War by Other Means

by Robert D Blackwill

  CHANGE 3

  As certain states come to employ geoeconomic tools, it can change not only the nature of diplomacy but that of markets as well.

  In 2008, South Africa–based Standard Bank sold a 20 percent stake to the state-owned Industrial and Commercial Bank of China (ICBC), expecting to streamline global operations and refocus on Africa through increased cooperation.42 But the deal did not turn out as hoped. By 2010 losses had climbed to $114.3 million.43 Asked a few years later why the agreement failed to yield the returns expected, Martyn Davies of Frontier Advisory, a Johannesburg-based research firm suggested that Standard’s 20 percent stake to ICBC was not enough to allow it to compete with fully state-owned entities—explaining that for regions (like Africa) awash in state-backed deals, counterparties without diplomatic credentials may be at a disadvantage.44 As states adopt a more direct footprint in markets, discussions once reserved for corporate boardrooms are removed to diplomatic negotiating tables, and as this occurs, private (often Western) firms stand to lose out.

  Major deals are no longer decided strictly on the business merits. Returning to China’s purchase of Embraers, for instance, it is unlikely that any offer by Boeing or Airbus could have swayed the choice of Chinese leaders looking to mark the visit of the Brazilian president with a strengthening of the links between two of the BRICS countries. To take one more example, Argentina and China became engaged in a tit-for-tat dispute a few years ago that began with a move by Argentina to level new tariffs on low-value-added goods—a move widely seen as directed squarely toward China—and quickly escalated, as Beijing countered with spurious safety bans on Argentine beef. Eventually Argentina blinked first, repealing the tariffs. But it was not until Argentina mollified Beijing by awarding several contracts to Chinese state-owned enterprises, including one for a major rail project, that China ended its “public safety” embargo on Argentine beef.45 Insofar as the goal for Argentine officials in awarding these contracts was assuaging China, not necessarily finding the best bid, the result is a class of deals decided more for coercive reasons than on market logic, and as such, only really open to a few select firms.

  And finally, as dealmakers, states have shown a willingness to bargain with tools that are uniquely sovereign—spurious tax charges, forced joint ventures, police raids, state secrets, and even incarceration of business rivals. In 2007, Hermitage Capital (Russia’s largest private equity fund at the time, with a sizeable global presence) paid more than $230 million in fraudulent tax charges.46 Less than twelve months later, the British oil multinational BP lost more than $1 billion when TNK-BP, a joint venture in which BP was a partner, was threatened with the loss of its license for the giant Kovykta oilfields in East Siberia, and BP was forced to sell a majority stake in the fields—roughly 63 percent—to the state-owned Russian company Gazprom.47 Another state-controlled company, Rosneft, announced in October 2012 that it had acquired all of TNK-BP for $61 billion, billable to the Russian state; analysts described that deal as having no economic logic. As economist Anders Aslund put it, “The gravest concern is that TNK-BP, a well-managed and successful oil company, may be nationalized for no other reason than Kremlin intrigue.”48

  Where business dealings occur on terms that go well beyond purely market means or profit logic, it imposes a class of international commerce fundamentally out of reach for private firms; it also creates a new front for diplomacy that, for better or worse, will exclude many countries, including the United States.

  In more extreme cases, such geoeconomically minded deals can change how entire markets operate, especially in strategically important sectors. Take energy, for example. That Chinese energy insecurity poses national security risks—risks that Beijing has sought to mitigate through its international energy investments—is by now a widely agreed fact. Where such geoeconomic logic is present, it can compel a different sort of deal structure. Some states, led by Beijing, have chosen not to look to open markets to provide the best price, opting instead to tie-up long term supplies through state-led contracts with other governments—and typically marshaling all aspects of national power to secure the best terms.49 The fact that China may find itself unable to satisfy domestic demand in a wartime scenario, says Rosemary Kelanic, an energy expert at George Washington University, “casts a new light on China’s ‘going out’ initiatives to secure petroleum through equity oil arrangements and closer ties with exporters like Saudi Arabia.”50

  In some instances, this preference for state-led dealmaking may have a self-propagating quality, spurring other countries to nationalize defensively or at least supplying pretext for preexisting nationalization agendas. Ukraine’s reassertion in the energy sector was, according to some, necessary “to protect the country’s independence from the powerful and predatory energy producer next door.”51 Likewise, in mid-2012, the government of Argentina moved to nationalize Spanish energy firm Repsol’s Argentine assets on rumors that Repsol was in talks with Chinese state oil major Sinopec.52 This trend represents a fundamental challenge to prevailing assumptions about how global commodity markets operate, with vastly more geopolitical dimensions than has been the case for the last several decades.53

  CHANGE 4

  These geopolitically motivated deals can become important factors in a given state’s foreign policy calculus.

  The series of strategic investments China has made across Africa are instructive. Premier Li Keqiang announced during his May 2014 African trip that Beijing would expand its existing line of credit to several African states by $10 billion, to a total of $30 billion.54 Behind many of these investments lay important development objectives.55 Often the amounts actually delivered fall well short of those promised, but they are still substantial. And especially when funneled into weak and nondemocratic states, these sums can themselves come to influence the foreign policy orientations and perceived national interests of the governments committing them. In other words, means can quickly blur into ends. Despite its stated policy of nonintervention, in recent years Beijing has waded directly into the domestic political processes of several countries on the receiving end of significant Chinese investment, including Sudan, Zimbabwe, and Venezuela.56 Whether these investments are indeed a direct factor motivating China’s military modernization or simply strengthen the argument for those inside the Chinese Communist Party who have long called for such a spending priority, China’s military buildup is couched in terms of backstopping its resource investments overseas.57

  Sudan provides the strongest current example. Sudan, an oil importer before Chinese investment spurred development of its oil industry, now earns some $2 billion per year in oil revenues, half of which comes from China. Before South Sudan gained formal recognition as independent in 2011, nearly 80 percent of Sudan’s oil revenue went to the purchase of weapons for use in subduing separatist fighters in the South.58

  With Chinese assistance, the Sudanese government built three weapons factories near Khartoum. China has deployed about 4,000 troops to Southern Sudan to guard an oil pipeline, and it has reaffirmed its intention to strengthen military collaboration and exchanges with Ethiopia, Liberia, Nigeria, and Sudan. Beijing has thus far stymied UN Security Council efforts to intervene in eastern Sudan’s ongoing violence. At the same time, China has rapidly expanded its role in UN peacekeeping efforts, with more than 2,000 Chinese participating in ten peacekeeping missions as of 2014 (and a pledge to permanently contribute 8,000 troops to UN peacekeeping). This makes China not only Africa’s largest trading partner but also the largest provider of peacekeepers to Africa of any of the five permanent members of the UN Security Council.59

  Apart from exerting pull momentum for China’s military buildup, these resource investments in less than creditworthy regimes beg the question of how China would respond should any of these investments fail. Given the poor credit record of many of these countries, it is not clear why China would be any more immune from risks of expropriation or default than other sovereign creditors. Nor is it obvio
us that Beijing has always weighed its risks appropriately.60

  According to one study, released in fall 2013 by the RAND Corporation, Beijing has tended to ask “financially-pressed borrowers … for concessions or accommodations such as according favorable access to Chinese investors, or granting wider scope for the number and activities of China’s Confucian Institutes that expand awareness and understanding of China’s culture and language. Other concessions linked to debt-forgiveness or extended or refinanced loans may involve the granting of geopolitical port-of-call and refueling rights for People’s Liberation Army naval vessels, or landing rights for PLA air units.”61

  One of the biggest such tests for China came in January 2012, when an oil-sharing dispute between Sudan and South Sudan prompted South Sudan’s government to halt oil production and expel the head of a major Chinese state-led oil company from the country for “noncooperation.” With significant oil supplies and investment at stake—China accounts for 82 percent of South Sudan’s oil exports—China could not avoid getting “uncomfortably drawn into the high-stakes conflict between north and south.”62 Beijing’s envoy for African affairs, Liu Guijin, was dispatched to break the deadlock, warning that if the two sides failed to resolve the problem, the “whole region would be affected; the repercussions would be very serious.”63

  Such adventurous dealmaking may prove a good thing, pulling Beijing toward more constructive, hands-on diplomacy in brokering crises. What is clear is that Beijing will face an increasingly difficult task in clinging to nonintervention as an ordering principle for its foreign policy.

  CHANGE 5

  Many of these contracts, often negotiated autocrat to autocrat, seem designed to bolster the respective regimes in question, often proving effective.

  Deals, especially bad ones, can be easier to negotiate autocrat to autocrat, unencumbered by the same levels of transparency or scrutiny that democratic publics tend to demand. In these cases, the terms might well come with financing for an important political goal. Early in 2012, as former Venezuelan president Hugo Chavez was gearing up for presidential elections, the Venezuelan state oil company PDVSA accepted an oil-backed loan of $1.5 billion from Chinese state-run bank ICBC for new housing construction projects (to be built by CITIC, China’s largest state-owned investment company). The projects were seen in Caracas as an important part of Chavez’s campaign strategy. Worse, PDVSA was forced to sell a 10 percent stake in one of its most promising joint ventures (with Chevron) to CITIC as part of the deal.64

  The same basic plot lines are found in states where China and Russia have embraced various autocratic regimes hostile to the West, such as Belarus, Uzbekistan, North Korea, Zimbabwe, Sudan, Angola, and, until recently, Myanmar. These deals and other forms of support are clearly motivated by material interests, whether China’s need for oil or Russia’s reliance on the sale of conventional weapons and nuclear reactors as important revenue sources. Some analysts see Russian and Chinese support for nondemocracies as motivated more or less exclusively by material factors (a fact that hardly makes China or Russia unique, some note, pointing out that Ethiopia, for instance, has for years been among the top recipients of U.S. assistance dollars, even though it is not a democracy). Others see more to it. “Defending these governments against the pressures of the liberal West,” Robert Kagan explained a decade ago, “reflects their fundamental interests as autocracies.”65

  Parsing motivations misses the larger point. Regardless of what, if anything, can be said for the origins of these deals, the fact is that some of today’s leading practitioners of geoeconomics, notably (but not only) Russia and China, also rank as the most important business partners and financing sources for some of the world’s most brutal autocrats, typically in ways that strengthen the domestic political strength of these regimes. China, concerned about preserving access to oil in the event of a confrontation with the United States, seeks improved relations with the governments of Venezuela, Sudan, and Angola, all out of favor with the West, and prioritizes ties with the former military dictators of Myanmar in exchange for access to port facilities.66 And with the People’s Republic of China (PRC) in a constant struggle for votes at the United Nations to promote its positions relative to Taiwan and Japan, it makes sense that Beijing courts leaders such as Zimbabwe’s Robert Mugabe, another autocrat who stands in pointed opposition to the West.67 To be sure, few if any of these countries make for natural allies. But as nondemocracies, China and Russia have important interests in common, both with each other and with other autocracies—interests that, returning to Kagan, “are under siege in an era when liberalism does seem to be expanding. No one should be surprised if, in response, an informal league of dictators has emerged, sustained and protected by Moscow and Beijing as best they can.”68

  CHANGE 6

  Once-distinct security and economic tensions tend to reinforce each other to a greater degree than in previous eras.

  As argued above, states are now more often opting to flex geopolitical muscle in economic terms—in short, adopting geoeconomic approaches. This is not to slight recent shows of military force—Russia’s invasions of Georgia in 2008 and Crimea in 2014, for example, or Chinese aggressive naval behavior in the South and East China Seas, not to mention the American-led wars in Iraq and Afghanistan. But increasingly states are airing disagreements with foreign policies in economic terms, from export bans on key commodities to cyberattacks on a country’s banking sector. As this occurs, it means that economic and security tensions risk reinforcing each other. Cases of economic drivers motivating security tensions—access to critical resources as a leading example—are not new. Increasingly, though, security challenges that themselves bear no great economic content are nevertheless managing to provoke economic disruptions.

  This is especially true in East Asia. One possible explanation for the region’s growing security tensions lies with China’s perception of its own economic strength—namely, a belief that the United States, Japan, and Korea are now too economically dependent on China to resolutely stand behind existing security commitments, a doubt often raised in the Western media. This in turn emboldens more aggressive behavior. In this light, some see the fact that China’s initial challenges to the Asian security status quo came in 2009—amid the world’s largest financial crisis in seventy years—as more than coincidence.69

  It is impossible to know where these trends are headed. Much will depend on how the United States, as the world’s reigning superpower, comes to understand and respond to them. This recognition is likely to be impacted by the fact that while many states are repurposing economic tools for geopolitical use, the United States is moving in the reverse direction. It is true that Washington is taking a more active foreign policy interest in the international economic arena, but for reasons that have far more to do with the economic welfare of the United States than with geopolitical outcomes. There is a growing (and, in our view, accurate) recognition in the United States that, more than ever, U.S. foreign policy must be a force for economic renewal at home. In fact, some speculate that in the decades to come, America’s economic performance will grow more important to its geopolitical fortunes than its possession of nuclear weapons or its seat on the UN Security Council.70 This is partly a story of how financial crises and their resulting economic insecurity can come to preoccupy foreign policy debates.71 And it is in part a cautionary tale of how two prolonged and expensive wars have affected the United States in recent decades and how, as a result, cost considerations of major American military engagement now preoccupy U.S. policy makers.

  Shoring up U.S. competitiveness will require a thoroughly reformed manifestation of U.S. diplomacy. Though America’s growing interest in foreign policy as an engine of domestic economic revival is well founded, it is no substitute for coming to terms with the widespread reemergence of geoeconomic statecraft. Washington must still reckon with the rest of the world’s move in the inverse direction—toward putting economic and financial instruments in th
e service of geopolitical goals. There will be trade-offs. But as with most things, understanding the nature of the exercise in which one is engaged tends to boost the odds of success. In Chapter 3, we look at the leading instruments of geoeconomics and the underlying variables that determine their effectiveness.

  CHAPTER THREE

  Today’s Leading Geoeconomic Instruments

  In one brief sentence … monetary policy is foreign policy … and that is still my view today, very much more than previously.… [I]t is not only domestic policy, but also definitely foreign policy.

  —HELMUT SCHMIDT, FORMER GERMAN CHANCELLOR

  THIS IS not the first time geoeconomics has enjoyed ascendancy in global geopolitics, but it might as well be. Compared to previous eras of geoeconomic salience—many point to the early postwar years as typified by the Marshall Plan and the initial stages of the Cold War—the world looks much different.1 Some of today’s favored geoeconomic tools, such as cyber, did not exist in Marshall’s day. Others, such as energy politics, while not new, are operating in such a vastly different landscape as to render them as good as new. Still others of these instruments, with development assistance as one example, function more or less as they did in earlier eras. Even these, though, have attracted important new players and dimensions.

  Today, seven economic tools are, at least in theory, suited to geopolitical application: trade policy, investment policy, economic and financial sanctions, cyber, aid, financial and monetary policy, and energy and commodities. We survey each instrument below, again aiming to take only the geopolitical as opposed to the purely economic measure of each.