Eastern Entente: Houthi Campaign
Following developments in the Houthi campaign, the growing cooperation between China, Russia, and Iran is becoming a major concern for the Red Sea region. This emerging ‘Axis’ increases uncertainty for stakeholders in commodity trade, as the stability of the Suez Canal, Strait of Hormuz, and Gulf of Oman are threatened. Iran’s power projection in the region, characterised by the use of proxy groups in an ‘Axis’ of resistance, has paralysed global trade flows. Although China and Russia's involvement is presented as a means to stabilise the region and foster trade, rising scepticism clouds maritime traffic and worsen future prospects (as quantitatively analysed in a recent article by the Global Commodities Watch). The geopolitical and economic implications are profound and pose risks to all parties involved, raising questions about the motives behind this new ‘Axis’ formation and what it means for the disruptive ‘Axis of Resistance’.
Axis of Resistance - In Retrospect
Since the Iranian Revolution of 1979, the Tehran regime’s foreign policy has been characterised by its desire to propagate its brand of Shi’a Islam across the Middle East. To this end, it has long developed and fostered relationships with sympathetic proxy groups throughout the region. This has allowed it to project power in locations that might otherwise be beyond its reach while exercising some degree of “plausible deniability." In January 2022, this prompted the former Israeli Prime Minister, Naftali Bennett, to brand Iran “an octopus” of terror whose tentacles spread across the Middle East.
The country’s so-called “Axis of Resistance'' has expanded since 1979, its first major franchise being Hezbollah, which was founded in 1982 to counter Israel’s invasion of Lebanon that year. Its most recent recruit has been the Houthis. This group was established in northern Yemen in the 1980s to defend the rights of the country’s Shi’a Zaidi minority. What was initially a politico-religious organisation then evolved into an armed group that fought the government for greater freedoms. It was able to exploit the chaos of the Arab Spring to capture the national capital, Sana’a, in the autumn of 2014, and the group now controls around 80% of Yemen’s population.
Exactly when the Houthis became a part of the “Axis of Resistance” is something of a moot point, but the general consensus among the group’s observers is that it started receiving Iranian military assistance around 2009, with this almost certainly contributing to its capture of the Yemeni capital, Sana’a, in 2014. Since the HAMAS attack against Israel on October 7, 2023, it has rapidly emerged as a key Iranian franchise whose focus has been attacking shipping in the southern Red Sea. At the time of writing, an excess of 40 vessels had been targeted, while repeated US-led strikes against Houthi military infrastructure on the Yemeni coast appeared to have had limited success in degrading the group’s intent or capability.
March 2024 saw a proliferation in the number and efficacy of attacks, with the first three fatalities reported on the sixth of the month as the Barbados-flagged bulk carrier True Confidence was struck near the coast of Yemen. Around three weeks later, on March 26th, four ships were attacked with six drones or missiles in a single 72-hour period. Separately, on March 17th, what is believed to have been a Houthi cruise missile breached southern Israel’s air defences, coming down somewhere north of Eilat, albeit harmlessly.
Since starting their campaign against mainly international commercial shipping in the waters of the Red Sea and Gulf of Aden in November 2023, the Houthis have become one of the mostaggressive Iranian proxy groups in the Middle East. This and their apparently strengthened resolve in the face of US and UK strikes have substantially raised their profile internationally and won them plentifulplauditsfrom their supporters across the region. The perception that they are standing up to the US, Israel, and their Western cohorts has been instrumental in developing their motto“God is great, death to the U.S., death to Israel, curse the Jews, and victory for Islam” into a mission statement.
Map of Houthi Attacks
Source: BBC
Iran-Houthi Mutualism
In terms of regional geopolitics, the mutual benefits to Iran and the Houthis of their cooperation are far-reaching. For their part, the Iranians can use the Houthis to project power west into the Red Sea and Gulf of Aden, pushing back against the influence of Saudi Arabia and other Sunni states. Although not part of the Abrahamic Accords of 2020, Riyadh has been showing signs of a willingness to harmonise diplomatic relations with Israel, even since the events following October 7, 2023. This is a complete anathema to Tehran, for which the Palestinian cause is central to its historic antagonism with Tel Aviv. The fact that Saudi Arabia was instrumental in setting up the coalition of nine countries that intervened against the Houthis in Yemen from 2015 onwards only strengthens Tehran’s desire to confront the country’s influence regionally.
A secondary benefit of the Houthis’ Red Sea campaign is that it helps to maintain Tehran’s maritime supply lines to some of its franchise groups further north in Lebanon, Gaza, and Syria. Their importance to Iran’s proxy operations was illustrated in March 2014 when the Israel Defence Forces (IDF) conducted “Operation Discovery," intercepting a cargo ship bound for Port Sudan on the Red Sea’s western shores carrying a large number of M-302 long-range rockets. Originating in Syria, they were reckoned to have been destined for HAMAS in Gaza following a circuitous route that included Iran and Iraq and which would have culminated in a land journey from Port Sudan north through Egypt to the Levant.
Iran began to increase its military presence in the Red Sea in February 2011 and has since established a near-permanent presence there and in the Gulf of Aden, to the south, with both surface vessels and submarines. However, this footprint is relatively weak compared to that of its presence in the Persian Gulf, to the east, and it would be no match for the Western vessels that have been operating against the Houthis in the Red Sea since late 2023. The latter’s campaign in these waters can, therefore, only reinforce Iran’s presence thereabouts.
A lesser-known reason for Iran’s desire to maintain influence around the Red Sea is a small archipelago of four islands strategically located on the eastern approaches to the Gulf of Aden from the Indian Ocean and Arabian Sea. The largest of the four islands is called Socotra and is considered by some to have been the location of the Garden of Eden. With a surface area of a little over 1,400 square miles, it has, in recent years, found itself more and more embroiled in the struggle for hegemony between Iran and its Sunni opponents in the region. In this sense, it and its neighbours could be seen to have an equivalence to some of the small islands and atolls of the South China Sea that are now finding themselves increasingly on the frontlines of Beijing’s regional expansionism.
While officially Yemeni, Socotra has long enjoyed close ties with the United Arab Emirates (UAE), with approximately 30% of the island’s population residing in the latter. Following a series of very damaging extreme weather events in 2015 and 2018, the UAE strengthened its hold on Socotra by providing much-needed aid, with military units arriving entirely unannounced in April 2018. Vocal opposition from the Saudi-allied Yemeni government led to Riyadh deploying its own forces to the island in the same year, but these were forced to withdraw in 2020 when the UAE-allied Southern Transition Council (STC) took full control of the island. Since then, Socotra has been considered to be a de facto UAE protectorate, extending the latter’s own influence south into the Gulf of Aden.
Shortly after came the signing of the Abrahamic Accords, which normalised relations between Israel and several other regional countries, including the UAE. Enhanced cooperation with the UAE gave Tel Aviv a unique opportunity to expand its own influence in the region through military cooperation with its new ally. In the summer of 2022, it was reported that some inhabitants of the small island of Abd al-Kuri, 130 km west of Socotra, had been forced from their homes to make way for what has been described as a joint UAE-Israeli “spy base." For Iran, this means that Israel now has a presence at a strategic point on the strategically vital approaches to the Red Sea from the Indian Ocean.
Perhaps a greater irritant for both the Houthis and Iran is the presence of UAE forces on the small island of Perim. This sits just 3 km from the Yemeni coast in the eastern portion of the Bab al-Mandab Strait, giving it obvious strategic importance. The UAE took the island from Houthi forces in 2015 and started to construct an airbase there almost immediately. Although there is no known Israeli presence there, Perim is now a major thorn in the side of Iran’s own regional ambitions. In the regional tussle for supremacy, this is yet another very pragmatic reason for the Houthi-Iran relationship.
Perim Airbase
Source: The Guardian
Since February 2022, much has been made of the extent to which Ukraine has become a weapons incubator for both sides in the conflict there, not least with regard to innovative drone and AI technology. Given the range of weaponry now apparently at the disposal of the Houthis in the Red Sea and Gulf of Aden, it may be that that campaign is serving a similar purpose for a Tehran keen to test recent additions to its armoury. Indeed, the Houthis’ use of a range of modern weapons, including drones, Unmanned Underwater Vehicles, and cruise missiles, since November 2023 continues to be reported on a regular basis.
In return for prosecuting its campaign in the Red Sea, the latter received substantial material military support from Tehran, allowing them to raise their standing even more. The aforementioned attack, which killed three seafarers aboard the True Confidence, was the first effective strike against a ship using an Anti-Ship ballistic Missile (ASBM) in the history of naval warfare. First and foremost, this will have been regarded as a major coup for the Iranian military assets mentoring the Houthis in Yemen. Additionally, it has given the latter’s global standing a further boost since an attack of this magnitude would be more normally associated with the much more sophisticated standing military of a larger country.
A simplistic analysis of the Houthi-Iranian relationship could stop at this point. However, recent events in the Middle East and further afield show that it is a relatively small coupling in a much larger, global marriage of convenience. A clue to this appeared in media reporting in late January 2024, when The Voice of America reported that Korean Hangul characters had been found on the remains of at least one missile fired by the Houthis. This led to the conclusion that the Yemeni group has received North Korean equipment via Iran.
North Korean missile supposedly used by the Houthis
Source: VOA
Russian Involvement
In late March 2024, Russia and China signed a historic pact with the Houthi in which the nations obtained assurance of safe passage through the Red Sea and Gulf of Aden in return for ‘political support’ to the Shia militant group. Despite the assurance, safety for Russian and Chinese vessels is not guaranteed. In late January, explosions from missiles were recorded just one nautical mile from a Russian vessel shipping oil, while on the 23rd of April, four missiles were launched in the proximity of the Chinese-owned oil tanker Huang Lu. Evidently, increased regional tensions incur an extra security risk for Russian tankers, regardless of the will of the Houthis to keep said tankers safe.
The Kremlin is trying to walk a thin line between provoking and destabilising the West while simultaneously trying to avoid, literally and figuratively, capsizing regional Russian maritime activity. Its seemingly contradictory two-pronged approach aims to secure vital shipping routes while fostering an anti-Western bond with regional actors. Russia is seen upholding its anti-West rhetoric, which serves as a cornerstone for bonding with regional actors and pushing forth Russian economic interests, while silently attempting to facilitate regional de-escalation led by Washington. Despite being a heavy user of their veto power in the UNSC, Russia abstained from voting on Resolution 2722, which demands the Houthis immediately stop attacks on merchant and commercial vessels in the Red Sea.
On January 11th, Washington put forth UN Resolution 2722 to the UNSC, which sought to justify attacks on Houthi infrastructure as a push-back for the group’s recent activities in the Red Sea. During the voting procedure of the resolution, Russia chose to abstain, even though Moscow often frequents vetoes as a tactic to show support for Kremlin-friendly states in Africa and the Middle East. The resolution subsequently passed, and the US and UK commenced their first strikes on Yemen the following day. These reveal Russia’s interests in securing enough stability to continue shipping its estimated 3 million barrels of oil a day to India, while aligning with overarching geopolitical alignments.
Russia’s interest in stabilising regional conflicts may lie in the threats to its weapon supply chains. As the war in Ukraine drags on, Tehran’s importance as a weapon supplier increases the Kremlin’s collaboration efforts. Putin continues to foster and protect regional connections by actively protesting Western regional presence, attempting to balance the current crisis with crucial ties to middle-eastern nations.
Trade Route Diversion
Since the onset of the crisis in the strait, Russia has utilised the opportunity to bolster anti-Western and pro-Russian sentiments. For one, Russia has flagged various Russian transport initiatives. On January 29th, Russia’s Deputy Prime Minister, Alexey Overchuk, noted that Russia’s “main focus is on the development of the North-South international transportation corridor," which is a 7200-km multi-modal transport network offering an alternative and shorter trade route between Northern Europe and South Asia.
International North-South Trade Corridor
A key part of the trade route involves an imagined rail network spanning from Russia to Iran. Though positioned as a universally beneficial transport option for both Europe and Asia, it seems Moscow and Tehran would benefit the most. The two highly sanctioned states, whose connection has recently deepened due to their shared economic isolation from the global economy, could position themselves as lynchpins of an effective transport network.
Unlike Tehran, which still has control over the vital Strait of Hormuz choke point, Russia’s political might in terms of energy transport networks is quickly dwindling after the Baltic states’ complete exit from the BRELL energy system and the West’s resolve to decrease energy dependence. The North-South corridor thereby holds value as a catalyst of global energy transport and trade.
However, this vision is thwarted by financial crises, with workon the railroad from Rasht to Astara in Iran suffering setbacks. Iran does not have the means to pour into the project and has already obtained a 500 million euro loan (about half of the total cost of construction) from Azerbaijan in FDI. In May 2023, it became known that the Kremlin would fund the project themselves by issuing a 1.3 billion euro loan to Tehran, despite Iran’s ballooning debt to Russia. The same month, Marat Khusnullin, Deputy Prime Minister, announced that Russia is expecting to invest approximately $3.5 billion in the North-South corridor by 2030. This is likely a major underestimation of the costs needed to complete the project.
With Iran’s growing debt and Russia’s war-born financial strain, further trade route developments are sure to be delayed. Seeing as the railroad project between Russia, Azerbaijan, and Iran has been in existence since 2005 with no concrete end in sight, the North-South Corridor, despite Russia’s active marketing campaign in light of the troubles in the Red Sea, is unlikely to become a viable transport option in the near future.
The Northern Sea Route (NSR), which Putin has similarly promoted since the start of the Houthi attacks, is likely to suffer a similar fate. The NSR’s realisation as a major global route is hindered by the fact that the Arctic Circle’s harsh climate causes the route to be icebound for about half of the year. Furthermore, in light of the recent war in Ukraine, the NSR is off-limits to even being considered a viable transportation route for large swaths of the West due to sanctions against Putin’s regime.
Russia: Long-Term Strategy
With Russia’s closest regional naval presence being Tartus in Syria, Russia is also interested in establishing naval bases closer to the Red Sea. Russia’s primary interest is to establish a port in Sudan. High-level bilateral negotiations have been actively taking place between Khartoum and Moscow, with an official deal being announced in late 2020. The construction of a naval base would increase Russia’s influence over Africa, facilitating power projection in the Indian Ocean. Nonetheless, the ongoing Sudanese civil war seems to have stalled negotiations.
The region is of such strategic interest to Russia that Moscow has recently pushed forth another alternative for bolstering its presence in the Red Sea: a naval base in Eritrea. During a state visit to Eritrea in 2023, Russian Foreign Minister Sergey Lavrov underscored the potential that the Massawa port holds. The same year, a Memorandum of Understanding was signed between the city of Massawa and the Russian Black Sea naval base Sevastopol, in which the two countries pledged to foster closer ties in the future.
A New Axis
China and Russia have recently struck a deal with the Houthis to ensure ship safety, as reported by a Bloomberg article. Under the agreement, ships from China and Russia are permitted to sail through the Red Sea and the Suez Canal without fear of attack. In return, both countries have agreed to offer some form of “political support” to the Houthis. Although the exact nature of this support remains unclear, one potential manifestation could involve backing the Yemeni militant group in international institutions such as the United Nations Security Council. In January 2024, a resolution condemning attacks carried out by the Houthi rebels off the coast of Yemen was passed, with China and Russia among the four countries that abstained.
Despite instances of misfiring by Chinese ships after the deal, the alignment between these countries has been viewed as the emergence of an “axis of evil 2.0." Coined by former U.S. President George W. Bush at the start of the war on terror in 2002, the term “axis of evil” originally referred to Iran, Iraq, and North Korea, which were accused of sponsoring terrorism by U.S. politicians. Indeed, China and Iran have maintained a robust economic and diplomatic relationship. China is a significant buyer of Iranian oil, purchasing around 90 percent of Iran’s oil output, totalling 1.2 million barrels a day since the beginning of 2023, as the U.S. continues to enforce Iranian oil sanctions.
Chinese Dominance of Iranian Crude Oil Exports
Source: Seeking Alpha
However, it may be far-fetched to consider China, Russia, Iran, and North Korea as a united force akin to the Communist bloc against the West during the Cold War. After all, there are significant tensions within these relationships. For example, Beijing has not fully aligned with Moscow regarding the invasion of Ukraine. Additionally, there are power imbalances within these relationships, as Iran relies on China far more than China relies on Iran.
Despite the thinness of this idea of an "axis," it remains concerning that these powerful countries (three of which are nuclear-armed) are aligning against the democratic world. Considering the volume of trade passing through the Suez Canal and the impossibility for the U.S. and company’s Operation Prosperity Guardian to protect every ship in the region, the deal struck between China, Russia, and Iran may be a significant factor that could shift the current global economic balance towards the side of the "Eastern Axis.”
Similarly, China’s recent activities against the Philippines in the South China Sea could be viewed as an attempt to undermine the Philippines’ economy, which heavily relies on its seaports. This could force the Philippines to capitulate or incur significant costs for the U.S. should it decide to provide more assistance to further enhance the Philippines’ defence capabilities.
China: Long-Term Strategy
In recent years, China has increased its ties with countries outside the ‘Western sphere’. Apart from being present in the Gulf of Oman and destining a myriad of vessels to secure the region, it has made strides in developing long-term partnerships with Russia and Iran. Chinese collaboration with Russia is advertised as having “no limits,”, and its 25-Year Comprehensive Cooperation Agreement with Iran further cements its political and economic involvement with both nations.
The security and economic aspects of China’s long-term plans are the most relevant to commodity trade, as violent conflicts and geopolitical tensions are the prime hindrances to trade flows through the region. Nonetheless, the cooperation of these nations does not bode well with the West and could negatively impact trade regardless of improved security.
China’s circumvention of the financial sanctions placed on Iran mocks the international community’s concerted effort to dissuade Tehran’s human rights violations, nuclear activities, and involvement in the Russia-Ukraine war. Its “teapot” strategy, which allowed China to purchase90% of total Iranian oil exports, relies on the use of dark fleet tankers and small refineries to avoid detection and evade the financial sanctions placed on Iranian exports.
Increased its bilateral trade flows with Russia also point to increased cooperation, with $88 billion worth of energy commodities being imported by China in 2022, with imports of natural gas increasing by 50% and crude oil by 10%, reaching 80 million metric tonnes. In 2023, bilateral trade reached $240 billion, proving both countries hold cooperation as a pillar of their economic strategy.
Chinese-Iranian Oil Trade
Source: Nikkei Asia
The West has increased efforts to dissuade cooperation with Russia, as seen with the creation of the secondary sanction authority. These sanctions cut off financial institutions that transact with Russia’s military complex from the U.S. financial system and have successfully led three of the largest Chinese banks to cease transactions with sanctioned companies. Despite the success of certain measures and sanctions, cooperation between both states remains, and their involvement in the Middle East will ensure collaborative efforts for the foreseeable future.
Conclusion
The evident development of collaborative endeavours among the ‘Eastern Axis’ countries is enough to engender strife and uncertainty in trade in the Red Sea. It is becoming increasingly evident that uncertainty will still roam the seas regardless of whether the Houthi conflict is tamed, preventing maritime trade in the Red Sea’s key routes from reaching their potential. The reliance of regional security on both violent attacks and political alignments, such as the involvement of the Eastern Axis in the region, highlights how deeply supply-chain stability is intertwined with geopolitical relations, establishing Iran as a determinant of the Red Sea’s future commodity trade prosperity.
Niger Coup: What Could've Left the Sahel's Last Bastion so Vulnerable?
Introduction
Niger’s President Mohamed Bazoum has been ousted from power, claims the presidential guard, who appeared on national television late on Wednesday night, mere hours after he was captured in the country’s presidential palace. The coup artists claim to have suspended all political institutions in the country. General Abdourahamane Tiani, the head of Niger’s presidential guard, who previously was rumoured to have been in negotiations with the president after Bazoum planned to demote him from head of the organisation, was initially challenged by the wider armed forces and national guard, who threatened to attack the insurrectionists unless they stepped down; those same armed forces now back the coup against Bazoum to supposedly prevent a bloodbath, even as Bazoum pledged to protect the democratic gains made in the country, in spite of recent events.
The following report provides a summary of the potential contributors to the instability in Niger, including the precarious security situation, growing anti-French and pro-Russian sentiments, dwindling food supply, political mismanagement of the world’s fastest growing population, and a sharp rise in the price of fuel.
National Overview
Niger is a multicultural yet overwhelmingly Muslim North-West African nation, around double the size of Texas or France, bordering Nigeria to the South, Mali to the West, Algeria and Libya to the North, and Chad to the East, as well as other smaller nations in all directions. It usually resides at the bottom of most indicators of human development and is one of the poorest nations on earth, with a population of around 25 million people. It is a former French colony, with French being the language of administration. France remains one of its primary import and export partners. Moreover, the country still uses the Franc as its currency.
The Hausa (also majorly present in northern Nigeria) live mainly in the South and centre of the country and are the largest ethnic group at 51% of the population. The Zarma-Songhai make up 21% of the population and primarily reside in the nation’s southwest. 80% of the country’s area is covered by the Sahara Desert. This area, however, only contains 20% of the country’s population, made up primarily of the Tuareg and other ethnic groups, which make up the remainder of Niger’s population. The sheer size of the Sahara makes water scarce, particularly in the north of the country. The South, however, has a more tropical climate with higher rainfall. It is home to both French and American military bases, with both countries involved in the international effort against Jihadist groups in the Sahel region of North West Africa; a section of this region forms part of Niger’s territory.
Situational Background
Niger is no stranger to coups and coup attempts, with military officers overthrowing presidents in 1974, 1996, 1999, and 2010. Bazoum’s ascent to the presidency, however, was the country’s first ever case of a peaceful transfer of power from one president to another, despite an attempted coup just two days before Bazoum’s inauguration in 2021 as well as accusations of fraud from the second place candidate, Mahamane Ousmane, whose supporters have held mass rallies. Bazoum was the preferred successor of his predecessor, Mahamadou Issoufou, who stepped down voluntarily. Rather than a break with Niger’s tradition of military coups, this suggests an aberration created by the transfer of power from one chairman of the board to another, instead of one governmental apparatus handing over to another.
Yet, Bazoum’s regime had begun to be viewed within the country as increasingly repressive and not particularly popular. Additionally, his predecessor may have been viewed internationally as an effective democratic leader, but this view is rarely found in Niger itself, with wide scale industrial action taking place under both Bazoum’s and Issoufou’s reigns respectively.
Militants in the Sahel and Lake Chad Basin
Bazoum, seen by many within Niger as a puppet of French authorities, has stated that France’s anti-Jihadist force in the region is a “relative failure, it’s a shared failure, a failure of the entire coalition." He also stated that France’s troop drawdown in the region would have only a limited impact. In fact, on the same day that Bazoum’s election victory was certified by the nation’s constitutional court, armed men on motorbikes attacked a string of villages on the Mali border, leaving 137 dead in the nation’s deadliest violence in recent times.
There are now more fatalities linked to militant islamist groups in the Sahel than in any other region of Africa. In fact, violence in the Sahel increases year on year, while fatalities linked to islamist groups in other parts of Africa have fallen.
In the West, the Islamic State in the Greater Sahara (ISGS) and Jama’at Nusrat al Islam wal Muslimin (JNIM), made up of various Al Qaeda affiliates, with the Macina Liberation Front (FLM) being the one most active in the Sahel, are the largest contributors to fatalities linked to islamist violence in the region. The Africa Center for Strategic Studies attributes these two groups with the majority of violent attacks and islamist militant violence in the Sahel, which now accounts for 60% of such violence across the continent.
This has led to the displacement of approximately 2.5 million people across the region, although Burkina Faso accounts for the majority of those displaced. Some of the latest data from 2021, the year of Bazmoun’s inauguration, showed a 50% rise in battles between JNIM forces and security forces, while battles with ISGS fell by 45%.
The main groups operating in Eastern Niger, as part of the Lake Chad Basin, are Boko Haram, the Islamic State in West Africa (ISWA), and Ansaru. These groups are also present in Nigeria, Cameroon, and Chad. The Lake Chad Basin is now the second highest region in Africa for fatalities linked to militant islamist groups. Its trend is overall downward, however, as opposed to the increasing violence in the Sahel. As of 2021, the Basin saw a 32% drop in militant islamist activity and a 21% drop in reported fatalities linked to militant islamist groups. Boko Haram is the group most on the decline, with a drop in linked fatalities of 46%, while ISWA only saw a drop of 3%. This discrepancy is most likely due to the death of Boko Haram’s longtime leader, Abubakur Shekau, in May 2021 and subsequent regrouping.
The relative rise in violence in the Sahel, and the drop in Lake Chad, present new problems for security forces in Niger. In 2012, the vast majority of violence that forces in Niger had to contend with was situated in the east of the nation, in the Lake Chad Basin. Although violence in the Basin has recently been on the decline, the sharp rise in violence in the Sahel, contained in parts of western Niger, leaves the counter-islamist-militant coalition split across the country with only vast desert and a small section of tropical savannah linking the two fronts, making transfers of troops and supplies by land vulnerable and logistically difficult.
Growing Anti-French Sentiment and Increasing Russian Influence Across the Region
There is little information on why the same presidential guard that fought to protect Bazoum’s life in March 2021, has captured him and supplanted Niger’s political institutions. There are serious concerns that the Wagner group is connected. Fans were flamed by Wagner Group Commander Yevgeny Prigozhin’s attendance at a recent Russia-Africa summit in St Petersburg, suggesting Wagner and the Russian state remain partners on the continent. Prigozhin's public statements, characterising the coup as “a battle by the people of Niger against their colonisers”, were especially alarming. The Wagner Group’s goals as a private military company (PMC) are to secure profit while advancing Russian socio-economic and foreign policy interests.
Niger and the wider region of Francophone North-West Africa have come under increasing Russian influence in recent times. This has combined with existing anti-colonial and anti-French sentiment to create a perfect storm of public pressure against the French and the West as a whole. The same week as the coup in Niger, the new Mali constitution, brought in via referendum, demoted French as an official language to the status of a “working” language. This subsequently promoted a number of native languages to official status.
The French military’s operations in Mali were always only somewhat supported by the population, with one especially gruesome event where a French air strike killed 22 people at a wedding, exemplifying the tension, propensity for callousness, and frequent unforced errors made by the French military. The French government asserted that those killed were Jihadis, while the UN concluded that they were overwhelmingly civilians. Mali has now turned to the Wagner Group for military aid in fighting insurgencies, and expelled its French forces.
Bazoum, however, has identified France as an easy target for "the populist discourse of certain opinions, especially on social media among African youth” and that “its adversaries want to project an image of France as a neocolonialist power. Some people stick to that cliché, which is not true, but which is very useful for propaganda.” He stated that Wagner had been ineffective in Mali, and that the number of refugees entering Niger from Mali had actually increased since the departure of French forces in the region.
With many of Niger’s neighbours creeping out of western influence, the nation seemed increasingly to be the last bastion of the so-called “coup belt”, a grouping of predominantly Francophone Central and West African countries.
The French government in particular came to view Niger as a partner of last resort, as its other options dissipated. Ibrahim Yahaya Ibrahim, a senior Sahel analyst at the International Crisis Group speaking to the Financial Times, said Bazoum’s pro-western stance had received a mixed reception at home, where he had taken “quite a hit”. “The same anti-French discourse that has proliferated in Mali and Burkina Faso is also present in Niger”. More specifically, Bazoum had complained of disinformation campaigns by Wagner against his government. Perhaps then it is no surprise that supporters of the Niger coup have been seen waving Russian flags all over the country, seen by many as Niger’s ally against western hegemony and colonialism.
Wagner’s preference for payment in natural resources, most commonly valuable raw minerals, is not news. Niger produces 7% of the world’s Uranium, with most of it ending up in France for use in the nation’s many nuclear power stations, which produce around 70% of French power. Around three quarters of France’s Uranium comes from just four countries: Kazakhstan, Australia, Niger, and Uzbekistan. However, Niger has been diversifying its customer base, with significant shares of the country’s uranium now being sold to companies based in Canada and China, with each nation’s operation in Niger maintaining its own extraction sites.
Therefore, the theory has been circulated that the coup in Niger achieves two goals for Wagner and the Russian government. Firstly, Wagner may now be able to operate in Niger in exchange for uranium, which can then be used in Russia for military and/or civilian purposes, or sold on international markets.
Secondly, Wagner may develop the relationships necessary to divert significant amounts of Uranium away from the French energy market, jeopardising the price of energy in France and bringing an energy-borne cost of living crisis there that countries dependent on Russian gas have been experiencing in the rest of Europe. This aspect of the coup will develop further in the coming weeks and is set for much speculation.
The Ukraine War and Global Fertiliser Supply
Much of Niger’s land is used to produce food. Despite this, the country’s largest import is rice, at a value of $275m. This demonstrates a caloric deficit in the country’s domestic food supply and leaves Niger’s food supply vulnerable to international pressures. For instance, the Russian invasion of Ukraine has left the developing world in the lurch. Russia is the largest agricultural fertiliser producer in the world. As such, the supply of such fertilisers has decreased all across the African continent. This is because most fertilisers are produced using coal or natural gas, the global price of which has led to a sharp increase in the price of fertilisers and subsequently food. As a result, the president of the African Development Bank predicts a 20% drop in food production across the continent. At present, around 44% of Nigerien children are malnourished, and around 18% of the population was predicted to have reached crisis levels of food insecurity between June 2022 and June 2023, this was twice as many as the same 12 month period previously. Niger’s population is also uniquely young, with an average population of around 14, which makes the population particularly exposed to food shortages as such a large proportion of the population are children.
A recent emergency response plan from the Nigerien government was budgeted at $280m; however, it became clear that it included a $200m shortfall. Additionally, the UN Food Programme has slashed food rations by 50% since January 2022 in response to the increasing global scarcity of food. So many children are now entering clinics with malnutrition that clinics across the country no longer have the resources to treat them, with many families not even being able to travel to clinics, being forced to watch their children die at home.
The Silent Pandemic of Climate Change
The Ukraine war is one reason for the rise in hunger, but another is climate change. Thousands of farmers in Niger are facing the oncoming storm of what has been called the “silent pandemic”. Niger is especially vulnerable to global warming, with temperatures rising there at a rate 1.5 times faster than the rest of the world. Nigerien farmers are being forced to adapt to their new environment as rainfall both becomes more scarce and increasingly erratic, leading to a cycle of droughts that are progressively eroding the 14% of the country’s land that is arable. As a result, the nation has not had a good harvest for around a decade, with 2021 seeing a 39% drop in cereal production.
Not only can we expect further drops in quantity production but also in quality. Changing conditions in which many grains are grown also have an impact on the quality of that supply and the nutritional benefit of the final product crop. For instance, high levels of atmospheric CO2 lead to a reduction in protein percentage. This, combined with high temperatures limiting the supply of glutenin protein polymers, is likely to have a negative effect on the ability of grain to be turned into dough and thus baked into processed food products such as bread. Additionally, heat stress over 30oC (with temperatures in Niger often reaching 40oC) reduces the rate at which starch accumulates, leading to grains grown in hotter environments containing fewer calories than those grown in more temperate conditions. With the world heating up, the problem of reduced calorie content in grain suggests obvious problems whereby no costs are reduced in production but the final product becomes progressively of less nutritional worth as the planet’s temperature rises.
These factors combine to create what is known as the “lean season”, the period between harvests of about four months. The lean season begins earlier every year, leading many to abandon their villages and settlements in the knowledge that to remain is to ensure starvation, and the only chance they have of survival resides in fleeing either to the cities or relatively aimlessly through the rural areas.
The World’s Fastest Population Growth and the Traitor Narrative
President Bazoum had attempted to make reducing family size a core tenet of his policy programme, with Niger having the world’s highest birth rate. Niger’s population is on track to triple by 2050, from 24 million to 68 million people. For many, this seems to allow Niger to share in the benefits of other populous nations such as China, India, and Nigeria in gaining political clout with the population. However, there are many warnings being made on the link between a high birth rate and rampant poverty.
The attitude most prevalent in Niger, however, is that there is much land but not enough people to fill it. In fact, Garé Amadou, editor in chief of the La Nation newspaper, states that many in the country believe the concerns over population growth are “just something that worries western countries” and that a large proportion of Nigeriens believe that there is a clandestine foreign agenda to contain Africa’s burgeoning population.
Bazoum's public pronouncement of his negative feelings towards rapid population growth has been an act of self-sabotage, especially in combination with specific policy measures. Many in Niger are not comfortable with a president, who has banned his ministers from polygamous marriage and declared the practise “a bad thing” in a country where a third of the population lives in such a marriage. Bazoum has also publicly advocated for the establishment of all girls boarding schools, where children would be educated away from their families by the state. Both of these measures are rooted in the noble goal of keeping women and girls in education for as long as possible. However, many commentators, both within and without Nigerien society, find it hard to comprehend how its president can believe that these measures would ever be popular.
In fact, these public pronouncements have been read by many within the country as rejections of Nigerien culture and the prescriptions of the Koran. This has created a common view that Bazoum is what in the west would be referred to as “virtue signalling” or “making a contribution to moral discourse that aims to convince others that one is ‘morally respectable”. In this case, the Nigerien population views the “others” that Bazoum is trying to convince of his moral respectability as western observers and authorities. This has contributed to the image of the President as being too pro-western, anti-tradition, and a puppet of the French and American governments.
However, almost all involved in the subject, both nationally and internationally, agree that an average of below three children per woman, is a necessary precondition for rapid economic development. Additionally, the Koran does not advocate for the maximum number of wives and children, but for men to have many children and more than one wife as long as they can be provided for, something that Niger’s economy is not capable of doing so healthily. Additionally, many religious leaders in the country are showing the way on increasing the use of contraception to prevent couples from having children they are unable to afford.
There has also been a significant cultural transition in maternity wards, with wives now giving birth in the company of their husbands, something quite rare until relatively recently. Furthermore, pregnant women are receiving more attention and care from their partners during pregnancy. However, the director of Issaka Gazoby maternity hospital in the capital Niamey, Mady Nayama, states that “population growth in Africa is frightening” and that the lack of resources available in the country to sustain such a fast growing population leads to intense poverty with “poverty that turns these children into vagabonds.” Niger’s birth rate is still the highest in the world but has been slowly declining for around 20 years. However, Nayama claims that many are still resistant to change and that “our religion tells us that, if God gives a child, he will feed it. But that’s not happening.”
If Bazoum had communicated the link between lowering the birth rate and increasing economic growth to the population, in addition to leaning into the efforts of religious leaders and medical professionals to increase the use of contraception, he may have been aided in steering the political ship away from the erroneous course of mistrust in the nation’s political institutions and making his own voice the herald of unpopular cultural change.
The End of Nigerian Fuel Subsidies and the Collapse of the Black Market
Most coups and coup attempts in Niger come about to secure the revenues of uranium and/or oil exports from the country. Although, it is not yet certain that this is the case here. The motivations of the coup artists remain elusive, with only their public statements to rely on, the candour of which cannot yet be evaluated. What seems more likely is that the very presence of oil and gold in the country has contributed to political instability, in addition to oil price shocks as a result of policy decisions made in neighbouring countries.
Nigeria’s President Bola Tinubu announced during his inauguration speech in May that the Nigerian “fuel subsidy is gone!”, with measures already taking effect in the country. The price of Premium Motor Spirit (PMS) rose rapidly to somewhere between NGN 488 per litre in the capital and NGN 555 per litre in Borno State.
Niger has also been affected. The major population centres of the south have become dependent on cheap, smuggled, Nigerian-subsidised petrol. Usually arriving at illegal fuel warehouses and being sold on the black market via touts waving petrol canisters by the roadside. The sudden end of subsidies has led to shortages in Niger’s most populated areas and sharp price rises. Previously, a litre of petrol could be bought for around 250 francs (around 45 cents US), but this has risen to around 600 Francs, more expensive than even at regular petrol stations. The rush on those petrol stations is especially severe in the south but is occurring all over the country. According to officials at the nation’s oil ministry, the price of petrol at regular stations has increased tenfold as demand at the pump increases. Consequently, transport costs have increased exponentially. For instance, at markets in the south, the price of a 100 kg sack of maize has risen by 4,000 Francs to 28,000, worsening an already precarious situation around the country’s food supply.
SONIDEP, the Nigerien Company for Oil Products, is coping with the sudden shortfall with reserves from the country’s only oil refinery. However, those reserves will not last forever, and eventually a decision will have to be made on whether to purchase fuel from overseas or begin to operate its sole refinery at maximum output.
The black market also functioned as a primary source of employment for many young men in the south of the country. It is now feared that many of this working-age population will be forced to turn to crime, or worse, to put increasingly expensive food on the table.
Conclusion
This political risk report highlights several key factors contributing to the instability in Niger. The recent ousting of President Bazoum by the presidential guard, leading to the suspension of political institutions, underscores the country's historical vulnerability to coups and power struggles. The precarious security situation, marked by increasing violence from militant Islamist groups in the Sahel and Lake Chad Basin, poses a significant challenge to the nation's stability. Additionally, growing Russian influence left Niger isolated as a bastion of unpopular former colonisers.
Niger's vulnerability to external factors is evident in its food supply situation. Reliance on food imports, particularly rice, coupled with the disruption caused by the Ukraine war and global fertiliser supply issues, exacerbates food insecurity and malnutrition in the country. Climate change is also a critical factor affecting agricultural productivity, contributing to the "silent pandemic" of climate change.
The trajectory of Niger's population growth is a matter of concern, with an anticipated tripling of the population by 2050. The government's attempts to address this issue, such as advocating for smaller family sizes and promoting girls' education, have been met with resistance, leading to perceptions of the president being out of touch with the country's cultural norms and influenced by Western interests.
Furthermore, the recent end of fuel subsidies in Nigeria has had adverse effects on Niger, leading to shortages and price hikes in the country, exacerbating the already challenging economic situation.
Niger faces a complex web of political, security, economic, and social challenges that require careful and strategic management to foster stability and address the underlying causes of instability. Only time will tell if this comes to pass.
India's Growing Reliance on Russian Oil Imports
Since Russia's full-scale invasion of Ukraine in 2022, India’s reliance on Russian crude oil has increased tenfold. The proportion has risen from as little as 2% of total crude imports in 2021/2022, to 20% in June 2023. Recent estimates suggest that this percentage may reach as high as 30% by the end of the year.
In the wake of the invasion, there has been a largely concerted effort to sanction Russia’s economy and prevent it from further funding their war of aggression. A key component of the sanctions have been directed at Russia’s oil industry, Russia being the world's third largest producer and second largest crude oil exporter.
In December 2022, the EU’s sixth sanctions package came into effect, banning seaborne crude oil and petroleum products from Russia (90% of total oil imports from Russia). This move complimented similar bans enforced in the USA and the UK. Yet an additional component of the combined sanctions effort has been a price cap on Russian crude oil, which set the maximum price at $60 per barrel of crude. Despite the fact that the G7 countries (USA, UK, France, Germany, Italy, Japan, Canada and the EU) have already agreed to ban or phase out Russian crude imports, the cap has given leverage to uninvolved countries, including India, when negotiating prices with Russia.
The rapid increase in Indian imports from Russia suggests that India has been able to harness Russia’s weakened bargaining position. At the same time this new arrangement has put downward pressure on the oil prices charged India’s former suppliers in OPEC, primarily, Iraq and Saudi Arabia
Source: Reuters
The price differential between Russian and OPEC sourced crude, provides a clear basis in explaining India’s shift. Taking the April 2023 price as a point of comparison, India was able to pay as little as $68 per barrel for Russian imported oil, while oil from Iraq (traditionally India’s largest supplier) was priced at $77 per barrel and oil from Saudi Arabia cost as much as $86 per barrel. During the month of April, the overall OPEC basket price ranged from $79 to $86 per barrel. The price gap between OPEC suppliers and Russia makes a clear case for India’s growing imports from Russia, while the significantly lower price of Russian crude demonstrates the impact of the $60 price cap.
Source: Euronews
The challenges posed by India’s growing taste for Russian oil are twofold. In the first instance, while the price of Russian oil is considerably lower than OPEC in this case, the $68 per barrel price tag is still well over the imposed price cap, revealing the limitations of the price cap regime. In the second instance, India has become a rapidly growing market for Russian oil and as such a prop for the Russian war economy. While EU oil imports declined, figure 2 shows the relative increase of Indian oil imports, partially offsetting the impact of oil sanctions. India’s growing reliance on imported Russian oil has already become a point of contention with Western leaders. With the forecasted increase of India’s Russian oil imports, it is likely to remain so.
Image credit: President of Russia via Wikimedia Commons
The Russian Oil Maskirovka: Why Aramco is Cutting Oil Prices
Oil markets have had an interesting year following the Russian invasion of Ukraine, to say the least . While firms have benefitted from this, with many announcing record profits, Saudi Aramco announced that it would be lowering oil prices in its main market Asia. This is off the back of weak manufacturing data from China that triggered a fall in Brent and WTI futures which track global oil prices. Although prices were raised in Asia, they remain unchanged in the United States but increased for European consumers. Aramco cut prices to $2.55 above the regional benchmark while Brent Crude futures jumped up to $87 per barrel before stabilising at $73 per barrel. Markets now look to the OPEC meeting in June, with some analysts believing that the group may decide to cut production again in a bid to keep high prices inflated.
On the one hand, it is not that surprising that Saudi Aramco’s profits dropped 19 per-cent considering their record profit of $161 billion off the back of an abnormal year for markets, but this is not just because of the oil market correcting itself. Saudi Arabia is competing with cheap Russian oil in key markets, like China and India, and, with 60 per-cent of its crude oil going to Asian markets - this is beginning to hurt the Kingdom’s economy. The IMF has halved its prediction on Saudi GDP growth from 8.7 per-cent to 3.1 per-cent, after cheap Russian oil undercut OPEC and priced Saudi Arabia out of key markets. However, this will only last until the Ukraine crisis is resolved and Russian oil can freely flow in global markets again. By convincing Saudi Arabia and OPEC to help sustain high prices, Russia has been able to sell its own oil at a discount to make up for the damage Western sanctions have caused on its economy. Unsurprisingly, this has ruffled feathers in the United States.
While Saudi Arabia is considered an ally of the United States, the relationship between the two nations has been less than cordial in recent years. The Kingdom has found itself becoming a rival oil exporter to the United States, and so has shown less interest in cooperation. President Biden refused to communicate with Crown Prince Mohammed Bin Salman, due to his involvement in the assassination of Jamal Khashoggi, and the relationship was further strained in March 2020, when Saudi Arabia dumped 40 million barrels of oil onto the market while in the midst of an oil price war with Russia. The resulting price decrease to -$37.63 per barrel was unprecedented and pushed American fracking companies out of business, thereby benefitting Saudi Arabia by decreasing global production and increasing prices.
Since then, Russia and Saudi Arabia have led their respective group of oil producers, together called OPEC+, to sustain high oil prices which had been placing inflationary pressures even before the Ukraine crisis began. In March of last year, they decided to increase production by 400,000 barrels a day each month, signalling that they had no interest in providing a safety net for Western Europe which has faced a decrease in Russian oil imports. This was following a call between Biden and King Salman in February, in which the former asked for more Saudi oil to relieve American allies, but nothing came of this. This coupled with Saudi Aramco making a $3.6 billion investment in Chinese Petrochemical firm Rongsheng and Xi Jinping calling for oil trade in Yuan, has caused security concerns in Washington. Biden might be facing more personal political problems due to oil markets though. Since WW1, sitting presidents won re-election only one out of seven times the economy has been in recession 2 years before they were up for re-election. With the OPEC meeting in June being held when the US is expected to breach its debt ceiling, if Biden does not receive favourable outcomes from both these issues, he can all but wave re-election in 2024 goodbye.
In the same way that neither Russia nor Saudi Arabia officially admitted to being in a price war in 2020, neither side has acknowledged the deception Russia orchestrated in convincing Saudi Arabia to sustain high oil prices. While the war in Ukraine has helped to keep these prices high, this has backfired in allowing Russia to snap up key markets in Asia. Whether this will remain the case going into the future is dubious. Looking at China, Russia was only able to unseat Saudi Arabia for 2 months of this year as the main supplier of oil, so if peace talks progress this year Saudi Arabia is likely to retake their lost market share. Moving forward we can expect oil prices to spike again if OPEC decides to cut production in June, but these prices are also dependent on the US debt ceiling. Although a default has never occurred before, OPEC are still looking at developments in the United States warily and it is evident that bad news coming from Capitol Hill will overshadow whatever decisions OPEC makes.
Photo Credits: mining.com
Commodities in the First Quarter: Inflation, War, and Geopolitics
Goldman Sachs’ 2023 commodity markets outlook had anticipated a substantial return of over 40 per-cent by the end of 2023 for commodities (S&P GSCI TR Index). As the first quarter of 2023 draws to a close, S&P GCSI spot prices closed the quarter at a -2.81 per-cent loss. As was the case in many financial markets, the S&P GCSI saw its biggest decline in the first quarter in the week of Silicon Valley Bank’s collapse – gold being the glaring exception. Of course, this is by no means indicative of how commodity markets will perform for the remainder of the year. Nevertheless, the impact of the ongoing banking on the inflation-duration investment cycle (elaborated below in Figure 1) for commodities remains to be assessed. This spotlight aims to do precisely that, considering some of the macroeconomic assumptions and models proposed in Goldman Sachs’ 2023 commodity outlook.
Understanding the Inflation-Duration Investment Cycle
The inflation-duration investment cycle is a tool useful for understanding investment in commodities and commodity market behaviour, relative to inflation and interest rates. It loosely correlates with the Merril Lynch Investment Clock – although it is a bit more specific to commodity markets.
Figure 1 - The Inflation-Duration Investment Cycle. Adapted from Goldman Sachs Commodity Outlook.
When Goldman Sachs published their 2023 Commodity Outlook, they affirmed that at present, the commodity market was still in the first stage of the inflation-duration investment cycle. Crucially, the 2023 Commodity Outlook explains that in addition to the current high-inflation, high-interest rate macroeconomic environment, commodity markets are confined in an underinvestment super cycle such that unless there is a sustained increase in capital expenditure (capex), increasing demand cannot trigger a supply-side response hence creating inflationary pressures in the short-term. The remainder of this spotlight will sum up the overarching macro-level geopolitical supply-side risks impacting three core sectors of the commodities market: agriculture, rare earth minerals, and energy markets.
Agriculture in Q12023
S&P agriculture indices (GSCI Agriculture, GSCI Livestock, and GSCI Grains) outperformed the S&P GSCI with GSCI Livestock being the best performing index considered in this spotlight, gaining 5.94 per-cent this quarter. Agriculture and Grains lost 0.61 per-cent and 2.57 per-cent, respectively.
At the macro-level there are two factors that will keep grain prices high, despite losses in value in the first quarter of 2023. These factors are the supply-side issues resulting from the Russo-Ukrainian War, despite the recent extension of the Black Sea Grain Initiative, and climate change – which is already having some impact on grain yields. As hypothesised at the start of the Russo-Ukrainian war, grain prices skyrocketed as the two countries contribute to about half of the world’s grain supplies. The wide use of grain in human and animal diet means that the precarity of grain supply will likely underpin most food-related price rises and contribute significantly to the cost of living crisis, globally. For that reason, the extension of the Black Sea Grain Deal on March 18 was of great relief for the global food supply chain. However, despite the extension there are two items still on the snag list: (i) a disagreement between Moscow and Kyiv over how much longer the Grain Deal will run for, and (ii) Russia banning major grain exporter – Cargill – from exporting Russian grain, which has already impacted futures’ prices.
Short-term risks impacting the supply of agricultural commodities also consist of grain supply, as they are crucial for animal feed. In addition to this, avian influenza outbreak in poultry supplies, which are not limited to just the United Kingdom, are having impact on related goods. Avian influenza outbreaks have been reported in the United Kingdom, United States, the rest of Europe, and there are fears that avian influenza and eventual egg shortages are also felt in South America. Long-term impacts of zoonotic diseases like avian influenza are difficult to quantify. Notwithstanding, after the outbreak of COVID-19 and the ensuing pandemic, there has been formal research dedicated to the matter which would suggest that countries with highly-industrialized, high-density agricultural industries run a higher risk of having disease outbreaks harm crop and livestock supplies. Thus, balancing land use and industrial density with growing populations’ driving up demand will be of importance if governments want to avoid severe shortages of crucial food items.
Energy Markets in 2023Q1
The three S&P energy indices considered in this spotlight – GCSI Natural Gas, Global Oil, and Global Clean Energy – all lost value quarter in 2023. Natural gas especially took a substantial hit, losing 44.43 per-cent of its value at the end of trading on March 31. Oil lost a little over five per-cent throughout the opening quarter whereas Global Clean Energy’s losses were below the one per-cent mark.
The stand out commodity here is natural gas (including LNG) and this is in large part because of the “geopolitical struggle between Europe and Russia” which will play a crucial role in dictating natural gas markets for the foreseeable future. As severe sanctions on Russian oil and gas were confirmed by the European Union throughout 2022, the bloc has not yet dealt with the fact that there is still strong demand and necessity for those commodities. Although some effort by means of REPowerEU have laid the groundwork for a shirt to alternative energy supplies, European countries have begun to look elsewhere for natural gas supplies. One such effort has been made by Italy who has looked to further increase imports of Algerian natural gas.
Another recent trend has been importing Indian-refined petroleum products derived from Russian oil, despite embargoes. This shows that short-term procurement of oil and gas into Europe could well become economically and politically costly until alternative energy supplies are not secured. As the necessity for reliable energy supplies begin to outweigh the political value of sanctions on Russia, European countries may well find themselves having to prioritise one over the other. A pessimistic outlook that may be, but it is already materialising; as France settled its first LNG deal in Yuan with China. As the BRICS countries begin to trade in their own currencies the return of a multi-polar energy market might lead to less market predictability and prolonged period of macro-scarcity.
On the other hand, the political and economic urgency to expedite the green energy transition is indicative of a positive outlook for renewables markets according to the International Energy Agency’s latest industry overview. Indeed, analysis and forecasts from McKinsey share this sentiment as they expect substantial growth in solar and wind energy. Bloomberg shares this sentiment in the hydrogen sector, too. As legislation and regulation gears itself towards carbon-neutrality in the world’s three largest economies – the United States, China, and the EU – there is a genuine legal basis for optimism in renewables markets. A medium to long-term risk to watch out for, however, would be the political and economic competition over the necessary resources – such as copper – for a green transition.
Rare Earth Metals in 2023Q1
In the opening quarter of the year, the S&P GCSI Core Battery Metals Index – which tracks stocks of rare earth metals (REM) pertinent to battery production – stagnated around the -0.34 per-cent mark. On the other hand the S&P GCSI Precious Metals Index soared 9.14 per-cent, though this was in large part due to investors backing gold and silver as the United States’ regional banking crisis erupted.
Although the relationship between geopolitical tensions and short-term supply risks of REMs is not yet at the scale of the relationship between geopolitical tensions and the supply of agricultural and energy commodities, there is reason to believe that this will not last very long. Essentially, this is because REMs and precious metals are crucial to the green energy transition and the production of key electronics’ components like semiconductors. REMs are also becoming ever-more important for the production and maintenance of modern-day defence systems. Thus, securing REM supply chains and secondary materials is a paramount task for states and businesses looking to establish a dominant presence at the international level. As of 2020 REM exports originated overwhelmingly from Asia with Myanmar, China, and Japan accounting for over half of all exports. The United States and its European allies, on the other hand, exported just over 10 per-cent of global REM exports. Furthermore, sanctions against Russia and Myanmar have further complicated access to REM imports for Western business and countries. This is exacerbated further by Beijing’s recent efforts to improve relations with Moscow and Naypyidaw – with the latter being crucial for China’s efforts to overcome the ‘Malacca Dilemma’.
In recognising this weak spot, both the Biden and Trump administrations took swift action to incentivise the reshoring production of crucial electronics, starting with the National Strategy for Critical and Emerging Technologies as a direct countermeasure to China’s efforts to increase its own electronics production. This was followed up with the CHIPS and Science Act and formal export controls, limiting semiconductors produced with American technology and inputs to China. In the meantime, the United States has sought to diversify its REM supplies from Africa, where China has a considerable geopolitical presence. What the impact the ongoing China-United States rivalry over REM supplies and semiconductor development will have on prices in the short-term remains to be seen, but the medium-to-long-term protectionism and antagonism between Beijing and Washington will likely lead to REMs enjoying substantial price increases considering their growing demand.
Summary: Outlook for 2023 and Beyond
The first quarter of 2023 carried forward many of 2022’s geopolitical dynamics and risks into global commodity markets. There have also been supply shocks, like avian influenza outbreaks and severe climate events, which have harmed the supply of crucial commodities that have further exacerbated the impacts of geopolitics on market activity.
This is particularly visible in agriculture markets where the uncertainty on how long the Black Sea Grain Initiative extension will last is a key risk to secure grain supplies globally. If Russia’s demands for a reduction of sanctions can be made credible by its recent rapprochement with China, then an extension of the Black Sea Grain Initiative beyond the current deadline will likely result from a reduction in Western sanctions. Conversely, if the West can find ways to cope with inflation and diversifying energy supplies, then Moscow might be forced to formally accept a longer extension. The outlook on the matter remains speculative, but the consequences of a no-extension scenario could spell disaster for global food supplies within the next quarter.
Although energy and REM markets are also mired by geopolitical power struggles and risks, the potential for a drastic spillover into commodity markets and the wider economy in the short-term is, at this stage, quite limited. Although, as REMs become more intertwined and necessary for future energy markets this outlook will likely change post-2023. This is because in the absence of short-term flashpoints, the increasing pursuance of protectionist and antagonising trade policies between Beijing and Washington will very likely undo much of the economic globalisation that occurred pre-COVID.
Hence, it is not likely that global commodity markets will break the macro-scarcity phase of the Inflation-Duration Investment Cycle in 2023 – and potentially prolong the under investment in commodities into 2024 and beyond. However, there is still a lot of 2023 to go and there is a lot of time for pressing issues to unfold and provide a clearer picture for commodity markets. Although, the current direction of the international regulatory and political environment does not offer much optimism for the long-term, with regards to increasing capex or securing crucial supply chains.
Cover photo credits to: Black Sea Grain Initiative FAQ | United Nations in Namibia
Extension of the Ukraine Black Sea Grain Initiative: Impact on Global Food Supply Chains
Since the beginning of the Russian invasion of Ukraine in February 2022, Ukrainian grain exports have been severely disrupted. Russian military vessels were carrying out a blockade of Ukrainian ports in the Black Sea for four months. On July 22 2022, an agreement was signed between Russia and Ukraine, mediated by the United Nations and Turkey, to maintain a safe maritime humanitarian corridor in the Black Sea, also known as the Black Sea Grain Initiative. Since then, about 900 ships carrying grain and other food items have departed from the Ukrainian ports of Chornomorsk, Odessa, and Yuzhny/Pivdennyi. When the time came of the end of the original deal, Ukrainian President Volodymyr Zelensky and the UN Secretary-General António Guterres both called for an extension of the deal, thereby enabling Russian and Ukrainian wheat and fertilisers to be exported through the Black Sea.
Initially, Ukraine and Russia had signed the deal for an initial 120 days last July, thereby averting a possible global food crisis. A subsequent November extension to the Black Sea Grain Initiative for an additional four months was due to expire on March 18, 2021, unless it was extended. While the UN and Ukrainian government backed the extension, the Kremlin was unhappy with specific provisions of the deal, thereby renewing fears of grain traders regarding potential risks to supplies and the potential increase in global grain prices. On March 18, 2023, the Ukrainian Deputy Prime Minister elucidated that the deal had been extended for 120 days. However, Moscow reckoned that it had agreed to a 60-day extension only, and a Russian Foreign Ministry letter to the UN said that the country was only willing to extend beyond the stated 60 days in the face of ‘tangible progress' towards unblocking flows of Russian food and fertilisers to world markets. The Turkish President, Recep Tayyip Erdogan, confirmed the rollover of the deal but did not comment on the exact duration of the extension.
As of March 2023, over 23 million tonnes of grain and other foodstuffs have been exported via the Black Sea Grain Initiative. Approximately 49 per-cent of the cargo constituted maize, the grain which was most affected by blockages in Ukrainian granaries at the start of the war, i.e. (75% of the 20 million tonnes of grain stored). It had to be displaced quickly to make room for the summer harvest. Wheat constituted 28 per-cent, sunflower products 11 per-cent and others 12 per-cent. Over 65 per-cent of the wheat exported through the Black Sea Grain Initiative went to developing countries. Maize was shipped to both developing and developed countries almost equally. 63 per-cent of wheat was exported to developing countries and 35 per-cent to developed countries. So far, approximately 456,000 tonnes of wheat departed Ukrainian ports to reach Ethiopia, Yemen, Djibouti, Somalia, and Afghanistan. The EU is a major global producer and exporter of wheat. In 2022, according to estimates, the EU exported approximately 36 million tonnes of soft wheat to Algeria, Morocco, Egypt, Pakistan, Nigeria and others. The Russian invasion of Ukraine caused a significant surge in food prices in global markets; the prices of particular grains rose steeply. The impact on price and the types of grain which have been exported through the Black Sea Grain Initiative is made available by an infographic published by the the Council of the European Union.
The extension of the deal is a significant success. Grain traders were concerned about the effects on global food prices and what it would imply for Ukraine’s summer wheat harvest had it not been extended. Shipping industry Representatives also appreciated the smooth functioning of the grain corridor. They feared that any end to the agreement would lead to the instantaneous stopping of vessels travelling to the Black Sea. Guy Platten, the Secretary General of the International Chamber of Shipping, elucidated that while the corridor had been a great success, any failure in a roll-over would have caused significant concern for shipping companies, who would not want to endanger their vessels and crew and would find it difficult to obtain insurance.
Market experts had also shared the fears that at a time when developing countries like Pakistan have been impacted by their own fair share of climate catastrophes like floods, leading to a massive destruction of crops, surge in energy prices as well as shocks to global supply chains due to the Russian invasion of Ukraine and high levels of inflation, a shock to grain exports, and subsequent rises in food prices would lead to a significant food crisis. Even in the developed world, for instance, in the EU, amid the cost of the living crisis and supply side shocks, higher global food prices would make essential edible items too expensive for people. Thus, the renewal of the agreement has been deemed a significant achievement.
Before the war, exports from Russia and Ukraine constituted about 30 per-cent of the global food trade. Between 5m to 6m tonnes of grain were exported each month from Ukraine’s seaports, according to the International Grains Council (IGC). The volume carried by ships via the grain corridor gained momentum towards the end of 2022, as per the Executive Director of the IGC, i.e. a very impressive level of export. In November and December 2022, Ukraine was close to approximately the same level as before the war in terms of exports by sea plus inland. While exports had slightly reduced in January and February 2023 due to poor weather, Ukrainian power outages affecting port facilities and delays in grain inspection delays, however, the overall success of the shipments of essential wheat, maize, oil seeds and barley from the Black Sea since August 2022 to countries reliant on grain imports had led to a fall of 30 per-cent in global wheat prices since its June peak. Thus, the 60-day extension of the agreement was widely praised and calmed fears of potential after effects on a wide range of industries and food prices.
Despite Kremlin’s concerns, it is likely that the UN and Turkey would mediate to have the agreement extended beyond the 60-day period and that Russia would agree to that because both Ukraine and Russia export considerable amounts of world’s grain and fertiliser, together supplying approximately 28 per-cent of global traded wheat and 75 per-cent of sunflower oil during peacetime. Moreover, as of 18 March, the UN Secretary General was adamant to seek ways to unblock Russian food and fertiliser shipments, which were blocked by sanctions targeting Russian oligarchs and the state agricultural bank. The Kremlin blames these sanctions for the ongoing food insecurity in the Global South. In the coming days, we may see easing of some sanctions that target Russian food exports, while overall sanctions may persist.
EU ban on Russian oil products – what will the fallout be?
On February 5th, 2023, the EU imposed a further price cap on Russian petroleum products. This comes after the decision, in December 2023, to set a threshold price for Russian crude oil shipped by sea at $60 per barrel. In particular, the new price cap will apply to “premium-to-crude” petroleum products, such as diesel, kerosene and gasoline, and “discount-to-crude” petroleum products, like fuel oil and naphtha. The maximum price agreed on by EU leaders for the former is $100 per barrel and the latter, $45 per barrel. The move is being undertaken by the EU and other G7 countries. This spotlight will focus on the fallout of the price caps on oil products.
Firstly, Russia, which is the second largest oil exporter in the world, will see a decrease in its fiscal revenues in the coming months. Earnings from oil and gas-related taxes and export tariffs accounted for 45 percent of Russia’s federal budget in January 2022. Contrary to embargoes, the price caps implemented by the EU ensure Russian oil products keep flowing into the market, whilst starving Moscow of revenue. In January, Russia’s government revenues decreased by 46 percent compared to last year and government spending surged due to higher military spending. A study by the Centre for Research on Energy and Clean Air reported that Russia is already losing $175 million a day from fossil fuel exports. The new price caps enforced in February will likely reinforce this trend and contribute to the widening Russian deficit, which was $25 billion in January. In response, the Kremlin might increase the shift of its oil product exports to China, India, and Turkey, which collectively now make up 70% of all Russian crude flows by sea and have so far contributed to partly offset the impact of Western sanctions on the Russian economy. At the same time, Moscow might scale up its efforts to bypass price caps imposed by G7 nations through its growing “ghost fleet”, which in January moved more than 9 million barrels of oil. However, these new importers have acquired considerable leverage vis-à-vis Russia. As Adam Smith, former sanctions official with the US Treasury Department, put it “Am I going to buy oil at anything above [the price cap], knowing that’s the only option Russia has?”. This might mean that, even if the Kremlin succeeds in re-orienting its exports of oil products to these new destinations, it will do so at lower prices.
On the other hand, the EU may face a diesel deficit in the coming months. In 2022, Russia accounted for almost half of the EU’s diesel imports, corresponding to around 500,000 barrels per day of the fuel. This will push European countries to try to step up imports of diesel from the US and the Middle East in order to avoid a spike in diesel prices. High fuel prices are politically sensitive and have contributed to high inflation rates across the EU. New trade flows in oil products from these regions could lead to a spike in clean tanker rates, which would increase delivered fuel costs in Europe. Tanker rates from the Middle East to the EU were already close to a three-year high at $60/tonne in January. They are expected to double this year. Moscow has responded to the EU price caps by cutting its oil output by 5 percent, or 500,000 barrels a day. Headline inflation in the eurozone has decreased for the third consecutive month in January but the threat of a rebound in inflation in the near future still looms large.
In such a case, the prospects for an increase in social tensions would become more concrete. Already in September of last year, due to the rising cost of living, protesters in Rome, Milan, and Naples set fire to their energy bills in a coordinated demonstration against escalating prices. In October, thousands of people marched through the streets of France to express their dissatisfaction with the government's inaction regarding the cost of living. In November, Spanish employees rallied together chanting "salary or conflict" in demand of higher wages. However, an increase in salaries would risk pushing up prices even more, thus jeopardising the European Central Bank’s efforts to bring inflation under control.
Risks of the German gas plans
This comprehensive mini-report from the Global Commodities Watch identifies the risks involved with German preparations and plans to curtail Russian gas supplies.
Indonesia and the possibility of Russian oil
In an interview given to the Financial Times in September 2022 Indonesian President Joko Widodo, said his country needs to look at “all of the options” as it contemplates buying cheap Russian oil to deal with rising energy costs. This extraordinary measure would be the first time in six years that Indonesia imports any oil from Russia. As it concerns south-east Asia’s largest economy, the potential ramifications are significant.
Why is Indonesia’s government considering this?
Amidst the global inflationary environment, the Indonesian government recently cut its fuel subsidy by 30%, therefore increasing consumer fuel prices by a large margin. The higher price of oil since Russia’s invasion of Ukraine means the Indonesian government has spent ever greater amounts for the benefit of consumers. In order to control this swelling subsidy budget Widodo took the unpopular decision to decrease government support for fuel, leading to a series of demonstrations and protests.
With conflicting aims of limiting the increase in budget expenditure on the one hand whilst responding to public opinion for lower prices at the pump on the other hand, it is no small wonder the Indonesian government is considering buying cheaper oil. Jokowi says “there is a duty for [the] government to find various sources to meet the energy needs of the people”. Moscow offering discounted oil at 30% lower than the international market rate has therefore become an attractive solution.
Russia is left with no choice but to sell cheaper oil due to western sanctions, a situation which will worsen if and when the much-rumoured G7 price cap on oil is implemented. From December 5th onwards the EU and the UK will impose a price cap on Russian oil shipped by tankers or else prohibit their transport. This move is already giving India and other significant importers of Russian oil leverage in negotiating oil price discounts, an advantage Indonesia would benefit from.
Are there alternatives?
Yet alternative options do exist. In particular the sale of State-Owned Enterprises (SOEs) could fill the hole left in the Indonesian government’s energy budget. Partially privatising the government oil group Pertamina is being mulled, with the firm’s geothermal branch expecting its IPO before the end of the year. With its $606 billion SOE sector equivalent to half the country’s gross domestic product, the fiscal incentives for such actions are strong.
The government is also attempting to upgrade ageing refineries, in particular through a controversial partnership with Russian state energy company Rosneft. One of the projects, the Tubang Oil Refinery and Petrochemical Complex, is expected to cost $24 billion and will increase Indonesia’s crude refining capacity by 300,000 barrels a day. In the context of Russia’s invasion of Ukraine, continued dealing with Russian SOEs poses its own complications in navigating western sanctions.
Risks and Outlook
The foremost risk with purchasing Russian oil comes from American warnings of sanctions for those involved in buying Russian oil using western services. With 80 per cent of global trade denominated in US Dollars, this could be difficult to avoid. The mere threat of such sanctions would affect the appetite of international investors, crucially regarding Indonesian government bonds. In the context of monetary tightening, this is a strong deterrent.
Yet the Indonesian government might follow the Indian model. Russia has recently become India’s largest supplier of oil, as India cashes in on the considerable price discounts offered. Yellen, the American treasury secretary, indicated that the US would allow purchases to continue as India negotiates even steeper discounts due to the western price cap. Monitoring the Indian case could prove fruitful as a bellwether for economic success and international reactions. However, the Indian government is less dependent on international investors' bond buying to fund its budget deficit meaning Indonesia’s risk exposure towards this is of greater importance
The Indonesian government will carefully study these options. Partially listing SOEs or increasing domestic refined supply may not make up the government’s budgetary hole without large-scale changes to the local economy. In the short term, Indonesia handing over its G20 presidency and shortly assuming the ASEAN one may factor into its decision.
In the long term, this temptation of Russian oil will remain. There are clear economic benefits to this by solving the conflicting aims of limiting budget expenditure while keeping consumer prices low. Furthermore, the United States’ tacit green light on buying Russian oil towards similarly developing countries minimises the chances of international reprimands.
This is reinforced by arguments often used against European countries to not buy Russian oil or gas holding little relevance in Indonesia. Notions of ‘supporting Putin’s war’ are of little geopolitical relevance to Indonesia if grain flows from Ukraine stay constant.
The likelihood that Indonesia will begin buying Russian oil is low. The scale of risks involved, particularly regarding sanctions, will dissuade the Indonesian government. The spate of interviews given in September from Indonesia's energy minister and President were likely moves to test the waters among investors and the international community. This decision is of course subject to rapid change given Indonesia’s unpredictable regulatory environment where policies can change on a dime.
The dilemma faced by Indonesia means that south-east Asia’s largest economy is firmly in the camp of countries calling for a rapid resolution to the Russia-Ukraine conflict.
Providing for the Peninsula
This collaborative research paper by London Politica’s Global Commodities Watch and Ukraine Watch sheds light on the critical infrastructure for the supply of Russian water, fuel and military equipment through and for Crimea and investigates how these may be affected by pressure from Ukrainian forces in the months to come.
State of supply: uranium in Europe
Despite being a strategic commodity, uranium has maintained a relatively low profile in the news even as the war in Ukraine continues and Europe’s energy crisis unfolds. This is surprising considering nuclear power, which depends on uranium, contributes roughly 25% of the EU’s total electricity generation. Russia itself has long been a key supplier of uranium and nuclear fuel to the EU, but the future of this relationship is now far from certain. For the moment, Rosatom, Russia’s state-owned and primary vendor of nuclear products, has managed to skirt EU sanctions and continue operating, but how long can this last and what does it mean for nuclear energy in Europe?
In terms of unenriched Uranium ore, Russia is the third largest supplier to the EU. In 2021 it accounted for 19.69% of supply, just behind Kazakhstan at 22.99% and Nigeria at 24.26%. This equates to 2,358 tU (tons of raw Uranium) and roughly €210 million paid to Russian vendors in 2021. However, Russia’s position in third place can be somewhat misleading, according to the World Nuclear Association and other sources, Rosatom owns significant stakes in uranium mining and processing in Kazakhstan. Nigeria has been ramping up its supply of uranium ore in recent years with an increase of 13.7% between 2020 and 2021. Considering the ongoing expansion of mining operations in the country, Nigeria may emerge as a leading supplier for Europe, if output can be maintained.
Unenriched uranium ore is only half of the equation when it comes to generating nuclear energy. The other key ingredient is refined or enriched uranium, suitable for nuclear fuel production. Europe is dependent on foreign enrichment services. While Europe itself manages some 62% of its enrichment needs, as of 2021, 31% is still sourced from Russian providers. The two primary Russian providers, according to Euratom, are Tenex and TVEL, which are both subsidiaries of Rosatom. Over the past few years, EU domestic enrichment rates have decreased, between 2019 and 2020 alone Euratom marked a 9% decrease in its share. In order to ensure security of supply in this sector, Europe must reverse this trend and look for third country partners. The current non-Russian and non-EU supply of enrichment services amounts to an astonishingly low 7%, a critical failure in market diversification.
The other side to the issue with enriched Uranium supply is the specific fuel configuration for reactors. Of the 103 active nuclear reactors in the EU, 18 are of the Russian designed VVER-440 or VVER-1000 models and depend greatly on fuel supply from TVEL. While many of these reactors are holdovers from original Soviet construction and are set to be phased out in the long term, they still represent an imminent threat. Mitigating this however, the US’s Westinghouse, a leading provider of nuclear infrastructure, is currently expanding its capacity to produce fuel at least for the VVER-1000 models; this has already been successful in Ukraine.
The situation for Europe’s uranium supply is precarious and the fact Russia’s supply has not yet collapsed, is of little consolation. Nonetheless, there are options on the table and unlike other commodities, uranium has the potential for a diverse supply chain with multiple partners. Two key questions are how long will it take to reorganise these highly complex, infrastructure heavy supply chains and how long will the EU continue its economic relationship with Russia?