War Update, Iran's Enriched Uranium, U.S. Trade Deals

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War Updates

From The Washington Post, citing a “senior administration official”: “We will continue to try to impress upon them that we can’t do anything and everything forever”

“It [i]s the administration’s “very strong view” that it will be hard to keep getting the same level of security and economic assistance from Congress.”

“’As long as it takes’ pertains to the amount of conflict, it doesn’t pertain to the amount of assistance.”

If I was a Ukrainian leader, those comments would scare the shit out of me, and increase the urgency of launching more aggressive attacks against Russia now.

After our podcast this week with Sim and discussing the situation with additional military analysts, the picture of the battlefield has changed a bit. I had previously been worried about a major spring offensive by both sides. Now, it looks like it would be better for Ukraine to be patient — to absorb Russian attacks, kill Russians at high rates with Western weapons, and bide time for an offensive once tanks and perhaps fighter jets arrive.

Cutting against that is the need to strike while Ukraine still has the full support of the West. The more that comes into doubt, potentially the more Ukraine needs to make moves now.

According to Ukraine’s agriculture ministry, Ukrainian grain exports are down 29.3% to 29.7 million tonnes in the 2022/23 season so far, hit by a smaller harvest and logistical difficulties.

Russia said on Monday that it would be “inappropriate” to extend the Black Sea grain deal unless sanctions affecting its agricultural exports are lifted and other issues are resolved. The exact words of Russian Deputy Foreign Minister Sergei Vershinin: “Without tangible results on the implementation of the Russia-U.N. Memorandum, above all on the real removal of sanctions restrictions on Russian agricultural exports... the extension of the Ukrainian document [past March 19th] is inappropriate.”

Ukraine’s Foreign Minister said Kyiv was “deeply concerned” about Russia’s actions and that more than 140 vessels are queued up at the Bosporus due to delays in inspections by Russia.

Wheat prices have rebounded considerably in the last month over fears that an escalation of the Russia-Ukraine war will hinder grain shipments.

According to Michael Kofman, Director of Russia Studies at The Center for Naval Analyses (and an analyst that has accurately predicted every stage of Russia’s invasion), Russia’s spring offensive has already begun, and has been in progress for several weeks. The offensive has 5 axes of advance, all with a goal of seizing the Donbas region of Ukraine. That is important because it means the Russian military is not considering a wider offensive, whether to assault Kyiv or Odessa.

Kofman believes that Russia’s mobilization campaign has not produced an additional secondary army – but rather has been positioned to offer substitutes for casualties taken in the Donbas campaign, while holding reserves to throw into the fray if one of the 5 axes shows progress. It is still possible that Russia tries to mobilize for a wider offensive against Ukraine – but it appears at least for now that Russia’s efforts are limited to the Donbas. Ukraine must now decide if it will risk a counteroffensive of its own – or if it will remain in a defensive crouch and hope that Zelensky’s anticorruption efforts helps ensure continued delivery of Western ammunition and of offensive weaponry in larger quantities.

US Trade Deals with UK, EU, and Japan

The U.S. government is seeking trade pacts on critical minerals with Japan and the UK, in addition to talks with the European Union. The goal of the pacts is to ensure the bloc is not reliant on China. This is the latest salvo in the U.S. attempt to corral allies on board with its anti-China policies. We have been surprised at the extent to which some European states have been willing to sign on to U.S. measures. One contact said of Dutch willingness to participate in U.S. semiconductor restrictions: “The fact that the Dutch government didn’t release details about agreement could mean they agreed to more, not fewer, restrictions. They didn’t make it public because they don’t want to be seen to kowtow to the US to domestic audience + not wanting to provoke China.”

OPEC

OPEC raised its 2023 forecast for global oil demand growth to 2.23 million barrels per day, a 2.3 percent increase. It is OPEC’s first upward revision in months, citing China's relaxation of COVID-19 restrictions and slightly stronger prospects for the world economy. The headlines focused on OPEC raising its growth forecast and not on the fact that a 2.3 percent increase is pretty anemic if China is truly reopening.

Iran Nuclear Update

The International Atomic Energy Agency has reportedly published a report claiming that Iran has successfully enriched uranium to 84 percent purity – the highest level found by inspectors to date, and significantly higher than the 60 percent purity level Iran had told the IAEA it was capable of.

Iran denied the reports. Meanwhile, at home, Iran’s government seems to have tamed the anti-government protests of recent months, and Supreme Leader Ayatollah Ali Khamenei has upped his public appearances to combat the notion that a struggle for power within the country is imminent. Israeli Prime Minister Benjamin Netanyahu reportedly held high-level meetings with military officials to discuss a possible military confrontation with Iran. Israel does not have great options to strike Iran if it does not have U.S. support. As for Iran itself – it appears Khamenei and the Iranian regime has at least stabilized the situation in the country for now.

Turkey Seeking to Bolster its Industrial Production

Turkish companies repurchased TL 25 billion ($1.32 billion) of shares after government measures to support the stock market were unveiled last week, including measures incentivizing company share buyback programs and increasing obligatory stock pension fund allocation. The Turkish government also banned layoffs and unveiled a temporary wage support scheme in 10 provinces to safeguard workers and businesses recovering from this month’s deadly earthquakes.

Swiss customs data showed that Switzerland sent 58.3 tons of gold worth 3.3 billion Swiss francs ($3.6 billion) to Turkey in January. The Turkish government is using the earthquake crisis to further its goals of strengthening the independence of Turkish industry. The significant increase in gold imports may suggest that even before the earthquake, Turkish citizens were getting increasingly worried about instability around May’s upcoming elections. Now the Turkish government must contend with the economic fallout of the earthquakes, which have caused an estimated $84 billion in losses, the equivalent of about 10% of Turkey’s entire economy in 2022.

Indo – Pacific

According to The Wall Street Journal, the U.S. plans to deploy between 100 and 200 troops to Taiwan in the coming months, up from roughly 30 there a year ago. I’m sure the Chinese are quaking in their boots about the deployment of ~100 U.S. soldiers. Jokes aside, this is unnerving. What starts as a drip becomes an open-ended commitment — we’ve seen this movie twice before (Korea and Vietnam) and the latter also started with just a small number of “advisers.”

Vladimir Putin met Chinese Foreign Minister Wang Yi and vowed to strengthen ties between their two countries despite “pressure from the international community” ahead of the first anniversary of Russia’s invasion of Ukraine. Wang’s visit to Moscow was the first by a senior Chinese official since Putin ordered the full-scale invasion last year. Any hopes that China would use its considerable influence over Russia to push the latter towards ending its war in Ukraine were dashed.

In South Korea, the chief of the ruling People Power Party (PPP) on Monday warned that calls for South Korea to consider acquiring its own nuclear weapons will get a boost if North Korea continues its military provocations. As if on cue, North Korea fired two short-range ballistic missiles (SRBMs) toward the East Sea. Why is it beginning to feel like a nuclear arms race in East Asia is inevitable? 

Indonesian President Joko "Jokowi" Widodo met with China's new foreign minister, Qin Gang, in Jakarta. During the meeting, Widodo stressed the need for a deeper economic partnership between the two countries, including completion of the Jakarta-Bandung high-speed rail project, construction of a green industrial park in Kalimantan and building the new capital, Nusantara. Qin pledged that Chinese companies would expand their investment in Indonesia in the areas of green infrastructure and the digital economy. An important relationship to watch going forward.

The Americas

Mexican President Andres Manuel Lopez Obrador ordered the country’s energy ministry to carry out the “necessary actions” for the nationalization of Mexico’s lithium deposits, which AMLO announced last April. According to AMLO, Mexico’s goal “is to nationalize lithium so that it cannot be exploited by foreigners from Russia, China, or the United States.” Mexico has an estimated 1.7 million tonnes of lithium and while it is soliciting foreign investment, the federal government is currently set to have a majority stake in any future joint venture with a non-Mexican company.

Panama’s mining chamber Camipa expressed “serious concern” in the face of the impasse that is putting the Cobre Panamá copper mine at risk due to restrictions on loading concentrate at the operation’s port. First Quantum Minerals' local subsidiary Minera Panamá suspended concentrate loading operations on February 6 at the port of Punta Rincón, following an order from maritime authority AMP to halt activity until it is shown that the accredited firm began to certify the calibration of the scales. Panama isn’t a copper exporter at the level of Peru – it is roughly the 11th largest exporter in the world – but the Cobre Panama mine accounts for 1.5 percent of global copper production. A reminder that supply-side disruption to copper isn’t limited to the Andes.

Controversial El Salvadorian President Nayib Bukele, who has made Bitcoin legal tender and challenged the country’s democratic institutions, also seems to have made headway in substantially reducing gang violence in the country. El Faro, an opposition media source that has been highly critical of Bukele, conceded that “the dismantling of the gangs has enormous life-changing potential for the country” even as it accused Bukele of manipulating the government and consolidating power in his grasp. U.S.-El Salvador relations have floundered under Bukele…but it is hard to argue with success. Rather than worrying about an inevitable El Salvador default, perhaps we should be considering whether El Salvador might offer a political model for the rest of the region.

That's it for this update!

If you didn't catch last week's Charts of the Month or the third installment of Lykeion Research "Investing Through Japan’s Next Big Inflection Point", now's your chance to catch up.

As always, we'll see you out there...