Author Archives: Joseph Shupac

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Canada Goes to Vote!

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The last time Canada voted, in 2011, the result was an election of first-in-a-while’s:

  •  the first party to win a majority government since 2000
  • the first Conservative party to win a majority government since 1988
  • the first time since 1962 that a Conservative party won three consecutive federal elections
  • the first time in Canadian history that the Liberal Party won fewer than 40 seats (it got just 34, down from 77 seats in 2008 and 100-plus seats in every other election since 1988)
  • the first time the Bloc Quebecois won fewer than half of Quebec’s parliamentary seats (it won just 5%, down from 65% in 2008 and an all-time high of 72% in 2004 and 1993)
  • the first time the Bloc Quebecois won less than 38% of Quebec’s popular vote (it got just 23%, down from an all-time high of 49% in 2004 and 1993)
  • the first time the Liberals were not one of the top two seat-winners in Canada’s largest province of Ontario
  • the first time the New Democratic Party won more than 43 seats nationally (they won 103, 59 of which came from Quebec)
  • the first time the modern Conservative Party fared decently well with non-white voters
  • the first time the Green Party won any seats at all (though it only got a single one, and it received a lower share of the popular vote, 3.9%, than in any other election since 2000)
  • and finally, the first time since 1984, 1958, and the World War elections of 1940 and 1917 that a single political party won either the popular vote or the most parliamentary seats in each of the eight Canadian provinces outside of French-speaking Quebec and remote Newfoundland (the Conservatives won the popular vote and the most seats in all eight of these provinces, in spite of winning just 39.6% of the popular vote and 54% of seats nationally)

Such a significant Conservative success reflected the fact that Canada’s economy and banking system performed better than those of most other rich-world nations following the global financial crisis. It was in fact only a year after the election that Bank of Canada chairman Mark Carney was enticed to move abroad to run the central bank in Britain, even though the British financial system is far larger, far more worldly, and far less dependent on natural resources than Canada’s, and had never before been run by a non-Briton. The myth of the super-responsible Canadian banker or financial regulator, a sort of modern Mountie in the otherwise cutthroat world of global capitalism, was in full swing. While this myth came mainly from other developed countries like the United States and England, which were desperately seeking an alternative to what they saw as their own untrustworthy financial classes, Canada’s Conservatives banked on the pride and confidence it generated to help them win big in 2011.

Like most stereotypes, this trait of the prudent, conscientious, and highly skilled Canadian banker may be true in certain cases – witness, for example, Brad Katsuyama, the hero of Michael Lewis’ recent financial bestseller Flash Boys – but still it is an exaggeration at best. Even as the Conservatives spoke of how their financial regulators and Canadian bankers had acted with the utmost restraint, the very opposite of greedy and wild Wall Street and Washington, they also enticed Canadian and foreign investors with lucrative dreams of becoming an “energy superpower”, intending the vast oil sands reserves in western Canada and Newfoundland to finally wean America off of the Middle East — and, simultaneously, to diversify Canada’s export dependence away from America by fueling a resource-hungry emerging Asia. Of course, this was still a year or two before “shale” and “fracking” would become household words, and before China’s raw materials imports really started to slow.

Now, with commodity prices having plunged and another Canadian election coming up on October 19, the Conservatives are in a bind. They are attempting to take the credit for Canada’s past successes while trying to shift the blame for its current flirtation with recession onto low oil prices, just as the NDP and Liberals are trying to pin the blame on the Conservatives for the current slowdown while shifting the credit for Canada’s past success onto the previously high oil prices. The NDP leader of the opposition, Thomas Mulcair, recently claimed that “Harper [the Prime Minister] put all of Canada’s eggs in one basket and then dropped the basket”, referring to the government’s support for the energy sector. (Canada is the world’s fourth largest producer of oil and gas, second largest producer of uranium, sixth largest generator of electricity, and fourteenth largest producer of coal). And yet Canada’s economic troubles might in a strange way actually work in the Conservatives’ favour, since they are still thought by many to be the party most adept at achieving GDP growth.

Then again, maybe Canada’s economic slowdown will end up haunting the Conservatives next week. Already this past May the Progressive Conservative party lost a provincial election in the right-wing stronghold of Alberta, where falling energy prices have been hitting the economy especially hard. Not only did Alberta’s Conservatives win six times fewer seats than the NDP did, but they also trailed behind the Wildrose Party, an Alberta-specific party that was formed in 2008, which also finished far ahead of the Conservatives in seats and even nearly beat the Conservatives in the popular vote.

So while nothing is certain yet even at this late stage in the national campaign, it does seem as though the best that Stephen Harper’s federal Conservative Party can hope for is to take the helm of a minority government like it did in 2004 and 2008. This seems to be an achievable goal for the Conservatives, since even if they win fewer seats than they did in 2011, which is likely, they could still benefit from the fact that the NDP and Liberals may divide the anti-Conservative vote along provincial, linguistic, and generational lines, if the NDP again depend heavily on getting votes from young people, British Columbia, and especially Quebec, and if the Liberals again do not.

In foreign affairs, Harper’s Conservatives are keeping to their strongly held anti-ISIS, anti-Putin, and pro-Israel model, while the NDP and Liberals are trying to stick them with the blame of not doing enough for Syrian refugees, polluting the global climate with carbon emissions, fear-mongering over the threat of Islamic terrorism and the spread of the Niqab within Canada, and, as it is often put, “betraying Canada’s traditional peace-keeping role”. (Canadians miss the days, which reached their apex under George W. Bush, when they were viewed as the good guys and Americans would sometimes pretend to be Canadians when travelling overseas). With Canadian soldiers now back from Afghanistan, where they suffered by far the most casualties of any Western armed forces apart from those of America or Britain, few Canadian voters are in favour of embarking on any new “on the ground” military interventions abroad. As a result, much of the debate has been whether or not the country should remain a token part of the international air force bombarding ISIS-held territories in eastern Syria.

The Liberals, who had won ten of the past thirteen federal elections until they were defeated in 2004 and 2008 and then crushed in 2011, have chosen Justin Trudeau, son of four-term former Prime Minister Pierre Elliot Trudeau and actress Margaret Sinclair, as their comeback kid. Trudeau was born less than ten months after his parents wed; his mother was only 22 years old at the time, while his father was 52 and three years into his nearly unbroken decade a half long tenure as PM. Trudeau the Son has had anything but a simple life. His parents were divorced when he was six years old, and his mother continued to be under media scrutiny as a result (among other things) of possibly having relationships with Ted Kennedy, Jack Nicholson, and Ron Wood. Most tragically, one of his two full siblings was killed in an avalanche when he was 27 years old.

In this election Trudeau has often been attacked for his inexperience (he only became an MP in 2008 and party leader in mid-2013), his youth (proving that Canada may be on the verge of entering a topsy-turvy Baby Boomer-led world in which being a 43 years old father of three can still be considered “too young”), his pretty-boy image, and of course his being a political princeling at a time when Canadian voters may be somewhat wary of family dynasties because of the despised W. Bush presidency and the Clinton-Bush faceoff that may be just around the corner south of the border. In 2011 the Liberals received fewer seats than the Conservatives or NDP in every province or territory outside of Newfoundland and Prince Edward Island (which together are home to fewer than 700,000 people) and tied with the Conservatives in Nova Scotia, yet still they remain hopeful that they will bounce back and re-take the Prime Minister’s office. Their trust in Trudeau may prove fruitful: recent polls have for the first time put the Liberals relatively far ahead in the lead with 35 percent support, compared to 29 percent for Harper’s Conservatives and 25 percent for Mulcair’s NDP.

While Trudeau is still seen as a political prince by much of the Canadian public, less well-known is that Thomas Mulcair, the NDP’s candidate for Prime Minister, also comes from a political lineage: his great-great and great-great-great grandfathers were both Premiers of Quebec. Mulcair is the second-born child of ten siblings in a half-Irish Catholic, half-French Canadian family, and grew up outside of Ottawa (on the Quebec side of the Ontario-Quebec border) and later in a suburb of Montreal. As recently as 2007 he was the NDP’s sole member of parliament from Quebec, which has since become the party’s political base. He was not, however, chiefly responsible for the NDP’s undprecedented success in the 2011 election, but rather came to his post as NDP leader following the death of 61-year-old Party Leader Jack Layton, who tragically died from cancer less than four months after his party’s massive electoral upswing that year.

The NDP was until relatively recently seen as a “far left” party many Canadians, but Mulcair has now been trying to position it closer to the political centre by promising, like the Conservatives but unlike the Liberals, to run a balanced federal budget next year and not raise income taxes for even the highest-earning Canadians. When asked in a recent debate about the need to run a deficit in order to provide government stimulus spending for the economy, Mulcair said that “Harper has hit the snooze button while Trudeau has hit the panic button”.

Mulcair has, however, kept more to traditional left-wing NDP positions on other issues like childcare support, corporate taxation, minimum wages, and environmental protection. He has in the past, from 2003 to 2006, served as Quebec’s provincial Minster of Sustainable Development, Environment, and Parks. Quebec is especially important for the NDP, as at the moment they hold 79 percent of its seats – and Quebec has 24 percent of Canada’s seats – compared to just nine percent for the Liberals, seven percent for the Conservatives, and five percent for the Bloc Quebecois.

For a country in which per capita carbon emissions are the highest among G7 economies and where love of the natural environment is held as both a defining national principle and mandatory beer commercial theme, Canada’s political leaders have been surprisingly ungiving on the subject of climate change. While all of the major parties have said they would invest in fossil fuel alternatives like wind and solar – a policy that has already led to a solar panel boom in a country that is not at all rich in wintertime sunshine – none are bullish on carbon taxes. Harper’s position is that they are little more than a left-wing trojan horse for general tax increases, so he is against them. Trudeau on the other hand is in favour of helping the provinces continue to take the lead on this issue (currently, British Columbia has a carbon tax and Ontario and Quebec cap-and-trade), while Mulcair supports a countrywide cap-and-trade system.

Even the Green Party has not been arguing for carbon taxes as much as one might assume they would. Instead they have been trying to position themselves as more than just a single-issue party, in order to remain more than just a single-seat party. (For the moment they actually possess three seats, because two members of parliament who were victorious as NDP representatives in the last election have since changed their colours to Green). Green Party candidates have been advocating for other popular policies, like a guaranteed minimum income and the repeal of Bill-C51. Party leader Elizabeth May recently told famous Canadian broadcaster Peter Mansbridge that they are likely to win 12 -15 seats and then ideally become a political kingmaker in parliament. This seems highly improbable: hatred of Stephen Harper has now built up to such a great extent among left-wing Canadians that Green supporters may be tempted to vote “strategically” for the NDP or Liberals just so that he will finally be kicked out of office.

Will Harper be kicked out of office? And if so, who will become Canada’s first new Prime Minister in a decade, Trudeau or Mulcair?

Tune in next week to find out.

China’s Hidden Regionacracy, part 1: China’s Borderlands

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How can one measure China’s economic stability? In the West, it is common to look to Hong Kong and Tibet as litmus tests of the strength of the central Chinese government. While it is true that both Hong Kong and Tibet are very important places, their combined populations do not account for even one percent of China’s overall inhabitants.

To get a better sense of China’s stability, then, one must also examine the other areas of China where the dictates of the central government are most likely to be resisted. Arguably, these include the following six regions: Southwestern China (namely, the provinces of Yunnan and Guizhou, plus the “Autonomous Region” of Guangxi), Southeastern China (the provinces of Guangdong, Fujian, and Hainan), Northeastern China (the provinces of Heilongxiang and Jilin), the Sichuan plateau (the province of Sichuan and “Direct-controlled Municipality” of Chongqing), and the “Autonomous Regions” of Xinjiang and Inner Mongolia.

These regions have a total population of over half a billion. They are home to a majority of China’s 120 million or so ethnic minorities, 300-400 million speakers of languages other than Mandarin, tens of millions of speakers of dialects of Mandarin that are relatively dissimilar to the Beijing-based standardized version of Mandarin, 20-30 million Muslims, 50-100 million recent adopters of Christianity, and tens of millions of family members of the vast worldwide Chinese diaspora.

Together, these regions form a cordon around the flat, triangle-shaped Chinese heartland that extends for more than a thousand kilometres from Beijing to Shanghai, where most of the rest of China’s population lives. Several other provinces, meanwhile, such as Shanxi, Gansu, Hunan, and the Hui Muslim “Autonomous Region” of Ningxia, arguably fall somewhere in between China’s central and peripheral territories, from both a geographical and political perspective.

Along with the high-altitude Tibetan(-Qinghai) Plateau and the Chinese Himalayas, these six peripheral regions possess by far the most rugged, expansive, and insular terrain within China. Their territories consist either of:

  • subtropical hills and mountains (throughout most of Southeastern and Southwestern China)
  • vast semi-desert plateaus (in Xinjiang and Inner Mongolia)
  • enormous mountains (in Xinjiang, where mountains cover an area larger than England and regularly reach heights higher than the highest Rockies)
  • mountainous or hilly islands (within the archipelagic coastal waters of Southeastern China, in places like Hong Kong, Macau, Hainan province, Xiamen, Zhoushan, Pingtan County, and nearby Taiwan)
  • mountain-enclosed riverlands (in Sichuan and Northeastern China)

Not surprisingly, Chinese central governments, whether they are controlled by ethnic Han Chinese as is the case today, or else by outside invaders like the Manchu or Japanese as was the case for most of the past half-millenium, have almost always had trouble subduing most or all of these areas.

Indeed, China’s peripheral regions contain all of China’s land borders, which are the longest in the world, more than two thousand kilometres longer than all of Russia’s land borders and well over double the length of the continental United States’. These borders remain almost impossible for the Chinese government to fully control, not only because of their incredible length and difficult terrain, but also because they are located an average of between one and a half thousand and three thousand kilometers away from the Chinese heartland. Only two significant railway lines cross the western half of this enormous distance as of yet.

Complicating matters further, China’s borders are shared with fourteen different countries, nearly all of which possess either ethnolinguistic or religious ties with the areas of China they are adjacent to. These include:

  • the long Himalayan border that separates Tibet from India, Nepal, and Bhutan, across which the exiled Tibetan Buddhist leadership resides
  • the even longer border that seperates Inner Mongolia (where more than one-fifth of the population are ethnic Mongols) and Xinjiang from the country of Mongolia (which in turn shares a three and a half thousand kilometer-long border with Russia)
  • the Manchurian-Korean border, where China is terrified of millions of refugees flowing in from North Korea in the event of a disaster there, and where nearly two million people living in the Manchurian provinces of Heilongxiang and Jilin are already Korean
  • the twin Siberian borders with Xinjiang, Inner Mongolia and Manchuria; Xinjiang’s borders with Khazakstan, Kyrgystan, Afghanistan, Pakistan, and Kashmir, where, as in Xinjiang, a plurality of the population is Muslim and/or ethnolinguistically Turkic
  • the southeastern and southwestern Chinese borders with Southeast Asia, throughout which there is a diaspora of tens of millions of southern Chinese, and where ethnic minority populations span both sides of China’s borders with countries like Myanmar and Vietnam.

As the economies of these peripheral Chinese regions as well as China’s neighbouring countries emerge, as in recent years many have begun to do at a faster pace than the Chinese economy has as a whole, they may deepen this array of cross-border relationships, and in turn could undermine efforts by China’s central government to enforce national unity within the huge Chinese economic and political system. The Chinese have certainly been worried about their neighbours within the relatively recent past: China sacrificed hundreds of thousands of its citizens during the Korean War in the 1950’s and then thousands during the Sino-Vietnam War in 1979, which, as a point of comparison, may be more casualties than the United States has suffered in all of the wars it has ever fought put together.

Since the 1980’s, however, as the China-US alliance took root and the Chinese economy began rapidly expanding, and as the economic growth of most of China’s neighbours collapsed in the early 1990’s (Japan and the Soviet Union), late 1990’s (South Korea, Taiwan, Southeast Asia, and British-era Hong Kong), or during the the 2008 global recession (Russia, Japan, Taiwan, Europe, and North America), while around the same time the power of China’s English-speaking rivals became preoccupied with Afghanistan and Iraq throughout the 2000’s, China has not had to worry about its borderlands nearly so much.

This is not to say that these regions were problem-free during this period. The Chinese government has in fact been concerned with many of them, including, for example:

Yet all such risks proved to be manageable ones, eased as they were by the amazing Chinese economic boom that was then still in full swing, and by the fact that China, which until 2010 still had an economy thought to be smaller than Japan’s, had not yet attracted the full attention of other powers intent on containing it.

Lately, in contrast, just as the United States has been disengaging from Afghanistan and Iraq and the economies of the US and Britain have begun speeding up again following their multi-year post-recession slog, and just as Japan, which continues to have the third largest economy in the world by a large margin, has finally begun to rebuild its will to implement an aggressive economic stimulus program and outwardly post-pacifistic foreign policy, many of China’s peripheral provinces and most of the countries surrounding China either grew or accelerated their economies at a faster pace than did the overall Chinese economy, which has slowed significantly in recent years.

In some of these areas, for instance on both sides of the border between south-western China and northern and eastern India, growth in 2014 accelerated at a much faster pace than in China as a whole. While China’s overall economic growth nevertheless remains quite strong compared to most of the rest of Asia and the world – at least, according to Beijing’s own official estimates, which admittedly are dubious – this constellation of recent trends does not bode well for its central government going forward.

Why Israel Won’t Let the West Bank Go

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Most of Israel’s critics argue that any Israeli claim to the moral high ground is compromised by the fact that the Israeli military has been dominating the West Bank since 1967, thereby denying the Palestinians the ability to ever form their own state. While of course there is some truth to this argument, it nevertheless ignores a critical point: Israel believes it must control the West Bank, at least for now, in order to ensure its own continued safety over the long-term.

Even though religion is the key motivator for most of the Jews and Christians who have settled or support Jewish settlement within the West Bank, Israel’s desire to control the West Bank is not ultimately rooted in religion, but rather in physical geography and presumed strategic necessity.

By dominating the West Bank, Israel gains control over the Jordan Rift Valley, a steep-walled, incredibly deep canyon containing a number of the points on earth that are the furthest below sea level, through which the Jordan River (which is really more like a stream) flows into the Dead Sea. The rift valley has historically served as an excellent defensive barrier against invasion or incursion. Israel uses it both as a defensive border with Jordan and as a barrier separating the estimated three million Palestinians living in Jordan from the three million Palestinians living in the West Bank. Israel is hardly alone in wanting control over this valley: about seven different African states also use the Jordan Rift Valley (in Africa it is called the Great East African Rift Valley) as an international border.

Even more important, the West Bank allows Israel to control the hills and highlands that surround Jerusalem on three sides and directly overlook nearly every other major Israeli city. The average elevation of a West Bank hill is about 700-1000 metres above sea level.  Tel Aviv, in contrast, sits roughly at sea level, with its downtown core just 20 km away from the West Bank and with a number of its suburban areas, like Modi’in or Rosh Ha’ayin, within 2 – 10 km of the West Bank. The Jordan Rift Valley, meanwhile, sits around 200-400 metres below sea level. And the centre of Jerusalem is within 2-4 km of the West Bank in every direction except due west.

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(Source: The Economist)

Managing the West Bank also lets Israel have control over any movement between West Bank Palestinians and Palestinians living within the pre-1967 borders of Israel, the latter of whom account for an estimated 20 percent of all Israeli citizens. Most Israeli Arabs outside of Jerusalem live in a region of hills and low mountains that is just around 20-60 km north of the West Bank, within which they make up about 50-75 percent of the regional population. This region also happens to be strategically crucial for Israel, as it borders Lebanon and overlooks Haifa (Israel’s largest port and third largest city) and the Jezreel Valley, the latter being Israel’s route to the the Sea of Galilee and Golan Heights, which is where the majority of Israeli freshwater is located and which serves as a relatively defensible Israeli border with Syria, Lebanon, and Jordan.

Israel’s continued occupation of the West Bank, then, is most likely the result of Israel’s intense desire for security, rather than the result of the Israeli government being a uniquely radical one. Indeed, it is possible that the Israeli government’s support for religious Jewish civilians settling the West Bank is based for the most part on the notion that these settlers are likely to help cement Israel’s strategic control over the region, rather than being a result of, as most critics of Israel believe, the Israeli government’s having been cowed or infiltrated by religious Jewish extremists. Of course, this does not mean that extremist views have not also become much too influential within Israeli politics.

The idea that Israel faces meaningful threats is not some outdated relic from the earlier days of Zionism when the country’s power was not yet fully-formed. To the contrary, it was only a decade or so ago, between 2001 and 2005, that a thousand Israelis were killed by Palestinian militants, most of them in suicide attacks. Relative to the size of Israel’s population, that would be the equivalent of about 45,000 Americans being killed, roughly nine times more than have died in Iraq and Afghanistan combined. In addition, Israeli attacks during this conflict claimed the lives of an even larger number of Palestinians.

Perhaps more worrying than the prospect of another intifadah, however, is the possibility – however unlikely – that Israel could suffer thousands or even millions of casualties by militant groups or individuals armed with weapons of mass destruction. This threat too may inform Israel’s continuing presence in the West Bank. If, for example, a country that has nuclear weapons, such as Pakistan, were ever to collapse into extreme chaos, one of Israel’s main defences would probably be to seal its own borders, and perhaps also to establish buffer zones in areas like the eastern Sinai Desert or southern Lebanon, until it could ascertain whether or not any such weapons were likely to have gone missing.  The goal would be to protect its core territories between Tel Aviv, Jerusalem, Haifa, and Be’ersheva.

This strategy might be an effective one, not only because Israeli borders are fairly short and carefully guarded, but also since it is extremely challenging to properly adapt a nuclear weapon for a missile – particularly a long-range missile – and because Israel has a relatively sophisticated missile defence system that it hopes to continue to improve over time. The weak link in the defence, however, could be the Palestinian territories, in which there are long-established smuggling, militant, and short-range missile networks as well as borders which are adjacent to major Israeli cities.

The West Bank poses a danger in this sense, because it directly borders and surrounds Jerusalem, overlooks the suburbs of Tel Aviv and Be’ersheva, and has a long external border with both Israel and Palestinian-inhabited Jordan. Indeed, the West Bank’s border with Jordan is more than 10 times longer than Gaza’s border with Egypt; the West Bank’s border with Israel is more than 6 times longer than Gaza’s. As such, Israel’s ability to respond to a nuclear threat arguably appears to depend on its ability to control the border of, or movement within, the West Bank. If you think this sounds paranoid, you may or may not be right – but still it is not surprising that security officials who live in dangerous places like Israel often think this way. The memory of the Holocaust also looms large in these considerations.

This does not mean that there is not a strong religious current running through the Israeli government and helping to drive its policy of expanded settler activity, or that the Israeli government’s alliance with portions of the religious right-wing is not a cynical one. Indeed, by issuing a claim on the West Bank that appears to be irrational – namely, that Israel has a right to it because Jews controlled it during parts of the Biblical era, or that God Himself granted it to the Jewish people – the religious right often dilutes and, in effect, undermines the true security-based explanation for Israel’s ongoing occupation of the West Bank.

Given that Israeli politicians understand Israel’s security situation extremely well, as many are themselves former military commanders or security officials, this also suggests that the Israeli government has been at least somewhat disingenuous with regard to the offers it has extended for a two-state solution in recent years or decades. Unless real trust is formed between Jews and Palestinians, or unless Israeli technology reaches such an advanced state that geographically-rooted security considerations are finally rendered meaningless, it seems unlikely that the Israeli leadership would ever remove its military from the West Bank in its entirety. Israel might not even be willing to remove much of its civilian settler population within the West Bank, as that can double as a security and intelligence force or political bargaining chip in times of crisis. The government’s offers to do so during peace talks, therefore, were perhaps never wholly intended to succeed, but may instead have been extended mainly in order to placate outside observers like the United States and Israeli peacenicks.

Clearly, the Israeli government has made, and continues to make, important mistakes. Many of its actions may even be cruel or counterproductive. Still, it is worth remembering that the primary motivation for the Israeli occupation of the West Bank is its very real and plausibly even existential security concerns, rather than its religious land-claims or nationalistic expansionism. The geopolitics of Israelis and Palestinians are simply intertwined now, and both must somehow find a way to make the best of a very dangerous – and, especially for the Palestinians, very tragic – situation. Getting God out of politics might be a good place to start.

 

 

 

 

Canada’s Election – and what it could mean for the TSX

[Update– My predictions in this article were incorrect: the Liberals, led by Justin Trudeau, ended up winning a majority government in parliament. I didn’t see that coming!]

In most countries, investors usually have a clear idea of what they want to see from an election. They want the victory of a competent, “market-friendly” candidate, with a majority government and no significant regional divisions displayed in the country’s voting patterns. This is, in fact, what they got out of the most recent Canadian federal election, in 2011: the right-of-centre Conservative Party won a decent-sized majority government (which was Canada’s first majority government since prior to 2004), winning in Ontario, British Columbia, and the Prairies, while at the same time Quebec abandoned its independence-minded Bloc Quebecois en masse in favour of the NDP, which also became the largest opposition party by a large margin in Ontario, British Columbia, and the country as a whole.

From the perspective of investors, it is unlikely that the 2015 election will be much more favourable than the current situation that exists in Canada. Even if the Conservatives were to win an even larger majority than they have now, which seems unlikely, this would still only be a continuation of the status quo, and would therefore be unlikely to generate any excitement among Canadians or foreign investors. Plus, given that the Conservative leader Stephen Harper has been Prime Minister for just short of ten years now, this status quo may start to become tiring even for investors and Conservatives. It would certainly not induce any sort of “hope and change” optimism that could potentially help stimulate markets in the short-term. To the contrary, the election campaign will probably make Canadians less confident in the health of their economy, as both the Liberals and the NDP may spend it trying to convince Canadians that Harper has brought the country to the brink of a recession.

In contrast, it is not very difficult to imagine that the elections could make Canada less appealing to investors. Here’s one scenario that would be much worse from an investor’s view: the Liberal Party, led by 43-year old Justin Trudeau (the son of a former Canadian Prime Minister) wins a minority government in parliament, while, on a provincial level, the country is regionally divided in its voting patterns, with Ontario going primarily for the Liberals, Quebec voting primarily for the NDP, the Prairie provinces voting primarily for the Conservatives, and British Columbia splitting its vote between two or three of the parties.

In such a scenario, Canada would have changed from having a “market-friendly” majority government led by an experienced Prime Minister and having no regionalist tendencies reflected in its voting patterns, to having a left-wing minority coalition government led by a young inexperienced Prime Minister (who would have been chosen purely because of his family name) and having significant regionalist divisions between eastern Canada and western Canada and between Quebec and the rest of the country reflected in its voting patterns.

If the NDP defeat the Conservatives instead of the Liberals, meanwhile, which is also possible (the NDP are currently the second largest Canadian party in parliament by far), it would bring to power a party that has never been in power before in its history, which until relatively recently was viewed by many conservatives as being “far left”, and which has a leader who is only in charge because of the tragic death of the former leader of the NDP following the party’s unprecedented success in the Canadian election of 2011.

Even worse, a staunchly provincialist party like the Bloc Quebecois, which is currently polling at around 10-20 percent in Quebec, could theoretically end up becoming the kingmaker in a split between the Conservatives and a Liberal-NDP coalition. Investors could turn on Canada to a certain degree if they begin to think that an increasingly fragmented result such as this is likely to occur. Thus, while the defeat of Stephen Harper’s Conservative Party or the loss of its majority position in parliament would not necessarily be bad for Canada over the longer term, it arguably represents a short-term challenge for the Canadian economy – and in particular, for Canadian financial markets – during the election year ahead.

For more on the economic position Canada currently finds itself in, see 5 Challenges for Canada’s Economy in 2015

Iran’s Weakening Position

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Originally written for Times of Israel

There is a fear in Israel that, with the signing of the nuclear deal two days ago, the United States may soon become allies with Iran. While this is not an irrational fear, it is important to remember that such an alliance actually already took place about a decade ago – and Israel made it through it in one piece. Back in 2001 and 2003, the United States effectively aided Iran by toppling the Sunni Arab government of Iraq and the Sunni Pashtun government of Afghanistan, paving the way for a Shiite, Iranian-influenced government in Baghdad and for empowered Shiite and Tajik (who are Persian-speaking) factions within northern and western Afghanistan.

The worry at that point was that Iran would build on its gains in the region by spreading its influence into Saudi Arabia’s Eastern Province, which is where most Saudi energy production is located and is, unlike the rest of Saudi Arabia, primarily inhabited by Shiite groups. Had that happened, or had Iran gained too much influence within the other energy-rich Gulf kingdoms, it would have become the dominant Muslim power in the Mideast. It was in this context that the Israeli, Saudi, and American rivalry with the Iranians intensified.

It is important to understand – and Israeli leaders do understand this, though they generally pretend not to while in public – that this situation no longer exists. Iran remains a critical country within the region, of course; but then again, so do Saudi Arabia, Egypt, Turkey, and Israel itself. The threat of Iran becoming the leading power within the Middle East is, for the moment at least, no longer significant. Indeed, the rising Muslim power of the region appears to be Turkey, not Iran — and, not incidentally, Turkey’s once-thriving relationship with Israel has deteriorated a great deal in recent years, first with the Gaza flotilla incident in 2010 and then with Turkey’s backing of the Muslim Brotherhood in 2013.

In contrast, Israel’s relationship with Iran has been improving a bit – though, again, you wouldn’t know it from listening to politcal rhetoric – as Iran’s relationship with Sunni Hamas has been damaged as a result of Hamas’ support for anti-Assad Sunni rebels (the Hamas leadership left Damascus for Doha in 2012, becoming closer with countries like Qatar and Turkey), Shiite Hezzbolah appears to be far too busy worrying about the Syrian Civil War to engage Israel in another war like it did in 2006, and Iran and Israel have increasingly found themselves allied with the same foreign countries, such as the UAE, India, and soon, perhaps, the United States.

This is not to say that Israel does not have a great deal to fear from the Iranians. But while Iran continues to grab headlines, the truth is that Iran’s regional standing is much less than it was. Israel has plenty of other worries, meanwhile, such as the Sunni Arabs, the Sunni Turks, the Sunni Palestinians, and the possibility of nuclear weapons falling into the wrong hands if a country like Sunni Pakistan were ever to collapse into internal chaos. The overwhelming, single-minded focus on Iran as the primary rival of Israel is, at least in part, likely a public relations stunt, probably having something do with domestic Israeli politics, or a result of the US and Israel having agreed to play “good cop-bad cop” with the Iranians because the Americans’ Saudi allies – who continue to be much more fearful of Iran – are not willing or able to play the role of bad cop themselves.

Consider that Israel has historically viewed Iran, even post-1979 Revolutionary Islamist Iran, as a Shiite Persian bulwark against the Sunni, Arab, and Sunni Arab worlds. As recently as the 1980s, during the Iran-Iraq War, the Israeli military directly attacked the Iraqis, and later helped to supply the Iranian religious government with weapons. Today the Muslim world remains roughly 90 percent Sunni, placing Shiite Iran in an inherently weak position. Indeed, Iran is itself is only about 50-60 percent ethnolinguistically Persian; most of the rest of its population are Arabs, Kurds, or Turkic Azeris, many of whom share ties with Iran’s regional rivals. As such, with only a few exceptions, Iran has often been defeated when it has had to face off against an external power like the British, Russians, Arabs, or Turks.

Here’s a quick list of eight factors that have caused Iran’s positon to weaken over the past decade or so:

1. Low Energy Prices

Energy prices were generally very high from about 2004-2014, but now they are not. The falling price of energy hurts countries like Iran and Saudi Arabia, and empowers countries like Israel and Turkey. Of course, prices could rise again — though if sanctions on Iran do end, they will probably continue to fall instead. Unless prices do rise, the Persian Gulf will simply not be as important as it was.

2. The Syrian Civil War

The Syrian war has not only weakened Iran’s position in Syria, but also in Gaza, since Hamas and Iran have backed different sides in the war; in Lebanon, where Hezzbolah is fearful of an Assad loss and thus relatively unable to focus on Israel; and, most importantly, in Iraq, where the weakening of Assad has led to the growth of ISIS. Unless Assad and the Iraqi Shiites can reassert their influence over the Sunni-inhabited Iraqi-Syrian borderlands, this situation is likely to persist.

3. “Bahrain Spring” Crushed by Saudis

Iran’s best chance to destabilize Saudi Arabia via its Shiite-populated energy-rich Eastern Province was during the Arab Spring, when large numbers of protestors representing the significant Shiite majority population of Bahrain, which is connected to Saudi Arabia’s Eastern Province by a causeway, were attempting to overthrow or coax democratic reforms out of the Sunni Bahraini royal family. Instead, the Saudis led what what was in effect an invasion of Bahrain, in order to keep the Sunni Bahraini royals in power. This was Iran’s chance, and it was missed. There may be other chances for Iran to throw its weight around in the Persian Gulf in the future, but its failure to capitalize on the Arab Spring revealed that it was not as influential as many feared it might be.

4.  Turkey’s Emergence

Turkey’s emergence has not only been the result of its rapid economic growth over the past decade, or of the fact that it is now benefiting from the fall in energy prices while the Arabs and Iranians and Russians are not. It has also been brought about by the stagnation or collapse of all of the countries in its neighbourhood, including Greece, Syria, Ukraine, Libya, Iraq, Cyprus, Georgia, Italy, and Europe in general. This has left an enormous power vacuum that the Turks can now consider filling.

Indeed, the area of Turkish interest extends all the way into Central Asia and even western China, where most of the population is of Turkic origin. In Iran, perhaps as much as 20-25 percent of the population are Turkic Azeri, speak a language quite similar to Turkish, and live in areas of Iran that are adjacent to Turkey’s close ally Azerbaijan (which is also Azeri), which was itself one of the fastest-growing economies in the world in the past decade. The Iranian leadership views Turkish power with dread. Turkey’s emergence and ties to the Muslim Brotherhood have also soured its relationship with Israel.

5.  American Resurgence

While the global power of the United States has remained largely unchallenged since the fall of the Soviet Union, there was a period during the mid-to-late 2000s when it seemed to be struggling on all fronts, facing a rapidly rising China, a gradually unifying Europe, a domestic financial crisis in 2008, a challenging time in its wars in both Iraq and Afghanistan, and emerging regional powers like Russia, Germany and Brazil. Since then, however, the American economy has been recovering much better than most other major countries, the economies of Germany, Russia, Brazil and perhaps even China have effectively entered a recession, European unity has shown itself to be largely non-existent, and the fastest-growing large European economies have been close American allies like Britain and Poland. Plus, the US military has left Iraq and, for the most part at least, has drawn down from Afghanistan.

While it is of course possible that some of these trends will be reversed going forward, for the time being American power looks to be in much better shape than it was. If China in particular enters a period of economic or political disarray, American confidence will surge. This means it may be becoming more difficult for a country like Iran to continue to accumulate influence on a regional level.

6. Economic Sanctions

While Iran was focused on evading sanctions, the Gulf Arab economies were growing rapidly as a result of the era of high energy prices, while Turkey, in spite of being a major energy importer, was growing faster than any other large economy in the world apart from China, and Israel was growing faster and more consistently than almost any other developed economy. While Turkey’s economy has cooled off a bit in the past few years as a result of the ongoing European economic crisis, Israel has continued to have strong growth throughout, and the Gulf Arab monarchies have continued to spend giant amounts of their cash purchasing military hardware. Today Iran’s gross domestic product is thought to be less than half the size of either Saudi Arabia’s or Turkey’s, to be smaller even than that of the United Arab Emirates, and to be not much larger than Israel’s, Iraq’s, Egypt’s, or Qatar’s.

7. Ayatollah Ali Khamenei

Khamenei is the only Supreme Leader has ever had apart from the revolutionary founder of the republic, Ruhollah Khomeini. A decade ago Ali Khamenei was 65 years old: now he will turn 76 before the end of the year. He has no formal successor. Some think that the 86-member Assembly of Experts, who are popularly elected every eight years, will get to choose who becomes the next Supreme Leader, but this too is complicated, as there are many other powerful political factions within the country who might want a say in the process, and the next Assembly election, set for February 2016, has already been postponed for more than a year. If Khamenei, who was recently hospitalized, dies before the elections in February, the situation could become very complex.

Iran, to be sure, is a country that is internally divided in many ways; it has, for example, a large younger urban generation that to a large extent does not support the social and religious conservatism of the clerical class. Complicating matters further, the position of President has, as a result of the influence of Ahmadinejad over much of the past decade, become much more significant within Iranian politics that it ever was before (Khamenei, by the way, was himself President for almost a decade before becoming Supreme Leader in 1989). Khamenei has also been dealing with prostate cancer in recent months, and arguably is not doing well with it. As Khamenei has been Supreme Leader for 26 years now – 16 years longer than his predecessor served as Supreme Leader – the older and sicker he gets, the more uncertain Iran’s political dynamic might become.

8. Saudi Political Transition

The Saudi royal family is sprawling and complex, because the modern founder of the Kingdom, Abdulaziz Ibn Saud, had forty-five sons. Thus far only Abdulaziz’s sons have served as king, the most recent of whom was King Abdullah, who took power in 2005 at the age of 80. There was a fear that, when Abdullah would pass away, there would be political infighting within the country that Iran might be able to exploit. The big challenge for the Saudis was electing a member of the next generation of the family to become heir to the throne, since, while the generation of Abdulaziz’s sons included many tens of people – the youngest of whom, Muqrin, is currently 70 years old, and was heir to the throne until this position was taken away from him a few months ago –  the generation after that has hundreds of male offspring in it.

In January 2015 Abdullah finally died, at 90 years old, and the Saudis have, thus far at least, successfully managed the transition. Abdullah’s half-brother Salman, aged 79, has become the new King. Even more important, in April of 2015 Salman chose his nephew, Muhammad bin Nayef, as the first ever grandson of founder Abdulaziz to become the heir apparent. Muhammad’s own father was Crown Prince for 27 years, until his death in 2012. While there could conceivably still be an internal uprising against Crown Prince Muhammad bin Nayef — interestingly, the backup heir to the throne is King Salman’s own son, Deputy Crown Prince Mohammad bin Salman (see video link) — for the moment the long-feared political and generational power transition seems to be going well, solidifying Saudi stability and power.

10 Consequences of US-Iranian Reengagement

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1. Iraq

Iran is the key to stabilizing or destabilizing Iraq. The Iranians have close religious and political ties with Iraqi Shiites, who make up a majority of the overall Iraqi population and control most of Iraq’s oil wealth. Iran also has potentially close ties with the Iraqi Kurds, since Iran’s own Kurdish regions are arguably better integrated into Iranian society than the Kurds in Turkey, Iraq, or Syria are within Turkish or Arab society, and since Kurdish is actually a branch of the Iranian language family. Iran has consistently proven that it is not willing to relinquish its influence within Iraq, regardless of any sanctions or threats aimed towards it. This is not surprising, since the Iranians remember too well the hundreds of thousands – or perhaps more than a million – of their citizens who died fighting the Iraqi army between 1982 and 1990, in a war in which chemical weapons, and maybe biological weapons, were repeatedly used. As such, to combat groups like ISIS and Al-Qaeda without sending US soldiers to Iraq and Syria, Iran probably needs to be cooperated with.

2. Syria

Given that Assad has not fallen after four years of intense fighting, it may seem to the US that the best move now is to try and cut a deal with the Syrian government that will bring an end to the conflict in the country as soon as possible. The alternative – a sort of large-scale version of the Lebanese Civil War which lasted from 1975-1990, which killed perhaps five percent of the Lebanese population (far more than the share of Syria’s population that has died thus far) and directly drew in the armies of Syria, Israel, and the United States – is a truly terrifying prospect. Iran, because of its ties to the Assads, to Hezzbolah, to Iraq, and potentially to the Syrian Kurds, must be a negotiating partner within any Syrian ceasefire deal. Moreover, because Assad no longer rules over most of the oil-rich desert of eastern Syria, much of which is now controlled by the Sunni group ISIS instead, and because Assad has been struggling to control all of the urban areas even within the much more populous western half of Syria, cutting a deal now may not even leave the Iranians with the level of influence in Syria they had enjoyed prior to the start of the civil war.

3. Afghanistan

Apart from Pakistan, Iran is the only significant country to share a long and accessible border with Afghanistan. Two of Afghanistan’s three biggest cities, Kandahar and Herat, are quite close to the Iranian border and to Iran’s second largest city, Mashhad. One of Afghanistan’s two lingua franca, Dari, is mutually inteligible with modern Persian. One of Afghanistan’s two major ethnic groups, the Tajiks, speak a language that is mutually intelligible with modern Persian as well. Afghanistan’s other major ethnic group, the Pashtun, speak a language that, while not mutually inteligible with modern Persian as such, is nevertheless a member of the overall Iranian language family. And 10-20 percent of Afghanistan’s population is, like Iran, Shiite. As a result, with the US finally withdrawing most of its armies from Afghanistan, Iran may be necessary to ensure that the country remains relatively stable and does not become a haven for Sunni extremism, a source of conflict between India and Pakistan, or a destablizing force for Pakistan (which, unlike Iran, already has many nuclear weapons) via the Af-Pak border-spanning Pashtun and Baluchi peoples – and specifically, via the most famous Pashtun organization, the Taliban.

4. Russia

The US may want to enlist Iran for the newly remergent American rivalry with Moscow. Iran is the only power outside of China to border Russia’s sphere of influence in ex-Soviet Central Asia. The Central Asian country of Tajikistan actually speaks modern Persian as its main language, while the gas-rich country of Turkmenistan shares direct ethnic ties with the adjacent areas of northeastern Iran. Iran is also the only country outside of the former Soviet Union to border the massive, energy-rich Caspian Sea, across which the West has been hoping to build a roughly 200 km long pipeline that will link Central Asia with Europe by way of Turkey and/or the Black Sea, in order to break the monopoly that Russia (and to a lesser extent, China) has on transporting Central Asian energy. Alternatively, Russia’s monopoly in Central Asia could be undercut via the construction of pipelines running through Iran from Turkmenistan to the Indian Ocean, or through Iran and the Middle East toward the Black or Mediterranean Seas.

Iran is also the only country apart from Russia and Turkey to border the Caucasus, a region that includes the southernmost, seperatist-inclined districts of Russia as well as the ex-Soviet states of Georgia, Armenia, and Azerbaijan; a region in which 15-20 million Muslims, and a similar number of non-Muslims, live. One Caucuses country, Azerbaijan, is energy-rich: it is currently the world’s 17th largest crude oil exporter and 30th largest natural gas producer. Azerbaijan is also intended to be the lynchpin of any attempt to build a pipeline linking Central Asia with the West. Crucially, Iran has potentially close ties with Azerbaijan, as an estimated 20-25 percent of Iran’s own population is ethno-linguistically Azeri, and as Azerbaijan’s population is Shiite rather than Sunni. Azerbaijan’s leading city, Baku, is only 500 km from Tehran, compared to 1900 km from Moscow and 1750 km from Istanbul.

Finally, given that Iran is thought to have by far the world’s largest reserves of easily-accessible natural gas outside of Russia, and given that Iran’s natural gas export capacity has been consistently underdeveloped in the past generation as a result of sanctions and war (Iran is currently only the 20th-25th largest natural gas exporter, in fact), the US may hope to see future growth in Iranian gas exports substantially undercut Russia’s gas revenues. This would be very significant if it were to occur, sincd Russia is far and away the world’s largest exporter of natural gas at the moment, even without counting the enormous amounts of natural gas in Central Asia where the Russians continue to hold most of the cards.

5. Arabia

By far the biggest prizes for Middle Eastern powers to fight over are the small, energy-rich monarchies in the Persian Gulf: Kuwait, Qatar, Oman, tiny Bahrain, and the considerably larger (though still pretty small) United Arab Emirates. Kuwait and the UAE alone possess an estimated 20 percent or so of the world’s “proven oil reserves” that are not located in shale deposits or tar sands, while Qatar accounts for an estimated 12 percent of the world’s proven natural gas reserves. Together, these mini-monarchies account for 5-10 percent of the world’s current oil and gas production.

These states also directly border the most energy-rich areas of Saudi Arabia, Iran, and Iraq, and even reach as close to 380km from an important region of Pakistan. Nearly all of the US military bases in the Middle East are located in these small kingdoms. Their populations are not ethnically or religiously homogenous: rather, they are a complicated mishmash of ordinary citizens, extended royal families, foreign visitors, and so many foreign workers (many of whom are non-Muslim) that non-citizen immigrants now often outnumber the citizens of these countries. Religiously, their citizens and royals are a mix between Sunnis, Shiites, and, in Oman, Ibadi Muslims.

Regardless of a deal with Iran, the US is probably not going to back away from its relationships with these monarchies under any circumstances. It has already proved its commitment to these countries in the past, most notably in 1990 when it liberated Kuwait from Iraqi annexation, and most recently in 2011 when it basically supported a Saudi-led invasion of Bahrain during the Arab Spring, which was aimed at protecting Bahrain’s Sunni monarchy from its protesting Shiite-majority population. Today, virtually all of the American soldiers in the Middle East (not counting Afghanistan) are stationed in Kuwait.

The US and its allies in this region have long relied on Iran to ensure safe passage through the narrow Strait of Hormuz, and for this reason alone a deal with Iran makes sense. While there is admitedly a risk of Iran becoming more influential in the Persian Gulf than the US or its allies would be comfortable with – in particular, because southern Iraq and eastern Saudi Arabia are both Shiite-majority energy-rich areas – the US is probably not going to let Iranian influence grow to too great an extent. Iran’s ability to access the Gulf is further limited, moreover, by the fact that the population of its own Gulf coastlands are home mainly to ethnic Arabs rather than to Persians, while a majority of Iranians live many hundreds of extremely mountainous – and for the most part inaccessible – kilometers away from the Gulf. As such, while the Iranians might conceivably be able to block or disrupt the energy production of the Gulf Arabs, they are unlikely to consider seizing the energy directly like Iraq tried to do when it annexed Kuwait.

6. Turkey

Many people worry that Iran will become the major power in the Middle East. In reality, however, Turkey actually seems to be in a far stronger position than Iran is. The Turks have an economy that is larger than Saudi Arabia’s and more than double the size of Iran’s; an economy which, unlike most other economies in the region, will probably benefit a great deal from the recent fall in oil prices. Turkey has a population that is less internally fractious than those of Iran or Saudi Arabia, and which has significant ties with the Turkic populations of Uzbekistan, Khazakstan, Turkmenistan, and western China, as well as with Turkic Azerbaijan and with the populous Turkic Azeri regions of Iran. Moreover, unlike Shiite Iran or extremist Wahabbi Saudi Arabia, Turkey potentially has ties with the rest of the world’s Sunnis, who account for perhaps 90 percent of all Muslims. Turkey also has a military that has benefited from being an ally of the US – and the only longtime Muslim NATO member – for decades. The Turkish military has dominated Turkey’s domestic politics for most of the past century, securing for itself a generous budget in the process.

Turkey’s economy grew faster than any other major country apart from China during most of the 2000’s; it grew, for example, from about the same size as its arch-nemesis Greece twenty years ago to roughly quadruple the size of the Greek economy today. One of Turkey’s closest allies, Azerbaijan, meanwhile, was virtually the fastest growing economy in the entire world during the past decade: the Azerbaijani GDP is now more than 11 times larger than it was back in 2003. Finally, and most importantly, almost every single one of Turkey’s neighbours – Greece, Syria, Iraq, Ukraine, Georgia, Libya, Egypt, Cyprus, Russia, the European Union, and before them the former Soviet Union, Yugoslavia, and Armenia – have been either seriously weakened or completely torn apart during the recent past. This has created quite a large power vacuum for the Turks to consider filling.

As Turkey’s power has grown, and as Turkey’s relationship with the West and especially Israel has become increasingly strained, a deal with Iran has become much more palatable for the US. Indeed, prior the mid-19th century, Iran was the only significant foil of the Turks in both the Middle East and Caucasus for many hundreds of years. Today, potential Iranian influence with the Kurdish people – the achilles heel of modern Turkey – and with the Alevi religious grouping that makes up arguably one-fifth of Turkey’s own population, may help in containing the vehemently Sunni and allegedly neo-Ottoman tendencies that have been emerging under the stewardship of Turkey’s Islamist Prime Minister-turned-President Recep Tayyip Erdogan since 2003. Iran may also be useful in balancing Turkish influence in both the Caucasus and Central Asia, where Turkey has very ambitious economic and pan-Turkic aspirations. Finally, the Iranians may have some economic leverage over the Turks, since Turkey gets around 40 percent of its oil imports from Iran, 20 percent of its natural gas imports from Iran, and 20 percent or so of its oil imports from Iraq where the Iranians continue to have influence.

7. India

While the Americans and Israelis have been publically spending most of their time worrying about the eventual possibility of an Iranian nuclear bomb, a much more pressing and probable danger may actually be that, should the political stability of South Asia deterioriate, one of Pakistan’s hundred or so nuclear weapons might fall into the wrong hands. Today, with the US leaving Afghanistan, and with India having last year elected a Prime Minister from an anti-Islamic, arguably fascistic organization (a Prime Minister who is not even allowed to travel to the United States except for when he is serving as Prime Minister, because he is seen as having been complicit in a large-scale attack against Muslims while he was governor of the Indian state of Gujarat), the politics of South Asia, which are brittle in the best of times, may be getting worse. This is not good for anybody.

Iran, however, has the potential to serve as a stabilizing force in South Asia. This is not only because of its level of influence in Afghanistan, which is signficant, but also because Iran is the only major country that has potentially close ties to both the Indians and the Pakistanis. Iran already has a very close economic relationship to India; even with sanctions, India gets around 5-10 percent of the oil it imports from Iran, another 15 percent or so from Iraq, where the Iranians have influence, and another 10-15 percent or so from Iran’s main Arab trade partner, the United Arab Emirates. Moreover, the Indians and Iranians have a relatively close political relationship, which has emerged in order to balance against the Sunni Arab-Sunni Pakistani-Sunni Afghan relationship that they both are afraid of. India is also home to tens of millions of Shiite Muslims, hundreds of millions of speakers of Hindi, which is related to modern Persian, and millions of speakers of Urdu, which uses the Persian script and is even more closely related to modern Persian (though admitedly, Urdu is quite a bit closer to Hindi than it is to modern Persian).

Pakistan, meanwhile, shares a long border with Iran, and, jointly with Iran, governs over the large, sparsely populated, resource-rich region of Baluchistan, where many Baluchis would like to gain independence from both Iran and Pakistan (and where Iran and Pakistan have historically cooperated in order to ensure that they are not able to do so). Baluchi languages are part of the Iranian language family, as are the Pashtun languages that are spoken by tens of millions of people in Pakistan along the Afghan border and in megacities like Lahore and Karachi. Anywhere from 15-35 million Shiites live in Pakistan, meanwhile, and nearly all of Pakistan’s population speaks Urdu. Finally, like India, the Pakistanis also have an increasingly voracious appetite for Middle Eastern and/or Central Asian energy, which the Iranians could help to provide them with.

Iran, therefore, could be helpful in keeping South Asia relatively stable. Given the harsh realities and dangers which exist in South Asia, which could in theory spread from South Asia to the rest of the world – and have already done so in the past, most famously on September 11, 2001 – stability in this region could be a huge boon for everyone, the US and its allies included. From a long-term, self-interested US point of view, moreover, an Iranian partner might eventually be useful in helping to contain India geopolitically if India becomes a major power and if the Pakistani or Bangladeshi states implode.

8. Qatar and the UAE

In recent years, the foreign policy of Qatar, the Gulf Arab monarchy with a per capita GDP that is well over double any of the others (it is the highest in the world apart from Norway, in fact), has diverged from those of some of the other Gulf Arab states. Not only has Qatar been trying to gain global prestige and influence via its plan to host the World Cup in 2022, its hosting of the pan-Arab news station Al Jazeera, and its ambitions for its capital city of Doha to outshine even Dubai as a regional hub, but the Qatari government has also been bankrolling groups like the Muslim Brotherhood (and its Palestinian affiliate, Hamas), which the Saudis view as an enemy. The Saudi-Qatari rivalry came to a head in 2013, when Egypt’s Muslim Brotherhood government was overthrown in a coup by the Egyptian military, which has been receiving huge amounts of subsidies from the Saudis, and which had the support of Egypt’s next largest electoral bloc, the Saudi-backed Islamist Salafists.

The Saudis have been looking for a way to curb Qatar’s confident meddling in the region, but this is not easy to do, since the Qataris have powerful friends in the United States (Qatar hosts a critical US air force base), Turkey (which has been the Muslim Brotherhood’s other leading backer in the politics of the Middle East), and Japan (which buys about 40 percent of the world’s LNG, an industry in which the Qataris are by far the dominant players). While the Saudis are certainly not happy about the possibility of American-Iranian reengagement, they may nevertheless see a silver lining in the deal as being that it could reduce the regional clout of Qatar.

The reason this could occur is because the Qataris, unlike the other Gulf Arab states, overwhelmingly produce natural gas rather than oil. With Iran itself having the world’s second largest gas reserves, and needing lots of Western capital in order to build pipelines and LNG facilities in order to transport those reserves to market (since transporting gas is not nearly as simple a process as transporting oil), a US-Iran deal could hurt Qatar’s position in the global natural gas market – and in particular, its dominance in LNG markets, in which Qatar accounted for one-third of the world’s exports as recently as 2013, which was almost quadruple the amount of the world’s next largest LNG exporter, Australia.

Apart from Qatar, Saudi Arabia’s other potential frenemy within the Gulf Cooperation Council fraternity is the United Arab Emirates, a country with a population that is about as large as those of Qatar, Kuwait, Oman, and Bahrain combined – and with a GDP that is actually larger than those of Iran and Israel, and more than half the size of that of Saudi Arabia itself. The Emiratis have historically had relatively close commercial ties to Iran, and they have kept these ties in place throughout the modern sanctions era. The UAE is also home to quite a large Iranian population. Indeed, along with Iraq, the United Arab Emirates are thought to have been by far the leading intermediaries for Iran’s covert, sanctions-beating imports of goods and exports of oil. This has earned the UAE enormous sums of money, but has also bothered the Saudis at times. If the sanctions on Iran end, it might put an end to this situation, which could be another silver lining for the Saudis. (The Economist had a somewhat different take on this point).

9. Israel

There has always been something a little bit ironic about the rheotric Israel has used regarding Iran, given that Israel arguably needs Iran as a balance against the Sunni, Arab, and Sunni Arab worlds far more than any other country does. Indeed, it seems possible that Benjamin Netanyahu was never as worried about Iran as it seemed to be, but was railing against it mainly because doing so helped his party within domestic Israeli politics, and because, prior to Iran’s weakening position in the Middle East as a result of the rise of anti-Assad rebels in Syria, Israel may have been agreeing to play “bad cop” with Iran during the past decade, while the US played “good cop”. (The Saudis – who are truly terrified of Iran – were not willing to publically play bad cop themselves, since they did not want to be seen as stoking inter-Islamic conflict. Moreover, the Saudis, unlike Israel, lacked the ability to seriously scare Iran with military threats much even if they had been willing to issue them). Certainly, the Iranians have a far better historical relationship with Israel and the Jewish people, both in modern and premodern times, than any major Arab state has.

The Iranian-Israeli relationship has also been indirectly improving of late, as a result of the broken ties between Hamas and Iran over Syria, and the fact that Hezzbolah and Assad have been focused entirely on Syria rather than on Israel since the civil war began, and finally because Israeli relations with Turkey have sdeteriorated sharply ever since the Gaza flotilla incident in 2010. The Israeli economy is also likely to be among the major beneficiaries of the lower oil prices that a US-Iran deal could help to solidify. This is of course not to say that Israel is not worried about Iran – far from it. But Israel has a lot of things to worry about. It is not so difficult to imagine that Israel may actually end up being happier about improving relations with Iran than even the Americans will be. And even if the Israelis do keep Iran as their main enemy, a US-Iranian deal may still be appealing, as it will distance the US from Israel a little bit, which some Americans may be pleased with since it could help grant them leverage against Israel with regard to Israeli-Palestinian relations.

10. Iran

Apart from the geopolical argument that a rapprochment with the Iranians will make Iran too strong in the Middle East, or the argument that it will allow Iran to covertly develop nuclear weapons, the most common argument against a US-Iranian deal is that Iran is a terrorist state that is pushing an extremist ideology across the Muslim world. In fact, this argument has never made too much sense, because clearly Saudi Arabia fits this description far better than the Iranians do. Unless the Americans are willing to adopt a new strategy in which both Saudi Arabia and Iran become US rivals, this argument does not seem to have much merit.

Indeed, as has often been pointed out, Iran is in many ways arguably the most promising major country in the region from a cultural perspective. Much of its population is urban (72 percent, the same percentage as Turkey’s population, and not too far from double that of Egypt’s), and it is also much more pro-American than any other major Muslim country in the region (in some ways at least), and less socially conservative than most of the Arab world, or even than large areas of Turkey or a decent-sized share of the Israeli population. Iran’s government, meanwhile, while hardly a true democracy, is a lot more democratic than many other Middle Eastern states. And since Iran is Shiite rather than Sunni, its ability spread its extremist religious ideology around the rest of the Muslim world, which as a whole is thought to be nearly 90 percent Sunni, is relatively limited.

Iran also has one of the largest, and probably the wealthiest and most secular, American diaspora among major Middle Eastern states. This is a result of the historical US and British alliance with the Iranian elite, which fled the religious Iranian Revolution in 1979. The Iranian population in California, where about half of Iranian-Americans live, is sort of like a smaller version of the Cuban-American diaspora that resides in southern Florida. By contrast, there is not much of a Turkish diapsora in the US, and the Arab diaspora in the US tends to be made up of poorer immigrants who arrived just in the past decade or two. Because the Iranian diaspora has been in the US for a longer period of time, and because it is not Arab, its relationship with the US was not complicated by the recent 9-11 and Iraq War era in the same way that America’s Arab diaspora has been. Moreover, its earlier arrival has given it the time to give birth to a generation of bilingual, bicultural children who have now come of age.

Finally, the Iranians have a a uniquely proud identity that stretches back far before the emergence of Islam. This stands in  contrast to some of the other Middle Eastern states, such as Saudi Arabia, where Islam is seen as the fundamental and overwhelming attribute of national identity, or Turkey, which was proudly the seat of the Sunni Caliphate, with formal control over Mecca and Medina, until the early 20th century, and where pre-Islamic history is associated with the original Turkic home of Central Asia rather than with the country’s modern location in Asia Minor.

Finally Passing Gas: 10 Winners and Losers of the Panama Canal Expansion

 

When the Panama Canal expansion is finally finished this spring, the canal will have two new features:

1. Serve larger ships that can carry up to 3x as many containers

2. Serve liquified natural gas (LNG) carriers

It is not entirely clear what effects this will have on world trade, but Panama’s hope is that, in spite of a recent shipbuilding trend toward vessels so large they will exceed even the acceptable post-expansion canal dimensions, the new canal will help to make it cheaper and easier for the commodities and consumers of the Atlantic world to access the industrial economies of the Asia-Pacific.

Like any other major infrastructure project, the canal expansion could create a number of winners and losers, all other things being held equal. Let’s briefly speculate on which nations these will be: 

Possible Winners:

South Korea, Taiwan, Trinidad, El Salvador, Colombia 

LNG markets may be the key to understanding which economies will benefit most from the expanded canal, because:

LNG cannot pass through the present-day canal, but will be able to post-expansion

In recent years natural gas prices have been around 5-10 times higher in East Asia than in North America. Today they are $1-2 per BTU in the US, compared to $8-9 in Japan and $5-6 in Germany

The “shale revolution” has unlocked gigantic supplies of natural gas in the US near the Gulf of Mexico, where there already a large number of LNG import facilities that could converted into LNG export facilities. The existence of these facilities is significant, as it is considerably cheaper and faster to retrofit an existing plant than it is to build an LNG export terminal from scratch.

The United States, to be sure, currently has the greatest number of LNG export projects in the world being planned, with the vast majority of these projects are located along the Gulf coast, not so far away from Panama. Even though only one of these facilities, Louisiana’s Sabine Pass, is expected to be finished prior to 2019, the early 2020’s could see many more come to fruition.

South Korea and Taiwan

A typical assumption has been that China and Japan will be the primary beneficiaries of the canal. China, after all, leads the world in importing commodities and exporting bulk goods, and
Japan has accounted for 40% of the world’s LNG imports – far more than any other country – in recent years.

Yet while China and Japan lead the pack in terms of the value of their absolute trade, they lag far behind both South Korea and Taiwan in the more relevant category of relative trade; that is, the value of their trade relative to the overall size of their economies. As can be seen in the chart below, the economies of China and Japan are not as trade-oriented as those of South Korea and Taiwan. As such, they might not benefit as much from the canal, which is intended to ease trade.

relative trade northeast asia

(*LPG stands for Liquid Petroleum Gasses, such as ethane, propane, and butane. The canal expansion is supposed to help these as well.)

Of course, none of this means that South Korea and Taiwan are risk-free investments. They are not. Ceteris paribus, though, they appear likely to be two of the greatest beneficiaries of the new canal.

 

Trinidad 

Until North American gas is made avaliable to East Asian markets, Trinidad is the sole LNG player in the Americas capable of serving the East. Today Trinidad is the world’s sixth largest LNG exporter and 23rd largest producer of natural gas in general. Trinidad exports 3.5 more LNG than Peru, which for the time being is the only other LNG exporter in the Americas. Trinidad also produces more gas in general than any Latin American country outside of Mexico or Bolivia, both of which it trails slightly.

This is a considerable amount of gas production for a country as small as Trinidad, which has a population of just 1.4 million (including its sister island, Tobago, which is home to just 62,000 people). Trinidad is also the world’s largest exporter of ammonia and second-largest exporter of methanol, which often find their way to East Asian markets as well. Finally, Trinidad is 14 km off the coast of Venezuela, another energy-dependent economy which, in the long term, might benefit by exporting gas and other commodities via the canal.

 

El Salvador 

There are only four countries in the Americas that possess a coastline on the Pacific Ocean yet lack direct access to the Atlantic. These are Chile, Ecuador, Peru, and El Salvador. Of the four, El Salvador and Ecuador are the only two which are located close to the Panama Canal. Indeed, Santiago, the Chilean capital, and Lima, Peru’s capital, are roughly 4500 and 2500 km away from the canal by ship, respectively; El Salvador’s capital San Salvador is 1400 km away.

El Salvador is also the only one of the four to have an economy that is not oriented towards exporting commodities to other Pacific states: Ecuador’s economy is based on exporting oil to Asia and California, Chile’s is based on copper exports, and Peru’s is based on a number of commodities. These do not need to pass through the canal; in fact the canal might cause the price of these resources to fall in Pacific markets, which may, perhaps, hurt these countries’ export revenues.

El Salvador, on the other hand, has an economy that instead depends on its relationship with the US; approximately 25% of Salvadorans worldwide already live in the US, and El Salvador exports lower-end manufactured goods to the US, and imports its refined fuels. Being able to access US markets via the canal, as well as other Atlantic markets like Europe and Brazil, could be a big boon for El Salvador.

Colombia 

Colombia is just 230 km from the canal, much closer than any other South American country. Panama was in fact a part of Colombia until the US helped to detach it in 1903, a decade before the completion of the original canal. Given its proximity, the canal’s expansion could help Colombia’s isolated Pacific coast west of the Andes Mountains interact commercially with its much more developed Atlantic and interior mountain cities. This could potentially allow Colombia to achieve a greater economy of scale, helping it to throw its political and economic weight around as the most populous country in South America apart from Portuguese-speaking Brazil.

Moreover, because Colombia’s vast supplies of coal (it is estimated to be the 10th largest coal producer in the world), coffee (it is the 3rd largest producer in the world), nickel (9th largest), bananas (10th), oil (19th), and other goods are much easier to export via Atlantic rather than Pacific ports — as a result of the navigability of the Magdalena River Valley (see map), which stretches from the major inland cities of Bogota and Medellin to the Atlantic – the expanded canal will help Colombian commodities to reach East Asian, Californian, and Chilean import markets.

Colombia_Topography_2

Finally, Colombia has medium-sized natural gas reserves: the 47th largest in the world, according to the CIA Factbook. Indeed, Colombia is the only LNG exporter in Latin America outside of Peru (as Trinidad speaks English, not Spanish). It too could pass gas in the years ahead, in that case.

In a future report, we will discuss the 5 potential “losers” of the Panama Canal’s expansion: Australia, Malaysia, Mexico, Yemen, and Mozambique. We will also discuss how Panama itself may be affected by the new canal.   

Estonia in 2015: Energy, the Euro, and Elections

It is probably just a coincidence, but there is a strong correlation between being a member state of the Eurozone and being dependent on energy imports. The Eurozone imports upwards of two-thirds of the energy it consumes (compared to just 10-15 percent for the US and China, and 30-40 percent for Britain and India); only two of the Eurozone’s 19 members import less than 47 percent of the energy they use. These two Eurozone outliers are the Netherlands and Estonia, which import just 17 and 10 percent of their energy consumption, respectively.

zuPKcv5

Estonia is a greater exception still. Unlike in the Netherlands, where, as recently as August, net oil imports accounted for an estimated 4.3 percent of Dutch GDP, in Estonia oil imports only accounted for 2.3 percent of GDP, the lowest share in the Eurozone apart from Ireland or Austria. Estonia is also a transit state for Russian exports of oil and coal, owns large reserves of oil shale (not to be confused with shale oil) and biomass energy (see graph below), and had been expected, prior to the recent collapse in oil prices, to have the European Union’s fastest-rising diesel fuel production during the next few years. Estonia also has by far the most oil stored up of any European country, relative to the pace at which it consumes oil. In other words, Estonia is unlikely to benefit from cheap oil, or from lower energy prices in general, to the same extent as other Eurozone countries.

20150201063416Europe’s energy use mix, with emphasis on biomass sources, particularly wood:

ENER29_Fig_02.eps.75dpi

For the Eurozone as a whole, oil imports were equal to an estimated 2.8 percent of GDP, which is much higher than in the nations the Eurozone trades with the most (see graph below). Falling oil prices should cause the value of the Euro to rise against the currencies of most of its top trade partners, therefore; at least, assuming that a declining Eurozone economy did not cause the oil price drop in the first place. Indeed, the Euro has already risen in value relative to the currencies of Russia, Norway, Sweden, Poland, and the Czech Republic since the oil price plunge began (though admittedly, it has also fallen in value relative to the currencies of the US, Britain, Switzerland, Denmark, and China).

Top 10 Eurozone Trade Partners

(Eurozone stats are at the far right of the graph)

This does not necessarily bode well for Estonia, however, which, in spite of not benefiting much from cheaper energy, may nevertheless have to cope with the effects a strengthening Euro could have on its export competitiveness. Unfortunately for Estonia, its exports are equal to almost 90% of its GDP, and they go mainly to non-Eurozone economies like Russia and Scandinavia, which are hardly dependent on imports of oil, energy, or commodies in general (see  graph below).

Estonia's Export Partners

Indeed, this characteristic holds true not only for Estonia’s largest export partners in absolute terms, but also of the countries with which Estonia enjoys the largest trade surpluses (see first graph below). Even worse, the biggest European beneficiaries of cheap oil and energy are nearly all situated next to the Mediterranean, the part of Europe Estonia exports to the least (see second graph below).

Estonia Trade Surpluses:Deficits

European %22Regions%22 Energy Imports

So, was Estonia’s 2011 decision to join a currency union which contains only one of its four largest export partners, and within which it is has an intensely outlying energy-import dynamic, a financially sensible move? Or was it rather the case that Estonia adopted the Euro primarily in order to proclaim its Europeanness (and non-Russianness), and so might now have to face some of the adverse economic consequences of the decision, at least where its exports are concerned, given that oil prices have dropped by well over 50 percent since October?

In addition, what effects might falling oil prices have on Estonian politics? Estonian elections are approaching this March, and a large majority of Estonian energy production is located in the part of Estonia in which nearly 75 percent of the inhabitants are ethnic Russians (who also comprise an estimated 25 percent of the overall Estonian population). Russia remains Estonia’s largest trade partner, and Russia’s ruble has already declined by one-third in value against the Euro since October. The Estonians are also tied to the Finns, their second largest trade partner, with whom they speak an extremely similar language (which is also extremely dissimilar to all other languages in Europe) — and Finland too has a national election coming up, in April.

Meanwhile, Russia’s two major NATO geopolitical rivals, namely the US and Turkey, as well as Russia’s largest NATO economic competitor, Canada, which is also home to the West’s biggest Ukrainian diaspora, are having elections this year as well (the US primaries are not until 2016, but the election will effectively begin in mid-2015). These elections could certainly cause NATO relations with Russia to deteriorate, even beyond the low point they are already sitting at. Indeed, a relatively robust American economic recovery could force the US Republican Party to make foreign policy the central focus of their political campaign – and perhaps specifically, to obsess over the chummy “Reset” with Vladimir Putin that Hillary Clinton initiated during her tenure as Secretary of State  –  which could thrust the Baltics, the sole ex-Soviet republics that are now firmly a part of NATO and the West, into the global spotlight. It could be an interesting time ahead for tiny Estonia, to say the least.