Putin's Russia caught in US and Chinese double-pincer

Mr Putin is discovering that global finance is more frightened of the US Securities and Exchange Commission than Russian T90 tanks

By Ambrose Evans-Pritchard

9:06PM GMT 26 Mar 2014
Russia and China are on a collision course, and China will not be the one to yield.

Russia and China are on a collision course, and China will not be the one to yield.

Russia's Vladimir Putin has committed a grave strategic blunder by tearing up the international rule book without a green light from China. Any hope of recruiting Beijing as an ally to blunt Western sanctions looks doomed, and with it the Kremlin's chances of a painless victory, or any worthwhile victory at all.

Mr Putin was careful to thank China's Politburo for its alleged support in his victory speech on Crimea. Foreign minister Sergei Lavrov has been claiming with his usual elasticity that “Russia and China have coinciding views on the situation in Ukraine.”

This is of course a desperate lie. China did not stand behind Russia in the UN Security Council vote on Crimea, as it had over Syria. It pointedly abstained. Its foreign ministry stated that “China always sticks to the principle of non-interference in any country’s internal affairs and respects the independence, sovereignty, and territorial integrity of Ukraine.”

We don't know exactly what China's Xi Jinping told President Barack Obama at The Hague this week it clearly had nothing in common with the deranged assertions of the Kremlin. The US deputy national security adviser Ben Rhodes appeared delighted by the talks, claiming afterwards that Russia could no longer count on backing from its "traditional ally".

If so, Mr Putin is snookered. He cannot hope to escape financial suffocation by US regulatory muscle, should he send troops into Eastern Ukraine or even if he tries to stir up chaos in the Russian-speaking Donbass by means of agents provocateurs.

Nor can he hope to turn the tables on the West by joining forces with China to create a Eurasian bloc, a league of authoritarian powers in control of vast resources. Such an outcome is the obsession of the 'Spenglerites', the West's self-haters convinced that the US is finished and that dollar will soon be displaced by the Eurasian Gold Ducat -- odd though that may seem at a time of surging oil and gas output in the US, and an American manufacturing revival.

The reality is that China is breaking Russia's control over the gas basins of Central Asia systematically and ruthlessly. Turkmenistan's gas used to flow North, hostage to prices set by Gazprom. It now flows East. President Xi went in person last September to open the new 1,800 km pipeline to China from the Galkynysh field, the world's second largest with 26 trillion cubic meters.

It will ultimately supply 65 BCM, equal to half Gazprom's exports to Europe. Much the same is going on in Kazakhstan, where Chinese companies have taken over much of the energy industry. The politics are poignantly exposed in Wikileaks cables from Central Asia. A British diplomat is cited in a 2010 dispatch describing the "Chinese commercial colonization" of the region, saying Russia was "painfully" watching its energy domination in Central Asia slip away.

Yet more revealing is a cable quoting Cheng Guoping, China's ambassador to Kazakhstan, warning that Russia and China are on a collision course, and China will not be the one to yield. "In the future, great power relations in Central Asia will be complicated, delicate. The new oil and gas pipelines are breaking Russia's monopoly in energy exports."

Mr Cheng not only expressed "a positive view of the US role in the region" but also suggested that NATO should take part as a guest at talks on the Shanghai Cooperation group -- allegedly the Sino-Russian answer to EU/NATO -- in order to "break the Russian monopoly in the region." That word "break" again. So there we have it in the raw, what really goes on behind closed doors, so far removed from the pieties of a Moscow-Beijing axis.

There was much anguish about such an axis in the 1960s, then based on Communist fraternity. Henry Kissinger saw through it, suspecting that the two hostile cultures were at daggers drawn along their vast borders -- "Four Thousand Kilometres of Problems" to cite the title of a 2006 opus by Moscow writer Akihero Ivasita.

George Walden exposes deep roots of this mistrust in his superb little book "China: A Wolf in the World?". As a diplomat in Russia and then in China -- one of the tiny handful of Westerners in Beijing through the Cultural Revolution -- he saw first-hand how the Marxist brotherhood had come to loathe each other. 

Indeed, they came close to nuclear war. The CIA and State Department were dumbfounded by his accounts at a debriefing in Washington. They had no sources on the ground in Mao's era.

Mr Walden says the Chinese have never forgiven Russia for seizing East Siberia under the Tsars, the "lost territories". They want their property back, and they are getting it back by ethnic resettlement across the Amur and the frontier regions, much as Mexico is retaking California and Texas by the Reconquista of migration.

The population of far Eastern Siberia has collapsed to 6.3m from over 8 million twenty years ago, leaving ghost towns along the Trans-Siberian Railway. Russia has failed to make a go of its Eastern venture. With a national fertility rate of 1.4, chronic alcoholism, and a population expected to shrink by 30m to barely more than 110m by 2050 -- according to UN demographers, not Mr Putin's officials -- the nation must inexorably recede towards its European bastion of Old Muscovy. The question is how fast, and how peacefully.

Jonathan Fenby, a China expert at Trusted Sources, said there is a faction within China's National Security Council that wishes to "line up with Russia" over Ukraine, hoping to exploit the crisis to gain better terms on gas, food, and raw materials. These voices have been overruled by Xi Jinping. He plays on a more sophisticated strategic stage.

China is likely to walk a tightrope, "hiding its brilliance and biding its time" as the saying goes. This will becomes a harder if the Ukraine crisis escalates. Beijing may have to choose. It is surely unlikely that imperious Xi Jinping will throw away the great prize of G2 Sino-American condominium to rescue a squalid and incompetent regime in Moscow from its own folly.

Mr Putin must realize by now how fatally isolated he has become, and how dangerous it would be to go a step further. Even Germany's ever-forgiving Angela Merkel has lost patience, lamenting an "unbelievable breakdown of trust." Enough of Europe's gas pipelines have been switched to two-way flows since 2009 to help at least some of the vulnerable frontline states, if he tries to pick off the minnows one by one. Eight EU countries have liquefied natural gas terminals. Two more will join the club this year, in Poland and Lithuania.

The EU summit text last week was a call to arms. Officials have been ordered to draft plans within 90 days to break dependence on Gazprom. Even if this crisis blows over, Europe will take radical steps to find other sources of energy. Imports of Russian may be slashed by half within a decade.

Capital flight from Russia reached $70bn in the first quarter. Russia's central bank cannot defend the rouble without tightening monetary policy, driving the economy deeper into recession in the process. Russian banks and companies must roll over $155bn of foreign debts over the next twelve months in a hostile market, at a premium already over 200 basis points.

Mr Putin is discovering that global finance is more frightened of the US Securities and Exchange Commission than Russian T90 tanks. Any sanction against any oligarch linked to any Russian company could shut it out of global capital markets, potentially forcing default. Creditors in the West would be burned. But nobody cares about them once national security is at stake, something markets have been slow to grasp.

Nor has he chosen a good moment for his gamble. Europe's gas tanks are unusually full. The price of oil is poised to fall -- ceteris paribus -- as Iraq's output reaches a 35-year high, the US adds a million barrels b/d a day this year from shale, and Libya cranks up exports again. The International Energy Agency says global supply jumped by 600,000 b/d last month. Deutsche Bank predicts a glut. So does China's Sinopec. Mr Putin needs prices near $110 to fund his budget. He may face $80 before long.

At the end of the day he has condemned Russia to the middle income trap. The windfall from the great oil boom has been wasted. Russia's engineering skills have atrophied. Industry has been hollowed out by the Dutch Disease: the curse of over-valued currency, and reliance on commodities.

He jumped the gun in Ukraine, striking before the interim government had committed any serious abuses or lost global goodwill, a remarkably sloppy and impatient Putsch for a KGB man. He took Germany for a patsy, and took China for granted. He has gained Crimea but turned the Kremlin into a pariah for another decade, if not a generation, and probably lost Ukraine forever. It is a remarkably poor trade

sábado, marzo 29, 2014



The End of Chinese Central Planning

Stephen S. Roach

MAR 27, 2014
Newsart for The End of Chinese Central Planning

BEIJINGIsn’t it now time for China to abandon the concept of a growth target?”

That was the question I asked Chinese Finance Minister Lou Jiwei this week at the 15th annual China Development Forum, which brings together top Chinese officials and an international delegation of academics, leaders of multilateral organizations, and business executives. Having attended the CDF since former Premier Zhu Rongji initiated it in 2000, I can attest to its role as one of China’s most important platforms for debate. Zhu welcomed the exchange of views at the Forum as a true intellectual test for China’s reformers.

It was in that spirit that I posed my question to Lou, whom I have known since the late 1990’s. In that period, he has been Deputy Minister of Finance, founding Chairman of China’s sovereign wealth fund, China Investment Corporation, and now Minister of Finance. I have always found him to be direct, intellectually curious, a first-rate analytical thinker, and a forward-looking advocate of market-based reforms. He is cut from the same cloth as his mentor, Zhu.

My question was set in the context of the new thrust of Chinese reforms announced at last November’s Third Plenum of the 18th Central Committee of the Chinese Communist Party, which emphasized the “decisive role” of market forces in shaping the next phase of China’s economic development.

I prefaced my question by underscoring the inherent contradiction between a target and a forecast in framing China’s major economic objectives. I argued that the former embodied the obsolete straitjacket of central planning, while the latter was far more consistent with market-based outcomes. A target perpetuates the image of the all-powerful state-directed Chinese growth machine – a government that will essentially stop at nothing to hit a predetermined number.

While it may seem like splitting hairs, continuing to frame the economic goal as a target sends a message of determined and explicit guidance that now seems at odds with the government’s market-oriented intentions. Wouldn’t dropping the concept send a far more powerful message? Isn’t it time for China to let go of the last vestiges of its centrally planned past?

Lou’s response: “Good question.”

China, he went on, is in fact moving away from its once single-minded emphasis on growth targeting. The government now stresses three macroeconomic goalsjob creation, price stability, and GDP growth. And, as evidenced by the annualwork report” that the premier recently submitted to China’s National People’s Congress, the current emphasis is in that order, with GDP growth at the bottom of the list.

This gives China and its policymakers considerable room for maneuver in coping with the current growth slowdown. Unlike most Western observers, who are fixated on the slightest deviation from the official growth target, Chinese officials are actually far more open-minded. They care less about GDP growth per se and more about the labor content of the gains in output.

This is particularly relevant in light of the important threshold that has now been reached by the structural transformation of the Chinese economy – the long-awaited shift to a services-led growth dynamic. Services, which now account for the largest share of the economy, require close to 30% more jobs per unit of output than the manufacturing and construction sectors combined. In an increasingly services-led, labor-intensive economy, China’s economic managers can afford to be more relaxed about a GDP slowdown.

Last year was a case in point. At the start of 2013, the government announced that it was targeting ten million new urban jobs. In fact, the economy added 13.1 million workers even though GDP expanded by “only7.7%. In other words, if China can hit its employment goal with 7.5% GDP growth, there is no reason for its policymakers to panic and roll out the heavy counter-cyclical artillery. That, in fact, was pretty much the message conveyed by a broad cross-section of senior officials at this year’s CDF: Slowdown, yes; major policy response, no.

Zhou Xiaochuan, the head of the People’s Bank of China, was just as emphatic on this point. The PBOC, he argued, does not pursue a single target. Instead, it frames monetary policy in accordance with what he called a “multi-objective functioncomprised of goals for price stability, employment, GDP growth, and the external balance-of-payments – the latter factor added to recognize the PBOC’s authority over currency policy.

The trick, Zhou stressed, is to assign weights to each of the four goals in the multi-objective policy function. He conceded that the weighting problem has now been seriously complicated by the new need to pay greater attention to financial stability.

All of this paints China with a very different brush than was used during the first 30 years of its growth miracle. Since Deng Xiaoping’s reforms of the early 1980’s, less and less attention has been paid to the numerical targets of central planning. The State Planning Commission evolved into the National Development and Reform Commission (NDRC) – though it is still housed in the same building on Yuetan Street in Beijing. And, over time, economic managers succeeded in drastically curtailing sector-by-sector Soviet-style planning. But there was still a plan and an aggregate growth target – and an all-powerful NDRC hanging on to the levers of control.

Those days are now over. A newleading committee” on reforms is marginalizing the NDRC, and China’s most senior fiscal and monetary policymakers Lou Jiwei and Zhou Xiaochuan – are close to taking the final step in the long journey to a market-based economy

Their shared interpretation of flexible growth targeting puts them basically in the same camp as policymakers in most of the developed world. The plan is now a goal-setting exercise. From now on, fluctuations in the Chinese economy, and the policy responses that those fluctuations imply, need to be considered in that vein.

Stephen S. Roach, former Chairman of Morgan Stanley Asia and the firm's chief economist, is a senior fellow at Yale University’s Jackson Institute of Global Affairs and a senior lecturer at Yale’s School of Management. He is the author of the new book Unbalanced: The Codependency of America and China.

March 26, 2014 6:09 pm

Saudi Arabia: A kingdom on guard

Alarmed by the rise of political Islam, the House of Saud is increasingly hardline at home and aggressive abroad
Saudi royal guards stand on duty in front of portraits of King Abdullah bin Abdulaziz (R), Crown Prince Salman bin Abdulaziz (C) and second deputy Prime Minister Mugren bin Abdulaziz©AFP
In the background: the 90-year-old King Abdullah, right, is said to have reduced his workload, allowing his aides to implement a more uncompromising policy    

The reaction was almost instant. On the same day that the Saudi government announced a ban on the Muslim Brotherhood, the four-finger sign of sympathy with Egypt’s Brothers disappeared from Twitter picture displays.

No one in the kingdom was willing to take the risk of being accused of supporting the Islamist group, even if the yellow symbol was sometimes just an expression of pity for the victims of the Cairo regime’s repression of Islamists.

This month’s ban, it was clear, would be enforced under harsh antiterrorism regulations that had been introduced just a few weeks earlier. So sweeping were the new laws that any hint of support for outlawed groups could be deemed a criminal offence.

The actions taken by the Saudi leadership reflect an increasingly hardline attitude in Riyadh that has rattled political activists and puzzled Middle Eastern and western officials.

The Muslim Brotherhood certainly has followers in Saudi Arabia. And they were emboldened by the sudden, if shortlived, success of their brethren in Egypt and Tunisia after the 2011 uprisings. But in an absolute monarchy, where no right of assembly is recognised, it has been impossible for a group to emerge that could pose a threat to the House of Saud.

Casting a wide net against a group’s sympathisers is not the usual Saudi way of doing business. The government’s preferred method is to combine subtle co-option and not-so-subtle punishment on a narrow band of leaders and agitators.

“It’s strange. Nothing has dramatically changed in Saudi Arabia to justify this,” says a Riyadh-based lawyer.

Around the same time as the legal crackdown, Saudi Arabia stepped up a long-running dispute with Qatar, accusing its smaller neighbour of destabilising the Gulf. Along with the United Arab Emirates and Bahrain, Riyadh withdrew its ambassador from Doha. It also hinted at more stringent measures, including closing its borders and airspace, in what is shaping up to be one of the worst crises within the Gulf Cooperation Council, the regional group that includes both Saudi Arabia and Qatar.

People close to the Riyadh government say Saudi Arabia is assuming regional responsibility and will no longer tolerate those who spread chaos across the region. “We are becoming an initiator of policy and defining our interests,” says one.

Others, however, say the moves are a sign of growing insecurity at a time when an ageing leadership is desperate to return the Arab world to a more comfortable pre-Arab awakening status quo, however intolerant that might seem.

This apparent nervousness has been accentuated by the suspicion among Saudi officials that the US is abandoning the Kingdom while seeking better relations with Iran, Riyadh’s regional rival. President Barack Obama will seek to assuage these fears when he visits Saudi Arabia this week.

Saudi Arabia has changed. Before it was more cautious, more diplomatic. Now it’s more assertive and more paranoid,” says a Saudi political analyst who asked to remain anonymous.

Islamist threat

There is much to trouble a conservative regional leader in a Middle East that is in a state of permanent ferment. Three years after the outbreak of Arab uprisings that sent ripples of panic through the autocratic Gulf, Saudi Arabia is operating in a more threatening environment.

The biggest blow in 2011 was the loss of Hosni Mubarak, Riyadh’s reliable Egyptian ally. Worse yet, his demise ushered in a Saudi nightmare: the rise of the Muslim Brotherhood.

It might seem ironic for a Wahhabi theocracy to oppose so forcefully a party that mixes religion with politics. But it is precisely because the monarchy bases its legitimacy on Islam that it fears Brotherhood rivalry. If political Islam were to be rooted in power in the largest Arab country, it could become an exportable commodity to the Gulf.

Fortunately for the kingdom, the Brotherhood’s rule in Cairo came to an abrupt end last summer in a military coup that had popular support. Saudi Arabia quickly embraced the new military regime and propped it up with billions of dollars of economic aid. The effective restoration of the old Mubarak order was an opportunity the Saudis were now determined to preserve.

“There is a conviction in Saudi that the Muslim Brotherhood is the only power that could have exploited the Arab spring, and so they think that without the Brotherhood there can be no revolutions,” says the Saudi political analyst.

The Saudi government’s fretting over Islamists in the kingdom, however, did not end with the fall of Mohammad Morsi, Egypt’s Islamist president. As Cairo’s crackdown on the Brotherhood escalated, many Saudis were at odds with official policy as their sympathies lay closer to the Islamists than to the Egyptian army.

The anxiety over Islamists in the UAE also added to Saudi concerns. Last year the UAE government accused dozens of alleged Islamists of plotting a coup backed by the Brotherhood overseas. In July the supreme court handed down long prison sentences to the alleged plotters in a trial criticised as unfair by western human rights groups.

As pressure on the Brotherhood widened, however, Saudi relations with Qatar grew frostier. Qatar, the only Gulf state to have been traditionally sympathetic to Islamists and to have backed the Morsi government, refused to join the regional crackdown on the Brotherhood. Saudi pressure for a change of policy in Doha, however, has continued to intensify, climaxing in the withdrawal of the three Gulf ambassadors this month.

According to Gulf sources, the main Saudi demand has been for the closure or the drastic curbing of the coverage of Al Jazeera, the Qatar-based network and only remaining popular channel that gives ample airtime to Brotherhood members. Qatar, however, has insisted it will not be bullied. It has argued that it is neither committed to the Brotherhood nor able to dictate to Al Jazeera how it should cover the Egyptian story.

Regional rivalry

Saudi Arabia might have handled Egypt with a softer touch had it felt more secure in its neighbourhood. But the stand-off between the Sunni kingdom and Shia Iran has intensified over the past three years, as the two regional heavyweights backed opposite sides in the Syrian war.

To Saudi Arabia’s chagrin, more­over, Iran’s image in the world has improved with the election of Hassan Rouhani. The centrist president favours engagement with the west and has embarked on negotiations with world powers that are designed to curb Iran’s nuclear programme and ensure it remains peaceful.

The prospect of a resolution of the nuclear dispute bolstered by the Rouhani government’s signing of an interim nuclear agreement in November – has sparked a profound rift in Saudi-US relations.

The growing production of shale gas in the US, along with its reduced dependence on Gulf oil, has deepened Saudi fear that the era of a special relationship with the USone based on an exchange of oil for security – was nearing an end.

Saudi officials have been uncharacteristically vocal in their criticism of the US, which they also blame for failures in Syria. And they have made no secret of their opposition to a nuclear deal with Iran, which they suspect would lead to western acquiescence of Iranian regional hegemony.

“With the warming of US relations with Iran and the reduction in Saudi Arabia’s strategic oil importance, the Saudis are concerned about losing out,” says the Riyadh-based lawyer.

What Saudi officials do not express, however, is that the sense of vulnerability and anxiety about the future might be exacerbated by something closer to home: the state of the monarchy.

King Abdullah is about 90 years old and is said to have considerably reduced his workload in the past year. Crown Prince Salman, his brother, is also believed to be in fragile health. Analysts and diplomats say that some princes and aides, including Khalid al-Tuwaijri, the king’s gatekeeper”, have assumed greater authority and pushed for a more uncompromising policy.

Internal disarray appears to have affected Saudi decision-making, particularly in policy towards Syria. Saudi backing for a nebulous rebel movement has also led to a flood of Saudis joining extremist groupspotentially forming a new wave of jihadis who might return to the kingdom and wage a domestic jihad, much as they had done after fighting the Soviets in Afghanistan in the 1980s.

Last month Riyadh sought to stem the flow of Saudi militants (at least 1,000 have gone to Syria, according to the interior ministry, and many more according to western sources) by imposing 20-year jail terms on those travelling to fight abroad.

Until recently Syria policy was led by Bandar bin Sultan, the hawkish national security chief and former ambassador to Washington.

Saudi watchers say that although Prince Bandar might still be involved, the Syria file has now been handed to Mohammed bin Naif, the more restrained interior minister whose focus in on antiterrorism at home.

Security gamble

It is not only in Syria, however, that Saudi Arabia has taken a dangerous gamble.

As the kingdom flexes its muscle, it risks provoking broader turmoil in the region while also breeding resentment at home. With the new antiterrorism laws, even the small political space that had been opened by King Abdullah is at risk of vanishing as freedom of expression is restricted.

Western diplomats say that Riyadh and other Gulf states financing Egypt’s economy should be using their leverage to counsel reconciliation and reform instead of replicating Egypt’s harsh measures against the Brotherhood.

With the Gulf, too, there are similar concerns. As one senior Gulf official says: “The message that’s now being given to political Islam is go underground, and that’s after 25 years of telling them to learn about democracy.”

The fear for Egypt and beyond is that the repression of the Islamist group that had renounced violence long ago might moderate some of its leaders but also unleash radicalised splinter groups. This could further swell jihadi ranks at a time of resurgence for al-Qaeda franchises in north Africa and Syria.

Saudi Arabia’s attempt to force a united Gulf front towards Egypt could also backfire, undermining a GCC alliance on which it hopes increasingly to rely to counter Iran’s authority. New fissures are already apparent in the region.

As Tarek Osman, author of Egypt on the Brink , says, two camps are emerging: one led by Saudi Arabia and the UAE, which maintains that political Islam is a perilous force that should be confronted; and the other led by Qatar and Turkey’s ruling party, which believes in political Islam’s ability to transform the region.
“This confrontation has not reached its peak yet,” he says.

Saudi Arabia’s policies might be pursued in the name of stability. But they could well achieve the opposite.

Gulf Cooperation Council: Minnows frustrate Riyadh’s plans for alliance

In the wake of the 2011 Arab uprisings, Saudi Arabia looked to protect itself through the Gulf Cooperation Council, the loose political and economic alliance of six oil-rich Sunni monarchies of which it is the most powerful member.

By working through the GCC, Riyadh managed to advance policies it favoured, including a peaceful transition of power in Yemen and support for the Nato military intervention in Libya.

It was also nominally a GCC force, though one largely made up of Saudis, that was dispatched to Bahrain to shore up the Sunni monarchy threatened by an uprising by the Shia minority.

Saudi Arabia’s efforts to bolster the authority of the GCC, however, have been frustrated on other fronts. Smaller Gulf states have been willing to co-operate when their interests converged with those of the Saudis, mindful of the benefits of closing of ranks to counter regional turbulence. But they have also continued to guard their independence carefully.

So when the kingdom suggested that Jordan and Morocco, two other Arab monarchies, should be added to the GCC club, the smaller members of the alliance balked.

Another Saudi plan to upgrade the alliance into a full union was also rebuffed, receiving enthusiastic support only from Bahrain. Oman took the unusual step of making its opposition public in a statement by its foreign minister.

The Saudi vision of a more coherent and united GCC has appeared to unravel in recent months, as Riyadh sparred with Doha and Oman was revealed to have hosted secret US-Iran talks.

Only two other states joined Saudi Arabia in withdrawing their ambassadors from Doha this month, with Kuwait and Oman apparently unconvinced by the accusations against Qatar.

Gulf officials insist that rifts will not destabilise the GCC. But so sensitive are Gulf tensions that when Arab leaders met at their yearly summit this week in Kuwait, the Saudi-Qatari dispute was not even put on the agenda.  

Copyright The Financial Times Limited 2014.