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NightWatch 20111130

NightWatch

For the night of 30 November 2011

North Korea: North Korean state media quoted a Foreign Ministry official as saying, "The construction of an experimental Light Water Reactor and the low-enriched uranium for the provision of raw materials are progressing apace." North Korea said earlier this month the facility would be up and running soon.

Comment: The good news is that North Korea eventually might achieve a quantity and quality of consistent and clean electric power that it could have achieved nearly ten years ago, under the Agreed Framework deal with the Clinton administration.

The bad news is that such a power supply still would burn up most of North Korea's land line power distribution infrastructure, but the electricity might be sold to South Korea, Russia or China.

Pakistan-NATO: Defense Minister Chaudhry Ahmad Mukhtar said on 30 November that Pakistan will restore NATO supply routes only if NATO apologizes for the 26 November airstrikes that killed 24 Pakistani soldiers. He repeated the order that NATO troops must vacate and stop flying unmanned aerial vehicles from Shamsi air base by 11 December.

Comment: Earlier on the 30th, international news services reported that Pakistan already had resumed normal cooperation with the NATO forces in Afghanistan. While Pakistanis in general are hostile to the US, the Islamabad government has grandstanded and played to public hostility in order to deflect public ire away from its complicity in the border operations and against NATO and the US.

Multiple apologies already have been issued by senior military authorities. The prospect of resumed cross-border cooperation means that Pakistani leaders acknowledge that Pakistanis were at least partly responsible for this incident.

The announcement of the eviction of the CIA from Shamsi is a public relations concession because it was supposed to have vacated the facility last May or June.

NightWatch research of operations reports from the northern border region of Afghanistan, where the Haqqanis operate, suggests that Pakistani tribal paramilitary forces or regular army forces stationed near the border routinely provide artillery and mortar fire across the border into Afghanistan in support of Taliban infiltration or Haqqani attack operations inside Afghanistan. This has been occurring for a decade, but this time it backfired.

Iran: Comment: Several reputable analysts have suggested that the attacks against the British Embassy are symptoms of a fundamental political struggle in the Iranian leadership elite. The argument is not new, but suggests that the underlying disagreements are not resolved.

The strong fundamentalists, embodied by the Revolutionary Guards Corps and the Basij militia, are hostile to outsiders and react violently to sanctions on Iran. They advocate that Iran can survive and be strong without concessions to the UN or the West.

A more pragmatic and worldly-wise group of leaders advocates dialogue with the West and others to discuss differences. This group has influence but lacks power at this time.

UK-Iran: Foreign Secretary William Hague said Britain ordered Iran to vacate its embassy in London by Friday, stressing it did not mean diplomatic ties between the two countries had been entirely cut off. It does mean they have been downgraded.

Norway-Iran: Norway has temporarily closed its embassy in Tehran due to security concerns after the British mission was attacked by an angry mob, the government said on Wednesday.

France-Iran: The French Foreign Ministry said it is recalling the French ambassador to Iran for consultation after the attack on British Embassy in Tehran. According to a Ministry statement, the attack was a violation of the Vienna Convention on Diplomatic Relations and that France must respond.

US-Iran: The United States unveiled sanctions against the energy and petrochemical sectors, as US Secretary of State Hillary Clinton spoke of a "significant ratcheting-up of pressure" on Iran.

She said Iran's oil and gas industry and its financial sector would also be targeted by the sanctions.

Comment: Sanctions on oil and gas and on banks dominate public conversations about restraining Iranian nuclear programs. The logical or practical connection between oil and banking sanctions and Iran's nuclear program, however, has not been well explained. To paraphrase Kissinger, means must match ends in order to achieve successful policy outcomes. Thus far that match has not been established, demonstrably.

Both oil and banking sanctions contain significant threats of unintended consequences. China relies on Iran for 10% of its petroleum imports. That means that it will never cooperate in imposing sanctions on oil exports because it cannot without disastrous effects on its economy and Europe's economy as well, because of global economic linkages.

Germany and Italy import Iranian oil, as well as India, China, Japan and South Korea. The economic stability of those countries could be affected by French President Sarkozy's proposal to sanction Iranian oil.

Higher oil prices would ripple across the world. Oil producers would reap a windfall and consumers would go into recession. That is why hedge fund managers are buying options that oil will reach $140 or $150 the barrel.

Banking sanctions have extensive backlash potential as well. India favors non-proliferation of nuclear weapons programs and related capabilities. Earlier this year an Indian bank agreed to cooperate in limited banking sanctions against Iran.

When Indian oil refiners found they could not use Indian banking facilities to pay for Iranian oil imports, Iran stopped shipping oil to India, 12% of whose oil imports come from Iran. The refiners found a work-around to keep the oil flowing.

The lesson is that sanctions on Iranian banks would have consequences for China, India, Russia, Italy, Germany, Japan, South Korea, the UAE and Turkey, before the sanctions hurt Iran. Iran is one of the few countries that continued to grow during the 2008 global economic crisis; has a favorable balance of payments, and has significant cash reserves owing to the high price of crude in the past three years.

It might be time for world leaders to devise more imaginative policy responses than punishment through sanctions to achieve compliant behavior by Iran. One of the downsides of an increasingly integrated global economy is the unintended consequences of sanctions.

Europe Union (EU): An agency of the European Union, Eurostat, published the latest unemployment figures for the core EU states. Some 16.294 million people in the 17-nation euro zone were out of work in October 2011, the highest tally since records began in 1995 and more than the combined populations of Belgium and Ireland. The figures beg the question of how much worse it can get, according to the report.

In addition to the suffering of the individuals who have lost their job, the rise makes it harder still for governments to end the debt crisis. More unemployment means higher social security payments and lower tax receipts. Growth suffers, public borrowing rises, investors get anxious, and the debt crisis rolls on.

Comment: In today's news cycle, the Eurostat report was overwhelmed by the report of action by the European central banks to improve liquidity. The action of the banks is what financial theorists call paying the "price of time." They bought more time for European banks and governments to meet immediate commitments, while hoping longer term economic improvements start to emerge. They bought approximately two weeks of time.

The main strategy of the big banks, according to Michael Lewis, is to buy time and wait and see whether economic conditions, such as jobs, get better. Thus far, that strategy is proving calamitous.

The problem with the strategy is that public confidence apparently is less a function of time than of present ability to pay and outlook for future ability to pay. The Eurostat unemployment data justify a negative outlook on present and future ability to pay in many of the EU countries. That is an indicator of a lack of confidence and increased stress in the financial system.

End of NightWatch for 30 November.

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