Syria’s war: The new normal

Territorial divisions are deepening, regardless of regime and rebel advances

ZIAD, Ammar and Zakaria are all Syrian, but 29 months into a civil war their once-similar home towns now look as if they belong to three different countries. Ziad is from Tartus, a north-western port city covered in posters showing President Bashar Assad. Ammar’s home town in the eastern province of Deir ez-Zor is run by rebels. In Zakaria’s birthplace in the north-east, schoolchildren learn Kurdish, banned until recently, rather than Arabic, the national language.

Syria is gradually breaking into three. The forces of Mr Assad recently seized the initiative but they cannot defeat the opposition and instead are consolidating their grip on the western spine of the country. From Damascus and Homs to Hama and Latakia, the regime is carving out a coastal state. Meanwhile, the rebels are doing the same in the Euphrates valley stretching from Turkey to Iraq through open desert. On July 22nd they took over Khan al-Asal, a town close to Aleppo, a divided northern city. As extreme Islamists among the rebels gain in strength, rumours abound that al-Qaeda-related groups will declare a religious state. Already, they fly black flags above mini-emirates.

Further east, long-persecuted Kurdish groups are using the chaos of the civil war to create an autonomous region. Last week the Democratic Union Party, the Syrian branch of Turkey’s Kurdistan Workers Party (PKK), announced a constitution and a plan to elect a council to administer the area known as Rojava or west Kurdistan. Exactly a year ago they took over policing the area and in early July they kicked out jihadists from the border town of Ras al-Ain.

Frontlines are hardening, even if rebel regions still contain regime-held cities. A de facto three-way partition is under way. The opposition’s foreign backers, mainly in the Gulf, may not be as generous as Mr Assad’s allies: Iran, Russia and Hizbullah, the Lebanese Shia party-cum-militia. Yet the rebels continue to fight vigorously. Weapons still trickle in. The regime would find it very difficult to take back areas run by jihadists, even though it is getting better at fending off the opposition in disputed regions. The National Defence Force, a paramilitary outfit trained by Iran, provides backup for the army. Defections have slowed since the end of 2012.

The sense of stalemate was underlined by General Martin Dempsey, America’s most senior officer. On July 22nd he laid out options for intervening in Syria, most of them difficult. He said a no-fly zone would cost $1 billion per month and could drag America into full-scale war. America’s plan to provide light arms, with the aim of uniting moderate rebel groups, has yet to start. “Planning is still in ridiculously early stages, the who, where, what, when,” says an analyst in Washington.

Syria as a country has ceased to exist. Different parts of it apply different legal systems, ranging from old national laws to sharia or no law at all. Economies are localised and reliant on new business linked to the war. Different flags fly over administrative buildings—where they still exist.

Read more at: http://www.economist.com/news/middle-east-and-africa/21582319-territorial-divisions-are-deepening-regardless-regime-and-rebel-advances

Recognizing the End of the Chinese Economic Miracle

By George Friedman

Major shifts underway in the Chinese economy that Stratfor has forecast and discussed for years have now drawn the attention of the mainstream media. Many have asked when China would find itself in an economic crisis, to which we have answered that China has been there for awhile -- something not widely recognized outside China, and particularly not in the United States. A crisis can exist before it is recognized. The admission that a crisis exists is a critical moment, because this is when most others start to change their behavior in reaction to the crisis. The question we had been asking was when the Chinese economic crisis would finally become an accepted fact, thus changing the global dynamic.

Last week, the crisis was announced with a flourish. First, The New York Times columnist and Nobel Prize-recipient Paul Krugman penned a piece titled "Hitting China's Wall." He wrote, "The signs are now unmistakable: China is in big trouble. We're not talking about some minor setback along the way, but something more fundamental. The country's whole way of doing business, the economic system that has driven three decades of incredible growth, has reached its limits. You could say that the Chinese model is about to hit its Great Wall, and the only question now is just how bad the crash will be."

Later in the week, Ben Levisohn authored a column in Barron's called "Smoke Signals from China." He wrote, "In the classic disaster flick 'The Towering Inferno' partygoers ignored a fire in a storage room because they assumed it has been contained. Are investors making the same mistake with China?" He goes on to answer his question, saying, "Unlike three months ago, when investors were placing big bets that China's policymakers would pump cash into the economy to spur growth, the markets seem to have accepted the fact that sluggish growth for the world's second largest economy is its new normal."

Meanwhile, Goldman Sachs -- where in November 2001 Jim O'Neil coined the term BRICs and forecast that China might surpass the United States economically by 2028 -- cut its forecast of Chinese growth to 7.4 percent. 

The New York Times, Barron's and Goldman Sachs are all both a seismograph of the conventional wisdom and the creators of the conventional wisdom. Therefore, when all three announce within a few weeks that China's economic condition ranges from disappointing to verging on a crash, it transforms the way people think of China. Now the conversation is moving from forecasts of how quickly China will overtake the United States to considerations of what the consequences of a Chinese crash would be. 

Doubting China

Suddenly finding Stratfor amid the conventional wisdom regarding China does feel odd, I must admit. Having first noted the underlying contradictions in China's economic growth years ago, when most viewed China as the miracle Japan wasn't, and having been scorned for not understanding the shift in global power underway, it is gratifying to now have a lot of company. Over the past couple of years, the ranks of the China doubters had grown. But the past few months have seen a sea change. We have gone from China the omnipotent, the belief that there was nothing the Chinese couldn't work out, to the realization that China no longer works.

It has not been working for some time. One of the things masking China's weakening has been Chinese statistics, which Krugman referred to as "even more fictional than most." China is a vast country in territory and population. Gathering information on how it is doing would be a daunting task, even were China inclined to do so. Instead, China understands that in the West, there is an assumption that government statistics bear at least a limited relationship to truth. Beijing accordingly uses its numbers to shape perceptions inside and outside China of how it is doing. The Chinese release their annual gross domestic product numbers in the third week of January (and only revise them the following year). They can't possibly know how they did that fast, and they don't. But they do know what they want the world to believe about their growth, and the world has believed them -- hence, the fantastic tales of economic growth. 

China in fact has had an extraordinary period of growth. The last 30 years have been remarkable, marred only by the fact that the Chinese started at such a low point due to the policies of the Maoist period. Growth at first was relatively easy; it was hard for China to do worse. But make no mistake: China surged. Still, basing economic performance on consumption, Krugman notes that China is barely larger economically than Japan. Given the compounding effects of China's guesses at GDP, we would guess it remains behind Japan, but how can you tell? We can say without a doubt that China's economy has grown dramatically in the past 30 years but that it is no longer growing nearly as quickly as it once did.

China's growth surge was built on a very unglamorous fact: Chinese wages were far below Western wages, and therefore the Chinese were able to produce a certain class of products at lower cost than possible in the West. The Chinese built businesses around this, and Western companies built factories in China to take advantage of the differential. Since Chinese workers were unable to purchase many of the products they produced given their wages, China built its growth on exports. 

For this to continue, China had to maintain its wage differential indefinitely. But China had another essential policy: Beijing was terrified of unemployment and the social consequences that flow from it. This was a rational fear, but one that contradicted China's main strength, its wage advantage. Because the Chinese feared unemployment, Chinese policy, manifested in bank lending policies, stressed preventing unemployment by keeping businesses going even when they were inefficient. China also used bank lending to build massive infrastructure and commercial and residential property. Over time, this policy created huge inefficiencies in the Chinese economy. Without recessions, inefficiencies develop. Growing the economy is possible, but not growing profitability. Eventually, the economy will be dragged down by its inefficiency. 

Inflation vs. Unemployment

As businesses become inefficient, production costs rise. And that leads to inflation. As money is lent to keep inefficient businesses going, inflation increases even more markedly. The increase in inefficiency is compounded by the growth of the money supply prompted by aggressive lending to keep the economy going. As this persisted over many years, the inefficiencies built into the Chinese economy have become staggering. 

The second thing to bear in mind is the overwhelming poverty of China, where 900 million people have an annual per capita income around the same level as Guatemala, Georgia, Indonesia or Mongolia ($3,000-$3,500 a year), while around 500 million of those have an annual per capita income around the same level as India, Nicaragua, Ghana, Uzbekistan or Nigeria ($1,500-$1,700). China's overall per capita GDP is around the same level as the Dominican Republic, Serbia, Thailand or Jamaica. Stimulating an economy where more than a billion people live in deep poverty is impossible. Economic stimulus makes sense when products can be sold to the public. But the vast majority of Chinese cannot afford the products produced in China, and therefore, stimulus will not increase consumption of those products. As important, stimulating demand so that inefficient factories can sell products is not only inflationary, it is suicidal. The task is to increase consumption, not to subsidize inefficiency.

The Chinese are thus in a trap. If they continue aggressive lending to failing businesses, they get inflation. That increases costs and makes the Chinese less competitive in exports, which are also falling due to the recession in Europe and weakness in the United States. Allowing businesses to fail brings unemployment, a massive social and political problem. The Chinese have zigzagged from cracking down on lending by regulating informal lending and raising interbank rates to loosening restrictions on lending by removing the floor on the benchmark lending rate and by increasing lending to small- and medium-sized businesses. Both policies are problematic. 

The Chinese have maintained a strategy of depending on exports without taking into account the operation of the business cycle in the West, which means that periodic and substantial contractions of demand will occur. China's industrial plant is geared to Western demand. When Western demand contracted, the result was the mess you see now.

The Chinese economy could perhaps be growing at 7.4 percent, but I doubt the number is anywhere near that. Some estimates place growth at closer to 5 percent. Regardless of growth, the ability to maintain profit margins is rarely considered. Producing and selling at or even below cost will boost GDP numbers but undermines the financial system. This happened to Japan in the early 1990s. And it is happening in China now.

The Chinese can prevent the kind of crash that struck East Asia in 1997. Their currency isn't convertible, so there can't be a run on it. They continue to have a command economy; they are still communist, after all. But they cannot avoid the consequences of their economic reality, and the longer they put off the day of reckoning, the harder it will become to recover from it. They have already postponed the reckoning far longer than they should have. They would postpone it further if they could by continuing to support failing businesses with loans. They can do that for a very long time -- provided they are prepared to emulate the Soviet model's demise. The Chinese don't want that, but what they do want is a miraculous resolution to their problem. There are no solutions that don't involve agony, so they put off the day of reckoning and slowly decline.

China's Transformation

The Chinese are not going to completely collapse economically any more than the Japanese or South Koreans did. What will happen is that China will behave differently than before. With no choices that don't frighten them, the Chinese will focus on containing the social and political fallout, both by trying to target benefits to politically sensitive groups and by using their excellent security apparatus to suppress and deter unrest. The Chinese economic performance will degrade, but crisis will be avoided and political interests protected. Since much of China never benefited from the boom, there is a massive force that has felt marginalized and victimized by coastal elites. That is not a bad foundation for the Communist Party to rely on.

The key is understanding that if China cannot solve its problems without unacceptable political consequences, it will try to stretch out the decline. Japan had a lost decade only in the minds of Western investors, who implicitly value aggregate GDP growth over other measures of success such as per capita GDP growth or full employment. China could very well face an extended period of intense inwardness and low economic performance. The past 30 years is a tough act to follow.

The obvious economic impact on the rest of the world will fall on the producers of industrial commodities such as iron ore. The extravagant expectations for Chinese growth will not be met, and therefore expectations for commodity prices won't be met. Since the Chinese economic failure has been underway for quite awhile, the degradation in prices has already happened. Australia in particular has been badly hit by the Chinese situation, just as it was by the Japanese situation a generation ago. 

The Chinese are, of course, keeping a great deal of money in U.S. government instruments and other markets. Contrary to fears, that money will not be withdrawn. The Chinese problem isn't a lack of capital, and repatriating that money would simply increase inflation. Had the Chinese been able to put that money to good use, it would have never been invested in the United States in the first place. The outflow of money from China was a symptom of the disease: Lacking the structure to invest in China, the government and private funds went overseas. In so doing, Beijing sought to limit destabilization in China, while private Chinese funds looked for a haven against the storm that was already blowing. 

Rather than the feared repatriation of funds, the United States will continue to be the target of major Chinese cash inflows. In a world where Europe is still reeling, only the United States is both secure and large enough to contain Chinese appetites for safety. Just as Japanese investment in the 1990s represented capital flight rather than a healthy investment appetite, so the behavior we have seen from Chinese investors in recent years is capital flight: money searching for secure havens regardless of return. This money has underpinned American markets; it is not going away, and in fact more is on the way. 

The major shift in the international order will be the decline of China's role in the region. China's ability to project military power in Asia has been substantially overestimated. Its geography limits its ability to project power in Eurasia, an endeavor that would require logistics far beyond China's capacity. Its naval capacity is still limited compared with the United States. The idea that it will compensate for internal economic problems by genuine (as opposed to rhetorical) military action is therefore unlikely. China has a genuine internal security problem that will suck the military, which remains a domestic security force, into actions of little value. In our view, the most important shift will be the re-emergence of Japan as the dominant economic and political power in East Asia in a slow process neither will really want.

China will continue to be a major power, and it will continue to matter a great deal economically. Being troubled is not the same as ceasing to exist. China will always exist. It will, however, no longer be the low-wage, high-growth center of the world. Like Japan before it, it will play a different role.

In the global system, there are always low-wage, high-growth countries because the advanced industrial powers' consumers want to absorb goods at low wages. Becoming a supplier of those goods is a major opportunity for, and disruptor to, those countries. No one country can replace China, but China will be replaced. The next step in this process is identifying China's successors.

Read more: Recognizing the End of the Chinese Economic Miracle | Stratfor
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Global Arms Markets as Seen Through the Syrian Lens

By Scott Stewart

The many and diverse efforts to arm the various actors in the Syrian civil war are really quite amazing to watch. These efforts are also quite hard to decipher -- and intentionally so -- since many of the arms transfers occur on the murky gray and black arms markets. Indeed, it is quite doubtful that anyone, whether Syrian intelligence, the Russian Foreign Intelligence Service or the CIA really has a complete picture of all the channels used to funnel arms into the conflict. Certainly, I cannot hope to catalogue all of them here. However, the efforts to arm all of the factions fighting in Syria do provide a great opportunity to discuss the global arms trade and its various facets.

The Nature of Weapons

To understand the global arms markets we must first understand some critical things about the nature of weapons. First of all, it is important to realize that weapons are durable goods. While certain types of weapons and weapon components have a limited shelf life -- such as battery-coolant units for the FIM-92A Stinger missile -- numerous other weapons remain functional for many decades. It is not unusual to find a militant or a soldier carrying an AK-47 assault rifle manufactured before he was born -- and in many cases even before his father was born.

Because of this durability, weapons provided to the anti-Soviet fighters in Afghanistan in the 1980s are still being used against coalition troops in Afghanistan. But 1980s-era weapons are not the only durable weapons in the theater: The Taliban is also attacking coalition forces in Afghanistan with British Lee-Enfield rifles sent to South Asia during the Victorian era. These antique main battle rifles with their larger cartridges and longer barrels have a demonstrated ability to engage targets at longer distances than the more modern AK-47.

But Afghanistan is not the only place where the durability of weapons is seen. Weapons provided by the United States and the Soviet Union to rebels and governments during Central America's civil wars are still making their way into the arsenals of Mexican drug cartels, and M-40 recoilless rifles provided by the United States to the government of Libya before Moammar Gadhafi's 1969 coup proved to be a very effective weapons system in the battle of Misurata, and today are being shipped from Libya to the rebels in Syria.

Sometimes, weapons can even outlast the countries that manufactured them. East German MPiKMS and MPiKM assault rifles are still floating around the world's arms markets more than two decades after the German Democratic Republic ceased to exist.

It is important to recognize that ammunition is also an important facet of the global arms trade. Ammunition tends to be less durable than weapons, and is also consumed at high rates. This means that while weapons are durable, they can only remain functional if sufficient supplies of the appropriate ammunition are available. One of the reasons weapons like the AK-47 have proliferated so widely is the ease and low cost of finding compatible ammunition for the rifles. In the case of Syria, the rebels can both purchase ammunition for weapons like the AK-47 and seize it from the government.

Weapons are also fungible, or interchangeable. An AK-47-style rifle manufactured in Russia is essentially the same as one manufactured in Pakistan or Egypt, and an M16-style rifle manufactured in China can easily replace an M16 manufactured in the United States. Indeed, in a place like Afghanistan or Syria, it is not unusual to find AK-47-style rifles manufactured in various countries and decades being carried within the same rebel group. Journalist C.J. Chivers has done a wonderful job chronicling the proliferation of the AK-47 in his book The Gun and in his blog.

Weapons are also goods that tend to retain their value and are easily converted to cash. Combined with their durability and fungibility, this explains why they so readily flow to conflict zones where there is an increased demand for them. Buying weapons from a place where there is an oversupply and then selling them in a place where there is a heavy demand can be highly lucrative. After the fall of the Soviet Union, arms merchants like Viktor Bout became incredibly rich buying excess Soviet weapons for very low prices in places like Ukraine and selling them for much higher prices in places like Liberia. In addition to cash, guns can also be exchanged for commodities such as diamonds, drugs and even sugar.

Arms Markets

There are three general types of markets for arms. The first is the legal arms market, where weapons are bought and sold in accordance with national and international law. The legal arms market also includes military aid sent by one government to another in accordance with international law. The parties in a legal arms deal will file the proper paperwork, including end-user certificates, noting what is being sold, who is selling it and to whom it is being sold. There is a clear understanding of who is getting what and under what conditions.

The second arms market is that involving illicit, or gray arms. Gray arms transactions involve a deceptive legal arms transaction in which legally purchased arms are shifted into the hands of someone other than the purported, legal recipient. One of the classic ways to do this is to either falsify an end-user certificate, deceiving the seller, or to bribe an official in the purported destination country to sign an end-user certificate but then allow the shipment of arms to pass through his country to a third location. This type of transaction is frequently used in cases where there are international arms embargoes against a particular country (like Liberia) or where it is illegal to sell arms to a militant group such as the Revolutionary Armed Forces of Colombia.

In one example of a gray arms deal, Ukrainian small arms were sold to Ivory Coast on paper but were then transferred in violation of U.N. arms embargoes to Liberia and Sierra Leone. Another example occurred when the government of Peru purchased thousands of surplus East German assault rifles from Jordan on the legal arms market ostensibly for the Peruvian military. Those rifles then slipped into the gray arms world and were dropped at airstrips in the jungles of Colombia for use by the Revolutionary Armed Forces of Colombia.

The third market is the illegal, or black arms market. In this market, the weapons are clearly transferred in violation of national and international law and there is no attempt to cover the impropriety with devices such as forged end-user certificates. Black arms transfers can involve regimes, such as when the Gadhafi regime in Libya furnished weapons to terrorist groupslike the Abu Nidal Organization or the Provisional Irish Republican Army. Nation-states will often use the gray and black arms markets in order to deniably support allies, undermine opponents or otherwise pursue their national interests. This was clearly revealed in the Iran-Contra scandal of the mid-1980s, though Iran-Contra only scratched the surface of the untold tons of arms that were smuggled during the Cold War. But other times, the black arms market can involve non-state actors or even organized crime groups. The transfer of Libyan weapons from militia groups to Tuareg rebels in Mali or of weapons from the conflicts in the Balkans to criminals in Europe exemplify this.

Some weapons are also made in an unregulated manner, such as the homemade rockets and mortars made by Palestinian militant groups or the Syrian resistance. The cottage industry of illicit arms manufacture in Darra Adam Khel Pakistan has long supplied militants and tribesmen on both sides of the Pakistan-Afghanistan border.

Weapons Flows to Syria

Currently, Syrian President Bashar al Assad's regime is being supplied through the legal arms market by Russia. At the same time, they are being supplied by Iran, but since Iran is forbidden from exporting weapons under U.N. Resolution 1747, these transactions are illegal or occurring on the black arms market.

Similarly, the Iranian and Syrian weapons provided to the al Assad regime's ally, Hezbollah, are illegal under U.N. Resolution 1701. Advanced Chinese weapons have also found their way into Hezbollah's arsenal, such as the C-802 anti-ship missile used in a July 2006 attack on the Israeli corvette Hanit. It appears Hezbollah received these weapons from Iran, which has purchased some of the missiles from China and manufactured its own copies of the missile.

The rebel groups in Syria are quite fractured. The weapon flows to these groups reflect this diversity, as do the number of different actors arming them. To date, the United States and EU countries have resisted directly arming the rebels, but covert efforts facilitate the flow of arms from other parties to the rebels have been going on for well over a year now.

One of the functions of the U.S. presence in Benghazi, Libya, was to help facilitate the flow of Libyan arms to Syrian rebels. From the American point of view, sending weapons to Syria not only helps the rebels there, but every SA-7b shoulder-fired surface-to-air missile sent to Syria to be fired at a regime helicopter or MiG fighter is one less missile that can find its way into the hands of militants in the region. Promoting the flow of weapons out of Libya to Syria also makes weapons in Libya much more expensive, and can therefore reduce the ability of local militia groups -- or regional militant groups such as al Qaeda in the Islamic Maghreb or Boko Haram -- to procure weapons from Libya.

Even though the U.S. and Turkish governments are involved in the process of passing arms from Libya to Syria, it is nonetheless a black arms channel. The Austrian Steyr Aug rifles and Swiss-made hand grenades in rebel hands were purchased by Saudi Arabia and the United Arab Emirates through legal channels but then diverted to the Syrian rebels several years later via black market channels. I have not seen any of the documentation pertaining to the Croatian weapons sold to Saudi Arabia and then channeled to the Syrian rebels via Jordan, so it is difficult to judge if they were arms sold legally to the Saudis and then diverted via an illicit gray arms transaction or if the entire transfer was clandestine and hidden in black arms channels.

Obviously, the weapons supplied by the Islamic State of Iraq to Jabhat al-Nusra and other jihadist rebel groups is another case of black arms transfers. But some rebel groups have purchased weapons with cash on the black market in Lebanon and Turkey while other rebel groups have even purchased weapons from corrupt officials in the Syrian regime. Of course, the rebels have also captured some sizable arms depots from the government.

As one steps back and looks at the big picture, it becomes clear that as these diverse channels move instruments of war into Syria, their individual themes are being woven together to orchestrate a terrible symphony of death. It may be years before the symphony is over in Syria, but rest assured that shortly after its final crescendo, economic forces will work to ensure that the durable and fungible weapons from this theater of war begin to make their way to the next global hotspot.

Read more: Global Arms Markets as Seen Through the Syrian Lens | Stratfor
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Mexico: Will Los Zetas Unravel Without Their Leader?

A Mexican soldier stands next to a placard depicting arrested cartel members. (YURI CORTEZ/AFP/GettyImages)

Summary

The arrest of Los Zetas leader Miguel "Z-40" Trevino Morales marks the most significant capture involving a Mexican organized crime leader since 2008. On July 15, Stratfor sources confirmed Mexican and U.S. media reports saying that Trevino was arrested in Nuevo Laredo, Tamaulipas state, and that he was being transferred to Mexico City. Reports indicate that he was arrested late July 14, though that has not been confirmed. At least one source claims Trevino's nephew was also arrested. 

Trevino became the leader of Los Zetas, one of Mexico's most prolific and most territorial organized crime groups, sometime in 2012 shortly before then-leader Heriberto "El Lazca" Lazcano Lazcano was killed by the Mexican navy. Trevino's arrest could change Mexico's criminal landscape substantially if Los Zetas begin to unravel in his absence. 

Analysis

One reason behind Los Zetas' success is the group's ability to replace its leadership, even its senior-most leaders, relatively easily. In fact, Trevino succeeded Lazcano without any noticeable internal strife -- a rare occurrence among Mexican criminal groups.

This ability stems from the founding members, several of whom deserted from the highly trained Special Forces Airmobile Group unit of the Mexican army. Because ex-military personnel formed Los Zetas, members tend to move up in the group's hierarchy through merit rather than through familial connections. This contrasts starkly with the culture of other cartels, including the Sinaloa Federation. However, Trevino did not originate from the Mexican military like his predecessor, so it is possible that the group's culture may have changed somewhat. 

It is unclear who will now try to keep the group together. Trevino's brother, Omar "Z-42" Trevino, will likely continue to maintain his role in criminal operations but it remains to be seen whether he has the capability or respect within the organization to replace his brother.

The places where cartel-related violence could rise as a result of Trevino's capture will depend on the ability of Los Zetas to replace their top leader as well as the strategies of Los Zetas' rivals. Should Trevino's arrest spark an internal struggle for succession, violence could rise in the states in which Los Zetas hold a substantial presence, including Tamaulipas, Nuevo Leon, Zacatecas, San Luis Potosi, Coahuila, Veracruz, Hidalgo, and Tabasco states.

Los Zetas' rivals, such as the Sinaloa Federation, the Cartel de Jalisco Nueva Generacion, the Knights Templar and factions of the Gulf cartel, probably see this transition as a moment of weakness. They could attack Los Zetas in their strongholds or otherwise try to expel Los Zetas from their own home territories.   

The intelligence from Trevino's arrest could be a boon to U.S. and Mexican officials. Unlike Lazcano, who was killed during his attempted apprehension, Trevino survived his arrest and thus could provide valuable intelligence either through interrogation or through the seizure of his personal belongings, including mobile phones, computers and paper records. These in turn could lead to the arrests of other high-ranking organized crime leaders.

Read more: Mexico: Will Los Zetas Unravel Without Their Leader? | Stratfor 
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Indonesia’s Submarine Doctrine Explained

By  Zachary Keck

Earlier this week I wrote a pieceoutlining the submarine forces of the three countries that sit atop the Malacca Strait— Singapore, Malaysia, and Indonesia. In discussing Indonesia’s expanding submarine force in that article, I quoted liberally from an interview I did with Koh Swee Lean Collin, an Associate Research Fellow at the RSIS Military Studies Program, and an expert on all things naval (particularly naval modernization) among ASEAN nations (see here and here, for instance).

The whole exchange is really worth reading, however, and so, with Collin’s permission, I’ve published it below. Enjoy!

The Diplomat: What is Indonesia’s submarine doctrine?

Koh Swee Lean Collin: As we all understand, Indonesia is a vast archipelagic country, which correspondingly means that effectively and comprehensively policing its vast maritime expanses poses a unique challenge. This thus also shapes the way the Indonesian Navy (or TNI-AL) prioritizes and builds its force structure in view also of the persistent resource constraints.

Submarines certainly form a major facet of the whole game plan. Their role is intended largely in peacetime to constitute a “fleet-in-being” deterrent to any potential foe. In wartime, due to the multiplicity of possible sea approaches the adversary may undertake, it is necessary to carry out effective sea denial using submarines, by focusing them on the strategic SLOCs [Sea Lines of Communication] of the highest priority.

To effectively accomplish this feat, Indonesia's ideal submarine fleet strength has to hover around eight at the minimum, and 12 ideally. Historical experiences had a role to play in deciding the envisaged submarine capacity TNI-AL should have. During its “golden age” in the 1960s, the TNI-AL had up to 12 Soviet-built submarines of the Whiskey class.

However, for the foreseeable future, TNI-AL seemed to realize that 12 boats could be financially implausible to attain, hence eight would be the best [number] to strive for. However, as we see today, the TNI-AL remains a distance from this intended target. With the new trio of South Korean-built submarines ordered recently, at the very most there'll be just five boats including the existing pair of Type-209s. It is most likely that not all boats will be operational at any one time.

Hence, the peacetime role of “fleet-in-being” deterrent and wartime sea denial role will remain the centerpiece of TNI-AL submarine doctrine. A limited sea control role would be possible in specific contexts, but more effective sea control over the Indonesian archipelago [only] appears more possible with a further expansion of TNI-AL's submarine force. More likely, the three South Korean-built boats will be the only operational boats gradually supplanting the aging pair of 209s, by then too old and less cost-effective to operate and maintain.

Why was the Palu Bay selected to serve as Indonesia’s submarine base?

The primary reasons for selecting Palu surely have to do with geography. It's located, first of all. astride the Strait of Makassar and the Palu Bay is a narrow, deep inlet (reportedly 400m) which provides maximum security for the submarine force in terms of concealment and defense against attacks. Besides its sitting astride the strategic waterway, Palu offers direct access northwards into the Sulawesi Sea, where Indonesia still has an outstanding dispute with Malaysia over the Ambalat offshore oil block, off the Malaysian-controlled Ligitan and Sipadan Islands (which were awarded to Kuala Lumpur in the early 2000s by the International Court of Justice). The historic loss of the islands to Malaysia made it even more imperative for Indonesia to safeguard its rights over the Ambalat block. This was also taken into account during previous naval standoffs between the two countries' maritime forces in 2005 and 2009.

Therefore, the significance of Palu Bay is to facilitate TNI-AL's ability to project a submarine presence into the Ambalat, and perhaps to serve as a form of deterrent against unilateral naval moves by the Malaysians whose existing Scorpene class submarines were based nearby in Sabah's Sepanggar. In fact, in 2009 Indonesia suspected that Malaysia had deployed the submarines in the disputed waters, leading to the RMN chief to assure Indonesian legislators that KL would not make such moves. Whether or not it had assured Jakarta of this remains debatable, but the Palu Bay would offer TNI-AL a form of insurance against potential Malaysian naval moves into the waters. It is not inconceivable that TNI-AL subs would be well poised to conduct covert surveillance in the Ambalat waters, keeping track of unusual Malaysian activities in the area.

 From a broader perspective, the Palu base is also part of the TNI-AL's overall reorganization efforts, fronted by the expansion from two existing fleets — the Eastern and Western Fleet Commands — to three, including the new Central Fleet Command. This appears to be a move to reorganize the division of labor of the TNI-AL more equitably into distinct geographical areas of responsibilities. It also signifies the increasing strategic importance of the central waterways of the Indonesian Archipelago, which are believed to be the arena of foreign submarine activities. TNI-AL's Palu base hence should also be seen in this light. However, the Palu base also has another focus down south, as I explain in greater detail in the following question about the strategic waterways.

To what extent, then, is Indonesia trying to gain the capabilities necessary to exert more control over the shipping routes it is located upon, potentially being able to interdict shipping from specific countries during a conflict?

I believe Indonesia is certainly seeking to exert greater control over the three main strategic waterways - Lombok, Makassar and Sunda. These are often relegated to secondary importance after the Malacca Strait, which carries greater economic value. However, the geostrategic location of Indonesia means that its archipelagic waters would become the conduit for foreign naval movements to and fro the Indian and Pacific Oceans. This certainly includes foreign submarine activities, as mentioned earlier.

The Indonesians have long been conscious of the vulnerability of these waterways to foreign naval activities, which Jakarta deemed as rather disconcerting, especially with the rise of major power rivalries and tensions in the region, which correspondingly amplifies the importance of these waterways. For many years since 2004, the TNI-AL has focused a significant portion of the maritime surveillance assets to counter piracy and sea robberies in the Malacca Strait and to deter separatism in the Papuan province, as well as to the Ambalat waters. It's therefore time for the Indonesians to place more attention on the three strategic waterways.

However, the tasks at hand for TNI-AL are daunting, given the emergent need to refocus attention on the Natuna Islands, where the South China Sea tensions and recent PLA Navy forays deep south in the area (as exemplified by the PLA Navy's “show of might” near James Shoal at the southernmost rim of the South China Sea) have created renewed concerns. To accomplish all these tasks, including greater control over the strategic waterways, Indonesia would have to expand its current naval forces in multiple dimensions, including surface, subsurface and land-based maritime aerial support elements.

We have recently seen procurement and force restructuring efforts that appear to be geared towards this mega effort. More emphasis has been placed on enhancing surface and aerial surveillance capabilities, while the earlier mention expansion from two to three fleet commands are all manifestations of this endeavor. This will certainly continue to be an incremental, gradual enhancement process which takes time, and until then the TNI-AL could only best hope for intermittent control over the waterways instead of round-the-clock ability to do so. One only needs to note the extremely daunting task TNI-AL faces in acquiring, operating and maintaining a capacity sufficient to police the entire archipelago.

 Submarines hence serve as a useful force in the effort to exert greater control over those strategic waterways, which are geographically ideal for subsurface actions in times of peace and war. The proximity of Palu base to these three waterways (Makassar astride, and Sunda and Lombok down south across the Java Sea) facilitates TNI-AL's submarine presence in those areas in both periods of peace and contingencies. However, in view of the small size of the TNI-AL submarine fleet even with the entry of the new boats, the best it can hope for presently remains primarily sea denial and at best, limited amount of sea control in those three waterways. The Palu base certainly serves as a “force multiplier” in this respect.

Image credit: flickr/Cooperation Afloat Readiness and Training (CARAT)

Read more at:http://thediplomat.com/flashpoints-blog/2013/07/19/indonesias-submarine-doctrine-explained/

Keeping the NSA in Perspective

By George Friedman

In June 1942, the bulk of the Japanese fleet sailed to seize the Island of Midway. Had Midway fallen, Pearl Harbor would have been at risk and U.S. submarines, unable to refuel at Midway, would have been much less effective. Most of all, the Japanese wanted to surprise the Americans and draw them into a naval battle they couldn't win.

The Japanese fleet was vast. The Americans had two carriers intact in addition to one that was badly damaged. The United States had only one advantage: It had broken Japan's naval code and thus knew a great deal of the country's battle plan. In large part because of this cryptologic advantage, a handful of American ships devastated the Japanese fleet and changed the balance of power in the Pacific permanently.

This -- and the advantage given to the allies by penetrating German codes -- taught the Americans about the centrality of communications code breaking. It is reasonable to argue that World War II would have ended much less satisfactorily for the United States had its military not broken German and Japanese codes. Where the Americans had previously been guided to a great extent by Henry Stimson's famous principle that "gentlemen do not read each other's mail," by the end of World War II they were obsessed with stealing and reading all relevant communications.

The National Security Agency evolved out of various post-war organizations charged with this task. In 1951, all of these disparate efforts were organized under the NSA to capture and decrypt communications of other governments around the world -- particularly those of the Soviet Union, which was ruled by Josef Stalin, and of China, which the United States was fighting in 1951. How far the NSA could go in pursuing this was governed only by the extent to which such communications were electronic and the extent to which the NSA could intercept and decrypt them.

The amount of communications other countries sent electronically surged after World War II yet represented only a fraction of their communications. Resources were limited, and given that the primary threat to the United States was posed by nation-states, the NSA focused on state communications. But the principle on which the NSA was founded has remained, and as the world has come to rely more heavily on electronic and digital communication, the scope of the NSA's commission has expanded.

What drove all of this was Pearl Harbor. The United States knew that the Japanese were going to attack. They did not know where or when. The result was disaster. All American strategic thinking during the Cold War was built around Pearl Harbor -- the deep fear that the Soviets would launch a first strike that the United States did not know about. The fear of an unforeseen nuclear attack gave the NSA leave to be as aggressive as possible in penetrating not only Soviet codes but also the codes of other nations. You don't know what you don't know, and given the stakes, the United States became obsessed with knowing everything it possibly could.

In order to collect data about nuclear attacks, you must also collect vast amounts of data that have nothing to do with nuclear attacks. The Cold War with the Soviet Union had to do with more than just nuclear exchanges, and the information on what the Soviets were doing -- what governments they had penetrated, who was working for them -- was a global issue. But you couldn't judge what was important and what was unimportant until after you read it. Thus the mechanics of assuaging fears about a "nuclear Pearl Harbor" rapidly devolved into a global collection system, whereby vast amounts of information were collected regardless of their pertinence to the Cold War.

There was nothing that was not potentially important, and a highly focused collection strategy could miss vital things. So the focus grew, the technology advanced and the penetration of private communications logically followed. This was not confined to the United States. The Soviet Union, China, the United Kingdom, France, Israel, India and any country with foreign policy interests spent a great deal on collecting electronic information. Much of what was collected on all sides was not read because far more was collected than could possibly be absorbed by the staff. Still, it was collected. It became a vast intrusion mitigated only by inherent inefficiency or the strength of the target's encryption.

Justified Fear

The Pearl Harbor dread declined with the end of the Cold War -- until Sept. 11, 2001. In order to understand 9/11's impact, a clear memory of our own fears must be recalled. As individuals, Americans were stunned by 9/11 not only because of its size and daring but also because it was unexpected. Terrorist attacks were not uncommon, but this one raised another question: What comes next? Unlike Timothy McVeigh, it appeared that al Qaeda was capable of other, perhaps greater acts of terrorism. Fear gripped the land. It was a justified fear, and while it resonated across the world, it struck the United States particularly hard. 

Part of the fear was that U.S. intelligence had failed again to predict the attack.  The public did not know what would come next, nor did it believe that U.S. intelligence had any idea. A federal commission on 9/11 was created to study the defense failure. It charged that the president had ignored warnings. The focus in those days was on intelligence failure. The CIA admitted it lacked the human sources inside al Qaeda. By default the only way to track al Qaeda was via their communications. It was to be the NSA's job.

As we have written, al Qaeda was a global, sparse and dispersed network. It appeared to be tied together by burying itself in a vast new communications network: the Internet. At one point, al Qaeda had communicated by embedding messages in pictures transmitted via the Internet. They appeared to be using free and anonymous Hotmail accounts. To find Japanese communications, you looked in the electronic ether. To find al Qaeda's message, you looked on the Internet.

But with a global, sparse and dispersed network you are looking for at most a few hundred men in the midst of billions of people, and a few dozen messages among hundreds of billions. And given the architecture of the Internet, the messages did not have to originate where the sender was located or be read where the reader was located. It was like looking for a needle in a haystack. The needle can be found only if you are willing to sift the entire haystack. That led to PRISM and other NSA programs.

The mission was to stop any further al Qaeda attacks. The means was to break into their communications and read their plans and orders. To find their plans and orders, it was necessary to examine all communications. The anonymity of the Internet and the uncertainties built into its system meant that any message could be one of a tiny handful of messages. Nothing could be ruled out. Everything was suspect. This was reality, not paranoia.

It also meant that the NSA could not exclude the communications of American citizens because some al Qaeda members were citizens. This was an attack on the civil rights of Americans, but it was not an unprecedented attack. During World War II, the United States imposed postal censorship on military personnel, and the FBI intercepted selected letters sent in the United States and from overseas. The government created a system of voluntary media censorship that was less than voluntary in many ways. Most famously, the United States abrogated the civil rights of citizens of Japanese origin by seizing property and transporting them to other locations. Members of pro-German organizations were harassed and arrested even prior to Pearl Harbor. Decades earlier, Abraham Lincoln suspended the writ of habeas corpus during the Civil War, effectively allowing the arrest and isolation of citizens without due process.

There are two major differences between the war on terror and the aforementioned wars. First, there was a declaration of war in World War II. Second, there is a provision in the Constitution that allows the president to suspend habeas corpus in the event of a rebellion. The declaration of war imbues the president with certain powers as commander in chief -- as does rebellion. Neither of these conditions was put in place to justify NSA programs such as PRISM.

Moreover, partly because of the constitutional basis of the actions and partly because of the nature of the conflicts, World War II and the Civil War had a clear end, a point at which civil rights had to be restored or a process had to be created for their restoration. No such terminal point exists for the war on terror. As was witnessed at the Boston Marathon -- and in many instances over the past several centuries -- the ease with which improvised explosive devices can be assembled makes it possible for simple terrorist acts to be carried out cheaply and effectively. Some plots might be detectable by intercepting all communications, but obviously the Boston Marathon attack could not be predicted.

The problem with the war on terror is that it has no criteria of success that is potentially obtainable. It defines no level of terrorism that is tolerable but has as its goal the elimination of all terrorism, not just from Islamic sources but from all sources. That is simply never going to happen and therefore, PRISM and its attendant programs will never end. These intrusions, unlike all prior ones, have set a condition for success that is unattainable, and therefore the suspension of civil rights is permanent. Without a constitutional amendment, formal declaration of war or declaration of a state of emergency, the executive branch has overridden fundamental limits on its powers and protections for citizens.

Since World War II, the constitutional requirements for waging war have fallen by the wayside. President Harry S. Truman used a U.N resolution to justify the Korean War. President Lyndon Johnson justified an extended large-scale war with the Gulf of Tonkin Resolution, equating it to a declaration of war. The conceptual chaos of the war on terror left out any declaration, and it also included North Korea in the axis of evil the United States was fighting against. Former NSA contractor Edward Snowden is charged with aiding an enemy that has never been legally designated. Anyone who might contemplate terrorism is therefore an enemy. The enemy in this case was clear. It was the organization of al Qaeda but since that was not a rigid nation but an evolving group, the definition spread well beyond them to include any person contemplating an infinite number of actions. After all, how do you define terrorism, and how do you distinguish it from crime?

Three thousand people died in the 9/11 attacks, and we know that al Qaeda wished to kill more because it has said that it intended to do so. Al Qaeda and other jihadist movements -- and indeed those unaffiliated with Islamic movements -- pose threats. Some of their members are American citizens, others are citizens of foreign nations. Preventing these attacks, rather than prosecuting in the aftermath, is important. I do not know enough about PRISM to even try to guess how useful it is.

At the same time, the threat that PRISM is fighting must be kept in perspective. Some terrorist threats are dangerous, but you simply cannot stop every nut who wants to pop off a pipe bomb for a political cause. So the critical question is whether the danger posed by terrorism is sufficient to justify indifference to the spirit of the Constitution, despite the current state of the law. If it is, then formally declare war or declare a state of emergency. The danger of PRISM and other programs is that the decision to build it was not made after the Congress and the president were required to make a clear finding on war and peace. That was the point where they undermined the Constitution, and the American public is responsible for allowing them to do so.

Defensible Origins, Dangerous Futures

The emergence of programs such as PRISM was not the result of despots seeking to control the world. It had a much more clear, logical and defensible origin in our experiences of war and in legitimate fears of real dangers. The NSA was charged with stopping terrorism, and it devised a plan that was not nearly as secret as some claim. Obviously it was not as effective as hoped, or the Boston Marathon attack wouldn't have happened. If the program was meant to suppress dissent it has certainly failed, as the polls and the media of the past weeks show.

The revelations about PRISM are far from new or interesting in themselves. The NSA was created with a charter to do these things, and given the state of technology it was inevitable that the NSA would be capturing communications around the world. Many leaks prior to Snowden's showed that the NSA was doing this. It would have been more newsworthy if the leak revealed the NSA had not been capturing all communications. But this does give us an opportunity to consider what has happened and to consider whether it is tolerable.

The threat posed by PRISM and other programs is not what has been done with them but rather what could happen if they are permitted to survive. But this is not simply about the United States ending this program. The United States certainly is not the only country with such a program. But a reasonable start is for the country that claims to be most dedicated to its Constitution to adhere to it meticulously above and beyond the narrowest interpretation. This is not a path without danger. As Benjamin Franklin said, "They that can give up essential liberty to obtain a little temporary safety deserve neither liberty nor safety."

Read more: Keeping the NSA in Perspective | Stratfor
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Russia to Offer Post-Sales Services for Malaysia Jet Deal - Minister

Su-30 fighter

MOSCOW, July 11 (RIA Novosti) – Russia is interested in adding post-sales maintenance and training to future arms contracts with Malaysia, Foreign Minister Sergei Lavrov said Thursday, in an apparent attempt to give Russia a competitive edge in an upcoming combat jet tender.

“We are interested in continuing military cooperation [with Malaysia], and not only in the form of arms deliveries, which we had quite a few before, but also in providing the post-sale servicing of the sold equipment and the training of the Malaysian personnel to operate this equipment,” Lavrov said at a joint news conference with his Malaysian counterpart, Anifah Aman.

Russia delivered 18 MiG-29A fighters to Malaysia in 1994-1995, followed by 18 Su-30MKM fighters in 2009. It also sold Malaysia 12 Mi-171Sh military transport helicopters.

Lavrov's offer of maintenance and training may have come in response to previous problems experienced by the Royal Malaysian Air Force in keeping its MiG-29 fleet operational.

“Malaysia bought the MiG-29s at a relatively low price, but later on the RMAF had to contend with higher expenses in spare parts replacement and maintenance work,” former Defense Minister Dr Ahmad Zahid Hamidi said in 2010, when questioned about the aircraft's performance, the local Star Online news website reported.

For bigger picture, click here.

MiG executives blamed the reliability issues on Malaysia's purchase of parts from Ukraine and India rather than the original supplier, according to Take-Off magazine.

Russia opened a servicing center in Malaysia in 2012 and a pilot training center in 2011, Lavrov said.

Russian aircraft maker Sukhoi and the Malaysian Defense Ministry signed a $100-million contract this year for maintenance of Malaysia’s fleet of Su-30MKM fighters, Russian defense industry officials said previously.

Malaysia has recently shortlisted five manufacturers in a tender for 18 combat aircraft for delivery by 2015 to replace ageing Russian-built MiG-29s.

The Russian Su-30MKM is one contender, along with the British-promoted Eurofighter Typhoon, Sweden’s SAAB JAS-39 Gripen, France’s Dassault Aviation Rafale, and Boeing’s F/A-18E/F Super Hornet.

Yakhont Medium-Range Anti-Ship Missile

For bigger picture click here.

Global Shipping Contends with Oversupply Problems

A container ship from the CMA CGM company stops at a terminal in Bremerhaven, Germany, in 2012. (INGO WAGNER/AFP/Getty Images)

Summary

The global shipping industry is oversupplied. Because supply far exceeds demand, shipping rates have plummeted, as have the prices of ships. Some shipping companies have sought to capitalize on this trend by purchasing newer, larger ships at lower prices so that they can remain price competitive. But unless demand rebounds by the time these ships become operational, the industry's oversupply problem will only worsen.

It is unclear whether the global shipping industry will normalize before these new ships enter the market. Demand could rise as the global economy recovers, or the supply of ships could somehow fall. But the economy's recovery could just as well be slower than anticipated. Several factors could prevent the industry from righting itself, not the least of which are inaccurate forecasts of future market behavior. In fact, the current state of global shipping was caused in part by incorrect predictions of continued growth prior to the 2008 financial crisis. In any case, continued poor performance and a sluggish global economy could eventually force the shipping industry to restructure.

Analysis

The most important factor to consider, in assessing the state of the shipping industry, is the state of the global economy. The international shipping industry accounts for approximately 90 percent of global trade by volume and is essential for connecting large sectors of the world's economy. Since 1734, the industry has seen more than 20 boom-bust cycles, which occur roughly once per decade. The most recent cycle began in 2004 and peaked in 2008 before declining rapidly at the onset of the global financial crisis.

The downturn afflicted each of the industry's three main categories: tanker, dry bulk and container. While the volume of global trade has recovered somewhat -- it grew 4 percent in 2011, marking a 16 percent growth in ton-kilometers -- the shipping industry is still reeling from the financial crisis.

Big, Efficient Fleets

The industry right now has far more ships than it needs. Most shipping companies tend to reduce the price of their services in an effort to underbid their competitors. Either they reduce the cost per ton or the cost per container. This means most companies try to accrue the biggest and most efficient ships possible. Between 2007 and 2012, the average container ship's capacity increased by 27 percent.

From a shipping company's perspective, overstocking a fleet with large ships while prices are low is a sound business move. Ships are long-term investments that can yield returns for 20 or 30 years, and trade will almost certainly pick up during the life span of any given ship. While purchasing new ships may seem counterintuitive in an oversupplied market, companies know that the capital cost of a ship plays a disproportionately large role in determining how profitable that ship will be, representing roughly half of all expenditures -- including port fees, labor, fuel and other costs -- over the course of the ship's lifetime. Buyers therefore take advantage of low prices whenever they can.

The more efficient these ships are, the lower the price their owners can offer to potential customers. Maersk shipping company recently christened the first ship in its Triple-E line, which is now the largest line of container ships in the world. These ships are a quarter of a mile long, and they can hold roughly 11 percent more cargo than their nearest competitors.

Overcapacity is a problem in itself, but the issue is complicated by the inherent lag in acquiring inventory. On average, it takes two to four years after the placement of an order for a ship to be built and delivered. Thus, ships ordered in 2008, when the industry began to decline, were not delivered until well after the financial crash. While shipping companies had hoped the economic downturn would end quickly as many had forecast, they could not afford to let their competitors build superior fleets -- they were forced to continue buying just to stay competitive.

An Informal Alliance

Along with the economic downturn, the contest to outbid competitors helped keep shipping rates low. In turn, low rates have forced shipping companies to work for fees that often cover only the operating costs of the ships. In these instances, companies that are still paying off the capital investment of the ship are actually losing money. This is notable, considering the Drewry global freight rate index dropped more than 30 percent from July 2008 ($2,727 per forty-foot container) to May 2013 ($1,882 per forty-foot container).

The threat posed by untenably low rates could transform the shipping industry. The world's three largest container lines -- Maersk, CMA CGM and Mediterranean -- have formed an alliance of sorts in an effort to reduce operating costs. The fact that the three largest companies in the industry are acting in concert indicates just how hard it has become for them to survive the downturn (to say nothing of smaller, poorer companies).

Their informal alliance could portend further consolidation. Past consolidation efforts to control shipping prices were unsuccessful, but several outstanding issues, such as China's slowed growth and the European crisis, may keep global demand low enough to force the industry to restructure itself.

In previous boom-bust cycles, demand and shipping rates rebounded as new ships became operational. It is unclear whether this will hold true in the current cycle. If it does not, newly acquired ships will only aggravate the industry's problems.

Read more: Global Shipping Contends with Oversupply Problems | Stratfor
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