The Week That Was
The Manchester Bombing
The Manchester bombing that claimed 22 young lives was a sobering start to the week. The attack was notably sophisticated, carried out by a conventional suicide bomber with the skills to make triacetone triperoxide, construct the explosive device, quietly network among multiple people without getting caught and effectively deploy a device against a soft target. But it was also notable that the bomber had looser ties to the Islamic State core than did the attackers in the Paris and Brussels cases. Though the 22-year-old bomber, Salman Abedi (a Manchester native of Libyan origin), traveled to Libya multiple times on family trips since the ouster of former Libyan leader Moammar Gadhafi and is thought to have traveled from Libya to Syria at least once on one of these trips, he and his Manchester cell appear to have been operating relatively autonomously. Just how few ties Abedi had to the Islamic State was made evident by the group's vague claim of responsibility, which lacked detail on the attacker's identity and on the plot itself.
Meanwhile in Libya, the Tripoli-based Government of National Accord is trying to use the opportunity to boost its own legitimacy by quickly rounding up Abedi's family members. In the United Kingdom, Labour Party leader Jeremy Corbyn has received a boost in the polls (Labour is now just five points behind the Conservatives) after criticizing the governing Conservative's counterterrorism policies and ahead of the June 8 snap election.
The U.S. versus NATO and the G6
Europe was on edge during U.S. President Donald Trump's trip to Brussels for the NATO summit and to Italy for the G7 summit. The G7 summit was a preview to July's G20 summit, and during it advocates of free trade tried hard to counter the protectionist rumblings coming out of Washington. During the NATO summit, Trump unsurprisingly criticized NATO defense spending, while other U.S. officials compensated for his speech by reaffirming the United States' commitment to Article 5 on collective defense. Contrary to the alarmist media reaction to the visit, it is still a U.S. imperative to maintain the Western security alliance. Less attention was paid to the fact that the Trump budget plan includes $4.8 billion for the European Reassurance Initiative — a 40 percent increase for a fund that was created by former U.S. President Barack Obama to reinforce the U.S. presence in Europe as a deterrent against Russia aggression.
We are closely following a looming flashpoint in the Russia-West standoff. Ukraine and Moldova began this week by implementing joint border controls on goods and people at the Kuchurhan border checkpoint with the Russia-backed breakaway territory of Transdniestria. Officials from the breakaway territory have warned they could enlist Russia, which has a sizeable military presence in the region, to ensure security at the checkpoint. Ukraine, meanwhile, threatened to close the border completely if it does so. With the Ukraine conflict at an impasse, Kiev is looking for ways to focus the West's attention on Russia.
Problems With the Arab Coalition
While Trump lectured the Europeans on defense spending, he promised Middle East leaders at a lavish summit in Riyadh that they would be free of U.S. admonishment on human rights. This is part of a U.S. strategy to cobble together a more coherent Sunni coalition led by Saudi Arabia to counterbalance Iran. U.S. reinforcement of Sunni allies is all the more possible now that the United States has a nuclear deal in place with Iran. And the election of incumbent President Hasan Rouhani in last week's election bodes well for the viability of the deal. But there are still big fault lines within the Arab coalition that Washington will have to contend with. This was on full display when a bizarre media war broke out between Qatar and the rest of the Gulf monarchies. Qatar claims it was hacked when its state-owned news agency published a report quoting Qatar Emir Tamim bin Hamad al-Thani as making favorable comments on Iran. But that didn't convince Saudi Arabia or the United Arab Emirates, which blocked Qatari media outlets to shame and isolate the Qatari government.
As the Iran-Saudi tension escalates, we will be watching Bahrain closely now that popular Shiite cleric Isa Qassim has been sentenced to a one-year jail sentence. Bahrain, backed by Saudi Arabia, is prepared to crackdown on the resulting Shiite protests, but the case is still an important indicator of whether Iran has the capability to enable an armed insurgency in the Shiite-majority kingdom of Bahrain to destabilize the Gulf. Saudi Arabia and Bahrain are being cautious: Though Qassim has been sentenced, his sentence was suspended for three years, and he has not been arrested.
Considering OPEC Exit Strategies
OPEC and other major oil producers agreed to extend their current deal to cut oil production through March 2018. The continuation of the deal was expected; In fact, markets were disappointed that the meeting did not result in more cuts to more quickly reduce the petroleum stockpiles that have swelled since 2014. Still, the deal's extension could result in the fulfillment of OPEC's goal in bringing oil storage levels back to five-year averages by early 2018. The focus will now be on producer exit strategies once the current extension ends. We expect compliance to slip the closer inventories get to five-year levels and for Saudi Arabia and its Gulf Cooperation Council partners to be left with the biggest burden in maintaining cuts. U.S. oil production growth (running roughly between 70,000 to 100,000 barrels per day per month) will keep prices low despite OPEC's attempts to rebalance the market.
The U.S. Reassures Its Southeast Asian Allies
After a seven-month break, the U.S. navy carried out what is believed to be the first freedom-of-navigation patrol (FONOP) in the South China Sea under Trump's administration. U.S.S. Dewey reportedly sailed within a 6 nautical mile radius of Mischief Reef, a disputed shoal that China built into an artificial island beginning in 2014. The operation aims to discredit China's sovereignty claim: A ruling by the Permanent Court Arbitration last July determined that China's artificial islands are not entitled to territorial waters extending 12 nautical miles.
More Caution in Chinese Currency Policy
A statement on the website of China's Foreign Exchange Trading System revealed a change in the way the yuan's daily fix will be calculated. The new system will involve a new "counter-cyclical adjustment factor." The change was presented as a way to counter herd behavior in currency markets and to introduce more stability, but in truth the change seems to be the latest example of China pulling back from its previous yuan liberalization policies. The more distant a prospect the free-float of the currency becomes, the less likely that the yuan will be able to one day challenge the U.S. dollar for the role of global reserve currency.
Colombia Keeps FARC Peace Deal on Fast Track
When Colombia's constitutional court called the fast track mechanism into question last week, we were concerned that Bogota could be blocked from implementing the FARC peace deal before next year's elections. But this week the Colombian government asked Congress to extend the fast track mechanism for another six months to facilitate quick approval of legislation related to the peace agreement. Colombian President Juan Manuel Santos has enough congressional support in both houses to win approval for the fast track mechanism and for the peace deal, though the opposition will try to delay approving the peace agreements by presenting new changes to the drafts of each part of the deal. The government's strategy to counter delays will be to crack down on absenteeism when a peace law proposal goes to a committee or to plenary vote. (Though, ironically congress was apparently unable to discuss a law penalizing absent congressmen because there were too many absentees.)
Keeping Watch on Venezuela's Attorney General
Venezuela's main state-run television news outlet has called for a protest against Attorney General Luisa Ortega in Caracas to demand her resignation. Ortega has openly criticized big government decisions, such as the attempt to disband the National Assembly in late March and the decision to try civilian protesters in military tribunals. She is now investigating officials for human rights abuses against protesters. This exposes a major split within the ruling party and strong support for Ortega among military members that has prevented Venezuelan President Nicolas Maduro from firing her (so far). The Ortega case is critical to monitor when watching for fissures within the Venezuelan government.
Quote of the Week
"We must seek partners, not perfection — and to make allies of all who share our goals."
U.S. President Donald Trump speaking in Riyadh May 21
Turkish officials have been hinting for weeks that the country is on the cusp of finalizing export deals worth up to $2 billion, the largest contracts in the nation's history. The agreements, primarily for maritime systems, are with Saudi Arabia and another unspecified nation. Though Turkey's defense exports doubled from 2011 to 2016, total deals in the industry remained relatively low at $1.68 billion last year — accounting for less than 1 percent of global arms exports. The rumored upcoming sales highlight not only Turkey's determination to boost its defense exports, but also Ankara's ambition to greatly expand its indigenous defense industry.
Fuel cells convert the chemical energy present in hydrogen into electricity. (How the conversion happens is a story for another element.) The technology operates much as a battery does, except that instead of recharging, a cell can run off a continuous supply of hydrogen in a stationary setting or refuel periodically as a traditional gasoline-powered engine does. Fuel cells show so much promise as a power source that for a time, scientists hailed the advent of an economy based around hydrogen. Their optimism has since ebbed, along with government support for the technology in the United States. Nevertheless, fuel cells — whether to power vehicles or to help satisfy demand for electricity — will probably be one of several technologies that usher in the transition from hydrocarbons, however gradual it may be.
Notwithstanding the reforms that India undertook in the early 1990s, its trade policy has long centered on resisting liberalization. Antipathy toward free market competition extends to a societal level in India, and in the decades after its period of liberalization, the country largely reverted to its defensive ways. In 2001, for instance, India's staunch opposition to the lower trade barriers proposed in the WTO's Doha Development Round contributed to the negotiations' failure.
The Week Ahead
Putin Visits Macron
Russian President Vladimir Putin will travel to France May 29 to speak with new French President Emmanuel Macron. The visit will coincide with the 300th anniversary of the first Russian emperor visiting France. Though Russia favored National Front leader Marine Le Pen in the election, Putin is quickly adjusting to Macron. After all, France historically has been a key European country for Russia to balance against the West, and Putin wants to prevent Paris from pushing back against Russia on issues such as Ukraine.
Moscow Shines a Spotlight on India in St. Petersburg Forum
Indian Prime Minister Narendra Modi is the guest of honor at Russia's St. Petersburg Economic Forum June 1-3, Russia's key conference to woo foreign investment. Russia wants to share the stage with Modi to show that it is not living in diplomatic isolation. India and Russia are expected to finalize an agreement on the joint production of the T-50 stealth fighter plane, a contract that could amount to more than $32 billion for India alone. The project is considered critical for both the Indian and Russian air forces as well as for their defense industries. Trouble has surfaced, however, over the large sticker price, with the Indians having second thoughts about the project. Russia is also keen on expanding energy ties with India.
With Modi's trip being at least partly motivated by the desire to drum up investment, it may give new impetus to an EU-India Free Trade Agreement, which has stalled in recent years. Last year, India cancelled 57 existing bilateral investment treaties, including its important European ones, with the intent to renegotiate new treaties on better terms. But changes within Europe mean that bilateral investment treaties are now negotiated by the bloc rather than by individual states, meaning that if he wants to increase his chances of attracting European investment, Modi may need to focus on negotiating an overall EU-India free trade agreement as Germany this week urged, since that would also include an investment component.
A High-Level Russia-Egypt Meeting
Russian Foreign Minister Sergei Lavrov and Defense Minister Sergei Shoigu are heading to Cairo on May 29 to meet with their Egyptian counterparts as part of their 2+2 (Foreign and Defense ministers) format that was agreed to in 2013. The Kremlin has sought to establish a larger physical presence in North Africa overall and has reportedly been building up its presence at Sidi Barrani air base in Western Egypt to help support its operations in Libya. Egypt can leverage its healthier relationship with the United States under Trump to try and extract concessions from Moscow.
Southeast Asian Leaders Look to Washington for Clarity
Now that the United States has reaffirmed its security commitment by resuming its Freedom of Navigation operation in the South China Sea, Southeast Asian nations will be looking for other definite assurances from Washington. Vietnamese Prime Minister Nguyen Xuan Phuc will visit Washington May 31 to discuss post-TPP trade relations and maritime disputes. Separately, U.S. Defense Secretary James Mattis will travel to Singapore to attend the annual Asian Security Summit, known as the Shangri-La dialogue. This is a traditional avenue for Washington to affirm America's regional leadership and maritime policies in the face of China's perceived aggressiveness.
An MIA Buhari Celebrates 2 Years as President
May 29 will mark Nigerian President Muhammadu Buhari's second year in office, though the president has been in the United Kingdom since May 7 for another open-ended medical vacation. Still, the business of government has continued in his absence, with the senate passing its version of the Petroleum Industry Governance Bill on May 26, marking the first time the bill has succeeded in the upper house. This version of the PIB, which was previously broken up into several bills to increase its chances of passing, avoids the more contentious issues of revenue sharing mechanisms and instead seeks to split the state-owned Nigerian National Petroleum Corp. into two entities — an oil and a holding company — and to create a new regulatory commission, among other reforms. For it to be successful, the PIB still needs to pass the House of Representatives and be signed by the presidency.
China-EU Summit Puts Climate Change in Focus
China and the European Union will hold their annual summit June 2 in Brussels. It is usually held in July, but China requested that it be moved earlier to keep the pressure on the United States, since the two participants are likely to stress the benefits of free trade in a manner that the United States has been unwilling to do. Another message to Trump will be the summit's focus on climate issues and the importance of the 2015 Paris Agreement. The U.S. administration is internally divided on the topic and in reality, it doesn't matter all that much if Trump pulls out or just fails to meet stated goals since the agreement includes no consequences for missing targets. Economics and technological advancements will continue to be the main drivers of renewable and efficient technology. At the same time, China is positioning itself with evolving environmental policy. Beijing's stricter domestic energy policies line up with China's goal of consolidating power as well as its efforts to position itself on the global stage as an up and coming leader on climate change and mitigation technologies.
Italy's Electoral Law Debate Begins
The lower chamber of the Italian parliament will begin discussing on May 29 a new electoral law. Because of the failed constitutional referendum in December, Italy's current electoral law would probably not allow the formation of a functioning government. The details of the electoral law could also help swing the odds between the ruling Democratic Party and the insurgent 5 Star Movement which continue to be neck-to-neck in polls. If the Five Star Movement achieved a strong result in Europe's most indebted nation, it could create problems across the Continent. This week progress was made toward a final bailout of Monte Dei Paschi, the troubled Tuscan bank. Attention now shifts to two Venetian banks —Banca Popolare de Vicenza and Veneto Banca — which will have to raise 1 billion euros ($1.1 billion) in private capital before they can receive similar public funding.
The following is an internal Stratfor document listing significant meetings and events planned for the next week.
- May 26-June 25: The Muslim holy month of Ramadan is observed around the world.
- May 29: The Italian parliament's lower chamber will start discussing the draft electoral law.
- May 29: The leaders of Sweden, Denmark, Iceland and Finland will meet in Bergen, Norway.
- June 1: Former French Socialist presidential candidate Benoit Hamon will launch a new political movement to rebuild the French left.
- June 2: Brussels will host the EU-China summit.
- June 3: Malta will hold parliamentary elections.
- May 26-29: NATO Secretary-General Jens Stoltenberg will visit Georgia.
- May 29: Russian President Vladimir Putin will meet French President Emmanuel Macron in Paris.
- June 1: Chinese representatives will attend the 40th Antarctic Treaty meeting. China plans to expand its research in Antarctica but has no immediate plans for mining or development.
- June 4: Cambodia will hold local elections.
- May 29-June 4: Indian Prime Minister Narendra Modi will visit Germany, Spain, Russia and France.
- May 30: India's monsoon season will begin, with rains expected to hit the southwestern state of Kerala first.
- June 1: Morgan Stanley Capital International's reclassification of Pakistan's stock exchange from frontier market to emerging market status will come into effect.
- June 2: In Nepal, the Rastriya Janata Party Nepal, an alliance of ethnic Madhesi parties, will strike to protest the second phase of the country's local body elections.
Middle East/North Africa
- May 29: Lebanese lawmakers face a deadline to pass a new electoral law. The deadline is already an extended one, and the entire parliament's term ends June 20.
- May 31: Vietnamese Prime Minister Nguyen Xuan Phuc will visit the White House.
- May 31: Brazil's central bank will meet.
- June 4: Mexico will hold state elections.
- June 5: Mercosur and the European Free Trade Association will hold the first round of formal trade negotiations.
- May 29: The Nigerian government will release a score card on President Muhammadu Buhari's presidency on the two-year anniversary of his taking office.
- June 1: South Africa's Eskom will stop providing power to Zimbabwe until the country's debts are paid.