Daily Sources 3/20

1. Mobarak Noruz! Noruz, or the Persian New Year, begins today. Mobarak Noruz means "Happy (Persian) New Year!" The Obama Administration has released a video message to all those celebrating Noruz worldwide and which offers an olive branch to Tehran. Indeed, the message contains nearly all the big buzz words which the Iranian analyst community has been insisting were prerequisites to discussion, to wit:

"Nowruz is just one part of your great and celebrated culture. Over many centuries your art, your music, literature and innovation have made the world a better and more beautiful place."

"We know that you are a great civilization, and your accomplishments have earned the respect of the United States and the world."

"My administration is now committed to diplomacy that addresses the full range of issues before us, and to pursuing constructive ties among the United States, Iran and the international community. This process will not be advanced by threats. We seek instead engagement that is honest and grounded in mutual respect."

[Emphasis, of course, mine.] Now for the ask:

"The United States wants the Islamic Republic of Iran to take its rightful place in the community of nations. You have that right -- but it comes with real responsibilities, and that place cannot be reached through terror or arms, but rather through peaceful actions that demonstrate the true greatness of the Iranian people and civilization. And the measure of that greatness is not the capacity to destroy, it is your demonstrated ability to build and create."

The full text of the statement can be found here and the video itself follows:





This is a Big Deal™, indeed, it looks like the Obama Administration is offering a chance to arrange the "grand bargain"--in which most of the outstanding issues between Iran and the US are resolved in one fell stroke--many have argued is the only real way forward with Iran. But, as I have pointed out before here, here (#4), here (#1), and here (#2), it might prove difficult for the leadership in Iran to respond quickly, openly, or fully, because the regime is fundamentally (sorry) revanchist and its raison d'etre is in one critical arena to prevent the influence of foreigners from taking root in Iran.

You can get a sense of how much crow the Iranian establishment thinks the US will have to eat in order to establish the ground for talks via Omid Memarian's March 17 IPS interview of Iranian MP, Dr. Kazem Jalali:

IPS: What would you see as a first step by the US?

KJ: Americans will have to apologize for their past behavior. They will also have to observe the Algerian Convention resolutions in which they committed not to interfere in Iran’s internal affairs. They will also have to abide by international laws.

For example, regarding Iran’s nuclear issue, everyone knows the Islamic Republic of Iran has not violated any regulations, and Mr. Elbaradei’s reports [to the International Atomic Energy Agency] testify to this. They will have to admit to this and let the Islamic Republic of Iran pursue its peaceful nuclear activities under the supervision of the IAEA.

I believe Mr. Obama and Mrs. Clinton will have to take practical steps. These steps can slowly remove the lack of trust so that other cooperation can ensue.

...

[Obama] should know that U.S. policies vis-a-vis other countries and Iran have been like the policies against African Americans in the US."

But I imagine that there is another data point which is causing some alarm in Tehran, as Andrew E. Kramer at the New York Times reports former Secretaries of State Henry Kissinger and George P. Shultz, former Secretary of Defense William Perry, and former US Senator Sam Nunn are in Moscow today scheduled to meet with Russian president Dmitri Medvedev. Apparently former Secretary of State James A. Baker III was also in Russia this week at an oil and gas conference, and the visits of so many luminaries as part of the effort to reset (re-start) Russian relations coinciding with the Noruz message will not--whether or not it is--be seen as mere coincidence in Tehran. Indeed, I think what we are seeing here is a squeeze. If the US comes to terms with Tehran without Moscow, then there will be incentive to ask for more in return for any pull back in Eastern Europe. If the US comes to terms with Moscow without Tehran, part of those terms will be the end of any assistance in Iran's nuclear power program and leave it without a critical ally in the UN Security Council.

Dr. Jalali, who is the rapporteur of Iran's National Security and Foreign Policy Commission, also suggests that Arab Sunni neighbors are concerned about US-Iranian rapprochement,

"[It] seems that some of the Arab countries are concerned about the outcome of Iran-US relations. They foresee an improvement of relations between Iran and the US and they are not pleased about this. They are doing their best to avoid this.

They also believe that there are developments taking shape within the Islamic world, which could present their leadership with serious challenges."

And I wouldn't gainsay that observation, for example, the Saudi Information Agency on March 17 reported that a prominent Shia cleric in the country had called for Shia secession from the country after attacks on Shia worshipers by government extremists recently.

"Al-Nimer sermon struck a chord within Shia in the country, and almost every Shia website carried the speech with the overwhelming majority supporting his views.

Following the speech the Saudi Interior Minister Prince Naif bin Abdulaziz who is currently in New York, ordered the arrest of Al-Nimer. There have been conflicting reports with some suggesting he was arrested, and others suggesting he went into hiding."

(Nota bene: The Saudi Information Agency is of unknown provenance, it's "about us" says they will shortly reveal just who "us" is. It is "independent" Saudi news, meaning that it is not a government organization ... meaning that it is likely a foreign government's mouthpiece or that of a special interests lobby of some kind.) That said, I still think it is fair to say that there is Arab Sunni concern about Iranian ambitions, the new clout of Shia governments, and what a US-Iranian rapprochement would mean in the Gulf. Indeed, Iran's establishment might find it difficult to reconcile coming to terms with the US with the purpose of its government, but it may well regard having fewer and fewer potential allies in pursuit of conflict with the US as a greater threat to its continued existence and independence. What would be the consequence, for example, of only having Beijing as its veto in the UN Security Council--especially given Beijing's recent censure of Iran's nuclear program.



If a decision could only be forced by making what some might consider a fulsome statement, it was at little or no cost, no? Kim Chipman and Ladane Nasseri at Bloomberg report that in a telephone interview Ali Akbar Javanfekr, media adviser to Iranian president Mahmoud Ahmadinejad, said:

"We welcome the overcoming of the problems between the two nations, the solving of issues that run deep. The good intention should be put into action, otherwise differences will remain as fire under the ashes."

From the State Department's press briefing today:

"The President has clearly–-made it clear that we are going to engage diplomatically with Iran. We intend to do that. It will be up to the Iranians how they want to reciprocate. But I also want to emphasize that we still have some very difficult issues that divide us. And what the President has said is that we want to work with Iran on trying to deal with these differences. We’re willing to diplomatically engage. It’s really going to be up to Iran. I can’t give you a specific thing that Iran needs to do. But certainly Iran is aware of our concerns. It’s certainly aware of our willingness to engage diplomatically. And we’ll just have to see what comes from that."

Emphasis mine.

2. Real Time Economics carries the complete text of European Central Bank executive board member Lorenzo Bini Smaghi's letter to the editors of La Repubblica which takes issue with Paul Krugman's (!?) argument that perhaps the adoption of the euro was premature and that the European fiscal response to the crisis has been insufficient. Key excerpt:

"According to Krugman, the fact that the ECB does not have a government behind it which can cover any losses accounts for its being overly cautious. However, this assumption implies that the taxpayer should bear the burden – through inflation – of the difficulties experienced by the banking system. I’m not so sure that this is what US citizens want, and it is certainly not what people in Europe want.

To sum up, Krugman’s argument is that it is better to have only one decision-maker in a crisis, rather than 16 governments which need to coordinate their actions, as is the case in the euro area. In theory, this seems reasonable. But it doesn’t explain how the most fateful decision of all – the decision to allow a systemically important bank to fail in the midst of a financial crisis – was taken by a single decision-maker, while the 16 euro area governments have managed to avoid making such a large mistake. Neither does it explain how euro area governments have managed to agree on measures aimed at bank recapitalization, at guarantees to bank liabilities and on principles for removing toxic assets from banks’ balance sheets, decisions which have become a point of reference for all the countries of the G20."

Well worth reading in full. Yesterday, the dollar fell several cents to $1.37 to the Euro (at market rate) in response to the quantitative easing announced by the FOMC Wednesday--see Daily Sources 3/18 #16.

Meanwhile, Jurjen van de Pol at Bloomberg reports that industrial production in the eurozone fell by 17.3% in January 2009 from January 2008. Output fell 3.5% from December.

"'Unlike other central banks, we have not completely exhausted our margin for maneuver on interest rates,' ECB council member Guy Quaden said in an interview with Belgium’s Trend-Tendances magazine published yesterday, adding that a rate of 1.5% is not the lowest point."

Meanwhile, Tony Barber at the Financial Times reports that the EU agreed today to provide the IMF with €75bn ($102bn) in additional contributions to fight the crisis as well as to create consensus with the US on new financial regulations.

"EU leaders also found a compromise on a Commission proposal, blocked for three months, to spend €5 billion on energy and broadband infrastructure programmes across Europe. Germany lifted its objections on condition the money is spent by the end of 2010. ... About €200 million of the funds will go to the Nabucco pipeline project."

The EU also launched an "eastern partnership" initiative which would seek to strengthen relations with six key ex-Soviet states, providing them with "€600m up to 2013." And so I suspect that Russia is feeling the squeeze from the West as well. Alex Nicholson at Bloomberg reports that the text of a speech by Russian Economy Minister Elvira Nabiullina was posted to the website which forecast that Russia's economy will shrink by 7% in the first quarter of this year.

"Exports declined almost 50% in the first two months compared with the same period in 2008, the ministry said, while imports shrank nearly 35%."

3. Reuters reports that Hugo Chávez yesterday said in a televised meeting with his ministers that Venezuela was going to go ahead with the nationalization of Banco Venezuela, a subsidiary of Spanish Grupo Santander:

"We are not retreating. Today we have returned to the subject, I announce the nationalization of Banco de Venezuela to strengthen the national public banking system."

Enrique Andres Pretel at Reuters reports that Chávez also announced yesterday that the government would announce a series of economic measures to offset the fall in the price of oil and the global financial crisis on Saturday.Meanwhile, Matthew Walter and Lester Pimentel at Bloomberg report that Venezuela's bolivar fell 5% to 6.63 to the dollar "in unregulated trading at 11 am New York time." The currency is down 14% on the year against the dollar in the parallel market.

"'The market is very nervous,' [Nelson] Corrie[, head trader at Interacciones Casa de Bolsa in Caracas,] said in a telephone interview. 'People are demanding dollars. Everyone is buying because they’re not sure what Chavez is going to announce tomorrow.'"

Meanwhile, Takeo Kumagai at Platts reports that Venezuelan oil minister Rafael Ramirez formally invited executives from Japan's top trading houses to consider participation in the upstream development of Venezuela's natural gas fields. (Though Japanese demand for natural gas is in free fall on declining industrial demand, it is still on the look out for the replacement of volumes lost to Indonesia's new contract terms--see Daily Sources 2/13 #10.) Ramirez would not comment on the LNG pricing contract envisioned for the plant to be jointly operated by Mitsui, Mitsubishi, Chevron and PdVSA. However, he did tell Platts that Venezuela would also sign a memorandum of understanding on energy cooperation with South Korea tomorrow.

4. Bill Faries at Bloomberg reports that Mexico's central bank cut benchmark rates by 0.75% to 6.75% today.

"While forecasting an economic contraction this year, the bank’s February consumer price report showed that the annual core inflation rate, which excludes fresh food and energy, rose to 5.78%, the highest since November 2001."

5. David Winning and Jing Yang at Dow Jones report that CNPC rejected an offer by Chevron to sell a stake in the Big Foot oil field offshore Louisiana.

"'Talks with Chevron are currently on hold. We wanted more equity than the 12.5% stake it was proposing to sell,' the [CNPC] official said on condition of anonymity.

Chevron has a 60% interest in Big Foot, which is located in deep water around 362 kilometers south of New Orleans. Norway's StatoilHydro ASA and Royal Dutch Shell PLC have stakes of 27.5% and 12.5%, respectively."

And Brad Setser at Follow the Money makes the following interesting points about the view from Beijing on the recent moves to quantitative easing by the Fed:

"What is the Fed buying: Agencies.

That helps China. If SAFE wants to lighten up its Agency portfolio — and it has a lot of Agency MBS — it can now sell to the Fed. That facilitates its exit from its large position in the Agency market. I suspect that China alone accounts for about half of all central bank Agency holdings — it is a huge player. The Fed, in effect, is making it easier for China to sell long-term Agency bonds and shift into short-term Treasury bills — or whatever other asset China wants to buy.

That help though isn’t free.

The Fed’s move has pushed the dollar down v the euro. And helped push oil up. Neither helps China financially. If China wants to shift from say Agencies to bunds, it is now easier for it to trade its Agencies for dollars, but each dollar buys fewer euros.

The dollar’s share of China’s reserve portfolio exceeds the United States’ share of China’s imports. The more the dollar falls over time, the fewer of the world’s goods China can buy with all the dollars it has salted away. And the more the dollar falls, the more likely that the RMB will eventually resume its rise against the dollar.

That also doesn’t help China financially. China’s government has borrowed in RMB to buy dollars and to a lesser degree euros, effectively opting to hold more reserves than it needs to support its export sector. The ultimate cost of that policy hinges on the dollar’s ultimate fall v the RMB.

SAFE thus should want a strong dollar, as it is fundamentally long dollars. Relative to other reserve currencies. And relative to China’s own currency."