Peter L. Berger's Blog, page 655

Struggling Brazil Disapproves of Dilma

The results are in from Brazil’s latest opinion poll, and they aren’t at all good for President Dilma Rousseff. After narrowly winning reelection in October of last year, Brazil’s worsening economic problems have now manifested into dangerously low approval numbers for the President. The Wall Street Journal:

According to a survey by the Datafolha polling institute, 10% of respondents said the Rousseff administration was “excellent or good,” compared with 13% in a poll published in April.

Meanwhile, around 65% of respondents said Ms. Rousseff’s administration was “bad or terrible,” up from 60% in the previous survey. That was the highest level since 1992, when President Fernando Collor de Mello received a 68% rating shortly before he was impeached.Brazil’s economy is expected to decline around 1.35%, while inflation is at nearly 9%, well above the central bank’s tolerance band of 2.5% to 6.5%.

With a disapproval rating of 68 percent, three points higher than Rousseff’s current rating, President Collor was ultimately impeached on corruption charges, after which he resigned. Due in part to the plethora of government jobs filled by appointment (at 20,000 compared to about 5,500 in the United States), Brazil’s government has long been plagued by scandal and corruption.

Under President Rousseff’s watch, another corruption charge is spreading through the Administration. Though Rousseff has thus far not been implicated, the state-run energy company, Petrobras, is under an ever-expanding investigation into its activities during a period when Rousseff herself had been chair of the company. The scandal made waves again just this past week, as two prominent construction-industry executives were arrested as part of the investigation into price-fixing by Petrobras contractors on billions of dollars worth of contracts.Widespread dissatisfaction is eroding Ms. Rousseff’s political strength only months into her new Presidential term. The  “country of the future”, as Brazil has been called, may be further into the future than many hoped.

Clouds Gather over Monday’s Optimism on Greece

The European Central Bank has extended its emergency liquidity assistance program to battered Greek banks by a little less than €1 billion today—less than half of the €2 billion extended yesterday. The move underscores growing confidence that some kind of deal will be secured before Thursday’s EU summit.

Here was the statement of Jean-Claude Juncker, Commission President, on the summit, via the Financial Times :

I simply wanted to say that the proposals that the Greek government was submitting to our meditation tonight and early this morning – although these proposals were coming in with some delay – are a major step taken by the Greek authorities into the direction of the expectations of the three institutions involved in that process.

I am confident that the Eurogroup on Wednesday will produce results to be submitted to the European Council on Thursday. I am convinced that this is not only our intention to finalise the decision-making process this week – we will finalise the process this week.

The FT further states that “Even Wolfgang Schäuble, the German finance minister, on Tuesday softened this tough verdict of the previous morning, describing the latest Greek proposals as a starting point for further negotiations.” Not everyone is quite so excited, however. The Wall Street Journal reports that politicians in Berlin are grumbling, and the IMF is not satisfied either:

“It is still short of everything that should be expected,” IMF Managing Director Christine Lagarde said Monday, suggesting Greece will have to modify its proposals significantly to win the IMF’s backing.

Some differences also remain on the details of an overhaul of Greece’s value-added taxes, where creditors have demanded increased revenue and the government is trying to limit the extent of tax increases that would hit its lower-income supporters.IMF representatives have told European officials that they are also not satisfied yet by Greece’s broader economic overhaul plans beyond its budgetary promises. The IMF sees a wider, business-friendly shake-up of Greece’s economy as essential if the country is to improve its long-term economic growth.

And Syriza politicians back home in Athens are in high dudgeon as well, according to Reuters:

“I believe that this program as we see it … is difficult to pass by us,” deputy parliament speaker and Syriza lawmaker Alexis Mitropoulos told Greek Mega TV.

“The prime minister first has to inform our people on why we failed in the negotiation and ended up with this result,” he said. “I believe (the measures) are not in line with the principles of the left. This social carnage … they cannot accept it.”

Though markets appear to remain convinced that some kind of resolution is at hand, there is still plenty that could go wrong with all of this. Time is very tight, with any procedural delays increasingly poised to set off a series of events that could spiral out of control. If a deal is not hammered out by the end of the week, for example, the ECB is likely to end its support of Greek banks, and Athens would be forced to try to impose capital controls in the midst of a bank run (something Greek Finance Minister Yanis Varoufakis yesterday said would be very difficult at best).

May you live in interesting times.

State Dept: Iran Still a Leading Terror Sponsor

The State Department released its annual report on terrorism on Friday, and surprise, surprise, Iran—with whom diplomats in other parts of Foggy Bottom are negotiating feverishly to secure a final nuclear deal—is prominently mentioned:

Iran continued to sponsor terrorist groups around the world, principally through its Islamic Revolutionary Guard Corps-Qods Force (IRGC-QF). These groups included Lebanese Hizballah, several Iraqi Shia militant groups, Hamas, and Palestine Islamic Jihad. Iran, Hizballah, and other Shia militia continued to provide support to the Asad regime, dramatically bolstering its capabilities, prolonging the civil war in Syria, and worsening the human rights and refugee crisis there. Iran supplied quantities of arms to Syria and continued to send arms to Syria through Iraqi airspace in violation of UN Security Council Resolutions. Finally, Iran used Iraqi Shia militants and high profile appearances by Qods Force officials on the front lines of Iraq to claim credit for military successes against ISIL and to belittle coalition airstrikes and U.S. contributions to the Government of Iraq’s ongoing fight against ISIL.

This is awkward reading, to say the least, for an Administration in the midst of a grand outreach to Tehran. The selection above is only the paragraph from the preface (or global “strategic assessment”); there’s much more detail buried further down in the report, and none of it screams “partner for peace.”

Of course, it’s not like the White House is unaware Iran is sponsoring both terrorism throughout the world and proxy groups throughout the Middle East. It simply thinks that the best way to rein in Tehran is to bring it back within the community of nations, through a nuke deal, and then the modernizing, moderating trends in Persian society will reassert themselves over time. But a lot of mischief is hidden in that “and then.” The White House has yet to fully address why an Iranian government, when it receives the estimated $150 billion windfall from unfrozen assets that’s to follow sanctions relief plus the benefits of reopened trade, will not significantly increase its terror-sponsorship in the short term.Tellingly, at about the same time the report was being prepped for release, Iran’s energy sector was making preparations for some kind of deal to be signed and for sanctions to be lifted. Though negotiations with European companies that have worked in Iran until as late as 2010 (companies like Norway’s Statoil, France’s Total, and Italy’s Eni) will not get started until the deal is signed, Iran’s oil ministry is signaling that it will be offering longer and more profitable contracts in order to entice as much as $185 billion in investments over the next six years. Iranian officials estimate that if the investment starts pouring in, Iran could be pumping as many as a million barrels per day more than it is now within six months.There’s the oil, the windfall, the hedge funds, and a fistful of other industries opening up—Iran is due to make a lot of money. We’ve always maintained the issue with the nuclear deal isn’t just the nukes, it’s what kind of Middle East it creates. Put simply, after all that cash comes in (if a deal is signed), what will next year’s report look like?

A Rare Good Decision

Los Angeles is not exactly known for prudent policymaking, as the recent $15 minimum wage increase, anti-street vendor regulations, and persistent densification plans all demonstrate. But the L.A. Department of Building and Safety recently made a rare good decision recently, transferring the City’s building permit records and regulations online for all to see. The L.A. Times has the story:

“”This system cuts red tape and improves customer service for builders, developers, and everyday Angelenos, making L.A. more attractive to key investments that create jobs,” [Mayor Eric] Garcetti said.

The online system, available through the Department of Building and Safety website, allows users to examine building permits, certificates of occupancy and other paperwork. It includes more than 13 million records dating back to 1905, which can be searched using an address, parcel number or other key information.The new system was welcomed by business and advocacy groups. “Any time we can streamline the process and save folks the time … that’s a win not only for our industry but for the city and everyone…” “

In an age of dismayingly dysfunctional urban governance, stories like this are a breath of fresh air, especially when they come from deep blue citadels like Los Angeles. We are far into the Information Revolution, but our governmental institutions are all mostly designed for the world as it existed between the 1930s and the 1960s. Streamlining government services and making records and information transparent are both important steps towards fixing that. More of this, please.

Japan’s Self-Defense Bills Stalling

Facing obstructionist moves from minority parties in the Diet (Japan’s parliament), Japanese Prime Minister Shinzo Abe moved to extend the current session for an unprecedented 95 days—through September 27—so as to not have his security bills die on the floor. The Japan Times:

“I want to see a thorough debate (on the bills) using the 95-day extension,” Abe told reporters after the vote. “In seeking (the bills’) passage, I’ll ensure our explanation will be thorough.” […]

A bill will be scrapped at the end of a legislative session unless lawmakers go through procedures to carry it over to the next session. Thus opposition lawmakers have been trying to prolong deliberations of the controversial security bills as long as possible.Facing reporters after the Abe-Yamaguchi meeting, Sadakazu Tanigaki, secretary-general of the Liberal Democratic Party, said the two parties had decided to extend the session partly because public support for the bills has yet to “sufficiently prevail.”“I think it’s true that it is difficult to understand the bills at first glance,” Tanigaki said.

That public support has yet to “sufficiently prevail” is a lovely euphemism for the situation the LDP finds itself. Public opinion continues to turn against the measures, with a poll taken over the weekend finding that 63.1 percent thinking that the bills should not be enacted during the current legislative session, up 8 points from last month. 56.7 percent believe the bills are unconstitutional, with only 29.2 percent thinking that they are not.

Though some have argued that Japan’s Self-Defense Forces, first formed in the 1950s, have always been usable should the right circumstances arise, and that therefore the bills being debated in the Diet are of secondary importance, it would be a mistake to think that a setback for Abe here would be without consequences. China, for one, is sure to be watching carefully as the debate evolves.

Back to the Bad Old Days

Egypt was lucky that the June 11 suicide bombing in the popular tourist destination of Luxor only killed two policemen. During the 1997 attack in Luxor, 58 foreign tourists were killed. Egypt was spared another mass atrocity this time, but the incident is likely a harbinger of things to come. Indeed, just days before the Luxor blast, two policemen were gunned down at the Pyramids in Giza, just outside of Cairo.

These latest attacks highlight the deterioration of security in Egypt, a development that complicates efforts to improve the state’s ailing economy, and threatens to undermine the regime of President Abdel Fattah al-Sisi.Much of the problem stems from the Sinai. Over the past year, Sisi and the military have been unable to contain or roll back the Islamic State or ISIS-affiliated rebellion in the Sinai. The violence commenced with the 2011 toppling of longtime President Hosni Mubarak and has gotten progressively worse. To date, nearly 1,000 troops and policemen have died trying to contain the burgeoning insurgency in the Peninsula.The violence, however, has not been limited to just the Sinai. In the past year alone, there have been nearly 200 attacks in Egypt outside of Sinai, including drive by shootings, grenade attacks, and the detonation of improvised explosive devices.Reflexively, the Government of Egypt has attributed these acts of terrorism to the Muslim Brotherhood, which was banned following the July 2014 coup that removed the democratically elected Islamist President and brought Sisi to power. While the organization has yet to explicitly take credit for specific acts of terrorism, a January 2015 statement on the Brotherhood’s website called for “a long uncompromising jihad” against the Sisi regime.But the June 11 suicide bombing represents something new, a clear escalation of tactics and targets. Historically, Egypt’s Muslim Brotherhood has abjured from “martyrdom” operations. Luxor suggests that the Brotherhood is evolving, or that ISIS is expanding its operations west of the Suez Canal.Either way, the onset of suicide operations beyond the canal represents a return to the 1990s, when Egypt battled a pernicious and persistent insurgency led by the Gama’a Islamiyya. During that decade, the Islamic Group—led by the blind cleric Sheikh Omar Abdel Rahman—wreaked havoc in Egypt, targeting policemen, government officials, Coptic Christians, and tourists, killing more than 1,200.The human toll during that decade was high, but so was the economic cost. Throughout the 1990s, tourism—which accounts for about 10 percent of the Egyptian economy—stagnated at around 300,000 visitors a month. In 1998, the year after Luxor, tourism revenues dropped by more than 25 percent, to less than $3 billion, and grew little until the smoke cleared from September 11, 2001. With the Islamic Group defeated, by 2011, foreign visitors to Egypt had skyrocketed to more than 1.5 million per month.By 2013, two years after Mubarak’s fall, the World Bank had ranked Egypt 140th—last in the world, behind Pakistan and Yemen—in terms of tourist safety. A year into the Sisi era, tourists had just started to return to Egypt. If last week’s terrorist attacks become a commonplace occurrence, though, as in the 1990s, then the tourism numbers could again bottom out.And developments in the Sinai could make matters even worse.On August 6, President Sisi will inaugurate a new 37-kilometer waterway, an $8 billion project designed to increase the capacity of the Suez Canal. Canal revenues are another critical source of government revenue, accounting for nearly $5.5 billion or 2 percent of GDP in 2014.Two years ago in August, terrorists affiliated with al-Qaeda fired a rocket propelled grenade at a ship traversing the canal. Amazingly, the vessel did not sustain serious damage. But today, ISIS affiliates in the Sinai possess advanced Russian anti-tank weapons capable of scuttling a ship, effectively blocking Suez Canal traffic.All of which is bad news for President Sisi, who has staked his legacy on resuscitating Egypt’s economy. Above all else, tourism, canal revenues, and foreign direct investment in Egypt are dependent on re-establishing security.After a difficult year, Washington appears to have come to terms with the coup and the Sisi presidency. In April 2015, the Obama Administration ended its long moratorium on weapons transfers and delivered ten Apache helicopters to Egypt. The transfer of still other purchased U.S. systems—including 12 F-16 fighter jets—could be delayed indefinitely, especially if the death sentence verdicts against several senior Muslim Brotherhood officials are carried out.But Egypt’s security—whether in the Sinai or west of the Suez Canal—isn’t contingent on tanks, fighter jets, or attack helicopters.Like Mubarak in the 1990s, Sisi can succeed in quelling the insurgency, but only if he adopts a new approach.One perennial challenge for Sisi is the Egyptian military’s atavistic attachment to expensive legacy systems ill-suited for a counterterrorism campaign. Beyond equipment, Egyptian operations in the Sinai ignore hard-learned modern counterinsurgency techniques, employing (frequently excessive) kinetic strategies, rather than economic ones.Despite prodding from Washington, Cairo has also stubbornly refused to reprogram U.S. military assistance dollars to secure its border with its failed-state neighbor, Libya. Closer to home, the state’s draconian approach to the Muslim Brotherhood—which won 50 percent of the parliamentary seats in the 2011–12 elections—may need some tweaking as well.Earlier this month in Cairo, an Egyptian general told me that the army was “winning” the war in Sinai. Despite assurances, victory is nowhere in sight in the Sinai, and terrorism is taking root along the banks of Egypt’s Nile River.Despite initial misgivings about the coup, the Obama Administration has backed Sisi’s economic agenda, praising his subsidy reforms and deploying Secretary of State Kerry in support of an investment conference in Sharm el-Sheikh this past March. None of this will much matter, however, if security continues to deteriorate. Absent a transition to modern counterterrorism tactics, Sisi’s Egypt could be in for a long decade.

Russia’s Faces Bleak Energy Outlook

The Russian economy is besieged on all sides these days, as Western sanctions sap foreign investment and tepid demand and abundant supply depress the price of oil. Energy analyst Dr. Tatiana Mitrova paints a grim portrait of Russian oil and gas prospects in an oversupplied world and links that development with economic stagnation, as Natural Gas Europe reports:

[A] stagnant economy is having a knock-effect for producers, customers, and for investment into the sector.

“There has been some sort of competition in the gas sector but definitely that is not enough for a purely competitive and efficient market,” [said Dr. Tatiana Mitrova, Head of the Oil and Gas Department at the Energy Research Institute of the Russian Academy of Sciences]. “Now we are facing a stagnant demand both for oil and gas globally. These two commodities are providing 70% of Russian export and 50% of Russian federal budget revenues, so you can imagine how painful that is.” […]“The oil and gas price decline is a complete disaster,” she says. “Again, if you remember 50% of the federal budget is provided by oil and gas, that explains a lot why Russia is so nervous about the oil price and gas price.”

Partially in response to Western sanctions, Moscow finalized a massive $400 billion gas deal with Beijing last year, and has another similar supply agreement currently in the works. Checked in the west, Russia is appearing to turn east to ply its hydrocarbon wares, but Mitrova pours cold water on those agreements, saying “Asian exports will start to expand only after the Power of Siberia pipeline is completed in five years starting from now. After that, it will take another five years to reach its projected capacity of 38bcm. Only by 2025 will the expected capacity of 38bcm start to flow to China, providing Russia with some diversification.”

Europe is far from freeing itself from Gazprom’s clutches, but Mitrova points out that Gazprom has given up on plans to extend its reach westward, content instead to protect what it’s already staked out. “Currently no one is talking about expansion. Currently it’s about protecting the market niche,” she said. However, the Kremlin has to be deeply concerned about its precarious position in an oversupplied world, especially as its conventional fields mature and output tapers off.

Iran Lets the US Teeter

The Iranians are mooting extending the nuclear negotiations, Bloomberg reports:

Foreign Minister Mohammad Javad Zarif and his deputy, Abbas Araghchi, both said on Monday that differences with a group of world powers were unresolved and that a deal by the end of the month might not be possible.

“Political and technical differences remain,” Zarif said ahead of discussions with European diplomats at an EU summit in Luxembourg. “We’ve always tried to channel all our efforts into finalizing a deal at the first possible opportunity, but it’s more important that we reach a good agreement.”Talks with envoys from the group of six world powers haven’t “progressed as much as we expected,” Araghchi was reported as saying by the semi-official Iranian Students’ News Agency. An extension may be needed to reach an “acceptable and desirable” accord, he said.

For Iran, the best outcome in the short term may well be an extension: in the case of one, U.S. relations in the region will continue to fray, without Tehran undertaking any new obligations on its part. The Iranians have been on the march in the Middle East lately, and the U.S. and the West in general have been in disarray. Why would Tehran not want the present cycle to continue?

In recent weeks, the Administration seemed to suggest that it would do anything, make any concession, to get a deal. Many things are still possible: the Iranians may have gotten over-confident, for instance, and may actually need time to recalibrate. Certainly, the recent display of French hawkishness (France has recently been getting on very well with Saudi Arabia) has complicated both U.S. and Iranian calculations. And it’s still possible, as TAI editor Adam Garfinkle has previously surmised, that it’s the Iranians who will walk away in the end, for internal reasons (and they will then try to blame us.)But in the interim, Iran is doing pretty well at the regional level—and the Administration is teetering on a limb it climbed out onto eagerly. At a minimum, that might continue a little longer.