Brazil's Election, NK Escalation, COVID Rumors, Russia's Grain Deal
A roundup of some important events
Brazil’s Election
In line with my analysis a few weeks back, former president Luiz Inácio Lula da Silva prevailed over incumbent Jair Bolsonaro following a super-heated and often violent campaign that culminated with a second-round runoff vote on Sunday. As predicted, it was the most tightly contested election in Brazilian history. In marked contrast to the first round, the end result fell in line with polling data in the lead-up to the vote. This go-round, the pollsters got it right.
Based on his verbal attacks on the country’s election system, violent rhetoric, conspiracist worldview, and extreme antipathy towards Lula and the political left, I was personally confident Bolsonaro would reject the outcome, instigate widespread political violence, and disrupt a peaceful transfer of power. To this point, that prediction has not materialized.
While Bolsonaro was typically ungracious in refusing to concede defeat—and protests by pro-Bolsonaro supporters rejecting the result continue throughout the country—it appears likely Lula will take power with minimal interference relative to my baseline assumption. The entire transition process should be significantly more “normal” than the Trump-Biden hand-off back in 2020. On a more upbeat note: given the broad spectrum of possible outcomes, this is an unambiguously positive result for Brazilian democracy, ecological preservation, and global climate health.
Now we look ahead. The always-excellent Latin America Risk Report has an illuminating short-form analysis of possible Lula scenarios here. I suggest reading it. Given the array of domestic and external headwinds confronting Brazil, I am personally pessimistic that Lula will emulate his past successes. As Bloomberg notes: “the 77-year-old leftist leader now faces the immense challenge of paying for his ambitious pledges and keeping the politically divided country growing in the face of increased global economic and financial headwinds.”
As we’re already seeing throughout South America, leftwing governments have struggled mightily to placate public anger and govern effectively in the face of powerful inflationary pressures, global economic headwinds, and acute social divisions. As I’ve pointed out ad nauseam, Brazil’s toxified social media environment and extreme polarization ensure that the political climate will remain extremely tense, violence-prone, and (possibly) gridlocked for the foreseeable future.
North Korean Missile Tests
From Reuters:
North Korea fired at least 23 missiles into the sea on Wednesday, including one that landed less than 60 km (40 miles) off South Korea's coast, which South Korean President Yoon Suk-yeol described as "territorial encroachment" and Washington denounced as "reckless".
It was the first time a ballistic missile had landed near the South's waters since the peninsula was divided in 1945, and the most missiles fired by the North in a single day. South Korea issued rare air raid warnings and launched its own missiles in response.
The launches came just hours after Pyongyang demanded that the United States and South Korea stop large-scale military exercises, saying such "military rashness and provocation can be no longer tolerated".
As I pointed out back in August, while the situation on the Korean Peninsula has been in a suboptimal but basically stable holding pattern since 2018, it would likely deteriorate in the final months of 2022. With Wednesday’s unprecedented missile launch—almost assuredly to be followed by the country’s seventh nuclear test in the weeks ahead—it feels like we’re edging ever closer to “crisis mode” akin to what we saw back in 2017.
The bigger picture: since 2020, the Kim regime has been battered by a brushing array of governance challenges—severe economic slowdown, COVID outbreaks, isolation and a near-total lockdown from the outside world, crop failure/widespread food insecurity—layered on top of enduring frustrations with the lack of diplomatic progress and sanctions relief from the international community. I think all of those factors provide key context around Kim’s decision to escalate tensions on the Korean Peninsula.
Here’s analyst Sue Mi Terry (Foreign Affairs):
Whatever he does, Kim is intent on sundering the U.S.–South Korea alliance by making it too costly and risky for Washington to come to Seoul’s aid in a crisis. He may well calculate that the United States will not respond to a North Korean attack on South Korea because it will be too concerned about a North Korean nuclear attack on U.S. bases in Asia or even against the United States itself.
My thinking: Kim appears intent on ratcheting up the hostile rhetoric, missile testing, and nuclear brinksmanship to bolster his domestic standing, gain international attention, signal Pyonyang’s deterrence capacity, probe for divisions in America’s East Asian alliance system, and, potentially, extract concessions from Washington, Seoul, and Tokyo at a moment in time when North Korea is suffering heavily.
To my mind, the significant risk here is the lack of safeguards in place relative to conditions back in early 2018.
China, which holds more economic leverage over North Korea than any other external actor, is at loggerheads with the United States over everything from Taiwan and technology to human rights and market access. The bilateral relationship between the two leading superpowers—now defined by stratospheric levels of mutual mistrust and zero-sum thinking—is at its lowest ebb in decades.
The international community is preoccupied with an array of severe challenges that weren’t present five years ago: war in Ukraine, inflation, COVID, and looming recession risk, among many, many others.
Neither hawkish South Korean President Yoon Suk-yeol nor US President Joe Biden appears willing to placate Kim’s ego and pursue the conciliatory approach to Pyongyang taken by their predecessors Moon Jae-in and Donald Trump.
It feels like we’re heading for a repeat of the 2017 North Korea crisis but in a much darker and more dysfunctional international political climate than six years ago. Multinationals already locked into contingency planning over a potential Taiwan Strait crisis may increasingly find themselves doing the same regarding their operations in South Korea.
China COVID Rumors
An unverified social media post, purportedly describing the meeting of a Xi Jinping-approved expert committee led by Politburo Standing Committee member Wang Huning to draw up a “conditional reopening plan” that will move China past the economically damaging zero-COVID strategy, quickly gained widespread circulation on WeChat social messaging groups popular among investors. This sparked a massive rally in Chinese equities.
Source: Bloomberg
Shortly thereafter, Chinese health officials publicly reiterated their commitment to the existing strategy. Per Barrons:
China on Saturday reiterated that it will “unswervingly” maintain its strict Covid containment policies, after a week of rumors that it would ease measures sent Chinese stocks skyrocketing.
At a press briefing announced just hours beforehand, officials from China’s health commission said the country’s controversial zero-Covid policy was working and would continue, despite the dramatic toll it’s had on the economy.
I see three key takeaways around the stock market brouhaha—none of which bode well for China’s future.
Opacity: China’s information environment is severely more closed off now than a mere decade ago, especially when it comes to understanding the machinations driving elite-level decision-making. Given the state’s all-encompassing obsession with information security, this creates a ton of noise but makes it harder than ever to locate the signals on an array of key issues—COVID management, Taiwan, the real estate market, tech sector regulation. Simply put, these darkening political dynamics have massive internal and external ramifications. Per Bloomberg:
It’s been decades since China has been as hard to parse as it is today. At a time when understanding Beijing’s domestic and economic drivers has rarely mattered more, its leadership is insulated and the outside world is left to read tea leaves. During Xi’s time in office, access for outsiders — from reporters to diplomats, academics seeking to carry out on-the-ground research and students hoping to master the nuances of a fiendishly difficult language — has become increasingly limited. Once-willing interviewees have become fearful of speaking. China’s draconian Covid Zero policies, plus Beijing’s recent focus on self-reliance, have only further tightened the seal.
Consequence: increasing opacity matters tremendously here because it’s occurring at a moment in history when the policymaking process has become more centralized/personalized under Xi’s leadership and decisions taken in Beijing have vastly greater weight than in decades past given the country’s superpower status and utter centrality to global affairs. Put simply: our need to accurately understand what’s happening inside of China is greater than ever but our capacity to do so is arguably more corroded than at any point in decades.
Frustration: all of this speaks to an intense frustration—among citizens, investors, MNCs, etc.—over the mounting costs of the PRC’s zero-COVID policies, which have, at this point, effectively cast China as an outlier relative to international consensus. More broadly, it speaks to deep unease over the country’s direction of travel as President Xi takes up his third term at the helm of the ruling CCP. Coming out of the 20th Party Congress, we’re seeing a regime laser-focused on national/regime security, ideological rigidity, central control, and self-sufficiency (often at the direct expense of growth, openness, and reform) as it girds itself for a decade of possible struggle and turmoil.
Going forward: I expect some tweaks and piecemeal changes around China’s zero-COVID policy (last month the government signaled that it will consider scaling back some restrictions around foreign executives and technical talent entering the country) so that it can be toggled up and down more efficiently on a case-by-case basis. However, to my mind, a wholesale course correction seems unlikely given both the obvious downside public health risks, and, more importantly, Xi’s well-documented obsession with exerting central control over the informational, ideological, societal, technological, and political space.
As I wrote earlier summer:
President Xi—who has methodically exerted personal control over his party, state, and society in a manner unseen since the Mao period—intimately links his strongman approach with China’s superior pandemic management.
Public criticism, much less open advocacy for an American-style “live and let live” recalibration, insinuates that when dealing with the single most salient political issue of the day, Xi and co are getting it wrong while ideological rivals are getting it right. From Beijing’s vantage point, going after zero-COVID is less a criticism of specific policy and more a full-frontal attack on the legitimacy of the system itself.
And added:
Preserving cherished narratives is a central reason why Chinese authorities are unwilling to repudiate Mao’s legacy, provide an honest accounting of the party’s role in WWII, or cave into international pressure for a more forthright accounting of COVID’s origins. Relitigating history risks undermining the stories the government tells itself and its citizens and puncturing its reputation for competent governance.
This is all a long-winded way of saying information control is essential to state control, and, therefore, something to be defended at all costs—whether those costs are human, economic, or geostrategic. Beijing is simply too invested in selling a story—that zero-COVID is both distinctive and uniquely successful—to chart a new course.
Russia-Ukraine Grain Deal Collapses…Then Revives
Russia temporarily withdrew, then restated (following Turkish diplomatic intervention), its support for this summer’s UN-backed grain deal with Ukraine.
Source: Trading Economics
From CNN:
Russia said Wednesday it was rejoining the agreement that guarantees safe passage for ships carrying vital grain exports from Ukraine, a move that may help ease concerns about global food supplies that were raised when Moscow suspended its participation in the pact last week.
The decision to reverse course and rejoin the agreement was announced by the Russian Ministry of Defense just days after Moscow cited drone attacks on the city of Sevastopol in occupied Crimea as the reason for its withdrawal from the deal.
“The Russian Federation considers that the guarantees received at the moment seem sufficient and resumes the implementation of the agreement,” the ministry said in a statement posted on its official Telegram channel.
With the war effort going poorly and Putin facing mounting domestic backlash, it makes sense that the Kremlin—in keeping with its broader strategy of high-risk escalation—might use a drone/semi-submersible attack as a pretext for ratcheting up pressure on international grain supplies; with the net effect being a likely exacerbation of the ongoing global food security crisis and higher risk of political instability across emerging markets.
As I mentioned before, this is ultimately about instigating disruption to the global trading system in hopes of breaking apart international solidarity. To my mind, the highly disruptive second and third-order effects of the Ukraine conflict—most acutely felt in the Middle East, Asia, and Africa—are emblematic of a fraying international order. For now, at least, it seems cooler heads prevailed and the deal stands.
However, as I wrote last week, Russia is locked in a bruising connectivity battle with the US and its allies over the fate of Ukraine and the flow of information, food, capital, energy, and technology are all in the firing line:
Ultimately, it’s about psychological pressure: creating a powerful sense of uncertainty and dread over energy supply and digital security while making clear your home government cannot effectively protect/provide for you.
With Moscow facing setbacks on the battlefield and boiling anger on the homefront, Putin and co. are signaling that the pipelines, fiber optic cables, airports, rail links, power stations, and computer networks knitting us all closer together are fair game for cyberattack and sabotage.
On that front, damage to an undersea fiber optic cable connecting the remote Shetland Islands to the Scottish mainland—likely the result of accidental damage from a fishing vessel, not intentional sabotage—which temporarily cut off phone and internet service for thousands of residents last month is noteworthy given the febrile geopolitical climate.
Edward Stringer (FT):
Few are aware just how dependent we are on a limited number of fibre-optic cables that form the internet’s spine and electronically link our continents and islands. Currently 95 per cent of international internet traffic is transmitted by undersea cables; satellites, in comparison, convey very little. There are still only about 200 cables around the world, each the size of a large hosepipe and capable of data transfers at about 200 terabytes per second. These cables — which carry an estimated $10tn worth of financial transactions every day — come together at 10 or so international chokepoints, which are particularly vulnerable.
As the Ukraine invasion is reminding us, all wars are economic. Our adversaries have realised that being able to threaten the sanctity of our information and financial systems is a huge strategic advantage. And as Vladimir Putin has long known, the single, physical point of failure in the system that can be overtly threatened is undersea cables. Holding these at risk is a guaranteed way of driving a wedge between Kyiv and the west.
With winter fast approaching and tensions mounting in Moscow, DC, and in political capitals across the European continent, I expect the situation to worsen before it improves. These types of “incidents”—whether the result of sabotage or mere accident—will further magnify the climate of severe uncertainty, dread, and paranoia in the months ahead.