Global Economies

Key excerpts from her comments are translated below.

On the revised U.S.-Japan defense guidelines:

“The recent update of the U.S.-Japan defense guidelines is aimed at enabling the U.S. and Japan to respond jointly and more effectively to the security challenges of the 21st century…This certainly affects China, and in recent years the U.S. and Japan have both been paying close attention to China’s maritime actions and its hardening posture in the East and South China Seas; however, I personally believe that this update does not specifically target China…The update is timely and prescient, and is predominantly meant to allow Japan, as the United States’ primary ally in Asia, to take on greater security responsibilities”

On the Trans-Pacific Partnership (TPP) and the Asian Infrastructure Investment Bank (AIIB):

“The TPP is very important to both the U.S. and Japan. From the U.S. point of view, the TPP is a key part of its ‘Asia Strategy’ and the strategic focus of its economic policy in Asia. In Japan, Abe has spent a great deal of domestic political capital to push for progress on the TPP. He hopes that joining the TPP would push forward domestic reforms in Japan, particularly in agriculture and the economy.

The AIIB and TPP clearly serve two different functions and cannot be compared directly. The TPP negotiations are moving into their final stages. If an agreement can be reached and implemented within a short period of time, it would have a positive effect on the United States’ reputation, standing and influence in Asia…While the AIIB puts some pressure on the TPP negotiations, the TPP’s main obstacles and sources of pressure come more from U.S. and Japanese domestic politics than from strategic pressures.”

On Abe’s speech in Congress:

“I believe those who wanted Abe to apologize directly [for Japan’s role using ‘comfort women’ during World War II] were disappointed, as he himself did not actually apologize. He also did not directly address the topic of ‘comfort women’…Though Abe expressed remorse and pledged self-reflection [on this issue], there are still people who would want a sincere apology from Abe himself. ”

On the U.S.-Japan alliance’s impact on China-Japan and U.S.-China relations:

“There has always been strategic mistrust in China-Japan and U.S.-China relations. The mistrust between China and Japan is mostly the result of historical issues and the relationship has been afflicted by a sense that the war remains ‘unsettled.’ I think a stronger U.S.-Japan alliance would deepen mistrust between China and Japan, particularly on military issues. Abe himself hopes that Japan can ‘normalize’ as a country and break free from the restrictions set by its pacifist constitution.

I believe Japan and the U.S. must, through public diplomacy, clarify and explain to China and other Asian countries how a closer U.S.-Japan alliance, particularly a closer military alliance, can benefit the entire region.”

To view the interview at NTDtv, click here. (Mandarin)

According to Miller, the relationship between the two powers are contingent on significant contributions from both parties; "significant national security and defense reforms on the Japanese side and a rebalance toward Asia on the United States’ side." Though there are a number of political obstacles on both sides, Miller says that the relationship can "serve as the foundation for a networked alliance approach to peace and security challenges in the Asia-Pacific."

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To read the full article, click here.(Paywall)

(11:39 - 20:34)

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Miller highlights South Korea's comfort women, the Dokdo/Takeshima dispute and differences in the larger historical narrative as the three key issues which remain unresolved.

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Economic and political turmoil in Ukraine has led to a significant reduction in energy consumption which should have eased the country’s key economic burden—its heavy dependence on dollar-priced hydrocarbon imports. In 2014 natural gas consumption alone went down by 16 % to 42.6 bcm, and imports fell by 8.3 bcm to 19.5 bcm. Falling demand and cheap crude also decreased Ukraine’s natural gas bill which went down from $12 billion in 2013 to $8.8 billion in 2014.

The country nevertheless continues to depend on energy imports—the energy import bill is indeed one of the most important internal economic and political challenges Ukraine faces. Almost all the proposed solutions have one common point: diversification and a shift away from dependence on Gazprom. However, these policy ideas still lack a realistic implementation plan and sound cost-benefit analysis: a fixation on import diversification has led to the neglect of domestic energy resources and a failure to promote energy saving.

So what is the solution?

Fixing Naftogaz’s deficit and improving the governance of this national champion must be the main priority of Ukraine's energy policy. The decrease of energy imports should have reduced the deficit of the national energy company Naftogaz. In reality, the deficit went up from $2 billion in 2013 to at least $7-$8 in 2014. Though non-payments and national currency devaluation have contributed to Naftogaz’s shortfall – they cannot explain the fourfold increase in the company’s deficit. Residential gas prices went up 50 % as of May 2014, industrial consumers continued to pay market-based tariffs, higher than the average price of imported gas - all this should have helped to alleviate Naftogaz’s deficit. Furthermore Naftogaz produces enough cheap gas to cover over 90% of Ukraine’s residential/heating demand. According to various media reports part of the deficit was linked to the mismanagement of production and gas flows. For example, in December 2014, Ukrainian national weekly ZN.UA published summary conclusions of the Audit Chamber of Ukraine. The report claimed that in 2011-14 period around 2 billion cubic meters per annum (bcma) produced by Ukrnafta—an upstream subsidiary of Naftogaz—were sold to private entities at the highly discounted price of $15 - $26/mcm, representing only a fraction of Ukraine’s industrial tariffs. Naftogaz was forced to source these volumes abroad paying in average $700 million per year. It is estimated that at least 3 bcm of gas produced by Naftogaz and its’ subsidiaries do not reach intended customers in residential/heating sector. Putting the house in order is therefore a clear “must”. Introduction of transparent governance is in the case is the only solution able to boost Naftogaz’s financial results and decrease its deficit.

Improvement of energy efficiency is also extremely important for Ukraine, which is in dire need of affordable energy supplies to re-launch its economic and industrial growth. According to the World Energy Council, the energy consumption of Ukraine's GDP reached 0.47 million British thermal units last year, almost four times higher than the average within the Organization for Economic Cooperation and Development. While some policy measures were implemented by the previous governments, introduction of energy-saving and energy-efficiency measures had been effectively blocked by lobbies of domestic energy intensive industries. In the last five years, the energy intensity of Ukraine's economy decreased only by 3.5 percent—a meager result even if compared with rather modest progress made even by its’ eastern neighbors. Energy saving is a low hanging fruit in Ukraine—it is cheap and will bring immediate results. Ukraine's energy-saving potential could reach as much as 40 - 50 percent of its current energy consumption.

Ukraine’s 'independents' is an important source of natural gas which should not be underestimated. In June-November 2014 period, Ukraine’s gas production rose by 2.1% year on year to 18.1 Bcm. This was mostly due to the performance of independent companies, whose output rose by 26.7% to 2.67 Bcm; conversely, Naftogaz’ production fell by 1% to 15.43 bcm. Independents’ output could reach 5.7 bcm by 2017 under a favorable investment-friendly tax regime.

Ukrainian government chose a different path, sharply increasing gas taxation for private producers in December 2014. The new fiscal regime clearly favours the license–holder of the large fields (e.g. Naftogaz) over smaller private enterprises and risks to undermine both the growth of independents and liberalization of Ukraine’s gas market.

These examples show that the energy reform in Ukraine stalls due to the lack of real reforms and some of the government’s actions even against the spirit of the Energy Community and liberalized energy market. While the Ukrainian leadership took some steps which shows its commitment to reforms—e.g. adoption of Third Energy Package compliant gas market law (Law N. 2250), thus breaking Naftogaz’s monopoly—Kiev has still a long way to go. However these steps should be coherent with a general fiscal and energy policy. New laws should also be working in practice and not only on paper. Increasing transparency, strengthening institutions and reducing the complexity of the legal system should be given high priority. It is up to Kiev to fully play by the European rules and not just applying them selectively.

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To read the article at the European Energy Review, click here.

The EastWest Institute has released a new report by a working group of Russian and U.S. experts on how the United States and Russia can jointly combat narcotrafficking out of Afghanistan. The joint U.S.-Russia working group previously has released two reports, Afghan Narcotrafficking: A Joint Threat Assessment in 2013 and Afghan Narcotrafficking: Post-2014 Scenarios in February 2015.

The paper points out that Afghanistan accounts for 80 percent of global opium and 74 percent of illicit opium production worldwide—90 percent of which is trafficked out of the country. Afghan heroin has created an addiction crisis in Russia, whereas for the United States the growing Afghan drug trade is further testimony to the failed decade long U.S.-led state-building exercise in the country.

The current publication comes at a time of increased tensions between the United States and Russia over Ukraine, which is detrimentally affecting joint efforts elsewhere in the world. “(…) [C]ooperation between the United States and Russia may not come easily even when confronting a common threat. Fallout from the Ukraine crisis has damaged the bilateral relationship to an extent that will take years to repair,” the study notes pessimistically.

Prior to the Ukraine crisis, both countries had slowly increased joint operations in the region. For example, back in 2010, Russian and American authorities seized approximately $60 million worth of opium during raids on four drug laboratories near the Afghanistan-Pakistan border. The EastWest paper elaborates:

"According to official data from the Federal Drug Control Service of the Russian Federation (FSKN), such cooperative operations continued through 2012, yielding a total of seven FSKN-DEA operations in the country. These operations resulted in seizures of 2.5 tons of opiates, 3.5 tons of hashish, 1.5 tons of morphine and 5.5 tons of precursors—along with the destruction of 10 drug laboratories."

However, even prior to the Ukraine crisis things did not always go smoothly between Moscow and Washington. Right around the time when United States state-building efforts intensified in Afghanistan (2008-2009), it became apparent that Moscow favored a more heavy-handed approach—a combination of opium eradication combined with interdiction efforts within Afghanistan and the destruction of laboratories—while Washington wanted to pursue a lighter touch campaign focused on drug interdiction in order not to further aggravate the Afghan population.

With the ongoing deterioration of Russia-West relations, the cooperation could potentially snap to a complete halt, although the U.S.-Russian working group does not seem to think this is likely. They offer a set of recommendations for Afghan, U.S., and Russian policymakers to consider. Here is a selection:

• Encourage Afghanistan to cooperate more actively with Iran to improve interdiction along the Afghan-Iranian border. (…)
• Speak with a common voice in matters of counternarcotics and border security in Central and South Asia and demand that Central Asian officials live up to the obligations of the counternarcotics and border management assistance that they have received. (…)
• Push Afghanistan and Pakistan to finalize the status of their frontier.(…)
• Deepen formal and informal cooperation across the FSKN and DEA field offices in Afghanistan and Central Asia.(…)
• Jointly expand multilateral training of Central Asian and Afghan border police, customs authorities and counternarcotics officers. (…)
• Establish joint positions on counternarcotics and border control at international bodies where these issues are discussed (…) 

According to the EastWest Institute, The State of Afghanistan’s Borders will be followed by three more reports in 2015 and 2016: two that will offer specific policy suggestions on alternative livelihood in Afghanistan and narco-financing and a final report presenting a compendium of all recommendations.

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To read this article at The Diplomat, click here.

Interviewer: World leaders are gathering in China over the next few days as the annual Boao Forum gets under way in the southern island of Hainan. This year’s meeting comes at a critical time for China. Its economy is slowing, but there is growing momentum for a new development bank it’s leading. Even though it’s an idea rooted by President Xi Jinping and its headquarters, as recently announced, will be based in Beijing, but delegates at the forum insist China will not dominate decisions made at the Asian Infrastructure Investment Development Bank, that’s because they say the AIIB will be held responsible for profits and losses by its stakeholders which, in this case, are the member countries. China’s vice finance minister has said that the bank’s shareholding structure is still under negotiation, but there would be a different [inaudible] for Asian members versus non-Asian members. Still, supporters of the AIIB say the bank will not rival that of the World Bank or the IMF. China has set a deadline of March 31st for countries to apply for founding membership to the bank.

And for more, let’s speak to Kok Piin-Fen in New York. She is the director of the China, East Asia and United States Program at the EastWest Institute. The organization is a think tank for international security policy. Piin-Fen, plans for the implementation of the “One Belt and One Road” initiative are expected to be released at the Boao Forum. Tell us how this initiative is expected to increase economic integration between the east and west.

Kok: Thanks for having me on the show. Essentially the “One Belt, One Road” initiative, as I understand it, is China’s signature diplomatic initiative in the region. It seems to link pretty much the whole Eurasian span of continents from East Asia all the way to the west, right up to the doorstep of Europe, so essentially it’s linking up markets from the maritime part of China’s eastern coast all the way to the western part. So, in that sense, it’s a way for China to tap into this vast market and to help ease domestic pressures within its country in terms of overcapacity in some sectors such as concrete and steel that’s needed for infrastructure, and also providing markets for excess capital.

Interviewer: Piin-Fen, the theme since 2014 has been Asia’s new future, but tell us, can Asia work together, I mean, despite differing strategic positions within the continent?

Kok: I believe so, especially in the area of economic and social development…There is a lot of talk about the geopolitics of all these various competing initiatives, whether it’s AIIB or the Trans Pacific Partnership, or TPP, and the Chinese-led RCEP—Regional Comprehensive Economic Partnership—but at the end of the day, I think everyone agrees that the goals of these so-called competing initiatives are really to promote the development and prosperity of the region. I think this is a pragmatic reason why you see many Asian countries, including Singapore, joining various so-called competing initiatives at the same time.

Interviewer: Piin-Fen, thanks very much for that. That was Kok Piin-Fen from the EastWest Institute.