by Brunello Rosa
14 September 2020
Last week the UK government presented a bill to regulate the smooth functioning of the internal market following the withdrawal of the UK from the EU on January 31st, 2020, which will exert its full effects starting from January 1st, 2021, at the end of the so-called transition period. As has been widely reported by the media, many clauses of the internal market bill override the provision of the so-called Northern Ireland (NI) protocol, which was signed between the EU and the UK alongside the Withdrawal Agreement (WA) in order to ensure that a physical border between Northern Ireland and the Republic of Ireland does not return following the UK’s departure from the EU.
As was clear from the very beginning, the implementation of the so-called Irish backstop would have effectively put a customs and regulatory border in the Irish sea, de-facto breaking the “union” of the Kingdom, while leaving Northern Ireland within the EU customs union. For that reason, Theresa May repeatedly refused to accept that option, considering that “no UK prime minister could ever accept” such a condition. Boris Johnson instead revitalised the plan, and that was the key to unblocking the negotiations with the EU in November 2019, perhaps knowing that he would have reneged that pact less than a year later.
The UK government has explicitly said in parliament that the internal market bill would break international law and that the government’s intention was in fact that of overriding the Withdrawal Agreement with domestic legislation. Top EU officials (starting with the leaders of the Council and the Commission, Charles Michel and Ursula von der Leyen, respectively) have called on the UK to respect the pacts signed with the Withdrawal Agreement and the Northern Ireland protocol (pacta sunt servanda, tweeted von der Leyen).
Where does all this leave the ongoing UK-EU negotiations?The two sides agreed that any deal would need to be reached by the EU Council by October 15th, to give enough time for EU parliament and national parliaments to ratify the treaties. For this reason, the EU sent the UK the ultimatum of either withdrawing the internal market bill or making it compatible with the Withdrawal Agreement and NI protocols by the end of September 2020, in order to have at least 15 days to make a final attempt to strike a skinny free-trade agreement (FTA).
This FTA would be even less ambitious than the one the EU recently signed with Canada (the so-called Canada-minus FTA). But it is self-evident that, given the tight schedule, the risk of a no-deal scenario has returned with a vengeance.
Is this just hard-ball negotiation tactics by Boris Johnson? One could suspect that, with deadlines approaching, the two sides are trying to play chicken to see who gives up first. That’s a possibility. However, Boris Johnson is on the record saying that for him a no-deal scenario is a perfectly legitimate and desirable outcome. Also, “no deal” is the only logically consistent end-point of his entire Brexit campaign.
Finally, no deal is the only way the UK would have a proper and final clean break from the rest of the EU, allowing maximum freedom in terms of state aid, taxation and regulatory divergence. It would be the final and cherished prize to secure in return for all the hardship of Brexit. Therefore, we do not think that this is just negotiation tactics. If the final outcome is no-deal, Johnson would sell it as his personal victory.
What’s wrong with a “no-deal” outcome? While the UK can gain something in the short term from reneging on the pact with the EU that was signed just a few months back, doing so would represent a terrible precedent. For a country aiming at “striking trade deals around the world” (such as the one it recently signed with Japan) as the “Leave” propaganda said, being perceived as a counterparty that not only does not respect its word, but does not even respect the treaties it signs, would be a terrible signal to send to other countries that could be potentially interested in striking a deal with the UK.
The UK has taken hundreds of years to move from encouraging piracy to providing one of the most reliable legal systems in the world. If Boris Johnson decides to go down that route, it could cause severe damage to the country’s international reputation. With the UK already being one of the countries hardest-hit by the economic repercussions of Covid, its PM needs to be careful in inflicting more damage from the effects of a no-deal Brexit, even if (as we discussed in our column of May 11th) he could get away with it in the short run by blaming Covid for the economic consequences of a disorderly exit from the EU.
by Brunello Rosa and Karmen Meneses
17 September 2020
by Brunello Rosa and Karmen Meneses
11 September 2020
by Brunello Rosa and Fawaz Sulaiman Al Mughrabi
10 September 2020
by Brunello Rosa
14 September 2020
by Brunello Rosa and Nouriel Roubini
28 August 2020
Alessandro Magnoli Bocchi, Fawaz Sulaiman Al Mughrabi
and Farah Aladsani
26 August 2020
Subscribe to receive our free weekly Viewsletter "Making Sense of This World"
by John Hulsman
8 September 2020
Introduction: Putin As Political Risk Grandmaster
In writing my last book on political risk, To Dare More Boldly, one of my favorite chapters revolved around analyzing foreign policy ‘chess players,’ actors playing the long game, possessing fixed, long-term strategic goals, even as they use whatever tactical means to achieve them.
Patient, low-key, but implacable, chess players do that rarest of things: they actually think ahead and are not prisoners of day-to-day events, conditioning all that they do in furtherance of their long-term strategy.
Russian President Vladimir Putin is the quintessential modern-day example of a chess player, as all the many devious tactics he pursues ultimately amount to a very single-minded strategic effort to restore Russia’s past greatness, often by blunting the West’s drives into what he sees as Russia’s sphere of influence in the countries surrounding it.
As such, Putin’s behavior is eminently explicable, rational, and easy to assess, but only if we start at his strategic end goals and work backwards.
As such, the way to correctly analyze the brewing revolution in Belarus is not to blindly follow the western commentariat in viewing the upheaval through Minsk’s lens, asking whether inept dictator Alexander Lukashenko is on his last legs, whether Belarus will follows the model of the Czech Revolution (peaceful transition) or be a new Ukraine (a bloodbath), or whether the revolutionaries ultimately succeed. Instead, it is Putin’s coherent, thought-through goals that must be focused on, as he is undoubtedly the key determinant of the outcome of the Belarusian revolution.
First, the Kremlin wants Belarus to maintain its membership in the Russian-led Eurasian Union, an economic and strategic grouping. Second, Russia needs Belarus to continue to refine its oil bound for western markets. Third, Putin does not want democracy to have a foothold next door, as the demonstration effect could well be injurious to himself. Fourth, the Russian leader does not want a pro-western, pro-EU neighbor on his doorstep. Fifth, Putin, in true chess player fashion, wants to use the crisis as an opportunity to forge even closer integration between Moscow and Minsk. Sixth, through all these goals, the Russian President wants to maintain and solidify Russia’s immediate sphere of influence.
Every specific move that has taken place since the demonstrations exploded following Lukashenko fixing the presidential election August 9th only make sense in the context of Putin’s chess-playing background, just as political risk events moving forward must be viewed primarily through the prism of what the Russian President, a political risk grandmaster, is trying to accomplish.
Alexander Lukashenko has ruled Belarus with an iron fist since July 1994. Effectively serving as Europe’s last dictator, he has ruled over a Soviet-lite regime since then, maintaining stability in what amounts to a backwater of Russian-dominated influence. That all changed this past August when, angling for a sixth term as president, Lukashenko cooked the Democratic books once too often.
The final count proclaimed the other-worldly tally that Lukashenko had won 80 percent of the vote, with his primary rival Svetlana Tikhanovskaya miles behind at just 10 percent.
But Lukashenko’s thuggish pull with the Belarusian people was fraying. The dictator faced public anger over his inept handling of the coronavirus—where he uniquely suggested drinking vodka would ward it off—as well as for his Soviet-style ineptitude regarding the country’s economy. Large-scale protests sprang up, with between 100,000-200,000 demonstrators gathering in Minsk’s main square alone, demanding free and fair elections.
The Belarusian President responded with characteristic brutality. After Tikhanovskaya filed an official complaint alleging vote rigging, she was detained by police and her children’s safety was threatened, a state of affairs which forced her to flee with them into exile in Lithuania. Before being allowed to leave, she was forced by authorities to read a prepared statement calling on her supporters to not attend anti-government rallies.
This attempt to quell the protests has utterly failed as they have consistently gone on since then. Even subsequent brutal crackdowns (and allegations of torture) have not dismayed the protestors. Making it harder for Lukashenko, the protests have been largely leaderless, so there is no easy way for him to decapitate the revolution. Indeed, Tikhanovskaya herself was merely a stand in candidate for her husband, a popular blogger who has languished in prison since May.
Desperate to save himself, Lukashenko has thrown himself upon the dubious mercy of Vladimir Putin. Late in August, the Belarusian President claimed he had reached a deal with the Kremlin, allowing for Russian troops to intervene in Belarus to put down the rebellion. Lukashenko hopes this announcement of resolve and power will persuade the demonstrators to desist.
Belarus Through Putin’s Eyes
Putin is well aware he holds all the cards in Belarus, as the country is extremely reliant for oil and gas from Russia, is economically intertwined with the Kremlin, and is militarily in thrall to Putin, with no outside power remotely considering intervening on the demonstrators’ side. In fact, unlike in western Ukraine, the Belarusian people have no strong anti-Russian mindset, instead freely acknowledging their close cultural, historical, and economic ties with their Slavic cousins.
Aware of all this, and acutely cognizant that Putin will make or break their revolution, the Belarus demonstrators have been careful not to offend the Kremlin. Speaking to the European Parliament on August 25th, Tikhanovskaya proclaimed, ‘The revolution in Belarus is not a geopolitical revolution. It is neither anti-Russian nor a pro-Russian revolution. It is neither anti-EU nor pro-EU.’ Tellingly, and wholly unlike in Ukraine, there have been no EU flags flying at the protests.
But, at least for now, this has not been enough to persuade Putin to abandon Lukashenko. For one thing, a neutralist Belarus (which is in essence what the protestors are promising him) is not as strategically advantageous to the Kremlin as having Belarus firmly in the Russian sphere of influence.
Further, the ideal outcome for Putin the chess player is one where a weakened and utterly dependent Lukashenko clings to power, wholly amenable to the Kremlin’s demands. Whereas before the dictator was flirting with closer ties with the west, precisely in order to give him more strategic breathing room, now—in order to survive— Lukashenko seems open to even closer economic and legal ties with Russia as urged by Putin, perhaps even to the integration of the two countries as a single state.
Spurred on by this strategic prize, Putin has acted decisively. Economically, he shored up Minsk by facilitating the refinancing of $1 billion in Belarusian debt to the Kremlin. When the Minsk press corps went on strike in sympathy with the protestors, Russia dispatched its journalists to keep Belarusian state television going. Crucially, at the end of August, the Russian President made it crystal clear that, while the Kremlin would rather not intervene, Russia is willing to provide Lukashenko with military and law enforcement support if necessary, while adding the situation does not yet require it.
Left to his own fate, Lukashenko would probably fall. However, Belarus is merely a plaything in a much larger game for regional power, where Putin holds all the cards.
Putin knows he has the west over a barrel regarding Belarus. He will always care more geo-strategically about what is happening in his backyard than will the far-away west, just as the US cares far more about who governs next-door Mexico than does China.
So while Putin recognizes that Belarus is a peripheral western concern, he also knows that for Russia it is primary, if its immediate sphere of influence is to be maintained.
(This is an excerpt of Dr. Hulsman's latest article, which you can read here).
Dr. John C. Hulsman is the widely-read Senior Columnist for City AM, the newspaper of the city of London. Dr. Hulsman is also a Life Member of the US Council on Foreign Relations. His most recent work, the best-selling, To Dare More Boldly; The Audacious Story of Political Risk, was published by Princeton University Press in April 2018 and is available for order on Amazon. He can be reached for corporate speaking and private briefings at https://www.chartwellspeakers.com.
Week 14 - 20 September 2020
US Consumption Likely to Remain Subdued And Central Banks To Remain On Hold
In the US, in August retail sales are expected to remain subdued at 1.1% m-o-m (p: 1.2%). The Fed is expected to remain on hold at its September 2020 FOMC meeting, the first meeting after its Chair Powell announced the CB would tolerate higher inflation.
In the EZ, core CPI inflation is projected to rise to 1.2% y-o-y (p: 0.4%).
In Japan, the BoJ is also seen to keep its policy rates unchanged at -0.1%.
In England, the BoE is expected to leave the key interest rate unchanged at 0.1%.
The Quarter Ahead: US-China Tensions Remain Elevated, Brexit Uncertainties Linger; Central Banks Remain Cautious
In the US, the government has revoked the visas of more than 1,000 Chinese students and researchers–who are deemed to be a security risk. The move follows a statement by President Trump in May aimed at Chinese nationals suspected of “having ties to the military, stolen data, and intellectual property”.
In China, Beijing is expected to impose "reciprocal restrictions" on all American diplomats in response to earlier curbs on the activities of its embassy staff in the US. The unspecified countermeasures will apply to all US embassy and consulate staff, as well as the consulate-general in Hong Kong. Also, China will keep opposing a forced sale of TikTok's US operations by its Chinese owner ByteDance, and would prefer to see the video app shut down in the US, rather than be sold to potential US buyers–such as Microsoft and Oracle.
In the EZ, ECB’s President Lagarde statement that “the ECB would carefully monitor the exchange rate” was perceived as dovish by the markets and led to EUR appreciation. President Lagarde also reiterated that “the bank is ready to do more, if needed”.
In the UK, PM Johnson has accused the EU of “imposing a full-scale trade border down the Irish Sea and a food blockade” between Northern Ireland and the rest of country. Meanwhile, the UK struck its first big post-Brexit trade deal, as it reached a historic agreement with Japan–expected to increase trade by GBP 15bn per year. The deal entailed a compromise on agriculture, under which the UK will have access to “export quotas for cheese and other products that have not been used by the EU”. The agreement with Japan comes at a crucial moment for Johnson, as his move to unpick parts of the Brexit withdrawal treaty risks the collapse of trade talks with Brussels.
Real Economy: Global Risks Hamper The Recovery, Inflation To Rise, Central Banks Maintain Easing Bias
In the US, the number of ‘unemployment benefits claims’ remained unchanged at 884K in the week ending on September 5; while the number remains high, ‘claims’ were below 1m for two weeks in a row–for the first time since March. In August CPI inflation increased to 1.3% y-o-y (c: 1.2%; p: 1.0%) and core-CPI rose to 1.7% y-o-y (c: 1.6%; p: 1.6%)–the highest rates since March.
In the EZ, in Q2 the economy shrank by -11.8% y-o-y (p: -3.7%)–the biggest contraction on record, but lower than initially estimated (c: -12.1%); as coronavirus-related restrictions hurt most sectors, the EZ is officially in recession.
In Japan, in Q2 the economy shrank an annualized -28.1% (c: -28.6%; p: 27.8%)–the biggest slump on record, reflecting the severe impacts of COVID-19.
Both the ECB and the BoC kept their main policy rates unchanged – at 0.0%, and 0.25%, respectively. Both CBs reiterated their willingness to support the economic recovery, as necessary.
Financial Markets: US Stocks Decline, Led By Technology; Bonds Stable. Oil Down, Gold Up
Market drivers: investor sentiment was hampered by concerns about: i) the fundamentals-valuation disconnect; ii) slowing progress in the US labor market; and iii) delays in COVID-19 vaccine development, as AstraZenica paused its trials. Global stocks declined w-o-w (MSCI ACWI, -1.2%, to 566) driven by the US (S&P 500, -2.5% to 3,341)–where equities fell for the second straight week, as technology stocks experienced their worst pullback since March. In Europe, stocks rose (Eurostoxx 50, +1.7% to 3,316) lifted by positive economic data, in spite of i) disappointment that the ECB did not announce additional stimulus; and ii) renewed fears of a hard Brexit.
Fixed income: w-o-w, bonds rose mildly (BAML Global, +0.2% to 297.8); the yield on US Treasury notes declined modestly (10y UST, -6bps to 0.67), pulled down by the news of the pause in the AstraZeneca trials.
FX: w-o-w, the USD gained against most currencies (DXY, +0.7% to 92.719; EUR/USD, +0.1% to 1.185).
Commodities: oil prices fell below 40 USD/b for the first time since July (Brent, -6.6% to 39.8 USD/b), as Saudi Arabia cut oil prices for some customers. Gold rose (+0.5% to 1,942 USD/Oz.), supported by market interest for safe heavens–as longer-term CB interest rates ticked higher.
Copyright © 2017 - 2020 Rosa & Roubini Associates - All Rights Reserved.
Rosa & Roubini Associates Ltd is a private limited company registered in England and Wales (Registration number: 10975116) with registered office at 118 Pall Mall, St. James’s, London SW1Y 5ED, United Kingdom.