Tuesday, February 27, 2007

Take the Money and Run

Take the money and run...

That’s what appears to have been behind the crash of the Shanghai stock market on February 27.

In early February, Time did a good job of describing the liquidity-fueled stock bubble in China, which looked just like the last stock market bubble in China, and the one before that.

Last year 2.4 million investors began trading stocks through the Shanghai exchange, a 250% increase in new accounts. That's an average of about 7,000 a day, a flood of fresh blood from san hu (as the Chinese call small investors) that is making seasoned traders nervous. "When you see shop assistants and taxi drivers racing out to borrow money to buy stocks, you've got trouble," says commodities guru Jim Rogers. "That's the market sucking in a whole lot of neophytes priming to get slaughtered."

When that article was written, the average P/E ratio on the Shanghai Stock Exchange was 45, compared to 18 for the NYSE.

And it had gone up since then, with the index crossing the 3000 mark and setting a new record on the first trading day after Chinese New Years’.

To my mind, there are only two kinds of people who continue to pour money into an overvalued market like this: cretins and criminals.

The cretins never know when to stop.

The criminals, on the other hand, know when a good thing is about to come to an end.

Some observers apparently thought that the rumor of an impending capital gains tax was enough to end the party.

I tend to attribute the crash to reports of an impending government crackdown against illegal bank loans i.e. bank loans taken out for ostensibly for business and capital construction purchases but diverted to stock market speculation.

This is probably as close to a smoking gun as we’ll get, from China Daily on January 30:

China's banking regulators have banned commercial banks from giving loans for stock investment and to investigate and call in all loans suspected of being used for such investment.
The China Banking Regulatory Commission (CBRC) would dispatch officials to examine loans at all commercial banks after the Spring Festival, which will fall on February 18, said an official with the China Banking Regulatory Commission, who declined to identified.

A crackdown right after Chinese New Year.

Just when the market crashed.

How about that.

The first thing the banks do when they hear about a possible audit is to try to call in suspicious loans and clean up their books; and that would be the signal for the speculators to realize their gains and get out of the market.

As to why the loss of 8% in market capitalization on a highly speculative bourse with minimal foreign exposure would give the New York Stock market the heebie-jeebies: it would be a dismaying indication of the tangential bad news that U.S. traders were looking for to confirm their own pessimism.

If I were in the U.S. markets, I would worry less about a much-needed $100 billion correction in Shanghai, than I would about the absolutely catastrophic news that the OMB was correcting its growth estimate for fourth quarter 2006 U.S. GDP from a heartening 3.5% to a dismal 2%.

That’s an overestimate of 75%, representing a contraction in anticipated GDP of perhaps $50 billion for the quarter, with a commensurate reduction in profits translating into a shrink in market capitalization of perhaps $200 billion based on real world—as opposed to speculative—valuation.

And it’s a sign that the U.S. is continuing to plod into a recession instead of pulling out of one.

For China, on the other hand, the crash is good news for everyone except, inevitably, its mismanaged banks, which have probably accumulated a fresh inventory of funny paper for their bad debt portfolios.

Fewer loans are written, macro control of the runaway economy is strengthened, inflationary pressures are reduced, the hemorrhaging of money from productive to speculative endeavors is staunched, and taxi drivers and shop assistants learn a salutary lesson about the risks of capitalism.

The big money players, I suspect, didn’t get skinned.

They took the money and ran—away from the stock market and back to the bond market and banking system.

That’s something I suspect doesn’t bother the government one bit.

Friday, February 23, 2007

Won Man, Won Job: Mark Wallace’s Quixotic Crusade Against the UNDP in North Korea

Update: The Wallace fracas jogged my memory of another dust-up in January 2006 featuring a Bush appointee on North Korea with impeccable conservative credentials but less-than-apparent qualifications as a diplomat—Jay Lefkowitz, Special Envoy on Human Rights in North Korea.

About the same time Wallace was leaking his UNDP letters to the Wall Street Journal, Jay Lefkowitz wrote an op-ed in the Journal calling for actions against North Korean labor exports (or as he characterized it, slave labor), both overseas and to the Kaesong Industrial Park, again citing their purported link to North Korea’s nuclear programs as an excuse for another effort to put economic pressure on Kim Jung Il’s regime.

Via One Free Korea:

These countries contract labor through historical — and even new — agreements with the regime of Kim Jong Il. Because the North Korean government takes a major portion of workers’ salaries, these arrangements provide material support for a rogue government, its nuclear ambitions, and its human rights atrocities.

So it looks as if the Boltonians saw the handwriting on the wall—the Bush administration’s commitment to sweeping aside both human rights rhetoric and John Bolton’s push to cripple North Korea with a de facto economic blockade for the sake of a quick nuclear deal—and, in a defiant final salvo let fly with the last remaining weapons in their arsenal.

I don’t normally expect to find myself on the same page with One Free Korea, but the Bush administration’s treatment of the North Korean human rights issue was bewilderingly cynical, even before the November 2006 electoral meltdown that triggered the abrupt change in direction away from confrontation.

Jay Lefkowitz, whose previous contribution to public policy had been the (presumably intentional) botching of the science on President Bush’s stem cell initiative that made research on the subject at the federal level impossible, was obviously—and extremely belatedly—appointed to the human rights envoy post as a sop to the evangelical base (see
At Long Last, Lefkowitz for details).

But this appointment was
apparently an empty honor and only a part-time job for Mr. Lefkowitz, who is working as full time in his litigation specialty at a law firm in New York City, and has reportedly declined two offers to return to the White House.

The United States envoy for UN reform, Mark Wallace, caused a stir in January by leaking an exchange of letters between him and the UN Secretariat over aid programs involving North Korea.

Wallace wrote:

"Unfortunately, because of the actions of the DPRK government and the complicity of UNDP, at least since 1998 the UNDP-DPRK program has been systematically perverted for the benefit of the Kim Jong-il regime -- rather than the people of North Korea."

Apparently, Wallace didn't have any evidence to back up this allegation, but was demanding an audit to try and find some.

Wallace’s complaint promised to kill two birds with one stone.

On the one hand, he was fulfilling his job description by engaging in some UN-bashing (UN reform being a right-wing bugbear and the inspiration for Wallace’s post).

On the other, he was advancing the Boltonian policy of using alleged support of its nuclear program as a pretext to cut off North Korean access to any outside money, legitimate or illegitimate.

By calling for an audit, Wallace was able to freeze UNDP programs in North Korea (which the US refuses to contribute to anyway) at least until the review is completed in March.

Now, feeling their post-Six Party Declaration oats, the North Korean envoy to the UN fired back...with a nasty letter, accusing the US of “dirty” political motives.

But [North Korean U.N. Ambassador Pak Gil Yon] said if the audit "is to serve the attempt by the United States to politicize international aid to the Democratic People's Republic of Korea, we will not tolerate it and the consequences will be severe." (Michelle Nichols, N. Korea accuses United States of hostility, lies, Reuters, January 22, 2007)

I imagine the North Koreans believe that, with the U.S. in a desperately conciliatory mood after the February 14 deal, Pyongyang has a chance of rolling back the de facto sanctions—like the tie-up of its (largely legitimate) funds in Banco Delta Asia-- that extend far enough beyond its nuclear program to constitute blatant harassment.

It’s interesting to revisit the UNDP uproar and the rhetorical contortions involved in this exercise of anti-diplomacy through the pages of the Washington Post.

Washington Post, January 19, 2007 headline:

US says UN Agency aided North Korea

Well, the U.N. Development Program is supposed to do aid; that’s its job. No clarity yet.

Problems continue in the lede:

The United States accused a U.N. agency of funneling millions of dollars in cash aid to North Korean leader Kim Jong Il and questioned if the funds had been used for other activities including nuclear weapons development, U.S. officials said Friday.

The UNDP makes payments to foreign governments and suppliers; that’s its job.

Finally we get closer to the nub:

The program, known as UNDP, said the use of cash for its operations in North Korea "in difficult circumstances" was approved by its executive board.

Ah, so the problem is the UNDP is handing out cash.

No, not quite:

UNDP Associate Administrator Ad Melkert ...said that by March 1, all hard currency payments to the government, national partners, local staff and suppliers would be replaced by payments in North Korean won.

So, the problem is that the UNDP is handing out forex cash payments.

No, that’s not quite it, either:

U.S. officials ... raised concerns that the cash might be misused, possibly for Pyongyang's nuclear program.

A Jan. 4 letter from Wallace to UNDP Administrator Kemal Dervis raised "U.S. concerns that UNDP has transferred hard currency directly to the regime of Kim Jong Il."

Finally, we get to the bottom of it! The US believes that North Korea is taking the forex cash the UNDP is laying out, and using it to fund the nuclear program.

Well, maybe not.

Acting U.S. Ambassador Alejandro Wolff said the United States is still seeking answers and doesn't know the extent of the problem, or how much money was involved.

So there might not even be a problem at all. But exactly how much money is there slopping through the UNDP system that may or may not be diverted to the North Korean nuclear program?

...from 2001 to 2005, UNDP spent an average of $2.3 million annually on both program and administration, including approximately $100,000 annually on local salaries.


In response to this politically-motivated brouhaha, the UNDP takes prompt action by knuckling under and promising to pay the fees, salaries, and local contracts in safe, worthless North Korean won.

Big success! But...

The North Korean won is not a hard currency that can be easily used to buy luxury goods or weapons parts _ but Melkert stressed that the only place to buy the local currency was from the country's central bank.

So instead of giving the forex half a chance of disappearing directly into the pockets of some local staff or contractor not affiliated with the nuclear program, it will get deposited directly into Kim Jung Il’s bank.


Irony, as they say, abounds.

Mark Wallace is no stranger to the diversion of government funds to unintended and possibly underserving destinations.

His qualifications for the UN post:

Serving as the lead attorney for the Republican Party in the Palm Beach recount of 2000, and acting as National Deputy Campaign Manager for Bush-Cheney ’04.

Wallace and John Bolton had shared precious moments together on the frontline of the battle for freedom and democracy, Bush-style.

I had forgotten this nugget:

Bolton... finding himself in South Korea on election night, contacted former Secretary of State James Baker in Texas to see how he might lend a hand. The reply: Go to Florida.

''I think, frankly, most of the people who did it just went down there by instinct,'' Bolton said. He said he received no legal fees, although the campaign paid his hotel bills and other expenses.

Bolton was part of the legal team and a ballot observer in Palm Beach County. Then he rushed to Tallahassee as the recount battle reached higher courts. It was his role, on Saturday, Dec. 9, 2000, to burst into a library where workers were recounting Miami-Dade ballots and relay news of the U.S. Supreme Court's stay in the on-again, off-again presidential recount.

''I'm with the Bush-Cheney team, and I'm here to stop the count,'' he was quoted as saying in news reports at the time.

Mark Wallace is a Florida lawyer who “specialized in commercial and civil litigation” and charter schools, and is close to Jeb Bush, going way back to 1994.

If the Bush family dynasty makes its way to a third presidency, I guess we’ll be seeing more of Mark Wallace.

Hopefully not at the UN.

Wednesday, February 21, 2007

Mini-Summit in New Delhi: India, Russia, and China Explore a Continental Alliance

America’s campaign against Iran may result in an undesirable by-product: a regional alliance of Russia, China, and India.

Foreign ministers of these three countries met in New Delhi for a mini-summit and issued a Joint Communique concerning their shared desire to work together on energy, terror, security, and trade.

Although carefully stating that their cooperation is not aimed at any one country (read “You-Ess-Aye”), there are clear implications for U.S. policy in the Middle East.

As the Communique stated:

They reaffirmed that trilateral cooperation was not directed against the interests of any other country and was, on the contrary, intended to promote international harmony and understanding and find common ground amidst divergent interests. They also emphasized the strong commitment of India, Russia and China to multilateral diplomacy.

The Reuters report connected the dots between Putin’s speech at the Munich Security Conference—which deflected a planned beat-on-Iran session with a fire-eating attack on destabilizing U.S. foreign policy—and the New Delhi meeting:

Putin recently made headlines by accusing the United States of fuelling a new arms race. He says U.S. domination in the post-Cold War world order needs to take account of new centres of powers like China, India and Russia.

"The whole world recognises that problems and conflicts must be solved by common efforts," Lavrov said, adding that the three foreign ministers discussed the Iran nuclear standoff, Iraq and West Asia. (Alistair Scrutton, India, China, Russia call for fairer world order, Reuters, Feb. 15, 2007)

According to a think piece by RIA Novosti’s political commentator Dmitry Kosryev, the three-way meetings were the brainchild of Russian Foreign Minister Yevgeny Primakov.

Kosryev describes the biggest success of the group as follows:

In 2006, the three countries successfully dealt with the situation created by the U.S.-Indian "nuclear transaction." Many people in Moscow and Beijing were ready to believe private Washington experts who said the ultimate goal of the U.S. was not to get a foothold on the Indian market of nuclear energy in order to save the dying American sector, but to use India as a bulwark against the rapidly growing influence of China and Russia.

In other words, the world's only superpower, which was losing its grip on things, allegedly intended to form a strategic alliance with a rising power of tomorrow spearheaded against other future powers.

The three countries used their meetings, including the G8 summit last summer, to get a handle on the situation. They eventually agreed that India had not lost its much touted wisdom and was unlikely to surrender its independence in a race for questionable benefits. This was their main achievement. (Dmitry Kosryev, Russia-China-India: diplomats' ties should encourage business, RIA Novosti, 2/14/07)

Discounting for Slavic delusions of grandeur, I would take that as confirmation that the Bush administration’s first nuclear giveaway—I guess you could call it the “non-proliferation semi-optout”—has not produced a particularly faithful or responsive U.S. client in New Delhi. Not a good omen for the North Korea deal.

If Putin can meld Russia, India, and China into an Asian bloc—something that has been traditionally regarded as impossible, given the deep and rather recent antagonisms between the three countries—it will be a strategic realignment that will dwarf anything that President Bush can accomplish on the continent.

Given the high profile that North Korea has occupied in the Bush foreign policy universe, it is easy to draw the erroneous conclusion that we have a coherent policy for Asia.

As I’ve argued elsewhere, in the absence of clear successes for Bush’s policy of transformation through confrontation either in Iraq or in North Korea, “obstinacy has morphed into obtuseness” and the United States spends a lot of time spinning its wheels in pursuit of unrealistic or impossible goals, while ignoring a growing global consensus concerning what the region really wants and needs.

America’s all-or-nothing hysteria concerning the supposedly existential Iran threat has already alienated Russia and China and is making their work in South Asia easier.

India does not view Iran as a threat, and, in fact, coordinates with Iran on key issues, such as preventing the resurgence of an anti-Shi’ite (and pro-Pakistan) Taliban in Afghanistan.

Mindful of its own less-than-transparent history as operator of a destabilizing, covert nuclear weapons program, India would be happy to cut Iran some slack on its nuclear ambitions—if the U.S. wasn’t breathing down its neck.

Continual U.S. pressure meant to drive a wedge between Iran and India over the nuclear issue, and to sabotage a historic and economically significant pipeline linking Iran, Pakistan, and India have also evoked a weary feeling of resentment in India.

U.S. actions tend to reinforce the perception that a regime-changed Iran that will be economically and strategically integrated into the U.S. security structure in the Middle East offers very little to India.

Russia and China are cleverly exploiting dissatisfaction with the U.S. demand that Asian countries forego their own energy security in order to help Washington pressure Tehran over its nuclear program.

Through a combination of pipelines and politics, Moscow and Beijing are proposing to midwife a shift in Eurasia’s economic center of gravity away from Europe and the Middle East, and integrate China, Central Asia, and South Asia—potentially including Iran--in a new, interesting, and powerful way.

It’s an attractive vision for countries that normally see their global aspirations take second place to the needs of the Western democracies and Japan. And it remains only a vision—one that could disappear in the face of energetic American opposition, a collapse in oil prices, political unrest, or another catastrophic war in the region, or all of the above.

One can anticipate that behind the scenes there was general agreement among the three nations that muddling through the Iran situation peacefully would be infinitely preferable to another polarizing and destabilizing war on the continent under U.S. leadership.

But the unrealized potential of a North-to-South Russia-China-India axis is countered by the reality of America’s insistence on imposing its will on the region through diplomatic, economic, and military measures.

Pressures on China, Russia, and India to disregard their own energy and strategic interests and toe the U.S. line on Iran are intense.

Russia and China are almost certain to resist, and will encourage India to say No to the United States at the critical moment.

In the end, New Delhi will probably exercise its well-known non-aligned caution and take an equivocal stance that will please no one and change nothing.

Nevertheless, the American insistence on armtwisting Asia to do something it is extremely unwilling to do—sanction Iran—betrays a certain amount of self-defeating blindness on our part.
Looking at the lack of enthusiasm for confronting Iran and the expanding cooperation of the three of the largest nations of the world to the exclusion of the United States, it might be time for somebody in Washington to question if confronting Iran is worth the cost—or even if the Middle East is really where the key strategic game of the 21st century is going to be played out.

The text of the Communique is available in English at India’s Ministry of External Affairs website.

Some of the key points were:

Multilateralism good.

The UN gets a big plug as an equitable dispute resolution mechanism (as a rebuke to the U.S.-led “coalition of the willing” model):

They expressed their conviction that democratization of international relations is the key to building an increasingly multi-polar world order that would be based on principles of equality of nations - big or small, respect for sovereignty and territorial integrity of countries, international law and mutual respect. The Ministers acknowledged that the UN is an appropriate instrument for promoting and attaining such a world order.

India’s aspirations to a permanent Security Council seat are discretely boosted, but not in a way that Japan and the other members of the G-4 can come along for the ride:

[T]he Foreign Ministers of Russia and China reiterated that their countries attach great importance to the status of India in international affairs, and understand and support India’s aspirations to play a greater role in the United Nations.

Terrorism bad.

The “war against terror” is welcomed by the multi-ethnic empires of Russia, China, and India as a highly useful formula for regional security and national stability in the face of ethnic unrest and separatist movements.

Russians can continue to beat up on the Chechens, India on the Kashmiri separatists, and China on the Tibetans and the Uighurs. No double standards means as long as the United States is conducting a bloody anti-insurgency campaign in Iraq and using extra-legal measures to pursue terrorists around the world, we’ve moved into the big glass house and can’t throw any stones.

They agreed that there can be no justification for any act of terrorism, irrespective of motivations, wherever and by whosoever committed. They stressed that selective approaches in counter-terrorism cannot yield sustainable results and it should be combated in a consistent, sustained and comprehensive manner without any double standards.

India underlines its non-aligned status by considering an observer seat (but not membership) in the Shanghai Cooperation Organization.

While welcoming India’s joining the Shanghai Cooperation Organization (SCO) as an observer country, the Foreign Ministers of Russia and China stated that they would actively facilitate early realization of mutually beneficial contribution of India to the SCO.

Making money is good.

The Ministers paid specific attention to the high potential of trilateral cooperation and synergy in the economic field.

This was fun. We’ll do it again next year.

The Ministers expressed satisfaction at the results of the trilateral meeting in New Delhi and agreed to hold their next meeting in China.

I apologize for the absence of links. I found Blogger extremely balky today.

Gambling: That Chinese Family Value

An article in the February 21 New York Times by Steve Friess, Las Vegas Adapts to Reap Chinese New Years’ Bounty, documents the huge financial impact of Lunar New Year celebrations on Las Vegas.

An amusing element of the article concerned the attempt to reconcile a travel-and-gambling binge with Chinese 春节 traditions:

“The Chinese New Year has always been a time for people to get together and play games, to celebrate good luck and good fortune,” Mr. Huang [a travel agent based in Las Vegas] said. “People like to get together and spend substantial amounts of money. Vegas helps keep up the tradition.”

That’s a new way to keep up tradition.

My memories of Chinese New Year’s in the good old days are quite different. I particular recall a frigid Lunar New Year spent in Taiyuan in the early 1980s when the entire town shut down and there wasn’t an open shop or restaurant to be found. The guy who tended the boiler in the hotel went home to make dumplings, as did almost everyone else, and I spent the holiday sleeping in my coat and eating boiled noodles.

Dining options for the New Years' reveler today are a little more varied:

It is not unusual for a family to spend more than $20,000 for a Chinese New Year dinner, said Richard Chen, the executive chef at the Wing Lei restaurant in the Wynn Las Vegas resort, which has imported abalone at $2,226 a pound and bird’s nest at $1,600 a pound for this year’s festivities.

Playing mah-jong at home all night with one’s family is apparently no match for the lure of dropping a bundle in a glitzy casino. Reportedly, there was more money bet in Las Vegas over the first weekend of Chinese New Year than there was on Super Bowl weekend.

China’s place at the center of the gambling universe appears secure.

The article quotes a casino type describing Chinese gamblers “as the best and highest quality” in the world, which I assume means they lose big, quickly, and enthusiastically, and somehow are always able to come up with more money so they can come back and lose again.

Win or lose, wherever you are...Happy New Year.

Monday, February 19, 2007

Setting Sun: Shinzo Abe and the Diverging U.S.-Japan Relationship

One element that continues to amaze is how cavalierly the United States threw Shinzo Abe under the bus while negotiating the North Korea agreement.

The abductee issue—which Abe had ridden to power and which forms the core of his image as Japan’s new generation assertive foreign policy hard case—was dismissively pushed off to the working groups.

While President Bush poured praise on the Chinese for facilitating the deal, Japan was left as the odd man out, refusing to join the energy aid program.

And it’s not as if Abe extracted any political capital by packaging this embarrassing outcome as a piece of principled intransigence.

Unwilling to denounce the deal, he meekly asserted that, despite its absence from the North Korean consensus, Japan was “not isolated”.

As reported in the New York Times:

Critics said Tokyo’s narrow focus on [the abductee] issue, seemingly at the expense of regional stability, would leave it isolated.
“We must not be isolated and we are not in fact isolated,” Mr. Abe said in Parliament. “Other countries understood our decision not to provide oil unless progress is made in the abduction issue.”(Norimitsu Onishi, South Korea and Japan Split on North Korea Pact, New York Times, Feb. 15, 2007)

Despite Prime Minister Abe’s protestations, all is not rosy.

Bloomberg reported:

Opposition politicians said Japan was ``out of the loop'' because the agreement failed to address the issue most important to the Japanese public: North Korea's kidnapping of Japanese citizens three decades ago.
The agreement signed in Beijing yesterday ``limits Japan's options regarding the abduction issue,'' said C. Kenneth Quinones, former U.S. State Department director of North Korea affairs and a professor at Akita International University in Japan. Abe ``has virtually no leverage with either Pyongyang or other six-party talk participants.''

Now, Abe—whose government was making noises last summer about pre-emptive strikes on North Korean missile facilities in the great American tradition—doesn’t look like our sheriff in North Asia. He looks like Barney Fife.

In a February 15th article entitled With U.S. shift, Abe’s N. Korea Containment Strategy Falls Apart, Asahi drove another nail in the coffin:

Prime Minister Shinzo Abe's containment policy for North Korea--a stance that helped him vault to power--is quickly crumbling.

The agreement reached Tuesday at the six-party talks in Beijing, in which North Korea would freeze its nuclear program in exchange for energy aid, shows that Washington has softened its stance toward Pyongyang.

That is bad news for Abe.

The prime minister continues to assert that Japan will not provide energy assistance to North Korea until the issue of Pyongyang's abductions of Japanese citizens is resolved.

But Abe's words now carry less weight compared to last year, when Japan and the United States were closely consulting on containing North Korea following its missile launches and nuclear test.

"While I would not say Japan has had the ladder taken out from under it, there is no denying that there has been a change in the tide," a senior official in the Cabinet Secretariat said.

An important multi-part article in Yomiuri has explored the rapidly growing divergence between Japan and the United States, as exemplified by the negotiations with North Korea.

According to the report, it all started with the cataclysm of the U.S. mid-term elections, which forced the Bush administration to turn away from the confrontational policies of the neo-cons to a dovish negotiated track led by the State Department:

According to sources in Washington, shortly after North Korea conducted a nuclear test, Bush, Vice President Dick Cheney, presidential aide Stephen Hadley and other top government officials held a secret meeting with U.S. experts on North Korea and China on Oct. 25. During the meeting, they did not discuss possible diplomatic solutions to the nuclear crisis, but rather confrontation strategies, including a scenario of toppling the Kim Jong Il regime with China's involvement and cost estimates for military options, the sources said.

However, the Bush administration found itself in a changed environment after the Republican Party suffered a major defeat in midterm elections on Nov. 7.

Then Defense Secretary Donald Rumsfeld and then Undersecretary of State Robert Joseph, as well as Bolton, who was the U.N. ambassador at the time, resigned or were replaced, prompting a drastic review of the Bush administration's diplomatic and security policies.

The U.S. policy on North Korea, which resulted in stalled talks on nuclear disarmament and eventually allowed the country to carry out a nuclear test, was forced to make a major shift from confrontation to dialogue.

Assistant Secretary of State for East Asian and Pacific Affairs Christopher Hill, the chief U.S. negotiator at the six-party talks, has been backed by dovish officials in the administration, mainly those at the State Department.

In a key parting of the ways the U.S. decided to identify non-proliferation—rather than denuclearization—as the focus of the North Korea negotiations.

Differences have become apparent between Japan and the United States over policies toward North Korea since the country's nuclear test on Oct. 9.

In early November, U.S. officials, including Robert Joseph, then undersecretary of state for arms control and international security, visited Japan.

The very first thing they said was they would seriously address nuclear nonproliferation.

"We were quite disappointed because the Japanese side was planning to discuss how to apply pressure on North Korea toward the country's abandonment of its nuclear programs," a source at the Prime Minister's Office said.

The suddenness of the switch, the obvious flaws in the deal, and the violence it did to the interests of our key ally in the region support my contention that the conciliatory posture of the Bush administration at the North Korean talks was a strategic fire sale: a matter of short-term tactical urgency driven by the mid-term electoral disaster.

Meant to buy the Bush administration time and diplomatic credibility, it resulted in a hastily concluded deal that will either fall apart because of its own flaws or be discarded once the Bush administration feels that its diplomatic options and freedom of action as a unilateral superpower have been restored.

What is most striking is how casually Japanese prestige and interests were sacrificed, at a time when Prime Minister Abe could least afford it.

At this juncture, facing an important July by-election that may determine whether or not he has the political clout needed to effectively rule the LDP and run Japan, the last thing Abe needed was to look superfluous and out of the loop.

An appearance of callowness, a string of scandals, and verbal gaffes by cabinet ministers who Abe is apparently unable to control or openly rebuke have combined to erode his popularity from 70% after his selection as Prime Minister, to the 40s today.

And instead of dancing a minutely choreographed minuet of bad cop and badder cop with the United States in dealings with North Korea and over Taiwan, Japan finds itself like a bum dancing without music as the U.S. strides off in search of a more useful partner--China.

A visit to Japan by Vice President Richard Cheney, keeper of the neo-conservative flame, would normally be expected to result in affirmation of the creed of confrontation not compromise regardless of the political winds blowing in Washington.

But the meetings will be shadowed by the remarks of Defense Minister Fumio Kyuma, who had the temerity to criticize the Iraq was as “a mistake”.

Kyuma is an odd choice as Japan’s first Defense Minister. Born in Nagasaki and considered something of a dove, he is obviously ambivalent about the ABM project that is meant to turn Japan into the front line of defense against North Korean missiles:

The government wants to permit the defense forces to shoot down any North Korean missile headed for the U.S. Kyuma demurs, citing the constitutional prohibition against "collective defense" and technical reasons.


As a result of the Iraq gaffe, Vice President Cheney refused to meet with Kyuma during his visit, effectively painting a bull’s eye on the Defense Minister’s back and begging the question, Why hasn’t Abe fired this guy? or in bureaucratic-speak, Why hasn’t Kyuma accepted responsibility for damaging relations with the United States and tendered his resignation?

Apparently, removing Kyuma from the Cabinet entails a political cost that Abe is unwilling to bear.

Is it because of Kyuma’s loyal service in promoting Koizumi’s agenda and Abe’s elevation to prime minister? The importance of his faction? The weakness of Abe’s administration, which can ill-afford another embarrassing resignation?

Or is there enough ambivalence in Japan concerning the security relationship between the U.S. and Japan that Kyuma’s remarks resonate with the Japanese public and would make his removal another indictment of Abe’s fecklessness in dealing with the United States?

In addition to the divergence on the Iraq and North Korea issues, the United States has shown itself to be less than enthusiastic in backing Japan’s campaign for a permanent Security Council seat.

Another major source of friction in the alliance is Okinawa. Chalmers Johnson describes the massive U.S. infrastructure—which is used for force projection in the region and not for Japanese defense—as follows: “thirty-eight [bases] are located in Okinawa, where they occupy some 23,700 hectares or 19 percent of the choicest territory of the main island. Okinawa is host to some 28,000 American troops plus an equal number of camp followers and Defense Department civilians”.

The Koizumi government cut a deal with the United States for a realignment plan that would send 8,000 Marines to Guam, and relocate an airfield, but leave the massive military footprint on the island group largely unchanged.

Despite efforts to depict Okinawa as a land of U.S.-Japanese amity, the bases are no bonanza for the prefecture, whose unemployment rate is twice the national average. Crime, crowding, crashes, and noise issues are continual sources of resentment. In 2006, local approval of the central government’s plans for the bases polled at 14%. The only thing that separates the various political figures in the prefecture on the issue of the U.S. bases is the relative degree of their disapproval.

Relocation of Marine air operations from an urban base in Ginowan to a new field to be built at Nago in northern Okinawa was agreed in 1996 and scheduled to be completed within 5 to 7 years, but the Okinawans have unenthusiastically dragged their feet on the issue and nothing has happened, to the undisguised anger of the U.S Department of Defense. Eric Johnston of the Japan Times provides an excellent overview of the contentious and miserable process.

When Tokyo’s chosen candidate for governor of Okinawa, Nakaima Hirokazu, won his election on November 19, 2006, the project was finally supposed to get on track. But Hirokazu immediately came down with a case of cold feet, announcing he wanted the Ginowan base closed within three years—long before any replacement base would be available at Nago. Kyuma, instead of trying to shove the deal down his throat as the central government was expected to do by Washington, criticized the Americans for being “bossy”.

In a sign that disappointment and suspicion are flowering into paranoia, the Japanese press aired a rumor that the United States dealyed the deployment of twelve F-22A Raptors—the state-of-the-art warbird that Abe hopes will serve as the symbol of U.S.-Japan military cooperation—into Okinawa in response to North Korean pressure.

In these unpromising circumstances, the Diet will begin debating legislation, sure to be unpopular, that would obligate Japan to pay up to $6 billion on relocation costs for the 8,000 U.S. troops who are to move from Okinawa to Guam as part of the realignment.

If that wasn’t enough, Japan was forced to back out of a key Iranian energy project, Azadegan—which by itself was expected to account for 6% of Japan’s total oil imports-- out of loyalty to the Bush administration’s policy of intransigence and no economic ties with the Tehran regime.

The loss of this project was followed by the dismaying news that a major Exxon Mobil gas project on Sakhalin had signed a preliminary agreement to sell its output to China instead of Japan. At the same time Russia began threatening a restructuring of another Royal Dutch Shell natural gas project in Sakhalin that was supposed to be a joint venture with Mitsubishi and Mitsui Trading.

In another looming problem, the aggressive U.S. push on sanctions against Iran that Tokyo is loyally supporting, if implemented, would endanger Japan’s access to Iranian oil, which currently accounts for over 10% of its imports.

The Japanese are supposed to be compensated with preferential access to Iraq opportunities but—in an ironic development considering that the Iraq war was intended to exclude competing powers and turn Iraq’s oilfields into a bonanza for the West—another energy-hungry power is muscling in:

Japan is clearly interested in increasing its profile in Iraq's energy sector, but the main obstacle to ramping up investment remains the endemic violence that persists in that country. Despite Tokyo’s calls for domestic firms to pump more money into overseas oil and gas projects, investment in Iraq will be difficult as violence is unlikely to cease anytime soon.

Japanese officials and analysts also worry that countries such as China might have an edge over Japan in gaining access to Iraq's energy resources, since it has more experience operating in inhospitable environments such as Sudan and Angola.

In fact, the new Iraqi government has courted Beijing because Chinese producers have been willing to invest in countries that are considered dangerous or politically isolated. Beijing had previously been thought to be out of the running for major contracts in postwar Iraq, with the best deals going to the U.S. and its allies. But the upsurge in violence there has made the country less attractive to Western producers.

Perhaps as a result of these revelations of the downside of acting as America’s sheriff in North Asia, support for Abe’s signature initiative—revision of the pacifist constitution to permit Japan to participate in hairy-chested overseas military adventures with its freedom and democracy loving brethren in the West—has evaporated.

According to Bloomberg on February 13:

Shinzo Abe's aim of revising Japan's pacifist constitution to allow the nation to assert itself militarily for the first time in 62 years may be petering out, a casualty of the prime minister's falling popularity.

``He's set himself up for failure,'' said Gerald Curtis, author of ``The Japanese Way of Politics'' and a professor of political science at New York's Columbia University. ``There's no enthusiasm for constitutional revision from society as a whole. For it to happen he has to be pretty popular, and he's not.''

An op-ed published in the Daily Yomiuru on Feb. 17 by Weston Konishi of the Mansfield Center stated:

[A]ccording to a Cabinet Office poll conducted last October, only 25 percent of Japanese respondents want their country to take a more active role in peacekeeping operations, humanitarian assistance and other "contributions to international society." Sixty-five percent of those polled believe Japan's contributions should either be kept at the current level or held at a "minimal level."

What about public support for a "proactive diplomacy" promoting fundamental values such as freedom, democracy, human rights and the rule of law (principles that were also invoked recently by Foreign Minister Taro Aso in his call for Japan to lead an "Arc of Freedom and Prosperity" among like-minded nations)? According to the same Cabinet Office poll, just 20 percent of Japanese believe that protecting universal values such as freedom, democracy and human rights should be a role for Japan in the international arena.

The prime minister's claim that "Japanese will no longer shy away" from enhanced international security responsibilities rings hollow considering statistics like these. Indeed, the very items that Abe now promises to the international community--readily deploying SDF missions abroad; actively promoting universal values; and championing the creation of "arcs," "spheres" or other geopolitical formations--are ideas that the Japanese public has not yet signed onto.

Without question, the U.S.-Japan alliance will survive America’s betrayal at the negotiating table in Beijing.

But Shinzo Abe may not.

And the hope that Tokyo and Washington would find an identity of interests that would create an impregnable united front against North Korea, China, and Russia in Northeast Asia is dead, a victim of fundamentally diverging interests and ruthless political opportunism by the Bush administration.

The Not So Great Game: Japan's Hunt for a Security Council Seat

It must be a great relief to the impoverished nations of Inner Asia and the South Pacific to know that, in addition to the profitable competition between the PRC and Taiwan for diplomatic recognition, there is another cash cow dangling its teat over the region—Japan.

Winning one of the non-permanent two-year elected seats on the Security Council allocated to Asia in 2008 is important enough to Japan that it has made winning regional support for its bid a focus of its financial diplomacy.

A Korean news outlet reported on January 26, 2007:

Prime Minister Abe had just received a long-awaited present from the Mongolian president: during the telephone conversation, President Enkhbayar said his nation would withdraw its candidacy for a non-permanent seat on the U.N. Security Council. He had reportedly urged Japan to run for the spot instead...

Junichiro Koizumi, then Japanese prime minister, visited Mongolia last summer to pledge assistance of US$350 million. Japan's last term on the council was made possible when Papua New Guinea withdrew its candidacy in 2004 due to financial problems.

This $350 million was on top of a big chunk of change handed out in May 2006 to the South Pacific, albeit as part of an initiative to support Australia and New Zealand’s ham-handed efforts in the region to counter Chinese influence.

As reported by the AP :

Japan lavished Yen 45 billion (US$410 million) in fresh aid to Pacific Island nations at a leaders' summit yesterday and walked away with unified support for Tokyo's bid to join the UN Security Council [as a permanent member-ed.]. (Japan Lavishes Aid on Pacific Islands, Taipei Times, May 28, 2006)

The beneficiaries of this largess were Scrabble powerhouses Fiji, Niue, Palau, Papua New Guinea, Republic of the Marshall Islands, Samoa, Solomon Islands, Tonga and Vanuatu, Cook Islands ,the Federated States of Micronesia, Kiribati, and Tuvalu.

Japan, of course, yearns for a permanent Security Council seat, together with the rest of the G-4 group of aspirants—Germany, India, and Brazil—to which it has linked its candidacy.

It views occupying a non-permanent seat as an important part of this effort, allowing it to demonstrate a deep involvement in Security Council affairs that, together with its significant financial support of UN operations, justifies a permanent position on the council.

As the withdrawal of Papua New Guinea in 2004 implies, wading through mountains of Security Council paper work requires a commitment of personnel, time, and money that smaller nations are not necessarily eager to make.

Holding a non-veto wielding seat does have some practical advantages that are not immediately apparent. All 15 members of the Security Council serve on the various sanctions committees set up in support of UN resolutions against Iran and North Korea, which are tasked both with monitoring the sanctions regime and permitting exemptions.

Not unexpectedly, Iran is trying to get elected to a non-permanent seat, presumably so it can have a say in the sanctions regime imposed upon it, but its chances of success are considered slim.

By serving on the council as a non-permanent member and participating in the sanctions committees, Japan has an additional leverage over Teheran, an important but troublesome energy partner, and Pyongyang, the bugbear of North Asia.

Traditionally, campaigning for an elected seat has been a biennial circus of pleading, bribery, threats, and cajoling starring the various national representatives stationed in New York.

David Malone’s Eyes on the Prize in Global Governance, provides a brisk overview and a witty insider’s perspective on the frenetic campaigning circa 2000.

Malone reports that at that time upward of 25% of U.N. New York representatives either received no instructions from their capitals or received instructions but chose to ignore them. Aegean cruises, tickets to Circ du Soleil, and dinners too numerous to count were deployed in order to sway these discriminating voters.

The line between diplomacy and deception was a fine one, and was easily crossed.

Many others - fearing to indispose often more powerful states or simply hoping to get credit for a vote they will not cast - actively mislead others on their voting intentions. This factor seems to have badly tripped up Australia in 1996. In a press conference after that vote, Richard Butler referred to "rotten lying bastards" as the explanation for Canberra's loss. The recognized master of the electoral game at the UN, Italy's Permanent Representative Paolo Fulci, has developed a formula many believe foolproof: 10 percent of those commitments received in writing and 20 percent of those conveyed orally must be discounted. Failure to factor this formula into projections can lead to disaster.

The abrasiveness of Australia’s representative to the U.N. was a byword, according to Malone, and Australia’s defeat was attributed to “the Butler factor”.

Judging from Malone’s account, a pre-9/11 campaign for an elected seat on the UN would require, in addition to a fine understanding of human cupidity and duplicity, a budget of a perhaps a million dollars for staffing up and funding an intensive vote-winning effort.

Today, on the other hand, it appears to be a much bigger deal, involving not only national ego but national interests and, in the case of Iran, perhaps even national survival.

The 2006 election saw an epic contest between the United States’ champion, Guatemala, and Hector Chavez’s Venezuela, which had promoted its candidacy throughout the developing world with oil aid incentives, for the Latin American and Caribbean seat.

The vote went through 47 ballots before everybody threw in the towel and gave the nod to Panama as a compromise candidate.

Japan should be master of the game by now, having served as 9 terms as an elected member.

But however successfully it fairs in the 2008 elections for a two-year seat, Tokyo’s ambitions for a permanent seat may be doomed.

China, of course, wants no part of Japan as a permanent member of the Security Council and, given Japan’s close adherence to the U.S. line in international affairs, there doesn’t seem to be very strong support for a) offending China and b) giving the U.S. a second veto.

So it appears prudent of Mongolia’s Enkhbayar to support Japan’s election to two-year membership on the council and skirting support for a permanent seat that would have antagonized the dragon on his southern border.

One would think that Washington would encourage Japan’s use of yen diplomacy to buy influence in Asia at China’s expense, ostensibly for support of its UN ambitions.

However, in another example of the bewildering disconnect between the United States and its closest ally in the region, the U.S. is allowing UN reform—and expansion of the Security Council—to languish.

On February 18, 2007 the Daily Yomiuri reported Japan still far from permanent UNSC seat:

While pressing for Security Council reform as part of the G-4, Japan has been seeking strong U.S. support for its own plan for council reform, but the United States has shown little interest in the topic. The United States was the only permanent member of the Security Council that did not make a speech in the OEWG [Open Ended Working Group—as its name implies, a UN group founded in 1993 whose discussions on UN reform will apparently last for the rest of eternity—ed] meeting.

With South Korea, Italy, and Pakistan formally opposed to expansion, China hostile, and the U.S. disengaged, prospects for Japan successfully driving the process to obtain a permanent Security Council seat are grim.

And that makes the price of $350 million for Mongolia’s support of a non-permanent seat—and Abe’s reported joy and relief at Enhkbayars’s nod—almost inexplicable.

Thursday, February 15, 2007

A Word Is Born: 去功能化

My ears perked up when Secretary Rice used the awkward expression “disablement” to describe the initial stage of the adventure in non-proliferation that North Korea and the U.S. are embarking upon.

As in:

IV. During the period of the Initial Actions phase and the next phase, which includes provision by the DPRK of a complete declaration of all nuclear programs and disablement of all existing nuclear facilities, including graphite-moderated reactors and reprocessing plant, economic, energy and humanitarian assistance up to the equivalent of 1 million tons of heavy fuel oil (HFO), including the initial shipment equivalent to 50,000 tons of HFO, will be provided to the DPRK.

I couldn’t think of how this would be rendered in Chinese, so I took a look at the Chinese text of the agreement that announced the “deal”, actually the “Declaration” concerning the deal that the various parties would try to achieve.

In the Chinese text, “disablement” is rendered as “去功能化 “.

As in:


I don’t think it’s really a Chinese word. I didn’t find it in my dictionaries. Google the phrase and you get about 600 hits, virtually all of them embedded in news stories covering the February 13 announcement.

It crops up a few times in other contexts.

One use is on an academic media site, talking in a po-mo sort of way about how trendy products are “stripped of their functional attributes” when the majority of the their value to the consumer can be ascribed to the image of with-it ness they bring.

On another site, the meaning is actually the subject of a query by a Chinese poster. 去功能化What’s that mean? the poster asks. The blog writer responds, I guess...maybe it’s like when you enter a code on a DVD player so it can’t show adult movies.

However, paydirt is hit with a Chinese-language report by Zhou Ning of China’s Global Times newspaper.

Expounding on the cultural differences he observed covering the 2004 Six Party talks, Zhou talks about how Asians prefer to reach agreement on an inclusive general principle, then hammer out the details, but the Westerners prefer to lay out every issue, argue and resolve each one individually before an overall agreement can be reached.

He writes (my translation):

For example, every time the United States people offer a proposal, they make it extremely detailed and concrete: they demand cessation 停止, destruction销毁, dismantling拆除, removal搬迁, disablement去功能化, they don’t let go of any plans计划, facilities设施, materials材料, or personnel人员. They not only care about what there is, there’s also the things they suspect might be, they are in mortal fear that if they aren’t careful somebody will find a loophole. They believe they have overlooked nothing, but they don’t know how to go about it, and all they can do is increase the suspicious worry and unease of the other party, to the point that even simple questions are made complicated.


Aha! So “去功能化” appears to be an American word inserted into the negotiations.

The U.S. State Department has a history of introducing obfuscatory verbiage into negotiations with the Chinese. Robert Zoellick claimed, rather improbably, that he had tied the Chinese translators in knots for months by introducing the word “mercantilism” (it’s 重商主义,Robert) into his trade negotiations with Beijing.

In Chinese one can say nice straightforward things like cease, destroy, dismantle, remove.

There’s also “eliminate all nuclear capability” ( 消除一切核功能 ), which would seem to fit our stated objective of denuclearization.

To be sure, there isn’t a direct Chinese synonym for “disable” used in this kind of situation. The closest I could think of was “render non-operational” ( 使。。。不能运转).

For one thing, this meaning of “disable” would mean “make it so it can’t work.” But this certainly isn’t what the North Koreans intend to do to their precious nuclear facilities in the initial stage. Obviously, the permanent, irrevocable, and verified disabling of their nuclear facilities a.k.a. elimination of North Korea’s nuclear capability is going to happen, if ever, a lot farther down the road.

暂时停转 (temporary cessation of operation) seems to be what’s really happening, but maybe that’s too close for comfort to the “time out” Iran is asking for

Instead, we get...something else: 去功能化

Literally, I would translate this neologism as: “a transformation involving a divergence from functionality.” Loosely, “defunctionalize” as in “removing functionality from the facility”, with the implication that it’s not random or destructive. Maybe it’s normal and reversible instead.

If I went techspeak, I would say “degrade” as in “The clock speed on the CPU was reduced in order to degrade performance so that export restrictions would be met.” But that would mean whatever was “degraded” was still functioning, albeit at a lower level—definitely not the impression we want to give.

Obviously, 去功能化 is a term pregnant with ambiguity.

It refers to a process, rather than an outcome, as if “the process of removing the function” of nuclear facilities, was a built-in attribute, like activating the V-Chip in the DVD player to disable its ability to play adult movies.

So, the North Koreans are promising to engage in the defunctionalizing of all their nuclear facilities. At least in Chinese. Makes you wonder what the Russian and Korean and Japanese says.

However, given the indefatigable nitpicking and hairsplitting by the American team that Zhou describes above, there is certainly a U.S. definition of what “disablement” of a nuclear facility entails.

But it doesn’t seem to include what Americans would normally construe "disablement" to mean, i.e. something involving dismantling or destruction.

Maybe the term was created and inserted into the negotiations so the Bush administration could assert that it had achieved more than the dreaded Clintonian “freeze”, while the North Koreans can interpret it to mean that all they need to do is to use reversible measures to put the facilities in a non-operating state without damaging or destroying them in order to receive the energy assistance promised in the declaration.

It would be interesting to find out exactly what去功能化means.

Wednesday, February 14, 2007

George Bush: Not Ready to Make Nice

Update, February 15th: Laura Rozen reports on a speech that Nicholas Burns gave at the Brookings Institute in which he indicated support for the "time out" proposal--Iran suspends enrichment and the UN suspends sanctions while negotiations go on--that ElBaradei has endorsed.

She discusses the confusing mixture of overt bellicosity and conciliatory diplomatic feelers that characterize our current Iran policy and wonders if the Bush administration's ultimate objective is the "grand bargain" culminating in a normalization of relations between Iran and the United States, or military confrontation using the nuclear issue or "force protection" of our troops in Iraq as the causus belli.

My personal feeling is that the ambiguity is deliberate, and is aimed at our allies, not necessarily Iran.

Most of our allies support a diplomatic resolution to the Iran issue, while only Saudi Arabia and Israel are genuinely committed to following the U.S. if we switch exclusively to the hard power track.

So it's important to give our allies hope that we are really going for "the grand bargain", even if that's the least attractive outcome to the folks that matter in the White House...

...especially if that perception allows the U.S. to win international support for more onerous (and destabilizing) U.N. sanctions against Iran as part of the "coercive diplomacy" approach, and avoid the "IAEA negotiations" dead end that China and Russia are preparing to sideline the Iran issue.

In other words, the Bush administration will continue to pursue the diplomatic route as long as it offers the prospect of stripping away support from Iran and acquiring diplomatic capital for the United States.

In a contradictory fashion, diplomatic success for the U.S. may increase, instead of decrease, the possibility of a military conflict with Iran.

There is something of a debate going on as to whether the North Korean deal represents a triumph of the realist professional wing of the U.S. foreign policy establishment and the world can breathe easier now that President Bush is finally under adult supervision.

Corrosive cynicism here (I examined the deal's value to American interests in Northeast Asia in this post, and found it wanting).

As much as I like the idea of diplomacy, compromise, win-win, and all that, I have trouble characterizing Chris Hill’s deal as “brilliant”. I think George Bush went into the tank on this one.

With the post-election American public, Congress, the GOP establishment, significant elements of the military, diplomatic/security professionals, and probably even Laura and Barney extremely dubious about the advisability of attacking Iran, I suspect President Bush gave a green light to Christopher Hill on North Korea as a piece of emergency image management.

Also, as an admittedly outside view of State Department dynamics, I think President Bush wanted Condi Rice to feel beholden to him for tossing her the North Korea bone, so she can stop nagging him about how he should be doing the grown-up diplomacy thing and singlemindedly push his Iran strategy instead.

Now President Bush can tell the world and the inside-the-Beltway crowd that he’s not just a war-hungry nut—he’s the Negotiarator!

So he gains some credibility and some slack, especially from his beleaguered foreign policy team, which he will promptly abuse by setting the bar for success of any Iran talks impossibly high. But there will be a massive effort to blame the Iranians because, you know, we love to make deals. Look what we did with North Korea!

Condi Rice sez: This president loves peace! But those Iranians are too wicked. Bombs away!

Then Bush gets what he really wants: hot containment of Iran.

Either the international community lines up behind the U.S. and gives us the diplomatic cover of sanctions, or we have something better than sanctions: a state of armed hostility between Iran and the U.S., with the terms of engagement—no-fly zones, acceptable dual-use targets, attacks on “proliferation-related” physical and financial infrastructure—defined so we can just go and blow their sh*t up—not just nuclear facilities, but oil terminals and refineries and pipelines—whenever we feel like it.

Maybe we won’t get an arrangement as good as we had against Saddam’s Iraq, where he couldn’t export oil or import equipment without our approval. But in one way a state of hostilities is even better, because then Iran has to negotiate directly with the U.S. instead of running to the U.N.

Nutshell prediction: Non-stop push to make an attack on Iran palatable to the international community and domestic audience; North Korean deal does not outlive its political usefulness and dies in the working groups. 2008: angry and armed Iran, North Korea, Russia, and China.

In other words, just like 2006, only moreso.

Tuesday, February 13, 2007

Bush’s Munich? Parsing the North Korean Agreement

This post takes a skeptical look at Bush administration diplomacy and wonders darkly if the haste to conclude a none-too favorable deal with North Korea had something to do with U.S. plans to escalate pressure on Iran.

Questions such as Cui bono—who benefits? and What’s the rush? should be explored if we are to understand why the State Department was allowed to enter so precipitously into a deal that seems to offer the United States so little.

For background on the twisted path to the Six Party agreement,
Intimate Enemies: Pyongyang, Beijing and the Nuclear Factor explores the dynamics of the China-North Korea relationship. On the US side, I covered John Bolton’s overreach with the Proliferation Security Initiative and the mixed results of U.S. attempts to apply the PSI to the North Korean situation; Condi Rice's faltering effort in crisis diplomacy; and the adverse consequences that a single-minded focus on North Korea hold for U.S. diplomacy and our goals in Asia.

Is appeasement in the air—or is it the prelude to aggression?

For the last two months, the Bush administration has been deep into negotiations with North Korea, both through the Six Party talks and in unprecedented direct discussions, most recently held in Berlin.

On February 12, Christopher Hill, Assistant Secretary of State and the chief U.S. negotiator at the Six-Party talks, announced in Beijing that a ”tentative agreement” has been reached and working groups will start hammering out the devilish details within a month.

Rumored outcomes not only include a vast infusion of energy aid (figures sure to be reduced, like 2 million kilowatts of electricity and 2 million tons of fuel oil) and provision of security guarantees in return for North Korea’s freezing of its nuclear program.

Promises of diplomatic relations are also being dangled.

However, the dizzying prospect of Bush and Kim, those two height and reality-challenged hereditary monarchs, doing the grip-and-grin in Pyongyang should not distract us from the policy puzzle such a rapprochement would represent.

This would be an astounding reversal for the Bush administration, which included North Korea in its Axis of Evil formulation (albeit casually and at the last minute in order to make the Bush policy of unilateral pre-emption appear global and not targeted at Muslim countries alone) and has spent five years excoriating, threatening, harassing, and destabilizing Kim Jung Il’s regime.

As recently as October 2006, North Korea’s nuclear test had created a united front of the main regional powers, China, Japan, Russia, and South Korea, as well as the United States, determined to put an end to North Korea’s nuclear ambitions.

However, in John Bolton’s swan song, the United States frittered away its diplomatic leverage in a futile attempt, climaxed by George W. Bush’s failure at the APEC summit in Hanoi, to hype the crisis as a pretext for implementing coercive inspections—a not-so-veiled de facto economic blockade meant to destabilize the Pyongyang regime, a measure that went far beyond anything that China, Russia, and South Korea were willing to entertain.

Finally, after Bush administration intransigence failed to cripple the regime, Chinese mediation and selective pressure brought North Korea back to the safe harbor of the negotiating table.

This is causing dismay within the constellation of evangelical and conservative regime change advocates who, to their credit, are the only people who seem to take North Korea’s dismal human rights record seriously.

The Chinese are eagerly midwifing this deal, for good reason.

It promises to denuclearize North Korea and strip it of all pretensions to an independent foreign policy that might disrupt China’s plans to include the peninsula securely within its sphere of influence.

And much of the expense of propping up the regime, which has been borne so grudgingly by Beijing, would be subcontracted out to the U.S.!

Although North Korea has been pleading pathetically for direct engagement with Washington and has even offered to act as a U.S. proxy on the peninsula, it would appear that China would have little to fear from U.S. diplomatic recognition of North Korea.

As long as Kim Jung Il is going nowhere and there isn’t a chance for a U.S.-aligned democracy being established in the northern half of the peninsula, the Chinese don’t care if North Korea is a desperately weak and isolated satrap with a failure-prone nuclear weapons program or a struggling, incompetently reforming socialist state.

What’s in it for the United States? What justifies this retreat from the brave rhetoric of the Axis of Evil to near-Clintonian appeasement?

Maybe Iran.

Today it is difficult to view actions of the Bush administration through any lens other than its apparent desire to attack Iran.

There are ways a North Korea deal could advance the US goal of attacking Iran.

The diplomatic and strategic firesale going on in the North Korean negotiations may have been meant to clear the decks for a frontal diplomatic assault on Iran after February 23, when the IAEA Director General’s report on Iran’s Non Proliferation Treaty compliance—unlikely to be a clean bill of health—is scheduled to be delivered and the sanctions and war bandwagon can start rolling again.

By using diplomatic means to de-WMD one of the charter members of the Axis of Evil, the United States could claim the moral high ground and work to isolate Iran as the last remaining intransigent rogue regime, thereby justifying use of force if Iran could not swing a deal on its nuclear weapons (a deal that the U.S. might make impossible to achieve, if we are genuinely keen to attack).

Perhaps the United States is also trying to sway the Chinese and Russians into backing more coercive diplomatic and military sanctions against Iran by offering them a win on North Korea.

This, to me, is unlikely to happen.

The Chinese care desperately about being on the right side in the Iran attack equation—Iran’s side.

And that doesn’t mean being able to stop an attack. Two (and soon to be three) carrier groups in the Persian Gulf say we can attack whenever we want to.

It means making sure that any attack by the U.S. and its allies cannot claim any U.N. endorsement, and, looking beyond the attack, that the Iranian regime can emerge from the attack confident of and grateful for the support of its allies, with its international legitimacy and regional standing intact, and free to export oil.

Even proponents of bombing Iran’s nuclear facilities admit it would accomplish little beyond enraging and uniting the Iranian people.

For such an attack to be significant as anything more than an expression of George Bush’s self-destructive hubris, it would have to be the climax in an effort to drive Iran into pariah status and cripple it financially, for years and possibly decades, by punitive post-war sanctions on its oil industry—as we did to Saddam’s Iraq.

For that kind of sanctions regime, formal international agreement, not ad hoc efforts, are needed.

Optimists in the Bush White House might look at the balance of forces in 2007 and find them reassuring similar to 2003, when Russia, China, the IAEA, and Old Europe were unable to block Bush from claiming UN authority for the Iraq invasion. Now, with Angela Merkel in charge in Germany and Jacques Chirac toeing a US line on the Middle East, the chance of obtaining explicit diplomatic cover for an attack on Iran might appear to be even better.

No doubt the old line, You’d better get on board now—because we’re going to attack anyway is being used to pressure any stragglers.

But Iran is not Iraq.

Explicit additional U.N. action is needed, because Iran, though suffering limited U.N. censure under resolutions 1696 and 1737, is not flat on its back legally, as Saddam was after the invasion of Kuwait.

This time, China and Russia are alert to any attempts to provide a U.N. pretext for open-ended sanctions against Iran that might be enforceable militarily by a self-proclaimed “coalition of the willing” led by the U.S..

Last weekend’s Munich Security Conference, which was suppose to serve as a prestigious first world forum for castigating Iran’s nuclear behavior, instead became the stage for Vladimir Putin’s stinging rebuke of the United States’ reckless security regime.

Robert Gates was supposed to be rolling out Iran product in concert with the release of the dubious Iran-IED link intel. Instead he had to listen stone-faced in the audience during Putin’s acid-tongued remarks, probably thinking ruefully, to paraphrase Robert Stack in Airplane!, “I sure picked the wrong week to use a half-assed excuse about Iran to try and sneak an anti-Russian missile system into Eastern Europe.”

Beyond using the conference as a high-profile platform to express anger at the U.S. initiative to move ABMs onto Russia’s borders, Putin was taking advantage of Europe’s clear distaste for the confrontational U.S. position on Iran to take the wind out of the sails of the movement to aggressively (and perhaps provocatively) apply the U.N. sanctions regime to Iran after the IAEA issues its report.

Despite Western fawning over Gates’ riposte to Putin, the fact remains that Putin had neatly turned the attention away from Iran, which was intended to be a main target of civilized wrath at the conference, to the 800 pound gorilla of global instability, the United States.

Angela Merkel and the Israeli delegate made game attempts to fan fears of the Iranian boogeyman, but Iran’s chief nuclear negotiator, Ari Larijani (who had originally begged off the event, ostensibly because of illness but probably because he was worried about making a good showing in a potentially hostile venue) was able to find a hospitable forum for his call for a return to negotiations.

An indication of where things are really going on Iran, at least in China, can be found in reports of an upcoming mini-summit between the foreign ministers of China, Russia, and India in New Delhi on February 14.

As reported in the Hindustan Times, a Chinese think tank pundit outlined the basic theme of the summit, which he believes that both Russia and India will endorse:

"China demands Iran should follow international rules. In the meantime, China believes that this issue should be solved in the framework of the IAEA," Zhao Gancheng, a South Asia expert at the Shanghai Institute of International Studies, China's influential think tank, said.
"The bottomline is that China will never advocate the use of force. China is against the use of force," Zhao stressed, indicating that if the US were to go ahead with a military strike, as is speculated in a section of the international press, it will face opposition from these three powerful countries.

So there you have it. China proposes a dispute mediation channel that will keep the Iran issue safely bottled up within the IAEA and away from the Security Council, where the threat of economic and military sanctions lurks.

Given the fact that Russian and Chinese support for diplomatically isolating Iran is remote, it remains to be seen if the United States maintains its enthusiasm for a North Korea diplomatic solution that will provide China with a foreign policy win and many more years of comfortable existence for Kim Jung Il’s regime in Pyongyang—and whether the promise of peace in one part of the world is actually a threat of war on another side of the globe.

Thursday, February 08, 2007

The Worldwide Gambling Storm

As American gamblers tote up the wins and losses from the almost $8 billion that was bet illegally on the Super Bowl (vs. $93 million in legal wagers through Nevada sports books), the world gambling industry is undergoing a fundamental realignment...

...and is counting the unexpected cost of a modest exercise in political opportunism that occurred on the floor of the U.S. Senate on September 29, 2006.

We all know about the butterfly effect: a butterfly flaps its wings in Beijing , chaotic reactions multiply and reinforce, resulting in a storm halfway across the globe.

Today’s subject is a reverse butterfly effect: a minor political disturbance in the United States that caused a storm across the Atlantic that is lapping up on the shores of China.

The butterfly in question is the feeble, doomed presidential aspirations of Dr. Bill Frist, erstwhile Senate Majority Leader.

Dr. Frist will probably be best remembered for the Terry Schiavo remote diagnosis, the Medicare pharmaceutical benefit donut, and for introducing the phrase “reeking of gorilla testosterone” to our political discourse.

But in fall 2006, he hoped to forestall a rout in the upcoming mid-term elections for the Republican Party, which was reeling from the Jack Abramoff and Mark Foley page scandals and public dissatisfaction with the Iraq war, and enhance his own stature and presidential chances by re-energizing the party’s conservative base with some carefully-chosen legislative initiatives.

One windmill he chose to tilt at—Internet gambling—was also a personal priority of Iowa Congressman and bluenose Jim Leach. The fact that Congressman Leach’s good will in the Iowa caucuses would be a valuable commodity for a presidential aspirant perhaps figured in Dr. Frist’s calculation.

Therefore, on the last day of the legislative session, Frist attached a piece of legislation—The Unlawful Internet Gambling Enforcement Act of 2006, hereinafter UIGEA--to a major port security bill that he correctly calculated was politically impossible to oppose or postpone.

The Act made it illegal for U.S. banks and financial institutions to participate in transmitting wagers and winnings between U.S. gamblers and offshore sites.

Absent conspicuous enthusiasm from the domestic legal gaming industry, it passed, President Bush signed it, and UIGEA became law.

Unfortunately for Frist and the Republicans, this particular episode of political kabuki had real and immediate consequences.

American banks promptly refused to handle remittances to e-wallet operators serving the offshore gaming industry, leaving America’s on-line gamblers without the wherewithal to game.

Even worse, Neteller, the leading e-wallet for American poker players feeding the kitty on the offshore sites, abruptly pulled out of the U.S. market, leaving U.S. account-holders—and their money—in limbo.

There are a lot of poker players in the United States (50 million), and a not insignificant number of them (over one million) are on-line poker players whose congenital “don’t tread on me” animosity toward government interference with their gambling activities was compounded by the hardship and anxiety of having their gambling bankrolls tied up in overseas escrow accounts.

Come the mid-term elections, the conservative base was unmoved but poker players were aroused.

They rounded on Jim Leach (Dr. Frist was retiring from office and therefore not up for re-election) and take credit for a “Green Velvet Revolution” that resulted in the veteran, highly-respected Congressman’s narrow defeat by Phil Loebsack, an unknown college professor and Democrat.

Poker sites claim that only 1 out of 10 voters cited Leach’s stand on Internet gambling as a reason to vote for him; 1 out of 7 stated that it was a strong factor in their decision to vote against him.

An even bigger storm was brewing across the Atlantic.

Internet gambling is legal in Europe. The largest companies are English, and publicly listed. They relied on American players for approximately 50% of their revenue, arguing that their offshore status exempted them from U.S. federal and state restrictions on on-line gambling.

When UIGEA was announced and it became illegal for U.S. financial institutions to remit money to gambling destinations offshore, the legality of operations issue was rendered moot.

The value of the publicly traded online gambling companies crashed, wiping US$ 7 billion of dollars of equity from London’s stock exchange at one stroke.

Not satisfied with the chilling effect of UIGEA on stock prices of the international on-line gaming industry, the U.S. government launched a frontal attack on the companies and individuals involved.

Ever since David Caruthers, CEO of the on-line gambling operation Betonsports, was arrested in transit at Fort Worth airport in 2005, executives of British on-line betting operations no longer travel to or through the United States for fear of arrest.

Post UIGEA, the financial institutions that enabled the day-to-day operations of the on-line gambling websites—and their executives—were also targeted.

The two founders of Neteller were abruptly arrested, even though they had severed day-to-day operating relationship with the company, and despite the company’s claim that it believed it was operating within a 270-grace period to come into compliance with UIGEA.

The aggressive pursuit of these largely British-based or listed companies has brought the United States into a direct clash with the U.K.

The Blair government is committed to the development of a highly-regulated and carefully monitored gambling industry that will draw on-line firms to Britain as a source of government revenue and economic growth, and the U.S. law was seen as a direct—and perhaps deliberate—attack on one of Britain’s flagship economic initiatives.

When Tony Blair’s Culture Secretary, Tessa Jowell, held a gambling summit at Ascot, meant to confirm Britain’s vision of a regulated, tax-generating international gaming industry with Britain at its head, the U.S. boycotted the event.

In reply, Jowell chided the U.S. for backsliding to a failed Prohibition model of gambling enforcement—and hinted American coin would continue to clink in Britain’s coffers:

"It [the US stance] is the new prohibition. In relation to gambling, you have three choices - you allow the market to rip, which some jurisdictions do; you prohibit, which some jurisdictions do; or you regulate," she said.

"The risks of prohibition, I think, are very well established. Our concern is that if internet gambling were to be prohibited, it would be driven underground and precisely the kind of protections that we want to extend to people would be impossible."

Ms Jowell told the BBC that there were 4 million regular online gamblers in the US and technology would allow them to evade authorities' attempts to control the activity.

After UIGEA passed and DOJ enforcement efforts reached a crescendo, The Daily Telegraph, employing the vitriol that it usually reserves for attacks on contemptible Middle Eastern despots, declared that the law was part of a U.S. conspiracy to cripple the U.K.’s world-leading gambling industry until America’s casinos had a chance to catch up.

[Gaming law specialist Jason] Chess describes the DoJ's actions as "nothing more than economic and imperialist bullying" and says the two-faced approach of the American authorities towards gambling shows there is a need to stand up to the DoJ. "There are US politicians preaching that gambling is a destroyer of families while a quarter of the population spends its vacations putting coins in slot machines in Vegas casinos," he says. "For me this is more about driving foreign traders out of action so Nevada and Vegas don't lose out on business in the future. The moves being made now give the US time to sort out the legalisation of online gaming and give the Vegas brands time to establish their own brands online."

Warwick Bartlett of Global Betting & Gaming Consultants agrees. "The Americans want to bring these gaming company executives to what they refer to as 'justice', which means slamming them in jail, pocketing their proceeds from the business and claiming the market as their own. Our view is that the US will legalise online gaming within five years. These subpoenas and the arrests represent sheer hypocrisy."

Indeed, post-UIGEA, the Sands announced plans to set up an on-line poker operation registered on the Isle of Man for non-U.S. players, presumably a stalking horse for a site that would be ready to attract U.S. players under a recognized brand once the ban is lifted.

The indignation of Mark Choueke, the Telegraph financial writer whose article is quoted above, was perhaps intensified by the fact that his employers, Sir Frederick and Sir David Barclay, happen to own an Internet gambling website called Ritz Club Online.

Surveying the dismal wreckage of the UK on-line gaming industry, Choueke was moved to invoke the 21st century capitalist Holy Trinity of freedom, anti-terrorism, and free enterprise to stand in judgment of American “justice”, concluding:

So online gaming executives are being hunted all over the globe in a manner more befitting terrorists, dragged off to American shores and forced to fight for their freedom because their successful businesses – perfectly legal in the country they operate in – are being or have been illegally used by American citizens.

British fury and alarm was compounded when it became clear that the DOJ was not just interested in crippling the on-line gambling companies and pursuing their executives.

The announced intention of the U.S. Justice Department is to compel the disgorgement of what they consider ill-gotten gains from illegal operations targeting U.S. gamblers, not just ordinary profits but the fruits of the sky high asset valuations that these companies enjoyed on the London Stock Market:

US authorities are homing in on the billions made by the founders of now-illegal online gambling companies by demanding British banks provide hard evidence of their wealth. Bankers say the US Department of Justice wants to recover the fortunes made by the industry's founders and senior executives through fines and asset seizures.

Dozens of the City's largest banks, accounting firms and law firms have been ordered to hand over documents relating to companies such as PartyGaming, 888 and Empire Online as the Department of Justice steps up its investigation.

The investment banks, accountants and law firms are providing details of individuals' ownership, involvement and proceeds so US authorities have documentary evidence to offer in court. Those caught up include DKW, bookrunner to the PartyGaming float, HSBC, 888's bookrunner, BDO Stoy Hayward, Credit Suisse, Deutsche Bank, Investec and many others.

The numbers involved are not trivial.

The founder of Internet gambling heavyweight PartyGaming, Anurag Dikshit (not a typo) had cashed out his interest for 420 million pounds at PartyGaming’s 2005 IPO.

If one assumes that more than half the value of his shares came from U.S. gamblers (not an unreasonable assumption, given the fact that the company lost over 60% of its value after UIGEA passed), after fines, interest, and penalties he would not have much of a financial cushion for whatever jail time the USDOJ is holding over his head.

The DOJ issued subpoenas to 16 U.K. banks, lawyers, and accountants demanding that they provide information on the personal finances of key principals associated with the on-line gambling industry.

This is a significant step, widening the net beyond the motley collection of foreigners, software engineers, website operators, and gambling executives who built the on-line gaming industry.

The foundations of the British establishment—the IPO billionaires, the big-money passive shareholders, and its premier financial institutions--now appear to be at risk as well.

The U.S. government is apparently threatening financial institutions and stockholders who profited from the public listing of the on-line gaming companies—even if they were never involved in company operations-- with harassment and prosecution if they don’t cooperate helping make the case against the targeted corporations and executives.

The Independent, the Guardian, and the Times of London—which are at best lukewarm on the Blair government’s gambling initiative--had reported the travails of the on-line gaming execs with bemused detachment.

However, with the fortunes and freedom of Britain’s financial establishment apparently threatened by the widened probe, they have displayed a new sense of urgency in defending British liberty against the DOJ inquisition.

Anger and displeasure at the U.S. government—and a call for the UK to resist attempts to extradite British gambling execs-- are no doubt being conveyed to the highest levels of the British government.

The City has been enraged by the US subpoenas. Robert Amsterdam, a specialist lawyer, said: "This means that the US will impose its jurisdiction, retroactively, on this side of the Atlantic. This is a disgrace."

The sense that the London financial world is being unfairly targeted is undoubtedly exacerbated by the fact that big American financial houses such as Goldman Sachs and Merrill Lynch are large holders of Internet gaming stocks, but as of yet have suffered no apparent repercussions.

For example, Fidelity held a stake in Sportingbet, an on-line company that, pre-UIGEA and even with its chairman under arrest for violation of Louisiana gaming laws(!), was worth $363 million. I have been unable to find any report that Fidelity or the other big American fund managers or investment banks have been compelled by moral or legal qualms or the U.S. government to divest their gambling holdings and realize their sizable paper losses.

On January 22nd, a "senior banking source" stated to the Times of London:

“The US is saying to itself, ‘We must get somebody’, and in the process it seems to think it can foist . . . US legislation, even individual state legislation, on anybody.
“It is a straightforward case of the Government being responsible for setting and arranging sensible boundaries on what the US can request.”

Prime Minister Blair, already tottering under domestic scandals and crippled by his image as America’s poodle for his complicity in President Bush’s Iraq disaster, now has to decide whether he wishes to alienate elite English opinion even further by acquiescing to U.S. extradition demands for some of Britain’s richer and better-connected men and women.

If things go badly for him, Tony Blair may supplant Jim Leach as UIGEA’s most prominent political victim.

However, there is more to UIGEA’s assault on the on-line gaming industry than the legal, political, financial, and diplomatic collateral damage it has already inflicted on innocent and not-so-innocent bystanders.

Within the United States, the UIGEA bill, although a premature piece of political grandstanding by Bill Frist, dovetails very nicely with an apparent U.S. predisposition to strangle the Internet gambling baby in its cradle.

The U.S.government is clearly leaning toward a casino-centric vision of gaming development in direct conflict, philosophically and legally, with the British push for Internet-based gaming.

In particular, it represents a rejection of the on-line poker business model that promised to be “the next big thing” that would power a global constellation of financial, media, and high tech interests in a reprise of the dot.com boom of the 90s.

The revolution that poker brought to on-line gaming--and promised to bring to international finance-- is conveyed in Online Poker: Going All In to Expose the Internet's Billion Dollar Bet by David Silverberg in the May 5, 2006 Digital Journal, written at the height of the on-line poker frenzy.

Fueled by the unexpected popularity of the World Poker Tournament, televised poker became America’s third most popular TV sport, behind football and car racing.

A seemingly miraculous synergy between television, the creation of a new sport and celebrities, the attractive nature of play on the Internet platform, and the favorable financial mechanics of the game when it could draw on a bottomless reservoir of new, inexperienced players turned on-line poker into an apparent pop-culture and financial juggernaut.

From 2001 until UIGEA in 2006, on-line poker had exploded:

Online poker revenues have grown from $82.7 million in 2001 to $2.4 billion (all numbers US) in 2005; last year, more than $60 billion was gambled on poker sites; and every day, 1.8 million players toss their ante into the virtual pots of the Internet.

Revenues were expected to reach $24 billion by 2010.

Despite the fact that Internet gambling was outlawed in the United States, the astounding growth rates associated with on-line poker revitalized the international stock flotation infrastructure of investment banks, venture capitalists, millionaires, lawyers, accountants, journalists, shills, grifters, and touts that had been laying dormant since the dot.com boom had gone bust at the turn of the century.

Then PartyGaming, which was by far the biggest player in the world and U.S. on-line poker business through its PartyPoker site, went public in 2005 in London with an IPO that valued the company at $12 billion—the largest stock floatation on the LSE in five years.

The Guardian gives an idea of the electrifying shock the PartyGaming float brought to the financial world (while noting in passing that two of Britain’s ten top fund management houses—who must be feeling very proud, prudent, and prescient today—passed on the deal because of the legal risks):

PartyGaming's Party Poker website was launched only in 2001 but the company is now worth more than some of the oldest and most famous names in British business, notably Sainsbury's, EMI, Rolls-Royce, British Airways, ICI and ITV.

PartyGaming's advisers, Dresdner Kleinwort Wasserstein, said they could have placed the shares three times over. The investment bank and its fellow underwriters will earn up to £40m in commissions from the float.

Other companies soon followed, netting their founders millions.

Behind all the enthusiasm was the fact that even with the runaway growth already experienced, the on-line poker industry’s penetration in the massive U.S.market—home to half of the world’s 100 million poker players—had only reached 3% by 2006.

Clearly, there was a tremendous amount of fuel available for the growth rocket.

There was also the perception that the U.S. government would not, despite the archaic anti-gambling strictures of the Wire Act, stand in the way of a revolutionary, burgeoning industry that offered the prospect of so much money and excitement for so many people.

But UIGEA, and the aggressive campaign to enforce it crushed the hopes of the publicly-listed on-line gambling industry.

At first, Internet gaming enthusiasts hoped that Harry Reid, Democrat and Senator from Nevada, who replaced Bill Frist as the new U.S. Senate Majority Leader, would lead an effort to repeal UIGEA.

However, it appears that Reid, who fought against mob control of the Las Vegas casinos in his previous position as Gaming Commissioner, wants a tight lid on all gambling, including on-line gambling, saying “Gambling cannot be regulated. It can only be controlled.”

Reid is probably skeptical of the titanic market forces seeking to shake off the regulatory shackles and grow the gambling industry to reach its full potential, since some of these same forces were responsible for strapping a bomb underneath his station wagon back in the good old days.

He is also, without a doubt, extremely conscious of the support that the brick-and-mortar casinos and their nearly quarter of a million flesh-and-blood employees provide to his political endeavors in Nevada, and will not endanger their well-being lightly or prematurely with some ill-considered de-regulatory legislation.

Therefore, consider it likely that Internet gambling in the United States will be legalized gradually, if at all, and only for U.S.-based operations whose transparency, accountability, and assets at risk within the country offer the best assurance of complete and eager regulatory and IRS compliance—America’s well-heeled, highly regulated, and basically legit casinos.

Ironically, this old-fashioned approach to gambling—call it selective prohibition—may find vindication of its quasi-mercantilist model in the behavior of the world’s other great gambling power—China.

The unequal struggle between on-line gaming and traditional casino gambling for the China market has already begun.

Deprived of its primary growth engine and driven by the financial dynamics of its game, the on-line poker industry is already knocking on China’s door, anxiously chumming for customers, and trying to vindicate its revolutionary business model after the shattering rebuke of UIGEA.

The poker industry requires a never-ending supply of “fish”—inexperienced or unskilled players with a tendency to lose—to provide recreation and profit to the “sharks”, and income to the website through its commission or “rake”. Otherwise, the pool gets filled with too many sharks, it becomes harder to win, and players drift away to other sites or out of the game altogether.

China is teeming with millions of potential fish.

To entice them, gambling sites and their constellation of education/tout websites have been Sinicized. Television deals have been signed. Johnny Chan—Cantonese speaking, and two time winner of the World Series of Poker—is being pushed as the public face of poker in the Far East.

Oliver Tse, a poker writer and eager evangelist for the future of Chinese poker, does the math:

Consider the following statistic: even if only 1 out of every 1,000 mainland Chinese residents were to put up 1,000 Yuan, or about USD$125, to enter an online satellite poker tournament for a 1-in-100 chance to advance to a $10,000 buy-in televised No Limit Texas Hold'em tournament, China alone would qualify over 13,000 players to that particular tournament, which would have a field whose size far exceeds the size of the field of over 8,700 at the 2006 WSOP World Championship Main Event.

Tse predicts that a WTP (World Tournament of Poker) event will be played in a Macau casino by 2008 that Texas Hold ‘Em will reproduce its Western success as a sports, gambling, and growth juggernaut in the Chinese market (although, as he admits disarmingly, his father tells him he “[doesn’t] believe Texas Hold'em will catch on in the Chinese-speaking markets in Asia because Texas Hold'em is too "slow" and too "difficult" to understand and learn compared to games such as Baccarat which dominates the Macau gaming market.”

There are also significant legal and policy factors that militate against on-line poker repeating its miraculous and profitable rise in China.

Gambling is illegal in China--except for limited lottery and keno concessions--and the prospects for tolerance, let alone legalization, of on-line gambling appear remote.

Tse admits that China’s iron control of the Internet will require explicit approval and licenses for poker to be played on-line in China.

One company has apparently succeeded in getting its nose in the tent: Sino Strategic International (SSI).

SSI, an Australian company, already operates lottery and keno gambling through several hundred outlets in Shanghai, with proceeds benefiting a state-sponsored welfare fund.

It has structured a similar deal with the China Aged Care Fund (CACF) “to jointly establish the CACF Charity Poker club and develop community aged care property projects which will include Multi-function Entertainment Centres (MECs) across China.”

The pitch is that the MECs will, through the magic of poker, anchor and fund retirement property developments nationwide.

The developments, described as “destination entertainment locations for surrounding residents and visitors” sound a lot like casinos in waiting, albeit with the disconcerting potential for bewildered retirement home denizens shuffling through the property at inopportune moments.

SSI also has plans for on-line poker.

Fatally, however, they are based on a VPN—a private network linking poker players around the country—instead of access to an open Internet platform.

Expect China to work to keep the Internet gambling genie in the bottle.

China shares with the United States a distaste for the overseas flow of potentially taxable gambling winnings into foreign hands.

Add to that China’s tight capital account restrictions—and the resulting obsession of Chinese businesses and individuals to gamble on the yuan exchange rate through illicit offshore financial hocus-pocus—and I think that China’s enthusiasm for permitting foreign companies and foreign players to fleece China’s poker players on-line is virtually nil.

China has seen the future of Asian gambling, and it looks a lot like its past: Macau.

An in-depth article by William Mellor and Oliver Staley on Bloomberg analyzes the Macau phenomenon—and the gold rush mentality of foreign casino operators flocking to the enclave that is fueling $20 billion in resort construction—in detail.

In 2005, Macau replaced Las Vegas as the world’s leading gambling Mecca. It draws on 2 billion potential visitors within the radius of a five-hour airplane flight (as opposed to 400 million for Vegas) and registered 6.8 billion in legal revenue in 2005 (vs. $6.5 for Vegas).

Thanks to loosened travel restrictions, 250 million residents of China—presumably almost all of the city dwellers who have enough money to lose a significant chunk of it at a casino—are already able to go to Macau as individual travelers.

``In 10 years, Macau will resemble Vegas on steroids,'' says Brian Summers, who helps manage $28 billion at Santa Fe, New Mexico-based Thornburg Investment Management Inc., including $240 million worth of Las Vegas Sands shares. Summers points to the demographics. Macau (population: 500,000) is the only place in greater China -- the mainland, Hong Kong, Macau and Taiwan --where its 1.3 billion people can gamble in casinos.

Led by Macau, Asia’s growth projections look a lot like on-line poker’s did—before UIGEA.

Across Asia, casino companies will spend as much as $71 billion over the next five years, according to [Merrill Lynch analyst Sean] Monaghan. Annual gaming revenues for the region could double to $23 billion in 2010 from $11.9 billion in 2005, according to a 2006 PricewaterhouseCoopers LLP report.

China’s domestic gambling industry is immense—estimated at about $100 billion US, of which only about 10% is accounted for by the legal keno and lottery plays.

However, given China’s basic bias toward government control; the tsunami of corruption, crime, tax evasion, and ruinous competition that a deregulated approach to legalized gambling would engender; and the government’s poor track record in matters of local criminal and tax law enforcement, I believe the PRC will keep gambling under tight control—and largely off-line—for the foreseeable future.

That, in turn, implies allegiance to the brick-and-mortar megacasino national gambling model, whether practiced exclusively in Macau or warily extended to a few locations in China.

Things might have gone differently if the U.S. government had negotiated with the various gaming stakeholders, on and off-line, held off on the premature and disruptive UIGEA legislation, and perhaps thrown its weight behind legalization of Internet gambling and the rise of new, web based gambling enterprises.

Instead, the publicly traded on-line gambling businesses that might have built well-capitalized, valuable, and trusted global brands have been crippled by their exclusion from the United States.

Furthermore, U.S. law enforcement actions against operators and facilitators of on-line gaming has legitimized similar restrictions—that might otherwise have been considered restraint of trade—by China and other countries.

In contrast, the traditional casino companies have been immeasurably strengthened. Secure in their core U.S. businesses, they are free to invest and partner in the new Asian projects.

Instead of internationalized gambling driven by the Internet, we will see the consolidation of national gambling blocs in the United States and China, with operations concentrated in the hands of a few well-capitalized multi-nationals operating brick-and-mortar casinos that double as resorts, with on-line gambling as a distant third priority.

The demand for on-line gambling will survive and grow despite the proliferation of national laws and international enforcement efforts. The only difference: since Internet gaming networks that serve U.S. and Chinese customers will be criminalized, they will simply be run by criminals

But the immense river of money that seemed to be headed for a new generation of publicly-held, visionary--and legal--Internet gaming companies will instead be flowing into the pockets of the powerful and politically connected old guard.

That’s a world of consequence for Dr. Frist’s eleventh-hour legislative coup, one that perhaps was not intended to be much noted or remembered outside of the Iowa caucus rooms in January 2008.


Probably nobody is happier with the havoc that UIGEA has wreaked on the Internet poker industry than one “Dickie Richard”.

“Dickie Richard” is the pseudonym of a professional card cheat whose specialty is the home game, played in what we Internet types call “meat space”i.e. the real world a.k.a. your home.

Richard has made a career out of joining, building, and burning these games with a unique combination of card mechanic skills, psychological manipulation, amoral ruthlessness, and, I might say, monastic fanaticism in his devotion to perfecting and practicing his craft.

He despises Internet poker because it only permits the most vulgar cheating—one grifter playing multiple hands or collusion of one or more confederates sharing information on their cards—without the technical, physical, emotional, and moral risks of walking into someone’s home, robbing a group of men, and returning to steal from them again and again for weeks at a time.

With the drift of poker players toward the Internet slowed by UIGEA’s attack on poker websites and the financial companies that provide the necessary flow of money back and forth, there is a wide-open path ahead for those who want to make a career out of ripping off the incompetent, careless, and self-deluded fish who make up the majority of the home poker players.

Aspiring grifters will be happy to know that Dickie Richard has written a book:

It’s called How to Cheat Your Friends at Poker and was published under the auspices of Penn Jillette, the large, vocal half of the Penn & Teller magic act.

Jillette apparently met “Dickie Richard” when Jillette was scratching out a living on the streets at a young age. Richard mentored him and helped start Jillette on the road to his current career at the intersection of magic, showbiz, and Foucaultian deconstruction.

Jillette feels he owes Richard a debt and assisted him in rewriting his book and getting it published. However, he does have qualms, as he admits shamefacedly in the Introduction:

Cheating at home card games is stealing from friends. It’s as easy as that. The techniques are easy. The work is easy. All that makes it hard is the morals, and unfortunately there are ways to get over that problem. Sadly, this book will help.

In addition to the relatively straightforward discussions of card marking, card palming, cold decks, “tilting” (psychological manipulation), and obsessive practicing that enable a card cheat to take total control of a home card game, Richard also dispenses useful advice on topics shunned by more conventional poker guidebooks, but which will be of use both to the aspiring card cheat and any ordinary dirtbag.

Richard devotes an entire chapter to the important subject of What To Do When Caught Cheating, and pounds home the basic rule: Admit Nothing! even if “someone grabs your hand and the six of diamonds falls out of your sleeve”.

He briskly leads the reader through the psychological dynamics and medical consequences suffering rough justice at the hands of an enraged mob, commenting, “Hand stompings hurt—a lot—but you’ll live, and later you’ll just have to learn the moves again with your new hands,” and ends with the golden rule of getaways:

And always, always keep your car with the driver’s door unlocked and the keys in the ignition.

He concludes mordantly:

Don’t worry about your car getting stolen. You’ll be playing mostly in good neighborhoods...If your car happens to be stolen the same night that you get busted cheating, then god wants you dead and there’s nothing you can do about it.

While providing a how-to manual for the aspiring grifter, “Dickie Richard” also seems to be auditioning for a role in a Russian novel. Dark pride, self-contempt, and hatred pour off the page in equal measure.

He describes his Big Mistake—losing his entire bankroll of over two million dollars in a to a judge in New Hampshire because his ego told him he could win straight up without cheating—like this:

I’ve never been back to New Hampshire. I can’t talk to anyone from Vermont because it’s too close to that memory...I couldn’t look at myself in the mirror for weeks. I still feel sick about it. Honor and equal pay on equal footing, being beat fair and square; that’s not worth 2.3 million dollars. That’s only worth a lifetime of pain...If there’s a lesson to be learned, it’s that you should never ease up, and don’t even think about playing fair.

After this cris de coeur, the triumphant sneer returns to Richard’s authorial voice as he tells how he paid a hooker $5000 to give the Judge a case of the clap—his case of the clap.

As a concluding moral palate cleanser after this sordid repaste, I would also like to point out an instance of useful scholarship in the book—the origin of the phrase “passing the buck”. We all know the philosophy behind Harry Truman’s famous phrase, even if its concrete meaning is obscure.

For our benefit, Dickie Richards glosses the word buck:

People call dollars “bucks” because they used a buck knife as a dealer button in the old days...The knife got replaced by a silver dollar, but they still called it a buck.

The “dealer button” for poker non-initiates, is now a plastic disk (itself heir to the silver dollar mentioned above) passed around the table at casinos to show which player is the nominal “dealer” even when a professional dealer is actually responsible for holding the deck and distributing all the cards.

Apparently, in the rude days of the frontier, poker players learned to alternate the deal to protect the deck from the intensive manipulations of whatever Dickie Richard might be lurking at the table—or maybe just to give each player an equal chance to cheat.

They would pass a buck knife around the table as a marker to keep track of whose turn it was to deal

“The buck stopped” in front of the player who was responsible for dealing the cards for the upcoming hand—something that Harry Truman, an inveterate poker, would be well aware of.

Richard concludes the entry triumphantly:

Who said that cheaters don’t know sh*t?

Not me. Thanks, Dickie.

For those who desire the endorsement of the Academy, Gary Martin covers “pass the buck” at The Phrase Finder.

Truman’s love of poker is attested to by no less authority than the U.S. National Archives, which also records this amusing anecdote:

Winston Churchill joined in one of Truman's poker games during his visit to the United States in 1946. Churchill and the presidential party were on their way by train from Washington to Fulton, Missouri, where Churchill would tell the world about an "Iron Curtain" that had descended upon Europe. This night, however, the great man's oratory was about his poker prowess gathered over forty years. Truman was worried about the honor of American poker players, and he and his companions felt they would have to play their best. As the game progressed, though, Churchill lost steadily, and his stack of chips dwindled. After about an hour of this disastrous play, Churchill left the room for a moment. Truman told his companions that they would have to let up some. "But, Boss, this guy's a pigeon" one of the players, Harry Vaughan, burst out. "If you want us to play our best poker for the nation's honor, we'll have this guy's pants before the evening is over." The players did let up on Churchill some, but not enough to let him go back home claiming he had beaten the Yanks.

How to Cheat Your Friends at Poker/the wisdom of Dickie Richard by Penn Jillette and Mickey D. Lynn, copyright 2005 is published by St. Martin's Press, New York and is available at Amazon.