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Book Chapter

Power shifts: Emerging markets emerged, geopolitics fractured

Author(s): Hulbert, Matthew

Publication Date: 2011

Permanent Link: https://doi.org/10.3929/ethz-a-006570307

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ETH Library Center for Security Studies

STRATEGIC TRENDS 2011 Key Developments in Global Affairs

Editor: Daniel Möckli

Series Editors: Andreas Wenger and Victor Mauer Authors: Matthew Hulbert, Prem Mahadevan, Daniel Möckli, Roland Popp

CSS ETH Zurich CHAPTER 1 Power shifts: Emerging markets emerged, geopolitics fractured Matthew Hulbert

Emerging markets have recovered from the economic crisis far better than the West. As geoeconomic power is shifting East, it is questionable whether China should still be coined as ‘emerging’. Yet it is not just on the geoeconomic level that emerging markets matter, but in the geopolitical realm. A debt-ridden US will stagger on, Europe will falter, new powers will rise on Beijing’s commodity back. No common rule book will be found, and no cohesive blocs formed either way. Entropy will become the defining feature of a fractured international system.

Russia’s President Medvedev, Brazil’s (former) President Lula da Silva, China’s President Hu and India’s Prime Minister Singh in Brasilia, 16 April 2010

11 STRATEGIC TRENDS 2 0 1 1

The world has become used to This is where the fresh thinking on lazy assumptions when it comes emerging states must come into play: to thinking about emerging They are no longer just engines of markets: that is ironic, given that economic growth, but catalysts of they have been the main ‘head- geopolitical movement. This trend line’ act of 2010/11. Faraway lands will become glaringly apparent when displaying rapid economic growth, capital accounts are made to ‘pay’. favourable demographics, producti- As the US has long known, and the vity growth, and burgeoning human EU is viscously finding out, debtors capital are more or less the common always needed financiers, and it is criteria employed. That is before we ultimately Asian creditors that will get onto the acronyms used to ‘group’ start calling the geoeconomic and geo- emerging markets according to market political shots. The clock simply can- potential and size. BRIC is the one not be turned back. The financial cri- that has really stuck (Brazil, Russia, sis has accelerated the long-term trend India, China) after the ‘Asia Tigers’ of Europe’s relative decline; America is lost their collective roar in the late hanging on for all its worth, the ‘rest’ 1990s. Others have been floated since, will continue to rise, with China at ‘CIVET’, ‘N11’, ‘MIKT’ and ‘VISTA’ the helm. The ‘rules of engagement’ are amongst some of those en vogue are however far from fully set. right now; more will no doubt follow. Such tectonic shifts are already play- Taken on their own, such acronyms ing out at the highest level of inter- mean absolutely nothing. They in- national relations: the G2 of the US variably do not even make compelling and China. What makes the G2 par- economic sense. But collectively, they ticularly interesting is not just that underline a profound shift in the glo- it constitutes the pinnacle of global bal economic balance of power, a shift affairs, but that other emerging mar- that has been dramatically accelerated kets are starting to wield more regional by the events of 2010. Geoeconomic political clout thanks to relative US power has gravitated so far East that decline and a rising Middle Kingdom. whether we should still term China as Smarter states are even starting to ‘emerging’ is highly debatable. Yet the position themselves between the US real catch for 2010/11 is not so much and China to optimise political gains that these markets have economically – a dynamic that will likely persist ‘emerged’, but that they are now cut- given the need for ‘third party’ coun- ting their geopolitical teeth as a result. selling in any dysfunctional marriage.

12 EMERGING MARKETS EMERGED

Beijing and Washington are certainly with Sino-US energy interests is the no exception to this rule. G2 matri- order of the day for those structurally mony is real, but it is not working out dependent on hydrocarbons. Com- well, and that is despite having the modities are ‘geopolitical kings’, for veiled polygamy of the G20 to ‘work now at least. Meanwhile, the likes of through’. Turkey and Iran are forging increa- singly independent political roles from Africa, Central Asia, the Middle East, US, European, or Chinese interests. and even Latin America are playing this ‘Chimerica’ game. They know US India and Brazil also have their own power is on the wane; they also know foreign-policy preferences and goals. that their economic ‘demand security’ They sided with China on global (hydrocarbon or otherwise) will in- climate talks, but continue to hedge creasingly emanate from Asian shores. their bets on currency questions. And Gulf states are more acutely aware of even on critical security issues such as this than anyone; political arbitrage Iranian sanctions, the US has found

Emerging markets: Beyond BRICs

CIVETS VISTA

Argentina South Africa Colombia

Vietnam Egypt

Indonesia Turkey

Bangladesh Mexico Nigeria MIKT South Korea Pakistan Iran Philippines Next-11

13 STRATEGIC TRENDS 2 0 1 1

European support a little shaky at the and geopolitical strings. The world UN and outright obstructive from has changed, and it is changed for Ankara and Brasilia. Russia is claim- good. ing regional leadership once more, a boast that few Europeans can refute Economics, stupid: The West in the Caucasus or Eastern Europe, weakened while Venezuela, South Africa, and If we start with Western downside Nigeria have been carving out distinc- risks, it is clear that the roots of the tive regional niches. This might not all problem are economic. Or more pre- sound like much yet, but it is a clear cisely, debt. Over the pond, the IMF indication of what we can expect in a thinks that US federal debt could well fractured geopolitical global configu- be equal to total GDP by as early as ration: divergence and entropy. The 2015, which marks a rapid expansion West can no longer carry the weight, of federal balance sheets from a de- and emerging markets have some way cade ago; debt was a far more slender to go before they fill the geopolitical 35 per cent of GDP. Macroeconomic vacuum. Geopolitics will be an in- mismanagement undoubtedly played creasingly messy business as a result. a major role throughout the Bush Jnr years, but it is the financial crisis of Bracing all emerging markets in the 2008/9 that really inflicted the pain. same political bracket does not really Massive demand-side intervention work at this stage. Stark differentia- helped to stave off the worst of the tion is still needed, not only between depression through unprecedented China and the rest of the BRICs, but liquidity support and lax monetary the BRICs and other emerging players policies. But the gap between spend- all riding the Chinese dragon. It is also ing and revenue is now huge; the by no means ‘guaranteed’ that emer- US debt-to-revenue ratio is 358 per ging markets will be able to overcome cent, according to Morgan Stanley, deep-seated capacity constraints any while the deficit hit a mammoth time soon – China included. MENA US$ 1.6 tr in 2009, and is set to rise turmoil has been a very loud wake-up to US$ 1.645 tr this year. call for anyone assuming that emer- ging markets are already politically US$ 600 bn worth of ‘Quantitative home and dry. But what it also starkly Easing II’ obviously has not helped, illustrates is that the West, and most but it is the trajectory of US debt that notably the US, can no longer singu- is most scary. In the coming decade, it larly keep pulling all the geoeconomic is entirely feasible that US federal debt

14 EMERGING MARKETS EMERGED will increase by nearly 250 per cent is therefore hardly going to tackle from US$ 7.500 bn to US$ 20.000 bn America’s long-term debt problem. – a scenario that would see the Treas- The Obama administration will be ury borrowing around US$ 5.000 bn lucky to even make these reductions per year to refinance maturing debt stick into 2012. Congress is divided, and raise new money. Interest pay- counter-cyclical measures will still ments on that kind of borrowing be needed to prop up the recovery – would exceed all domestic discretion- and despite endless analysis that the ary spending; forget QE2, it is more US intends to cut defence spending, like the Titanic. Once you bring in America remains remarkably bullish private-sector debt and municipal bal- on military expenditure. Washington ance sheets into the equation guaran- spent 50 per cent more on defence teed by the US tax payer, things look last year than at any point of the Cold even worse – extrapolate that towards War, and the Department of Defense 2035 and you get a figure closer to has still tabled a US$ 553 bn invoice 200 per cent of GDP. for this year – a US$ 4 bn uptick from 2010. The ‘security risk’ for Wash- US Titanic ington is therefore not military, but Cutting the budget deficit by fiscal. Geoeconomic power is what US$ 1.100 bn over the next decade matters now.

A weakening dollar

140

130

120

110

100

90

80 2003 2004 2005 2006 2007 2008 2009 2010 2011

Source: Federal Reserve 2011 US$ trade weighted exchange index: broad

15 STRATEGIC TRENDS 2 0 1 1

While it is by no means impossible ence of European Monetary Union. that the US will manage to combine The numbers are bad, but it has been growth with economic prudence, the a fundamental lack of political re- signs look ominous, not least because solve that has turned a crisis in the appetite for US treasuries remains periphery into a vital assault on the ironically strong. Dollar interest rates core. are pretty low, ten-year yields are healthy, and the greenback remains European leaders have consistently relatively steady as the world’s reserve failed to quell the market by pro- currency. But the chances that this viding a political firewall to protect state of affairs will persist are at best weakened economies against market hopeful. Underlying conditions are predations. The focus is on play- unsound, and pricing is out of sync ing local politics rather than prop- with fundamentals. When capital erly recapitalising European banks markets eventually call time on US or providing for a much-needed debt (and they will, given the lever- single euro bond, and indeed, fiscal age we are talking about), the adjust- union. Put simply, tax revenues from ment will be rapid and the pain severe. the core will be needed to backstop Whether this is born out of currency bad debts of the periphery – a move markets spilling into bond markets or that will cause enormous political vice versa does not really matter; the heartburn across European capitals, same question will one day be put on but remains a crucial antacid. This the table: US default? is not just a question of liquidity for a growing number of eurozone Eurozone crisis economies, but fundamental sol- One of the main factors adding to US vency. The current policy of ‘lend bond market hallucinations right now (a little) and hope that things will is not just trade-driven support for turn out OK’ is not only futile, it is the dollar from abroad or low levels of potentially very dangerous for a de- investment demand, but capital flows structive run on the euro. If official driven by eurozone instability. If the resources are insufficient to cover US debt position is shaky, then the liabilities, markets know exactly euro has been positively disastrous. which way to bet. Likewise, any Contagion from the Greek and Irish restructuring inevitably required in crises has spread to Portugal, Spain, Greece and Ireland should be done Belgium, and Italy, and for many now sooner rather than later. Waiting un- poses serious threats to the very exist- til 2013 (as currently agreed) for a

16 EMERGING MARKETS EMERGED

EU17 vs. EU10

Eurozone members Other EU member states

EU countries with largest debt to GDP ratios

Gross government debt as % of GDP (2010)

91 % or more

Ireland Netherlands 81 % – 90 % 66% 71 % – 80 % 94% Belgium (105%) (74%) 100% 70 % or less (106%) Figures in brackets show United 2013 forecast Kingdom 77% Germany Sovereign risk fears (86%) 75% (77%) France Austria Hungary 84% 70% 78% (90%) (75%) (80%) Portugal 118% 83% (120%) (92%) Spain Greece 63% 130% (79%) Italy (144%) Turkey

Malta Source: IMF 2010, CSS ETH Zurich 70% (71%)

17 STRATEGIC TRENDS 2 0 1 1 long-term mechanism for distressed Lacking geopolitical clout sovereigns will merely lead to disor- Even if things organically pan out derly defaults and massive losses for for the euro (at some point, yields private creditors; more likely than will probably become more attractive not, such losses would end up with for traders to take some heat off the the tax payer anyway. European Central Bank); the political damage has been done. The broader The fact that Berlin (and Paris) have trend is unmistakable. Europe is as now shifted ground towards ‘competi- internally focused as it is highly frag- tiveness’ rather than getting to grips mented in terms of national interests with the real problems to hand, risks and priorities. making matters worse. No one doubts that rekindling growth and fiscal disci- Despite high expectations from the pline are crucial components towards Lisbon Treaty and longer-term aspira- a sustainable eurozone; boosting Ger- tions to play a significant world role, man consumption would of course be Europe remains geopolitically mar- a good start down the growth track. ginalised. Enlargement has ground But the prospect of an ‘EU17’ forg- to a halt, neighbourhood policy is ing ahead on economic cooperation, broken – not only in MENA coun- while leaving ten (potentially higher- tries, but across Eastern Europe and growth) markets behind, can only be the Southern Caucasus in the ill- interpreted in one way: a Union with- fated ‘Eastern Partnership’. Even the in a Union. Whether Franco-German Balkans look increasingly insecure. plans eventually stick or not remains Talking down to Moscow or Ankara another question. Aligning corpo- is certainly a thing of the past, as is rate tax rates, scrapping index-linked passing over Washington. Brussels wages, harmonising pension ages, and has failed to gain a credible foothold applying debt breaks is hardly going in Central Asia to diversify natural to be to everyone’s taste, particularly resources, and with defence budgets if they do not gain cast-iron guaran- being sharply cut, ‘crisis management’ tees from Berlin to stand full square credentials look increasingly dubious behind future bailouts, or indeed in places like Western Asia and Africa. underpin a Eurobond in return. In the Europe’s main priority in the coming midst of ongoing state elections, the years may well be to contain protests German gambit seems clear: It is their on the streets of Lisbon, Madrid, and way or the highway as far as the future Rome, not piecing war-torn countries of the euro is concerned. back together.

18 EMERGING MARKETS EMERGED

Europe’s global geopolitical signifi- But Germany is the proof in the cance today is not so much what it pudding. As economic tremors from does in the world, but how emerg- Greece, Ireland, Spain, and Portugal ing markets bilaterally interact with shook the eurozone, it was Berlin European capitals. Ten years ago, that was first on the boat to Singa- leaders like Blair and Chirac meas- pore and China in search of fresh ured themselves by their roles on the cash. Just as they were leaving, the world stage. For their successors, at- IMF arrived in Brussels to help save tracting inward investment from Asia, some European bacon; so much for the Middle East, and Latin America is the euro supplanting the dollar any the benchmark of success. Sarkozy has time soon as a global reserve. In times been on a US$ 22 bn charm offensive of crisis, Europe still has to look to with China of late and US$ 10 bn in a beleaguered Washington for help. Delhi, while Cameron has been wooing Even now, Chancellor Merkel point- Indian and Gulf investment. Portugal, edly reminds European colleagues Spain, and Greece have been grateful that German exports are going great for any Chinese bond market inter- guns in China (in large part thanks to ventions. Denmark is getting on re- a weakened euro), and will continue markably well with Brazil. to do so thanks to Berlin’s privileged

Too much and too little: US and European defence compared

% Euro (Bn) 20 500

15 375

10 250

5 125

UK FR GER 0 0 Def. exp./GDP Def. exp./ troops deployed/ Defence expenditure total gov exp. total milit. pers.

Sources: European Defence Agency 2010 (figures 2009) US EU26

19 STRATEGIC TRENDS 2 0 1 1 energy relationship with Russia. assets was clearly not economically Political arbitrage some might say: motivated, but strategic. Piraeus port Charlemagne it is not. sits aside the Bosporus and provides access to Southeastern Europe and You could argue that none of this the Black Sea region. Likewise, other really matters. The fact that Europe emerging markets will all take greater has been unable to get its economic stakes in the European game, whether house in order sounds innocuous, at it is Turkey telling France to pull their least from a geopolitical perspective. Mediterranean socks up, Brazil rais- But assuming that more and more ing eyebrows on the Common Agri- capital supporting European growth cultural Policy, or Gulf states looking comes from emerging markets, the over their ‘fractured’ shoulders. likes of India and China should have relatively little difficulty making their Crafting coherent European policies weight felt in Europe in future. Given will be very hard in that context, as will the relatively small size of European staying aloof from emerging power economies, it will also be easy for Asia tussles. It is no coincidence that in the to ‘drop’ them at times of their political midst of sovereign debt discussions, choosing. China’s purchase of Greek China has already asked the EU to

Share of global GDP: China closes on the US 25

20 US

C 15

10

I 5 G

R B 0

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Note: Graphic displays comparison of US, BRIC, US United States GB Germany and Germany as Europe’s biggest economy C China R Russian Federation rather than a global ranking I India B Brazil Source: IMF 2011

20 EMERGING MARKETS EMERGED grant it ‘market economy’ status and to partner the US has long been waiting lift a long standing arms embargo. The for underlines the degree to which EU remains a long way from mirroring US power has to be measured against Hillary Clinton’s quip of ‘how do you Asia-Pacific in future. It also draws talk tough to your bank manager’ but us back to a G2 world, and the in- it is highly unlikely that Europe could, exorable rise of China. The good news or indeed should stand in the way of a is that it is dawning on Washington rising China, irrespective of how Wash- that economic dependence on China ington might want things to play out. could be geopolitically problematic. Europe cannot even stick to a consist- What if China plays up over Taiwan? ent line when it comes to Russia and What if they do not play ball on Iran? the vexed issue of gas supplies. Nor will What if they start threatening Japan’s it when it comes to persuading Ankara maritime interests? And what of the to play with a straight bat over tricky Korean peninsula? These are some of transit issues in future. the standard issues that tend to crop up, and on their own all have consid- Creditor catch: China emerged erable merit, other than the fact that The fact that Europe is not turning they miss the bigger point: The great- into the kind of serious geopolitical est geopolitical concern for Washing-

Contributions to global growth: China taking the lead 50

45

40

35

30

25

20

15

10

5

0 Brazil Russia India China BRIC G3 (US/EU/Japan)

Source: Goldman Sachs Global ECS Research 2011 2001–2010 2011–2020

21 STRATEGIC TRENDS 2 0 1 1 ton is not if China starts playing poli- mon ground: apparently not. Take tics with the assets they already have, a zero off the G‘20’ and you get far but if they start working on economic closer to the political reality and plan B to avoid US export dependency indeed, political dividing lines of the full stop. G2.

The only thing keeping the US econo- Beijing’s global economic reorientation my afloat right now is Chinese credit, Obviously, China is still dependent whether measured in terms of the cur- on US exports for the time being; it rent account deficit or the federal fis- also has no truly comprehensive out- cal deficit. China is by far the largest let for non-dollar securities to provide buyer of US treasuries ahead of Japan alternatives to US markets. And de- and the Fed. It is therefore ironic that spite Beijing’s bluster around a Spe- Washington keeps telling Beijing to let cial Drawing Rights vehicle pulling the renminbi rise while Ben Bernanke in currencies ranging from the euro is printing money like it is going out of to sterling to the yen, China is not fashion. America’s global reserve status looking to pitch the redback as any is an ‘exorbitant privilege’ indeed, it kind of reserve currency any time gives Washington the unique ability soon beyond ad hoc currency swap to keep financing external imbalances agreements and enhanced cross bor- and live beyond their means – but one der trade. The renminbi is not fully that is giving Central Banks inflation- convertible, and capital controls are ary headaches the world over. almost certain to stay in place for now. And yes, China clearly does not Little wonder that every time the want a fire sale on US dollar denomi- G20 meets, ‘imbalances’ become the nated bonds (what some term the euphemism for Sino-US currency ‘nuclear option’) given it holds over tussles. Surplus and deficit economies US$ 1.160 bn of them. take their respective sides: ‘Devaluation vs. appreciation’ becomes an archetyp- But the assumption that Chi- al case of ‘six of one, half a dozen of na will not gradually diversify its the other’. ‘Consumption vs. savings’ US$ 2.800 bn reserves (70 per cent sounds eerily similar. You would think of which are held in a structurally that with commodity prices trading at flawed greenback) away from the dol- historically high levels and a potential lar, or reduce its exposure to Western double-dip recession staring us in the demand in light of the financial cri- face, the G20 could find some com- sis, is about as unrealistic as thinking

22 EMERGING MARKETS EMERGED property prices would only ever rise. employment remains high and there- Rebalancing will assuredly come one fore the Chinese Communist Party day, but it will not be in the form that (CCP) safe. the US wants: Your bank manager has just called time on you, foreclosure is The Chinese Development Bank imminent. and the China Export-Import Bank issued loans in excess of US$ 110 bn This train is already in motion, and the to developing countries over the past US can do very little to stop it. Stok- two years – a larger sum than the key ing domestic and regional demand are lending arms of the World Bank. Chi- two key pillars in China’s approach. na became Brazil’s largest single trade Despite all the Keynesian headlines in partner and investor in 2010, and saw the West, it was China that launched a export trade increase by a staggering massive US$ 585 bn stimulus in 2009 73 per cent. Exports were also sharply that amounted to 8 per cent of GDP, up to India (38 per cent) and Rus- alongside US$ 1.5 tr of state-enforced sia (69 per cent), which buffeted an lending to the private sector over the overall export increase of 30 per cent. space of the year. The Chinese econ- ‘Cementing the BRICs’, you might omy not only grew by 10 per cent in say, given China’s clear economic 2010, it surpassed Japan to become the ascendency over its ‘alphabetic allies’, second-largest economy in the world. but Beijing also replaced the US as the Obviously, with domestic demand on key trade partner of Japan, Thailand, the up, China’s surplus will shrink to Malaysia, Singapore, Hong Kong, some degree (which many in Wash- Australia, the Philippines, South ington will see as good news), but this Korea, and Indonesia. is not some kind of short-term tactical play, rather it is a fundamental reori- Once you understand that, you start entation of Beijing’s global economic to understand why Chinese take-up of position. It wants to use its financial eurozone debt has been so tepid and clout to stimulate a new wave of self- why the dollar is on shaky ground. reinforcing growth with other emerg- China has better games to play, not ing markets – not just keep propping only with the BRIC economies, but up the export channels of old. China emerging markets across the board. clearly thinks that more stable invest- And nowhere more so than in com- ments can be made beyond Western modities, which constitutes the third, exports – not only to drive global eco- and most important pillar of China’s nomic growth, but to ensure Chinese geoeconomic strategy.

23 STRATEGIC TRENDS 2 0 1 1

Commodities: Strategically key affairs today: ‘Economic policy is Commodities are not just a massive energy policy is foreign policy’. Secu- hedge against the dollar (deals are in- rity of supply, diversity of supply, and variably structured in dollar-denom- reducing price risk exposure are the inated assets directly filtered from crucial ingredients in China’s resource foreign exchange reserves), but loans strategy. And it is a strategy they can- are also linked to prevailing commod- not afford to get wrong. Chinese oil ity prices. As we know, Asian demand import dependency will rise beyond dictates fundamentals on the trading 80 per cent over the next 20 years or floors of New York and London these so with around 40 per cent of global days, which means China is basically demand growth coming from Chi- placing a bet on its own economic nese shores alone. It already became performance rather than the US. It the world’s largest consumer of ener- also explains why close Chinese rela- gy ahead of the US in 2010, an event tions with resource-rich states are the that should have been a further 20 biggest geopolitical drivers of global years down the track according to the

Commodity price increases 450

400 1

350

300

2 250 3 4 200 5 6 150

100

50

0

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Price indices (2002-2004=100) 1 Sugar Price Index 4 Food Price Index 2 Oil Price Index 5 Dairy Price Index Source: Food and Agriculture Organization 2011 3 Cereals Price Index 6 Meat Price Index

24 EMERGING MARKETS EMERGED

IEA. This has inevitably facilitated far Nigeria, Guinea, and Ghana firmly on stronger Chinese links to Central Asia, the roster. This mirrors developments Russia, Africa, Latin America, and the in Central and East Africa. North Middle East. Such linkages will con- Africa is also a going concern. tinue to recalibrate global affairs writ large; producer supply will inexorably The list could easily go on; China lean towards Asian demand. has actually made over 200 resource investments in over 50 countries. China cannily used the economic Its upstream oil portfolio increased downturn as the perfect storm to by over 40 per cent in the past year; make strategic resource investments equity ownership now surpasses when few else could. ‘Loans for oil’ 1m b/d, and PetroChina, CNPC, agreements were an easy sell for those CNOOC, and Sinopec show abso- deemed to be on the critical list of lutely no sign of letting up. And it is resource (mis-)management. Vene- not just in ‘frontier’ markets where zuela was falling over itself to sign a China has been investing. Brazil US$ 20 bn credit line in exchange for secured a US$ 10 bn loan to help up to 200,000 b/d for Sinopec and finance its US$ 174 bn five-year stra- CNPC; Colombia looks similarly keen tegic energy plan, quickly followed by to provide an US$ 8 bn transportation investments in Argentina, while Can- outlet to China to help circumvent the ada has opened up tar sand prospects Panama Canal for ‘Bolivar’ supplies. for overseas investment. Russia was not much different, strik- ing a US$ 25 bn oil export-backed loan This matters economically – 5.7 per agreement for Rosneft to supply China cent growth in Latin America, 4.7 per with up to 300,000 b/d over the next cent in sub-Saharan Africa and 9.3 per 20 years. China nipped Central Asian cent in East Asia and the Pacific would supply in the bud, sourcing oil from all be unthinkable without Chinese Kazakhstan and gas from Turkmeni- demand – but it also has a political stan and indeed, Uzbekistan. South- edge: Resource-rich states are increas- east Asian and Australasian supply is ingly empowered to play off compet- increasingly dominated by Chinese ing Western and Eastern commercial demand, alongside a swathe of African interests. This can be seen in Central states joining the ranks of CCP natu- Asia, where Russian, European, US, ral resource interests. China has galva- and Asian suitors all want to sit at the nised relations with West African pro- table; and in Africa, where resource ducers, most notably Angola, but with rents invariably go to the highest, or

25 STRATEGIC TRENDS 2 0 1 1 indeed most corrupt bidders. In Latin East. More controversially, Beijing America, it is now an increasingly fine sees Iran as a major supply option. line between those playing the market It has 25-year LNG supply contracts and those draining the state, while Rus- in place with Tehran, and has taken sia clearly wants to perfect its arbitrage a majority stake developing the Yada- potential (political and economic) by varan oil field to ship 300,000 b/d to simultaneously feeding Eastern and the mainland over the next 30 years. Western markets. Removing the word North Pars Gas and North Azadegan ‘post’ from Soviet space would also be are more recent additions to China’s nice for the Kremlin. Persian collection.

Middle East: A ‘Chimerican’ lake? On their own, such deals sound a Hence the old game of Western little dry, but they could not have demand and producer supply is dead. any sharper political resonance if More players on both sides of the oil you tried. It is highly unlikely that producer and consumer ledgers will China will do much heavy lifting on inevitably bring far greater politi- international sanctions against the cal complexity, and nowhere more so Iranian nuclear programme, not un- than in the Middle East, where China less its most important regional energy has made its resource presence firmly supplier, Saudi Arabia, decides to felt. Marginal producers are exactly call time on Tehran’s nuclear ambi- that for China now: marginal. Risk, or tions and put pressure on Beijing to rather tolerance of risk, plays a major comply accordingly. China knows part when going for juicy finds. that the 1 m b/d it takes from Riyadh will be crucial to meeting long-term Beijing is well aware that some of their demand, and ultimately it is the one more exotic commodity bets might relationship it has to make work in not pay off, but it is no surprise that the Middle East. Arab oil supplies still China has been leading the charge trump Persian output. And the US back to Iraq to make sure they can certainly gets this; it explains why the capitalise on new prospects. Baghdad White House has been happy to let sits on some of the largest reserves in China source more and more Saudi the world; getting your foot in a US- (and Iraqi) oil to pressure Tehran. opened door is a smart long-term play. Likewise, China has major energy links From an energy perspective, this plac- with Kuwait, the UAE, Qatar, Yemen, es Saudi-Iranian power plays at the and Oman to ensure that supplies flow heart of the US-China relationship

26 EMERGING MARKETS EMERGED in the Middle East. What is more, and you start to look like a distinctly the Saudis know it – China’s presence ‘ordinary power’ as Britain found out gives them considerable political lev- in the post-war period. That is before erage over Washington, Beijing, and we even consider the issue of where ultimately Tehran. Which points us Gulf states decide to recycle their pet- towards another inconvenient truth rodollars in future. No security, no for the US: When it comes to political $? It is certainly a question for the influence in awkward resource states – US to ponder – not only in terms be it Iran, Sudan, or further afield in of treasuries, but what currency oil Asia, Africa, and Latin America, it is is priced in, lest Washington decide China that now has the critical voice, to pander to ‘energy independence’ whether it always wants it, or not. instincts and fall back on domestic, Canadian, American, and West Af- This begs the more fundamental ques- rican production over the Atlantic. tion of how long the US will continue to With benchmark prices already north underwrite global oil supplies through of US$ 100/b in 2011 and key pro- its naval dominance – and indeed, how ducers in the Middle East doing very long China will keep paying the US to little to quell the market, gradual US maintain such a presence. The Mid- disengagement from the region might dle East sits at the heart of this debate, not be as farfetched as once thought. and although the exact date is impos- sible to predict, the point at which the Before we get too carried away, China US relinquishes this role will basically has little interest in ousting the US signal the end of its superpower status. from the Persian Gulf anytime soon, For the US, it has not been about con- nor indeed from anywhere else where trolling resources destabilising con- or consuming vast Saudi-Iranian power plays are flicts could hamper amounts of Mid- at the heart of the US-China Beijing’s internal dle Eastern oil for relationship in the Middle East agenda, but it is at quite some time, least working on but rather ensuring the safe flow of some maritime insurance policies hydrocarbons to global markets, in the interim. The so-called ‘String whether in the East or West. of Pearls’ policy now spans from the Persian Gulf to the Chinese main- Execute that role, and much else fol- land via the Strait of Hormuz to the lows as the geoeconomic and geopo- Malacca Straits with a naval presence litical lynchpin of the world – lose it, in Cambodia, Pakistan, the South

27 STRATEGIC TRENDS 2 0 1 1

China Sea, and the Indian Ocean. nance over the old guard at this stage, China has also been closely eying Yem- but merely to ensure that it holds the en’s Aden port for a base at the mouth aces over emerging market energy of the Red Sea and adjacent to the Horn competitors, and most notably India. of Africa. With the Bab al-Mandab as Delhi is being squeezed so tight se- another key potential maritime choke curing new reserves that ONGC has point, and potential conduit for Suda- asked the government to follow the nese oil supplies, a foothold in Yemen Chinese lead and sink its US$ 280 bn offers Beijing numerous strategic op- of foreign reserves to help secure re- tions. Likewise, China’s growing trade sources. This might come as a ‘news links with Egypt over the years hold the flash’ for some, but emerging markets key to the Suez Canal at the other end are no more politically aligned than of the Red Sea. Closer to home, grow- the West. Not on energy, not on geo- ing Chinese influence in the South political interests, and certainly not China Sea is a reality that Australia, on geoeconomic interests either. Vietnam, and Japan are starting to understand, although Beijing has also Political turbulence been exploring different land-based That of course leaves us with a highly routes. Enhancing Sino-Russian, turbulent outlook. As much as Chi- Sino-Kazakh, Sino-Turkmen, Sino- na’s rise is creating political opportu- Burmese, the Pakistan corridor, and nities for other emerging markets to the Kra Canal (linking the Malay Pen- leverage, it also comes with political insula to the Gulf of Thailand) are all risks. The obvious ones relate to East prospective supply routes on the table. Asia, where for many in ASEAN, China looks a little too dominant. The West should hardly be shocked by The East Asia Summit has even pulled such developments; it spent most of up a chair for the US and Russia as a the 20th century trying to implement counterweight to Chinese influence. a similar blue print of Japan increasingly sees linking strategic pres- Emerging markets are China an outright po- ence to the flow of oil. no more politically litical threat in the East aligned than the West But the issue with China China Sea, and not to is not only that its presence provides be trusted on natural resources, least resource-rich states with a stronger of all rare earths. Moans can also be hand to resist Western pressures, but heard that as the fulcrum of six-party that Beijing’s primary motivation is talks, China is not doing enough on not to establish geopolitical domi- North Korea, or helping to improve

28 EMERGING MARKETS EMERGED governance standards across resource- nitely. Geoeconomic muscle of the rich states. Chinese terms of trade are East and chronic fatigue in the West certainly raising African eyebrows; will inevitably affect both global and quips of being flooded with cheap regional geopolitical outlooks sooner Chinese goods can be heard from or later. The first signs of this can Malawi to Senegal and back. Similar already be seen. messages are relayed in Asia. Even Bra- zil rues a low renminbi resulting in hot On the global level, take the capital inflows and a rising real against ‘BASIC’ grouping of Brazil, South the dollar. To be fair, complaints that Africa, India, and China on climate China refuses to sign up to a global issues, or indeed far larger group- climate deal are a bit rich; nobody else ings such as the G77 or WTOG20 is exactly chomping at the bit to put (distinct from the newly formed pen to paper, and let us not forget that G20) on global trade talks to block the West has effectively ‘outsourced’ Europe/US proposals. Reform of the its emissions to the Middle Kingdom Sister Banks and UN also tends to anyway. But the charge nevertheless find collective voice across emerg- stands, in some quarters at least. ing markets to gain a greater share of the votes, even though consen- Global governance: Diversity and sus is badly lacking as to which instability nations should get the plaudits. We The fact that emerging markets do can also see clear signs of players such as not see eye to eye on a range of geo- Brazil aspiring to global roles. Bra- political issues is not just significant silia provided leadership for UN for global governance gaps at ‘the missions in Haiti, it backed Turkey’s top’, but actually points to the blunt position over Iranian enrichment fact that this is now global governance (even though this was voted down at in action; namely China, alongside a the UNSC) and maintained its calls growing number of emerging markets for reform of international financial following their own agenda and their institutions. Compared to Mexico, own interests. Whether you call that a Venezuela, Bolivia, Chile, Argentina, political vacuum or merely a fleeting and Colombia, Brazil is clearly now reflection of power shifts underway is the leading Latin American voice in debatable – but the trend is clear: Nei- global forums. Rousseff will use this ther the US, nor Washington flanked elevated status to stand above the by Europe and Japan will be able to Latino ‘left-right’ political fray and underwrite regional balances indefi- stake a claim to regional leadership.

29 STRATEGIC TRENDS 2 0 1 1

9,5 8,1 7,5 7 7 6,5 6 6 4,5 4,1 4 4 4 3,8 3 2,6 2,6 2,1 2 1,7 1,3 1,3 China 1. 2. India Vietnam 3. Bangladesh 4. Indonesia 5. Egypt 6. Nigeria 7. 8. Pakistan Philippines 9. Brazil 10. Federation 11. Russian of Republic 12. Korea, Turkey 13. 14. Mexico Iran 15. 16. United Kingdom United States 17. 18. France Canada 19. Japan 20. 21. Germany 22. Italy 11 G7 11 BRIC N BRIC (in %): ‘Chindia’ ahead ‘Chindia’ (in %): 2015 : GDP growth : 2011 7 , G , 11 forecasts Source: IMF IMF Source: 2015 BRIC, N BRIC,

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In South Asia, a rising Indian star will tural reform. It is only really the sov- continue to compete with China to ereign wealth of Singapore that gives some degree, but has become remark- the region global geoeconomic reach; ably wary not to become a US pawn in geopolitically, its main interest is not the region. Its main aim is to entrench playing a global role, but trying not to its regional political power – albeit with be squeezed by its larger neighbours to some Indian blue helmets cropping up the North and West. in strange places – while playing a glo- bal economic role. The latter will need In Africa, more and more economies infrastructure gaps to be filled, and infla- are finding their own path towards tionary pressures checked, but one thing economic growth and political niches is for sure: Just like China, India’s natu- of late, in large part on the back of ral resource footprint will rapidly grow Chinese natural resource investments. alongside its naval forces. Do not expect Nigeria and Angola will continue to it to be pretty though; neither China nor vie for ascendency in West Africa, albe- India will move to improve the situ- it punctuated by ‘tropical dictatorships’ ation in places like Myanmar given in Equatorial Guinea and extreme the political dynamics and natural political instability in Ivory Coast. resources involved. A race to the bot- Kenya is rediscovering its regional feet tom will be the result unless a gentle- in East Africa, even though the Horn man’s agreement can be struck on is slipping further into anarchy. South upstream acquisitions. Africa has played a more important role in the UN General Assembly, but For the smaller South Asian players, conversely has used its regional clout to Bangladesh will continue to register shield Zimbabwe from Western pres- growth, but will remain as politically sures in Southern Africa. Elections in feeble as the likes of Nepal and Sri Lan- Cameroon, the DRC, and Nigeria will ka. Little sign of improvement will be certainly test how far Africa’s demo- seen in Pakistan given that Islamabad cratic credentials have, or indeed have now sits at the heart of the Afghani- not, come. Unrest in Zimbabwe and stan-Pakistan quagmire. Southeast Asia Chad will also be important spaces to is less politically hairy, but relations watch, particularly as many of the ‘new between Malaysia and Indonesia tend generation’ of African leaders hailed to be tetchy; those between Cambo- in the mid-1990s as guarantors of sta- dia and Thailand are even worse. Like bility in places such as Rwanda and Vietnam, they will all remain growth Ethiopia, have now become sources of markets, but require significant struc- concern. Although some resource-rich

31 STRATEGIC TRENDS 2 0 1 1 states such as Botswana and Tanzania Arab League, the chances are that have got on with the quiet business of the Gulf states will sit tight, try to reform, others such as the Central Afri- ride out the storm and offer tactical can Republic and Gabon look as fragile concessions along the way to quell as ever. If things go awry, it remains un- the Arab street. Changing the guard likely that you will see any significant in Saudi Arabia, Kuwait, UAE, Bah- Western cavalry coming over the hori- rain, Oman, and Qatar is only a mat- zon. A weak African Union under Cape ter of time of course, but inviting Town’s and Lagos’ tutelage will have to further unrest at this stage is a risk put its own fires out – albeit with sub- that few regional or external players tle Chinese help – not least because the would want. Scrapping ‘dynastic suc- West’s biggest political priority now lies cession’ full stop is even riskier, un- to the north east; namely to try and less you are willing to put democracy keep a stake in the MENA game. above interests in the most critical oil-producing region of the world. US authority was already being seri- US reticence to push the revolution- ously tested by Iranian regional influ- ary envelope in Iran underpins the ence after the geopolitical own goal fact that notional stability still re- of the Iraq War, and to a lesser extent mains a better devil for Washington Turkey, who with the second-largest and Beijing to know. The common standing army in NATO is trying to ‘unspoken language’ for external play a power broker role. Although players in the region remains that of Western powers have failed to pro- oil, geopolitical interests, and eco- duce a consistent line on Libya amid nomic pull. If democracy can be a Russian and Turkish opposition to useful tool to deliver on that then assertive action, broader events in fine, but it is certainly not a require- Tunisia, Egypt, Bahrain, and Yemen ment. Oil and petrodollars sit at the have dealt a severe blow to the old core of the Gulf’s global significance. model of Western powers turning a That goes as much for Beijing and blind eye to decrepit regimes for the Delhi, as it does for Washington. sake of notional stability. They have also revealed a serious chink in emerging Reverberations from Tripoli and market amour; the issue of succession. Cairo have not merely been confined to MENA markets, however. Central Emerging succession issues Asian states have been busy pushing While some analysts have started through snap elections rather than counting down from 22 across the constitutional stitch-ups. Kazakh,

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Uzbek, and Turkmen leaders are cer- aware of its own internal problems. tainly not getting any younger. And Inflation is worrisome, money supply although qualitatively different beasts, needs to be controlled, labour short- larger markets such as Russia will ages must be filled, the population need to think harder about economic is getting older, middle class aspira- modernisation to ensure the political tions are growing, and environmental underpinnings of the state remain in- degradation is showing. It also has its tact rather than erecting barricades. own ‘succession’ in 2012 to confront, The BRIC acronym can only carry when Xi Jinping will likely take over Russia so far; if anyone can keep play- from President Hu Jintao – a date- ing a game of political smoke and mir- line that the CCP will be desperate rors it is no doubt Moscow, but the to maintain high levels of growth to- Kremlin still needs to get off corrup- wards and beyond. China has faced tion and hydrocarbons and into equi- these kinds of challenges before and table growth if it is to stay the course. managed to overcome them; it prob- ably will do so again. Indeed, for all the ‘excitement’ around Middle East democracy, the downside Unfortunately, this analysis cannot risk is that many states will become easily be shared for the US economy. increasingly harsh and repressive to China has the geoeconomic upper contain the symptoms of social unrest hand, other emerging markets will use rather than address underlying causes. that to great effect, either through nat- Those in office will watch their mili- ural resource endowments or bilateral taries far more carefully for political trade. America will stagger on; Europe cohesion and support – if nothing will fail to geopolitically matter; Asia else, that is ultimately what put pay will rise, others will ride the coattails. to Mubarak and to a lesser degree, No common rule book will be estab- Gaddafi. Conversely, in states where lished, and no cohesive ‘blocs’ formed the military is the dominant political – either across emerging markets or force, we should expect to see more the West. But when the geoeconomic democratic dressage to paper over the bite point comes and the debts are cracks: Pakistan and Myanmar offer called in, emerging markets – and two examples. Thailand is another, China in particular – will need to be once you scratch under the surface. ready to fully take up the geopolitical slack. The world will not wait, nor will The irony of all this is certainly not their own domestic constituents once lost on China. Beijing remains acutely the world has shifted East.

33 CSS ETH Zurich

STRATEGIC TRENDS offers a concise annual analysis of major developments in world affairs, with a primary focus on international security. Providing succinct interpretations of key trends rather than a comprehensive survey of events, this publication will appeal to analysts, policy-makers, academics, the media, and the interested public alike. It is produced by the Center for Security Studies (CSS) at ETH Zurich. Strategic Trends is available both as an e-publication (www. sta.ethz.ch) and as a paperback.

STRATEGIC TRENDS 2011 is the second issue of the Strategic Trends series. It contains a brief overview as well as chapters on emerging markets and frac- tured geopolitics, changing regional dynamics in the Middle East, terrorism and counterterrorism ten years after 9/11, and narcotics as a growing security concern.

The Center for Security Studies (www.css.ethz.ch) at ETH Zurich specialises in research, teaching, and the provision of electronic services in international and Swiss security policy. An academic institute with a major think-tank capacity, it has a wide network of partners.