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  THE
KWR INTERNATIONAL ADVISOR November
2004 Volume 5 Edition 7
In this issue:
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The
Bush Victory and What It Means
By
Scott B. MacDonald
NEW
YORK (KWR) One of the most hard-fought elections in
several decades is over. President George W. Bush won
re-election and Democratic challenger Senator John Kerry
lost. Bush gained 274 electoral votes, four more than
needed for a win. He also won the popular vote, 51% to
48% for Kerry. In addition, the Republicans expanded
their majorities in Congress and hold more than half
of the governor mansions. The response in the U.S. corporate
bond market was a rally almost across the board.
Those sectors with the most to gain from a Republican
victory are the pharmaceutical and health care sectors,
defense, energy, basic materials, and any company with
asbestos litigation (Halliburton). The last-mentioned
is largely because of the loss of Democratic Minority
Leader Senator Tom Daschle of South Dakota, who was active
in obstructing legislation that sought to undo the litigation
mess surrounding asbestos settlements. The expectation
is that the Bush victory should provide a positive note
for the U.S. corporate bond market in November. Simply
stated, the lack of disputed votes and the graciousness
of John Kerry in conceding in a timely manner removes
a major uncertainty for the market.
Why Did Kerry Lose? Although a lot is said about the
division of the United States into two countries (one
conservative and deeply religious and the other liberal
and secular), that is not a satisfactory answer to why
Senator Kerry lost the 2004 presidential elections. A
more practical answer is that Kerry failed to persuade
enough people that he was more capable of executing the
war than Bush.
Iraq dominated all three debates, figured prominently
in most of the candidates’ major speeches and certainly
was a point of concern among the electorate. Along these
lines, Kerry had the problem of appealing to the center
by showing that he would win the war, and appealing to
the Democratic left by showing that he would end the
war. Trapped between the two political groups, he found
himself forced to campaign by attacking Bush. In the
course of that, he failed (just barely) to persuade the
majority that he had a coherent policy. In the end, he
could not persuade enough voters that he was better than
Bush, even though he might have persuaded them that Bush
was bad.
Kerry’s failure to get elected reflects another
issue - the decline of the Democratic Party. Despite
more people registered as Democrats, the Democratic Party
is becoming the minority party in holding political office.
It is struggling to regain momentum across the country.
Once the dominant player throughout the American south,
the party failed to carry any states in that region for
Kerry, even with Senator Edwards from North Carolina
running as his vice presidential candidate. Yet, even
in a heavily Democratic state like New York (which overwhelmingly
voted for Kerry), the governor and mayor of its most
populous city, are both Republicans. California, another
heavily Democratic state, also has a Republican governor.
For any future Democratic candidate to win the White
House, considerable thought is required as to what the
party represents and where it wants to take the United
States. Bill Clinton’s success came from his ability
to take to the political center and in some areas clearly
borrowed from the Republicans. Kerry and Edwards in many
regards harkened back to the old more leftwing Democratic
Party. While this guaranteed that they won the nomination
process, it hurt them with the political center. As mirrored
by the elections results, the old message is not selling.
For the Democrats it is time to come up with a new message
that sells.
George W. Bush has four more years. He faces challenging
environments in both domestic and foreign policy arenas.
Approaching the policy arenas he has a strong mandate.
Not only has Bush gained in the popular vote since 2000,
the Republican Party has greater control over both houses
of Congress. This means that Republicans will continue
to control important committees in the Congress, including
Ways and Means and Banking.
Bush’s economic policy in the second term will
focus around three major initiatives - Social Security
reform, tort reform and making the earlier round of tax
cuts permanent (and making headway on estate taxes).
This dovetails with ongoing Bush programs for maintaining
a high level of defense spending and reforming the GSEs
(Government-Sponsored Enterprises). Trade policy has
a protectionist bent, something that is likely to resurface.
Another important issue on the economic policy side is
the Federal Reserve. In the short term we do not see
any change in Fed policies - at the next FOMC meeting
on November 10, we expect rates to go from 1.75% to 2.0%,
with one more possible hike by year-end. Although this
interest rate cycle is likely to end earlier than most,
the Fed is likely to push rates above core inflation.
More importantly, Alan Greenspan is likely to step down
at some point during the next Bush administration. This
means that the next Fed head is to be selected by a Republican
president and Congress. This should have a major impact
on regulatory policy and GSEs. As Greenspan has been
supportive of reforming the GSEs, we would expect his
successor to be like-minded, especially considering that
this is a major issue for the chairman of the Senate
Banking Committee Richard Shelby, a close Bush ally.
Look for more headlines on reforming Fannie Mae and Freddie
Mac (actions which are likely to be more bondholder friendly
and less equity friendly).
Moving into the next term, the Bush administration expects
that economic growth will strengthen as more Americans
have more money to spend (because of a smaller tax burden),
hence maintaining strong consumer demand. As economic
growth picks up, companies will add personnel, bringing
down unemployment. At the same time, economic growth
will help generate higher tax revenues from corporate
America. The combination of these factors will allow
the administration to pursue its reforms.
Perhaps the economic scenario of the Bush administration
is a little too rosy. The budget deficit is likely to
be an obstacle to any new economic policy initiatives.
And as spending is not likely to fall, the pressure is
on raising revenues. This potentially represents a problem,
considering that the administration is still looking
for over 4% growth in 2005. We expect real GDP growth
in 2005 to be in the 2.5%-3.0% range, largely due to
higher oil prices. Consequently, the government will
have less money than it thought, which should reduce
its ability to launch new initiatives. In addition, there
is likely to be growing pressure within the Republican
Party to reduce the deficit. Rounding out the picture,
the current account balance of payments in massive – close
to 6% of GDP. This also represents a challenge to the
ability of Bush II to push ahead with more spending.
The other critical area of business facing President
Bush in his second term is what to do with Iraq and the
war against terrorism. This dominated his first term.
Indeed, he responded with a sense of vision that embraced
a highly controversial and ambitious policy to make the
Middle East a region of democratic governments. U.S.
policy, therefore, is based on the holding of elections
in Iraq (set for January) and supporting whatever government
emerges. Along these lines, Iraq represents much more
bloodshed and a testing of U.S. political will. It also
means leaning on other governments in the region, such
as Iran (with its nuclear ambitions), Syria and Saudi
Arabia (home of al-Qaeda’s founder and a majority
of the 9/11 terrorists).
U.S. policy also includes the option to strike first,
something that has led to considerable friction with
a number of Washington’s allies. Yet, Libya was
leaned on (starting with the Reagan administration) and
eventually surrendered its weapons of mass destruction.
Although there is much that can be debated about Bush’s
Middle Eastern gambit, if it is successful, he will looked
inspired. If he fails, Iraq will be compared to Vietnam,
an unpleasant memory in American history.
Presidents going into a second term are searching for
their place in history. This is the period when long-term
policies already put in place can be sharpened and reinforced.
New initiatives can be launched. Bush needs to focus
more on the domestic side of policy. Indeed, it can be
argued that domestic economic issues - unemployment,
the high cost of prescription drugs and the loss of health
care insurance - almost cost him the election. The country
is divided and needs gracious leadership. It requires
a presidential heavy hitter like Ronald Reagan and Franklin
Delano Roosevelt, who can restore a sense of domestic
purpose and unity. That means dealing with the deficit,
reforming Social Security, appointing new Supreme Court
justices and restoring a dialogue within the country.
Failure to do so will not put Bush with the likes of
Reagan and Roosevelt, but in the camp of Rutherford Hayes
and Benjamin Harrison, forgotten Republican presidents
of the Gilded Age, who presided over growing inequalities
in their country. Much is at stake in the next four years.
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A
Two-part Guide to Understanding Investing in Asia
(This
article originally appeared in the October Global Edition
of Business Facilities Magazine)
Part
One: The Essential Importance of an Asian Business
Development Strategy
By Keith W. Rabin
If
for no reason other than demographics, it is
clear future growth in the world economy will be primarily
driven by activity outside the U.S. and Western Europe.
Japan also faces extremely serious demographic problems;
however, it appears to belong in a special category
when one considers the immense potential now beginning
to be realized as restructuring and reform takes hold
and the $3 trillion plus in savings presently invested
in its Postal Savings system begins to finance retirements,
pushing consumption higher.
At this point, indicators such as the recent forecast by
Goldman Sachs that China will overtake the U.S. to become
the world's largest economy in less than 40 years—not
to mention the inherent growth in other Asian economies—is
almost common knowledge. However, another important point
was recently raised by Martin Spring in On Target, who noted
even then China's per capita income will be only one-sixth
that of the U.S. That will leave China many more decades
of growth until income parity with the U.S. is achieved.
Spring goes on to quote Financial Times bureau chief James
Kynge as saying that "within 10 years [China's] appetite
for base metals, food, and probably also luxury goods, will
strain the world's ability to produce them."
These developments will have a profound impact not only on
commodity prices but also on the market for all kinds of
goods and services. At a minimum this will mean Asia will
account for a far greater share of global consumption and
financial market capitalization.
As highlighted in "The 2003 Aging Vulnerability Index" by
Neil Howe and Richard Jackson, the bottom line is that the
role of Asia, especially China and India, will be far more
significant in the future world of our children. For forward-looking
investors and corporations, that means there will be real
business growth opportunities in the emerging markets and
those countries that can sell to them.
This trend is further exacerbated by the growth of outsourcing.
A recent Fortune article quoted Gartner data indicating that
U.S. companies will spend some $17 billion on human resources
outsourcing in 2004. Of that, $6.4 billion—more than
one third—will be in payroll processing. This indicates
major outflows of U.S. service jobs to other countries, with
countries such as India as well as the Philippines and other
places with strong English capabilities being the beneficiaries.
It seems fair to say in coming decades, any company seeking
to maintain its growth, momentum, and market share will have
to define and implement a global expansion strategy. This
will be a real problem as U.S. companies, particularly those
that lack the scale and resources of the Fortune 500 and
other major multinationals, have enough problems initiating
nationally-scaled strategies. As a result they have traditionally
been reluctant to focus their attention overseas.
A recent survey undertaken by KWR International in cooperation
with Business Facilities underscored the difficulties and
the ambivalence of many companies seeking to initiate overseas
expansion strategies. While many recognized that "international
expansion is important," a notably smaller amount were
ready to declare it a near-term priority. Additionally, of
the respondents who noted they were already internationally
active, a significant number expressed dissatisfaction with
their efforts—leaving substantial room for improvement.
The reasons for this are many. A more complete analysis of
the obstacles and constraints and the steps that firms of
all sizes might take to overcome them must be addressed in
another article. That said, they essentially revolve around
the fact that most small to mid-sized and even many major
firms lack the familiarity, experience, and ability needed
to understand and operate in foreign markets. They are also
hard pressed to apply the resources, attention, and focus
needed to define and develop effective and sustainable implementation
strategies, to nurture their long-term success, and to access
the outside support and facilitation that could help in these
efforts.
This inherent difficulty, however, is no excuse for inaction.
Developing an effective international expansion strategy,
particularly in Asia—where trust and relationships
are absolutely essential ingredients to success—takes
a lot of time and effort. It cannot be rushed. Therefore,
companies that seek to sustain and expand their competitiveness
in the face of the economic forces now unfolding before us
are well advised to start giving these issues careful consideration
so that they might begin to address them in an effective
and coherent manner.
Part
Two: Predicting the Economic Success of Asia
By Dr. Scott B. MacDonald
Asia
is enjoying a period of solid economic growth:
current account balances are generally in surplus,
and foreign exchange reserves are at record
high levels. In China, the region's new economic
locomotive, efforts to achieve a soft landing
appear to be succeeding, albeit in a gradual
fashion. Elsewhere, India has achieved a change
in government and many of the key elements
of the country's economic reforms are intact.
Generally speaking, good news also dominates in Southeast
Asia. Even in Japan, economic reforms have helped
set the stage for what appears to be a sustainable
recovery. The task ahead for many Asian governments
and businesses is to manage success and not fall
back into the pitfalls that led to the Asian financial
crisis of 1997-98.
Clearly a very strong desire on the part of most
Asian governments not to relive the socio-economic
disequilibrium of the late 1990s has resulted in
a substantial stockpiling of foreign exchange reserves
(China has $483 billion), measures to improve corporate
governance, and the restructuring of financial sectors.
In some cases, there has been an improvement on labor
market flexibility and less red tape for foreign
investment.
Asia is also benefiting from relatively benign international
economic conditions. In particular, the region's
major trade partner, the United States, is enjoying
moderate economic growth. In addition, European economic
growth is set to accelerate moderately in 2005, which
should help maintain export expansion in Asia.
Although there is a strong likelihood that Asia will
continue to enjoy strong economic growth through
2004 and 2005, there are some clouds on the horizon.
Asia's strong pattern of economic expansion can not
happen without access to vast amounts of natural
resources. In particular, China's spurt of industrial
expansion over the past three years has fueled heavy
demand for natural resources. The recent round of
oil price hikes were, in part, caused by strong growth
in China, which combined with renewed demand in the
U.S. and geopolitical uncertainties in key oil producer
nations, led to a sustained rise in international
hydrocarbon prices. Some 30% of China's energy needs
are imported. And behind China is India, with a population
of around one billion and an increasing consumer
appetite that will raise energy needs.
Asia's need to maintain strong levels of growth is
renewing the old debate over securing access to key
resources. While it is doubtful that any Asian countries
will come to blows over coal or copper, oil is another
matter altogether. For energy deficient countries
such as China, South Korea, and Japan the economic
lifeline extends from their home ports in the Pacific
to the Middle Eastern and Central Asian oil fields.
This raises issues of the security of supply lines
as well as potential areas for exploration. Closer
to home, it means greater attention to overlapping
national claims in such areas as the Kurile Islands
and the South China Sea around the Spratly Islands.
In the latter, tensions have run high in the past,
as reflected by a 1988 naval battle between Vietnamese
and Chinese forces.
For much of Asia, economic growth was and remains
export-driven. While there is a degree of complementary
exports, China's long growth spurt (beginning in
1978) has elevated it into a competitor for many
of the same goods produced by other Asian countries.
Thailand, Malaysia, South Korea, and Japan have all
felt the impact of competitive Chinese exports, based
on lower labor costs. Japan and China have already
locked horns on a number of trade issues and more
are likely. As China climbs the industrial ladder,
its competitive nature will only increase and trade
frictions are likely to rise.
Other obstacles include the weakness of the Asian
financial sector, where reforms have been made but
more must occur, and poor corporate transparency
and disclosure that hurts investors. Last, but hardly
least is the threat of terrorism. There are elements
throughout the region that feel marginalized by the
formal political system and have opted for terrorism
as a means to achieving their goals.
Yet, for all the potential points of economic derailment,
Asia is more likely to stay on track. For all the
tensions emerging in the region, there are critical
reasons for governments to find peaceful solutions.
Common economic gains are likely to outweigh the
potential for conflict. Consequently, the major task
confronting Asia is how to manage the challenges
and avoid the pitfalls, something that it can do
considering the political will and vision its leadership
has demonstrated in the past. Prior to the Asian
financial crisis there was considerable discussion
about the Asian Century; that talk was premature,
but the years ahead could be just that.
Commodities – More
Bullish Than Not
by
Scott B. MacDonald
NEW
YORK (KWR) On October 28, China announced it was
raising interest rates for the first time in nine
years. The message from some analysts was that
China’s dynamic 9%+ real GDP growth is over
and, with that, so is the demand for industrial
inputs such as oil, coal, steel and copper. They
believe commodity prices will now decline, including
oil, which could fall sharply back into the $30s.
We are not so certain: we could see oil heading
lower by year-end, but chances are that
commodity prices are going to stay high for the
foreseeable future.
The reasons we are likely to see sustained high
prices in many commodities are both structural
and geo-political. Oil and natural gas prices climbed
because of the short-term fear that access to supply
would be reduced by geopolitical events emanating
from Nigeria, Norway, Iraq, and Venezuela. Shoot-outs
with al-Qaeda-linked radicals in Saudi Arabia did
not help matters. On a structural basis, there
is greater demand from China and India, not to
mention higher demand from more traditional markets
in Europe, Japan and North America, owing to economic
recovery. We would add that a number of speculators
helped to push oil prices up, taking advantage
of the fear factor. And, gradually seeping into
oil market concerns is that this form of energy
is ultimately finite and that the global economy
is dependent on fields that are beginning to peak.
As for many other commodities, limited supply is
a factor. Prior to 2003, most mining companies
were careful not to build up supply, having been
hurt by large inventories in coal, copper, nickel
and zinc during the late 1990s and early 2000s.
Because many companies were careful in moving too
fast to bring on capacity, both in terms of the
actual resources as well as the processing and
other facilities needed to bring them to market,
supply for a number of commodities, from coal to
uranium is tight. Indeed, copper stockpiles monitored
by the London Metals Exchange are at a 14-year
low.
In addition, rails and ports in countries like
the United States, Canada and South Africa are
already running at capacity, making it more difficult
for greater supply to make it to end users, hence
contributing to the tightness in supply for key
commodities. As Con Fauconnier, the head of South
Africa’s Chamber of Mines stated (November
2): “Transport infrastructural shortcomings
in our country make it impossible, most certainly
right now and in the immediate future, to meet
not only the demand from China but also a number
of other potentially profitable commodity export
destinations.”
In the past, energy spikes have been followed by
economic slowdowns, usually recessions. This time,
however, we have different structural factors at
work that are likely to moderate the downturn – namely
China’s slowdown is not going to radically
reduce its need for commodities. China is suffering
from power shortages and will still require high
levels of oil, gas and coal imports. There is also
a political element: for China to control the current
trends of rising public discontent with the widening
gap between new rich and poor and official corruption,
the government needs to maintain a relatively strong
pace of growth. For China to have some level of
economic growth, it must have inputs. It is as
simple as that.
Although China has signaled that it is taking further
measures to reduce the pace of its economic growth,
the action of that country’s central bank
is not a magic wand that will suddenly bring oil
prices and other commodities to more sane numbers.
We think that China’s growth will cool, though
it will be a soft landing, probably in the 7-8%
growth range. At the same time, higher oil prices
will moderate global growth in 2005. We see U.S.
real GDP growth in the 2.5-3.0% range.
One last factor to consider is the weather. A number
of powerful hurricanes recently interrupted oil
and gas production in the Gulf of Mexico, which
accounts for around 20% of U.S. supply. According
to weather data, the hurricane seasons for the
next several years are likely to be more severe
as part of a long-term cycle. Considering the recent
battering from these hurricanes, it is likely that
the pattern will be repeated in some capacity through
2005 and 2006.
Short of a global depression in which China, India
and all other rapidly industrializing countries
collapse and revert to a pre-industrializing state,
it is hard to see global commodity prices collapsing
in the future. Prices for oil, gas, coal and copper
are likely to moderate, but we see no major decline
as occurred in the late 1990s and early part of
this decade, even with slower global growth forecast
in 2005.
Malaysia:
A Stable Polity Amidst a Growing
Economy
by
Jonathan Lemco
NEW
YORK (KWR) For the past six months, Malaysia
has been an investor darling. The economy
is growing at a nice clip, the state-owned
petroleum company, Petronas, is profitable,
and the political transition from Prime Minister
Mahatir to Prime Minister Badawi has been
smooth. Inflation is low and the nation’s
external debt is capably managed. We think
that Malaysia enjoys the advantage of high
oil prices. But when they fall, the nation
is still poised to prosper as it has diversified
its industrial base.
Malaysia has one of the most open economies
in Southeast Asia, and as a consequence it
benefits from a greater boost from global
growth (consensus estimates are that Malaysia
will grow 7.0% in 2004) than many of its
neighbors. The current account has been in
surplus since 1998. As of Mid-October 2004,
exports had risen 24% year-on-year. The strong
balance of payments has allowed the central
bank to accumulate more than a quarter of
its international reserves in 2004 (US $54.5
billion as of August 2004), to the point
that they now exceed the external debt.
Oil prices are high and this supports the
Malaysian economy. Further, there has been
some progress in passing structural reforms.
Also, the Malaysian government has taken
steps to reduce its external debt. The credit
rating agencies have taken notice and we
expect Moody’s to upgrade its “Baa1” rating
of Malaysia by one notch to “A-”.
Standard and Poor’s already rates the
Malaysia credit “A-“.
A credit rating upgrade will be an important
boost for Malaysian credit quality, but also
an affirmation of the government’s
fiscally prudent policies. The 2005 Budget,
which proposes a moderate pace of fiscal
consolidation, is realistic. In fact, it
might be considered investor-friendly in
that it eases foreign investor rules in brokerage,
fund management, futures brokerages and venture
capital firms. It also removes the tax on
interest income for non-resident investors,
which should drive more investor interest
into Malaysia’s domestic bond markets.
Also, private investment growth seems to
be picking up. The government estimates that
investment will grow by 14.8% in 2004. In
the meantime, the Central Bank (Bank Negara
Malaysia) emphasizes caution in hiking interest
rates such that no increase is expected for
6-12 months. While the government plans for
fiscal consolidation, balancing the budget
is not sacrosanct. The government intends
to narrow the fiscal deficit from 4.5% of
GDP in 2004 to 3.8% of GDP in 2005. The Malaysian
Central Bank has also reinforced its commitment
to a pegged exchange rate, which it regards
as underpinned by low inflation and strong
external accounts.
After years of stable, if partly authoritarian
and confrontational government, under Prime
Minister Mahatir, Prime Minister Badawi enjoys
strong and unrivalled political support.
Although some analysts suggest that Anwar
Ibrahim could pose a political threat, we
think that the mechanics of the Malaysian
political system make this unlikely for the
foreseeable future. Badawi has made progress
in improving the public delivery system to
lower the cost of doing business and increasing
transparency (especially in the public bidding
of projects).
The Malaysian economy is not without risks.
It must continue to attract foreign direct
investment when oil prices eventually decline.
The Malaysian corporate sector must be made
more competitive. Corruption remains a problem
in both the private and public sectors. A
tax system overhaul is needed to attract
more multinational companies. In fact, in
2007 the Malaysian government plans to introduce
a goods-and-services tax so that it can cut
taxes for individuals and corporations. In
the meantime, Malaysia’s corporate
tax rate of 28%, is uncompetitive relative
to Singapore’s 20 percent.
Malaysia is on the right track for balanced
and steady growth going forward. It has been
a strong economic performer since the 1997-98
financial crisis. There is every reason to
believe that Malaysia will continue to provide
an attractive environment for international
investment.
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Contact: Dwight Ingalsbe email: ingalsbe@epfr.com
Russia
Sees Gains in Bush Reelection
by
Sergei Blagov
MOSCOW
(KWR)--The Kremlin suggested that Bush's
electoral triumph was a victory over international
terrorism. In the meantime, despite remaining
differences, Russia appears to eye economic
and political benefits in the U.S. election
outcome, which could also affect Moscow’s
Asian policies.
Meanwhile, the Kremlin eyes economic and
political benefits in Bush’s reelection.
Russia’s Renaissance Capital brokerage
said that Bush's re-election would be "better
for Russia." A second Bush administration
would probably give President Putin a freer
hand in domestic and post-Soviet affairs,
and preserve high oil prices, which would
fuel economic growth, Renaissance said
in the report.
Annual bilateral trade only accounts for
about $11 billion and Russia accounts for
a little more than half percent in U.S.
foreign trade. However, Moscow seemingly
hopes to boost bilateral trade by energy
supplies.
In its drive towards the American energy
market, Russia has been focusing on natural
gas, particularly in its liquefied form.
Last August, Russia’s gas giant Gazprom
pledged to move commercial gas sales to
the U.S. Supplies should start before 2010.
Russia, which holds the largest gas reserves
in the world, has been viewing the United
States as a long-term major market of liquefied
natural gas (LNG) by sea.
Russian companies have been also attempting,
with government backing, to take over from
Saudi Arabia as the main oil provider to
the U.S. The companies are also seeking
American capital for investment in Russian
oil, which could help deliver Russian oil
to America's West Coast.
Meanwhile, direct oil and gas shipment
to the U.S. remains a challenging task
given the distance and the lack of infrastructure
in Russia. In 2002, Russia's state-owned
Rosneft oil company and the US firm Marathon
Oil Corporation announced a decision to
participate jointly in Urals North American
Marketing (UNAM), a project to supply oil
from the Urals region in Russia to North
America. Oil supply under this project
was due to begin in 2003, but the ambitious
plan is yet to materialize.
Most Russian media outlets pronounced Russia
better off with a re-elected U.S. President
George W. Bush. "Bush's victory is
beneficial for Russia," Alexander
Livshits, Putin's former economic adviser,
wrote in a commentary. "We know him,
we know members of his team. We are used
to them, and they are used to us.
Bush's
administration does not tell us how to
live. It does not interfere much with our
country's domestic affairs. And the personal
relationship that our two presidents have
established is also important," he
wrote.
The fall of 2001 was a high point in U.S.-Russian
relations and Russia seemed to become one
of the United States' close allies for
the war on terrorism. Yet subsequently
the two countries were struggling to overcome
their differences over the U.S.-led war
on Iraq as well as Iran’s nuclear
ambitions.
For instance, last month Russia responded
coolly tothe deployment of the U.S. missile
shield following the announcement that
the missile defense system could become
operational in Alaska later this year.
The U.S. defense system is designed to
deploy a field of interceptors in Alaska
and California that would fly into space
to meet and destroy a missile. U.S. officials
have acknowledged that the system would
not defend against Russian or Chinese technology,
but against the countries like Iran or
North Korea that are developing long-range
missiles and weapons of mass destruction
that could be carried by the missiles.
After President Bush pulled out of the
1972 Antiballistic Missile Treaty in order
to pursue the new antimissile defense program,
to be launched in Alaska, Russia announced
it no longer felt bound by previous agreements
that prohibited missiles with multiple
warheads. In February 2004, Russia said
it successfully tested a new strategic
supersonic system, that would allow avoid
U.S. defenses. Russian officials claimed
that the prototype weapon proved it could
maneuver so quickly as to make "any
missile defense useless."
Moves towards strengthening its own strategic
deterrent have caused little controversy,
but Russia has long come under fire from
Washington for its help in building the
Bushehr 1,000 megawatt light-water nuclear
plant on Iran's Gulf coast. The U.S. insisted
that the Russian technology could be used
to develop nuclear weapons, but Moscow
and Tehran argued that the plant could
be used only for civilian purposes. Russia
has vowed to complete construction of Iran's
first nuclear reactor at Bushehr, despite
U.S. concerns that Tehran was using $800
million project as a cover for a nuclear
weapons program.
Apart from Iran’s nuclear ambitions,
there have been other bilateral disagreements
as well. Washington has warned against
Russia’s richest man Mikhail Khodorkovsky’s
case implication for the rule of law in
Russia and the country's commitment to
free markets. Russia accused the U.S. of
double standards approach. Moscow has described
the U.S. comments on a variety of events
in Russia, including recent moves to limit
elections and boost centralized controls,
as “interference in Russia’s
internal affair.”
Moscow’s move towards Kyoto ratification
happened to come as a blow to the Bush
Administration, which had been pressuring
Russia not to ratify. Russia recently moved
to approve the Kyoto Protocol, bringing
the international treaty to limit greenhouse
emissions closer to coming into force worldwide.
George W. Bush rejected the pact in 2001,
saying the tough regulations would adversely
affect the country's economy.
On the other hand, Moscow has been keep
to continue security cooperation with the
U.S. Russia has offered some help in tackling
security threats, including standoff with
North Korea. In the wake of Bush's reelection,
Moscow could become more pro-active in
search for a solution of a crisis over
Pyongyang’s nuclear ambitions.
Putin has openly supported Bush's reelection
bid and has demonstrated intention to overcome
acrimony over Iraq. The Russian leader
made several statements over the last months,
voicing his strong support for Bush’s
reelection bid. Last summer, Putin said
that the Iraq invasion was indeed justified,
because Saddam was planning terror attacks
against U.S. targets, according to Russian
intelligence. Two weeks before the US vote,
Putin said international terror groups
aimed to sink Bush's reelection efforts.
As democrats have voiced stronger criticism
of Russia, concerns were voiced in Moscow
that relations with the U.S. could decline
under the Democrats. Subsequently, Russia
has been aiming at stronger ties with China,
seemingly to balance those with Washington.
Hence it remains to be seen whether shared
interests of the U.S. and Russia could
outweigh potential problems. Official pledges
to overcome differences in bilateral relations
are to be followed up by more concrete
results.
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Chavez’s
Kingdom – Venezuela’s
Caudillo Flexes His Muscles
by Scott
B. MacDonald
NEW YORK (KWR) Having survived a coup attempt, a major strike by the
country’s most powerful union (oil workers at PDSVA), and
a referendum to constitutionally oust him from office, President
Hugo Chavez remains firmly in control of Venezuela, the world’s
fifth largest oil exporter. In many regards, the President has
extended his control over the nation’s body politick to
such an extent that it is dubious that any opposition movement
can oust him – legally or through a coup. Through suasion
and coercion, Chavez has created a government, which in some
ways a state akin to Mexico’s old PRI regimes, where an
opposition was tolerated (to a point), the politically ambitious
were channeled into the system (or life became very complicated),
and the spoils of the economic system were guided to the key
bases of support. The economy is increasingly bearing the mark
of mixing command economics with what is left of the country’s
private sector. And for now, Chavez’s government is enjoying
the benefits of higher oil prices, which helps cover up considerable
economic mismanagement.
The latest consolidation of power for President Chavez and his Bolivarian
revolution came with the October 31, 2004 gubernatorial and mayoral elections.
The outcome was a massive sweep for the Chavistas. According to the official
count, pro-Chavez candidates won 270 out of 334 mayor’s offices
and 20 out of 22 governor’s mansions. The latter included seven
states that were previously held by opponents. Among the defeated were
two of the most prominent anti-Chavezista leaders, Miranda Governor Enrique
Mendoza and Carabobo Governor Henrique Salas Feo. The only two states
that did not fall before the Chavezista electoral juggernaut were in
Zulia in the west and Nueva Esparta in the north.
Chavez clearly recognized the significance of the election results, stating: “This
is a giant victory. Venezuela has changed forever. The revolution has
arrived, and there is no going back.”
Maybe. The elections were not without controversy. The National Electoral
Council (CNE) was quick to call results, leaving some of the outcome
for a number of tight elections questionable. In addition, there was
no independent oversight of the vote and opposition parties were clearly
not welcome as observers. Moreover, CNE officials claimed that voter
abstention was 55 percent; independent sources dispute that number, indicating
it was closer to 70 percent. The fundamental reason for the high level
of voter apathy was that many Venezuelans regard the electoral process
as fraudulent.
The opposition also managed to survive. Despite the failure to provide
a more unified front, the opposition managed to hold on to Zulia, one
of the major oil-producing states and Maracaibo, its capital. This turn
of events came even after a very concerted push by pro-Chavez forces
to unseat Manuel Rosales, Zulia’s governor. Rosales could emerge
as a challenger in the 2006 presidential elections.
What is next for Chavez? With the military largely under his control,
a majority of the electorate in his favor (or just plain apathetic),
the judiciary packed with his followers, Cuban advisors, and oil prices
still high, he is now gearing up for the congressional elections in 2005
and the presidential contest in 2006. Clearly having either members of
his Fifth Republic Movement (Movimiento Quinto Republica) and its ally,
the Fatherland for All Party, along with smaller parties (including the
Communists), sitting in mayor’s halls and gubernatorial mansions,
gives Chavez dominance over the country’s political system, both
nationally and locally.
Chavez is also benefiting from the oil bonanza. After the economy contracted
by 7.5 percent in 2003, real GDP growth is expected to be over 12 percent
in 2004. According to the IMF, real GDP growth for next year will be
a more moderate 3.5 percent, reflecting the assumption that oil prices
will moderate. The government is more bullish, looking to 5 percent growth.
If oil prices plunge (which we do not expect), the government will have
to scramble to make ends meet – or opt to use the printing press
and inflation be damned. It should also be noted that Chavez is using
the oil wealth to pay for social programs, reinforcing his support among
the population’s working class sectors.
Hugo Chavez is clearly leaving his mark on Venezuela’s history.
He assumed control of a country long troubled by economic mismanagement,
substantial socioeconomic inequalities, and massive corruption. The old
republic’s political elite was popularly regarded as inept, corrupt
and self-serving. Under Chavez, the former political elite has been defeated
and left grappling with how to re-invent itself. In its place, Chavez
has advanced his political agenda of reshaping Venezuela’s political
life – along the lines of a liberal Cuban model, where political
control is well-defined and there is a little more openness in terms
of the private sector and foreign involvement in the economy. All the
same, Chavez is the dominant political figure and without a credible
and more cohesive opposition, he is likely to remain the left-leaning
strongman well into the next decade.
KWR
VIEWPOINTS
Featured
Guest Opinion
China
Minmetals Meets Mild Canadian Resistance
Jim
Letourneau, Big Picture Speculator
CALGARY
(KWR) Global demand for commodities has been
a boon to resource rich countries like Canada
and Australia. Increasing demand for raw materials
has led the Chinese government to take a proactive
role in the procurement of commodities and
the facilitation of their production. The proposed
$7 billion purchase of Toronto-based Noranda
by China’s Minmetals is part of this
initiative.
Resistance to the transaction is not unexpected.
Noranda has a made-in-Canada corporate history dating
back to 1922. The transformation of a prospector’s
dream into an international mining conglomerate is
a source of national pride. The sale of Canada’s
largest mining also includes 60% of Canada’s
third largest miner, Falconbridge.
Although much is being made of Canada’s resistance
to this transaction it appears to be restricted to
the minority. The loudest complaints have been from
the 3rd ranking opposition NDP party who are raising
the specter of China’s human rights record.
Some are even trying to wrap themselves in the red
maple leaf flag and raise sovereignty issues about
Canada’s resources. While there may be a time
when countries want to hoard their raw materials
for domestic consumption in the face of shortages,
the fact remains that Canada is great exporter of
raw materials. After all, there are 32 million Canadians
and 1.3 billion Chinese.
Images of Tiananmen Square in 1989 are still fresh
in people’s minds but the advances in the average
living standards and freedoms for the Chinese people
have been ignored. China’s transition from
Soviet style central control to a more market driven
economy has been extraordinarily rapid.
Human rights issues are important to Canadians, we
believe in diversity, freedom of expression and compromise.
We don’t want evil empires using our resources
for nefarious purposes. Countries that execute criminals,
torture political prisoners and discourage freedom
expression might not be ideal trading partners but
as long as Canadian’s are willing to turn a
blind eye to the human right’s record of other
countries there are no moral grounds to not trade
with China as well. So far trade restrictions
on softwood lumber, grain, and beef that benefit
American special interest groups have been refreshingly
absent for Canada-China trade relations.
It appears unlikely that Canadians will be undertaking
a global inventory companies involved with countries
with human rights issues. There are numerous small-scale
resource development projects being spearheaded by
Canadian companies in countries with sketchy human
rights records. If a country is open for resource-related
business, chances are there’s a TSX Venture
exchange company using Canadian capital to explore
for it.
I know from personal experience that almost everything
we buy comes from China. During a recent move, I
collected approximately 20 different sized boxes
from the local Wal-Mart. While the in-store recorded
announcement distracted unconcerned soothed crowed
that the vast majority of the goods they sold were “sourced
from Canadian suppliers”, the boxes all had
the words “Made in China” on them. As
my daughter Veronica succinctly stated “Where
else are we going to get our stuff from?”.
Trade is a two-way street.
China as also indicated that they are in the market
for Canadian energy assets. Canada’s oilpatch
has a longstanding tradition of selling its assets
to the highest (usually American) bidder when prices
are high and then buying them back for a song when
prices are low. Foreign investment in Canadian natural
resources is nothing new.
On a more practical level Bombardier is in the running
for $4.5 billion worth of Chinese transportation
contracts. Canadian Prime Minister Paul Martin is
clearly aware of the consequences of restricting
the free flow of goods and services between the world’s
most rapidly growing economy and Canada. Mild opposition
followed by practical compromise is the preferred
modus operandi of Canadians. While the purchase of
Canadian companies by Chinese interests may not be
greated with open arms, there are no reasons to prevent
it outright. A multi-billion dollar transaction without
a European or American purchaser is a new phenomenon
to Canadians. Ultimately, everyone will get what
they want. China will get access to Canadian resources,
technology and capital markets, Canadians will strengthen
trade relations with China and the Canadian opposition
parties will get attention by opposing it all. Noranda
will be sold and China will be making additional
investments in Canadian resources in the near future.
Geo-Political
Notes:
Arafat’s
Departure
by
Scott B. MacDonald
For
a region already filled with political upheaval,
the news that the 75-year old Yasser Arafat
is dead does not bode well. This is not to
say that the long-time Palestinian leader
was a man of peace. Rather, the risk is that
his legacy is one of chaos and civil war
among the Palestinians, which has implications
well beyond the confines of the Gaza Strip
and West Bank. Arafat is the last of the
Nasserites, who came to age in the aftermath
of European dominance. Like Egypt’s
Nasser, Syria’s Assad and Algeria’s
FLN leadership, Arafat’s orientation
was Arab nationalism, socialist economics
and alignment with the Soviet Union during
the Cold War. It is important to emphasize
that this placed him in the secular camp,
not the radical Islamic camp. Although he
mouthed the Islamic rhetoric, his closest
allies are secular and, perhaps most telling,
his wife is Christian (though officially
she converted to Islam but has lived in Paris
with the couple’s daughter for the
past three years).
The Arafat legacy cuts two ways. His stubborn nature
helped create a Palestinian nation such as it is.
At the same time, his stubbornness also guaranteed
that the experiment in government was dysfunctional
and dependent on his personality. With no clear-cut
successor and a weak core of followers within his
Fatah party, his departure from the West Bank for
Paris leaves behind a very fluid political situation.
Waiting on the sidelines is Hamas, a well-defined
political movement centered around radical Islam
and with a proclivity for terrorist actions. As
the Arafat era appears to be drawing near, the
next step is probably going to be an intense and
bloody contest for leadership within the Palestinian
community. This is not a positive for the Palestinians,
Israelis or anyone hoping for stability in the
Middle East.
EMERGING
MARKET BRIEFS
 Algeria – An
End to the Violence?: Algeria has been
locked in a civil war between the secular-oriented
government, which is dominated by the military
and radical Islam since 1992. That conflict has
claimed an estimated 100,000 lives since it started.
Now a general amnesty is being considered for Algerians
implicated in violence and murder over the past
12 years. Accordingly, President Abdelaziz Bouteflika
believes the time is right to try to move to the
next stage to bring peace to Algeria. Hence, the
idea of an amnesty was recently brought up during
events to mark the 50th anniversary of the start
of the war of independence against France.
Bouteflika, however, was very specific in stating
that despite his party's strong victory in April's
election such a decision could not be taken by
his government alone. Instead, he suggested a referendum
would be needed, because, according to the constitution,
the people are sovereign and not parliament or
the president. Along these lines, a general amnesty
would be expected to pertain to of all those who
have been implicated in the sectarian violence
of the past decade, including the armed Islamists
as well as members of the security forces accused
of torture, and summary executions. There are also
those involved in the disappearance of more than
7,000 Islamist prisoners, arrested during this
period.
The families of the victims of both the Islamists
and members of the security forces do not generally
agree with each other. However, in this case they
appear to have found common ground over a possible
amnesty. Consequently, President Bouteflika envisions
a general amnesty as being part of the country's
path to dialogue that will eventually end the conflict
with reconciliation. This has considerable importance
to global energy supply as Algeria is a leading
exporter of oil and gas to Europe and is one of
the few OPEC members thought to have still unexplored
regions capable of holding substantial hydrocarbon
reserves.
Mauritania
and Oil: Long an economic backwater, the
African country of Mauritania is quietly becoming
an oil-based economy. Mind you, this former French
colony that shares borders with Mali, Senegal, Algeria
and Morocco is not destined to become the next Saudi
Arabia. Oil is still a relatively young industry,
commencing with experimental wells in 2001. The economy
has traditionally been dominated by agriculture,
fish processing and the mining of iron ore. Periodic
drought has complicated the dependence on agriculture,
while foreign fishing companies are threatening to
deplete the rich offshore waters. Consequently, the
increasing level of exploration for oil and natural
gas, both onshore and offshore, is regarded with
considerable hope.
In early November it was announced that the Mauritanian
government is expected to commit to taking 12 percent
of the $600 million Chinguetti oil project off the
country’s coast (which would effectively reduce
stakes in the field owned by Woodside Petroleum).
This puts the government into the development of
a 120 million-barrel field, which is due to start
up in March 2006. The government is exercising an
earlier agreed upon option, making it the third-largest
shareholder in the project after Woodside (whose
stake falls from 53.8 percent to 47.4 percent) and
Perth-based Hardman (19 percent).
The development of the hydrocarbon industry is critical
for Mauritania’s economic development. The
country has long been one of the poorest nations
in the world, with 50 percent of the population estimated
to live below the poverty line and with unemployment
over 20 percent. In addition, the population is young – 45.9
percent of the population is below the age of 15
years. If properly managed wealth generated from
oil and natural gas exports could make a contribution
to the country’s economic development. If poorly
managed, oil wealth will prove to be an additional
source of corruption and greater socio-economic inequality.
As further exploration efforts hit their targets
and the weight of hydrocarbons grows on the economy,
Mauritania’s leadership will have some tough
decisions to make, all of them with long-term consequences
for the well-being of their people.
Mexico’s
Pemex - Change at the Top: On
November 1, 2004, the CEO of Pemex, Raul Munoz Leos, the
first private company executive
to run Pemex, Mexico's state-owned oil company resigned.
Leos was brought in to run Pemex four years ago by President
Vincente Fox, with the idea that a CEO with private sector
experience could improve the operating efficiences of Pemex,
long the domain of high-ranking and usually moderately competent
bureacrats. Leos was also regarded as the right man to open
up more of the Mexican oil sector to foreign companies, badly
needed to help in exploration and development on new fields.
Mexico faces the problem that it is pumping faster than it
can explore, raising questions as to the long-term life of
national hydrocarbon reserves. Any change in Mexico's oil
laws, many of which date back to the early 1920s and represent
a strongly nationalistic tradition, have been the source
of considerable political tension. Leos was repeatedly blocked
by powerful influences within the Mexican government, including
some cabinet ministers who are opposed to any openings to
foreign companies. Leos will be replaced by Luis Ramirez,
Pemex's head of exploration and production. This is not a
positive development for the credit as it underscores political
influence over Pemex. Although we do not expect to see any
ratings action because of this development, it reflects that
Pemex's longer-term problems pertaining to exploration and
reserve life are still not being properly addressed.
Book
Review: Kim Jong-Il: North Korea's Dear
Leader
 Michael
Breen, Kim
Jong-Il: North Korea's Dear Leader (New
York: John Wiley, 2004). $24.95
Reviewed
by Scott B. MacDonald
 Click
here to
purchase John Wiley's book, "Kim
Jong-Il: North Korea's Dear Leader," directly
from Amazon.com
Michael
Breen, an old Korean hand and journalist, has written
an entertaining, must-read book on North Korea's
dictator, Kim Jong-il, also known as the "Dear
Leader".
Having
traveled to North Korea a number of times and now
living in the South, he
clearly has an understanding of the local political
culture and how it often collides when the West
looks at North Korea, which he ultimately describes
as
thus: "It's Hitler's Germany and Stalin's
Russia in the middle of Mao's Cultural Revolutionary
madness." Considering
the fractured nature of data available about North
Korea and its dubious place as part of President
George W. Bush's Axis of Evil, Breen provides
an educated
glimpse into a country made critical by the combination
of its harsh political regime and possession of nuclear
weapons.
Breen traces Kim Jong-il's childhood, his relations
with his family and describes the world around him.
He notes that the Dear Leader's rise to national
leader in the boots of his father, Kim Sung-il (the
Great
Leader) was not a given, considering the existance
of a half-brother, the son of the elder Kim's second
marriage. As Breen notes: "The stage was better
set for his half-brother Pyong-il to be seen as the
new 'first son', and Jong-il to be the more obscure
Billy Carter/Roger Clinton figure identified in the
pictures as 'second left, back row,
with the hair'." What saved Jong-il from this
fate was that his mother had been a partisan and
that he was active in promoting the personality cult
for
his father. Indeed, the younger Kim demonstrated
a strong interest in film and opera, all of which
aimed
at reinforcing the personality cult of North Korea's
Great Leader and the mission of self-reliance (Juche).
Along these lines, we are treated to such exciting
revolutionary operas as The Sea of Blood, True Daughter
of the Revolution, and (how can we forget!) Fate
of a Member of the Self-Defense Corps. Nonetheless,
Jong-il's
patriotism and loyality to Kim Sung-il made an impression
on the veterans around the Great Leader. As the Great
Leader aged, these veterans increasingly looked to
Jong-il as the successor. By 1980, Jong-il emerged
as the official successor, though he was exceedingly
careful not to upstage his father. When the elder
Kim died in July 1994, Jong-il was probably actively
involved
in running the government. Even so, he did not officially
emerge as North Korea's undisputed leader until 1997,
having observed a lengthy period of respect. He was
also busy consolidating his power.
Although Breen admits that it is tempting to regard
Kim Jong-il as a "nutter", someone that
suffers from malignant narcissism (according to one
political
psychological profile), he emphasizes that the Dear
Leader is a product of local political culture. Korean
political culture is clearly heirarchical, founded
upon Confucianism. While this is changing in the
South due to democratization and globalization, it
has been
allowed to go unchecked in the North, with the dyfunctional
twist of fate being the emergence of a Communist
dynasty.
Within this context, Kim Jong-il is aware that the
North Korean state is a facade of forced loyalty,
held in place by a system of gulags and military
power.
Breen also asserts that Jong-il is aware that his
father generated real emotion from his people having
fought
against the Japanese in the liberation of his country
and then against the Americans. In contrast, the
son does not generate that level of support. In fact,
according
to Breen, he is the one fat man in a country hard
hit by famine during the 1990s (that might have left
3
million dead) and focused on remaining in power and
living the high life. In a sense, Kim must relaize
that he is trapped. If he makes the changes necessary
to moving North Korea out of its developmental cul-de-sac,
he is also opening the door for his own demise. Any
crack of freedom (even just economic), threatens
to disrupt a system of ruthless and total control.
Consequently,
the system is run to have total loyalty to the Dear
Leader and focus with a deep hatred on the enemies
that threaten the North Korean workers paradise.
Why do we care? According to Breen we care because
Kim Jong-il presides over a country that is unable
to feed itself, but has the capacity to threaten the
surrounding region with weapons of mass destruction.
The new series of missiles, which probably can carry
nuclear weapons, can currently reach Japan, China,
Russia and Alaska. The next generation of missiles
might be able to hit the U.S. west coast. This certainly
makes
Washington take notice of the strange, chubby man with
the funny hair sitting in Pyongyang. While we have
our own security concerns, there is also the fate of
the North Korean people, caught in the world's most
isolated state.
What to do? North Korea represents a very difficult
foreign policy problem. The Kim regime is a brutal
authoritarian regime, armed with weapons of mass
destruction. At the same time, no one really wants
to see the North
Korean state implode. The economic and political
costs of a failed state in North Korea would be massive
for
South Korea and poise tough questions for both China
and the United States. Breen believes that North
Korea needs to be nudged along, gradually making the
necessary
changes. U.S. policy should broaden its focus from
the nuclear issue to a more fullsome approach, including
the discreet interdiction of the regime's illicit
trafficking in drugs and weapons (cutting off the flow
of cash
which allows Kim Jong-il to buy his imported cognac),
a non-agression pact, a Korean War peace treaty,
U.S. embassy in Pyongyang, loans, and access to U.S.
markets.
In addition, North Korea should be made to sign a
human rights agreement with the U.S., China, South
Korea,
Japan and Russia. Although it would be difficult
to enforce, it would give the outside world a little
more
legal leverage on promoting change within the North.
Although none of this is perfect, it could create
a workable peace. As Breen concludes:
"But then, although unstated, a comprehensive
engagement approach would also lay the groundwork
for the eventual
regime change and the exit of Kim Jong-il - which,
after all - is what we're all waiting for. The sad
fact is that, until that happy day, the poor people
of North Korea will continue to suffer."
Breen's Kim Jong-il is a very worth while read.
For
pictures and updates of our recent Japan Small Company
Investment Conference, click above
Past
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©
2004 - This document is for information purposes only.
No part of this document may be reproduced in any
manner
without the permission of KWR International, Inc.
While the information and opinions contained within
have been compiled by KWR International, Inc. from
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and estimates included within this document are subject
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Advisor may at any time have a long or short position
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This document may not be reproduced, distributed
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