Francis Fukuyama on Iran and Rule of Law

Francis Fukuyama has an op ed in today's Wall Street Journal which argues that the Constitution of revolutionary Iran provides avenues for the development of a more integrated state:

"Compared to Section Eight [of the Constitution], the references in the Iranian Constitution to God and religion as the sources of law are much less problematic. They could, under the right circumstances, be the basis for Iran’s eventual evolution into a moderate, law-governed country.

The rule of law was originally rooted in religion in all societies where it came to prevail, including the West. The great economist Friedrich Hayek noted that law should be prior to legislation. That is, the law should reflect a broad social consensus on the rules of justice. In Europe, it was the church that originally defined the law and acted as its custodian. European monarchs respected the rule of law because it was written by an authority higher and more legitimate than themselves.

Something similar happened in the pre-modern Middle East. There was a functional separation of church and state. The ulama were legal scholars and custodians of Shariah law while the sultans exercised political authority. The sultans conceded they were not the ultimate source of law but had to live within rules established by Muslim case law. There was no democracy, but there was something resembling a rule of law."

I agree with much of his analysis. Indeed, I made similar observations early last year in my post Law and Revolution in Iran, though of course Fukuyama's prose is much easier on the ears.

More on Iranian Elections Protests

I have refrained from saying much more about the election protests, simply because there is so much going on, and it is so hard to distinguish fact from fiction from this far remove, that it seems like it is mostly a question of watching to see what will happen. That said, a few points and some footage:

Meir Javedanfar makes the very important point that the clergy of the holy city of Qom--which could be described as the main locus of Shia thinking in Iran--have yet to congratulate Ahmadinejad on his victory.

"In 2009, the silence of some of the clergy in Qom against the current crisis is deafening to the supporters of Mahmoud Ahmadinejad.

In an article published on the 16th of June in the pro Ahmadinejad Borna News agency, it was asked why despite the fact that President Ahmadinejad had won 24 million votes, he has still not been congratulated by some of the clergy in Qom?. Even more importantly the article asks, why is it that some of the senior clergy have not condemned the recent violence? Although the article does not mention any names, it is not difficult to guess that one such clergy is Ayatollah Sanei, who has publicly lambasted Ahmadinejad after the elections.

The behavior of the clerics is certainly out of the ordinary. Usually, within a day of a president's election, majority if not all of the 14 senior Ayatollahs of Qom congratulate the new president. Not this time."

Note that the protesters the other day marched in silence. (This is important for the further reason that the Hidden Imam--the twelfth and last Imam and future savior of mankind--has been hidden by God, but in an unseen way, silently, so to speak, influences current events.)



That's a lot of people for such relative quietude. The numbers are also important--many analysts say that all the government needs to do is to ruthlessly use the military and various intelligence and security organizations to repress the demonstrations. But when you have such large numbers of people out in the street, there's a good chance that members of each of the security units have relatives in the crowds. That would make them unlikely to randomly attack the crowds. (Which could possibly be confirmed by the stories that at night key protesters are being targeted by the security forces--comfortable with targeting the leaders of the revolt, but not the masses.)

Pepe Escobar at Asia Times reports that Rafsanjani has called for an emergency meeting of the Council of Experts in Qom.

"Article 111
Whenever the Leader becomes incapable of fulfilling his constitutional duties, or lobs one of the qualifications mentioned in Articles 5 and 109, or it becomes known that he did not possess some of the qualifications initially, he will be dismissed. The authority of determination in this matter is vested with the experts specified in Article 108."

The 86 members of Council of Experts, led by Rafsanjani, are directly elected by the people of Iran.

This footage suggests there may be some truth to the rumors that some in the security forces are acting to protect some of the protesters.



If that perception is true, it is an essential data point. And Mousavi and Karrubi both are reported to have deep ties with the Revolutionary Guard.

Of course, a situation where the armed forces are uncomfortable with attacking the protesters would be very similar to the 1979 Revolution.

Ali Akbar Dareini at the Associated Press reports that the government, via state cable news station, Press TV, has accused the US of interference in the current situation.

Outside of the question of representation and the Islamic nature of the state, the Iranian Constitution is an anti-colonial document. I have counted no less than 12 articles and sections of the constitution which are designed to prevent foreign influence--see Law and Revolution in Iran. I understand that both sides claim foreign intervention. And this is the key point--that both sides argue that they stand for the true revolution. The most compelling argument the Ahmadinejad camp will make--whoever that contains--is that the opposition candidate forces are betraying the revolution to outsiders.

In Iran the government is especially opaque, so the effect claims of foreign influence has on the population will be larger than we might estimate. Opaque governments make for a larger "black helicopter" crowd than transparent ones. Beyond that, you cannot overstate the fierce nationalism--and general feeling of aggrievement at the hand of outsiders--felt by the Iranian population at large.

(In fact, the US government has interfered in terms of acting to persuade twitter to stay open ... and the regime is very focused on controlling, as far as it can, the flow of information. The fact that so many around the world and in the US are expressing their support for the opposition lends them ammunition, but at least the regime can no longer state that it is just the government of the US that is opposed it, and not the people.)

The notion that both sides are claiming to be the true inheritors of the revolution seems bolstered by the fact that the opposition's color is green ... traditionally considered the color of Islam. The news that the national soccer team wore green wristbands is basically a big deal. Soccer is a BFD in Iran.


(An image at the WSJ.)

The National Iranian American Council helpfully translates some of Grand Ayatollah Yousef Sanei's ... note he is a better regarded Islamic scholar than the Leader of the Revolution Khamenei ... letter to Mousavi:

"'I was hoping that your election, with your experience and devotion to and blessings of Imam [Khomeini] and his loyal friends, would please the people of Iran. Regretfully, this did not happen. Be certain that administration of justice and respect for people’s rights and votes, which are evident in your letter, are only possible through informing all the people.'

Sanei further explained 'I am obligated to pray for you and all the men and women of this country and for the continuation of the holy objectives of Imam Khomeini’s Islamic Republic.' Sanei concluded by wishing Mousavi success with the support of the people, universities, and esteemed clergies, as well as in protecting the people’s rights."

Given the fact that the opposition is made of Old Guard revolutionaries like Karrubi, Rafsanjani, and Mousavi--see Iranian Elections cont-Why the ideas matter--I still see this movement as establishment versus establishment. It is a battle between forces which see the Republican elements of the regime as critical, and those which want to switch it to an absolutist form of government. In that vein, it is more of a question of whether we are seeing the moment when Charles shuts down Parliament for eleven years, or the end of the Long Parliament--with the declaration of loyalty to the Parliament as opposed to the King sparking the English Civil War.

If the forces that back Ahmadinejad refuse to make concessions--and appear to institute an absolutist system, the promise of the Constitution will end up being a persistent problem for the government. As Ladane Nasseri and Ali Sheikholeslami at Bloomberg reported, the people are waiting for the next signal from Khamenei to be delivered in his Friday sermon. I think it likely that concessions will be made, but, either way, it will be a critical moment ... and we should know the results by midnight PST.

More footage:

Iranian Election cont. -- Why the ideas matter

"Man is by nature a political animal." - Aristotle, Politics
-- meaning, in part, that he is a social animal. What creates social cohesion?
"Evils draw men together." - Aristotle, Rhetoric

"The true mark of success in Iran will be an election that follows due process. Politicians come and go--but a healthy, functioning and fair legal system is the people's long-term guarantee for greater human rights." – Shirin Ebadi, Iran’s Human Rights Test Washington Post, 11 June 2009

Stratfor has a decent insta-analysis on the Leader of the Revolution's [LOTR] Ayatollah Khamenei's decision to call on the Guardian Council to investigate the complaints made by the opposition candidates that the election count was falsified.

"There is precedence for such intervention by the Supreme Leader. In 2004, when the Guardian Council rejected the applications of 3,600 out of nearly 8,200 people seeking candidacy in Iran’s upcoming parliamentary elections in a blow to Khatami’s presidency, Khatami used the same language as Mousavi and his supporters are using today, calling the move a 'silent coup d’etat' by the state. Khatami and then speaker of the Majlis (Iranian Parliament) Karroubi demanded a full review of the candidate screening, and the Supreme Leader responded by ordering the Council to look into the matter and reconsider some of its decisions."

Although this is the case, there may be another reason the Guardian Council has been chosen--additional legitimacy. I say this because Iran's constitution suggests that the proper venue of inquiry into such matters would be the Judiciary, led by Ayatollah Mahmoud Hashemi Shahroudi, who is appointed by the LOTR and has already ruled the election valid.

Article 156
The judiciary is an independent power, the protector of the rights of the individual and society, responsible for the implementation of justice, and entrusted with the following duties:
1. investigating and passing judgment on grievances, violations of rights, and complaints; the resolving of litigation; the settling of disputes; and the taking of all necessary decisions and measures in probate matters as the law may determine;
2. restoring public rights and promoting justice and legitimate freedoms;
3. supervising the proper enforcement of laws; ... †

Perhaps the most proper institution for examining the validity could be the National Inspectorate General, though I do not have access to the legislation which established its powers:

"Article 174
In accordance with the right of the judiciary to supervise the proper conducting of affairs and the correct implementation of laws by the administrative organs of the government, an organization will be constituted under the supervision of the head of the judiciary branch to be known as the National General Inspectorate. The powers and duties of this organization will be determined by law."

Either way, election fraud, or the perception of it, does much to undermine the regime--and just now entrusting the head of the Judiciary with the job would probably be viewed as stacking the deck. Although half of the Guardian Council is appointed directly by the LOTR, the other half is nominated by the Majlis and as such is at least somewhat representative.

And the importance of representation to the Islamic Republic of Iran can be understated. It is worth remembering that the broad participation of the population was heralded by none other than the head of the Judiciary himself, who said on the 13th per Tehran Times:

"[The people's] participation shows the unity between the people and the system, and the people’s belief in the revolution after 30 years."

The LOTR said,

"Thank God, the people’s enthusiasm to take part in the election is very great."

Speaker of the Majlis Ali Larijani said,

"The people’s participation is due to their awareness and shows the people’s strong loyalty to the revolution."

Interior Minister Sadeq Mahsouli said,

"The enemies of our nation sought to reduce the participation of the people by spreading rumors that the election would not be fair. However, through their enthusiastic participation in the election, the people showed that they have complete trust in the election (process)."

And, obviously, the opposition--members of the establishment themselves--were looking to the turnout as a mandate. Mir-Hossein Mousavi said

"The unity which has been created among the people provides a golden opportunity for us, and we should not regard it as a threat."

Ayatollah Rafsanjani himself said,

"In my opinion, this election is one of the country’s most fateful elections."

And the government is by law a Republic:

"Article 6
In the Islamic Republic of Iran, the affairs of the country must be administered on the basis of public opinion expressed by the means of elections, including the election of the President, the representatives of the Islamic Consultative Assembly, and the members of councils, or by means of referenda in matters specified in other articles of this Constitution."

If the LOTR allows the results to be honored without a thorough and convincing report demonstrating that the numbers were not, in fact, cooked, then the regime loses its Constitutional basis.

Why would the LOTR, basically given nearly total power by Constitution, allow himself to be seen as a party to stealing an election and thus throwing out the basis of his rule?

It's the same question I posed a few days ago. I don't know the answer, but I suspect that a real and thorough effort will be made to legitimize this election--and should that prove impossible, the Guardian Council will rule it invalid. If that does not take place, then I suspect that we have indeed seen a coup, where the establishment has been overturned by a coalition of hard right forces.

I would add that should that prove the case, the legitimacy of the government will likely continue to be challenged unless the powers that be can truly convince a sizable plurality of the security forces and people in general to murder their countrymen with impunity. There has been footage of security forces shooting into the crowds, but that does not mean that sufficient people have been convinced to act like jackboots in defense of a totally new government structure.

Some analysts believe that the Iranian Constitution is but a farce, a shadow play behind which the real maneuvering of the political elite hides. But I suspect that the promises made in the Constitution, though compromised by the political facts on the ground in some ways, may prove to be similar to the American Declaration of Independence, which has no true legal standing, but the ideas behind which--specifically that all men are created equal--ended up leading the country to civil war, and overturning some of those compromises.

Indeed, if this is, and I believe it is, a battle between competing members of the establishment, it may resemble a civil war more so than a revolution. After all, President Ahmadinejad has Constitutional responsibilities that inform his rhetoric against corruption:

"Article 49
The government has the responsibility of confiscating all wealth accumulated through usury, usurpation, bribery, embezzlement, theft, gambling, misuse of endowments, misuse of government contracts and transactions, the sale of uncultivated lands and other resources subject to public ownership, the operation of centers of corruption, and other illicit means and sources, and restoring it to its legitimate owner; and if no such owner can be identified, it must be entrusted to the public treasury. This rule must be executed by the government with due care, after investigation and furnishing necessary evidence in accordance with the law of Islam."

And the fact that the color of the protesters is green, though it is meant to allude to the color revolutions, also happens to be the color of Islam may indicate that what the people are out in the street demonstrating for is not for a revolution, but for the implementation of the revolution ... for realizing the promise of the Constitution. Indeed, that is the key message of Shirin Ebadi's piece in the Washington Post excerpted from above--that she believes that the Constitution properly executed provides for the human rights of the people. Peruse, for example, the following rights enumerated by Iran's Constitution:

"Article 19
All people of Iran, whatever the ethnic group or tribe to which they belong, enjoy equal rights; and color, race, language, and the like, do not bestow any privilege.

Article 23
The investigation of individuals' beliefs is forbidden, and no one may be molested or taken to task simply for holding a certain belief.

Article 26
Political parties, societies, political and craft associations, and Islamic or recognized minority religious associations may be freely brought into being, provided that no violation is involved of the principles of independence, freedom, national unity, Islamic standards, and the foundations of the Islamic Republic. No person may be prevented from joining, or compelled to join, one of the above.

Article 27
Unarmed assemblies and marches may be freely organized, provided that no violation of the foundations of Islam is involved.

Article 32
No person may be arrested except according to and in the manner laid down in the law. If someone is detained, the subject matter of the charge, with reasons (for bringing it), must immediately be communicated and explained in writing to the accused. Within at most 24 hours the file on the case and preliminary documentation must be referred to the competent legal authority. Legal procedures must be initiated as early as possible. Anyone infringing this principle will be punished in accordance with the law.

Article 34
To ask for justice is the unquestioned right of every individual Everyone may refer to the competent courts in search of justice. All members of the nation are entitled to have recourse to such courts within their reach. No one may be prevented from recourse to any court to which the law entitles him to refer

Article 35
In all courts, both parties to the claim are entitled to select a lawyer for themselves. If they do not have the capacity to do this, the means of a lawyer being appointed to act for them must be made available to them.

Article 36
A sentence to punishment and its execution must only be by the decision of a competent court, and by virtue of law

Article 37
Innocence is the basic principle No person is considered legally guilty, except in cases where his guilt is established in a competent court."

And as Borzou Daragahi at the Los Angeles Times reports a protester said: "Your rights are something you take,not something you're given." (The LA Times tends to have the best big paper reporting on Iran.)

That said, every revolutionary and military thinker knows that a key step in any revolution or establishing dominance an area is to hold broadcasting, TV and radio, as well as the key transportation hubs and any armories. Times have changed from the times when you could just occupy the broadcasting towers and train station ... information dissemination has become decentralized. It is not easy to control communications in the internet age.

Not that folks aren't trying. For example, try going to Tehranbureau.com ... note that it's running off a changed address and looks awful different. I am of the understanding that internet attacks have similarly taken place against government web pages. James Cowie at renesys blog has a breakdown on service disruptions in the communications infrastructure:

"There's no question that something large happened in the Iranian telecom space, and that the timing aligns with the close of voting and the emerging controversy. Iran typically has a fairly high baseline level of sporadic route instability, due to the country's highly centralized incumbent transit through DCI (Data Communications Iran, AS12880) and DCI's somewhat peripheral connectivity to the main east-west conduits for data. Even so, we started seeing spikes of route instability (changes in the paths to Iranian IP space) starting around 08:05 UTC on Saturday (just after noon in Tehran) that were significantly larger than normally expected. These bursts affected as many as 400 prefixes (blocks of IP addresses)--the majority of Iran's Internet presence."

So it does look like this political contest could spiral out of control. And you may think my quotes from Aristotle at the top are a tad precious, but Aristotle is well-known to all senior Islamic clerics, because he forms the basis of discussion of the most important Islamic philosophers in the history of that religion. Indeed, if I understand correctly, all must learn formal Aristotelean logic. And both sides know that the ideas incorporated in their Constitution are enough to spawn a revolution. It already has.

I would hypothesize that both sides would decide that allowing an all out confrontation to emerge would not be in their interests, as both have extensive interests in the prevailing system. Thus my suspicion that we will see a real investigation and real concessions regarding the election, perhaps a recall, but you never know--perhaps the genie has left the bottle.

More footage of protests:





From Twitpic:



Tehranbureau is live blogging from Iran here.

The National Iranian American Council is also hosting translations of twitter, email, facebook, etc. accounts from Iran.

Nico Pitney at the Huffington Post is live blogging about the events.

Andrew Sullivan is as well at the Atlantic.

† I am using the translation of the IRI's Constitution hosted by the Tehran law firm--Dr. Alexander Aghayan & Associates, Inc.--here.

UPDATE: More footage via Michael Totten's blog (h/t T. Greer at the Scholar's Stage, who also had some awful nice words to say about my own efforts.)





as Totten notes, folks so far appear to be facing down threats from the security forces ... & on that note:

Iranian Elections cont.

The National Iranian American Council is live-blogging the situation in Iran, and providing helpful translations of twitter accounts.

A photo from Shahram Sharif on flikr.



My two cents:

It is hard to tell from this remove, but clearly many in Iran believe that the election has been tampered with. There is talk of a coup ... but it would be in this sense: that the Constitution of Iran has been overturned, but the power structure that allegedly has replaced it remains an open question.

The Leader of the Revolution [LOTR] has endorsed the results, which is, at least on the surface odd, given that the LOTR derives his legitimacy from the Constitution. (In fact, he is supposed to derive it both from the process outlined in the Constitution and his impeccable Islamic credentials, but as a matter of fact Ayatollah Khamenei does not have particularly strong credentials as a world-class Shia cleric. So, in fact, he only derives his legitimacy from the process outlined in the Constitution ... the rest is just power politics.)

So, why would the LOTR endorse the results of an election which appears to contravene the provisions in the Constitution which call for democratic election of a President from a slate of candidates chosen by committees whose members themselves are mostly selected by the LOTR himself? It's a good question and I don't pretend to know the answer.

It may be that the folks in charge now are a loose coalition of hard right paramilitaries, essentially the Revolutionary Guard led, at least figuratively, by Ahmadinejad. But that seems too pat an answer for Iran ... cause if it was true of Russia, it is true of Iran, that it is an enigma, wrapped in a riddle, surrounded by mystery. The political process over there is opaque, and appears to have just become more so.

But folks over there are saying they haven't seen forces like this unleashed since the 1979 revolution. If that's true, the forces behind Ahmadinejad's selection may not be able to control the situation. (Iran is not Tehran; Tehran is to Iran as New York City is to the US. And a primary locus of the 1978-9 revolution was ... Tehran.) We shall see.

The BBC has footage of violent clashes in Tehran.

My 2¢ on the Iranian Election Tomorrow: thoroughly "Iranic"

Many commentators have noted that the way the Presidential contest in Iran is being portrayed is somewhat anachronistic--in terms of reformers versus conservatives or right versus left. (See, for example, Greg Scoblete's post at The Compass, Kevin Sullivan's post also at the Compass, Mahmoud Sadri's post at Iranian.com, Maziar Bahari's piece in Newsweek, and Borzou Daragahi's article in the Los Angeles Times.)

My two cents:

Both candidates are revanchist--in the sense that the Islamic Republic of Iran's Constitution itself is revanchist, meaning a "political policy, as of a nation or an ethnic group, intended to regain lost territory or standing." The Constitution is explicitly anti-colonialist, calling for self-reliance and attempting to ensure an absence of outside interference.

All candidates for the Presidency must be vetted by the Guardian Council. Half of the members of the Guardian Council itself are directly appointed by the Leader of the Revolution [LOTR], half are chosen by the Chief of the Judiciary (different from the Minister of Justice) who himself was appointed by the LOTR and confirmed by the Majlis (Iranian Parliament), candidacy for which is also approved by the Guardian Council. (For a long piece on Iran's Constitution, and why reformers see it as a potential means of providing for human rights in Iran, contra the establishment, see Law and Revolution in Iran.)

Iranian politics thus do not fit the mold of left versus right as in the West, or even really reformist versus conservative. There is the establishment, and then there is the slightly less establishment.

What Ahmadinejad is is a populist anti-establishmentarian--he is taking on the old guard of the Revolution. He has replaced senior officials in all branches of the Executive with his own guys--the people he replaced mostly got their jobs due to political connections with the Old Guard. One of his most radical moves was to completely replace the senior diplomatic staff of the government. His constant refrain is to argue against the "corruption" of the old Guard--indeed, the recent kerfuffle with Rafsanjani--see Daily Sources 6/10 #8--is mostly about his accusation that Mousavi is backed by the "corrupt" elements of the old Guard, personified by the "puppet master," Rafsanjani. He's a caudillo wanna-be, greatly limited by the Constitution's emphasis on the LOTR and various institutions designed to guarantee the Islamic nature of the government.

Mousavi is the old guard, a previous prime minister, tied in with the Revolutionary Guard, the bonyad system†, and backed by Rafsanjani--he is the establishment choice, which is why he might be the first presidential candidate to unseat the incumbent in the history of Iranian presidential elections.

Thus, it might be somewhat ironic that some in the West appear to be excited about Mousavi, when Ahmadinejad, awful and obnoxious as he is, is the candidate who threatens to overturn part of the power structure there. Mousavi will likely make less anti-Semitic comments in the press, seem more reasonable, return the Old Guard's picks to their places in government, and, as such, be resolutely less populist than Ahmadinejad--as Ahmadinejad's views, though horrific, do have currency throughout much of the Middle East.

Thus, strange as it is to say, Ahmadinejad is the candidate of change, though much of that change would be expressed in ways that we are uncomfortable with. But it is change that could weaken the existing power structure. If he were able to grab more power, he would certainly continue to make efforts to undermine the existing power structure, unlike Mousavi--and likely make the Iranian system weaker and more malleable in the future.

(Of course, enthusiasm in the West for Mousavi might undermine his candidacy, because it could be interpreted as a sign that he the West's choice, and potential tool.)

Iranic ... if you will ... ain't it?

† One key element of the Old Guard is the "bonyad system"--charitable trusts which represent as much as 20% of Iranian non-petroleum GDP, and which are all directly answerable to the LOTR.

UPDATES:

Juan Cole at Informed Comment notes that some neo-cons are openly rooting for a Ahmadinejad win. I just want to make it plain that though I think that Ahmadinejad would do more to weaken the regime than Mousavi, I do not truck with the neocons.

Cole also links to an interesting and detailed analysis by Walter Posch via the Middle East Institute.

Gary Sick--one of our country's most insightful Iran analysts--notes that Rafsanjani's letter is unprecedented and asks if the LOTR, and the rest of the establishment has found that it has lost control of events on the ground:

"Thus far, Khamene`i has remained utterly silent in the face of Rafsanjani’s direct challenge to him to act or else risk the future of the Islamic system. Whatever Khamene`i decides to do – facilitate a possibly unfair election of Ahmadinejad, encourage the more liberal opposition, or simply do nothing – he is at risk of being unveiled as quite an ordinary man whose powers are anything but magical and who has no answers to the tumultuous uncertainties generated by an election that is assuming historic importance.

No one in Iran appears to be fully in control of events that have a potential to mark a turning point in the history of the Islamic revolution."

Al Jazeera reports that the head of the Revolutionary Guards has reacted to the large number of people on the street by issuing a statment warning that a velvet/color revolution will be put down:

"'There are many indications that some extremist [reformist] groups, have designed a colorful revolution ... using a specific color for the first time in an election,' the statement said.

Calling that a 'sign of kicking off a velvet revolution project in the presidential elections', Javani vowed that any 'attempt for velvet revolution will be nipped in the bud'."

The text of Rafsanjani's open letter to the LOTR via TehranBureau.

Shirin Ebadi's op ed in the Washington Post where she says:

"I am often asked about the elections, but what I think about who should win doesn't really matter. As a lawyer and as someone who has spent my career fighting for and within the Iranian legal system, I am more concerned with the legality of the protection of human rights within Iran. The true mark of success in Iran will be an election that follows due process. Politicians come and go -- but a healthy, functioning and fair legal system is the people's long-term guarantee for greater human rights. "

Daily Sources 3/10

1. Hadi Soesastro, the head of Indonesia's Center for Strategic and International Studies, has a post at Vox EU which calls for proactive engagement by east Asian nations in the G20.

"There is now no better forum than G20. Essentially, it will act as a 'steering committee for the world economy', as Barry Eichengreen aptly said, and this forum should now replace the G7 or G8 for good."

Soesastro appears to regard the preoccupation with the expanded Chiang Mai Initiative as parochial and not broad enough to really address the economic concerns in the Asia Pacific. Worth reading.

2. Keith Bradsher at the New York Times reports that the National Bureau of Statistics announced the consumer prices in China fell by an annual rate of 1.6% in February. Producer prices fell 4.5% for the same time period.

"In yet another possible hint of deflation, an index of real estate prices in 70 Chinese cities also fell in February, inching down 0.3% from January and down 1.2% from a year ago."

3. Zhou Xin at Reuters reported yesterday that the head of the Chinese National Energy Agency, Zhang Guobao, made comments in the China Reform Daily yesterday which argued that China should use its nearly $2 trillion in foreign exchange reserves to buy more gold, oil, uranium and other strategic commodities.

"[Mr. Zhang] added that agencies such as China's National Oil Reserves Centre should be allowed to issue foreign exchange bonds to obtain money from China's forex reserves for overseas purchases."

(h/t Chuck Butler at Daily Pfenning.) Meanwhile, Judy Chen at Bloomberg reports that Wang Jian, secretary general of the China Society of Macroeconomics which itself is a division of the National Development and Reform Commission, said in an interview that a weaker yuan "won't help exports. Foreign consumers still won’t have enough money to buy."

"'A three percent in appreciation would attract more foreign capital into China to help us acquire assets overseas,' said Wang. 'We should take advantage of the low prices and use reserves to buy more commodities, oil fields and valuable assets in the US.'"

4. Janet Ong at Bloomberg reports that Taiwanese exports fell at an annual rate of 28.6% in January.

"Exports, which are equivalent to about 70% of GDP, fell 37.2% over the first two months of 2009, the largest decline on record. China and the US are Taiwan's biggest overseas markets.

The economy contracted 8.36% in the fourth quarter, pushing the island into its first recession since the technology bubble burst in 2001. The jobless rate climbed to a seven-year high of 5.33% in January.
...
Taiwan's shipments to China fell 32.6% compared with a 63.5% plunge in January. Exports to the U.S. declined 24.7% from a year earlier and sales to Europe fell 34.7%, more than January's 32.6% decrease."

February's export decline was Taiwan's sixth consecutive month of exports contraction.

5. Gordon Fairclough at the Wall Street Journal reports that the Dalai Lama delivered a speech in Dharamsala, India, to mark the 50th anniversary of his exile in which he condemned Chinese control of the region in especially harsh terms.

"The Dalai Lama said China's Communist government had subjected Tibet and its people to 'untold suffering and destruction' over the past five decades, turning the Himalayan region into 'hell on earth.' He also called for 'meaningful autonomy' for Tibetans."

Edward Wong at the New York Times reports that the Dalai Lama said,

"Today, the religion, culture, language and identity, which successive generations of Tibetans have considered more precious than their lives, are nearing extinction."

China's foreign ministry spokesman responded to the criticism by dismissing it as lies and claiming that Beijing's policies are "blazing a new path for Tibet's prosperity."

6. Der Spiegel reports that Jean-Claude Juncker, prime minister of Luxembourg and the chairman of 16 finance ministers from the eurozone, told reporters yesterday that the EU has rejected an appeal by the US to launch further economic stimulus coordinated internationally. He said, "We're not prepared to increase the economic programs."

7. Ben Hall at the Financial Times reports that French industrial production fell by an annual rate of 13.8% in January.

"January’s plunge was the sixth consecutive monthly decline in industrial output, the longest continuous contraction in the 29-year old statistic series."

8. Emma O’Brien at Bloomberg reports that Ukraine's central bank--Natsionalnyi Bank Ukrainy--has issued warnings to a set of domestic banks not to sell the hryvnia below the rate it sets.

"'This is a tussle between the banks and the NBU,' said Dmitry Gourov, a Ukraine economist in Vienna at UniCredit SpA, Italy’s largest bank. 'The central bank could easily make a scapegoat of one particular bank, there’s always that risk.'"

The hryvnia has fallen 39% versus the dollar in the past six months.

9. RIA Novosti reports that the Russian Finance Ministry will cut its export duty on crude from $115.3 to $108-$112 per metric tonne (~$14.79-$15.34/b) starting April 1. The ministry reportedly expects the Urals blend price to average between $41.54-$42.54/b in March.

10. Anthony DiPaola and Glen Carey at Bloomberg report that Abdullah bin Hamad al-Attiyah, Qatari minister of oil, said in an interview that "We cannot discuss another [OPEC] cut until we see the compliance at 100%." Al-Attiyah indicated that neither a price target nor a price band was in the works. Shigeru Sato and Yuji Okada at Bloomberg report that Saudi Aramco kept supply to Japanese refiners at the same level seen in March for April.

"'The Saudis seem to have avoided a deeper reduction in April supplies to Japan, hinting that the kingdom may oppose an additional reduction,' said Ken Hasegawa, a commodity derivatives sales manager at Newedge in Tokyo."

11. Ladane Nasseri at Bloomberg reports that Iran's energy ministry announced that the Bushehr nuclear plant will be producing 500 megawatts by August 22, per a press release by Energy Minister Parviz Fattah. The other 500MW of the 1,000 MW plant is scheduled to be linked to the grid by March 2010.

12. Michael Collins Dunn at the Middle East Institute Editor's blog posted yesterday on the decision of Morocco to cut relations with Tehran. Tehran had criticized Morocco for expressing support for Bahrain after a former speaker of the Iranian parliament called it the 14th province of Iran--see Daily Sources 2/20 #6. Morocco may have felt singled out by Iran given that the rest of the Arab Muslim nations also backed Bahrain.

"[The] Moroccan announcement breaking relations also spoke of Iranian attempts to 'alter the religious fundamentals of the kingdom, to attack the roots of the Moroccan people's ancestral identity.' Iran called the charges baseless, but it seems the Moroccans are alleging direct interference with their internal affairs.

Morocco has complained in the past that the Iranian Embassy in Rabat was seeking to spread Shi'ism in the Sunni Kingdom, where the King also claims religious leadership and the title Amir al-Mu'minin or Commander of the Faithful."

13. Borzou Daragahi and Ramin Mostaghim at the Los Angeles Times reports that the arrival of Turkish Foreign Minister Ali Babacan in Tehran has sparked speculation that Ankara is looking to serve as a mediator for talks between the US and Iran.

"'The term "mediation" is used at times,' Babacan told reporters in Ankara ... before departing for Iran, according to the Turkish newspaper Sabah. 'This will only be realized if a concrete request is made by both sides. We could contribute to the furthering of relations between the two nations to a positive level.'
...
Clinton told Turkey's Kanal D television last week that the Obama administration welcomed any Turkish efforts to help sway the Islamic Republic. 'You know the Iranians better than we do,' she said. 'You have shared a border for--I think I was told over 350 or so years. So we are going to ask for your help in trying to influence Iranian behavior.'"

14. Ismail Khan at the New York Times reported yesterday that the Mamoond tribe, which resides in the Bajaur region of Pakistan and in Afghanistan, signed an agreement with Islamabad to hand over several Taliban leaders, lay down their arms, and stop harboring foreign militants. "The entire Taliban leadership in Bajaur comes from the Mamoond, which has also been accused of harboring al Qaeda operatives."

15. Lydia Polgreen at the New York Times reported yesterday that President Omar Hassan al-Bashir released from prison Hassan al-Turabi today. Turabi was originally arrested two months ago because he came out in favor of the ICC trying al-Bashir. When he was released, he reiterated that support, "We must accept all international policies, especially if they address justice." (Turabi is Sudan's most prominent Islamist, and as such puts a premium on jurisprudential thinking.) Analysts say the move might be to bridge political divisions in Sudan now that the regime is under new pressure, which makes sense. I would add, however, that Turabi, an old colleague of Osama bin Laden, and prominent Islamist is not exactly considered friendly by most of the West.

16. Joshua Goodman and Andre Soliani at Bloomberg reports that Brazil's GDP shrank by 3.6% in the fourth quarter from the third. However, Brazil's GDP grew by 1.3% in the fourth quarter of 2008 from 4Q 2007.

"Brazil’s economy expanded 5.1% last year, compared with 5.7% in 2007. Industrial activity fell 7.4% from the previous quarter. Household consumption fell 2%."

17. Christine Cordner at Platts reports that the EPA today proposed a comprehensive national system for monitoring carbon dioxide and other greenhouse gas emissions which would begin reporting in 2011.

"EPA said that about 13,000 facilities, accounting for about 85-90% of US GHG emissions emitted, would be covered under the proposal. The new reporting requirements would apply to suppliers of fossil fuel and industrial chemicals, manufacturers of motor vehicles and engines, as well as large direct emitters with emissions equal to or greater than 25,000 metric tons/year."

Daily Souces 3/2

1. Tony Barber at the Financial Times reports that the EU promised in its summit Sunday that it would provide financial assistance to eastern European nations in order to help them weather the crisis. However, the ministers rejected Hungary's appeal for a €180 billion package for the entire region, saying that it would consider financial aid on a case by case basis. (For the Hungarian appeal, see Daily Sources 2/27 #1.) Der Spiegel reports that Chancellor Merkel led the rejection of a region-wide bailout. "'I see a very different situation here,' she said on her way into the meeting. 'You cannot compare Slovenia or Slovakia with Hungary.'" There has been repeated speculation that the crisis would drive member states out of the monetary union, which has caused some to argue that the requirements for entry should be lowered. Chancellor Merkel apparently also led the rejection of that idea,

"Dutch Prime Minister Jan Peter Balkende said that if a nation wants to join 'it must meet the minimum economic criteria.' While Luxembourg Prime Minister Jean-Claude Juncker, who chairs the group of euro zone countries, said 'I don't think we can change the accession criteria to the euro overnight. This is not feasible.'"

2. Christian Neef and Jan Puhl ofDer Spiegel interview Polish Prime Minister Donald Tusk in today's international edition. An excerpt:

"SPIEGEL: There are also other conflicts. German Foreign Minister Frank-Walter Steinmeier, for example, rejects the American plan to install a missile defense shield in Eastern Europe and has conveyed this position to US Secretary of State Hillary Clinton.

Tusk: Poland will ensure that its interests are taken into consideration within the European Union and NATO. We need good relations with our western neighbors when it comes to questions of national security.

SPIEGEL: What does that mean in terms of the missile defense issue?

Tusk: We should speak openly about what best serves our security on the Continent. If the US and Poland are convinced that a missile defense shield will enhance the security of both countries, the other NATO members should accept this. Even Germany.

SPIEGEL: And if the project is abandoned, will the Poles again say that the major powers have cut a deal over their heads?

Tusk: If the stationing of the missile defense system is postponed, it will be an American decision. But then the remaining passages of the agreement -- i.e., the option of establishing other defense components in Poland -- should be immediately implemented. For us, it is important that we obtain American Patriot missiles.

SPIEGEL: Will Poland continue to strive for a special relationship with Washington?

Tusk: We are interested in pursuing close military cooperation with the US."

Well-worth reading in full.

3. Edward Hugh at Fistful of Euros reports that on Friday Sweden announced that its economy had officially contracted by 2.4% in the fourth quarter from the third--an annualized decline of 9.3%. Denmark officials reported that their economy had contracted by 3.9% in the fourth quarter over the year previous. Finnish GDP also fell by 1.3% in the fourth quarter.

"Unlike Denmark, Finland’s recession started with exports, and has now spread to areas like services and retail sales. Finance Minister Jyrki Katainen said last month that the Finnish economy may contract as much as 4.4% in 2009. The unemployment rate rose to 7% in January from 6.1 percent in December as companies cut jobs in the face of the slowdown."

4. Reuters reports that the Russian Finance Ministry said today that its Reserve Fund--oil revenues reserved for making up shortfalls in the budget--is currently worth over 4.8 trillion rubles (~ $136.3 billion) and the National Wealth Fund stands at 3.0 trillion rubles (~ $83.7 billion).

5. Seyoon Kim at Bloomberg reports that South Korea's Ministry of Knowledge Economy announced that exports fell again in February by 17.1% from a year earlier.

6. Eric Watkins at the Oil & Gas Journal reports that China's National Development and Reform Commission has approved CNPC's plan for a new 10 million tonne a year (~ 200 kb/d) refinery in Jieyang in Guangdong province. This is partially significant because CNPC's current refineries are all in the north of China, and so it indicates the breakdown of the informal divvying up of the nation's markets by the big three national oil companies. The NDRC also approved the following refinery expansions and construction:

"-- The capacity of the 400 kb/d Zhenhai refinery in Ningbo will be increased to 460 kb/d by September of this year and eventually to 600 kb/d.

-- In Shanghai, the combined capacity of the 280 kb/d Jinshan and the 220 kb/d Gaoqiao refineries will be boosted by 100 kb/d to 600 kb/d.

-- In Nanjin, the combined capacity of the 260 kb/d Jinling refinery and the 160 kb/d Yanzi refinery will be boosted to levels similar to those in Ningbo or Shanghai.

-- The cities of Maoming, Guangzhou, Huizhou, Quanzhou, and Tianjin will each see refinery capacity boosted to 400 kb/d.

-- Construction on a refinery is scheduled in Caofeidian.

Meanwhile, CNOOC—after a 6-month delay for unspecified reasons—is set to commission its 240 kb/d refinery at Huizhou, in Guangdong province, to operate on a trial basis when it goes online in March."

Many analysts have already remarked upon the huge addition of refining capacity in the Asia Pacific. Much of the refining additions were premised on China as an petroleum product market, for example in Saudi Arabia, India, South Korea, and even Japan. But if China moves ahead with all of its refining capacity addition plans--and usually Beijing makes good on its infrastructural construction plans--it is hard to see, given the trajectory of demand growth in an unsubsidized petroleum products market in both India and China and continued economic doldrums, where this additional potential supply would go. In addition, Winnie Zhu at Bloomberg reports that CNPC and Rosneft may begin construction on a 200 kb/d, $3 billion, refinery in Tianjin according to the municipal authorities there. The municipal authorities hope to get approval from the NDRC for the plant by the end of this year. Given the strong ties between Rosneft and CNPC--Rosenft has repeatedly gone to CNPC for large loans to deal with capital requirements for situations inside Russia--there is a fair likelihood that this will go forward. I would add that culturally, the Communist Party in China has few remaining vestiges of its original ideological goals, but that I suspect the import of finished or manufactured goods is still considered akin to the days of colonial exploitation and that Beijing will go to some lengths not to become the major market for imports of petroleum products, preferring to produce them internally.

7. Maureen Fan at the Washington Post reports that the US and China concluded on Saturday their first inter-military consultations after Washington OK'd an arms sale of $6.5 billion to Taiwan in October which had prompted Beijing to cut official military ties.

"'These were the best set of talks that I have ever been part of,' said David Sedney, deputy assistant secretary of defense for East Asia, who co-chaired the annual Defense Policy Coordination Talks. 'Not because we pretended that everything was fine and everything was resolved, but because we worked very seriously to address the obstacles while at the same time engaging in some discussions in some of the new areas like counterpiracy.'"

Tim Bowler at the BBC reports that in an interview with Chinese Commerce Minister Chen Deming said that "Given such a high degree of openness it is impossible for China to survive in an isolated way from the financial crisis. ... All countries in the world are in the same boat, and we share the same destiny."

"[Mr. Chen] ruled out major changes in the value of China's currency, despite pressure from the United States.

The US has long been angered that China does not allow the yuan to float freely, saying the artificially low currency makes Chinese exports unfairly cheap.

Mr Chen said he did not think 'for the next period of time' there would be a 'remarkable change' in the value of the yuan."

(h/t Yves Smith at naked capitalism.)

8. Fareed Zakaria at PostGlobal argues, as I have, that the compromise in Swat is not an unmitigated disaster, but rather that we should differentiate between Islamists bent on destroying the West and Islamists seeking a semblance of an operational justice system locally.

"The Swat Valley was historically a peaceful area that had autonomy within Pakistan (under a loose federal arrangement) and practiced a moderate version of sharia (Islamic law) in its courts. In 1969, Pakistan's laws were formally extended to the region. Over the years, the new courts functioned poorly, with long delays, and were plagued by corruption. Dysfunctional rule eroded government credibility. Some people grew
nostalgic for the simple, if sometimes brutal, justice of the old sharia courts. A movement demanding their restitution began in the early 1990s, and Benazir Bhutto's government signed an agreement to reintroduce some aspects of the sharia court system with Sufi Muhammed, the same cleric with whom the current government has struck a deal. (The Bhutto arrangement never really worked, and the protests started up again after a few years.) Few residents of the valley would say that the current truce is their preferred outcome. In the recent election, they voted for a secular party. But if the secularists produce chaos and corruption, people settle for
order.

The militants who were battling the army (led by Sufi Muhammed's son-in-law) have had to go along with the deal. The Pakistani government is hoping that this agreement will isolate the jihadists and win the public back to its side. This may not work, but at least it represents an effort to divide the camps of the Islamists between those who are violent and those who are merely extreme."

"'We won the war in Iraq chiefly because we separated the local militants from the global jihadists,' says Fawaz Gerges, a scholar at Sarah Lawrence College, who has interviewed hundreds of Muslim militants. 'Yet around the world we are still unwilling to make the distinction between these two groups.'"

Well-worth reading in full. I would add that sharia itself is not incompatible with existing Pakistani law--and that the possibility of appeal included in the agreement is a de juris acceptance of the supremacy of the federal courts. Reincorporating the major political organizations of Swat into the federal umbrella is a reasonable strategy on the part of Islamabad. For my earlier remarks on the swat agreement, see Daily Sources 2/19 #10 and Daily Sources 2/17 #4.)

9. Mary O'Grady has an opinion piece in the Wall Street Journal which argues that federal policy not to target medical marijuana distribution in the US de facto gives producers in Mexico--and Latin and South America--a stimulus, and thus exporting instability to the country. If you are familiar with my blog, you know I tend to disagree with Ms. O'Grady, but in this instance I believe she is right. If we intend to have prohibition, then we must target consumption in order to stop the export of instability to producing nations. If we cannot credibly target consumption, then we should take prohibition off the books. Worth reading in full.

10. Irene Tang at Platts reports that Malaysia will institute stricter specifications for gasoline and diesel in the middle of 2009. "Malaysia will introduce a new 95 RON gasoline grade in July 2009 and will
fully implement Euro-II compliant gasoline and diesel a month later." The new specifications, which mainly make the products more environmentally-friendly, are more expensive to make, and given that costs will be passed on to consumers, they will put upward pressure on price in Malaysia, and thus downward pressure on demand.

11. The Bureau of Economic Analysis said today that personal consumption grew by 0.4% in January from December in chained 2000 dollars, by 0.6% in nominal terms. Personal consumption accounts for 70% of US GDP.

12. Courtney Schlisserman at Bloomberg reports that the Institute for Supply Management’s factory index rose slightly to 35.8 in February from 35.6 in January. Anything below 50 indicates a contraction.

13. Reuters reports that semiconductor chip sales fell by 29% in January from a year ago.

14. Jeff Rubin, chief economist at CIBC World Markets, has published a research report which argues that car sales in the US will likely fall another 30-40% before bottoming. Rubin argues that about half of the 51 light vehicle plants in the US will be forced to close.

"Easy credit is already gone. The credit bubble wasn't just about sub-prime mortgages. It was just as much about car sales. Some two-thirds of vehicle sales in America over the last decade were debt financed. The leasing market has all but dried up and the securitization market for car loans isn't far behind. If you buy a car these days, try paying cash, which of course isn't superabundant, particularly for the over three-and-a-half million Americans who have already lost their jobs."

Rubin goes further and argues that car sales will never recover to the heights seen this decade, because Americans will adopt European driving habits as energy prices recover:

"The only reason gasoline is cheap, is because no one can afford to drive. When the recession is finally over, and Americans start filling up their SUVs, pump prices will go right back up to the $4/gallon price they were last Memorial Day."

Perhaps, but US population density is much smaller than Europe's, and to a certain extent, until cities west of the Mississippi radically restructure, circumstances will require that people will drive much more than Europeans.

15. Former Secretary of the Treasury under Reagan and State under Bush I, James Baker, writes in the Financial Times:

"During the 1990s, American officials routinely urged their Japanese counterparts to kill their zombie banks before they could do more damage to Japan’s economy. Today, it would be irresponsible if we did not heed our own advice."

A must read.

16. Warren Buffet's letter to Berkshire Hathaway shareholders has the chattering classes all abuzz. Barry Ritholtz's Big Picture carries the complete text. Scott Patterson at the Wall Street Journal has a story on the letter, which discusses the costs Berkshire faced in unwinding the exposure of reinsurance acquisition General Re to complex derivatives of particular interest:

"Berkshire's substantial insurance holdings haven't needed to take the massive write-downs on toxic subprime securities that have plagued much of the financial industry in the past two years. One reason is Mr. Buffett's longstanding dislike of complex derivatives, which he famously called 'financial weapons of mass destruction' in his 2002 shareholder letter and which he railed on again in his latest letter. He pushed General Re, the large reinsurance company Berkshire acquired in 1998, to disentangle itself from a vast web of derivatives -- financial instruments tied to the value of other securities, such as stocks or bonds -- over the course of five years, winding down its book of 23,218 derivatives contracts at a loss of about $400 million, he said in the letter. The losses may have been far more substantial if General Re had held onto to the contracts, Mr. Howard said.

'Upon leaving, our feelings about the business mirrored a line in a country song: "I liked you better before I got to know you so well,"' Mr. Buffett wrote, referring to General Re's derivatives book."

17. From Bloomberg, a graph of US meat consumption since the collapse of Lehman Brothers:



Meat is ethically problematic--newspeak, I guess, for a sector built on industrialized murder--but it has also historically viewed as a barometer of wealth. (I love meat and think humans are not especially more culpable than other predators for its consumption. Still, I find the industrialized slaughter of innocents troubling in a way that, say, an individual hunting or fishing--or even small scale farming--is not. As consumption goes down, and fewer are able to afford the expense of meat--not to mention hunting--however, the economics of industrial meat will only become more competitive. If transportation fuels costs rebound, this effect will only be strengthened.)

Daily Sources 2/17

1. Hiroko Tabuchi at the New York Times reported on Monday that the Japanese government announced that GDP had shrunk by 3.3% in the fourth quarter from the third. The annualized rate is a 12.7% contraction.

2. Eurointelligence reports that Le Monde has a story on the recent four country tour of the Austrian finance minister, Josef Pröll, to Bucharest, Sofia, Kiev and Zagreb in support for a €150 billion plan to support the eastern European economies. He has been arguing that the Austrian financial sector is solvent. However, as Yves Smith at Naked Capitalism notes, Austrian banks have apparently lent as much as €230 billion, or 70% of Austrian GDP, to the ex-Soviet bloc. She quotes at length from a piece by Ambrose Evans-Pritchard at the UK Telegraph:

"Stephen Jen, currency chief at Morgan Stanley, said Eastern Europe has borrowed $1.7 trillion abroad, much on short-term maturities. It must repay–-or roll over-–$400 billion this year, equal to a third of the region's GDP. Good luck. The credit window has slammed shut. …

'This is the largest run on a currency in history,' said Mr Jen.

In Poland, 60% of mortgages are in Swiss francs. The zloty has just halved against the franc. Hungary, the Balkans, the Baltics, and Ukraine are all suffering variants of this story. As an act of collective folly – by lenders and borrowers – it matches America's sub-prime debacle. There is a crucial difference, however. European banks are on the hook for both. US banks are not.

Almost all East bloc debts are owed to West Europe, especially Austrian, Swedish, Greek, Italian, and Belgian banks. En plus, Europeans account for an astonishing 74% of the entire $4.9 trillion portfolio of loans to emerging markets. …"

Ms. Smith reports that the Austrians are allegedly confident that Berlin will bail them out. Meanwhile, today Eurointelligence reports that the Narodowy Bank Polski said it was difficult to justify entering the European monetary union, pushing the zloty to its lowest level since joining the EU, and presumably exacerbating the losses of those banks invested in the country. Laura Cochrane at Bloomberg reports that emerging-market stocks today took a beating on the growing fears around the eastern European economic troubles, led by eastern European mining and financial companies.

3. Andrei Batrak, Martin Doerry, Christian Neef and Matthias Schepp of Der Spiegel conducted an interview of Russian foreign minister Sergei Lavrov recently, where he evinced optimism regarding US-Russian relations. In part his optimism is an outgrowth of the crisis; apparently in his view wealth created the luxury for certain conflicts to bloom:

"Lavrov: We can no longer afford the luxury of little geopolitical games, because we all face challenges that directly affect our citizens. So we should no longer ideologize problems, we should instead honestly express our own national interests, understand the legitimate interests of our partners, and have no more hidden agendas, where one thing is said while something else is done behind someone's back. The signals that we are receiving indicate that our Western partners are aiming for the same objectives."

He also indicated that Russia has already agreed to allow the transit of supplies to US troops in Afghanistan, though I infer that Moscow may look for some further quid pro quo for permitting the transit of munitions.

"SPIEGEL: Let's look ahead. The war in Afghanistan is the greatest foreign policy challenge that the new US administration faces. Russia must also have an interest in preventing the West from failing in the Hindu Kush. How can you help?

Lavrov: In April 2008, we signed an agreement with NATO concerning the transit of nonmilitary goods over Russian territory to Afghanistan. Up until now, such agreements have only been made with Germany and France, and recently one was concluded with Spain. In late January, the US asked us to apply the NATO agreement as the basis for supplying the American contingent. We immediately consented and have also agreed with NATO to make Russian military transporters available to the peacekeeping troops in Afghanistan. We could also work more closely together to curb drug trafficking."

Lavrov was Russia's Ambassador to the UN from 1994 until he was appointed Foreign Minister in 2004 by Vladimir Putin. Worth reading in full.

4. Pamela Constable at the Washington Post reports that Islamabad has announced it has agreed with the Taliban to introduce sharia courts into the Swat valley.

"'There was a vacuum . . . in the legal system. The people demanded this and they deserve it,' said Amir Haider Khan Hoti, chief minister of the North-West Frontier Province. The new system will include an appeals process, something the Afghan Taliban justice system did not allow for."

Jane Perlez at the New York Times reports that the new accord puts into effect agreements made by Benazir Bhutto in the early 1990s and Prime Minister Nawaz Sharif in 1999. The agreements to put in place sharia courts had never been honored. Despite the clear desire for a means of legal redress of issues, the lawyers movement appears to regard the decision as a jurisdictional challenge.

"'This means you have surrendered to a handful of extremists,' said Athar Minallah, a leader of a lawyers’ movement that has campaigned for an independent judiciary. 'The state is under attack; instead of dealing with them as aggressors, the government has abdicated.'"

That said, historically the modern nation state was been built in part via competing jurisdictions, and the general desire for rule by law is something that it is in the US interest to encourage. (see The Law in Pakistan.) That said, the Associated Press reports that NATO immediately criticized the decision, with spokesman James Appathurai saying:

"It is certainly reason for concern. We should all be concerned by a situation in which extremists would have a safe haven. Without doubting the good faith of the Pakistani government, it is clear that the region is suffering very badly from extremists and we would not want it to get worse."

5. India's Economic Times reports that today Russia and China signed a $25 billion energy deal whereby Beijing would lend $15 billion to Rosneft and $10 billion to Transneft in return for 20-years supply of 300 kb/d.

"Russian crude will be supplied through a long-delayed pipeline project agreed to late last year. The pipeline, which extends from western Siberia to the Pacific coast, is to be linked to China from the Siberian city of Skovorodino, 70 kilometers (44 miles) north of the Sino-Russian border."

The deal is very similar to the $6 billion loan CNPC provided Rosneft to purchase remaining Yukos assets in 2005. Meanwhile, Michelle Wiese Bockmann at Lloyd's List reports that Lukoil Trading and Shipping Supply chief executive Gati Al-Jebouri told journalists that the company expects to supply more crude to the international markets, given a reduction in domestic consumption.

6. Carola Hoyos at the Financial Times reports that Christophe de Margerie, Total SA CEO, told the media that he doesn't believe the world will ever be able to produce more than 89 mb/d of oil. It was not clear from the story whether Mr. Margerie included biofuels or NGLs in his definition of oil. He noted that in the current financial environment, national oil companies--which control about 70% of the world's proven reserves--will have a hard time financing new investments. He expects more than 1.5 mb/d of potential supply from the Canadian oil sands and Venezuelan Orinoco belt to have been shut in by low prices. Hoyos implies that Margerie expects prices to rebound in the medium term, which make some sense of his decision to focus on development in Venezuela as opposed to Brazil as per reports on Friday. (see Daily Sources 2/13 #9.) Meanwhile, Simon Romero at the New York Times reports that Hugo Chávez's referendum to abolish presidential term limits passed over this weekend. If the economic indicators recently published by the Center for Economic and Policy Research are facts, then it is easy to see why.

"- The current economic expansion began when the government got control over the national oil company in the first quarter of 2003. Since then, real (inflation-adjusted) GDP has nearly doubled, growing by 94.7% in 5.25 years, or 13.5% annually.
- Most of this growth has been in the non-oil sector of the economy, and the private sector has grown faster than the public sector.
- During the current economic expansion, the poverty rate has been cut by more than half, from 54% of households in the first half of 2003 to 26% at the end of 2008. Extreme poverty has fallen even more, by 72%. These poverty rates measure only cash income, and does take into account increased access to health care or education.
- Over the entire decade, the percentage of households in poverty has been reduced by 39%, and extreme poverty by more than half.
- Inequality, as measured by the Gini index, has also fallen substantially. The index has fallen to 41 in 2008, from 48.1 in 2003 and 47 in 1999. This represents a large reduction in inequality.
- Real (inflation-adjusted) social spending per person more than tripled from 1998-2006.
- From 1998-2006, infant mortality has fallen by more than one-third. The number of primary care physicians in the public sector increased 12-fold from 1999-2007, providing health care to millions of Venezuelans who previously did not have access. - There have been substantial gains in education, especially higher education, where gross enrollment rates more than doubled from 1999-2000 to 2007-2008.
- The labor market also improved substantially over the last decade, with unemployment dropping from 11.3% to 7.8%. During the current expansion it has fallen by more than half. Other labor market indicators also show substantial gains.
- Over the past decade, the number of social security beneficiaries has more than doubled.
- Over the decade, the government’s total public debt has fallen from 30.7 to 14.3% of GDP. The foreign public debt has fallen even more, from 25.6 to 9.8% of GDP.
- Inflation is about where it was 10 years ago, ending the year at 31.4%. However it has been falling over the last half year (as measured by three-month averages) and is likely to continue declining this year in the face of strong deflationary pressures worldwide."

The source primarily used in the CEPR paper is the Banco Central de Venezuela. That said, the paper argues that one shouldn't look at the time prior to the government's reorganization of PdVSA as a guide to economic performance. Perhaps, but Caracas can only loot PdVSA for so long--consumption driven growth provided by subsidies via oil revenues and nationalizations can only run as long as production remains normal and there are remaining oil companies willing to make large investments in the country. The nationalization of a national oil company's project would probably put an end to any international interest whatsoever.

Joshua Partlow at the Washington Post has an especially interesting article emphasizing the legal nature of the leftist turn in South America.

"[F]rom the Venezuelan charter in 1999 to the new constitutions in Ecuador last year and Bolivia last month, a team of Spanish legal scholars influenced the conception, drafting or implementation of the documents, which have stirred domestic class tensions and harmed relations with the US government. The leader is Roberto Viciano Pastor, an author and constitutional law professor at the University of Valencia whose technical, and some say ideological, assistance in writing the constitutions is generating new scrutiny across South America."

The effort to win political dominance via democratic appeals to revamp the legal landscape--whatever the criticisms of the protagonists and their true intentions--demonstrates an interest in legitimizing change via established rule of law, and in itself should be encouraging. Partlow quotes Brazilian president Luiz Inácio Lula da Silva who said last month:

"What we have achieved in these last years was, in truth, the result of the deaths of many people, many young people, who decided to take up arms to bring down the authoritarian regimes in Chile, in Argentina, in Uruguay, in Brazil, in almost all the countries. They died, and we are doing what they dreamed of doing--and we have won this by democratic means."

Vis-a-vis the on-going struggle with Exxon-Mobil, Platts reports that Exxon today announced it had a 103% replacement rate for oil produced in 2008. Most of those bookable barrels come from Canada's oil sands--which require expertise to exploit similar to what is found in Orinoco. But, in news consistent with Mr. Margerie's predictions, Matthew Cook at Platts reports that federal agency Statistics Canada announced over the weekend that Canadian oil production fell 3.31% to average about 2.68 mb/d in 2008.

Meanwhile, Spencer Swartz at Dow Jones reports that IEA chief Nobuo Tanaka told reporters:

"If OPEC is aiming at rapid increases by cutting supply maybe it would not be good for economic recovery. We think OPEC countries should take a closer look at the market and make a flexible decision."

And Luke Pachymuthu at Reuters reports that Iraqi Oil Minister Hussain al-Shahristani told journalists that OPEC should make further cuts should prices not recover. Such noise should be taken with more than a grain of salt, given that Iraq is not subject to OPEC supply quotas.

7. Shobhana Chandra at Bloomberg reports that the Federal Reserve Bank of New York’s general economic index fell to minus 34.7% in January from minus 22% in December. The index measures manufacturing activity in New York.

8. Phred Dvorak at Real Time Economics posts the extremely worrisome story that Littler Mendelson, a leading employment-law law firm consulted on roughly half of all layoffs in the US, is currently working on roughly an additional two million layoffs this quarter.

"Applying his admittedly unscientific methodology, Mr. Mathiason estimates the US could lose around three million jobs from January through March, or one million a month."

Worth reading in full.

Daily Sources 12/22

1. Robert Lindsay at the London Times reports that the Ernst & Young ITEM Club expects China's economy to be the world's largest within a decade, due to the credit crunch.

"Brazil, Russia, India and China, the “Bric” nations, will account for 40 per cent of global economic growth between next year and 2020, according to ITEM. Of this, China will account for a quarter."

I cannot help but be just a tad snarky about the credibility of accounting corporations these days, as in, oh, an accounting company said so, its account thus must have a likelihood of coming to pass of, oh, say, precisely zero. How's that for a number?

2. Ambrose Evans-Pritchard at the UK Telegraph reports that a variety of countries have begun to raise tariffs in response to the financial crisis. Russia has imposed 30% import tariffs on cars, 15% on agircultural equipment and 95% on poultry imports.

"'It is possible during the financial crisis to support domestic producers by raising customs duties,' said Premier Vladimir Putin. ... India and Vietnam have imposed steel tariffs. Indonesia is resorting to special 'licenses' to choke off imports."

In the meantime, China has moved towards subsidizing its steel industry and appears to be maintaining its currency peg to the dollar, as opposed to allowing the renminbi to appreciate. Anthony Faiola and Glenn Kessler at the Washington Post have a similar story--if less alarmist--which notes that Argentina and Brazil are seeking to raise tariffs on a wide variety of products, and that France is providing its sovereign wealth fund with additional monies to prevent the foreign takeover of "strategic" industries. Faiola and Kessler note that on Friday the US announced it was going to take China to task within the WTO framework for providing illegal subsidies to its export sector. Robert Samuelson in the Washington Post notes that much of the fiscal stimulus coordination between the major industrialized and developing economies is mostly for the press releases.

"Countries agree on broad principles but then go their separate ways. Germany's 'stimulus' program, for instance, is much smaller than the one apparently planned by the Obama administration. Countries renounce protectionism, but there are signs that China -- with a massive trade surplus -- might relax its policy of currency appreciation. By making the yuan cheaper, China would give its exports an added price advantage. If the United States inserted "Buy American" provisions in any stimulus legislation, it, too, would be embracing economic nationalism."

Yves Smith provides her own analysis, which more or less concludes that many nations have begun instituting beggar thy neighbor policies. All four pieces are worth reading in full.

3. Li Yanping and Kevin Hamlin at Bloomberg report that China has cut its benchmark interest rate by 27 basis points (0.27%) to 5.31%. This is the fifth time Beijing has cut its benchmark interest rate in three months.

4. Martin Fackler at the New York Times reports that Toyota announced that it expects an operating loss of ¥150 billion (~ $1.7 billion) for the fiscal year ending March 31. This is the first operating loss Toyota would experience in its 70 year history.

5. Yuriy Humber and Torrey Clark at Bloomberg report that many of the so-called "oligarchs" in Russia are approaching the government for bridge loans to weather the financial crisis.

"More than 100 business leaders are vying for loans from Putin and the administration of President Dmitry Medvedev because Russian companies have about $110 billion of foreign obligations due next year, according to the central bank, double the total owed in Brazil, India and China."

The government is taking voting shares and requiring representatives on corporate boards in return for capitalization. Many of the corporations will therefore revert to state control. Well worth reading in its entirety.

6. Lucian Kim at Bloomberg reports that Russian Prime Minister Vladimir Putin will personally open the next meeting of the Gas Exporting Countries Forum (GECF) in Moscow tomorrow. Many worry about the GCEF as a new OPEC, but there are too many differences between natural gas and oil business realities for GCEF to really have the same kind of influence on the market as OPEC does. (I might write something explaining this further later.) In any case, the members of GCEF include Algeria, Bolivia, Brunei, Egypt, Indonesia (which may soon cease to be a natural gas exporter), Iran, Libya, Malaysia, Nigeria, Qatar, Russia, Trinidad & Tobago, the UAE, and Venezuela. Norway and Equatorial Guinea both have observer status with the organization. It's website can be found here.

7. Sam Fletcher at the Oil & Gas Journal reports that in a report for the London Energy Meeting, Cambridge Energy Research Associates wrote that the global oil market is being hit hard by a global "recession shock."

"At the start of this year, some analysts estimated global demand growth as high as 2.1 million b/d. CERA's current global demand estimate for 2008 is a 300,000 b/d decline and for 2009, an additional 660,000 b/d drop. 'The last time demand dropped this much was in the deep recession of 1981,' it said."

The report also appears to claim that the oil markets have been in the grip of unprecedented price volatility in 2008, which is odd given my recent analysis of front month price volatility which showed, for example, more instances of 5% price moves in front month oil in 1986 than I had seen so far in 2008. (see Spot Life CL Jan 09 pt 2, which was posted on 12/11.) I'll take a look at the data again, but I don't think my last account is much off. Mathew Carr at Bloomberg writes that the CERA report stresses that more data transparency would do much to smooth the price volatility we see in the oil markets.

"I think it would be hard to find anyone who would disagree with that. A US Securities Exchange Commission redefinition of reserves may prove to be a model for the world, [Daniel] Yergin said. 'The definition of reserves for financial reporting purposes needs to be updated.'"

I think it would be hard to find anyone who would openly disagree with that, but, it was just recently that Russia was reported to have delayed the introduction of more transparent oil reserves data accounting methods. (see Daily Sources 12/16 #1) The reasons that producing countries have an interest in opacity need to be better explored, clearly, as they do not appear to be especially anxious to provide it. Just saying following Western accounting "best practices" does not have much persuasive power these days given the obvious lack of credibility the Western accounting powerhouses have in pretty much every market sector they happen to cover.

8. Richard Meade at Lloyd's List writes that increased transparency is currently being considered by the shipping industry as a way to combat chronic woes.

9. John Kingston at the Platts blog "The Barrel," notes

"In its monthly report this week, OPEC said OECD stocks currently stand at 56.3 days of forward cover, about four days more than the average for the past five years. But given the steepness of virtually all forward curves for crude and major products, and given antecdotal reports from individual markets, it's tough to find anybody who really believes that number. Almost everyone believes it is much higher. It's that number that will keep oil depressed for the foreseeable future, unless just about every barrel of OPEC's cuts takes hold."

Steve Gelsi at Marketwatch has the related story that oil stored at Cushing, Oklahoma, is approaching the record level of 28 million barrels set earlier this year. (h/t reader trexbean) Given the huge contango, it seems that folks in the market are having a hard time financing storage deals but that all available storage is about to be gone even with such difficulties.

10. The AFP reports that on Sunday it interviewed a PKK spokesman and, in it, he openly worried about Ankara's relationship with the Kurdish Regional Government in Iraq.

"'Since they failed in their military campaign in the border region over the past year, they have come up with the policy of trying to divide the Kurds and provoke infighting among them,' Kamal Kheyri told AFP by telephone."

(h/t informed comment)

11. The BBC reported that the Iraqi Parliament on Saturday rejected the draft law which would have allowed coalition forces not covered by the Status of Forces Agreement, ie everyone but the US, to remain in Iraq beyond 2008. The Parliament in effect called for individual agreements with each coalition member. The al-Maliki cabinet has until the new year to craft a new bill and get it through Parliament or there will be no legal mandate for the British presence there. Somewhat ironic given the English media's response to the blanket legislation, considering the fact that the UK did not have an individual agreement a "national humiliation." (see Daily Sources 12/15 #11)

12. Ernesto Londoño at the Washington Post reports that the al-Maliki government is threatening to expel from Iraq members of the anti-Iranian opposition fighters--or terrorists, depending on your point of view--group the MEK. There are about 3,500 Iranian members of the MEK residing in a refugee camp, more or less, in northern Iraq. The US State Department designated them a terrorist group some time ago. Danny Postel provides some links to neoconservative support for the MEK over the years, including Daniel Pipes, David Horowitz, Max Boot, and Patrick Clawson. If I remember correctly, Pipes was involved in a controversy a few years ago when he was to speak at an MEK rally to be held openly in Washington, DC.

13. Thomas Erdbrink at the Washington Post reports that on Sunday police in Tehran shut down the office of Shirin Ebadi's human rights organization. The article is well worth reading in full.

"In a telephone interview, Ebadi called the closure of her organization's office 'illegal' and "unacceptable." She vowed to reopen the center, saying that 'the police actions are against the law.'"

The fact that the government is going out of its way to impede the operation of Ebadi is important because it shows that Tehran regards this human rights lawyer as a significant threat to the credibility of the regime. It is just as important that the reason given is that Ebadi's organization did not possess the appropriate license for operations in Tehran, that is, the government is using "the letter of the law" to oppose, in Ebadi's view, the spirit of it. I go into great length about the unique vulnerability of the Islamic regimes to a disregard for rule of law in a piece I wrote in April, Law and Revolution in Iran.

14. Stephanie McCrummen has an interesting account of conditions in Somalia. As the situation deteriorates, many apparently feel they have no choice but to join one militant group or another. In this case, mostly al-Shabaab. Worth reading.

15. Nicholas Winning at Real Time Economics reports that the European Union’s Eurostat statistics agency released figures today showing that in October new industrial orders in the eurozone fell 4.7% on the month and 15.1% on the year. This is the worst decline seen since records were first kept in 1997. Also,

"The Belgian National Bank [released the results of a survey today with] its main confidence index [plunging] to -31.3 from -23.7 in November. The drop was most noticeable in the manufacturing sector, where confidence fell to -36.5 from -27.1."

16. Bloomberg reports that the Irish government announced a plan to recapitalize its three largest domestic banks by purchasing preferred shares and underwriting the issue of further shares in the companies. The government will take a controlling stake in Anglo Irish Bank Corporation with preferred shares representing 75% of the corporation's voting rights in return for an investment of €1.5 billion (~ $2.087 billion). Dublin will pay €2 billion (~ $2.783 billion) each for preferred shares with voting rights in Allied Irish Banks and Bank of Ireland. "Irish financial shares have fallen on average 92% this year, led by Anglo Irish, which has plunged 97%." You'll recall that Ireland began a sort of race toward upping state insurance of domestic financial institutions, thus putting their European financial competition at a disadvantage, in late September early October, presaging the disunity in the European fiscal response to the financial crisis seen of late. (see Daily Sources 10/6 #1)

17. David Smith at the London Times reports that revised third quarter GDP figures for the UK will be released this week showing a contraction of at least 0.5%.

"The Centre for Economics and Business Research, a consultancy, predicts that Britain will contract by 3% in 2009 and a further 0.7% in 2010, implying a long, deep recession.

Capital Economics, another consultancy, now predicts a fall of 2.5% in GDP next year, with a further drop of 1% during 2010.

This compares with the Treasury’s prediction of a decline in GDP of between 0.7% and 1.25% next year, followed by a recovery in 2010, when it expects to see the economy grow by between 1.5% and 2%."

18. George Soros, writing for the interesting non-profit organization--the Project Syndicate--makes the following observation:

"The US consumer can no longer serve as the motor of the world economy. To avoid a global depression other countries must also stimulate their domestic economies. But periphery countries without large export surpluses are not in a position to employ countercyclical policies. It is up to the IMF to find ways to finance countercyclical fiscal deficits. This could be done partly by enlisting sovereign wealth funds and partly by issuing Special Drawing Rights so that rich countries that can finance their own fiscal deficits could cede to poorer countries that cannot."

He also has a sort of neo-Kantian notion of the markets, saying that they do not honestly reflect the conditions of the organizations in which they invest. Worth reading.

19. Matthew Brown at Bloomberg reports that the TED spread--the difference between what banks and the US government pay to borrow money--has dropped to below 150 basis points (1.5%) for the first time since the demise of Lehman Brothers. The indicator suggests that interbank lending has not increased as a result of the financing efforts of various governments.

20. Fareed Zakaria has an opinion piece in today's Washington Post which says, in tones laden with hysteria, that, for Obama to have done his job well, he will have to "do nothing less than rescue capitalism." I tend to like Zakaria's analyses, which are generally extremely well informed, nuanced, and sly. This piece, however, suggests that Zakaria should take a break from the press and its sensationalist ways. The troubles we face are serious, indeed, and require measured un-sensational, in short serious, analysis. There is no need to deify the moment any further. You can almost hear the ghost of Heidegger chuckling in the wings.