Fresh overtures hint at a thaw in India-China relations

In an economic system that is still globalized, conflict does not automatically equal economic setback. This is because the conflict is no longer simply a shooting war, but a complicated struggle of wills.

India and China are cases in point. Last year they had a serious military standoff over the Doklam border region, which came on the head of tensions between them over a clutch of other issues – the China-Pakistan Economic Corridor, Beijing’s foiling New Delhi’s efforts to bring Jaish-e-Mohammed chief Masood Azhar under United Nations sanctions, and China blocking India’s bid for a membership in the Nuclear Suppliers Group (NSG).

Yet according to official Chinese statistics, its trade with India has been booming. Two-way value reached a record US$84.44 billion in 2017, an 18.63% increase over the previous year. And what is more, India’s exports to China saw a 40% increase, thus somewhat mitigating New Delhi’s complaint of an imbalance. India has long complained about a trade deficit that was more that $52 billion in 2016 and remains around that figure even now, though the overall volume of trade has increased.

The Narendra Modi government’s ties with China have waxed and waned. Initially, both sides even spoke of the possibility of a quick border settlement through out-of-the-box solutions. But thereafter it became clear that there was no meeting point there. Communication broke down over the NSG and Masood Azhar issues, and India publicly refused to endorse the Belt and Road Initiative (BRI). Indeed, it stepped up to the plate in the West Pacific in helping revive the “Quad” grouping with the US, Australia and Japan.

India’s relations with China involve the four C’s – conflict, competition, cooperation and containment. The areas of conflict are well known – the border, and China’s relationship with Pakistan.

China may not think India as much of a competitor when it comes to the economy, but politically New Delhi remains a potent presence in areas that border both India and China, especially in South Asia. The two sides cooperate on a range of areas; India was among the early supporters of the Asia Infrastructure Investment Bank and is, of course, a partner of China in BRICS and of the Shanghai Cooperation Organization (SCO).

As for containment, this is actually the hidden theme in their relationship – China thinks that India is trying to contain its rise in collaboration with the US and Japan, while New Delhi believes that Beijing’s policies in South Asia are aimed at preventing India from playing a larger extra-regional roleRecent Indian moves signal New Delhi’s effort to restore balance in a relationship that had gotten frayed, in large measure by India’s megaphone approach on contentious issues that the two countries confront. Many of these could have been resolved through quiet diplomacy, but New Delhi wanted to appear muscular and tough and sought to browbeat Beijing without really having the wherewithal to do so. This has led Beijing to look at India with more wary eyes.

Until recently, despite periodic transgressions on the undefined Line of Actual Control that marks the Sino-Indian border, things were reasonably calm. Now, after the Doklam crisis, the Chinese appear to be seriously shoring up their military posture along the entire LAC, and so the net result could well be a setback to the maintenance of peace and tranquility on the border. As for the Indian Ocean, there is no direct confrontation, but the Chinese presence is marked and steadily growing.

Despite the bravado and bluster of its generals, India would be seriously disadvantaged if it actually had to fight China and Pakistan simultaneously. However, this is not a probable scenario. China is not likely to intervene in any India-Pakistan issue, though it is quite possible that Islamabad would consider embarrassing New Delhi were India to be involved in any border confrontation with China. As for any larger war, that is not likely to happen, as long as rational calculations guide the policies of the three nuclear-armed nations.

Indeed, one of the greater failures of Indian diplomacy has been its inability to break the so-called Sino-Pakistani nexus. This has severely constrained its regional policies and compelled India to seek a somewhat lopsided “alliance” where Washington seeks India’s military commitment in the Pacific, but steers clear of any commitment to New Delhi’s more vital interests in the north Arabian Sea and the Persian Gulf.

In the last couple of years as ties with China have been at a nadir of sorts, it has become clear that the problem was more of an immature approach on New Delhi’s part, which sought to inject muscle into what were in essence diplomatic issues. Both sides now know that for the present, the possibility of a border settlement is remote for reasons that have to do with domestic politics in both countries. The Special Representative process is at a dead end and both need a new political format with which to manage their ties.

Nevertheless, the very success of the dialogue between the Special Representatives, which resulted in a far-reaching agreement on the Political Parameters and Guiding Principles for the Settlement of India-China Boundary Question in 2005, suggests that the real challenge is in managing Sino-Indian ties in an era when Beijing’s rise has brought it much closer to India in South Asia and the Indian Ocean region. In the circumstances, friction is inevitable, but it can be minimized through deft diplomacy.

Some sources speak of a visit by Indian Prime Minister Narendra Modi in April, which could explain the abruptness with which a planned “thank you” visit to Delhi by the Dalai Lama, which was to have taken place late this month, was canceled. Whatever the case, both India and China know that should such a visit go through, it will come with added expectations because of the tensions of the past two years. Modi is also scheduled to attend the SCO summit in Shanghai in June.

Both sides seem to be conscious of the need to do something to arrest the decline in their ties. On Thursday on the sidelines of the National People’s Congress, Chinese Foreign Minister Wang Yi spoke of the need of the two sides to shed differences and manage their relationship in the spirit of compromise, and that the dragon and elephant could dance with each other, instead of fighting. He spoke of the importance of mutual trust that could help the two sides overcome their difficulties.

Each side knows what the other is talking about: The Chinese want assurances that they are not being targeted by the Quad, and India needs some action on the part of China to indicate that Beijing has moved away from its policy of propping up Pakistan to offset India.

The trade figures show that there is considerable room for enhanced business ties. If New Delhi could negotiate serious concessions by Beijing on the BRI, it could provide a leg up to the signature scheme that would gain enormously from an Indian commitment in the South Asia-Indian Ocean region. In turn, India could benefit from Chinese investment, especially in the area of infrastructure.

This would not necessarily moderate the other elements in the “four C’s” equation, but would provide at least some win-win areas instead of a zero-sum outcome.

Asia Times March 9, 2018

A new cold war

A new and dangerous phase of the Cold War is building up between the United States and Russia, featuring a new generation of strategic weapons. Last week, President Vladimir Putin unveiled a number of new weapons which, he said, was necessitated by the things the US had been doing for the past two decades that had been impacting negatively on Russian security.

Both the US and Russia (and China) have been developing a range of new weapons over the past decade and a half. But several recent developments have prompted the Russians to highlight their “achievements”. First among these is the Trump Administrations new National Security Strategy announced in December 2017 followed by a Nuclear Posture Review last month.

The NSS has declared that “revisionist” China and Russia were now posing a threat to the United States security. The NPS, on the other hand, has detailed plans of developing new capabilities, in particular a new generation of low-yield nuclear weapons for a submarine launched ballistic missile and a new submarine launched cruise missile.   Linked to this has been a new National Defense Strategy which says that the US military now had to equip itself to deal with Russia and China which posed a greater threat to the US than terrorism.

In July 2017, President Trump had called for a ten-fold increase in the US nuclear arsenal creating a sensation among the senior military staffers. At present Russia has some 4,300 weapons as against 4,000 of the US, China has just 270. 

To an extent the tone and tenor of Putin’s  annual state address last week was dictated by the fact that he  faces a Presidential election soon. There is no question that he will win, but what he wants is a high turnout as a signal of public acclaim for his policies.  So, the tough-talking speech was accompanied by dramatic graphics showing what the systems could do.

Incidentally, both China and India found favourable mention in the speech when Putin reiterated  the “comprehensive strategic partnership” with China and the Russian-Indian “special privileged strategic relationship.”

In essence all the new and exotic systems were aimed at defeating what Putin said was a growing American global missile defence system. In addition to simple and inexpensive decoys on existing missiles, there was an entirely new type of missile called the Sarmat which had a specially short boost phase and carried nuclear warheads on hypersonic vehicles. The second was a cruise missile powered by an innovative nuclear engine which gave it virtually limitless range and the ability to fly in an unpredictable trajectory.  This weapon had completed its  trials and was ready to for the development phase. A third,  new and unique system, was an unmanned underwater vehicle (UUV), also powered by a nuclear engine,  that could attack  harbours, ships at sea or infrastructure and also possessed unlimited range.

In addition Putin amplified the Russian nuclear doctrine which he said would emphasise  nuclear retaliation for any nuclear or WMD attack, or also any strike by conventional weapons “that threaten the very existence of the state.” This last point was aimed at a new generation of Prompt Global Strike systems being developed by the US. China and Russia worry that accurate non-nuclear missiles to take out their weapons  and decapitate their command and control. Retaliatory strikes by surviving weapons could be picked off by BMD systems.

Many of these systems, American and Russian are still in the development phase. For example, the current American missile defence systems are all right for defence in war theatres, but cannot cope with Intermediate Range Ballistic Missiles, but newer systems like the SM-3IIA based on Aegis destroyers could be deployed by the hundreds, beginning this year, and could be used against ICBMs. There are also technologies just over the horizon, such as lasers mounted on UAVs and so on.

The principal Russian grievance is that when first Cold War ended, they were given verbal assurances that NATO would not expand eastwards in exchange for an acceptance that a reunited Germany could join the organization. In 1999, Hungary, the Czech Republic and Poland joined NATO and in 2004, Estonia, Latvia, Lithuania, Slovenia, Slovakia, Bulgaria and Romania became members.

Far from being merely a political alliance, NATO revealed its teeth when it intervened in the Balkans conflict against Serbia, a historic ally of Russia. NATO was enabled to ride roughshod over Russian views because the country was down and out and faced economic collapse in the 1990s. The next step was the 2002 US withdrawal from the Anti Ballistic Missile(ABM) treaty. In the old treaty, both the US and the Soviet Union were allowed to have one ABM site each, but as Putin noted in his speech, new systems have been installed in Alaska an California, two areas, one in Romania and one in Poland had been created in Europe and now new launch areas were established in Japan and South Korea. Further, the system involved some 35 warships that were deployed close to Russia. The US may argue that the systems are aimed at “rogue” regimes like North Korea or Iran, but  the view from Russia is that they seek to undermine its deterrence capabilities.

The Russian pushback has resulted in its war against Georgia in 2008 and its seizure of Crimea and  its hybrid war in western Ukraine in 2014. Russia argued that these instances was a defensive move aimed at the expansion of NATO to cover Georgia and Ukraine. The result has been western sanctions on Russia  and a new Cold War which is now taking a dangerous turn.

Greater Kashmir May 26, 2018

India’s Stance on Dalai Lama Reveals Dynamics With China

At first sight, there is nothing wrong with Foreign Secretary Vijay Gokhale’s request to the Cabinet Secretary requesting him to send out a directive asking senior government officials to stay away from events aimed at marking the start of the Dalai Lama’s 60th year of exile, in particular a large public event in New Delhi on 1 April.

India has, for long, insisted that it permits the Dalai Lama refuge in India on humanitarian grounds and also because of his revered status as a religious leader. The Tibetans, the government of India insists, are not permitted to carry out any political activity in the country. Attending the 60th year celebrations may or may not qualify for this, but the government is within its rights to advise its officials.

The foreign secretary’s letter was sent on the eve of his visit to Beijing on 22 February. He noted that the coming months were a “very sensitive time” for bilateral relations. This June, Prime Minister Narendra Modi is expected to visit Qingdao in China to attend the Shanghai Cooperation Organisation (SCO) summit. But unconfirmed reports suggest that the Prime Minister may make an official visit as early as April. That would explain the "sensitive time" point.

The reality of how India has dealt with the Dalai Lama and the Tibetan refugees is more nuanced. The Modi government, in particular, has not been above using the Tibetans and the Dalai Lama as instruments for signalling its own China policy.

In 2014, among the guests to Prime Minister Modi’s inauguration was the Sikyong or head of the Tibetan government-in-exile, Lobsang Sangay. Last year, in the midst of the Doklam standoff, India permitted Sangay to hoist the Tibetan flag on the shores of the Pangong Tso lake on the border with Tibet in Ladakh.

Beginning 2016, relations between New Delhi and Beijing have been tense. China’s hold on listing Jaish-e-Muhammad chief Masood Azhar under the UN Al Qaeda-Taliban sanctions committee was one reason. The second was its refusal to support India’s membership in the Nuclear Suppliers Group.

On both issues, instead of quiet diplomacy, New Delhi chose to try and shame Beijing with strong public statements that put the latter’s back up. Later in 2017, the two sides had their most serious border confrontation, but one which involved Chinese transgression of the Sino-Bhutanese border at Doklam.

New Delhi was not above using the Dalai Lama’s access to signal its displeasure with Beijing. In December 2016, the Dalai Lama visited the Rashtrapati Bhavan and shared a dais with the president on a function to honour Nobel laureates. Early in 2017, the Dalai Lama was permitted to visit Tawang, the first time since 2009.

What infuriated Beijing was that he was received by Chief Minister Pema Khandu and the Union Minister of State for Home Affairs Kiren Rijiju.

A History of Tense Relations With China

The man who dealt with these issues as the Indian Ambassador in Beijing was Gokhale himself, and he is keenly aware as to how bad relations with China have led to an imbalance in India’s global posture. Ever since he became foreign secretary, there has been an effort to restore some equilibrium both in the Asia-Pacific region and the Middle-East.

India and China have shifted their stand on Tibet over the past 70 years. Conscious that India lacked the capacity to take on China in Tibet, Prime Minister Jawaharlal Nehru sought to negotiate Tibet’s autonomous status and encouraged the Dalai Lama to sign the 17-Point Agreement which effectively recognises Chinese authority over Tibet.

Given the Dalai Lama’s status as the temporal and religious authority of Tibet, when he came away to India, his government ministers accompanied him, and so the establishment was, in a sense, a Tibetan government-in-exile, though it was formally called the Central Tibetan Administration (CTA) of His Holiness the Dalai Lama.

The terms used by the Tibetans for their council of ministers in Lhasa, Kashag, is still used, and its leader, the Kalon Tripa, served under the Dalai Lama. In 2011, the Dalai Lama gave up his temporal authority and the political authority was transferred to the Kalon Tripa, whose title was changed to Sikyong, currently Lobsang Sangay, who functions as the president of the CTA.

But the title was the same as regents took when the Dalai Lama was a minor.

In his very first meeting with Dalai Lama after his escape and exile in India in April 1959, Nehru made it clear that he could not act as the head of a government in exile in India. Since then, India has allowed Tibetans to protest against visiting Chinese leaders, it has encouraged Tibetan leaders to make their political statements outside the country, but it has also allowed the CTA to function.

China’s Rising Power

Whatever may have been Chinese intentions when they signed the 17-Point Agreement, they changed by 1959. Perhaps spooked by a CIA covert war against them in Tibet, they cracked down with great brutality and the Dalai Lama was lucky to manage his escape from Tibet. Over the years, the Chinese have, at times, reached out to the Dalai Lama, and at times termed him a “dangerous separatist”, “demon”, “splittist” and a “wolf in sheep’s clothing.”

Currently, however, they take the most negative view of anyone interacting with him, even though he has clearly signalled that he accepts Chinese sovereignty over Tibet and is seeking only autonomy.

So extreme is the Chinese view that they have even declared that his reincarnation should be as per Chinese instructions and subject to their approval. They believe that his visits to Tawang may be a prelude for his reincarnation to take place there in the famous monastery which had been established in accordance with the wishes of the 5th Dalai Lama in 1680.

As Chinese power has grown, so has their ability to ensure that the Dalai Lama is not received by any foreign leader. Today, only the Americans are willing to meet him; his last meeting with President Obama being in June 2016. Despite everything, Prime Minister Modi is yet to have had an official meeting with Dalai Lama.

Discretion, it is said, is sometimes the better part of valour.

The Quint March 19, 2018

Amid High-Level Visits, India Strengthens Jordan, Vietnam Ties

Back to back visits from King Abdullah of Jordan and President Tran Dai Quang of Vietnam, in this week and the next, are the latest hallmark of New Delhi’s growing desire to come up with a regionally balanced foreign policy.

King Abdullah, who arrived on 27 February, is following up on Prime Minister Narendra Modi’s recent visit to Palestine and Oman. To reach Ramallah, the de factoadministrative capital of Palestine, Modi had to go via Amman, and Abdullah took the occasion to host him at his palace, while facilitating his transit to the Palestinian capital.

President Quang is ranked number two in the Vietnamese hierarchy, after Secretary General of the Party Nguyen Phu Trong, the third being Prime Minister Nguyen Xuan Phuc – who attended the special ASEAN summit with his fellow government heads as chief guests for the Republic Day 2018.

The India-Jordan Relationship: Rekindling Old Fires

The Modi government has shown a marked preference for building ties with Jordan. The Prime Minister had met King Abdullah for the first time on the sidelines of the UNGA in September 2015. This was followed by a visit by President Pranab Mukherjee to Jordan in October 2015, the first by an Indian head of state.

India has long-standing ties with Jordan. The erstwhile Crown Prince of Jordan, Hassan bin Talal, was a special friend of Rajiv Gandhi. After a hiatus, relations were renewed by King Abdullah’s visit to India in December 2006.

Jordan is not endowed with energy resources. The relationship is more a meeting of minds of two countries that feel threatened by Islamist radicalism. This facet of the relationship is underscored by King Abdullah’s special address at the India Islamic Centre in Delhi on ‘Promoting Understanding and Moderation’.

In recent years, aware of the burden Jordan faces because of refugees, India has been donating money for humanitarian assistance to the country. As a stable state in the otherwise volatile Middle East, ties with Jordan go beyond the mere calculation of oil, trade, or investment.

Also Read: Watch: Jordanian King, PM Modi Talk On Islamic Heritage

India Attempts to Woo Vietnam

President Tran’s visit over the coming weekend comes in the wake of the recent trip by Prime Minister Phuc. In 2016, Prime Minister Modi had visited Vietnam, and the two countries had worked out agreements for cooperation in a number of areas including IT, Space, and information sharing on shipping.

India had also offered Hanoi a $500 million Line of Credit to promote deeper defence cooperation, on top of an earlier $100 million. The tempo of high-level visits suggests that India-Vietnam relations are on the cusp of reaching a qualitatively higher level, driven in part by geopolitical convergence. 

So far, India’s economic ties with Vietnam have been somewhat spotty. Vietnam’s major trading partner remains China. India-Vietnam trade was around $ 7.6 billion in 2017 – a tenth of the Vietnam-China trade.

Vietnam’s trading and investment links with China, Japan and South Korea offer opportunities for Indian companies as well.

Vietnam has a well-established diplomatic framework, which seeks to balance its ties between its major “threat” China, and powers like Russia, the United States and India. It is not keen to be drawn into the orbit of any of these powers and seeks good relations with all of them.

Last year, Vietnam hosted the APEC Leaders’ summit and welcomed several heads of state, including Xi Jinping and Donald Trump. When he visited Washington in May, Vietnamese Prime Minister Phuc became the first South-east Asian leader to be received by Trump.

China’s Relationship Status With Vietnam: It’s Complicated

Strained ties between China and Vietnam, over their maritime boundary, were aggravated last year by tensions over a Spanish company exploring for oil in Vanguard Bank, an area claimed by China.

This led to the suspension of border defence exchanges between the two countries and a veiled threat of use of force by China, leading Vietnam to back off. A meeting between their foreign ministers in August was also cancelled.

As China’s neighbour, with both land and maritime borders, as a country that has fought a brief war with China, and also as one of its major trading partners, Vietnam’s relations with China are complex. The two countries have resolved their land border dispute and have settled their maritime boundary in the Gulf of Tonkin area.

In 1974, while Vietnam was involved in liberating the South, China quietly occupied the Paracel Islands also claimed by Vietnam. Later, in 1988 China threw the Vietnamese out of the Johnson Reef through military action. China’s over-the-top claims in the South China Sea has led to continuing tensions between the two.

Vietnam follows a policy of “cooperation and struggle” with China. As part of this, its Defence Minister visited Washington in August. It was later announced that an American aircraft carrier would visit Cam Ranh Bay in 2018. China holds exercises in the Gulf of Tonkin and the Paracel islands over Vietnamese protests, yet the number of Chinese tourists in Vietnam, and their bilateral trade are at a record high.

Vietnam maintains close political ties with China, and the two communist parties interact at various levels. Early last year, the Secretary General of Vietnamese Communist Party, Trong, met Xi Jinping in Beijing. Their joint statement called for the two countries to “manage their maritime differences,” and avoid complicating the issues.

Forward Movement in India-Vietnam Ties Likely

Given this background, we are likely to see a modest forward movement in India-Vietnam ties. Besides the Line of Credit, which is being used to purchase Indian-made patrol vessels, India provides training and support for Russian-origin military equipment, like Kilo-class submarines, and Sukhoi fighters.

An Indian satellite tracking station is being set up and this has military applications, though it is billed as a civilian facility. There has been talk of Vietnam acquiring the Indo-Russian Brahmos, but so far there has been no confirmation of any sale.

After the Indian acquisition of the Israeli Spyder short-range quick reaction missile, the Vietnamese are also evaluating the system.

India’s imperatives in the East and West are not the same. But, both are important. In the East, it has important economic goals.

If India’s manufacturing revolution is to succeed, it needs to find a way to be part of the important value chains that link countries like Japan, South Korea, Taiwan, China, Vietnam, and other countries of Southeast Asia. 

As far as the West is concerned, it depends on the region for the bulk of its energy supplies and is now seeing this as an important source of trade and inward investment, and of course, remittances. But with the rise of China, both also carry heavy geopolitical obligations and commitments.

Balancing all of it is the major challenge for the country.

The Quint March 2, 2018

A greater helmsman? Xi abolishes term limits, but a leader too long at the helm seldom works out well for any country

Ten years is about the most in which a leader can provide effective governance, in a democratic system. Margaret Thatcher, the Iron Lady, was Prime Minister from 1979 to 1990. Her policies transformed Britain. But in the end, with her popularity declining, her Conservative Party forced her out of office. Some years later, Tony Blair suffered the same fate. In 1951, the US legislated a two term limit for its president. France arrived at the same spot in 2008, after some experiment. As for authoritarian states, it’s more difficult to assess a Stalin or a Mao but as rulers they overstayed their time to the detriment of their country.

Xi Jinping’s move to remove term limits for the office of the president is portentous since, the Communist Party of China (CPC) Constitution has no limits for his other arguably more important hat, General Secretary of the Party. Till the 1990s the Chinese presidency was really a symbolic office. The person who mattered was Mao Zedong, General Secretary from 1949 to his demise in 1976. His rule was a disaster. That experience persuaded Deng Xiaoping, his next effective successor in the 1980s to insist on term limits, which were written into the PRC Constitution.

For Party offices there were norms but no rules, and likewise there were none for the Chair of the Central Military Commission (CMC) which runs the PLA. Jiang Zemin served in that position for 15 years. Though Deng had held various high posts in the Mao era before being purged, as the paramount ruler in the 1980s Deng himself did not hold any position when he led China into far-reaching economic reforms. His only official position was honorary chairman of the China Bridge Association, though, importantly, he was Chairman of the CMC.

It was in the Jiang Zemin era that the party boss or General Secretary also became concurrently the President of PRC (and Chairman of CMC). Xi has been steadily accumulating and centralising power ever since he took office as General Secretary in November 2012 and President in March 2014. He used an anti-corruption campaign to bring down powerful politicians like Bo Xilai, Zhou Yonkang and Sun Zhengcai, and bring the PLA under his control. By taking personal charge of key Leading Small Groups – supra ministerial institutions – on foreign policy, economic reform, internet security, military reform he has immeasurably tightened his grip on the government.

Over the years, the CPC propaganda machine has seen him being addressed as “a leader of the core” and “lingxiu” or revered leader, a term used previously only for Mao. China stands at the cusp of a very complex transformation. Having largely eliminated poverty through its economic miracle, it must now become a rich country, or stagnate in the middle-income trap. Also, as a rising power it must avoid the Thucydides Trap of conflict with the US.

CPC knows its authority depends on continuing economic prosperity in the country. But the old economic model is no longer sustainable, and though CPC has taken impressive steps to take the country to higher economic and political levels, it faces huge headwinds. In the global game of Snakes and Ladders China has so far hit the ladders up, but higher up the board is populated by snakes.

We need to place these developments in context. Altering the term limits today does not mean Xi will automatically follow through as President for life. Xi, an authoritarian leader, is no monster like Mao. He is a diligent, hardworking leader who has systematically advanced China’s interests. There is always a worry, though, of the “Bad Emperor” syndrome indicated by Francis Fukuyama, and the hubris that comes with power. Things go well to start with, then things get out of control, a leader loses his touch, and the country gets stuck with him. Thereafter it sometimes becomes an excruciatingly long and costly haul.

Times of India March 3, 2018

Uncle Sam not happy

The United States pressure on Pakistan continues unabated. After suspending $ 2 billion of assistance, Washington has succeeded in getting Pakistan placed in a “Grey List” of countries on a terrorism financing watch list.

The Financial Action Task Force (FATF) did not officially list Pakistan, though the resolution has been passed at the FATF plenary, its members are giving Islamabad six months to set things right, if not the listing will take place in the June plenary of the organisation.

The FATF has a blacklist comprising of two countries—North Korea and Iran—though action against the latter is suspended as a result of the 2015 nuclear deal. In addition, there are 9 countries in the “grey” watchlist.

The FATF decision came after Washington pressed a second vote on the issue on Thursday after Saudi Arabia and China had voted down a US-proposal to put Islamabad on the watch list on Tuesday. The US directly confronted the Saudis directly and compelled them to drop their support to Pakistan. Seeing this, China, too, abandoned Islamabad. It is not clear whether Pakistan’s decision, earlier this month, to send 1600 troops to Saudi Arabia, was aimed at shoring up the support of Saudis who also represent the six GCC members in the FATF. 

“For the first time we’re holding Pakistan accountable for its actions. We’ve seen modest progress in terms of Pakistan’s actual acknowledgment of these concerns, but the president is not satisfied with progress when it comes to Pakistan,” White House spokesman Raj Shah said Thursday.

The consequences of the listing range from making it more difficult for Pakistan to tap international markets and make borrowing more expensive. It would also damage the prospects for the country receiving FDI.  Indeed, it could also encourage some western companies to leave Pakistan.

The Trump Administration has been critical of Pakistan for its lax controls over terrorist financing and money laundering and inaction against terrorists operating from its soil. Islamabad had desperately sought to stave off the vote by cracking down and seizing assets of the Jamaat-ud-Dawa which fronts for Hafiz Saeed’s Lashkar-e-Tayyeba as well as charities associated with the outfit such as the Falah-e-Insaniat Foundation. Pakistan claimed it has seized 200 properties of the group, which they should have actually done ten years earlier when the group was proscribed by the United Nations in the wake of the Mumbai terror attack. Hafiz Saeed has been arrested and then released six times on various pretexts and outfits like the Jaish and LeT have openly collected funds in public places.

If all this sounds somewhat symbolic, it probably is.  Pakistan has been there before when it was on the watchlist between 2012-2015. At the time, it was still able to tap the global bond market and get a bailout package from the IMF. The watchlist is not the same as the black-list which targets countries like North Korea and Iran.

But there are two differences now. First,  the Pakistani economy is not in good shape on account of its current account deficit and overvalued currency. Second, this could be only the first of a succession of measures thought up by Washington to bring Islamabad to heel on the issue of supporting terrorism. The real pressure could come if Pakistan sought to approach the IMF for help to stabilize its economy.  

The same plenary also proved disappointing for Iran which was hoping it would be permanently taken off the blacklist following the 2015 nuclear deal, the so-called Joint Comprehensive Plan of Action (JCPOA). Teheran had hoped that with European support it will be able to succeed, but it did not. Sanctions have been suspended for another six months till June. Iran has also passed fresh laws to bar terrorist financing and money laundering but it is unable to move the Trump Administration which is actually contemplating walking out of the nuclear deal. Because of this, large multi-national banks have avoided contact with their Iranian counterparts.

So, Pakistan has  six months to show that it is serious in cracking down on terrorism financing and money laundering. Islamabad has been a slippery customer in the past and managed to get out of many a scrape with the US, using its wit and support from friends like China and Saudi Arabia. 

The crunch would come if the Americans decide to press for Pakistan to be placed on the black-list. Such an eventuality is not expected, but it is where the FATF process ends. That would be a disaster for Islamabad as no foreign banks or corporate would touch it with a barge-pole. It is such a listing that has brought a much richer Iran to its knees.

No doubt, Pakistan will hope that the Saudis and the Chinese will bail them out, as they have done so in the past. But it is important to understand the processes that go into organisations like the FATF. Though it works through consensus, it also involves significant lobbying where the financial clout of the United States and Europe is viewed with respect. Beyond a point, neither Beijing, nor Riyadh would like to cross Washington. If anything, they would seek a quid pro quo elsewhere and leave Islamabad twisting in the wind, alone.

Greater Kashmir February 26, 2018