Friday, June 18, 2010

Faraway Countries

Apologies for the hiatus in blogging- caused by total lack of time.

To restart the thread I wanted to move away from UK politics- I have much to say, but I am still considering the best way to express my thoughts on the future direction of the Liberal Democrats. In any event the coalition is running smoothly for the time being, and there are more urgent issues to address overseas.

Political upheaval in the newly independent states of Central Asia do seem to make much impact in the minds of Western newspaper readers, but occasionally, the five Republics of Kazakhstan, Kyrgyzstan, Uzbekistan, Turkmenistan and Tajikistan do make occasional news, albeit in a rather tangential way. The average person may have heard of Kazakhstan, if only because Sacha Baron Cohen chose to make his generic East European a Kazakh- even though most Kazakhs are not European, but rather east Asian in appearance. Perhaps others may have heard of Uzbekistan because of the campaigns of Craig Murray who, when British Ambassador in Tashkent, denounced the brutal torture and murder of opposition figures by the regime of President Islam Karimov. However, I think that over the course of the next few years we are all going to be hearing a lot more about the region- since I fear that it is becoming a geopolitical crush point that will lead to extremely dangerous instability that will threaten the security of both the West and of China.

So how can these "faraway countries of which we know nothing" (copyright Neville Chamberlain) create such difficulties? After all, they are mostly extremely poor, landlocked (in the case of Uzbekistan, double-landlocked) and indeed are very far away. Of course the same could be said of neighbouring Afghanistan- and indeed that is the root of the problem. The ethnic composition of Afghanistan includes Tajiks (Ahmad Shah Massoud, the stalwart of the Anti Soviet resistance, was a Tajik) Turkmens and Uzbeks as well as Pashto, Hazara, Baluchis and other ethnic groups.

The mosaic of ethnic groups in Afghanistan is mirrored across the rest of central Asia: Uzbekistan has several cities, including fabled Samarkand, that are majority Tajik. Kyrgyzstan has a near 20% Uzbek minority, as does Turkmenistan, while there are Russian minorities across the entire region, including nearly a quarter of the population of Kazakhstan. In fact Stalin deliberately constructed the borders of his Asian satraps so that they did not coincide with actual ethnic boundaries: particularly in the Fergana valley, which is shared between Kyrgyzstan and Uzbekistan. The result is that when the former republics of the Soviet Union became independent, they were pretty fragile political units at best.

The politically fragile countries faced a series of challenges: extreme poverty, as the market of the former Soviet Union disappeared, and a flight of Russians back to the Russian Federation- many well educated workers, which the local economies could ill afford to lose. In Tajikistan, the country initially disintegrated into civil war, which was only ended with the emergence of a Russian backed strongman, Emmamoli Rahmon. Early hopes for the emergence of democratic states were dashed as the Soviet Nomenklatura stayed in power. All of the regional leaders, with the exception of Kyrgyzstan, had their roots inside the Communist Party, and the leaders of Kazakhstan, Uzbekistan and Turkmenistan made the transition form First Secretary of the local Party into Presidents of independent states almost seamlessly. The political culture has remained rooted in the corruption and brutality of the Communist era.

In fact the corruption in the region was fed by significant energy discoveries. The vast oil reserves of Kazakhstan have allowed the regime to build from scratch a new capital, Astana, in the middle of the huge land mass. Yet despite this wealth, the majority of Kazakhs remain dirt poor. In Turkmenistan, the wealth is based on giant gas fields- and the corruption of the regime reached truly baroque proportions. The President declared himself the "Turkmenbashi", the father of the nation, and renamed months of the year after himself and his mother. Perhaps fortunately he later succumbed to a massive heart attack and was replaced with a more conventionally authoritarian and corrupt regime. Uzbekistan has few resources, but is by far the most populous state in the region: and with significant Uzbek minorities in all its neighbours. Even still, there is a significant Tajik minority, which has been the subject of repression by the ruthless and brutal regime.

Overall, then the situation in Central Asia, poor, corrupt, and unstable is not a happy one. However there are yet further pressures which are undermining the already fairly grim outlook for the region. The impact of the "War on terror" as it applies to Afghanistan has only added to the political pressures on these unstable societies. Although the first President of Kyrgyzstan was not a Communist, indeed was regarded as a Liberal when first elected, he soon lapsed into the same authoritarian format as his neighbours. Eventually he was overthrown in the so-called Tulip revolution- which led to hopes that the other dictators might be forced to concede ground. However when a similar Liberal movement was formed in Uzbekistan, Karimov snuffed it out with ruthless brutality: a brutality that drew protests across the world. In Kyrgyzstan the domestic political turmoil became an arena for a struggle between the United States and Russia. The US needed a forward support base for its operations in Afghanistan, and the new government was happy to provide it. As the political pendulum swung against the Liberals, however, the Russians too demanded a base in the former Soviet Republic. The result is that the two countries both have bases within about sixty miles of each other. Neither claims to be interfering in the internal affairs of the host country, but the spies and spooks of both are much in evidence.

China is the immediate neighbour of the region, and has significant interests- not least reopening the old silk road trading route between China and Europe that existed for centuries and which the Chinese would like to develop as a faster way to access the markets of Europe.

Meanwhile individuals and groups loyal to Islamic fanaticism have also been using the region to wage a proxy struggle with both the West and the oppressive local dictatorships. The Fergana Valley, split so uncomfortably between Kyrgyzstan and Uzbekstan, has been a hotbed of groups which support the agenda of Al-Qaida. Now, as unrest grips Kyrgyzstan, the Uzbeks on the Kirghiz side of the border have come under attack by forces opposed to the new leadership in the Kirghiz capital, Bishkek.

So what can we conclude from this brief tour d'horizon?

That several great Power interests: The US, Russia and China, all have interests that collide in the region- as does India, which is wary of Pakistani influence anywhere. That the dire poverty- despite the potentially huge oil and gas wealth available- and oppressive politics are creating the conditions for a major radicalization of society- possibly in the direction of Islamic fanaticism. That the impact of the war in Afghanistan, including the lucrative heroin trade, is eroding the rule of law across the region.

In short, Central Asia now resembles the Balkan peninsula at the turn of the twentieth century: a hot bed of violent instability that could create the conditions for Great Power rivalry to lead to something worse.

I fear that until we know and understand the conditions in these far away countries, we will have learn our lesson the hard way: it is not just in Afghanistan that central Asia has the power to disrupt on a global scale.

Tuesday, June 08, 2010

Crying Wolf?

Market volatility, especially in equities and currencies, has once again become an issue. Questions over the stability of the Eurozone come on top of indications that the Chinese economy may be overheating. The sabre rattling by North Korea has only added to the sense of unease.

To an extent I see a certain folk memory of the Great Depression driving this unease. After the Wall St crash of 1929, a short term stability was restored, but over the next two years the original liquidity crisis, caused by so much stock being bought on margin, became a solvency crisis, as those wiped out in the crash gradually "restructured". In May 1931 the Austrian bank, Creditanstalt went bankrupt, and the crisis which had begun on Wall St. began to destroy the global banking system.

The current policy makers, led by Ben Bernanke, are close students of the history of the Great Depression. This is why they have been so aggressive in injecting liquidity and solvency where they think it is most needed.

The problem is that this has only moved the problem, not solved it.

Now governments will have to pick up the large bill for bank rescue, and the price of that is that they are being scrutinised more closely than ever. There is only so much demand for government bonds, and in the end governments too must live within their means, at least over the longer term. Whereas in the 1930s governments instituted a "beggar thy neighbour" policy: trade restrictions and high tariffs, now governments know that such protectionism does not work. The result is that they have to make cuts in their own expenditure: you might call it a "beggar thyself" policy.

In the end until the relative position between debt and the total size of the economy is controlled, then governments flirt with a meltdown in confidence. It is not so much what the governments actually do, but what they are expected to do, that is important. Thus both the UK and Germany are announcing dramatic cuts in expenditure. Given the fact that there have been some substantial revisions in the UK debt number which puts the country in a much better position, the cuts now announced may look a little swingeing. Nevertheless this is not about the detail: it is about trust and confidence. If the markets believe that the government can address the deficit in an orderly way, then they will retain their confidence in the system.

It is to the audience in the global markets that the coalition is addressing itself: and the rest of us will just have to be patient- and prudent.