This article discusses important ongoing global issues, including international finance, oil markets and east-west geopolitical tensions, and analyses their implications for Timor-Leste’s national security and economic development. Fundasaun Mahein (FM) hopes that this analysis can help Timor-Leste’s decision makers to develop policies which promote our people’s wellbeing and security and assert Timor-Leste’s sovereignty by avoiding taking sides in disputes between bigger countries. This includes ensuring that Timor-Leste maintains good relations and cooperation with our neighbouring countries, while taking advantage of existing opportunities for regional economic and security cooperation with a wide range of partners.
Energy, financial and political crises threaten global security
Over the last year and more, world events suggest that significant political and economic shifts are underway at global and regional levels. These changes are occurring in the context of China’s rise to the status of a global economic superpower, which has enabled the Chinese Communist Party to increasingly assert itself on the world political stage. This includes financing major infrastructure projects and signing cooperation agreements around the world, particularly in the Global South and MENA region (Middle East and North Africa). China has also increased its military preparedness and engaged in more aggressive actions related to sea lines of communication (SLOC) and other regional security interests, including the long-running dispute over Taiwan. Meanwhile, western states have implemented various initiatives aimed at countering Chinese influence around the world, particularly in the Asia-Pacific region.
Following Russia’s invasion of Ukraine in February 2022, the United States and European Union implemented various sanctions aimed at damaging the Russian economy and state, including banning imports of various Russian products, seizing foreign assets of the Russian Central Bank and cutting off major Russian banks from the international financial system. Germany suspended the certification of the Nordstream II gas pipeline, which was expected to greatly increase the flow of Russian gas to Germany and, proponents hoped, could have resolved regional energy supply and price problems. Russia responded with its own economic and financial measures, including requiring buyers of Russian gas from “unfriendly countries” to pay indirectly using rubles rather than foreign currencies.
In addition to the immediate humanitarian effects of the Russia-Ukraine war, this “economic war” has led to sharply increased energy prices, with a resultant increase in the price of many other goods on global markets. Large European economies, including Germany, are facing de-industrialisation and economic recession as companies reduce production or move abroad due to soaring energy costs, which is likely to cause serious economic and financial problems within the European Union. As a result, German trade unions and employer groups have strongly opposed the German Government’s policies towards the Russia-Ukraine conflict, while EU politicians and populations are divided about how to respond to the crisis.
Although energy prices have declined somewhat in recent weeks, they remain significantly higher than early 2022 prices. Moreover, despite significant pressure to increase oil and gas production to resolve supply issues and bring down energy prices, the Organisation of Petroleum Exporting Countries (OPEC) recently announced plans to cut oil production by 2 million barrels per day. Some western officials heavily criticised this decision, arguing that it benefits Russia by maintaining high oil and gas prices. On the other hand, the Saudi Arabian Government and OPEC itself have rejected claims that OPEC’s decision was politically motivated and denied that they are “taking sides” in the Russia-Ukraine conflict.
The energy crisis comes in addition to inflation and currency crises across the world, including in Europe. The UK’s Bank of England is currently shoring up its bond market following a major collapse, while the US Federal Reserve and European Central Bank have made several recent adjustments to interest rates in its attempts to control inflation. Many analysts are suggesting that severe economic recession and financial crises are likely to occur in 2023. Meanwhile, rising electricity bills and other costs have led to a “cost of living crisis” in many European countries, and protests have broken out in several European countries against current government policies.
In addition to high energy costs, there are concerns that fertiliser shortages may impact global food security in the coming months, which will have serious implications for vulnerable populations around the world. While Timor-Leste is heavily dependent on imported goods, we have abundant land and many people who can quickly return to work in food production in rural areas during times of crisis. This was seen during COVID-19: when people faced economic hardship in Dili, they returned to rural areas where they could work in agriculture and live off the land. The limited industrial agriculture also means that Timor-Leste is less dependent on imported fertilisers and other inputs, which protects us from shortages and price increases. However, increased international food, energy and fertiliser prices will have major impacts in Timor-Leste due to our dependence on imported rice, wheat flour, chicken, supplements and baby formula, which will disproportionately affect poor people living in Dili who cannot produce their own food.
De-dollarisation and South-South cooperation
In addition to increased energy prices and associated economic and political crises, the Russia-Ukraine conflict has accelerated international trade in non-reserve currencies, or currencies other than US dollar, euro, pound sterling and yen. This is partly because countries which engage in significant trade with Russia – such as many African countries – can no longer use dollars and euros for this trade, even if they themselves have not implemented sanctions against Russia. As a result, alternative payment arrangements to enable continued trade are being developed and expanded.
At the same time, plans for China to pay Saudi Arabia for oil deliveries using the Chinese yuan have been announced, while the BRICS organisation – composed of Brazil, Russia, India, China and South Africa – are developing a new global reserve currency which will challenge the US dollar’s position at the world reserve currency. Recent reports suggest that China is aiming to sharply reduce its dollar holdings, partly due to concerns about western financial sanctions. Over the last two years, many other countries have significantly reduced their holdings of dollars and other traditional reserve currencies in favour of Chinese yuan and other currencies.
Financial analysts and international organisations such as the IMF have warned that sanctions against Russia are accelerating “de-dollarization”. This process could threaten the status of the US dollar as the world reserve currency, while raising major implications for the future of the global economy and for the national economic strategies of countries which hold large dollar reserves. This includes Timor-Leste, as a large proportion of our Petroleum Fund is invested in US government treasury bonds.
Accompanying the growing importance of China on the world stage and accelerated trade occurring outside the dollar-based financial system, increased South-South cooperation is challenging the traditional North-South relationships which have dominated international relations for decades. A notable example is the recent summit of the Shanghai Cooperation Organisation (SCO), where the leaders of China, Russia, India, Pakistan came together with those of several other large countries, including Turkey, Iran and the United Arab Emirates, to discuss ongoing cooperation efforts in the areas of security, trade and infrastructure. Combined, SCO countries make up over 40% of the global population and 24% of global GDP, as well as a huge proportion of global oil and gas reserves and food production. Importantly, SCO members agreed at the summit in September to increase trade using national currencies, which will further accelerate de-dollarisation.
An example of South-South cooperation occurring in Timor-Leste is the ongoing discussions with Indonesia about creating a Special Economic Zone (SEZ) at the Atambua land border. Proponents believe that a SEZ will attract private investment and stimulate economic growth, which can support the local and national economies and strengthen the relationship between the two countries. FM sees that such a scheme could be beneficial if aligned with a broader economic development and security strategy. Potential benefits include increased employment and incomes for local residents, increased government revenues and technological development. However, SEZs also bring various economic and security risks, especially when they are implemented in regions where regulatory capacity is weak. SEZs usually involve relaxation of regulations in order to attract private investment, which can attract illicit trade and other criminal activities such as money laundering, which are already a major concern in Timor-Leste. The growth of illegal economic activity would also damage the country’s reputation, which can then lead to reduced investor confidence and negative impacts to economic growth.
Asia-Pacific geopolitical competition and regional security
The growing competition and tensions between western states and China in the Asia-Pacific region raise many implications for regional security and economic cooperation efforts. Several examples of initiatives from both sides aimed at countering the other’s influence can be identified. First, the AUKUS agreement of September 2021 between Australia, the United Kingdom and the United States involves increased military cooperation between these three countries. This includes the provision of nuclear-powered submarines to Australia. The agreement is widely seen as aiming to counter Chinese influence in the region.
On the other hand, China has increased security cooperation efforts in the Asia-Pacific. In March 2022, details emerged about a new security cooperation agreement between China and the Solomon Islands. This news was met with anger from numerous officials from Australia, New Zealand and the United States. Even though Australia and the US sent diplomatic teams to the Solomon Islands capital to try to block the agreement, the Solomon Islands Government signed it. China is also in the process of negotiating an agreement with several Pacific island countries known as the “Five Year Action Plan on Common Development (2022-2026)”. The draft agreement outlines plans for political, security, economic, health, socio-cultural and environmental cooperation between China and Pacific Island states. The leader of Micronesia has expressed concerns about the possibility of the plan contributing to increased tensions between the west and China.
In addition to new security cooperation agreements, the dispute over Taiwan is a major flashpoint with regards to regional security in Asia-Pacific. As noted above, while the US officially considers Taiwan to be part of the People’s Republic of China, it maintains a policy of “strategic ambiguity” towards the China-Taiwan issue. However, US President Biden has stated on multiple occasions that the US will defend Taiwan in case of a Chinese attack. The House Speaker (President of the Parliament) of the United States, Nancy Pelosi, recently made a provocative visit to Taiwan. This action has led to heightened tensions between China and the US, and Chinese military exercises and preparations increased sharply after Pelosi’s visit. On 16 October at the 20th Communist Party Congress, President Xi Jinping repeated the Chinese Government’s commitment to “reunification” with Taiwan.
Further reflecting the deepening competition in Asia-Pacific between the US and China, in early October, Pacific Island leaders travelled to Washington to sign a new cooperation agreement between the US and Pacific Island states. News emerged that the Solomon Islands had refused to sign the agreement until “indirect references” to China were removed, saying that it did not want to be forced to “take sides”. In Timor-Leste, various large projects are being planned and implemented with support from donors, including the re-development of Dili Port, rehabilitation of Dili and Baucau airports, Hera jetty construction and improvement of drainage and water supply in Dili. These initiatives indicate a renewed interest from foreign partners in keeping Timor-Leste “on side” in a time of increased competition between major powers.
Timor-Leste must maintain diverse partnerships to ensure shared security
In conclusion, these events illustrate how increased competition and conflict between “east” and “west” is creating risks and opportunities within the Asia-Pacific region, and more broadly. It is likely that tensions will continue to increase, and there is a real danger that regional disputes and conflicts could escalate into a larger military confrontation. On the other hand, ongoing regional integration and cooperation initiatives present good opportunities for economic, infrastructure and state capacity development. Timor-Leste’s location and good relations with a range of international partners mean that we are well placed to benefit from such initiatives.
For Timor-Leste, as a small country with extensive ongoing security and defence cooperation with Australia and the USA, entering into a similar agreement with China is unrealistic at this time. However, there are many other areas where cooperation with China could bring benefits to Timor-Leste, especially in the area of infrastructure development and industrial capacity. China’s Belt & Road Initiative and the Asian Infrastructure Investment Bank are important cooperation programs which could benefit Timor-Leste, as long as all projects are implemented based on cost-benefit analysis and realistic financial planning. At the same time, it is essential to maintain economic and socio-cultural cooperation with neighbouring countries, especially ASEAN, to ensure that Timor-Leste’s economic, infrastructure and human capacity development does not become overly dependent on a single partner. To facilitate Timor-Leste’s industrial development, the Government should prioritise scholarship programs to send young people to study mathematics, material sciences and engineering in various Asian countries, including China, Korea, Japan and Singapore.
Finally, Fundasaun Mahein reiterates the importance of shared security as a guiding principle for international cooperation between Timor-Leste and our neighbours. In other words, Timor-Leste’s security is bound with that of our neighbours, and therefore reckless policies which provoke regional tensions are also harmful to our security. All policy decisions must be taken based on careful analysis of regional dynamics and potential risks, especially in the area of security and defence cooperation. However, this does not mean that Timor-Leste must simply submit to the will of its bigger neighbours to avoid upsetting them. On the contrary – FM believes that it is extremely important for Timor-Leste to assert its sovereignty by expanding cooperation with a diverse range of partners, while maintaining friendly relations and cooperation with our existing partners. While current security cooperation programs may be adequate for Timor-Leste’s needs, diversification of security cooperation in the future may also be needed to ensure Timor-Leste’s sovereignty and security, especially in the current context of growing regional tensions and economic crises.