Stratfor’s Global Intelligence: Week of July 25, 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

Next Steps in Turkey’s Coup Aftermath

Turkey is wasting little time in purging its military, intelligence, internal security, judiciary and schools of opposition supporters. A state of emergency will enable the crackdowns and a large-scale restructuring of the military and intelligence apparatus is to be expected in the coming weeks. This scale of the crackdowns are of course giving the Europeans a great deal of anxiety and we have seen a number of threats raised recently that Turkey will not get its deal for visa liberalization with Europe and that its membership with NATO could be threatened.
Losing NATO membership would be going too far — Turkey plays far too strategic a role in the alliance for human rights concerns to get in the way. The Europeans could delay their decision on the visa liberalization deal, hoping that the intensity of the Turkish crackdowns will eventually wane. We will be watching carefully if Turkey does loosen the taps on the migrant flow to remind the Europeans of the pressures from the migrant crisis they face without Turkey’s cooperation. And with terrorist attacks in Europe occurring on a much more frequent basis, like the Afghan refugee who recently carried out an axe attack on a train in Bavaria, anxiety over immigrants is set to soar, playing into the hands of Euroskeptic and nationalist parties.

Notably, the United States is offering to work with Turkey’s judiciary and Ministry of Foreign Affairs officials to put together a proper request for the extradition of Fethullah Gulen, the aging leader of the Gulenist movement who lives in self-imposed exile in Pennsylvania. The government of President Recep Tayyip Erdogan accuses of Gulen of plotting the July 15 coup attempt. It will not be that difficult for the Turkish government to prove the involvement of members of the Gulen movement itself in the attacks, but tracing a direct link to Gulen himself for the extradition to pass muster will prove far more difficult in the U.S. legal system. Washington wants to dispel once and for all the conspiracy theory that the United States is using Gulen to destabilize the Turkish government, but also knows that it cannot be seen facilitating a draconian crackdown. It appears the U.S. administration’s strategy for damage control for now is focused on showing the Turkish government how it takes it concerns seriously and has every right to investigate the claims.

The Start of China’s Debt Swap

China is emitting lots of different signals on how it intends to tackle loads of bad debt in state-owned enterprises, but a lot of complications are also cropping up. China’s state council said this week that it is planning a program to allow enterprises to trade outstanding debts for equity stakes to be held by commercial banks. The statement did not offer details or indicate when a pilot would be in place. China’s corporate debt problems are quite severe, especially among so-called “zombie” companies. And much of this debt is held by state-owned enterprises in industries like coal and steel. For this reason, a trial program is likely before the end of 2016.

This week, investors in state-owned Dongbei Special Steel, a steel manufacturer that defaulted on seven bonds worth $131 million in March, are calling for a boycott of all bonds issued by Liaoning’s local government and provincial state-owned enterprises. They are also requesting that the central government suspend all debt financing instruments from all provincial enterprises. The backlash was sparked when Liaoning’s provincial state-owned enterprise oversight authority, which owns 46 percent of the company, unilaterally issued a plan last week to swap 70 percent of all loans to the company to equity.

This all adds up to a messy start for the pilot debt to equity swap experiment. Caixin cited a source close to the China Development Bank, which holds three of the bonds issued to Dongbei Special Steel, saying that the banks will refuse to implement this plan since they believe it is meant to maintain Dongbei as a zombie rather than actually improving its creditworthiness. While current creditors said that they only bought bonds because they were forced by the provincial government, they are now escalating this to central government authorities. future bond issues will be successful. Meanwhile, China reportedly plans to set up an asset-management company to accelerate coal industry consolidation. The company, which includes China’s two largest coal enterprises — Shenhua and China Coal — as well as two existing asset-management companies, will buy low-quality coal assets from struggling miners and non-coal state-owned enterprises in an effort to force capacity reductions. These efforts are all designed to offload Chinese state-owned enterprises of irreparably bad debts. Just how effective these measures are remains to be seen.

A Kremlin Struggle Intensifies

An intra-Kremlin struggle we have been tracking closely is getting intense. On July 19, the Federal Security Service (FSB) raided the offices of the Federal Investigative Committee in Moscow, arresting three of its powerful chiefs. The arrests come as rumors rampant inside of Russia that the FSB may be attempting another power grab. The Federal Investigative Committee has long been the envy of the other security services, with the power to prosecute some of Russia’s most powerful figures.

The raid comes a week after a major purge of FSB senior officials in the economic and financial departments. The purged generals were replaced by members a part of the Internal Security Directorate — a section of the FSB nicknamed “Sechin’s task force,” referring to Rosneft chief and FSB alumni Igor Sechin. Though the situation is still murky, it is possible Sechin is in working on expanding his powerbase. This comes as Putin has barred Sechin from taking on more assets in the country, and as Putin himself is building up his own personal military. Putin has reportedly banned Rosneft from purchasing a privatized stake in Bashneft given his desire to keep any state firm from taking part in the privatization efforts. This appears to amounting to a full-scale struggle between Putin and Sechin.

Full Articles

A Coup as Audacious as Turkey’s Future

The bizarre scenes of Turkey’s fleeting coup attempt are imprinted on our minds: a TRT news anchor declaring at gunpoint that the military had seized control of the country, a frazzled CNN Turk journalist holding up her iPhone for a puffy-eyed president calling on the nation to take to the streets, the rat-a-tat-tat of Cobra helicopters raining down bullets on a fleeing crowd, calls to prayer wailing through the night to bring the faithful out to protest, terror-stricken forces in army fatigues being hauled off by police and civilians, a bloodied soldier lynched by a mob of the president’s supporters, and jubilant Syrians enjoying the irony of Turkey’s chaos as their own country remained under siege.

China Is Building Its Future on Credit

As China tries to overcome slowdowns in its industrial and trade sectors, the country’s banks have continued to increase the pace of lending, issuing 1.38 trillion yuan ($205.8 billion) worth of loans in June. The figure confirms some economists’ expectations that lending will keep rising as China’s central government attempts to revive economic growth and boost property markets that showed signs of another slump in May. It also indicates that despite Beijing’s repeated pledges to reduce the economy’s reliance on credit and state-led investment, the easy flow of financing from state-owned banks remains the country’s primary bulwark against widespread debt crises among corporations and local governments.

A Brexit From Europe’s Scientific Community?

In the scientific community, collaboration across countries, continents and oceans has long been the norm, driving scientific knowledge and innovation forward. Research projects and development, especially at the academic level, often cross international borders. Even so, science and research are not immune to political and economic restraints: Travel and immigration regulations, access to funding, and patent laws all limit open collaboration in scientific development.

The United Kingdom’s vote to leave the European Union will not eliminate the opportunities for its scientists and researchers to work with those of other countries, even EU member states. Nevertheless, it will have repercussions for the future of technological innovation in the United Kingdom. Though ideas will continue to flow freely between the United Kingdom and the Continent after the Brexit, scientists and researchers may not. In addition, as the Brexit becomes a reality, funding for research in the United Kingdom will likely take a substantial hit.

A European Dream, Deferred

As difficult to accept as the United Kingdom’s recent vote to leave the European Union is for many people around the world, for some citizens of Moldova, Georgia and Ukraine, it is just baffling. For several years, their countries have aspired to join the Continental bloc, though none has clinched an official offer of membership yet. Though the Brexit will not precipitate the European Union’s demise in the immediate term, it will undoubtedly fix the union’s attention on its inherent problems. Consequently, Moldova, Ukraine and Georgia worry that EU interest in expanding east will decrease, enabling Russia’s influence in the region to grow.

Russia’s Muslim Regions Turn to the Gulf for Help

As Russia’s economy continues to stagnate, the country’s 83 regions are being forced to compete with one another for outside investment to stay afloat. The quest for funding was a popular theme at the recent St. Petersburg International Economic Forum, where regional governments and corporations tried to woo foreign partners and financiers. Some regions have focused their campaigns on Asia and Europe: The Kaluga and Kaliningrad provinces, for example, have signed investment deals with Bavaria, and Kaluga’s governor visited Vietnam earlier in the year seeking funding. But four of Russia’s Muslim republics — Tatarstan, Bashkortostan, Chechnya and Dagestan — have set their sights on Muslim states in the Middle East and Southeast Asia, a strategy that has put Moscow on edge.

Angola’s Longtime President Will Rule Even Longer

Longtime Angolan President Jose Eduardo dos Santos has announced that he will remain chairman of the ruling Popular Movement for the Liberation of Angola (MPLA). The move suggests that dos Santos, who said in March that he would retire from “active politics” in 2018, will stand for re-election in Angola’s next presidential election, though he might not serve a full term.

The Week Ahead

European Banking Authority Stress Test

July 29 will be an important date for European banks, because the European Banking Authority (EBA) will release the results of its stress test. The test includes 51 banks with a minimum of 30 billion euros ($32.9 billion) in assets, representing around 70 percent of total EU bank assets. Included on the list are five Italian banks, most notably the troubled Monte dei Paschi. In recent weeks, the Italian government and EU authorities have discussed ways to help Monte dei Paschi get rid of its massive amount of non-performing loans. Rome argues that the Italian state should be allowed to help Monte dei Paschi, a move that could go against current EU regulations. Germany and other northern European countries, on the contrary, believe that rules should be respected. Negative results for Italian banks in the stress tests would probably make Rome and Berlin reach a compromise to prevent contagion in the eurozone.

Bank of Japan Monetary Policy Meeting

From July 28 to July 29, the Bank of Japan will hold its first monetary policy meeting since the Brexit vote last month. The bank has struggled to increase inflation and the value of the yen low and the Brexit vote has not helped as the yen plunged to around 100.5 to the dollar in its aftermath. It has since recovered to around 105, but that remains a 13 percent increase in its value since the beginning of the year and much of the recent weakening has been in an anticipation of the BOJ further easing its monetary policy, possibly as early as next week’s meeting.

Japan’s current monetary easing program — dubbed “quantitative and qualitative easing” — is nearing structural limits as now the Bank of Japan holds roughly one-third of all Japanese government bonds. Instead of increasing government bond purchases, the bank is likely to increase monetary base expansion, increase its purchases of other domestic assets, and possibly cut interest rates even further. There has been considerable speculation that the BOJ might need to begin implementing a more permanent solution such as “helicopter money” or perpetual bonds. Bank of Japan governor Haruhiko Kuroda has consistently dismissed the idea saying that it was not legal in Japan. While a creative solution getting around legal qualms may be possible, for now Japan is likely to use other tools at its disposal. Separately the Japanese government will continue to discuss the potential scope and size of further fiscal stimulus to be unveiled later this year, with some such as Nikkei, saying that it could approach 30 trillion yen ($282 billion).

U.S. National Security Advisor in China

From July 24-27, President Obama’s National Security Advisor Susan Rice will visit Beijing. Rice will be urging restraint in the wake of a ruling from the July 12 Permanent Court of Arbitration in the Hague, which invalidated China’s claims to the waters of the South China Sea under its nine-dashed line as well as any potential claim that its possessions in the Spratlys can be designated “islands” entitled to a 200-nautical-mile exclusive economic zone. China’s state media and government has publicly responded to the ruling with nonstop vitriol denouncing the ruling as well as some military exercises in the South China Sea, but by the admission of U.S. officials China has avoided “precipitous action” that could seriously worsen tensions.

The Chinese for their part appear keen to avoid uncontrolled rises in tensions, tamping down on protests and social media postings that had called for violence against the United States and the Philippines. While Rice explicitly announced that Washington was not forswearing its freedom of navigation operations in the South China Sea, her visit is also implicit recognition that Beijing is walking a tightrope, hoping to avoid unneeded conflict while managing nationalist pressures at home. It suggests that in the near term, the United States will avoid actions (such as freedom of navigation patrols within 12 nautical miles of Chinese possessions in the Spratlys) that would make China feel compelled to respond assertively.

Armenian Unrest

Armenia has experienced significant turbulence over the past week, with a police building being stormed in Yerevan on Jul 17 by a group called the Founding Parliament and holding hostages until July 23. In the meantime, demonstrations have been held over the government’s handling of the event, with violent clashes taking place between protesters and police on Jul 20 and protests continuing (albeit more peacefully) into July 21 and July 22. These events illustrate the difficult position of the Armenian government as Yerevan experiences volatility on both on the domestic front and in its ongoing standoff with Azerbaijan over the breakaway territory of Nagorno-Karabakh. It will therefore be key to watch which measures Yerevan resorts to in order to end the standoff over the weekend and into next week, as a reaction seen as too forceful could trigger bigger demonstrations, while continuing negotiations with the hostage takers risks dragging out the event with unpredictable consequences. It will also be important to track the position of Armenia’s patron, Russia, to the ongoing standoff.

Hope for Libyan Oil

It looks as if Libya’s oil production could rise a bit over the next few months. After a meeting with the United Nations’ Libya head Martin Kobler, militant leader Ibrahim Jadhran gave a joint press conference with Kobler and said that oil exports would begin soon at Ras Lanuf and Es Sider and we are watching to see if Jadhran follows through this time. Ras Lanuf and Es Sider combined had an export capacity of around 600,000 barrels per day prior to being taken offline in late 2014. Damage sustained at the ports during fighting over the last 20 months may render the capacity lower.