Thursday, 26 September 2013

How economic cooperation may bring more peace to Central Asia

China is quickly displacing both the US and Russia as the great power in Central Asia. Their strategic initiative for the region stems from a desire to develop an energy road that does not require getting its feet wet in the eastern Pacific. China wishes to restore the bounties of the energy-rich Silk Road as part of its “marching westward” policy.

Almaty, Kazakhstan
Given that China imports the majority of its energy, and with much of these deliveries relying on uninterrupted maritime routes, China has positioning itself expertly as a prime partner for the huge developing energy fields in Central Asia.

It seems every second month or so a new oil field or mine is opened in one of the “Stan” countries, to great fanfare and promised visits of heads-of-state with large check books. Chinese President Xi Jinping spent 10 days this month visiting those countries in a whirlwind tour of shaking hands and smiling faces.

More than most Asian heavyweights, the energy and resource-hungry China is very keen to grow its economic ties to the region. However, it won’t be an easy ride. Beijing is competing with Russia, Europe, and the United States for influence and access.

All these countries want a slice of what could boast the largest untapped store of rare earth minerals and hydrocarbons on the planet. From Moscow’s perspective, the geopolitics of Central Asia have changed remarkably over the past two decades.

For much of the last century, Russia was the go-to trade partner for states such as Tajikistan, Kazakhstan, Kyrgyzstan, Uzbekistan, Turkmenistan, and even troubled Afghanistan. But Russia has become a net energy exporter and doesn’t need as much energy piped from its Former Soviet Union as it once did. Those countries have also developed their democratic systems and are becoming increasingly independent of power patrons.

Once the Soviet Union collapsed in 1991, they all discovered much healthier options for trade with a rising China and an interested Europe. The opportunity was grabbed with both hands by Beijing. Today the oil and gas pipelines are heading east to China because Beijing has what the Stan countries need: somewhere to sell their abundant natural goods.

According to US Energy Information Agency estimates, Kazakhstan alone owns over 30 billion barrels of proven oil reserves and over 60 trillion cubic metres of natural gas. Most of the other Stan countries boast similar potential reserves.

It is possible growing competition could increase friction between China and Russia, but it will also offer more opportunities for diplomatic cooperation, decreased militancy, and lower the potential for interethnic conflict between the hundreds of people groups.

Depending on how events play out on the ground, Russia and China do not have to fall out diplomatically over changing political alignments in Central Asia. While Russia does not need the hydrocarbon energy for domestic consumption, this by no means implies Moscow is uninterested in retaining its ideological and cultural influence over the various governments.

Moscow still dreams of re-establishing dominance over the region as quickly as it can, a fact proven with the April 2010 Russian-backed coup in Kyrgyzstan. So China’s game for influence will be suspicious in Moscow.

Aside from the energy ambitions, Moscow and Beijing are acutely aware of the United States impending departure from Afghanistan in 2014. Without the military might of the US, there is dangerous potential for security lapses throughout Central Asia as Islamist groups return home from a decade of fighting. Already the honed skills and insidious political ideologies they bring with them are threatening the present status quo.

When the US removes the majority of combat troops from Afghanistan, Central Asia will be more or less off the radar for strategic planners in Washington. The residue US forces will not be adequate for sustained security in the region, and China would dearly like to avoid any spill-over of violence into its energy interests.

To cope with this China still defers to Russia for security issues in the region, especially for militant Islamists which Moscow has deep experience with. Nevertheless, Beijing needs to avoid the separatist Muslim Uighur population in western China taking advice from battle-hardened jihadists.

A decade ago the Chinese economy was weaker than the United Kingdom’s. Today it is feeling strong enough to stretch its foreign policy legs to test itself as a counterweight to the United States in the Pacific. This strategy seems to be working for Beijing in its east, but stretching legs in Central Asia will throw China up against Russia. And while cooperation is still the best move in the short term, Russia is a very different beast to America and may not bow so easily under pressure.

Ultimately, Beijing is noticing Russia can be challenged for control and influence over Former Soviet Union states. Despite the growing friendship between Russia and China in other areas, Beijing’s “marching westward” policy will frustrate Moscow no matter how close they pull together on other fronts. Both Asian landmass heavyweights will of course benefit from the disappearance of American influence and prestige in Central Asia.

Thankfully, if events play out as predicted, economic and diplomatic cooperation between Russia and China will probably bring more peace and prosperity to Central Asia. Trade has the tendency to do that.

Thursday, 19 September 2013

Indian government avoiding tough financial fixes as elections approach

Concerns are rising over India’s battered currency as it experiences a 20% loss in value this year. Other worrying reports suggest India could dip to only 5.3% GDP growth at the end of the financial year March 2014. Regrettably the many underlying structural weaknesses are unlikely to be fixed with tougher policies.

There are plans to set the economy on track, but there are legitimate concerns they will not be broad or robust enough to convince foreign observes to stay interested in the stumbling Indian financial system.

India’s labyrinthine regulations and stifling bureaucracies often frighten investors away, but rather than address these structural issues directly and avoid obstacles in the future, the government appears to be more concerned about the plight of the rupee and winning votes.

After emerging from a decade of healthy growth rates averaging 7.7%, 2013 will be the first year India may not hit an IMF target of 5.6%. Government economists blame unsustainable spending on fuel subsidies, poor infrastructure, and distressing fiscal and current account deficits for their currency woes. On top of this, Indians could be exacerbating the situation by moving to gold to hedge against a falling rupee.

The world’s second-largest country by population watched its currency slip to an all-time low of 68.85 against the US dollar at the end of August. The slide stems from India’s expensive and uncompetitive manufacturing sector which keeps export levels low and imports high, resulting in a current account deficit of 6.7% of GDP at the end of 2012.

A weaker currency should help India to boost exports, or at least it would in healthier economies. Unfortunately for New Delhi, major legislative and structural obstacles will stymie many benefits of a weaker rupee.

The new governor of the Reserve Bank of India Raghuram Rajan – who became the bank’s head September 4 - is determined to ensure any future actions by India’s central bank will be transparent and structured carefully to stabilise asset prices in financial markets.

In a recent move, the RBI sold US dollars from its reserves to oil importers to prevent further declines. The intervention balanced the rupee and probably held off a dangerous currency crisis but at the cost of dipping into India’s foreign exchange reserves.

Mr Rajan is showing good signs he can steer the Indian economy through these tough times, with India projected to end the fiscal year next March with 4.5 to 5% growth. Though it is something of a veneer, as the steps will be short-term fixes avoiding the structural weaknesses in the economy which are largely to blame for the present predicament.

The government’s foreign reserves are stronger today than in 1991; with about a seven month buffer for imports should the situation take a turn for the worse. If India can reach 5% growth this financial year, it might avoid a major crisis similar to the doldrums of 1991 where the rupee fell sharply and foreign exchange levels hovered near critical levels.

With general elections approaching in May 2014, India’s fiscal reality is worrying the government.
Investors have noticed the historical pattern during Indian elections of temporary rather than structural changes and few believe the government is willing to do what is necessary if it threatens precious votes. International investors need to know any changes made in the run up to the election will not disappear after it is over.

One of these changes will address India’s inefficient and corrupt food distribution system. The country has over 800 million rural and urban poor people and a US$22 billion expansion of the inefficient program should help feed hungry Indians at heavily subsidised prices.

India’s Food Security Bill has been on the conveyor belt since 2009 and should clean up some of the murky processes, but it is being criticised as a populist policy. Large-scale spending on food programs will certainly swing votes, but the government’s coffers will suffer and may possibly intensify the economic situation.

While the central bank is making strong announcements of rigidity in future reforms, the Indian government is unlikely to ease the rules on foreign direct investment in multi-brand retail for example. After all, a recent decision to relax those rules caused widespread protests around the country, despite their necessity.

If India can make its rigid labour laws more flexible and remove the onerous red tape it might encourage more foreign companies to invest and could bring the country’s manufacturing sector back into competitiveness.

The chances of India collapsing into a quagmire similar to the 1991 crisis remains low, especially while the country’s foreign debt levels are much lower than 20 years ago. But if New Delhi cannot implement the necessary raft of tough financial and legislative changes, the various economic troubles could fester for many more business cycles to come.

Wednesday, 18 September 2013

The partnership of the Bear and the Dragon

China and the United States have had a rocky road this year. Cyber tensions and territorial disputes have helped to cool the US “pivot” efforts in Asia. Relations between Russia and the US are equally stressed, described at the recent G-20 conference as the worst since the end of the Cold War.

But regular visits to Moscow by the Chinese President Xi Jinping and a new energy deal – which will potentially deliver 38 billion cubic metres of Russian natural gas directly to the thirsty Chinese industries – both herald smooth driving ahead for Russia and China as they draw each other into a closer embrace.

The warm relationship has been nurtured over this year. Mr Xi has taken three trips overseas since he took office in March. In two of those outings he made sure to visit Moscow where an enormous weapons procurement and a NZ$330 billion oil deal were organised. Russia now delivers more than 17% of its total energy exports to East Asia – up from a tiny 4% in 2005.

Russian President Vladimir Putin has called the relationship between the two Asian heavyweights as “the best in their history”. Their opinions are also synchronising on the world stage with the two countries agreeing on almost every foreign policy issue.

While the headlines focused on what the world’s most powerful leaders said about Syria, on the sidelines of last week’s G-20 conference, Russia and China were particularly busy discussing new energy deals.

Russian energy firms are looking to diversify their exports into East Asia due to the growing energy independence in their usual European markets. And China would rather have more options for importing natural gas than just those transported across the sea, especially as the Pacific becomes crowded with competing national interests. Ultimately, China may not be able to guarantee constant flows of its critical energy imports.

China presently uses more energy than any other country in the world. Their natural gas consumption has been steadily rising over the past decade, with Beijing estimating its economy will guzzle between 200 and 250 billion cubic metres per year by 2020. The stars are aligning in many ways because China is looking for more natural gas and Russia has vast stocks.

Alongside its gas deals with Russia, China wants to develop their domestic energy production quickly. Yet even with an announced NZ$16 billion investment plan for domestic energy exploration, China is unlikely to meet its energy production goals soon and will still need to rely on imports to make up the shortfall.

China’s thirst for energy is a unique opportunity for Russia. An opportunity made all the more smooth with their shared ideological history. With each step Russia takes away from the United States with clashing diplomatic spats, it moves closer to China which it sees as a trustworthy and important ally.

So while the Bank of America recently confirmed a US$1.5 billion exit from the China Construction Bank, and with Goldman Sachs making a similar move four months ago from the world’s most profitable bank - the Industrial and Commerce Bank of China - it’s no wonder Beijing and Moscow are walking increasingly in lock-step.

China doesn’t have to put all their eggs in the Russian basket, there are other energy options for in Central Asia. For instance, the Galkynysh natural gas field in Turkmenistan began construction in July and could boast between 13 trillion and 21 trillion cubic metres of natural gas reserves. Those pipelines would flow more naturally into China than almost anywhere else with Beijing promising more funding than the already delivered NZ$9 billion.

But there is political strategy in the close dance of the two massive economies on the Asian landmass.

Both countries are finding their geographic neighbourhoods increasingly crowded and neither have much affection for the American plan for the future. Economic ties, as implicit expressions of soft-power, can sometimes speak louder as geopolitical actions than their more visually impressive hard-power brethren.

Although Russia has not been exactly forthcoming in supporting China’s territorial claims in the South China Sea, Beijing has nevertheless thrown its support behind Russian positions regarding Syria.

And even though high-profile American banking investors may be getting the jitters in China – a flight of whom should sound alarm bells in Beijing and global investors alike - Russia is right now happy to put more effort into their neighbour.

Beijing’s reaction to Russian overtures this year show they plan to take the partnership with their northern neighbour as more of a friendship, with benefits. However, the relationship may have its limits as the economic connection is so far all that is on the cards.

Right now, the two nations have more to gain by working together than by ignoring the opportunities lying in front of them. After all, the path to reconciliation with the United States is a long one for Russia. Earning some cash from a still enormous Asian market is far simpler; it could even turn into a long term plan for Moscow.

Thursday, 12 September 2013

Japan's plan for controversial islands

As the world listens for signs about the next steps in Syria, new flare-ups in old flashpoints in the Eastern Pacific are still causing problems between two of the world’s largest economies. 

Japanese Chief Cabinet Secretary Yoshihide Suga publically announced on September 9 that Japan is seriously thinking about sending public officials to the disputed islands known as the Senkakus in Japan and the Diaoyu in China. The statement caught the attention of many observers, especially China.

Tokyo backtracked on the proposal by September 11, but the fact that the idea was even suggested shows just how much Japan is concerned about China’s intent and aggressive territorial claims in the region.

Although the island chain in question was returned to the Japanese government in 1972 by the United States, and Tokyo feels justified in protecting its interests, the Chinese will not appreciate the latest example of Japanese belligerent sovereignty.

From China’s point of view, the islands traditionally belonged to China and Japan has no right to claim ownership. The islands were only given to Japan because they were allied with the United States following World War II. At least this is the narrative in Beijing.

The islands have morphed into symbols of nationalism for both countries, with any violation by the other’s coast guard or military causing furore back home. China had hoped Japan’s nominal ownership of the island chain would not go beyond formal nationalisation and see construction of new buildings and official settlement of people.  

But with the latest announced and then quickly withdrawn proposal, those hopes seem vain.
From Tokyo’s security perspective, the broiling events further south in the South China Sea - where the Chinese coast guard have moved swiftly to dominate other disputed islands - is a situation Japan cannot afford to experience in their own backyard.

If Japan had decided to go ahead with the plan to station public officials on the island chain – and the plan is not entirely off the table – then it would be an important evolution in the dispute for two reasons.

First, it would show that Japan is tired of making room for Chinese encroachment on what Japan considers its sovereign territory. Control of the islands directly reflects back on Japan’s Prime Minister Shinzo Abe and his plans for the nation.

Second, the move would never be made unless Japan felt its own military could cope with the eventual Chinese reaction. Beijing would not sit idly by and let Japan consolidate its hold on such a geostrategic position in the extremely busy sea lanes out of the South China Sea.

The situation around the Senkaku/Diaoyu islands is different to the Spratly Islands or the Scarborough Shoal in the South China Sea, but only in the sense that the Chinese and Japanese navies are extraordinarily powerful neighbours, and highly militarised.  

Chinese UAV spotted near disputed islands - Japan MoD
China doesn’t yet consider the Philippines as a military threat, despite Manila’s close alliance with the United States, and it certainly is not worried about Vietnam. But the Japanese navy has leapt ahead in competency and capability over the past decade to be one of the strongest forces in the Pacific.

Chinese and Japanese ships are constantly steaming through the disputed island chain, trying to appear more powerful than the other and give their mutually exclusive claims to the windswept rocks greater legitimacy. And it’s not just ships manoeuvring through the islands. Following the rescinding of Japan’s proposal, a Chinese drone was spotted flying over the island chain.

The Japanese Air Self-Defence Force scrambled fighter jets to intercept the plane but the aircraft did not enter Japanese airspace, according to the Defence Ministry.

With all this movement the risk of patrol ships or aircraft colliding is increasing every month. Equally, the potential for miscalculation leading to clashes might send an otherwise easily managed situation spiralling out of control as a result of heightened tensions.

What is happening in East Asia is nationalistic belligerency at its most dangerous. The risk of clashes and collisions affect not just China and Japan, but most nations in the Asia Pacific region. Both Japan and China are entitled to stretch their military and political legs, but the question is: at what cost to international stability?

Wednesday, 11 September 2013

Fresh fighting in Philippines could undermine peace talks

About 300 Moro National Liberation Front (MNLF) fighters crept onto the beaches near Zamboanga City in the country’s Mindanao region September 9…Clashes between security forces and the fighters killed at least eight people and left 24 others wounded…20 hostages were also captured…The MNLF is an Islamic splinter group of the more well-known Moro Islamic Liberation Front (MILF) which is presently in negotiations with the Philippine government…The militants are taking advantage of a distraction in Manila as talks for peace continue with their parent group, the MILF…Prime Minister Benigno Aquino has proudly displayed the talks as evidence of his administration’s success at ending the insurgency which has lasted for decades…Now that a city of 800,000 people is essentially under siege, the government is feeling the pressure to end the flare-up quickly in case other groups decide to act in the vacuum…The MILF are the strongest of militant groups in Mindanao, but other factions are not ready to relinquish their weapons and are clearly willing to continue the conflict…US Special Operations advisers are assisting government troops to decisively end the situation soon.

Russia looks to repair Libyan relationship with new arms deal

Russia will provide Libya with arms, military hardware and training to strengthen its border security, Russian Foreign Minister Sergei Lavrov said September 10 after meeting with his Libyan counterpart, Mohamed Abdelaziz, Itar-Tass reported…Russia has sought to restore military cooperation with Libya’s new government, although the country is still mired in tribal feuds, crime and political instability…Libya turned to Russia for arms deals during the Gadhafi era, but since the dictator’s fall Moscow has been biding its time to re-engage the troubled country…Alongside the new arms deals, Russian state-owned energy company Gazprom Neft has secured its own deals to operate in Libya…Energy deals in Libya help to both secure alternative supplies for Moscow and dilute any similar deals Libya may have with France and Italy…While Russia will benefit from a closer interaction with Libya, the reality on the ground is fractious at best with many competing tribes and multiple weak centres of political gravity which do not overlap…Russia’s movement in Libya is a small part of a larger Russian spread of influence in North Africa and the Middle East attempting to compensate for an exhausted and distracted US and NATO.

The obstacles in removing Syria's chemical weapons

US Secretary of State John Kerry will meet with Russian Foreign Minister Sergei Lavrov in Geneva on September 12 to discuss the Syria crisis, an unnamed US official said September 10, AFP reported. The pair spoke over the phone earlier in the day about a Russian proposal to neutralise Syria's chemical weapons stock by putting it under international control.

Sorting out the rising fear of international military action in Syria has moved somewhat convincingly into the diplomatic realm. The Arab League supports Russia's initiative regarding Syria's chemical weapons but the U.N. Security Council has postponed its September 10 meeting on Syria at the request of Russia, which had called for the talks, unnamed council envoys said. No reason for the postponement was given.

Russia’s scheme takes the discussion from talking about an imminent military strike to a potential political backdoor. Both the US Senate and House are reportedly revising, but not abandoning, their plans for a military strike in Syria. US President Barack Obama’s threat to unilaterally attack targets in Syria appears to have had the desired effect of forcing Damascus and its allies in Iran and Russia to seek out a diplomatic resolution to the impasse.

Whether the offer from Russia is genuine, or meant to buy time, Syria’s chemical weapons problem is now effectively being dealt with politically, just as Moscow wished. However, the plan to destroy the weapons will not be a simple task.

The Assad regime has not exactly been transparent with its chemical weapons program in the past and is usually frustratingly tepid in dealing with weapons inspectors. Also, Syria is still officially a warzone with few safe passages available for removing the weapons from of the country and keeping them out of rebel hands.

So if the international community can’t get the weapons out of Syria, they will have to go in and get them. And without a cease-fire, the UN probably won’t risk their personnel moving between cities looking for chemicals if they can’t be protected. Just because both sides may wish for the chemical weapons’ destruction, the chances of miscalculation would still be high.

The inspectors will have no guarantee all the splintered rebel factions would agree to any cease-fire, especially considering the presence of al Qaeda-affiliated groups on the ground. After all, the inspectors who were in Damascus during the recent gas attacks were unable to drive to the scene due to sniper fire from rebel positions, for instance.

On top of this, even with all the intelligence assets focused on Syria, no one is 100 percent certain where all of Syria’s chemical weapons are located. Many will probably be underground now, as the regime has probably reacted to the threat of targeted US strikes, shifting them out of sight. They may even be spread across the country disguised as conventional weaponry. And there is a good chance they could be stored around civilian buildings to deter strikes.

Some reports suggest the constant taking and re-taking of arms depots in Syria could have muddled the stores of chemical weapons multiple times. Conventional and chemical artillery shells look strikingly similar and only purposefully-trained troops would be able to know the difference between them.

In the heat of battle, and with all the inherent confusion of supply lines, it is entirely possible the chemical weapons used in August were not authorised by either the regime high command or the dedicated chemical weapons corps. It is possible artillery groups who fired the shells may not have known they launched chemical weapons at all.

(This would at least explain the panicked calls between the Syrian high command and ground troops which was intercepted by US intelligence. And it would explain why high-explosive shells were reportedly seen landing alongside the gas.)

If these rumours are accurate, then perhaps the regime itself doesn’t even know where they all are. In this scenario, the UN teams will be chasing their tail.

But even before the plan reaches this point, the negotiations are going to take a long time. Putting the idea in front of the UN Security Council will be the first step, but agreeing to what it should say, in a form each veto-member can sign off, will make this an arduous task. Russia and China have already made it next to impossible for the Security Council to pass resolutions on Syria and will likely dilute the new deal as much as they can. There is little chance Moscow or Beijing will agree to the imposition of a cease-fire in any upcoming negotiations.

Any negotiations could last for years, with the exact amount of chemical weapons in Syria never fully being known. The United States is still trying to destroy their own stockpile of chemical weapons safely, and they have been at the task for decades. Even with the significant obstacles, it is important to keep the pressure of the Syrian regime no matter how watered down the results could be.

Russia proposes removal of Syrian chemical weapons, US weighs offer

US President Barack Obama will address the nation on chemical weapons in Syria the night of September 10. Obama has expressed scepticism regarding Russia's proposal that Syria hand over its chemical weapons to international control, but he said that he and his team would study the scheme.

"President Obama will take a hard look at it. But it has to be swift, it has to be real, it has to be verifiable. It cannot be a delaying tactic," US Secretary of State John Kerry said in testimony to the House Armed Services Committee on Tuesday. While Mr Kerry said the United States would consider a serious suggestion, the official made clear he did not consider the Russian statement Monday to be one. 

Syrian Foreign Minister Walid al-Moallem said September 10 that his government had agreed to the Russian proposal to place its chemical weapons under international control for subsequent destruction and thereby “derail US aggression”. Russian Foreign Minister Sergei Lavrov said Moscow and Damascus were preparing a plan of action and would then finalize the plan with U.N. Secretary General Ban Ki Moon and the Organization for the Prohibition of Chemical Weapons.

After more than two weeks of terse words between the United States and Russia, it was the carrot offered by Moscow and the stick wielded by Washington which ultimately made the breakthrough with the new offer. While the plan to destroy Syria’s chemical weapons stockpile safely is not set in concrete, the proposal has the potential to bring all parties to the negotiation table to find an answer.

It does look like Mr Obama bluffed the Syrians out of their chemical weapons. Ideally, if the proposal is genuine, then the Washington should grab it with both hands. Because no matter how hard Mr Obama tries to keep the momentum for war moving at home, he has been unable to swing the American people in support of the policy.

The purpose of Mr Obama’s military threat was to force something out of Syria, although it was never clear exactly what would happen. A few days ago critics of the administration called his strategy “naive”, but if his method removes the possibility of the Syrian regime using chemical weapons and avoids Western-led bloodshed, then it will have worked. But the situation could very well have turned out much worse, and still might.

When the US declared very publicly that any Syrian use of chemical weapons was crossing a “red line”, Washington backed itself into a corner. Yet as the Pentagon moved military assets into the Mediterranean and pounded the war drums it wasn’t just the Syrians who watched beads of sweat form on the upper slopes of their foreheads. Russia has talked more about Syria to the world’s media in the past few weeks than at almost any time during the two-year conflict. Clearly the US threat of military strikes, and their unforeseen consequences, was the boost Moscow needed to get overtly involved in the conflict to protect its few immediate interests and extend its influence in the Middle East.  

As soon as the Russians think Mr Obama can’t attack - whether via a hostile US Congress or overwhelming popular discontent - then the plan is likely to disappear. And there is no discussion at the moment about a cease-fire.

It is far from certain that a permanent cease-fire is even desired. In the murky ethics of foreign policy, there is always a mix of the realistic and the humanitarian. Neither ideal overwhelms the other. So it is with Syria that the ideal situation is continued bloodshed. So long as no side wins, the situation can be handled. Iran, Saudi Arabia, Russia, and the United States all bizarrely agree on this point.

If the Syrian regime succeeds in crushing the rebels, then by extension Iran and Russia consolidate their control over a geopolitically significant swathe of the Middle East. The US can’t allow that, and neither can the Saudis. Yet if the rebels are victorious then the various Sunni Islamic forces - including elements of al Qaeda - will hold a very strategic piece of land from where they can base their dreams of creating a Caliphate in the Muslim world. Iran, Russia, and the US must not allow this.

Unfortunately, the longer the fighting stagnates with no end in sight, the better it is for international security. As ironic as that seems.

Bear in mind that, on the Syrian side, the regime has manipulated past peace deals. Right now, the proposal pulls the United States off the red button and gives Syrian President Bashar al Assad time to regroup and prepare for more conventional ways to kill rebel forces. But if the negotiations start, Mr al Assad can delay and obfuscate as much as he wants, so long as his regime appears to be participating. They will get expert consultation from a very experienced Iranian diplomatic corps which are very adept at dragging negotiations out for years while showing little advancement.

So as the drums for war might fade, the situation on the ground in Syria will remain largely unaltered. Any agreement to remove the regime’s weapons is not going to include demands for a cease-fire or push for reconciliation between the various belligerents. Mr al Assad will have used chemical weapons with virtual immunity – at least in the sense of no punitive military response – and is left in a position where he is more or less free to act in whichever way he pleases.

Mr al Assad ultimately comes out looking stronger by defying the US and receiving only words in response, not missiles.

With the inclusion of Hezbollah and Iranian Revolutionary Guards fighting in Syria this summer, the regime has made significant gains against the rebels. A major downside with a US designation of a red line around chemical weapons is that now Washington can’t act to end the conflict if the regime continues to use conventional weapons alone. The fighting in Syria will get worse as the regime cracks down on rebel forces.

As if to confirm this, Syrian government planes bombed the rebel suburbs of Damascus on September 10 for the first time in three weeks, Reuters reported. The heaviest fighting was in Barzeh, where jets staged three air raids while tanks shelled the area. Opposition activists said the offensive shows that Mr al Assad no longer fears a strike by the United States.

Ultimately, if the Russian proposal goes ahead, the Western world will be spared another quagmire the Middle East. The true winners are not really the US or Europe in all this, instead it is Syria, Iran, and especially Russia. Moscow has shown the Arab world that it is back in the game for influence and very much ready to partner with pariah regimes with which the US finds it difficult to cope. Egypt in particular will be looking at these events closely.

But when all this is calculated, bluffing is not a good habit in parents or diplomats and one must use it sparingly. Reward and punishment are not symmetric. If the proposal goes ahead, the US will of course need to be careful how it treads in the future.

Tuesday, 10 September 2013

In Egypt, bombing signals emergence of competent new militant group

An Islamist militant group based in the Sinai Peninsula, Ansar Beit al-Maqdis, claimed responsibility in an online statement for the September 5 assassination attempt targeting Egyptian Interior Minister Mohammed Ibrahim, AFP reported...The group apologised for not killing Ibrahim and vowed another attack targeting him and army chief Gen. Abdel Fattah al-Sisi...The minister was not near his home at the time, three security sources said...The Egyptian Muslim Brotherhood in an official statement condemned the attempt on Egyptian Interior Minister Mohammed Ibrahim's life...The Brotherhood emphasized it was engaged in a peaceful struggle and called the incident a criminal act...The attack targeted the motorcade of Mr Ibrahim shortly after he left his home, but was not large enough to penetrate the vehicle...Early reports explain the device was attached to a standing motorcycle on the street, instead of being thrown, and contained perhaps several kilograms of high explosives...Mr Ibrahim is a very hard target with a dedicated security detail and by almost successfully killing him the attack suggests the Islamist group is highly experienced in good surveillance tradecraft, at least enough to find the correct attack site...Creating a viable explosive device is not easy and the group will learn from their mistakes for the vowed follow-on attacks...If police forces cannot catch the group soon, then Egyptian security service will need to prepare for more attacks on their officials.

Russia suggests transfer of Syrian chemical weapons to international community

UN Secretary-General Ban Ki Moon said September. 9 he welcomed a Russian proposal for the Syrian regime to transfer its chemical weapons to the international community for destruction, AFP reported...Ban said he may urge the Security Council to demand that the weapons be transferred immediately to secure zones inside Syria...However, Ban warned that Syria must accept the proposal...British Prime Minister David Cameron also supported the idea...Russian President Vladimir Putin continues to say he will support the Syrian regime...Mr Putin has consistently been sceptical of US and Western claims of the Syrian regime’s outright responsible for the recent chemical weapons attacks, and has pushed for a political solution to the conflict...The Russian position is backed up by a German intelligence report pointing out that the chemical weapons may have been used without Mr al Assad’s permission...US National Security Advisor Susan Rice is also supporting a political transition as “the only sustainable way to end the suffering”...Russia would gain more by keeping the al Assad regime intact as an example of its seemingly unconditional cooperation with pariah governments, especially to the eyes of Egypt’s controversial military government which right now could be looking for an alternative power alignment away from a cooling US.

Clashes in Central African Republic threaten French security interests

At least 55 people died in the Central African Republic September 7-8 in battles between gunmen loyal to former President Francois Bozize and the ex-rebels who removed him from power, according to the government and a regional peacekeeper, Reuters reported September 9...The fighting occurred near Bossangoa, the former president's home region, and area about 300 kilometres north of the capital Bangui...Increasing clashes between loyalists and rebels are forcing France to consider bolstering its peacekeeping troops in the CAR, centred around the Bangui M’Poko International Airport...Presently, there are too few troops to supply adequate protection of other strategic points in Bangui should a speedy evacuation of French and Western nationals become necessary...The government of current President Michel Djotodia is attempting to maintain control of the nation’s capital as loyalists and other factions vie for influence, and responsibility for stability ultimately lies with Mr Djotodia...While the violence has so far been between rebel groups, French and African Union peacekeepers could be targeted in the future if they are viewed as part of the problem, rather than as part of the solution.

Japan will close all nuclear plants for tests

Japan will shut down its last two functioning nuclear reactors by September 15, Sky news reported September 2...The two reactors were restarted in July 2012 after passing safety tests, but a new set of guidelines require the reactors to be re-tested which could last up to six months, according to Kansai Electric...10 other reactors are already moving through the new testing process...The two reactors will remain closed for at least the remainder of 2013, leaving Japan without any atomically-generated energy for the first time since May 2012...Coupled with the ongoing cleanup and containment at the Fukushima Dai-ichi plant, the loss of all functioning nuclear energy for a minimum of six months will test Japanese Prime Minister Shinzo Abe’s plans for economic stimulation...Japan will now have to rely on expensive thermal and hydrocarbon energy generation and can expect electricity rate hikes.

Sunday, 8 September 2013

In Australia, voters suggest temporary swing to the right

Australia's Liberal-National party coalition, led by Tony Abbott, won around 54 percent of the vote in parliamentary elections on September 7, election officials said...The coalition is projected to win at least 77 seats in Australia's 150-seat parliament, mostly at the expense of the Labor Party, which has ruled for more than six years…Final results in the Senate could take more than a week to determine…Despite Mr Abbott’s extreme contrarian views on global warming and ending carbon and mining taxes, these issues took second place to the Australian voter’s desire for better economic conditions…Internecine squabbles and a series of scandals significantly undermined once-strong support for the Labor Party…Because of this, the coalition victory was likely more about voters strategically acting against the Labor party, than it was about voting for Mr Abbott’s conservative policies…If Mr Abbott can deliver on his promises of economic austerity and seriously cut government jobs, he could boost the Australian economy and increase his chances of re-election…Without these successes Mr Abbott will have a tough time broadening his popular appeal and parrying the expected opposition attacks from the left once they regroup.

EU lays blame for chemical weapons attack with al Assad regime

The 28 EU member states agree that the available intelligence appears to show strong evidence that the Syrian government perpetrated the August 21 chemical attack that killed more than a thousand people, EU Foreign Policy Chief Catherine Ashton said September 7 at a meeting of EU foreign ministers in Vilnius, Lithuania, Reuters reported…Europe has been unable to agree on a response to the Syrian regime’s recent alleged chemical weapons usage…Political designs and the economic crisis in Europe are making it difficult for EU members to get involved in military activities abroad…Even with an apparent consensus it remains uncertain whether the EU will become involved in Syria…On the sidelines at the current G-20 meeting, and in their own countries, some EU officials have expressed they will not simply ignore Mr al Assad’s use of chemical weapons, indicating that some sort of military action is still possible...Agreeing that the Syrian regime committed the attacks sets some of the necessary groundwork for a potential NATO military strike. 

Thursday, 5 September 2013

Sudan reopens pipeline as agreements reached with South

Sudan will continue to allow South Sudan to export oil through its northern pipelines and Port Sudan, Sudanese President Omar al Bashir said September 3, Reuters reported...South Sudanese oil production has only recently come back online as a result of security and oil agreements between Juba and Khartoum in September and March of 2012...The two Sudans remain at odds following ongoing rebel violence and internal pressures on the regime in Khartoum...Both governments are sponsoring different rebel groups, and even mediation from the African Union is failing to bridge the mistrust between the two nations...However, bringing the pipelines back online reflects the deep connection between the two nations...Land-locked South Sudan controls the majority of the hydrocarbons, while Sudan controls the piping to the Red Sea...Stopping the pipeline severely impacts both countries...Each government will try to leverage the best deal from this relationship, but ultimately cooperation is necessary because oil is the base of both economies.

Russian military moves in reaction to threatened Syrian strikes

The Russian missile cruiser Moskva, flagship of Russia’s Black Sea fleet, is en route to the eastern Mediterranean to take over the navy's operations in the region, a Russian military source said September 4, Reuters reported, citing Interfax...The cruiser is expected to join other Russian ships in roughly 10 days, the source said... The survival or removal of Syrian President Bashar al Assad is not going be the catalyst for a Russia/US clash, but the presence of US and Russian warships in the same region raises the risk of miscalculation and accidents...Russia’s plan has been to use its ties with Syria to prevent the West from becoming engaged with the rest of the world, especially in Former Soviet Union states...An attack on Syria, even a limited strike, would be interpreted by Moscow as a direct challenge...Russia may need to find some way of re-establishing credibility, risking escalation in diplomacy or even physical responses...The prospect of bogging down the US in a fresh Arab conflict would be in Russia’s interest, giving it more time to manoeuvre in its former satellite states...But Russia is unlikely to use its military assets to interdict a Western strike...Syria is ultimately a bargaining chip for Moscow and does not represent Russia’s primary interests.

China looks to leverage warming Arctic transit routes

Setting aside the vigorous debate on climate change for a moment, the Arctic is flicking onto Pacific radars for some very good reasons. Shipping routes are opening up and energy fields are being exposed, both of which is grabbing China’s attention.

Arctic temperatures have risen 7.2 degrees Fahrenheit or 0.13 degrees Celsius over the past half-century. As a result, ice coverage has fallen 53% over summers to 1,384,000 square kilometres today, down from a high of 2,896,800 square kilometres in 1979 according to the US National Snow and Ice Data Centre.

Some analysts suggest there may not be any ice at all during summer sometime within the next 20 years. This sort of news would worry polar bears - if they could read - but it is making shipping companies smile from ear to ear. For centuries, explorers have tried and failed to find a route across the Arctic and easily connect Asia to Europe, but thick ice has always blocked their path.

For various reasons, ice is melting at faster rates opening up new highways for international shipping. The Northeast Passage, for instance, is administered by Russia and spreads 15,000 kilometres from the Bering Strait to the Barents Sea. Moscow issued 482 permits this summer to travel the cold waters, a marked increase from 46 permits in 2012 and a measly four in 2011. Russian officials are planning for an even greater increase in permits in the coming years if temperatures continue to rise.

Moving through the passage is about 20% quicker than steaming through the Suez Canal and Mediterranean Sea. In total, the distance slices 4,400 kilometres off an Asian trip to Europe and cuts back the total days at sea from 48 days to 35 days.

Shipping goods from Asia to Europe account for about 34% of total global cargo per year. The shipping industry expects about 15 million tons of cargo to travel via the Passage by 2021. Geopolitically, with the continued instability in the Middle East and recent militant attacks along the Suez Canal, the Northeast Passage is a welcome alternative for a few months of the year.

Already a Chinese cargo ship is making history by moving goods en route to Rotterdam travelling through the Northeast Passage from the warm water port of Dalian. The Chinese cargo ship Yong Sheng is expected to dock in the Dutch port by September 11.

For China, access to the Arctic is important for many reasons. China gained observer status as part of the Arctic Council in May, which is a group attempting to become the international decision making body for Arctic affairs.

For Beijing’s long term plans, moving goods quicker to Europe through the “golden gateway” will be crucial. Access to the Northeast Passage should reduce China’s dependence on other shipping bottlenecks in the Strait of Malacca, Suez Canal, and Panama Canal. For the time being, ships with ice-breaking capabilities will still be needed until the ice recedes further, but China is at least in at the ground floor.

Aside from the transit routes, China is just one of many countries chasing access to largest fields of untapped hydrocarbons in the world. Approximately 13% of the world’s undiscovered oil, or 90 billion barrels, and 22% of undiscovered natural gas reserves, 509 trillion cubic metres, are located in the Arctic. All of it is at least technically recoverable, so long as the ice stays back.

China would dearly love to work on recovering the energy reserves, but does not have direct access to the region. To compensate, Beijing is developing diplomatic ties with adjacent Arctic countries.

Estimates vary, but it would seem unreasonable to expect a completely ice-free route to the Arctic for perhaps another decade or two – at least one remaining open for half the year. The new route depends on the ongoing global warming trend, but such phenomena do not move quickly. Until the route is stable, insurance rates will be high and probably outweigh any savings the shipping companies will gain by shortening the delivery times.

However, the benefits of both establishing a political presence and voice in the Arctic, as well as gaining valuable experience with polar shipping are sure to incentivise Beijing’s drive to extend its influence in the far north.

Wednesday, 4 September 2013

US seeks legal justification for Syrian airstrikes

US President Barack Obama, speaking to congressional leaders September 2, said that Syrian President Bashar al Assad must be held accountable for the use of chemical weapons…Mr Obama said he believed he will win votes in both the House of Representatives and the Senate to authorise military action…Mr Obama said an operation in Syria would be "limited" and "proportional," saying, "It does not involve boots on the ground. This is not Iraq and this is not Afghanistan."Voices from both domestic US and international continue to offer radically different views regarding punitive strikes on the Syrian regime…Washington is trying to sustain slowing momentum for a military strike against Syria by leaking intelligence estimates and softening expectations for the UN investigative report…The US President did not need to seek a congressional vote for military action, but it will lend legal justification to any executive decision…Mr Obama’s relationship with Congress is not cordial so full cooperation between the two power centres is unlikely…Polls meanwhile suggest fewer than 19 percent of Americans want action against Syria, supporting Congress’s hesitations and undermining Mr Obama’s thrust…Already considered a weak president on foreign policy, Mr Obama has perhaps another week to collect support for military action…It remains unclear whether the US has sufficiently prepared for the political consequences of any military intervention.

Growing violence in Iraq unlikley to break political stability

Khalid Mohammed, AP
Fourteen car bombs exploded in different neighbourhoods in Baghdad on September 3, Al Sumaria reported, citing a source in the Iraqi police…More than 60 deaths and injuries have been reported…Explosions occurred in the Amil, Talibiya, Al-Amel, Ielam, Maamel, Sedea, Karrada, Sadr City, Zaafraniya, Baghdad Jadeeda, Shurta Rabea and Shurta Khamesa areas of Baghdad…Many of the neighbourhoods are Shiite-dominated areas…While the disruptive attacks in Iraq have intensified, the capabilities of the bombers have not evolved appreciably…Weaker vehicle bombs and relatively low casualties indicate a limited focus on soft targets…Also notable is that target choices are not economically critical for Iraq, nor are the militants striking government installations…The wave of attacks is painful for Iraqis, but do not threaten to upset the balance of power…Militants have been unable yet to entice local populations to their cause or turn the three main ethnic power groups against each other…Political cooperation between Kurds, Shiites, and Sunnis will likely continue amidst the bloodshed and Iraqis appear to be able to absorb the present spike in violence.

Armenia unexpectedly moves to join Russia's Customs Union

Armenian President Serzh Sarksian and
Russian President Vladimir Putin - ArmeniaNow
Armenia has decided to join the Russian-led Customs Union, Armenian President Serzh Sarkisian announced September 3, Radio Free Europe/Radio Liberty reported…During talks with Russian President Vladimir Putin, Sarkisian said Armenia is also prepared to take part in the formation of a Eurasian economic union… While surprising for many, an agreement to join the Customs Union is simply making official the reality of a very close economic relationship…Joining the Union was not necessarily a highly desired move for Armenian President Serzh Sarkisian, but Armenia is a loyal Russian partner…Yerevan had been looking beyond Russia for economic alliances but apparently also wishes to remain inside Moscow’s orbit…The small Caucasus country would prefer not to be entirely dependent on Russia economically but their geography makes this difficult…Armenia has little viable alternative choices in the region, especially since its borders with Azerbaijan and Turkey remain closed over territory disputes.

Egyptian military clamps down on Sinai unrest

Eight people were killed and 15 injured September 3 in north Sinai when four Egyptian Apache helicopters fired missiles at purported arms depots in al-Thoma, al-Mahdeya and al-Moqataa, Al-Ahram reported, citing MENA...Reports on September 1 also suggest the Egyptian police averted an attack on a ship headed for the Suez Canal...While the ship escaped undamaged, explosions were heard in the area...Perhaps connected, a top militant leader was arrested in Sinai August 31...Following Egypt’s latest political violence, unrest in the Sinai Peninsula has increased with militants demonstrating the know-how and intent to strike at government targets...Attacks are fairly common in the Sinai where large deserts make effective security difficult to maintain...The violent trend is likely to continue as radical Islamists who once supported the Islamist government in Cairo turn to militancy to express their outrage at the ouster of the Egyptian Prime Minister...At the present moment, similar militancy in mainland Egypt has not yet reached the point to seriously threaten the military regime...In response the Egyptian military are attempting to degrade the capabilities of Sinai militants to pre-empt the spread of militancy into mainland Egypt, an effort made simpler with the current state of emergency...Shipping through the Suez Canal must prepare for further attacks.

ASEAN economic condition still highly enviable despite looming changes

Considering the size of the neighbouring giant economies in China and India, the Association of Southeast Asian Nations (ASEAN) is sometimes shadowed. But member countries have demonstrated impressive integration and are well on a path to becoming a serious powerhouse. By investing in each other’s economies they have maintained an enviable position in the face of the global financial crisis.

If they were taken as a single nation, the group would be the eighth largest country in the world, with a combined total of 600 million people milling around in the 10 existing member countries and boasting a seriously large US$2.5 trillion GDP. Their markets could offer an attractive alternative to those of China and India, especially as China begins to succumb to natural market cycles.

The member countries plan to have all their free trade agreements with China, Japan, South Korea, India, Australia, and New Zealand completed by the end of this year, on the way to forming the much more robust ASEAN Economic Community in 2015. However, because they have largely relied on excessive liquidity and exports to maintain their economies, a looming correction cycle could jeopardise their long term growth plans.

The problem is that over a long horizon, the economic tea-leaves for Southeast Asia are a mixed bag. On one hand the nations have mostly sound economic principles and robust political stability. While the rest of the world struggles with the aftershocks of financial crisis, the various members have pulled together to strengthen their commitment to cooperation and preservation of what they see as a useful economic tool for greater wealth.

They also appear to recognise the limits to cooperation. Given how many headaches the European Union is suffering presently, it is encouraging that few ASEAN elites in power talk about creating a glorious currency union. Public-sector budget deficits do go some way in offsetting the strong corporate sector savings. Malaysia and Thailand have budget deficits of about 4%, while Indonesia and the Philippines hover around 2% of GDP. And public debt-to-GDP ratios are not excessive.

On the other hand, the historic reliance on a precarious export-driven model for growth is producing worrying obstacles for the member states they would rather avoid. So long as foreign demand whips up repeating orders for cheap goods, Southeast Asia theoretically won’t feel the fiscal pinch. But apprehension is particularly widespread within regional ASEAN governments as reduced global liquidity and dropping consumer demand in China remind members of the ghosts of the 1997 Asian crisis.

The problems arise when, despite most ASEAN country’s efforts to reduce their dependence on trade by adopting a flexible currency exchange regime, their growth relies on a continued status quo in trade. Their standard of living presumes the booming growth in China will not tick around on the inexorable cycle towards a contracting bust any time soon.

Some analysts predict any slowdown in China will only marginally affect the economies in Southeast Asia, but the reality suggests the success of both China and ASEAN depends on at least their present market relationships remaining steady and unflustered.

Over the last decade, China was a destination close by to which the emerging economies of Vietnam, Malaysia, Thailand, and the Philippines could ship their cheap goods. The deep Chinese market appetite, seemingly insatiable, consumed everything it could purchase while the peripheral Asian export-driven economies obliged, maintaining a stable flow of commodities and raw materials into the Chinese growth machine.

Today, the ASEAN business model is largely superior in comparison to China and India, each of which depend far more on debt, with both experiencing much longer working capital cycles. Many companies in the association are able to self-finance much of their capital expenditure, leaving them less vulnerable to fluctuations in interest rates. The return on equity ranges from 10% in Malaysia, 11% in the Philippines, to 14% among the largest regional population of Indonesia.

As surely as night follows day, a natural economic correction in China is preparing to steady the booming cycle of their phenomenal period of growth. So as the Chinese machine eases back, the ASEAN countries may have a tough time finding alternative export markets.

It is true that consumption growth in Thailand consistently outmatches other non-ASEAN countries, such as South Korea and Taiwan, but supplying domestic demand is unlikely to assuage the expected gradual downward slide in export orders from China in the coming years. One such case is Indonesia’s account deficit which reversed since late 2011 as commodity prices fell and external demand withered for coal, palm oil, and copper – demand for which used to come from China in much greater numbers.

It is unclear what will happen if the global economy continues to recover, but any greater reduction in global liquidity could precipitate structural changes in Southeast Asian economies. Should the global economy contract again, it would add more pressure to the already tight domestic consumer markets in Southeast Asia.

Ultimately, ASEAN corporate sectors are in extremely good financial health, in stark contrast to the excess indebtedness of other Asian and global economies. However, sliding currencies and capital outflows are the result of a skewed dependency on trade in some countries. While some corrections have been made, many Southeast Asian nations still expect higher growth and higher global liquidities to maintain investment flows, neither of which can be assumed in the rapidly evolving financial environment.