Iraq, Iran and the United States

Whose side are they all on?

The Americans and the Iraqis find it hard to read the ambiguities in Iran's policy towards Iraq

IN HIS five years as Iraq's foreign minister, Hoshyar Zebari has often expressed alarm at the prospect of his battered country becoming a cockpit for a power struggle between the Americans and their regional enemies, Iran and Syria. Keep your quarrels away from us, says Mr Zebari, an affable Kurd, who has kept his job longer than any other minister since Saddam Hussein was toppled. Iraq has more than enough on its plate already, he says.

In recent weeks fighting has intensified, with Iraqi and American forces fighting together against assorted Shia militias and “criminal gangs” (in the government's words) linked to Iran—first in Basra, the main port city of the south, and now in the Shia districts of Baghdad.

Basra has since got much calmer. But fierce fighting has continued in the sprawling slums of Sadr City, home to some 2m Shias and a bastion of support for a populist Shia cleric, Muqtada al-Sadr, and his Mahdi Army militia. Iraqi health officials say that more than 1,000 people have been killed since the fighting began in late March. In return, Sadrist militiamen have sent waves of mortars and rockets hurtling into the Green Zone, the fortified district on the west bank of the Tigris river where Iraq's government is situated, as well as the American and British embassies.

Iraq's prime minister, Nuri al-Maliki, a Shia, has repeatedly stressed that the military campaign he launched in March, backed by American and British forces, was not directed against any one faction, certainly not just the Mahdi militia. It was, he said, an effort to impose the rule of law. Iraq's government is setting great store on provincial elections in the autumn, and Mr Maliki says he wants to disarm all the militias before they take place.

In his onslaught on these armed groups, Mr Maliki, not so long ago widely dismissed as weak and sectarian, has won rare support from most of the main political parties across the spectrum—Kurdish, Sunni and Shia. But the Sadrists have cried foul, raising fears among Mr Maliki's backers that prolonged fighting may drag Iran and America more deeply into a conflict that many Iraqis, including Mr Zebari, would rather solve without their involvement. As the words exchanged by America and Iran, Mr Maliki's two key international backers, get angrier, the prime minister and his government face a dilemma.

Indeed, says a European diplomat, a “perfect storm” could brew up, with Iraq's already blighted political landscape being further ruined by battles fought by outsiders. “Iraq is getting caught in the middle and the tensions are affecting it immediately and directly,” says the diplomat.

It is devilish hard to fathom Iran's precise intentions in Iraq. No one can say with certainty how much influence it has on the main political groups, including the one loyal to Mr Sadr, on whom Iran's government seems to blow hot and cold. Nor is it clear why large numbers of Iranian-made weapons are turning up in the hands of Shia militiamen, who undermine a government that Iran seeks to strengthen. This week, Iraqi state television aired images of an Iraqi general in Basra standing by a seized cache of rockets, which he said could have been supplied only by Iran's army. One of Mr Sadr's top men, Salah al-Obeidi, said that a criminal gun-running network that has operated in the region for years probably acquired the arms. “Everyone, even the pro-government forces, has Iranian weapons,” he explains.

Moreover, American and Iraqi forces have tried to draw a distinction between the mainstream units of Mr Sadr's Mahdi Army and what American commanders call “special groups”, who are funded and trained by Iran and have fought on, despite a truce called by Mr Sadr.

Iran's government has fiercely denied the charges, refusing to take part in the next round of talks with American officials on security in Iraq until American troops stop killing innocent people in Sadr City. This week Haider al-Ameri, a senior figure in the Islamic Supreme Council of Iraq, a key party in the ruling Shia-led alliance, annoyed Mr Maliki by saying there was little evidence of direct Iranian interference.

Moreover, Iran has long argued that it is the presence of American troops in Iraq that is most responsible for destabilising both the country and the region. Yet, confusingly, the government in Tehran has endorsed Mr Maliki's American-backed campaign to impose his will on the Shia militias, which is the main reason for the current spate of fighting in Sadr City.

Stirring this diplomatic stew still more, a group of pro-Iranian politicians from Iraq's ruling Shia alliance this week embarked on a bout of freelance diplomacy, flying to Tehran to present the Islamic Republic with evidence of Iranian involvement in recent fighting in Iraq. But the trip achieved little. Iran's supreme leader, Ayatollah Ali Khamenei, refused to see them.

Still, there have been efforts by people close to Iraqi and Iranian centres of power to accommodate each other. In recent weeks Iraq's president, Jalal Talabani, a Kurd, has twice gone to the border between Iraq and Iran to meet Qassem Suleimani, the head of Iran's Quds Force, a special unit of the Iranian army which helps revolutionary Islamist forces in the region, including Lebanon's powerful Shia movement-cum-militia, Hizbullah. Mr Talabani, who has known Mr Suleimani since the Kurdish leader's days in opposition to Saddam Hussein, appealed for Iran's help to reduce tension between Iraq's various militias. Mr Suleimani is said to have agreed, adding some rude words about Mr Sadr.

Have the Iranians turned against Mr Sadr? Or do different parts of Iran's establishment have different agendas? Iraqi intelligence sources say that the Iranians had once hoped to groom Mr Sadr, who has spent most of the past year in Iran, as an Iraqi version of Hassan Nasrallah, the charismatic head of Lebanon's Hizbullah. Mr Nasrallah, whose family is linked to the Sadrs, has become influential and widely admired in the region.

But most rank-and-file Sadrists are fierce nationalists and would strongly object to the idea of boosting Iran's influence. For instance, this week one of Mr Sadr's prominent members of parliament, Hassan al-Rubaei, walked out in protest against the fighting in Sadr City. But he was equally fierce in his condemnation of both the Americans and the Iranians.

China Inflation Quickens; Close to Fastest Since 1996 (Update2)

May 12 (Bloomberg) -- China's inflation accelerated to close to the fastest pace since 1996 as food prices soared and the government slowed gains by the yuan.

Consumer prices rose 8.5 percent in April from a year earlier, the National Bureau of Statistics said today, after gaining 8.3 percent in March. That topped the 8.2 percent median estimate of 22 economists surveyed by Bloomberg News.

Food prices jumped 22 percent, a threat to social stability as the world's most populous nation prepares to host the Olympic Games this summer. Faster currency appreciation, while reducing import costs, also risks attracting more speculative funds into an economy flooded with cash.

``The yuan needs to appreciate at a much faster pace to reduce import costs,'' said Li Wei, an economist at Standard Chartered Bank Plc in Shanghai. ``The inflation situation is very serious and the government needs a clear solution.''

The yuan traded at 6.9830 versus the dollar as of 11.57 a.m. in Shanghai from 6.9833 before the data was released. The currency has climbed about 0.4 percent versus the dollar since March 31 after a 4.2 increase in the first quarter that was the biggest jump since the end of a fixed exchange rate in 2005.

The price of crude oil has doubled in the past year and copper has climbed about 24 percent since the start of this year, adding to China's import bill. Labor costs are also rising.

Food Stampede

The jump in food prices was more than the 21 percent increase in March. Meat climbed 48 percent. Non-food prices climbed 1.8 percent, an unchanged pace.

``Inflation is China's number one economic issue,'' said Donald Straszheim, vice chairman of Newport Beach, California- based Roth Capital Partners.

Three people died in last year's worst food stampede in China, at a cooking oil sale at a Carrefour SA supermarket in Chongqing, underscoring the threat to stability from rising prices. Soaring inflation helped trigger the Tiananmen Square protests that were crushed by the army in 1989.

Central bank Governor Zhou Xiaochuan said May 10 that the government will boost agricultural supplies to cool prices.

Rice, wheat, corn and soybeans have risen to records this year, boosting hunger and malnutrition around the world, according to United Nations Secretary-General Ban Ki-moon.

Economic Expansion

China's economy, the world's fourth largest, expanded 10.6 percent in the first quarter from a year earlier, down from the 11.9 percent pace for all of 2007, as exports cooled and blizzards closed factories. Consumer prices rose 8.7 percent in February, the biggest gain since May 1996.

``Price pressures are still very big,'' said Isaac Meng, senior economist at BNP Paribas SA in Beijing. ``Higher inflation makes people's daily lives harder and weaker growth threatens jobs -- both are important social issues and the government can't ignore either.''

Central banks around the world are grappling with faster inflation and slowing growth. In Asia, Bank Indonesia on May 6 raised interest rates for the first time in more than two years and the Reserve Bank of India last month twice ordered lenders to set aside more reserves.

China's Zhou said May 5 that there's a possibility interest rates will rise. The central bank has kept the benchmark one- year lending rate unchanged at a nine-year high of 7.47 percent this year after six increases in 2007.

Overseas Funds

The government is concerned that rates higher than in the U.S. and the strengthening yuan are attracting overseas money to an economy awash with trade cash -- threatening to fuel inflation.

The People's Bank of China will raise interest rates at least once this year, according to 11 of 15 economists surveyed by Bloomberg News last month.

China's central bank has ordered lenders to set aside more deposits as reserves three times this year, pushing the ratio to a record 16 percent. It also sells bills to drain cash from the financial system.

The government is targeting inflation of 4.8 percent this year, the same as the actual rate in 2007.

The average wage in Chinese urban areas climbed 18.3 percent in the first quarter from a year earlier to 6,524 yuan ($935). Producer prices jumped 8.1 percent in April from a year earlier, the fastest pace since November 2004.

Dollar Climbs on Speculation Losses Are Overdone, Fed on Hold

May 12 (Bloomberg) -- The dollar rose against the yen for the first time in six days as traders judged its losses were excessive given speculation the Federal Reserve will refrain from lowering interest rates.

The currency rebounded from a three-week low versus the yen as a technical chart that traders use to predict price movements signaled the dollar's 2.4 percent decline in the past five days was overdone. Traders have stepped up purchases of options that profit from dollar appreciation and turned bullish in the futures market for the first time since December 2005.

``The dollar had been oversold,'' said Masanobu Ishikawa, Tokyo-based general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd., Japan's largest currency broker. ``For some investors, the dollar is offering a good buying opportunity.''

The U.S. currency climbed to 103.47 yen at 12:50 p.m. in Tokyo from 102.87 in New York on May 9. It gained to $1.5404 per euro from $1.5482. The euro traded at 159.40 yen from 159.21 yen. The dollar will strengthen to $1.50 by Dec. 31, according to the median estimate of 40 strategists surveyed by Bloomberg.

The dollar's 14-day stochastic oscillator versus the yen was 21.9, according to data compiled by Bloomberg. A level below 20 suggests the currency has fallen too fast. The chart measures the closing price of a security relative to its highs and lows during a particular period to try to predict whether it will rise or fall.

Dollar Index

The Dollar Index traded on ICE futures in New York, which tracks the currency against those of six trading partners, rose to 73.199 from 73.050 on May 9. It dropped to a record of 70.698 on March 17. The U.S. currency gained to $1.9481 against the British pound from $1.9539, and strengthened to 1.0470 versus the Swiss franc from 1.0411.

New Zealand's dollar fell to 76.46 U.S. cents from 76.94 cents on speculation slowing economic growth will prompt the nation's central bank to cut interest rates, making the currency less attractive for investors seeking higher yields. The Australian dollar fell to 93.72 U.S. cents from 94.35 cents.

The difference in the number of wagers by hedge funds and other large speculators on an advance in the greenback versus the euro, known as net longs, was 21,315 on April 29, figures from the Commodity Futures Trading Commission in Washington show. There were net-short positions in each of the previous 123 weeks. Net longs were trimmed to 12,512 on May 6.

`Sustained Turnaround'

``There is kind of a sea change taking place at the moment,'' said Mitul Kotecha, head of foreign-exchange research in London at investment bank Calyon. ``It's probably the early sign of perhaps a more sustained turnaround.''

The dollar's rebound gained traction last month after the Federal Reserve Open Market Committee said ``substantial'' rate cuts since September would help foster growth. U.S. employers also eliminated fewer jobs in April than forecast by economists.

Meanwhile, a slide in business confidence in Germany and France, which account for about half the euro-region economy, renewed speculation the European Central Bank will reduce rates this year. An end to lower rates in the U.S. and the possibility of cuts in Europe raises the appeal of dollar-denominated assets.

Futures on the Chicago Board of Trade show an 82 percent chance the Fed will hold its target lending rate at 2 percent at its next meeting on June 25. The balance of bets is for a cut of a quarter-percentage point.

In another bullish signal for the dollar, demand for one- month options that grant the right to sell the euro is greater than for those allowing for purchases. The so-called risk- reversal rate had a 0.44 percentage point premium for euro puts relative to calls on May 9.

As recently as March, demand for call options was greater than put options. On Jan. 28, the premium for euro calls reached 0.45 percentage point, the highest since April 2007.

Asian Stocks Decline on Inflation Concern; Toray, Vanke Drop

May 12 (Bloomberg) -- Asian stocks dropped for a fourth day, set for their longest losing streak in more than two months, on concern rising raw-material costs and a global slowdown will erode earnings.

Toray Industries Inc., Japan's largest maker of synthetic fibers, slumped after saying profit will drop this year. China Vanke Co., the nation's biggest listed developer, fell on concern the government will raise interest rates after inflation accelerated last month. Australian banks gained after Westpac Banking Corp. made an all-stock approach for St. George Bank Ltd.

``Investors should be prepared for more anaemic results,'' said Michael Foo, head of Asian portfolio management at Clariden Leu AG, which manages the equivalent of $123 billion in assets globally.

The MSCI Asia Pacific Index lost 0.1 percent to 148.79 as of 1:40 p.m. in Tokyo, extending a three-day, 2.3 percent retreat and poised for its longest consecutive period of declines since March 5.

The Nikkei 225 Stock Average added 0.5 percent to 13,717.13. Konica Minolta Holdings Inc., the world's No. 2 maker of film used in liquid-crystal displays, surged the most in seven years in Tokyo trading after the company said profit will climb as rivals forecast slower growth.

China's CSI 300 Index fell 0.6 percent. About half of Asian markets open for trading declined. South Korea and Hong Kong are shut today for holidays.

In the U.S., Standard & Poor's 500 Index futures expiring in June rose 0.2 percent recently. The S&P closed lower on May 9, led by financial shares, after American International Group Inc. said it needs to raise $12.5 billion to cover writedowns.

Higher Costs

Toray fell 1.7 percent to 630 yen after the company said higher raw-material prices and slowing demand will reduce profit by 9 percent this year. Mitsubishi Gas Chemical Co., Japan's fifth-largest chemical producer by market value, slumped 3.5 percent to 726 yen after the company said higher fixed costs will probably lead to a 13 percent drop in net income.

Prices for crude oil have doubled in the last 12 months, while coal prices have soared 77 percent in 2008.

China Vanke, the nation's biggest listed property developer, dropped 4.3 percent to 20.93 yuan. Ping An Insurance (Group) Co., China's second-largest insurer, lost 2.8 percent to 62.30 yuan.

China's inflation quickened to 8.5 percent in April, close to the fastest pace in 11 years and exceeding the median estimate of economists for an 8.2 percent increase. Central bank Governor Zhou Xiaochuan said May 5 there's a possibility interest rates will rise. The benchmark lending rate is at a nine-year high of 7.47 percent after six increases last year.

Food Costs

``China's inflation numbers are going to get worse before they get better, mainly due to rising food prices,'' said Arjuna Mahendran, Singapore-based head of investment strategy at HSBC Private Bank, which oversees client assets of about $494 billion including A shares.

National Australia Bank Ltd., the country's largest by assets, advanced 5.6 percent to A$34.05. Commonwealth Bank of Australia, the nation's largest mortgage lender, rose 3.7 percent to $A45.54.

The combined Westpac and St. George would create a lender with about A$500 billion of assets, trailing only National Australia. St. George's shares slumped 28 percent in the 12 months to May 9 as loans to companies including Centro Properties Group soured.

``Any sort of rationalization of the sector reduces competition and can't hurt,'' said Rob Patterson, managing director of Argo Investments Ltd. in Adelaide, which manages $3.8 billion in stocks, including Westpac and St. George.

Konica surged 12 percent to 1,666 yen, the biggest rally since March 2001, after saying net income will increase 1.7 percent in the year ending March 2009 as revenue gains. Mizuho Securities Co. raised its rating on the Tokyo-based company to ``buy'' from ``hold'' following the earnings forecast.

Orix Corp. advanced 7.7 percent to 18,580 yen. Japan's largest non-bank financial company said it expects net income to rise 3.2 percent this business year as revenue climbs 10 percent.

Saturday, May 10, 2008

Bolivia

Battle by referendum

A tactical victory for the opposition

Cheering for autonomy—from socialism

THEIR vote may have lacked legal force, but the thousands of opposition supporters celebrating the approval of an unofficial referendum on regional autonomy held in Santa Cruz, Bolivia's economic capital, on May 4th sensed a political triumph. With four-fifths of the votes counted, 86% backed the autonomy plan. As if to confirm their judgment, the national government of Evo Morales, the socialist president, felt obliged to take out full-page newspaper advertisements declaring the referendum a “resounding failure”.

In theory, the voters approved a plan to set up an elected regional assembly that would assume many of the powers of the central government. In practice it was a warning to Mr Morales not to go ahead with a new constitution that in the opposition's view would enshrine “21st century socialism” and dilute the rule of law by giving equal status to customary justice imparted by Andean Indian caciques. The constitution's text was approved at an ad hoc session of a Constituent Assembly from which the opposition was excluded.

Mr Morales sees his foes as a racist elite clinging to privileges. Government officials busily picked holes in the referendum result, pointing out that since only 66% of voters turned out barely half the electorate backed autonomy. But apply the same logic to the presidential election of December 2005, and Mr Morales would have won 45% rather than 53%. And in some rural areas in Santa Cruz, mobs of government supporters prevented voting by burning ballot boxes.

Three other departments in Bolivia's more prosperous east are due to follow Santa Cruz in holding autonomy referendums in the next few weeks. The opposition hopes that all this will oblige the government to hold talks to amend the constitutional draft before it fixes a date for, yes, a referendum to approve it. “The conditions no longer exist for the government to impose its constitution and if it tried it wouldn't last more than a few days,” says Oscar Ortiz, an opposition leader who heads Bolivia's senate.

César Navarro, the parliamentary leader of Mr Morales's Movement to Socialism, agrees that “adjustments” in the draft constitution are inevitable. But Mr Morales's more radical supporters disagree. Bolivia remains deeply divided. But the opposition now reckons it has the initiative again.