As everyone has seen over the past week, President Obama plans to honor the agreement that will have all US military personnel out of Iraq by the end of the year, but what comes after that?  Although I don’t usually use “Truth-Out” as a source, their article (though heavily nuanced) has a pretty good encapsulation of what we might see: 

Speaking from the White House, President Barack Obama announced today that all US troops in Iraq would be withdrawn by the end of the year. The final drawdown will leave behind thousands of private security contractors and State Department employees….

Between 4,500 and 5,000 private security contractors will remain in Iraq to protect two US consulates and the embassy in Baghdad, according to Denis McDonough, Obama’s deputy national security adviser.

The State Department will have 16,000 civilian employees on the ground in Iraq and is preparing for its largest overseas operation since the end of World War II, according to a Washington Post report.

The Washington Post article talks more about the role that the State Department will be playing in a post-Military Iraq, comparing it charitably with the Marshall Plan:

The State Department is racing against an end-of-year deadline to take over Iraq operations from the U.S. military, throwing together buildings and marshaling contractors in its biggest overseas operation since the effort to rebuild Europe after World War II.

Attention in Washington and Baghdad has centered on the number of U.S. troops that could remain in Iraq. But those forces will be dwarfed by an estimated 16,000 civilians under the American ambassador — the size of an Army division.

And what is the scope of what these folks will be doing?  Well, pretty diverse:

The list of responsibilities the State Department will pick up from the military is daunting. It will have to provide security for the roughly 1,750 traditional embassy personnel — diplomats, aid workers, Treasury employees and so on — in a country rocked by daily bombings and assassinations.

To do so, the department is contracting about 5,000 security personnel. They will protect the U.S. Embassy in Baghdad plus two consulates, a pair of support sites at Iraqi airports and three police-training facilities.

The department will also operate its own air service — the 46-aircraft Embassy Air Iraq — and its own hospitals, functions the U.S. military have been performing. About 4,600 contractors, mostly non-American, will provide cooking, cleaning, medical care and other services. Rounding out the civilian presence will be about 4,600 people scattered over 10 or 11 sites, where Iraqis will be instructed on how to use U.S. military equipment their country has purchased.

So, are we just taking out military folks, and just replacing them with ex-military folks that have gone on to work for the Private Military Firms?  Yeah, that’s about it.  Remember that the stumbling block for the Obama plan to keep between 3-5,000 folks in Iraq was the immunity issue with the Status of Forces Agreement (SOFA).  Baldly stated, this meant that US Troops who committed an illegal act in the country was immune from being charged by the host country, and would rather be charged by the United States, back here.

However, contractors come with their own set of problems.  For instance, how might a civilian contractor employed by the State Department be eligible for diplomatic immunity?   A great article at CNN lays out some of the intrinsic problems:

For years, thousands of civilian contractors have worked in Iraq operating in a variety of military and support functions. But they have always lacked the same criminal immunity from Iraqi laws that the U.S. military enjoys under existing agreements between the two countries. And for the most part, they operated under the purview of the Defense Department.

While contractors would be subject to the Iraqi criminal justice system as they always have, ambiguities will still exist as to how they would also be held accountable under U.S. law if a situation similar to the 2007 incident involving contractors working for Blackwater (now operating as Xe Services) were to occur.

The issues surrounding their presence in Iraq are likely to become only more complex when U.S. troops do pull out and leave the oversight of the entire contracting force to the U.S. Embassy in Baghdad.

“What the State Department does is diplomacy, and you’re going to have the State Department managing contractors that are going to be flying helicopters, driving MRAP’s, medevac-ing wounded personnel,” Richard Fontaine, and expert on contracting issues with the Center for a New American Security, told CNN.

It will be interesting to see how all that shakes out.  Essentially it is accepted that War in Iraq is over, but if you simply switch out contractors for the military, it begs the question if anything has changed.  Despite the obvious up-front cost of contractors, in the long run, the costs are mitigated by the fact that a cook or trigger-puller for a private military firm doesn’t have the extensive train-up costs and retirement benefits that their military brethren have.  Of course, when you pay a guy $200,000 a year (like the DynCorps guys on Karzai’s protective detail were getting) you don’t as much have to look forward to your retirement as you do when you are only making 50k.

http://burnpit.legion.org/2011/10/private-military-firms-and-post-2011-iraq

War is on its way in the Middle East as Muslim countries are determined to force a showdown over the future of Israel, Ronald Reagan’s assistant defense secretary Frank Gaffney warned in an exclusive Newsmax.TV interview.

“I’m afraid there’s a war coming, a very serious, perhaps cataclysmic regional war,” he said. “It will be presumably over, at least in part, the future existence of the state of Israel. It may involve all of its neighbors, as they have in the past, attacking Israel to try, as they say, to drive the Jews into the sea.

“It may involve the use of nuclear weapons,” Gaffney predicted. “But whatever form it takes and whenever it occurs, it is unlikely to be contained to that region, and we must do everything we can to prevent freedom’s enemies from thinking they have an opportunity to engage in that kind of warfare.”

That means standing “absolutely, unmistakably” as one with Israel and doing everything to prevent Iran getting its hands on nuclear weapons.

Gaffney, who now heads up the nonprofit Center for Security Policy in Washington, D.C., was speaking on the day that the “moderate” Islamist party Ennahda claimed victory at the ballot box in Tunisia and the day after Libya’s new rulers declared that country will be run on Islamic principles and under Sharia law.

Gaffney does not believe Ennahda is really a moderating force. “I don’t believe there is such a thing as a moderate Islamist party,” he said. “The challenge with Islamists is that they seek to impose what they call Sharia on everybody, Muslim and non-Muslim alike.

“They may, as a matter of tactical expediency, choose to do so in incremental ways, often nonviolently, at least initially.

“The problem is that, because ultimately they must — according to Sharia, according to what they believe is God’s will — make everyone feel subdued in order to achieve their God-mandated direction, they will not remain moderate. They will not be satisfied with anything less than the ultimate supremacy of Sharia and they certainly will not resist the use of violence when it becomes expedient to get their way.”

Gaffney, who writes a regular column for Newsmax, foresees a rising tide of Islamist governments growing throughout Middle East and North Africa and spreading even further.

“We’re witnessing not just the violent kind of jihad that these Islamists believe God compels them to engage in, but also, where they must for tactical reasons, a more stealthy kind, or civilizational jihad as the Muslim Brotherhood calls it. We’re witnessing that playing out, not only in places in the Middle East but also in Europe, in Australia, in Canada and here in the United States as well,” he said.

The spread of Sharia, which Gaffney said often is referred to as “Communism with a god,” is “the most urgent and grievous challenge we face as a free people.

“Those who follow this program of Sharia believe that God is directing them to engage in jihad or whatever form of warfare is necessary to accomplish their goals . . . .Through stealth, they have successfully penetrated important parts of the free world including our own government and civil society institutions.”

The Obama administration has to stop “embracing” the Muslim Brotherhood, Gaffney said.

“This is legitimating our enemies,” he said. “It is facilitating their influence operations and their penetration and it greatly increases the prospect that they will be successful at what the Muslim Brotherhood’s own documents indicate is their desire, which is to destroy western civilization from within.”

Gaffney noted that Ennahda had won what appears to be a clean election in Tunisia, but that doesn’t mean there ever will be another vote there.

“The problem is not simply democracy. People are pointing to Tunisia as a perfect example of democracy at work. Democracy is fine if all you want is one-man-one-vote one-time. That is precisely what the Muslim Brotherhood and its like-minded Islamist friends want.”

The Obama administration must apply pressure to ensure that democracy has a future there and elsewhere in the region, Gaffney said.

“The president and his administration are not even pursuing that,” he said. “What we are likely to wind up with, not just in Tunisia, not just in Libya, not just in Egypt, but probably in due course in Syria — as we have in Lebanon, as we have in Gaza and probably will have down the road in Yemen, Bahrain, maybe Saudi Arabia — is the takeover, the unmistakable takeover, perhaps through the ballot box, of people who will not seek or allow others freedom, who will impose Sharia and who will use whatever resources they amass as a result, not only to suppress their own people, but to endanger us.”

http://www.newsmax.com/PrintTemplate.aspx?nodeid=415578

By Scott Stewart

On Oct. 11, the U.S. Department of Justice announced that two men had been charged in New York with taking part in a plot directed by the Iranian Quds Force to kill Saudi Arabia’s ambassador to the United States, Adel al-Jubeir, on U.S. soil.

Manssor Arbabsiar and Gholam Shakuri face numerous charges, including conspiracy to use a weapon of mass destruction (explosives), conspiracy to commit an act of terrorism transcending national borders and conspiracy to murder a foreign official. Arbabsiar, who was arrested Sept. 29 at John F. Kennedy International Airport in New York, is a U.S. citizen with both Iranian and U.S. passports. Shakuri, who remains at large, allegedly is a senior officer in Iran’s Quds Force, a special unit of the Islamic Revolutionary Guard Corps (IRGC) believed to promote military and terrorist activities abroad.

Between May and July, Arbabsiar, who lives in the United States, allegedly traveled several times to Mexico, where he met with a U.S. Drug Enforcement Administration (DEA) confidential informant who was posing as an associate of the Mexican Los Zetas cartel. The criminal complaint charges that Arbabsiar attempted to hire the DEA source and his purported accomplices to kill the ambassador. Arbabsiar’s Iranian contacts allegedly wired two separate payments totaling $100,000 in August into an FBI-controlled bank account in the United States, with Shakuri’s approval, as a down payment to the DEA source for the killing (the agreed-upon total price was $1.5 million).

Much has been written about the Arbabsiar case, both by those who believe the U.S. government’s case is valid and by those who doubt the facts laid out in the criminal complaint. However, as we have watched this case unfold, along with the media coverage surrounding it, it has occurred to us that there are two aspects of the case that we think merit more discussion. The first is that, as history has shown, it is not unusual for Iran to employ unconventional assassins in plots inside the United States. Second, while the DEA informant was reportedly posing as a member of Los Zetas, we do not believe the case proves any sort of increase in the terrorist threat emanating from the United States’ southern border.

Unconventional Assassins

 One argument that has appeared in media coverage and has cast doubt on the validity of the U.S. government’s case is the alleged use by the Quds Force of Arbabsiar, an unemployed used car salesman, as its interlocutor. The criminal complaint states that Arbabsiar was recruited by his cousin, Abdul Reza Shahlai, a senior Quds Force commander, in spring 2011 and then handled by Shakuri, who is Shahlai’s deputy. The complaint also alleges that, initially, Arbabsiar was tasked with finding someone to kidnap al-Jubeir, but at some unspecified point the objective of the plot turned from kidnapping to murder. After his arrest, Arbabsiar told the agents who interviewed him that he was chosen for the mission because of his business interests and contacts in the United States and Mexico and that he told his cousin that he knew individuals involved in the narcotics trade. Shahlai then allegedly tasked Arbabsiar to attempt to hire some of his narco contacts for the kidnapping mission since Shahlai believed that people involved in the narcotics trade would be willing to undertake illegal activities, such as kidnapping, for money.

It is important to recognize that Arbabsiar was not just a random used car salesman selected for this mission. He is purportedly the cousin of a senior Quds Force officer and was in Iran talking to his cousin when he was recruited. According to some interviews appearing in the media, Arbabsiar had decided to leave the United States and return permanently to Iran, but, as a naturalized U.S. citizen, he could have been seen as useful by the Quds Force for his ability to freely travel to the United States. Arbabsiar also was likely enticed by the money he could make working for the Quds Force — money that could have been useful in helping him re-establish himself in Iran. If he was motivated by money rather than ideology, it could explain why he flipped so easily after being arrested by U.S. authorities.

Now, while the Iranian government has shown the ability to conduct sophisticated operations in countries within its sphere of influence, such as Lebanon and Iraq, the use of suboptimal agents to orchestrate an assassination plot in the United States is not entirely without precedent.

For example, there appear to be some very interesting parallels between the Arbabsiar case and two other alleged Iranian plots to assassinate dissidents in Los Angeles and London. The details of these cases were exposed in the prosecution and conviction of Mohammad Reza Sadeghnia in California and in U.S. diplomatic cables released by WikiLeaks pertaining to the Sadeghnia case.

Sadeghnia, who was arrested in Los Angeles in July 2009, is a naturalized U.S. citizen of Iranian descent who at one point ran a painting business in Michigan. Sadeghnia was apparently recruited by the Iranian government and allegedly carried out preoperational surveillance on Jamshid Sharmahd, who made radio broadcasts for the Iranian opposition group Tondar from his residence in Glendora, Calif., and Ali Reza Nourizadeh, who worked for Voice of America in London.

Sadeghnia’s clumsy surveillance activities were a testament to his lack of tradecraft and were noticed by his targets. But even though he was fairly inept, a number of other factors seem to support claims that he was working as an agent for the Iranian government. These include his guilty plea, his international travel, and the facts that he conducted surveillance on two high-profile Iranian dissidents on two continents, was convicted of soliciting someone to murder one of them and then returned to Tehran while on supervised release.

Sadeghnia’s profile as an unemployed housepainter from Iran who lived in the United States for many years is similar to that of Arbabsiar, a failed used car salesman. Sadeghnia pleaded guilty of planning to use a third man (also an Iranian-American) to run over and murder Sharmahd with a used van Sadeghnia had purchased. Like the alleged Arbabsiar plot, the Sadeghnia case displayed a lack of sophisticated assassination methodology in an Iranian-linked plot inside the United States.

This does raise the question of why Iran chose to use another unsophisticated assassination operation after the Sadeghnia failure. On the other hand, the Iranians experienced no meaningful repercussions from that plot or much negative press.

For Iranian operatives to be so obvious while operating inside the United States is not a new thing, as illustrated by the case of David Belfield, also known as Dawud Salahuddin, who was hired by the Iranian government to assassinate high-profile Iranian dissident Ali Akbar Tabatabaei in July 1980. Salahuddin is an African-American convert to Islam who worked as a security guard at an Iranian diplomatic office in Washington. He was paid $5,000 to shoot Tabatabaei and then fled the United States for Iran, where he still resides. In a plot reminiscent of the movie Three Days of the Condor, Salahuddin, who had stolen a U.S. Postal Service jeep, walked up to Tabatabaei’s front door dressed in a mail carrier’s uniform and shot the Iranian diplomat as he answered the door. It was a simple plot in which the Iranian hand was readily visible.

There also have been numerous assassinations and failed assassination attempts directed against Iranian dissidents in Europe and elsewhere that were conducted in a rudimentary fashion by operatives easily linked to Iran. Such cases include the 1991 assassination of Shapour Bakhtiar in Paris, the 1989 murder of Abdul Rahman Ghassemlou in Vienna and the 1992 killing of three Iranian-Kurdish opposition leaders at the Mykonos restaurant in Berlin.

All that said, there was a lengthy break between the Iranian assassinations in the West in the 1980s and 1990s and the Sadeghnia and Arbabsiar cases. We do not know for certain what could have motivated Iran to resume such operations, but the Iranians have been locked in a sustained covert intelligence war with the United States and its allies for several years now. It is possible these attacks are seen as an Iranian escalation in that war, or as retaliation for the assassinations of Iranian nuclear scientists in Iran, which the Iranians claim were conducted by the United States and Israel.

South of the Border

 One other result of the Arbabsiar case is that it has re-energized the long-held U.S. fears of foreign entities using the porous U.S.-Mexico border to conduct terrorist attacks inside the United States and of Mexican cartels partnering with foreign entities to carry out such attacks.

But there are reasons this case does not substantiate such fears. First, it is important to remember that the purported Iranian operative in this case who traveled to the United States, Arbabsiar, is a naturalized U.S. citizen. He is not an Iranian who illegally crossed the border from Mexico. Arbabsiar used his U.S. passport to travel between the United States and Mexico.

Second, while Arbabsiar, and purportedly Shahlai, believed that the Los Zetas cartel would undertake kidnapping or assassination in the United States in exchange for money, that assumption may be flawed. Certainly, while Mexican cartels do indeed kidnap and murder people inside the United States (often for financial gain), they also have a long history of being very careful about the types of operations they conduct inside the United States. This is because the cartels do not want to incur the full wrath of the U.S. government. Shooting a drug dealer in Laredo who loses a load of dope is one thing; going after the Saudi ambassador in Washington is quite another. While the payoff for this operation seems substantial ($1.5 million), there is no way that a Mexican cartel would jeopardize its billion-dollar enterprise for such a small one-time payment and for an act that offered no other apparent business benefit to the cartel. While Mexican cartels can be quite violent, their violence is calculated for the most part, and they tend to refrain from activities that could jeopardize their long-term business plans.

One potential danger in terms of U.S. mainland security is that the Arbabsiar case might focus too much additional attention on the U.S.-Mexico border and that this attention could cause resources to be diverted from the northern border and other points of entry, such as airports and seaports. While it is relatively easy to illegally enter the United States over the southern border, and the United States has no idea who many of the illegal immigrants really are, that does not mean that resources should be taken from elsewhere.

As STRATFOR has noted before, many terrorist plots have originated in Canada — far more than have had any sort of nexus to Mexico. These include plots involving Ghazi Ibrahim Abu Mezer, a Palestinian who was convicted of planning a suicide bombing of the New York subway system in 1997; Ahmed Ressam, who was arrested when he tried to enter the United States with explosives in 1999; and the so-called Toronto 18 cell, which was arrested in 2006 and later convicted of planning a string of attacks in Canada and the United States.

Moreover, most terrorist operatives who have traveled to the United States intending to participate in terrorist attacks have flown directly into the country from overseas. Such operatives include the 19 men involved in the 9/11 attacks, the foreigners involved in the 1993 World Trade Center bombing and the follow-on New York landmarks bomb plot, as well as failed New York subway bomber Najibulah Zazi and would-be Times Square bomber Faisal Shahzad. Even failed shoe bomber Richard Reid and would-be underwear bomber Umar Farouk Abdulmutallab attempted to fly directly into the United States.

While there is concern over security on the southern U.S. border, past plots involving foreign terrorist operatives traveling to the United States have either involved direct travel to the United States or travel from Canada. There is simply no empirical evidence to support the idea that the Mexican border is more likely to be used by terrorist operatives than other points of entry.

An IED Attack in Monterrey

On Oct. 20, as a Mexican military patrol chased a vehicle carrying suspected cartel gunmen through the streets of Monterrey, Nuevo Leon state, an unidentified party remotely detonated an improvised explosive device (IED) placed in a parked car moments before the patrol passed by it. There were no reported deaths or injuries from the blast, but all of the gunmen in the vehicle escaped. Though this is the first IED attack Monterrey has witnessed, there have been other such attacks in Mexico within the past year or so. In July 2010, La Linea, the enforcement arm of the Vicente Carrillo Fuentes cartel, set off an IED in a car in Ciudad Juarez, killing four people; between August and December 2010, the Gulf cartel deployed as many as six IEDs throughout Tamaulipas state; and in January 2011, a small IED detonated in Tula, Hidalgo state, injuring four people.

In the aftermath of such attacks, it is tempting for observers and the mainstream media to assume cartel violence in Mexico has reached an unprecedented level of escalation, and that an increased use of IEDs is all but certain. However, the Oct. 20 ambush, sophisticated though it was, actually showed some degree of restraint on the part of the planners, as did the IED attacks of the past year elsewhere in Mexico. Given the psychological impact and tactical effectiveness of IED use in a combat environment — and cartel personnel armed with the knowledge to construct sophisticated explosive devices — perhaps more astonishing than the occurrence of IED attacks is the fact that cartels do not conduct them with more regularity or on a greater magnitude than they have. That the cartels choose not to do so illustrates a calculated strategy aimed at staving off further American involvement and limiting negative domestic public opinion against them.

Military grade explosives are very easy to acquire on the black market in Mexico. More readily available and cheaper than guns, they are routinely confiscated by security forces. In fact, the army has made notable seizures as recently as the past week. On Oct. 18, the Mexican army seized around 20 kilograms (about 45 pounds) of C4 in or around Mexico City, capable of producing an explosion 10 times larger than that of the Monterrey blast. Later on Oct. 20, the army seized 45 blocks of C4, detonators, weapons and cell phones in Coatzacoalcos, Veracruz state.

The prevalence of individuals practiced at constructing explosive devices adds to the issue. Many cartels employ ex-military personnel as enforcers. Los Zetas, for example, were founded by defectors from the Mexican army’s Special Forces Airmobile Group and originally served as the enforcement arm of the Gulf cartel before embarking on their own narcotics trafficking operations. These individuals learned the intricacies of demolitions as part of their military training, and they are now in a position to deploy — or train others to deploy — IEDs across the country.

However, former members of the military are not the only ones in Mexico who know how to make bombs. The country’s mining sector has given many people an expertise in the use of explosives and has contributed to cartel inventories. Industrial hydrogel explosives have been used in some IEDs, notably in an attempt made in Juarez in August 2010. They also have been seized in cartel munitions caches in large enough quantities to bring down buildings.

Despite the availability of explosives and the prevalence of people who know how to manipulate those explosives, large IEDs have yet to be deployed in Mexico. This dynamic has been very different from what we have seen in places like Colombia in the 1980s and 1990s. The reason for this is simple. The leaders of Mexico’s various cartels conduct business based on the principle that if they can stand to benefit from something — an assassination, extortion or even a licit activity — they will do it; if not, it will be avoided. The use of large IEDs would create substantial domestic pressure and compel the Mexican government to come down hard on the cartels — much harder than Mexican President Felipe Calderon’s administration has demonstrated to date.

More important, cartels cannot afford direct and heavy-handed interdiction from the U.S. government aimed at their total dismantlement. The use of large, powerful IEDs would lead the Mexican government to designate the cartels as terrorist organizations. Such a designation would allow U.S. law enforcement easier access to their finances and operation, something the cartels want to avoid at every cost. It could also lead to dramatically increased U.S. involvement in the fight against the Mexican criminal cartels.

Mexico’s drug cartels must weigh the tactical benefits of using IEDs with the strategic need to keep the U.S. government off their backs. Intermittent IED attacks can be expected in the future, but those attacks will continue to utilize small amounts of explosives to mitigate the risk of U.S. involvement — or political crisis in Mexico. This dynamic could possibly change should one of the criminal cartels become desperate and believe they have nothing to lose, but as we saw in the case of La Linea in Juarez, the group did not follow through on their threat to employ a 100-kilogram vehicle-borne IED even when heavily pressed.

Oct. 19

• The Mexican military seized a drug lab in Zapopan, Jalisco state. Approximately 27 metric tons of chemical precursors were discovered.
• Mexican authorities seized a heroin and cocaine processing lab in Xochitepec, Morelos state. Two individuals were detained in the operation.

Oct. 20

• An improvised explosive device in a vehicle exploded Oct. 20 as a Mexican military convoy passed by it in Monterrey, Nuevo Leon state, while pursuing gunmen. All the gunmen escaped.
• A police radio operator was killed by gunmen in a security hut in Veracruz city, Veracruz state. The operator was involved in an ongoing operation in Los Volcanes neighborhood. Police pursued the gunmen afterwards, killing one gunman and injuring another.
• The Mexican military detained five alleged Los Zetas members in Coatzacoalcos, Veracruz state. Among the five was Rodrigo Herrera Valverde, a nephew of the former Veracruz state governor, Fidel Herrera Beltran.

Oct. 21

• A confrontation in Tancitaro, Michoacan state, between gunmen and the Mexican military left one soldier and three gunmen dead.
• Three individuals were executed in Apatzingan, Michoacan state. Their bodies were left with a narcomanta signed by the Knights Templar stating that the individuals died because of their behavior.

Oct. 22

• Police seized 42 kilograms of cocaine from a tractor-trailer near Ciudad Juarez, Chihuahua state.
• Police arrested four suspected La Barredora members in Acapulco, Guerrero state.

Oct. 23

• A convoy of gunmen executed three individuals in Villa Ocampo, Durango state. The same convoy was reported driving through Las Nieves, Durango state, prior to the executions.
• Soria “El Hongo” Adrian Ramirez, leader of Cartel del Centro, was arrested in Ojo de Agua, Mexico state. Cartel del Centro is reportedly in territory disputes with the Knights Templar, La Familia Michoacan and La Mano Con Ojos.
• A confrontation between Mexican authorities and gunmen in Doctor Gonzalez, Nuevo Leon state resulted in the death of a Los Zetas plaza boss and the capture of three Los Zetas members. The plaza boss, Gabriel “El Cochiloco” Hernandez Hernandez, was responsible for the municipalities of La Laja and El Oregan in Nuevo Leon state.

Germany’s parliament voted Oct. 26 to limit the German commitment to European bailouts. This move shows Germany’s unwillingness to continue serving as the primary source of funding for Europe as a whole. This means circumstances within Europe must shift in order for the European Union and the eurozone to survive the current financial crisis. Sharp writedowns of Greek debt would have to not trigger a financial meltdown, EU member states would have to put the union’s interests above their own, and outsiders would have to be persuaded to become the primary funders for the European bailout mechanism.

Analysis

STRATFOR has watched with great interest as the eurozone crisis has unfolded over the past 21 months. In many ways this is the final stage of the post-Cold War interregnum. In the aftermath of World War II, the European Union (and its predecessors) was created to both constrain Germany and harness Germany’s economic dynamism to bolster French power. This was made possible because Europe was split and occupied by U.S. and Soviet forces, while Germany was denied the ability to unilaterally further its national interests. Those circumstances have changed. The Soviets left, the U.S. presence is a shadow of what it once was, and the Germans are reunified and once again looking out for themselves. With the Cold War over, the European Union is left to its own devices.

Germany benefits greatly from the European Union and the eurozone. These structures keep European competition firmly in the realm of economics and finance — areas in which the Germans, with their capital richness, central location, highly skilled labor and powerful industrial base, are well prepared to win. The European Union even created a regulatory structure that expressly puts German industry at an advantage.

But Germany is no longer willing to fund Europe, which it has done from immediately after World War II until very recently. The Germans have “bailed out” Europe several times. They paid massive war reparations — primarily to the French — after World War II. They funded the majority of the European Union’s development costs and agricultural subsidies for the first three decades of European integration. They paid — by themselves — for the rehabilitation of the former East Germany and contributed the largest share of funding for the rehabilitation of the rest of the former Soviet satellites. They also were forced to allow the other eurozone states to enter into the common currency at artificially depreciated currency exchange rates.

Dissatisfaction with this past role was apparent Oct. 26 when Germany’s parliament, the Bundestag, voted overwhelmingly to approve Chancellor Angela Merkel’s negotiating position at the EU summit later that day.

The Bundestag capped Germany’s financial guarantee to the European Financial Stability Facility (EFSF) — the eurozone’s bailout mechanism — at its current level of 211 billion euros ($294 billion). (The EFSF does not contain actual state cash; it uses government guarantees as backing to raise money on private bond markets. Contributing states only have to fill their guarantees if states undergoing bailout procedures default, in which case investors will be reimbursed with state money.) The Germans believe they have done enough, and they will no longer serve as Europe’s cash machine.

The other important prohibitive clause in the legislation the Bundestag approved is opposition to the European Central Bank’s (ECB’s) purchasing any state debt. Such purchases are already illegal under EU treaties, but in order to prevent financial meltdowns the ECB has been making indirect purchases (it lends money to banks to buy the debt and, through economic machinations, ends up holding the debt). The Germans see such actions not only as undermining a clause they fought very hard to get included in EU treaties, but also as directly undermining their efforts to get the weaker eurozone states to implement austerity measures. Whether the ECB will follow the German recommendation — and it is a recommendation, as the ECB is officially independent — remains to be seen. Mario Draghi, the Italian who will take over as ECB governor Nov. 1, has made it clear that he intends to maintain the purchase policy. Discussions at the summit should be quite vigorous.

Between the prohibition on new government guarantees and the demand on ECB actions, the Germans have constrained — perhaps outright eliminated — the two largest and most credible sources of potential funding for the eurozone’s bailout systems.

Instead, the Germans are asking for much deeper private and non-European participation. They want holders of Greek debt to take a much larger restructuring than the 21 percent discount agreed upon in July. Leaks from the International Monetary Fund (IMF) have echoed this, indicating that perhaps a 60-75 percent reduction in the bonds’ value is necessary if Greece is to ever recover. In trade, the Germans are demanding that the current EU/IMF monitoring of Greece’s finances become permanent.

Somewhat surprisingly, there is no clear message on how the bailout fund will be expanded to handle more bailouts. At its current size — 440 billion euros — it might be able to barely handle Spanish remediation, but a banking crisis or an Italian bailout would utterly overwhelm it. In Merkel’s Bundestag speech Oct. 26, the chancellor indicated that some sort of financial leveraging option would be used, but that is something that will be debated and decided at the EU summit later in the day. Merkel will need to return to the Bundestag to get the specifics ratified.

With such limited financing options, the European bailouts are to be funded more or less by the kindness of strangers: The EFSF’s existing funding limits are woefully inadequate for the tasks at hand, and if the Germans will not lead the way to increase its volume directly, eurozone governments are now wholly dependent upon outsiders to meet those funding commitments the eurozone governments refuse to. The Germans have stated very clearly what they expect from the rest of the European Union: austerity. With no more German guarantees on order and with a leveraging plan that is somewhat dubious, the only means many EU states have of avoiding bankruptcy is to make extremely deep budget cuts. These states are now in a bit of a race to implement austerity measures before the markets cut off funding.

To work, this strategy requires three very unlikely developments.

First, sharp writedowns of Greek debt must not start a general crisis. The largest holders of Greek debt are the Greek banking sector and the Greek pension system, so sharp writedowns could save Athens on interest payments, but they will only increase the pension burden by causing a Greek banking meltdown that will require the Greeks — both state and private — to more aggressively tap the EFSF (which has not yet been expanded). Even this assumes that the banks agree to a “voluntary” restructuring and do not simply declare Greece to be in default, which would trigger the cascade of financial failures the Europeans have spent the past two years trying to avoid.

Second, all of Europe’s financially troubled governments would have to put the European Union and the euro ahead of their own survival. This is highly unlikely, but not (yet) impossible. The Slovak government has already fallen over the EFSF issue, but it still approved ratification. Additionally, in preparation for the Bundestag presentation and the subsequent summit, Merkel laid very heavily into one of Europe’s financial laggards: Italy. Merkel’s actions triggered a political crisis in Rome, where pension reforms were agreed upon but at the cost of the promised resignation of political and financial fixture Silvio Berlusconi as prime minister.

Third, forces beyond Europe would have to buy in, en masse, to the European bailout, likely without guarantees that their funds are completely safe. Under the pre-existing system any investors would be guaranteed to have 100 percent of their funds returned to them — courtesy largely of German taxpayers — should a weak state default. Under any leverage plan, that recovery percentage would be smaller; 20 percent is emerging as the likely number for an absolute guarantee. But the Europeans desperately need outsiders to buy in to provide the sort of bridge financing and financial safety nets required to keep Europe’s governments and banks afloat. To that end, EFSF chair Klaus Regling is already planning trips to China and Japan — the world’s largest holders of foreign currency reserves — to try and convince them to use their stored cash for assistance. Some purchases are likely, but if the Germans are unwilling to finance the rescue of a system they benefit from, it is difficult to envision others being willing to do more.

STRATFOR does not see any of these three scenarios as being particularly likely. But without a great deal of financial commitment from Germany and the other, richer eurozone states, this is what must happen if the eurozone is to survive.

http://www.stratfor.com/print/203866

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Stalin’s image whitewashed by state media: historians

October 26, 2011

MOSCOW – Human rights activists and historians are criticizing Russian state-controlled media, accusing it of whitewashing Soviet dictator Josef Stalin’s image.

Boris Yeltsin Center Director Alexander Drozdov said Wednesday state-run television stations have turned Stalin’s name into a brand. Recent opinion polls indicate that between one-third and one-half of respondents positively view Stalin’s legacy.

Arseniy Roginsky, head of the Memorial rights group, said at least 12 million were executed on trumped-up charges during Stalin’s purges. He said many millions more died of hard labour, forced hunger, and through a massive collectivization drive and the forcible eviction of various ethnic groups.

Roginsky and other activists have urged the government to give a legal assessment to crimes of Soviet past.

The Associated Press

http://www.thespec.com/print/article/615087

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Moscow Region Governor Accused Of Scheming To Fix Elections For Ruling Party

by Tom Balmforth

Moscow Oblast Governor Boris Gromov allegedly called on local leaders to “use every opportunity to hinder our opponents’ campaign staffs in all their activities.”

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In Belarus, Inflation Adds to Economic Woes

http://www.stratfor.com/print/203749

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Lithuania not to reopen CIA prison investigation

Oct 27, 2011
TBT Staff

VILNIUS — Lithuania has said it will not re-open it’s investigation into an alleged illegal CIA prison in the country, despite demands from Amnesty International.

Amnesty International, the world’s most prominent human rights organization, last month called on Lithuania to re-open an investigation into a US prison camp that was reportedly based in the country. The calls came after new evidence was unveiled.

The new information is centered on Abu Zubaydah, who was allegedly a prisoner in the Lithuania camp in 2005. George W Bush writes in his recent memoirs that he had authorized the use of waterboarding on Zubaydah.

“There is enough information in the public domain to make it imperative for the criminal investigation to be re-opened,” Julia Hall, Amnesty International’s expert on counterterrorism and human rights in Europe, told journalists in late September.

The Lithuanian prosecutor’s office, however, said that the new information was not sufficient or pertinent enough to warrent re-opening the investigation, which was closed in January for lack of evidence.

http://www.baltictimes.com/tools/print_article/29882/

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Grybauskaite: EU too slack in decision making

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Lithuanian state companies more than triple H1 profits

http://www.baltic-course.com/eng/markets_and_companies/?doc=47871&ins_print

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Skaisgiryte Liauskiene and EU officials discuss Lithuanian EU presidency

AHMAD AL-RUBAYE/AFP/Getty Images

STRATFOR