CHINA INTERNATIONAL STUDIES·January/February 2011
Devastated by the international financial crisis, most SCO member states were suffering from economic difficulties with trade volume reduced notably, both bilaterally and multilaterally. In the meantime, the member states had been stepping up their efforts in tackling the crisis, which to some degree helped reduce the negative impacts of the crisis with gratifying results being made in the cooperation of various fields. The China-Russia “dual engine” mechanism has been working well and other member states’ strategic dependence on the SCO has been increased markedly. The SCO, in general, enjoys a good momentum of development.
I. The Impact of the Financial Crisis
1. Many member states confronted increasing financial difficulties with their economies suffering from a serious setback
Though not very seriously affected by the Crisis, China still suffered from a sharp decrease in terms of order from overseas and the foreign-oriented enterprises suffered serious losses. “Hundreds of factories in the manufacturing centers of the South are closed with millions of people losing their jobs”. Foreign direct investment, which had been falling for 8 months, was reduced by 17.8% annually. The total foreign trade volume, including import and export between January and October was $1,755.49 billion, down by 19.9% over the same period of the previous year. The export was down by 20.5% and import down by 19%, which was the biggest fall since the 1980s when statistics were available. At the end of the year, some indicators were going down with a smaller margin and the employment rate moved upward. However, the foundation for a general economic recovery was not yet stabilized and there were still some deep-rooted conflicts and potential problems.
Hit by both the financial crisis and a sharp fall in oil price, Russia went into the most serious economic recession of the past ten years. The economic overheating pushed by the “virtual revitalization” led to a big blow to the real economy by the crisis. In the first half of the year, Russia” s export of crude oil was reduced by 52.25% on a year-on-year basis, natural gas down by 50.8%, investment in fixed assets down by 18.2%, investment in the construction sector down by 19.3%, industrial output down by 14.8% and the output of the processing industry down by 23.1%. The total unemployment was around 7 million, the highest over the past 10 years. The GDP of the first 10 months was down by 9.6%, which had never been seen over the past 10 years. “With foreign capital fleeing, energy revenue falling with a great margin and capital flowing out, the West said Russia was once again on the brink of collapse.” Against this backdrop, the IMF, in October, downgraded Russia’s annual economic growth expectancy to -7.5%. Mr. Kudrin, Russia’s Deputy Prime Minister and Finance Minister said frankly that Russia’s financial crisis would not reach the peak until late 2009 and early 2010 and it would take 3 to 4 years for the country to come out of the crisis.”
Kazakhstan sank into a deep economic crisis. The country’s total foreign debt reached $106.773 billion at the end of June, up by 10% over the same period of the previous year. In the first 9 volume down by 40.7%, the net loss of the banking sector was $19.3 billion dollars, and foreign reserve revenue was down by 49%. By October, the bad assets of the banking sector had totaled about $23.9 billion, accounting for 35.9% of the total loans. The exchange rate between USD and Tenge soared by 23.14%.
The falling demand in the international market and a drop in price of raw materials gave rise to a fall in the export of Uzbekistan’s traditional export products such as cotton, ferrous and non-ferrous metals together with a sharp decline in revenue. In the first half of the year, the growth rate of foreign trade volume was down from 31% in 2007 to 5% and the inflation went up to 3.6%. By November, the Som has depreciated by 8.22% against the USD.
Kyrgyzstan’s major economic indicators went down in the first half of the year. In the first five months, the GDP was down by 0.9% on an annual basis, which represented a first GDP decline in recent years. The total industrial output fell by 20.2%, the export fell by 15.3% and the import fell by 18.4%. And the total foreign debt was $2.349 billion.
As a result of the economic contraction of Russia and Kazakhstan as well as a sharp decline in labor demand, a total of 15000 workers who had been working in Russia and Kazakhstan (accounting for 10% of Kyrgyzstan’s total labor force in Russia and Kazakhstan) returned to Kyrgyzstan, which led to a 40% drop in overseas remittance. The country’s Minister of Economic Development and Trade, Akylbek Japarov, said frankly, “The adverse impact of the global financial crisis on Kyrgyzstan is emerging and the growth of the country’s major industrial sectors is slowing down.” In an effort to respond to the financial crisis, Kyrgyzstan had to think hard on how to make use of the closure of Manas US military base by dealing with both the USA and Russia for the purpose of maximizing economic gains.
As the poorest Central Asian country, Tajikistan went into a lot of difficulties as a result of the financial crisis and natural disasters. Because of a long-term default on the debt owned to Uzbekistan’s natural gas, Tajikistan’s supply of natural gas from Uzbekistan was reduced by half as of February, which aggravated the country’s economic difficulty. Tajikistan’s output of the light industry was reduced by 11.6%, the output of the food processing industry went down by 14.8%, the output of the chemical industry and petrochemical industry went down by 69.9%, the production of synthetic materials was reduced by 21.4%, the output in the mechanical and metallurgy industries was down by 9.8%. The production of 130 out of over 800 enterprises was completely suspended. And most enterprises reduced production and only 40-50% of the production forces were in operation. The unemployment rate was going up. In the meantime, when the demand in the international raw material market was sluggish and the prices were going down, there had been a sharp drop in aluminum ingot and cotton, the pillar products for the country’s export (accounting for 70% of the country’s total GDP).The export volume was reduced by 43% with the income reduced by $460 million. The industrial output went down by 13.3% on an annual basis and the GDP went up by only 2.8%, down by 3% over the same period of the previous year. As a result of a contraction in the overseas labor quota of Russia and Kazakhstan, in the first nine months of the year, Tajikistan suffered from a 35% reduction in revenue from overseas labor service, which accounts for 40% of the country’s total GDP. However, gasoline, natural gas and electricity on the domestic market had gone up by 61.6%, 89.5% and 56.3% respectively. The Asian Development Bank predicted that the annual inflation rate of Tajikistan would be 12.5%. By October 1st, the total foreign debt of Tajikistan went up to $1.524 billion, accounting for 32.6% of the total GDP. By the end of November, the local currency Somoni had depreciated by 26.1% against the USD, being No.2 among the former Soviet Union countries.
2. There was a drop in bilateral trade volume among member states
Due to the close geopolitical and geo-economic relations, the economic relations among SCO member states have all along been developing rapidly and the bilateral trade has been enjoying a particularly strong momentum. Affected by the financial crisis, the countries suffered from an economic slowdown with a sharp reduction in foreign demand. Economic relations among SCO member states had also been affected with a remarkable fall in bilateral trade. The bilateral trade volume between China and Russia for the first 10 months reached only $31.492 billion, down by 34.4% over the same period of the previous year. Russia’s export to China was $17.722 billion, down by 16.3% and its import from China was $13.7698 billion, down by 48.7%. The trade volume between China and Kazakhstan for the first 9 months was only $6.814 billion, down by 22% over the same period of the previous year. Kazakhstan’s export to China was $3.968 billion, down by 29.4% and its import from China was $2.846 billion, down by 9%.The bilateral trade volume between China and Kyrgyzstan for the first quarter was only $241 million, down by 26.4%. Kyrgyzstan’s export to Russia was $26.9 million, down by 48.5% and its import from Russia was $214 million, down by 22.2%. In the first three quarters, the trade volume between Russia and Tajikistan was only $600 million, down by 25-28%. Kyrgyzstan’s trade volume in the first half of the year with other member states was down by 25%. Its trade volume with China, Russia and Kazakhstan, Uzbekistan and Tajikistan went down by 10%, 30%, 5% and 40% respectively.
II. New Progress in Cooperation among SCO Member States
The financial crisis, while exerting a serious impact on the economy of SCO member states, had increased member states’ sense of urgency and efforts in helping one another and going through the difficulties in good concert. Since the outbreak of the financial crisis, new important headway has been made in the cooperation among member states in such fields as finance and economy.
1. Tackling the financial crisis in a proactive way
In response to the financial crisis, the Expert Working Group on Creation of SCO Development Fund met in Beijing in early 2009 when the experts of the parties exchanged opinions over the issues of formation order and running principles of the SCO Development Fund. China actively supported the SCO Development Fund initiative and was ready to donate the start-up fund for the Fund when it was set up. At the regular meeting of the Council of Heads of Member States of the Shanghai Cooperation Organization (SCO CHS) took place in June 2009 in Yekaterinburg, which continued to put it high on its agenda to tackle the economic crisis, signed or issued such important documents as the Yekaterinburg Declaration and Joint Communiqué. All the parties concerned agreed to, by following the “Shanghai Spirit” and on the basis of the Treaty on Long-term Good-neighborliness, Friendship and Cooperation, deepen cooperation in a comprehensive way in various fields, uphold the common interests of member states, security and stability in the region, and continuously increase the confidence and cohesiveness in jointly tackling the financial crisis. The eighth prime ministers” meeting of the SCO held in Beijing in October, when putting it high on the agenda to tackle the international financial crisis as well as regional and global challenges, emphasized the importance of enhancing cooperation within the SCO framework in such fields of economy and culture, and further pushing for the healthy and stable development of the Organization.
2. Achieving substantial development in financial cooperation
The Chinese economy took the lead in stabilizing and turning for the better with sufficient foreign exchange reserve, which provided favorable conditions for SCO member states to jointly go through the difficulties. After providing Russia and Kazakhstan with loans standing at $25 billion and $10 billion respectively in return for oil, China decided to lend $1.5 billion to a project of the copper industry company of Kazakhstan; provide Tajikistan a loan of $1 billion; provide Kyrgyzstan a $200 million preferential loan and RMB 80 million aid given gratis. In particular, the Chinese Government decided to provide a total of $10 billion credit support to the bilateral and multilateral economic and technological cooperation projects within the SCO framework, which greatly facilitates the member states” efforts to get out the crisis. Russia invested in Kazakhstan and Tajikistan by $3 billion and $80 million respectively. And within the framework of its $2 billion preferential loan, Russia provided Kyrgyzstan a 40-year preferential loan of $300 million in advance and released Kyrgyzstan a total debt of $193 million on the condition that Russia got 48% of the equity of Дастан”, a defense industry company in Kyrgyzstan as well as the ownership of the premise of Russia’s Trade Representative Office in Bishkek. In the meantime, the SCO Business Council and the SCO Interbank Association agreed to provide a uniform support platform to the investment projects in the SCO framework, including financing nearly 35 projects by up to a total of $6 billion. The active financial support given to the member states by the SCO as well as China and Russia helped stabilize and alleviate the severe financial and economic situation of the Central Asian countries.
Meanwhile, economic cooperation among SCO member states enjoys a good momentum. Though the SCO economic and trade cooperation was adversely affected by the global financial crisis, the SCO, by virtue of China’s abundant funds and big market demand as well as the natural resources of Russia and the Central Asian countries such as energy, farm produce (grains, oil-bearing crops and cotton), mineral resources (gold, uranium, copper and tungsten), still enjoys strong momentum and great potential in terms of bilateral and multilateral economic and trade cooperation. After the China-Kyrgyzstan-Uzbekistan railway and the China-Kyrgyzstan-Uzbekistan highway projects were establi- shed, the China-Central Asia natural gas pipeline was linked up connecting China, Turkmenistan, Kazakhstan and Uzbekistan, which brought about a significant step change in the SCO cooperation.
3. Greatly increasing political mutual trust
The SCO has experienced the fluctuating international situation and withstood the tests of the global financial crisis. The political mutual trust among member states has been greatly improved and the Organization’s cohesion has been enhanced. In 2009, confronted with more new problems and new threats, the SCO member states increased their sense of common action and self-enhancement with a greater determination for cooperation of mutual benefit. The member states supported one another on questions of core interest in relation to sovereignty, security and development. The successful convocation of the Summit in Yekaterinburg consolidated the common position of the member states in addressing global and regional issues and helped define the principle of further increasing political mutual trust, deepening pragmatic cooperation and promoting the healthy and stable development of the Organization. Against a backdrop of great complexities in international political and economic situations, the Summit played a crucial role in consolidating consensus, boosting confidence and showing the direction. It has important implications in terms of implementing the Treaty on Long-term Good-neighborliness, Friendship and Cooperation, promoting the continuous development of the SCO and working for a harmonious region featuring lasting peace and common prosperity. Immediately following the July 5 incident in Urumqi in China’s Xinjiang Uyghur Autonomous Region, the SCO issued a statement to give its solidarity with the Chinese Government in taking legal actions to crack down on violence with a view to maintaining Xinjiang’s stability, a good indication of the high level mutual trust among member states with regard to issues of mutual core interest.
4. Steadily pushing forward cooperation in security
The year 2009 witnessed a reemergence of the three evil forces together with a rise in drug trafficking, cross-border organized crime and frequent major incidents of public health and security. In particular, information security posed a new threat to the region’s security and stability. Thus, member states increased the awareness of and capability of jointly fighting against terrorism and narcotics by coordinating with one another to increase cooperation in security. Following the successful command staff joint counter-terrorism exercise of the SCO member states, “Norak-Anti-Terror-2009”, the joint military drill by China and Russia, dubbed “Peace Mission-2009”, has also reached the expected objectives. “The two countries drew upon each other’s experience in quelling terrorists in North Caucasus and fighting against secessionist forces in Xinjiang Uyghur Autonomous Region.” In the meantime, the Meeting of Defence Ministers SCO Members States was held with productive results and the Plan for the Cooperation of Defense Ministries of SCO Member States for 2010-2011 was approved. The Joint Communiqué on the Meeting of Defence Ministers of SCO Members States was released, which defined the major programs for the cooperation among defence ministries of the member states with regard to increasing consultation on defence and security, preparations for joint anti-terror military exercises, exchange of experience on fight against terrorism, peace keeping, and the development of armed forces. The Summit approved and signed the SCO Counter-Terrorism Convention, which had been prepared over a long time and the SCO Regulations on Political Diplomatic Measures and Mechanisms of Response to Events Jeopardizing Regional Peace, Security and Stability as well as the Agreement among the Governments of the SCO Member States on Cooperation in the Field of Ensuring International Information Security. The approved documents helped further improve the SCO system for security cooperation demonstrating to the international community the determination and confidence of member states in cracking down on the Three Forces and cross-border crimes. On the basis of the successful cooperation in ensuring security of the Beijing Olympic Games, the SCO held in October the first Meeting of Ministers of Internal Affairs and Public Security as well as the meeting of heads of counter narcotics agencies of the SCO member states when the security cooperation for the 2010 Shanghai Expo was listed as an important part of the forthcoming multilateral security cooperation.
5. Working together to address the Afghanistan and Pakistan issues
The turbulent situation in Afghanistan and Pakistan has become a big concern of the SCO and the international community. In March 2009, the first Special Conference on Afghanistan was convened under the auspices of the SCO. For the first time, high-level representative from international organizations and Western countries were invited to a meeting as such, including those from the United Nations (Secretary General Ban Ki-moon), North-Atlantic Treaty Organization, European Union, Organization on Security and Cooperation in Europe, the CIS and the United States. Delegates had an in-depth discussion on such major issues as how to fight against terrorism, drug trafficking, organized crime and how to realize peace and stability in Afghanistan and promote the country’s economic reconstruction. The Conference highlighted SCO’s sincerity and determination to join the international community to address the Afghanistan issue. The Conference issued the Statement and Plan of Action of the Shanghai Cooperation Organization Member States and Islamic Republic of Afghanistan on combating terrorism, illicit drug trafficking and organized crime as well as the Declaration of the special Conference on Afghanistan convened under the auspices of the Shanghai Cooperation Organization. In an effort to push the situation in Afghanistan and Pakistan to develop in a direction that is conducive to regional stability, the regular meeting of the Council of Heads of Member States of the Shanghai Cooperation Organization (SCO CHS) in June 2009 in Yekaterinburg once gain listed the Afghanistan and Pakistan issues as the major items on the agenda. SCO member states have been making their respective efforts to support the international community in restoring stability and promoting the reconstruction in Afghanistan. In spite of deteriorating social security in the Afghanistan and Pakistan, Chinese companies play an active part in helping local government with their economic reconstruction. Russian and Central Asian countries gave NATO troops active support in their shipment of humanitarian goods to Afghanistan. In the first half of 2009 alone, the USA used the “air corridor “of the SCO member states to ship over 4000 container of nonmilitary goods to Afghanistan. General David H. Petraeus, U.S. Central Com- mander admitted that “the USA has to fulfill the task of moving the military actions to Afghanistan’s North Western provinces and Pakistan’s Baluchistan. Without the north bridges, the mission would be impossible.
6. Steadily carrying out cooperation in other fields
In 2009, member states successfully signed the agreement on cooperation among custom departments and cooperation in such fields as energy, transportation, telecommunication, agriculture, science and technology and culture have been making headway. In August, the first SCO forum on TV cooperation was held which put cooperation by member states in culture and information under spotlight. Participants at the Forum hoped to increase exchanges and cooperation in the culture industry covering TV, radio, internet, information, and documentary and feature films. In September, China’s Russian TV channel took the lead in successfully landing in Kyrgyzstan and “landing” projects with other member states are now under active discussion. In addition, the SCO dialogue partner mechanism has been launched and up till now the status of SCO dialogue partner has been granted to the Democratic Socialist Republic of Sri Lanka and the Republic of Belarus. The Special Expert Group was instructed to continue its work on the draft document on the order of admitting new members. This is a good indication of SCO’s international image featuring peace, openness, transparency and cooperation and the cooperation between the SCO and the international community is further expanded.
III. To Continue the Strong Development Momentum
Though the real economies and economic and trade cooperation of the SCO member states were greatly affected by the global financial crisis, the real fact that member states have mutually com- plementary advantages, mutual interdependence and all win cooperation of mutual benefits have not been changed and they have stronger aspirations for deepening cooperation in a variety of fields. When responding to the crisis, the SCO is enjoying new greater opportunities for further development.
Firstly, SCO is increasingly important to China and Russia strategically.
The financial crisis defused temporarily the tension between the East and the West, but the USA and the West’s established policy of checking China’s and Russia’s development will not be changed. The SCO is the only regional organization on which China can exert a great influence and from which China can benefit a lot. The Organization is of great strategic significance in offsetting the efforts by the USA and the West to contain China’s peaceful development and it plays an important role that cannot be replaced in expanding China’s foreign economic and trade cooperation as well as ensuring energy and resources security. The SCO is the most vigorous among the many regional organizations in which Russia participates and it is Russia’s strategic pillar in preventing itself from being squeezed by the USA and the West. Especially when the influence of the Commonwealth of Independent States (CIS) and the Collective Security Treaty Organization (CSTO), which are dominated by Russia, is becoming increasingly weaker, the SCO is the only organization by which Russia can express its aspirations and concerns with a strong voice. “The SCO can help put Russia in a better position in having dialogues with the USA”. And it can also help “Russia regains its influence on its former territories and the Central Asia which the USA is competing for.” Russia hopes to, in the SCO framework, use China’s influence to crack down on secessionist and religious extremist forces which aim to destroy political stability, and prevent the infiltration activities by the USA and the West in this region as well as bring about more vigor into the region’s economic cooperation. Being unable to resist the USA and the West’s efforts to tempt the Central Asian countries, Russia can rely on the influence of the SCO and China to “stop some small countries from going to the extreme.” In the foreseeable future, the SCO is still the major strategic support for China and Russia for their peaceful development endeavors.
Secondly, the SCO dual-engine mechanism is in full swing.
China’s efforts to push forward SCO cooperation across a variety of fields is intended to promote the good neighborly relations among member states and achieve common develop- ment, security and stability instead of seeking for domination of the SCO and Central Asian affairs. Though China and Russia have some “duplication” or “conflicts” over some economic and trade cooperation projects with Central Asian countries, Russia still regards China as a “partner in abolishing the single polar world order” and a “major regional partner in developing various Euro-Asia organizations”. Furthermore, China takes a fair and reasonable approach in project bidding. In relation to some construction projects such as the hydra power station in Tajikistan, in which Russia had got involved earlier, China even withdrew voluntarily and gave way to Russia. Therefore, though the two countries have a certain degree of “competition” with regard to economic and trade cooperation with Central Asian member states, the competition is going on in a fair and positive manner. This kind of cooperation is only a “small episode” in the two countries’ strategic partnership instead of the “main melody” in their cooperation of mutual benefit, let alone a conflict of interests between two competitors. This can be well addressed though friendly consultation. Based on this consensus, China and Russia cooperate and coordinate with each other in good concert effectively ensuring the good operation of SCO’s Dual Engine mechanism. “It can be said that the SCO is an organization that ensures regional stability and development of Central Asia with the participation of China and Russia, two major regional powers.”
Thirdly, the seriously unfavorable external environment continuously increases Russia’s enthusiasm for the SCO.
The South Ossetia conflict brought Russia into a difficult situation diplomatically. The West feels a crisis of confidence towards Russia and there is an increased “centrifugal tendency” among Russia’s traditional allies”.
Shortly after Georgia left the CIS, Uzbekistan also put an end to its activities in the Euro-Asian Economic Community and refused to sign the agreement on establishing the rapid response forces. As Russia took too much into consideration of the interests of Uzbekistan in its hydra power station project, Tajikistan’s President Emomali Rakhmon refused to attend the Summit Meetings of the Collective Security Treaty Organization (CSTO) and the Euro-Asian Economic Community hosted by Russia in February of 2009, which resulted in an unprecedented crisis in the Russia-dominated regional organizations. In front of these serious challenges, Russia is increasingly dependent on the “supporting” role of the SCO for realizing its strategic interests as “China would not compete with Russia upfront, but rater is most likely to work together with Russia to exploit resources in Central Asia.” To this end, Russia had been active in fulfilling its responsibility as the presidency of the SCO summit meeting putting in full efforts in preparing the summit in Yekaterinburg and the special Conference on Afghanistan, which produced positive results.
Fourthly, member states in Central Asia are even more dependent on the CIS strategically.
The political elite in Central Asia hold the view that as China and Russia are major nuclear powers and permanent members of the UN Security Council, links and cooperation with these two countries can help guarantee their own security to the largest degree. By virtue of the influence of the SCO, “Kazakhstan, Uzbekistan, Kyrgyzstan and Tajikistan could become equal partners of the world major powers” and “the local rulers” self respect can be satisfied.” Further more, after the storms of the “color revolution”, the western-style democratic infiltration has not until now stopped. “The USA still continues to make use of its presence in Central Asia to impose pressure on the local governments”. The Central Asian countries, therefore, are more motivated to stay together with the SCO which does not interfere with their internal affairs. From this perspective, the SCO “is a practical and reliable means for Central Asian countries to prevent the color revolution from happening in their own territories. SCO is almost the only means.” More importantly, the Central Asian member states can use the SCO to balance their relations with Russian and the United States. Against a backdrop that the competition between Russia and the United States is aggravating and the Central Asian countries cannot express their “real positions and voices” as they wish in the organizations led by Russia, Central Asian member states prefer to count on the SCO as a platform to express their positions in a “neutral” or “mild” way over some sensitive issues, thus avoiding offending Russia or any party from the West. In the wake of the South Ossetia conflict, the SCO, in line with the real situation, released a statement on the incident, which while giving its support to Russia to continue a positive role in the region, did not represent a confrontation with the international community. A move as such substantially reduced the pressure from Russia on Central Asian countries and avoided the awkward situation faced by Belarus and other CIS countries of how to express their positions on their own. Actually, as early as “in early 2001, it was noted that most of the leaders in Central Asian countries had got tired of Russia. Instinctively, they hope to find a way to reduce the role of Moscow to the minimum.” The SCO has just provided Central Asian members states an opportune “haven” which can help prevent direct conflicts with both Russia and the USA. They can make use of the “Group Effect” as produced by the SCO to even out Russia’s influence on the individual country and the traditional pressure from Moscow can be reduced. Especially in the wake of the Russia-Georgia Conflicts, “leaders of the former Soviet Republics take a more cautious approach to maintain good relations with the Kremlin when developing relations with the West, “as they are worried that, if otherwise, Moscow could find a pretext to impose trade sanctions at any time.” In such a situation, recent years have seen “words of passion on SCO from Central Asian countries, particularly Kyrgyzstan and Tajikistan, instead from Russia or China”. These countries, being sometimes indifferent to some meetings organized by the CIS, are active in participating in the SCO activities. After it took over the 2010 Presidency of Council of Heads of Member States of the Shanghai Cooperation Organi- zation, Uzbekistan had been actively planning the development of the SCO by proposing a series of important initiatives. Kyrgyzstan was also very excited at being the president of the regular session of the Council of Prime Ministers of the Shanghai Cooperation Organization member countries and it had set up special agen- cies to prepare the meeting.
In sum, the SCO is now in the process of being built and developed on a continuous basis. Though still having some unsatisfactory elements, the Organization made its concept of “peace and cooperation” penetrate into the minds of the people, which has become a guiding principle by which the member states build on their respective strengths and conduct win-win cooperation of mutual benefits. This way, the Organization enjoys greater vigor, increased cohesion and better prospect.
Zhao Mingwen, Senior Research Fellow at China Institute of International Studies.
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