Iran Gains Ground in Afghanistan as U.S. Presence Wanes


An Afghan police officer at his unit’s outpost overlooking the districts north of Farah, the capital of the province that goes by the same name. In October, the Taliban overran posts like this one in a siege. Credit Bryan Denton for The New York Times
































An Ambitious Expansion






























Intrigue in ‘Little Iran’


























Double-Edged Soft Power






But Iran’s economic leverage comes at a price.













Peace or Proxy War?







The question now: Does Iran?





























Ruhullah Khapalwak contributed reporting from Kabul, Afghanistan.

China Prepares for a Crisis Along North Korea Border

Beijing bolsters defenses along its 880-mile frontier and realigns forces in surrounding regions

By Jeremy Page

North Korean soldiers recently rode on a boat used as a local ferry as they cross the Yalu river north of the border city of Dandong, China. Photo: Kevin Frayer/Getty Images

BEIJING—China has been bolstering defenses along its 880-mile frontier with North Korea and realigning forces in surrounding regions to prepare for a potential crisis across their border, including the possibility of a U.S. military strike.

A review of official military and government websites and interviews with experts who have studied the preparations show that Beijing has implemented many of the changes in recent months after initiating them last year.

They coincide with repeated warnings by U.S. President Donald Trump that he is weighing military action to halt North Korea’s nuclear weapons program, while exerting pressure on China to do more to rein in Pyongyang.

Recent Chinese measures include establishing a new border defense brigade, 24-hour video surveillance of the mountainous frontier backed by aerial drones, and bunkers to protect against nuclear and chemical blasts, according to the websites.

China’s military has also merged, moved and modernized other units in border regions and released details of recent drills there with special forces, airborne troops and other units that experts say could be sent into North Korea in a crisis. They include a live-fire drill in June by helicopter gunships and one in July by an armored infantry unit recently transferred from eastern China and equipped with new weaponry.

China’s Defense Ministry didn’t respond directly when asked if the recent changes were connected to North Korea, saying only in a written statement that its forces “maintain a normal state of combat readiness and training” on the border. It has denied previous reports of thousands of extra Chinese troops moving into border areas.

A Chinese Foreign Ministry spokesman on Monday said: “Military means shouldn’t be an option to solve the Korean Peninsula issue.”

Chinese authorities have nonetheless been preparing for North Korean contingencies, including economic collapse, nuclear contamination, or military conflict, according to U.S. and Chinese experts who have studied Beijing’s planning.

China’s recent changes in force structure, equipment and training are connected to nationwide military reforms launched last year to overhaul Soviet-modeled command structures and prepare better for combat beyond China’s borders, those experts say.

In the northeast, however, those reforms are geared predominantly toward handling a North Korean crisis, the experts say.

China’s contingency preparations “go well beyond just seizing a buffer zone in the North and border security,” said Mark Cozad, a former senior U.S. defense intelligence official for East Asia, now at the Rand Corp.

“Once you start talking about efforts from outside powers, in particular the United States and South Korea, to stabilize the North, to seize nuclear weapons or WMD, in those cases then I think you’re starting to look at a much more robust Chinese response,” he said. “If you’re going to make me place bets on where I think the U.S. and China would first get into a conflict, it’s not Taiwan, the South China Sea or the East China Sea: I think it’s the Korean Peninsula.”

China, like many foreign governments, still considers a U.S. military strike unlikely, mainly because of the risk of Pyongyang retaliating against South Korea, an American ally whose capital of Seoul lies within easy reach of the North’s artillery.

The Pentagon declined to discuss U.S. planning efforts. American officials didn’t respond to questions about steps taken by China. But top American officials say they are focused on diplomatic and economic pressure, and view military action as a last resort.

Although technically allied to Pyongyang, Beijing wouldn’t necessarily defend its regime, but is determined to prevent a flood of North Koreans from entering northeastern China and to protect the population there, U.S. and Chinese experts say.

Beijing also appears to be enhancing its capability to seize North Korean nuclear sites and occupy a swath of the country’s northern territory if U.S. or South Korean forces start to advance toward the Chinese border, according to those people.

That, they say, would require a much larger Chinese operation than just sealing the border, with special forces and airborne troops likely entering first to secure nuclear sites, followed by armored ground forces with air cover, pushing deep into North Korea.

It could also bring Chinese and U.S. forces face to face on the peninsula for the first time since the war there ended in 1953 with an armistice—an added complication for the Trump administration as it weighs options for dealing with North Korea.

Beijing has rebuffed repeated American requests to discuss contingency planning, American officials say.

China has long worried that economic collapse in North Korea could cause a refugee crisis, bring U.S. forces to its borders, and create a united, democratic and pro-American Korea. But China’s fears of a U.S. military intervention have risen since January as Pyongyang has test-fired several missiles, including one capable of reaching Alaska.

“Time is running out,” said retired Maj. Gen. Wang Haiyun, a former military attaché to Moscow now attached to several Chinese think tanks. “We can’t let the flames of war burn into China.”

He wrote an unusually outspoken article for one of those think tanks in May arguing that China should “draw a red line” for the U.S.: If it attacked North Korea without Chinese approval, Beijing would have to intervene militarily.

A man in Dandong offered tourists the use of binoculars to view the North Korean side of the Yalu River in April. Photo: Damir Sagolj/REUTERS

China should demand that any U.S. military attack result in no nuclear contamination, no U.S. occupation of areas north of the current “demarcation line” between North and South, and no regime hostile to China established in the North, his article said.

“If war breaks out, China should without hesitation occupy northern parts of North Korea, take control of North Korean nuclear facilities, and demarcate safe areas to stop a wave of refugees and disbanded soldiers entering China’s northeast,” it said.

Maj. Gen. Wang said he didn’t speak for the government. But his article isn’t censored online—as it would likely be if Beijing disapproved—in China and other Chinese scholars and military figures recently voiced similar views.

In recent weeks, some details of China’s preparations have also emerged on the military and government websites.

The new border defense brigade patrolled the entire frontier in June to gather intelligence and has drawn up detailed plans for sealing it in a crisis, according to the military’s official newspaper.

Aerial drones would help identify targets, supplementing the new 24-hour video surveillance and addressing problems with “information access, rapid mobility and command and control,” another report in the newspaper said.

Many other units in the northeast have recently conducted new combat-focused training for the kind of joint military operations that experts say would be needed for an intervention within North Korea.

In one drill, a new “combined arms brigade” simulated battle against a “blue team” with artillery, tanks and helicopters, state television reported in June.

The new Northern Theater Command, which controls forces in the northeast, also now incorporates units in eastern China that experts say could be launched across the Yellow Sea toward North Korea.

Meanwhile, authorities in Jilin province, which borders North Korea, are reinforcing and expanding a network of underground shelters and command posts to withstand air, nuclear or chemical attack, local government notices show.

Chinese soldiers recently patrolled the streets of Dandong near the North Korean border. Photo: Jiwei Han/ZUMA PRESS        

Such facilities were needed “to respond to the complicated security situation surrounding the province,” Jilin’s civil air defense bureau said in a notice on its website, which also features photos and specifications of U.S. military aircraft.

In May, Jilin’s government unveiled what it called China’s first “combat-ready big data disaster preparedness center” in an underground facility designed to protect critical military and government data from nuclear or chemical attack.

Jilin authorities declined to comment, citing the sensitivity of the subject.

China’s military reforms aren’t complete and the People’s Liberation Army, or PLA, remains ill-prepared for a North Korean operation, some experts say.

“I don’t see the PLA at this time being particularly enthusiastic about being tasked to undertake a potential near-term mission in North Korea,” said Dennis Blasko, a former U.S. military attaché in Beijing.

But China, like the U.S., has been surprised by how fast North Korea’s nuclear weapons program has progressed, say foreign diplomats and experts. Beijing also worries that Pyongyang’s actions are now harming Chinese security interests, since the U.S. deployment in South Korea in April of a missile-defense system that China says can track its own nuclear missiles, diplomats and experts say.

Beijing’s interests “now clearly extend beyond the refugee issue” to encompass nuclear safety and the peninsula’s long-term future, said Oriana Skylar Mastro, an assistant professor at Georgetown University who has studied China’s planning for a North Korean crisis.

“China’s leaders need to make sure that whatever happens with (North Korea), the result supports China’s regional power aspirations and does not help the United States extend or prolong its influence,” Ms. Mastro said.

—Ben Kesling in Washington contributed to this article.

The Coming Financial Volatility

Gene Frieda

Monetary tightening

LONDON – Bond investors are from Mars, and central bankers are from Venus – or so suggests the bond market’s negative reaction to signals that the exceptional monetary-policy accommodation of the last decade is winding down. Risky asset markets, however, are ignoring the red flags that the bond markets are waving. Are they right?
Today, inflation remains low in much of the developed world. But previously dovish central banks in countries like the United States and the United Kingdom are itching to roll back the accommodative monetary policies that they have pursued since the eruption of the global financial crisis of 2008.
Inflation-targeting central banks assume that, when inflation expectations are stable, changes in inflation stem from changes in the amount of slack in the economy. When slack diminishes – as is happening now, with unemployment now well below average levels over the business cycle (and at multi-decade lows in the US and the UK) – inflation will eventually rise.
Already, these central banks have maintained loose monetary policies for much longer than in the past, in order to offset the headwinds to growth and inflation that the financial crisis produced. Yet they know from past asset bubbles that leaving monetary policy too loose for too long risks digging an ever deeper hole, with natural interest rates and potential growth ending up even lower in the next cycle.
So are investors in risky asset markets right to be so complacent? For now, there can be no definitive answer. But the record from past periods of calm suggests that, when cross-asset market volatility is low, de-risking is prudent.
To be sure, investors would have greater cause for concern if there were clearer signs of excessive risk-taking in financial markets and the real economy – the kind of excess that craves the monetary-policy punch. Because periods of asset-price euphoria – exemplified by the dotcom and real-estate bubbles of 2000-2008 – typically feature exceptionally loose monetary policy, central banks are now trying to extend the business cycle by removing monetary accommodation in a gradual and predictable manner.
But asset-price bubbles also tend to feature new innovations that entice markets and central banks into believing that this time really is different. In the post-crisis context, the most likely justification for higher asset-price valuations is the global decline in the “price” of savings (the natural rate of interest), or R-star. If corporate earnings grow as a function of trend growth (the underlying rate of growth), but funding costs remain a function of an even lower R-star, then equity multiples should be higher than in the past on a structural basis, and credit spreads should generally be tighter.
But, while this argument appears accurate today, investors have at least two reasons to be worried.
First, to the extent that the gap between trend growth and natural rates drives up asset valuations, marginal changes in that gap should lead to changes in those valuations. If central banks were simply altering short-term interest rates – the traditional tool of monetary policy – as they have done in the past, this would be less of a concern.
But, in the present cycle, central banks have become far more dependent on indirect tools – namely, long-term interest rates. The effects of such tools are shaped by investor expectations, and are thus prone to sudden and extreme shifts. In 2013, for example, the US Federal Reserve’s suggestion that it would begin to taper off one of its quantitative easing programs triggered a “taper tantrum,” with money pouring out of the bond market and bond yields rising substantially.
The second key cause for concern is that higher valuations do not necessarily mean higher returns or better volatility-adjusted returns. Even if the positive gap between potential growth and natural interest rates justifies higher asset valuations, lower potential growth denotes lower returns across asset classes. As interest rates rise toward the natural rate, financial conditions should tighten, and risky asset valuations should fall. Central banks want this tightening to come about gradually, but the brief history of unconventional monetary policy suggests that asset re-pricing tends to occur abruptly – sometimes disruptively so.
Why, then, don’t investors take advantage of extremely low volatility to buy cheap insurance?
Markets do not explode every time volatility is low, but volatility has always been extremely low when markets have exploded. Insurance is needed most when imbalances become extreme.
Equity and credit valuations are not cheap; but they are not egregiously expensive, either.
Here on Earth, central bankers and bond investors have something in common: both worry that the current period of extremely low volatility is neither sustainable nor desirable. After all, lower combinations of fixed income, foreign exchange, and equity volatility have been seen three times before: just prior to the onset of the global financial crisis, in the month preceding the taper tantrum, and in the summer of 2014.
In short, there is no doubt that volatility will eventually rise to normal levels. For investors today, the lesson is clear: reducing the scale of risk exposure is the right way forward.

Latin America’s disappointing economic growth
The commodity hangover has been compounded by political uncertainty
SCAN the Latin American newspapers and it is hard to find much sign of a convincing economic recovery. True, Brazil’s industrial production is perking up after a two-year slump.

Mexico’s energy reform is starting to pay off, at last, with a big new oil discovery by an international consortium. And Peruvian restaurateurs celebrated “National Char-roasted Chicken” day on July 16th, hoping to dispatch a million birds, up from last year’s 720,000.

Otherwise, animal spirits are in short supply. After five years of deceleration and one of recession, Latin America should register modest economic growth of 1-1.5% this year, according to forecasters. The picture varies from country to country. The return to aggregate growth is largely thanks to Brazil and Argentina, which are coming out of recessions.

Venezuela’s economy is collapsing. Mexico, Chile, Colombia and Peru are expanding at a sluggish rate of 2-3%. Only in Central America, the Dominican Republic and Bolivia is growth a respectable 4% or so.

What makes this particularly worrying is that external conditions are generally favourable.

The world economy is picking up speed. The United States and China, the region’s biggest trading partners, are growing nicely. Financiers look favourably on Latin American governments and companies, as Argentina’s recent launch of a 100-year bond illustrated.

So why is the region still so off-colour? One answer is that adjusting to the end of the commodity boom, which benefited South America particularly, has taken longer than expected.

Between 2003 and 2010 China’s industrialisation boosted demand for minerals, oil and foodstuffs. Commodity prices fell steadily between 2010 and 2015. As export revenue shrank, the region’s currencies weakened, curbing imports and pushing up inflation.

The good news is that in many countries this external adjustment went smoothly and is largely over. The region’s current-account deficit narrowed by 1.4 percentage points of GDP last year (to 2.1%). Inflation is falling swiftly, allowing central banks to cut interest rates (see chart).

That offers hope of a pickup in growth in 2018.

But Latin America also faces a fiscal squeeze. The commodity boom temporarily boosted tax revenues. Too many governments spent, rather than invested or saved, this windfall. The primary fiscal deficit (ie, before interest payments) in the region as a whole increased from 0.2% of GDP in 2013 to 2.6% last year. In other words, public debt is rising. Many governments have started to retrench. Few are in a position to prime the pump of recovery.

There is a second factor slowing the rebound: political uncertainty. That starts with Donald Trump. While he has agreed to renegotiate, rather than scrap, the North American Free-Trade Agreement with Mexico and Canada, he continues to threaten to impose protectionist measures, discourage investment south of the Rio Grande and deport millions of Mexicans and Central Americans. So far Mexico’s economy has held up better than feared: the peso is stronger now than it was before Mr Trump’s election last November. The annual growth rate was 2.7% in the first quarter of this year. But Mexico is living from month to month.

The second doubt concerns domestic politics. Latin America will not return to faster growth unless it does more to solve the structural problems that hold it back. They include inadequate infrastructure, poor-quality schooling, badly designed taxes and regulations that hobble business. Fixing these requires persuasive leadership. But in the larger countries, the only president who is even moderately popular is Mauricio Macri of Argentina. In Brazil, Michel Temer has an approval rating of 7% and may be evicted from office because of corruption allegations.

Between November of this year and October 2018, Chile, Colombia, Mexico and Brazil all face presidential elections (while Argentina has an important mid-term congressional election this October). These contests will take place amid popular disillusion with politicians, caused partly by corruption. In each, there is some risk that a populist could triumph.

No wonder investment remains depressed. Growth this year is coming mainly from a small recovery in exports and from import substitution. The first task facing governments is to provide investors, both local and foreign, with a reasonable degree of policy certainty. More than is usually the case, for insights on their economic prospects, Latin Americans should turn to political scientists rather than to economists.

Russia’s Strategy: Built on Illusion

By George Friedman

Strong powers can underplay their hands and afford to make mistakes. Weak powers, on the other hand, need to exaggerate their power and be far more precise in its use. Power is like money; the less you have, the more you need to flaunt it and the fewer mistakes you can afford to make. But by trying to convince others that they have more power than they actually do, they run the risk of squandering a scarce resource. It’s nearly impossible to both flaunt power and preserve it at the same time.

This is the core strategic problem of Russia. On the one hand, it is still trying to find its way more than 25 years after the collapse of the Soviet Union, an event President Vladimir Putin has referred to as “the greatest political catastrophe” of the 20th century. In the lives of nations, a quarter of a century is not very long, and the reverberations of the catastrophe are still being felt. On the other hand, Russia lives in a complex and dangerous region, and appearing weak can be the biggest threat to its well-being. Therefore, like a wealthy person coming into hard times, Russia must simultaneously try to appear more powerful than it is and meticulously manage what power it has.
Russia’s Geographic Weakness
Since the fall of the Soviet Union, Russia has faced two fundamental problems. The first is geographic. The second, which we’ll return to later, is economic.

Russia’s main geographic problem is that it needs to maintain a buffer zone to its west to stem the risk of attack from the European Peninsula. Russia has been invaded three times, once by France and twice by Germany. In each case, it survived because of strategic depth. The Baltics, Belarus and Ukraine created the buffer zone that gave Russia room to retreat and exhaust the enemy. Although the weather also played a role, distance was the main challenge for attacking armies. Even in World War I, Germany was unable to sustain the gains it won. In the Napoleonic Wars and World War II, the enemy was ground down and defeated.

After World War II, Russia’s buffer zone expanded dramatically. A second tier of nations to the West – Poland, Czechoslovakia, Hungary and Romania – came under Soviet dominion. Soviet power pushed into central Germany. For the first time in its history, it had strategic depth such that an attack from the European Peninsula was unthinkable.

But maintaining the force that was needed to hold this deep buffer exceeded Soviet resources. The drop in oil prices, the inherent inefficiency in the economy, and the cost of defending what it had won in World War II had become unsustainable, and the Soviet Union collapsed. It first lost the deep buffer of Eastern Europe, and two years later, it lost the critical elements of its core buffer, the Baltics and Ukraine.

An argument can be made that given the situation on the European Peninsula, the threat to Russia has evaporated. But nothing in Russia’s history permits such complacency. In 1932, Germany was a weak and divided liberal democracy. Six years later, it was the most powerful military force in Europe. Russia understands the speed with which European (and American) intentions and capabilities can change. It must therefore continue to pursue strategic depth.

Russian servicemen march at Red Square during the Victory Day military parade in Moscow on May 9, 2017. NATALIA KOLESNIKOVA/AFP/Getty Images
When the Baltic countries were brought into NATO, the Russians were unable to respond. But Ukraine was a different matter. It had become independent but was not absorbed by the West. It was also a critical part of Russia’s buffer. Ukraine is vast, and the cost of crossing it from the west is high. When Western countries, particularly the U.S., appeared to support the establishment of a pro-Western government in Kiev during the 2004 Orange Revolution, Russia believed they actually intended to undermine Russian security. A Ukraine armed or controlled by the West would make Russia very difficult to defend. The U.S. claimed the Orange Revolution was about human rights, but the Russians saw that as a cover. The Russians fought back with covert operations designed to install a pro-Russian government in Kiev. The Americans responded by supporting the uprising in 2014, and the Russians saw this too as a hostile act.

But Russia was in no position to do anything about it. Its intelligence services failed to understand or prevent what happened in Kiev. The Russians had to do something to demonstrate they were not impotent. So Russia formally annexed Crimea, a region that was historically Russian, and where Russian force was already overwhelming. This convinced the Americans that Russia was an aggressive power. Russia found itself in a strategic confrontation that outstripped its resources but which it could not abandon.

But with Russia unable to challenge Western forces and with the U.S. uninterested in an extended conflict with Moscow, the result was a frozen conflict in Ukraine. There was an implicit agreement: Russia would accept a pro-Western government in Kiev so long as that did not include a military alliance or deployment of Western forces in Ukraine. The U.S. and Europe would accept the status quo so long as the Russians did not become aggressive. The Russians had a buffer against the West, and the West had a buffer against Russia.

This achieved a solution the West could live with because Ukraine was not a fundamental interest. But for the Russians, it was only minimally acceptable. Ukraine was vital to Russian interests and this solution was only just short of a defeat.
Economic Constraints
Russia decided it had to act to increase its strength. But it was dealt another blow in 2014, when oil prices began to decline as a result of increased supplies and constrained demand. And this brings us back to Russia’s second fundamental problem: its economic weakness. Russia is dependent on an economic variable it can’t control. It remains heavily reliant on oil exports but it can’t dictate the price of oil. At a time when it needed to expand its military power, it was facing deep economic constraints. This was precisely the problem the Soviet Union faced in the 1980s. It had to increase its military force while its major export, energy, plunged in price. This problem was instrumental in the Soviet Union’s collapse. To avoid repeating this scenario, the Russians had to decrease their defense budget rather than increase it.

After the dual shocks of 2014, Russia could either acknowledge its weakness or attempt to appear more powerful than it was. But if it acknowledged its problems, Russia was afraid, reasonably so, that the U.S. could impose a more aggressive policy on Moscow. Russia was forced into the maneuver of a formerly wealthy man down on his luck. It had to appear convincingly more powerful than it was, with the attendant danger of using up resources it couldn’t afford to spend. It pursued this strategy through low-cost, low-risk actions.

One such action was in Syria. The intervention there served no Russian strategic interests. There was speculation that Russia was interested in pipelines or ports. But no one believed that Russia’s commitment to Bashar Assad was so deep that it would intervene to save him. In reality, the Russians intervened to show that they could, and to prove that they could deal with the United States and Turkey as equals. From a strategic standpoint, it made little sense. From a psychological standpoint, it made some sense. The forces it sent were limited, and while they may have prevented the fall of Assad, they are now as bogged down as the Americans, unable to win and unable to leave. But being as bogged down as the Americans was not a problem. To the contrary, it made Russia a player on a bigger stage.

Russia’s second low-risk action was an old Soviet strategy: using its intelligence forces in a destabilization campaign. The goal of the Russian campaign was not so much to interfere in political campaigns as to be seen as interfering. The Soviets also played this game in the 1980s, supporting various radical groups in Europe. Of course, the Soviet Union collapsed anyway. Actions taken by weak nations designed to make them appear stronger than they are always fail in the long run. A country’s real power is durable, but illusions are fleeting.

The Russians are delighted that they have convinced some that they control Donald Trump. Not only does this breed instability in the United States, but it gives a sense of overwhelming, if covert, Russian power. If they actually did try to control Trump, then their reputation for incompetence in such matters proceeds them, since being able to blackmail Trump had value only if it were kept secret. And the coup of the century (or several centuries) would be the biggest secret of all time. But the point was not to control Trump, but to destabilize the United States. And while it has certainly created an uproar, the fact remains that American power is intact, and so is Russian power. The balance of power has not changed.

Russia has achieved what it needed to in Syria and in its destabilization campaign. It appears to be stronger than it is. But Russia’s fundamental problems have not been addressed. Its strategic depth has been compromised if not lost, and its economy is staggering as oil prices remain low. The Russians have no solutions to these problems so instead they are engaging in a series of very impressive bluffs. But in the end, they are merely buying time, not solving their strategic problema.