Week of October 11th, 2013

A Weekly Report of U.S. Think Tank Community Activities


The talk around Washington is still the government shutdown. And, this issue remains in flux and may very well change between the time this is written and you read it.

Currently, it appears that Republicans are signaling that they are willing to increase the government debt ceiling for 6 weeks so both sides can sit down and discuss the budget and the government shutdown. Talk within the GOP indicates that this is a plan that can be agreed upon by most Republicans, including conservative ones.

This bill may be passed by the time you read this. However, this doesn’t end the government shutdown. It only mitigates its impact. And, the whole process may take place again in six weeks as it has in the past (read the Monitor analysis for more on the past history of debt ceiling negotiations).
One component under discussion is how the shutdown is impacting the world and American foreign relations. The Monitor analysis looks at this issue and tries to separate fact from political rhetoric. The analysis shows that the threatened default is only a threat and that holdings by China and Japan are only a fraction of US debt and their liquidation would hurt China more than the US.


Executive Summary

The talk around Washington is still the government shutdown. And, this issue remains in flux and may very well change between the time this is written and you read it.

Currently, it appears that Republicans are signaling that they are willing to increase the government debt ceiling for 6 weeks so both sides can sit down and discuss the budget and the government shutdown. Talk within the GOP indicates that this is a plan that can be agreed upon by most Republicans, including conservative ones.

This bill may be passed by the time you read this. However, this doesn’t end the government shutdown. It only mitigates its impact. And, the whole process may take place again in six weeks as it has in the past (read the Monitor analysis for more on the past history of debt ceiling negotiations).
One component under discussion is how the shutdown is impacting the world and American foreign relations. The Monitor analysis looks at this issue and tries to separate fact from political rhetoric. The analysis shows that the threatened default is only a threat and that holdings by China and Japan are only a fraction of US debt and their liquidation would hurt China more than the US.

Think Tanks Activity Summary

The Brookings Institution looks at the reported suspension of foreign aid to Egypt. They suggest that Obama was politically backed into a corner. “Having failed to suspend aid right after the coup, despite threatening to do exactly that, the administration was left with little choice but to define its least worst option. With this partial suspension, it hopes to make clear that there is some price (largely symbolic and perhaps temporary) for ignoring U.S. preferences. The administration hopes to show it they won’t be overly influenced on Egypt policy by Gulf and Israeli lobbying for total aid resumption. And it hopes to sustain a working relationship with the people who are running Egypt—an objective which has been perhaps the only consistent component of the U.S. approach toward Egypt since the 2011 revolution.”

The Wilson Center releases what are called the Avner Cohen Collection on the Israeli Nuclear Bomb. Cohen has spent decades documenting Israel’s nuclear program. In the introduction, Cohen states, “While this collection serves as a guide to the past, it may also enlighten our understanding of the present and help shape a more peaceful future. Historical scholarship on Israel’s nuclear program affects contemporary thinking on nuclear matters in the Middle East and globally. Moreover, historical transparency may help promote regional stability by reducing distrust between Israel and its neighbors.”

It was confirmed in the releases that during the 1973 war some Military leaders contemplate using nuclear weapon.

The Carnegie Endowment looks at Russia and its support of Syria and Assad. They note, “The Russians side with Mr Assad not because he is their man, but because his forces are killing Islamist extremists, whom Moscow now considers to be its most dangerous enemies. But for him, al-Qaeda’s allies would have turned Syria into a base for international terrorism. Russians play down the fact that Mr Assad’s Russian-made weapons are also killing innocent civilians, and thus breed more jihadis. While the Kremlin has long decided on its goals, the White House has so far demonstrated only two aims: it wants to see Mr Assad go and is reluctant to become involved militarily. Sensing this, Russia has sought to engage the US on Syria’s chemical disarmament and a wider political settlement of the crisis. These are less about Syria than about achieving Mr Putin’s most far-reaching, even improbable goal in foreign affairs: restoring equality to the US-Russia relationship.”

The Carnegie Endowment also looks at Russia and the Arab Spring and the perception of the phenomena with Russian Muslims. They conclude, “As Moscow works out the details of its new policy in the Middle East, it is also important for Moscow to take into account the Arab Spring’s impact on Russia’s Muslim community, which is only now starting to show its reaction to the upheavals in the Middle East. Russian Muslims are following with interest and even admiration the successes of their radically minded coreligionists in the Arab world, and many think that Russia should seek a rapprochement with the victors. Of course, Moscow cannot shape its foreign policy to suit the wishes of Muslims in the North Caucasus or the Volga Region. At the same time, the Kremlin must take into account the possibility of an increasingly radicalized Islam in Russia, especially in the context of the Russian leadership’s desire to maintain normal relations with the new elites in the Arab world.”

The Wilson Center looks at Russia’s history in the Middle East. In the interview with Paul du Quenoy, he speaks about Russia’s traditional interests in the region. “If you look at a lot of the Soviet era publications on imperial Russia in the Middle East – documentary collections or academic articles – they almost always bring out this idea that Russia had a long-standing relationship with the people of that part of the world as a benefactor, as a friend, as someone who could be relied on in a crisis, and I do think that informs how they think today. The people making policy are likely more engaged with immediate problems, but these are all people who were educated in the diplomatic academy and probably have a pretty pronounced sense of what the Russian Empire’s history was in the region.”

The CSIS looks at the US capture of Al-Libi and how it may impact the growing terrorism in Libya. Of interest to the US is, “information that al-Libi might possess regarding militant groups within Libya itself. After the fall of Gaddafi, Libya’s interim government has had great difficulty in asserting its authority beyond a few select areas. Islamist militant groups have recently grown in strength and influence within Libya, presenting a threat not only to the Libyan government but, as demonstrated by the killing of Ambassador Christopher Stevens and three other Americans at the U.S. Consulate in Benghazi in September 2012, to U.S. interests as well. Given al-Libi’s history with the LIFG, many of whose former members remain active within Libyan militant movements, his capture could prove a boon for those seeking to counter the rise of violent militancy within Libya.”

The CSIS looks at the Turkish decision to buy a Chinese air defense system and what it means about overall US/Turkish relations. They note, “There has undoubtedly been some deterioration in the previously close relationship between the Turkish Prime Minister and U.S. President Barack Obama since their two meetings at the White House on May 16 of this year. Erdogan’s disappointment at the continuing unwillingness of Obama to engage forcefully in the Syrian crisis has been deepened by his sanctioning of the Russia-brokered deal with the Assad regime on its chemical weapons instead of military action. The two sides have also publicly disagreed on the reaction to the military overthrow of the Muslim Brotherhood government in Egypt and the Turkish government’s reaction to the Gezi Park protests. The absence of a bilateral meeting between the two leaders at the recent St. Petersburg G-20 meeting testified to a possible chill in the relationship and it remains to be seen how Washington will choose to react to Ankara’s Chinese gambit.”

The Heritage Foundation asks what happens if the debt ceiling is not raised and the US government must pick who gets paid. Although the Constitution says government issued bonds must be paid, there is some flexibility given to the President as to what other government functions get funded. They conclude, “In brief, the President has broad authority to manage government payments to avoid defaulting on federal obligations. He can choose which payments to make and in which order and these choices will impact the effects on the average U.S. taxpayer and the economy.

The German Marshall Fund argues that the US government shutdown is hindering US foreign policy. They note, “The government shutdown sends a very negative message about the United States’ reliability as a partner in world affairs and reduces the authority with which it can carry out a leadership role. How can allies have confidence that the country’s attention will remain on developments in Syria or Iran’s nuclear ambitions when it cannot even keep its government’s doors open? President Barack Obama was forced to cut his planned visits to Southeast Asia, thereby postponing potential advances in bilateral and multilateral relations in the Asia-Pacific. The moral authority of the United States to guide other countries on a pathway to pluralistic democracy is further complicated when a minority faction is able to cause a shutdown of the U.S. government in an effort to press for its specific policy demands. As one U.S. diplomat recently put it, “How are we supposed to promote good government when we can’t even pass a budget?”


Will US Government Shutdown Have International Implications?

The US Federal government shutdown is heading into its second week with little movement. The biggest change in the situation is that next week the US runs up against its debt ceiling. This has the Republican congressmen talking about a temporary debt ceiling increase and Obama threatening a US default that will roil the international monetary markets.

Can that happen? Not likely. What is coming out of Washington is primarily rhetoric from both sides to make the opposition back down. The fact that the US financial markets have been relatively calm is indication that there is little economic threat despite the terrible prophecies.

In this analysis, we will look at two issues: What is the international impact of the US shutdown and how is it impacting US foreign policy?

Let’s look at the financial impact. Despite the stories of doom, the US will not default on its debts. Default means the inability of the U.S. government to service its debt, to make principal and interest payments on outstanding bills, notes, and bonds. This is not to be confused with payments due to others, whether contractors, vendors, or recipients of entitlement programs, each of whom would have a serious issue were cash flow to cease but none of which is the same as a true national default.

If the debt ceiling is not raised, it does not mean the government has defaulted, but rather than it must immediately balance its budget – a problem since the government borrows nearly 40 cents of every dollar it currently spends. But default isn’t an issue.

Here’s why. Monthly interest expense on Treasury debt is typically about $25 billion, with larger sums due (about $95 billion in 2012) in both June and December. Although revenue varies month to month, the Treasury should receive roughly $175 billion in October, slightly less in November, and about $250 billion in December based on current trends. In other words, the government takes in about seven times as much in revenue as it pays out in interest on the national debt. There is no possibility of real default. And, the government can still roll over its debt as long as it doesn’t exceed the debt ceiling.

There is also the Constitutional aspect. Obama can’t default as long as there is money in the treasury. Section 4 of the 14th Amendment of the US Constitution (The validity of the public debt of the United States, authorized by law…shall not be questioned. ) guarantees the payment of the Government’s debt and Obama ignoring this part of the US Constitution would be an impeachable offense.

The US does have entitlement obligations, including the politically sensitive Social Security payments due at the beginning of November. Obama could choose not to make those payments, but would likely run up against a court injunction if he did. This, in turn, would force deeper cuts in other parts of the government if no deal is reached.

Despite the horror stories, political battles over debt ceilings are a regular part of the brinksmanship of Washington. President Reagan fought Democrats in Congress over the debt limit as both sides sought to gain budget concessions. From 1985 to 1987, there were short-term debt limit increases passed, 11th-hour compromises, “extraordinary measures” used by the Treasury Department in order to extend the federal government’s borrowing power, veto threats, demands for clean hikes, and, eventually, grand budget bargains. Democrats wanted to use the impending debt limit to force tax hikes and military spending cuts.

In October 1985, Democrats refused to pass a long-term debt limit hike because they wanted to use the issue to force multiple showdowns over the budget in coming months. The threat of a filibuster was enough to stall a grand budget bargain, and the Reagan Treasury Department was able to enact emergency procedures – including raiding the Social Security “trust fund” – in order to extend the government’s ability to pay its bills.

The standoff lasted over a month. On November 14, 1985, Congress approved a temporary measure, buying enough time to pass a grand budget bargain – the bipartisan Gramm-Rudman-Hollings deficit reduction measure – which included a spending cut measure similar to last summer’s sequestration.

The same thing happened after the 1986 midterm elections gave the Senate back to Democrats, giving them complete control of Congress. Emboldened by the debt limit fights of the last two years, Congressional Democrats would use the debt limit to push their demands. The increases in tax revenue and cuts to defense spending would finally be theirs.

The reality is that when the Congress and the White House are under the control of different parties, the debt ceiling becomes a tool to pass measures that the White House doesn’t like. What we see today is really the norm.
Financial Markets
However, we can still ask the question: will the international financial markets understand the politics of Washington and not panic? Then, there is the question of continued buying and holding of US securities by the Chinese and the Japanese.

The evidence in the marketplace says yes. If there were a real concern, the markets would be reacting already.

However, the size of the Chinese and Japanese holdings forces us to look at potential ramifications. China is by far the largest foreign holder of U.S. Treasury securities. At the end of July (the last month for which official statistics are available) it had holdings of $1.2773 trillion in Treasuries. The holdings of autonomous Hong Kong add an additional $120.0 billion. That total is down $37.6 billion over the last two years, which means the Chinese have reduced their exposure to US Treasury securities.

Japanese holdings are $1.1354 trillion.

The holdings of the Chinese and Japanese sounds like a lot, but it is just a fraction of US debt. In 2011, the last year for which U.S. Treasury data is available, U.S. debt securities amounted to a staggering $33.7 trillion, 34.2% of the world’s total. In comparison, China’s foreign exchange reserves, which are thought to be mostly in Treasuries, totaled only $3.50 trillion at the end of this June.

Since the debt must be paid per the US Constitution, there is little reason to sell it. And, if they do, the damage to their own economy and reserves will be much greater. In fact, the damage to their economy would be the destruction of their export economy and the rebirth of the US export economy.

If China sold Treasury securities in massive quantities, it would cause a panic, but the world’s deep markets would quickly adjust. The Chinese would get back dollars. Then, they would have to either buy hard assets or convert the proceeds into other currencies. Those would be securities denominated in euros, pounds, francs, and yen.

As China buys these other currencies, the dollar would drip in relation to the euro, yen, pound, and franc. That would make American goods cheaper and the goods of Japan and Europe more expensive. China’s export market to America would be destroyed in one binge of US treasuries sales.

Since the Europeans and Japanese would not want more expensive currencies, they would buy dollars and dollar denominated securities to cheapen their currencies and make their exports more competitive. Then, America’s debt would be in the hands of more friendly Europeans, who bought them with their more valuable currencies.

The Chinese government is running too much of a deficit itself to allow such damage to its own economy.
So, what of all the talk about default and the resulting financial meltdown? It’s just that – talk.

Meanwhile, the American public isn’t voicing any concerns about raising the debt limit. Most voters don’t want to see the debt ceiling hiked yet again in a clean deal, according to a Fox News poll released Tuesday morning. Fifty-eight percent of voters would vote against hiking the debt-ceiling if they were lawmakers, while 37 percent would vote for it.

The public also wants cuts in government spending by combining a debt-ceiling hike with spending reductions. 62 percent of voters want any debt-ceiling hike combined with significant spending cuts in a deal. This may undercut the Senate Democrats and Obama because even 48 percent of Democrats would like to see a hike accompanied by cuts.

Is the Shutdown Hurting American Foreign Policy?

The issue of the shutdown’s impact on US foreign policy came up last week when Obama announced that he was cancelling the planned trip to Asia due to the government shutdown.

The White House was quick to paint the shutdown as impacting US foreign policy. Press Secretary Jay Carney said in a statement. “This completely avoidable shutdown is setting back our ability to create jobs through promotion of U.S. exports and advance U.S. leadership and interests in the largest emerging region in the world.”

Obama sees Asia as a fast-growing region where the United States is competing for influence with China. Chinese President Xi Jinping is visiting Indonesia, Malaysia and Brunei, and Russian President Vladi¬mir Putin also will attend APEC. There was some speculation that Obama and Putin had hoped to meet during that summit and work toward a resolution of Syria’s crisis.

However, the reality is that major world leaders don’t just meet to make agreements. Meetings like those between Xi Jinping and Putin are the result of months of negotiation at lower levels. The leaders only get together to ratify these previous negotiations. Interestingly, meeting with Putin didn’t seem so important when Obama purposely snubbed him in Scandinavia just a few months ago.

In this era of vast foreign policy bureaucracies and instant communications, the concept of international meetings of world leaders that lead to agreements that weren’t pre-arranged is long past. Presidential visits are more symbolic than substantial. Any agreements that were to be announced have already been made and agreed upon. They will likely be announced quietly in the next few weeks.

Conversely, the damage was done to Obama. No one, including the Republicans would have denied him the opportunity to go to Asia. He also had the chance to travel by announcing that he would agree to negotiate with the Republicans in order to make this critical trip. That means he has damaged his personal relations with Xi Jinping and Putin just to make a point of not travelling during the shutdown. And, this is the second time he has backed down with meeting Putin.

This is not the first time Obama has cancelled trips to Asia either. He has cancelled in 2010 for domestic reasons, which calls to question the seriousness of his repeated “pivot” to Asia.


The President’s Legal Authority at the Debt Limit
By Andrew Kloster
Heritage Foundation
October 9, 2013
Issue Brief 4067

Some time between the middle and the end of October, the federal government will reach a hard limit on the amount of debt it can issue, and its ability to finance governmental operations will be affected. Confusion about the debt limit abounds, and this Issue Brief will address some common questions. The United States debt limit, or debt ceiling, is the statutorily defined amount of debt the U.S. Treasury can issue, either by borrowing from the public or issuing an intragovernmental receipt to special accounts, such as the Social Security or Medicare trust funds. The Treasury Department has to have liquidity, or cash on hand, to disburse the funds necessary to meet its contractual obligations. The federal government maintains this liquidity by managing governmental receipts (such as income tax payments) and selling debt (such as Treasury bonds).

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Turkey Looks to China on Air and Missile Defense?
By Bulent Aliriza and Samuel Brannen
Center for Strategic and International Studies
October 8, 2013

On October 1, Turkish Defense Minister Yilmaz explained that the decision was made because “the Chinese gave us the best price.” He added “We had asked for co-production and a technology transfer. If other countries cannot guarantee us that, then we will turn to ones that can.” The following day, Turkish Foreign Minister Ahmet Davutoglu echoed his colleague by saying that the Chinese offer had met Turkey’s primary demands of price and co-production and commented “If only the American and European system makers offered better conditions, we could choose them.” The long-serving Under Secretary for Defense Industry Murad Bayar followed up with a press conference on the same day in which he said that the three reasons behind the choice were satisfaction of operational needs, the opportunity for over 50 percent local co-production of missile parts and the overall cost. Bayar also noted that the agreement could be signed in six months and that the system would be delivered in four years.

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The Capture of Abu Anas al-Libi
By Rob Wise
Center for Strategic and International Studies
October 7, 2013

Al-Libi, a 49-year old Libyan whose given name is Nazih Abdul-Hamed al- Ruqai, has a long history of involvement with Islamic militancy. Originally a member of the Libyan Islamic Fighting Group (LIFG), a violent Islamist movement that fought to oust Muammar Gaddafi, al-Libi appears to have become involved with al Qaeda in the early 1990s. He reportedly spent time in Sudan while al Qaeda – under the leadership of Osama bin Laden – was headquartered there. Al-Libi also allegedly lived for several years in Afghanistan before fleeing the country in late 2001. He appears to have spent much of the last decade in Iranian custody before returning home to Libya in the midst of the 2011 civil war. While al-Libi is believed to have served as a computer expert for al Qaeda, he is wanted by the United States primarily for his role in the 1998 bombings of the U.S. Embassies in Nairobi, Kenya and Dar es Salaam, Tanzania.

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Russia Is Defending Its Own Interests With Its Stance on Syria
By Dmitri Trenin
Carnegie Endowment
October 2, 2013
Financial Times

When people in the west seek to explain Moscow’s approach to the crisis in Syria, they often refer to Damascus as Russia’s “last remaining ally in the Middle East”. They also frequently include Russia’s interest in the Syrian arms market and the Tartus naval facility. Finally, a seemingly powerful argument is made about the Syrian people’s fight for democracy – which sends shivers down the spine of authoritarians, including President Vladimir Putin. These explanations are generally misleading. True, Hafez al-Assad, Bashar’s father, was a Soviet ally, but Moscow de facto withdrew from geopolitical competition in the Middle East in 1990, when it joined Washington and many others to oppose its other nominal ally, Saddam Hussein’s Iraq. Bashar al-Assad, in calmer times, was a more frequent visitor to Paris and London than to Moscow. Mr Putin himself never visited Damascus.

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Russia and the Arab Spring
By Alexey Malashenko
Carnegie Endowment
October 1, 2013

Russia has spent over a decade trying to recapture the influence the Soviet Union once enjoyed in the Middle East, but President Vladimir Putin’s attempts to position Moscow as a key regional player have come up short. With revolutions across the Arab world overturning old orders and ushering in Islamist governments, Russia’s chances for strengthening its position in the region look increasingly slim. The Kremlin must change course and ensure that its approach to the Middle East and Islamists reflects post–Arab Spring realities.

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The United States Shuts Down Its Diplomacy
By Glenn Nye
German Marshall Fund
October 7, 2013

On October 1, the start of the United States’ new fiscal year, thousands of federal government workers awoke to the sad realization that they would not be going to work. Their paychecks and their duties were indefinitely on hold due to the failure of the U.S. Congress to reach a compromise on funding for agencies. The immediate result was the shuttering of several federal agencies responsible for carrying out a wide array of services, while members of Congress treated their country and the world to an unfortunate and troubling bit of political drama. However long the shutdown lasts, it will have serious repercussions not only for citizens at home but also for the United States’ global leadership role.

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New Exclusive Interviews on the Israeli Nuclear Program
By Avner Cohen
Wilson Center
October 2013

More than sixty years have passed since Israel began its nuclear project and almost half a century has elapsed since Israel first crossed the nuclear weapons threshold. Yet Israel’s nuclear history has no voice of its own: no insiders have told the story from within.

(http://www.wilsoncenter.org/publication/avner-cohen-collection#_ftn1#_ftn1 ). Unlike all seven other nuclear weapons states, Israel’s nuclear policy is built upon non-acknowledgement. Israel believes that nuclear silence is golden, referring to this national conduct as amimut (opacity in Hebrew). Amimut is the public trademark of Israel’s relationship with the bomb. It involves secrecy, ambiguity and taboo. As such, researching Israel’s nuclear history poses serious challenges. I recall how Israel Dostrovsky and Shalheveth Freier—the second and the third heads of the Israeli Atomic Nuclear Commission—told me that the deeds of that history resisted the written record. When the 1973 Yom Kippur War down broke out, Freier ordered his subordinates to stop communicating with anyone in writing.

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Russia’s Curious Relationship with the Middle East – from Imperial Times to the Present
Interview with Paul du Quenoy
Wilson Center
October 2013

What I found to be most significant was what the Russians were doing in places like Syria and Palestine, where they were building not just diplomatic ties but also cultural and educational ties through school systems and religious endowments. There was also a Russian ecclesiastical mission in Jerusalem, which was trying hard to create an atmosphere where Russian pilgrims could travel and also to get local Arab populations to be on their side geopolitically. I also found that in places like Egypt and Morocco, there were Russian diplomatic missions arriving for really no particular reason other than to create constituencies that believed in the disinterestedness of Russian power. The diplomats would receive instructions to meet the local ruler and try to impress upon him the majesty of Russian power, the breadth of Russia’s interest in the region and in Muslims, and convince him that Russia was a true friend.

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Reported Suspension of U.S. Aid to Egypt a Short-Term Measure
By Tamara Cofman Wittes
Brookings Institution
October 9, 2013

The reported plan to suspend part of U.S. military aid to Egypt reflects exactly what President Barack Obama announced in his speech at the UN General Assembly two weeks ago—continued aid to support counterterrorism and border security efforts, but withholding “prestige” items, like tanks and F-16s. The president also mentioned resumption of economic aid to support education, but we have seen no further news on that front as yet. The Egyptian military is unlikely to overreact to this move—the Egyptian state paper has been spinning the president’s words as representing U.S. acquiescence in Egypt’s political trajectory and a resumption of aid—which is not inaccurate. So the announcement, when it finally comes, will present a half measure that will gain the U.S. little except closure on an awkward, months-long saga over Egypt aid—but given how telegraphed this move has been, I don’t expect it will have much negative impact in Egypt either.

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Mounzer A. Sleiman Ph.D.
Center for American and Arab Studies
Think Tanks Monitor
National Security Affairs Analyst
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