Inter Press Network

Tuesday, October 04, 2005

Intelligence Brief: Nepal

Drafted By: Dr. Michael A. Weinstein

Nepal, landlocked and bordered by the rising Asian powers of India and China, has become the object of competition among its neighbors as the country has descended into severe instability. The only Hindu kingdom in the world, with a generally impoverished population of 27.7 million people and few strategic resources, Nepal interests New Delhi and Beijing as a geostrategic prize in the new "great game" for spheres of influence in Central Asia. [See: The 'Great Game' Heats Up in Central Asia]

Except for a brief period of parliamentary government after World War II, Nepal was an absolute monarchy until 1989, when King Birendra, bowing to pressure from a coalition of political parties and social movements, instituted a constitutional monarchy. The new parliamentary system was riven by fractious partisanship, failure of leadership, corruption and the persistence of poverty. In 1996, the Communist Party of Nepal (Maoist) (C.P.N.(M.)) abandoned parliamentarism and initiated an armed "people's war" in the countryside aimed at overthrowing the constitutional monarchy and establishing a "socialist republic."

The Maoist insurgency gained support among the 80 percent of Nepalese living in rural areas and now is estimated to control up to 70 percent of the countryside. The campaign to suppress the insurgency by the Royal Nepalese Army (R.N.A.) has been marked by brutality and torture on both sides, most recently documented by U.N. Special Rapporteur on Torture Manfred Nowak in a September 16, 2005 press conference following his investigative trip to Nepal.

A further plunge into instability came in February 2005, when King Gyanendra, who had assumed the throne after the heir apparent had killed his parents and himself, dissolved parliament and declared a state of emergency, suspending civil liberties, imposing press censorship and banning opposition demonstrations, in the name of fighting the insurgency more effectively and suppressing corruption. [See: "Sacking the Government Brings International Attention to Nepal"]

Gyanendra's seizure of absolute power has not calmed Nepal's political turmoil and has led to international censure, including the withdrawal of military aid to Kathmandu by New Delhi and Washington. On April 30, Gyanendra lifted the state of emergency, but did not surrender control and has not moved to re-establish the parliamentary system. Since then, Nepal has been in a state of political flux, in which the three parties to the domestic conflict -- the king, the Maoists and the parliamentary parties -- have maneuvered for advantage in an intensely uncertain situation.

Nepalese Instability: Tri-partite Conflict

The crisis precipitated by Gyanendra's February seizure of absolute power threw the parliamentary parties into the position of either attempting to mount resistance in order to recoup their losses or accepting defeat. Particularly after the king revoked the state of emergency in April, they chose the former, pursuing a three-pronged campaign to delegitimize his rule and render him unable to govern. Forming the same kind of coalition that had forced the institution of a parliamentary system in 1989, they subsumed their rivalries under a common program of restoring democracy.

As Gyanendra remained unyielding, the parliamentary parties radicalized their positions. The crisis ratcheted up to a higher level, when, in late August, the Nepali Congress Party (N.C.P.) -- the largest parliamentary grouping, which has close ties to New Delhi -- announced that it had decided to delete the goal of achieving a constitutional monarchy from its constitution. The Communist Party of Nepal (U.M.L.), the second biggest grouping, had already abandoned constitutional monarchy for a "democratic republic."

In response to the parliamentary parties' break with the monarchy, the Maoist insurgency announced a three-month cease fire and has begun releasing some of its R.N.A. prisoners, although Nepalese media report that it continues to carry out abductions of school teachers and students for "re-education." Registering a shift in the balance of power, the seven-party parliamentary coalition announced on September 16 that it would form a team to negotiate independently with the Maoists. The coalition made it clear that talks were premised on the insurgency ending violence against civilians and that the Maoists would not be permitted to join the coalition unless they laid down their arms.

Along with abandoning their commitment to monarchy and moving towards the Maoists, the parliamentary parties, with the support of student and other civil-society groups, initiated an ongoing series of street demonstrations in Kathmandu, aimed at forcing Gyanendra to restore democracy, that have attracted up to 7,000 participants and have met with mass arrests -- including temporary detention of top party leaders -- and often violent suppression by government security forces.

Faced with international isolation, the collaboration of the Maoists and the parliamentary parties and the emergence of "people power," Gyanendra has held fast to his refusal to institute a cease fire to match the Maoist's initiative and has urged the parliamentary parties to negotiate with him.

Each actor in the tri-partite conflict is playing a risky game with uncertain results.

The Maoists, who have used previous cease fires to rearm and regroup, are growing increasingly confident that their people's war strategy of surrounding Nepal's cities and precipitating urban insurrection is succeeding. Their commitment to a future parliamentary regime is at best suspect.

The parliamentary parties hope to emerge as victors by playing both sides against the middle, counting on the support of New Delhi and its Western allies, and on people power.

Gyanendra is counting on the continued backing of the R.N.A., military aid from Beijing to make up for New Delhi's suspension and residual popular commitment to the monarchy.

At present, it is impossible to predict who will emerge on top or whether there will eventually be a compromise between two or among all of the parties.

The Bottom Line

New Delhi, which counts Nepal within its sphere of influence -- due to its preponderant economic power in the country, cultural affinities and strategic advantages -- has been most severely impacted by the crisis. Indian analysts report on a power struggle in New Delhi between the Ministry of External Affairs, which backs the parliamentary parties and their efforts to negotiate with the Maoists, and the Home and Defense Ministries, which place their bets on Gyanendra, fearing a Maoist takeover and a spread of Maoist insurgencies into India, exacerbated by border insecurity. Thus far, New Delhi has chosen to back the parliamentary parties, but there is no assurance that the strategy will succeed or that it can be pursued effectively given intra-governmental conflicts.

As New Delhi faces hard choices, Beijing has seized the opportunity to move in and offer Kathmandu arms deals, one of which has already been signed. Islamabad is rumored to be doing the same. Washington and London have been left with no option but to back New Delhi as they try to pressure Gyanendra to restore constitutional monarchy and accept international mediation to end the Maoist insurgency.

The latest moves in the new great game highlight the uncertainties and shifting opportunity structures that emerge when strategically valuable, weak states begin to implode. Beijing has nothing to lose by backing Gyanendra and will win big if he holds on to power. New Delhi, which allowed the situation to get out of control, faces the possible diminution of its influence. As the crisis has deepened, New Delhi has sent troops to Indian states bordering Nepal to contain an escalated conflict.

Uncertainty is the watchword in Nepal, where much depends on how the parliamentary coalition plays its hand as it seeks to finesse the Maoists and the king.

Al-Qaeda's Proliferating Ideology

Drafted By:Erich Marquardt

The July 7, 2005 attacks in London served as reminders that there is no end in sight to the current campaign by Islamists against the United States and its allies. The attacks were committed by British citizens, some of whom were raised in the country. This fact is important since it displays how segments of the British Muslim population became so alienated by British foreign policy that they contributed to al-Qaeda leader Osama bin Laden's movement against the United States and its allies.

Furthermore, the strikes came after similar attacks in Madrid, where on May 11, 2004, 191 people were killed and more than 600 wounded when ten bombs were detonated on the city's train line. Spain has held many suspects in these attacks; some are Moroccan, others Tunisian, but all are Muslim.

If attacks such as these continue, it will mark al-Qaeda's success at listing an accurate set of grievances against the West that many Muslims share. By exploiting those who agree with this set of grievances, al-Qaeda is bound to organize, and, more importantly, inspire segments of the Muslim population to take violent action against the U.S. and its allies. [See: The Threat of Al-Qaeda and the Islamic Revolutionary Movement]

Implications of the London Attacks

The July 7 attacks in London were coordinated effectively, with multiple militants exploding four bombs within an hour's time frame. Three of the bombs struck underground trains, while the last bomb destroyed one of London's trademark double-decker busses. The attacks occurred in downtown London and sent a message to many governments that similar style incidents could occur anywhere. The attacks left some 50 dead and hundreds injured. Abu Hafs al-Masri Brigades, an Islamist group that was formed in 2001, claimed responsibility for the actions. [See: "Intelligence Brief: Islamist Terrorism in Europe"]

Two weeks after the July 7 attacks, Muslim militants targeted London's transportation system again -- the Brigades also claimed responsibility for these attacks. Where the July 7 militants succeeded, the July 21 militants failed. The July 21 attacks targeted the London transportation system yet none of the bombs detonated properly and there were no serious casualties. Indeed, one of the suspects, Hussain Osman -- also known as Hamdi Issac -- argues that the July 21 attacks were merely "copycat" attacks intended to foment fear and panic, but not to actually kill anyone.

London investigators have also not been able to uncover any connection between the July 7 attackers -- who are believed to have died in the attacks -- and the July 21 attackers. The July 7 attackers, for instance, were of Pakistani descent, while the July 21 attackers were African. Investigators have not ruled out a connection yet. More importantly, investigators believe that the two groups of militants had no organizational relationship with al-Qaeda. This development, if it is true, further highlights how bin Laden's rhetoric has emboldened Muslims across the world who agree with his argument of the need for a "defensive jihad" against the U.S. and its allies. [See: "The Threat of Al-Qaeda and the Islamic Revolutionary Movement"]

If there were no organizational ties to al-Qaeda, the London attacks signify the difficulties in preventing such acts in the future since there is no one group to infiltrate and eliminate. For instance, while the latest attacks were claimed by the Brigades, it is not clear whether the organization had any real role in the operations.

Abu Hafs al-Masri Brigades

The Brigades were formed in 2001 after the death of al-Qaeda leader Abu Hafs al-Masri -- known as Muhammad Atef -- in Afghanistan; the organization's title also bears his name. Their first attributed attack occurred on March 9, 2004, when two suicide bombers detonated themselves in Istanbul, killing one person and injuring five others. Then, on May 11, 2004, the group claimed responsibility for the terror attack on Madrid's transportation system, where 191 people were killed and more than 600 wounded when ten bombs were detonated on the train line. The Brigades claimed that the strike was in response to Spain's military support of the U.S.-led occupation in Iraq.

However, it is not clear how involved the Brigades were in all of these incidents; indeed, many of its claims have been proven false. For instance, the organization claimed responsibility for the August 5, 2004 bombing of the Marriott Hotel in Jakarta, in addition to the power blackout in August 2003 that affected the northeast United States; both claims turned out to be false. Because of these inconsistencies, it is possible that a figure within the organization lays claim to attacks in which the group had no role, simply to promote the notion that the organization is an organized and lethal force.

The veracity of the Brigades' claims are important, considering that after the London attacks the organization released a statement giving Italy, Denmark and the Netherlands an August 15 deadline to withdraw troops from Iraq. Failure to meet the deadline, the organization argued, would result in assaults on these countries by Islamist militants. This deadline has concerned Italy greatly, since the country fears that its support for the U.S.-led war in Iraq has made it a high target for Islamists.

Concern in Italy

Italians fear that members of their own Muslim population could follow al-Qaeda's ideology and launch an attack on Italian soil. On July 12, for instance, the Italian military intelligence agency S.I.S.M.I. released an alarming report where it stated that some 300 Islamist suicide fighters successfully reached Iraq from other countries -- three of them were proven to have come from Italy. This knowledge is concerning and embarrassing for the Italian government, as it sheds doubt on Rome's ability to combat internal militants since it cannot even prevent them from leaving Italy to fight in Iraq.

However, even if the Brigades does not have the operational capacity that it proclaims, Italy's support of the U.S. still makes it a target for other Islamist militants, and the government is aware of this. The success of the July 7 London attacks, and even the fear caused by the failed July 21 attacks, prodded Rome to action, and in recent days it has taken serious measures against potential Islamists within its borders.

On August 15, Italian police announced that more than 100 suspected Islamists had been arrested, and that Rome would expel hundreds more; the action is part of Italy's anti-terror sweep that is now possible due to legislation passed after the London attacks giving the Italian police more power. According to the Italian Interior Ministry, police targeted "Islamic gathering places: call centers, Internet points, Islamic butcher shops and money transfer businesses."

The ministry also stated that it ordered more than 700 people to leave Italy for violating immigration laws. Also on August 15, the ministry stated that its current intelligence can "confirm that an elevated risk for a terrorist attack in our country remains." As the September 11, 2001 anniversary draws near, the Italian government is being extra vigilant in case militants are planning to launch an attack on that day in order to tie special significance to their actions.

Denmark and the Netherlands

Denmark is also a country on the Brigades' hit list. Some 500 Danish troops are in Iraq fighting alongside U.S.-led forces. Islam is now the second largest religion in Denmark, making up about five percent of the population.

In recent weeks, Danish police have been very visible in the country's capital, Copenhagen, and have been especially vigilant in protecting the city's public transportation system.

While it has not responded with the same vigor as Rome, Copenhagen has taken action against some Muslim extremist groups. Just recently, for instance, Fadi Abdullatif, spokesman for the Danish wing of Hizb ut-Tahrir -- a radical Islamist group -- was arrested due to his threats against the Danish government. Such rhetoric was seen in a Hizb ut-Tahrir handout, distributed in Denmark, that said, "So, travel to help your brothers in Fallujah and exterminate your rulers if they block your way."

The Netherlands was also threatened with the August 15 deadline. However, the Netherlands withdrew its troops even before the threat was levied. Nevertheless, the country feels that it could be next in an attack, especially since it has large Moroccan and Turkish communities that have not been completely integrated with Dutch society.


It is difficult to draw conclusions regarding the Islamic revolutionary movement. A logical assessment is that U.S. military operations against al-Qaeda in Afghanistan scattered an already relatively primitive organization. Continued U.S. vigilance in that country and elsewhere will make it difficult for al-Qaeda to orchestrate any large-scale attacks against the United States, or even its major European allies.

Yet, because of al-Qaeda's attractive ideology, similar attacks such as those that occurred in London and Madrid, in addition to those that have been executed in other capitals around the world, will continue. In these cases, militant individuals or Muslim war veterans will be drawn together to undertake the planning and execution of attacks against the interests of the U.S. and its allies. These individuals and groups may have no organizational relationship with al-Qaeda, but agree with bin Laden's rhetoric against the West and are willing to use violence to further this goal.

While it is possible to prevent al-Qaeda from developing into a larger and more sophisticated organization, it is less possible to prevent small-scale attacks from unknown and unidentified militants who develop plans to attack the West with the motive being equal to a religious and political grievance. Preventing these attacks will require the creation of a security state, a possibility that is not likely in Western countries. Of course, as long as vigilance remains high, it is also unlikely that Muslim militants will be able to execute a massive and sustained terror campaign. However, such knowledge is not especially reassuring to the West as it only takes one lucky and well-placed strike to cause a major catastrophe.

Examining the Threats to Indonesia's National Interests

Drafted By:Erich Marquardt

With 210 million people, Indonesia is the world's fourth most populous state and possesses Southeast Asia's strongest military. Consisting of more than 17,000 islands, spanning from the east of Malaysia to the western portion of the island of New Guinea, Indonesia controls critical sea lanes and airways, making it a strategic regional state in Southeast Asia. Ruled by authoritarian military leaders since its independence from the Netherlands in 1949, Indonesia was a strong ally of the West during the Cold War and an adversary to communism. Throughout this period, the military was the dominant political force in the country and kept a tight rein on political power, imprisoning and killing political dissidents to eliminate threats to its rule.

After the end of successive military dictatorships, first by General Sukarno from 1945 to 1967 and then by General Suharto from 1967 to 1998, the government of Bacharuddin Jusuf Habibie agreed to economic liberalization policies in addition to lifting controls on labor unions, political parties and the media. Indonesia's first nationwide elections after the successive military dictatorships of Sukarno and Suharto took place in June 1999; since these elections, Indonesia has seen peaceful transfers of political power.

As Jakarta continues to struggle with political stability, it faces a number of threats to its interests. It has strived to retain its territorial integrity, fighting off separatist rebels in Aceh and Papua provinces; it has suffered from Islamist violence, best displayed during the October 2002 terror attack on a Bali nightclub that killed 202 people; the present civilian government of President Susilo Bambang Yudhoyono has tried to limit the power of Indonesia's most dominant faction, the military; and it must prepare to adapt to the changing security arrangements in East Asia due to the rising status of China as a regional power. How the present government in Jakarta handles these significant threats to its interests will determine the future shape of Indonesia's internal and external security disposition.

Threats of Separatism in Aceh and Papua Provinces

In Indonesia's Aceh province, located on the northernmost part of the island of Sumatra, separatist rebels of the Free Aceh Movement, known as Gerakin Aceh Merdeka (G.A.M.), have been fighting the Indonesian government for 30 years. No stranger to separatism, Jakarta fought a recent losing battle against separatists on the eastern portion of the island of Timor, known as East Timor.

The conflict in East Timor culminated in January 1999 when the Indonesian government of Habibie agreed with a U.N. process to allow the East Timorese to vote on independence. Approximately 98 percent of registered voters took part in the election, and 78.5 percent of those voters called for independence from Indonesia. The Indonesian Defense Forces, or Tentara Nasional Indonesia (T.N.I.), in an attempt to influence the election, and in retaliation to the final result, responded roughly, causing much violence and destruction. Indeed, the attacks against the East Timorese were so harsh that it critically affected Indonesia's relations with other states, resulting in the U.S. Congress severing all military ties with its once strong Cold War ally. While Indonesia was forced to relinquish sovereignty in East Timor, it does not plan on surrendering sovereignty elsewhere in its island chain, such as in the provinces of Aceh and Papua.

More independent than other parts of Indonesia, and more Islamic in character, Aceh never fully submitted to Dutch rule. After Jakarta took control of the province as part of its independence from the Netherlands, separatist tension remained, heightened by the fact that Aceh is abundant with such natural resources as timber and natural gas; these resources have been used by the central government in Jakarta, creating animosity among the more separatist elements of the population in Aceh who feel that their resources are being exploited.

G.A.M. calls for an independent and Islamic state and uses military force to agitate against the centralized rule of Jakarta. In addition to targeting Indonesian troops, the organization has attacked such international economic interests in the region as Exxon Mobil's natural gas facilities in Aceh. The movement is believed to have received funding and equipment from Iran and Libya; however, most of its arms are thought to come from sources in the region.

In response to G.A.M.'s insurgency, the Indonesian military frequently uses brutal tactics to destroy the organization's resolve. Human rights groups accuse the military of using tactics of abduction, rape, torture and mass killings against G.A.M. members and alleged supporters; as stated by the New York-based organization Human Rights Watch, "Substantial evidence from several reliable sources, including Indonesia's own National Commission on Human Rights, establishes that Indonesian security forces have engaged in extra-judicial executions, forced disappearances, torture, beatings, arbitrary arrests and detentions, and drastic limits on freedom of movement in Aceh."

Nevertheless, T.N.I.'s actions in Aceh have managed to push the rebels out of major cities and into the more rural areas of the province. While it appears that G.A.M. has been weakened, it still exists as an organization and continues to launch scattered attacks on Indonesian interests.

Indeed, G.A.M. just completed negotiations with the Indonesian government in Helsinki, mediated by former Finnish President Martti Ahtisaari. As recently stated by Ahtisaari, "Issues discussed included special autonomy or, as proposed by G.A.M., self-government; amnesty and other measures to facilitate an agreement; security arrangements; monitoring of the implementation of the commitments; and timetable."

At the end of the talks, both sides came to common agreement over some of the key issues involving the conflict. G.A.M. publicly stated that it would drop its quest for independence in exchange for Aceh's greater autonomy from Jakarta. G.A.M. and Jakarta have agreed to a third round of discussions, planned for the middle of April.

On the western portion of the island of New Guinea, T.N.I. has engaged separatist rebels of the Free Papua Movement, known as the Organisasi Papua Merdeka (O.P.M.). O.P.M. is a political organization, with a military wing, that fights for independence and autonomy for the indigenous people of West Papua. Not a major threat to Jakarta, O.P.M. has engaged in military struggles with T.N.I., which reacts with a heavy hand, seen through the actions by the KOPASSUS, the Indonesian special forces unit. Human Rights Watch argues that "disproportionate reprisals against civilians and suspected separatists [occur]. Arbitrary detention, torture, disappearances, and arson are widespread in this region of Indonesia."

Successive governments in Jakarta, and especially the highly nationalistic T.N.I., have as a major policy goal the preservation of Indonesia's current territorial integrity. After the loss of East Timor in 1999, Jakarta has worked to prevent the fragmentation of its territory, an often difficult task due to the spread-out nature of the country's islands. Both the United States and China, two states with influence in the region, have supported Indonesia in these efforts since a fragmented Indonesia would create risk for the stability of the straits. Ralph Boyce, the U.S. ambassador to Indonesia, explained this risk, telling the U.S. Congress in July 2001, "However, the flip side, which is instability in the world's fourth most populous nation, would threaten not only Indonesia's immediate neighbors, but also our own strategic and regional objectives.

Islamist Violence

Indonesia's large Muslim population makes it vulnerable to advances by Islamist organizations to recruit and train militants to launch attacks against the United States and Western interests. There are active, militant Islamist organizations operating in the region, and attacks against Indonesian and Western interests have already transpired.

On October 12, 2002, Indonesia suffered from a terror attack on a nightclub in the resort-city of Bali. The bomb blasts killed 202 people, many of them Westerners flocking to Indonesia's beautiful tourist destinations. The attacks were launched by Jemaah Islamiyah. On August 5, 2003, the group attacked the J.W. Marriott hotel in Jakarta, killing a dozen people. Finally, on September 9, 2004, nine people were killed when a car bomb detonated outside the Australian Embassy in Jakarta, injuring almost 200 people -- Indonesian authorities attributed this attack to Jemaah Islamiyah, although it is not clear if the organization claimed responsibility.

As these attacks demonstrate, militants have been able to launch successful, high-profile attacks on Western interests within Indonesia. The United States is concerned that Islamist organizations could increase their ranks and strength in Indonesia and launch even more debilitating attacks. Because Indonesia controls some of the world's most trafficked and vital sea lanes, it could provide a lucrative opportunity for Islamist organizations to cripple the global economy. As clearly defined by the U.S. State Department, "Indonesia remains a linchpin of regional security due to its strategic location astride a number of key international maritime straits."

For instance, the Straits of Malacca are a key sea lane for the transport of goods, as they link together the Indian and Pacific Oceans. Twenty-five percent of world trade passes through the Straits. Some 80 percent of Japan's oil is brought through the Straits, and as China increases its energy consumption and purchases of oil from the Middle East, it too sees the majority of its energy traffic pass through these critical sea lanes.

Furthermore, due to the dynamics of the Straits -- shallow reefs and narrow channels -- sea traffic is slow, meaning that any major attack would be extremely damaging. After all, the Straits are already a major target of pirates; the International Maritime Bureau ranks the Straits as the second hardest hit piracy hotspot on the globe. Some potential attack scenarios include the hijacking of an oil tanker and using it in conjunction with explosives to create an enormous bomb that could be used to attack coastal regions. The environmental disaster alone from the explosion of an oil tanker would be tremendous. Attacked in a narrow part of the channel, the oil spillage could be enough to block the route for other ships, having a significant effect on the global economic market.

For this reason, the United States, and its allies in the region, has worked with Indonesian security forces to analyze these scenarios and devise counter-terrorism techniques to combat their realization. China, too, has given assistance to Jakarta, offering to send military equipment at reduced rates for use by the T.N.I.

The Indonesian Military

The Indonesian military is the strongest power faction in Indonesia. The country was ruled by military leaders until 1998, and while a civilian government now rules in Jakarta, that government is handicapped by the entrenched power of the military. In the words of Juwono Sudarsono, the civilian minister of defense, the military "retains the real levers of power. … From the political point of view, the military remains the fulcrum of Indonesia." To highlight how independent of the central government the military is, it is estimated that almost one-third of the T.N.I. budget derives from the Indonesian government, with the rest of the budget coming from unaccountable sources; Dana R. Dillon from the Washington-based Heritage Foundation claims that these profits emanate from "illegal logging, poaching, drug smuggling, and protection rackets."

Until 1998, Indonesia was ruled by generals; this rule fostered an atmosphere where members of the military were exempt from many of the norms and laws affecting civilian society. Furthermore, under the concept of dwifungsi, the military was able to assert itself in social and political affairs. Dwifungsi reserved political posts within the government for military officers. This created a condition where officers served in all levels of the government, even in parliament, causing the entire government to be under the oversight of the military.

The system of dwifungsi is no longer active and a number of reforms have been pushed through to try to limit its past effects. For instance, military officers must now resign from the armed forces before filling a position in the civilian government. The police, too, have been separated from the military. Nevertheless, the atmosphere prevails today, seen through the many human rights offenses committed by the T.N.I., and shown by military leaders who are still unwilling to give up their entrenched positions of power to a civilian government.

Up until the early 1990s, T.N.I. and the U.S. military enjoyed good relations. According to the U.S. Defense Security Cooperation Agency, from 1950 to 1993 the United States trained more than 8,000 Indonesian officers in U.S. military schools, in addition to providing Indonesia with hundreds of millions of dollars in military assistance grants, loans and credit used to purchase U.S. military supplies.

Throughout this period, however, the little civilian oversight of the military caused T.N.I. to become grossly corrupt and violent. In November 1991, the Indonesian military shot at peaceful protesters in East Timor, leading to the deaths of hundreds of people. The following year, in 1992, the U.S. Congress ended its security assistance to Jakarta. In 1995, the ban was relaxed, only to be reestablished following the reaction by T.N.I. to the 1999 decision by East Timor to separate from Indonesia.

Then, in 2002, another incident occurred involving T.N.I.; an ambush resulted in the deaths of two U.S. citizen teachers in Papua province on New Guinea. The F.B.I. complained about the little support it received from Jakarta in investigating the murders, which led Congress to further restrict the International Military Education and Training (I.M.E.T.) and Extended International Military Education and Training (E-I.M.E.T.) programs. It is thought that the Indonesian military had a role in the murders. Until the U.S. Secretary of State certifies to Congress that T.N.I. is assisting in the F.B.I. investigation on the murders, the military education and training programs will remain restricted and so will U.S. arms sales to the Indonesian government.

Jakarta claims that it is working to comply with the United States on these matters. Nevertheless, U.S. Senator Patrick Leahy said in a speech on the floor of the U.S. Senate in early February, "Although senior Indonesian military officers have repeatedly vowed to support reform, they have done next to nothing to hold their members accountable for these heinous crimes. Instead, the Indonesian military has consistently obstructed justice."

It is for this reason that the current civilian government of Yudhoyono is seeking closer ties to the Unites States and the reestablishment of the I.M.E.T. programs; Yudhoyono seeks to establish civilian control over the entrenched power of the military. The I.M.E.T. programs, for example, provide officer training courses to member countries, presently consisting of Malaysia, Thailand, Pakistan and India. It is funded by the U.S. Department of State.

The Defense Security Cooperation Agency of the U.S. Department of Defense describes the I.M.E.T. program as one that "exposes students to the U.S. professional military establishment and the American way of life, including amongst other things, U.S. regard for democratic values, respect for individual and human rights and belief in the rule of law." The department further explains that the purpose of I.M.E.T. is to "further the goal of regional stability through effective, mutually beneficial military-to-military relations which culminate in increased understanding and defense cooperation between the United States and foreign countries; and to increase the ability of foreign national military and civilian personnel to absorb and maintain basic democratic values and protect internationally recognized human rights."

Because I.M.E.T. pushes civilian control of the military, it is in the interests of the civilian government of Yudhoyono to increase relations with the United States and to get its military involved in this program; this explains why Juwono is pushing for a "re-engagement" with Washington. For the entrenched military leaders, however, increasing ties with the United States could lead to the erosion of their power to civilian rule, which would be a new development for Indonesia. U.S. Deputy Defense Secretary Paul Wolfowitz understands this assessment, noting during a January 2005 visit to Indonesia, "Cutting off contact with Indonesian officers only makes the problem [of corruption] worse."

The military's long nationalistic history of taking actions necessary for the preservation of Indonesia's territorial integrity and security as a state makes it skeptical of improved relations with the United States. It rations that excessive force is necessary to retain control over Indonesia's many islands, where uprisings are common and separatist groups are trying to follow the example of East Timor. Indonesian military leaders worry that if it were to increase relations with the U.S., it will lose the ability to take the necessary measures to preserve Indonesia's national interests.

The Changing Security Environment

The civilian government in Jakarta is striving to reestablish good relations with Washington. In addition to its desire to firmly control the Indonesian military establishment, Jakarta also recognizes that the security environment in Southeast Asia is changing as China increases its regional power. Indonesia's modern history with China has been rocky because Jakarta cooperated with Washington to resist the spread of communism. Relations with China were not officially resumed until 1990, although since 1985 economic relations between the two countries had been reestablished. Presently, the two countries are continuing to improve relations, and trade between them has increased greatly.

For instance, a free trade area is being planned that will encompass the states that make up the Association of Southeast Asian Nations (A.S.E.A.N.) and China, creating a market of 1.7 billion people. Indonesia, as the largest economy in A.S.E.A.N., will have a huge role in trade relations with China. China is already Indonesia's fourth-largest export market and one of China's primary resource suppliers, especially in oil and gas.

However, there are potential conflicting interests between the two states. China will seek a more influential role in Southeast Asia, especially considering so many of its resources and trade will emanate from there. This will induce China to seek greater control of the region to protect its own interests and to receive the benefits that come with being a regional powerhouse. Indonesia, on the other hand, is large and independent enough to desire complete autonomy from China. Furthermore, because the United States is seeking to continue its influence in the region, Jakarta will likely attempt to balance between China and the United States, obtaining the best concessions from each.

As an example of this, if the Bush administration is able to reestablish ties with Jakarta, it will result in more U.S. weaponry being sold to Indonesia, which would be used to patrol the country's critical sea lanes. China, too, has offered fighter jets and other weaponry to Indonesia, much for the same reason but also to improve relations with a country that was formerly its antagonist.

As an example of this balancing technique, after the Chinese offer of weaponry, Juwono said that the Chinese "emphasized there would be no conditionality" and that Jakarta considered the offer "attractive." Juwono said his response to Beijing was that Indonesia's decision "depends on the strategic partnership. If it's junior partnership for Indonesia, no way." Indonesia is able to maintain this balance because the Chinese understand that Jakarta can always turn to the United States for equipment if Jakarta considers Beijing's conditions on the weapons purchases to be too demanding. And the United States knows that if it attempts to influence Indonesia's political decisions excessively, Jakarta could seek more support from Beijing.


As Southeast Asia's largest and most powerful state, Indonesia is a keystone country that is courted by both China and the United States. Both countries seek to gain influence in Jakarta, especially since the country patrols the Malacca Straits -- a critical passageway for global trade. Indonesia can attempt to balance the two powers off each other, gaining economic and military benefits from both while preserving its autonomy.

Yet, Indonesia faces a series of internal problems with which it must deal. It faces separatists in two of its provinces, and has already lost to a separatist movement in East Timor. It has suffered from multiple terrorist attacks within its borders and must be vigilant in preventing such an attack from affecting trade through the Straits. Its nationalistic military is loathe to submit to civilian rule and still retains the "real levers of power."

Yet, if Jakarta is able to control the many threats to its interests, and maintain good relations with both the United States and China, it has a promising future. The plan to create a free trade area encompassing China and the A.S.E.A.N. states will help to unite East Asia's economic ideals, improving the region's development and placing it more independent from the West.

Intelligence Brief: Sudan

Drafted By: Dr. Michael A. Weinstein

The largest country in Africa in land mass and a rising oil power -- pumping 300,000 barrels of crude per day and working to raise the total to 500,000 by the end of 2005 -- Sudan was at the center of East African politics during the week of September 19, hosting a regional counter-terrorism conference, inaugurating its first "unity" government, resulting from the agreement ending the country's north-south civil war, and reporting a victory in its other civil war -- in the western region of Darfur -- amid warnings from United Nations envoy Jan Pronk that the conflict was escalating to dangerous levels.

Once the haven for al-Qaeda and an Islamic confrontation state, Sudan has more recently -- especially since 9/11 -- changed its strategic aims and its foreign policy, moving towards integration with the broader world community and its loose capitalist order, under pressure from Washington, but also as a result of a domestic decision to focus on the possibilities for economic development opened up by its oil industry.

Khartoum's major foreign policy objective is to have Washington remove Sudan from its list of countries sponsoring terrorism. Although Washington publicly credits Khartoum with cooperation in its effort to suppress revolutionary Islamist groups, it has not acceded to Khartoum's wish because of the persistence of the Darfur conflict and the fact that Sudan serves as a route for Islamist fighters heading north to Iraq. Removal from Washington's list is important to Khartoum, not only because U.S. economic sanctions would be lifted, but because improved relations with Washington would encourage foreign investment in Sudan generally.

Counter-Terrorism Conference

Hosting the September 20-22 counter-terrorism conference, which brought together security chiefs from 16 north-central and east African states, and observers from Egypt, Libya, Yemen, Saudi Arabia, China, the U.N., the E.U. and the U.S., was a primary goal of Khartoum, which hoped that its selection would enhance its international legitimacy.

Although the states represented at the meetings have genuine domestic interests in suppressing international Islamic revolutionary groups and domestic insurgencies that operate across porous borders, the conference was also an extension of Washington's grand strategy for the region, which is based on the long-term aim of gaining access to the region's states in order to foster military-military relations and undertake civil affairs projects. Washington hopes that its strategy of penetration will provide the basis for friendly regimes in the area that will suppress radical Islamism and work to alleviate endemic poverty, which Washington sees as the root cause of the region's instability.

It is not an accident that the states attending the conference overlap with the countries falling under the "area of responsibility" and "area of interest" of the Combined Task Force Horn of Africa for U.S. Central Command, which is based in Djibouti and is tasked with implementing Washington's regional strategy. While the conference was going on, Major General Timothy Ghormley was in Washington holding a press briefing underscoring Washington's policy in soberly optimistic terms.

Held in secret, except for televised opening remarks, the conference was more a symbolic show of solidarity than an advance over the pledge to cooperate made by the participating states at their first meeting in Kenya in 2004. The Declaration on Counter-Terrorism issued at the end of the conference reaffirmed earlier commitments, mentioned a "plan of action" and included a pledge to combat terrorism "in all its forms." The latter responded to complaints by Khartoum that Washington applies a "double-standard" in its "war on terrorism," targeting radical Islamism to the exclusion of other armed movements.

Conspicuously absent from the conference were Eritrea, which had not been invited, and Somalia, a failed state with an interim government based in Kenya, waiting on promised peacekeeping troops from Uganda and Sudan to secure its relocation to Mogadishu. Khartoum accuses Asmara of providing support to the rebels in Darfur. Somalia is the focal point of al-Qaeda activity in East Africa. In his press briefing, Ghormley admitted that his Task Force had made little progress in gaining access to Eritrea and made it clear that he was barred by administration policy from intervening in Somalia.

The effectiveness of regional cooperation with Washington's policy remains problematic. States in the region -- Sudan in particular -- are more interested in gaining legitimacy for their own domestic counter-insurgencies than in suppressing international Islamic revolution. Eritrea remains in an incipient state of war with Ethiopia. Each interested party in the region will define "terrorism" according to its own priorities, blunting and confusing intra-regional collaboration.

Unity Government and Escalation in Darfur

The selection of Khartoum to host the counter-terrorism conference was, in part, a reward for its 2005 peace agreement with the Sudan People's Liberation Movement/Army (S.P.L.M./A.) that ended a twenty-year civil war between the Muslim north, which controlled the state apparatus, and the Christian and animist south. [See: "Sudan's Changing Map"]

During the conference, the unity government prescribed by the agreement was sworn in, with the National Congress Party, representing the north and supporting President Omar Hassan al-Bashir, gaining 52 percent of the cabinet appointments, including the power ministries and the finance and energy ministries. Left with only the foreign ministry among the important posts, the S.P.L.M./A., which had fought hard for the energy ministry, was dealt a blow to its credibility with its constituency. Analysts predict that there is now a high likelihood that in four years the south will vote to separate from Sudan, as allowed by the peace agreement.

As the unity government was experiencing a shaky start, the civil war in the Darfur region heated up when the rebels there seized a town in violation of a 2005 cease-fire agreement. Khartoum responded with military force and succeeded in retaking the town. The African Union (A.U.), which is mediating peace talks between Khartoum and the two rebel groups in Abuja, Nigeria, urged all sides to hold to the cease-fire, and U.N. envoy Pronk issued a gloomy assessment of the situation, calling on countries that had promised aid to Darfur to honor their pledges.

The Bottom Line

As Khartoum seeks to break out of international isolation, it faces the legacy of northern domination of Sudan's south and west. Northern interests remain dominant in the country, but they have been challenged by previously suppressed regional groups.

Unwillingness of the northern political class to share power more generously promises to lead to eventual secession by the south and continued warfare in the west. The latter will constrain Washington to keep Khartoum on its list of terrorism sponsors. Hosting the counter-terrorism conference did nothing to change Khartoum's precarious position and enhance its international legitimacy.

Drained by civil war in the west and persisting tensions with the south, Khartoum will be hard pressed to achieve its development goals.

Having chosen to stay out of Somalia, at odds with Eritrea and equivocal towards Sudan, Washington risks being drawn into regional conflicts on one or another side rather than achieving its aim of regional integration. If Washington takes sides, it risks exacerbating instability; if it refrains from doing so, its effectiveness will be, at best, modest.

Friday, September 30, 2005

Poland's Rightward Turn and the Significance for Europe

Drafted By: Federico Bordonaro

As expected, a right wing majority was the result of Poland's September 25 general elections. The Law and Justice Party (PiS), led by the twin brothers Lech and Jaroslaw Kaczynski, won 28 percent of the vote, beating its likely ally, the liberal-conservative Civic Platform (P.O.), which received about 26 percent of the vote.

Like in previous post-communist era elections, the current ruling party -- the Democratic Left Alliance (S.L.D.) in this case -- has been brutally punished by voters. S.L.D. won a disappointing 11 percent of votes, although forecasts predicted an even worse thrashing for President Aleksander Kwasniewski's party. Poland is perhaps the only European country that has experienced such a sudden, dramatic change in its popular support.

With far-right parties such as the Self Defense Party (Samoobrona) and the catholic-nationalist League of Polish Families each taking 10 percent of the vote, the next parliament will be dominated by Poland's various right-wing factions. However, Polish sources say that negotiations to give birth to a new government have been difficult, for the conflict between PiS and P.O. over economic liberalization and cuts to the welfare state will need a compromise and could lead to an internally divided coalition.

At any rate, a right wing president (who will likely be P.O.'s candidate Donald Tusk or PiS' rival Lech Kaczynski) is expected to be elected when Polish voters return to the ballot boxes in October.

For the European Union, Warsaw's rightward turn means that Eastern Europe's most influential new member will likely strengthen its (already existing) pro-U.S. and anti-Russian policy, and will highlight some fundamental differences in the perception of European construction among European elites and their populations.

Warsaw's Geopolitical Orientation

Poland epitomizes the pro-Western former communist East. With some 40 million inhabitants, it is demographically the most important among the ten countries which joined the E.U. in 2004. At a political level, Warsaw is the new E.U. member that consistently showed the willingness to join a renewed Euro-Atlantic political, security and economic alliance. For Poland, joining the E.U. and entering the transatlantic security community is one single goal -- although composed of two aspects.

During the E.U.'s 2003 split in the face of the Iraq intervention, Warsaw joined the Anglo-American axis without hesitation. This put Warsaw at odds with Franco-German diplomatic maneuvers and let French President Jacques Chirac express his disappointment toward the "newcomers," which some observers expected to show more compliance to the Paris-Berlin combine. On the contrary, Poland actively supported the U.S.-led war against Saddam Hussein's Ba'athist government in Iraq.

History and geopolitics has, in fact, inexorably affected Warsaw's foreign policy orientations. Poland was once a powerful state. During the 16th and 17th centuries it formed a multi-ethnic empire extending from the Baltic Sea to the Black Sea's northern region; Poland has known the hard rule of great powers ever since. Split among Austria, Prussia and Tsarist Russia since the end of the 18th century, and occupied by Hitler's army in 1940, the country was then made a satellite by the Soviet Union after Moscow helped to defeat Nazi Germany in WWII.

Germany and Russia are, therefore, inevitably perceived as geopolitical rivals by Warsaw. Although post-1990 relations with the two states are at unprecedented good levels, Poland will carefully avoid weakening Anglo-American influence in favor of a Russo-German axis, or even in favor of any one of those powers increasing in strength. This fundamental interest prevails over Warsaw's traditional excellent relations with France since Paris often looks to be the political brain behind the attempt to build a more autonomous Europe, thus reducing Washington's influence in European affairs.

In addition, Poland is trying to regain its leading role in Central and Eastern Europe by shaping enhanced cooperation with the Baltic states, Ukraine and even Georgia. In 2004, Warsaw actively supported the pro-U.S., pro-Western "orange revolution" in Kiev, and it's rapidly emerging as a solid U.S. ally when it comes to stirring up a similar civic movement in pro-Russia Belarus. [See: "The Poland-Belarus Controversy and the Battle for Eastern Europe"]

Such orientations have clearly emerged in Poland's foreign policy during the social-democratic rule of the last few years, so the rightward turn is not a synonym of Warsaw's reorientation, but instead a strengthening of some already working trends.

In August 2005, Warsaw launched a new initiative with Kiev, Vilnius and Tbilisi, aimed at forging a democratic community to foster liberal and pro-market policies in Eastern Europe. Such a move was clearly directed at easing Belarusian and Moldovan integration into the E.U.-N.A.T.O political, economic and security architecture, while at the same time securing the transport of Caspian oil and gas resources to the Eastern and Northern European markets via Georgia and Ukraine, thus bypassing Russian and Belarusian territories.

For Washington's broad geopolitical aims, Poland is gaining more and more importance. Warsaw's goals coincide with Washington's interests on a number of foreign policy issues. The new containment of Russia is certainly the most evident, but on a more general cultural and ideological level Warsaw's commitment to liberal democracy and pro-market reforms can prove decisive to carry American values in Eastern Europe, where populist policymakers can easily achieve wide popular support.

Moreover, from the American view, Poland's role in the enlarged Europe is also one of containment versus the French and German ambition to lead a united continent from a more autonomous one. However, the Franco-German combine is losing momentum, and some influential politicians in Paris and Berlin (like Nicolas Sarkozy and Angela Merkel) do not share plans to build a European superpower if it is not in a solid partnership with the United States.

If the more free market oriented policymakers take the lead in Warsaw's coming right wing coalition, pro-British and pro-American politicians in Western Europe will gain an even more valuable ally. However, national contexts still play a major role in the European Union, and dramatic changes in the economic policies in France, Germany and Italy are less likely than progressive re-adjustments of national social models. [See: "In the Heart of Europe: Social Models and Geopolitics"]

Why Poland Matters

European elites have an interest in carefully analyzing the evolution of Polish politics. After France and the Netherlands rejected the E.U.'s Constitutional Treaty, the European integration process as a whole entered a serious crisis. Apart from the fragile constitution's fate, the problem for the E.U. is that public opinion in the core countries is now disillusioned with the process itself.

The Polish right wing coalition set to rule in Warsaw will not help to revitalize the integrationist effort toward a strong political union: the PiS party explicitly warned against an immediate switch to the euro, and will probably win the battle against its allied party P.O. -- which would like to ditch the Polish national currency in favor of Brussels' single currency.

Furthermore, both the PiS and the P.O. have announced that they won't move to help the E.U.'s constitution, but instead will wait and see what Britain will do in this regard. Given the improbability of a short-term British rescue of the E.U. Constitutional Treaty, this will mean even more uncertainty for the constitution's destiny.

The 2004 enlargement was in the end a source of political troubles for the Franco-German combine and its historical allies in Western Europe, though unity remains a diplomatic success in light of Europe's turbulent history. Poland, like the Baltic states, Slovakia, the Czech Republic or the membership candidates Bulgaria and Romania, are afraid of Western European hegemony and clearly opted for a double security guarantee: N.A.T.O. (i.e. the U.S.) and the E.U.'s common security and defense policy.

In addition, Eastern Europe has often chosen to implement pro-market reforms which many advocate be applied to France and Germany. If citizens in France and Germany perceive European integration as a tool to enhance their own social models, voters in Poland and elsewhere in Eastern Europe seem to perceive it as the way toward more free market, U.S.-inspired reforms.

As a consequence, the British view of Europe as a wide free market federation and as the European pillar of a renewed transatlantic alliance has gained new strength to the detriment of neo-Gaullist or social-democratic visions in continental Europe.


The Polish general elections will not overly affect Warsaw's foreign policy, but they will strengthen an already existing pro-American course.

How much a new E.U. member can influence Western countries' policies remains difficult to predict, but when all is said and done, the European political landscape seems fairly fragmented at the moment.

However, the new Polish coalition will have to cope with inner competition, as the Civic Platform will try to gain momentum and to foster decidedly pro-market reforms, whereas the Law and Justice Party will probably seek a more moderate path. If the two parties fail to set a coherent policy, a further rise of radical outsiders such as the nationalistic and populist Self Defense Party could weaken the current rulers and open the way to a difficult phase in Warsaw's post-communist course.

Confrontation Looms as I.A.E.A. Passes Resolution on Iran

Report Drafted By:Erich Marquardt

For the past few years, Iran has been testing the resolve of the international community on the issue of its nuclear research program. Iran, a signatory to the Nuclear Non-Proliferation Treaty (N.P.T.), argues that it reserves the right to control the nuclear fuel cycle. Tehran states that control over the cycle is important for Iran's development of nuclear energy. Indeed, according to the N.P.T., a state does reserve the right to control the nuclear fuel cycle, including the process of enrichment. The sticking point is that the process of enriching nuclear fuel is controversial because while enrichment is necessary to create nuclear energy, the enrichment process, if enhanced, can also be used to produce weapons-grade material to create nuclear weapons.

On September 24, the International Atomic Energy Agency (I.A.E.A.) passed a resolution stating that "Iran's many failures and breaches of its obligations [under the N.P.T.] ... constitute noncompliance." The resolution calls for Iran to end the conversion of uranium and to answer more questions about its past nuclear activities. Failure to comply with these demands could result in Iran's nuclear case being brought before the U.N. Security Council, an action that could result in economic and military sanctions being placed on the Persian state.

Background to the Current Crisis

Certain members of the international community, led by the United States, for years have feared that Iran is attempting to develop nuclear weapons under the guise of its nuclear energy program. In the past, Iran has admitted to keeping aspects of its nuclear research program secret from the international community, and there is the possibility that there are still aspects of the program that remain hidden from international inspectors. Since the start of the current crisis, the I.A.E.A. has been trying to ascertain whether Iran's failure to disclose certain parts of its nuclear research program constitutes a violation of the N.P.T.

The United States and its allies want to prevent Iran from acquiring nuclear weapons because such a development would give Iran more power in the Middle East. A country with nuclear weapons has more foreign policy leverage since it becomes more costly to threaten a nuclear power with military action. It would limit the ability of the United States -- or any other power in the region -- to take military action against Iran, since any such action could result in Tehran retaliating with nuclear weapons. [See: "Why States Seek to Acquire Nuclear Weapons"]

If Iran were able to add nuclear weapons to its threat arsenal, it would also be better able to assert itself in the region, possibly to the detriment of regional stability and, therefore, to U.S. and Western interests. Regional instability can create uncertainty over the global supply of energy, a concern that was an important factor in the Bush administration's decision to push Iraq out of Kuwait in 1991, and played a factor in the current Bush administration's decision to remove Saddam Hussein from power in Baghdad.

Furthermore, Israel, which is the major U.S. ally in the Middle East, views a nuclear-armed Iran as a major security threat. Iran is the main sponsor of the Islamic group Hezbollah, an organization that was responsible for bearing the brunt of the resistance against the Israeli invasion and subsequent occupation of Lebanon and is still responsible for occasional attacks against Israeli interests today. Israel worries that if Iran were able to acquire nuclear weapons, it would be able to spread its influence better in the Middle East to the detriment of Israel's security situation. Israel remains the only Middle Eastern state that possesses nuclear weapons, and by losing its monopoly in nuclear arms, it would also lose some of its ability to influence Middle Eastern affairs. [See: "Can Israel Maintain its Nuclear Superiority in the Middle East?"]

The United States has been very clear in its accusations that Iran is attempting to develop nuclear weapons covertly. On September 21, for instance, State Department spokesman Adam Ereli said at a daily briefing that Iran needs to "stop pursuing a nuclear weapons program under the guise of a civilian nuclear program."

Nevertheless, the United States does not consider military action against Iran a viable option under the present circumstances. For instance, the ongoing insurgency in Iraq has resulted in the overextension of the U.S. military; many of Iran's nuclear facilities are believed to be hidden, making it difficult to eliminate its nuclear research program through air strikes; and, the skyrocketing price of oil is weakening the economies of oil-dependent countries, and any military move on Iran would add more instability to energy supplies, thus lifting oil prices even higher.

Because of these restraints, the United States has pursued a policy of isolating Iran from the international community with the hopes that this pressure will cause Iran to abandon its drive to control the nuclear fuel cycle. Iran has extensive relations with the international community, and the Bush administration thinks that this is the country's vulnerable point. [See: "Washington's Iran Strategy: Ostracizing Tehran from the International Community"]

This explains why Washington has been careful not to be perceived as the primary party taking a hard line with Iran, as can be seen in U.S. Secretary of State Condoleezza Rice's recent statement about the E.U.-3's role: "We are not trying to be in the lead on this one because it's the E.U. that they [Iran] walked out on. Remember that our strategy has been that the European Union offered to engage them in these talks."

The administration's strategy has been to lobby the E.U.'s three most influential states -- the United Kingdom, France and Germany (the E.U.-3) -- to pursue Washington's hard line with Iran. On September 19, Rice explained this strategy in an interview with Time Magazine. Rice said, "Ultimately, I don't believe the Iranians can afford to be completely isolated from the international community. ... This is a very worldly population that is accustomed to being a part of the international economy, international politics. I don't think Iran wants to get that isolated. And I think it's one reason that they have been so anxious to avoid referral to the Security Council."

Rice's statements do explain why Tehran has attempted to engineer a foreign policy that does not relinquish its right to control the nuclear fuel cycle but also does not permanently damage relations with its major trading partners, such as certain states in the European Union; Iran depends on European states economically and a loss of trading relations with the bloc would have a negative impact on the Iranian economy.

Therefore, in the past, Tehran has retreated from its bold nuclear rhetoric in order to prevent the E.U.-3 from moving closer to Washington's policy line on Iran. For instance, on October 21, 2003, the E.U.-3 convinced Iran to place an extra protocol on its signed copy of the N.P.T.; the protocol allowed for more intrusive inspections by the I.A.E.A. and placed into effect a temporary halt on all uranium enrichment activities inside Iran.

Nevertheless, after this agreement was established, Iranian Foreign Minister Kamal Kharrazi made a statement highlighting Iran's motivations behind complying with the European demands: "We suspended uranium enrichment voluntarily and temporarily. Later, when our relations with the I.A.E.A. return to normal, we will definitely resume enrichment." Early in 2004, Kharrazi continued to pursue this policy line, arguing that "it's our legitimate right to enrich uranium."

Yet, the next crisis occurred in late 2004. During this crisis, once the point came where Iran would lose the support of the E.U.-3, Tehran announced on November 14 that it would fully suspend all uranium enrichment-related activities.

Throughout these crises, the E.U.-3 had been hesitant to take Washington's suggested hard line on Iran, which involved referring it to the U.N. Security Council for a vote on possible sanctions. The E.U.-3 attempted to work with Iran to offer it political and economic incentives in return for its commitment to not control the nuclear fuel cycle. The main goal of this policy was to provide Iran with the necessary enriched nuclear fuel so that it could pursue a nuclear energy program, yet not allow it to control the entire fuel cycle, thus removing the possibility that Tehran could seek to create nuclear weapons at a later stage through its own indigenous uranium enrichment program.

However, Iran was unwilling to accept this deal, calling its right to control the nuclear fuel cycle a matter of national pride and security. Secretary of Iran's Supreme National Security Council Ali Larijani said that "pressuring a country like this is resisting a country's national pride." In response to the E.U.-3's offer of providing Iran with nuclear fuel, Larijani argued, "There is no international guarantee that governments would provide us with nuclear fuel. We cannot lay the fate of this nation in the hands of other governments."

Therefore, the E.U.-3 began to move more toward Washington's current policy on Iran, and on September 24 pushed a resolution through the I.A.E.A. board that could result in Iran being referred to the Security Council.

The September 24 Resolution

In the days before the September 24 resolution, the E.U.-3 hesitated over their proposed draft since Russia and China -- two countries that have veto rights on the U.N. Security Council -- reacted negatively to the draft motion, implying that such a resolution could result in a veto. A veto of this resolution by Russia or China in the Security Council could create a diplomatic row with the two Asian states on one side, and the E.U. and the U.S. on the other; this is a development that most countries involved want to avoid.

Indeed, while the E.U.-3 did decide to approve a resolution that could refer Iran to the Security Council, it was watered down from what the U.S. had initially hoped. Any threat of sanctions was removed from the resolution, although sanctions still would be a possibility if the issue makes it to the Security Council and it votes to sanction Iran for violating the N.P.T. Furthermore, the resolution did not outline a time frame when Iran would be put before the Security Council but instead said that such a referral could occur if Iran does not cease uranium conversion and if it fails to answer additional questions on its nuclear research program.

The resolution also showed how the international community is divided over referring Iran to the Security Council. The resolution passed with 22 votes in favor, one vote against, and twelve abstentions. In the past 20 years, there have only been two instances where the I.A.E.A. board has not passed a resolution by consensus. Both Russia and China abstained from the vote.

After the vote, members of the E.U.-3 stressed that Iran still had ways to avoid being referred to the Security Council. French Foreign Minister Philippe Douste-Blazy said, "This resolution shows the international community's concern about Iran's non-cooperation regarding the non-proliferation rules. At the same time, the text keeps open the possibility of negotiations which we must take advantage of, without delay, in order to put forward proposals which could re-establish trust." The U.K., which usually toes the closest to the U.S., said that, "Iran has an opportunity now to address the clear concerns of the I.A.E.A., and the lack of confidence in Iran's nuclear intentions."

But the statements, and the resolution, did not proceed much further. While the resolution worked to the Bush administration's advantage, it still gives Tehran time to maneuver away from having any punitive measures placed upon it.

Russian and Chinese Resistance

Despite not voting against the I.A.E.A. resolution, Russia and China have reservations about bringing Iran before the Security Council. On September 21 in a speech in San Francisco, RIA Novosti reported that Russian Foreign Minister Sergei Lavrov said, "While Iran is cooperating with the I.A.E.A., while it is not enriching uranium and observing a moratorium, while I.A.E.A. inspectors are working in the country, it would be counter-productive to report this question to the U.N. Security Council." Lavrov continued, "It will lead to an unnecessary politicizing of the situation. Iran is not violating its obligations and its actions do not threaten the non-proliferation regime."

Moscow refuses to state that Iran has violated the N.P.T., saying instead that the country is still abiding by the treaty. Washington argues that because of Iran's decision to keep aspects of its nuclear research program secret, it has undercut the principles of the N.P.T. which act as a violation

In a sign that Russia may be willing to veto any Security Council resolution punishing Iran, the Russian Foreign Ministry released a statement that "it will not contribute to the search for a solution to the Iranian problem by political and diplomatic methods."

The statements made by Lavrov and the Foreign Ministry display Moscow's unwillingness to support tougher action on Iran. Indeed, for Moscow, E.U.-3 and U.S. action against an important trading partner and a country that resists U.S. influence in the Middle East is just another sign of Moscow's weakening international influence. Combined U.S. and E.U. efforts in Moscow's near abroad have led to its loss of influence in Eastern Europe and, at least temporarily, in Central Asia and the Caucasus. Moscow has been struggling to reassert itself after the devastating collapse of the Soviet Union, and so far it has not been very successful.

Russia also is the party responsible for being the primary supporter of Iran's nuclear research program. Moscow is building the US$1 billion nuclear reactor at Bushehr, and has provided Iran with much of its nuclear knowledge. If the Bushehr reactor goes operational, it can be expected that Moscow will assist Tehran in the creation of more nuclear power plants, offering Russia a lucrative economic future in the field of nuclear energy. Moscow also provides Tehran with the bulk of its military equipment -- such as MiG-29 fighter aircraft, Su-24 fighter bombers, T-72 tanks, and Kilo-class attack submarines -- making it a major contributor to Iran's growth as a regional power.

The Chinese, on the other hand, also warned against taking Iran's nuclear issue before the Security Council. Chinese Foreign Minister Li Zhaoxing reportedly told an E.U. grouping, led by British Foreign Secretary Jack Straw, that bringing Iran before the Security Council "could encourage Iran to take extreme measures" and would, therefore, be counter-productive.

China has its motives for preventing a condemning resolution. China, for instance, has seen a dramatic increase in energy demand due to its rapid economic development. In order to find new energy resources, it has looked to countries near its borders that still have reserves to be exploited. Since Iran does not share economic relations with the United States due to U.S. sanctions on the country that stem from the 1979 Islamic Revolution, Beijing has been able to foster new energy ties with the country. About 15 percent of China's imported oil and natural gas comes from Iran, and U.S. attempts to destabilize Iran would pose a threat to China's energy and economic interests.

China, too, is wary of attempts by the U.S. to weaken countries such as Iran, since Beijing fears that Washington will take future actions aimed at containing China's rise as a major power in Asia. For instance, in an example that displays the Bush administration's views on China, on September 21 U.S. Deputy Secretary of State Robert Zoellick argued that China's "actions on Iran's nuclear program will reveal the seriousness of China's commitment to non-proliferation." This statement can be read that China's continued support for Iran on this issue demonstrates its willingness to take actions counter to U.S. interests, explaining the U.S. rationale for containing China.

Furthermore, China and Russia have been improving their bilateral relations and have been cooperating in order to limit the spread of U.S. influence in Central Asia. Both countries are working together to increase the cohesion of the Shanghai Cooperation Organization (S.C.O.), and have caused the S.C.O. to release a statement calling for the withdrawal of the U.S. military from its member states. [See: "The Significance of Sino-Russian Military Exercises"]

The resistance by China and Russia played a role on the E.U.-3's final proposed resolution; while the resolution passed did affect Iran's interests negatively, it did not result in any immediate action on Iran, giving Tehran once again more time to avoid being the victim of any substantial international action against it.

Nevertheless, Russia and China still abstained from voting on the resolution. While the two states were not willing to vote against the resolution, questions remain on whether they would be willing to issue a veto if a future resolution that threatens sanctions comes before the Security Council.

Despite their resistance to U.S. and E.U.-3 efforts on Iran, it cannot be said that Russia and China would welcome Iran becoming a nuclear power; both countries may be interested in placing restraints on Iran's nuclear development. Nevertheless, it appears that an Iran with nuclear weapons is not as much of a concern to Russia and China than is the ability of the United States and the E.U.-3 to refer Iran to the Security Council and to place economic and military sanctions on the country.

How Iran Might Proceed

Before the September 24 vote, Larijani said that it was unfortunate that "countries with economic ties with Iran, particularly in the petroleum area, have so far not defended Iran's rights." This tact taken by Iran was an effort to threaten with economic repercussions those countries that are supporting U.S. policy on Iran. Iran is the second largest oil exporting country in O.P.E.C., and has the ability to cancel billions of dollars in contracts with European energy companies. It also possesses the world's largest gas reserves. Larijani explained this threat, stating, "Some countries with economic interests especially in oil do not show any feelings of responsibility the [Supreme National Security Council] is determined to create a balance and provide the ground for their participation [in energy projects] accordingly."

Billions of dollars in contracts are on the line, with companies such as Royal Dutch Shell, Repsol of Spain and Total of France facing a major loss of business. Iranian President Mahmoud Ahmadinejad was even more succinct on his country's economic threats, telling the Iranian parliament that "economic ties are not irrelevant to political ties" especially with "hostile" countries that "fail to recognize Iran's legitimate rights" under the N.P.T. For instance, China, Russia and India also have major energy contracts out with Iran, and those countries have shown no interest in jeopardizing such contracts due to questions over Iran's controversial nuclear program.

For instance, in early 2005 India and Iran signed off on plans to construct a 1,609-kilometer (1,000 miles) natural gas pipeline from the Iranian port of Assaluyeh to the Indian state of Rajasthan, traversing Pakistan; additionally, in 2004, Iran signed a 30-year, US$70 billion liquefied natural gas deal with China's Sinopec.

That being said, India did vote in favor of the I.A.E.A. resolution due to its hope of acquiring more nuclear technology from the United States. In July 2005, India and the U.S. signed a nuclear deal that granted New Delhi access to civilian nuclear energy cooperation; however, the U.S. Congress has not yet approved the entire deal. New Delhi was concerned that Washington was hinging future nuclear support on India's vote for the resolution condemning Iran. However, because India was not behind drafting the resolution, and has shown little outspoken regard for punishing Iran due to its nuclear program, Tehran views India in a different light as it does the U.S. and the E.U.-3. [See: "The Implications of the U.S.-India Strategic Partnership"]

Therefore, behind these threats, Tehran's hope is that major European energy companies will lobby their governments and ask for a less confrontational foreign policy when it comes to dealing with Tehran. It will be important to note whether Iran proceeds with executing its economic threats now that the E.U.-3 has pushed through a resolution that threatens Iran with referral to the Security Council.


The three-year posturing between Iran and the United States is moving closer toward confrontation. The U.S. has been able to convince the E.U.-3 to put more pressure on Iran to abandon its desire to control the nuclear fuel cycle. However, as expected, both Russia and China have increased their resistance to attempts by the E.U.-3 and the U.S. to place Iran before the Council. Nevertheless, the U.S. and the E.U.-3 have managed to push the I.A.E.A. board to pass a resolution that threatens to refer Iran to the Security Council if it does not pursue a series of measures to explain its nuclear activities.

Before the I.A.E.A. vote, Iran tried to demonstrate to the E.U.-3 that it will not abandon its wish to control the nuclear fuel cycle, even though this could damage economic and political relations with the European bloc. Tehran was betting that resistance by Moscow and Beijing to the joint U.S.-E.U.-3 maneuvers would soften the E.U.-3's line and give Iran the ability to continue its nuclear research program. While a softer resolution was passed, it still damages Iran's interests since the resolution demands that Iran end the conversion of uranium and demands that it answer more questions about its nuclear research program; failure to comply with these demands could result in it being referred to the Security Council.

It is important now for Iran to keep Russia and China on its side. If Iran does eventually get referred to the Security Council, it will need one of those two countries to veto any resolution that calls for sanctions. However, any such veto would create an international crisis and there is little doubt that both Russia and China want to avoid this development. It can be assumed that they will now put pressure on Iran to make its nuclear efforts look innocuous and to prevent a major escalation of rhetoric with the U.S. and the E.U.-3.

The United States, on the other hand, will have to continue to pressure the international community to resist Iran's wish to control the nuclear fuel cycle. With the intervention in Iraq draining U.S. resources, Washington is not in a position to begin a new front across the border in Iran, even if that only involves executing air strikes on Iran's suspected nuclear facilities. With the price of oil seeing record highs, the United States and the E.U.-3 cannot afford to pursue any action that could result in uncertainty over oil supplies since that would push the price of oil even higher, threatening a recession in oil-dependent countries. Indeed, this concern could also affect how willing the U.S. and the E.U.-3 will be eventually to implement sanctions on Iran, since this, too, would create concern in the market.

Additionally, the failure to find weapons of mass destruction in Iraq continues to hinder the United States' credibility on the international scene, and an attack against a country that does not have a proven nuclear weapons program would not be welcomed in the international community and could further erode Washington's ability to pursue an effective, multilateral foreign policy.

Bangkok Struggles to End Separatist Violence in Southern Thailand

Drafted By: Adam Wolfe

While the world looks to suture the recent Aceh peace agreement onto the violence that is bleeding southern Thailand, the region's Muslim insurgency is eyeing the benefits of globalized terror networks. Bangkok has tried a variety of responses to the separatist violence -- everything from imposing martial law to dropping 100 million origami birds inscribed with peace messages onto the region -- but nothing has curtailed the violence, which has killed some 900 people since January 2004. With every attempted tactic, Bangkok seems to reinforce the differences between the Muslim, Malay-speaking south and the Buddhist, Thai-speaking majority.

Bangkok insists that the insurgency is an internal problem that it can deal with, but the separatist groups have ties to international Islamist militant organizations and the situation is gathering the potential to destabilize the greater region. At this juncture, it appears that the violence will increase -- and possibly destabilize parts of the region -- before Bangkok or the separatists can be convinced to sit across the table from each other in formal peace negotiations.

Background on Southern Thailand

The regions of Pattani, Yala and Narathiwat were part of an independent sultanate, the ancient kingdom of Pattani, until annexed by Thailand (then known as Siam) in 1902. The residents speak Yawi, a Malay dialect, and are Muslims, having adopted Islam in the 13th century. In these ways, the region is very different than the rest of the country, and because of this it has always failed to attract much attention from the central government, helping to further increase the income disparity between the south and the rest of the country.

For decades, southern separatist groups have quarreled with the government. In the seventies and early eighties, Muslim separatists were involved in drug smuggling and other operations with the remnants of Malaysia's communist insurgency based on Thailand's southern border, ostensibly to finance their attacks against the government (though many of the militants have historically been more attracted to banditry than waging war against the government).

The separatist groups also conducted several attacks against public schools, government-run clinics and police stations in the region because they were seen as anti-Islamic tools of the state. In February 2002, Thai security forces killed Saarli Taloh-Meyaw, the leader of the Pattani United Liberation Organization (P.U.L.O.), but maintained that there was no organized, violent separatist movement. Bandits and criminal gangs were blamed for the bloodshed, which in many cases was, and to a large extent still is, the cause.

On January 4, 2004, thirty armed separatists raided an army depot in Narathiwat, stealing over 300 guns and killing four Thai soldiers. Eighteen nearby schools were set on fire at the same time. The next day, two police officers were killed by a bomb they were trying to defuse. Another bomb injured a police officer, and two more were dismantled that day. It became clear soon after the incidents that a new chapter in the conflict between the Muslim separatists and the Thai government had begun. The following weekend, the Thai government imposed martial law on the three southern-most provinces, and for the first time admitted, publicly, that it was battling a Muslim, separatist insurgency.

Since then, the violence on both sides has only increased. There are frequent killings, in addition to attacks on government and Buddhist buildings. Public beheadings of Buddhists (360,000 of the 1.3 million southern residents practice Buddhism) have lead to gun training sessions for the remaining Buddhist population (it's estimated that over 34,000 have fled) being taught in Buddhist temples by Thai military officials. The counter-offensive launched by Bangkok has also been responsible for at least its share of deaths in the region. Most notoriously, in October 2004, 78 people from the small town of Tak Bai died by suffocation while in police custody after being rounded up at a protest that turned violent. On April 28, 2005, Thai security forces killed more than 100 poorly armed militants after separatists launched a series of raids on security posts.

There is evidence that the separatists are using more sophisticated bombs and techniques as they learn from successful attacks. The security forces have apologized for the most egregious violent acts of suppression, but do not appear to be backing away from putting violent repression at the center of the counter-insurgency strategy. The government's latest attempted strategy gives more power to the prime minister to contain the separatist movement, which is likely to create a more powerful backlash.

The Government Response

Thai Prime Minster Thaksin Shinawatra's government is the country's first stable, democratically elected government. He was the first prime minister to serve out his four-year term, and in February his Thai Rak Thai (T.R.T.) party gained an even greater majority. However, in July his public approval rating dipped below 50 percent for the first time. His taking a more direct role in the southern conflict is, at least in part, designed to reverse his sinking popularity.

Thaksin's government has tried a variety of methods to contain the southern separatist threat -- none, so far, have had the intended effect. The police and the army were each given a chance at being in charge of the response, development funds have been promised and threatened with withdrawal, and martial law has been imposed. Of the several initiatives launched this year, one does seem to have some promise of success.

In March 2005, the National Reconciliation Commission (N.R.C.) was created to recommend steps to end the conflict. The N.R.C. has had some success in convincing the government that it needs to focus on the sources from which the separatist movement draws strength, instead of only on military responses. It convinced the government to release a full report on the killings at Tak Bai last October. The commission also has received widespread praise from the West and A.S.E.A.N. countries. Still, the N.R.C. is not scheduled to release its full report until early 2006 and has no direct role in drafting government policy. Thaksin continues to ignore the N.R.C. when it suits his convenience.

On July 17, without judicial approval, the Thai Cabinet issued an emergency decree that grants the prime minister sweeping new powers over the three southern provinces. Thaksin now has the power to order the detention of suspects for seven days without trial, censor the media, tap phones and expel foreigners. The emergency rules also grant immunity to security forces in emergency zones -- a direct dismissal of the N.R.C. recommendations. The net effect of this shift from martial law to rule by emergency decree is more likely to harden the conflict rather than bring about its end. The southern conflict is not strictly military in nature. The decree does nothing to bring the southern, Muslim population into the process of ending the violence, as the N.R.C. has recommended -- the emergency powers only drive another wedge between the south and the rest of the country. Predictably, there has not been a decrease in violence since mid-July.

The Conflict's Significance Outside Thailand

Malaysia's government has been put in an awkward spot by Thailand's southern conflict. There is domestic pressure to support the separatists, who draw their ancestry back to Malaysia, and the northern state of Kelantan has launched a fundraising campaign to assist Thais fleeing the violence.

Still, maintaining diplomatic relations with Thailand is very important for Kuala Lumpur. When 131 Thai Muslims fled across the border in late July, Malaysia was reluctant to repatriate them. This has increased tensions between the two states. Kuala Lumpur's suggestion that the A.S.E.A.N. states should take up the issue of southern Thailand's conflict was sharply dismissed by Bangkok, and Malaysia has said it will not return the refugees until Thailand can provide assurances that their human rights will be protected. This bilateral tension could spread to the greater region, where the balance of power is in a fragile transition. [See: "India's Project Seabird and the Indian Ocean's Balance of Power"]

Thailand's reaction to Malaysia has been typical of Bangkok since the present conflict began in January 2004: every suggestion that an outside moderator be brought in has been met with a harshly worded assurance that Bangkok can resolve the separatist problem on its own. The recent Aceh agreement in Indonesia has been floated as a model for negotiations between the separatists and the government, but Bangkok has dismissed this in addition to all other calls for outside mediation.

However, if the links between Thai separatists and international Islamist militant groups should become operational, pressure on Bangkok to accept outside help in ending the conflict may prove convincing. While the groups like P.U.L.O. have received financial support from abroad, there is no evidence that any foreigners are fighting alongside or training the separatists, and the groups claim that all their weapons have been obtained locally. As the conflict continues, this may change. There is evidence that the separatists are growing in sophistication, and this may eventually lead to globalizing their conflict by tapping into the existing Islamist militant networks.


There is little reason to believe that the conflict in southern Thailand will be resolved in the midterm. The Thai government is still attempting to suppress the separatist movement without outside assistance, even though every attempt thus far has failed. The latest plan of giving the prime minister more direct control over the situation seems destined to join its predecessors in the wastebasket of failed strategies.

The Muslim separatist movement is still a localized one, though it does have some contact with international Islamist militants. Should it choose to exploit these relationships, and globalize the conflict, the Thai government will not be able to defend its policy of sovereignty before peace in the face of the overwhelming diplomatic pressure that will follow. Pressure from the West and A.S.E.A.N. countries to accept outside mediation can also be expected to increase after the N.R.C. releases its final report in early 2006. Until then, more bloodshed can be expected in southern Thailand.

Thursday, September 22, 2005

Economic Brief: Italy's Loss of its Strategic Markets

Drafted By: Federico Bordonaro

On September 14 and 15, Italy's overall economy experienced two potentially decisive events. After almost seven months of struggle, on September 14 the board of Banca Popolare Italiana (B.P.I.) accepted that the Netherlands' ABN Amro acquire B.P.I.'s 29.5 percent stake in Antonveneta, Italy's ninth-largest bank, for about €2.5 billion (US$3.1 billion).

The following day, Russian gas giant Gazprom publicly expressed interest in buying stakes of Italy's SNAM Rete Gas, a company dedicated to natural gas and crude oil provisioning and distribution, created by Italian oil company ENI. Due to Gazprom's financial strength, and because of an Italian law which obliges ENI to sell its stakes in SNAM (now at 51 percent), reducing its shares to 20 percent by 2007, it is likely that the Russian corporation will succeed.

The two financial moves signal a changing scenario in Italy's economy, and will have crucial economic and geopolitical consequences.

Gazprom's Bid for SNAM

Gazprom is already the main gas supplier to Italy. By acquiring 30 percent of SNAM's stakes, the Russian giant will play a relevant strategic role in Italy's gas distribution market. In May 2005, ENI's former CEO, Vittorio Mincato, already sold Gazprom the rights to directly sell two billion cubic meters of gas to Italian consumers. The Russian group, however, appears determined to take control of the whole gas distribution market in Italy.

It is no secret that Gazprom is directly controlled by Moscow, and, more precisely, by President Vladimir Putin and his powerbrokers. In fact, Putin's direct involvement in the corporation's strategies look evident. Since an anti-monopoly Russian law forbids a group to expand its power at home to a certain extent, Gazprom's enormous financial strength is naturally flowing abroad. Germany and Italy seem to be its two main targets, but the strategies are different, although the unifying characteristic of the two enterprises is the Kremlin's active role in them.

Gazprom will benefit from the Russo-German agreement to build an ambitious Baltic pipeline to convoy Russian gas directly to Germany via the Baltic Sea, thus avoiding Russia's geopolitical rival Poland. The project was strongly wanted by German Chancellor Gerhard Schroeder and Putin as the basis for a Russo-German energy strategic partnership. [See: "The Poland-Belarus Controversy and the Battle for Eastern Europe"]

In the Italian case, Gazprom is instead trying to couple its already preponderant role as supplier with a strategic control of gas distribution, a goal announced by Putin himself after his last bilateral talks with Italian Prime Minister Silvio Berlusconi by stating that new investments in the Italian gas distribution network were both in Gazprom's and in Russia's interests.

As ENI's new CEO, Paolo Scaroni, recently highlighted, the European gas market is experiencing a dramatic increase in consumption. In 2004, the 15 western E.U. states consumed around 454 billion cubic meters of gas, but such a figure is expected to rise to 580 billion by 2015. At the same time, European gas production is declining. Russia, Algeria and Norway are now the three main gas suppliers, and the E.U. will depend upon gas imports for 90 percent of its needs in ten years. Russia will play a key-role in this supranational strategic market, but Italy is set to be the first E.U. country to experience foreign leadership in the distribution market as well.

ABN Amro's Bid on Antonveneta and Italy's Banking System

Perhaps the most revolutionary event in the Italian economy has been ABN Amro's success to takeover B.P.I.'s stakes in Antonveneta -- a move which likely opens the way for the Dutch bank's future control over the whole Italian bank. ABN Amro's takeover will be the first cross-border bank takeover, provided it is not prevented by the Bank of Italy which has been dramatically weakened by its governor's -- Antonio Fazio -- involvement in a major scandal. Fazio has allegedly tried to help B.P.I.'s maneuvers to maintain control over Antonveneta, but his phone conversations with B.P.I.'s chief, Giampiero Fiorani, were intercepted by the financial police in July. The incident has damaged both Fazio's and the Bank of Italy's reputations and the country's image as a safe place to do business. However, for the same reasons, it has accelerated the process of dismantling Rome's banking system's "protectionist" tradition.

It is now to be expected that other big foreign banking groups will try to acquire Italian banks. In July, Spain's Banco Bilbao Vizcaya Argentario tried to takeover Italy's Banca Nazionale del Lavoro. The move failed, but ABN Amro's success could change everything.

Moreover, the single currency itself, whose credibility heavily depends upon the ability of capital to flow freely in the European Union, is said to benefit from such market liberalizations.

The Bottom Line

Italy is losing its long-standing state grip on two strategic economic sectors: energy and banks. The opening up of the once unassailable Italian banking system is being warmly welcomed by liberal factions, for they consider such developments the only possible way to revitalize the allegedly limp and inefficient field.

Similarly, liberal economists and many decision-makers consider the foreign takeover of big national companies such as SNAM both inevitable and beneficial because, they argue, foreign investment will be encouraged, and corporate governance will be strategically and financially more transparent and effective. Ironically, the Italian "liberal" turn in the energy market will benefit actors such as Gazprom, whose link with a great power's geopolitical strategy is self-evident.

Such a new Italian economic context comes -- paradoxically -- at a time of growing neo-protectionism, often unspoken or disguised as "economic patriotism," but it also comes in the age of a renewed, intense competition among big corporations to take control over strategic markets. Not only U.S. and E.U.-based groups, but also Russian companies and probably, very soon, big Chinese competitors will try to conquer their share of influence in the Italian markets. [See: "Economic Brief: Economic Nationalism"]

Look for Italy's economic jewels to quickly become the prize of an economic competition whose stakes won't be merely financial, but also geopolitical. Rome's inability to continue its protection of some of its national strategic sectors is a natural consequence of the E.U.'s rules, and will probably further enhance the Europeanist orientation of its elites.