Thursday, March 26, 2009

Power Up

The new world economic order will undoubtedly reshape everything from what we buy to how we manage our career. Yesterday’s so-called emerging economies have more than emerged to overtake the combined GDP of G7 nations by 2027. Despite the brutal recession, most of these BRIC economies have been holding up relatively better so far. Accordingly, the corporate growth in the western economies will increasingly come from what I call “new order economies” such as China, India, Turkey, South Africa etc. It is worth reading today’s layoff announcement by IBM ( that has been steadily shifting its talent mix significantly in favor of these countries, most notably India. The recessionary business environment seems to be only accelerating what has been going on for the last decade as “offshoring”. If you are a manager in the US, Japan or EU, you must now not only be able to manage across different cultures, time zones and backgrounds but also acquire hands-on work experience in more exotic locations other than the usual BRIC countries. For example, in the last 12 months or so, there has been an uptick in the number of c-level hirings of US nationals in Turkey. Here is an interesting article from Newsweek:

What's called a 'global' recession is in fact shrinking economies mainly in the West, not the East.

As Chinese Premier Wen Jiabao informed the world recently, he's a "little bit worried." Not about China, mind you, but about the United States. "We have loaned huge amounts of money to the U.S., so of course we have to be concerned," said Wen earlier this month, warning America to "honor its word" and "ensure the safety of Chinese assets." Translation: Those guys on Wall Street really screwed up. We think the dollar might tank and erase the value of our $2 trillion in T-bills. Get your act together.

It's a stunning turnabout from even a year ago, when such warnings were almost always issued by rich nations, like the U.S., to poorer ones. But a lot has changed in recent years and recent days. Emerging giants like China are stronger, more economically competent and vastly richer. Their confidence has only increased amid a calamity that is widely described as the worst "global" recession in 70 years, but is in fact not truly global. It is shrinking the richest economies, but only slowing the emerging giants. This year GDP is expected to contract by 3 percent in the U.S. and Europe, and by close to 6 percent in Japan, while continuing to expand in China and India by 7 and 5 percent, respectively.

That growth gap is destined to reshape the economic future of the world. Goldman Sachs chief economist Jim O'Neill now predicts that the major emerging markets—Brazil, Russia, India and China, a.k.a. the BRICs—could overtake the combined GDP of the G7 nations by 2027, nearly a decade sooner than the forecast in a landmark study a few years back. The ascent of the formerly poor giants is accelerating, and their confidence is evident not only in the utterances of Wen Jiabao. Manmohan Singh of India has blamed the "massive failure" on authorities in "developed societies," but his peers all name America by name. Vladimir Putin of Russia scorns "the irresponsibility of the system that claims leadership." Luiz Inácio Lula da Silva of Brazil, in an interview with NEWSWEEK (following story), says the U.S. bears the brunt of responsibility for the crisis, and for fixing it at the upcoming G20 summit in London.

Power is not only shifting toward the BRICs, but among them as well. For all their outspokenness, Brazil and Russia have been hit much harder by the crisis than India and China. Dependent on sales of commodities that are shrinking rapidly in price, Russia's economy has fallen off a cliff, and could shrink 3 percent this year. Brazil will likely stagnate. Their recoveries could be slow and painful, too. Goldman Sachs projections for the period from 2011 to 2050 show Russia growing at just 2.8 percent, Brazil at 4.3 percent, China at 5.2 and India at 6.3. If those figures turn out to be correct, three of the top four economies in the world—China, the U.S., India and Japan, in that order—would be Asian within the next two decades. The Asian Century is almost here.

The markets seem to know it. While the S&P 500, down about 45 percent last year, has plummeted another 15 percent since the start of 2009, the Shanghai Composite Index is up by 20 percent, continuing a rally that began in November.

The grim consumer outlook, unemployment paranoia and general siege mentality that's taken hold in the West is also largely absent in Asia. In China and India, sales of cars, white goods and many other types of consumer products are still rising, in large part because of the strong and swift stimulus measures taken by these nations, which have clearly learned a lot about macroeconomic policymaking since the 1990s. Capital goods and machinery are showing double-digit growth in India, and cement sales in China have suddenly risen, now that it's getting warm enough to build. Russia once again is the outlier: consumer spending there is still down sharply.

Americans are ceding the role of world's most resilient shoppers to the Chinese and Indians. Chinese bank lending this past December was up 1,000 percent over the same period last year, as the government lowered interest rates, reigniting the real-estate market. "That's opening up a whole new, broader base of local people in China who can now afford apartments—and believe me, the demand is there," says Michael Klibaner, head of China research for the real-estate market research firm Jones Lang LaSalle.

The big question for China has been whether it can forge an economy that depends not on exports to the West, but on consumption. Klibaner says it's happening, because the strongest real-estate growth now is not in big cities that cater to exporters but in smaller ones geared toward the domestic market. That follows the trend in Brazil, where the middle class is the largest segment of the population, and also in India. "Consumer spending is 60 percent of GDP in India," says Global Insight chief economist Nariman Behravesh. "That's a key reason why the economy hasn't been hit harder in this downturn."

None of this means that BRIC consumers will save a world in financial crisis. Their purchasing power is still far too weak compared with rich nations like the U.S. and Japan. Yet as their economies grow, so will the power of their wallets. Sooner rather than later, consumers in the BRIC nations will dictate the R&D investments of major corporations, the travel routes of airlines and the marketing campaigns of multinationals.

The BRICs are better positioned to recover than their richer peers. Broadly speaking, better control of inflation, lower deficits, increasing productivity, richer social programs and greater political stability have given the emerging giants greater room for error at a time when the macro-economic environment in rich countries has been deteriorating. Even Brazil and hard-hit Russia have used raw-materials windfalls (oil and gas for Russia, soybeans and iron ore for Brazil) to build a buffer for the downturn—Russia has spent more than $300 billion defending the ruble, and still has that much in reserve. Brazil's $208 billion reserve remains almost untouched.

What's more, the BRICs have learned from our follies. Strong regulatory oversight allowed the Indian and Chinese financial sectors to emerge relatively unscathed from the credit crisis. Through the first half of 2008 (the most recent available data), Chinese banks were acquiring foreign rivals and increasing their share of global financial markets. If that continues, a Deutsche Bank report released last week predicts, China will become one of the dominant financial markets in the world by 2018, alongside the U.S. and the EU, with a 13 percent share in global bond markets, 40 percent of equity markets and 18 percent of global banking.

Sooner than that, the Chinese will likely see an uptick in exports. Purchasing-order surveys in China have been up for three months now, notes CLSA economist Andy Rothman, as factory owners in places like the Yangtze River Delta struggle to fill rush jobs for Western clothing chains that panicked and reduced orders too much. Rothman calls it the "Wal-Mart effect", and expects the interest of increasingly thrifty Western consumers in all things cheap to help Chinese exporters rebound. Many others say the "cheap is cool" phenomenon will ultimately buoy all kinds of emerging-market products and services, from Mexican cement makers to Indian telecom providers, that still tend to offer the best prices. When consumers around the world do start buying again, it seems they'll be doing it in the BRIC countries.

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Wednesday, March 18, 2009

Turkey and Russia on the Rise. Are They Doomed to Clash Soon?

This great analysis by Stratfor guys came out yesterday in the light of increased traffic between the two countries politicians. As Turkey is starting to feel more of a free-agent in the region as the EU membership is no longer a natiaonal passion and there is a lot more at stake with its neighbors particularly Iraq and Iran as well as the Central Asia. It is worth mentioning that following George Mitchell and Hillary Clinton's recent visits, President Obama is planning his first visit to a Muslim country right after few weeks into his presidency on April 6-7 to attend a high-profile event on the Alliance of Civilizations.

"Russian President Dmitri Medvedev reportedly will travel to Turkey in the near future to follow up a recent four-day visit by his Turkish counterpart, Abdullah Gul, to Moscow. The Turks and the Russians certainly have much to discuss.

Russia is moving aggressively to extend its influence throughout the former Soviet empire, while Turkey is rousing itself from 90 years of post-Ottoman isolation. Both are clearly ascendant powers, and it would seem logical that the more the two bump up against one other, the more likely they will gird for yet another round in their centuries-old conflict. But while that may be true down the line, the two Eurasian powers have sufficient strategic incentives to work together for now.

Russia’s World

Russia is among the world’s most strategically vulnerable states. Its core, the Moscow region, boasts no geographic barriers to invasion. Russia must thus expand its borders to create the largest possible buffer for its core, which requires forcibly incorporating legions of minorities who do not see themselves as Russian. The Russian government estimates that about 80 percent of Russia’s approximately 140 million people are actually ethnically Russian, but this number is somewhat suspect, as many minorities define themselves based on their use of the Russian language, just as many Hispanics in the United States define themselves by their use of English as their primary language. Thus, ironically, attaining security by creating a strategic buffer creates a new chronic security problem in the form of new populations hostile to Moscow’s rule. The need to deal with the latter problem explains the development of Russia’s elite intelligence services, which are primarily designed for and tasked with monitoring the country’s multiethnic population.


Russia’s primary challenge, however, is time. In the aftermath of the Soviet collapse, the bottom fell out of the Russian birthrate, with fewer than half the number of babies born in the 1990s than were born in the 1980s. These post-Cold War children are now coming of age; in a few years, their small numbers are going to have a catastrophic impact on the size of the Russian population. By contrast, most non-Russian minorities - in particular those such as Chechens and Dagestanis, who are of Muslim faith — did not suffer from the 1990s birthrate plunge, so their numbers are rapidly increasing even as the number of ethnic Russians is rapidly decreasing. Add in deep-rooted, demographic-impacting problems such as HIV, tuberculosis and heroin abuse — concentrated not just among ethnic Russians but also among those of childbearing age — and Russia faces a hard-wired demographic time bomb. Put simply, Russia is an ascending power in the short run, but it is a declining power in the long run.

The Russian leadership is well aware of this coming crisis, and knows it is going to need every scrap of strength it can muster just to continue the struggle to keep Russia in one piece. To this end, Moscow must do everything it can now to secure buffers against external intrusion in the not-so-distant future. For the most part, this means rolling back Western influence wherever and whenever possible, and impressing upon states that would prefer integration into the West that their fates lie with Russia instead. Moscow’s natural gas crisi with Ukraine, August 2008 war with Georgia, efforts to eject American forces from Central Asia and constant pressure on the Baltic states all represent efforts to buy Russia more space — and with that space, more time for survival.

Expanding its buffer against such a diverse and potentially hostile collection of states is no small order, but Russia does have one major advantage: The security guarantor for nearly all of these countries is the United States, and the United States is currently very busy elsewhere. So long as U.S. ground forces are occupied with the Iraqi and Afghan wars, the Americans will not be riding to the rescue of the states on Russia’s periphery. Given this window of opportunity, the Russians have a fair chance to regain the relative security they seek. In light of the impending demographic catastrophe and the present window of opportunity, the Russians are in quite a hurry to act.

Turkey’s World

Turkey is in many ways the polar opposite of Russia. After the dissolution of the Ottoman Empire following World War I, Turkey was pared down to its core, Asia Minor. Within this refuge, Turkey is nearly unassailable. It is surrounded by water on three sides, commands the only maritime connection between the Black and Mediterranean seas and sits astride a plateau surrounded by mountains. This is a very difficult chunk of territory to conquer. Indeed, beginning in the Seljuk Age in the 11th century, the ancestors of the modern Turks took the better part of three centuries to seize this territory from its previous occupant, the Byzantine Empire.

The Turks have used much of the time since then to consolidate their position such that, as an ethnicity, they reign supreme in their realm. The Persians and Arabs have long since lost their footholds in Anatolia, while the Armenians were finally expelled in the dying days of World War I. Only the Kurds remain, and they do not pose a demographic challenge to the Turks. While Turkey exhibits many of the same demographic tendencies as other advanced developing states — namely, slowing birthrates and a steadily aging population — there is no major discrepancy between Turk and Kurdish birthrates, so the Turks should continue to comprise more than 80 percent of the country’s population for some time to come. Thus, while the Kurds will continue to be a source of nationalistic friction, they do not constitute a fundamental challenge to the power or operations of the Turkish state, like minorities in Russia are destined to do in the years ahead.

Turkey’s security is not limited to its core lands. Once one moves beyond the borders of modern Turkey, the existential threats the state faced in years past have largely melted away. During the Cold War, Turkey was locked into the NATO structure to protect itself from Soviet power. But now the Soviet Union is gone, and the Balkans and Caucasus — both former Ottoman provinces — are again available for manipulation. The Arabs have not posed a threat to Anatolia in nearly a millennium, and any contest between Turkey and Iran is clearly a battle of unequals in which the Turks hold most of the cards. If anything, the Arabs — who view Iran as a hostile power with not only a heretical religion but also with a revolutionary foreign policy calling for the overthrow of most of the Arab regimes – are practically welcoming the Turks back. Despite both its imperial past and its close security association with the Americans, the Arabs see Turkey as a trusted mediator, and even an exemplar.

With the disappearance of the threats of yesteryear, many of the things that once held Turkey’s undivided attention have become less important to Ankara. With the Soviet threat gone, NATO is no longer critical. With new markets opening up in the former Soviet Union, Turkey’s obsession with seeking EU membership has faded to a mere passing interest. Turkey has become a free agent, bound by very few relationships or restrictions, but dabbling in events throughout its entire periphery. Unlike Russia, which feels it needs an empire to survive, Turkey is flirting with the idea of an empire simply because it can — and the costs of exploring the option are negligible.

Whereas Russia is a state facing a clear series of threats in a very short time frame, Turkey is a state facing a veritable smorgasbord of strategic options under no time pressure whatsoever. Within that disconnect lies the road forward for the two states — and it is a road with surprisingly few clashes ahead in the near term.

The Field of Competition

There are four zones of overlapping interest for the Turks and Russians.

First, the end of the Soviet empire opened up a wealth of economic opportunities, but very few states have proven adept at penetrating the consumer markets of Ukraine and Russia. Somewhat surprisingly, Turkey is one of those few states. Thanks to the legacy of Soviet central planning, Russian and Ukrainian industry have found it difficult to retool away from heavy industry to produce the consumer goods much in demand in their markets. Because most Ukrainians and Russians cannot afford Western goods, Turkey has carved out a robust and lasting niche with its lower-cost exports; it is now the largest supplier of imports to the Russian market. While this is no exercise in hard power, this Turkish penetration nevertheless is cause for much concern among Russian authorities.

So far, Turkey has been scrupulous about not politicizing these useful trade links beyond some intelligence-gathering efforts (particularly in Ukraine). Considering Russia’s current financial problems, having a stable source of consumer goods — especially one that is not China — is actually seen as a positive. At least for now, the Russian government would rather see its trade relationship with Turkey stay strong. There will certainly be a clash later — either as Russia weakens or as Turkey becomes more ambitious — but for now, the Russians are content with the trade relationship.

Second, the Russian retreat in the post-Cold War era has opened up the Balkans to Turkish influence. Romania, Bulgaria and the lands of the former Yugoslavia are all former Ottoman possessions, and in their day they formed the most advanced portion of the Ottoman economy. During the Cold War, they were all part of the Communist world, with Romania and Bulgaria formally incorporated into the Soviet bloc. While most of these lands are now absorbed into the European Union, Russia’s ties to its fellow Slavs — most notably the Serbs and Bulgarians — have allowed it a degree of influence that most Europeans choose to ignore. Additionally, Russia has long held a friendly relationship with Greece and Cyprus, both to complicate American policy in Europe and to provide a flank against Turkey. Still, thanks to proximity and trading links, Turkey clearly holds the upper hand in this theater of competition.

But this particular region is unlikely to generate much Turkish-Russian animosity, simply because both countries are in the process of giving up.

Most of the Balkan states are already members of an organization that is unlikely to ever admit Russia or Turkey: the European Union. Russia simply cannot meet the membership criteria, and Cyprus’ membership in essence strikes the possibility of Turkish inclusion. (Any EU member can veto the admission of would-be members.) The EU-led splitting of Kosovo from Serbia over Russian objections was a body blow to Russian power in the region, and the subsequent EU running of Kosovo as a protectorate greatly limited Turkish influence as well. Continuing EU expansion means that Turkish influence in the Balkans will shrivel just as Russian influence already has. Trouble this way lies, but not between Turkey and Russia. If anything, their joint exclusion might provide some room for the two to agree on something.

The third area for Russian-Turkish competition is in energy, and this is where things get particularly sticky. Russia is Turkey’s No. 1 trading partner, with energy accounting for the bulk of the trade volume between the two countries. Turkey depends on Russia for 65 percent of its natural gas and 40 percent of its oil imports. Though Turkey has steadily grown its trade relationship with Russia, it does not exactly approve of Moscow’s penchant for using its energy relations with Europe as a political weapon. Russia has never gone so far as to cut supplies to Turkey directly, but Turkey has been indirectly affected more than once when Russia decided to cut supplies to Ukraine because Moscow felt the need to reassert its writ in Kiev.

Sharing the Turks’ energy anxiety, the Europeans have been more than eager to use Turkey as an energy transit hub for routes that would bypass the Russians altogether in supplying the European market. The Baku-Tbilisi-Ceyhan (BTC) pipeline is one such route, and others, like Nabucco, are still stuck in the planning stages. The Russians have every reason to pressure the Turks into staying far away from any more energy diversification schemes that could cost Russia one of its biggest energy clients — and deny Moscow much of the political leverage it currently holds over the Europeans who are dependent on the Russian energy network.

There are only two options for the Turks in diversifying away from the Russians. The first lies to Turkey’s south in Iraq and Iran. Turkey has big plans for Iraq’s oil industry, but it will still take considerable time to upgrade and restore the oil fields and pipelines that have been persistently sabotaged and ransacked by insurgents during the fighting that followed the 2003 U.S. invasion. The Iranians offer another large source of energy for the Turks to tap into, but the political complications attached to dealing with Iran are still too prickly for the Turks to move ahead with concrete energy deals at this time. Complications remain for now, but Turkey will be keeping an eye on its Middle Eastern neighbors for robust energy partnerships in the future.

The second potentials source of energy for the Turks lies in Central Asia, a region that Russia must keep in its grip at all costs if it hopes to survive in the long run. In many ways this theater is the reverse of the Balkans, where the Russians hold the ethnic links and the Turks the economic advantage. Here, four of the five Central Asian countries — Kazakhstan, Uzbekistan, Kyrgyzstan and Turkmenistan — are Turkic. But as a consequence of the Soviet years, the infrastructure and economies of all four are so hardwired into the Russian sphere of influence that it would take some major surgery to liberate them. But the prize is a rich one: Central Asia possesses the world’s largest concentration of untapped energy reserves. And as the term “central” implies, whoever controls the region can project power into the former Soviet Union, China and South Asia. If the Russians and Turks are going to fight over something, this is it.

Here Turkey faces a problem, however — it does not directly about the region. If the Turks are even going to attempt to shift the Central Asian balance of power, they will need a lever. This brings us to the final — and most dynamic — realm of competition: the Caucasus.

Turkey here faces the best and worst in terms of influence projection. The Azerbaijanis do not consider themselves simply Turkic, like the Central Asians, but actually Turkish. If there is a country in the former Soviet Union that would consider not only allying with but actually joining with another state to escape Russia’s orbit, it would be Azerbaijan with Turkey.  Azerbaijan has its own significant energy supplies, but its real value is in serving as a willing springboard for Turkish influence into Central Asia.

However, the core of Azerbaijan does not border Turkey. Instead, it is on the other side of Armenia, a country that thrashed Azerbaijan in a war over the disputed Nagorno-Karabakh enclave and still has lingering animosities toward Ankara because of the 1915 Armenian “genocide.” Armenia has sold itself to the Russians to keep its Turkish foes at bay.

This means Turkish designs on Central Asia all boil down to the former Soviet state of Georgia. If Turkey can bring Georgia fully under its wing, Turkey can then set about to integrate with Azerbaijan and project influence into Central Asia. But without Georgia, Turkey is hamstrung before it can even begin to reach for the real prize in Central Asia.

In this, the Turks do not see the Georgians as much help. The Georgians do not have much in the way of a functional economy or military, and they have consistently overplayed their hand with the Russians in the hopes that the West would come to their aid. Such miscalculations contributed to the August 2008 Georgian-Russian war, in which Russia smashed what military capacity the Georgians did possess. So while Ankara sees the Georgians as reliably anti-Russian, it does not see them as reliably competent or capable.

This means that Turkish-Russian competition may have been short-circuited before it even began. Meanwhile, the Americans and Russians are beginning to outline the rudiments of a deal. Various items on the table include Russia allowing the Americans to ship military supplies to Afghanistan via Russia’s sphere of influence, changes to the U.S. ballistic missile defense (BMD) program, and a halt to NATO expansion. The last prong is a critical piece of Russian-Turkish competition. Should the Americans and Europeans put their weight behind NATO expansion, Georgia would be a logical candidate — meaning most of the heavy lifting in terms of Turkey projecting power eastward would already be done. But if the Americans and Europeans do not put their weight behind NATO expansion, Georgia would fall by the wayside and Turkey would have to do all the work of projecting power eastward — and facing the Russians — alone.

A Temporary Meeting of Minds?

There is clearly no shortage of friction points between the Turks and the Russians. With the two powers on a resurgent path, it was only a matter of time before they started bumping into one another. The most notable clash occurred when the Russians decided to invade Georgia last August, knowing full well that neither the Americans nor the Europeans would have the will or capability to intervene on behalf of the small Caucasian state. NATO’s strongest response was a symbolic show of force that relied on Turkey, as the gatekeeper to the Black Sea, to allow a buildup of NATO vessels near the Georgian coast and threaten the underbelly of Russia’s former Soviet periphery.

Turkey disapproved of the idea of Russian troops bearing down in the Caucasus near the Turkish border, and Ankara was also angered by having its energy revenues cut off during the war when the BTC pipeline was taken offline.

The Russians promptly responded to Turkey’s NATO maneuvers in the Black Sea by holding up a large amount of Turkish goods at various Russian border checkpoints to put the squeeze on Turkish exports. But the standoff was short-lived; soon enough, the Turks and Russians came to the negotiating table to end the trade spat and sort out their respective spheres of influence. The Russian-Turkish negotiations have progressed over the past several months, with Russian and Turkish leaders now meeting fairly regularly to sort out the issues where both can find some mutual benefit.

The first area of cooperation is Europe, where both Russia and Turkey have an interest in applying political pressure. Despite Europe’s objections and rejections, the Turks are persistent in their ambitions to become a member of the European Union. At the same time, the Russians need to keep Europe linked into the Russian energy network and divided over any plans for BMD, NATO expansion or any other Western plan that threatens Russian national security. As long as Turkey stalls on any European energy diversification projects, the more it can demand Europe’s attention on the issue of EU membership. In fact, the Turks already threatened as much at the start of the year, when they said outright that if Europe doesn’t need Turkey as an EU member, then Turkey doesn’t need to sign off on any more energy diversification projects that transit Turkish territory. Ankara’s threats against Europe dovetailed nicely with Russia’s natural gas cutoff to Ukraine in January, when the Europeans once again were reminded of Moscow’s energy wrath.

The Turks and the Russians also can find common ground in the Middle East. Turkey is again expanding its influence deep into its Middle Eastern backyard, and Ankara expects to take the lead in handling the thorny issues of Iran, Iraq and Syria as the United States draws down its presence in the region and shifts its focus to Afghanistan. What the Turks want right now is stability on their southern flank. That means keeping Russia out of mischief in places like Iran, where Moscow has threatened to sell strategic S-300 air defense systems and to boost the Iranian nuclear program in order to grab Washington’s attention on other issues deemed vital to Moscow’s national security interests. The United States is already leaning on Russia to pressure Iran in return for other strategic concessions, and the Turks are just as interested as the Americans in taming Russia’s actions in the Middle East.

Armenia is another issue where Russia and Turkey may be having a temporary meeting of minds. Russia unofficially occupies Armenia and has been building up a substantial military presence in the small Caucasian state. Turkey can either sit back, continue to isolate Armenia and leave it for the Russians to dominate through and through, or it can move toward normalizing relations with Yerevan and dealing with Russia on more equal footing in the Caucasus. With rumors flying of a deal on the horizon between Yerevan and Ankara (likely with Russia’s blessing), it appears more and more that the Turks and the Russians are making progress in sorting out their respective spheres of influence.

Ultimately, both Russia and Turkey know that this relationship is likely temporary at best. The two Eurasian powers still distrust each other and have divergent long-term goals, even if in the short term there is a small window of opportunity for Turkish and Russian interests to overlap. The law of geopolitics dictates that the two ascendant powers are doomed to clash — just not today."

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Thursday, March 12, 2009

Turkey Sees a Greater Role in Obama's Foreign Policy

When Barack Obama was elected President of the United States, villagers in a remote Turkish province made headlines by sacrificing 44 sheep to celebrate his victory. Those villagers will feel their celebration was vindicated by Washington's announcement that Obama will travel to Turkey next month — an event being hailed here as proof of Turkey's elevated strategic role in the foreign policy of the new Administration.

"There has never been such a high-profile period in U.S.-Turkish relations before," says columnist Cengiz Candar, referring to Obama's planned trip, which follows a visit by Secretary of State Hillary Clinton to Ankara last weekend. "Never in history has a U.S. President visited Turkey so soon after taking office." 

Ties between Washington and Ankara had become increasingly fraught under the Bush administration, never fully recovering from the Turkish parliament's refusal in 2003 to allow U.S. troops to use Turkey as a launching pad into neighboring Iraq. During the subsequent war, U.S. popularity fell to an all-time low in Turkey. But Obama appears to view Turkey — a predominantly Muslim but officially secular country straddling Europe, Central Asia and the Middle East — as having a key part to play in his effort to heal U.S. relations with the Islamic world. An increasingly asserive regional power, Turkey has significant influence in a number of conflict zones critical to U.S. foreign policy objectives, ranging from relations between Israel and its neighbors to the Caucasus, Iraq and Iran. "The new administration is aware of Turkey's importance," said Turkish foreign minister Ali Babacan after meeting Clinton. "Turkish-American relations have entered a new era."

Since last May, Ankara has hosted several rounds of secret peace talks between Syria and Israel. It also played a role in helping secure the tenuous cease-fire that ended hostilities in Gaza earlier this year. Turkey has also been approached by Tehran to mediate in its standoff with Washington over Iran's nuclear program. A day after Secretary Clinton's Ankara visit, a high-profile Turkish delegation flew to Tehran, with whose regime Prime Minister Recep Tayyip Erdogan's moderate Islamist-rooted government enjoys good relations.

And while Turkey would not allow U.S. troops to transit its territory on the way in to Iraq, it has said it will allow them to pass through Turkey on their way out, in line with President Obama's withdrawal plans. Ankara may play an even larger role in Afghanistan, another key focus of the Obama Administration. Turkey already has about 800 troops on the ground as part of the NATO mission there, and could potentially provide more — the Obama Administration is currently struggling to convince other European NATO allies to send reinforcements. Washington could also seek Ankara's help in persuading some its neighbors to allow NATO to run supply lines for its Afghanistan mission through their territories.

Turkey's rising star in Obama's Washington could also help keep the country's democratization process on track. Elected twice on a platform of change, Prime Minister Recep Tayyip Erdogan's government has been faltering on democratic reforms in recent months. Having been frustrated in its efforts to expedite its acceptance into the European Union, Turkey's government has instead put greater emphasis on looking east, burnishing its influence in the Islamic world. The Kurdish conflict in the southeast, which spills over into Iraq, remains unresolved and reforms have stalled, while a recent U.S. State Department human rights report cites police misconduct, allegations of torture and limits on freedom of expression as problems in Turkey.

By dangling the prospect of a high-profile strategic role for Ankara, Obama can help ensure that Turkey gets back on track on issues that matter: E.U. membership, fully addressing the grievances of the country's large Kurdish minority and better democracy. And a more stable Turkey can only strengthen its position as a moderate role model for the countries to its east.

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Wednesday, March 11, 2009

G20 to Develop Early Warning System

If someone had told me all the banks in the UK would be owned by the government only 6 months ago, I would have laughed really loud….a long-term corporate strategic planning tool is becoming mainstream for world’s governments to establish early warning systems to spot new disasters before it is too late.  An interesting article from today’s FT is as follows:

“Why did no one see this coming?” is the $50,000bn dollar question about the global financial crisis asked by more or less everyone – perhaps the most celebrated inquisitor being Queen Elizabeth of England during a visit to the London School of Economics late last year.

As policymakers from the Group of 20 leading developed and emerging economies struggle to combat the immediate effects of the crisis with fiscal stimulus packages and financial bail-outs, their forthcoming summit will also look at designing early warning systems to spot new disasters.

The problem, experts warn, is that, like much of the G20’s agenda, it is a question of implementation rather than technical improvement. It is not just that any attempt to design such a system inevitably misses crises that do happen and falsely predicts crises that do not, but that policymakers tend either to ignore such warnings or try to suppress them so they are not made public.

Early warning systems used by institutions such as the International Monetary Fund are focused at national level on individual emerging markets and generally look at current account deficits, large public debts and currency mismatches – government and the private sector borrowing abroad heavily in a foreign currency – particularly for countries committed to defending a fixed exchange rate. But for a crisis centred in the US, which ran a large deficit but had a floating currency and relatively low public debt and borrowed in dollars, it was not so straightforward.

“Too many people, including the IMF, bought into the idea that securitising debt had made the US financial system robust,” says Morris Goldstein, senior fellow at the Peterson Institute in Washington. “This was a different kind of crisis.”

Gordon Brown, the UK prime minister, has been talking about early warning systems for about a decade and has recently said such mechanisms could have prevented the crisis. But officials from other countries and from financial institutions say he never gave details of what he meant.

Brad Setser, a former US Treasury and IMF official now at the Council on Foreign Relations, says the UK’s financial service industry itself acted as a huge conduit for dollar-denominated borrowing – unlike the US, which maintains detailed data on capital flows. Mr Setser says it was not clear until afterwards just how much dollar debt was being funnelled through London via the so-called “shadow banking system” outside the reach of regulation.

“Given how much trouble has emerged from the shadows, a bit more transparency about what goes on in the UK might have helped the world’s regulators (and the IMF) do a better job of providing a bit more early warning of budding problems,” he recently wrote.

What will emerge from the G20 is likely to be a less than cataclysmic shift. Institutions such as the IMF and the Bank for International Settlements, the central bankers’ central bank, will step up their co-ordination with each other and aim to produce reports of potential flashpoints in the whole system as well as individual countries.

What they do with the results remains an open question. Publishing them – or even giving them to the IMF’s executive board, from which they could leak – could invite runs on the currency or debt of countries identified as being at risk. Reza Moghadam, head of the IMF’s strategy, policy and review department, says: “We need to combine country risk with cross-cutting risk and think carefully about with whom these analyses are shared.”

IMF officials say they were subjected to repeated attempts by many governments – in particular the UK, when Mr Brown was chancellor of the exchequer – to tone down warnings about instability in individual countries. Mr Goldstein recalls the enormous pressure he was put under to keep quiet about problems in the Japanese banking system in the 1990s. “Fundamentally, early warning systems come down to being willing to make the call in public,” he says. “It is about balls as much as brains.”

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Tuesday, March 10, 2009

A survival plan for global capitalism

The following article is from today's FT, offering crisp, concise call-to-action to save " the future of global capitalism". Easier said than done but the G20 meeting next month in London could mark the first important step of integrating worldwide effort by governments to save a long-lasting depression just like in 1933.

J.K. Galbraith wrote that 1929 stood alongside 1066, 1776, 1914, 1945 and 1989 in its importance. The world today was shaped by the efforts of governments to overcome the economic meltdown of the 1930s – and the consequences of their failures. Even if this economic crisis is not as bad as the Great Depression, it will have epoch-moulding consequences. This week the Financial Times starts a series on the Future of Capitalism. Much, however, depends on the success of next month’s meeting of the Group of 20 in London and how successful governments are at ending this worldwide crisis.

The intellectual impact of the crisis has already been colossal. The “Greenspanist” doctrine in monetary policy is in retreat. It no longer seems clear that it is easier for central banks to clean up after asset price bubbles burst than to prick them when they are small. Monetary authorities will need to be more concerned both about financial stability and global imbalances which allowed a few countries to build up vast surpluses while a few others ran yawning deficits.

Finance has already changed irrevocably. The grand investment banks which once strode alone have either collapsed, or joined the flock of retail banks. Governments are now borrowers, lenders, investors and insurers of last resort for much of the financial system. The future of finance will be determined by their efforts to disentangle themselves from the thickets of guarantees they have been forced to make. The depth of the crisis will determine how easily they manage it.

The fiscal cost of this episode is unclear. In some countries, it may be state-busting. Some nations will need to cope with extraordinary fiscal tightenings in the coming years. The domestic impact of government spending – and its geopolitical ramifications – could yet be colossal. Again, much depends on how soon the downturn ends.

There is one certainty. While recessions are inevitable, deep depressions or slumps – or whatever you call them – are neither necessary nor welcome. They destroy wealth, sap happiness and crush old certainties. What is more, increasing poverty is a grave threat to world stability and democracy. Revolutions often start as bread riots, and economically-stagnant countries make belligerent neighbours. Growth must be restarted.

In 1933, during the last comparable fight to restart the world economy, 66 governments met in London with tariffs and hackles raised. Franklin Roosevelt, newly-elected as US president, sent delegates to the “Economic and Monetary Conference”. But rather than being a staging post for recovery, the conference collapsed. The London G20 meeting must not suffer the same fate. Participants must agree on three points.

First, world demand is in freefall. Stimulus is necessary. The surplus countries with the most leeway to increase domestic spending – Japan and Germany, in particular – are not yet doing enough. They can afford to encourage serious spending and are, in any case, suffering the steepest contractions. In addition, if these habitual exporters were to become serious importers, it would be politically easier to hold back protectionism.

Second, governments must take responsibility for dealing with their financial systems. The toxicity which started in mortgage-backed securities is spreading through the world’s banks as ever more assets go bad in the recession. Politicians must make sure that their banking systems are adequately capitalised and deal with the illiquid securities at the heart of this crisis.

Third, governments must agree to put aside more money for the International Monetary Fund. The recession would enter a new, dreadful chapter if a rash of financial crises broke out across eastern Europe, Asia or South America. The fund’s current funds are clearly inadequate. The idea of a large issuance of SDRs – the IMF’s own reserve asset – is an excellent one. Changes in voting-weights, to raise Asia’s share and lower Europe’s, are also both inevitable and desirable.

What matters is that there is agreement on these three issues so that politicians – even those in weak governments, as in Japan – are given the political cover to do what is necessary. A united front is, therefore, essential. Big questions about the shape of the broad future of the world economy can wait until we are certain that there is a future for globalization. An impartial commission could be appointed to mull them over. If spats over minutiae – such as the regulation of tax havens or bankers’ pay – were to stand in the way of a deal, the verdict of history would be damning. Electorates are unlikely to be more forgiving. The aim now is simple: end this brutal recession.

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Thursday, March 05, 2009

Clean Energy and Governments’ Greenest Bail-outs

Today’s FT article was quite revealing in the sense that even South Korea and China are spending proportionally larger than the US under Obama’s presidency. It’s not easy being green, even if you have powerful friends. The Obama administration’s $787bn stimulus package contains $56bn in grants and tax breaks for US clean energy projects. The proposed round of government spending in economies across the world represents a unique opportunity for green businesses. The increased investment could pull energy consumers towards using more renewables, create millions of new jobs in green industries and help to create a more efficient, low-carbon future.

However, proponents of a green stimulus also claim that there will be serious consequences if the money is misspent. Using this funding to continue with the sorts of infrastructure that we already have could mean that countries are committed to a path which has already led to a growth in greenhouse gas emissions.

The white bubbles on the right represent the total size of each county’s fiscal stimulus package, while the green bubbles inside are equivalent to the country’s allocation towards environmental initiatives.

On the other hand Obama’s billions are no panacea for the sector’s financing woes.

Global investment in clean energy is expected to hold steady at $150bn this year as banks and hedge funds hoard cash – a marked slowdown for an industry where investment grew 60 per cent per year in 2006 and 2007, according to New Energy Finance, a clean energy consultancy. As interest in new wind and solar projects wanes amid falling oil prices, and a lack of available credit stalls expansion of existing ones, anxious eyes are turning to the government.

Mr Obama’s stimulus includes calls for $38bn in direct government spending and $18bn in tax breaks for clean energy spread over the next 10 years, according to Dewey & LeBoeuf, the law firm. Owners of solar, wind and other clean energy facilities will be able to claim tax credits against the cost of equipment, helping attract big institutional investors that have been put off by uncertainty about taxes. But the short timeframe – credits can be claimed only for projects that are up and running in the next three to four years – means projects still on the drawing board may not be ready in time to qualify.

Plans for direct spending include $11bn for a new energy grid, $2bn in grants for battery technologies, and $6bn in loan guarantees for additional power plants and transmission lines. Such spending is well and good, assuming the money can be allocated efficiently by government bureaucrats. Recent experience at the Treasury, where staffers are being stretched to the limit doling out billions in bail-out money, suggests that is more easily said than done.

Source: FT 05.03.2009

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Today’s FT article was quite revealing in the sense that even South Korea and China are spending proportionally larger than the US under Obama’s presidency. It’s not easy being green, even if you have powerful friends. The Obama administration’s $787bn stimulus package contains $56bn in grants and tax breaks for US clean energy projects. The proposed round of government spending in economies across the world represents a unique opportunity for green businesses. The increased investment could pull energy consumers towards using more renewables, create millions of new jobs in green industries and help to create a more efficient, low-carbon future.

However, proponents of a green stimulus also claim that there will be serious consequences if the money is misspent. Using this funding to continue with the sorts of infrastructure that we already have could mean that countries are committed to a path which has already led to a growth in greenhouse gas emissions.

The white bubbles below represent the total size of each county’s fiscal stimulus package, while the green bubbles inside are equivalent to the country’s allocation towards environmental initiatives.

On the other hand Obama’s billions are no panacea for the sector’s financing woes.

Global investment in clean energy is expected to hold steady at $150bn this year as banks and hedge funds hoard cash – a marked slowdown for an industry where investment grew 60 per cent per year in 2006 and 2007, according to New Energy Finance, a clean energy consultancy. As interest in new wind and solar projects wanes amid falling oil prices, and a lack of available credit stalls expansion of existing ones, anxious eyes are turning to the government.

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