Putin thrilled as Trump puts coal in Mattis’s stocking
China sees opportunities but remains cautious
Hi folks,
Donald Trump’s wild week will, once again, affect both China and Russia.
This week Donald Trump: criticized the Special Counsel’s investigation; broke a long-standing norm and attempted to intervene in monetary policymaking; closed the Trump Foundation amid accusations of fraud; proclaimed the defeat of ISIS; withdrew troops from Syria and abandoned the US’s Kurdish allies after consultations with their archrival; announced his Defense Secretary’s resignation; withdrew half of US forces from Afghanistan; insulted Secretary of Defense James Mattis after he watched cable TV and realized Mattis’s resignation criticized Trumpism; presided over a government shutdown; and, finally, claimed to not know Brett McGurk, the government’s emissary to combat ISIS.
Patrick Shanahan will become the acting Defense Secretary on January 1st. Not much is known about Shanahan, although he used to be a Boeing executive and has been a key supporter of the US space force. Mattis selected Shanahan to be his deputy; Shanahan therefore likely believes Great Power competition is the defining US/Western security challenge.
Steve Mnuchin of the Treasury Department issued a bizarre statement on Sunday night noting sufficient liquidity for the nation’s six largest banks, likely startling investors and markets. Markets were not concerned about a liquidity crisis before the weekend. Mnuchin is a Goldman Sachs alum and, presumably, no fool. He knew his “reassurances” would likely alarm investors. Are Mnuchin/Trump trying(?) to stimulate a mini financial crisis(??) and deter the Federal Reserve from raising rates? It is unclear if this bold strategy will pay off.
Any economic/financial difficulties will exacerbate Trump’s legal and political problems, which already appear quite grim. This has been a bizarre, exhausting week. But things will get even weirder and darker.
How does Trump’s chaos affect China and Russia?
Konstantin Kosachev [of Russia’s Foreign Affairs Committee] said the departure of Secretary Mattis is a “positive” sign for Russia, since Mattis was far more hawkish on, quote, “Russia and China” than Donald Trump. Chinese state media was somewhat more circumspect. The state-run People’s Daily used the resignation and government shutdown to reinforce China’s messaging that Trumpian dysfunction and unreliability imperil US allies.
Donald Trump’s decision to withdraw combat personnel from Afghanistan will likely lead Russia and China, along with various other actors, to increase security engagement in Central/South Asia. As noted previously in The Report, Russia has reinforced security contacts with India even before Trump’s Afghanistan announcement. Trump’s decision to reduce troop levels in Afghanistan add yet another dimension to Sino-Russian ties and will make the politics of Central/South Asia much more complicated.
[Sidebar: Trump’s motivations are unclear, but there’s a very strong argument that, in the age of Great Power competition, the US/West should have reduced its military presence in Afghanistan several years ago.]
Watch Chinese stock markets closely over the next week. The Communist Party leadership could be furious if Trump’s actions precipitate a stock market rout on Chinese exchanges. On the other hand, the Chinese leadership may be more inclined to negotiate a truce to the trade war if domestic financial difficulties appear more serious. Finally, domestic and international financial markets may ignore Mnuchin and Trump.
Trump’s behavior may also shift the calculus of US political actors: Senators from both major political parties expressed alarm over Secretary Mattis’ resignation. Expect both the Senate and the House of Representatives to assert greater influence over foreign policy in the near future. The probability of additional House/Senate sanctions on Putin may have increased this week due to Trump’s actions.
Next week the report will identify some themes for 2019. We’ll also, as promised, provide more information on Sino-Russia 5G connections in a future edition.
The Report wishes everyone a happy holiday week and a Merry Christmas.
China – Russia
俄媒:中俄合研超重型火箭发动机 俄不担心被仿制- People’s Daily Russian Media: China and Russia collaborate on researching super-heavy rocket engines. Russia isn't afraid of being imitated. (Chinese)
“"Should Russia share secret rocket technology with China?" Russian "Viewpoints Newspaper" on the 17th says, the Russian "power machinery" research and production association announced they have already decided to jointly research and develop super-heavy rocket engines with China, but this decision must first receive approval from the Russian government. At the moment, Russia has refused Chinese requests to share this technology.
According to reports, Russia's "power machinery" company revealed, that during the Zhuhai Airshow in November, they signed a research, development and production collaboration agreement with their Chinese counterparts related to liquid oxygen-kerosene, liquid hydrogen-liquid oxygen, and liquid oxygen-methane rocket engines. "Chinese partners have expressed significant interest in designing 480-ton rocket engines." According to the same reports, everything currently depends on the Russian government: whether they authorize or prohibit cooperation with China in the field of super-heavy rocket engines.
The editor of the Russian Northeast-Asia military research project said, China has made great progress in super-heavy rockets, and that the independence of Chinese engineers should not be underestimated. A Russia-China collaboration to develop super-heavy rockets would be beneficial for both countries. He also said, China will not heavily rely on Russian technology and capabilities.”
China and Russia band together on controversial heating experiments to modify the atmosphere - SCMP
“China and Russia have modified an important layer of the atmosphere above Europe to test a controversial technology for possible military application, according to Chinese scientists involved in the project.
A total of five experiments were carried out in June. One, on June 7, caused physical disturbance over an area as large as 126,000 sq km (49,000 square miles), or about half the size of Britain.”
Legislator hails Pentagon chief’s resignation as positive sign for Russia –TASS
“Chairman of the Russian Federation Council’s (upper house of parliament) Foreign Affairs Committee Konstantin Kosachev has said that the departure of US Secretary of Defense James Mattis is a positive signal for Russia, since Mattis was far more hawkish on Russia and China than US President Donald Trump.”
Comment: Kosachev repeats the phrasing “Russia and China” several times.
因不掌握具体情况俄不回应干涉美国政治指认 – Xinhua (Chinese language)
“Russia does not respond to US political interference [accusation?]”
Comment: The story mostly quotes the various actors involved in the story [mostly quotes from Peskov, Putin’s press secretary] with little commentary.
俄宣布将在北极增兵 军人宿舍与航空设备已完工 – People’s Daily Russia announces that it will increase its troops in the Artic (North Pole); Military quarters and aviation equipment have already been completed. (Chinese)
"Moscow seeks to exert influence in the Arctic Circle. The Russian Defense Ministry indicated on the 18th that it will expand troops stationed in this strategic area next year."
According to reports, as the temperature rises, the Arctic channel will gradually open up, making the mining of minerals easier than in the past. Russia has become increasingly more interested in the Arctic Circle, and has in recent years has built a series of military and scientific bases in the Arctic."
俄专家:土耳其“爱国者”上或藏木马 会全部失灵 – People’s Daily Russian Expert: Turkey's "Patriot" (missile defense system) has a concealed trojan horse; it will completely fail. (Chinese)
"According to a December 19th "Russian Satellite News Agency report," the director of the Russian World Arms Trade Analysis Center said that the United States has agreed to sell "Patriot" anti-missile defense systems to Turkey. This measure is intended to undermine Russia and Turkey's transaction of S-400 air defense missile system, in hopes of avoiding a potential loss of influence over NATO member state Turkey.
He also pointed out, America probably has sabotaged the software and hardware of the "Patriot" anti-missile defense system it sold to Turkey. Once the US and Turkey have a conflict, America will activate the trojan horse. He said, "if the relationship between the United States and Turkey deteriorates, Washington can activate it via radio signals, causing the entire Patriot" based Turkey air defense system to be made inoperable. This is a trojan horse, and Ankara needs to realize the dangers of purchasing the American anti-missile defense system.””
China – Europe
中国对欧盟政策文件 – Xinhua (Chinese language)
China’s policy towards the European Union
[Comment: the policy is arranged in the following order. As is customary, the most important elements are listed first. There’s the usual hectoring about Taiwan, Hong Kong, and Tibet. Curiously(?), Xinjiang is not mentioned in the “guiding principles” section or anywhere else in this document.]
1. Guiding principles for developing China-EU relations
2. Cooperation in the fields of politics, security, defense, and other areas
3. Cooperation in trade, investment, finance, finance and other fields
4. Cooperation in research and innovation, emerging industries, sustainable development, etc.
5. Cultural, society, and other areas
“The process of European integration is a product of European countries and peoples pursuing peace and uniting themselves. As the world's most integrated and comprehensive national conglomerate, the EU is an important strategic force in the international landscape. Although EU development has been affected by events such as Brexit in the recent years, the EU has not changed its integration direction and continues to work to promote reforms and meet challenges, playing an important role in regional and international affairs.
Both China and the EU are important participants and shapers of the world's multi-polarization and economic globalization. They share broad common interests in safeguarding world peace and stability, promoting global prosperity and sustainable development, and promoting the progress of human civilization. They are also reforms. An indispensable partner with development. The EU has maintained China's largest trading partner status for 14 consecutive years, and China is the EU's second largest trading partner. Developing good relations with the EU has always been one of the priorities of China's diplomacy…
China hopes that the United Kingdom will proceed from the EU in an orderly manner and is willing to promote the parallel development of China-EU and China-UK relations…
[The EU should?] adhere to the commitment to respect China's sovereignty and territorial integrity, adhere to the one-China principle with practical actions, respect China's core interests and major concerns, and the long-term stable development of China-EU relations.
The EU and member states should lift the arms embargo on China as soon as possible.
Support, exchange and cooperate in the construction of “Digital China” and the construction of the EU single digital market. We will use the mechanisms of China-EU information technology, telecommunications and information dialogue, and the China-European digital economy and network security expert working group to deepen 5G cooperation and promote technical exchanges in the fields of digital economy, Internet of Things, Internet of Vehicles, Industrial Internet, artificial intelligence, and smart cities.
Strengthen policy dialogue and pragmatic cooperation in areas related to climate change in China and Europe, strengthen cooperation in carbon emissions trading, and exchange and cooperation on climate change and low-carbon development at the urban level. Adhere to the principles and regulations of the UN Framework Convention on Climate Change, work together to promote the follow-up negotiations and effective implementation of the Paris Agreement, actively build and improve the global climate governance system, and jointly promote green, low-carbon and sustainable development.”
Hacked European Cables Reveal a World of Anxiety About Trump, Russia and Iran - NYT
“The techniques that the hackers deployed over a three-year period resembled those long used by an elite unit of China’s People’s Liberation Army. The cables were copied from the secure network and posted to an open internet site that the hackers set up in the course of their attack, according to Area 1, the firm that discovered the breach.”
“In a new China Monitor, Scott W. Harold, political scientist at RAND corporation and MERICS visiting fellow, explores five scenarios for how China’s interaction with the new initiative might develop. China has traditionally viewed the EU as an “important strategic partner” in the promotion of a “multi-polar international order.”
Harold notes the potential value of the integration efforts to China as a “reinsurance policy” against the United States. Should the project deepen trans-Atlantic divisions, “Beijing may seek to encourage breakdowns in trust between Washington and Brussels,” Harold writes…
As one recent analysis of China’s relations with US allies and European partners put it, China wants to “weaken Western unity, both within Europe and across the Atlantic.” These aims could be well served by a major EU-US rift. Equally, China could lose out if a stronger Europe increased US willingness to support the liberal international order, or if the EU took up the mantle of the defender of global liberalism. China prefers a “stable – but pliant and fragmented – EU.” …
Importantly, they found that the majority of respondents obtained their information about the EU primarily from consuming PRC state media, meaning that their impressions reflected positive propaganda images of the EU. In recent years, however, open source media reporting has found growing skepticism about the EU’s future among Chinese elites.
For example, speaking to Deutsche Welle in late 2015, Qiu Yuanlong of the Chinese Academy of Social Sciences (CASS), highlighted the EU’s mounting problems of debt, deep diplomatic divisions, and a weak and disorganized military policy. Recent work by Chang and Pieke has updated this view, noting that the 2016 Brexit vote and rising right-wing nationalism have led to a growing sense of pessimism about the EU’s prospects and ability to solve problems in interna- tional society. They also note diminished confidence in the EU’s capacity to act as a new “pole” in a multipolar order, something the Chinese government sees as desirable in countering American hegemony.”
Comment: Excellent article.
“Ukrainian reserve soldiers brave cold to participate in military training”
Comment: (图片来源:视觉中国) [picture source: Visual China]. So Chinese observers attended the exercises at the Ukrainian military’s invitation? Quiet messaging to the Kremlin?
Looking for China’s spies – BBC
US and UK accuse China of sustained hacking campaign – The Guardian
Russia – Asia
“Japan is confronted by a shortage of fighter aircraft as China and Russia have both been simultaneously increasing their military presence in East Asia.”
Russia Is Building Military Barracks on Disputed Kuril Islands – Franz-Stefan Gady for The Diplomat
North Korean nuclear crisis settlement continues under Russian-Chinese plan, says diplomat – TASS
Central and South Asia
Turkmenistan: The weight of this sad time we must obey – Eurasianet
“There was some good news about the China-Central Asia gas pipeline. Kazakhstan’s Deputy Energy Minister, Magzum Mirzagaliyev, announced on December 11 that the route’s annual capacity had increased by 5 billion cubic meters to 55 billion cubic meters following the construction of two new compressor stations. Regrettably for Turkmenistan, it appears most of this new capacity will be reserved for Kazakh exports.”
Comment: This piece is from August, but I just came across it this week. Very relevant in the context of a potential Power of Siberia 2/Altai gas pipeline. Observe Turkmenistan very, very closely. Also worth noting that Russia/Gazprom in October announced plans to resume imports of Turkmen gas.
Report: Hackers detect online protest-sniffing software in Kazakhstan - Eurasianet
“Kazakhstan has reportedly adopted online software developed by Russia's security services and designed to detect protest moods among the population…
The Information and Communications Ministry has not commented publicly on the BBC Russian report. Restrictive government control over online space in Kazakhstan has had real-life consequences for countless internet users.
Many grumble that speeds slow down almost every evening in what is suspected to be an attempt by the government to limit access to live content produced by a hated opposition figure in exile.”
Uzbekistan, Kazakhstan To Launch 'Silk Visa' Program In February – RFE/RL
“Uzbekistan and Kazakhstan aim to launch a program dubbed Silk Visa, which will allow foreigners with visas issued by either of the two countries to travel in both Central Asian republics, an Uzbek official says…
Qosimhojaev also said that two other Central Asian nations, Tajikistan and Kyrgyzstan, had expressed interest in joining the program in future. Kazakhstan said earlier that it was working to attract Azerbaijan and Turkey to join the Silk Visa program, which is intended to ultimately function along the same lines as the Schengen visa system in Europe.”
India's role crucial for Afghan peace process: Pakistan – The Economic Times
“Speaking in the National Assembly on Monday, Foreign Minister Shah Mehmood Qureshi said Pakistan alone could not bring peace in Afghanistan as it was a "shared responsibility" of regional countries.”
Comment: Take overtures from Pakistan to India with a major grain of salt. On the other hand, there does seem to be growing popular anger and elite frustration within Pakistan over 1) the China-Pakistan Economic Corridor and 2) China’s (arguably very selfish) lack of commitment to Afghanistan’s stabilization.
As the highly influential PRC academic Dr. Yan Xuetong wrote in Foreign Affairs, “Consider the case of Afghanistan: even though it is an open secret that the United States expects the Chinese military to shoulder some of the burden of maintaining stability there after U.S. troops leave the country, the Chinese government has shown no interest in this idea.”
The PRC’s disengagement from Afghanistan, insensitivity to Pakistani interests, and treatment of Muslims within China (particularly in Xinjiang) could present opportunities for India in South/Central Asia. At the same time, growing religious majoritarianism within India and the historically fraught relationship between the two South Asian nations may constrain India’s foreign policy options.
The upcoming US withdrawal from Afghanistan will lead to changing regional dynamics: Russia, India, Pakistan, Iran and China will all, to one degree or another, attempt to fill the security void.
Afghanistan is becoming more important for Sino-Russian relations. Worth noting that Russia has been arming the Taliban for months.
China’s ‘Belt and Road’ Plan in Pakistan Takes a Military Turn - NYT
Comment: Long article, but worth a read. Pakistan is important from China’s perspective because of the port of Gwadar and the Beidou navigational system.
Chinese investments/loan extensions (debt traps?) in Malaysia, the Maldives, and Sri Lanka have produced political backlashes. Is Pakistan next? The Sino-Pakistan relationship already doesn’t enjoy much popular support within Pakistan, although the Pakistani security establishment is highly invested in the relationship.
Russia has security relationships with both India and Pakistan; it has strengthened security ties with India recently. If Russia increases its presence in Afghanistan it may become more involved in South Asian politics.
China
Xi challenged over direction of China’s economic reforms – FT
China’s Bizarre Program to Keep Activists in Check – by Jianying Zha for the New Yorker
“The truth is, I’ve wondered about the possibly corrupting influence of Jianguo’s tangled dealings with the police. That formula of Nietzsche’s comes to mind: If you gaze long enough into an abyss, the abyss will gaze into you. Had Jianguo’s experiences with bei lüyou instilled in him a measure of sympathy toward the officers entrusted with his fate? Was it having—in some small part—its intended effect? It’s plain that Jianguo’s years of arrests and imprisonment haven’t bent his will. In matters of principle, he has never backed down. He openly condemns the despotic rule of the party-state, and he refuses to stop writing or posting his criticism. But, when he’s in actual contact with the police, he responds to civility in kind. And here things get more complicated, because some police officers have gone further than civility. One officer told him, “I’ve read your book and my admiration for you is total.” The phrase he used, wuti-toudi, literally means “with four limbs and a head touching the floor”—admiration to the point of prostration.”
Comment [JDM]: One of the best pieces I’ve read on China’s Ministry of Public Security and its mission of “stability maintenance” in a long time. Wow.
How China Views the Arrest of Huawei’s Meng Wanzhou – by Jiayang Fan for the New Yorker
The [Opium] war taught China two lessons it has never forgot. The first was that it had failed to recognize the threat of Western technological prowess. While Britain was energetically cultivating the use of steam in the first industrial revolution—and the steam-powered ships that propelled its victory in the war—China had sequestered itself, falling behind in mastering the technology that became the modern world’s instrument of power. President Xi Jinping’s push for technological supremacy in the twenty-first century can be seen as a continued revision of Chinese tactics. The second was that principle matters little in an international war of wills. In 1840, a Chinese official named Lin Zexu was tasked with stamping out the opium trade. He sent a letter to Queen Victoria, signed by the Emperor, in which he made an appeal to her conscience. “The purpose of your ships in coming to China is to realize a large profit,” Lin wrote. “You do not wish opium to harm your own country, but you choose to bring that harm to other countries such as China. Why?”
Comment [JDM]: It cannot be overstated how important this history is to China, especially since “勿忘国耻” (“never forget national humiliation”) became a key tenet of the country’s Patriotic Education Campaign in the 1990s.
Russia
“The move to consolidate state spending announced in 2016 is now yielding results, and the treasury is bursting at the seams. The first budget surplus since 2011 was 4.4 times higher than the projected amount: over 2 trillion rubles ($15 billion). Next year’s projected surplus of 1.9 trillion rubles paints the same rosy picture. Inflation and unemployment are at historic lows, as is the national debt, amounting to only 15 percent of GDP for 2019. The government has announced ambitious plans to develop social and digital infrastructure. In other words, all the necessary conditions are in place for an investment boom of the capital that is supposedly returning to Russia.
But that boom isn’t happening. Foreign investors fear follow-up sanctions, and Russian companies, which according to official state statistics have accumulated about 16 trillion rubles in their bank accounts, are not rushing to invest. Nor is the government in a hurry to invest money in the domestic economy. First Deputy Prime Minister Anton Siluanov deposits all surplus oil and gas export revenues in the National Wealth Fund, whose value may reach 7 percent of GDP next year: the threshold beyond which the law allows it to be spent. But even this spending will most likely be channeled overseas: for instance, Russia is willing to loan Egypt over $3 billion for the construction of a new nuclear power plant.
If reserves are really so huge, why can’t they be at least partly invested in economic development in Russia itself? Some claim that excessive budget spending will drive up inflation. Others say that Russia needs the reserves in case the oil price drops even lower. But what if the answer lies in relations between different sectors of Russia’s ruling elites? ….
The greater the pressure, the stronger the ties between the members of Putin’s court, and the more pronounced their group identity.”
Comment: Provides a partial explanation to an unresolved question: why is Putin decreasing social spending even as reserves grow and his popular approval ratings decline? Prokpenko’s analysis suggests that Putin values intra-elite unity more than popular approval.
OUTLOOK 2019 Russia – Bne Intellinews and BCS Global Markets
Comment: Take what BCS says with a grain of salt: as a Russian financial institution, they regard sanctions very critically. That said, worth reading this article carefully.
“By and large Russia is ready for a full scale economic war with the US. It has built up $470bn in hard currency reserves or 23 months of import cover. The government’s 15% of GDP external debt is the lowest of any major economy in the world. And Russia sold off most of its US treasury bill holdings. All this makes the Russian government largely impervious to pressure….
If in December real incomes go down, 2018 will be the fifth consecutive year that Russians have reduced their income. In 2014, incomes fell by 0.7%, in 2015 — by 3.2%, and in 2016 — by 5.8%. Real disposable incomes of the population are about 2% lower than the 2011 level and 10% lower than the peak values of mid-2014.
The real wages of Russians in August 2018 recovered to the pre-crisis level, exceeding the level of August 2013 by 1.1%, but real incomes continued to be behind by 12.4%. A study by Deloitte found that the number of Russians who believe the economy is in recession has risen significantly over the past year, from 51% to 61%. The number of Russians who expect their purchasing power to fall in the coming year has risen from 22% to 30%. At the same time consumers’ inflation expectations are for a 9% increase in prices, while the CBR is expecting the increase in 2019 to be half that level.”
Another comment: It seems strange that the Kremlin is cutting social spending programs even as Russia’s real disposable incomes decline: declining/stagnant living standards (as measured by median real incomes, etc) tend to precede anti-establishment political backlashes, as the US and Europe have come to (re-)discover.
As noted above in Prokpenko’s article, Putin’s prioritization of elite interests over the public is a conscious choice: Putin appears to fear an elite coup more than a popular revolution. Putin’s assessment is not necessarily incorrect: the Russian populace views today’s economic realities through the prism of the disastrous 1990s and may be willing to tolerate substantial hardships.
That said, there are signs of growing popular discontent within Russia, including the pension reform protests, United Russia’s difficulties in elections in the regions, Putin’s falling approval rating, etc. Expect more elite-popular tensions in Russia, particularly if and when a recession materializes.
Michael Carpenter’s Russia watchlist in 2019
“A military incursion into Ukraine. The most likely target is the canal that feeds fresh water from the Dnieper river to Crimea. Without this water, Crimea's agricultural sector goes under. Also look for Russia to seek complete dominance over the Sea of Azov and Kerch Strait…
Pressure on President Lukashenka to allow Russia to build a military base in Belarus, especially if the US green-lights the construction of "Fort Trump" in Poland. If Minsk resists, the Kremlin will be prepared to execute an Anschluss operation…
Moscow arms the Taliban with more sophisticated weapons as the US draws down its forces and the NATO ISAF mission is stretched to the breaking point. Moscow displaces the US as the chief power-broker in Afghanistan and the Taliban comes back to power…
The Russian-Saudi relationship blossoms as Moscow sends more weapons to Saudi Arabia and coordinates further oil supply cuts.
The Kremlin's active measures campaign in the US goes into overdrive as Russia seeks to shape the 2020 presidential field. Dark money becomes the main tool of Kremlin influence as Russia concludes that financing organic disinformation is more effective than offshore ops.”
Steve Rosenberg’s of BBC on Russian press reaction
The Week In Russia: Putin On Repeat -- Big Press Conference, Little News – RFE/RL
Dr. Dmitri Trenin of the Carnegie Endowment:
“The experience with Ukraine, for all obvious differences, needs to be taken into account as Moscow decides how to handle Belarus. Minsk evidently prefers being middleman btw RUS &EU, rather than Moscow’s ally. But attempt to fully integrate Belarus w/Russia could produce new crisis.”
That’s all for this week, folks. Thank you for reading. If you enjoy this newsletter please share with your friends and follow The Report on Twitter.
It’s a wonderful life. Merry Christmas to all!
Until next week,
Joe Webster
This newsletter was put together with assistance from James DeMarshall.
The China-Russia Report is an independent, nonpartisan weekly newsletter covering political, economic, and security affairs within and between China and Russia. All articles, comments, op-eds, etc represent only the personal opinion of the author(s) and do not necessarily represent the position(s) of The China-Russia Report.