July 1999

Updates on Kosovo and Kashmire – Financial assesment

Updates on Kosovo and Kashmire

The world is still a volatile place to be. There are many internal and external problems, tensions and conflicts. Not to lessen the terrible impact on society and the individual’s life of war/conflicts but these are mostly of small scale and low intensity but a number of them have become high intensity and touching large scale levels.

Some perfect examples of these are the problems about Kosovo, the continuing struggle in Kashmire which recently received a new dimension.

Where as the Kosovo problem have reached its peak and a more normal situation is promising to return on the short term, Kashmire has become even more dangerous.

Kosovo

The regime of president Milosevic finally accepted the terms as presented by the G8 meeting in Cologne, Germany, and started to withdraw from Kosovo. It took 78 days of an ever increasing bomb campaign, the ever more likely possibility of the use of NATO ground forces and especially the increased activities of the Kosovo Liberation Army, KLA, against the Yugoslav army, VJ, and Serbian special police forces, MUP, in Kosovo, to make president Milosevic accept the demands of the international community or better NATO. Under the terms of the accord signed in Macedonia on 9 June, the Serb armed forces and security units were given 11 days to leave Kosovo.

Kosovo would be divided into 5 sectors, an US, an Italian, a British, a French and a German sector would be established under command of NATO. The name of the force would be KFOR, Kosovo Implementation Force. NATO would be in command and furnish the majority of the forces. The sector forces would be responsible for the maintenance of law and order, clear the area of mines, booby traps and unexploded munitions, restore the infra structure and support the UN civilian mission in restoring the government and the economy in Kosovo.

The withdrawal of the Yugoslav/Serbian units from Kosovo started on time and was concluded within the given timeframe. At the same time two large movements of people came to live. The Kosovo-Albanians returned to their homes or what was left over from them and a large number of the Serbians afraid for the revenge of the Albanians packed their belongings and moved into Serbia.

NATO KFOR forces moved in as fast as they could but the inadequate infrastructure and the possible existence of mines and booby traps in Kosovo slowed down their movement. A small Russian unit of paratroopers took the opportunity and moved from Bosnia through Serbia into Kosovo and occupied the airport at Pristina. The Russian could now reinforce their rightfull place in the solution of the Kosovo conflict and at least try to claim an own sector in Kosovo.

After prolonged negotiations it has been agreed with the Russians that they will send in about three battalions with support forces, about 3.600 men, into Kosovo. They will be stationed in the Italian, US and German sectors under NATO command but with a seperate command line to Moscow.

The KLA moved in reaction on the Serbian withdrawal out of the countryside into the towns and cities and they started to arrest people and occupy buildings to install their own structures. Often before the NATO KFOR forces arrived the KLA was alrady on the streets. The KLA have become a force to be reckoned with in the immediate time after the Serbian withdrawal.

NATO command and the sector commanders could persuade the KLA out of the positions they more or less had quietely occupied. After negotiations between NATO and the KLA, the latter decided to obey the NATO orders for the moment as this would be the most prudent and beneficial. The NATO and the international community have something to offer Kosovo and the Balkan region in general desparately needs, financial, material and technical support to reconstruct the region. And ofcourse the threat of the fighting power of the full deployed NATO KFOR force which is no adversary to the KLA. But as long as the NATO KFOR is not fully deployed and some civil government structures like a police force is not re-introduced violence between the two groups will continue and KFOR can only react and try to stop the most severe cases of agression, revenge.

NATO can have some kind of agreement with the KLA leadership and some of the local KLA commanders but some KLA units still do what they want and behave as they were in control. They continue to intimidate, arrest, beat and steal from Serbians, Gypsies and Albanians they suspect of collaborating with the Serbians. They feel and behave as the majority of the Albanians do, they are the victors and because of the wrong doings, atrocities, of the Serbians, they can take revenge and burn the houses of the Serbians and threat them very badly.

The problems and the hatred between the two people are very large. The economy, the infra structure and a large number of houses in Kosovo are destroyed. The Serbians who remain in Kosovo are afraid of the hostility of the Kosovo-Albanians. The Albanians in turn are angry because of the injustice, to phrase it mildly, done to them by the Serbian security forces and want retribution, revenge.

The psychological pattern of the peoples living on the Balkan, black and white-you win or loose-you are for us or against us mentality, will make revenge, ethnic cleansing and agression against opponents a normal and to expected reaction. In this particular environment, agression between the two groups will continue and will be very difficult to stop.

NATO KFOR have until now be greeted by the Albanians and be at best considered neutral by the Serbians. This could change very easily in this climate if one or both get the feeling of being treated unfair. KFOR is in danger to become a target from both sides. Any weakness will be exploited by both groups, a determined and hard but fair intervention of KFOR is necessary if they want to keep the respect of both groups and minimise the violence.

A living together will prove to be very difficult as there are to many bad feelings to eachother and the demands and expectations are very divergent. Yugoslavia and the Serbians living in Kosovo want to keep Kosovo part of Yugoslavia, which will be very difficult to achieve. And a large number of Kosovo-Albanians want to become independent and would like to eject all Serbians living in Kosovo. A small number of Kosovo-Albanians, the hardliners in the KLA, would like a greater Albania which would be unacceptable to the international community and especially to Macedonia, Montenegro and Greece with small numbers of Albanians within their borders.

The KFOR forces in Kosovo will minimise the violence in Kosovo if they can get and keep the respect of the people in Kosovo. KFOR could deliver a kind of violent free society, occassional clashes between the two people’s can not be excluded, but in general the situation will be stabile. KFOR can thus create an artificial stability which wil give the people an opportunity to rebuild their country. The real problem in Kosovo can not be solved by KFOR as the Serbians and the Albanians in Kosovo have to learn to live together if they want to have a common future in Kosovo.

The position of the Serbians will be diminished after the Belgrade government lost all its influence in the province, at least as far as they stay in Kosovo. But this will also be true for the KLA. The KLA, which is a very loose and diversified organisation, will find it increasingly difficult to rally support for their goals. In the immediate aftermat of the Kosovo conflict the KLA will find supporters but if stability has returned two things are prone to happen. First the KLA will find it very difficult to remain together as two major groupings are represented. Namely a right and left wing, the right wing are more fascist bred and the left wing communist bred. And second, the attractivity of the KLA will loose its glamour as the war will be over and the war-heroism will fade away.

Moderate policies, reconstruction and even some better relations between the two people will be the road to a better future of Kosovo. The relations question could however take another two decades.

Kashmire

The problems between India and Pakistan about the divided region of Kashmire intensified as some people occupied a number of hills in the vicinity of the town of Kargil which are overlooking the vital national highway 1A linking Srinagar to the town of Leh on the border with Tibet. The people, group, responsible for the occupation are described by India a mercenaries/terrorists commanded and supported by Pakistan, in particular the secret service SIS and commandos of the Special Service Group. And by Pakistan as Kashmiris, freedom fighters, who want to liberate Kashmire of the Indian occupation.

The size, 600 men, the equipment, assault rifles, mortars, snow scooters, heavy and specialised radio and radar equipment, special clothing, the organisation and the occasional artillery support out of Pakistan make it very unlikely that the group acts on its own. The operation is to large, to well prepared and furnished with advanced equipment, in short to complicated to be the work of the Kashmiris. The operation has the same blue print as the Pakistani operation and support of the Afghan Taliban coup. The Pakistani influence is to clear to be covered.

This essential small and low level operation, a small group occupying a small tract of land, is a good opportunity for Pakistan to pressure India and put Kashmire on the international agenda but it could have dramatic consequences between the two countries. The strategic importance of the site, the highly specialised character of the force and operation which is only possible with outside support and the more then obvious advantage for Pakistan will strain the relations between the two countries to the max. Everything seems to be possible in this situation. If India perceives its position worsened and Pakistan’s alleged involvement and advantage increased this could lead to a direct confrontation between the two countries.

The geographical conditions of the region favour defensive operations. A well trained and positioned force will be difficult to eject out of the Kargil region. Indian forces encountered several difficulties in removing the intruders. With the use of air assaults, artillery barrages and carefull pressing foreward infantry forces at night they could slowly take over positions of the intruding force. If the resistance remains the same than this operation could take a couple of months, in a worst case scenario, before all intruders have been defeated.

This time of initial combat is the most dangerous of all as India refuses to accept any diplomatic offerings of Pakistan or the international community and the intruding force on the hills is not yet eliminated. A wrong interpretation and perception of the situation could easily escalate the conflict in an all out war between India and Pakistan.

India is partly right in its refusal of mediation because this would legitimate the action of the intruding forces around Kargil. Any mediation and acceptance would lead to a strengthening of the position of the intruders, make it more difficult the remove them in the future and more importantly it would be beneficial for Pakistan.

This operation is always beneficial for Pakistan because even if nothing happens the Kashmire problem receives more international attention then before. And with some luck Pakistan could gain by the use of a small force, a reunification with or independence of Kashmire, virtually free of charge if India would accept the ploy. Something they could not achieve in war and the decade long attrition warfare in the Karakorum mountain range/Siaachen glacier. A piece of brinkmanship between nuclear states with a high reward at low cost.

Financial assesment

The world economy is not doing very badly, the developed markets continue as before and the Asian, Latin America and Russian markets show some recovery after the disasters in 1997 and1998.

The U.S. economy is doing the best of all and contrary to last year the growth is based on a larger number of sectors. This widening is a sign that the American economy as a whole is doing fine. The only disadvantages in the U.S.A. are the possible interest rates rise and the high valuation of large number of very good stocks. A rate hike will diminish the growth of the stock market as do the high valuations but these will also make other companies more interesting and worthwhile to procure. The earnings of a large number of companies from a larger number of sectors are very promising, the first announcement from the companies support this trend. This will mean a broadbased growth not only the financial and some groups of tech stocks will do good but also the basic industries as Caterpillar and Georgia-Pacific.

The Asian economies have bottomed and are now coming back although it will take some time before old levels and growth can be reached and maintained. There are still very large problems in Asia which need to be adressed. All growth is largely export induced where as internal consumer demand and financial business prudency are the most needed to create sustainable growth.

Some of the Latin America economies are also slowly showing some more growth. But there are still a rather large number of problems like the currency and fiscal problems in countries like Brazil and Venezuela. They will continue to depress earnings growth and keep the economies in the danger zone. The stocks in those countries are cheap but risky.

Colombia is in much deeper trouble. They will be forced to devaluate their currency which could have a negative effect on the other countries in the danger zone.

The more promising countries and responsible for the Latin growth are Chile and Argentina. They are more stable and will show increased economic growth. Their economies have better weathered out the Asian crisis and they have contrary to former agreements closed their markets to for example Brazilian products and circumvented product dumping and protected their own industries.

The Russian economy is still suffering from the deficiencies in government leadership, trade and financial legislation and with lagging consumer purchasing power and investments into the industries. The demand is to low to generate growth. And the whealing and dealings of criminal organisations and the peculiar way of doing business of certain, what they call in Russia, bizznismen are also not very promising as preconditions for a healthy economy. Not withstanding all these problems the Russian economy has improved somewhat as the industrial production improved. But this stems largely from the fact that Russian products have become more popular because western or eastern products for that matter are simply to expensive. The improvements in the stockmarket are more based on former weakness then on regained strength. The Russian stocks remain therefore very speculative and uncertain in their performance.

The European economy is differentiated. Some countries have a weak economy because of the high unemployment figures, large budget deficits and low demand. And some countries are doing much better in Europe. Countries like the Netherlands, Spain, Ireland and the United Kingdom have shown in recent years a steady and above average growth of their economies.

The first signs of a recovery are visible in the weaker European countries with a lower unemployment figure and higher demand. They are not over the hill as a lot of problems have to be solved but within two years the situation will see a substantial improvement and a rejuvenated Europe.

The stockmarkets

The stock markets are partly reflecting the healthy situation of some economies. As the markets are sometimes more worried about inflation and valuation than in the results of the companies. And ofcourse some reports, good and bad, have an above average impact on the price of stocks. Psychology is distorting the price of stocks.

The financial markets have been moving sideways. There have been no large rises nor droppings on the stock markets of the U.S.A. and Europe. As the better then expected earnings came out the markets were moving up but the inflation nightmare, the rising of interest rates, pushed the markets down and nothing really happened. The market indexes remained approximately on the same line with a slight upward movement.

The majority of the other stock markets, Asia, Russia and Latin America, have done better and experienced a period of growth. They have been growing on average 25 % since the beginning of the year.

July 1999 will maybe mean a break of the sideway trend of the U.S. stockmarket, this depends on the decisions taken by the U.S. Federal Reserve, the Fed, to do nothing or rise the interest rates by an unknown number of basispoints.

If, very unlikely, the Fed is neutral the markets will move up by 5-8 % as a correction to the recent downward push in the market. If the Fed, most likely, rises the rates by 25 or even 50 basispoints the market will remain the more or less same and do nothing. A rise of 25 – 50 basispoints is an expected move and the market has anticipated this development and pushed the market down. But if the Fed rises the interest rates by more than 50 basispoints or is talking and thinking of a 1994 style of three or four consecutive rises of interest rates, the market will react violently and fall by at least 5-10 %.

The other markets around the world will react on the interest rates in the U.S. because they will increase the costs of U.S. dollar denominated debts and make exports into the U.S. cheaper and more profitable.

The effects for the third world will be bad as they are not able to profit from exports into the U.S. The will have only negative consequences of the interest rates rise, namely higher debt service and more expensive imports.

The situation in Asia and Latin America is more stable and will remain the same for most cases as the higher export revenues make up the higher costs of imports and debt service. Asian and Chilean and Argentinian stock markets will probably deliver a continued growth on the second part of 1999. The growth will be lower than in the first two quarters but will remain in the double digit range.

Only the weakest of Asia and Latin America, like Indonesia and Colombia, who do not have their financial affairs in order and who’s industrial/economical activities are still not up and running will get additional problems because of the Fed’s action.

Only Europe will benefit a little from higher interest rates as the export revenues and opportunities will increase. As the Euro will loose some value to about US $ 1,015 to 1,025 vs. an Euro but this reflects the strength of the U.S. economy and the present not so strong European economies. Afterall the Fed rise is not for fun but to contain an overheating of the U.S. economy and inflation. The lower value of the Euro vs. the U.S. dollar is not dramatic or a prove that the Euro has failed as a currency, it happened not so long ago that the U.S. dollar had the value of DM 1,90-1,95 and higher. Remember the Reagan days.

The European stock markets will benefit from a possible U.S. interest rates rise and the slowly improving European economies. New highs are therefore very likely in the second part of 1999. The first decade of the next millennium could become an European decade. The European economies are recovering from a depression and it might be their turn to experience an economic boom after the Japanese eigthies and the U.S. nineties.