A serious defect of East Asia’s export economic model is that it discourages the development of household consumption as a source of economic growth. Families are encouraged to save rather than spend, which depresses their consumption. At a certain point, leading East Asian economies have undergone transitions during which policies were adjusted to stabilize or boost consumption while allowing fixed investment to taper off, thereby creating more balanced economies. China, however, has yet to do so, and thus remains dangerously reliant on exports and investment.

At the root of the East Asian model of economic growth is the need to maintain employment for massive populations. East Asian states in general have high population densities and histories of labor-intensive agriculture. Governments that do not provide stable employment conditions inevitably end up with large and unhappy populations on their hands — frequently the cause of revolutions. In the modern context, East Asian governments have focused on harnessing the savings of the population and controlling the country’s financial system to ensure credit is directed to expanding infrastructure and industrial capacity. Cheap credit enables businesses — especially export-oriented manufacturers — to maximize employment and output and seize greater international market share, bringing in more cash to perpetuate the cycle.

Following from the East Asian model of growth, China’s economic “miracle” relies on the channeling of massive household and corporate savings into fixed capital investment to build the roads, factories, trains and buildings necessary to modernize and expand economic activity. But a serious defect of the East Asian model is that it discourages the development of household consumption as a third source of growth to complement exports and investment. Families are encouraged to save (which helps the government finance national policies) rather than spend (which would assist the local economy), depressing household consumption. Increasing government investment in recessionary periods means building more production capacity despite weak demand (domestically or abroad). This practice cannot be maintained indefinitely, and East Asian states have tended to undergo transitions (sometimes very rocky ones) during which policies are adjusted to stabilize or boost domestic consumption while allowing fixed investment to taper off. The result — if the restructuring is successful — is a more balanced economy sustained by consumption while varying degrees of exports and investment contribute to its growth.

(click here to view interactive graphic)

Both Taiwan and South Korea have gone through this process. In Taiwan, rapid growth in exports, savings and investment between 1962 and 1985 was accompanied by the decreasing importance of consumption to the overall economy. Taiwan’s exchange-rate deprecation in the late 1970s facilitated a rapid rise in exports, which outstripped domestic consumption as a share of gross domestic product (GDP). However, since Taiwan is a small island with limited room for heavy industry, capital formation never rose above 30 percent of GDP, meaning the economy never became so reliant on investment as to detract from consumption. After 1983, Taiwan implemented financial liberalization to allow for more efficient, market-oriented allocation of capital and to help make the transition into a high-tech economy. This transition facilitated a rise in private consumption from 47 percent of GDP in 1968 to 60 percent of GDP in 2008. Today, Taiwan maintains a balance of consumption (60 percent of GDP), exports (73 percent of GDP) and investment (21 percent of GDP).

Similarly, beginning in the 1970s, South Korea saw rapid growth in exports, savings and fixed investment, reaching the peak of fixed investment in the years leading up to and immediately following the Seoul Olympics of 1988. While geographically small, South Korea required large fixed investment to support the expansion of heavy industry by cheobol, or state-supported corporate conglomerates. Naturally, consumption fell as a portion of GDP until 1988, when it reached a low of 49 percent. After this period, currency appreciation (which increased domestic purchasing power) enabled consumption to remain stable, while the resulting drop in exports was offset by an increase in investment. Even after the 1997 Asian financial crisis, when consumption dropped to its lowest point amid domestic financial troubles and recession, South Korea was able to recover rapidly on the back of a policy-supported domestic consumption boom from 1998 to 2002. Today, Korea balances consumption (55 percent of GDP) with exports (53 percent of GDP) and investment (about 30 percent of GDP).

China, however, has not yet undergone this transition to consumer-led growth and remains heavily dependent on exports and investment. While consumption in Taiwan and Korea fell below half of GDP only once (and quickly recovered), in China consumption fell below half of GDP in 1990 and, especially since 2000, has continued to fall, hitting a low point of 35 percent of GDP in 2008. Of course, household consumption grew in absolute terms during this period as family incomes improved and consumer markets expanded. But as a portion of the overall economy, household consumption fell while savings, fixed investment and especially exports grew. In other words, unlike other East Asian states, China has not succeeded in shoring up the consumption share of its economy. A major danger of this economic structure is that it makes China extremely vulnerable to global slowdowns that affect trade. In fact, when exports plummeted during the 2009 global recession, a surge in investment from government stimulus accounted for more than 90 percent of growth while consumption contributed less than 10 percent.

A variety of historical factors account for the metamorphosis of the South Korean and Taiwanese economies, in contrast to China, beginning with the obvious fact that their development process began earlier. It is not a coincidence that in both South Korea and Taiwan, the shift from state-guided investment to consumption-driven economies occurred in tandem with democratization. More private control over wealth generated more popular demand for control over other things, like political representation and governance. Moreover, these states set out on the path of modernization sooner and were supported every step of the way by the United States, which provided them with security, capital investment and expertise and granted them access to the world’s biggest consumer market. In China, the Communist Party remains resolutely opposed to popular-style governments that could challenge its regime and does not have the strategic option of opening its doors fully to the United States — though since its opening up in 1978 it has enjoyed the enormous advantage of exporting to the U.S. consumer market. Nevertheless, allowing greater domestic freedoms and more extensive foreign presence poses a threat to the Chinese regime’s unity and stability. These factors have contributed to the government’s reluctance to unleash the consumptive power of Chinese households.

Weak Consumption

Despite China’s inherent handicaps, the trend of falling consumption as a share of China’s economy was not inevitable. In the first decade of economic reforms, China experienced relatively balanced growth. Economic liberalization in 1979 unleashed 30 years of pent-up consumption as households, entrepreneurs and farmers gained the freedom to buy and sell. Consumption stayed at 50 percent of GDP throughout the 1980s, while exports and fixed investment expanded at a gradual rate averaging 25 percent and 18 percent per year respectively. However, by the late 1980s consumption growth became unstable, as rapid inflation and political unrest forced the government to re-centralize control, including control over economic policy in order to cool down the overheating economy.

Consumption has never contributed as much to the Chinese economy as it did in the 1980s, though it enjoyed a period of relative stability from 1994 to 2000. In 1992, then-leader Deng Xiaoping launched a growth strategy focused on promoting the coastal cities as manufacturing and export powerhouses. Initially, the booming export economy and investment led to a rapid rise in private employment in the export sector, stabilizing the decline in consumption, but this proved unsustainable. By the late 1990s, coastal cities and state-owned enterprises were flooded with subsidized capital, much of it misallocated by government-controlled banks, and the domestic banking system was at risk because of an increasing number of non-performing loans and an overheating real-estate sector. Blaming the inefficient management of state-owned enterprises (SOEs) for the economic problems, the government launched major reforms that caused rising unemployment and a breakdown of the “iron rice bowl” — the welfare system for the masses of state employees. After Premier Zhu Rongji initiated the process of downsizing the state sector in 1995, 48 million jobs were lost and the state sector contracted by 3 percent per year for the following decade. This downsizing, in addition to pro-export policies, resulted in China’s consumption as a share of GDP falling more than it ever had. It was not that Chinese consumers were not earning more and spending more — rather, it was that their overall contribution to the economy was smaller relative to exports and investment.

In the last decade, the Chinese economy has been driven primarily by fixed investment (44 percent of GDP in 2008) and exports (32 percent of GDP) at the expense of domestic consumption (35 percent of GDP). Employment and wage growth have lagged behind rising costs for education, housing, health care and basic goods, leading to the rise in savings. And with few investment opportunities, most families deposit their savings in the state-run banking system, which converts the funds into government-planned investments. Meanwhile, consumers and small- and medium-sized businesses have trouble obtaining credit and must rely on their earnings for self-financing or on underground lending, thus perpetuating the high savings rate.

Limited capital for entrepreneurs and small and medium-sized enterprises has made China dependent on the export sector for employment. Over the last two decades, state-sector downsizing and a shrinking agricultural sector has put pressure on the Chinese government to create jobs. The relaxation of agricultural trade barriers leading up to China’s World Trade Organization accession, in addition to greater job opportunities in the booming cities, caused rural jobs to fall as a proportion of China’s labor force from 73 percent in 1990 to 61 percent in 2007. This created a contingent of at least 150 million migrant workers who move between rural and urban areas providing low-wage labor, which was soaked up — especially before the recent global recession — by export-oriented private and foreign enterprises. For most of the early 2000s, China’s economy increasingly achieved growth through foreign consumer demand rather than its own.

Emerging from the global economic crisis, China’s economy is in a period of flux, with exports diminishing in importance and government investment taking up the slack. There is much official rhetoric about economic “restructuring” to create sustainable household demand to drive growth in the future. Nevertheless, the economy at present retains the structure — and structural liabilities — of the patterns of development over the past two decades. The transition away from export dependency has only just begun, and stimulus policies targeting domestic-driven growth are necessarily temporary.

Regional Disparities

China’s increasing economic dependency on exports and investment — and the accompanying decline of consumption — has contributed to regional disparities. Looking at China’s provinces through the lens of economic structure, four major classes can be identified: those provinces that are the most heavily dependent on exports, those that are most heavily dependent on investment, those that show a relative balance and those with limited exports and investment.

The first category (orange on the accompanying map) consists of export-dependent regions, where exports generally take a greater share of regional GDP than consumption. These are the wealthy, cosmopolitan coastal provinces and municipalities, including Beijing, Tianjin, the Greater Shanghai region and Guangdong province. When Western countries speak of “China,” they refer to these vibrant manufacturing hubs. Xinjiang, the autonomous region in the far northwest and the single non-coastal province in this category, is a newcomer to the category due to a recent push by Beijing to deepen economic links to Kazakhstan and Central Asia. But the wealth of these export centers is deceptive, and they are really China’s most vulnerable regions. Not only are their economies extremely dependent upon international markets, but investment has surpassed what local consumption there is, making them uniquely vulnerable to factors well beyond their control.

Second (yellow on the map) come the investment-heavy regions, where fixed investment is vastly more important than consumption. Northeast China, previously known as Manchuria, the “Rust Belt” or old industrial heartland, lies in this category — a region kept alive by government subsidies and transfers. Sparsely populated regions such as Inner Mongolia in the north and Tibet in the west serve as geopolitical buffers that give China strategic depth and provide natural resources but otherwise have no economies to speak of. High fixed investment goes into the capital-intensive industries that exploit resources in these regions, including coal (China’s number one source of energy by far). Beijing also needs to maintain sovereignty over these buffer regions for them to serve a strategic purpose effectively. This category also includes landlocked, poor, populous and resource-rich provinces that lie next to wealthier coastal areas, such as Shaanxi and Shanxi in the north and Anhui and Jiangxi in the south. These regions are — and probably always will be — dependent upon monies from Beijing to subsidize their social stability. It is not a coincidence that Mao Zedong’s famous Long March began and ended in such regions (Jiangxi and Shaanxi, respectively).

Two neighboring provinces on the eastern coast, Jiangsu and Shandong, as well as Hebei in the north and Heilongjiang in the northeast, fall into their own category (white on the map). These four provinces present as close a semblance of “balanced” economic structure as China can provide. Exports are beneficial but not essential, and though investment is more important than consumption, the discrepancy between these sources of growth is not as warped as it is in the investment-dependent regions. Both these provinces are wealthy and have large populations, diversified natural resources and vibrant light manufacturing sectors, and benefit from foreign trade and investment. Many leading Chinese politicians come from this area, and if China has a region that could ever achieve the “success” of Taiwan or Korea it would be comprised of some combination of these provinces.

Finally, there are the interior provinces (green on the map) that cannot develop export industries and where the investment share of the economy is not outrageously high (though often more than half of GDP). These range from the heavily populated central provinces known for providing migrant labor to other provinces (Henan, Hubei, Hunan) to the sparsely populated western provinces (Gansu, Qinghai) as well as the poor, relatively isolated and self-contained Sichuan and Chongqing provinces in the southwest. These areas are exceedingly poor in absolute and relative terms, but they are not dependent on the outside world or subject to the most rapid or volatile forces of change.

Where Next?

Despite the massive amount of public funds spent in 2009 and 2010 to boost domestic consumption, no amount of incentives or subsidies will enable Beijing to turn domestic household consumption into the engine of China’s growth in the near term. The past two decades of export-orientated growth have taken money out of the pockets of consumers to finance infrastructure and industrial capacity to the detriment of growth in consumer credit, wages and social services. The result is an economy with overcapacity, over-reliance on the outside world and anemic domestic consumption. A transition to a consumer-driven economy will take a long time and will come at the cost of rising unemployment for low-wage laborers from rural areas unable to find jobs in an economy that increasingly demands skilled labor. Rising unemployment in the export sector and falling government investment likely will create sociopolitical instability. Adding a sense of urgency to the dilemma, the Communist Party is preparing for a leadership transition in just two and a half years, and the outgoing administration must weigh the need for timely economic restructuring against the bleak realities of inertia in the system.

Members of the Mexican military detained Jose “El Indio” Gerardo Alvarez Vasquez in Huixquilucan, Mexico state, April 21 after a firefight. The gunbattle began after the Mexican military raided a house in Huixquilucan. Alvarez attempted to escape from the scene in a Mini Cooper but was apprehended along with 17 others in the house.

Alvarez reportedly held a senior position in the Beltran Leyva Organization and was in charge of negotiating and securing shipments of drugs from South and Central America with the respective independent criminal organizations in those regions. He also reportedly was responsible for drug shipments in Guerrero and Mexico states and for the BLO’s methamphetamine trafficking, which stretched through Mexico and into the United States. The United States had placed a standing bounty of $2 million for the capture of Alvarez; Washington has now requested his extradition. He also reportedly was responsible for instigating much of the fighting that has taken place in Morelos and Guerrero states in recent weeks.

Alvarez allegedly sided with Edgar “La Barbie” Valdez Villarreal against Hector “El H” Beltran Leyva and Sergio “El Grande” Villarreal Barragan after the death of BLO kingpin Arturo Beltran Leyva in December 2009 and the subsequent conflict for leadership of the organization. Beltran Leyva and Villarreal since went on to form the Cartel Pacifico Sur (CPS).

While the violence between Valdez’s men and the CPS is not likely to subside due to Alvarez’s capture, the arrest represents a major blow to Valdez’s organization. His connections to South and Central American trafficking organizations and the duties he carried out in Mexico were undoubtedly vital for a large portion of the flow of revenue to Valdez’s organization. While he likely was not the only person in the organization with these sorts of contacts, he will not be replaced easily. Given his stature in Valdez’s organization and his role in the conflict in Morelos and the surrounding areas, the government and CPS most likely sought his demise. It is quite common for competing drug trafficking organizations to tip the authorities off to the location of rival high-ranking members, as with Hector Beltran Leyva’s brother Alfredo.

Monterrey Security Situation Continues to Deteriorate

Between 30 and 50 armed men traveling in up to 10 vehicles kidnapped a total of six people in the early morning hours of April 21 from the Holiday Inn at the corner of Padre Mier and Garibaldi streets in Monterrey, Nuevo Leon state. The previous day, the body of transit police officer Gustavo Escamilla Gonzalez, who had gone missing April 15, was thrown from a moving vehicle into Lazaro Cardenas Avenue in the Monterrey suburb of San Pedro Garza Garcia. Four flowers and a banner that read, “This is what happens to those that support the [expletive] Los Zetas” were attached to his corpse, along with a list of 20 other names of law enforcement officials who allegedly support Los Zetas. The banner was signed by the New Federation. Escamilla is the 25th law enforcement official in Nuevo Leon killed by the New Federation for allegedly cooperating with Los Zetas. Additionally, organized criminal elements used the increasingly popular tactic of blockading major thoroughfares throughout the Monterrey area April 25 to impede the response time of Mexican security forces. A total of four blockades backed up traffic in Monterrey proper, Apodaca, Guadalupe and San Nicolas de los Garza.

These three incidents indicate the conflict between Los Zetas and the New Federation is continuing its westward expansion. While the majority of the violence and conflict still is centered along the southern edge of the Rio Grande from Nuevo Laredo to Matamoros, the Monterrey area has seen a notable increase in cartel activity and violence. Monterrey has been a Zeta stronghold for several years now. The group has established networks of corrupt political and law enforcement officials and has secured trafficking routes through the city. As the New Federation zeros in on Los Zetas support structure, Monterrey is an obvious target. The Monterrey metropolitan area will therefore most likely become increasingly violent in the weeks and months ahead.

(click here to view interactive map)

April 19

• The dismembered body of a restaurant owner, identified as Alfredo Paredes Montiel, was found near the offices of the attorney general’s office anti-drug task force in Cuernavaca, Morelos state. A message criticizing suspected drug trafficker Edgar Valdez “La Barbie” Villarreal was found near the body. Paredes had been kidnapped the previous day.
• The body of the wife of a Chiapas state legislature candidate was discovered in the municipality of Selvas de Chiapas, Chiapas state. The victim had been shot once in the head.
• Eight prisoners escaped from the Tenancingo jail in the municipality of Tenancingo, Mexico state. Prison director Miguel Garcia Reyes Retana is being investigated in connection with the incident.

April 20

• Mexican naval troops seized a suspected drug trafficking safe-house in Cuernavaca, Morelos state. Several firearms, cellular phones, an axe and a chain saw were seized. No arrests were made.
• A former Coahuila state Communications and Transport Secretariat official, identified as Alejandrina Martinez Macias, was stabbed to death in her house.
• Approximately 30 gunmen seized a National Migration Institute detention facility in Acayucan, Veracruz state, freeing 13 illegal Guatemalan immigrants being held there.

April 21

• Suspected members of drug-trafficking cartels blocked several roads in Monterrey, Nuevo Leon state, by coercing drivers to park their vehicles across several lanes. Roadblocks were reported at the intersections of Colon and Pino Suarez streets as well as Padre Mier and Garibaldi streets.
• The bodies of two unidentified men were discovered outside a bar in the 10th of April neighborhood in Cuernavaca, Morelos state. A message addressing suspected CPS leader Hector Beltran was draped over the bodies.
• The body of the Veracruz state Maritime Customs administrator, identified as Francisco Serrano Aramoni, was discovered at an unspecified location. Serrano was kidnapped last year near the Morelos bridge in downtown Veracruz.
• Approximately 25 gunmen kidnapped six people from a Holiday Inn in Monterrey, Nuevo Leon. The kidnappers took four guests, two clerks and a security guard from the hotel premises.

April 22

• The bodies of five men were found in a van abandoned in the municipality of San Miguel El Alto, Jalisco state. All the bodies bore signs of torture and gunshot wounds to the head.
• The Secretariat of Public Security confirmed the April 19 arrest of eight suspected members of La Familia in the municipality of Donato Sierra, Mexico state.
• Residents of the La Concepcion neighborhood in Tultitlan, Mexico state, found the body of an unidentified man. The victim had been shot in the forehead.

April 23

• Soldiers arrested 16 suspected cartel members during a raid on a ranch in Panuco, Veracruz state. Two suspects were killed in the incident, and the authorities seized weapons, ammunition and vehicles.
• Soldiers and state investigative agents arrested three policemen in Apodaca, Nuevo Leon state. The men are suspected of provoking an altercation with federal policemen on June 8, 2009.
• Unidentified gunmen killed six policemen and one bystander during an ambush in Ciudad Juarez, Chihuahua state.

April 24

• Unidentified gunmen attacked Michoacan state public security head Minerva Bautista Gomez in Morelia, Michoacan state. Bautista, four bodyguards and two civilians were injured in the attack.
• Six suspected members of drug-trafficking cartels were killed in two firefights in the municipalities of San Nicolas de los Garza and Juarez, Nuevo Leon state.
• Soldiers killed three suspected kidnappers and freed four kidnapping victims during a highway chase and subsequent firefight in General Bravo, Nuevo Leon state.

April 25

• Roadblocks set up by drug-trafficking cartels were reported in the municipalities of Monterrey, San Nicolas de Los Garza, Apodaca and Guadalupe, Nuevo Leon state.
• Two explosions damaged a bank and a nightclub in the Ciudad de los Deportes neighborhood of Mexico City. No injuries were reported.
• One policeman and one suspected gunman were killed during a firefight in Zapopan, Jalisco state. A civilian and another policeman were reportedly injured.

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BISHKEK, Kyrgyzstan – Opposition leaders declared they had seized power in Kyrgyzstan on Wednesday, April 7, taking control of security headquarters, a state TV channel and other government buildings after clashes between police and protesters left dozens dead in this Central Asian nation that houses a key U.S. air base.

President Kurmanbek Bakiyev, who came to power in a similar popular uprising five years ago, was said to have fled to the southern city of Osh, and it was difficult to gauge how much of the impoverished, mountainous country the opposition controlled.

“The security service and the Interior Ministry … all of them are already under the management of new people,” Rosa Otunbayeva, a former foreign minister who the opposition leaders said would head the interim government, told the Russian-language Mir TV channel.

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The opposition has called for the closure of the U.S. air base in Manas outside the capital of Bishkek that serves as a key transit point for supplies essential to the war in nearby Afghanistan.

A senior U.S. military official says some flights were briefly diverted at the base, but as far as military officials in Washington know, the base was never closed. Scheduled troop movements in and out of Afghanistan were not affected. The official spoke on condition of anonymity because base operations are sensitive.

During the day, protesters who were called into the streets by opposition parties stormed government buildings in Bishkek and battled with police amid volleys of tear gas. Groups of elite officers then opened fire with live ammunition.

The Health Ministry said 40 people died and more than 400 were wounded. Opposition activist Toktoim Umetaliyeva said at least 100 people were killed by police gunfire.

Crowds of demonstrators took control of the state TV building and looted it, then marched toward the Interior Ministry, according to Associated Press reporters on the scene, before changing direction and attacking a national security building nearby. They were repelled by security forces loyal to Bakiyev.

After nightfall, the opposition and its supporters appeared to gain the upper hand. An AP reporter saw opposition leader Keneshbek Duishebayev sitting in the office of the chief of the National Security Agency, Kyrgyzstan’s successor to the Soviet KGB. Duishebayev issued orders on the phone to people he said were security agents, and he also gave orders to a uniformed special forces commando.

Duishebayev, the former interior minister, told the AP that “we have created units to restore order” on the streets. Many of the opposition leaders were once allies of Bakiyev, in some cases former ministers or diplomats.

Why is Kyrgyzstan Important?

Like its neighbors Uzbekistan and Tajikistan, Kyrgyzstan has remained impoverished since the 1991 collapse of the Soviet Union and has a history of stifling democratic institutions and human rights.

Kyrgyzstan is a predominantly Muslim country, but just as in Soviet times, it has remained secular. There has been little fear of the spread of Islamic fundamentalism as in other mostly Muslim regions of the former Soviet Union.

Since coming to power in 2005 amid street protests known as the Tulip Revolution, Bakiyev had ensured a measure of stability in the country of 5 million people, but the opposition says he has done so at the expense of democratic standards while enriching himself and his family. He gave his relatives, including his son, top government and economic posts and faced the same accusations of corruption and cronyism that led to the ouster of his predecessor, Askar Akayev.

In the past two years, authorities have clamped down on the media, and opposition activists say they have routinely been subjected to physical intimidation and targeted by politically motivated criminal investigations.

Many of the opposition forces had been in power with Bakiyev until Bakiyev purged his government of most opposition elements in October 2009. The purged individuals, most of whom belonged to the Social Democrats and United People’s Movement, joined forces to spearhead nationwide protests already under way due to the Central Asian country’s economic and electricity crisis.

Control of the military is critical to watch. The Kyrgyz military has yet to be deployed — even though Interior Ministry forces are out in droves against the protesters, who have seized and even burned down numerous government buildings. Using the military against protesters has been taboo since 2007, when Bakiyev came under international criticism for using excessive force after monthlong protests. That the military has not been deployed even as the government is possibly collapsing leaves open the question of who really is in charge of the military.

Protesters reportedly are seeking to break out of jail former Defense Minister Ismail Isakov, who led the military for years and still holds considerable influence over the much of it. If the opposition can gain control over the military, there will be little the Bakiyev government can do.

The Kyrgyz opposition already is attempting to organize a new government. It has settled on former Foreign Minister Roza Otunbayeva as its head. Otunbayeva is an interesting choice, as she holds quite a bit of influence over the former Tulip Revolution forces from her days in helping Bakiyev to power. She also was a Soviet diplomat and studied and worked in Moscow, meaning she most likely retains strong ties to Russia.

It also is critical to watch if this new opposition government has merged with other opposition forces, such as the Communist Party and Ak-Shumkar Party, both of which have heavy ties into Russia. Ak Shumkar leader Temir Sariev recently met Russian Prime Minister Vladimir Putin in Russia, suggesting Moscow could be nudging matters along in Kyrgyzstan.

Sources inside Kyrgyzstan said April 8 that several Chinese markets were targeted by rioters and burned during the recent unrest, while Americans and Russians were not similarly directly targeted. These are merely rumors but they fall in line with a trend of growing anti-Chinese sentiment among populations in Central Asia as the Chinese presence has gradually increased in the region. China’s reaction to the revolution in Kyrgyzstan has been negative — which is no surprise, since it shares a border with the country and is also worried about social unrest in its own northwestern region of Xinjiang, where riots broke out in July 2009. China has denounced the rioting and called for the quick return of calm and order. If rumors are true about ethnic Chinese in Kyrgyzstan being victims of looting and vandalism, they further explain China’s unhappiness with the situation. The question now for China is whether the Chinese will need to reconsider aspects of their Central Asia strategy based on the Kyrgyz situation. Also, if the new government in Kyrgyzstan is broadly more pro-Russian, how will China respond?

The interim government of Kyrgyzstan will issue a decree announcing April 10 as a national day of mourning for those killed in the recent riots across Kyrgyzstan, Kabar reported April 8. The decree will be signed by Roza Otunbayeva, head of the interim government.

Some History

A Central Asian country of incredible natural beauty and proud nomadic traditions, most of Kyrgyzstan was formally annexed to Russia in 1876. The Kyrgyz staged a major revolt against the Tsarist Empire in 1916 in which almost one-sixth of the Kyrgyz population was killed. Kyrgyzstan became a Soviet republic in 1936 and achieved independence in 1991 when the USSR dissolved. Nationwide demonstrations in the spring of 2005 resulted in the ouster of President Askar AKAEV, who had run the country since 1990. Subsequent presidential elections in July 2005 were won overwhelmingly by former prime minister Kurmanbek BAKIEV. The political opposition organized demonstrations in Bishkek in April, May, and November 2006 resulting in the adoption of a new constitution that transferred some of the president’s powers to parliament and the government. In December 2006, the Kyrgyzstani parliament voted to adopt new amendments, restoring some of the presidential powers lost in the November 2006 constitutional change. By late-September 2007, both previous versions of the constitution were declared illegal, and the country reverted to the AKAEV-era 2003 constitution, which was subsequently modified in a flawed referendum initiated by BAKIEV. The president then dissolved parliament, called for early elections, and gained control of the new parliament through his newly-created political party, Ak Jol, in December 2007 elections. In July 2009, after months of harassment against his opponents and media critics, BAKIEV won re-election in a presidential campaign that the international community deemed flawed. Just a few months later in October, BAKIEV engineered changes in the government structure that further consolidated his already considerable hold on power. Current concerns include: privatization of state-owned enterprises, negative trends in democracy and political freedoms, endemic corruption, improving interethnic relations, electricity generation, and combating terrorism.

Recent Background of Events Leading to the Uprising (from Stratfor)

• March 10: The Council of Kyrgyz Elders demanded the closure of the U.S. air base at Manas and called for an immediate withdrawal of U.S. forces from their country, the Voice of Russia Web site reported.
• March 10: Kyrgyz President Kurmanbek Bakiyev met with U.S. Central Command chief Gen. David Petraeus in Bishkek and said that Kyrgyzstan will seek to assist in the rehabilitation of Afghanistan, the Trend news agency reported.
• March 11: Some parliamentarians expressed discontent over the news that Italian authorities issued a warrant for the arrest of Yevgeny Gurevich, a business associate of President Kurmanbek Bakiyev’s son, Maksim, Radio Free Europe/Radio Liberty reported.
• March 12: The Kyrgyz opposition group Ata-Meken (Fatherland) demanded that President Kurmanbek Bakiyev and his son resign, Radio Free Europe/Radio Liberty reported.
• March 17: About 3,000 demonstrators gathered in Kyrgyzstan’s capital, Bishkek, protesting an increase in heating and electricity tariffs and the reported oppression of political opposition, The Washington Post reported. Ata-Meken party leader Omurbek Tekebayev told the protesters to take control if the government does not listen, the Trend news agency reported.
• March 18: The Kyrgyz Defense Ministry released plans for the joint construction of an anti-terrorism training center with the United States, Xinhua reported. Sources said construction would begin a short time after the establishment of a joint military office. The center is backed with a start-up fund of $5 million from the United States.
• March 20: Kyrgyz President Kurmanbek Bakiyev announced that several ministries and agencies will be relocated to Osh over the next few years, with the Defense Ministry being the first, according to a AKIpress news agency report.
• March 23: About 30 people, including Temir Sariev, the leader of the opposition party Ak-Shumkar, were detained in Bishkek while protesting, Interfax reported.
• March 23: Kyrgyz President Kurmanbek Bakiyev said the only two paths for his country’s foreign policy are becoming a “satellite” to a larger power or being independent in world politics, Interfax-AVN reported. Bakiyev said other countries have met Kyrgyzstan’s efforts to establish its international independence over the last year with a “respectful attitude.”
• March 26: Kyrgyz Defense Minister Baktybek Kalyyev said that a U.S.-funded new military training center in Batken will strengthen security in Kyrgyzstan and will not complicate their relations with Russia or Uzbekistan, Interfax reported.
• March 29: Russian and Kyrgyz leaders firmly intend to complete a draft agreement on setting up Russia’s unified military base on Kyrgyz territory, Collective Security Treaty Organization Secretary-General Nikolai Bordyuzha said, the AKIpress news agency reported.
• March 31: Members of the religious extremist organization Hezb-e Tahrir were detained in Kyrgyzstan’s Dzhalal-Abad region, the Web site 24.kg reported.
• April 1: A media rights advocate said that a Kyrgyz court had shut down Forum, which was an opposition newspaper, the Trend news agency reported.
• April 5: Authorities in Kyrgyzstan have offered discounts to those people deemed most affected by a recent hike in electricity and heating bills in an apparent bid to calm tensions, AP reported. Kyrgyz Prime Minister Daniyar Usenov ordered the government to pay half the power bills of households in remote and mountainous regions.

Stratfor Provides A Timeline of Protests

• April 6 (3:21 p.m. – all times are local): Protesters in Talas took over a regional government office during a rally, Reuters reported.
• April 6 (3:29 p.m.): Representatives of the Talas regional state administrator said they are holding talks with the “opposition,” according to reports from the Kyrgyz news agency 24.kg Web site.
• April 6 (5:02 p.m.): Kyrgyz Prime Minister Daniyar Usenov vowed to restore order in Talas and says the 100 police officers that he sent to the city should be sufficient to restore order, reported the AKIpress news agency.
• April 6 (5:10 p.m.): Kyrgyz Prime Minister Daniyar Usenov said he is ready to talk with the opposition, reported the AKIpress news agency.
• April 6 (5:41 p.m.): Law-enforcement agencies arrested participants and organizers of a protest in Talas, reported the AKIpress news agency.
• April 6 (6:26 p.m.): Kyrgyz Prime Minister Daniyar Usenov denied that a regional governor had been taken hostage in the town of Talas but confirmed that a group of opposition protesters was inside a local government office, Reuters reported.
• April 6 (6:42 p.m.): Reports come in that police in the country’s northwest have used rubber bullets and tear gas to disperse protesters, BBC reported.
• April 6 (8:06 p.m.): A rally resumed at the square in front of Talas’ regional administration building. Opposition leaders and activists made speeches, and Ferghana.ru claimed that special forces entered the city and young people prepared Molotov cocktails, the Kyrgyz news agency 24.kg Web site reported.
• April 6 (10:14 p.m.): The governor of the Talas region, who had been held by opposition protesters, was freed in a police operation, Reuters reported.
• April 6 (11:05 p.m.): The Interfax news agency reported that protesters again seized the building of the Talas regional administrator. According to human rights watchdogs, supporters of the opposition have also torched a police UAZ. There were also unconfirmed reports that the administration building is on fire.
• April 6 (2:36 a.m.): Kyrgyzstan’s Kabar news agency reported that 24 rioters in Talas were injured in clashes with police.
• April 7 (9:56 a.m.): Reuters reported that Internet access was blocked in most households around Bishkek and that police cordoned off the main road between Talas and Bishkek.
• April 7 (12:37 p.m.): Russian Deputy Foreign Minister Grigory Karasin called for restraint in Kyrgyzstan, the Interfax news agency reported.
• April 7 (12:42 p.m.): At least 85 policemen were injured — four seriously — in the unrest April 6 in the northern Kyrgyz town of Talas, Kyrgyz Prime Minister Daniyar Usenov told a press conference April 7, according to the Xinhua news agency.
• April 7 (4:53 p.m.): Kyrgyz Prime Minister Daniyar Usenov told Russia’s ambassador in Bishkek that Russian media outlets are biased against the Kyrgyz government, RIA Novosti reported.
• April 7 (5:43 p.m.): Interior Minister Moldomusa Kongantiyev and First Vice Prime Minister Akylbek Japarov were taken hostage by opposition protesters in Talas, APA reported.
• April 7 (6 p.m.): RIA Novosti reported that Kyrgyz protesters seized the state television station building in Bishkek.
• April 7 (6:12 p.m.): Reports surfaced that Kyrgyz Interior Minister Molodmusa Kongantiyev has been killed, according to the Interfax news agency. A sate of emergency was called for Bishkek, Talas, Chui and Naryn.
• April 7 (6:35 p.m.): According to Russia’s Itar-Tass, law enforcement units in Kyrgyzstan only control of the Government House which houses the executive and President Kurmanbek Bakiyev. Reports came in that rioters began seizing weapons from government offices in Talas.
• April 7 (6:52 p.m.): Reports from Russia’s Interfax claimed that the Manas International Airport was closed to air traffic with only two more regional flights from Moscow and Osh to be allowed to land.
• April 7 (7:02 p.m.): Former Kyrgyz President Askar Akayev said he supported the protests in his country, Ekho Moskvy reported April 7.
• April 7 (7:12 p.m.): Internet service in Kyrgyzstan was halted, 24 News Agency reported.
• April 7 (7:16 p.m.): The Prosecutor General’s Office building burned in downtown Bishkek, Kyrgyzstan, RIA Novosti reported April 7.
• April 7 (7:17 p.m.): The Kyrgyz opposition took control of regional centers and towns, such as Tokmok in the Chui Region and Karakol and Cholpon-Ata in the Issyk-Kul Region in northern Kyrgyzstan, Interfax reported April 7, citing employees of human rights organizations.
• April 7 (7:25 p.m.): Former Kyrgyz leader Askar Akayev said April 7 that current President Kurmanbek Bakiyev should step down, Reuters reported.
• April 7 (7:27 p.m.): Russia tightened security at its airbase in Kant following the events in Kyrgyzstan, according to Defense Ministry spokesman Lt. Col. Vladimir Drik.
• April 7 (7:35 p.m.): Kyrgyz Prime Minister Daniyar Usenov said Anvar Artykov and Duyshenbek Chotonov testified that the Ata-Meken and SDPK Parties were intent to seize power in Kyrgyzstan, the 24 News Agency reported.
• April 7 (7:45 p.m.): The Kyrgyz parliament reportedly debated calling in the army and declaring a state of emergency, AsiaNews reported.
• April 7 (7:46 p.m.): The Collective Security Treaty Organization (CSTO) alliance said it will not intervene to settle the political crisis in Kyrgyzstan, Interfax reported.
• April 7 (7:59 p.m.): Protesters in the capital of Kyrgyzstan stormed the parliament building and are occupying the first floor, RIA Novosti reported April 7. Former parliament speaker Omurbek Tekebayev reportedly was among the men who stormed the building.
• April 7 (8:05 p.m.): Kyrgyzstan was set to increase the number of U.S. military forces based in Bishkek, Gazeta.ru reported April 7, citing an Ekho Moskvy report. The Kyrgyz Parliament’s Director-General of Relations Anton Belyakov said the opposition had unconfirmed reports that after nightfall Kyrgyzstan would increase the number of U.S. military forces based in the capital city.
• April 7 (8:08 p.m.): Kyrgyzstan’s parliament is scheduled to meet April 8, Xinhua reported April 7. Sources told Xinhua that the legislature could hold an emergency session the night of April 7 if the president orders it.
• April 7 (8:08 p.m.): Kyrgyzstan’s state-run television resumed broadcasting at 5:33 p.m. local time Kyrgyz Television 1 reported.
• April 7 (8:14 p.m.): The Kyrgyz opposition discussed the possibility of negotiating with the government, Interfax reported.
• April 7 (8:16 p.m.): Kyrgyz opposition supporters dispersed peacefully from the building adjacent to the Government House area in Bishkek.
• April 7 (8:17 p.m.): RIA Novosti reported that the government and the opposition in Kyrgyzstan have agreed to hold talks in Bishkek, according to Kyrgyz State Councilor for Defense, Security and Law Enforcement Elmurza Satybaldiev.
• April 7 (8:23 p.m.): Former Kyrgyz President Askar Akayev has ruled out Russia’s involvement in Kyrgyz unrest, Gazeta reported April 7. He said Russia only wants good for the Kyrgyz citizens and aided the country through the economic downturn.
• April 7 (8:37 p.m.): Itar-Tass reported that Kyrgyz Internal Affairs Minister Molodmusa Kongantiyev was being held hostage in the Talas regional administration building, and his condition is serious.
• April 7 (8:40 p.m.): According to the Russian news service Itar-Tass, the location of Kyrgyzstan President Kurmanbek Bakiyev is still unknown. This report comes as Itar-Tass also reports that opposition supporters have left the parliament building, which they took over, and are moving toward the “White House,” the presidential office building in the capital of Bishkek.
• April 7 (8:54 p.m.): Around 300 protesters have seized an administration building in Kyrgyzstan’s southwestern Dzhalal-Abad region, 24.kg news agency reported.
• April 7 (9:06 p.m.): Kyrgyz security services deny that protesters in Bishkek took the State National Security Service building and released prisoners being held in Metropolitan Detention Center No. 1.
• April 7 (9:06 p.m.): Interfax reported that Kyrgyz Interior Minister Molodmusa Kongantiyev told a news conference that law enforcement has increased security in the country, Kyrgyzstan’s 24 News Agency reported. Kongantiyev said all political meetings in the country will be considered illegal and that unlawful activities by the opposition will be halted.
• April 7 (9:09 p.m.): RIA Novosti reported that looters have seized computers, documents, furniture and more in the Kyrgyz parliament building, according to Parliament Speaker Zainidin Kurmanov said.
• April 7 (9:19 p.m.): The Kyrgyz opposition has demanded the resignation of the current government and has agreed to negotiate with the head of the Kyrgyz government, one of the opposition leaders said on national television, Interfax reported April 7.
• April 7 (9:29 p.m.): People believed to be protesters entered the property of Kyrgyz President Kurmanbek Bakiyev, Interfax reported. No one appeared to be inside the home, said witnesses.
• April 7 (9:37 p.m.): Internet was restored in Bishkek, Kyrgyzstan, STRATFOR sources said.
• April 7 (9:37 p.m.): Kyrgyzstan President Kurmanbek Bakiyev was taken directly to the presidential plane, which took off from Bishkek’s Manas International Airport around 8 p.m. local time, IA REGNUM reported, citing an unconfirmed source.
• April 7 (9:47 p.m.): An opposition leader called protesters off the streets in Kyrgyzstan and called for a people’s militia to control the situation, RIA Novosti reported.
• April 7 (9:51 p.m.): Former Speaker of the Kyrgyz Parliament Omurbek Tekebayev, speaking live on state television NTRC, said retired Police Col. Turat Madalbekov has been appointed security commander of Bishkek, Gazeta reported.
• April 7 (10:06 p.m.): Military vehicles were burned near government buildings and police and protesters exchanged gunfire, Gazeta reported. Government buildings’ fences also cracked in several places.
• April 7 (10:07 p.m.): Kyrgyz President Kurmanbek Bakiyev’s two aircraft waiting at the Manas airport were not used, NEGA reported. A source close to the Kyrgyz president told RIA Novosti that reports that Bakiyev left the country are untrue. NAGA also reported that the Kyrgyz army has not made any moves.

Alongside this potentially divisive issue, the Chinese government’s indictment of four employees of multinational mining giant Rio Tinto has been in the news since July 2009, when the four,  three Chinese nationals and Australian citizen Stern Hu, general manager of Rio’s iron-ore division in China, were arrested in Shanghai and accused of offering bribes and stealing state secrets.

The Rio Tinto Group is a diversified, British-Australian, multinational mining and resources group with headquarters in London and Melbourne. The company was founded in 1873, when a multinational consortium of investors purchased a mine complex on the Rio Tinto river, in Huelva, Spain from the Spanish government. Since then, the company has grown through a long series of mergers and acquisitions to place itself among the world leaders in the production of many commodities, including aluminium, iron ore, copper, uranium, coal, and diamonds. Although primarily focused on extraction of minerals, Rio Tinto also has significant operations in refining, particularly for refining bauxite and iron ore. The company has operations on six continents but is mainly concentrated in Australia and Canada, and owns gross assets valued at $81 billion through a complex web of wholly and partly owned subsidiaries. In 2007, the company was valued at $147 billion.

Since July last year, the charges were changed to accepting bribes and “infringing” commercial secrets, and the four finally began their trial on March 22, reportedly pleading guilty to the bribery charges, although they disputed the bribery amounts. One defendant also pleaded guilty to the commercial-secret charge, to which Hu and the other two defendants pleaded not guilty.

Although Hu has garnered the lion’s share of media attention in the case, the more interesting defendant is one the media seem to be ignoring — Rio associate Wang Yong, who disputed the bribery amounts and allegedly received the largest bribe. The Rio investigation was spawned by the tense iron-ore pricing negotiations between Rio Tinto and the China Iron and Steel Association in 2009. All four of the defendants were involved in the negotiations, but Wang reported to a different manager than Hu, who was the leader of the Rio negotiating team.

It is fairly clear that the Rio Tinto investigation was politically motivated and part of Beijing’s intensifying crackdown on corruption. It is notable, though, that the Ministry of State Security was responsible for the Rio Tinto investigation, not the Ministry of Public Security, which handles all bribery and other criminal investigations. And the focus on Hu, a Chinese-born Australian national, may be an intended distraction from the larger aspect of the case, which involves Wang, a Chinese citizen, and Du Shuanghua, a powerful Chinese steel magnate who was once China’s second wealthiest person.

The four Rio Tinto executives pleaded guilty to accepting a total of $13.6 million in bribes from representatives of Chinese steel companies, the bulk of which Wang allegedly received in 2006. At that time Wang had a separate sales team handling iron-ore from Robe River Iron Associates, an Australian joint-venture involving Rio Tinto and several Chinese companies, and one of his major customers was Rizhao Steel Co., which Du owns.

Du did not appear in court during the trial, but his recorded testimony, read by the prosecutor, claimed he had given Wang $9 million in bribes, most of the total in the Rio Tinto case. Wang said the money was a loan that he intended to invest in the stock market in Hong Kong. He borrowed the money from Du because he could not get the necessary funds into Hong Kong, despite the fact that his brother manages a brokerage firm that does business in Hong Kong and on the mainland. In his recorded testimony, Du actually referred to the money as a “good deed” fee, a common term in China for bribes that are usually paid as “gifts” through middlemen “consultants” who can provide sufficient plausible deniability.

After the Robe River deal, Du’s company became extremely successful, drawing the attention of state-owned enterprises, and Rizhao was eventually bought out by a state-owned steel firm based in Shandong province that was able to set the price of the acquisition because of an obscure Chinese law. Du subsequently fell to 29th on China’s richest-person list.

The verdict in the bribery case netted a combined 10-year sentence for Australia’s Stern Hu, and also found three of his Chinese colleagues guilty. Though the sentence is for 10 years, it appears to be the combined sentence for both the bribery charges (the maximum sentence of which is 15 years) and for infringing commercial secrets (a maximum sentence of seven years). The case has been a sore point in relations between Australia and China and the ruling shows that China intended to send a strong signal to Australia and other countries with business in China, especially Western ones, that Beijing does not take such offenses lightly. From the Chinese perspective, there is considerable fear that foreign governments use companies as a front, and that bribery, which is rampant in China, is used by foreigners to manipulate Chinese officials and Communist Party members and gain sensitive intelligence. Therefore the Chinese may have used Hu as an example — whether fitting or not — to warn foreign countries against such attempts. Though tensions will persist between Canberra and Beijing over the case, major Australian and Chinese companies are continuing to seek major deals on minerals and investment.

Taken together, the Google controversy and the Rio Tinto scandal bring into focus the fine line that must be walked by business interests in China, as well as by Chinese government authorities, going forward.  As in many such interactions between a seemingly intractable, totalitarian government and business interests seeking to remain free from restrictions, a middle way must be negotiated, in which sufficient penalties are imposed on some, as a message that allows the government interests to maintain their appearance of strength, but certain concessions can be made in the interest of progress.  All of this, however, is probably too little, too late for Stern Hu, facing 10 years in a Chinese prison.

On the European side of the pond, Obama has plans to meet with Hungarian Prime Minister Gordon Bajnai, Polish Prime Minister Donald Tusk, Romanian President Traian Basescu and possibly also the leaders of the Czech Republic, Slovakia, Bulgaria, Slovenia, Croatia and the Baltic States — all on the sidelines of the official ceremony accompanying the signing of the new START treaty. That the American president is choosing to meet with the Central and Eastern European leadership en masse in the same venue that is supposed to be dedicated to the pomp and circumstance of the signing of the new START treaty will not please Moscow. This is particularly true since Russia had originally planned for the signing of the treaty to be a minor stop on Medvedev’s own tour of the region, and because the event was designed to highlight Russia’s status as a superpower worthy of the United States’ undivided attention.

The time and place of the meeting is therefore not accidental. It is supposed to signal to Russia that the United States is still very much involved in Central and Eastern Europe. It is also sending the same message to the beleaguered Central Europeans who these days feel threatened more than they expected they would when they joined the European Union and NATO alliances in the last decade. Estonian President Handrik Ilves summarized it well on Thursday when he noted that the ultimate question for Europe really comes down to “how much you trust the Russians.” He also peppered the interview with references to the EU’s abandonment of Ukraine and Georgia, and the general European lackadaisical attitude regarding Moscow’s resurgence in the region.

From the perspective of Estonians and other Central and Eastern Europeans, the Russian resurgence is going largely unchecked, by both the United States and Europe. The Obama administration did not endear itself to the region with some early indications that it was “abandoning” the ballistic missile defense (BMD) plans — plans that have since changed. It is the EU attitude as a whole, however, that ultimately worries the Central and Eastern Europeans. For Berlin and Paris, economic and domestic interests come before Central European security interests. Germany is beginning to act more and more like a “normal country” — as German Finance Minister Wolfgang Schaeuble recently mentioned in an interview — which to Central and Eastern Europeans means a lot of things, none pleasant. The point is not that Poland and its neighbors expect to see the Wehrmacht on the horizon any time soon, but rather that they remember how a “normal” Germany repeatedly sold out Central and Eastern Europe’s security for its own national interests.

In that calculation, Central Europe’s economic interests — which are firmly tied to their EU membership — begin to diverge with their security interests, which are fundamentally about the region’s alliance with the United States. This is why the United States can find eager allies in a region Russia sees as a vital buffer from the rest of Western Europe, and exert considerable pressure on Moscow by nurturing its relationship with Central Europe.

In the other hemisphere, Putin is scheduled to grace the near abroad of the United States with a visit to Venezuela for a meeting with President Hugo Chavez.

Putin’s visit will come at the end of a week of Easter holidays, during which Venezuelan businesses will have shut down in an attempt to conserve electricity. The presidential holiday declaration indicates the desperation felt by the Venezuelan government in the face of the country’s deteriorating electricity sector. The country does not expect much relief in the wake of the holiday, as more severe rationing is expected to commence on Monday.

Russia has long dabbled in Latin America as a way to make the United States nervous — particularly during the Cold War. In more recent memory, Russian government officials have made semi-regular visits to Venezuela to pressure the United States in its own backyard, similar to how Russia has felt pressured in its near abroad. Although Venezuela would love to be able to take advantage of the Eurasian attention, Russia has yet to make a clear commitment regarding how it would be willing to help. Venezuela is, after all, a notoriously unstable petro-state halfway around the world from where Russia’s priorities lie.

But the Putin-Chavez visit comes at a particularly interesting time. Venezuela’s fundamentally unstable domestic situation raises a number of very interesting questions in the lead-up to Putin’s visit. So far the reports on the visit — which was preceded by a visit from Russian Deputy Prime Minister Igor Sechin — have mostly focused on arms deals, tentative oil agreements and the establishment of a joint bank. But the most important kind of help that Venezuela could receive from Russia at this point is something (anything) to assist with Venezuela’s dire electricity situation. There also remains the possibility that Venezuelans are not looking to the Russians for help in the short term. They may instead seek to tap Russian expertise in strict domestic political controls to help the Chavez regime survive the aftermath of a possible electricity sector meltdown. It is known that the Cubans have been helping Chavez to solidify personal control over the domestic situation. Perhaps the Russians could lend a hand, too.

Ultimately, however, Russia is not there to solve Venezuela’s problems. As long as Russia can raise the hackles of the United States by making high profile visits to South America, it will. But any serious partnerships or investments that might cost Russian time or treasure are unlikely.

Nevertheless, Russia appreciates the opportunity to meddle in the Western Hemisphere just as the United States is using the opportunity in Central and Eastern Europe to exert influence in Russia’s near abroad.

ISRAELI PRIME MINISTER BENJAMIN NETANYAHU and Greek Prime Minister George Papandreou visited Moscow on Monday. Their agendas were different, but their shared purpose was to seek Russia’s aid on points key to the national interests of each country.

Netanyahu traveled to Moscow to ask Russian President Dmitri Medvedev for “sanctions with teeth” against the Iranian energy sector to force Tehran to reassure the world that it is not developing a nuclear weapon. Iran, an oil producer, imports between 25 and 30 percent of its gasoline due to a lack of refining capacity. Russia is central to an effort to squeeze Iran with gasoline import sanctions because Moscow is a permanent — and thus veto-bearing — member of the U.N. Security Council, and because it could easily ship gasoline to Iran via its former Soviet Union neighbors (Azerbaijan and Turkmenistan in particular) if sanctions are imposed by the West outside of the United Nations.

Meanwhile, Papandreou journeyed to Moscow — officially to talk about business and military cooperation — as his country faces a wrenching economic crisis and possible default. While Papandreou was in Moscow, his finance minister attended the meeting of the eurogroup — finance ministers of EU member states using the euro — in Brussels. The meeting concluded with no clear plans to offer Greece financial assistance despite a dire situation from which there seems no clear exit. Athens is somehow supposed to raise 33 billion euro ($44.9 billion) by June, with investors becoming increasingly worried that Athens has no real chance of consolidating its budget — which it most probably does not.

The visit to Moscow therefore can only raise eyebrows and spark rumors that the Greek prime minister is in fact going to the Kremlin “hat in hand.” This was an avenue that both Iceland and Serbia took during their economic crises, and each time the EU responded with financial aid of its own to counter Moscow’s rising influence. A Russian loan to Greece — no matter what the actual size of the aid package — would be a psychological blow to EU unity. An EU member state — a eurozone state no less — finding financial assistance in Russia rather than among its fellow euro users would lay bare the EU’s inefficiency, particularly in times of crisis management. Moscow would therefore send a powerful message to Central European states that see the EU as a counter to Russian spheres of influence on their borders.

STRATFOR finds the fact that both Netanyahu and Papandreou are in Moscow — and that they are both asking for a favor — an indication of the growing consolidation of Russia’s power, a fine note to accent the Kremlin’s return to the center of Eurasian geopolitics.

While Russia sits in the catbird seat, China is in a less enviable spot. U.S. Secretary of State Hillary Clinton visited Saudi Arabia on Monday to meet with Saudi leaders and discuss sanctions on Iran — including China’s role. The Americans have attempted to assure China that its oil supplies will be preserved — even amid heightened tensions in the Gulf due to Iranian sanctions — by facilitating a deal with the Saudis to ramp up oil exports to China.

China has shown little inclination to buy into this scheme to wean itself off Iranian oil. In recent months China has not only continued importing from Iran, but also accelerated its exports of gasoline to Iran (which are likely to be a primary target of U.S. sanctions) and hastened deals allowing one of China’s roving national oil companies to produce natural gas in Iran’s giant South Pars field. Beijing has consistently opposed talk of Iranian sanctions, emphasizing diplomatic efforts instead, and variously delaying and downgrading its participation in P-5+1 negotiations since late December.
China is decidedly against Iranian sanctions in the interests of the country’s energy security and economic stability. Iran is China’s third largest oil supplier, providing 11 percent of China’s total — this is reason enough for China to resist sanctions. While sanctions may not specifically target Iranian oil exports, Beijing reasonably fears they could create a chain reaction jeopardizing its oil supplies not only from Iran, but also from the rest of the Gulf, since these shipments pass through the Strait of Hormuz where Iran is most likely to aim any retaliation. While China’s economic growth rate is high, serious vulnerabilities exist in the banking, property and export sectors, all of which the government is attempting to address without triggering a destabilizing slowdown. Now would be an exceedingly bad time for a sudden energy shock.

Moreover, much of the credibility of China’s claims to rising international status rest on its ability to defend smaller states like Iran that are antagonistic to the United States. If China drops Iran at the first sign of American coercion, a host of other states — in Latin America, Africa and Southeast Asia — will rethink whether they can rely on China for support. In such a case, Chinese leaders would struggle to allay domestic outrage at yet another example of acquiescence to the United States, while much of the political capital they have painstakingly built up in recent years through speeches, state visits and investments across the world would be squandered.

Yet there is little China can do to stop the sanctions drive. Unlike Russia, Chinese participation is not a prerequisite to a successful sanctions regime. It is logistically more difficult for China to circumvent sanctions, as the land routes are too long and the sea routes are at least implicitly subject to American naval coercion. This means Washington does not have to negotiate with Beijing, as it does with Moscow, to address its chief concerns and try to win it over. The Chinese are external to the international diplomatic process, and while they can veto a resolution authorizing U.N. sanctions, that would only encourage the United States to lead its allies in taking action outside the United Nations, diluting the influence of one of Beijing’s primary international platforms.

Worst of all for China, an outright rejection of sanctions, or an attempt to undermine them, would result in greater external pressure from an American administration that has already shown its willingness to target China’s economy through trade protections and other tools. Of course, the United States has not yet clinched the deal on sanctions. Much remains to be done, and (crucially) Russia has not committed either way, giving Beijing room to maneuver. Still, in essence, Beijing has no way to stop sanctions against Iran, and to oppose them it must decide if it is ready to withstand the American reaction.

Wednesday, January 13, 2010

Tuesday evening a 7.0 earthquake hit Port-au-Prince, Haiti. Already the poorest nation in the Western hemisphere, the latest reports coming out of major news sources paint a grim picture. Widespread destruction throughout Port-au-Prince, including the partial collapse of the Presidential Palace, evidences a long recovery road. Airport closings have hampered the arrival of needed aid from the international community.

A powerful earthquake shook Haiti on Tuesday, leveling buildings in the capital, Port-au-Prince, and sending panicked residents into the streets, as beleaguered authorities braced for major casualties. The quake, which had a preliminary magnitude of 7.0, occurred about 4:45 p.m. and was centered about 10 miles west of the capital. The U.S. Geological Survey said it was the largest temblor ever recorded in Haiti, and witnesses reported a series of strong aftershocks. “People are out in the streets, crying, screaming, shouting,” said Karel Zelenka, director of the Catholic Relief Services office in Haiti. “They see the extent of the damage,” he said, but could do little to rescue people trapped under rubble because night had fallen.

As 2010 looms on the horizon, RealIntel.com wants to step up our “no-spin reporting of world events” a notch.  We’ll still provide the basic intel we’ve been posting from excellent resources like Stratfor, OSAC, and others, to let you decide what is and what is not important.  However, starting with this report, we’ll also mine the newsboards and video archives to provide issue-based background reports like this one, on the Mexico Drug Cartels, the Southern Border Control Issue and the U.S. effort to stem the tide of Illegal Immigrants.  It’s still pretty much raw intelligence, posted as it comes to us, but with an emphasis on a particular issue:  This time, Mexico.  We’ll lean heavily on Stratfor, our excellent source for common-sense reports, the U.S. State Dept. and USAC, their public news outlet, but we’ll also take a look at other resources that can lend a bit of color to the issue at hand as well.  For now, we’ll link to the video reports on other sites.  While viewing videos in a separate window may prove a little cumbersome for our readers, it also saves the cost of maintaining expensive server space for embedded videos.   Comments are enabled.   Let us know what you think.

Click on the Picture to View These Video Reports

The refusal by the Federal Government to control the US-Mexico Border has led to the deaths of thousands of people on both sides of the border. Even CNN is now acknowledging that open borders have made most of our major cities dangerous and drug ridden. At least 28 billion dollars of drug money flows into Mexico from the US each year, funding an army of illegal aliens that are now terrorizing American cities. Each month of this insane open border's policy, drives the US further in debt and deeper into crime and chaos.

In the continuing drug war in Mexico, the assault weapons they use such as AK-47s and 50 caliber rifles are largely coming from U.S. traffickers at a rate of 2,000 a day. Ben Tracy reports.

The violence associated with drugs in Mexico is a result of factors on both sides of the border. Drug related and cartel violence in Mexico is fueled by demand and guns from the U.S. Reuters' Colin Chapman takes a look at the issues with STRATFOR expert Fred Burton.

Stratfor Special Report:  Securing The Border

Click on the Pictures to View These Video Reports

Part 1: The United States and Mexico face systemic challenges in efforts to secure their shared border from drug cartel violence. In Part 1 of a special report, STRATFOR examines the geographic and political issues that weaken Mexico’s central government and contribute to the strength of the cartels.

Part 2: The United States and Mexico face systemic challenges in efforts to secure their shared border from drug cartel violence. In Part 2 of a special report, STRATFOR examines tactics used in cross-border smuggling and patrol operations and questions of corruption on both sides of the Rio Grande.

Part 3: The United States and Mexico face systemic challenges in efforts to secure their shared border from drug cartel violence. In Part 3 of a special report, STRATFOR examines constraints on U.S. efforts to control crime and violence in the border region.

La Familia Michoacana North of the Border

By Ben West and Fred Burton

In an indictment handed down Nov. 20, the U.S. Federal District Court for the Northern District of Illinois accused 15 individuals of being involved in the trafficking of cocaine and other narcotics in the Chicago area. The 15 were arrested in a nationwide counter-narcotics operation led by the U.S. Drug Enforcement Administration (DEA) dubbed “Project Coronado,” which was aimed at dismantling the drug trafficking network of La Familia Michoacana (LFM), a mid-sized and relatively new drug cartel based in Michoacan state in southwestern Mexico.

The U.S. investigation of LFM has revealed many details about the operation of the group in the United States and answered some important questions about the nature of Mexican drug trafficking and distribution north of the border.

LFM stands out among the various drug cartels that operate throughout Mexico for several reasons. Unlike other drug trafficking organizations (DTOs) that have always been focused on drug trafficking, LFM first arose in Michoacan several years ago as a vigilante response to kidnappers and drug gangs. Before long, however, LFM members were themselves accused of conducting the very crimes they had opposed, including kidnapping for ransom, cocaine and marijuana trafficking and, eventually, methamphetamine production. The group is now the largest and most powerful criminal organization in Michoacan — a largely rural state located on Mexico’s southwestern Pacific coast — and maintains a significant presence in several surrounding states.Beyond its vigilante origins, LFM has also set itself apart from other criminal groups in Mexico by its almost cult-like ideology. LFM leaders are known to distribute documents to the group’s members that include codes of conduct and pseudo-religious quotations from Nazario Moreno Gonzalez, also known as “El Mas Loco” (“the craziest one”), who appears to serve as a sort of inspirational leader of the group.

Unanswered Questions

In April 2009, STRATFOR published a report on the dynamics of narcotics distribution in the United States. It laid out the differences between trafficking (transporting large quantities of drugs from the suppliers to the buyers over the most efficient routes possible) and distribution (the smaller scale, retail sale of small quantities of drugs over a broader geographic area) as well as the various gangs on the U.S. side that are involved in drug trafficking. The report outlined the differences in the resources and skills required to transport tons of narcotics hundreds of miles through Mexico versus picking up those loads at the border and managing the U.S. retail networks that distribute narcotics to the individual buyers on the street.

In our April analysis, we identified several intelligence gaps in the interface between the Mexican-based drug traffickers (such as the Sinaloa Cartel, the Beltran-Leyva Organization [BLO] and Los Zetas) and the U.S.-based drug distributors (such as MS-13, Barrio Azteca and the Mexican Mafia). One question we were left with was: How deeply involved are the Mexican DTOs in the U.S. distribution network? While it appeared that narcotics changed hands at the border, it wasn’t clear how or even whether the relationships between gangs and drug traffickers had an effect on the distribution of narcotics within the United States. Although we suspected it, there was little evidence that showed cartel involvement in the downstream or retail distribution of narcotics in the U.S. market.

Command and Control in Chicago

Now there is evidence. The indictment handed down Nov. 20 in Chicago clearly alleges that a criminal group in Chicago was directly conspiring with the drug trafficking organization LFM to distribute shipments of cocaine. The indictment specifically links the criminal group in Chicago to LFM and labels it a “command and control group” run by someone in Michoacan. While the indictment only referred to this person as “individual A,” we suspect that the unidentified person was LFM operational manager Servando Gomez Martinez, the second in command of LFM. The manager of the Chicago command and control group, Jorge Luis Torres-Galvan, and the distribution supervisor, Jose Gonzalez-Zavala, were allegedly in regular contact with their manager in Mexico, updating him on accounting issues and relying on him to authorize which wholesale distributors the group could do business with in the United States.

These wholesale distributors also appear to have had close ties to the command and control group. According to the indictment, they were allowed to sell cocaine on consignment — they could wait to pay Zavala once the entire load was sold — an agreement that indicates a great deal of trust between the supplier and the retail distributor. It was likely a matter of the LFM commander in Mexico authorizing their involvement and probably was based on an existing business or extended-family relationship. Due to LFM’s ideological basis, its members should be thought of more as adherents than employees. The group does not operate using the same business objectives as most other major DTOs, so we would expect personal relationships to be more valued than strictly business relationships among LFM members.

Another member of the group, Jorge Guadalupe Ayala-German, allegedly operated stash houses in the Chicago area where deliveries of narcotics would come in and shipments of cash would leave. The indictment says Ezequel Hernandez-Patino was responsible for physically delivering the shipments of cocaine to the wholesale distributors, and Ismail Flores with Oscar Bueno were responsible for transporting money south to Dallas, where they would deliver cash proceeds from the sale of cocaine and pick up more cocaine to sell. The indictment does not indicate that Flores or Bueno supplied any other markets between Dallas and Chicago, which suggests that the Chicago-based LFM members were fairly compartmentalized.

Project Coronado

The larger operation from which the Chicago indictment emerged, the DEA-led Project Coronado, was a joint operation with the FBI, the U.S. Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF) and numerous other agencies. It followed several similar nationwide sweeps such as Operation Xcellerator, a multi-year effort to dismantle the Sinaloa cartel’s connections in the United States, and Project Reckoning, which went after a Gulf cartel network in the United States that was trafficking cocaine to Italy. Under Project Coronado, the DEA, FBI and ATF, along with other federal, state and local law enforcement agencies, have made a total of almost 1,200 arrests, seized $32.8 million in U.S. currency and seized 11.7 tons of marijuana, methamphetamines, cocaine and heroin since the operation began in 2005. Dozens of other indictments and criminal complaints (in addition to the Chicago indictment) have been unsealed against associates of the group across the country since Oct. 22, the official culmination of Project Coronado.

The other cases revealed more details about LFM’s operations in the United States: how it trafficked methamphetamines and cocaine from Mexico to Dallas, how a cell in Nashville was supplied by a distribution hub in Atlanta, and how a group in New York had obtained automatic assault rifles, high-caliber pistols and ammunition with the intent to smuggle those weapons back to Mexico to supply LFM. LFM has been responsible for a substantial level of violence in southwestern Mexico, and former Mexican Attorney General Eduardo Morina Mora recently called it the most dangerous cartel in Mexico.

The Northern District of Texas had the most cases as a result of Project Coronado. It appears that Dallas was a major U.S. hub for LFM, where it managed drug shipments from Mexico to other regions (Chicago and Arkansas were specifically mentioned) and the collection of cash from those distributors before shipping the cash back to Mexico. Dallas is a logical hub for such activity because of its proximity to Mexico and its location along Interstate 35 and Interstate 20, which link Dallas to the rest of the United States as well as points to the south. In at least one case, an individual attempting to smuggle four kilograms of methamphetamines to Dallas passed through the McAllen, Texas, border crossing on a passenger bus but was interdicted by police.

Most indictments (including the one in Chicago) pointed out that LFM groups in the United States conducted countersurveillance while moving drug shipments. On one occasion, accused Dallas drug distributor Soto Cervantes changed the location of a meet-up point when he learned that the person he was meeting suspected that he was being followed. The change in location caused the police (who were indeed following the transporter) to call off the surveillance mission in order to not compromise their investigation. As a result, authorities relied primarily on electronic surveillance of the suspects’ communications through wiretaps on home and cellular phones — of which the suspects had many and which they changed frequently.

There were other cases when police were unable to follow suspects due to such surveillance detection tactics, when targeted traffickers called off meetings and changed vehicles in an effort to confuse police. While seemingly simple, these tactics indicate a higher degree of tradecraft and professionalism among the suspects linked to LFM, who don’t appear to be members of run-of-the-mill street gangs. It is unclear if these tactics have been institutionalized in the LFM network, but judging by the frequency that police encountered them in various U.S. cities during Project Coronado, they appear to be a standard practice for many if not all LFM members.

Implications

The details released in the Nov. 20 indictment provide solid evidence that drug trafficking organizations in Mexico (specifically LFM) have established command and control groups inside the United States that report to and receive orders from commanders in Mexico. And this shows that LFM has had an international presence far beyond what we originally suspected and is not just a small-time trafficking group in southwestern Mexico.

Whereas most drug distribution in the United States is carried out by individual gangs serving their own interests and operating on their own familiar turf, the criminal group in Chicago working for LFM was carrying out orders issued by a drug trafficking organization some 3,000 miles away. And based on the interaction the Chicago group had with its contact in Mexico, the use of such tactics as countersurveillance measures, the coordination among groups in different cities and reports from STRATFOR sources within U.S. counternarcotics agencies, it is likely that the individual in Mexico was managing several groups throughout the United States.

Most criminal enterprises avoid this kind of command and control structure for two reasons. First, distribution in a foreign country is not typically in a Mexican-based drug trafficker’s area of expertise. Their interests tend to focus on their own territory, which they can control much more easily due to their familiarity with and proximity to it. Second, as seen in these latest arrests, U.S. law enforcement agencies are much more proficient at thwarting drug distribution operations than Mexican law enforcement agencies are. (LFM has recently proved very proficient indeed at challenging Mexican security forces.) By passing the drugs off to gangs in the United States, major cartels are also able to avoid a great deal of liability at the hands of U.S. law enforcement. In a way, LFM’s efforts to move downstream, farther from the source of the cocaine, mirror those of other, larger Mexican DTOs that are expanding their control over the supply of cocaine in South America as they move upstream, closer to the source.

And this raises the question: Why would LFM want to expand its operations so deeply into the United States when other Mexican DTOs maintain a more superficial presence there? One possible answer is that LFM is much smaller than Sinaloa, Los Zetas and BLO, controls much less territory and gets a smaller share of the narcotics being trafficked through Mexico. By expanding business into the United States, LFM is able to leverage what little control it does have in order to gain access to the highly lucrative retail market. And then there is LFM’s ideological bent, which makes it behave at times more like a cult than a purely pragmatic business.

Our answer to the above question is only conjecture. What is certain, at this point, is that there is now a precedent for Mexican DTOs to have a greater influence over their lower-level supply-chain operations in the United States. The details released in the Chicago indictment provide a better understanding of how Mexican-based drug traffickers impact the drug distribution network inside the United States and prove that at least one, “La Familia,” is taking a very hands-on approach.

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