Saturday, May 02, 2009

On the prowl

China's sovereign-wealth fund is back on the acquisition trail

Having kept a relatively low profile after big paper losses on its early overseas investments, China's fledgling sovereign wealth fund, China Investment Corporation (CIC), is hunting for acquisition targets once more. Such a move, combined with the more aggressive expansion plans of other Chinese companies, will reinforce speculation that China aims to exploit the global economic crisis by securing strategic assets at fire-sale prices. In truth, the CIC's agenda is more about seeking solid investment returns while helping the government to diversify China's foreign-exchange reserves. Still, Chinese outward investment will remain controversial.

Comments by the CIC's chairman, Lou Jiwei, in mid-April underlined the firm's renewed appetite for foreign investment. Mr Lou talked in particular of the CIC's interest in cautious expansion into Europe. Most importantly, he said that the economic crisis had changed the investment climate. Not only does the collapse in asset prices mean there are bargains for investors like the CIC, but many potential target firms' desperate need for cash is likely to clear away some objections to Chinese investment (particularly when non-controlling stakes in companies are involved).

This is a marked departure from the CIC's hesitant behaviour in the past half-year, when it avoided high-profile foreign investments. That stance was a response to the intensification of the global financial crisis in September and October last year, which hit the value of the CIC's portfolio. A key part of the fund's mandate is to make reasonable returns on its holdings of China's foreign reserves. But the company has been burned by the financial meltdown--in particular by unsuccessful investments in US financial companies.

Curbed appetite

So what has the CIC been up to? During its apparent hibernation, when many overseas markets were too turbulent to invest in, the CIC concentrated on internal restructuring and on domestic investments. As foreign financial institutions sold stakes in China's largest state-owned commercial banks, the CIC stepped in. The fund began purchasing sizeable quantities of shares in domestic banks from September 2008 and continued to do so into January 2009. According to the state-run China Daily newspaper, the CIC now holds shares worth US$22.5bn in China Construction Bank, US$22bn in the Bank of China, and US$22bn in Industrial and Commercial Bank of China.

The recent shift in focus for the CIC, which was established less than two years ago with around US$200bn in capital from China's foreign reserves, underlines the fact that global financials are now unappetisingly risky. Yet Mr Lou's recent remarks on investing in Europe do not necessarily herald the start of an unrestrained shopping spree. Indeed, the need for large overseas investments is becoming less urgent. The downturn in exports has diminished the importance of rebalancing the country's capital flows--a purpose that the CIC's outward investments indirectly serve. In 2007 and 2008 huge inflows of foreign exchange caused significant domestic liquidity issues, but the size of inflows has fallen off since mid-2008. The Economist Intelligence Unit forecasts that China's trade surplus will contract by more than one-third from US$361bn in 2008 to US$230bn in 2013. Inflationary pressure is also easing. The consumer price index is now in negative territory, and the fading away of the food- and oil-price shocks of early 2008 has also made sterilising foreign-currency inflows less urgent.

With the decline in one of its primary roles, the CIC has taken the opportunity to tighten up its operations, reshuffle staff and move into cheaper and less-risky assets. The company hired Zhou Yuan as the new head of its alternative-investment team in December 2008, in the hope that Mr Zhou's experience with UBS, a Swiss bank, would help the unit to improve returns. CIC's recent pursuit of mining investments--for example, with Fortescue, an Australian iron-ore miner--would also suggest a shift towards a more conservative portfolio, as officials seem to regard mining companies as safer and more consistent with national strategic goals than those in the financial sector.

"Go global" and prosper

Despite the easing of capital inflows, China will continue to have very large foreign reserves, and the CIC's mission will remain to diversify those reserves. As such, its investments will remain potentially controversial. The company is therefore keen to avoid the perception that it is on a mission to take controlling stakes in target companies' management or to buy up politically sensitive natural resources. Mr Lou underlined this in a speech in early April. He also stressed the CIC's adherence to the Santiago Principles, a new set of guidelines for sovereign wealth funds that China helped to draft. Undoubtedly, his efforts to present the CIC as a responsible investor are part spin, designed to reduce foreign opposition to the firm's investment plans. But they also suggest that the CIC will err on the side of making cautious and non-controversial investments for the next few years.

The CIC's low-profile approach contrasts with the more aggressive strategies of industrial state-owned enterprises (SOEs), whose investment bids--such as those in the mining sector--continue to make headlines. The SOEs' bolder strategy is being encouraged by the central government's "go global" policy (also referred to as the "going out" policy), the aim of which is to establish a larger Chinese presence in the international arena. The policy focuses on foreign acquisitions, brand-building and boosting international competitiveness. Chinese SOEs are being attracted by the low valuations of increasingly desperate foreign targets. Zheng Xinli, an influential economist with the Chinese Communist Party's top think tank, said in February 2009 that, with the exception of financial firms, China's SOEs should be bold in making overseas investments, particularly in strategically important sectors such as energy and resources. As international raw-material prices and shipping costs plummet, Chinese policymakers see a rare (and cheap) opportunity for Chinese enterprises to develop new markets abroad.

However, the global crisis swings both ways, and China has not gone unscathed. It seems that many Chinese companies, particularly in export-oriented sectors like high technology and textiles, are reluctant to risk overseas investments. Many have financial problems themselves. Despite the high-profile mergers and acquisitions being inked in the resources sector, a recent survey by a government trade promotion body showed that most firms are actually planning to cut down investment overseas.

Friday, May 01, 2009

Is There a real war between Pakistan and the Taliban?

As the Pakistani army launches a new assault on the Taliban, America hopes it is now more serious about defeating the militants


WHEN Barack Obama unveiled his new policy on Pakistan and Afghanistan in March, he gave a warning that al-Qaeda, the Taliban and other jihadist gangs were “killing Pakistan from within”. The generals who guard Pakistan’s national security had shown only “mixed results” in combating the threat, he said. They would no longer enjoy a “blank cheque”; they must show that they are fighting in good faith.

On April 26th, Pakistan gave a glimpse of this: by launching an attack on the Pakistan Taliban in parts of North-West Frontier Province (NWFP) recently overrun by the militants. It began with an assault in Lower Dir, near the border with Afghanistan, in which the army claims to have killed 70 militants and lost ten soldiers, and which displaced some 30,000 people.

On April 28th the army launched a bigger offensive in the scenic Buner valley, just 100km (62 miles) from Islamabad, Pakistan’s capital. As helicopter gunships and jets strafed their positions, the Taliban took around 70 policemen and soldiers hostage. But showing more resolve than it had previously, the army said airborne troops had been dropped behind Taliban lines and freed 18 of the captives. Major-General Athar Abbas, a military spokesman, said 50 militants had been killed in the first two days of fighting. He said it would take a week to drive the Taliban out of Buner.

This sudden violence seems to have been provoked, in part, by embarrassing media reports of the Taliban’s capture of Buner. Many of the bearded fighters had come from the neighbouring district of Swat, a Taliban stronghold, where NWFP’s government, at the army’s urging, had brokered a ceasefire with the militants in February. Under the terms of this pact, the government promised to institute Islamic law, sharia, throughout the Malakand division (whose seven districts, including Swat and Buner, make up about a third of NWFP’s area). In return, the local Taliban, led by a zealot called Mullah Fazalullah, were to lay down their arms.

The Taliban’s advance into Buner, which had resisted Talibanisation, was a violation of the deal, but at first neither the government nor the army seemed concerned. America, which had opposed the Swat deal from the start, was furious. On April 22nd Hillary Clinton, the secretary of state, said Pakistan was becoming a “mortal threat” to the world; its government and people needed to “speak out forcefully against a policy that is ceding more and more territory to the insurgents”. On April 25th she expressed concern for the safety of Pakistan’s nuclear arsenal if the Taliban were to “topple the government”.

Some Western diplomats considered this scaremongering. The Taliban are near Islamabad because the capital, a 1960s new town, was built close to the rugged border area where these Pushtun tribesmen live. But there is no chance of their seizing Islamabad. If, unthinkably, the disparate warlords who make up the Pakistan Taliban were to mass together for a frontal attack, Pakistan’s army, which is 620,000-strong and well-drilled for conventional warfare, could crush them. Indeed, many pundits reckon that an Islamist takeover in Pakistan would be possible only with the army’s support.

The Taliban, almost exclusively Pushtun, are not popular in Pakistan. Though often anti-American, and bothered by a growing extremist fringe, most Pakistanis are moderate. Unlike some Taliban leaders, Mullah Fazalullah is not known to have links to al-Qaeda. Yet Mrs Clinton’s warning points to an uncomfortable fact: since 2001, despite lavish American sponsorship, including over $10 billion in military aid, Pakistan has only become more turbulent and violent.

Even the country’s president, Asif Zardari, has conceded that the Taliban hold “huge amounts of land”. The army deserves much of the blame. During a seven-year campaign in NWFP and the Pushtun tribal areas adjoining it, where 120,000 troops are currently deployed, it has oscillated between fighting militants and making deals that, typically, give militants the run of their areas in return for a promise (rarely kept) of good behaviour.

The Taliban in Pakistan are linked by ideology and Pushtun tribal kinship to those fighting in Afghanistan. In South and North Waziristan, two ever-hostile tribal areas, the local commanders, including Baitullah Mehsud, leader of the Pakistani Taliban, are widely believed to play host to al-Qaeda’s core leadership. They also send their long-haired gunmen across the border to fight Western and Afghan forces.

For America, Britain and other Western countries there is a direct connection between militancy along the lawless “Af-Pak” borderlands and jihadist bombings in Western cities. Yet Pakistan is the biggest victim of the militant tide. Around half a million people are estimated to have been displaced by fighting in the north-west. From their havens there, many jihadist terrorist groups have launched attacks on the state. Pakistan has suffered over 60 suicide-bombings in each of the past two years, on hotels, restaurants and mosques in Peshawar, Lahore and Islamabad, and on army facilities. Benazir Bhutto, Mr Zardari’s wife, a two-time former prime minister and leader of the Pakistan People’s Party (PPP) who was murdered in December 2007, was one high-profile victim. Foreigners are also at risk. In Peshawar, NWFP’s increasingly nervy capital, two Afghan diplomats and one Iranian have been kidnapped. America’s consul last year had her (bulletproof) car sprayed with bullets.

Even if the Taliban cannot conquer Islamabad, they might soon grab some lesser strategic place—just imaginably, Peshawar; or they could close down the motorway linking it to Islamabad. Mr Obama’s new policy, which treats Pakistan as the main threat to regional stability, is intended to arrest this slide. It will come with a lot more money, including $1.5 billion a year in non-military aid over the next five years. At a conference in Tokyo on April 17th America, Britain, Japan, Saudi Arabia, South Korea and other “friends of Pakistan” also pledged $5.3 billion in budget support and other aid. Pakistan will be expected to provide better accounting for how it spends this money; for years its squandering of America’s war-on-terror cash has been an open joke.

The mess in Malakand

Like a spectre, the Malakand ceasefire had been waiting to test America’s renewed commitment to securing Pakistan. It was agreed between NWFP’s provincial government and a veteran Swati Islamist, Sufi Muhammad, who is Mullah Fazalullah’s father-in-law, shortly before the inaugural visit to Islamabad of Richard Holbrooke, Mr Obama’s “Af-Pak” envoy. America considered the pact yet another abdication to the Taliban by an army that has sometimes inexplicably underperformed. By one Western estimate, it has lost 70% of its battles against the Taliban. It has also lost over 1,500 soldiers.

Another cause for alarm is that Swat is not like the tribal areas, which have always been largely beyond the writ of Pakistan. Swat, by contrast, is a thickly populated former tourist destination, famous for honeymooning couples and Pakistan’s only ski-lift. The Taliban’s capture of Swat therefore contained a promise of further militant expansion, even into Punjab, Pakistan’s richest and most populous province. Nor, judged on the failure of earlier deals, did the ceasefire ever seem likely to weaken the militants, as the government hoped it would. When it was eventually approved on April 13th by Mr Zardari after much anxious foot-dragging, an American spokesman said it violated the principles of democracy and human rights.

But most Pakistanis seemed to welcome the deal, believing it would end recent carnage in Swat. Since mid-2007, when Mullah Fazalullah and his followers took up arms in protest at an army raid on a jihadist citadel in Islamabad, the Red Mosque, they have blown up 200 non-Islamic schools in the district, beheaded scores of government workers and alleged spies, and periodically kidnapped companies of soldiers sent to fight them. Preaching class warfare, as well as jihad, they have seized hundreds of houses and landholdings, including many of Swat’s prized orchards. Half of the district’s police officers and many administrators have fled, as have most landowners. Around 800 people have been killed, most during a heavy-handed army action that began last October, and displaced at least 100,000 people.

AP The Taliban in Buner, with Koran and Kalashnikov

The Taliban behaved repellently during that offensive. Residents of Mingora, Swat’s biggest town, awoke daily to find still-dripping corpses littering its central plaza, or dangling from lamp-posts there. They dubbed it Khooni Chowk, or “Bloody Square”. Yet almost all agree the army killed more civilians than did the militants. “The army was aiming its shells at ordinary people. Or else, did they hit our houses every day by mistake?” asks Fazal Rahman Nono, a local resident.

If few Swatis have much love for the Taliban, practically none say they want a military operation to dislodge them; nor do the army and NWFP’s government. General Abbas says that if the army had continued with its last offensive in Swat, “the whole valley would have been flattened”. He also defends the ceasefire deal; he says it has isolated the radical Mullah Fazalullah by bolstering Mr Muhammad, who was until recently in prison and disgrace, having led an army of Swatis to be slaughtered by American bombers in Afghanistan in 2001.

But far from muzzling his son-in-law’s jihadist invective—which Mullah Fazalullah once broadcast regularly, earning himself the moniker “Mullah Radio”—Mr Muhammad has echoed it. Ahead of a rally on April 19th to celebrate Mr Zardari’s signing of the ceasefire accord, Mr Muhammad was allegedly primed by the provincial government to tell the Taliban to disarm. Instead, addressing a crowd of 40,000 in Mingora, he denounced Pakistan’s constitution and said democracy was for infidels. Similarly, Mullah Fazalullah’s commanders say the deal is a first step to imposing sharia throughout Pakistan.

They clearly have no intention of ceding Swat to the government. Instead, the ceasefire has enabled them to tighten their grip on it. Last week they occupied the office of Médecins Sans Frontières, an NGO, in Saidu Sharif. In early April, they occupied the northern Swati town of Bahrain, and on April 28th shot and injured one policeman there and kidnapped another. Speaking by phone, a local resident says: “Ours is a life of fear and death.” Yet the government could probably have lived with this, if the Taliban had not embarrassed it by taking Buner.

A step too far

On April 24th, four days before the army launched its offensive, the Taliban leader in Buner, Commander Khalil, welcomed your correspondent to his requisitioned house in the village of Sultanwas. He claimed to have been sent to the district by Mullah Fazalullah to check that sharia was being followed, in accordance, he said, with the terms of ceasefire agreement. Yet he and his men had proceeded to chase away the district police and a few local resisters, killing eight. They then looted every government and NGO office and well-to-do house or business they could find. Pointing to a large trove of stolen computers, American-donated food aid and jerry-cans of petrol, he said: “We’ll give them to the poor, who really need them. These houses also belonged to rich people, who ran away when we arrived because they were scared to face our justice.”

America is delighted by the army’s subsequent assault in Buner; a Pentagon spokesman called it “exactly the appropriate response”. Some American officials believe the army will even resume its offensive in Swat; and this time crush Mullah Fazalullah. Such optimism might seem justified by a modest improvement in Pakistan’s fortunes on other fronts. Courtesy of an IMF loan of $7.6 billion, the offerings of its friends, and some penny-pinching economic management, it is no longer at risk of insolvency, as it was late last year. And in March, skilful diplomacy by the army and America averted a political crisis sparked by Mr Zardari’s efforts to have his more-popular rival, Nawaz Sharif, rendered ineligible for election. If Pakistan now has a window of relative political and economic stability, could Malakand prove to be a turning-point in Pakistan’s flagging war with extremism?

Probably not. The government has made no effort to use the ceasefire to extend its writ in Swat. Nor has it announced any plan to abrogate the deal. And the army shows little sign of wanting to resume the fighting in Swat. If this suggests Pakistan’s top brass may, under pressure from America, be doing no more than the minimum (or slightly less than that) demanded of them, it would not be for the first time. One of the tricks used by the former president, Pervez Musharraf, was to arrest a few of the former jihadist assets of the army’s Inter-Services Intelligence (ISI) agency; then later release them.

America has endured many such false hopes in Pakistan. Another was in early 2007 when the ISI backed a Taliban commander in South Waziristan, called Muhammad Nazir, to expel some Uzbek militants who had found refuge there. The army suggested that foreign militants would no longer be welcome in the tribal area. But Mr Nazir did not evict his Arab terrorist guests, and in February he declared a new alliance with South Waziristan’s main Taliban commander, Mr Mehsud, the alleged mastermind of Ms Bhutto’s murder.

In a more recent setback, Abdul Aziz, head of Islamabad’s Red Mosque, was released from jail on April 16th. He had survived the army’s assault on the mosque (though over a hundred, and perhaps many more, of his followers did not) by fleeing dressed in a black burqa. Within hours of his release Mr Aziz was back in the pulpit, claiming credit for the introduction of sharia to Swat, and predicting the same for all Pakistan.

Another act of Pakistani slipperiness, the government’s failure to dismantle the latest incarnation of the Lashkar-e-Taiba (LET) terrorist group that is alleged to have carried out a murderous commando-style attack in Mumbai last November, may be most troubling. In response to strong American, British and, naturally, Indian pressure, it arrested half a dozen mostly mid-level LET members, and vowed to try them for this crime. But there is little prospect that the group’s senior leaders, currently under house arrest, will face justice. And the government has already failed in its obligation to take over LET’s assets, which include schools, dispensaries and hospitals. In Punjab, which is home to LET (a group formerly trained by the ISI to fight in Indian-held Kashmir), the government has taken over 20 LET schools and five hospitals. Yet the group is estimated to retain control over an estimated 50-70 other properties, which it holds in other names.

Pakistan’s failure to suppress LET invites the thought that the army has not entirely abandoned its old proxy. And it still considers India, against whom it has fought three full-scale wars, to be its main enemy. To some extent, this obsession with India illuminates the army’s troubles in the north-west. By maintaining its readiness for a conventional war on Punjab’s plains, it has been slow to acquire the necessary counter-insurgency skills; hence its brutish reliance on artillery fire in Swat.

Worse, the army stands accused of protecting some of its former militant allies in the tribal areas, to preserve them for future (or perhaps current) use in Afghanistan and Indian-held Kashmir. This allegation is often cited to explain the army’s failures. But there is rarely evidence for it. Increasingly, though, senior American officials decry Pakistan’s obsession with India. General David Petraeus, chief of America’s Central Command, argues that Pakistan faces greater danger from home-grown extremism. With a smile, General Abbas suggests he doesn’t think much of this: “When people come here and tell us about our neighbour, how good or bad he is, allow us to take it with a pinch of salt.”

Rigid, deceitful and, it seems, convinced that Islamist militancy poses a much lesser threat to Pakistan than America reckons, the army will always be an awkward ally along the north-west frontier. Then again America is a difficult friend for Pakistan. Its pressing objective is to stanch the flow of Taliban into Afghanistan and to crush al-Qaeda’s leadership; these are not priorities for many Pakistanis. And if the Pakistani army’s efforts against the Taliban have not been successful, it reasonably counters that the cross-border insurgency has been inflamed by America’s own blunders in Afghanistan and its missile strikes into Pakistan.

The army considers that it takes a longer-term view of what is required for its troubled north-west. In Swat, for example, it seems to think it would be fruitless to pulverise the Taliban, and in the process kill many civilians, while Pakistan’s civil institutions are too weak to fill the vacuum that would be created. This is not entirely unreasonable. Local dissatisfaction with Pakistan’s slothful and corrupt justice system—so much worse, Swatis say, than the traditional system of modified sharia that it replaced in 1969—has helped fuel Mullah Fazalullah’s insurgency.

Many also seem to believe that, once sharia is instituted, the brutal militants will fade away. Inam-ur-Rahman, head of the Swat peace committee, a group that speaks to both the army and Taliban, says: “For God’s sake, let’s implement the deal. It will bring peace.” Alas, that sounds naive. But even a government determined to crush the Taliban will struggle without the support of the local population. “Even if you take a Pushtun person to paradise by force, he will not go,” adds Mr Rahman. “He will go with you only by friendly means.”

Thursday, April 30, 2009

Battle of Ideas

Chinese companies are enforcing patents against foreign firms

FOR over a decade Schneider Electric of France has bombarded a Chinese firm, Chint Group, with lawsuits accusing it of copying its technology. But the tables turned on April 15th when the two companies settled an infringement case—with the French firm forking over $23m to Chint. The rich settlement against a foreign firm is a landmark. It serves as a reminder that Chinese companies are just as eager to defend patents as Western firms, and that China’s intellectual-property regime has been tightened in recent years.

Long the workshop of the world, China wants to be the brains as well. The country’s patent office leads the world in patent applications, more than 800,000 of which were filed in 2008. Most are for “petty” patents: middling technology that undergoes minimal review and receives only a 10-year term. Such patents are usually derided by research-intensive Western firms—but Schneider was stung by one that had been issued to Chint. And Chinese firms are increasingly filing “invention” patents that are rigorously scrutinised and receive 20 years of protection, as in the West (see chart). This year Chinese companies are poised to surpass foreign ones in receiving invention patents in China.

With the rush for patents has come an increase in disputes. Since 2006 more patent lawsuits have been filed in China than anywhere else, even litigious America. Most pit domestic firms against each other, but in recent years foreigners have found themselves on the receiving end too. In December Samsung, a South Korean conglomerate, was ordered to pay compensation to Holley, a Chinese telecoms firm. The recent victories and lucrative awards will open the floodgates to more suits, predicts Tony Chen of Jones Day, a law firm.

Intellectual property is relatively new to China. Patents date back to Venice in the 15th century, but Communist China did not allow them until 1985. Since 2006 it has pursued a deliberate policy of gathering as many patents as possible and developing home-grown technologies—not least because Chinese companies pay around $2 billion a year in licensing and royalties to American firms alone, according to America’s Bureau of Economic Analysis.

Chinese firms are also increasingly seeking patents abroad, a sign that they plan to protect their technology when exporting it to rich countries. They won 90 patents in America in 1999 but last year they received 1,225. That is still relatively few—IBM, an American technology giant, receives around 3,000 a year—but it is increasing quickly. Because it takes three to five years to issue a patent, the number issued to Chinese firms is expected to soar soon. The quality of patents issued in China is also improving. Revisions to the patent law that take effect in October strengthen the requirement for a patent’s novelty, bringing it up to global standards. Stronger patents are easier to enforce, opening the door to more lawsuits.

All these trends are important because countries that create intellectual property eventually enforce it as well, explains Dominique Guellec of the OECD. America, it is worth remembering, was the great copyright and patent infringer when it was a developing country in the 18th century

Wednesday, April 29, 2009

Is Israel heading for a clash with the US?

It is Israel's Independence Day - traditionally time for leading Israeli politicians to give big interviews about their country's past and future.

Israel's new Prime Minister, Benjamin Netanyahu, has remained conspicuously tight-lipped.

Israeli voters went to the polls in February.

Mr Netanyahu knows their number one priority is personal and national security.

This would have been an ideal moment for him to set the scene as regards foreign policy, but it looks like Israelis - and the impatiently expectant international community - will have to wait a little while longer.

In a region where sparks can fly and wars can start without too much warning, Mr Netanyahu's spokesmen have announced the world view of this new Israeli government will only be revealed around 18 May.

Israeli PM Benjamin Netanyahu
Mr Netanyahu is likely to reveal more about his policy in Washington

This is when Mr Netanyahu is scheduled to meet US President Barack Obama in Washington.

In the meantime, the Israeli leader's defence and foreign ministers have dropped some heavy hints (though, not unusually for tumultuous Israeli government politics, the declarations were not always harmonious).

They, as well as Washington's statements and comments made by Arab leaders, are being closely monitored.

Israelis and Middle East-watchers are keen to know if there will be an ugly clash at the White House next month.

In the end, it is unlikely, but the players' stated positions make it perfectly possible.

Mr Netanyahu has a track record of difficult relations with his country's closest ally, dating back to his previous term as Israel's premier back in the late 1990s.

Complex reality

Clearly, a key issue is Palestinian statehood.

Mr Netanyahu and his foreign minister have preferred to remain vague on the issue.

Foreign Minister Avigdor Lieberman claims boosting the Palestinian economy is more of a priority.

We can't talk forever... at some point steps have to be taken so that people can see progress on the ground
US President Barack Obama

He insists that the international community drop phrases like "land-for-peace" or "two-state solution".

He says they oversimplify a complex reality.

Defence Minister Ehud Barak said in an interview published on Tuesday that he believed peace could be achieved within three years.

Mr Lieberman has promised "new approaches, new ideas, new visions".

It is questionable whether that will be good enough for Barack Obama.

Since taking office, he and his Secretary of State, Hillary Clinton, have gone out of their way to insist a two state solution is the only solution to the decades old Israeli-Palestinian conflict.

They also appear keen to push for wider regional peace.

'New war?'

This month Jordan's King Abdullah became the first Middle East leader to be received in Washington by President Barack Obama.

He urged Israel's acceptance of what has become known as the Arab peace initiative, where Israel would achieve diplomatic recognition in the Arab world in exchange for pulling back to its pre-1967 borders, allowing for the formation of a viable Palestinian state.

Jordan's King Abdullah and US President Barack Obama at the White House
King Abdullah was the first Middle East leader to visit President Obama

King Abdullah said it was imperative the US take a forceful role in resolving Israeli-Palestinian relations.

If no progress was made, he warned, the region was facing a new war.

Palestinian Authority President Mahmoud Abbas said King Abdullah spoke on behalf of the wider Arab world.

President Obama seemed sympathetic to the message.

He said: "We can't talk forever... at some point steps have to be taken so that people can see progress on the ground. And that will be something that we will expect to take place in the coming months."

But how far is he willing to push Israel? US administrations are famously reluctant to come to diplomatic blows with the country some describe as America's 51st state.

'Biggest obstacle'

It could all come down to Iran.

While in opposition, Mr Netanyahu repeatedly said Iran was the biggest threat to Israel's existence.

He is very likely to deliver this message and ask for assurances during his visit to Washington.

President Obama may press for progress on the Palestinian issue in return.

It's impossible to combat any problem in our region without resolving the Iranian problem

Israeli Foreign Minister Avigdor Lieberman

Speaking in Washington on Friday, US Secretary of State Hillary Clinton said: "For Israel to get the strong support it is looking for vis-a-vis Iran, it can't stay on the sidelines with respect to the Palestinians and peace efforts. They go hand-in-hand."

International diplomats have speculated that Sunni Arab governments which fear Iran feel they need clear steps forward towards an Israeli-Palestinian peace deal in order for their nations to accept Arab backing of US-Israeli moves against a fellow Muslim nation.

Publicly the leaders of Egypt, Jordan, Saudi Arabia and other Arab nations insist the Israeli-Palestinian conflict is the core Middle East issue.

Until that is resolved there can be no regional peace.

But Israel's Foreign Minister, Avigdor Lieberman, insists what he describes as "the Iranian problem" must be resolved before anything else.

"The biggest obstacle to a comprehensive solution is not Israel. It's not the Palestinians. It's the Iranians."

"It's impossible to combat any problem in our region without resolving the Iranian problem.

"This relates to Lebanon, to influence in Syria, their deep involvement with Egypt, in the Gaza Strip, in Iraq.

"If the international community wants to resolve its Middle East problems, it's impossible because the biggest obstacle to this solution is the Iranians."

Tough position

Mr Lieberman recently told Barak Obama's Middle East envoy, George Mitchell, that 15 years of peace talks with Palestinians had "brought neither results nor solutions".

To obtain true regional stability, the US should focus instead on preventing Iran obtaining a nuclear weapon, he said.

US Middle East envoy George Mitchell meets Palestinian Authority President Mahmoud Abbas  (April 2009)
Mr Abbas is hoping the US will push Israel towards a two-state solution

Mr Netanyahu has often said he believes it better to take a tough position at the outset of negotiations in order to have bargaining possibilities.

The most likely scenario is that he and President Obama will do their best to find common ground during their talks in Washington.

Israel's foreign and defence ministers have clearly quashed domestic and international speculation that the Netanyahu government, dismayed at the Obama administration's efforts to engage Iran, favoured going it alone against Iran with their own military strike.

Both men say they are open to normalising relations with Syria (something Mr Obama favours strongly, though Mr Lieberman says is unlikely because at the moment, he says, there is nothing to talk about).

Both men say they favour advancing stalled talks with the Palestinian Authority.

There is room for discussion, but Palestinians in particular are hoping Mr Obama will not just talk but act tough on the issue of expanding Jewish settlements in the occupied West Bank.

Here, Mr Netanyahu has been clear: he sees no reason to stop the building.

Mr Abbas has been equally clear - he will not sit down with the Israelis until all settlement growth is frozen.

President Obama has also invited him to the White House next month.

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