• Russia
    Russia After Sochi
    The Sochi Olympics have placed a spotlight on the poor global standing of Russia under Vladimir Putin, whose policies are likely to damage relations with the West long after the Games are over, writes CFR’s Stephen Sestanovich.
  • Russia
    Snowden, Syria, and Sochi
    Play
    With the Winter Olympics at Sochi set to begin in a matter of days, Former Ambassador John Beyrle, Angela Stent of Georgetown University, and CFR's Stephen Sestanovich discuss the current state and recent history of U.S.-Russia relations with Andrew Guff.
  • Russia
    Snowden, Syria, and Sochi
    Play
    With the Winter Olympics at Sochi set to begin in a matter of days, former ambassador John Beyrle, Angela Stent of Georgetown University, and CFR's Stephen Sestanovich discuss the current state and recent history of U.S.-Russia relations with Andrew Guff.
  • Russia
    Parker and Rutherford: Countering China’s Rise Through a U.S.-Russia Coalition
    William J. Parker III, PhD, is a military fellow at the Council on Foreign Relations, and Alanna C. Rutherford, JD, is a partner at a New York law firm and a CFR Term Member. Let’s face it; the United States and Russia are not exactly best of friends right now as President Putin continues to challenge the super power moniker the United States currently enjoys.[i] But isn’t it ironic that following a fifty-year cold war with the former Soviet Union, the United States and Russia find themselves in a situation where their collective best option to counter the rising power of China may be each other? That’s right, the United States and Russia have the opportunity to keep China in check without forcing an unnatural alliance. While the Chinese are far from being capable of defeating the United States in any real conflict and have neither the leadership nor combat experience of the United States or Russia, engaging the Chinese diplomatically, economically, and militarily with Russia at our side is worth serious consideration. This would not be the first time that the United States and Russia have aligned themselves to protect against a threat. Indeed, the U.S.-Soviet alliance played a critical role in defending against Germany during World War II. Similarly, a strong and cooperative Russia could be helpful as a partner to counter China’s rise and quest for expansion, prevent the proliferation of nuclear weapons, control the exportation of biological warfare capabilities, and prevent the explosive expansion of extreme Islamist groups. Although common wisdom would have the United States align its interest with the rising economic star of China, it is Russia with whom the United States still shares a great deal in common when it comes to our national interests today. Certainly, many could argue that a U.S.-Russian coalition (whether in NATO or not) is a long shot. But the payoff for both countries, and the world, is worth the try. Just as the United States partnered closely with our NATO allies during the Cold War to counter the former Soviet Union, today we should consider forming a close coalition with Russia (in addition to our NATO allies) to counter the meteoric rise and potentially hostile intentions of China. The United States, Russia, and China, along with the rest of the world, can all benefit from a more stable environment that removes pirates from our sea lanes, eliminates the scourge of terrorism from the earth, and gains momentum towards eliminating weapons of mass destruction. So while a strategy to counter China’s apparent interest in expanding (at least their influence and likely their real estate) is prudent for the United States and Russia, continued efforts to find common ground between the Chinese and the United States must continue as well. Working with the Russians to slow, and eventually halt, China’s aggressive approach toward the Asia-Pacific region is not a zero-sum game. There are real and tangible possibilities for a three-way win between some of the most powerful nations on the globe. Russia was a major power in the world for almost 500 years. The Russian people and President Putin want Russia to be a world power again.  But the reality is the former Soviet Union and mother Russia is no longer the superpower it once was. The sense of impotence felt by the Russians appears to drive a significant amount of their foreign policy, which at times is a great irritant, and potential hindrance, to the execution of the United States’ foreign policy objectives. Aligning with the United States on certain issues not only helps the Russians deal with these issues, but also helps America deal with many of the same issues. Common ground for the United States and Russia to work closer together  1. Countering the Rise of China. As Russia’s star has faded with the collapse of the Soviet Union, it has seen the emergence of its former communist ally, China, as a rising power as a direct result of the loss of its own influence. This is a source of concern for a country that has been dominant in international politics for hundreds of years and still would like to view itself as a world power.  Playing off the Russian view of itself as a unique and continuing presence on the world stage, as well as concerns about the Chinese eclipsing Russia even as the two countries work together, can help the United States work with Russia to better achieve American and Russian foreign policy goals. Moreover, as discussed further below, the range and depth of these U.S.-Russian foreign policy alignments are significant. As such, finding common ground on China and relying on Russia as a counterweight to China’s growing influence both regionally and globally will be crucial to American foreign policy in the next ten years. Despite doctrinal similarities, past relations between Beijing and Moscow were marked by significant divisions and historical animosities. Russia and China have been involved in numerous disputes over the years, ranging from border skirmishes to political doctrine disagreements, but have emerged in the last decade as tentative allies and cautious trading partners. Defining Sino-Russian relations for a long time was the roughly 4,300km in shared borders and, more recently, competing interests in Mongolia, the country that separates the two along 3,485km of additional border space and which both countries have previously claimed sovereign rights over.[ii] Characteristic of the disputes between China and Russia was the border dispute concerning the islands at the Amur and Ussuri confluence, which nearly led to war between the two nations and resulted in the deaths of over one thousand Russian and Chinese soldiers in March 1969.[iii] Recent years have seen the resolution of a number of Sino-Russian conflicts, like the Amur and Ussuri confluence, through a series of treaties including the 2004 agreements. The 2008 Sino-Russian Border Line Agreement marked the acceptance of the demarcation the eastern portion of the Chinese-Russian border in Beijing, China. Not only did the agreement include an additional protocol with a map outlining the eastern part of the borders both countries share, but it also included the return of Yinlong/Tarabarov Island and half of Heixiazi/Ussuri Island. But in China’s continued attempted expansion there are many more points of contention between the two nations than resolutions. In addition to territorial claims on parts of Russia’s Far East border, China has territorial claims against eleven of its twenty-four neighbors.[iv] [v] The Chinese People’s Liberation Army (PLA) conducted a large-scale joint exercise incorporating their Shenyang and Beijing military districts along Russia’s Siberian Military District. As President Putin continues to focus on Ukraine, the Baltic countries, Belarus, and numerous other former USSR states in the hope that Russia can reassert its influence over the former USSR, the mistrust between the two Sino-Russian neighbors continues to be an issue.[vi] After Russia’s experience with Germany in World War II, the sage Russian strategist would realize the real threat to Russia’s national security remains on its borders. As such, China remains a pressing and close threat to Russia maintaining its status as the largest country on earth in terms of land mass. Yet using Russia as a counterweight to China will not be an easy sell. Russia is well aware that in some respect, its future is tied to China. In addition to being neighbors, China has now eclipsed Europe as Russia’s largest trading partner. Although the trading relationship is still marred by a certain level of distrust between the two countries and concerns about dependency, in recent years, the scope of the differences between Beijing and Moscow has narrowed. The Chinese remain a growing market for Russian commodities, while Europe has been decreasing its reliance on Russian oil and gas supplies, and many of the European countries are still feeling the effects of the 2008 financial crisis, making Europe a lesser opportunity for Russian commodities. Meanwhile, this past summer, China and Russia signed a $270 billion deal that will double Russian oil supply to China. Moscow was Chinese president Xi Jinping’s first international stop only nine days into his term. The two countries have also recently begun conducting joint military maneuvers. However, even as trade with China increases in the critical area of oil and gas, there are significant declines in other areas. For example, prior to 2007 roughly 25 to 50 percent of all Russian military supplies sold went to China. That line of commerce has significantly weakened in recent years as Chinese technology has advanced and as Russia holds back its most current weaponry from a partner still viewed with some suspicion, instead selling them older Soviet technology. There are burgeoning examples of a Sino-Russian united front, however. Both countries have pushed back against the United States and have aligned themselves, citing a noninterference pact, against UN action in Syria, Iran, and North Korea. The two countries have begun to develop areas of commonality as of late that suggest a warming of relationships between the two, and the potential emergence of an anti-American block. Indeed, the more the United States relationship with the former empire breaks down, the more likely a Sino-Russian axis becomes. In sum, this makes it a critical time for the United States to reengage Moscow to its own ends and highlight where its interests overlap with those of America. Americans have much to lose if engaging in this gambit does not take a significant position on the foreign policy agenda. It will also require a considerable and sustained effort that has not been a hallmark of recent American relations with Moscow. Thus far, Russia’s attempts to stay relevant in foreign affairs have been negative, rather than positive, acting as spoiler to Washington’s initiated multilateral agenda, such as loud but ultimately ineffective protests against installation of NATO military bases in Poland and Czech Republic. This has been both in, and contrary to, American interests with Russia, many times serving as a convenient excuse as to why certain purported policy objectives cannot take place. Most importantly though, Russia’s actions, even if contrarian, have highlighted a desire to remain relevant on the world stage.  It can do that either through formation of a closer alliance with China or by serving as a counterweight. The Russians know that in either scenario the biggest threat is simply being marginalized. As long as Russia remains fearful and continues to want to reassert itself in the world order, China’s growing influence can be used against Moscow, as it views the burgeoning power of China as a zero-sum threat to its own influence. It is the lever the United States needs to create a mutually beneficial relationship with Moscow. Despite outward appearances and the relative level of personal disengagement between key actors in the United States and Russia, there is a mutual base of shared culture and political interest that can be developed to the benefit of American foreign policy goals globally and with respect to China. China remains an unknown to both countries in terms of long-term objectives and seems to have little interest in the existing world order and power structure. Meanwhile, Americans and Russians have benefited from the historic and existing world order for the better part of the last hundred years. Coupled with shared policy objections on nuclear nonproliferation, counterterrorism, and regional stability issues in the Middle East and Asia, the United States and Russia have a growing and overlapping interest in ensuring that the world order is not disrupted by an increasingly dominant China. 2. Nonproliferation Efforts. Countering Potential Loose Nukes. According to the Federation of American Scientists and Armscontrol.org, Russia has approximately 4,500 nuclear weapons, of which 1,480 are deployed strategic warheads, 1,022 are non-deployed strategic warheads, and 2,000 are tactical warheads.[vii] While the United States has approximately 600 more nuclear weapons than Russia does, according to these same references, America’s nuclear arsenal is well protected and monitored. The threat of Russian nuclear weapons ending up in the hands of state or non-state actors with nefarious intentions has remained a concern of both the United States and Russia since the demise of the USSR. Russia’s nuclear arsenal has been a constant concern for the United States since the dissolution of the Soviet Union; and if the Russian state fails or becomes severely economically handicapped, large amounts of the world’s nuclear arsenal could be in play for sale or takeover. Thus, both the United States and Russia have a significant interest in a stable and content Russian populous to prevent such a scenario. Countering the Proliferation of Chemical and Biological Weapons Programs. “The vast Soviet Union biological weapons infrastructure dwarfed any known Western bioweapons program,” according to former Soviet biological warfare expert, Ken Alibek, in his book Biohazard.[viii] But the threat for biological or chemical weapons is not nearly as frightening as the scientists who have the expertise to develop a new program anywhere in the world. The threat of rogue biological or chemical scientists from former Soviet programs poses a real threat to the national security of many countries. It is in the interest of both nations to prevent further proliferation of these horrific weapons. 3. Enhancing Regional Stability. Both the United States and Russia have an interest in regional stability in the Middle East, Europe, and Asia. Russia’s interest is in part derived from a land mass that spans the continents and is an immediate neighbor to fourteen countries—sharing borders with Azerbaijan, Belarus, China, Estonia, Finland, Georgia, Kazakhstan, Latvia, Lithuania, Mongolia, North Korea, Norway, Poland, and Ukraine. Middle East. In the Middle East, Russia’s concerns, like those of the United States, cover terrorism, nuclear threats, and disruptions caused by wars and failed states that could affect either country or destabilize the status quo. As an example, Iran has been pursuing a uranium-enrichment and missile program that could potentially provide it with the capability to produce weapons-grade fissile material and the associated weapons delivery systems in the very near future. If Iran is able to obtain nuclear weapons, the rest of the Middle East will likely rapidly proliferate in an attempt to defend itself. Saudi Arabia, Kuwait, Oman, the United Arab Emirates, and many other nations will likely feel compelled to possess these weapons to potentially counter the unpredictable behavior of Iran. This threat was in part what led Russia to assist the United States in bringing Iran to the table in the recently executed January 20, 2014, deal that has Russia, the United States, Britain, China, Germany, and France easing sanctions restriction in exchange for Iran permitting the United Nations’ atomic agency access to its nuclear facilities and its centrifuge production lines to confirm it is complying with terms of the deal. Asia. In addition to the possible containment of China, Russia has strong economic ties in the region that it will want to protect and expand, especially in light of the global financial crisis, and its internal projections of slower growth in the upcoming years. Given the Obama administration’s announced pivot towards Asia and expanded American military presence in the region, ensuring a stable and prosperous Asia, as a means of counteracting both the economic influence and potential military might of China, has become a key foreign policy point on the American agenda. Europe. Since the end of World War II, the U.S. interest in building a strong and prosperous Europe has been paramount to its foreign policy objectives. It is this prosperous Europe that now serves as Russia’s largest trading partner outside of China. Russia’s gas and oil pipelines, carrying its most significant exports, are geared towards European delivery.  Moreover, Russians think of themselves as European, which means that Europe is a paramount concern for the Russians. Although there are significant disagreements between the United States and Russia in this area, as is evidenced by Russia’s incursions on the sovereign space of its former empire in Georgia or disputes about the expanding NATO membership, there remains significant common ground with the United States based on economic and political interests. 4. Countering Terrorism. The same groups of Islamists that threaten Russia also threaten the United States and the world. In recent years, Russia has experienced a number of attacks by groups either loosely or directly affiliated with al-Qaeda.[ix] Russia and the United States are also in agreement that it is not in either country’s interest for the Taliban to gain control of Iraq or Afghanistan (a fight that occurs on Russia’s doorsteps). While the United States has suffered at the hands of terrorists, most notably on September 11, 2001, Russia has experienced hundreds of attacks against its people in the past two decades as well. The reality is Muslim extremism is a major problem for Russia and has been for decades. The thirty-one deaths from the January rail and trolley attacks in Volgograd, adds to a continuous trend of suicide attacks against Russia, leaving hundreds dead since 1995.[x] 5. Counter Narcotics. As the American war on drugs and attempts to eradicate the sources and trading routes for those narcotics continues, Russia is equally focused on the devastating effect of the narcotics industry on its own population, as well as a source of support for terrorists and other insurgent operations around the globe. In particular, Russia continues to concentrate on the smuggling of poppy from Afghanistan through various Central Asian countries. What does Russia bring to a potential coalition? Russia is a resource-rich, exceptionally large, mostly Christian, well-educated, militarily and diplomatically experienced nation that still has the leadership and attitude of a former superpower. Russia is almost twice the size of the United States with the largest land mass of any country in the world. Russia boasts the tenth-largest population of any nation in the world. In addition to being the second-largest arms dealer in the world, Russia is the third-largest developer of software. Russia has a trade surplus with China. Russia has a permanent seat on the United Nations Security Council and enjoys veto power. Russia helped to remove chemical weapons from Syria. Russia is not part of OPEC and therefore sets its own oil prices. Russia has a significant impact on the world economy. Russia has been helpful in moving U.S. forces in and out of Afghanistan. The Russian population is well educated. Russia has allies and relationships that the United States does not, and it and can and has served as a useful broker in accomplishing foreign policy agendas, e.g., Syria chemical disarmament and Iran negotiations. Why does an alliance with the United States makes sense for Russia?  The United States is currently the world’s only superpower. Recognition of Russia by the world (especially the United States) as a major player is important to Russians. President Putin’s approval rating is tied to the economy; and Russia’s economy is slowing to an expected 2 percent annual growth in the near future. Russia has had difficulty attracting foreign direct investment in the past several years. Russia’s long-term challenges include a shrinking workforce, extensive corruption, and underinvestment in infrastructure. A high unemployment rate for young men in Russia could result in more internal terrorist acts.  What do America and Russia collectively bring to the table? Global Firepower ranks the top five most powerful militaries (in descending order) as: the United States, Russia, China, India, and the United Kingdom.[xi] But China is closing rapidly, with double digit increases in military spending in almost every year in the past quarter century. The United States and Russia collectively control much of what China needs to continue aggressive expansion: natural resources, technology, and intellectual capital. Potential regional stability in both Europe (preventing a contentious/spoiler European neighbor) and Asia (mitigating Chinese influence). Two predominantly Christian nations. Similar religious backgrounds often drive nations towards similar fundamental beliefs.  Approximately 75 percent of the United States is Christian. Similarly, Russia is predominantly Christian with predictions as high as 75 percent of the Russian population being Russian Orthodox Christian. With both countries seeing their heritage as largely Christian and European (although with some differences), there is a commonality in a collective cultural background that can be drawn upon in a way that China does not share. Unknowns and Potential Challenges to Building a Coalition How Russia will respond to an offer to form a coalition against China is unknown. How human rights issues in Russia will impact a U.S.-Russian coalition. The relationship between the United States and Russia seems to have deteriorated in recent years With loose nukes and chemical weapons, a weaker Russia is a more dangerous Russia. The Russian Duma has yet to ratify the 1990 Bering Sea Maritime Boundary Agreement with the United States. Conclusion             While the United States has twice in recent history discussed a so-called “reset” in its relationship with Russia, that reset has never been coupled with a concrete policy agenda that focuses on key items that the two old foes have in common. Given the complicated relationship between the parties and the personalities currently involved on both sides, this task will not be easy. But the last year has shown that there are several areas where American-Russian interests are aligned; and these areas can be built on to mutual success. The authors would like to publicly acknowledge Mr. William Piekos, a research associate at the Council on Foreign Relations, for his thorough and professional review of this article.  [i] U.S. relations with Russia face critical tests in 2014 as Putin, Obama fail to fulfill expectations: http://www.washingtonpost.com/world/europe/us-relations-with-russia-face-critical-tests-in-2014-as-putin-obama-fail-to-fulfill-expectations/2014/01/02/a46c880c-4562-11e3-95a9-3f15b5618ba8_story.html [ii] China’s Threat to Russia: http://www.project-syndicate.org/commentary/china-s-threat-to-russia  Quote in box derived from this source. [iii] The Amur River border. Once a symbol of conflict, could it turn into a water resource stake? http://cybergeo.revues.org/4141 [iv] CIA Fact Book: Russia.  https://www.cia.gov/library/publications/the-world-factbook/geos/rs.html [v] China’s threat to Russia Vladimir Putin is worrying too much about relations with the west: http://www.theguardian.com/commentisfree/2007/aug/27/chinasthreattorussia [vi] “China’s New Foreign Policy Strategy and Russia’s Concerns,” International Problems 63, no. 4 (2011). [vii] Nuclear Weapons.  Who has what?  http://www.armscontrol.org/factsheets/Nuclearweaponswhohaswhat [viii] Alibek, K. and S. Handelman. Biohazard: The Chilling True Story of the Largest Covert Biological Weapons Program in the World - Told from Inside by the Man Who Ran it. 1999. Delta (2000) ISBN 0-385-33496-6 [ix] http://rt.com/op-edge/russia-terrorist-attacks-caucasus-139/ [x] Timeline: Terror attacks in Russia.  http://www.sbs.com.au/news/article/2011/01/25/timeline-terror-attacks-russia [xi]Global Firepower:   http://www.globalfirepower.com/
  • Monetary Policy
    Which Fed Guidance Should We Believe?
    In October 2012, the Fed issued what came to be called a “pledge” to keep its target interest rate near zero through mid-2015.  The market immediately reacted as the Fed wanted, centering expectations on a rate hike in mid-2015. At its next meeting, the Fed abandoned date-based guidance in favor of data-based guidance: a pledge to keep rates near zero until the unemployment rate fell below 6.5%.  The Fed emphasized, however, that the two pledges were consistent, as it didn’t expect unemployment to fall below that level until mid-2015. The Fed justified the shift from date-based to data-based guidance by stating that the latter “could help the public more readily understand how the likely timing of an eventual increase in the federal funds rate would shift in response to unanticipated changes in economic conditions and the outlook.” But has it? Fast forward, and the unemployment rate has been falling much faster than the Fed anticipated back then; the Fed now expects it to dip below 6.5% later this year.  Yet the market has revised its rate expectations in the opposite direction; it now believes a hike will not come until late 2015. For its part, the Fed has said nothing to nudge the market toward its amended (data-based) guidance; in fact, it is now suggesting that rates are likely to stay low “well past the time” the unemployment rate reaches 6.5%. Chairman Bernanke had in June of last year also indicated that QE3 monthly asset purchases could be expected to end when unemployment hit 7%, whereas a tapering of asset purchases is only now just starting with unemployment at 6.7%. All this suggests that the Fed’s experiment with data-based guidance is a flop. The 6.5% guidance may have been announced to help the public understand how the Fed would respond to “unanticipated changes in economic conditions,” but the Fed appears to have buried it because the unanticipated changes in the unemployment rate came about for unanticipated reasons – in particular, a big drop in the labor force participation rate. Before the Fed moves on to the next generation of guidance markers, it ought to think twice about the risks of worsening, rather than improving, the signal-to-noise ratio in its communications.  The jolt to the bond markets from the chairman’s unanticipated taper talk last May suggests what’s at stake as the Fed reverses the trajectory of policy from accommodation to tightening. New York Fed: Primary Dealer Surveys Federal Reserve: Minutes from the December 11–12, 2012 FOMC Meeting Financial Times: Four Problems That Question the Efficacy of Forward Guidance Hilsenrath: Jobs Report Alone Unlikely to Alter Fed’s Course   Follow Benn on Twitter: @BennSteil Follow Geo-Graphics on Twitter: @CFR_GeoGraphics Read about Benn’s latest award-winning book, The Battle of Bretton Woods: John Maynard Keynes, Harry Dexter White, and the Making of a New World Order, which the Financial Times has called “a triumph of economic and diplomatic history.”  
  • Russia
    Slouching Toward Sochi
    As twin explosions in Volgograd raise concerns of terrorist attacks disrupting Russia’s Winter Olympics in February, expert Dmitri Trenin explains the root causes of insurgency in the North Caucasus.
  • Egypt
    Egypt Ends the Year With Prison Sentences
    On December 18, Egyptian security forces raided the Egyptian Center for Economic and Social Rights (ECESR), a leading think tank.  The timing is extraordinary, because foreign diplomats and human rights activists were still in town after the December 16-17 meeting of the "Forum for the Future."  The Forum was a G-8 Initiative established during the Bush years to promote closer cooperation between governments and civil society organizations in the Middle East, and thereby help promote human rights and democracy. The full story is told by Michele Dunne and Amy Hawthorne here. In Cairo, Ahmed Maher, Mohamed Adel, and Ahmed Douma were given three year sentences. As Egypt Independent put it, The defendants were demonstrating against the instatement of the new protest law, which requires prior authorization from the Interior Ministry to hold demonstrations. The arrest of these prominent political activists worries human rights groups that the new political establishment is falling further backwards towards the old police state of the Mubarak era, or perhaps worse. Maher and Adel were founders of the April 6 Youth Movement that led the protests against the Mubarak regime. So their jailing is a clear message to protesters that continuing activity will land you a stiff prison term--and a message to us that Egypt is simply becoming a military dictatorship once again.  As The New York Times explained last May when Maher was arrested by the previous government, "Mr. Maher founded the April 6 Youth Movement in 2008 to organize young people and express solidarity with striking textile workers in the Nile delta town of Mahalla, north of Cairo. It began on Facebook, where the first April 6 group page attracted 60,000 members and the attention of the security forces, who arrested, tortured and threatened to rape Mr. Maher in 2008." He was released then, but is now back behind bars. In November, Secretary of State Kerry visited Cairo and said he thought they were on track toward democracy: "The road map is being carried out to the best of our perception, there are questions we have here or there about one thing or another, but foreign minister [Nabil] Fahmy has re-emphasized to me again and again that they have every intent, and they are determined, to fulfill that particular decision and that track." Questions here or there, one thing or another, but the message was clear: "Kerry visits Egypt, hails signs of democracy after military ouster," said NBC; "Egyptians Following Right Path, Kerry Says," was how The New York Times reported it. The jailing of Ahmed Maher for a three year term is a mockery of those remarks. Members of Congress who still believe there should be no interruption in U.S. military aid to the Egyptian military regime should think again. What exactly will we be paying for? Does anyone believe that jailing peaceful and popular protest leaders will create a stable Egypt?    
  • Russia
    A Faustian Bargain for Ukraine?
    Earlier today Russia intervened dramatically in Ukraine’s political turmoil with an offer to sell the cash-strapped country deeply discounted natural gas. The New York Times captured the prevailing wisdom when it wrote that it was unclear what “Russia might receive in return for its assistance”. Here’s an answer: Russia will receive immense leverage over Ukraine. Indeed history suggests that cheap energy is much more effective than expensive energy as a true source of geopolitical leverage. Most people who think about energy and geopolitics understand that the “oil weapon” is weak: if an oil supplier cuts off a customer, that customer can turn elsewhere and still pay the market price. Natural gas is more complicated, since markets are more rigid, but many countries still have considerable flexibility in sourcing their supplies. But, as a team at the RAND Corporation pointed out smartly a few years ago, this logic falls apart when the starting point involves bargain basement supplies. Imagine that Kuwait, instead of selling the United States oil for the roughly $100 a barrel that markets currently command, sold the same oil from $20 a barrel. The Kuwaitis would suddenly gain immense leverage: they could threaten to hike prices to market rates, and while the United States could turn elsewhere for crude, it wouldn’t have any way to avoid the painful price increase. The same is true for the relationship between Venezuela and Cuba: Venezuela sells Cuba cut-rate oil, which allows it to exert leverage by threatening to revert to prevailing market prices. Indeed one can interpret the 1973 oil crisis as a variation on this theme: OPEC countries were only able to hike prices rapidly because those prices had been artificially suppressed beforehand. Now Ukraine is sliding (back) into a similar relationship with Russia. One Ukrainian parliamentarian observed today that “free cheese is only found in a mousetrap”. That seems to be most people’s instinct, and as a result, they’re trying to figure out what the secret deal is. But the metaphor, while compelling, is imperfect, since the consequences for Ukraine of accepting cheap natural gas need not be immediate. Alas that fact shouldn’t be comforting: long term dependence can be far more pernicious than a one-off deal.
  • United States
    Obama: Silent on Ukraine
    Last week, National Security Adviser Susan Rice gave a long speech about administration human rights policy. Here is one passage: We often can cooperate with Russia on nonproliferation, arms control, counterterrorism and other vital interests.  But, as we meet these mutual challenges, we don’t remain silent about the Russian government’s systematic efforts to curtail the actions of Russian civil society, to stigmatize the LGBT community, to coerce neighbors like Ukraine who seek closer integration with Europe, or to stifle human rights in the North Caucasus. Well, maybe not silent about Ukraine--but close enough to it. There have been massive demonstrations Ukraine this weekend --despite very bad weather and police repression-- and ever since President Yanukovich rejected an agreement that would have tied Ukraine more closely to Western Europe and the EU. He chose instead closer ties to Moscow and met this weekend with Putin. The whole story is well told at CFR’s main site today. Where is President Obama? Rice last week repeatedly assured us of the administration’s commitment to human rights ("advancing democracy and respect for human rights is central to our foreign policy.  It’s what our history and our values demand, but it’s also profoundly in our interests") but neither she nor the President nor the Secretary of State has said much about the extraordinary events in Kiev. It’s time for them --personally, not through nameless spokesmen-- to offer at least moral support to the hundreds of thousands of Ukrainians out in the streets, and to denounce the suppression of dissent by the Yanukovich government. It is not in the interest of the United States for Ukraine to fall back into the Russian orbit--nor for our top officials to remain indifferent and near silent in the face of the largest manifestation of a demand for freedom to occur in years in Europe.
  • Russia
    Will Piekos: China’s Inroads into Central Asia
    Will Piekos is a research associate for Asia Studies at the Council on Foreign Relations. Chinese President Xi Jinping wrapped up a lengthy trip to Central Asia this past weekend that ended in a meeting of the six-member Shanghai Cooperation Organization in Bishkek, Krgyzstan. On paper at least, the trip was a significant success for Beijing. Xi signed multiple economic and energy agreements with the former Soviet satellite states and showed regional security leadership through the SCO. The trip even included some attempts at soft power projection—Xi announced 30,000 government scholarships to students of SCO member states. With the United States withdrawing from Afghanistan, Central Asia is an area full of potential for Chinese investment and diplomacy. On the economic and energy front, China made substantial progress in locking down Central Asian resources. In Turkmenistan—the only ‘Stan that is not a member of the SCO—Xi inaugurated production at Galkynysh, the world’s second-largest gas field. China also announced $30 billion in deals in Kazakhstan, including CNPC’s $5 billion stake in the Kashagan offshore oil project. And in Uzbekistan, Xi and his hosts revealed $15 billion in oil, gas, and uranium deals. Though it would be premature to pronounce these deals as successes, they represent a commitment by Beijing to invest more in the region. Chinese investment is enticing to Central Asian regimes in part because Beijing doesn’t impose restrictive trade policies to investment (like Moscow) or promote democratization and respect for human rights (like Washington). Russia still controls the majority of the region’s energy exports, but Beijing has made impressive advances into the region, securing land-based access to oil and natural gas and alleviating some of its resource security concerns. At the regional security level, China earned the reaffirmation of the SCO’s fight against the “three evil forces”—terrorism, separatism, and extremism. Beijing fears Uighur unrest in the far western province of Xinjiang, where Han Chinese have faced sporadic violence from separatists and Uighurs angered by what they see as efforts at Sinification. A report just this week revealed that Chinese security forces had killed twelve Uighurs and wounded a score at a “terrorist facility” in an area near the Chinese border with Pakistan, Afghanistan, and Tajikistan. As the United States withdraws troops and military aid from the region, Central Asian leaders fear extremist elements will turn to the northwest in search of a new fight, while Beijing worries that terrorism in these states will bleed into Xinjiang and encourage Uighur separatists. They hope the SCO can fill the gap left by the U.S. withdrawal. China’s leadership in the SCO also allows Beijing to gather consensus around foreign policy objectives further away from home. During the meeting, the SCO unsurprisingly took positions consistent with Chinese (and Russian) views. These included condemning the possibility of military strikes or unilateral sanctions against Iran (which is an observer at the SCO), stressing the importance of negotiations in maintaining peace on the Korean Peninsula, and opposing Western intervention in Syria. And there has been a certain convergence in China and Russia’s policy agendas—most notably an anti-Western, anti-U.S. stance on the previously mentioned issues—that have allowed the two countries to work together in Central Asia and in the SCO. Meanwhile, the authoritarian nature of the other SCO regimes—and their dependence on China and Russia for investment—means that the organization often speaks with one voice. This is not to say that Beijing does not face obstacles in its efforts to “go west.” Investment by Chinese companies and the importation of Chinese labor faces some of the same resentment and accusations of cultural imperialism that Chinese companies encounter elsewhere in their “going out” strategy. The “three evil forces”—and the social conditions that inspire them—are notoriously difficult to stamp out, especially in impoverished areas ruled by undemocratic regimes. China’s energy deals with Central Asian nations will undoubtedly help the region’s autocratic regimes, but if the benefits don’t trickle down to the people, China could find itself the target of popular demonstrations. Moreover, China will have to shoulder a bigger security load in the region and coordinate multilateral operations, with which the PLA has minimal experience. With foreign policy challenges on many of its other borders—most recently tensions in the East and South China seas and a border dispute with India—Beijing has the opportunity for economic and diplomatic success in Central Asia. The question is, will China fight only for its own interests, or will it put those of its smaller neighbors on similar footing? For now, at least, the two are in step.
  • Monetary Policy
    Why the Labor Data Point to a September Fed Taper
    The August “jobs report is an important reminder that all this tapering talk is insane and dangerous,” pronounced Slate economics writer Matt Yglesias, reflecting the consensus of the econo-commentariat.  But as today’s Geo-Graphic shows, the report is actually wholly consistent with a September Fed taper. “If the incoming data are broadly consistent with [the Fed’s economic] forecast,” Fed Chairman Ben Bernanke said in June, “the Committee currently anticipates that it would be appropriate to moderate the monthly pace of purchases later this year.” This was widely interpreted in the markets to mean a September taper, which jibes squarely with subsequent FOMC member comments (and Bernanke’s unwillingness to suggest that it didn’t). The August jobs numbers were slightly weaker than the market consensus expectation, but the fall in the unemployment rate to 7.3% was one the Fed had in June not actually expected to see until the fourth quarter, as our figure on the left shows.  There was therefore no surprising negative news for the Fed in the unemployment numbers. But is the unemployment rate the right number to be looking at?  “With the [labor force] participation rate still falling,” Reuters’ Felix Salmon pointed out, “the unemployment rate is less relevant than ever.” Indeed, the participation rate—the percentage of the population in the labor force—fell in August to 63.2%, its lowest level in 35 years.  As our figure on the upper right shows, however, this decline is wholly on trend with the fall since 2001, and there is therefore no news for the Fed here either—the participation rate is precisely where the Fed should have expected it to be. (The flattening out between 2003 and 2007 was driven by abnormally robust labor demand.  An aging population is over time consistent with a declining participation rate.  See our post from May 21 of last year.) Importantly, as the bottom right figure shows, the decline in the participation rate was also not driven by a rise in discouraged workers—that is, the number of people who would like to work but have given up because of poor job prospects. The bottom line is that if an imminent Fed taper is misguided, as Yglesias, Salmon, and others have argued, it is not misguided because of the August jobs report.  The Fed could not have gleaned anything more negative in it than they would have expected back in June. CBO: Labor Force Projections Through 2021 Bloomberg: Unemployment Falling for Wrong Reason Creates Fed Predicament Kahn: Our Long-Term Unemployment Challenge (In Charts) Wonkblog: Three Reasons the U.S. Labor Force Keeps Shrinking   Follow Benn on Twitter: @BennSteil Follow Geo-Graphics on Twitter: @CFR_GeoGraphics Read about Benn’s latest book, The Battle of Bretton Woods: John Maynard Keynes, Harry Dexter White, and the Making of a New World Order, which the Financial Times has called “a triumph of economic and diplomatic history.”
  • Middle East and North Africa
    The Syria Deal
    The text of the framework agreement between the United States and Russia leaves one with more questions than answers. Until last week Syria denied having any chemical weapons, so its willingness to account for 100% of them is, to say the least, in doubt. Secretary Kerry himself said, when he first mentioned a possible deal, that it couldn’t work. And our partner in this endeavor, Russia, has itself failed to meet all its obligations with respect to chemical weapons. Worse, it remains the key conventional weapons supplier to Syria. Thus we are left wondering if Russian planes might arrive in Syria to help remove chemical weapons--but laden with more  conventional weaponry for the regime. And wondering again why this is a good deal if it results in another 100,000 Syrian civilian deaths, more tens of thousands of refugees and displaced persons, and more destruction. Iranian and Hezbollah military personnel continue to aid and in some cases direct the efforts of the regime. The Wall Street Journal put it this way: The training of thousands of fighters is an outgrowth of Iran’s decision last year to immerse itself in the Syrian civil war on behalf of its struggling ally, the Assad regime, in an effort to shift the balance of power in the Middle East. Syria’s bloodshed is shaping into more than a civil war: It is now a proxy war among regional powers jockeying for influence in the wake of the Arab Spring revolutions. What is our reaction? Apparently it is a small program of assistance for the Syrian rebels, one that was announced in June but got off the ground only weeks ago--two and half years into this war. President Obama said this on September 10th: When dictators commit atrocities, they depend upon the world to look the other way until those horrifying pictures fade from memory. But these things happened. The facts cannot be denied. The question now is what the United States of America, and the international community, is prepared to do about it. Because what happened to those people -- to those children -- is not only a violation of international law, it’s also a danger to our security. Nevertheless the deal with Russia does not punish Assad or strike a blow at the regime; it merely says "don’t do it again." So the lesson for dictators who commit atrocities is that you can use chemical weapons 10 or 15 times, and then you may be asked to give them up. Period. It’s like telling an ax murderer that his punishment is to give up his ax--or to promise to give up the ax and promise that he has no more axes hidden anywhere else. The Syrian regime, and Iran, and Hezbollah, and Russia, seem very pleased with this diplomatic achievement. But why should we be?
  • Russia
    Dagny Dukach: The Wary Partnership Between China and Russia
    Dagny Dukach is an intern for Asia Studies at the Council on Foreign Relations. Sino-Russian cooperation has grown considerably over the past few months, with the most notable example of this being China and Russia’s joint naval exercise in July. Against the backdrop of Obama’s pivot to Asia and rhetoric from Russian and Chinese leaders extolling their renewed cooperative spirit, some Western observers have suggested that improved relations between the two powers threaten U.S. interests. Dr. Ariel Cohen, a senior research fellow in Russian and Eurasian studies and International Energy Policy at the Heritage Foundation, has argued that the United States must do all it can to prevent a growing “anti-American … Beijing-Moscow axis from taking root.” Other prominent American scholars have warned of the “new anti-American tack” of Sino-Russian relations, and suggested that without major U.S. policy change, American fears of a Chinese-Russian axis could be realized. But this attitude does not adequately reflect the motivations driving Moscow and Beijing. Not only do they have significant reasons to pursue improved relations that have nothing to do with the United States, but the extent of their cooperation and mutual trust is also still very limited. Since President Xi Jinping’s visit to Moscow just days after his inauguration in March, the two countries have increased their cooperation on several fronts. In early July, China embarked upon its largest ever joint military maneuvers with the Russian-Chinese “Joint-Sea 2013” naval exercises. Moscow and Beijing’s interaction on the Snowden affair led some to speculate about the extent of the countries’ cooperation, and a multi-billion dollar oil agreement was signed in late June that will triple Russian oil flowing into China over the next twenty-five years. And Russia and China have a long history of cooperation in the United Nations, where their Security Council vetoes have blocked many Western attempts at economic sanctions targeting countries such as Syria, Iran, and North Korea. However, there has been little indication that Russia and China’s joint activities are directly aimed against the United States. The joint naval exercises included a wide range of activities, from search-and-rescue missions and anti-piracy to anti-submarine and surface warfare, and emphasized confidence building and a cooperative spirit more than preparation to target a specific foe. Similarly, while the oil deal may help Russia reduce its dependence on Western buyers, it will also provide more long-term stability for both the Russians and the Chinese, and should not be construed as anything more than defensive (not aggressive or offensive) insurance against a volatile oil market. Even in the Snowden affair, the extent of cooperation is still unclear, but as of yet, there is little indication of collusion by Moscow and Beijing against Washington. Indeed, Russia and China’s position on the Snowden affair appears to reflect their common policy of non-intervention. Finally, in addition to the obvious benefits of maintaining cordial relations between countries that share a border of over 3,600 kilometers, Russia admires China’s economic success, and China depends upon Russian resources to fill its manufacturing plants. China and Russia have their own reasons to cooperate, many of which have nothing to do with threatening the West. In fact, several recent incidents have betrayed the limitations of this Sino-Russian alliance. First, Moscow has remained silent on the South China Sea dispute, while Beijing has not supported Russia’s recognition of South Ossetia and Abkhazia as independent states. Just last year, China took issue with oil deals Russia signed with Vietnam in waters claimed by the Chinese. Beyond these territorial disputes, there are also significant gaps in trust and ideology between the two nations. Many Chinese see Russia as a failure, as a great power that slipped into mediocrity as a result of its political reforms and ideological laxness. Furthermore, in addition to the recent and well-publicized joint naval exercises, both Russia and China have also conducted their own military exercises aimed at defending against potential threats from each another. For example, this year Russia deployed 160,000 troops from July 13 to 20 in a war-game along the PRC border, and China has conducted several military drills in the past few years where troops were advanced distances only possible in a conflict against Russia or Central Asian states such as Kazakhstan. Thus the burgeoning Sino-Russian alliance need not be perceived as a threat to the United States. Moscow and Beijing are still far from a cohesive axis that might directly threaten Washington, and as such, the United States would be best off keeping a watchful eye, avoiding an antagonistic attitude towards cooperation between China and Russia. Indeed, more concerning than improved relations between China and Russia is Washington’s predisposition to fear that relationship, and to assume that it could not peacefully coexist with a more cooperative Moscow and Beijing.
  • Monetary Policy
    Mortgages and Monetary Policy Don’t Mix
    From the beginning of 2009 through this past May 21st, the Fed amassed a portfolio of mortgage-backed securities (MBS) valued at $1.2 trillion.  Over this period, the average 30-year fixed mortgage rate fell from 5.33% to 3.65%, and the spread between that rate and the 10-year government borrowing rate fell from 2.8 percentage points to 1.7 percentage points. Then came talk of “calibration” and “tapering” . . . "Calibrating" asset purchases to volatile data while pledging to ignore data on rates, as we argued recently in Dow Jones’ Financial News, is a tough line for the Fed to walk.  On May 22, and then again on June 19, Chairman Ben Bernanke suggested that the Fed might soon begin reducing the pace of MBS purchases, dependent on developments in the labor market.  Mortgage rates soared.  The average 30-year rate is now hovering around 4.5%; about half the decline in mortgage rates that the Fed had engineered through its multi-year MBS purchase scheme has evaporated. In consequence, the monthly mortgage payment on a $200,000 home purchased with a 10% down payment has risen by a whopping 10% since calibration talk began.  Housing starts also plummeted 10% from May to June, hitting their lowest level since last August, just before the Fed’s latest round of MBS purchases. This confirms our view, expressed recently in the Wall Street Journal, that the Fed should never have gotten involved in sectoral credit allocation in the first place: it should have limited its interventions to the Treasury market, and let the Treasury take politically charged decisions on whether and how to intervene in specific areas of the economy, such as the mortgage and housing markets.  The Fed has only set itself up, as well as the market, for ongoing exit strategy headaches.  Mortgages and monetary policy just don’t mix. Financial Times: U.S. Housing Construction Slides to Ten-Month Low Bernanke: May 22 Congressional Testimony Bernanke: June 19 FOMC Press Conference Wall Street Journal: Thirty-Year Mortgage Rate Posts Largest Weekly Increase Since 1987   Follow Benn on Twitter: @BennSteil
  • Russia
    Friday Asia Update: Top Five Stories for the Week of July 12, 2013
    Sharone Tobias and Will Piekos look at the top five stories in Asia this week. 1. Cybersecurity the main focus of the U.S.-China Strategic and Economic Dialogue. U.S. Secretary of State John Kerry, U.S. Treasury Security Jack Lew, Chinese top diplomat Yang Jiechi, and Chinese Vice Premier Wang Yang met in Washington for the fifth round of the U.S.-China Strategic and Economic Dialogue this week. The dialogue focused on a number of issues, including how to deal with North Korea, Asian maritime disputes, and economic issues; the two sides made headway on investment and climate change agreements, though (unsurprisingly) there were no breakthroughs on cybersecurity, a main focus of the talks. 2. Japanese defense paper calls for enhanced military capabilities, stronger ties with the U.S. Japan released its 2013 defense white paper this week, the first under the administration of Prime Minister Shinzo Abe. Territorial disputes with China and North Korea’s growing belligerence are at the top of Japan’s list of security concerns, and Tokyo hopes to counter these threats with an upgrade in military capability and intensification of defense cooperation with the United States. China’s state media was predictably indignant at the implication that it was the cause of regional tensions. 3. Two die in plane crash on Korean airline. Asiana flight 214 from Seoul to San Francisco crashed on Saturday, killing two Chinese nationals and seriously injuring fifty passengers. The cause of the crash has yet to be determined, though the conduct of the pilots is under investigation. Asiana’s president, Yoon Young-doo, apologized on Monday. 4. China, Russia hold naval exercises. China and Russia concluded a set of joint naval exercises, continuing a recent string of improved relations between the two nations. A PLA Navy officer lauded the countries’ partnership as a “long-lasting and strategic” one, and the two sides pledged further military cooperation. In the United States, the exercises have been viewed with a certain wariness, as some fear increased Sino-Russian cooperation could be an attempt by Beijing to counter the U.S. rebalance to Asia. 5. Chen Guangcheng leaves NYU amidst controversy. Chinese blind dissident Chen Guangcheng claimed that New York University forced him to leave because of pressure from China. Representatives from NYU, including CFR Adjunct Fellow Jerome Cohen, claim that Chen’s fellowship was only intended to last one year. As a result of the controversy, Chen lost an offer to be a visiting scholar at Fordham University and currently has only one option open to him, the Witherspoon Institute. Chen came to the U.S. after escaping from house arrest to the American Embassy in Beijing, causing a diplomatic crisis that ended with his flight to New York. Bonus: Jenny from the Soviet Bloc. Singer Jennifer Lopez was embroiled in controversy last week after performing at a lavish birthday concert for Turkmen leader and alleged human rights abuser Gurbanguly Berdymukhamedov. The party was paid for by the China National Petroleum Corporation.