Serbia: The West's Window of Opportunity
STRATFOR TODAY » June 2, 2008 | 1813 GMT

ALEXA STANKOVIC/AFP/Getty Images
Supporters of the ultra-nationalist Serbian Radical Party greet the party’s acting leader Tomislav Nikolic during a pre-election rally in Belgrade on May 6

Summary

A Radical coalition has emerged to run the Serbian capital of Belgrade, and there are rumors that a similar coalition is forming to run Serbia’s national government. However, the Socialists’ lack of capital has left a window open for Europe to move in and use its influence to make Serbia’s government a pro-Western one.

Analysis

As Serbia continues to dwell in political limbo while the government’s parties fight over forming a national coalition, a Radical coalition has formed to run the country’s capital, leaving rumors that a similar agreement for the national government is just over the horizon. However, though Serbia looks like it is returning to a government reminiscent of the 1990s, there is a small and brief opening that could allow the Europeans to swoop in and establish a pro-Western Serbia.

Serbia’s parliamentary elections were held May 11 with no party gaining majority, though the pro-Western Democratic Party (DS) led by President Boris Tadic took the most seats, closely followed by the Radical Party. Since then, DS and the Radicals have been fighting fiercely for coalition partners to gain a majority, mainly from Prime Minister Vojislav Kostunica’s Democratic Party of Serbia (DSS) and a Socialist coalition.

Though Kostunica’s DSS and Tadic’s DS were part of the former ruling coalition, bad blood has boiled between them over three main issues: who the alpha dog in the coalition is, who would take blame for the February independence of Serbia’s former autonomous region of Kosovo and whether Serbia should join the European Union after the bloc largely supported Kosovar independence.

Typically, DSS goes hand in hand with DS, as the Socialists typically side with the Radicals. However, all bets were off this time after the May 11 elections. And, late on May 29, DSS joined in a coalition with the Socialists and Radicals in order to take over Belgrade’s city hall. Taking over Belgrade gives the Radicals the best chance of placing their candidate, Radical Party Deputy Chief Aleksandar Vucic, as mayor of Belgrade. This position may just seem municipal, but it is third in the line of succession to lead the country, behind the president and prime minister. The mayor of Belgrade also leads 20 percent of Serbia’s population and controls a hefty chunk of the state’s budget.

It is a symbolic and practical win for the Radicals and gives all indications that this new coalition will carry over into the national political scene. The Radicals have vowed that if they get into power, they will reverse the government’s decision to move toward the European Union and also attempt to challenge Kosovo’s independence. Moreover, the Radicals could prevent Serbia from moving toward the West like the rest of the Balkan states, leaving it isolated in the region.

Negotiations to form the national coalition began June 2, but the decision does not lie with the typically pro-Western DSS; this time, it lies with the Socialists. The Socialists know that this time around they can make or break the government and are intending on taking full advantage of the situation. Before agreeing to a national coalition with DSS and the Radicals, the Socialists have presented them with a list of demands including “an immediate 10 percent rise in pensions, measures to boost employment and public health and other laws to suit the needs of the poor, unemployed and elderly.” Their populist demands are typical for election rallies, but now they want to see the cash put up for them up front. As interim prime minister, Kostunica is in charge of the purse strings still, but he is wary of dipping into Serbia’s currency reserves as the country faces rising inflation and fuel costs.

This lack of funds for the Socialists’ agenda has left an opening for the Europeans via Tadic and DS. Whereas the Radicals and DSS are scouring for funds, DS could get the Socialists to flip sides by coming up with the funds. Sources have indicated to Stratfor that Tadic has already gone to the Europeans — who are pushing to get Serbia locked into a pro-Western government and eventually to see it as a member of the European Union — for funds to sway the Socialists.

It is a race to see which side can come up with the funds first in order to lock down a Serbian government. Whereas the nationalists publicly look as if they are about to take the government, they will have trouble going up against the might behind the pro-Westerners.

source: stratfor.com

Chile: Releasing $1 Billion To Ease Fuel Price Impact

June 2, 2008
Chile will release $1 billion in emergency funds to help mitigate the economic impact of high global oil prices, President Michelle Bachelet told reporters June 2. Bachelet said $250 million will go to state oil company ENAP to help address the issue of Chilean dependence on imported fuel. The move comes one day ahead of a planned 48-hour strike by Chilean truck driver

WIRED MAGAZINE: 16.06
The People's Republic Leads the Way in Alternative-Energy Hardware
By Spencer Reiss 05.19.08 | 6:00 PM
INCONVENIENT TRUTHS: Get Ready to Rethink What it Means to Be Green
1: Live in Cities
2: A/C Is OK
3: Organics Are Not The Answer
4: Farm the Forests
5: China Is the Solution
6: Accept Genetic Engineering
7: Carbon Trading Doesn't Work
8: Embrace Nuclear Power
9: Used Cars — Not Hybrids
10: Prepare for the Worst
IT'S NOT JUST CARBON, STUPID: Dangers of Focusing Solely on Climate Change
Pop quiz: Who's the volume dealer in alternative-energy hardware? If you said choking, smoking, coal-toking China, give yourself a carbon credit.

Consider solar cells, the least carbon-intensive option after nuclear, wind, and biomass, according to an analysis by the International Atomic Energy Agency. In 2007, photovoltaic factories in the People's Republic tripled production, grabbing 35 percent of the global market and making China the world's number one producer. How about rechargeable lithium-ion batteries, critical for superefficient electric vehicles? Chinese manufacturers will soon rule that world, too. Windmills? "Prepare for the onslaught of relatively inexpensive Chinese turbines," says Steve Sawyer, head of the Global Wind Energy Council. His forecast: China will produce enough gear to generate 10 gigawatts of power annually by 2010 — more than half the capacity that the whole world installed in 2007.

China has three big reasons for jumping feetfirst into the carbon fight. Obviously, there's the threat of climate change — flooding in China's coastal cities, drought in the country's interior. Second, there's political instability: Air and water pollution is already a flash point for public protests. And then there's the burgeoning export market for green products stamped made in china.

Will renovating the planet spur the first wave of homegrown Chinese tech innovation? Jeff Immelt, CEO of General Electric, thinks so. "China has as much or more at stake than anyone," he said at a recent corporate summit. "Solar energy, carbon sequestration — we're going to be blown away by China's progress over the next couple of decades." If only they could clean up Beijing's air in time for the summer Olympics.

May 11, 2008
ALMIGHTY
The Dollar: Shrinkable but (So Far) Unsinkable

By PETER S. GOODMAN
If the United States were any other country, these would surely be days of panic and austerity in Washington. With debts spiraling higher, a trade deficit exceeding $700 billion a year, and its currency plunging for years, the government would be forced to cut spending and jack up interest rates in a frantic bid to attract investment.

But the United States is not any other country. For more than half a century, Americans have enjoyed a unique privilege in the global economy: The dollar has been the world’s dominant currency, the money used in most transactions and the repository for the national savings of many countries, including China, Japan and Saudi Arabia.

Come what may — a financial crisis here, a military misadventure there — Americans could count on money sloshing up thick on their shores. Virtually limitless demand for American government bonds has supported the dollar’s value, and kept domestic interest rates down. Americans have been emboldened to spend in blissful disregard of their debts, secure that foreigners would always supply finance. And that devil-may-care spending has in turn fueled economic growth around the world.

This dynamic may be so deeply embedded in the workings of the global economy that it could endure for many years to come: The costs of weaning the United States from its credit habit would ripple far and wide.

But what are the chances that a day of reckoning is coming, when the dollar would be so weak that America would have to play by the rules that apply to every other country? Recent signs do suggest some fraying in the American relationship with its many foreign creditors. The balance of trade has gotten so lopsided and the question marks hovering over the American economy so thick that some foreign governments are beginning to hedge their bets on the dollar.

Russia has been diversifying its hoard of foreign exchange, plunking more into other currencies like the rising euro. In the oil-drenched Middle East, signs suggest a slight shifting to other flavors of money. And markets have been parsing every utterance from Beijing for hints that China may moderate its voracious appetite for dollars.

Meanwhile, China, Russia and Middle Eastern nations have been injecting hundreds of billions of dollars into state-controlled investment pools known as sovereign wealth funds, which have mandates to seek out better gains on their capital than they get from American government bonds.

“These central banks know that holding these low-yielding Treasury bills is just an aid program to the United States, and they want to get out of that business,” said Kenneth S. Rogoff, a former chief economist at the International Monetary Fund. “They are very keen to diversify.”

Over all, dollars have never been purchased in as large quantities. But, that said, the dollar has been slipping as a percentage of total foreign currency reserves, as nations increasingly sock away other currencies as well, to cushion themselves against crisis. Between 2001 and the end of 2007, the dollar’s share of the world’s total foreign exchange reserves shrank from about 73 percent to 64 percent, as the euro expanded from about 18 percent to more than 25 percent, according to the International Monetary Fund.

That change does not reflect a selling of dollars, the monetary fund reports. Rather, it captures how the dollar has fallen in value against many currencies, making the total value of dollars a smaller percentage of all money. “It hasn’t been an active diversification,” said John Lipsky, first deputy managing director at the fund. “Central bankers tend to be the most conservative investors. Whatever they do is going to be done with exceeding caution.”

Now, however, people in international financial circles detect a subtle shifting of the ground in confidence about the dollar. A few years ago, the suggestion that another currency could rival the dollar would have been ridiculed. Today, some economists say the dollar could begin surrendering some of the advantages of dominance to the euro over the next decade or two. Longer term, the dollar could find itself eclipsed by China’s yuan as the primary money in usage in the world.

For Americans, losing that status could be painful, sending interest rates higher and raising the costs of buying homes and cars. A country that has been operating with essentially unlimited credit might have learn to live within a budget.

But many economists say that chatter about the demise of the dollar is overblown. The United States, despite its problems, has been a remarkably solid place to put money, making it singularly able to attract savings, they point out. The dollar is likely to continue to shed value, and the American economy will grow far slower than India’s and China’s, they acknowledge. Yet the dollar, they argue, remains one of the few entities that seem to have fundamental staying power in an age of risk and obsolescence. The size of the United States military alone reinforces confidence that America will endure to honor its debts.

Yes, foreigners have been lending alarming amounts of money to Americans, who have spent extravagantly in excess of their means, economists say. One day, balance will be restored in line with the basic laws of economics — perhaps chaotically, and probably via a substantial fall in the dollar’s value.

But “one day” could well get pushed into the future for a long time to come, for the simple reason that codependence governs the global economy: The current flows of capital lubricate world commerce, giving the American consumer the wherewithal to keep buying; those purchases, in turn, generate business and employment from Asia to Latin America.

When Americans head to the mall, backed by foreign largesse, they drive there burning gasoline made from oil pumped abroad, notably the Middle East. They drive home carrying electronics and clothing churned out in Chinese and Japanese factories. Making these goods absorbs commodities — energy from Australia and Africa; cotton from Texas and California; iron ore from Brazil and India.

Keeping this global assembly line humming has become a primary development strategy for China, as it continues a wrenching transformation from a predominantly agricultural nation into a rapidly industrializing trading power whose factories employ millions of poor farmers streaming toward cities.

China subsidizes many factories, handing out low-interest loans and making land available at below-market prices. Buying up United States Treasury bills helps goose production: China’s central bank buys dollars in part to keep the yuan valued lower, making Chinese goods cheaper on world markets. And by helping keep interest rates lower in the United States, China ensures that American consumers can keep buying.

The Chinese “recognize that they have to lend us the money if they want to maintain those markets,” said Michael P. Dooley, an economist and a partner in Cabezon Capital, a hedge fund specializing in emerging markets.

China’s leaders fear anything that threatens to crimp exports; that would eliminate jobs and send angry peasants back to their villages. So, with more than $1 trillion already invested in dollar-denominated assets, China is loath to do anything that could drive the dollar down precipitously. If it started selling dollars, that could trigger a panic that would send the dollar plummeting.

But some analysts wonder how much longer China can continue to win at this game. Investing money in the United States requires spending that much less on enormous problems at home, like pollution and a shortage of health care. By indirectly making mortgages cheap in the United States, China has helped foster the boom that saturated Miami with glittering condos even as tens of millions of Chinese live in dilapidated concrete block apartments.

On this side of the Pacific, the great real estate bonanza has, of course, ended badly. Some economists point to the real estate bubble as a prime example of the dangers of too much cheap money washing in: Speculators drive prices sky-high, setting markets up for a punishing fall.

“You can have too much of a good thing,” said Brad Setser, a former Treasury official now at the Council on Foreign Relations. In this view, if the dollar maintains its status as the global reserve currency, that would be good news for Americans only in the way that another offer for a credit card is good news for a family about to land in bankruptcy: It may stave off foreclosure for another spell, but it makes the ultimate day of reckoning that much worse.

“We continue to run deficits, and a larger share of our income goes to support this,” Mr. Setser said. “Our attitude seems to be, ‘Lord give us the strength to resist temptation, but not quite yet.’ ”

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