Kenyan Coalition Stress: Potential Omen

The governing coalition in Kenya is facing new strains after President Mwai Kibaki approved a controversial media law last week. The measure establishes a new communications commission that will regulate broadcasting content and impose tougher jail sentences for press offenses. International observers and local activists had bitterly opposed the law, staging demonstrations and protests in December.

For Mr Kibaki, the measure is designed to balance the media's freedom with its responsibility to "account [for] the overriding interest and safety of Kenyans." Many within the country, however, fear that the communications law will return Kenya to authoritarian government. Indeed, Kenya's vast array of media outlets is now subject to office raids and electronic wiretapping.

Kenya's Prime Minister, Raila Odinga, has openly opposed the bill saying that the expanded federal powers would be "oppressive to the democratic gains achieved" in Kenya. Messrs Odinga and Kibaki fought a tense election battle last spring, in which political violence claimed some 1,500 lives and displaced 300,000 Kenyans. A UN-brokered agreement brought Mr Odinga's Orange Democratic Movement (ODM) and Mr Kibaki's Party of National Unity (PNU) together into a power-sharing deal, but it has proved an uneasy alliance.

Not surprisingly, many analysts are concerned that a dispute over the communications law will send Kenya backsliding into political turmoil. Many officials with the ODM have complained that major decisions (such as diplomatic appointments) are being made without their consent. While the relationship between Messrs Odinga and Kibaki still appears cordial, mounting tensions will make it difficult for these leaders to hold their country together.

These are important times for Kenyan politics. Across the continent, Ghana has (for now) peacefully settled a December presidential election that produced razor-thin margins. The challenger, John Atta Mills, defeated the ruling-party candidate, a feat which Mr Odinga called a "rare example of democracy at work in Africa." Farther south, Africa is host to one of the world's most horrific heads of state, Robert Mugabe, who plans to unilaterally form his own government next month. Mr Mugabe appears to be doing everything in his power to drive a final stake through his earlier power-sharing agreements with Morgan Tsvangirai.

In recent weeks, Abdullahi Yusuf Ahmed resigned from his post as president of Somalia. While the flagrant anarchy in the Horn of Africa rendered this announcement largely ceremonial, Kenya should be concerned about the political forces in its northeastern neighbor. Should the coalition in Nairobi falter, there would be cascading fallout for democratic movements throughout the region. Even in South Africa, the recent democratic lodestar of the continent, there are populist tensions heading into 2009 election. Indeed, much depends on the ability of Messrs Odinga and Kibaki to manage Kenya's fragile coalition.

These are all significant challenges for Africa in 2009, and this review ignores the larger structural problems affecting Sudan, the Democratic Republic of Congo, and the Niger Delta. Certainly all of these political hot spots do not hinge on the Kenyan governing coalition, but leaders in Nairobi must make every effort to start the year off right.

Gazprom Supply Threats Part of Larger Standoff

Back in August, Europeans were concerned that the brief war between Russia and Georgia would lead to cold winters in Berlin, Rome, Istanbul, and Paris. Sovereign leaders throughout the European Union are highly dependent on Russian gas exports, and the rising political tensions between Moscow and the West threatened to spill over into economic relations.

By all accounts, these concerns were legitimate. Since the 1990s, Russia's quasi-capitalist economic climate has been riddled with powerful oligarchs, corrupt middlemen, and a general proclivity for mixing business and politics. OAO Gazprom, which is Russia's largest extractor of natural gas, controls about a third of the world's gas reserves and pipes in about a quarter of Europe's supplies. To be sure, EU leaders are reminded of this market share whenever Gazprom threatens to cut gas exports. Such threats have come thick and fast over the past several years, often during price disputes with Georgia, Ukraine, Belarus, and other neighboring states.

On New Year's day in 2006, Gazprom actually followed through and shut down the Ukrainian pipeline. As much of the EU's gas comes from distribution facilities in Ukraine, major consumers faced more than two days of supply limitations. Now three years later, there are fresh concerns about gas supplies coming from Russia.

The economic backstory is familiar: for the 2009 contract, Ukraine offered to pay $235 per 1,000 cubic meters while Russia was demanding $250 per 1,000 cubic meters. Moreover, Gazprom officials claim that Ukraine has $2.1b in outstanding debt from gas imported in 2008. Ukrainian officials also want to charge Gazrpom a higher fee for transporting Russian gas into the rest of Europe.

After weeks of economic brinkmanship, Gazprom announced that its disagreements with Ukraine would not disrupt gas supplies to European markets. The news was designed to reassure both politicians and investors, but there are several complicating factors. First, the global economic slowdown has put significant pressure on commodities prices. Over the summer, the bullish futures market for oil and natural gas bouyed economies in Russia, Iran, and Venezuela, but now the bubble has burst. As a result, Gazprom (and by extension, the Kremlin) will look to wring every last penny out of gas sales.

Second, Russia's Prime Minister Vladimir Putin recently announced the formation of the Gas Exporting Countries Forum (GECF) along with Iran and Qatar. This OPEC-style cartel is designed to band together gas exporters and, in the words of Mr Putin, end "the era of cheap energy resources." Most analysts suggest that it could take some time for the group to significantly reflate energy prices, especially in the face of a depressed economic climate. Still, the GECF brings Moscow closer to Tehran, a strategic alliance that troubles many Western observers. As a consequence, future price disputes with Gazprom may bleed into negotiations with Iran.

Third, Ukraine's gas negotiations are part of a domestic political saga between President Viktor Yushchenko and Prime Minister Yulia Tymoshenko. The two were allies in the 2004 Orange Revolution, but they have drifted steadily apart. Ms Tymoshenko has positioned herself closer to Russia, and the Gazprom price dispute has only sharpened the differences between these rivals. It is likely that the natural gas deal will be a significant campaign issue as both leaders run for the presidency in the coming year.

For its part, Europe seems prepared for a supply cut, should Gazprom reneg on its New Year's resolution. Many governments learned from the 2006 freeze and have stockpiled reserves that provide at least some stopgap measures. Nevertheless, recent political and economic developments have made for chilly relations between Russia and the West.

Israel's Airstrikes: A Product of Opportunism

Back on December 19, the Palestinian group Hamas formally ended its six-month ceasefire with Israel. The move was widely anticipated, and many regional analysts suggested that Hamas had simply used the period of calm to stockpile weapons and train fighters. By most accounts, the recent ceasefire was no stepping stone to peace, but rather a brief respite before intensified fighting.

There was little surprise, then, when Palestinian militants quickly began firing Qassam rockets and mortar shells from the Gaza strip into southern Israeli towns like Sderot. The reaction of the Israeli government, however, has shocked many in the international community. Over the past weekend, the Israel Defense Forces (IDF) carried out a series of aggressive air strikes that have killed more than 300 Palestinians, and military officials appear to be planning an extensive ground campaign. On Sunday, the Israeli government just approved an emergency measure to call up some 7,000 reservists to assist a broadening operation.

As with any asymmetrical conflict, there have been an alarming number of civilian casualties as a result of the IDF attacks. The air strikes have hit the Islamic University in Gaza, a Hamas-owned television station, and a local mosque which Israelis claimed was being used to house terrorists. As military action continues, the sprawling collateral damage affects homes and neighborhoods throughout the Hamas-controlled territory.

There are basically three explanations for the current Israeli operations in Gaza. First, the government in Jerusalem is struggling with its own internal turmoil and facing elections in February. In September Prime Minister Ehud Olmert resigned in the face of corruption charges, but he still remains in office as the interim minister until elections. A slew of well-known candidates is vying for the top job, and the current hostilities in Gaza are sure to become a major part of the campaign.

The low-level violence coming out of Gaza (even during the ceasefire) has continually outraged Israelis living in border towns. The incessant air raid sirens that scream out when rockets are approaching have caused many citizens to question their government's recent restraint. For the ruling Kadima party, a successful military operation against Hamas would serve as a bulwark against the hawkish criticisms of former Prime Minister Benjamin Netanyahu (a political rival who is running for PM).

Other analysts point to the long shadow of Israel's 2006 war againt Hezbollah. In that conflict, the Israeli military conducted a sloppy 34-day assault on southern Lebanon. Despite attacks by sea, land, and air, the conflict revealed Hezbollah's sophisticated operational organization and brought the Iranian-backed Islamist group massive prestige in the Arab world. For many Israelis, the Hezbollah war had frayed the notion of military deterrence and such weakness had emboldened militants in Gaza. As such, the current strikes against Hamas are obviously designed to redress recent charicatures of Israel as a paper tiger.

Third, the global political climate seems to have provided Israel with an attractive opportunity to attack Hamas. The United States, which is often considered a moderating force in such conflicts, is ill-equipped to handle a diplomatic crisis. President George Bush has little power to broker any substantive deal during his remaining weeks, and President-elect Barack Obama is keenly focused on the American economy. The European Union, another diplomatic heavyweight, is days away from a presidential rotation. On December 31, French President Nicolas Sarkozy will give way to Czech President Vaclav Klaus (an admitted euro-skeptic). With all due respect, it's hard to imagine a strong, unified voice coming from the EU any time soon.

As a result, Israel may well continue bombing against the uneasy backdrop of strongly-worded statements from various global leaders. Mr Olmert could see this conflict as an opportunity to salvage his fractured legacy and bring substantive changes to the Gaza strip. Curiously, Mr Olmert has explicitly denied any attempts to force Hamas from power. Some analysts have suggested that the alternative, a functionally lawless and hostile territory at Israel's doorstep, would be measurably worse.

Still, the problem remains: Hamas is a much better combat party. After seizing control of Gaza in 2007, the party has been unable to provide for its citizens (albeit, there are obvious external forces at play) and alienated foreign supporters. In contrast, the militant wing of Hamas, the al-Qassam Brigades, has always thrived on its violent conflicts with Israel and will almost assuredly gain recruits as a result of the current hostilities. Just as Israel's political machine is looking to score points with the air strikes in Gaza, so too will Hamas be able to distract observers from its governing failures. Instead, many in the Arab world will focus on the need for Hamas to stand up and protect Palestinians in Gaza.

It seems unlikely that Israel would continue this fighting for more than a month, as it did in 2006. For one, economic realities may soon hamstring military options. Israel's currency, the shekel, weakened against the dollar this morning and the Bank of Israel has just issued a rather gloomy economic forecast. Still, the coming days and weeks could be very bloody and will surely leave Gaza in tatters.

It's hard to see how anyone will bring real change to the region, but it may, at some point, be Mr Obama's job to try.

2008: Global Markets Review

What a difference a year makes. At the start of 2008, many market analysts were predicting that global share prices would rise this year, exceeding the record highs seen towards the end of 2007. Instead, we have seen a catastrophic collapse in global equity market value. The FTSE All-World Index, measuring developed and emerging economies, began the year at $34 trillion and proceeded to lose some $17 trillion in wealth.

January began with investor jitters over monoline bond insurance companies (like MBIA and Ambac) who were facing ratings cuts. These small companies guarantee the repayment of bond principal and stood behind many of the credit instruments (like collateralized debt obligations) that were already showing signs of distress. Many forecasters claimed that the monolines would need a significant injection of cash to fend off a collapse.

On January 22, in an attempt to stem global pessimism, the Federal Open Market Committee in the US cut its target federal funds rate by 75 basis points. The dramatic move was largely unanticipated and gave stocks a considerable bounce following the Davos summit in Switzerland. Two days later, officials at the French investment bank Société Générale announced that one of their rogue futures traders had single-handedly lost $7.2b. The news reassured some traders who thought the story might explain the rapid sell-off in January.

The ensuing rally proved to be unconvincing, however, as the dollar lost ground, China and India saw their economies slowing, and the price of oil began its record ascent. By March, another crisis loomed as Bear Stearns, facing insolvency, was forced into a merger with JPMorgan Chase with money supplied by the Fed. Analysts were already concerned about Lehman Brothers, but the financial rescue of Bear led many to believe that policymakers would not allow a major investment bank to fail.

Markets recovered on this sentiment, and rising commodity prices brought on a new fear: inflation. In June, the Fed threatened to raise interest rates, and the European Central Bank (ECB) actually hiked rates 25 basis points in July. These policy measures, mixed with lingering fears in the credit market, quickly snuffed out the year's stock market rally.

The end of the summer brought on a dizzying crisis in the financial markets. Gloomy economic data and credit fears created a toxic mix that led to a giant sell-off of Fannie Mae and Freddie Mac. As their share prices fell, it became more and more difficult for these mortgage institutions to raise capital, which in turn put greater downward pressure on their stock. In July, this negative cycle ultimately forced the US government to announce it would backstop Fannie and Freddie's debt.

The brief inflation scare was now a full-blown recession panic. Trading volumes thinned, hedge funds began to worry about redemptions, and investor confidence was shaky. On September 7, the government nationalized Fannie and Freddie, which sent signals to the market of a worsening crisis. On September 14, Lehman Brothers filed for bankruptcy after the government's reckless experiment with free-market principles. Many observers now point to this moment as the inflection point of an accelerating downturn.

Soon thereafter the huge insurance company AIG asked for a bailout, Merrill Lynch was sold to Bank of America, and Washington Mutual (the 6th largest bank in the US) failed and was ultimately seized by JPMorgan Chase. News of the government's $700b rescue package briefly lifted stocks, only to be voted down by the House of Representatives on September 29. To make matters worse, European banks were discovered to be more leveraged than their counterparts in America, Iceland's banking system collapsed, and traders the world over couldn't get their money out of Lehman's bankruptcy proceedings.

The tumult of September led to Black October. Curiously, the slew of government rescue packages actually invited speculation against the world economy. The week after Congress passed the Troubled Assets Relief Program (TARP), US stocks suffered their worst 5-day performance since the 1930s. Huge losses forced world governments to pursue more extreme actions. The UK began purchasing direct stakes in its banks to help recapitalization and an array of central governments agreed to a coördinated rate cut.

More aggressive monetary policy had the desired effect, but the rally was short lived. When Treasury Secretary Henry Paulson announced that the US would follow Britain's plan to buy shares in banks (and not purchase distressed mortgage assets) there was widespread panic around Citigroup, which has heavy exposure to mortgage backed securities. Tumbling share prices forced the government to reconsider, and on November 24 it organized the largest bailout in history for Citi. As the crisis wore on, it seemed the policy responses (especially in the United States) were increasingly myopic an ad hoc.

The next shoe to drop was the burst of the foreign exchange bubble. As investors pulled out of risky investments in emerging markets, foreign currencies collapsed and borrowers raced to repay their debts. Forex speculators who were playing the carry trade (borrowing in low-interest currencies to invest in higher yielding ones) were forced to rapidly unwind their positions. The instability in the currency market raised the spectre of a sovereign default in emerging markets. For all those who once believed in "decoupling," 2008 was providing a flawless rebuttal.

As the year ends, there is still great uncertainty regarding the credit markets and the direction of equities in the near term. Many analysts agree that markets will eventually recover, but there are still disagreements over whether a bottom has been printed. Even as lending rate indices return to normal (Libor, Euribor, Tibor were all down in the last week) there is still significant fear in the markets. Treasury yields across the board are trading near historic lows with risk management at a premium.

These problems certainly won't evaporate as the calendar turns to 2009, but there are many traders at least looking for a fresh start.

For Palestinians, Hajj a Matter of Politics

The Hajj is the largest annual pilgrimage in the world. For Muslims, the journey to Mecca is the fifth pillar of Islam, an obligation that every fit and financially able believer must perform at least once in his or her lifetime. In 2008, the holy pilgrimage takes place from December 6-10.

As the Hajj draws to a close today, many observers are relieved that the season has been remarkably uneventful. Over the past decades, the pilgrimage has often been marred by crowd stampedes, and in recent years has been seen as a prime target for terrorist attacks. This season some 2 million Muslims made the journey to the birthplace of the prophet Mohammed at the Grand Mosque in Mecca, Saudi Arabia.

Each year, record numbers embark on this spectacular pilgrimage, as Muslims come from across the globe to perform a series of religious rituals. Saudi authorities, who have become increasingly sophisticated in their efforts to control massive crowds, give a quota to each foreign government that must then select which pilgrims are able to travel to Mecca. For most countries, the process is fairly simple. For Palestinians, however, the ability to participate in the Hajj is wrapped up in a political standoff.

The ongoing power struggle between the left-leaning Fatah Party (which controls the West Bank) and the more hard-line Hamas (which controls the Gaza Strip) has all but paralyzed the Palestinian Authority (PA). This year, the Saudi government only granted visas to pilgrims from the West Bank, a move that underscored the current political tensions. Officials in Riyadh claimed that Palestinians needed to apply for pilgrimage visas through the PA, which is controlled by President Mahmoud Abbas's secular Fatah faction. Still, some 3,000 Palestinians in Gaza had applied and received visas.

In response, Hamas leaders said they would prevent anyone from leaving Gaza to embark on the pilgrimage unless Saudi Arabia offered additional visas. According to news outlets, Hamas set up police checkpoints near the Rafah border crossing into Egypt and turned away prospective travellers and journalists. In conflicting statements, officials at the Hamas-run Interior Ministry in Gaza blamed the Egyptians for keeping the border closed.

Hamas has controlled the Palestinian enclave ever since it managed to repel forces loyal to Fatah in 2007. Moreover, the party enjoys considerable political support among Palestinians (Hamas surprisingly won a January 2006 election). Indeed, for many Western officials, the vote was an example of the vexing democratic trends in the Middle East. Still, Hamas is viewed with skepticism by regional leaders. Conservative Arab regimes in Egypt and Saudi Arabia look unfavorably on Hamas' violent rejection of the PA, no doubt concerned about their own political stability.

In the immediate aftermath of the Gaza takeover, certain security analysts were concerned that an independent, militant enclave could rekindle the nearby Muslim Brotherhood and establish a stronger anti-Israel coalition with Egypt. For a host of reasons, this seems not to have happened. Egypt rather enjoys its on-again-off-again status as leader of the Arab World, and seems unlikely to challenge Israel (and the redoubtable list of allies) directly.

The real problem with Hamas is that it effectively prevents any lasting peace agreement between Israel and the Palestinians. Israeli officials have no reason to negotiate with the PA, as long as it remains divided. More fundamentally, Hamas' long term strategy (open hostilites with Israel) are incongruent with any lasting agreement. In addition, the physical dislocation of the West Bank and Gaza serves only to exacerbate the strains that prevent any reconciliation.

Western governments have chosen to isolate Gaza, establishing an informal embargo that reinforces the depraved conditions in which many Palestinians live. It's hard to imagine how such a policy decreases the likelihood of terrorism or creates momentum for peace. Given America's strategic failings in the region, the US is no longer "the indispensable nation" when it comes to Middle East diplomacy. Any future negotiations will hopefully include the Saudis, who are proving helpful both in Lebanon and Afghanistan.

The recent events in Gaza are certainly disheartening. In times when divisions within the Islamic world are quite stark, the Hajj represents a brief moment of solidarity. In this part of the world, however, the frustrating bind between religion and politics is all too common.

EULEX Begins in Kosovo

Two months ago, European Union troops rolled into the volatile buffer zones around Georgia's breakaway provinces of Abkhazia and South Ossetia. Tuesday, some 1,000 miles west across the Black Sea, the EU finally launched its much-delayed police mission in Kosovo. Together, these deployments represent an important test for the EU and its ability to serve as a meaningful force in international peace and security.

Beginning on December 9, hundreds of EU officials will join an international police force designed to resolve the chaotic affairs in Kosovo. The European Rule of Law Mission, more commonly known as EULEX, will take control of police, justice, and customs duties with the support from local staff. No doubt, EULEX will need to address the tactical turmoil that has plagued Kosovo since it declared independence from Serbia in February. While the mission was first approved in December 2007, the intervening months have seen only false starts and operational hangups.

More pressing, however, is the need to combat deep-rooted corruption, a roaring narcotics trade, and human trafficking. Kosovo is strategically located along one of the most lucrative trading routes for heroin and sex-slave smuggling. Drugs from Afghanistan and Central Asia enter Europe from distribution centers in Kosovo. The heroin is often carried across the Adriatic Sea to members of the vast Kosovo Albanian mafia living abroad. Some analysts suggest that these smugglers handle more than 5 tonnes of heroin a month, as it travels to Turkey, Greece, Italy, Germany, and Switzerland. The multi-billion dollar industry is by far the most lucrative in Kosovo.

EULEX is replacing the NATO-led Kosovo Force (KFOR) that was operating under a United Nations mandate in the region. The complex web of international bodies that have previously, or are currently, operating in Kosovo can be traced back to the guerrilla war fought in 1998-99. Serbia (who still considers Kosovo to be one of its provinces) has claimed control over the former Ottoman province since 1912. For its part, however, the ethnic Albanian-Kosovo population has continually resisted any assimilation or submission to centralized authority.

These tensions broke open in the final months of 1998, as the Kosovo Liberation Army (KLA) repeatedly attacked Serbian security personnel. NATO bombings, launched under the auspices of humanitarian intervention, also struck Yugoslav military and civilian targets that ultimately forced the Serbian military out of Kosovo. In 1999, once hostilities subdued, KFOR was deployed so as to promote security and assist hundreds-of-thousands of refugees.

EULEX was initially favored by officials in Prishtina, Kosovo's capital city because it was thought to lessen the pressure of the UN. KFOR was closely linked to the UN Security Council, where Russia (a staunch ally of Serbia and opponent of Kosovo's independence) holds veto power. By contrast the EU is dominated by countries that have already recognized Kosovo as an independent state.

Now it seems the mood has changed. Serbia believes it can still influence the EULEX mission through the UN (likely the case, given their organizational overlap). What is more, officials in Prishtina are worried that anti-corruption measures will cost political support among well-connected traffickers and their facilitators. Thus,
it seems EULEX is walking into a very different situation than it envisioned when the force was first drafted.

Belgrade would like EULEX to remain status-neutral on Kosovo. There are perhaps enough countries within the EU that have not recognized Kosovo (chiefly Spain, Greece, and Romania) that this request could be honored. Still it is unlikely that EULEX will be able to make either, let alone both, of these bitter rivals happy. Such conflict could be a serious problem not just for this specific mission, but for the future of EUpeacekeeping operations.

In many respects EULEX is a test case for the European Union. It is the largest-ever mission undertaken by the EU (the startup budget alone is $266m) and takes on vast responsibility for regional development. A failure to deliver in Kosovo would certainly undercut the strategic relevance of EU forces around the globe.

If the last 12 months are any indication, it could be a tough road ahead for Europe.

Mumbai and the Indo-Pak Crisis

By now, the events of a last week's three-day terrorist attack in Mumbai are well known. Islamic operatives carried out a harrowing raid in the Indian port city, killing more than 180 people and injuring close to 300. Even though train and bus bombings have scarred Mumbai's recent past, the attack has sent shock waves throughout the region.

While the precise number of terrorists involved remains unclear, analysts have noted the group's remarkable strategic and operational complexity. This week's intelligence report focused on the threat of advanced weapons (nuclear or biological), which terrorists might use to increase the attention and lethality of their attacks. By contrast, the recent violence in Mumbai stands out because of the elaborate and skillfully planned siege of the city's most recognizable landmarks.

The primary targets for these attacks appeared to be foreigners and Jews. Both the Taj Mahal and the Oberoi Trident, in which hostages were taken, are five-star hotels that attract American and British clientele. Similarly, the nearby Café Leopold was attacked in part because it is popular among well-heeled tourists. The terrorists also assaulted the Chabad-Lubavitch center (a Jewish community space) tucked away in the backstreets of Mumbai.

As a secondary objective, the attacks were designed to terrorize the local population as well. Bomb blasts in the Chhatrapati Shivaji Terminus station, Mumbai's main rail terminal, and attacks on hospitals in the city affected a much broader cross-section of Indian society. Just yesterday, a whole week after the crisis began, Mumbai police found two unexploded bombs in luggage left behind at the rail station, which were safely detonated.

A group calling itself the Deccan Mujahideen claimed responsibility for the attack, although US officials claim that evidence will more likely implicate Pakistani Islamist militant groups Lashkar-e-Taiba or Jaish-e-Mohammed. Militants from these organizations were responsible for the December 2001 attack on the Indian Parliament in New Delhi that killed 14 people. What is more, reports indicate that one group of terrorists joined the attack after sailing in rubber-dinghies to Mumbai from Karachi, Pakistan.

The combination of high-profile targets and high-traffic civilian infrastructure has led some analysts to suspect al Qaeda is behind the attacks. While it remains possible that the al Qaeda core helped plan the attack, it seems more likely that the organizational masterminds are located in Pakistani franchise groups. Al Qaeda is undoubtedly part of the security nightmare facing Pakistan at the moment, but there are even more sensitive challenges. Some officials believe that the Mumbai attacks were planned with the help of Pakistan's highly secretive and dangerously autonomous Inter-Services Intelligence (ISI).

Even as the details of the siege are under investigation, the political tensions between India and Pakistan are ratcheting up. India's opposition Bharatiya Janata Party (BJP) has continually criticized the ruling Congress party for being "soft on terrorism." Any perceived reluctance to take a hard-line approach to militancy in Pakistan could haunt the incumbents in the May elections. In recent months, India has suffered a slew of Islamist militant attacks in Delhi, Bangalore, and Jaipur, which have killed more than 150 people. Populist pressures, which are now reaching a critical point, will look to hold someone accountable.

Here's the problem: the recent Mumbai attacks are as much a function of India's security failings as the insidious influence from neighboring Pakistan. Reports showed earlier this week that the US passed two warnings to New Delhi saying an attack was imminent. In addition, a number of Indian officials have been forced to resign for allowing the rather embarrassing performance of various police forces during the crisis.

India, and particularly the ruling Congress party, has political incentive to indict Pakistan. Shifting the blame to its historic rival conveniently ignores the inability of the current Indian government to protect its own citizens. Nevertheless, sabre rattling will only paper over the deep problems that plague the Indo-Pak relationship.

First, these countries have nuclear arsenals which complicate any skirmishes. Many scholars will argue that these weapons keep a lid on cross-border confrontation, as officials in Islamabad and New Delhi are unlikely to start a nuclear war. Still, the very assurance of a nuclear stalemate allows both states to manipulate low-level tensions. This phenomenon usually favors Pakistan (which would be wiped out were it not for its nuclear weapons), but on this occasion India will squeeze Pakistan's government into concessions.

Second, these countries are unlikely to find lasting peace unless there is a true political settlement in Kashmir. The region has caused over 60 years of conflict and bloodshed, often with Muslim Kashmiri separatists trying to expel India (a predominantly Hindu country) from the territory. Both Lashkar-e-Taiba and Jaish-e-Mohammed have their roots in the Kashmiri struggle, and the region will undoubtedly take center stage in the ensuing political or military fireworks.

Third, the new Pakistani government has yet to prove it can deliver any real security gains. The last few months have seen US officials criticize the inability of Pakistan's military to combat militants along its western border. In response to the Mumbai attacks, India is demanding that Pakistan redirect some 100,000 troops to counter terrorists threats in the east. Philosophically, both the US and India are articulating a similar desire to clamp down on Ismalist militancy in Pakistan. In practice, however, both countries would like Pakistan to deal with the threat in different places.

This is no time to pull the Pakistani government in opposing directions. President Asif Zardari is already in a compromised position (his economy is in shambles and he still faces questions about his political capital) and is now scrambling to assuage Indian authorities. It seems unlikely that the Indo-Pak standoff would reach the levels it did back in 2001, when the US had to broker a sensitive peace deal. Indeed, there has been much progress between the two countries since 2003, when a cease-fire was signed across the Kashmiri line of control.

Political fallout is another matter entirely. The pressures rising in both India and Pakistan could lead to a dramatic change in their respective domestic landscapes. Clearly the Americans will play an active role here. The US dispatched Secretary of State Condoleezza Rice to the region, and Indian Foreign Minister Pranab Mukherjee is set to meet with President-elect Barack Obama in Washington.

It is clear that this crisis will not be solved in a week of shuttle diplomacy. In all likelihood, these negotiations will be ongoing when Mr Obama takes office in January. Still the Mumbai attacks demonstrate that terrorists don't need weapons of mass destruction to make a big splash. They can simply destabilize those countries that do.

Soldiers' Riots Threaten Mugabe's Rule

Skirmishes are nothing new in Zimbabwe's depraved capital, but Sunday's violence in Harare was quite remarkable. Shots rang out in the city center after soldiers grew unruly while queuing at the main branch of the Zimbabwe Allied Banking Group. Witness reports suggest that about 70 uniformed soldiers began rioting late Sunday afternoon when the bank said it had run out of cash. Under government policy, depositors are only allowed to withdraw 500,000 Zimbabwe dollars (about 27¢) from banks per day.

Soldiers looted the bank, smashing windows and harassing employees, and then moved on to assault black-market currency traders in Harare. President Robert Mugabe has stubbornly driven his country into blighting poverty, but until now, the rank-and-file have largely been insulated from pronounced hardships. Rampant cronyism and political payoffs have shifted the strains of hyperinflation away from Mr Mugabe's inner circle and onto Zimbabwe's beleaguered citizens. Sunday's riot, however, sends a strong message that the regime is losing control over the ever-important military.

Soldiers have said there is no food in the barracks, no medical supplies at military hospitals, and increasing frustrations with Mr Mugabe's government. Reports indicate that thousands of desertions have depleted the military's numbers from some 40,000 to 26,000 troops. Mr Mugabe's rule is entirely dependent on these forces and their ability to hold populist uprisings at bay. If soldiers continue to bleed out into the growing pool of disaffected Zimbabweans, a more sustained revolt is in the cards.

To make a bleak situation even worse, much of Harare is without water and is facing a massive cholera outbreak. The disease comes from drinking contaminated water, and Zimbabwe has been suffering from a recent shortage in purification chemicals. Nearly 12,000 cases of cholera have been reported in the country, and the number of deaths is fast approaching 500. In a sign of the widening crisis, the disease is spreading to border towns in neighboring South Africa and Botswana.

Such medical outbreaks are placing even greater strain on limited resources. The South African constitution (one of the most progressive in the world) mandates that all citizens have adequate access to healthcare, a promise aid workers are struggling to meet. Zimbabwean refugees are flooding across the now-contaminated Limpopo River, which forms a natural border between South Africa and Zimbabwe. Back in May, South Africa witnessed violent anti-immigrant riots, many of which targeted Zimbabweans living in the country. The current health crisis could exacerbate existing social tensions.

At the very least, the Harare bank riot dispels any notion that the ruling Zanu-PF party can continue to ignore the opposition. Ever since Mr Mugabe's rival Morgan Tsvarangirai pulled his Movement for Democratic Change (MDC) out of the impotent power-sharing agreement, Zanu-PF officials have attempted to consolidate their power. It appears the frightening realities of Zimbabwe have finally caught up with the country's notorious dictator. For so long, Mr Mugabe lived in a fantasy world where he willfully ignored the plight of those he ruled. With soldiers joining the chorus of dissent, Mr Mugabe must realize that his days are numbered.

Could the rising social unrest lead to a coup? Possibly. But Mr Mugabe still has an inner circle of fiercely loyal generals. In recent weeks, they have meted out harsh punishment against any soldiers suspected of defecting. There are reports that some of the soldiers who have taken part in recent riots have been killed. As a result, Western officials are instead predicting a state of "low-grade anarchy," as order crumbles and the military becomes unable to deal with unrest.

Leaders of the Southern African Development Community (SADC) have proven spineless statesmen when dealing with Mr Mugabe. Their failings have turned misery into tragedy, as Zimbabwe plunges into ever-worsening circumstances. In response to the current cholera outbreak (but with eyes on the soldiers' riot) the SADC should call an emergency meeting to address the crisis in Zimbabwe.

As the disease leaks out into the region, heads of state will be forced to confront medical challenges. Let's hope they consider all the political ones as well.

Thailand's Messy Street Protests

Political tensions are nothing new in Thailand, a state that has been riddled with 18 military coups since the end of it absolute monarchy in 1932. But in recent days, the simmering violence has threatened to unleash another wave of upheaval on the Buddhist country. On Monday, Thai officials cancelled a planned legislative session in response to violent protests in Bangkok.

The backstory can be traced to the most recent coup in September 2006. Then-Prime Minister Thaksin Shinawatra was deposed when the military junta overthrew the elected government and dissolved Parliament and the Constitutional Court. The armed forces claimed they were responding to the corrupt and socially divisive policies of the ruling government. As Mr Thaksin was in New York meeting with the UN General Assembly, tanks flooded the streets of Bangkok to assert military control.

Mr Thaksin is a charismatic telecommunications billionaire whose political stronghold is in the country-side and among the urban poor. As leader of the Thai Rak Thai (TRT) party, he helped craft economic policies that rehabilitated Thailand in the wake of the Asian financial crisis. In May 2007, however, the Constitutional Tribunal banned Mr Thaksin and some 100 of his associates from participating in politics for 5 years and disbanded the TRT. The verdict followed allegations that Mr Thaksin paid a small party to run in 2006 elections to circumvent rules for single-party elections.

Out of office, Mr Thaksin is certainly not out of the loop. While his opponents were determined to purge the country of his political influence, he maintains connections with officials in Bangkok. The former Premier lives in exile, but the vestiges of his TRT party were transformed into the current People's Power Party (PPP). With the return of civilian government in December 2007, the PPP won the most seats in the Thai House of Representatives and is now the ruling party.

Not surprisingly, given its political heritage, the PPP wants to pass alterations to the constitution that would clear the way for Thaksin to rejoin the Thai government. The specific amendments would change sections of the Thai constitution relating to election fraud and fallout from the 2006 military coup. The proposal has caused much resentment among the opposition People's Alliance for Democracy (PAD), primarily composed of royalists with bitter feelings towards Mr Thaksin.

The recent PAD protests have brought alarming violence onto the streets of Bangkok. Opposition demonstrators have clashed with pro-government mobs, trading grenades, Malotov cocktails, and small bombs. In an effort to cripple the country's infrastructure, the protests have been directed around the Government House, parliament, police stations, and an old airport north of Bangkok. Ever since August, the violence has forced current PM Somchai Wongsawat (Mr Thaksin's brother-in-law) to operate out of a disused terminal of the city's Don Mueang airport.

The PAD hopes to incite violence that will force the military to step in and stabilize the country. Such a move would effectively mark the next iteration of Thai military rule and reshape the political landscape in favor of opposition parties. On Monday, protesters physically blocked Thai officials from appearing at an important legislative session. The government had been set to ratify certain trade documents relate to the December economic summit of the Association of Southeast Asian Nations (ASEAN) in Bangkok. Responding to rumors that the aforementioned constitutional amendments would also be put to vote, PAD protestors sealed off the parliament building.

Previous demonstrations had been poorly handled by the PPP government. Tear gas and other repressive police measures were used to break up a crowd, which ultimately received sympathy from the Thai public. Sensing the PR battle in this political standoff, the PPP has attempted more peaceful resolutions to the current crisis. Still, postponing legislative action is inefficient and unlikely to solve deep-rooted problems between the parties.

On Tuesday, army chief General Anupong Paojinda said that the military had no intention of launching a coup to put a lid on political tensions. While he pledged to use military resources to ensure security, Gen Anupong would like to keep his forces out of the fray. The civilian elections of 2007 were a start to the messy democratic transition for Thailand. Mr Somchai must be careful not to take the bait from protestors, as a rise in violence could yet lead to another military putsch.

One thing is for sure, Thailand's street clashes are part of a very serious political crisis.

Repo Rates Signal A Dizzying Crisis

Would you ever pay someone to borrow money from you? The financial crisis has certainly produced its share of head-scratching phenomena, but this scenario is sure to confuse even experienced traders. Bloomberg News is reporting that the owners of US Treasuries may soon get paid to borrow money, as frightened investors look for shelter in an economic storm.

In order to understand this development, one must first consider the $7 trillion-a-day repurchase market. Repurchase (repo) agreements are transactions in which a borrower "sells" securities to a lender, with an agreement to purchase those securities back at a later date for a specified price. In effect, the borrower is taking out a secured loan, with the security acting as collateral. The difference between the borrowers "selling" price (the amount of money loaned) and the price at which the security is repurchased represents the interest on the transaction.

Repo agreements play an important role in allocating short-term capital within financial markets. Securities dealers use these instruments to finance their market-making and risk-management activities, like speculative investments or covering short positions. Some investors will use spreads between certain "special" collateral (usually US Treasuries) and general lending rates set by the Federal Reserve. Imagine a securities dealer who "sells" her treasury with an agreement to repurchase the collateral on 2% interest and then uses the cash received to finance an investment that earns 3%. The dealer has successfully manipulated a 100 basis point spread to her advantage.

One would expect a natural floor for repo rates. That is to say, it seems logical that these quasi-interest rates would always remain positive. Borrowers would agree to pay a higher price for the collateral in the future, in exchange for cash on hand. However, the current economic collapse has created serious distortions in the market. Treasuries are in such high demand at the moment that lenders may soon pay a premium to gain the security. Since the bankruptcy of Lehman Brothers in September, investors have been almost giving away cash to get Treasuries. Repo rates have fallen to 0.05 percent for a 5-year note maturing in October 2013, and general treasury yields are tumbling.

There is still much disagreement about how negative repo rates would actually affect the economy. During Japan's "Lost Decade" of the 1990s negative repo rates developed as a result of the country's zero-interest rate. In 2003, repo rates dipped negative in the US as traders tried to cover their short positions on the 10-year note.

In the contemporary climate, the Treasury may impose negative repo rates as a way to stop "fails" on repurchase agreements. As the lending markets gum up, trillions of dollars in securities are not being delivered or received as per the terms of repo agreements. There is, at present, no penalty for failing to deliver the collateral in such a deal. As these fails exacerbate the liquidity crisis, officials are considering policies that would lead to negative repo rates. Under such conditions, holders of US Treasuries would be paid a premium to borrow money from investors through the repo market.

The result would likely increase demand for short-term treasuries (driving down already low yields) and potentially more problems in the bond market. Stocks are heading for a huge two-day rally, but the gains should be short-lived. Following the gloomy economic data this past week, the risk premium on the 10-year US Treasury CDS blew out to record levels. Along with many observers, it seems several foreign central banks are beginning to doubt the efficacy of America's bailout plans.

Monday, President-elect Barack Obama held a press conference that provided a modest intraday rally for the markets. Now with his team in place, the next administration will have to craft policies that address dizzying (and at times unthinkable) economic realities.

Colombian Trade Deal On The Ropes

Congressional wrangling over a potential bailout of the American automotive industry currently dominates the legislative agenda in Washington. Still, many analysts are eager to see how lawmakers will handle the proposed Free Trade Agreement (FTA) between the US and Colombia. The Bush administration has orchestrated trade deals with Colombia, South Korea, and Panama this year, but it seems likely that representatives will adjourn for the year without voting on these measures.

Back in April, President George Bush attempted to sidestep delays in the legislative process. The administration invoked the fast-track law, which prevents Congress from amending a trade deal, limits floor debate, and prevents a Senate filibuster. In effect, fast-track would have forced Congress to vote on the FTA within 90 legislative days. It proved a costly mistake, however, as House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid lined up against the bill and the President's brash political maneuverings.

The agreement would eliminate tariffs between Colombian and American markets, and encourage foreign direct investment in Colombia. Proponents of the trade deal argue that the agreement would provide much-needed economic stimulus for both countries, through expanded export possibilities. The most vocal critics are organized labor and human rights advocates. These officials are worried about widely reported violence against union workers in Colombia. According to media outlets, 26 union organizers were murdered in 2007, reinforcing skepticism about the country's human rights record.

Colombian President Alvaro Uribe recognizes that his economy desperately needs this agreement. In an effort to compete with China in supplying Western markets with low-cost labor, Mr Uribe needs to attract major firms to set up shop in Bogotá, Calli, and Medellin. Officials within the country are pointing to massive reductions in violence (albeit from frightening levels) and improved governance as signs of the country's commitment to a viable trade relationship.

In an April press conference, Secretary of State Condoleezza Rice claimed that "Colombia has not only come back from the brink of being a failed state, but it is increasingly one of the most successful states in Latin America." Indeed the administration has repeatedly stitched the FTA together with US concerns for economic and political stability in the region. It is no surprise that the administration is deepening ties in Colombia as countries like Venezuela and Bolivia ramp up their anti-Americanism. 

There is an important economic backdrop to this discussion. Colombian goods already receive duty-free access to US markets as part of a trade preference plan. As a result, the new agreement would only eliminate tariffs for American producers looking to meet demand in Colombia. Such realities seem to point to an obvious resolution: pass the FTA. Nevertheless, Washington is no simple town. Democrats are still smarting from Mr Bush's end-run, and are in no hurry to give the President his final wish.

It's all rather unfortunate. The global economy is in need of serious rehabilitation, but protectionist policies will only exacerbate the coming recession. President-elect Barack Obama was a lukewarm advocate for free trade on the campaign trail, but his tune may change in the White House. At least, one would certainly hope so.

Somali Pirates Strike Again

About this time last year, the "Pirates of the Caribbean: At World's End" DVD sales were an eye-popping $167,484,208 in the United States. Fast-forward almost twelve months and retail sales in just about every consumer category are plummeting in the face of an American recession. Still, pirates of a different kind managed to lead one rally on Monday that could have lasting implications. In a brazen attack, Somali pirates hijacked a Saudi oil tanker, which pushed crude futures off their morning lows. 

As with many of these incidents, the details remain sketchy. Nevertheless, media outlets are reporting that Somali pirates have seized the Sirius Star, owned by the Dharhan-based Saudi Aramco, which is the largest vessel ever to come under attack off the coast of Africa. The ship is operated by Vela International, which has a sizable fleet of Very Large Crude Carriers (VLCCs) connecting traders in the Middle East, Europe and the US Gulf Coast. The Sirius Star is fully loaded with 2 million barrels of crude oil, more than a quarter of the 7 million barrels that Saudi Arabia provides to world markets each day.

While there are indications that other oil tankers have been hijacked in the region, this attack is particularly noteworthy. First, the pirates managed to take control of a ship that is larger than a nuclear-powered US aircraft carrier (more than 1,000 ft long). By contrast, Somali pirates are generally marauding in small speed boats that rely on maneuverability and heavy weapons to pull off an attack. Lieutenant Nathan Christensen of the US Navy's 5th Fleet called the most recent episode "unprecedented." Along with other navies from Russia, India, NATO, and the EU, Lt Christensen represents an international force that is hoping to reverse the recent increase in piracy near the Horn of Africa.

Second, according to the International Maritime Bureau, the Sirius Star was hijacked some 450 miles southeast from the port of Mombassa. This part of the Indian Ocean is not generally considered a strategic chokepoint for petroleum transport. Pirates usually take advantage of narrow shipping lanes in the Gulf of Aden as supertankers travel towards the Suez Canal. The fact that Somali pirates have broadened their operations to reach waters farther off the Kenyan coast speaks to the rising lawlessness of the region. One response to increased piracy in the Gulf of Aden is to send tankers around the Cape of Good Hope in South Africa; however, the Sirius Star attack jeopardizes the presumed security of the southern route.

At first blush, it seems ridiculous that pirates should successfully attack massive cargo vessels. All ships have some sort of security plan, but they usually involve evasive maneuvers designed to create a large wake. The idea is to generate waves that will disrupt the advances of smaller speed boats. Still, the pirates have AK-47s and grenade launchers, while cargo vessels are unarmed (except for a few Israeli ships). Insurance liabilities mean that shipping companies would have to pay higher costs if they were to arm their crews. As a result, these vessels depend on the patchy protection of international navies in the region.

Various strategic risk analysts have indicated that the Somali pirate attack could lead to significant and sustained increases in oil prices. It takes about an extra week to send a tanker around the southern tip of Africa, and the added time and fuel consumption could prop up crude futures that have fallen sharply. In the past, ships carrying chemical, merchant, or fish cargo have been seized, while oil tankers have suffered only attacks. The Sirius Star hijacking could signal the start of a dangerous new era for petroleum flows from the Middle East.

Pirates are said to be using satellite phones and GPS devices to track their targets and increase the effectiveness of their attacks. No word yet on whether they have added portable DVD players to inspire their exploits.

G-20: Working For The Weekend

For the most part, international summits are well-staged political theatre. Any agreements, concessions, or terms set to come out of such proceedings are all but finalized before the meeting even begins. Once the foreign dignitaries arrive, ceremonial handshakes and signatures bring some closure to weeks or even months of behind-the-scenes negotiations. Over the years, these summits have been adopted a clear diplomatic strategy: prevent any surprises.

This weekend's G-20 meeting in Washington carries the same political traditions. That is to say, one can fairly expect a slew of photo opportunities, media engagements, and political hand-wringing, without much progress on substantive issues. Absent some miracle, the leaders of the world's largest economies will produce little more than economic platitudes about coöperation and transparency.

The main problem is that since the onset of the economic collapse (say, September 15 when Lehman Brothers filed for bankruptcy) national governments have been unable and unwilling to work in concert. The piecemeal approach to shoring up individual banks has failed to address the global financial contagion. One of the most remarkable themes of the credit crisis has been the reëmergence of statism. During boom times, financial markets were thought to render national borders irrelevant. In the face of growing hardship, however, officials in the US, Europe, and Asia are responding with introspective policies, which foremost address domestic pressures.

As a consequence, each members of the G-20 arrives in Washington with a particular self-interest. The Asian states, Saudi Arabia, and Australia are all looking for a greater voice in setting the global economic agenda. European officials (led by French Prime Minister Nicholas Sarkozy) want to reshape the regulatory framework of global finance. For its part, the United States is represented by a man whose political capital is rapidly approaching zero. Nevertheless, President George Bush is reluctant to make any moves that would undermine capitalist forces or forfeit America's primacy in global economics.

It is extremely difficult to see how much good could come of this summit. With the euro area officially in a recession and American markets closing the week in a nosedive, investors will need concrete reassurances. Speculation about a global stimulus package is appreciated, but will still take precious time to implement.

Under these circumstances, President-elect Barack Obama will gladly keep his distance from the summit. He has sent two surrogates, in former Secretary of State Madeline Albright and Republican Congressman Jim Leach, to meet with various delegations. Neither Ms Albright nor Mr Leach is expected to hold a significant position in Mr Obama's administration.

As much as a G-20 meeting might hold the potential for economic recovery, the very spectacle is a considerable risk. As many analysts note, an unsuccessful summit is far worse than not having one at all. Chances are Monday will be a gloomy day for markets the world over. 

Motown Needs Mo' Money

While credit may be scarce, there is no shortage of irony in the current financial crisis. Less than two months ago when the first draft of the Troubled Assets Relief Program (TARP) was debated before Congress, six of the eight Detroit-area representatives rejected the bailout. At the time, the $700b rescue package was seen as an endorsement of the reckless investment practices of America's biggest banks. Lawmakers from the Rust Belt were skeptical of saving any industry that claimed to be "too big to fail."

Now Detroit representatives are back in Washington, hats in hand, frantically seeking a bailout of their own. As the financial meltdown sends shockwaves through the real economy, the American automotive industry sits on the brink of collapse. At the end of September, President George Bush signed a spending bill that included $25b in low cost loans for car manufacturers. These funds were designed to allow automakers to retool production facilities in an effort to build more fuel efficient cars. Still, the rapidly deteriorating economic conditions have industry leaders pleading for additional help from the federal government.

Most analysts recognize that the automotive crisis spreads beyond the employees of the big three domestic car manufacturers: General Motors, Ford, and Chrysler. Indeed, the multiplier effect of the automotive industry means that trouble for these corporations will seep into other sectors of the economy. That is to say, the knock-on effect of losing one automotive job could lead to the loss of as many as 5 other jobs across suppliers, transporters, and other car-related industries. Some reports suggest that looming bankruptcy for the domestic autos puts more than 3 million jobs at risk and threatens to wipe tens of billions of dollars from the US economy.

GM and Ford are burning through cash at a staggering rate, each at more the $2b per month. Moreover, Chrysler recently failed to secure a cost-cutting merger with GM that may have been the company's last hope. The main problem with the automotive industry is simple: less cash is coming in, while huge sums are going out. The 30-40% drop in sales have left these corporations with excess capacity (there are more cars than there are willing buyers) and they have massive debts (some $45b), which they can no longer service because of declining revenue. 

However, the domestic autos cannot simply close factories and layoff workers to save money. On account of labor agreements, contractual obligations, and pension payments, GM, Ford, and Chrysler all face inflexible costs. Share values are plummeting and the industry is unable to sell commercial paper (and thus finance its operations with corporate bonds) because the market is so risk averse. It seems there is little hope for the historic manufacturing base of the American economy.

Look abroad, however, and there is a very different outlook for GM and Ford. Foreign sales are sliding in the current market conditions, but promise to act as a buoyant force on revenues in the future. Indeed, over the next forty years, the growth of the car industry will come from emerging markets. Of particular note are the BRIC economies: Brazil, Russia, India, and China. As these countries become richer, their populations (which represent huge markets) will funnel disposable income into automotive sales.

The industry realities are all slightly different across the BRIC countries. Brazil has no real indigenous manufacturing base; instead, GM, Ford, Wolkswagon, and Fiat control about 80% of the market share. In Russia, the Putin government all but did away with domestic car companies and has attracted foreign brand manufacturers. Both GM and Ford have controlling positions in Russia, which is expected to quickly pass Germany as the largest auto market in Europe. Bureaucratic red tape has traditionally hamstrung India's car industry, but Tata Motors is a viable domestic producer that is looking to expand globally. Nevertheless there is still room for competition from foreign brands.

China is the most interesting economy in that it has irresistible potential for market growth. Indeed by 2050, China is expected to have an automotive fleet that outnumbers the current global passenger fleet of 700 million cars. The domestic auto industry has consistently used a long-term strategy of joint-ventures with GM and Wolkswagon to support Chinese brands. While manufacturers in Shanghai will eventually look to stand alone, there is certainly potential for an American footprint on the Chinese car market.  

If, as predicted, the number of cars on the road swells to 3 billion by the end of this half-century, there are very real implications for climate change. Indeed some analysts have rather cataclysmic predictions for the environment unless zero-emissions vehicles are built. BRIC countries are likely to worry about traffic congestion in the short-term, but they will soon have to consider the effect of passenger cars on local air pollution. Nevertheless, it is likely that these issues will fall under the imminent regulations of a Kyoto successor.

The realities of global demographics suggest that there is vast potential for automakers (American or other) to exploit in the future. In the short term, however, there are very painful decisions facing the major corporations that have, for too long, built inefficient gas guzzlers in the US. In recent days, Congressional support has coalesced around an automotive bailout, but the measure still faces stiff resistance from President George Bush and Treasury Secretary Henry Paulson.

Earlier this week, president of GM North America Troy Clarke sent an email to 29,000 salaried GM employees, asking them to lobby their elected officials on behalf of the company. Desperate times have indeed led to desperate measures. 

The Future of Foreign Oil

In recent months, US politicians have railed against America's dependence on oil from unsavory regimes in the Middle East. Let's get something straight: the number one exporter of oil to the US is Canada, followed by Saudi Arabia, Mexico, Venezuela, and Nigeria. While the Saudis are a major part of the American energy equation, the Kingdom's absolute monarch has been a consistent regional ally for the US since oil was discovered before the Second World War. Indeed, officials in Washington would be foolish to call King Abdullah anything but a friend.

Nevertheless, such rhetorical maneuverings are hardly surprising. On both sides of the political spectrum, the bogeyman of Iran (which has no hydrocarbon trade with the US) serves to advance a specific agenda. Conservatives would like to ramp up domestic production of oil in the Arctic National Wildlife Refuge (ANWR). Liberals would like to transition energy investment into alternative sources, like wind and solar power. 

Instability in the Middle East certainly affects global energy security, as supply routes often traverse hostile terrain. With respect to oil bound for US, however, the real threat is offshore. Saudi supertankers are primarily concerned with navigating the pirate-soaked chokepoints near the Strait of Hormuz and Bab el-Mandab. From this perspective, the Middle East is not the real problem with American energy policies.

But it soon could be. The International Energy Agency (IEA) warned on Wednesday that falling investment and the credit crisis could lead to an oil supply crunch in the near future. Swooning oil prices (which undercuts the incentive for producers to build new capacity) have exacerbated declining rates of production in 800 of the world's largest oil fields. All across the globe, projects slated for exploration have been delayed, threatening the future health of the oil pipeline.

Alarmingly, the IEA reported that the worst declines were found in developed country fields, such as the North Sea and Alaska. This trend signals a shift in control over the oil market. With spare capacity concentrated in the Persian Gulf and OPEC member-states, the Middle East will become a more important part of the global energy equation. The IEA, which serves the Organization for Economic Coöperation and Development (OECD), reported that, as a result, the West will lose influence over oil flows.

For the moment, the global economic contraction is tempering oil demand, with prices falling below $60 per barrel on Tuesday. Nevertheless, the IEA still predicts increasing commodities pressure from emerging markets in the Middle East and China until 203o. In the process, the OECD, which is a group of 30 high-income countries that embrace democratic and free-market principles, will lose the leverage it has previously enjoyed in the energy market. As the number of hydrocarbon sources shrinks, the West will become increasingly dependent on the Middle East for oil. 

President-elect Barack Obama has already suggested that some of his economic plans would include initiatives for green jobs. For environmental and geostrategic reasons, Mr Obama would do well to shift the American energy market away from oil. Unfortunately, as commodity prices continue to fall in the short term, it will be hard to incentivize cleaner, but more expensive, fuels. No doubt the financial crisis will amplify even marginal differences in cost.

Still, green technology is an investment in America's future. The energy market will not alone address important issues like greenhouse gas emissions, although the size of that market failure is significant. Perhaps it is more helpful to bundle the concept of energy security with climate change on a broader level. That is to say, energy security it not only a function of stability in the Middle East, but also affected by long term shifts in the market. And if the current trend continues, the West may well find itself playing according to someone else's rules.

And, just maybe, American politicians will be justified in their verbal attacks on foreign oil.

This Interregnum Won't Be Lame

In 1933, the Twentieth Amendment to the US Constitution cut the amount of time between election day and the inauguration. Originally, the terms of the executive office and Congress began on March 4, four months after Americans cast their ballots. In 1937 (the first election cycle in which the amendment was existent), Franklin Delano Roosevelt was the first president to celebrate the now-customary January 20 inauguration date.

Even in the interregnum's abbreviated form, the transition from President-elect to President seems painfully impractical. There are the logistical challenges of overhauling federal officials and executive appointments, but it seems unlikely that such a process would stretch some two-and-a-half months. With a financial crisis changing by the hour, war-time developments moving at comparable speed, and the looming spectacle of economic collapse, this is no time for impotent political actors. 

Last Friday, in his first official appearance since Grant Park, President-elect Barack Obama said that he would move with "all deliberate haste" to assemble his cabinet. In the same speech, however, Mr Obama was careful to note that "The United States has only one government and one president at a time." At a time when he is under intense pressure to craft an economic rescue plan, Mr Obama reminded Americans (and everyone else watching) that President George Bush is still at the helm for another 10 weeks.

According to pundits, these are the days of a "lame duck" president. To be sure, Mr Bush's power has steadily eroded both in the United States and abroad, a reality that is in no small part thanks to his abysmal approval ratings. And it is true that the promise of a new face in the White House has discouraged Congress and foreign leaders from dealing with Mr Bush. Nevertheless, the idea that Mr Bush will not shape policy over the next several weeks is terribly misleading.

Just last week, the Washington Post reported that the White House is attempting to push through a series of deregulation measures to lift constraints on private industry. Among the administration's new rules are plans to ease restrictions on commercial fishing, relax standards on pollutant emissions, and rollback restrictions on mountaintop coal mining. On account of arcane procedural stipulations, these rules would be extremely difficult to undo for any future administrations. 

On a larger scale, Mr Bush will be a central figure at the G-20 meeting to be held in Washington on November 15. Notably, Mr Obama will not be present. European leaders are likely to propose some sort of international regulatory system, and while the Bush administration opposed such a scheme, any agreements will have consequences for Mr Obama's economic plans. The President-elect will meet with Mr Bush this week, and they will almost surely discuss a framework for the summit. Still, at this point, Mr Bush has the final say.

This may well suit Mr Obama just fine. It's quite a mess to inherit, and there are some nasty issues the President-elect would rather not touch. Consider Guantanamo: this detention facility has become a modern-day gulag that breeds anti-American sentiment throughout the world. According to the Pentagon, Guantanamo has held 759 detainees since 2002, while only a handful have ever been charged with a crime. Mr Obama has pledged to close the facility (a move Mr Bush now supports as well), but he would rather have someone else work out the details.

Even in Iraq, Mr Obama may benefit from an agreement that keeps American troops in the country beyond his initial campaign timeline of 16 months. A slew of recent car bombings threaten to destabilize Baghdad once again, and Mr Obama will have to balance domestic pressures with on-the-ground realities. Perhaps having his hands tied with a Bush-backed Status of Forces Agreement (SOFA) would temper Mr Obama's critics.

From this perspective, it seems the term "lame duck" president is somewhat of a misnomer. Mr Bush is still very much involved in America's looming challenges. If his advisory panels are any indication, Mr Obama will spend the next few weeks assembling a crack team of economic and political heavyweights. But he will most certainly keep one eye on the moves Mr Bush makes on his way out of office.

By many accounts, the Senator from Illinois won the election on his president's failings. For now, however, Mr Obama will need Mr Bush to reverse his fortunes and craft successful policies to stabilize the economy and national security developments. Before Mr Obama moves to Washington, he will want the White House in order. 

No Honeymoon For Obama

Well, that certainly didn't take long. Within hours of winning an historic election in the US, President-elect Barack Obama was staring at a slew of economic and foreign policy challenges. Much has been made of the problems that await the next administration, a complex cocktail of crises brewing at home and abroad. As Mr Obama receives his first security briefing today, the President-elect is surely aware that his administration will not be able to rest during the traditional "honeymoon period."

Following the election celebrations in Grant Park, Chicago, Mr Obama has received congratulatory calls from foreign leaders across the globe. Nevertheless, the buoyant mood has not stopped some premiers from expressing their demands (or thinly veiled threats) to the President-elect. 

On Wednesday, Russian President Dmitri Medvedev made it clear that he would deploy Iskander missiles to Kaliningrad, a Russian exclave between Poland and Lithuania. The announcement comes in response to President George Bush's controversial plans to build a missile defense system in Poland. While many analysts have categorized Mr Medvedev's rhetoric as "tough-talk," it remains indicative of Russia's new swagger. Mr Obama will have to work with his counterparts in Europe (particularly NATO partners) to moderate rising tensions in former Soviet states. 

Also on Wednesday, Afghan President Hamid Karzai called on Mr Obama to end American airstrikes that have led to an alarming number of civilian casualties in his country. Ever since the August 22 bombing of Azizabad, a small village in northwest Afghanistan, Mr Karzai has faced increasing domestic pressure to stand up to American and NATO forces. That airstrike killed at least 30 civilians, according to a review by US Central Command, and led US General David McKiernan to order a decrease in the number of bombings by Western forces. Just this week, however, coalition forces allegedly killed dozens of Afghan civilians after an airstrike in the village of Sha Wali Kot, a Taliban stronghold.

During the election, Mr Obama made Afghanistan the cornerstone of his foreign policy agenda. The President-elect believes, rightly, that the hyphenated conflict in Afghanistan and Pakistan is the real war on terror and will ask Europe to increase its military presence in Afghanistan. Across the Atlantic, many leaders found it easy to turn down such requests from the unpopular Mr Bush. Now with the man they want in office, European allies will be forced to coöperate with the US.

Even with greater support from NATO members, however, Afghanistan is a frightening mess. Mr Obama can commit more troops and more resources to the country, but he is likely to see limited success. The political realities on the ground spell a long and frustrating campaign for anyone who gets involved. A just war (as many have called the campaign in Afghanistan) is not necessarily a winnable war. If Mr Obama gets American and European troops bogged down in yet another endless conflict in the Middle East, his support will unwind rapidly.

Mr Obama has also promised to withdraw from Iraq and negotiate with the Iranians. Both are positive goals, but will require careful execution. Aside from the very real prospect of losing hard-earned security gains, there are complex political implications that follow from Mr Obama's strategy. On Thursday, Israel's Foreign Minister Tsipi Livni claimed that dialogue with Tehran could be seen as a sign of American weakness in the Middle East. Indeed both Israel and Saudi Arabia are worried about the rising power of Iran in the region, and will surely require the US to hedge any negotiations with strict security guarantees.

Newspaper reports hailed Mr Obama's victory as a landslide. But while his margin in the electoral college was resounding, the President-elect only won about 52% of the popular vote (barely more than Mr Bush in the 2004 election). Many of the challenges that now face Mr Obama will require difficult and perhaps unpopular solutions. His ability to build coalitions as a president must match the aplomb he showed as a candidate.

For the US, and indeed much of the world, Mr Obama's election is a powerful moment. Unfortunately, with all the problems that America faces, there is no time to celebrate. 

What's In A Name? Opposition Politics In South Africa

Rumors of a split in the ANC, South Africa's ruling party, had been stirring ever since former president Thabo Mbeki was forced out of office in September. Over the weekend, a group of erstwhile ANC loyalists met in Johannesburg to officially form a new party. The breakaway faction is led by former Defense Minister Mosiuoa Lekota and Mbazima Shilowa, the former Premier of Gauteng Province.

The party got off to a rather inauspicious start, when it attempted to brand itself as the South African Democratic Congress. Within 24 hours, the party learned that Ziba Jiyane (a KwaZulu-Natal politician) had already registered the name with the Independent Electoral Commission. The party may instead embrace its popular nickname "Shikota," although discussions appear to be ongoing. 

Some 6,000 delegates attended the conference in Johannesburg, a sign that South Africa may well witness real opposition politics for the first time since the end of Apartheid. Since the first all-race elections in 1994, the ANC has enjoyed overwhelming popular support and unmatched political power. To this point, the main opposition party has been the Democratic Alliance, which is widely dismissed by the country's black voters and holds only 10% of the seats in parliament.

The ANC split has been an ugly divorce, and it remains to be seen how the new party presents its platform to the South African electorate. Some analysts suggest that political fault lines are overlapping with tribal differences and personal rivalries. Ever since Nelson Mandela left office in 1999, the image of a Rainbow Nation has been fading fast. Now ethnic tensions threaten to flare up in the continent's most stable country. Jacob Zuma, the current head of the ANC and frontrunner in next year's presidential elections, has broad support among his own ethnic group, the Zulus. At the same time, many Xhosa supporters of Mr Mbeki feel as though their interests will be sidelined in the the ANC. 

There is, unfortunately, a bitter nature to this political process. Personal vendettas wracked the ANC after the party's controversial meeting in Polokwane last December. At that congress, Mr Zuma ousted Mr Mbeki from the ranks of the ANC, and a wave of antipathy began to force out the former president's supporters as well. Indeed, the breakaway party has made no secret of the fact that it cannot live with the personalities in the ANC. For his part, Mr Zuma has not taken to the split kindly. While addressing a huge crowd in Soweto, the ANC president called the new party's members "snakes."

On real political issues, the two parties disagree over the direction of the economy. Messrs Lekota, Shilowa, and their followers assert that the pro-Zuma faction of the ANC is giving too much influence to the South African Communist Party and the powerful Cosatu trade union. They argue that bowing to such interests will forfeit recent gains in economic development.

Still, Mr Zuma's populist message has been gaining traction. While South Africa has enjoyed considerable growth as an emerging market under Mr Mbeki, many critics claim that the gains have failed to trickle down to the country's poor. Zuma supporters are playing up this divide. When the new party officially announced its candidacy from the up-market Johannesburg suburb of Sandton, the ANC quickly lambasted the plush setting. 

In recent months, Mr Zuma has made the rounds with business leaders (foreign and domestic) promising not to make any radical changes to economic policy. Nevertheless, he will be under considerable pressure from his constituents to boost employment, slow privatization, and provide relief for those suffering in the country's sprawling shanty towns.

Regardless of whom South Africans elect, there are significant headwinds facing the economy. The country is a major exporter of BMW and Mercedes Benz, and the battered automotive has already seen a drop in sales, which could depress 2009 exports by up to 15%. South Africa also has a large industrial base and is a big commodities exporter, which create significant vulnerabilities in a global economic contraction.

Does a new party represent an evolution in South African democracy? In one sense, the top-down discipline of the ANC has finally been challenged, and there is at least the possibility of real debate on social and economic issues. And yet, if the new leadership fails to inspire supporters (and thus runs itself into political obscurity), it may well leave the ANC more powerful, monolithic, and with fewer voices of internal dissent.

As the election cycle finishes in the US, it now begins in South Africa. It is a similarly important vote, one which will show the trajectory of democracy in the Rainbow Nation. 

For Freight Trade, Credit Problems Just The Start

Market analysts are constantly searching for predictive economic indicators. Such soothsayers will point to consumer confidence, payroll levels, employment numbers, and a cocktail of other variables to support their forecasts. Over the last several weeks, one metric has gained significant traction in the industry. The Baltic Dry Index (BDI) is a number issued daily by the London-based Baltic Exchange. Each Monday through Friday, the Baltic's employees place calls to a panel of international shipbrokers to determine the cost of shipping various raw material cargoes.

The BDI condenses information from 26 shipping routes, various dead-weight tonnages, and a range of transported commodities. The index considers unprocessed inputs (such as cement, coal, and metallic ores) that serve as an outlook for production in a given economy. With markets that are increasingly driven by speculation, the BDI represents a tangible reality: people must book ships to move their commodities. As a result, the index is thought to be a valuable leading indicator of economic growth.

Back in 2003, the BDI spiked above 4,000 as emerging markets (most notably China) commanded more ships to move their freight. The index is subject to sharp movements because the supply of cargo ships is fairly inelastic. That is to say, the number of ships transporting global freight is fairly constant. It takes about 2 years to build a new cargo vessel and these freighters are too expensive to take out of circulation. As a result, global demand is the real driving force behind the BDI's rise and fall.

On Friday, the BDI closed at 851, down more than 90% since June. According to market reports, a cargo ship traveling around both southern capes cost just $6,300 per day. Earlier this year, when commodity prices were surging, the cost was some $234,000 per day. The global slowdown has eroded demand, forcing shipbrokers to hold their vessels in port or put them up for sale.

There are, however, even more alarming signs for the industry. Some of these ships have cargo already loaded, but are unable to deliver these goods to their scheduled buyers. The problem: trading partners cannot secure bank letters of credit. International transactions are supported by letters of credit, which effectively allow trading parties in different countries to secure an agreement. Banks issue letters of credit which guarantee payment for the seller once the goods have been shipped. The bank also acts on behalf of the buyer ensuring that no payment is made until confirmation of the delivery is received.

The fact that goods are piling up at certain docks has some analysts claiming that supply and demand are sufficient. Instead, the current economic climate has made it extremely difficult for anyone to secure the credit necessary for such transactions. As with many financial contracts, these international deals hinge on trust. With banks exposed to major write-downs, many ship owners are reticent to accept the few letters of credit they receive. 

Indeed, the credit freeze threatens to undermine global trade and bring the import-export economy to a grinding halt. If the current trend continues, industrial economies in Europe and East Asia will contract sharply, and developing world countries in Latin America and Africa (highly dependent on commodity exports) will face bitter losses. 

Optimistic analysts suggest that as lending rates come down (dollar LIBOR is at its lowest level since the Lehman Brothers collapse) and the financial crisis eases, the shipping economy will recover. Even still, the underlying fundamentals of the global economy are bleak. Recession in the United States and Europe is all but assured, which will shrink demand for raw materials. 

Either way, the shipping news is once again a must-read.