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January 31, 2023
Russia & Europe
Last week marked the last that Gazprombank, Russia’s third largest financial institution and one of its only remaining state-backed financial institutions with access to the SWIFT international payment system, would perform dollar-denominated transactions.
American banks JP Morgan Chase and New York Mellon closed corresponding accounts for dollar transfers last week. Gazprombank assured its clientele that access to funds would be uninterrupted via other denominations.
Gazprombank had become a crucial lifeline for Moscow to service currency trades amid sanctions on its Central Bank – with profits from Russian oil and gas sales accumulating in its accounts.
Technology / Cyber
Russia’s state-owned Rostelecom is reportedly negotiating acquisition of one of Russia’s “big four” mobile providers, MegaFon, from the holding company of sanctioned billionaire Alisher Usmanov.
The move would amount to a major consolidation of the industry into government hands, as Rostelecom already owns a second major operator, Vimpelcom.
For Usmanov’s holding company, the sale of MegaFon could be a way to completely pull out of the telecom and tech market and focus on heavy industry. Previously Usmanov handed over internet major Mail.ru to state-controlled investors.
Transfer of the telecoms sector into largely government hands could, experts note, help solve problems like access to equipment and service interruptions – but could also diminish competition and lead to higher prices.
Tensions between Azerbaijan and Armenia are threatening to put at risk a “sanctions-proof” trade route – the International North-South Transport Corridor (INSTC) – running overland and by sea from Moscow to Mumbai.
Experts say Russia faces an impasse as it attempts to mediate the crisis. Lack of action will further tarnish its image in Armenia (a treaty partner), while any action may trigger a crisis with Turkey, which backs Azerbaijan.
Meanwhile, Iran is wary that territorial gains by Azerbaijan will encircle restive northern provinces where pan-Turkic tendencies are high.
The final piece of the INSTC – which was envisioned 23 years ago by India, Russia, and Iran – is a yet-incomplete rail link between Azerbaijan and Iran. Moscow and Tehran recently pledged to accelerate its completion.
Russian officials claim that its new combat unmanned ground vehicles (UGVs) will be outfitted with antitank weapons to target newly pledged US and German tanks for Ukraine.
Advances in UGVs generally point to a future in which anti-aircraft and anti-tank weapons with automated targeting and precision capabilities gradually replace human-operated systems.
Analysts, however, are skeptical that Moscow’s next-gen UGVs have been tested in complex battlespaces against a variety of countermeasures, and assess that human decisionmaking will remain the competitive edge for the foreseeable future.
Germany may lose its place as the world’s #2 carmaker to China in 2023, as the latter targets 8 million exported units by 2030 – enough to overtake Japan’s overall lead by double by that time.
European imports of Chinese-made cars surged 156% in 2021. The average price was roughly a third of that for German-made vehicles, and 30% less expensive than Japanese makes.
Analysts assess that overcapacity and improved quality have driven this demand, but the dynamic could generate protectionist measures in Brussels.
PRC provinces released growth targets ahead of this spring’s National People’s Congress. All targets were between 5 and 6.5% for the year, but the path towards growth remains troublesome.
Many provincial budgets have been drained by years of zero-covid coupled with the property market bust. Policymakers hope consumers will boost the economy with spending, but spending requires confidence in the future—something many Chinese are still lacking after the last 3 years.
Technology / Cyber
The US is revoking licenses to US firms exporting goods to Huawei. The move will hurt China’s already beleaguered telecoms giant.
A group of policymakers in the US administration focused on cutting off China’s access to US inputs for advanced research has clearly won the internal policy debate.
This cohort of policymakers championed the US export ban on chips technology and talent, and they will likely continue pushing for a ban on early-stage investment in PRC companies with high-end technology.
The move comes days after agreement was reached between Japan, the Netherlands, and the US regarding the export of chip manufacturing kit into China.
The US sanctioned a PRC micro satellite manufacturer and operator after their satellites were found to be providing imagery services to the Russian military in Ukraine.
China quickly walked back its “no limits partnership” with Russia after its invasion of Ukraine, but official policy remains in favor of friendship with Russia.
The episode may not be a feature of PRC policymaking and official support, but rather a company selling services into Russia when it had no reason not to sell them the imagery. Although the airspace and resulting satellite imagery above China is tightly controlled, the same cannot be said for China’s international trade.
The sanctions precede Secretary of State Blinken’s visit to China next week. Analysts do not expect a major breakthrough in current relations.
A suicide bomber, believed to be affiliated with the Tehreek-e-Taliban, killed more than 100 people—mostly police officers or their families—at a mosque in Pakistan.
China bet on closer ties with the Pakistani government and factions within the security services, hoping such relationships would prevent terror attacks inside China. China’s infrastructure and cultural exchange programs in Pakistan have already been attacked, however.
The suicide bombing will reiterate to China the security issues it has along its border with Afghanistan, Tajikistan, Pakistan, Jammu and Kashmir, and India.
Separately, the Rwandan military shot at a Congolese jet for violating its airspace at the end of last week.
The two events highlight risks China shoulders by engaging in developing nations to push economic development, secure its borders, or collect minerals.
For China, engagement in these risky countries is not a problem that can be solved by engagement elsewhere—China cannot chose the countries that border it any more than it can decide which country has the most cobalt.
So, the risks of these relationships must be mitigated through closer security agreements or military deployments. These events will push China’s policymakers to continue pursuing additional overseas military bases—a move that will cause much consternation in Washington.
Messaging from PRC officials suggest the peak of the covid exit wave has passed and that China is on the mend.
KSG is holding off on declaring all-clear until the fallout from this Lunar New Year holiday becomes more apparent over the next 3 weeks.
We hope the PRC will return to normal health by the end of February.