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.