Stratfor’s Global Intelligence: Week of Feb. 1, 2016

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BISHKEK (TCA) — The Times of Central Asia presents to its readers Stratfor’s Global Intelligence, a weekly review of the most important events that happened in the world — from Europe to Middle East to Russia to Central Asia to Afghanistan to China and the Americas.

The Week That Was

There are a number of reasons why we are watching Italy much more closely this year. The first is that Italy’s banks are weighed down with bad debt and failure to adequately address the issue threatens to reignite a financial crisis in the eurozone. Italy is also a core European power in the southern periphery, prepared to stand up to German directives. And, soon or later, migrants who are blocked along the Balkan route from Greece will redirect themselves to the Italian coast and Italy will play a leading role an intervention in Libya across the Mediterranean Sea. This week the focus was on the search for a solution to Italy’s banking problem. After a month of dramatic losses in Italian bank shares, European and Italian authorities on Tuesday finally managed to come up with a solution to the Italian banks’ 200-billion-euro non-performing loan problem. The mechanism they agreed upon was trumpeted as a success, since it enabled involvement by the Italian government without contravening European laws against state aid. However, the solution looked too good to be true and it probably is.

The Italian government guarantees will have to be issued at market rates, which means the situation has not changed much for ailing banks, which will still need to suffer severe write-downs on the loans in order to get them off their books. These write-downs would hit their already shaky balance sheets and might trigger a bank run, which is the fearsome eventuality that inspired the negotiations in the first place. After digesting this new information, the market showed itself to be largely unimpressed, with Italian bank share prices dropping another 5 percent on Thursday. Thus, at this point, Tuesday’s deal looks less like a miracle cure and more like a placebo — a placebo that the patient does not even have faith in.

So we will be watching Italian bank shares closely in the coming weeks, with the expectation that more falls will drive the European Union and Italy back to the negotiating table once again. In order to solve this problem it is likely that the European Commission will ultimately have to compromise on its principles against state aid. That would deal a further blow to the fledgling banking union, which only came into force on Jan. 1, and which was already suffering due to German resistance to the creation of a deposit insurance scheme.

In another unavailing European search for a solution, Greece has become an easy target for EU members fed up with the migrant crisis. Austria has revived threats to kick Greece out of Schengen Agreement as punishment for not doing enough to limit the migrant flow. In reality, such a move would do little to stem migrant traffic since Greece does not even share borders with Schengen members. Instead, Greek citizens traveling within the European Union would be punished, alienating Athens further from the EU establishment. Nonetheless, migrant traffic will increase as the weather gets warmer in the coming months, and that means more political pressure on Athens from other EU members. Starting this week this situation will become even more difficult as Greece comes under review for its compliance with the bailout program. So as international creditors’ are once again poring over Greece’s books and negotiating another tranche of financial aid, Greece will be struggling to tame social unrest and facing impossible demands from its EU peers to stem the migrant flow. Athens will naturally try to bargain migrant assistance with leniency on the bailout, but that is not going to go over well in Berlin, which is also under significant political pressure and faces local elections in March. An exciting couple months ahead indeed for Europe.

This week also saw revived talk of a coordinated output by OPEC and non-OPEC members, with all eyes on Russia and Saudi Arabia. Besides Russian private firm Lukoil, who strays quite a bit from its Russian energy peers, Russian energy firms are not advocating an imminent production cut, nor has anything been coordinated among these firms for a potential cut. Before it considers reducing production, Saudi Arabia will try to assess the extent to which U.S. production will stray from its current level of around 9.3 million barrels per day. Riyadh, however, is also going to remain highly resistant to ceding market share to the Iranians as that country re-enters the market. We are not counting on a coordinated cut any time soon.

Though there is little to get excited about on the Syrian political negotiations (most of the relevant rebel groups did not even bother to show up in Geneva Friday and many obstacles remain on that front,) we are seeing some movement when it comes to U.S.-Turkish military coordination for northern Syria. Our sources claim that an understanding was reached between Ankara and Washington where the United States is holding back Syrian Kurdish rebel forces from operating west of the Euphrates (a red line for the Turks) while Turkey has agreed to expand U.S. access to Turkish air bases in the southeast with the expectation that the United States can provide air cover for a potential ground operation into Jarablus on the Syrian border (thus mitigating the Russian threat to Turkey.) If this is true, we should start to see additional U.S. aircraft, troop movements and logistical buildup at these Turkish bases. We are also looking to see if the withdrawal of Turkish-backed Nour el Din Zinki rebels from Aleppo city, where Jabhat an-Nusra moved in this week, will mean those Turkish-backed rebels will be refocused on the operation near the border as Ankara looks for reliable ground allies and continues to reject Kurdish rebel involvement in the fight.

Ukraine could also be seeing hints of a potential compromise resulting from a recent upswing in U.S.-Russian diplomacy, as Moscow is reportedly reshuffling more radical leaders in the self-proclaimed Luhansk People’s Republic and Donetsk People’s Republic. This is essentially Moscow laying the groundwork for future concessions on Minsk, but this will still require a stronger Western push on Kiev to agree to recognize elections in the east and constitutional amendments on eastern autonomy. We still have a long way to go on this front.

Full Articles

China: The Power of Military Organization

China’s People’s Liberation Army (PLA) has long known it needs to restructure if it hopes to compete with the world’s most advanced militaries. As China’s prominence has risen, so too has its global interests, creating the need to develop the power-projection capabilities of its historically under-represented navy and air force. Moreover, growing maritime competition with the United States and Japan has emphasized the need for increased capability to conduct seamless joint operations. Though much of the attention on China’s military reform is on weapons acquisitions, the true determinant of its success will be organizational reforms.

Why Iraqi Kurdistan Is Struggling to Pay Its Bills

Low global oil prices are wreaking havoc on Iraqi Kurdistan’s finances. While the cash-strapped Kurdish government has managed to export oil independently of Baghdad since June 2015, it will become increasingly reliant on foreign support the longer oil prices remain depressed, regardless of how much control it has over its oil export revenue. The Kurdistan Regional Government will especially look to Turkey to keep oil exports and revenues flowing as it struggles to address both its own disintegration and the profound effect that the financial strain is having on the morale of the peshmerga fighting the Islamic State.

In Russia, State Firms Will Stay Public for Now

Moscow is once again taking a hard look at its finances during this period of prolonged economic woe, this time considering privatizing of some of Russia’s large state-owned firms and entities. Such a plan could help cover the possible shortfall looming over the federal budget. Whether the government can overcome the elite who want to maintain control over the companies, however, remains to be seen.

Greece: The Scapegoat of a Migrant Crisis

Europe’s immigration crisis shows no signs of abating, and the European Union is struggling to figure out how to address it. The bloc’s original strategies of cooperating with Turkey to limit the number of asylum seekers and redistributing migrants across the Continent have clearly failed. Now, EU member states are looking for alternative approaches as they try to stem the tide of asylum seekers flowing into Europe, and they appear to have reached an agreement on who is to blame: Greece.

How Losing India’s Business Could Ruin Russia’s Defense Industry

India is the world’s largest defense importer, accounting for 15 percent of all global imports over the past five years. However, the primary source of these weapons may soon change. Russia has long had privileged access to the Indian market, providing some 70 percent of India’s weapons in volume over the last half decade. However, even as India invests heavily in upgrading and modernizing its armed forces, several pending deals between Moscow and New Delhi have stalled.

Special Report: Mexico’s Cartels Will Continue to Erode in 2016

Mexican authorities have recaptured Sinaloa cartel leader Joaquin “El Chapo” Guzman Loera, and the media have had a field day, but, as with his escape, Mexico’s cartel landscape remains pretty much unchanged. Fissures and infighting among drug cartels are redefining the drug trade — and the fight against it. As indicated in our 2015 Cartel Annual update, Stratfor categorizes Mexican organized criminal groups by the distinct geographic areas from which they emerged, and it is clear that the trajectories of Mexico’s three regional organized crime umbrellas — Sinaloa state, Tamaulipas state and Tierra Caliente — are set: All will continue their decentralization and division in 2016.

The Week Ahead

There are growing indications that North Korea could follow up its nuclear test with a ballistic missile launch from its Sohae Satellite Launching Station in northwestern North Korea in the coming days. There is a strong technical component to such a test, as North Korea tries to demonstrate advancements in both its nuclear technology and delivery systems. The North Korean missile launch and China’s reticence to economically punish Pyongyang will only fuel a debate in South Korea over whether or not to deploy the Terminal High Altitude Area Defense System (THAAD) with the United States. China has effectively tried to veto the THAAD deployment in South Korea by threatening economic consequences to South Korea, but the reality is that Beijing cannot afford to see its trade drop significantly with South Korea any more than Seoul can.

Iran-Russia relations will be a big theme for this week when the Iranian supreme leader’s foreign affairs advisor Ali Akbar Velayati (also head of the Center for Strategic Research of the Expediency Discernment Council) will meet with Russian President Vladimir Putin from Feb. 1 to Feb. 4 as well as other senior Russian officials. Velayati, who served as foreign minister for 16 years under three different presidents, not only has the trust of the supreme leader, but a wealth of experience in dealing with Moscow. There is no shortage of issues for the two sides to discuss, especially as Iran and Russia are closely aligned on Syria while competing more directly in the Caucasus.

Meanwhile, Russian Foreign Minister Sergei Lavrov will visit his Omani and Emirati counterparts in their respective capitals from Feb. 2 to Feb. 3. In the United Arab Emirates, Lavrov will meet with Crown Prince Mohammed bin Zayed al Nahyan and Foreign Minister Abdullah bin Zayed al Nahyan. In Oman, Lavrov will meet with Deputy Prime Minister Fahd bin Mahmoud al Said, as well as Foreign Minister Yusuf bin Alawi bin Abdullah. According to the Russian Foreign Ministry, Russia and the oil-rich Gulf states will discuss the oil market during these visits. While Oman has declared its willingness to cut by upwards of 5-10 percent if done in coordination with other large producers, the UAE has stuck to the Saudi line that there was still more time to wait out the price rout.

Back in Moscow, Russian Prime Minister Dmitri Medvedev will hold a series of talks Feb. 1-3 with the heads of the big Russian state banks — VTB Bank, Vnesheconombank (VEB) and Sberbank. The meetings will focus on three critical and controversial issues. First, the big three each have petitions for federal financial assistance, which the government is crunched to find funds for. Second the Finance Ministry has proposed privatizing portions of the big three, something banks such as Sberbank have been in favor of in the past — though all are wary of the program now due to low share prices. And lastly, the government is pressuring the banks to restructure key loans to strategic businesses and regional governments, which would pile more pressure on the banks. So any decisions on these issues this next week will ripple throughout the Russian economy and sectors. This is just one set of difficult meetings the government has been holding in recent weeks to try to stabilize the Russian economy and government’s finances.

Greece will again be a focal point for Europe this week, as the intersection between its bailout program and the migration crisis deepens. Officials from the European Commission, the European Central Bank, the European Stabilization Mechanism and the International Monetary Fund will arrive in Athens early in the week to begin an assessment of the status of the aid program. Athens hopes that the approval of a controversial pension reform (which should happen in February) will open the door for a negotiation over debt relief, but social unrest is on the rise. Greece is also dealing with another equally pressing issue: on Feb. 4 the interior ministers of Germany and France will visit Athens and the island of Lesbos to discuss Greece’s efforts to cope with the arrival of asylum seekers. Northern Europe wants Athens to improve border controls and build additional reception centers.