Friday, August 29, 2014

Improved Cooperation Amongst the Blue Nile States and Its Impact on East African Development

From August 25th to 26th representatives from Egypt, The Republic of the Sudan, and Ethiopia met in Khartoum to discuss the development of Grand Ethiopian Renaissance Dam (GERD) and its potential impact on the flow of the Blue Nile. The meeting concluded with the announcement of an agreement to convene a team of experts to assess the dam’s impact and report its findings within six months. Thus far this summit has proven to be the most productive of recent meetings between these countries. Though Egypt has concerns about the dam’s construction (namely that the flow of the Nile will be reduced while the GERD's reservoir fills) it would appear that Cairo is resigned to the dam’s construction and is attempting to ensure that Egyptian concerns are taken into account in the management of the project. This cooperation could prove to be a positive step in the economic development of East Africa.

Prior to the Arab Spring Egypt's claim that it has a legal right to the majority of Nile’s water meant that the cooperation that we have seen in these meetings would have been unthinkable. Agreements reached in 1929 and 1959 between Egypt and the United Kingdom (representing their then East African Colonies) awarded the vast majority of the waters of the Nile to Egypt with a smaller portion reserved for Sudan. Ethiopia was not a party to the treaties despite the fact that the majority of the waters of the Nile originate in that country. Suffice it to say neither Ethiopia nor the other co-riparian countries willingly consented to these agreements but until recently there has been little that they could do about this arrangement as Egypt, though a poor country itself, was still much more powerful militarily and economically than its neighbors. The fact that many of these countries faced their own internal problems did not help the situation.

The internal instability that the Arab Spring has wrought in Egypt has weakened Cairo’s ability to bully its neighbors. One of the reasons that the military let then president Mohamed Morsi sack Field Marshal Tantawi in August of 2012 might have been the need to demonstrate to Egypt’s neighbors that their was a strong leader in Cairo. The idea may well have been that Tantawi's dismissal would send a message to parties, such as co-riparian countries that wanted more water, that Egypt could still protect its interests. Clearly, this tactic has not worked. Cairo now finds itself in a position where starting a conflict to prevent the development of GERD is too costly. Egypt appears to have accepted this reality and is now positioning itself so that Cairo can ensure that Egyptian interests are protected. On the surface statements such as “Egypt was never, and will never be against the development (of co-riparian countries)”...“as long as they are aiming to achieve mutual development,” (as well as) “the integrated management of water resources” might appear as rhetoric, however, the geopolitical realities of the region gives us reason to take such statements at face value.

The reality is that East African countries such as Ethiopia, Kenya, and Tanzania are developing quickly. We are seeing improvements in infrastructure that provide access to Central African minerals, the development of the region’s manufacturing capabilities, and significant investments in port facilities. These developments combined with a geographic location that allows for easy trade with East Asia, South Asia, and Europe bodes well for the region, however, regular access to electricity is key to ensuring this development. The GERD could help meet these energy needs. Hydrological cooperation in the region could help maximize water resources, improve food security, and ensure a more reliable energy supply while reducing the political risk that a conflict (be it formal e.g. military or informal e.g. chronic acts of sabotage) would inflict. Cooperation would allow the countries of East and Northeastern Africa to focus on putting their resources to productive purposes rather than trying to undermine one another. If the team of experts is able to do their job properly within the six month time frame we will know by the Spring of 2015 whether or not such cooperation is possible and what policies will need to be enacted to promote it as well as a having a better understanding of any potential agreement's impact on the economic development of East Africa.

Friday, August 15, 2014

Some Geopolitical Constraints That Marina Silva Would Face if She Ran in and Won Brazil's October Election

Wednesday’s plane crash that resulted in the death of Brazilian Presidential Candidate Eduardo Campos is a tragedy. Though Campos had been third in the polls there was some indication that his position was improving and even if he lost it was very likely that he would have ultimately become one of the more significant Brazilian politicians. As things stand now there is a great deal of speculation as to how his death will affect the race but the reality is that no one really knows. What we can do is develop scenarios that serve as models to help us predict what could come in a world that can change quickly. One possible scenario would be that Campos’s running mate Marina Silva will run. Though it would currently appear that Dilma Rousseff is favored to win reelection it does not hurt to question some of the challenges that Silva would face if she ran in and won October’s elections especially as she is viewed in some quarters as being unpredictable and some argue that the policies of a President Silva would be anti-business and negatively impact the economic development of the country. These concerns are not unjustified. That said, if she were to win the election it does not change the fact that she would be governing Brazil which is a landmass that has some developmental challenges that relate directly to geography.

The reality is that the richest counties in the world do not just have a surplus of natural resources and arable land which provide the wealth to develop substantial human capital and infrastructure. The richest countries also have favorable geography. By this I mean most of these states have well developed maritime and riverian port systems, are situated at latitudes that affords them enough of a growing season to feed their population, and have the bulk of their territory in temperate, relatively flat lands (1).  Brazil does fairly well with the first two conditions but relatively poorly with the third.

It is usually more expensive to build and maintain infrastructure in the tropics. It is not a surprise that Northern Brazil has historically been the poorest part of the country as the cost of building the requisite infrastructure to promote economic development has caused that region to lag behind the more prosperous south. A wealth gap has resulted in northerners moving to seek opportunity in the south while a lack of facilities have caused many of these migrants to settle in favelas where they do not always find the opportunity that they sought. This has served as a cause of social unrest in the past. Developing the Northern states of Brazil (which is where Silva and the recently deceased Campos hail from) and the infrastructure of the country in general is a strategic imperative for Brasilia. In recent years we have seen significant investment in improving southern port facilities in Vitória and Santos while in April northern port complexes in Miritituba and Barcarena were opened. The latter will reduce traffic in southern ports and will benefit from the expansion of the Panama Canal and the eventual construction of the Nicaragua Canal. Developments such as these have environmental consequences which Silva opposes but, if managed properly, they could provide economic opportunities that could help poorer communities some of whom would be part of her constituency. Silva has been in politics too long to be ignorant of this reality and naïve enough about its implications.

The reality is that winning October’s Presidential Election will only give the victor the powers of the head of state of the Federative Republic of Brazil it will not give them the ability to overcome the geographic challenges which the country faces. The difference between the candidates will be how they respond to these obstacles given the political, social and economic constraints that they face. If Marina Silva were to run and was elected she would not be able to rule by decree. It is not unreasonable to think that if elected Silva would pursue more environmentally friendly policies than her opponents would and that she might not be as business friendly. That said, it also must be noted that as a democratically elected leader she would have to take into account the aspirations of the Brazilian population as whole if she wishes to stay in power and not see some of her potential accomplishments undone in the event that she was not reelected.

As things stand now economic development usually results in a degree of environmental degradation. This reality is something that Silva has raised concerns about. Would President Silva have luxury to be as vocal about such issues as she has been in the past? After all, it is a lot easier to be an opposition candidate than a head of state. There are countless examples of politicians who behaved very differently than people expected when they assumed office. Certainly, former Brazilian President Lula is such an example. As things stand now it is too early to know if Silva will run in let alone win October’s election. That said, if she were to win it needs to be understood that she would face the same geographic and economic constraints that her opponents would face as well as a variety of other limitations that political and social realities would impose upon her. This reality would influence how she responds. After all, there is often a huge difference between doing what you want to do and doing what you actually can do. Reconciling her environmental concerns, the economic challenges that Brazil’s geography imposes that can only be ameliorated with some environmental cost, and the aspiration of the Brazilian population for a higher standard of living which could result from such developments would be a major challenge for Silva. It is likely, that if elected, she would have to make compromises. What these compromises would be remains to be seen.

1.  There are some exceptions here. For example, Singapore does not meet these requirements. However the state’s relatively small population, location near one of the most important shipping lanes in the world, and the fact that the city-state is small and thus requires less infrastructure than larger states makes it a unique case.

Friday, August 1, 2014

Will the BRICS Development Bank Turn the Renminbi into a Reserve Currency?

On July 15th plans for a BRICS Development Bank were announced at the BRICS Summit in Fortaleza Brazil. It is likely that this bank could serve as a mechanism for China to transform the renminbi into a reserve currency while delaying the liberalization of the Chinese economy and protecting Beijing’s interests in regions such as Sub-Saharan Africa and Latin America. Though the bank will presumably pay lip service to the concept that all BRICS currencies are equal the fact that China is contributing $41 Billion of the $100 Billion capitalization for the bank means that this is not a partnerships of equals. In Beijing’s ideal world the bank would be viewed as democracy as this would demonstrate that China is not a hegemon, however, the reality is that the BRICS members have very different levels of economic development as well as conflicting interests. The fact that mutual opposition to the dominance of the World Bank and IMF united them does not mean that they will always find consensus. China will presumably dominant the BRICS Development Bank for the same reasons the United States dominates the Bretton Woods Organizations, namely, they provide more capital than other donors and can use these organizations to advance their own interests. One of Beijing’s goals is the internationalization of the renminbi. The bank could help China achieve this objective.

If China wants to be a super power the renminbi must be a reserve currency like the US Dollar and the Euro. Thus far the Chinese have been reluctant to liberalize their economy as it would weaken the Communist Party as well as other powerful interests, such as the heads of state owned industries and governmental ministries, all of whom would lose wealth and influence. Though Chinese President Xi Jinping has been launching an aggressive anti-corruption campaign many large state owned companies and their supporters in the upper echelons of the Chinese Communist Party still remain influential. The corruption crackdown is unlikely to completely change this reality. Liberalization would also likely encourage greater transparency which would raise further questions about the validity of Chinese economic indicators, the sustainability of the country’s shadow banking sector, and the reality that China’s property bubble could be bursting. All of these questions would run contrary to Beijing’s interests.  By making the BRICS Development Bank denominate loans in renminbi China could start the transformation of its currency into a reserve currency without necessarily making politically difficult reforms at home. The internationalization of the renminbi could also help China in its dealings abroad as it would no longer have to exchange renminbis for US Dollars or Euros to conduct transactions thus making Beijing less dependent upon the monetary policies of foreign powers. Such a shift would be helpful in China’s dealings abroad.

In recent decades China’s interests have expanded far beyond East and Southeast Asia. China has loaned and invested billions of dollars in Sub-Saharan Africa to develop infrastructure and the extractive industries. There is no indication that this trend will slow. In July Xi Jinping made a tour of Latin America where he proposed a $20 Billion dollar infrastructure fund and $5 Billion Chinese-Latin American cooperation fund to facilitate investment in Latin America. Creating a context where it is easier to conduct business using the renminbi is clearly in China’s interest as well as countries that China is investing in especially as trade with these countries is likely to grow.

In recent decades much talk has been made about China’s rise. The reality is that China is not becoming abnormally strong. The country has in fact been abnormally weak and is in the process of attaining the status that a country with its population, resource base, and geographic location should have. We have already seen Beijing increase its military spending and investment in other regions of the world. If China wants to be a great power (which it does) internationalizing its currency is a crucial step. The BRICS Development Bank could be a game changer even if it does not live up to its full potential. The bank’s ability to provide funding for infrastructure in the developing world will be crucial to economic development and global trade. The BRICS Development Bank will also be a symbolic reminder that the Post World War II construct of international organizations, such as the United Nations and the Bretton Woods Organizations, does not reflect the current world order. These factors are important but the emergence of a new reserve currency of global significance would be no less of a game changer.

Friday, July 11, 2014

The Potential Impact of a BRICS Development Bank on Argentina

From July 14th to July16th Brazil will host the 6th Summit of Heads of State and of Government of BRICS. This meeting will likely see the emergence of a BRICS Development Bank that will serve as an alternative to the World Bank, which the BRICS see as too heavily oriented towards Western interests. Though the idea for such a bank has been discussed since 2012 the impact of the Federal Reserve’s tapering on countries such as India and South Africa, Chinese unease over the fluctuation of the US dollar, and the challenges that Russia is facing due to its actions in Ukraine have accelerated this project. One country that could benefit from a BRICS Development Bank is Argentina.

Russia has invited Argentina to the BRICS summit and is supporting the possibility of Argentina joining the organization. This can been seen as part of Moscow's effort to generate good will in order to increase trade and enhance its presence in Latin America. To achieve this end Russia has also canceled 90% of Cuba’s $35 million debt and backed Brazil for a permanent seat on the United Nations’ Security Council. If Argentina joined BRICS, or at least had access to capital from the BRICS Development Bank, it could greatly benefit the country. The reality is that due to the default of 2001 Argentina is a relatively risky place to invest and has struggled to attract capital since the default. Access to the BRICS Development Bank combined with Russia’s efforts to build good will in Latin America via trade and investment could help Argentina attract the capital it so desperately needs.

Argentina will likely seek funding to improve their ports from either the Russians or the BRICS Development Bank. As things stand now the expansion of the Panama Canal and the creation of the Nicaragua Canal will likely make Argentine exports such as soy less competitive as compared to comparable US and Brazilian exports. The latter countries are both closer to the canals and have or are developing their infrastructure to capitalize on this shift in global shipping. The Brazilians in particular have been very active in developing their ports and improving transport from the interior to the coast. Argentina does not want to be left behind. In a worse case scenario the Argentines could find themselves dependent on Brazilian ports thus reducing profits from their exports while enriching their regional rival.

If Argentina is able to attract the capital it needs to be competitive on the global market it could help the country rehabilitate itself economically. A shift to a leadership that is more business friendly could facilitate this process though it is important to note that any attempt for the country to become more economically sustainable would presumably result in cuts to social spending which would likely lead to social instability and a heightening of political risk. That said, Argentines are tired of the country's economic decline and are no doubt acutely aware of how neighboring Uruguay has been flourishing due to its relatively pro-business policies. Argentina has seen political instability in the past. If Buenos Aires can attract capital and survive whatever unrest results from potential economic reforms we could see the country return to the level of economic development that its geography and resource base should afford it.       

Friday, June 20, 2014

The Implications of a Remilitarized Japan

On Thursday Japanese Prime Minister Shinzo Abe and New Komeito Party head Natsuo Yamaguchi confirmed that there will be no reinterpretation of the Japanese constitution to permit Collective Defense though the potential for such a shift is still possible. Such a move would be a preliminary step to the normalization of the Japanese military.  Despite this delay it is probable that Japan will remilitarize at some point in the future given that Tokyo can not assume that the United States will always protect Japanese interests. Though there is a great deal of overlap between Washington and Tokyo's interests the reality is that the United States wants its allies to shoulder a greater burden in terms of providing security in their respective regions. Washington has also cut military spending due to the sequester. For these reasons Abe is hoping for the reinterpretation of the constitution by the end of the year to coincide with possible revisions to the guidelines governing US-Japanese defense cooperation. Such a shift will have geopolitical consequences in the Western Pacific  

As things stand now Japan is working with the Philippines in order to protect Tokyo and Manila's mutual interests in the Western Pacific. Japan is helping the Philippines finance patrol boats as well as providing financial assistance to improve communication technology for the Filipino Coast Guard. Filipino President Aquino will be visiting Japan on the 24th of June. China’s activities in the South China Seas and how they should be addressed will likely be discussed during this trip.  This is where collective defense comes in to play as neither country's military is a match for the Chinese however a united front with the participation of countries with similar grievances, such as Vietnam, and possibly with tacit or even explicit US support would be a strong deterrent. Though such a grouping could in theory cause China to behave in a less aggressive manner it is also likely that a united front  could be viewed as a credible enough threat by Beijing that China will feel compelled to take preemptive action to protect its perceived interests. There are several reasons to act sooner rather than later including the reality that China faces significant demographic threats such as an aging population and an increasing dependency ratio. Beijing also needs to make significant economic reforms which will not be popular with the population. For these reasons anything that can boost nationalism in China is in Beijing's interest as it will serve as a distraction. The dispute over the Diaoyu/Senkaku islands is an issue which stokes a great deal of nationalist sentiment in China.

If Japan commits to remilitarization and makes overtures to Manila, Hanoi and other countries who are concerned with Beijing’s territorial ambitions it is possible that China will occupy the Diaoyu/Senkaku islands which both Japan and China claim. China's intent will not be to start a war (though there a credible arguments that Beijing will tolerate a short conflict). Beijing will be betting that despite the uproar that such a maneuver will cause the international community will feel that they have too much to lose economically if they push for strong sanctions against China. Certainly, Beijing is looking at the global response to Russia's annexation of Crimea with great interest. If China annexes the Diaoyu/Senkaku islands but manages to convince the international community that it will not interfere with shipping lanes in the region it is possible that many countries outside of the region will fell that any conflict is not worth the economic costs. The problem is that Japan and other regional powers, such as the Philippines and Vietnam, would likely view inaction as appeasement. The thinking in many East and Southeast Asian capitals might be, “If we allow this what next?”. Such a scenario sets the stage for a dramatic escalation in tensions which could impact some of the most important shipping lanes in the world. For this reason we must pay close attention to any signs that Japan will remilitarize as well as any developments that result in closer relations between Japan and countries such as the Philippines and Vietnam even if there is no overt call for Collective Defense. Given that Abe is pushing for a constitutional reinterpretation by the years end we might see significant developments in the South and East China Seas in the coming months.

Friday, June 13, 2014

The Implications of Developing Sino-Bangladeshi Relations in the Indian Ocean on International Relations in the South China Sea

This week Bangladeshi Prime Minister Sheikh Hasina completed a three day visit to China. One of her primary objectives during the trip was to attract investment to develop a deep-sea port on Sonadia Island in the Bay of Bengal. Though an agreement is still pending such a development would serve as an additional stop along the so-called String of Pearls, a network of ports that the Chinese have helped develop which link East Africa, Southwest Asia, and South Asia to China. A further increase in China's presence in the Indian Ocean and the concomitant increase in trade that would presumably accompany it will be a positive step for Bangladesh even if it could complicate relations between Delhi and Dhaka. What garners less attention is the reality that an increase in China’s presence in the Indian Ocean could also exacerbate tensions in the South China Sea.

If there is a an increase in trade between the Indian Ocean and the South China Sea the route will become more valuable. Though the energy resources in the South China Sea are attractive Beijing's primary interest in the region is to have greater control over shipping lanes through which half of the world’s cargo by tonnage passes through each year. China wants to be a great power and great powers are Blue Water Powers (i.e. they have a global naval presence). The problem with a global naval presence is that sovereign powers resent foreign powers imposing themselves near their territory. We have already seen heightened tensions in the South China Sea between China and Vietnam and China and the Philippines with the former allegedly ramming Chinese ships and the latter having filed a case against China in the Permanent Court of Arbitration in The Hague accusing Beijing of violating the United Nations’ Convention on the Law of the Sea (UNCLOS). As long as China's neighbors are divided they cannot stand up to China in an effective manner. For this reason it will be important to note if the Philippines and Vietnam decide to cooperate to protect their interests in the South China Sea.

Though Manila and Hanoi have conflicting claims over the Spratly Islands there is evidence that the Vietnamese and Filipinos recognize that they can better protect their respective interests by cooperating. Last Sunday members of the Filipino and Vietnamese navies staged a symbolic display by gathering to play soccer and volleyball and drink beer on the Vietnamese held Southwest Cay in the South China Sea. Though such a gathering is hardly a concrete commitment to mutual defense it does send a message that cooperation is possible. It will be important to monitor if Filipino-Vietnamese relations develop beyond the symbolic and whether or not an agreement between the two countries will gain either direct or indirect support from Japan and the United States. 

The so-called String of Pearls is a potential step to transform China into a Blue Water Power. This process will take decades and will be prone to conflicts. Whether or not these conflicts escalate to the point where diplomacy fails remains to be seen. What is important to note is that
what happens in the Indian Ocean can impact relations in the South and East China Seas. As countries in one region see China enhancing it power in another region they will question how this will impact their long-term interests. It is possible that we will see greater cooperation between the Philippines, Vietnam and a remilitarized Japan with either the explicit or implicit backing of the United States. Such a grouping might be able to provide a balance of power in the Western Pacific but it could also be viewed as a sufficient threat for Beijing to take action to protect Chinese interests. For this reason it is important to monitor factors which could unite countries in the South and East China Seas even if these factors are occurring in another region and their implications are not always immediately evident. 

Friday, June 6, 2014

The Impact of the European Reassurance Initiative on the Asia-Pacific Region

This week US President Barack Obama unveiled a one billion dollar European Reassurance Fund to help assuage fears amongst the United States' Central and Eastern European allies that Washington is a fair weather friend. Certainly, the Obama Administration’s shift to a foreign policy in which the US is looking to lead from behind rather than take charge has been a cause for concern from Warsaw to Bucharest. The fund will lead to an increase in exercises and a greater rotational presence of American troops in Europe which will serve as a more credible deterrent to Russia if Moscow were to consider military incursions into the Baltic States or Eastern and Central Europe. In the coming days much will be written about the potential effects of this fund on relations between the US, EU and Russia. What is also important to note is that this fund has a symbolic function as it serves as a reminder to the United States' allies in other parts of the world that Washington will support its allies with more than just words. One region where the symbolism of this initiative will be scrutinized closely is in the Asia Pacific Region.

The past few years have seen heightening tensions in the South and East China Seas. Some likely results of these conflicts will be the normalization of Japan's military and new security arrangements such as April’s US-Filipino Deal which gives the US access to military bases in the Philippines for the next ten years. Suffice it to say China does not appreciate such developments. Japan’s rearmament will presumably happen at some point however it is important to note that a gradual, transparent shift will presumably be perceived as less of a threat to Beijing and thus make it less likely that China will feel that it is being forced into a position in which it must take action. By making a public statement that the US will back its European Allies the president is also implying that the United States will not shirk its responsibilities to its Asian allies and in theory could give Tokyo some room to take a less aggressive stance in terms of rearmament. After all, the Obama Administration has made it very clear that the European Reassurance Fund will not detract from American activities in the Asia Pacific Region. In fact the "Pivot" to Asia has been a central feature of the President's foreign policy and this shift will likely be carried on by his successor no matter what political party they represent. 

Reassuring US allies in the Asia Pacific region could also serve a useful purpose in the negotiations of the Trans Pacific Partnership. Washington explicit offer to reassure its Eastern European allies could be perceived as tacit admission that the US will back its partners in the Asia Pacific given that the region is far more economically significant to the United States than Central and Eastern Europe. Implied reassurance that the US will do what is necessary to keep strategic shipping lanes in the East and South China Seas open will not harm negotiations. This is of particular importance as some of the rumored proposals of the agreement, such as provisions targeting currency manipulation and restrictions on the origin countries for inputs for textile production, appear to be designed to exclude China. Though the actual terms of the Trans Pacific Partnership will not be known until the final proposal is ready for ratification it is safe to say that China will not want to see its interests threatened and that Beijing will take what it perceives as appropriate action to counter such threats. Recent conflicts between China and Vietnam and China and the Philippines demonstrate that Beijing is not adverse to using its military to protect its territorial claims while history has shown us that small skirmishes can escalate quickly. The European Reassurance Fund serves as a sign that the Untied States will back its allies.

Though the fund is an important development funding resistance and actively taking part in military operations should the need arise are entirely different things. In an actual war a billion dollars is not that much money and, thought the US is planning on rotating more troops through Europe, the permanent US military presence that Poland has requested is currently being denied. Numerous capitals in the Asia-Pacific region are no doubt aware of this reality. That said, the fund will likely be welcomed by US allies in the Asia Pacific region as a positive sign that the United States is a dependable ally. At the end of the day this is a fairly affordable way for President Obama to demonstrate to US allies that, despite a change in US foreign policy, the United States is a friend that can be trusted.  

Friday, May 23, 2014

Russia’s Shift to the East and It’s Potential Impact on September’s Caspian 5 Summit

On Wednesday May 21st Russia and China agreed to a 30-year natural gas deal worth $400 Billion. This agreement serves as a clear indication that Moscow recognizes Russia’s need to diversify its client base. Though all of the terms of the deal are unclear it would appear that the Chinese were able to get the pricing that they wanted (a factor which had delayed this deal for a decade). Moscow would not have agreed to China’s price if it were not in Russia’s interest. In the past this price was not beneficial for Russia but recently a variety of factors such as Iranian-American détente, the situation in Ukraine, and the reality that Russia will be facing demographic challenges in the coming years has changed the equation. The deal will allow Russia to demonstrate that it has options other than European market as well as affording Moscow the opportunity to focus its attention on other areas where its interests are threatened. The Caspian is once such place.

On September 29th the Caspian 5 (Russia, Azerbaijan, Turkmenistan, Kazakhstan and Iran) will meet in the Russian city of Astrakhan to discuss the management of the Caspian Sea. This summit could serve as a starting point for Russia to ensure that Russian companies have a stake in any potential agreement which would see oil and natural gas pipelines running through Iranian or Turkish territory. Such a move would give Russia a degree of control over energy resources that bypass Russian territory and would presumably be lucrative. In the past it was in Russia’s interest to hinder the development of transit routes which did not pass through Russian territory. Now Moscow’s ability to interfere could be weakened especially if Turkey, Iran, Azerbaijan and Georgia cooperate. If the infrastructure is going to be built and Russia is less dependent on European markets Moscow could have a financial interest in aiding the exploitation of energy resources rather than hindering projects. It is also possible that Russia could have a degree of control over the operations of key infrastructure. Pipelines that bypass Russian territory are by no means an ideal development for Russia but if this outcome is inevitable Moscow will ensure that the situation evolves in the manner that is most beneficial to Russian interests. The fact that Russia is a significant regional player means that it has leverage. Even in a weakened state Moscow can project power. For example, in 1993 Russia demanded that Lukoil be awarded a 10% stake in a consortium to develop Azerbaijan’s offshore oil fields. Baku consented. Given that China will have a 19% stake in Rosneft means that Beijing might also become a player in the region as well if Rosneft is involved in any deals (a likely scenario). This would add an additional dimension to the geopolitical situation in the Caspian.

Wednesday’s deal allows Russia to demonstrate that in the coming years it will have alternatives to the European market. The reality is that Europe has an interest in diversifying its energy supplies while Iran, Azerbaijan and Turkey appear to be coming to some sort of agreement which could potentially see the development of transit corridors which link Caspian energy resources to the Mediterranean and the Persian Gulf. The United States also has a variety of interests in undermining Russia’s energy exports. Essentially, this shift is inevitable.  Moscow clearly understands this and is now making the best arrangements that it can. The terms of the China-Russia gas deal seem to favor Beijing. That said, Moscow is powerful enough to presumably force agreements in the Caspian that will favor Russia. September’s summit will provide insight into how this story will progress.   

Friday, May 9, 2014

The Impact of the Ukrainian Conflict on Russia’s Arctic Ambitions

When territory becomes more valuable competition over the land in question becomes more intense. For example, we are currently seeing such a drama unfold in the South and East China Seas due to the regions’ valuable energy resources, the importance of the territories’ shipping lanes, and the pressure that unfavorable demographic trajectories are placing on regional players. In the coming decades we will likely see a similar dynamic unfold in the Arctic, however, the hemorrhaging of capital from Russia due to Moscow’s annexation of Crimea and the need to maintain an active military presence near Ukraine are diverting resources away from other areas of Russian concern. This reality could complicate the country’s Arctic ambitions.

The U.S. Energy Information Administration speculates that the Arctic could hold approximately 22% of the planet’s undiscovered conventional oil and natural gas resources. The region also has significant deposits of nickel, copper, coal, gold, uranium, tungsten, iron and diamonds. Historically, the cost of exploiting these resources has been prohibitively expensive. However, the combination of technological advances, such as improved offshore production systems, three-dimensional seismic surveys, and improved drilling and completion techniques combined with retreating ice sheets are changing this dynamic. The Arctic also has shipping lanes that will see much more use as the planet continues to warm. The Northern Passage, which runs along Russia’s northern coast linking Europe with East Asia, is a transport corridor that is approximately 20% shorter than routes that transverse the Suez Canal. Some estimates predict that by 2030 25% of shipments from Europe to East Asia will use this passage. Though weather, the lack of search and rescue infrastructure, and high insurance costs currently limit the utility of this route at the present it is reasonable to believe that the Northern Passage will see more usage as the planet warms.

Events in Ukraine are distracting Russia at a time when Moscow should be aggressively staking its claims to the Arctic. Resolving the inevitable territorial disputes that will emerge as Arctic shipping lanes become more important and the exploitation of natural resources in the region increase will be a strategic imperative for Russia. It is in Moscow’s interest to aggressively pursues such policies now while the country’s demographic, military and economic strength are stronger than they might be in coming decades. Suffice it to say, the situation in Ukraine is reducing Russia’s ability to protect its long-term interests. Though maintaining Ukraine as a buffer state is a necessity for Russia it is in Moscow’s interest to try and resolve this conflict as quickly as possibly so that the country does not neglect its long term interests in other regions.

Friday, May 2, 2014

Why Russia Will Ultimately Compensate Ukraine for Crimea

Currently, Moscow is facing sanctions from the West (toothless though they may be), there is a significant military build up on the Ukrainian border and, according to the IMF, Russia is in a recession with more capital expected to flee the country. For these reasons the idea that Russia would pay Ukraine for Crimea is not a widely held belief. However, in the long term there are several factors that make it likely that Moscow will ultimately offer some form of payment to Kiev.

Despite current geopolitical and economic obstacles Russia is relatively strong, however, the country is facing significant demographic challenges. Per the World Bank, 1988 was the last time the Total Fertility Rate was 2.1 (the replacement rate). From 1991 to 2011 this metric has fluctuated between 1.2 and 1.6 while the dependency ratio is 40 and growing. This means that Russia will likely be weakened both economically and militarily in the coming decades. For this reason Moscow has an incentive to cement agreements that protect Russian interests while the country is experiencing a period of relative weakness. Sooner or later legitimizing the possession of Crimea via some form of compensation will be necessary. Though the deal will have been forced, it will also have been finalized.

Ukraine owes a significant amount of money to Russian companies, such as Gazprom, as well as international lenders (e.g. the IMF), and a variety of European banks and businesses. By compensating Ukraine for the annexation of Crimea Moscow would essentially be disbursing money which would ultimately flow back into the Russian economy while simultaneously protecting the interests of its European business partners. Essentially, the end result would be that Russia forced the sale of a territory of strategic importance to Moscow since it had become clear that Kiev could not be counted on the protect Russian interests. With the deal legitimized, Ukraine’s debt would be pared down to more manageable levels. That said, a Ukrainian default is still a very real concern. The IMF did not authorize a $17.1 billion bailout out of charity. The financial contagion that a Ukrainian default would engender would be extremely problematic to say the least and thus must be prevented. The IMF deal requires raising taxes and energy prices. Given that Kiev could not afford discounted gas it is unclear how Ukrainians will deal with this price hike. For this reason continued political instability in the country is likely. Despite this problem, any capital inflow (especially a compensation package that does not need to be repaid in the manner that a loan would) could put Ukraine on a path to ultimately regain a degree of economic self sufficiency and in theory become a stronger trade partner for both Russia and Europe. This process will not be easy and will need to be monitored closely.  

Maintaining a favorable buffer against neighboring countries has long been a key concern of Russia. This is why ensuring the compliance of states such as Ukraine and Belarus has been a strategic imperative for Moscow. The leverage that comes with controlling the energy supply for many of its neighbors has been a useful foreign policy tool for Moscow in recent years. Not surprisingly Russia’s neighbors do not like this dependency. There are movements to undermine Russia’s leverage which naturally goes against Moscow’s interests and if Russia is distracted with Ukraine it has fewer resources to undermining these movements. There are numerous areas of concern for Moscow. For example, it is likely that US-Iranian détente will result in the development of energy pipelines linking the Caspian to the Persian Gulf and the further development of infrastructure connecting Azerbaijan with Turkey. We are already seeing some improvements in Azeri-Iranian relations that testify to this. September’s meeting of the Caspian 5 (Russia, Azerbaijan, Iran, Kazakhstan, and Turkmenistan) will be an important summit to monitor. Another story to follow is the memorandum of intent that Ukraine and Slovakia signed on Monday April 28th. If the deal goes through the reverse flow of gas from Slovakia into Ukraine will commence in October. This will reduce Ukraine's dependency on Russian gas. Presumably, Moscow will try to undermine this deal.

While compensation for Crimea will not likely be paid out anytime soon such an action would help legitimize Russia’s claim to Crimea and could help ensure potential investors that the country is safe for business. Keep in mind it is in both Moscow’s and Western businesses’ interest to keep political instability in Russia at a minimum. Compensation is a means towards that end. For this reason, if Moscow starts making noise about offering some form of compensation for Crimea it could be a sign of improving business conditions in Russia.