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The Global Summits: Series Introduction; STRATFOR

The Global Summits: Series Introduction

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STRATFOR TODAY » March 31, 2009 | 1109 GMT



Summary

Over the next seven days, most of the world’s leaders will attend a string of summits in Europe and make a series of decisions that will shape the world. The discussions at these meetings will focus on the global economy, the overall tone and strength of U.S.-European relations, and the United States’ course for the future.

Analysis

During the course of the next seven days, most of the world’s leaders will be attending a series of rolling summits and side meetings in Europe and Turkey on everything from global financial infrastructure to the way the United States interacts with allies and rivals alike. Collectively, these gatherings constitute the greatest density of decision points in the modern world since the summits that brought about the end of the Cold War.

The discussions that will take place fall into three broad categories.


The first type of talks will address the economic crisis. The United States has kept its place at the center of the global economic and financial systems for more than 60 years. At STRATFOR, we do not see the United States losing that role, but that hardly means there will not be movement. The key issue is the degree of agreement — or more to the point, disagreement — between the United States and some of its closest allies on how far to go in revamping the global financial architecture and stimulating the global economy. The Americans see stimulus as the most logical road forward; they have already launched their program and expect the Europeans to follow suit. The Europeans see exporting to the United States as the way out of recession, and therefore see few reasons to launch a new stimulus effort.

How these talks progress will deeply affect the second category of discussions: the timbre and strength of the overall U.S.-European relationship. There is more in play between the United States and Europe than “simply” trade: There is the most robust security relationship in the modern world, at a time when Russia is looking to extend its influence deep into Europe. U.S. President Barack Obama has made much political hay at home over claims that he can get more out of the Europeans in terms of security on the Continent or contributions to the war in Afghanistan. In Europe, Obama’s popularity is largely predicated on the opposite — that he will not ask as much as his predecessor did of the Europeans. Balanced between those two positions is not only the security of Obama’s political position at home, but the degree to which he will trust and involve the Europeans in global affairs in the future.

This brings us to the final category: the U.S. path. The need to counter the recession, the need to fight the war in Afghanistan and the need to counter a rising Russia are all givens for the United States. In these summits, Obama will see the only wild card — the role Europe can be convinced to play — turned over. And then he will have to make some choices.

How much Obama gets out of Europe will determine what sort of deals he will seek with the final player: Turkey. Turkey wields influence in Pakistan and Afghanistan as well as the Middle East and in much of the former Soviet region. If the Europeans — who repeatedly have refused to extend EU membership to Turkey — decline to assist the Obama administration, the question will be what sort of offers Obama can make to the Turks.

How these various summits progress will answer a wide-ranging list of questions: How soon will the recession end? How coherent will NATO be in countering Russia? How powerful will Turkey become? How competently will the war in Afghanistan be fought? Will Europe be part of Obama’s multilateralism? What will be the balance of power on the entire Eurasian landmass? It is going to be a busy week.

And it will slightly derail our timeline in publishing our forecast for the second quarter. STRATFOR’s quarterly forecast is designed to pair our ongoing intelligence-gathering efforts with our understanding of the way geography shapes events, projecting forward three months. In this case, the events of the next seven days will establish the parameters of global interactions not only for the coming weeks, but for years.

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Comment by Shawn Swanson on March 31, 2009 at 9:28am
March 31: Germany, Russia

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STRATFOR TODAY » March 31, 2009 | 1308 GMT

Summary

German Chancellor Angela Merkel and Russian President Dmitri Medvedev will meet March 31, ahead of a flurry of summits including G-20, NATO and EU meetings. The two countries have differing opinions on many issues. However, Merkel and Medvedev — representing the two most powerful countries in Europe — want to truncate the agenda for the rest of the string of summits that begin today. And certainly before either meet with U.S. President Barack Obama.

Analysis

When they meet March 31, German Chancellor Angela Merkel and Russian President Dmitri Medvedev will kick off the whirlwind of bilateral meetings and summits that includes the G-20, NATO and EU gatherings. The two are an interesting pair to start everything off in that they seem to be on the same page going into the G-20 summit. But each also has a set of critical security issues that it needs to clear up with the other before the German and Russian leaders go into other meetings — particularly those involving U.S. President Barack Obama.

While formally the two have an aligned agenda on the economic aspects of the upcoming summits, in reality the two have little interest in talking finance. Germany wants to revamp the European and global financial architecture, something Russia cares little about. Russia wants oil prices to rise, something that Germany has no interest in. So aside from rhetoric about “being on the same page,” economics and finance are simply not on the agenda for the Medvedev-Merkel meeting. The degree to which the Russians bully their “common position” is because Russia needs Merkel’s support for something much closer to the Russian heart.

Russia and the United States have been locked in tense negotiations since Russia began to resurge onto the international stage back in 2005, but the talks were boiled down to a defined set of issues. Russia wants three major things: an end to NATO expansion, a new set of nuclear arms treaties and for the United States to put a cap on its influence in the former Warsaw Pact states, particularly Poland. In exchange, the United States wants Russia to cease support for Iran and allow U.S. military shipments to traverse former Soviet turf to supply American forces in Afghanistan. There has been limited movement on some of these issues, but Russia wants firm commitments before it considers any serious concessions itself.

So Russia needs German help in nudging the Americans in what Russia feels is the appropriate direction. Germany under Merkel has opposed NATO expansion, viewing it as unwise to expand the alliance to difficult-to-defend countries that are not ready for security integration. She also sees no reason to aggravate unduly the country that supplies Germany with half of its natural gas. So Medvedev is courting Merkel in an attempt to put a Western — as opposed to a Russian — check on American plans.

But there are limits. From Berlin’s point of view, the demilitarization of Poland is a non-starter just as it is in Washington. After all, Poland is Germany’s primary buffer and Berlin would rather keep Poland a meaningful barrier to any Russian expansion. But holding the line on NATO expansion would force the United States to make its security relations with Ukraine and Georgia a bilateral issue rather than a NATO issue. The former leaves Germany blissfully out of Russian calculus. And that is precisely where Germany would like to stay.

The Medvedev-Merkel meeting should be a cordial one, but having a NATO ally sit down and draw lines on a map with the United States’ primary security rival is not something that is going to generate warm feelings in Washington. And the reaction will be swift in coming as Medvedev has his bilateral meeting with Obama the very next day.
Comment by Shawn Swanson on March 31, 2009 at 9:32am
Latin America and the G-20 Summit

STRATFOR TODAY » March 31, 2009 | 1323 GMT

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Summary

Three Latin American states — Argentina, Brazil and Mexico — will attend the G-20 Summit April 2 in London. While their policy goals differ in attainability, the summit provides an opportunity for these Latin American states to rub elbows with representatives from more developed states at a time when a new U.S. agenda is being formed, and major changes are being made to international financial institutions.

Analysis

The three Latin American member states — Argentina, Brazil and Mexico — of the G-20 group of industrialized nations will meet with their fellow G-20 members April 2 in London. Each state ultimately seeks to boost its influence through summits like this. But because of their developing nation status, only those policies that coincide with the agendas of the developed nations attending the summit are likely to succeed. Though each of the Latin American states will approach the summit from the perspective of a developing nation that first and foremost needs the developed world to get its financial act together, all three are approaching the summit from very different perspectives.

Brazil

Brazil sees the summit (and all summits, really) as a way of pushing forward in its unending quest to attain a global leadership role. The South American giant has been seeking a position in the lead pack of states since the days of the League of Nations. Brazil still seeks a permanent seat on the U.N. Security Council. The G-20 grouping and its meetings offer a chance for Brazil to rub elbows with the states of the G-8 and offer itself as the next best thing in emerging countries — and in fact it is not far off. Brazil’s increasing economic stability and rising oil wealth has put the country at the top of the list of stars-to-be even as the country’s growth estimates have been shaken by the global economic downturn.

Brazil’s official agenda is perhaps less exciting. Brazil supports the recapitalization of the International Monetary Fund (IMF). This is already on the agenda for most G-20 states, so Brazil is likely to be pleased with the outcome of the meeting on that point. Brazil also has said it wants a more prominent role for emerging markets, stating outright that while it would consider contributing to the recapitalization effort, it would only do so if were given a greater voice in IMF affairs. It is not yet clear how far Brazil will be able to get on this point of its agenda, although it may find allies on the topic in Saudi Arabia and China.


The least plausible of Brazil’s goals is the resolution of the long-dead World Trade Organization Doha round of trade talks. Brazil’s main goal in emphasizing the Doha round is to discourage protectionism across the board and to get developed countries on board with loosening agricultural tariffs. But the prospects of its Doha goal coming to fruition are low as the two biggest stumbling blocks on this quest happen to be the United States and the European Union, which have shown little intention of budging on their own bilateral disputes regarding that issue. And even then, an U.S.-EU agreement would only make Doha possible — not probable.

Mexico

Similar to Brazil, Mexico sees the G-20 meeting as an opportunity to promote itself as a real player on the international scene. Mexico’s ultimate goal is to see its international profile rise to the level of the economic quartet of Brazil, Russia, India and China (BRIC). In some ways, however, Mexico’s diplomatic pull is greater than Brazil’s, a fact evidenced by French President Nicolas Sarkozy’s trip to Mexico ahead of the G-20 summit to plan a bilateral agenda for the meetings. Moreover, Mexico started off the G-20 week by hobnobbing with Queen Elizabeth II. (Her official state gift to Mexican President Felipe Calderon was a copy of George Orwell’s dystopian novel 1984.)

Mexico’s higher diplomatic profile in part a result of the country’s dogged determination to get itself a seat at every table that matters, including a role as a non-permanent member of the Security Council. Mexico’s strategy is to pitch itself as a rising power that understands and has a special relationship with the United States, which gives Mexico more opportunities to speak to a variety of international players.

Much like Brazil, Mexico is seeking a greater role for emerging nations in the IMF as well as the World Bank. With substantial plans for the reform and recapitalization of the IMF already under way, the reforms Mexico is advocating are attainable. It is less clear how much influence emerging countries will gain, however. Mexico is the only one of the three Latin American countries that has said it may seek an IMF loan with the purpose of funding domestic infrastructure projects.

Argentina

Argentina’s place in the G-20 is by no means clear. With a populist government rapidly approaching its second economic crisis in a decade, Argentina’s ability to offer constructive options to the G-20 is limited. Ironically, the London summit is scheduled for the 27th anniversary of the start of the Argentine-British war over the Falkland Islands.

As far as concrete agenda items, Argentina stands alone among the Latin American G-20 states (but alongside the United States, United Kingdom and France) in its prioritization of the elimination of international tax havens, and its reasons are clear. Because of Argentina’s declining political and economic situation, Argentines have taken their money offshore; the country lost about $23 billion to capital flight in 2008. With capital mostly unavailable to the country as a result of its 2001 debt default, the government is seeking to force the repatriation of that money. With the U.S. and the United Kingdom on its side, Argentina has powerful support on this initiative, although it is unclear how much change is likely.

For all three Latin American states, the G-20 summit offers an opportunity for making connections and pursuing bilateral relations. None of these countries has sufficient economic wherewithal seriously to contribute to a major global effort to react to the international economic crisis, but each has a stake. For Brazil and Mexico, this is a chance to step forward as leaders of the developing world and show themselves to be reliable partners to the developed states. Latin America’s real game-on time with the United States will come in mid-April with the 5th Summit of the Americas set for Trinidad and Tobago, when the leaders of all Western Hemisphere states will meet U.S. President Barack Obama for the first time. For the moment, however, the world’s eyes will remain trained on the great powers of Eurasia and the Middle East as they seek to negotiate the future balance of power in the presence of a new U.S. administration.
Comment by Shawn Swanson on March 31, 2009 at 7:23pm
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France: Sarkozy Issues a Warning

STRATFOR TODAY » March 31, 2009 | 1855 GMT

Summary

French President Nicolas Sarkozy warned leaders of the G-20 countries that France will leave the summit if definitive results are not made on global financial regulation. Sarkozy is intending to make the revamped financial architecture appear as a French initiative and maneuver himself back into popularity.

Analysis

French President Nicolas Sarkozy has issued his fellow G-20 leaders a demarche: either produce “concrete” results on global financial regulation, or France will walk out of the summit. President Sarkozy reportedly made his threat during a cabinet meeting a week before the April 2 summit, saying that he would leave the summit “if it does not work out.” Sarkozy’s deputy chief of staff for economic affairs and financial lieutenant for the G-20 summit Xavier Musca compared Sarkozy’s threat to nuclear warfare, saying that “a basic rule with nuclear deterrence is that you do not say at what point you will use the weapon.”

Sarkozy’s threat to walk out of the G-20 summit if there is not an agreement on financial regulation will allow France to claim any potential success, no matter how minute.

France comes to the G-20 summit with two main goals: establish a firm global regulatory architecture and reduce the role of tax havens in the global economy. Paris wants to minimize the number of tax loopholes available to its wealthy citizens, and both France and Germany arrive at the G-20 summit arguing for greater oversight over hedge funds and rating agencies as well as a general call for a crackdown on derivative trading. A consensus exists between Paris and Berlin to restrict the “Anglo-Saxon” financial cabal that politicians, academics, societal actors and even bankers themselves in Europe have agreed to blame for the current global financial imbroglio. Paris and Berlin are also unified in opposing the U.S. call for more stimulus spending.


For Sarkozy this represents somewhat of a reversal. His election to the French Presidency in May 2007 represented a new chapter in French leadership, with Sarkozy actively campaigning on a smaller role for the state in finance and economics. This prompted his rivals to paint him as a puppet for an “Anglo-Saxon” ultra-liberal style of economics, particularly in regards to labor relations.

The current economic crisis, however, has put Sarkozy on the defensive. According to the Organization for Economic Cooperation and Development (OECD) data released on March 31 the France’s gross domestic product (GDP) is set to shrink by 3.3 percent in 2009. Unemployment is expected to rise to around 10 percent in 2009 and up to 11 percent in 2010, up from 7.8 percent in 2008 according to the forecasts of the European Commission and the OECD. At home Sarkozy is facing pressures to keep manufacturing jobs in France and to reduce the effects of the recession.

There is also a further dimension to Sarkozy’s push for reform. He sees the current G-20 meeting and the push for regulation as his achievement. It was Sarkozy who demanded that the G-20 summit in November 2008 be held and then called for the creation of Bretton Woods II, which met resistance from the United States. At home Sarkozy faces dwindling popularity, with the Metro-Krief survey conducted in early March citing disapproval rating of 60 percent. However, when asked how they perceive Sarkozy’s international efforts, the French approve up to 70 percent, according to the British Times.

Sarkozy is therefore trying to reposition himself as “Super-Sarko”, the one that the French have grown accustomed to seeing perform shuttle diplomacy during the Russia-Georgia conflict and the Gaza incursion by Israel. To do so, he has to frame the current meeting and any eventual agreement on financial regulatory architecture as a French initiative.
Comment by Shawn Swanson on March 31, 2009 at 11:00pm
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China, Saudi Arabia, and the IMF Quota and Voting System



STRATFOR TODAY » March 31, 2009 | 1911 GMT

Summary
Saudi Arabia and China could give a big boost to the International Monetary Fund (IMF) resources, and both have suggested that they may announce during the G-20 summit. But both countries expect greater influence within the IMF in return.

Analysis

As world leaders convene in London for the G-20 summit, the role of the International Monetary Fund (IMF) in stabilizing ailing countries and the global financial system will be a topic of considerable importance. The IMF already has loaned billions of dollars to the hardest-hit European countries and to Pakistan. Meanwhile, a number of other loans are under negotiation — including a potentially huge one to Turkey, and the line of prospective borrowers is growing. At the moment there are two prominent discussions surrounding the IMF: The first concerns recent changes to the organization’s lending policies that would modify its practice of requiring strict fiscal behavior of borrowing countries; the second concerns boosting the fund’s reserves to increase its lending power.

To make sure the IMF has the reserves necessary to continue lending, and to do so rapidly and confidently, British Prime Minister Gordon Brown, German Chancellor Angela Merkel and others have called for the IMF’s reserves to be increased. Everyone agrees this should be done, but the question is whether this should be through contributions from member states or through having the IMF issue bonds. Japan promised $100 billion in February for the fund. Tokyo’s eagerness stems from the knowledge that if the global financial contagion does not stop spreading, then banks will not be able to return to normality and trade will continue to balk, making recovery impossible for Japan. The European Union and the United States have each suggested that they would contribute $100 billion, and Norway has promised $6 billion for the fund.

Now, the world’s eyes have fallen on Saudi Arabia and China, two countries faring relatively well amid the global crisis, each of which possesses an enviable near-$2 trillion in foreign exchange reserves and assorted national accounts. Together, these two could give a big boost to the IMF’s resources, and both have suggested that they may announce contributions while attending the G-20 summit. Yet both countries expect to get something in return beyond the interest on their loans.

At issue is the political power that the IMF exercises over its debtors. The IMF has long required countries that accept loan money to fall in line with austere financial management requirements meant to bring these countries in line with the highest fiscal standards and standards of creditworthiness, thus giving the IMF a sounder investment. The United States (or a critical mass of other IMF states) can wield executive power to shape requirements on countries that accept loans. This comes in handy when, say, Washington wants to turn the screws on Pakistan over the regional security situation while Pakistan is seeking financial assistance from the IMF. Similarly, if China and Saudi Arabia are to give more of their cash to the IMF, they will expect greater political influence over IMF borrowers and greater say over the IMF’s management.

The organization’s daily activities are handled by the Executive Board, which is made up of 24 directors who represent particular countries and coalitions of countries. (Beijing and Riyadh each are represented by their own director.) IMF members each have a quota reflecting their respective country’s relative economic heft and determining the amount of capital the country invests in the fund’s reserves. Quotas are matched by Special Drawing Rights (SDRs), the IMF’s reserve assets, which are valued according to a currency basket of euros, yen, dollars and pounds sterling. In addition, countries have voting rights within the fund, which are mostly determined by quotas.

If they are to contribute more money to the fund, the Chinese and Saudis want their quotas lifted and greater voting representation. Currently, the Chinese are ranked seventh, with 3.72 percent of total SDRs and 3.66 percent of votes. By contrast, Germany, the economy of which the Chinese overtook in 2008 in terms of gross domestic product, has 5.99 percent of SDRs and 5.88 percent of votes. Meanwhile, the Saudis are ranked ninth, with 3.21 percent of SDRs and 3.16 percent of votes. High-level Chinese officials have hinted that Beijing could give as much as $100 billion more to the fund, and Saudi officials have vacillated about giving the same amount — but both countries have made such donations contingent upon adjustments within the IMF’s structure of executive power.

Of course, Beijing and Riyadh are not necessarily after the same things. Riyadh has a relatively simple requirement: If it is being asked to give more money, its representation should be proportionate. The Saudis typically support U.S. leadership in the IMF. Riyadh thus wants a greater share of votes so their support is more valuable to Washington, thus giving the Saudis the ability to extract concessions from the United States on issues of importance to Washington. Foremost in the minds of Saudi leaders is the thought of Iran’s growing power in the Middle East and Washington’s attempts to strike a deal with Iran. Riyadh would be happy to have some way of reminding Washington to keep Saudi interests in mind as it negotiates with the Saudis’ chief regional rival.

Beijing, by contrast, wants more influence at the center of IMF decision making, including over the process of scrutinizing, granting and distributing loans. The IMF has a nasty reputation in East and Southeast Asia for being an instrument of Western hegemony, mostly a legacy of the strict demands put on borrowing countries during the Asian financial crisis of 1997-1998. Because China’s economic interests in this region are vital, Beijing hopes to have a heavier hand in IMF dealings there, if only to be sure that they do not run counter to Chinese interests.

The IMF is not necessarily jumping to give China and Saudi Arabia what they want. The Board of Governors decided not to alter quota amounts during a regular five-year review in 2008, but has formally agreed to increase quotas in the future in the case of member countries whose economies are growing rapidly. The alternative, in the urgent situation presented by the global economic crisis, is for the IMF to issue bonds, which would allow the fund to raise capital while not requiring structural alterations. Heading into the G-20 summit, the Chinese and Saudis have not ruled out the idea of buying these bonds. But they no doubt would prefer to increase their contributions and heighten their stature and influence within the IMF.
Comment by Shawn Swanson on April 1, 2009 at 8:20am
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Australia and the G-20 Summit

STRATFOR TODAY » April 1, 2009 | 1020 GMT

During the November 2008 G-20 summit, when Australia was assigned a co-chair position in the working group on reforming the International Monetary Fund (IMF), a key recommendation that emerged from the working group — one espoused by Australian Prime Minister Kevin Rudd — called for a greater role for China and other developing nations in the IMF. This greater role involved both their contributions to the fund and their voting rights. Rudd has promoted a stronger showing for China not only at the IMF, but in the overall discussions on reshaping the global economic architecture and dealing with the current economic crisis.

Rudd’s attention on China is in part understood by his affinity for the country. He is a fluent Mandarin speaker who has made good relations with China a key part of his policies. Australia must balance relations with China and the United States, however. Canberra has close trade relations with both countries, and in urging a more cooperative relationship with Beijing, Rudd is also trying to re-position Australia away from occasionally playing mediator for the two bigger nations, an uncomfortable position to be in when relations between Washington and Beijing sour.

Canberra’s key ambitions heading into the G-20 are beyond the trilateral Australia-China-U.S. relationship. Australia is also trying to ensure that the G-20 remains the forum for discussion and action on global economics, thus keeping a seat at the table for Canberra. Australia would like the G-20 to take the place of the more exclusive G-7 (or G-8) framework (to which it does not belong), but arguing for a strong G-20 on the grounds that Australia wants a seat does not hold much sway. Instead, Canberra is playing up the changes in the global economic balance, emphasizing the role that developing countries should play in broader financial and economic discussions. By emphasizing China’s role, for example, Canberra is seen arguing for something much more logical: a clear role for the world’s third-largest economy in dealing with — and taking on additional responsibilities for — the workings of global economics.

Canberra also has another challenge at the G-20 it would like to pre-empt, namely, the recent call from a U.N. advisory panel headed by economist Joseph Stiglitz to replace the G-20 with a U.N.-based Global Economic Council. Canberra is concerned that such a council would likely quickly fall into bureaucratic ineffectiveness, housed at the United Nations and leaving Australia once again with no voice in the real global economic planning.
Comment by Shawn Swanson on April 1, 2009 at 8:25am
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China and the G-20 Summit

STRATFOR TODAY » April 1, 2009 | 1150 GMT

Summary

China will enter the April 2 G-20 summit with perceived strength, largely because it holds trillions of dollars worth of foreign exchange reserves while many of its fellow G-20 members are starved for cash. Beijing will try to use the G-20 summit to gain greater influence in the realm of global finance and beyond.

Analysis

Chinese leaders are in very different circumstances from their peers as they head to London for the April 2 G-20 summit. The developed world remains in the clutch of a financial crisis that has hampered bank lending, and most of the richest Western governments and corporations are starved for cash. Meanwhile, Chinese banks are lending rapidly and Beijing itself rests on a massive cushion of $2 trillion worth of foreign exchange reserves. The contrast is stark.

Make no mistake; the economic downturn has wreaked havoc in China. Exports, the lifeblood of the Chinese economy, have nearly collapsed. The country’s manufacturing sector has been pummeled, creating waves of unemployment and increasing the frequency of incidents of social unrest.

The Communist Party has worried publicly about its ability to guide the country through the storm. Debates within the Party over economic policy reached a fever pitch during the March National People’s Congress legislative sessions. Domestic security forces, including the People’s Liberation Army, are deployed across the country, ready to stamp out the first sparks of revolt — especially in hot spots such as Tibet and Xinjiang, but also in surrounding regions.

Real economic strains have been compounded with an ominous atmosphere surrounding several anniversaries, from the “glorious founding” of the People’s Republic of China (1949) to the less-celebrated (by the government at least) Tibetan uprising (1959), the Tiananmen Square incident (1989) and the Falun Gong demonstrations (1999).

But despite this stack of causes for concern, China is in many ways better off than the world’s other top economies. From the onset of the global recession in late 2008, Beijing has attempted to turn the crisis into opportunity. First, Beijing has resisted tapping its $2 trillion reserves, which have served as a safety net while the central government moves ahead with aggressive spending to maintain the economy.

China was one of the first countries to pass a stimulus plan, though the massive $586 billion package is actually focused on increasing domestic demand in the long term; it has added supplements, bailing out 10 of its most distressed industries. Meanwhile, Beijing has significantly loosened monetary and credit policies to prop up ailing businesses and fund a spending drive by state-owned giants as they make strategic acquisitions abroad at bargain prices.

Beijing thus enters the G-20 summit in a position of perceived strength thanks to its abundance of free liquidity, its rapid response to the crisis and its coping strategy. The United States relies on China to continue purchasing its government debt in order to finance deficits that are ballooning because of stimulus plans. Many of the world’s wealthiest countries are also craving cash — with some worrying they will not be able to sell their bonds — and businesses are on the verge of failing left and right, needing fresh investment.

The all-purpose lifesaver amid the crisis, the International Monetary Fund (IMF), is itself in need of recapitalization so it can manage the flood of emergency loan requests from tottering developing countries. All eyes have turned to China as a potential source of badly needed funds.

With all this in mind, China’s leaders will attend the summit in London with the intention of furthering their lemons-to-lemonade strategy — despite their serious fears about domestic stability, on the surface they will strive to show that everything is in great shape. T

hey will tout China’s importance as a powerful economy whose stimulus measures have served to spur some trade during a recession that has threatened to cut off nearly all trade, emphasizing the need for countries to coordinate policy responses to the economic crisis, notably through more fiscal stimulus. They also will push for reforms to financial institutions and regulatory schemes — though they will not get carried away with this, and will resist European efforts in this direction if they are seen as creating too much tension with the United States.

The Chinese expect developing countries to be given a greater voice in global financial institutions and will champion the causes of the developing world. Most importantly, China intends to present itself as a positive force and “responsible stakeholder” in world affairs, and to win for itself a louder voice and more influential place in international institutions.

One area of focus in this regard is the IMF, which China is seeking to change in coordination with other developing countries in the G-20. The IMF is the lender of last resort for countries experiencing serious financial distress, from Iceland to Central Europe to Pakistan. China has offered to dip into its treasure troves to help boost the IMF’s resources on the condition that its quotas (and hence voting power) are increased.

China would like to gain greater influence within the IMF in distributing funds, but also in other international institutions, and it would like to do so with clear recognition from the rest of the world that its participation is beneficial and necessary.

China’s rhetoric at the G-20 summit will not be entirely rosy. Beijing will take every opportunity to remind the world that the origins of this crisis are in the Western capitalist system, and that when that system failed, the Chinese system remained strong. Western countries, for their part, might claim that China’s reserves are too large or that its currency is deliberately undervalued. In this context, much will be made of Chinese President Hu Jintao’s scheduled meeting with Russian President Dmitri Medvedev, where the two are slated to discuss a plan to create an alternative global reserve currency that would replace the U.S. dollar in global trade. The proposed currency allegedly would be based on the IMF’s system of Special Drawing Rights.

China’s talk about resisting global dollarization is not new; Chinese officials have been rhetorically challenging the dollar and proposing the yuan as an additional global reserve currency since before the start of the financial crisis, and China has experimented with using the yuan for trade with Hong Kong and others. But a global currency cannot be created overnight, nor can it be created by the mere desire for it to exist — even if every G-20 member, including the United States and its allies, shared that desire.

None of this amounts to anything substantial, and China knows it — the purpose is to put the United States in a defensive position ahead of the summit, thus pre-empting potential criticism aimed at China from any direction. In truth, China wants to protect the value of the dollar to maintain the worth of its own dollar-denominated investments. Deep down, China sees the U.S.-centered global system as essential, and does not wish to stir up bad feelings with the United States, which would only postpone global economic recovery.

Topics such as a new global currency will be thrown around outside of Hu’s bilateral engagements, but in actuality they will serve as pretexts under which he and his partners will discuss more pressing concerns, ranging from security to trade relations, depending on whether Hu is meeting with U.S. President Barack Obama, British Prime Minister Gordon Brown, Japanese Prime Minister Taro Aso, Brazilian President Luiz Inacio “Lula” da Silva, South Korean President Lee Myung Bak, Australian Prime Minister Kevin Rudd or Thai Prime Minister Abhisit Vejjajiva (who is attending as a representative of the Association of Southeast Asian Nations).

Beyond the rhetoric, China’s purpose is to use the G-20 as a means to achieve ends it has been pursuing throughout the financial crisis as it seeks to maximize its relative external advantage and win a more influential seat at the global financial round table while maintaining internal stability. China will seek to make itself central to a network of countries that wish to emphasize that their interests are not directly aligned with those of the United States, but China will do so without directly challenging the United States — which is by far its No. 1 trading partner, considering all of the intra-Asian trade links for which the United States is the end destination.

A coalition of countries talking about becoming independent of the United States, while not in fact attempting anything of the sort, serves several purposes, ranging from diplomacy to domestic populism. But ultimately, China still sees the United States as the center of the global system for some time to come, and is not interested in Russia’s efforts to create an anti-American pole — it knows that it depends on continued U.S. consumption of Chinese goods and noninterference with Chinese domestic affairs.

Beijing does wish to put constraints on American power, however, and it hopes to do so by gaining international support and enhancing its own role as a player on the world stage.
Comment by Shawn Swanson on April 1, 2009 at 8:29am
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April 1: Russia, United Kingdom

STRATFOR TODAY » April 1, 2009 | 1040 GMT

Russian President Dmitri Medvedev and British Prime Minister Gordon Brown have decided to meet April 1 ahead of the G-20 summit.

Russia and the United Kingdom have not been at the top of each other’s lists of countries to meet with at or after the April 2 G-20 summit. Medvedev and Brown each will be meeting with other leaders, such as U.S. President Barack Obama, Chinese President Hu Jintao and European heavyweights German Chancellor Angela Merkel and French President Nicolas Sarkozy. There has not been a pressing need for the two sides to meet, for each has its own agenda at the G-20 meeting.

The United Kingdom plans on backing — in words if not in actions — the U.S. plan for more spending, which Germany and France staunchly oppose. Russia, meanwhile, does not care about the actual G-20 summit as much as it does the accompanying bilateral meetings that have been long in the making, as Russia has been locked in tense negotiations with the United States and other Western powers, like Germany, as it resurges onto the international stage and attempts to reclaim its former sphere of influence.

The United Kingdom traditionally has not been part of these negotiations, though London and Moscow have a relationship made tense by both countries’ continuing Cold War mentality, which includes spying, Russian poisonings in London and the United Kingdom’s granting of asylum for the Kremlin’s most wanted.

But after a phone conversation with Brown late March 26, Medvedev said he would like to meet the British leader. Though the countries do not directly affect each other, Russia is looking at a meeting with the United Kingdom as an extension of its other moves at the G-20 summit, especially against Merkel and Obama.

Medvedev will remind Brown that while it does not depend on Russian energy or consider itself a core piece of the European continental dynamic in which Russia plays many European states off each other, the United Kingdom is part of the European Union and will be affected by whatever Russia does with the Europeans.

Russia also sees London as Washington’s representative in Europe. When Russia counters the United States in Europe, it does not directly affect the United States, which is an ocean away — but these moves do affect the United Kingdom. Also, any Russian meddling with policies and decisions over the war in Afghanistan affects the United Kingdom, which is heavily invested in the war.

Medvedev does not have much leverage to use against Brown within these larger negotiations; however, Russia wants to remind Brown that his country is invested in the outcome of Russia’s meetings with the other Europeans and the Americans.

In Russia’s view, this could persuade the British to put more pressure on Washington and the Europeans. If not, then Russia has at least reminded the United Kingdom of what exactly is at stake in Russia’s upcoming moves.
Comment by Shawn Swanson on April 1, 2009 at 8:31am
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April 1: Turkey, Pakistan and Afghanistan

STRATFOR TODAY » April 1, 2009 | 1037 GMT

Summary

Turkey is hosting a key trilateral summit on April 1, which will be attended by the Afghan and Pakistani presidents and Islamabad’s military and intelligence chiefs. Ankara has been playing a critical role in aiding U.S. efforts to contain the jihadist insurgency in southwest Asia, the latest step in Turkey’s bid to emerge as a major international player.

Analysis

Turkish President Abdullah Gul on April 1 will host a trilateral summit on Afghanistan. The meeting in Ankara will be attended by Afghan President Hamid Karzai and Pakistani President Asif Ali Zardari, both of whom are accompanied by large delegations. This is a very significant meeting, given its timing — a day after a key U.N. conference on Afghanistan in The Hague, five days before U.S. President Barack Obama’s visit, and following the G-20 and NATO summits.

On March 27, Obama unveiled Washington’s new strategy on dealing with the jihadist insurgency in southwest Asia, which entails a regional approach to deal with growing Talibanization of both Afghanistan and Pakistan. The United States has engaged several countries (Russia, Saudi Arabia, Iran, the Central Asian republics, China, and India) in its efforts in Afghanistan, but it is relying especially on assistance from Turkey.

The same day that President Obama unveiled his Afghan strategy, his national security adviser, retired Marine Corps Gen. James Jones told a gathering in Washington that Ankara “has a very special role to play in Afghanistan by virtue of its history and…its performance.” Jones added that Turkey’s role will be “critically important.”

An international consensus on Afghanistan will remain a work in progress for quite some time. Different states, given their respective influence in the country, will have their input on U.S. efforts to try to end the insurgency. But the Turks are playing a pivotal role by trying to get Afghanistan and Pakistan — who have been clashing with each other since the end of the Taliban regime in late 2001 — to cooperate. The April 1 meeting is the third such meeting between the Afghan and Pakistani leadership in the last two years.

Turkey and Pakistan have had long-standing ties, especially between the two countries’ militaries, which will be helpful in negotiations with ‘reconcilable’ elements of the Taliban. Additionally, as the only Muslim NATO member state, Ankara has considerable influence in Afghanistan, given its participation in the International Security Assistance Force (ISAF). Though Turkish troops are not currently participating in combat operations in Afghanistan, they, along with their French and Italian counterparts, are responsible part of the ISAF contingent responsible for the security of Kabul.


Even though ethnic Turkmen in Afghanistan constitute a small minority, the Turks have considerable influence among the Afghanistan’s third largest ethnic group, the Uzbeks, through top Uzbek strongman Abdul-Rashid Dostum, for whom Turkey is virtually a second home.

Turkey’s connections to both sides of the Afghan divide could prove highly useful in the efforts to reach a balance of power between the Taliban-dominated Pashtun community and the minorities who have fought with the Taliban under the banner of the Northern Alliance. Any such power-sharing arrangement necessitates cooperation between Islamabad and Kabul, and the Turks have already made progress on that front.

The fact that the April 1 trilateral summit is the third such meeting, and is being attended by Pakistani army chief Gen. Ashfaq Kayani and Lt. Gen. Ahmed Shuja Pasha the director-general of the Inter-Services Intelligence (ISI) directorate, speaks volumes about the extent of success that the Turks have had in their mediation efforts. This is perhaps the first time that Pakistan’s president, its army chief and head of intelligence are all attending an international meeting on Afghanistan. Islamabad is facing its own Taliban insurgency and Kabul has embarked upon negotiations with Taliban elements tied to Pakistan — two dynamics that have helped the Turks bring the two sides towards some preliminary understanding on how to address the Taliban issue.

Obviously, Turkey has its own interests in playing the role of peacemaker in Afghanistan. Acting as a mediator in various international disputes is a key means by which Turkey seeks to advance its objective of attaining global player status. Between its role as mediator between Israel and Syria, and Afghanistan and Pakistan, the Turks hope to emerge as a leader in the Islamic world, which the Turks feel can facilitate their goal of securing European Union membership.

Emerging as a stakeholder in Afghanistan offers the Turks a future opportunity to regain influence in their old stomping grounds in Central Asia. But the Turks will tread carefully on this path because they do not want to upset Russia (which sees Central Asia as its own sphere of influence) because of their energy dependency on the Kremlin. It will also have to balance between Washington and Moscow on Afghanistan.

For the United States, Turkish involvement in Afghanistan not only helps with the jihadist insurgency in southwest Asia, it also serves as a strong counter to Iran, as Tehran also wants to project power into Afghanistan through its ties with the Tajiks, the Hazara, and others. Therefore, the Turkish leadership is preparing to showcase its achievements on Afghanistan to Obama at a time when the U.S. president will be returning from summit meetings where he is not getting much help from his European allies. The Turks know the more they can achieve between the Afghans and the Pakistanis, the better able they will be to capture American support for their own ambitions.
Comment by Shawn Swanson on April 2, 2009 at 2:19pm
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The G-20 Concludes: The Money Question

STRATFOR TODAY » April 2, 2009 | 1655 GMT

Summary

Preliminary reports suggest the G-20 summit, which has just ended, has achieved commitments to provide massive financial support to struggling countries. This along with a recent change in International Monetary Fund policies should provide important assistance to many large states working to weather the economic downturn.

Analysis

The G20 summit has ended. Preliminary reports indicate that the summit produced commitments to provide massive financial support to struggling countries. Paired with a recent tweak in International Monetary Fund (IMF) policies, this should greatly help many large states weather the economic downturn.

In total, the IMF, which has served as the preferred international vehicle for bailing out economies most direly affected, will have its coffers expanded by $750 billion to $1 trillion. The fund uses its reserves to make loans to countries facing harsh structural imbalances — countries with policies in need of a severe correction (at least in the IMF’s estimation). The IMF uses their desperation to demand major changes to their economic structure. States normally prefer not to come under IMF tutelage as these “guidelines” often require extremely unpopular austerity measures that spark considerable social instability. Countries that the IMF sees as requiring such firm guidance — many of which already have IMF programs — include Hungary, Iceland, Mongolia, Malawi, Ukraine, Sri Lanka and Pakistan.


But courtesy of a policy change adopted within the last month, the IMF also can grant bridge loans to states facing short-term liquidity crunches, but which otherwise are following sound policies. These states would be doing fine if not for the global financial chaos. States likely interested in tapping this no-strings-attached lending vehicle include South Korea, Mexico and perhaps Poland.

Most of the $750 billion funding increase is likely for this second batch of states. They tend to be much larger, and so require more funding, if only in the short term. The IMF is likely to have the biggest global impact with regard to this group. Weaker states forced to seek more traditional IMF loans tend to be small and not particularly critical to global commerce. It is the bigger states that matter in terms of global stability. With investors skittish about lending to anyone not backed by the full faith and credit of the U.S. government, these larger states have found it next to impossible to access credit (even Germany has witnessed some failed bond auctions). Having an extra $750 billion fund run by the IMF to ensure that these states can carry out basic operations is a critical improvement in such a strained credit environment.

Of the $750 billion being pushed the IMF’s direction, $250 billion is the result of a new issuance of Special Drawing Rights. In common lingo, this means that the voting structure of the fund — it is technically commanded by states who pay in for voting control — has been altered. Most likely this means that cash-rich states like China and Saudi Arabia have won additional representation in the fund.

A second batch of money totaling $100 billion will be made available to the World Bank. While the bank’s efforts are noteworthy, it tends to focus on long-term development issues via loans of rather small size rather than short-term remediation via multibillion-dollar loans. Its efforts almost certainly will prove helpful in the long run, but they will have little effect on the economic crisis of the day.

Finally, there is a third batch of money totaling some $250 billion provided to various development banks, which will be used for trade finance. While details on this step remain vague at present, in theory this should allow many importers to continue operations.

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