1

STRATFOR 700 Lavaca Street, Suite 900 Austin, TX 78701 Tel: 1-512-744-4300 www.stratfor.com

GEOPOLITICAL ISSUES AHEAD:

A Monthly Assessment

Introduction

[TK from George]

East Asia/Oceania

China

December is the last month of a nerve-racking year both economically and politically for China. Beijing appears to have avoided the worst threats of social stability for the year, with growth rates back up to nearly 8 percent, the official target rate for preserving jobs and to begin creating new ones. This rate was achieved through a surge of bank loans and central government disbursements, and now the urgent question remains: How -- and when -- should Beijing begin easing out of these emergency financial and economic policies to prevent the economy from overheating? December is too early for a major tightening of monetary or fiscal policy (the most likely timeframe for any big moves in that regard would be mid-2010), but the debate will dominate Beijing throughout the month.

Another major concern will be trade relations with the United States. To get through the financial crisis, China has surged exports to keep its manufacturing centers standing. Meanwhile, in the United States, the manufacturing sector is suffering, unemployment is high, China is perceived as stealing market share for U.S. manufacturers and domestic pressure is rising for the U.S. government [to do something about it?]. This contrast in economic recovery strategies has created tensions between the two countries, apparent in the rising number of trade disputes on goods ranging from Chinese tires to steel pipes to U.S. cars. Both sides are making threats while trying to avoid a full trade war. At the same time there is some potential for major U.S. and Chinese companies to cooperate in the areas of energy, high technology and clean technology due to a bilateral agreement in November.

An international carbon emissions reductions treaty will be discussed at the U.N. climate-change summit Dec. 7-18 in Copenhagen, Denmark, that is the proposed successor to the Kyoto Protocol. China is a critical player in negotiations over a proposed treaty because it is one of the top carbon emitters and the fastest growing economy in the world. Regardless of environmental questions, climate-change talks are important because global energy-industry players are waiting for predictable signs of new domestic and international laws in order to structure their mid- to long-term investment plans. China has presented itself as the leader of the developing world, arguing that the developed economies should make the biggest sacrifices and investments. China does not appear willing to establish a time frame for imposing binding carbon emissions reductions targets upon itself. Nor is it clear what the United States will be able to commit to, since the domestic policy in Washington has not been set. No final binding treaty will likely emerge from the summit, but a preliminary non-binding agreement is possible if the United States and China can work together (so far it has not been evident that they can).

China and Central Asia

The Central Asian Natural Gas Pipeline (Turkmenistan-Uzbekistan-Kazakhstan-China) will become fully operational on Dec. 15, with 15 billion cubic meters of capacity coming online (to be increased to 30 billion by December 2010). Currently natural gas is a small component of China’s overall energy mix (around 3 percent), but it will become a greater portion as the country’s economy continues to grow. Beijing is also trying to reduce its traditional dependence on coal to diversify China’s energy mix, but this is happening slowly, with coal in abundant supply and [still the country’s?] most reliable [energy source?]. Also in December, a natural gas pipeline from Qinghai to Gansu provinces will begin operating.

China will also hold a fourth round of discussions with Taiwan about opening formal negotiations for a free trade agreement (the Economic Cooperation Framework Agreement). Cross-strait relations have improved over the past year, and several major Chinese banks are preparing to invest in Taiwan following the recent signing of a financial cooperation agreement. A free trade agreement would contribute greatly to closer economic ties, though such an agreement would likely still restrict the movement of labor, agricultural goods and other items. Any trade agreement would require considerable political maneuvering on both sides.

Internationally, China will seek to learn more about the new government in Japan, led by the Democratic Party of Japan (DPJ). DPJ Secretary General Ichiro Ozawa will visit China on Dec. 12, while China’s most likely contender to become the next president, current Vice-President Xi Jinping, will visit Japan (in addition to South Korea, Cambodia and Myanmar) beginning Dec. 17. Regional defense discussions will continue with China’s defense minister visiting North Korea, Japan and Thailand until Dec. 5. China will also watch the beginning of bilateral discussions between the United States and North Korea, which begin on Dec. 8, so as to gauge how well Washington and Pyongyang communicate.

South Korea

The government of South Korea has decided to begin enforcing the twice-delayed 1997 Trade Union Labor Relations Adjustment Act (TULRAA) in January 2010. Two key provisions of the act include ending the practice of a company paying the salary of the full-time union representative at the company and opening[allowing?] a company to have more than one labor union represented. The TULRAA is seen by the major labor umbrella unions, the Korean Confederation of Trade Unions (KCTU) and the less militant Federation of Korean Trade Unions (FKTU), as a major initiative to break the backs of organized labor, and to some extent they are right. The power of labor unions has waned in Korea since their heyday in the 1980s, but they still represent a formidable challenge to the government in expanding industry and inviting foreign investment, and the Lee Myong Bak government has vowed to counter the power of the umbrella unions. The labor unions are now considering major nationwide strikes in December to protest the government actions. The Korean Metal Workers Union, whose 140,000 members includes many shipyard workers and make up the largest single portion of the militant KCTU, has not yet decided whether it will participate in the strikes. Other disruptions could come from unions covering transportation or port workers. For the KCTU and FKTU, the TULRAA is a fundamental challenge to their strength, and barring a last-minute deal with government and industry, they will strike or risk seeing their power further eroded.

Thailand

The opposition United Front for Democracy against Dictatorship (UDD) party, known as the “red shirts,” plans to hold a “showdown rally” from Nov. 28 to Dec. 2 in [where? and did it happen? please update during fact check], preceding the king’s birthday. One million people are expected to take part in the protest against the administration of Prime Minister Abhisit Vejjajiva, whom they hope to see ousted from power before year’s end. There are additional stressors in the mix. Tensions between Cambodia and Thailand that have been simmering for months over border demarcation spiked recently when Cambodian Prime Minister Hun Sen offered ousted Thai Prime Minister Thaksin Shinawatra a position in the Cambodian government as an economic advisor. Also exacerbating tensions was the recent ax murder in Thailand of a Cambodian worker by his Thai co-worker over political differences. Hence, the UDD rally could trigger nationalist backlashes, with localized violence spreading rapidly with little central control.

Eurasia

Russia
In recent months Russia has been discussing major economic reforms that envision privatizing thousands of companies and bringing foreign investment into strategic industries, particularly the energy sector. These discussions were officially endorsed during the 11th national congress of the ruling United Russia party in St. Petersburg, which concluded Nov. 21, with both Russian President Dmitry Medvedev and Prime Minister Vladimir Putin stating that the reforms will be enacted. The details are still being debated and will be further hashed out in December, with the first new energy laws likely to take effect in January. Meanwhile, asset-swaps and investment deals are already starting to be proposed with such Western energy majors as Total, GDF and E.ON. Putin has put his weight behind the reforms but will be careful to control how quickly and how deeply they are carried out due to their political undertones and the resulting clan war that is now taking place.
Ukraine
Ukraine's monthly natural gas payment will again come due on Dec. 7, this time with only a little over a month before the Ukrainian presidential election is scheduled to take place. Ukrainian Prime Minister Yulia Timoshenko has already wrapped up a deal with her Russian counterpart Vladimir Putin that lays out terms for natural gas purchases in 2010. These terms include removing the 20 percent discount off European prices that Ukraine receives and instituting a 60 percent increase in transit fees that Ukraine will charge Russia. This deal has ostensibly stabilized the energy relationship between the two countries, but Ukrainian President Viktor Yushchenko has called for the terms to be changed. With an eye toward undermining Timoshenko's candidacy in the election, Yushchenko has gone so far as to take control of the National Bank of Ukraine (the country's central bank, which transfers funds that the state oil and gas firm Naftogaz uses to make payments) in order to prevent Timoshenko from making payments. This has caused Timoshenko to seek other payment methods, and it is sure to make Ukraine’s energy relationship with Russia more volatile as the election approaches.
Central Asia
December will be a month in which two significant Central Asian natural gas pipelines are set to come online. The first, a pipeline from Turkmenistan to Iran, is projected to supply 6 billion cubic meters (bcm) of natural gas to Iran in 2010 and could double its capacity in the coming years. The second is the natural gas pipeline from Turkmenistan to China (mentioned above) that will send 10 bcm of natural gas the first year and has the capacity to send 30 bcm. Both pipelines -- and particularly the Turkmen-Chinese line -- are significant in that that they are the first real projects that serve to divert Central Asian energy supplies away from Russia. The two pipelines present the region with many opportunities, such as hooking its vast resources and infrastructure with energy-hungry China.

Azerbaijan is also interested in sending its natural gas to China via the Transcaspian pipeline project.

But the pipelines pose issues and challenges as well. Azerbaijan and Turkmenistan have had bitter disputes over legal boundaries on the Caspian Sea and in natural gas fields in the area, making cooperation between the two countries difficult. Also, Russia owns the majority of Turkmenistan’s energy infrastructure and would ultimately be in control of energy flows to China as well as to Iran. This means Moscow could turn off the spigot if it deemed it politically necessary. Yet another problem is that the Turkmen-Chinese pipeline could give rise to regional tensions in Central Asia. The line transits Uzbekistan and Kazakhstan and will earn the two countries generous trans-shipment revenues. This gives both countries substantial leverage, especially Uzbekistan, which Russia views as a rising star in the region and a substantial threat. STRATFOR will continue to monitor the situation closely for any potential roadblocks as the pipelines come online.
Nord Stream
Significant headway has been made on the Nord Stream pipeline, with countries such as Sweden, Finland and Denmark all allowing their territorial waters to be used in the joint venture between Russia and Germany. STRATFOR sources have reported that technical issues have largely been settled, with the initial projection of $20 billion for the pipeline being revised to a more manageable $12 billion. Russia has agreed to provide 68 percent of the financing, roughly $8 billion, while Germany would cover approximately $3 billion to $4 billion and the Netherlands would provide around $1 billion. Construction is now expected to begin in December and the first leg of the pipeline could be operational by late 2010. If construction costs exceed expectations, France and Austria would likely be eager to step in with extra financing in exchange for stakes in the project. The Nord Stream pipeline, which represents the growing economic relationship between Russia and Germany as well as Europe’s willingness to work with Russia on energy projects, also will increase Russia’s geopolitical influence in Europe.

Latin America

Argentina

The Argentine Workers’ Center (CTA), one of Argentina’s largest union conglomerates, has threatened to go on strike Dec. 15. CTA is upset with the government for its refusal to officially recognize the umbrella group, which backed the crippling 48-hour subway strike in November and can be expected to bring out large numbers of people for demonstrations in December. Thus far it does not appear that Argentine labor organizations are sufficiently organized to seriously challenge the government, but there is a great deal of speculation throughout the country that the administration of Argentine President Christina Fernandez de Kirchner may not be viable. And as economic problems continue to mount, the chance of serious labor unrest will only increase.

In addition, Argentine Economy Minister Amado Boudou has said that Argentina plans to begin negotiations in December to settle its Paris Club debt. Once begun, the process will take months to resolve. Meanwhile, the newly elected Argentine legislature will take its seats Dec. 10, marking a significant decline in the powers of Fernandez, who saw her base shrink in recent elections. The divisions in the legislature will make it difficult for laws to be passed, and the president will likely rely on her so-called “super powers” to pass laws by decree, although the new legislature could allow those powers to lapse when they come up for renewal in the next year[2010? 2011?].

Peru

Internationally, Peru’s relations with Chile will continue to deteriorate in December. The discovery in November of a Chilean spy in the Peruvian military has ratcheted up already high tensions between the two countries. Though we do not expect a cross-border altercation (primarily because Chile far outstrips Peru militarily, thus providing a strong disincentive to Peru to act on its complaints) the two will continue to exchange heated words. Peru will also seek to increase its arms purchases from abroad. STRATFOR sources have indicated that Peru will likely try to buy arms from Israel or Russia, since it views the United States as having close ties Chile. Any spillover from the dispute could impact trade relations between the two countries, and the Peruvian legislature is considering ending a free trade agreement with Chile. The market-friendly policies of the administration of Peruvian President Alan Garcia make it unlikely that the policies would thoroughly disrupt business relations with Chile, which accounts for 6 percent of Peru’s exports. However, the possibility of disrupted commercial interaction between the two states cannot be discounted.