The Arkin Group

September 25, 2020

Brazil has allowed its popular anti-corruption task force to continue, as the country’s former president Luiz Inacio Lula da Silva faces fresh charges. President Jair Bolsonaro and his top prosecutor Augusto Aras extended the mandate of the “Operation Car Wash” task force until January 31. Earlier this month, critics raised the alarm that they would disband the team that started in 2014. Operation Car Wash has grabbed national and international attention for exposing corrupt practices by politicians and businesses like Petrobras and Odebrecht over the past six years. Just this week, offshore drilling company Seadrill announced that its Brazilian subsidiary Seadrill Serviços de Petroleo, Ltda has been served with a search and seizure warrant in relation to the investigation of Petrobras. Last week, Lula da Silva was hit with new money laundering charges – the fourth case against him as a result of Operation Car Wash. Lula da Silva denies the charges, and his supporters see them as political persecution. Bolsonaro campaigned on an anti-corruption platform in 2018 when Lula da Silva was barred from running due to corruption charges against him. But since taking office, Bolsonaro has been accused of interfering in corruption investigations involving his sons, and former Justice Minister Sergio Mora, who was a leading figure in the anti-corruption efforts of Operation Car Wash, stepped down in April as a result. Politicizing anti-corruption efforts is not new in Brazil and will likely continue through Bolsonaro’s term in office and into his reelection campaign in 2022.

Iran’s Revolutionary Guard Corps has opened a new naval base on the Strait of Hormuz – a critical oil shipping lane that handles more than one-fifth of global supply – amid a realignment of regional geopolitics that appears designed to contain Tehran. Iranian state television announced that the Shaheed Rahbari base on the eastern side of the strait will give Iran control over ships that transit the Hormuz Strait, the Persian Gulf, and the Sea of Oman. Saudi Arabia’s King Salman bin Abdulaziz assailed Iran in a speech to the United Nations General Assembly earlier this week, alleging that decades of peaceful outreach to Iran have been met with intransigence on the nuclear issue, supporting extremist groups in the region, and recently, attacks on Saudi oil facilities. Saudi Arabia and many of its neighbors in the Middle East have long been understood to be working with Israel behind the scenes in response to growing concern about Iran as a threat to regional stability and security. Last week, the UAE and Bahrain signed accords normalizing relationships with Israel, becoming the region’s third and fourth countries to do so, and more Middle East states may follow suit. An increasingly isolated Iran may be prone to high-visibility threats (such as to global oil shipping), small-scale confrontations, and other announcements designed to engender concern about destabilizing activities.

Evidence and assessments are continuing to emerge about foreign powers’ efforts to influence U.S. elections, highlighting the need for a robust and coordinated U.S. defensive response. The Central Intelligence Agency recently reiterated its 2016 conclusion, this time with moderate confidence, that Russian President Vladimir Putin was directing election interference efforts to boost the electoral chances of President Trump. Sources have conveyed to media that the assessment, which is classified, says that Putin is likely directing the Russian influence operation. The operation involves efforts by pro-Russian Ukrainian lawmaker Andriy Derkach (who was recently sanctioned by the U.S.) to work through U.S. media, lobbyists, and members of Congress to spread rumors and other information detrimental to Democratic candidate Joe Biden. The shift from high confidence in 2016 to moderate confidence now appears to be linked to a smaller volume of direct evidence linking the Russian president to election interference efforts. Meanwhile, Facebook has taken down a number of fake accounts believed to be part of a Chinese election interference campaign. In contrast to Russia’s efforts, the Chinese campaign is understood to be limited in size and does not support a specific candidate – messages being disseminated are intended both to support and to undermine the incumbent president’s campaign. That Russia is persisting in its interference efforts despite public denouncement and punitive sanctions for its previous efforts, and that China and Iran (to some degree) are testing these waters, as well, indicate that the U.S. should enhance its focus on online political meddling as an ongoing threat to our national security. We need to build on efforts already underway both to strengthen our defenses against these assaults, which are likely to continue and become more sophisticated over time, and to mount a proactive response to these transgressions.

September 18, 2020

Israel signed accords with the United Arab Emirates and Bahrain at the White House on Tuesday, making the UAE and Bahrain the third and fourth Arab states to establish formal ties with Israel and marking another significant step towards a fundamental shake-up of the geopolitical balance in the Middle East. The accords themselves encompass few concrete details, the most substantial of which is a commitment to establish diplomatic ties between Israel and the UAE. However, they have brought back-channel relationships with Israel, borne in large part out of collective concern over the regional threat posed by Iran, out into the open. The signatories of the accords are framing them as a step toward peace in the Middle East. There is also some speculation that trade matters were somehow folded into bringing the accords to fruition, including the potential U.S. sale of advanced fighter jets to the UAE, as well as a conspicuously timed $615 million investment in a US LNG producer by Abu Dhabi’s sovereign wealth fund. Whatever the case, there is reason to hope that a regional alliance – if it grows – will help to contain Iran. There is also a real possibility that, feeling increasingly backed into a corner, Iran may feel compelled to accelerate its nuclear program.

Belarusian President Aleksander Lukashenko has accused the U.S. of fomenting weeks of protests throughout the country triggered by the August 9 election that delivered him yet another term, and that many Belarusians and other observers have called fraudulent. Lukashenko, who is backed by Russia, has been Belarus’s president since 1994. Lukashenko’s claims about U.S. involvement echo those of the director of Russia’s Foreign Intelligence Service, Sergei Naryshkin, who has claimed to have evidence that the U.S. funded the Belarusian opposition and provided other forms of encouragement and support. Attempts to delegitimize the opposition are a shift from Lukashenko’s previous strategy to stem the unrest, which involved violent police suppression of protests and the detention of more than 7,000 demonstrators. After decades of close alignment with Moscow, Lukashenko has shown some signs of independence, most pointedly by refusing Russian President Vladimir Putin’s calls for de facto reunification of the two countries. However, his refusal to step down in the face of powerful popular opposition leaves him with little recourse other than to seek Kremlin support, a move that will ultimately require some concessions to Moscow.

The U.S. has charged five Chinese hackers with targeting more than 100 U.S. firms and other victims, including video game companies and universities, and accused the Chinese government of turning a blind eye to their misdeeds because they also provide services to Beijing’s intelligence apparatus. The U.S. says the hackers are affiliated with a high-profile Chinese cyber outfit known as APT41, which has links to China’s Ministry of State Security. Additional arrests were made in connection with the case – two Malaysian businessmen the U.S. says conspired with the hackers in profiting off their infiltration of video games. The U.S. move to penalize the hackers is part of a long-standing effort to address widespread efforts by cybercriminals in various countries to target U.S. firms and other entities. However, publicly linking the crimes to China’s state security apparatus is more in line with the U.S.’s recent pivot to a confrontational approach on issues where China is broadly perceived as an aggressor, from island-building to research-stealing to extralegal territorial claims in the South China Sea. (We note that this is not the first or only instance – for example, a federal grand jury indicted four People’s Liberation Army hackers for stealing data from credit rating agency Equifax in February). This latest incident is not likely to add significantly to tensions between the U.S. and China – which are already running high – but it does not bode well for future phases of the U.S.-China trade deal. The phase 1 deal is still intact, but as more contentious issues in the bilateral relationship have come to the fore, it has lost its utility as an incentive for restraint.

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.

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.

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

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.