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Mission Grey Daily Brief - September 02, 2024

Summary of the Global Situation for Businesses and Investors

Russia's invasion of Ukraine continues to be a dominant theme, with ongoing conflict causing a severe humanitarian crisis in both countries. Meanwhile, the situation in Iran is deteriorating, with the government cracking down on nurses' protests and media freedom. In Germany, the right-wing Alternative for Germany (AfD) party is expected to win its first election, and in Azerbaijan, there are concerns about the government's human rights abuses and greenwashing ahead of COP29.

Ongoing Conflict in Ukraine

Russia's unprovoked invasion of Ukraine in February 2022 continues to cause widespread devastation and a dire humanitarian crisis. Recent Russian attacks on Kharkiv, Ukraine's second-largest city, have resulted in civilian casualties and infrastructure damage. Ukraine has also conducted a surprise incursion into Russia's Kursk region, capturing about 500 square miles of Russian soil. This changes the outlook for potential negotiations, but Russian leader Vladimir Putin remains committed to continuing the war. The international community is calling for all parties to respect international humanitarian law and allow unhindered access for aid organizations.

Deteriorating Situation in Iran

The situation in Iran is causing concern, with the government cracking down on peaceful protests by nurses over poor working conditions. There are also increasing worries about the Pezeshkian government's handling of various issues, including inequality, media freedom, and access to the internet. Iranian authorities have been accused of unjustly arresting and sentencing peaceful protesters, and the Biden administration is closely monitoring the situation. Additionally, there is alarm over the treatment of journalists, with editors of the Stand News outlet recently found guilty of sedition charges.

Germany's Right-Wing Party Gains Traction

Germany's right-wing Alternative for Germany (AfD) party is expected to win its first election since its formation in 2013, benefiting from rising anti-mass immigration sentiment. Exit polls show the AfD securing a substantial share of the vote in Thuringia and Saxony, while the center-left Social Democratic Party brought in less than 8%. This follows a wider trend of success for conservative groups across Europe. The impact of the AfD's win will depend on the willingness of centrists to work with them. The election comes just days after a Syrian immigrant carried out a terrorist attack in Solingen, Germany, killing three people.

Azerbaijan's Human Rights Abuses and Greenwashing

Azerbaijan is facing criticism for its human rights record and greenwashing efforts ahead of the COP29 Climate Summit, which it will host this year. There are reports of the detention and mistreatment of outspoken critics of the government, including academic Dr. Gubad Ibadoghlu, who has been arrested and denied medical assistance. Additionally, Azerbaijan's human rights record has significantly worsened since being announced as the host of COP29, with journalists and activists facing arrest and criminal prosecution. There are concerns that the government is delaying trials until after the summit to avoid international scrutiny.

Risks and Opportunities

  • Risk: The ongoing conflict in Ukraine and Russia's attacks on civilian infrastructure pose significant risks to businesses and investors, especially those operating in the region.
  • Risk: The deteriorating situation in Iran, including the government's crackdown on protests and media freedom, creates an unstable environment that may deter investment and business operations.
  • Risk: The rise of right-wing politics in Germany and across Europe could lead to policy changes that may impact businesses, particularly those related to immigration and deportation laws.
  • Opportunity: Azerbaijan's hosting of COP29 presents an opportunity for businesses and investors to engage in discussions around climate action and green initiatives. However, the country's human rights record should be carefully considered when exploring potential opportunities.

Further Reading:

- Sudan Tribune - Sudan Tribune

A photographer traveled 10,000 miles through Ukraine. This is what he saw - CNN

After Ukraine Strikes Russian Energy Facilities, Russia Bombards Kharkiv - The New York Times

Azerbaijan Holds First Parliamentary Elections Since Gaining Full Control Of Nagorno-Karabakh - Radio Free Europe / Radio Liberty

Azerbaijani Official Shocked At Armenia's Emergency Nuclear Shutdown, Questions 'Certain Technologies' - Radio Free Europe / Radio Liberty

Ex-Stand News journalists in tears after editors of defunct Hong Kong outlet found guilty of sedition - Hong Kong Free Press

Experts express alarm over Pezeshkian government's behavior - ایران اینترنشنال

Germany's right wing poised for major wins as centrist parties stumble - Fox News

Good Cop, Bad COP29: Azerbaijan's greenwashing ahead of crucial climate summit - SBS News

Graham urges Biden, Israel to take on Iran after hostages killed, calls Harris foreign policy 'wrecking ball' - Fox News

History Shows Giving Land to Russia Won't Bring Peace in Ukraine - Foreign Policy

Iran - VOA Asia

Themes around the World:

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Political Turmoil and Military Buildup

Japan's parliamentary elections and shift in leadership have caused political uncertainty, potentially impacting the country's market rally. The new government is also pursuing Japan's largest military buildup since World War II, increasing defense spending by 16% amid geopolitical rivalries with China and Russia.

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Defense and Geopolitical Tensions

Japan is boosting defense production and technology amid rising geopolitical tensions with China, Russia, and North Korea. It has committed to strengthening its military capabilities and increasing defense spending. However, there is indifference from the private sector due to low profitability, uncertainty of investment returns, and aversion to reputation risks associated with the defense business.

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US-China Trade Tensions

The US has blacklisted 1,000 Chinese companies and imposed high tariffs on Chinese goods, citing national security concerns. This has disrupted bilateral business and rerouted supply chains, with potential negative consequences for the US economy. China has responded with efforts to reduce reliance on US technology and develop its battery industry, threatening US competitiveness.

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Economic Impact of War

Israel's war against Hamas and Hezbollah militant groups has resulted in high financial costs, with military spending increasing significantly. This has led to concerns about declining investment, higher taxes, and a strain on government budgets. The conflict has also disrupted the tourism industry and hindered economic growth, particularly in border areas.

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US-China Geopolitical Tensions

China's military drills near Taiwan and its support for Russia's invasion of Ukraine have heightened tensions with the US. The potential for a wider conflict, especially over Taiwan, could disrupt global supply chains and chip manufacturing, impacting businesses.

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Shipping and Trade Resilience

Despite Russia's intensified attacks on Ukrainian ports and ships, shipping operations continue, demonstrating the resilience of Ukraine's seaborne trade. Companies like Maersk, Hapag-Lloyd, and HHLA remain committed to operating in the region, signaling a strong will to keep trade flowing.

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Economic Slowdown and Recession

Germany is facing a prolonged economic slowdown and a second consecutive year of recession, with a predicted 0.2% decline in GDP for 2024. High inflation, interest rates, and weak export demand, along with structural issues like an aging population and bureaucratic inefficiencies, contribute to this downturn.

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Israel's Military and Defence Industry

Israel's military actions against Iran and Hezbollah have showcased its advanced military capabilities and technology, including precision air and drone strikes. The conflict has highlighted the role of defence companies, with Israel's largest weapons firm facing divestment from Barclays due to pro-Palestinian pressure. Israel's military industry is expected to benefit from US support, such as the deployment of the THAAD missile system.

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Energy Security

India's energy demand is expected to rise with its growing population and economy. The country aims to quadruple its natural gas use by 2030, reducing reliance on coal and oil. This shift may impact global energy markets and benefit government-owned energy companies.

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Border Controls and Trade Impact

Germany's newly reintroduced land border controls have raised concerns among businesses about potential delays and higher costs. This could affect the movement of goods and workers, increasing costs for companies and consumers, reducing trade volume, and impacting the overall German economy.

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Impact of Sanctions

Western sanctions on Russia are having a significant impact on its economy and ability to wage war. The US has sanctioned Chinese and Russian entities involved in providing military technology to Russia. These sanctions target the supply chain of dual-use items, which can be converted into military items. The war has also reshaped global trade and financial flows, with countries seeking loopholes to mitigate the economic impact.

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Food Insecurity and Climate Change

Environmental, economic, and political shocks have led to food insecurity and social unrest. Climate change, conflict, and supply issues impact food availability and access, with implications for US and global security.

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Scams and Fraud

Scams are a significant issue in Thailand, with over 89% of respondents in a survey reporting exposure to scams monthly. Online scams have resulted in substantial financial losses, impacting individuals and the country's economy. Efforts to combat scams include collaborations between private and public sectors, as well as the development of anti-scam technologies and early warning systems.

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US Food Security

Environmental, economic, and political shocks have led to food insecurity globally, impacting pillars of food security: availability, access, utilization, and stability. Food insecurity can result in social unrest and economic instability, with potential implications for US and global security. US leadership is essential to strengthen partnerships and advance solutions.

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Digital Services Tax Hike

France is considering raising the Digital Services Tax (DST) from 3% to 5%, which could damage the economy and inflame trade tensions with the US. It may hinder digital trade and job creation, and undermine global tax talks, setting a destabilizing precedent for other countries.

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Ukrainian Resilience and Morale

Ukrainian forces are heavily outnumbered and outmatched in artillery and ammunition, and there are growing signs of exhaustion, demoralization, and desertion. However, they are forcing the Russians to advance slowly and are inflicting heavy casualties, which could lead to a peace settlement limiting Russian territorial gains.

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Economic Growth Forecast

The International Monetary Fund (IMF) slashed Japan's 2024 growth forecast to 0.3%, the lowest since the pandemic, citing auto supply disruptions and the fading of one-off factors like tourism. However, the IMF predicts Japan's growth will accelerate to 1.1% in 2025, driven by wage and consumption increases.

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Medicinal Supply Shortages

Germany is facing shortages of medicines, particularly antibiotics and children's medications, with saline solution being the latest addition to the list. This is due to the majority of active ingredients being produced in China and India, where environmental regulations are less stringent, and supply chains being longer and prone to disruptions. The consequences include increased treatment time and potential risks to the quality of treatment.

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US-China Drone Supply Chain Disruptions

China's sanctions on US drone manufacturers, such as Skydio, have disrupted the US drone supply chain in Ukraine. This has prompted Skydio to seek alternative suppliers and raised concerns about potential disruptions in US supply chains. China's sanctions are a strategic move to increase global reliance on Chinese suppliers and eliminate leading American drone companies.

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UK's RegTech Sector

The UK's RegTech industry is expected to grow substantially, driven by technological advancements and increasing regulatory pressures. The demand for RegTech solutions is rising as organizations seek to enhance compliance and risk management capabilities, particularly in the financial sector.

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Western Military Aid to Ukraine

Ukraine has received military aid, including weapons and fighter jets, from Western countries to support its defense against Russia. However, experts warn that many of these weapons may not survive the war if used to their maximum potential. The West needs to be prepared for potential losses while understanding that the support is crucial for Ukraine's victory.

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US Economic Exceptionalism

The US dollar, equities, and yields are experiencing gains due to US economic exceptionalism, reduced Federal Reserve easing, and improved polling for Trump. This has resulted in volatile trading, with the US dollar securing consecutive weekly gains and gold reaching an all-time high. A Trump victory is expected to impact global trade and reduce Fed rate cuts.

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Financial System in West Bank

There are concerns that Israel may sever the West Bank from the global financial system by not renewing a waiver for international banks to maintain ties with Palestinian financial institutions, which could result in an economic catastrophe and further destabilize the region.

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Reshoring Medicine Production

The French government is promoting strategic objectives of reshoring medicine production and keeping manufacturing jobs in the country. This is evident in the sale of Sanofi's Opella to a US investment fund, where the government secured guarantees for production and jobs to remain in France. The government is also taking steps to invest in domestic pharmaceutical production, as seen during the COVID-19 pandemic, to ensure the availability of critical medicines and boost local manufacturing.

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Climate Change and Natural Disasters

Thailand and other Asian countries have experienced intensifying storms, floods, and other extreme weather events due to climate change, causing economic losses and impacting supply chains. Typhoon Yagi in 2024 caused destruction and displacement in Thailand and neighboring countries, highlighting the need for preparedness and adaptation measures.

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China's Growing Influence

Georgia's new strategic partnership with China marks a shift in foreign policy. While it offers economic opportunities, it raises concerns about its impact on Georgia's EU integration and relations with Western allies. China's stance on the Ukraine war and its pseudo-neutrality are also questioned.

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Economic Downturn

Germany's economy is facing a challenging period with a potential recession looming, lagging behind other advanced economies in terms of GDP growth. Structural issues, such as dependence on Chinese trade and energy prices, contribute to the downturn.

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Energy Security

India is hungry for energy to meet the demands of its growing population and economy. The country aims to quadruple its natural gas use by 2030, which has raised concerns given the volatility of the gas market. India is also investing in nuclear power, green hydrogen, and electric vehicles for energy independence.

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Foreign Investment Surge

Thailand's investment applications surged by 42% in the first nine months of 2024, reaching a 10-year high of $21.7 billion. This reflects growing confidence in the Thai government's policies and improved business regulations. Foreign investment rose 38%, with major contributions from Singapore and China. Big Tech companies like Nvidia, Amazon, Google, and Microsoft are investing heavily.

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Record-High Deficit and Mounting Debt

France's financial future is under scrutiny as credit rating agencies assess the country's ability to manage its debt. The country faces a record-high deficit, projected to reach 6.1% of GDP this year, and a potential downgrade in its credit rating. The government plans to borrow €300 billion in medium- and long-term bonds next year, risking becoming the biggest borrower in the Eurozone.

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Russian Hacking Campaign

Russia's hacking campaign against Georgia's government, companies, and infrastructure aims to thwart its westward path and pro-Western aspirations. This includes infiltrating key ministries, the energy sector, and telecommunications networks, with potential sabotage and intervention in domestic politics.

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Geoeconomic Fragmentation

Geoeconomic fragmentation is altering trade patterns and financial vulnerabilities in the ASEAN+3 and euro area regions. Amidst rising geopolitical tensions, countries are adopting inward-focused strategies to enhance economic and national security. This has impacted China's export activities and increased financial exposure for the euro area. Regional financing mechanisms must adapt to support member countries in navigating these complexities and fostering stability.

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US Election Impact

The upcoming US presidential election creates uncertainty for businesses, with some postponing investment plans. A potential Trump victory is seen as inflationary, affecting global trade and equity markets. The election outcome will influence US policies and economic relations with other countries.

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Foreign Investment Opportunities

Japan is attracting more foreign investment, with the yen's depreciation making Japanese assets more attractive. The country is also easing restrictions for foreign lawyers, creating more opportunities for international law firms, particularly those advising on cross-border deals. This shift in focus from China is due to increasing geopolitical risks.

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Global Supply Chain Shifts

India has the potential to become a competitive alternative manufacturing hub as global supply chains are rapidly reshaped. To capitalize on this opportunity, India should reduce tariffs and ease foreign direct investment (FDI) restrictions, according to World Bank economist Franziska Ohnsorge.

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Insurance Brokerage Expansion

WTW has launched an insurance brokerage service in Japan, offering solutions to commercial clients and wholesale facultative reinsurance placement services. This expansion highlights the growing importance of independent international brokers in Japan's evolving corporate insurance market, presenting opportunities for risk management and insurance partnerships.