On the Record
In a tense situation, anything can happen. Both accidents, as well as planned accidents.
Iranian Foreign Minister Javad Zarif
On Our Radar
The Deterrence Dilemma With Iran. After vowing repeatedly to retaliate against the United Kingdom for impounding a Syria-bound Iranian oil tanker off the coast of Gibraltar, Iran seized two British tankers on July 19 and released one of them, the Mesdar, after reportedly delivering a warning to the crew on environmental regulations. Iran will likely hold on to the other tanker, the Stena Impero, as leverage in negotiations with a British government in the midst of a major political transition. The latest tanker shenanigans follow a week of Iran denying a U.S. claim that one of its drones was shot down and the Iranian seizure of a small Emirati-owned and Panamanian-flagged oil tanker that Iran claimed was smuggling oil. Iran has a history of cracking down on smugglers outside of its own network, but the incident only reinforced Iran's message to the world that no foreign vessel is safe from Iranian harassment in the Persian Gulf. As Iranian Foreign Minister Javad Zarif said, "It's called the Persian Gulf for a reason."
The week's events support our running forecast that a U.S. limited strike scenario is still the most likely outcome of the current crisis. Iran knows President Donald Trump wants to avoid war at all costs, and that is why Iran is taking action to convince the world that it is more than ready to risk war and that the only alternative to avoiding war is to relax the sanctions against it. The Europeans cannot provide Iran with the economic safety net it needs, and the United States does not want to be seen as rewarding Iran with sanctions relief for dangerous behavior. And so, the crisis will escalate, and the United States will be forced to contend with the difficult question of what it will take to actually deter Iran from continuing attacks on tankers in the region and from shortening its nuclear breakout time. There simply are not enough naval escorts you can pack into the area to cover all the tankers that transit the critical and narrow Strait of Hormuz. Sanctions are the most tempting, nonmilitary answer, but they will only drive Iran to push back harder. That's why the threat of military action remains high, no matter how much Trump wants to avoid it.
Brexit, the Boris Way? Former British Foreign Secretary Boris Johnson is expected to win the Conservative Party's leadership contest July 23, and as the United Kingdom's next prime minister, he is committed to delivering Brexit at any cost. Johnson has threatened to suspend Parliament and drag the queen into a potential constitutional crisis to prevent lawmakers from trying to block a no-deal exit. But Parliament will not go down without a fight, and on July 18 approved a motion to remain in session in October regardless of whether Johnson tries to suspend the body. The motion was backed by 17 Conservative members of Parliament — a reminder that there is a considerable number of lawmakers who are ready to vote against their own government if that is what it takes to avoid a hard Brexit. This could prove decisive should the opposition trigger a no-confidence motion against the new prime minister, a scenario that will become much more likely as the Oct. 31 Brexit deadline approaches.
Japan's Postelection To-Do List. Japan's upper-house elections take place on July 21 and are expected to deliver a win to the ruling Liberal Democratic Party. If Japanese Prime Minister Shinzo Abe manages to secure a two-thirds majority, that will help ensure forward movement on some big pending reforms, including a 2 percent consumption tax hike expected in October and a constitutional reform to expand the role of Japan's Self-Defense Forces. With elections behind Tokyo, we can also expect U.S.-Japan working-level trade negotiations to pick back up, with meetings already scheduled for July 24-26 in Washington. Key to watch will be whether Japan and the White House can come to a compromise over agriculture and auto tariffs: Japan is willing to offer substantial agricultural concessions to the United States, but the United States is also pushing Tokyo to limit auto exports to the United States or else face tariffs. Meanwhile, Japan's trade battle with South Korea is set to worsen. We'll be watching a July 24 hearing in which the Japanese government is supposed to decide whether to remove South Korea from a so-called white list of countries for trade in sensitive materials.
Italy's Leaders Contemplate Elections. As we wrote in our 2019 Third-Quarter Forecast, Italy reached an agreement with Brussels to avoid sanctions from the European Commission, but that would not be enough to tame deep frictions between Italy's governing parties, the right-wing League and the populist Five Star Movement. The League has threatened to leave the coalition, but if it follows through, there's a chance the Five Star Movement finds a new partner (for example, the center-left Democratic Party) to avoid an early election, putting the League back in opposition. This is giving League leaders a lot to think about as they plan their next moves. The Italian Parliament will enter its summer recess in August, and the League is running out of time to make its move if it wants an election to happen in September.
Mexico's Progress Report on the Border. July 22 marks the first checkpoint of the U.S.-Mexico deal on curbing illegal migration. Mexico is hoping that a nearly 29 percent drop in U.S. border apprehensions between May and June will help convince the White House that Mexico's security measures are having the desired effect and will thus justify putting the tariff threat to bed. But with border security a headlining issue for his re-election bid, President Trump will keep applying heavy pressure on Mexico, insisting that Mexico overhaul its asylum policies as the next step of the process. That won't go over well in Mexico City. Guatemala's high court has unsurprisingly already shot down a proposal that would have allowed the United States to send asylum seekers from any country to Guatemala.
Erdogan Is Getting His Rate Cut. A cut to Turkey's key interest rate — currently at 24 percent — is widely expected when Turkey's central bank's monetary policy committee convenes on July 25. President Recep Tayyip Erdogan's distaste for high interest rates led to the recent firing of the central bank's governor and his replacement by a more compliant deputy, who is expected to embrace a cut, even if it leads to more downward pressure on the Turkish lira.
Ukraine Goes to the Polls. Ukrainians will head to the polls on July 21 for parliamentary elections that are likely to be dominated by the Servant of the People party of President Volodymyr Zelenskiy, who rose to a sweeping victory in presidential elections just three months ago. The expected outcome will enable Zelenskiy to consolidate political power in parliament and give him a strong mandate to pursue his anti-corruption agenda on the domestic front. However, Zelenskiy's bid to end the conflict in eastern Ukraine will face steep challenges as Russia has shown no inclination to back down and has worked to facilitate Russian citizenship procedures to Donbas residents, stoking tensions further with Kiev.
Anti-Corruption Comes Back to Bite Ramaphosa. South African President Cyril Ramaphosa was dealt a blow this week when the country's public protector accused him of violating the constitution and ethics code related to a 2017 campaign donation. The allegations will no doubt hand additional firepower to Ramaphosa's enemies, who may use it to try to unseat him in parliament. While any removal attempt will likely fail, the accusations may weaken Ramaphosa's anti-corruption narrative and embolden rival factions within the ruling African National Congress party. As the battle for South Africa and its ability to clean itself up after years of mismanagement and graft heats up, more mudslinging like this will be likely.
On Our Minds
Testing U.S. Security Guarantees in the South China Sea. With Vietnam openly accusing China of violating its sovereignty in the South China Sea over energy exploration and the Philippines debating internally how to respond to the sinking of a fishing vessel by China, a big question on the minds of these middle powers is what U.S. security guarantees are actually worth in the region. As Vietnam's maritime disputes with China escalate, Hanoi will predictably look to the United States for reinforcement. But Philippine President Rodrigo Duterte is going down a different path, much to Beijing's delight. In a statement that his government later had to clarify was "sarcasm," Duterte said he was invoking the Mutual Defense Treaty with the United States and calling "America to gather their Seventh Fleet in front of China." Duterte was cheekily calling out the weakness of Manila's defense relationship with the United States to remind his opponents that they're better off with his approach of negotiating with China instead of engaging in real conflict. The more unreliable the United States is seen as a security partner to these states, the more room China has to maneuver in its near abroad.
How Long Will Iran's Political Unity Last? Between the rhetoric of Iran's more pragmatic president and foreign minister and the aggressive actions of the Islamic Revolutionary Guard Corps, Iran's typically divisive political system has been remarkably unified in pushing back against the United States' maximum pressure campaign. But will this unity fray the closer Iran gets to parliamentary elections in February? Iranian hard-liners are gearing up for a comeback following the past six years of being led by a moderate reformist alliance, now suffering a major credibility crisis from the collapse of its nuclear negotiation with the United States. Even as a big external enemy like the United States can be powerful glue for a government as fractious as Iran's, this internal competition is likely to grow and will set the stage for presidential elections in 2021. The faction that comes out on top of these elections will play a chief role in shaping the next nuclear negotiation with the West.
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On Our Calendar
In the coming week, U.S. Secretary of State Mike Pompeo is scheduled to visit El Salvador and Mexico, Japan holds elections for its upper house of parliament, Ukraine holds parliamentary elections and former British Foreign Secretary Boris Johnson is expected to win the job of prime minister. For more, see our Geopolitical Calendar.
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