THE BLOG
05/12/2014 12:59 am ET Updated Jul 11, 2014

Xi and Putin Playing Dangerous Games to Mask Domestic Problems

Nothing garners presidential approval like a good war. For Vladimir Putin, the Ukraine crisis and the annexation of Crimea have been excellent politics. In the most recent Pew Global Attitudes polling, Russian confidence in their President's performance hit 83%, up 14% from when Pew last checked. Dating back a half century, only two American presidents have reached 80% job approval: George H.W. Bush in the wake of the first Gulf War in February 1991, and his son W. a decade later when he stood in the rubble of the World Trade Center in September 2001.

Chinese President Xi Jingping has similarly used aggressive moves against China's neighbors to amp up nationalist fervor. China has antagonized Vietnam and the Philippines as it has broadened its resource claims over the South China Sea, and, most notably, Xi has used international diplomatic settings to play the Japan card -- admonishing the Japanese in numerous settings for lack of remorse for inflicting 35 million casualties on the Chinese during the years leading up to WWII.

Xi and Putin share basic tenets. Putin's migration of Russia to a "controlled" democracy mirrors the principles of the Chinese Communist Party in his opposition to multi-party democracy, independent media and civil liberties. Now both men are taking a turn toward nationalism as they confront internal threats to their leadership. Both countries are facing a slowdown in economic growth that has been the cornerstone of popular support over the past decade, and both are seeing increasing public anger over corruption at the highest levels of government.

The risk Xi and Putin face is not simply about the prospect of public outrage over corruption -- after all, corruption in both countries must be a long-accepted reality -- but rather the prospect that slowing economic growth together with increasing visibility about the depth of corruption will magnify popular discontent -- as was the case in Ukraine. After all, it was not venality that brought down Ukrainian President Yanukovych, but the toxic combination of being viewed as venal and ineffectual.

Kleptocracy -- rule by thieves and crooks -- has at long last emerged as a threat to the regimes in Russia and China. According to a State Department cable leaked on Wikileaks, Xi has long believed that systemic corruption within the leading families of the Communist elite is the Achilles heel that could lead to the demise of the regime. Since his installation as President, Xi's has mounted a public anti-corruption campaign, targeting increasingly senior officials in the Chinese Communist Party.

And the numbers are not small. Two years ago, a New York Times series on China's princelings -- the children of the leaders of China's revolution -- laid out the $2.7 billion accumulated by former Prime Minister Wen Jiabao and his family, and Bloomberg News provided details on billions of dollars accumulated the families of Party leaders, including hundreds of millions of dollars of assets accumulated by Xi Jingping's own family. Then, earlier this year, leaked documents provided details of billions of dollars of funds held by close relatives of China's ruling elite in offshore accounts, along with suggestions that as much as $1 trillion to $4 trillion have left China since 2000. Clearly, with that much money at stake, there has been opposition within the Party to Xi's campaign, and in recent weeks, Xi's two immediate predecessors in the top job -- each of whom have been implicated in the scandal -- demanded a halt to the anti-corruption campaign.

Like Xi, Vladimir Putin makes a show of approving new anti-corruption and transparency initiatives. Putin has long walked a fine line with respect to the massive corruption in Russian society and the unmatched theft of state assets that occurred at the time of the collapse of the Soviet Union that led to the rise of the Oligarchs. When he succeeded Boris Yeltsin, Putin made a show of cracking down on oligarchs and returning stolen assets to the state. But his has been a carefully managed process -- jailing his enemies and carefully laying down the rules of permitted behavior of his friends -- and speculation persists about the magnitude of the fortune Putin himself has amassed during his years in power.

Since the end of the Cold War, US foreign policy toward our erstwhile adversaries has been built around a military policy of encirclement and containment, coupled with economic policies promoting free trade and economic integration. The military policy was straightforward. NATO expansion into all of the former Warsaw Pact nations, coupled with partnerships with the former Soviet republics to the south, created a military cordon around Russia from the Baltic Sea to Afghanistan. At the other end of Asia, the US military has maintained airfields and naval facilities from Japan and South Korea in the Sea of Japan at northern end of China's Pacific coast down to Singapore and the Philippines in the South China Sea.

But the military policy of containment was secondary in many respects to the economic policy of integration. The opening up of the Russian and Chinese economies brought with it enthusiasm that free trade and the mutual economic dependency that it engenders would be the key to preventing future conflicts. This notion was popularized by Tom Friedman in The World is Flat as the "Dell Theory of Conflict Prevention," which suggests that:

"No two countries that are both part of a major global supply chain, like Dell's, will ever fight a war against each other as long as they are both part of the same global supply chain."

Today, that premise being tested.

Putin's and Xi's actions have undermined critical global relationships and trust, and threaten trading relationships critical to each country's future. In the case of Russia, Vladimir Putin's saber rattling may have worked to great effect to build his domestic popularity, but it has accelerated capital flight, damaged the ruble, and raised real questions about the economic sustainability of the Russian economy. In particular, Putin's demonstrated willingness to use Russia's control over energy supplies as a political weapon will necessarily lead Russia's trading partners in Europe to seek alternative sources of energy supplies and ultimately undermine the competitive position and stability of Russian energy economy.

For its part, Xi's rhetoric has already driven Japanese investment out of China. While some might dismiss disinvestment as of little import to a country with China's currency reserves, the Chinese economy produces little innovation and has relied on Japanese investment as a critical source of innovation and management expertise. But of perhaps even greater significance was China's effort to embargo sales of Chinese strategic minerals to Japan. China's politicization of trade was struck down by the World Trade Organization, and has now left China to grapple with the choice between honoring its own political rhetoric or respecting international trade regimes.

Putin's land grab in Ukraine and China's saber rattling in the Sea of Japan and South China Sea have demonstrated two fundamental flaws in the US post-Cold War strategy combining military containment and free trade. First, the intimidation value of military assets is clearly limited if there are questions -- on our part or in the minds of our adversaries -- about our willingness to use them. Second, the Dell Theory that was supposed to be the "carrot" that went along with the military "stick" turns out to be a two-edged sword. During the Ukraine crisis, Europe's dependence on Russian natural gas quickly emerged as a limiting factor on the tools available to the West to seek to temper Putin's aggressiveness, and similarly the dependence of the leading industrial economies on Chinese rare earths demonstrates the vulnerability of western economies to what in essence would be Chinese blackmail should the Chinese Communist Party determine -- as it has already demonstrated through its dealings with Japan -- that the domestic politics trumps the country's larger economic interest.

Despite the appearance that each now seems to hold the upper hand in the local disputes, Russia and China are each in a position of great risk. Both depend enormously on free trade for their economic well-being. Russia now derives 70% of its foreign currency earnings from commodity sales and depends on its energy sector for 50% of its budget, while China's export-driven growth strategy is legendary. While they trumpet their trade agreements with each other, neither offers the other what they now derive through trade with and investment from the rest of the world. On the other hand, many in Europe would welcome greater economic and security incentives to accelerate the migration away from dependence on Russian energy supplies, and China's neighbors have much to gain from redirected Japanese and western investment that is already leaving China.

Interestingly, Pew's data also suggests that the nationalist strategies embraced by Xi and Putin decline in effectiveness with progressively younger age groups. Specifically, Putin's appeal to the Soviet past resonates strongly with older Russians, while alignment with Putin declines with each age cohort. The younger Chinese and Russians are, the more they participate in social media, the more they are likely to be disdainful of the corruption of their leaders, and the more they have at stake in the economic trajectory of their country. This is not unique to those two countries, but is simply the local manifestation of a phase transition that is affecting politics globally.

Right now, it seems unlikely that Xi or Putin will depart from the path they are on out of concern for the longer term impact on their national economies. After all, they have found a formula that is working for them. But the lesson of Ukraine -- and the Arab Spring before it -- is that leaders can no longer afford to be venal and ineffectual. For his part, Vladimir Putin can do what he chooses and has little to lose. After all, he represents no political party and his only enduring interests are his own. But Xi Jingping is walking a much finer line, and if he chooses his Party over his country as he is appears inclined to do, he may well end up with neither.

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