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Global Intelligence: Week of Feb. 6, 2017

February 4, 2017 | 22:10 GMT

The Week That Was

Central Banks, Beware

Perhaps the biggest development to come out of this week was the Trump administration's building assault on central banks and their policies. First, the head of Trump's National Trade Council Peter Navarro took shots at Germany for allegedly exploiting the United States and the rest of the European Union with a eurozone where an "implicit Deutsche Mark" is undervalued relative to other country's currencies. Then, Trump accused Japan of taking advantage of the United States with their money and money supply by using quantitative easing to weaken the yen. The U.S. Federal Reserve is not even being spared from the White House reprimanding. Patrick McHenry, the Republican vice chairman of the House's Financial Services Committee, sent a stern letter to Federal Reserve Chair Janet Yellen and the rest of the Board of Governors that it should not be negotiating with other central banks on new international regulations and standards for the banking sector — such as the Basel Committee and Financial Stability Board — until President Donald Trump completes a review and has his own political appointments in place. In the same vein, Trump on Friday ordered a review of the Dodd-Frank Act in the first step of pulling back on banking and financial regulations that have been in place since the 2008-2009 Global Financial Crisis. This is a major change in the U.S. position that in turn spells a big shift for the global economy. Over the past decade, major central banks have seen their power and influence increase as they have borne much of the burden in mitigating risk and fallout from the 2008 financial crisis. Their main monetary tool has taken the form of quantitative and other monetary easing programs. Central Banks have also responded with more regulations on the financial sector. Their moves, in theory, should have independence from the political establishment in order to make tough economic decisions as needed. Trump is now arguing that such policies are unfair and that central banks should not be so assertive. With Trump wanting a weaker dollar, less financial regulations coming from the Federal Reserve and the Federal Reserve itself in a tightening cycle, his policy runs squarely against Yellen's approach. With Yellen now entering her final year of her term as chair (her term ends in February 2018), the two will likely be at a standoff for much of the year as Trump works to limit the Fed's independence and as Yellen tries to resist. Trump's eventual appointment of a new chair will be one tool at his disposal to impose his views. If the Federal Reserve pulls back from Basel Committee discussions and other international forum on regulations, movement on those issues will effectively cease as the United States sits at the center of the global financial system and no global regulations can come into force or be negotiated without its involvement.

Since January has just ended, it is also time to take stock of the dollar, which was one of the month's worst performing currencies. The dollar's value is the single most important number in global markets and it can change conditions all over the world. For example, recent dollar strength saw big problems hit Turkey and relief in Japan, which prefers a weaker yen. January's softening looks to be caused by two main factors: the Trump administration's well-vocalized aversion to a strong greenback and questions over its ability to get tax reform and infrastructure spending policies through the U.S. political machine. If the policies do make it through their inflationary pressure should lead to faster Fed rate hikes, creating an upward pressure on the dollar that no amount of Presidential jawboning could resist. But for now the markets and the Fed are in wait-and-see mode, with Friday's jobs report confirming that wages are not rising fast enough to force the central bank to move early.

A Perfect Storm Building in Europe

Developments out of France, Italy and Germany only underscore the mounting political challenge to the eurozone. France's conservative presidential candidate Francois Fillon had a terrible week trying to deflect new allegations that his wife and two of his children received hundreds of thousands of euros for fake jobs. Fillon denies these allegations, but has promised to withdraw his candidacy if there is a formal investigation against his family. In the meantime, his popularity is in decline and members of his Republican Party have allegedly started looking for a candidate to replace him. France holds the first round of its presidential election in April, with a runoff vote in May. Should the Republican party fail to reach the second round of the vote, there will be millions of conservative votes up for grabs. Some of them will probably go to centrist candidates, but many could go to the far-right National Front, which wants France to exit the eurozone. A big shift in France will create massive uncertainty in the currency area at a time when Italy is also getting close to new elections and where anti-euro parties will also perform strongly. Italian lawmakers will start amending the country's electoral laws in late February, opening the door for early general elections later in the year. The leader of the ruling Democratic Party, former Prime Minister Matteo Renzi, wants to hold elections in June, while he thinks he can still win them. But a small faction of the Democratic Party is considering the possibility of breaking away and creating its own political movement. A split in the Democratic Party would hurt its performance in elections and help the anti-establishment Five Star Movement, which wants to hold a referendum on Italy's membership in the eurozone. The Five Star Movement would probably still have to reach a coalition agreement with the right wing Northern League (also anti-euro) to form a government, but by then international markets would already be panicking. Italy's euroskeptics were also given a boost this week by a report from the Italian bank Mediobanca, which stated that the potential costs involved in re-denominating Italy's sovereign bonds from euros into lira were growing every year, due to a technicality with a newer form of bonds. The intimation is that if Italy is ever going to leave the euro, then the bloc feels (in line with Shakespeare's Macbeth) that "'twere well it were done quickly."

With France and Italy bubbling, the last thing Germany needs is an attack from the United States on the eurozone. The German government spent the week trying to prevent its world from collapsing, with its most senior officials reaching out to Berlin's key partners on issues such as immigration, defense and trade. Germany Foreign Affairs minister Sigmar Gabriel made a last-minute trip to see his U.S. counterpart, Rex Tillerson, and US Vice President Mike Pence in Washington. The German government is concerned about recent suggestions by members of the Trump administration that the United States could impose restrictions to imports from Germany. Gabriel also sought reassurance from the Trump administration about the U.S. commitment to NATO and security in Europe. Chancellor Angela Merkel meanwhile visited Turkish President Recep Tayyip Erdogan, and the EU-Turkey immigration agreement was one of the most important topics on the agenda. Germany wants Turkey to keep preventing asylum seekers from reaching the European Union, especially considering that this is an electoral year and Merkel wants to be reelected. But the Turkish government wants the European Union to honor its end of the deal, including a promise to relax visa requirements for Turkish citizens.

Russia Leverages Uncertainty in the Borderlands

Russia, the West and the countries caught in between had an eventful week. Violence spiked in Eastern Ukraine between Ukrainian forces and Russian-backed separatists. Though there are escalatory signs on both sides, Kiev has a political interest in showcasing Russian aggressions in eastern Ukraine so as to derail any prospect of a U.S.-Russia rapprochement. As shown in defense talks this week between Ukraine and Lithuania, Kiev is also busy reaching out to other powers for security back-up. Georgia, too, revealed its uneasiness over U.S.-Russia relations and, much to Russia's delight, seems to now be wavering on whether or not to attend an upcoming NATO summit in May. Russian President Vladimir Putin's visit to Hungary was yet another opportunity for Moscow to deepen discord within Europe. Hungary has been one of the most vocal advocates in Europe to end sanctions and warm relations with Russia and Putin had plenty of economic incentives to prod Budapest further along on that conciliatory track. The prospect of warming U.S.-Russian relations is already creating useful uncertainty in Europe for Russia to leverage, but Washington will still have to proceed cautiously. Notably, U.S. Ambassador to the United Nations, Nikki Haley called for an end to Russian aggressions in Ukraine, which marked the first official condemnation of Moscow under the new administration. Trump's Press Secretary Sean evaded the question when he was pressed for the president's stance on the issue. The Trump administration also made a slight adjustment to existing sanctions the Obama administration imposed on the Federal Security Service (FSB), but both the Trump and Putin teams downplayed the move, denying it was an actual "easing" of sanctions. Nonetheless, the move was widely regarded in Russia and the United States as a conciliatory move, which goes to show just how politically sensitive this issue is and how that course raise complications for any concessions the Trump administration attempts with Russia.

A Familiar Feud Between Washington and Tehran

Iran will be one of many foreign policy firestorms for the Trump administration to manage. The commotion this week began when Iran tested a medium-range ballistic missile on Jan. 30, two days after a White House executive order temporarily banned the entry of Iranian visa holders into the United States. Iran blew off U.S. warnings that it was put "on notice" and the U.S. Department of the Treasury's Office of Financial Assets Control on Feb. 3 issued a list of 12 Iranian entities and 13 individuals to be sanctioned. Iran's foreign ministry responded within hours with news that it plans to impose sanctions on U.S. individuals and entities deemed to be involved in supporting terrorist organizations. Even though Iran's ballistic missile testing and the US sanctions in response do not directly impact the Joint Comprehensive Plan of Action (JCPOA), the developing tit for tat between Washington and Tehran still complicates the nuclear framework as both sides will perceive aggressions as violations of their broader understanding. This gets especially complicated for Iranian President Hassan Rouhani who is trying to eke out an incumbent victory in elections this spring. We will be watching a meeting next week between Russia and Iran where the two will be discussing the JCPOA. Iran needs Russia's (and Europe's) influence within the JCPOA group to mitigate any attempt by the United States (with strong nudging from Israel) to revisit the terms of the deal. Russia's vote in the U.N. Security Council is also critical to Iran in fending off U.N. sanctions, but there is little Moscow can do to dissuade Washington from imposing unilateral sanctions.

Setting up the U.S.-Mexico Negotiations

After recovering from the drama of the previous week, Mexican President Enrique Pena Nieto announced on Feb. 1 that negotiations between Mexico and the United States to discuss changes to NAFTA will be moving forward. On Feb. 2, Foreign Minister Luis Videgaray and U.S. Secretary of State Rex Tillerson met to begin discussing the framework of any future negotiation. Any future U.S.-Mexico talks are likely to focus on rules of origin for specific products made in the bloc, labor mobility between the two countries under the trade agreement, and dispute settlement mechanisms currently contemplated in the trade agreement. Although it is clear that negotiations will begin within months, there are still several roadblocks ahead. U.S. rhetoric concerning the construction of a border wall (and making Mexico pay for it) could delay the start of a meaningful negotiation. Similarly, any negotiation begun with the explicit aim of closing the trade deficit with Mexico will likely worry Mexican authorities, given that such a demand might be interpreted as an attempt to curb future Mexican economic development.

Shoring up Alliances in Asia

U.S. Secretary of Defense James Mattis is finishing up his first official overseas trip to South Korea and Japan on Feb. 4. The visit is widely seen as an attempt to shore up the alliance with two of Washington's most important Asian allies. During the trip, Mattis reaffirmed the U.S. commitment amid the shifting security environment in the region. During his meeting with Japanese Prime Minister Shinzo Abe, Mattis pledged to uphold Article 5 of the security treaty to defend Japanese-administered territories in the context of China's military aggression and maritime competition in the East and South China Sea. Seoul shared similar momentum, as Mattis strikes a harder stance over North Korea's provocation and nuclear program; and both countries also agreed to move forward with the planned deployment of Terminal High Altitude Area Defense (THAAD). While Seoul wanted some assurance, South Koreas ongoing political crisis could continue to complicate THAAD deployment as opposition figures capitalize on the foreign policy legacy of impeached President Park Geun Hye. Next week, Park may face renewed pressure for interrogation following month-long probe. The outcome will partly form the ruling by Constitutional Court over the validity of the impeachment decision, with a possibility of an overturn or suspension — however unlikely — remains.

Quote of the Week

"Maybe we do a new NAFTA, and we put an extra F in the term NAFTA. You know what the F is for, right? Free and fair trade. Not just free trade. Free and fair trade. Because it's very unfair."
- U.S. President Donald Trump

Full Articles

The United States Reassures Its Asian Allies

Two weeks after taking office, U.S. President Donald Trump has begun establishing his administration's foreign policy priorities. U.S. Secretary of Defense James Mattis arrived in Tokyo on Feb. 3 for the second leg of his first overseas trip, a four-day visit to South Korea and Japan. While in Japan, Mattis will meet with his Japanese counterpart and pay a courtesy call to Prime Minister Shinzo Abe, who will head to Washington for a meeting with Trump on Feb. 10. That Mattis chose to visit South Korea and Japan on his maiden voyage as defense secretary indicates the importance the Trump administration has put on the Asia-Pacific region, particularly Northeast Asia.
Australia, like other traditional U.S. allies in the Western Pacific, doesn't quite know what to expect from the Trump presidency. An unusually testy phone call on Jan. 28 between Australian Prime Minister Malcolm Turnbull and U.S. President Donald Trump, reportedly cut short by Trump after the pair clashed over a 2016 deal to resettle refugees, only underscored the sense that this uncertainty may linger. Ever the patient ally of the United States, Australia has been at this juncture before. Throughout its history, the country has subjected itself to the policy vicissitudes of faraway powers. Australia's extreme geographic isolation gives it a vast buffer against military threats, granting it free rein in its near abroad, along with considerable wealth and stability. At the same time, it puts Australia's economy at the mercy of distant export markets. Furthermore, because Canberra lacks the resources to sustain a globally capable navy of its own, it has tried to prove its value to maritime powers capable of securing critical sea-lanes on its behalf. To that end, Australia has routinely participated in U.S.-led military operations of marginal relevance to its interests — for instance, the United States' recent endeavors in the Middle East. But the new U.S. administration's apparent ambivalence toward traditional alliance networks and its possible willingness to force a confrontation with Beijing have cast doubt on the future of the established economic and security architecture in the Western Pacific. China's own growing clout, meanwhile, has further complicated the picture.
The Islamic State has been working feverishly to block Iraqi troops in eastern Mosul from advancing into the western half of the city. Recent satellite images show the fruits of its labor: Since November, the group has fortified its defensive positions along Mosul's southern edge. Three months ago, the area was riddled with the Islamic State's roadblocks and barriers. Now the militants have added at least 3 kilometers (1.8 miles) of berms and ditches to the same front line, shoring up their defenses and obstructing one of the few routes left into western Mosul.

The Week Ahead

Japan's Lullabye for Trump

In an effort to court the new U.S. administration and convince Trump that Japan should not be a prime target for a trade war, Japanese Prime Minister Shinzo Abe will hold a two-day summit President Trump Feb. 10-11 at the White House and at Trump's Mar-a-Lago estate in Florida. Abe is cleverly arriving armed with a new plan to invest $150 billion and create as many as 700,000 jobs in the United States, mostly in infrastructure-related industries. Japan's leaders hope that the plan will help temper the Trump administration's criticisms of Japanese currency policy, thus potentially sparing Japan from being labeled a currency manipulator – and from the punitive measures and damages that would likely entail. With the demise of Trans-Pacific Partnership (TPP), both Abe and Trump are also interested in pursuing a bilateral free trade agreement and Japan will reassert its shared commitment to contain China and North Korea. As Japan's investment plan suggests, the Abe administration is willing to go to great lengths to ensure that its strategic and economic partnership with the United States only deepens under Trump despite recent trade rhetoric. Next week will be important for the Brexit process, because the bill to authorize the British government to start formal negotiations to leave the EU will enter committee stage on February 6 and 7. During this stage, lawmakers in the House of Commons will probably suggest amendments. Among other things, lawmakers will demand a greater role of parliament in negotiations with the European Union. After the end of the committee stage, the Commons will vote the bill on February 8. If it is approved, it will be sent to the House of Lords, where support for the EU is stronger. While these lawmakers are unlikely to try to block the bill, they may suggest their own amendments. London's plan is to have the bill approved by early March, so that Prime Minister Theresa May honors her promise to start formal negotiations with the European Union by the end of that month.

Merkel Goes to Poland

German Chancellor Angela Merkel will be in Poland on Feb. 7 to meet President Andrzej Duda and Prime Minister Beata Szydlo. Bilateral relations have been relatively cold between the two neighbors recently. For example, Warsaw has demanded a reform of the European Union to repatriate powers to national parliaments, which goes against Berlin's views for future integration. Poland has also refused to implement a German-backed plan to distribute asylum seekers across the bloc. But the two governments have similar concerns about the future of NATO and the potential rapprochement between the United States and Russia. They also support the Ukrainian government and want to maintain sanctions against Moscow. The current uncertainty about the global environment could open the door for more German-Polish cooperation.

A Political Test for Modi

On Feb. 4, the first set of India's 2017 state elections kicked off with polls opening in the states of Punjab and Goa. Yet the biggest election to watch is in Uttar Pradesh, India's most populous state, which goes to the polls Feb. 11. Prime Minister Narendra Modi's Bharatiya Janata Party (BJP) is angling to win big in Uttar Pradesh. The state's assembly sends the greatest number of delegates of any state to the upper house of parliament, where the BJP must boost its numbers to make it easier to pass laws. The elections will coincide with India’s Budget Session of parliament, which kicked off on Feb. 1 with finance minister Arun Jaitley unveiling a $315 billion budget for the upcoming fiscal year. Notably, Jaitley scrapped the Foreign Investment Promotion Board to reduce hurdles to investment, something Apple is bound to take notice of as the company discusses a plan with the Karnataka state government to begin manufacturing iPhones in April in Bangalore.

Testing the Boundaries of Mercosur

Argentine President Mauricio Macri will visit Brasilia on Feb. 7 to meet with Brazilian President Michel Temer. Increasing trade prospects for the Mercosur will be one of the main points on their agenda. Both countries' foreign ministries are seeking ways to increase the historically protectionist bloc's ability to gain access to new markets abroad. One way to do this would be to amend the bloc's founding treaty so that nations within the bloc can sign deals independently of one another. Such a decision would require lengthy discussion and may not meet with any success. Such a move would undermine the bloc's protectionist nature, which would anger domestic manufacturing unions that have historically been shielded from foreign competition by high trade barriers. The electoral timeline of the next several years is also not in Macri or Temer's favor. Brazil will hold a presidential election in 2018, and Argentina will hold an election in 2019. These votes could bring more protectionist governments to power which would be less likely to move forward with opening their countries to foreign competition.

Turkey and Israel Meet Again

Turkey and Israel have begun pursuing normalized, bilateral ties after a reconciliation deal struck in 2016 sealed their slow rapprochement. Israeli officials were in Ankara this past week and in the coming week, from Feb. 7-8, Turkey's culture minister will be in Tel Aviv for an official visit, where he will take part in a Tel Aviv Tourism Exhibition. He will then visit Palestinian officials in Ramallah, the seat of the Palestinian Authority. Israel desires solid relations with Turkey for economic and security reasons. Turkey offers the prospect of cooperation on energy-related deals, and perhaps more importantly at this juncture, an influential force among Palestinians and sway with Gaza's Hamas leadership, which Turkey has continued to help despite the six-year freeze between Tel Aviv and Ankara. For its part, Turkey is eager for the prospect of energy deals as well.

Astana Talks on Syria Continue

As a follow up to Jan. 23 talks on Syrian political negotiations, Turkish, Russian and Iranian representatives will meet again in Astana, Kazakhstan to hash out technical details for monitoring the fragile Syria cease-fire. The Dec. 30 cease-fire was implemented with the backing of all three powers but particularly through the actions of Russia and Turkey. Concurrently with the Astana talks, representatives of the Syrian opposition will be meeting with Turkish officials in Ankara on the same day. In theory, these talks are preparing for the next round of Geneva talks Feb. 20, which will be the first Geneva-based Syrian negotiations in almost a year.

Slovenian President Goes to Moscow

Slovenian President Borut Pahor will visit Moscow on Feb. 10 to meet with his Russian counterpart. The visit is at the invitation of Russian President Vladimir Putin, who has been cultivating divisions among the Europeans, particularly over sanctions and the future of relations with Moscow. Slovenia has been an avid supporter of maintaining sanctions on Russia, following Berlin's line. However, there is increasing dissent within the Slovenian government and among big business. Moscow has reportedly prepared a string of economic deals for its visitor, similar to the sweeteners Russia offered Hungary this past week. A rumor has also surfaced in recent weeks that Putin and Trump are considering Slovenia for their first summit, though there are no signs such plans are in the works. The following is an internal Stratfor document listing significant meetings and events planned for the next week.
EUROPE

• Feb. 6: The EU Foreign Affairs Council will gather to discuss Libya, Egypt and managing conflict in the Middle East.

• Feb. 6: Israeli Prime Minister Benjamin Netanyahu and British Prime Minister Theresa May will meet in London.

• Feb. 6-8: A parliamentary committee from the British House of Commons will examine the Brexit bill followed by a final vote.

• Feb. 7: EU General Affairs Council will discuss preparations for the March 9-10 European Council meeting.

• Feb. 7: German Chancellor Angela Merkel will visit Warsaw to meet with Polish President Andrzej Duda.

• Feb. 8-9: The Maltese rotating presidency of the Council of the European Union will hold a meeting of high-ranking officials to follow up on the 2015 Valletta summit on migration.

• Feb. 10: Italian President Sergio Mattarella will visit Spain.

• Feb. 12: Former German Foreign Minister Frank-Walter Steinmeier is expected to be elected by the parliament as German president.

EURASIA

• Feb. 6: Representatives from Turkey, Russia and Iran will meet in Astana to discuss monitoring the cease-fire in Syria. 

• Feb. 6: A Russian delegation will visit Syria.

• Feb. 6-7: Moldovan President Igor Dodon will visit Brussels.

• Feb. 8: Russian and Iranian officials will meet in Moscow for consultations on the Joint Comprehensive Plan of Action (JCPOA).

• Feb. 10-11: Slovenian President Borut Pahor will visit Moscow.

• Feb. 12: Turkmenistan will hold its presidential election.

ASIA-PACIFIC

• Feb. 6-9: South Korean President Park Geun Hye is set to be questioned by prosecutors.

• Feb. 7-10: Chinese Foreign Minister Wang Yi will visit Australia and New Zealand.

• Feb. 9-10: Indonesian Foreign Minister Retno Marsudi will visit Singapore.

• Feb. 10: Japanese Prime Minister Shinzo Abe will meet with U.S. President Donald Trump in Washington.

SOUTH ASIA

• Feb. 11: The Indian state of Uttar Pradesh will hold elections.

MIDDLE EAST/NORTH AFRICA

• Feb. 6: Syrian opposition representatives will meet with Turkish officials in Ankara.

• Feb. 7: The Lebanese parliament will convene for a session.

• Feb. 7-8: Turkish Minister of Culture and Tourism Nabi Avci will travel to Israel.

• Feb. 8: Kuwaiti Minister of Information Sheikh Salman Humoud Al-Sabah will face a vote of no-confidence.

• Feb. 12: Egyptian pharmacists will stage a nationwide strike.

AMERICAS

• Feb. 7: Argentine President Mauricio Macri will visit Brasilia to meet with Brazilian President Michel Temer.

AFRICA

• Feb. 8: Somalia will hold its presidential election.