The World That Was

Adrian Olivier,

Sunday 19 March – Sunday 26 March

On Wednesday the Federal Reserve raised interest rates by a quarter percentage points to 5% as it continues the fight against inflation and risks to financial stability. The rate hike was no surprise to investors and economist who had widely anticipated the 25 basis-point increase despite the turmoil in the banking sector. Fed Chairman Jerome Powell threw cold water on investors’ expectations of a rate cut by the end of the year – investors had expected interest rates to be lower than they currently are by year end at around 4.75% – saying inflation will only gradually decline for the next two years and that “if that happens, participants don’t see rate cuts this year”. The banking crisis may aid the Fed in its goal to slow down the economy: fears of a bank run cause lenders to take fewer risks with their capital so they have the cash to cover any withdrawals. That will mean less lending from banks, less issuing of mortgages and make it harder for businesses to get loans. A cooling lending market could lead to layoffs and a slowdown in the housing market. Both the Fed and the Treasury have stopped short of committing to guaranteeing customers’ bank deposits or raising the $250 000 cap on federally-secured bank deposits.

Europe’s banking turbulence continued this week with bank shares tumbling. Germany’s Deutsche Bank saw shares down as much as 14.9% on Friday – falling to the lowest value in five months. In the last week the bank has lost $3 billion in market value, and has lost more than a fifth of its value in the last month. Shares fell after the bank’s cost of credit default swaps (CDS) rose above 220 basis points from 142 two days earlier – the highest since 2018. CDS are a form of insurance for bondholders – they insure the bank’s debt against the risk of default. Turning to Switzerland, Swiss banking regulators and UBS are aiming to complete the takeover of Credit Suisse in less than a month. UBS shares were down 7% on Friday and its five-year CDS were up 14 basis points. CDS for all major European banks rose on Friday as investors showed their unwillingness to take risks on their portfolios. European regulations and central banks have made it clear that they will do everything in their power to keep markets stable – reiterating that banks are better capitalised and regulated than they were in 2007 before the global financial crisis. In the United States, banks shares fell again.

In France French president Emmanuel Macron and his government survived two votes of no confidence as protests raged on the streets of Paris. The first no-confidence motion, put forward by France’s longest-serving MP Charles de Courson, and the opposition centrist grouping Liot, was narrowly defeated – it fell short of the required absolute majority by only nine votes. A total of 278 MPs voted in favour. A second no-confidence motion tabled by Le Pen’s party, National Rally, was rejected. After the government won both votes, it is likely that Macron’s proposed changes to the pension system will become law. On Thursday a million French protested on the streets ahead of King Charles III’s planned visit, which has been postponed. About 30% of flights at Paris Orly Airport were cancelled. Violence marred some of the marches in the western cities of Nantes, Rennes and Lorient. In Lorient an administrative building was attacked and the courtyard of the police station was set afire and its windows broken. Lyon, in the southeast, has also seen violence.

The UK announced earlier this week that it would be supplying depleted uranium (DU) tank shells for those Challenger II tanks it is supplying to Ukraine. The announcement has outraged the Russians who consider such weapons “dirty bombs”. Moscow’s military leadership has warned that it would consider such a move would amounting to nuclear proliferation. The ammunition is technically called armour-piercing fin-stabilized discarding sabot (APFSDS), long dart penetrator ammunition. APFSDS uses a special penetrating rod made of depleted uranium with the addition of titanium and molybdenum.

Depleted uranium is natural uranium that has been changed by removing the more radioactive isotopes, leaving it about 99.8% 238U and has 40% less radioactivity than natural uranium. Depleted uranium has many uses – it is used as a counterbalance on helicopter rotors and airplane control surfaces, as a shield to protect against ionizing radiation, as a component to munitions to help them penetrate enemy armoured vehicles, and as armour in some parts of military vehicles. Tank armour is made of DU to protect from high explosive armour piercing rounds. There have been claims, such as those by former Democratic Congressman Jim McDermott in 2014, that DU shells had caused “severe and long-lasting injuries to Iraqis”. 300,000 DU rounds are estimated to have been fired by the US military in Iraq since 2003 and there is no definitive proof that the shells cause cancer. More likely than not, the Russians are anticipating heavy tank and armoured vehicle casualties from the use of DU shells. The United States has announced that it had found a way to speed up delivery of Abrams M-1 tanks to Ukraine by using older models. The Abrams also fires 120mm DU ammunition.

Perhaps in response to this British move, the Kremlin announced that it would be stationing tactical nuclear weapons in Belarus. President Putin told Russian state television on Saturday that Belarusian leader Alexander Lukashenko had long raised the issue of stationing tactical nuclear weapons in Belarus. Russia will start training crews to operate the weapons from next week and the construction of a storage facility for tactical nuclear weapons in Belarus will be completed by 1 July, President Putin added. In addition, a small number of Iskander tactical missile systems, which can be used to launch the nuclear weapons, have already been transferred to Belarus, President Putin said. The announcement – rather ironically – comes a few days after a joint statement issued by Russia and China saying “all nuclear powers must not deploy their nuclear weapons beyond their national territories, and they must withdraw all nuclear weapons deployed abroad” during Chinese President Xi Jinping’s state visit to Moscow.

Tactical nuclear weapons are smaller and can be used in in combat on the battlefield to destroy hardened targets and strong defences. Russian president Vladimir Putin said the move was akin to the United States placing its own nuclear weapons in Europe – The Netherlands for instance is home to American nuclear weapons. Nuclear weapons were last placed in Belarus in the 1990s – the collapse of the Soviet Union stranded Russian nuclear weapons in Belarus, Ukraine and Kazakhstan until the process of repatriation was completed in 1996. It should be noted that none of these countries could have ever used these weapons – without dismantling them and rebuilding them – as the Russians held the launch and detonation codes. This will mark the first voluntary placing of Russian nuclear weapons outside its borders and the Russians will not be transferring control of the weapons over to Minsk. The U.S Defence Department has not officially voiced concern over the moves, saying it did not believe that Russia was preparing to use nuclear weapons, stating “We have not seen any reason to adjust our own strategic nuclear posture” and reiterating that the U.S. remains “committed to the collective defence of the NATO alliance.”

In Ukraine, the frontline seems to have stabilised for the time being. The Russians have made little progress with their offensive largely stalled. Ukrainian president Zelensky has made repeated pleas for more military support – especially ammunition – from Western allies. President Zelensky said Ukraine could not launch a potential counter-offensive in the east of the country until further ammunition arrived. Earlier in the week, European Union (EU) ministers agreed on their two-billion-euro ($2.14bn) plan to provide 1 million artillery shell to Ukraine over the next year. These shells will come from European military stockpiles which are running low and will have to be replenished. Many of these shells do not exist yet and have to be manufactured. It is unclear if the EU will achieve this goal – which is far below Ukraine’s request of 350,000 shells a month to defend the frontline and launch a spring offensive.

On March 24, the U.S. Air Force retaliated against two Iranian-backed militias in Syria. The day before, a U.S. contractor in north-eastern Syria had been killed by a drone strike. Since 2021 there have been 80 attacks on U.S. troops in Syria.

 China has lifted all remaining restrictions on the importation of Australian coal, ending trade restrictions in place since the end of 2020. This follows an easing of the restrictions at the beginning of the year when four major state-backed importers were given permission by the Chinese government to import Australian coal.  As of March 13, 2023, a total of 1.35 million tons of coal had been shipped from Australia to China, a significant increase from the 0.82 million tons in February. It is projected that Australian coal imports will reach 2.6 million tons by the end of the month. This level is, however, still significantly lower than the coal volumes prior to the restrictions in 2020. In February 2020, China imported 3.4 million tons of thermal coal and 3.9 million tons of coking coal. Thermal coal is used in electricity generation while coking coal is used to produce coke – the primary source of carbon used in steelmaking. China produces over one billion tons of steel a year and has a voracious appetite for coal. The resumption of trade relations indicates a thawing political climate. Last week, Australian deputy prime minister and defence minister Richard Marles announced that Australia has “absolutely not” committed to join the US in event of war over Taiwan, despite signing AUKUS – a trilateral security pact between Australia, the U.K. and the U.S.

In the week ahead:

U.S. Vice President Kamala Harris is today embarking on a 9-day African trip where she will visit Ghana, Tanzania and Zambia to discuss the future of American involvement in Africa. The trip signals U.S. attempts to deepen its engagement in Africa in response to Chinese and Russian successes in Africa.