War by Other Means

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War by Other Means Page 13

by Robert D Blackwill


  The reason most often cited for why any large-scale sell-off is unlikely is that it is economically irrational, as it would affect the value of the seller’s holdings. This, though, assumes an economic lens on a question that may well be motivated by geopolitical interests. Most people think nothing of it when countries spend billions of dollars developing and deploying military weapons systems. If, say, Russian president Vladimir Putin is looking to invest $100 billion in blunting the power projection capacity of NATO and the EU, why is it seen as so forthrightly rational to spend this sum on weapons that are unlikely to alter the balance of military power in the region, but somehow irrational to spend the same $100 billion to undermine the ability of Ukraine’s new government to borrow at reasonable rates and thus its capacity to resist Russian demands? For many states, if the aim is geopolitical rather than economic return on one’s investment, it is far from clear that investment in military hardware is the wiser of the two choices.

  There may be reason to hope that as China internationalizes the RMB and finds itself in the position of having sovereign creditors for its sovereign debt, the prospect of direct reciprocity may further raise the costs of geopolitically motivated buying or selling of debt. A notable step in this direction unfolded in March 2012, when Japan became the first major developed country to receive Beijing’s blessing to invest in Chinese sovereign debt (a handful of other countries have since followed suit). More recently, the IMF announced in November 2015 that it would include the RMB in its basket of currencies which comprise the IMF’s Special Drawing Right, or SDR.

  But rising stockpiles and purchases of reserves still means expanding geopolitical influence. Consider announcements by Chinese officials in the first half of 2015 outlining plans to recycle the country’s reserves into several of Beijing’s signature foreign policy projects, including its “New Silk Road” initiative and its Asian Infrastructure Investment Bank.213 And the concentration of U.S. (and to a lesser extent eurozone) liabilities in the hands of a few sovereigns carries certain risks and vulnerabilities, which necessarily come with geopolitical consequences. Even though any wholesale sell-off of U.S. Treasuries has drawn analogies to mutual assured nuclear destruction (and the possibility is therefore extremely remote), when any single creditor holds a substantial enough potion of the total marketable pool of a given U.S. security, it may be able to cause undesired shifts in these markets without harming its economic interests—or without even necessarily bearing any malign intent.

  National Policies Governing Energy and Commodities

  In 2006 and again in 2008, Russia suspended gas supplies to parts of Europe amid a political dispute. In all, Russia has brandished or acted upon this threat more than fifty times since the dissolution of the Soviet Union according to analysis.214 Part of the Kremlin’s strategy in building Novorossiya, or New Russia, has been to match its diplomatic embrace with deals and investments in key commodity sectors. In January 2014, Gazprom took control of Armenia’s state gas company, even renaming it Gazprom Armenia. In April of that year, it paid $1 for Kyrgyzstan’s gas company, now called Gazprom Kyrgyzstan. Analysts say the push is geopolitical. “What’s the economic purpose of Gazprom acquiring the Kyrgyz gas network? It’s clear that the goal there was strategic,” explains Columbia University’s Alexander Cooley.215 The gas deals are matched by similar Russian state investments in nuclear, hydroelectric, and oil sectors across Russia’s “near-abroad”—leading one former Kyrgyz member of Parliament to complain that these sales have turned Kyrgyzstan into a “client state of the Kremlin.”216

  Increasingly, Moscow is extending this reach beyond its “near-abroad.” Russia is fast “becoming the nuclear Wal-Mart of the Middle East,” as one expert put it, positioning itself as the main supplier of no-strings-attached nuclear power technology in the Middle East.217 After landing a flurry of nuclear cooperation agreements with Egypt, Jordan, Algeria, and Saudi Arabia, Russia broke ground on its first nuclear power plant in Turkey in April 2015. For Russia, at least some of these deals seem to defy commercial logic.218 But for states on the receiving end of this Russian nuclear technology, it is cheaper and faster than Western alternatives, and, unlike the United States and other Western partners, it comes unencumbered by certain conditions on nonproliferation.219

  The tendency to put energy and commodities to geopolitical use is not uniquely Russian. In fact, many of these same central Asian countries are balancing Russia’s tightening embrace through energy deals with China. A week before signing the Eurasian Economic Union into existence in May 2014, Kazakh president Nursultan Nazarbayev announced a string of energy deals with China. Nazarbayev used the joint press conference with Chinese president Xi to reiterate that “both Kazakhstan and China have much common ground on major issues” and, in an unsubtle message to Moscow, that “both sides stick to the principle that countries have the right to choose their own development path.”220

  Thus far, China has not evinced any real desire to use its economic weight to challenge Russia geopolitically in Central Asia.221 However, in conversations with leaders in the region, it is clear that this possibility weighs heavily on their minds.222 Certainly, Beijing has not shied away from energy and commodities as instruments of geopolitics in other parts of the world. China in 2010 enacted export bans on rare earth elements as a means of registering dissatisfaction with the policies of neighboring countries around the South and East China Seas. In 2012, again amid tensions in the South China Sea, China National Offshore Oil Corporation chairman Wang Yilin characterized China’s deepwater rigs as “mobile national territory and a strategic weapon.”223

  But leverage can be fickle, and healthy appetite is the next best thing to market share. China’s energy and resource scarcity is a crucial driver of global politics in the post–Cold War era.224 And it is no doubt a strategic vulnerability. At the same time, though, and perhaps counterintuitively, the sheer size of China’s resource appetite also functions as a form of geopolitical leverage. To understand why, consider America’s oil dependence. A major reason the United States has influence in the Middle East—the reason oil is pegged in dollars—is that America is among the largest consumers of the region’s oil exports.225 But a more limited U.S. appetite for Middle Eastern oil, either because the United States is using less oil or because it is securing oil domestically, may mean diminished geopolitical sway in the area and perhaps an eventual decision in the distant future by some of the countries to price oil in RMB rather than U.S. dollars.

  States enlist energy or commodities to help with all sorts of geopolitical needs. The totemic case tends to be fairly overt coercion—an image initially formed by the Gulf petropolitics that played out in the 1970s Arab oil embargo and then reshaped by Russia’s pipeline politics in more recent years (though there are other examples, including China’s periodic threats to cut off fuel supplies to North Korea amid geopolitical spats).226 In April 2014, with tensions over Ukraine still mounting, in place of a customary letter from the head of Gazprom to counterparts at European gas firms came instead a letter from President Putin addressed not to these firms but to eighteen European heads of state. In it, Putin openly suggested that European gas supplies were at risk of a shutoff.227 As often is the case, though, this geoeconomic coercion need not be threatened explicitly to be effective. In fact, the mere prospect that Russia might use gas supplies to Europe as a weapon in its standoff over Ukraine was enough to temper EU policy.

  But energy and commodities need not be coercive at all to make for effective geoeconomic tools. For some, they can be an insurance policy of sorts. Qatar, long obsessed with maintaining its autonomy and survival in a tough neighborhood, now supplies 85 percent of the United Kingdom’s natural gas needs—a fact that would surely weigh in Doha’s favor should the United States, the United Kingdom, or NATO ever find itself in the position of needing to prove its security commitments regarding the tiny country.228 For others, pipeline politics are neighborly shows of enlightened self-interest.
In a bid to shore up friendly Sunni monarchies in its neighborhood, Saudi Arabia has allowed the Bahraini government—traditionally more popular with Bahrain’s Sunni population—to produce oil from a Saudi field “on loan” to Bahrain.229 Finally, in still other cases, the geoeconomics of energy can be more about collateral consequences. In its quest for oil China sold twelve oil tankers to Iran, even with sanctions against Iran in place. With each tanker capable of carrying 2 million barrels of oil in the years ahead, Iran will presumably continue oil exports to China, among other countries—thereby better insulating itself from the United States.230

  Leading Geoeconomic Endowments

  If a central question is how states work their geopolitical will in the world through the application of economic leverage, then at least as important as the tools and tactics—aid dollars, sanctions, trade policies, and the like—are the underlying geoeconomic capabilities and attributes that help explain whether these instruments work. In other words, just as not all states are created equal in terms of their capacity to project military power, there are certain structural features—or geoeconomic endowments, as we call them—that dictate how effective a country is likely to be in the use of geoeconomics.

  ENDOWMENT 1

  Ability to control outbound investment.

  First is a state’s willingness and ability to put domestic capital to geopolitical use—be it outbound portfolio investment or outbound FDI, debt or equity. Across several of today’s rising powers, governments control not just vast sums but a growing array of mechanisms for channeling this investment: state-owned investment vehicles for deploying reserve assets, sovereign wealth funds, state-owned banks, and state-owned enterprises, to name a few. These mechanisms also tend to be mutually reinforcing.231

  Many of the cases involving the use of investment as a geoeconomic tool are distinctly ill-suited to several countries, including the United States. A mix of legal, political, economic, and cultural factors renders it highly unlikely that the United States would create a sovereign wealth fund at the national level, for instance. And compared to the more traditional investment tools that are more universally available to states (for example, free trade agreements, or FTAs, and bilateral investment treaties, or BITs), many of today’s geoeconomic tools differ in two key respects. One, they are often direct rather than indirect conduits for the state—that is, FTAs and BITs channel investment only insofar as they shape the choices of private sector actors. And on balance, private sector actors are far less likely to pull out their investment over foreign policy disputes. But today’s SWFs, state development banks, and SOEs are taking orders from their government owners, whose motivations may not always be primarily commercial. The fact that nearly all top executives of Chinese SOEs have red “Party phones” (and Russian SOEs have similar “white phones”) on their desks, or that many of these SOEs would be loss-generating if stripped of their subsidies, would seem to support the idea that SOE decisions are made within the province of Party officials, whose motivations go beyond revenue and profit.232

  This key difference in turn helps to account for a second: direct economic channels tend to retain their geopolitical value far better than indirect channels. The fact that, for example, Moscow, Riyadh, or Beijing can reroute substantial sums in investments if a country makes a choice at odds with the major power’s national security interests can confer leverage long after the investment is made. As alluded to earlier, the patterns of Gulf financing to Egypt across the various stages of Egypt’s revolution and counterrevolution punctuate the point, as Saudi and UAE financing abruptly halted following the ouster of President Mubarak, never to return during the year that the Muslim Brotherhood drove the country’s political process. Within days of the Egyptian military’s ouster of President Morsi, however, Saudi and UAE pledges of state-led investments (apart from pure assistance dollars) reappeared, reaching into the tens of billions.

  By contrast, in the case of FTAs or BITs, it is highly unlikely that a country could “turn off” an FTA or otherwise reroute trade or investment flows it enables, once such agreements become a matter of domestic and international law. While the WTO does have a national security exemption that member states could invoke, as a practical matter the fact that no state has ever done so does not inspire confidence as to its relevance.

  ENDOWMENT 2

  Domestic market features (overall size; degree of control over one’s domestic market, both in dictating terms of entry and in controlling import levels from a given sector or country; asymmetries in economic relationships with other states; perceptions of future growth).

  As Chapter 4 highlights, China’s geoeconomic performance is in part a story about the advantages of size and speed. The fact that, as former foreign minister and current state counselor Yang Jiechi put it, “China is a big country and other countries are small countries” may work to its advantage in using economic instruments in pursuit of the country’s geopolitical objectives.233

  Size may still matter, but this is less true in geoeconomics than in traditional geopolitical and military realms. Singapore and Qatar are two of the strongest examples.234 Singapore punches far above its weight with its two primary SWFs, Temasek and the Government of Singapore Investment Corporation (GIC), accounting for 60 percent of the $23 billion in cross-border deals by global SWFs in early 2014. Along with the country’s central bank, the Monetary Authority of Singapore, the two SWFs generate the financial returns necessary to sustain the tiny city-state’s nearly $10 billion defense budget.235 Qatar—a country smaller in size than the state of Connecticut and with a population (of 260,000 citizens) on par with JPMorgan’s workforce—emerged as a pivotal player in nearly every violent revolution to unfold in the Middle East since 2011.236

  Beyond sheer size, sums, and growth rates, four more variables help explain a country’s ability to translate its domestic market into geopolitical leverage: ability to exercise uniquely tight rein over access to domestic markets, capacity to redirect domestic import appetites to make a geopolitical point, actual or perceived consensus that a country’s domestic market is too large to ignore (this, of course, especially applies to China and is merely a regional dynamic in the case of Russia), and a growth trajectory that makes other countries see rising future costs to opposing its foreign policy interests today. Of the various geoeconomic instruments currently in use, these domestic market features are probably most relevant in determining how fruitful particular trade and investment policy and sanctions efforts will be in producing geopolitical benefits.

  ENDOWMENT 3

  Influence over commodity and energy flows.

  There are three basic variables that determine how successfully a country can, through its energy policies, influence its geopolitical standing: monopoly power (market ownership, as with OPEC members), monopsony power (purchasing power, as with the United States and China), and centrality as a transit point between major buyers and sellers (e.g., the Suez Canal, as a major international oil route, enhances Egypt’s strategic relevance). All three are undergoing serious shifts. The shale revolution generally, and the ascendance of the United States as a net energy exporter in particular, places new pressures on an already strained OPEC that could ultimately dissolve the cartel.237 As growing energy appetites in China, India, and elsewhere come to absorb sizeable shares of a given country’s exports—and as these deals take the form of multiyear bilateral contracts between states—this purchasing power can come with new sources of geopolitical leverage for the importing country. Consider the 2014 deal between Russia and China finalizing the terms of a thirty-year gas supply contract: it was Beijing’s purchasing power and geopolitical importance to Russia that ultimately gave China the upper hand, finally steering the agreement to completion after a decade of negotiations. Finally, long-standing transit arteries—the Panama Canal, the Strait of Malacca, the Strait of Hormuz, gas thoroughfares in central Asia—may become more or less strategically important as new sources of supply begin to redraw e
xisting trade and demand patterns.

  ENDOWMENT 4

  Centrality to the global financial system (e.g., reserve currency status, some forms of financial sanctions).

  The reason that the dollar’s global footprint carries greater geopolitical benefits for Washington than, say, the Peruvian nuevo sol does for Lima is the same reason that U.S. sanctions carry greater bite than would similar sanctions from Peru: a vast share of global transactions directly touch, or at least rely upon, the U.S. financial system in some way. But this is changing.238 Countries that have large, systemically vital financial sectors also tend to have a relatively easier time raising and mobilizing capital at low borrowing costs, and relatively greater ability to impact another country’s borrowing costs.239 At the same time, the link is easily exaggerated, as policy choices (e.g., fiscal health) and asymmetric dependencies (e.g., banking exposure) can of course also weigh heavily on a given geopolitical landscape. And again at the opposite end of this spectrum, North Korea has proven how a lack of financial market integration can be advantageous, at least for countries on the receiving end of geoeconomic coercion. In early 2015, after President Obama leveled new sanctions on North Korea following the cyberattack on Sony Pictures, U.S. Treasury officials privately admitted that their newfound power to implement sanctions would amount to little; their problem was not a lack of power but a dearth of targets. North Korea has shown itself highly resilient and creative in the face of sanctions, ironically aided by its own self-imposed isolation from global markets.240

 

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