The Power and the Money

Is power really ending? A preview of Moisés Naím’s new book

Moisés Naím has an interesting new book coming out: The End of Power. Its argument that power (conventionally declined) is decaying is incontrovertible ... but I worry from this preview that the author is conflating too many different things to create a useful framework.  

1. The American problem is super-simple to understand. Combine parliamentary parties with the Constitution (written and unwritten: the filibuster and all that) and you have a recipe for paralysis; 
2. Ditto the European problem. The E.U. is riven with veto points and lacks a real demos, but it has a currency. So they cannot even figure out to create a common deposit insurance scheme, let alone a real transfer union. The diagnosis is not rocket science nor  is the problem unprecedented; 
3. Piracy and organized crime are frightening ... but sideshows and being dealt with. Moreover, neither affects serious states inside their borders. 

There is an argument to be made that the world is facing global problems without a global government. This “governance” thing is failing to compensate; the one international institution that resembles an actual federal government (the E.U.) is still much too weak. But that argument leaves out problem (1). To shoehorn current American political paralysis into his argument, Naím will need a theory to tie the rise of ideological disciplined parties to some greater global force.

Naím appears to be trying to create a theory about the decline of all kinds of centralized power ... but it is not clear that centralized power is declining. Take the examples in the linked-to essay. None of them are clear-cut. Corporate CEOs do churn more than ever before ... but CEOs and the owners of capital get an ever-higher share of income. The BP oil spill did hit the BP share price more than the Exxon Valdez spill hit Exxon ... but the Gulf spill was a far far far far bigger disaster. France did pull out of Afghanistan after a few green-on-blue attacks ... but was not an important part of the U.S. coalition and Paris went on to occupy northern Mali a few years later.

Let me be clear: I think that Naím is an important thinker who is on to something important. I do not think the world is the same as it was in, say, 1980. But from what I see in the precis, I worry that this book will not explain (or even properly define) the difference.

I have posted about the tendency among popular academics to lurch between the extremes of “We Have Seen It All Before” to “Everything is Different Now!” That post mentioned Stratfor as an example of how the former mindset can lead to some head-scratching conclusions. I am hopeful that the new book from Naím will avoid the latter, but the essay gives some reason to worry.

Drone wars

There has been a lot of recent controversy about America’s drone policy. That controversy is deserved. There seems to be something odd about the use of weapons of war outside a war zone. What are the rules? Where does it end?

When I think about it, there do seem to be clear rules and we know exactly where it ends. Only they are not the rules that the Administration has written down and they are not rules that any administration could openly admit to.

Basically, the United States will use drones in any of the areas where we would use any kind of military force to advance our interests outside of war. E.g., countries (or subareas of countries) that satisfy two conditions:

1. They are outside the reach of a legitimate, democratic and effective government;
2. The open use of American force would not embarrass a government we like or damage other American interests.

E.g., the U.S. will use drones to kill people in the world’s ungoverned spaces, just like it will use the Marines or the Army or any other element of national military force. But we will not use them to kill people in Canada and we will not use them in Colombia, albeit for different reasons.

These unwritten rules, I think, are why liberals massively support the use of drones to kill Al-Qaeda members in Yemen. I was surprised to discover that self-selected viewers of the Ed Show are okay with this policy. The support is there despite the risk to foreign civilians and even when the alleged terrorists are American.

The legality is strange (in essence, even American citizens in ungoverned spaces have no rights) but not, I do not think, new.

In practical terms, the difference between drones and F-16s or cruise missiles is one of cost. They can linger for more time than most manned vehicles and with no risk of losing the pilot. And they are more accurate than cruise missiles. That makes them easier to use. But it is not like the U.S. refrained from firing cruise missiles at Afghanistan or Sudan. Or, for that matter, sending helicopters full of Naval special forces into Pakistan.

None of this is to say that there is nothing new under the sun. Surveillance technology is different: ultra-high resolution photographs and bird or bug-sized flying spybots are in fact new things that need new rules. But those truly new things have not yet entered the public debate.

Drones as they currently exist are a matter of a change in scale but not a change in kind. The fundamental issues are no different and the unwritten rules are no different. If we are honest with ourselves, we know the rules and we know the limits. We just cannot say them ... and perhaps do not wish to admit them. After all, they amount to a declaration of sovereignty over much of the planet, within which the Constitution does not apply.

But once you realize that the limits are there, the lack of debate makes sense.

Randy McDonald reviews a science fiction novel

I was pleasantly surprised by John J. Lumpkin’s first novel, Through Struggle, The Stars. I’m normally wary of the sub-genre of military science fiction. Many of the more recent titles that I’ve seen appear on bookshelves aren’t very good books at all, titles written by their generally right-wing American authors who were much less interested in the art of writing than they were in creating crude nationalist propaganda. The need for a jihad against Muslims, the amusing fatal decadence inherent in the French (or, more broadly, Europeans), the underhanded cunning of the Chinese, the need for the simpler and more martial mores of the past to replace an immoral liberalism — all these tacks have featured too prominently in too many milSF books I’ve picked up for me to feel comfortable with the genre. To the author’s credit, he did a very good job of avoiding this pitfalls of milSF.

Through Struggle, The Stars is set in the starfaring future of 2139, decades after the development and deployment of technologies capable of creating stable wormholes between points in space light-years apart and antimatter-fueled starships capable of transporting wormhole terminuses to distant planetary systems made interstellar travel possible, and after a devastating asteroid impact on Earth gave every countrry capable of mounting interstellar colonization efforts the incentive to do so. Colonies from dozens of different powers are scattered among the nearby stars, different countries’ colonies clustering in different areas. China and Japan, apparently the dominant powers on Earth, are also prominent players beyond the Solar System. Of late, these countries have begun to drift towards war. In this dynamic, unsteady environment, newly commissioned American cadet Neil Mercer joins the United States Space Force and catches himself up in the various maneuverings of the United States as it and its leadership bring the United States and its allies into the Sino-Japanese conflict.

To my relief, no one is propagandizing for any country in this novel. Each of the actual and potential combatants have their good sides, but each also has their own flaws. Lumpkin has written a novel where China is probably the biggest power in the world, but it isn’t an obviously evil or threatening polity. Military fiction novels where the parties in a conflict are complex are inherently more interesting than ones where contrived conflict is created between Good Guys and the Evil Ones, if only because it makes it possible to sympathize with characters on all side that aren’t sockpuppets. Lumpkin deserves to be praised for his even-handedness.

Some of my fellow reviewers have pointed out that the world of 2139 is a world where not much seems to have changed since the early 21st century, politically and otherwise. China is an oligarchy with an expansive sphere of influence on Earth; Britain is an independent American ally outside of an integrated Europe where France seems to be a major player; countries in the global South like Brazil, India, and Mexico seem to be present only in passing, although Iran does make an interesting appearance. Culturally, too, the world of 2139 seems almost too recognizable and contemporary, a certain Hispanicization of the United States aside. These likely anachronisms did stand out to me, although they didn’t prevent my enjoyment of the novel.

I also liked the attention that Lumpkin gave to his material universe. Different worlds are not perfectly Earth-like, the colonization of distant exoplanets is a costly venture that isn’t universally successful, and attention has been given to the import of the location of different stars in different places. The planetography of some of the worlds visited is paid attention, and the nature of life on sai; he even gives multiiple explanations for Fermi’s paradox. (One of these explanations lies at the root of the Sino-Japanese conflict and the United States’ involvement in sai.)

The novel is definitely a good first novel, and a worthy one. I’d give it 3.5 stars out of 5. The novel’s website points to it being the first novel in a projected series, The Human Reach. I look forward to seeing followups, and to seeing this and other novels on the series on bookshelves. Well done.

I bought my copy of Through Struggle, The Stars from Smashwords for $US 2.99, but the novel is also available from Amazon and other online retailers.

Another review of a science fiction novel

Carlos Yu here.

Through Struggle, the Stars
A Human Reach Novel
By John J. Lumpkin
Copyright 2011 John J. Lumpkin
Smashwords Edition

The important things out of the way first: Through Struggle, the Stars is a solid, readable first novel. I would read this novel’s sequel, and I would consider reading an unrelated novel by this author. It’s well-paced and has moments of genuine dramatic tension, a B in a world without grade inflation.

Through Struggle, the Stars is military science fiction without being military pulp science fiction. It’s not a dumb adventure novel of the kind where your IQ points are used for target practice by the writer, and it doesn’t read like someone else’s fetish porn. Quite frankly, this is probably why it hasn’t found a publisher yet. The story is jingo-neutral, or close to it.

Lumpkin has put some thought into each of his set pieces and how they fit into the overall plot of the book. The space combat is realistic in that ships radiate energy like real physical objects, they move with very low accelerations, and they are very vulnerable to hypervelocity impacts. Lasers in space and as a form of artillery have important roles. Lumpkin abides by the constraints of his imaginary wormhole technology, and he uses the local stellar neighborhood as his playground. It’s not totally rigorous, but he’s put in some work.

There is a nagging problem with inconsistency in the setting, however. I’m not sure whether this would be picked up by the general science fiction reader, should such a person exist, but it jarred me. Simply put, the timescales are off. A social setting that would not be a bad extrapolation of today’s demographics in 2050 is given a date of 2139. Future institutions are immediately recognizable. Technological progress outside of the space applications sector has moved very, very slowly —there are no flashy advances in automation or genetic engineering, for example. Despite Japan  becoming a major power once again through its first mover advantage in space technology, economic convergence between the richer nations and the poorer nations has stopped. At the same time, interstellar colonies on previously barely habitable worlds somehow have reached populations in the millions and have been settled for decades, and there is significant commerce. Many nations have colonies.

This mismatch in timescales is a shame, because each part of Lumpkin’s universe feels realistic enough. If anything, his setting feels a little too contemporary — a scene involving a Mercedes and a brawl in a casino parking lot comes to mind.

The politics of colonization motivate the background of the plot — true terra nullius, there are no aliens so far in this setting. There is a worldwide belief in the necessity of developing colonies off-Earth to maintain cultural and biological survival due to the horrible effects of a near-future asteroid impact. This belief has merged with a resurgent nationalism. Policymakers also believe that wars between superpowers can escalate incrementally, perhaps because of the excellent defensive countermeasures in this setting, but I wonder if Lumpkin has in the back of his mind what happens when the conditions for deterrence through mutually assured destruction no longer apply.

The characterization in Through Struggle, the Stars was, for want of a better word, adequate. The soldiers are more fully realized than the intelligence agents. I didn’t believe in the motivations of the two principal Chinese agents, but it wasn’t because of “characterization through ethnic stereotype,” and they are presented as outliers. People die, and I am pretty sure that Lumpkin has read Tobias Wolff’s short story, “Bullet in the Brain.” (Go read it. It’s short.)

Through Struggle, the Stars is an emotionally cool book. It lacks some of the quirky outsider energy of classic science fiction, but it also lacks the same undercurrents of dogmatism and score-settling. This book is not about saving the world with a single grand gesture, or flipping the table over to reveal the rot underneath; it’s about conflicted people in the military and the intelligence services at a particular point in geopolitical history. I enjoyed how the Big Secret turned out not to have very much effect, although it is conceptually important.

I’m more than happy to answer any questions.

A review of a science fiction novel

A friend of mine, James Nicoll, asked me and a few other mutual amigos to review a self-published science fiction novel: Through Struggle, The Stars, by John Lumpkin. Somewhat reluctantly, I downloaded and read it. To my surprise, I enjoyed the read while remaining unconvinced by the scenario. I will also put up my friends reviews (all written separately). Here (with one change) is mine:

Through Struggle, The Stars is much better than a self-published novel has any right to be. It’s a tale of a war in the year 2140 between China and Japan, told through the eyes of a new officer in the United States Space Force. The USSF — which has inexplicably adopted naval ranks and conventions despite the name — exists to defend both the terrestrial United States and its interstellar colonies. The setting is hard science fiction, in the sense that the only gimme is a system of wormholes to allow interstellar travel. No aliens; space vessels rotate for gravity; and while they use fusion engines that we have no idea how to build the accelerations involved are tiny. The politics aren’t self-evidently silly and the populations of the colony worlds are sensibly low. In fact, it reads like the kind of novel that I tried to write as a teenager, only well-crafted.

From the tone of the above paragraph, I’m sure that you can guess that my overall review is going to be negative. Since the book has a lot of positive qualities, let me start with them. First and foremost, I kept reading! I am not the sort of person who finishes every book he starts. In fact, I finish only a small minority of them. Most of my reading is work-related nonfiction and thus mostly skimmed. As for novels, I’m a high-friction reader: the moment I have to work to maintain my attention, my reading speed drops quickly — and it takes very little to get me to quit. This novel I did not quit. That is an extremely good thing. 

Second, I very much liked how the majority of the American characters had Spanish last names. Finally, somebody who thinks about demographics! I also liked that they threw in Spanish catch-phrases, but just as that: catch phrases. That is exactly how Spanish survives after several generations. We learn (from a Senate vote) that the United States has at least 52 states by 2140 and the author opens the possibility that Cuba might be one of them. Normally, that would get my “silly future cliché” alert up, but the allusion is simply that one enlisted USSF person has Havana for a home town. That would be possible today. While I do not believe that Cuba will ever become part of the United States it is supremely easy to believe that the country will continue to have a “special relationship” with the mainland, up to and including free migration. So the throwaway line didn’t desuspend my disbelief — after all, add Puerto Rico and the District of Columbia and you’ve got 52 right there.

The characters were believable, if somewhat clichéd. Actually, “clichéd” isn’t the right word. They were believable enough for me to care about them (and therefore keep reading) but they weren’t distinct enough for me to really remember any details. The one exception was a Chinese gangster-turned-intelligence-agent, and he stuck with me because I didn’t really ever believe in him. He wasn’t a cliché by any means; he just seemed too much like an agent of the plot, a character created by “The Narrative” rather than a real person who naturally found himself involved with the other people in the book. (The phrase in quotes is a reference to Scalzi’s Redshirts.)

The politics were well-handled … but lacking. First, the portrayal of China as a quasi-democracy felt wrong. Such regimes first appeared in Latin America in the late-nineteenth century; they quickly collapsed (via coups or civil wars) or turned into full-on dictatorships. That pattern continued through the 20th century with a third wrinkle: several of the quasi-democracies turned quickly into real democracies. Mexico’s second dictatorship-in-drag collapsed in the 1990s; even in Turkey today, the “deep state” seems to be on its last legs. It strained my belief to think that China would be ruled by a century-old corrupt oligarchy 130 years from now. (A newly-minted corrupt oligarchy would be a different story.)

Second, the politics of the war were given disappointingly short shrift. It is indisputable that major inter-state war has gone into serious decline since 1945. It strikes me as very plausible that it could see a comeback. The novel provides a necessary condition: powerful directed-energy weapons make it at least plausible that politicians would believe that they could control the ladder of escalation. (The prevalence of robotic and precision weapons had a similar effect.) Logically, therefore, the war began as a limited conflict fought at sea and in space; one can imagine future audiences cheering on such a contest.

The problem is that there was something very pro forma about the backdrop. There is an interesting question about whether industrialized interstate war (limited or not) is possible in a modern democratic environment. Can modern democratic politicians capitalize on violence? Would modern audiences countenance unleashing death in their names for anything less than national survival? These questions are unaddressed. When the author reveals the reason the American president maneuvered the U.S. into the war, it comes as an anticlimax. (It depends on the FTL McGuffin.) There were some references to U.S. domestic opposition, but mostly in the context of “ethnic Chinese” congressmen objecting to a war with the madre patria. (Which is, I have to say, a silly idea — in a world where China has been rich for a century, there will be no discernable Chinese-American community have been little net immigration from China for at least as long. The descendents of past and current immigrants will have long since assimilated; second-generation outmarriage among Chinese-Americans currently tops 50%.) There is a subplot involving a Taiwanese independence movement that strained credibility. In short, the politics never became unbelievable — but they were underexplored.

Which brings me to the killer problem: the book read like it took place in 2012, 2030 on the outside. It was simply unbelievable as a depiction of life in 2140. The ground combat scenes, for example, read like they happened last week. (The main characters were a little too composed during the fighting, but that’s a different issue.) Sure, there were exoskeletons and lasers from space, but that felt like window-dressing. Nothing about microdrones, intelligent robotic “pack animals,” self-guided ammunition ... the tactics of ground combat were basically unchanged.

The same problem afflicted the rest of the book. There were passing mentions of self-driving vehicles, advanced drones, machine translation, advanced 3-D printing, computer interfaces implanted in people’s eyeballs and “the best genes that money could buy,” but none of that had any appreciable effect on the course of the action or the social background in which the characters operated. The author failed completely at giving the impression that the book took place in the future. Now, it is possible that the author is correct that by 2140 automation will advance, sensor technology improve, cyborgization continue, 3-D printing mature and gene modification become common among the rich ... yet with daily life remaining about the same as in 2012. (Along with military organizations, ground combat and democratic politics.) That is possible! And hell, as a small-c conservative, I would very much like it to be true. But it’s a tall order, and a writer who wants to keep my disbelief suspended needs to make the case. The author of this book does not even try.

As a coda, I had three other quibbles. First, while the space combat scenes seemed well thought through, I did have to wonder what all those people on board the ships were actually doing. Even if our 22nd-century space navies decide to keep human commanders in the loop rather than entrusting it all to the AI’s, one would think that the ships would operate with tiny stripped-down crews and lots of maintenance robots. If that’s wrong, I want to know why.

Second, the dynamics of space colonization didn’t make much sense, at least not on the surface. There wasn’t much commerce, so the motivation seemed to be non-economic. The few colonies we saw were not rich places, so there was some indication that the author realized the problem, but it wasn’t explicit. Nothing caused me to recoil, but I couldn’t shake the feeling that something didn’t make sense about the scenario.

Lastly, there were a few dumb throwaways. A reference to helium-3 mining on the Moon. Ugh. A reference to asteroid mining. Slightly more plausible for a few rare elements, but double-ugh as something needed to power Earth industry. And then there was a major lacuna for a book about geopolitics: a bit about coastal protections for major cities was the only reference to global warming.

In short, the book succeeded as a yarn. But it failed as science fiction. Props for the Spanish last names, thinking through the dynamics of orbital combat, and avoiding (most) clichés. But minus for essentially writing “2012 in Space!” rather than something about the year 2140.

I would read other works by the author; he shows a lot of promise. I’m not sure that I would read other works set in the same universe, though. None of my objections require him to rewrite his background — just explore it in greater depth. The end result, however, won’t look much like the “2012 in Space” that we saw. Maybe Charlie Stross would let him bounce ideas around?

Comments welcome on any and all of the topics raised above.

And the United Nations makes Ghana give Argentina its warship back

There is something amusingly science-fictional about the title of this post, like something that John Brunner would have written satirically in the 1960s.

The International Tribunal on the Law of the Sea (ITLOS) is an international court (loosely-associated with the United Nations) that rules on disputes related to the Law of the Sea Treaty. It consists of 21 judges elected by the governments of the states party to the Law of the Sea Convention. They serve nine-years terms; decisions are made by majority. Since it was created in 1996, the Tribunal has only seen 20 cases.

And today it released its decision in case #20! “Ghana shall forthwith and unconditionally release the frigate ARA Libertad, shall ensure that the frigate ARA Libertad, its commander and crew are able to leave the 22 port of Tema and the maritime areas under the jurisdiction of Ghana, and shall ensure that the frigate ARA Libertad is resupplied to that end.” It also ordered each party to pay its own costs associated with keeping the ship in berth to date.

Ghana argued that the ITLOS did not have jurisdiction because:

1. The ARA Libertad was in Ghanaian territorial waters (p. 4 at the above link);
2. Argentina had waived immunity under U.S. and U.K. law (p. 5);
3. Domestic appeals in Ghana are continuing (p. 6).

ITLOS declared (in paragraphs 94-100 at the link to the decision):

1. A warship is an expression of the sovereignty of the State whose flag it flies;
2. In accordance with general international law, a warship enjoys immunity, including in internal waters, and that this is not disputed by Ghana;
3. Any act which prevents by force a warship from discharging its mission and duties is a source of conflict that may endanger friendly relations among States;
4. Attempts by the Ghanaian authorities on 7 November 2012 to board the warship ARA Libertad and to move it by force to another berth without authorization by its Commander and the possibility that such actions may be repeated, demonstrate the gravity of the situation and underline the urgent need for measures;
5. The urgency of the situation requires the prescription by the Tribunal of provisional measures that will ensure full compliance with the applicable rules of international law.

And so, the decision! Argentina gets its ship back, although the two parties can continue to argue about the underlying principles. The Argentines also wanted Ghana to salute the flag and otherwise genuflect, but the Tribunal wisely seems to have ignored all that.

The decision was unanimous, but some of the judges added their own wrinkles. Anthony Lucky of Trinidad thought the Tribunal should have been more forceful in asserting sovereign immunity. Chandrasekhara Rao of India was annoyed that the Ghanaian government took a different view before ITLOS than before its own courts. He also wanted the Tribunal to state more forcefully that a state that allowed a foreign warship into its waters automatically gave up jurisdiction over that ship. Finally, Rüdiger Wolfrum of Germany and Jean-Pierre Cot of France had ... well, what seems to this non-lawyer to be a lot of hair-splitting that ends up in the same place as Lucky and Rao.

And thus, this latest attempt to seize Argentine assets comes to naught. Even in today’s world of limited sovereign immunity, it is hard to collect on sovereign debts. An expropriation case would be different (at least if it involved export industries) since foreign courts could easily go after production from the expropriated assets. But when it comes to sovereign debt, about the only leverage seems to be going after new issuances.

In short, Argentina won and Ghana lost. Sorry, LT.

Some headlines should be accompanied by exclamation points!!!!

Today I read in the Financial Times, “Philippines backs rearming of Japan.”

My reaction was, “Philippines backs rearming of Japan!!!”

When China gets a Philippine official to state “We would welcome that very much,” in reference to having Japan ditch the pacifist clause in its constitution, then you know that the People’s Republic has completely botched its diplomacy. (The Philippines is a country that still remembers the Japanese occupation, albeit not near as vividly as China or Korea.)

I currently believe that the United States is still what preserves the peace in East Asia. China is being aggressive. The Chinese public (at least portions of it) seems to have some militaristic tendencies. (Click the link for the pictures.) So it is not hard to imagine a Chinese government trying for a splendid little war with the Philippines or Vietnam. Nor is the converse impossible: since Japan currently hold naval superiority, Japanese politicians might try to goad the big fellow into a similarly splendid little Sino-Japanese naval war. 

It is not just China. Don’t forget the stunningly hostile South Korean reaction to Japanese possession of the Dokdo (aka Takeshima) islands.

I know, Steven Pinker tells us that we live in a less violent age. And he is right! But still ... sometimes a weird whiff of 1914 drifts over from East Asia. And it seems like the offshore balancing of the United States is what keeps the smell of gas from igniting.

Anyway, to bring it back full circle, when the Philippines calls for Japanese rearmament, then China’s attempt to assert its claim over the potentially energy-rich (and strategically located) South China Sea has now officially backfired.

Ecuador attacks Chevron in Argentina: world governance runs both ways

I hate the word “governance,” but it is useful. After all, there are things that are governed without a single government. When those multiple governments are hierarchically ordered (even if legally sovereign) then I prefer the word “empire.” But sometimes imperial institutions can run both ways.

The bilateral treaties that govern the investor-state arbitration system tend to be unequal. Consider for example the U.S.-Ecuador treaty. The United States exempts Ecuadorean investors from using anything but U.S. courts in the following sectors:

• Air transportation
• Banking
• Customhouse brokers
• Government grants
• Government insurance and loan programs
• Energy and power production
• Insurance
• Maritime services and maritime-related services
• Mining on the public domain
• Ocean and coastal shipping
• Ownership of real property
• Ownership and operation of radio and television stations
• Ownership of shares in the Communications Satellite Corporation
• Primary dealership in United States government securities
• Provision of common carrier telephone and telegraph services
• Provision of submarine cable services
• Use of land and natural resources

Meanwhile, the Ecuadoreans exempt:

• Traditional fishing (not including fish processing or aquaculture)
• Ownership and operation of broadcast radio and television stations

Quite a difference! Looks pretty damn imperial, no? You can kinda understand why President Correa wants to withdraw from ICSID and abrogate the investment treaties.

Thing is, these treaties are ultimately enforced not by ICSID or some other sort of world-government-in-drag, but national courts. And the same conventions that allow national courts to enforce foreign rulings (the way Argentina lost its ship in Ghana) can be used to establish extraterritorial jurisdiction. That can do it a bit to reduce the imperial feel to the international system that protects property rights. The Ecuadoreans, in short, can use foreign courts to enforce their laws.

Last year, Ecuadorean courts levied a $18.2 billion damage claim against Chevron for polluting watersheds in the country. Ecuador’s legal team knows that ChevronTexaco doesn’t have many assets in Ecuador, so its strategy is to go around the world looking for Chevron assets that it can attach. (You can read a copy of the plan from the legal team here. They call it the “Invictus memo.”) In February, Chevron won a preliminary victory when it got an arbitration tribunal to take its side. Problem is the ruling applied only to Ecuador.

So it was big news in October when the U.S. Supreme Court ruled [CLARIFICATION: It was not a ruling per se; the SCOTUS decided not to hear an appeal, thus allowing the plaintiffs to proceed] that Ecuador could freely continue its search for Chevron assets. A week later an Ecuadorean court let the plantiffs seize $96.3 million owed to Chevron by the Ecuadorean government (yes, that would be in effect Ecuador taking cash from itself) and all licensing fees owed Chevron from the use of its logo. And now ...

... an Argentine judge has given the plantiffs all of Chevron’s shares in Chevron Argentina, all of Chevron Argentina’s dividends, its 14% stake in the Oleoductos del Valle pipeline, 40% of its bank deposits and 40% of the revenue from future Argentine crude sales!

How much is the above worth? Well, I don’t know how much cash-on-hand Chevron Argentina enjoyed and it’s safe to assume that they won’t be paying any dividends as long as the judgment is in place, but it is possible to calculate the value of its crude production. (Oleoductos del Valle loses money.) The June domestic price of crude in Argentina was US$467 per cubic meter. (If you click the link and download the data, you’ll find that the price didn’t vary much.) Using production data from January through September of 2012, you’ll find that Chevron Argentina will produce crude worth about $833 million in 2012. 40% of that is $333 million; not a bad chunk of change. Of course, the Ecuadorean government will only get about 35% of that, since the income is actually due the plantiffs and their lawyers. Still, $117 million per year is nice, and if the precedent holds it could wind up with a lot more than that as more Chevron assets are attached around the world.

Eventually the Ecuadorean government might even net enough to pay off Occidental.

Argentina loses in the United States, but as the Rock said, it doesn’t matter

It isn’t quite as dramatic as the frigate trapped in Ghana, but Argentina lost a big one in the U.S. Court of Appeals last on October 26th. The court upheld an earlier ruling that Argentina broke its contracts when it offered to restructure the debts of its creditors on pain of repudiation for those who refused to take the deal. If everyone had taken the deal, that would be one thing; but the Argentine government can’t go ahead and pay some creditors but not others.

On October 25th, Foreign Minister Héctor Timerman provided a list of the assets that stiffed creditors have tried and failed to seize. It’s pretty remarkable:

1. In 2004, NML Capital (same fellows who have grabbed the frigate) grabbed 12 properties in the United States, including the residences of the Argentine ambassadors to the U.S. and the OAS, the residences of the heads of the Argentine army and naval attachés (in Maryland and D.C., respectively), the Washington offices of all three military attachés (Army, Navy and Air Force), the Argentina mission to the OAS (the whole damn building, at 1816 Corcoran Street N.W.), and four Air Force storage units. On August 3, 2005, the D.C. District Court ruled that all of these properties were covered by sovereign immunity.
2. In May 2007, creditors seized the presidential jet in California. A judge in California rapidly returned the wonderfully-named Tango One to Argentina within a couple weeks.
3. In September 2008, creditors went after the accounts of the Miami consulate and the New York tourism office. A New York district judge tossed that one out on September 30, 2009.
4. In May 2010, creditors grabbed Argentine funds owned by the Banco de la Nación Argentina in New York. That was overturned on September 24, 2010. To be honest, I do not understand this ruling: the Banco de la Nación is not the Argentine central bank, but state-owned commercial bank. (It is worth adding that two months earlier, in March 2010, the U.S. Supreme Court pre-emptively blocked an attempt to seize the nationalized pension funds. The Argentines quickly repatriated the funds after the SCOTUS decision.)
5. In April 2011, creditors seized an Argentina space ship. Really! They attached the SAC-D satellite. The Central District Court of California ruled against the creditors on May 25th, 2011; on June 6th the creditors announced that they would not appeal.
6. On August 1st and 9th of 2011 creditors managed to embargo central bank funds held in the Federal Reserve Bank of New York — that was overturned on June 26, 2012, when the Supreme Court refused to hear the case.
7. On May 16th, 2011, creditors claimed Argentine state-owned patents in New York worth about $1.2 billion. That failed on March 22nd, 2012. I’ll admit that I don’t understand this decision either; patents seem like commercial assets to me.
8. In December 2009, creditors went after Argentine central bank reserves in Switzerland. That took until October 17, 2012, to resolve, but the Argentines kept their money.
9. On April 3, 2009, creditors grabbed the accounts of the Argentine embassy in France. That was quickly lifted, although a final decision in Argentina’s favor didn’t come down until September 28, 2011.
10. On December 22, 2009, creditors seized an Argentine Air Force storage unit in Nanterre. The Argentines got that back on November 22, 2011.
11. Ditto, creditors tried to freeze the French accounts of the Argentine military in August 2010. Judges overturned that within days.
12. Also in France in 2009, creditors claimed the General San Martín Museum in Boulogne Sur Mer. That was overturned on March 5th, 2010.
13. In Germany, the Argentine embassy’s accounts were frozen on April 23, 2003. A court ruled against the creditors on December 6, 2006, and the German supreme court confirmed it on July 4, 2007.
14. A second attempt to grab the Frankfurt consulate’s account in December 2010 failed in September 2011.
15. In Belgium, creditors froze the Argentine embassy’s accounts in August 2009 ... and still have them frozen! The case has been appealed multiple times, with varying decisions, and is now going to be decided in early 2013. Precedent is on Argentina’s side.
16. Ditto creditors grabbed the Argentine Agriculture Commission to the European Union in Brussels. That one is still in court but the smart money is on Argentina.
17. In Italy creditors grabbed a whole bunch of stuff, but the Italian high court declared that Argentina enjoyed general immunity on May 27th, 2005.

In short, courts have gone out of their way to protect the Argentine government. In most of these cases, the decisions have been clear-cut, but even in the fuzzy cases of #4 and #7 the Argentines have won. So why should this recent decision matter?

Well, mostly it doesn’t. The decision means that Argentina can no longer make payments on its restructured debt in the United States. In December, Argentina is supposed to make $3.3 billion in coupon payments in New York, so it looks like a big deal. Thing is, Argentina has three simple options:

1. Pay the holdouts according to the original deal, while paying the holders of restructured debt the new payments. Plausible ... but in addition to the cost, it would open a host of new lawsuits and be a political humiliation. Ixnay on this option.
2. Pay outside the United States. Sounds easy, but all it would take is a few holdouts to push Argentina into technical default and trigger all the credit default swaps on the debt. Argentina could restructure the debts as domestic law with the agreement of 85% of the creditors ... but that would also trigger the credit default swaps even if Argentina remains current on all payments. Of course, the Argentine government won’t be on the hook for the swaps. Since it can’t issue new debt anyway, there really isn’t much downside.
3. Screw everybody. Just stop paying.

Me, I vote for option (2), but it doesn’t matter. Argentina is going to go into technical default, the insurers are going to lose money, and the holdout creditors are going to be no closer to being paid. Plus, Argentina is also going to get its ship back, although like Jon Rabinowitz, I kinda hope that it doesn’t.

Argentina v. Ghana, round 1½

The Argentines are going to fly their sailors home ... on an Air France plane. The reason is obvious: they are nervous that Ghanaian courts would just seize any Argentine aircraft!

It looks like the Ghanaian port authorities are going to move the Libertad. It’s clogging up a needed berth, costing the port $3,667 per day.  To be fair, that is a lot less than the $50,000 that the Libertad is currently paying in docking fees ... well, that Argentina is ratcheting up in fees. I suspect that Argentina isn’t actually paying them. After all, it has stated that it is going to claim those fees in damages in the suit it plans to file against Ghana at the U.N. Law of the Sea Tribunal in Hamburg.

Speaking of the U.N., nobody should be surprised that the Security Council is not treating this as a threat to world peace. So much for hyperventilating about an Argentine strike on Ghana ...

P.S. No, nobody in Argentina is seriously discussing war with Ghana!

Argentina loses round one in Ghana

In most countries, military and diplomatic assets owned by foreign states are untouchable by judicial action. That’s why the attempt to attack Argentine embassy accounts in France ultimately failed. But that does not — so far — seem to be the case in Ghana. The creditors are winning.

On October 11, 2012, Judge Richard Adjei Frimpong of the Commercial Division of the Ghanaian High Court held that the Argentine government had waived sovereign immunity in the initial bond contracts. (Technically, in the 1994 fiscal agency agreement attached to them.) I have not yet been able to get a copy of the ruling, but I have some idea of what the two sides in the case argued. Argentina’s lawyer, Latty Otu, argued two things. First, you can’t seize military vessels under the Law of the Sea. Second, the fiscal agency agreement only covered assets inside Argentina.  

The creditors’ lawyer, Ace Ankomah, posed several counterarguments. First, he argued that while the Law of the Sea recognizes that naval vessels are immune, it says nothing preventing states from waiving that immunity. Second, the fiscal agency agreement applies outside Argentina — the clauses specifically applying to assets located inside Argentina involved the assets that the government refused to allow to be attached.

This is not what I expected to happen. Now, there are two more appeals to go in the Ghanaian court system. The first is the Court of Appeals. The second is the Supreme Court. The fastest that these could go is three months. One thing that won’t happen is an intercession by the Ghanaian government. Government lawyers took Argentina’s side in court, but the Ghanaian government is not going to interfere with the legal process. Just yesterday, Argentina’s deputy foreign affaris and defense ministers  returned empty-handed from a visit to Ghana. Meanwhile, in Buenos Aires the head of Argentina’s intelligence services has had to resign — understandably, she should have seen the Ghana incident coming — as has the head of military strategic intelligence and the Chief of the Navy. Meanwhile, Argentina continues to rack up $50,000 a day in docking fees and around $550 per hour for a good lawyer. Still, there’s one good thing. After reports came out that the sailors on board the ARA Libertad reacted very badly to the visit by the Argentine negotiating party, Ace Ankomah’s office brilliantly announced that they stand willing to fly all the sailors home immediately at no charge.

If the Ghanaian court decision surprised me, the reaction of the Libertad’s crew to a visit by the Argentine negotiating team has me completely stonkered. From Clarín:

The team announced, “We want to bring the greetings and support of the Argentine people.” The sailors’ cold anger was visible. Witnesses to the visit stated that the team spent no more than 15 minutes on board before abandoning the ship for the Ghanaian capital. After the [pair of Argentine officials] left, the Libertad’s sailors dropped the pretense: they confessed to their superiors that they wanted to “punch them.”

 Oh, my.

I suspect that Argentina is going to get its ship back, but now it is just a hunch. Argentina is going to the International Tribunal for the Law of the Sea (located in Hamburg) for a judgment. Does anyone know anything about law to make a prediction about the Ghanaian appeal or the Tribunal’s ruling? If this one sticks, and a naval vessel really can be seized to force repayment of debt, we really will be in a revolution.

UPDATE: Argentina will evacuate the crew of the ship. No word on whether they will take the creditors’ offer to pay for their flights home.

Ecuador is not a colony of China

Since its big default on its foreign debt (which I should really write about, it was ingenious) Ecuador has made a lot of oil-for-loans deals with China. The FT reported that Ecuador sold oil at $14-$15 per barrel. Felix Salmon wrote a post entitled “How Ecuador sold itself to China.” Neat stuff.

But exaggerated. The Bolivarians in Quito have not sold their sovereignty to China. Here’s the deal. The China Development Bank (CDB) loans money to Ecuador. Petroecuador repays by shipping oil to China. The Chinese pay for the oil at market prices. The money is deposited in the CDB, which withdraws 21% of the revenue to repay the loan. China has made three of these loans, at fairly cheap interest rates: 7.25% for the first , 6% for the second and 6.9% for the third, at a time when Ecuador basically could not borrow and paid 8.45% on its outstanding issues.

OK, so no Chinese empire ... but is China freeing Ecuador from dependence on the United States? (We will ignore that whole dollarization thing.) Not really. There are some reports that the country is now exporting all its crude to China and Latin America. The official figures for the first half of 2012, however, tell a different story. By value, 59% of oil exports went to the United States; another 11% went to Chile and 10% to Peru. Only 2% worth (or $137 million) went to China. Ditto, imports of refined products from the U.S. of A. came to 55% of Ecuadorian petroleum imports; an additional 8% came from Panama. Only 5% came from Venezuela and nothing from China. Ecuadorian crude isn’t the best quality, but it’s good enough for Chinese refineries ... except they do not seem to really want it.*

(A useful resume of different oil blends is here: scroll to Table 1.)

OK, then. Unless something drastically changes, Ecuador is going to pay Occidental. Maybe not for a while, but it will pay. And China does not have a colony across the Pacific, fun as it is to imagine such a thing.

I should mention that the international courts thing runs both ways. Maybe Ecuador will pay Occidental with assets taken from Chevron ...

* UPDATE: I imagine that Petroecuador is swapping its oil for oil from other sources to send to China. PDVSA does this all the time, so it would not be unprecedented, and it would explain why the Central Bank reports almost no crude exports to the PRC despite the loan deals.

Ecuador loses round one to Occidental

Ecuador just lost at ICSID, where the panel ruled that it owes Occidental $1.77 billion, plus interest at 4.2% compounded annually back to May 16th, 2006. If the Ecuadorians paid right now, they would owe $2.4 billion. If they delay, it will add up at the six-month LIBOR, compounded monthly. (FWIW, Occidental initially asked for $3.4 billion, but companies always highball their claims.)

What now? Ecuador will attempt to have the award annulled on the basis of some procedural or factual error. If they fail at that, then they will pay. The reason is simple: Ecuador is an oil exporter and its export sales can be attached. There won’t be the need to go fishing around the world for small change (or sailing ships) the way Argentina’s creditors need to do. It gets better: Ecuador exports crude to be refined for the home market! If it thumbs its nose at ICSID, not only will it lose export revenues, it will see domestic gasoline prices spike upwards hard. (Of course, Ecuador has been working overtime to try to get Chinese or Venezuelan interests to finance a refinery expansion.)

Ecuador might, however, pay Oxy and stiff the other claimants. There have been some declarations in this direction. Depends on how much they think China cares about its stake.

Few appreciate how Saudi Arabia undergirds the viability of this system. Ecuador exports 212,000 bpd to the United States. That is not a lot, but its sudden disappearance could upset a tight market ... except for the fact that Saudi Arabia stands every-ready to step in with its extra capacity.

Next up: another entry in the long China-doesn’t-have-an-empire series.

Observatorio argentino 17: Where do we stand in the courts?

As debtors attempt to use U.S. courts to collect on Argentina, the verdict is mixed but mostly negative. Good luck with that ship thing.

The biggest blow occured on March 1, 2010, when the U.S. Supreme Court ruled that Argentine pension funds in the United States could not be attached. Actually, there was no ruling as laymen understand it, but the Court denied an appeal, and so that was that. The next day the Argentine pension agency repatriated $200 million. (The actual chain of events was an attachment order by Judge Griesa in New York, that the Second Circuit Court of Appeals tossed out in October 2009.) Soon afterwards, on March 8, Griesa ruled that billions in pension assets were “immune from attachment, restraint and execution.” A second attack on $105 million in Argentine central bank assets failed in June of this year for different reasons: central bank reserves are immune under the Foreign Sovereign Immunity Act of 1976 (FSIA).

Thing is, all hope is not lost. The Second Circuit tossed the decision not on the grounds that pensions are an essential state function and not commercial activity, but because the Argentine government had not had a chance to use the recently-nationalized funds for any purpose at all. (Really, it makes sense: read the decision.) 

Still, it looks grim for creditors. The Second Circuit declined to interfere with Argentina’s payments to creditors who accepted its restructuring deal: so much for the court orders I referred to in the last post. And that ship in Ghana? Argentina is gonna get it back.

In other words, the creditors are gonna keep going around the world hassling Argentina but it amounts to a hill of beans ... unless two things happen. One, Argentina suddenly needs to borrow on world markets again. Two, ICSID rules against Argentina. It is weird for ICSID to take on a debt case, but it seems to have done so ...

Ghana declares war on Argentina, seizes naval vessel! Or not.

Argentina, like a lot of countries, keeps a few old-line sailing vessels in its navy. They use them to train sailors and show the flag. They don’t fight, they don’t get involved in disputes. So imagine how surprised 200 sailors must be to find themselves trapped in Ghana, their ship being held as if war had just been declared!

The ARA Libertad pulled into Tema, Ghana, on graduation tour down the West African coast. A hedge fund with a legal claim on Argentina had been monitoring its movement. The ship docked to find a bailiff from the Superior Court of Judicature waiting there with a court order to hold the vessel. “The Accused (the Foreign Ministry of Argentina), its officials, agents ... including the captain of the Ship, Pablo Lucio Salonica, and the crew are prohibited from moving the frigate ARA Libertad from Puerto Tema without a new order from this court.” The crew then had to surrender to the court. Argentina can release the ship by paying a bond: the local press has mentioned $10 million; technically, the bond will have to be equal to the value of the ship.

Elliott Capital is chasing money it claims Argentina owes it. Argentina defaulted on its debts back in 2002, and then essentially repudiated most of it. Most creditors accepted the deal, but Elliott did not. (More accurately, Elliott bought Argentine debt on the secondary market after the default but before the repudiation.) Elliott owns bonds with a face value of $630 million; including past-due interest, they are now worth $2.3 billion. (That is a lot of interest!) Elliott has done relatively well in New York courts, getting judgments worth about $1.6 billion. That is what the Ghanaian seizure is about.

The thing is, the New York courts have been pretty strict about what the creditors can actually seize. They have ruled out going after Aerolineas Argentinas, stating that it is in receivership and not really a state entity. Ditto for state funds held in New York. On the other hand, the court only just declared in favor of the bondholders in these two orders here and here, which changes things from the days when creditors were just looking around for assets without a legal decision in their favor.

Anyway, I predict that the Argentine ship is released: it is a naval vessel, protected by sovereign immunity. But I also predict that Argentina is going to find itself in a gigantic heap of trouble, particularly as the economic situation continues to deteriorate. It will be basically locked out of foreign markets, although it might be able to raise dollar funds at home. (Maybe. And at high cost.)

Any interest in a post on the state of Argentina?

The rogue state of Canada?

Who’s the bad boy of international arbitration? Well, the Argentine Republic, of course. And then the Bolivarian Republic. Followed to nobody’s surprise by Ecuador. But the country formerly known as Dominion is in the running: number six most sued according to the United Nations. That is deucedly odd, when you think about it.

What the hell? Canada? Well, Canada is a member of NAFTA, and Chapter 11 of NAFTA protects property rights. So when any level of government in Canada does something that an American or Mexican investor can credibly claim is tantamount to expropriation, they become vulnerable to arbitration.

Now Canada is about to ratify the Washington Convention, which would open up ICSID to its companies. In the way of Canada’s hyperfederalism, the hold-up is with provincial ratification. (In many ways, Canada is the European Union with elections and an army.) Given the country’s experience with NAFTA, there is some worry about the possibility that ICSID will overrule the country’s sovereignty.

These worries are overblown. The Washington Convention does not automatically open the way for foreign investors to go to arbitration. That requires either domestic enabling legislation or an investment treaty. What ICSID does do, is allow companies to enforce their judgments against third countries in Canadian courts. That is something that Canada’s myriad mining and petroleum companies will embrace.

Now, it also means that NAFTA arbitration decisions can be enforced around the globe ... but the fact of the matter is that Canada is a small country right next to the United States, and NAFTA decisions could already be enforced there. Giving French courts the same privilege is not going to change a whole lot. It also removes the ability of national courts to review arbitration decisions, but as a practical matter NAFTA had already removed that. Note that the Ontario Court of Appeal’s recent decision had to do with a case against Mexico.

In short, for those of you who worry about this sort of thing, Canada is already in deep with the big legal web of international property rights protection. (I like to call it the Empire, because it is cool and ironic.) Joining ICSID won’t change anything.

The French won in Algeria, and that is why Assad will lose in Syria

A few posts ago, I noted that the French won the Algerian War militarily. My co-blogger has scolded me for being deliberately misleading. He is correct. The discussions with Lebanese army officers that produced the post were actually discussions about why the French experience illustrates why Assad is going to lose.

The French Army had three key advantages that Assad does not have. Moreover, at least one of the reasons why De Gaulle decided to abandon that military victory also apply. First, what advantages did the French have that Assad does not? First, French troop levels (proportional to the Algerian population) were four times the levels that Assad can muster. In theory, Assad can call up reservists and increase draft calls. In practice, that will not work.

Second,the French Army could draw on the resources of the Hexagon. In effect, it was financed by a large industrial power. Assad has ... nothing, except in Michael Ignatieff’s fever dreams.

Finally, troops could not and would not defect during the Algerian War. No matter how far morale declined (and it actually did not decline all that far) defection was simply not in their opportunity set. That is not true of Assad.

There are two more differences, but they are actually an epiphenomena of the above three French advantages. The French could credibly commit to remaining in control indefinitely. That commitment reduced the willingness to fight among the Algerian population. (That commitment turned out to be wrong, of course ... but in 1958 it seemed much more likely that France would be sovereign in Algeria in 1968 that it does that the Baath Party will still rule Syria in 2022.) In addition, the French army had the resources to engage large-scale population resettlements ... something far beyond Assad’s reach.

In other words, the reasons why France won in Algeria show why Assad is going to lose.

The problem is that he is going to lose slowly. He can easily fight on for another few months, although the correlation of forces has turned against him. De Gaulle abandoned the victory because of international pressure and because there were no real advantages (other than access to oil, which the Evian Agreements let France keep) to hanging on. The first applies to Assad. The second not so much.

What could change that timeline? Large-scale support for the rebels, which still does not seem to be happening, or a coup.

I see no signs of a coup, but I am not a Syria expert.

A hidden blow for the workers of the world

Doug Muir pointed out to me that something interesting happened in 2009, to the attention of pretty much nobody. That something got the World Bank to change how it reports on countries’ labor regulations ... and by so-doing, remove a long-standing anti-labor bias at the Bank.

The World Bank has a set of indicators called the “Doing Business.”  It measures how easy it is to do things like start a business, get a loan, etc. One of the indicators used to be “Employing Workers.”  The index penalizes countries that establish minimum wages above a quarter of average wages, set maximum weekly hours below 66, require any advance notice for dismissal or specific procedures for job termination.

The index is problematic. First, when you dig down into the data, you can find some odd judgment calls: the United States, we’re told, has no restrictions on night work and no mandatory notice period for dismissal ... which I suppose is true in some states, but not most. Saudi Arabia gets a perfect score despite regulations that ban women from particular professions.

Second, labor unions have protested that the index assumes, without much empirical backing, that labor market regulations are all cost and no benefit. The unions are correct on this point: the empirical evidence is very much lacking that the Bank’s indicator has any consistent effect on employment levels or growth. 

But nobody cares about unions, and so nothing happened until 2009, when somebody introduced this paragraph into a supplemental spending bill in the U.S. House of Representatives:

SEC. 1626. REFORM OF THE ‘DOING BUSINESS’ REPORT OF THE WORLD BANK.

(a) The Secretary of the Treasury shall instruct the United States Executive Directors at the International Bank for Reconstruction and Development, the International Development Association, and the International Finance Corporation of the following United States policy goals, and to use the voice and vote of the United States to actively promote and work to achieve these goals:

1. Suspension of the use of the “Employing Workers” Indicator for the purpose of ranking or scoring country performance in the annual Doing Business Report of the World Bank until a set of indicators can be devised that fairly represent the value of internationally recognized workers' rights, including core labor standards, in creating a stable and favorable environment for attracting private investment. The indicators shall bring to bear the experiences of the member governments in dealing with the economic, social and political complexity of labor market issues. The indicators should be developed through collaborative discussions with and between the World Bank, the International Finance Corporation, the International Labor Organization, private firms, and global unions.
2. Elimination of the “Labor Tax and Social Contributions” Subindicator from the annual Doing Business Report of the World Bank.
3. Removal of the “Employing Workers” Indicator as a “guidepost” for calculating the annual Country Policy and Institutional Assessment score for each recipient country.

(b) Within 60 days after the date of the enactment of this section, the Secretary of the Treasury shall provide an instruction to the United States Executive Directors referred to in subsection (a) to take appropriate actions with respect to implementing the policy goals of the United States set forth in subsection (a), and such instruction shall be posted on the website of the Department of the Treasury.

Within 90 days, the Bank dropped the indicator. It’s still being tracked, but it’s no longer included in the international rankings, which means nobody cares.

There is a mystery here. Somebody inserted that provision, but it was done very quietly and even development professionals didn’t pick up on it at the time. Oh, they noticed that the indicator was dropped, but not that it was in response to a legislative threat from the United States. It was a very discreet threat, buried 1600 paragraphs down in a supplemental appropriations bill. Obviously this was only a meaningful threat in the context of the last Congress — today the Bank would be able to ignore this, confident that the Republicans would strip it out. But in the summer of 2009 someone was able to push back against the Bank and force it to abandon, in Doug’s words, “a pretty aggressive anti-labor position which was already having noticeable effects across the developing world.” The Bank would say it was anti-regulation rather than anti-labor, which is not completely unfair, but ignore that for the moment.

Who was the responsible party? Some staffer? A senator? President Obama? I would like to know.

Argentina beats ICSID! Seriously, Argentina beats ICSID. Regularly.

In April, I had the honor to attend a conference on international investor-state arbitration held at the London School of Economics. (Below is a picture of me on the roof of the LSE after the conference. Yes, the weather was as bad as it looks.)

There I had the good luck to meet a law professor from William and Mary named Susan Franck. Susan has done a lot of excellent work, but what struck me the most was the time and effort she’s put into verifying all the “stylized facts” that people believe about investor-state arbitration. A stylized fact is a fact assumed to be true for the purposes of argument. Economists love ‘em. So do politicians. (Frex, the sylized fact that most U.S. federal spending fits the normal conversional definitions of wasteful.) But stylized facts aren’t always actual facts.

One big stylized fact about investor-state arbitration is that governments always lose. It isn’t hard to see where that comes from. By most reasonable standards, international investment law is an ass. Companies can freely renegotiate contracts with governments, but governments cannot renegotiate with companies. There are few outs for contingencies short of foreign invasion, and maybe not even then. On the other side, it isn’t hard to believe that most of the time the governments are wrong (like, you know, these guys) and deserve to lose.

Only they don’t lose most of the time. Susan found that governments won 58% of cases. Investors won 38%, and the remainder were settled. (She also found that the average claim was for $343 million, whereas the average award came to only $10.4 million. Go figure.)

So how’s Argentina doing? Well, not too badly. Of its post-2001 cases, 33 have been decided. Argentina won eight, or 24%. Of those eight, it won five in arbitration. Two were annulled and one was overturned by a U.S. district court. It lost nine (27%) ... but annulment hearings are pending in five of those nine. If you put those five into the net-yet-decided category, Argentina’s win percentage goes up to 32%, against a lose percentage of 16%.

Of course, 32% + 16% = 48%. Argentina settled a remarkable 52% of its post-2001 cases! Of these 16 settlements, five (31%) were in electricity, three (20%) in natural gas production and distribution, two (13%) in water and sewer systems, and an additional two (13%) in telecoms. The final one was the Unisys contract mentioned in an earlier post.

The settlements aren’t public,  but we do know a little, thanks to Wikileaks. AES owned several power plants, and dropped its suit once the Argentine federal Congress and the Buenos Aires provincial legislature ratified new rate agreements. Pan-American Energy (a subsidiary of BP) sued at ICSID over the pesification of domestic hydrocarbon contracts and the imposition of an oil-export tax. It dropped its claim after Chubut province agreed to renegotiate its E&D concession, presumably by enough to compensate it for the federal takings. If I may take the risk of presenting my own stylized fact, the other settlements were likely similar: rate hikes or other informal compensation, in exchange for a suspension of the international suits.

The bottom line is that Argentina has not done too badly at ICSID and other arbitrations. Its wins outnumber losses two-to-one, and it settles half its cases, as far as we know without direct compensation. What this implies about the unwillingness of the Fernández administration to pay up in its five unequivocal losses, including one pre-2001 case (for a total liability of $427 million) is left as an exercise for the readers.

It is not unreasonable to cry for Argentina in most of its cases at ICSID

Bernard Guerrero asks: “You mentioned in an earlier post that Argentina had justice on its side with regards to the various ICSID cases. How so?”

An excellent question! Short answer: most of Argentina’s cases are a direct result of the 2001 devaluation. The Argentine government acted prudently and responsibly in the aftermath of that economic collapse. In the face of 1.2 million job losses, and riots in the streets, it was entirely reasonable to freeze rates, cancel contracts, default on debt, and pesify dollar-denominated bank accounts. (The scale of the turn-of-the-century Argentine depression is immense.) Such actions were legal under Argentine law, and would have been legal in the United States. (FDR confiscated gold back in the day.) Unfortunately, the Washington Convention and associated bilateral investment treaties are more restrictive, which gave foreign companies operating in Argentina the right to sue for damages from the price freezes.

In other words, until Repsol, none of the Argentine cases at ICSID involved straight-up opportunistic property seizures without fair compensation. Rather, they involved emergency measures taken in the midst of a Depression-scale crisis. The companies could not have possibly expected the real value of their tariffs to quadruple in the middle of a 20% crash in GDP and 10% plunge in employment, which is what sticking to the original contracts would have meant. Argentine law sees things that way. American law sees things that way. European Union law sees things that way. But international law, as codified in the Washington Convention of 1965, does not. That is unjust.

Longer answer: Of Argentina’s 46 post-2001 arbitration cases, 32 are a direct result of the 2001 devaluation. If you add in the three cases brought by bondholders, that number rises to 35. Most of the remainder are contract disputes, which also come out of the turn-of-the-century Argentine depression: frex, a cancelled contract with Unisys to modernize the judiciary’s IT systems, or an abandoned project with Impregilo S.p.A. to build a highway. 

It is not hard to find the texts (or at least decent summaries) of the ICSID decisions. Latin Arbitration Law is a good source. UNCTAD also maintains a good database. The Investment Treaty Arbitration site has a list of cases, with all intermediate and annulment decisions. Finally, an easy-to-use list with summaries of the outcome can be found at the IIAPP website. I also recommend the Kluwer Arbitration Blog and (if you can get access) the Investment Arbitration Reporter.

All of the Argentine cases reject expropriation claims, but provide compensation for lost revenues due to contract violations. You can see the frustration by the Argentine lawyers when they argue that expropriation law should not apply in these cases. In fact, most of the arbitral decisions have a very sympathetic tone towards the Argentine arguments. But the law is the law, or at least what the arbitrators say that the law is, and that is that.

To be fair, Argentina has not done badly at ICSID. (If there is interest, I will put up another post with some data about that.) But it is understandable that the government feels that most of the post-2001 cases should not have been brought at all. This is not to support the YPF nationalization, or to claim that Argentina is run by a saintly government interested only in the public good. (To give one egregious example, Argentina settled the Unisys claim for $8 million in April 2007 ... but made no move to actually pay.)

It is to say that there is something wrong with the international system. It was designed to protect natural resource investors against predatory states without the need to call on their home governments. It is becoming a system of unlimited liability which essentially locks governments in to the letter of their initial contracts in a rigid way with no parallel in any domestic legal system on the planet.

In fact, the standards have been getting stricter, to the point where governments are required to grant a “guarantee of stability in a secure environment, both physical, commercial and legal” that may, for some countries, be impossible ... and is certainly more protection than that granted to domestic investors.

Practical upshot? Hard to say ... but the illegitimacy of most of the claims against Argentina will make life much harder for companies with a decent case in a straight-up expropriation. (You can guess which firm I might be talking about.) That is not, I think, a good thing ... but I may be wrong.

La madre patria contra la Argentina

 War in the River Plate! Spain attacks Argentina!

OK, not really. But Spain and Argentina are really going into it over threats that the latter might nationalize Repsol’s oil holdings. In fact, things are so bad that the Spanish foreign minister needed to specify that his country’s position “is not bellicose.” But the minister also said, “Whatever attack on Repsol that violates the prinicipal of legal security will be taken as an attack on Spain.” 

Minister José García-Margallo then added, “[Spain] will take the measures that it considers appropriate and ask for the support it considers necessary from its partners and allies.” The deputy prime minister, Soraya Sáenz, upped the ante. “Spain will defend its interests with all means available.” Now the prime minister himself has threatened a boycott of Argentine soya and beef. The European Union has announced its support for the Spanish government.

The threats may have worked. President Fernández of Argentina had been expected to announce the nationalization on Thursday, but instead limited herself to an anodyne statement that she was “ready to pay all the prices that must be paid” to keep the economy growing. Se then added some words about the triumph of Argentine-made chocolate. YPF shares soared. Repsol shares, not so much.

So what is going on? Putatively, President Fernández wants YPF to invest more. YPF is reluctant, because of Argentine price controls and export restraints. In 2011, YPF’s net income was $1.23 billion, down from $1.46 billion in 2010. So the fight is over $1.2 billion per year. The move has populist appeal.

Can Argentina get away with expropriation? I suspect that most of the talk about trade boycotts is bluster. Perhaps Spanish law allows for unilateral boycotts, but it would create a mess. Spain and Argentina signed a bilateral investment treaty in 1991. It calls for arbitration; sanctions without following the process laid out by the treaty would be illegal unless Argentina categorically states that will not pay compensation ever. Moreover, Spanish consumers do buy 31% of Argentina’s primary product exports to the European Union, but without an E.U. boycott the Spanish government cannot do anything without kissing the single market goodbye. If sanctions are going to be imposed, it won’t be quickly.

Spain’s problem is that ICSID won’t be that directly effective, since Buenos Aires wants the company to increase production aimed at the domestic market. Unless YPF exports its production, enforcement efforts will be even slower than the already slow arbitration process. (The Argentina-Spain BIT slows things even more, since it requires some attempt at local remedies before going to arbitration.) Thus, I suspect, the blizzard of diplomatic threats.

On the other hand, there are some threats that Madrid can credibly make. It can push Argentina to pay its debts to other governments. It can add its voice to the U.S. against Argentina in multilateral lending organizations. It can threaten to support the U.K. in the Falklands. And it can try to eject Argentina from the G20. These are the threats that probably made President Fernández think twice.

Economically, expropriation does not make a whole lot of sense. Argentine needs $250 billion or more to develop the shale fields: tying yourself up in legal knots and wrecking your reputation for $1.2 billion a year is not worth it. Moreover, YPF is currently worth only $8.6 billion. It seems like a big risk to take for the $4.3 billion it would take to get control of the enterprise. In fact, Argentina could get control for even less by sticking to its plan to expropriate the 25.46% of the company owned by the Eskenazi family, which is Argentine. Since the Eskenazis borrowed heavily to finance their stake (at the request of the Argentine government), an expropriation for them would be a bailout ... and cost little of nothing. Of course, Argentina would also assume the Eskenazi’s debts, but half of those are owed to ... Repsol. (Default!) Argentina would still need to get the additional 24.55% needed to gain control of the enterprise, but that would cost only $2.1 billion. The central bank has $47.3 billion in reserves, and there are very few institutional barriers keeping the government away from that money.

It is not as simple as that, of course. The government would need to do some leaning on the Eskenazi family, in order to get them to refrain from exercising their repurchase agreement with Repsol. (Basically, if Repsol looses control of YPF, it has to buy the Eskenazi’s stake at $38 per share ... implying a market cap for the company of $14.9 billion.) The current share price is depressed.

What will happen? Argentina is going to nationalize: it makes political sense. The nationalization will be with enought compensation to keep Spain from going to the mattresses with sanctions. (Or going to war! Not. And not.) It might even be enough to keep Repsol out of court. Considering how Argentine provinces have been yanking concessions, Repsol will likely prefer to settle.

Caveat? President Obama met with President Fernández today. We do not know what was said, although they said that nothing was said. That may have settled things, although I would still bet on expropriation with negotiated compensation. (Yes, I just bought some YPF stock.)

America has been at war for a long long time

 Rachel Maddow has a new book, Drift. I’ve skimmed it; it isn’t bad. In it, her contention is that for a variety of institutional reasons, it has since the 1980s become far too easy for America to go to war. 

The book started a debate between Kevin Drum and Jonathan Bernstein. Bernstein suggested, “U.S.-sponsored interventions of one form or another are hardly unusual, even before Maddow’s apparent jumping off point in the Reagan Administration. Perhaps the idea is that there was a golden age of sorts after Vietnam, but if so it lasted less than a decade. I’m not really sure it’s become easier to deploy troops for controversial missions or to begin interventions in other nations.”

Bernstein was supported by Armando at TalkLeft, who wrote, “That is not historically accurate in my view. The times getting into war was not easy was after wars that had been very costly and not particularly successful from the US point of view. Think World War I and Vietnam. Otherwise, going to war has been one of the great American pasttimes. I’m all for making going to war hard, but the history does not demonstrate that, except for isolated periods, that was ever really the case in the United States.”

Drum conceded the point, but suggested that there was still a difference between then and now: “So what’s different? I’d say this: it’s one thing to periodically wage brief, smallish military actions. The Dominican Republic occupation of 1965 falls into that category. So do Grenada and Panama ... the last couple of decades seem quite different. The Gulf War, followed by Somalia, followed by Haiti, followed by Kosovo, followed by Afghanistan, followed by Iraq, followed by Libya and Yemen, and all against a background of drone warfare that now seems all but perpetual, feels very different. It feels like we’re simply in a constant state of military action. In the last 20 years, there have only been three or four in which the U.S. military wasn’t at war.” Matt Yglesias supported Drum, adding that there might be an economic element: technology has made it cheaper and easier to project conventional military force, and therefore we do it more.

Bernstein is right. Everyone else, including Armando, is wrong. And none of it relevant to the argument in Drift.

In 1898, the United States went to war with Spain. Between 1898 and 1902, American troops battled Philippine insurgents. Peace came to Luzon in 1901-02, but fighting continued on Mindanao until 1912. In 1904, the U.S. navy bombarded rebel positions in the Dominican Republic; eventually U.S. Marines wound up (with the permission of the local government) occupying the customhouses. In 1906-09, we occupied Cuba, although there was (to be fair) not much fighting. In 1907 and 1911, we deployed to Honduras to halt Nicaraguan invasions. Between 1912 and 1925, U.S. Marines actively hunted insurgents (the original Sandinistas) in Nicaragua. In 1914, we once again bombarded Dominican rebels; we also occupied Veracruz to prevent arms from getting to the government. Between 1914 and 1934, we occupied Haiti: unlike Cuba in 1906-09, that one did involve quite a bit of fighting. We did the same on the other side of Hispaniola in 1916-24. In 1916-17, we invaded northern Mexico after Pancho Villa attacked Columbus.

Then there was World War 1. After which ... 

In 1917-19, U.S. troops again garrisoned Cuba. In 1919, we landed in Honduras to protect a neutral zone during a civil war. Between 1918 and 1920, American forces blundered pointlessly around Siberia doing something or other, and sustaining a lot of casualties. For a few days in Guatemala, Marines saw combat during a civil war in that country. In 1925, we invaded both Honduras and Panama during periods of unrest.  In 1933 and 1934, we waved gunboats around Cuba, but no war was necessary, since we succeeded in overthrowing the government by what would today be called covert action.

And then, peace until 1941.

Counting ... between 1898 and 1934, the United States was at peace for all of ... well, never, actually.

It is true that only the Philippine War rivalled the Iraq conflict in terms of intensity. (World War One, obviously, was hugely worse.) U.S. force levels rapidly grew from 12,000 in 1899 to 70,000 in 1900, by which point U.S. combat deaths approached two soldiers every day. By most metrics, the war (fought by a small all-volunteer army) was as intense as the Iraq War — proportional to the U.S. population, the peak force of 70,000 represented a per-capita commitment twice as large as the peak Iraq deployments in 2008. 

Because the Philippine War lasted 28 months, as opposed to the 102 months of the Iraq War, the total proportion of Americans who served in the conflict was about a third of the recent level. The 126,000 soldiers who served in  the Philippines over the entire course of combat operations amounted to 0.2% of the U.S. population, compared to the roughly 0.6% of the U.S. population who served at least one tour of duty in Iraq between March 20, 2003, and the official end of combat operations on August 31, 2010. The combat casualty rate, meanwhile (excluding deaths from disease) ran at 596 per 100,000 troops in 1900, almost exactly matching the 2004-07 rate of 608 in Iraq. (Iraq casualty rates per 100,000 ran at 718 in 2003, 650 in 2004, 588 in 2005, 583 in 2006, and 610 in 2007. They then plunged to 199 in 2008, 135 in 2009, and 121 in 2010.)

But ... that is fine. The Drum argument does not hinge on the big wars of the past decade; rather it hinges on the continual small wars since 1989. In that respect, 1989-2012 looks pretty much the same as 1898-34: lots of small wars punctuated by two big ones. Nor does Armando’s argument hold up. World War 1 had little effect on the American government’s propensity for military intervention. It is true that the U.S. avoided a potential big war during the Mexican Revolution, but that decision was made before we entered WW1; before, in fact, it was clear that we would.

The history is both worse and better for Matt Yglesias’s argument, depending on how you interpret it. In the Dominican Republic, for example, early insurgencies depended upon the seizure of customshouses to gain resources: naval bombardment, therefore, presented a cheap means of intervention. In general, I would venture to say that Yglesias’s hypothesis is correct: cheaper war probably means more war. (Someone should test that!) What the history does not support, however, is the rather specifc hypothesis that military intervention is cheaper today than it was in 1898-1934.

Let me add that this has little bearing on Rachel Maddow’s overall argument. She wants to explain why the post-Vietnam reforms designed to make intervention difficult failed. She does not claim that 1989-2012 (actually, 1983-2012 for her purposes) is unprecedented or novel. Other readers in the blogosphere have extended her argument, however, and I think it is probably worth adding a little historical corrective.

The empire strikes back, weakly, and after long delay

 “With regards to provisions in several FTAs that give foreign investors the right to sue governments directly in foreign tribunals, I will ensure that foreign investor rights are strictly limited and will fully exempt any law or regulation written to protect public safety or promote the public interest.”

—Senator Barack Obama, on the campaign trail in 2008

The Argentine decision to avoid paying ICSID expropriation judgments is finally coming back to haunt it. A few weeks ago, the Obama administration announced that it would begin to vote against credits for Argentina from multilateral lending organizations. A few days ago, the administration announced that Argentina will no longer be eligible for duty-free access to the U.S. market under the Generalized System of Preferences (GSP).

Argentina exported $477 million to the U.S. under the GSP in 2011, mostly cheeses, candy, leather, strawberries, wine, and lithium. Removing GSP will cost Argentina $17 million per year, assuming, of course, that it continues to export the same amount.

The Presidential authority comes from the Trade Act of 1974, so named at a time when Congress did not give legislation stupidly cutesy names but called laws what they were. Subchapter V mandates that a country which “has nationalized, expropriated, or otherwise seized ownership or control of [American-owned] property” and “fails to act in good faith in recognizing as binding or in enforcing arbitral awards in favor of United States citizens or a corporation” will not qualify for the GSP unless ...

1. “Prompt, adequate, and effective compensation has been or is being made to the citizen, corporation, partnership, or association”;
2. “Good faith negotiations to provide prompt, adequate, and effective compensation under the applicable provisions of international law are in progress”;
3. “A dispute involving such citizen, corporation, partnership, or association over compensation for such a seizure has been submitted to arbitration under the provisions of the Convention for the Settlement of Investment Disputes, or in another mutually agreed upon forum.”

No country has ever been punished for expropriation under the Trade Act. That may be because no country before now has ignored ICSID rulings. In 2005, CMS Gas received $133.2 million. In 2006, Azurix received $165.2 million. (The awards will accrue interest as long as they are unpaid.) In September 2007, Argentina lost its petition to annul the award against CMS. In May 2008, CMS sold its claim to Bank of America. (More accurately, it sold the claim to a subsidiary of BofA called Blue Ridge Investments.) By then, the $133 million award had grown to $180 million, counting interest. (That is a lot of interest!)

We don’t know how much Blue Ridge paid , but the State Department estimated that it paid around $54 million for the claim and CMS’s 23% stake in the TGN pipeline company. Blue Ridge’s original plan was to flip the claim as quickly as possible. (The Wikileaks cable is fascinating in that regard: Blue Ridge wanted to threaten Argentina with the possibility of selling its claim to a vulture fund that would take them to court in the United States; Argentina apparently planned to use its control over pipeline rates to force Blue Ridge to sell its claim to a government crony.)

About 16 months later, the Azurix case reached the end of the line when an ICSID appeals panel refused to annul the judgment against Argentina. Soon after, in September 2009, Azurix filed a petition to suspend Argentina’s GSP preferences. Blue Ridge signed on. The petition then ground its way through the USTR bureaucracy ... and finally, now,  Argentina is facing sanctions.

There are two points to make about Argentina’s recalcitrance. First, the country has done remarkably well at ICSID. Several decisions have been annuled by ICSID review panels. In at least one case, against a British company, the D.C. Circuit Court ruled that since the contract specified that the company had to first exhaust all local remedies, their decision to go direct to arbitration vacated a $185 million award. Second, in terms of justice, pretty much all the companies going up against Argentina are in the wrong. But that’s a subject for a different post ... as is the question of whether President Obama is living up to the position stated in the epigraph of this post. (He is.)

Do the companies have options other than getting the U.S. government to go to bat for them? If they were natural resource exporters, then the legal remedies would be fairly powerful: ultimately, Argentina would lose the ability to sell production from the expropriated assets. These are service companies, however. It isn’t clear that the courts will rule their way, and it isn’t clear that Argentine has many assets that the courts can seize. (Short version: since the Argentine central bank was not using its New York funds for commercial purposes, creditors could not go after them. I am not a lawyer and cannot say if that would apply in an expropriation case, but I suspect that it would.) Getting the U.S. government involved in muscling Argentina may be their best way forward.

But it is a sign that the arbitration system may crack when used for cases other than natural resource companies. Back to the 1970s!

Policy of attraction, part 4

 Americans don’t spend enough time thinking about the Philippines. America behaved as a deucedly strange colonial power. One of the strangest things was the way the U.S. prevented Americans from investing in the new territories.

Worst empire ever? What was that all about? Well, in May 1901 1902, the Americans signed a peace agreement with Emilio Aguinaldo, the leader of the insurgency. The advent of a negotiated peace meant that the McKinley administration needed Congress to establish a civil government in the Philippines. Without a civil government, the U.S. would be unable to sell public land, issue mining concessions, or otherwise alter Spanish law.

Problem is, Democrats were inalterably opposed to allowing American investment into the islands. Not in agriculture, not in mining, and certainly not in manufacturing. Now, some of the worry was straight protectionism ... but less than you would think. In the early 20th century, the GOP was the party of protection; the Democrats were the party of free trade.

So why the opposition to allowing Americans to invest in the Philippines? Simply put, the Democrats hated the idea of America as a colonial power. They feared that sizeable U.S. investment would create a domestic interest group with an interest in the permanent retention of the archipelago. That would make annexation much harder to reverse. (Democratic opposition to permanent retention of the Philippines, it should be noted, had much of its roots in racial anxieties over the addition of 7 million “Malays” to the United States. If the Philippines had possessed the racial makeup of Cuba, the Democrats would have set it on the road to statehood; the loudest opponents of Philippine annexation also decried the decision to make Cuba a protectorate. Cuba, you see, had enough white people to imagine it as a state.)

But don’t take my word for it! Senator Fred Dubois (D-Idaho):

I have tried, in what I have said, to be temperate in language. I have endeavored to argue the question presented by this majority bill fairly, with good temper, and honestly. I do not think it will be easy to get out of the Philippine Islands, should future events demonstrate the wisdom and necessity of doing so, after American capital has gone there and is being employed under the tempting opportunities presented by this bill.

Do they not know, if this bill passes, the difficulties in our path will be multiplied many times, provided in the future it is deemed patriotic and wise to allow the Filipinos their own independent government? The granting of these extra privileges and unusual inducements which are offered to corporations and syndicates, it seems to me, contemplates a fixed purpose on the part of the advocates of this bill to retain the islands for all time to come as a colony, as a dependency of the United, States.

Representative John Robinson (D-Nebraska):

The bill which is now before the House provides for the organization of corporations to carry on all branches of business. It provides for the issuance of bonds by the Philippine government and certain of the cities of those islands. It invites the investment of capital, and in the future capital so invested in the Philippines, held by our own and citizens of other countries, will urge their claims to our protection with a stronger voice, and clamor more loudly than ever, that in honor we must not leave their interests unprotected in these islands: but that we must continue to hold down these people by force of arms. We must continue to spend millions of dollars annually to maintain an army there. We must continue to send the flower of our youth to these tropical islands, in order that foreign investors, seeking only worldly gain. may continue to exploit this unfortunate people.
  
An argument such as this, Mr. Chairman, would mean that the time will never come when we can withdraw our forces from these islands. It would mean that the reasons which prevent us now from granting these people their independence would become stronger with each passing year, and that at no time could we hope to withdraw our jurisdiction and leave these people in liberty and peace.

Representative John Williams (D-Mississippi):

Nor do we give away, or prepare to give away, their franchises. It would be contrary to the Democratic theory if we made the slightest preparation for that, because every vested interest which we plant in the Philippine Islands is one more strong voice enlisted in favor of their permanent retention — a vested interest pleading not to be left.

Representative Allan McDermott (D-New Jersey) similarly worried that allowing the government of the Philippine Islands to sell bonds to American investors would indelibly link them to the U.S.:

This bill settles the policy of the Republic Party. It is to be continuing possession and occupancy with unlimited additions to our bonded debt.This bill means that we are to permanently hold the Philippine Islands, and I predict the holding will prove a plague to ourselves and our children.

Representative David De Armond (D-Missouri):

Civil government for the Filipinos! Civil government in which the Filipinos do not participate; civil government in which the Filipinos have no part; civil government which-the Filipinos do not desire; civil government, not for the benefit of the American citizen, but for the American promoter, the American syndicate organizer, the American capitalist, the American boss, the American contributor to campaign funds, used to corrupt the needy voter, to overcome the judgment of the honest element of American citizens, and win victories by false pretenses and more positive wrong. [Applause on the Democratic side.]

And so the Democrats held up the bill, using the filibuster in the Senate and capitalizing on Republican protectionists in the House. The resulting Philippine Organic Act of 1902 heavily restricted the rights of non-Filipinos and all corporations to own land or invest in mineral rights in the Philippines. It banned Americans and American companies from owning more than 1024 hectares (2500 acres) of land and limited mining claims to one claim of 1,000 × 1,000 feet per lode. It also limited the ability of Americans to invest in public franchises and utilities.

For a colonial power, this was weird.

Congressional Democrats did not completely prevent Americans from investing in the Philippines. A 1905 act allowed the insular government to issue railroad concessions, for example. In addition, Americans could invest in sugar mills (although not sugar lands) and they could physically move to the islands and invest as Filipinos in mining operations. Nor did the Democrats manage to keep the Philippines outside of the American customs area; free trade arrived in 1913.

But caveats aside, the restrictions worked. When the Commonwealth of the Philippines became autonomous in 1935, they received a country that was almost entirely owned by Filipinos. That might not have been the best thing for the country’s economic growth, but it was seriously bizarre for a country that had just spent 37 years as a dependency.

Weirdest ... empire ... ever.

Policy of attraction, part 3

 In comments, J.H. asks why the Phillipines didn’t adopt the U.S. dollar. After all, Hawaii and Puerto Rico did, as did Cuba, Panama, and the Dominican Republic. So why not the Philippines?

By the time the Philippine War ended in 1902, five different monies circulated in the Philippine Islands:

(1) Mexican silver pesos;
(2) Spanish silver pesos minted under the 1897 Royal Decree;
(3) Fractional currency;
(4) bank notes issued by the Banco Español Filipino; and
(5) U.S. dollars paid to American troops during the war.

The silver currencies traded at values that had little to do with their actual silver content; the Philippines were basically on a fiat money standard, with the difference that nobody was actually in charge of issuing it. Nobody liked that, so the U.S. had to decide between three different options. First, it could regularize the silver currency, basically continuing the existing system but under the control of a single mint. Second, it could introduce the U.S. dollar. (The U.S. was then on the gold standard. Dollar coins had a fixed gold value, and federally-regulated banks were required to back their note issues with gold or U.S. government bonds.) Third, it could introduce a separate Philippine gold-backed currency.

Why adopt the dollar? I give the floor to Representative Ebenezer Hill (R-Connecticut): “I want to say to every one of these representative from the Pacific coast that whenever they vote to put a new and strange system of coinage in the Philippine Islands is to build a fence between the trade of those islands and the trade of that coast.”¹ Since Republicans backed the permanent retention of the Philippines, such a position was not terribly surprising.

What might be much more surprising is that most of the support for adopting the dollar came from the Democrats, who were loudly and uniformly opposed to annexation. What explains that? Well, examine the following exchange:

William Jones (D-Virginia): I would like to ask the gentleman if he does not think by extending the coinage laws of the United States to the Philippine Islands and giving them our lawful money we could get out of there if we wanted to much more easily than if we gave them a distinctive currency which we would have to redeem and pay for?

Sereno Payne (R-New York): Oh, on the other hand, I think it would look as though we meant to stay there forever. [Laughter on the Republican side.]²

What was Jones getting at? How would installing the dollar in the Philippines make it easier to leave? Well, let’s go to Representative James Williams (D-Illinois):

A moment ago the gentleman from New York twitted those of us who want to get out of the Philippines with some sort of imagined inconsistency because we were supporting the substitute bill. ... I believe with all my heart that a greater mistake was never made than ever having landed a man to stay upon the Philippine shore after the Spanish fleet was destroyed. ... But I claim that when we leave we should leave behind American money as a stimulating agency for the expansion of American trade in the future. ... I say today that if you turn the Philippine Archipelago loose as an independent nation upon the Earth, it can not by any legislation float a token coin.³

In other words, the Democrats supported introducing the dollar because they believed that it would promote economic stability, thereby making it easier for the U.S. to get out forthwith. After all, Cuba had the dollar but the United States was smoothly on the way out. (The Democrats had no problem with Puerto Rico, although they were upset that the constitution was not extended to the island.) This position was honest: as I may talk about in a future post, the Democrats also strongly supported restrictions on American investment in the islands as long as they were under American sovereignty.

So why did Republicans prefer the option of a gold-backed Philippine currency?

The first problem is the Philippines were poor. One cent in 1901 was worth 27¢ in 2010 in the United States. In 1901, the price level in the Philippines was a lot lower than the price level in the U.S. (This is a general phenomenon: prices are lower in poor countries than in rich ones.) So one American penny bought at least the equivalent of fifty cents, whereas a Filipino centavo bought half as much. Losing the smaller denomination would have been a serious problem.

Of course, Philippine poverty wasn’t the only problem: Representative Hill proposed that the U.S. reintroduce the half-cent as an easy solution. The second fear was a bout of inflation. Puerto Rico had seen that during the changeover, as merchants attempted to charge as much in the new currency as they had in the old. (In theory, that shouldn’t happen. In practice, it did, and it forced an unpleasant political response.) William Howard Taft, the governor of the Philippines, was particularly worried; the last thing he wanted was popular discontent. Puerto Rico had handled the trouble, but Puerto Rico wasn’t coming out of a vicious guerrilla war.⁴

Finally, the Commission government convinced itself that a new peso could be introduced faster than the dollar. The Taft government (and potential American investors) were unhappy with the exchange rate fluctuations that afflicted the archipelago. It wanted a gold peso to stabilize the situation, and it wanted it quickly. If it could not get a gold peso, then it wanted the right to mint silver ones, but it wanted something.

The Democrats were a minority in Congress. They couldn’t pass a bill adopting the dollar in the House. In the Senate, Democrats were willing to fight for investment restrictions, but they were not going to do that over the currency. So bills passed both houses.

Except different bills passed each chamber. The House of Representatives voted 89-55 in favor a gold-backed Philippine peso, whereas the Senate accepted unanimously a proposal to coin silver. No compromise was forthcoming. As a result, the Philippine Organic Act of 1902 contained no monetary proposal, save an authorization to mint small change.

After another year of monetary chaos in the Philippines, the Philippine Commission went back to Congress. On January 22, 1903, the House of Representatives changed its position and voted 147-127 to introduce the dollar into the islands. The Senate then also changed its position, and voted on February 16th to create a gold peso. This time, however, compromise was forthcoming, in the sense that the House reversed itself. On February 24th, the lower house voted 139-104 to create a gold peso at a fixed rate of 2:1 with the dollar.

The introduction turned out to be messy and unsettled. It proved difficult to get the old silver pesos out of circulation; the exchange ratewith silver varied wildly; and managing the new currency proved more difficult than expected. It is far from clear that switching to a gold peso avoided many of the problems that switching to the dollar would have entailed. But there you have it.

In short, Taft and the GOP wanted to create a fixed exchange rate with the U.S. (believing that would promote trade and investment) but without the delay and dislocation that they believed would come from introducing the dollar. They then got all the delay and most of the dislocation anyway because Congress could not decide.

That said, it is also extremely unlikely that adopting the dollar would have made much difference. For it to have had a big effect before independence, you would have to be a very strong believer in the (excellent!) work of Andrew Rose on the effect of currency unions on trade to argue that having the dollar (as opposed to a fixed rate of 2:1 under American sovereignty) would increase trade by much. (In fact, Rose would expect it to make no difference; the fixed exchange rate between the U.S. and the P.I. was already a strong currency union.) There was a big financial crisis in 1919-22, in which the management of the fixed exchange rate was involved, but it is unclear at best whether the dollar would have really made any difference. The combination of postwar dislocations and mismanagement at the Philippine National Bank would have been a major problem either way; the dollar did not protect Cuba.

As for post-independence Philippines, well, after WW2 the U.S. spent a lot of effort to de-dollarize countries that used the currency. Considering how important capital controls were for postwar Philippine governments, it is hard to see why the Philippines would have been any different. Capital controls would have still been imposed and an American commission would have helped introduce a new currency, and the only difference is that the exchange rate would have fixed under the Bell Trade Act at 1:1 instead of 2:1. Perhaps the Philippines would have resisted de-dollarization (Panama did) but that seems very unlikely.

In short, the Philippine currency embroglio probably belongs in the list of Great Debates That Turned Out Not To Matter. But it get the world some coins that it otherwise would not have had, and now you know why.

Angela Merkel finds her inner Teddy Roosevelt: Lessons from Santo Domingo

 It appears that the German government has just announced that it wants Greece to renounce its sovereignty in return for more credit. (Well, at least in return for the release of existing credit lines.) The idea isnt new: in 2002, two prominent economists seriously proposed that Argentina give up its sovereignty for five years. Of course, Argentina has done quite well for nine years by breaking all the rules, but it is far from clear that Greece could copy that, or that Argentina will continue to do well.

There is a historic parallel: the U.S. and the Dominican Republic in 1905. (Actually the U.S. and lots of Latin American countries, ranging as far afield as Peru and Bolivia, plus Liberia ... but let’s wait on that.) Short takeaway: Washington was way more generous back in those benighted days, with very little at stake, than Berlin is being today, despite massive repercussions for Germany if things go wrong.

The backstory was about what you might expect. The D.R. had defaulted; its government was facing multiple armed revolts; and the Germans were nosing around. This latter made Washington nervous that a rebel force (or one of the rapidly-changing governments of the day) might transfer a naval base to Germany in return for aid. In fact, after U.S. intelligence captured a letter from General Demetrio Rodríguez openly requesting aid for President Carlos Morales, Captain James Miller “invited” Rodríguez on board his ship, where he explained: “Neither he [Morales] nor anyone must think for a moment that Germany or any other foreign power could be situated in any portion of the Dominican territory.”

President Morales saw an opportunity. If he could convince the United States to take over his country’s customhouses, using the German threat as motivation, then he could kill three birds with one stone. First, having U.S. troops in the ports would remove them as strategic targets for rebel forces. Second, U.S. officials could manage the customhouses far better than corrupt Dominicans, thereby increasing revenue. Third, if the Americans could be convinced to skim a bit off the top and use that to guarantee debt repayments, then the D.R.’s borrowing costs would go down, and Morales could borrow more on top of the increased revenue. Win win win! Who needs sovereignty? (Two out of the three points, one might think, would apply to Greece today.)

Uncharacteristically, President Theodore Roosevelt (in his own words) chose to  “put off the action until the necessity became so clear that even the blindest can see it.” He was a bit worried that American public opinion might not be thrilled with the idea of involvement in somebody else’s civil war, not while the Philippine War had only just ended two year previously, and not with U.S. troops still fighting in Mindanao. So Roosevelt waited, and the Dominican situation got worse, and the Europeans kept nosing around, and American investors kept screaming, and finally in May 1904 the President proclaimed his famous corollary to the Monroe Doctrine. It read:

Any country whose people conduct themselves well can count upon our hearty friendship. If a nation shows that it knows how to act with reasonable efficiency and decency in social and political matters, if it keeps order and pays its obligations, it need fear no interference from the United States. Chronic wrongdoing, or an impotence which results in a general loosening of the ties of civilized society, may in America, as elsewhere, ultimately require intervention by some civilized nation, and in the Western Hemisphere the adherence of the United States to the Monroe Doctrine may force the United States, however reluctantly, in flagrant cases of such wrongdoing or impotence, to the exercise of an international police power.

Thing is, it still took a while to build support, and there was, you know, an election to win. President Roosevelt didn’t agree to Morales’s request until December 1904, a month after the U.S. presidential vote. The Senate, it turns out, had other ideas. Roosevelt decided that with the election past, that wasn’t a problem, and so the U.S. took over the customhours without a treaty on March 31, 1905.

Under the agreement, the U.S. directed 55% of customs revenue towards debt payments, but it did not do so mindlessly or automatically. Rather, it banked the money until February 1907, when it finally forced the D.R.’s creditors to accept a 50% haircut on their outstanding principal. (The average coupon was reduced to 5%.) In fact, if expropriation claims are excluded, creditors accepted a 57% haircut on their debt.

Moreover, the agreement worked: there was no austerity. Even after the U.S. took 55% off the top, government spending did not fall. Moreover, the D.R. managed to go to the capital markets as early as May 1907, when it refinanced its outstanding post-haircut debt of $15.8 million and borrowed an additional $3.9 million. ($3.9 million is, as a share of U.S. GDP, the equivalent of $1.7 billion in 2010.)

And therein lies the rub. Or rubs. First, the D.R. was not a democracy in 1904; Greece is one in 2012. Second, the D.R. asked for the receivership; the Greek government is not. Third, the U.S. used its good offices to obtain a very favorable debt restructuring; the E.U. (meaning the Germans, really) is letting Greece hash things out with its creditors on its own. Finally, in the case of the D.R. the U.S. really was able to improve custom collection; I’m not sure that anyone believes that a foreign administrator will be able to easily improve the Greek internal revenue service inside a culture of widespread evasion.

In other words, the U.S. was much more generous to its dirt-poor neighboring nondemocracy than the Germans are being towards their not-as-poor fellow democracy. Good luck with that. Unless, of course, failure is the plan.

Not worried about the Straits of Hormuz

 A number of people have been asking about the risk that Iran will shut down the Strait of Hormuz. The short answer is: we’re not worried about it. But it’s worth running down why.

The ostensible reason why the Iranian government might want to shut down the strait is retaliation against a Western oil embargo. Sanctions are already causing Iran pain;  there is little doubt that such an embargo could be devastating. The European Union purchases 18% of Iranian production; Japan and South Korea take another 27%. China absorbs 22%, and could take more, but probably won’t for two reasons. First, after China’s recent self-imposed foreign policy disasters, the People’s Republic seems to have little appetite for antagonizing the West. Second, China and Iran are right now embroiled in a pricing dispute that could cut Iran’s exports by 40%. The truth is that God only knows if the European Union will get its act together, but let’s say that they do. 

Would Iran respond militarily? Military actions against commerce will, of course, provoke a response by the United States Navy. The ensuing naval war has two outcomes:

(1)  Iran loses. That would be a bad result. The best-case loss for Iran is something like the 1988 battle. (This was called Operation Praying Mantis back in the day when the Defense Department chose names for reasons other than propaganda.) The worst case loss is a wrecked export infrastructure, no naval capacity, and airstrikes against the nuclear facilities. All that, and you get blamed as the aggressor in the court of world opinion.

(2)  Iran wins. Is that possible? Probably not. But … back in 2002 the United States held a wargame called Millennium Challenge 2002. The results were rather interesting.  

Red, commanded by retired Marine Corps Lt. General Paul K. Van Riper, used old methods to evade Blue’s sophisticated electronic surveillance network. Van Riper used motorcycle messengers to transmit orders to front-line troops and World War II lighting signals to get airplanes off the runways without using radio communication.

Red received an ultimatum from Blue that was essentially a surrender document that Red must respond to within 24 hours. Given that Red knew that Blue was coming, by the second day of the exercise Red used a fleet of small boats to determine the position of Blue’s fleet. In a preemptive strike, Red launched a massive salvo of cruise missiles, overwhelming the Blue forces’ electronic sensors, destroying sixteen warships. This includes one aircraft carrier, ten cruisers and five out of the six amphibious ships. The equivalent of this success in a real conflict would have resulted in the death of over 20,000 service personnel. Soon after the cruise missile offensive, another significant portion of Blue’s navy was “sunk” by an armada of small Red boats carrying out both conventional and suicide attacks, able to engage Blue forces due to Blue’s inability to detect them as well as expected.

At this point, the exercise was suspended and Blue’s ships were “re-floated” and changes were made to the rules of engagement; later this was justified by General Peter Pace as: “You kill me in the first day and I sit there for the next 13 days doing nothing, or you put me back to life and you get 13 more days’ worth of experiment out of me. Which is a better way to do it?” … Due to his concerns about the scripted nature of the new exercise, Van Riper resigned his position in the midst of the war game. Van Riper later expressed concern that the wargame’s purpose had shifted to reinforce existing doctrine and notions of infallibility within the U.S. military rather than serve as a learning experience.

Iran has invested heavily in mine technology, which suggests they are at least committed to making a plausible threat. Their mines would be a lot better — more destructive, smarter/more selective, and harder to detect — than they were in 1988. They’re believed to have several thousand, and could plausibly get hundreds of them in the water on short (less than 48 hours) notice. Iran has also invested in cheap, dumb anti-ship missiles: in increasing order of size and scariness, the Kosar, Noor, and Raad. That last is a 3-ton subsonic shore-to-ship cruise missile with a payload that could probably disable a warship with a clean hit. The Kosar and Noor are smaller and shorter-range but can be mounted on small boats — these are the missiles modeled in Millennium Challenge. The U.S. counter-campaign would not be as simple as just sailing in and claiming naval control of the Straits; a sensible admiral will want to see missile launch, radar and airbase sites suppressed first.

Since a spike in energy prices will hurt almost everyone, world opinion would set firmly against Iran pretty quickly. Notable exceptions would likely include Venezuela and Russia, with the latter being important for its Security Council veto. So, military counteraction won’t have the benefit of a U.N. resolution. Another interesting legal aspect is flagging. Under international law an attack on a flagged ship can be treated as an attack on the flag nation, so if a Panamanian-flagged tanker hits an Iranian mine, Panama has a formal casus belli. Mines have gotten a lot smarter, but not yet so smart they can detect a flag. Moreover, the GCC will firmly line up against Tehran. The U.K. will almost certainly back military action, and France is even more likely to act. (France has a small military base in Abu Dhabi.) In other words, the lack of a UNSC resolution will probably do little to slow Western action.

Let’s say, then, that Iran could win the opening battles of a naval war in the Persian Gulf. Then what? The U.S. and E.U. won’t lift sanctions. The world’s largest navy will regroup and counterattack. There will be a period of prolonged high oil prices, but that won’t make the West (or the GCC) more willing to back down.

The nature of a counterattack would be open to considerable debate. Attacking the oil export facilities, for instance, could cripple Iran’s economy — but would also ensure that oil prices would stay high, as Iranian production would be offline for a long period of time. Nonetheless, even limited American action will destoy a great deal of Iran’s export capability along the way. Attacking the nuclear facilities would mean a dramatic expansion of war aims. It would probably be expensive, too — those facilities are far inland, dispersed, and well protected. Still, Iran will run a high risk that the U.S. will take the opportunity to attack the nuclear program: after all, Iran will have already used the biggest arrow in its quiver, and a counter-campaign will have to involve prolonged airstrikes on Iranian coastal defenses. 

In theory, of course, Iran could escalate further. Iran could launch missile attacks against GCC targets, but the U.S. and its Arab allies would respond with strategic attacks of their own — e.g., the destruction of Iran’s export capability. Iran could intervene in Iraq, but the U.S. no longer has combat troops in that country. A year ago, Iran could possibly call on Syrian support, but nowadays Syria has other problems. Finally, Iran could attempt to mobilize Hezbollah, but launching a Third Lebanon War isn’t in Hezbollah’s interests at the present time. Moreover, Hezbollah can do nothing to dissuade the United States.

In other words, if Iran loses the naval war, then it loses. If Iran wins the naval war, then it loses, possibly worse. There is no obvious endgame that ends with Iran ahead.

If a war starts by Iranian action, it won’t be because there is an international payoff. The reasons would be domestic. Some elements in Iran might consider a conflict with the U.S. worthwhile, even if Iran clearly comes off the worse, as long as critical regime assets are not endangered. There’s nothing like a foreign war for rallying popular support, after all. The most likely scenario would involve an actor or actors rather than the central government as such — the Revolutionary Guards, or some other group, taking an action that pulls Iran out on a limb. Nonetheless, that seems unlikely. 

Therefore, we will be greatly surprised if Iran mines Hormuz or otherwise attacks shipping, except in retaliation for an American (or Israeli) air raid. It simply has nothing to gain.

A one-sentence counterargument below the fold.

Plus ça change, plus elle ressemble à un tas de debans de rue de Brooklyn

  A while ago, I discussed the problems of correctly implementing what should be, in theory, the world’s easiest counterinsurgency strategy for a country as rich as the United States: bribe your opponents. The U.S. has tried it in multiple ways; at best, it’s been a partial success, in the sense that things could be worse. But only partial. In October of last year, the Taliban hit the headquarters of the Panjshir provincial reconstruction team. When I was there in ‘06, Panjshir was quiet, well-protected by the local militia. That said, there were plenty of incidents like this, albeit not as deadly. Bribery is expensive, it is long-term, and it needs to be institutionalized (either formally or informally) in a way that aligns everyone’s incentives.

Are there lessons from history? Well, yes, but they’re not good. My co-blogger and I give you a report from 170 years ago:

The deceptive quietude of Afghanistan which followed the sharp lessons administered to the Dooranees and the Ghilzais was not seriously disturbed during the month of September 1841, and Macnaghten was in a full glow of cheerfulness. His services had been recognised by his appointment to the dignified and lucrative post of Governor of the Bombay Presidency, and he was looking forward to an early departure for a less harassing and tumultuous sphere of action than that in which he had been labouring for two troubled years. The belief that he would leave behind him a quiescent Afghanistan, and Shah Soojah firmly established on its throne, was the complement, to a proud and zealous man, of the satisfaction which his promotion afforded.

One distasteful task he had to perform before he should go. The Home Government had become seriously disquieted by the condition of affairs in Afghanistan. The Secret Committee of the Court of Directors, the channel through which the ministry communicated with the Governor-General, had expressed great concern at the heavy burden imposed on the Indian finances by the cost of the maintenance of the British force in Afghanistan, and by the lavish expenditure of the administration which Macnaghten directed. The Anglo-Indian Government was urgently required to review with great earnestness the question of its future policy in regard to Afghanistan, and to consider gravely whether an enterprise at once so costly and so unsatisfactory in results should not be frankly abandoned.

Lord Auckland was alive to the difficulties and embarrassments which encompassed the position beyond the Indus, but he was loth to admit that the policy of which he had been the author, and in which the Home Government had abetted him so eagerly, was an utter failure. He and his advisers finally decided in favour of the continued occupation of Afghanistan; and since the Indian treasury was empty ... Macnaghten was pressed to effect economies in the administration, and he was specially enjoined to cut down the subsidies which were paid to Afghan chiefs as bribes to keep them quiet.

Macnaghten had objected to this retrenchment, pointing out that the stipends to the chiefs were simply compensation for the abandonment by them of their immemorial practice of highway robbery, but he yielded to pressure, called to Cabul the chiefs in its vicinity, and informed them that thenceforth their subsidies would be reduced. The chiefs strongly remonstrated, but without effect, and they then formed a confederacy of rebellion.

The Ghilzai chiefs were the first to act. Quitting Cabul, they occupied the passes between the capital and Jellalabad, and entirely intercepted the communications with India by the Khyber route.

Macnaghten did not take alarm at this significant demonstration,regarding the outbreak merely as “provoking,” and writing to Rawlinson that “the rascals would be well trounced for their pains.” Yet warnings of gathering danger were rife, which but for his mood of optimism should have struck home to his apprehension. Pottinger had come down from the Kohistan, where he was acting as political officer, bent on impressing on him that a general rising of that region was certain unless strong measures of prevention were resorted to ...

Is Sint-Maarten an independent state?

 The Kingdom of the Netherlands is a strange animal. It isn’t much of an empire. Nor is it a proper federation; it doesn’t even have a federal government per se. International treaties apply differently to the different parts. (See Articles 24-28 of the Charter of the Kingdom.) The Caribbean members have duty-free access to the European Union, but there is no true common market. In theory, Article 35 requires that they pay for their own defense. (In reality, it doesn’t matter: the insular Caribbean outside Cuba is a de facto military protectorate of the United States.) The Supreme Court of the Netherlands is the ultimate court of appeal, but most of the ex-British insular states (save Barbados and Guyana, but including Mauritius an ocean away) still use the Privy Council. It uses a different currency, with its own central bank. Finally, the Caribbean countries can all withdraw fairly easily, using provisions laid down in the Charter. Sint-Maarten could remove Dutch influence far more easily than the Bahamas could get rid of the United States.

So is the Kingdom meaningless? Are the constituent countries simply independent countries without a seat in the U.N.? Well, not quite. First, there is a common citizenship. Immigration and naturalization laws may vary (the latter by rather little), but once you’ve got that Kingdom passport you’re a full citizen. If Great Britain had been willing to extend that to the West Indies Associated States, I doubt that any of them would be sovereign countries today. (To be fair, the WIAS had other issues, not least of which that there was no equivalent of the Charter. British officials treated the association as nothing more than a British administrative inconvenience, which rankled on the islands.)

Second, law enforcement. The relationship is a bit of a mess. This Dutch document goes into it: since I am not a Dutch speaker, and translation software is overvalued, I can’t say that I understand the details. That said, while Dutch police have less authority in Sint-Maarten than, say, the FBI does in Puerto Rico, they do have authority, even if they generally need local approval to make arrests. That is a bit more authority than, say, OPBAT gives American officials in the Bahamas, or than DEA agents have in Colombia or Mexico.

Third ... well, here it gets interesting. The Netherlands provides financial support to the other countries in the Kingdom, but it is phasing it out. Development and fiscal aid is supposed to end by 2013. In fact, transfers have been generally miniscule. According to IMF data, in 2008 aid to Sint Maarten amounted to only 0.3% of GDP.

Recently, however, that has changed. Aid rose to 2.0% of GDP in 2009 and 6.2% in 2010, most of it to pay off Sint-Maarten’s debt arrears. More substantively, the Netherlands took over the debt from the former government of the Netherlands Antilles that otherwise would have gone to Sint-Maarten, a gift worth approximately 30% of the country’s GDP. In return, however, the island has had to accept Dutch financial supervision. The Financial Supervision Authority is supposed to stick around until 2013, by which point Sint-Maarten is supposed to have trained up enough people to take over the functions formally carried out by the government of the Netherlands Antilles. We’ll see.

In short, being part of the Kingdom of the Netherlands is a bit more substantive than simply lacking a U.N. seat. That said, technical sovereignty matters very little. The U.S. routinely took control of the finances of Latin American countries before WW2, and the IMF effectively does so today. (A country can refuse IMF money, of course ... but Sint-Maarten can, in theory, also refuse Dutch support.) Similarly, law enforcement officials from a powerful state can often find ways to exercise their authority inside a weaker one. Finally, lots of nominally sovereign countries share or outsource judicial authorities. What matters, rather, is citizenship and the moral authority to call on Dutch resources when necessary. It is a relatively weak relationship, but a real one nonetheless.

The French side of the island is completely different. If there’s interest, I’ll discuss it later.

Old evil vendepatria PDVSA saves new socialist PDVSA!

 On the turn of the New Year, the International Chamber of Commerce (ICC) awarded ExxonMobil $907.6 million in its dispute with PDVSA over the Venezuelan government’s nationalization of its interest in the Cerro Negro project in the Orinoco oil belt. The press has been pretty quick to call it a victory for PDVSA, considering that the company initially claimed that its investment was worth $12 billion. Exxon, they say, received only book value for its investment, and Chávez has run away with the store.

Is that true? My job here is to argue that it’s not. Exxon received from PDVSA what it was contractually entitled to get. The standard used by the ICC was the market value of the assets, not book value. The assumptions used to calculate that market value, however — chief among them estimates of the expected future price of oil — were limited by a clause in ExxonMobil’s 1998 association contract that effectively put a ceiling on the value of the company’s investment.

In the words of Steven Bodzin: “So for all the rhetoric about how the Old PDVSA sold out the patria etc. etc., the only reason the New PDVSA was able to do so well in arbitration was because of clever bargaining by the Old PDVSA?”

I’m going to briefly walk through the Orinoco value chain. Then I’ll briefly describe some key features of the Cerro Negro contract. Finally, we’ll run some numbers.

Let’s start with Cerro Negro. The project is in the Orinoco oil belt — but keep in mind that until 1956 it was actually called the Orinoco tar belt. (The “faja bituminosa del Orinoco.”) The crude oil there is “extra heavy,” meaning that its specific gravity exceeds that of water. At room temperature, the stuff is gunky and practically solid. Put it into a beaker and turn it upside down; the oil will stick.

That creates a bit of problem in terms of transporting the stuff. There are three solutions. The first is to heat it up and sent it out in special ships. That’s expensive and really only done for oil intended to be made into asphalt. The second is to mix the extra-heavy gunk with lighter crudes and export it. Venezuela’s “Merey” blend is a mix of 61.8% gunk and 38.2% lighter “Mesa” crude. (That’s nice, because it means you can calculate a market price for the gunk.) The third is to build an “upgrader,” where you partially refine the gunk, mix it with a diluent and then export the resulting “synthetic crude.”

The Cerro Negro project covers 115 square miles and includes an upgrader. Its costs, therefore, are not low. The cost to get the extra-heavy crude out the ground isn’t that high. Wikileaks documents indicate that it is around $4 per barrel, but it isn’t as though that number is top secret: Bernard Mommer, formerly the People’s Vice-Minister for Hydrocarbons and currently the Bolivarian Republic’s representative on OPEC’s Board of Governors, estimated them at $3.60. Upgrading costs, on the other hand, are significantly more expensive: Mommer reported them to be $9 per barrel. That comes to a total production cost of $12.60 per barrel of syncrude.

Production costs aren’t the only costs, of course. In 2002, the Bolivarian Republic hiked royalties from 1% to 17%. In 2006, it hiked them again, this time to 33%. That same year, it raised the income tax rate from 34% to 50%. Taxes and royalties, therefore, are very substantial.

When Hugo Chávez converted the Cerro Negro oil extraction project into a majority-PDVSA joint venture in May 2007, ExxonMobil rejected Venezuela’s (undisclosed) compensation offer and went to arbitration. It went to arbitration in two forums: the ICC and ICSID. The ICC arbitration was based on ExxonMobil’s association agreement, which established the Cerro Negro venture between ExxonMobil (41.67%), PDVSA (41.67%), and BP (16.66%). Article 15, “Consequences of Certain Governmental Actions,” stated that Exxon could take PDVSA to arbitration if PDVSA refused to “restore the economic benefit that the foreign party would have received had the discriminatory action(s) not occurred.”

What were the lost economic benefits? Well, at the prevailing oil price for Venezuelan blends in 2007 (and assuming a 9% nominal discount rate and 2% inflation) Exxon would have earned an average of $325 million per year (nominal), with a net present value of $3.0 billion. That’s a lot more than $907.6 million! So was Exxon robbed?

Well, no. The first (and minor) point is that in 2007 it was far from clear that high oil prices were going to last. When ExxonMobil signed the contract in the late 1990s, Venezuelan oil was bouncing around $16 per barrel. So it is possible that Venezuelan lawyers might have persuaded the arbitration panel to use a lower oil price, under the assumption that prices might have crashed. If that had been the case, I would unhesitatingly call the $907 million result a victory for the Revolution.

The nice thing, however, is that we don’t need to resort to hair-splitting. Article 15 of the association agreement tells us the price the arbiters had to use:

… after the first period of six consecutive months during which the price of Brent crude oil is in excess of the threshold price [$27 in inflation-adjusted 1996 dollars], Lagoven CN [PDSVA’s subsidiary in the Cerro Negro venture] will not be required to compensate any foreign party for any discriminatory action(s) with respect to any fiscal year in which the average price of Brent crude oil is in excess of the threshold price, and such foreign party received net cash flow commensurate, after taking into account the effect of the discriminatory action(s), with a reference price for the production produced by the parties that bears at least a reasonable relationship, adjusted for quality and transportation differences, to the threshold cash flow for such fiscal year.

Translation: the highest possible oil price that can be used to value damages in the event of expropriation is $27 per barrel in 1996 dollars, or $37.50 in 2007 dollars. Moreover, that’s the highest price — Venezuela, after all, doesn’t sell Brent but rather lower-priced blends. That price can be marked down to adjust “for quality and transportation differences.” E.g., the arbiters can pick a lower one.

Ah hah! Brilliant! When Brent traded at $37.50, Mesa crude traded at around $32. At $32 per barrel (adjusted for 2% inflation), Exxon would have expected to earn an average of $95 million per year through 2035. At a nominal discount rate of 9%, that would value ExxonMobil’s investment at $865.8 million. It only takes a little tweaking of the discount rate or oil price to get us to the figure that the ICC finally came up with. 

What does this imply for the results of the upcoming ICSID arbitration? Damned if I know. That arbitration is against the Bolivarian Republic, not PDVSA. So Article 15 doesn’t apply. Rather, the relevant document is the bilateral investment treaty that defines what the Venezuelan government can and cannot do. Moreover, it is possible that ExxonMobil will be able to argue not only that the 2007 expropriation was illegal, but that the big royalty and tax hikes the year before were also illegal under the Netherlands-Venezuela bilateral investment treaty. My gut feeling is that Venezuela is going to win, but I’m not sure why exactly I suspect that will be the case.

To sum up, then, this case was not a victory for the Bolivarian Republic. Rather, it was a victory for the PDVSA negotiators who wrote Article 15 of the association agreement back when the plain old Republic of Venezuela invited foreign companies in to develop the Orinoco oil belt. ExxonMobil got basically the maximum that it could have expected to get. So what was that initial $12 billion claim all about? Well, as Michele Bachmann would mispronounce, nothing but chutzpah.

A new nation in the Caribbean

 Every Christmas, we go to a different Caribbean island to meet my wife’s family. This year, we went to Sint Maarten, Saint Martin, and St. Vincent. The first two, I should add, share the same island.

Sint Maarten, which makes up the southern half of a tiny Caribbean island in the north of the Lesser Antilles, is a new country in two ways. First, it really is a new country. The Kingdom of the Netherlands is not a small country on the northwestern coast of Europe. Rather, it is a federacy of several different countries, called, well, “countries.” In 1954, when the former empire was turned into a federacy via the Charter, the Kingdom consisted of the Netherlands, Suriname, and the Netherlands Antilles. (Dutch New Guinea was not part of the new structure.) In 1975, Surinam became independent in a disgusting little racist episode engineered by Prime Minister Joop den Uyl. Aruba split from the rest of the Netherlands Antilles in 1986, but remained part of the Kingdom. Finally, last year the Netherlands Antilles dissolved into two more countries, Curaçao and Sint Maarten, while the three remaining territories (Bonaire, Saba, and Saint Eustatius) became part of the Netherlands. Sint Maarten’s status as a country, then, is only a little over a year old.

Sint Maarten is a new country in another sense, however: more than three-quarters of the population consists of the descendents of immigrants who arrived after 1960. The sugar and cotton industries collapsed after the abolition of slavery in 1863. Maartenese laborers went to Cuba, Puerto Rico, and the Dominican Republic to work in the sugar industry. In 1918 a giant oil refinery opened on Curaçao, followed by one in Aruba in 1928, sucking out more labor from Sint Maarten. The result was stagnation: in 1960, the population was only 2,728. The island looked to be sinking into a backwater, an unpopulated remnant.

The jet age (and Fidel Castro) changed all that. The Cuban Revolution removed that island as a destination for North American tourists. Sniffing opportunity, in 1964, the Antillean government relocated and expanded Princess Juliana International Airport.

Tourists began to arrive en masse, the cruise ships followed. And the population grew. And grew. And grew. To only 40,000 people, admittedly, but the entire country covers only 13 square miles. By 1992, only 30% of the population had been born in St. Maarten, and a solid chunk of those were the children of post-1964 immigrants.

It is possible to be naturalized as a Dutch citizen, but it isn’t easy. (Strangely, it seems as though I may qualify for Dutch citizenship without the need to be naturalized, just as I qualified for Spanish citizenship until last Tuesday.) In 2001, citizens made up 51% of the population. 30% of the population was (still) native-born; an additional 10% came from elsewhere in the former Netherlands Antilles and 2% came from the Netherlands proper. The math, then, shows that only 9% of the population consists of naturalized citizens.

Who naturalizes? It isn’t easy to tell, but it is easy to see who doesn’t naturalize: in 2001, people born in the British West Indies made up 20% of the population, whereas citizens of those countries made up 21% — they do not naturalize; neither did a small number of their Sint-Maarten-born children. Even more dramatically, the Haitian-born made up 8% of the population, but Haitian citizens made up 12% — very few of their children naturalize. Finally, Dominican-born made up 12% of the population and while Dominican citizens made up 10%; of the three major groups, they are the most likely to naturalize. (Two-thirds of the foreign born outside those three groups and developed-world expats become Dutch citizens. Most of them are from Cuba, South America, and Lebanon.) The West Indians may be unlikely to receive Dutch citizenship, but they are also next-to-invisible on the Dutch side. The initial plantation owners on that side of the island were from Britain; they brought English. Everyone speaks it fluently, from birth, with a faint West Indian inflection. 

The Dominicans, on the other hand, are pretty distinctive. Our first contact with them actually came on the French side of the island. We were walking along Orient Bay in the evening, and heard tropical music coming from one of the beach clubs, all the way at the southern end of the beach. It was a live band, and an awesome live band. Everyone in there except for us (including the waitress) was Dominican. (There are no border controls.) It was awesome ... and by day an utterly nondescript beach bar populated by tourists.

On the Dutch side, you can see money-sending places, Spanish service shops, and evangelical iglesias scattered around the poorer outskirts of Philipsburg. The Dominicans are visible. The migration is skewed towards women: 61%. According to the Sint Maarten government, most of the initial migration came in illegally from Romana and San Pedro de Macoris. The migrants provided fake work sponsors to Sint Maarten’s then-lackadaisical immigration officials. It’s also skewed towards the unskilled: Dominicans make up 29% of all unskilled workers, with Haitians filling an additional 30%.

The Haitian migration is almost the mirror image of the Dominican one in terms of gender: it’s 59% male. It’s also the mirror image in terms of visibility. The only easily-spotted presence is the fishermen near the airport, and the stalls where they sell their products.

Policy, as you can imagine, has been confused, although it is getting better. Before August 1, 1996, education was neither free nor compulsory for immigrant children. The legal school population doubled in 1990-95, and so educating immigrants was not particularly popular, especially since many of the Haitians were refugees fleeing the chaos of the early 1990s and living in tent cities.  Nonetheless, the government came around to the idea that creating a large uneducated underclass was a bad idea, and so compulsory education was extended to all. State health insurance, however, is not available for undocumented immigrants, who often cross over the French border to receive emergency care. 

Thoughts?

Bad news from Afghanistan: In order to bribe people not to fight, you have to make sure that they stay bribed

 There is no shortage of bad news from Afghanistan. One new piece appeared in today’s New York Times. President Karzai has decided to abolish a northern militia currently paid for by NATO. This is a problem.

The above photo is not of members of the Afghan National Army. It is of Panjshiri militiamen in 2006, guarding the headquarters of the Panjshir provinicial reconstruction team. (In unrelated news, the Panjshir PRT was recently attacked by Taliban suicide bombers.) Afghanistan is loaded with armed militia, including the ones that make up the anti-government forces collectively referred to as the “Taliban.”

One strategy for establishing peace in a wartorn country is to bind armed militia to the state. You basically bribe people not to fight you, the government, or each other. In the process, you hope that you create lasting institutions that can create, over time, a legitimate chain of command that can permanently integrate (and subordinate) the formerly warring factions into the state. It is slow, it is painful, it can undercut other nation-building goals, but it is nonetheless vital to get it right. We botched it badly in Iraq, and paid quite a price. Of course, if you are going to bribe people not to fight ... sorry, integrate armed men into state institutions ... then you have to make sure that they stay bribed. That means that you (be it the local government or foreign overlords) have to make a credible commitment that the flow of benefits will continue as long as the militia obeys orders. By cutting off the flow of NATO money, Karzai has simultaneously undercut NATO’s ability to strike bargains and his own status as a credible partner.

There are reasons for President Karzai’s decision. Members of the Critical Infrastructure program (and the “Afghan Local Police” more generally, as the integrated militia are called) have been known to extort the citizenry, and they are not inside the chain of command of the Afghan National Police. The problem? Taking them off the NATO payroll is not going to get them to stop extorting the citizenry, or bring them under government control. Quite the reverse, actually. It is a dumb decision, and it bodes ill for other places in Afghanistan (like Panjshir) where independent militia have been de facto bought off.

It isn’t all bad. Karzai has (under pressure!) agreed to allow the Taliban to set up an office in Qatar from which peace negotiations can be conducted. But the President of Afghanistan isn’t exactly showing himself to be steadfast negotiating partner, and the decision to defund the Critical Infrastructure program bodes ill for the country’s post-American future.

POSTSCRIPT: There is some evidence that NATO was botching the integration programs, at least in the north. (The programs I saw in Panjshir in 2006 were well-run, but Panjshir is a special case on multiple levels.) Some salaries have not been paid. (This was a huge problem for the Afghan National Police in Nangarhar province back in ‘06; we dealt with it using a system much like the one that doesn’t seem to be working for the Afghan Local Police in Kunduz province.) The German government is worried about the lack of the long-term program to integrate the militias into the state’s chain of command. (The report to the German legislature can be found here.) Finally, here is the U.S. military’s investigation (written, surprisingly, by a one-star!) into allegations of human rights abuses by the Afghan Local Police, with recommendations for increasing American “command, control, and influence” over them. Of course, if the program is disbanded by the Afghan national government, then any hope of getting the militia under control goes out the window ...

Dubai in Central America?

 It seems as though Honduras is going ahead with a Charter City. I’ll have a bit to say about that in some later posts, but right now I just want to aggregate some primary source information about what the Honduran legislature  has and has not passed. The basic idea is to create a city where national laws and national institutions do not apply. Instead, new rules can be written on a clean slate, with a government that can outsource and contract functions to any other government (or private entity) that it wants. The result, it is hoped, with be economic growth with political order, a made-to-measure version of Dubai. After all, if an absolute monarchy bordering Saudi Arabia could do it, why can’t anyone?

The first part was a pair of constitutional amendments. Article 304 now allows Congress to select judges (with a two-thirds vote) for special courts in the “Special Development Regions.”

Article 329 meanwhile, now states: “The Special Development Regions shall have their own legal personality, their own public administration, their own legal system that will be approved or disapproved by a simple majority of the national Congress, their own legal exemption in conformity with Article 304 of this Constitution, the power to sign treaties and international agreements concerning trade and cooperation in matters under their control, subject to the ratification of the national Congress … In the fields of budgets, taxes, tax collection, tax administration, as well as the ability to sign contracts that shall pass into the next national administration, and the ability to borrow internally or externally as long as such debts lack any guarantee from the State of Honduras.”

So far, so vague. But on August 23rd, Congress passed the enabling legislation for the special development regions. It added that the regions will have the ability “shall establish their own police and have the power to exercise their function themselves or by delegation. To this effect, they have the power to sign cooperation agreements to strengthen the same with other countries.” More impressively, the statute restricts the ability of the national government to intervene in the special region’s affairs, and states that any “jurisdictional conflicts” will be settled by an arbitration panel of three judges selected from a pre-assigned list of forty people, half selected by Congress, and half selected by the “Transparency Commission” that runs the region. (An unofficial translation of the amendments and the legislation can be found here.)

The Transparency Commission is kind of sort of limited by the “Normative Councils,” elected by the region’s permanent residents (foreign and Honduran). The normative councils set taxes and ratify changes to the region’s governmental organization

Now, Hondurans will be allowed free entry to the region, and any businesses there will need to have at least 90% of their workforce and 85% of their payroll go to Hondurans, except that “both ratios can be modified in exceptional cases determined by the special development region’s regulations.”

Finally, on December 6th, President Porfirio Lobo appointed the Transparency Commission. It consists of five people: two American economics professors, the former head of the INCAE business school in Costa Rica, a former IABD vice-president, and a former Singaporean general.

The boundaries of the region have not yet been established, and although the Economist mentioned that the region will use the Mauritian legal system (and therefore ultimately the British one, since Mauritius, like the Bahamas, still uses the Privy Council as its ultimate court of appeal), I have not yet obtained independent confirmation of that fact.

And there you have it. Before I discuss what I think the implications will be, what do you think? Does this idea have potential, or will it be a failure?

Department of Obvious: Syria is not Libya

 This has become a fairly handy idiot test.

Short version: intervening in Syria would be much, much harder and more expensive than intervening in Libya. This was true back in March, and it’s still true today.
 
(1) The uprising in Syria has never remotely approached the success of the uprising in Libya. Syria has seen a bunch of large, sustained protests and demonstrations. That’s great! But Libya saw the effective secession of almost half the country. By the middle of March, the rebels controlled the country’s second largest city. About a fifth of the country’s area and maybe a third of its population had passed completely out of government control. Major government military units had gone over to the rebel’s side. Nothing like that has happened in Syria.

(2) Syria has an actual, functioning air force. This is in sharp contrast to Libya, which did not. Syria actually has late-ish model planes, pilots who know how to fly them, and some semblance of a professional administrative and logistical infrastructure to support them. No, the Syrians couldn’t stand up to a sustained war with NATO — but they exist, and would have to be dealt with.

(3) Syria has an actual, functioning air defense system. Again a sharp contrast to Libya. As with the air force, it could be dealt with — but it would take time, and would likely cost casualties.

(4) Syria’s in a much, much more delicate and complicated location. Just look at a map. Taking Gaddafi out was relatively easy — Egypt and Tunisia just had their revolutions, and nobody cares much about Chad. But Syria? Israel, Iraq, Turkey, Lebanon. What a nightmare. Do I need to spell out why this makes everything much harder and more fraught?

(5) Assad is much less diplomatically isolated than Gaddafi. By 2010, the Brother Leader had managed to alienate or annoy pretty much everyone. Even the Arab League openly despised him. His nominal “friends” in the Mediterranean — most notably Berlusconi’s government in Italy — turned out to be fair-weather indeed. Russia restricted itself to tut-tuts from a distance. Only in Sub-Saharan Africa did he have any real allies left, and the plain sad fact is that Niger and Senegal just don’t count for much when you’ve got the United States, United Kingdom, and French Republic all lined up against you. With bombs.

Assad, on the other hand, is a respected member of the international club. He’s a dictator, but he’s not a flake. He’s a reasonable neighbor. (Well, unless you’re Lebanese. More accurately, a Lebanese of a certain political flavor.) The Arab League is never going to pass a resolution approving force against him. And the Russians are likely to veto anything in the Security Council — they’re much closer to him than they ever were to Gaddafi. They’ve had a small naval base at the Syrian port of Tartus since the 1970s, and they’ve sold weapons to the Syrians since forever.

In fact, the Russians were just closing a deal to sell Syria a bunch of Yakhont antiship missiles when the uprising started. The Yakhont is basically a bigger, dumber Exocet; a supersonic cruise missile designed to kill large ships from far away. Israel vigorously protested the deal, for fear Syria would pass a couple along to Hezbollah. (Hezbollah blew a massive hole in an Israeli corvette a few years back using a crappy little Chinese C-802, and my co-blogger will eventually post something about his research on the brewing conflict over Israel’s new offshore gas fields,  so it’s a quite reasonable fear.) Remember how in Libya, we had capital ships hanging around just offshore from Tripoli, and the Charles de Gaulle parked conveniently just a bit further out? That wouldn’t happen in Syria; even the faint possibility of shore launched cruise missiles would make any sane admiral pull his ships well back over the horizon.
 
Oh, and he’s got the Iranians on side, at least for the moment. I think the Iranians would switch sides in a flash, if they thought it was in their interest — but until they reach that point, they’re backing him firmly. (They just replaced their ambassador to Damascus with a hardliner with ties to the Revolutionary Guards.)

(6) Assad is much less physically isolated than Gaddafi. Libya looks like a solid block of territory, but in fact it’s like Canada — a long, thin populated strip and a vast empty hinterland. 90% of the population lives within 100 km of the coast. The civil war cut that strip in two, east and west. Gaddafi had an open path to the south, but as supply lines they were meaningless; an 800 km drive across desert, and then you’re in Niger. (A country whose major resources are under French control.) With NATO controlling the seas, virtually everything in Gaddafi’s territory had to come in or out through Tunisia, most of it on a single coastal road. The moment the rebels cut that road was the moment when everything changed for good.

There’s nothing like this in Syria, which has well-developed land links to all its neighbors except Israel. And most of Syria’s coast is actually Lebanon. Nobody’s going to blockade Lebanon. As with the air defenses, this is a solvable issue — but it makes everything much, much more difficult and expensive.

So, to summarize:

• Military intervention in Syria would be incredibly expensive and difficult, would have to overcome serious diplomatic obstacles, and would likely involve significant losses and casualties. This has always been true, and will probably continue to be true for some time to come. Therefore, it is very unlikely to happen.
• Because military intervention is unlikely, any uprising against Assad will have to succeed or fail without it, as did the uprisings in Tunisia and Egypt. I judge this unlikely, but that’s an issue for another post.
• If someone says “our intervention in Libya prevented us from intervening in Syria,” then you may immediately begin heavily discounting, or completely ignoring, anything else they have to say on the topic. (This goes double if they suggest that the reason is “Syria has no oil.”) If someone suggests that we should intervene in Syria, same-same.

I wish the Syrian people good luck in getting rid of the loathsome Assad regime. But the plain fact is, they’ll have to do it without direct military help from us.

China doesn’t have an empire, except maybe in one unexpected country and only if you squint hard

 Empire is one of those ill-defined terms. Problem is, define it too narrowly—say, formal sovereignty over a subordinate political community—and you deny the existence of, say, the Soviet empire in Eastern Europe, or the American one in the Caribbean. That’s not a useful definition. Define it too loosely, however, and every power imbalance becomes an example of “empire.” That’s not helpful either.

One useful way to define empire is through the threat of sanctions. If one political community enforces its writ over another by the threat of sanction (active painful sanctions), then you’ve got an empire. Might be strong, might be weak, but it’s imperial. A corollary, of course, is that the stronger political community will extract either political control or economic benefits from the weaker one. (China gets no visible non-commercial benefit from its presence in the Bahamas, for example.)

Chinese energy policy is often accused of being imperialistic, especially in Africa. The evidence comes in three flavors. First, “equity oil”: the tendency of Chinese state-owned companies to buy equity stakes in foreign oilfields and oil producers. Second, the way China ties state-financed loans to oil agreements. If countries want the cheap finance, they need to give China cheap oil. Finally, the long-term nature of such agreements, putatively locking the producing nations into providing China with oil at a discount.

The most famous of these deals, with Russia, turned out to be a lot less when examined it up close. China lent Russia money at market rates to build a pipeline that would deliver hydrocarbons to China at market prices. It’s hard to see the imperialism. Where was the threat? Where was the benefit?

OK, but that’s with the Russian Federation, you say. Russia is a great power, sort of, and not subject to Chinese pressure the way that smaller and poorer places might be. Okay. To test that, we can go over the universe of loans-for-hydrocarbons deals signed by China since the beginning of 2009. How many of them involved the delivery of oil at less than market price? Not Angola, not Brazil, not Bolivia, not Kazakhstan, not Ecuador, not Turkmenistan.

Has China managed to get a price discount anywhere? Yes, once. In February 2009 the People’s Republic inked an agreement with the Bolivarian Republic which provided a $4 billion loan from the China Development Bank in return for 200,000 barrels of oil per day at a $2.00 per barrel off the market price, invoiced monthly. Now, to be fair, a discount in that range is fairly standard. The problem is that Venezuela’s “market price” is completely opaque. Venezuelan crude trades at rather less than WTI or Brent simply because it costs much much more to refine. Only PDVSA is, shall we say, rather opaque at providing information about the prices that it charges. So how to benchmark against the market price, when the market price (while existant) is hard to find?

You would have to go all James Bond to get the answer. Fortunately, the State Department did so in 2009. Venezuelan sources told State that PDVSA supplied China with oil as low as $5 per barrel. That’s a not a discount of $5 per barrel (which would already be above the $1-$3 norm for such agreements); that’s a price of $5 per barrel.

Wow! Now that’s imperialism!

Only ... well ... imperialism is not defined by a smart bunch of Chinese companies taking advantage of the administrative wreck that is Petróleos de Venezuela. Rather, it is defined as the use of sanctions or the threat of sanctions to alter the governing policies of a subordinate political community. I suppose that maybe you could define the possibility that China would withhold its capital as a form of sanction ... except that the only reason Venezuela has trouble raising capital at much better terms elsewhere is the mismanagement of the Hugo Chávez. (For what it’s worth, which isn’t very much, Venezuela now insists, “We don’t cut prices in any of our international agreements.” Except to the Bolivarian Alliance countries. And Spain. But other than that, we should believe Minister Rafael Ramírez. I mean, he said it below portraits of Che and Fidel!)

I suppose you can call it crafty Chinese imperialism, or you can say, “The people now charged with reaching international supply agreements on PDVSA’s behalf couldn’t negotiate their way out of a wet paper bag.”

Ghana, I should add, appears to be doing a much better job. For all the Ghanian deals’ faults, and there are many, Ghana hasn’t even given the Chinese preference for oil contracts in exchange for their money, let alone a price discount.

In short, Chinese hydrocarbon companies are going abroad ... because that’s where the oil is! Other than in cases of truly gross local incompetence they haven’t gotten particularly good deals, despite widespread bribery on their part.

Uranium, of course, is a different story.

Is the Commonwealth of the Bahamas an independent state?

 Is the Commonwealth of the Bahamas a sovereign nation? It has a seat in the United Nations, so it a technical legal sense the answer is clearly yes. And it has a very cool flag.

But in any other sense of the world, the Bahamas isn’t sovereign. Like many (perhaps most) microstates, the Bahamas has only managed to survive by a combination of outsourcing some state functions to bigger more powerful countries and giving control to powerful neighbors when their interests are at stake. 

Let’s start with the obvious: the Bahamas is fully dollarized. Technically there is a separate Bahamian dollar, maintained at parity with U.S. money — in reality the U.S. dollar circulates to the point where you have to go out of your way to receive Bahamian banknotes. Unlike Argentina during the days of the currency board, nobody bothers to hoard dead presidents. Still, the Bahamas hasn’t completely outsourced monetary policy to the United States: under the Exchange Control Act of 1956, the Central Bank retains the right to restrict foreign exchange dealings. In practice, this has worked as a tax on capital outflows, although there are also some restrictions on current transactions. Still, it’s telling that the act enabling the controls predates official sovereignty by 17 years — and yes, it applied to Great Britain as well.

Moreover, monetary policy is a poor test of sovereignty, even ignoring Bahamian capital controls. After all, many sovereign states outsource monetary policy. Zimbabwe is about as sovereign a country as you are likely to find, and even it adopted the U.S. dollar in the wake of a ruinous hyperinflation. So let’s turn to something more fundamental: law enforcement. Sovereign countries do not allow foreign courts to make decisions or foreign law enforcement agencies to make arrests. The United States, for example, is perfectly willing to help out the RCMP, and the links between the RCMP and the FBI are so profound that the agencies can be indistinguishable — but the Mounties don’t fly helicopters over Montana, and FBI agents don’t make arrests in Ontario. And while American and Canadian courts respect each other’s decisions, you can’t appeal an adverse outcome in Newfoundland to a court in Washington, D.C.

This is not true in the Bahamas, although, confusingly, the foreign power with judicial power and the foreign power with police power happen to be different. The Bahamas’ supreme court is the Judicial Committee of the Privy Council in London. In 2006, 2007, and 2009 the Privy Council held its sessions in the Bahamas — the only country to have that privilege outside the U.K. itself — but at the end of the day, it’s still a British court.  It creates some controversy, particularly over death penalty cases. Nonehteless, the Bahamas shows no sign of wanting to cut its links to it.

Meanwhile, with some caveats, U.S. law enforcement operates in the Bahamas almost as freely as it does in Florida. In the late Seventies and early Eighties, drug traffic through the islands into Greater Miami steadily escalated, and the Reagan Administration put more and more pressure on the Bahamas to do something about it. In November 1983, the Pindling government gave into the pressure and convened a commission of inquiry “To inquire into the illegal use of the Bahamas for the transshipment of dangerous drugs intended for the United States of America.” The commission was made up two Bahamians, an Australian, and a Canadian, and after 146 days it uncovered what everyone knew: the Colombians moved narcotics with impunity through the islands.

And I mean impunity. Aircraft from Colombia would land in Bimini or drop cargo to waiting boatmen, who would put them in speedboats for the 50-mile into Broward and Palm Beach counties. The chief local distributor on Bimini received $90,000 for each run, with local schoolchildren received $500 for a night’s work. A December 1979 raid by the Royal Bahamian Police ended with rocks being thrown at the cops “by children, adults and elderly.” It also uncovered corruption, which had not yet escalated to the upper channels of Bahamian law enforcement … but was clearly getting there.

The result was OPBAT: Operation Bahamas and Turks and Caicos. It started in 1984, but in 1987 the Bahamian government granted the U.S. Coast Guard the right to stop any and all ships and aircraft entering or leaving Bahamian territory. The USCG couldn’t officially make arrests without a Bahamian sign-off, but that was a distinction without a difference. In 2004, the Comprehensive Maritime Agreement between the U.S. and the GCOB (Government of the Commonwealth of the Bahamas) replaced the grab-bag of unofficial conventions and understanding, but had the effect of strengthening the U.S. position in the islands: now the Royal Bahamian Defence Force would regularly station “ship-riders” on U.S. vessels and helicopters, giving the full rights of arrest in Bahamian waters. This authority has proven useful not only in combatting the drug traffic, but also in preventing Haitian migration to either the Bahamas or the U.S. Of course, stopping emigration is not good for Haiti — and OPBAT’s success in curbing the Caribbean drug trade has been awful for Mexico. (I’m heading to Monterrey on Wednesday.) But it has prevented any chance that the Bahamas might become a narco-state.

(You can read Wikileaks’ rather anticlimactic revelations about Bahamian thoughts regarding Haiti and the CMA here. In 2007, the U.S. Army pulled out of OPBAT, and its helicopters were replaced by DEA aircraft, a distinction without a difference. All that happened were that Army UH-60s were replaced at Georgetown by three DEA Bell 212s and a fixed wing aircraft.)

To recap: Bahamian monetary policy is set by the Fed, the supreme court is in Britain, and American law enforcement freely operates in its national territory. Does that make for a sovereign country?  I report, you decide ... but if you pushed me, I would have to say not.

Another Libya post

 Various people have noticed that this Libya thing has been dragging on for a while now, and various explanations are being trotted out. But not by me! I was against intervention in the first place, but now that it’s happened I think it’s going reasonably well.  

What’s “reasonably well”? Isn’t Qaddafi still in power? Well, yes he is. But he’s also continuing to lose ground on every front. I already wrote about the “correlation of forces” notion; nothing has changed in the three weeks or so since then. If I stare very closely, it does look like the speed of disintegration may be slowing, which would be bad — but he’s still not winning any battles, morale in Tripoli is still low, and defections are continuing. A while back, I predicted that he’d be gone “by August, give or take a month” — in other words, between July 1 and September 30. I’ll stand pat on that.

Meanwhile, four quick thoughts.

(1) Most of the action seems to be taking place in the western mountains and around Misrata. The eastern front, out by Benghazi, has been relatively quiet. That seems a bit odd, given that Benghazi is the rebel capital and, presumably, the largest concentration of forces are located there. Thinking out loud: if the war ends after a string of victories in the west and central fronts, without anything much having happened in the east, you’d expect that to affect the postwar balance of forces in the country.

(2) France has resorted not just to arming the rebels, but arming them via large, random weapon dumps out of planes. This suggests some things, both bad and good. Bad: the French aren’t coordinating with Tunisia or the various rebel groups in the west. Good: the French chain of command (including, but not limited to, President Sarkozy) is getting anxious. Libya is a much bigger deal in France than in the U.S., and Sarkozy has an election coming up next year. (An election he’s currently favored to lose in a landslide, I should add. But ten months is a long time.) I don’t see Sarko caring to start his campaign without having resolved Libya — somehow. So while I’m ready to be wrong about September 30, I will be astonished if Qaddafi is still clinging to power by next February — the point at which the French presidential campaign really takes off.

(3) The fact that the Libyan rebels are willing to tolerate and work together with large numbers of armed Berbers strikes me as cause for cautious optimism. (Qaddafi spent 40 years demonizing the Berbers as dim, treacherous primitives who are Not Really Libyan.) Of course, the Berbers seem to be doing more than their share of the fighting. 

(4) Two big question marks: Egypt and Tunisia. Egypt is a poor country, and its military is no great shakes, but they’re so big that even a very modest intervention could have disproportionate effect. Tunisia is much smaller — but even Tunisia has half again the population of Libya, and they’re right next to the most intense theater of fighting. I have the strong impression that both countries are being very very cautious and moderate in their responses because they’re both internally unstable at the moment, having just come through their own revolutions. Still, it’s interesting that nobody in either country cares to busy giddy minds with foreign quarrels.

Let’s see how it looks in August.

The Romans to the rescue?

 Anglo-French forces have begun making helicopter strikes from carriers in support of rebel operations. They join the Anglo-French air sorties (which now outnumber U.S. sorties by a growing margin) and the Anglo-French  ships that have been shelling shore targets in support of the rebels in Misurata. (War nerds should click the second link.) William Hague, meanwhile, was in Benghazi two days ago.

It is an excellent level of support. (Everyone should read this comment by Doug Muir, and this post by Alex Harrowell, at which point somebody should answer the queries they raise.) But four days ago one country put them all to shame, a most unexpected country: Italy. Yes, Italy. Home of the oil company that seriously thought it could reclaim its oil from Gaddafi. Home of one of the Colonel’s biggest friends. Land of the supremely bizarre “Friendship Treaty” between the Italian Republic and the Grand Arab Libyan Popular Socialist Jamahiriya. Italy!

Ever since Gaddafi demonstrated that he could hit rebel oil production, the rebel government has been hard up for cash. (The one tanker that they got out has finally been purchased by a refinery in Hawaii.) Legal confusion in the United States has held up the rebels’ ability to access Gaddafi’s assets, or use them as collateral for loans. (The recent sale of rebel oil to Hawaii is an indication that this fog may be lifting.) So how is the rebel government going to get the foreign exchange that it needs?

Enter Italy. Foreign Minister Franco Frattini, said Rome would, through Eni and UniCredit SpA, “provide the [rebel] council for the needs of the Libyan people with a huge quantity of fuel and a huge amount of money.” He added: “We are talking about billions of euros that is not money of the regime. This is money of the people of Libya. [These] important frozen assets can represent a very valid guarantee for this transfer of money to the Libyan people.”

In the absence of NATO forces capable of hitting irregular government troops far inland, then the only way to get resources to the rebels is to let them borrow against government assets. British training is all well and good, but the rebels need air support, and right now they do not have it outside a narrow coastal band. So ... Italy just won huge credit by offering cash. Stratfor likes to insist that the Anglo-French effort is all about securing petroleum contracts at Italian expense: if so, Rome just blew a hole in that idea. The rebels should look at Eni et al pretty favorably ... and the decision to channel the lending through Eni only reinforces that.

On the other hand, Britain seems to be training the rebels on the ground. Serious rebel training would obviate the worries about the oil fields, by allowing the rebels to coordinate with foreign air forces operating at high altitudes. (To be frank, getting the rebels into some sort of recognizeable — and hard to copy — uniform would help.) That will also be quite thanked.

In short, the postwar question will be: does concrete Italian financial support outweigh concrete Anglo-French military support? I suspect that given the legal mess, the former will prevail. But then again, I never did believe the idea that Cameron’s and Sarkozy’s decisions had been driven by a desire to have their national companies (particularly BP) seize formerly-Italian production contracts. That said, Rome seems to have found an easy (and almost costless) way to insure that its interests will survive the conflict.

It would be nice if the U.S. would move as quickly in unfreezing Libyan assets. It was a heroic effect to clear the Hawaiians to import rebel crude, but there is more to do. Britain and France, it is time to start serious lawfare.

Libyan civil war oil update

 There have several important developments in the Libyan civil war, not least the temporary incursion into Tunisia and NATO’s decision to begin attacking Libyan state institutions. (The death of one of Gaddafi’s sons is a result.) These are important, but developments regarding the country’s oil industry are even more so. And so, this update.

Last weekend, government forces damanged rebel-controlled oil fields. How is not certain. Tripoli claims that British warplanes did the damage, but that seems unlikely to say the least. Wahid Bughaigis, the rebel oil minister, said that the damaged equipment included a generator, an oil tank, and several small diesel tanks to fuel the generators. The rebels say they will need at least a month to repair the damage.

The problem is that the rebels do not control the refineries or gasfields. They therefore need to import fuel, and that’s expensive. The Qatari government (working with Vitol, an oil trader) helped the rebels market one million barrels (for an above-market $129 million in revenue). The MT Equator tanker, carrying 550,000 barrels of that oil, arrived in Singapore for refueling on April 28, before steaming on to China. (China is being quite helpful where it counts.) $129 million, however, is not a lot in terms of rebel needs. Bougaighis said: “To put things in perspective, one cargo of gasoline of 25,000 metric tons costs us $75 million, so you don’t go far with $129 million.”

I suspect that he is wrong about that: 25,000 metric tons is around 7.9 million gallons, and I doubt they’re paying $9.44 per gallon. But I am sure that the rebels are facing energy problems. Benghazi used to get its electricity from natural gas supplied out of Brega. Brega, however, is in government hands. As a result, the rebels have cut electricity production in Benghazi by 25 percent to conserve fuel. Of course, in a country without anything resembling a smart grid, electricity cuts mean rotating outtages running as long as 3½ hours. Bughaigis: “We didn’t have this problem when the gas was supplied to the plants, but now we have to supply it (diesel) by sea and get it from the road.”

For what it’s worth, the U.S. cleared up (as best as it could) the remaining uncertainty about the ability of Americans to buy Libyan oil. The Office of Foreign Assets Control (OFAC) declared that said transactions involving Qatar Petroleum or Vitol are permitted provided the entity in Libya is under the control of the rebel-backed leadership. Anyone dealing with Libyan oil purchases must supply a report to OFAC detailing the arrangements within 30 days. The practical significance of this is limited, however, since the Europeans opened the door to rebel oil sales some time ago.

In the Department of Obvious: Vienna-based OMV, which produces some 10% of its total oil and gas production from Libya (33,000 boe a day), is seeing its profits go down. Production at the Shateira oil field shut down at the end of February due to violent clashes between government and rebel forces. Libya provided 20 percent of the crude used by OMV refineries, but it has been able to buy crude from Saudi Arabia, Kazakhstan and the Black Sea region to make up for the slack. OMV will have to upgrade the refinery in Burghausen, Germany, to process non-Libyan crude, but it should be able to do that.

Department of Not so Obvious: Eni’s production is down 9%, but profits are up 15% on high prices. Since April, Eni production in Libya has been about 50,000 to 55,000 barrels of oil equivalent per day, down from 280,000. (Libya accounted for about 10 percent of Eni's overall cash flow.) Eni said since April the company has been producing 50,000 to 55,000 barrels of oil equivalent a day in Libya for local electricity production, all coming from its Wafa facility. No Eni facilities in Libya have been damaged and are currently on “hot standby” ready to produce again once the situation stabilizes.

And finally, Department of WTF: Eni appears to have sent a tanker to western Libya to try to pick up oil from its production facilities. The Aqua got within a few kilometres of the Libyan port of Mellitah before turning away between April 20 and 21. (The booking from Mellitah to Venice probably cost over $500,000, including a risk premium to venture into Libyan waters.) It was there to load up 600,000 barrels of oil. The Libyan government, obviously, refused to let the Eni ship fill up. “They didn't want the crude to go, because they wouldn't have gotten any money for it,” said an industry source, adding, “They could use it to refine into gasoline.” I can understand why NATO would be happy to let the Italians give it the old college try (“Go get your oil! Just make sure that Tripoli knows it won’t get any money for it, 90% tax rate be damned.”) I am less sure as to why Eni thought it could possibly get its oil.

So there you have it. Nothing here changes the assessment that the rebels will win, but the government ability to strike at the fields is unexpected.

Europe goes to war

 Libya update: So far, both Doug Muir and I appear to be correct. The war has devolved into a stalemate, but casualties are only racking up in Misrata, where the New York Times estimates between 313 and 1,000 deaths thus far. That is a tragedy, but far less than it could have been.

Calls to send ground forces are growing, but the United States so far shows no signs of seeing any political pressures, domestic or foreign, to send American troops. The E.U. has signed off on a 61-page “concept of operations” to send roughly 1,000 troops to coordinate humanitarian relief, most likely in Misrata.

According to the Guardian, Eufor Libya “would be authorised to fight if they or their humanitarian wards were threatened.” The Guardian reports that the current on-call European battlegroup is mostly made up of German troops, but it turns out to be predominantly Dutch, although the Germans are involved. The other battlegroup is from the Nordic countries; predominantly Swedish. French units, in particular, are not involved. Inside a European Union that appears to be straining over economic adjustment and immigration, the politics of this will be problematic. (I for one would like Doug Muir’s insights here. After all, so far we’re both right!)

A French parliamentarian, Axel Poniatowski, has correctly pointed out that in order to be more effective, NATO will need to put spotters on the ground. Reports that the Europeans are running short of precision-guided munitions only make that more pressing; moreover, the Europeans may have to deploy helicopters, which means ground crews.

And that means a need to creatively interpret the U.N. resolution or go back and get a new one. France and Britain seem to disagree on this point.

This is an intervention that should be easy. The rub is that the Europeans really have let their military capacities deteriorate to a rather remarkable extent. Moreover, coalition warfare is extremely difficult; more so, when the allies do not agree. So far, the six bad results have been avoided, including the 7th possibility of prolonged attrition warfare. Conditions in rebel-held territory seem good, and the oil industry is getting organized. But the jury is still out.

War versus non-war

 Americans have a problem with the word “war.” In the dictionary, war is an armed conflict between organized groups for political objectives. In the U.S., however, the word took has the connotation of absolute war, an interstate conflict aimed at the unconditional surrender of the other side.

To some extent this has always been true. Three of our five declared wars — the War of 1812, the Mexican-American War, and the Spanish-American War — weren’t aimed at unconditional surrender, but they were aimed at the territorial dismemberment of our opponent. Moreover, in all three cases, the declaration of war rapidly led to an escalation of American aims. The War of 1812 immediately became a war to drive Britain out of North America. The Mexican-American War started over Texas and ended in an American occupation — and were it not for Nicholas Trist the southern boundary of the United States would be several hundred miles further south. The Spanish-American War started with a very 21st-century “authorization to use force,” but Congress declared war after Spain declared it on us ... and soon enough the U.S. was in possession of Puerto Rico, Guam, and the Philippines.

What does this have to do with Libya? Well, Libya is a massive food importer. In a total war, even a casualty-averse total war, his enemies could starve him out. But we are not fighting a total war, and we obviously should not be fighting a total war. Since Libya imports about 75% of its food needs, this means that the U.N. is soon going to have to organize relief efforts at the same time that NATO is blockading his ports.

It will get stranger.

How it could all go wrong in Libya

 I seem to have been a bit sanguine about Gaddafi’s resources in my last post. The IMF reports that Gaddafi is sitting on a 143.8-tonne $6.4-billion pot of gold. If correct, that’s a lot of ready cash. 

If the war goes on much longer, and I suspect that it will, there are at least six bad contingencies:

1. Gaddafi leaves. Absolute chaos ensues;
2. Gaddafi massacres people in his territory in some bold and ugly way that the Western media can’t ignore;
3. Rebel tactical incompetence leads to operational disaster;
4. The rebels start to fall apart in their territory. Chaos ensues;
5. Rebels massacre civilians;
6. The Syrian government shells a rebellious town into rubble, killing tens of thousands and doing exactly what we intervened to prevent Gaddafi from doing.

In a perfect world, the U.S. and U.K. and France would have contingency plans for all of these events. I’m pretty sure, in fact, that all three governments do have a strategy: stay out and stonewall political pressures to respond. Contingency #6? Nothing to be done, impossible to intervene. Contingency #1? Pottery barn, not. Contingency #2? Already trying. Contingency #5? See no evil. Contingency #4? Time to declare failure; just like we did in Somalia.

The strategy is stay out; the tactic will be to stonewall.

The question, however, is whether “stonewall” is a strong enough political tactic to implement the desired strategy? Can we disengage if things begin to go wrong?

People who talk about Bahrain are frustrating me

 It isn’t just Matt Yglesias, but he went ahead again and stated that the United States needs to do more about Bahrain:

If the point of intervening in Libya is to establish a precedent that dictators can’t massacre people to remain in power then the Obama administration needs to toughen its line on Bahrain and Yemen in order to make that work. If the point of intervening in Libya is to have a “demonstration effect” that bolsters the forces of liberalization in the Arab world, then the Obama administration needs to toughen its line on Bahrain and Yemen. ...

The fact that we’re [intervening in Libya] only serves to strengthen the case that we need to be taking the modest easy steps available to us to advance the same goals elsewhere in the region.

What “modest easy steps”?? Cutting military assistance? Sanctioning Bahraini banks? Those are neither modest nor easy, and worse yet, I am at a loss as to why they would work. (Further complicating the Western position is the fact that the GCC is backing the U.N. on Libya.) I am also at a loss as to why we should consider Bahrain’s oppression as being something on the same scale as the Stalinesque massacre that was bearing down on the Libyan rebels. The U.S., right now, is very explicit about our anger at the Bahrainis and Saudis. 

I would like to have somebody lay out the “modest easy steps” that the U.S. government should be taking with regards to the situation in Bahrain. Seriously, I want somebody to convince me that such options exist! But just calling for some sort of magical pixie dust, or demanding even harsher U.S. rhetoric with no thought as to the consequences, that is just dumb.

Two traps in thinking about international relations in the 21st century

 Commentators often, I think, fall into two serious (and diametrically opposed) traps when discussing international politics.

The first is to assume that everything is different now that we’re in the 21st century. Globalization, democratiza-tion, international institutions, new norms, and the internets have all combined to create a brave new world where none of the old verities apply. I talked a lot about this back when people were all agog over the putative “Twitter revolutions,” but it applies to more conventional analysis. Take this from a month ago: 

“The U.S. should call for an urgent, immediate Security Council meeting and push for a strong resolution condeming Libya’s use of violence and authorizing targeted sanctions against the regime. Such steps could stand a chance of rever-sing the course of a rapidly deteriorating situation. An effective international response could not only save many Libyan lives, it might also send a powerful warning to other Arab leaders who might contemplate following suit against their own protest movements.”

A Security Council resolution is indeed a powerful thing. And that is what happened. But when it did not work, the same author produced an very odd follow-up a few days ago, when Libyan government forces were at the outskirts of  Benghazi:

“The administration should move quickly and aggressively to recognize the provisional Libyan government, release the frozen Libyan assets to that provisional government, and allow the flow of weapons to them. It should push for ever tighter targeted sanctions against Qaddafi, and continue to mobilize international consensus against his regime to make sure that he remains an absolute pariah without access to international institutions, revenues, or support. It could jam Qaddafi’s communications and provide intelligence, and more. The debate should move away from an exclusive focus on military action.”

Huh? Come again? What besides military action is supposed to dissuade the Colonel from slaughtering his opponents, conducting house-to-house raids, mass arrests, show trials, and the rest of the panoply of modern totalitarianism? Perhaps “crazy” is the wrong word, given that we are talking about the Colonel, but Gaddafi would be crazy not to bring out the full Stalin should he win, and I am at a loss as to why people think that our brave new globalized world of international institutions would change the logic of authoritarianism.

Of course, the second mistake is to assume things are just like the 19th century. In this view, the spread of democratic ideals is irrelevant, international institutions are mere epiphenomena, and norms only have meaning when backed up by force. Technology changes power balances, of course, but ideology does not, with the possible exception of nationalism. This is the mistake that Stratfor seems to make in its more head-scratching analyses. States are the only actors that matter, states are in a zero-sum game, international opinion does not exist, communication technology only matters in military terms, and political norms are meaningless once you move outside states. The problem with that view is that it contradicts our everyday experience of watching international politics happen. (It is also not entirely consistent with more concrete data.)

I tend more towards the second error, myself. That might be more common among Americans, since our approach to foreign relations has changed less than elsewhere, and international institutions and norms have less of a daily effect on our lives, but both extremes (everything is different now versus nothing has changed) are, I think, good things to avoid.

No-drive zone and the Libyan civil war

 This is going to be ugly, but ground troops will not be needed. (With a caveat.) We can conduct enough sorties to impose a real no-drive zone between rebel-held territories and the west. The problem is that it looks as though Gaddafi’s forces have already moved into Benghazi. The rebels will have to root them out, and that could be ugly. (Preliminary reports look pretty ugly, but maybe not as much as it could have been.)

Minimally-trained infantry should be able to outflank government forces outside the cities, but the rebels seem to be worse than minimally-trained. Maybe this is my own experience talking, but they seem like mobs with guns, rather than a serious fighting force. The West could send in advisors, which would, of course, be serious mission creep. If it happens, I’d bet on the British doing it, not the United States.

The truth is, neither side the Libyan civil war appears to be particularly competent. (This should not be surprising.) In the words of a former RAF officer (and personal friend): “I think holding onto small cities was a mistake, the rebels have bogged themselves down there and waited for the fight to come. Ideally, defence should have been based on the ‘restricted block methodology’ (ie: Stalingrad) freeing up manpower to build SUV mobile platoons heading for Tripoli and locking the government in. Not rocket science, infantry 101 which concerns me about the skills of the regular Libyan NCO/Officers.” This graduate of Fort Benning, for what little that is worth (and truly, it is not worth much at all; the only times I have been in a combat zone have been as a civilian) concurs. Andrew Exum also concurs. (Oh man did his post bring back memories of digging. And getting tear-gassed. But I digress.) 

Historically, Libyan troops have performed very poorly at the operational and tactical level. From Arabs at War: “Junior officers exhibited little initiative, creativity, flexibility, or adaptability ... They rarely thought to manuever in battle, could not make combined-arms operations work properly, and regularly failed to scout or adequately secure their positions ... Information did not flow evenly across the Libyan hierarchy either verically or horizontally, with the result that few had the requisite information to adequately perform their assigned missions.” Strangely, maintenance was a serious problem, while logistics performed amazingly: the country maintained an armored division in Chad, a thousand miles away.

In this war, the logistical advantage is gone: the U.N. forces are going to make sure of that. In the east, you are going to have ugly ugly irregular fighting until the last of the Gaddafi forces are gone. In the west, though, it depends.

One smart policy would be to promise financial rewards to defecting Libyan forces, including foreign-born militia. With economic sanctions on, Gaddafi is down to paying to his troops from his cash reserves. He can’t export oil or gas, he can’t access his foreign assets. Libya is also an importer of gasoline (this is not unusual for oil producing countries). The rebels knew this, and hijacked vessels headed to Gaddafi-held territory, but now NATO navies are enforcing a blockade. Moreover, the Ras Lanouf refinery is damaged and on fire.

Another smart policy would be to call off the International Criminal Court and offer a blanket amnesty. I am sure that Venezuela would be happy to take the Colonel. (Once upon a time, I would have thought Saudi Arabia, and that might still be a possibility, even with the recent collapse in U.S.-Saudi relations.)

In short, the U.N. coalition is going to dismantle Gaddafi’s air defenses and enforce a no-drive zone. The rebels will root out government forces in the east in awful fighting to which the press will probably not pay much attention. Then we are going to get a waiting game. Even with sanctions, Gaddafi can hold out for a long time, especially if his troops think that the alternative is death. Thus, bribes ... but somehow I do not think that is going to happen. In short, we could have a long waiting game, unless

The wild card would be Gaddafi attacks on civilian populations in the west. If that happens, all bets are off. Perversely, that means a rebellion in the areas he currently holds would be worse for the U.N.’s ability to stay out than a long stalemate.

But here’s the good thing: the United States is not in the lead. Yes, we are providing right now most of the firepower. But politically, we are not in the lead. If this turns into a repeat of the containment of Iraq, the onus is not on us, and the decisions are not on us. If we draw back, the Europeans (honestly, the Anglo-French coalition) and the Arab countries will have to decide whether to keep on.

And you know what? As a nationalist American, I like that. I like being the biggest kid but not the alpha dog. The French moved out in front, the Arabs made the call, the U.N. granted the authorization, and we’re in it because we’re big and burly and feel solidarity. (Nobody reading this will understand this save for the few who went to grade school with me: we’re Jimmy, not Brandon.) And this, this is new, and this is good.

So tell me, how should the U.S. force Bahrain to compromise?

 Every so often, I get annoyed with people I generally respect. Today Matt Yglesias annoyed me, although, to be fair, it was part of a sullen-but-sensible post about Libya. He began, “So I guess I agree with Jon Chait that the fact that the U.S. isn’t using its influence over the Saudi or Bahraini governments to halt the killing of non-violent protestors there isn’t a reason to decline to intervene in Libya.”

Hmm. More and more observers are noting that Saudi Arabia has openly split with the United States and no longers considers itself a client state. We also know that President Obama effectively ordered the Bahrainis to stop shooting protestors the first time out, and that Secretary Gates told them that they would have to give parliament real power. Bahrain seemed to be following our lead until recently, when with Saudi support they reversed direction and cracked down.

Yesterday, the U.S. openly told both the Bahraini and Saudi governments that they are “on the wrong track. There is no security answer to this.” Presumably right now, a few days into the crackdown, the U.S. is considering out a menu of carrots and sticks to lay before the government in Manama. And normally we would have a lot of leverage. The problem is, with the Saudis against us, it hard to see what levers would be effective ... and it is easy to see some that would be downright counterproductive.

Obviously, he must think that there is something else besides diplomatic pressure that we can do right now that would be neither ineffective nor counterproductive. But what could that be? Honest question: from where I sit, it looks like our imperial contr ... er, influence has ebbed considerably. If that’s correct, then our best hope is to (correctly!) persuade the Bahraini monarchy that the crackdown is against their own best interest.

This sort of sullen refusal to admit the limits of American power bugs me. Matt Yglesias generally does a great job of puncturing American myths about our good-will and omnipotence. Here, though, he seems to be buying into them, but that may just be because I am missing the lever that Washington should be pulling.

Any ideas?

Saudi Arabia adopts the Brezhnev doctrine?

 Once again, Stratfor seems to have gotten things backwards, without ever mis-stating a single fact. Stratfor says, “The Iranian roadmap in the Persian Gulf appears to be off-track as a result of a pretty overt U.S. and Saudi countermove in the region.” Here at TPTM, we say Saudi Arabia just made a mistake, and the emerging U.S.-Saudi split just got significantly wider.

As you all know, the Gulf Cooperation Council (GCC), founded to defend against Iran’s revolutionary Shia politics, today coordinated the entry of troops from the Peninsular Shield Force and UAE police units. Apparently, the Bahraini and Saudi governments considered the local foreign-staffed security forces to be insufficient.

The move comes after a weekend of demonstrations and violence that claimed the lives of two more protesters. The most recent round was severe enough to encourage Sunni lawmakers to ask the King to declare martial law. Of course, as this video shows, the violence ran both ways. These are pro-government thugs attacking students at the University of Bahrain:

Stratfor declares “The GCC countries have made their countermove to Iran’s destabilization campaign and are doing so with apparent U.S. backing.” Reuters says differently. So does all the supporting evidence. Over the weekend, Defense Secretary Gates visited Bahrain. There he said, in no uncertain terms, that the United States wants the Khalifa family to accept a constitutional monarchy. It seems unlikely that Washington had anything to do with the decision to dispatch GCC forces.

The chief barrier to resolving the Bahraini situation is that the royal family is split. The King’s uncle, and Prime Minister since 1971, is the unofficial head of the hardliners. (He may have ordered the first attack on the demonstrators at the Pearl traffic circle.)  The Crown Prince is the leader of the liberal faction in the family, and he has been pro-active in apologizing for the deaths of protestors on national television and meeting with opposition groups throughout the crisis. The King is the moderate caught in the middle. That internal jockeying has made managing the protests more difficult.

This morning, however, the situation got infinitely worse. It is not clear what the GCC troops are there to do. The Sunni deputy chairman of Bahrain’s Parliament, Abdel al-Mowada told Al Jazeera: “It is not a lack of security forces in Bahrain, it is a showing of solidarity among the GCC. I don’t know if they are going to be in the streets or save certain areas  ... [but protesters] blocking the roads are no good for anyone, we should talk. The government is willing to get together and make the changes needed, but when the situation is like this, you cannot talk.”

The opposition is enraged. Wifaq described the arrival as a “blatant occupation” and the Bahrain Center for Human Rights declared, “This is an internal issue and we will consider it as an occupation.” It’s hard to overemphasize the power of the word  “occupation” in Arab politics, given its ties to the Palestinian Territories and Iraq.

The Saudi move — and although the GCC seems to be lined up, the impetus is likely from Riyadh — to shore up the Khalifa family is terribly shortsighted, but comprehensible in context. Bahrain is in Saudi Arabia’s near abroad. The relatively loose laws of Bahrain have allowed it to serve as a Las Vegas equivalent, where Saudis can drink and pursue other anti-Wahhabist pleasures.

Why then are the Saudis so concerned? The Eastern Province of Saudi Arabia, like Bahrain, is majority Shia. If the Khalifa monarchy were to go constitutional, it might embolden Saudi Arabia’s Shia population. The rising tide of popular revolution has made the Saudi monarchy more reactionary than it might be under other circumstances. In other words, the Saudis are as worried about a democratic constitutional monarchy Bahrain as they are about a radical Shia republic. The remote chance of a radical Shia takeover or an Iranian invasion is secondary.

Unfortunately, the intervention just put two cornerstones of American policy in contradiction. The Saudi alliance has been a cornerstone of U.S. policy since 1931. The hosting of the Fifth Fleet in Bahrain has, since 1971, run a close second. The Naval presence, however, requires Bahrain to be stable, under whatever form of government. American policy in Bahrain has recently moved towards support for a full constitutional monarchy as the best way to preserve stability. But the creation of a constitutional monarchy conflicts with what Riyadh considers to be a core interest.

Intervention is a bad short term solution to a long term problem. Even under the rubric of the GCC, the arrival of foreign troops en masse is a profoundly poor idea. Bahraini politics have had a violent undercurrent for the past decade, and the citizenry is not going to take kindly to foreign forces clearing the streets. It raises the stakes between the King and the opposition, and may give the conflict a more overtly sectarian cast. It also adds to the pressures pushing the opposition towards republicanism. Moreover, the economy of Bahrain is going to take a serious hit with Saudi tanks in the streets, and given that it’s mostly financial services, it’s vulnerable to a collapse in foreign confidence. Finally, the move is going to encourage Iran. The former has longstanding territorial disputes with Bahrain and may take the chance to take a swipe at those and claim responsibility for the Shia opposition, which is currently fiercely anti-Iranian.

Far from a clever countermove against a nefarious Iranian scheme, Riyadh has just made a touchy situation significantly worse. An optimistic view has the liberal forces in Bahrain using the breathing spell to create a constitutional democracy. Saudi fears of dominoes prove unfounded, and everyone relaxes. A pessimistic view has GCC troops shooting Shia in the streets. In that case, Iranian covert operations would gain an opening, and the United States would once again find itself trapped on the side of the villians. The Saudi coordination of several longstanding U.S. Gulf allies against American interests is going to require substantial finesse from Washington.

American dependence on Saudi Arabia for diplomatic support and resources can’t be ended over this move, but it’s a bad position for the United States.

The United States and Bahrain: intro

 The big U.S. link with Bahrain is, simply, the Fifth Fleet. We station roughly 3,500 personnel and 16 vessels in Bahrain. My direct contact with the military presence there took place unexpectedly in a bar in the ground floor of a Best Western in Manama. The decor was country-and-western, the music was crunk, the males were mostly off-duty American sailors, and the women were disproportionately from Thailand. Yes, I left immediately; why do you ask?

Bahrain does not provide the use of their territory for free. We currently pay about $9.6m a year for the use of about 66 acres and 15 berths. But that isn’t all: in 2010, we also provided the Bahrain Defense Forces with $20.8 million in assistance; this year’s budget request is for $21.7 million. That comes to a little over $1,500 for every BDF effective; not a small chunk of change. The U.S. presence is governed by a 1992 treaty (T.I.A.S. 12236) ... most of which is classified.

OK. Do we get anything else for our protection? Well, Bahrain has sent troops to Afghanistan: about 125 Bahrainis guard Marine encampments in Helmand. (If you divide all our military aid by 125, you get about $173,600 per Bahraini; a bargain compared to Blackwater.) We signed a free trade agreement in 2006. That agreement (building on an earlier 2001 treaty) included provisions protecting U.S. investments from expropriation. That, plus our help in resolving a border dispute with Qatar, got Occidental a 48% stake in a field that will eventually produce 100,000 barrels per day of oil and 2.5 million tcf of natural gas. Even with a 46% tax rate on oil companies, that will be a lot of revenue. Oxy expects to invest about $1.5 billion in the field. Under reasonable assumptions (say a 10% cost of capital and an $80 oil price), that investment could clear over $830 million a year, which ain’t bad. Try doing that in Ecuador! And since Oxy does in fact pay income taxes to the U.S. federal government, the gain to Americans could come to, uh, about a dollar a year per person.

In addition, to Oxy, ChevronTexaco got an exploration concession in the formerly-disputed area with Qatar in 2001. (Strangely, so did Petronas, from Malaysia, and some goobers from Calgary. I think we could have complained about that ... except eventually they all pulled out in favor of a Thai outfit. The link has a pretty good rundown of the state of play in Bahraini hydrocarbons.) 

In short, the U.S. gets a base that helps us keep the oil lanes open and contain Iran; in return we get some useful soldiers and some oil concessions, guaranteed by the specter of ICSID. Not too shabby. Viva el imperio; maybe Randy McDonald was right.

What about other parts of the relationship? Well, Wikileaks tells us that the Bahraini government likes to claim that the periodic unrest in the Kingdom is due to Iranian and Syrian machinations, but the State Department isn’t buying it. In 2008, they reported, “Small but violent bands of Shia underclass youth, frustrated with persistent discrimination and what they perceive as too gradual a pace of reform, clash with police nearly every week. The Sunni minority, which rules the country and controls all security forces, has generally acted with restraint, but it takes only one mistake to provoke a potentially disastrous escalation.”

In short, if Bahrain does go up (and it is not clear that it will) the United States will not have been surprised.

Saudi and America part ways over Egypt

 Well, yesterday some news broke that was so predictable that I am embarrassed at not predicting it. It turns out that the Saudi government is unhappy with the U.S. decision to use our aid as a lever to prevent the Egyptian army from shooting protestors. It is even less happy that we might now use same to convince the Egyptian army to pack Mubarak off into (not very) early retirement. Dissatisfied with the way that we are running things, the Saudis threatened to replace our support dollar-for-dollar.

Saudi Arabia has deep links with the United States. The above picture was taken in an Aramco compound in the country; it is no coincidence that it bears a frightening resemblance to the view from my brother’s backyard in Coral Springs, Florida. The nationalization of Aramco was uncontentious, favorable to the companies, and served American goals. Only twice have Saudi and American interests substantially diverged: briefly in 1973 when the Saudis embargoed oil shipments, a stand they rapidly reversed; and substantively in the past two decades with Saudi financing for Islamic radical movements. And to be fair, the Saudis have been increasingly helpful in combatting terrorist finance, although their best is not always that good. “We are trying, but if money wants to go it will go,” said Prince Mohammed bin Nayef in May 2009.

The break over Egypt, though, portends a deeper split. The U.S. has decided that it really does not get much from keeping Mubarak in power. The alternative is not really that scary, and might even be better. Riyadh has decided something different. Now, I do not think that Riyadh is going to get what it wants here, but if you want to look for signs of the American empire cracking at the seams, this is a pretty good one.

A second takeaway is that Saudi Arabia doesn’t really care about Islamic extremism. Of course, we knew that already.

How much has the U.S. given to Mubarak over the years?

 So asks my old high school buddy, Omar Wasow. Below, in millions of constant 2009 dollars, is the answer.

The U.S. strategy in Egypt, then, is obvious. It is hard to force a government to resign, no matter how much money we give it. That is why the U.S. didn’t bother to threaten the Micheletti coup government in Honduras. The general lesson should be obvious. (“Stop receiving our money or we’ll stop giving you money!”) But it is not as hard to change the behavior of actors within the government. In that vein, the Obama Administration informed the Egyptian military that they will lose the gravy train and go down with the rest of the ship if they fire on the protesters.

There are rumors that we are now taking a harder line with Mubarak. That would also make sense, but it is not something a weak and weakening imperial government wants to try with an autonomous satrapy unless it was sure that the satrap had lost support of key actors within his or her own government. (Personally, I would be reluctant to do it: people often dig in their heels when they feel like they are being threatented.) Not that I’m suggesting that the United States is an empire, let alone a weak and weakening one, or that Mubarak is an American satrap ...