Global Intelligence: Week of Aug. 22, 2016

Global Intelligence: Week of Aug. 22, 2016
Global Intelligence: Week of Aug. 22, 2016
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The Week That Was

Shaping perceptions in the Middle East

Outside and regional powers in the Middle East are working double time to shape perceptions, giving the impression of strategic realignments than what may actually be the case. Moscow is looking at how little time is left before the U.S. election and what needs to be done to improve its chances of extracting strategic concessions. To that end, Russia is trying to make it appear that its influence is escalating in a theater where the United States is deeply embroiled. On Aug. 17, Russian Tu-22M3 strategic bombers conducted airstrikes over Iraq and Syria out of Iran's Hamadan air base. This was clearly aimed at conveying an impression to the United States and the picture will be even more convincing should Russia successfully negotiate access to Turkey's Incirlik air base.

From the satellite imagery we procured of the Hamadan base, and information from Russian contacts, the Russian Tu-22M3 bombers returned to their base in Syria after taking off from Iran. Subsequent bombers have used Hamadan as a refueling stop. The presence of at least four Su-34 fighter-bombers at Hamadan may imply a more sustained presence as Russia tries to both demonstrate a military footprint in Iran while also enhancing tactical and operational security. (Syrian rebels have been known to plant spotters close to Syria's Hmeimim air base in Latakia from which the Su-34 fighter jets typically fly.)

Though Tehran publicly confirmed that Russia has been granted military aviation privileges in Iran, there seems to be a great deal of discord among the Iranian political elite over the move. After all, the Soviets (along with the British) occupied Iran during World War II and the Iranian constitution now expressly forbids foreign military bases in Iran. It appears that the decision to grant Russia temporary access was made by Supreme Leader Ayatollah Ali Khamenei. He did this through the Secretary of the Supreme National Security Council of Iran, Ali Shamkhani, in consultation with the new chief of the Armed Forces General Staff Maj. Gen. Mohammad Hossein Bagheri, who hails from the Islamic Revolutionary Guard Corps. The supreme leader may have decided it was worth granting Russia this privilege in exchange for fortifying Russia's military commitment in Syria in defense of the loyalists. However, Iran remains highly wary of Russian intentions.

Turkey, for its part, is playing along with Russia and Iran in this array of negotiations in hopes of getting the clearance to directly contain Kurdish People's Protection Units (YPG) trying to expand further westward in northern Syria. Turkey is discussing with both Russia and the United States a plan to establish checkpoints manned by international monitors to address concerns that any cease-fire imposed, however localized, can be used by either side to resupply forces. Russia, Iran and Syria want to ensure Turkey limits its reinforcement to Syrian rebels, but Ankara will need room operate militarily in the north before it agrees to any limitations. Turkey's public distancing from NATO has been alarming to the West. Turkish Foreign Minister Mevlut Cavusoglu even lambasted the West this week for creating a crisis in Ukraine by "always threatening the country and forcing it to make a choice between them and Russia." It should be remembered, however, that this blustery rhetoric is merely a tactic designed to compel Russia to agree to its terms in Syria and highlight to the United States the risks of further alienating a strategic partner like Turkey.

A lack of political consensus continues to delay the finalization of the new Iran Petroleum Contract, putting Iran's future production growth at risk. Iranian Oil Minister Bijan Namdar Zangeneh met with the parliamentary speaker, Ali Larijani, and said that more changes will be introduced to the Iran Petroleum Contract. The Iran Petroleum Contract was approved by President Hassan Rouhani's Cabinet earlier in the month and Iran was hoping to sign the first contracts under the Iran Petroleum Contract this year. Even though the Cabinet and the Ministry of Petroleum are technically the only parties that need to approve the contract, Larijani is still trying to defuse dissent stemming primarily from the Islamic Revolutionary Guard Corps, which fears losing out to foreign contractors.

On a related note, Rouhani reportedly signed a deal with the Islamic Revolutionary Guard Corps to set up a bank that will distribute government loans at a low interest rate. This could be an incentive to help bring the Islamic Revolutionary Guard Corps on board with the new Iran Petroleum Contract and provide another channel for the Islamic Revolutionary Guard Corps to build patronage. Iran's oil production rise has already stalled in approaching a pre-sanctions level of 4 million barrels per day. (Iran is believed to be at around 3.85 million barrels per day currently.) A substantial rise beyond this level will likely need new investment and for that, they need to get the Iran Petroleum Contract off the ground.

Keeping Tabs on the Kremlin Struggle

More details surfaced this week on the circumstances surrounding the fall of former Russian Chief of Staff Sergei Ivanov. In the days before the reshuffle, Russian President Vladimir Putin had called an impromptu session of the permanent members of the Security Council on Aug. 8, likely due to the incidents in Crimea. Ivanov, who was the architect behind the policy to annex Crimea, was suspiciously missing along with five other permanent members of the council amid rumors that he was pressing Putin to take decisive action on Ukraine and ultimately reach a settlement with the West instead of dragging out the frozen conflict.

Putin held a security council meeting in Crimea and publicly endorsed a suggestion from Russian Prime Minister Dmitri Medvedev to appoint former Minister of Education and Sciences Dmitry Livanov as the president's envoy on trade and economic relations with Ukraine. We are on alert for any signals that could portend a shift in Russia's Ukraine policy amid the deeper Kremlin struggle underway. Ivanov's fellow Federal Security Service (FSB) alum and key ally Igor Sechin, who heads Rosneft, is also in the crosshairs. Putin has postponed the privatization of oil firm Bashneft, likely due to Rosneft's aggressive attempt to take the smaller company. In addition, the privatization of oil giant Rosneft looks to be moving ahead at full steam, against Sechin's wishes. As Putin isolates himself with less qualified loyalists, the Russian leader's powerful former inner circle is growing restless.

China's Big Step in Advanced Encryption Communications

China successfully launched the world's first quantum-communications satellite this week, marking an important step in advanced encryption communications. The satellite will use quantum mechanics, a discipline of physics dealing with the behavior of matter and light on the atomic and subatomic scale, to distribute encryption keys between the satellite and two ground stations. Quantum key distribution is an emerging technology that allows for virtually "hack-proof" communication between two users.

China is perhaps the world's most advanced country in deploying this technology and has already set several records for the longest on land connections using it. More broadly, the slow and continued rise of quantum computers, which perform computing using quantum mechanics, have the potential to break conventional encryption keys efficiently, jeopardizing many of the encryption standards that are in place today. For the foreseeable future quantum key distribution platforms will be expensive and reserved for securing only the most sensitive information, such as those related to national security. Nevertheless it is a key emerging technology with highly tangible geopolitical implications.

China's Property Markets Cooling Off Again

On Aug. 18, China's National Bureau of Statistics released data on average home prices across the country's largest cities. According to the data, home prices rose in 51 of 70 surveyed cities in July, down from 55 in June, 60 in May and 65 in April. The data confirm Stratfor's expectation that Chinese property markets would cool in the second half of 2016 after a stimulus-driven surge in activity in the year's first quarter. News of slowing price growth has spurred market speculation that Beijing will ramp up construction spending in the months ahead in an effort to offset recent declines, especially in second-tier and smaller cities. Premier markets like Shenzhen and Shanghai, by contrast, will likely tighten home purchase controls to stem surging prices. However, there are mounting indications that President Xi Jinping intends to accelerate economic reforms and industrial consolidation — as well as signs that Xi's hold on economic policy is strengthening compared with other leaders, notably Premier Li Keqiang. If so, major stimulus in the second half of 2016 — which would indicate slower progress on reform and restructuring — may be less likely.

Another Step in China's Financial Liberalization

Beijing has taken another notable step in its goal to allow more cross-border flows of capital. China's State Council approved a link between stock markets in Hong Kong and Shenzhen this week, following a similar mechanism for the Shanghai-Hong Kong link established in 2014. Though there will be a limit in the daily volume of trade, an aggregate quota system is expected to be dropped. The Shanghai stock market, while much larger, is dominated by China's state owned enterprises as well as banks, insurance and other financial services companies. Given the lack of confidence in China's heavy industry the poor performance of banks on top of the trading restrictions, the Shanghai-HI link has fallen short of Beijing's expectations.

The Shenzhen market, while more volatile, hosts many of Chinese start-ups, technology firms and companies that would fit more in line with China's broad transition towards a consumption based economy. Tech companies, for example, represent roughly 25 percent of the Shenzhen stock market while consumer-related stocks (both for staples and discretionary spending) make up another quarter. China hopes that allowing foreign investment into this active stock market with smaller companies will stabilize some of the activity on the market. It also allows foreign investors to target a different slice of the Chinese market. China's financial liberalization process will remain gradual and cautious so as to avoid large capital outflows whenever jitters run through the economy.

Trouble on the Bolivarian Front

Venezuelan citizens, who had previously been exempt from Nicaraguan visa requirements, will now have to apply for a visa to travel to Nicaragua. This is a big shift for Nicaragua-Venezuela relations. Nicaragua has been a core ally of Venezuela in Petrocaribe and the Bolivarian Alliance for the Peoples of Our America (ALBA), both designed to distance the region from U.S. energy sources.

As Venezuela's political and economic crisis deepens, Nicaragua is likely trying to insulate itself from fleeing Venezuelan officials and opposition members. The reactions from the neighborhood are just as important in watching Venezuela itself in gauging how close the country is to a break point.

South Africa and the ANC's uphill battle

In the second week following South Africa's municipal elections, jockeying over coalition formation revealed little consensus amongst the country's top political parties. The nationalist-Marxist Economic Freedom Fighters refused to join in any formal coalitions with the ruling African National Congress (ANC) or the Democratic Alliance. The ruling ANC and its rival, the Democratic Alliance, managed to form some coalitions with small parties but in several areas there were no coalitions formed at all, meaning that looking forward minority municipal governments will struggle to enact reforms or pass other important legislation. The ANC, fresh off its defeats in major metropolitan areas like Johannesburg, Tshwane (home to Pretoria, the country's administrative capital), and Port Elizabeth, will contend with an increasingly competitive political landscape at the local level.

Moreover, the defeat has exacerbated pressure on the ANC's hierarchy, with the ANC's Youth League calling for an earlier leadership conference, which should it occur, would likely transform into a party referendum on President Jacob Zuma's leadership (his term as ANC party head finishes in 2017; his term as the country's president in 2019). Consequently, it will be important to watch for fractures within the ANC's leadership, notably between pro-business members and more leftward-leaning and ethnic-Zulu oriented factions as the country's dominant party seeks to regain ground lost during the recent elections.

Quote of the Week

"You all saw what happened in Turkey… Erdogan will look like a baby compared to what the Bolivarian revolution will do should it face a coup from the right once again."

- Venezuelan President Nicolas Maduro

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