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Watch List Findings: Jan. 13, 2018

Shift in the U.S. position on North Korea, dissonance between president and military in the Philippines, questions about NAFTA’s future

|January 12, 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 Jan. 8

North Korea: U.S. Ambassador to the United Nations Nikki Haley said Jan. 7 that North Korea must stop conducting missile tests before the United States will negotiate with Pyongyang. How should we interpret this statement? Her comments came days before North Korea and South Korea are scheduled to hold talks. The U.S. Navy also announced on Jan. 7 that the USS Carl Vinson is en route to the Western Pacific and that the USS Wasp will soon arrive at the Sasebo naval base in Japan.

  • Finding: What’s notable about Haley’s statement is the demand that North Korea stop testing – not denuclearize altogether – as a condition for talks. This is a slight shift in rhetoric from the position laid out by Secretary of State Rex Tillerson and supports our view that the U.S. has few options available. The underlying fundamentals, however, appear to still be basically the same. The U.S. and North Korea have been holding back-channel talks for months. The U.S. military has assets headed to the region again, but it can’t use them without destroying its alliance with South Korea. North Korea can’t refrain from testing indefinitely. South Korea has rejected a permanent “freeze-for-freeze” arrangement (freezing drills with the U.S. in exchange for the North freezing missile and nuclear testing) and intends to resume drills with the U.S. in April.

Venezuela: Venezuela’s government ordered shops to cut food prices following recent shortages, resulting in long lines at supermarkets. It also ordered the issuance of the first 100 million petros, an oil-backed national cryptocurrency. How does this cryptocurrency work, and what does Venezuela hope to achieve? How bad is the economic situation? Will social unrest increase over the coming weeks?

  • Finding: Each petro would have the same value as one barrel of Venezuelan oil. The cryptocurrency would be backed by 5.3 billion barrels of oil from the Orinoco Belt, or approximately $267 billion. In this way, it’s similar to a gold standard but with a different commodity. Venezuela’s goal is to circumvent the international system of payments underpinned by the U.S. dollar, but details on how the specific mechanisms would work in this offering aren’t publicly available. Social unrest has become a constant in Venezuelan politics, as have lines at supermarkets. The black market and bartering have become regular alternatives to grocery stores. We do not expect unrest to increase in the coming weeks. Another round of crisis talks started Jan. 12. Talks in December reportedly made progress, so there is hope that this round will as well. But even if dialogue came crashing down, the opposition would need time to organize and rally the public for any major demonstrations.

Russia: According to BuzzFeed, which cited unnamed sources, NATO and Russia will hold a meeting in Azerbaijan between Gen. Curtis Scaparrotti, NATO’s supreme allied commander of Europe, and Gen. Valery Gerasimov, the chief of the general staff of Russia’s armed forces. Is this report true and, if so, what can we expect from the meeting? Will it change anything?

  • Finding: There’s been no official confirmation of a meeting. If it occurred, it would be the first such meeting since 2013, when the ban on personal contacts between the head of NATO and Russia was imposed. Either way, as long as the relationship between Moscow and Washington goes unchanged, we don’t expect a significant change in the balance of power between NATO and Russia.

China, Iran: China has frozen the bank accounts of several Iranian companies, according to Iran’s Mehr news agency. Is this report accurate? If so, why did China make this move? Why now?

  • Finding: The report quoted the deputy head of Iran’s Chamber of Commerce. It conflicts with other reports, which say China has been investing heavily in Iran in various sectors, from railways to hospitals. There was a story Nov. 21 in which the chief of the international affairs department at Iran’s central bank said banking issues with China had cropped up in the early fall, but he said those issues had been resolved. They were the result of pressure from the U.S. Treasury Department’s Office of Foreign Assets Control, which periodically pressures Chinese financial institutions to restrict their dealings with Tehran. Then on Nov. 29, the head of the Iran-China Chamber of Commerce referenced issues facing Iranian citizens and firms in China. Those issues were not the result of U.S. pressure on Beijing, he said, but rather were related to a Chinese crackdown on money laundering.

Items from Jan. 9

Iran: Iranian President Hassan Rouhani has reportedly reopened the case of the death of former President Akbar Hashemi Rafsanjani. Yet Rouhani did not attend a ceremony commemorating Rafsanjani’s life on Jan. 9. What, if anything, does this have to do with the recent bout of unrest?

Belarus: There are reports that the political opposition in Belarus may soon stage protests against the government, which has been accused of planning to rig local elections. The country has been simmering for some time, of course, and President Alexander Lukashenko has been in power for even longer. Still, we need to develop a framework for assessing the unrest and, if it worsens, what it would mean for the country.

  • Finding: Belarus experienced protests and unrest in 2006, 2011, 2015 and 2017. They primarily centered on political grievances, including accusations of electoral fraud. More recent protests included economic complaints. In all these cases, security personnel were able to quash the protests by force. Based on the previous incidents, 3,000-5,000 people in one place is a strong turnout. Anything beyond that could be cause for concern. Belarus and Russia are closely integrated, and Russia needs to keep Belarus in its sphere of influence. We expect protests in Belarus, and we expect them to be put down. An indicator that we’ve deviated from this predicted course would be if a foreign country became involved, such as Russia sending security forces to support the government.

China: China Central Television reportedly aired footage of an airbase on Fiery Cross Reef in the South China Sea on Dec. 30 – something it supposedly promised the Philippine government it would not do. The Philippine defense secretary has said he will lodge a formal diplomatic protest because China reneged on the deal. An adviser for the U.S. secretary of state, meanwhile, has accused Beijing of “provocative militarization” in the South China Sea and has suggested that Washington would resume freedom of navigation operations there. What prompted Washington’s statements? Is it coordinating with the government in Manila? What is the status of Philippines-China relations?

  • Finding: There’s nothing confirming that the U.S. and Philippine statements were coordinated, but the timing suggests it is possible – as does the fact that the issue has erupted, seemingly out of nowhere, more than two weeks after the air base was shown on Chinese TV. Notably, the announcements came on the same day that the U.S. announced a modest increase in anti-terrorism aid to the Philippines. Another aspect worth watching is that the Philippine defense minister’s statement directly conflicts with that of the president’s spokesman, who said a military buildup on disputed reefs that China has already transformed into manmade islands would not be a breach of “good faith” – and that only new reclamation activities would. Dissonance between President Rodrigo Duterte and the Defense Ministry is nothing new. But given the pro-U.S. orientation of the Philippine Defense Ministry and military, as well as the country’s long history of political meddling by the military, we need to watch for signs that the military is attempting to subvert Duterte’s preferred approach to disputes with China. There’s a rapprochement between China and the Philippines right now, but it’s tenuous.

Items from Jan. 10

Syria: The Turkish government summoned the Russian and Iranian ambassadors to express “discomfort” over violence in Idlib, Syria. Are we seeing a serious breakdown in cooperation among the three countries?

Turkey: The Turkish government said it will mediate between Iraq and the Kurdistan Regional Government in northern Iraq. The standoff that followed the KRG’s secession referendum in September 2017 seems to have ended – Iran reopened its border crossings with the region, and KRG President Massoud Barzani resigned. So what is there to talk about?

  • Finding: Although the KRG’s military force, the peshmerga, was subdued and disbanded following the Iraqi government’s takeover in October, several issues about the status of the northern, Kurd-populated area remain. One concerns land rights. Under Saddam Hussein’s rule, land was taken from Kurds and given to Arabs. In 2003, some Kurds were resettled, but most of the disputes weren’t resolved. When the peshmerga pushed out the Islamic State, many Arabs left again, and in the process of fighting IS, the KRG supposedly destroyed over 80 villages, which Baghdad claims was an illegal move by the Kurds to expand their territorial control. Now that the fighting is over, there is talk of bringing the issue of the villages’ destruction to international courts.

Brent crude: Brent crude is over $69 per barrel, which crosses a major threshold. The price has rallied by about 10 percent over the course of a month. Will this rise continue? Are these prices stable? What caused the rally?

Items from Jan. 11

Canada, U.S.: The Canadian government is “increasingly convinced” that U.S. President Donald Trump will announce that the U.S. is pulling out of NAFTA, according to a Reuters report. Mexico’s economic minister said Jan. 10 not to underestimate Trump’s threats on NAFTA. Speculative media reports suggest that Trump may use a withdrawal letter as negotiating leverage. We know that Trump has significant powers to announce a withdrawal. We also know much of the law on this is unclear at best. Have we gained any clarity on presidential powers? How is the U.S. Congress reacting to these reports, particularly the delegations from states such as Texas and California that would be greatly affected? What are the mechanics if Trump does write a withdrawal letter? What would the Canadian and Mexican reactions be.

  • Finding: There is no legal clarity on what would happen if Trump signs a letter terminating NAFTA. It would, however, trigger long legal and political battles, delaying any clear resolution. If Trump sends a letter, Mexico would walk away from NAFTA negotiations while Canada is expected to stick them out. Business groups from Texas and California and members of Congress from farm states like Iowa, Illinois and Kansas have been very vocal lately in support of NAFTA.

Tunisia: Unrest in Tunisia has continued for a third straight night. The army has been deployed to several cities, and casualties have been reported. This is where the Arab Spring began. Most likely this is not going to advance into much, but let’s keep an eye on it. Watch the main unions and political parties – that’s where the power resides.

  • Finding: The protests were in response to a finance act that the government imposed as part of economic reform agreed to with the International Monetary Fund. On one hand, Tunisia needs to push ahead with the economic reforms to access the financial aid provided by the deal, but on the other hand, the moves are highly unpopular among the population, which was already reeling from dire economic conditions. Two parties from the coalition government – Al Joumhouri and Afek Tounes – have pulled out of the coalition. The country’s highly influential Tunisian General Labor Union has asked the government to raise the minimum wage and increase handouts within a week but at the same time has condemned the violence associated with the protests.