• Vietnam: Political and security risk update

  • With roughly seventeen months to go until the Vietnamese Communist Party’s next National Congress, at which the party’s next leaders will be selected and announced, personnel vetting has now begun. It will be make or break time for Party General Secretary Nguyen Phu Trong, who is seeking to implant his own nominees in positions of power ahead of his expected retirement. Yet the normally tense run-up to a National Congress has become tenser with an increasingly assertive Beijing trying to bully Vietnam in the South China Sea, which may force Hanoi to finally decide whether it is going to align with either China or the United States, rather than trying to hedge its bets between the two. At the same time, pressure on the economy from the US-China trade war and downturn in international markets, as well as domestic problems, namely cyber security and national debts, must be dealt with before they become even bigger problems. For Trong – who is rumored to have had a stroke earlier this year, and still struggling with his health today – it will be an uphill battle to maintain previous levels of stability until the next National Congress.

    Between China and the US

    Tensions in the South China Sea (SCS) are rising. In May, China announced its opposition to Vietnam’s explorations around the energy-rich Vanguard Bank of the Spratly Islands, which both Vietnam and China claim as their own territory. On July 3, the Chinese survey ship Haiyang Dizhi 8 entered the area, escorted by several Chinese coast guard vessels and maritime militia ships, which may have belonged to state-owned energy giants China National Petroleum Corp. (CNPC) and the China National Offshore Oil Corp. (CNOOC). This prompted Vietnam to publicly complain about Chinese pressure (when in the past it has typically tried to resolve the situation through backchannel discussions) and announced that it wouldn’t back down, as it had done in 2017 and 2018 when China also tried to pressure Vietnam to stop explorations for oil and gas.  A month-long standoff ensued, and in early August experts said that the Chinese ship had left the area. But, on August 13, news reports stated that it had returned. It seems that the situation will be ongoing for some time.

    This spat, the most serious in years, risks drawing Vietnam deeper into the US-China dispute. Nguyen Phu Trong, State President and Secretary General of the Vietnamese Communist Party (hereafter the “VCP” or “the Party”) is expected to visit Washington in October, a trip that could seem his pledge closer loyalty to the US, which has promised to defend Vietnamese security interests in the SCS. An official at the Vietnamese Ministry of Foreign Affairs said: “Trong’s visit to Washington will result in closer relations between Vietnam and the US, though not a comprehensive alliance. Vietnam wants to have as many friends as possible, though we do not know if China always wants to be our friend.”

    A move closer to the US would mean Vietnam moves slightly further away from China’s orbit, a direction it itself has been moving in, in fact. Vietnam has partly excluded Huawei from helping to develop its 5G network – as compared to South Korea, a staunch US ally in the region, which has allowed Huawei far more scope in its telecommunications system. Vietnam has also increased efforts to prevent goods being transported from China and through Vietnam onto the US, a way for Chinese firms to bypass US tariffs. Belief in Washington that Vietnam is turning a blind-eye to this has drawn the ire of the Trump administration.

    In late June, Trump lambasted Vietnam as “almost the single worst [trade] abuser of everybody.” A source within a state-run economics institute said: “This was most probably meant as a threat – for Vietnam to reduce its largest trade surplus with the US and to curb Chinese products being sold through Vietnam. Just as likely, the Trump administration wants Vietnam to purchase military hardware from the US, not Russia, [its traditional supplier].”

    But if Vietnam inches away from China, even slightly, it risks Beijing’s retaliation. This could come in the form of increased activity of Chinese vessels in parts of the SCS where Vietnam is exploring for oil and gas. This could frustrate petroleum firms already invested in those areas of the SCS. In the past, Vietnam has backed down and suspended oil exploration because of Chinese pressure. Or Beijing could retaliate by reducing investments (private or public, and those through the Belt and Road Initiative) into Vietnam. This wouldn’t be disastrous to the economy; China isn’t the largest investor in Vietnam, and Japan, which is, provides more investment into higher-skilled sectors of the economy.

    Water Conflict?

    This year the Mekong River dropped to its lowest level in more than a century, the result of a regional drought and the annual monsoon rains arriving two months late. But environmental problems along the Mekong, which are becoming more common each year, are also the result of increased dams being built upstream. China has built eleven mega-dams on its stretch of the Mekong (known as Lancang in Mandarin) and funded numerous more downriver, chiefly in Laos.

    Since the Mekong starts in Tibet, then passes through Myanmar, Thailand, Laos, Cambodia and Vietnam, it means Vietnam, as the most downstream country, will be the most affected by what happens upstream, and the country least able to determine the future of the river. It is a hostage to the whims of other countries, namely China. A Mekong River Commission study of current and planned hydropower developments through 2040 (the majority China-built or funded) found that will result in a 40-80 percent decline in fish stocks in the Mekong. Investors should be cautious about the business impact of this. A report on Vietnam published in July by Future Directions International found:

    • Water diverted from [the Mekong and its tributaries] irrigates more than four million hectares of [Vietnamese] farmland and hydropower plants provide almost 40 per cent of its electricity.
    • Paddy fields in [Vietnam’s Mekong Delta region] consistently produce about 25 million tonnes of rice, with at least half of that exported. Exports from the region account for about 15 per cent of the rice that is traded globally.”
    • It is expected that by 2040 as much as 97 per cent of the sediment that would normally flow along the length of the river could be trapped behind dam walls. An official report into the potential effects of upstream dam construction on Vietnamese agriculture argued that if all of the planned dams were constructed, it is conservatively estimated that annual losses to the Vietnamese fishing and agricultural sector would exceed US$760 million per year.”

    There is also a security risk. Some analysts now call the Mekong the “new South China Sea”, referring to possible future conflict between Southeast Asian nations and China over sovereignty (and ideas of shared sovereignty) over the river. China, as the upstream nation and controller of most of the dams, holds the cards. Earlier this year, maintenance work at the Jinghong Dam meant it had to jettison water, which resulted in floods in Thailand and Laos, spoiling crops. Then, in order to refill the dam, Chinese authorities took water from the Mekong River at a time when the waterway was already at its lowest in a century. An expert on this subject has stated: “China’s dam network gives it increasing leverage over downriver countries. In response to a major drought in downriver countries in 2016, China released “emergency water flows” from one of its dams. Today, it is again promising to release more water – a jarring reminder of the extent to which downstream countries now depend on China’s goodwill… China could, in short, use its dams to weaponize water.”

    As the most downstream country on the Mekong, and one of the most reliant on it, Vietnam would necessarily have to take a strong stance against China dominating this maritime area, too.  But it is potentially more explosive. Whereas conflict in the SCS is about oil-prospecting and nationalism, conflict on the Mekong River would be about the most basic and necessary aspects of Vietnamese economy and society; fishing and farming.

    Less Safe As More Go Online

    Cyber-security firm Kaspersky reports that Vietnam is the second most cyber-attacked country in the world, after Russia, with around 800,000 malicious code infections per day measured in January 2019. In the first six months of this year, there were 19 million online, and 99 million offline, attacks. This comes as the number of Internet users in Vietnam continues to rise (it saw a 16 percent rise social media usage in 2018, while smartphone usage is now 72 percent, and laptop/desktop usage 43 percent of the adult population) and with steady economic growth. Sources say they expect the problem to get worse before it gets better. Pro-democracy voices in society question whether the government’s cure is worse than the disease. The Cybersecurity Law, which came into force on January 1, increases the state’s ability to curb free-speech online. However, a government source said: “We are simply not spending enough on manpower and the infrastructure to curb cybercrime – which should be a major demand of foreign investors when liaising with government authorities.”

    Possible Succession Crisis Within Communist Party

    The VCP began preparations this year for selecting the next set of Central Committee cadre for the next National Congress, which will take place in early 2021. This means that political jostling for the top posts within the VCP has also begun. Sources assert that preparations for the 2021 are more complicated than in the past, as questions

    Nguyen Phu Trong, who will have served two-years as VCP Secretary-General by 2021, so according to the Party’s unwritten code and tradition he should step down. Yet, in 2018, the VCP made a rare move of making Trong the State President, following the death of the incumbent. Not since Ho Chi Minh has one politician held both positions, which makes Trong head of the party and also head of state. Since the 1980s, there has been an agreement to appoint different officials to the so-called four pillars – VCP Secretary-General, State President, Prime Minister and head of the National Assembly – in order to deter consolidation of power.

    Will Trong remain as State President, but hand over power as Party Secretary-General? Who will become the next Party chief? Trong’s natural successors are either too old (so would require the VCP to change its law on officials retiring at 65) or do not have enough experience in government offices (so would require another alteration to the Party’s unwritten rules). It is shaping up to be one of the most complex and reformist National Congresses in recent history, but this brings risks. One academic has warned of a “succession crisis” and stated that “the longer the succession process lingers, the more likely the VCP will jump into a state of instability, at a time that requires them to be much more stable and focused.”

    Investors should be concerned if problems with political succession spill outside the VCP. In order to maintain his clique’s supremacy in the VCP, Trong and his most apparent heir, anti-corruption czar Tran Quoc Vuong, might expand the anti-graft campaign to focus more on political rivals. This may disrupt provincial politics. It could also see political retribution against executives from the state-owned enterprises that haven’t been proven corrupt, but as potentially a rival power-network to Trong’s. Or if a sizeable contingent of VCP officials tries to push Trong and his allies out of office, it could unravel into intra-party conflict. There is only a small chance that this could lead to unrest in the country.