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16 June 2019

As India's Economy Cools, the Spotlight Hits Its Shadow Banks


Managing the shadow banking crisis will form one of the Reserve Bank of India's core challenges in the months ahead.

The central bank will balance its efforts at pumping cash into the economy with keeping a lid on inflation.

Avoiding a crisis in shadow banks will be key toward sustaining consumption amid an economic slowdown.

Editor's Note: This assessment is part of a series of analyses supporting Stratfor's upcoming 2019 Third-Quarter Forecast. These assessments are designed to provide more context and in-depth analysis of key developments over the next quarter. 

As growth in India's $2.6 trillion economy cools, the problems afflicting its shadow banking sector are increasingly coming to light. Shadow banks — also known as non-banking financial companies — are facing a cash crunch ever since a titan in the sector, Infrastructure Leasing & Financial Services, defaulted on its payments in September 2018. That event sparked fears of a contagion rippling through India's already sluggish corporate credit system. Traditional banks — saddled with a significant number of non-performing loans — are not as likely to extend credit to companies already swimming in red ink, the legacy of an infrastructure binge that accompanied roaring growth in the economy from a decade and a half ago.

20 years after Battle of Tololing, defence reforms & Kashmir policy are Modi’s key challenges

ANIT MUKHERJEE

The Kargil war discredited Islamabad – not just as a revisionist state, but one that was downright dishonest.

In retrospect, the Battle of Tololing, fought between India and Pakistan during the Kargil war in 1999, was not much of a battle. There were only around 20 casualties, on both sides, and by the morning of 13 June 1999, Indian troops had captured only a few bunkers. Nonetheless, many describe this as a turning point, which changed the course of the war, as the Indian troops thereafter began a month-long ‘ridge-hopping’ campaign.

On the 20th anniversary of this battle, it is worth asking what changed — and did not, in the subcontinent. Ironically, while there is much that India can be proud of but, as revealed by the India-Pakistan crisis earlier this year, it still has a long way to go.

The Rohingya Crisis

Eleanor Albert and Andrew Chatzky

Hundreds of thousands of Rohingya, a Muslim ethnic minority group, are fleeing persecution in Myanmar’s western Rakhine State, fueling a historic migration crisis.

Introduction

Discriminatory policies of Myanmar’s government since the late 1970s have compelled hundreds of thousands of Muslim Rohingya to flee their homes in the predominantly Buddhist country. Most have crossed by land into Bangladesh, while others have taken to the sea to reach Indonesia, Malaysia, and Thailand.

Beginning in 2017, renewed violence, including reported rape, murder, and arson, triggered an exodus of Rohingya amid charges of ethnic cleansing against Myanmar’s security forces. Those forces claim they are carrying out a campaign to reinstate stability in the western region of Myanmar, but international pressure on the country’s elected leaders to rein in violence continues to rise.

Who are the Rohingya?

The Rohingya are an ethnic Muslim minority who practice a Sufi-inflected variation of Sunni Islam. There are an estimated 3.5 million Rohingya dispersed worldwide. Before August 2017, the majority of the estimated one million Rohingya in Myanmar resided in Rakhine State, where they accounted for nearly a third of the population. They differ from Myanmar’s dominant Buddhist groups ethnically, linguistically, and religiously.

Trump Should Make a Deal with China Before It’s Too Late

by Peter Harris

Making a monster out of Beijing would make Americans poorer and less safe.

President Donald Trump’s threat to impose tariffs of 25 percent on all Chinese goods not currently subject to surcharges means that imports from China might soon become a lot more expensive. But the potential ramifications of a prolonged U.S.-China trade war go far beyond consumer prices. Trump has said that he will make his final decision on extra tariffs after the G20 summit in Osaka, scheduled for June 28–29. What he chooses to do could affect U.S.-China relations in a profound and enduring way.

For decades, deepening economic ties between the United States and China have served to keep this most important of bilateral relationships on an even keel. After the collapse of the Soviet Union in the early 1990s removed the original rationale for a U.S.-China strategic entente, a burgeoning (and lucrative) flow of trade and investment has been essential to convincing leaders in both countries that an antagonistic relationship was worth avoiding, despite the many points of disagreement that separate them.

A World Safe for Autocracy?


The Chinese people, President Xi Jinping proclaimed in 2016, “are fully confident in offering a China solution to humanity’s search for better social systems.” A year later, he declared that China was “blazing a new trail for other developing countries to achieve modernization.” Such claims come as the Chinese Communist Party (CCP) has been extending its reach overseas and reverting to a more repressive dictatorship under Xi after experimenting with a somewhat more pluralistic, responsive mode of authoritarianism.

Many Western politicians have watched this authoritarian turn at home and search for influence abroad and concluded that China is engaged in a life-and-death attempt to defeat democracy—a struggle it may even be winning. In Washington, the pendulum has swung from a consensus supporting engagement with China to one calling for competition or even containment in a new Cold War, driven in part by concerns that an emboldened China is seeking to spread its own model of domestic and international order. Last October, U.S. Vice President Mike Pence decried China’s “whole-of-government” effort to influence U.S. domestic politics and policy. In February, Christopher Wray, the director of the FBI, went further: the danger from China, he said, was “not just a whole-of-government threat but a whole-of-society threat.” Such warnings reflect a mounting fear that China represents a threat not just to specific U.S. interests but also to the very survival of democracy and the U.S.-led international order.

What to Watch for as the Hong Kong Protests Unfold


What Happened

On June 12, Hong Kong's legislature delayed debate on a controversial bill that would allow citizens to be extradited to mainland China for criminal trials. The delay comes shortly after hundreds of thousands of people in Hong Kong took to the streets to rally against the government's recent decision to bypass a standard committee review to accelerate the bill's passage, which would add mainland China, Macau and Taiwan to a 20-country extradition list. Solidarity protests were also held in cities across the world on June 9, including in the United States, Canada, United Kingdom, Germany and Australia.

Despite the backlash, however, the government is still expected to resume the debate period and hold a vote on the bill in the coming weeks. In the meantime, demonstrations will likely continue and potentially escalate as the government keeps pushing forward with the law, fueled by fears that it could open up Hong Kong's judicial system to Beijing's political interference.

Whither Hong Kong?

PDF file 0.5 MB 

This Perspective considers the future trajectory of the Special Administrative Region in light of the 2014 prodemocracy street protests and their aftermath. First, it examines economic and political trends in Hong Kong–China relations; second, it considers the issues triggering these recent protests; third, it considers the effect of the protests; fourth, it explores possible future scenarios; and lastly, it offers some concluding observations.

Key Findings

Hong Kong Remains Key to China's Economy and Is an Important Symbol of a Unified China

While Hong Kong has become far less important to China in absolute economic terms, the two entities are gradually developing an integrated economy, and Hong Kong remains key to China's international trade and investment.

Although Hong Kong has lost its status as a crucial economic intermediary between China and Taiwan, it has acquired great political importance as a concrete symbol of national unification.

Is China leading in global innovation?


Innovation is the process by which new knowledge and ideas are created. Global leaders in innovation produce the scientific discoveries and technological advances that shape the modern world, making it critical to national power. An economy’s capacity to innovate is dependent on a variety of factors, including its commitment to research and development, the quality of its workforce, and the effectiveness of government institutions. As China works to upgrade its economy, its innovative strengths and weaknesses will shape its long-term economic competitiveness and prospects for global leadership.

Global Innovation Index

The Global Innovation Index (GII) is an annual ranking of more than 120 economies by their innovation capabilities and output. The GII scores and ranks each economy based on its performance within seven different pillars of innovation. Use the below interactive to compare how different economies perform in the GII. Click the play button to animate change over time.

Reintegrating ISIS militants and families is a global problem

BY JAMES DURSO

With the defeat of the Islamic State (IS) in war-battered Iraq and Syria, governments around the world — including the United States — are struggling with a new challenge from the terrorist group: What to do about thousands of family members of dead or captured ISIS fighters?

Thousands of women from around the world — America, Western and Eastern Europe, Central Asia and beyond — traveled to Iraq and Syria at the height of ISIS's power, marrying into its ranks and bearing children. Others were taken as captives from Kurdish, Yazidi, Christian and other Iraqi and Syrian religious-minority communities overrun by IS and eventually absorbed into the terrorist organization, in one form or another. 

Many of those women want to return to their home countries, along with their children, since the IS "caliphate" is no more, and Iraq and Syria are not eager to accept them as citizens. Whether or how they can be reintegrated is an incredibly difficult issue, with enormous potential security implications, especially for Central Asia nations that face their own ethnic, religious, political and security issues. 

America's Current War Plans for China, Russia Will Not Work, New Report Says


The Pentagon's plans to develop weapons and strategies to penetrate Russian or Chinese complex defense networks are a waste of time and could lead to the defeat of U.S. military forces on the future battlefield, according to a new report from the Center for a New American Security.

The Defense Department's 2018 National Defense Strategy has put every branch of the U.S. military on a path to create new war plans designed to defeat America's top two near-peer competitors -- Russia and China.

The Pentagon is focusing many of its modernization efforts and operational concepts toward defeating advanced anti-access area denial (A2/AD) networks -- ranging from sophisticated air defense systems to complex jamming weapons that disrupt GPS and military communications -- developed by these two adversary powers to degrade the effectiveness of a U.S. attack.

This is a mistake, according to "Why America Needs a New Way of War," by Christopher Dougherty, a senior fellow in the Defense Program at CNAS.

Russia’s Quest to Lead the World in AIIs Doomed

BY AARON BATEMAN

Innovation in the former Soviet Union is still in shackles.

In 2017, Russian President Vladimir Putin famously stated that whoever becomes the leader in artificial intelligence “will become the ruler of the world.” Most experts on technology and security would agree with Putin about the importance of AI, which will ultimately reshape healthcare, transportation, industry, national security, and more. Nevertheless, Moscow’s recognition of AI’s importance will not produce enough breakthroughs to obtain the technological edge that it so deeply desires. Russia will ultimately fail in its quest to become a leader in AI because of its inability to foster a culture of innovation. 

Russia’s anxieties about competing in the information age are far from new. In 1983, then-Soviet Minister of Defense Nikolai Ogarkov lamented to the New York Times that in the United States, “small children — even before they begin school — play with computers….here we don’t even have computers in every office of the Ministry of Defense.” The Soviets were concerned about Ronald Reagan’s Strategic Defense Initiative, a land and space-based missile defense system, in part due to its artificial intelligence-enabled battle management system. In short, the Soviets feared that they would be unable to compete as the information revolution accelerated. 

Does the UK Benefit From Chinese Investment?

MICHAEL PETTIS

While foreign investment usually benefits developing economies and creates local economic benefits in advanced economies, it generally does not benefit advanced economies on the whole except in very limited cases. On the contrary, foreign investment in advanced economies is more likely to lead to higher unemployment or rising debt.

A2018 Financial Times article began making the rounds again as part of a growing debate over China’s role as an exporter of capital. This topic may be of particular interest in the context of Italy’s recent efforts to position itself to increase its share of Chinese investment abroad. The article’s title, “Chinese Investments in the UK Fail to Materialise,” broadly summarizes its main point: British expectations of substantial Chinese investment have led to disappointment.

The article starts with the following lines:

Four years ago, when George Osborne visited Beijing, there was enormous optimism that investment from China would help to regenerate Britain’s northern cities. More recently, Downing Street said this week that more than £9bn of business deals would be signed between the two countries during UK prime minister Theresa May’s three-day visit to China.

A Hot Spot Is Getting Hotter

MARC PIERINI

Turkish, U.S., and European maneuvers continue around northern Syria, where the fighting has escalated.

The unconventional diplomatic and military choreography over northeastern Syria continues unabated between Ankara and Washington, and it involves European states as well, albeit more discretely. Meanwhile, Russia and Iran have kept supporting the approach of Syrian President Bashar al-Assad’s regime. As always, different players have different stakes in the game.

Looking at the realities in the field, the prominent development during the past few weeks has been Russia’s massive delivery to Syria of military supplies, including different missile types, through an air bridge to its Hmeimin airbase near Latakia. This has been carried out by large transport planes flying directly over Turkish territory. Ironically, these flight plans imply Ankara’s acquiescence.

The Russian objective embodied in the deal with Turkey over Idlib Governorate was always explicit: that remaining jihadis should not be allowed to return to Russia or anywhere else inside Syrian or Iraqi territory. Turkey’s position in the deal was delicate from the beginning, to say the least. By now it seems that Moscow wants a quick “solution” by way of an all-out offensive on the jihadis, irrespective of the humanitarian crisis that this is triggering. Civilian populations displaced by the current bombing campaign are probably around 200,000, if not higher, and many have gathered along the border with Turkey’s Hatay Province in makeshift camps, which offer little in terms of humanitarian supplies. In addition, the level of security for the internally displaced Syrians is low, all the more so as Turkey doesn’t intend to open its border to would-be refugees.

Europe’s Flawed Peace Policy

JUDY DEMPSEY

Europe is in the throes of a geostrategic crisis. The arc of stability that was described in the EU’s first security strategy back in 2003 is in tatters. The vision set out then and superseded in 2016 by the EU Global Strategy has exposed the fundamental weakness of post-1945 Europe.

As a bloc, the union cannot do defense and it cannot do hard power because its philosophy is anchored on a peace project. The ineluctable rise of China, cyber attacks, digitization, and the assault on the West’s once unchallenged preeminence that was protected by NATO and the United States mean that the Europeans will have to step out of the shadow of the EU’s peace domain.

Look at the arc. Almost every day there are military incidents in Ukraine’s eastern Donbas region, which Russia invaded in 2014. Germany, supported by France, mediated a ceasefire between Russia and Ukraine in 2015. But the so-called Minsk process for the region has not moved from a process to a permanent peace that restores Ukraine’s territorial integrity.

Balancing the poles

Shyam Saran

The progressive polarisation of US-China relations, interspersed with phases of remission, is likely to persist

What began as a trade dispute between the US and China has now morphed into a full spectrum strategic contest which is unlikely to abate any time soon. The one point the two sides agree upon is precisely that they are locked in a geopolitical contest and that its resolution will have to be the unquestioned dominance of one or the other. Neither accepts that multi-polarity is feasible in the sense that a cluster of major powers could construct a loosely structured but stable international order as a contemporary version of the European order set in place by Congress of Vienna in 1815.

The new hegemon, it is predicted, will be a rejuvenated US, which has seen off the Chinese challenge as it did the Soviet challenge in the Cold War. Or China will overtake the US and emerge as the undisputed hegemon in the current millennium. The resolution of the contest may take time so there will be a bi-polar world in the interim. Chinese analysts envision a process in which China will initially establish predominance in the Western Pacific pushing the US out towards the outer oceanic rim and then proceed to establish global pre-eminence. It is no coincidence that in its first ever Indo-Pacific Strategy Report (ISPR) released by the US on June 1, it is explicitly stated that China is a revisionist power which “seeks Indo-Pacific regional hegemony in the near-term and ultimately global pre-eminence in the long term”.

The Risks of a ‘Total’ US-China Competition

By Robert Farley

Even China hawks need to make a careful appraisal of what sparks joy in the Sino-American relationship.

Last week, Columbia University history professor Stephen Wertheim published an op-ed in the New York Times warning against the dangers of a new Cold War with China. Wertheim worries that opinion in Washington on the state of the relationship with China has changed dramatically in the past few years, across the political spectrum; Democrats are sounding nearly as hawkish on China as President Trump. Wertheim argues the Trump administration’s xenophobic approach to China risks ratcheting up tension to the extent that cooperation with Beijing will become impossible.

It may be a touch premature to sound alarm bells regarding an emerging New Cold War mindset in Washington, but it’s also important to carefully set forth the stakes of competition between China and the United States. The South China Sea is important, but it’s not Germany. Despite the ongoing “decoupling” between China and the United States, the relationship between the two is far tighter, and vastly more important domestically, than the relationship between the United States and the Soviet Union in 1945. The social, political, and economic relationship that China and the United States have built since the 1990s has helped to bring hundreds of millions of people out of poverty, and in so doing to transform the economies of both countries. Millions have traveled in both directions, and mutual cultural understanding has bloomed. “Civilizational” differences between China and the United States (or between the U.S. and Japan) have not prevented the two countries from developing one of the most productive economic relationships in world history.

Tankers Are Attacked in Mideast, and U.S. Says Video Shows Iran Was Involved

By David D. KirkpatrickRichard Pérez-Peña and Stanley Reed

LONDON — Explosions crippled two oil tankers in the Gulf of Oman on Thursday in what the United States called “unprovoked attacks” by Iran, raising alarms about immediate security and potential military conflict in a vital passageway for a third of the world’s petroleum.

Iran called the accusations part of a campaign of American disinformation and “warmongering.”

The explosions forced the crews of both vessels to evacuate and left at least one ablaze, and hours later the causes were still under investigation. Yet the backdrop of steeply rising threats between President Trump and Iranian leaders gave the stricken ships a grave significance even before the facts became clear.

By afternoon, Secretary of State Mike Pompeo said that American intelligence agencies had concluded Tehran was behind the disabling of both ships. He pointed to the weapons used, the expertise and resources required and the similarity to other recent attacks attributed to Iran.

The Factors That Could Push the U.S. and Iran to War

Despite hard-line factions in both Iran and the United States that would like to pursue confrontation, both countries will remain keen to avoid a major war with each other.

Nevertheless, the risk of miscalculation and escalation will remain high, particularly given Iran's force dispositions and conflict strategy, as both countries ramp up their military preparations. 

The absence of meaningful channels of communication will also reduce the ability of both countries to de-escalate tensions after an accident or initial confrontation.

The United States is sending additional forces to the Persian Gulf as Iran prepares and mobilizes its army; together, the countries' actions are significantly increasing the possibility of war. Compounding the risk is a faction within the White House, epitomized by hawkish national security adviser John Bolton, that is more eager than others in the administration to start a conflict with Iran. Bolton, naturally, has ideological counterparts in Iran, especially in the Islamic Revolutionary Guard Corps (IRGC), who are also spoiling for a fight.

The Strategic Threat from Iranian Hybrid Warfare in the Gulf

Anthony H. Cordesman

The threat of war with Iran may seem distant to many in United States and Europe, but its strategic implications became all too clear only hours after two freshly loaded tankers – the Frontline and the Kokuka Courageous – were attacked in the Gulf of Oman on June 12, 2019 – just outside the "Persian" or "Arab" Gulf. These attacks came less than a month after four previous attacks on tankers near a port in the UAE, and after months of rising tensions over Iran's nuclear programs, the war in Yemen, and the growing arms race in the region.

The fear of further attacks, and interruption in the continued export of petroleum sudden raised the global price of crude oil by 4% – a global price rise that everyone in the world must pay – including Americans – regardless of the fact the U.S. is no longer a major petroleum importer.

The reasons why such incidents can lead to immediate price rises, as well as growing concerns over far more serious patterns of conflict are simple. First, the military confrontation between Iran, the U.S., and the Arab Gulf states over everything from the JCPOA to Yemen can easily escalate to hybrid warfare that has far more serious forms of attack. And second, such attacks can impact critical aspects of the flow of energy to key industrial states and exporters that shape the success of the global economy as well as the economy of the U.S.

New and Critical Materials

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The RAND Corporation is a nonprofit institution that helps improve policy and decisionmaking through research and analysis. RAND's publications do not necessarily reflect the opinions of its research clients and sponsors.

Cybersecurity: These are the Internet of Things devices that are most targeted by hackers

By Danny Palmer

We're sorry, but a problem is preventing your video from playing.

Internet-connected security cameras account for almost half of the Internet of Things devices that are compromised by hackers even as homes and businesses continue to add these and other connected devices to their networks.

Research from cybersecurity company SAM Seamless Network found that security cameras represent 47 percent of vulnerable devices installed on home networks.

According to the data, the average US household contains 17 smart devices while European homes have an average of 14 devices connected to the network.

But while the range of connected devices ranges in scope from computers and smartphones to smart televisions and kitchen appliances, it's security camera systems which are the most hacked IoT devices.

Many of these attacks can bypass the security of cheap models of IP camera – with many of these low-cost devices based on a similar blueprint, meaning that if a vulnerability is found in one, it may also work against other models.

Top Intelligence Official: Moving to the Cloud ‘One of Best Decisions We Made’

BY FRANK R. KONKEL

Cloud computing is changing the way U.S. spy agencies meet their missions.

Sue Gordon, the principal deputy director of national intelligence, said the intelligence community’s $600 million bet on cloud computing in 2013 has more than paid off.

Speaking Tuesday in Washington at the Amazon Web Services Public Sector Summit, Gordon said the decision to turn to a commercial cloud vendor to host an assortment of classified, sensitive data for intelligence agencies for analysis and other purposes was to “hedge our bets against” against a world of big data.

Gordon said the 17 agencies that comprise the intelligence community have kept pace with that world and singled out cloud computing as “one of the best decisions we made.” Gordon said the C2S environment has improved the efficiency of intelligence analysts that sift through mountains of data, ultimately leading to better data for decision- and policy-makers. In addition, Gordon said it was more secure from outside attackers than the intelligence community’s traditional legacy systems.

INSIDE THE CRYPTO WORLD'S BIGGEST SCANDAL


ONE DAY IN the spring of 2010, Kathleen McCaffrey, a sophomore at New York University, received an invitation from a stranger named Arthur Breitman. On the basis of what Breitman had been told about her political persuasion by a mutual acquaintance, he thought she might want to join his monthly luncheon for classical liberals. (­Breitman had also seen a photograph of McCaffrey and thought she was pretty.) McCaffrey, the curious type, accepted.

BREITMAN WAS NOT typically one to overextend himself socially, but he made a “beeline” for McCaffrey, she recalls, when she walked in the door. The luncheon, it turned out, was actually for anarcho-capitalists—people who believe that an absolutely free, self-regulating market will allow individuals, bound to one another by contract alone, to flourish in radical harmony. But by the time McCaffrey discovered she’d been misled, they’d already hit it off. She told Breitman she admired Milton Friedman. Breitman was pleased to report that he was friends with Friedman’s grandson, Patri, and offered to lend her a book about freedom by Patri’s father.

To keep McCaffrey nearby, Breitman threw an impromptu party at his disorderly financial-­district apartment after lunch. The next morning he texted her to say he’d reserved a table for two for that evening. Everything from that point forward felt like a fait accompli.

IT’S TIME YOU LEARNED ABOUT QUANTUM COMPUTING


YOU’VE PROBABLY HEARD of quantum computing. Do you understand it? Unlikely! It’s time that you did.

The basic idea—tap into quantum physics to make immensely powerful computers—isn’t new. Nobel-winning physicist Richard Feynman is generally credited with first suggesting that in 1982. But in the past few years the concept has started to become more real.

Google, IBM, Intel, Microsoft, and a pack of startups are all building and testing quantum computing hardware and software. They’re betting that these machines will lead to breakthroughs in areas such as chemistry, materials science, logistical planning such as in factories, and perhaps artificial intelligence.

It will probably be years before the technology is mature enough to be broadly practical. But the potential gains are so large that companies such as JP Morgan and Daimler are already experimenting with early machines from IBM. And you don’t have to be a giant bank or auto maker to play with quantum computing. Both IBM and Rigetti Computing, a startup that opened its own quantum computing factory last year, have launched services to help developers learn about and practice with quantum computing code.

The U.S. Army and the Battle for Baghdad

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The U.S. Army's many adaptations during the Iraq War were remarkable, particularly in the areas of doctrine, organization, training, materiel, personnel, and leader development and education. The Army has already institutionalized some of those adaptations; however, other important lessons have not yet been institutionalized. In an effort to help the U.S. Department of Defense and the Army retain institutional knowledge and capabilities and fully prepare leaders for future conflicts, RAND researchers recount the Army's efforts in the Iraq War, especially in Baghdad, and offer lessons learned and recommendations. For example, if the United States engages in a similar conflict in the future, the Army should prepare to prevent insurgencies; provide robust division, corps, and theater headquarters; and consider making advisement a necessary assignment for career advancement. Instability and insurgency are part of the future, and if history is any guide, the United States will look to the Army to deal with these challenges. Thus, the ultimate goal of this report is to help the Army continue to institutionalize the lessons from the Iraq War and the Battle for Baghdad to minimize the amount of adaptation the Army will have to undergo when it is called to serve in similar circumstances.