Markets are certainly enjoying seasonal jolliness and making merry as they end the year: bonds have been on a serious roll in the past two months, recouping a chunk of the losses of the last two years; in equities, the US S&P 500 Index is within a gnat’s whisker of breaking the all-time high seen at the end of December 2021. Christmas is so often a bullish time. Investors have much for which to be cheerful.
Meanwhile back in the real world, Peace on Earth and Goodwill to All in this festive season are in distinctly short supply at the close of 2023. Two countries, Ukraine and Israel, both facing existential threats, find themselves on the back foot struggling to curry favour with the international community.
The Royal Navy Type 45 destroyer HMS Diamond, in company with other nations’ warships, is fully engaged in the Red Sea protecting merchant shipping. The protagonists are Iranian-backed Houthi rebels launching drone attacks in support of Hamas from The Yemen across the Bab El Mandab Strait. The Strait at the southern end of the Red Sea and the Suez Canal in the north are the gateways between the Mediterranean and the Gulf of Aden. Approximately 12% of all global shipping passes through the 20-mile-wide neck separating Arabia and Africa. With destinations or origins among western European ports and those down the US eastern seaboard, a long list of major freight carriers and tanker operators is already re-routing oriental shipping around the Cape of Good Hope adding significant time, disruption and cost to global supply chains: CMAS; Evergreen; Hapag Lloyd; HMM; Moller-Maersk; OOCL; and Yang Min. OOCL and Evergreen have also embargoed goods of Israeli origin or being delivered to Israel. The essential Red Sea economic arithmetic is a $25k Iranian-made drone requires a $2m Aster 30 “Sea Viper” missile to shoot it down to save a super-tanker with a build cost of $90m and a cargo worth $150m.
The logistical difficulties are compounded by severe delays in another of the major global maritime chokepoints, the Panama Canal between the Atlantic and Pacific Oceans: a chronic lack of rainfall has reduced the canal’s transit capacity from 36 vessels per day, currently to 22; unless there is a significant and prolonged deluge, only 18 ships will be allowed to pass per day from 1st February.
In less than a week the price of Brent crude has risen $7 or 10% to $80, having slumped after the recent OPEC meeting; shipping container rates have also increased by 21% since mid-October including 10% this month (though they remain only a fifth of where they were at their extraordinary peak in 2022 arising from the enormous disruption created by the pandemic and Putin’s invasion of Ukraine).
Little reported but illustrative of the widening conflict in the Middle East, Coalition military bases in Iraq belonging to countries (mainly American but also British) who are giving support to Israel are also under regular drone/missile attack from Iranian-backed Islamic Resistance from within Iraq itself.
In this column on 13 October, we drew attention to a prescient article written by former Foreign Secretary William Hague in The Times warning Israel not to walk into the trap laid for it by Hamas (and by association, Iran): that a strong military reaction with the aim of extirpating Hamas and involving many collateral Palestinian civilian deaths for the October 7th atrocities against Jewish Kibbutzim would only lead to withering support in the United Nations. Despite Israel being a willing party to the Abraham Accords negotiated by Donald Trump to normalise Israeli-Arab relations, and in receipt of atrocities perpetrated by those with no interest in the Accords’ success, so it has come to pass as Hague predicted. Israel finds itself in its habitual situation of being the UN bogeyman. There are no winners here.
What is abundantly clear is that through its multiple proxies across the region, Iran remains a strongly malign influence. Interesting in the current situation in the Gulf is the silence from China, Iran’s key ally. Much of the disrupted shipping contains Chinese-manufactured goods. China has a purpose-built garrison facility in Djibouti on the Horn of Africa with 2000 military personnel, specifically to protect Chinese maritime interests in such a sensitive region. As America’s Operation Prosperity Guardian gathers way which includes as an option military retaliation against Houthi launch pads, perhaps General Secretary Xi has determined that Coalition forces (i.e. “the other side”) will do the job without him having to ruffle the feathers of the Iranian regime which not only supplies 1.5m barrels a day to Beijing, roughly 10% of China’s daily consumption, but also sits fully across the path of China’s One Belt One Road. Without Tehran’s co-operation the New Silk Road becomes no more than a New Silk Cul-de-Sac.
If the international reaction to the Middle Eastern conflict is divisive and active, the pernicious attitude towards Ukraine is very different: it is one of palpable frustration and boredom. Italian prime minister Georgia Meloni (for whom Rishi Sunak appears to have developed a considerable soft-spot given how often he seems to be photographed in her embrace or swapping happy snaps) revealed as much in the unfortunate entrapment telephone call made to her by two Russian radio pranksters in October; her insight was as accurate as it was embarrassing. Frustration among western leaders that President Zelensky has failed this year to make any progress repelling the Russians despite billions of dollars of military aid, and boredom that the war is about to enter its third year with no end in sight, yawn, here we go again. The reality is their boredom with Zelensky repeatedly making forced embassies to western capitals and NATO summits with his begging-bowl for more and better equipment is an indictment of western policy failure: a divided and under-funded NATO still has zero collective idea of how to secure victory for Ukraine and inflict defeat on Putin; it sorely misses the galvanising leadership brought to that particular cause by Boris.
Ukraine is now the punchbag in other people’s knockabout politics. In the US it is a victim of Joe Biden’s fiscal profligacy that as far as Congress is concerned, the money has run out. Freeing up any further expenditure on military aid to Ukraine is now conditional on Biden agreeing a deal with dissident Republicans to focus on stemming illegal migration across the Mexican border. The funding freeze is real: if a deal is not secured between the warring parties on Capitol Hill, then US military aid to Ukraine ceases at the end of 2023. According to the website “Ukraine Support Tracker” in the period January 24 2022 to 31 October 2023, of the $247bn pledged or spent on Ukraine by the international community, $75bn is from America, 61% of whose funding is military aid and the rest financial (the next biggest, surprisingly, is Germany with $22bn of which $18bn is military, followed by the UK at $14bn of which half is military and the rest financial aid; despite President Macron’s vocal interventions both before the conflict began and since, the total aid from France is a paltry $1.8bn).
Zelensky’s problems do not end there; last week in an ongoing EU constitutional stand-off, Hungary’s prime minister Viktor Orban (a paradoxically pro-Putin NATO member) vetoed a central €54bn financial aid package to Kiev until €30bn of EU covid recovery funds are released to Hungary, a course of action Brussels refuses to countenance until Orban recants on anti-LGBTQ and other policies on inequality, in line with EU values. Meanwhile, under the direction of Commission President von der Leyen and France’s President Macron, munition supplies to Ukraine are still hampered while the EU centralises procurement. For the tidy minds of Brussels bureaucrats, process trumps purpose and people.
Zelensky must be wondering what Kafkaesque world he is living in when his country has failed to be protected despite treaties ensuring such; has been invaded and large areas laid waste and thousands of his countrymen are dead, injured, homeless or refugees; is tolerated about as much as a 19th century poor-house inhabitant, in receipt of the military equivalent of foodbank support despite doing NATO’s job for it; and ends up like a ping-pong ball in other people’s games of political wiff-waff.
At home, his position is far less secure than historically. He is politically under open fire from luminaries including the Mayor of Kiev and the head of the army with whom he disagrees about the necessity to call up another 500,000 conscripts to help break the military stalemate. A Presidential election is due in 2024 on completion of his 5-year term. He has publicly declared that given the emergency, this is no time for an election to take place. Whatever the internal consequences for his presidency and his government, his potentially suspending elections would be sure to earn him a disapproving rap across the knuckles from the EU which is keen to entertain the concept of Ukrainian membership if not the reality of it actually joining.
The consequences of these elements are clear in Russia. Putin’s invasion might have been completely botched in the execution but he can now see that a measurable victory in Ukraine is achievable. His country and economy are on a war footing; far from collapsing, GDP is expanding. Western sanctions have not brought Russia to its knees, it has found alternative routes to market for big revenue-earners such as oil, gas and commodities. At $582bn its reserves including gold are still close to all-time highs.
In 2024 29.4% of all Russian government expenditure is ear-marked for his armed forces. Putin is planning for the long-term, already looking to replace, replenish and upgrade his military capability for the next challenge in his face-off against NATO. The Baltic States, Poland and Rumania are all aware they are potentially at risk. In the far north in a metaphorical and literal re-initiation of the Cold War, NATO’s newest member Finland has also been given notice of punitive action from Moscow as Putin prepares a new militarized zone in the Leningrad region on the Finnish border. Putin will have noted the non-response from NATO government leaders at its summit in the summer to Secretary General Jens Stoltenberg’s exhortation for a significant step up in spending on defence beyond the minimum 2% of GDP. The best that was agreed was that all members should try and achieve the existing minimum requirement of 2% of national GDP, a sure sign that either many members do not see a significant threat (from anyone, not just Russia), or that they expect the US to come to the rescue when necessary.
On which score in a complex web of geopolitical permutations, Putin will be playing game theory on the outcome of the US election and the possibility of coping with Donald Trump again: will a Republican White House retreat into an American bunker, eschewing the role of the world’s policeman and all the associated cost? Will Trump want to do a deal with Putin? Or might Trump raise the stakes against Russia? What is Trump’s attitude to NATO today? Is Trump’s head in a different place regarding China than it was when he left office in January 2021 (tariffs; protection of US intellectual property rights; the origin of ‘Chinese Flu’)? And what about his ‘Li’l Rocket Man’ in North Korea? As for the Iranians: doesn’t trust them an inch.
Markets are taking all this in their stride. It is contextual but not divertingly concerning to them. Central banks and interest rates remain their primary concern and investors are scenting victory forcing the hand of the Federal Reserve to change tack. However crazy, the world is still turning and little is going to deflect markets’ end of year euphoria. But context remains important just in case the situation takes an unexpected turn, as happened in 2022, and everyone wonders what happened and why.
As we ponder 2024, economically, politically and geopolitically, it is shaping up to be a fascinating year. But that is for January. On which note, from all of us on the Jupiter Merlin Team, we wish you a very merry Christmas and a happy and prosperous New Year.
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