Category Archives: Politics

China, Europe, Politics, Russia, United States

The strengthening partnership between Russia and China?

GEOPOLITICS

Intro: Relations between China and Russia have been growing closer since the end of the cold war. But while the crisis in Ukraine has drawn Russia closer to China, the relationship is far from equal

The commemorations in Moscow to celebrate the capitulation of Nazi Germany 70 years ago speak volumes about today’s geopolitics. On May 9th, Western leaders stayed away in protest against Russia’s aggression in Ukraine, an important proclamation as this was the first annexation of sovereign territory in Europe since the second world war. China’s president, Xi Jinping, was the guest of honour of his friend, Vladimir Putin. Western sanctions over Ukraine, and what looks set to be a long-term chilling of relations with America and Europe, has given Russia no other option than to embrace China as tightly as it can.

In the coming days, in a further symbol of the growing strategic partnership between the two countries, up to four Chinese and six Russian naval vessels will rendezvous to conduct live-firing drills in the eastern Mediterranean. The exercise, which follows several similar ones in 2013, is aimed at sending a clear message to America and its allies. For Russia the manoeuvres send a strong signal that it has a powerful friend and a bonding military relationship with a country that has growing geographic reach and influence. For China, such an exercise of this kind speaks of increasing global ambition that is line with Mr Xi’s slogan about a ‘Chinese dream’, one which he says includes a ‘dream of a strong armed-forces’. In taking part, China is sending its ships from anti-piracy duty in the Gulf of Aden.

But this also provides an opportunity for China to display its Type 054A guided-missile frigate, which it would like to sell to the Russians. It also brings with it operational experience in an unstable region in which it has an expanding economic presence. In 2011, China organised the evacuation of more than 38,000 Chinese from Libya during that country’s upheaval. And just last month its navy disembarked several hundred of its citizens out of Yemen, which is being torn apart by civil war. There are believed to be at least 40,000 Chinese working in Algeria and more than 1m across Africa.

Relations between China and Russia have been growing closer since the end of the cold war. For different reasons both countries resent America’s ‘hegemony’ and share a desire for a more multipolar world order. Russia, for all its bravado, is a declining great power, and is looking for ways to recover at least some of its lost status; whereas China, a rising power on the world stage, bridles at what it perceives as American attempts to constrain it. As fellow permanent members of the UN Security Council, both with autocratic governments, Russia and China find common cause in expressing grievance at Western liberal interventionism. The two countries settled all of their long-standing border disputes in 2008, just prior to the Russian-choreographed war in Georgia. This provided the onset for Russia in concentrating more of its military forces in the west as a deterrent against the further expansion of NATO.

Despite the strengthening partnership there have been the occasional tensions. For example, Russia played a key role during the 1990s in helping China to reform and modernise its military forces. Russia was able to preserve a defence-industrial base that would otherwise have withered from lack of domestic orders. But since the middle of the last decade, irked by China’s pilferage of its military technology and its consequent emergence as a rival in the arms market, Russia’s weapons sales to its neighbour have slowed.

Moscow’s wariness of becoming little more than a supplier of natural resources to China’s industrial machine speaks volumes of Russia’s humiliating position that until recently saw China as backward. As long as Russia could sell to Europe all the gas required to keep the Russian economy growing, it could arbitrarily put deals with China on hold. These included plans for two gas pipelines from Siberia into China that were announced in 2006 and then quietly dropped as the two sides argued and bickered over prices.

All that has changed. The continuing crisis in Ukraine has forced Russia to ‘pivot’ its economy towards Asia in an effort to lessen the impact of Western sanctions by finding alternative markets and new sources of capital. For China it is a golden opportunity to gain greater access to Russia’s natural resources, at favourable prices, as well as being in a better position to secure access to big infrastructure contracts that might have gone to Western competitors and to provide financing for projects that will directly benefit Chinese firms.

Russia’s incursions into Ukraine and its seizure of Crimea violated two of China’s most consistently held foreign-policy tenets: non-interference in other states and separatism of any kind. Yet, while China abstained from voting on the UN Security Council resolutions condemning Russia (with the Chinese media giving Russia strong support) it has quietly welcomed a new cold war in Europe that might distract America from its declared ‘rebalancing’ towards Asia.

Additional and striking new evidence of the new closeness between China and Russia was a $400 billion gas deal signed in May last year under which Russia will supply China with 38 billion cubic metres (bcm) of gas annually from 2018 for 30 years. China has insisted that the gas comes from new fields in eastern Siberia by passing through as yet an unbuilt pipeline, a plan that will ensure supplies are not diverted elsewhere. Other deals have followed too. The biggest was a preliminary agreement signed in November for Russia to sell an additional 30 bcm a year through a proposed pipeline from Western Siberia. In every such new instance it is probable that China was able to drive a hard bargain on price.

Other clear signs of Russia’s weakness have also become clear. Its recent decision to resume high-tech arms exports to China most noticeable. In April it agreed to sell China an air-defence system, the S-400, for around $3 billion. This will help give China air dominance over Taiwan and the Senkaku islands (Diaoyu to the Chinese), who dispute Japan’s claim to them. In November, too, Russia said it was prepared to sell China its latest Sukhoi-35S combat aircraft. Initially it had refused to sell any fewer than 48, in order to make up for losses it suffered as a result of China’s purloining of the designs. Now it has agreed to sell only 24.

Looking ahead problems seem discernibly clear. One is that both countries are competing for influence in Central Asia, once Russia’s backyard. Mr Putin wants to establish his Eurasian Economic Union partly to counter growing economic power in Central Asia, through which China wants to develop what it calls a Silk Road Economic Belt. China is using the Shanghai Co-operation Organisation (SCO), of which Russia and Central Asian nations are also members, to boost its security ties in the region as well. Another difficulty is Russia’s military and energy links with countries such as India and Vietnam, both of which are rivals of China. But the biggest problem of all seems likely to be Russia’s irritation with being forced into an increasingly subservient role in its relations with China.

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China, Economic, Government, Politics

Economic (and political) reforms in China…

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ECONOMIC DATA from China reveals that growth has slowed sharply and that deflation has set in. As China’s economy is being weighed down by both a property slump and weak factory production, many may conclude that the received wisdom over China belongs to the pessimists. Certainly, manufacturing output is at its weakest since the dark days of the global financial crisis. In the first three months of 2015, GDP grew at ‘only’ 7% year-on-year. Growth predictions suggest that this year will probably be China’s weakest in 25 years.

After three soaring decades, fears are rising that China is on the verge of an economic crash. That would be a disaster. China is the world’s second-largest economy and Asia’s pre-eminent rising power. Fortunately, however, the pessimists are missing something from their presumptive models which are not truly reflective of China today. China is not only more economically robust than they allow, it is also putting itself through a quiet (and welcome) financial revolution.

The robustness rests on several pillars. The vast bulk of China’s debts are domestic, and the government still has enough leverage to stop debtors and creditors getting into a panic.

The country has been steadily shifting the balance away from investment and towards consumption, which will help to put the economy on a more stable footing. With a boom in services, China generated over 13m new urban jobs last year, a record that makes slower growth acceptable. Given China’s huge economy, expected growth of 7% this year would boost the global economy by more than 14% (compared to 2007).

But the real reason to doubt the pessimists is China’s reforms. After more than a decade of dithering, the government is acting in three vital areas. First, in finance, it has started to loosen control over interest rates and the flow of capital across China’s borders. The cost of credit has been historically and artificially low, minimising the returns available to savers, as well as succouring inefficient state-owned firms and pushing up investment. Caps on deposit rates are becoming less relevant, thanks now to an explosion of bank-account substitutes that have attracted almost a third of household savings. The governor of China’s central bank, Zhou Xiaochuan, has said there is a ‘high probability’ of full-rate liberalisation by the end of this year.

China is also becoming more tolerant of cross-border cash flows. Slowly but surely, the yuan is becoming more flexible; international conglomerates and multinational firms are able to move revenues abroad far more easily than before. The government’s determined stance to get the IMF to recognise the yuan as a convertible currency before the end of 2015 should pave the way for bolder reforms.

The second area is fiscal. In the early 1990s, reforms gave local government bodies greater responsibility for spending, but few and limited sources of access to revenue. China’s problem of too much investment since then largely stems from those policies. Stuck with a flimsy tax base, cities have relied on sales of land to fund their operations and have engaged in reckless off-balance-sheet borrowing.

The finance ministry insists it has a plan in place to sort out this mess by 2020. Part of those plans include central government transferring funds to the provinces for social priorities, while local government agencies are being promised more in tax revenues. A pilot programme has already been launched in an attempt to clear up local-government debt. This will lay the ground for a municipal-bond market – which, despite the risks, will likely be much better than today’s opaque funding for provinces and cities.

The third area of reform is administrative. At the start of his premiership in 2013, Prime Minister Li Keqiang pledged that he would cut red tape and bureaucracy by making life easier for private companies. Since then, there has been a boom in the registration of private firms: 3.6m were created last year, almost double the number registered in the previous year.

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IN TIME, the cumulative effects of these reforms will lead to capital being allocated more efficiently. Lenders will price risks more accurately, with the most deserving firms being given funding options and savers earning decent returns. This will have the effect of slowing China’s economy down – how could it not? – but gradually and without breaking the system.

Dangers will remain. Liberalisation breeds instability. When countries ranging from Thailand to South Korea dismantled capital controls in the 1990s, their asset prices and external debts surged, which ultimately led to the then banking crises of south east Asia. China has strong defences but nonetheless its foreign borrowing is rising and its stockmarket is up by three-quarters in just six months.

How politics changes in China is also important. Whilst the economic reforms the country proposes have high-level backing, the anti-corruption campaign of President Xi Jinping means that Chinese officials live in a state of constant fear of state investigators. Many officials dare not engage in local experiments for fear of offending someone powerful.

Political reforms matter, too, because there is a pressing need to end the dire system of hukou, or household registration, which relegates some 300m people who have migrated to cities from the countryside to second-class status and hinders their ability to become empowered consumers. Similarly, farmers and ex-farmers need the right to sell their houses and land, or they will not be able to share in China’s transformation.

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Britain, Europe, Foreign Affairs, Government, NATO, Politics, Society, United States

Britain’s shrinking influence on the global stage…

BRITISH FOREIGN POLICY

SOME two decades ago the British foreign secretary, Douglas Herd, decreed that Britain should aim to ‘punch above its weight in the world’. Today the country seems hesitant, reluctant even, to enter the ring. Some, such as a recently retired British NATO chief, have even complained that the prime minister, David Cameron, has become a ‘foreign-policy irrelevance’. America continues to despair of Britain’s shrinking armed forces and has openly criticised Britain’s ‘constant accommodation’ of China. Allies are worried, and so they should be given world events as they are. For example, consider Britain’s non-adoptive approach over events between Russia and Ukraine.

Yet, despite the world’s tensions, the country’s politicians, who are fighting to win a general election on May 7th, appear unbothered by those expressing concern. That is a mistake. Britain’s diminishing global clout and influence has become a big problem, both for the country and the world.

A powerful force in relative decline, Britain’s propensity is to veer between hubristic intervention abroad and anxious introspection at home. Following Tony Blair’s expeditionary misadventures in Iraq and Afghanistan, conflicts which cost us heavily, Britain’s coalition government was always going to shun grand schemes. Now, it would seem, is that our ruling politicians are not so much cautious, but apathetic, ineffective and fickle.

The prime minister did make a brave and passionate case for armed intervention and assistance in toppling the Libyan regime of Muammar Qaddafi. But like so many other examples concerning foreign intervention he did not reckon for the day after and Libya is now in a state of internecine civil war. He led America to believe that Britain would support it in bombing raids over Syria, only to find that his parliamentary vote was bungled by strong political opposition. Britain may have been one of the moving forces behind the workings of the 1994 Budapest memorandum, which ostensibly guaranteed Ukraine’s security when it gave up its Soviet-era nuclear weapons, but the prime minister has been almost absent in dealing with Russian revanchist aggression against it. Last year, too, as host of a NATO summit in Wales, David Cameron urged the alliance’s members to pledge at least 2% of their GDP to defence. Just months later, a fiscally straightened Britain intent on deficit reduction at all costs looks poised even to break its own rule.

David Cameron’s pledge of an in-out referendum on Europe if he wins the election has given the impression of Britain being semi-detached. Rather than counteracting that position through vigorous diplomacy, the prime minister has reinforced it. In European Union summits, for instance, he has often been underprepared and zealously overambitious. His rather humiliating and embarrassing attempt to block Jean-Claude Juncker from becoming EU president of the Commission left him with only Hungary for company as a dissenting voice. Mr Cameron’s insistence of pulling the Conservatives out of the EU’s main centre-right political group has had the unintended effect of cutting Britain out of vital discussions with other centre-right leaders, such as Angela Merkel of Germany.

And what of Labour? Ed Miliband, the party’s leader, may well be pro-European, but he has no more connection of American foreign policy than Mr Cameron does. He apologises for Labour’s interventionist history so strenuously and unreservedly that he leaves little or no room for liberal intervention. And, of course, differing arguments abound from all political parties over the submarine-based nuclear-missile system that is seen by the Conservative Party as a pillar of Britain’s relations with America and NATO – an argument that swings to total rejection when it comes to the Scottish Nationalist Party, a position which rankles right-wing politicians as the SNP could end up propping-up a potential Labour minority government through confidence and supply motions.

Those who defend the prime minister say that Britons are war weary and impoverished. What do they say, then, of Mrs Merkel and François Hollande, the French president, who have shown that you can have an active foreign policy while dealing with an economic crisis?

Liberal values and promoting international co-operation require defending, especially so just now. New emerging powers, particularly China, want a far bigger say in how the world works. By seizing Crimea at will, and invading Ukraine, Vladimir Putin’s Russia has challenged norms of behaviour that were established after the Versailles Treaty and Second World War. If Britain now refuses to stand up for its values, it will inherit and become part of a world that will be less to its liking.

Britain is still well placed to make a difference. With a great diplomatic tradition, a permanent seat on the UN Security Council and reasonably strong ties to Europe and America, Britain ought to be pushing hard to extend open trade, human rights and international law as well as providing impetus towards new agendas against crime, terrorism and climate change.

If Britain is to make its voice heard, it needs to bulk up its diplomacy and armed forces. Pledging to spend 2% of GDP on defence may seem arbitrary but it is a crucial sign to America and other countries that Britain is prepared to pull its weight in exchange for NATO’s guarantee of joint security. This should make more sense than the obscure commitment to spend a lavish amount of 0.7% of GDP on foreign aid.

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