The world isn't flat, it's flattened

It wasn't the world that got flat, contrary to New York Times pundit Thomas Friedman, but the emerging markets that got flattened.

Faddish conventional wisdom over the past few years held that American influence was fading as technology radiated to the far reaches of the world. When America's economy went into a ditch, though, the supposed economic superpowers of the future went flying, like children on skates holding onto the back of truck.

The American consumer, it turns out, played Atlas to the global economy, taking the exports of Asia, so that Asia could buy the commodities of Russia, Latin America and Africa. Remove the American consumer, and Asian exports crash, taking commodity prices along with them.

The financial crash exposes the fragility of large swaths of the world. The political consequences will be terrible. The worst of it is that America will not be around to moderate the melee, not if Democratic Senator Barack Obama is elected president, that is. Those who objected to America's role as world policeman will get what they wanted, but they won't like it: a religious war reaching from Lebanon to Pakistan, and Colombian-style narco-war spreading to Mexico and Brazil.

The wave of American self-pity that may carry Obama to the White House stems, in turn, from a global crisis that has sunk a good deal of the developing world. Worst affected are the most populous Muslim countries, and Russia's "near abroad". Pakistan, Ukraine and Belarus are out of funds and have applied for help to the International Monetary Fund. Indonesia and Turkey face drastically increased borrowing and import costs. Iran's economy will implode with oil in the mid-US$60s.

The table below shows the cost of default protection, a gauge of hard-currency borrowing costs, for some emerging markets. The numbers are somewhat arbitrary, reflecting a freeze on credit to emerging markets.

Annual cost of five-year default protection in basis points above the London interbank offered rate (LIBOR):

Country	Basis Points Above LIBOR
Argentina	3900
Ukraine	2750
Pakistan	2600
Venezuela	2260
Kazakhstan	1200
Indonesia	1200
Russia	1200
Turkey	900
Philippines	720
Egypt	720

That is, with LIBOR at 3.5%, the Russian government will pay roughly 15% for dollar funding, while Ukraine and Pakistan will pay about 30%, and Turkey about 11%. That does not accurately gauge the damage to their economies, though, for many of these countries depended on huge borrowings from short-term credit markets that now are frozen.

The economic crisis buoyed Obama out of his post-convention slump and exposed the emptiness of the Republicans. But it also has crushed the aspirations of the most populous Muslim countries. Even before the financial crisis, Pakistan and Turkey had turned towards political Islam. Pakistan's intelligence service is providing support to the Taliban in Afghanistan, jeopardizing the Western position. The financial crisis will push Pakistan further towards radical Islam. Now this proclamation will be preached from every mosque from Tyre to Lahore: "The corrupt West tried to seduce you with consumerism. Now the poisoned gifts of the West are shown to be an illusion, and those of you who lusted after them are left only with your humiliation."

Just what has the rest of the world done to challenge the economic hegemony of the United States? The commodities boom has evaporated in a matter of months, with most raw materials trading at half of their May 2008 peaks. Like the housing bubble in the United States, the commodities bubble turns out to have been a way for the capital of the West to invent profits where there were none to begin with. With the commodities bubble came a fad for investment in emerging market currencies, drawing hundreds of billions of dollars into high-yielding currencies like the Brazilian real, the Turkish lira and the South African rand. The most popular emerging market currencies have fallen by 30% to 50% from their peaks.

The stock exchanges of the BRIC (Brazil-Russia-India-China) combination have fallen half again as far as the US stock market this year in dollar terms:

Country	Stock Market Change 2008 to Oct. 22
Brazil	-59%
Russia	-72%
India	-62%
China	-62%
US	-40%

No one in Asia, it appears, knows how to make money when American import demand shrinks, and when Asian growth falls, raw materials prices collapse. No one in Latin America, for that matter, seems to know how to make money when raw materials prices collapse. For all the preening and posing of the emerging world's nouveau riche, it turns out that the American consumer was the center of the world economy, and without the American consumer, all that is left are busted stock markets and bad credit.
Most embarrassing for the flat-worlders is the observation that the emerging markets crashed when the world concluded that Washington would not be able to reverse the financial crisis. The economic bomb that detonated in America caused more collateral damage in the emerging markets than casualties at home.

Until July 2008, commodity prices rose as stock prices deteriorated because investors falsely assumed that Washington would set off a new wave of inflation as it rescued the banking system. The commodity producers thumbed their collective nose at economic distress in the industrial world and expected the boom to go on forever. Once the markets concluded that Washington would not be able to prevent a financial collapse, the commodity indices crashed along with stock prices. The commodity producers went from boom to bust almost overnight.

Iran's theocrats, as I reported in June (Worst of times for Iran, Asia Times Online, June 24, 2008), managed to steal $35 billion from oil revenues. Luxury real estate prices rose to Parisian levels while poor Iranians lacked necessities. With the collapse of the oil price, subsidies for essential items will disappear and the regime will face economic collapse. Before it does so, I believe Iran will undertake an adventure to assert its hegemony in the region, probably at the expense of Iraq.

The low level of violence in Iraq during the past several months owes something to the skill of American arms in the so-called "surge", but it owes even more to a tacit agreement between Iran and the George W Bush administration: in return for leashing its irregular forces in Iraq, Iran would get a free hand with Hezbollah in Lebanon, and American forbearance with respect to its nuclear weapons program.

The Bush administration's motive to bribe Iran and avoid political damage in Iraq disappears on US presidential election day on November 4. Whether the US administration (or for that matter Israel) has the nerve to launch an air strike on Iran's nuclear facilities is anyone's guess (and everyone is guessing that the answer is negative). Nonetheless, Iran has created the strongest Shi'ite presence since the original battles that determined the succession to the Prophet Mohammed. It can watch the Shi'ite cause fade away with the price of oil, or it can attempt to use its capabilities before they are lost for another thousand years. Nothing at all that we know of the Iranians indicates that they would go quietly into another long night of Sunni oppression.

Iran's leaders, in short, find themselves in a position similar to, but more urgent than, the one that Adolf Hitler described to his senior commanders three weeks after the German invasion of Poland. I have quoted this before, but it deserves to be tattooed onto the foreheads of analysts who think that economic weakness reduces the likelihood of armed conflict.

We have nothing to lose, but much indeed to gain. As a result of the constraints forced upon us, our economic position is such that we cannot hold out for more than a few years. [Hermann] Goering can confirm this. We have no other choice, we must act ... At no point in the future will Germany have a man with more authority than I. But I could be replaced at any moment by some idiot or criminal ... The morale of the German people is excellent. It can only worsen from here.

Iran's ultimate target will be Saudi Arabia, whose largest oil fields are found inconveniently in Shi'ite-majority areas just across the Persian Gulf from Iran. The Saudis will not sit quietly while Iran gains the upper hand in Iraq. Pakistan and Turkey, Sunni powers with large armies, will be loath to allow Iran to dominate the region, and they also will be all the more dependent on Saudi generosity.

A whole generation of Western analysts looked approving on Turkey's turn to Islamism, as I reported last summer (Turkey in the throes of Islamic revolution, Asia Times Online, July 22). Now Turkey will be Islamist - and broke. Turkey paid more than 20% for local currency deposits in order to attract the funds to finance a current account deficit amounting to 7% of gross domestic product. The Islamist government of Prime Minister Recep Tayyip Erdogan now faces the worst of all possible worlds. The Turkish lira has lost a third of its value in the past month, and almost all of the devaluation will turn up in higher domestic prices. Credit availability for Turkish businesses will vanish, and Turkey will enter a profound economic crisis.

A belt of ungovernability now stretches from Lebanon to Pakistan, with incalculable political and military consequences. I believe that a Shi'ite-Sunni version of Europe's 17th-century Thirty Years' War will engulf the region.

Latin America presents a different malady: it has the middle class that wasn't. The raw materials boom turned into a windfall for Brazil and Argentina, and the windfall financed spectacular rates of internal credit growth (31% and 38% respectively during the past year). For the first time, Brazil's auto manufacturers produced for internal demand rather than exports, and Sao Paolo choked in traffic while the helicopters of ethanol billionaires buzzed overhead. Argentina is now effectively broke, and the government of Cristina Kirchner has expropriated the country's private pension plans to obtain cash. Its foreign credit has collapsed completely.

Brazil's central bank still has formidable reserves, but the fragile political compromise that has kept a nominally leftist government in power cannot hold under present circumstances. Brazil's enormous underclass is ruled by drug gangs that are better armed than the police. A Brazilian congressional committee was told in February 2006 that corrupt elements in the Argentine army were selling heavy weapons to the Brazilian drug mobs, including anti-tank missiles.

Mexico in some ways is the most worrying place in the Western hemisphere. A low-level civil war between the drug cartels and the federal government has been fought over the past two years, and the cartels are winning. Senior Mexican officials charged with suppression of the cartels have been moving their families quietly out of the country. The collapse of the oil price and the likely collapse of remittances from Mexicans in the United States threaten the stability of the financial system, and the Mexican peso has lost nearly 40% of its value during the past several weeks. With the collapse of the American construction industry, a major source of employment for illegal Mexican immigrants to the US, the economic safety valve has broken, and the cartels have in inexhaustible supply of young men willing to risk their lives for a living.

Apart from Western and Central Asia and Latin America, the part of the world most affected by the economic crisis will be the Russian periphery. Ukraine has already joined Pakistan and Iceland at the mendicants' queue before the International Monetary Fund, and a number of other countries may not be far behind. Euphoria over the prospects of Eastern European economies permitted them to borrow massively on the now-frozen interbank market and eat up the proceeds in imports. Eastern Europe has the highest current account deficits in the world, and the greatest dependency on short-term foreign borrowings. "The risks of a hard landing are highest in Eastern Europe," warns the International Monetary Fund in its just-released Global Financial stability report.

Although Russia has taken on water in the crisis, its position relative to its former satellites has actually strengthened, as the table below makes clear:

Eastern Europe countries, current account deficit and net dependency on foreign bank borrowings

Country	Current Account (% of GDP)	Net Borrowing From Foreign Banks (% of GDP)
Bulgaria	-21.9	-29.0
Serbia	-16.1	-15.1
Latvia	-15.0	-72.5
Romnia	-14.5	-36.4
Estonia	-11.2	-78.7
Lithuania	-10.5	-45.6
Croatia	-9.0	-59.7
Ukraine	-7.6	-9.5
Hungary	-5.5	-54.1
Poland	-5.0	-17.1
Kazakhstan	-1.7	-8.0
Russia	+5.8	+2.2

Source: International Monetary Fund, Global Financial Stability Report (October 2008).

There are no winners, but losing the least is the next best thing to winning. If America turns inward, even an economically damaged Russia will loom larger in the world.


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Author: By Spengler
Original Source: Asia Times
Date Published: Oct 28, 2008
Web Source: http://www.atimes.com/atimes/Global_Economy/JJ28Dj07.html
Date Accessed Online: 2009-02-18

Oil Apocalypse Now? (Documentary)

Oil Apocalypse Now?

This British Documentary tries to look at, investigate and understand the current history of oil (i.e. "Peak Oil") and the effect of this limited supply of oil will have on our human future including our ability to transport ourselves, our products and, ultimately, our food supply across the world.

Moscow, Tehran force the US's hand

It may seem there could be nothing in common between the blowing up of a bridge in the Khyber, the usage of an air base nestling in the foothills of the Pamirs and the launch of a 60-pound (37.2 kilogram) satellite into the night sky that will circle the Earth 14 times a day.

But band them together and they trigger the political and diplomatic equivalent of what is known in the game of chess as zwischenzug, which means an intermediate move that improves a player's position.

Persians, who invented chess, would have mastery over zwischenzug.

Iranian Foreign Ministry spokesman Hassan Qashqavi said in Tehran on Wednesday, "Iran has no plans to stop its nuclear activity. At its forthcoming meeting, the 'Iran Six' should draw up a logical approach and accept the fact that Iran is a nuclear state."

The Taliban don't play chess
It is unlikely the Taliban factored Iran's imminent zwischenzug when they blew up the 30-meter iron bridge in the Khyber Pass 24 kilometers west of Peshawar in northwest Pakistan on Monday, which halted the supplies for North Atlantic Treaty Organization (NATO) troops in Afghanistan. But the disruption of traffic once again exposed the vulnerability of the main NATO supply route and focused attention on Tehran.

This is forcing NATO into a major policy shift. NATO's top military commander in Afghanistan, General John Craddock, admitted that the alliance would not oppose individual member nations making deals with Iran to supply their forces in Afghanistan. To quote Craddock, a four-star American general who is also NATO's supreme allied commander, "Those would be national decisions. Nations should act in a manner that is consistent with their national interest and with their ability to resupply their forces. I think it is purely up to them."

Craddock was transferring rapidly to the operational plane what the alliance's secretary general Jaap de Hoop Scheffer had said only a week ago that NATO member countries, including the United States, should engage Iran to combat the Taliban in Afghanistan.

Scheffer wouldn't have spoken without Washington's nod. Craddock underscored it. NATO is keen to use the new highway built by the Indian government from central Afghanistan to the Iranian border at Zaranj, which would allow access to Iran's deep-sea Persian Gulf port at Chabahar. The road is largely unused. The Indians completed work on the highway hardly a fortnight ago.
NATO is scrambling. It must somehow reduce dependence on Pakistani supply routes, which are currently used for ferrying about 80% of supplies. The irony cannot be lost on onlookers. NATO seeks an Iranian route when Tehran is demanding a US troop pullout from Afghanistan.

Last Thursday, Iranian Foreign Minister Manouchehr Mottaki remarked that Iran had paid attention to the plans of US President Barack Obama's administration to withdraw US troops from Iraq and "we believe this should be extended to Afghanistan as well".

The irony deepens insofar as a fortnight ago US Secretary of Defense Robert Gates in his first congressional testimony in the new administration leveled allegations about increased Iranian "interference" and doublespeak in Afghanistan, and implied that Tehran was fueling the insurgency.

Russia's zwischenzug
The heart of the matter is that the US's efforts to open supply routes from the north across the Amu Darya have got caught up in the great game in Central Asia. American spokesmen blithely claimed Russia and the Central Asian states were providing supply routes. But the geopolitics do not bear that out.

Kyrgyzstan President Kurmanbek Bakiyev dropped a bombshell on Tuesday by demanding the closure of the US military base in Manas, which is used for ferrying supplies for Afghanistan. He said this after talks with Russian President Dmitry Medvedev, during which Moscow pledged to Bishkek that it was writing off $180 million debt and would also provide Kyrgyzstan with a $2 billion soft loan and an outright grant of $150 million.

NATO's envoy to Central Asia, Robert Simmons, rushed to Bishkek in a last-ditch attempt to stall the Kyrgyz move, but only to regret the development and admit that NATO's Afghan operations would be adversely affected. Washington still hopes to salvage the situation, but that involves taking Moscow's help.

Moscow is willing, as always - provided the US is prepared to shelve its untimely geopolitical agenda to broaden and deepen its (and NATO's) strategic presence in Central Asia on the pretext of developing new supply routes for Afghanistan. Plainly put, Moscow feels irritated about Washington's abrasive diplomacy in Central Asia in recent weeks.

The US signed an agreement with Kazakhstan, Russia's key ally, offering to procure "a significant part" of its supplies for Afghanistan from that country. and in turn is pressuring it to make troop deployments in Afghanistan. Conceivably, Moscow (and Beijing) view with disquiet the US move to court their key Shanghai Cooperation Organization (SCO) and Collective Security Treaty Organization (CSTO) ally into the Western strategic orbit. Conceivably, Moscow's zwischenzug to evict the US military from Kyrgyzstan would enjoy tacit Chinese encouragement as well.

Nyet to selective engagement
Washington prefers "selective engagement" without addressing the underlying factors that caused the chill in relations. The Kremlin remains cautiously optimistic that Obama may address relations from a fresh perspective. The mood is reflected in a pithy comment by former Russian president Mikhail Gorbachev that "there are grounds for optimism, so far".

But an underlying sense of exasperation is visible. As a Moscow commentator put it, the George W Bush era may be over, but the "consequences are still there"; Obama might have new ideas, but the "old wire-pullers" are still there in the establishment in key positions; and, therefore, Obama might need "years rather than months to shape a new foreign policy".

So, Moscow resorted to zwischenzug. Last Saturday, the influential Moscow paper Nezavisimaya Gazeta reported that Russia proposed to reopen the key Soviet air base of Bombora on the Black Sea coast in Abkhazia. On Tuesday, Russia signed an agreement with Belarus setting up an integrated air defense system. On Wednesday, Medvedev used the CSTO forum to reiterate he was open to cooperation with the US in the fight against terrorism in Afghanistan.

Again, in related comments on Wednesday, Russian Deputy Foreign Minister Grigory Karasin said, "We hope that we and the United States will hold special and professional talks on this issue [of transit routes to Afghanistan] in the near future. We will see how effectively we can cooperate ... The US, Central Asia, China - we are all interested in a successful anti-terrorism operation in Afghanistan."

Karasin assured that the US's eviction from Manas "would not prove an obstruction". He said, "We [Russia] hope that we and the United States will hold special and professional talks on the issue in the near future. We will see how effectively we can cooperate."

In sum, the ball is in Obama's court. The big question is whether he can bulldoze the hardliners and jettison the heavy baggage of geopolitics that his faltering Afghan war is needlessly carrying.

Meanwhile, the shadow of US-Russian relations falls on the Hindu Kush. The Russian media reported that a high-level Afghan military delegation is expected in Moscow in the "near future". With a growing possibility that Obama may withdraw support for Afghan President Hamid Karzai, Moscow will be weighing its options.

The US is perched on a slippery slope in Afghanistan. The Taliban resurgence continues and the security situation is deteriorating, but NATO is unable to increase its force level or evolve an effective strategy. NATO supply lines have come under threat, but alternate routes are yet to be negotiated. The US's rift with the Karzai regime is widening, but a replacement is never easy to be catapulted into power in Kabul. Again, Washington should pressure Islamabad, but the situation in Pakistan is far too fragile to take any greater pressure.

It is against this complex backdrop that Iran's satellite took off into the star-studded night sky on Monday. Named Hope, its launch has a multiplier effect on geopolitics. Warning bells are ringing in Western capitals that any expectation of Tehran lowering its guard is misplaced. The launch can be seen as a technological feat, which it indeed is, but Hope also gives a hard message about Iran's military capability.

Experts estimate that the two-stage rocket used for its launch could easily carry a small warhead to a target 2,500 kilometers away. It may not be an inter-continental ballistic missile, but southern Europe comes within its range, as indeed the whole of Israel. Simply put, Iran has in hand a credible deterrent against a US-Israeli military attack.

White House press secretary Robert Gibbs described the launch as of "acute concern to this administration". German Foreign Minister Frank-Walter Steinmeir said after his first meeting with US Secretary of State Hillary Clinton, "We want to be helpful in making sure that the outstretched hand of President Obama is a strong hand." No doubt, these are strong words.

But an unmatchable German word is more to the point - zugzwang. It literally means "compelled to move". That is, a situation develops on the chessboard when any move a player makes can only weaken his position, but he is nonetheless compelled to make his move.

It may be far-fetched to say that Moscow and Tehran coordinated their respective zwischenzug, but certainly both keenly await Washington's zugzwang .

Ambassador M K Bhadrakumar was a career diplomat in the Indian Foreign Service. His assignments included the Soviet Union, South Korea, Sri Lanka, Germany, Afghanistan, Pakistan, Uzbekistan, Kuwait and Turkey.

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Author: M K Bhadrakumar
Original Source: Asia Times
Date Published: Feb 6, 2009
Web Source: http://www.atimes.com/atimes/Central_Asia/KB06Ag02.html
Date Accessed Online: 2009-02-09

What Kind of US President Would Chinese Like?

With Obama having completed his historic path to the White House, we feel a need to let it be known what kind of president Chinese would most welcome.

Over the past decade, every time the White House has changed hands, its relationship with China has hit rough seas. As each president sought to flex their newfound strength, China became one of the victims. Trade protectionism gave way to a new period of relationship repairing. Only by the third or fourth year did relations stabilize.

Bill Clinton and George Bush both spent two terms in the White House. The former at first supported setting limits on China's most favored nation status, while Bush framed China as a competitor. In the end, shared interest forced both countries to shelve their differences, and they were able to establish mutually agreeable terms for cooperation. Because of this, during both the Clinton and Bush era,the two countries benefited economically from the stable bilateral relationship.

This year, we noticed political and academic circles in both countries were more optimistic. They broadly believed that the relationship was entering a period of maturity, and that regardless of who would take office next, they would not be able to dramatically shake this trend. During this year's election, China did not become a major campaign issue, indicating that both sides agree over it more than they disagree.

Meanwhile, with the financial crisis still storming forward, economic issues have taken paramount importance. Two major engines of global economic growth – the US and China – have both begun to exhibit signs of slowdown. In the third quarter, the US economy shrank by 0.3%, while China's economy only recorded 9% growth.

With both countries gearing up to avoid an economic slide, stable relations are especially critical. It should be clear to the new president that both countries are mutually dependent on trade. Before the crisis, China accumulated US dollars through exporting, and spent most of them on Treasury bonds. Americans were able to maintain their consumption levels by borrowing, while also providing a huge market for Chinese products.

The global financial crisis has forced both countries to abandon previous paths for growth. China needs to base its growth on increasing domestic consumption, and the US must forfeit its reliance on heavy financial leverage to spur it. The new president should not simply blame China for a trade imbalance, and blindly demand that the yuan appreciate.

The November 15 G20 meeting is being seen as an opportunity for the US and the international community to jointly solve the financial crisis and build a new global financial system. At this juncture, we should not overly preoccupy ourselves with how to prevent the further deepening of the crisis, but instead focus on how to solve the fundamental and fatal flaws in the financial system. The new president should be willing to courageously take up this cause, and show more self-restraint in the printing of the US dollar.

Regarding other long-standing differences between the US and China, for example, in human rights, Tibet, and other problems, the new president should learn how to be more respectful of China's sovereignty. Countries will inevitably be different, and reckless condemnation will only deepen mistrust between them and leave problems unsolved. Globalization is bringing the hearts of people the world over closer together, and foresightedness and modesty will go a long way towards earning their respect.

China and the US have both affirmed that Taiwan is a part of China. With this significant premise set, the Taiwan question should not be a stumbling block for the two countries' relationship, and instead, be a chance to catalyze a stronger one. The new US president should not continue arms sales to Taiwan, as peace in the strait of Fermosa is of the interest of all parties. With both Taiwanese and mainlanders sharing the same blood and traditions, unification will come sooner or later, and the new president should work towards making this inevitability a more perfect and mature one.

Finally, we want to reiterate that Iraq has become the biggest mistake of the Bush presidency. We are looking forward to a president who does not walk with a big stick, strutting with the air of a haughty soldier. The new president should let the children wearing soldier's uniforms come home soon, and pour their energy into making the US economy flourish once again.

This is the kind of president we would like to see.

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Author: Wen Zhao
Original Source: The Economic Observer
Date Published: 2008-11-05
Web Source: http://www.eeo.com.cn/ens//Observer/2008/11/05/119199.html
Date Accessed Online: 2008-11-03