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The growing importance of the Caspian countries and their constant changes

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In this series of articles, we intend to present an overview on the Caspian countries, their history, their changing politics and economy in order to offer a complete analysis on the late panorama in this part of the world.

As a macro approach, political and economic relations juxtapose when it comes to the development plans of the Caspian Five and their expectations. Geographically close and sharing a basin with abundant natural resources, some of those countries have maintained relations since before they became independent, the prime example being an agreement on the region signed in the early 20’s between the then called Persia and the former Soviet Union. The current five littoral nations – Iran, Russia, Kazakhstan, Turkmenistan and Azerbaijan – still struggle to tackle a solution for a fair division, while coping with external influences from Eurasian partners, the American pressure for businesses and omnipresence of the European Union.

Who moved my sea?

Russia is intrinsically connected to all the other Caspian countries, be that for its historical role as the most important player in this side of the world map or for its actual importance for being the region’s economic life belt. It is unarguably the member with the greatest incomes that also pushes the economies in the Balkans, and it physically controls the access routes to the said sea. One is in the country itself and one in the newly accessed Crimea, a ‘conquest’ that cost Russia many sanctions from the not-so-far West, nevertheless local relations in this occasion remained untouched.

Lately, the recession in the Russian economy also hit its Caspian partners, especially the independent former provinces, whose main economical sources are, not surprisingly, fossil fuels. The crisis was also responsible for Putin’s dream of a common currency in the Eurasian Economic Union (in which the only nation from the Caspian Sea is Kazakhstan) to disappear into thin gas.

Even so, the negotiations about the rights of exploitation for the countries in the area, which have lasted for more than a decade, made a clear progress in their last configuration, but show that the theme is still very sensitive for all of the members.

On the last meeting, in 2014, it was agreed that no nations apart from those that surround the sea would be allowed to have military forces there, under the pretext of maintaining regional security – and the message between these Cyrillic and Arabic lines is clear: keeping the American forces away from the Caspian waters. And although it was also settled that there would be a balance between those regional forces that does not show the slightest level of the complicity the referred countries will still be expected to cultivate before coming to the thorniest issue on the agenda that has already resulted in gunboat diplomacy.

The Achilles’ heel in the Caspian epic politics is how to divide the basin. Whereas Iran defends it must be equally divided into five parts, thus supporting the stance Caspian water plateau is a lake, Russia and the others support that it is a sea and the division should be proportional to the extension of the margin, by defining a total of 25 miles in the surface for exploitation and keeping an area for common use, which was supposed to relief tensions between the participant countries. As a third factor, it must be taken into account the difference in the legal status of the sea and lake. Whereas Iran strongly supports the lake solution, as mentioned before, the other Caspian countries argue that the Caspian is a sea. Accordingly, under this solution, the Caspian Common Force would need to observe the strictly defined rules of conduct under the UN Law of the Sea.

While the international community anxiously awaits a solution in the next meeting, expected to take place in 2015, the rich Caspian region remains untouchable for the countries who are not part of the Caspian Five and also for some of this group, since the agreement reached so far, in 2003, is trilateral (between Russia, Kazakhstan and Azerbaijan). Those resolutions, therefore, play a primordial role in the maintenance of a cooperative environment in the region.

A Vodka-Maotai tidal bore

The ex-Soviet republics, which had a previously shy importance to geopolitics, now gain recognition for the encounter of two distinct poles of influence – Russia and China.

Because of their political objectives, both nations share influence over the countries in Eurasia and, whilst Russia’s Look East policy aims to develop a common market and deepen its power in the area, China’s Go West counts greatly on the Silk Road Fund promises of an Economic belt through the funding of infrastructure in the same region, somewhat competing with funds cost by the US.

While the dual influence is beneficial for the region, once it foments local development in the main economic activities and physical integration, it is to say that both countries are willing to raise their controlling power, which might eventually have impacts in their relation.

The Casper Sea

Composed mostly of young nations, the Caspian region still has a long way to go both in diplomatic and democratic aspects. As a rich, yet discreet region, it counts with political regimes that are indisputably organized, but still making progress.

Both Turkmenistan and Azerbaijan rely on a traditional political system, which is characterized by a great conversion of roles in a strong leadership figure. That is to say that the government itself is prone to engage in a multiplicity of duties, such as keeping the local order, informing and communicating with the civilians, revealing high centralization of the available means in the administrative sphere.

The latest news in Kazakhstan, on the other hand, is not centered in communication. The country has anticipated elections on the verge of an economic crisis, choosing President Nursultan Nazarbaiev, locally referred as a ‘father’, with over 97% of votes, for a fifth successive term, against two opponents that actually supported the current government. Even though variety could be an option, it seems to not have been taken into consideration by the citizens, either because of great leadership performed by the president or an unexpressive opposition campaign.

Moreover, those countries are a pool of ethnicities, gathering many distinct peoples that have historically offered the governors extra difficulties in keeping a political unit. The main question is whether or not those governors will be able to deal with them all in an era where information flows faster and wilder than the waters in their sea.

Have we seen it oil?

To sum up, the promising Caspian region is full of opportunities for development in different aspects – economical, by the convergence of plenty of investment, political, because of the advances in international negotiations and, finally, humanitarian, with the exposition of the internal politics as a chance of putting the governmental system on the spot and making it better.

We will scrutinize all of them in the next weeks.

Luísa Monteiro is a bachelor in Social Communication and is currently taking a Master's degree in Communication and Politics at PUC São Paulo. Her researches are closely linked to the studies of internet as a democratic agora and her latest academic production correlates the (offline) social movements and their exposure on the net.

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Eastern Europe

Shifting Geography of the South Caucasus

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nagorno karabakh

One year since the end of the second Nagorno-Karabakh war allows us to wrap up major changes in and around the South Caucasus. Most of the changes discussed in the scholarly works so far focused on the role of Turkey and Russia. The shifting geography of the South Caucasus, however, has been disregarded.

In many ways, the war accelerated the pre-existing trends, but also initiated new developments. The first and foremost change concerns geography. The South Caucasus has been historically dominated by neighboring states. Whether it is the Sasanian and Byzantine empires in late antiquity or later Ottoman and Persian states, the region was exclusively subject to one or two powers. The idea is that the region was mostly closed to the outside, non-regional influence. The trend continued in 19th-20th centuries when the South Caucasus was exclusively dominated by Russian power. The end of the Soviet Union changed this geopolitical reality when several powers were able to penetrate the region. Yet the pace of the change was relatively slow – Russia was still able to minimize the extent to which the neighboring or non-regional countries were able to act in the South Caucasus: Turkey, Iran, US, EU, and to a certain extent, China have been influencing the region to a limited degree.

But the second Nagorno-Karabakh war accelerated this process. The South Caucasus’ borders are increasingly shifting. No single power or even a duo of countries can dominate the region. It reflects geopolitical changes in the world where the emerging multi-polar world ushers in a different set of rules. Exclusive geopolitical control is no longer viable and the 2020 war showed exactly this.

There is also yet another dimension of the unfolding geographic change. The war also solidified that the Caspian basin and South Caucasus are inextricably linked to the greater Middle East. Russia and Turkey are basing their strategies in the region on developments in the Middle East and the Black Sea region. Not since the end of the Soviet Union has the South Caucasus been such a critical point for the powers around it. In a way, this re-emergence of close contacts between the South Caucasus and the Middle East is a return to normalcy which was disrupted in the early 19th century by Russian annexation of the South Caucasus. Indeed, in pure geographic terms the region is better connected to Turkey and Iran than to Russia, with which it shares the impassable Caucasus Mountain range.

This also means that the role of the South Caucasus in the thinking of Iran and Turkey, and by extension Russia, has grown. Considered if not as a complete backwater region in the calculus of large powers, the South Caucasus has nevertheless experienced a lack of attention. This was especially true for Iran, which now struggles to retain its weakening position in the region.

It is true that Iran was never a dominant power in the South Caucasus. Unlike Russia or Turkey, the traditional power brokers, it has not had a true ally. Tehran was certainly part of the calculus for states in the region, but it was not feared, like Ankara or Moscow. And yet, the South Caucasus represents an area of key influence for Iran, based on millennia of close political and cultural contacts various Persian empires had with the South Caucasus.

The 2020 war changed Iran’s calculus in the region as the Islamic Republic’s interests were largely unheeded. Iran has now to adjust to the changed geopolitical landscape and it can be even argued that the recent escalation it had with Azerbaijan over the detained trucks, drills, and alleged Israeli influence, was an effort to wedge itself back into the geopolitics of the South Caucasus.

Yet there is little Iran can realistically do to boost its position in the region. The South Caucasus will certainly feature higher in Tehran’s foreign policy agenda than before. But Tehran does not have an ally in the region, nor does it have financial means to strengthen its soft power. Iran can support Armenia in its efforts to balance the triumphant Azerbaijan.

The lifting of US-imposed sanctions could augment Iran’s projection of financial and diplomatic power in the South Caucasus. Still, a more realistic approach for Tehran would be to build closer cooperation with Russia. Both loath growing Turkish influence and the Islamic Republic does not object to growing Russian influence as much as it does resent the West’s and Turkey’s presence. Surely, interests with Russia do not align always, but for Tehran, Moscow is a traditional power in the South Caucasus which is about maintaining a status quo. Turkey, on the other hand, disrupts it seeking greater influence.

There has been a certain retrenchment of the Western influence in the South Caucasus. While it does not signify a definitive decline in West’s fortunes, it is nevertheless important for Washington and Brussels to formulate a more robust approach toward the region. Decreasing the tensions with the Turkey could be one of the steps. Increasing economic engagement with the region would be another. Delay could be damaging. Georgia, which serves as a door for the West to the Caspian basin and on to Central Asia, could be the biggest loser if Washington shifts its foreign policy away from the region. An alternative could be a Russian model of peacebuilding and regional order where Georgia, Armenia, and Azerbaijan will face a lack of foreign policy options if the West’s unwillingness to commit to the region continues to grow. Author’s note: first published in caucasuswatch

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Eastern Europe

Russia: The Neighbor From Hell

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Photo: Kuźnica Białostocka, Poland. Migrants' encampment area. Army, Border Guard and Police on the border. Credit: Polish Territorial Defence Force

From Belarus to Ukraine to Georgia, an arc of instability has emerged, offering opportunities for malign activities by foreign powers. This has proved too tempting for Vladimir Putin’s Russia, which openly pursues an activist foreign policy seeking gains for the Kremlin at whatever cost to its neighbors. For the West, it is time to consider the wider Black Sea region as a whole and to develop a strategy. 

The migrant crisis unfolding on the Belarusian-Polish border is the most pressing and serious emergency. For some months, the Belarus dictator Aliaksandr Lukashenka and his security services have been funneling thousands of Middle Eastern migrants toward the EU border. Officially, Russia has distanced itself from the crisis, with President Vladimir Putin on November 13 denying claims he had helped to orchestrate a crisis.  

Russia is often disbelieved by neighbors with unhappy experiences of its statecraft. In this case, too, there are reasons to doubt Putin’s words. Firstly, the Belarus migrant drama bears an uncanny resemblance to the events of 2016, when the Kremlin unleashed a sudden wave of developing world migrants across Finland’s and Norway’s Arctic borders. Secondly, few believe Lukashenka’s regime on its own is sufficiently organized to orchestrate events of complexity spanning two continents.  

Russia’s rapid dispatch of advanced combat aircraft and paratroopers (two of whom died in the exercise) to the Belarus-Poland border and Putin’s contemptuous dismissal of Germany’s Chancellor and the EU’s senior head of government Angela Merkel (she was told to call Lukashenka herself) were open signals of approval for the Belarusian position. Only when Lukashenka mused that he might cut off gas supplies to Europe was he publicly slapped down by Russia. It was also notable that Russia and Belarus recently agreed on further steps in their on-again-off-again Union state. 

To the south, in eastern Ukraine, the clouds are also gathering. Fighting is worsening with Russia’s separatists in Donbas, and ceasefire violations are spiking. US briefings now suggest around 100,000 military personnel and large amounts of armored equipment are located within reach of the border; military movements are being organized at night. Not only does this follow the deployment of large Russian formations for exercises in the Spring, but it also matches a threatening drumbeat of anti-Ukrainian rhetoric from Russian leaders including Putin, who have questioned the country’s right to an independent existence. The Kremlin has increased funding for the Donbas and pledged humanitarian support to the rebel-controlled regions thus facilitating trade between Russia and parts of Donetsk and Luhansk. 

The bottom line is that Russia is putting Ukraine back on the agenda and — as some predicted — forcing the Biden administration to take notice, despite its desire to park Russia and focus on China. Putin and his aides remain determined to build a near-exclusive sphere of influence in its neighborhood and Ukraine is the crown jewel in its geopolitical thinking. If Russia is finally seeking a settlement to its seven-year-long forever war, that would require agreement from Ukraine to effectively hand control of eastern regions to Russia and its local agents, plus a commitment to stop the country from joining Western military and economic institutions. There is no sign that Ukraine will agree to such constraints on its sovereignty. 

Further south in the South Caucasus, Georgia, the West’s only partner in the region, is suffering a continuing crisis following the municipal elections in October and the former president Mikheil Saakashvili’s stealthy return to the country. He is now in prison on a hunger strike. Russia lurks here too. It might not be orchestrating the crisis, as in Belarus, but it does benefit. Russian media has been actively addressing the events in Georgia and playing on recurrent tensions between the country and its Western partners, especially the European Union (EU). As always, chaos — sometimes resulting from direct Russian interference, and sometimes not — makes it harder for candidate countries to meet the membership terms of Western clubs while emboldening those European countries sympathetic to Russia and skeptical of expansion. This makes it harder for organizations like the EU to engage Georgia.

Russia’s grand strategic aim is to maintain its power in neighboring states. That means keeping the West at bay, and political instability serves that purpose. Belarus, Ukraine, and Georgia are distant, but the Kremlin is always present. In some cases, it resorts to military pressure to gain momentum, in other cases it sits and waits, but the pattern signals a clever use of opportunities as they arise, exploiting the space given by a West signaling decreasing willingness to engage in the wider Black Sea region. 

Seen from the long-term perspective, the 1990s and 2000s were a period of a slow but steady decline of Russian influence in what then constituted the former Soviet Union. From the Kremlin’s point of view, the present period is much more productive, with concrete gains and the reversal of the West’s military and economic expansion. For Putin and his ministers, it seems likely that the US considers defending Ukraine, Georgia, and even involvement in the Belarus-Poland border crisis costlier than the potential benefits of having these countries within America’s geopolitical perimeter.

The ground is now prepared to seek a reversal of the West’s geopolitical gains and cast aside the wishes of the people of Ukraine and Georgia. The push against aspiring liberal democracies is now gathering pace, timed to coincide with a wider geopolitical shift, namely the recalibration of US foreign policy to east Asia. 

Author’s note: first published in cepa

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Eastern Europe

Five Important Principles for a Successful Mandatory Funded Pension for Ukraine

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pension oecd

The government’s plans to launch a mandatory funded pension scheme (the so-called second pillar) has provoked a lot of debate about future of pensions in Ukraine. Over the past quarter century, second pillars were introduced in several of Ukraine’s neighboring countries. Contrary to common belief, such schemes are not immune to politics, as they change and evolve constantly. So, it would be important to ensure a design for the program that can be preserved and perpetuated in Ukraine’s specific economic, social and political context.

Neither of the two types of pension schemes – solidarity and fully funded – is better than the other. In fact, they work best when they complement each other, as each is exposed to different risks. Thus, an effective reform will need to be centered around enabling synergies between the two schemes.

While the funded system is proposed as a risk mitigation strategy for the solidarity system in Ukraine, it also carries important implementation risks. To make Ukraine’s pensioners more secure, the Ukrainian government will need to map out all such risks and address them along the path to launching the new system. From global experience assessed by the World Bank, there are five key principles that should guide the preparatory work.

1. Strong regulatory and fiduciary framework. This is a key precondition for safety of the pension assets. First, no funded system should start without a regulator that is well-equipped and able to effectively enforce all legal provisions. Bill 5865 in Rada introduces a proper regulatory framework and powers of the regulator. This bill should certainly form part of the reform package. Second, it will also be important to establish proper segregation of assets and records between the activities of the existing voluntary plans and the new mandatory scheme. And third, several governance issues pertaining to non-state pension funds (especially the ultimate fiduciary responsibility of their boards, risk management and internal controls) will need to be addressed to have these funds prepared for their new role and be seen by the public as effective and trusted custodians of their pension assets.

2. Sustainable financing. The funded system can be introduced either as a complementary scheme to the current solidarity system or as a substitutional system. The current government proposal is a hybrid: on the benefit side, it is complementary, but on the revenue side, part of the solidarity system contributions is proposed to finance the new funded scheme. Such an approach may limit the effectiveness of the new system fiscally and socially, aggravating the risk of falling benefits in the solidarity system. This may result in no net improvement in the future combined retirement benefits from this reform. Instead, to maximize the impact of the new funded system, it will need to be funded from new contributions, without tapping into the same fiscal space that provides for the wellbeing of current pensioners. Ideally, these new contributions should come from employee wages, so there is personal attachment to the pension account – a signature element of individual responsibility in such programs. Such employee contributions could further be co-financed by the employer and/or by the government, as an incentive to contribute more for retirement.

3. Efficient administration. The mechanism of money and information flows in the new system should be carefully designed and tested, so that the administrative costs of the new system are minimized. No single Hryvna should be lost on its way from employers to an individual account, as it passes through the government machinery of revenue collection. For this, every detail of the process needs to be elaborated and all risks mapped and mitigated.  It can be shown that a 1% annual charge on pension assets over someone’s full work career reduces around 20% of their pension benefits by the time of retirement. Therefore, cost reduction is key – and it has been shown that centralizing core administrative functions is an effective cost reduction strategy. Finally, simple provisions need to be introduced for individuals who do not actively choose a fund. This would pave the way to establishing a “default” fund with a life-cycle investment strategy. Importantly, a gradual implementation approach should help minimize various operational risks. So, Ukraine should start with a simple design that can be easily understood by the general public – and add more complex elements to the system over time.

4. Overall pension system design. The new funded scheme will be only a small supplement to the current system. With a 4 percent contribution rate, it will take an individual about 25 years of contributions for the account value to reach their corresponding annual wage in that year in the future. This is a rather insignificant amount, considering that this accumulated amount equivalent to one year’s wage will have to be spread over the remaining life of an individual after retirement. Therefore, better coordination with the solidarity system, especially its system of minimum income guarantees, is required

5. Well-defined role of the state. Explicit legal provisions about what government can and cannot do will put the system on the right track. The state plays several important roles here: ensuring proper regulations and fair competition in service provision; facilitating a “default” fund; providing co-financing from the general budget to stimulate participation; enabling core record-keeping infrastructure and standards of member services; facilitating markets for financial instruments to promote diversification of investments; providing well-coordinated general minimum income guarantees at retirement, through the solidarity system; and so on. So, having a clear implementation plan and well-defined transitional arrangements will be instrumental to the success of this reform.

A lot of work needs to be done to ensure that Ukraine’s future pensioners have an adequate pension that will allow them a dignified retirement. Therefore, learning from the successes and mistakes of other countries, the government should target a realistic timeline to build the second pillar – with well-coordinated preparatory work yielding a consensus on key design elements (incorporating all the above principles).

Originally published in UKRINFORM via World Bank

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