On Monday December 1st Russian President Vladimir Putin surprised the world by announcing the end of the South Stream project which would have seen Russian energy resources transferred to European markets by a route which would bypass Ukraine. Initially, the end of the project was greeted with surprise but in hindsight it makes sense. The combination of the European Union’s Third Energy Package, which stipulates that companies that produce and transmit energy must be separate entities, and the reality that the cost of the project has risen consistently have been obstacles for years. One year the project is projected to cost 10 billion euros, a few years later its 15 billion, then its 30 billion. Trends like this make investors nervous. Recent threats by some investors to pull out, thus passing the costs back to Moscow, combined with the sanctions that had been imposed upon Russia due to Moscow’s activities in Ukraine have made the project less and less viable. This is not to say that a similar project will not be developed at a later date but Monday’s announcement makes it clear the current iteration is not in Russia’s interest.
As things stand now Russia’s plan appears to be to utilize the existing infrastructure and direct it towards Turkey. This move would provide Ankara with an additional energy source while allowing the development of a potential transfer point for the redirection of energy resources to European markets, which would benefit both Russia and Turkey. Though Moscow does not have the same leverage over Ankara that it has over Kiev this development would at least provide Russia with an additional revenue stream that the country desperately needs. Estimates suggest that Russia has lost at least $120 billion to capital flight in 2014 with some analysts projecting that another $80 billion could depart the country in 2015. The combination of the ruble being at its lowest value since Russia's 1998 financial crisis and declining oil revenues means that the Russian economy in a difficult position. Diversifying Russia’s economy would presumably improve the country’s economic standing. However, diversifying an economy is not something that happens overnight. Therefore, Moscow must make the best of a bad situation by reaching out to new customers, positioning itself to service old clients if their demand rises, and minimizing competition. Putin appears to be pursuing all of these tactics.
Though much attention has been paid to the fact that many European countries are dependent upon Russia for the bulk of their energy needs we must also understand that Moscow has been overly dependent upon these countries as customers. If something were to happen that limited the purchase of Russian energy resources by these countries it would be a major blow to Moscow’s budget. Clearly this is what has happened. This shift has forced Moscow to diversify its clientele. May’s 30 year $400 billion plus natural gas deal between Russia and China is an initial step in this direction. (An interesting side note is that deal was executed in a currency swap denominated in Yuan. This can be perceived as an early attempt to diminish the US dollar as the world’s dominant reserve currency).
In addition to finding a major new client in China Moscow is hedging its bets closer to Europe. Using Turkey as an energy connection point could in theory serve as a hedge against the proposed Trans-Caspian Pipeline. Though the September 29th meeting of the Caspian 5 (Russia, Iran, Azerbaijan, Uzbekistan, and Kazakhstan) ended with an agreement which better delimited which portions of the Caspian Sea falls under the sovereignty of each state, and appears to give Russia a degree of the control over the management of energy resources of the sea, there is no guarantee that this agreement might not be undermined if it benefits a Caspian 5 country. In theory, Moscow could use the energy connection point in Turkey to undersell, and thus undermine the Trans-Caspian Pipeline, if such an action was perceived as being in Russia’s interest. Though that move would not make sense economically (especially because Moscow would have to get Ankara on board which, if possible, would not be cheap) it would make sense politically and would be in line with Moscow’s history of using energy resources to accomplish political goals even if the action ran contrary to Russia’s economic interests. Just the threat that Russia could pursue such a policy affords Moscow a degree of leverage over the other Caspian 5 countries.
The fact that much of the European Union shares a currency but fiscal policy is dictated by the capitals of the bloc’s respective members rather than by Brussels combined with the reality that the constituent members of the EU have varying economic interests has meant that Europe has been unable to effectively tackle its fiscal and unemployment crises. Clearly, the EU needs money. South Stream would have provided states, such as Bulgaria, income from transit fees and construction jobs and companies, like Italy’s Saipem, revenues from service rendered. The abandonment of the project impacts the interests of these entities. For example, Saipem estimates that the termination of the project will cost the company about $3 billion. There is no doubt that there are EU member states and European companies who have a vested interest in South Stream or a comparable project. Given the rise of anti-establishment parties in Europe and the concomitant decline of the power of the traditional political parties in many European countries we could see a political shift in the EU that could set the stage for a reincarnation of South Stream somewhere down the line. Though such a development is unlikely to occur anytime soon it is not unreasonable to believe that Russia is playing the hands that it can now while keeping an eye on the long game in Europe.
In Russia’s ideal world the realization of large profits through the sale of energy resources to customers who are located near existing infrastructure would be an ongoing phenomena. Clearly, the world is not ideal. Europe’s desire to reduce dependency on Russia, sanctions due to Moscow’s actions in Ukraine, and drops in oil prices and the value of the Ruble has forced Moscow to begin the diversification of its client base. Might this be less profitable than before? Absolutely. That said, this is not about missing the good old days. This is about adapting to new realities even if they are not as fortuitous as in the past. We must recognize the reality that though Russia’s economy is experiencing a great deal of pain it does not mean that the Russians are alone in their suffering. As the economic crisis in Europe deepens (and it looks like it will) the pain that many countries feel could turn into desperation and we should never underestimate the ability of desperation to changes public interests, state policies, and who is deemed as a suitable trading partner. South Stream as we know it may have been abandoned. This does not mean that a project that closely resembles it will not take its place somewhere down the line.
Friday, December 5, 2014
Friday, November 7, 2014
Factors Which Could Lead to Improvements in Sino-Japanese Relations in the East China Sea
On November 7th China and Japan issued a carefully worded statement which indicates that Beijing and Tokyo are seeking to ease the tensions between the two countries which have risen dramatically since 2012 when Japan nationalized the islands in the Easy China Sea known as Senkaku to the Japanese and Diaoyu to the Chinese. The statement admitted that "Different Positions" exist in regard to who has sovereignty over the islands and announced plans to create a "Crisis Management Mechanism" to try and prevent the situation from worsening. A mechanism such as this could ideally set the stage for some form of formal agreement as to the legal status of the islands. A victory for China is that the original draft of the statement apparently stated that Japan had sovereignty over the islands but was aware of China’s claims. If Japan had refused to modify this wording it would have greatly complicated discussions and made it less likely that Chinese President Xi Jinping and Japanese Prime Minister Shinzo Abe would meet during the APEC Summit in Beijing, that is currently under way, to discuss the matter further. Japan's apparent concession here indicates that Tokyo is serious about finding a resolution.
Both Japan and China have incentives to resolve this dispute. China has seen a significant drop in Japanese investment which is problematic during at time when the economic implications of potential shifts, such as reigning in China’s Shadow Banking Sector and reforming its Real Estate Market amongst other things, could severally compromise the growth rates that China has seen in recent decades and lead to an increase in social instability. (In theory China could refuse to make any meaningful reforms but that could lead to even worse consequences in the long-term). Japan meanwhile is facing its own degree of economic uncertainty as an increase in consumption taxes has limited economic growth, and the deflation of the Yen, while good for Japanese exporters, has negatively impacted the wealth of much of the Japanese populace. Both countries also have negative demographic trajectories which, barring a dramatic change to immigration policy, will lead to a context in which relatively fewer workers will be supporting a rapidly graying population. All of this comes at a time when China is working to transform its Navy into a Blue Water Navy, Japan is seeking to remilitarize, and the United State has made it clear that it will back Japan in the event of any military disputes.
It is pretty clear that both Beijing and Tokyo have a variety of pressing concerns. Resolving the disputes over the islands would afford both China and Japan more bandwidth to address these obstacles. A resolution could also afford Tokyo a degree of flexibility as Japan’s activities in the East China Sea are similar to those of China in the South China Sea. In January 2013 the Philippines filed a lawsuit against China in the Permanent Court of Arbitration alleging violations of the United Nations’ Convention on the Law of the Sea. If the court findings favor The Philippines it could set a legal precedent that Beijing could use against Tokyo. Such a finding would not be an issue for the Japanese if the dispute over the islands were already resolved.
Despite the incentives to find a resolution the islands enflame nationalist sentiment in both countries. If either side is perceived as giving in too much there could be political consequences. It is also not impossible that any resolution in the East China Sea could be used as a template to resolve disputes in the South China Sea, thus, Beijing will not want to set any precedents that could be used against China. After all, Japan (backed by the US) and China are far more evenly matched than China and countries such as The Philippines and Vietnam. Beijing has no interest in setting precedents which weaker countries can use to the detriment of Chinese interests. In the next week we shall see how this potential compromise progresses. How far it goes and what each side is willing to give up will be telling not just for the Senkaku/Diaoyu Islands but also for disputes in the broader Western Pacific Region.
Both Japan and China have incentives to resolve this dispute. China has seen a significant drop in Japanese investment which is problematic during at time when the economic implications of potential shifts, such as reigning in China’s Shadow Banking Sector and reforming its Real Estate Market amongst other things, could severally compromise the growth rates that China has seen in recent decades and lead to an increase in social instability. (In theory China could refuse to make any meaningful reforms but that could lead to even worse consequences in the long-term). Japan meanwhile is facing its own degree of economic uncertainty as an increase in consumption taxes has limited economic growth, and the deflation of the Yen, while good for Japanese exporters, has negatively impacted the wealth of much of the Japanese populace. Both countries also have negative demographic trajectories which, barring a dramatic change to immigration policy, will lead to a context in which relatively fewer workers will be supporting a rapidly graying population. All of this comes at a time when China is working to transform its Navy into a Blue Water Navy, Japan is seeking to remilitarize, and the United State has made it clear that it will back Japan in the event of any military disputes.
It is pretty clear that both Beijing and Tokyo have a variety of pressing concerns. Resolving the disputes over the islands would afford both China and Japan more bandwidth to address these obstacles. A resolution could also afford Tokyo a degree of flexibility as Japan’s activities in the East China Sea are similar to those of China in the South China Sea. In January 2013 the Philippines filed a lawsuit against China in the Permanent Court of Arbitration alleging violations of the United Nations’ Convention on the Law of the Sea. If the court findings favor The Philippines it could set a legal precedent that Beijing could use against Tokyo. Such a finding would not be an issue for the Japanese if the dispute over the islands were already resolved.
Despite the incentives to find a resolution the islands enflame nationalist sentiment in both countries. If either side is perceived as giving in too much there could be political consequences. It is also not impossible that any resolution in the East China Sea could be used as a template to resolve disputes in the South China Sea, thus, Beijing will not want to set any precedents that could be used against China. After all, Japan (backed by the US) and China are far more evenly matched than China and countries such as The Philippines and Vietnam. Beijing has no interest in setting precedents which weaker countries can use to the detriment of Chinese interests. In the next week we shall see how this potential compromise progresses. How far it goes and what each side is willing to give up will be telling not just for the Senkaku/Diaoyu Islands but also for disputes in the broader Western Pacific Region.
Friday, October 24, 2014
Could Somali Oil Deals Ultimately Threaten Shipping Through The Suez Canal?
Somalia is open for business. This is the message that Somali President Hassan Sheikh Mohamoud has been conveying since August’s US-Africa Leaders Summit in Washington. Monday’s Somalia Oil and Gas Summit saw this message further articulated upon with Somalia’s Petroleum Minister pledging to have oil production starting by 2020. This would be a major boost for the Somali economy as there has not been significant foreign investment in the country since civil war broke out in 1991. On the surface this investment would be wonderful for the Somalia as the revenues that the projects could generate could be used to rebuild infrastructure and provide security to attract foreign capital to land based projects rather than just off shore hydrocarbon extraction. Hopefully, this will be the case, however, more money means more resources to fight over. Though there are signs of improved relations between Mogadishu and the autonomous region of Puntland it is too early to tell how long these improvements will last. Meanwhile, relations with the self-declared (though not formally recognized) country of Somaliland remain as contentious as ever.
On October 14 the Mogadishu based Federal Government of Somalia (FGS) signed an agreement with Puntland that promised that the FGS would not seize land controlled by Puntland in order to create new states. Puntland had cut ties with Mogadishu in August over this concern. The agreement between the FGS and Puntland highlights the fact that these entities can work together as Puntland merely wants autonomy unlike Somaliland which declared itself an independent state in 1991. Despite the agreement there is no guarantee that improved relations between Puntland and the FGS will hold out. There is an estimated 10 billion barrels of oil off the Puntland coast. It is not realistic to think that the FGS will allow to Puntland the keep all revenues nor is likely that Puntland will allow Mogadishu to take the majority of the profits. For this reason the question of how profits from potential deals are divided must be monitored closely as terms deemed unfair to either side heighten tensions, diminish trust, and create a situation in which conflict is far more likely. If there is conflict the diversion of resources to fight rivals could lead to a rise in piracy and serve as a boon to al-Shabaab both of which could impact shipping through the Suez canal.
Somali Piracy had dropped 40% since its peak in 2011 however a resurgence could be possible if the limited military resources of Somali states were used to fight amongst themselves. The reality is that fisherman might resent oil companies if their operation were perceived as impacting the fishermens’ livelihood. This could drive them to protect their interest through force which could pave the way for an increase in piracy. If the FGS, Puntland, and/or Somaliland were busy fighting themselves stopping a rise in piracy could prove problematic. Though it is not impossible that Somalia would welcome foreign assistance in containing piracy it is also important to note that this request could be perceived as an incursion on Somali sovereignty. Some might see such assistance as Somali leadership admitting that it is weak. From a political perspective this is hardly the image that leaders want to project even at the best of times. A rise in piracy would not be cheap. The London School of Economics Cost has projected that for every $120 million seized by pirates customers and affected industries (e.g. Shipping) have lost between 0.9 and 3.3 billion dollar.
Al-Shabaab has been weekend in recent years with the September killing of its former leader Ahmed Abdi Godane being just the latest in a series of blows which have dramatically weakened al-Shabaab’s influence in the country. If competition over oil and natural gas led Mogadishu to concentrate its limited resources on expanding the FGS’s influence into Puntland and/or Somaliland it would be a welcome respite for the al-Shabaab as it would afford the organization time to regroup. Preventing the development of extra sources of revenue for the FGS is also a key incentive for al-Shabaab as additional funding for Mogadishu would give the FGS more tools to further weaken if not totally eradicate al-Shabaab. Though there may be internal division within al-Shabaab’s ranks it is important to note that existential threats can turn rivals into allies. A resurgence of al-Shabaab would not just threaten Somalia. It could also threaten other regional countries, such as Kenya, which are currently seeing a great deal of investment.
By its very nature more conflicts in Somalia would increase instability in the country. If this were to lead to a resurgence of piracy shipments through the Suez Canal could be adversely affected. These events are playing out at a time when crises such as ISIS and Ukraine are commanding much of the international community's attention and while internal conflicts in the European Union and the United States over economic policy is influencing how much of an appetite these countries have in becoming overly involved in another part of the world. If Puntland and the FGS can agree on profit sharing from oil and natural gas projects and if credible policies for addressing security concerns related to Somaliland, al-Shabaab, and piracy are put into place we could be looking at the beginning of a more stable and prosperous Somalia. That said, achieving all of these prerequisites is easier said than done and potential conflicts over oil and natural gas revenues could undo all the progress that Somalia has made in recent years.
On October 14 the Mogadishu based Federal Government of Somalia (FGS) signed an agreement with Puntland that promised that the FGS would not seize land controlled by Puntland in order to create new states. Puntland had cut ties with Mogadishu in August over this concern. The agreement between the FGS and Puntland highlights the fact that these entities can work together as Puntland merely wants autonomy unlike Somaliland which declared itself an independent state in 1991. Despite the agreement there is no guarantee that improved relations between Puntland and the FGS will hold out. There is an estimated 10 billion barrels of oil off the Puntland coast. It is not realistic to think that the FGS will allow to Puntland the keep all revenues nor is likely that Puntland will allow Mogadishu to take the majority of the profits. For this reason the question of how profits from potential deals are divided must be monitored closely as terms deemed unfair to either side heighten tensions, diminish trust, and create a situation in which conflict is far more likely. If there is conflict the diversion of resources to fight rivals could lead to a rise in piracy and serve as a boon to al-Shabaab both of which could impact shipping through the Suez canal.
Somali Piracy had dropped 40% since its peak in 2011 however a resurgence could be possible if the limited military resources of Somali states were used to fight amongst themselves. The reality is that fisherman might resent oil companies if their operation were perceived as impacting the fishermens’ livelihood. This could drive them to protect their interest through force which could pave the way for an increase in piracy. If the FGS, Puntland, and/or Somaliland were busy fighting themselves stopping a rise in piracy could prove problematic. Though it is not impossible that Somalia would welcome foreign assistance in containing piracy it is also important to note that this request could be perceived as an incursion on Somali sovereignty. Some might see such assistance as Somali leadership admitting that it is weak. From a political perspective this is hardly the image that leaders want to project even at the best of times. A rise in piracy would not be cheap. The London School of Economics Cost has projected that for every $120 million seized by pirates customers and affected industries (e.g. Shipping) have lost between 0.9 and 3.3 billion dollar.
Al-Shabaab has been weekend in recent years with the September killing of its former leader Ahmed Abdi Godane being just the latest in a series of blows which have dramatically weakened al-Shabaab’s influence in the country. If competition over oil and natural gas led Mogadishu to concentrate its limited resources on expanding the FGS’s influence into Puntland and/or Somaliland it would be a welcome respite for the al-Shabaab as it would afford the organization time to regroup. Preventing the development of extra sources of revenue for the FGS is also a key incentive for al-Shabaab as additional funding for Mogadishu would give the FGS more tools to further weaken if not totally eradicate al-Shabaab. Though there may be internal division within al-Shabaab’s ranks it is important to note that existential threats can turn rivals into allies. A resurgence of al-Shabaab would not just threaten Somalia. It could also threaten other regional countries, such as Kenya, which are currently seeing a great deal of investment.
By its very nature more conflicts in Somalia would increase instability in the country. If this were to lead to a resurgence of piracy shipments through the Suez Canal could be adversely affected. These events are playing out at a time when crises such as ISIS and Ukraine are commanding much of the international community's attention and while internal conflicts in the European Union and the United States over economic policy is influencing how much of an appetite these countries have in becoming overly involved in another part of the world. If Puntland and the FGS can agree on profit sharing from oil and natural gas projects and if credible policies for addressing security concerns related to Somaliland, al-Shabaab, and piracy are put into place we could be looking at the beginning of a more stable and prosperous Somalia. That said, achieving all of these prerequisites is easier said than done and potential conflicts over oil and natural gas revenues could undo all the progress that Somalia has made in recent years.
Sunday, September 28, 2014
Is There Sufficient Pressure to Finally Force a Consensus as to the Legal Status of the Caspian Sea?
The 4th Summit of the Caspian 5 (Russia, Iran, Azerbaijan, Turkmenistan, and Kazakhstan) will meet on September 29th in the southern Russian city of Astrakhan. The purpose of the conference is for these countries to come to a consensus as to the legal status of the Caspian Sea. Though there is some precedent for cooperation in managing the Caspian Sea and its surroundings, such as tackling criminal activity, consensus has thus far proven elusive. There are a variety of reasons for this impasse with Russia’s fear that the proposed Trans-Caspian pipeline would undermine Moscow’s ability to influence its neighbors being of particular prominence. Despite such challenges a variety of factors such as the effects of sanctions against Russia and the developing détente between the United States and Iran could mean that this summit could actually result in a consensus as to the legal status of the Caspian Sea. If this consensus were to become a reality it would be of great significance to Eurasian energy markets.
Pipelines that bypass Russian territory and cause Moscow to lose influence over countries that are dependent upon Russian energy exports has been a concern of the Kremlin for a long time. Moscow is well aware that the fragile but ongoing rapprochement between Iran and the United States could set the stage for the construction of pipelines that would link the Caspian to the Persian Gulf. Moscow also knows that if such a pipeline were built the proposed Trans-Caspian pipeline linking Turkmenistan with Azerbaijan would likely become a reality. These potential pipelines and the existing Baku-Tibilisi-Ceyhan pipeline are thus a serious threat to Russia’s ability to project power therefore Moscow has done everything that it can to prevent the development of such infrastructure. Currently, Russia is carrying on with its usual points of contention, e.g. claiming that developing pipelines in a seismically active area is a recipe for disaster. Despite this and other tactics, such as arguing that the Caspian is in fact no more than a large lake and thus is not governed by international laws that pertain to the seas, Moscow is facing a variety of challenges including a negative demographic trajectory and the economic and political consequences of the crisis in Ukraine. All of these factors could cause Russia to lose influence in Eurasia in the long-term therefore it is not impossible that Russia might try to negotiate agreements to protect its interests now while Moscow is in a position of relative strength. Ending the ambiguity surrounding the legal status of the Caspian Sea would also allow Moscow to devote resources to other issue such as Russia's Arctic claims and desire to control shipping lanes North of the Arctic Circle which are becoming more useful as the planet warms.
If the Caspian 5 Summit were to produce consensus as to how the resources of the Caspian should be divided and managed it is likely that such a resolution would be contingent upon assurances that Russia would have a stake in the management of any Trans-Caspian Pipelines. For this to happen it is likely that Iran’s demand that the Caspian be divided in to five equal parts would also be met. After all it is unlikely that Tehran would give Moscow what it wants and not want something in return. If consensus were to occur it is also possible that the Caspian would be delimited to ensure that any Trans-Caspian Pipelines passed through Russian territory thus giving both countries a stake in the management of any pipeline. The other Caspian 5 countries might not like this but they might accept it especially if Russia paid for some of the pipelines. It is also not impossible that the Caspian 5 could push for the Caspian Sea to be classified as a lake. After all, many of the Caspian 5 countries have an interest in limiting outside influence in the region. Ensuring that the United Nations’ Convention on the Law of the Sea did not apply to the Caspian Sea would be a means to this end. That said, it should be noted that even if the Caspian 5 countries agreed that the Caspian Sea is in fact a lake it is unlikely that the international community would recognize this recategorization.
As things stand now the Caspian 5 countries are contending with very different realities than the ones that they were living with during the 3rd Summit in 2010. As we have seen Russia is facing significant political and demographic challenges which could compel Moscow to make concessions that it might not have made in the past. We’ve already seen a precedent for similar concessions with May’s thirty year, $400 billion natural gas deal between Russia and China serving as a striking example. Negotiations for this deal had been going on for years but Russia had balked at China’s terms. Pressure put on Russia due to the crisis in Ukraine changed all this as Russia needed to find non-European customers. This shift forced Moscow to acquiesce to China’s demands. In terms of Iranian interests we should note that the ongoing rapprochement between the Washington and Tehran could set the stage for greater investment in Iran which would allow the country to further develop its energy infrastructure. We have also seen Kazakhstan and Turkmenistan’s energy sectors receiving a great deal of investment from the Chinese. The ability to export more energy would be beneficial to the treasuries of both countries thus any action that could lead to the development of pipelines in the Caspian Sea is likely to be championed by these countries. Turkmenistan and Azerbaijan will of course benefit from their proposed Trans-Caspian Pipeline so any move that can move that project ahead will presumably be backed by both Baku and Ashgabat. If these pipelines were developed it is likely that the political risks associated with Russia’s penchant for using energy exports as a tool of coercion are mitigated thus providing additional stability to energy markets in Eurasia. We shall know with in the coming days whether or not the 4th Summit of the Caspian 5 results in real change. If it does it could prove to be one of the more significant developments that Eurasia has seen in recent years.
Pipelines that bypass Russian territory and cause Moscow to lose influence over countries that are dependent upon Russian energy exports has been a concern of the Kremlin for a long time. Moscow is well aware that the fragile but ongoing rapprochement between Iran and the United States could set the stage for the construction of pipelines that would link the Caspian to the Persian Gulf. Moscow also knows that if such a pipeline were built the proposed Trans-Caspian pipeline linking Turkmenistan with Azerbaijan would likely become a reality. These potential pipelines and the existing Baku-Tibilisi-Ceyhan pipeline are thus a serious threat to Russia’s ability to project power therefore Moscow has done everything that it can to prevent the development of such infrastructure. Currently, Russia is carrying on with its usual points of contention, e.g. claiming that developing pipelines in a seismically active area is a recipe for disaster. Despite this and other tactics, such as arguing that the Caspian is in fact no more than a large lake and thus is not governed by international laws that pertain to the seas, Moscow is facing a variety of challenges including a negative demographic trajectory and the economic and political consequences of the crisis in Ukraine. All of these factors could cause Russia to lose influence in Eurasia in the long-term therefore it is not impossible that Russia might try to negotiate agreements to protect its interests now while Moscow is in a position of relative strength. Ending the ambiguity surrounding the legal status of the Caspian Sea would also allow Moscow to devote resources to other issue such as Russia's Arctic claims and desire to control shipping lanes North of the Arctic Circle which are becoming more useful as the planet warms.
If the Caspian 5 Summit were to produce consensus as to how the resources of the Caspian should be divided and managed it is likely that such a resolution would be contingent upon assurances that Russia would have a stake in the management of any Trans-Caspian Pipelines. For this to happen it is likely that Iran’s demand that the Caspian be divided in to five equal parts would also be met. After all it is unlikely that Tehran would give Moscow what it wants and not want something in return. If consensus were to occur it is also possible that the Caspian would be delimited to ensure that any Trans-Caspian Pipelines passed through Russian territory thus giving both countries a stake in the management of any pipeline. The other Caspian 5 countries might not like this but they might accept it especially if Russia paid for some of the pipelines. It is also not impossible that the Caspian 5 could push for the Caspian Sea to be classified as a lake. After all, many of the Caspian 5 countries have an interest in limiting outside influence in the region. Ensuring that the United Nations’ Convention on the Law of the Sea did not apply to the Caspian Sea would be a means to this end. That said, it should be noted that even if the Caspian 5 countries agreed that the Caspian Sea is in fact a lake it is unlikely that the international community would recognize this recategorization.
As things stand now the Caspian 5 countries are contending with very different realities than the ones that they were living with during the 3rd Summit in 2010. As we have seen Russia is facing significant political and demographic challenges which could compel Moscow to make concessions that it might not have made in the past. We’ve already seen a precedent for similar concessions with May’s thirty year, $400 billion natural gas deal between Russia and China serving as a striking example. Negotiations for this deal had been going on for years but Russia had balked at China’s terms. Pressure put on Russia due to the crisis in Ukraine changed all this as Russia needed to find non-European customers. This shift forced Moscow to acquiesce to China’s demands. In terms of Iranian interests we should note that the ongoing rapprochement between the Washington and Tehran could set the stage for greater investment in Iran which would allow the country to further develop its energy infrastructure. We have also seen Kazakhstan and Turkmenistan’s energy sectors receiving a great deal of investment from the Chinese. The ability to export more energy would be beneficial to the treasuries of both countries thus any action that could lead to the development of pipelines in the Caspian Sea is likely to be championed by these countries. Turkmenistan and Azerbaijan will of course benefit from their proposed Trans-Caspian Pipeline so any move that can move that project ahead will presumably be backed by both Baku and Ashgabat. If these pipelines were developed it is likely that the political risks associated with Russia’s penchant for using energy exports as a tool of coercion are mitigated thus providing additional stability to energy markets in Eurasia. We shall know with in the coming days whether or not the 4th Summit of the Caspian 5 results in real change. If it does it could prove to be one of the more significant developments that Eurasia has seen in recent years.
Friday, September 12, 2014
Factors that Could Transform the Shanghai Cooperation Organization Into a More Powerful Entity
The 14th Summit of the Shanghai Cooperation Organization (SCO) was held from September 11th to September 12th in Dushanbe Tajikistan. Though security concerns resulting from the United States’ withdrawal from Afghanistan and the economic consequences of sanctions against Russia due to the crisis in Ukraine dominated the meeting, fora such as this serve as useful venues for regional powers to discuss common concerns. Given that SCO is looking to admit new members this could increase the utility of the organization. For these reasons an understanding of SCO is more important than ever.
The Shanghai Cooperation Organization was formed in June 2001 by the Republic of Kazakhstan, the People’s Republic of China, the Kyrgyz Republic, the Russian Federation, the Republic of Tajikistan and the Republic of Uzbekistan. The stated goals of SCO were to cooperate on issues of concern such as security, environmental degradation, and economic cooperation and development. Despite some successes in combating terrorism, narcotics trafficking, and smuggling SCO faces significant limitations in its ability to project power. A key limitation of the organization is its refusal to interfere in the internal affairs of other countries. All of the members of SCO have domestic problems to which they are sensitive to thus any action on the part of SCO members that could be perceived as sanctioning intervention could set a precedent that would serve as justification for the international community to interfere with the internal affairs of these countries. This is why such precedents will be avoided. This reality begs the question, "How can an entity project power if it refuses too?" This reality combined with other internal tensions, such as Russia and China’s ambition to dominate the organization, means that effective power projection is unlikely anytime soon.
Despite structural factors which limit the Shanghai Cooperation Organization’s ability to project force beyond anti-terrorism/law enforcement operations the organization’s activities should be monitored as it is possible that greater economic cooperation amongst members and neighboring states (the so-called Silk Road Economic Belt) could lead to the further development of Central Asian energy resources. Two key questions we should be asking are:
The first question will be answered largely by whether or not there are enough factors to encourage cooperation (aside from border security and anti-terrorism/joint law enforcement operations) amongst states with differing interests. To a degree we might be seeing such an alignment of interests now. Essentially, we have a group of countries all of whom have a vested interest in further developing the energy sector of Central Asia while limiting Western interference in the region. There are several developments that have and/or are emerging whose implications we must ponder:
All of these developing stories have the potential to influence global energy markets. For this reason it is more important than ever to keep tabs on summits such as the annual meeting of the Shanghai Cooperation Organization. This will become even more true if India, Pakistan, and Iran were ultimately admitted to SCO. There are of course reasons that can prevent these countries from joining the organization. Russia wants India to join to weaken Chinese influence in SCO. If this were to happen China would want Pakistan to join to offset India admission. Meanwhile no one really trusts Iran and SCO members currently use the sanctions against Tehran to justify not offering admission. Despite these challenges it is difficult to argue that SCO truly represents Eurasia if these countries are not admitted. However, one does not need to be a member of the Shanghai Cooperation Organization to work with it. It will be interesting to see if the factors discussed earlier makes SCO into a more important organization.
The Shanghai Cooperation Organization was formed in June 2001 by the Republic of Kazakhstan, the People’s Republic of China, the Kyrgyz Republic, the Russian Federation, the Republic of Tajikistan and the Republic of Uzbekistan. The stated goals of SCO were to cooperate on issues of concern such as security, environmental degradation, and economic cooperation and development. Despite some successes in combating terrorism, narcotics trafficking, and smuggling SCO faces significant limitations in its ability to project power. A key limitation of the organization is its refusal to interfere in the internal affairs of other countries. All of the members of SCO have domestic problems to which they are sensitive to thus any action on the part of SCO members that could be perceived as sanctioning intervention could set a precedent that would serve as justification for the international community to interfere with the internal affairs of these countries. This is why such precedents will be avoided. This reality begs the question, "How can an entity project power if it refuses too?" This reality combined with other internal tensions, such as Russia and China’s ambition to dominate the organization, means that effective power projection is unlikely anytime soon.
Despite structural factors which limit the Shanghai Cooperation Organization’s ability to project force beyond anti-terrorism/law enforcement operations the organization’s activities should be monitored as it is possible that greater economic cooperation amongst members and neighboring states (the so-called Silk Road Economic Belt) could lead to the further development of Central Asian energy resources. Two key questions we should be asking are:
- How effective is SCO as a forum for formal and informal discussions of member and observers such as Iran, India, and Pakistan?
- What factors exist that could encourage cooperation or conflict?
The first question will be answered largely by whether or not there are enough factors to encourage cooperation (aside from border security and anti-terrorism/joint law enforcement operations) amongst states with differing interests. To a degree we might be seeing such an alignment of interests now. Essentially, we have a group of countries all of whom have a vested interest in further developing the energy sector of Central Asia while limiting Western interference in the region. There are several developments that have and/or are emerging whose implications we must ponder:
- The sanctions imposed on Russia due to the crisis in Ukraine has led Moscow to impose import bans on Western products and forced Russia to seek new markets for its oil and natural gas.
May’s 30 year 400 billion USD natural gas deal between China and Russia is an example of this eastward shift. (Russia got a very poor deal here as Moscow was desperate to secure a deal and Beijing knew it had all the leverage).
- China is actively working towards developing its interior. Access to cheap energy is an essential component of this strategy. Central Asia can serve as such a source.
- Many Central Asian countries’ economies are heavily tied to Russia and are dependent upon remittances sent back from expatriate workers residing in Russia. A fluctuating ruble or a reduction in remittances is heavily damaging to their economies so they have a vested interest in ensuring that Russia is making money. If Moscow cannot profit off trade with the West it will have to look elsewhere. Clearly, this is what Russia is doing. Central Asian countries have an interest in facilitating this process.
- Interest in developing the energy resources of the Caspian is growing while factors that have limited development in the region are arguably diminishing. Traditionally, Azerbaijan has been the dominate player in the region vis-à-vis energy exports but if the Trans-Caspian Pipeline were built and sanction against Iran were dropped Turkmenistan and Iran could both become significant energy exporters. Russia has opposed the Trans-Caspian Pipeline as it would undermine Moscow’s ability to force countries to respect Russia’s will or risk having their energy supplies cut off. Iran has significant supplies of natural gas but due to sanctions has been unable to attract the capital and technical know-how to best exploit them. Russia will of course do what it can to prevent competition from developing however Moscow is facing constraints that it did not have to contend with prior to the crisis in Ukraine. It is not impossible that we will see greater investment in the Caspian. The question is how involved will Russia be? The Caspian 5’s summit on September 29th could provide some answers. If some of the territorial disputes over the Caspian were resolved amicably it would set the stage for significant investment in the region. If this were to happen it would indicate that Russian companies would have a privileged position in any consortium which would exploit the resources of the Caspian.
All of these developing stories have the potential to influence global energy markets. For this reason it is more important than ever to keep tabs on summits such as the annual meeting of the Shanghai Cooperation Organization. This will become even more true if India, Pakistan, and Iran were ultimately admitted to SCO. There are of course reasons that can prevent these countries from joining the organization. Russia wants India to join to weaken Chinese influence in SCO. If this were to happen China would want Pakistan to join to offset India admission. Meanwhile no one really trusts Iran and SCO members currently use the sanctions against Tehran to justify not offering admission. Despite these challenges it is difficult to argue that SCO truly represents Eurasia if these countries are not admitted. However, one does not need to be a member of the Shanghai Cooperation Organization to work with it. It will be interesting to see if the factors discussed earlier makes SCO into a more important organization.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
Friday, April 18, 2014
The Potential Impact of Improving Azeri-Iranian Relations on the Extraction of Oil and Natural Gas from the Caspian Sea
Last week Azerbaijani President Ilham Aliyev met with his Iranian counterpart Hassan Rouhani and Iranian Supreme Leader Ayatollah Ali Khamenei in Tehran. These meetings mark a significant step towards improving relations between the two countries which have been strained in recent years due to Iran’s displeasure with Azerbaijan’s positive relations with the United States and Israel, Azerbaijan’s distaste for former Iranian President Mahmoud Ahmadinejad, and accusations from both sides that the other side was interfering with their internal affairs. The potential for US-Iranian détente and fear over Russia’s actions in the Caucasus have removed an impediment for dialogue and created an incentive to cooperate respectively. Such cooperation could have a significant impact on regional energy cooperation which will likely affect global energy markets.
One result of improved Azeri-Iranian relations could be the development of oil and natural gas pipelines that link the Caspian Sea to the Persian Gulf. Such a route was not feasible in recent years for a variety of reasons such as poor relations between Baku and Tehran, US Sanctions, and Russian pressure. Now we find ourselves in situation where Azerbaijan has an interest in improving relations with Iran while knowing that such an attempt is unlikely to damage Baku’s relationship with Washington. In fact Washington will likely support such a move as the US has an interest in undermining Russia’s energy policy. The EU and Turkey will also support an improvement in Azeri-Iranian relations as Brussels and Ankara have a long-term interest in diversifying their energy supplies. Such a move goes against Russian interests. It should be noted that during the visit President Aliyev was quoted as saying, "Many powers do not want a friendship between Iran and Azerbaijan, and are after disrupting this relationship. The officials of the two countries must make efforts to counter these steps." Presumably he was talking about Russia.
Russia’s regional military presence puts pressure on Azerbaijan which forces Baku to exercise caution with regards to any actions that could undermine Russia's energy interests. Currently, Russia has troops based in neighboring Armenia and in the Georgian break away republics of South Ossetia and Abkhazia. At the present there is no indication that Moscow has any plans to invade Azerbaijan. That said, Russia annexation of Crimea and the 2008 Russian-Georgian War serve as testaments that Moscow will act decisively to protect Russian interests. Suffice it to say Russia's regional military presence does not sit well with Baku. By improving relations with Iran and maintaining positive relations with Turkey and Georgia, Azerbaijan could gain support against Russia. An indicator that will likely precede significant energy cooperation is a security agreement between Tehran and Baku with the potential involvement of Ankara and Tbilisi. The reality is that significant cooperation in the region goes against Russian interests thus a credible deterrent will need to precede any developments in energy policy that go against Moscow’s interests. Azerbaijan by itself is too weak to counter any threats from Russia, however, if Baku is credibly backed by Tehran and Ankara, Moscow will have to be more careful in how it responds to any shifts in Azerbaijani energy policy that go against Russian interests.
One result of improved Azeri-Iranian relations could be the development of oil and natural gas pipelines that link the Caspian Sea to the Persian Gulf. Such a route was not feasible in recent years for a variety of reasons such as poor relations between Baku and Tehran, US Sanctions, and Russian pressure. Now we find ourselves in situation where Azerbaijan has an interest in improving relations with Iran while knowing that such an attempt is unlikely to damage Baku’s relationship with Washington. In fact Washington will likely support such a move as the US has an interest in undermining Russia’s energy policy. The EU and Turkey will also support an improvement in Azeri-Iranian relations as Brussels and Ankara have a long-term interest in diversifying their energy supplies. Such a move goes against Russian interests. It should be noted that during the visit President Aliyev was quoted as saying, "Many powers do not want a friendship between Iran and Azerbaijan, and are after disrupting this relationship. The officials of the two countries must make efforts to counter these steps." Presumably he was talking about Russia.
Russia’s regional military presence puts pressure on Azerbaijan which forces Baku to exercise caution with regards to any actions that could undermine Russia's energy interests. Currently, Russia has troops based in neighboring Armenia and in the Georgian break away republics of South Ossetia and Abkhazia. At the present there is no indication that Moscow has any plans to invade Azerbaijan. That said, Russia annexation of Crimea and the 2008 Russian-Georgian War serve as testaments that Moscow will act decisively to protect Russian interests. Suffice it to say Russia's regional military presence does not sit well with Baku. By improving relations with Iran and maintaining positive relations with Turkey and Georgia, Azerbaijan could gain support against Russia. An indicator that will likely precede significant energy cooperation is a security agreement between Tehran and Baku with the potential involvement of Ankara and Tbilisi. The reality is that significant cooperation in the region goes against Russian interests thus a credible deterrent will need to precede any developments in energy policy that go against Moscow’s interests. Azerbaijan by itself is too weak to counter any threats from Russia, however, if Baku is credibly backed by Tehran and Ankara, Moscow will have to be more careful in how it responds to any shifts in Azerbaijani energy policy that go against Russian interests.
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.
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.
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:
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.
- 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.
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 détente 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.
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 détente 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.
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.
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