Global Guerrillas

SCENARIO: CHECHEN INDEPENDENCE (Part 3)

This brief could be alternatively titled, "how to coerce a major state for less than one million dollars."

How could global guerrillas fight on the strategic level? To explore this, I crafted a potential scenario that pits Chechen (or more precisely now, Caucasian Front) guerrillas against the Russian state. Part 1 provides an overview of the scenario. Part 2 explains how the moral center of a state has shifted to the markets it participates in (and how traditional symbolic terrorism can put the state on the horns of a dilemma). Part 3 (below) examines some of the mechanics of systems disruption necessary to accomplish the desired moral effects.

Pipeline Disruption

Russia's energy exports is the main thread that ties it to the world's markets. Internally, the energy industry is directly responsible for 25% of the country's employment and 50% of the state's tax revenues. It is the single most important strength of the Russian state. In order to defeat the Russian state strategically, Chechen guerrillas turned this strength into a weakness. This was done through systems disruption. It turned the moral sentiment of global markets against the state (via uncertainty, menace, and mistrust).

On the face of it, the disruption of the Russian energy transportation infrastructure was straight forward. There wasn't any need for deep systems analysis to determine systempunkts (points of greatest vulnerability). The pipelines of Transneft's oil and gas transportation system are concentrated into two major conduits (see diagram of the gas pipeline system). These lines were both easy to access and disrupt using simple homemade thermite and propane tanks (DIY, or do-it-yourself, explosives that are very effective against infrastructure). An effects-based operation with the goal of causing immediate losses would make frequent small attacks against those lines to the east of Moscow. In many cases, these attacks impacted both oil and gas exports due to co-location vulnerability.

Expansion of the Effort to Maintain Effects
However, the campaign got more complicated when it was forced to move beyond attacks on the main lines due radical increases in defensive efforts (which were only partially effective). To maintain the desired effect (a reduction in Russian gas/oil exports of 50% or more), Chechen guerrillas developed and exploited systempunkts in the rail, communications, and electricity systems. Since the disruption of these system exceeded the ability of a regional open source movement to accomplish, it opted to expand through a market-based approach. Guerrilla entrepreneurs sent into the field with financing hired participants from easily accessible criminal networks to provide target selection, bomb manufacturing, and emplacement services. Since these attacks didn't involve body-count terrorism, these participants were easy to recruit. The fluid marketplaces that developed emerged much more rapidly than the government could react to. Here's how these systems were disrupted:

• Rail. Transneft's oil transport capacity is limited to ~four million barrels a day. The rest is transported by rail. The Russian rail system exhibits many of the sparse network problems of the pipeline system. There are several links and hubs to the east of Moscow that provide a complete system shutdown capability. In order to immediately impact rail system performance, the Chechen guerrillas began to cut the fiber connections of the rail systems Unified Main Digital Communications Network (which follows the route of the tracks). These attacks disconnected the central routing and management system from downstream customers, trains, and stations. The ongoing disruption of these links made subsequent attacks on the tracks themselves more effective (since it slowed rerouting efforts and attempts to mitigate the disruption).
• Electricity. Systems analysis revealed the Russian electrical system, although more complex than the rail and pipeline infrastructure, had several key systempunkts. Attacks on only three high voltage substations was able to force the system into a cascading failure that collapsed electricity delivery in the central area north of Kazakhstan. Ongoing attacks on regional high voltage lines of 500 KV and above delayed repair efforts. This ongoing regional blackout complicated the repair of pipeline and railway disruption.
• Communications. To amplify the moral distress of markets in Russia's continued ability to participate in the global economy, Chechen guerrillas opted to focus their communications disruption on Moscow. To do this, the guerrilla began to systematically dismantle the cell phone tower infrastructure that supplied the city with robust communications capability. The high volume of calls routed to the remaining towers caused overloads and drops in service for the vast majority of subscribers.

Epilogue
(See Part 1 for a more descriptive Epilogue) The effect of this disruption campaign was a sustained reduction, by 50%, of Russian oil and gas exports for three months. Market reaction was fierce. The ruble fell precipitously (50 to 1), contracts with Russian oil and gas firms were embroiled in legal wrangling, and the cost of debt soared. Additionally, domestic opinion turned against the government which it blamed for the current problems. The Russian government was assailed from all sides. Facing collapse and major unrest at home, the Russian government offered Chechnya independence. Other provinces in the Caucasus would soon follow.

FEAR MANAGEMENT

Last August, in a Shiite neighborhood in eastern Baghdad, a suicide car bomb went off near a police station across the street from an open air bus station. Ten minutes later, as people crowded in the station to watch the rescue across the street, another suicide bomber drove his car into the station itself. The carnage was widespread but far from over. Twenty minutes later, as the victims of the first two blasts were removed to Kindi hospital only 200 yards away from the terminal, a third suicide car bomb went off at the hospital's side entrance.

THE ANALYSIS GAP: OIL MARKETS

Conventional oil market analysis is focused on traditional economic factors. The only intangible factors left to deal with is the sentiment of OPEC (to abide by quotas, increase/decrease quotas, etc.) and Saudi Arabia's maximum production capacity (a closely guarded secret). This type of analysis has worked fairly well in the past, but it has recently reached an impasse. It is no longer explanatory or predictive. This brief explains the problem, and what can be done to correct it.

PIERCING THE CORPORATE VEIL

Is business war?  It is in the world of post-industrial, post-state conflict. 

Battles between the corporate allies of nation-states and the transnational tribes and gangs of black globalization are at the core of this century's epochal war. 

Meet the Competition

Jeffrey Ake, the CEO of Equipment Express, has become a poster-boy for this conflict.  His visit to Iraq -- to manage his company's water and cooking oil bottling operation -- placed him squarely the cross-hairs of his guerrilla competitors. 

The problem is that these new competitors don't play by the Queensbury Rules of American business. 

The CEO as an Objective of War

CEO kidnapping isn't new.  It is common practice in Brazil, Mexico, etc.  The difference in Iraq is the motive.  In Iraq, it isn't purely financial gain.  It is being used as a way to unravel the fledgeling Iraqi government.

Here's why.  America's second largest ally in Iraq isn't the UK.  Not even close.  Corporations like Halliburton provide almost as many trigger pullers and engineers as the US Army.  They are the battalions of foot soldiers in Thomas Barnett's sys-admin force -- connecting Iraq to the US and the world. 

This role converts CEOs into generals/colonels in the US globalization machine (leaders of new entrants in the rapidly expanding long tail of warfare).  They are now legitimate and highly prized targets. 

The Corporate Systempunkt

The corporation is a particularly bad organization for warfare.  It is much too centralized.  The institution of the CEO is a particular weakness (a systempunkt in global guerrilla lingo).  The CEO's network centrality makes him/her a single point of failure for the entire corporate organism.  Here are some of the ways this damage can flow through a company:

• Psychological trauma.  We've already seen the results of this trauma at work on corporate decision making in Iraq.  Ongoing assaults on corporate employees have caused numerous corporate withdrawals (over a large number of nationalities, which implies that corporate behavior in this regard is relatively universal).  Assaults on CEOs ups the psychological ante:  it pierces the flimsy veil between corporate behavior and the personal security of senior executives.  The result is a greater level of risk adverse behavior within the target company and companies on the edge of involvement.
• Financial trauma.  The departure of the CEO from a public company can create substantial market volatility in the company's stock (see this Fed study for more) for up to two years after the event.  NOTE:  This volatility offers the incentive of rapid financial gains to guerillas with the foreknowledge of attacks through leveraged investments in options and derivatives -- remember, in this crazy new world micro-finance and warfare are closely connected. 
• Organizational trauma.  The financial trauma (see above) is symptomatic of the organizational chaos a company goes through when a CEO rapidly departs.  The pyramidal organizational networks of most corporations demonstrate a major vulnerability to the loss of its central decision maker.  This is particularly true in a small entrepreneurial company like Equipment Express. Even after a new CEO is selected, he/she can be relied upon to change strategic plans, roil the ranks of senior management, and generally slow down decision making in the short-term.

What's Next?

Frankly, a CEO is an excellent strategic target as well as a tactical target.  As a rule of thumb, I would consider all CEOs that reside/work within a nation-state at war with non-state guerrillas at risk.  Under almost all measures of this new method of warfare, CEOs are better targets than government or military officials.   

Remember, in this flat world, it is easy to pull up a CEO's name, address, credit history, and even a satellite photo of his/her home from a Cyber Cafe in Peshawar. 

JOURNAL: The Second Energy Crunch

Venezuela's 935,000 barrel a day Amuay refinery (satellite photo) resumed partial operations today, one day after it was shut down due to a power failure.  Full operations are expected to resume in seven days.  The cause of this shutdown was due to the interruption of the fuel to the steam boilers that powered the complex.  Shocks of this type, on top of deep concerns over insufficient global refining capacity, will continue to drive the market to new highs -- the market is that jittery.  This event played a major part in driving gasoline prices to new highs today.

Let's ignore the potential political implications of this (the US and Venezuela are on the outs and this outage may have been a warning from Chavez to Bush).  What's interesting to us (as watchers of global guerrillas) is that global gasoline prices could be influenced by a single point of failure.  This type of failure is well within the means of global guerrilla system saboteurs to replicate on demand.  Iraq's guerrillas have amply demonstrated this capability.

This situation will not get better, instead, it will get worse.  A recent report by Arjun Murti at Goldman Sachs (the largest trader in energy derivatives) predicts, based on economic analysis alone (growing global demand is outpacing the world's limited production capacity), that the price of oil could spike to $105 a barrel in the next two years (that's a gasoline price of $4 a gallon).  He points out that the lead times for infrastructure improvement are so long that only a major decline in demand (due to a substantial economic decline) will get us out of this shortage.  Again, this demonstrates that the world is in an unusual situation.  A window of vulnerability has developed that can be exploited by global guerrillas (a Shadow OPEC that controls supply through disruption) to radically impact global economic development. 

URBAN TAKEDOWNS

A rapid increase in urbanization and the proliferation of megacities are salient trends of global economic development since WW2.  These trends will be exploited in this war.  Cities are both the center of gravity of modern urban economies and extremely vulnerable to global guerrilla systems sabotage -- the leveraged infrastructure that cities rely upon is the perfect target. 

It is therefore important to understand what provides cities their cohesion and why they collapse.  In a departure from 4th generation warfare (4GW) theory, this cohesion isn't provided by moral factors but rather economic.  A good source of insight into the economic factors that hold cities together, is a post 9/11 report by James Harrigan and Philippe Martin of the Federal Reserve Bank of New York (PDF).  Their analysis indicates the following:

• Cities form when aggregation is economically advantageous to both firms and workers. 
• A city's size (its population of both firms and workers) is maintained through a market equilibrium, where the benefits of aggregation are balanced with the costs. 
• Ongoing insults to this equilibrium, in the form of a terrorist tax, can cause a city to decline (disaggregate).  This decline is defined as a transition to a new stable market equilibrium at a smaller size. 

A Terrorism Tax

A terrorism tax is an accumulation of excess costs inflicted on a city's stakeholders by acts of terrorism.  These include direct costs inflicted on the city by terrorists (systems sabotage) and indirect costs due to the security/insurance/policy/etc. changes needed to protect against attacks.  A terrorism tax above a certain level will force the city to transition to a lower market equilibrium (aka shrink).  So, what is that level?  Here's what they concluded:

• Singular terrorist events (black swans), like 9/11, do not impact city viability.  The costs of a singular event dissipate quickly.  In contrast, frequent attacks (even small ones) on a specific city can create a terrorism tax of a level necessary to shift equilibiriums.
• In the labor pooling model of city formation, a terrorism tax of 7% will cause a city to collapse to a lower equilibrium.  Labor pooling equilibrium reflects the benefits of aggregating workers in a single location.  Workers get higher wages and more choices.  Firms get stable wages (no one firm can deplete the market) and more candidates.
• In the core-periphery model of city formation, a terrorism tax of 6.3% will push a city to a lower equilibrium.  The core-periphery model is based on transportation costs.  Firms generate transportation savings by concentrating in a single location next to suppliers and customers.  Customers and workers glean the benefit of lower transportation costs by locating near jobs and goods.

Case Study:  New York City

The models used above are likely insufficient to fully explain why a city is in equilibrium.  However, it is good approximation.  As a rule of thunb, a terrorism tax of 10% would be sufficient to push a city to significantly lower equilibriums -- it would cause workers and firms to leave the city for other locations until it ceased to be a target or expensive to defend. 

If we apply this model to NYC, the terrorism tax necessary to collapse the city would be $40 billion a year (10% of NYC's $400 billion a year economy).  London is $23 billion ($236 billion), Paris is $13 billion ($131 billion), etc.  As large as these numbers are, it isn't hard to see how quickly they could mount.  For example:  the northeast blackout of 2003 indicates that a power loss to NYC costs ~$1 billion a day.

TARGET: CORPORATE PSYCHOLOGY

Contrack International, a private US corporation and the managing partner of the $325 m contract to rebuild Iraq's transportation infrastructure, announced its withdrawal from Iraq today.  The company felt it had a responsibility to do so.  Here's why:

• Transaction costs skyrocketed.  Up to 60% of the dollars spent on contract completion were going to security.  Further, suppliers (such as its sole supplier of gravel), withdrew due to fears of reprisals.
• Systemic chaos due to personnel problems.  An ongoing campaign of violence directed against corporate personnel resulted in poor morale and defections.  The corporate HQ was attacked 2.5 months ago and the body of an Egyptian driver for the company was found shot in the head with the word "collaborator" attached to his chest. 
• Decision making was stalled.  The FUD (fear, uncertainty, and doubt) of the guerrilla campaign prevented efficient decision making.  The company was only able to complete $30 m of work over last 8 months.

Market Disruption via Corporate Targeting

Modern states and militaries are totally reliant on corporate outsourcing (critical allies in this war).  As this relationship is currently configured, this dependency is a vast underbelly of risk.  Global guerrillas disrupt the psychology of the markets that make this outsourcing possible through leveraged attacks on corporate systempunkts.  Corporations are not obligated to deviate from the standards of corporate governance.  As a result, they will cut and run from a conflict when they find themselves isolated across the following psychological vectors (read Boyd for more):

• Moral.  A company is morally isolated when it cannot meet its obligations to its stakeholders.  These include profits to shareholders and safety/morale to employees.  Management teams that don't meet their obligations to these stakeholders are either summarily replaced or held legally/financially liable.
• Mental.  Uncertainty is Kryptonite to corporate decision making.  Too much uncertainty and corporate valuations fall.  If an operation introduces new uncertainties that taints daily decision making, it will likely terminate it.
• Physical.  In order to do business, corporations enmesh themselves in a deep web of connections.  If a corporation's activities put their relationships with suppliers, financiers, and partners at risk, they are obligated to cease them.

UPDATE: HALLIBURTON TARGETING

As nation-states continue their drive to become more efficient, they increasingly resort to private corporations to provide critical services. These services are core to the US reconstruction and security effort in Iraq. However, because these services are market-based, they offer global guerrillas substantial leverage for disruption (see Target: Halliburton for more). A proven methodology at work in Iraq and Saudi Arabia is to target employees of "Halliburton" companies providing this support. These attacks have drained both countries of needed expertise, radically increased costs (increased security, insurance, etc. have drained billions), driven away new investment (as well as market participants), and trashed operational tempo. The interesting aspect of this is how few real casualties are required to destabilize a market. The attached graph demonstrates the low level of fatalities that have been inflicted on "Halliburton" employees and how little real effort it takes global guerrillas to inflict damage through the use of these new tactics. In fact, the total number of fatalities has even declined over the last four months. The reasons for this include:

• A shift to hostage taking. The media attention gained through hostage dramas has made simple assaults less effective in comparison. Numerous corporate withdrawals in exchange for the release of employees held hostage have reinforced this.
  
• More and smarter security. Secure enclaves, guarded convoys, and more have reduced the number of fatalities. However, this has been done at huge expense to both efficiency and tempo. This has reduced the number of fatalities from private security companies (and reflects the bulk of the decline).
  
• Fewer targets. In general, Halliburton targeting has been a success. Many companies have withdrawn their employees from Iraq or ceased operations in the country. Reconstruction is proceeding at a snail's pace. The current rate of attacks can be seen as a maintenance effort to ensure the continuation of market destabilization.

$100 OIL?

Attacks against the Iraqi oil system continue to increase (see chart). As a result, oil production in Iraq is still well below pre-war levels and declining... (as is Iraq's electricity production). This pattern of activity is one demonstration of the shift from simple terrorism to global guerrilla strategies. The expertise gained here will likely be used to disrupt Saudi Arabian and Caspian sea production (the Saudi system offers substantial opportunity for cascades of failure). GGs are already flowing into Saudi Arabia from Sudan and Iraq. Additionally, they have begun aggressive operations again in Chechnya (near critical pipelines in Dagestan and Azerbaijan). Through these disruptions, global guerrillas will be able to gain pricing control over oil.

The impact of this disruption is likely to be severe given the window of vulnerability in the oil market due to insufficient production and high demand. In support of this, Adam Sieminski, Deutsche Bank's chief energy strategist, estimates that a major disruption of supplies would result in $80 oil. Two disruptions (a major attack on Iraqi and Saudi production), would result in $100 oil. This price, if extended for months, would result in a severe global recession.

While we can't predict a black swan event, we can anticipate events based on trends, capabilities, motivations, and unique periods of vulnerability.

A WINDOW OF VULNERABILITY

Today, the price of oil hit a record high of $43.05 a barrel (UPDATE). A combination of excessive demand, uncertainty, and a lack of spare producation capacity have combined to create this price. This situation, as it persists through this fall/winter, is a window of vulnerability that can be exploited by global guerrillas. A series of well orchestrated GG attacks on Saudi, Caspian, and Iraqi oil infrastructure (while these conditions persist) would drive the price over $100 and keep it there.

The economic effects of this exploitation would be decisive. A short term spike in oil prices (2-5 months that average over $75 a barrel) would plunge the world into recession, spike the US budget deficit, and put many nations in the developing world at the brink of state failure (a good outcome for GGs). The only real question is whether operational GGs have developed a strategic understanding of their current capacity to control global markets and national economies.

If they did, they would likely attack. The negative strategic repercussions for global guerrillas would be minimal. The short term nature of the spike would not necessarily benefit OPEC, since much of the benefit in improved prices would go to financial speculators (lost to the industry). Additionally, the volatile nature of the price increase wouldn't necessarily increase the level of investment in new production (particularly if prices were allowed to drop after this period of intense activity).