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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.
Eyewitness footage shows explosion at military industry factory in Isfahan, Iran.
What We're Watching: Iran weapons depot targeted, fierce battles in eastern Ukraine, Czechs back pro-EU president, McCarthy-Biden debt limit meeting
What we know about the Isfahan attack
In what’s broadly believed to have been an Israeli attack, three drones hit an Iranian ammunition factory in the central city of Isfahan, Iran, on Saturday night. Iranian state media said damage to the site was “minor,” but phone footage suggests that the compound – used to produce advanced weapons and home to its Nuclear Fuel Research and Production Center – took a serious blow. An oil refinery in the country's northwest also broke out in flames on Saturday, though the cause remains unknown. Then, on Sunday night, a weapons convoy traveling from Syria to Iraq was also targeted by airstrikes. US reports attributed the Isfahan attack to Israel – which has in the past targeted nuclear sites in Natanz and hit Iranian convoys transporting weapons to Hezbollah in Lebanon. Indeed, this comes after Russia purchased hundreds of Iranian-made “suicide drones,” which it has used to pummel Ukrainian cities. While the deepening military alliance between Iran and Russia is a growing concern for Washington, it’s unclear if Uncle Sam played a role in the Isfahan hit – or whether Israel, which has to date refused to deliver heavy arms to Kyiv, agreed to carry out this attack in part to frustrate Iranian drone deliveries to the Russians. The escalation comes just days after CIA Director William Burns flew to Israel for meetings with his Israeli counterparts – and as US Secretary of State Antony Blinken heads to Israel and the West Bank this week. Crucially, it highlights the increasing overlap between Russia’s aggression in Ukraine and the longtime shadow war between Iran and Israel.
The battle for Bakhmut
Days after securing commitments from Germany and the US for advanced battle tanks, Kyiv says it’s engaged in “fast-track” talks with its Western counterparts for long-range missiles and military aircraft to provide cover for tanks in action. This comes after a weekend of heavy fighting outside Bakhmut, a flashpoint in eastern Ukraine and a critical supply route for the Russian military. However, German Chancellor Olaf Scholz does not seem to be on board with these arms deliveries – at least for now. Ukraine, for its part, has been targeting train lines around Bakhmut, specifically in villages that are well-positioned to act as hubs for Russia to bring reinforcements into southern Ukraine. Meanwhile, as the Russians pummeled the village of Kostyantnivka on Saturday, Ukraine reportedly hit a hospital in occupied Luhansk, saying it was being used as Russian military headquarters. As heavy fighting continues – and Russia reportedly prepares to call up more troops – Kyiv says it’s having increasing difficulty fending off Russian advances.
Czechs choose "calm"
In a second-round run-off, the Czech Republic elected retired general Petr Pavel as its new president. The pro-Europe, former NATO four-star officer beat populist Andrej Babis, a former PM, reaping 58.32% of the vote compared to his opponent's 42%. Three of the candidates who dropped out after the first-round backed Pavel in a contest marred by threats and disinformation – and cast as a fight between Pavel’s pro-Europe multilateralism and Babis’ populism, which resonated largely with rural voters. Pavel, a former chief of general staff of the Czech military, who vowed to "lead with experience and calm" wants to continue aiding Ukraine in lockstep with the West. Babis, who would have likely adopted many of the same policies as current populist President Milos Zeman, recently said he would not honor NATO’s mutual defense clause, but later walked that back. Even though the role of the president is largely ceremonial, the office still carries weight, including being responsible for choosing the prime minister and the central bank chief. Indeed, Pavel’s win reiterates the country’s pro-Western leanings and will be music to the ears of bureaucrats in Brussels.
Can Biden and McCarthy solve the debt limit crisis?
Newly confirmed House Speaker Kevin McCarthy said on Sunday that he will meet President Joe Biden at the White House on Wednesday to try and chart a path on raising the debt ceiling to avoid default. (For context on what the debt ceiling is and why it matters, see this GZERO explainer.) Interestingly, McCarthy said that cuts to Medicare and Social Security – which some fiscal hawks in his party had been pushing for – were “off the table.” Indeed, it’s a good sign that the two are set to meet face-to-face to try and solve a looming catastrophe, but they are still miles apart in finding common ground. Biden, for his part, says he won’t negotiate and that the Republican-controlled House needs to raise the debt limit without preconditions in order to avoid an economic crisis. But McCarthy – who is being held hostage by the far-right faction of his party that nearly torpedoed his speakership bid – can’t make many concessions on increasing the federal government’s borrowing capacity without putting himself at risk of being booted out by his own caucus. While neither side has much political wiggle room, emergency measures put in place by the US Treasury to avoid default will expire in June.
Hard Numbers: Iran’s uranium supplies, ex-cops charged in Memphis, US recession fears, the rise of traveling eggs
70: Iran now has enough enriched uranium to build nukes, according to International Atomic Energy Agency chief Rafael Grossi. While the Islamic Republic insists that its nuclear program is for peaceful purposes, it reportedly has 70 kilograms (155 pounds) of uranium enriched at 60% – enough to build several nuclear weapons.
Watch on GZERO World — Grossi explains how close Iran is to getting the bomb.
2.1 & 2.9: The US economy grew by 2.1% in 2022 and 2.9% year-on-year in the last quarter. But don't uncork those champagne bottles just yet — the Fed is going to keep raising interest rates to clamp down on inflation, and the housing market, the manufacturing sector, and consumer spending are all slowing down.
5: Five former Memphis police officers have been indicted following the death of Tyre Nichols, who died in hospital on Jan. 10 after a “confrontation” during a traffic stop. The five ex-cops face charges including assault, second-degree murder, and kidnapping. A video of the encounter is expected to be released on Friday.
2,002: Since early November, US-Mexico border agents have increasingly been seizing a new kind of contraband: eggs. (Yep, from chickens). Rising US egg prices, driven partly by an avian flu outbreak, have led to a reported 2,002 instances of egg smuggling in recent months.
Iran getting the bomb? Not as close as you might think
The 2015 Iran nuclear deal is pretty much dead in the water right now. And perhaps the train has already left the station because Tehran is too close to enriching enough uranium to get the bomb.
So, is it too late?
“Having the nuclear material does not mean [that] automatically that you have a nuclear weapon,” International Atomic Energy Agency chief Rafael Grossi tells Ian Bremmer on GZERO World. Still, Grossi would like more cooperation from the Iranians.
The IEAE, he says, "wants to provide the diplomatic, technically neutral platform for a good understanding. I hope this message is heard in Tehran.”
Watch the GZERO World episode: Rogue states gone nuclear and the watchdog working to avert disaster
Podcast: Iran on the verge: why you don’t want the nuclear deal to fail, according to Iran expert Ali Vaez
Listen: Renewing the Iran nuclear deal is more urgent than ever for the Biden administration. Iran is closer to getting the bomb, with the breakout time to enrich enough uranium for a single nuclear weapon reportedly less than two weeks. On the GZERO World podcast, Ian Bremmer speaks to Ali Vaez, Iran project director at the International Crisis Group, who says the odds of reaching an agreement in the short term are 50/50.
There are domestic political risks for Biden either way, but a new deal would significantly delay Iran’s ability to enrich enough uranium for a weapon. It's also now clear that the real effect of pulling out of the deal in 2018 was that it boosted Iran's nuclear program. Vaez also digs into Israel's strategic interest in a deal, which they have long opposed, and Russia's role in the negotiations with Iran.
Listen to Ian Bremmer's interview with Ali Vaez, Iran project director at the International Crisis Group.
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Iran’s nuclear program runs hotter
Talks between Iran’s government and world powers over the future of Iran’s nuclear program continue. The US and Iran are still not communicating directly; Britain, China, France, Germany, and Russia are shuttling between them.
The good news is that they’re all still talking. The bad news is that, after eight rounds of negotiations, the main players haven’t agreed on anything that would constitute a breakthrough.
Even the good news isn’t that great. No, Iranian officials haven’t yet exited the room in anger, but they have good reason to just keep talking, according to Eurasia Group’s Henry Rome — even if they have no intention of working toward a deal. Negotiations, Rome warns, “provide political cover to advance the nuclear program.”
They make it harder for the US and Europe to dial up new pressure on Iran or for Israel to target its nuclear facilities and scientists. They give Russia and China a reason to defend Iran’s position.
They also protect (what’s left of) Iran’s economic stability by ensuring sanctions don’t immediately get tighter. And perhaps, Tehran may reason, the Americans might improve their offer.
Iran’s (mis?) calculation
But Iran’s government, now led by Ebrahim Raisi, a president more openly hostile than his predecessor toward the West, may feel it has little more to lose by continuing to say no.
After all, Iran’s “resistance economy” have survived tough sanctions before, and the government believes that new protests inside Iran against economic hardship can be contained — or, if necessary, crushed.
And what if Donald Trump becomes US president again in three years? Won’t he just tear up whatever Iran has signed, just as he withdrew the US from the last nuclear agreement?
Maybe. But revival of the nuclear pact, according to Rome, “is the best option for Iran’s economic stability.”
A new deal could free up $100 billion in frozen foreign reserves. It would allow Iran to sell much more oil at market prices. It would draw new trade and investment into the country.
That's a plus for Iran’s cash-poor government and for its long-suffering people. Without an agreement, Iran faces the indefinite extension of US sanctions, which might one day trigger public unrest that Iran’s security forces can’t contain.
Escalating tensions
The Biden administration — focused for now on COVID, domestic political headaches, inflation, China, and Vladimir Putin — is well aware that Iran’s willingness to talk may not offer hope for a breakthrough. US and European officials have said publicly that a deal must come within “weeks, not months.” That deadline could be extended, but only if genuine progress offers credible hope for an agreement.
In short, if there’s no deal by late spring, it will be time for all sides to brace for trouble. A breakdown of talks will persuade the Biden administration to squeeze Iran’s economy still harder. Iran could accumulate enough highly enriched uranium for several bombs, set more advanced centrifuges spinning, and advance closer to a nuclear weapon than ever before.
If so, warns Rome, Israel may be ready to come back off the sidelines “with cyberattacks and sabotage inside of Iran against military, economic, and nuclear sites, aimed at degrading Iranian capabilities and destabilizing the government.” Israel might also conduct military exercises that put the Middle East — and global oil markets — on edge.
The risk of military conflict, deliberate or accidental, can’t be ignored. In fact, Eurasia Group sets the likelihood of direct Israeli and/or US airstrikes on Iranian nuclear facilities in 2022 at 20 percent. Given the stakes, that’s a frighteningly high number.
In short, there’s a reason this story features in Eurasia Group’s report on Global Top Risks for 2022.