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 Nov. 6
Saudi Arabia: After Houthi rebels in Yemen fired a missile toward Riyadh, Saudi Arabia responded by closing all of Yemen’s land and sea ports and its airports. Saudi Arabia then said it reserved the right to respond to Iran, which supports the Houthis, at the appropriate time and manner. This comes as Lebanon’s prime minister resigned during a trip to Saudi Arabia. Given the circumstances, is there reason to believe that Riyadh threatened war with Iran over the Houthi strike? What action can the Saudis afford to take against Iran?
- Finding: See our Reality Check published Nov. 10.
India: India’s defense minister visited the northeasternmost Indian state of Arunachal Pradesh. China considers the area disputed territory and said the visit was not conducive to peace in the region. In light of the Doklam standoff earlier this year, we need to understand to what extent this visit is normal for a defense minister. Was it a provocation directed at China? Is there any reason to believe China will respond beyond its statement?
- Finding: The Indian defense minister’s visit is not out of the ordinary but could still stoke tensions. The minister assumed office in early September and has been visiting and inspecting military units along India’s border in Sikkim, Assam and Arunachal Pradesh. This particular trip was at the request of state authorities and planned in mid-September. The minister discussed infrastructure projects in the state and worked on compensation plans for people whose land was acquired by the Indian army in 1962. China consistently criticizes these kinds of visits in the state because of its disputed status. Prior to this visit, Beijing criticized New Delhi’s plans to build a railway there and floated the possibility of re-routing water from a key river in India’s northeast. At this point, it is unlikely that anything will come of China’s political rhetoric.
Iraq, Syria: There are signs that the Kurds in northern Iraq are capitulating. The Iraqi Kurdish region’s prime minister said the regional government will hand over oil revenue and border controls to the Iraqi central government provided that the Kurds get their share of Baghdad’s national budget. Are the Kurds starting to acknowledge that they will not get their independence? Meanwhile, Kurds in Manbij, Syria, are pushing back and demonstrating against the Syrian Democratic Forces for their mandatory conscription orders. What’s the future of the SDF as a fighting force in Syria?
- Finding: Iraqi Kurds are in a difficult situation. Turkey, Iran and Iraq want to prevent a new Kurdish state from forming and have been cooperating to make sure this doesn’t happen. Iraq’s northern Kurdish region previously sold oil to Turkey, but Turkey stopped importing it when Iraqi Kurds held an independence referendum in September. Also, Massoud Barzani, who announced he would step down as president of the Kurdistan Regional Government last month, had said he would give Baghdad control of the strategic border crossings in Kurdish territory. The Kurds need external support to continue with their independence movement. For now, the only country that could play that role is the U.S., and it’s not in Washington’s interest to get bogged down in another conflict in the Middle East. It is unlikely that an independent Iraqi Kurdistan will take shape.
China: The People’s Bank of China warned that “inclusive finance” schemes on the internet may be Ponzi schemes to illegally collect funds. This directly affects peer-to-peer online lending platforms, which have been used to circumvent lending restrictions in China. How large has peer-to-peer lending in China grown? What methods are available to the government to oversee it and prevent systemic risk?
- Finding: Peer-to-peer lending in China has been growing since 2011. The industry is estimated to have more than 4,800 lenders and $100 billion-$120 billion in loans outstanding. This total, however, also includes fraud, Ponzi schemes and other illegal activities. Regulators have taken notice. In August 2016, they introduced rules requiring lenders to have a qualified financial institution to act as a fund guardian; limitations on the amount individuals and enterprises may borrow; and restrictions on guaranteed principal and interest agreements. These rules have not yet been fully enforced. By the end of 2016, only 8 percent of firms had adopted a fund guardian. There is still uncertainty over which government departments are in charge of the changes, and fraud remains common.
China: China National Petroleum Corporation said it will reduce natural gas supplies to industrial users by 3 to 10 percent this winter so that it can meet the needs of residential users. The company also said it hopes to buy more liquefied natural gas on the spot market and increase imports from Central Asian countries such as Kazakhstan. This could affect industrial economic activity and increase energy prices. We need a better idea of what types of industries may see gas cuts, the anticipated shortage by volume, how long the shortage may last and whether the CNPC plans to secure the supply will be sufficient.
- Finding: CNPC is facing a shortfall of at least 5 billion cubic meters (177 billion cubic feet). As much as a fifth of this could be made up through increased natural gas supplies from Kazakhstan. There are no other clear options for boosting imports (since the shortfall assumes existing pipelines and liquefied natural gas terminals would be operating at full capacity) or boosting domestic production. China may be forced to slow the pace of its transition from coal to natural gas for residential users.
Ukraine: Ukraine’s president spoke with the U.S. secretary of state about how to coordinate the deployment of U.N. peacekeeping forces in the rebel region of Donbass. At the same time, there are reports that fighting has broken out in Donetsk and that the security situation is rapidly deteriorating. We still believe Russia, the U.S., Ukraine and the European Union are working toward a settlement in Ukraine. Given the recent fighting, is there any reason to believe this has been derailed?
- Finding: Russia and the U.S. continue their negotiations on Ukraine. On Nov. 9, the Wall Street Journal reported that Washington plans to seek Russia’s approval for the deployment of 20,000 international peacekeepers in eastern Ukraine.
Items from Nov. 7
Oil prices: Brent crude is currently trading at $64 per barrel, its highest price in more than a year. This is probably a short-term spike due to political developments in Saudi Arabia, including the arrests of several royal figures and ministers and the accusation that Lebanon has declared war on Riyadh, but we need to see if there anything else that could account for the price hike.
- Finding: In late October, the price of Brent crude exceeded $60 per barrel for the first time in two years. The upward trend in prices started before Saudi Arabia’s purges began, though these purges did seem to contribute to the spike. There are, however, other short-term factors driving prices higher. OPEC cuts have reduced supply, and “backwardation” – when a commodity’s futures contract trades below its spot price – indicates that demand has increased. In addition, the amount of shale oil available on the market seems to have declined. The decline owes to increased land costs, lack of financing, and a greater focus on profits rather than drilling new wells. Ultimately, however, we expect shale oil supplies to increase and prices to decline again.
Russia: The Economic and Political Reforms Center in Russia reported that the country saw 284 protests in the first quarter of 2017, 378 protests in the second quarter and 445 protests in the third quarter. Most rallies took place in Rostov, Krasnodar, Sverdlovsk and Novosibirsk regions, as well as in Moscow. We need to check if this organization has any political affiliations, and we need to verify the size of the protests it is tracking.
- Finding: The Economic and Political Reforms Center was founded in 2015 and is headed by Mironov Nikolai Mikhailovich. He seems to have been associated with the Russian government until 2011. The center’s website does not provide information about its sources of funding. The organization’s report does not provide details on the size of the protests. It states only that the center divides protests into three categories: socio-economic, labor and political issues. In 2016, the center registered 229 protests in the first quarter, 263 in the second quarter and 544 in the third quarter.
Items from Nov. 8
Philippines, China: Manila said it scrapped a plan to build a fisherman’s shelter on an occupied reef in the Spratly Islands because of Chinese pressure. This comes a day after Manila said it restarted construction of military-oriented infrastructure on Thitu Island. Meanwhile, the Chinese and Philippine coast guards met in Beijing on Nov. 7, and Philippine President Rodrigo Duterte said he plans to ask China to clarify its intentions in disputed waters. The island spat seems inconsistent with the meeting of the coast guards. We need to determine how much pressure Duterte is under at home related to his stance on China. China wants to gain an upper hand in the Philippines. How can it do this?
- Finding: There’s no evidence of a substantive increase in domestic pressure on Duterte. He has had steady support among the military and foreign policy establishment, particularly since he began backing off early efforts to weaken cooperation with the United States. The meeting of the Chinese and Philippine coast guards is consistent with their goal of boosting maritime security cooperation and reducing the risk of clashes. Meanwhile, the Philippines has also been enhancing security cooperation with the United States and its allies, particularly Australia and Japan. China’s goal is to make the Philippines believe that, given its military weakness and U.S. disinterest in risking a conflict over minor islands, it has no choice but to concede to China’s position in disputed waters, and that it’s in the Philippines’ economic interest to do so.
Germany: The German Council of Economic Experts, which advises the German chancellor, warned in an annual report that the eurozone’s largest and most powerful economy is in danger of overheating. Germany is still dealing with the fallout of the 2008 financial crisis. What does overheating look like for the German economy? Given its membership in the European Union, what are Germany’s options for dealing with this problem?
- Finding: The German Council of Experts believes that a 2 percent increase in gross domestic product in 2017 and a 2.2 percent increase in 2018 could result in inflation and asset bubbles. Germany cannot independently control its monetary policy, so it must rely on institutions such as the German Council of Experts to lobby the European Central Bank for eurozone-wide monetary policies that would benefit Germany. The problem is that southern Europe has not experienced the same economic success that Germany has, and higher interest rates could therefore put this region’s own recovery at risk.
Russia: A Russian minister said that more than 375,000 Russian citizens have returned home from abroad and that, in the first nine months of 2017, 90,000 Russians who had been living abroad were resettled. This trend could have short-term implications for local populations in Russia as well as long-term implications for demographics. We need to figure out where these people are coming from, why they are returning to Russia now and how the resettlement project works.
- Finding: Russia’s goal is stability. The resettlement program was introduced in 2006 and ended in 2012, but it was reintroduced in 2013. Participants are given money and other benefits, including tax-free transportation of their property and medical assistance. Roughly 40 percent of participants move to the Central Federal District, while roughly 15 percent move to the Siberian Federal District. Those who participate in the program are returning to Russia mostly from former Soviet republics, including Ukraine (38.8 percent), Kazakhstan (20.6 percent), Uzbekistan (12.1 percent) and Moldova (8.5 percent). Roughly half of participants said they returned to Russian for economic reasons, while 20 percent said they moved to get a better education.
Items from Nov. 9
China: China’s long-awaited “super-regulator” – the Financial Stability and Development Committee – finally launched. It was expected to oversee China’s main regulatory bodies. On Nov. 9, Chinese state media said it will also supervise local governments, monetary policy and industrial policy, among other things. Its broad mandate makes it perhaps the foremost body to gauge the direction and effectiveness of China’s reform efforts. Will this body have the teeth to enforce painful reforms?
- Finding: The Financial Stability and Development Committee has a broad mandate and a fancy title, but like the other regulatory bodies in China, it can only make recommendations and supervise other regulators. According to Chinese economist Zhou Xiaochuan, the main areas of concern for the new body are shadow banking, asset management, internet finance and financial holding companies. The commission is headed by a vice premier; however, he is due to retire soon. It is unclear who will take the helm after his departure. The general problem with Chinese financial regulation is that different sectors such as insurance, banking and securities all have their own watchdog agencies, which are too siloed to deal with systemic problems. A single commission devoid of special interests and concerned only with the macroeconomic picture sounds nice on paper, but it is unclear how this agency will effectively control the Chinese financial system’s many parts.
Spain: Madrid announced that it is considering a constitutional change that would allow regions to hold independence referendums. At first blush, this seems to be against Madrid’s own interests, especially given how it reacted to the Catalonia vote. Is this just a fig leaf, or is Madrid really content to further devolve power to the regions?
- Finding: In an interview with the BBC, Spain’s foreign minister said that a parliamentary committee was created to explore the possibility of amending the constitution to address the concerns of the Catalan people. This could be interpreted as meaning that the committee will look at legalizing public referendums. But the minister’s comments are somewhat ambiguous; the government could be considering a variety of options to better deal with and accommodate separatist movements in the future such that they do not threaten national unity.