The world could do with some glad tidings at the moment, to cope with a global economic crisis and turmoil in the Middle East. Unfortunately, the return of Vladimir Putin to the Kremlin does not qualify as good news.
International co-operation is badly needed for both economic and political reasons, but Mr Putin’s now inevitable return to the presidency in March 2012 will strengthen the forces of nationalism in Russia. At a time when the world’s liberal democracies are struggling economically and losing self-confidence, the new-old Russian president will bolster the authoritarian camp in global politics.
If Russian foreign policy becomes more introverted and nationalistic in 2012, it may form part of a global trend. The US and France are going through presidential elections next year, which will limit the time their leaders can devote to world affairs, and the scope of their actions. The top Chinese leadership will also change next year, which could well see Chinese foreign policy take on a more strident tone. The turmoil in the Middle East is likely to continue throughout 2012, as is the financial crisis within the European Union.
In this situation, the personality of the Russian president will matter more than ever. Russia is one of the five permanent members of the UN Security Council, and remains a major military, energy and diplomatic power.
The ease with which Dmitry Medvedev, the current Russian president, has been eased aside, will strengthen the cynical view that he was always a glove-puppet for Mr Putin. That, however, was not the assessment of western leaders who have dealt with Russia over the past four years. The Americans and Germans in particular discerned a real difference between the Putin and Medvedev camps.
At home, Mr Medvedev’s rhetorical emphasis on the rule-of-law and his more critical view of the Soviet past seemed to mark him out as a relatively liberal figure.
Internationally, it was Mr Medvedev who represented the camp in the Russian government that is most open to co-operation with the west, and that gives some credence to the idea that there are universal values that all major powers should endorse. It was Mr Medvedev who worked closely with the US on the “reset” that has seen Russian-American relations improve sharply since the nadir of 2008 and the Russo-Georgian war – allowing the US and Russia to make progress on arms control. When Nato moved to intervene in Libya, Mr Putin in the prime minister’s office was openly hostile to the idea. But Mr Medvedev at the Kremlin was much more nuanced and may have prevented Russia vetoing the UN resolution that allowed intervention.
Russia remains a major geopolitical player that still thinks and acts like one of the big, global powers. Unfortunately, Mr Putin’s view of world affairs is marked by a nostalgia for the “respect” (or fear) that Russia commanded during the cold war – and by a deep suspicion of the west. According to the Putin world-view, the Americans and the Europeans deliberately took advantage of a period of Russian weakness in the 1990s, to betray promises and to enlarge Nato up to the borders of Russia, and then to foment anti-Russian “colour revolutions” in Ukraine and Georgia. Mr Putin’s vision of the world seems to be based on the idea of a small number of quasi-imperial powers, centred in Washington, Beijing, Moscow, Brussels and so on, jostling for power and “spheres of influence”. Fashionable ideas about interdependence get short shrift.
At home, Mr Putin has talked often about his belief in reform and his desire to battle corruption and diversify the economy. In reality, however, the Putin years saw Russia turn into a petro-state – where rival oligarchs battled for the ear of the Kremlin, and many of those who crossed the president ended up in prison or in exile. It is hard to believe that a second Putin presidency will change this well-established way of doing things.
Western leaders comfort themselves that while Mr Putin may be bad, he does not appear to be mad. His willingness as president to confront the US over issues such as human rights, Georgia, the Ukraine or Kosovo was almost always tempered by a shrewd sense of just how far he could go. Several western leaders, including George W. Bush and Tony Blair, initially felt that they had struck up a good relationship with Mr Putin. Mr Blair noted regretfully in his memoirs that while Mr Putin, as president, eventually pursued a “foreign policy of a very nationalist kind”, the British prime minister “never lost that initial feeling for him or the thought that had circumstances transpired or conspired differently, the relationship could have prospered”.
If Mr Putin remains a man that foreign leaders feel they can do business with, then the return of his hard-edged nationalism to the Kremlin need not be a disaster. Unfortunately, it is a well-established rule of politics that the longer a leader is in office, the more likely he is to succumb to megalomania and to make major errors of judgment.
Mr Putin has already served eight years as president and four as prime minister. Now that the presidential term has been extended to six years, he is poised for a further 12 years in the Kremlin. A president who occupies power for 20 years would be bad news in any country. In a nation with the tragic history of autocracy of Russia, it is a sad and ominous development.
The best way to tackle the Big Four
Michel Barnier has shocked the Big Four accounting firms. The European Union internal market commissioner wants to ban them from operating as consultants as well as auditors, force them to work jointly with others, and set time limits on how long they can audit each company.
It could be the biggest shake-up of accounting since the collapse of Enron laid low Arthur Andersen and led to the 2002 Sarbanes-Oxley Act. Yet it will not amount to much unless the industry’s looming disaster – the failure of another audit firm and contraction to a Big Three – can be avoided.
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Making accountants perform better and ending the conflict of interest of auditors also acting as consultants and tax advisers are laudable aims. But if no way is found to break the Big Four oligopoly and return to a Big Five (preferably a medium-sized six or seven), then Mr Barnier’s proposals will be little more than crowd-pleasing gestures.
The hard reality is that large companies and financial institutions – the kind of banks that suddenly found their assets had collapsed in value between 2007 and 2009 despite their books being given a clean bill of health by auditors – have precious little choice. They often employ two or three of the Big Four in various roles, so rotating auditors is like shuffling a tiny pack of cards.
The figures speak for themselves. The Big Four perform 99 per cent of audits on FTSE 100 companies and 95 per cent of those on FTSE 250 companies. Some 85 per cent of the UK industry’s fee income goes to the Big Four, leaving their nearest rivals BDO International and Grant Thornton trailing.
Large companies cannot replace a Big Four auditor with a second-tier firm because they lack the expertise and resources to compete. Without a significant shift in the terms of competition – or an enforced break-up by anti-trust authorities – there is little chance of this improving.
Indeed, there is every prospect of it getting worse. “The shift to concentration in this industry is an irreversible, one-way, ratchet,” says one senior accountant. Since the failure of Arthur Andersen, governments and regulators are wary of provoking another collapse. KPMG paid $456m to the US tax authorities in 2005 over illegal tax shelters but escaped criminal prosecution.
If another Big Four firm went down, there would not be enough capable of auditing multinationals to go around. The hopes of regulators and shareholders of curbing their conflicts of interest and imposing higher standards of scrutiny would become moot. Their importance to the global economy has made them too big to fail, or to control.
The Barnier proposals that have captured the headlines and provoked outrage in the industry do little to address this, instead focussing on improving the existing firms’ standards of conduct. They are the latest in a series of such regulatory and legal shifts, both in the US and Europe, since Enron.
The core proposal to end conflicts of interest between the firms’ accounting and consulting operations, by barring them from consulting to audit clients, is a good idea. That was the focus of Sarbanes-Oxley and led to three of the Big Four selling their consulting divisions, before quietly building them up again.
The industry is already going this way in Europe. In the UK, the Auditing Practices Board restricts the overlap in its code of conduct – for example, barring accounting firms from offering more aggressive types of tax advice to audit clients, or from consulting on some kinds of information technology.
The Big Four’s consulting arms mostly sell services to non-audit clients – those audited by other firms. Deloitte, for example, gained consulting and tax fees of £1.4bn in 2009 from non-audit clients, compared with £200m from audit clients. Among the Big Four as a whole, the gap has been widening and they could easily and usefully end the remaining overlap.
I see no need for the Big Four to spin off their consulting operations altogether, as Mr Barnier, for ill-defined reasons, prescribes for the largest firms. It would stop the Big Four from being able to draw on inhouse expertise and attract young recruits who train as auditors and then switch to more exciting work, without clear benefits.
A structural change is needed but this is the wrong one. It would be better to let the Big Four retain their consulting arms (once the conflicts of interest over audit clients have been ended) and instead encourage the emergence of new competitors to the biggest firms through ownership and anti-trust measures.
Mr Barnier’s best proposal in this regard has attracted little attention – an amendment to the EU audit directive to end the requirement for accounting firms to be majority owned and controlled by accountants (the same rule is written into state law in the US). That has hitherto protected the Big Four by barring outsiders from challenging them, in a way that is akin to insisting that all airlines are owned by pilots.
The next step should be to unleash the competition authorities. This is already under way in the UK, where a House of Lords committee declared in June that the auditing of large companies “is dominated by an oligopoly with all the dangers that go with that”. The Office of Fair Trading has now threatened the Big Four with being referred to the Competition Commission.
If the European Union wants to restructure the accounting industry it ought to call Joaquín Almunia, its competition commissioner. With due respect to Mr Barnier, he is the wrong man for the job.
Time to think the unthinkable and start printing again
It is the policy that dare not speak its name: the printing press. The time has come to employ this nuclear option on a grand scale. The alternative is likely to be a lost decade. The waste is more than unnecessary; it is cruel. Sadists seem to revel in that cruelty. Sane people should reject it. It is wrong, intellectually and morally.
A recession looms close in the UK and other high-income countries, less than four years after the start of the last one. This would be a disaster for those who would lose their jobs or the young, who would find their hopes of work further postponed.
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A big danger for the UK is a sharp fall in house prices, which would threaten the finances of households and banks. A new recession would also shatter fragile business confidence, which would reduce real business investment, still 20 per cent lower in early 2011 than before the crisis. That would further delay the structural shifts on which sustained recovery depend. With UK gross domestic product still 4 per cent below its pre-crisis peak, this depression would be longer and costlier, in terms of lost output, than the Great Depression of the 1930s, as I noted four weeks ago.
What is to be done? The first task is to abandon what Adam Posen, an outside member of the monetary policy committee, calls “policy defeatism”. As he argued in a new speech: “Throughout modern economic history ... every major financial crisis-driven downturn has been followed by premature abandonment – if not reversal – of the . . . stimulus policies that are necessary to sustained recovery. Every time, this was due to unduly influential voices claiming some combination of the destructiveness of further policy stimulus, the ineffectiveness of further policy stimulus, or the political corruption from further stimulus.”
Up pops Spencer Dale, the Bank of England’s chief economist, as if on cue, with arguments that the UK’s sharp productivity slowdown indicates a permanent reduction in potential output and its growth. He also suggests that part of the recent productivity shortfall is due to reduced innovation by financially constrained smaller businesses. He offers no evidence for this theory. The striking fact, as Bill Martin at the Centre for Business Research in Cambridge has noted in an important paper, is that productivity slowdowns and output declines have occurred across the board. This makes it likely that the poor productivity reflects weak demand.
It is vital, then, to sustain demand. With fiscal policy set on kamikaze tightening and conventional monetary policy almost exhausted, that leaves “quantitative easing”. Mr Posen recommends a great deal more of it, starting with “a minimum of £50bn in gilt purchases in secondary markets” though he now boldly recommends something closer to £75bn or £100bn, in light of the dire external environment. Lowering long-term interest rates would surely provide at least some benefit. But Mr Posen recommends two institutional innovations, as well, aimed at enhancing supply: a public bank or authority for lending to small businesses and an institution for securitising loans made to small and medium enterprises. An alternative would be for a new agency to take the tail risk on normal bank lending to SMEs. That would be a far more sensible way for the government to promote credit to small business than general guarantees to banks.
Personally, I would favour the “helicopter money”, recommended by that radical economist, Milton Friedman. This would be a quasi-fiscal operation. Central bank money could pass via the government to the public at large. Alternatively, the government could fund itself from the central bank, directly. Better still, the government could increase its deficits, perhaps by slashing taxes, and taking needed funds from the central bank. Under any of these alternatives, the central bank would be behaving like any other bank, creating money in the act of lending.
In current circumstances, a policy of direct financing of government by the central bank should recommend itself to monetarists and Keynesians. The former have to be worried by the fact that UK broad money (M4) shrank by 1.1 per cent in the year to July 2011. The latter would have to be pleased that governments could run still bigger deficits without increasing their debt to the public.
Some will argue that a policy of direct financing by the central bank must be inflationary. This is wrong. No automatic link exists between central bank money and the overall money supply. Above all, the policy would be inflationary only if it led to chronic excess demand. So long as the central bank retains the right to call a halt, that need be no serious danger.
A far greater threat is that a prolonged period of feeble demand would undermine supply, impoverish the country and bequeath a legacy of huge public debts. The big risk, in short, is now of a lost decade. Act now. That must not happen.
Mexican Cartels and the Pan American Games: A Threat Assessment
By Scott Stewart
The 2011 Pan American Games will be held in Guadalajara, Mexico, from Oct. 14 through Oct. 30. The games will feature 36 different sports and will bring more than 6,000 athletes and tens of thousands of spectators to Mexico’s second-largest city. The Parapan American Games, for athletes with physical disabilities, will follow from Nov. 12 to Nov. 20.
Like the Olympics, the World Cup or any other large sporting event, planning for the Pan American Games in Guadalajara began when the city was selected to host them in 2006. Preparations have included the construction of new sports venues, an athletes’ village complex, hotels, highway and road infrastructure, and improvements to the city’s mass transit system. According to the coordinating committee, the construction and infrastructure improvements for the games have cost some $750 million.
The preparations included more than just addressing infrastructure concerns, however. Due to the crime environment in Mexico, security is also a very real concern for the athletes, sponsors and spectators who will visit Guadalajara during the games. The organizers of the games, the Mexican government and the governments of the 42 other participating countries also will be focused intensely on security in Guadalajara over the next two months.
In light of these security concerns, STRATFOR will publish an additional special report on the games. The report, of which this week’s Security Weekly is an abridged version, will provide our analysis of threats to the games.
Cartel Environment
Due to the violent and protracted conflicts between Mexico’s transnational criminal cartels and the incredible 
levels of brutality that they have spawned, most visitors’ foremost security concern will be Mexico’s criminal cartels. The Aug. 20 incident in Torreon, Coahuila state, in which a firefight occurred outside of a stadium during a nationally televised soccer match, will reinforce perceptions of this danger. The concern is understandable, especially considering Guadalajara’s history as a cartel haven and recent developments in the region. Even so, we believe the cartels are unlikely to attack the games intentionally.
Historically, smuggling has been a way of life for criminal groups along the U.S.-Mexico border, and moving illicit goods across the border, whether alcohol, guns, narcotics or illegal immigrants, has long proved quite profitable for these groups. This profitability increased dramatically in the 1980s and 1990s as the flow of South American cocaine through the Caribbean was sharply cut due to improvements in maritime and aerial surveillance and interdiction. This change in enforcement directed a far larger percentage of the flow of cocaine through Mexico, greatly enriching the Mexican smugglers involved in the cocaine trade. The group of smugglers who benefited most from cocaine trade included Miguel Angel Felix Gallardo, Ernesto Fonseca Carrillo and Rafael Caro Quintero, who would go on to form a Guadalajara-based organization known as the Guadalajara cartel. That cartel became the most powerful narcotics smuggling organization in the country, and perhaps the world, controlling virtually all the narcotics smuggled into the United States from Mexico.
The Guadalajara cartel was dismantled during the U.S. and Mexican reaction to the 1985 kidnapping, torture and murder of U.S. Drug Enforcement Administration Special Agent Enrique Camarena by the group. Smaller organizations emerged from its remains that eventually would become the Arellano Felix Organization (aka the Tijuana cartel), the Vicente Carrillo Fuentes Organization (aka the Juarez cartel), the Gulf cartel and the Sinaloa Federation. The sheer number of major cartel organizations that came out of the Guadalajara cartel demonstrates the immense power and geographic reach the group once wielded.
Even after the demise of the Guadalajara cartel, Guadalajara continued to be an important city for drug smuggling operations due to its location in relation to Mexico’s highway and railroad system and its proximity to Mexico’s largest port, Manzanillo. The port is not just important to cocaine smuggling; it also has become an important point of entry for precursor chemicals used in the manufacture of methamphetamine. For many years, the Sinaloa Federation faction headed by Ignacio “El Nacho” Coronel Villarreal was in charge of the Guadalajara plaza. Although Guadalajara and the state of Jalisco continued to be an important component of the cocaine trade, Coronel Villarreal became known as “the king of crystal” due to his organization’s heavy involvement in the meth trade.
Guadalajara remained firmly under Sinaloa control until the Beltran Leyva Organization (BLO) split off from Sinaloa following the arrest of Alfredo Beltran Leyva in January 2008. This caused the Beltran Leyva Organization to ally itself with Los Zetas and to begin to attack Sinaloa’s infrastructure on Mexico’s Pacific coast. In April 2010, Coronel Villarreal’s 16-year-old son Alejandro was abducted and murdered. Like the murder of Edgar Guzman Beltran, the son of Joaquin “El Chapo” Guzman Loera, the BLO and Los Zetas were thought to have been behind the murder of Coronel Villarreal’s son. In July 2010, Coronel Villarreal himself was killed during a shootout with the Mexican military in Zapopan, Jalisco state.
Coronel Villarreal’s death created a power vacuum in Guadalajara that several organizations attempted to fill due to the importance of Guadalajara and Jalisco to the smuggling of narcotics. One of these was La Familia Michoacana (LFM). LFM’s attempt to assume control of Guadalajara led to the rupture of the alliance between LFM and Sinaloa. (LFM has since fractured; the most powerful faction of that group is now called the Knights Templar.) The group now headed by Hector Beltran Leyva, which is called the Cartel Pacifico Sur, and its ally Los Zetas also continue to attempt to increase their influence over Guadalajara.
But the current fight for control of Guadalajara includes not only outsiders such as the Knights Templar and the CPS/Los Zetas but also the remnants of Coronel Villarreal’s network and what is left of the Milenio cartel (also known as the Valencia cartel) which has historically been very active in Guadalajara and Manzanillo. One portion of the former Milenio cartel is known as “La Resistencia” and has become locked in a vicious war with the most prominent group of Coronel’s former operatives, which is known as the Cartel de Jalisco Nueva Generacion (CJNG). CJNG appears to have gotten the better of La Resistencia in this fight, and La Resistencia has recently allied itself with Los Zetas/CPS out of desperation.
In July, CJNG announced it was moving some of its forces to Veracruz to attack Los Zetas’ infrastructure there. This CJNG group in Veracruz began to call itself “Matazetas,” Spanish for “Zeta killers.” It is believed that the CJNG is responsible for the recent killings of low-level Zeta operators in Veracruz. Taken with the Los Zetas/La Resistencia alliance, the CJNG offensive in Veracruz means that if Los Zetas have the ability to strike against the CJNG infrastructure in Guadalajara, they will do so. Such strikes could occur in the next few weeks, and could occur during the games.
As illustrated by the recent body dumps in Veracruz, or the bodies dumped in Acapulco during Mexican President Felipe Calderon’s visit to that city in March, the Mexican cartels do like to perform a type of macabre theater in order to grab media attention. With the attention of the press turned toward Guadalajara, it would not be surprising if one or more cartel groups attempted some sort of body dump or other spectacle in Guadalajara during the games.
And given the ongoing fight for control of Guadalajara, it is quite likely that there will be some confrontations between the various cartel groups in the city during the games. However, such violence is not likely to be intentionally directed against the games. The biggest risk to athletes and spectators posed by the cartels comes from being in the wrong place at the wrong time; the cartels frequently employ fragmentation grenades and indiscriminate fire during shootouts with the authorities and rival cartels.
Crime
One of the side effects of the Mexican government’s war against the cartels is that as some cartels have been weakened by pressure from the government and their rivals, they have become less capable of moving large shipments of narcotics. This has made them increasingly reliant on other types of crime to supplement their income. Crime always has been a problem in Mexico, but activities such as robbery, kidnapping and extortion have gotten progressively worse in recent years. According to the U.S. State Department’s 2011 Crime and Safety report for Guadalajara, crimes of all types have increased in the city. Indeed, due to the high levels of crime present in Mexico, athletes and spectators at the Pan American Games are far more likely to fall victim to common crime than they are to an act of cartel violence.
The Mexican government will employ some 10,000 police officers (to include 5,000 Federal Police officers) as well as hundreds of military personnel to provide protection to the athletes and venues associated with the Pan American Games. But when one considers that the Guadalajara metropolitan area contains some 4.4 million residents, and that there will be thousands of athletes and perhaps in excess of 100,000 spectators, the number of security personnel assigned to work the games is not as large as it might appear at first glance. Nevertheless, the authorities will be able to provide good security for the athletes’ village and the venues, and on the main travel routes, though they will not be able to totally secure the entire Guadalajara metropolitan area. Places outside the security perimeters where there is little security, and therefore a greater danger of criminal activity, will remain.
When visiting Guadalajara during the games, visitors are advised to be mindful of their surroundings and maintain situational awareness at all times in public areas. Visitors should never expose valuables, including wallets, jewelry, cell phones and cash, any longer than necessary. And they should avoid traveling at night, especially into areas of Guadalajara and the surrounding area that are away from the well-established hotels and sporting venues. Visitors will be most vulnerable to criminals while in transit to and from the venues, and while out on the town before and after events. Excessive drinking is also often an invitation to disaster in a high-crime environment.
As always, visitors to Mexico should maintain good situational awareness and take common-sense precautions to reduce the chances of becoming a crime victim. Pickpockets, muggers, counterfeit ticket scalpers, and express kidnappers all will be looking for easy targets during the games, and steps need to be taken to avoid them. Mexico has a problem with corruption, especially at lower levels of their municipal police forces, and so this must be taken into account when dealing with police officers.
While traditional kidnappings for ransom in Mexico are usually directed against well-established targets, express kidnappings can target anyone who appears to have money, and foreigners are often singled out for express kidnapping. Express kidnappers are normally content to drain the contents of the bank accounts linked to the victim’s ATM card, but in cases where there is a large amount of cash linked to the account and a small daily limit, an express kidnapping can turn into a protracted ordeal. Express kidnappings can also transform into a traditional kidnapping if the criminals discover the victim of their express kidnapping happens to be a high net worth individual.
It is also not uncommon for unregulated or “libre” taxi drivers in Mexico to be involved with criminal gangs who engage in armed robbery or express kidnapping, so visitors need to be careful only to engage taxi services from a regulated taxi stand or a taxi arranged via a hotel or restaurant, but even that is no guarantee.
Miscellaneous Threats
In addition to the threats posed by the cartels and other criminals, there are some other threats that must be taken into consideration. First, Guadalajara is located in a very active seismic area and earthquakes there are quite common, although most of them cannot be felt. Occasionally, big quakes will strike the city and visitors need to be mindful of how to react in an earthquake.
Fire is also a serious concern, especially in the developing world, and visitors to Guadalajara staying in hotels need to ensure that they know where the fire exits are and that those fire exits are not blocked or locked.
The traffic in Mexico’s cities is terrible and Guadalajara is no exception. Traffic congestion and traffic accidents are quite common.
Visitors to Mexico also need to be mindful of the poor water quality in the country and the possibility of contracting a water-borne illness from drinking the water or from eating improperly prepared food. Privately operated medical facilities in Mexico are well-equipped for all levels of medical care, and foreign visitors should choose private over public (government-operated) health care facilities. Private medical services can also stabilize a patient and facilitate a medical evacuation to another country (such as the United States) should the need arise.
In conclusion, the most dangerous organizations in Mexico have very little motivation or intent to hit the Pan American Games. The games are also at very low risk of being a target for international terrorism. The organizing committee, the Mexican government and the other governments that will be sending athletes to the games will be coordinating closely to ensure that the games pass without major incident. Because of this, the most likely scenario for an incident impacting an athlete or spectator will be common crime occurring away from the secure venues.
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