KCL Geopolitical Risk Society Monthly Risk Report

Compiled by Will Marshall, Editor-in-Chief for KCL Geopolitical Risk Society, this month’s report analyses the impact of the recent US midterm elections on Financial Markets, Chinese plans for the expansion of its ambitious ‘Belt and Road Initiative’ in the High North and the ongoing standoff between Russia and Ukraine in the Sea of Azov.

Security

Ukraine calls up Reserves as crisis with Russia escalates

The Ukrainian Government has ordered a call-up of the country’s military reserves as the ongoing confrontation between Kiev and Moscow over the Kerch Straits continues to escalate. The call to arms comes after the seizure of three Ukrainian naval vessels by the Russian Federal Security Service on 25^th November after what Moscow claims was a violation of its territorial waters.[1]

The Kerch Strait is a strategically located isthmus between the disputed territory of Crimea and Russia proper. Whilst a bilateral treaty legally guarantees the right of both nations to patrol the 19km strait linking the Black Sea to the Sea of Azov, Moscow’s latest moves are indicative of Russian attempts to reaffirm its hold over the Crimean Peninsula, which has been de facto under the control of Russia since its occupation of the territory during the 2014 confrontation between the two states.[2]

In response to Moscow’s provocations, Ukraine’s President Petro Poroshenko declared martial law across the country, barring Russian males aged between 16 and 30 years old from entering Ukraine and calling up several thousand troops from the reserves to be deployed to strategically vulnerable locations across the country. On a speech on Monday 26^th November, the day after the seizure of the vessels Poroshenko justified his actions, claiming Russian forces were ‘ready at any moment for an immediate invasion of Ukraine.’[3] This is not to say such fears are not warranted. Russia and Ukraine have been in what has been described as a state of ‘undeclared war’ since 2014 with Ukrainian forces engaged in combat with Russian-sponsored separatists in Donestk and Lughansk provinces in the eastern region of Donbass. So far the conflict, which has existed in a state of stalemate for the past four years with neither side making decisive gains has claimed more than 6,000 lives on both sides.

The ongoing crisis has broader implications for relations not just between Russia and Ukraine but also in regards to the former’s relations with Poroshenko’s NATO allies. The President has already appealed to the Western alliance to deploy naval forces to the Sea of Azov in a show of force aimed at persuading Moscow to think twice about a further escalation of the crisis. Whilst the alliance has publicly expressed its ‘full support’ for Kiev, despite not being a member state, it is yet to be seen whether this latest conflagration in Eastern Europe has the potential to result in an all-out conflict between the two states which could drag in stakeholders from across the region.

Trump Deployments on Mexican Border declaimed as ‘Political Ploy’

President Donald Trump has announced the deployment of over 5,000 US troops to the Mexican border, a move condemned by opponents as a cynical political ploy aimed at stoking fears over immigration in the run up to November’s midterm elections.[4] The decision to deploy US Forces along the southern border, concentrated in the states of Texas, Arizona and New Mexico has come in light of reports of multiple ‘caravans’ of undocumented Central American migrants located close to the Mexico-Guatemala border heading northwards towards the United States.

Trump Administration officials have claimed the decision to deploy troops on the border is not one which has been taken lightly and that other options to address a recent surge in migration from the south have been extensively discussed.[5] According to Kevin McAleenan, the US Commissioner of Customs and Border Protection, border agents have encountered almost 1,900 people per day over the past three weeks, half of whom have been identified as unaccompanied children attempting to cross the border.[6] Whilst undocumented migration provides tangible benefits to the US economy, providing a crucial source of cheap labour to many of America’s industries, particularly the agricultural sector in which over half of illegal migrants are employed, there exists a very real fear regarding the social consequences of such migration in the minds of many Americans. Chief among these are concerns regarding criminality and linkages to the drugs trade.[7] Whilst the degree to which these accusations are open for debate, President Trump has successfully managed to securitise the issue of migration which provided a key pillar of his 2016 election campaign and has since been utilised to justify the gradual militarisation of America’s southern border. In light of the deployment of over 2,100 members of the National Guard to the border this April, this most recent move brings the total number of US troops stationed along the US-Mexico border to greater than those deployed in active combat missions such as in Iraq. This is illustrative of the elevated image migration has gained as an issue of national security under the current administration.

The President’s most recent moves however, have received condemnation from Democratic and Republican politicians alike, as well as a substantial number of current and ex-servicemen. Former Homeland Security spokesperson David Lapan questioned whether the deployment was an appropriate use of American military capabilities, stating ‘service members who have repeatedly spent long periods of time away from home don’t need this. And the US doesn’t need its military to ‘defend’ against a group of unarmed migrants, including many women and kids’.[8] Others have questioned the financial costs of such an operation with defence officials stating that operations along the border are expected to cost in excess of $220 million by the end of 2018 alone.[9] That the announcement of the operation, dubbed ‘Operation Faithful Patriot’ came just days before the November congressional midterm elections has raised speculation that the President strategically deployed US troops as a political ploy to reassert his credentials amongst his support base before the country went to the polls.

This latest incident is indicative of a global trend towards the securitisation of migration as an issue, drawing notable parallels with the deployment of the EU Naval Mission which has been operating in the Mediterranean to counter refugee traffickers from North Africa since 2015 or the mobilization of Bangladeshi Forces to stem the migration of persecuted Rohingya from neighbouring Myanmar last year. Thus, the necessity of monitoring not just migration itself but the reactions to and discourses surrounding this phenomenon is an issue necessitating increased attention on the part of security and geopolitical risk professionals.

Maldives President seeks Indian assurance amid brewing crisis

Newly elected Maldivian President Ibu Solih took advantage of the opportunity provided by his inauguration on Saturday 17^th November to advocate for closer ties with the Indian Government, in a significant departure from the pro-Chinese policy pursued by previous administrations and raising the potential for a diplomatic showdown between the two Asian superpowers over the tiny island nation. Solih took the opportunity offered by his inauguration speech to announce the pursuit of an ‘India First’ approach to foreign affairs, making a personal appeal to Indian PM Narendra Modi for increased bilateral cooperation over mutual security, commercial and developmental interests across the Indian Ocean region.[10]

Whilst traditionally a close allies, bilateral relations between the Indian and Maldivian Governments have been strained in recent years as the island nation has undergone a series of domestic political crises. In 2013, Former President Abdulla Yameen came to power amidst widespread allegations of electoral fraud and corruption. Since then, Abdulla came come under fire resulting from claims of democracy erosion, political repression and jailing of opposition leaders. Indeed, even ex-President Mohamed Nasheed, renowned internationally for his work in promoting climate diplomacy was imprisoned in 2015 as a result of terrorism charges his supporters claimed were spurious.[11] Perhaps the former President’s most significant move however, came from his abandonment of traditionally close Indo-Maldivian relations in pursuit of an aggressive pro-China policy.

The island nation, despite its size occupies a key geostrategic position straddling major shipping routes between the Far East and Persian Gulf thus making the archipelago an attractive target for Beijing and Xi Jinping, seeking to consolidate the country’s economic arteries via the ambitious ‘Belt and Road Initiative’. As a key partner in the so-called ‘maritime’ belt and road, the Abdulla administration coveted the extensive investments, numbering in the hundreds of millions of dollars, offered by Beijing in order to pursue an ardent programme of infrastructural development. Nevertheless this policy came at a cost, saddling the tiny nation with an enormous $3bn worth of debt to Chinese creditors leading to claims the Maldives were at the receiving end of a neo-colonial ‘land grab’ by Beijing, similar to those pursued by the Chinese Government across Africa.[12] This exercise of Chinese economic and soft power is only one of a number of examples of similar incidences across the region in recent years. Last year, Beijing obtained a 99-year lease on the Hambantota deep-water port in Sri Lanka after the country was unable to repay loans amounting to $1.4bn having already elicited similar deals to construct port facilities capable of holding military grade vessels in Ryaukpyu, Myanmar and Gwadar, Pakistan.[13] This is further evidence of a trend worrying to both Western and Indian policymakers; where the tendrils of Chinese economic and soft power spread, the expansion of military interests is likely to follow. Having successfully militarised territorial disputes with its southern neighbours in the South China Sea, Beijing is now seeking to expand its influence across the Indian Ocean, connecting China’s arc of influence to its commercial interests in Africa and the Persian Gulf. Such a move is undoubted to elicit a reaction from China’s rival to the south as New Delhi seeks to respond to what it views as an unacceptable encroachment on India’s traditional sphere of influence.

Whilst the shock success of Solih’s Maldivian Democratic Party, gaining a solid majority with 58% of the vote during September’s elections has allowed New Delhi to regain and reconsolidate its traditional position of influence over the Maldives, Beijing is unlikely to give up such a geostrategically significant asset without a struggle. Although India may have the upper hand for now it is probable Beijing will seek to offset thee losses by pursuing closer bilateral relationships with other partners in the region, for example the Seychelles with whom Beijing has already expressed a strong interest in developing economic ties, cultural and educational exchanges or a deepening in China’s presence in Sri Lanka.[14] Whatever the strategic calculations of both capitals, what is evident is that Sino-Indian relations have hit a new, and dangerous sticking point as Beijing seeks to expand its influence into the Indian Ocean. Only time will tell whether Asia’s two emerging supergiants can find grounds for cooperation and compromise. If not, the consequences for the populations of the world’s two largest states, and the stability of the Indo-Pacific region as a whole could be dire.

Finance & Economics

US Midterms usher in Unexpected Surge in Stock Prices

The US stock market has undergone an unexpected surge in light of November’s midterm elections, experiencing the highest post-midterm rally since 1982.[15] Despite producing few surprises in the eyes of pundits with the Democrats regaining control of the House of Representatives for the first time in eight years and the Republicans narrowly increasing their majority in the Senate, the fact that polls proved correct in an era which is no stranger to electoral upsets has done much to lift the cloud of uncertainty which has overshadowed the US economy in recent months.

The Dow Jones Industrial average closed up Wednesday 7^th November having gained 545 points, or a rise of 2.13% in percentage terms whilst the S&P 500 Index displayed similar gains, climbing by 2.12%.[16] Stocks and shares saw rallies across the board with Amazon, Caterpillar, United Rentals and Goldman Sachs all experiencing rises in stock prices in the wake of the election result.[17] Whilst historical trends suggest that midterms generally yield positive results for the stock market given the removal of the political uncertainties which suppress investment prior to election day, the context surrounding this November’s ballot has resulted in a stronger than normal surge even for a midterm.

That Congress has reached a state of gridlock with neither party holding a majority in the House or the Senate bodes well for stable economic growth in the next two years. Political gridlock serves to provide the stability necessary to boost investor confidence in the knowledge that any radical economic reforms proposed by either party are likely to be passed through Congress. Whilst investors expect President Trump’s business-friendly initiatives to continue a split Congress eases fears the President will engage in further disruptive market actions.[18] For example, a second round of sweeping tax cuts aimed at enticing middle-class voters by President Trump is now unlikely and beneficial given the potential for further cuts to dangerously overheat an already thriving economy.[19] Meanwhile, the probability of Trump completing his four-year presidential term is now increased. Republican control of the Senate makes the possibility of the President’s impeachment, which has long been a topic of debate among the Democrats given allegations of Russian interference in the 2016 Presidential elections is now likely off the table. This has brought confidence to investors fearing the potential impact of the dramatic political upheavals associated with impeachment could have on markets. Moreover, Trump has demonstrated a willingness to work with the Democrats on economic initiatives aimed at encouraging sustainable growth such as further investment into long-term infrastructural projects, thus raising the prospect of promising gains in such sectors.

Despite these positive developments, these results come with a word of caution. As Trump is now likely to experience significant difficulties in the passage of new domestic legislation, it is probable the President will ramp up his controversial foreign policy in a bid to rally his support base in the run up to the 2020 Presidential elections. Thus, it is conceivable that Trump will pile the political and economic pressure on to rogue regimes such as Iran in an effort to repeat the success of his North Korea breakthrough earlier this year. Similarly, a significant escalation of the US-China trade war is a distinct possibility as the President seeks to provide tangible returns to support his rhetoric on bringing industry back to America. Both these scenarios risk creating a large degree of market volatility from geopolitical risk. Thus, whilst November’s midterms show promising signs for the US economy, as with anything relating to Trump’s volatile presidency, we must take such signals with a strong pinch of salt.

China announces ‘Polar Silk Road’ as Arctic commerce soars

The Chinese Government has in recent months been making quiet moves to establish its status as a major stakeholder in the Arctic Circle as Beijing eyes the immense commercial and geopolitical opportunities the High North offers. In a recent white paper, the government announced its ambitious new policy towards the hitherto neglected polar regions in a bid to secure the economic potential of the region as global warming offers the potential to open up lucrative new sea lanes between the Far East, Europe and North America.[20] Asserting its status as a ‘Near-Arctic State’, despite lacking any legitimate geographical reasons to be a significant stakeholder in the region, Beijing’s most recent report is indicative of the soaring investment the region has experienced in recent decades.

Of all the places on the planet, perhaps the polar regions have experienced the greatest impact from global warming over recent decades. Whilst the Arctic Ocean currently remains covered by ice from November through to July, warming summer temperatures mean that summer sea ice has dropped by over 25% since records began in 1979.[21] Whilst the Northern Sea Route around the north coast of Russia and the North-western Passage through the Canadian Arctic are currently navigable for 2-4 months per year, it is estimated that by 2100 these sea routes may potentially be open for over 10 months of the year if current warming forecasts remain accurate.[22] The economic potential of the opening up of the Arctic to new commercial opportunities has long been recognised by leading powers in the region with US and Russian corporations and governments moving in on the lucrative resources of the region. According to global financial firm the Guggenheim Partners over $1 trillion has already been invested in more than 900 projects in the polar region across a broad range of sectors including seaport facilities, mining operations, oil and gas pipelines.[23]

Seeing US and Russian gains, China now wants in on the action, seeking to incorporate its new polar trade route into Beijing’s ‘Belt and Road Initiative’ which seeks to connect economic centres across Asia, Africa, Europe and the Middle East via an immense network of infrastructural projects and strategic investments. Eyeing China’s main export markets in Europe and North America, the ‘Polar Silk Road’ aims to reduce the transportation time of goods between China and the West. Whilst the current between East Asia and Rotterdam takes an average of 30 days along the Suez Canal route, an arctic shortcut could cut up to a week off this by 2050, with transit times potentially halving by 2100 under a high-emissions scenario.[24] According to Beijing’s white paper this could cut China’s annual transportation costs by up to $127bn per year by the time the route becomes fully operational.[25] Moreover, such a route would allow Chinese vessels to avoid the dangerous choke points associated with the Suez Canal route such as the Malacca Straits and the Gulf of Aden which are susceptible to piracy as well as being major geopolitical flashpoints.

New sea lanes do not represent the only potential asset Beijing sees in the Arctic circle. Expert geologists estimate the polar regions are home to 13% of the globe’s undiscovered oil and 30% percent of its undiscovered natural gas reserves. Such lucrative economic potential could transform the Arctic Ocean into the new frontier of rapid economic development in the 21^st Century.[26] For the Chinese, cautious and unwilling to involve themselves in the intractable geopolitics of the Middle East which provides the fuel for China’s remarkable economic growth, the existence of extensive reserves in the arctic may be the jackpot Beijing needs to fuel continued growth in coming decades. Furthermore, the polar regions contain significant natural reserves of rare minerals such as platinum, diamonds, uranium, phosphate and nickel all of which represent an untapped resource in a world which is rapidly depleting its natural resources.

Whether Beijing can successfully mobilise its resources to compete with powers such as Russia and the US, which hold a physical presence in the arctic region remains yet to be seen. Nevertheless, these latest moves by the Chinese Government are indicative not only of the increasing geopolitical importance of the Arctic Circle but of Beijing’s ambitions to project its economic power far beyond it sphere of influence. This begs the question of whether such moves will be a source of prosperity of conflict on the world’s last true frontier?

Environment

Climate Experts point the finger at Global Warming as California burns

The US State of California has gripped the headlines of media outlets across the globe in recent weeks after huge swathes of land were engulfed by the deadliest fires in state history, precipitating dire warnings from climate experts that such devastating events are likely to become increasingly common in coming decades as the global climate continues to warm. These most recent wildfires, originating in the northern county of Butte on 8^th November and rapidly spreading over more than 110,000 acres of tinder-dry forest and scrubland have already claimed the lives of over 77 individuals whilst several hundred remain unaccounted for.[27] Although experts claim that multiple compounding factors including poor forest management, local topography and highly unusual wind conditions have been responsible for the emergence and rapid spread of such a destructive blaze, other factors clearly highlight the role of climate change in exacerbating the environmental conditions which sparked the fires.

California is no stranger to destructive wildfires. Indeed, the scrub-like, coniferous ecosystems endemic to Northern California actually evolved to burn frequently given the importance of wildfires in clearing undergrowth, spreading seeds and providing space for the next generation of forest as part of a natural cycle of regeneration.[28] However, wildfire statistics in recent decades have displayed a rapid departure from historical trends which, when viewed in conjunction with climate data demonstrates an almost perfect correlation between the two variables. Of the 20 largest wildfires in Californian history, 15 have occurred since 2000, indicative of a dry season which is growing harsher and longer. Since 1970 temperatures in western regions of the US have warmed at double the global average, precipitating a shift in seasonal weather patterns as the autumn rains, which generally bring an abrupt end to wildfire season have been delayed year on year.[29] According to Faith Kearns, a researcher at The University of California Institute for Water Resources the rains, which traditionally arrived in late October now come several weeks later in November or even December. The effect of such drought-like conditions is cumulative, meaning that with each passing day plants dry out more thus dramatically enhancing the risk if fire even when temperatures have fallen from their summer highs. Such a trend has been exacerbated by rising average temperatures, approximately three degrees Fahrenheit in the last century across the state, which further serve to dry out vast expanses of low-lying vegetation and hence serve to create a more fire-prone environment.[30] Although it is difficult to predict future trends, long-term projections suggest, with a high degree of certainty that the combined effect of warming temperatures and an extended dry season is likely to be that such destructive fires will become commonplace across large swathes of the south-western US.

Such a trend, if it were to continue would represent a major blow to many of California’s major industries such as agriculture and wine making which together contribute over $110bn to the state economy, potentially forcing a diversification of crops away from temperate varieties and towards tropical and sub-tropical produce. Moreover, with recurrent back-to-back droughts occurring on a regular basis across the state on a regular basis by the end of the century it is doubtful whether California’s already severely stressed infrastructure will be able to cope with increased water pressures thus costing several billion more dollars to the taxpayer.[31] Meanwhile, rising temperatures and increased atmospheric pollution as a result of wildfires is likely to give rise to major public health crises as deaths from heart disease, strokes and organ failure all see a significant uptick whilst pre-existing health conditions such as asthma are likely to be further exacerbated. Thus, whilst California’s most recent fires may have been disastrous both in terms of lives lost and the economic impact it is likely that this impact, devastating though it may be, is only an indication of what is to become commonplace across the sunshine state by the end of the century with severe implications increasingly apparent across a range of risk sectors.

Technology

Facebook’s Soros Smear Campaign highlights fears over the Politicisation of Social Media Companies

Facebook came under fire last week amid revelations that the social media giant had hired a PR firm to launch a smear campaign against Hungarian-American investor and philanthropist George Soros, highlighting broader issues surrounding the growing engagement of media companies in targeted political campaigns. The head of Soros’ grant-making network made claims Facebook had launched a concerted campaign against the multibillionaire after Soros described the social network as a ‘menace to society’, appealing for ‘independent, congressional oversight’ on the issue from US politicians.[32]

Elliot Schrage, Facebook’s outgoing Head of Communications and Policy claimed responsibility for the hiring of independent PR company Definers Public Affairs to launch a campaign against Soros after his criticisms of the social media giant at the Davos Economic Forum in January 2018, citing fears the investor was seeking financial gain by betting against the company in the market.[33] Soros has a long history of seeking financial gain from such behaviour, becoming known as ‘The Man who broke the Bank of England’ after his short-sale of over $10bn worth of pound sterling during the 1992 Black Wednesday currency crisis. Facebook’s Chief Operating Officer, Sheryl Sandberg admitted knowledge of the hiring of Definers to launch such an investigation despite previous denials, although she vehemently claims the PR company had sought to exploit antisemitic conspiracy theories in its campaign against the Jewish investor. Soros is a long-term patron of liberal and progressive causes thus making him a regular target for right-wing conspiracy theories portraying him in the classic trope of a Jewish banker pulling the strings of global affairs.

This latest incident is merely illustrative of the growing trend of social media companies using their platforms in to make a political point. Just last month, online payments platform PayPal banned British Far-Right mouthpiece Tommy Robinson from using its software, disabling and deactivating his account after releasing a statement saying ‘we do not allow PayPal services to be used to promote hate, violence, or other forms of intolerance that is discriminatory’.[34] Twitter meanwhile has a long history of banning users, ranging from Hamas activists to conservative activist Milo Yiannopoulos and pharmaceutical tycoon Martin Shkreli for violations of community guidelines. Whilst companies maintain the right to decide the guidelines by which they operate and suspensions from platforms have, for the most part been targeted against those expressing extreme views, the increasing politicisation of media companies in particular raises broader concerns surrounding the ability of such companies have to spin narratives and target specific political constituencies. The scandals surrounding the role of ‘bot accounts’ on Facebook in influencing the outcomes of the Brexit Referendum campaign and 2016 US Presidential election serve to highlight the very real ramifications the distortion of information through social media companies, either knowingly or unknowingly can have on the political process. Thus risk professionals, who themselves make extensive use of social media as part of their analysis of situations on the ground must be increasingly aware of the increased politicisation of online companies and take such variables into account when conducting threat analysis as such companies play an increasing role in facilitating narratives and communication in our increasingly interconnected world.

[1] https://news.sky.com/story/ukraine-calls-up-reservists-over-russian-invasion-fear-11570673

[2] https://www.theguardian.com/world/2018/nov/27/kerch-strait-confrontation-what-happened-ukrainian-russia-crimea

[3] https://edition.cnn.com/2018/11/27/europe/kerch-russia-ukraine-analysis-intl/index.html

[4] https://edition.cnn.com/2018/10/30/politics/trump-troops-border-criticisms/index.html

[5] https://www.reuters.com/article/us-usa-immigration-trump/trump-sends-5200-troops-to-mexico-border-as-caravan-advances-idUSKCN1N31VG

[6] Ibid

[7] https://theconversation.com/why-care-about-undocumented-immigrants-for-one-thing-theyve-become-vital-to-key-sectors-of-the-us-economy-98790

[8] https://edition.cnn.com/2018/10/30/politics/trump-troops-border-criticisms/index.html

[9] https://www.nbcnews.com/news/world/more-5-600-active-duty-troops-fan-out-across-southern-n934751

[10] https://www.thecitizen.in/index.php/en/NewsDetail/index/5/15567/Solihs-India-First-Places-China-on-the-Maldivian-Sidelines

[11] https://edition.cnn.com/2018/02/06/asia/maldives-political-unrest-explainer-intl/index.html

[12] https://www.scmp.com/news/asia/south-asia/article/2172236/new-maldives-government-begin-untangling-secret-building-deals