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Archive | January, 2009

Wither Pakistan?

Fatalistic articles about the future of Pakistan are nothing new. This is a subject that Indian, American and indeed, even Pakistani writers have opined on. Conflict with India in Kashmir, sectarian violence in Sindh, secessionist movements in Balochistan, a war in Swat, and the talibanization of FATA, do not help in dispelling the prophecies of dismemberment that the US’s National Intelligence Council (NIC) highlights in its paper Global Trends 2025: A Word Transformed (PDF). Ahmad Faruqui’s article on Outlook builds on that report and asks, given the current state of affairs, if it is possible to envision a rosy future for the State.

Alas, the advice to focus on the future was not taken as the nation soon plunged into reliving the battles of the past. The storm over Mumbai will eventually pass but what about the gathering storm in Swat and the full force gale that is blowing through Fata? The tussle between the ISI, the army and the civilian government continues. A new tussle appears to have emerged between the civilian president and prime minister, both of the PPP. There are few signs that the judges will be restored or that the nefarious constitutional amendments dating back to the Zia era will be annulled.

I’ve pointed to the gradual talibanization of Pakistan in previous posts because this is a matter that should be of significant concern to India. As the writ of the state of Pakistan diminishes in the western provinces, the tussle will be between the US military and the Pashtuns. While India’s relations with the United States have improved since they hit nadir in December 1971, any future presence of US forces within the territory of present day Pakistan will be viewed by India with some discomfort. Increasingly, as we move from a unipolar to a multipolar world (with India being one of the poles), India will consider the Subcontinent to be part of its sphere of influence. The presence of foreign forces within this realm of influence will bother India. India’s growing economic and political clout notwithstanding, our leaders would also do well to learn from the collapsing political engine in the Pakistani federation. With regard to Pakistan, Faruqui proposes:

To avoid a meltdown, first and foremost, a change in political culture needs to occur. Extremism has to be taken out and replaced with tolerance. The government cannot do this by fiat. The clergy, the academics, the literati and the media — they have to bring this about, from the grassroots up.

Secondly, law and order has to be restored on the streets. It is not possible to envision a rosy future if kidnappings, robberies, murders and beheadings dominate the headlines.

Vigilante justice and moral police mobs inflict chaos, increasingly with impunity in the streets of Indian cities. States’ inability to enforce law and order and the mob’s ability to unleash its own version of moral code will have very dire consequences for the Indian State. Instead of dealing with this scourge, India’s netas are quick to utter that timeless Indian phrase — “politically motivated” — to weasel their way out of taking concrete action. Pakistan’s quagmire should be a lesson to India and our leaders would do well to learn from Pakistan’s mistakes.

[CROSSPOSTED]

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India and Kazakhstan: Impetus Needed in Relationship

Nursultan Nazarbayev greets Vajpayee in Almaty (2002)

Nursultan Nazarbayev greets Vajpayee in Almaty (2002)

On January 26, New Delhi will host Kazakh President Nursultan Nazarbayev at the Republic Day celebrations. India and Kazakhstan first established diplomatic relations following the collapse of the Soviet Union in 1991. Nazarbayev made his first official visit to India in 1992, and in 2002, following his second visit to New Delhi, then Prime Minister Atal Behari Vajpayee attended the Conference on Interaction and Confidence-Building Measures in Asia (CICA) summit in Almaty. At that time, Nazarbayev’s efforts in defusing India-Pakistan tension (emanating from the 2001 Parliament attack) were roundly praised. After the defeat of the NDA in the 2004 general elections, contacts between India and Kazakhstan, at the head of state level, have tapered off, until now.

India’s strategy towards Central Asian countries has been no different than its strategy towards African nations, and can be only summarized as “playing catch-up with the Chinese”. In this new “Great Game” of the century, India is consistently assuming the role of “Johnny-come-lately” to China in Central Asia. Indeed, China already has a fairly robust multi-dimensional relationship with Kazakhstan, as it does with other CIS states, on account of Shanghai Cooperation Organisation (SCO) membership. Kazakhstan is the largest country in Central Asia and shares borders with Russia, China, Uzbekistan, Turkmenistan, and Kyrgyzstan. President Nazarbayev is a Soviet-era leader who maintains fairly rigid control of the state, despite it being a democracy, by letter of law. Weary of China and Russia’s undue influence in the SCO, Kazakhstan has pitched for a full Indian membership in the council. India’s trade with this bludgeoning economy stands at a paltry $128 million (2007), contrasted against China’s $6 billion (2005) economic engagement with this Central Asian republic. This idle wasting of time is a shame, considering Kazakhstan’s phenomenal economic growth since the 2000s, which includes a staggering average GDP (absolute) growth of 9.5% from 2004-2007.

Kazakhstan’s strategic location along the Caspian Sea is hard to overemphasize. The Caspian Sea has the world’s third largest oil reserves, by some estimates, containing 200 billion barrels of oil, and 236 trillion cubic feet of proven natural gas reserves. Cognizant of the desperate energy situation in India, Oil and Natural Gas Limited (ONGC) is seeking a 40% share in Kazakhstan’s Satpayev oil exploration sector (with Russia’s blessing) in the Caspian, after getting outbid by China National Petroleum Corp (CNPC) for the acquisition of the oil company PetroKazakhstan.

However, Nazarbayev’s chief mission in New Delhi will be to ink a deal to export uranium, in the wake of the end of “nuclear apartheid” against India. India’s own uranium reserves stand at about 115,000 tons, most of which is low grade. Kazakhstan is currently the second largest producer of uranium, producing about 12,000 tons (2008); the country is likely to overtake Australia as the single largest producer of uranium by 2011. For India, inking the nuclear deal is a consummation devoutly to be wished. While nuclear energy constitutes only 3% of our total energy production, this figure will likely increase to 25% by 2050, as India seeks to reduce its reliance on “dirty” coal. India has already inked similar deals with Canada and France.

India should also continue to boost cooperation with Kazakhstan on the regional security front. The Kazakhs have expressed a desire to establish a naval fleet to guard its interests in the Caspian. They have looked to India for assistance and we have been happy to oblige, much to the chagrin of Russia. As I will point out in a later article, India’s engagement with Central Asia is going to ruffle feathers in Moscow and put us at odds with Russia; as a country with growing economic and political clout, India must at once expect this to happen, and at the same time not be hindered in our quest to establish new alliances despite the grievances/protests of our old allies.

Yet another important dimension of engagement on security should be partnering on intelligence gathering and counter-terrorism issues. Uyghur warriors, many of whom come from Kazakhstan and Kyrgyzstan, have been fighting Chinese rule in Xianjing province. Although present on a smaller scale, there is a growing component of Uyghur and Uzbek fighters in Osama bin Laden’s International Islamic Front (IIF) terror umbrella; that many of these fighters have seen action against Pakistani forces in South Waziristan should be a matter of interest to India.

India’s growing population and economy need sustainable sources of energy — the problem of inadequate power supply is already acute, and will likely get worse if remedial measures aren’t taken and alternative sources aren’t identified posthaste. In doing so however, both India and Kazakhstan need to not neglect other equally important areas of mutual interest. In this regard, our very one-sided, military dominated relationship with Russia should serve a reminder on how not to go about forging new partnerships.

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US – UAE Nuclear Deal

Very quietly, the United States and the United Arab Emirates have signed a deal that will allow the UAE to develop nuclear reactors and obtain nuclear fuel from the US, under the 123 Agreement framework. Under the agreement, the UAE, which is already a signatory to the Nuclear Non-Proliferation Treaty (NPT) and the Comprehensive Test Ban Treaty (CTBT), will be subjected to nuclear safeguards inspection from the International Atomic Energy Agency (IAEA), and will forgo the right to enrich/reprocess spent Uranium fuel. The whole nuclear program of the UAE will apparently be under US management, pending IAEA approval.

Since its birth in December 1971, the UAE has experienced massive economic growth on account of its petroleum reserves. This initial economic growth gave rise to two main economic power centers in this federation of seven emirates — Abu Dhabi, the capital of the UAE and largest emirate by area, whose revenues are driven by oil, and Dubai, the most populous emirate, whose revenues are driven by trade and financial services.

Economic growth lead to investments in infrastructure and construction, resulting in the arrival of hoards of blue – and white collar workers, primarily from the Indian subcontinent, to fill the employment vacuum. This sustained population growth, particularly in Dubai, has forced the UAE to consider alternative sources of energy. By some estimates, UAE’s demand for electricity is likely to rise to 40,000 megawatts (MW) by 2020. However, UAE’s energy sector is projected to be capable of meeting only about 50% of this demand.

The 123 Agreement is yet to be ratified by Congress, and will still need to be approved by the President of a new US administration. Barack Obama has not publicly stated his views on the issue. The deal has already met with vociferous disapproval from members of Congress. Rep. Brad Sherman, the chairman of the House Foreign Affairs Terrorism, Nonproliferation, and Trade subcommittee, said:

“Any (nuclear cooperation) agreement between the United States and the UAE should not be submitted to Congress until, at a minimum, the UAE has addressed the critical issue of transshipments and diversion of sensitive technologies to Iran.”

If that’s the Congressman’s line of thought, then this is yet another classic example of the kind of cluelessness that has come to typify the thinking of successive US administrations on matters concerning the Middle East. Indeed, Iran is the one country that can be counted on to get irked by the proposed deal.  Relations between “Shi’a” Iran and “Sunni-Arab” UAE have always been icy.

A major bone of contention between the UAE and Iran is with regard to the Abu Musa and Lesser Tunb islands, unilaterally occupied by Iran, but claimed by the UAE. The Abu Musa archipelago lies within the strategic Straits of Hormuz corridor, an area vital to the petroleum driven economies of the Arabian Peninsula. In addition, as Anthony Cordesman points out, there are two specific areas of concern for Abu Dhabi — (a) the presence of a significant Iranian immigrant (potential “fifth column”) population in the UAE, and (b) the strategic proximity of Dubai and Sharjah to the old Iranian port-town of Bandar Abbas. The vulnerability of the northern emirates’ shipping channels to Iran’s airbase in Bandar Abbas is a source of worry for UAE’s rulers.

For its part, Iran can’t be too pleased with the cosiness exhibited smaller Arabian Peninsular countries like the UAE and Qatar towards the United States. US military bases in the UAE, like those in Jebel Ali and Al Dhafra, and UAE’s ambivalence towards the US invasion of Iraq can’t have helped matters much either.

This nuclear deal is a bad idea — not because of an alleged UAE-Iran nexus, but because the UAE will be susceptible to an Iranian military assault either if Iran-UAE relations deteriorate, or if Iran has its back to the wall in any future US-Iran military confrontation. The UAE can ill afford be in a military conflict with Iran — the repercussions will be felt far beyond the region, given that expatriates make up about 80% of the total population of the UAE.

Allowing the accumulation of nuclear material in a politically and militarily weak country situated in the most unstable region on earth, and in the proximity and cross-hairs of Iran, is foolish. To think that this will impress upon Iran the virtues of towing Washington’s line with regard to nuclear technology is an exercise in naiveté. Far from making the UAE politically and strategically more secure, the deal will prove to be an albatross around Abu Dhabi’s neck.

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Satyam IT Scandal

If the global economic downturn wasn’t bad enough, incidents such as the Bernard Madoff issue, and now the Satyam scandal can’t have helped matters much in providing confidence to the already skeptical investor. India’s fourth-largest IT company admitted to “irregularities” in its books, thanks to the imaginative accounting practices of its Chairman Ramalinga Raju.

The company, which ironically received the Global Peacock Award for Excellence in Corporate Governance, first raised investors’ concerns with the apparent bid to acquire Maytas Infra, a construction company owned by Raju’s son. Once word of the proposed acquisition got out, shareholders rebelled, forcing the deal to fall through. The attempted unilateral acquisition, though, opened up a whole host of issues at Satyam with regard to systemic corporate mismanagement, which culminated in Ramalinga’s shameful admission on Wednesday.

Some people have put the whole episode down to poor corporate governance. Unfortunately, the issue is much deeper. Like everything else in India, the larger issue is archaic laws; the dilapidated securities and internal control legislation of the country is not congruent with the current business environment of India. The issue is compounded further when you consider countries like the United States, where despite the attempts to heavily regulate internal control, dramatic failures such as the Madoff scandal, or even the sub-prime mortgage scandal come to light.

In the United States, the Sarbanes-Oxley Act (“SOX”) was passed in response to the Enron and Worldcom drama of 2001. The Act’s Section-404 requires both management and an independent external auditor to assess the adequacy of the company’s internal controls over financial reporting (ICFR). In addition, a public accounting oversight body, the Public Company Accounting Oversight Board (PCAOB) was constituted. However, as of 2009, SOX has effectively run its course in terms of its usefulness.

Companies have had a few good years to understand the scope and approach of SOX audits and have taken comfort in the fact that the demands of the Act, despite the design, merely result in scratching the surface of ICFR. Despite the design, there is a fundamentally flawed bottom-up approach to ICFR that all SOX audits assume. For example, more hours are spent reviewing mundane transactional detail than investing in a robust review of the “bigger picture” and asking why company executives are doing the things that they are doing.

Most “white collar” crime is committed by corporate executives, and not, for example, by staff accountants or system administrators. Corporate fraud uncovered by the United States Department of Justice (DoJ) indicted 214 CEOs and Presidents, 53 CFOs, 23 Corporate Councils and Attorneys and 129 VPs, in 1,236 cases registered since 2002. Fraud can occur with the marriage of — (a) Opportunity, (b) Motive, and (c) Means. Usually, these three elements fall either directly or indirectly within the purview of corporate executives. Corporate executives didn’t get where they got by boiling potatoes; they’re sharp, know their businesses inside out, and are driven to excel. The intrinsic flaw in public auditing is the relationship between the auditor’s independence in assuring the accuracy of their client’s books, and the dependence on the client for revenue. An imbalance in this relationship creates scenarios such as Arthur Andersen’s willful connivance in cooking up Enron’s books in 2001.

So where does India proceed from here? Clearly, investor confidence will be down, both at home and abroad (Satyam trades on the New York Stock Exchange). Lack of investor confidence may very well translate into reluctance to invest in India’s growth — negatively impacting Foreign Direct Investment (FDI) and an already slowing economy. Despite the drawbacks of legislation like SOX (as described above), regulation of internal control must be standardized in India. If the 2008 financial crisis has proved one thing conclusively, it is that companies and people operating in a capitalist and/or entrepreneurship friendly environment will look out for their own interests; the capitalist system, by design, is anti-self regulation. India needs to look into the following areas:

  • Developing robust legislation to regulate publicly traded companies in India, including the regulation of internal control, corporate governance, independence and financial disclosure requirements;
  • The creation of a federal body, separate from, but reporting to the Securities and Exchange Board of India (SEBI), that will enforce the legislation described above;
  • Auditor independence (I find it hard to believe that PricewaterhouseCoopers genuinely had no idea that Satyam was cooking its books); public auditors should not be allowed to provide consulting or advisory services to companies on whose books they issue opinions;
  • The constitution of an independent Audit Committee to review the company’s state of affairs; the requirement of having an independent Internal Audit department that reports only and directly to the Audit Committee;
  • A national whistle-blower program to report instances of possible corporate fraud to the newly constituted federal body;
  • A requirement of full disclosure of any business interests held by executives’, their spouses, and immediate family;
  • A comprehensive review of the company’s corporate governance as part of audits and investigations, assessing the reasonableness of significant corporate decisions (asking the question “why” instead of regular checklist auditing);
  • Stringent penalties for committing corporate fraud (e.g., holding executives personally liable), and a body to investigate and adjudicate over fraud cases.

At the end of the day, the Satyam saga is a tragic multi-point failure of a government that doesn’t sufficiently regulate publicly traded companies, of an Executive Board that didn’t probe suspicious transactions (why does an IT firm need to acquire a construction company?), of lower level management and staff who wouldn’t notify authorities of irregular accounting practices, and of auditors who chose to turn a blind eye to obvious accounting irregularities.

Adopting the recommendations above will not completely solve India’s problems (indeed the pressure to report significant revenue increases in a rapidly developing economy such as India’s will remain and will bare fruit to more ingenious accounting practices), but should be looked at as a good starting point. The central government, in trying to ensure investor confidence and tackle other cases of corporate fraud, must show that it is serious about providing a clean and transparent business environment and that it still upholds that timeless credo of the Nation — Satyam eva jayate — Truth alone Triumphs.

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