Russia, China and Iran launch Gulf of Oman war games

US rivals project increased Middle East influence with first joint naval exercises

Najmeh Bozorgmehr in Tehran and Henry Foy in Moscow

A handout photo made available by the Iranian Army office on December 27, 2019 shows Iranian seamen saluting the Russian Navy Neustrashimyy-class frigate "Yaroslav Mudry" while moored at Chabahar on the Gulf of Oman during Iran-Russia-China joint naval drills. - Iran, China and Russia started four days of joint naval drills in the Indian Ocean and the Gulf of Oman, the commander of Iran's flotilla announced. The exercise comes at a time of heightened tensions since the United States withdrew from a landmark 2015 nuclear deal with Iran in May 2018. (Photo by - / Iranian Army office / AFP) / === RESTRICTED TO EDITORIAL USE - MANDATORY CREDIT "AFP PHOTO / HO / Iranian Army office" - NO MARKETING NO ADVERTISING CAMPAIGNS - DISTRIBUTED AS A SERVICE TO CLIENTS === (Photo by -/Iranian Army office/AFP via Getty Images)
Iranian sailors saluting a Russian navy frigate during joint naval drills in the Gulf of Oman © Iranian Army office/AFP via Gett

Russia, China and Iran launched their first joint naval exercises in the Gulf of Oman on Friday in a direct challenge to US influence in the Middle East.

The move reflects growing co-operation between the US’s two main rivals and the Islamic republic, which is under sanctions imposed by Washington.

“The most important achievement of these drills . . . is this message that the Islamic republic of Iran cannot be isolated,” vice-admiral Gholamreza Tahani, a deputy naval commander, said. “These exercises show that relations between Iran, Russia and China have reached a new high level while this trend will continue in the coming years.”

The exercises brought a firm rebuke from the US, with the state department telling the Financial Times that Iran should “think twice” about conducting joint naval exercises, warning that such actions “should concern all nations with an interest in safeguarding freedom of navigation in the region”.

The Gulf has become a flash point between Washington and Tehran after President Donald Trump withdrew the US from the Iranian nuclear deal and imposed sanctions on the country in May 2018. Tehran shot down a US surveillance drone in June and seized a British-flagged oil tanker for allegedly violating its territorial waters in July.

Jonathan Eyal, associate director at the Royal United Services Institute, said the joint naval drills had been choreographed by the three countries to send a message that US influence in the region was waning.

“This is a carefully calculated exercise in which all three participants are winners: Iran gets to claim it is a regional power, Russia demonstrates its role as the key actor in the Middle East, and China can show it is a global naval power,” Mr Eyal said. “The strategic message is that these are the countries shaping events in the Middle East.”

In this photo provided Friday, Dec. 27, 2019, by the Iranian Army, Chinese navy members wave while approaching to the Iran's southeastern port city of Chahbahar, in the Gulf of Oman. Iran's navy on Friday kicked off the first joint naval drill with Russia and China in the northern part of the Indian Ocean. (Iranian Army via AP)
Chinese sailors took part in what was the first ever joint naval drill with both Russia and Iran © AP

Iran has repeatedly opposed the presence of foreign forces in the Gulf and threatened to make oil shipments insecure for all countries if its own crude sales are blocked by the US or regional states.

The US has accused Iran of attacking at least six oil vessels in the area in May and June, charges that Tehran denies.

The naval drills, which will include tactical exercises such as rescuing frigates under attack, began in the port city of Chabahar in southeastern Iran and are due to continue in northern parts of the Indian Ocean.

Russia said the joint exercises were legal and focused on ensuring regional stability. “We are dealing with the issues of maintaining stability in the region, security and the fight against terrorism,” said Maria Zakharova, of the Russian foreign ministry. “This co-operation and interaction is built on both a bilateral and multilateral basis but exclusively on a legal basis.”

China’s foreign and defence ministries described the exercises as “normal military-to-military co-operation”. “It is not necessarily connected with the regional situation,” the defence ministry added.

The initiative comes after a US-led naval coalition, including Bahrain, Saudi Arabia and the United Arab Emirates, launched operations in the Gulf in November to guarantee the safe supply of oil from the region. The UK and Australia have also agreed to send warships.

Cmdr Sean Robertson, a Pentagon spokesman, said the US was monitoring the joint exercise and would “continue to work with our partners and allies to ensure freedom of navigation and the free flow of commerce in international waterways”.

The Russian, Chinese and Iranian drills are being conducted near the Strait of Hormuz, one of two choke points for tankers travelling between Iran and China.

China imports about half its annual crude oil requirement with Iran being its seventh-largest supplier last year.

G2388_19X Oman locator map

Iran’s daily oil exports have plummeted to fewer than 500,000 barrels from 2.8m bpd before the sanctions were introduced.

China is thought to have remained Iran’s top customer.

Moscow has condemned the US decision to withdraw from the nuclear deal and sought to find alternative trade and finance mechanisms to offset the impact of the sanctions.

After the joint exercises conclude, Mohammad Zarif, Iran’s foreign minister, is due to visit Moscow on Monday for discussions with Sergei Lavrov, his Russian counterpart, on “the development of ties in the trade, economic, humanitarian and other practical fields”, said Russia’s foreign ministry.

Additional reporting by Tom Mitchell in Beijing and Lauren Fedor in New York

The EU must rethink its approach to UK trade talks

Brussels was wrong to treat Brexit as a threat, rather than grasping it as an opportunity

Wolfgang Münchau

The EU played an indirect but critical part in last week’s electoral triumph for UK prime minister Boris Johnson — and in Brexit.

It was a historic error of judgment by some of the EU’s leaders to collude with Remainers in the UK. Instead, they should have gone out of their way to help Mr Johnson’s predecessor Theresa May pass her withdrawal agreement.

The EU leadership not only overplayed its hand during the negotiations. It committed the critical error of refusing to rule out a Brexit extension from the outset. They contributed to the ensuing uncertainty and the change in the Tory leadership. The rest is history.

As a direct consequence of these errors, the EU will end up with a more distant relationship with the UK than it could have had. Mrs May’s withdrawal deal, while far from ideal, would have been consistent with a future association agreement. By betting the house on an elusive second Brexit referendum, a coalition of EU leaders and the Remain campaign have ended up forfeiting that opportunity.

If EU leaders had any strategic sense, they would now pause for a minute to decide exactly what they want from a new bilateral relationship with the UK.

The signs of that happening are not promising. I am marginally encouraged by Angela Merkel’s comments right after the UK election, looking forward to “friendship and close co-operation between our nations”. But Mette Frederiksen, the Danish prime minister, immediately raised the issue of fishing rights — an issue with the potential to kill any trade deal. Ursula von der Leyen, the European Commission president, set out a sequence with a first phase of talks to include only goods and fishing. This is exactly the same approach the EU took in the negotiations over the withdrawal agreement. The UK would be mad to accept this.

It would be complacent to think that Mr Johnson will be a pushover in the second phase, the upcoming trade negotiations. What would happen if the EU were to play hardball and only offer a minimal deal, perhaps spiced with demands for EU access to UK fishing waters, or that the UK follow EU labour market rules?

If Brussels were to make such demands, it would give Mr Johnson a rational reason to walk away from talks entirely. The Brexit transition period is scheduled to expire at the end of 2020. At that point, Mr Johnson will still have four more years in office ahead of him, longer than any other EU leader.

There would also be significant economic consequences for the EU’s leaders if no trade deal is struck and the two sides end up in a trading relationship based on World Trade Organization rules. That would put at risk a substantial portion of the EU’s £94bn bilateral trade surplus in goods.

Sceptics argue that a trade deal cannot be concluded quickly. But speed is a political variable. If the EU decided to prioritise a deal with the UK, it could choose to fast-track the negotiations. It is true that the EU would not be able to ratify a trade deal by the end of next year. But if negotiations were far enough along by late 2020, the two sides could find a way to extend the transition period.

The history of the EU’s free trade agreement with Canada offers another model. It has been provisionally applied since 2017, while awaiting final approval by the member states. When somebody tells you that a trade deal takes many years to negotiate, they are really saying that they do not want events to move faster.

Another important consideration for the EU is that the UK is likely to start parallel trade talks with the US. If such a deal were to be concluded first, it might contain passages that could interfere with a not-yet-concluded EU trade deal. For example, American negotiators might insist on access for their chlorinated chicken and genetically modified organisms.

If the EU really wants a strategic partnership with the UK, it is in its interest to conclude that agreement before the US does. If it is the strategic goal of US president Donald Trump to drive a wedge between Britain and the EU, this would be an ideal opportunity.

A full, balanced and fair trade agreement is possible, but that would require the EU to drop its Versailles treaty, victor’s justice mentality. I realise that the European Council does not undertake negotiations itself. But this time it should become more closely involved. We will know that this process is veering off track if we see the two sides reverting to the usual briefing hostilities.

The EU was wrong to treat Brexit as a threat, rather than grasping it as an opportunity to forge a strategic bilateral relationship with the UK. Britain’s departure is also an invitation to forge further integration among the remaining members.

It is a sad reflection on the state of the EU that I have no idea how it proposes to solve the apparent conflict between its geopolitical interests and fish.

The Posh Versus the Blokes in the UK

By: George Friedman

I arrived in London on Saturday afternoon. Traffic was heavy and it took nearly two hours to reach my hotel, giving ample time to speak to my driver. It was time well spent. He was a Scotsman who had been living and driving in London for a long time. We discussed the election, of course, and the devastation of the Labour Party and the rise of the Conservatives.

He had voted for the Tories. He explained that this was because of his loathing for what he called the “posh in London” and their hatred of England while enriching themselves shamelessly and despising anyone who doesn’t worship as they worship.

By “worship” he was not referring to religion, but their belief that Britain is corrupt and demands ruthless reform. He particularly was enraged that the playing of “Rule Britannia” was seen by the posh left as disgraceful, because it paid homage to an evil that Britain ought to apologize for over and over: the British Empire.

The loss of empire didn’t bother him. What bothered him was that the posh left was unwilling to respect that whatever faults Britain might have had, Britain was a great moment in human history, and he as a British subject and as a Scotsman was not prepared to be ashamed about it.

What has happened in Britain is something that can be seen elsewhere. The left-wing party has become the party of the well-to-do and educated elite. The conservatives have become the party of the workers.

The former demand the right to hold on to their status but also to redefine the meaning of a nation’s history, and use their power to force moral principles on a society not prepared to respect them. England's Labour Party had been the party of the working class but seems to a great extent to have turned on the workers.

The European Union question is mixed in with this. The posh (I will use this name for them) supported EU membership eagerly. According to my driver, the left-wing posh are all involved in finance, and they saw EU membership as beneficial to them. But there was another aspect he did not mention.

If one of the things you wish to do is take ownership of British history and deny the British the right to admire the greatness and forgive themselves what harm they did, then the EU is the perfect vehicle. In announcing and trying to impose a European identity, devaluing one’s own nation, the EU gave the posh a powerful tool with which to subordinate the brilliant, dark and beloved history of Britain.

The desire of this class to make more money is easy to understand. Harder to understand is this class’s desire to redefine British recollection of their past. When voters opted to leave the EU, this class was both dumbfounded and enraged. You could read many times about how the people who voted to leave were considered to be uneducated, lacking all understanding of what they were doing.

The posh wanted to delegitimize the election and insisted that it be replayed. The desire for a do-over was in their rational interest, but more was going on. The posh believed they had a right to rule, and that those who voted against them were illegitimate pretenders. As the struggle to reverse Brexit intensified, the battle to delegitimize the enemies of the EU also intensified.

Having opened by declaring the voters ignorant, they extended their assault to include a range of other values, such as patriotism, and the right to preserve and celebrate British culture. The struggle over Brexit did not start the culture war, but it pushed the industrial working class into an uprising against the posh and their belief.

There was of course a massive economic dimension. The industrial working class of the Midlands were not experiencing the benefits of the EU. The posh of London were. The EU played a major role in this. Britain is the second-largest economy of the EU, and its loss would be extremely painful.

The EU had two possible routes. One was to reach a redefinition of the relationship with Britain. The other was to be utterly rigid in finding a resolution. The EU assumption was that rigidity was more rational, since it would force a shift in the British political alignment that would reverse Brexit.

It did everything it could to make Brexit appear a disaster, and it convinced all those who already believed it, while building rage against the EU in those who didn’t. The political collaboration between the posh and the EU drove a further wedge between the two English classes and strengthened the belief that rational acceptance of the EU was being blocked by primitive and ignorant nationalism. Thus the economic and financial battles merged.
The British political structure has now massively shifted. The Labour Party had been the party of the industrial working class and aligned with their culture, unlike Marxists who wanted to transform it. The Conservative Party was the party of the well-to-do and of empire. Today, Labour is the party of the posh, demanding cultural shifts, while the Conservatives are the party that lost posh London and took a huge chunk out of the industrial Midlands.

It should be noted that the major shift was cultural and not economic. Labour was unclear on the EU and shared with the posh the desire for moral reform. The Conservatives sided with the working class on both economic and cultural matters.

The British realignment is something we also see more broadly in the Euro-American world. Parties that were formerly working-class parties have shifted to supporting the well-to-do and focusing on cultural change. Parties that were formerly the parties of the wealthy are now speaking for the workers, and particularly for their cultural views.

This isn’t particular to Britain at all. The desire to protect traditional cultural values is powerful among working classes, who see the assault on their values by former allies as a betrayal. Thus the Labour Party became the party of the posh, and the Conservatives speak for my driver.

A Chinese Reality Check for Stock Bulls

Some of the factors lifting markets in recent days aren’t quite what they seem

By Nathaniel Taplin

A worker installs steel rebars on a construction site of a highway in China. Photo: china stringer network/Reuters

Lower trade tensions: check. Global manufacturing rebound: check. No inverted yield curve: check. What could go wrong?

Actually, a fair amount. Signs of renewed vigor in the global economy are real, but some of the factors lifting markets in recent days aren’t quite what they seem. Sharp surges in commodity prices and mining stocks, in particular, may be difficult to sustain. Copper is up about 5% since early December, while shares in miner Rio Tinto have risen about 7%.

First, the good news: Key parts of the global manufacturing complex, after a terrible 2019, are doing better. Although most analysts missed it, signs of stabilization in China’s export-oriented electronics sector have been evident for months. After a brutal crash in late 2018, global semiconductor sales have begun rising again. So have global smartphone sales, according to tech advisory firm Canalys.

Chinese data—from both official and other sources—backs this up. Operating profits of listed Chinese information technology firms were up 9.7% on the year in the third quarter, the best results since early 2018. After steep declines for most of late 2018 and 2019, Chinese mobile phone production was up on the year for the third month in a row in November.

Auto production rose for the first time since June 2018. Overall profit growth at listed Chinese firms also appears to have stabilized—good news for global consumer goods, since profit growth tends to lead the labor market.

There is, however, one problem with this rosy picture. One of the things lifting Chinese industrial growth to a five-month high in November—and global markets to record levels Monday—was strong production of heavy industrial products such as steel and cement. This looks unlikely to last.

The industrial surge—year-over-year growth in steel-product output more than doubled to 10%—appears to stem from a jump in electricity and utility project investment, up sharply since September. The value of infrastructure projects approved by China’s economic planning agency jumped in the second and third quarters, but has cratered since September as fiscal constraints bite.

Strong infrastructure-driven demand for materials could last a few more months as that effect feeds through with a lag, but probably no more. China’s power sector is already heavily over-invested: Power plants in 2018 ran an average of only about 3,900 hours a year, compared with more than 4,700 hours in 2011.

China’s housing market—the most important driver of global metal demand—is also starting to look shaky again. Property investment growth slowed for the second month in a row to 8.4% on the year in November, the weakest reading since December 2018. New home prices rose half as fast in November as they did midyear.

Add plateauing Chinese credit growth to the mix and the current bounce in metal prices and mining stocks seems at risk of a reversal in the coming months.

Investors can ride the rally for now, but would be wise to take profits before too long.

Should We Fear Singapore-on-Seine?

The phrase “Singapore-on-Thames” is shorthand for Britain becoming a low-tax, lightly regulated economy that can out-compete the sclerotic, over-regulated eurozone. Yet, there is no meaningful political support in Britain for significantly lighter bank regulation – in contrast to the situation in France.

Howard Davies

davies66_Xavier TESTELINGamma-Rapho via Getty Images_bankoffranceeuflag

LONDON – The idea that London might have a post-Brexit future as a kind of deregulated “Singapore-on-Thames” is one of the more curious notions to have emerged in the three and a half years since the United Kingdom’s citizens voted narrowly to leave the European Union in the fateful June 2016 referendum.

In fact, at least as far as the financial sector is concerned, the bigger threat to European regulatory harmony could come from France.

The phrase “Singapore-on-Thames” is shorthand for Britain becoming a low-tax, lightly regulated economy that can out-compete the sclerotic, over-regulated eurozone from a strategic position only 20 miles or so offshore. The general idea was first mooted a couple of years ago by Philip Hammond, then Britain’s chancellor of the exchequer, as a means of encouraging the EU to strike a friendly Brexit deal with the UK.

Those who know Singapore well will quickly recognize that the analogy is far from perfect.

True, Singapore has low tax rates (unless you wish to import an expensive foreign car), and low levels of public spending – although the latter does not seem to be part of the plan for Singapore-on-Thames advocates.

But the idea that Singapore is a deregulated paradise is not borne out by reality, as anyone who has tried to dispose of a piece of used chewing gum there will know. As Guy de Jonquières has noted, Singapore’s success owes more to the fact that it is a “meticulously planned economy,” with “handholding and cosseting” of overseas investors by “powerful, eager to please bureaucrats.”

The political prospectuses of both major parties in the UK’s December 12 general election, with their nostalgic ideas for reviving British manufacturing, would seem to suggest that Britain should be reborn as a latter-day Stoke-on-Trent, rather than as a twenty-first-century European Singapore.

Nonetheless, the notion that the UK might seek a post-Brexit competitive advantage through deregulation – particularly in relation to financial services – has taken hold on the continent, where it has become something of a bogeyman, used to frighten other EU member states.

The EU commissioner responsible for the financial sector, Valdis Dombrovskis, has warned that the UK cannot hope to retain access to EU markets if it departs from the bloc’s rules. “The more systemically important the market,” he argues, “the closer the regulatory alignment that is expected.” The UK, Dombrovskis says, must think very carefully before it moves away from rules followed by the rest of the EU. If it does diverge, the access of UK-based financial firms to EU markets could be restricted.

From the perspective of a London-based bank, this argument seems strange. I can identify no notable constituency in British politics that favors significant bank deregulation. The Bank of England argues that capital ratios are now adequate, and those who disagree tend to want even heavier burdens on banks.

The issue of financial regulation has not featured prominently in the general election debates, which is hardly a surprise. And we have seen no sign that the pendulum is swinging back toward deregulation, as it has begun to do in the United States.

UK banks have an average core Tier 1 capital ratio – the key measure of their strength – of over 15%, which is above the eurozone average, and the prospect of a material reduction of that figure seems remote. The Bank of England’s stress tests, which are the tightest constraint for most banks, are “biblical” in nature: banks must show that they can survive a 5% annual contraction in GDP, a doubling of unemployment, and precipitous falls in house and stock prices. So, the argument that the UK is about to deregulate its banking system seems odd. And it seems even stranger when one compares the political rhetoric on both sides of the English Channel.

Whereas British politicians recently have offered no words of comfort to UK banks, France’s finance minister, Bruno Le Maire, has declared himself in favor of easing the capital burden on French banks in the interests of competitiveness. “We have gone too far in setting these requirements,” Le Maire said recently. Basel III, the stone tablets that contain the global standards for banking regulation, “must be simplified and lightened,” he declared, adding that “American banks are not subject to rules as strict as those which apply to European banks.”

Le Maire thus seems to be on a collision course with Dombrovskis, the EU’s financial rule-setter-in-chief, who says, “the EU is committed to carrying through the final Basel III reforms faithfully.”

That is the UK position, too, but it seems no longer to be the French view. So, in the world of financial regulation, a “Frexit” from the Basel framework seems more of a threat to the level European playing field than Brexit is. With French President Emmanuel Macron having recently deemed NATO to be in a state of “brain death,” it seems that a similar verdict on the Basel Committee on Banking Supervision is now being prepared.

It is true that some aspects of the global agreement on Basel III, reached – reluctantly in the case of France and Germany – at the end of 2017, weigh more heavily on European banks than on their US peers. That is partly because mortgages are rarely securitized and sold in Europe, whereas in the US, two state-guaranteed enterprises, Fannie Mae and Freddie Mac, stand behind the mortgage market and warehouse loans originated by banks.

Also, European banks lend more to large, highly-rated corporate customers, which in the US typically fund themselves in the capital markets. The so-called “output floors” in the Basel accord therefore affect European banks more severely.

These are valid points. But, rather than launching another transatlantic political dispute, it would be preferable if consenting regulators could privately negotiate a way to smooth the hard edges in the Basel accord. Frexit could be just as damaging to Europe’s financial system as Brexit.

Howard Davies, the first chairman of the United Kingdom’s Financial Services Authority (1997-2003), is Chairman of the Royal Bank of Scotland. He was Director of the London School of Economics (2003-11) and served as Deputy Governor of the Bank of England and Director-General of the Confederation of British Industry.