In Washington, The Bailout Is Toxic

The American political spectrum looked like a horseshoe yesterday, as lawmakers on the left and right ganged up to defeat the Troubled Asset Relief Program (TARP). After a week in which markets begged Washington to set aside political agendas, the $700b rescue plan was scuttled. Congressional leaders had pushed for coöperation, and in the end 133 government-skeptical Republicans joined with 95 market-skeptical Democrats in voting against the measure.

Less than a month before Representatives would stand for reëlection, few were willing to incur the political risk of an increasingly unpopular bailout. News of the failed vote sent global stock markets tumbling and left President George Bush and Treasury Secretary Henry Paulson scrambling to craft new legislation. The Dow Jones industrial average had nearly 8%, wiping out some $1.2t in shareholder value.

The news forced Asian and European markets down, while frantic sell-offs in Russia forced yet another closure of the equities exchange. News from Wachovia, Bradford & Bingley in Britain, and Fortis in Belgium all raised fears over nationalization and deepening bank problems. The spread between 3-moth Libor and 3-month overnight index swaps, a measure of stress on the banking system, blew out yesterday to its highest point in the crisis.

EU Trade Commissioner Peter Mandelson laid into American lawmakers, saying that their rejection of the Paulson plan showed "irresponsibility and political partisanship." Mr Mandelson may soon find himself ensnarled in such political headaches. With so many national governments, the EU could struggle to forge consensus around a rescue plan for European banks. In certain respects, European banks, which are more highly levered than American banks, could be at greater risk of collapse. And with only 4 of the top 20 banks now in the US, it is clear that governments across the globe will need to involve themselves in restoring financial stability. 

Now hedge funds are facing major redemptions, as investors pull their money out of a frightfully volatile market. While many Americans have been reluctant to bail out reckless investment banks, hedge funds are intimately connected to pension plans, endowments, and foundations that are important to a much broader cross-section of the country. 

As these investment vehicles are put under strain, there may be a shift in the electoral pressure felt by lawmakers. Voters may have been unhappy with the bailout, but they are likely to feel the increasing effects of a financial crisis, and will want some form of relief for the markets. In this next round of negotiations, Mr Paulson must do a better job of connecting the current financial peril on Wall Street to average Americans watching from afar. 

For many voters, TARP was itself a toxic asset. If the (highly likely) stock market slide continues, however, these same constituents will press for some form of government rescue plan. In the meantime, the markets try to hang on during a wild ride. 

Somali Pirates Stuck With Nasty Cargo

In recent days, media outlets have been reporting about a Belize-flagged vessel that was transporting more than 30 Soviet-designed T-72 tanks to Mombassa, Kenya. Last Thursday, the Ukrainian cargo ship, MV Faina, was hijacked by about 100 well-armed Somali pirates in the Gulf of Aden. After boarding the ship, the attackers claimed the vessel was actually headed to Juba, in southern Sudan. It appeared the pirates hoped to use this compromising information (Sudan is under a UN arms embargo) to secure a $20m ransom payment from Ukraine. 

News of the attack is not so surprising. Somalia has been without a functioning government for 17 years, during which time the country's lawlessness has spread to the waterways off the Horn of Africa. As one of the most trafficked regions in the open seas, the Gulf of Aden hosts about 10% of the world's seaborne trade. And this year alone, pirates have reportedly attacked more than 50 merchant vessels commanding million-dollar ransom payments.

Nevertheless, an earlier pirate attack from August 21 is beginning to stir up serious concern. An Iranian merchant ship, the MV Iran Deyanat, was highjacked southeast of al-Makalla in Yemen by about 40 Somali pirates. The vessel was taken to Eyl, a small fishing village in the Puntland region of northern Somalia, which is host to a number of crime syndicates.

The MV Iran Deyanat left port in Nanjing, China at the end of July and was reportedly headed to Rotterdam for a German client. According to documents, the ship's declared cargo was "minerals" and "industrial products." When the pirates boarded the ship to inspect the freight, however, many became seriously ill and some died. Andrew Mwangura, the Director of East African Seafarers' Assistance Programme, claimed that, "Our sources say it contains chemicals, dangerous chemicals." 

News of the toxic cargo has rattled local officials. The Puntland Minister of Minerals and Oil, Hassan Allore Osman, dispatched negotiators to meet with the pirates on September 4, in an effort to inspect the ship. Instead, the pirates have prevented access to the sealed cargo containers, which they have threatened to detonate. Progress in the standoff is unclear, although Mr Osman confirmed that several pirates had died, while others had lost hair and suffered skin burns. 

The MV Iran Deyanat is owned and operated by the Islamic Republic of Iran Shipping Lines (IRISL), a nationalized company under the auspices of the Iranian military. Back on September 10, the US Treasury announced sanctions against the IRISL for its part in Iran's nuclear program. The company has been accused of transporting materials to UN designated proliferators and falsifying documents to move illicit cargo. Indeed, many analysts have suggested that the toxic shipment includes chemical weapons headed to Eritrea. The Islamic Courts Union (ICU), a Somali insurgent group, has historically received financial and material support from Eritrea. In 2006, Iran provided the ICU with shoulder-fired surface-to-air missiles and antitank missiles. 

The International Maritime Bureau (IMB) estimates that anywhere from $1b to $16b is lost each year due to international piracy. Such statistics are woefully inaccurate, however. Shipping companies will often fail to report attacks or pay "no questions asked" bribes to ensure safe passage. Honest disclosures about the treacherous routes their cargo must navigate would undoubtedly raise hefty insurance premiums. The shadowy elements of the maritime economy only exacerbate the sort of confusion that now shrouds the MV Iran Deyanat. 

After the UN Security Council unanimously passed a new Iranian resolution on Sunday, any further indications that Iran was involved in shipping chemical material would likely come under international scrutiny. 

Maritime chokepoints in hostile waters are prime targets for pirate attacks. As a result of the resent surge in hijackings, Somali crews now have some 14 vessels and over 300 hostages held off the coast. There is one ship, however, that should receive special attention from the Djibouti-based multinational taskforce that now patrols the Gulf of Aden. A few pirates may have gotten crude justice for their trade, but the real offender might be a more familiar miscreant: Iran. 

Eight for '08

After a week of politiking and grandstanding on the economy, US presidential candidates John McCain and Barak Obama will appear at Ole Miss this evening to debate foreign policy. No doubt, these men will discuss the current financial crisis and the proposed bailout; however, their principal focus will be on matters happening outside the US.

In presidential campaigns, foreign policy is a speculative art. Once in office, a candidate may face global developments unforeseen during the general election. Indeed, there are historical examples of unexpected crises that defined an American president. John F. Kennedy could not have predicted the Cuban missile crisis in 1962, nor did Jimmy Carter expect to witness the Islamic Revolution in 1979. One would expect Messrs McCain or Obama to face similar unscripted challenges in the next term.

Nevertheless, there are certain foreign policy issues which stand plainly before the candidates. What is more, the ways in which these men confront such challenges suggest the policies that each might craft in the future. From that perspective, here are eight questions for Election '08. 

1. In your opinion, what were the critical elements to the recent reduction in violence in Iraq, and how would this success be replicated in other counterinsurgency struggles? 

Mr McCain and officials in the Bush administration have scored points in recent months by claiming that the surge, by all accounts a huge political gamble, has been a success in Iraq. The 2007 strategy shift was designed to increase the troop levels in Baghdad and Anbar Province by more than 20,000 troops in an effort to "create space for political progress." In September of last year, General David Patraeus told lawmakers that "the military objectives of the surge are, in large measure, being met." Mr McCain has asserted that the major reason for decreasing violence is the number of troops. This logic would suggest that the US should look to deploy more brigades when attempting to clamp down on insurgents.

There are, of course, alternate explanations for the improved security climate in Baghdad and Anbar province. First, many of the Shia-Sunni neighborhoods that saw the worst sectarian violence are, in effect, ethnically cleansed. Second, Iraq has benefitted from the ceasefire which Shia cleric Moqtada al-Sadr's Mahdi army struck with coalition forces in August 2007. Third, American forces began to embrace the organic Anbar Awakening and began to pay Sunni militias to combat al Qaeda forces. And finally, analysts have pointed to certain highly classified strategic changes in Iraq that have led to the targeted assassination of command-level insurgents.

If these developments are more important the troop numbers vis-á-vis Iraqi stability, they would provide a very different blueprint for how the US should conduct its global war on terror.

2. If you become president, how would you conduct the war in Afghanistan?

It should be noted that an updated Afghan policy really does not exist at the moment. Mr Obama has made a point of calling Afghanistan the "central front in the war on terror," and the Bush administration has recently signaled it will shift forces to focus on fighting the Taliban. In the mid-1980s, the Soviets deployed 120,000 troops to Afghanistan but were still defeated in a costly counterinsurgency. Today the US and NATO are attempting to quell the resurgent Taliban with a mere 50,000 troops. 

Some analysts suggest a massive increase in forces is needed to hold the major cities like Kabul and the Karzai government. Still others contend that the terrain is simply too difficult to patrol, and that American and NATO forces should work with the Taliban's rival tribes in an effort to replicated the progress in Anbar. 

3. Given Pakistan's inability to control the Northwest Frontier Province, how would you address the recent problems with cross-border raids conducted by American forces?

Any attempt to consider Afghan military policy without Pakistan is politically illiterate. The vaunted Pakistani intelligence service, ISI, helped start the Taliban, and the agency still has a tangled web of conflicting loyalties. In recent days, Pakistani forces have fired on American helicopters in what have been described as accidental border skirmishes. Nevertheless, the debate over "hot pursuit" is one that will shape US policy in Afghanistan and its America's relations with the Zardari government.

4. In light of the August war, how will you deal with a resurgent Russia that insists on maintaining a sphere of influence along its border region?

Russia's incursion into Georgia was a clear message to the Caucasus that it would not allow petulant pro-Western states in the former Soviet Union. More importantly, the Kremlin recognizes that the US is tied down by war in Iraq and Afghanistan, and has used this window of opportunity to exert pressure in critical regions. Recent arms deals with the Syrians and talks with Iran should certainly concern the next US president.

5. Article 5 of the NATO charter states that an attack on any one member should be considered an attack on all members, triggering a military response of collective self-defense. In your opinion, should the US welcome states like Georgia into NATO and risk being dragged into a conflict like the one in August?

The recent events in Georgia have effectively ended the era in which security guarantees could be dispensed without concern for the consequences of such a commitment. And in many respects, the brash political moves of Georgian President Mikheil Saakashvili have made it more difficult for NATO to offer membership action plans in the Caucasus. At a fundamental level, the next American president will need to seriously consider whether NATO should remain as a military organization or transition toward a glorified political club.

6. How will you deal with the nuclear program in Iran and the country's increasing influence in the Middle East?

Many analysts believe that policy hawks have overstated the threat from Iran's nuclear program. In reality, the nuclear issue is an effective bargaining chip for Tehran, which has suffered under nearly 30 years of sanctions. Unlike the Libyans (who traded their nuclear program for an end to sanctions in 2003), Iran imagines an endgame in which it is able to keep some semblance of a nuclear program, which may ultimately become weaponized. 

Iran is a country of contradictions: the world's 28th largest economy, ranked 71st in GDP per capita, has the 3rd largest oil reserves, and an energy shortages in its own capital. These realities are in large part due to the frightening geography of Iran (huge mountain ranges and uninhabitable central plains), which makes it very difficult to establish infrastructure and drives up exploration and export costs for the energy sector.

Iran has used this terrain to hide its nuclear program. Any attempts to knock out enrichment plants (recently considered by the Israelis) would likely be foiled by their geographic spread and depth (many facilities are underground). It seems a successful end to the nuclear standoff will have to be diplomatic and not military. 

7. Do you consider China a strategic threat or an important ally?

Chinese economic growth has been seen as a threat to the financial influence of the US, but the global credit seizure may, temporarily, render such comparisons moot. Some analysts have pointed to the rapidly increasing investment Beijing has made in its military budget. Still, the Chinese army is effectively land-locked and the country has no ability to project naval power. Sino-American relations are critical for future negotiations on climate change and the global energy equation. Moreover, China's broad presence in Africa may well complicate any efforts by the US to shape policy on the continent.

8. Do you view al Qaeda-style terrorism as an existential threat to the US?

As a strategy, terrorism relies on an overreaction. Al Qaeda's hope with the 9/11 attacks was to draw the US into a costly war in the Middle East, a script which the Americans followed tragically. Preëmptive strikes and military responses to terrorism are the core of the Bush Doctrine, and are likely to remain in some form of American foreign policy. Is this wise? Likely not. The global war on terror has indeed debilitated al Qaeda: Osama bin Laden and Ayman al-Zawahiri are still at large, but their high watermark as the functional leaders of spectacular attacks has passed. The next president would do well to follow a more European model for counterterrorism and demilitarize the issue. The legal course has had its own headaches, but they pale in comparison to the bloody, expensive, and misdirected war in Iraq.

This is an important debate both for the candidates and for America. For too long the world has known Mr Bush's constancy of incompetence. Perhaps, tonight is the start of something new.

In Pyongyang, Brinkmanship Pays

There is a laundry list of daunting tasks that await the next American president. He must ease the financial crisis, manage two difficult wars, and perform the sort of diplomatic stagecraft that will counter regional hegemons in Russia and China. Now add the nuclear standoff in North Korea.

President George Bush will bequeath a number of foreign policy headaches to his successor, but the crisis in Pyongyang should not be one. In recent days, North Korea has expelled  United National atomic inspectors from its Yongbyon nuclear facility and announced plans to restart its bomb-making enrichment process. The International Atomic Energy Agency (IAEA) said that the North Koreans had removed seals and surveillance cameras from the Yongbyon plant and intend to reactivate the Soviet-era facility next week.

These developments signal a breakdown in the disarmament-for-aid negotiations, which began back in 2003. The six-party talks were deadlocked until October 2007 when North Korea agreed to disable its main nuclear reactor and fully disclose the details of its nuclear program to the IAEA. In exchange, the cash-strapped regime would receive economic aid and heavy fuel oil from neighboring South Korea. As added incentive, the Bush administration announced that compliance from the Pyongyang would see the North taken off the US state sponsors of terrorism list.

Washington delayed the move, however, as the North Koreans failed to agree on verification standards outlined by the IAEA. In doing so, the US unwittingly provided the North with a way out of the scheduled disarmament. Last month, Pyongyang claimed that denuclearization talks had failed, and this week moved to resume its nuclear program. Such heightened defiance of the international community represents a serious blow to the administration's efforts to halt weapons proliferation.

Surely, this comes at no surprise. Brinkmanship, in which a negotiating party leverages the threat of disaster to secure a favorable outcome, has been a core principle in Pyongyang's nuclear strategy. In an effort to win concessions from the international community, North Korea has frequently pushed the nuclear standoff to the brink. In 2006, the North tested long-range ballistic missiles and later staged a partially successful test of a nuclear weapon. These actions take North Korea farther away from the negotiating table, which means nonproliferators must offer even greater incentives for it to come back. 

Given the current approach to the negotiations, the North stands to gain more from brinkmanship than coöperation. Indeed, Pyongyang has benefitted from America's ad hoc nuclear policy, successfully exploiting subtle rifts in the international community. In addition, a slew of larger, more immediate problems have allowed North Korea to operate in the shadows of political consciousness. It is to be expected that the North will periodically make noise enough to extract lucrative (and much needed) aid packages. 

Pyonyang's announcement this week is essentially a scare tactic designed to piggy-back on recent fears about Kim Jong Il's health and the stability of the regime. The US and its allies should not rush to appease the North. As Secretary of State Condoleezza Rice remarked, "We have been through ups and downs in this process before." But as Washington pushes for the standardization of nuclear monitoring procedures, it must likewise clarify its own position on nuclear proliferation. Accommodating India, isolating Iran, and neglecting North Korea is no way to forge a coherent strategy.

For the moment, Russia and China view North Korea as a potential threat to stability in the region and will make their own moves to keep Pyongyang in check. Nonetheless, with a looming succession of leadership in the North, Washington should be prepared to bring a renewed focus to the negotiating table. 

The will be a lot of questions for the new American president. This is one he should get right.

It's The Insolvency, Stupid

Shoot first, ask questions later. In the wake of last week's financial nightmare, this philosophy was remarkably popular. Many observers pressed the US Congress to quickly approve a $700b bailout plan to buy up distressed assets and restore confidence to the American economy. From this perspective, the federal government could not afford to get bogged down in legislative details as markets entered a negative spiral. In reality, measured deliberations are the only way in which the federal government can literally afford to fix the crisis.

Earlier this week, Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke rolled out a plan for the US Treasury to purchase huge numbers of distressed assets from various financial institutions, at a premium. Effectively the federal government would create a latter-day Resolution Trust Corporation (RTC) to liquidate bad debt, as it did in the Savings and Loans crisis of 1989. These assets would be purchased at above-market value and transferred onto the taxpayers' balance sheet.

In theory, the bailout would relieve a huge credit burden that has frozen interbank lending and commercial paper markets. With distressed assets burdening all the major financials, banks have been uncomfortable making valuations in a very volatile market. According to the Treasury's plan, financial institutions would be able to clear their balance sheets of toxic paper and begin lending once again. 

Upon closer review, however, such a plan addresses only one side of the current economic crisis: illiquidity. Firms are constrained by mortgage backed securities (MBS) which they cannot sell and cannot borrow against. As a result, financials are unwilling to provide short- and even long-term cash without spectacular interest rates. The fundamental market loses its fundamental lubricant: liquidity.

The Treasury's plan would likely ease the credit squeeze temporarily. Unfortunately, it has already experimented with MBS bailouts and seen very limited success. In March of 2008, the Treasury unveiled its Term Security Lending Facility (TSLF) program, which was designed to buy investment-grade debt securities from financial institutions and unfreeze the credit market. Banks effectively blew out the allocated funding, as they attempted to unload depreciated collateral. There was a voracious appetite for cash, and yet the economy has only accelerated towards its breaking point.

These events would indicate that the markets are also suffering from a solvency crisis. Simply put, there is not enough cash available to cover the debt in the economy. The US total debt-to-GDP ratio (including government, private, individual debts) is above 300%, and the bailout will only exacerbate that figure. In many respects, the US must now confront the harsh realities of its FIRE (Finance, Insurance, Real Estate) economy. Unlike the speculative dot-com bubble in 2000, the complex financial instruments related to mortgage payments have left no usable infrastructure. Instead, the country is awash in big consumer durables: vacant houses.

Even as Congress battles in vain to limit golden parachutes (deferred payments and legal loopholes will ensure C-level executives get their millions), it looks as though some form of the rescue bill is sure to pass. Will the market unwind favorable, or will the US resemble Russia in 1998 and Argentina in 2001? One thing seems for sure, however, Wall Street is forever changed.

For a handful of brilliant individuals, it has been a fantastic party. Unfortunately, it looks like taxpayers will be picking up the tab.

Autumn in NY, With Ahmadinejad

For the past few years, as summer turns to fall, New York has welcomed one of the world's most polarizing figures. With the United Nations General Assembly beginning its 61st session this week, Iranian President Mahmoud Ahmadinejad will again address leaders from across the globe. Unlike his previous visits, Mr Ahmadinejad has not monopolized the headlines of American and international news outlets. Instead, the world is intently watching lawmakers in the US work out a massive economic rescue bill.

The current financial turmoil comes at a bad time for Iranian analysts who might otherwise use the the occasion to review American policies in the Middle East. Ever since the US began its global war on terrorism, Iran has reëmerged as an imperial power, seeking to project its influence throughout the region. As a result, American concerns for Iraq, the energy equation, Lebanon, Syria, and the Israeli-Palestinian peace process must now account for Iran's emboldened position.

At a geopolitical level, the wars in Afghanistan and Iraq have primarily benefitted the Iranians. In these campaigns, the US eliminated two of Iran's regional adversaries when it toppled the Taliban in November 2001 and Saddam Hussein in April 2003. Moreover, coalition forces have been unable to establish viable governments in these countries. The subsequent power vacuüm has presented the Iranians with an opportunity to become the regional hegemon.

Any attempt to craft policy positions on Iran should be aware of three basic realities. First, Iran faces real security threats in the region. Of its seven bordering neighbors, the US has a military presence in three (Iraq, Afghanistan, and Turkey) and overt military influence in another (Pakistan). Iran is also subject to instability from the Caucasus, and the social strains coming from the millions of refugees flooding across its borders with Afghanistan and Iraq. Failures to understand the Iran's concerns in a bad neighborhood have compromised US relations with Tehran. 

Second, the image of Iran's strength belies deeper problems. To be sure, Iran's oil exports provide the global economy with 2.7 million barrels per day (mb/d), which exceeds the existing global spare capacity of about 1.5 mb/d. Indeed, were Iranian production to be taken offline by political decisions or military attacks, the energy market would panic. But revenues from high oil prices have papered over some of the gross domestic failings of the present administration. Mr Ahmadinejad's inept government has led to high unemployment, high inflation, and a stagnant non-hydrocarbon export sector. There are pressure points within the Iranian economy that might be better exploited than the blunt-force sanctions that the US has heretofore applied.

Third, the Iranian nuclear issue is part and parcel of domestic politics. Ever since the nuclear program began back in the pre-revolutionary period of the Shah in the 1960s, it has been an source of national pride. For this reason, the Iranians rejected a proposal from the so-called EU-3 (UK, France, and Germany) to supply Iran with light-water reactors, which do not use weapons grade uranium. According to the chief Iranian negotiator, Hassan Rohani, such a deal would violate Iran's national sovereignty. This rabid nationalism is the way in which the Iranian leadership circumvents its crisis of legitimacy. 

Iranian politics have never been democratic, but the current administration has backpedalled from the quasi-republican government that existed under former-president Mohammad Khatami. Indeed, the Iranian political process is approaching a monarchy. A series of policy changes have strengthened the shadow government of the leadership council, which ostensibly serves as a moral guardian for the country. The Supreme Leader, Ali Khamenei, now commands the loyalty and deference of candidates who wish to serve in public office.

Under these circumstances, Iran heads into an election year. Rather improbably, Mr Ahmadinejad is still the favorite. In addition to the country's economic problems, Tehran suffers from water shortages and mid-day power cuts. The Supreme Leader has also disagreed publicly with Mr Ahmadinejad (on Israel and negotiations with the West), but has suggested that his president should serve another four years. 

Iranians are aware of the political theatre with which they are presented. In some ways, the country looks as it did in the 1970s: awash in oil money, rife with corruption, and growing resentment from reformists. But predictions of an another revolution are unrealistic. The leadership council is simply too strong at this point to allow wholesale political upheaval. And so the next US president should be prepared to negotiate accordingly. He should enlist Iran's help with regional security challenges and leverage economic pressure points in the ongoing nuclear discussion.

The leaves are changing in Manhattan, one can only hope the policies in Washington will, too. 

Old Foes Return To Unseat Mbeki

The rumblings started more than a week ago in Pietermaritzberg. On September 12, South Africa's High Court ruled that corruption charges against ANC president Jacob Zuma were invalid on procedural grounds. Judge Chris Nicholson ripped into President Thabo Mbeki and the National Prosecuting Authority (NPA) for colluding in a politically motivated vendetta against Mr Zuma. The decision touched off a raucous celebration from Mr Zuma's supporters and a week of political pressure that forced Mr Mbeki to resign this past weekend. 

The case, still unresolved, has hung like a dark cloud over South African politics since 2004. The following year, Mr Zuma's business partner, Schabir Shaik, was convicted on fraud and corruption charges relating to a $5b South African arms procurement deal in the late 1990s. The imbroglio led Mr Mbeki to dismiss his deputy president in mid-2005 and produced a series of embarrassing setbacks for the country's judiciary. In September 2006, the NPA was denied a postponement after the prosecution was repeated unprepared for trial. While the most recent decision offers no position on Mr Zuma's guilt or innocence, the ruling clears the way for him to become president in next summer's presidential elections. 

Relieved of parliamentary duties three years ago, Mr Zuma has since reëmerged as a dominant figure in South African politics. Last December, he was elected President of the ruling ANC party, dealing a bitter defeat to Mr Mbeki who had held the post since 1997. In many ways, Mr Zuma's victory was a sign of the increasing frustration directed at South Africa's president. While Mr Mbeki arrived as the hand-picked and widely praised successor of Nelson Mandela, he recently lost the support of the South African Communist Party (SACP) and the powerful trade union movement, Cosatu. These political factions comprise the formal alliance of the governing ANC, and have increasingly shifted their loyalties to Mr Zuma. 

Although he was a former member of the SACP, Mr Mbeki instituted more conventional economic reforms in an effort to increase the country's prosperity. Indeed, tight fiscal policies, more liberalized trade agreements, and greater privatization have helped annual growth rates reach 5% in recent years. These advances, however significant for South Africa, were not enough to win over the support of party members who felt their core values had been trampled. 

Perhaps the most important factor in Mr Mbeki's resignation was his legion of political adversaries. In addition to his alleged political interference with Mr Zuma's case, Mr Mbeki accused three of the ANC's most respected leaders of subversion in 2001. Former ANC secretary-general Cyril Ramaphosa and former provincial premiers Tokyo Sexwale and Mathews Phosa were marginalized in a bizarre, and still controversial, move by Mr Mbeki. No evidence was ever presented, and no charges were ever filed, but the episode changed the political landscape within South Africa.

Nevertheless, as with Mr Zuma, these figures resurfaced. Mr Phosa is currently the ANC Treasurer General and Messrs Sexwale and Ramaphosa are part of the 86-member National Executive Committee (NEC), which voted to oust Mr Mbeki this past weekend. No doubt their influence was used to settle an old political score.

On Monday, sources within the ANC tipped Kgalema Motlanthe as the overwhelming favorite to become South Africa's caretaker president. If confirmed on Thursday, Mr Motlanthe would suddenly become one of the most powerful figures on the continent, quite a rise for the MP who was only elected in May. Mr Motlanthe is a strong ally of Mr Zuma, however, and it is likely that he will act as a figurehead for the ANC president until elections early next year.

These are difficult times for South Africa. Mr Mbeki's demise was predictable, but not at this rate. Many observers were still expecting Mr Zuma's legal troubles to forestall his ascendancy, which might have allowed the outgoing president to appoint his own successor. Instead, it appears the country is hurtling towards a dramatic change in leadership. 

Aside from his own checkered past, which include charges of rape and alarming views about HIV and AIDS, Mr Zuma has some unsavory supporters. ANC Youth League leader, Julius Malema, has been an outspoken critic of the current administration and said in June, "We are prepared to die for Zuma. We are prepared to take up arms and kill for Zuma." The remarks were parodied by radio disk jockeys and brushed aside by parliamentary figures. Given recent events, however, the message is harrowing.

Should Mr Zuma become president, he will inherit a country that is facing drastic power shortages, alarming levels of violent crime, a full-blown HIV/AIDS epidemic, and an unstable neighbor in Zimbabwe. The Court's September 12 ruling claimed that Mr Zuma's corruption charges were part of "some great political contest or game." On the contrary, Mr Nicholson, the matter is much more serious. 

From Russia, With Volatility

Russia is familiar with these sorts of historical comparisons. After the war in Georgia, many commentators likened its behavior to Soviet aggression of the 1980s. In the last week, however, Russia has been reminded of an all-together different date: 1998. In the so-called "Ruble crisis" of that year, falling commodity prices and evaporating tax revenues caused the Russian government to default on its national debt. 

During the recent global financial crisis, Russia's dollar-based RTS Index lost 21% before officials decided to shut down the exchange for two days. Russian stocks, which had outperformed all other world markets over the last decade, quickly became the cheapest among the world's 20 largest economies. Emerging market analysts pointed to a vortex of despair that wiped out share prices and forced Russian authorities to close equity exchanges.

Earlier this week Russia's Finance Ministry announced that it would make $44b available for its biggest banks, and yesterday President Dmitri Medvedev issued a government rescue plan that would inject about $130b in liquidity into the market. The effect was instant and dramatic. Russia's two main exchanges surged on Friday morning, with trading twice suspended for one-hour periods to prevent overheating. The RTS Index gained 20%, the best single-day performance since the index was introduced in 1995.

Still, traders warned of future volatility in the market. Russia faces a quartet of forces that may compromise the economy's fundamentals. First, the hostile foreign policy coming from the Kremlin has unnerved investors. As a result of the war in Georgia, some $35b has left Russian markets, and the continuing anti-Western diplomacy is unlikely to reverse this trend.

Second, the recent drop in oil prices has put stress on an economy, and indeed a government, that is overwhelmingly dependent on commodity prices. Crude is down 18% since August, and in an effort to spur growth, the administration recently cut the tax on oil companies.

Third, recent business developments in Russia have done little to ensure investors of its commitment to property rights and transparency. Earlier this year, tensions rose between Russian government officials and British executives at TNK-BP, the joint-venture oil company. CEO Robert Dudley was aggressively forced out of the company after shareholders asked the Kremlin to intervene. In July, PM Vladimir Putin openly criticized the chief executive of Mechel, a coal mining and steel company, a moved which wiped $6b in shareholder value from the company. These events took place against the backdrop of a increasingly strong-arm economic policy, which Mr Putin had used to seize state control of Yukos oil in 2004.

Finally, there is the continuing credit freeze that is felt throughout the global economy. Russia once assumed that it would become the world's next financial capital, riding the wave of a commodity boom. Not so fast. Russia must first deepen its domestic capital pool, facilitate a more competitive and effective bank lending system, and streamline the policies of its central bank. The country is in better shape than it was 10 years ago: it has pricing power from immense oil reserves and has the world's third largest hard currency reserves, at more than $560b. But the past week has shown that Russia is not immune to the global credit contagion.

The country's oligarchs have never quite embraced free-market capitalism, instead depending on political influence. For a vibrant economy to grow in Russia, the country would do well to use this period of capital restructuring for something equally pressing: political reform. 

For The Fed: Try, Try Again

It's certainly not for lack of effort. The global financial market crisis has decimated stock exchanges across the world this week, in spite of several efforts by the US Federal Reserve to reassure investors. In the latest rescue measure, the Fed announced early Thursday that the world's main central banks would inject $180b of dollar liquidity into the market. Along with the European Central Bank, the Bank of England, the Bank of Japan, the Bank of Canada and the Swiss National Bank, the Fed's Board of Governors approved a plan for emergency intervention.

Officials hope the new liquidity will help thaw a frozen credit market. On Wednesday, interbank lending ground to a halt, as the capital flight to "safety" saw a huge increase in the demand for US treasuries. With banks hoarding their cash, overnight lending rates were at record levels this week, as measured by the London interbank offered rate (Libor). While the US central bank has a target of about 2% for short term interest rates, these lending rates shot up on the open market. The Libor was at 5.03% on Wednesday, although the rate was already easing (down 119 basis points) with the announcement of increased liquidity. 

Two other variables highlighted the severity of the crisis. The government repurchase (repo) market stalled on Wednesday with the overwhelming demand for securities. In repo agreements, the Federal Open Market Committee effectively buys treasuries from primary dealers in order to increase reserves in the banking system. The transaction works as a loan with the treasury security as collateral. This week, however, skittish investors have grabbed up bonds and exhausted supply. 

The swap spread also yawned this week, with the so-called TED spread clearing 3% for the first time since the stock market fall of October 1987. The swap spread is a barometer for risk appetite in the economy, with a wide spread signaling a lack of confidence in the market. It is a measure of the difference between fixed interest rates (usually the Libor) and US treasury rates, which moved sharply in opposite directions this week. 

The liquidity injection appeared to rally the markets, though the effect seems transient. Asian stocks experienced volatile trading and ultimately closed at their lowest levels since last October. European markets posted modest gains, but the Dow Jones Industrials Average was trading below the day's open.

Banks from the world's largest economies rallied together after the staggering consequences of Lehman Brothers' collapse on Monday. There is a pressing need for dollars as many banks have their reserves tied up in Lehman's bankruptcy proceedings. In general, money markets have been under considerable strain this week as investors move out of stocks and into cash. This trend may well continue until the Darwinian climate reaches a new equilibrium, and investors come out of hiding. 

The central banks' liquidity deal was announced at 3am in the US. If this past week is any indication, financial officials still have many sleepless nights ahead.

Kadima: On the Clock

On a day when much of the world focused on a global economic free-fall, the main party in Israel's governing coalition voted for a new leader Wednesday. Exit polls showed foreign minister Tzipi Livni leading Transport minister Shaul Mofaz by a comfortable margin of 48% to 37%, and was headed to replace outgoing PM Ehud Olmert. The Kadima party has about 74,000 members who could vote in the election, although reports indicated that only about 1 in 5 turned out at the polls. 

Ms Livni ran a campaign which highlighted her intense involvement with the Palestinian peace process and a plan to target government corruption. Her reputation stood in contrast to the more hawkish Mr Mofaz, who commanded Israeli military forces against the second Intifada in 2000. Both ministers were looking to follow the embattled Mr Olmert, who announced plans to step down in July. The prime minister faced increasing criticism for his handling of Israel's war with Hezbollah in 2006, and was formally indicted on two counts of misusing government funds. 

Ms Livni's victory means she could become the first female PM since Golda Meir resigned from office in 1974. Still, there are some significant hurdles to clear. According to Israeli President Shimon Peres, Ms Livni has 42 days to cobble together a ruling coalition that commands at least 61 of the 120 seats in the Knesset legislature. Recent political infighting has convinced many analysts that Ms Livni will be unable to hold together such an alliance. If she fails, Israel would likely face another round of elections in six months that could reshape its political landscape.

The Kadima Party was founded in 2005 by Ariel Sharon, after the former PM broke away from his right-wing Likud Party. Most commentators agree that the political spectrum in Israel is largely determined by attitudes toward the occupied territories in Gaza and the West Bank. Mr Sharon argued that in order for Israel to remain a viable state in the Arab world, it was necessary to dismantle Jewish settlements and disengage from the territories. Such concessions roiled conservatives and led to the foundation of the new "center-left" party. 

Because of the Palestinian issue, both Mr Olmert and Ms Livni, who was a former Mossad agent, came over from Likud during the initial split. In contrast, Mr Mofaz initially rejected Mr Sharon's invitation to join Kadima, but ultimately bowed to his PM in late 2005. Mr Mofaz is indeed much closer to Likud; he opposes any deal with Syria that would give up the Golan Heights and is unwilling to negotiate on the final status of Jerusalem with Palestinians. While these positions certainly compromised Mr Mofaz within Kadima, his hardline is better suited to coalition-building with Israel's conservative politicians.

While the Palestinian issue is effectively definitional for Kadima, actual peace negotiations are likely to lose momentum in the wake of the election. Domestic politics and the typical horse-trading with fringe elements of the Israeli government will no doubt dominate Ms Livni's agenda. More importantly, it is hard to imagine that Mr Olmert's credibility in the negotiations will extend much longer. On Tuesday, the outgoing prime minister met again with Mahmoud Abbas, head of the Palestinian Authority, to discuss the core issues of a peace deal. 

These regular meetings started in November 2007, although there is little to show for the efforts. Mr Abbas and his Fatah party are undermined by the violent whims of Hamas, and Mr Olmert (technically still a caretaker of the Israeli government) is no longer a true power broker. Indeed, if Israel does move to snap elections, current support levels indicate that Binyamin Netanyahu, the opposition Likud leader, would control the government. The shadow of Mr Netanyahu's uncompromising stance on the Palestinians already looms over the peace process.

This is not to say that an agreement is impossible. Indeed, the Bush administration is trying desperately to orchestrate a deal before the end of the year. Mr Olmert, no doubt to salvage his own reputation, is pushing for a "shelf" or "interim" agreement to be worked out with the Palestinians. Rushing such a critical peace deal is no way to save face. If American officials are concerned about a return to the hardline Likud policies, they should work to strengthen the current coalition, not the political reprobate Mr Olmert has become. The current domestic unpredictability in Israel (long since a reality for the Palestinians) is hardly the sort of climate needed for a lasting deal. For now, regarding the peace agreement, no news is good news. 

Orange Revolution Is Bruised Fruit

As if the global market collapse weren't enough. Ukraine's parliamentary speaker Arseny Yatsenyuk announced Tuesday that the country's Western-leaning governing coalition had officially fallen apart. Back on September 3, President Victor Yushchenko pulled out of the coalition with his erstwhile ally, PM Yulia Tymoshenko. The two sides had 10 days to reconcile the political rift, but were unable to come to any agreement. Should the frost continue for another 30 days, Mr Yuskchenko has the right to dissolve parliament and call for another round of elections.

Back in November of 2004, Mr Yushchenko and Ms Tymoshenko were global icons as they led the Orange Revolution in Ukraine. After a fraudulent round of presidential elections triggered widespread protest, Mr Yushchenko won a run-off against the sitting PM Victor Yanukovych. The election was hailed as a victory for political progress in the region. Mr Yushchenko and his Our Ukraine party endured a nasty campaign (his supporters were intimidated and he was poisoned) en route to a peaceful transfer of power. For her part, Ms Tymoshenko lent the opposition her populist charisma in exchange for assurances that she would become prime minister. On the heels of an unsavory, Kremlin-backed regime, Mr Yushchenko and Ms Tymoshenko were seen as the darlings of democracy. 

The political honeymoon did not last long. In September 2005, a series of senior officials resigned from the ruling coalition in response to political infighting, and Mr Yushchenko dismissed the government headed by Ms Tymoshenko. Since then, Ukraine's political landscape has been reeling. In 2006, Mr Yanukovych's pro-Russian Party of Regions dominated the parliamentary elections, securing the most seats ahead of Ms Tymoshenko's bloc. The Our Ukraine party came in a humiliating third. Faced with accepting his bitter rival Mr Yanukovych as the new PM, Mr Yushchenko hastily organized a new coalition that would enable his former prime minister, Ms Tymoshenko, to head the government. 

Such political wrangles were only exacerbated by economic troubles that began in 2003. Ukraine is home to the fastest rise in price levels in Europe (inflation now tops 31%) and has been struggling to stimulate the sort of growth that can lift some 8% of its population out of poverty. Indeed, the present rue began with disagreements over the struggling economy. In May, Ms Tymoshenko prevented President Yushchenko from addressing parliament as an apparent response to the premier's veto on government policies. There are historic tensions between these camps on how to navigate the sale of state assets, such as its metallurgic enterprises.

More recently, and indeed more openly, the president and PM disagreed over Russia's war in Georgia. Mr Yushchenko condemned the fighting in the breakaway republics, no doubt alarmed by the precedent Moscow was setting for its former republics. The president's cozy relations with NATO and US Vice President Dick Cheney stand in contrast to the prime minister has issued only general statements calling for peace and stability. These remarks fail to convince observers that Ms Tymoshenko would rule out a coalition with the increasingly popular Mr Yanukovych.

Such an alliance would undoubtedly play well in Russia. The Party of Regions, which has the most seats in Ukraine's assembly, backed President Dmitri Medvedev's recognition of Abkhazia and South Ossetia and has consistently pushed for pro-Russian foreign policy. For now, members of Ms Tymoshenko's bloc are denying any efforts to swap their coalition partners. Vice PM Hrihoriy Nemyria claimed that, "Our priority is to restore the Orange coalition," and Ms Tymoshenko has attempted to downplay the standoff. 

Still, economic woes produce strange bedfellows. The embattled global economy has sent shock waves to Ukraine, creating a negative symbiosis with internal developments. News of the coalition collapse caused Standard & Poor's to cut Ukraine's credit rating, and credit-default swaps on government bonds reached a record 5.92% (up 22 basis points). Credit-default swaps are financial instruments designed to protect bondholders in the case of a default, and their price fluctuations are seen as a the market's prediction for stability. These increasing prices indicate eroding confidence in the Orange coalition. 

The political turmoil in Ukraine has likely scrapped any foreseeable plans to join NATO. If nothing else, Russia will chalk up another victory in the Caucasus and press to reëstablish its influence in Kiev. 

In Nigeria, MEND Is No Fix

Just a few days after calling for a way to track "blood oil" stolen from African producers, Nigerian President Umaru Yar'Adura faces a serious round of bloodletting in the Niger Delta. On Friday, the Movement for the Emancipation of the Niger Delta (MEND), an opposition militant group, warned oil companies to remove personnel from their installations in the wake of clashes with government forces.

Addressing a group of extractive-industry experts last week, Mr Yar'Adura asked if it were possible to add a chemical marker to crude oil so as to determine its origin. An estimated 10% of Nigeria's daily oil production is stolen and laundered on the international market, which accounts for a loss of $400b in government revenue since the 1970s. Profits from the siphoned oil (currently valued at around $20m each day) fund militia groups in conflict areas and fuel government corruption.

Africa has seen this problem before. For years, the international market was riddled with conflict diamonds used to finance rebel groups in Angola, Sierra Leone, and Liberia. Beginning in 2000, Southern African diamond-producing states began to establish an international certification scheme that would help track diamonds from extraction to distribution. Most analysts estimate that the current market share for conflict stones has fallen to a fraction of one percent from nearly 15% in the 1990s.

Oil stocks have proven much more difficult to trace. Transport tankers often change hands hundreds of times en route to their destination, and crude oil is quickly refined into the more useful petroleum gas, diesel, and kerosene.  In the mangrove swamps of the Niger Delta, organized militias load stolen oil onto barges that strike black market deals with ships waiting in the Gulf of Guinea. Payments for such contraband are regularly made in cash (used to pay off government officials) and weapons (to further embolden the smugglers).

Last week MEND declared an "oil war" against the Nigerian government, and has engaged in several attacks on major extraction facilities in the region. The group's spokesman Jomo Gbomo claimed that the hostilities were in response to a shootout with the government's special military Joint Task Force (JTF) in the Elem-Tombia district. Mr Gbomo also stated that MEND forces had fully destroyed the Royal Dutch Shell Plc flow station on Sunday night. The Alakiri facility was targeted by fighters in speed boats with rocket-propelled grenades, a harrowing sign of rising tensions in the Delta.

Since 2006, such rebel attacks have cut Nigerian oil exports by 20%. The country has a wealth of fossil fuels (300 billion barrels of crude and 187 trillion cubic feet of natural gas), but has struggled to maintain steady supply on account of MEND and other militias. In fact, Nigeria is the continent's leader in hydrocarbon reserves, but problems in the Delta have moved trade south to Angola, currently the largest oil exporter in Africa. 

Shell announced last week that the corporation would extend its force majeure on Bonny light (the high grade Nigerian crude from the Delta basin). This legal clause, enacted back in July after sabotage of the Nembe Creek pipeline, allows Shell to miss contracted delivery schedules on account of circumstances beyond their control. Oil companies in the region are trying to limit the number of casualties they sustain by "down-manning" any facilities that might face rebel attacks. Both measures signal apprehension from extractors that paints a gloomy picture for investors and the Delta region.

Back in mid-August, MEND made headlines for an all-too-uncommon gesture. The rebels orchestrated the rescue of two German hostages who had been kidnapped by rival militants in July. According to reports, an elite commando unit extracted the Julius Berger Plc employees and handed them over to government officials in the Delta. Initially, MEND had hoped the operation would win them the opportunity to speak with their imprisoned leader, Henry Okah. After such a deal was denied, MEND nevertheless carried out the rescue for humanitarian concerns (one of the hostages was severely injured).

Many analysts commented that such behavior might be a sign of changing tactics by MEND. Others hoped that the rescue would initiate some sort of goodwill exchange between the rebels and government forces, perhaps easing tensions in the region. Instead, it seems MEND was intent on demonstrating its remarkable power in the Delta. The Nigerian government is reminded that stability in the oil-industry hub of Port Harcourt is entirely dependent on coöperation from MEND. The rebel group may well use this leverage to extract political and economic concessions from a government they regard as oppressive.

Less than 10 days ago, Mr Yar'Adura returned from Saudi Arabia after receiving medical attention for a health scare. With secrecy still shrouding the trip, government supporters can only hope he benefitted from the best care. The Niger Delta is not for the faint of heart. 

Tit for Tat Diplomacy

In Venzuela, stories about presidential assassination plots are nothing new. Over the last six years alone, President Hugo Chavez has claimed at least 26 times to local media that he is the target of such machinations. In his most recent allegation, however, the fiery Mr Chavez has singled out the US ambassador, Patrick Duddy, for leading an American-backed coup. 

On Thursday, Mr Chavez gave the US envoy 72 hours to leave Caracas and delivered the latest in his string of bitter diatribes against the Bush administration. Mr Chavez is certainly capable of venturing into such diplomatic spats on his own, but he appears to be joining an ongoing row between the US and regional ally Bolivia. Indeed, Mr Chavez has pledged support for Bolivian President Evo Morales who recently declared the American envoy to La Paz persona non grata.

Mr Morales claimed that ambassador Philip Goldberg had been supporting opposition groups in the eastern part of his country. Here, in the Santa Cruz department, Mr Morales' social and political reforms have touched off unrest. The region is rich in natural gas, and the revenues from such fossil fuels are subject to a new tax under a government plan to redistribute the country's economic wealth.

There are historic divisions between the resource-blessed and revenue-generating lowlands and the indigenous poor highlands. As the left-leaning Mr Morales engages in an ambitious project of land reform, he faces stiffening opposition in eastern Bolivia. Youth movements have blocked roads, occupied buildings, and crippled the regional energy and aviation infrastructure. As of yet, Mr Morales has refrained from using the military and relied instead on pro-government mobs to blockade the rioters. Certainly this approach is untenable in the long term.

More pressing, however, is the lowland rebel attack on Wednesday, which bombed a critical pipeline in Tarija state. As a result, natural gas exports to neighboring Brazil have been cut by 3m cubic meters per day (about 10% of capacity). Comgas, Brazil's largest natural gas distributor, said that none of its clients were effected by disturbances in the supply chain, but the company gets about 70% of its natural gas from Bolivia. Continued political protests could metastasize into an energy crisis for the region.

The noxious political climate between the US and Venezuela has only deteriorated in recent days. On Friday the US Treasury announced sanctions against 2 senior Venezuelan officials who were accused of "materially assisting" the FARC rebels in Colombia. Recall that in May Interpol found evidence on a seized computer in Ecuador that established an official link between Caracas and the rebel group. In addition, the US also planned to expel Venezuelan envoy Bernardo Álvarez in response to Mr Chavez' move on Thursday.

It is unlikely the Bush administration will work to repair such relations in the last few weeks of the term. But Mr Chavez did explain that he would send an ambassador to the US once a new government is inaugurated in January. Candidates Barak Obama and John McCain should have a plan when they inevitably restart political relations with Caracas. The US imports $40b in oil from Venezuela (America's fourth largest supplier), and the two countries reached bilateral trade levels of $50b in 2007. 

After oil, the US needs Venezuela's help with another addiction: cocaine. American officials are increasingly worried about narcotics trafficking that runs from Colombia, through Venezuelan airports, and into major US cities. So far, election campaigning in the US has focused on the economy and the Middle East. It would behoove both men to let their gaze stray across the Caribbean as well. 

Israel's Real Threat

During Russia's August war in Georgia, the geopolitical firmament was suddenly revised. Great powers were once again engaged in bare knuckles realpolitik, which has left lingering questions about Moscow's relations with the West. While Americans and Europeans were most vocal in their efforts to check the Kremlin, Israel was working carefully behind the scenes to appease Russia. 

Israeli advisors were in Georgia during the hostilities, and Israel has reportedly sold some $500m worth of military equipment to the Tbilisi government over the past ten years. In late 2007, however, Israeli intelligence analysts saw escalating tensions between Russia and Georgia and moved to disaffiliate themselves from the impending showdown. Before Georgian President Saakashvili sent tanks into South Ossetia, Israel announced that it had frozen arms shipments to the Caucasus. 

By most secondary accounts (Israel does not officially discuss its weapons deals), the Israeli decision was designed to curry favor with the Kremlin. Indeed, Russia is considered a critical player in the insurance of Israel's broader security in the Muslim world. No doubt officials in Jerusalem are wary of Russian ambitions to sell S-300 air defense missiles to Iran.

These most recent political calculations prompt a review of Israel's most pressing national security challenges. Generally, the are three major concerns: Palestinians living inside the post-1967 borders, "confrontation states" on its borders, and Israel's relationship with Arab and Muslim states in the region. It is through these lenses that Israel begins to orchestrate its foreign policy with the US, Europe, Russia, and other powers.

Without belittling the human tragedy of terrorism, the Palestinians do not represent an existential threat to Israel. Suicide attacks have long outraged Israeli citizens, and their recurrence will sap political morale. In turn, Palestinians have extracted certain concessions from the Jewish state (prisoner releases, dismantling Israeli outposts) which should not be overlooked. Nevertheless, the ongoing power struggle between Fatah and Hamas has hamstrung Palestinian efforts to effectively negotiate with Israel. Officials in Jerusalem will always consider a cessation of violence as a pretext for discussions on Palestinian statehood. At present, no Palestinian figure has the political capital, much less the realistic ability, to make such a guarantee. Consequently, Israel's "core interests" are relatively unthreatened by the Palestinians living inside its borders.

Relations with the "confrontation states" are complicated but predominantly positive. Israel has peace treaties with Egypt and Jordan, both of which are open enemies of Hamas. In Egypt, President Hosni Mubarak must contend with the opposition Muslim Brotherhood, an offshoot of Hamas, which hopes to overthrow his secular regime. While Mr Mubarka's tone is sometimes confrontational, his rhetoric belies a strategic alliance against Islamic extremism. 

Jordan's relationship with Israel has been friendly since 1970, when the Palestinian Liberation Organization attempted to overthrow the Hashemite regime. What is more, Jordanians privately depend on both the Americans and Israelis for its own national security. As a result, Amman and Jerusalem have established a constructive relationship vis-à-vis the Palestinians.

Israel has no formal relations with Syria, although it does have certain understandings with Damascus about portions of Lebanon. To be frank, Syria's main interests are in Lebanon rather than Israel, and end up working with groups like Hezbollah rather than Hamas. Such projects can flare up from time to time (see Israel's 2006 war with Hezbollah), but Damascus lacks the resources to challenge Israel. 

Finally, the political framework within Beirut is such a mess that Lebanon cannot itself have functional state-to-state relations, but the Israelis have productive contacts with certain Lebanese factions.

That leaves the broader Muslim world, which any sampling of press clippings would describe as a precarious environment. In reality, Israel has an impressive lattice of formal strategic alliances or informal relations. Official agreements with Turkey (the strongest Muslim country in the region) and Morocco complement a host of off-the-record arrangements with the conservative monarchies in the Arabian peninsula. These regimes are deeply distrustful of Hamas, which helped organize the Nasserite Pan-Arab socialist movement in the 1970s and 80s. In Dubai, many Israeli businessmen are negotiating defense contracts with these Arab monarchies under 3rd-party passports. 

The real challenge for Israel is Iran. Should President Ahmadinejad somehow acquire a deliverable nuclear weapon, his unsavory remarks about the existence of Israel may well demand a new security strategy. Whether or not Iran would engage in an undoubtedly suicidal nuclear attack is unclear. The fact that such a scenario is Israel's worst nightmare is not.

And so the Israelis will pull all the right levers to keep weapons out of Iran. Even when the US was pressing against Russia, PM Ehud Olmert flew to Moscow to smooth over his country's relationship with the Kremlin. For all the talk of the American-Israeli relationship, US military aid to the Jewish state is minimal. The annual $2.5bn in weapons and technology has remained relatively constant since the US began working with Israel. In 1974, the US arms deal constituted 20% of Israeli GDP; today that figure is 2%. Israel broadcasts its relationship with America largely in an effort to harness US military suasion. 

Contrary to the bluster of its enemies, Israel has a security stronghold in the Middle East. But the position is compromised if Russia begins to supply Israel's enemies. As the West looks to form a united front against Messrs Medmedev and Putin, expect Israel's next PM to make new friends in Moscow. 

Fool Zim Once...

Zimbabweans are watching their country move in fits and starts towards a power-sharing agreement between President Robert Mugabe and top opposition leader Morgan Tsvangirai. For all those expecting such a deal to end the country's economic privation, history provides a sobering example to the contrary.

In 1980, after Zimbabwe gained independence from Britain, Mr Mugabe faced another political rival in Joshua Nkomo. A revolutionary of comparable pedigree, Mr Nkomo emerged as an alternative leader of the liberation government. His opposition ZAPU party enraged Mr Mugabe who waged a brutal five-year campaign of suppression against its supporters. Mr Mugabe went so far as to dispatch the Fifth brigade of his security forces (a unit trained by the North Koreans) to Mr Nkomo's popular stronghold in Matabeleland. From 1982-1987, an estimated 10,000 civilians were murdered and cast into mass graves.

Ultimately in 1987, Mr Mugabe crafted the woefully misnamed Unity Accord, which struck a power-sharing agreement with Mr Nkomo. According to the agreement, ZAPU was absorbed into Mr Mugabe's then-ZANU party to forge the now-recognizable Zanu-PF party. In reality, Mr Nkomo became an impotent vice president and his party was eliminated from Zimbabwean politics. No doubt Mr Nkomo, who died in 1999, would be wary of the rhetorical optimism surrounding current negotiations.

In recent days of discussion, both Mr Mugabe and Mr Tsvangirai have commented on positive developments. While the parties have agreed in principle to the need for a power-sharing agreement, both sides are trying to jockey for control of the government. The opposition Movement for Democratic Change (MDC) would like to see the current president serve as the ceremonial head of the government, while increasing the power of Mr Tsvangirai, the executive prime minister.

The political enervation of Mr Mugabe seems unlikely. At 84, the former revolutionary hero is a stubborn dictator who has expressed interest in forming his own government apart from the MDC. Moreover, many of Mr Mugabe's recent political appointments (in his cabinet and in parliament) suggest the president has no interest in following the spirit or letter of an agreement he signed opposition leaders in July. Given these developments, it will take a lot more than perfunctory announcements of diplomatic headway to convince analysts that Zimbabwe is on the road to recovery.

Indeed, American and European leaders are not convinced by the existing deal, with some calling for Mr Tvangirai to scupper the power-sharing agreement. While many foreign governments and aid agencies are eager to help Zimbabwe, there is stifling reluctance to provide any capital that might strengthen Mr Mugabe's hand. The policy is well-intentioned: wait for the thuggish dictator to leave, then flood the country with food, fuel, and infrastructure to combat hyperinflation. Unfortunately for Mr Tsvangirai, such alliances with the West are potentially compromising. In a shrewd twist, Mr Mugabe submits these global connections are evidence his rival will serve foreign interests. 

It is a tired trick, however, and one that is unlikely to resonate among ordinary Zimbabweans. In March, the MDC won control of the lower house of parliament and in August the MDC chairman Lovemore Moyo beat out Mr Mugabe's personal choice to become house speaker. Nevertheless, Mr Tsvangirai is facing increased pressure from regional forces to sign a power-sharing deal. South African President Thabo Mbeki, Mr Mugabe, and Arthur Mutambara (leader of the minority faction of the MDC) all favor an imminent agreement. 

For his part, Mr Mbeki, who has pursued a spineless and politically illiterate solution to the Zimbabwean crisis, wants to strike a deal before his term ends next year. Waiting in the wings is the improbable ANC President Jacob Zuma, who has taken a much harsher line against the current regime in neighboring Zimbabwe. If Messrs Mbeki and Mugabe, who are personal friends, want to solve this impasse, the clock is running.

Cracks in Mr Mugabe's power are no indication that he will leave any time soon. As seen in Kenya's 2007 elections, power-sharing agreements can be ugly and violent. And it should be noted the PM Raila Odinga and President Mwai Kibaki (the protagonists in that electoral drama) were essentially colleagues and not historic rivals, as in Zimbabwe. 

Without question, Zimbabwe needs to be freed from Mr Mugabe. But the SADC cannot simply pursue "quiet diplomacy" and expect him to walk away from the land he once inspired with such hope. Regional leaders must themselves threaten a date with the ICC in order to entice Mr Mugabe into a lucrative sunset program.  

On July 30, in an effort to deal with seven-digit inflation, the Zimbabwean central bank redenominated its currency cutting 10 zeros off its Z$5 tn notes. Such slapdash measures certainly won't fix the economy and there is likewise no easy was to get rid of Mr Mugabe. 

OPEC's Balancing Act

Was it really only 22 months ago that oil prices were sliding toward $50 per barrel? Indeed, back in November of 2006, OPEC cut production levels in an effort to offset slumping demand. Once again oil prices are falling; however, this time futures are approaching a benchmark quote of $100 per barrel. After peaking at $145.29 on July 3, oil prices have lost 30 percent en route to a five month low.

As OPEC considers how to respond to a global economic slowdown, the cartel is far from unified. Ahead of the this week's third quarter meeting in Vienna, there was disagreement over growing crude oil reserves. Price hawks, including Iran, Venezuela, and Libya, want OPEC to cut production and keep prices above the $100 mark. These producers are primarily concerned about an oil overhang, in which unchanged production would outstrip the levels of global demand. Saudi Arabia, OPEC's largest member and the only producer with real spare capacity appears unlikely to cut production. The kingdom's oil minister, Ali Naimi, declared the market "fairly well balanced" and within the targets set at the June meetings in Jeddah. 

Earlier this summer, Saudi Arabia increased production to offset the oil spike and is currently producing 9.5 million barrels per day. After bringing its Khursaniyah field online (which has a capacity of 500,000 bpd) the kingdom is pumping an extra 600,000 bpd above its official OPEC quota. While the development in China and India will effectively provide a demand floor for oil, the Saudis are aware that demand in the US (the world's largest market) has shrunk by about 1 mbpd. 

In the last few days, oil futures have fallen with the strengthening of the US dollar and reports that Hurricane Ike will leave the oil-production platforms in the Gulf of Mexico unscathed. Still, many analysts argue that it would be politically infeasible for OPEC (more specifically Saudi Arabia) to cut production and risk further outrage from American consumers. The cartel may want to meet again in a few weeks to reëvaluate the market. Third quarter demand is typically low (as refineries close for maintenance) but fourth quarter demand rises with heating needs in the Northern hemisphere winter. OPEC is unlikely to wait until its next meeting in December, however, as transportation lag-times would compromise the cartel's ability to capitalize on a bull market. 

The current talks in Vienna are designed to accommodate the holy month of Ramadan. OPEC's Muslim officials are no doubt hoping their own fasting does not harbinger further cuts in the global appetite for crude. 

Paulson and His Life Raft

So much for a day of rest. On Sunday US Treasury Secretary Henry Paulson announced that the government would officially seize control of mortgage giants, Fannie Mae and Freddie Mac. The move was not as unexpected as it was historic. Back in July, Mr Paulson unveiled a more modest plan to rescue the twin lending institutions, effectively obligating the government to stand behind their debt.  According to former Treasury official Ted Truman, "Freddie and Fannie have been de facto nationalized, at least for a while." Instead, the announcement signals that start of a curious, if not uncomfortable, plan to nationalize part of the mortgage lending industry. 

The Treasury's strategy is in four parts. Freddie and Fannie will first enter a period of "conservatoriship" under the Federal Housing Finance Agency. In formal bankruptcy, a court-appointed receiver will restructure a firm's debt. The receiver organizes the capital structure (asset liquidation, payment of bondholders and shareholders) according to specific regulations. Conservatoriship is a diluted form of receivership, except the US government is trying to negotiate with creditors on the fly. There is no established law that regulates such a bailout. As a result, Mr Paulson is navigating unchartered waters.

Second, Freddie and Fannie will have access to a loan facility from the federal government through 2009. In addition, twelve federal home-loan banks will also benefit from this line of credit. While these bank-owned coöperatives have been injecting much needed liquidity into the lending market, they have considerable short-term debt. Of greater concern to these banks, however, is borrowers' falling collateral. The properties and assets used to secure these loans are eroding with the housing market.

Third, the government will purchase $1 bn of preferred stock at no cost, while gaining rights to 79.9% of Freddie and Fannie's common stock at the nominal price. As part of the agreement, the Treasury will buy mortgage-backed securities from the firms, amounting to another $5 bn in September.

Finally, the US Treasury will become a buyer of last resort for any bonds packaged by Freddie and Fannie in the event that open market demand evaporates. While this measure guarantees that the lending institutions will stay above water, it could come at a fantastic cost to the American taxpayer. Indeed, analysts have speculated that the bailout may come with a price tag in excess of $200 bn. 

Conventional wisdom says that the US simply could not allow Freddie and Fannie to fail. These multi-trillion dollar lenders own or guarantee about half of the $12 tn American home loan market. And with housing prices still falling at nearly 15% per year, the credit crisis would rapidly lead to negative equity for many families in the US. No doubt the Treasury's announcement brings much-needed relief to homeowners. Facing a national mortgage default rate of 9%, the government will now be able to cut payments or extend the terms from 30 to 45 years for borrowers. Stockholders are less enthused. Sunday's announcement eliminates billions of dollars in dividends on preferred stock, which will ultimately undercut the investment value of common stockholders as well. Not surprisingly, trading on Monday saw Freddie and Fannie's share price drop more than 80% to less than $1 per share.

International markets, however, rallied at the news of the massive credit-default swap. In gains not not seen since April, banks across Europe and Asia (who were effectively underwriting Freddie and Fannie's debt) strengthened, which sent the MCI World up 2.1 percent. Investor enthusiasm belies the stopgap nature of the bailout. Only the next 15 months of this mortgage crisis are scripted. By then a new Congress and new administration will have to thin the portfolios of these lending giants. Mr Paulson's billion dollar life raft may well have saved the ship, but the waters ahead are still rough.

The US and India: Friends with Benefits

Somewhere Iranian President Mahmoud Ahmadinejad is laughing. As the scourge of anti-nuclear activists, Mr Ahmadinejad must enjoy watching the US wiggle its way through the global restrictions on nuclear trade to cement a deal with India. Back in 2005, President Bush and Indian PM Manmohan Singh inked a civilian nuclear agreement that signaled strategic coöperation on atomic energy.

At the time, the agreement was a marked departure from US policy regarding states that have not signed the Non-Proliferation Treaty, like India. Unlike North Korea and Iran (both have signed the NPT but seem habitual violators), India's nuclear weapons are technically legal. Nevertheless, the south Asian state is experiencing a shortage of domestically produced uranium, needed in both civilian and military capacities. 

With India a rising economic power and a potential bulwark against China, the US is eager to help Mr Singh resolve his problem. American Undersecretary of State, William Burns, is presently lobbying members of the Nuclear Suppliers Group in Vienna to allow trade with India. The NSG is designed to prevent the exchange of fuels and technology with countries that, like India, develop a bomb without agreeing to the internationally recognized safeguards for nuclear facilities.

Not surprisingly, the NSG is hesitant to undo 34 years of multilateral restrictions. Proponents, primarily those representing Washington's interests, claim that the second-most populous nation on earth needs nuclear fuel to satisfy exploding energy demand. Security officials claim that the accord would legitimate, and thus provide control over, India's nuclear program. The 45-member NSG has not been entirely receptive to such arguments. Nor should it.

Unlike the five recognized nuclear powers (US, Britain, France, Russia, and China), India never signed the test ban treaty and has no intentions of ending the production of fissile material for bomb making. Even if India acquires uranium on the open market for its civilian needs, more of its domestic production could be funneled towards weapons development. What is more, India has said that it will only agree to inspections from the International Atomic Energy Agency (IAEA) where and when it deems appropriate. Such a policy fundamentally undercuts the potential for snap inspections by the IAEA to monitor India's nuclear facilities. 

In an effort to lift the restrictions while Messrs Bush and Singh are still in office, Washington has worked quickly to allay some of the members' fears. In particular, many observers are concerned that India would resume nuclear testing, similar to its "Operation Shatki" in 1998. Even as the US tightens the rule-waiver, it realizes the potential backlash in India. Parliamentary officials are in a row over the disclosure of a secret letter from the US State Department to Congress. Increased restrictions (including specific prohibition of nuclear testing) have come as an unwelcome surprise to many Indians who received a much more laissez faire impression of the deal from Mr Singh. 

Once again the US has put itself at odds with an international organization, and once again the consequences seem pervasive. Whatever suasion American leadership still had on non-proliferation will surely evaporate with the creation of this loophole. Even with the legitimate security concerns for India's nuclear program, the NSG waiver sends the wrong message to those watching closely. Not only does the US position coddle the obstinacy of Iran and North Korea, but it makes life more difficult for the IAEA to regulate emerging nuclear states like Brazil. 

All too often, statesmen are slaves to their own ego. Surely a game of playing favorites is no way to solve the nuclear problems of our time. 

Cross-Border Complications

The Af-Pak border region has an impressive legacy of political turbulence. During the Soviet invasion of Afghanistan, millions of refugees spilled over into neighboring Pakistan and the Northwest Frontier Province served as a major weapons cache for the Mujahideen. More recently, the US war in Afghanistan has now focused its military resources in this treacherous region.

Before former President Pervez Mursharraf resigned on August 18, the US enjoyed the rhetorical commitment from Pakistan to fight Taliban forces within its borders. While it is generally understood that Mr Musharraf's involvement in the regional war on terror was tepid (his policies exacerbated rising domestic unpopularity), Washington had effectively forced his hand into coöperating with the American agenda. For this, many Pakistanis saw their general-turned-president as a feckless, if authoritarian, leader. No surprise then that the country was overjoyed to see the back of Mr Musharraf.

Careful what you wish for. In recent days, the US has conducted a number of controversial cross-border raids in the North Waziristan tribal areas. Frustrated by the deteriorating political climate in Islamabad, American forces have stepped up unilateral strikes against Taliban and al Qaeda targets. But these attacks have generated considerable resentment from the new Pakistani government. The parliament has passed an official resolution condemning the recent assaults and has filed a complaint with US ambassador William Wood. 

American forces have long claimed the right to pursue militants into Pakistan when in "hot pursuit," but such a distinction seems increasingly vague. On the record, the US military has not changed its strategy in the region; however, senior Pentagon officials have confirmed a more aggressive approach in Pakistan. In the last week, the parliament has held debate on the increased use of US Predator drones, ground troops, and helicopter-borne raids. 

This harsh line from Washington risks a serious blowback. Indeed, many analysts claim that such behavior potentially alienates a valuable ally in the war on terror. Both houses of the Pakistani parliament asked the government to "repel such attacks in the future with full force." While it is unlikely that the Pakistani Army would enter into hot conflicts with US troops, Islamabad could make the Northwest Frontier a much more unsavory region.

Saturday's parliamentary election will surely focus on the violence wrought by American forces in Waziristan. But the election will also remind voters of the internecine violence that killed Benazir Bhutto in December. Asif Ali Zardari, Bhutto's widow, is poised to become the Pakistan's next President as ruler of the PPP. In many ways Mr Zardari is an unlikely leader and who has yet to prove he can rescue his country from the brink of disaster. With an economy in shambles (foreign currency reserves have all but dried up), a more dangerous Taliban insurgency, and rising tensions with nuclear armed India. 

Zardari will have one valuable asset with which to govern: a democratic mandate. But his skills as an executive will surely be tested by the still-powerful military and an oft-autonomous spy agency (Inter-Services Intelligence). Pakistanis are finally free from the clutches of Mr Musharraf, but their future is in no secure hand.   

Big Oil, Bigger Costs

These are curious times for international oil majors. Crude prices have fallen more than 10 percent from their mid-summer peak, and there are analysts that project futures will continue to slide as the global economic slowdown dampens the demand for oil. Nevertheless, oil majors have returned more than $120 bn to shareholder and are experiencing record profits. Such performance has relegated industry executives to pariah status at the recent Democratic and Republican National Conventions, where delegates are outraged at high fuel prices.

Oil majors must be somewhat troubled by their fat-cat caricatures. This attitude reflects a fundamental misunderstanding of the industry's structural woes. While no one should lose sleep over the financial solvency of its executives, the oil and gas industry has suffered from eroding profit margins. As oil and gas prices rose, many industry analysts declared that surging demand (fueled by developing nations like China and India) was one of the "new fundamentals" driving the bull market. According to the Cambridge Energy Research Associates (CERA), rising costs provide a serious challenge to industry growth.

The factors threatening profits are twofold: increased government involvement in the market and a weak dollar. For many years, the energy industry benefited from soft fiscal terms that provided rich incentives for exploration. Now as international majors are restricted from the Middle East and face increasingly hostile policies from Russia and Venezuela, oil companies are wary of the competition from state owned corporations in Asia. In 2006 CNOOC, China's biggest offshore producer secured a $2.7 bn contract in Nigeria. More recently, Russia's Gazprom has been in negotiations with Nigerian officials to explore in the Gulf of Guinea. 

Structural problems in the US market have also weakened the dollar, which is used as the reporting currency for the oil and gas industry. As a result, all final construction costs have seen a significant rise on account of recent exchange rate movements. The Upstream Capital Cost Index (UCCI) serves as an industry-specific measure of inflation, much like the general Consumer Price Index (CPI). This figure has doubled since 2005, a function of increasing input costs. The price of iron ore, primarily used to make steel, has shot up nearly 60% in 2008. The endogenous reality of high oil prices means that major internationals are paying more to transport their resources to importers. Installation vessels, which manage drilling platforms, have seen a 2% rise in costs over the past 6 months alone. Finally, the largest increase in the UCCI has been attributed to more expensive deep water equipment needed to maintain sub-sea umbilicals (up 12% in the last 6 months).

These rising costs have all bolstered the remarkable rise in organic capital spending (expenditures that do not include acquisitions), and have discouraged new investments in oil reserves. Perhaps politicians, in the US and abroad, should focus less on the knee-jerk populism surrounding energy prices and invest their efforts in alternative and renewable sources. In the 1970's structural variables in the oil market favored a green revolution, but the politically contrived shortage eased and hydrocarbons were once again cheap and plentiful. Today, an oil spike coincides with improving technological alternatives and real discussions of peak oil. If rich nations encourage investment in green energy, the end of the fossil fuel era may well be in sight. Rather than rail against big oil, statesman should work to coöperate with the profit incentives of major internationals. What has been fodder for political victories will not support a real transformation in the future of energy. 

Strange Goodbyes in Anbar

On Monday, the US military officially handed over Anbar Province to Iraqi security forces at a modest ceremony in Ramadi. After a major insurgency by al Qaeda threatened to wrest control of Anbar from the Americans in 2006, the strategic province has seen a precipitous drop in violence. As the first Sunni Arab province to undergo this transition (security control had previously been ceded in 10 of 18 provinces in Iraq), there was indeed reason to celebrate. 

Unfortunately for locals, such revelries are likely to take place in Washington and behind the well-fortified walls of the Green Zone. The handover of power is a major political victory for the embattled American President and for Iraqi PM Nouri al Maliki. Mr Bush is slowly solidifying a legacy of success for the "surge," a luxury his own tenure in office has almost assuredly squandered. And Mr Maliki appears to have revived his once-languid position in office and strengthened his hand against opposition forces in the Iraqi government. More importantly, Mr Maliki has gained the political capital to confront the Americans on the so-called "status of forces agreement" (SOFA) that will help return sovereignty to the Iraqi government. 

But there is a decidedly different tone in the Sunni neighborhoods across Anbar Province. In late 2006, many Sunni tribal leaders grew disenchanted with the brutal violence and rigid fundamentalism of al Qaeda in Mesopotamia. An organization of ad hoc security forces (led by local Sheikhs) spawned the more widely recognized Anbar Awakening. This indigenous movement was later encouraged by the Americans (effectively outsourcing the conflict against al Qaeda), but retained its regional character. Consequently, the resolution in Ramadi has failed to address the serious grievances of Sunni leaders in Anbar.

On the one hand, Awakening members feel that they are being excluded from the emerging Iraqi security forces. Mr Maliki has long been wary of the movement, and considers many of its militia members to be a front for the al Qaeda groups sowing his demise. As a result, the army and police have dismantled Awakening forces, arresting many of its leaders. 

In addition to their security concerns, the Awakening council is locked in a power struggle with the ruling Islamic Party, which has the backing of Mr Maliki. In 2005, Sunni leaders largely boycotted the provincial elections allowing the Islamic Party to win 36 of 41 seats. The next round of voting is slated to take place in November (although a cloud of bureaucratic delays threatens the process), and this time the Awakening council is eager to challenge for political influence. Given the compromised security position of its leaders, many in the council say that the chances for a fair election are slim. Awakening members are arguing that they need US troops to stay in Anbar to prevent fraud and violence. 

It is easy to see why the US is desperate to leave Iraq. And while provincial handovers demonstrate the nascent competence of the Iraqi government, they are no substitute for the security guarantees US troops have provided since the start of the surge. Iraq still has all the ingredients for an unconscionable civil war: heavy weapons, a feeble state, and a concatenation of sectarian rivalries. Should American forces leave this tinderbox in haste, it may not be the oil that flows. Waves of bloodletting would likely crash across this most sensitive region. 

Cold War 2.0?

Recent developments in the Caucasus have inspired debate among scholars and politicians alike as to the reëmergence of the Cold War. Institutional preferences notwithstanding, there are many parallels that resemble the famed tensions at the end of the twentieth century. Indeed, many pundits have dusted off a once-antiquated lexicon for Cold War relations in an effort to describe the Russia-Georgia conflict. Politicians alike appear to be enjoying a return to the systemic clarity of the frigid standoff.  

US President George W. Bush pledged to "rally the free world in defense of a free Georiga," and Britain's PM Gordon Brown warned that "NATO must reëvaluate the alliance's relationship with Russia and intensify our support for Georgia and others who may face Russian aggression." Such talk has only sharpened the Kremlin's response. This week, Russian President Dmitri Medvedev claimed that "Russia, like other countries in the world, has regions of privileged interests." More telling, perhaps, was that Mr Medvedev made clear to reporters that this sphere of influence would extend beyond the states bordering Russia. 

The bluster of statesmen is nothing new in this age. In relations with Iran and North Korea, the international community (more specifically, the Bush administration) has used a hard line to halt the spread of nuclear weapons. Nevertheless, there was an air of nostalgia that surrounded Russia's incursion into South Ossetia. Strongman Vladimir Putin was finally able to orchestrate a military campaign that would reëstablish Russia's rightful place in the international system. Mr Putin's well-documented K.G.B legacy no doubt left the current PM with a seething resentment for American ascendancy. Indeed, Putin once referred to the collapse of the Soviet Union as "the single greatest geopolitical tragedy of the twentieth century."

No doubt Russia's policy (still under the not-so-subtle direction of Mr Putin) was designed to redress such grievances. But the movement of tanks and troops into Gori was a play dictated by contemporary realities, rather than Cold War pangs. The recent tensions probably begin at the NATO summit in Bucharest (April 2008) when the US pushed for Georgian membership in the alliance. Mr Putin made no secret of his displeasure with the West encroaching on Russian borders, and security experts have suggested that Moscow looked into potential military solutions. In early August, a ceasefire between South Ossetian and Georgian forces collapsed, providing the spark that would light the Caucasus. In an effort to restore control over the breakaway republics of South Ossetia and Abkhazia, Georgian President Mikheil Saakhashvili dispatched troops to Tskhinvali. Russia had already warned through its ambassador, Yuri Popov, that any regional conflict would bring Russian intervention. Mr Saakhashvili, the charismatic golden boy of regional democratization effectively gave Messrs Putin and Medvedev license to carry out an aggressive response.

Once Georgian forces had been pushed back from the disputed territories, Russian troops continued their advance. Such "coming over the top" signaled Moscow's resolve on three points. First, Mr Putin was sending a strong message to any other post-Soviet states, most notably Ukraine which is also seeking NATO membership. Second, the Russians recognized that strategic value of the trans-Caucasus energy corridor running through Georgia. US support for the Baku-Tblisi-Ceyhan (BTC) pipeline during the Clinton administration (during a period of Russian decline) had secured a reliable access point, controlled by the West, for oil and gas from the region. A military incursion into Georgia would not only create the sort of instability that might raise short-term revenues (Russia is the second largest oil producing country in the world) and increase the likelihood the future pipelines would have to run through Russia. Third, Russian aggression flowed from years of Western involvement in the post-Soviet Baltic and Eastern European states. This explanation is effectively the Cold War revisited. In recent days, Mr Medvedev has used the West's recognition of Kosovo in an effort to justify the Kremlin's support for Abkhazia and South Ossetia as independent states.

The miscalculation in Tblisi unwittingly ensnared those parties from whom Saakhashvili expected ideological and material support. With wars in Iraq and Afghanistan the US is in no position to offer much military support, other than providing Georgian coalition troops with a lift home. French and German leadership in the peace negotiations are undercut by their overwhelming dependence on Russian oil and gas exports. Moscow has used this leverage before, limiting oil production to Eastern Europe in early 2007. Any political move to upset Moscow could trigger a cold and dark winter for the offenders.

Thus the two principal levers for international pressure, military and economic, are undercut by the proximate realities of American overstretch and the oil crisis. None of the existing options are particularly persuasive. Throwing Russia out of the G8, denying membership into the OECD, ending certain bilateral agreements are all symbolic measures, unlikely to move Russian leadership which is awash in oil revenue. What is more, the West is painfully dependent on Russian coöperation against Iran, an altogether more harrowing challenge.

The reality is that Russia's aggression seized a global window of opportunity. This was no return to history, but instead a product of the volatile contemporary moment. Mr Bush has rewritten the limits of presidential incompetence, and as a result, the US finds itself alarmingly ill-equipped to respond to the challenges of the Middle East and now the Caucasus. American hegemony is, if only for a short while, susceptible to second-tier powers, like Russia. Rising commodity prices have allowed Moscow to reinvest in the military and once again flex its nationalist muscle.

If the US revives the Cold War playbook, an unfortunate standoff may well escalate. It is unlikely that the Americans or Europeans can bluff their way out of this hand. By most accounts, Russia stopped its war in Georgia on account of capital outflows nearing $8bn after two days of fighting. Western demand for Russia's resources may well outstrip the stagecraft of present politicians. After all, the customer is always right.