Zero Daily Newsletter discusses four geopolitical threats: Ukraine, Russia, China, Iran

 What geopolitics stories could still blow up the global economy?

   

Investors hate uncertainty. For now, most of them are trying to understand how central bankers, particularly at the US Federal Reserve, will calibrate changes in interest rates to slow inflation while avoiding recession.

But there are also three big geopolitical stories that will generate plenty more questions throughout 2023.

Russia’s war

After more than a year of war following Russia’s invasion of Ukraine, two realities have emerged. Russia’s military isn’t strong enough to conquer Ukraine, but it is probably strong enough to prevent a complete Ukrainian victory. The war has now settled into a stalemate that continues to put upward pressure on energy prices and threaten further surges in food prices. (The current deal to allow grain exports through the Black Sea expires on March 18.) 

To some extent, the consensus expectation for a war that lasts beyond 2023 will allow producers and companies to adjust their supply chains to new realities, to make alternative arrangements for diminished supplies of oil, gas, grain, and other commodities, and to find new trade partners.

But wars create surprises, and Russia’s inability to win the war leaves its leaders to think up creative new ways to punish Ukraine and its backers, with attacks in cyberspace, on pipelines, or on fiber optic cables, for example, adding wildcards to a deck already stacked against a predictable economic recovery from COVID. 

China’s rebound?

In a time of war and global economic uncertainty, China poses a long list of questions. After all its extended COVID lockdowns, can Chinese leaders jumpstart China’s own economic growth to inject new fuel into global commerce? The relatively modest growth target the Chinese leadership recently announced generates optimism that Beijing has a realistic understanding of the risks in pushing too hard too quickly on state spending and loose lending. Has China finally cleared its COVID hurdles? There’s a lot of optimism on that front. Will US-China relations continue to deteriorate? If Washington decides that Xi Jinping’s government is trying to boost Russia’s odds of winning the war, that’s a safe bet. 

Iran in flux

Two weeks ago, a senior US Defense Department official issued a startling warning. “Back in 2018,” he said, “when the [Trump] administration decided to leave the JCPOA, it would have taken Iran about 12 months to produce one bomb's worth of fissile material. Now it would take about 12 days.” That followed news in February that the International Atomic Energy Agency charged with monitoring Iranian nuclear facilities had reported finding small quantities of uranium enriched at 84%. (Enrichment at 90% can produce a nuclear weapon.) 

This is a country preparing for its first transition of supreme leadership in more than 30 years, given Ali Khamenei’s advancing age and declining health. (He’ll be 84 next month.) It has faced widespread protests. The unrest seems to have died down for the moment, but given how abruptly the upheaval began, some new and equally unexpected trigger could start the cycle of demonstrations all over again. And Iran’s willingness to provide Russia with drones for use against Ukraine has newly antagonized Europeans as well as Americans.

There are fears in Israel that only an attack on Iran can prevent the development of a nuclear weapon. What’s more, many say that the recent restoration of ties between Iran and Saudi Arabia, brokered by China, is yet another sign of the deepening rift between Washington and Riyadh. Taken together, this all suggests there is constant wrangling in the heart of the world's main oil-producing region, where the US holds limited leverage. 

In all these cases – Russia’s war, China’s rebound, and Iran’s flux – we have risks that are reasonably well understood. None is guaranteed to create a new and unforeseen crisis, but all of them bear careful watch through 2023 and beyond.

Four Nuclear States Can Ruin Your Whole Strategy - Matthew Kroenig (WSJ)

Four Nuclear States Can Ruin Your Whole Strategy

Washington and its allies face new threats from Russia, Iran, North Korea and China—all at once. 

By Matthew Kroenig

The Wall Street Journal, March 1, 2023

In its 2022 Nuclear Posture Review, the Biden administration promised to “reduce the role of nuclear weapons” in U.S. strategy. America’s adversaries have different ideas. In recent days, the rapidly advancing nuclear capabilities of all four of America’s nuclear-capable rivals—Russia, Iran, North Korea and China—have made international news.

Vladimir Putin announced on Feb. 21 that Moscow was suspending its participation in New Start, its last remaining arms-control treaty with the U.S. This means that for the first time since the Strategic Arms Limitation Treaty of 1972, there are no negotiated limits on Russia’s nuclear forces.

America hasn’t conducted on-site inspections of Russia’s nuclear arsenal since March 2020 in any case, first because of Covid-19 and then Russian noncooperation during the war in Ukraine. That led the State Department to declare Russia “in noncompliance” with the treaty in January.

It would be prudent to assume Russia may soon expand its strategic nuclear force beyond the 1,550 warheads allowed in the treaty, if it hasn’t done so already. This is in addition to its large stockpile of battlefield and exotic nuclear weapons (such as underwater nuclear-armed drones) that the treaty doesn’t cover.

On Feb. 19, it was reported that International Atomic Energy Agency inspectors caught Iran enriching uranium to 84% purity—a hair’s breadth from the 90% needed for a bomb. Outside experts estimate that Iran’s breakout timeline—the time it would take to produce one bomb’s worth of weapons-grade uranium—is now essentially zero.

Some argue that we have more time because it would take months for Iran to fashion a functioning nuclear warhead, but in reality the game will be over as soon as the Iranians have enough material for a bomb. Like North Korea, Tehran could move the material to secret underground locations and fashion warheads undisturbed.

The Biden administration tried to negotiate limits on Iran’s nuclear program, but talks broke down in the face of Tehran’s brutal crackdown on protesters. President Biden says he is willing to use force as a last resort, but the moment of last resort is now and Mr. Biden isn’t readying military options. The 20-year international effort to keep Iran from the bomb has likely failed.

On Feb. 18, North Korea conducted a test of a nuclear-capable intercontinental ballistic missile and demonstrated the ability to reach the continental U.S. Pyongyang is the third American adversary capable of holding the U.S. homeland at risk with the threat of nuclear war.

As the North Korea threat grows, American allies worry about the credibility of our extended deterrence, and some consider building their own nuclear arsenals. In public opinion polls, a majority of South Koreans support building an independent nuclear force.

On Feb. 7, the Pentagon notified Congress that China now has more ICBM launchers than the U.S.

What President John F. Kennedy declared in 1962 is still true: America needs to be “second to none” in nuclear weapons. Falling behind means losing a critical element of deterrence.

Instead of pursuing 1990s-era fantasies about reducing the role of nuclear weapons, Washington needs to understand that, for the first time since the Cold War, it is entering a long-term strategic-arms competition. This time will be even more dangerous because the U.S. now faces multiple nuclear-armed rivals.

America needs to strengthen its strategic forces to provide an adequate deterrent for itself and the more than 30 formal treaty allies that rely on U.S. nuclear weapons for their security.

America won the last Cold War in part because it outcompeted the Soviet Union in strategic forces. Washington should remember that lesson if it doesn’t want to lose this one.

Dr. Kroenig is the director of the Atlantic Council’s Scowcroft Center for Strategy and Security and a professor of government at Georgetown. He served as a senior policy adviser for nuclear and missile-defense policy in the Office of the Secretary of Defense, 2017-21.

How Iran beats Russia at sanctions game - Ian Bremer, GZero Signal Newsletter

 Israel o faz por causa própria ou para ajudar a Ucrania?

How Iran beats Russia at sanctions game

   

A recent attack on a weapons manufacturing compound in the Iranian city of Isfahan, presumably by Israel, has again highlighted the Islamic Republic's position as a global arms powerhouse. 

While it’s hard to know exactly what projects are in the works at the Isfahan facility, there are reports that the site is used to produce "suicide drones.” These are the same cheap and dirty contraptions Vladimir Putin’s military is using to pummel Ukrainian cities. 

With attention yet again on Iran’s drone-making prowess, a big question emerges: How has heavily sanctioned Iran managed to become a one-stop shop for Russia’s advanced weapons needs, while Moscow, largely cut off from Western supply chains, is desperately searching for weapons and parts? 

What are some of the biggest pain points for Russia in procuring weapons and parts? Moscow has long relied heavily on Western components for making advanced weaponry. Before the war, the bulk of its stash came from US firms. But access to semiconductors, the nearly invisible microchips essential for running modern military hardware, changed after the outset of the war when more than 30 countries – like Japan, the Netherlands, and the EU – joined US-driven bans on exports to Russia. 

What’s more, Russia has struggled to bulk up its domestic semiconductor industry. Some firms have gone bust, and private companies have refused to use domestically made chips, citing quality concerns – again reinforcing Russia’s reliance on foreign manufacturers. But global supply kinks have made procuring chips harderfor everyone. 

Still, Moscow has found ways to access these and other parts through third parties – including China and Turkey, a NATO member! Russia also imported $777 million worth of products from Western tech firms between April and October 2022 despite export bans. But Putin needs to get his hands on way more components to fuel his war machine. 

Iran to the rescue, but how? Tehran, meanwhile, has developed a knack for skirting Western sanctions and finding gaps in international arms control agreements to procure Western-made components.

“Iran has been living under sanctions for more than 40 years, so they’ve developed elaborate processes to do it [evade sanctions],” says Dr. Jon B. Alterman, director of the Middle East Program at the Center for Strategic and International Studies. “The smuggling operations in Iran are run by people close to the government. They’ve gotten good at it, and they’ve gotten wealthy doing it. They have the infrastructure.”

One part of their solution is quite relatable: Like you and me, the mullahs turn to the World Wide Web to shop. 

“Some of the stuff [needed to make drones], they can buy on eBay and Amazon,” says Alterman. “In a world of a huge amount of commerce, a lot of things are obtainable.” 

It’s also a matter of proactive preparedness. Iran has for decades invested heavily in its arms industry, launching a modernization program that’s allowed it to make major advancements in ballistic and cruise missile production. 

Iranian officials have also been known to scour conflict zones for American and Israeli debris for research purposes, including reverse-engineering. In fact, President Joe Biden recently tapped a task force to establish why a whopping 82% of components found in downed Iranian drones in Ukraine were reportedly made in … America. (Not exactly the Made in America promo Biden wanted).

Why would Iran help Russia? Like so many things in geopolitics, it’s a case of I’ll scratch your back if you scratch mine, but Iran is also playing the long game.

“The war in Ukraine has reshuffled the deck of alliances, and Iran now has access to modern weaponry,” says Pierre Boussel, a Middle East expert at the Liechtenstein-based Geopolitical Intelligence Service. So Iran is arming the Russians and, in return, the Russians are giving Tehran some advanced hardware. Case in point: Moscow recently sent Tehran the US Javelin anti-tank missile and Stinger anti-aircraft missile, as well as British anti-tank missiles.

While Iran’s rustic approach can’t compete with the West’s, it has helped Tehran carve out a nice space for itself in the arms-making world: “US sanctions have forced Tehran to position itself in a low-cost arms market,” Boussel says, adding that “Iranian drones may be slow and inaccurate … but they are numerous enough to overwhelm enemy defenses.”

Plagued by crises at home and abroad, Iran has enough on its plate. So what’s its game plan? “The Iranians have an interest in having at least one of the great powers being indebted to them,” says Alterman, adding “they see an opportunity to lock in some gains.”

“Iran has no partners, so the fact that somebody might owe it is kind of a big deal in Iran.”

Sancoes americanas ao Iran: implicações geopolíticas - J.P. Morgan

Geopolitical Flashpoints

Global Implications of Re-Imposing Sanctions on Iran

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By Joyce Chang, John Normand^AC, Ben Ramsey^AC, Giyas M Gokkent^AC, Nur Raisah Rasid^AC, Abhishek G Deshpande^AC, Pedro Martins Junior, CFA^AC, David Aserkoff, CFA^AC, Meera Chandan^AC, Jonathan Cavenagh^AC, Anezka Christovova^AC, Robert Habib^AC, Daniel P Hui^AC, Tarek Hamid^AC, Matthew Anavy, CFA^AC

Click here for the full Note and disclaimers

A special message from Joyce Chang, Global Head of Research In this edition of Geopolitical Flashpoints, which can also be found on J.P. Morgan Markets, the Global Research teams examine the economic and market implications of the re-imposition of Iran sanctions on November 5 as the Trump administration deadline to unilaterally withdraw from the 2015 Joint Comprehensive Plan of Action (JCPOA) nears on November 4. The reports highlighted below summarize the latest developments and include recommendations and views across asset classes.

As the November 4 deadline that President Trump set to unilaterally withdraw from the 2015 Joint Comprehensive Plan of Action (JCPOA)¹ and the re-imposition of sanctions on November 5 looms, we assess the macro and market implications. The basic aim of US secondary sanctions is to force non-US companies to choose between transacting with the US and its financial system, or with Iran. Ending the Iran deal was a key foreign policy plank of candidate Trump’s election platform and the effects of the sanctions are already becoming evident. The latest Iranian export data suggests that many countries that import Iranian oil have already started to reduce their imports significantly well ahead of the November 4 deadline. While there is still uncertainty around how much Iranian barrels would be lost once the sanctions are implemented, the markets have tried to price in anywhere between 0.5mbd (in early June) to just over 1mbd (late Sep/early October) of exports being curtailed. Iran crude exports fell to around 1.6mbd in September as major importers including China scaled back their crude purchases. We now expect Brent to average $85/bbl in 4Q18 and $83.5/bbl in 2019, with Brent to finish at around $90/bbl by year-end. The upward revision in our forecasts was strongly driven by significant supply-side risks, more than offsetting the expected softness in demand. In the absence of Iran supply concerns, oil prices would have likely hovered around or below $70/bbl, but with the presence of Iran risks we expect oil prices to remain well supported in the months ahead. Iran oil sanctions could put 1.5-2.4mbd of oil exports at risk, which would more than compensate any demand drop due to slower global growth and trade tensions. While the growth impact of US-China trade disputes matter for commodities demand, Iran matters a lot more in the case of oil, given the large supply shock it could represent in the very near term. Iran poses a first order effect via supply shock whereas US-China trade war poses a second order effect via economic growth slowdown. 

Background on US sanctions on Iran and decision to re-impose sanctions

Since the late-1980s, a series of sanctions have been imposed against Iran, including by the United States, the European Union and members of the United Nations (UN) Security Council, due to Iran’s refusal to suspend the enrichment of uranium and other activities deemed malign by participating members. As a result of sanctions, Iranian inflation topped 40%oya, while oil exports and growth collapsed after 2012. After 20 months of talks, in July 2015, the Joint Comprehensive Plan of Action (JCPOA) was agreed between the 5 permanent Security Council members, Germany and the European Union with Iran, to limit the country’s nuclear program in return for lifting the European Union and United Nations nuclear-related sanctions and US secondary sanctions, although US comprehensive primary sanctions preventing US individuals and companies from engaging with Iran remained in place.

On May 8, President Trump announced that the US would unilaterally withdraw from JCPOA and reimpose all sanctions lifted or waived in connection with JCPOA after wind-down periods of 90 or 180 days. As President, Trump had signed waivers in 2017, but finally made a May 2018 announcement regarding his intention to quit the JCPOA, blaming Iran’s ballistic missile tests and actions across the MENA region as justification for the US to pull out from “the decaying and rotten deal”. The re-imposition of so-called “secondary sanctions” aimed at non-US companies’ dealing with Iran began after the wind-down periods; the first set of secondary sanctions became effective on August 7², which reimposed sanctions to include purchase or acquisition of US dollar banknotes by Iran, trading in commodities such as gold, steel, coal, semi-finished metals, such as aluminum, and some other transactions related to commodities, currencies and sovereign debt. The next set of sanctions—which target the oil trade—come into effect on November 5³. The sanctions to be reimposed to include those targeting Iran’s port operation, shipping sector, and most importantly, transactions with the National Iranian Oil Company (NIOC), Naftiran Intertrade Company (NICO), and National Iranian Tanker Company (NITC), amongst others. In addition, sanctions on provision of underwriting services, insurance or re-insurance and transactions by foreign financial institutions with the Central Bank of Iran and designated Iranian financial institutions under Section 1245. The transfer of payments may be impacted if the SWIFT network is disconnected as in 2012. In addition to these sanctions, the US government will reimpose, as appropriate, the sanctions on persons removed from the Specially Designated Nationals (SDN) list. President Trump’s executive orders would not only turn the clock back to the sanctions regime that prevailed before the JCPOA—critically, on a bilateral basis, compared to the multilateral framework that prevailed before—but they may want to go even further. The sanctions can effectively cutoff access to the US financial sector not only for any party dealing directly with Iran, but also third parties (including international banks, insurance companies, shipping companies) facilitating significant transactions with Iran.

Additionally, on October 3rd, the US Secretary of State terminated the Iran Amity signed in 1955 after Iran used it as a basis for a case at the International Court of Justice. The Amity Treaty, an agreement to encourage good relations and trade, was signed with the Iranian Shah, who was a US ally. Although an insignificant act in itself, it does point toward a more hawkish stance on Iran. 

Oil Commodities Research View

Global oil supply should tighten after the imposition of Iran sanctions, with risks biased to the upside especially after US mid-term elections. The upward revision in our forecasts has been driven by significant supply-side risks as importers of Iranian crude have scaled back significantly in the run-up to the November 4 deadline. This has been one of the key drivers of oil prices in 2018. Front month Brent has risen by as much as $20/bbl since the start of the year until recently when it touched $86.3/bbl on Oct 03. There is still uncertainty around how much Iranian barrels would be lost once the sanctions are implemented and we estimate the markets have tried to price in anywhere between 0.5mbd (in early June) to around 1.5mbd (late Sep/early October) of exports being curtailed. Iran exports close to 2.5mbd of its crude output with the remainder consumed domestically. In a briefing published by the US State Department in June, it was suggested that oil imports from Iran should be cut down to zero. Whilst there have been several comments earlier this year by the State Department that reflected no predisposition towards waivers, this position has changed to a case-by-case basis waivers for countries that are making efforts to reduce their imports. Despite the levels of waivers remaining unclear and uncertain in the near-term, we do expect the US administration to push these countries to significantly reduce their imports from Iran eventually even if they were to receive some waivers initially to allow them to replace Iranian crude supply.

The latest Iranian export data suggests that many countries that import Iranian oil have already started to reduce their imports significantly well ahead of the November 4 deadline. Iran crude exports fell to around 1.6mbd in September as major importers including China scaled back their crude purchases. Additionally, buyers of Iranian oil have indicated their reluctance to buy Iranian oil to avoid any repercussions given the uncertainty. Currently the market is not short oil as Iranian oil is still in the market and Saudi Arabia and Russia have ramped up oil production to avoid a spike that concerned some of its key consumers and allies. However, the risk of losing another 0.5mbd to even 1.5mbd (from current ~1.5mbd) in a worst case scenario where US pushes towards it zero Iran export target could tighten the oil markets significantly in the near-future and OPEC’s spare capacity could be challenged even in a modest oil demand growth environment. The retaliation from Iran to return to full-scale Uranium enrichment or block Strait of Hormuz could be seen as a major geo-political risk to oil but also the region that is currently steeped in various conflicts.

Oil markets are currently very fragile and anxious as the very drivers, such as strong demand and tight OPEC supply that helped balanced the markets earlier this year, have started to raise uncertainty around the recovery in oil price. Despite the weakness in physical markets due to the factors mentioned above, we think the impact on the oil markets from the loss of Iranian barrels will only be felt once physical markets show signs of tightness post re-imposition of sanctions on November 5. Once the physical markets show signs of tightness, then the lack of spare capacity and rising geo-political risks surrounding oil producing countries including Iran, Venezuela, Russia and Saudi Arabia should be sufficient in returning robust support under oil prices once again. We don’t doubt that the Kingdom can increase production towards its 12 mbd capacity; however, the timing of it is what markets will question once Iran’s sanctions are in force and start to tighten physical markets and markets for medium/heavy sour crude. Most of the Kingdom’s available nameplate capacity remains constrained. At 10.7mbd of current production, their nameplate spare capacity is 1.3mbd as also suggested by the Saudi Oil minister but the real available capacity is questionable in the near term. Abhishek Deshpande

Economic and Political Views

The effect of sanctions against Iran’s economy has already become evident, with Iranian oil production declining 12% from its peak in May, as trade partners begun to reduce their oil imports. Oil prices have reacted in sympathy, as our commodities strategy has commented extensively. As a result of these developments, the Iranian rial depreciated by up to 75% in the black market through September and inflation accelerated to 31.4%oya. Against this background, a series of protests have erupted with deteriorating economic conditions throughout the year. Iran has threatened the closure of the Strait of Hormuz, through which one fifth of global oil trade passes, if the country is not permitted to export its oil. Despite Donald Trump’s offer to meet Iranian president Hassan Rouhani without preconditions, it remains unlikely that the Iranian government will return to negotiations in the near-term. 

The reactions of large importers of Iranian oil, like China and India, would seem to be critical to judge the degrees of freedom enjoyed by countries that otherwise would spurn such US extraterritorial sanctions. The EU for its part has staked out a strong stance to defend its political decision to try to keep the Iran deal (JCPOA) alive, notably with the extension of the 1996 EU “Blocking Statute” to include US Iran sanctions, which ostensibly compels European entities to not comply with extraterritorial US sanctions. However, it remains to be seen whether, in practice, the Blocking Statute will dissuade European companies from deciding to stop dealing with Iran given many firms have too much to lose if their US business / access to the US financial system becomes compromised. The more interesting European policy proposal (in conjunction with China and Russia) is that of an Special-Purpose Vehicle (SPV) to allow non-US firms to effectively deal with Iran in legitimate business (as per EU law) anonymously, and therefore, not run the risk of being targeted by the US. This proposal, which has been strongly criticized by the US, has yet to be unveiled and tested operationally. A key battleground on the US’s willingness and ability to counter this proposal would be whether the Trump administration would challenge the SPV itself or the European or other central banks supporting the SPV. At the country level, while Turkey and India are most vulnerable through the trade channel, another perhaps even stronger impact of sanctions could come through the financial channel, as local companies and banks could be denied access to critical USD payment systems. Turkey, India, Korea and China have the highest exposure to Iran through the trade channel, with bilateral trade with Iran ranging from 0.9%-2.75% of overall trade for these economies. Ben Ramsey, Giyas Gokkent, Nur Raisah Rasid

Cross-Asset Strategy Views

We have been long petro assets to varying degrees all year and recommend keeping such exposure while supply risks persist and Brent is below $90/bbl. We were maximum long in Q1 and Q2 (long Oil futures, overweight US Energy Equities and HY Energy Credit, and long either NOK, CAD or RUB), moderately long in Q3 (we went tactically short crude in early summer), and now close to maximum long again (re-entered long Brent in September). To be sure, the value proposition of petro assets varies considerably, with Energy Equities, Energy Credit, Russian Equities and US inflation breakevens discounting the highest oil price, and petro-currencies like RUB factoring in the lowest price. But the ruble is only interesting as an Iran hedge for those who think that higher oil prices will do more good for Russia through a higher trade surplus than further Russia-specific sanctions might harm capital flows. For now, we are neutral oil currencies given a generally strong US dollar environment, and hedge Iran supply risks through oil directly or with oil stocks and credit. John Normand

Global FX Views

The primary transmission of Iran sanctions to FX is likely to be through oil prices with our commodity strategists expecting that Brent could breach $90/bbl going into year-end. This will likely inform the performance of petro-exporters vs. importers. We have long argued that even though petro-FX has lagged oil prices, a more selective stance on these currencies is required. The performance of several petro-FX has been held back due to various idiosyncratic factors that have not translated into a growth boost for these currencies. Even though oil prices have been increasing for 2 years, our growth forecasts for petro-currencies have not increased by much.

On a more granular basis, growth in G10 countries (CAD and NOK) has fared better than EM petro FX (COP, MXN, RUB) where average growth forecasts have actually been downgraded over this same period. Among G10 petro-FX, we are structurally bullish on NOK (neutral in the recommended trade recommendations, but long NOK in the long-term recommendations) and have bullish forecasts for CAD (though for reasons other than high global oil prices, as local crude prices are in fact heavily depressed). Oil prices have impacted forecasts of RUB in recent weeks (RUB targets were upgraded by 5% over the next three quarters), but we are still neutral which is still a more favorable stance compared to other high-yielders in the region such as ZAR where we are underweight. In Latin America, we are neutral both MXN and COP as weak EM appetite and policies implemented domestically could continue to offset the terms-of-trade positives from higher oil prices.

We also assess the impact of higher oil prices on energy importers. J.P. Morgan FX forecasts for energy importers have been downgraded in recent weeks. For instance, in G10, our Japan strategists downgraded JPY in October in part motivated by deteriorating external balances related to oil. We are short JPY versus USD in our recommended macro portfolio. In EM, our strategists point to INR underperformance in part being linked to higher oil prices (where FX targets were cut in sympathy with CNY in September). In addition, higher oil prices have also had an impact on TRY weakness, but admittedly this has been a secondary driver given other idiosyncratic factors in the country. Meera Chandan, Jonathan Cavenagh, Anezka Christovova, Robert Habib, Daniel Hui

US Credit Research Views

Second order impacts on US Credit from sanctions on Iran are meaningful. Few, if any, of the companies in our combined universes are actively involved directly in Iran post the last round of sanctions. However, sanctions are likely to increase the overall risk premium and volatility of the commodity, which should filter through the ecosystem. In the near term, a greater call on US shale could have an additive effect to the services sector as activity levels increase on the back of the expectation of sustained higher prices. More importantly, increased cash flow and improved leverage metrics have particularly topical implications.

Sanctions could accelerate Rising Star pipeline. US High Yield (specifically BB) rated credit stands at a cross-road, with a substantial amount of BB-rated E&P and MLP credits poised for transition to investment grade at current strip pricing. Sanctions could easily accelerate that trend as E&Ps use excess cash flow from the “Iran bump” to pay down debt and/or achieve critical mass for investment grade ratings. Similarly, on the Investment Grade side, one of the greatest overhangs market wide on US credit is the “low-BBB wall” and potential Fallen Angel implications during the next cyclical downturn. Capital and balance sheet discipline remain front and center in Energy. Therefore, we expect BBB-rated Energy companies to continue to use excess cash flow to pay down debt and bolster balance sheets as well as start to return value to shareholders in a disciplined way. 

Value continues to accrue to critical infrastructure. Finally, one important downside of sanctions impact is the potential supply demand imbalance when/if sanctions end. Midstream company bonds remain a source of “safe spread” and are somewhat insulated from the commodity. We continue to see good value in Midstream and MLPs especially in a more volatile crude oil environment. Prudent growth and deleveraging remain the focus, and in a world of wider differentials and increased volatility, value is inexorably moving within the industry food chain towards infrastructure. Tarek Hamid and Matthew Anavy

Emerging Markets Equity Strategy Research Views

Near-term upside via better support to oil prices offsetting medium-term negative geopolitical risk to EM equities could be the result of the US decision to advance on the Iranian sanctions. The near-term positive is backing to higher oil prices. There is a strong historical co-movement between GEM equities and oil price rallies and corrections. During periods of rising oil prices, the median return for GEM equities was USD20%. In 80% of the positive return periods for oil, GEM equities also posted positive returns. LatAm and CEEMEA are the most impacted by the change in oil prices and EM Asia the least. Russia, Colombia, Brazil, Thailand and Poland have the highest positive sensitivity to oil price changes. The potential medium-term negatives to EM equities could include a narrower hallway to US-EU future cooperation in other geopolitical sensitive issues such as Russia and Syria, for example, and an unintended re-escalation of nuclear investments in the Middle East region for neighbors to defend themselves from a possible Iran threat. 

Overall oil strength has been more positive for GEM vs. DM equities as it is possibly associated with periods of high economic growth expectations. This is where the risk lies in the current cycle. The core reason for the upward revision in oil prices is a supply constraint and weaker global growth. We prefer to keep a Neutral rating on Energy to remain less directionally dependent on short-term volatility in oil prices. We could indirectly benefit from higher oil prices by OW positions on Russia, Brazil, and on energy in the ASEAN region.Pedro Martins and David Aserkoff

Please find below links to recently published reports from the J.P. Morgan Research team.

GLOBAL RESEARCH

J.P. Morgan Perspectives: Geopolitics and Markets: Risks on the Rise (Global Research, 1 November 2018)

Geopolitical Flashpoints: Will the US introduce further sanctions on Russia?, (Anatoliy A Shal, Nicolaie Alexandru-Chidesciuc, et al, 26 September 2018)

Geopolitical Flashpoints: Macro and Market Implications of Reimposition of US Sanctions on Iran (Global Research, 24 May 2018)

EMERGING MARKETS ECONOMIC RESEARCH

Iran sanctions: On again: Bracing for the November 5 reimposition (Ben Ramsey, Giyas M Gokkent, Nur Raisah Rasid, 1 November 2018)

Middle East and North Africa Weekly (Giyas M Gokkent, 15 October 2018)

Europe, Middle East and Africa Emerging Markets Weekly (Nicolaie Alexandru-Chidesciuc, 7 July 2018)

MENA Macro, Credit and Equity conference: Highlights from presentations and panel discussions (Nicolaie Alexandru-Chidesciuc and Zafar Nazim, 2 July 2018)

COMMODITIES RESEARCH

Oil Market Special: OPEC: A linchpin in global geo-politics, (Abhishek G Deshpande, Prateek Kedia, 19 October 2018)

Oil Market Weekly: Back to the 90s, (Abhishek G Deshpande, 8 October 2018)

OIL MARKET OUTLOOK - APPEC WEEK: EM matters but Iran matters more in the near-term, (Abhishek G Deshpande, 24 September 2018)

Oil Market Quarterly 3Q18: EM matters but Iran matters more in the near-term (Abhishek G Deshpande, Thomas Anthonj, et al, 23 September 2018)

Commodities Derivatives Quarterly 3Q18: Oil vol trapped between Iran and USD; Gold gamma to remain under pressure, (Arindam Sandilya, Ladislav Jankovic, 21 September 2018)

Oil Market Weekly: Demand outlook pitted against supply shocks (Abhishek Deshpande, 15 October 2018)

Commodities Quarterly 3Q18: Base metals and agriculture poised to join oil higher in 4Q after a weak 3Q(Abhishek Deshpande, Shikha Chaturvedi, Natasha Kaneva et al, 21 October 2018)

Oil Market Quarterly 3Q18: EM matters but Iran matters more in the near-term (Abhishek Deshpande, 23 September 2018)

Commodities Derivatives Quarterly 3Q18: Oil vol trapped between Iran and USD; Gold gamma to remain under pressure (Arindam Sandilya and Ladislave Jankovic, 21 September 2018)

Oil Market Weekly: President, Dollar & Oil (Abhishek Deshpande, 27 August 2018)

Iranian Sanctions and Global Oil Market Update (Abhishek Deshpande, 11 May 2018)

CROSS-ASSET STRATEGY RESEARCH

The J.P. Morgan View: Bond yields haven’t hit their cycle highs – mapping contagion through 2019 (John Normand, 12 October 2018)

The J.P. Morgan View: Rethinking the US-China trade war and the Oil outlook (John Normand, 21 September 2018)

US CREDIT RESEARCH

Investment Grade Energy: Sector Overview, October 2018 (Matthew Anavy et al, 19 October 2018)

High Yield Energy: Sector Enamored with Its Own Mortality (Tarek Hamid et al, 19 September 2018)

ASIA PACIFIC EQUITY RESEARCH

Rocks, Fuel and Steel: Retail Fuel Price Hikes Restart; Iran Sanction Impact; US Rig Count Moves Higher; Steel Steady, Aluminum Volatile (Pinakin Parekh, CFA, Priyanshi Jain, Scott L Darling, 14 May 2018)

OIL AND GAS EQUITY RESEARCH 

Middle East Oil Macro - Saudi Conference Feedback: Oil policy moving into 'offense' as fiscal outlook improves(Christyan F Malek et al, 24 October 2018)

Middle East Oil Macro: Manaar call feedback: US/Iran sanctions to drive shift in OPEC/Russia production policy(Christyan F Malek et al, 16 October 2018)

Big Oil 'Trilemma' Key Investor Debates: ESG focus accelerating; frustration with negative de-coupling from oil; greater EPS predictability key for RDS (Christyan F Malek et al, 16 October 2018)

EMERGING MARKETS EQUITY STRATEGY RESEARCH 

Key Trades and Risks: Emerging Markets Equity Strategy (Pedro Martins Junior et al, 16 October 2018)

VIDEO AND PODCASTS

Middle East Oil Macro - Saudi Conference Feedback: Oil policy moving into 'offense' as fiscal outlook improves(Christyan F Malek et al, 24 October 2018)

1. ¹ JCPOA was signed between Iran, the P5+1 (France, UK, China, Russia and the US plus Germany) and the European Union
2.  https://www.whitehouse.gov/briefings-statements/remarks-president-trump-joint-comprehensive-plan-action/
3.  https://www.treasury.gov/resource-center/sanctions/Programs/Documents/jcpoa_winddown_faqs.pdf

Click here for the full Note and disclaimers

O mundo de Fukuyama e os tropecos da Historia, na Ucrania, na Russia - Ross Douthat

 

The New york times, FEBRUARY 24, 2014, 1:28 PM 

Huntington’s Conflicts, Fukuyama’s World

My Sunday column, on Russian grand strategy and Ukrainian turmoil, doubles as the latest installment in my semi-recurring series dedicated to the idea that ours is still essentially a Francis Fukuyaman world — that is, a world in which the West’s combination of liberal cosmopolitanism and democratic capitalism has no ideological rivals worthy of the name. To elaborate a little on that theme and its significance, let me quote from a Walter Russell Mead essay that ran in the Journal late last week, under the Fukuyama-invoking headline “Putin Knows History Hasn’t Ended”:

… this episode is confirmation that the problem that has haunted Western statesmanship since 1989 is still with us. Both President Obama and the many-headed collection of committees that constitutes the decision-making apparatus of the EU believe that the end of the Cold War meant an end to geopolitics.

….This is not so much an intellectual error as a political miscalculation. For American and European policy makers, the 1989 geopolitical settlement of the Cold War seemed both desirable and irreversible. Powers like Russia, China and Iran, who might be dissatisfied with either the boundaries or the legal and moral norms that characterized the post-Cold War world, lacked the power to do anything about it. This outlook is Francis Fukuyama’s “The End of History” on steroids: Humanity had not only discovered the forms of government and economic organization under which it would proceed from here on out, it had found the national boundaries and the hierarchy of states that would last indefinitely.

There are many things that Vladimir Putin doesn’t understand, but geopolitics isn’t one of them. His ability to identify and exploit the difference between the West’s rhetoric and its capabilities and intentions has allowed him to stop NATO expansion, split Georgia, subject Washington to serial humiliations in Syria and, now, to bring chaos to Ukraine.

Mr. Putin is a master of a game that the West doesn’t want to play, and as a result he’s won game after game with weak cards. He cannot use smoke and mirrors to elevate Russia back into superpower rank, and bringing a peaceful Ukraine back into the Kremlin’s tight embrace is also probably beyond him … But as long as the West, beguiled by dreams of win-win solutions, fails to grapple effectively in the muddy, zero-sum world of classic geopolitics, Mr. Putin and his fellow revisionists in Beijing and Tehran will continue to wreak havoc with Western designs.

Though this analysis may give Putin’s Ukrainian strategems a little too much credit (he’s not exactly winning this crisis so far), I think it has a lot of merit. Nobody would look at the last decade and a half in U.S. foreign policy and say that we’ve played the great game particularly well, and a naive Fukayama-on-steroids view of post-Cold War geopolitics has arguably been a problem under both George W. Bush and Barack Obama — taking the form of an overestimation of American military power in Bush’s case, and an overestimation of the influence of global norms and institutions in Obama’s.

But perhaps the issue isn’t just that our policymakers have overread their Fukuyama. Maybe it’s that in an essentially Fukuyaman world, where liberal democracy has few intellectually-credible challengers, the stakes of geopolitics are considerably lower than they used to be …. and so our policymakers drift into a kind of laziness that empowers figures like Putin on the margins … but only on the margins, so our laziness is never really fully punished, and so it perdures. In other words, we keep getting outmaneuvered by authoritarian regimes because in a world where the liberal-democratic world has the only attractive model going, the stakes are much higher for illiberal governments than they are for us: They have to be successful in their gambits, because they have so much more to lose, whereas we can afford drift and error, because our underlying mastery is unlikely to be challenged.

Thus, for instance, has Western strategy toward the Russian near-abroad been particularly wise or well-conceived? I would say not: From Georgia to Ukraine, the U.S. and the E.U. and NATO have made repeated efforts to draw former Soviet satellites into the West’s orbit without reckoning fully with potential Russian countermoves, and without being prepared to make the kind of commitment that would be required to fully back our would-be allies and clients in those regions. (And to be clear, I think making that kind of commitment — a military guarantee to Tbilisi, for instance — would be a reckless mistake.)

But at the same time, from the West’s perspective, the stakes in these disputes are relatively low. The struggle for influence is taking place on Russia’s very doorstep, and there’s no real possibility that a Putinist victory in Kiev or the Caucasus would inspire copycat right-wing movements to seize power in, say, Italy or France or Germany, the way Communist movements nearly did in the early 20th century. A true “new Cold War” scenario, in other words, remains entirely fanciful — which means, in turn, that no matter how many hands Putin wins with weak cards we’ll still be playing with house money.

You can tell a similar story about a lot of the places where lesser powers have frustrated American policymakers in the last decade — the Iranians in Iraq, Pakistan (or various Pakistani factions) in Afghanistan, Assad and Putin recently in Syria. We make a botch of things, they outmaneuver us, the world becomes marginally more dangerous and our influence marginally declines … but at the end of the day they’re still tinpot thugs presiding over basket-case economies with the mob always potentially at their throat, and there’s still no equivalent of the Comintern or the Axis (or the Holy Alliance, further back) in sight.

Or to put it yet another way … there’s a sense in which Samuel Huntington’s “clash of civilizations” thesis, touted as an alternative to Fukayama’s liberal triumphalism, has been vindicated by geopolitical events: There really are major civilizational faultlines in the post-Cold War world, and crises keep irrupting along the rough borders that Huntington sketched — where what he called the “Orthodox” world overlaps with the West (the Balkans, the Ukraine), along Islam’s so-called “bloody borders” (from central Africa to Central Asia), in Latin American resistance (in Venezuela’s Chavismo, Bolivia’s ethno-socialism, and the like) to North American-style neoliberalism, and to a lesser extent in the long-simmering Sino-Japanese tensions in North Asia.

But at the same time, Huntington’s partial vindication hasn’t actually disproven Fukuyama’s point, because all of these conflicts are still taking place in the shadow of a kind of liberal hegemony, and none them have the kind of global relevance or ideological import that the conflicts of the 19th and 20th century did. Radical Islam is essentially an anti-modern protest, not a real alternative … China’s meritocratic-authoritarian model has a long way to go to prove itself as anything except a repressive Sino-specific kludge … Chavismo and similar experiments struggle to maintain even domestic legitimacy … and what Huntington called the Western model is still the only real aspiring world-civilization, with enemies aplenty, yes, but also influence and admirers in every corner of the globe.

None of this means that geopolitics somehow doesn’t matter anymore, or that events from the Iraq War to the current Ukrainian troubles are just minor detours on a march to an inevitable destination. Liberal democracy’s current status as the only ideological game in town need not prove permanent, tensions still abound within the liberal project, and one can buy the “end of history” thesis as a description of our era without believing that it represents an actual definitive End.

But where the challenges we’re facing right now are concerned, from Kiev to Caracas, the Middle East to the Korean peninsula, the context in which geopolitical maneuvering takes place still leaves our would-be rivals at a permanent ideological disadvantage, which even the wiliness of Vladimir Putin is unlikely to soon overcome.

Nossos amigos iranianos (e os nao-alinhados alinhados...) -

NAM Countries Hypocritical on Iran

David Albright and Andrea Stricker

The Iran Primer, United States Institute of Peace, September 7, 2012

            The Non-Aligned Movement (NAM) summit ended on August 31 in Tehran with the adoption of a communiqué that is troubling and even hypocritical in its support for Iran’s nuclear program.   The final NAM document—in addition to the “Tehran Declaration,” a separate paper written by Iran—also criticized unilateral sanctions against Iran, including penalties by the United States and European Union. 

 

            The core issue is that the NAM statement misinterprets the Nuclear Non-Proliferation Treaty (NPT). Contrary to widespread perception, the international treaty signed by 190 nations does not guarantee a signatory country access to the nuclear fuel cycle if that state is under investigation for not complying. The 120 NAM states appear unwilling to join the world’s six major powers in pressing Iran to abide by successive U.N. resolutions.  They basically do not want to acknowledge Iran’s intransigence—even though many members are U.S. or European allies and claim to oppose Tehran’s nuclear policies. 

 

            The final statement could embolden Iran’s efforts and, in turn, undermine nonproliferation and international security—which the NAM states claim to uphold.

 

            The NAM communiqué supports Iran’s “nuclear energy rights,” specifically the right to develop all aspects of the nuclear fuel cycle, including enrichment. This position misconstrues the NPT. Under Article IV, Iran cannot claim the right to nuclear energy production—or a right to enrich at all—while under investigation for possible non-peaceful uses of these capabilities. 

 

            Iran’s right to nuclear energy is qualified—as long as there are no major lapses in its Article II obligations. The NPT specifically requires a pledge

 

            ·“not to manufacture or otherwise acquire nuclear weapons or other nuclear explosive             devices”

 

            ·and “not to seek or receive any assistance in the manufacture of nuclear weapons

            or other nuclear explosive devices.”

 

            These commitments are now being challenged by the International Atomic Energy Agency (IAEA), the U.N. nuclear watchdog.

 

            U.N. resolutions also require Iran to suspend uranium enrichment until it has cleared up questions about its activities with the IAEA.  Most of the NAM members are signatories to the NPT. They are also U.N. members, and therefore aware of U.N. resolutions on Iran and of their legal obligations to enforce and fully comply with them.

 

            So the NAM communiqué failed to acknowledge the need for Iran to fully comply with the international treaty on nuclear weapons. Iran tried to portray that the final communiqué represented a diplomatic victory for Tehran and its controversial nuclear program. But the summit’s resolution instead undermined the Non-Aligned Movement’s credibility, since it demonstrated that developing nations cannot be counted on to deal seriously with nuclear nonproliferation issues.

 

*ISIS Interning Research Associate Andrew Ortendahl contributed to this report.

 

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