In Other News – April 24, 2020

Oil prices in the U.S. turned negative this week, signaling the depth of the demand shock caused by the Great Lockdown. While prices ticked up again yesterday, partly on news that raised the risk of U.S.-Iran conflict in the Middle East (see below), there remains a real possibility that prices will go negative again as production gradually adjusts downward to levels that better reflect the current state of global oil demand. The OPEC+ deal to cut nearly 10 million barrels per day of production to stem the dramatic drop in prices was not nearly enough to offset demand losses, which have been estimated at up to around 30 million barrels a day. The collapse of oil prices had already led to thousands of layoffs in the U.S. oil patch, where production is expected to fall sharply as drilling slows. It is also pushing oil-dependent governments into deep financial distress and threatening governments’ ability to provide basic services, like salaries for government employees. This will be an added source of instability in countries that are already struggling, like Iraq and Venezuela.

Rumors are circulating about the health of North Korean leader Kim Jong Un following conflicting reports and a period of conspicuous absence from state-run media, where he has been a near-constant fixture for several years. Speculation about how a transfer of power would proceed – and the possibility of his death leaving a power vacuum – is creating a profound sense of unease. There is good reason to fear the outcome of a chaotic power struggle in a resource-strapped rogue state, with particular concerns about who would take control over its nuclear weapons and the likelihood of a humanitarian crisis and flood of impoverished, refugees into China, South Korea, and Japan. However, should the North Korean regime collapse, China and South Korea would almost certainly step in to try to contain the damage as they are the countries that would bear the brunt of the impact, but it could still spin out of control. Even if this health crisis passes quickly, it highlights the very real risks of a future succession crisis in North Korea and argues for thorough contingency planning.

Iranian harassment of U.S. Navy ships in the Persian Gulf last week has triggered an exchange of threats between the two countries and renewed fears of conflict in the region. The U.S. Navy said last week that IRGC ships had engaged in aggressive and dangerous provocations at sea, prompting President Trump to announce via twitter that he had ordered the U.S. Navy to “shoot down and destroy any and all Iranian gunboats if they harass our ships at sea”. IRGC General Hossein Salami responded by saying Iranian forces will meet any U.S. action with a counteraction. A recent ratcheting up of tensions between the U.S. and Iran has at times seemed to verge on open conflict, something both sides appear to want to avoid. While their rhetoric does not seem to be leading towards a near-term diplomatic resolution, we suspect that the Iranians will take the U.S. threat at face value, which will hopefully put a stop to aggressive encounters, at least in the near term. However, there remains a risk that the IRGC will act in contravention of official policy and cross a red line that forces a U.S. response.

U.S. Secretary of State Mike Pompeo has accused China of exploiting the Covid-19 pandemic, ramping up bullying of its neighbors in the South China Sea while the rest of the world is distracted by coronavirus-fighting efforts. China dispatched a vessel last week to intimidate a Malaysian oil drilling ship in response to Malaysian state-owned Petronas’ exploration of a disputed offshore area in the South China Sea that is also claimed by Vietnam and China. This triggered a response from the U.S., which sent at least two warships within 50 nautical miles of the Malaysian ship. China’s claims to the South China Sea far exceed the area recognized as its exclusive economic zone, though China has rejected an international ruling on the matter. China appears to be escalating pressure tactics in the South China Sea, with ramped-up military exercises and harassment of neighbor countries’ commercial vessels and an announcement last weekend that it had formally established two new South China Sea administrative districts, Xisha and Nansha, that include dozens of contested islands and reefs in the Paracel Islands archipelago. Earlier this month, the U.S. publicly denounced the sinking of a Vietnamese fishing vessel by a Chinese patrol ship. China has a vested interest in maintaining stability in the region, but as the number of incidents rises, so does the risk of a miscalculation that erupts into violent confrontation.

In Other News – April 17, 2020

The International Monetary Fund forecast in its April 2020 World Economic Outlook that global GDP will shrink by 3% this year, the worst contraction since the Great Depression. Dubbing this period the “Great Lockdown”, the IMF said this downturn will be far more serious than the one that followed the 2008 financial crisis, which resulted in a 0.1% contraction in 2009. It expects growth to recover somewhat in 2021, but not to pre-pandemic levels. The long-term implications – not just economic, but also in terms of the global order – are impossible to predict with certainty. But we would note that crises and conflicts already underway can shift in surprising ways. Economic pressure catalyzes political change, brings some hostilities to an end and others to a boiling point, and resets the global gameboard, knocking some powers down a peg or two and pushing others into a higher class. Big changes seldom proceed smoothly, and once people begin to emerge from isolation and quarantine, we should expect a period of uncertainty on almost all fronts in the near-to-medium term.

Iranian naval vessels harassed U.S. warships conducting training exercises in the Persian Gulf yesterday, the latest provocation in a months-long escalation of U.S.-Iran tensions that has included numerous rocket attacks and the U.S. killing of Iranian General Qassem Soleimani.U.S. officials say that 11 small Iranian Revolutionary Guard Corps vessels circled U.S. ships and crossed their bows and sterns at dangerously close range, in some cases as close as just 10 yards away. The U.S. has signaled in recent months that it is open to negotiations with Tehran, but that it would not allow Iran to have operational nuclear weapons, and that the ball is in Iran’s court to take the next step in pushing talks forward. Iran is suffering from both a financial and a public health crisis – under the weight of crippling U.S. sanctions and a crisis-level coronavirus outbreak – but says it will not negotiate and has accused the U.S. of exacerbating its health crisis by refusing to relax sanctions on materials needed to combat the virus. Iran does not appear as yet to see the U.S.’s offer as an enticing one, and we expect to see low-level provocations – those designed to stop just short of any red lines – to continue.

Saudi Arabia declared a unilateral two-week cease-fire in Yemen, where it and allies have been battling Houthi rebels since 2015. The kingdom cited fears of the spread of coronavirus in Yemen, whose health care system has been decimated by the war and whose population suffers from high rates of hunger and disease, including outbreaks of cholera, diphtheria, and measles. Saudi Arabia says the move was intended to bolster efforts to advance a United Nations-brokered peace process that has thus far failed to end hostilities, and after the announcement, said it would give the UN $500 million for humanitarian aid to Yemen and another $25 million to fund efforts to fight the virus. But experts note that the kingdom has also been hard-hit by the virus, which has infected several members of the royal family, and is also facing a prolonged period of severely depressed oil prices that will put it under financial strain. Just before the Saudi announcement, a senior Houthi official tweeted out a plan to end the war, which may have been a cynical attempt to seize the public relations upper hand but nonetheless bodes well for at least a temporary cessation of hostilities on both sides. United Nations envoy to Yemen Martin Griffiths appears optimistic about the prospect of a formal agreement. Yemen is often described as the world’s worst man-made humanitarian crisis. It would be welcome news from both a humanitarian and a regional stability standpoint if the war were to come to a close, or at least an uneasy peace.

Brazilian President Jair Bolsonaro faces an uncertain political future owing to a contracting economy, clashes with his health minister over coronavirus, and eroding protections for the Amazon rainforest and its indigenous inhabitants. Bolsonaro has been skeptical of the threat of Covid-19 and an outspoken critic of lockdown measures to combat the spread of the coronavirus, which are threatening Brazil’s economy (the World Bank forecasts the country will see a 5% contraction this year). Bolsonaro fired popular Brazilian Health Minister Luiz Henrique Mandetta, who has called for more extreme social distancing and more testing, and said that “the measures have to be eased” and that the new health minister’s mission is to “open jobs”. The Health Ministry has reported more than 30,500 cases and 2,000 deaths from COVID-19, but with a lack of testing, the numbers could be much higher. The virus is also weakening Brazilian state protection for the Amazon rainforest and its people, another significant political touchstone for the country. The political implications for Bolsonaro could be seen in the municipal elections if they do go forward in October, and in the presidential race in 2022, when some political observers see a chance for Brazil’s left-wing Worker’s Party (PT) to return to power.

OPEC+ reached an historic deal to cut aggregate production by almost 10 million barrels per day on Monday, but prices still plunged below $30/barrel on Wednesday as multilateral organizations warned that demand lost from coronavirus lockdowns would far exceed cuts. Intergovernmental energy body the International Energy Agency has forecast that April demand for oil will fall by 29 million barrels per day – nearly three times OPEC+ cuts. The International Monetary Fund, in the same outlook that forecast a global economic contraction of 3% this year, said oil prices will average $35/barrel in 2020, which could be a crippling blow to the finances of petrostates. Some countries whose economies rely on oil revenues, like Saudi Arabia and to a lesser extent Russia, have sufficient savings or financial clout to see them through a difficult 2020 and possibly beyond. But those already under severe financial strain, like Iran and Venezuela, will face a sharply elevated risk of instability and may make foreign policy decisions borne out of desperation rather than self-interested strategy.

Venezuelan migrants are evading border blockades to travel between Venezuela and Colombia, undermining virus-control measures and threatening public health and stability among the poor in both countries. Official check points along the border have been closed since lockdown orders were mandated in both countries in March, but that has not deterred the flow of migrants and refugees going both ways between the two countries. It is estimated that 4.9 million Venezuelans have fled the country due to the political, economic, and humanitarian disaster facing Venezuela over the last few years. There are approximately 1.8 million Venezuelan refugees in Colombia. Some Venezuelans continue to flee due to shortages of everything from food to gasoline and now also for fear of the virus. But some Venezuelan refugees are struggling to find work or make ends meet in Colombia (as well as Ecuador and Peru) and are returning by foot back to Venezuela at informal crossings where there are no epidemiological controls. The flow of people between Venezuela and Colombia could make efforts to control the virus difficult, and the increasingly desperate situation for Venezuelans and poor Colombians alike could be destabilizing for the border region.

In Other News – April 10, 2020

Mexico was the lone holdout yesterday on an OPEC+ deal to collectively cut oil production by 10 million barrels a day (b/d) in May and June to stabilize oil prices, and today says it reached a production cut deal with President Trump whereby the US would compensate for a portion of the cuts that Mexico would not agree to, though OPEC had not publicly confirmed as of this morning. Prices have cratered under the impact of a pandemic-fueled economic slowdown and a Russia-Saudi price war that flooded the market with cheap crude. Many major oil producers rely on oil revenues to fund government spending, and a prolonged period of low prices poses risks to their financial and political stability, especially if revenue losses are steep enough to impact basic services like social programs and infrastructure. In the US, the price collapse has already led to rounds of layoffs and major cuts to capital spending budgets. Oil producers have little choice but to take action to try to stem the bloodletting, meaning that a deal is likely, even if it takes some wrangling. But the duration of demand losses is an unknown – as the virus rages on, it is unclear how long lockdowns will last, and whether they will need to be applied intermittently over the next several months. Estimates for demand losses from the pandemic vary widely, with some reaching as high as 20 or even 35 million b/d. If those high-end estimates come to pass, a 10 million b/d cut can only do so much. Deal developments will continue throughout the day – an agreement could be hammered out as soon as this evening.

ISIS has claimed responsibility for a rocket attack on the US’s Bagram Airfield in Afghanistan. Though there were no casualties reported, the attack came just after the start of an Afghan-Taliban prisoner exchange considered a key component of the US-Taliban peace deal agreed in February. ISIS is attempting to rebuild capacity under the cover of the global novel coronavirus pandemic and seeking to reoccupy the territory left unprotected by the withdrawal of US troops from the region. The US has worked closely with Iraq in recent years to fight ISIS, but as US troops withdraw, Iraq will be left to do much of that work on its own. And Iraq is beset with other challenges as it starts to battle the spreading coronavirus outbreak – Iranian-backed militias trading fire with the US, months of protests, a revolving door of Prime Ministers-designate, and a collapse in oil prices – leaving limited capacity to effectively counter ISIS’s resurgence without assistance.

Remittances to Latin America have tumbled as the coronavirus/COVID-19 pandemic sweeps the United States. Across Latin America and the Caribbean, remittances from the United States could drop 7-12% this year as compared to 2019, when the region received $75 billion. This will be an enormous blow to the region with potential generational impacts. Recognizing the hit Mexico will take from the loss of remittance dollars, President Andrés Manuel López Obrador recently appealed to migrants living across the border to “not stop thinking about their loved ones.” Remittances to Mexico from the United States and other countries totaled $36 billion in 2019. Along with oil revenues and the tourism sector, remittances are considered a key component of the Mexican economy, which was already contracting before the coronavirus shutdowns. Bank of America has predicted that Mexico’s GDP could contract by 8% this year. To put it in perspective, that would be a larger drop than the 2009 recession when Mexico’s GDP contracted by 6.5% or the 1994 Peso Crisis when it contracted by 6.2%.

The US has labeled the Russian Imperial Movement a terrorist organization, the first such designation for a white supremacist outfit. The move, part of an effort by US law enforcement to address growing problems of domestic terrorism and white supremacist incitement and violence, enables the Treasury to bar Americans from financial transactions with the organization and ban members from entry into the US. And that in turn allows law enforcement to investigate US individuals with suspected links to the group for evading sanctions. US officials say the Russian Imperial Movement provides support, including military training, to “like-minded” people in the US and Europe, and may have assisted the Russian government’s annexation of Crimea by recruiting Russian fighters to aid pro-Russian separatists in the region. No concrete link between the group and the Russian government has been identified, but their goals are aligned in at least one respect. Both have sought to exacerbate racial tensions throughout the west – a tactic that has been repeatedly used by Russian government-backed troll farm Internet Research Agency to undermine democracies in the US and Europe.

The US Indo-Pacific Command is seeking $20.1 billion in additional funding in 2021-2026 to counter China’s growing clout in the region. The funding request would go towards a wide range of activities and hardware, including radar warning systems, cruise missiles, military exercises with regional allies, deployment of more forces and more intelligence-sharing. The request seeks to address what has long been considered a misalignment of military spending, wherein China is frequently touted as the US’s biggest competitor worldwide, but Europe receives the lion’s share of spending. And the goal of the proposed build-up is deterrence – to signal to China that the cost of any preemptive military action on their part will outweigh the benefits, and that the success of any such strikes is far from guaranteed. A chorus of experts is warning that China will seek to strengthen its regional position in the aftermath of the coronavirus pandemic, and with the U.S. and China already at odds over trade issues and the spread of misinformation about virus’s origins, tensions are likely to escalate.

In Other News – April 3, 2020

President Trump issued a warning (via twitter) to Iranian-backed private militias in Iraq that they will “pay a very heavy price” for carrying out a planned “sneak attack” on U.S. interests in the country. He later indicated in a press briefing that the U.S. is open to a deal with Iran, but that it is Iran’s role to initiate negotiations. Iranian-backed militias have stepped up rocket attacks on U.S. and coalition troops in Iraq and U.S. intelligence officials say that reports pointing to “imminent” attacks have become more frequent and are now coming almost daily. U.S.-Iran tensions have escalated sharply since a rocket attack in December that killed an American contractor that engendered a series of retaliatory actions, including the U.S. killing of Iranian General Qassem Suleimani. Opportunities to ratchet back the conflict are limited at present. Prospects are slim for a near-term diplomatic solution as both countries contend with severe Covid-19 outbreaks and related economic fallout, and it is not clear that Iran is in complete control of its proxies in Iraq.

OPEC+ will meet on Monday to discuss a possible deal to cut 10 million barrels a day from global oil production in coordination with other global oil producers – including the U.S. – to support oil prices. Oil prices fell below $30 a barrel, hammered by the combined impact of the coronavirus-driven slowdown in economic activity and a price war between Saudi Arabia and Russia that has flooded the market with cheap oil, but have recovered somewhat on news that a coordinated cut may be in the works. Oil-producing countries face looming budget shortfalls and significant potential for instability if oil’s price collapse leaves them unable to maintain social spending. For the U.S., the energy sector has been an economic bright spot for the past decade for both domestic production/employment and foreign trade, and low prices have already led to thousands of layoffs, exacerbating a dramatic rise in unemployment caused by coronavirus-related shutdowns. Should prices remain deeply depressed through the spring and summer, the impact on the U.S. energy sector – where production costs per barrel are higher on average than in Russia or Saudi Arabia – is likely to be severe and long-lasting. U.S. coordination with OPEC would be a first, but necessity will require the world’s largest oil producers to give quarter to avoid making an already-dire economic outlook worse. Chinese purchases may also help – reports suggest that it is capitalizing on low prices by filling its available storage capacity.

Crime rates across a multitude of categories have fallen dramatically amid urban coronavirus lockdowns all over the world, but concerns have surfaced about the potential for crimes of opportunity. The pandemic has left stores, museums, office buildings and other locations that are home to targets of value empty, which could trigger see a spike in the types of crimes that are more easily committed when people are not out roaming the streets. Earlier this week, thieves stole a Van Gogh from the deserted Singer Laren museum near Amsterdam (on the artist’s birthday). Luxury retailers in major cities like New York and Paris have removed merchandise from stores and in some cases boarded up windows and doors but looting or even small-scale smash-and-grabs seem less likely under current conditions than crimes that happen far below the radar. Organized, sophisticated criminals will likely recognize this unique opportunity for discreet illegal activities from small-scale robberies to intellectual property theft and major cybercrimes.

European countries that purchased novel coronavirus testing kits from China are saying that many of the tests are faulty and that they do not detect the virus at an early stage. The Slovak government bought 1.2 million tests from China for $16 million that it says it cannot use. China claims that the problem in Slovakia is incorrect use of the tests, but reports have also surfaced of faulty Chinese tests supplied to Spain, Turkey, and the Czech Republic. China has been playing up its success combating the virus’s spread and is seeking to establish itself as a global leader in public health assistance. But U.S. intelligence agencies have told the White House that China under-reported both cases and deaths, consistent with long-term, persistent and thoroughly justified concerns about the veracity of Chinese official data across all sectors. These doubts about the actual situation in China, along with its early cover-up of the virus, add credence to reports of faulty test kits.

In a similar shrewd public relations vein, a Russian military flight delivered medical supplies to New York on Wednesday following a Trump-Putin phone call, even as Russia continues its efforts to interfere in our political process.

With all eyes on global efforts to confront the novel coronavirus pandemic, China continues to press its claims to waters within the nine-dash line in the South China Sea, using its fishing fleet – backed by the Chinese Coast Guard – to trawl in Indonesia’s internationally recognized exclusive economic zone. Local fishermen in the Natuna Islands say that the Indonesian government has dialed back confrontations with Chinese vessels over their incursions into Indonesian waters, and that Indonesia authorities are failing to acknowledge clear-cut cases of intrusion by the Chinese. China is Indonesia’s largest trading partner and the dominant power in Asia, and while former Maritime and Fisheries Minister Susi Pudjiastuti responded forcefully to Chinese incursions, she was replaced with a more China-friendly minister in October. No regional Asian power has the might to take on China in the South China Sea, and given China’s intransigence on the issue, it is possible that nothing short of a large-scale military conflagration with the U.S. will persuade it to relinquish its extraterritorial claims.

The Trump administration is turning up the heat on Venezuela with the deployment of the Navy to bolster counternarcotics operations in the Caribbean. According to Defense Secretary Mark Esper, the goal is to increase U.S. capacity in the Western Hemisphere to go after drug cartels and organized crime seeking to exploit the current coronavirus crisis. The increased pressure on Venezuela comes a week after U.S. federal prosecutors indicted Venezuelan President Nicolás Maduro on drug trafficking conspiracy charges and days after Secretary of State Mike Pompeo proposed the formation of a transition government in Venezuela in exchange for U.S. sanctions relief. Venezuelan opposition leader Juan Guaidó also proposed forming a “national emergency government” to deal with the double threat of coronavirus and falling oil prices. Maduro has discarded such proposals and scoffed at U.S. threats. However, Maduro is increasingly vulnerable as Venezuela is ill-prepared to fend off COVID-19 and still dependent on oil exports for revenue to the state – a situation made all the more difficult since Russia’s oil giant Rosneft sold its Venezuelan assets and the IMF rejected Maduro’s $5 billion loan request.