In Other News – May 22, 2020

Beijing has announced plans to implement new national security legislation in Hong Kong that would expand its powers to break up large gatherings – like protests – a significant move in China’s push to bring Hong Kong fully under mainland authority. U.S. Secretary of State Mike Pompeo called it a “death knell” for the partial autonomy Beijing promised to uphold for Hong Kong in the 1997 handover of the island from the U.K. to China. Previous attempts by China to pass laws tightening Beijing’s authority over Hong Kong have sparked massive protests, most recently in 2019, in response to a bill that would have allowed for extradition of Hong Kong citizens to the mainland (and elsewhere). Recent protests were virtually brought to a halt by the Covid-19 outbreak, but a fresh wave of unrest is likely in response to this latest development, and U.S. officials and congress are already calling for punitive measures in response, such as sanctions on Chinese officials for suppression of democracy. One other option that will be proposed – but will likely just be noise at this point – is U.S. removal of Hong Kong’s special status under trade and other laws, which would mean that trade restrictions that apply to mainland China, such as export controls, would also apply to Hong Kong. This issue is one of many irritants in the U.S.-China relationship, including U.S. moves to prevent tech giant Huawei from playing a significant international role in 5G networks, its support for Taiwan, and territorial disputes between China and its neighbors in the South China Sea. As with other flash points in the bilateral relationship, this incident is unlikely to erupt in direct conflict, but every new provocation-and-response heightens the risk of a miscalculation by either side.

Social unrest returns to Chile as protesters criticize the government’s handling of the coronavirus pandemic and economic fallout. A surge in COVID-19 cases led to a strict lockdown of capital city Santiago last week and protests this week. While the government of Chilean President Sebastian Piñera has sought to slow the pace of community spread, dozens of people took to the streets in the El Bosque neighborhood on May 19 to protest job losses and food shortages resulting from the shutdowns. Demonstrators clashed with police who used tear gas and water cannons to disrupt the crowds. The word “hambre” (meaning hunger) was illuminated on a building in Santiago. President Piñera has announced plans to distribute food to low and middle-class households as part of a larger stimulus package aimed at shoring up the Chilean economy which is contracting quickly amid the global slowdown. Chile also expects the International Monetary Fund (IMF) to approve a two-year loan for $23.8 billion, due in part to the sound fiscal policies of the Piñera government. However, these measures may not be enough to stave off social unrest in Chile which was only recently quelled after mass protests rocked the country in 2019. Unfortunately, postponement of a national referendum on amending the constitution, originally scheduled for April 25 but moved to October 26, is likely to lead to further frustration. Without the ability to voice their discontent through the ballot box, ordinary Chileans could return to the streets in protest, leaving open the possibility of another period of social unrest in the country.

Venezuela has filed a lawsuit against the Bank of England for the release of $1 billion worth of gold while also awaiting five fuel tankers from Iran, both signs of deepening financial strain on the Maduro regime. President Nicolás Maduro claims that Venezuela will use funds from the sale of its gold reserves to respond to the coronavirus pandemic and has proposed that the funds be transferred to the United Nations Development Programme (UNDP). In a lawsuit filed this week, Venezuela argued that the Bank of England should release the funds, despite U.S. sanctions, to address the humanitarian crisis. At the same time, Venezuela is awaiting Iranian oil tankers set to deliver 1.5 million barrels of fuel to Venezuela in the coming days. The ships passed through the Suez Canal earlier this month. Reportedly, the Venezuela military will escort the ships to port and has warned the United States from interfering with the transfer of needed goods. Venezuela’s oil production has dropped significantly due to mismanagement by the government and U.S. sanctions on the sector, and the country has been suffering from an acute gasoline shortage in recent weeks. Venezuelan opposition leader Juan Guaidó, who has been recognized as the legitimate interim leader of Venezuela by the United States, has warned the Bank of England from releasing the funds to Maduro and has pointed to the Iranian fuel transfer as further evidence of Maduro’s mismanagement and corrupt dealings. Gauidó continues to state that negotiations are the only way out of the crisis. He also rejects any part in the failed “Operation Gideon” on May 3 when a number of armed Venezuelan expats and two Americans clashed with Venezuelan security forces off the coast of Venezuela. Maduro proclaimed the assault an attempted coup, while Guaidó condemned Maduro for staging a “massacre” for propaganda purposes. These latest developments signal the deepening strain on Maduro, facing U.S. sanctions, a significant oil crisis, and the coronavirus economic fallout.

Oil prices have staged a comeback, with the U.S. benchmark trading above $30/barrel after falling into negative territory earlier this month, on the back of OPEC+ production cuts and tentative reopenings around the world. Oil demand in China, the world’s second-biggest consumer, is almost back to pre-pandemic levels, thanks in part to commuters choosing driving over public transportation, but demand for aviation fuel is still lagging. Saudi national oil giant Aramco’s share price has recovered to levels not seen since before Saudi Arabia and Russia set off an oil price war, amid the demand shock of the pandemic, that helped drive oil prices to negative levels in the U.S. This development is welcome news, especially for economic recovery prospects in oil-producing countries like the U.S. However, recent reports of new partial lockdowns in parts of South Korea, China, and other locations where the virus had been thought to be under control highlight the risk of more demand shocks to come.

In Other News – May 15, 2020

President Trump has amped up anti-Chinese rhetoric over the past week, floating several potential measures to punish China for the coronavirus pandemic, including demands for reparations, scuttling the trade deal, and forcibly delisting Chinese companies from U.S. stock indices. Any of these steps would represent the extreme end of the foreign policy spectrum, and none is likely to be carried out. But several other headline-making U.S. initiatives point to an increasingly confrontational approach to China across a range of issues. The U.S. Commerce Department has taken aim at the rollout of China’s 5G global network business by effectively blocking Chinese tech giant Huawei from obtaining most foreign microchips. The U.S. has accused China of targeting organizations studying Covid-19 to steal research on treatments, vaccines, and testing. The U.S. federal government retirement fund has postponed a decision to transfer of roughly 11% of its $40 billion in international holdings to Chinese stocks, and the delay may be indefinite. The U.S. Navy upped its presence in an area of the South China sea where a Malaysian drillship had been engaged in a standoff with Chinese vessels. Though warning signals are flashing, escalation to the level of direct conflict or a renewal of a damaging trade war is in neither side’s interest, especially as both countries contend with the coronavirus and its severe impact on their respective economies.

Political stability in Latin America could be threatened as coronavirus cases continue to rise in the region and its economies suffer from the impacts of the pandemic. The IMF predicts an economic contraction of 4.2% for Latin America, deeper than the so-called “Lost Decade” of the 1980s or the decline following the 2008-09 financial crisis. The region’s largest economies Brazil and Mexico, which were both slow to respond to the virus and are now seeing spikes in Covid-19 cases, are likely to take the biggest hit with Brazil’s GDP to contract by 4.7% and Mexico by as much as 7%. Argentina, Chile, Peru, Ecuador, and Colombia – to speak nothing of Venezuela – will suffer economic declines as well given their commodity-dependent, export-driven economies. This is complicated further by their lack of financial flexibility to provide bailouts for their populations and a recent history of social unrest. Chile, Ecuador, and Bolivia all faced anti-government protests in 2019. As Latin America comes out of the public health and economic crisis in 2021, the region is likely to face another period of social unrest and political instability. This could also pave the way for a resurgence of the political left in the region, with a return of left-wing populists like Brazil’s former President Lula da Silva promising increased spending on the public health system and social safety net.

Indian Prime Minister Narendra Modi has announced plans for a relief package totaling more than $260bn to help the country climb out of a deep economic slump as it emerges from a nationwide lockdown to combat the coronavirus. Modi provided little detail on how the funds, equivalent to ~10% of India’s GDP, will be allocated and disbursed. India’s central government-mandated lockdown, stricter than most and implemented early in the detection of infections in the country, has been credited with helping keep infections at a manageable level despite India’s 1.3 billion people and high population density. But it had an outsized impact on the country’s poor, many of whom live hand-to-mouth and lack the resources to carry themselves and their families through a six-week period without work. A slight easing of restrictions has seen throngs of people return to the streets, many flouting social distancing and public health guidelines, with worrying implications for the virus’s trajectory. The massive stimulus plans are welcome news for India, which was already struggling with rising unemployment and slowing growth pre-pandemic. Unfortunately, if relaxing the lockdown leads to a spike in infections as expected, India will need to develop a more sustainable means of limiting the virus’s spread to make the most effective use of its relief package.

This year is shaping up to be the worst in oil industry history. That’s according to Faith Birol, head of multilateral energy advisory body the International Energy Agency (IEA). The IEA has forecast that oil prices will remain below pre-coronavirus levels for at least a year, and possibly multiple years. Oil prices have rebounded somewhat after declining sharply in April and even turning negative in the U.S. Major oil producers around the world committed to a coordinated production cut of ~10 million barrels per day to support prices, and those cuts have already begun to have an effect, but with economic activity still limited by various degrees of lockdown across the globe to slow the spread of Covid-19, recovery is still a ways off. A sustained period of low prices will be a blow to economies whose oil export revenues form the foundation of their state budgets, like Saudi Arabia and Russia. It will even be a drag on a return to robust growth in the U.S., where drilling has fallen off sharply and producers have slashed budgets and laid off workers. However, looking beyond the economic impact, a loss of funding for government activities and services further raises the risk of political instability – possibly even regime change – in already-struggling petro-states such as Venezuela, Iran, and Iraq.

In Other News – May 8, 2020

The European Commission forecasts a 7.4% drop in economic growth this year, which would mark the worst contraction for the continent since World War II, dwarfing the 4.5% contraction of the 2009 recession. And the EC has warned that its forecast may underestimate this year’s actual drop in GDP. Italy, Spain, and Greece are expected to be hardest hit, but unemployment will rise throughout the bloc, averaging 9%, according to the EC’s projections. If history is any guide, we have cause for concern that harsh economic conditions and the feelings of insecurity that accompany them can give rise to struggles over limited resources and the rise of troubling political movements. That risk is not confined to Europe. As we move into this period of prolonged uncertainty, the soundness of our allies’ institutions will be critical to keeping them on track for a return to stability. And from a trade standpoint, coordination – not conflict – will be key to spurring a faster rebound on both sides of the Atlantic.

Indian security forces killed Riyaz Ahmad Naikoo, a senior leader of militant Kashmiri separatist group Hizbul Mujahideen, setting off violent protests that injured more than a dozen people. The status of Kashmir has long been a hot-button issue between India and Pakistan – and between Kashmiri separatists and Delhi. Violent attacks in the region were almost commonplace, but ebbed in late 2019 and early 2020 after India revoked Jammu and Kashmir’s decades-old special constitutional status and imposed a months-long security crackdown and communications blackout that appears to have deterred separatist activity. However, the harsh measures employed by India’s central government have also drawn international condemnation of Delhi’s tactics and further fueled separatist sentiment in Kashmir. While India sees Naikoo’s death as a victory, it is also likely to spark at least a temporary escalation of militant attacks as the country grapples with a sharp rise in Covid-19 cases.

U.S. and Chinese officials have confirmed their commitment to the bilateral trade deal following President Trump’s threat to terminate it if Beijing wasn’t upholding its end, though the president cast further doubt on its future in an interview this morning. The two sides negotiated the first phase of the deal in January after a two-year trade war that inflicted damage on both sides. China’s obligations require it to buy an additional $200 billion of American goods over 2019-2020, a target that was seen as potentially out of reach even before the Covid-19 pandemic triggered months-long halts to economic activity in major growth centers in both countries. Since the deal was signed, Chinese imports of U.S. goods have actually fallen. Though the pandemic has undoubtedly played an outsized role in the U.S.-China trade trajectory, the optics of China failing to meet purchasing targets are poor, especially with tensions on the rise between the two countries in other areas, including China’s role as the origin of the virus. Conditions on the ground may not allow for strict adherence to the terms of the deal, but scuttling it would inflict yet more economic pain on both countries as they endeavor to get growth back on track.

Russian billionaires are backstopping the government’s lackluster Covid-19 response after two decades of lying low to avoid attracting the eye of the state. The election of Vladimir Putin as president in 1999 ushered in a period of consolidating wealth and clout from powerful oligarchs that emerged from the wreckage of the dissolution of the Soviet Union. Since then, with a few high-profile exceptions, the country’s oligarchs have toed the Kremlin line and steered clear of wading into matters of state. But Putin has taken little action to stem the spread of the virus in Russia, which has now infected ~177,000 and killed ~1,600 (though actual counts are likely much higher), and the country’s health care system is underfunded and ill-equipped to handle the outbreak. So these modern-day boyars are deploying funds, as well as corporate logistics and purchasing capacity, to help fill the gap. Putin’s approval rating has hit its lowest since 1999 in a recent poll, at 59%. There is little risk of regime change in Russia, and support is still strong for constitutional changes that would allow Putin to remain in power past the end of his current term. But as the Covid-19 pandemic upends the world as we know it, there may be scope for the beginnings of a rebalancing of interests in a flailing Russia.

“Practical Advice for Crisis Preparedness,” featuring Jack Devine in conversation with Sergio Galvis of Sullivan & Cromwell LLP

TAG President Jack Devine participated in a podcast with Sergio Galvis, partner at Sullivan & Cromwell and editor of Latin Lawyer, about The Arkin Group’s work with clients in managing risks and seizing opportunities around the world, particularly in Latin America. As Jack noted, “A company has to have protocols, plans, cyber plans, what happens if their system’s taken down … Much of intelligence is getting ready before the balloon goes up. It’s the preparation. We used to call it “putting the plumbing in,” and a lot of companies spend a lot of money but very little in what I would call the plumbing for intelligence, protection, and crisis management.” The podcast presents practical strategies derived from Jack and Sergio’s decades of experience in the region. According to Jack, company boards and executives can do much to safeguard their assets and operations in Latin America by first and foremost, gathering intelligence about their business partners, knowing who they are dealing with on the ground, and understanding the local terrain.

Jack and Amanda Mattingly, managing director at The Arkin Group, also authored a chapter on dealing with political violence and crime in Latin America for The Guide to Corporate Crisis Management, Second Edition, published by Latin Lawyer.

https://www.sullcrom.com/publication-crisis-management-latin-lawyer-guide-corporate-second-edition-ahlers-galvis-giuffra
https://latinlawyer.com/edition/1001437/the-guide-to-corporate-crisis-management-second-edition

In Other News – May 1, 2020

China has scheduled its delayed National Party Congress meeting for May 22, signaling confidence that Covid-19 is sufficiently contained and setting the stage to announce post-pandemic stimulus measures and this year’s economic growth target. China is likely to take aggressive measures to juice its economy, which is positive news for the U.S. economy, especially for sectors like agriculture and energy that are suffering from demand destruction and low (sometimes negative) prices. However, the U.S. has amped up rhetoric targeting China over its response to the Covid-19 epidemic, specifically its lack of transparency regarding the origin and severity of the virus. The U.S. has also sent another Navy ship to the South China Sea in response to China’s ongoing efforts to assert its claims to internationally disputed territory. The U.S.-China trade relationship is too entrenched and too important to both countries’ economies to unravel, and a resumption of activity is critical to their return to growth. But tensions in other areas of the relationship could lead both sides to seek a new normal in bilateral trade ties, one that limits mutual reliance.

With the Covid-19 outbreak on the wane in Asia, anti-China protests have once again flared up in Hong Kong. Last week, local authorities arrested high-profile, pro-democracy political activists linked to months-long anti-government demonstrations that were disrupted by the Covid-19 outbreak. The arrests have sparked accusations that China’s proxy government in Hong Kong is using the outbreak as cover for taking anti-democratic action, as well as fear of more arrests and other measures to further weaken Hong Kong’s autonomy from the mainland. Hong Kong’s 2019 protests were striking in both size and duration and should leave no room for doubt about the population’s willingness to respond to perceived Chinese overstepping. Unfortunately, China does not seem to have heeded the message. As Beijing continues to assert its dominance in Hong Kong, that will both elevate the risk of a renewal of mass protests and further undermine U.S.-China relations.

Brazil’s President Jair Bolsonaro’s “So What?” response leaves him unpopular and politically vulnerable. In the last week, Brazil’s health and economic woes merged with political crisis when the Minister of Justice, Sérgio Moro, resigned in protest against Bolosonaro. Moro is well-regarded in Brazil for his 2014 role in the Operation Car Wash corruption case that brought high-profile politicians and business executives to justice. Moro is now accusing President Bolsonaro of corruption, alleging that he fired the head of Brazil’s federal police, Maurício Valeixo, in an effort to undercut federal investigations into his sons. Since Moro’s bombshell resignation, Brazil’s Supreme Court authorized public prosecutors to investigate the allegations against Bolsonaro and blocked his appointment of a family friend and loyalist, Alexandre Ramagem, as the new federal police chief. Meanwhile, criticism is mounting over Bolsonaro’s response to the coronavirus crisis and economic fallout. As of April 30, Brazil recorded 80,246 confirmed cases and 5,541 deaths. Asked about the rising death toll, Bolsonaro said to reporters: “So what? I’m sorry, but what do you want me to do?” Brazilian pollster Datafolha found this week that 45% consider Bolsonaro’s handling of coronavirus to be bad or terrible, compared to 27% who consider it good or excellent. This number falls below his baseline of support which hovers around 33%. With the number of Covid-19 deaths rising, the economy likely to contract by 5.3% according to the IMF, and now political turmoil in the capital – Brazil is entering uncharted territory.

Investigations into the downing of Malaysia Airlines flight MH17 over eastern Ukraine point to the direct involvement of a senior Russian FSB border service official, Colonel General Andrei Burlaka. Audio recordings suggest Burlaka may have been acting as a commander of pro-Russian rebel forces in Crimea believed to have shot down the aircraft, killing nearly 300 civilians. If confirmed, this would further undermine Russia’s denial of any involvement in the incident. Also this week, a video meeting between Russian and Ukrainian Foreign Ministry officials seeking an end to the conflict – a condition for the relaxation of EU sanctions on Russia – failed to make progress. These two developments together diminish the likelihood that Russia will see any sanctions relief in the near term, as it grapples with an extreme drop in global oil prices and the spread of Covid-19 within its borders. Now would be an opportune time for Russian President Vladimir Putin to strike a more cooperative tone on the international stage, but we doubt this combination of headwinds will trigger any effort on his part to scale back the country’s aggressive tactics, like backing separatists in Ukraine or conducting cyber-assaults on the U.S.