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Vladimir Putin : Being strong: National security guarantees for Russia

June 25th, 2012 · No Comments · Geopolitics


Article by Prime Minister Vladimir Putin in Rossiiskaya Gazeta  February 2012

Article by Prime Minister Vladimir Putin in Rossiiskaya Gazeta

Being strong: National security guarantees for Russia

The world is changing, and the transformations underway could hide various risks, often unpredictable risks. In a world of economic and other upheaval, there is always the temptation to resolve one’s problems at another’s expense, through pressure and force. It is no surprise that some are calling for resources of global significance to be freed from the exclusive sovereignty of a single nation, and that this issue will soon be raised as a “matter-of-course.”
There will be no possibility of this, even a hypothetical one, with respect to Russia. In other words, we should not tempt anyone by allowing ourselves to be weak.

It is for this reason that we will under no circumstances surrender our strategic deterrent capability, and indeed, will in fact strengthen it. It was this strength that enabled us to maintain our national sovereignty during the extremely difficult 1990s, when, lets’ be frank, we did not have anything else to argue with.

Obviously, we will not be able to strengthen our international position, develop our economy or our democratic institutions if we are unable to protect Russia – if we fail to calculate the risks of possible conflicts, secure our military-technological independence and prepare an adequate military response capability as a last-resort response to some kind of challenge.

We have adopted and are implementing unprecedented development programmes for our armed forces and for the modernisation of Russia’s defence industry. All in all, we will allocate something like 23 trillion roubles for these purposes over the next decade.

Frankly speaking, there have been plenty of discussions regarding the size and timeliness of such sizable allocations. I am convinced that they fully correspond to the country’s potential and resources. And, most important, we cannot put off the goal of creating modern armed forces and of comprehensively strengthening our defensive potential.

It is not a question of militarising Russia’s budget. In effect, allocating these funds now means we are “paying our bills” for the years when the army and the navy were chronically underfunded, when we procured very few new weapons, while other countries were steadily building up their military might.

A smart defence against new threats

We need a response system for more than just current threats. We should learn to look “past the horizon,” and estimate threats 30 or even 50 years away. This is a serious objective and requires mobilising the resources of civilian and military science and reliable standards for long-term forecasting.

What kinds of weapons will the Russian army need? What technical requirements will be established for our defence industry? In effect, we need to develop a qualitatively new and smart system for military analysis and strategic planning, for prescribed approaches with prompt implementation by our security-related agencies.
So what is the future preparing for us?

The probability of a global war between nuclear powers is not high, because that would mean the end of civilisation. As long as the “powder” of our strategic nuclear forces created by the tremendous efforts of our fathers and grandfathers remains dry, nobody will dare launch a large-scale aggression against us.

However, it should be borne in mind that technological progress in many varied areas, from new models of weaponry and military hardware to information and communications technology, has dramatically changed the nature of armed conflicts. Thus, as high-precision long-range conventional weapons become increasingly common, they will tend to become the means of achieving a decisive victory over an opponent, including in a global conflict.

The military capability of a country in space or information countermeasures, especially in cyberspace, will play a great, if not decisive, role in determining the nature of an armed conflict. In the more distant future, weapons systems based on new principles (beam, geophysical, wave, genetic, psychophysical and other technology) will be developed. All this will, in addition to nuclear weapons, provide entirely new instruments for achieving political and strategic goals. Such hi-tech weapons systems will be comparable in effect to nuclear weapons but will be more “acceptable” in terms of political and military ideology. In this sense, the strategic balance of nuclear forces will play a gradually diminishing role in deterring aggression and chaos.

We see ever new regional and local wars breaking out in the world. We continue to see new areas of instability and deliberately managed chaos. There also are purposeful attempts to provoke such conflicts even within the direct proximity of Russia’s and its allies’ borders.

The basic principles of international law are being degraded and eroded, especially in terms of international security.

Under these circumstances, Russia cannot fall back on diplomatic and economic methods alone to settle contradiction and resolve conflict. Our country faces the task of developing its military potential as part of a deterrence strategy and at a sufficient level. Its armed forces, special services and other security-related agencies should be prepared for quick and effective responses to new challenges. This is an indispensable condition for Russia to feel secure and for our partners to heed our country’s arguments in various international formats.

Together with our allies, we should also strengthen the capabilities of the Collective Security Treaty Organisation, including the Collective Rapid Response Force. The CSTO is ready to fulfil its mission as a guarantor of stability in Eurasia.

The rapid development of its armed forces, nuclear and space industries, the defence industry, military training, fundamental military science and applied research programmes will remain a key priority in Russia’s future policies.

The army saved Russia

The break-up of a single unified country, as well as the economic and social upheaval of the 1990s, dealt a serious blow to all of the state’s institutions. The Russian armed forces also faced serious challenges. Combat training programmes virtually disappeared. Elements of the First Strategic Echelon were hastily withdrawn from Eastern Europe and then deployed in areas lacking infrastructure. The full-strength units that were the most combat-ready were disbanded because the country lacked funding to maintain them and for the construction of military cantonments, bases, training centres and housing.

Officers received no wages for months on end. To be honest, the country even had trouble feeding its military personnel. Tens of thousands of officers and soldiers were being discharged. The number of generals, colonels, lieutenant colonels and majors exceeded that of captains and lieutenants. Many defence industry companies stood idle, accumulated debt and lost their most valuable and unique specialists.

The media was harsh with the armed forces. Day after day, a few “activists” considered it imperative to “kick” and humiliate the army in the most painful manner and to defile everything linked with such concepts as the oath of allegiance, the call to duty, service to the Motherland, patriotism and this country’s military history. Actually, they believed that any day when this wasn’t done, was lost in vain. I have thought about this, and I still consider it a real moral crime and an act of treason.

We must always remember that the country owes a lot to the officers and men who preserved the armed forces in the extremely difficult 1990s against all odds, and who facilitated the combat readiness of military units in times of crisis. Those officers and soldiers fought whenever necessary. They lost their comrades and won. That’s the way things were in the North Caucasus, in Tajikistan and in other “hot spots.” These people preserved the army’s spirit and honour, as well as Russia’s territorial integrity and sovereignty. Moreover, they defended the safety of Russian citizens making it impossible to humiliate this country and to “write” it off.

Still, the country had to pay dearly for the mistakes made during the numerous and inconsistent reforms, which frequently stipulated nothing more than automatic reductions.

In 1999, terrorist gangs unleashed a direct aggression against Russia, a tragic situation. We had to put together a 66,000-strong military formation virtually piecemeal from combined battalions and separate detachments. Although the basic Russian armed forces had more than 1,360,000 personnel, they lacked full-strength units capable of accomplishing their objectives without additional training.

But the army accomplished its objective. Russian officers, sergeants and soldiers fulfilled their duty. They considered their oath of allegiance to the Motherland to be more important than their lives, health and well-being. And, most importantly, Russian society once again came to realise the simple truth that it must support its armed forces. We must strengthen them otherwise we will end up feeding a foreign army on our soil, or we will even become slaves to thugs and international terrorists.

On the road back, we first prioritised the most urgent projects. We reinstated the system of elementary social guarantees for military personnel and eliminated those ignominious wage arrears. Year after year, we spent increasingly more on the development of the Army, the Navy and the Air Force. This was in sharp contrast with those periods when high-priority projects lacked funding.

I remember in 2002 when the Chief of the General Staff proposed liquidating a base for strategic ballistic missile submarines on the Kamchatka Peninsula. Understandably, this proposal was motivated by dire circumstances. This would have deprived Russia of its naval presence in the Pacific Ocean. I decided against this. Due to the lack of the required budgetary funding, we had to ask private companies for help. I would like to thank them for that. Both Surgutneftegaz and TNK stepped up to provide the required funding for the base’s initial reconstruction. Budgetary allocations were later disbursed. Today, we have a modern base in Vilyuchinsk where next-generation Borei class submarines will soon be deployed.

Permanent readiness units comprising contract soldiers were established in every strategic sector. Self-contained formations were also deployed. It was one such formation that forced Georgia to sue for peace in August 2008 and who defended the people of South Ossetia and Abkhazia.

But previous experience proved that the potential for developing the military system inherited from the Soviet Union had become depleted. And by the way, what did that system look like? It comprised thousands of bases, depots, arsenals, numerous headquarters and cadre-strength units. In effect, all of that system’s elements were needed to deploy a mobilisation-type 20thcentury army with millions of officers and soldiers.

It was not possible to build up the military simply by adding personnel and equipment partly because it didn’t solve the inefficiency problem and partly because the country lacked both the human and financial resources. Most importantly, that system did not meet contemporary and long-term requirements. We could eventually have lost our entire military potential, and we could have lost our armed forces as an efficient mechanism.

There was only one way out. We had to build a new army. We had to establish a modern and mobile army which could maintain permanent combat readiness. This is a very difficult process affecting tens of thousands of people. The inevitable mistakes, grudges and disagreements are all linked with this process. This resulted in a negative public response, including from some military personnel. This reform is not being implemented by one or two people. A very complex institution, which had amassed many problems, is now being overhauled. Setbacks, excesses on the part of “executors,” inadequate informational support, the lack of proper “feedback” channels and the formalistic fulfillment of specific directives can all be called real problem areas in the ongoing reform. Our task is to understand these problem areas and to modify our decisions accordingly, while facilitating a system-wide transformation of the armed forces.

Achievements to date

There are no undermanned units in the Russian armed forces any more. The Army has over 100 combined and special brigades. These are full-scale military units with the requisite personnel and equipment. Their alert reaction time is one hour and they can be deployed to a potential theatre of war within 24 hours.

In the past, it took up to five days to prepare for combat readiness. The deployment and equipment of all the armed forces to wartime conditions could take nearly a year, even though most armed conflicts now last from a few hours to several days.

Why have we chosen the brigade as the main tactical unit? First of all, we have relied on our own experience in the Afghan and other wars, where mobile combat and assault groups reinforced with air and other support units have proved  more efficient than regiments and divisions.

The new brigades are smaller than divisions in the number of personnel but have a bigger strike capability, better firepower and support, including artillery, air defence, reconnaissance, communications, and so on. Brigades can operate both autonomously and jointly with other units. I admit that the quality is not perfect in all instances. We need to achieve the required standards in the near future.

The Russian army is getting rid of economic management, community service and other non-core and auxiliary functions. Military personnel now spend nearly all their time on combat training. This is the only way to turn new recruits into professional soldiers, since they are only conscripted for 12 months. Soldiers and officers should carry out their direct duty – intensive combat training. This  should also have a positive effect on discipline and law and order in the armed forces and will ultimately improve the prestige of conscription military service.

We are overhauling the system of military education. Ten research and education centres are being formed as a rigid vertical system where officers can improve their professional qualifications.  In doing this we are relying both on our own traditions and on global experience.

It is only by relying on military research that military and military technical doctrines can be effective and the General Staff can work efficiently. We must restore the lost authority of our military institutions and integrate them into the system of military education, just as we are doing in the civilian sector of the economy. Military science must have a decisive influence on the formulation of the goals of the defence industry. Competent procurement mechanisms  and the Defence Ministry departments responsible for military orders must ensure the efficient development of technical specifications for the design and production stages, as well as the specifications of weapons and military equipment.

There is no question that military research cannot develop properly without partnership with civilian science and without exploiting the potential of our leading universities and state research centres. Scientists must have sufficient information about the current status and development prospects of the army and weapons systems to be able to steer their prospective research in the right direction, and in particular to provide potential military uses for their products.

It should be added that the command agencies in the armed forces have been reduced by half. Four enlarged military districts – Western, Southern, Central and Eastern – have been established and have assumed command of the air force, air defence and naval forces. These are in fact operational and strategic commands. A new arm of the armed services, the Aerospace Defence Forces, became combat operational on December 1, 2011.

The Air Force now has seven large air bases with a powerful infrastructure. The network of airfields is being modernised. In the past four years we have upgraded 28 airfields, the first time this has happened in 20 years. Modernisation projects are planned at a further 12 military airfields.

We have greatly increased the capabilities of our early missile warning system. Tracking stations have been launched in the Leningrad and Kaliningrad Regions and in Armavir, and a similar facility is undergoing tests in Irkutsk. All aerospace defence brigades have been equipped with the Universal-1S automation systems, and the Glonass satellite group has been deployed.

The land, sea and air components of our Strategic Nuclear Forces are reliable and sufficient. The proportion of modern land-based missile systems has grown from 13% to 25% over the past four years. The rearmament of 10 missile regiments with the Topol-M and Yars strategic missile systems will be continued.  Long-range aviation will maintain the fleet of strategic Tu-160 and Tu-95MS bombers; work is underway to modernise them. They will be equipped with a new long-range cruise missile system. Russia’s strategic aviation resumed combat patrols in their zone of responsibility in 2007. A new aircraft is being designed for strategic long-range aviation.

New-generation Borei class strategic submarines are being put on combat duty. These include the Yury Dolgoruky and Alexander Nevsky which are undergoing state trials.

The Russian Navy has resumed patrols of the strategic areas of the world’s oceans, including the Mediterranean. We will continue with these displays of the Russian flag.

Goals for the coming decade

We have begun a large-scale programme to re-equip the Army and Navy and other national security forces. Our number one priorities are nuclear forces, aerospace defence, military communications, intelligence and control, electronic warfare, drones, unmanned missile systems, modern transport aviation, individual combat protection gear, precision weapons and defence capabilities against such weapons.

The training of combat and command personnel should become more intensive, comprehensive and of higher quality. Efforts will be focused on building effective inter-service groups of troops and forces and improving combat readiness.

Our professionals will have to work out a forward-looking ideology for the development of the different branches of the armed forces, and define clear goals and objectives for each of them in the relevant conceptual documents. It is already clear that nuclear deterrence will retain its leading role and importance in the structure of the Russian armed forces, at least until we develop new types of weapons, new-generation assault systems, including high precision weapons. These weapons, as I have already said, are capable of meeting combat goals that are comparable with the current role of the nuclear deterrence forces. In addition, the role of the Navy, the Air Force and the Aerospace Defence Forces will grow significantly over the coming years.

Today’s challenges require us to take resolute steps to strengthen Russia’s air and space defence system. We are being pushed into action by the U.S. and NATO missile defence policies.

A global balance of forces can be guaranteed either by building our own missile defence shield – an expensive and to date largely ineffective undertaking – or by developing the ability to overcome any missile defence system and protect Russia’s retaliation potential, which is far more effective.

Russia’s strategic nuclear forces and air and space defence are designed to serve precisely this purpose. One cannot be “overly patriotic” about this. Russia’s military technical response to the U.S. global missile defence system and its segments in Europe will be effective even if disproportionate. But it will fully match U.S. steps in missile defence.

We aim to restore a blue-water (in the full sense of the word) navy, primarily in Russia’s North and Far East. The activities of the world’s leading military powers in and around the Arctic are forcing Russia to defend its own interests in the region.

In the coming decade, Russian armed forces will be provided with over 400 modern land and sea-based inter-continental ballistic missiles, 8 strategic ballistic missile submarines, about 20 multi-purpose submarines, over 50 surface warships, around 100 military spacecraft, over 600 modern aircraft including fifth generation fighter jets, more than 1,000 helicopters, 28 regimental kits of S-400 air defence systems, 38 battalion kits of Vityaz missile systems, 10 brigade kits of Iskander-M missile systems, over 2,300 modern tanks, about 2,000 self-propelled artillery systems and vehicles, and more than 17,000 military vehicles.

More than 250 military units, including 30 air squadrons, are already using advanced military equipment. By 2020, the proportion of new armaments should rise to at least 70%. The systems remaining in service will also be significantly upgraded.

So the goal for the next decade will be to equip our armed forces with advanced armaments, which have better visibility, higher precision, and faster response times than similar systems used by any potential enemy.

The social dimension

A modern army must employ qualified personnel with the skills to operate the most modern weapons systems. These professionals must have in-depth knowledge and a high level of education and culture. The individual requirements for each officer and soldier are increasing significantly today.

At the same time, servicemen are entitled to receive a full package of social benefits to match the huge responsibility that they bear. This includes access to healthcare services, rehabilitation treatment, health insurance, a decent pension and employment opportunities after retirement. In addition, their salary should be at the same level as for qualified professionals and managers in the leading industries, or even higher.

In 2007, we decided to increase military pay and pensions. At the first stage of the reforms, in 2009, the government launched a major initiative to raise the pay for those who shoulder a special responsibility for upholding Russia’s defences.

We have now taken the next step: from January 1, 2012 military pay has almost tripled. The Armed Forces have become much more competitive as an employer. This has improved the situation significantly. It has created an additional incentive to join the military forces.

Also on January 1, 2012, officers of the Interior Ministry were given a pay raise. Other branches of the military, law enforcement and special services will see their pay rise from January 1, 2013.

The pensions of all retired military servicemen, regardless of the sector of the forces they served in, went up by 60% from January 1, 2012. In the future, military pensions will go up every year by at least 2% above inflation.

In addition, we will introduce a special education certificate so that every retired serviceman will be able to receive education or enrol in a retraining programme at any Russian educational institution.

Housing is another major issue, which has been poorly addressed over many years. In the 1990s, at best the government provided only 6,000-8,000 flats or housing certificates a year. Very often, people retired without receiving any housing at all; they were simply put on the same waiting list along with civilians and had to wait their turn.

Looking back, we can see that housing for military servicemen started increasing significantly from 2000, up to an annual average of 25,000 flats for servicemen. Doing this however required a dramatic change in government policy and a shift to focus financial and organisational resources on to this problem.

The 15+15 Presidential Programme carried out in 2006-2007 was the first measure in this respect. Around 20,000 additional flats were provided to servicemen in the regions where the housing problems were more serious.

Between 2008 and 2011, some 140,000 flats were purchased or built for military personnel employed by the Defense Ministry, with another 46,000 service personnel properties provided beyond that. Nothing of this kind had happened before. We allocated money even during the financial crisis. However, despite the scale of the programme, which was even larger than initially planned, the problem has yet to be resolved.

We should be honest about the reasons for this. Firstly, the Defense Ministry has not kept proper records of the servicemen who need housing. Secondly, staffing arrangements were not directly linked to housing availability. We have to adjust this.

In 2012-2013, the provision of permanent housing to military personnel should be complete. In addition, a modern service housing fund must be created by 2014, which should resolve the “never-ending” problem of military housing.

By the end of 2012, we will provide flats to those service personnel who were discharged in the 1990s but never received housing and are still on municipal waiting lists. That’s over 20,000 people.

The personnel that signed contracts after 2007 will be provided with housing in accordance with plan through the savings and mortgage lending system. The number of people participating in this programme exceeds 180,000, with over 20,000 flats already purchased.

Another crucial issue is the fate of military towns and the thousands of people who live there. They are former service people and their families, pensioners and non-military professionals – all those who have served the armed forces, and thus, the country for many decades.

It is unacceptable that these towns with their problems are just discarded by the Defense Ministry and have to be handled solely by the regional or municipal officials. We must carry out a thorough inventory audit of real property that is owned by the armed forces and is to be transferred into the ownership of the civilian authorities. In other words, residential blocks, kindergartens, public utilities now owned by the Defense Ministry must be transferred to their respective municipalities, after renovation, and when they are fully functional, and – this is particularly important – funds should be supplied for their current maintenance.

Serious changes are planned for military strength acquisition. Currently, 220,000 officers and 186,000 soldiers and sergeants serve under contract. An annual increase of 50,000 service personnel is expected within the next five years. They will serve as sergeants, sergeant majors and military equipment specialists.

Selection will be strict and will consist of several stages. Marshal Georgy Zhukov used to say, “It’s me and the sergeants who command this army.” These “junior commanders” are the backbone of enforcement in the army. They follow through on order, discipline and proper military training. We need respectable people with the appropriate background, moral values and physical qualities for these positions. Not just the junior officers but all contract soldiers will be trained at special training centres and sergeant schools.

We expect that by 2017, 700,000 service personnel out of one-million will be “professionals” and include officers, military students, sergeants and contract soldiers. By 2020, the number of conscripts will decrease to 145,000.

The rationale behind these changes clearly shows that our objective is to create a fully professional army. At the same time, we need to be aware of the fact that a professional army is expensive. If we continue manning the armed forces with contract personnel and conscripts, we will be compromising between this objective and our national capabilities.

But compulsory military service will require qualitative adjustment as well. This is a mandatory requirement for military reform.

Military Police will be introduced to oversee discipline among the personnel. Public, veteran, religious and human rights organisations should be actively involved in the education of the servicemen and the protection of their rights and interests and for forming a healthy moral environment.

I believe we should think about developing the military clergy. Each military unit will have a military chaplain within the next few years.

We understand that there is an issue of social inequality within the current draft system. Conscripts are usually boys from low income and working class families or those who were not admitted to universities and could not apply for deferred service. We need to enhance the prestige of compulsory military service. It should become a privilege rather than a duty.

These measures could include additional privileges for those who serve in the army and want to enroll in the country’s best universities. Another option could be government support for those who want to take professional exams, or government scholarships for the graduates who served in the army and want to continue their education in the best business schools in Russia or abroad. They could also be eligible for preferential terms in applying for civil service posts or being included in the management reserves. The army should be returned to its traditional status as the most important social mobility engine.

In the long term, we should consider introducing stand-by reserve forces. As in many countries, this category of personnel would undergo regular drills and be prepared to serve in combat units if required.

There is no clear idea of a national reserve now. Our immediate task is to conceptualise this and suggest it for discussion. In particular, I would like to speak about the Cossacks. Millions of our fellow citizens today say that they are members of this social class. The Cossacks have historically been in the service of the Russian state, defending its borders and participating in the military campaigns of the Russian Army. After the 1917 revolution, the Cossacks were subjected to harsh reprisals that in essence amounted to genocide. But the Cossacks have survived and preserved their culture and traditions. The government’s task now is to help the Cossacks in every way it can. We must also get them involved in military service and the military and patriotic education of young people.

I think it important to stress the following. The army should definitely become a professional contract army. But we cannot eliminate the notion of honorable military duty for men. They must be ready to defend their Motherland when it comes under threat.

We need to raise the level of our work in organizing the military patriotic education of schoolchildren and promoting military-based sports and physical culture in general. Active military service lasts for twelve months, and a soldier has to concentrate exclusively on combat training. This means that he should join the army physically fit and tough, and better still, knowing how to handle motor vehicles, computers and information technology. In this connection I would like to emphasise the importance to the state of the work done by Russia’s Voluntary Association for Assistance to Army, Air Force, and Navy (DOSAAF).

The federal, regional and municipal authorities should do all they can to help this organisation achieve its goals. Government and public agencies should join hands. In this context, I am in favour of the idea of establishing a voluntary movement of the popular front in support of the army, navy, and the defence industry.

Our aims in the sphere of defence and national security cannot be achieved unless both servicemen and defence industry employees are highly motivated – and unless, let me add, the Russian public shows respect for the Armed Forces and military service.

New requirements of the Russian defence industry

The defence industry, our pride, boasts powerful intellectual and scientific capabilities. But we must also be honest in speaking about the problems that have built up. Russia’s defence research centres and production facilities have been slow to modernise over the last 30 years.

In the coming decade, we need to close this gap. We must regain the technological lead in the entire spectrum of modern military technologies. I would like to stress once again that we will put the task of re-equipping the armed forces firmly in the hands of Russia’s defence industry and scientific infrastructure.

We will have to address several interconnected tasks at the same time: to increase by an order of magnitude the delivery of advanced and next-generation equipment; to form forward-looking scientific and technological capabilities, to develop and master technologies of critical importance to the manufacture of competitive military products; and, finally, to upgrade the technological base of the industries that specialise in the production of advanced weapons and military equipment. We should also build, modernise or re-equip our experimental and test infrastructure.

Today, Russia is firmly integrated into the global economy and open to dialogue with all its partners, including on matters of defence and in the sphere of military-technical cooperation.

But learning from the experience and trends of other countries does not mean that Russia will switch over to using borrowed models or give up the concept of self-reliance. Quite the contrary: to achieve steady socioeconomic development and guarantee national security, we must, while borrowing the best experience, build up and maintain Russia’s military-technological and scientific independence.

In this context, let me address the sensitive topic of buying military equipment from abroad. As is evident from global practice, all the key suppliers of the global arms market, all the most advanced technological and industrial powers are at the same time purchasers of various parts of systems, models, materials and technologies. This makes it possible to quickly solve the most pressing defence problems and, let us be frank, to stimulate domestic producers.

Besides, there is a fundamental difference between buying in order to own something and buying in order to abandon one’s own designs. I am convinced that no amount of “pin-point” purchases of military and scientific equipment can replace the production of our own weapons; these purchases can only serve as a source of technology and knowledge. Incidentally, a similar thing happened in the past. Let me remind you that an entire family of Russian tanks in the 1930’s was based on U.S. and British armoured vehicles. This experience led to the development of the T-34, the best tank of WW II.

In order to really improve this country’s defence capability, we need the world’s best state-of-the-art military equipment, not spending billions and trillions of roubles. It is unacceptable for the army to become a market for morale-sapping obsolescent weapons, technologies and research and development, especially if it is being paid for out of the public purse.

That is why we have made our defence plants and design bureaus comply with stringent requirements, have been encouraging competition and investing heavily in the modernisation of the defence industry, advanced technologies and training of specialists.

The activities of defence industry enterprises should concentrate on the mass production of high-quality weapons with the highest performance characteristics to meet both current and projected defence challenges. Moreover, it is only the latest weapons and military equipment that will enable Russia to strengthen and expand its foothold in the world arms markets, where the winner is the one who can offer the most advanced designs.

Reacting to present-day threats and challenges alone means being doomed to the role of someone who is always playing catch-up. We must do our best to gain a technological and organisational edge over any potential adversary. Such a stringent requirement should become the key criterion for us as we set targets for the defence industry. This will enable industries to engage in long-term planning and know for certain where they should direct resources allocated for technological modernisation and development of new types of weapons. Scientific centres and institutes will be given incentives and clear guidelines for the development of basic and applied research in the military and related areas.

We have made great headway in reforming the army. Now we must revise the principles behind the planning and implementation of the state weapons programme. To enable defence companies to make long-term plans, we have decided to stagger the state’s defence order over three to five or even seven years. But I think that taking this step is not enough on its own.

We must start by linking military planning to the task of providing the army with weapons, military equipment, and other resources. Along with this we should consider establishing a single body responsible for the placement of and oversight of defence contracts. This body would be responsible for the execution of state defence orders in the interests of all agencies concerned.

Adjustments in the government defence order after it has been approved by the government must be kept to a minimum. We should also bear in mind that the purchase price in all cases has to be fair and sufficient to recover the costs of investments and also pay for development, modernisation, recruitment of skilled labour and staff training.

Another problem is that businesses and institutes in the defence industry lack a common database and often duplicate various research projects. We must do our best to create a “search engine,” a common database, common standards and a transparent mechanism of pricing for defence industry projects. We should work for more integration and cooperation between various companies, and we should also standardise production facilities.

At the same time, we need to promote competition, while making state purchases. We must reasonably encourage rivalries for increased quality, primarily during the conceptualisation and research stage. At the same time we must prioritise successful research projects during the creation of ready-made products, so as not to duplicate specific weapons systems.

The defence industry is in no position to calmly try to catch up with the latest developments. We must facilitate breakthroughs and become leading innovators and manufacturers.

To attain a leading global technological position in weapons manufacturing, we must reinstate the entire industrial cycle from modeling and design to commercial production, while specifying troop-level quality and subsequent elimination.

The lack of incentives for the development of companies that might generate breakthrough ideas, the receding relationships between universities, departmental institutes and defence industry businesses creates a lag in defence industry research, as well as the disintegration of science institutes and science-intensive sectors. All this cannot evolve by itself. The state is unable to simply hold tenders and to award contracts.

The state must persistently look for breakthrough R&D projects and find teams of researchers who can implement the respective backlogs in a given sphere. Moreover, the state must promote a healthy competition during R&D projects. This includes unorthodox ideas that might be generated by teams of young enthusiasts.

All countries with a well-developed defence industry prioritise defence-related research as a powerful driving force of innovation growth. It is precisely defence-related research projects receiving large and sustained state funding, which make it possible to implement many breakthrough technologies which would never exceed the profit margin in the civilian sector. The civilian sector manufactures such ready-made products and adapts them to its own needs.

We need modern companies acting as a kind of broker between military, industrial, scientific and political circles. Such companies must be able to single out and support the best aspects of national innovation projects, while circumventing excessive bureaucracy involving too many discussions. Optimal models for these kinds of companies are currently being developed and will soon be initiated.

Several days ago, I met with telecommunications and IT specialists in Novosibirsk. Notably, we discussed leading US universities which have won a reputation for themselves by implementing defence contracts and research projects. I think we must also more actively involve the potential of civilian universities in implementing programmes for the modernisation of the defence industry. Large-scale defence contracts can be another source of university and research centre development.

Sometimes critics claim that rebuilding the defence industry is a yoke for the Russian economy and a back-breaking burden which ruined the Soviet Union in its time. I am confident that this is a misconception.

The Soviet Union collapsed because it suppressed natural free-market development in the economy, and because it neglected people’s interests for too long. It disintegrated as a result of a fruitless attempt to force the entire country to work as one single factory. This inevitably resulted in the loss of control even in the defence industry. In Soviet times, they would simultaneously test and adopt several rival weapons systems. Moreover, the government even failed to facilitate the transfer of elementary technology to civilian use.

We must not repeat our past mistakes here. The huge resources invested in the renewal of the defence industry and in the rearmament programme must facilitate the modernisation of the entire Russian economy. They must serve as a major incentive for quality growth where state spending creates jobs, facilitates market demand and “feeds” science. This implies the accomplishment of the very same effects being stipulated by current modernisation programmes. The only thing is that the defence industry will facilitate a much larger effect than we have previously attained.

The renewal of the defence industry will facilitate the development of the most diverse sectors, including metallurgy, engineering, the chemical and radio-electronic industries, as well as the entire range of information technologies and telecommunications. Enterprises in these sectors will also receive the required resources to renew their production facilities. They will receive new engineering solutions. This will promote the stability of many research teams, as well as their presence in the civilian research market.

A balance has developed in the modern world of the mutual influence of defence and civilian technologies. In certain industries, such as telecommunications, innovative materials and information and communication technologies, it is the civilian technologies that are the driving force behind the burgeoning development of military equipment; in others, such as aviation and space technology, military designs lead the way for innovations in civilian sectors. This situation calls for innovative approaches towards the principles underlying the exchange of information and the revision of obsolete approaches to the protection of state secrets. We should be very rigorous about protecting a limited number of truly important secrets, while at the same time exchanging all other scientific and technical information between all those who are able to use it effectively.

In so doing, it is crucial to ensure the availability of a counter flow of innovations and technologies between the defence and civilian sectors. The intellectual property created in the defence sector should be properly assessed. Such an assessment should take into account the potential of civilian commercialisation and prospects for the transfer of technology. We should manufacture civilian products at defence plants, but avoid repeating the sad experience of the defence industry conversion, in which defence plants were making titanium saucepans and shovels. We already have a good example in the serial production of the first digitalised Russian civilian aircraft, the Sukhoi Superjet.

Clearly, we need to thoroughly revise the economic activities that military and industrial complex enterprises are pursuing.  They are plagued by numerous inefficiencies, such as vast unjustified expenses, overhead costs which often run into the thousands of percentage points, as well as tangled and obscure relations with contractors, where a parent company is balancing on the brink of bankruptcy and its subsidiaries and suppliers are generating profits running into two or three figures.

We will aggressively combat corruption in the defence industry and the Armed Forces and hold fast to the principle of the unavoidability of punishment. Indeed, corruption in the sphere of national security amounts to no less than high treason.

Excessive protectiveness has already resulted in our reduced competitiveness, sharp increases in prices for defence products, generation of windfall profits that are being used for personal enrichment of individual businessmen and officials rather than the upgrading of the industry. Open auctions should be held in all instances where they don’t contradict national interests and pose no threat to the safety of state secrets. Defence purchases should be carried out under close public control, and punishment for violations in the sphere of defence government contracting should be toughened.

We will be building the single operating algorithm for vertically integrated entities which shouldn’t be headed by lobbyists representing a particular enterprise. At the same time, we should start breaking departmental stereotypes and engage civilian enterprises and private businesses in the manufacturing of military equipment and defence engineering.

The development of the military-industrial complex by the state alone is already ineffective and will cease to be economically viable in the mid-term. It is important to promote the partnership between the state and private businesses in the defence industry and make the procedures involved in establishing new defence enterprises less complicated. Private companies are prepared to invest their capital, expertise and know-how in the defence industry. We believe that we will have our own entrepreneurs of the calibre of Demidov and Putilov.

The leading manufacturers of armaments and military equipment in the United States and Europe are not run by the state. A fresh look at the industry and innovative business approaches to the organisation of manufacturing processes will give Russian weapons a new breath of life and improve the competitiveness of Russian weapons on international markets. Certainly, employment at privately-run defence enterprises should require security clearance. However, this should not become a barrier to establishing such enterprises or to their participation in state defence contracting. It is precisely such new private companies that may provide technological breakthroughs capable of drastically changing the industry.

The problem is that our private investors do not know exactly which of their capabilities may be used by the defence industry or areas where they can apply their energy or capital. An open information source must be established that clearly states the current needs of the defence industry for private businesses and investment.

Legacy enterprises that were established in Soviet times need to be upgraded. Manufacturing processes should be streamlined in order to be able to use advanced technologies. This work should be performed by highly skilled managers, process engineers and technical officers from private business. Quality management at defence enterprises should be enhanced and reporting should be introduced on spending under state defence contracts.

In addition, national mobilisation needs should be reviewed. The existing system is in many ways antiquated. Today, we don’t need production facilities that just churn out old armaments and ammunition. The defence industry and the mobilisation reserve should be based on the latest high-tech manufacturing facilities capable of making competitive high-quality products. They can be based on existing plants and enterprises that need to be upgraded, or built from the ground up.

Of course, we need to raise the prestige of defence industry occupations. Therefore, it would be wise to provide additional social guarantees, or even privileges, to defence sector employees. In addition, average salaries at state-run defence enterprises and R&D centres should be comparable to military service pay.

Education and on-the-job personnel training should be a focus of particular attention. Many enterprises have run into an acute shortage of technicians and highly skilled workers, which interferes with the timely execution of government orders and with the expansion of manufacturing capacities.

Specialised higher education institutions, including applied bachelors programmes, and vocational schools of general education, whose graduates often go on to work at defence enterprises, should play the key role in resolving this issue. I believe that future employment can be arranged through three-way agreements signed between the educational institution, a sectoral concern and a student. Work at an enterprise should begin when students are still pursuing their studies in college and should take the form of practical training and on-the-job training. In addition to gaining working experience, students will have the opportunity to earn good money and will be motivated to acquire necessary skills. Of course, such on-the-job training should be integrated into curricula.

The prestige of technical specialties is on the rise. Defence enterprises should become the focus of attraction for talented youth and should provide – as was the case in the Soviet Union – broad opportunities for creativity in the sphere of engineering, research and technology.

I believe that we should consider sending young employees of the defence sector and senior students of technical colleges to receive on-the-job training at leading Russian and international labs, institutes and enterprises. Managing modern equipment calls for superior skill sets, deep knowledge, and ongoing training. Therefore, professional advancement programmes at enterprises should absolutely be maintained and supported.

* * *

In the process of building our defence policy and modernising the Armed Forces, we should keep up with the latest trends in the military sphere. To fall behind these trends means becoming vulnerable and putting at risk our country and the lives of our soldiers and officers. We cannot afford repeating the tragedy of 1941, when a lack of readiness of the state and the Army for war led to the vast loss of human lives.

The unprecedented scale of the armaments programme and upgrading of the defence industry re-affirms the seriousness of our intentions. We understand that Russia will have to spend a lot in order to be able to implement these plans.

Our goal is to build an Army and a defence industry that will strengthen, not deplete, our national economy, and that is capable of securing Russia’s sovereignty, the respect of its partners and lasting peace.

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From FT : My lessons from life as a Chinese central banker

May 13th, 2012 · No Comments · Geopolitics, Markets


My lessons from life as a Chinese central banker

By David Daokui Li

When I became one of three academic members of the People’s Bank of China’s Monetary Policy Committee in April 2010, I knew I was unprepared, despite teaching economics for nearly 20 years in the US and Hong Kong before returning to China. In fact, few people could have been prepared: China has a large and mixed economy and its institutions are still young. The financial crisis made my task even harder, since it exposed the deficiencies in traditional macroeconomic theories.

Following my term on the committee, I think I have learnt three fundamental lessons, which may be useful for those trying to understand how monetary policy is made, not least in China.

First, central bank independence is an unhelpful superstition. In theory, independence is a good defence against pressures from politicians facing re-election. The PBoC is under the control of the state council, and not run under by autonomous bank staff. This may suggest that Chinese officials are subject to strong political whims. Perhaps, but Chinese leaders often stay in office for as long as 10 years and are as concerned about their legacy as long-serving central bankers such as Alan Greenspan.

In reality, China’s close co-operation with economic agencies is a stronger defence against local governments, equity investors and property developers – all of whom push for easy money policies – than a pure independence model. The MPC consists of officials not only from the central bank, but also from the finance ministry, and the banking, securities and insurance regulatory agencies.

Knowing this, I was nevertheless shocked when the Chinese premier recently said that only two factors had the potential to undermine his government: corruption and inflation. He does, of course, have some influence over these factors.

My second lesson: do not be overconfident in the power of price instruments. Textbooks preach that prices are the most fundamental signals in a market economy. However, in reality, price signals in the monetary system may not work quickly enough. We should be modest in our expectations for interest and exchange rate policies.

Take the trade balance, which does not respond quickly to exchange rates. It depends upon existing contracts between importers and exporters, which cannot quickly respond to exchange rate changes. It might be a policy objective to reduce the trade surplus but a fast appreciation of the renminbi against the dollar is likely to cause speculation of further appreciation, creating bubble-like exchange rate dynamics.

My third lesson: respect investor sentiments but work steadily and patiently against them. These are actually the most important drivers of economic fluctuations.

Unfortunately for central bankers, I estimate that monetary policies can influence, at most, 50 per cent of investments. In China, this figure was about 70 per cent before the financial crisis. A central banker must respect investor sentiments, not because they are correct but because they have an overwhelming momentum, like a huge oil tanker. How do you change the direction of such a huge tanker? Steer early and steadily, while staying patient and not expecting instant response.

Since the financial crisis, China’s central bank has been carefully steering against investor sentiments. Between August 2008 and June 2009, Chinese investors were largely pessimistic. Monetary policies were then aimed at delicately changing investors’ minds through cuts in interest rates and deposit reserve ratios. By mid-2010, however, investor sentiments had swung in the other direction – annual output growth was running at 10 per cent. Tighter policies were then pursued, together with stronger banking and property market regulations. By mid-2011 sentiments finally stabilised.

Looking to the future, what is the most important question for China’s central bankers? In my opinion, it has to be how to lower China’s huge stock of broad based-money in renminbi – equivalent to $14tn or 190 per cent of gross domestic product. Thirty per cent is locked up at the PBoC, giving it the largest central bank balance sheet in the world. An amount this large is a perennial destabilising force for the entire economy, which is at the mercy of the mood of the depositors.

China needs reform. It must enhance the size of its securities markets, especially the bond markets, in order to lure bank deposits. China must also implement bank loan securitisation, ie convert some of the good quality bank loans into bonds so that banks can raise capital and become more robust. Until these steps are taken the capital account cannot be fully convertible, the exchange rate cannot be fully liberalised and the renminbi cannot be a genuinely international currency.

The writer is a professor of economics at Tsinghua University and a former member of the People’s Bank of China Monetary Policy Committee

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Rand Corp : The Next War

May 10th, 2012 · No Comments · Geopolitics


The Next War

Americans are fooling themselves if they think the era of adventures abroad is over. In fact, another big international intervention is just around the corner. And we’re not nearly ready for it.


U.S. President Barack Obama’s recent speech during his surprise visit to Afghanistan on May 1 said it all: “Our goal is not to build a country in America’s image or to eradicate every vestige of the Taliban. These objectives would require many more years, many more dollars, and most importantly, many more American lives.” This extraordinary statement is one that those involved in U.S. foreign policy have heard many times before: The era of big interventions is over. It’s a tried-and-true narrative, and today, the argument goes something like this: The combination of significant war fatigue and coming defense cuts makes it unlikely that the United States will muster the political will or economic resources to sustain another large-scale military effort. The invasion, occupation, and reconstruction of Iraq and Afghanistan will almost certainly be seen as aberrations permitted by the post-9/11 environment, or so the thinking goes.


The conventional wisdom has it wrong. It is, in fact, likely that in the next decade, the United States will once again launch a military intervention, though with a smaller footprint than in years past. The threat from terrorist camps in weak, failed, or rogue states such as Yemen; the danger of civil wars or internecine conflicts that threaten stability in countries such as Sudan and South Sudan, and humanitarian crises that could cost tens of thousands of lives in places such as Syria and Somalia will not allow the option of intervention to be taken off the table. But the full-scale military engagements of the 2000s — akin to Iraq and Afghanistan — will not be policymakers’ preferred mechanism for conducting such operations

In light of these changes, future interventions require a revamping of current counterinsurgency (COIN) doctrine. COIN doctrine as presented in the famousFM 3-24 field manual — let’s call it COIN 1.0 — reflected the historical experience of the 20th century and the fledgling 2003-2006 counterinsurgency efforts, based largely on the U.S. experience in Vietnam. It’s unsurprising that this doctrine is now showing its age.

COIN 1.0 may not have been written exclusively for Iraq, but it was significantly tailored to meet the demands of that war. Not to minimize the complexity — and lethality — of combat operations in Iraq, but in retrospect it was a relatively easy country to stabilize. Iraq is a coherent nation-state with infrastructure, an educated workforce, and a well-established market economy with a high-value export: oil. It has only two ethnic groups and two major religions, and these groups overlap. Perhaps most importantly, it has a fully functional seaport connected to a road network, making supplying large bodies of troops relatively inexpensive (as such things go). Between the lack of infrastructure, complex tribal structure, and poorly developed economic market, the challenges in Afghanistan, as well as in many other countries in which the United States might be tempted to intervene, are much greater.

With revisions of COIN 1.0 under way, it is time to consider the lessons learned from Iraq and Afghanistan. The differences between the two wars underscore a host of significant lessons from the last five years that should be incorporated into a revised counterinsurgency doctrine — let’s call it COIN 2.0.

Our starting point is the belief that a society that has been disrupted, whether due to war or natural disaster, does not experience a linear return to stability.This is immensely frustrating to the outside observer (let alone a participant like the U.S. forces who were charged with shepherding the transition). The history of civil conflict suggests that the relationship may be more analogous to the physical process of phase change, such as conversion of water to ice or steam. Long changes in temperatures, whether cooling or heating, do not affect the liquid state of water — until at a fixed point it changes state to become ice or steam. In a similar manner, it often appears as though many counterinsurgency measures are without observable effect until a threshold for change is reached. The perception that various inputs appear to have no impact leads to both unjustified support for ineffective projects and unfair dismissal of potentially very effective programs.

For example, in Iraq after months of intense conflict and high death tolls, violence precipitously declined between April and December 2007. A range of targeted operations, training programs, and other 2006-2007 counterinsurgency activities have been both credited and discredited for this decline, but in fact a confluence of events and conditions were likely the reason for the declining death tolls. New counterinsurgency strategies must be built on the assumption that we do not know the exact process to obtain stability but that we should be able to identify and evaluate trajectories.

COIN 1.0 holds that establishing a set of observable measures is vital to assessing the effectiveness of various efforts. This is often easier said than done, however, as measures are fraught with inaccuracy and largely based on guesswork. For instance, the United States often measures stability by gauging levels of violence. In most cases, this is uninformative: U.S. commanders don’t know whether violence is occurring because of their programs, because there are fewer victims, or because of a change in insurgent tactics. For example, in Afghanistan, civilian casualties by insurgents increase violence against coalition forces, leading many to conclude that protecting the population is critical to counterinsurgency success. However, civilian casualties by insurgents in Iraq actually resulted in less violence against coalition forces. Simply measuring levels of civilian casualties may be informative for policies in Afghanistan but under other conditions (such as those in Iraq) other more nuanced measures may be required.

The other common approach is to measure progress using operational output, conflating measuring the process of counterinsurgency activity with the impact of those activities. Process measures are most easily understood as the direct results of COIN programs. For example, a process measure for security-training programs may be the number of trained police. An assessment like this is clearly appealing — it’s easy to count — but this approach is incomplete and often misleading. In this example, “more police” is not the desired end; “more police” increases public safety, which in turn generates government legitimacy — but we do not know the number or quality of police required for public safety or what level of public safety is required for this increase in legitimacy to occur.

Additionally, the models and measures of progress in COIN 1.0 do not account for third-party problems. Simply stated, the United States usually fights insurgencies by supporting a host-nation government, which means it is constrained by that government’s preferences. In many cases, this is a significant constraint, as U.S. officials have learned through their often-problematic partnerships with Iraqi Prime Minister Nouri al-Maliki and Afghan President Hamid Karzai.

This presents us with what social scientists call the “principal-agent problem.” In this case, the United States serves the role of “principal” — stripped of academic jargon, that means an actor that wants things done — with a set of objectives related to international security. The host-nation government, as the “agent” (commissioned to act for the “principal”) does not receive the full benefit of the objectives, but does face costs and risks for its efforts to conform to U.S. desires.

Broadly speaking, the United States has two options to induce the host-nation government to act in accordance with its objectives. First, it can try to convince the host nation that it should change its preferences. Secondly, it can change the incentives — through positive (carrots) or negative (sticks) means.

In the international arena, the first approach very seldom works. Politicians in weak or failed states have typically risen to the top by knowing and exploiting local power dynamics, and they don’t need an international power to inform them of their interests. The second approach, while perhaps more useful, has the risk of incentivizing the host nation to sustain conflict in order to be rewarded for resolving it. That is what social scientists call a moral hazard — a government may be inclined to play the role of an arsonist in order to get hired for the job of firefighter. This moral hazard tends to exacerbate the problems with process measures. For example, do police still increase legitimacy if they are corrupt and foster instability, thus ensuring future aid and support?

COIN 1.0 focused on military force as a solution to political or social problems, such as an insurgency or ethnic tensions. Although the military has been critical in ending and deterring interstate conflict, it has a more limited capability in the nuanced intrastate-conflict setting. While we still don’t know exactly which COIN activities induce stability, we do know that military force alone is insufficient.

First, violence has limited applicability in solving what are inherently political problems. The record regarding the use of large-scale force, in accordance with Western norms of warfare, to bring about political settlements is not encouraging. Mass indiscriminate violence (like that wielded by the Roman Empire or the Russians in Chechnya) has proved effective in quelling insurgencies. The same is true of highly targeted, discriminate violence by small and exceptionally trained forces against an opponent with a hierarchical structure (think U.S. Special Forces against al Qaeda in Iraq). However, the first of these options is not a viable course for U.S. policy (even leaving the moral concerns aside), and the second requires a special set of circumstances — the right capability against the right enemy.

The second reason that the military is no panacea for resolving insurgencies is the simple fact that it is ineffective in employing nonviolent means. The military is a blunt instrument, best used for forcefully imposing security — its attempts to impose nuanced political, social, and institutional reforms will likely be counterproductive. For instance, continued efforts to build governing capacity in light of widespread corruption in Afghanistan has been both intensely frustrating for NATO forces and counterproductive at building public support for the national and local government among Afghans.

Finally, existing institutions meant to better provide nonviolent solutions, such as the U.S. State Department and the U.S. Agency for International Development, are often ill-resourced and ill-prepared to effectively implement programs in conflict settings and deal with substate actors (such as governors or district heads). As former Defense Secretary Robert Gates noted on more than one occasion, there are more personnel in U.S. military bands than there are Foreign Service officers. Struggles by these civilian agencies in conflict zones have been well documented, and significant reform in both resourcing and culture is needed in these civilian departments.

The new model of counterinsurgency, COIN 2.0, must be based on a flexible, realistic model incorporating a set of feasible methods by which progress can achieved and measured. Although some of these concepts have been considered and even to some extent developed in COIN 1.0, greater effort should be directed to the following changes:

Lesson 1: Measure both the counterinsurgency activities and their direct outputs. It’s not wrong to measure the hours or dollars spent training police or the number of police. But these should be thought of as steps that move us in the right direction, not to be confused with progress toward the ultimate outcome.

Lesson 2: The record on establishing “metrics” is less than encouraging. Some are so general as to be useless, while others are so specific that their relevance is questionable. As a result, we should continue to use multiple crude measures such as violence or public polls on support to gauge any given environment. But rather than treating these measures as competitors, policymakers should treat them as related, helpful in finding the “sweet spot” where these measures may be combined to become markers for outcomes.

Lesson 3: Explicitly address the moral hazard involved in working through host nations by developing means to work “by, with, and through” their governments. Strategic planning must anticipate incentive and implementation difficulties raised by host nations’ shifting incentives — and plan on this being immensely frustrating.

Lesson 4: Cultivate civilian-agency culture to recruit, train, and deploy individuals with the expectation that work outside the traditional embassy setting is now the norm.

Lesson 5: Foster and develop a culture of impact assessment and evaluation in military activities similar to efforts to study and evaluate development programs. Despite the recognition that “assessment” is required, few programs have incorporated the controlled-comparison approach. This gold standard for evaluation typically involves collecting systematic information about the outcomes experienced by individuals or areas before and after exposure to a policy and then comparing these outcomes to individuals or areas that did not receive the program. This allows us to make inferences about effectiveness by using measurements with controls as in scientific experiments — and thus presents the best hope for determining which programs have impact.

Lesson 6: The military, while invaluable in providing a general blanket of security, is currently unsuited for the delicate work of knitting societies back together. Hybrid operational entities that value the role of the military within a civilian framework, as well as agencies implementing civilian programs that can bring back stability and legitimacy, should be constituted.

Don’t expect the United States to completely abandon its interventionist past. It will continue to be involved in diplomatic and military interventions abroad due to its strategic needs and humanitarian ambitions. To ignore this reality is to create a dangerously underprepared military and civilian workforce.

To prepare for the interventions to come in the next decade, the United States must adapt the lessons from its experiences in Iraq and Afghanistan and use them to generate a new, more realistic, and feasible doctrine. Much like innovation in technology, COIN 2.0 keeps the best features of COIN 1.0, with important modifications. Only a comprehensive relook at all these aspects of intervention strategy can effectively meet the demands of the new age of conflict. Military leaders should consider these concepts carefully — the next intervention is always just over the horizon.

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April 25th, 2012 · No Comments · Markets


 | SATURDAY, APRIL 14, 2012

The Big Flaws in Dodd-Frank


A financial historian warns that it’s done nothing to prevent the government subsidy of mortgage risk that fueled the financial crisis.

Charles Calomiris is nothing if not intense — and tireless. The Henry Kaufman professor of financial institutions at Columbia Business School has published numerous scholarly papers in refereed journals on banking and finance, and is the author of the book U.S. Bank Deregulation in Historical Perspective. More recently, he has published pieces in the financial press, including The Wall Street Journal andBarron’s, about the causes of the 2008 financial crisis, and has delivered talks and given interviews on this topic. His latest project is the forthcoming Fragile by Design: Banking Crises, Scarce Credit, and Political Bargains, co-authored with Stanford University political science professor Stephen Haber; the book takes a fresh look at the connection between politics and banking in several countries, including a detailed analysis of the U.S. I recently recorded an interview with Calomiris in his office at Columbia, from which edited excerpts follow.

Barrons: When President Obama signed the Dodd-Frank bill into law on July 21, 2010, he was photographed embracing former Federal Reserve Chairman Paul Volcker, who helped shape some of its provisions. Can Dodd-Frank prevent another financial crisis?

Calomiris: I don’t know anyone who understands what happened who would say that Dodd-Frank solves the problems that created the financial crisis. The legislation runs 2300 pages, and so it would take some time to explain what Dodd Frank got wrong and what it should have done instead.

Gives us some idea of what it got wrong.

You mention Paul Volcker, so let’s discuss the part of Dodd-Frank called the Volcker Rule. The Volcker Rule tries to ban proprietary trading within banks. The first problem with that — which I foresaw along with many others — is that it would be hard to define proprietary trading, because obviously, an essential role of banks is to help make markets in various financial instruments and to execute trades for their clients.

So the question is, how do you define the limits of proprietary trading? From the hundreds of questions that they asked people and the thousands of complicated responses that they have gotten, it’s become clear that there is no hope of being able to describe what it is they are trying to prohibit in a way that can be predictably identified, so that banks can know whether or not are they are in violation.

Even if it can’t be done, might it still be helpful to get rid of proprietary trading by banks?

I don’t think so. One thing for sure: there is no story about proprietary trading having anything at all to do with the crisis. Even Paul Volcker practically admits that.

Then what do you think was motivating Volcker?

We all have our laundry lists of what we would like to see done. Paul Volcker is somebody who has been around for a long time, and has a long laundry list. Proprietary trading by banks is just something he doesn’t like, and Barack Obama wanted to hear Volcker’s ideas. So basically he gets a free pass to bring his laundry list to the Dodd-Frank bill.

Gary Spector for Barron’s“There is a powerful political interest that wants real-estate lending to be sponsored by the government.” — Charles Calomiris

You don’t let the crisis go to waste.

You put it to a lot of different uses, except the ones that matter. Did the crisis have anything to do with women and minorities not being hired sufficiently by financial institutions? I could come up with a cockamamie theory that it might have, because women are more conservative than men. If we had more women running banks maybe we would have seen fewer imprudent risks. I haven’t heard anyone make this argument, so why has Dodd-Frank created new quotas for financial institutions to hire women and minorities? I don’t think any of us believe that was a crisis-mitigation policy. It was just politics.

Do you think the partial repeal of Glass-Steagall had anything to do with the crisis?

No, and the irony is that even the original of the Glass-Steagall Act, as passed in 1933, had nothing to do with the crisis it was supposed to address. Senator Carter Glass, who had been Chairman of the House Committee that drafted the Federal Reserve Act under President Woodrow Wilson in 1913, in 1933 played the same role as Volcker did some 75 years later.

On Carter Glass’s laundry list was the notion that mixing investment banking with commercial banking was a bad idea. There was no evidence for that, and all subsequent research has rejected Glass’s view. It’s not even a close call. The Bank of United States’ failure here in New York in 1930 had nothing to do with securities markets; it was exposed to Manhattan real estate and suffered losses related to the New York real-estate crash in Manhattan in 1929. Most of the other U.S. banks that failed in the 1930s did so as a result of farm problems and especially farm real-estate problems.

The Steagall part of the 1933 Act was federal deposit insurance, which was actually opposed at the time by Glass, the secretary of the treasury, the Federal Reserve, and President Franklin D. Roosevelt himself. But who did want it? Small banks in rural areas; Steagall was from Alabama. So we had ideology without evidence combined with special interests, and we got Glass-Steagall.

Federal deposit insurance has not been repealed.

No, but repeal would not matter; it has been trumped by “too big to fail.” The government has made it clear that it will insure all deposits and bank debts without limit. So even if we got rid of the Federal Deposit Insurance Corporation, the difference would mainly be symbolic.

But what about the Glass part of Glass-Steagall? Did the ability of commercial banks to merge with investment banks have anything to do with the crisis?

Probably even less than the under-representation of women and minorities. Remember some of the illustrious names that got into deep trouble during the crisis — Bear Stearns, Lehman Brothers, Merrill Lynch. They were all stand-alone investment banks at the time, unaffected by the partial repeal of Glass-Steagall. And we can only wish that commercial banks had done more of the relatively low-risk underwriting of securities that the repeal of Glass-Steagall permitted them to do, instead of accumulating toxic mortgages, which Glass-Steagall had not prevented them from doing.

And to make the whole argument about Glass-Steagall even more ludicrous, the repeal of the Act in 1999 made it possible for JPMorgan Chase [ticker: JPM] to acquire Bear Stearns and for Bank of America[BAC] to acquire Merrill Lynch, which helped stabilize the system.

You mention toxic mortgages. How does Dodd-Frank address that problem?

Not at all. There is no attempt in Dodd-Frank to address the key problem of government subsidization of mortgage risk, and the exposures of Fannie Mae [FNMA], Freddie Mac [FMCC], and the Federal Housing Administration are still growing.

How do you explain the omission?

There is a powerful political interest that wants real-estate lending to be sponsored by the government. Starting about 1830, an important influence on the politics of banking came from farming interests, which increasingly promoted bank exposure to farm real-estate risk. What has changed since World War II is the huge demographic shift toward the cities. And so the power of the agrarian populist movement has been replaced by the power of the urban populist movement, which has to do with subsidizing lending to housing in cities.


Organizations like Acorn [the Association of Community Organizations for Reform Now] and other urban community activists led the fight to subsidize risky mortgage lending. Christopher Dodd and Barney Frank of Dodd-Frank, our supposed reformers, have been poster-politicians for this movement. Dodd was driven from the Senate in a mortgage scandal involving Countrywide Financial, the former mortgage giant that was long a favored client of Fannie Mae. And Frank has been a major Fannie and Freddie supporter, as well as one of the great deal makers in one of the most important waves of bank mergers in U.S. history. Housing and banking are Frank’s mutually supporting interests. But Democrats were not the only ones; President George W. Bush and Speaker Newt Gingrich were also prominent proponents of subsidizing mortgage risk and facilitating the political deals that made so many risky mortgages possible.

Could you give an example of what you mean?

Remember Washington Mutual, the bank that collapsed in 2008? WaMu has practically become a synonym for bad lending practices. The background on what happened is significant. When Washington Mutual signed a merger agreement in 1999, it was permitted to do so only after it also signed a written agreement to make loans to urban constituencies, especially poor and minority constituencies, under the Community Reinvestment Act. WaMu’s combined resources after the merger came to about $150 billion in total assets. It was required to make a 10-year CRA commitment of $120 billion, plus contributing 2% of its pretax earnings to not-for-profits, which eventually helped to bring about its collapse.

That’s just part of the larger story. The experience of the 1980s alone should have taught us to limit government subsidies of real-estate lending risks. There was the savings and loan crisis, which was all about speculation in real estate. There was the commercial real-estate crisis in the east after the 1986 Tax Reform Act caused some problems in commercial real-estate values.

So what did we do? In 1989 and 1991, we tinkered with capital ratios. But did we do anything to limit government subsidization of real estate risk? Quite the opposite — the government doubled down.

Doubled down as in blackjack?

Yes, except the blackjack player doubles down by just doubling his original stake. The government effectively multiplied the bets many-fold.

How so?

The government geared up Fannie Mae and Freddie Mac — “government sponsored enterprises” — by allowing them to operate on very thin capital and by imposing new mortgage-lending mandates through the Department of Housing and Urban Development beginning in 1995. These mandates set growing minimum proportions of Fannie Mae and Freddie Mac mortgage lending targeting inner cities, low-income borrowers, and minority groups. That was the major part of it. There were also CRA mandates for commercial banks, of which WaMu was a notorious example. And, as if to keep the action even harder to track, the 12 Federal Home Loan Banks started lending to any financial institution that agreed to make mortgages.

And what did we see happening in the mortgage industry? We saw mortgage leverage ratios skyrocketing. The share of mortgages requiring a down payment of 3% or less went from about zero in the mid-1990s to about 40% just prior to the crisis, an unbelievable surge. We saw a boom in things called low-doc and no-doc mortgages, where “doc” stands for documentation. And guess what? When you don’t ask people for documentation, they lie, and if you a hang a sign out your window that says ,”I am not going to ask for any documentation,” you become a magnet for liars.

The mortgage lenders knew that. They did some experimenting with faster mortgages on a low-documented basis in the 1980s, and once they found out it was a bad idea, they abandoned it. Fannie and Freddie crossed the Rubicon in 2004, when they decided to take the caps off all their lending involving no docs and low docs. Why did they do it? Their risk managers objected, but they were steamrolled. The HUD mandates told them that they had to give an increasing amount of their mortgages to targeted groups, and to meet those targets they kept relaxing their underwriting standards.

With all this highly leveraged and undocumented borrowing, fueled by government policy, no wonder home prices assumed bubble proportions.

Are you against any government subsidy of homeownership?

Well, we could debate whether it is a good idea. But let’s suppose it is a good idea. There are lots of ways to do it that are better than subsidizing risk, especially since subsidizing risk does no favor to people when they lose their homes through foreclosure.

One way to promote homeownership would be through matching down payments. This is along the lines of what the Australians do to help first-time homeowners. On a means-tested basis, we could help first-time buyers make their down payment. That would be rewarding thrift. We could also give special tax deductions for people who put money aside for their house. These measures would subsidize housing without subsidizing leverage.

But what do we do instead? All of our housing assistance subsidizes people only to the extent to which they borrow.

You would abolish that kind of subsidy altogether?

I would phase it all out over time, including the tax deduction for mortgage interest. By subsidizing the down payment on a means-tested basis for the purchase of the first home, we would reduce leverage and risk. And we’d make a bigger difference in encouraging homeownership, since the down payment, in a mortgage industry that has been taught to care about risk, is often the biggest hurdle.

And we would no longer subsidize credit risk. We would not encourage any institutions — banks, Fannie, Freddie, the FHA, or the Federal Home Loan Banks — to make or guarantee bad loans.

Do you think that idea would fly?

To begin with, the American taxpayer might vote thumbs down and say we can’t afford it. But I would point out that subsidies already are happening through the back door. Fannie’s and Freddie’s losses together might ultimately cost the taxpayer $300 or $400 billion, but nobody knew they were spending that. Not only are we subsidizing housing, we aren’t subsidizing it in a very smart way. We are subsidizing it in a way that creates financial instability and that hides from the taxpayers what they are spending.

And that greater transparency ultimately explains why my proposal has such a hard time finding support in Washington — and perhaps why Dodd-Frank does not even address the problem.

The opposition would be too formidable?

You know who are the constituents that aren’t going to like it? If you are Acorn, you won’t like it, because that means you lose your hefty broker fees and political power. Acorn is a major intermediary for this whole racket. Members of Congress aren’t going to like it because they get fees, too, called campaign contributions, from those who benefit from the subsidies, and lots of favorable press from attending ribbon-cutting ceremonies.

We are basically talking about undoing the deal between the urban populists and the too-big-to-fail financial institutions (banks and “government-sponsored entities”), who are given enormous market power and protection that boost their profits in exchange for agreeing to distribute some of those profits to favored constituencies. That is the deal Washington has brokered over the past 30 years, and it was done on a bipartisan basis.

I guess we can read more about that in the book you’re completing with Stephen Haber. But let’s try a counter-factual. Say that your radical proposal had been in place since 1995, and that the government’s aggressive encouragement of high-risk mortgage lending had not occurred. Would that have been enough to prevent the 2008 financial crisis from happening?

Yes, it would have been enough. We would not have had the crisis. But I hasten to add that even if you’d had these government housing subsidies, they alone were not enough to cause the crisis. Had prudential regulation functioned properly for Fannie and Freddie and for the banks, you wouldn’t have had this crisis, even with the mortgage risk subsidies. Even though risky mortgages would have been made, financial intermediaries would have been maintaining more capital against that risk. So the government created this concentration of risky mortgages and then the institutions who were intermediating those mortgages were highly levered. So we got leveraged banks on top of leveraged mortgages. The combination is what gave us the crisis.

So we have to find ways to make our regulatory system avoid the incentives to under-capitalize and to pretend, when losses start to mount up, that you don’t have losses.

And in your view, we have to give up on the idea of imposing discipline on banks by taking measures like denying them the protection of federal deposit insurance?

Yes, I’m afraid I think proposals like that are lost causes, although I certainly agree that in a rational world, the abolition of federal deposit insurance would be a huge improvement.

Franklin D. Roosevelt himself made the prescient forecast in October 1932 that deposit insurance would “lead to laxity in bank management and carelessness on the part of both banker and depositor.” At the time, postal savings accounts offered small depositors protection against loss. Today, depositors who want protection can be encouraged by banks to keep their funds in short-term Treasury bills, and rich depositors can buy their own insurance, if that’s what they prefer. We don’t need the FDIC for any of this.

Before federal deposit insurance, we find abundant examples of banks accumulating cash through times of stress in order to assure depositors that they were solvent and were prudently managing risk. The banks’ incentive was simple; like any business, they didn’t want to lose customers. But now that all deposits of any size are effectively insured by the federal government, along with the overriding ethos of “too big to fail,” the laxity and carelessness which FDR warned against has become an ongoing nightmare.

There is no need for prudential regulation to tell our neighborhood deli how to manage risk; we can count on the market system to do that. But because the market system has been abrogated in crucial ways for our financial institutions, we need prudential regulation of finance.

But hasn’t your own analysis put us between a rock and a hard place? You indict the government for subsidizing risk in mortgage lending. But who else except government will be imposing prudence on our financial institutions? Isn’t that the fox guarding the chicken-coop?

Quite right. The regulators are willing accomplices. That’s why you shouldn’t even be allowed to talk about regulatory reform unless you can answer two important questions. First, how will the regulated banks not be able to get around it? And second, why will the regulator have an incentive to enforce it?

It turns out that it is not that difficult to think of rules that are so simple and transparent — so automatic and nondiscretionary — that the regulator would go to prison if they weren’t enforced. For example, I would impose a rule requiring that banks hold cash at the central bank equal to 20% of their assets. They would earn the Treasury bill interest rate on those cash reserves. That would not cost banks very much because they are in normal circumstances holding Treasuries not far from that amount. So they would reduce their Treasury holdings commensurately and hold this cash.

Why at the central bank?

Because if they are holding them at the central bank, the regulator will know they are holding them continuously — not just on the day that coincides with each accounting quarter.

Any other ideas?

Yes, about nine more. Here is just one: I would establish a minimum uninsured debt requirement for large banks in the form of subordinated debt, known as contingent capital certificates, or “CoCos.” The CoCos would automatically convert to equity based on predetermined market triggers, which would be very dilutive to pre-existing shareholders. One banker who understood my proposal for CoCo’s said, “You are putting an electric fence behind me. ”

He was exactly right. Since the bank managers would have every incentive to prevent the triggering of a CoCo conversion, it would force them to act prudently. It would be saying to the bank CEO, “If you don’t manage your risk properly, it is not the taxpayer who is going to be subsidizing you. You’re either going to have to go out into the marketplace repeatedly to raise equity, and that is going to be dilutive because you are going at the worst possible time. Or you are going to end up doing so badly that you trigger the CoCo conversion, which is even more dilutive, and in which case you are going to get fired immediately.

What all these ideas have in common is that they are incentive-robust, which mean they take into account the incentives of regulators and bankers.

Sounds feasible.

But it may not be feasible politically because anything that would work undermines the political coalition that is in charge of our financial system. They see types like me coming a mile away.

Did Dodd-Frank do any of this? Dodd-Frank said that we should study CoCos. Over 2300 pages, that’s all we read on the subject. Remember the regulators are appointed by politicians. In Fragile by Design our first chapter on the U.S. is called “Crippled by Populism.”

I look forward to reading it. Thanks, Charles.



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Africa . . perspectives

April 17th, 2012 · No Comments · Geopolitics

Africa’s Tuareg Dilemma

April 11, 2012 | 0903 GMT

By Robert D. Kaplan, Stratfor


Some years back, when I left Niamey, the capital of Niger, and headed north on a rutted, dirt track it was as if the country disappeared on me. There was no police, no sign of authority, nothing. Flash floods had left the road completely washed out in places, with the wheels of large trucks half-sunk in mud, drivers stuck for days on the side of the road. Here there were only Tuaregs, the “blue men” as they were called, on account of the color of their dazzling robes and the blue vegetable dye (“nila”) they smeared on their bodies. The Tuaregs, a pastoral Berber people, were lords of the Sahara; it’s better to have a Tuareg with you than a GPS device, went the saying of U.S. Army Special Forces with whom I was embedded.

My experience heading north from Timbuktu in Mali was even more extreme. Though it connotes the back of beyond, Timbuktu was actually a cosmopolitan locale — complete with a museum of medieval Islamic manuscripts, a few decent restaurants and satellite dishes — compared to where I was going.

I was off to Araouane, 240 kilometers (150 miles) north from Timbuktu into the desert. Araouane was a name on a map, as though it were Cleveland or some place. But nobody in Timbuktu — and certainly not in Bamako, the Malian capital very far away to the southwest — knew anything about Araouane, and if anyone still lived there. It took 14 hours and numerous breakdowns in the fine sand to reach Araouane, a huddle of ruins on a cosmic emptiness where only women, children and old men lived — the Tuareg men were out conducting raids and commerce on caravan routes throughout the desert. Here the Malian state did not exist.

There is a geographical lesson here. Scan a map of the Sahara from the Atlantic Ocean to the Horn of Africa and you will see Mauritania, Mali, Niger and Chad, countries that encompass this desert comparable in size to the United States. Then notice where the capitals of these countries are located: crouched far away to the south, inside the Sahelian plain, where they are demographic and environmental extensions of coastal West Africa — and also where the local political elites whom the Europeans discovered are located.

You can drive from Cotonou in Benin on the Gulf of Guinea, due north for hundreds of kilometers to Niamey, and the landscape will change relatively little — compared, that is, to the concentrated differences that you encounter further on. For soon after leaving Niamey and heading north or northeast the landscape evolves into utter desert. A similar situation ensues after leaving these other capitals. European colonialists in drawing these boundaries decreed that the desert would be ruled not from a central point in the desert itself, as previous Berber cultures had done, but from a distant, coastal-oriented periphery in the Sahelian plain.

This situation would make governance in the hinterlands difficult under the best of conditions. But in this part of Africa the conditions are the worst, since the level of institutional development and transportation links is abysmal, and it is mainly through roads and institutions that hinterlands are governed. There is little economic activity in the desert compelling governments to maintain more than a light footprint there. These aren’t countries so much as city-states — Nouakchott, Bamako, Niamey, Ndjamena — with armies that try to keep some order in the far-flung, far less populated reaches. State armies never have ruled this desert; rather, they have maintained for much of the time a stable cease-fire with the Tuaregs there (often through integration of key Tuareg fighters into local military bases).

Democracy has complicated the situation, even as it has helped jump-start a tradition of better governance. As one diplomat in Bamako once explained to me, with democracy there was more pressure on local politicians to spend money in the populous south, near the capital, because that’s where the votes are. And without aid to the desert communities to the north, governance cannot ultimately follow.

The most effective government I experienced in the Tuareg lands of the Sahara was Algeria’s. A few years ago I spent a month in Tamanrasset, in Algeria’s extreme south, as far from the capital of Algiers on the Mediterranean as it is from Lagos in Nigeria on the Gulf of Guinea. Algeria is a real state, with a highly professional army and institutions. But it was the Algerian army that ruled Tamanrasset and its environs, not civilian government bureaucrats. Security, even in this principal city of the central Sahara — ruled by a Mediterranean, North African state no less — was tenuous. Algeria as such, much as Niger and Mali as such, ended far, far away, closer to the capital.

The Tuareg dilemma, in which these Berber semi-nomads have recently conquered the northern half of Mali and may even threaten neighboring countries, is not completely solvable. The modern European state system is an ungainly fit for what obtains in the Sahara Desert. However, it is not out of the question that in the near future, through the building of better roads and more robust institutions — things that come with economic growth and democracy — governments in places like Bamako and Niamey can extend development deep into the desert, even as the Tuaregs are granted a reasonable degree of autonomy. An independent Tuareg state of the Sahara might then exist more formally — and the West will still have allies to combat al Qaeda in the region.

The problem in Mali, where junior army officers have overthrown the elected government ostensibly because of its failure to control the Tuaregs in the north, is not only one of a dictatorship replacing a democracy. The problem is also one of fleeting central authority itself. In his classic work on development theory, Political Order in Changing Societies (1968), Harvard professor Samuel P. Huntington noted that many governments in places like Africa cannot simply be classified as democratic or authoritarian, because their most “distinguishing characteristic” is sheer “fragility,” no matter who is in charge. They have few institutions as such, and it is sturdy bureaucracies rather than elections that truly define a system.

So Mali and its neighbors will totter on. There may be elections in Bamako, or there may not be. Tuareg raiders may control the desert interior, or a battalion of southern-led soldiers from the capital may do so. The real fundamental drama will play out gradually, outside the strictures of media accounts. This drama will be about how, and whether, Africa’s recently impressive economic growth rates can lead to the creation of larger middle classes. It is larger middle classes that lead, in turn, to more efficient and vigorous government ministries, and to more professional militaries, so that hinterlands might be brought under control and artificially drawn borders made more workable. The Saharan countries, in this regard, are a more extreme version of the larger African challenge, as the desert has created the largest dichotomy of populations within the continent.

And this will be hard. For example, the fact that the capital city of Luanda, on the coast, is booming because of offshore oil wealth does not mean that the sprawling Angolan interior in southern Africa is doing likewise. The same can be said for a recently and weakly rejuvenated Mogadishu, and whether or not it affects the rest of Somalia. The African challenge, or at least an aspect of it, is to extend good governance and development far beyond the capitals.

Read more: Africa’s Tuareg Dilemma by Robert D. Kaplan | Stratfor

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China and its trade

April 15th, 2012 · No Comments · China, Markets

Some clarity on trade in the Asia-Pacific region . . .

China’s Rise: Opportunity Or Threat For East Asia?

April 15, 2012

By Yukon Huang

The consequences of China’s economic development for the West, and the United States in particular, are being closely watched. But the impact of China’s growth for its neighbors is no less important. Over the past decade, North Asian economies that are higher on the economic value chain like Japan, Taiwan, and South Korea have benefited from China’s low-end-manufacturing strengths. Meanwhile, Southeast Asian economies, more closely resembling China and offering similar comparative advantages, have often found themselves outmuscled more recently by their much larger neighbor.

Looking to the future, both China and Southeast Asia will seek to climb the economic value ladder—indeed, China is doing so even now. In the process, Beijing and Southeast Asia will increasingly challenge both the North Asian economies and those of the West.

A Mixed Bag for Asia

A decade ago, as East Asia emerged from financial crisis, China’s rise was viewed by many neighbors as a potential threat rather than an opportunity. But when economies from South Korea to Thailand revived and the regional production-sharing network matured, everyone seemed to benefit from China’s demand for specialized components and primary products. Processing trade—that is, importing raw materials or components for mainland assembly and processing then exporting the finished products—drove China’s trade growth, accounting for its entire balance of trade surplus, while “normal trade” usually generated a net deficit (see Figure 1).

(click to enlarge)

Yet over the next decade, a split emerged in how China’s growth affected North Asian and Southeast Asian economies. Bilateral trade figures illustrate the emerging differences. Between 2000 and 2010, the North Asian trio of Japan, Taiwan, and South Korea saw its collective trade surplus with China (mirrored in China’s trade deficits with these countries) soar from $30 billion to $210 billion (see Figure 2). This growth came from exporting technology-intensive components to China, which provided an assembly base for the finished products ultimately destined for the West.

In doing so, the North Asian economies avoided American-led criticism of unfair Chinese competition, even as they in fact contributed to a large share of China’s contentious bilateral trade surpluses with the United States and the European Union. Australia, another major beneficiary, saw its trade surplus jump from almost nothing in the early part of the last decade to $35 billion in 2010, reflecting China’s voracious appetite for raw materials.

(click to enlarge)

The story for ASEAN countries is more complex, given that their resource endowments are similar to China’s. Immediately after the Asian financial crisis, the region benefited across the board. Its overall trade balance with China shifted from a deficit in the late 1990s to a surplus of nearly $20 billion by 2004.

But by 2009 this surplus had slowly evaporated as Vietnam and Singapore moved to significant deficits and the surpluses of other countries moderated as their imports of finished products and construction-related equipment from China accelerated. More recently, there has been some bounce-back largely due to Malaysia’s unique mix of exports, including both commodities and electronics components, as demand rebounded in the West (see Figure 3).

(click to enlarge)

Trying to Keep Up with a Giant

Evolving regional production patterns have, moreover, affected capital flows, investment rates, and wage trends in ways that have benefited some East Asian countries more than others. China’s industrialization process will likely still be an opportunity for the more developed North Asian economies, which have managed to strengthen their position at the high end of the consumer electronics and IT product lines. But it is affecting investment and labor markets in Southeast Asia in ways that are complicating the subregion’s efforts to moderate widening income disparities, increase productivity, and possibly escape the middle-income trap.

Real wages have stagnated in the Southeast Asian economies as a result of relatively low productivity growth and pressure to stay competitive with China’s labor costs. The ASEAN countries have also struggled to boost private investment rates closer to pre-Asian crisis levels in order to sustain long-term growth. For these two indicators, China is in a class by itself.

Starting in the mid-1990s, real wages in China surged by over 12 percent annually (see table below). Breaking this down by sector, growth ranged from around 8 to 10 percent annually in manufacturing to 15 percent in financial services. By contrast, real wage growth for the middle-income economies of Thailand, the Philippines, and Malaysia was in line with GDP growth for much of the 1990s but then fell off sharply and either declined or stagnated over most of the past decade.

Growth in Real Wages
(% annual increase)
2000-2005 2006-2009
China 12.6 12.7
Malaysia 3.5 1.1
Philippines -1.1 -0.7
Thailand -1.0 1.2
Source: International Labor Organization

China’s share of investment to GDP, meanwhile, rose steadily from 35 to more than 45 percent over the past decade and a half. By contrast, investment rates never fully recovered in Southeast Asian economies after the Asian financial crisis, remaining about one-third lower than in the late 1990s at around 20 to 25 percent of GDP compared with as high as 35 to 40 percent earlier. Some of this decline was desirable given elevated pre-crisis levels, but the pendulum has swung too far in the opposite direction.

Stagnant real wage growth and relatively low investment rates have been viewed as largely the result of country-specific conditions. But the region’s production network has played a significant role in enabling China to pull away from its Southeast Asian neighbors. With multinational firms managing decisions about where components are produced, location is influenced by the relative productivity of labor and wage costs along with the logistical advantages that China’s size offers. That means China both attracts the lion’s share of investment and sets the bar for labor costs.

China’s exceptional investment rates have contributed to industrial labor productivity’s estimated 10 to 20 percent annual increases since the mid-1990s—much higher growth than its neighbors have experienced and exceeding manufacturing wage increases.1 High labor productivity growth added to the advantages China could provide for labor-intensive assembly lines after its WTO accession in 2001. And there was also ample room for importing medium-tech components from Southeast Asia, which was supported by investments from multinational firms that were driving production-sharing arrangements.

Over time, however, China’s declining unit labor costs have put pressure on countries like Malaysia to limit wage increases in order to maintain competitiveness within the production chain. Failing to do so would mean that these product lines would likely migrate to lower-cost centers in Vietnam, South Asia, or back to China.

Moving Up the Ladder

Meanwhile, China has been aggressively upgrading its technological capacity while its infrastructure base has solidified. Thus even with rapid wage growth, China has been able to strengthen its position in more skill-intensive production lines, though its competitive advantages in more labor-intensive products such as footwear have declined with more recent wage escalation. And in a few cases, production has moved to countries where costs are lower.

Location considerations within China are also coming into play. With the rising cost of production along its coast and an expanded interior transport network, firms like Honeywell and Acer have been moving inland, though some are considering locations abroad in order to target external markets or take advantage of cheap labor.

Surging energy prices, which increase transportation costs, and the complexities of a dispersed supply chain are also encouraging some firms that previously outsourced components to Southeast Asia to relocate their operations and associated R&D activities within China to places like Chongqing or Henan. Intel and Dell are two examples. Moreover, as Chinese technology-intensive companies like Huawei expand, local linkages have deepened.

Thus, processing-related imports have fallen from over 40 percent of China’s total imports to 30 percent over the past decade. And as a share of its exports, they have declined from 55 percent to about 40 percent as production has become more integrated within China. As its economy matures, more and more parts of the production network are consolidating within or moving to China.

Ultimately, both China and the middle-income Southeast Asian countries face the same challenge: becoming more innovative to achieve high-income status. They all realize that they have no alternative but to move up the value chain—with all the requirements that this will entail, from reoriented education systems to globally linked research networks and open innovation systems. If they are successful, they will eventually encroach on the domain of the North Asian trio and heighten competitive pressures in East Asia more generally.

[This piece was expanded from an op-ed, “In the Middle Kingdom’s Shadow,” that originally appeared in the Wall Street Journal on March 27, 2012.]

Yukon Huang is a senior associate at the Carnegie Endowment for International Peace and a former country director for the World Bank in China.

[1]. Estimates of labor productivity done by the World Bank, WTO, the Conference Board, and UNCTAD vary from 10 to 20 percent depending on industrial classification, concepts applied, and data sources.

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April 15th, 2012 · No Comments · Geopolitics, Technology


The NSA Is Building the Country’s Biggest Spy Center (Watch What You Say)

o: Name Withheld; Digital Manipulation: Jesse Lenz

The spring air in the small, sand-dusted town has a soft haze to it, and clumps of green-gray sagebrush rustle in the breeze. Bluffdale sits in a bowl-shaped valley in the shadow of Utah’s Wasatch Range to the east and the Oquirrh Mountains to the west. It’s the heart of Mormon country, where religious pioneers first arrived more than 160 years ago. They came to escape the rest of the world, to understand the mysterious words sent down from their god as revealed on buried golden plates, and to practice what has become known as “the principle,” marriage to multiple wives.

Today Bluffdale is home to one of the nation’s largest sects ofpolygamists, the Apostolic United Brethren, with upwards of 9,000 members. The brethren’s complex includes a chapel, a school, a sports field, and an archive. Membership has doubled since 1978—and the number of plural marriages has tripled—so the sect has recently been looking for ways to purchase more land and expand throughout the town.

But new pioneers have quietly begun moving into the area, secretive outsiders who say little and keep to themselves. Like the pious polygamists, they are focused on deciphering cryptic messages that only they have the power to understand. Just off Beef Hollow Road, less than a mile from brethren headquarters, thousands of hard-hatted construction workers in sweat-soaked T-shirts are laying the groundwork for the newcomers’ own temple and archive, a massive complex so large that it necessitated expanding the town’s boundaries. Once built, it will be more than five times the size of the US Capitol.

Rather than Bibles, prophets, and worshippers, this temple will be filled with servers, computer intelligence experts, and armed guards. And instead of listening for words flowing down from heaven, these newcomers will be secretly capturing, storing, and analyzing vast quantities of words and images hurtling through the world’s telecommunications networks. In the little town of Bluffdale, Big Love and Big Brother have become uneasy neighbors.

The NSA has become the largest, most covert, and potentially most intrusive intelligence agency ever.

Under construction by contractors with top-secret clearances, the blandly named Utah Data Center is being built for the National Security Agency. A project of immense secrecy, it is the final piece in a complex puzzle assembled over the past decade. Its purpose: to intercept, decipher, analyze, and store vast swaths of the world’s communications as they zap down from satellites and zip through the underground and undersea cables of international, foreign, and domestic networks. The heavily fortified $2 billion center should be up and running in September 2013. Flowing through its servers and routers and stored in near-bottomless databases will be all forms of communication, including the complete contents of private emails, cell phone calls, and Google searches, as well as all sorts of personal data trails—parking receipts, travel itineraries, bookstore purchases, and other digital “pocket litter.” It is, in some measure, the realization of the “total information awareness” program created during the first term of the Bush administration—an effort that was killed by Congress in 2003 after it caused an outcry over its potential for invading Americans’ privacy.

But “this is more than just a data center,” says one senior intelligence official who until recently was involved with the program. The mammoth Bluffdale center will have another important and far more secret role that until now has gone unrevealed. It is also critical, he says, for breaking codes. And code-breaking is crucial, because much of the data that the center will handle—financial information, stock transactions, business deals, foreign military and diplomatic secrets, legal documents, confidential personal communications—will be heavily encrypted. According to another top official also involved with the program, the NSA made an enormous breakthrough several years ago in its ability to cryptanalyze, or break, unfathomably complex encryption systems employed by not only governments around the world but also many average computer users in the US. The upshot, according to this official: “Everybody’s a target; everybody with communication is a target.”

For the NSA, overflowing with tens of billions of dollars in post-9/11 budget awards, the cryptanalysis breakthrough came at a time of explosive growth, in size as well as in power. Established as an arm of the Department of Defense following Pearl Harbor, with the primary purpose of preventing another surprise assault, the NSA suffered a series of humiliations in the post-Cold War years. Caught offguard by an escalating series of terrorist attacks—the first World Trade Center bombing, the blowing up of US embassies in East Africa, the attack on the USS Cole in Yemen, and finally the devastation of 9/11—some began questioning the agency’s very reason for being. In response, the NSA has quietly been reborn. And while there is little indication that its actual effectiveness has improved—after all, despite numerous pieces of evidence and intelligence-gathering opportunities, it missed the near-disastrous attempted attacks by the underwear bomber on a flight to Detroit in 2009 and by the car bomber inTimes Square in 2010—there is no doubt that it has transformed itself into the largest, most covert, and potentially most intrusive intelligence agency ever created.

In the process—and for the first time since Watergate and the other scandals of the Nixon administration—the NSA has turned its surveillance apparatus on the US and its citizens. It has established listening posts throughout the nation to collect and sift through billions of email messages and phone calls, whether they originate within the country or overseas. It has created a supercomputer of almost unimaginable speed to look for patterns and unscramble codes. Finally, the agency has begun building a place to store all the trillions of words and thoughts and whispers captured in its electronic net. And, of course, it’s all being done in secret. To those on the inside, the old adage that NSA stands for Never Say Anything applies more than ever.


When construction is completed in 2013, the heavily fortified $2 billion facility in Bluffdale will encompass 1 million square feet.

Utah Data Center

1 Visitor control center

A $9.7 million facility for ensuring that only cleared personnel gain access.

2 Administration

Designated space for technical support and administrative personnel.

3 Data halls

Four 25,000-square-foot facilities house rows and rows of servers.

4 Backup generators and fuel tanks

Can power the center for at least three days.

5 Water storage and pumping

Able to pump 1.7 million gallons of liquid per day.

6 Chiller plant

About 60,000 tons of cooling equipment to keep servers from overheating.

7 Power substation

An electrical substation to meet the center’s estimated 65-megawatt demand.

8 Security

Video surveillance, intrusion detection, and other protection will cost more than $10 million.

Source: U.S. Army Corps of Engineers Conceptual Site plan

A swath of freezing fog blanketed Salt Lake City on the morning of January 6, 2011, mixing with a weeklong coating of heavy gray smog. Red air alerts, warning people to stay indoors unless absolutely necessary, had become almost daily occurrences, and the temperature was in the bone-chilling twenties. “What I smell and taste is like coal smoke,” complained one local blogger that day. At the city’s international airport, many inbound flights were delayed or diverted while outbound regional jets were grounded. But among those making it through the icy mist was a figure whose gray suit and tie made him almost disappear into the background. He was tall and thin, with the physique of an aging basketball player and dark caterpillar eyebrows beneath a shock of matching hair. Accompanied by a retinue of bodyguards, the man was NSA deputy director Chris Inglis, the agency’s highest-ranking civilian and the person who ran its worldwide day-to-day operations.

A short time later, Inglis arrived in Bluffdale at the site of the future data center, a flat, unpaved runway on a little-used part of Camp Williams, a National Guard training site. There, in a white tent set up for the occasion, Inglis joined Harvey Davis, the agency’s associate director for installations and logistics, and Utah senator Orrin Hatch, along with a few generals and politicians in a surreal ceremony. Standing in an odd wooden sandbox and holding gold-painted shovels, they made awkward jabs at the sand and thus officially broke ground on what the local media had simply dubbed “the spy center.” Hoping for some details on what was about to be built, reporters turned to one of the invited guests, Lane Beattie of the Salt Lake Chamber of Commerce. Did he have any idea of the purpose behind the new facility in his backyard? “Absolutely not,” he said with a self-conscious half laugh. “Nor do I want them spying on me.”

For his part, Inglis simply engaged in a bit of double-talk, emphasizing the least threatening aspect of the center: “It’s a state-of-the-art facility designed to support the intelligence community in its mission to, in turn, enable and protect the nation’s cybersecurity.” While cybersecurity will certainly be among the areas focused on in Bluffdale, what is collected, how it’s collected, and what is done with the material are far more important issues. Battling hackers makes for a nice cover—it’s easy to explain, and who could be against it? Then the reporters turned to Hatch, who proudly described the center as “a great tribute to Utah,” then added, “I can’t tell you a lot about what they’re going to be doing, because it’s highly classified.”

And then there was this anomaly: Although this was supposedly the official ground-breaking for the nation’s largest and most expensive cybersecurity project, no one from the Department of Homeland Security, the agency responsible for protecting civilian networks from cyberattack, spoke from the lectern. In fact, the official who’d originally introduced the data center, at a press conference in Salt Lake City in October 2009, had nothing to do with cybersecurity. It was Glenn A. Gaffney, deputy director of national intelligence for collection, a man who had spent almost his entire career at the CIA. As head of collection for the intelligence community, he managed the country’s human and electronic spies.

Within days, the tent and sandbox and gold shovels would be gone and Inglis and the generals would be replaced by some 10,000 construction workers. “We’ve been asked not to talk about the project,” Rob Moore, president of Big-D Construction, one of the three major contractors working on the project, told a local reporter. The plans for the center show an extensive security system: an elaborate $10 million antiterrorism protection program, including a fence designed to stop a 15,000-pound vehicle traveling 50 miles per hour, closed-circuit cameras, a biometric identification system, a vehicle inspection facility, and a visitor-control center.

Inside, the facility will consist of four 25,000-square-foot halls filled with servers, complete with raised floor space for cables and storage. In addition, there will be more than 900,000 square feet for technical support and administration. The entire site will be self-sustaining, with fuel tanks large enough to power the backup generators for three days in an emergency, water storage with the capability of pumping 1.7 million gallons of liquid per day, as well as a sewage system and massive air-conditioning system to keep all those servers cool. Electricity will come from the center’s own substation built by Rocky Mountain Power to satisfy the 65-megawatt power demand. Such a mammoth amount of energy comes with a mammoth price tag—about $40 million a year, according to one estimate.

Given the facility’s scale and the fact that a terabyte of data can now be stored on a flash drive the size of a man’s pinky, the potential amount of information that could be housed in Bluffdale is truly staggering. But so is the exponential growth in the amount of intelligence data being produced every day by the eavesdropping sensors of the NSA and other intelligence agencies. As a result of this “expanding array of theater airborne and other sensor networks,” as a 2007 Department of Defense report puts it, the Pentagon is attempting to expand its worldwide communications network, known as the Global Information Grid, to handle yottabytes (1024 bytes) of data. (A yottabyte is a septillion bytes—so large that no one has yet coined a term for the next higher magnitude.)

It needs that capacity because, according to a recent report by Cisco, global Internet traffic will quadruple from 2010 to 2015, reaching 966 exabytes per year. (A million exabytes equal a yottabyte.) In terms of scale, Eric Schmidt, Google’s former CEO, once estimated that the total of all human knowledge created from the dawn of man to 2003 totaled 5 exabytes. And the data flow shows no sign of slowing. In 2011 more than 2 billion of the world’s 6.9 billion people were connected to the Internet. By 2015, market research firm IDC estimates, there will be 2.7 billion users. Thus, the NSA’s need for a 1-million-square-foot data storehouse. Should the agency ever fill the Utah center with a yottabyte of information, it would be equal to about 500 quintillion (500,000,000,000,000,000,000) pages of text.

The data stored in Bluffdale will naturally go far beyond the world’s billions of public web pages. The NSA is more interested in the so-called invisible web, also known as the deep web or deepnet—data beyond the reach of the public. This includes password-protected data, US and foreign government communications, and noncommercial file-sharing between trusted peers. “The deep web contains government reports, databases, and other sources of information of high value to DOD and the intelligence community,” according to a 2010 Defense Science Board report. “Alternative tools are needed to find and index data in the deep web … Stealing the classified secrets of a potential adversary is where the [intelligence] community is most comfortable.” With its new Utah Data Center, the NSA will at last have the technical capability to store, and rummage through, all those stolen secrets. The question, of course, is how the agency defines who is, and who is not, “a potential adversary.”


Once it’s operational, the Utah Data Center will become, in effect, the NSA’s cloud. The center will be fed data collected by the agency’s eavesdropping satellites, overseas listening posts, and secret monitoring rooms in telecom facilities throughout the US. All that data will then be accessible to the NSA’s code breakers, data-miners, China analysts, counterterrorism specialists, and others working at its Fort Meade headquarters and around the world. Here’s how the data center appears to fit into the NSA’s global puzzle.—J.B.


1 Geostationary satellites

Four satellites positioned around the globe monitor frequencies carrying everything from walkie-talkies and cell phones in Libya to radar systems in North Korea. Onboard software acts as the first filter in the collection process, targeting only key regions, countries, cities, and phone numbers or email.

2 Aerospace Data Facility, Buckley Air Force Base, Colorado

Intelligence collected from the geostationary satellites, as well as signals from other spacecraft and overseas listening posts, is relayed to this facility outside Denver. About 850 NSA employees track the satellites, transmit target information, and download the intelligence haul.

3 NSA Georgia, Fort Gordon, Augusta, Georgia

Focuses on intercepts from Europe, the Middle East, and North Africa. Codenamed Sweet Tea, the facility has been massively expanded and now consists of a 604,000-square-foot operations building for up to 4,000 intercept operators, analysts, and other specialists.

4 NSA Texas, Lackland Air Force Base, San Antonio

Focuses on intercepts from Latin America and, since 9/11, the Middle East and Europe. Some 2,000 workers staff the operation. The NSA recently completed a $100 million renovation on a mega-data center here—a backup storage facility for the Utah Data Center.

5 NSA Hawaii, Oahu

Focuses on intercepts from Asia. Built to house an aircraft assembly plant during World War II, the 250,000-square-foot bunker is nicknamed the Hole. Like the other NSA operations centers, it has since been expanded: Its 2,700 employees now do their work aboveground from a new 234,000-square-foot facility.

6 Domestic listening posts

The NSA has long been free to eavesdrop on international satellite communications. But after 9/11, it installed taps in US telecom “switches,” gaining access to domestic traffic. An ex-NSA official says there are 10 to 20 such installations.

7 Overseas listening posts

According to a knowledgeable intelligence source, the NSA has installed taps on at least a dozen of the major overseas communications links, each capable of eavesdropping on information passing by at a high data rate.

8 Utah Data Center, Bluffdale, Utah

At a million square feet, this $2 billion digital storage facility outside Salt Lake City will be the centerpiece of the NSA’s cloud-based data strategy and essential in its plans for decrypting previously uncrackable documents.

9 Multiprogram Research Facility, Oak Ridge, Tennessee

Some 300 scientists and computer engineers with top security clearance toil away here, building the world’s fastest supercomputers and working on cryptanalytic applications and other secret projects.

10 NSA headquarters, Fort Meade, Maryland

Analysts here will access material stored at Bluffdale to prepare reports and recommendations that are sent to policymakers. To handle the increased data load, the NSA is also building an $896 million supercomputer center here.

Before yottabytes of data from the deep web and elsewhere can begin piling up inside the servers of the NSA’s new center, they must be collected. To better accomplish that, the agency has undergone the largest building boom in its history, including installing secret electronic monitoring rooms in major US telecom facilities. Controlled by the NSA, these highly secured spaces are where the agency taps into the US communications networks, a practice that came to light during the Bush years but was never acknowledged by the agency. The broad outlines of the so-called warrantless-wiretapping program have long been exposed—how the NSA secretly and illegally bypassed the Foreign Intelligence Surveillance Court, which was supposed to oversee and authorize highly targeted domestic eavesdropping; how the program allowed wholesale monitoring of millions of American phone calls and email. In the wake of the program’s exposure, Congress passed the FISA Amendments Act of 2008, which largely made the practices legal. Telecoms that had agreed to participate in the illegal activity were granted immunity from prosecution and lawsuits. What wasn’t revealed until now, however, was the enormity of this ongoing domestic spying program.

For the first time, a former NSA official has gone on the record to describe the program, codenamedStellar Wind, in detail. William Binney was a senior NSA crypto-mathematician largely responsible for automating the agency’s worldwide eavesdropping network. A tall man with strands of black hair across the front of his scalp and dark, determined eyes behind thick-rimmed glasses, the 68-year-old spent nearly four decades breaking codes and finding new ways to channel billions of private phone calls and email messages from around the world into the NSA’s bulging databases. As chief and one of the two cofounders of the agency’s Signals Intelligence Automation Research Center, Binney and his team designed much of the infrastructure that’s still likely used to intercept international and foreign communications.

He explains that the agency could have installed its tapping gear at the nation’s cable landing stations—the more than two dozen sites on the periphery of the US where fiber-optic cables come ashore. If it had taken that route, the NSA would have been able to limit its eavesdropping to just international communications, which at the time was all that was allowed under US law. Instead it chose to put the wiretapping rooms at key junction points throughout the country—large, windowless buildings known as switches—thus gaining access to not just international communications but also to most of the domestic traffic flowing through the US. The network of intercept stations goes far beyond the single room in an AT&T building in San Francisco exposed by a whistle-blower in 2006. “I think there’s 10 to 20 of them,” Binney says. “That’s not just San Francisco; they have them in the middle of the country and also on the East Coast.”

The eavesdropping on Americans doesn’t stop at the telecom switches. To capture satellite communications in and out of the US, the agency also monitors AT&T’s powerful earth stations, satellite receivers in locations that include Roaring Creek and Salt Creek. Tucked away on a back road in rural Catawissa, Pennsylvania, Roaring Creek’s three 105-foot dishes handle much of the country’s communications to and from Europe and the Middle East. And on an isolated stretch of land in remote Arbuckle, California, three similar dishes at the company’s Salt Creek station service the Pacific Rim and Asia.

The former NSA official held his thumb and forefinger close together: “We are that far from a turnkey totalitarianstate.”

Binney left the NSA in late 2001, shortly after the agency launched its warrantless-wiretapping program. “They violated the Constitution setting it up,” he says bluntly. “But they didn’t care. They were going to do it anyway, and they were going to crucify anyone who stood in the way. When they started violating the Constitution, I couldn’t stay.” Binney says Stellar Wind was far larger than has been publicly disclosed and included not just eavesdropping on domestic phone calls but the inspection of domestic email. At the outset the program recorded 320 million calls a day, he says, which represented about 73 to 80 percent of the total volume of the agency’s worldwide intercepts. The haul only grew from there. According to Binney—who has maintained close contact with agency employees until a few years ago—the taps in the secret rooms dotting the country are actually powered by highly sophisticated software programs that conduct “deep packet inspection,” examining Internet traffic as it passes through the 10-gigabit-per-second cables at the speed of light.

The software, created by a company called Narus that’s now part of Boeing, is controlled remotely from NSA headquarters at Fort Meade in Maryland and searches US sources for target addresses, locations, countries, and phone numbers, as well as watch-listed names, keywords, and phrases in email. Any communication that arouses suspicion, especially those to or from the million or so people on agency watch lists, are automatically copied or recorded and then transmitted to the NSA.

The scope of surveillance expands from there, Binney says. Once a name is entered into the Narus database, all phone calls and other communications to and from that person are automatically routed to the NSA’s recorders. “Anybody you want, route to a recorder,” Binney says. “If your number’s in there? Routed and gets recorded.” He adds, “The Narus device allows you to take it all.” And when Bluffdale is completed, whatever is collected will be routed there for storage and analysis.

According to Binney, one of the deepest secrets of the Stellar Wind program—again, never confirmed until now—was that the NSA gained warrantless access to AT&T’s vast trove of domestic and international billing records, detailed information about who called whom in the US and around the world. As of 2007, AT&T had more than 2.8 trillion records housed in a database at its Florham Park, New Jersey, complex.

Verizon was also part of the program, Binney says, and that greatly expanded the volume of calls subject to the agency’s domestic eavesdropping. “That multiplies the call rate by at least a factor of five,” he says. “So you’re over a billion and a half calls a day.” (Spokespeople for Verizon and AT&T said their companies would not comment on matters of national security.)

After he left the NSA, Binney suggested a system for monitoring people’s communications according to how closely they are connected to an initial target. The further away from the target—say you’re just an acquaintance of a friend of the target—the less the surveillance. But the agency rejected the idea, and, given the massive new storage facility in Utah, Binney suspects that it now simply collects everything. “The whole idea was, how do you manage 20 terabytes of intercept a minute?” he says. “The way we proposed was to distinguish between things you want and things you don’t want.” Instead, he adds, “they’re storing everything they gather.” And the agency is gathering as much as it can.

Once the communications are intercepted and stored, the data-mining begins. “You can watch everybody all the time with data- mining,” Binney says. Everything a person does becomes charted on a graph, “financial transactions or travel or anything,” he says. Thus, as data like bookstore receipts, bank statements, and commuter toll records flow in, the NSA is able to paint a more and more detailed picture of someone’s life.

The NSA also has the ability to eavesdrop on phone calls directly and in real time. According to Adrienne J. Kinne, who worked both before and after 9/11 as a voice interceptor at the NSA facility in Georgia, in the wake of the World Trade Center attacks “basically all rules were thrown out the window, and they would use any excuse to justify a waiver to spy on Americans.” Even journalists calling home from overseas were included. “A lot of time you could tell they were calling their families,” she says, “incredibly intimate, personal conversations.” Kinne found the act of eavesdropping on innocent fellow citizens personally distressing. “It’s almost like going through and finding somebody’s diary,” she says.

In secret listening rooms nationwide, NSA software examines every email, phone call, and tweet as they zip by.

But there is, of course, reason for anyone to be distressed about the practice. Once the door is open for the government to spy on US citizens, there are often great temptations to abuse that power for political purposes, as when Richard Nixon eavesdropped on his political enemies during Watergate and ordered the NSA to spy on antiwar protesters. Those and other abuses prompted Congress to enact prohibitions in the mid-1970s against domestic spying.

Before he gave up and left the NSA, Binney tried to persuade officials to create a more targeted system that could be authorized by a court. At the time, the agency had 72 hours to obtain a legal warrant, and Binney devised a method to computerize the system. “I had proposed that we automate the process of requesting a warrant and automate approval so we could manage a couple of million intercepts a day, rather than subvert the whole process.” But such a system would have required close coordination with the courts, and NSA officials weren’t interested in that, Binney says. Instead they continued to haul in data on a grand scale. Asked how many communications—”transactions,” in NSA’s lingo—the agency has intercepted since 9/11, Binney estimates the number at “between 15 and 20 trillion, the aggregate over 11 years.”

When Barack Obama took office, Binney hoped the new administration might be open to reforming the program to address his constitutional concerns. He and another former senior NSA analyst, J. Kirk Wiebe, tried to bring the idea of an automated warrant-approval system to the attention of the Department of Justice’s inspector general. They were given the brush-off. “They said, oh, OK, we can’t comment,” Binney says.

Sitting in a restaurant not far from NSA headquarters, the place where he spent nearly 40 years of his life, Binney held his thumb and forefinger close together. “We are, like, that far from a turnkey totalitarian state,” he says.

There is still one technology preventing untrammeled government access to private digital data: strong encryption. Anyone—from terrorists and weapons dealers to corporations, financial institutions, and ordinary email senders—can use it to seal their messages, plans, photos, and documents in hardened data shells. For years, one of the hardest shells has been the Advanced Encryption Standard, one of several algorithms used by much of the world to encrypt data. Available in three different strengths—128 bits, 192 bits, and 256 bits—it’s incorporated in most commercial email programs and web browsers and is considered so strong that the NSA has even approved its use for top-secret US government communications. Most experts say that a so-called brute-force computer attack on the algorithm—trying one combination after another to unlock the encryption—would likely take longer than the age of the universe. For a 128-bit cipher, the number of trial-and-error attempts would be 340 undecillion (1036).

Breaking into those complex mathematical shells like the AES is one of the key reasons for the construction going on in Bluffdale. That kind of cryptanalysis requires two major ingredients: super-fast computers to conduct brute-force attacks on encrypted messages and a massive number of those messages for the computers to analyze. The more messages from a given target, the more likely it is for the computers to detect telltale patterns, and Bluffdale will be able to hold a great many messages. “We questioned it one time,” says another source, a senior intelligence manager who was also involved with the planning. “Why were we building this NSA facility? And, boy, they rolled out all the old guys—the crypto guys.” According to the official, these experts told then-director of national intelligence Dennis Blair, “You’ve got to build this thing because we just don’t have the capability of doing the code-breaking.” It was a candid admission. In the long war between the code breakers and the code makers—the tens of thousands of cryptographers in the worldwide computer security industry—the code breakers were admitting defeat.

So the agency had one major ingredient—a massive data storage facility—under way. Meanwhile, across the country in Tennessee, the government was working in utmost secrecy on the other vital element: the most powerful computer the world has ever known.

The plan was launched in 2004 as a modern-day Manhattan Project. Dubbed the High Productivity Computing Systems program, its goal was to advance computer speed a thousandfold, creating a machine that could execute a quadrillion (1015) operations a second, known as a petaflop—the computer equivalent of breaking the land speed record. And as with the Manhattan Project, the venue chosen for the supercomputing program was the town of Oak Ridge in eastern Tennessee, a rural area where sharp ridges give way to low, scattered hills, and the southwestward-flowing Clinch River bends sharply to the southeast. About 25 miles from Knoxville, it is the “secret city” where uranium- 235 was extracted for the first atomic bomb. A sign near the exit read: what you see here, what you do here, what you hear here, when you leave here, let it stay here. Today, not far from where that sign stood, Oak Ridge is home to the Department of Energy’s Oak Ridge National Laboratory, and it’s engaged in a new secret war. But this time, instead of a bomb of almost unimaginable power, the weapon is a computer of almost unimaginable speed.

In 2004, as part of the supercomputing program, the Department of Energy established its Oak Ridge Leadership Computing Facility for multiple agencies to join forces on the project. But in reality there would be two tracks, one unclassified, in which all of the scientific work would be public, and another top-secret, in which the NSA could pursue its own computer covertly. “For our purposes, they had to create a separate facility,” says a former senior NSA computer expert who worked on the project and is still associated with the agency. (He is one of three sources who described the program.) It was an expensive undertaking, but one the NSA was desperate to launch.

Known as the Multiprogram Research Facility, or Building 5300, the $41 million, five-story, 214,000-square-foot structure was built on a plot of land on the lab’s East Campus and completed in 2006. Behind the brick walls and green-tinted windows, 318 scientists, computer engineers, and other staff work in secret on the cryptanalytic applications of high-speed computing and other classified projects. The supercomputer center was named in honor of George R. Cotter, the NSA’s now-retired chief scientist and head of its information technology program. Not that you’d know it. “There’s no sign on the door,” says the ex-NSA computer expert.

At the DOE’s unclassified center at Oak Ridge, work progressed at a furious pace, although it was a one-way street when it came to cooperation with the closemouthed people in Building 5300. Nevertheless, the unclassified team had its Cray XT4 supercomputer upgraded to a warehouse-sized XT5. Named Jaguar for its speed, it clocked in at 1.75 petaflops, officially becoming the world’s fastest computer in 2009.

Meanwhile, over in Building 5300, the NSA succeeded in building an even faster supercomputer. “They made a big breakthrough,” says another former senior intelligence official, who helped oversee the program. The NSA’s machine was likely similar to the unclassified Jaguar, but it was much faster out of the gate, modified specifically for cryptanalysis and targeted against one or more specific algorithms, like the AES. In other words, they were moving from the research and development phase to actually attacking extremely difficult encryption systems. The code-breaking effort was up and running.

The breakthrough was enormous, says the former official, and soon afterward the agency pulled the shade down tight on the project, even within the intelligence community and Congress. “Only the chairman and vice chairman and the two staff directors of each intelligence committee were told about it,” he says. The reason? “They were thinking that this computing breakthrough was going to give them the ability to crack current public encryption.”

In addition to giving the NSA access to a tremendous amount of Americans’ personal data, such an advance would also open a window on a trove of foreign secrets. While today most sensitive communications use the strongest encryption, much of the older data stored by the NSA, including a great deal of what will be transferred to Bluffdale once the center is complete, is encrypted with more vulnerable ciphers. “Remember,” says the former intelligence official, “a lot of foreign government stuff we’ve never been able to break is 128 or less. Break all that and you’ll find out a lot more of what you didn’t know—stuff we’ve already stored—so there’s an enormous amount of information still in there.”

The NSA believes it’s on the verge of breaking a key encryption algorithm—opening up hoards of data.

That, he notes, is where the value of Bluffdale, and its mountains of long-stored data, will come in. What can’t be broken today may be broken tomorrow. “Then you can see what they were saying in the past,” he says. “By extrapolating the way they did business, it gives us an indication of how they may do things now.” The danger, the former official says, is that it’s not only foreign government information that is locked in weaker algorithms, it’s also a great deal of personal domestic communications, such as Americans’ email intercepted by the NSA in the past decade.

But first the supercomputer must break the encryption, and to do that, speed is everything. The faster the computer, the faster it can break codes. The Data Encryption Standard, the 56-bit predecessor to the AES, debuted in 1976 and lasted about 25 years. The AES made its first appearance in 2001 and is expected to remain strong and durable for at least a decade. But if the NSA has secretly built a computer that is considerably faster than machines in the unclassified arena, then the agency has a chance of breaking the AES in a much shorter time. And with Bluffdale in operation, the NSA will have the luxury of storing an ever-expanding archive of intercepts until that breakthrough comes along.

But despite its progress, the agency has not finished building at Oak Ridge, nor is it satisfied with breaking the petaflop barrier. Its next goal is to reach exaflop speed, one quintillion (1018) operations a second, and eventually zettaflop (1021) and yottaflop.

These goals have considerable support in Congress. Last November a bipartisan group of 24 senators sent a letter to President Obama urging him to approve continued funding through 2013 for the Department of Energy’s exascale computing initiative (the NSA’s budget requests are classified). They cited the necessity to keep up with and surpass China and Japan. “The race is on to develop exascale computing capabilities,” the senators noted. The reason was clear: By late 2011 the Jaguar (now with a peak speed of 2.33 petaflops) ranked third behind Japan’s “K Computer,” with an impressive 10.51 petaflops, and the Chinese Tianhe-1A system, with 2.57 petaflops.

But the real competition will take place in the classified realm. To secretly develop the new exaflop (or higher) machine by 2018, the NSA has proposed constructing two connecting buildings, totaling 260,000 square feet, near its current facility on the East Campus of Oak Ridge. Called the Multiprogram Computational Data Center, the buildings will be low and wide like giant warehouses, a design necessary for the dozens of computer cabinets that will compose an exaflop-scale machine, possibly arranged in a cluster to minimize the distance between circuits. According to a presentation delivered to DOE employees in 2009, it will be an “unassuming facility with limited view from roads,” in keeping with the NSA’s desire for secrecy. And it will have an extraordinary appetite for electricity, eventually using about 200 megawatts, enough to power 200,000 homes. The computer will also produce a gargantuan amount of heat, requiring 60,000 tons of cooling equipment, the same amount that was needed to serve both of the World Trade Center towers.

In the meantime Cray is working on the next step for the NSA, funded in part by a $250 million contract with the Defense Advanced Research Projects Agency. It’s a massively parallel supercomputer called Cascade, a prototype of which is due at the end of 2012. Its development will run largely in parallel with the unclassified effort for the DOE and other partner agencies. That project, due in 2013, will upgrade the Jaguar XT5 into an XK6, codenamed Titan, upping its speed to 10 to 20 petaflops.

Yottabytes and exaflops, septillions and undecillions—the race for computing speed and data storage goes on. In his 1941 story “The Library of Babel,” Jorge Luis Borges imagined a collection of information where the entire world’s knowledge is stored but barely a single word is understood. In Bluffdale the NSA is constructing a library on a scale that even Borges might not have contemplated. And to hear the masters of the agency tell it, it’s only a matter of time until every word is illuminated.

James Bamford ( is the author of The Shadow Factory: The Ultra-Secret NSA from 9/11 to the Eavesdropping on America.

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Colan and Cottrell : Managing Your ‘Attention’

April 14th, 2012 · No Comments · Excellence

Makes sense

You may have been told, perhaps after turning in that term paper three days late, that you had to learn to manage your time. But how do you manage time? Your parents and teachers never explained that, and for a good reason: time is not manageable.

For more, see

Manage Attention

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George Friedman on Iran’s Strategy

April 10th, 2012 · No Comments · Geopolitics


Iran’s Strategy

April 10, 2012 | 0904 GMT


By George Friedman

For centuries, the dilemma facing Iran (and before it, Persia) has been guaranteeing national survival and autonomy in the face of stronger regional powers like Ottoman Turkey and the Russian Empire. Though always weaker than these larger empires, Iran survived for three reasons: geography, resources and diplomacy. Iran’s size and mountainous terrain made military forays into the country difficult and dangerous. Iran also was able to field sufficient force to deter attacks while permitting occasional assertions of power. At the same time, Tehran engaged in clever diplomatic efforts, playing threatening powers off each other.

The intrusion of European imperial powers into the region compounded Iran’s difficulties in the 19th century, along with the lodging of British power to Iran’s west in Iraq and the Arabian Peninsula following the end of World War I. This coincided with a transformation of the global economy to an oil-based system. Then as now, the region was a major source of global oil. Where the British once had interests in the region, the emergence of oil as the foundation of industrial and military power made these interests urgent. Following World War II, the Americans and the Soviets became the outside powers with the ability and desire to influence the region, but Tehran’s basic strategic reality persisted. Iran faced both regional and global threats that it had to deflect or align with. And because of oil, the global power could not lose interest while the regional powers did not have the option of losing interest.

Whether ruled by shah or ayatollah, Iran’s strategy remained the same: deter by geography, protect with defensive forces, and engage in complex diplomatic maneuvers. But underneath this reality, another vision of Iran’s role always lurked.

Iran as Regional Power

A vision of Iran — a country with an essentially defensive posture — as a regional power remained. The shah competed with Saudi Arabia over Oman and dreamed of nuclear weapons. Ahmadinejad duels with Saudi Arabia over Bahrain, and also dreams of nuclear weapons. When we look beyond the rhetoric — something we always should do when studying foreign policy, since the rhetoric is intended to intimidate, seduce and confuse foreign powers and the public — we see substantial continuity in Iran’s strategy since World War II. Iran dreams of achieving regional dominance by breaking free from its constraints and the threats posed by nearby powers.

Since World War II, Iran has had to deal with regional dangers like Iraq, with which it fought a brutal war lasting nearly a decade and costing Iran about 1 million casualties. It also has had to deal with the United States, whose power ultimately defined patterns in the region. So long as the United States had an overriding interest in the region, Iran had no choice but to define its policies in terms of the United States. For the shah, that meant submitting to the United States while subtly trying to control American actions. For the Islamic republic, it meant opposing the United States while trying to manipulate it into taking actions in the interests of Iran. Both acted within the traditions of Iranian strategic subtlety.

The Islamic republic proved more successful than the shah. It conducted a sophisticated disinformation campaign prior to the 2003 Iraq war to convince the United States that invading Iraq would be militarily easy and that Iraqis would welcome the Americans with open arms. This fed the existing U.S. desire to invade Iraq, becoming one factor among many that made the invasion seem doable. In a second phase, the Iranians helped many factions in Iraq resist the Americans, turning the occupation — and plans for reconstructing Iraq according to American blueprints — into a nightmare. In a third and final phase, Iran used its influence in Iraq to divide and paralyze the country after the Americans withdrew.

As a result of this maneuvering, Iran achieved two goals. First, the Americans disposed of Iran’s archenemy, Saddam Hussein, turning Iraq into a strategic cripple. Second, Iran helped force the United States out of Iraq, creating a vacuum in Iraq and undermining U.S. credibility in the region — and sapping any U.S. appetite for further military adventures in the Middle East. I want to emphasize that all of this was not an Iranian plot: Many other factors contributed to this sequence of events. At the same time, Iranian maneuvering was no minor factor in the process; Iran skillfully exploited events that it helped shape.

There was a defensive point to this. Iran had seen the United States invade the countries surrounding it, Iraq to its west and Afghanistan to its east. It viewed the United States as extremely powerful and unpredictable to the point of irrationality, though also able to be manipulated. Tehran therefore could not dismiss the possibility that the United States would choose war with Iran. Expelling the United States from Iraq, however, limited American military options in the region.

This strategy also had an offensive dimension. The U.S. withdrawal from Iraq positioned Iran to fill the vacuum. Critically, the geopolitics of the region had created an opening for Iran probably for the first time in centuries. First, the collapse of the Soviet Union released pressure from the north. Coming on top of the Ottoman collapse after World War I, Iran now no longer faced a regional power that could challenge it. Second, with the drawdown of U.S. forces in the Persian Gulf and Afghanistan, the global power had limited military options and even more limited political options for acting against Iran.

Iran’s Opportunity

Iran now had the opportunity to consider emerging as a regional power rather than solely pursuing complex maneuvers to protect Iranian autonomy and the regime. The Iranians understood that the moods of global powers shifted unpredictably, the United States more than most. Therefore it knew that the more aggressive it became, the more the United States may militarily commit itself to containing Iran. At the same time, the United States might do so even without Iranian action. Accordingly, Iran searched for a strategy that might solidify its regional influence while not triggering U.S. retaliation.

Anyone studying the United States understands its concern with nuclear weapons. Throughout the Cold War it lived in the shadow of a Soviet first strike. The Bush administration used the possibility of an Iraqi nuclear program to rally domestic support for the invasion. When the Soviets and the Chinese attained nuclear weapons, the American response bordered on panic. The United States simultaneously became more cautious in its approach to those countries.

In looking at North Korea, the Iranians recognized a pattern they could use to their advantage. Regime survival in North Korea, a country of little consequence, was uncertain in the 1990s. When it undertook a nuclear program, however, the United States focused heavily on North Korea, simultaneously becoming more cautious in its approach to the North. Tremendous diplomatic activity and periodic aid was brought to bear to limit North Korea’s program. From the North Korean point of view, actually acquiring deliverable nuclear weapons was not the point; North Korea was not a major power like China and Russia, and a miscalculation on Pyongyang’s part could lead to more U.S. aggression. Rather, the process of developing nuclear weapons itself inflated North Korea’s importance while inducing the United States to offer incentives or impose relatively ineffective economic sanctions (and thereby avoiding more dangerous military action). North Korea became a centerpiece of U.S. concern while the United States avoided actions that might destabilize North Korea and shake loose the weapons the North might have.

The North Koreans knew that having a deliverable weapon would prove dangerous, but that having a weapons program gave them leverage — a lesson the Iranians learned well. From the Iranians’ point of view, a nuclear program causes the United States simultaneously to take them more seriously and to increase its caution while dealing with them. At present, the United States leads a group of countries with varying degrees of enthusiasm for imposing sanctions that might cause some economic pain to Iran, but give the United States a pretext not to undertake the military action Iran really fears and that the United States does not want to take.

Israel, however, must take a different view of Iran’s weapons program. While not a threat to the United States, the program may threaten Israel. The Israelis’ problem is that they must trust their intelligence on the level of development of Iran’s weapons. The United States can afford a miscalculation; Israel might not be able to afford it. This lack of certainty makes Israel unpredictable. From the Iranian point of view, however, an Israeli attack might be welcome.

Iran does not have nuclear weapons and may be following the North Korean strategy of never developing deliverable weapons. If they did, however, and the Israelis attacked and destroyed them, the Iranians would be as they were before acquiring nuclear weapons. But if the Israelis attacked and failed to destroy them, the Iranians would emerge stronger. The Iranians could retaliate by taking action in the Strait of Hormuz. The United States, which ultimately is the guarantor of the global maritime flow of oil, might engage Iran militarily. Or it might enter into negotiations with Iran to guarantee the flow. An Israeli attack, whether successful or unsuccessful, would set the stage for Iranian actions that would threaten the global economy, paint Israel as the villain, and result in the United States being forced by European and Asian powers to guarantee the flow of oil with diplomatic concessions rather than military action. An attack by Israel, successful or unsuccessful, would cost Iran little and create substantial opportunities. In my view, the Iranians want a program, not a weapon, but having the Israelis attack the program would suit Iran’s interests quite nicely.

The nuclear option falls into the category of Iranian manipulation of regional and global powers, long a historical necessity for the Iranians. But another, and more significant event is under way in Syria.

Syria’s Importance to Iran

As we have written, if the Syrian regime survives, this in part would be due to Iranian support. Isolated from the rest of the world, Syria would become dependent on Iran. If that were to happen, an Iranian sphere of influence would stretch from western Afghanistan to Beirut. This in turn would fundamentally shift the balance of power in the Middle East, fulfilling Iran’s dream of becoming a dominant regional power in the Persian Gulf and beyond. This was the shah’s and the ayatollah’s dream. And this is why the United States is currently obsessing over Syria.

What would such a sphere of influence give the Iranians? Three things. First, it would force the global power, the United States, to abandon ideas of destroying Iran, as the breadth of its influence would produce dangerously unpredictable results. Second, it would legitimize the regime inside Iran and in the region beyond any legitimacy it currently has. Third, with proxies along Saudi Arabia’s northern border in Iraq and Shia along the western coast of the Persian Gulf, Iran could force shifts in the financial distribution of revenues from oil. Faced with regime preservation, Saudi Arabia and other Gulf states would have to be flexible on Iranian demands, to say the least. Diverting that money to Iran would strengthen it greatly.

Iran has applied its strategy under regimes of various ideologies. The shah, whom many considered psychologically unstable and megalomaniacal, pursued this strategy with restraint and care. The current regime, also considered ideologically and psychologically unstable, has been equally restrained in its actions. Rhetoric and ideology can mislead, and usually are intended to do just that.

This long-term strategy, pursued since the 16th century after Persia became Islamic, now sees a window of opportunity opening, engineered in some measure by Iran itself. Tehran’s goal is to extend the American paralysis while it exploits the opportunities that the U.S. withdrawal from Iraq has created. Simultaneously, it wants to create a coherent sphere of influence that the United States will have to accommodate itself to in order to satisfy the demand of its coalition for a stable supply of oil and limited conflict in the region.

Iran is pursuing a two-pronged strategy toward this end. The first is to avoid any sudden moves, to allow processes to run their course. The second is to create a diversion through its nuclear program, causing the United States to replicate its North Korea policy in Iran. If its program causes an Israeli airstrike, Iran can turn that to its advantage as well. The Iranians understand that having nuclear weapons is dangerous but that having a weapons program is advantageous. But the key is not the nuclear program. That is merely a tool to divert attention from what is actually happening — a shift in the balance of power in the Middle East.

Read more: Iran’s Strategy | Stratfor

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Startfor : Syria, Iran, and the Balance of Power in the Middle East

November 26th, 2011 · No Comments · Geopolitics

Quite complex . .  and risky !

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Syria, Iran, and the Balance of Power in the Middle East

November 22, 2011

By George Friedman

U.S. troops are in the process of completing their withdrawal from Iraq by the end-of-2011 deadline. We are now moving toward a reckoning with the consequences. The reckoning concerns the potential for a massive shift in the balance of power in the region, with Iran moving from a fairly marginal power to potentially a dominant power. As the process unfolds, the United States and Israel are making countermoves. We have discussed all of this extensively. Questions remain whether these countermoves will stabilize the region and whether or how far Iran will go in its response.

Iran has been preparing for the U.S. withdrawal. While it is unreasonable simply to say that Iran will dominate Iraq, it is fair to say Tehran will have tremendous influence in Baghdad to the point of being able to block Iraqi initiatives Iran opposes. This influence will increase as the U.S. withdrawal concludes and it becomes clear there will be no sudden reversal in the withdrawal policy. Iraqi politicians’ calculus must account for the nearness of Iranian power and the increasing distance and irrelevance of American power.

Resisting Iran under these conditions likely would prove ineffective and dangerous.Some, like the Kurds, believe they have guarantees from the Americans and that substantial investment in Kurdish oil by American companies means those commitments will be honored. A look at the map, however, shows how difficult it would be for the United States to do so. The Baghdad regime has arrested Sunni leaders while the Shia, not all of whom are pro-Iranian by any means, know the price of overenthusiastic resistance.

Syria and Iran

The situation in Syria complicates all of this. The minority Alawite sect has dominated the Syrian government since 1970, when the current president’s father — who headed the Syrian air force — staged a coup. The Alawites are a heterodox Muslim sect related to a Shiite offshoot and make up about 7 percent of the country’s population, which is mostly Sunni. The new Alawite government was Nasserite in nature, meaning it was secular, socialist and built around the military. When Islam rose as a political force in the Arab world, the Syrians — alienated from the Sadat regime in Egypt — saw Iran as a bulwark. The Iranian Islamist regime gave the Syrian secular regime immunity against Shiite fundamentalists in Lebanon. The Iranians also gave Syria support in its external adventures in Lebanon, and more important, in its suppression of Syria’s Sunni majority.

Syria and Iran were particularly aligned in Lebanon. In the early 1980s, after the Khomeini revolution, the Iranians sought to increase their influence in the Islamic world by supporting radical Shiite forces. Hezbollah was one of these. Syria had invaded Lebanon in 1975 on behalf of the Christians and opposed the Palestine Liberation Organization, to give you a sense of the complexity. Syria regarded Lebanon as historically part of Syria, and sought to assert its influence over it. Via Iran, Hezbollah became an instrument of Syrian power in Lebanon.

Iran and Syria, therefore, entered a long-term if not altogether stable alliance that has lasted to this day. In the current unrest in Syria, the Saudis and Turks in addition to the Americans all have been hostile to the regime of President Bashar al Assad. Iran is the one country that on the whole has remained supportive of the current Syrian government.

There is good reason for this. Prior to the uprising, the precise relationship between Syria and Iran was variable. Syria was able to act autonomously in its dealings with Iran and Iran’s proxies in Lebanon. While an important backer of groups like Hezbollah, the al Assad regime in many ways checked Hezbollah’s power in Lebanon, with the Syrians playing the dominant role there. The Syrian uprising has put the al Assad regime on the defensive, however, making it more interested in a firm, stable relationship with Iran. Damascus finds itself isolated in the Sunni world, with Turkey and the Arab League against it. Iran — and intriguingly, Iraqi Prime Minister Nouri al-Maliki — have constituted al Assad’s exterior support.

Thus far al Assad has resisted his enemies. Though some mid- to low-ranking Sunnis have defected, his military remains largely intact; this is because the Alawites control key units. Events in Libya drove home to an embattled Syrian leadership — and even to some of its adversaries within the military — the consequences of losing. The military has held together, and an unarmed or poorly armed populace, no matter how large, cannot defeat an intact military force. The key for those who would see al Assad fall is to divide the military.

If al Assad survives — and at the moment, wishful thinking by outsiders aside, he is surviving — Iran will be the big winner. If Iraq falls under substantial Iranian influence, and the al Assad regime — isolated from most countries but supported by Tehran —survives in Syria, then Iran could emerge with a sphere of influence stretching from western Afghanistan to the Mediterranean (the latter via Hezbollah). Achieving this would not require deploying Iranian conventional forces —al Assad’s survival alone would suffice. However, the prospect of a Syrian regime beholden to Iran would open up the possibility of the westward deployment of Iranian forces, and that possibility alone would have significant repercussions.

(click here to enlarge image)

Consider the map were this sphere of influence to exist. The northern borders of Saudi Arabia and Jordan would abut this sphere, as would Turkey’s southern border. It remains unclear, of course, just how well Iran could manage this sphere, e.g., what type of force it could project into it. Maps alone will not provide an understanding of the problem. But they do point to the problem. And the problem is the potential — not certain — creation of a block under Iranian influence that would cut through a huge swath of strategic territory.

It should be remembered that in addition to Iran’s covert network of militant proxies, Iran’s conventional forces are substantial. While they could not confront U.S. armored divisions and survive, there are no U.S. armored divisions on the ground between Iran and Lebanon. Iran’s ability to bring sufficient force to bear in such a sphere increases the risks to the Saudis in particular. Iran’s goal is to increase the risk such that Saudi Arabia would calculate that accommodation is more prudent than resistance. Changing the map can help achieve this.

It follows that those frightened by this prospect — the United States, Israel, Saudi Arabia and Turkey —would seek to stymie it. At present, the place to block it no longer is Iraq, where Iran already has the upper hand. Instead, it is Syria. And the key move in Syria is to do everything possible to bring about al Assad’s overthrow.

In the last week, the Syrian unrest appeared to take on a new dimension. Until recently, the most significant opposition activity appeared to be outside of Syria, with much of the resistance reported in the media coming from externally based opposition groups. The degree of effective opposition was never clear. Certainly, the Sunni majority opposes and hates the al Assad regime. But opposition and emotion do not bring down a regime consisting of men fighting for their lives. And it wasn’t clear that the resistance was as strong as the outside propaganda claimed.

Last week, however, the Free Syrian Army — a group of Sunni defectors operating out of Turkey and Lebanon —claimed defectors carried out organized attacks on government facilities, ranging from an air force intelligence facility (a particularly sensitive point given the history of the regime) to Baath Party buildings in the greater Damascus area. These were not the first attacks claimed by the FSA, but they were heavily propagandized in the past week. Most significant about the attacks is that, while small-scale and likely exaggerated, they revealed that at least some defectors were willing to fight instead of defecting and staying in Turkey or Lebanon.

It is interesting that an apparent increase in activity from armed activists — or the introduction of new forces — occurred at the same time relations between Iran on one side and the United States and Israel on the other were deteriorating. The deterioration began with charges that an Iranian covert operation to assassinate the Saudi ambassador to the United States had been uncovered, followed by allegations by the Bahraini government of Iranian operatives organizing attacks in Bahrain. It proceeded to an International Atomic Energy Agency report on Iran’s progress toward a nuclear device, followed by the Nov. 19 explosion at an Iranian missile facility that the Israelis have not-so-quietly hinted was their work. Whether any of these are true, the psychological pressure on Iran is building and appears to be orchestrated.

Of all the players in this game, Israel’s position is the most complex. Israel has had a decent, albeit covert, working relationship with the Syrians going back to their mutual hostility toward Yasser Arafat. For Israel, Syria has been the devil they know. The idea of a Sunni government controlled by the Muslim Brotherhood on their northeastern frontier was frightening; they preferred al Assad. But given the shift in the regional balance of power, the Israeli view is also changing. The Sunni Islamist threat has weakened in the past decade relative to the Iranian Shiite threat. Playing things forward, the threat of a hostile Sunni force in Syria is less worrisome than an emboldened Iranian presence on Israel’s northern frontier. This explains why the architects of Israel’s foreign policy, such as Defense Minister Ehud Barak, have been saying that we are seeing an “acceleration toward the end of the regime.” Regardless of its preferred outcome, Israel cannot influence events inside Syria. Instead, Israel is adjusting to a reality where the threat of Iran reshaping the politics of the region has become paramount.

Iran is, of course, used to psychological campaigns. We continue to believe that while Iran might be close to a nuclear device that could explode underground under carefully controlled conditions, its ability to create a stable, robust nuclear weapon that could function outside a laboratory setting (which is what an underground test is) is a ways off. This includes being able to load a fragile experimental system on a delivery vehicle and expecting it to explode. It might. It might not. It might even be intercepted and create a casus belli for a counterstrike.

The main Iranian threat is not nuclear. It might become so, but even without nuclear weapons, Iran remains a threat. The current escalation originated in the American decision to withdraw from Iraq and was intensified by events in Syria. If Iran abandoned its nuclear program tomorrow, the situation would remain as complex. Iran has the upper hand, and the United States, Israel, Turkey and Saudi Arabia all are looking at how to turn the tables.

At this point, they appear to be following a two-pronged strategy: Increase pressure on Iran to make it recalculate its vulnerability, and bring down the Syrian government to limit the consequences of Iranian influence in Iraq. Whether the Syrian regime can be brought down is problematic. Libya’s Moammar Gadhafi would have survived if NATO hadn’t intervened. NATO could intervene in Syria, but Syria is more complex than Libya. Moreover, a second NATO attack on an Arab state designed to change its government would have unintended consequences, no matter how much the Arabs fear the Iranians at the moment. Wars are unpredictable; they are not the first option.

Therefore the likely solution is covert support for the Sunni opposition funneled through Lebanon and possibly Turkey and Jordan. It will be interesting to see if the Turks participate. Far more interesting will be seeing whether this works. Syrian intelligence has penetrated its Sunni opposition effectively for decades. Mounting a secret campaign against the regime would be difficult, and its success by no means assured. Still, that is the next move.

But it is not the last move. To put Iran back into its box, something must be done about the Iraqi political situation. Given the U.S. withdrawal, Washington has little influence there. All of the relationships the United States built were predicated on American power protecting the relationships. With the Americans gone, the foundation of those relationships dissolves. And even with Syria, the balance of power is shifting.

The United States has three choices. Accept the evolution and try to live with what emerges. Attempt to make a deal with Iran — a very painful and costly one. Or go to war. The first assumes Washington can live with what emerges. The second depends on whether Iran is interested in dealing with the United States. The third depends on having enough power to wage a war and to absorb Iran’s retaliatory strikes, particularly in the Strait of Hormuz. All are dubious, so toppling al Assad is critical. It changes the game and the momentum. But even that is enormously difficult and laden with risks.

We are now in the final act of Iraq, and it is even more painful than imagined. Laying this alongside the European crisis makes the idea of a systemic crisis in the global system very real.

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