In Other News: Democracy & Corruption in Latin America, UK Defense Spending & More – November 20, 2020

November 20, 2020

Questions about democracy, sovereignty, and corruption have emerged again in Latin America, as Peru got its third president in one week, Mexico secured the release of a high-level former official from drug trafficking charges in the United States, and Brazil held the first round of municipal elections this month. In Peru, corruption allegations led to the ousting of popular President Martín Vizcarra, who was replaced by Congressional leader Manuel Merino, who then stepped down amid protests. Francisco Sagasti was sworn in as interim President on Monday, but popular demands for constitutional changes leave in doubt his ability to govern between now and presidential elections scheduled for April 2021. In Mexico, the government of President Andrés Manuel López Obrador persuaded the U.S. government to release former Mexican Defense Minister Salvador Cienfuegos, who was apprehended by U.S. federal agents on drug trafficking charges last month in the United States. Mexican officials saw the arrest as a breach of trust between allies and an infringement on Mexican sovereignty. A U.S. federal judge dismissed the charges upon the request of U.S. Attorney General William Barr on Wednesday. In Brazil, candidates for municipal elections who added “Bolsonaro” to their ballot names in hopes of benefitting from President Jair Bolsonaro’s popularity were not so successful at the polls – possibly indicating that corruption investigations involving the president and his family are catching up with him at the ballot box. The runoff races are scheduled for the end of November.

The UK has announced the largest increase in defense spending in three decades, allocating an additional $21 billion over four years to develop its military’s cyber, space, and artificial intelligence capabilities. The plan, as presented to the public, would include measures designed to enhance the country’s nuclear deterrent capabilities and protect shipping lanes essential to supplying the country, as well as creating 40,000 new jobs. The move to bolster defense spending comes just months after the public release of a report by the UK’s Intelligence and Security Committee detailing years of Russian cyber campaigns targeting various facets of the UK government, including its Foreign and Commonwealth Office and Defense Science and Technology Laboratory, as well as links between the Russian government and organized crime groups operating in the UK and what are believed to be extra-territorial assassinations carried out at the Kremlin’s behest on UK soil. The shift in defense posture also comes amid what appears to be a global recalibration of the threat posed by China in the cyber and military arenas. The spending increase has raised some eyebrows – it may require cuts to funding elsewhere, especially as the UK struggles to content with the fallout of both Covid-19 and Brexit – but it appears to be broadly accepted as long-overdue.

The US Securities and Exchange Commission is pressing ahead with proposed regulatory changes that could force Chinese firms to delist from U.S. exchanges. The proposed regulation would prohibit companies whose financial reporting does not comply with US auditing standards – specifically those that do not allow inspections by the Public Company Accounting Oversight Board (PCAOB) – from listing their shares on U.S. exchanges, and China is one of the few countries in the world that does not permit PCAOB inspections of its companies (this applies to mainland and Hong Kong firms). If this rule is ultimately finalized, the shares of Chinese giants like Alibaba and Baidu, which are held by a number of US individual and institutional investors, would no longer be tradable in the US. A harder line on China appears to have bipartisan support in the US, but this particular regulatory shift will have a significant impact on the bottom lines of some major financial institutions. It is likely trigger at least some backlash in the public comment period, but if it moves forward, the timeline for the change – it would take effect in January 2022 – would allow for either a modification of China’s position, which is unlikely, or a gradual winding down of US investors’ holdings.