A Busy Day in Geopolitics

By Kamran Bokhari

There will be many days that are, geopolitically speaking, rather quiet. Yesterday was not one of them. Three separate but highly significant developments occurred involving the four major powers of the globe: the United States, Russia, China and Germany. Given that the three events illustrate a major step forward in our forecasts, we will use this Reality Check to examine all three rather than just one.

U.S.-Russian Cooperation

The first development involved a meeting between top military officers of the United States, Russia and Turkey. U.S. Joint Chiefs of Staff Chairman Gen. Joseph Dunford, Russian Armed Forces General Staff Chief and First Deputy Defense Minister Gen. Valery Gerasimov and Turkish General Staff Chief Gen. Hulusi Akar held a tripartite meeting in the Turkish city of Antalya. Media reports suggest the three generals sat down to discuss the impending assault on the Islamic State’s core turf in Syria, especially its capital of Raqqa. If we are to believe open-source accounts, the conversations involved the nuts and bolts of the military campaign against the jihadist regime and how different actors’ forces (both state and non-state) in the anti-IS camp can avoid stepping on each other’s toes.

CFO Marcus Schenck, left, and CEO John Cryan of Deutsche Bank present the company’s financial results for 2016 during an annual press conference on Feb. 2, 2017 in Frankfurt, Germany. Thomas Lohnes/Getty Images

Anyone who understands the job description of the armed forces’ highest-ranking commanders from any country will easily recognize the spurious nature of such reports. Apex-level military leaders do not dwell on such minutiae, which is left to generals much lower on the totem pole. A meeting of the most senior generals is not about discussing tactical details. This meeting in Turkey – like all similar meetings – involves strategic-level discussions.

Another critical thing to bear in mind is that heads of different countries’ military establishments meet after their respective political bosses already have made a decision on joint action. In this case, that action involves the fight against the Islamic State. While the media portrayed it as a last-minute arrangement, several weeks – if not months – have been spent laying the groundwork for this meeting. Few details have surfaced on what the three generals actually talked about. It may be the case that official reports about battles in the Syrian towns of Manbij and Raqqa were designed to obfuscate a major agreement between the United States and Russia. It is also interesting that no leaks have come out yet from Washington on what was discussed, especially in light of the bitter fight over the Donald Trump administration’s alleged Russian connections. We would expect any signs of U.S.-Russian cooperation to be a major stick that the administration’s opponents would not hesitate to use.

There is no way of telling if any agreement has been reached. But the top American general did not meet his Russian counterpart in the presence of Turkey’s top military officer as a formality, much less to discuss mundane matters. This decision to cooperate may be limited to Syria. But given that Russia is involved in the Middle East to gain leverage in its dealings with the United States over its near abroad – especially Ukraine – it would not be surprising if a broader international U.S.-Russian understanding was in the making. Such a deal would be a major change in Washington’s relations with the Kremlin – something the Trump administration has been trying to achieve.

Chinese Power Projection in Southeast Asia

While the Americans, Russians and Turks were trying to find ways to cooperate in the Middle East, Chinese-backed rebels in Myanmar resumed a new round of attacks. The government in Naypyitaw claimed yesterday that the rebel group Myanmar National Democratic Alliance Army (MNDAA) had carried out multiple attacks in the Kokang region of Shan state. The MNDAA, one of at least five rebel groups operating near the Chinese border, has rejected the Myanmar government’s proposed peace offer. This latest round of fighting was the first major clash since early December. The renewal of rebel activity coincides with the second round of peace negotiations scheduled for later this month. This is important because our model says that China can’t make big military moves and must create political instability in a given region (e.g. the Philippines) to advance its interests. Myanmar is a different kind of meddling but the same general idea, though not as strategically important at first blush.

Kokang is a borderland region whose residents, though citizens of Myanmar, are ethnic-Chinese who speak Mandarin, use the yuan in business transactions and have familial ties across the border in China’s Yunnan province. Two strategic interests explain Beijing’s alleged support for the Northern Alliance, an umbrella group of anti-government armed rebels that includes the MNDAA. First, free transit through Myanmar would open maritime trade routes to parts of China that otherwise require traveling great distances over land to access the Indian Ocean. Second, Beijing wants to make sure the West does not gain a foothold in a country that borders China.

The cross-border Chinese connection and a shared loathing for the Myanmar regime have Beijing and the rebels in a relationship of sorts. Another Myanmar insurgent outfit that China supports is the United Wa State Army (USWA). According to multiple media reports and think tanks, the Chinese military supplies light arms, equipment and vehicles to USWA via third-party countries such as Laos. USWA, in turn, is both an end user of this matériel support and a conduit to other rebel factions. To get a sense of the China-USWA ties, it is important to mention that in late February the group said China should serve as an arbiter in a new peace process replacing the deal offered by Naypyitaw.

China is trying to become a regional hegemon in Asia. Under its currently weakening political and economic circumstances, the best option at its disposal is subversion in neighboring countries. Keeping its neighbors preoccupied with domestic conflict prevents the United States from forming stable anti-China coalitions. The recent activity by the MNDAA, USWA and other rebel groups indicates that China is employing the subversion tactic in Myanmar to protect Beijing’s interests and to build regional influence. Between conventional wisdom focused on Chinese naval power projection in the South China Sea and North Korea’s bellicose activities, China’s moves to back rebel groups in India’s backyard are largely going unnoticed.

German Banking Sector in Trouble

At its March 5 board meeting, Deutsche Bank (DB) decided to raise 8 billion euros ($8.5 billion) of fresh capital by issuing 687.5 million new shares on March 21, pricing them at a 39 percent discount from the shares’ March 3 closing price of 19.14 euros. The stock then fell another 6 percent on Monday following the news. Separately, Germany’s largest financial institution decided to integrate its Postbank unit into its retail banking operations after failing to secure a reasonable price. Additionally, DB will lay off staff to attempt to recover a sustainable trajectory. Not only is this bad news for shareholders, but also it is an indication that DB is struggling with restructuring, and by extension, with efforts to contain a liquidity crisis. DB also is selling a minority stake in its asset management business as well as other assets in its investment banking business, which combined are anticipated to yield an additional 2 billion euros.

This is a bad sign for Germany and the European economy. Deutsche Bank is not only Germany’s biggest bank and one of the world’s 30 systemically important banks, it also plays an important political role in Germany and the EU. While technically it is a private bank, Deutsche Bank is tied to the government informally, and formally to most major German corporations. Those that rely on exports or shipping already are experiencing financial strains.

DB’s fate will be shared by all of Germany. In the 1990s, Germany’s top lender began operating more like a typical investment bank, looking to take advantage of financial globalization. Deutsche Bank prioritized short-term gains and invested in risky assets, like any other bank. The 2008 crisis has meant not just financial losses for the bank, but also that it was delegitimized and faced investigations, legal troubles and potential fines to be paid in coming years, seriously weakening its position.

The latest news only confirms the bank is in a difficult position and at risk of potential crisis with no signs of improving soon. This shows that people don’t have confidence in DB if the bank must cut its share price that much to convince people to buy. If DB cannot steer itself out of this crisis, it will have huge implications for Germany’s banking sector and Europe’s largest economy. Germany already is struggling to limit the extent to which the European Union is devolving. A German financial crisis will have an enormous effect on the economic health of the Continent.

Forward Movement

Yesterday was exceptional. Geopolitical Futures spends a great deal of energy daily sifting through the deluge of noise in an effort to identify events with massive geopolitical implications. Usually it is no more than a single event. Yesterday we discovered three events involving great powers. All of them showed significant forward movement in our forecasts on U.S.-Russian relations, Chinese regional power and a German banking crisis. While details of these events continue to unfold (eventually we will know what the chiefs of staff discussed), it is imperative that we lay out these developments with what we know so far. Today’s forecasts are tomorrow’s news. Such days are rare, but we do run into them from time to time.