This Week: Japan grows, Kurds Grease Turkey with Oil, and North Korea tests unimpressive missiles.

Hello, and welcome to the Dispatch for May 13 − 19!

Turkey

On Monday, the Financial Times reported on an energy deal between the Turkish Government and the Kurdish Regional Government of Northern Iraq. The deal, confirmed a day later by Prime Minister Erdogan, includes a partnership with Exxon Mobile on oil exploration in the Kurdish autonomous region in Iraq.

The Financial Times says the deal has been in the works for a while, and this might explain the sudden success of the peace talks between Turkey and the PKK. For the Kurds, this will be a huge win; they’ve been in conflict with the central government in Baghdad over oil revenues for the better part of a decade, and this deal loosens the Kurds’ dependence on oil infrastructure in the rest of Iraq. For Turkey, the deal promises more secure energy supplies at a better price and will allow them to cut imports from Iran as the US has demanded. The US has been cool on any oil deal that doesn’t include the Iraqi government so far, but given the state of the Iraqi government right now, I’m guessing the administration will take the win on Iranian oil and let this one go. So far, the deal is a great example of political realities trumping historical animosities.

North Korea

On Monday, after a week of relative calm on the peninsula, North Korea replaced its Armed Forces Minister, retiring a general who had been responsible for sinking a South Korean warship and shelling an island. A day later, an aide to Japanese Prime Minister Abe made an unannounced trip to North Korea for four days of talks. On Sunday, the DPRK launched four short-range anti-ship missiles into the sea of Japan.

The clearest signal this week was the launching of the anti-ship missiles: while South Korea and the US decried the action as a matter of policy, the tests were as non-threatening as a missile test gets. The Kim regime is obviously playing to a domestic base, but it looks like they’re not trying to provoke their neighbors with this launch - the short-range anti-ship missiles aren’t particularly impressive. The last few months of provocations have been an absolute disaster for the DPRK: they lost the Kaesong industrial complex and the $90M/month it provided, the Chinese cut off their bank accounts and starved them of oil for a month, they provided fuel to the hawks in South Korea and Japan to strengthen their own military forces, and they got slapped with another round of Security Council sanctions. We’ll see how the next few months go, but the first half of this year should provide enough fodder to demote or fire half the military command - if it leads to a bit less political jockeying in the DPRK, we may finally get some peace and quiet from the hermit kingdom.

Iran

What looked to be a quiet presidential election in Iran opened up on the 12th with last-minute applications by two candidates. The first, Esfandiar Rahim Mashaei, is the protege and chosen successor of current president Mahmoud Ahmadinejad; the second, former President Ali Akbar Hashemi Rafsanjani, is a cleric who supported both the Islamic Revolution in 1979 and the dissident Green Movement in 2009.

Both men are seen as a challenge to the existing political establishment, though Rafsanjani is the more interesting of the two: he was seen as close to Ayatollah Khamenei, and apparently helped orchestrate his ascension after Ayatollah Khomeini’s death. His support of the Green Movement uprisings in 2009 caused him to fall out of favor with the establishment, but he is still a member of the Assembly of Experts. He has been endorsed by the leaders of the 2009 Green Movement and is seen as the best chance for the moderates in Iran.

Iran is facing enormous economic challenges, due in large part to the sanctions it faces - estimates of its inflation rate are between 30% to 100% per year, and that’s not likely to improve anytime soon. That level of economic collapse is dangerous for a regime: the Arab spring was kicked off by protests over food prices and water scarcity. Given the challenges the country’s facing, Khamenei and the Iranian Revolutionary Guard should seriously consider just giving this one to Rafsanjani - if he succeeds in repairing Iran’s economy, great, the revolution continues and everyone gets to keep their heads; if not, in five years they can send the moderates into the woods and claim a “new start.” That’s damned unlikely, though - more likely is a replay of 2009, with a rigged election and a nasty crackdown to follow.

Nigeria

Following the massacre in Borno last week, Nigerian President Goodluck Jonathan declared a state of emergency in the northeast of the country, granting the military broad powers to combat Boko Haram. The military was quick to take up the mandate, launching a series of airstrikes on militant camps on Friday.

The Nigerian army hasn’t acted with restraint so far, and Goodluck’s declaration won’t be good news to anyone living in the northeast. The big question is the affect an all-out assault on the group will have on Nigeria’s neighbors: Nigeria is bordered by Niger to the north, Chad to the east, and Cameroon to the south. Boko Haram has already been active in Cameroon and Chad is just shy of ungoverned. Niger looks the most stable of the three, but the recent insurgency in Mali and the presence of a new US military drone base underline the country’s vulnerability.

Japan

Japan reported annualized economic growth of 3.5% for the first quarter, a phenomenal pace for a country whose growth has been effectively zero for nearly two decades. The growth has been partly attributed to the extremely aggressive monetary policy pushed by Prime Minister Shinzo Abe. On Friday, Abe announced a plan for more than $680Bn in infrastructure investment, as well as a focus on regulatory overhaul to improve economic efficiency.

Abe has committed to an extremely aggressive economic policy, one in many ways the opposite of the Eurozone’s austerity-first policies. Early signs are encouraging - exports rose 3.8% in the first quarter and the Japanese stock market rose more than 70%. This isn’t because Japan is in any better shape than Europe: it’s debt levels are estimated at 230% of GDP and the ossified regulatory structure and rigid labor market have shouldered much of the blame for Japan’s stagnation, while the Bank of Japan has steadfastly refused to engage in monetary expansion despite nearly two decades of near-deflation (the BoJ board has expressed its concerns about the new policy as well). Abe still needs to show his policies can make growth stick - Japan faces several daunting challenges, including a rapidly aging population - but it’s good to see someone somewhere actually taking growth seriously.

Thanks for joining me, and my best for the week ahead!

Eric