How The US Swindled Russia In The Early 1990s

Authored by Eric Zuesse via The Strategic Culture Foundation,

Due to a historic data-dump on December 10th, the biggest swindle that occurred in the 20th Century (or perhaps ever) is now proven as a historical fact; and this swindle was done by the US Government, against the Government and people of Russia, and it continues today and keeps getting worse under every US President.

It was secretly started by US President George Herbert Walker Bush on the night of 24 February 1990; and, unless it becomes publicly recognized and repudiated so that it can stop, a nuclear war between the US and all of NATO on one side, versus Russia on the other, is inevitable unless Russia capitulates before then, which would be vastly less likely than such a world-ending nuclear war now is.

This swindle has finally been displayed beyond question, by this, the first-ever complete release of the evidence.

It demonstrates beyond any reasonable doubt (as you’ll verify yourself from the evidence here), that US President G.H.W. Bush (and his team) lied through their teeth to Soviet President Mikhail Gorbachev (and his team) to end the Cold War on Russia’s side, when the US team were secretly determined never to end it on the US-and-NATO side until Russia itself is conquered.

And this swindle continues today, and keeps getting worse and worse for Russians.

Until now, apologists for the US-Government side have been able to get away with various lies about these lies, such as that there weren’t any, and that Gorbachev didn’t really think that the NATO issue was terribly important for Russia’s future national security anyway, and that the only limitation upon NATO’s future expansion that was discussed during the negotiations to end the Cold War concerned NATO not expanding itself eastward (i.e., closer to Russia) within Germany, not going beyond the then-existing dividing-line between West and East Germany — that no restriction against other east-bloc (Soviet-allied) nations ever being admitted into NATO was discussed, at all. The now-standard US excuse that the deal concerned only Germany and not all of Europe is now conclusively disproven by the biggest single data-dump ever released about those negotiations. 

The release on December 10th, by the National Security Archives, of a treasure-trove of all the existing documentation — 33 key documents — that’s been made available to them from numerous archives around the world, and brought together finally for the very first time complete and in chronological order, makes crystal clear that the American apologists’ lies about the lies WERE lies, not accurate accounts of the history, at all.

The assemblers at the National Security Archives assume that the numerous and repeated false promises that were made by Bush’s team were mistakes, instead of as what they so clearly were (but you’ll judge it here for yourself): strategic lies that were essential to Bush’s goal of America ultimately conquering a future isolated Russia that would then have little-to-no foreign allies, and all of whose then-existing-as-Soviet allied nations within the Soviet Union itself, and beyond, including all of its former Warsaw Pact allies, would have become ultimately swallowed up by the US-NATO bloc, which then would be able to dictate, to a finally alone nation of Russia, terms of Russia’s ultimate surrender to the US That view (which the National Security Archives documents to be clearly true, even as it denies it and says that only Bill Clinton and subsequent Presidents were to blame) is now exposed irrefutably to have been the US plan ever since GHW Bush’s Presidency.

In other words: This release of documents about the turning-point, provides capstone evidence that the US never really had been in the Cold War against communism; the US was instead aiming ultimately to be the imperial nation, controlling the entire planet.

For America’s Deep State, or what President Eisenhower famously warned about as the “military-industrial complex,” the Cold War was actually about empire, and about conquest, not really about ideology at all. This also had been shown, for example, by America’s having assisted so many ‘former’ Nazis to escape and come to America and to be paid now by the US Government. After World War II, the top level of the US power-structure became increasingly taken over by the military-industrial complex, America’s Deep State, so that increasingly the US Government is in a condition of “perpetual war for perpetual peace” — a warfare state and economy: fascism.

Here, then, are highlights from this historic data-dump, presented in chronological order, just as in the release itself, and with a minimum of added commentary from myself [placed in brackets], but all stripping away here the dross of accompanying inconsequentials, and leaving only the golden steady core of stunningly successful American deceit of Russia. These are those highlights, from the data-dump, which the National Security Archives headlined “NATO Expansion: What Gorbachev Heard” and sub-headed “Declassified documents show security assurances against NATO expansion to Soviet leaders from Baker, Bush, Genscher, Kohl, Gates, Mitterrand, Thatcher, Hurd, Major, and Woerner,” so that the swindlers (or as the National Security Archive view them as having instead been blunderers) can become immediately recognized and known.

All of these documents pertain to negotiations that occurred throughout the month of February 1990, and a few relate also to the immediate aftermath. That’s the crucial period, when the geostrategic reality of today (which all the world now know to be a continuation of the Cold War, but this time against only Russia, and not against the Soviet Union and its Warsaw Pact) was actually created.

At the negotiations’ start, West Germany’s Chancellor Helmut Kohl’s agent, Germany’s Foreign Minister, Hans-Dietrich Genscher, stated publicly to the whole world, West Germany’s initial offer to the Soviet Union’s President Mikhail Gorbachev, and this offer did not include a simultaneous termination of both military alliances — the Soviets’ Warsaw Pact and America’s NATO — but instead only a promise that NATO would never absorb any additional territory, especially to the east of West Germany (and this publicly made promise was never kept). So: right from the get-go, there was no actual termination of the Cold War that was being proposed by the US group, but only an arrangement that wouldn’t threaten Russia more than the then-existing split Germany did (and yet even that promise turned out to have been a lie):

Document 01

US Embassy Bonn Confidential Cable to Secretary of State on the speech of the German Foreign Minister: Genscher Outlines His Vision of a New European Architecture.

1990-02-01

Source: US Department of State. FOIA Reading Room. Case F-2015 10829

“This US Embassy Bonn cable reporting back to Washington details both of Hans-Dietrich Genscher’s proposals – that NATO would not expand to the east, and that the former territory of the GDR in a unified Germany would be treated differently from other NATO territory.”

Document 02

Mr. Hurd to Sir C. Mallaby (Bonn). Telegraphic N. 85: Secretary of State’s Call on Herr Genscher: German Unification.

1990-02-06

Source: Documents on British Policy Overseas, series III, volume VII: German Unification, 1989-1990.

“The US State Department’s subsequent view of the German unification negotiations, expressed in a 1996 cable sent to all posts, mistakenly asserts that the entire negotiation over the future of Germany limited its discussion of the future of NATO to the specific arrangements over the territory of the former GDR.” [The National Security Archives’ calling that Bill-Clinton-era State Department cable ‘mistaken’ is unsupported by, and even contradicted by, the evidence they actually present from the February 1990 negotiations.]

Document 03

Memorandum from Paul H. Nitze to George H.W. Bush about “Forum for Germany” meeting in Berlin.

1990-02-06

Source: George H. W. Bush Presidential Library

“This concise note to President Bush from one of the Cold War’s architects, Paul Nitze (based at his namesake Johns Hopkins University School of International Studies), captures the debate over the future of NATO in early 1990. Nitze relates that Central and Eastern European leaders attending the ‘Forum for Germany’ conference in Berlin were advocating the dissolution of both the superpower blocs, NATO and the Warsaw Pact, until he (and a few western Europeans) turned around that view and instead emphasized the importance of NATO as the basis of stability and US presence in Europe.”

Document 04

Memorandum of Conversation between James Baker and Eduard Shevardnadze in Moscow.

1990-02-09

Source: US Department of State, FOIA 199504567 (National Security Archive Flashpoints Collection, Box 38)

“Baker tells the Soviet foreign minister, ‘A neutral Germany would undoubtedly acquire its own independent nuclear capability. However, a Germany that is firmly anchored in a changed NATO, by that I mean a NATO that is far less of [a] military organization, much more of a political one, would have no need for independent capability. There would, of course, have to be iron-clad guarantees that NATO’s jurisdiction or forces would not move eastward.’”

Document 05

Memorandum of conversation between Mikhail Gorbachev and James Baker in Moscow.

1990-02-09

Source: US Department of State, FOIA 199504567 (National Security Archive Flashpoints Collection, Box 38)

“Even with (unjustified) redactions by US classification officers, this American transcript of perhaps the most famous US assurance to the Soviets on NATO expansion confirms the Soviet transcript of the same conversation. Repeating what Bush said at the Malta summit in December 1989, Baker tells Gorbachev: ‘The President and I have made clear that we seek no unilateral advantage in this process’ of inevitable German unification. Baker goes on to say, ‘We understand the need for assurances to the countries in the East. If we maintain a presence in a Germany that is a part of NATO, there would be no extension of NATO’s jurisdiction for forces of NATO one inch to the east.’”

Document 06

Record of conversation between Mikhail Gorbachev and James Baker in Moscow. (Excerpts)

1990-02-09

Source: Gorbachev Foundation Archive, Fond 1, Opis 1.

“The key exchange takes place when Baker asks whether Gorbachev would prefer ‘a united Germany outside of NATO, absolutely independent and without American troops; or a united Germany keeping its connections with NATO, but with the guarantee that NATO’s jurisdiction or troops will not spread east of the present boundary.’ … Turning to German unification, Baker assures Gorbachev that ‘neither the president nor I intend to extract any unilateral advantages from the processes that are taking place,’ and that the Americans understand the importance for the USSR and Europe of guarantees that ‘not an inch of NATO’s present military jurisdiction will spread in an eastern direction.’”

Document 07

Memorandum of conversation between Robert Gates and Vladimir Kryuchkov in Moscow.

1990-02-09

Source: George H.W. Bush Presidential Library, NSC Scowcroft Files, Box 91128, Folder “Gorbachev (Dobrynin) Sensitive.”

“This conversation is especially important because subsequent researchers have speculated that Secretary Baker may have been speaking beyond his brief in his ‘not one inch eastward’ conversation with Gorbachev. Robert Gates, the former top CIA intelligence analyst and a specialist on the USSR, here tells his kind-of-counterpart, the head of the KGB, in his office at the Lubyanka KGB headquarters, exactly what Baker told Gorbachev that day at the Kremlin: not one inch eastward. At that point, Gates was the top deputy to the president’s national security adviser, Gen. Brent Scowcroft, so this document speaks to a coordinated approach by the US government to Gorbachev.”

Document 08

Letter from James Baker to Helmut Kohl

1990-02-10

Source: Deutsche Enheit Sonderedition und den Akten des Budeskanzleramtes 1989/90

“Baker especially remarks on Gorbachev’s noncommittal response to the question about a neutral Germany versus a NATO Germany with pledges against eastward expansion.”

Document 09

Memorandum of conversation between Mikhail Gorbachev and Helmut Kohl

1990-02-10

Source: Mikhail Gorbachev i germanskii vopros, edited by Alexander Galkin and Anatoly Chernyaev, (Moscow: Ves Mir, 2006)

“Prepared by Baker’s letter and his own foreign minister’s Tutzing formula, Kohl early in the conversation assures Gorbachev, ‘We believe that NATO should not expand the sphere of its activity. We have to find a reasonable resolution. I correctly understand the security interests of the Soviet Union, and I realize that you, Mr. General Secretary, and the Soviet leadership will have to clearly explain what is happening to the Soviet people.’ Later the two leaders tussle about NATO and the Warsaw Pact, with Gorbachev commenting, ‘They say what is NATO without the FRG. But we could also ask: What is the WTO without the GDR?’ When Kohl disagrees, Gorbachev calls merely for ‘reasonable solutions that do not poison the atmosphere in our relations’ and says this part of the conversation should not be made public.”

Document 10-1

Teimuraz Stepanov-Mamaladze notes from Conference on Open Skies, Ottawa, Canada.

1990-02-12

Source: Hoover Institution Archive, Stepanov-Mamaladze Collection.

“Notes from the first days of the conference are very brief, but they contain one important line that shows that Baker offered the same assurance formula in Ottawa as he did in Moscow: ‘And if U[nited] G[ermany] stays in NATO, we should take care about nonexpansion of its jurisdiction to the East.’”

Document 10-2

Teimuraz Stepanov-Mamaladze diary, February 12, 1990.

1990-02-12

Source: Hoover Institution Archive, Stepanov-Mamaladze Collection.

“This diary entry is evidence, from a critical perspective, that the United States and West Germany did give Moscow concrete assurances about keeping NATO to its current size and scope. In fact, the diary further indicates that at least in Shevardnadze’s view those assurances amounted to a deal – which Gorbachev accepted.”

Document 10-3

Teimuraz Stepanov-Mamaladze diary, February 13, 1990.

1990-02-13

Source: Hoover Institution Archive, Stepanov-Mamaladze Collection.

“Stepanov-Mamaladze describes difficult negotiations about the exact wording on the joint statement. … ‘During the day, active games were taking place between all of them. E.A. [Shevardnadze] met with Baker five times, twice with Genscher, talked with Fischer [GDR foreign minister], Dumas [French foreign minister], and the ministers of the ATS countries,’ and finally, the text of the settlement was settled.”

Document 11

US State Department, “Two Plus Four: Advantages, Possible Concerns and Rebuttal Points.”

1990-02-21

Source: State Department FOIA release, National Security Archive Flashpoints Collection, Box 38.

“The American fear was that the West Germans would make their own deal with Moscow for rapid unification, giving up some of the bottom lines for the US, mainly membership in NATO.”

Document 12-1

Memorandum of conversation between Vaclav Havel and George Bush in Washington.

1990-02-20

Source: George H.W. Bush Presidential Library, Memcons and Telcons (https://bush41library.tamu.edu/)

“Bush took the opportunity to lecture the Czech leader about the value of NATO and its essential role as the basis for the US presence in Europe.”

Document 12-2

Memorandum of conversation between Vaclav Havel and George Bush in Washington.

1990-02-21

Source: George H.W. Bush Presidential Library, Memcons and Telcons (https://bush41library.tamu.edu/)

“Bush’s request to Havel to pass the message to Gorbachev that the Americans support him personally, and that ‘We will not conduct ourselves in the wrong way by saying “we win, you lose.” Emphasizing the point, Bush says, ‘tell Gorbachev that … I asked you to tell Gorbachev that we will not conduct ourselves regarding Czechoslovakia or any other country in a way that would complicate the problems he has so frankly discussed with me.’ The Czechoslovak leader adds his own caution to the Americans about how to proceed with the unification of Germany and address Soviet insecurities. Havel remarks to Bush, ‘It is a question of prestige.’”

[I think that Havel was deceived to believe that “prestige” was the issue here. This is what the US team wanted the Soviet team to think was the US team’s chief motivation for wanting NATO to continue. But subsequent historical events, especially the US team’s proceeding under President Bill Clinton and up through Donald Trump to expand NATO to include, by now, virtually all of the Warsaw Pact and of the Soviet Union itself except for Russia, in NATO, proves that US aggression against Russia has been the US aim from the start, and the US Government has been working assiduously at this plan for ultimate conquest. I think that Havel’s use there of the word “prestige” was very revealing of the total snookering of Gorbachev that Bush achieved. Gorbachev and his team trusted the US side. Russia has paid dearly for that. If the US side continues and NATO isn’t voluntarily terminated by the US Government, then WW III will be the inevitable result. NATO will end either after the ‘conquest’ of Russia or before that WW-III ‘conquest’ (likelier to be actually destruction of the entire world) even happens. The world, today, will decide which. NATO should have ended in 1991, when the Soviet Union and its Warsaw Pact did.]

Document 13

Memorandum of Conversation between Helmut Kohl and George Bush at Camp David.

1990-02-24

Source: George H.W. Bush Presidential Library, Memcons and Telcons (https://bush41library.tamu.edu/)

“The Bush administration’s main worry about German unification as the process accelerated in February 1990 was that the West Germans might make their own deal bilaterally with the Soviets (see Document 11) and might be willing to bargain away NATO membership. … The German chancellor arrives at Camp David without [West German Foreign Minister] Genscher because the latter does not entirely share the Bush-Kohl position on full German membership in NATO, and he recently angered both leaders by speaking publicly about the CSCE as the future European security mechanism.[11] … Bush’s priority is to keep the US presence, especially the nuclear umbrella, in Europe: ‘if US nuclear forces are withdrawn from Germany, I don’t see how we can persuade any other ally on the continent to retain these weapons.’ … [Bush wanted Lockheed and other US weapons-makers to continue booming after the Cold War ‘ended’ — not for the nuclear-weapons market to end. Bush continued:] ‘We have weird thinking in our Congress today, ideas like this peace dividend. We can’t do that in these uncertain times.’ [For the US team, ‘perpetual war for perpetual peace’ would be the way forward; a ‘peace dividend’ was the last thing they wanted — ever.] … At one point in the conversation, Bush seems to view his Soviet counterpart not as a partner but as a defeated enemy. Referring to talk in some Soviet quarters against Germany staying in NATO, he says: ‘To hell with that. We prevailed and they didn’t. We cannot let the Soviets clutch victory from the jaws of defeat.’” [I earlier had placed that crucial secret statement from Bush into historical perspective, under the headline, “How America Double-Crossed Russia and Shamed the West”.] 

Document 14

Memorandum of conversation between George Bush and Eduard Shevardnadze in Washington.

1990-04-06

Source: George H.W. Bush Presidential Library, Memcons and Telcons (https://bush41library.tamu.edu/)

“Shevardnadze mentions the upcoming CSCE summit and the Soviet expectation that it will discuss the new European security structures. Bush does not contradict this but ties it to the issues of the US presence in Europe and German unification in NATO. He declares that he wants to ‘contribute to stability and to the creation of a Europe whole and free, or as you call it, a common European home. A[n] idea that is very close to our own.’ The Soviets — wrongly — interpret this as a declaration that the US administration shares Gorbachev’s idea.”

Document 15

Sir R. Braithwaite (Moscow). Telegraphic N. 667: “Secretary of State’s Meeting with President Gorbachev.”

1990-04-11

Source: Documents on British Policy Overseas, series III, volume VII: German Unification, 1989-1990. (Foreign and Commonwealth Office.

“Ambassador Braithwaite’s telegram summarizes the meeting between Secretary of State for Foreign and Commonwealth Affairs Douglas Hurd and President Gorbachev, noting Gorbachev’s ‘expansive mood.’ Gorbachev asks the secretary to pass his appreciation for Margaret Thatcher’s letter to him after her summit with Kohl, at which, according to Gorbachev, she followed the lines of policy Gorbachev and Thatcher discussed in their recent phone call, on the basis of which the Soviet leader concluded that ‘the British and Soviet positions were very close indeed.’”

Document 16

Valentin Falin Memorandum to Mikhail Gorbachev (Excerpts)

1990-04-18

Source: Mikhail Gorbachev i germanskii vopros, edited by Alexander Galkin and Anatoly Chernyaev, (Moscow: Ves Mir, 2006)

“This memorandum from the Central Committee’s most senior expert on Germany sounds like a wake-up call for Gorbachev. Falin puts it in blunt terms: while Soviet European policy has fallen into inactivity and even ‘depression after the March 18 elections in East Germany, and Gorbachev himself has let Kohl speed up the process of unification, his compromises on Germany in NATO can only lead to the slipping away of his main goal for Europe – the common European home. ‘Summing up the past six months, one has to conclude that the “common European home,” which used to be a concrete task the countries of the continent were starting to implement, is now turning into a mirage.’ While the West is sweet-talking Gorbachev into accepting German unification in NATO, Falin notes (correctly) that ‘the Western states are already violating the consensus principle by making preliminary agreements among themselves’ regarding German unification and the future of Europe that do not include a ‘long phase of constructive development.’ He notes the West’s ‘intensive cultivation of not only NATO but also our Warsaw Pact allies’ with the goal to isolate the USSR. … He also suggests using arms control negotiations in Vienna and Geneva as leverage if the West keeps taking advantage of Soviet flexibility. … The main idea of the memo is to warn Gorbachev not to be naive about the intentions of his American partners: ‘The West is outplaying us, promising to respect the interests of the USSR, but in practice, step by step, separating us from “traditional Europe”.’”

Document 17

James A. Baker III, Memorandum for the President, “My meeting with Shevardnadze.”

1990-05-04

Source: George H. W. Bush Presidential Library, NSC Scowcroft Files, Box 91126, Folder “Gorbachev (Dobrynin) Sensitive 1989 – June 1990 [3]”

“Baker reports, ‘I also used your speech and our recognition of the need to adapt NATO, politically and militarily, and to develop CSCE to reassure Shevardnadze that the process would not yield winners and losers. Instead, it would produce a new legitimate European structure – one that would be inclusive, not exclusive.’”

Document 18

Record of conversation between Mikhail Gorbachev and James Baker in Moscow.

1990-05-18

Source: Gorbachev Foundation Archive, Fond 1

“When Gorbachev mentions the need to build new security structures to replace the blocs, Baker lets slip a personal reaction that reveals much about the real US position on the subject: ‘It’s nice to talk about pan-European security structures, the role of the CSCE. It is a wonderful dream, but just a dream. In the meantime, NATO exists. …’ Gorbachev suggests that if the US side insists on Germany in NATO, then he would ‘announce publicly that we want to join NATO too.’ Shevardnadze goes further, offering a prophetic observation: ‘if united Germany becomes a member of NATO, it will blow up perestroika. Our people will not forgive us. People will say that we ended up the losers, not the winners.’”

Document 19

Record of conversation between Mikhail Gorbachev and Francois Mitterrand (excerpts).

1990-05-25

Source: Mikhail Gorbachev i germanskii vopros

“[Miterrand] implies that NATO is not the key issue now and could be drowned out in further negotiations; rather, the important thing is to ensure Soviet participation in new European security system. He repeats that he is ‘personally in favor of gradually dismantling the military blocs.’ Gorbachev expresses his wariness and suspicion about US effort to ‘perpetuate NATO’.” [This was extraordinary documentation that the US team had deceived Gorbachev to think that they were trying to suggest to him that both military alliances — NATO and Warsaw Pact — would be ended, but that Gorbachev was “wary” and “suspicious” that maybe they didn’t really mean it. Stunning.]

Document 20

Letter from Francois Mitterrand to George Bush

1990-05-25

Source: George H.W. Bush Presidential Library, NSC Scowcroft Files

True to his word, Mitterrand writes a letter to George Bush describing Gorbachev’s predicament on the issue of German unification in NATO, calling it genuine, not ‘fake or tactical.’ He warns the American president against doing it as a fait accompli without Gorbachev’s consent implying that Gorbachev might retaliate on arms control (exactly what Mitterrand himself – and Falin earlier – suggested in his conversation). Mitterrand argues in favor of a formal ‘peace settlement in International law,’ and informs Bush that in his conversation with Gorbachev he “‘indicated that, on the Western side, we would certainly not refuse to detail the guarantees that he would have a right to expect for his country’s security.’”

Document 21

Record of conversation between Mikhail Gorbachev and George Bush. White House, Washington D.C.

1990-05-31

Source: Gorbachev Foundation Archive, Moscow, Fond 1, opis 1.[12]

“Baker repeats the nine assurances made previously by the administration, including that the United States now agrees to support the pan-European process and transformation of NATO in order to remove the Soviet perception of threat. Gorbachev’s preferred position is Germany with one foot in both NATO and the Warsaw Pact — the ‘two anchors’ — creating a kind of associated membership. Baker intervenes, saying that ‘the simultaneous obligations of one and the same country toward the WTO and NATO smack of schizophrenia.’ After the US president frames the issue in the context of the Helsinki agreement, Gorbachev proposes that the German people have the right to choose their alliance — which he in essence already affirmed to Kohl during their meeting in February 1990. Here, Gorbachev significantly exceeds his brief, and incurs the ire of other members of his delegation, especially the official with the German portfolio, Valentin Falin, and Marshal Sergey Akhromeyev. Gorbachev issues a key warning about the future: ‘If the Soviet people get an impression that we are disregarded in the German question, then all the positive processes in Europe, including the negotiations in Vienna [over conventional forces], would be in serious danger. This is not just bluffing. It is simply that the people will force us to stop and to look around.’ It is a remarkable admission about domestic political pressures from the last Soviet leader.”

Document 22

Letter from Mr. Powell (N. 10) to Mr. Wall: Thatcher-Gorbachev memorandum of conversation.

1990-06-08

Source: Documents on British Policy Overseas, series III, volume VII: German Unification, 1989-1990. (Foreign and Commonwealth Office

“Gorbachev says he wants to ‘be completely frank with the Prime Minister’ that if the processes were to become one-sided, ‘there could be a very difficult situation [and the] Soviet Union would feel its security in jeopardy.’ Thatcher responds firmly that it was in nobody’s interest to put Soviet security in jeopardy: ‘we must find ways to give the Soviet Union confidence that its security would be assured.’”

Document 23

Record of Conversation between Mikhail Gorbachev and Helmut Kohl, Moscow (Excerpts).

1990-07-15

Source: Mikhail Gorbachev i germanskii vopros

“This key conversation between Chancellor Kohl and President Gorbachev sets the final parameters for German unification. Kohl talks repeatedly about the new era of relations between a united Germany and the Soviet Union, and how this relationship would contribute to European stability and security. Gorbachev demands assurances on non-expansion of NATO: ‘We must talk about the nonproliferation of NATO military structures to the territory of the GDR, and maintaining Soviet troops there for a certain transition period.’ The Soviet leader notes earlier in the conversation that NATO has already begun transforming itself. For him, the pledge of NATO non-expansion to the territory of the GDR in spirit means that NATO would not take advantage of the Soviet willingness to compromise on Germany.”

[Of course, Gorbachev never knew that Bush had instructed his agents, on the night of 24 February 1990, “To hell with that. We prevailed and they didn’t. We cannot let the Soviets clutch victory from the jaws of defeat,” indicating that for the US aristocracy, conquest of an isolated Russia was the actual ultimate aim — there would be no actual end of the Cold War until the US would conquer Russia itself — grab the whole thing. Gorbachev was, it is now absolutely undeniable, conned.]

Document 24

Memorandum of Telephone Conversation between Mikhail Gorbachev and George Bush

1990-07-17

Source: George H.W. Bush Presidential Library, Memcons and Telcons ((https://bush41library.tamu.edu/)

“In this phone call, Bush expands on Kohl’s security assurances and reinforces the message from the London Declaration: ‘So what we tried to do was to take account of your concerns expressed to me and others, and we did it in the following ways: by our joint declaration on non-aggression; in our invitation to you to come to NATO; in our agreement to open NATO to regular diplomatic contact with your government and those of the Eastern European countries; and our offer on assurances on the future size of the armed forces of a united Germany – an issue I know you discussed with Helmut Kohl. We also fundamentally changed our military approach on conventional and nuclear forces. We conveyed the idea of an expanded, stronger CSCE with new institutions in which the USSR can share and be part of the new Europe.’”

Document 25

September 12 Two-Plus-Four Ministerial in Moscow: Detailed account [includes text of the Treaty on the Final Settlement with Respect to Germany and Agreed Minute to the Treaty on the special military status of the GDR after unification]

1990-11-02

Source: George H.W. Bush Presidential Library, NSC Condoleezza Rice Files

“the agreed text of the final treaty on German unification. The treaty codified what Bush had earlier offered to Gorbachev – ‘special military status’ for the former GDR territory. At the last minute, British and American concerns that the language would restrict emergency NATO troop movements there forced the inclusion of a ‘minute’ that left it up to the newly unified and sovereign Germany what the meaning of the word ‘deployed’ should be. Kohl had committed to Gorbachev that only German NATO troops would be allowed on that territory after the Soviets left, and Germany stuck to that commitment, even though the ‘minute’ was meant to allow other NATO troops to traverse or exercise there at least temporarily. Subsequently, Gorbachev aides such as Pavel Palazhshenko would point to the treaty language to argue that NATO expansion violated the ‘spirit’ of this Final Settlement treaty.”

[Obviously, now, it was no “Final Settlement” at all.]

Document 26

US Department of State, European Bureau: Revised NATO Strategy Paper for Discussion at Sub-Ungroup Meeting

1990-10-22

Source: George H. W. Bush Presidential Library, NSC Heather Wilson Files,

“Joint Chiefs and other agencies, posits that ‘[a] potential Soviet threat remains and constitutes one basic justification for the continuance of NATO.’ At the same time, in the discussion of potential East European membership in NATO, the review suggests that ‘In the current environment, it is not in the best interest of NATO or of the US that these states be granted full NATO membership and its security guarantees.’ The United States does not ‘wish to organize an anti-Soviet coalition whose frontier is the Soviet border’ – not least because of the negative impact this might have on reforms in the USSR. NATO liaison offices would do for the present time, the group concluded, but the relationship will develop in the future. In the absence of the Cold War confrontation, NATO ‘out of area’ functions will have to be redefined.” [Clearly, they wanted the revolving door to land them in high-paid positions supported by US weapons-making corporations, not just in retirements with only military pensions. Or else, they just loved war and, like Bush, didn’t want there to be any “peace dividend.”] 

Document 27

James F. Dobbins, State Department European Bureau, Memorandum to National Security Council: NATO Strategy Review Paper for October 29 Discussion.

1990-10-25

Source: George H. W. Bush Presidential Library: NSC Philip Zelikow Files

“This concise memorandum comes from the State Department’s European Bureau as a cover note for briefing papers for a scheduled October 29, 1990 meeting on the issues of NATO expansion and European defense cooperation with NATO. Most important is the document’s summary of the internal debate within the Bush administration, primarily between the Defense Department (specifically the Office of the Secretary of Defense, Dick Cheney) and the State Department. On the issue of NATO expansion, OSD ‘wishes to leave the door ajar’ while State ‘prefers simply to note that discussion of expanding membership is not on the agenda….’ The Bush administration effectively adopts State’s view in its public statements, yet the Defense view would prevail in the next administration.”

[This allegation, by the National Security Archives, fundamentally misrepresents, by its underlying assumption that the Bush Administration’s statements such as that NATO would move “not one inch to the east” weren’t lies but instead reflected Bush’s actual intention. They ignore altogether Bush’s having secretly told his vassals on the crucial night of 24 February 1990, “To hell with that. We prevailed and they didn’t. We cannot let the Soviets clutch victory from the jaws of defeat.” Gorbachev believed that this was to be a win-win game; but, the US side were now under secret instructions that it’s to be purely more of the win-lose game, and that now a lone Russia would end up being its ultimate loser. The despicable statement by the National Security Archives, “yet the Defense view would prevail in the next administration,” presumes that it didn’t actually already ‘prevail’ in the Bush Administration itself. It prevailed actually in George Herbert Walker Bush himself, and not only in his Defense Department. Bush brilliantly took advantage of Gorbachev’s decency and expectation that Bush, like himself, was decent. Bush lied — and his team and their successors ever since have been carrying out his vicious plan. The National Security Archives downplays to insignificance Bush’s crucial instruction to his people, “To hell with that. We prevailed and they didn’t. We cannot let the Soviets clutch victory from the jaws of defeat.” That statement, at that crucial moment, is what enables us to understand what was actually going on throughout these negotiations. The Archives’ blaming only Bill Clinton and the other Presidents after Bush is a despicable lie. And it wasn’t just “the Defense view” — Cheney — who prevailed within the Bush Administration there. Cheney, like Baker, were doing what GHW Bush had hired them to do. Baker’s job was to lie. If it weren’t, then he’d have told Gorbachev the next day not to trust what the Bush team were saying, but instead to demand everything to be put in writing in the final document, and to assume the worst regarding anything that the Bush team were refusing to put in writing in the final document. Baker was a lawyer, and a very skilled liar, who was just doing his job for Bush. For some inexplicable reason, the National Security Archives simply assumes otherwise.]

Document 28

Ambassador Rodric Braithwaite diary, 05 March 1991

1991-03-05

Source: Rodric Braithwaite personal diary

“British Ambassador Rodric Braithwaite was present for a number of the assurances given to Soviet leaders in 1990 and 1991 about NATO expansion. Here, Braithwaite in his diary describes a meeting between British Prime Minister John Major and Soviet military officials, led by Minister of Defense Marshal Dmitry Yazov. The meeting took place during Major’s visit to Moscow and right after his one-on-one with President Gorbachev. During the meeting with Major, Gorbachev had raised his concerns about the new NATO dynamics: ‘Against the background of favorable processes in Europe, I suddenly start receiving information that certain circles intend to go on further strengthening NATO as the main security instrument in Europe. Previously they talked about changing the nature of NATO, about transformation of the existing military-political blocs into pan-European structures and security mechanisms. And now suddenly again [they are talking about] a special peace-keeping role of NATO. They are talking again about NATO as the cornerstone. This does not sound complementary to the common European home that we have started to build.’ Major responded: ‘I believe that your thoughts about the role of NATO in the current situation are the result of misunderstanding. We are not talking about strengthening of NATO.’”

Document 29

Paul Wolfowitz Memoranda of Conversation with Vaclav Havel and Lubos Dobrovsky in Prague.

1991-04-27

Source: US Department of Defense, FOIA release 2016

“These memcons from April 1991 provide the bookends for the ‘education of Vaclav Havel’ on NATO (see Documents 12-1 and 12-2 above). US Undersecretary of Defense for Policy Paul Wolfowitz included these memcons in his report to the NSC and the State Department about his attendance at a conference in Prague on ‘The Future of European Security,’ on April 24-27, 1991. During the conference Wolfowitz had separate meetings with Havel and Minister of Defense Dobrovsky. In the conversation with Havel, Wolfowitz thanks him for his statements about the importance of NATO and US troops in Europe. … In conversation with Dobrovsky, Wolfowitz remarks that ‘the very existence of NATO was in doubt a year ago.’“

Document 30

Memorandum to Boris Yeltsin from Russian Supreme Soviet delegation to NATO HQs

1991-07-01

Source: State Archive of the Russian Federation (GARF), Fond 10026, Opis 1

“This document is important for describing the clear message in 1991 from the highest levels of NATO – Secretary General Manfred Woerner – that NATO expansion was not happening. The audience was a Russian Supreme Soviet delegation, which in this memo was reporting back to Boris Yeltsin (who in June had been elected president of the Russian republic, largest in the Soviet Union), but no doubt Gorbachev and his aides were hearing the same assurance at that time. The emerging Russian security establishment was already worried about the possibility of NATO expansion, so in June 1991 this delegation visited Brussels to meet NATO’s leadership, hear their views about the future of NATO, and share Russian concerns. Woerner had given a well-regarded speech in Brussels in May 1990 in which he argued: ‘The principal task of the next decade will be to build a new European security structure, to include the Soviet Union and the Warsaw Pact nations. The Soviet Union will have an important role to play in the construction of such a system. If you consider the current predicament of the Soviet Union, which has practically no allies left, then you can understand its justified wish not to be forced out of Europe.’ Now in mid-1991, Woerner responds to the Russians by stating that he personally and the NATO Council are both against expansion — ’13 out of 16 NATO members share this point of view’ — and that he will speak against Poland’s and Romania’s membership in NATO to those countries’ leaders as he has already done with leaders of Hungary and Czechoslovakia.”

The 7 Key Takeaways From Xi Jinping's Vision For "A New Era" In China

As reported first thing this morning, China"s President Xi Jinping outlined his vision for the next five years, ushering in a "new era" (a term he repeated 36 times) of development in China, as the Communist Party’s 19th Congress opened in Beijing on Wednesday. During a 3½-hour long speech, Xi said the internal and external situations facing China were undergoing complicated changes which the party needed to address. Xi started with the opening remark that “the prospects are bright while the challenges are also grave”, before reminding his audience of his achievements over the past five years, which included: poverty reduction, strengthening the one party rule, national security, cutting down pollution and the Belt and Road infrastructure initiatives. One can also throw in "nationalizing China"s capital markets" in this list.

Further, as DB"s Jim Reid wrote overnight, Xi"s anti-graft drive has achieved an “important and irreversible’ momentum and he insisted that China has ‘zero tolerance” on corruption. On the long term, he wants to set the agenda for the country to be “a modern, socialist power” by 2050. On the economy, he says the liberalisation of both interest rate exchanges will continue as "the door China opened will not close but will open wider and wider".

Elsewhere, Xi wants China to make the "quality and efficiency" of growth a priority and deepen supply side reforms as well as insisting on the need to reduce excessive capacity and debt ratios. On housing, he said "houses are for people to live in, not for speculation" and he promised to provide more homes through a variety of different channels.

Before his formal address, Deputy central bank chief Pan also noted that he expects that the Yuan will have a more secure foundation after the congress allowing the central bank to push exchange rate market reforms.

Xi also vowed to step up ideological guidance within the party, strengthen its anti-corruption campaign, retain the government’s grip on Hong Kong and Macau, and oppose any moves towards independence in Taiwan.

Courtesy of SCMP, here are the seven major takaways from Xi"s report:

1. A new name for Xi’s political philosophy

Xi said China has formed “socialism with Chinese characteristics for a new era”. The idea will be the guiding principle for the country’s development in the coming years. The slogan was released amid speculation about how Xi’s political thought would be enshrined into the party’s constitution. There are 14 elements behind the concept, with one key idea being that the party should lead in every aspect of life in China.

Xi said the dream of national rejuvenation would only be a fantasy without the leadership of China’s Communist Party. The party should lead in all areas and the authority of the party central leadership should be respected, he said. Cadres should keep in line with the party leadership, while the party should tighten its lead on ideological work. “The party resolutely opposes all attempts that will weaken, distort or reject the leadership of the party and the implementation of socialism,” he said adding that a “principal contradiction” had emerged in Chinese society because of uneven development and the public’s demand for a better life.

2. Becoming a nation with leading, global influence by 2050

Xi laid out some ambitious targets for the next 30 years and more. The first batch should be achieved from 2020 to 2035, Xi said. China will be a top ranked innovative nation by 2035 with a large middle-income population and narrower wealth gap. China’s soft power should be boosted, Xi said. From 2035 to 2050, China should become a nation with pioneering global influence.

3. Keeping up with the “irreversible” momentum of anti-corruption campaign and maintaining the rule by law

China will set up a leading group for comprehensive rule by law. Xi repeatedly talked about the concept during his speech and vowed the party and the government would rule the country under the law and through public oversight. No one would be able to put themselves above the law, he said. He added that China must watch out for any attempt to copy Western-style democracy.

Xi also issued a warning to delegates at the Great Hall of the People on corruption, saying China insists on “zero tolerance” of graft. He said the government has been unswerving in “fighting tigers, destroying flies and hunting down foxes”, referring to the government’s sweeping anti-corruption campaign. He said a national supervision law would be formulated and shuanggui – a party disciplinary practice – would be replaced.

4. Protecting national sovereignty

China’s capability to deal with national security should be boosted as the nation will resolutely protect its sovereignty and interests. Xi said China has made a “historical breakthrough” in national defence and military reform. The navy has protected the nation’s maritime interest and its army rapidly upgraded its weaponry. For the coming years, China will continue pushing for integration between the civilian and the military sector. The People’s Liberation Army should be a “world class” force by 2050. China also opposes separatism under the guise of religion or extremist thought, Xi said.

5. Upholding central government authority over Hong Kong and Macau and opposing Taiwan independence

Xi said the “one country, two systems” principle will not be changed nor distorted in Hong Kong. The central government’s jurisdiction over the two Special Administrative Regions, which also includes Macau, should not be shaken, he said.  On Taiwan, Xi said Beijing has properly handled the changing situation facing the island and will continue to resolutely oppose any move to seek independence for Taiwan.

6. Creating a level playing field for foreign businesses

Countering foreign diplomats and business concerns that the government was blocking overseas investment, Xi said China would give equal treatment to all businesses. “The China which has opened up will not close, but will open wider and wider,” he said. China’s GDP has increased from 54 trillion yuan (US$8.2 trillion) five years ago to 80 trillion yuan and the government would aim for growth that is of higher quality and sustainable, he said.

7. Protecting the public interest

Fighting poverty was crucial for China to become a moderately prosperous society, Xi said. All provinces which are under the poverty line should climb above that threshold by 2020. He also pledged to create more jobs for college graduates and migrant workers. Addressing concerns over rising property prices, Xi said houses were for people to live in, not for speculation.

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Not enough? Then here are 6 more key highlights, this time from Goldman"s China economist, Yo Song, who writes that "overall the report sent few new signals on either near-term cyclical policy or longer term structural policy, in our view, although there are a few changes/ highlights/ new concepts to note, which we outline below."

• Change in the “principal contradiction facing Chinese society,” which is usually viewed as the guidance on the Party"s key area of focus. In the report, Xi said that “the principal contradiction facing Chinese society has evolved to be that between unbalanced and inadequate development, and the people"s ever-growing needs for a better life,” a change from previously, “the principal contradiction in our society is still between the ever-growing material and cultural needs of the people, and the backwardness of social production.” (This statement had been in place since 1981.) We view this change in “principal contradiction” as an acknowledgement of the need for more efficient and balanced economic development. Instead of purely focusing on the speed of economic growth, policy makers now also emphasize higher productivity, higher profitability, more innovation and efficient distribution, as well balanced development between urban and rural areas, and among different regions of the country. This is also consistent with the tone from policy makers in recent years (e.g., the “new norm” from Xi, and “focusing on not just the quantity but also the quality of development” in the Central Economic Working Conference).


• Xi’s thoughts on socialism with Chinese characteristics for a new era. The report came up with thoughts on socialism with Chinese characteristics for a new era, which should be effectively a summary of Xi’s thoughts and will likely be incorporated into the Party Constitution during the Congress. There are 14 fundamental principles, which have been mentioned previously in different situations, with the first being “ensuring Party leadership over all work.” On economic areas, Xi mentioned “continuing to comprehensively deepen reform and “adopting a new vision for development,” which reiterated Xi’s five development concepts (i.e., innovation, coordination, green development, opening and sharing), and reemphasized letting the market play a decisive role in resource allocation. Environmental issues are listed as a separate principle under “ensuring harmony between human and nature,” and the report mentioned plans to “implement the most rigorous ecological and environmental protection system.”


• A new two-stage development plan. In the report, Xi emphasized importance of the period up to 2020 as "the decisive stage in building a moderately prosperous society," and said that "all requirements on building a moderately prosperous society from the 16th, 17th, 18th Party Congress must be followed." Presumably, this would include the goal of doubling income by 2020 established in the 18th Party Congress, though it was not explicitly mentioned here. Then Xi proposed a two-stage development plan from 2020 to the middle of the 21st century, with the first stage from 2020–2035 to see that socialist modernization is basically realized, and the second stage from 2035 to the middle of the 21st century to develop China into a great modern socialist country. However, there are no quantitative details in the plan currently.


• Characterizing the economy as turning from a high-growth phase to a high-quality development stage. The report also mentioned building a modern economic system. Major measures for this include deepening “supply side” reforms (e.g., reiterating key structural tasks such as over-capacity cuts and de-leveraging), strengthening innovation, promoting SOE reforms with mixed ownership, developing a twin policy management framework with both monetary policy and macro-prudential tools, “significantly” loosening market access to domestic service sectors and protecting foreign enterprises’ legal rights in China.


• Other highlights included a proposal to establish a central leading working group on the comprehensive rule of law, although the exact form of the group has not yet been specified. In social areas, Xi highlighted a policy intention to widen the coverage of education, reduce income gaps between low- and high-income groups, strengthen social protection (e.g., retirement, unemployment), reduce poverty and deepen ongoing medical service reforms. He also reiterated that, “houses are for living, not for speculation” and mentioned plans to “speed up the development of a housing system with supply from multi entities, protection from multi channels and combination of rental and sale.”


• The next publication will be the list of Central Committee members on Oct 24, followed by revealing of appointments to the Politburo Standing Committee on Oct 25.

The above was summarized best by UBS" chief economist, Paul Donovan, in just one sentence: "China"s economic challenge is that the successful model of the last twenty years will not work in the next twenty years."

And while we previously gave a full preview of what to expect from the 19th Congress, here is a 2 minute summary for those pressed for time:

"China's Big Reshuffle": A Preview Of The Year's Biggest Political Event, China's 19th Party Congress

Nearly two years after the historic, and still mysterious "Shanghai Accord" which in early 2016 halted what at the time appeared to a global collapse in capital markets courtesy of what appears to have been unprecedented political, fiscal and monetary coordination between the developed world and China, on October 18 the world turns its attention to what is arguably the most important political event of the year, and the logical conclusion to the stabilization process which started with the Accord, when the Chinese Communist Party kicks off its 19th Party Congress, the political event that will determine the country’s leadership lineup and policy priorities for the next five years.

Given the emphasis on maintaining stability in the run-up to this pivotal political transition, what the Congress will mean for China’s economy, its markets, and its place in the world is why Goldman has dedicated its latest "Top of Mind" periodical to the Congress, with editor Allison Nathan asking two experts on Chinese politics how Xi Jinping—who is already widely regarded as the most powerful leader of China since Mao Zedong—can use the reshuffle to further consolidate power. And, more importantly, what he intends to do with it: pursue economic reforms more aggressively or maintain the status quo.

Specifically, five of seven seats on the Politburo Standing Committee (PSC)—the senior-most CCP leadership—are expected to turn over, as is about half of the Politburo, the 25-member decision-making body that sits just below the PSC.

To explore these issues, Goldman sat down with two Chinese political experts, David Shambaugh of the George Washington University and Willy Lam of the Chinese University of Hong Kong. Both anticipate the Congress will cement Xi Jinping’s absolute authority over the CCP and the country. And both raise the possibility that Xi could be paving the way to stay in power beyond two terms, in a break with historical norms. However, Shambaugh and Lam view Xi as a visionary, not a reformist. They believe his overriding goal is to strengthen and perpetuate CCP rule, with no tolerance for policies that could destabilize the political order. (Lam argues, for example, that Xi is determined to avoid the political self-criticism that he believes brought down the USSR.) As such, both experts see only limited prospects for economic reform. But one possibility to watch: a potential reshuffling involving the role of premier that might signal a more aggressive reform stance.

Meanwhile, Goldman"s own view is that a more consolidated power base could increase the odds of structural reforms in Xi’s second term. GS Senior China Economist MK Tang and Chief China Equity Strategist Kinger Lau argue  that such a shift looks more likely than in the recent past because growth led by fixed investment and easy monetary policy has become increasingly untenable. Although any reform strategy is most likely to remain selective and targeted, the potential result may be more sustainable, but slower, economic growth. Such a slowdown may be all but unavoidable according to Andrew Tilton, GS Chief Asia-Pacific Economist, given the debt build-up that China’s new leadership will have to address.

Tilton digs into the potential implications of the eye-popping increase in China’s debt-to-GDP ratio since the Global Financial Crisis (from 154% in 2008 to over 260% today),  concluding that while an acute crisis is unlikely in the near term, growth will eventually have to slow as policymakers rein in credit expansion.

Given the expectation that policy support will moderate at least somewhat following the Congress, Goldman then asks its strategists and economists what investors can anticipate in the months ahead, as well as other pressing questions for the assets under their coverage (e.g., will MSCI inclusion really matter to equities, and are fears of sharp CNY depreciation justifiably dead?). In short, they believe concerns that the post-Congress environment will lead to a sharp equity sell-off, widespread credit defaults, or sharp volatility in FX and rates are overdone, although as the chart below shows, that may prove to be wishful thinking.

Of course, the potential implications of the Congress extend beyond China itself. As GS Senior Commodities Strategist Hui Shan highlights, many investors are concerned that following the Congress, metals demand and prices will drop off sharply. And, on the geopolitical front, Goldman"s interviewees point out that Xi’s consolidation of power at home goes hand in hand with greater engagement abroad, particularly as the US pulls back from global affairs.

In short, there will be plenty of China developments to watch even well after the Party Congress concludes.

Interview with David Shambaugh

David Shambaugh is Gaston Sigur Professor of Asian Studies, Political Science and International Affairs, and the founding director of the China Policy Program at the George Washington University. In addition to his work in academia, he has served on the staff of the US National Security Council East Asia Bureau and the US Department of State"s Bureau of Intelligence and Research. From 2009-2015, he served on the Board of Directors of the  National Committee on US-China Relations. Shambaugh has written more than 30 books and 300 articles. Below, he argues that the 19th Party Congress is unlikely to change China’s economic or political direction.

Allison Nathan: The Chinese Communist Party (CCP) begins its 19th Party Congress on October 18. What makes this event significant?

David Shambaugh: The CCP has held a congress on average every five years since 1921, although the frequency has only become consistent in recent years. These congresses are a significant event for China’s political system, involving changes to personnel and, at times, policy. During the Congress, the Party’s General Secretary will deliver a work report covering all issue areas, which will effectively become “required reading” for 88mn party members, 45mn cadres and the public at large.

The Congress will reshuffle personnel in the three senior bodies of the CCP: the Central Committee, which has about 200 members plus 200 alternates; the Politburo, which today has 25 members; and the most senior body, the Politburo Standing Committee (PSC), which currently has 7 members. Although the upcoming congress is an interim congress— meaning that General Secretary Xi Jinping will retain his position—there will still be substantial turnover in all three bodies, with about half of the Central Committee, 10-13 of the Politburo members, and 5 PSC members expected to change.

Interim congresses are also important in that they typically involve the designation of a successor-in-waiting to become the General Secretary. However, there is no indication that Xi plans to explicitly designate a successor this year (though Chongqing Party Secretary Chen Min’er seems to be his favored candidate). Many believe there is a high probability that Xi plans to break with recent norms and stay on as General Secretary beyond the traditional 10-year term—though we will likely have to wait five years to find out. The next congress in 2022 will be very important for this reason, and also because it will occur around the 100th anniversary of the CCP’s establishment, which has enormous symbolic importance for the Party.

Allison Nathan: How are decisions about personnel and other matters made in the Standing Committee?

David Shambaugh: The General Secretary is always “first among equals.” Ever since the rule of Deng Xiaoping in the late 1970s, there has been a deliberate focus on collective leadership and decision-making by consensus at the PSC level, the Politburo level, and indeed throughout the party. As part of this process, retired senior leaders have typically played a background role in personnel decisions. However, that has all changed under Xi, who is a strongman unlike anything China has seen since Mao Zedong. On the surface, Xi engages in consultations. But in practice, the Standing Committee operates with substantial deference to him. Former president Hu Jintao’s Communist Youth League faction has been diminished significantly under Xi, and Jiang Zemin’s political influence has also waned considerably. So I see no evidence this time of retired leaders being involved in the reshuffle.

Allison Nathan: There is a lot of uncertainty about who will join the PSC. But given Xi’s apparent dominance, would any configuration suggest a meaningful shift in policy?

David Shambaugh: Although the list of potential new  PSC members has narrowed, we won’t know who has been chosen or what portfolios they will assume until the new members walk out on stage 4-5 days after the Congress opens. However, only one scenario would suggest real change, in my view: the appointment of Wang Qishan, the current director of the powerful anti-corruption campaign, as Premier. The role of Premier is traditionally very important; the Premier heads the government and typically oversees economic and all other policy areas. Because it is a government position rather than a party position, the Premier technically won’t be confirmed until the National People’s Congress in March. But we will know if Wang is a possibility for the role if he appears on stage.

The appointment of Wang Qishan as Premier would have extremely positive implications for economic reform. Wang is a powerful politician and a no-nonsense decision-maker. He is both respected and feared throughout the system. He is just the kind of Premier China needs to implement the economic reforms outlined in the CCP’s Third Plenum in 2013. These reforms have gone virtually nowhere over the last four years; economists I speak with suggest that at most 15% and perhaps even less than 10% have been implemented. One reason why reform has not moved forward is that Premier Li Keqiang does not have much political power. So a strong Premier could spur reform efforts. That said, Wang Qishan stands only a 50/50 chance to become Premier, given that he is above the typical retirement age for PSC members.

Allison Nathan: What other factors have held back reform?

David Shambaugh: One factor is that Xi himself has not put muscle behind implementing the reforms he announced,  although he took personal responsibility for them in 2013. Every time structural reforms have encountered difficulties, he has backed down. And I see little evidence that he actually wants to accomplish some of them, such as addressing the dominance of state-owned enterprises (SOEs). This is another reason why the role of Premier may not go to Wang Qishan, who would probably be more forceful in pushing through SOE restructuring and many other needed reforms.

There has also been substantial pushback from vested interests—SOEs, localities, provinces, banks and shadow banks, and others that don’t want to lose the advantages they enjoy under the current system. And finally, the anti-corruption campaign has had a very negative effect on initiative. Cadres have been “frozen” by the campaign. They are afraid that taking action could make them the subject of an investigation. The campaign has slowed over the past year, but it is difficult to overstate its impact; nearly half a million individuals have been formally investigated, including very senior party officials and military personnel. The People’s Liberation Army (PLA) has seen more than 4000 officers and over 100 generals—including four Central Military Commission members—taken down. That is unprecedented. This has become an institutionalized “rectification” program, and I believe it is set to continue, most likely under Li Zhanshu, an advisor to Xi Jinping who is widely expected to assume Wang Qishan’s role in the Congress.

Allison Nathan: Some experts think that Xi’s consolidation of power may presage and even enable a more open and reformist direction later in his term. How likely is that?

David Shambaugh: The theory that Xi has to “crack down before he opens up” has been floating around for a few years now. Xi is no doubt a visionary. He has developed his vision for China in various speeches, initiatives such as One Belt, One Road, and a 454-page book called The Governance of China. The Party Congress is apparently going to amend the constitution to include Xi’s “thought,” which is a very special term in Chinese communist lexicon that was previously reserved only for Mao Zedong. So Xi will be elevated into the pantheon of profound thinkers in Chinese communist history.

But as much as Xi Jinping is a visionary, he is not a reformist. Five years ago—just before the 18th Party Congress adjourned—I argued that this was the case, and I believe it has played out. He is very cautious. Strengthening the CCP has been his absolute priority. The upcoming congress won’t change this. In my view, what we’ve seen in the last five years is exactly what we are going to get over the next five, both politically and economically.

Economic reform will likely continue in some areas, such as deregulation and the opening up of the bond market. But these changes are likely to move slowly and incrementally. Most economists agree that China’s economic growth rates need to come down sharply, and that tough reforms are needed for the banking and financial system, the SOEs, the hukou system of household registration, and many other areas. But policymakers are unwilling to do what’s required for fear that less stimulus and lower employment will cause problems for the Party.

Allison Nathan: What might be the other policy priorities for President Xi over the next five years?

David Shambaugh: Foreign policy will remain a priority. One Belt, One Road is Xi Jinping’s signature project, but it remains largely on the drawing board. I expect that he will continue to roll it out over the next five years. More broadly, Xi deserves credit for stepping up China’s game in several areas of global governance—including everything from climate change to global economic policy to peacekeeping, anti-piracy and other transnational issues. The hope is that this positive engagement in the global arena continues. Xi’s speech at the World Economic Forum in Davos this year was very encouraging. That said, there is an enormous contradiction between his embrace of an open international economy, which benefits China, and the relatively closed internal investment climate for foreign multinationals in China.

Allison Nathan: What do you make of US actions towards China under the Trump administration so far?

David Shambaugh: Given Donald Trump’s aggressive campaign rhetoric regarding China, many people including me were quite worried about US-China relations, especially since Trump inherited already-tense relations from the Obama administration. But Trump has pivoted and tried to engage China since he assumed office. He deserves some credit for this positive turn of events. But he has also initiated many actions on the trade front, as well as sales of weapons to Taiwan, that have surely irritated the Chinese. In general, Trump has been quite unpredictable and fickle in his approach to China, which has not been helpful.

Allison Nathan: Is Trump a blessing or a curse for Xi’s ambitions for China?

David Shambaugh: Trump is an absolute blessing for Xi Jinping and his vision for China’s standing in the world. Just as China is embracing global engagement, Trump is withdrawing from it, expressing disdain for everything from the Trans-Pacific Partnership (TPP) to global commitments on climate change. This is creating a vacuum of global leadership, particularly in Asia. Nobody is better-placed to fill that vacuum than China, although I have my own doubts about China’s ability to do so.

Allison Nathan: In March 2015 you went so far as to say that “the endgame of Chinese communist rule has begun.” Do you have more or less conviction in that statement today?

David Shambaugh: I get asked this question a lot. In retrospect, that was most likely an overstatement. The CCP has demonstrated remarkable resiliency and ability to “muddle through.” But China is a Leninist political system, and scholars of such systems note that they pass through what I call a “Leninist lifecycle” of seven stages. They all get to the sixth stage when they need to adapt and open up, as the Soviet Union attempted under Gorbachev and as the Vietnamese are trying to do in limited ways today. But they are often unsuccessful in institutionalizing internal reforms and end up getting scared, recoiling and cracking down, which makes the system more brittle. That is what I was observing in 2015, and what I still observe today. In trying to rescue the Party, Xi’s tough actions have, in reality, stressed the system significantly.

That said, changes to these systems need to be observed not over weeks, months, or years, but over decades. The Soviet system began to decline in 1964 when Khrushchev was overthrown by Brezhnev. It took 27 years before it finally collapsed. If you look at China today, it appears strong and unified from the outside, but there are substantial stresses inside the system. I would not predict that these stresses lead to imminent collapse, but I certainly don’t think they contribute to the system’s longevity.

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Interview with Willy Lam

Willy Lam is an adjunct professor at the Center for China Studies and the Department of History at the Chinese University of Hong Kong. He is also a senior fellow at the Jamestown Foundation in Washington, DC. Dr. Lam has spent 40 years researching and writing on China’s politics, public administration, and reforms. He has held senior editorial positions at media organizations including the South China Morning Post and CNN’s Asia-Pacific  headquarters. Lam is the author of six books on China, including “Chinese Politics in the Era of Xi Jinping” (2015). He is the editor of the just-published “Routledge Handbook of the Chinese Communist Party.” Below, he  discusses Xi Jinping’s consolidation of power over the last five years and gives his predictions for the composition of the new Politburo Standing Committee, China’s senior-most leadership.

Allison Nathan: You have published six books on China’s leadership, most recently about Xi Jinping. How would you describe Xi and his goals?

Willy Lam: Xi Jinping is a charismatic and authoritarian leader, significantly more so than his two predecessors, Presidents Hu Jintao and Jiang Zemin. As a “princeling,” a descendant of a prominent official, Xi has always had confidence to act authoritatively and to take risks. This has likely contributed to his persona as a strongman with a Machiavellian streak.

Xi is also a nationalist. His most famous slogan, the “Chinese Dream,” conveys the idea of China rising up after one and a half centuries of Western colonialism. His goal is for China to close the development gap with the US, and to restore its rightful position in the world as the Middle Kingdom of the 21st century. This emphasis on nationalism is understandable given that the so-called Chinese economic miracle—annual GDP growth rates of 9-11%—ended several years ago, even before Xi took power. With the economic outlook less rosy than before, nationalism has become a key pillar of the party’s legitimacy.

Finally, Xi is a Maoist. He firmly believes that power and national resources should remain concentrated in the Chinese Communist Party (CCP); indeed, he views this monopoly as critical to the party’s survival. For example, the lesson Xi draws from the demise of the USSR is that criticism of party founders weakened and eventually undermined the Soviet regime. So Xi believes that for the CCP to survive into the 21st century, there should be no criticism of Maoist norms and practices.

Allison Nathan: Many observers have noted Xi’s consolidation of power. What evidence is there of this consolidation?

Willy Lam: There are many examples of Xi’s consolidation of power. In just five years, he has built his faction into the most powerful one within the CCP, which in itself is a testament to his influence. This faction consists of Xi’s former associates and protégés in Fujian and Zhejiang provinces, where he worked earlier in his career, as well as officials who have worked in his home province of Shaanxi and some of his classmates and early acquaintances. Xi is also personally  involved in policy decisions to a greater extent than many of his predecessors. For example, the CCP has had a long tradition of granting authority over economic matters to the premier. Buttoday, the ultimate arbiter of financial and economic policy is Xi himself. In addition, Xi has secured a firm grip on the army, the police, and the overall security apparatus by promoting his protégés to senior positions across these entities. Whoever controls the military in China effectively controls the party and the state, so this leaves Xi’s power unchallenged. Finally, the effectiveness of Xi’s anti-corruption campaign has both demonstrated and enhanced his power. The Central Commission for Disciplinary Inspection, the official institution in charge of this drive, has been effective at rooting out not only corruption but also political adversaries.

Allison Nathan: What outcomes of the 19th Party Congress would indicate whether Xi has consolidated his power further?

Willy Lam: There is a broad expectation that this Party Congress will cement Xi Jinping’s absolute authority. For example, it is very likely that the Congress will decide to change the CCP Constitution to include Xi Jinping  Thought as a supreme guiding philosophy for the party and state. In CCP ideology, “thought” is far superior to “theory,” and the former has previously applied to the ideas of only one leader—Mao Zedong. Formalizing Xi Jinping Thought would therefore elevate Xi to the status of Mao’s 21st-century equivalent.

Some analysts have also speculated that the Politburo Standing Committee (PSC), China’s highest ruling council, could shrink to five from seven members, which in their view would reflect further consolidation of power by Xi. I think the number of members will remain seven because Xi will still feel the need to give two or three seats to representatives of other factions. But this has no bearing on his level of influence. There is no doubt that Xi has overriding authority regarding the composition of the new leadership and that he will dominate the new committee regardless of its size.

Finally, there is considerable focus on the fortunes of two individuals. The first is Wang Qishan, the current head of the anti-corruption campaign and a close ally of Xi who is widely regarded as China"s second most powerful leader. Wang is 69 years old, one year above the age at which most PSC members retire. But some analysts believe that he could stay on, interpreting Wang’s recent high-profile meetings with foreign officials and public figures as a sign that his political fortunes are rising. However, there is a good possibility that Wang will retire, largely because his anti-corruption drive has put him at odds with non-Xi-dominated power blocs in the CCP, including the Communist Youth League faction led by Hu Jintao and the Shanghai faction led by Jiang Zemin. Letting Wang retire could therefore allow Xi to obtain more concessions from these factions. It would also help Xi manage two other issues: Wang’s own power-grabbing tendencies, and corruption allegations against him.

The second official in focus is Premier Li Keqiang, who is a member of the Communist Youth League faction I just mentioned. There is speculation that Li could lose his premiership and be relegated to the less powerful post of Chairman of the National People’s Congress, China’s parliament. I believe he will remain premier, but that Xi will continue to be far more influential in setting economic policy, given that Li’s own policymaking capacity has beensubstantially diminished under Xi’s dominant rule.

Allison Nathan: What do you expect the new composition of the Standing Committee to be?

Willy Lam: Beyond Xi and Li keeping their seats, I would group potential PSC inductees into three tiers according to their chances of joining the committee. In the first tier, I believe the most likely candidate is Li Zhanshu, Xi’s most trusted advisor. Li is already a Politburo member, and there seems to be a high  probability that he replaces Wang Qishan as the anti-corruption tsar. The next most likely candidate is Zhao Leji, who is another very close associate of Xi and the director of the Organization Department, the head of personnel within the CCP.

In the second tier, I would place Xi Jinping’s key advisor on both domestic and foreign policy, Wang Huning. Wang is a former professor from Shanghai who has served three Chinese presidents: Jiang Zemin, Hu Jintao, and now  Xi Jinping. But there is no precedent for a policy advisor advancing to the PSC, which limits his chances. Also in the second tier are two potential inductees whose odds depend on the extent to which Xi appeases other factions. One is Han Zheng, the longstanding party secretary of Shanghai who has professed allegiance to Xi Jinping but has some ties to the Shanghai faction. The other is Wang Yang, vice premier of the State Council, who represented China in the Comprehensive Economic Dialogue with the US and is a senior member of the rival Communist Youth League faction.

The third tier consists of rising stars from the so-called sixth generation, the politicians born from the late 1950s to the late 1960s. The two most talked-about names are Hu Chunhua, the party secretary of Guandong province, who is already a Politburo member but is a protégé of Hu Jintao, and Chen Min"er, the newly-promoted party secretary of Chongqing and a protégé of Xi Jinping.

Allison Nathan: Will Xi pick a successor? And is he attempting to lay the groundwork for a third term?

Willy Lam: A big question mark remains as to whether Xi wants to tap a successor anytime soon. He has long-term ambitions for China; the “Chinese Dream” is for China to become a full-fledged superpower by 2049, the centenary of the establishment of the People"s Republic. In the eyes of Xi Jinping, these long-standing goals require that he stay in power as long as possible. If Xi were committed to serving just two five-year terms like his predecessors, he would have promoted dozens of officials from the seventh generation—the cadres born in the 1970s—by now. Instead, only four members of that generation occupy senior positions today. In my opinion, Xi islikely to remain supreme leader for at least fifteen years, until the 21st Party Congress in 2027. If that is indeed the case, he is in no hurry to pick a successor.

Allison Nathan: Will Xi use his power to propel economic reform?

Willy Lam: In my view, only to a very limited extent. China"s  economic report card under Xi has been mixed. He has continued some of the economic reforms first initiated by Deng Xiaoping. And there have been achievements across various parts of the economy. China now owns more miles of highspeed railway than the rest of the world combined, for example. And it has made advancements in artificial intelligence, robotics, green technology, and so forth. But this innovation has been largely state-sponsored, and there has not been much progress with regard to the long-standing goal of restructuring the economy in terms of breaking its dependency on government investments and developing consumer spending and services.

Xi’s priority is preserving the CCP’s monopoly on power. Therefore, the party will not tolerate any mistake or adopt any policy—no matter now brilliant—that could jeopardize its control. Xi made this clear in a speech in which he compared China to the Titanic, saying that if China starts to sink, “it will go down just like that.” So he is keenly aware of avoiding any possible threat to party stability. What this means in practice is that China will remain a mixed economy, partially integrated into the international marketplace, but still with a dominant party-state apparatus in sectors such as defense, finance, insurance, oil and gas, and telecommunications. Indeed, Xi is a firm believer in state capitalism and there is no indication that he will relax control over China’s state-owned conglomerates. Having come to understand his view of the world, it is clear to me that he is more Maoist than he is reformist.

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Dealing with the debt drag: Goldman"s economist Andrew Tilton argues that the drag on growth from China’s debt buildup is not over yet

China’s debt-to-GDP ratio has risen from 154% in 2008 to over 260% today. A key challenge for China’s leadership over the next five years will be to bring this credit boom under control, likely at the expense of growth.

Breaking the mold

China’s debt buildup differs from most historical debt booms. First, it is very large—as a share of GDP, it ranks as one of the  largest debt buildups in modern history. In absolute size, it is the largest debt buildup ever. Second, it is occurring in a very large economy—China currently represents 18% of world GDP on a purchasing power parity basis and 15% on a dollar basis. Third, the overwhelming majority of China’s debt is domestic, so a “sudden stop” of external funding is not a principal concern. Instead, the worry is the distribution of funds (and ultimate credit losses) within the Chinese system. These characteristics leave no obvious historical analogy to China’s debt buildup; in our view, the closest recent one is the Japanese boom of the 1980s.

How we got here

In the depths of the global financial crisis, Chinese authorities turned to a 4tn renminbi stimulus package of infrastructure and other fiscal outlays (supported by bank credit). While this was manageable for an economy with China’s strong fiscal position, excess credit growth and growing fiscal deficits have persisted since 2009. One reason for the deteriorating credit/growth tradeoff is the fading impulse from economic liberalization and export growth following China’s entry into the World Trade Organization in 2001. The export boom did not require significant “levering up” of Chinese households or businesses; without it, policymakers tolerated ongoing credit  growth as a necessary tool to reach still-ambitious real GDP growth targets

Lessons from history

What are the likely consequences of this debt boom? Looking at the experiences of 55 countries around the world back to 1960, and a few as far back as the late 1800s, we found several characteristic outcomes for the economy and asset markets:

• Economic growth usually slows after large-economy domestic debt booms. The slowdown’s source is domestic demand weakness, particularly private consumption and investment, which benefited from easy credit in the boom period. (However, at this point China’s investment/GDP ratio is only 2pp below its all-time peak of 45%.)


• In the context of weak domestic demand, inflationary pressures tend to ease and the current account improves.


• Policy interest rates are cut to support debt repayment and economic activity.


• Equity markets tend to outperform global benchmarks in the boom phase and underperform in the bust.


• Currencies typically weaken after debt booms, but this result is less robust for large economies. One reason for the difference might be that smaller economies typically have more external debt and therefore are at greater risk of a “sudden stop” in financing with abrupt economic and asset market consequences. Another reason is the outsized importance of Japan in this analysis, as it saw significant yen appreciation in the late 1980s and early 1990s.  (Given the deflation that ensued in Japan, Chinese policymakers likely view this as a cautionary tale, and the recent management of the CNY suggests they have little interest in repeating the Japanese experience.)


• Risks of a banking or broader financial crisis are heightened, though this is far from a guaranteed outcome.

Implications for today

These themes played out in China from 2012-2015, to varying degrees. Growth slowed, inflation fell, policy rates were cut significantly in 2015, the equity market crashed that year, and the currency depreciated about 10% on a trade-weighted basis. But the economy and markets have performed much better recently—so has the whole story already played out? Unfortunately, we think not. The improvement over the past year partly reflects renewed stimulus and reacceleration of debt growth over the 2015-16 period that is only beginning to be unwound, with as yet uncertain consequences for the economy. So, while we do not expect an acute crisis nearterm, we do expect growth to eventually slow anew as policymakers continue to rein in credit expansion.