Friday, April 4, 2014

The Potential Precedents That Could Be Set By The Philippines’ Lawsuit Against China Concerning Beijing’s Actions In The South China Sea

This week the Philippines filed a lawsuit with the United Nation’s Permanent Court of Arbitration in the Hague. The suit alleges that China’s actions in the South China Sea violate Filipino territorial integrity as defined under the United Nation’s Convention on the Law of the Sea. Beijing claims most of the South China Sea via its 9 Dash Line (the demarcation line that China uses to justify its claim to most of the South China Sea) and has occupied territory such as Scarborough Shoal, Mischief Reef, and Second Thomas Shoal. In some cases China has gone far beyond setting up mere outposts. In 2012 Beijing established Sansha City on Yongxing Island. Sansha is a prefecture which is designed to administer the Spratly Islands, the Paracel Islands and the Macclesfield Bank. Essentially, China has been pursuing a policy of de facto annexation in the hope that in time Beijing will be able to force de jure recognition of Chinese claims to the territory. Suffice it to say, China’s neighbors are not happy with this approach which is why the Philippines filed the lawsuit in the first place. No matter who wins the suit the legal precedent will have a major impact on security concerns in the South and East China Seas.

The United Nations Convention on the Law of the Sea came into effect in 1994. The law’s mandate is as follow:

"The United Nations Convention on the Law of the Sea lays down a comprehensive regime of law and order in the world's oceans and seas establishing rules governing all uses of the oceans and their resources."

One of the key stipulations of the law is that it sets Exclusive Economic Zones (EEZ) as being 200 nautical miles (370 kilometers/230 miles) from a state’s maritime borders. Both China and the Philippines are signatories of the law (as is Japan, which we will discuss shortly). One of the areas occupied by China is Scarborough Shoal, which is only 220 km from the Philippines, but is 857 km from China. China claims that it has a right to the territory as Beijing claims that the Chinese have fished in the region as far back as 960 C.E. It is important to note that a finding in favor of China could set a legal precedent that implies that a country will have the right to exploit the resources of another country’s EEZ if it had used the territory at some point in the past. It is safe to say that such a finding could greatly complicate other territorial disputes.

If the court rules in favor of the Philippines it is unlikely that China will change its polices in the region in any significant manner. Beijing has no interest in reducing its presence in a region that sees half of the world’s shipping by tonnage pass through it each year. Essentially, great powers dominate the sea thus if China aspires for greatness Beijing must be able to dominate the South and East China Seas in the same manner that the United States has been able to dominate the waters of the Americas. China is also likely to face a degree of domestic instability in the coming years as it makes structural reforms, such as reigning in its shadow banking sector, which will likely be unpopular. It is also important to note that China's actions in the South China's Sea are very popular amongst a significant portion of the Chinese population. Stoking nationalist sentiment can help to maintain social stability during a time of unpopular reform.

If the lawsuit favors the Philippines the ruling could actually support China's strategic interests in the East China Seas. In September of 2012 Japan nationalized the Diaoyu/Senkuku Islands. This action angered Beijing who said that China would not, "sit back and watch its territorial sovereignty violated." Since then both sides have strengthen their security presence in the region. China also imposed an Air Defense Identification Zone over the region in November of 2013. A ruling against China’s actions in the South China Sea could set a legal precedent that could apply to Japan’s actions in the East China Sea. Whether or not this would reduce tension remains to be seen, as both countries will presumably act in their perceived interests. That said, a legal ruling could allow the countries to make some concessions while saving face. This is important as tensions are only going to get worse. For example, it is likely that Japan will reform its pacifist constitution (which could trigger a preemptive Chinese response in the East China Sea). Such an action would further complicate a difficult situation. Given that the United States will back Japan, and is making security arrangements with other regional players such as the Philippines, we find ourselves in a context where tensions could escalate quickly and result in a large, long-term conflict. Anything that could ameliorate this situation, such as the potentially face saving option that a legal ruling could provide, should be monitored closely. After all, instability in shipping zones as important as the South and East China Seas impacts most of the global supply chain and thus the vast majority of the world’s population.

Friday, March 28, 2014

The Implications of Myanmar’s Census

From March 30th until April 10th Myanmar will conduct its first census since 1983. On the surface this would appear to be a reasonable action as a great deal has changed in the last thirty plus years, not the least of which has been the country's emergence from isolation. The problem is that the census is likely to enflame ethnic tensions. The instability that the census could provoke will be one of the most significant challenges that Myanmar has encountered since it has begun re-engaging with the international community. Therefore, it is important to monitor how Naypyidaw handles this potential unrest. A good performance would send a very positive signal to investors. A poor handling of the situation could see investors hold back and would likely see the Chinese attempt to regain some of the leverage that Beijing has lost as the West has begun to reengage with Myanmar.

Ethnic insurgency has long been a key concern in Myanmar. After the assassination of independence hero Aung San many ethnic groups, such as the Karen, launched armed insurgencies. These struggles have been going on for decades and the census could potentially undo some of the progress that Naypyidaw has made in pursuing peace talks with the rebels. A key problem with the census is that significant ethnic minority groups such as the Karen, Shan and Chin were not consulted in the development of the census questions, thus, the census has a variety of subgroups for minorities, such as the Chin, which the groups in question do not recognize. The suspicion is that the format of the census will make these groups appear divided and thus undermine their interests. Though, census takers, especially those of mixed ethnicity, have the option of clarifying their background there are concerns that this will result in them being grouped under a catchall "foreigners" tag. In addition to this the Muslim minority Rohingyas of Rakhine State will not be included. Essentially, the census looks like it only supports the interests of the majority Burmens.

If the census results in heightened political instability it is likely that Beijing will try to exploit the situation to its advantage. China’s interests in Myanmar are both strategic and economic. The country provides Beijing with energy resources and access to the Indian Ocean, the latter of which is essential for the development of parts of China’s interior such as Yunnan Province. For this reason Beijing will invest in Myanmar even if the country is experiencing a degree of political instability. In fact China was Myanmar’s only significant investor from the 1980s until the country began reforms in 2011. Beijing feels that Washington is pursuing a containment strategy against China and will likely seize the opportunity to cement its interests in the country if the United States and other western powers temporarily back off due to political instability. For these reasons we should monitor both how Naypyidaw addresses the ethnic tensions which the census is likely to provoke as well as China’s (and to a lesser degree India’s) actions if political instability causes western powers to back off. The reality is that Myanmar is poor due to decades of poor governance not a lack of resources. The country could develop relatively quickly if given the chance. How it will develop will be influenced by foreign investors so knowing who is investing and what their interests are is essential for forecasting how Myanmar will develop.

Friday, March 14, 2014

Will Uganda's Anti-Gay Law Benefit Tanzania?

On February 24th, 2014 Uganda passed a law which included sentences of life in prison for certain homosexual acts (the original draft called for the death sentence) as well as prison terms for people who support the gay community. Not surprisingly the international community and global markets have not viewed this law favorably:
  • Since October 3rd, 2013 the Uganda Shilling has fallen from 2,553 to the dollar to 2,513 as of March 14th, 2014.
  • Standard & Poor’s has reduced Uganda's credit rating to B.
  • The World Bank has suspended a $90 Million loan to improve the country’s health system.
  • Denmark and Norway have suspended aid. They likely will not be the last countries to do this.
Given that Uganda is dependent upon aid for 20% of its budget these action will cause problems for the economy no matter what rhetoric Kampala employs for damage control. Though there are many companies and countries who have demonstrated that human rights violations are not a hindrance to investment it is important to note that when investments to things, such as infrastructure, are not made and alternative options exists investors might look elsewhere. Tanzania could be such an alternative.

Though Tanzania has seen a great deal of investment in recent years (Chinese direct investment went from $700 million in 2011 to $2.1 billion in 2013) infrastructure in Kenya has historically attracted more capital than Tanzania. For example, in August of 2013 Kenya signed deals worth $5 billion from the Chinese in order to improve infrastructure with $2.5 being spent on the construction of railroads and $1.25 billion to be spent on trains. If Kenya and Uganda want to develop their manufacturing bases investments such as these are essential yet Uganda’s anti-gay law will impact investment in Uganda which in turn will impact Kenya as the two countries are key trading partners and Ugandan goods often pass through Kenya en route to the port of Mombassa (Ugandan infrastructure is heavily integrated with Kenyan infrastructure). Suffice it to say a variety of parties in both Kenya and Uganda want to see the law repealed or at least weakened as it goes against their economic interests.

Ultimately, two key things that many investors in East Africa want are access to Central African resources and commodities from the fertile lands around Lake Victoria. They do not necessarily need multiple routes to obtain these goods so if investment ends up in Tanzania Kenya and Uganda might struggle to attract capital at a later time and the funds that they might be able to raise could be on less favorable terms. As things stand now the Chinese are investing in the Tanzanian port of Bagamoyo with the intent of making into the largest and most modern port in Africa. We are also seeing the potential development of the Port of Maruhubi in Zanzibar. In February the China Harbour Engineering Company (CHEC) signed a Memorandum of Understanding pledging $230 million dollars to the develop the port (its is important to note that a Memorandum of Understanding is not a concrete deal so CHEC presumably has a way out of the agreement). These port developments combined with improvements in rail and customs procedures would likely result in major improvements to Tanzania's competitiveness. As of now railways only transport about 10% of Tanzanian goods despite the fact that moving goods by rail take half the time that road transport takes.

It is important to remember that there is a political element to this law. When President Yoweri Museveni signed the bill he made a point of stressing that his actions showed that Ugandans would not be bullied by foreign powers. This helped stoke nationalist sentiment which will be important if he is to run for re-election in Uganda’s 2016 election. For this reason Museveni is unlikely to weaken or repeal the law unless Nairobi and the Ugandan business community puts pressure on him and if he can back off in manner that saves face. Due to this reality it is important to monitor how forcefully Nairobi and the Ugandan business community lobbies against the law. Time could be of the essence as once significant investment has been put into Tanzanian infrastructure there is no guarantee that an investment in developing Uganda's roads, railways, and ports will be worthwhile.

Friday, March 7, 2014

The Impact of Russian Demographics on the Crisis in Ukraine

There are numerous driving factors for Russia's involvement in Ukraine. These include the strategic imperative to retain a malleable border state, the need to ensure Russia's ability to maintain military bases in the country (especially the warm water naval base in Sevastopol), and the capcity to use Ukraine as a transit state for Russia oil and natural gas. A pro-Western administration in Kiev complicates these demands. All of these issues explain Moscow's actions, however, there is another factor in play here. The unfavorable demographic trajectory which Russia's faces and the need to make economic and security arrangements during at time when Moscow is relatively strong.

Russia is seeing a declining population. The CIA’s 2013 estimate for population growth was -0.02%. In fact population growth has usually been negative since the end of the Cold War and 1988 was the last time that the country has the replacement fertility rate of 2.1. These unfavorable trends will complicate Moscow's ability to project its authority in the future. Despite this challenge the country is relatively strong at the moment. For this reason it makes sense for the Moscow to try to cement deals while it is in a position of strength. The reality is that Crimea is of strategic importance to Russia and it is of much less significance to Europe and the Untied States. Of course Western leaders will condemn any effort to annex the territory of another country but they will not back their words with actions, as it is not in their interest. The United States has no stomach to become involved in another foreign conflict and forbidding US firms from conducting business in Russia is unlikely to say the least. Many European powers are dependent upon Russia for energy and trade and have made it clear that though they disapprove of Russia’s actions business will continue as normal. Moscow’s history of shutting off energy flows when it has a dispute has also demonstrated that Putin is willing to hurt the Russian economy in order to advance the country’s political and security interests. In short Russia knows that the West is all talk and no action and the West knows that Russia has no problem with acting on its threats.

By annexing Crimea Moscow will solve a potential security problem. Russia will presumably compensate Ukraine as such an action is necessary as it will add a degree of credibility to whatever form of treaty ends this impasse. The compensation would also make a Ukrainian default less likely. Though the Russian economy has taken a hit since the conflict began Moscow can afford the bill now far more easily than it might be able to in the future. Preventing Ukraine from defaulting is essential as it could lead to the spread of financial contagion into the European, Russian and global banking systems (this is also why the US offered Kiev a billion dollars in loans. That wasn’t altruism. That was self-interest). The situation in Ukraine also sends a message to country's in Russia's Near Abroad who harbor designs for greater integration with Europe. Moldova and Georgia certainly come to mind here. The likelihood of anymore countries in Russia’s Near Abroad joining NATO and the European Union is less likely. After all if Russia were to invade a member of NATO or the EU concrete action would need to be taken. Neither Brussels nor Moscow has a interest in allowing stakes to rise that high. Negotiations will continue between the EU and countries seeking greater integration but as long as Russia is capable of protecting its interests these talks will come to nothing.

The US has threatened consequences for Russian actions. Though military operations or bans on US businesses working in Russia are highly unlikely it is possible that the US will try to aid other powers in diversifying away from Russia energy. We might see increased activity in developing shale reserves in countries such as Poland where, after initial excitement, major energy firms pulled out as unfavorable geology made fracking uneconomical. Promoting Western interests by subsidizing such operations is not an impossible course of action, though it remains to be seen what form such a policy would take. The cooperation between Turkey, Georgia and Azerbaijan will likely be encouraged though that approach will encounter challenges due to Russian pressure on Georgia and Azerbaijan and current political tensions in Turkey. US-Iranian d├ętente could also see the development of pipelines which transverse Iran. Russia of course understands these threats and for the time being is capable of countering them. In the long term unfavorable demographic trends will likely see Moscow lose a great deal of influence. However, for the time being we can expect Moscow to bully the weaker powers in its Near Abroad while trying to strike a more conciliatory tone with more powerful states. The intent will be to secure treaties which can help protect Russian interests while it is relatively weak. One way or another the situation in Crimea will be resolved in a manner which will be favorable to Russia. In the coming years it is likely that we will see some form of resolution to conflicting territorial claims in the Arctic between Russia and countries such as Norway and Canada. Moscow will also use a combination of threats and economic incentives to try and enlarge Russia’s Customs Union. In the meantime the political and social instability will continue in Ukraine while global markets remain vigilant of the financial contagion that could result if Kiev defaults on its debts.

Friday, February 28, 2014

Is Bolivia One Step Closer to Becoming a Maritime Power?

Bolivian President Evo Morales traveled to Peru yesterday to meet with his Peruvian counterpart President Ollanta Humala.  Bolivia’s access to the Port of Ilo and surrounding territory and the expansion of port facilities were presumably key issues to be discussed. In 1992 then Peruvian President Alberto Fujimori offered Bolivia access to this territory with a 99-year, potentially renewable lease. The understanding was that Bolivia would cover the cost of building the requisite infrastructure. Though the treaty was never ratified its status was of relatively little importance as La Paz lacked the funds to invest in the project. In recent years the Bolivian economy has improved to such a degree that it has the capital which it lacked in the past. For this reason the implementation of the agreement is a key geopolitical imperative for La Paz as it would functionally change Bolivia from a landlocked country to a maritime power.

Bolivia has been fairly successful in recent years. The country’s economy grew an estimated 6.5% in 2013, the budget is balanced, inflation is under control, and debts are manageable. Though the country's success has been aided by the high price of commodities in recent years and thus is subject to market fluctuations (it is already estimated that 2014’s growth will be lower than in 2013) the fact that La Paz has foreign reserves worth an estimated $14 Billion gives the country room to maneuver. Such a nest egg could help fund the expansions of Ilo’s port. Bolivia is also attempting to reduce its dependency on primary commodities. In August 2013 Bolivia and the Netherlands signed a letter of intent in which they agreed to cooperate in developing Bolivia’s substantial lithium deposits to manufacture batteries in Bolivian territory. Though a letter of intent is not a firm agreement, access to adequate port facilities would make Bolivian batteries more competitive thus the development of Ilo could help to transform this letter of intent into a legally binding document. The development of the port could also afford Bolivia the opportunity to set up Export Processing Zones and profit from the types of manufacturing that has helped countries, such as China, develop. Linking the port to the Interoceanic Highway (which connects Brazil to Peru) would also help Bolivia further expand its manufacturing industry and make the country’s exports more competitive.

Access to the sea has long been a contentious issue in Bolivia. The 1879-84 War of the Pacific saw a victorious Chile seizing Bolivia's coastal territory. Bolivia has long sought to address this issue. In April 2013 Bolivia filed a case against Chile with the International Court of Justice. Despite Peru's success in reclaiming land from Chile last month we must note that the cases are different so Peru’s victory is not a precedent which will see Bolivia reclaiming the territory that it lost during the war. Access to Ilo mitigates this issue. No matter what happens the combination of access to adequate port facilities, a well managed economy, developing infrastructure, positive growth, and valuable resources will go a long way towards restoring the investor confidence which Bolivia lost in 2006 when President Morales put the country’s energy sector under state control. Many investors are pulling out of emerging markets for a variety of reasons such as tapering. Exiting emerging markets without taking the time to differentiate between them is short sighted and could stop investors from putting their money in a place where it could contribute to economic development and provide impressive returns. Bolivia may very well be one of these places.

Friday, February 21, 2014

The Impact of Turkish, Georgian and Azerbaijani Infrastructure Projects on European and Asian Markets

On Wednesday the foreign ministers of Turkey, Azerbaijan and Georgia met in Ganja, Azerbaijan to discuss regional cooperation. This is the most recent step in the ongoing integration of the three countries which, amongst other things, links Caspian energy resources to the Mediterranean. This development is occurring at a time when the instability in Ukraine calls into question the viability of that country as a transit state for energy that is intended for Europe. After all the deep divisions between Eastern and Western Ukraine and the reality that the opposition movement is highly fragmented makes it questionable that today’s concessions by the Yanukovych administration will lead to long term political stability in Ukraine. Existing and proposed infrastructure in the Azerbaijan, Georgia, Turkey corridor could help offset disruptions that instability in Ukraine might produce.

In 2012 the Trabzon Declaration called for stronger economic, energy and political relations between Ankara, Tbilisi and Baku. This declaration formalized an existing pattern of relations between Turkey, Georgia and Azerbaijan which has resulted in several important infrastructure projects. The Baku-Tbilisi-Ceyhan (BTC) Pipeline transports crude oil from the Caspian Sea to the Turkish coast of the Mediterranean. This pipeline is complemented by the Baku-Tbilisi-Erzurum Gas Pipeline which aids the export of natural gas. The Baku-Tbilisi-Kars Railway is expected to be completed by the end of 2014. This corridor will connect Azerbaijan, Georgian and Turkish railways and will expand freight service which should make the export of raw material from Central Asia more economical. These projects can help develop the region and could serve as an important source of primary commodities for Asian and European markets.

Despite Turkey’s current political turmoil, the ability to serve as an energy corridor to the Mediterranean benefits whoever is in power in Ankara while the expansion of rail services would help Georgia and Azerbaijan’s exports. For these regions all parties have an incentive to cooperate.  Though Russia will not want to see its control over energy exports to Europe lessened it is important to note that Moscow could benefit from these projects.  For example, there are ongoing talks between Moscow and Baku to reverse the flow of oil through the Baku-Novorossiysk Pipeline with the intent of sending some of the oil through the Baku-Tbilisi-Ceyhan Pipeline which in theory could be a more economical manner for Russia to serve some of its European clients. There have also been proposals to link regional railways to Russian rail infrastructure which would aid Russian exports. Though it is likely that Russia would attempt to stop the development of an alternative energy source to Europe it is not unreasonable to think that the development of an alternative energy corridor in which Moscow has a degree of control would be allowed to progress without Russian interference. No matter what happens the development of pipelines and railways in the Azerbaijan, Georgia, Turkey corridor could lead to greater development in the region and serve as a reliable supply of raw materials to Asian and European (and potentially East and Southern African) markets.

Wednesday, February 12, 2014

Will Spain’s Anti-Abortion Law Increase the Number and Size of Protests in Europe?

Generally speaking I focus on tangible resources in these posts. These physical goods range from oil to infrastructure. That said, we must note that some resources are valuable yet intangible. A lack of a concrete form does not mean that they do not merit discussion. These abstract resources can take many forms such as obtaining a quality education, the ability to utilize a specific service, and an institutional structure that provides the vast majority of a population with the opportunity to provide for themselves and their family. A codified sets of rights also falls under the rubric of intangible resources as they guarantee the population specified rights and privileges. By limiting a woman’s right to an abortion Madrid may very well have added more fuel to the protest movements in Spain. As we have seen with the Arab Spring such a shift has the ability to spread far beyond the borders of one state impacting the political, social, economic, and security stability of an entire region.

Between alleged corruption in the royal family, an unpopular government, and a crippling economic crisis Spain's situation is terrible to say the least. This does not mean that things cannot get worse. When peoples’ rights are stripped from them they will often protest. It is likely that the demonstrations that have already occurred in response to the new abortion law will only become larger given that opinion polls are estimating that up to 80% of Spaniards, including practicing Catholics, feel that the proposed law was not necessary. (It is important to note that "opposing" and "not necessary" are not the same thing. That said, it is also safe to say that there is significant opposition to the law.). As we have seen with other protest movements, such as the Occupy Movement, protests attract protestors even if their personal cause is not the purpose of the protest. On one hand this hinders the development of effective leadership, as the demonstrations are not cohesive. On the other hand the increased turnout can lead to increased social instability.

Protest movements can start and spread due to unexpected incidents. Mohamed Bouazizi’s self-immolation quite literally sparked the Arab Spring. The causes of demonstrations can also be relatively unnecessary. The protests in Ukraine, which started when Kiev froze negotiations to further integrate with the EU, had diminished until President Yankuvych passed an anti-protest law that compromised Ukrainians' freedom to protest. Given many Ukrainians' response to the attempted removal of a right it is neither unreasonable to think that Spain’s new abortion law will provoke massive demonstrations nor is it unrealistic to think that Spaniards who have other grievances will use these protests to make their voices heard. If such incidents were to occur it is also possible that they could further provoke protest movements in other countries. These demonstration could help increase the power of political parties that want to limit European integration. Nationalist Parties such as Marine Le Pen’s National Front in France, Geert Wilders’s Freedom Party in the Netherlands, and Greece’s Golden Dawn are examples of political movements whose ideologies have historically been relatively fringe yet have become far more popular as the economic crisis has carried on in Europe. The increased protests that Spain’s recent actions might provoke could serve as an ideal fora for these groups to attract more support.

Europe will not see the sort of instability that we have seen in North Africa and Southwest Asia as Europe is democratic (and thus unpopular leaders can be voted out) and significantly richer. That said, an increase of protests is the last thing that Europe need during a crucial year in which May’s European Parliamentary Elections could see nationalist parties make political gains which would further limit Brussels ability to act decisively. The forthcoming stress tests for many European banks will also add a greater degree of economic instability to existing political, social and security concerns. Is Europe doomed in the long term? No. Even if the EU as we know it sees a fundamental institutional shift we are still looking at a region with a massive amount of financial and human capital as well as an important geographic location and the infrastructure to maximize its utility. Though a rising dependency ratio will cause problems in the coming decades and some countries of the European Periphery will remain poor the European Core will remain significant. That said, the potential for instability that Madrid has just unleashed is the last thing that Europe needs in 2014.