China, the US: Collision course.
Also: NATO, Turkey, Ukraine, Russia, OPEC, India, Pakistan and the Seychelles.
CHINA. UNITED STATES. Collision course.
Military talks remain on hold despite a near miss at sea.
China's defence minister said Sunday the US was "provoking bloc confrontation" shortly after the Pentagon accused China's navy of cutting in front of a US vessel undertaking exercises in the Taiwan Strait on Saturday.
INTELLIGENCE. Minister Li Shangfu found time to give a combative speech at the Shangri-La Dialogue defence forum this weekend but not to meet his US counterpart. While trade and diplomatic talks are ongoing, the US and China risk sleepwalking into crisis unless militaries can keep an open line. Ranking above any other branch in Beijing’s hierarchy, the People’s Liberation Army, which reports directly to the Party, can and does overrule civilian officials.
FOR BUSINESS. For as long as the US maintains sanctions on Li, talks will not come quickly. Backing down will be hard for Washington but easier than for Beijing. Until then, a lack of dialogue risks undermining progress on the economic track. If Chinese and US ships had collided on Saturday, it is not difficult to imagine the escalation to a new Gulf of Tonkin-style incident. Businesses should look past the relative bonhomie between trade negotiators.
NATO. TURKEY. Two can play.
Erdogan won’t veto Sweden forever.
NATO chief Jens Stoltenberg met Turkish President Recep Tayyip Erdogan on Sunday in a failed bid to have Turkey agree to Sweden's accession to the alliance. Officials from Turkey, Sweden and Finland will meet this week.
INTELLIGENCE. Fresh from his election victory and while forming a new cabinet, Erdogan wants to extract the maximum price to agree to Sweden’s NATO membership. He won’t however, forestall Stockholm’s bid indefinitely, conscious this could bring forward US congressional approval of a delayed purchase of F-16 fighter jets. Erdogan will continue to play hardball with the alliance, but ultimately Turkey needs NATO more than NATO needs Turkey.
FOR BUSINESS. Erdogan’s strategy on Sweden – where disagreement over Kurdish groups is ostensibly behind a refusal to ratify – mirrors to an extent the far trickier path he is walking between Western bond vigilantes, who have driven down the value of the lira, and his industrialist backers, who benefit from a weak currency. Expect a weak lira through summer to maximise tourist revenues before a return to orthodox monetary policies in the autumn.
UKRAINE. RUSSIA. Crying wolf.
Kyiv says its counteroffensive is ready. Moscow says it’s begun.
In an interview published on Saturday, Ukraine’s president gave the strongest indication yet his military was ready for a long-mooted counterstrike on Russia. On Sunday, Moscow claimed to have thwarted a large-scale attack in Donetsk.
INTELLIGENCE. As spring turns to summer, Kyiv’s delayed counteroffensive risks becoming a propaganda victory for Moscow as it otherwise fends off sporadic Ukraine-linked incursions within its borders. While drone attacks on Moscow and the alleged capture of Russian soldiers by far-right rebel partisans are embarrassing, ultimately, only a major military assault will break Russian lines. Until then, the conflict looks set to remain a long war of attrition.
FOR BUSINESS. Firms and investors looking to predict the war’s next phase are better off seeking to understand the context than following blow-by-blow engagements. While the Kremlin made a strategic error in invading Ukraine, it has learned most of its early lessons, and its war economy appears secure. Where Moscow is vulnerable are its relationships beyond the West. Currently, they provide a lifeline, but Western diplomats will continue chipping away.
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OPEC. RUSSIA. Fuel on the fire.
Saudi Arabia cuts production. Russia celebrates.
Riyadh said on Sunday it would reduce oil output in July by roughly 10%, or 1 million barrels per day, its biggest cut since 2020. Earlier on Sunday, the OPEC+ group agreed to extend previous cuts of 3.66 million bpd, to the end of 2024.
INTELLIGENCE. Reduced supply won’t so much benefit Saudi Arabia, whose coffers are full from last year’s oil price rally, as Russia, which, while strictly not an ally, has grown closer to the Kingdom. The move will annoy Joe Biden, who called Riyadh a “pariah” in 2020 and has been battling inflation amid a tight labour market. Washington planned to begin replenishing its Strategic Petroleum Reserve next month, which has been depleted to 40-year lows.
FOR BUSINESS. Since the invasion of Ukraine, this is OPEC’s clearest signal that it doesn’t mind Western criticism. Europe, in particular, remains vulnerable to OPEC-set prices, unlike China and India, which both benefit from discounted Russian crude. Preliminary data last week suggests India received more oil in May from Russia than from the US, Saudi Arabia, Iraq and the UAE combined. Inflation may have just been given a second wind.
INDIA. Derailment.
A rail collision comes at an inopportune time for Modi.
Investigators said on Sunday they suspected a signal malfunction as reason for a crash in Odisha on Friday that killed at least 288 and injured 1,000 more. It was India's third-deadliest rail disaster, after incidents in 1995 and 1981.
INTELLIGENCE. Rail accidents are tragically common in India, but the scale of Friday's disaster comes as a blow to Prime Minister Narendra Modi, who had pledged safety fixes and was due on Saturday to launch a semi-high-speed train from Mumbai to Goa. It will also risk previous election gains made by Modi's Bhartiya Janata Party in Odisha, a traditional opposition stronghold, which gave the BJP a 17% swing in 2019. India returns to the polls next year.
FOR BUSINESS. Modi has enacted an increasingly bold foreign policy as he consolidates dominance at home. Still, accidents happen, and Modi will worry about the political impacts, particularly after the BJP's surprise defeat in state elections in Karnataka last month. Modi won’t take chances and has already expelled opposition leader Rahul Gandhi from parliament. Gandhi is now on a speaking tour in the US ahead of Modi’s own visit to Washington later this month.
INDIAN OCEAN. No country is an island.
The US and China make moves along a critical shipping route.
Pakistan’s Balochistan province on Saturday declared the Chinese-built port of Gwadar a tax-free zone. On Thursday, the US reopened its embassy in the Seychelles after 27 years. The US is also building an embassy in nearby Maldives.
INTELLIGENCE. Washington’s moves to shore up its influence in the Indian Ocean are a reaction to Beijing’s growing presence, a sign of Delhi’s increasing comfort with US activity, and a hedge against a possible transfer from Britain to Mauritius of Diego Garcia, a vital naval base. Moves in Gwadar demonstrate China’s hold on the strategic port, which could, in time, host PLA assets. Pakistan, facing fiscal collapse, would usually want to collect all the tax it can.
FOR BUSINESS. While 80% of seaborne trade crosses the Indian Ocean, its infrastructure is sparse, and besides bases in Diego Garcia and Djibouti, the US and China only have a tenuous hold. Concerns over a Chinese base in Gwadar were once overblown, but Saturday’s move is significant. Should Beijing establish a presence, the US and India will want to ensure it’s not the first of many. As in the Cold War, firms can expect regional competition to return.
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