16 May 2024
This Week:
Putin Reshuffles War Cabinet
Technological Developments in US Military
New Tariffs Imposed on China
Geomagnetic Storm Tests Global Infrastructure
Interest Rates Will Remain High Long Term
UK Report Recommends New Political Violence Category
Argentina’s Poverty Increases Due to Reforms
Attempted Assassination of Slovak Prime Minister
Putin Reshuffles War Cabinet
Russia announced major changes in the Defense Ministry as Defense Minister Sergei Shoigu is moving to the Security Council. Shoigu became defense minister in 2012 and is one of Putin’s closest allies during the current war. One of the major issues facing Russia is balancing soldiers and workers in the defense industries, which Belousov will be tasked with handling because this is interconnected with inflation and sanctions. Shoigu will remain influential in the war as secretary of the Security Council, which advises Putin on military and strategic issues and is a more senior position. In some ways, this was actually a promotion for Shoigu. Taking Shoigu’s place is First Deputy Prime Minister Andrei Belousov, an economist with extremely limited military experience. Belousov’s expertise indicates that Putin wants the defense ministry to focus and help Russia’s war economy and rearmament. CNA scholar Dmitry Gorenburg has noted that the “economic and the warfighting are becoming increasingly interrelated, and this appointment is part of a recognition of that. They’re trying to ameliorate potential impacts” of the conflict on Russia’s economy. Importantly, this does not necessarily mean that Russia’s military operations are failing, but it does highlight the ongoing complexity and problems of the war when it comes to economic issues.
While replacing Shoigu is not necessarily a negative indicator, Putin has also removed the intelligence chief and appointed a loyal technocrat (Mikhail Mishustin) as prime minister. All of these changes do indicate that Russia is preparing for a protracted conflict as war economies are difficult to maintain. The conflict has become a war of attrition and will likely last for several years. Russia is advancing in the northeastern region of Kharkiv, and Ukraine’s air defense is now only shooting down 46% of Russian missiles (compared to 73% six months ago). A protracted conflict will benefit Russia in certain ways because this is the country’s typical approach to warfare: outlasting the enemy. In addition, Russia is not the first country to appoint a bureaucrat or economic-focused defense minister (e.g., Robert McNamara in the US, John Nott and Grant Shapps in the UK). From an organizational perspective, this could bring long-term benefits to the Russian war effort, and Ukraine will need to prepare for such a protracted conflict with a better organized Russia.
Technological Developments in US Military
The United States military has gained several technological advances recently that will likely alter balance of power calculations in net assessments. First, the US Army has now acknowledged the use of laser weapons in combat zones overseas, a goal that was decades in the making (the first prototype was in 1973). The 20-kilowatt palletized high-energy laser (P-HEL) systems were developed as anti-drone technology, and they have proven successful against threats in the Middle East. Second, US Special Operations Command (SOCOM) is implementing a new electronic warfare (EW) program focused on the ground domain. These EW systems will include “dismounted/body-worn; mounted; unattended sensor; and small unmanned payloads to enable electromagnetic surveillance (ES), electromagnetic attack (EA), and electromagnetic protection (EP) capabilities.” Such EW systems will be used in counter-drone defenses, electromagnetic countermeasures, and jamming-resilient radar capabilities.
Finally, SOCOM has acknowledged the use of artificial intelligence with their warfighters, which is “optimizing warfighter performance, improving targeting precision, and enhancing situational awareness in contested environments.” No single development is likely to entirely shift a war, but the accumulation of these technological developments acknowledged recently indicate major changes in how analysts will need to look at the military balance of power in places like the Indo-Pacific. For example, drones will now be a critical aspect of future wars, but if the US is capable of mass deployment of P-HEL and EW systems, then drones (especially less sophisticated ones) deployed by other countries will be significantly less effective. A military balance of power is important for security analysts to understand because that will be used by governments to make important foreign policy and defense decisions, such as choosing when/if to attack based on their likelihood of success. E.g., China could decide to forgo invading Taiwan over the medium term if they believe they lack an advantage due to such technological developments from the United States.
New Tariffs Imposed on China
President Biden announced on May 14 new tariff increases on Chinese imports, including steel and aluminum, semiconductors, electric vehicles, critical minerals, solar cells, and cranes. Biden said during his speech on this, "American workers can out-work and out-compete anyone as long as the competition is fair, but for too long it hasn't been fair.” China has been accused of using unfair market practices (such as dumping into the market), and former President Trump started imposing tariffs on China due to that, leading to the current trade war between the two countries. Over the past few weeks both the US and EU have complained about Chinese “overcapacity” and “excess supply.”
Although the Biden administration has taken a generally tough stance against China, these new tariffs were most likely done for political reasons as the US imports few electric vehicles from China. Biden is likely trying to appeal to unions with these tariffs. However, there will be some negative impacts as China will retaliate in some way as this impacts $18 billion in Chinese goods. China will send the excess supplies to other markets, which will hurt US exporters (China has just overtaken the US to become India’s largest trading partner). This is also a strong indicator of a general rise in protectionism as now the Democrats are trying to outdo the Republicans on trade barriers. The US led the world in promoting free trade in the 20th century, but that neoliberal approach has practically ended. Corporations should expect that the US will no longer promote free trade, and trade blocs will form. A free flow of goods, investment, and services is over.
Geomagnetic Storm Tests Global Infrastructure
Despite many pretensions otherwise, both governments and corporations are mostly at the whim of the ecological and cosmological events that are beyond their control. Over the weekend of May 10-12, major solar activity caused “northern lights” to be seen all the way into Florida while the Aurora Australis could be seen in Namibia. This was due to the strongest geomagnetic storm in more than two decades. The storm had a disturbance storm time (Dst) index of -412 (similar to one in 2003), but it was not as bad as the storm in 1989 with a Dst of -589 that caused power outages across Canada. Elon Musk noted that some Starlink satellites were “degraded” because of the event, and GPS signals were also degraded. However, there was significantly less damage than in 2003 because utilities and satellite operators were better prepared. Importantly, this was nowhere near as bad as the geomagnetic storm of 1859 that had a Dst between -800 and -1750. An 1859-level “Carrington event” will eventually reoccur, which would devastate global infrastructure and cost the US between 3-15% of GDP. An even worse Carrington event took place in 774 that was 10x worse than in 1859. If businesses are not prepared for such cosmological events, then their infrastructure will be significantly harmed. Though rare, they do occur at regular frequencies, and they pose major safety and business operational risks.
Interest Rates Will Remain High Long Term
Financial markets strongly indicate that interest rates will remain high for the long term, which will have several negative impacts on businesses and consumers. At the very least, extremely low interest rates will not return because of inflation and continuous geopolitical tensions. Higher interest rates make it more difficult for businesses to borrow money to fund research and operations whilst also preventing consumers from buying goods like houses and cars. Analysts will need to track the relevant variables to determine the likelihood of interest rates dropping within the medium term as there is a strong interconnection between those rates and security issues.
Government debt remains a critical variable as it is rising significantly (advanced economies had budget deficits at 5.6% in 2023), and the IMF estimates that it will remain elevated through 2029. Higher deficits lead investors to demand higher premiums for government bonds, and government borrowing crowds out private investment. Relatedly, Western countries are aging rapidly, and governments are having to spend more on social services. Generous pensions in European countries means they will have to take on more debt to fund them as the ratio of retirees to workers increases. That will keep interest rates higher as well. Finally, supply-shock risks from geopolitical issues (leftovers of the pandemic, wars in Ukraine and Gaza, and the ever-present US-China competition) will keep inflation higher, meaning interest rates will remain higher. Much of the extraordinary growth and innovation that occurred after the Great Recession was due to ultra-low interest rates providing basically free capital for businesses. That model is over, and corporations will need to expect less money to invest.
UK Report Recommends New Political Violence Category
In the United Kingdom, the government’s advisor on political violence has written a report recommending Parliament legislate a new category to designate and ban “extreme protest groups” that use “criminal tactics.” Groups like Palestine Action and Just Stop Oil are the kind of “extreme protest groups” that would be included in the new category. These are groups that attempt to destroy art, harm important historical documents (like the Magna Carta), vandalize buildings and statues, and disrupt traffic. Such groups represent threats to public safety, and if the UK took this step, then it would likely change the way Western governments approached such protestors. The US and Europe have had to contend with “extreme protest groups” that stop ambulances from getting to hospitals or engaged in deadly protests. This will most likely impact corporations because they could be required to engage in certain reporting on employee activism if Western governments decide to stop “extreme protest groups” from continuing to harm communities.
Argentina’s Poverty Increases Due to Reforms
Argentina is facing an economic crisis as now nearly 60% of the country is living below the poverty line, which has increased from 44% in December 2023. President Javier Milei’s free market policies are the cause of the loss of thousands of jobs as he has closed government agencies and stopped 90% of public construction. Due to these problems, beef consumption is now at the lowest it has been since 1967 because people cannot afford the food staple. These economic problems were expected because free market reforms almost always create short-term economic disruptions before leading to a stronger economy, and Argentina had been plagued by extremely high inflation and poor public finances. Milei’s policies have had some positives already as April’s inflation reduced to single digits, down from 25% in December 2023, the government had a surplus in Q1 2024, the peso has stabilized, and the central bank reserves have reached $12 billion. Argentina remains an important test case for market reforms in Latin America, a continent that has faced significant economic problems over the past several decades. While it is too soon to tell if Milei’s policies will work, if they are able to reverse Argentina’s decline, then other countries in the region are likely to follow. This will improve broad market conditions in South America and allow for more foreign direct investment.
Attempted Assassination of Slovak Prime Minister
Slovak Prime Minister Robert Fico is currently in critical but stable condition in hospital due to a politically motivated assassination attempt that occurred while he was leaving a government meeting on May 15. The would-be assassin shot Fico five times. The full motivation has not been delineated, but government officials believe it is because of the recent election won by a Fico ally. Fico is a left-wing nationalist politician, and his policies have led to a series of recent protests. Insight Forward has recently highlighted the increased threats from assassinations for political and high-value figures, and this event seems to fit the new tragic pattern. See here for our previous analysis.
"History is a vast early warning system"
- Norman Cousins
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