The New Power in the PNA

By George Friedman

Hamas has beaten Fatah in a key election and
is now the dominant political party among the Palestinians. Many observers
expressed surprise at the outcome, but the only thing that should have
surprised anyone is that there was surprise. Hamas was facing a corrupt
Fatah faction that had been driven into the ground by Yasser Arafat.
Arafat's successor, Mahmoud Abbas -- who was widely celebrated by Western
leaders -- is in fact an obscure party functionary whose primary claim to
leadership was his relationship with Arafat. While Arafat, the icon of
Palestinian nationalism, could not be repudiated, repudiating Abbas was
easy. Like the political wing of Fatah, he stood for nothing but the
perpetuation of Fatah and the system of patronage that Arafat created. When
it came to Abbas, Western media and leaders confused political exhaustion
with virtue.

But it was not simply internal Palestinian politics
that drove the Hamas victory. A wave of Islamist politics is sweeping the
Muslim and Arab worlds, and the Palestinians are far from immune. The
Islamist movement is doing far more than simply challenging the West: It is
challenging the secular Arabists who were the heirs of the Nasserite
tradition. The Islamists are confronting figures like Hosni Mubarak in
Egypt. In many ways, Fatah was the embodiment of secular Arabism -- the
purest form of Nasserism. The Palestinians were among the most secular in
the Arab world. Therefore, challenging and defeating Fatah represents a
critical moment in the history of the Arab and Muslim world. It represents a
new high-water mark for Islamists.

There was yet another process at
work in the election. Arafat and the Palestinian National Authority (PNA)
that he essentially created and dominated have existed in a complex
relationship with Israel. In many ways, the PNA was a creation of Israel,
living within boundaries that Israel defined. Whatever its level of
involvement in the suicide bombing campaign against Israel, via Marwan
Bargouthi and the al-Aqsa Martyrs Brigade, Fatah still accepted the
existence of the state of Israel. As a secular movement, it had no inherent
moral objection to Israel's existence -- only a political objection, and
political objections are inherently flexible.

Hamas has a moral
objection to Israel's existence, deriving from its understanding of Islamic
texts. But it also had serious political objections to Fatah's approach to
Israel. From Hamas' point of view, once Arafat had negotiated the existence
of a quasi-state -- the PNA -- he became casual about negotiating the two
critical things: first, the definition and rights of the Palestinian nation
and, second, the transformation of the sort-of-state the PNA represented
into an authentic state. An authentic state, by Hamas' lights, meant a state
with an army that it was free to deploy in a clearly defined territory.


Even if Hamas accepted the existence of Israel in some sense, its
view was that the other side of the equation had not been fulfilled. Only
the illusion -- not the reality -- of a Palestinian nation-state had been
created. Hamas' objection to Fatah was that it had accepted an illusion. Its
objection to Abbas was that he was content to preside over an illusion.
Corruption, the decline of Arab secularism and the inability of Fatah to
articulate the interests of the Palestinians led it to defeat after decades
of dominating and defining the Palestinian cause.

The issue today is
what Hamas will do with its power. It must be understood that Hamas has not
yet reached an unassailable position among the Palestinians: It defeated but
did not blow out Fatah. Fatah is still there and can, particularly after a
defeat like this, recover. Moreover, Hamas has never faced the problem of
governing. Its unity is the unity of an opposition party, and its purity is
the purity of a movement that has never had to award contracts for paving
roads. There is a vast difference between opposing the rascals in power and
taking power yourself. A party unused to ruling can very quickly become
everything that it has opposed -- a bureaucratized, patronage-driven entity
more interested in holding onto power than in governing.

It is very
possible that this will happen to Hamas. Certainly, this is what Israelis
hope will happen. There is a strand of thinking among Israelis that argues
that Hamas' victory is the best hope there is for peace in the Middle East.
The logic runs thus: Negotiating with the PNA under Arafat or Abbas was an
exercise in futility. Arafat was duplicitous and Abbas powerless. No
settlement reached by Fatah would ever have any meaning because Fatah could
not deliver the rejectionists among the Palestinians. Hamas embodies the
rejectionists. If Hamas were to enter into an agreement -- even if it had
opposition on its flanks, like Ariel Sharon did on the Israeli side -- it
ultimately would be able to deliver. And since peace is always made with
enemies, better to deal with your worst enemy than with hapless moderates
like Abbas.

Moreover, this line accepts that Hamas rejects the right
of Israel to exist, that it has waged and can continue to wage suicide bomb
attacks in Israel, and that it intends to govern by whipping up religious
sentiment that must, by definition, be anti-Israeli. Nevertheless, this
reasoning goes, the experience of government will affect Hamas in two ways.
First, Hamas has come into power on a tidal wave of hope -- but those hopes
inevitably will be dashed. Hamas will, in a fairly short period of time,
come under criticism for failing to deliver on those hopes. And second, as
we have said, because Hamas is ill-prepared for the mechanics of governing,
it will commit a series of amateurish errors, further dulling its bright
credentials. Therefore, Hamas -- a radical Islamist movement with a
rejectionist policy -- simultaneously will embody the most radical position
among Palestinians while transforming into a normal political party. Not
only will it be able to negotiate from a position of authority, but its
appetite for confrontation will be dulled.

This is a view shared by
many Western observers as well as Israelis, but there is, as one can see, a
deep contradiction in the thinking. On the one side, Hamas is valued as a
powerful revolutionary force -- therefore, it can negotiate authoritatively.
On the other, it will be moved to negotiate because the experience of
governing will exhaust it sufficiently that it will move from radical to
routine politics.

Before this question of what Hamas will do with its
power can be answered, two immediate challenges are posed to both Israel and
the West. Western countries funnel a great deal of aid to the Palestinians.
One of the charges made against Arafat was that he, in effect, stole a great
deal of that money. It was one of the charges leveled by his Palestinian
critics, and one of the ways they wound up in Palestinian jails. At this
point, depending on how the PNA reconstitutes itself, that money is likely
to be passed to the control of Hamas functionaries. In effect, Hamas will be
the recipient of Western aid.

Israel has a similar problem. The
Israelis collect a good portion of Palestinian taxes and pass them back to
the PNA -- one of the reasons we call the PNA a pseudo-state. When the
Israelis remit the funds to Palestinian accounts, those accounts will be
controlled by Hamas. Hamas has announced its intention to take its own
militias and designate them as a Palestinian army. The Israelis have
accepted the concept of a Palestinian police and security force, but
accepting the existence of a Palestinian army -- let alone a Palestinian
army that is in reality Hamas' militias -- and passing tax funds to them to
spend as they wish would challenge the Israeli understanding of what a
Palestinian state will mean. Sharon certainly didn't envision that -- and
with his incapacitation, he has come to embody the gold standard of the
Israeli position on the Palestinians.

But forget the Israelis for a
moment. Consider the position of the Americans and Europeans. First, all
sides have agreed that there should be a Palestinian state and have provided
funding to the PNA. Second, all sides believe deeply in the concepts of
national self-determination and free elections. Third, all sides oppose
terrorism and the kind of suicide bombing campaigns carried out by Hamas.
Even those governments most sympathetic to the Palestinians have opposed
Hamas' rejection of Israel's right to exist and the suicide campaigns.


So then, we have an ongoing flow of money to a PNA that is seen as
the legitimate representative of the Palestinian people, and what appears to
be a free and honest election of a group that is regarded by virtually
everyone outside the Muslim world as among the least savory of terrorists. A
decision must be made fairly quickly. Does the world honor the principle of
national self-determination, even when the nation determines it wishes to be
governed by people who are regarded as morally reprehensible?

Those
who argue for national self-determination and free elections always seem to
think that the outcome will be the election of nice folks who'd be at home
in Wisconsin. This is as true of the Bush administration as of Amnesty
International. It is the universal self-delusion of the West. OK, so now the
Palestinian people have spoken, and they have spoken for Hamas. Since Amnesty
International has no power, it will be able to finesse its position more
easily than the Bush administration -- which does have to make a
decision.

The decision to be made is clear and must come soon: Does
the United States continue to provide funds to the PNA, even if those funds
wind up in Hamas' coffers? This question has broad ramifications. One of the
goals the United States has set itself in the war against jihadists is to
create an environment in which free elections can be held in the Muslim
world. We guess the assumption has been that, given a choice, Muslims would
vote for pro-Western, secular regimes. The Palestinians have voted for an
anti-Western, religious regime. Which gives -- the doctrine of the absolute
right to self-determination, or the absolute opposition to groups designated
as terrorists?

The Bush administration does not have the luxury of
ignoring this one. Unless action is taken, the money will continue to flow.
Sending money to Hamas will surely cause the administration to say, "Does
not compute, does not compute." Cutting off the money will signal to the
Islamic world that the United States is absolutely committed to democratic
institutions, unless it doesn't like the outcome.

The Israelis, for
their part, will have to figure out whether they want to rupture relations
with the PNA by cutting off tax funds collected from the Palestinians. Doing
that could result in the resumption of the intifada and suicide bombings. The
Israelis have no appetite for this. Thus, the United States and Israel will
be regarding each other with fairly blank looks on their faces, wondering,
"What do we do now?"

Meanwhile, Hamas will be moving rapidly to take
control of the mechanisms of the PNA. They have made a lot of bold promises,
and they need to turn their election into a psychological victory. At the
moment, their minds are not on international relations, but on consolidating
their political and psychological position among the Palestinians. To the
extent they are looking beyond their immediate realm, they are looking at
the Islamic world.

That means that they will be saying and doing
things that increase the fervor of their followers and give opponents a
sense of their relentless inevitability. Personnel shifts, particularly the
replacement of officials known to be close to the West or Israel, will take
place quickly. Statements will be made that will be frightening to the West
and exhilarating to the Palestinians. In the United States, Israel and
Europe, the blank look will turn to serious concern, and the pressure to act
will grow.

That will be the critical point. Hamas benefits from a
sense of embattlement -- the sense that it is confronting the enemies of
Islam. As it backs the Israelis and Americans into a corner, and both start
reacting, Hamas will increase its strength and authority. It will also look
to countries like Saudi Arabia -- a fellow Sunni entity, rather than Shiite
Iran -- and the other Gulf states for support. Some European countries will
continue funding Hamas under the theory that engagement will moderate the
movement. And that will be the tipping point.

We have never believed
that a long-term solution to the Israeli-Palestinian crisis could be found.
It is certainly true that if Hamas, in becoming a governing party, is forced
by its circumstances to negotiate a settlement with Israel, then our theory
would be wrong. But the other possibility is that Hamas, due to internal
political considerations as well as the reaction of Israel and the United
States, will become more inflexible. We tend to believe that is the likely
outcome. But even if it turns out to be the first case, we long
have argued that the geographic realities of the Israelis and
Palestinians preclude the existence of two viable states. Hamas, even if it
enters the peace process, knows the problem and will demand more than Israel
could possibly concede.

The peace process is not in worse shape than
it was before the Hamas win, because the situation was never any good. The
new constellation is interesting, but not all that different. There will be
hints of improvement followed by disappointment, coupled with spasms of
violence. We don't see how this can change.

Osama's Vietnam Syndrome

By George Friedman

Osama bin Laden has broken his long silence:
An audiotape containing his latest statement was delivered to and broadcast
by Al Jazeera on Jan. 19. The United States has said that the tape appears
to be authentic, and there has been ample time for al Qaeda to have denied
its authenticity if it were fake. That hasn't happened, so it appears
reasonable to assume that this is, in fact, an authoritative statement by
the head of al Qaeda.

This obviously puts to rest the question of
whether bin Laden is still alive. The tape apparently was recorded after
Nov. 22, 2005, since bin Laden discusses the widely circulated story that
U.S. President George W. Bush had suggested to British Prime Minister Tony
Blair that Al Jazeera's headquarters should be bombed. That story first
appeared in the press on Nov. 22. While the tape theoretically could have
been made anytime between Nov. 22 and Jan. 19, logic and precedent dictate
that it would have been recorded some time before it was aired. It generally
takes -- and has always taken -- at least a week, and often longer, for
messages from bin Laden to reach broadcast stage. Security requires a slow
and tortuous journey, lest the tape be tracked back to bin Laden's location.
So we would guess that the tape was not made much after Jan. 1.

If we
were to guess -- and this is pure guess -- we would argue that the tape was
made after Dec. 15, 2005. Dec. 15 was the date of the election in Iraq. That
election drew extensive participation by the Sunni population and posed a
serious crisis for the jihadists in Iraq. It raised the real possibility
that a substantial portion of the Sunnis would turn against the jihadists,
since they would now have a role to play in the government. There were also
serious discussions within the Muslim world, and in the United States, as to
whether al Qaeda remained functional and whether bin Laden -- who hadn't been
seen or heard from since December 2004 -- was still alive. The Dec. 15 date
represented a crisis for al Qaeda, and it was logical that bin Laden would
be willing to face the security risk involved with making and transporting a
tape. Therefore, not that this is critical, but we would guess the tape was
made sometime between Dec. 16 and the first week of January.

The
recording reveals two things about bin Laden.

First, he is still in
touch with the world. He knows what is going on in American politics, he has
access to American books -- he mentions one book by name -- and he is aware
of the state of operations in Iraq. The level of detail varies, but it is
unlikely that he is stuck in a cave somewhere. Unless there are platoons of
couriers bringing reports to him -- something that would violate all rules
of security -- it would appear that bin Laden is able to access satellite
television and possibly the Internet. Wherever he is, there is electricity
and some degree of connectivity to the world. He's getting his news from
somewhere.

Second, and much more important, bin Laden is aware of
the state of the war and has decided that he needs to change tactics
somewhat. He acknowledges the possibility of al Qaeda's defeat, which is not
like the old bin Laden. On the tape, according to a translation made by The
Associated Press, he says:

"Finally, I say that war will go either in
our favor or yours. If it is the former, it means your loss and your shame
forever, and it is headed in this course. If it is the latter, read history!
We are people who do not stand for injustice and we will seek revenge all our
lives. The nights and days will not pass without us taking vengeance like
Sept. 11, God permitting."

At this juncture, he is separating the war
from the attacks of Sept. 11. He is open to the possibility that the war
might be lost. However, acts of revenge -- like the Sept. 11 attacks -- will
continue. Bin Laden therefore is referring to Sept. 11 as an operation other
than war.

In referring to the true war, he specifically cites Iraq
and Afghanistan. About those, he speaks -- at the beginning of his recording
-- with his usual bravado: "The war in Iraq is boiling up without end and the
operations in Afghanistan are continuing in our favor." Thus, there is a
disconnect between this assertion that the war continues and that the trends
favor al Qaeda, and the assertion that the war might go either way. Two
things are clear: First, bin Laden increasingly means, by "war," operations
in Iraq and Afghanistan; and second, he views Sept. 11-type operations not
as part of the war, but as an alternative to war.

These points are
interesting. But what is fascinating and vital is his turn to Vietnam as a
mode of analysis and strategy. Bin Laden refers to the U.S. Army as the
"Vietnam butcher." This indicates that he has been thinking about Vietnam,
but that thinking becomes clearer in the way he addresses the problems and
opportunities in Iraq and Afghanistan.

First, he focuses on anti-war
sentiment in the United States:

"But I plan to speak about the
repeated errors your President Bush has committed in comments on the results
of your polls that show an overwhelming majority of you want the withdrawal
of American troops from Iraq. But he has opposed this wish and said that
withdrawing troops sends the wrong message to opponents, that it is better
to fight them on their land than their fighting us on our land."

Bin
Laden clearly knows about the polling trends in the United States and
obviously knows that Bush has slipped substantially in opinion polls. He
overstates the numbers when he says that the overwhelming majority want
withdrawal -- it is a majority, but far from overwhelming -- but he clearly
is speaking to the anti-war movement in the United States.

He is also
speaking to troops in Iraq, saying: "Pentagon figures show the number of your
dead and wounded is increasing not to mention the massive material losses,
the destruction of the soldiers' morale there and the rise in cases of
suicide among them." Bin Laden is portraying the U.S. Army in Iraq as being
in fairly desperate straits, while the Pentagon remains indifferent.


Analytically, he views the condition of the United States as if it were
Vietnam. Bin Laden is asserting that there is massive sentiment against the
war and that Bush, like Lyndon Johnson and Richard Nixon, is resisting that
movement and resisting withdrawal. He is portraying the Army in Iraq as if
it were the Army in Vietnam, late in that war. The truth or falsehood of the
view is not material here -- nor should his statements be taken as propaganda
directed at the American public. Bin Laden is not unsophisticated. He is not
trying to persuade the American public to oppose the war. His view is that
the polls show that Bush's political base has collapsed, along with morale
in the U.S. Army.

Bin Laden then pulls a maneuver right out of Ho Chi
Minh's playbook, saying:

"We don't mind offering you a long-term truce
on fair conditions that we adhere to. We are a nation that God has forbidden
to lie and cheat. So both sides can enjoy security and stability under this
truce so we can build Iraq and Afghanistan, which have been destroyed in
this war. There is no shame in this solution, which prevents the wasting of
billions of dollars that have gone to those with influence and merchants of
war in America who have supported Bush's election campaign with billions of
dollars -- which lets us understand the insistence by Bush and his gang to
carry on with war. If you are sincere in your desire for peace and security,
we have answered you."

If there is a massive anti-war movement in the
United States and if the Army is weary of war, then the next logical move is
to offer negotiations toward a cease-fire. Bin Laden completely understands
that Bush would reject that offer. His hope is that the offer of a truce
would further split the United States -- undermining Bush's political power
even more and giving ammunition to those who want an end to the war. "If you
are sincere in your desire for peace and security," he says, "we have
answered you."

During the Vietnam war, the North Vietnamese
introduced the idea of a negotiated settlement in large part because they
wanted to provide a rational basis for the anti-war movement. They
understood that there would be only a tiny pro-Hanoi movement in the United
States. They also understood that as the war dragged on and victory became
less visible, support would grow for a negotiated settlement as the only
reasonable outcome. The view of the pro-war faction -- that the offers of
peace talks did not provide any basis for a real settlement but were a cover
for a North Vietnamese victory -- was opposed by those who argued that
settlement and withdrawal were the only rational actions for the United
States in an unwinnable war.

Wherever he is, bin Laden has done a lot
of thinking, and he apparently has come to think of himself as Ho Chi Minh.
From his viewpoint, Bush, like Johnson, is resisting a wave of anti-war
sentiment. The Army is tired. An offer of a long-term, honorable truce would
build up the anti-war faction. Add to that the promise that even if the
United States wins the wars in Iraq and Afghanistan, al Qaeda will continue
to stage Sept. 11-type attacks, and you have an added incentive for a
negotiated settlement.

Bin Laden may be deluding himself, but he
smells serious political problems for Bush in the United States and a
movement that wants to withdraw forces in return for a truce that guarantees
no further attacks on the American public. That is the heart of his message.
He is prepared to negotiate a truce. He believes that this will fuel
anti-war sentiment today, just as the offer of negotiations fueled anti-war
sentiment in the 1960s. And if that truce is agreed to, he believes that he
can reshape the Islamic world today much as North Vietnam reshaped
Indochina.

What is most clever in this move is that it doesn't
require actual negotiations. If Bush starts to draw down forces in Iraq, bin
Laden can declare a truce and imply in the Muslim world that he compelled the
United States to capitulate. He is trying to trap Bush in two ways. If there
isn't a drawdown, Bush would face an anti-war movement calling for truce
with al Qaeda. And if there is a drawdown, Bush would face assertions that
he is implicitly or secretly agreeing to the truce that bin Laden
proposed.

Bin Laden is not Ho Chi Minh. No one will call him "Uncle
Osama" or liken him to George Washington, as they did Ho. It is difficult to
imagine that anyone -- pro- or anti-war -- in the United States would think
seriously of negotiating with him. Even the Europeans, who have never seen
an offer of negotiation they didn't like, took a pass when it came to bin
Laden. Nevertheless, as a glimpse into bin Laden's strategic thinking, the
view is fascinating. Above all, there is this parallel: The most creative
diplomacy of the North Vietnamese followed their defeat in the Tet
Offensive. The moment that bin Laden's strategic position in Iraq (but not
Afghanistan) is at its weakest -- following the Dec. 15 elections -- is the
moment he offers a truce.

Fascinating.

Iran's Redefined Strategy

By George Friedman

The Iranians have broken the International
Atomic Energy Agency seals on some of their nuclear facilities. They did
this very deliberately and publicly to make certain that everyone knew that
Tehran was proceeding with its nuclear program. Prior to this, and in
parallel, the Iranians began to -- among other things -- systematically bait
the Israelis, threatening to wipe them from the face of the earth.

The
question, of course, is what exactly the Iranians are up to. They do not yet
have nuclear weapons. The Israelis do. The Iranians have now hinted that (a)
they plan to build nuclear weapons and have implied, as clearly as possible
without saying it, that (b) they plan to use them against Israel. On the
surface, these statements appear to be begging for a pre-emptive strike by
Israel. There are many things one might hope for, but a surprise visit from
the Israeli air force is not usually one of them. Nevertheless, that is
exactly what the Iranians seem to be doing, so we need to sort this
out.

There are four possibilities:

1. Mahmoud Ahmadinejad, the
Iranian president, is insane and wants to be attacked because of a bad
childhood.
2. The Iranians are engaged in a complex diplomatic maneuver,
and this is part of it.
3. The Iranians think they can get nuclear
weapons -- and a deterrent to Israel -- before the Israelis attack.
4.
The Iranians, actually and rationally, would welcome an Israeli -- or for
that matter, American -- air strike.

Let's begin with the insanity
issue, just to get it out of the way. One of the ways to avoid thinking
seriously about foreign policy is to dismiss as a nutcase anyone who does
not behave as you yourself would. As such, he is unpredictable and, while
scary, cannot be controlled. You are therefore relieved of the burden of
doing anything about him. In foreign policy, it is sometimes useful to
appear to be insane, as it is in poker: The less predictable you are, the
more power you have -- and insanity is a great tool of unpredictability.
Some leaders cultivate an aura of insanity.

However, people who climb
to the leadership of nations containing many millions of people must be
highly disciplined, with insight into others and the ability to plan
carefully. Lunatics rarely have those characteristics. Certainly, there have
been sociopaths -- like Hitler -- but at the same time, he was a very able,
insightful, meticulous man. He might have been crazy, but dismissing him
because he was crazy -- as many did -- was a massive mistake. Moreover,
leaders do not rise alone. They are surrounded by other ambitious people. In
the case of Ahmadinejad, he is answerable to others above him (in this case,
Ayatollah Ali Khamenei), alongside him and below him. He did not get to
where he is by being nuts -- and even if we think what he says is insane, it
clearly doesn't strike the rest of his audience as insane. Thinking of him as
insane is neither helpful nor clarifying.

The Three-Player
Game

So what is happening?

First, the Iranians obviously
are responding to the Americans. Tehran's position in Iraq is not what the
Iranians had hoped it would be. U.S. maneuvers with the Sunnis in Iraq and
the behavior of Iraqi Shiite leaders clearly have created a situation in
which the outcome will not be the creation of an Iranian satellite state. At
best, Iraq will be influenced by Iran or neutral. At worst, it will drift
back into opposition to Iran -- which has been Iraq's traditional
geopolitical position. This is not satisfactory. Iran's Iraq policy has not
failed, but it is not the outcome Tehran dreamt of in 2003.

There is
a much larger issue. The United States has managed its position in Iraq --
to the extent that it has been managed -- by manipulating the Sunni-Shiite
fault line in the Muslim world. In the same way that Richard Nixon
manipulated the Sino-Soviet split, the fundamental fault line in the
Communist world, to keep the Soviets contained and off-balance late in the
Vietnam War, so the Bush administration has used the primordial fault line
in the Islamic world, the Sunni-Shiite split, to manipulate the situation in
Iraq.

Washington did this on a broader scale as well. Having enticed
Iran with new opportunities -- both for Iran as a nation and as the leading
Shiite power in a post-Saddam world -- the administration turned to Sunni
countries like Saudi Arabia and enticed them into accommodation with the
United States by allowing them to consider the consequences of an ascended
Iran under canopy of a relationship with the United States. Washington used
that vision of Iran to gain leverage in Saudi Arabia. The United States has
been moving back and forth between Sunnis and Shia since the invasion of
Afghanistan, when it obtained Iranian support for operations in
Afghanistan's Shiite regions. Each side was using the other. The United
States, however, attained the strategic goal of any three-player game: It
became the swing player between Sunnis and Shia.

This was not what
the Iranians had hoped for.

Reclaiming the
Banner

There is yet another dimension to this. In 1979, when the
Ayatollah Ruholla Khomeini deposed the Shah of Iran, Iran was the center of
revolutionary Islamism. It both stood against the United States and
positioned itself as the standard-bearer for radical Islamist youth. It was
Iran, through its creation, Hezbollah, that pioneered suicide bombings. It
championed the principle of revolutionary Islamism against both
collaborationist states like Saudi Arabia and secular revolutionaries like
Yasser Arafat. It positioned Shi'ism as the protector of the faith and the
hope of the future.

In having to defend against Saddam Hussein's Iraq
in the 1980s, and the resulting containment battle, Iran became ensnared in a
range of necessary but compromising relationships. Recall, if you will, that
the Iran-Contra affair revealed not only that the United States used Israel
to send weapons to Iran, but also that Iran accepted weapons from Israel.
Iran did what it had to in order to survive, but the complexity of its
operations led to serious compromises. By the late 1990s, Iran had lost any
pretense of revolutionary primacy in the Islamic world. It had been flanked
by the Sunni Wahhabi movement, al Qaeda.

The Iranians always saw al
Qaeda as an outgrowth of Saudi Arabia and Pakistan and therefore, through
Shiite and Iranian eyes, never trusted it. Iran certainly didn't want al
Qaeda to usurp the position of primary challenger to the West. Under any
circumstances, it did not want al Qaeda to flourish. It was caught in a
challenge. First, it had to reduce al Qaeda's influence, or concede that the
Sunnis had taken the banner from Khomeini's revolution. Second, Iran had to
reclaim its place. Third, it had to do this without undermining its
geopolitical interests.

Tehran spent the time from 2003 through 2005
maximizing what it could from the Iraq situation. It also quietly
participated in the reduction of al Qaeda's network and global reach. In
doing so, it appeared to much of the Islamic world as clever and capable,
but not particularly principled. Tehran's clear willingness to collaborate
on some level with the United States in Afghanistan, in Iraq and in the war
on al Qaeda made it appear as collaborationist as it had accused the
Kuwaitis or Saudis of being in the past. By the end of 2005, Iran had
secured its western frontier as well as it could, had achieved what
influence it could in Baghdad, had seen al Qaeda weakened. It was time for
the next phase. It had to reclaim its position as the leader of the Islamic
revolutionary movement for itself and for Shi'ism.

Thus, the
selection of the new president was, in retrospect, carefully engineered.
After President Mohammed Khatami's term, all moderates were excluded from
the electoral process by decree, and the election came down to a struggle
between former President Ali Akbar Hashemi Rafsanjani -- an heir to
Khomeini's tradition, but also an heir to the tactical pragmatism of the
1980s and 1990s -- and Ahmadinejad, the clearest descendent of the Khomeini
revolution that there was in Iran, and someone who in many ways had avoided
the worst taints of compromise.

Ahmadinejad was set loose to reclaim
Iran's position in the Muslim world. Since Iran had collaborated with Israel
during the 1980s, and since Iranian money in Lebanon had mingled with Israeli
money, the first thing he had to do was to reassert Iran's anti-Zionist
credentials. He did that by threatening Israel's existence and denying the
Holocaust. Whether he believed what he was saying is immaterial. Ahmadinejad
used the Holocaust issue to do two things: First, he established himself as
intellectually both anti-Israeli and anti-Jewish, taking the far flank among
Islamic leaders; and second, he signaled a massive breach with Khatami's
approach.

Khatami was focused on splitting the Western world by
dividing the Americans from the Europeans. In carrying out this policy, he
had to manipulate the Europeans. The Europeans were always open to the claim
that the Americans were being rigid and were delighted to serve the role of
sophisticated mediator. Khatami used the Europeans' vanity brilliantly,
sucking them into endless discussions and turning the Iran situation into a
problem the Europeans were having with the United States.

But Tehran
paid a price for this in the Muslim world. In drawing close to the
Europeans, the Iranians simply appeared to be up to their old game of
unprincipled realpolitik with people -- Europeans -- who were no better than
the Americans. The Europeans were simply Americans who were weaker.
Ahmadinejad could not carry out his strategy of flanking the Wahhabis and
still continue the minuet with Europe. So he ended Khatami's game with a
bang, with a massive diatribe on the Holocaust and by arguing that if there
had been one, the Europeans bore the blame. That froze Germany out of any
further dealings with Tehran, and even the French had to back off. Iran's
stock in the Islamic world started to rise.

The Nuclear
Gambit

The second phase was for Iran to very publicly resume --
or very publicly claim to be resuming -- development of a nuclear weapon.
This signaled three things:

1. Iran's policy of accommodation with
the West was over.
2. Iran intended to get a nuclear weapon in order to
become the only real challenge to Israel and, not incidentally, a regional
power that Sunni states would have to deal with.
3. Iran was prepared to
take risks that no other Muslim actor was prepared to take. Al Qaeda was a
piker.

The fundamental fact is that Ahmadinejad knows that, except in
the case of extreme luck, Iran will not be able to get nuclear weapons.
First, building a nuclear device is not the same thing as building a nuclear
weapon. A nuclear weapon must be sufficiently small, robust and reliable to
deliver to a target. A nuclear device has to sit there and go boom. The key
technologies here are not the ones that build a device but the ones that
turn a device into a weapon -- and then there is the delivery system to
worry about: range, reliability, payload, accuracy. Iran has a way to
go.

A lot of countries don't want an Iranian bomb. Israel is one. The
United States is another. Throw Saudi Arabia, Turkey, and most of the 'Stans
into this, and there are not a lot of supporters for an Iranian bomb.
However, there are only two countries that can do something about it. The
Israelis don't want to get the grief, but they are the ones who cannot avoid
action because they are the most vulnerable if Iran should develop a weapon.
The United States doesn't want Israel to strike at Iran, as that would
massively complicate the U.S. situation in the region, but it doesn't want
to carry out the strike itself either.

This, by the way, is a good
place to pause and explain to readers who will write in wondering why the
United States will tolerate an Israeli nuclear force but not an Iranian one.
The answer is simple. Israel will probably not blow up New York. That's why
the United States doesn't mind Israel having nukes and does mind Iran having
them. Is that fair? This is power politics, not sharing time in preschool.
End of digression.

Intra-Islamic Diplomacy

If the
Iranians are seen as getting too close to a weapon, either the United States
or Israel will take them out, and there is an outside chance that the
facilities could not be taken out with a high degree of assurance unless
nukes are used. In the past, our view was that the Iranians would move
carefully in using the nukes to gain leverage against the United States.
That is no longer clear. Their focus now seems to be not on their
traditional diplomacy, but on a more radical, intra-Islamic diplomacy. That
means that they might welcome a (survivable) attack by Israel or the United
States. It would burnish Iran's credentials as the true martyr and fighter
of Islam.

Meanwhile, the Iranians appear to be reaching out to the
Sunnis on a number of levels. Muqtada al-Sadr, the leader of a radical
Shiite group in Iraq with ties to Iran, visited Saudi Arabia recently. There
are contacts between radical Shia and Sunnis in Lebanon as well. The Iranians
appear to be engaged in an attempt to create the kind of coalition in the
Muslim world that al Qaeda failed to create. From Tehran's point of view, if
they get a deliverable nuclear device, that's great -- but if they are
attacked by Israel or the United States, that's not a bad outcome either.


In short, the diplomacy that Iran practiced from the beginning of
the Iraq-Iran war until after the U.S. invasion of Iraq appears to be ended.
Iran is making a play for ownership of revolutionary Islamism on behalf of
itself and the Shia. Thus, Tehran will continue to make provocative moves,
while hoping to avoid counterstrikes. On the other hand, if there are
counterstrikes, the Iranians will probably be able to live with that as
we

Dissecting the 'Chinese Miracle'

By Peter Zeihan

The "Chinese miracle" has been a leading economic story for several years now. The headlines are familiar: "China's GDP Growth Fastest in Asia." "China Overtakes United Kingdom as Fourth-Largest Economy." "China Becomes World's Second-Largest Energy Consumer." "China Revises GDP Growth Rates Upward -- Again." Everywhere, one can find news articles about China, rising like a phoenix from the economic debris of its Maoist system to change and challenge the world in every way imaginable.

But just like the phoenix, the idea of an inevitable Chinese juggernaut is a myth.

Moreover, Western markets have been at least subconsciously aware of this for a decade. More than half of the $1.1 trillion in foreign direct investment that has flowed into China since 1995 has not been foreign at all, but money recirculated through tax havens by various local businessmen and governing officials looking to avoid taxation. Of the remainder, Western investment into China has remained startlingly constant at about $7 billion annually. Only Asian investors whose systems are often plagued (like Japan's) by similar problems of profitability or (like Indonesia's) outright collapse have been increasing their exposure in China.

Once the numbers are broken down, it's clear that the reality of China does not live up to the hype. While it is true that growth rates have been extremely strong, growth does not necessarily equal health. China's core problem, the inability to allocate capital efficiently, is embedded in its development model. The goals of that model -- rapid urbanization, mass employment and maximization of capital flow -- have been met, but to the detriment of profitability and return on capital. In time, China is likely to find itself undone not only by its failures, but also by its successes.

The Chinese Model

Until very recently, China's economic system operated in this way:

State-owned banks held a monopoly on deposits in the country, allowing them to take advantage of Asians' legendary savings rate and thus ensuring a massive pool of capital. The state banks then lent to state-owned enterprises (SOEs). This served two purposes. First, it kept the money in the family and assisted Beijing in maintaining control of the broader economic and political system. Second, because loans were disbursed frequently and at subsidized rates -- and banks did not insist upon strict repayment -- the state was able to guarantee ongoing employment to the Chinese masses.

This last point was -- and remains -- of critical importance to the Chinese Politburo: they know what can happen when the proletariat rises in anger. That is, after all, how they became the Politburo in the first place.

The cost of keeping the money circulating in this way, of course, is that China's state firms are now so indebted as to make their balance sheets a joke, and the banks are swimming in bad debts -- independent estimates peg the amount at around 35-50 percent of the country's GDP. Yet so long as the economic system remains closed, the process can be kept up ad infinitum: After all, what does it matter if the banks are broke if they are state-backed and shielded from competition and enjoy exclusive access to all of the country's depositors?

This system, initiated under Deng Xiaoping in 1979, served China well for years. It yielded unrestricted growth and rapid urbanization, and helped China emerge as a major economic power. And so long as China kept its financial system under wraps, it would remain invulnerable.

But the dawning problem is that China is not in its own little world: It is now a World Trade Organization member, and nearly half of its GDP is locked up in international trade. Its WTO commitments dictate that by December, Beijing must allow any interested foreign companies to compete in the Chinese banking market without restriction. But without some fairly severe adjustments, this shift would swiftly suck the capital out of the Chinese banking system. After all, if you are a Chinese depositor, who would you put your money with -- a foreign bank offering 2 percent interest and a passbook that means something, or a local state bank that can (probably) be counted on to give your money back (without interest)?

The Chinese are well aware of their problems, and perhaps their greatest asset at this point is that -- unlike the Soviets before them -- they are hiding neither the nature nor the size of the problem. Chinese state media have been reporting on the bad loan issue for the better part of two years, and state officials regularly consult each other as well as academics and businesspeople on what precisely they should do to avert a catastrophe.


The result has been a series of stopgap measures to buy time. Among these, the most far-reaching initiative has been a partial reform of the financial sector. The government has founded a series of asset-management companies to take over the bad loans from the state banks, thus scrubbing them free of most of the nonperforming loans. The scrubbed banks are then opened up so that interested foreign investors can purchase shares.


So far as it goes, this is a win-win scenario: Foreign banks get access to assets in-country before the December jump-in date, and the state banks avoid meltdown. In addition, a measure of foreign management expertise is injected into the system that hopefully will teach the state banks how to lend appropriately and -- if all goes well -- lead to the formation of a healthy financial sector. At the same time, the deep-pocketed foreign companies come away with a vested interest in keeping their new partners -- and by extension, the Chinese government -- fully afloat.

The only downside is that central government, through its asset-management firms, assumes responsibility for financially supporting all of China's loss-making state-owned enterprises.

But this rather ingenious banking shell game addresses only the immediate problem of a looming financial catastrophe. Left completely untouched is the existence of a few hundred billion dollars in dud loans -- linked to tens of thousands of dud firms for which the central government is now directly responsible.

Which still leaves for China the unsettled question: "Now what do we do?"

Two Opposing "Solutions"

As can be expected from a country that just underwent a leadership change, there are two competing solutions.


The first solution belongs to the generation of leadership personified by Deng Xiaoping and Jiang Zemin, and could be summed up as a philosophy of "Grow faster and it will all work out." It could be said that during Jiang's presidency, while the leadership certainly perceived China's debt problem, they -- like their counterparts in Japan -- felt that attacking the problem at its source -- the banking system -- would lead to an economic collapse (not to mention infuriate political supporters who benefited greatly from the system of cheap credit).

Jiang's recommendation was that everyone should build everything imaginable in hopes that the resulting massive growth and development would help catapult China to "developed country" status -- or, at the very least, raise overall wealth levels sufficiently that the population would not turn rebellious. In the minds of Jiang and his generation of leaders, the belief was that only rapid economic growth -- defined as that in excess of 8 percent annually -- could contain growing unemployment and urbanization pressures and thus hold social instability at bay.

The second solution comes from the current generation of leadership, represented by President Hu Jintao. This solution calls for rationalizing both development goals and credit allocation. The leadership wants to eliminate the "growth for its own sake" philosophy, consolidate inefficient producers and upgrade everything with a liberal dose of technology. Key to this strategy is a centrally planned effort to focus economic development on the inland areas that need it most -- and this entails tighter control over credit. Hu wants loans to go only to enterprises that will use money efficiently or to projects that serve specific national development goals -- narrowing the rich-poor, urban-rural and coastal-interior gaps in particular.

There are massive drawbacks to either solution.

Regional and local governors enthusiastically seized upon Jiang's program to massively expand their own personal fiefdoms. And as corporate empires of these local leaders grew, so too did Chinese demand for every conceivable industrial commodity. One result was the massive increases in commodity prices of 2003 and 2004, but the results for the Chinese economy were negligible. China consumes 12 percent of global energy, 25 percent of aluminum, 28 percent of steel and 42 percent of cement -- but is responsible for only 4.3 percent of total global economic output. Ultimately, while "solution" espoused by Jiang's generation did forestall a civil breakdown, it also saddled China with thousands of new non-competitive projects, even more bad debt, and a culture of corruption so deep that cases of applied capital punishment for graft and embezzlement have soared into the thousands.

Yet the potential drawbacks of the solution offered by Hu's generation are even worse. In attempting to consolidate, modernize and rationalize Jiang's legacy, Hu's government is butting heads with nearly all of the country's local and regional leaderships. These people did quite well for themselves under Jiang and are not letting go of their wealth easily. Such resistance has forced the Hu government to reform by a thousand pinpricks, needling specific local leaders on specific projects while using control of the asset management firms as a financial hammer. After all, since the central government relieved the state banks of their bad loan burden, it now has the perfect tool to strip power from those local leaders who prove less-than-enthusiastic about the changes in government policy.

Or at least that is how it is supposed to work. Local government officials have become so entrenched in their economic and political fiefdoms that they are, at best, simply ignoring the central government or, at worst, actively impeding central government edicts.

Hu's team is indeed making progress, but with the problem mammoth and the resistance both entrenched and stubborn, they can move only so fast for fear of risking a broader collapse or rebellion. And this does not take into consideration Beijing's efforts to strengthen the Chinese interior -- where the poorest Chinese actually live. Complicating matters even more, Hu's strategy relies upon the central government's ability to wring money out of the wealthy coastal regions to pay for the reconstruction of the interior.

That has made the coastal leaders even more disgruntled. However, they have come upon a fresh source of funding, replacing the traditional sources of capital that now are drying up as a result of the personnel changes in Beijing: the underground lending system, which was spurred by the official government monopoly over banks in years past. The central government now estimates that the underground banking sector is worth 800 billion yuan, or some 28 percent of the value of all loans granted in country.

Dealing with Failure -- And Success

The question in our mind is which strategy will fail -- or even succeed -- first. If Jiang's system prevails, then growth will continue, along with the attendant rise in commodity prices -- but at the cost of growing income disparity and environmental degradation. The likely outcome of such "success" would be a broad rebellion by the country's interior regions as money becomes increasingly concentrated in the coastal regions long favored by Jiang. And that is assuming the financial system does not collapse first under its own weight.

Local rebellions in China's rural regions have already become common, but two of are particular note.

In March, the villagers of Huaxi in the Zhejiang region protested against a local official who had used his connections to build a chemical plant on the outskirts of town. When rumors of police brutality surfaced, some 20,000 villagers quite literally seized control of the town from 3,000 security personnel. Before all was said and done, the villagers invited regional press agencies in to chronicle events in the town that had told the Politburo to go to hell, and started burning police property and parading riot control equipment before anyone who would watch. They actually sold tickets to their rebellion. Huaxi marked the first time local officials actually lost control of a town.

Then, in December, protests erupted against a local official in Shanwei, who had similarly lined his pockets with the money that was supposed to have been made available to farmers displaced by his expanding wind-power farm. The local governor figured that since he was investing not just in an energy-generating project in energy-starved China, but a green energy project, that he would have carte blanche to run events as he saw fit. He was right. When the protests turned violent, government forces opened fire -- the first authorized use of force by government troops against protesters since the Tiananmen Square incident in 1989.

Such events are, in part, evidence of a degree of success for the strategy espoused by Jiang's generation. The grow-grow-grow policy results in massive demand for labor by tens of thousands of economically questionable -- and typically state-owned -- corporations. This, in turn, draws workers from the rural regions to the rapidly expanding urban centers by the tens of millions. The dominant sense among those who are left behind -- or those who find their urban experiences less-than-savory -- is that they have been exploited. This is particularly true in places like Shanwei, on the outskirts of urban regions, when urban governors begin confiscating agricultural land for their pet projects.

But for all the complications created by Jiang's solution to China's economic challenges, it is Hu's counter-solution that could truly shatter the system. In addition to dealing with all the corrupt flotsam and high-priced jetsam of Jiang's policies, Hu must rip down what Jiang set out to accomplish: thousands of fresh enterprises that are unencumbered by profit concerns. A steady culling of China's non-competitive industry is perhaps a good idea from the central government's point of view -- and essential for the transformation of the Chinese economy into one that would actually be viable in the long term -- but not if you happen to be one of the local officials who personally benefited from Jiang's policies.

The approach of Hu's generation is nothing less than an attempt to recast the country in a mold that is loosely based on Western economics and finance. Even in the best-case scenario, the central government not only needs to put thousands of mewling firms to the sword and deal with the massive unemployment that will result, it also needs to eliminate the businessmen and governing officials who did well under the previous system (which did not even begin to loosen its grip until 2003). And the only way Beijing can pay for its efforts to develop the interior is to tax the coast dry at the same time it is being gutted politically and economically.


The challenge is to keep this undeclared war at a tolerable level, even while ratcheting up pressure on the coastal lords in terms of both taxation and rationalization. But just as Jiang's "solution" faces the doomsday possibility of a long rural march to rebellion, Hu's strategy well might trigger a coastal revolution. As the central government gradually increases its pressure on the assets and power of China's coastal lords, there is a danger that those in the coastal regions will do what anyone would in such a situation: reach out for whatever allies -- economic and political -- might become available. And if China's history is any guide, they will not stop reaching simply because they reach the ocean.

The last time China's coastal provinces rebelled, they achieved de facto independence -- by helping foreign powers secure spheres of influence -- during the Boxer Rebellion. This resulted, among things, in a near-total breakdown of central authority.

 

Update: Curzon likes Stratfor, and SimonWorld likes the analysis.