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Asia's Coming Nuclear Nightmare

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While the world focuses on the dangers that a nuclear-armed Iran could present in the Middle East, a potentially more dangerous and unstable nuclear proliferation is occurring in the Indian Ocean.

In the coming years India, Pakistan, and perhaps China will likely deploy a significant number of nuclear weapons at sea in the Indian Ocean. This could further destabilize already unstable nuclear relationships, creating a real risk of a sea-based exchange of nuclear weapons.

Observers have long seen India-Pakistan nuclear rivalry as the most unstable in the world, and South Asia as the most likely location of nuclear conflict. This is not just academic speculation. Foreign diplomats have been evacuated from Islamabad on several occasions from fears of an impending nuclear exchange with India.

India has a “no first use” (NFU) nuclear-weapons policy of sorts, although it is increasingly subject to caveats and exceptions. But Islamabad refuses to adopt an NFU policy and indeed has announced a long list of actions that it claims would justify a nuclear response against India. Pakistan is also busy miniaturizing its nuclear weapons for tactical use, thus reducing the threshold for Pakistani nuclear action.

Importantly, Pakistan sees its nuclear arsenal not only as a deterrent but also as an enabler,  providing an umbrella under which it can sponsor sub-conventional attacks against India. In the face of terrorist attacks such as those in Mumbai in 2008, Delhi has found its options constrained by concerns about a possible Pakistani nuclear response. But few are confident that India's restraint can be maintained in the face of another serious cross-border attack that is proved to have been sponsored by Pakistan.

Both India and Pakistan are now in the process of moving their nuclear weapons capabilities into the maritime realm.

India is the furthest down this track, having launched its first indigenous nuclear-powered ballistic missile submarine INS Arihant in 2009 (expected to be commissioned this year); it is also in the process of building two more so-called SSBNs. Further, India is developing nuclear-tipped Dhanush short range ballistic missiles for deployment on offshore patrol vessels. India has leased a nuclear-powered hunter-killer submarine and has plans to construct up to six more SSNs (unlike SSBNs, SSNs are not armed with nuclear ballistic missiles). Pakistan is following India's lead, having recently established a Naval Strategic Force Command Headquarters with the declared intention of developing a sea-based deterrent. This may involve nuclear-armed conventional submarines supplied by China, rather than SSBNs.

Some nuclear weapons states have created a nuclear “triad” in order to have an assured second strike capability. While such an assured capability can help stabilize a nuclear relationship, according to a recent Carnegie report, taking the India-Pakistan nuclear dynamic into the maritime realm may in fact create greater instability.

One issue is an ambiguous mix of conventional and nuclear capabilities at sea, including the deployment of nuclear missiles on Pakistani conventional submarines and on Indian missile boats. Uncertainty over whether a platform is carrying nuclear weapons creates a risk of an inadvertent but highly escalatory attack on an opponent's nuclear capability. Another concern is that maritime nuclear capabilities could lower Pakistan's already low nuclear threshold. Islamabad may be tempted to conduct a demonstration nuclear attack at sea, believing it will not be escalated on land. A further problem is Pakistan's reported propensity to delegate nuclear authority to field commanders, which could create considerable risks if submarine communications are interrupted.

China is also a major player in the nuclearization of the Indian Ocean. China's role in creating a nuclear-armed Pakistan is a big factor in the distrust that characterizes the India-China security relationship. In the 1980s, China supplied Pakistan with weapon plans along with fissile material, and facilitated the supply of missile technology. Any further moves by China to develop Pakistan's maritime nuclear capability will only cement India's threat perceptions about China.

The India-China nuclear relationship is itself relatively unstable and is now also moving into the Indian Ocean. This is because India's land-based nuclear deterrent currently suffers from considerable geographical and technological disadvantages compared with China. China is able to deploy its nuclear missiles in sparsely populated territory close to India's border, providing it with nuclear missile coverage of the entire subcontinent. In comparison, India fields much shorter range missiles that can barely reach major population centers in eastern China.  

This gives India good reason to establish an assured second strike capability on SSBNs that could potentially be forward deployed into the western Pacific. Alternatively, India may deploy its SSBNs in a well-protected “bastion” in the Bay of Bengal, although this may require further development of Indian missile technology.

There have been increasing detections of Chinese SSNs in the Indian Ocean in recent years, including the deployment of a Chinese SSN to the western Indian Ocean between last December and February, nominally as part of its anti-piracy deployment. According to Indian sources, these deployments are part of hydrographic “profiling” of the region and will likely increase in frequency. But Beijing has less reason to deploy its SSBNs in the Indian Ocean; instead, they will likely be primarily deployed in the western Pacific, targeted at the United States. This could create its own risks: the detection of an unusual transit of a Chinese SSBN into the Indian Ocean or an Indian SSBN into the Pacific could be seen as an escalation at times of tension.

The United States also has a potentially significant role in facilitating nuclear stability in the Indian Ocean. In the 1980s, Washington helped construct India's only facility for communications with submerged nuclear submarines and the U.S. might again support India's maritime nuclear capabilities. It might even be in Washington's interests to help Pakistan. The establishment of reliable communications links with Pakistan's nuclear-armed submarines could, for example, be critical in stabilizing the India-Pakistan nuclear dynamic.

Despite concerns about superpower competition in the Indian Ocean during the latter half of the Cold War, there was relatively little nuclear competition in that theatre. The three-party nuclear rivalry we will soon see in the Indian Ocean is likely to be more unstable, and potentially far more dangerous.

Dr. David Brewster is with the Strategic and Defence Studies Centre at the Australian National University, where he specializes in South Asian and Indian Ocean strategic affairs.  He is also a Senior Maritime Security Fellow at the Indian Council on Global Relations, Mumbai, and a Fellow with the Australia India Institute.

This article originally appeared on the Lowy Interpreter.

Image: Wikimedia/Ajai Shukla

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Is China's Economy Doomed?

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There has been much fretting about China's growth over the past five years. One special focus for hand-wringing has been the Chinese financial system and its non-banking component—the shadow banking system—in particular.

Financial growth in China has certainly been rapid since 2007, a classic warning of impending trouble. In the decade before 2007, credit grew only a little faster than GDP, reaching 187 percent of GDP, which is about normal for an emerging economy.

Then China applied a huge stimulus in 2009 in response to the global financial crisis, mainly in the form of easing the constraints on credit expansion. As a result, China sailed through the crisis with double-digit growth. But by 2014 the credit to GDP ratio had risen to 282 percent, a bit more than Australia or the US and much more than is normal in emerging economies. The shadow banking component led the expansion, growing at 37 percent annually since 2007.

This issue received special attention in the recent McKinsey Global Institute report on global debt. The Fung Institute in Hong Kong has also recently produced a couple of excellent papers on the topic.

The shadow banking sector is harder to delineate than the core banking system because its precise size is confused by fuzzy definitions, double counting of some institutions and under-reporting of others. Based on Chinese central bank data, the Fung Institute puts shadow banking assets a little over 50 percent of GDP, or less than one-third the size of bank credit. McKinsey estimates that the sector is a bit larger.

This is much smaller than the American shadow banking sector, and the Chinese institutions are much less complex.

In China, as in most countries, the expansion of shadow banking is the result of controls and distortions on the core banking sector which prevent banks from meeting the needs of savers and borrowers. They take their unsatisfied financing requirements to the informal financial sector, which expands to meet these needs. Depositors left the banking system because government controls made the interest return unattractive for savers. Borrowers went to the shadow banking systems because banks would not give them loans, or offered only unattractive short-term funding.

With this in mind, the rapid expansion of the shadow banking system should be seen as a phase in the ongoing development of China's finances. There are benefits as well as dangers.

The answer is not to shut it down, but to develop the benefits and minimise the dangers. In the pre-2007 world, much of China's enormous savings ended up funding the expansion of state-owned enterprises, with this investment (or over-investment) becoming less and less efficient over time. Private sector enterprise (the dynamic element in the economy) was starved of funds, receiving only 20 percent of bank credit.

The growth of the shadow banking sector is the transitional means for correcting this—imperfect, but a step towards a better financial system.

An efficient financial system provides finance across the full range of risks, offering safety for risk-averse depositors while also offering high-risk funding for the most dynamic entrepreneurs. The shadow banking sector's proclivity for excess and mindlessly low credit standards (also demonstrated in America and Europe in the period leading up to the 2008 crisis) needs to be reined in while at the same time retaining the dynamism and flexibility. Finding the right balance for the less-regulated non-bank institutions is a challenge for financial policy-makers everywhere, not just China.

So is this a worry?

China's central government has the resources and administrative capacity to prevent a serious macro-economic financial crisis. The central government starts with modest debt levels—27 percent of GDP. Even if it had to absorb the losses envisaged in McKinsey's most extreme disaster scenario, this would take official debt up to around 75 percent of GDP—less than in most advanced economies. Many borrowers also have substantial deposits to offset against their liabilities. While there are substantial credit risks in the housing industry (property developers and builders), most homeowners have little or no debt.

China's huge foreign reserves are not available in any substantive way for domestic financial problems. But these reserves (and the current-account surplus) ensure that China cannot be affected by the flight of foreign money that made the 1997-98 Asian crisis so disastrous.

All that said, it is quite possible, even likely, that there will be numerous bankruptcies (a property crash would be serious, as McKinsey estimates that housing-related credit accounts for 40-45 percent of lending). The central government would have to bail out some local governments (it has already begun taking over small amounts of their debt). As well, the links between shadow banking and the mainstream banks would precipitate balance sheet strains for the banking system.

Financial history tells us that countries that undergo financial deregulation always experience a crisis, to a greater or lesser degree. In China, the deregulation is taking place in a carefully staged fashion. But policy-makers can make mistakes. Markets can lose confidence and growth can be knocked off trend. China's low official debt, substantial government ownership of banks and enterprises, and enormous foreign reserves don't give it immunity from financial troubles, but they do mean that when things go wrong, they can be fixed with less disruption and quicker bounce-back. A Chinese 'Lehman moment' still seems unlikely.

Stephen Grenville is a Visiting Fellow at the Lowy Institute for International Policy and works as a consultant on financial sector issues in East Asia. This article originally appeared on the Lowy Interpreter, here.

Image: Flickr/Stuck in Customs

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Pakistan’s New Missile Disrupts Nuclear Stability in South Asia

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Pakistan recently test-fired a surface-to-surface ballistic missile, Shaheen III. Capable of carrying a nuclear warhead, the missile is estimated to have a maximum range of 2750 km. While it has been claimed to provide a boost to Pakistan’s strategic depth and to deterrence stability in South Asia, a careful examination of how Shaheen III impacts the deterrence equation between India and Pakistan captures the latest Pakistani missile to be instead counter-productive.

Shaheen III is the latest addition in the Shaheen series. The previously developed and successfully tested missile, Shaheen II, is estimated to have a range of around 2500 km. The range of Shaheen II continues to remain a rough estimate. For instance, right after Pakistan tested Shaheen II in March 2004, Pakistan’s National Engineering and Science Commission (NESCOM) chairman, Samar Mubarakmand, was quoted saying that “the full range of the missile was 2,500 km although it was tested only to 2,000 km, the edge of Pakistan’s sea limits.” Another ISPR press statement issued on April 18, 2008, after the second successful test of the Shaheen II missile, however, confirmed the missile to have a range of 2000 km. But leading Pakistani newspapers claim Shaheen II to have a range of 1500 km. Based on an estimated range of 2000 km, a map has been made by C SIS that depicts the area (marked with blue dotted lines) that Pakistan could target using Shaheen II ballistic missile. This is critical to note as we question what new capabilities Shaheen III brings to the table.

Right after the launch of Shaheen III, Shahid Latif, retired commander of Pakistan’s air force was quoted as saying that “India doesn’t have its safe havens anymore.” With the ability to reach India’s extreme eastern frontiers, Director General of the Strategic Plans Division, Lieutenant General Zubair Mahmood Hayat, called Shaheen III “a major step towards strengthening Pakistan’s deterrence capability” vis-à-vis India. However, despite all the claims made by strategic experts and military leaders in Pakistan, there remains question on whether Shaheen III enhances the deterrence stability or is rather counter-productive.

From India’s perspective, Shaheen III does not really change the situation much as far as the credibility of Pakistan’s deterrent is concerned. Looking purely from a strategic point of view, Pakistan has had the ability to target all of India’s major population centers with Shaheen II, whose maximum range (2500 km) is estimated to be shorter than that of Shaheen III by only 250 km. Even if we go by the estimated range of Shaheen II at 2000 km which has been successfully tested by Pakistan and confirmed by ISPR, the missile would only miss the extreme eastern tips of India. Thus, when it comes down to “deterrence capability,” Shaheen II can deliver a nuclear warhead to almost all of the strategic sites of India to make the preexisting deterrent credible.

Shaheen III could offer Pakistan the ability to target Indian naval vessels in the Bay of Bengal, but for that Pakistan would need a highly effective and accurate terminal guidance system which could help a missile trace the targeted vessel’s movement and adjust its trajectory accordingly after flying across the entire Indian mainland. Another asset which would make Shaheen III stand out could be the multiple independently targetable re-entry vehicle (MIRV) capabilities, but Pakistan could use these payloads on Shaheen II as well, if it is able to develop or acquire them.

The purpose that Shaheen III could serve best, however, is to give Pakistan the ability to target Andaman and Nicobar islands in the Bay of Bengal. This, as has been argued by General Khalid Kidwai, former head of the Strategic Plans Division (SPD) and advisor to Pakistan’s National Command Authority in a conversation at the 2015 Carnegie International Nuclear Policy Conference, is the “sole purpose for the development of Shaheen III.” However, in the same conversation, he also added that by covering the islands of Andaman and Nicobar, Pakistan aims to take away India’s second-strike capability. But that goes far off from making Shaheen III a strategic deterrent, which Pakistan claims it to be. Instead of strengthening the concept of mutually-assured destruction (MAD), which Gen. Kidwai argues to be critical for South Asia, attempts to take away India’s second-strike capability will further destabilize the deterrence equation. It will push India to further cooperate with its global partners on its Ballistic Missile Defence Programme which will definitely be counter-productive for Pakistan.

Thus, while much has been stated and claimed about Shaheen III from the Indian perspective, it really does not bring anything new to the tableas far as deterrence stability is concerned. On the other hand, if Pakistan aims to take-away India’s second-strike capability, as Gen. Kidwai argues the purpose to be, it will only push India to further enhance its BMD systems. Indian doctrine of credible minimum deterrence is solely based on having a nuclear force that is capable of surviving a nuclear first-strike and launching a second strike which can inflict massive damage to the opponent to make the deterrent credible. Retention of second-strike capability is therefore a vital for stability in South Asia and development of Shaheen III by Pakistan with the aim of taking away India’s second-strike capability will only prove to be counter-productive for the former.

Arka Biswas is a SAV Visiting Fellow at the Stimson Center. This article originally appeared on South Asian Voices, here.

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Russia Ditches Plans for Super Advanced 5th Generation Fighter Jets

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The Russian military is scaling back initial requirements for the fifth generation T-50 (PAK FA) fighters to twelve planes, after initially planning for fifty-two. Deputy Defense Minister Yuri Borisov said that this was due to economic considerations.

However, Borisov noted that the Defense Ministry reserves the right to determine the number of fifth generation fighters for purchase, so the initial plans may be corrected.

“It would be better for us to have a reserve of PAK-FA and the possibility to move ahead in the future to using the 4+ fighters’ [Su-30 and Su-35] capabilities to the maximum,” Borisov said. In other words, Russia would make the most of its existing Sukhoi Su-35 capabilities, which are highly rated by experts. The United States is currently the only country with an Air Force that includes a fully operational fifth generation jet fighter, the F-22.

Production of the T-50 series will go ahead in 2016 regardless of any reduction in orders. During a visit to the plant where the planes were being constructed, in Komsomolsk-on-Amur in the Russian Far East, Borisov said, “according to the next year plans, we should have the first delivery of the series fifth-generation fighters.”

The T-50 will be a stealth aircraft, invisible to radars. It has several advantages over the F-22: “the T-50 is significantly faster than the F-22, and has a huge advantage in terms of range—5,500 kilometers compared to the F-22’s 3,400. The T-50’s detection systems allow it to spot incoming threats at a distance of up to 400 kilometers, compared to the F-22’s 210 kilometers.” However, Russia’s fifth generation air fleet will be at a numerical disadvantage, as the U.S. Air Force inventory of F-22s is 187.

India is also interested in the T-50, a fact that may help boost purchases. However, India wants to localize production of its T-50s “much like another Russian-designed fighter, the Sukhoi Su-30MKI, which has been in series production for more than a decade at the Hindustan Aeronautics Ltd (HAL) plant in Nasik.”

India is frustrated at delays in its negotiations with the French company Dassault over the contract for the Rafale fighter aircraft.

Image: Wikimedia/Alex Beltyukov

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