IISIA Monthly Report - ETH ZIISIA Monthly Report Institute for International Strategy and Information Analysis Inc. 5 related markets are likely to fall – we, IISIA, call this a

IISIA Monthly Report

Institute for International Strategy and Information Analysis Inc.

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Table of Contents

Table of Contents 2

Chapter 1 Geopolitical Risks and the Financial Market

Takeo Harada, CEO

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～Dispute as expected ── a Sharp Analysis of Financial Market

from a View Point of Georgia Dispute～

Chapter 2 The Latest Move in the Intelligence Community

and the Military Technology

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Takeo Harada, CEO

Chapter 1 Geopolitical Risk and Financial Market

Dispute as expected – a Sharp Analysis of Financial Market from a View Point of Georgia Dispute

By Takeo Harada, CEO

(1)Why Geopolitical Approach is Useful for Financial Market Analysis

＜Figure3-1: The 20 Biggest Cross-Border Sovereign Wealth Fund Deals Since 2005＞

(Source: The New York Times1)

In the modern society, the state is obliged to explain what it does and why to the people (in

principle at least). Accordingly, the state has to explain why it sells the abundant resources at a high

price, or why it conducts the sovereign fund (SWF). It is impossible for the state to avoid disclosing

the policies and results of the SWF to the people.

Certainly, the SWFs of China, Russia, or Arab countries have not disclosed the information fully,

and their attitude has been harshly criticized. In fact, that is why the International Monetary Fund

1 http://graphics8.nytimes.com/images/2008/04/01/business/02graphic-full.jpg



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(IMF) is now drawing up a guideline to require transparency of a certain level, modeling the

Government Pension Fund of Norway.2

Some might argue that this guideline will be applied to the emerging countries and oil producing

countries, but not to developed economies including Japan, as they have no such SWFs. However, it

depends on how you define the SWF. When a discussion arises around a SWF, the owner is quite

often an emerging country, not a developed one. Still, if a government has a large number of a

company’s stock, or keeps a close relationship with a certain circle in the financial market, they can

be regarded as a kind of SWF. For example, Yucho Bank (The Japan Post Bank) is funded 100 % by

the Japan Post Group, and the 100 % of the Japan Post Group stock is owned by the Finance

Minister, that is, the Japanese Government.3 Hence, it is impossible to assume that the government

has no influence on the fund management of Yucho Bank.

Now, what kind of responsibility the state has to the people, when it has a huge influence to the

market investing money through the SWF? It is to serve the best interests of the state. Now, what

are the interests of the state? It is the lives and assets of its people.4 Even though it is said that the

world is being globalized and becoming flat, 5

a state stays the place as it were on the earth

geographically, and there is naturally a pattern for each country about how it serves the best national

interests for its people. A desert state seeks water, while a cold country an ice-free port, for example.

The geographical conditions set a typical pattern for the country to behave in the international

community, and this can be a negative influence to the market and prices of financial products in

2 http://www.imf.org/external/pubs/ft/survey/so/2008/pol070908a.htm

3 http://www.japanpost.jp/corporate/about/

4 In the administrative practice of the Japanese government, “national interest (kokueki)” is not used

as a legal term. However, as often pointed out, there is a similar concept in the 3rd

article of the Law

on the Foundation of the Ministry of Foreign Affairs – the Ministry of Foreign Affairs contributes to

maintaining peace and safety of the international community, try to subjectively and positively

promote a favorable international circumstances, and develop a harmonious relationship with other

countries, in order to increase interests of the country and the people of Japan.) As a natural

consequence of this article, the 4th article is stipulated, which means nothing but “the maintenance

and promotion of its people’s lives and assets”. That is why IISIA explained this term as is in the

body text. 5 As for the world that is “becoming flat”, please refer to Thomas Friedman’s The World Is Flat: A

Brief History of the Twenty-first Century”(Farrar Straus & Giroux. 2005). Friedman argues that with

the advent of the Internet there is no rational necessity to keep the supply chain within the country,

and new bases of the supply chain, emerging economies, will prosper, and a variety of other

fundamental changes will happen globally in this century. If taking his accounts carelessly, one can

miss the factors, which is what we call “geopolitical risks” in this chapter. However, I note that

Friedman himself does not miss this point, as he importantly explains on pp.324-325 in the book

mentioned above.



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related markets are likely to fall – we, IISIA, call this a “geopolitical risk”.6 Unlike personal

investors, funds, or investment banks, the state can not move themselves. To be exact, when it moves,

it invades another country – this means a war. On the other hand, some countries are located in a

disadvantaged geography (in the mountains or desert, for example). The state is not able to improve

the condition, and it cannot fully develop the production of wealth. This leads a political instability,

which can trigger an internal war (civil war, terrorism) as the worst situation. When this happens in a

oil producing country, a concern for the oil supply can be publicized in the international community.

Thus, the influence of the geopolitical risk is not limited in the country but widespread globally.

(2)Georgia Conflict as Points and Verification on Financial Market Analysis

Although what is mentioned above is a little abstract, it is understandable that analysis based on

geopolitical risks can be most rational and effective. Here we show some points of geopolitical

analysis and then examine the effectiveness taking the Georgia conflict in August for example.

The followings are the 5 points IISIA considers important points of geopolitical risk analysis (there

are more point other then these. These are just tentative and roughly processed points we will

continue to sophisticate in the future).7

●The change of “resource countries” along with the development of alternative energies

Since the dawn of the 20th century, humans lived in the “civilization of oil”. Now, as the alternative

energies are developed, the “resource countries” include not only the existing oil producing countries

but other countries and areas and the weight of their importance is shifting. This triggers a sea

change in the world of money as well as military conflicts and domestic instability.

●The Formulation of block economies along with the development of alternative energies

The development of alternative energies encourages multipolarizing the world, giving the

significance of resource countries as well as country with new energy technologies. The US seems to

shift its emphasis on hegemony with intellectual property rights, rather then conventional hegemony

with the military power and currency.

●The economic circulation and the change of administration of the U.S., and the Development

of humanitarian support business.

When the circulation of the US economy is in the declining phase, the Democratic Party is likely

6 “Geopolitical risk” is a Swedish-origin concept and developed in Germany, as one can see in the

following source.

http://de.wikipedia.org/wiki/Geopolitik(Germany) 7 Including this point, IISIA plans to draw up a model method of our analysis and prepare a learning

system of the method, as we have received requests from many clients. I would like our valued

clients to expect our new development.



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take the White House, as they are considered to be good at domestic economy policies. As for the

diplomatic policy, the US will shift from the diplomacy by the military power committing to the

entire global society to the Monroe Doctrine that allows the rise of other countries in each part of the

globe. Humanitarian activities in conflict areas will be used as diplomacy, rather than the military

power (superficially at least). In other words, the “demand” for humanitarian activity will increase in

various areas.

●The change from the Washington Consensus system

Since the mid 1980s, the US urged the world to implement “structural reform” including

deregulation, liberalization, privatization and IPO. It was actually “destructive business”, which are

now thrown away by the West countries in secret. The main plotters of the Washington Consensus

(the scheme of destructive business) are now criticized more than ever, and the governments of other

countries are publicly or secretly going against it.

●The Creation of effective demand in the cyber space

In the declining phase of the market circulation, the cyber space is used more than ever to create

effective demand. In particular, this method is used with warfare, which is the ultimate method to

create effective demand, and the combination causes new sea changes in the world of money.

＜Figure3-2: Georgia and neighborhood countries＞

(Source: Washington Post8)

In this section, we analyze the geopolitical risk of the Georgian conflict in terms of the first 3

points.

On August 8, the Russian troops went into Georgian territory, and the “war” begun. As the tension

8 http://www.washingtonpost.com/wp-dyn/content/graphic/2008/08/13/GR2008081301858.html



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goes suddenly high, most interesting was that the trend in the oil market. Let’s see the trend of WTI

for the past several months.

＜Figure3-3: Crude Oil Futures (WTI, last 6 month)＞

(Source: Fuji Futures9)

Since 2006 the oil price rallied and reached a peak on July 11, and WTI (oil futures) was declining

since then, as the discussions on the development to alternative energies heat up. It is difficult to

consider that Russia took this trend positive. Still, it is impossible to change the move toward

alternative energies, as the concern about global warming soars. Most effective is to shut down some

oil field for some reasons, but this makes difficult for Russia to join as a main player to the oil

market when it starts rising.

Therefore, it was a logical and reasonable judgment that Russia decided to make a short-term

limited attack to the neighboring country, which has no oil field but is located on the important oil

pipeline route. However, although the “war” began, the oil price didn’t rise (The WTI was 114.45

USD/barrel, -0.65% from the day before) .

9 http://www.fuji-ft.co.jp/chart/0n-genyu/index.htm



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Then France, the EU presidency holder, brokered and the agreement for ceasefire was signed by

both Russia and Georgia, making a way for Russia to withdraw from Georgia. When the ceasefire

was prepared, on August 20, Goldman Sachs announced that they would maintain their prediction

that the oil price would be 149 USD through the end of this year. This announcement led the oil

price rally to 120 USD.10

In other words, it was clearly shown that the trend of the oil market is

controlled by the intention of the US.

It should be noted that in the meantime Russia made a very intimidating statement. On August 20,

the very day when Goldman Sachs made their announcement, Russia's deputy finance minister said,

“Russia is not planning to raise its exposure to debt issued by U.S. agencies Fannie Mae and Freddie

Mac, but will not cut it rapidly”.11

This statement shows that Russia knows well that the GSE

problem is the key for the US economy, and here it is revealed that there is a strain between the two

big countries (superficially at least).12

This might sound a little exaggerated, but it is true that the

oil is the lifeline for Russia’s economy, and it is Russia that opposes to the global warming, which

encourages the development of alternative energies.13

It is highly likely that such warfare can be

continuously triggered in the area around Russia, in the context that Russia has their own logics

about the oil and diplomacy.

More than that, Russia’s attack to Georgia, a pro- American country, can be regarded as a blast of

their frustration to the US diplomacy to Russia, as it happened just after July when the oil price

reached a peak. Although Russia is not very positive to the development of alternative energies, it is

not true that they are not trying to obtain an advantageous position in the trend. More exactly,

Russia’s fundamental energy policy seems to keep an advantageous position in the alternative energy

sector and nuclear sector, while maintaining the interests of the oil production that has produced

huge wealth for the country. As proof, the US Russia Strategic Framework Declaration submitted by

the US president Bush and Russian President Putin on April 6 in Sochi states as follows.14

“Reliable Access to Nuclear Fuel: Recognizing the need for an assured fuel supply, both the U.S.

10

http://jp.reuters.com/article/marketsNews/idJPnJT823169820080820

It should be noted that according to this news report Goldman Sachs didn’t mention a word on the

Georgia conflict as a possible reason for the rise of the oil price. 11

http://www.reuters.com/article/ousivMolt/idUSLK73251720080820?sp=true 12

On the other hand, according to the news report below, the US has begun placing pressures on

Russia by restricting their investment into the US.

http://www.ft.com/cms/s/0/a39f87a2-70ac-11dd-b514-0000779fd18c.html?nclick_check=1 13

Please refer to the remarks by Khabibullo Abdusamatov, head of a space research lab at the

Pulkovo observatory in St. Petersburg.

http://en.rian.ru/science/20080122/97519953.html 14

http://www.whitehouse.gov/news/releases/2008/04/20080406-4.html



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and Russia have committed to creating reliable access to nuclear fuel.

Reserve of low enriched uranium: The Russian Federation is working on the establishment of a

stockpile of low enriched uranium to be available to the IAEA for ensuring reliable nuclear fuel

supply.

Blending Down Highly Enriched Uranium (HEU): The U.S. is downblending 17.4 MT of excess

HEU from its defense programs and is pledging $50 million to support establishment of an IAEA

international fuel bank to ensure reliable supplies of nuclear fuel.”

That is, Russia and the US agreed about the sharing of the nuclear market – as for nuclear fuel,

which is equivalent to oil for thermal power generation, the US will be in charge of the highly

enriched uranium (HEU) market, while Russia will control the low enriched uranium market. When

considering that nuclear energy is the first practical option among alternative energies, this

agreement is of historical significance, just as the Sanremo Agreement and the Red Line Agreement,

both of which were signed by Western oil majors to share the Middle East oil interests. It is natural

that Russia wants to finish the sharing of the market as soon as possible to import nuclear fuels they

have developed to the global market. And, it is Iran that Russia has incorporated with most

vigorously for the development of nuclear fuels.15

＜Figure3-4: Angarsk International Uranium Enrichment Plant in Siberia＞

(Source: WMD Insights16

)

Regarding Iran’s nuclear problem, it was reported as if the direct negotiation among Iran, the US,

15

See below about Russia’s export of Uranium for Iran.

http://www.iht.com/articles/ap/2007/09/16/africa/ME-GEN-Iran-Russia-Nuclear.php 16

http://www.wmdinsights.com/temp/I11/I11_R1_RussiaBegins.htm



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and EU in Geneva on July 19 had been a breakthrough. However, it didn’t bear a fruitful agreement,

and nothing has changed in the situation around Iran’s nuclear problem. Russia must be frustrated in

the current situation in terms of expanding their nuclear energy market – unless Iran’s nuclear

problem is solved, Russia cannot expand their nuclear business to Iran and the Middle East.

Now, which country makes the problem tense? It is Israel, whose conservatives in the government

keep calling for an air campaign to Iran. Then, is there a way to make Israel lose their spirit for

attacking Iran? Theoretically, an idea is “to advance to the area where a huge amount of Israeli

weapons are exported, destroy them completely, and bring some of them back to home to analyze.”

Although it is little known in Japan, Georgian army has a huge amount of Israeli weapons. Georgia

has bought weapons from Israel for 3 trillion USD in the past, a report says.17

Israel witnessed

Georgian army putting to flight under Russia’s fierce attack, and as a result, in Israel there was even

an argument for restriction of weapon export to Georgia. Clearly, Israel was afraid that the warfare

could spill over into the country.

In the meantime, Russia has fully understood the effect of the warfare to Israel – as proof, on

August 20, Russian president Medvedev called Israeli president Olmert to discuss the Georgia

problem.18

Shortly, president Medvedev invited Syrian president Assad to Russia. It was said that

president Assad might have asked for the deployment of high quality Russian missile in his country,

which stirred up more concerns in Israel.19

Israel is under a pressure – they concern about how long it will take for Russia to analyze Israeli

weapons Russian army had brought back home from Georgia in August. While being engaged in

peaceful diplomacy, there is a possibility that Israeli people’s sentiment will decide that it is now to

take an air campaign to Iran. Because, Iran is a country whose army has a huge amount of Russian

weapons, which Israeli are afraid of.20

Concerning the Georgia conflict, major media worldwide reported the gap between Georgian

17

See “Heikle Ruesstungsgeschaefte Israels mit Tbilissi (Delicate Ruesstungs of Business Israel

with Tbilissi)”. Neue Zuercher Zeitung, Swiss, August 11, 2008 ( Currently the report is not available

on the web.) 18

http://news.yahoo.com/s/nm/20080820/wl_nm/israel_russia_dc_1 19

Since Olmert reportedly asked for Russia to restrain their weapon export to Syria (see the news

report below), and this shows how Israel are afraid that Russian weapons might spread to the entire

Middle East region triggered by the conflict in Georgia.

http://www.nzz.ch/nachrichten/international/syrischer_praesident_assad_in_russland_1.812454.html 20

http://www.iht.com/articles/ap/2007/01/24/africa/ME-GEN-Iran-Russia-Weapons.php



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president Saakashvilli’s excessive trust on the US and the reality that American president Bush

didn’t offer any active involvement in the situation. Despite the desperate call for support from

president Saakashvilli, whose pro-America attitude is well-known, the Bush administration sent just

humanitarian aids instead of full involvement in the warfare against Russia.21

Although it is too early to judge the situation, the US has already announced that basically they

have no intention to deploy their forces to the region.22

While not supporting the “allied country”,

what kind of interests does the US pursue?

First of all, we should note that thanks to the Georgia conflict, the US gained good profits in the

weapon market. Witnessing the reality of Russia’s invasion to the neighboring Georgia, Poland,

which had procrastinated the negotiation with the US, suddenly agreed to finalize the deployment of

the BMD systems.23

Why is this an interest for the US? Because, BMD is the leading product of the US military

industry. The market of BMD is dominated by 3 American companies (Reytheon, Lockheed Martin,

and Northrop Grumman) by 80 %, and this is said to be continued until 2015.24

For the new US

administration in the future, it will be an important task to sell BMD to the world. Because of the

Georgia conflict, Poland, which had often suffered from neighboring Russia’s invasion in the history,

agreed to finalize the BMD contract. This was a positive achievement for the Bush administration.

On the other hand, the US navy decided and announced A Cooperative Strategy for 21st Century

Seapower.25

It was revealing to specialists, as the humanitarian support activity was mentioned as a

priority issue for the navy. The report writes as follows:

“Humanitarian Assistance and Disaster Response. Building on relationships forged in times of

calm, we will continue to mitigate human suffering as the vanguard of interagency and

multinational efforts, both in a deliberate, proactive fashion and in response to crises. Human

suffering moves us to act, and the expeditionary character of maritime forces uniquely positions

In fact, as of the end of August, there is a leak that the US will drop the US- Russia agreement on

nuclear energy use.

Financial Times, 24 August 2008.

http://www.ft.com/cms/s/0/4c45d088-720f-11dd-a44a-0000779fd18c.html）。

At this point, Russia’s fury against the US is expected to reach a peak. 21

http://www.cnn.co.jp/usa/CNN200808140014.html 22

http://www.guardian.co.uk/world/2008/aug/15/russia.georgia1?gusrc=rss&feed=networkfront 23

http://sankei.jp.msn.com/world/europe/080815/erp0808151135007-n1.htm 24

http://www.aiaa.org/aerospace/images/articleimages/pdf/AA_Nov06_EOE.pdf 25

http://www.navy.mil/maritime/MaritimeStrategy.pdf



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them to provide assistance. Our ability to conduct rapid and sustained non-combatant evacuation

operations is critical to relieving the plight of our citizens and others when their safety is in

jeopardy.”

In brief, it is mentioned that the navy will be actively involved in humanitarian support and disaster

assistance. Some specialists point out that to carry out these activities, existing “hospital ships” are

not sufficient. They need new special marine vessels with necessary equipments for aid teams to get

on shore in any circumstances as well as to support them from the ship.26

＜Figure3-5: The Largest U.S. Navy Hospital Ship, “MERCY”＞

(Source: Information Dissemination27

)

26

http://informationdissemination.blogspot.com/2008/07/expert-opinions-matter-most.html 27

http://informationdissemination.blogspot.com/2008/07/expert-opinions-matter-most.html）



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In other words, if the navy are involved in humanitarian support and disaster assistance, the US

shipbuilding industry will have a business chance. The currently biggest hospital ships, MERCY and

CONFORT, belong to the San Diego base and were first built as oil tankers by National Steel and

Shipping Company run by General Dynamics28

The management of the company, which build a

number of maritime vessels for the US navy, has former admiral Jay L. Johnson as a member. The

former admiral is a key figure in the navy, as he was the Chief of Naval Operations Strategic Studies

Group under the Clinton Administration from 1996 to 2000.29

More than that, as the US navy goes for the humanitarian support and disaster assistance worldwide,

private military service companies see them as a prospective market to join vigorously. Especially at

an emergency assistance, to send many rescuers to the shore from MERCY or COMFORT small

ships are necessary. Many specialists at Naval War College argue now that for this purpose, military

service companies should be utilized.30

Thus we can find a strange but logical consequence. For the US, Russia’s attack on Georgia had a

positive effect in regard promoting the sales of BMD and the development and deployment of

advanced hospital ships. That is why the US sent to Georgia, the allied country seeking for military

assistance desperately, nothing but humanitarian aid.

There was a decisive event – from July 15, shortly before Russia went on attacking Georgia, the US

military with 1200 soldiers had practiced a joint exercise with Georgian military with 800 soldiers in

the suburb of Tbilisi, says a report.31

The exercise was planned to continue for 3 weeks. It is an

undeniable fact that the US soldiers were not far from the place where Russia was invading.

Nonetheless, they didn’t fight back. When looking back the consequence, it is possible to assume

that the US and the Russia intentionally “danced” together on the purpose of something other than

protecting Georgia.

(3)Afterword

Since the spring of this year, IISIA has repeatedly mentioned the possibility of “regional conflicts

for creating effective demand to boost the global economy”. The Georgia conflict on August 8 can

be regarded as the first case.

However, the conflict didn’t expand to a full-scale war involving the US, Russia, Israel, Syria, and

28

http://www.nassco.com/ 29

http://en.wikipedia.org/wiki/Jay_L._Johnson 30

http://www.serviammagazine.com/mag/JanFeb2008/0208_Coalition.htm 31

http://www.iht.com/articles/ap/2008/07/15/europe/EU-GEN-Georgia-US-Military.php



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Iran. Rather, Russia could keep their dignity as a military power, while the US could gain money for

the military industry.

At the same time, losses caused by the US risk assets are soaring, and the “trans-border investors”

such as funds and investment banks are likely to be involved in active trading to cover their own

losses. For this reason, it is necessary for them to generate a huge geopolitical risk and volatility of

the market, both of which lead to a new sea change in an unexpected circumstance. When, where,

and how will a new crisis happen? It will be a focal point of this fall.



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Chapter 2 Intelligence and the Latest Move in the Military Technology

ByTakeo Harada, CEO

(1)The Latest Move in the World’s Intelligence Community

●Using Disclosure of Information for Prospective Analysis of “Sea Change”

For common people including personal investors, it is very difficult to follow every activity

intelligence agencies are involved. In particular, covert actions including destroying or even killing

the target cannot be noticed beforehand.

However it is too early to give up. If you read the open sources of intelligence agencies very

carefully, it is possible to see in which direction they intend to lead the situation.

By the Information Disclosure Law enacted in 1999 in Japan, the administrative agencies disclose

their information.32

However, they are passive as in their other activities, and never intend to lead

the public to a certain direction using the disclosure of information.

Still, the situation is completely different in the US, the Mecca of information disclosure.

Especially when the intelligence agency discloses a confidential paper at citizen groups’ long-time

request, it should be reminded that there can be a strategic implications involved in it.

For instance, the National Security Archive of George Washington University is a research institute

that requires intelligence agencies to disclose information and announce their achievements on the

website for free.33

On August 14 in 2007, the website announced that the government disclosed a

confidential paper which reported that Pakistan was the hotbed for Taliban, the Islamist armed

group.34

At that time, the situation in Pakistan was not so serious. However, on December 27 the former

prime minister Bhutto was assassinated, the situation got worse shortly, 35

and eventually president

Musharraf resigned on August 18 in 2008.36

Indeed, there is no description that shows the

possibility of the later consequence. Still, considering the fact that the Musharraf administration was

pro-American, we can see that the disclosed information abandoning the friendly US-Pakistan

32

http://www.soumu.go.jp/gyoukan/kanri/a_06.htm 33

http://www.gwu.edu/~nsarchiv/index.html 34

http://www.gwu.edu/~nsarchiv/NSAEBB/NSAEBB227/index.htm 35

See also http://sankei.jp.msn.com/world/asia/071227/asi0712272235004-n1.htm 36

See also http://mainichi.jp/select/world/news/20080819k0000m030069000c.html

http://sankei.jp.msn.com/world/asia/071227/asi0712272235004-n1.htm



16

relationship is a significant sign showing a change in the US diplomacy. More than that, it was a

preparative process for the US intelligence agency to nurture a public opinion favorable for a change

of administration.

Now, let’s see how major media worldwide covered the influence of this drastic change in Pakistan

to the market. Among a number of reports, it should be noted that British and American financial

media reported that painful assassination of former president Bhutto triggered the rally of the oil

price.37

That is, if one could expect the turmoil in Pakistan, he could have constructed a logical

explanation for the coming development in the market toward the rise of the oil price. Thus, the

disclosure of information at the National Security Archive can be a leading indicator for grasping the

coming sea change.38

Then, what kind of papers did the National Security Archive feature lately? On August 20 in 2008,

on the front page of the website the Archive disclosed the US government confidential paper

describing a close relationship between Al Quaeda and Taliban.39

According to the paper, the

Clinton administration attacked Al Quaeda’s military training facility in Afghanistan with cruise

missiles, and this led to Al Quaeda and Taliban who harbors them to get even closer to each other.

This missile attack was a revenge attack for the simultaneous bombings at the American embassies

in Kenya and Tanzania on August 7 in 1998.40

The bombings had caused more than 220 deaths so

that the US administration committed a missile attack to Afghanistan.

Although certainly painful and must be remembered, the incidents happened 10 years ago. It is

natural to question why the paper is extensively disclosed at this moment.

Therefore, let’s analyze the intention of the intelligence agency to foresee a possible sea change.

First of all, notable is the fact that the disclosure was done in the midst of the presidential campaign.

37

See also http://money.cnn.com/2007/12/27/markets/oil_eia/?postversion=2007122715 38

“Leading indicator” shows a move before the thing starts moving, while the coincident indicator

moves as the thing moves, and the lagging indicator moves following after the thing moves.

Needless say, it is significant to find a leading indicators to have an effective strategy in the market. 39

http://www.gwu.edu/~nsarchiv/NSAEBB/NSAEBB253/index.htm

See also below (a news report in Japan)

http://www.yomiuri.co.jp/world/news/20080821-OYT1T00693.htm

For the intelligence department working within major media in Japan, the National Security

Archive is important to find a sea change. Therefore, they often release this kind of tiny articles. The

best way is to keep checking the archive’s website, indeed. But as an easier alternative, it is effective

to watch the situation through this kind of inconspicuous articles. 40

http://www.pbs.org/newshour/bb/africa/july-dec98/bomb_8-7.html

http://money.cnn.com/2007/12/27/markets/oil_eia/?postversion=2007122715

http://www.gwu.edu/~nsarchiv/NSAEBB/NSAEBB253/index.htm



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Plus, on August 8, around 10 days before the disclosure, Russia invaded into East Ossetia, Georgia’s

territory, and the tension in the region escalated to armed conflict. At the very same time,

presidential candidate McCain (Republican) boosted his rating as a hero of the Vietnam War.

Judging from these factors, it is highly possible to assume that the disclosure aimed at boosting

McCain and putting Obama, McCain’s de-facto rival, to the corner. Because the paper argues that

the Clinton administration’s missile attack led Al Quaeda and Taliban to get even closer to each other,

the public opinion is likely to have an impression that a Democratic administration may not be

capable of conducting a right military action.

In fact, this is a headache for candidate Obama and the Democratic Party, especially when there are

serious concerns over the Georgia conflict and the Iran crisis, which can involve the US military

actions. However, Obama and the Democratic Party cannot stop such information disclosure.

Information disclosure is generally done at the request of citizens, and it cannot be stopped by any

third party with political intention.

However, this information disclosure is not always disadvantageous for the Democratic Party,

which will possibly take the office next year. It is possible for the party to argue that it is their task to

separate the 2 Islamist armed groups and conduct sweeping attacks on them by taking over the

former administrations’policy. In fact, while calling for withdrawal of the US military from Iraq,

candidate Obama insist the necessity to enhance military operations in Afghanistan involving

European countries.41。

Actually, it will be revealed later what kind of intentions the US intelligence community, which

conducts their business regardless of the changes of administration, had behind such information

disclosure. However, as the Pakistan case suggests, the current information disclosure has surely a

certain message and leading indicator of the future development. And Afghanistan will keep being a

focal point to analyzing a sea change in the market, the domestic situation, and the global affairs

from now through the coming year.

●US Intelligence Community Outsourcing Analyzing Section

For intelligence agencies, the essential “brain” or the “heart” is the analytic department.

Intelligence agencies in every country make their best effort to secure excellent human resources. In

fact, in the US, an agency of the military has traditionally hired brightest graduates of prestigious

41

http://jp.reuters.com/article/topNews/idUSL238333620080724



18

private universities including the Ivy League.42

However, the US government has shown a move toward outsourcing the analytic department, the

“brain” of intelligent agencies. The decisive proof or the move is the paper entitled “Analytic

Outreach” (Intelligence Community Directive. Number 205) published on July 16 in 2008,43

which

has created silent ripples in the intelligence community.

“Outreach” is a political term in the US, which means to contact people of other groups to make a

human network that can be utilized for one’s own purpose. This directive was devised as a

complementary measure for The National Security Act of 1947, in order to achieve more advanced

analyses by fully utilizing human resources outside of the government.

However, why did the US intelligence agencies decide to outsource the “brain” or the “heart” of

them? There are 2 possible reasons.

Firstly, after all, intelligence activity involves large scale mobilization of human labor. Especially in

the expanding Internet space, it requires a huge amount of human resources in order to pick up and

analyze information as well as to distribute intentional information through blogs as a covert

action.44

To expand the OSINT activity using the Internet, the US government founded the Open

Source Center (OSC) on November 8 in 2005.45

It is financially difficult for the government to support all of the intelligence activities the agencies

conduct in the virtually infinite Internet space. That is why the idea of outsourcing was realized. Plus,

it shouldn’t be missed that this can be an employment measure for the OBs retired from the US

intelligent agencies.

Secondly, the US government has a strategic intention to lead the world of OSINT in the name of

outreach or outsourcing. This can be understood by the following part of the directive.

“Sound intelligence analysis requires that analysts who are dealing with issues of concern

network in the U.S. and internationally to develop trusted relations. These trusted relationships

42

For example, the 434th Military Intelligence Detachment(Connecticut) conducting OSINT

analysis with the Internet is typical of this kind of intelligence agency. 43

http:// www.fas.org/irp/dni/icd/icd-205.pdf

“Intelligence Community Directive Number 205. Analytic Outreach” 44

See below as essay (Japanese) about this point.

http://blog.goo.ne.jp/shiome/e/50470b89cb36d3f680e6c21ea7c837cb

http://blog.goo.ne.jp/shiome/e/67cea518f5208ab754e1421e6ea678ed 45

https://www.opensource.gov/

http://www.fas.org/irp/dni/icd/icd-205.pdf

http://blog.goo.ne.jp/shiome/e/50470b89cb36d3f680e6c21ea7c837cb



19

could include, as appropriate, experts in academia; think tanks; industry; non-governmental

organizations; the scientific world;….46

”

Here, we can see that by this directive the US government intends to acquire excellent analysts not

only in the country but also from all over the world. Regarding the OSINT activity using the Internet,

the “frontier age” was over when the Internet, the “road for information” was build through the IT

bubble and IT revolution, and now is the time to create an effective information traffic system for the

OSIONT analysis, just like building an efficient traffic system for automobiles. In Japan, there was a

time when “IT 1.0” created a number of IT bubble billionaires, and now is the time for the “IT 2.0”.

And the US is now steadily preparing to be the global champion of the “IT 2.0).

In fact, the US intelligence agencies are developing a massive network involving OSINT agencies

overseas, as a variety of international conference on related issues are being held one after another in

Washington sponsored by the US government.47

At the same time, the International Security Network (ISN) of the Swiss Federal Institute of

Technology Zurich (Eidgenoessische Technische Hochschule Zurich) is engaged in the same kind of

project. The project, ISN Partner Network, 48

has called for public and private intelligence agencies

on the globe to join the network for free, and already involved many agencies worldwide. When

looking at this trend, we can understand that there has been the might swell of changing time both in

Europe and America.

Then, through these trends of “outsourcing of analytic activities” and “networking”, what kind of

sea changes will appear in the market, the domestic situation, and the global affairs?

Firstly, we should note that in the above-mentioned IT 2.0 there will emerge champion companies

trend, which will show some presence in the market. Conventional IT companies in Japan might

have been something like companies of the construction and property sectors in the real world,

gaining their profits through building the infrastructure of the Internet, after all. When taking a look

at a country like Holland, 49

where the penetration rate of the internet has reached 90 %, we can see

46

See http:// www.fas.org/irp/dni/icd/icd-205.pdf, “Purpose 4.” 47

Director of National Intelligence (DNI) is going to holding the following conference.

http://www.dniopensource.org/

IISIA will send a researcher to a conference in September to watch the trend in the intelligent

community. The achievement will be reported in the October issue of the IISIA Monthly Report. 48

http://www.isn.ethz.ch/net/ 49

http://ja.wikipedia.org/wiki/%E5%9B%BD%E3%81%AE%E3%82%A4%E3%83%B3%E3%82%B

http://www.fas.org/irp/dni/icd/icd-205.pdf

http://www.dniopensource.org/

http://ja.wikipedia.org/wiki/%E5%9B%BD%E3%81%AE%E3%82%A4%E3%83%B3%E3%82%BF%E3%83%BC%E3%83%8D%E3%83%83%E3%83%88%E6%99%AE%E5%8F%8A%E7%8E%87%E3%83%AA%E3%82%B9%E3%83%88



20

that the business model of IT companies as “construction and property companies” has passed a

peak.

Since the aforementioned trend in the US and Switzerland seeks for a next business model, it is

quite natural that there will emerge new companies specialized in OSINT activities with the Internet,

or in developing tools for them (translation, or statistics and analysis software, for example). In this

regard, the “seemingly dead” emerging market of Japan could be reinvigorated by new companies

corresponding to the needs of the times.

Secondly, in order to adapt to the coming IT 2.0 age, it is important to foster the young generation

with advanced skills necessary for the industry. Needless to say, they need basic Internet and

computer skills. Plus, in order to conduct full-fledged OSINT activities tackling a spectrum of

information, foreign language skills as well as a wide range of and profound cultural knowledge are

the most important skills for analysts.

As mentioned earlier, the US intelligent agencies keep hiring the best and brightest of the highest

educational institutions and training them as first-class analysts. As the US intelligence community

continues to develop the outsourcing of analytic department gradually to overseas, students capable

of being involved in IT 2.0 will be sought by the new industry in public and private educational

institutions in Japan.

F%E3%83%BC%E3%83%8D%E3%83%83%E3%83%88%E6%99%AE%E5%8F%8A%E7%8E%

87%E3%83%AA%E3%82%B9%E3%83%88

See below as source.

http://www.itu.int/ITU-D/ict/statistics/



21

(2)The Latest Move in the Military Technology

●Battle Action Being Unmanned: Deployment of Fighter Wing only with UAV

IISIA has repeatedly mentioned the

possibility of regional conflicts for

creating effective demand to boost the

global economy in the midst of the

financial crisis cause by the US risk

assets. At the same time, while the

conflict in Afghanistan has been growing,

and the Georgia conflict happened in

August. And, in this circumstance, the

significance of the unmanned aerial

vehicle (UAV) is growing too.

For example in Afghanistan, MQ-7 Reapers were deployed in the operation in November in 2007.50

Taliban, the Islamist armed forces, who are living humans, were killed by the UAVs, machines

without human soldier.

At the same time, in the escalation of the Georgia conflict, the UAVs were deeply involved. On

April 20 in 2009, the US UAV was shot down by Russia’s MIG-29 over Abkhazia region of Georgia.

The US lodged a strong protest against Russia regarding this incident.51

In fact, the use of the UAV is expanding. On August 11, the US air force made a decision to

“unhumanize” all the air fighters of the 174th fighter Wing.

52 This Wing is deployed in Iraq at the

moment, all of whose pilots of the F-16 were ordered to go back home as of August 5. As a result, in

Iraq and the surrounding region the attack on living humans of armed forces will be done by the

unmanned machines in the near future.

However, a more important sea change of the military market is not the “unhumanization” of the air

fighter. The UAV is used and operated in the integrated military communication network.53

Like the

US, UK promotes the use of the UAV in the scheme of the Skynet project, for which the country

succeeded in launching the Skynet 5c satellite in June. Thus, the unhumanaization of the air fighter

is closely linked with the development of space communication technology.

50

http://www.af.mil/news/story.asp?id=123071575 51

http://www.state.gov/r/pa/prs/ps/2008/apr/103974.htm 52

http://www.technobahn.com/cgi-bin/news/read2?f=200808131847 53

http://news.bbc.co.uk/2/hi/science/nature/7451867.stm

MQ-9 Reaper

(Photo Defense-Update)



22

＜Figure4-1: U.K. Skynet Communications＞

1. Skynet 5 overhauls satellite communications for UK forces

2. The largely autonomous satellites talk to two UK ground stations

3. Skynet 5 supports high-bandwidth applications, such as UAV video

4. Antennas and terminals are upgraded to make best use of Skynet

5. New battlefield networks, such as Cormorant, feed into the system

6. System gives commanders access to more information, faster



23

1. Improved technologies, including a solar 'sail', lengthen the platforms' operational lives to at least

15 years

2. The satellites are 'hardened' against interference. A special receive antenna can resist attempts at

jamming

3. Each spacecraft has four steerable antennas that can concentrate bandwidth onto particular regions

4. The system gives near-global coverage, providing 2.5 times the capacity afforded by the previous

system

5. Each spacecraft is a 3x4x4.5m box and weighs just under 5 tonnes; the solar wings once unfurled

measure 34m tip to tip

(Source: BBC54

)

In addition, when reminding the principle that new military technologies are eventually converted

to consumer production to cause a sea change in the financial market, one can wonder if the UAV,

whose technology is allowed only for military use at the moment, will be the case too. In this regard,

Air 4 All, a consortium of European aviation companies has disclosed the following roadmap.

54

http://news.bbc.co.uk/2/hi/science/nature/7451867.stm



24

＜Figure4-2: Road Map to Civil UAV＞

(Source: AIR4ALL55

)

According to the chart, it is clear that all types of the UAV technology are expected to be converted

for consumer production by 2015. In addition, it is understood that they will be used for passenger

airplanes.

Now, let’s see the competitive landscape of the UAV market in the following chart.

55

http://www.air4all.net/?OBH=314



25

＜Figure4-3: Revenue and Number of Employees of the UAV Companies＞

(Source: UAV Forum56

)

According to the chart, no Japanese company has entered into the UAV market. However, the

market is now thriving with active involvement of the US and UK aviation companies, offering a

possible sea change in the global market. As the UAV market is linked to the communication

technology and space development sectors where a huge amount of money flows in, Japanese

companies, which have money and related technologies, will be involved at the consumer production

phase.

Therefore, when thinking of the impact of the technology to the market, we shouldn’t miss that the

deployment of the UAV-only fighter wing has significance in terms of military operation as well as

the safety test for the future consumer production.

56

http://www.uavforum.com/vendors/vendgraph.htm



26

END

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