs (MNTP) that morphed into the Joint Company Menatep-Invest out of which the two partners established the Menatep Bank in 1990. Nevzlin became President. Menatep was used to found Yukos, where Nevzlin assumed the position of Vice-President. Yukos became the world’s largest non-state oil company in only five years.

The foundation of their wealth began with currency trading in the early nineties based on algorithms Nevzlin devised, and then buying up for cash the vouchers issued in the process of privatization, initially in state enterprises, and then in property at deeply discounted prices. The new Russian oligarchs, mostly Jewish, lent the money to the state Yeltsin ran, and the loans were secured by state assets. When the government defaulted on loan payments, the oligarchs seized the assets. Through buying vouchers and foreclosing on state loans, by the mid-nineties, Khodorkovsky and Nevzlin were very rich.

Nevzlin and Khodorkovsky bankrolled Yeltin’s re-election in 1996 for which Nevzlin was awarded the Russian Order of Friendship. In September 1997, Nevzlin became Deputy Director of the Russian news agency, ITAR-TASS, for a year. Nevzlin developed a plan to gradually transform ITAR-TASS into a joint-stock company. In 1999, Bank Menatep went belly-up in the Russian financial crisis of 1998-1999. Yukos was also in trouble, spending US$12 to pump oil with its outdated equipment that was only selling for $US8 per barrel. Nevzlin and Khodorkovsky not only saved the company by modernizing it, transforming the financial reporting to western methods to assure transparency and accountability, but mainly through the god’s of fortune as oil prices began their spectacular rise.

The two partners began to devote more time to the development of civil society and the two founded the Open Russian Federation to fund civil society projects. The two also funded a school for public administration. From March to December 2001, Nevzlin was president of the Russian Jewish Congress and he personally funded a number of Jewish historical and heritage research projects, including the establishment of the Moscow Jewish Cultural Center and the International Center for Russian and Eastern European Jewish Studies in Moscow. From November 2001 to March 2003, Nevzlin became a senator in the Federation Council of Russia representing Mordovia and became the first rector of a university without a PhD for the Russian State University for the Humanities. The two partners became the biggest supporters of civil society organizations providing at least 50% of the income of all of them while Khodorkovsky also donated a hundred million $US to the Russian State Humanities University.

In 2003, the political winds that had been changing over the previous four years became a whirlwind. Putin had assumed the presidency of Russia in 2000 after rising under Yeltsin as Acting President in 1999. By 2003 he was consolidating his power in preparation for running for president again in 2004. Though the economy had stabilized and had experienced enormous growth under his regime, fueled in good part by increases in the value of Russia’s oil and gas, Russia began also to regress in democratic terms. Part of that regression meant eliminating any economic centres of power that threatened Putin’s political power. You were either in bed with Putin or sentenced to the scrap heap of history. Putin targeted Vladimir Gusinsky, another Jewish oligarch, who owned a media company and two television stations. Gusinsky was charged and agreed to sign over his companies to the state and fled to Israel.

Khodorkovsky, in 2003 then the richest man in Russia, had as big an ego as Putin and challenged him in the political arena by funding civil society human rights and opposition groups. As an ex-KGB agent, Putin was wedded to doublespeak, doubletalk and double think while Khodorkovsky was a believer in saying what he thought without inhibitions. In February 2003, he refused in a direct meeting with Putin to buckle under. In fact, he directly challenged Putin at the meeting with a slide show arguing that political corruption was costing the Russian economy US$30 billion per year. Khodorkovsky and Nevzlin were true believers in the free market – he and Nevzlin had published a manifesto, The Man with the Ruble, extolling the virtues of capitalism. They wrote: “Our guiding light is Profit, acquired in a strictly legal way. Our Lord is His Majesty, Money, for it is only He who can lead us to wealth as the norm in life.” They had also become believers in free speech and human rights, transparency and accountability. However, Nevzlin, a more prudent man, was not willing to uphold his beliefs at the risk of his life.

Putin’s guiding light was power and Russian nationalism. He turned the power of the state apparatus against Yukos. At the meeting in February, Putin took umbrage at Khodorkovsky’s speech and in not very subtle terms issued his threat. “Some companies, including Yukos, have extraordinary reserves. The question is: How did the company get them? Your company had its own issues with taxes. To give the Yukos leadership its due, it found a way to settle everything and take care of all its problems with the state. But maybe this is the reason there is such competition to get into the tax academy?”

Nevzlin, who had mastered public relations, got the message and immediately went to take citizenship in Israel in 2003 and made efforts to move whatever funds he could salvage to safe havens. Khodorkovsky held his ground as other billionaires and millionaires fled Russia to save their lives (several were murdered abroad) and to avoid the wild west lawlessness of Russia where kidnappers and murderers in cahoots with the state ransomed children and killed at will, Khodorkovsky, as stubborn as Putin, refused to flee, even though Nevzlin warned him that the old laws still on the books could be used to prosecute them.

The squeeze began on 2 July 2003 when, their partner, Platon Lebedev, was arrested. Later in July, the head of security for Yukos, Alexi Pichugin, was also arrested and eventually sentenced to 24 years in prison for murder. Khodorkovsky could bend or flee. He not only stood his ground but ran a public campaign against Putin. By the time Khodorkovsky was arrested on 25 October at the Novosibirsk airport in Siberia at 8:00 in the morning as he was preparing to fly back to Moscow, Nevzlin was living in Israel where he fled with two other partners from Yukos, Vladimir Duvdov and Michail Brodno. Nevzlin has said that he had spoken to his friend just earlier and he seemed to know the consequences he faced.

So did Pavel Ivlev, a tax lawyer who never worked for Yukos or Khodorkovsky but was called as an expert witness at the trial even though he was the lawyer representing other Yukos employees who had been charged, a completely illegal move under any jurisdiction. In the pre-trial examination, he was told that he had to tell all – namely how the employees took sacks of cash out of Yukos to deliver to Khodorkovsky personally. Ivlev protested that he had no knowledge of that ever happening. He was told that if he said that, he too would be arrested. The next day, Ivlev fled the country and flew to Kiev and eventually his family joined him and they now live in New Jersey.

Three years after Mikhail Khodorkovsky was convicted of fraud and tax evasion after a ten month farcical trial, he was sentenced to nine years in prison and sent to Khodorkoovsky colony, YaG-14/10, a 9 hours flight and a 15 hour train ride from Moscow. In January 2004, an international warrant was issued for Nevzlin’s arrest, initially for evading US$930,000 in taxes for the 1999-2000 fiscal year, with illegal appropriation of shares in two Eastern Oil Company (VNK) subsidiaries, and, in July, for murder and attempted murder, specifically targeting businessman Sergei Gorin and his wife, and also Yevgeny Rybin, the president of the East Petroleum Company.

Moscow City Court tried Nevzlin in absentia and found him guilty of organizing five murders and sentenced him to life in prison. All efforts to extradite Nevzlin from Israel failed as the Israeli Supreme Court found that none of the evidence the Russian government presented was enough to even charge him let alone secure a conviction. The High Court of Justice in Israel ruled, “These are hearsay testimonies that do not even justify the appeal to extradite Nevzlin.” In the end, 42 Yukos employees were charged and sentenced. Yukos was sold at a bargain basement price to a company, Baikalfinansgrup capitalized at $US300 with no assets at all registered in a small town of Tver three hours drive from Moscow, the purchase financed by a US$9billion loan by the state oil company, Rosneft, to get rid of debt in return for Baikalfinansgrup’s shares as collateral. Ironically, the process that the partners had initially used to acquire the assets was now put in reverse gear.

While in prison, Khodorkovsky and Lebedev were charged in March 2009 with stealing Yukos’ oil between 1998 to 2003. The trial ended in December 2010 and the two were sentenced to a further 14 year prison term. It was clear that Putin had determined that the two would never again be out of prison.

Since leaving Russia, Nevzlin has repeatedly criticized the Putin regime and offered monies to opponents. He set up an institute on Eastern European and Russian Judaism, The Leonid Nevzlin Research Center for Russian and Eastern European Jewry, at the Hebrew University in Jerusalem. Twin institutions were funded in Moscow, Vilnius and Kiev. He has helped create an endowment for Beth Hatefutsoth, the Nahum Goldmann Museum of the Jewish Diaspora next to Tel Aviv University and became chair of its Board, funding the Nevzlin Program for the Study of Jewish Civilization at Tel Aviv University and the International School for Jewish Peoplehood Studies at Beth Hatefutsoth. He also helped saved the newspaper, Haaretz, by buying a 20% interest.

Two More Eastern European Israeli Billionaires: Mashkevich and Rabinovich.02.05.13

Two More Eastern European Israeli Billionaires: Mashkevich and Rabinovich 02.05.13

by

Howard Adelman

Lev Leviev originally came from Uzbekistan. Alexander Mashkevich was born in Kyrgyzstan, lived in Kazakhstan and still commutes between there and Israel where he moved and took out citizenship in 1991. He also has homes in Belgium and London where his family reside. Unlike Leviev, who was a school dropout, Mashkevich began as an academic teaching philology and became Dean of the Faculty of Linguistics at the University of Kyrgyzstan. Further, Mashkevitch has never invested in the Israeli economy except to buy a 10,000 sq. ft. condo for his daughter for $US31 million.

With two other partners, Muslims from Uzbekistan and Kyrgyzstan, he entered into the good graces of the President of Kazakhstan, Nur Sultan Nezdabayev. When the USSR imploded, the three obtained control initially of aluminum through Khazakhstan Aluminum and, subsequently, the chromium and gas operations in Khazakistan through the Eurasian Natural Resources Corporation (ENRC). When ENRC went public at the end of 2007 when the economy had already begun to dip, it was floated on the London stock exchange for over US$10 billion to the benefit mostly of the three partners. In 2009, ENRC earned almost US$1.5 billion profit on sales of US$3.8 billion, an unheard of 40% return on sales. ENRC invests in coal and transportation companies from Eastern Europe to Africa.

Patokh Chodiev, one of his partners in ENRC, was, like Leviev, an Uzbek, but, unlike Leviev, a Muslim and a scholar who studied international law and mastered Japanese when he lived in Japan. Chodiev later established the Chodiev Group and last week, through a nephew, Orifjon Chodiev, purchased one of the small commercial banks in Khazakistan, the TAIB Bank. For insurance, Chodiev acquired Belgium citizenship in 1997. The third partner, Alijan Ibrgimov, is a Muslim Uigur born in Kyrgyzstan.

Mashkevich followed the pattern established by Leviev and Nevzlin in becoming a plutocratic leader of the Jews in the Euro-Asian Jewish Congress and supports synagogues, even though, unlike Leviev, he is not deeply religious though he plays the role of an observant Jew. Further, he is a supporter of the Braslev Hasidim rather than the Lubavitchers. In 2011, in the Savarona Affair, he was caught by the Turkish police on a very wealthy yacht with other billionaires, but primarily with another Khazakh, Taufik Arif, who lives in Turkey and also owns a metal production factory in Kazakhstan as well as many properties jointly with Donald Trump. The group has more in common with Berlesconi of Italy and purportedly enjoys the pleasures of under-aged girls. In the Turkish press, Taufik has been accused of making money through trafficking in females from Eastern Europe.

Another Eastern European billionaire, Vadim Rabinovich, plays the same game. He is president of the United Jewish Community of Ukraine which he created in 1999. He previously led the All-Ukrainian Jewish Congress which he created in 1997 and dissolved in 1999 because it ostensibly was not willing to bend to his will. He is also Vice President of the European Jewish Union. He made his little fortune in the furniture business and his large fortune in the natural gas business. Like most of the plutocrats, he got in trouble with the law. As with Leonid Nevzlin, that can become a badge of honour. For much of Eastern Europe still has to learn that the rule of law does not mean using the law to rule and throw opponents in jail. However, how do we know when the accused are criminals or political victims?

In yesterday’s National Post, an article on p. A9 was headlined, “Jailing of ex-PM of Ukraine ruled rights violation”. Maria Danilova and Lori Hinnant told the story of how the current president, Viktor Yanukovych, used the judicial system as a club to keep the former president, Yulia Tymoshenko, a heroine of the 2004 pro-democracy Orange Revolution, in prison. Viktor Yanukovych, like the second president, Leonid Kuchma, advocates closer ties with Russia and was known for closing opposition papers and allegedly even having a journalist, Georgiy Gongadze, killed, the accusation that was the catalyst for the Orange Revolution. He was charged in 25 March 2011 but the case was dismissed in December of that year.

Tymoshenko, however, was sentenced to seven years for “exceeding her powers” and “negotiating a gas contract with Russia”. The European human rights court ruled unanimously that her jailing was politically rather than criminally motivated. Typically, as in the blog narrated yesterday, charges are also pending for embezzlement, tax evasion and murdering a politician and a businessman.

Rabinovich was also convicted of a variety of crimes and stripped of his citizenship for fleeing the country and taking out Israeli citizenship. The conviction was subsequently reversed and his citizenship restored. He had a criminal record from the communist period. In 1980, he was charged with stealing state property and spent nine months in jail. In 1984, he was once again arrested and that time sentenced to fourteen years in prison for black market activities but was released in 1990. He then took advantage of the opening up of the Eastern European economic system to quickly accumulate assets.

Like many other plutocrats, he is known for owning a football club, FC Arsenal Kyiv in Kiev, and for his contributions to Jewish charities. He put up the money for the restoration of the Hurva Synagogue, but when we went there to make a program for our show, “Israel Today,” the Hasidim who were given control of the synagogue would not give us access – even to see it let alone to videotape the restoration. The sign denoting the square outside the synagogue read “Vadim Rabinovich Z”L” (“may his memory be blessed”), a designation not only incorrect, since he was not dead, but completely illegal because Israeli public spaces cannot be named after people who are still alive. Public spaces in the old city must be named after people who died before 1500 AD. Rabinovich also donated a golden menorah ($US3 million) that now overlooks the Western Wall.

Two months ago, on 4 March 2013, a bomb was hurled by young man wearing a baseball cap at his car in Kiev near the Klovska metro station in Kiev but no one was hurt in the explosion. Six weeks earlier, a senior government official and famous Ukrainian businessman with close ties to the present government, Boris Podolsky Evseevich, visited his office and suggested that harm might come his way if he did not transfer his ownership of Jewish News One TV to the government within a week. JN1TV has tried to become the Jewish al Jazeera. In addition, Rabinovich-Katsman own the following newspapers: Stolychka, Stolichnye Novosti, Jewish Review (in Russian), Jewish Reviewer, Vek, Mig, and Zerkalo .

In the Ukraine there has been a noticeable rise in anti-Semitism recently, particularly with the increased representation of the far right Svoboda Party (“Freedom” in Ukrainian) in Parliament as a result of the elections in October 2012 in which they garnered over 10% of the vote. The party was expected to incite new waves of public protest to advance its social and nationalist messages. On 26 April 2013, the JTA reported that, “Marching in formation, six young men in dark jackets approach an anti-government rally in Cherkasy, a city some 125 miles southeast of Kiev. At the appointed moment, they remove their windbreakers to reveal white T-shirts emblazoned with the words ‘Beat the kikes’. Their jackets carry the name of Svoboda, the ultranationalist Ukrainian political party.” One of the men beat Victor Smal, a lawyer and human rights activist, so savagely that he is rendered barely recognizable. A website http://iamthewitness.com/Ukraine.html is headlined, “The French Connection: Who Controls the Ukraine?” and argues that it is the Jews. I quote generously from that site.

“In the early 1990s, backed by the financial power of international Jewish bankers, the vultures bought for pennies, and plainly seized, all major enterprises previously owned by the state, including the biggest factories and entire sectors of the newly ‘privatized’ national economy.” Four Jewish media moguls were then named and their pictures put up on the site: Gregory Surkis, Victor Medvedchuk, Vadim Rabinovich and Victor Pinchuk.

They do own many of the TV stations and newspapers in the Ukraine even though Jews constitute only .2% (103,000) of the Ukrainian population of 48 million. What is not stated is that Leonid Kuchma two term presidency was brought down largely because of that same media exposures of widespread corruption under his government.

Professor Vasyl Yaremenko, director of the Institute of Culturological and Ethnopolitical research at Kiev State University, wrote, “Ukrainians need to know that the mass media is completely in the hands of Jews, and everything that we watch or read is the product of Jewish ideology…” The site states that Leonid Kuchma, the second president of the Ukraine from 1994 to 2005 was put in office by the Jew, George Soros. The Jewish Ukrainian billionaire, Victor Pinchuk, who owns oil, gas and energy import/export companies, the nation’s largest steel mill and a chain of banks, is his son-of-law.

“Jew Victor Medvedchuk is Ukrainian President Leonid Kuchma’s Chief of Staff. The Medvedchuk-Surkis cabal controls Ukraine’s energy sector (8 regional energy companies), oil and gas market, alcohol and sugar production, shipbuilding, and athletic organizations. He is a member of the Ukrainian Parliament, and a leader in the Social Democratic party of Ukraine (SDPU).” “Jew Gregory Surkis is second in command of the SDPU. He owns a soccer team, Dynamo-Kiev, and is a president of the Professional Soccer League. He is CEO of Slavutich, a company that controls several regional energy companies (KirovogradEnergo, PoltavEnergo, etc). He too is a member of the Ukrainian Parliament.” And so it goes, on and on, naming one rich Ukrainian Jew after another.

Even Hollywood enters the fray. Mila Kunis is a Hollywood actress who was born in the Ukraine and migrated to the US when she was seven. The Ukrainian legislature member, Igor Miroshnichenko, called her a “zhydovka” on his Facebook page, a derogatory term used to refer to a Jewess that has not been publicly used since the Nazi era. In the debate in the Ukraine parliament, an anti-hate bill was defeated when only 208 votes were cast for the bill and 226 were needed for it to pass.

Professor Yaremenko claimed that 136 and possibly 158 of the members of the Ukrainian parliamentary members are Jews, more than in the Israeli Knesset. Professor Yaremenko asked: “Who voted for them?” “Who paid for costly election campaigns?” Yaremenko claims that 90% of Ukrainian banks are owned by Jews. The site claims that the infamous Ukrainian famine of 1933 was organized by Jews and that 99% of PCIA members––Stalin’s secret police––were Jewish. The site ends: “We cannot allow Zionists to destroy Ukraine.”

The story ends where is has always begun – Jewish economic, political, academic, professional success is connected with a Jewish cabal and ideology intent on power and control while sucking out the life blood of other nations. Jewish business successes may be the result of varied characters and different means, but it is always connected with a Medici-like hidden hand that wants worldwide control and power.

NEXT WEEK: Machiavelli, The Prince and the Jews

Tycoons and Monopolies I.14.04.13

Tycoons and Monopolies I 14.04.13

by

Howard Adelman

Economic development depends in good part on entrepreneurs. The vast majority are small, but some have become very rich. There are at least seventeen Israeli billionaires in Forbe’s Israel list not counting billionaires who hold Israeli citizenship but whose primary residence is now elsewhere. I have already referred to the richest, the Ofer brothers (Idan and Eyal) and Arison brother (Micki) and sister (Shari) in previous blogs. Since the Arisons largely inherited their money from their father who died in 1999, I will only tell one story of Shari Arison who was voted the 56th greatest Israeli in 2005 because of her philanthropic work. In March 2009, she sponsored the annual Good Deeds Day in Israel to inspire and recruit thousands of volunteers. As part of the event, a Palestinian youth orchestra from Jenin performed classical Arabic tunes and songs of peace in a concert honouring Holocaust survivors. Subsequently, the conductor was condemned by Jenin politicians, fired from his job and expelled from Jenin. Such are sometimes the unintended bad effects of good deeds.

Israeli billionaires are sometimes accused of bad deeds. Focusing on the Israeli documentary, The Shakshuka System (Shitat Hashakshuka), written by the Israeli investigative journalist, Miki Rosenthal and directed by Ilan Aboody, I will re-introduce the Ofer brothers. Shakshuka refers to an Israeli hot breakfast concoction of poached eggs cooked in a tomato and olive oil sauce with lots of spices and an assortment of other ingredients often mixed in – sausages, tuna, spinach, feta cheese. Since the film was broadcast, the term now has a secondary meaning in Israel to refer to mixing of government and big business in the process of devolving state assets onto the private sector. A lawyer working for the Ofer family can be given the credit for this neologism for he described the process for calculating the purchase price of state assets as combining various offers and making a shakshuka out of them.

The film combined a Monopoly Board, cartoons and official records, history and interviews, to explain how the Ofer brothers and the Israel Corporation purchased what were state assets at what were alleged to be bargain basement prices. But the film starts with the end, the effort of the Ofer family to suppress the film and prevent it from being shown on Israeli TV. Eventually they not only failed, but their own film made to counteract the critical film, and shown back-to-back on Channel 1 (the Israeli version of CBC), evidently, according to a radio survey, garnered a credibility of only 10% while the Rosenthal-Aboody film had a credibility of 90%. However, in the process of making the film, Rosenthal lost his job with Channel 2 (the Ofers actually bought the channel as part of its campaign). Nevertheless, the film garnered far more publicity than it would otherwise have if the Ofers had not launched such a strenuous campaign to suppress it. The Ofers also agreed to pay NIS 40,000 to settle their suit against Rosenthal et al out of court.

In the film, as in a Michael Moore documentary but without Moore’s narcissism, no one from the Ofer family, its hirelings or the government is willing to talk to Rosenthal about the process of privatization, but in the tradition of investigative journalism, the narrative relays how the government sold state assets in the resource industry cheaply while the companies continued to pollute and hired former state employees in charge of the sale to work for the Ofers immediately after the purchase. Other than introducing a new meaning to a Hebrew word, as a result of making the film, Rosenthal and Aboody have been frozen out of many work opportunities. At the same time, the Ofer brothers blame the film for making government officials unwilling to meet with them lest those officials be suspected of collusion.

We should not, however, stereotype billionaires, though when at the end we discuss the Eastern European Israeli billionaires, one may be tempted to do so. The billionaires in Israel represent a widely divergent group both in background, how they made their fortunes and any conclusions that can be drawn for their impact on the Israeli economy. The most well known in Canada is David Azrieli because he is a Canadian as well as an Israeli citizen and is included in the Canadian rather than Israeli list. He made his money (currently a fortune estimated in excess of $3 billion), like many of the very rich who made fortunes in Canada, as a property developer in both Israel and Canada where he is ranked as the 9th wealthiest Canadian by Forbes.

Trained as an architect in the Technion (though he never graduated) and having served in the IDF, he was one of the first Israeli migrants to Montreal in 1954. The Azrieli School of Architecture and Urbanism at Carleton University was named after him, not only because of his $5.1 million donation, but because of his commitment to high quality architecture in his developments. In Israel, the Jerusalem Shopping Mall, as well as twelve other super malls in Israel, and the Azrieli Center in Tel Aviv, are now landmark developments. Azrieli has a controlling share in Sonol, Tambour and Supergaz. There is no indication that his contribution to the Israeli economy (and the Canadian economy) has been anything but positive.

However, he has donated funds to Im Tirtzu, self-described as a centrist organization combating efforts to promote a boycott of Israeli academic institutions. However, Im Tirtzu is known for its denial of the Nakba, condemnation of artists who support Palestinian nationalism, its campaign against the New Israel Fund for funding the "lies" that were fed into the Goldstone Report, and especially its criticisms of biases in political science departments of universities. In the case of Ben Gurion University of the Negev, the organization claimed that 9 of 11 professors in the department were left-wing activists who supported the boycott of Israeli academic institutions. Although the heads of Israel’s seven leading universities condemned Im Tirtzu‘s "dangerous attempt to create a thought police," the Israeli Council for Higher Education appointed an international committee to investigate the allegations but it too became controversial because well-known scholars were rejected from being appointed to the committee and the original chair also resigned. The committee did conclude that the curriculum of the department was indeed imbalanced and recommended closure unless changes were made.

Then there are the American billionaires who are also Israeli and not included in the list. Micki Arison is classified as American because he runs Carnival Lines out of Miami; both he and Shari were born in the USA and retain their American citizenship. Noam Gottesman, who founded GLG Partners, a wealth management firm, which he sold but still controls TOMS Capital, has lived in London and New York and is not an Israeli resident. Other Israeli-born billionaires have made their fortunes in America. Arnon Michan, the Hollywood producer (Pretty Woman, L.A. Confidential and numerous other movies) built his initial fortune in Israel by developing and expanding his father’s fertilizer company into a large chemical business. He has always had an intimate relationship with Israel, having served in the Israeli intelligence and is credited by Shimon Peres for obtaining what was required to build Israel’s nuclear capacity — as well as other forms of arms dealing. (Meir Doron and Joseph Gelman (2011) Confidential – The Life of a Secret Agent Turned Hollywood Tycoon). He has no current impact on the Israeli economy except as a goodwill ambassador and financial backer of the Israeli Network which re-broadcasts Israeli programs to Canada and the United States.

Marc Rich is another billionaire born in the USA with Israeli citizenship, but he lives in Switzerland. He fled the USA to escape indictment for tax evasion, running an export oil scam and involvement in the illegal trading with Iran in 1983 but was pardoned by President Clinton in 2001. A more interesting billionaire personality from an Israeli perspective is Haim Saban, another Hollywood mogul who owns Univision, the Spanish-language media giant. He sold Fox Family Worldwide, a co-venture with Robert Murdoch, to Disney in 2001 and made $1.5 billion. He has retained a continuing commitment to and involvement in Israel but is formally classified as an American billionaire. His main efforts are directed towards ensuring American support for Israel rather than having any direct impact on the Israeli economy. He supplied the funds to build the headquarters in Washington of the Democratic National Committee and founded and funded the Saban Center for Middle East Policy at Brookings.

The big Israeli billionaire movers and shakers in the Israeli economy, other than those discussed above, can be divided into five groups:

a) Mizrachis – Israeli Jews born in Arab countries;

b) the Ashkenazis;

c) the older Israeli-born businessmen;

d) the Young high-tech Sabras;

e) the East Europeans, the most colourful collection of all.

I will discuss the Mizrachis in this blog, then the other Israeli billionaires in subsequent blogs. Since the Toronto International Jewish Film Festival is now on, I will delay some of these economic blogs to review some of the films I see.

Shlomo Eliahu came to Israel as a child of fourteen from Baghdad and made his fortune, and reputation for integrity and responsibility, in insurance and banking. He owned large stakes in Bank Leumi and the Union Bank of Israel (Bank Igud) which in turn owned 9.9% of Bank Leumi’s shares, but very recently had to sell his personal stake in Bank Leumi to consolidate his takeover of Migdal Insurance and Financial Holdings and escape the requirements of the Israeli anti-monopoly laws. He is one of the two billionaires who has run for and had a seat in the Knesset, first as part of DASH, the Democratic Movement for Change, in 1978, and then in 1980, as part of Ahva until 1981. He then went back to making money. In 2012, that effort landed him in trouble with the law for he was fined almost $3million for non-payment of taxes between 2007 and 2009 when he took NIS 74.3 million out of Israel without notifying the authorities, in part ostensibly for gambling in London. There were rumours of money laundering but no evidence that I could find and a spokesperson for the Eliahu group explicitly denied it.

When Italian insurance giant Generali was due to sell its interest in Migdal to Eliahu, and Elihau was about to sell his shares in Bank Leumi, as stated above, to satisfy the new anti-trust laws, Bank Leumi lent Eliahu NIC2billion to buy Generali’s 69.1% controlling share of Migdal. Eliahu sold another block of shares in Leumi for NIS200million thereby raising about two-thirds of the needed price of his purchase of Migdal. After Eliahu completed the purchase of Migdal, the share price rose 40% and Eliahu joined the billionaire class.

I tell this story because all sales were private. But if it was a state sale to a private entrepreneur and the share price went up 40% after the sale was completed, there would have been accusations that the stock was sold too cheaply and that politicians and civil servants had colluded with Eliahu to help him make his fortune. The reality is that once you have a fortune, it is easier to enlarge it for there are fewer competitors in the buying sweepstakes for states privatizing their holdings.

Eliahu retained his personal political conscience. He railed against the high cost to Israelis of buying a home because of the scarcity of land and sites on which to build. He called for land to be privately owned so a base for personal capital would be created. "Why have Israelis, exemplary children, been sentenced to a country that does not care to give them a piece of land? To build a home?…We have a lot of land. In two years, I’ll build you hundreds of thousands of homes at a construction cost of $1,000 per square meter. $20,000 for a young couple, an 80% mortgage, and you’ll have a reasonable home for a family.”

Yitzhak (Isaac) Tshuva, another Mizrachi Israeli, seems to have been apolitical. He was born in Libya. He came to Israel as an infant in the Jewish exodus from Arab countries following the War of Independence. Starting as a contractor and developer, he has maintained his down-to-earth modesty though he came to own some very posh investment properties through his wholly owned property company, El-Ad, in New York, Florida and Los Angeles, including the landmark Manhattan Plaza Hotel which he recently sold after renovating and selling off a large number of condos.

Tshuva also controls the Delek Group, a global integrated energy company based on the Israel Fuel Corporation which he acquired from private interests rather than the state, but in gaining control, he pushed aside the establishment very wealthy Recanati family which made him some enemies in establishment circles. The Delek Group was part of the conglomerate that discovered and brought on stream the Tamar gas reservoir; Delek owns about one-third of Tamar. (See my blog on the energy sector.) He is an example of a Horatio Alger story of a self-made billionaire who made his money through hard work, discipline and dedication. Though in his early years he received state contracts – such as for building the Bar Lev Line along the Suez Canal – there was never any suggestion that he obtained those contracts other than through competition and an excellent business reputation. He has also had but survived serious setbacks, losing half a billion dollars when financial markets took a dive in 2008.

Tshuva has one ambitious plan that would have a tremendous political impact – to develop a 106-mile canal to bring Red Sea water to help refill the Dead Sea as well as develop hotels, restaurants and parks along its length. Tshuva is working with Jordan and the Palestinian Authority as well as the Israeli government to advance the project.

One last aside on the Recanati famil fortune which controlled the IDB Group and bought a controlling share of Gmul at a premium price just when the stock market hit the skids. When he lost about a half billion dollars and had to liquidate assets to satisfy creditors, he stepped aside. Leon Recanati lost control but retained his (and his family’s) reputation as a businessman of honour and integrity.

TO BE CONTINUED

Tycoons and Monopolies.I.14.04.13.doc

Tax Loopholes and Privatization.10.04.13

Tax Loopholes and Privatization 10.04.13

by

Howard Adelman

In the 1980s Israel began an aggressive program of liberal market reforms that included the privatization of many state-owned firms. I wrote about some of that privatization in yesterday’s blog on the energy sector. However, the reforms of its 1985 Economic Stabilization Plan went well beyond privatization of state owned-firms. First, the central bank independence in setting monetary policy was enhanced. Fiscal discipline was introduced. So was government intervention in the import and export of capital. Market competition was, at least for a time, increased by reducing monopolistic practices. Finally, Israel adopted a fixed exchange rate to halt runaway inflation and to stabilize the New Israeli Shekel (NIS).

Israeli credit exploded along with housing construction. Investment increased by leaps and bounds. So did consumption levels. From 1986 to 1992, GDP doubled per capita to $14,636. After coming through a severe recession between 2002 and 2004, the GDP more than doubled again by 2012 to $31,282 compared to Canada’s $50,436. How and why then did Israel slip up again in 2012 and develop a budget deficit of 4.6% (originally estimated at 4.2%), well beyond the target of 2-3%?

One explanation is the two year budget that Finance Minister Yuval Steinitz introduced in 2010 to the applause of International Monetary Fund and the OECD who lauded the longer range ability of government ministries to plan and the private sector, both corporations and individuals, to know what to expect for their financial planning. One severe critic was Avi Ben-Bassat, a Senior Fellow at the Israel Democracy Institute (IDI) where he heads the Economic Reform Project, is President of the Israeli Economic Association and was a former Director-General of the Finance Ministry from 1999-2001. Budget planning two-and-a-half years in advance is impossible because there will inevitably be too many intervening changes and unpredictable contingencies that will emerge. That is why no other country has adopted the model however appealing it might seem to armchair economists. The assumptions were just wrong.

Growth started to decline in the second quarter of that budget cycle. Instead of responding by introducing a mini-budget for the second year, policy makers were too wedded to the idea of predictability when unpredictability emerged as the governing pattern and predictability had proven to be a chimera. Along with a decline in growth, there was the correlated decline in tax revenues. Then Netanyahu, wedded to the ideological convictions of the right and the risk that raising taxes would pose for his own re-election, refused to raise taxes. What is more, he went on a bit of a pre-election spending spree rather than considering some drastic cuts in spending.

If the exercise in reducing the deficit is to follow Ben-Bassat’s proposal of one shekel of increased revenues for every two shekels in reduction in expenditures, where is the revenue to come from if income, corporate and consumption taxes are already at an optimum? Besides, consumption and value added taxes are regressive and increase the disparities between rich and poor. One source can be loopholes – raising tax revenues from those not paying their fair share of taxes. Even if the Haredim are put to work, this process will take a while to phase in and higher revenues cannot be expected from Haredim for the purposes of the forthcoming budget. The same is true if efforts to improve the economic earnings of the Arab sector work out. (See my future blog on disparities.)

Exemptions have to be targeted. The Israeli Treasury was already considering cutting tax breaks for exporters. (Meirav Arlosoroff, "Israel’s treasury mulls cutting tax breaks for exporters," Haaretz 17.02.13) Teva Pharmaceutical Industries paid just 0.3% taxes on $1.66 billion in profits in 2012 under the Encouragement of Capital Investments Law that allow companies which export more than 25% of the output special tax breaks. This means that most small and even medium size firms pay 25% of their profits in taxes while Teva benefitted from a very questionable additional 0% special rate for global companies. The corporate tax system was clearly skewed towards the large firms and the larger the firm was, the less tax it seemed to pay.

Further, there are additional tax reductions dependent on the region in which your facilities are located – 6% as opposed to 12% if the plant was in an outlying region. Global companies did even better since they were taxed a maximum of 5% and taxes on dividend distributions were taxed at only 15%. But the corporate tax rates cannot be changed because they were given to the companies as incentives to establish in Israel and have terms built in that do not allow increases for a number of years. The reality is that corporations such as Teva as well as Amdocs, Check Point, Iscar and Israel Chemicals, pay a disproportionately small amount of taxes as a result of the inter-state competition to lure exporters to each respective country.

Even with that competition, there is still room to cut exemptions without giving an incentive for large companies to relocate. Further, developed nations can work towards tax treaties that prevent large companies from escaping paying taxes by insisting on minimum taxes in any country where they locate and sell their goods and services. Further, taxes can be raised on dividends from 15% to 20%. The differential tax rates between regions can be maintained but doubled. One can expect a combination of these methods to be used to reduce the budget deficit and raise revenues.

However, export taxes are a mug’s game as all developed countries move towards broader and deeper free trade relations with other countries. There are other loopholes, however, for escaping or reducing VAT taxes, some of which discourage direct exports and encourage companies to initially export to a distributor in another country and eventually a subsidiary charged with distribution and located abroad. I am in no position to estimate whether a combination of reforms can raise an additional NIS5 billion shekels, but I am certain that this is where the focus will be on one main source of revenues.

There is another source that may not increase state revenues but which is certain to reduce consumer expenditures. Ten years ago, the Israeli Ministry of Finance undertook a study that showed that monopolies cost the Israeli economy NIS5 billion per year that is paid by both consumers and manufacturers. Many of these were government companies. Thus, a source of revenue can come from selling off even more government monopolies raising money from the sale of capital while guaranteeing economic benefits for both consumers and corporations as well as further future tax revenues for the government. This will have to de done on a company by company basis rather than across the board. Will the Israeli Electric Corporation be sold off or subjected to competition? What about the ports?

One exception will be Better Place. The government granted Better Place an effective monopoly on electric cars, but it is hard to envision how this sector could be developed without such a monopoly. I had the pleasure of driving one of the first versions of the electric car and produced and hosted the first television special on Better Place outside of Israel. However, Better Place is now in deep financial trouble. Shair Agassi, who conceived and founded the company in 2007, introduced the revolutionary idea of the swappable battery, and invested a good part of the fortune he made in the computer software business, was driven out of the company last October along with Moshe Kaplinsky and three other top executives, the VPs of marketing, infrastructure and public relations. Over 200 staff were laid off.

The company had established 38 of the planned 45 battery switching stations, and 2000 recharging stations, but only sold about 500 cars in Israel. The company was haemorrhaging money (a half billion in losses thus far) with little insight into how one could both develop a capital intensive infrastructure yet wait for income as public confidence in the car and the integrated system grew slowly. Idan Ofer, head of the Israel Corporation, and both the largest individual shareholder (8%) and largest corporate shareholder (28%) respectively has taken over, invested more money, but it is unclear whether he will pull the plug or even can or wants to shoulder on. Monopolies may be needed to develop some concepts but the risks are much larger.

In other areas, the matter is simpler. One of the sources of the protest movement in Israel last year was the report by the trade ministry that monopolistic pricing in the food industry resulted in Israelis paying among the highest food prices in the developed world whereas in 2005 those prices had been 10-20% cheaper than in other OECD countries. Monopolistic pricing is not just a problem of government owned firms but permeates the private sector. For example, Shufersal and Mega between them control two-thirds of the market share of the sale of groceries. Thus, in spite of the anti-monopolistic laws of the Israeli Antitrust Authority and the Monopoly Chapter that prohibits the abuse by a firm of its dominant position that might harm competition or the public, the present implementation of the law has been ineffective. The effect of the May 2012 amendment to the law authorizing the Director-General to impose monetary sanctions on both corporations and individuals in lieu of criminal prosecution for violations has yet to be examined to assess the results. The Tamar gas field, that came on line at the end of last month and that I wrote about yesterday, is and has been declared by the government to be a monopoly. (Announcement, David Gilo, General-Director Antitrust Authority, 13.11.13) What significance this has I have yet to determine.

I will deal with the issue of Tycoons in a separate blog. In Israel, 20 families own and control most of the country’s resources, including Idan Ofer whom I discussed above. As in the break up of the Soviet Union, they obtained from the state and the labour unions in the process of privatization companies at bargain prices, for they were the only groups with enough wealth to buy the companies. Cross-sectoral and multi-layered conglomerates with ownerships of banks that supply the financing to vertically integrated groups distort the Israeli economy, push up prices for consumers and, through transfers and other means to subsidiaries, reduce revenues to the state. Private sector monopolization may possibly be preferable to state monopolization, though that is debatable, but monopolization has repeatedly been demonstrated as a drag on an economy while, surprisingly, incurring greater risks. These large conglomerates have higher levels of financial leverage and hence higher risks than small to medium-sized stand alone companies.

If the state revenues are affected, so is the private sector. Restraint on competition inhibits the ability of small and medium firms to expand, especially given many of the tax advantages granted to the large firms. The largest cost to consumers has been in the housing sector. But that is largely a result of the state control of land and the way land is released for development to the private sector.

The Israel Lands Authority (ILA) controls almost all the land in Israel. If more land is freed up and released with fewer bureaucratic obstacles, this could accomplish two goals – increased revenues for the state as well as reduced prices for home buyers primarily by increasing the land available for construction. Further, if the land is sold and not just leased (usually two terms of 49 years), revenues could rise much faster but at the expense of long term income that could be offset from gas royalties. Further, if the Israeli government sold off the exiting leases to the existing owners on a right of first refusal, as recommended by an April 2009 Ministry of Finance Report, significant additional revenues could be created. As well, bureaucratic government costs will be reduced while other steps could be taken to protect the environment and set aside open lands for permanent benefit to Israelis. The laws are already in place. In August 2009, the Knesset passed the Israel Land Authority Law allowing Israeli citizens to own property in Israel and not just lease it. On 21 January 2013, Netanyahu appointed Moshe Kahlon as the new ILA chairman. As the former Communications and Welfare Minister, he earned a stellar reputation for slashing the very high cell phone prices in Israel. Concerted action can be expected to implement the law, bring land prices down and enhance revenues for the state.

I, of course, do not know what combination of sources of revenues from closing tax loopholes to selling off monopolies, breaking up or imposing rules on existing private monopolies and selling leases and land to bring in a target of NIS5 billion, but this outline should indicate that there are enough sources of potential additional revenues without needing to raise corporate, income or consumer taxes.

Tax Loopholes and Privatization10.04.13.doc