China’s new development bank is becoming a massive embarrassment for Obama

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China’s new development bank, which was announced just five months ago, is becoming a massive headache for the US. 

Try as it might, the US government can’t persuade its allies to stop joining the Asian Infrastructure Investment Bank (AIIB).

The bank will be a bit like the World Bank, providing loans to developing countries in Asia for infrastructure projects.

Unlike the World Bank, China will hold the reins of the AIIB. The US administration is publicly worried that the institution will not meet high governance standards, but it really seems opposed to the move because it signals a growing Chinese influence in the region and in global politics.

The US has already endured a series of embarrassments over the bank. It might have been expected that some European countries with a cooler relationship with the US would join, which they did. India and Singapore, however, were quick to sign up despite having decent relationships with the US. And several other countries have started joining, leaving the US almost completely isolated in its position.

Britain is one of the US’ closest allies, but the government has been pursuing an unashamedly warmer relationship with China for several years and was one of the first countries to say it wanted a role in the AIIB

The front page of the Financial Times the next day, in which anonymous White House sources attacked the British government for “constant accommodation” of China, might have been intended as a warning to others, but it doesn’t seem to have worked.

South Korea has applied, and America’s other major allies in the region, Japan and Australia, have been warming to the idea of joining

Tuesday, however, brought the most embarrassing event of all. Taiwan, which has no formal relationship with mainland China, is a former enemy of China, and basically survived the 20th century with its independence only through assistance from the United States, applied to join the AIIB

The infrastructure bank isn’t going to be a massive boom for the UK economy, or even for nearer nations like Japan, and the US will not retaliate. The point is that the UK is willing to take a very modest improvement in economic and political ties with China in exchange for a small deterioration in ties with the US. Pretty much every country has decided that this is the right move. 

The AIIB is a part of the wider “new Silk Road” initiative by China to deepen trade and investment both in the rest of Asia and the wider world. According to Barclays, it could actually be a positive thing for the region’s stability:

We believe through the building of interdependent relationships based on shared economic interests, this New Silk Road plan should deepen political linkages, improve mutual understanding and foster long-term stability in the region. The agreement to set up the AIIB by countries that have territorial disputes with China suggests potentially lower geopolitical risks and lower probability for military conflicts, in our view.

But the move goes beyond that — it’s a major PR push for China, which the American administration has positioned itself opposite from. So far, that strategy is failing spectacularly for the US.

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Fearful that Nazi leader Adolf Hitler would attempt to flee Germany, US intelligence tried to predict what the Führer would like if he altered his appearance.

The Office of Strategic Services, a precursor to the CIA, hired American make-up artist Eddie Senz to alter Hitler’s portrait in various guises.

Senz’s altered images were circulated among Allied forces before the D-Day invasion in June 1944.

The pivotal Normandy invasion was one of the largest amphibious military assaults and predicting Hitler’s reaction was part of the Allied forces’ extensive planning.

During the 1990s, German news magazine Der Spiegel first published Senz’s photos to the public. 

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Why Russia suddenly wants to supply cheap gas to Ukraine

Russia Gas Pipeline

The Russian government is requesting that its state-owned gas giant Gazprom provide discounted gas to the struggling government in Ukraine.

The deal seems weird because Russia is also supporting an armed insurgency inside Ukraine, made up of pro-Moscow rebels. The conflict has decimated the Ukrainian economy. So why is Russia suddenly offering to help the country it has spent the past few months undermining?

Last week the European Commission sent a letter to the Russian government asking it to consider granting Kiev a discount on its gas from Russia, such as abolishing the export duty, which now costs $100 per thousand cubic metres of gas.

The Russian response — requesting Gazprom lower its prices for Ukraine — hints that Russia is seeking to cool tensions in the region to wriggle out of international sanctions as it attempts to pull itself out a deep economic downturn.

Russia’s GDP is forecast by the International Monetary Fund to fall by 3% this year and by a further 1% in 2016 sanctions and a collapse in oil prices have dented the country’s prospects.

Gas deals between the two countries have long been a major source of friction. Ukraine imported 58% of the gas needed for its domestic market from Russia in 2013, while Moscow has repeatedly used its gas bounty to exact major political concessions from Kiev.

Ukraine gas

A gas deal brokered between former Ukrainian Prime Minister Yulia Tymoshenko and Russian President Vladimir Putin to get gas flowing again after a 2009 standoff resulted in her being sentenced to seven years in prison and a fine of $200 million (the Ukraine criminal justice system is highly political).

Yet the following year, the new pro-Moscow administration was able to secure a 30% discount on its gas imports in exchange for extending Russia’s lease of the Black Sea port of Sevastopol (part of Crimea, which has now been annexed by Moscow).

Kiev has spent the past months trying to wean itself off Moscow’s pipeline by buying more gas from Europe. Prime Minister Arseniy Yatsenyuk said last month that the country would borrow $1 billion using government guarantees to shift the country to European suppliers of natural gas. Kiev’s funding problems, however, mean the process is likely to take longer than anticipated.

The European Commission and Ukraine want the Gazprom discount to last six months. The Russian company doesn’t want to offer more than three. Russia’s Kommersant newspaper reports that a deal is likely as Ukrainian demand looks set to decline rapidly unless Gazprom accepts lower prices.

It comes at a critical juncture for Kiev as it begins implementing ambitious economic reforms agreed with the IMF as part of a $40 billion bailout package. Part of this deal involves restructuring the country’s debt, which could result in significant losses for its creditors.

As Business Insider reported, Russia’s $3 billion loan to Ukraine from its sovereign wealth fund (due to be repaid in December) is one of the debts that may be renegotiated as Kiev seeks to lower its repayments by $5.2 billion in 2015. Because the loan is counted as “official debt,” any unilateral default on Ukraine’s side would breach IMF rules, meaning the IMF would not continue to provide funding.

As such Russia effectively holds a veto over its neighbours’ bailout package.

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