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Boomtown Dubai Feels Effects of a Global Crisis

Robert F. Worth, New York Times
DUBAI, United Arab Emirates — On the surface, this glittering Arabian boomtown seems immune to the financial crisis plaguing the global economy.

… But as recession looms in the West, cracks are appearing in the oil-fueled boom that has made Dubai, with its futuristic skyscrapers on the turquoise waters of the Persian Gulf, a global byword for unfettered growth.

Banks are reining in lending, casting a pall over corporate finance and building plans. Oil prices have been dropping. Stock markets across the region have been falling since June. After insisting for days that the oil-rich Persian Gulf region was fully “insulated” from financial troubles abroad, the Emirates’ Central Bank made about $13.6 billion available on Sept. 22 to ease credit problems, in an echo of bailout measures in the United States. Already, some bankers are saying it is not enough.

Some of Dubai’s more extravagant building projects — the ever-bigger malls, islands and indoor ski slopes — are likely to be dropped if they do not already have financing lined up, bankers say. The credit crisis could also reduce demand from buyers, who will have a harder time getting mortgages.

The shrinkage will be more severe if the financial crisis worsens in the West.
(4 October 2008)

The party’s over for Iceland, the island that tried to buy the world

Tracy McVeigh, The Observer
Almost overnight, its population became the wealthiest on Earth. Tracy McVeigh in Reykjavik finds that the credit crunch is making the cash disappear

… Iceland is on the brink of collapse. Inflation and interest rates are raging upwards. The krona, Iceland’s currency, is in freefall and is rated just above those of Zimbabwe and Turkmenistan. One of the country’s three independent banks has been nationalised, another is asking customers for money, and the discredited government and officials from the central bank have been huddled behind closed doors for three days with still no sign of a plan. International banks won’t send any more money and supplies of foreign currency are running out.

People talk about whether a new emergency unity government is needed and if the EU would fast-track the country to membership. On Friday the queues at the banks were huge, as people moved savings into the most secure accounts. Yesterday people were buying up supplies of olive oil and pasta after a supermarket spokesman announced on Friday night that they had no means of paying the foreign currency advances needed to import more foodstuffs.

This North Atlantic volcanic island, which is the size of Cuba, with a population of 320,000 – the size of Coventry’s – is an unlikely player on the global financial stage. It is famous for its fish, geysers and for winning the UN’s 2007 ‘best country to live in’ poll. But Iceland built its extraordinary wealth on the crest of the worldwide credit boom and now the crunch is sweeping it away, bankrupting a people for whom the past eight years have been, for most of them and by their own admission, one long party.

The nation’s celebrated rags-to-riches story began in the Nineties when free market reforms, fish quota cash and a stock market based on stable pension funds allowed Icelandic entrepreneurs to go out and sweep up international credit. Britain and Denmark were favourite shopping haunts, and in 2004 alone Icelanders spent £894m on shares in British companies. In just five years, the average Icelandic family saw its wealth increase by 45 per cent.
(5 October 2008)
Related from the Canadian Press: Iceland pays price for rapid economic growth as inflation and anxiety heat up:

In the longer term, Iceland is putting faith in its growing hydroelectric and geothermal energy industries to carry it through the credit squeeze and back to growth – aluminum products are expected to overtake the traditional marine products industry in terms of revenue this year.

But with a current account deficit out of control, inflation running at more than 12 per cent and interest rates at a record 15.5 per cent, it first has to ride out a rocky patch.

Bolivia: Defeat of the Right

Immanuel Wallerstein, Commentaries
In the amazing series of elections in South America in the last five years, the most radical results were in Bolivia, with the election of Evo Morales as President. It is not because Morales stood on the most radical platform. It was rather that, in this country in which the majority of the population are indigenous peoples, this was the very first time that an indigenous person was elected president of the republic. This in itself was a profound social revolution, and was not at all appreciated by the descendants of European immigrants who had always controlled the country.

The big question when Morales was elected was whether he could stay long in office, or whether the Bolivian right, perhaps in collusion with the armed forces, could oust him. He has now demonstrated that he can.

There were three major elements in his program. Bolivia’s national income today is primarily drawn from its gas exports, essentially to Brazil and Argentina. The gas is located in the eastern provinces, the so-called Half Moon. And these areas are the ones in which there are the lowest percentages of indigenous peoples. The majority are Euro-descendants. Until Morales came to power, the prices at which the gas was sold were ridiculously low. And the income remained largely with the eastern provincial governments.

So, Morales sought to renegotiate the prices of the gas being exported. And he instituted a hydrocarbon tax so that much more of the income would come to the national government. Morales intended to use the money for social redistribution throughout the country, which would of course significantly benefit the indigenous populations.

In addition, the land in the eastern provinces is exceptionally mal-distributed. Two-thirds of the land are owned by one-sixth of 1% of the population. Morales wished to place a cap on the acreage any one person could own – a form of major agrarian reform.

In foreign policy, Morales attempted to maintain reasonable relations with the United States. He continued to accept the money the U.S. had been giving for anti-narcotic operations, especially since this money went to the armed forces. He did, however, in addition, welcome Venezuelan aid and Cuban doctors. The U.S. government was clearly not happy with Morales and would have preferred to see the Bolivian right return to power.

The strategy of the Bolivian right was to demand more autonomy for the regional governments, ultimately hinting at secession – a project they had never advocated as long as they controlled the central government. They demanded a recall election of Morales. The tactic badly backfired.
(1 October 2008)
While the attention of most Americans was elsewhere, a huge drama is playing out in South America. As usual, energy is at the bottom of it. -BA

Behind the Bluster, Russia Is Collapsing

Murray Feshbach, Washington Post
… Predictions that Russia will again become powerful, rich and influential ignore some simply devastating problems at home that block any march to power. Sure, Russia’s army could take tiny Georgia. But Putin’s military is still in tatters, armed with rusting weaponry and staffed with indifferent recruits. Meanwhile, a declining population is robbing the military of a new generation of soldiers. Russia’s economy is almost totally dependent on the price of oil. And, worst of all, it’s facing a public health crisis that verges on the catastrophic.

To be sure, the skylines of Russia’s cities are chock-a-block with cranes. Industrial lofts are now the rage in Moscow, Russian tourists crowd far-flung locales from Thailand to the Caribbean, and Russian moguls are snapping up real estate and art in London almost as quickly as their oil-rich counterparts from the Persian Gulf. But behind the shiny surface, Russian society may actually be weaker than it was even during Soviet times. The Kremlin’s recent military adventures and tough talk are the bluster of the frail, not the swagger of the strong.

While Russia has capitalized impressively on its oil industry, the volatility of the world oil market means that Putin cannot count on a long-term pipeline of cash flowing from high oil prices. A predicted drop of about one-third in the price of a barrel of oil will surely constrain Putin’s ability to carry out his ambitious agendas, both foreign and domestic.
(5 October 2008)
UPDATE (October 5 2008). Dmitry Orlov points out that this aricle is propaganda. BTW, I should mention that just because something appears in EB, it doesn’t mean I agree with it. Often I post articles that are significant because they represent the viewpoint of an important party, in this case, some of the Washington elite. -BA

Dmitry writes:
The Washington Post article you linked to is just some American propaganda, of a desperate, pathetic sort. It is generally possible to judge just how badly things are going in the US by how stridently Americans lambaste Russia, which is their favorite whipping boy. The digs about the preparedness of the Russian military in Georgia are particularly hilarious, given that the American-armed and trained Georgian toy army turned out to have weapons that jam, uniforms that fall apart, discipline such that they retreated without orders, and a host of other well-documented problems. This isn’t some sort of difference of opinion, where a variety of viewpoints can be entertained. Russia faces an well-orchestrated disinformation campaign designed to draw attention from real problems and replace them with fake ones. For instance, the Georgian attack on S. Ossetia, timed to coincide with the Olympics, was designed to draw attention away from the fiascos in Pakistan and Afghanistan.