Mission Grey Daily Brief - December 30, 2024
Summary of the Global Situation for Businesses and Investors
The global situation remains volatile, with geopolitical and economic tensions dominating the headlines. Iran's economy is in crisis, with protests breaking out in Tehran's historic bazaar over inflation and the devaluation of the rial. Georgia's Euro-Atlantic ambitions have been derailed, with the election of a far-right president and the suspension of its EU membership application process. Russia's war in Ukraine continues to escalate, with reports of a plane crash in Azerbaijan and allegations of sabotage by Russia's shadow fleet. Pro-Kremlin media outlets continue to spread disinformation and promote Russian narratives, while Peru's political situation remains unstable two years after a "soft" coup.
Iran's Economic Crisis
Iran's economy is in its worst state since the founding of the Islamic Republic in 1979, with US-led sanctions over its nuclear program, support for militant groups, and arms transfers for Russia's war on Ukraine squeezing the country. The Iranian rial's sharp depreciation has had ripple effects across the economy, with merchants facing higher costs and reduced consumer demand as at least one-third of Iran is now living below the poverty line. The strike in Tehran's historic bazaar reflects the bleak outlook of the country, with business owners and employees protesting against runaway inflation and soaring foreign currency rates. The strike began with shoe sellers in the 15th Khordad area and quickly spread to other sectors, with merchants chanting "Don't be afraid, close up" and "Brave merchants, support, support". The protests soon expanded to key commercial hubs, including Abbasabad Market and Baghe Sepahsalar, known for fabric and shoe vendors. The Iranian rial's sharp depreciation has created an untenable mix of higher costs and reduced consumer demand, with at least one-third of Iran now living below the poverty line.
Georgia's Euro-Atlantic Ambitions Derailed
Georgia's Euro-Atlantic ambitions have been derailed, with the election of a far-right president and the suspension of its EU membership application process. The election of Mikheil Kavelashvili, a goateed 53-year-old former professional soccer player and founder of the ultra-right People's Power party, has sparked protests in the country, with 80% of Georgians supporting membership in the EU. The suspension of Georgia's EU membership application process until the end of 2028 has further fueled the protests, with thousands of Georgians taking to the streets to express their support for the EU and opposition to the new president. The United States has sanctioned the founder of the Georgian Dream party, Bidzina Ivanishvili, a multi-billionaire and the richest man in Georgia, for eroding democratic institutions, enabling human rights abuses, and curbing the exercise of fundamental freedoms in Georgia. The current president, Salome Zourabichvili, has derided the Georgian Dream's hand-picked selection of Kavelashvili as an anti-constitutional "farce", with legally limited powers.
Russia's War in Ukraine
Russia's war in Ukraine continues to escalate, with reports of a plane crash in Azerbaijan and allegations of sabotage by Russia's shadow fleet. Azerbaijan Airlines Flight J2-8243 crashed on Wednesday in a ball of fire near the city of Aktau in Kazakhstan, with at least 38 people killed and 29 surviving. Russian President Vladimir Putin has apologised for the incident, but Azerbaijan's president, Ilham Aliyev, has accused Russia of trying to cover up the issue for days. Finnish commandos boarded an oil tanker that officials suspect had cut through vital underwater cables in the Baltic Sea, including one that carries electricity between Finland and Estonia. The ship, the Eagle S, bears all the hallmarks of vessels belonging to Russia's shadow fleet, with officials saying it had embarked from a Russian port shortly before the cables were cut. If confirmed, it would be the first known instance of a shadow fleet vessel being used to intentionally sabotage critical infrastructure in Europe, and a clear escalation by Russia in its conflict with the West.
Pro-Kremlin Media Outlets
Pro-Kremlin media outlets continue to spread disinformation and promote Russian narratives, with one outlet, Geoestrategia.eu, losing its domain and migrating to a new one. The outlet is disguised as a center for strategic research and geopolitical analysis, but Espreso. Global has concluded that it is an active part of Russia's hybrid warfare and a tool of its propaganda. The outlet frames Russia's war in Ukraine as a NATO proxy conflict, blaming Europe for "instigating the war" and spreading Russian disinformation and consistently praising Russia, its leadership, and its weapons. The outlet has also promoted Russia's claim that its new missile, Oreshnik, is unbeatable, with the narrative of invincible Russian weapons meant to make the West view the world the way the Kremlin wants.
Peru's Political Situation
Peru's political situation remains unstable two years after a "soft" coup against former President Pedro Castillo and the rise to power of Dina Boluarte, representing the transnational elite. The country continues to suffer from the chronic issues inherited from Alberto Fujimori's dictatorship in the 1990s, with no democracy in sight. The rise of Boluarte, who represents the transnational elite, has further exacerbated the country's political and economic instability, with no clear path towards democracy and stability.
Further Reading:
Moldova's separatist region cuts gas as Ukraine transit deal runs out - MarineLink
Peru: Dina Boluarte; no democracy - Press TV
Protests break out in Tehran’s historic bazaar over inflation, rial devaluation - ایران اینترنشنال
Russia shot at Azerbaijan Airlines plane before crash, says country’s president - The Independent
Themes around the World:
Inflationary Pressures Persist
Germany's inflation rate rose to 2.6% in December 2024, driven by rising food prices and persistent energy costs. This inflationary environment complicates economic recovery efforts and affects consumer spending, impacting overall business operations.
AI Adoption in Financial Sector
Japan's financial sector is poised for transformation through generative AI, supported by regulatory backing and low labor costs. This technological shift is expected to enhance operational efficiency, reduce costs, and attract foreign investment, positioning Japan as a leader in AI integration.
Supply Chain Resilience Initiatives
Japan is enhancing supply chain resilience by placing critical goods plants under state control during crises. This move aims to secure essential materials like semiconductors and batteries, ensuring stable procurement and mitigating risks from global disruptions.
End of Russian Gas Transit
Ukraine's cessation of Russian gas transit to Europe marks a pivotal shift in energy dynamics, impacting supply chains and energy security across the EU. This decision, driven by national security concerns, will result in significant financial losses for both Ukraine and Russia, while forcing EU countries to seek alternative energy sources, potentially increasing costs.
Impact of Biden's Steel Blockade
President Biden's decision to block Nippon Steel's acquisition of U.S. Steel raises significant concerns for Japan-U.S. trade relations. This unprecedented move could deter future investments from Japan, impacting bilateral economic ties and creating uncertainty for Japanese firms planning expansions in the U.S. market, particularly in the steel and chemical sectors.
Generative AI in Financial Sector
The adoption of generative AI in Japan's financial sector is poised to drive digital transformation and economic growth. With regulatory support and low labor costs, Japan is becoming a prime location for AI development, enhancing operational efficiency and risk management in financial institutions, which could attract further foreign investment.
Climate Change and Economic Impact
Thailand faces severe climate risks, ranking 9th globally for vulnerability. Projected losses from climate change could reach 19.5% of GDP by 2050, necessitating significant adaptation financing. This situation threatens key sectors, infrastructure, and exacerbates income inequality, impacting investment strategies and supply chains reliant on agricultural productivity and urban stability.
Geopolitical Tensions and Investments
Geopolitical tensions, particularly with China, are influencing foreign investment strategies in India. The shift towards local ownership in foreign investments, as seen in Haier's operations, reflects a broader trend of seeking stability and reducing exposure to geopolitical risks.
Impact of US Tariffs on India
The potential re-imposition of tariffs by the US under the Trump administration poses significant risks for Indian exporters, particularly in textiles and jewelry. Companies like Welspun Living and Goldiam International could face revenue declines, affecting stock performance and investor sentiment, while also reshaping supply chains as firms seek alternatives to mitigate tariff impacts.
Nippon Steel Acquisition Blocked
U.S. President Biden's decision to block Nippon Steel's $14.1 billion acquisition of U.S. Steel raises concerns over Japan-U.S. trade relations. This unprecedented move could deter future foreign investments and complicate bilateral economic ties, impacting Japanese firms' strategies in the U.S. market.
Declining Business Confidence
Recruitment firms report a decline in business confidence in France, with profits dropping significantly. This trend reflects broader economic challenges, including faltering growth and political uncertainty, which may deter foreign investment and disrupt supply chains.
Geopolitical Tensions in Eastern Europe
The end of gas transit has exacerbated geopolitical tensions, particularly between Ukraine and Slovakia, with Slovak Prime Minister Robert Fico criticizing Ukraine's decision. This situation underscores the fragility of alliances in Eastern Europe and the potential for retaliatory measures that could disrupt regional cooperation and economic stability.
Manufacturing Sector Decline
France's manufacturing sector is experiencing a downturn, with the PMI dropping to a 55-month low. Weak demand and political uncertainty are leading to job losses and reduced production, which could disrupt supply chains and diminish France's competitiveness in the global market.
Political Instability and Economic Impact
Germany faces significant political challenges, including a governmental stalemate and declining public confidence. This instability could hinder effective policymaking, affecting economic recovery efforts and investor sentiment, potentially leading to a slowdown in foreign direct investment.
Critical Minerals Supply Chain Vulnerability
A thinktank report emphasizes the UK's over-reliance on China for critical minerals, essential for technology and green transitions. The government is urged to diversify supply chains and engage with international partners to mitigate risks, which could reshape investment strategies and supply chain management in the UK.
Increased Skilled Worker Visa Requirements
Starting in 2025, the UK will raise salary thresholds for Skilled Worker visas by up to 82%, aiming to attract highly skilled professionals. This change may limit the pool of eligible applicants, impacting sectors like technology and healthcare, while also increasing costs for employers who sponsor foreign workers.
Impact of Tariffs on Supply Chains
Proposed tariffs by the Trump administration could significantly affect the U.S. lumber market and related supply chains. Tariffs may lead to increased costs for consumers and businesses, potentially disrupting construction and real estate sectors, while also prompting shifts in sourcing strategies among U.S. companies reliant on imported lumber.
Trade Tensions with China
China's recent sanctions on U.S. defense companies illustrate escalating trade tensions. These actions could disrupt supply chains and affect U.S. firms' market access in China, prompting businesses to reassess their strategies in the face of retaliatory measures.
End of Russian Gas Transit
Ukraine's cessation of Russian gas transit to Europe marks a pivotal shift in energy dynamics, impacting supply chains and energy prices across the EU. This decision, driven by geopolitical tensions, is expected to lead to increased gas prices and force European nations to seek alternative energy sources, reshaping investment strategies in the energy sector.
Supply Chain Security Regulations
The U.S. Department of Commerce's proposed regulations on drone supply chains reflect a growing emphasis on securing critical technologies from foreign adversaries. These regulations could reshape the landscape for U.S. manufacturers and suppliers, influencing investment strategies and operational frameworks in the tech sector.
Dependence on China for Minerals
A thinktank report urges the UK to reduce its reliance on China for critical minerals essential for technology and green energy. This dependency creates vulnerabilities in supply chains, especially post-Brexit. The UK government is expected to develop a strategy to diversify sources, which could reshape investment and trade dynamics.
Impact of Tariffs on Lumber Market
Proposed tariffs on Canadian lumber imports by the Trump administration could disrupt the U.S. lumber supply chain, leading to increased prices for consumers and potential volatility in the housing market. The historical context of tariffs indicates a complex relationship between domestic production incentives and consumer costs.
Impact of US-China Trade Relations
The evolving geopolitical landscape, particularly the return of Donald Trump, poses risks for Thailand's trade dynamics. Potential tariff increases and trade protectionism could significantly impact Thai exports, necessitating businesses to reassess their strategies in light of these uncertainties.
National Security and Foreign Investment
The Biden administration's decision to block Nippon Steel's acquisition of US Steel highlights the increasing scrutiny on foreign investments based on national security concerns. This shift may deter foreign investments in the U.S., impacting capital inflows and altering the landscape for international business operations.
Impact on Moldova and Transnistria
The halt in gas supplies has severely affected Moldova and the breakaway region of Transnistria, leading to heating and hot water shortages. Moldova declared a state of emergency, highlighting the vulnerabilities of non-EU countries reliant on Russian energy, which may affect regional stability and investment attractiveness.
Geopolitical Risks and Trade Tensions
Geopolitical tensions, particularly with China and the US, pose significant risks to Germany's trade relationships. The automotive sector, a key economic pillar, is losing competitiveness, exacerbated by high energy costs and shifting market dynamics. Companies must reassess their global strategies to mitigate these risks.
Legal Challenges to Investment Decisions
Nippon Steel's potential lawsuit against the U.S. government over the blocked acquisition of US Steel raises questions about the legal frameworks governing foreign investments. This could set precedents affecting future foreign acquisitions and the interpretation of national security risks.
Challenges in the Services Sector
The services sector in France is contracting, with employment declining for the first time in four years. Political uncertainty and weak demand are significant constraints, which could lead to reduced consumer spending and lower economic growth, impacting overall business operations.
Challenges from E-commerce Platforms
The rise of international e-commerce platforms poses a threat to UK retailers, leading to market share erosion and potential closures. This trend necessitates protective measures to support local businesses, which are crucial for maintaining economic stability and cultural identity.
Negative Power Prices and Energy Supply
Germany's power prices have turned negative due to an oversupply of renewable energy, highlighting the challenges of balancing energy generation and consumption. This situation affects energy producers and could influence energy pricing strategies for businesses reliant on stable energy costs.
Bank of Japan's Monetary Policy Shift
The Bank of Japan's potential interest rate hikes signal a shift from decades of deflation. This change could influence currency valuation and investment flows, impacting both domestic and international business operations.
Integration of Chinese Firms Abroad
Chinese firms expanding internationally are learning the importance of local integration and adapting to foreign markets. This shift is crucial for overcoming competitive disadvantages and enhancing their global presence. Failure to adapt could lead to operational challenges and reputational damage in international markets.
Sanctions on Russian Energy Sector
The U.S. and U.K. have intensified sanctions on Russia's energy sector, targeting major oil companies and shipping vessels. These measures aim to cripple Russia's war funding and may lead to volatility in global oil markets, affecting investment strategies and supply chains reliant on Russian energy.
Changes in Media Regulations
Recent shifts in France's media regulations, particularly regarding streaming services and content distribution, could reshape the entertainment landscape. The potential for increased investment from major players like Disney may enhance local production but also disrupt existing market dynamics.
Rising Debt and Bond Market Risks
France's escalating public debt, projected to reach 112% of GDP, has resulted in climbing bond yields, making French bonds riskier compared to other Eurozone countries. This situation raises concerns about the country's fiscal health and could deter investment, impacting overall economic growth.
National Security and Foreign Investment
The Biden administration's decision to block Nippon Steel's acquisition of U.S. Steel underscores a growing trend of prioritizing national security over foreign investments. This move may deter future foreign investments, particularly from allied nations, and could reshape the landscape of U.S. industrial policy, emphasizing domestic production and supply chain resilience.