Saudi oil bombings, what happens next?

Will the Iran-US rapprochement continue despite the bombings?

Friday, September 20, 2019

Political Disruption brings you insights on how the fast-changing global political environment is creating a political disruption of business.

Good Morning!

We didn’t plan to have a new Iran-related issue this week after our Iran update last week, but hey we can’t choose what’s happening in the world, and this bombing of Saudi oil infrastructure is quite significant.

Welcome to a new week of Political Disruption!

Hans Diels (you can also follow me on Twitter: @hans_diels)

Iran Risk Update

Increased risk of escalation

Risk: The alleged Iranian involvement in the bombing of Saudi oil relations made plans for a US Iran rapprochement more complicated. However, the (relatively) cautious response from the White House shows that the softer approach of Iran is not completely gone. We expect limited retaliation by the US (increased sanctions + potential cyber-attacks). Further escalatory steps by both parties can still get them in an accidental conflict. New small scale attacks from Yemen an Saudi Arabia or the United Arab Emirates are also a possibility

Potential disruptive impact: An escalation of the conflict would actively disrupt maritime traffic in the Gulf and will have an impact on political stability in the wider Middle East. It would also impact oil prices even in this weak oil market.

US President Donald Trump and Saudi Crown Prince, Mohammed bin Salman, Official White House Photo, Shealah Craighead

What happened

The attack. Over the weekend two Saudi oil facilities (Abqaiq and Khurais) were set ablaze. At first, it seemed a drone attack, but later it seemed more likely to have been missiles or a drone-missile mix. The destruction of the attack drew 5,7m barrels of oil off the market (more than 50% of Saudi daily production and 5% of the global oil market).

Who did it? Houthi rebels in Yemen claimed the attack but it seems more likely that the attack came from outside of Yemen (from inside Iraq or Iran itself). The sophistication of the attack suggests Iranian involvement. US experts concluded that the missiles’ trajectory pointed to Iran. Saudi Arabia said the attacks were clearly launched from the North, not from Yemen, this could mean they came from either Iran or Iraq. Despite the Saudi arguments, Houthi rebels provided further details, stating that the attack was launched from three distinct sites in Yemen.

Why did Iran do this (if they did it)?

Disruption. Iran has been showing it potential for disruption since it started harassing tankers in the Strait of Hormuz and was seen as responsible for minor acts of sabotage of oil targets in the Gulf. It wants to put the pressure on the US and Europe showing that it’s not a weak player. Until recently Iran’s actions have been well-calibrated not to provoke a harsh response.

Sanctions. The objective of the Iranians is to get sanctions relief by pulling the US back in the Iran deal (or an alternative deal). It seems that they may have overplayed their hand just while the US President started talking about alleviating some sanctions to make a meeting with Iranian President Rouhani happening. Until now Iran has made sure that all attacks had a large level of ‘deniability’ making sure that attacks could not be directly linked to the Islamic Republic.

Saudi Weakness. The attacks showed the weakness of the Saudi air defences. Despite having bought billions of dollars of military hardware from the US they were not able to withstand the attack. It also demonstrated that Iran could severely hurt Saudi Arabia. A recent report from the CSIS showed that the Saudis have

vulnerabilities in its oil, desalination, electricity, SCADA, shipping, and other systems.


Oil market. Oil prices surged 20% in the immediate aftermath of the attacks but fell later in the week when the Saudis reported on Wednesday that half of the production had already been restored and by the end of September it would be at full production according to Saudi Energy Minister Prince Abdulaziz bin Salman.

Further escalation.

The US. Last week we argued that prospects for an Iranian-US rapprochement were looking better. We still think that the moderated reaction by the White House shows that President Trump is not looking for a large-scale conflict with Iran. The President probably does not want to go into an election year with another Middle-Eastern conflict. Further escalation would also have a negative effect on oil prices and on the American economy. Trump also quickly scaled back his more escalatory remarks on the issue and said he does not want war with Iran.

Trump already announced a tightening of sanctions. A new US cyber offensive is also possible as is retaliation to Iranian proxies (with or through the Saudis) in Yemen or Lebanon. As the Iranians did not attack American targets it could be seen as a measured response when the Americans did target Iranian proxies and not Iranian targets.

Immediate prospects

While the prospects for a Rouhani-Trump meeting at the UN this month have clearly diminished, we don’t think it is impossible. Trump would really love a photo-op with the Iranian President, demonstrating his capacities as a dealmaker. But then Rouhani would have to get his visa for the US. At this moment the Iranian delegation has not received its visa. The 1947 U.N. “headquarters agreement,” required the United States to allow access to the United Nations for foreign diplomats. But according to Washington, it can deny visas for “security, terrorism, and foreign policy” reasons. But the UN is trying to solve the issue. Not granting visas would really hurt New York’s role as a diplomatic meeting place.

Prospects for immediate sanctions relief look less likely at this moment.

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Iran update - Bye bye Bolton

Will John Bolton's resignation bring the US and Iran down from the path to escalation?

Friday, September 13, 2019

Political Disruption brings you insights on how the fast-changing global political environment is creating a political disruption of business.

Iran Risk Update

↓ Decreased risk of escalation

Risk: Relations between the US and Iran remain tense, but the possibility for another approach to Teheran has increased now the President’s hawkish National Security Advisor has left the administration and President Trump seems more willing to facilitate a summit meeting with Rouhani. Small escalatory steps by both parties (or by Israel) can still get them in an accidental conflict.

Potential disruptive impact: An escalation of the conflict would actively disrupt maritime traffic in the Gulf and will have an impact on political stability in the wider Middle East. It would also impact oil prices even in this weak oil market.

Bye-bye Bolton

(now) former US National Security Advisor John Bolton. (Source: Kremlin)

Resigned (or fired?) This week US National Security Advisor John Bolton resigned or was fired by the President (depending on whose account of the story you belief, hint, Bolton’s story seems more legit than the President’s). Bolton resigned probably because of a range of disagreements over policy with the President. Bolton was uncomfortable with the US approach of North Korea, withdrawing pressure without getting anything in return. On this issue he was already sideline as during the last Trump-Kim meeting he was touring in Mongolia at the moment Trump made his historic step on North-Korean soil. He also disagreed with Trump’s planned meeting with the Taliban in Camp David (just days before the 9/11 commemorations).

Uberhawk. John Bolton was quite a hawk. He was one of the architects of the Iraq war. He never learned the lesson that regime change is not as easy as it looked before the Iraq and Afghanistan invasions. He was the most aggressive proponent of regime-change in Iran.

Thaw in US-Iranian relations? While Bolton’s departure will certainly not hurt the prospects for de-escalation of tensions with Iran, more will be needed to convince Teheran that the US really wants to talk. Iranian officials have reacted mildly positive to Bolton’s resignation and even made jokes. Iran’s minister of information, Mohammad Javad Azari Jahromi, tweeted:

“Need a mustache fashion Designer? @AmbJohnBolton is free right now,”

With a little help from a friend? To alleviate sanction pain, and try to keep Iran in the deal, France has proposed a $15 billion credit line. Washington has only recently intensified its pressure campaign and declared that they were not dealing with Iran through Macron. In a reaction Iran has said it would (in violation of the deal) start developing centrifuges that could enrich uranium more quickly.

Some hope? But Bolton’s departure seems to have changed something. President Trump declared that he would be willing to ease some of the sanctions if this could bring the Iranians to the table.

In addition, the fact that Trump allowed Iranian Foreign Minister, Zarif, to visit the G8 summit in Biarritz shows the start of a milder approach to Iran. Finally, Rouhani states everytime that Teheran further violates the agreement, that this steps are reversible.

But then there’s Bibi. In Israel there’s a high level of concern about the prospect of a Trump-Rouhani summit. Moreover, during the G7 summit, Israeli Prime Minister Benjamin Netanyahu told Macron that "It is precisely the wrong time to talk with Iran". On September 9, Netayahu claimed to have exposed a “nuclear weapons development site” near Abadeh.

Where will it go from here?

There are four possible scenarios:

Further escalation

In the first scenario, mutual provocation continues, and there is a good chance that the conflict will eventually get out of hand and that both countries will end up in a military conflict. The US will not be able to win a "quick" victory in Iran, and Tehran will use all its influence through its allies in Syria, Yemen, Lebanon, and Iraq to have the entire Middle East share in the chaos.

The risk of such a scenario has increased because of Israel’s shadow war in the Middle East. It is allegedly hitting Iranian (or allied) targets in Iraq and Lebanon. Recently it hit a weapons factory in Iraq that according to Israel worked for Iran and conducted a drone strike in Beirut (Lebanon).

Not very long ago, President Trump had planned a rocket attack on targets in Iran. The fact that an attack was planned shows that the conflict could escalate quickly. Iran's actions against ships in the Gulf also run the risk of getting out of control and forcing the US to take harder action. While at this moment both Washington and Teheran are holding back further escalation, the highest risk of an escalation is through a conflict incited by Israel that no matter what wants to avoid a Trump-Rouhani summit meeting.


In June, several misinterpreted actions by the US and Iran almost led to further escalation. Iran thought that some American activities, including reducing the American presence in the embassy in Iraq, were a preparation for an American attack. In response, it began to move troops itself. This movement of troops was seen in Washington as Iranian aggression.

The risk of miscalculation is high because both countries do not have official channels of communication to speak with each other quickly in the event of an incident. Even in full Cold War, the US and the Soviet Union had a hotline to avoid misunderstandings in the event of a crisis.

North Korea model

In this scenario, the regime in Iran uses the ‘dealmaking’ ambition of the American President to organize a grand summit between Trump and the Iranian leaders. North Korea used such a summit, without making any real concessions, to get rid of its pariah status and got rid of the strict application of economic sanctions. A problem here is that unlike Kim Jong-un, Iranian leaders are not eager for a summit meeting with the President of a country that they have described for years as the Great Satan. However while a summit with Trump would be a step too far for Ayatollah Khamenei, it may not be for President Rouhani.

NAFTA bis model

An alternative could be to renegotiate the nuclear agreement. Similarly, the NAFTA agreement was replaced by a new deal that did not entail any significant changes. A recent leaked diplomatic communication from the (former) ambassador of the UK to the US indicated that one of the main problems Trump had with the Iran deal was that it was Obama's agreement. A new Trump-Iran agreement could offer a solution.

The way to an agreement

The US has already indicated that it wants to sit together with Iran to reach an agreement. Iran has already stated that it intends to consider this. However, Tehran will only want to talk when some of the sanctions disappear. This is a difficult step for Washington. A solution can be to maintain American sanctions, but at the same time to weaken their extraterritorial application. By granting exemptions to countries such as India and China and possibly Europe, these countries could buy Iranian oil again. This would give the Iranian economy some breathing room. At this moment President Trump seems to be considering such a scheme.

Once Tehran and Washington start talking again, they could include other issues that the US (and the EU) are concerned about, such as Iran's role in the wider region and its ballistic missile program.


While Israel’s shadow war is pushing up the risk of an escalation, the departure of Bolton and Trump’s increasing willingness to consider sanctions relief to get a Trump-Rouhani summit pushes the risk down. Overall we expect that the prospects for de-escalation are increasing but a risk of miscalculation or Israeli agressiveness that could draw the US in a conflict persists.

Brexit, what's next?

Is it a deal, is it no-deal; is it an election, is it not an election?

Friday, September 6, 2019

Political Disruption brings you insights on how the fast-changing global political environment is creating a political disruption of business.

Good Morning!

This week I crunch my teeth on Brexit, the gift that keeps on giving (if you like to talk about political disruption at least :-) )

Welcome to a new week of Political Disruption!

Hans Diels

Is this the end of no-deal? No, it isn’t!

Anti-Brexit poster, Leamington Spa High Street, Stephen Craven

Where are we now?

In a 328-301 vote supported by former government ministers and other Tory rebels, the UK parliament has taken control over its agenda, which is normally controlled by the government. Parliament needed to do this if it wanted to block PM Boris Johnson’s plan to leave the EU with or without a deal. He even lost his parliamentary majority as former justice minister, Phillip Lee, quit the party to join the Liberal Democrats. Parliament voted on wednesday on a bill that forces Johnson to ask for an extension of the October 31 deadline if the EU and the UK do not reach a new deal.

How will things move on from here?

Johnson has repeatedly said that he will not ask the EU for an extension, so he probably might use every trick up his sleeve to stop the bill from moving forward. After passing in the House of Commons, it has to go to the House of Lords (probably today) and then the PM has to send it to the Queen for royal assent.

What Johnson can do is call early elections, trying to dissolve parliament before the bill becomes law. Johnson would like to hold an election on October 14 or 15 a few days before the European Summit on October 17. With a new mandate after campaigning for a ‘come what may’ Brexit, he could find himself in a stronger position.

But Johnson would need two-thirds of parliament to trigger an early election under the 2011 Fixed Term Parliaments act. Therefore he would require the support of Labour. While Labour has said it would like elections, Labour wants to be sure that the anti-no-deal Brexit law is on the statute books (meaning it has passed the House of Commons, the Lords and has the assent of the Queen).

No No-Deal, but what do we want?

The main problem has been that while a majority of MP’s has always been against a no-deal Brexit, they have never been able to formulate an alternative. None of the Brexit options has been able to get a majority in the parliament. And this seems not to have changed. These are the different groups:

  • There are the hard-but-not-crazy Brexiteers, who do want a clear break with the EU but do not want to jump off the no-deal cliff, this group wants a Canada-style trade deal with the EU, nothing more, nothing less.

  • There are the soft-Brexiteers, who want an exit from the EU, but want some or another form of connection with the EU (single market or customs union).

  • There are the moderate-remainers, who wanted to stay in the EU but now the referendum has gone the other way, want to remain as much integrated with the EU as possible from the outside (single market and customs union).

  • Finally, there are the diehard-remainers who want no Brexit deal, who want a new referendum and stay in the EU.


Now Johnson has lost his majority it seems nothing more than a question of timing before elections will be called. This can be done in two ways:

  • Either by Johnson himself. For this he needs a 2/3 majority in parliament. Labours seems not ready to give this to the PM as they want to be sure that the Brexit extension bill is approved by both houses of parliament and sent to the Queen.

  • Or by a vote of no-confidence in the government. Here only a simple majority is needed and MPs have four days to form an alternative government. When no new government can be formed elections are called at least seven weeks after no confidence vote.

Election prospects

While Boris Johnson’s Conservative Party has been leading in the polls since he became PM, he’s polling at 34% of the votes. Given the UK’s first-past-the-post system (which rewards the first party) this could be enough to have a majority in parliament, it remains a big gamble.

Johnson has two advantages at this moment:

  • He seems to have united the leave-vote. Since he became PM polls show that the conservatives have gained votes to the detriment of Nigel Farage’s Brexit Party (see figure).

  • The remain vote is heavily divided. Labour is polling relatively weakly while the Lib Dems have their best polling in 10 years. And the Greens and the SNP are further dividing the remain vote.

  • In the UK’s first-past-the-post system only the biggest party in a district gets a seat, this is an advantage for the biggest party.  

Source: Politico:

What happens after the elections?

What happens if the UK holds elections (before or after the October 31 deadline)?

Scenario 1: Conservatives win the election

If Johnson’s party wins the election, it will be a much more united pro-Brexit party. The ‘rebels’ who joined the opposition to extend the Brexit deadline, will not be able to stand in elections for the Tories and will (probably) be replaced by hardline Brexit loyalists.

The haggling with the EU will continue, and prospects for a solution remain dim, as the conservatives are so divided on Brexit, that no deal will satisfy the hardline Brexiteers. If Boris Johnson wins a majority in the elections, the probability of a no-deal Brexit will be higher than they’ve ever been. If elections are held before the deadline, the new parliament could scupper the current bill and the UK would probably crash out on October 31.

(Scenario 1b: Conservatives win and persuade EU to change)

A low probability alternative version of this scenario is that a big win by the conservatives would lead the EU to change its position on the backstop and negotiate an considerably better deal. This has a very low probability as this would weaken the EU’s negotiating position with other bullies (read Trump, China…). In addition it would make leaving the EU much more atractive to other disgruntled members with populist governments.

Scenario 2: Labour takes over control

While a labour victory seems very unlikely given their current polling, it would mean the UK government will negotiate a new deal with the EU. Labour prefers the UK to stay in the customs union and have a close single market relationship. So a Norway + scenario could be possible (Norway is in the Single Market, not in the Customs Union). This would eliminate the backstop as there would be no need for a hard border in Ireland.

Scenario 3: Liberal Democrats join or support a government

The LibDems are polling good and are expected to make serious gains in the next elections. Given the relatively low polling results for both the Conservatives an Labour, the LibDems could turn out the party choosing the next government. The LibDems want in principle to stay in the EU and want to subject any Brexit deal to a new referendum. Whether they will get this approved in a deal with either the Conservatives and Labour (which still has a Brexit-faction) is doubtful. But any government that has to use support from the LibDems will have to negotiate a deal that would leave the UK much closer to the EU (customs union, single market).

Scenario 4: A new referendum on Brexit.

A fourth scenario remains a new referendum on Brexit. The question then becomes: Which question will the government ask the population. Will it be a binary choice between the current deal and staying in the EU? This will not please the Brexiteers in the conservative party who think the deal is not good enough. But what is the alternative? A range of options (WTO-conditions, customs union, single market, staying in)? And a second referendum will open a new range of questions. If the result would be very outspoken, it could work. But, as it seems at the moment, there will be a very tight result (with the remain side winning this time), what will keep Brexiteers from arguing for a third referendum?

So if you thought we were getting close to the end-game…. We are getting closer, but the end-game will be a long one.

This is not a trade war

Political Disruption August 30, 2019

Friday, August 30, 2019

Political Disruption brings you insights on how the fast-changing global political environment is creating a political disruption of business.

Good Morning!

I used the holiday period to revamp Political Disruption. From now on, you’ll get a weekly newsletter, bringing one big analysis each time.

This week we explain why the good news on the US-China trade war is not really good because, in the long run, a definite solution is not possible.

If you have suggestions for topics I should cover, please let me know by replying to this mail.

Welcome to a new week of Political Disruption!

Hans Diels

This is not a trade war

Forecast: Recent signals from the US President on US-China relations lead markets to optimism. However, ambiguity over the aims of the trade conflict (on the US side) and its embeddedness in the broader geopolitical rivalry between the US and China leads us to forecast more turbulence in the trade relationship, no substantial deal and much uncertainty. We expect in the medium and long-term more tariffs, sanctions, investment and export controls.

President Donald Trump talks on the phone aboard Air Force One. (Official White House Photo by Shealah Craighead)

Both China and the United States weakened their rhetoric in the last days. According to Trump, Chinese negotiators allegedly called their American counterparts to say that they want a deal. The American President stated that an agreement is close. With so many good news, the stock markets revived. However, the long-term trends look less favourable.

A new summit, a new truce

After every major summit, the US and China launch a new ceasefire. 

  • After the G20 in Buenos Aires in December last year, Trump postponed what he considered a "great and productive meeting with unlimited possibilities for both the United States and China" raising tariff rates for 90 days. However, he raised the tariffs in May. 

  • At the end of June, there was a new G20 summit in Osaka, Japan. The United States promised not to impose new tariffs 'for the time being', and American companies could, despite an earlier ban, continue to sell their products and services to the Chinese technology company Huawei. In exchange, China would, according to Trump, buy a "huge" amount of American agricultural products. A good month later, in a tweet, the US President threatened with new rates (10% extra on more than $ 300 billion worth of Chinese products) from September.

  • Now at the end of the G7 summit, Trump changed his tone again about China and showed himself to be much more conciliatory again. 

What does the US want?

How long will it take this time before it goes wrong again? To understand whether the end of the trade dispute is in sight, one should understand what the objectives of the US tariffs on China are. Here it gets difficult. There is no clear goal, or there is no goal that has been communicated. It is not clear, certainly not for the Chinese, what they should do to accommodate the Americans.

  • The American President himself seems to be very focused on the bilateral trade balance with China. The balance can easily be solved if China just buys more American products. Something the Chinese would have no problem with. They would like to purchase agricultural products, but also American fuels. Something according to this line seemed to be the deal in December last year.

  • On the other hand, there are the formal requirements of the Americans that deal with subsidies, intellectual property rights and the entire organization of the Chinese economy that is far too much intertwined with the Chinese state. If the US intends to free up the Chinese economy completely, it will end up disappointed. Control over the economy is an essential part of the power of the Chinese Communist Party over the population and is therefore not negotiable.

  • Also, it seems more and more that rates are not a means but the goal for some people in the White House. By creating permanent uncertainty about new tariffs, American companies will be less inclined to expand their presence in China, and we see some companies already adjusting their supply chains. This is also in line with a recent tweet from Trump in which he called on American companies to "immediately start looking for an alternative to China."

As long as the goal is not clear, it is not clear when the Chinese have made enough concessions. Moreover, it will not be evident when the conflict is effectively over, as permanently new demands from the US side can arise.

Geopolitical links

Besides, the US President linked the trade dispute to other issues. He has linked China's help in solving the North Korean problem as something that could a negotiated trade solution easier. More recently, Trump also linked a peaceful solution in Hong Kong to trade negotiations. However, all these linkages are just temporarily flare-ups suggested in tweets and don't seem part of a more encompassing strategy.

This makes it impossible for the Chinese to have a clear view on what the US really wants. This will prevent China from making significant (politically painful) concessions. As, for the Chinese, there's a permanent risk that after they made their concessions, the US will demand something new on another issue.

Moreover, many issues could arise in the future. The trade dispute is, after all, only one element in the global competition between the US and China:

  • Taiwan, which China sees as an inseparable part of its territory but which the US has vowed to protect.

  • Control over the East and the South China Sea. China is not looking for world dominance but wants control over its immediate environment. However, for Washington, it is essential to maintain a free passage in the waterways around China, through which a large part of world trade goes. 

  • Human rights violations in Xinjiang where China emprisons around 1 million people in 'political education' camps and has installed an extreme totalitarian regime for the rest of the population.

  • crackdown in Hong Kong. For weeks protesters have been challenging the local (and indirectly Chinese) authorities. Protests and police interventions have turned more violently recently.

All these issues clearly matter for the US. The big question is to what extent the US is willing to enter into a military conflict with China over them. Once the answer is no, the call for harsher economic measures (tariffs, sanctions, control of investment, export controls) will only be louder from the US Congress, the President and the American public.

This entanglement of geopolitical conflict with economic measures ensures that any new geopolitical escalation can flare up the trade war.

Permanent uncertainty

If we face a pure trade conflict, it would have been easier to predict when it would end, but because it is increasingly intertwined with other issues and with the broader geopolitical competition between the US and China, we can only say with certainty that we will see much more turbulence shortly. The optimism of the stock markets, therefore, seems to be more wishful thinking than anything else.

Political Disruption - July 2019

Economic statecraft 2.0, US-China conflict, Erdogan's miscalculation, Iran and some more trade news.

Thursday, July 4, 2019
Political Disruption brings you insights on how the fast-changing global political environment is creating political disruption of business.

Good morning, this month we talk about how economic statecraft is reaching a new level with cyber attacks intensifying and political detention becoming a new technique. We discuss the US-China meeting in Osaka at the G20. Then we focus on the implications of the AKP’s loss in the Istanbul elections rerun. Then we go to Iran (again) for an update on its conflict with the US and finally we find some good and bad trade news.

Welcome to Political Disruption in July!

Hans Diels

1. Economic statecraft 2.0 - Hacking and political detention

Business risk: Increased risk of political detention and damage occurring due to hacking of infrastructure.


Economic statecraft on the rise. In a world of geopolitical competition and high levels of economic interdependence economic statecraft will thrive. This is what we’ve seen in the American politicization of trade policymaking and in the Chinese instrumentalization of regulatory measures to punish firms of governments with which it has political disagreements (remember when the Chinese stopped buying Norwegian salmon when the Chinese dissident Wen Xiabo received the Noble Peace Price?). Moreover, the use of economic statecraft has been spreading to other states (Qatar blockade and Saudi Arabia stopping to send patients to Canadian hospitals).

Detention wars. However this was just the beginning. Economic statecraft or the use of economic interdependencies to reach political goals, is reaching new heights these months. The first escalation was the use of detention as a political weapon in the trade conflict. First, there was the arrest of Meng Whanzhou, CFO and daughter of Huawei Founder Ren Zhengfei. She was arrested in Canada at the request of the United States for breaching US regulations banning dealings with Iran. While the extraterritorial application of US law (another form of economic statecraft using the pervasiveness of the US financial system, is nothing new, Trump’s politicisation of the arrest is new. The US President suggested that Meng Wanzou’s release could be part of a trade deal with China. By taking her arrest out of the legal and into the political sphere, all pretence of a purely legal process has been dropped. In reaction to Meng’s arrest, China arrested Michael Kovrig, a former Canadian diplomat, now working for the International Crisis Group. In this way, detention is becoming a political weapon and should concern businesspeople and other people travelling to China in these tense times.

Hacking Wars. Another example of the ramping up of the level of economic statecraft is the cyberconflict that is further developing between the US and Russia. A New York Times (NYT) report shows that US forces have stepped up operations in Russia. The US has placed implants on the Russian electricity grid. The fact that the US didn’t mind the NYT bringing out the news shows that the operations are meant to deter Russia of attacking the American grid.

2. (another) Truce? An agreement? Or continued US-China conflict?

Business risk: While a temporary cease-fire in the US-China trade conflict might comfort some market players, the truce will only be temporary, and we can expect further disruptions (tariffs, sanctions and informal measures) soon between the US and China.

President Trump during the G20 meeting in Osaka, Japan (Source: White House)

Is it a truce, is it an agreement? It’s certainly not an agreement at this moment. However, at his G20 meeting with Chinese President Xi Jinping, President Trump made some gestures to China. He said that he would allow US companies to sell to Huawei again and put off any new tariffs on China. China also promised to start repurchasing US agriculture products.

Huawei is back! Strangely, the President let Huawei off the hook after months of pressuring US allies to stop dealing with the firm as it presents a national security risk. The latter is something a lot of US Senators also believe and China-hawk, Marco Rubio, already threatened with Congressional action if the President would weaken his stance on Huawei.

Trade or national security? The confusion around whether Huawei is just a chip in the trade negotiations or an imminent security threat illustrates the fact that Trump’s actions on China are a combination of tactical measures pushed by different groups in his administration. It makes clear that there’s a lack of a real China-strategy that determines whether China is a strategic geopolitical competitor or just a badly behaving trade partner.

Continued conflict? Given that one of the few issues on which there’s an agreement in the US Congress is China’s emergence as a real strategic competitor, we can expect the conflict to continue and no temporary cease-fire or some insignificant deal will solve the structurally conflicting relationship between the US and China. Expect more turbulence in the future.

3. Erdogan’s big miscalculation

Business risk: Big risk of increased political instability, which will make the already hard economic situation even harder. Smaller risk of temporary disruptions of maritime traffic through the Turkish Straits.

What happened before? On March 31, Erdogan’s AKP party lost municipal elections in Istanbul by 0.2%. President Erdogan refused to accept his loss and forced a rerun of the elections. Erdogan reached himself national prominence when he was elected mayor of Istanbul in 1994.

What happened now? On Sunday, June 23, the rerun led to an even bigger defeat for the AKP candidate. He lost from Ekrem Imamoglu of the centre-left CHP with 9.2% of the votes. In addition to the symbolism, losing Istanbul is also a big blow to the AKP’s patronage networks for which Istanbul is essential.

What will happen? Turkish opposition parties will feel bolstered after their victory in Istanbul (and other important cities). This will strengthen their determination to keep resisting the slide towards repression. At the same time, Erdogan weakened and humiliated will probably not give the opposition more leeway. He will dig in! These two dynamics will collide, and we expect a lot more political instability in Turkey due to increasing conflict between Erdogan and his opponents.

Not repressive enough, not free enough. Turkey is a typical case of a political regime in between democracy and autocracy. On one hand, it's not oppressive enough to contain all political dissident and on the other hand it’s not free enough to create political openings to voice legitimate concerns without breaking the law. This makes it a very combustible environment without a pressure valve, leading to a potential blow-up.

Why does it matter? Turkey is the EU’s fifth largest trade partner and instability and economic crisis will have an impact on the EU’s economy. Besides, Turkey is already in quite some trouble in its relationship with the US as it plans to buy a Russian anti-missile system. The US has threatened with sanctions if the sale proceeds. Finally, Turkey has a deal on migration with the EU, where it receives millions of refugees in exchange for European money. If instability increases, the refugee deal could be threatened, potentially creating a new migration crisis in Europe.

4. Back to Iran?

Business risk: Relations between the US and Iran remain tense, and while the decision not to escalate militarily has avoided immediate conflict, small escalatory steps by both parties can still get them in an accidental conflict that will actively disrupt maritime traffic in the Gulf and will have an impact on political stability in the wider Middle East.

Is Iran breaking the deal? Yes, a little bit. Javad Zarif, the Iranian foreign minister, said that his country had crossed the 300 kg stockpile limit of low enriched uranium. While it’s a formal breach of the agreement, it’s a tiny, well-calibrated step by Tehran to push the Europeans to look harder for a way out of the sanctions that are stifling the Iranian economy.

President Donald J. Trump signs an Executive Order in Bedminster, New Jersey, entitled “Reimposing Certain Sanctions with Respect to Iran.” (Official White House Photo by Shealah Craighead)

Do the Iranians want to break the deal? Probably not. A spokesman of the Iranian foreign ministry declared that the Iranian steps are reversible, clearly indicating that Iran prefers to keep the nuclear deal if other countries do their part of the agreement. The actual breach is very limited, does not teach the Iranians anything new for their nuclear programme and does not bring it significantly closer to building an atomic bomb. However, further breaches could shorten to lead time to complete a nuclear programme.

What do the Europeans want? They try to keep the deal alive and are still searching for a mechanism that could allow trade with Iran. However, this seems nearly impossible given Washington’s encompassing financial sanctions. However, they will launch a credit line to facilitate trade with Iran. Whether this will convince firms to get involved in Iran and face the wrath of the US, is very uncertain.

President Trump the peacenik? At the last month, President Trump cancelled a military strike on Iran he had ordered in retaliation of Iran shooting down a drone and instead opted for cyber attacks on Iran. While the US also put sanctions on Iranian Supreme Leader Ali Khamenei and other officials, the Trump administration signalled that it would like to get back to the negotiating table with Iran. It also seems as if Trump’s getting enough of his hawkish advisers (Secretary of State, Mike Pompeo and National Security Advisor John Bolton). Especially seems to be fallen out of grace when he missed Trump’s historical steps into North Korea while he was on a ‘mission’ to Mongolia.

Try the Kim way? Maybe Iran could take some lessons from the North Korean Leader Kim Jong-Un, who seems to be playing the US President just perfectly by providing him with ‘historic’ photo-ops without giving anything substantively. Maybe a visit by Trump (accompanied by Ivanka?) would do a lot to weaken the President’s stance on the Islamic Republic. One problem is that Iranian Supreme Leader Ali Khamenei seems a little bit less well cast to play the role of Jolly Good Fellow that his fellow Supreme Leader Kim Jong-Un seems to love.

5. More trade news

Business risk: Not only the US and China are stirring trade conflict, things also start simmering between India and the US and Japan and South Korea. Especially this last conflict could have an impact on global tech supply chains.

USMCA Signing Ceremony ([State Department photo by Ron Przysucha )

The Good News:

  • India has increased his tariffs on two dozen US products in reaction to Washington’s suspension of its General System of Preferences (GSP) to India.

  • Japan has imposed trade restrictions on South Korea for smartphone and chip materials. Japanese firms will have to obtain approval to sell materials used to make chips and smartphones -- to South Korean companies. This is a reaction to a historic dispute between the two countries over wartime labour during the Japanese occupation in World War II.

The Good News:

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