In Other News: Russian Cyberattacks, Iran Nuclear Ambitions & More – September 11, 2020

September 11, 2020

Microsoft warned yesterday in a report that the Russian unit responsible for the hack of the Democratic National Committee in 2016, Fancy Bear, is engaging in accelerated and increasingly sophisticated cyberattacks on both Democratic and Republican campaign officials, consultants, and think tanks in the lead-up to the 2020 election. Microsoft also warned that Chinese hackers are actively targeting Biden campaign staff and high-profile members of the US policy and national security communities, and that Iranian hackers have targeted the Trump campaign, but with limited success. Separately, the US announced yesterday that it had designated four Kremlin-linked individuals – including Ukrainian parliamentarian Andrii Derkach – for new sanctions related to their attempted interference in 2020 elections. According to information in the Microsoft report, a previous round of US sanctions on and retaliatory cyberattacks against Kremlin-linked cyber units for their efforts to improperly influence US elections may have actually prompted Fancy Bear to step up its attacks rather than deterring further activities. Electoral interference via cyberattack is emerging as the new normal, not only in the US, but also in EU countries and other democracies. In addition to shoring up their own cyberdefenses, the US and its allies may soon find common cause in establishing rules of the road – and agreed multilateral countermeasures – to protect their systems from increasingly aggressive cyberattacks by non-democratic powers.
Iran’s nuclear chief announced this week that the country is building a new facility for production of advanced uranium enrichment centrifuges near its Natanz nuclear site. The facility would replace one that was damaged in a July fire that Iran claims was the result of sabotage. This latest announcement is one of a string of incidents and information releases indicating that Iran is repeatedly violating its commitments under a nuclear deal signed in 2015 with the US, China, France, Germany, Russia, and the UK  in exchange for the lifting of sanctions. A few days prior, the International Atomic Energy agency reported that Iran now has more than 10 times the amount of enriched uranium it is permitted to possess under the 2015 nuclear accord, though the stockpile is not enriched to levels required to build a nuclear weapon. Iran began to more openly violate its commitments under the accord after the US withdrew in 2018, and has continued openly flouting agreed restrictions while engaged in a steady escalation of tensions with the US. The Iranians are progressing in their push to develop a nuclear weapon, and this will become an increasingly troubling issue for the US and our allies. Iran is approaching a red line that if crossed could well result in a military confrontation.

Warning shots were fired at the disputed India-China border in the Himalayas, marking the first reported violation in decades of a long-held no-firearm protocol at the Line of Actual Control (an agreed, de facto demarcation between the two countries). Though there were no casualties, this was an alarming escalation, especially in light of weeks of attempts by both sides to reach a diplomatic resolution after a June border confrontation between the Chinese and Indian armies killed at least 20. Since the fatal June incident, India and China have flooded the area with reinforcements, artillery, tanks, and aircraft, while simultaneously pursuing a diplomatic solution. We do not think that either country wants war, but with nationalist sentiment running high on both sides, Indian and Chinese leaders are also under pressure not to back down. With neither side willing to advance or retreat, China and India may be entering into a prolonged standoff with occasional flare-ups between their two armies, any of which could have the potential to create more casualties.

In Other News: Evidence Against the Kremlin, India-China Standoff & More – September 4, 2020

September 4, 2020

Evidence is piling up linking the Kremlin to extralegal assassinations and foreign election meddling, increasing the risk that Russia will face more cohesive pushback from the international community. This week, news emerged that: 1) the Kremlin-backed Internet Research Agency had set up fake Facebook accounts and even hired journalists to write for a fake left-wing news site to stoke partisan tensions; 2) a Homeland Security Department memo asserted with high confidence that Russian state media agencies were pushing false information about U.S. presidential candidate Joe Biden’s mental health; and 3) the German government confirmed doctors’ initial findings that Russian dissident Alexey Navalny was poisoned with Novichok in what is thought to be an attempted assassination by the Russian state. Meanwhile, in Belarus, journalists from Russian state-backed TV channel RT stepped in to replace hundreds of Belarusian journalists who went on strike in protest against what were widely viewed as fraudulent elections that delivered a victory to Alexander Lukashenko, a longtime Kremlin ally who has been president of Belarus since 1994. Each of these incidents has at least a veneer of plausible deniability, complicating a coordinated international response. However, it is only a matter of time until the cumulative impact of Russia’s actions causes sufficient alarm for countries or blocs to band together to counter the Kremlin’s increasingly aggressive stance toward its enemies, perceived and real.

Indian and Chinese soldiers engaged in another tense standoff for the first time since a clash at the border in June killed at least 20. The soldiers, stationed in the Himalayas near the Line of Actual Control (an agreed demarcation at the two countries’ long-disputed border), approached each other and shouted but did not engage. Indian officials have indicated that the incident was in response to a late-night Indian operation to claim vantage points allowing them to observe Chinese troop movements in disputed territory, and that the operation was prompted by Chinese incursions into Indian territory. This latest flare-up would be unremarkable except that it is the first such incident since the fatal June clash, and comes after several weeks of bilateral efforts to ease tensions. Parallel with those efforts have been a series of punitive Indian trade actions targeting China, including restricting Chinese firms’ access to buildout of India’s 5G network and a ban on dozens of Chinese apps (like TikTok), as well as moves to bolster diplomatic and military ties to countries like the U.S. that are powerful enough to be a credible counterweight to China. India appears to be using every means at its disposal to counter what it – and most of the rest of the world – sees as a pattern of aggressive Chinese behavior targeting neighboring countries. Any incident that adds to the risk of escalation is cause for concern, especially when it involves two nuclear-armed neighbors with nationalist-leaning heads of state. However, we do not think either side has the appetite now for a larger conflict.

Latin America’s economy will contract by approximately 9.4% in 2020, according to the International Monetary Fund (IMF). Mexico, Argentina, and Peru are likely to see double-digit declines in growth this year, making it the worst economic downturn in the region since WWII. Still, the IMF projects that the region will see a recovery of 3.7% growth in 2021. Many countries have tried to mitigate the impacts of Covid-19, but the pandemic continues to rage through the region. Brazil’s confirmed death toll from Covid-19 currently stands at approximately 120,000, and Mexico’s is at about 64,000. Popular outreach by their governments could be blunting the economic impacts in the short term. But Latin America is suffering from multiple related economic factors from the pandemic including: 1) the negative impacts of lockdowns and travel restrictions inside the region; 2) the reduction of trade within and outside the region; 3) the reduction of foreign investment; and 4) lower remittances from the United States and Europe. Many countries are also suffering from a decline in global demand for commodities, a significant drop in tourism, and low oil prices. Coming out of the pandemic, the region will likely have to deal with growing crime, insecurity, and social and political unrest – and the possibility of increased migration to the United States from Mexico and Central America. See TAG’s Special Report: Latin America for more insight.

“Will Brazil’s ‘Car Wash’ Prosecutors Stay on the Job?” Latin America Advisor, September 3, 2020

Asked if Brazil’s “Operation Car Wash” task force is in peril, TAG’s Amanda Mattingly responded that “Disbanding the popular anti-corruption task force would unleash a torrent of criticism of President Bolsonaro and his prosecutor general, Augusto Aras.” Amanda underscored the tremendous amount of support in Brazil for the team of prosecutors and exposing corruption and said, “Under no circumstance would this not be seen as political and an attempt to avoid investigations involving alleged graft by Bolsonaro’s own family members.” Amanda’s comments were published in the Inter-American Dialogue’s Latin America Advisor on September 3, 2020.

“Will Brazil’s ‘Car Wash’ Prosecutors Stay on the Job?” Latin America Advisor

Latin America: Economic Contraction, Energy Issues, Politics & the Pandemic – September 3, 2020

Special Report

Latin America: Economic Contraction, Energy Issues, Politics & the Pandemic

The Economy & Covid-19

Latin America’s economy as a whole is set to contract by approximately 9.4% in 2020, according to the International Monetary Fund (IMF). This is down by four percentage points from its April projection and since the largest economies of the region – Brazil and Mexico – have suffered from the worst outbreaks of Covid-19. According to Goldman Sachs analysts, Mexico, Argentina, and Peru are likely to see double digit declines in growth this year, making it the worst economic downturn in the region since WWII. Still, the IMF projects that the region will see a recovery of 3.7% growth in 2021.

Latin America has been considered the global epicenter of the pandemic since early June, accounting for more than 40% of the world’s new Covid-19 deaths despite having only 8% of the population. Latin American governments, central banks, and international financial institutions have taken steps to mitigate the impacts of Covid-19, but the pandemic continues to rage through many parts of the region. Brazil, Mexico, Peru, and Chile have been hit hardest according to confirmed numbers of cases, but numbers out of Bolivia, Ecuador, and Venezuela are less clear. There is a widely held belief that Covid-19 cases are undercounted due to a lack of testing capacity as well as political will on the part of some governments, including in Venezuela, Mexico, and Brazil. Brazil’s confirmed death toll to Covid-19 currently stands at approximately 120,000, and Mexico’s is at about 64,000.

Both Mexican President Andrés Manuel López Obrador (popularly known as “AMLO”) and Brazilian President Jair Bolsonaro have underplayed the coronavirus since the beginning and were slow to implement shutdown orders in their countries – even when governors urged the federal governments to take specific measures. Many Brazilians and Mexicans live and work in the informal economy, so shutting down the country and asking people to work from home was just not a possibility in their view. Bolsonaro has also denied responsibility for the virus saying, “I’m sorry but what do you want me to do” and AMLO has told Mexicans to “lose weight and pray.”

But neither AMLO nor Bolsonaro seem to have suffered in approval ratings for their handling of the virus and the resulting economic downturn. In Mexico, an August poll by Parametria found AMLO’s approval rating to be 65%, while the Mexican newspaper Reforma’s August poll found his approval rating to be 56%. In Brazil, an August poll by Datafolha found 37% gave Bolsonaro a positive approval rating, which is up from 32% in June and the highest his ratings have been since he took office.

Popular outreach could be buoying their approval ratings and blunting the economic impacts in the short term. But Latin America is suffering from multiple related economic factors from the pandemic including: 1) the negative impacts of lockdowns and travel restrictions inside the region; 2) the reduction of trade within and outside the region; 3) the reduction of foreign investment; and 4) lower remittances from the United States and Europe. Many countries are also suffering from a decline in global demand for commodities, a significant drop in tourism, and low oil prices.

Energy Issues

Energy is a key sector of the economy in Latin America and will be important for the recovery of the region. The oil market is currently in trouble worldwide – oil prices have come back from recent lows but remain depressed by the pandemic’s impact on global demand. This augurs poorly in the near term for oil-producing countries in Latin America. The continuing spread of Covid-19 through the region means there is little visibility on when consumption and growth will start to pick up again, but consensus is against any real optimism about a recovery before 2021.

If oil stays as cheap as it is, that could undermine the value proposition for costly sub-salt exploration and development offshore Brazil. Venezuela’s economy was already in ruins heading into the pandemic, and low oil prices have only added to the pressure. According to the Organization of the Petroleum Exporting Countries (OPEC), Venezuela produced 339,000 barrels per day in July, which was up from 336,000 barrels per day in June. These are production levels not seen in Venezuela since the 1930s.

There will probably be some big deals in oil, but they may be of the consolidation/distressed assets variety, whereas the big infrastructure spending is more likely to be in natural gas and renewables. The United States is pushing to export more of its LNG to Latin America, but that is going to require new import capacity, pipelines, and capex spending.

Climate considerations are also playing a role in government decision-making throughout Latin America, particularly as countries in the region seek to expand energy access. This bodes well for renewables, but also potentially for natural gas. Natural gas burns cleaner than oil, is growing easier to deliver by ship and truck, is available for export in large quantities from the United States (with low shipping costs) and is also increasingly available from South American sources thanks to technological advances. Although economics in Argentina’s Vaca Muerta shale are currently challenged by low oil prices, in recent years, natural gas production growth from shale was sufficient to spur a resumption of exports to neighboring Chile and Brazil and to trigger Argentina’s first-ever exports of liquified natural gas (LNG) last year.

Social & Political Consequences

Coming out of the pandemic, the region will likely have to deal with growing crime, insecurity, and social and political unrest – and the possibility of increased migration to the United States from Mexico and Central America. Political stability will be necessary for the economic recovery in the region, but it is far from certain as many people in Latin America have begun to feel disillusioned with democracy. Economic prosperity has not been a natural correlation to democracy, and neither has security. Rapid urbanization, poor social services (like healthcare and education), weak democratic institutions, and persistent inequality, which were already chronic in the region, have been exacerbated by the pandemic and the economic contraction.

Political protests and violence, which were seen in 2019 in places like Bolivia and Chile, could return as the region shifts gears to elections. Bolivia and Chile are both scheduled to hold elections in October, after a presidential contest in Bolivia and a national vote on the need for a new constitution in Chile were postponed due to the pandemic. Brazil is scheduled to have municipal elections in November. Venezuela will have legislative elections in December, but the opposition parties have decided to boycott saying that the election will be rigged. Peru, Chile, Nicaragua, and Ecuador are scheduled to have general elections in 2021, and Mexico will hold midterm elections in June 2021.

Corruption is also a chronic issue. Latin Americans want to weed out corrupt officials, ruling elites, and private sector corporate interests which benefit from corrupt dealings and seem out of touch with the people. At the same time, political parties are increasingly using corruption allegations to undermine their political opponents. For example, AMLO recently floated the idea of a referendum on five former Mexican presidents and whether they should be charged with corruption. This came after a former PEMEX head implicated two former presidents in corrupt dealings involving millions of dollars. If AMLO moves forward with the referendum, it could have profound political consequences.

If you or your firm would like an individualized consultation or more specific information on Latin America, please contact The Arkin Group at 212-333-0280 or at www.thearkingroup.com.