The Geopolitics of Dope

19. June 2010 by admin.

The Geopolitics of Dope Over recent months, the level of violence along the U.S.-Mexican border has begun to rise substantially, with some of it spilling into the United States. Last week, the Mexican government began military operations on its side of the border against Mexican gangs engaged in smuggling drugs into the United States. The action apparently pushed some of the gang members north into the United States in a bid for sanctuary. Low-level violence is endemic to the border region. But while not without precedent, movement of organized, armed cadres into the United States on this scale goes beyond what has become accepted practice. The dynamics in the borderland are shifting and must be understood in a broader, geopolitical context. A low-friction border, one that easily could be traversed at low cost — without extended waits — was important to both sides. In 2006, the United States imported $198 billion in goods from Mexico and exported $134 billion to Mexico. This makes Mexico the third-largest trading partner of the United States and also makes it one of the more balanced major trade relationships the United States has. Loss of Mexican markets would hurt the U.S. economy substantially. The U.S. advantage in selling to Mexico is low-cost transport. Lose that through time delays at the border and the Mexican market becomes competitive for other countries. About 13 percent of all U.S. exports are bought by Mexico.There always have been uncontrolled economic transactions and movements along the border. Both sides understood that the cost of controlling and monitoring these transactions outstripped the benefit. Long before NAFTA came into existence, social and economic movement in both directions — but particularly from Mexico to the United States — were fairly uncontrolled. Borderland transactions in particular, local transactions in proximity to the border region (retail shopping, agricultural transfers and so on), were uncontrolled. So was smuggling. Trade in stolen U.S. cars and parts shipped into Mexico, labor from Mexico shipped into the United States, etc., were seen as tolerable costs for an open border.The U.S. border with Mexico has been intermittently turbulent since the U.S. occupation of northern Mexico. The annexation of Texas following its anti-Mexican revolution and the Mexican-American War created a borderland, an area in which the political border is clearly delineated but the cultural and economic borders are less clear and more dynamic. This is the case with many borders, including the U.S.-Canadian one, but the Mexican border has gone through periods of turbulence in the past and is going through one right now. Not disrupting this trade and not raising its cost has been a fundamental principle of U.S.-Mexican relations, one long predating NAFTA. Leaving aside the contentious issue of whether illegal immigration hurts or helps the United States, the steps required to control that immigration would impede bilateral trade. The United States therefore has been loath to impose effective measures, since any measures that would be effective against population movement also would impose friction on trade. The United States has been willing to tolerate levels of criminality along the border. The only time when the United States shifted its position was when organized groups in Mexico both established themselves north of the political border and engaged in significant violence. Thus, in 1916, when the Mexican revolutionary Pancho Villa began operations north of the border, the U.S. Army moved into Mexico to try to destroy his base of operations. This has been the line that, when crossed, motivated the United States to take action, regardless of the economic cost. The current upsurge in violence is now pushing that line. The United States has built-in demand for a range of illegal drugs, including heroin, cocaine, methamphetamines and marijuana. Regardless of decades of efforts, the United States has not been able to eradicate or even qualitatively reduce this demand. As an advanced industrial country, the United States has a great deal of money available to satisfy the demand for illegal drugs. This makes the supply of narcotics to a large market attractive. In fact, it almost doesn’t matter how large demand is. Regardless of how it varies, the economics are such that even a fraction of the current market will attract sellers. Even after processing, the cost of the product is quite low. What makes it an attractive product is the differential between the cost of production and the price it commands. In less-developed countries, supplying the American narcotics market creates huge income differentials. From the standpoint of a poor peasant, the differential between growing a product illegal in the United States compared with a legal product is enormous. From the standpoint of the processor, shippers and distributors, every step in the value chain creates tremendous incentives to engage in this activity over others. There are several factors governing price. The addictive nature of the product creates an inelastic demand curve in a market with high discretionary income. People will buy at whatever the price and somehow will find the money for the purchase. Illegality suppresses competition and drives cartelization. Processing, smuggling and distributing the drugs requires a complex supply chain. Businesses not prepared to engage in high-risk illegal activities are frozen out of the market. The cost of market entry is high, since the end-to-end system (from the fields to the users) both is a relationship business (strangers are not welcome) and requires substantial expertise, particularly in covert logistics. Finally, there is a built-in cost for protecting the supply chain once created. Because they are involved in an illegal business, drug dealers cannot take recourse to the courts or police to protect their assets. Protecting the supply chain and excluding competition are opposite sides of the same coin. Protecting assets is major cost of running a drug ring. It suppresses competition, both by killing it and by raising the cost of entry into the market. The illegality of the business requires that it be large enough to manage the supply chain and absorb the cost of protecting it. It gives high incentives to eliminate potential competitors and new entrants into the market. In the end, it creates a monopoly or small oligopoly in the business, where the comparative advantage ultimately devolves into the effectiveness of the supply chain and the efficiency of the private police force protecting it. That means that drug organizations evolve in several predictable ways. They have huge amounts of money flowing in from the U.S. market by selling relatively low-cost products at monopolistic prices into markets with inelastic demand curves. Second, they have unique expertise in covert logistics, expertise that can be transferred to the movement of other goods. Third, they develop substantial security capabilities, which can grow over time into full-blown paramilitary forces to protect the supply chain. Fourth, they are huge capital pools, investing in the domestic economy and manipulating the political system. Cartels can challenge — and supplant — governments. Between huge amounts of money available to bribe officials, and covert armies better equipped, trained and motivated than national police and military forces, the cartels can become the government — if in fact they didn’t originate in the government. Getting the government to deploy armed forces against the cartel can become a contradiction in terms. In their most extreme form, cartels are the government. Drug cartels have two weaknesses. First, they can be shattered in conflicts with challengers within the oligopoly or by splits within the cartels. Second, their supply chains can be broken from the outside. U.S. policy has historically been to attack the supply chains from the fields to the street distributors. Drug cartels have proven extremely robust and resilient in modifying the supply chains under pressure. When conflict occurs within and among cartels and systematic attacks against the supply chain take place, however, specific cartels can be broken — although the long-term result is the emergence of a new cartel system. In the 1980s, the United States manipulated various Colombian cartels into internal conflict. More important, the United States attacked the Colombian supply chain in the Caribbean as it moved from Colombia through Panama along various air and sea routes to the United States. The weakness of the Colombian cartel was its exposed supply chain from South America to the United States. U.S. military operations raised the cost so high that the route became uneconomic. The main route to American markets shifted from the Caribbean to the U.S.-Mexican border. It began as an alliance between sophisticated Colombian cartels and still-primitive Mexican gangs, but the balance of power inevitably shifted over time. Owning the supply link into the United States, the Mexicans increased their wealth and power until they absorbed more and more of the entire supply chain. Eventually, the Colombians were minimized and the Mexicans became the decisive power. The Americans fought the battle against the Colombians primarily in the Caribbean and southern Florida. The battle against the Mexican drug lords must be fought in the U.S.-Mexican borderland. And while the fight against the Colombians did not involve major disruptions to other economic patterns, the fight against the Mexican cartels involves potentially huge disruptions. In addition, the battle is going to be fought in a region that is already tense because of the immigration issue, and at least partly on U.S. soil. The cartel’s supply chain is embedded in the huge legal bilateral trade between the United States and Mexico. Remember that Mexico exports $198 billion to the United States and — according to the Mexican Economy Ministry — $1.6 billion to Japan and $1.7 billion to China, its next biggest markets. Mexico is just behind Canada as a U.S. trading partner and is a huge market running both ways. Disrupting the drug trade cannot be done without disrupting this other trade. With that much trade going on, you are not going to find the drugs. It isn’t going to happen. Police action, or action within each country’s legal procedures and protections, will not succeed. The cartels’ ability to evade, corrupt and absorb the losses is simply too great. Another solution is to allow easy access to the drug market for other producers, flooding the market, reducing the cost and eliminating the economic incentive and technical advantage of the cartel. That would mean legalizing drugs. That is simply not going to happen in the United States. It is a political impossibility. This leaves the option of treating the issue as a military rather than police action. That would mean attacking the cartels as if they were a military force rather than a criminal group. It would mean that procedural rules would not be in place, and that the cartels would be treated as an enemy army. Leaving aside the complexities of U.S.-Mexican relations, cartels flourish by being hard to distinguish from the general population. This strategy not only would turn the cartels into a guerrilla force, it would treat northern Mexico as hostile occupied territory. Don’t even think of that possibility, absent a draft under which college-age Americans from upper-middle-class families would be sent to patrol Mexico — and be killed and wounded. The United States does not need a Gaza Strip on its southern border, so this won’t happen. The current efforts by the Mexican government might impede the various gangs, but they won’t break the cartel system. The supply chain along the border is simply too diffuse and too plastic. It shifts too easily under pressure. The border can’t be sealed, and the level of economic activity shields smuggling too well. Farmers in Mexico can’t be persuaded to stop growing illegal drugs for the same reason that Bolivians and Afghans can’t. Market demand is too high and alternatives too bleak. The Mexican supply chain is too robust — and too profitable — to break easily. The likely course is a multigenerational pattern of instability along the border. More important, there will be a substantial transfer of wealth from the United States to Mexico in return for an intrinsically low-cost consumable product — drugs. This will be one of the sources of capital that will build the Mexican economy, which today is 14th largest in the world. The accumulation of drug money is and will continue finding its way into the Mexican economy, creating a pool of investment capital. The children and grandchildren of the Zetas will be running banks, running for president, building art museums and telling amusing anecdotes about how grandpa made his money running blow into Nuevo Laredo. It will also destabilize the U.S. Southwest while grandpa makes his pile. As is frequently the case, it is a problem for which there are no good solutions, or for which the solution is one without real support.

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Security and World Cup

18. June 2010 by admin.

Summary

Security is always a concern for organizers of the World Cup, and this year’s upcoming tournament in South Africa — the first World Cup on the continent — is no exception. Envisioning a range of threats from terrorism to petty crime, tournament organizers are trying to beef up security in nine cities that will serve as venues for the games. Less than a month before the tournament begins, STRATFOR thought it time to look at how real those threats are and how security preparations are shaping up.

Analysis

In June and July, South Africa will host the first World Cup tournament ever held in Africa. The first game of the tournament will be June 11 in Johannesburg, where the finals are scheduled to be held July 11. The World Cup draws hordes of spectators, sponsors and dignitaries, including this year, perhaps, U.S. President Barack Obama, who has expressed an interest in attending should the U.S. team proceed to the finals.

Security is always a concern for World Cup organizers, and this year’s tournament — the largest sporting event ever hosted on African soil — raises concerns about South Africa’s ability to provide a secure environment for the month-long event. While terrorism is high on the list of organizers’ concerns, the security issue that will affect the most people will likely be violent crime, which has grown endemic in South Africa over the past two decades.

 

The South Africa World Cup Organizing Committee has designated nine cities to host the soccer matches: Cape Town, Durban, Johannesburg, Bloemfontein (Mangaung in the local language), Pretoria (Tshwane), Rustenburg, Port Elizabeth, Polokwane and Nelspruit. Semi-final matches will be played in Cape Town and Durban, the third place match will be played in Port Elizabeth and the finals will be played in Johannesburg.

In the run-up to the event, STRATFOR thought it appropriate to take a look at the security environment in South Africa, evaluate specific threats and offer guidance on how to avoid danger during the tournament.

 

Crime

 Unlike terrorism, which tends to be driven by ideology, criminal activity is driven by opportunity and the desire for quick cash, and both of those factors will be in abundance during the World Cup. To mitigate against any conceivable security threat, an estimated 44,000 members of the South African Police Service (SAPS), the South African National Defense Force (SANDF) and private security personnel will be deployed at tournament venues, hotels where the teams will be staying and anywhere considered a possible launching point for criminal or terrorist acts (more on these deployments below in the section titled “Security Preparations”). Many national teams will also have their own security details. The U.S. team, for example, will be guarded by personnel from the State Department’s Diplomatic Security Service (DSS).

Foreign governments also have been heavily involved in assisting South African security officials with logistics and communications in preparation for the tournament and will remain involved until it ends. The DSS has extensive experience conducting security for large, high-profile events, and there has been extensive coordination with the German authorities to learn from their experiences hosting the last World Cup, which was held in 2006. These measures will certainly go a long way toward securing the stadiums, hotels and other World Cup venues, most of which are located in city centers. But efforts to secure World Cup activities could displace criminal attacks to more accessible targets outside this ring of security, to urban and rural areas where the police presence will be weaker.

Property crime is widespread in South Africa and found in every city throughout the country. The country’s criminal elements tend to be organized and efficient, with gangs often conducting practice runs and extensive preoperational surveillance before hitting hardened targets such as armored cash transporters and ATMs (sometimes using explosives and automatic weapons). Organized-crime leaders are even known to specify high-demand products for theft, including certain models of cars and cell phones and other electronics. In the pursuit of cash or valuables, criminals are known to use extreme violence against anyone attempting to stop them. While such extreme measures would not likely be employed against unarmed civilians during the World Cup, firearms, knives and other weapons are plentiful in South Africa and are frequently used if a victim resists.

Most crime in South Africa takes place in underdeveloped and poorly policed townships outside of the main city centers. However, criminals certainly do not limit themselves to townships, and in order to pursue wealthier targets they are known to attack in upscale neighborhoods and on downtown streets. In 2007, the wife of prominent businessman and senior African National Congress (ANC) politician Tokyo Sexwale was targeted in a carjacking in an upscale, well-policed Johannesburg neighborhood. Three hijackers in a vehicle cut off Judy Sexwale’s BMW in a parking lot, forced her from the car and sped off in it, all in about 10 seconds. The incident occurred at 11 a.m., with numerous bystanders looking on. Carjackers do not discriminate between white, black, foreigner or local; the trigger is the appearance of wealth — mainly clothes, accoutrements and cars. Carjacking has become so rampant in South Africa that many South Africans do not stop at stop signs if they perceive any potential risk as they approach an intersection.

Suggesting an even greater threat than that posed by local street gangs and criminals, STRATFOR sources say that criminals from Nigeria are planning to travel to South Africa and take advantage of the throngs of tourists attending World Cup events during the month-long tournament. Along with Chinese and Russians, Nigerians are leading organized-crime figures in South Africa, focusing on fraud and black-market activities. Driven by economic desperation, Zimbabweans also present a significant, though less sophisticated, criminal threat in South Africa. It is likely that migratory criminals from other African countries will also prey upon World Cup visitors, contributing to the prevailing threat. This criminal element will include everything from the relatively harmless hawkers of African curios who will be found outside every tournament venue and major hotel to organized gangs that will surveil unsuspecting tourists and rob them when the opportunities arise.

Not all criminal activity in South Africa involves property crime. Among all the world’s countries, South Africa has the highest incidence of reported rapes per capita. While rapists do not specifically target foreigners, gangs often use the same level of speed and precision to identify and attack rape victims as they do in conducting carjackings. Rape is also employed to instill fear in victims, particularly white victims, during home invasions. Because of the high level of police protection in the city centers during the month-long World Cup, tourists should be relatively secure in these areas, but the risk of being targeted by opportunistic rapists and other criminals will increase in outlying areas. Finally, rape carries the associated risk of contracting HIV/AIDS, since South Africa has a high incidence of the disease (in 2008, approximately 11 percent of South Africans had been diagnosed with HIV/AIDS).

When visiting South Africa during the World Cup, foreign travelers are advised to be mindful of their surroundings and maintain situational awareness at all times in public areas. Visitors should never expose valuables, including wallets, jewelry, cell phones and cash, any longer than necessary. And they should avoid traveling at night, especially into townships and areas of South African cities that are outside of the more secure and centralized soccer venues. Outlying areas will have scant police protection, since most of the country’s security apparatus will be focused on the World Cup. No matter where they are, foreign visitors are encouraged to travel in large groups (three or more people), since in South Africa, as elsewhere, there is generally more safety in numbers.

 

The Jihadist Threat

 

Despite thinly veiled threats from regional jihadist groups, none of the major groups (either global or regional) possess the capability or the strategic intent to carry out a spectacular attack against a World Cup venue. The core al Qaeda group — Osama bin Laden, Ayman al-Zawahiri and their closest confidants — has not demonstrated an ability to strike outside of South Asia for years. While the jihadist desire remains strong to strike at high-profile international targets, militant groups often come to the conclusion that striking local and regional targets where their capabilities are more established provides a better chance for success. Pulling off an attack in an entirely novel theater (where jihadists do not control the territory) against a lesser known target requires months of planning, training and coordination, along with substantial resources. The devolution of al Qaeda through military and covert operations in Afghanistan and Pakistan has severely hampered if not disabled al Qaeda prime, which is not likely capable of assembling and projecting sufficient force to South Africa this summer to affect the World Cup.

Meanwhile, al Qaeda’s more capable and active regional nodes such as al Qaeda in the Arabian Peninsula (AQAP), al Qaeda in the Islamic Maghreb (AQIM) (to which a specific threat against the World Cup was attributed in April that ultimately proved hollow), the Islamic State of Iraq (ISI) and the Somalia-based jihadist group al Shabaab are focused on their own objectives back home. Of these groups, AQAP is the only one that has demonstrated the ability to strike outside of its region, since it was behind the Christmas Day attempt to bring down Northwest Airlines Flight 253. While the attempt was unsuccessful, its masterminds are believed to be still at large in Yemen. Still, the attempt did alert U.S. counterterrorism authorities to the threat posed by AQAP. The United States has deployed assets to Yemen to disrupt the group’s capability to carry out further attacks, making it more difficult for AQAP to operate without U.S. authorities (who are working closely with South African officials in providing security for the World Cup) knowing about it.

The other three primary al Qaeda franchise groups, AQIM, the ISI and al Shabaab, have demonstrated no ability to strike outside of their regions. AQIM’s current struggle is primarily against the Algerian government, and the group’s target set is limited, for the most part, to Algerian military and police forces. AQIM also has claimed responsibility for minor attacks and abductions in Mauritania, Mali and Niger. While two members of the ISI have recently been arrested in Iraq on suspicions of plotting an attack during the World Cup, those reports have not been substantiated as a serious threat — or even one that involved South Africa. The ISI also has not shown an interest in striking outside of its region and considering that it is currently fighting the U.S.-backed Iraqi government, now is not an opportune time for the group to stage an attack on another continent. South Africa is more than 8,000 kilometers (5,000 miles) away from northern Africa and the Middle East, putting a substantial distance between these groups and the World Cup.

Similarly, al Shabaab is consumed with a three-front war against the Western-backedTransitional Federal Government (TFG) of Somalia, African Union forces and various Somali militias. The militant group is currently focused on toppling the TFG, not waging transnational jihad by attacking the World Cup. The primary advantage of attacking the tournament would be the publicity it would bring, but this is something al Shabaab does not necessarily want right now. The group is challenged enough as it is by forces on the ground supporting the TFG and does not need to provide another reason for regional and global security forces to intervene on the TFG’s behalf.

 

Lone Wolves and Grassroots Jihadists

 

Threats from grassroots jihadists and lone wolves are much less predictable than threats from the al Qaeda core or its franchises. Whereas jihadist groups are bright blips on the radar of intelligence agencies around the world, lone wolves operate under the radar, often unbeknownst to any security or intelligence agency. They maintain anonymity by operating without the help of others and even without telling others, which means they are far more difficult to detect. They are also not limited to any geographical region. Grassroots terrorists, on the other hand, may work in groups, but these groups are small cells unaffiliated with known and monitored jihadist entities and are virtually invisible. In both cases, however, the lack of support networks typically limits their capability, and thus the damage they can cause. The low profile of lone wolves and grassroots jihadists generally means they lack experienced bombmakers, operatives and strategists, and their attacks typically come across as amateurish. Nevertheless, given the global attention to South Africa during the World Cup, it would not take a large attack to attract worldwide media coverage.

 

Other Terrorist Threats

 

While the actions of lone wolves and grassroots jihadists are difficult to predict and cannot be ruled out, there are no major political conflicts in South Africa at the moment that might induce a terrorist act. Nor is there any recent history of terrorism in South Africa. That, along with the general trend in grassroots attacks, suggests that any ideologically motivated terrorist attack in South Africa during the World Cup would likely — if successful at all — be small and unsophisticated.

Of course, jihadists by no means have a monopoly on the tactic of terrorism. Any individual or group can attempt to affect political change through violence against the public. And the World Cup certainly offers an extremely public forum for a group or individual to air their grievances against the South African government, or any of the other 31 countries represented by the qualifying teams. Reasons for terror attacks can be as provocative as ethnic disputes, as mundane as personal financial problems or as unpredictable as mental illness.

Although terrorism is not common in modern-day South Africa, there has been a trace of such activity in its recent history. During apartheid, the ANC — the current ruling party — was considered a terrorist group by the South African government because it was opposed to white rule and expressed its opposition through violence. On the far right, the white supremacist group Afrikaner Weerstandsbeweging (AWB) committed violent acts against black South Africans and staged protests against the government during the final days of apartheid. The AWB has not carried out violent attacks in decades, but its leader, Eugene Terre Blanche, was murdered by two black farmhands April 3. AWB leaders continue to leave violence as an option, at least rhetorically, but in more than 20 years they have shown no appetite for violent retaliation. While it is highly unlikely that the AWB would sanction an attack, underlying racial sentiments could still provoke a grassroots or lone-wolf attack (the consequences of which we have outlined above). As far as the AWB is concerned, the group is a known entity and would have a difficult time launching an attack without the authorities finding out about it during the planning process.

There are other right-wing extremists in South Africa not affiliated with the AWB, and in April South African police arrested suspects and seized explosives from a residence in south Johannesburg linked to right-wing activities. The arrests served a positive purpose for the government in showing that blacks are not the only ones who commit violent acts in South Africa, and government officials were quick to say that Pretoria does not foresee a significant threat from right-wing groups during the World Cup.

South Africa did spawn one militant Islamist group, People Against Gangsterism and Drugs (PAGAD), which detonated almost 200 improvised explosive devices between 1996 and 2000, largely targeting government buildings (such as police stations), gay night clubs and synagogues in the Cape Flats area east of Cape Town. Their largest attack occurred in 1998 against a Planet Hollywood restaurant (one person was killed and the restaurant was closed). PAGAD was not technically a jihadist group, since it did not want to overthrow the South African government. Its intent was to attack targets that it believed oppressed Muslim customs in the country. PAGAD’s leader and several members were sentenced to prison terms in 2002, and there has been very little activity by the group since. While PAGAD still has a small number of supporters in the Cape Flats area of Cape Town and still condones violence, there are no indications that it, or any other grassroots jihadist group in South Africa, is planning to carry out an attack during the World Cup.

A recent incident in Angola during that country’s hosting of the African Cup of Nations soccer tournament raised questions about the possibility of a similar domestic terrorist threat in South Africa. In January, the Togo soccer team participating in the tournament in Angola’s Cabinda province was attacked by members of the rebel group Front for the Liberation of the Enclave of Cabinda (FLEC). Armed with AK-47s, a small number of FLEC fighters, who are opposed to the Angolan government’s presence in the oil-rich province, shot at the bus carrying the Togo soccer team as it was traveling to a game, injuring several team members and killing two. Angola’s security environment is much less stable than that of South Africa, where no rebel groups on the order of FLEC operate. South Africa also does not have nearly the same level of volatility in its political conflicts as Angola, where disagreements can quickly become violent.

 

Security Preparations

 

For the duration of the World Cup tournament, the South African Police Service and the South African National Defense Force will deploy forces to the streets, air and sea to protect against threats to tournament venues. Most of the measures (such as naval patrols off the coast and overflights of fighter jets) are in light of the jihadist threat, which, while unlikely to materialize in an attack, is still seen as a looming worst-case scenario. Private security firms have been contracted by the tournament organizing committee to provide security around and inside the soccer stadiums.

Participating teams and attending dignitaries (including visiting heads of state) will likely have security escorts that will include protective motorcades so as not to require closing off streets. Teams will have both primary and alternate travel routes, along with designated safe areas in the event of an incident and stationary protective teams at their hotels. Uniformed and plainclothes security officers will likely be stationed along travel routes between team accommodation sites and the playing venues. As a result of these precautions taken by the participating teams, along with the overall security umbrella provided by the South African government, the “window of opportunity” to attack a World Cup team will be very small. As a byproduct of these measures, potential attacks will likely be diverted to more accessible soft targets, which could be unsuspecting tourists or bystanders, especially in areas from which police have been pulled to beef up security at tournament venues.

South African security agencies do have recent experience safeguarding large sporting events like the World Cup. In June 2009, South Africa hosted the Confederation Cup, an international soccer tournament that gathered eight teams in four different stadiums around the country for two weeks without incident. This time around, South African officials are making even more extensive preparations to secure tournament venues, and remaining concerns largely involve the execution of the security plan in the event of an incident.

The federal police and military units to be deployed and the outline of this year’s World Cup security umbrella include the following:

• South African air force (SAAF) Gripen fighter jets (currently South Africa has about six operational out of 12 delivered from an order of 26), which will enforce no-fly zones above World Cup venues. The aircraft will rotate to different air force bases depending on threat levels determined for each game.
• Other SAAF and army aircraft such as smaller Hawk fighter jets, transport planes and helicopters will be mobilized for other duties, including logistics.
• South African navy ships will be deployed, including patrol corvettes that will be stationed as command platforms in the harbors at Cape Town, Durban and Port Elizabeth to provide additional radar and anti-aircraft coverage.
• Naval submarines, minesweepers and other vessels will be deployed to provide supplemental coverage.
• Military and police explosive ordinance disposal teams, including sniffer dogs, will be present at all stadiums.
• The SAPS Special Task Force, the police force’s specialized counterterrorism team, will be on standby for rapid response to any crisis situation in the country from its national base in Pretoria.
• Special weapons and tactics (“SWAT”) teams will be mobilized from city-based police force detachments.
• A national-level joint operations “fusion center” will be maintained in Pretoria, while each province hosting a World Cup venue will have a provincial-level command post.
• There are no designated demonstration areas for protesters, and no protests will be permitted at World Cup venues or fan parks adjacent to the venues.
• For access to VIP sections at the stadiums, there will likely be credential controls in place, including portable fingerprint scanners.
• Game attendees will be inspected by metal detectors and hand wands, and all vehicles arriving at the stadiums will be searched.
• While there are no “official” hotels for the visiting teams, there has been communication between World Cup security officials and management at the high-end hotels likely to accommodate teams and dignitaries.
• Uniformed and plainclothed police officers will be present at high-profile and popular venues such as Nelson Mandela Square in Johannesburg, the Victoria and Alfred (V&A) Waterfront in Cape Town and the Gateway in Durban, all of which are likely to receive large numbers of World Cup visitors.

 

Political Instability

 

The ANC is entrenched as the ruling party of the South African government. In the short term, the ANC does not face any threat to its political hegemony from a rival political party. Whatever instability the government does face stems from within its ruling alliance, which, along with the ANC, consists of the Congress of South African Trade Unions (COSATU) and the South African Communist Party. COSATU’s approximately 2 million members are capable of mobilizing strikes and protests on a city and national basis, and are usually motivated by pay and cost-of-living concerns. Protests are not usually violent, but if any do occur during the World Cup, foreign visitors are advised to steer clear of them. Some COSATU members, notably the National Union of Metalworkers of South Africa, have threatened to strike during the tournament, but the ANC government is almost certain to put intense pressure on all labor groups to help ensure a strike- and protest-free World Cup.

 

Miscellaneous Threats

 

Privately operated medical facilities in South Africa are well equipped for all levels of medical care, and foreign visitors should choose private over public (government-operated) health-care facilities in South Africa. Private medical services can also stabilize a patient and facilitate a medical evacuation to another country (such as the United Kingdom or the United States) should the need or preference arise.

Should a catastrophic event occur in a South African city during the World Cup, both private and public medical services would be heavily taxed if not overloaded. Although provisions will be in place for such a contingency, a mass-casualty event would degrade the availability and quality of care on the scene, and conventional means of medical evacuation may not be immediately available. Indeed, South African health officials have publicly expressed their concerns about the medical system’s state of readiness for the enormous influx of World Cup attendees (organizers estimate as many as 300,000), some of whom will need medical attention at some point during their stay.

Even without a catastrophic event, South Africa’s transportation infrastructure will likely be stressed to capacity. There is a robust domestic private-airline sector, private nationwide bus network and many private car-rental companies, and these providers may be stretched to meet the needs of 300,000 foreign visitors.

Hotels in South Africa that host World Cup teams will have extra security personnel assigned to them, though mainly to protect the teams. Hotels in South Africa are otherwise on their own as far as implementing security precautions, and travelers should not assume that hotels in which they find themselves have extensive security plans in place.

South Africa’s airline industry maintains a level of security sufficient for direct flights operating to and from the country to be certified by the U.S. Federal Aviation Administration, and airport security will certainly be heightened during the tournament. The South African government also purchased body scanners following the attempted bombing by a Nigerian national of a Northwest Airlines flight from Amsterdam to Detroit on Christmas Day in 2009. Despite these safeguards, however, South Africa has not implemented airport security standards as stringent as those used in the United States. That is not to say there is any intentional negligence, but there are weaknesses to be exploited in the system, should an attacker desire to do so.

Finally, “hooliganism,” a security threat endemic to large soccer matches and tournaments anywhere passions run high, will be present in South Africa. Hooliganism is the popular term for the phenomenon in which mobs of soccer fans engage in violent and destructive behavior, often under the influence of alcohol or drugs. However, South Africans themselves are not known for hooliganism, which tends to be more common in Europe. The fact that this year’s World Cup will be so far removed from Europe will reduce the risk of hooliganism considerably, and the large security force on hand will likely prevent any violent activity from getting very far out of hand. South African authorities are also working with European governments to blacklist identified hooligans and ban them from traveling to South Africa for the tournament.

While crime will likely have the most visible affect on the World Cup games, South African authorities are preparing for the worst. Hosting an event like the World Cup is an extraordinary challenge for any country, especially one without a wealth of experience at it. In such cases, it is the unexpected and unintended that usually cause the most disruption. However, South Africa is not alone in preparing for the event. The International Federation of Football Associations (FIFA), Germany, the United States and other countries have provided financial and professional assistance. For the most part, events like the World Cup and the Olympics — despite daunting challenges — typically transpire rather smoothly, and South Africa is certainly hoping that it does not buck the trend.

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Next Steps for Ankara and Moscow

9. June 2010 by admin.

Next Steps for Ankara and Moscow

June 8, 2010 

 

WORLD LEADERS FROM ACROSS EURASIA and the Middle East will be gathering in Istanbul Tuesday for a Conference on Interaction and Confidence Building Measures in Asia (CICA) summit hosted by the Turkish leadership. Some of the high-profile attendees include Russian Prime Minister Vladimir Putin, Azerbaijani President Ilham Aliyev, Iranian President Mahmoud Ahmadinejad, Syrian President Bashar al Assad, Ukrainian President Victor Yanukovich and Kazakh President Nursultan Nazarbayev.

 

With Turkish-Israeli relations in serious jeopardy in the wake of the flotilla crisis, the war in Afghanistan in flux, Moscow contemplating a shift in foreign policy with the West and the United States trying to juggle all of the above, the geopolitical intensity surrounding the summit is all too apparent.

 

The headlining issue of the conference will of course be the Turkish-Israeli flotilla crisis. Not surprisingly, Israel decided to send a lower level diplomat from its consulate in Turkey rather than having a senior official come under fire by the Turkish hosts. Turkey will use the CICA platform — as well as a summit beginning Wednesday in Istanbul with Arab foreign ministers as part of the Turkish-Arab Cooperation Forum — to highlight what Turkey sees as the gross illegality of Israel’s actions that resulted in the death of eight Turkish citizens in international waters off the Gaza coast. Turkey does not intend to let this issue rest. The issue is not even really about Gaza, anymore. On the contrary, Turkey views its current crisis with Israel as an opportunity to accelerate its regional rise to fame.

For this plan to work, Turkey needs to go beyond the public censures and pressure Israel into making a very public concession to Ankara. The problem for Turkey is that there is no Arab consensus to build on in forging this campaign against Israel. The Arab states are happy to engage in the rhetoric alongside Turkey, but when it comes to taking action against Israel, the impetus falls flat. Though Turkey will attempt to galvanize the Arabs at the Wednesday summit, it is not clear to STRATFOR that Ankara will be able to overcome the challenge of Arab fractiousness and weakness in formulating its response to Israel.

 

Turkey will also be spending some quality time during the CICA summit with the Iranian president. Iran is happy to see the flotilla crisis deflect attention away from its own nuclear controversy with the West, but it’s also not enthused about Turkey soaking up the spotlight and hijacking Iran’s role in defending the Palestinians. Wanting their piece of the action, the Iranians have announced that they will send their own aid ships to the Gaza coast, while privately hinting that they will try to score a moral victory in attempting to recreate the Mavi Marmara incident by provoking Israeli forces into an attack. An Iranian-provoked confrontation with Israel in the Mediterranean is precisely what the Turks cannot afford. Such a move would draw the United States to Israel’s side and undercut Turkish momentum in a snap. The Turks will use the summit as an opportunity to share some of the spotlight with Ahmadinejad and thus try to keep Tehran from scuttling its own agenda, but Iranian tenacity on this issue may also be hard to beat.

 

Turkey is not the only one with its hands full at this summit. Putin has a slew of private meetings lined up with the leaders of Turkey, Azerbaijan, Ukraine and Kazakhstan. His sideline meetings in Istanbul come after Russia held a week of meetings in Germany and the Baltic states and ahead of a visit to France. Rather than an attempt to rack up frequent flyer miles, the prime minister’s busy agenda stems from a major shift Russia is seriously contemplating making in its foreign policy toward the West.

 

The strategic thrust behind the shift is a Russian desire to obtain Western technology to modernize the Russian economy in everything from energy to space to telecommunications. Russia has internally acknowledged that for it to get its hands on this technology –- and ensure Russia’s competitiveness as a global power in the years to come –- it needs to appear more pragmatic to the West in making its foreign policy moves. This doesn’t mean Russia is ready to be any less nationalistic, just a little more willing to strike deals to get what it wants. The only reason Russia can even think about making such a dramatic shift is because it has spent the past several years carefully laying the groundwork in the former Soviet Union states in preparation for this very moment.

 

Russia wants to make sure that before it follows through with this plan, it gets some assurances from Europe and the United States that they will reward Russian cooperation with the technological cooperation Moscow is seeking and respect the sphere of influence Russia has recreated. At the same time, Putin -– acting as the enforcer on this issue -– is talking to the former Soviet states to make sure they understand that any Russian opening to the West is not a signal of Russia relenting in its former Soviet space, but a sign of Moscow dealing with the West on its own terms and in the time of its choosing. In other words, Putin wants to make sure Ukraine, Georgia, the Central Asians and the Baltic states don’t get any ideas about trying to flirt with the West the second they see Moscow shift.

 

While Putin delivers this stern reminder to Ukraine and the Central Asians, he will also be meeting separately with Turkish Prime Minister Recep Tayyip Erdogan. The Russians are wary of Turkey’s regional resurgence and want to ensure that the two don’t bump heads in pursuing their respective agendas. But the Russians have a plan for this, too. By regularly waving deals on energy and peace agreements in the Caucasus, Russia is keeping its relationship with Turkey on an even keel. Putin is not (yet), however, scheduled to meet with the Iranian president, something that will not go unnoticed in Tehran. The Iranians, picking up on the leaks of a coming Russian foreign policy shift, have already spent the past weeks publicizing their ire against Moscow and warning the Russians against turning on them for a grand bargain with the United States. The Russians are not at the point of throwing Iran under the bus (Iran is still a very useful lever for them in dealing with Washington), but it doesn’t hurt Moscow to keep the Iranians on edge as Russia feels out the West and contemplates a major foreign policy shift that may be on the horizon.

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Arabs, Israelis and the Strategic Balance

8. June 2010 by admin.

Arabs, Israelis and the Strategic Balance  Last week’s events off the coast of Israel continue to resonate. Turkish-Israeli relations have not quite collapsed since then but are at their lowest level since Israel’s founding. U.S.-Israeli tensions have emerged, and European hostility toward Israel continues to intensify. The question has now become whether substantial consequences will follow from the incident. Put differently, the question is whether and how it will be exploited beyond the arena of public opinion. The most significant threat to Israel would, of course, be military. International criticism is not without significance, but nations do not change direction absent direct threats to their interests. But powers outside the region are unlikely to exert military power against Israel, and even significant economic or political sanctions are unlikely to happen. Apart from the desire of outside powers to limit their involvement, this is rooted in the fact that significant actions are unlikely from inside the region either.The first generations of Israelis lived under the threat of conventional military defeat by neighboring countries. More recent generations still faced threats, but not this one. Israel is operating in an advantageous strategic context save for the arena of public opinion and diplomatic relations and the question of Iranian nuclear weapons. All of these issues are significant, but none is as immediate a threat as the specter of a defeat in conventional warfare had been. Israel’s regional enemies are so profoundly divided among themselves and have such divergent relations with Israel that an effective coalition against Israel does not exist — and is unlikely to arise in the near future. Given this, the probability of an effective, as opposed to rhetorical, shift in the behavior of powers outside the region is unlikely. At every level, Israel’s Arab neighbors are incapable of forming even a partial coalition against Israel. Israel is not forced to calibrate its actions with an eye toward regional consequences, explaining Israel’s willingness to accept broad international condemnation.

Palestinian Divisions

To begin to understand how deeply the Arabs are split, simply consider the split among the Palestinians themselves. They are currently divided between two very different and hostile factions. On one side is Fatah, which dominates the West Bank. On the other side is Hamas, which dominates the Gaza Strip. Aside from the geographic division of the Palestinian territories — which causes the Palestinians to behave almost as if they comprised two separate and hostile countries — the two groups have profoundly different ideologies.Fatah arose from the secular, socialist, Arab-nationalist and militarist movement of Egyptian President Gamal Abdul Nasser in the 1950s. Created in the 1960s, Fatah was closely aligned with the Soviet Union. It was the dominant, though far from the only, faction in the Palestine Liberation Organization (PLO). The PLO was an umbrella group that brought together the highly fragmented elements of the Palestinian movement. Yasser Arafat long dominated Fatah; his death left Fatah without a charismatic leader, but with a strong bureaucracy increasingly devoid of a coherent ideology or strategy.Hamas arose from the Islamist movement. It was driven by religious motivations quite alien from Fatah and hostile to it. For Hamas, the liberation of Palestine was not simply a nationalist imperative, but also a religious requirement. Hamas was also hostile to what it saw as the financial corruption Arafat brought to the Palestinian movement, as well as to Fatah’s secularism.Hamas and Fatah are playing a zero-sum game. Given their inability to form a coalition and their mutual desire for the other to fail, a victory for one is a defeat for the other. This means that whatever public statements Fatah makes, the current international focus on Gaza and Hamas weakens Fatah. And this means that at some point, Fatah will try to undermine the political gains the flotilla has offered Hamas.The Palestinians’ deep geographic, ideological and historical divisions occasionally flare up into violence. Their movement has always been split, its single greatest weakness. Though revolutionary movements frequently are torn by sectarianism, these divisions are so deep that even without Israeli manipulation, the threat the Palestinians pose to the Israelis is diminished. With manipulation, the Israelis can pit Fatah against Hamas.

The Arab States and the Palestinians

The split within the Palestinians is also reflected in divergent opinions among what used to be called the confrontation states surrounding Israel — Egypt, Jordan and Syria. Egypt, for example, is directly hostile to Hamas, a religious movement amid a sea of essentially secular Arab states. Hamas’ roots are in Egypt’s largest Islamist movement, the Muslim Brotherhood, which the Egyptian state has historically considered its main domestic threat. Egyptian President Hosni Mubarak’s regime has moved aggressively against Egyptian Islamists and sees Hamas’ ideology as a threat, as it could spread back to Egypt. For this and other reasons, Egypt has maintained its own blockade of Gaza. Egypt is much closer to Fatah, whose ideology derives from Egyptian secularism, and for this reason, Hamas deeply distrusts Cairo. Jordan views Fatah with deep distrust. In 1970, Fatah under Arafat tried to stage a revolution against the Hashemite monarchy in Jordan. The resulting massacres, referred to as Black September, cost about 10,000 Palestinian lives. Fatah has never truly forgiven Jordan for Black September, and the Jordanians have never really trusted Fatah since then. The idea of an independent Palestinian state on the West Bank unsettles the Hashemite regime, as Jordan’s population is mostly Palestinian. Meanwhile, Hamas with its Islamist ideology worries Jordan, which has had its own problems with the Muslim Brotherhood. So rhetoric aside, the Jordanians are uneasy at best with the Palestinians, and despite years of Israeli-Palestinian hostility, Jordan (and Egypt) has a peace treaty with Israel that remains in place.Syria is far more interested in Lebanon than it is in the Palestinians. Its co-sponsorship (along with Iran) of Hezbollah has more to do with Syria’s desire to dominate Lebanon than it does with Hezbollah as an anti-Israeli force. Indeed, whenever fighting breaks out between Hezbollah and Israel, the Syrians get nervous and their tensions with Iran increase. And of course, while Hezbollah is anti-Israeli, it is not a Palestinian movement. It is a Lebanese Shiite movement. Most Palestinians are Sunni, and while they share a common goal — the destruction of Israel — it is not clear that Hezbollah would want the same kind of regime in Palestine that either Hamas or Fatah would want. So Syria is playing a side game with an anti-Israeli movement that isn’t Palestinian, while also maintaining relations with both factions of the Palestinian movement. Outside the confrontation states, the Saudis and other Arabian Peninsula regimes remember the threat that Nasser and the PLO posed to their regimes. They do not easily forgive, and their support for Fatah comes in full awareness of the potential destabilizing influence of the Palestinians. And while the Iranians would love to have influence over the Palestinians, Tehran is more than 1,000 miles away. Sometimes Iranian arms get through to the Palestinians. But Fatah doesn’t trust the Iranians, and Hamas, though a religious movement, is Sunni while Iran is Shiite. Hamas and the Iranians may cooperate on some tactical issues, but they do not share the same vision.

Israel’s Short-term Free Hand and Long-term Challenge

Given this environment, it is extremely difficult to translate hostility to Israeli policies in Europe and other areas into meaningful levers against Israel. Under these circumstances, the Israelis see the consequences of actions that excite hostility toward Israel from the Arabs and the rest of the world as less dangerous than losing control of Gaza. The more independent Gaza becomes, the greater the threat it poses to Israel. The suppression of Gaza is much safer and is something Fatah ultimately supports, Egypt participates in, Jordan is relieved by and Syria is ultimately indifferent to. Nations base their actions on risks and rewards. The configuration of the Palestinians and Arabs rewards Israeli assertiveness and provides few rewards for caution. The Israelis do not see global hostility toward Israel translating into a meaningful threat because the Arab reality cancels it out. Therefore, relieving pressure on Hamas makes no sense to the Israelis. Doing so would be as likely to alienate Fatah and Egypt as it would to satisfy the Swedes, for example. As Israel has less interest in the Swedes than in Egypt and Fatah, it proceeds as it has.A single point sums up the story of Israel and the Gaza blockade-runners: Not one Egyptian aircraft threatened the Israeli naval vessels, nor did any Syrian warship approach the intercept point. The Israelis could be certain of complete command of the sea and air without challenge. And this underscores how the Arab countries no longer have a military force that can challenge the Israelis, nor the will nor interest to acquire one. Where Egyptian and Syrian forces posed a profound threat to Israeli forces in 1973, no such threat exists now. Israel has a completely free hand in the region militarily; it does not have to take into account military counteraction. The threat posed by intifada, suicide bombers, rockets from Lebanon and Gaza, and Hezbollah fighters is real, but it does not threaten the survival of Israel the way the threat from Egypt and Syria once did (and the Israelis see actions like the Gaza blockade as actually reducing the threat of intifada, suicide bombers and rockets). Non-state actors simply lack the force needed to reach this threshold. When we search for the reasons behind Israeli actions, it is this singular military fact that explains Israeli decision-making. And while the break between Turkey and Israel is real, Turkey alone cannot bring significant pressure to bear on Israel beyond the sphere of public opinion and diplomacy because of the profound divisions in the region. Turkey has the option to reduce or end cooperation with Israel, but it does not have potential allies in the Arab world it would need against Israel. Israel therefore feels buffered against the Turkish reaction. Though its relationship with Turkey is significant to Israel, it is clearly not significant enough for Israel to give in on the blockade and accept the risks from Gaza. At present, Israel takes the same view of the United States. While the United States became essential to Israeli security after 1967, Israel is far less dependent on the United States today. The quantity of aid the United States supplies Israel has shrunk in significance as the Israeli economy has grown. In the long run, a split with the United States would be significant, but interestingly, in the short run, the Israelis would be able to function quite effectively.Israel does, however, face this strategic problem: In the short run, it has freedom of action, but its actions could change the strategic framework in which it operates over the long run. The most significant threat to Israel is not world opinion; though not trivial, world opinion is not decisive. The threat to Israel is that its actions will generate forces in the Arab world that eventually change the balance of power. The politico-military consequences of public opinion is the key question, and it is in this context that Israel must evaluate its split with Turkey. The most important change for Israel would not be unity among the Palestinians, but a shift in Egyptian policy back toward the position it held prior to Camp David. Egypt is the center of gravity of the Arab world, the largest country and formerly the driving force behind Arab unity. It was the power Israel feared above all others. But Egypt under Mubarak has shifted its stance versus the Palestinians, and far more important, allowed Egypt’s military capability to atrophy. Should Mubarak’s successor choose to align with these forces and move to rebuild Egypt’s military capability, however, Israel would face a very different regional equation. A hostile Turkey aligned with Egypt could speed Egyptian military recovery and create a significant threat to Israel. Turkish sponsorship of Syrian military expansion would increase the pressure further. Imagine a world in which the Egyptians, Syrians and Turks formed a coalition that revived the Arab threat to Israel and the United States returned to its position of the 1950s when it did not materially support Israel, and it becomes clear that Turkey’s emerging power combined with a political shift in the Arab world could represent a profound danger to Israel.Where there is no balance of power, the dominant nation can act freely. The problem with this is that doing so tends to force neighbors to try to create a balance of power. Egypt and Syria were not a negligible threat to Israel in the past. It is in Israel’s interest to keep them passive. The Israelis can’t dismiss the threat that its actions could trigger political processes that cause these countries to revert to prior behavior. They still remember what underestimating Egypt and Syria cost them in 1973. It is remarkable how rapidly military capabilities can revive: Recall that the Egyptian army was shattered in 1967, but by 1973 was able to mount an offensive that frightened Israel quite a bit.The Israelis have the upper hand in the short term. What they must calculate is whether they will retain the upper hand if they continue on their course. Division in the Arab world, including among the Palestinians, cannot disappear overnight, nor can it quickly generate a strategic military threat. But the current configuration of the Arab world is not fixed. Therefore, defusing the current crisis would seem to be a long-term strategic necessity for Israel.Israel’s actions have generated shifts in public opinion and diplomacy regionally and globally. The Israelis are calculating that these actions will not generate a long-term shift in the strategic posture of the Arab world. If they are wrong about this, recent actions will have been a significant strategic error. If they are right, then this is simply another passing incident. In the end, the profound divisions in the Arab world both protect Israel and make diplomatic solutions to its challenge almost impossible — you don’t need to fight forces that are so divided, but it is very difficult to negotiate comprehensively with a group that lacks anything approaching a unified voice.

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The U.S.-Pakistan Conundrum and Europe’s Existential Test

22. May 2010 by admin.

The U.S.-Pakistan Conundrum and Europe’s Existential Test

 

 

May 20, 2010

 

 

U.S. NATIONAL SECURITY ADVISER JIM JONES and CIA Director Leon Panetta met with Pakistan’s top civil and military leadership Wednesday and reportedly urged it to take more aggressive action against jihadists, especially in North Waziristan. (The region is the main hub of an array of international jihadist actors, which the Pakistanis have yet to target in their yearlong counterinsurgency campaign.) The visit was prompted by revelations about the deep connections the would-be Times Square bomber, Faisal Shahzad, had with Pakistan’s jihadist community as well as its military. Shahzad’s father is a retired Air Vice Marshal, the third highest rank in the Pakistani air force. His uncle is a retired two-star general who once headed the Frontier Corps in Khyber-Pakhtunkhwa Province, formerly known as the North-West Frontier Province. The Frontier Corps is the paramilitary force currently playing a key role in the counterinsurgency campaign against Taliban rebels in northwest Pakistan.

Given the level of religious radicalization that the country has experienced over the past three decades or so, it is not unusual for a person with Shahzad’s pedigree to have joined al Qaeda transnational jihadists. Furthermore, being from an elite family also does not mean that senior people within the army have ties to the global jihadist nexus involved in plots to attack the United States. However, Tuesday there were reports that Pakistani authorities had arrested a serving army major suspected of being an accomplice to Shahzad, which further exacerbates an already complicated U.S.-Pakistani relationship.

 

Cooperation between Washington and Islamabad on dealing with the jihadist menace had just begun to improve when the Times Square bomb incident took place. It had hardly been three months since U.S. Central Command chief Gen. David Petraeus had applauded Pakistani efforts against the militant infrastructure. He said Islamabad’s forces were doing the best they could with limited resources, and should not be expected to expand the scope of their operations anytime soon. The shifting paradigm in Washington vis-a-vis Islamabad came to a screeching halt when it became clear that Shahzad had been dispatched by jihadist elements based in Pakistan.

 

The problem is not that the United States has completely reverted to the old policy of pressuring Pakistan. Rather it has to do with the dilemma where on one hand U.S. President Barack Obama’s administration needs to stabilize Pakistan to deal with the Afghan Taliban, while on the other it needs to pressure Pakistan to take tougher action against al Qaeda, which could further destabilize the already dangerously weakened Pakistani polity. In other words, the U.S. strategy for the region has been knocked off balance.

 

This precarious situation should not be considered an unintended outcome of the plot to detonate an improvised explosive device in the heart of Manhattan. It is very clearly the work of transnational jihadists headquartered in Pakistan who view increased U.S.-Pakistani cooperation as a lethal cocktail. The jihadists have been able to exploit the weakness of the Pakistani state and the contradictions within its security establishment to their advantage.

 

But in the past year they have faced a major onslaught and find themselves caught between U.S. unmanned aerial vehicle strikes and Pakistani ground assaults. They are in no position to resist the combined U.S.-Pakistani offensive. Their only way out is to undermine the bilateral relationship, which, given its fragility and the tools at the disposal of the jihadists, is not hard to do.

 

This strategy mimics efforts to ignite conflict between India and Pakistan by staging attacks in India in an attempt to force New Delhi into taking unilateral action against militant facilities on Pakistani soil. Doing so would lead to an all-out war between the two South Asian rivals, giving militants even more room to maneuver. In the case of the United States and Pakistan, an attack does not have to be successful, such as the case with the Times Square plot. All that is required is an attempt by an individual with easily traceable connections to Pakistan and its security establishment, which would undermine the ties between the two. Ideally, the goal is to create a situation where the United States is forced to be more aggressive about unilateral action on Pakistani soil. Doing so would create further chaos, which is the environment in which the jihadists thrive.

 

It should be noted that the whole idea of the al Qaeda-allied Pakistani Taliban claiming responsibility for the failed Times Square attack makes no sense. Why would the jihadists expend resources on an individual who did not have the skill set to pull off a real bombing? It only makes the organization appear weak, unless of course the intent was not to stage an actual attack, but rather undermine U.S. strategy for the region by creating problems between Islamabad and Washington.

 

Lest our readers think there isn’t anything going on in the world beyond Pakistan, the financial crisis in Europe has not gone anywhere — in fact, it continues to build. German Chancellor Angela Merkel told parliament that Europe is facing an “existential test” from the Greek-triggered crisis, noting that “if the euro fails, then Europe fails.” The chancellor is laying the groundwork for a Friday vote on approving Germany’s 123 billion euro contribution to a eurozone bailout fund.

 

While it was not designed that way, the euro has become the EU. The euro was intended to inject German economic dynamism into the rest of Europe, providing capital and markets that would act like the ocean tide and raise all boats. Instead, the common currency allowed poorer Southern Europe to delay reforms.

The issue of the day focuses on German subsidization of the South versus a series of rolling collapses should Berlin refuse. Unintended or not — and economically beneficial or not — the link between Germany’s checkbook and “the preservation of the European idea” is undisputed. If Germany is to seek global stature, it will have to make donations of similar scale to the European South over and over again. And should it refuse to participate, the great unraveling of Europe will begin with a vengeance.

 

It is not so much that we are attracted to the drama in Berlin — although it is worth noting that there has not been this type of drama in Berlin since the 1940s — but rather that the Germans are enacting policies that have a hint of desperation to them. On Wednesday the Germans instituted a ban on naked short selling, market parlance for betting that a certain horse will lose badly. Such trades usually only affect the margins of the market, and governments only get nervous about them when the ship seems about to go down. 

 

For comparison, the United States instituted a similar policy in July 2008, just before the American markets degraded from wobbly to free fall.

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Geopolitics of European Monetary Union

19. May 2010 by admin.

The Geography of the European Monetary Union

As we consider the future of the euro, it is important to remember that the economic underpinnings of paper money are not nearly as important as the political underpinnings. Paper currencies in use throughout the world today hold no value without the underlying political decision to make them the legal tender of commercial activity. This means a government must be willing and capable enough to enforce the currency as a legal form of debt settlement, and refusal to accept paper currency is, within limitations, punishable by law.

 

The trouble with the euro is that it attempts to overlay a monetary dynamic on a geography that does not necessarily lend itself to a single economic or political “space.” The eurozone has a single central bank, the European Central Bank (ECB), and therefore has only one monetary policy, regardless of whether one is located in Northern or Southern Europe. Herein lies the fundamental geographic problem of the euro.

Europe is the second-smallest continent on the planet but has the second-largest number of states packed into its territory. This is not a coincidence. Europe’s multitude of peninsulas, large islands and mountain chains create the geographic conditions that often allow even the weakest political authority to persist. Thus, the Montenegrins have held out against the Ottomans, just as the Irish have against the English.

Despite this patchwork of political authorities, the Continent’s plentiful navigable rivers, large bays and serrated coastlines enable the easy movement of goods and ideas across Europe. This encourages the accumulation of capital due to the low costs of transport while simultaneously encouraging the rapid spread of technological advances, which has allowed the various European states to become astonishingly rich: Five of the top 10 world economies hail from the Continent despite their relatively small populations.

 

Europe’s network of rivers and seas are not integrated via a single dominant river or sea network, however, meaning capital generation occurs in small, sequestered economic centers. To this day, and despite significant political and economic integration, there is no European New York. In Europe’s case, the Danube has Vienna, the Po has Milan, the Baltic Sea has Stockholm, the Rhineland has both Amsterdam and Frankfurt and the Thames has London. This system of multiple capital centers is then overlaid on Europe’s states, which jealously guard control over their capital and, by extension, their banking systems.

 

Despite a multitude of different centers of economic — and by extension, political — power, some states, due to geography, are unable to access any capital centers of their own. Much of the Club Med states are geographically disadvantaged. Aside from the Po Valley of northern Italy — and to an extent the Rhone — southern Europe lacks a single river useful for commerce. Consequently, Northern Europe is more urban, industrial and technocratic while Southern Europe tends to be more rural, agricultural and capital-poor.

 

Introducing the Euro

Given the barrage of economic volatility and challenges the eurozone has confronted in recent quarters and the challenges presented by housing such divergent geography and history under one monetary roof, it is easy to forget why the eurozone was originally formed.

The Cold War made the European Union possible. For centuries, Europe was home to feuding empires and states. After World War II, it became the home of devastated peoples whose security was the responsibility of the United States. Through the Bretton Woods agreement, the United States crafted an economic grouping that regenerated Western Europe’s economic fortunes under a security rubric that Washington firmly controlled. Freed of security competition, the Europeans not only were free to pursue economic growth, they also enjoyed nearly unlimited access to the American market to fuel that growth. Economic integration within Europe to maximize these opportunities made perfect sense. The United States encouraged the economic and political integration because it gave a political underpinning to a security alliance it imposed on Europe, i.e., NATO. Thus, the European Economic Community — the predecessor to today’s European Union — was born.

 

When the United States abandoned the gold standard in 1971 (for reasons largely unconnected to things European), Washington essentially abrogated the Bretton Woods currency pegs that went with it. One result was a European panic. Floating currencies raised the inevitability of currency competition among the European states, the exact sort of competition that contributed to the Great Depression 40 years earlier. Almost immediately, the need to limit that competition sharpened, first with currency coordination efforts still concentrating on the U.S. dollar and then from 1979 on with efforts focused on the deutschmark. The specter of a unified Germany in 1989 further invigorated economic integration. The euro was in large part an attempt to give Berlin the necessary incentives so that it would not depart the EU project.

 

But to get Berlin on board with the idea of sharing its currency with the rest of Europe, the eurozone was modeled after the Bundesbank and its deutschmark. To join the eurozone, a country must abide by rigorous “convergence criteria” designed to synchronize the economy of the acceding country with Germany’s economy. The criteria include a budget deficit of less than 3 percent of gross domestic product (GDP); government debt levels of less than 60 percent of GDP; annual inflation no higher than 1.5 percentage points above the average of the lowest three members’ annual inflation; and a two-year trial period during which the acceding country’s national currency must float within a plus-or-minus 15 percent currency band against the euro.

 

As cracks have begun to show in both the political and economic support for the eurozone, however, it is clear that the convergence criteria failed to overcome divergent geography and history. Greece’s violations of the Growth and Stability Pact are clearly the most egregious, but essentially all eurozone members — including France and Germany, which helped draft the rules — have contravened the rules from the very beginning.

 

Mechanics of a Euro Exit

The EU treaties as presently constituted contractually obligate every EU member state — except Denmark and the United Kingdom, which negotiated opt-outs — to become a eurozone member state at some point. Forcible expulsion or self-imposed exit is technically illegal, or at best would require the approval of all 27 member states (never mind the question about why a troubled eurozone member would approve its own expulsion). Even if it could be managed, surely there are current and soon-to-be eurozone members that would be wary of establishing such a precedent, especially when their fiscal situation could soon be similar to Athens’ situation.

 

One creative option making the rounds would allow the European Union to technically expel members without breaking the treaties. It would involve setting up a new European Union without the offending state (say, Greece) and establishing within the new institutions a new eurozone as well. Such manipulations would not necessarily destroy the existing European Union; its major members would “simply” recreate the institutions without the member they do not much care for.

 

Though creative, the proposed solution it is still rife with problems. In such a reduced eurozone, Germany would hold undisputed power, something the rest of Europe might not exactly embrace. If France and the Benelux countries reconstituted the eurozone with Berlin, Germany’s economy would go from constituting 26.8 percent of eurozone version 1.0’s overall output to 45.6 percent of eurozone version 2.0’s overall output. Even states that would be expressly excluded would be able to get in a devastating parting shot: The southern European economies could simply default on any debt held by entities within the countries of the new eurozone.

With these political issues and complications in mind, we turn to the two scenarios of eurozone reconstitution that have garnered the most attention in the media.

 

Scenario 1: Germany Reinstitutes the Deutschmark

The option of leaving the eurozone for Germany boils down to the potential liabilities that Berlin would be on the hook for if Portugal, Spain, Italy and Ireland followed Greece down the default path. As Germany prepares itself to vote on its 123 billion euro contribution to the 750 billion euro financial aid mechanism for the eurozone — which sits on top of the 23 billion euros it already approved for Athens alone — the question of whether “it is all worth it” must be on top of every German policymaker’s mind.

This is especially the case as political opposition to the bailout mounts among German voters and Merkel’s coalition partners and political allies. In the latest polls, 47 percent of Germans favor adopting the deutschmark. Furthermore, Merkel’s governing coalition lost a crucial state-level election May 9 in a sign of mounting dissatisfaction with her Christian Democratic Union and its coalition ally, the Free Democratic Party. Even though the governing coalition managed to push through the Greek bailout, there are now serious doubts that Merkel will be able to do the same with the eurozone-wide mechanism May 21.

 

Germany would therefore not be leaving the eurozone to save its economy or extricate itself from its own debts, but rather to avoid the financial burden of supporting the Club Med economies and their ability to service their 3 trillion euro mountain of debt. At some point, Germany may decide to cut its losses — potentially as much as 500 billion euros, which is the approximate exposure of German banks to Club Med debt — and decide that further bailouts are just throwing money into a bottomless pit. Furthermore, while Germany could always simply rely on the ECB to break all of its rules and begin the policy of purchasing the debt of troubled eurozone governments with newly created money (“quantitative easing”), that in itself would also constitute a bailout. The rest of the eurozone, including Germany, would be paying for it through the weakening of the euro.

 

Were this moment to dawn on Germany it would have to mean that the situation had deteriorated significantly. As STRATFOR has recently argued, the eurozone provides Germany with considerable economic benefits. Its neighbors are unable to undercut German exports with currency depreciation, and German exports have in turn gained in terms of overall eurozone exports on both the global and eurozone markets. Since euro adoption, unit labor costs in Club Med have increased relative to Germany’s by approximately 25 percent, further entrenching Germany’s competitive edge.

Before Germany could again use the deutschmark, Germany would first have to reinstate its central bank (the Bundesbank), withdraw its reserves from the ECB, print its own currency and then re-denominate the country’s assets and liabilities in deutschmarks. While it would not necessarily be a smooth or easy process, Germany could reintroduce its national currency with far more ease than other eurozone members could.

The deutschmark had a well-established reputation for being a store of value, as the renowned Bundesbank directed Germany’s monetary policy. If Germany were to reintroduce its national currency, it is highly unlikely that Europeans would believe that Germany had forgotten how to run a central bank — Germany’s institutional memory would return quickly, re-establishing the credibility of both the Bundesbank and, by extension, the deutschmark.

 

As Germany would be replacing a weaker and weakening currency with a stronger and more stable one, if market participants did not simply welcome the exchange, they would be substantially less resistant to the change than what could be expected in other eurozone countries. Germany would therefore not necessarily have to resort to militant crackdowns on capital flows to halt capital trying to escape conversion.

Germany would probably also be able to re-denominate all its debts in the deutschmark via bond swaps. Market participants would accept this exchange because they would probably have far more faith in a deutschmark backed by Germany than in a euro backed by the remaining eurozone member states.

 

Reinstituting the deutschmark would still be an imperfect process, however, and there would likely be some collateral damage, particularly to Germany’s financial sector. German banks own much of the debt issued by Club Med, which would likely default on repayment in the event Germany parted with the euro. If it reached the point that Germany was going to break with the eurozone, those losses would likely pale in comparison to the costs — be they economic or political — of remaining within the eurozone and financially supporting its continued existence.

 

Scenario 2: Greece Leaves the Euro

If Athens were able to control its monetary policy, it would ostensibly be able to “solve” the two major problems currently plaguing the Greek economy.

First, Athens could ease its financing problems substantially. The Greek central bank could print money and purchase government debt, bypassing the credit markets. Second, reintroducing its currency would allow Athens to then devalue it, which would stimulate external demand for Greek exports and spur economic growth. This would obviate the need to undergo painful “internal devaluation” via austerity measures that the Greeks have been forced to impose as a condition for their bailout by the International Monetary Fund (IMF) and the EU.

If Athens were to reinstitute its national currency with the goal of being able to control monetary policy, however, the government would first have to get its national currency circulating (a necessary condition for devaluation).

The first practical problem is that no one is going to want this new currency, principally because it would be clear that the government would only be reintroducing it to devalue it. Unlike during the Eurozone accession process — where participation was motivated by the actual and perceived benefits of adopting a strong/stable currency and receiving lower interest rates, new funds and the ability to transact in many more places — “de-euroizing” offers no such incentives for market participants:

• The drachma would not be a store of value, given that the objective in reintroducing it is to reduce its value.

• The drachma would likely only be accepted within Greece, and even there it would not be accepted everywhere — a condition likely to persist for some time.

• Reinstituting the drachma unilaterally would likely see Greece cast out of the eurozone, and therefore also the European Union as per rules explained above.

   

The government would essentially be asking investors and its own population to sign a social contract that the government clearly intends to abrogate in the future, if not immediately once it is able to. Therefore, the only way to get the currency circulating would be by force.

The goal would not be to convert every euro-denominated asset into drachmas but rather to get a sufficiently large chunk of the assets so that the government could jumpstart the drachma’s circulation. To be done effectively, the government would want to minimize the amount of money that could escape conversion by either being withdrawn or transferred into asset classes easy to conceal from discovery and appropriation. This would require capital controls and shutting down banks and likely also physical force to prevent even more chaos on the streets of Athens than seen at present. Once the money was locked down, the government would then forcibly convert banks’ holdings by literally replacing banks’ holdings with a similar amount in the national currency. Greeks could then only withdraw their funds in newly issued drachmas that the government gave the banks to service those requests. At the same time, all government spending/payments would be made in the national currency, boosting circulation. The government also would have to show willingness to prosecute anyone using euros on the black market, lest the newly instituted drachma become completely worthless.

 

Since nobody save the government would want to do this, at the first hint that the government would be moving in this direction, the first thing the Greeks will want to do is withdraw all funds from any institution where their wealth would be at risk. Similarly, the first thing that investors would do — and remember that Greece is as capital-poor as Germany is capital-rich — is cut all exposure. This would require that the forcible conversion be coordinated and definitive, and most important, it would need to be as unexpected as possible.

Realistically, the only way to make this transition without completely unhinging the Greek economy and shredding Greece’s social fabric would be to coordinate with organizations that could provide assistance and oversight. If the IMF, ECB or eurozone member states were to coordinate the transition period and perhaps provide some backing for the national currency’s value during that transition period, the chances of a less-than-completely-disruptive transition would increase.

 

It is difficult to imagine circumstances under which such support would not dwarf the 110 billion euro bailout already on the table. For if Europe’s populations are so resistant to the Greek bailout now, what would they think about their governments assuming even more risk by propping up a former eurozone country’s entire financial system so that the country could escape its debt responsibilities to the rest of the eurozone?

 

The European Dilemma

Europe therefore finds itself being tied in a Gordian knot. On one hand, the Continent’s geography presents a number of incongruities that cannot be overcome without a Herculean (and politically unpalatable) effort on the part of Southern Europe and (equally unpopular) accommodation on the part of Northern Europe. On the other hand, the cost of exit from the eurozone — particularly at a time of global financial calamity, when the move would be in danger of precipitating an even greater crisis — is daunting to say the least.

 

The resulting conundrum is one in which reconstitution of the eurozone may make sense at some point down the line. But the interlinked web of economic, political, legal and institutional relationships makes this nearly impossible. The cost of exit is prohibitively high, regardless of whether it makes sense.

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The U.S.’ Eurozone Problem

15. May 2010 by admin.

The U.S.’ Eurozone Problem

Authors:

Ashraf Laidi, Chief Market Strategist, CMC Markets Adolfo Laurenti, Deputy Chief Economist and Managing Director, Mesirow Financial Carmen Reinhart, Research Associate, National Bureau of Economic Research; and Vincent Reinhart, Resident Scholar, American Enterprise Institute Uri Dadush, Director, International Economics Program, the Carnegie Endowment Ron Sloan, Chief Information Officer, Invesco Anna Gelpern, Associate Professor of Law, American University

May 14, 2010

 

The debt crisis that began in Greece and spread to other eurozone countries has served as a painful reminder of the risks associated with high public debt in a globalized financial system. The threat of contagion to countries outside Europe has divided experts on what the impact will be on the U.S. economy–whose debt is expected to rise to 90 percent of GDP by 2020. Some economists argue the U.S. economy will benefit from the eurozone crisis, since the euro’s continued weakness will secure the U.S. dollar’s status as a global reserve currency. Others say the U.S. debt problem will escalate if bloated entitlement programs go unaddressed. Some analysts argue the greater impact of the crisis will be on U.S. growth, which relies on market confidence and exports to Europe.

 

CMC Markets’ Ashraf Laidi, Mesirow Financial’s Adolfo Laurenti, the National Bureau of Economic Research’s Carmen Reinhart and the American Enterprise Institute’s Vincent Reinhart agree that the crisis buys the U.S. government time to tackle its debt–for better or worse. Of greater concern is the impact of the crisis on U.S. market confidence and growth, say the Carnegie Endowment’s Uri Dadush and Invesco’s Ron Sloan. Finally, American University’s Anna Gelpern says the crisis heightens the need for strong financial reforms that can “shield banks–and by extension the public–from government failure.” –Roya Wolverson, Staff Writer on Economics, CFR.org

Ashraf Laidi, Chief Market Strategist, CMC Markets

The most common arguments against a destabilization of the U.S. economy by the eurozone sovereign debt crisis are 1) the activism of the U.S. federal government in mobilizing another TARP-like aid package for U.S. banks, 2) a compliant Federal Reserve willing to reopen the liquidity taps by buying (again) U.S. government bonds, and 3) the sole ability to print a currency in which globally held U.S. debt is denominated. These measures–enacted in 2008 and 2009–effectively restored confidence in U.S. and global financial markets. The 60 percent surge in equity markets since March 2009 offered a jolt of confidence, while government-stimulus programs helped cap the unemployment rate and revived the role of consumers in lifting the U.S. economy out of recession.

To be sure, these solutions came at a cost. The Federal Reserve balance sheet swelled to a record $2.29 trillion as a result of purchasing government debt, while the U.S. debt ceiling was raised to $14.3 trillion, nearly triple the level of 2001. Currency and bond markets took notice. The U.S. dollar lost more than 20 percent of its value, and U.S. bond yields doubled throughout the stimulus period. Yet, as debt concerns escalated in the eurozone, the U.S. dollar benefited from flows exiting risky European currencies into the safety of U.S. treasury paper.

Today, German and French banks are exposed to as much as $900 billion in Greek and other eurozone countries’ debt. This exposure could bolster speculative attacks on U.S. equities on the rationale that a deteriorating European economy could quash the recovery of the Chinese economic engine as well as the U.S. consumer. Under such a scenario, a double dip U.S. recession is a stark possibility. Yet, as long as the corroding euro retards the process of global currency diversification away from the greenback, the United States will have little difficulty continuing to finance its debt from overseas lending. The power of printing its own currency will deflect credit agencies’ scrutiny from the United States, as they focus on more pressing cases in the eurozone and Britain.

 

Adolfo Laurenti, Deputy Chief Economist and Managing Director, Mesirow Financial

The 750 billion euro stabilization package implemented in the eurozone was instrumental in stopping the panic and restoring some semblance of order in increasingly volatile financial markets.

Nonetheless, upon closer scrutiny, the plan doesn’t fix the structural fiscal imbalances that impair countries like Greece, Spain, Portugal, and to a lesser extent, Italy and Ireland. The massive aid package only buys time for these embattled states to execute much-needed corrective policies. In order to bring government spending under control, additional measures of fiscal tightening must be adopted.

The eurozone plan also buys some time for the United States. The sovereign debt crisis in the eurozone has reasserted the position of the dollar as the world’s reserve currency. Yet the flight to safety out of Europe and the resulting strong demand for Treasury bonds should not be an excuse to delay action on our own weak fiscal position.

The concern is twofold. In the short run, we need to pay for the cost of bailouts and stimulus policies that followed the financial crisis and the “Great Recession.”

More importantly, long-term demographic trends make the burden of Social Security and Medicare unsustainable. Within a decade, American public finances will be under severe pressure to keep up with the exploding costs of our entitlement programs. Unless Congress resolves to undertake prompt and profound revision of the federal budget, the country may face dire consequences from our current profligate spending attitudes.

Thus, fiscal complacency is a major threat to the economic outlook for the United States. A slowdown in Europe will reduce our exports across the Atlantic, but the overall effect on the U.S. economy will be negligible when compared to the potential damage that a fiscal crisis may produce on our economy–if we let the opportunity to reduce our deficit and debt slip by.

The European malaise has given us some precious, borrowed time. We’d better not waste it.

 

Carmen Reinhart, Research Associate, National Bureau of Economic Research; and Vincent Reinhart, Resident Scholar, American Enterprise Institute

Recent weeks have shown that, although Greece may have a small footprint on global economic output, it casts a long shadow on financial markets. These funding difficulties have mostly resonated in the United States as a morality play. Borrowers with dubious prospects of repayment will ultimately be confronted by angry lenders.

The message has taken hold with such force domestically because our own fiscal path seems unmoored. While the current debt stock relative to national income, at 85 percent, does not directly trigger alarms, fiscal deficits run at 10 percent of income. More worrisome, public confidence that there are enough political leaders with the courage to arrest the process seems at a low ebb.

All true. But there was another message from Europe with equally profound implications. This was quieter and directed to an elite group controlling the official foreign exchange reserves of about a dozen sovereign governments, mostly located along the Asian Pacific Rim. Greece’s funding problems and the continent’s contagion established that the euro is not ready to be a reserve currency.

The economies in the world that are growing faster than the rest–China, India, and Korea, among others–are also saving more. After the Asian Crisis of 1998–a devastatingly deep but localized predecessor to what the world just went through–those countries have been directing a good-sized share of that saving to building up foreign exchange reserves.

Reserve managers, however, do not buy foreign currencies. They buy the safest assets, government securities, denominated in those foreign currencies. Buying safe dollar-denominated assets is easy; they are called U.S. government securities. Buying safe euro-denominated assets has been revealed to be patently more difficult. Many gilt-edged bonds have an embossed “€” somewhere, but their repayment prospects differ according to where they were printed, say, in Germany or Greece. Simply put, U.S. government securities satisfy a need as a reserve asset that is less likely to be satisfied by those from Europe, at least for some time.

In these circumstances, any noble exhortation based on the European experience is likely to fall flat. As long as reserve managers are buying U.S. government securities, U.S. politicians will not be pressed to change their ways by financial markets. A benefit, but perhaps only for a time. Politicians who are not disciplined are not likely to show discipline on their own. Thus, the faltering of the euro as an asset class because of the bad behavior of some may enable bad behavior for longer here at home.

 

Uri Dadush, Director, International Economics Program, the Carnegie Endowment

The United States has a vital interest in assuring that the euro crisis is controlled. The EU represents 20 percent of U.S. exports. More than 50 percent of U.S. overseas assets are held in Europe, while close to 40 percent of Europe’s foreign assets invested in the United States.

 

In fact, the euro crisis has already had a significant impact on the U.S. economy: Since late November, the euro has lost 17 percent of its value vis-à-vis the dollar, making U.S. exports less competitive, even as the Obama administration’s goal is to double exports in five years. U.S. exports are also adversely affected by Europe’s sluggish recovery–in the first quarter, European GDP was up only 0.3 percent on the same quarter a year before, compared to a 2.5 percent rise in the United States and 11.9 percent in China. U.S. investors in Europe should expect to take large balance sheet and income translation losses due to the lower euro.

But the most important effects of the euro crisis on the United States will operate not through the real channels of trade and foreign direct investment, but through broader effects on confidence and banks. Stock market volatility (as measured by the VIX index) has more than doubled in the last two months, and the confidence that banks have in lending to each other–measured by the TED spread (the difference between three-month inter-bank lending rate and the yield on Treasury Bills) was as wide as 30.8 basis points at the end of last week, a nine-month high, up from this year’s low of 10.6 basis points in March.

 

This is against a backdrop of a crisis largely confined thus far to Greece, a country accounting for a mere 2.6 percent of the eurozone GDP. Imagine what would happen if the crisis spread to Spain or Italy, countries five or six times larger. Though the exposure of U.S. banks to the most vulnerable countries in Europe is limited–about $176 billion, or 5 percent of their total foreign exposure–the indirect exposure is much larger, since U.S. banks do business with all the large international banks, which are themselves exposed to these vulnerable countries.

A spreading euro crisis would hurt U.S. interests in two other ways. First, although U.S. government debt may increase in popularity initially due to a safe haven effect, a spreading crisis would likely eventually place the spotlight on rising U.S. debt as well, aggravating the country’s unstable debt dynamics.

 

Ron Sloan, Chief Information Officer, Invesco

The 2009 private sector debt crisis has morphed into the 2010 sovereign debt crises, as the private debt was swapped into government debt. In fact, the pea was just moved under a different shell in a replay of this classic scam. Deleveraging on this scale is going to take a long time, and not everyone has the patience for this. Hence, rioting in Greece.

The eurozone crisis begs the question of what will fuel the growth that an increasingly export-driven developed world needs. We can’t all export to the smaller emerging world, and we can no longer count on significant growth within the developed world as new austerity measures become the rule of thumb throughout much of Europe. Once inventory restocking is finished, sustainable growth assumptions will have to move lower in the debt-laden developed world, and an emerging world that is increasingly moving to tighten its own fiscal and monetary policies.

The eurozone crisis is really a growth crisis. Debt-laden companies and countries–including those in the United States–will lose many reinvestment/growth options. Without growth, social instability and economic volatility will follow. The euro is certainly at risk in its current configuration. Southern European countries are looking to revalue their way out of their crisis, and German and French citizens are becoming more resistant to the austerity measures required to save the euro. The developed world has absorbed two decades (the ’80s and ’90s) of social and economic tailwinds–driven by low interest and tax rates, inflation, and increasing consumption and leverage–that are now turning into headwinds. Deleveraging will be a long and messy process.

 

Anna Gelpern, Associate Professor of Law, American University

The crisis in Europe reinforces the central message of the past two years: Governments and financial institutions are locked in a dysfunctional loop. When banks and shadow banks go under, they draw in governments to protect credit flows, payment systems, and people’s savings. When governments go under, they sink their creditors–banks, pension funds, insurance companies. Financial reform is essential not only to shield people from bank failure, but also to shield banks–and by extension the public–from government failure.

Greek banks and pension funds hold more than a quarter of Greek government debt. If Greece defaults, it wipes out popular savings and freezes credit essential to recovery. Elsewhere, European banks, pension funds, and insurance companies hold over half of Greek debt. Thus default threatens the broader European financial system, needed to finance Greek growth. This is the same system that nearly collapsed in 2008 from the U.S. housing bust, and was deeply shaken by the failures of Lehman Brothers, Fortis and Dexia, and the Icelandic banking crisis. But it is also the system that benefited from the U.S. government support for AIG, which had sold credit derivatives to European banks, absorbing their risks so they could hold less regulatory capital.

This leads to a paradox: Even if Greek debt is deeply unsustainable, and even if Greek debt contracts contain relatively few barriers to restructuring, uncertainty about the effects of default on the financial systems threatens to reduce or eliminate the benefits of debt reduction. To be sure, links between governments and financial institutions were central in the crises of the 1980s and 1990s as well, but now no part of the global financial system can be presumed immune.

In the past, we had thought that the best way to ensure a timely and orderly sovereign debt restructuring was through reforming sovereign debt contracts, or sovereign bankruptcy. One lesson from Greece is that stronger financial reforms–on both sides of the Atlantic–may be the surest way forward to manage sovereign distress. That means boosting capital so firms can absorb losses, comprehensive resolution so conglomerates may die in peace, and transparent derivatives markets to reveal the true risks of default.

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The Eurozone: Looking For Solutions

9. May 2010 by admin.

The Eurozone: Looking For Solutions

 

After an all-night meeting on the Greek debt and eurozone crisis, the eurozone members have preliminarily announced an emergency fund in an attempt to prevent the crisis from deepening.

 

So far there are no details on the size or scope of the emergency fund. All that has been released is that the EU’s central authorities will gain the ability to issue bonds to pay for currency protection programs, or bailouts. Supposedly, such debt will be guaranteed by eurozone members, but there are no details as yet as to how such debt would be paid back. The EU has no independent fund-raising capacities, suggesting that this is somewhat akin to cosigning for an open line of credit for a college student with no independent income.

 

We assume that is not precisely what they have in mind — in addition to being fiscally…questionable, the eurozone countries have already put forward all of the spare cash they will likely be able to independently generate for the next several months to pay for Greece’s bailout thus far — but we are waiting along with everyone else to see what the real deal is. It is highly likely that there will be some sort of an implied role in the process for the European Central Bank. Full details of the plan will be announced just before the Asian markets open Sunday May 9.

What we can say is that the Europeans do seem to be moving toward a plan with considerable speed, and we are not referring just to this emergency summit. European summits that run into the early morning hours are commonplace — one downside of a “consensus-based” governing system — but something else happened Saturday May 8 that is unprecedented.

 

Germany’s constitutional court rejected a case asserting that the Greek bailout announced just a few days ago was unconstitutional. It is not so much that the court rejected the case, but that it rejected it so quickly. The case was only filed last week, and the court rejected the case May 8 (a Saturday!) so that Berlin would have the needed legal cover to move immediately on this new crisis fund. Normally EU policy is hashed out over years. Now it is being done in hours, and Berlin is taking charge.

 

Something big is coming, and something big needs to come considering the scope of problems that the Greek crisis has imposed. The Greek crisis is clearly spreading to other eurozone members. Investors are beginning to shed the debt of a host of other eurozone states, Spain most notably, and unlike tiny Greece, there is no financial force in Europe — or the world — that can possibly bail out these larger states. The Greek bailout has not been sufficient to calm the markets. There is also fear — whether grounded in reality or not — that Europe’s problems could also spread to the United States and other global markets.

 

If the European Union — normally known for expansive, poorly enforced legalisms — is going to sequester the damage, it needs to do it fast. The EU is not known for speed, which is why a fast solution would be unprecedented in and of itself. And that may be exactly what Berlin and other eurozone capitals are thinking, that shocking the markets at this point is no longer about money, but rather the scope and speed of a European response.

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Geopolitics of Russia: A Permanent Struggle

25. April 2010 by admin.

Geopolitics of Russia: A Permanent Struggle

 

Russia’s defining characteristic is its indefensibility. Unlike the core of most states that are relatively defensible, core Russia is limited to the region of the medieval Grand Principality of Muscovy. It counts no rivers, oceans, swamps or mountains marking its borders — it relies solely on the relatively inhospitable climate and its forests for defense. Russian history is a chronicle of the agony of surviving invasion after invasion.

Traditionally these invasions have come from two directions. The first is from the steppes — wide open grasslands that connect Russia to Central Asia and beyond — the path that the Mongols used. The second is from the North European Plain, which brought to Russia everything from the Teutonic Knights to the Nazi war machine.

 

 

To deal with these vulnerabilities, Russia expanded in three phases. In the first, Russia expanded not toward the invasion corridors to establish buffers but away from them to establish a redoubt. In the late 15th century, under Ivan III, Russia did creep westward somewhat, anchoring itself at the Pripet Marshes, which separated Russia from the Kiev region. But the bulk of Russia’s expansion during that period was north to the Arctic and northeast to the Urals. Very little of this territory can be categorized as useful — most was taiga or actual tundra and only lightly populated — but for Russia it was the only land easily up for grabs. It also marked a natural organic outgrowth of the original Muscovy — all cloaked in forest. It was as defensible a territory as Russia had access to and their only hope against the Mongols.

 

The Mongols were horsemen who dominated the grasslands with their fast-moving cavalry forces. Their power, although substantial, diminished when they entered the forests and the value of their horses, their force multipliers, declined. The Mongols had to fight infantry forces in the forests, where the advantage was on the defender’s side.

 

 

The second phase of expansion was far more aggressive — and risky. In the mid-16th century, Under Ivan IV, Russia finally moved to seal off the Mongol invasion route. Russia pushed south and east, deep into the steppes, and did not stop until it hit the Urals in the east and the Caspian Sea and Caucasus Mountains in the south. As part of this expansion, Russia captured several strategically critical locations, including Astrakhan on the Caspian, the land of the Tatars — a longtime horse-mounted foe — and Grozny, which was soon transformed into a military outpost at the foot of the Caucasus.

 

Also with this expansion, Ivan IV was transformed from Grand Prince of Moscow to Tsar of All Russia, suggesting the empire to come. Russia had finally achieved a measure of conventional security. Holding the northern slopes of the Caucasus would provide a reasonable defense from Asia Minor and Persia, while the millions of square kilometers of steppes gave birth to another defensive strategy: buffers.

Russia — modern, medieval or otherwise — cannot count on natural features to protect it. The Pripet Marshes were small and could in many cases simply be avoided. There is no one who might wish to attack from the Arctic. Forests slowed the Mongol horsemen, but as Muscovy’s predecessor — Kievan Rus — aptly demonstrated, the operative word was “slowed,” not “stopped.” The Mongols conquered and destroyed Kievan Rus in the 13th century.

 

That leaves buffers. So long as a country controls territory separating itself from its foes — even if it is territory that is easy for a hostile military to transit — it can bleed out any invasion via attrition and attacks on supply lines. Such buffers, however, contain a poison pill. They have populations not necessarily willing to serve as buffers. Maintaining control of such buffers requires not only a sizable standing military for defense but also a huge internal security and intelligence network to enforce central control. And any institution so key to the state’s survival must be very tightly controlled as well. Establishing and maintaining buffers not only makes Russia seem aggressive to its neighbors but also forces it to conduct purges and terrors against its own institutions in order to maintain the empire.

 

The third expansion phase dealt with the final invasion route: from the west. In the 18th century, under Peter and Catherine the Great, Russian power pushed westward, conquering Ukraine to the southwest and pushing on to the Carpathian Mountains. It also moved the Russian border to the west, incorporating the Baltic territories and securing a Russian flank on the Baltic Sea. Muscovy and the Tsardom of Russia were now known as the Russian Empire.

 

Yet aside from the anchor in the Carpathians, Russia did not achieve any truly defensible borders. Expansions to the Baltic and Black Seas did end the external threat from the Cossacks and Balts of ages past, but at the price of turning those external threats into internal ones. Russia also expanded so far and fast that holding the empire together socially and militarily became a monumental and ongoing challenge (today Russia is dealing with the fact that Russians are barely a majority in their own country). All this to achieve some semblance of security by establishing buffer regions.

 

But that is an issue of empire management. Ultimately the multi-directional threat defined Muscovy’s geopolitical problem. There was a constant threat from the steppes, but there was also a constant threat from the west, where the North European Plain allowed for few natural defenses and larger populations could deploy substantial infantry (and could, as the Swedes did, use naval power to land forces against the Muscovites). The forests provided a degree of protection, as did the sheer size of Russia’s holdings and its climate, but in the end the Russians faced threats from at least two directions. In managing these threats by establishing buffers, they were caught in a perpetual juggling act: east vs. west, internal vs. external.

 

The geography of the Russian Empire bequeathed it certain characteristics. Most important, the empire was (and remains) lightly settled. Even today, vast areas of Russia are unpopulated while in the rest of the country the population is widely distributed in small towns and cities and far less concentrated in large urban areas. Russia’s European part is the most densely populated, but in its expansion Russia both resettled Russian ethnics and assimilated large minorities along the way. So while Moscow and its surroundings are certainly critical, the predominance of the old Muscovy is not decisively ironclad.

 

 

The result is a constant, ingrained clash within the Russian Empire no matter the time frame, driven primarily by its size and the challenges of transport. The Russian empire, even excluding Siberia, is an enormous landmass located far to the north. Moscow is at the same latitude as Newfoundland while the Russian and Ukrainian breadbaskets are at the latitude of Maine, resulting in an extremely short growing season. Apart from limiting the size of the crop, the climate limits the efficiency of transport — getting the crop from farm to distant markets is a difficult matter and so is supporting large urban populations far from the farms. This is the root problem of the Russian economy. Russia can grow enough to feed itself, but it cannot efficiently transport what it grows from the farms to the cities and to the barren reaches of the empire before the food spoils. And even when it can transport it, the costs of transport make the foodstuffs unaffordable.

 

Population distribution also creates a political problem. One natural result of the transport problem is that the population tends to distribute itself nearer growing areas and in smaller towns so as not to tax the transport system. Yet these populations in Russia’s west and south tend to be conquered peoples. So the conquered peoples tend to distribute themselves to reflect economic rationalities, while need for food to be transported to the Russian core goes against such rationalities.

 

Faced with a choice of accepting urban starvation or the forcing of economic destitution upon the food-producing regions (by ordering the sale of food in urban centers at prices well below market prices), Russian leaders tend to select the latter option. Joseph Stalin certainly did in his efforts to forge and support an urban, industrialized population. Force-feeding such economic hardship to conquered minorities only doubled the need for a tightly controlled security apparatus.

 

The Russian geography meant that Russia either would have a centralized government — and economic system — or it would fly apart, torn by nationalist movements, peasant uprisings and urban starvation. Urbanization, much less industrialization, would have been impossible without a strong center. Indeed, the Russian Empire or Soviet Union would have been impossible. The natural tendency of the empire and Russia itself is to disintegrate. Therefore, to remain united it had to have a centralized bureaucracy responsive to autocratic rule in the capital and a vast security apparatus that compelled the country and empire to remain united. Russia’s history is one of controlling the inherently powerful centrifugal forces tearing at the country’s fabric.

 

Russia, then, has two core geopolitical problems. The first is holding the empire together. But the creation of that empire poses the second problem, maintaining internal security. It must hold together the empire and defend it at the same time, and the achievement of one goal tends to undermine efforts to achieve the other.

Geopolitical Imperatives

To secure the Russian core of Muscovy, Russia must:

• Expand north and east to secure a redoubt in climatically hostile territory that is protected in part by the Urals. This way, even in the worst-case scenario (i.e., Moscow falls), there is still a “Russia” from which to potentially resurge.
• Expand south to the Caucasus and southeast into the steppes in order to hamper invasions of Asian origin. As circumstances allow, push as deeply into Central Asia and Siberia as possible to deepen this bulwark.
• Expand as far west as possible. Do not stop in the southwest until the Carpathians are reached. On the North European Plain do not stop ever. Deeper penetration increases security not just in terms of buffers; the North European Plain narrows the further west one travels making its defense easier.
• Manage the empire with terror. Since the vast majority of Russian territory is not actually Russian, a very firm hand is required to prevent myriad minorities from asserting regional control or aligning with hostile forces.
• Expand to warm water ports that have open-ocean access so that the empire can begin to counter the economic problems that a purely land empire suffers.

Given the geography of the Russian heartland, we can see why the Russians would attempt to expand as they did. Vulnerable to attack on the North European Plain and from the Central Asian and European steppes simultaneously, Russia could not withstand an attack from one direction — much less two. Apart from the military problem, the ability of the state to retain control of the country under such pressure was dubious, as was the ability to feed the country under normal circumstances — much less during war. Securing the Caucasus, Central Asia and Siberia was the first — and easiest — part of dealing with this geographic imbroglio.

 

The western expansion was not nearly so “simple.” No matter how far west the Russians moved on the European plain, there was no point at which they could effectively anchor themselves. Ultimately, the last effective line of defense is the 400 mile gap (aka Poland) between the Baltic Sea and Carpathian Mountains. Beyond that the plains widen to such a degree that a conventional defense is impossible as there is simply too much open territory to defend. So the Soviet Union pressed on all the way to the Elbe.

 

At its height, the Soviet Union achieved all but its final imperative of securing ocean access. The USSR was anchored on the Carpathians, the Black Sea, the Caucasus and the Urals, all of which protected its southern and southwestern flanks. Siberia protected its eastern frontier with vast emptiness. Further to the south, Russia was anchored deeply in Central Asia. The Russians had defensible frontiers everywhere except the North European Plain, ergo the need to occupy Germany and Poland.

Strategy of the Russian Empire

The modern Russian empire faces three separate border regions: Asian Siberia, Central Asia and the Caucasus (now mostly independent states), and Western Europe.

 

First, Siberia. There is only one rail line connecting Siberia to the rest of the empire, and positioning a military force there is difficult if not impossible. In fact, risk in Russia’s far east is illusory. The Trans-Siberian Railroad (TSR) runs east-west, with the Baikal Amur Mainline forming a loop. The TSR is Russia’s main lifeline to Siberia and is, to some extent, vulnerable. But an attack against Siberia is difficult — there is not much to attack but the weather, while the terrain and sheer size of the region make holding it not only difficult but of questionable relevance. Besides, an attack beyond it is impossible because of the Urals.

 

East of Kazakhstan, the Russian frontier is mountainous to hilly, and there are almost no north-south roads running deep into Russia; those that do exist can be easily defended, and even then they dead-end in lightly populated regions. The period without mud or snow lasts less than three months out of the year. After that time, overland resupply of an army is impossible. It is impossible for an Asian power to attack Siberia. That is the prime reason the Japanese chose to attack the United States rather than the Soviet Union in 1941. The only way to attack Russia in this region is by sea, as the Japanese did in 1905. It might then be possible to achieve a lodgment in the maritime provinces (such as Primorsky Krai or Vladivostok). But exploiting the resources of deep Siberia, given the requisite infrastructure costs, is prohibitive to the point of being virtually impossible.

 

 

We begin with Siberia in order to dispose of it as a major strategic concern. The defense of the Russian Empire involves a different set of issues.

Second, Central Asia. The mature Russian Empire and the Soviet Union were anchored on a series of linked mountain ranges, deserts and bodies of water in this region that gave it a superb defensive position. Beginning on the northwestern Mongolian border and moving southwest on a line through Kyrgyzstan and Tajikistan, the empire was guarded by a north extension of the Himalayas, the Tien Shan Mountains. Swinging west along the Afghan and Iranian borders to the Caspian Sea, the empire occupied the lowlands along a mountainous border. But the lowlands, except for a small region on the frontier with Afghanistan, were harsh desert, impassable for large military forces. A section along the Afghan border was more permeable, leading to a long-term Russian unease with the threat in Afghanistan — foreign or indigenous. The Caspian Sea protected the border with Iran, and on its western shore the Caucasus Mountains began, which the empire shared with Iran and Turkey but which were hard to pass through in either direction. The Caucasus terminated on the Black Sea, totally protecting the empire’s southern border. These regions were of far greater utility to Russia than Siberia and so may have been worth taking, but for once geography actually helped Russia instead of working against it.

 

Finally, there is the western frontier that ran from west of Odessa north to the Baltic. This European frontier was the vulnerable point. Geographically, the southern portion of the border varied from time to time, and where the border was drawn was critical. The Carpathians form an arc from Romania through western Ukraine into Slovakia. Russia controlled the center of the arc in Ukraine. However, its frontier did not extend as far as the Carpathians in Romania, where a plain separated Russia from the mountains. This region is called Moldova or Bessarabia, and when the region belongs to Romania, it represents a threat to Russian national security. When it is in Russian hands, it allows the Russians to anchor on the Carpathians. And when it is independent, as it is today in the form of the state of Moldova, then it can serve either as a buffer or a flash point. During the alliance with the Germans in 1939-1941, the Russians seized this region as they did again after World War II. But there is always a danger of an attack out of Romania.

 

This is not Russia’s greatest danger point. That occurs further north, between the northern edge of the Carpathians and the Baltic Sea. This gap, at its narrowest point, is just under 300 miles, running west of Warsaw from the city of Elblag in northern Poland to Cracow in the south. This is the narrowest point in the North European Plain and roughly the location of the Russian imperial border prior to World War I. Behind this point, the Russians controlled eastern Poland and the three Baltic countries.

 

The danger to Russia is that the north German plain expands like a triangle east of this point. As the triangle widens, Russian forces get stretched thinner and thinner. So a force attacking from the west through the plain faces an expanding geography that thins out Russian forces. If invaders concentrate their forces, the attackers can break through to Moscow. That is the traditional Russian fear: Lacking natural barriers, the farther east the Russians move the broader the front and the greater the advantage for the attacker. The Russians faced three attackers along this axis following the formation of empire — Napoleon, Wilhelm II and Hitler. Wilhelm was focused on France so he did not drive hard into Russia, but Napoleon and Hitler did, both almost toppling Moscow in the process.

 

Along the North European Plain, Russia has three strategic options:

1. Use Russia’s geographical depth and climate to suck in an enemy force and then defeat it, as it did with Napoleon and Hitler. After the fact this appears the solution, except it is always a close run and the attackers devastate the countryside. It is interesting to speculate what would have happened in 1942 if Hitler had resumed his drive on the North European Plain toward Moscow, rather than shift to a southern attack toward Stalingrad.

2. Face an attacking force with large, immobile infantry forces at the frontier and bleed them to death, as they tried to do in 1914. On the surface this appears to be an attractive choice because of Russia’s greater manpower reserves than those of its European enemies. In practice, however, it is a dangerous choice because of the volatile social conditions of the empire, where the weakening of the security apparatus could cause the collapse of the regime in a soldiers’ revolt as happened in 1917.

3. Push the Russian/Soviet border as far west as possible to create yet another buffer against attack, as the Soviets did during the Cold War. This is obviously an attractive choice, since it creates strategic depth and increases economic opportunities. But it also diffuses Russian resources by extending security states into Central Europe and massively increasing defense costs, which ultimately broke the Soviet Union in 1992.

Contemporary Russia

The greatest extension of the Russian Empire occurred under the Soviets from 1945 to 1989. Paradoxically, this expansion preceded the collapse of the Soviet Union and the contraction of Russia to its current borders. When we look at the Russian Federation today, it is important to understand that it has essentially retreated to the borders the Russian Empire had in the 17th century. It holds old Muscovy plus the Tatar lands to the southeast as well as Siberia. It has lost its western buffers in Ukraine and the Baltics and its strong foothold in the Caucasus and in Central Asia.

 

To understand this spectacular expansion and contraction, we need to focus on Soviet strategy. The Soviet Union was a landlocked entity dominating the Eurasian heartland but without free access to the sea. Neither the Baltic nor Black seas allow Russia free oceangoing transport because they are blocked by the Skagerrak and the Turkish straits, respectively. So long as Denmark and Turkey remain in NATO, Russia’s positions in St. Petersburg, Kaliningrad, Sevastopol and Novorossiysk are militarily dubious.

 

There were many causes of the Soviet collapse. Some were:

• Overextending forces into Central Europe, which taxed the ability of the Soviet Union to control the region while economically exploiting it. It became a net loss. This overextension created costly logistical problems on top of the cost of the military establishment. Extension of the traditional Russian administrative structure both diffused Russia’s own administrative structure and turned a profitable empire into a massive economic burden.
• Creating an apparent threat to the rest of Europe that compelled the United States to deploy major forces and arm Germany. This in turn forced the Russians into a massive military buildup that undermined its economy, which was less productive than the American economy because of its inherent agricultural problem and because the cost of internal transport combined with the lack of ocean access made Soviet (and Russian) maritime trade impossible. Since maritime trade both is cheaper than land trade and allows access to global markets, the Soviet Union always operated at an extreme economic disadvantage to its Western and Asian competitors.
• Entering an arms race with much richer countries it could compete against only by diverting resources from the civilian economy — material and intellectual. The best minds went into the military-industrial complex, causing the administrative and economic structure of Russia to crumble.

In 1989 the Soviet Union lost control of Eastern Europe and in 1992 the Soviet Union itself collapsed. Russia then retreated essentially to its 17th century borders — except that it retained control of Siberia, which is either geopolitically irrelevant or a liability. Russia has lost all of Central Asia, and its position in the Caucasus has become tenuous. Had Russia lost Chechnya, its eastern flank would have been driven out of the Caucasus completely, leaving it without a geopolitical anchor.

 

 

The gap between Kazakhstan in the east and Ukraine in the west, like the narrowest point in the North European Plain, is only 300 miles wide. It also contains Russia’s industrial heartland. Russia has lost Ukraine, of course, and Moldova. But Russia’s most grievous geopolitical contraction has been on the North European Plain, where it has retreated from the Elbe in Germany to a point less than 100 miles from St. Petersburg. The distance from the border of an independent Belarus to Moscow is about 250 miles.

 

To understand the Russian situation, it is essential to understand that Russia has in many ways returned to the strategic position of late Muscovy. Its flank to the southeast is relatively secure, since China shows no inclination for adventures into the steppes, and no other power is in a position to challenge Russia from that direction. But in the west, in Ukraine and in the Caucasus, the Russian retreat has been stunning.

 

We need to remember why Muscovy expanded in the first place. Having dealt with the Mongols, the Russians had two strategic interests. Their most immediate was to secure their western borders by absorbing Lithuania and anchoring Russia as far west on the North European Plain as possible. Their second strategic interest was to secure Russia’s southeastern frontier against potential threats from the steppes by absorbing Central Asia as well as Ukraine. Without that, Muscovy could not withstand a thrust from either direction, let alone from both directions at once.

It can be said that no one intends to invade Russia. From the Russian point of view, history is filled with dramatic changes of intention, particularly in the West. The unthinkable occurs to Russia once or twice a century. In its current configuration, Russia cannot hope to survive whatever surprises are coming in the 21st century. Muscovy was offensive because it did not have a good defensive option. The same is true of Russia. Given the fact that a Western alliance, NATO, is speaking seriously of establishing a dominant presence in Ukraine and in the Caucasus — and has already established a presence in the Baltics, forcing Russia far back into the widening triangle, with its southern flank potentially exposed to Ukraine as a NATO member — the Russians must view their position as dire. As with Napoleon, Wilhelm and Hitler, the initiative is in the hands of others. For the Russians, the strategic imperative is to eliminate that initiative or, if that is impossible, anchor Russia as firmly as possible on geographical barriers, concentrating all available force on the North European Plain without overextension.

 

Unlike countries such as China, Iran and the United States, Russia has not achieved its strategic geopolitical imperatives. On the contrary, it has retreated from them:

• Russia does hold the northern Caucasus, but it no longer boasts a deep penetration of the mountains, including Georgia and Armenia. Without those territories Russia cannot consider this flank secure.
• Russia has lost its anchor in the mountains and deserts of Central Asia and so cannot actively block or disrupt — or even well monitor — any developments to its deep south that could threaten its security.
• Russia retains Siberia, but because of the climatic and geographic hostility of the region it is almost a wash in terms of security (it certainly is economically).
• Russia’s loss of Ukraine and Moldova allows both the intrusion of other powers and the potential rise of a Ukrainian rival on its very doorstep. Powers behind the Carpathians are especially positioned to take advantage of this political geography.
• The Baltic states have re-established their independence, and all three are east and north of the Baltic-Carpathian line (the final defensive line on the North European Plain). Their presence in a hostile alliance is unacceptable. Neither is an independent or even neutral Belarus (also on the wrong side of that line).

Broader goals, such as having a port not blocked by straits controlled by other countries, could have been pursued by the Soviets. Today such goals are far out of Russian reach. From the Russian point of view, creating a sphere of influence that would return Russia to its relatively defensible imperial boundaries is imperative.

 

Obviously, forces in the peripheral countries as well as great powers outside the region will resist. For them, a weak and vulnerable Russia is preferable, since a strong and secure one develops other appetites that could see Russia pushing along vectors such as through the Skagerrak toward the North Sea, through the Turkish Straits toward the Mediterranean and through La Perouse Strait toward Japan and beyond.

 

Russia’s essential strategic problem is this: It is geopolitically unstable. The Russian Empire and Soviet Union were never genuinely secure. One problem was theNorth European Plain. But another problem, very real and hard to solve, was access to the global trading system via oceans. And behind this was Russia’s essential economic weakness due to its size and lack of ability to transport agricultural produce throughout the country. No matter how much national will it has, Russia’s inherently insufficient infrastructure constantly weakens its internal cohesion.

 

Russia must dominate the Eurasian heartland. When it does, it must want more. The more it wants the more it must face its internal economic weakness and social instability, which cannot support its ambitions. Then the Russian Federation must contract. This cycle has nothing to do with Russian ideology or character. It has everything to do with geography, which in turn generates ideologies and shapes character. Russia is Russia and must face its permanent struggle.

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Geopolitics of Recession

25. April 2010 by admin.

The Geopolitics of Recession

Let’s begin with some simple numbers.The global recession is the biggest development in the global system in the year to date. In the United States, it has become almost dogma that the recession is the worst since the Great Depression. But this is only one of a wealth of misperceptions about whom the downturn is hurting most, and why.As one can see in the chart, the U.S. recession at this point is only the worst since 1982, not the 1930s, and it pales in comparison to what is occurring in the rest of the world. (Figures for China have not been included, in part because of the unreliability of Chinese statistics, but also because the country’s financial system is so radically different from the rest of the world as to make such comparisons misleading. For more, read the China section below.)

                     But didn’t the recession begin in the United States? That it did, but the American system is far more stable, durable and flexible than most of the other global economies, in large part thanks to the country’s geography. To understand how place shapes economics, we need to take a giant step back from the gloom and doom of the current moment and examine the long-term picture of why different regions follow different economic paths.

The United States and the Free Market

The most important aspect of the United States is not simply its sheer size, but the size of its usable land. Russia and China may both be similar-sized in absolute terms, but the vast majority of Russian and Chinese land is useless for agriculture, habitation or development. In contrast, courtesy of the Midwest, the United States boasts the world’s largest contiguous mass of arable land — and that mass does not include the hardly inconsequential chunks of usable territory on both the West and East coasts.Second is the American maritime transport system. The Mississippi River, linked as it is to the Red, Missouri, Ohio and Tennessee rivers, comprises the largest interconnected network of navigable rivers in the world. In the San Francisco Bay, Chesapeake Bay and Long Island Sound/New York Bay, the United States has three of the world’s largest and best natural harbors. The series of barrier islands a few miles off the shores of Texas and the East Coast form a water-based highway — an Intracoastal Waterway — that shields American coastal shipping from all but the worst that the elements can throw at ships and ports.

                            The real beauty is that the two overlap with near perfect symmetry. The Intracoastal Waterway and most of the bays link up with agricultural regions and their own local river systems (such as the series of rivers that descend from the Appalachians to the East Coast), while the Greater Mississippi river network is the circulatory system of the Midwest. Even without the addition of canals, it is possible for ships to reach nearly any part of the Midwest from nearly any part of the Gulf or East coasts. The result is not just a massive ability to grow a massive amount of crops — and not just the ability to easily and cheaply move the crops to local, regional and global markets — but also the ability to use that same transport network for any other economic purpose without having to worry about food supplies.The implications of such a confluence are deep and sustained. Where most countries need to scrape together capital to build roads and rail to establish the very foundation of an economy — transport capability — geography granted the United States a near-perfect system at no cost. That frees up U.S. capital for other pursuits and almost condemns the United States to be capital-rich. Any additional infrastructure the United States constructs is icing on the cake. (The cake itself is free — and, incidentally, the United States had so much free capital that it was able to go on to build one of the best road-and-rail networks anyway, resulting in even greater economic advantages over competitors.)Third, geography has also ensured that the United States has very little local competition. To the north, Canada is both much colder and much more mountainous than the United States. Canada’s only navigable maritime network — the Great Lakes-St. Lawrence Seaway —is shared with the United States, and most of its usable land is hard by the American border. Often this makes it more economically advantageous for Canadian provinces to integrate with their neighbor to the south than with their co-nationals to the east and west.Similarly, Mexico has only small chunks of land, separated by deserts and mountains, that are useful for much more than subsistence agriculture; most of Mexican territory is either too dry, too tropical or too mountainous. And Mexico completely lacks any meaningful river system for maritime transport. Add in a largely desert border, and Mexico as a country is not a meaningful threat to American security (which hardly means that there are not serious and ongoing concerns in the American-Mexican relationship).With geography empowering the United States and hindering Canada and Mexico, the United States does not need to maintain a large standing military force to counter either. The Canadian border is almost completely unguarded, and the Mexican border is no more than a fence in most locations — a far cry from the sort of military standoffs that have marked more adversarial borders in human history. Not only are Canada and Mexico not major threats, but the U.S. transport network allows the United States the luxury of being able to quickly move a smaller force to deal with occasional problems rather than requiring it to station large static forces on its borders.Like the transport network, this also helps the U.S. focus its resources on other things.Taken together, the integrated transport network, large tracts of usable land and lack of a need for a standing military have one critical implication: The U.S. government tends to take a hands-off approach to economic management, because geography has not cursed the United States with any endemic problems. This may mean that the United States — and especially its government — comes across as disorganized, but it shifts massive amounts of labor and capital to the private sector, which for the most part allows resources to flow to wherever they will achieve the most efficient and productive results.Laissez-faire capitalism has its flaws. Inequality and social stress are just two of many less-than-desirable side effects. The side effects most relevant to the current situation are, of course, the speculative bubbles that cause recessions when they pop. But in terms of long-term economic efficiency and growth, a free capital system is unrivaled. For the United States, the end result has proved clear: The United States has exited each decade since post-Civil War Reconstruction more powerful than it was when it entered it. While there are many forces in the modern world that threaten various aspects of U.S. economic standing, there is not one that actually threatens the U.S. base geographic advantages.Is the United States in recession? Of course. Will it be forever? Of course not. So long as U.S. geographic advantages remain intact, it takes no small amount of paranoia and pessimism to envision anything but long-term economic expansion for such a chunk of territory. In fact, there are a number of factors hinting that the United States may even be on the cusp of recovery.

Russia and the State

If in economic terms the United States has everything going for it geographically, then Russia is just the opposite. The Russian steppe lies deep in the interior of the Eurasian landmass, and as such is subject to climatic conditions much more hostile to human habitation and agriculture than is the American Midwest. Even in those blessed good years when crops are abundant in Russia, it has no river network to allow for easy transport of products.

                                                Russia has no good warm-water ports to facilitate international trade (and has spent much of its history seeking access to one). Russia does have long rivers, but they are not interconnected as the Mississippi is with its tributaries, instead flowing north to the Arctic Ocean, which can support no more than a token population. The one exception is the Volga, which is critical to Western Russian commerce but flows to the Caspian, a storm-wracked and landlocked sea whose delta freezes in the winter (along with the entire Volga itself). Developing such unforgiving lands requires a massive outlay of funds simply to build the road and rail networks necessary to achieve the most basic of economic development. The cost is so extreme that Russia’s first ever intercontinental road was not completed until the 21st century, and it is little more than a two-lane path for much of its length. Between the lack of ports and the relatively low population densities, little of Russia’s transport system beyond the St. Petersburg/Moscow corridor approaches anything that hints of economic rationality.Russia also has no meaningful external borders. It sits on the eastern end of the North European Plain, which stretches all the way to Normandy, France, and Russia’s connections to the Asian steppe flow deep into China. Because Russia lacks a decent internal transport network that can rapidly move armies from place to place, geography forces Russia to defend itself following two strategies. First, it requires massive standing armies on all of its borders. Second, it dictates that Russia continually push its boundaries outward to buffer its core against external threats.Both strategies compromise Russian economic development even further. The large standing armies are a continual drain on state coffers and the country’s labor pool; their cost was a critical economic factor in the Soviet fall. The expansionist strategy not only absorbs large populations that do not wish to be part of the Russian state and so must constantly be policed — the core rationale for Russia’s robust security services — but also inflates Russia’s infrastructure development costs by increasing the amount of relatively useless territory Moscow is responsible for.Russia’s labor and capital resources are woefully inadequate to overcome the state’s needs and vulnerabilities, which are legion. These endemic problems force Russia toward central planning; the full harnessing of all economic resources available is required if Russia is to achieve even a modicum of security and stability. One of the many results of this is severe economic inefficiency and a general dearth of an internal consumer market. Because capital and other resources can be flung forcefully at problems, however, active management can achieve specific national goals more readily than a hands-off, American-style model. This often gives the impression of significant progress in areas the Kremlin chooses to highlight.But such achievements are largely limited to wherever the state happens to be directing its attention. In all other sectors, the lack of attention results in atrophy or criminalization. This is particularly true in modern Russia, where the ruling elite comprises just a handful of people, starkly limiting the amount of planning and oversight possible. And unless management is perfect in perception and execution, any mistakes are quickly magnified into national catastrophes. It is therefore no surprise to STRATFOR that the Russian economy has now fallen the furthest of any major economy during the current recession.

China and Separatism

China also faces significant hurdles, albeit none as daunting as Russia’s challenges. China’s core is the farmland of the Yellow River basin in the north of the country, a river that is not readily navigable and is remarkably flood prone. Simply avoiding periodic starvation requires a high level of state planning and coordination. (Wrestling a large river is not the easiest thing one can do.) Additionally, the southern half of the country has a subtropical climate, riddling it with diseases that the southerners are resistant to but the northerners are not. This compromises the north’s political control of the south.Central control is also threatened by China’s maritime geography. China boasts two other rivers, but they do not link to each other or the Yellow naturally. And China’s best ports are at the mouths of these two rivers: Shanghai at the mouth of the Yangtze and Hong Kong/Macau/Guangzhou at the mouth of the Pearl. The Yellow boasts no significant ocean port. The end result is that other regional centers can and do develop economic means independent of Beijing.

                             With geography complicating northern rule and supporting southern economic independence, Beijing’s age-old problem has been trying to keep China in one piece. Beijing has to underwrite massive (and expensive) development programs to stitch the country together with a common infrastructure, the most visible of which is the Grand Canal that links the Yellow and Yangtze rivers. The cost of such linkages instantly guarantees that while China may have a shot at being unified, it will always be capital-poor.Beijing also has to provide its autonomy-minded regions with an economic incentive to remain part of Greater China, and “simple” infrastructure will not cut it. Modern China has turned to a state-centered finance model for this. Under the model, all of the scarce capital that is available is funneled to the state, which divvies it out via a handful of large state banks. These state banks then grant loans to various firms and local governments at below the cost of raising the capital. This provides a powerful economic stimulus that achieves maximum employment and growth — think of what you could do with a near-endless supply of loans at below 0 percent interest — but comes at the cost of encouraging projects that are loss-making, as no one is ever called to account for failures. (They can just get a new loan.) The resultant growth is rapid, but it is also unsustainable. It is no wonder, then, that the central government has chosen to keep its $2 trillion of currency reserves in dollar-based assets; the rate of return is greater, the value holds over a long period, and Beijing doesn’t have to worry about the United States seceding.Because the domestic market is considerably limited by the poor-capital nature of the country, most producers choose to tap export markets to generate income. In times of plenty this works fairly well, but when Chinese goods are not needed, the entire Chinese system can seize up. Lack of exports reduces capital availability, which constrains loan availability. This in turn not only damages the ability of firms to employ China’s legions of citizens, but it also removes the primary reason the disparate Chinese regions pay homage to Beijing. China’s geography hardwires in a series of economic challenges that weaken the coherence of the state and make China dependent upon uninterrupted access to foreign markets to maintain state unity. As a result, China has not been a unified entity for the vast majority of its history, but instead a cauldron of competing regions that cleave along many different fault lines: coastal versus interior, Han versus minority, north versus south.China’s survival technique for the current recession is simple. Because exports, which account for roughly half of China’s economic activity, have sunk by half, Beijing is throwing the equivalent of the financial kitchen sink at the problem. China has force-fed more loans through the banks in the first four months of 2009 than it did in the entirety of 2008. The long-term result could well bury China beneath a mountain of bad loans — a similar strategy resulted in Japan’s 1991 crash, from which Tokyo has yet to recover. But for now it is holding the country together. The bottom line remains, however: China’s recovery is completely dependent upon external demand for its production, and the most it can do on its own is tread water.

Discordant Europe

Europe faces an imbroglio somewhat similar to China’s.Europe has a number of rivers that are easily navigable, providing a wealth of trade and development opportunities. But none of them interlinks with the others, retarding political unification. Europe has even more good harbors than the United States, but they are not evenly spread throughout the Continent, making some states capital-rich and others capital-poor. Europe boasts one huge piece of arable land on the North European Plain, but it is long and thin, and so occupied by no fewer than seven distinct ethnic groups.These groups have constantly struggled — as have the various groups up and down Europe’s seemingly endless list of river valleys — but none has been able to emerge dominant, due to the webwork of mountains and peninsulas that make it nigh impossible to fully root out any particular group. And Europe’s wealth of islands close to the Continent, with Great Britain being only the most obvious, guarantee constant intervention to ensure that mainland Europe never unifies under a single power.Every part of Europe has a radically different geography than the other parts, and thus the economic models the Europeans have adopted have little in common. The United Kingdom, with few immediate security threats and decent rivers and ports, has an almost American-style laissez-faire system. France, with three unconnected rivers lying wholly in its own territory, is a somewhat self-contained world, making economic nationalism its credo. Not only do the rivers in Germany not connect, but Berlin has to share them with other states. The Jutland Peninsula interrupts the coastline of Germany, which finds its sea access limited by the Danes, the Swedes and the British. Germany must plan in great detail to maximize its resource use to build an infrastructure that can compensate for its geographic deficiencies and link together its good — but disparate — geographic blessings. The result is a state that somewhat favors free enterprise, but within the limits framed by national needs.And the list of differences goes on: Spain has long coasts and is arid; Austria is landlocked and quite wet; most of Greece is almost too mountainous to build on; it doesn’t get flatter than the Netherlands; tiny Estonia faces frozen seas in the winter; mammoth Italy has never even seen an icebreaker. Even if there were a supranational authority in Europe that could tax or regulate the banking sector or plan transnational responses, the propriety of any singular policy would be questionable at best.Such stark regional differences give rise to such variant policies that many European states have a severe (and understandable) trust deficit when it comes to any hint of anything supranational. We are not simply taking about the European Union here, but rather a general distrust of anything cross-border in nature. One of the many outcomes of this is a preference for using local banks rather than stock exchanges for raising capital. After all, local banks tend to use local capital and are subject to local regulations, while stock exchanges tend to be internationalized in all respects. Spain, Italy, Sweden, Greece and Austria get more than 90 percent of their financing from banks, the United Kingdom 84 percent and Germany 76 percent — while for the United States it is only 40 percent.And this has proved unfortunate in the extreme for today’s Europe. The current recession has its roots in a financial crisis that has most dramatically impacted banks, and European banks have proved far from immune. Until Europe’s banks recover, Europe will remain mired in recession. And since there cannot be a Pan-European solution, Europe’s recession could well prove to be the worst of all this time around.

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