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.
Showing posts with label Geopolitics. Show all posts
Showing posts with label Geopolitics. Show all posts
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, 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.
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