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.
Friday, May 2, 2014
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.
Friday, February 21, 2014
The Impact of Turkish, Georgian and Azerbaijani Infrastructure Projects on European and Asian Markets
On Wednesday the foreign ministers of Turkey, Azerbaijan and Georgia met in Ganja, Azerbaijan to discuss regional cooperation. This is the most recent step in the ongoing integration of the three countries which, amongst other things, links Caspian energy resources to the Mediterranean. This development is occurring at a time when the instability in Ukraine calls into question the viability of that country as a transit state for energy that is intended for Europe. After all the deep divisions between Eastern and Western Ukraine and the reality that the opposition movement is highly fragmented makes it questionable that today’s concessions by the Yanukovych administration will lead to long term political stability in Ukraine. Existing and proposed infrastructure in the Azerbaijan, Georgia, Turkey corridor could help offset disruptions that instability in Ukraine might produce.
In 2012 the Trabzon Declaration called for stronger economic, energy and political relations between Ankara, Tbilisi and Baku. This declaration formalized an existing pattern of relations between Turkey, Georgia and Azerbaijan which has resulted in several important infrastructure projects. The Baku-Tbilisi-Ceyhan (BTC) Pipeline transports crude oil from the Caspian Sea to the Turkish coast of the Mediterranean. This pipeline is complemented by the Baku-Tbilisi-Erzurum Gas Pipeline which aids the export of natural gas. The Baku-Tbilisi-Kars Railway is expected to be completed by the end of 2014. This corridor will connect Azerbaijan, Georgian and Turkish railways and will expand freight service which should make the export of raw material from Central Asia more economical. These projects can help develop the region and could serve as an important source of primary commodities for Asian and European markets.
Despite Turkey’s current political turmoil, the ability to serve as an energy corridor to the Mediterranean benefits whoever is in power in Ankara while the expansion of rail services would help Georgia and Azerbaijan’s exports. For these regions all parties have an incentive to cooperate. Though Russia will not want to see its control over energy exports to Europe lessened it is important to note that Moscow could benefit from these projects. For example, there are ongoing talks between Moscow and Baku to reverse the flow of oil through the Baku-Novorossiysk Pipeline with the intent of sending some of the oil through the Baku-Tbilisi-Ceyhan Pipeline which in theory could be a more economical manner for Russia to serve some of its European clients. There have also been proposals to link regional railways to Russian rail infrastructure which would aid Russian exports. Though it is likely that Russia would attempt to stop the development of an alternative energy source to Europe it is not unreasonable to think that the development of an alternative energy corridor in which Moscow has a degree of control would be allowed to progress without Russian interference. No matter what happens the development of pipelines and railways in the Azerbaijan, Georgia, Turkey corridor could lead to greater development in the region and serve as a reliable supply of raw materials to Asian and European (and potentially East and Southern African) markets.
In 2012 the Trabzon Declaration called for stronger economic, energy and political relations between Ankara, Tbilisi and Baku. This declaration formalized an existing pattern of relations between Turkey, Georgia and Azerbaijan which has resulted in several important infrastructure projects. The Baku-Tbilisi-Ceyhan (BTC) Pipeline transports crude oil from the Caspian Sea to the Turkish coast of the Mediterranean. This pipeline is complemented by the Baku-Tbilisi-Erzurum Gas Pipeline which aids the export of natural gas. The Baku-Tbilisi-Kars Railway is expected to be completed by the end of 2014. This corridor will connect Azerbaijan, Georgian and Turkish railways and will expand freight service which should make the export of raw material from Central Asia more economical. These projects can help develop the region and could serve as an important source of primary commodities for Asian and European markets.
Despite Turkey’s current political turmoil, the ability to serve as an energy corridor to the Mediterranean benefits whoever is in power in Ankara while the expansion of rail services would help Georgia and Azerbaijan’s exports. For these regions all parties have an incentive to cooperate. Though Russia will not want to see its control over energy exports to Europe lessened it is important to note that Moscow could benefit from these projects. For example, there are ongoing talks between Moscow and Baku to reverse the flow of oil through the Baku-Novorossiysk Pipeline with the intent of sending some of the oil through the Baku-Tbilisi-Ceyhan Pipeline which in theory could be a more economical manner for Russia to serve some of its European clients. There have also been proposals to link regional railways to Russian rail infrastructure which would aid Russian exports. Though it is likely that Russia would attempt to stop the development of an alternative energy source to Europe it is not unreasonable to think that the development of an alternative energy corridor in which Moscow has a degree of control would be allowed to progress without Russian interference. No matter what happens the development of pipelines and railways in the Azerbaijan, Georgia, Turkey corridor could lead to greater development in the region and serve as a reliable supply of raw materials to Asian and European (and potentially East and Southern African) markets.
Wednesday, February 12, 2014
Will Spain’s Anti-Abortion Law Increase the Number and Size of Protests in Europe?
Generally speaking I focus on tangible resources in these posts. These physical goods range from oil to infrastructure. That said, we must note that some resources are valuable yet intangible. A lack of a concrete form does not mean that they do not merit discussion. These abstract resources can take many forms such as obtaining a quality education, the ability to utilize a specific service, and an institutional structure that provides the vast majority of a population with the opportunity to provide for themselves and their family. A codified sets of rights also falls under the rubric of intangible resources as they guarantee the population specified rights and privileges. By limiting a woman’s right to an abortion Madrid may very well have added more fuel to the protest movements in Spain. As we have seen with the Arab Spring such a shift has the ability to spread far beyond the borders of one state impacting the political, social, economic, and security stability of an entire region.
Between alleged corruption in the royal family, an unpopular government, and a crippling economic crisis Spain's situation is terrible to say the least. This does not mean that things cannot get worse. When peoples’ rights are stripped from them they will often protest. It is likely that the demonstrations that have already occurred in response to the new abortion law will only become larger given that opinion polls are estimating that up to 80% of Spaniards, including practicing Catholics, feel that the proposed law was not necessary. (It is important to note that "opposing" and "not necessary" are not the same thing. That said, it is also safe to say that there is significant opposition to the law.). As we have seen with other protest movements, such as the Occupy Movement, protests attract protestors even if their personal cause is not the purpose of the protest. On one hand this hinders the development of effective leadership, as the demonstrations are not cohesive. On the other hand the increased turnout can lead to increased social instability.
Protest movements can start and spread due to unexpected incidents. Mohamed Bouazizi’s self-immolation quite literally sparked the Arab Spring. The causes of demonstrations can also be relatively unnecessary. The protests in Ukraine, which started when Kiev froze negotiations to further integrate with the EU, had diminished until President Yankuvych passed an anti-protest law that compromised Ukrainians' freedom to protest. Given many Ukrainians' response to the attempted removal of a right it is neither unreasonable to think that Spain’s new abortion law will provoke massive demonstrations nor is it unrealistic to think that Spaniards who have other grievances will use these protests to make their voices heard. If such incidents were to occur it is also possible that they could further provoke protest movements in other countries. These demonstration could help increase the power of political parties that want to limit European integration. Nationalist Parties such as Marine Le Pen’s National Front in France, Geert Wilders’s Freedom Party in the Netherlands, and Greece’s Golden Dawn are examples of political movements whose ideologies have historically been relatively fringe yet have become far more popular as the economic crisis has carried on in Europe. The increased protests that Spain’s recent actions might provoke could serve as an ideal fora for these groups to attract more support.
Europe will not see the sort of instability that we have seen in North Africa and Southwest Asia as Europe is democratic (and thus unpopular leaders can be voted out) and significantly richer. That said, an increase of protests is the last thing that Europe need during a crucial year in which May’s European Parliamentary Elections could see nationalist parties make political gains which would further limit Brussels ability to act decisively. The forthcoming stress tests for many European banks will also add a greater degree of economic instability to existing political, social and security concerns. Is Europe doomed in the long term? No. Even if the EU as we know it sees a fundamental institutional shift we are still looking at a region with a massive amount of financial and human capital as well as an important geographic location and the infrastructure to maximize its utility. Though a rising dependency ratio will cause problems in the coming decades and some countries of the European Periphery will remain poor the European Core will remain significant. That said, the potential for instability that Madrid has just unleashed is the last thing that Europe needs in 2014.
Between alleged corruption in the royal family, an unpopular government, and a crippling economic crisis Spain's situation is terrible to say the least. This does not mean that things cannot get worse. When peoples’ rights are stripped from them they will often protest. It is likely that the demonstrations that have already occurred in response to the new abortion law will only become larger given that opinion polls are estimating that up to 80% of Spaniards, including practicing Catholics, feel that the proposed law was not necessary. (It is important to note that "opposing" and "not necessary" are not the same thing. That said, it is also safe to say that there is significant opposition to the law.). As we have seen with other protest movements, such as the Occupy Movement, protests attract protestors even if their personal cause is not the purpose of the protest. On one hand this hinders the development of effective leadership, as the demonstrations are not cohesive. On the other hand the increased turnout can lead to increased social instability.
Protest movements can start and spread due to unexpected incidents. Mohamed Bouazizi’s self-immolation quite literally sparked the Arab Spring. The causes of demonstrations can also be relatively unnecessary. The protests in Ukraine, which started when Kiev froze negotiations to further integrate with the EU, had diminished until President Yankuvych passed an anti-protest law that compromised Ukrainians' freedom to protest. Given many Ukrainians' response to the attempted removal of a right it is neither unreasonable to think that Spain’s new abortion law will provoke massive demonstrations nor is it unrealistic to think that Spaniards who have other grievances will use these protests to make their voices heard. If such incidents were to occur it is also possible that they could further provoke protest movements in other countries. These demonstration could help increase the power of political parties that want to limit European integration. Nationalist Parties such as Marine Le Pen’s National Front in France, Geert Wilders’s Freedom Party in the Netherlands, and Greece’s Golden Dawn are examples of political movements whose ideologies have historically been relatively fringe yet have become far more popular as the economic crisis has carried on in Europe. The increased protests that Spain’s recent actions might provoke could serve as an ideal fora for these groups to attract more support.
Europe will not see the sort of instability that we have seen in North Africa and Southwest Asia as Europe is democratic (and thus unpopular leaders can be voted out) and significantly richer. That said, an increase of protests is the last thing that Europe need during a crucial year in which May’s European Parliamentary Elections could see nationalist parties make political gains which would further limit Brussels ability to act decisively. The forthcoming stress tests for many European banks will also add a greater degree of economic instability to existing political, social and security concerns. Is Europe doomed in the long term? No. Even if the EU as we know it sees a fundamental institutional shift we are still looking at a region with a massive amount of financial and human capital as well as an important geographic location and the infrastructure to maximize its utility. Though a rising dependency ratio will cause problems in the coming decades and some countries of the European Periphery will remain poor the European Core will remain significant. That said, the potential for instability that Madrid has just unleashed is the last thing that Europe needs in 2014.
Friday, February 7, 2014
Will Shifts In East Asian Demographics Impact Reactions To North Korean Aggression?
Relations between Seoul and Pyongyang are especially tense this month due to the annual "Foal Eagle" joint military drill conducted by the US and South Korea that will be held at the end of February. North Korea views these exercises as a provocation and has already threatened to cancel the proposed family reunions scheduled for February 20th to the 25th stating that "Dialogue and exercises of war" are incompatible. This comes at a time when Kim Jong Un is trying to consolidate his power with the recent execution of his uncle Chang Song-thaek providing an example of the brutality of this process.
When we look at the current tensions on the Korean Peninsula it is important to remember that North Korea has a history of taking action when the US military is in the region. For example the attacks on Yeonpyeong Island on November 23rd, 2010 coincided with the Hoguk Exercises which were a joint Korean-US undertaking on the western shore of the Korean Peninsula. Last year’s drills were especially tense provoking North Korea to threaten pre-emptive nuclear strikes. Given the statements coming out of Pyongyang this year it is likely that tensions will be as bad if not worse. For these reasons some form of aggression from North Korea would not be unexpected. What is different this year is that the geopolitical climate of East Asia has shifted. This shift is attributed to numerous factors one of the most important of which is changing demographics.
Much of East Asia is facing a demographic crisis in which the population is aging rapidly while birth rates have fallen. Since 1978 China has had a one-child policy (which is now being reformed) and in the past few decades certain parts of Japan and South Korea have in many ways had a de facto one child policy due to a variety of reasons such as the high cost of raising children. 1984 was the last year that South Korea’s total fertility rate was 2.0. This metric has fluctuated between 1.1 and 1.2 for over a decade. Japan’s total fertility rate has not been 2.0 since 1974 and has ranged from 1.3 and 1.4 since 2002. From an economic standpoint this demographic shift is a challenge as the youth must provide more support to the elderly than in previous decades and the percentage of the population that can be classified as elderly is becoming much larger. This change is also forcing countries to stake territorial claims and make security arrangements now when they are in a position of relative strength.
From a security standpoint declining populations will mean a significant decrease in the number of people who are fit for military duty (immigration could mitigate this issue but at the present none of the countries in question are particularly keen on welcoming large numbers of foreigners). This dynamic combined with the reality that the US will not guarantee security in the manner that it has in the past are forcing China, South Korea, and Japan to shift their policies in a more aggressive manner. This change takes numerous forms such as the establishment of China’s Air Defense Identification Zone over a significant portion of the East China Sea and Japan’s efforts to build up its military. Such a situation increases the chance for conflict. In the past North Korea has been able to get away with a high degree of brinkmanship. Given the current geopolitical shift and evidence that Beijing is beginning to lose patience with Pyongyang it is not impossible that acts of aggression that in the past would only provoke condemnation might now produce more concrete action. For these reason we must be particularly concerned with East Asia this February. History provides us with countless examples of incidents that usually would have stayed minor but have become amplified due to social, political and economic changes such as a major shift in the demographics of a country. Though it can be a challenge to predict the exact form that a potential conflict will take we do know that major structural shift will usually increase tensions. Understanding the nature of these shifts better equips us to address these challenges.
When we look at the current tensions on the Korean Peninsula it is important to remember that North Korea has a history of taking action when the US military is in the region. For example the attacks on Yeonpyeong Island on November 23rd, 2010 coincided with the Hoguk Exercises which were a joint Korean-US undertaking on the western shore of the Korean Peninsula. Last year’s drills were especially tense provoking North Korea to threaten pre-emptive nuclear strikes. Given the statements coming out of Pyongyang this year it is likely that tensions will be as bad if not worse. For these reasons some form of aggression from North Korea would not be unexpected. What is different this year is that the geopolitical climate of East Asia has shifted. This shift is attributed to numerous factors one of the most important of which is changing demographics.
Much of East Asia is facing a demographic crisis in which the population is aging rapidly while birth rates have fallen. Since 1978 China has had a one-child policy (which is now being reformed) and in the past few decades certain parts of Japan and South Korea have in many ways had a de facto one child policy due to a variety of reasons such as the high cost of raising children. 1984 was the last year that South Korea’s total fertility rate was 2.0. This metric has fluctuated between 1.1 and 1.2 for over a decade. Japan’s total fertility rate has not been 2.0 since 1974 and has ranged from 1.3 and 1.4 since 2002. From an economic standpoint this demographic shift is a challenge as the youth must provide more support to the elderly than in previous decades and the percentage of the population that can be classified as elderly is becoming much larger. This change is also forcing countries to stake territorial claims and make security arrangements now when they are in a position of relative strength.
From a security standpoint declining populations will mean a significant decrease in the number of people who are fit for military duty (immigration could mitigate this issue but at the present none of the countries in question are particularly keen on welcoming large numbers of foreigners). This dynamic combined with the reality that the US will not guarantee security in the manner that it has in the past are forcing China, South Korea, and Japan to shift their policies in a more aggressive manner. This change takes numerous forms such as the establishment of China’s Air Defense Identification Zone over a significant portion of the East China Sea and Japan’s efforts to build up its military. Such a situation increases the chance for conflict. In the past North Korea has been able to get away with a high degree of brinkmanship. Given the current geopolitical shift and evidence that Beijing is beginning to lose patience with Pyongyang it is not impossible that acts of aggression that in the past would only provoke condemnation might now produce more concrete action. For these reason we must be particularly concerned with East Asia this February. History provides us with countless examples of incidents that usually would have stayed minor but have become amplified due to social, political and economic changes such as a major shift in the demographics of a country. Though it can be a challenge to predict the exact form that a potential conflict will take we do know that major structural shift will usually increase tensions. Understanding the nature of these shifts better equips us to address these challenges.
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