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Watch List Findings: April 7, 2018

Al-Qaida in Yemen, Russian airstrikes in Syria, U.S.-China trade dispute

|April 6, 2018

What follows are the preliminary findings for issues identified in the daily Watch Lists this week. We are only sending findings that we regard as significant or potentially significant to keep this list manageable. We have findings for all the Watch List items. Should you be interested in findings not listed here, please contact us and we will email them to you.

To emphasize, you can contact us if there is an item not included here for which you’d like to see the findings.

Our goal, as always, is to focus on what matters and not on things that don’t.

Items from April 2

Saudi Arabia: Osama bin Laden’s son has released a new message urging Saudis to join al-Qaida in Yemen and rise up against the Saudi ruling family. In the past several months, Hamza bin Laden has released a series of messages denouncing Saudi Arabia and, in particular, its relations with the U.S. This follows on the heels of the Saudi air defense system’s interception of seven Houthi missiles fired from Yemen, targeting multiple Saudi cities, including Riyadh. Is there any evidence of a growing al-Qaida operation against Saudi Arabia, and what is the kingdom’s ability to manage these threats?

  • Finding: There is no evidence that al-Qaida is increasing its operations in Yemen or planning a campaign in Saudi Arabia. Al-Qaida in Yemen has been weakened recently, which may explain the timing of Hamza bin Laden’s message. In February 2018, a military operation expelled al-Qaida from key outposts in Hadramawt province, which shares a 370-mile (600-kilometer) border with Saudi Arabia.

China: The Caixin Manufacturing Purchasing Managers’ Index for March indicates that China’s manufacturing growth slowed due to lower export demand. Official Chinese statistics over the weekend said manufacturing growth increased due to rising domestic and foreign demand, essentially the exact opposite. We will try to reconcile these differences. If manufacturing growth is slowing and demand for exports is indeed down, why is that happening?

  • Finding: The gap between the Caixin and official PMI figures is not unusual – the Caixin index is occasionally even more optimistic than the state’s – and can be explained, at least in part, by differences in sampling scope and methodology. Caixin wasn’t claiming that there is an aggregate slowdown in exports, just that many of the specific firms it sampled for the index (which focuses primarily on small, private-sector manufacturers, making it more narrow than the monthly PMI published by the state) had reported a brief lull in exports. The Caixin PMI also said such firms had positive longer-term outlooks, and despite the monthly dip, the index still shows a much stronger trend compared to 2016 through early 2017. We expect growth to slow marginally this year as Beijing’s reforms kick in, but there’s no evidence that the latest figures herald a major decline.

Turkey, Kosovo: Turkish President Recep Tayyip Erdogan has accused Kosovo’s prime minister of “protecting terrorists” in connection with the controversial deportation of six Turks, allegedly members of the Fethullah Gulen movement. Erdogan also criticized Kosovo’s prime minister for firing the interior minister and the head of the intelligence agency for “carrying out their duties.” Where does Turkey’s relationship with Kosovo – and the Balkans – stand now?

Russia, Armenia: Russian troops in Armenia have been put on alert during drills and will be deployed to the Alagyaz highland training ground, according to news reports, which provide no further explanation. Is there anything unusual here, and what is behind the alert?

  • Finding: In general, there is nothing unusual about Russian military drills in Armenia given that Moscow has a military base there. The timing, however, is notable. The drills took place in advance of Russian President Vladimir Putin’s visit to Turkey and after Azerbaijan held drills on March 12. Armenia considered those exercises a violation of the Organization for Security and Co-operation in Europe’s rules that require each member to inform other members about drills, which Azerbaijan did not do. The Azerbaijani drills included roughly 25,000 servicemen, 250 tanks and armored vehicles, about 1,000 rocket-artillery units of different caliber and 50 army and frontline aviation units. More than 1,000 servicemen took part in Russia’s exercises in Armenia. In addition, military police units will soon be deployed to Russia’s 102nd Military Base in Gyumri and the Yerevan military garrison. The Russian drills should be understood as a response to Azerbaijan and a demonstration to Turkey of Russian interests in the Caucasus.

Turkey, Syria, Russia: On April 2, Russia conducted more than 30 airstrikes on targets over Idlib province in Syria after reports that militants were going to launch attacks against Syrian troops in the region. Residents of Idlib asked Turkey to take over their town to prevent the Syrian army from advancing. Meanwhile, U.S. President Donald Trump ordered a freeze on $200 million designated for recovery efforts in Syria and said U.S. forces would be leaving Syria “very soon.” Turkish newspaper Yeni Safak reported on April 2 that the U.S. has sent a small number of reinforcements to Manbij in northern Syria, against a “possible” counterterrorism operation led by Turkey. How will Turkey respond to the airstrikes? What is the status of U.S.-Turkey relations at this point?

  • Finding: Turkey will not protest the airstrikes or take any responsive measures against them. Russia and Turkey, along with Iran, are currently engaged in negotiations over Syria’s future. Ankara does not want to do anything to put this arrangement at risk, because it benefits Turkey. Russia does not want to become mired in Syria, like the U.S. is in Iraq, and is therefore ready to make concessions so that Turkey will take part of the burden of managing post-conflict Syria. Turkey also has influence over rebel forces on the ground and Russia does not. Turkey will use its leverage over Russia to seek a leading role in enforcing a future de-escalation zone in Idlib province.

China, U.S: In relation to the tariff “war” between the U.S. and China, the U.S. has the advantage, but China can retaliate against U.S. trade restrictions in non-trade-related matters – at least that is our position right now. Let’s see how it plays out in practice. U.S. tariffs so far have been much ballyhooed, but is either side instituting tariffs that will seriously damage the other?

  • Finding: The tariffs implemented thus far are relatively small – covering roughly $3 billion worth of goods from both sides – and not the sort that would cause substantial damage. China doesn’t rely heavily on the U.S. market for steel and aluminum exports. Beijing will only raise duties on the main U.S. exports to China, such as soybeans, aviation equipment and high-end electronics, if the U.S. escalates matters into a full-blown trade war. Placing tariffs on these items would undermine China’s own economy and the long-term development of its high-tech industries. At this point, Beijing’s focus is mostly on pressuring exporters of luxury agricultural products, such as ginseng, that are not important to China’s base economy and that are grown in nominally pro-Trump constituencies in swing states such as Wisconsin.

Kazakhstan: According to news reports, Kazakh police raided the local offices of Forbes magazine and another news outlet on April 2 and detained and questioned several journalists as part of a libel probe. What has the Kazakh government so spooked?

  • Finding: The raid appears to be related to a 2017 lawsuit filed by a businessman and former government minister against these two news outlets. Over the past few years, journalists in the country have uncovered examples of corruption and questionable business practices. This makes the government nervous; the Kazakh president wants to strengthen his power and improve the country’s image abroad, and reports of corruption don’t help.

Canada: Canada’s gross domestic product was lower than expected in January, contracting by 0.1 percent from the previous month and falling short of expectations. Last month, the Bank for International Settlements identified Canada as among the top three countries most vulnerable to a banking crisis. What is happening with Canada’s economy?

  • Finding: The decline was driven by sharp drops in oil production, unscheduled maintenance shutdowns, inflated real estate sales in late 2017 due to tax incentives, household spending cuts due to high household debt, and tougher mortgage lending rules.

Items from April 3

Kazakhstan: Local government revenues in cities and regions in Kazakhstan have significantly decreased over the past year. Local budgets in 10 of the country’s 16 regions declined. Astana’s budget declined about 28 percent. Tax revenues make up 55 percent of local budgets. What is behind the budget declines, and what areas and groups are hardest hit? Are there any federal government plans in place to help support regional spending?

  • Finding: The hardest hit area is Astana, where revenue declined by 27.6 percent. It was followed by East Kazakhstan, Aktobe, Zhambyl and Almaty. The budget declines are mainly due to a decline in transfers, which make up 37.7 percent of local budgets. Transfers can include grants, donations or reparations. They are irregular, voluntary payments to local governments. The federal government budget was released on April 4, and it allocates 31 billion tenge ($97 million) for drinking water in rural communities, 31.5 billion tenge for engineering and communication infrastructure and 29 billion tenge for development of local roads. These investments are allocated to the regions, but there is no indication as to whether they will replace regional government spending.

India: Violent clashes erupted in several states after India’s Supreme Court announced it will not stay its most recent ruling on arrest procedures related to the Scheduled Caste and Scheduled Tribe (Prevention of Atrocities) Act, which regulates how hate crimes against people from lower castes are prosecuted. The court said that the previous judgment did not dilute the law, and that safeguards had been included to “protect the fundamental rights of innocents.” While the court rejected the government’s request for a stay, it said it will consider the government’s review petition after 10 days. The court also said that the parties in the original case should file their written submissions in two days. Are there signs that the protests will continue? How do these protests compare to previous caste-related unrest, and do they pose a potential threat to the central government?

  • Finding: The Scheduled Caste and Scheduled Tribe (Prevention of Atrocities) Act deals with the prosecution of crimes against the low-caste Dalit community. Protests involving this group also erupted in January in Maharashtra and in July 2016 in Gujarat. Both protests remained contained within the state and were motivated by violence committed against the Dalit. This week’s protests stand out for two reasons. First, they are a response to a government action rather than to violence committed against the Dalit. Second, they spread to at least four different states. As to whether the protests pose a threat to the central government, we need to see the reaction to the Supreme Court’s review in 10 days.

China: China’s Ministry of Finance has called on state-owned banks to stop lending to local governments. The only exception would be for the purchase of government bonds. Meanwhile, China’s top economic commission said – purportedly for the first time – that Beijing will begin taking steps to reduce China’s overall debt, not just slow the growth of debt (as has been the policy for the past few years). Also, President Xi Jinping said state-owned enterprises must deleverage. The purpose of these moves is to target China’s debt-fueled growth model. How effectively can the central government enforce these measures? How much impact will they have, and how much time will it take to see results?

Items from April 4

Montenegro: Protests in Montenegro are being organized in response to a series of attacks reportedly linked to organized crime. One of these protests is reportedly being organized by Civic Alliance, a nongovernmental organization that receives funds from the U.S. Agency for International Development. Is there any evidence that the U.S. is supporting the protest, through funding or other means? How much money does Civic Alliance receive from USAID compared to other donors? What other activities is Civic Alliance involved in?

Poland: Poland’s prime minister and the head of the ruling Law and Justice party have both said an agreement with Brussels over Warsaw’s controversial judicial reforms is getting closer. The head of the Law and Justice party also said Poland plans to make changes to the reforms, following a deal with the European Commission. Our forecast predicts that disputes between Brussels and EU member states will continue this year. A deal between Warsaw and the EU would pose a challenge to that forecast.

  • Finding: Poland’s ability to defy the EU is constrained by its budgetary dependence on the bloc and by a domestic drop in support for the ruling party. But the changes Poland is prepared to make to appease the EU are cosmetic. The government will not reverse the most significant legal reforms enacted by the party, yet they may tick the necessary boxes for the EU to back down. These concessions do not mean that Polish-German frictions will dissipate. Rather, they are an indication that Poland is still much weaker than Germany.

Items from April 5

India, Vietnam, Russia: India and Vietnam reached new defense agreements with Russia this week, even though both India and Vietnam have been gradually pivoting toward the U.S. in recent years. Most notable, India appears ready to sign a deal to purchase S-400 anti-aircraft and anti-missile systems from Russia. Such deals may run afoul of U.S. sanctions on Russia. India and Vietnam’s longtime arms relationships with Moscow can be difficult to abandon, given interoperability issues and the role Russian technology plays in accelerating the Indian and Vietnamese domestic arms industries. In what areas do these countries rely the most on Russia? What, if anything, can the U.S. do to unwind their reliance on the Russians?

  • Finding: India and Russia have a close defense relationship that dates back to the Cold War. More than 60 percent of India’s military hardware comes from Russia, which is also largely responsible for maintenance. Vietnam’s defense relationship with Russia is similarly tight: They have mapped out a plan for cooperation until 2020, with a focus on military technological development, training cooperation and defense delegation exchanges. The United States’ best option to disrupt these relationships is to keep doing what it’s doing: offer naval support and transfers of technology. Both countries are wary of the Chinese navy, and Washington is uniquely suited to sell them naval hardware, organize joint military drills and assist with strategic planning and homegrown military innovation. Meanwhile, in June 2016, the U.S. named India a “major defense partner,” a designation that would make India as close as any of its closest allies. Washington is making small inroads with Vietnam too, including on maritime security, humanitarian assistance and coast guard cooperation issues.