Policy Tensor

The Russian Intervention in Syria

In World Affairs on September 19, 2015 at 11:54 pm

It seems that Soleimani made quite an impression on Putin. Rather than simply supplying Assad with more arms and ammunition as the Policy Tensor had imagined, Russia has chosen to deploy a significant number of military assets in Syria. What is the scale of the Russian deployment and what prompted it? What is Putin up to now? And where is this going?

What seems to have forced Putin’s hands is the recent setbacks suffered by Assad this year. Islamist rebel forces led by Jabhat al-Nusra (JN) conquered Idlib City in March and kicked regime forces out of all but one of their positions in Idlib Province by September. This has placed the rebels in a position to launch attacks into the Alawite heartland on the Syrian coast. That the primary purpose of the deployment is to thwart the rebel offensive is clear from the location and nature of Russian assets in Syria.

Al Assad Airbase

Instead of deploying assets to their existing naval base at Tartus, the Russians have deployed their forces further north in Latakia Province where they will be closer to the frontline. The center of activity is the Bassel al-Assad International Airport at Jableh in Latakia Province. Satellite imagery provided by AllSource Analysis has confirmed the presence of tanks, armoured personnel carriers, howitzers, trucks, and prefabricated housing for 1,500 personnel. The equipment in the field so far is consistent with the deployment of a single army brigade.

That’s right: Russia is deploying ground forces in Syria. On September 13, reports filtered in that fifteen buses carrying Russian troops arrived in Hama City and turned its Equestrian Club into military barracks. More troops are on the way. Transport aircraft continue to airlift assets to what is now a de facto Russian military base at the rate of up to two per day. Under the cover of a large military exercise involving a hundred thousand troops, Russia has buildup its military assets at Taganrog Central airbase in southern Russia. Located 800 miles from Latakia, the airbase is perfectly positioned to supply the war effort in Syria.

Putin’s goals are limited: Protect Russia’s only naval base in the Middle East at Tartus and make sure than the Assad can hold on to the territory still under his control. The troops in the field are mandated to thwart the rebel advance and perhaps conduct counter-offensives against JN et al. These limited objectives are likely to be achieved.

Given that the United States is conducting daily airstrikes in the vicinity, it is necessary to have military-to-military contacts to ensure that there are no incidents. The Russian intervention has changed the calculus somewhat in as much as it is now even harder to see how Assad could possibly be dislodged. The United States should finally surrender its futile opposition to Assad and play ball. A great power settlement in Syria is very much possible and was held up by US opposition to Assad. Now that the United States seems finally ready to fold, a deal is indeed likely in the coming months. 

That Putin has managed to force Obama’s hand is not altogether surprising. US policy in Syria has been ham-handed from the get-go. It was very much possible in the beginning to get ahead of the curve. The US could’ve armed moderate rebels while they were still viable and forced Assad to the table with the threat of military escalation. The Obama White House foolishly outsourced the arming of the rebels to the oil monarchies; with predictable results. Once the Islamists had essentially taken over the rebellion there was no choice but to back Assad. Yet, the White House could not drop its opposition to the Assad regime. This short-circuited any possibility of a great power settlement in Syria. Forging a Syrian army to oust Assad might have worked had it been given sufficient time and resources. But it served no discernible US interest and was not worth the effort given that the alternate strategy of backing Assad was always available. The actual effort of course was laughable.

Russia is not about to replace the United States as the dominant power in the region for the obvious reason that the United States continues to be vastly stronger than Russia. Strength alone is not enough however. If the US leaves security vacuums in the region, like it has in Syria and Iraq, others will be pulled in despite themselves. (Although one can’t help but feel that Putin must relish deploying Russian troops in the region for the first time since the collapse of the Soviet Union.) The extent to which Russia has been pulled in will become clear in the coming months.

Russia is also not about to conquer the Islamic State. Despite all the anti-ISIS rhetoric emanating from Moscow, nothing so far suggests that Russian ground forces will even engage the fighters of the Islamic State. And even if they did, it would require a considerably bigger military deployment than a single army brigade to make an impression on Baghdadi. The existence of the Islamic State is the principal security threat to US protectorates in the region. It cannot be conquered without ground forces; as I predicted and is now amply clear after 4,700 airstrikes with little to show for them. And the Russian troops heading to Syria non-withstanding, no state has taken up the mantle. In particular, President Obama has effectively decided to kick the can down the road to the next administration.

Stephen Walt has proposed that the Islamic State can be contained. I have very serious misgivings about such a course of (in)action. Specifically, the Islamic State poses an existential threat to the Kingdom of Saudi Arabia. It could potentially overrun the entire Arabian peninsula in short order on the backs of a very sympathetic populace. It may not be in a position to do so now, but it is bound to get stronger as state formation proceeds apace. It would be a grave mistake indeed to tolerate the existence of the Islamic State and run this risk for an extended period. In any case, there is no sign that the US security apparatus would tolerate a Salafist-Jihadist state bang in the heart of the Middle East to survive for long. If not this president then the next one will be going after the Islamic State. 

The big news is not the likely survival of the Assad regime or the Islamic State. Both of these were already baseline scenarios. The big news is the military alliance between Russia and Iran; something that has never obtained previously. The alliance is not a serious threat to the United States for the simple reason that Russia cannot protect Iran against the United States. In the event of a confrontation between the United States and Iran, Russia would be in no position to intervene. And in the worst case scenario, if the Russians did threaten to do so, their fleet could be bottled up in the Black Sea. In any case, the US could easily blockade both nations without incurring significant damage. 

So the military alliance is no game changer for the global balance of power. It does however have significant implications for the balance of power in the Middle East. The biggest losers as a result of these developments are Turkey and Saudi Arabia, both of whom have expended significant resources to take down the Assad regime. The Islamist rebels on their payroll can no longer hope to topple the government in Damascus. Perhaps it is time to throw them under the bus. 

Broker-dealer Balance-sheets

In Markets on September 14, 2015 at 6:08 am


The bankers huddled with Hank Paulson and Tim Geithner at the New York Fed’s downtown Manhattan office on the weekend of the Lehman crisis were there because they played a central role in the provision of global credit. I say this because the size of the balance-sheets of the broker-dealers is the best available explanatory variable for global asset prices. I use broker-dealers, market-makers, and banks interchangeably to mean the small number of big banking firms that make markets, have access to the Fed’s window, and maintain large positions in the wholesale lending market. Their importance comes not just from their trillion dollar balance sheets but also from their role as marginal providers of US dollar credit.

The equity of the broker-dealers doesn’t move much (see next chart). Instead of raising and retiring equity, banks resize their balance-sheets by raising and lowering their debt levels. And it is the book leverage of broker-dealers that is the best predictor of global asset prices. For instance, controlling for the leverage of the broker-dealers, variation in the balance sheet quantities of commercial banks and shadow banks adds little predictive power.

Procyclical leverage and VaR

Developments in intermediary asset pricing since the onset of the Western financial crisis by a number of scholars (many affiliated with the BIS) have led to a very coherent picture of the global financial system. Global asset prices strongly covary and are in fact largely determined by a single global systematic factor (usually captured by the VIX) that explains two-thirds of the variation in asset prices. The explanation is straightforward: The volatility of asset prices determines the VaR constraint facing the broker-dealers who modulate their leverage to maintain a constant probability of default. That is, they follow the VaR rule which can either be seen as a regulation or a contract solution to an asymmetric information game between the banks and their counter-parties. Either way, it captures the empirical behaviour of banks quite precisely.

This optimization behaviour of the broker-dealers is procyclic and potentially destabilizing. Larger balance-sheets mean easy credit implying lower asset price volatility, which in turn results in even larger balance-sheets and so on. Symmetrically, smaller balance-sheets mean tighter credit implying lower asset price volatility and therefore tighter VaR constraints that banks respond to by shrinking their balance-sheets further. One can think of it as the money multiplier. Indeed, this is the central transmission channel of US monetary policy. Monetary shocks are amplified by the optimization behaviour of the broker-dealers. Lower policy rates push down systematic volatility that allows banks to increase their leverage putting further downward pressure on systematic volatility and so on.

Global banks are also at the heart of the international transmission of US monetary policy. The US monetary stance is so central to global markets that it prompted a paper by a researcher at the Bank of England as whether the United Kingdom has an independent monetary policy or whether it is a slave to the Fed. US and European banks extend cross-border dollar credit directly to local firms as well as indirectly by lending to local banks (which in turn lend to local firms). It is in this manner that US monetary shocks propagate internationally.

The odds of a Fed rate hike this week embodied in the futures price of the 30-day bill are about one in four. I think that is too high. It’s hard to see how the Fed can hike in light of the developments in China; especially since there is no sign of inflation getting anywhere close to mandate levels. Intermediary asset pricing theories can help us anticipate the response of global markets (especially term and risk premia) when the Fed does get off the floor. For now, just observe that developments in China mean that volatility is likely to be higher thus forcing tighter credit conditions globally and pushing down asset prices even in the absence of an exit from the zero lower bound. This bodes ill for the global asset price boom, especially for emerging markets which are the first to get culled when risk premia rise.

Europe’s Escalating Crises

In World Affairs on September 7, 2015 at 7:19 pm


The escalating crises of the European Union have left many American strategists smiling. Primacists scheming to prevent the emergence of an independent European superpower found the continent nowhere close to being ready to do away with the American pacifier. More prescient authors had warned of the dangers of monetary union in the absence of any serious labor market or fiscal integration. Others had warned of the threat posed by instability in regions next door. Yet others, of the Europeans’ shoddy record in assimilating Muslims in their midst. Still others, of the democratic deficit undermining the legitimacy of the European Union itself.

The EU’s democratic credentials have been seriously tested by the eurozone crisis. While technocrats impose austerity measures on the southern periphery, Berlin has continued to ‘lead from behind’. In light of Berlin’s posse of rich northerners, France has found it attractive to walk largely in lockstep with the result that Franco-German cooperation has been very close despite serious disagreements over policy. This extraordinary cooperation in testing times at the geopolitical center of the continent has raised the hope that Europeans are yet capable of coordinated political action.

The return of trucks filled with dead bodies to the continent has provided a much-needed ethical jolt to European leaders. Merkel has called for an equitable distribution of burden sharing through a mandatory refugee quota. Hollande, long opposed to mandatory quotas, has finally come around. British opposition can perhaps be bypassed by persuading the twenty-six Schengen states to sign on.

Whether or not Hollande and Merkel are able to deliver a solution of some sort to the refugee crisis, Europe will continue to face security challenges from its near-abroad. Europe’s inability to mount a coherent response to developments in either Ukraine or the Middle East is the result of the incongruence of political realities on the continent. For while continental affairs are settled under Franco-German cohegemony, the French are alone when it comes to mobilizing politico-military action overseas: Germany has recused itself from foreign security policy thereby effectively cutting short any possibility of the emergence of the continent as a unitary security actor. Whence, the incoherence of the European response to instability nearby.

There are real alternatives to passively responding to the instability from the south threatening the European order. Berlin has wisely maintained a working relationship with Moscow. Indeed, of all the Western powers, Germany is closest to Russia. A great power deal on Syria is yet possible. Berlin could persuade Moscow to arm-twist Assad to the table. A political accommodation in Syria that ends the fighting would necessarily involve accepting that Assad stay on; at least temporarily. The Americans are ready to cut such a deal but they don’t want to take the lead on this lest they rattle their Sunni allies—the Saudis, the Turks, and the Egyptians. In order to bring sufficient pressure to bear on the Americans, Berlin would have to convince Paris of the merits of a great power settlement in Syria.

French enthusiasm is even more important if stabilization in North Africa is contemplated; as it should. Indeed, an international force to impose the peace in Libya is also not out of the realm of European capabilities. Modulo the air war against Qadaffi and the French intervention in Mali, the Europeans have shown little appetite for campaigns overseas. That may be about to change. As more and more refugees make the hazardous journey across the Mediterranean, this course of action will become increasingly attractive. Security vacuums have a way of goading unwilling polities to get involved. If Europe indeed emerges as a unitary security actor in response to these threats, the escalating crises would not have been in vain.


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