Caucasus Burning

By THOMAS DE WAAL
FROM TODAY'S WALL STREET JOURNAL EUROPE
August 19, 2008

So much has been left in ruins in the Caucasus in the past week. What chance is there of a salvage operation?

The landscape is littered with wreckage. First South Ossetia was ravaged; now Georgia is experiencing a great tragedy. Amid the wider carnage, the greatest losers are the 25,000 or so ethnic Georgians of South Ossetia. Only a month ago Ossetians and Georgians were buying and selling from one another in South Ossetia by day even as armed men in their villages exchanged fire at night. Now those Georgians face total dispossession, their homes burned by South Ossetian irregular fighters. Around 50,000 Georgians in Abkhazia are still in their homes, but they face a precarious future. These people have the greatest moral right to pass judgment on a long list of culprits.

Russia's guilt is of course the most blatant. The Russian army has unleashed atavistic violence and allowed Ossetians and North Caucasians to follow in its wake, reinflaming interethnic hatreds that had begun to fade after the wars of the 1990s. The cost of this will be there for years and Moscow should pay the price, in terms of both economic compensation for the wreckage it has caused and international opprobrium. On the latter, Germany could take the lead by threatening to cancel the joint Nord Stream project -- a Russian gas pipeline with a political agenda, designed to bypass Moscow's critics in Poland and the Baltic states.

Next in line for criticism is the Georgian leadership, which has now all but lost the two disputed territories. Georgia is a small nation under threat from the Russians, and in the short term Georgians will rally around their leader. But there almost certainly will be a reckoning with their impetuous president, Mikheil Saakashvili.

Since coming to power in 2004, Mr. Saakashvili has been a man in a hurry. His economic reforms are impressive, but he was courting trouble from the start when he promised to win back Abkhazia and South Ossetia within five years. A brief look at the Balkans, Cyprus or Northern Ireland tells you that complex ethno-territorial conflicts need more time to heal than that. Yet Mr. Saakashvili deliberately thawed the (misleadingly named) "frozen conflicts," challenging the Russian-framed peacekeeping operations and moving his security forces closer to Abkhazia and South Ossetia. He kept up the economic isolation of the two territories and rejected any initiatives to open them up -- for example, by allowing the Abkhaz to trade with Turkey -- as a threat to Georgian sovereignty.

His rhetoric was just what the Russians wanted to hear and they moved in to fill the vacuum economically, politically and militarily. Many Abkhaz were unhappy about being swallowed by Russia, but the argument that Moscow was guaranteeing their security trumped all others. Now the Russians are triumphant.

How did Georgia's 2003 Rose Revolution, which was greeted with such euphoria by Georgians, end up like this? I was present at Mr. Saakashvili's first press conference after the revolution. There he said explicitly -- and in Russian -- that in contrast to his predecessor, Eduard Shevardnadze, he wanted "normal relations" with Russia.

Vladimir Putin, pushing first as president and now as prime minister to build the resurgent Russia that we saw rampaging through Georgia last week, played a leading role in this. But it is hard to imagine the wily Mr. Shevardnadze allowing himself to get sucked into a war with Russia.

Many Washington policy makers played their part, too. They loved the idea of a new "beacon of democracy" run by thirtysomething economic reformers astride an important energy corridor and standing up to Russia. But they all too often neglected to pay attention to what Georgia was actually doing. The Georgians basked in American attention and felt emboldened to challenge Moscow even more. When President George W. Bush stood on Freedom Square in Tbilisi in May 2005 and told Georgians, "The path of freedom you have chosen is not easy, but you will not travel it alone," they believed it meant something.

When I asked a senior U.S. official four years ago what Washington would do if Russia attempted a military assault on Georgia, he said, "We won't send in the U.S. cavalry." But now it looks as though this was precisely what Mr. Saakashvili was counting on.

As for Europe, France and Germany might say that their cooler approach to Georgia all along looks wise in retrospect. But they have little to be proud of. The EU had the opportunity to approve a new border-monitoring force for Georgia in 2005, when the Russians blocked the continuation of the old one under the aegis of the Organization for Security and Cooperation in Europe. But France and Germany vetoed the plan. The unarmed force could have been an early-warning system had it been in place this year, and might have helped deter the Russian campaign.

* * *

Few Western policy makers have engaged seriously with the South Caucasus, and they would do well now to ponder the fact that South Ossetia was not even the most dangerous of the region's conflicts. That dubious honor goes to Nagorno-Karabakh, a territory dispute between Armenia and Azerbaijan. There, tens of thousands of troops face each other across 110 miles (175 kilometers) of trenches, and angry rhetoric is strong on both sides. The fragile Karabakh cease-fire is observed by just six unarmed European monitors. If the world wakes up to the danger of the cease-fire breaking, there will have been at least one good outcome from the Georgian tragedy.

Negotiations over the Karabakh conflict have been fruitless so far, but they have come up with a useful formula for squaring the separatist circle. A draft peace plan under discussion would defer the issue of the status of the disputed region of Karabakh itself. Instead, the region would have some interim status short of statehood while other issues, such as the return of Azerbaijani land currently occupied by Armenians outside Nagorno-Karabakh, are resolved and refugees begin to return home.

That kind of solution now looks to be the most desirable one for Abkhazia and South Ossetia. The Abkhaz and Ossetians themselves have far more reason to want to live well with their Georgian neighbors than the Russians do. Giving them some kind of international guarantees and more power to dictate their own futures is the only way to lift the Russian wolf off their shoulders and allow at least some Georgian refugees to go home.

Yet it is probably too late. The Russians now have a tight grip and will try to keep others out. President Dmitry Medvedev said last week that Abkhaz and Ossetians "do not trust anyone but Russian troops...We are the only guarantors of stability in the region."

Answering that charge is a big physical and moral challenge for both Europe and the United States. If they want to fix things in the region, they need to consider a new version of the mass peaceful intervention they made in the Balkans from the mid-1990s, in the form of policemen and peacekeepers, human-rights investigations, and large-scale economic investment. It would be expensive, but in the end it would probably cost much less than doing nothing.

Mr. de Waal is Caucasus editor at the Institute for War and Peace Reporting in London.

The Russo-Iranian Axis

By DANIEL SCHWAMMENTHAL
FROM TODAY'S WALL STREET JOURNAL EUROPE
August 19, 2008

Russia's rape of Georgia requires more than just a rethinking of how the West can protect other former Soviet states from a resurgent Kremlin. Every international crisis with a Russian component now takes on a new dimension. In the case of Iran's nuclear program, this means the European Union's insistence on U.N.-approved sanctions against Tehran may no longer be just naive but willfully negligent.

The EU's faith in U.N.-brokered conflict resolutions rests in large part on the assumption that following the fall of communism, Russia, a veto-wielding Security Council member, shares the West's basic values and interests. As looting Russian soldiers are demonstrating in Georgia, this was a misconception.

If Russia cannot be trusted in its "near abroad," there is little reason to believe it can be trusted any more in the Middle East. To the contrary. Moscow's dealings with the ruling mullahs should have long convinced Europe that Russia doesn't share its goal of stopping the Iranian bomb. How else could one explain Moscow's construction of a nuclear reactor in Iran, its delivery of advanced antiaircraft missiles to Tehran and its refusal to pass anything but the weakest economic sanctions?

And yet, the EU's core assumption has been that we can trust Moscow on Iran. The Russians, so the argument goes, cannot possibly have any interest in a nuclear Iran either. Another misconception.

True, Moscow must be wary of Islamic terrorists getting their hands on nuclear material, given Moscow's scorched-earth war against its breakaway republic of Chechnya, which is majority Muslim. But the Kremlin's support for Iran has probably bought Russia adequate insurance against the possibility of Tehran passing on some dirty bomb to a Chechen rebel.

Instead, Moscow can quite rightly assume that a nuclear Iran will hurt Western interests more than Russia's. And in Moscow's atavistic balance-of-power calculations, as long as the West loses more than Russia, Russia wins.

It is primarily Israel and American troops in Iraq that would be threatened by a nuclear Iran. Tehran's launch of a space rocket on Sunday, though, is yet another reminder that the U.S. homeland and all of Europe may at some point be within its reach as well.

Iran may not even have to use a nuclear device to spread destruction. The Islamic Republic may believe the atomic bomb makes it untouchable, and step up its support for terrorists -- or even launch direct (conventional) attacks on Western and Israeli targets. The Gulf region could also be threatened. Under the security umbrella of a nuclear bomb -- and borrowing a page from Moscow's book in Georgia -- Tehran could claim to come to the rescue of its Shiite brethren in its predominantly Sunni neighbor states.

The worst-case scenario of course remains that the Islamists may use the doomsday device to fulfill an apocalyptic vision of Shiite Islam. Any conflagration in the Gulf would send energy prices through the roof. And this is where Russia's stalling at the U.N. Security Council comes in. It increases Iran's chances of getting the bomb while at the same time it makes a pre-emptive Western attack on Iran's nuclear installations more likely. In either case, as a major oil and gas producer, Russia would stand to profit from the inevitable panic on the energy markets.

Many Europeans still believe that only a U.N. stamp of approval lends collective action moral and legal legitimacy. But clearly, a regime that acts with such brutality and disregard for international norms, as Security-Council-member Russia has in Georgia, has no legitimacy to confer. The U.N. as an institution has also little legitimacy left, as it, partly again due to Russian (and Chinese) vetoes, has stood idly by in the face of genocide in Sudan and Mugabe's crimes in Zimbabwe.

Europeans also argue that Western "unilateral" sanctions are futile because they would allow Russia and other countries to come in and replace Western suppliers. But not every supplier is replaceable. Iran wants Western technology because Western technology is still generally superior to that coming from Russia, China or other emerging economies.

Europe here has both a qualitative an a quantitative edge. The EU is Iran's main trading partner, and Germany and Italy have been particularly busy. Earlier this month it emerged that Berlin has given the green light for a €100 million deal for a German company to provide Iran with three liquefied gas plants.

It would be impossible for Tehran to quickly find adequate alternatives for their European imports. "Around two-thirds of the Iranian industry is to a significant degree equipped with machines and plants of German origin," Michael Tockuss, at that time the director of the German-Iranian Chamber of Industry and Commerce, told German weekly Focus in 2006. "The Iranians are certainly dependent on German spare parts and suppliers."

Moscow's invasion of Georgia rightly shook up the EU. It realized that it borders a ruthless regime that literally gets away with murder -- thanks mainly to its arsenal of nuclear missiles.

Unless Europe wants an even deadlier nuclear power at its southern flank, it will have to stop hiding behind Moscow's veto and tighten the screws on Iran.

Schröder on Georgia

FROM TODAY'S WALL STREET JOURNAL EUROPE
August 19, 2008

As German Chancellor, Gerhard Schröder famously called Vladimir Putin a "flawless democrat." He apparently hasn't changed that opinion. Now on the Kremlin's payroll with a plum job at a Gazprom-controlled consortium, Mr. Schröder is speaking the company line about Russia's invasion of Georgia.

In an interview with Der Spiegel published yesterday, Mr. Schröder blames only Georgian President Mikheil Saakashvili for the war. Asked whether he considers Russia at least partly to blame or its response excessive, the ex-Chancellor is first evasive, "this I cannot and don't want to judge," before claiming that "nobody in Moscow's leadership has an interest in military confrontations." Georgian civilians fleeing marauding Russian soldiers probably disagree.

Mr. Schröder, whose current job is to help build a pipeline to deliver Russian gas to Germany -- a project he pushed through as Chancellor -- denies that Russia wants to annex South Ossetia and Abkhazia. He sounds like a Kremlin official when he cynically adds, "I don't think that there will be a return to the status quo ante."

While seeing no evil in his paymasters, he criticizes "serious mistakes by the West in the policy vis-à-vis Russia," including the planned antimissile defense shield in Poland and the Czech Republic and the presence of U.S. military advisers in Georgia. Mr. Schröder defends the "strategic partnership" between Moscow and Berlin, arguing that in this "multipolar" world, Europe must "create close relations with Russia."

"I don't think much of demonizing Russia. I consider Russia as part of Europe," Mr. Schröder told Der Spiegel. He did not say whether Moscow considers large chunks of Europe as part of Russia.

The late U.S. Congressman Tom Lantos last year called Mr. Schröder a "political prostitute" for "taking big checks from Putin." That's extreme language -- Lantos joked at the time that sex workers resented the comparison -- but Mr. Schröder would be a more credible advocate for the Kremlin's point of view if he weren't on its payroll.

The Chinese Want Property Rights, Too

By LESLIE HOOK

BEIJING

The protest zones are silent, but the city is simmering with dissent. Preparations for the Olympics led to a level of social disruption unlike anything in recent memory. At the same time, traditional avenues of solving problems have been shut down, and police crackdowns have intensified. This has created an Olympic pressure-cooker.

On Aug. 10, the day President Bush went to church here, a man with unkempt hair sidled up to me after the service. "My wife was arrested 100 days before the Olympics," Dong Jiqin murmured, eyes darting with fear.

Mr. Dong and his wife Ni Yulan have been fighting to retain the home they live in, while property developers and police try to force them to leave. Ms. Ni, a lawyer by training, has been helping citizens file lawsuits in land disputes for years, suffering multiple beatings and detentions as a result.

Mr. Dong, 56, who was born in the house, says the property deed is in his grandmother's name and was transferred to him by court order. That hasn't stopped a property company from trying to take control of the land. He says that, on April 15, over a dozen hired thugs showed up in his yard. He shows me where they cut the electrical and phone lines, dug up the house's water pipe, and tore down a shed. He says they even started carrying furniture out the door.

That day he and his wife were taken into detention. He was released a week later, but his wife is still in prison on charges of obstructing official business. Her trial was scheduled for Aug. 4, but postponed because it was so near the Olympics. Mr. Dong still lives in the house, with plainclothes policemen stationed outside to keep an eye on him.

As property prices rocketed -- and big infrastructure projects got underway for the Olympics -- more and more Beijingers were pushed out of their homes by a range of illegal methods, regardless of whether they owned the land. Ms. Ni's case "encapsulates a fundamental issue," Nicholas Bequelin of Human Rights Watch says, "which is that tenants have very few rights in China and that they have been forcibly evicted on an extremely large scale without adequate compensation or avenues for redress."

For centuries China has had a process of informal appeal called shangfang -- the practice of bringing complaints to the officials who run the country. Today, China's communist leaders have an Office of Letters and Visits in Beijing, and traditionally the disaffected have flocked there from around the country to plead their cases.

All this was swept aside by Beijing's Olympics cleanup. Months before the Games began, thousands of petitioners from outside Beijing were sent home or into detention. Across Beijing, suspected dissidents have been placed under increased surveillance. The most prominent were incarcerated.

Wang Yuying and Wang Yuping, sisters, have fought seven years for compensation for the home they were forcibly evicted from in 2001. Since July 20, they have been under 24-hour surveillance. Although they were entitled to compensation and a new apartment, they say that the local police chief claimed the payment on their behalf and kept the money for himself, giving the apartment to his mistress.

"I've petitioned at all the places I could," says the elder sister Wang Yuping, when I chat with them in a public park. Each time a suspected plainclothes policeman saunters by, she sits up straighter and says, "I'm not afraid. I'm just telling you the truth." This is a brave attitude: In October 2006 the sisters' complaints landed them in jail for 10 days.

The younger sister dismisses Olympics "protest parks" as completely fake. The rights group Chinese Human-Rights Defenders reported eight cases of the detention or disappearance of people who applied for permits to voice their dissent in Olympic protest zones. The older sister asks, "Where are the common people supposed to turn?"

Mr. Dong tried to seek help outside the system. The morning I met him at church, he was there to present Mr. Bush with an open letter describing his wife's arrest. In the end, security was so tight he didn't even shake the president's hand.

"I've heard what he has said," Mr. Dong says, referring to Mr. Bush's remarks on human rights. "Freedom is a right that people are born with." As he speaks, he eyes the policemen camped out by his house.

Ms. Hook is an editorial page writer for The Wall Street Journal Asia.

When Henry Met Fannie

There's no rest for a Treasury Secretary in a financial meltdown, as Hank Paulson is discovering. Fannie Mae and Freddie Mac continue to bleed mortgage losses, and so the Treasury chief may soon have no choice but to pull the trigger on his new authority for taxpayers to recapitalize the mortgage giants.

Fan and Fred shares took another header yesterday, in the wake of a Barron's article predicting that a Treasury recap was "almost inevitable." When a single story in one day can take nearly 22% off Fannie shares, and nearly 25% off Freddie's, you know investors are scared to death.

They should be. Two weeks ago the companies added another $3.1 billion in losses to the $11 billion they'd already reported in recent quarters. Both companies slashed their dividends and warned they'd buy fewer mortgages, while being more selective about those they do buy. So much for the assertion -- made so confidently this year by Barney Frank, Chris Dodd and Chuck Schumer -- that Fan and Fred would rescue the mortgage market from the housing slump.

Instead the companies have dug an even deeper hole than have many subprime lenders. Their current run of losses are based in so-called Alt-A loans, aka "liar loans," that didn't require enough proof of borrower net worth. Fan and Fred piled into Alt-A mortgages in recent years as a way to gain market share amid the late, unlamented housing mania. No one knows how many of those loans will go belly-up before the housing market starts to turn, presumably in 2009.

Both companies insist they have adequate capital to ride this out, but they also said this before Treasury and Congress felt obliged to make explicit what had been an implicit taxpayer guarantee. Freddie still says it will raise another $5.5 billion from investors, and good luck with that. Freddie has a negative corporate net worth and a market capitalization -- after Monday's losses -- below $3 billion. Freddie holders, who have lost more than 90% of their investment in the last 12 months, may not want to double down.

Meantime, Treasury claims it has no plans to inject taxpayer money directly into the companies. Even so, Mr. Paulson has quietly hired Morgan Stanley, the investment bank, to look into "appropriate capital structures" if he does decide to sign the blank check that Congress has given him.

Robert Scully, the Morgan banker who will lead the effort, is by all accounts a straight shooter. And he will need to be, given the enormous political pressure he will soon face from Fannie Mae's defenders, both at Morgan and in Washington. Morgan Stanley says it is forgoing any other investment banking business with Fan and Fred while it works for Treasury. But until recently it was among the banks advising Freddie on that elusive $5.5 billion capital infusion.

Morgan Stanley is also home to Kenneth Posner, one of the biggest Fan and Fred cheerleaders on Wall Street. Only last March, the analyst crowed about the "complete defeat" of the "anti-GSE ideologues" -- that is, the people who had been right all long about the reckless risks the companies were taking. Mr. Posner also predicted that Fannie and Freddie would return to breakeven by the third quarter. Mr. Scully shouldn't be caught in the same intellectual area code as Mr. Posner.

A taxpayer recap for Fan and Fred would be far different than most Wall Street deals. Typically, the banker's job is to balance the competing interests of the existing shareholders with the need to raise money at a price the market will bear. That can't be the priority here. If taxpayers have to ante up, the only justification is to protect the larger financial system. Existing Fannie and Freddie shareholders should be wiped out and managers and directors lose their jobs. We think Mr. Paulson should already have eliminated managers and private holders as a price of the recent bailout legislation. But if he lets either survive after taxpayers are forced to inject cash, the Treasury chief should be run out of town.

The new law also creates a new regulator for Fannie and Freddie, and the nominee for that job hasn't yet been named. The current acting director of the newly created Federal Housing Finance Agency, Jim Lockhart, has done a capable job with the limited tools available to him and would be a fine choice. But the Bush Administration needs to act now so the Senate can vote to confirm someone in September -- not wait six months or a year hoping that the crisis will go away.

A taxpayer recap for Fan and Fred can't be a get-out-of-bankruptcy-free card. As a de facto nationalization, any plan should rein in their riskiest operations with a goal of selling their profit-making businesses to the private sector, and perhaps handing what's left of their "affordable housing" mission back to Housing and Urban Development. It's time Mr. Paulson put taxpayers ahead of Wall Street.