Global Economies

Prime Minister Dmitry Medvedev shocked many in Davos on Wednesday when he told Bloomberg that "Gazprom may lose its monopoly on gas exports from Russia."

This statement underscores the rise of the independent gas producers and marks a paradigm shift for the Russian gas market. Last year, Gazprom's production decreased 5.4 percent, while the independents increased their output. For example, Novatek's production grew 7.1 percent in 2012.

Inside Russia, the key impact has been that Gazprom, the dominant supplier, lost important clients such as E.On Russia. There was a similar story at a previous development, when Qatari gas first started to compete in Europe. Traditional suppliers lost market share because of newcomers' competitive pricing.

Currently, gas trade in Russia is regulated by the Federal Tariffs Service, or FTS. While Gazprom has to respect FTS' prices within a 3 percent margin, independents can sell below the minimum tariffs, allowing them to gain market share. In an oversupplied gas market, the reintroduction of spot trading, expected this fall, could boost even more the expansion of the gas independents at the expense of Gazprom.

Independents have key advantages over Gazprom. They can secure new supply contracts, control lifting costs and buy gas production and distribution assets. Their ability to lobby for tax breaks has also contributed to their success. For example, the favorable tax regime was a key factor in Total's decision to partner with Novatek.

Independents' ambitions are not limited only to Russia. In November, Novatek requested an exemption from the gas export monopoly. If Novatek is successful, Rosneft, an emerging gas producer, might follow suit.

While the monopoly will formally remain intact, the energy independents may be allowed to bid for specific export quotas. If implemented, this measure will probably lead to a smaller Gazprom, which will have to increase its operational efficiency and will need to review some of its ambitious projects. But it will also improve the image and market position of Russian gas in Europe's liberalized energy market.

Click here to read this piece at The Moscow Times.

1. What were the successes and challenges in the first term in the U.S.-China bilateral relationship?

Miller:

After four years, we’re actually hard pressed to find concrete successes in the vital U.S.-China relationship. Perhaps the best that can be said is that the relationship did not deteriorate further, which is actually no small achievement. The few concrete successes have done little to overcome the mutual mistrust that still prevails. That is the most enduring problem that President Obama will face in his second term.

During his 2008 campaign, Obama offered tough talk about China. Once he took office, he dramatically moderated his tone. His administration initially tried to accommodate Chinese concerns in the hopes of generating good will and greater cooperation in dealing with many of the most pressing bilateral and global challenges. They included the global financial crisis, the currency dispute with China, climate change, and Iran and North Korea’s nuclear programs.

But Obama’s efforts at partnership did not lead to the desired results: China was slow to address concerns over its currency and industrial policies; it snubbed Obama at the Copenhagen climate discussions; it was reluctant to apply pressure on North Korea; and it adopted more assertive regional policies. There was some progress on Iran as China supported UN sanctions in 2010, but then China refused to support new sanctions designed to undermine Iran’s continued progress on its nuclear program.

After the conciliatory approach produced little success—a charge critics were quick to make about Obama’s “soft” approach—the administration adopted a tougher stance toward China while continuing to seek expanded opportunities for dialogue. That’s the approach that is largely in place today.

Kok:

I agree that the biggest achievement was that both sides managed not to escalate tensions. Cool heads prevailed in managing the tense confrontation between the Impeccable, a U.S. Navy frigate, and Chinese ships in 2009, offering a stark contrast to the loudspeaker diplomacy and ensuing crisis following a collision between a U.S. Navy EP-3 aircraft and a Chinese fighter jet in 2001. And while China has blamed U.S. involvement for exacerbating its maritime disputes with its neighbors, both sides have urged restraint in dealing with the heightening tensions.

One of the successes was the U.S.-China Joint Statement issued by Obama and Hu on January 19, 2011, which defined the U.S.-China relationship in more specific terms than previous joint statements. By describing the relationship as “both vital and complex” and recognizing differences as well as common interests, the Joint Statement laid the foundation for developing the “new type of big-power relationship” that U.S. and Chinese leaders espoused in 2012.

Another significant development was the addition of cybersecurity—an area of growing mistrust between the two countries—to the U.S.-China Track 1 agenda. Also, kudos to the Chinese leadership for showing an increased maturity toward U.S.-China military-to-military relations by not cutting off those contacts in response to the Obama administration’s announcement of a $5.8 billion arms sales/upgrade package to Taiwan.

But there were still plenty of strains, whether over trade, human rights, or Obama’s meeting with the Dalai Lama in the White House.

2. What are the new Chinese leadership’s main priorities vis-à-vis the United States and vice versa?

Miller:

The U.S.-China agenda is as crowded in Obama’s second term as it was in the first: climate change, non-proliferation concerns in Iran and North Korea, China’s military modernization, the global economy, trade, industrial policies, human rights and increasing tensions in the South and East China Seas. The administration’s overarching priority is to put the relationship on a new footing—all while trying to manage the change in the Chinese leadership.

Kok:

China’s new leadership under Xi Jinping has stated its commitment to continuing a foreign policy of cooperative engagement with the United States. Some top priorities include:

• Persuading the U.S. to play a more constructive role in facilitating peace and prosperity in the Asia-Pacific region, instead of, advertently or not, pitting China’s neighbors against it. China may want to “rebalance” the U.S. strategy in Asia, shifting away from a military focus to an economic agenda.

• Working with the U.S. and other countries to ensure stability and peace in Afghanistan and its surrounding regions after the U.S. withdrawal in 2014.

• Urging the U.S. to get its fiscal house in order, and pushing for the de-politicization of economic relations (especially with regard to Chinese investment in the United States and U.S. trade complaints against China).

3. Is the U.S.’s “rebalancing” strategy in Asia sustainable in the second term given continuing unrest in the Middle East and North Africa? And is it clear to China what this policy is?

Miller:

This is not just a question of resources but of intentions. China views the rebalancing—with its concomitant expansion of the U.S. military presence in the region—as containment or military encirclement of China. The Obama administration argues that is not the case, but even a Department of Defense-commissioned assessment has pointed out that the strategy behind its force planning has not been “adequately articulated.” This has certainly contributed to Chinese unease about the rebalancing. But despite the lack of clarity about its intentions and questions about resource constraints, the United States recognizes that its long-term strategic challenges and opportunities will be in Asia: military, foreign, and economic policy will continue to reflect this.

Kok:

If China ever needed additional fuel to fan the already vibrant flames of suspicion over U.S. intentions, the “rebalancing” strategy was it. Chinese officials and experts have been particularly concerned about the U.S.’s moves to strengthen its security and military alliances in the region, despite the U.S.’s explanations that the “rebalancing” isn’t purely military but also encompasses diplomatic, political and economic policies. While I don’t think that anything the U.S. says or does will fully dispel the notion among the Chinese that the U.S. is out to contain them, the U.S. could do a better job of explaining itself.

The turmoil in the Middle East and North Africa will test Washington’s ability to effectively draw down its resources in that region, which is a prerequisite for the “rebalancing” strategy in Asia. That being said, I believe the “rebalancing” strategy in Asia will continue, since the U.S. needs to send a strong signal to its allies in the region—and to China—about its commitments to them.

4. What issues challenge the bilateral relationship most?

Miller:

It depends on who you ask. The Pentagon has serious concerns about China’s growing military capabilities that could threaten U.S. force projection capabilities in the region. Congress, which has become quite effective at inserting itself into foreign policy, would like to see more attention paid to Chinese human rights violations and to China’s currency and industrial policies. Human rights issues are one of the few areas where members of Congress have found common ground. And, of course, members of Congress will continue to press the administration on Chinese currency, trade, and industrial policies—an area where the administration also has significant concerns.

But the fundamental challenge to the relationship lies in the lack of trust on both sides—and this complicates efforts to address U.S. concerns vis-à-vis China. Whether dealing with Taiwan, China’s rapid military expansion and modernization, human rights abuses, the growing use of cyber weapons, intensifying territorial and maritime disputes, nuclear nonproliferation or Syria, the trust deficit undermines the ability of U.S. and Chinese leaders to make significant progress, whether in a bilateral or multilateral setting.

Kok:

Aside from China’s continuing concerns about the U.S.’s “rebalancing” strategy in Asia at a time of maritime tensions in the region, the other challenges will include U.S. arms sales to Taiwan. More specifically, the question is whether the Obama administration will announce more sales during the second term and, if so, how it will affect U.S.-China military-to-military relations. Trade, currency, and human rights concerns will continue to surface.

While not bilateral issues per se, the tensions over North Korea, Iran and Syria—and, in all probability, new hotspots in the Middle East and North Africa— will test the ability of the U.S, China and the international community to find common ground. With climate change back on Obama’s agenda, it will also be interesting to see how these two countries manage it—especially at the multilateral level—and avoid a repeat of Copenhagen.

5. Does the new Chinese leadership team offer a new chance to make progress on dealing with key irritants?

Miller:

The new team will not fundamentally alter China’s strategic priorities and concerns, so I don’t see this as a big new opportunity. Xi’s primary focus, like Obama’s, will be on meeting domestic challenges. Yes, Xi, like his predecessors, has noted the need for the U.S. and China to develop a strong cooperative relationship—comments echoed by Obama and his predecessors. But the challenges continue to grow.

Kok:

Xi has expressed a willingness, in principle, to develop relations with the U.S. in a positive and transformative way. However, this willingness is conditioned on China’s expectation that Washington respects its core interests and its status. Like Obama, Xi also faces domestic pressures. These emanate from nationalistic segments of the population, and competing political interests between China’s various policy bureaucracies and within the central leadership. He and his leadership team will feel the need to respond to any U.S. actions that may be seen as jeopardizing China’s domestic stability and territorial integrity.

6. What is the single biggest move that Obama or Xi could make to fundamentally improve the relationship? How likely is that to happen?

Miller:

If we’re dreaming big and thinking of transformative moves, China’s willingness to moderate its actions on the territorial and maritime conflicts in which it is currently embroiled would be a remarkable step in the U.S.-China relationship and regional security as a whole. China will never abandon its claims outright and the United States should not expect it to. But if China agreed to try to resolve these disputes within a multilateral setting rather than bilaterally, which gives China the upper hand, that could do a lot to stabilize the situation and lessen U.S. concerns about Chinese ambitions. I am not convinced another statement or communiqué could have a transformative effect, but it certainly would help to strike a more cooperative tone at this time of increasing tension in the region.

Kok:

In light of the ongoing tensions in the Asia-Pacific region, Obama and Xi might wish to consider signing a joint statement or even a joint communiqué on U.S.-China peaceful relations in that region. Both sides could reaffirm their commitment to peace, security, stability and development in the region; articulate their respective strategic interests and objectives; and outline principles for cooperation and open communication. While it will not eradicate the deep-rooted mistrust between the countries, such a move by the Asia-Pacific’s two largest powers would be a signal of assurance toward each other and to the rest of the region.

Commenting on the value of shale gas and similar energy alternatives, Bochkarev held that they "can be quite an important source of natural gas and energy for the country."

Click here to read the article in full at Radio Free Europe/Radio Liberty.

Bochkarev has recently published an EWI report on energy security solutions, available here.

The international crisis management apparatus emerging after the Global Financial Crisis (GFC) is focused too narrowly on the financial sector. The apparatus is assessed as weak and as unrepresentative of key actors, both by sector and by geographic region. East Asian economic power is seriously under-represented.

There has been little effort since the GFC to bridge decision-makers and communities of interest currently separated either by the private/public divide or by political differences involving countries such as the United States, China, Russia, India, and EU members.

“Economic shock” is an event that can cause a sudden, drastic change in an economy. It can originate from outside or within the economic sphere. The causes can come from government policy settings, political change, natural causes, technological change, irrational market behavior or war and terrorist attacks.

The international community has invested heavily in the past twenty years in preventing large scale violent conflict because of the human and economic costs. Yet the human and developmental costs of global economic shock, though less visibly deadly, may be higher in many ways than those caused by war. The international community has not developed a systematic approach to dealing with the heavy human costs of global economic shock, nor does it have the institutions to do so.

Most countries pay little attention to the sum total of effects of economic shock beyond their own borders. When a global economic shock occurs, there are low levels of trust between major actors and they typically resort to “financial nationalism”.

The inadequacy of current global institutions is widely recognized. A 2009 OECD study concluded that since the GFC “has struck at a time of great global interdependence”, the response to these “unprecedented events” cannot be “business as usual”. It suggested that new institutional mechanisms are needed to generate truly global, integrated and multidimensional responses. A 2010 OECD study assessed the impact on fragile states of several successive economic shocks: “Fragile states are suffering from the cumulative effects of three consecutive and inter-related shocks – the food price crisis, escalating oil prices, and the global financial crisis – proving that their economies are more integrated into the world economy than previously thought.”

The 2010 Economic Report of the U.S. President noted that regulatory responses to global crises are not adapting well because they limit themselves to national settings and this narrow approach creates incentives for behavior that saps confidence. “Financial stress can spread quickly and easily across borders”, it said, “Yet regulation is still set largely in a national context and has failed to effectively adapt”.

A more comprehensive OECD study on “Future Global Shocks” conducted over two years and published in 2011 reviewed shocks arising from five different sources: financial crises, cyber risks, pandemics, geomagnetic storms and social unrest. It recommended that international co-ordination to address global shocks should be strengthened at all phases of the risk management cycle. It also called for self-organisation needs to be promoted across society as a cornerstone of building resilience. It suggested that efforts to improve resilience should focus on routine processes, e.g. information-sharing, broad consultation and participation, training exercises and simulations, citizen level resilience.

An April 2012 op-ed from the Peterson Institute’s Edwin M. Truman assessed that “the G-20’s accomplishments [in response to the GFC] are in danger of unraveling, because these countries have failed to implement their agreements on reform of the International Monetary Fund.”

In a June 2012 paper, David Korowicz went so far as to contemplate the proposition that a return to normal from a global shock may not be possible and it is time to begin to plan “how we might move forward if a reversion to current conditions proves impossible”. He outlines how contagion in the financial system could set off semi-autonomous contagion in supply chains globally. He notes that “Our immediate concern is crisis and shock planning. It should now be clear that this is far more extensive than merely focusing on the financial system”.

A July 2012 report from the office of the UN Secretary General, Ban Ki Moon, gives a comprehensive review of the success in reforms of the global financial system, including its ability to handle systemic shock. Having noted that at the international level, reforms have concentrated on the Basel III arrangements, the report assessed that “changes envisaged in the Basel III framework might be too small to sufficiently enhance resilience” and that we needed “more attention to linkages between the financial sector and the real economy”.

An IMF internal document (3 October 2012) reporting the findings of an early warning exercise conducted by the Financial Stability Board, concluded that there are important risks to the implementation of reforms, and that this is reflected in the lack of market confidence. It also concluded that there are signs of fragmentation in the financial system. It called for immediate efforts to rebuild confidence and for financial sector reform.

At a broader level, the problem of weak institutions in the face of global threats has been neatly summarized in a unique official assessment by the United States National Intelligence Council and the European Union’s official Security Studies Institute. They jointly concluded in October 2010 that the “growing number of issues on the international agenda, and their complexity, is outpacing the ability of international organizations and national governments to cope”.

A system for anticipating and mitigating economic shock should be an important part of improved global governance. The EastWest Institute is working with partners from business and government to devise such a system. It will need to include new confidence building measures, new arrangements for trusted information sharing, and more politicized communications channels on the subject of economic shock.

Click here to read this piece at New Europe.

Shrugging off its traditional reliance for foreign-exchange earnings on jute goods and tea, Bangladesh has economically made giant strides, with home remittances and garment manufacturing giving momentum to a whole basket of non-traditional exports. But a cursory visit there is enough to dispel the general perception in Pakistan that Bangladesh is doing economically far better than Pakistan.

Despite multiple crises compounded by rampant corruption and a terror-driven law-and-order situation, Pakistan’s economy is far more resilient and multifaceted, notwithstanding the fact that the Bangladeshi taka is performing better than the Pakistani rupee. The pervasive mass poverty in Bangladesh far outstrips the comparable percentage of poverty in Pakistan. The focus of Bangladesh’s economy seems to be the city of Dhaka, with high-rise buildings mushrooming on scarce land with greater value than almost any other capital city in the world. Traffic jams are endemic. There is one thing in common to the two democracies – rampant nepotism and corruption – and these put them increasingly under threat, which is force-multiplied by the widening rich-poor gap and inflation triggering a mass upsurge.

To quote Khadimal Hasan in New Age: “Promises made by the Awami League during the 2008 general elections remain unfulfilled, good governance has remained elusive, the rule of law is yet to be established and human rights violation continues to be rampant.” Despite the Awami League government’s many failings, the main opposition Bangladesh Nationalist Party (BNP) could not play any significant role inside and outside parliament in projecting people’s concerns. The BNP has concentrated its anger on partisan issues, such as the “eviction of party chairperson Khaleda Zia from her Dhaka Cantonment House and the cases filed against her and her two sons for corruption taking precedence over pressing public concerns.”

Like in Pakistan, without political consensus about elections under a genuinely neutral caretaker government, the atmosphere in Bangladesh is charged with politics of confrontation. Fearing overturn of their present overwhelming mandate, the Awami League government forced an amendment through parliament abolishing the concept of caretaker governments. This could lead to a rerun of 2005 when the BNP, as the ruling party then, tried to engineer the vote. Street agitation for installation of a non-partisan government to conduct polls created a situation for an army-dictated superior judiciary-supported caretaker administration of technocrats taking power. Free and fair elections were ultimately held in 2008.

The ‘Bangladeshi Model’ failed when, within one year, the army forgot its resolve to stay away from politics. Armies can intervene for course corrections but are not equipped to run governments. At most they can run people who run governments, and that too for a short time.

Dr Debapriya Bhattacharya of the Centre for Policy Dialogue (CPD) observed that the country’s economy was approaching lower-level equilibrium in 2013, short of the GDP growth target of 7.2 percent, failing to reach even six percent, compared to the record 6.32 percent of the 2011-2012 financial year. With the CPD projecting that revenues collection will fall short of target, an additional TK100 billion will be needed to meet budgetary allocations. Remittance inflows of over $12 billion were a bright spot, with the budget deficit and balance of payments remaining in the safe zone.

Political uncertainty could destabilise Bangladesh’s macroeconomic stability, having a serious impact on the economy. To quote Abul Kalam Azad and Sharier Khan in The Daily Star: “A series of mega projects aimed at revolutionising communications, ports and energy sectors were rolled out, but due to weak governance, indecision, an inability to execute plans, corruption, fund shortages and donors’ conditions affected the progress of most of them.”

Nevertheless, given the prevailing recession in the developed world, it is not a bad performance. With some headway in projects in the power sector, one must commend the tremendous initiative of the present government for a ‘digital’ nation by 2020, the progress matching India in quality, if not in quantum. An 18 percent interest on loans to the manufacturing sector, rising to more than 20 percent for small businesses, almost double that in India, is pushing up production costs and adversely affecting people’s purchasing power. To its credit, the Bangladesh Bank kept a cap of seven percent for export financing and 13 percent for farm loans when withdrawing the cap on rates imposed in 2008 to help businesses cope with world recession.

The campaign in Assam against Bangladeshi settlers and the water issue will adversely impact India-Bangladesh relations. Expert Mohammad Khaliquzaman said that the entire northern area was turning into a desert due to lack of water, with India releasing 20 percent less water in the past five years than that stipulated for Farakka Barrage in the Farakka Water Treaty. The Indian intention to unilaterally build other dams upstream, including one at Tipaimukh, is alarming. Construction of dams is not needed for saving rivers but to save the lives of people. 

The ugly controversy over how many people died during the 1971 civil war is politically motivated to vitiate the congenial atmosphere developing between peoples of Pakistan and Bangladesh. The truth is not something to be proud of. While nowhere near the quantum being propagated, the three-million figure is ingrained in the Bangladeshi national psyche. The local population did suffer mass atrocities at the hands of elements of the Pakistani army. However, in many isolated places non-Bengalis were massacred by mob action. There were targeted killings and rapes. In her book Dead Reckoning, Sarmila Bose, granddaughter of Indian revolutionary Subhas Chandra Bose, dismissed the allegations of ethnic-cleansing, rape and killings against the Pakistani army as highly exaggerated. Commensurate atrocities carried out against the non-Bengali population, especially the Biharis, were never documented.

The driving force in the arguments, in her words, is “bitter emotional partisanship.” With both sides remaining in absolute denial of truth, instead of reconciling fact with fiction, there is no closure in sight. Pakistan should request the UN to commission professional verification of the claims of Bengalis and non-Bengalis perishing in this horrific civil war, offering to pay for the services of internationally renowned independent auditors. It will be money well spent.

Another thing common in Pakistan and Bangladesh is widespread resentment against what is perceived as Indian arrogance by the intelligentsia and the masses. This is much less so in Pakistan then in Bangladesh, where the generally held belief is that the Indian government dictates everything to the Bangladeshi government. PCB chairman Zaka Ashraf was either dangerously naive or plain ignorant in fantasising that India would ever allow the Bangladeshi cricket team to tour Pakistan. Neither Pakistanis nor Bangladeshis (as opposed to their present government) like a master-slave relationship. India’s image of a bully is not conducive to a future common market in South Asia.

The inland transit facilities demanded by India highlight an important geopolitical home truth. Bangladesh’s pivotal economic location is extraordinary. Surrounded by West Bengal and the impoverished ‘Seven Sisters’ states of northeast India, Bangladesh’s two bustling ports make for an economic centre of a possible Association of Eastern States of South Asia. The AESSA concept means an economic (if not political) confederation of almost 400 million people. Standing on a failsafe line of destiny with corrupt governance alternating between the two badly polarised ladies, Bangladesh desperately needs an honest, competent government truly dedicated to the people.

Click here to read this column at The News International.

The EastWest Institute has been advocating a major effort to improve the reliability and security of the cables based on the 12 recommendations made in a joint IEEE-EWI Report, The Reliability of Global Undersea Communications Cable Infrastructure (ROGUCCI) Report. EWI continues to champion many of these recommendations and conducts outreach seminars with senior government and industry leaders in India, as well as across the globe.

New Europe

The News

AP Pakistan

Kuwaiti News Agency

Asia-Plus

Central Asian News Service

Federation of Arab News Agencies

New Europe

JŪRA MOPE SEA

DiploNews

The re-election of Mr. Barack Obama as President of the United States represents both a remarkable moment in American political history and, at the same time, a reaffirmation of the broad contours of US foreign policy – towards the world, towards Asia and towards China in particular. Notwithstanding broad policy continuity from Mr. Obama’s first presidential term to his second, however, challenges loom.

In any number of ways, this election marks a significant milestone in US politics. With his victory earlier this week, Mr Obama became the first sitting American president in history to win a second term against the backdrop of a US unemployment rate in excess of 7.1 per cent.

Less commented upon is the fact that he also became the first US president since Mr Ronald Reagan to twice win the majority of the national popular vote – and the first Democrat to do so since Mr. Franklin D. Roosevelt (who last did so in 1940 and 1944). (Mr. Bill Clinton, the last two-term Democratic president, never won a majority of the US popular vote, winning 43 per cent in 1992 and 49 per cent in 1996, both three-way races.)

And with his win, Democratic candidates for president and vice president have now won the national popular vote in the United States in five of the last six elections (1992 to 2012) – an impressive run that matches the similar GOP run from 1968 to 1988.

Clearly, Mr Obama has made political history in a variety of important ways. With respect to the implications of his re-election for US foreign policy, though, the story is much less dramatic – at least at first blush. In a second term, “continuity” will largely be the name of the game, including in the Asia-Pacific region and with regard to China – America’s single most consequential diplomatic partner.

Click here to read the rest of this column at The Straits Times.

Click here for a round-up of media coverage on David Firestein's most recent trip to China.