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Watch List Findings: Aug. 12, 2017

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  • Last updated: August 11
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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 Aug. 7

Venezuela: A former national police captain openly challenged the Nicolas Maduro government and said he was engaging in a civil-military action to establish constitutional order. The military stepped in and regained control of the area. This is the second time in about six weeks that a former security officer has openly defied Maduro. Are we detecting any signs or gestures that indicate an alignment between the Democratic Unity Roundtable coalition, dissident Chavistas and the military? How have Colombia and Mexico responded to this weekend’s events? What is Cuba’s current role and policy toward Venezuela? Are there any signs that weapons have been stolen? And have any members of the National Guard spoken out against the government? We have a defined model of Venezuela, and we expect to see things like this, but are we reaching a point where the government can no longer hold? What would a post-Maduro Venezuela look like?

Russia: Russia’s largest bank, Sberbank, had a year-over-year increase in profits of more than 35 percent. Can we draw any broader conclusions about the Russian economy from this?

  • Finding: The monetary policy of Russia’s central bank suggests an improvement in the country’s macroeconomic environment. The central bank is the majority owner of Sberbank, which has benefited from the gradual decrease since 2015 in the key central bank rate. The growing margin between the bank’s interest rates, along with the central bank’s falling key interest rate, enabled Sberbank to recover lost profits. Sberbank’s profits have steadily grown since early 2015, when they fell by more than 20 percent. The pace of the Russian central bank’s rate cuts may accelerate the rest of the year after the inflation rate slowed to 4 percent as of May 15. The key interest rate stands at 9 percent; the central bank’s target is 2.5-3 percent.

France: French President Emmanuel Macron will visit Eastern Europe later this month and will reportedly push for rules that protect French workers from cheaper competition in Eastern Europe. We have written about how the east’s low wages, coupled with an excellent workforce, makes it an engine for growth. How serious is Macron, and what kind of options does he have to try to pursue this?

  • Finding: Macron is serious, but he has few options. Reforming France’s labor laws is one of Macron’s most ambitious and important moves as president of France. Where this becomes geopolitical is in French support of revisions to the EU directive on posted workers, who are sent by their employers to perform duties in other EU member states. The European Commission has been trying to pass these reforms since 2014 but to no avail. Then in June at an EU meeting, France pushed for a 12-month limit for temporary workers to stay abroad and still pay social contributions to their home countries (at the time, 24 months was being suggested in negotiations). This rule has been contentious between Western and Eastern Europe for years, so Macron is walking into an old argument with the gusto of someone who hopes to change the system. The next meeting on this issue is in October, according to the EU employment commissioner. Next, we need to better understand EU labor laws, better understand migration and remittances in Europe, and see how this issue manifests deeper regional divides in the EU.

China: The People’s Bank of China removed 60 billion yuan in liquidity by allowing 310 billion yuan of securities to expire while providing 250 billion yuan in new liquidity through reverse repurchase agreements. Is this part of a larger trend? Does it tell us anything about the state of the Chinese economy?

Items from Aug. 8

Philippines: The U.S. is reportedly prepared to bomb Islamic State targets in the Philippines, although the Philippine government denies this. Is this a real possibility? It would mean the U.S. would have boots – forward air controllers, at least – on the ground. If true, this would indicate the U.S. is getting nervous about IS in Asia, even if it doesn’t follow through on the bombings. Separately, the Philippines has admitted it did not want the Association of Southeast Asian Nations to condemn China for militarizing and reclaiming land in the South China Sea. Is there a shift underway in Southeast Asia?

  • Finding: The Philippines has denied the reports, and the political environment in Manila is not exactly ripe for the introduction of U.S. airstrikes on Philippine soil. Meanwhile, follow-up reports citing U.S. officials say the U.S. drones mentioned in the original report are intended for intelligence, surveillance and reconnaissance, not airstrikes – though the officials did not deny that the possibility had been discussed. Regardless, the rising jihadist threat in the southern Philippines has created an opportunity for the U.S. to underscore its value to the country and deepen ties with the Philippine military at a time when the island nation has become perhaps singularly important to the balance of power in the Western Pacific.

Japan: Japan has upgraded its threat level on North Korea in an annual defense white paper. We need to scrutinize this report and determine whether previous defense white papers have led to changes in Japanese actions. On the surface, this rhetoric suggests the Japanese are readying their public for some sort of action, or at least rattling North Korea’s cage. Phillip

Indonesia-Russia: Indonesia and Russia finalized an unusual deal for Indonesia’s purchase of Russian fighter jets. Indonesia’s trade minister noted that U.S. and EU sanctions on Russia had opened new opportunities for the Southeast Asian country. What is Indonesia’s strategy here, and what does this say about Russia’s presence in the region?

  • Finding: Indonesia is in the middle of a big military modernization drive, and upgrading its fighter fleet is a priority. This deal has been in the works since 2015; the timing of its completion stems more from bureaucratic delays on Indonesia’s side and outstanding bargaining points. This deal doesn’t necessarily indicate that Russia is trying to expand its competition for influence with the United States. Russia has long been one of Indonesia’s largest arms suppliers, and since Indonesia’s existing fleet consists of Russian Su-35 fighter jets, there would be interoperability and other concerns related to changing suppliers. In general, Southeast Asian states have long favored Russian arms, which are more affordable than their U.S. or European counterparts and come with fewer geopolitical strings attached than Chinese arms.

Poland: The Polish government is reportedly preparing legislation to limit foreign ownership of the media. We need to examine if this is legal under EU rules. Additionally, there is a conflict brewing between the military, the intelligence service and the president in Poland. This seems to change the internal dynamics radically.

  • Finding: The EU hasn’t reacted to the proposed bill. It’s been debated in Poland for a few years now, and it’s unclear whether it will pass this time. Separately, the president blocked on Aug. 8 the defense minister’s appointment of several new generals. The appointments are part of a proposal to reform the military forces that the Defense Ministry presented in May and that the president and National Security Bureau have yet to respond to. The appointees are supposed to take their posts on Aug. 15. A power struggle is underway between the president and a powerful faction within the Law and Justice party, with the president probably winning more influence over the process.

Afghanistan: The Taliban are asking for Saudi involvement in Afghanistan. At a time when the U.S. is planning another round of combat in the country, the Taliban are reaching out to an American ally. Let’s examine what the Taliban are trying to do with this move.

  • Finding: The Afghan Taliban have not actually sought Saudi involvement in the talks to end the conflict. Their statement was in response to a senior Saudi diplomat in Kabul. Speaking to reporters Aug. 7, the charge d’affaires at the Saudi Embassy in Kabul criticized the Qataris for hosting the Taliban’s political bureau in their capital. The Taliban responded with an official communique downplaying the issue. Simply put, the Taliban are caught in the ongoing Saudi-Qatari dispute.

Items from Aug. 9

South Korea: An official from South Korea’s presidential office said that the North Korean conflict is not an imminent crisis and that a diplomatic resolution is highly probable. Will South Korea make its own deal with the North to head off war? What would it look like?

  • Finding: South Korea wants to forestall war on the peninsula as long as possible. The problem for Seoul is that an indefinite suspension of military exercises with the U.S., as proposed by Beijing and demanded by the North, would require South Korea to stomach the prospect of a dramatic break from the U.S. and to carry its own security burdens at a time when the risks of doing so are becoming more acute. Seoul realizes it has limited ability to prevent the U.S. from going to war, and to minimize its own casualties, it can’t reduce its own readiness to fight.

U.S.-China: The U.S. has delayed trade actions against China and, according to American officials, the U.S. is holding back on sanctions against Chinese banks after China supported a U.N. Security Council resolution against North Korea over the weekend. The center of gravity of the U.S.-China relationship continues to be North Korea, not trade. As things develop, we need to be constantly imagining how various scenarios on the Korean Peninsula will affect this relationship.

  • Finding: This week, the U.S. showed signs that it may be resuming trade sanctions against China. Commerce Secretary Wilbur Ross announced preliminary duties ranging from 16.56 percent to 80.97 percent on imported aluminum foil from China. The stated reason was that government subsidies to local exporters create unfair trade conditions. A decision on the duties will be released Oct. 24. Notably, the listed offenders include one American firm that has a joint venture with a Chinese aluminum producer. This shows that U.S. firms that operate abroad may be subjected to changes in U.S. trade policy. Additionally, the duties are separate from the Trump administration’s investigations to invoke part of the Trade Expansion Act of 1962, which can be used by the president without congressional approval to prevent imports if they are determined to threaten U.S. national security. If China cannot or does not help resolve the North Korea issue, restrictive trade policies will continue.

Items from Aug. 10

Israel: Haaretz reported that Israel, the U.S. and Russia held meetings last month in Jordan and in Europe about the situation on the Syria-Jordan and Syria-Israel borders. According to the report, the Israelis expressed concerns over a cease-fire backed by the U.S. and Russia, arguing that the two countries didn’t take Iranian forces in Syria seriously enough. This is important because it indicates U.S. cooperation with Russia is at a fairly high level. This may have broader implications for relations. It is also interesting that Israel is participating in talks with these countries as an equal, and that someone wanted to leak this information. The Israelis have been quiet lately. Let’s look into what they are up to.

  • Finding: We anticipated that the U.S. and Russia would find areas where their interests overlap, and Syria is one of these areas. Russia’s interference in other places (such as North Korea) must be considered on the table in these discussions, giving Russia greater leverage than is apparent by looking just at the situation in Syria. As for Israel, the Israelis have mostly played a peripheral role in the Syria conflict, responding with airstrikes when their positions were threatened but otherwise not partaking in the fighting. Israel is concerned, however, that de-escalation of the conflict could proceed in a way that involves establishing a heavy presence of Iran’s proxy in southern Syria, near Israel’s borders. This could enable Iran to establish a land bridge to Lebanon and to directly supply another of its proxies, Hezbollah, which derives much of its legitimacy from framing its political goals as armed resistance against Israel. Israel is concerned that Iran’s presence in Syria could challenge it on the Golan Heights while it continues to face the risk from Hezbollah in southern Lebanon.

Malaysia-China: According to an unnamed Malaysian official who spoke with the Straits Times, Malaysia is considering a Chinese proposal to set up a regional counterintelligence center and a missile system in Johor, a Malaysian state that borders Singapore. We’ve seen some flirtation between Malaysia and China over the past year, but if this proposal moves forward, China’s strategic position would significantly improve.

  • Finding: Malaysia’s Defense Ministry and other government officials have denied knowledge of the reported discussions. Nonetheless, this issue is worth watching closely, given the potential implications for China’s attempts to gain influence among U.S. partner states in Southeast Asia and Malaysia’s strategic position along critical trade routes. Notably, Malaysia’s military bases in Johor are less than 25 miles (40 kilometers) from Changi Naval Base in Singapore, where the U.S. stations littoral combat ships and Poseidon surveillance aircraft on a rotational basis. China has been pouring aid and investment into Malaysia to further its One Belt, One Road plans and to gain leverage on more critical issues such as the territorial disputes in the South China Sea. This issue could be a valuable test case in whether Chinese economic statecraft can deliver tangible benefits in non-economic areas, such as its ability to project power.