Archive for the ‘Middle East’ Category

Israel: IDF aids Haitian victims

January 22, 2010
A birth this week in Haiti at the field hospital of the Israel Defense Forces.  Source: IDF
A birth this week in Haiti at the field hospital of the Israel Defense Forces. Source: IDF

Israel has a comparative advantage in medical care and specifically in treating trauma victims, which comes not only from its advanced human capital, especially in technology and health care, but also from vast experience treating victims of terror and war.  Read the NYTimes article  published yesterday on the subject.  Israel has been treating Haiti’s earthquake victims in its mobile tent hospitals set up in the last week in the impoverished Caribbean nation. 

The Times article discusses the ambivalence Israelis are experiencing, concerned about how they treat Palestinians in Gaza, while offering help to Haitians.  There is a difference.  Rockets have rained down on Israeli towns from Gaza for years, where Hamas was elected to office not long ago and where IDF Staff Sgt. Gilad Shalit, 23 years old, has been held hostage for over 3 1/2 years.  Read the hate for Israel contained in the Hamas Covenant to understand the difference between helping Haitian earthquake victims and maintaining a blockade of the Gaza Strip.  This document has been translated and published at the Yale Law School’s Avalon project, where you can go as well for a fairly full documentary history of the Middle East conflict (1916-2010).

Israel’s economy: weathering the storm

November 10, 2009
Source: Google Images
Source: Google Images

Much news and commentary you hear about the State of Israel has to do with geopolitics and the Arab-Israeli conflict (see my colleague Ben Moscovitch’s blog on this site for a nice selection.)  Settlements, will Abbas run or not, Iran’s plans to wipe Israel off the map, Israel’s thoughts about taking military action against Iran, the Goldstone Report on the war in Gaza, films about the war in Lebanon, and on and on. 

Not that this hyper-news about Israel is not important and interesting.  But, let’s step back and look at Israel from a “rising power” perspective — half highly indebted socialist country/half cutting-edge hi-tech and health sciences capitalist upstart.  Its economy has proven itself resilient to the intifada, to the tech bust of nearly a decade ago, and now to the US-led global meltdown. 

How so?  It’s about policy, stupid.  Sound economic policy, begun in the 1980s with a classic monetary stabilization program that reduced inflation, and deepened only a few years ago, by none other than Benjamin Netanyahu, as finance minister, with his Thatcherite restructuring of the economy (e.g., increasing the labor force participation rate by creating incentives for the religious to work) and his shift to a rules-based fiscal policy.  Israel still has a high government debt burden — above 80% of GDP.  But that is down from above 100% not long ago.  Meanwhile the rest of the world has caught up to Israel’s debt levels (with the U.S. now surging higher). 

On the external front, the country couldn’t look better — $60 billion in foreign exchange reserves, a current account surplus, and “net external creditor” status, that is, Israel’s claims on foreigners exceed foreigners’ claims on Israel (oh, how the U.S. would love to have that balance sheet!)

So, in spite its modest size, constrained by the country’s small population, the Israeli economy dwarfs those of many of its much poorer and poorly run neighbors.  Have a look at the Fitch press release below referencing a recent report on Israel and its sovereign credit outlook.

Fitch Affirms State of Israel at ‘A’/’A+’; Outlook Stable   
06 Nov 2009 8:22 AM (EST)

Fitch Ratings-London-06 November 2009: Fitch Ratings has today affirmed the State of Israel’s Long-term Foreign and Local Currency Issuer Default Ratings (IDR) at ‘A’ and ‘A+’ respectively with Stable Outlooks. The Short-term Foreign Currency IDR is affirmed at ‘F1’ and the Country Ceiling at ‘AA-‘.

“Israel has fared better than many other small, open economies in the recent global economic and financial downturn, suffering only a mild recession compared to rated peers in Europe and Asia,” says Paul Rawkins, Senior Director in Fitch’s London-based Sovereigns team. “Nonetheless, the downturn has exposed Israel’s key vulnerability to shocks, namely a high public debt ratio that looks set to exceed 80% of GDP in the wake of wider fiscal deficits in 2009-10.”

Fitch says an improved macroeconomic policy framework, coupled with structural reforms since the last recession in 2001-02, laid the foundations for strong growth in 2004-08, in line with the ‘A’ median of 5%, rendering the economy markedly more resilient to shocks. With the exception of Bahrain, China and Poland, Fitch expects Israel to be the only country in the ‘A’ range to escape an outright recession in 2009. This performance is attributed largely to aggressive monetary and exchange rate policies, aided by a relatively trouble-free banking sector and an absence of asset price bubbles. Structurally, Israel’s high-tech manufacturing and services sectors have proved unexpectedly resilient to declining global investment demand, presaging a near record current account surplus in 2009.

Israel’s high public debt ratio remains the key constraint on its sovereign ratings. The adoption of rules-based fiscal policy in the wake of the last recession has served Israel well; limits on the growth of public expenditure and a ceiling on the state (i.e. central government) deficit facilitated a contraction in general government debt to 78% of GDP at end-2008 from a peak of 100% in 2003. Even so, this ratio remains high relative to the peer group median of 37%, although it is not the most extreme (‘A-‘ rated Greece exceeds 100% of GDP). Moreover, considering the mildness of its recession and an absence of financial sector-related support, the current external shock has taken a heavy toll on the public finances, chiefly on the revenue side. Fitch expects Israel’s general government deficit to widen to 6%-7% of GDP in 2009-10, on a par with rated peers Malaysia and the Czech Republic, which have experienced much steeper recessions, while pushing general government debt up to over 84% of GDP by end-2010.

While Israel’s experience with fiscal rules has been mixed, the current framework has entrenched fiscal discipline and together with signs of a strong economic recovery, suggests Israel’s powerful public debt dynamics could reassert themselves by 2011, forestalling any further deterioration in the public debt/GDP ratio. The government envisages a sharp narrowing in the state deficit to 3% of GDP in 2011 (from 6% in 2009), but still hopes to adhere to tax cuts over the medium term. Fitch expects some revision to the fiscal rules, with greater prominence being given to the Maastricht public debt/GDP ratio of 60% of GDP. From a rating standpoint, a positive rating action would require a decline in the debt/GDP ratio to a level nearer to the ‘A’ median. Conversely, a prolonged rise in the debt/GDP ratio and/or sustained fiscal easing would prompt a negative rating action.

Externally, the Government of Israel became a net external creditor for the first time in 2008, although it still falls short of ‘A’ norms on this measure. Burgeoning international reserves – these have more than doubled to USD60bn since end-2007 – have been the key factor behind this status change for the sovereign, facilitated by a strong current account surplus and buoyant net capital inflows. The economy as a whole also passed a new milestone in 2008, registering a surplus of external financial assets over liabilities for the first time. Israel expects its standing on the international stage to be further enhanced by OECD membership in the near future.

Contact: Paul Rawkins, London, Tel: +44 (0) 20 7417 4239; Richard Fox, +44 (0) 20 7417 4357

Media Relations: Peter Fitzpatrick, London, Tel: + 44 (0)20 7417 4364, Email:

Additional information is available on

Turkey: the harder they come…

October 7, 2009
Turkish Prime Minister Recep Tayyip Erdogan  Source: Google Images
Turkish Prime Minister Recep Tayyip Erdogan Source: Google Images

Sovereign risk in Turkey was once talked about in the same breath as Brazil’s.  Not so anymore.  One is going hat in hand to the IMF, likely to get $45 billion in the coming weeks; the other is largely self-financing.  What went wrong in Turkey?  Always keep your eye on the current account deficit, folks, even when Wall St. analysts tell you its nothing to worry about because it’s financed by FDI, or some such Bernanke-esque bunk.  Current account deficits mean borrowing from abroad.  And that means vulnerability.  Turkey went into the global crisis with a 5-6% current account deficit, while Brazil went in with small surpluses.  Keep your eye on America as well and its sovereign credit risk — current account deficits there have been nearly halved to 2-3% from 5-7% a couple of years ago, largely due to the US recession.  But the U.S. still can’t kick its foreign borrowing habit, Obama’s protectionism notwithstanding.  Likewise, watch out for “twin deficits.”  That’s when government deficits move in tandem with current account deficits (the former often driving the latter).  The US has these, as does Turkey (where government deficits are in the range of 5-7% of GDP, versus Brazil’s 3-4%).  Turkey’s overall government debt burden remains modest at under 50%, versus Brazil’s near-70%; however, Brazil’s government debt burden is headed down, while Turkey’s is rising.  Hence, Fitch moved Brazil up to investment grade not long ago, while Turkey languishes at BB-.  They both were BB- only a few years ago.  Sometimes the rating agencies get it right, even though it often takes them some time to do so.

So, the Turkish prime minister shows up hat in hand at the IMF’s doorstep, while President Lula’s Brazil is considered a rising power.  Have a look below at the CreditSuisse report from today on Turkey’s negotiations with the IMF.  Deputy Prime Minister Babacan, whom I met with in the past and perceive as smart and wily, is thankfully in charge of these negotations.

From CreditSuisse:

Berna Bayazitoglu
+44 20 7883 3431
Prime Minister Erdogan denounced yesterday the claims in the local media that the IMF has offered a sizable financing package to the Turkish government which it cannot turn down. As we reported in the Emerging Markets Economics Daily yesterday, Erdogan told the Wall Street Journal on Monday (5 October) that the Turkish government has resolved one of the sticking points with the IMF, namely the IMF’s request for an independent tax revenue administration, and added that “he would like to see a new IMF program for Turkey agreed soon.” This was the most upbeat assessment that Erdogan has offered on the subject in a long while. Looking for an explanation for the change in Erdogan’s tone about an IMF agreement, the Turkish media claimed yesterday morning that the IMF might have offered a large financing package to Turkey (amounting to $45bn) which Erdogan cannot turn down. However, at a reception later in the day, Erdogan denounced local media stories that the IMF has made a new offer to Turkey.

Nevertheless, Erdogan’s statements in the Wall Street Journal add strength to the possibility that the government might invite an IMF mission to Turkey soon. As we noted in the Emerging Markets Economics Daily yesterday, speaking at various conferences in the last few days at the IMF/World Bank annual meetings in Istanbul and somewhat in contradiction to Erdogan’s statements in the Wall Street Journal, Deputy Prime Minister Babacan (who is the senior policymaker in charge of policy discussions with the IMF) had said that the discussions on the tax revenue administration and local governments’ spending were still continuing and that the IMF was studying the government’s medium-term economic plan and fiscal program.

The Statistics Office will release the industrial production data for August tomorrow. We forecast that industrial production was down 4.7% yoy in August, slowing from a contraction of 9.1% yoy in July. Our forecast is more optimistic than the consensus forecast (according to Bloomberg) of a 5.2% yoy contraction.

Iraq: Just asking the question…

August 19, 2009
Iraqi Foreign Ministry after a bomb attack Wednesday.  Source: NYTimes Iraqi Foreign Ministry after a bomb attack Wednesday. Source: NYTimes

The question is:  Was it the right for the United States to announce its withdrawal from Iraq in order to focus on the war in Afghanistan? 

See this link for a video on the bomb attacks in Iraq.  Attacks in Iraq. Source: NYTimes

Arguments on both sides of the issue are convincing.  Obama got elected by single-mindedly attacking Bush’s policy on Iraq including, until recently, the “surge,” which dramatically reduced internecine violence in that country.  Now, just as he must do on health care reform, the President has to follow through on his election pledges or and others on his left flank will never forgive him.  Yet McCain this time last  year said the job in Iraq wasn’t finished, and the Democrats took his “one hundred years” quote out of context to convince the American people that McCain planned on staying in Iraq for, well, a hundred years.  Now, Iraq may be spinning out of control again, and it may be because of a too-precipitous pullout of American forces.  Barack Obama made the point last year on the campaign trail that, unlike Hillary Clinton, he has good judgment, never supporting an invasion of Iraq, even making a speech to that effect in the Illinois state legislature, where grandstanding on the issue had no policy effect at all.  Putting aside whether we should have invaded Iraq to rid the world of this dictator with bad intentions if not bad weapons, it is a legitimate debate whether we should wind down Iraq, a country central to stability in the Middle East — given its location, ethnicity, and oil wealth, and wind up Afghanistan, arguably a mountainous backwater that has bled imperialists from Russia to Britain to the United States for centuries.  True, instability in Afghanistan triggers instability in nuclear-armed Pakistan.  I said there were good points on both sides of the issue.  I merely wish to get under the teflon a little and question the wisdom of President Obama’s foreign policy choices.

Russia-Turkey deal: the Czars would be jealous

August 7, 2009
Peter the Great sought a warm-water port on the Black Sea.  Source:
Peter the Great sought a warm-water port on the Black Sea. Source:

The NYTimes published an article today detailing a set of energy deals concluded between Russia and Turkey in Ankara, with Prime Ministers Putin and Erdogan present.  The deal was with Russian energy giant Gazprom, allowing state-owned Gazprom access to Turkish territorial waters, a benefit Russian czars and party chairmen since Peter the Great (pictured above — who ruled Russia from 1682-1725) have sought by force (or threat of force).  Now, in true “Western” fashion, Russia, Inc. is signing a business contract that provides benefits to Turkey as well.  Turkey desires to become an energy hub and has obtained a Russian commitment to build a pipeline across its territory.

The Times article explains how Western interests have competed with Russia for energy agreements with Turkey in order to avoid Russian dominance of the Eurasian energy pipeline system, and the consequent vulnerability of energy-hungry Western Europe.  Russia has used pipeline cutoffs before for political purposes, e.g. with the Ukraine.

Turkey for its part, with a less pro-Western government than heretofore, headed by the moderate Islamist AKP party, probably does not mind playing what the Brits over a century ago called, “the Great Game,” or the Great Power competition in the East.  Has Vlad the Great bested Peter??

Don’t Forget Nigeria…

August 6, 2009

…Africa’s second largest economy and a potential rising regional power.

Nigeria, with about $215 billion in GDP last year, follows South Africa and leads Egypt in Africa in terms of the size of its economy, but lags both countries in wealth per head, with roughly $1350 of GDP per capita.  Nigeria relies very heavily on oil exports to fuel its economy.  Recent high oil prices have provided this classic developing country — with its poverty, mineral wealth, political instability and corruption, as well as reforms and emerging institutions —  with strong GDP growth and a strong external balance sheet (foreign exchange reserves in excess of government liabilities to foreigners).  With 155 million people, 250 ethnic groups, many languages, and a 50%-40% Muslim-Christian divide (view map below), this simmering rising power in West Africa is one to watch, if not next year, then some time this century.  Check out the CIA Factbook on Nigeria.

Of note is the ongoing conflict between the government and Islamic militants, putting Nigeria right smack on one of Huntington’s fault lines between civilizations.  See this article on recent unrest

Nigeria: At the Faultline Between Islam and Christianity  Source: Nigeria: At the Faultline Between Islam and Christianity Source:

Of interest as well is Fitch’s report on Nigeria, published last month, when the agency affirmed the country’s sovereign ratings.  See below.

“Fitch Affirms Nigeria at ‘BB-‘/’BB’: Outlook Stable   

03 Jul 2009 6:30 AM (EDT)

Fitch Ratings-London-03 July 2009: Fitch Ratings has today affirmed the Federal Republic of Nigeria’s Long term foreign and local currency Issuer Default Ratings (IDR) at ‘BB-‘ and BB’ respectively. The Outlook is Stable. At the same time, Fitch has affirmed the Short-term foreign currency IDR at ‘B’ and the Country Ceiling at ‘BB-‘.

“Nigeria’s strong sovereign balance sheet is the main support to its ratings. Although weakened by a major reserve loss since September 2008, its balance sheet still stands out amongst its rating peers,” says Veronica Kalema, a Director in Fitch’s Sovereign Department.

“Earlier banking sector consolidation also resulted in a well-capitalised banking system, which together with Nigeria’s strong overall and public net external creditor position and low government debt, have helped cushion the economy against the collapse in oil prices, the global recession, a reversal of capital flows and the banking sector’s exposure to a sharp fall in equity prices. With some signs of global stabilisation now apparent and a recovery in oil prices, Nigeria looks likely to weather the shocks,” adds Kalema.

The government moved swiftly to base the 2009 budget on a lower benchmark oil price of USD45/barrel (Fitch has a forecast of USD55/barrel for 2009 and the oil price is currently around USD70/barrel). Nevertheless, oil production shortfalls below the budgeted 2.3 million b/d continue to present a serious revenue challenge. However, this will be offset by the higher- than- budgeted oil price, reduced disbursements from the Excess Crude Account (ECA) and likely under-execution of the Federal Government (FG) budget. The domestic debt market provides financing flexibility for the FG and a few sub-nationals that have started to tap it to fund development spending. Nevertheless, sub-nationals face a serious revenue squeeze, and there is a risk that this will result in further disbursements from the ECA. Fitch forecasts small budget deficits at the FG and consolidated government levels and continuing low public debt of 12% of GDP in 2009, well below the ‘BB’ median.

The Central Bank of Nigeria (CBN) at first used reserves to support the naira in the face of lower oil revenues and capital outflows in the second half of 2008. Amid some confusion as to its policy goals, which heightened speculative pressure, CBN starting in late November eventually engineered a roughly 20% depreciation and stabilised the market, albeit by resorting to a temporary reversal of foreign exchange liberalisation. The naira is now at a more realistic rate consistent with lower oil prices and restrictions have begun to be eased. Despite a significant depletion of reserves by 28% to USD44.8bn in May 2009 since the peak of USD62.1bn in September 2008, low foreign liabilities of both the public and private sectors mean that Nigeria’s external balance sheet remains robust and is still one of the strongest in the ‘BB’ category. The recent increase in oil prices, if sustained, should slow the pace of reserves depletion. However, the reserves cushion has been eroded and any renewed bout of lower oil prices would likely trigger further downward pressure on the exchange rate, accelerate reserves depletion and is likely to bring negative rating action.

Unlike other countries in the region, Nigeria’s banking system has been under strain due to margin loan exposures to the sharp fall in equity prices. The loss of confidence together with lower oil revenues has also resulted in a liquidity squeeze on the money markets which, despite measures to inject liquidity, is still not fully alleviated. Although the system’s high capitalisation means that it can absorb the bulk of the losses without any support from the sovereign, the problems have exposed severe weaknesses in banking regulation and risk management. These will be the key focus of the new central bank governor, Lamido Sanusi, who as a former banker is well-qualified to address them so as to restore confidence in the financial system so that it can better support real sector development.

Nigeria’s ratings are hampered by data weaknesses and lack of transparency in several key areas including public finances, the balance of payments, international reserves and the banking system. Improvements are essential to enhancing creditworthiness.

Following an average of 6%+ growth in 2004-2008, in 2009 growth will slow to around 3%, reflecting much lower fiscal spending, private credit growth, remittances and oil prices/production. However, this will be in line with regional growth and much higher than the ‘BB’ median. Reforms and investment in infrastructure have slowed under the current administration, although there are now signs of revival. Niger Delta (ND) insecurity has further reduced oil production this year and is an ongoing rating constraint. More broadly, it has adverse implications for the government’s power and gas sector strategies necessary for further diversification and raising Nigeria’s growth potential. Improvements in the ratings will also depend on sustaining non-oil growth and raising per-capita income by addressing infrastructure through investment and reforms.

A copy of the sovereign report on Nigeria will be available shortly on Fitch’s website

Contact: Veronica Kalema, London, Tel:+44 (0) 20 7417 6336; Richard Fox, +44 (0) 20 7417 4357

Obama: Too busy for Israel?

July 28, 2009

Netanyahu and Obama smile for the cameras.  Source:  Google Images

Great op-ed by Aluf Benn, diplomatic editor/correspondent for Haaretz, in today’s NYTimes.  He asks, Where has Obama been on Israel?  Why hasn’t he spoken to Israelis directly, the way he has addressed everyone else from Ghanaians to Egyptians, Europeans to Latin Americans?  For sure, he is really busy, probably busier than any other president since FDR.  As he himself has emphasized, there is the bank bailout, the trillion dollar fiscal stimulus, two wars (one to wind down, one to wind up), a failing state (Pakistan), and health care reform (is that really necessary right now?), not to mention the controversy over the arrest of a Harvard professor who is a friend of his.  Yet he has said he is the one who can untie the Gordian Knot of the Arab-Israeli conflict by the power of his personality and the credibility he has in the Muslim world.  Well, Aluf Benn argues that he is losing credibility with Israelis, a key player in the conflict.  Moreover, he points out something important and elusive to most world leaders.  The difference between playing to American Jews and playing to Israelis.  You don’t have to go on and on about the Holocaust and link it to the Arab-Israeli conflict to placate Israelis.  Just visit Yad Vashem and then deal with the here and now.  American Jews are more interested in politicians reiterating their angst about the Holocaust than are Israelis.  Israelis prefer to hear about a plan to deal with Iran’s emerging nuclear weapons capability, about Hamas rockets in the south and Hezbollah rockets in the north, and about Israel being recognized as a Jewish state by the Muslim world.  Have a read…

Karim Sadjadpour on Iran…

June 17, 2009

Karim Sadjadpour of the Carnegie Endowment on CNN this morning.

Karim Sadjadpour of the Carnegie Endowment was on CNN this morning analyzing the situation in Iran of late (see below).  Which way the Iranian Revolutionary Guard Corps and the paramilitary Basij will turn in this standoff will be critical, as will the staying power of the protestors in the coming days.  Note Sadjadpour’s article that I embedded in an earlier post on Iran as well.  Very good reading on the man with difficult decisions to make, Supreme Leader Khamenei…

From CNN’s American Morning with John Roberts:

John Roberts: Where do you see this ending?

Karim Sadjadpour: It’s difficult to say, John. A lot of it depends on what the opposition leaders decide they want to do. Certainly there’s a tremendous sense of outrage in Tehran. Not only in Tehran, throughout the country there’s a tremendous sense of injustice that these young people have. At the same time, it’s a country which endured an eight-year war with Iraq. People are allergic to the prospect of further carnage and bloodshed and violence. But at the moment, I think there’s truly a sense of outrage and I see these protests continuing.

Roberts: The Iranian Revolutionary Guard Corps (IRGC) and the government have told people to stay inside. The IRGC is saying if you put up certain materials on blog sites you could face legal charges. How big of a role is the Revolutionary Guard Corps and this paramilitary organization, the Basij, playing in trying to tamp down these protests?

Sadjadpour: They’re playing a definitive role. But what’s been amazing is they haven’t dissuaded people from going in to the streets. Historically, when the regime has announced that the Basij and the Revolutionary Guard are authorized to use force to shoot people, that will quell the protests. But so far, we haven’t seen the protests really quelled. The other day there were several hundred thousand people in Tehran. And it just gives you an idea of how outraged people feel that they’re willing to go out in to the streets and risk their lives.

Roberts: And this ruling Guardian Council, which has said it will recount certain parts of the election. Of course, Moussavi and his supporters are calling for a new election. How far do you think they will go in that? Are they playing for time here, hoping all of the protests will die down and eventually people will get tired of going out in the streets and accept the results of the election? Or might this actually lead to a new election? Can they resist the will of the people?

Sadjadpour: The Guardian Council is not like our Supreme Court. It’s not an objective entity. It’s essentially under the hegemony of Ayatollah Khamenei, the supreme leader. And I think Khamenei deferred to the Guardian Council simply as a tactical move to buy time. But Khamenei may be faced with a dilemma and it may be one day soon, whether to sacrifice President Ahmadinejad or sacrifice himself. Because it’s really gotten to the point where people are calling for the head of Khamenei. And this is unprecedented in the last 20 years.

Roberts: Khamenei has been supreme leader since 1989. This is, as you suggest, all about his survival as well. Right now he’s hitched his wagon to Ahmadinejad who’s got the loyalty of the Revolutionary Guard Corps and the Basij. Can you foresee any circumstances under which he might, for his own survival, throw Ahmadinejad overboard?

Sadjadpour: I think it’s certainly within the realm of possibilities. And I would argue, John, Ahmadinejad doesn’t necessarily have the loyalty of the Revolutionary Guards and the Basij. I was based in Iran for a couple of years and I spoke to many of these young people within the IRGC and Basij who recognize that this “death to America” culture of 1979 is obsolete today and Iran will never achieve its full potential unless there’s reform made in the political, economic, social realm. So I think we shouldn’t take for granted the fact that all of the regime’s shock troops are necessarily going to side with President Ahmadinejad.

Roberts: What will it take to initiate that huge fracture? As we see now, the Guard Corps and the Basij are on the side of the government.

Sadjadpour: We have to get inside the head of Ayatollah Khamenei…his world view is very clear. When you’re under siege, never compromise. Because if you compromise it’s going to project weakness. If he orders a mayor clampdown, I think we may start to see fissures within the regime’s shock troops.

Netanyahu’s Speech: Coarse, but airs Israel’s point of view

June 15, 2009

Benjamin Netanyahu, Israeli Prime Minister   Source:

Well, actually, Israel has several points of view.  The one expressed by Netanyahu is just one of them.  Nevertheless, in the “dialogue of civilizations” launched by expert bridge-builder Barack Obama in Cairo earlier this month, when he raised the Arab-Israeli conflict as an obstacle to dialogue, one voice was not heard.  Israel’s.  It’s like negotiating an end to the global financial crisis without inviting China.

Benjamin Netanyahu is no Barack Obama.  He is no Shimon Peres.  He lacks their diplomatic skill.  I have had extensive meetings with him on a number of occasions, and found him to be a man enthused with his own self-importance.  Just like Barack Obama and Shimon Peres, but a lot less charming.  What a discovery?  Political leaders are vain.  Yet Netanyahu proved an effective leader as Israel’s finance minister, freeing up the economy to realize its potential.  Can he be an effective and visionary prime minister his second time around?  This speech falls short of the mark.

What Netanyahu did in his speech yesterday (see text) was to say, Wait a minute!  Listen to our point of view! 

Obama made efforts to recognize the Arab narrative in his speech in Cairo.  He recognized the Jewish narrative in part by discussing the Holocaust.  Netanyahu gave voice to another part of the Jewish narrative – the claim to the land in Israel.

But the Arab reaction has been sour.  Mubarak is angry, saying that the requirement that Palestinians acknowledge Israel as a Jewish state, a cornerstone of Netanyahu’s speech, “scuttles the chances for peace,” and that no one in Cairo will answer the phone when Netanyahu calls.

It’s not a very radical idea.  Given the Arab insistence on the “right of return” of Palestinian refugees to Israel, an act that would destroy Israel as a Jewish state, it’s not asking a lot.  The Arab Peace Initiative of 2002, which Obama and some Israeli leaders have applauded, called for a just solution to the refugee problem, according to U.N. General Assembly Resolution 194, which many insist calls for a right of return (“Resolves that the refugees wishing to return to their homes and live at peace with their neighbours should be permitted to do so at the earliest practicable date…”)

Arguably, Obama’s conciliatory speech in Cairo opened the door for this sharp Arab reaction to Netanyahu’s speech.  Bush pushed the Arabs to accept Israel’s narrative; Obama is pushing Israel to accept the Arab narrative.  Obama may have inadvertently created huge expectations on the Arab street for Israeli concessions.

There is a deal to be had in the Arab-Israeli conflict.  But both sides have to make concessions.  The deal is:  the dismantling of most West Bank settlements in exchange for Jerusalem.  Israel gets sovereignty over Jerusalem – because no cities, including Berlin, remain divided over the long term – with substantive measures to ensure that Muslim/Palestinian interests in Jerusalem, especially around the holy sites, are overseen by Muslims and Palestinians, much as the Ottomans allowed the French and Russians to oversee their holy sites in centuries past.  In exchange, Israel dismantles most West Bank settlements, forcing tens of thousands, perhaps over a hundred thousand Jewish people to relocate inside Israel behind agreed borders.  As George Bush agreed to, some Israeli settlement blocks, major cities in place for over forty years, generally in and around Jerusalem and very close to the Green Line, perhaps representing some eighty thousand people, will remain as part of Israel.  The Palestinians get a viable, contiguous state in the West Bank with transportation links to Gaza.

That is a deal in which both sides make concessions.  The Arab Peace Initiative demands one-sided concessions from Israel in exchange for the Arabs agreeing not to make war.  It’s like Vito Corleone making you an offer you can’t refuse.

The only problem with the Jerusalem-for-Settlements idea is that Palestinians, Arabs and Muslims will never go for it.  It’s become too emotional a part of their narrative.  Jerusalem is the third holiest city of Islam.

Putting aside such discussions of what is fair, the key question in all of this is, Whose side is time on?  Given demographic realities, it seems that time is on the Arab/Muslim side.  Peres and others on Israel’s left acknowledge this, which has underpinned their efforts to move quickly to a negotiated settlement.  The right in Israel emphasizes their neighbors’ weaknesses – economic and political — and argue that time is on Israel’s side, a potentially risky misconception. 

Netanyahu, spokesman of the right, basically said in his speech, Here is our position; now come to us.  He has adopted the Arab strategy:  stake out a hard line and let others begin concessions.  Netanyahu has stood up to Barack Obama, maybe not the last foreign leader to do so.  Read Jeffrey Goldberg for insight into how Mr. Netanyahu thinks.

Politics in Israel is dysfunctional, leaving that nation bereft of visionary leadership.  It takes so much effort to make and hold coalitions together there, that politicians have little time for policy making.  Political reform is needed, included raising the minimum for parties to be seated in parliament.  The religious parties must be folded into larger groupings.  If things remain as they are, Israeli leaders will miss opportunities, and for tiny Israel with so few friends in the world, this could be an existential threat.

Photo:  Benjamin Netanyahu, Israel’s Prime Minister.   Source:

Does the election in Iran matter?

June 14, 2009

Ayatollah Ali Khamenei, Iran's Supreme Leader   Source:


Iran remains divided between reformists and conservatives.  President Ahmadinejad “won” the election Friday, and hundreds of opposition leaders have been detained.  Emotions among Iran-watchers worldwide have been on a roller coaster ride, as hopes of a new era have been dashed.

Certainly, elections in Iran matter – the importance of nascent democratic institutions, even in a theocracy, should not be underestimated.  Still, all rivers of power in Iran converge and flow directly into the office of the Supreme Leader, Ayatollah Khamenei.  In making sense of the elections in Iran, the task is twofold:  one, understanding Khamenei and how the election fits into where he is taking Iran; and two, what is the outlook for Iran in a post-Khamenei era.  For these tasks, I recommend reading an article by Karim Sadjadpour, of the Carnegie Endowment for International Peace.

Iran is ruled by a small group of clerics, desperate to stay in power.  They have opened enough avenues of expression to channel social pressures, while retaining ultimate power.  They garner support from a segment of the populace (arguably a declining one) by appealing to the ideals of the Islamic Revolution and warning of foreign enemies, especially the United States.  And, they position loyal “clerical commissars” throughout the bureaucracy, maintaining informal control of formal institutions.  This give-and-take between the clerical oligarchy and the people they rule can become a game of chicken that the authoritarians in the end ultimately lose.

The Constitution of 1979, as amended in 1989, confers extensive powers to the Supreme Leader.  Sadjadpour says:

“ As Supreme Leader, Khamenei’s constitutional authority is unparalleled. He controls the main levers of state—the courts, military, and media—by appointing the heads of the judiciary, state radio and television, the regular armed forces, and the elite Revolutionary Guards. He also has effective control over Iran’s second most powerful institution, the Guardian Council, a twelve-member body (all of whom are directly or indirectly appointed by Khamenei) that has the authority to vet electoral candidates and veto parliamentary decisions.”

It is true that the Supreme Leader is chosen by and answers to the elected Assembly of Experts, headed by one-time ally and rival, former President Rafsanjani.  The Assembly is a body of 86 largely septuagenarian clerics, required to meet twice annually.  Assembly members are elected by the people to eight year terms; however, candidates come from a list prepared by the government.  So, in theory, Khamenei controls the body that can, in the end, dismiss him.  He likewise has a finger, if not a full hand, in many of Iran’s complicated and overlapping political institutions.

In addition to his formal powers, as the Constitutionally-sanctioned final interpreter of Islamic issues, the Supreme Leader has the potential for nearly absolute power.  As a consequence, the Iranian president has much less power than the Supreme Leader, executing policy and managing the bureaucracy.  Yet in practice, the president is the country’s front man, as we have seen so unpleasantly with Ahmadinejad, both because of Khamenei’s reclusive nature and the regime’s strategy of fostering a theological mystique about the man and the office.

Khamenei, a close disciple of Ayatollah Ruhollah Khomeini, remains true to the ideals of the Revolution.  He does so probably out of belief and as a strategy for survival.  The Iranian mullahs’ claim to legitimacy rests on their role in expelling foreign influence and cleaning up the corruption of the Shah.  They accomplished this through a return to Islamic piety.  Naturally, they keep sounding these themes to remind the impoverished Iranian public of the clerics’ rightful claim to power.  We shall see if this claim remains credible as time puts greater distance between the Iranian public and the Revolution.  (Regarding Iran’s mistreatment over the years at the hands of the great powers, especially the British, see Ken Pollack’s book, The Persian Puzzle.)

Khamenei is said to lack both the charisma and clerical legitimacy of his predecessor.  He was only made an ayatollah shortly before Khomeini designated him as his successor.  There is a dissident group of clerics in Iran that does not recognize his legitimacy.  Even though he has been in power twice as long as Khomeini, his shortcomings relative to the father of the Iranian Revolution can explain his behavior.  For example, even if he wanted to (and it is likely he does not), he could not become an Iranian Gorbachev or F.W. DeKlerk.  He must placate right-wing clerics by continuing to condemn the United States and Israel, and by maintaining strict Islamic piety, including the mandatory veil (hejab) for women.

Khamenei’s insecurity as leader has also necessitated a balancing of clashing interests in Iran.  First, by supporting Presidents Rafsanjani and Khatami from 1989-2005, Khamenei countenanced an opening of Iran to the world — while never compromising on the regime’s hostility to the United States and Israel, and a modest loosening of restrictions on social practices.  Later, as a result of the popularity of the reformers, he swung back to the conservative “principalists,” epitomized by the pious, young engineer and mayor of Tehran, Ahmadinejad, who ensured a re-emphasis of the ideals of the Revolution.  This way he kept his rivals off balance, facilitated modest pragmatism both domestically and internationally (which by the way, ensured progress on the nuclear weapons program), reminded Iranians not to abandon key tenets of the Revolution, and allowed a release of pent-up social tension.  His swing back to orthodoxy was largely domestically driven, however, the advent of Bush on the international stage likewise facilitated this swing.

As for potential successors to Khamenei, the outlook is unclear.  Ahmadinejad, as a layman, is precluded from becoming Supreme Leader.  However, lest we forget that Khomeini had to amend the constitution to allow Khamenei to succeed him, the Assembly could amend the Constitution again.  Rafsanjani is five years older than Khamenei.  There are both conservative and reformist ayatollahs in the wings.  Sadjadpour’s article discusses some scenarios. 

What is clear is that authoritarian regimes can ignore popular pressure for participation only by delivering the economic goods. This is what we have seen in China over the last three decades, and in Russia more recently.  However, political monopoly can coexist with economic diversity only so long, especially once economic growth and the distribution of wealth falter.  Iran’s economy is state-dominated and creaking, with billions of petro-dollars going to food and energy subsidies, buying off the populace, especially the poor.  As in Russia, Venezuela and other populous oil exporters, as long as oil prices are high, the authoritarian regime has time.  But, commodity markets rise and fall, as do governments.

What about Iran’s so-called democracy?  We should not dismiss the importance of formal institutions, such as Iran’s legislature, presidency and other elected bodies.  These institutions, though emasculated of real power, can ease a transition to a broader democracy, the way the Soviet Duma did with the fall of Communism.  Countries with arguably less-developed institutions, such as Saudi Arabia, where some 5,000 princes rule and its consultative assembly (majles) is very limited, should have a more difficult time transitioning to representative democracy.

Finally, what does the election mean for relations with the West?  First, the bad news.  Whether reformists or conservatives rule Iran, the nation’s determination to acquire a nuclear weapon will likely remain firm.  Self-reliance and freedom from foreign influence remain key pillars of the Revolution and of the Iranian narrative.  A nuclear weapon symbolizes a broad-based commitment of the Iranian nation to rising to great power status.

Sure, engagement would be easier with moderates.  Further, the probability of an acceptable agreement over the bomb, however low, is higher with the moderates.  And, the bomb is only one aspect of the West’s relationship with Iran, though arguably the most important.  Nevertheless, if the West really wants to stop Iranian acquisition of a nuclear weapon, nothing short of a boycott of oil exports would do the trick.

Sadjadpour says this about a policy of engagement with Iran:

“Any successful approach to engaging Iran must be tailored to take into account Khamenei’s central role in Iran’s decision-making process and his deeply held suspicions:

• Khamenei must be convinced that the United States is prepared to recognize and respect the legitimacy of the Islamic Republic and must be disabused of his conviction that U.S. policy is to bring about regime change, not negotiate behavior change.

• Khamenei will never agree to any arrangement in which Iran is expected to publicly retreat or admit defeat, nor can he be forced to compromise through pressure alone. Besides the issue of saving face, he believes deeply that compromising in the face of pressure is counterproductive, as it projects weakness and only encourages greater pressure.

• Successful engagement will require a direct channel of communication with the Supreme Leader’s office, preferably with Khamenei himself. He is wary of domestic rivals and will not take any foreign policy decision that may benefit Iran but risk hurting his own political interests. The Clinton administration’s unsuccessful attempts to downplay and bypass Khamenei and engage Khatami and the reformists in 2000 are a case in point.”

So, engagement is possible.  President Obama may have the magic to do it.  Nevertheless, engagement is unlikely to yield extensive results, especially regarding nuclear weapons.  And, the good news?  In spite of Moussavi’s loss this Friday (real or fraudulent), reformism is alive and well in the Islamic Republic.

 Photo:  Ayatollah Ali Khamenei, Iran’s Supreme Leader.  Source: