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.

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.

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.

In Other News – March 27, 2020

The U.S. government indicted Venezuelan President Nicolás Maduro on narco-trafficking conspiracy charges this week. U.S. federal prosecutors charged Maduro with leading a violent drug cartel that has flooded the United States with cocaine for decades. U.S. Attorney General William Barr said that Maduro’s government is “plagued by criminality and corruption,” and the State Department announced a $15 million reward for information leading to Maduro’s arrest. The indictment of a head of state is an escalation of the Trump administration’s efforts to oust Maduro from power, following a year-long effort to squeeze the regime by imposing oil sanctions and recognizing opposition leader Juan Guaidó as the legitimate president.

The U.S. has cut $1 billion in aid to Afghanistan and threatened to cut another $1 billion next year, citing Afghan leaders’ inability to resolve a political dispute that would lay the groundwork for a peace deal with the Taliban that allows U.S. forces to withdraw from the country. The U.S. provides Afghanistan with around $4 billion in security aid and $500 million in civilian aid annually. Two competing politicians – Ashraf Ghani and Abdullah Abdullah – have both declared themselves president, threatening the future of a Taliban deal. Secretary of State Pompeo traveled to Kabul on Tuesday but was unable to facilitate a resolution. Afghan sources have suggested that Afghanistan’s political factions are already seeking to align themselves with Russia or Iran in advance of a U.S. withdrawal.

North Korea launched two projectiles, believed to be short-range ballistic missiles, toward the Sea of Japan on Saturday. The Japanese Coast Guard confirmed that a missile landed in water outside of its exclusive economic zone. The launch comes as the country’s two closest neighbors, South Korea and China, have both been focused on managing Covid-19 outbreaks among their populations. North Korea claims to have no cases, but quarantined 380 foreigners in the country for around 30 days ending in early March, and President Trump wrote to North Korean leader Kim Jong Un to offer assistance with the virus. Health experts say that proximity to China and South Korea would suggest that there are at least a few cases of the virus in North Korea.

Russian President Vladimir Putin has suspended an April 22 referendum on a constitutional change to presidential term limits that would allow him to remain in power until 2036, citing the need to focus on the pandemic. Meanwhile, security experts warn that Putin may be using the cover of Covid-19 to further Russia’s campaign to legitimize its incursion into Crimea. Ukraine agreed a few weeks ago to enter into direct negotiations to resolve the conflict – a dramatic change from its previous stance – and representatives of the two sides met via video conference this week to create an additional formal negotiating platform. But Ukraine effectively postponed further movement on the talks, claiming that signing a document would be “physically impossible by videoconference”.

Public health measures to reduce the spread of Covid-19 have given governments cover to impose restrictions on political activities essential to a functioning democracy and rule of law. Bolivia’s government has postponed planned elections; Hong Kong, India, and Russia have banned demonstrations; Israeli Prime Minister Benjamin Netanyahu has managed to postpone his arraignment on corruption charges and temporarily derailed the formation of a new Israeli government, which could have passed legislation preventing indicted individuals from becoming Prime Minister; and Hungarian Prime Minister Viktor Orban’s government has extended an emergency law that can be used to silence critical press coverage under the guise of “false information”.

The Department of Homeland Security has warned that terrorists may exploit global leaders’ focus on Covid-19, stepping up attacks around the globe. There have been at least three attacks so far this week, killing more than 150, and attacks may further accelerate. ISIS seized control of a Sikh religious facility in Kabul on Wednesday, killing at least 25 before Afghan forces were able to locate and neutralize the assailants. A Boko Haram raid in Chad, also Wednesday, killed 92 Chadian soldiers, and another Boko Haram ambush in Nigeria on Tuesday killed 50 Nigerian soldiers. In slightly more uplifting news, Germany convicted eight far-right extremists from a group called Revolution Chemnitz who had been plotting to overthrow the government. Germany’s right wing Alternative for Germany party has vowed to dissolve a far-right faction, known as “The Wing”, owing to monitoring from Germany’s intelligence services, but intelligence experts warn it could be a cosmetic change to avoid scrutiny. The FBI announced on Wednesday that it had killed a Kansas City man who had been the subject of a domestic terrorism investigation. The bureau attempted to serve a warrant on the man, whom they suspected of planning to bomb an area hospital using an improvised explosive device. The suspect was armed at the time.

Alternative theories about the origin of Covid-19 continue to bubble up from unlikely sources, hinting at the use of the virus to further ongoing misinformation campaigns. Theories about the real origins of Covid-19 have come from unlikely sources – a Chinese Ministry of Foreign Affairs spokesperson, anti-vaccination groups, Iran’s Ayatollah Ali Khamenei. Like the appearance of SARS in humans in 2002, the novel coronavirus is understood by public health experts to have jumped from a wild animal to humans, this time in a “wet market” in Wuhan, the epicenter of the first outbreak. But there is no shortage of other explanations – that it was engineered in a Russian laboratory, that it was brought to China by a U.S. military delegation, that it actually doesn’t exist at all. FEMA has created a “rumor control” page on its website seeking to address misinformation, like the rumor that the U.S. would be under “national lockdown” for two weeks, which the Department of Homeland Security has attributed to a foreign government, possibly Russia.

The Russian-Saudi oil price war and demand hit from the Covid-19-related drop-off of economic activity have already triggered two major energy sector developments: massive layoffs in the U.S. shale patch and coal’s surprise status as the world’s most expensive fossil fuel. The U.S. shale sector has laid off thousands of workers just as Covid-19 prevention measures shut down hubs of economic activity nationwide, which will further weaken energy demand. Places like Texas, Montana, and Pennsylvania will likely be hit particularly hard. Meanwhile, the massive drop in oil prices of the past few weeks made coal – at least temporarily – more expensive on an energy-equivalent basis than a barrel of oil. While cheap oil is negatively impacting America’s energy sector, if prices stay low, that will be one less headwind for economic recovery as we emerge from the Covid-19 crisis.