Friday News Analysis — August 17, 2018 CFIUS Reform in the FY19 NDAA; Turkey in Turmoil; & Other Stories You May Have Missed
Greetings from Washington, where it is hot, hazy, and humid—typical weather for the dog days of August. As we continue to put out our Friday updates, we welcome your feedback and thoughts to make this more useful. As always, we can be reached at firstname.lastname@example.org and email@example.com
Reforms to CFIUS Reflect Future Security Challenges
One of the major elements that has been incorporated into the recently-signed John S. McCain National Defense Authorization Act for Fiscal Year 2019 (NDAA) is a significant expansion of the powers of the Committee on Foreign Investment in the United States (CFIUS) to evaluate the investments, mergers, and other transactions by foreign companies that might affect U.S. national security. These legislative changes, known as the Foreign Investment Risk Review Modernization Act (FIRRMA), were incorporated into the NDAA through bipartisan and bicameral efforts during the NDAA conference.
A thorough analysis of FIRRMA from the legal eagles at the Lawfare Blog lays out the changes in the legislation, but there are some major items that stand out. First, the legislation empowers CFIUS in terms of jurisdiction, staffing, and resources. The major jurisdictional changes expand CFIUS’s authority beyond its current role of examining transactions “by or with any foreign person that could result in foreign control of any United States business.” The scope of “control” is broadened to examine all methods of influence that a foreign investor might have on a company, even if they are not directly exercised. CFIUS can also review:
- Real estate transactions near sensitive national security locations;
- Investments in companies related to critical technologies or critical infrastructure;
- Changes in ownership structure that could result in foreign ownership; and
- Any transaction that CFIUS believes is structured to avoid CFIUS review.
Finally, rather than simply broadening the scope of CFIUS’s responsibilities without providing the commensurate resources, it lays out specific Senate-confirmed positions responsible for CFIUS, dedicated staff, and CFIUS fund.
FIRRMA also goes beyond the existing CFIUS review process to mandate biennial reports on Chinese investment in the United States, with special attention to how the investments match the Made in China 2025 policy laid out by the Communist leadership. FIRRMA also mandates that CFIUS look into two other key sectors: first, a report on foreign state-owned investment in U.S. rail infrastructure and any potential remedies, and, second, a briefing to Congress by CFIUS on any foreign investments related to election infrastructure and democratic processes at home and abroad
These reforms are a major step forward for the CFIUS process at a time when the United States is finally facing the economic and technological confrontation from China’s economic model. China’s push forward in advanced technologies; its protection of domestic industries from market competition; widespread use of intellectual property theft; a web of ties between military and business leaders; and its use of technological innovation to advance its authoritarian internal and revanchist external security goals represent a fundamental challenge to the economic-social-technological balance of the United States and key allies.
Notably, these reform efforts to CFIUS encourage cooperation with allies to coordinate the security risk of foreign investments and improve cooperation on a range of economic security matters. While it is not yet a Five Eyes for reviewing investments by China and other potential adversaries, it is a reminder that this is a shared problem for a range of western industrial economies — despite the more divisive language that we see on a certain Twitter account.
At the time the NDAA was in conference, I was disheartened that the bill’s conference had dropped the re-imposition of sanctions on ZTE — one of the worst offenders in terms of China’s aforementioned behavior. While I still believe that the Trump Administration’s confused relaxation of the ZTE sanctions was a major misstep, those working to get FIRRMA across the finish line knew that any action on ZTE would raise the ire of the White House and threaten these important reforms — and the rest of the vital items in the NDAA. ZTE, and a range of other Chinese technology companies, investment avenues, and other forays into technical education and research deserve our close attention, and FIRRMA is an important step forward in this battle.
Turkey is Running Aground
Turkey is facing a series of interrelated crises — in the country’s economy and its relationship with the United States — that took a darker turn this week.
A proximate cause of Turkey’s woes is the rapidly escalating row with the United States. Relations between the two countries have been growing rockier for years, but the decline has accelerated since the July 2016 military coup attempt against Turkish President Recep Tayyip Erdogan. President Erdogan has argued that his former ally turned bête noir, Fetullah Gülen, masterminded the coup. Gülen lives in Pennsylvania but has an extensive network in the Turkish government and military, including many of the coup plotters. Erdogan wants Gülen extradited, but U.S. officials have raised concerns that the evidence might not be sufficient to convince an American court. One of the more explosive allegations against President Trump’s former National Security Advisor, LTG (ret.) Michael Flynn is that he was involved in a conspiracy to abduct Gülen and render him to Turkey.
Andrew Brunson, an American pastor who was preaching in the Turkish city of Izmir, was arrested and accused of espionage and participation in the Gülenist coup plot, charges that the U.S. State Department have described as not credible. He has become a cause célèbre for American evangelical Christians, including Vice President Mike Pence. The attention on Brunson has made him a valuable bargaining chip and President Erdogan has explicitly linked releasing Brunson with extraditing Gülen. Efforts to negotiate for Brunson’s release appear to have broken down last week, triggering anger from President Trump, increased steel and aluminum tariffs on Turkey, and sanctions on Turkish officials. Turkish metal exports to the United States are minimal, but the negative signal combined with fundamental concerns about the Turkish economy, to trigger deterioration in Turkey’s financial condition.
On Friday morning, the Turkish lira was trading at 6.14 lira per dollar; while that is stronger than earlier this week, it still represents a weakening of more than 20% since August 1. As the lira has weakened, the amount of local currency needed to repay international lenders has increased. Société Genérale estimates that the cost for Turkish firms to service their international debt has increased by 25% in the past two months and the country has the largest foreign-denominated debt load of any emerging market.
Concerns were muted on Wednesday when Qatar announced an investment of $15 billion in Turkey. The two countries have similar political views and Turkey has been a strong supporter of Qatar in its dispute with Saudi Arabia and other members of the Gulf Cooperation Council. However, recent events suggest that this may not be enough to prevent further deterioration in the economy.
Additional risks stem from the heterodox economic views of President Erdogan. Erdogan has argued that high interests rates cause inflation, the opposite of the generally accepted view. As President Erdogan has centralized authority, including reducing the independence of the central bank and placing relatives in high-ranking economic positions, investors have worried that the opportunities for Turkey to avoid a serious economic downturn have diminished.
Other Stories You May Have Missed
- Last week we mentioned the ongoing turmoil in Venezuela and the collapse of that nation’s economy. Late last week, a federal court in Delaware ruled that the U.S. assets of Petróleos de Venezuela SA (PdVSA) could be claimed by creditors who have been unpaid by the bankrupt Venezuelan state. As a result, the assets of Citgo—the U.S. refining and retail arm of PdVSA much beloved by Boston Red Sox fans—could potentially be seized by creditors. While the Venezuelan government is appealing the ruling, it represents a serious challenge for the cash-strapped nation and raised doubts about PdVSA bonds on international markets that are backed by Citgo shares as collateral.
- The U.S. Bureau of Reclamation warned that the water levels in Lake Mead could fall below an important threshold by 2020, threatening water supplies for up to the 40 million people—and the farmers and industries—who rely on the Colorado River for water.
- While there was back-and-forth today between President Trump and the government of the District of Columbia regarding the rising cost of the now-postponed, possibly-canceled military parade in Washington, D.C., it is worth noting that the cost of the parade had skyrocketed from early estimates of $12 million to $92 million. As a point of comparison, the now-canceled U.S.-South Korea military exercises—canceled by President Trump for being provactive and “tremendously expensive”—would have cost $14 million.