Stratfor’s Global Intelligence: Week of Feb. 8, 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

The good news for Europe is that the combined benefits of low oil prices and quantitative easing are set to last for a while. The bad news is that much deeper political stresses on the Continent are threatening to erode those advantages and stir much deeper problems in the market. Portugal is the next country to watch in the European periphery taking on Brussels and Berlin over austerity measures. Grappling with a public debt estimated at 129 percent of GDP, the new and fragile minority government in Lisbon has to rely on parliamentary support from three small left-wing parties to get anything done. Predictably, this makes negotiating on sensitive matters like the budget deficit all the more difficult. But Portugal is by no means alone in that fight. As we have been tracking, Italy has been leading the anti-austerity charge, while Spain, in a similarly fragile political situation as Portugal, will also join the pack. In the end, the European Commission will have no choice but to compromise and let Lisbon slide on the EU deficit rules, but the credibility of the commission in managing the debt crisis continues to suffer as a result.

Problems are meanwhile piling up against the Greek government. The creditors are demanding a tougher reform of the pension system while farmers blocked roads nationwide and labor unions held the second general strike since Syriza’s September reelection. Greece is also working against the clock to prevent its expulsion from the Schengen agreement: Athens recently announced that the efforts to cope with the migration crisis will be managed by the Greek Defense Ministry, which is supposed to improve the efficiency of border controls and reception centers. Athens is engaging in token measures to try and get other Schengen members to ease pressure. This multiplicity of open fronts is taking its toll on Syriza, and some members of the party recently suggested it would be best to leave power. Early elections or a change in the composition of the government cannot be ruled out at this point.

This week brought signs that British Prime Minister David Cameron is making progress in compelling Brussels to make concessions ahead of the upcoming U.K. referendum on EU membership. EU Council President Donald Tusk sent a letter to the bloc’s 28 members proposing an “emergency break” to temporarily allow the suspension of employment benefits for migrants. He also proposed the introduction of a system to allow a group of national parliaments to veto European Commission legislative proposals. Cameron was optimistic about the proposals, but he will still have a hard time convincing Euroskeptics at home that this is enough to insulate Britain from problematic EU policy. Countries in Eastern Europe also oppose plans that would sever the benefits of their nationals working abroad, while France is wary of British interference with eurozone affairs. The EU governments will discuss Tusk’s letter in their Feb. 18-19 summit.

Russia has apparently picked up on the intensification of U.S.-Turkish talks to coordinate an offensive on the Mare-Jarabulus line in northern Syria. Not coincidentally, another Russian jet violated Turkish airspace in the same area where the operation would be taking place — a not so subtle reminder that Moscow can still easily make a mess of the offensive if it so chooses. To get around this sticking point, we have been watching for whether Turkey could recruit other allies on the ground to create a coalition shield to avoid Russia singling Turkish forces out on the battlefield. Saudi Arabia’s announcement that it was ready to send ground troops to Syria may be an indicator that those negotiations are bearing fruit.

Any attempt by the United States to prod Kiev into making limited concessions to help detangle the situation in Syria with Russia is going to be all the more complicated by the growing fragility of the Ukrainian government. On Jan. 31, the Self Reliance Party of Ukraine’s ruling coalition called for a no-confidence vote against Prime Minister Arseniy Yatsenyuk in the Ukrainian parliament, threatening to leave the coalition if the vote was not held. The same day, parliament Chairman Volodymyr Groysman announced that the legislature would consider a report on the work of the Cabinet from Feb. 16 to Feb. 19, which could precede a no-confidence vote. Whether or not the prime minister retains his position does not really matter. Either way, Kiev will need to make changes in its government to retain any semblance of stability. The upheaval itself will undermine any attempt by Washington to use Kiev in its in its broader negotiation with Moscow.

The Kremlin held a series of meetings this week concerning proposals to privatize some of the state’s most strategic firms. Notably, Putin chaired one of the meetings to try and balance the opposing sides. Putin did not outright shut down the idea of privatization, but he laid out strict guidelines: stakes can only be sold at an appropriate price, Russian oligarchs should take part in the purchases and only approved foreign partners can participate. Since the meeting chaired by Putin, Finance Minister Anton Siluanov — who was the primary driver behind the push for privatization — has quieted down while Economy Minister Alexei Ulyukaev proposed Rosneft, Alrosa and Bashneft as the first three companies to be privatized. We will be watching what comes out of a Russian Security Council meeting on the plans, where many of the Kremlin elite most vehemently opposed to the proposals will make their voices heard. We are also looking to see if the Kremlin will once again call on oligarchs pony up their wealth to at least force them to take part in the privatization and what other related discussions to the privatization plans may be taking place with potential Asian, Gulf and European powers.

In other business news, ChemChina struck a deal to buy Syngenta for $43 billion after an intense one-year courtship. The deal fits squarely in a trend we have been tracking of China using acquisitions and partnerships in the West to acquire technology and move up the export value chain. In diversifying its agribusiness, China’s focus on Syngenta makes perfect sense. The Swiss firm is one of the four largest producers of genetically modified crops. China will get access to more genetically modified seed varieties through this deal. This does not imply that China will become more open to foreign genetically modified goods, however. China’s intent is to advance domestic production of genetically modified crops to meet its food security needs.

We also saw confirmation that China has been holding all five dissident booksellers that had gone missing in Hong Kong last year, along with a Chinese journalist that had disappeared in Thailand while traveling to Laos.  The growing reports of what appear to be cross-border renditions, along with recent leaks from the U.S. intelligence community that Chinese agents had come to the United States and attempted to capture or kill the brother of an aide of former President Hu Jintao who was arrested in 2015, show that Chinese intelligence services are becoming increasingly aggressive abroad. This appears to be an internationalization of the crackdown on flows of information out of China that could endanger Xi Jinping’s regime ahead of the 2017 Party Congress.

Argentine President Mauricio Macri has already implemented a slew of reforms to make life easier for Argentine farmers coping with the commodity glut. And with more painful reforms to come, he may have found some relief in congress. Eighteen legislators in Argentina’s lower house split from the opposition Front for Victory coalition to form a dissident Peronist bloc. The bloc’s separation from the Front for Victory weakens that party’s ability to present a united front against Macri’s economic reforms. Macri’s Cambiemos coalition and allied parties now have 92 legislators in the lower house, and Front for Victory has only 82. This means that any economic or regulatory regime measures that have to go through congress for approval will face less resistance from former president Cristina Fernandez de Kirchner’s allies.

Full Articles

Russia Has Few Options for Turning Its Economy Around

Low oil prices have thrown a wrench in many of the world’s economies, but perhaps nowhere more so than Russia. Depressed energy prices have sent the value of the Russian ruble tumbling and inflation soaring, and much of the Russian population is struggling to make ends meet.

The Central Bank of Russia, under pressure to find a solution to the country’s deepening economic crisis, is exploring all of the monetary policy options at its disposal. But the bank will find that its primary tool for combating the inflation wreaking havoc on the Russian economy — adjusting the country’s key interest rate — may be difficult to actually use under the current circumstances. As a result, bank officials will likely be forced to turn to secondary, less effective measures to keep the Russian economy from sliding even further into disrepair.

What Kind of Power Will China Become?

These are grim times for the Chinese economy. In the two years since property markets peaked and subsequently began to slow in most cities across China, it has become abundantly clear that the approach to economic management that sustained double-digit annual growth for two decades has exhausted itself. The unprecedented stock market volatility of the past year, along with signs of spreading unemployment and labor unrest in many regions, are important reminders that the transition to new foundations of national economic growth will in all likelihood be bitter, slow and unnervingly uncertain.

Ukraine: What Happens in the East Starts in Kiev

The conflict in eastern Ukraine may be simmering, but political infighting in Kiev is heating up. On Jan. 31, the Self Reliance Party of Ukraine’s ruling coalition called for a no-confidence vote against Prime Minister Arseniy Yatsenyuk, threatening to leave the coalition if parliament did not hold the vote. But whether the prime minister retains his position is a moot point. Kiev will need to shake up its government to retain any semblance of stability, and the upheaval will only complicate Ukraine’s position in the broader standoff between Russia and the West.

Pakistan’s Military-Democracy Complex

The Pakistani military has always played an important role in Pakistani politics. For nearly 70 years, the army has defined the country’s national security priorities, sometimes from the seat of government itself, and many commanders have been placed in prominent economic and political positions. In keeping with that tradition, Prime Minister Nawaz Sharif appointed Gen. Raheel Sharif as the chief of army staff, the most visible and powerful position in the country, in November 2013. The general wasted no time gaining influence in Pakistan’s foreign and defense affairs.

After Sanctions, Iran’s Growing Role in the Caucasus

With the end of sanctions on Iran, the country’s regional economic influence will begin to rebound. The adjacent South Caucasus region, encompassing Azerbaijan, Georgia and Armenia, is one area that Tehran will target for greater cooperation, reaching out to make deals on trade and energy. In doing so it will inevitably have to consider the role of Russia, which has dominated the political and economic affairs between the Black and Caspian seas for two centuries. Russia and Iran are regional geopolitical rivals, a dynamic manifested in the long-simmering Nagorno-Karabakh conflict between Azerbaijan and Armenia and on negotiations over pipeline projects for Iranian hydrocarbon exports. Despite their rivalry, Russia and Iran will have to work together in order to block Western-led infrastructure projects, which they both largely oppose, and to avoid foreign military presence in the region, particularly by Georgia.

The Week Ahead

North Korea is preparing another attempted satellite launch and has given notification of warning to air and maritime traffic. The flight path from the Sohae launch facility largely avoids flying over any foreign territory, and foreign militaries, including South Korea, Japan and the United States, have prepared contingency plans should the launch experience guidance failure and physically threaten South Korean or Japanese territory. North Korea’s nominal allies, Russia and China, have been unable to dissuade Pyongyang from conducting the launch, and barring major weather or technical faults, the launch is likely to occur. It is unlikely that any country will actively attempt to interfere with the launch or the rocket’s trajectory, but there will be both close monitoring and strong condemnation of the Pyongyang’s actions. It would be notable if North Korea is successful at placing a functioning satellite in orbit, demonstrating continued technological improvements despite isolation.

A failure at some stage of the launch is not out of the picture; after all, it is rocket science. An extreme accident could send parts of the rocket hurtling toward South Korea or Japanese territory, in which case the respective countries would try to destroy the parts before impact. In such a case, heightened alerts and a more active watch of the Korean peninsula would be necessary.  In the long run, the effect would be to fuel South Korea’s internal debate on whether to accept a U.S. Terminal High Altitude Area Defense anti-ballistic missile system deployment to the Korean Peninsula, as well as maintain the ongoing pressure to develop more robust trilateral security architecture between the United States, Japan and South Korea.

Venezuela remains high on our watch list as the opposition coalition National Unity Roundtable (MUD) is clearly crafting the legal framework to oust President Nicolas Maduro. The coalition is virtually united in the opinion that Maduro must leave power before economic measures can be taken to alleviate the crisis. But Maduro is digging in for a fight, saying that he will resist any attempts to oust him. The head of the National Assembly supports a constitutional amendment to reinstate term limits for the president, cut Maduro’s term short to four years (rather than the current six-year term) and to hold new elections for president in December. The National Assembly, which is controlled by the opposition, doesn’t require the supreme court’s approval for this amendment. If passed, it would go to a national referendum, which would represent a real threat to the Maduro government’s ability to remain in power. There may also be segments of the armed forces beginning tentative negotiations with the opposition. The Venezuelan defense minister is slated to meet with opposition legislators at an unspecified date and members of the armed forces’ legal department have visited the National Assembly. The armed forces have an interest in breaking the current political deadlock between the legislature and the central government, and their potential support for the National Assembly would be crucial in allowing or preventing a referendum on Maduro’s tenure from coming to fruition.

In Europe, Poland will be the likely headliner of the week. Prime Minister Beata Szydlo will make two significant trips abroad. On Feb. 8, she will meet with Hungarian Prime Minister Viktor Orban in Budapest to coordinate positions on several EU issues, including the refugee crisis and the draft agreement between the European Union and the United Kingdom. Poland has been more recently falling in line with the Orban model of economic nationalism and resistance to Brussels interference, widening the east-west split in Europe. Szydlo will meet German Chancellor Angela Merkel in Berlin on Feb. 12, in a meeting that could be tense because of the recent friction between Poland and Germany. Both meetings happen at a time when the Polish government is seeking to expand its control of state institutions and is promising to follow a policy of “economic patriotism” that could hurt foreign investments in the country. Poland recently announced special taxes for banks and supermarkets, sectors in which there is a large foreign presence.

During the Munich conference this week, there are two key meetings to watch. Russian Foreign Minister Sergei Lavrov and his U.S. counterpart John Kerry will will hold a meeting on Feb. 11. This will be a good opportunity to watch for any hints of progress on the interlinked Syria and Ukraine negotiation currently underway. Relatedly, the foreign ministers from Ukraine, Russia, France and Germany may convene in Munich under the four-member Normandy format to continue discussing the Minsk process for Ukraine.

The pope and the patriarch are going to try to reconcile after nearly one thousand years of feuding. The head of the Russian Orthodox Church, Patriarch Kirill, will meet his Roman Catholic counterpart, Pope Francis, Feb. 12 in Cuba while both are on tour in Latin America. This will be the first meeting between the two religious leaders since the Great Schism of 1054. Russia and the Vatican have had a rocky history, as they grew into a religious and then political rivalry within the European theater over nearly millennia. As the popularity of the pope resurged since Pope Francis began his papacy three years ago, Russia has also seen a revival in support for the Russian Orthodox Church in recent years. Both Pope Francis and Patriarch Kirill have become more politically active, taking positions on foreign, military and security issues. In recent years, Pope Francis has criticized Russia’s actions in Ukraine, as well as the West’s sanctions against Russia. Meanwhile, Russia has been using its church as a foreign policy tool – both in trying to draw in Eastern Orthodox Christians from abroad, but also as a diplomatic conduit. The Russian Orthodox Church is framing this week’s meeting as both a confirmation of the importance of Russia’s role within the wider Christian world – at a time when its relations around the world have been under attack.