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Monthly Intelligence Report

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M o n t h ly I n t e l l i g e n c e R e p o r t | O C to b e r 2 0 2 2

THIS MONTH IN GEOPOLITICS

1 All Eyes on Ukraine

M AT T E R S O F O P I N I O N

3 A Three-Way Race for Influence in Africa?

ON GEOECONOMICS

8 Economics and War

T H E WO R L D AT L A R G E

12 Big Trouble in Little Chinese Banks

17 If the Lights Go Out in Europe

21 Iran’s Nuclear Negotiations: Tactics and True Position

M E T H O D O LO GY

23 Global Stability Index

 T his M onth in G eopolitics
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T H I S M O N T H I N G EO P O L I T I C S

All Eyes on Ukraine

THE WAR IN UKRAINE continues to be one More important from a geopolitical perspective
of the most geopolitically significant events is how U.S. unrest affects U.S. foreign policy. The
in the world, mostly because the stakes haven’t decision to establish permanent bases in Poland,
changed: If Russia wins, its forces are on the border for example, and to transfer substantial amounts of
of NATO, and if Ukraine and the United States win, we weapons there is largely divorced from domestic
can expect regime change in Russia. This makes a rage. But the economic hardship that has resulted
negotiated agreement all the more likely, even if it from the economic war on Russia has certainly
isn’t particularly imminent. been felt at home. I believe there will be increased
opposition to the war in Europe on these grounds,
Meanwhile, the world is heading toward recession, and thus more pressure to seek a negotiated
the first in 14 years. Normal business cycles tend end. Even so, economic anger will not be focused
to generate recessions to rectify inefficiencies and solely on Ukraine, and most U.S. residents seem to
irrationalities in the economy, and though there’s understand that their economic problems do not
a degree of cyclicality to the coming one, the U.S.- begin and end with the conflict there.
led economic war on Russia played a huge part as
well, disrupting the flow of hydrocarbons just as the That conflict, as it happens, has entered a new
world was recovering from the economic fallout phase. Russia has captured Luhansk and is
of the COVID-19 pandemic. This, in turn, could positioned to take control over more of Donetsk.
affect everything from interest rates and inflation From a purely military point of view, this is neither a
to employment. The coming months will lock major breakthrough for Russia nor a major defeat
dysfunction into place. for Ukraine. From a morale point of view, it is more
significant. The capture of Luhansk marked a change
How bad things get will depend largely in Russian operations. Moscow had initially fought
on the United States, which, for better with large armored divisions it could neither control
or worse, dominates global geopolitics. nor supply. Its new strategy is more methodical,
focusing on narrower objectives with a distinctly
Put simply, what happens here matters everywhere. attritive flair.
And what’s happening here betrays an anger the
likes of which hasn’t been seen since the 1960s
and 1970s. I’m not interested in litigating whether
the anger is justified — some of it is timeless, some
of it is newfound in light of recent Supreme Court
decisions — because ultimately what matters is that
there is anger, and that that anger is manifesting itself
violently. Expect that to continue in the next month.

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There will be a lot of talk of a cease-fire in the next And we are still seeing uncertainty surrounding its
month. Russia and Ukraine will both be tempted, but relationship with its biggest customer, the United
ultimately neither will sign on — Ukraine is being too States. Pressure on China’s exports, led by declining
heavily armed by the West for Russia to consider, economies around the world, has unbalanced
and I can’t believe Ukraine believes Russia would its economy, and there is apparently real political
respect it. Instead, much of the next month will be pressure on President Xi Jinping as a result. Russia’s
about rest and deployment ahead of an assault on performance in Ukraine, meanwhile, has forced
Odessa. Russia’s recent gains open the door to Beijing to rethink its relationship with Moscow. It still
success, but Ukraine has had a lot of time to train needs Russian energy but would be happy to find
and reorganize. It’s hard to imagine anything decisive other sources. More than anything, though, Beijing
will happen right now. doesn’t want to be drawn into Russia’s war; next
month, we will see more and more evidence that it
The same could be said for Joe Biden’s visit to isn’t going to sabotage its relations with the U.S. just
Saudi Arabia. Washington wants Riyadh to hike oil to please Russia.
production, something Riyadh can absolutely do if it
wants to. Bilateral ties are fraught — more on that in
a separate article — but the fact is that Saudi Arabia
can’t completely spurn the U.S. any more than the
U.S. can completely spurn Saudi Arabia. We expect a
shift in supply of oil next month. The only question is
how much.

Hovering in the background is China, which over the

long term outweighs the short-term machinations
of Ukraine. We are still seeing the consequences of
China’s default on real estate debt. We are still seeing
the vast pandemic-induced closures in China’s
financial hub in Shanghai.

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M AT T E R S O F O PI N I O N

A Three-Way Race for Influence

in Africa?
THE GERMAN GOVERNMENT RECENTLY ANNOUNCED that it would no longer participate in the U.N. military
mission in Mali, the Sahelian country that has been at war with itself since 2012. France, a former colonial
power with substantial influence in Africa, formally withdrew its troops from Mali on Aug. 17. Its foreign security
allies growing thin, and with a still-pressing need to combat insurgents, the Malian government has since
turned to the Wagner Group, the Russian mercenary outfit that on paper is private but in practice acts as an
arm of the government in Moscow.

Mali is only the latest African nation to employ Russian private military contractors, or PMCs. Wagner-affiliated
PMCs are also known to have operated recently in the Central African Republic, Mozambique and Libya.

Their deployment represents a sort of return by Russia to Africa. During the Soviet era, Moscow maintained a
substantial presence throughout the continent, competing with the U.S. for influence and doling out military
and development aid. But when the Soviet Union collapsed, Soviet funding dried up, and Russia ceased to
be seen as a player in the region. Over the past few decades, it has been primarily an arena for U.S.-China
competition. It seems that Moscow has joined the fray.

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Gallup routinely collects data on how certain African populations view the leadership of these three powers.
The level of approval for U.S., Chinese and Russian leadership is often a gauge of overall views of the countries
in question. In general, Africans in these countries tend to be fairly positive on all three, with substantial
percentages of the populations mostly approving.

Approval of Russian Leadership in Key African Countries

Do you approve or disapprove of the job performance of the leadership of Russia?
% Approve

Gallup, 2021

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But even then, opinions differ markedly. In 2021, for example, approval of U.S. leadership ranged from a high of
80% in Cote d’Ivoire to a low of 12% in Egypt. In general, levels of approval for U.S. leadership are close to but
slightly higher than that of Chinese leadership — approval of U.S. leadership tends to be particularly high in
Sub-Saharan Africa — and are dramatically higher than that of Russian leadership.

Approval of U.S. Leadership in Key African Countries

Do you approve or disapprove of the job performance of the leadership of the United States?
% Approve

Gallup, 2021

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Approval of Chinese leadership in 2021 ranged from 82% in Mali to 11% in Egypt. Elsewhere, approval of
Chinese leadership exceeded that of the U.S. and Russia in Cote d’Ivoire, Malawi, Morocco, Namibia, Nigeria,
Senegal and Tanzania. (Interestingly, none of these countries were in the top 10 of African recipients of foreign
direct investment [FDI] from China in 2020.) Approval of Russian leadership tends to be lower than that of
either U.S. or Chinese leadership.

Approval of Chinese Leadership in Key African Countries

Do you approve or disapprove of the job performance of the leadership of China?
% Approve

Gallup, 2021

Each power has its own strategy for courting Africa. The U.S. has offered investment, development aid and
military aid, which generally comes with strings attached — commitment to transparency, general adherence
to global norms of human rights, etc. This approach has been criticized as having colonial overtones and
creating a debt dependency for recipient countries. Though China’s investment and development comes with
much less oversight, Beijing is often criticized for exercising debt-trap diplomacy, offering African governments
massive loans for projects that can never be paid back to increase its political leverage. Russia tends to offer
military equipment and direct intervention through the Wagner Group, much of which has gone to illiberal
African countries.

The data suggest that the approaches taken by the U.S. and China seem to be the most appealing. Gallup data
on Africans’ views of two key aspects of infrastructure — satisfaction with roads and highways and internet
access — may provide insight into African countries that would be particularly open to trading influence for
development in these areas, with those countries with the lowest levels of each potentially being the most open.

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Views on Infrastructure in Key African Countries

In the city or area where you live, are you satisfied or dissatisfied with the roads and highways?
Do you have access to the internet in any way, whether on a mobile phone, a computer or some other device?

% Satisfied with roads and highways % Yes, access to the internet

Country

Algeria 43 43 ------------------------------------------- ---------------------------------------------------------

8181 --------------------------------------------------------------------------------- -------------------

Benin 40 40 ---------------------------------------- ------------------------------------------------------------

3131 ------------------------------- ---------------------------------------------------------------------

Burkina Faso 36 36 ------------------------------------ ----------------------------------------------------------------

2626 -------------------------- --------------------------------------------------------------------------

Cameroon 34 34 ---------------------------------- ------------------------------------------------------------------

4141 ----------------------------------------- -----------------------------------------------------------

Congo 44 44 -------------------------------------------- --------------------------------------------------------

3434 ---------------------------------- ------------------------------------------------------------------

Cote d’Ivoire 39 39 --------------------------------------- -------------------------------------------------------------

3939 --------------------------------------- -------------------------------------------------------------

Egypt 59 59 ----------------------------------------------------------- -----------------------------------------

4242 ------------------------------------------ ----------------------------------------------------------

Gabon 30 30 ------------------------------ ----------------------------------------------------------------------

7979 ------------------------------------------------------------------------------- ---------------------

Ghana 41 41 ----------------------------------------- -----------------------------------------------------------

4141 ----------------------------------------- -----------------------------------------------------------

Guinea 25 25 ------------------------- ---------------------------------------------------------------------------

3333 --------------------------------- -------------------------------------------------------------------

Kenya 49 49 ------------------------------------------------- ---------------------------------------------------

5252 ---------------------------------------------------- ------------------------------------------------

Malawi 33 33 --------------------------------- -------------------------------------------------------------------

2828 ---------------------------- ------------------------------------------------------------------------

Mali 27 27 --------------------------- -------------------------------------------------------------------------

2727 --------------------------- -------------------------------------------------------------------------

Mauritius 65 65 ----------------------------------------------------------------- -----------------------------------

7979 ------------------------------------------------------------------------------- ---------------------

Morocco 60 60 ------------------------------------------------------------ ----------------------------------------

7171 ----------------------------------------------------------------------- -----------------------------

Mozambique 51 51 --------------------------------------------------- -------------------------------------------------

2626 -------------------------- --------------------------------------------------------------------------

Namibia 43 43 ------------------------------------------- ---------------------------------------------------------

5555 ------------------------------------------------------- ---------------------------------------------

Nigeria 45 45 --------------------------------------------- -------------------------------------------------------

3636 ------------------------------------ ----------------------------------------------------------------

Senegal 54 54 ------------------------------------------------------ ----------------------------------------------

5151 --------------------------------------------------- -------------------------------------------------

Sierra Leone 26 26 -------------------------- --------------------------------------------------------------------------

2626 -------------------------- --------------------------------------------------------------------------

South Africa 55 55 ------------------------------------------------------- ---------------------------------------------

6666 ------------------------------------------------------------------ ----------------------------------

Tanzania 47 47 ----------------------------------------------- -----------------------------------------------------

1818 ----------------------------------------------------------------------------------------------------

Togo 24 24 ------------------------ ----------------------------------------------------------------------------

2828 ---------------------------- ------------------------------------------------------------------------

Tunisia 30 30 ------------------------------ ----------------------------------------------------------------------

6464 ---------------------------------------------------------------- ------------------------------------

Uganda 42 42 ------------------------------------------ ----------------------------------------------------------

4444 -------------------------------------------- --------------------------------------------------------

Zambia 27 27 --------------------------- -------------------------------------------------------------------------

2323 ----------------------- -----------------------------------------------------------------------------

Zimbabwe 25 25 ------------------------- ---------------------------------------------------------------------------

3232 -------------------------------- --------------------------------------------------------------------

Gallup, 2021

Africans’ low levels of satisfaction with roads and highways and internet access — perhaps the two most
important aspects of African infrastructure — suggest a predisposition toward China and the U.S., which
unlike Russia can actually help develop them. For now, Moscow is largely relegated to offering weapons and
manpower through organizations like the Wagner Group. But for illiberal regimes fighting extremists, other
countries or their own citizens, that may be enough.

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 O n G eoeconomics
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O N G EO EC O N O M I C S

Economics and War

FOR BETTER OR WORSE , economics and war The reasons for this have less to do with policy
are the pillars on which our political history rests. than with power. It’s a paradox that the more
Economics provides for the essentials of life; war powerful a nation is, the greater its global
withholds them. Both are enormously complex interests are. The greater its global interests, the
undertakings, with a dizzying number of functional more likely it will engage in war as its interests
layers and mechanisms. They are fundamentally increasingly conflict with those of its enemies.
different in intent yet profoundly symbiotic.
Economics causes wars, and wars drive economies. War, in other words, isn’t a black swan. It’s a common
Wars can be fought only by way of economic event for major powers such as the U.S. and
production. Economies can exist only if they are not therefore for the U.S. economy. Given the expense
captured or destroyed by war. and regularity of war, the American economy cannot
be understood without building the high likelihood of
The United States has been engaged in large‑scale
war into that understanding.
war — that is, war involving multiple divisions —
roughly 21% of the time since 1945: in Korea
(1950‑1953), in Vietnam (1965-1973), during Desert
Storm (1991) and in Iraq (2003-2008). This is a
staggering number, particularly because it excludes
lesser engagements such as Grenada and Lebanon.

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American war-time economies have a relatively Both were significant, but GDP’s movement
stable pattern. GDP rises while inflation holds stable. was more dramatic, and its sustained rise finally
As the end of war approaches, GDP falls. Inflation, controlled inflation. This pattern held during the
meanwhile, will rise, even if it stabilizes to different Vietnam War too. GDP rose, and inflation followed.
degrees from year to year. The major variable is The key difference was that GDP growth could not
time. The longer the war lasts, the more extreme the keep up with inflation.
shifts. And the more extreme the shifts, the greater
the impact on other variables. Take World War II. GDP
rose dramatically during the conflict, only for inflation
to cut in after it ended.

U.S. Annual Inflation Rate, 1910-2022 (%)

Note: An estimate for 2022 is based on the change in CPI from Q1 2021 to Q1 2022
Source: U.S. Federal Reserve, Minneapolis

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For the United States, war may create relatively have its cities or industrial plants come under major
short-term economic instability, built around attack. The Atlantic and Pacific oceans buffer the
crises of confidence that generally tend to resolve United States, while Canada and Mexico present no
themselves. The reason they do is rooted in threat. The costs of war, then, are relatively little, and
geography. In no war since the 19th century has the U.S. industry will maintain its value while consumption
U.S. homeland been in danger of occupation, nor of goods continues, at times at higher prices.

U.S. Real GDP, 1945-2021

Annual growth rate (%) Trillion USD, chained 2012 NBER dated recessions Large-scale war events

Source: U.S. Bureau of Economic Analysis, National Bureau of Economic Research

This is not the case for most other nations. China Also important is the economic nature of warfare
was devastated by Japan in World War II and took outside of military action. In the current war in
more than a generation to rebuild its economy. Ukraine, the U.S. has withheld direct intervention but
Russia essentially paid the same price in World War II has nonetheless waged a multifront economic war
as Germany and Japan did. against Russia. One tactic was to weaponize the
dollar, specifically by denying Moscow access to
Even the victorious pay a price: Britain in the dollar as a trade currency, thus making it difficult
World War II and the North Vietnamese during for Russia to trade even with countries not involved
the Vietnam War both incurred huge costs in the conflict. Blocking an enemy’s trade is routine
despite winning. The American model involves in war, of course, but Washington demonstrated
a secure homeland, while most other nations that it had the strength to demand other countries
face the possibility, even the likelihood, of participate in the dollar war and that the war was
war at home. The two have very different not so much a physical war but a conceptual one in
economic outcomes. which the abstract force of currencies was used to
endanger the Russian economy.

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The Russians have a more conventional option There is another vital dimension that allows
to use against the NATO alliance opposing them war, or war preparations, to power an economy.
— cutting off the supply of natural gas to Europe Consider the effect the development of long-range
— and they have used this option early and often. bombers in World War II had on the development
For Russia, the economic cost of losing European of civilian aircraft and the subsequent economic
customers was worth the risk if spiraling prices on consequences. Consider the Roman road system
the Continent compelled members of the alliance to developed for military purposes but serving to unite
break faith with the rest of the West. Italy and, in time, overawe Europe. The development
of military projects powers the civilian world and even
It’s an old but effective move; the U.S. severed oil civilization itself.
supplies to Japan before World War II, and Arab
oil producers imposed an embargo during their This is just as true in our time. Consider the
war with Israel. But it’s not without its dangers. components of the iPhone. The microchip was
Japan responded by striking Pearl Harbor. The used in minuteman missiles. The GPS system was
West responded to the oil embargo by slowly but designed for the U.S. Navy to use in guiding cruise
surely reducing dependence on Arab oil. Economic missiles and navigating nuclear submarines. The
attacks, then, are vulnerable to military and economic digital camera was first developed for use by the
countermeasures and thus require contingencies. National Reconnaissance Office in the 1960s. There
The sanctions imposed on Iran over the past few is a huge expenditure in most major countries on
years, for example, have indeed hurt its economy, their militaries. There is a counterflow of value in the
but they haven’t forced Tehran into submission. If spinoffs from the development of weapons of war.
anything, they have led to more Iranian proxy attacks
A nation survives by being able to protect its citizens
throughout the Middle East. In short, economic
and to deliver the necessities and pleasures of life
attacks are never guaranteed to work and are never
to them. Militaries and economies are essential in
without consequence.
that regard, their relationship immeasurably complex.
Kinetic warfare is therefore conducted with And though that relationship is different for every
economic measures and physical contact. Here, country, for the U.S. it is central: The economy helps
too, geography gives the United States a huge create national power and the military helps create
advantage. The North American continent can the economy.
sustain American economic needs — reliably if
not quite painlessly. It’s difficult for an enemy force
to interdict supplies from outside the continent
because the U.S. dominates the world’s oceans.
The strength of the American economy powers
the American dollar, which can open another
front. Most nations lack this critical advantage of
economic geography.

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T H E WO R L D AT L A RG E

Big Trouble in Little Chinese Banks

CHINA HAS A LONG LIST of economic and China’s rural banking market consists of four
financial problems. Its economy has yet to types of financial institutions: a large commercial
fully recover from the COVID-19 pandemic and its bank (Agricultural Bank of China), a policy bank
attendant supply chain disruptions. It has a (Agricultural Development Bank of China), the Postal
staggering amount of debt, with a growing number of Savings Bank of China, and a number of small- and
important companies in default. And it has, as always, medium-sized rural financial institutions. The latter
profound wealth disparity between the rural interior are directly responsible for credit, lending, and
and the wealthy coasts. Small banks in China’s rural financing local businesses and farmers, so they are
provinces, which are failing at an alarming rate, highly exposed to small businesses whose loans are
appear to be the latest potential flashpoint in a collateralized with land or property that is now rapidly
looming crisis. The fact that provincial leaders can’t depreciating. It used to be that national institutions
solve the banking problems on their own calls into such as the Agricultural Bank of China would
question Beijing’s strategy of empowering local underwrite the small ones, but now they are either
governments to tend to their own affairs — which unwilling or unable to as they contend with their own
means the banking problem will soon be a political spike in overdue property loans.
problem, if it isn’t already.
The fragility of China’s banking system is well
documented, but until recently it has been effectively
Managed Fragility managed. But new pressures on the Chinese
economy have created competing priorities for the
Commercial banks in China’s rural areas play a critical
central government. Beijing’s economic strategy
role in the government’s strategy to support interior,
depended on export-driven growth. COVID-19
poorer communities. Some 1,600 such institutions
lockdowns and trade distortions have killed this
are scattered across China’s interior. Though they
strategy, while the war in Ukraine buried it. The
account for just 12% of the banking system’s total
government has thus been forced to pivot from
assets, they are the ones responsible for supporting
aggressive exporting to industrial infrastructure
the small businesses and farmers that constitute
investment to spur economic growth. Problems in
the lifeblood of rural communities. Consequently,
small rural banks simply took a backseat to these
domestic food production and rural stability depend
bigger economic priorities.
on the healthy operations of small rural banks.

Beijing thus has a vested political interest in keeping

these banks afloat and their depositors satisfied.
When they fail, disgruntled residents have little
recourse but to protest. Beijing, of course, has little
tolerance for public dissent generally but especially
in rural interior areas, which have been the breeding
grounds for larger movements of national unrest and
political discontent when wealth disparities grow too
wide to stomach. After years of export-driven growth,
this is exactly the situation in which China finds itself.

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The most recent high-profile victim of this policy is their accounts had been frozen and that they would
in Henan province. In April, four rural banks there — not be able to withdraw their money. The banks
Shangcai Huimin County Bank, Yuzhou Xinminsheng repeatedly promised to unfreeze the accounts, but
Village Bank, New Oriental Country Bank of Kaifeng after a few months without satisfaction depositors
and Zhecheng Huanghuai Community Bank — and staged a protest at a bank in Zhengzhou, the
one in the neighboring province of Anhui — Guzhen provincial capital, to demand that their savings
Xinhuaihe Village Bank — notified depositors that be returned.

Trouble in Henan Province

In April, four rural banks in Henan province and one in Anhui froze customer accounts, leading to protests in Henan’s
provincial capital, Zhengzhou.

Source: GPF research

The Henan incident has called into question the Despite its best efforts, Beijing is unable to
central government’s traditionally hands-off offload the work of fixing the problem to provincial
approach for dealing with small rural banks. Years of governments. Small rural banks used to have a
soaring debt, unproductive investment and rising lifeline in local government funding vehicles and in
property prices severely distorted the Chinese selling deposits through third-party online platforms.
financial system. From this emerged risky, self- But in recent years, most local government funding
reinforcing borrowing structures such as shadow vehicles have accumulated a substantial amount
banking, a pattern that is especially pronounced of debt, and many are on the verge of defaulting.
in small rural banks. Rather than recognize these Changing bank management is a half-measure since
systemic vulnerabilities, the central government there’s no guarantee new management would be
often downplays their existence and instead any less corrupt. The inability of local governments
attributes any observed problems in rural banks to to address local banking problems, combined with
isolated incidents. Investigations into the Henan Beijing’s political sensitivity to unrest, has forced the
incident, for example, revealed that a private firm central government to action, even if it would prefer
called the Henan Xincaifu Group had stakes in to sit this one out.
all of the banks listed and had embezzled funds
through the use of fabricated loans and internal and
external collusion.

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Beijing’s Options

After the Henan protests, the Chinese central bank One such reform was to modify rural credit unions
held an emergency meeting with other major banks — cooperatives sanctioned by the central bank
and financial regulators. From the meeting came a to provide credit in rural areas — to tighten the
measure for local officials to create task forces to qualification requirements for executive management
mitigate the systemic risks posed by defaulters. To teams of rural credit unions, to regulate the corporate
be sure, this is mostly symbolic; rampant corruption governance structures of RCUs and to strictly
and insufficient enforcement mechanisms will scrutinize shareholder behavior. The reforms worked
completely defang it. well enough, but the government stopped short of
executing a second round meant to fix problems
Interestingly, the central government did such as insufficient assets, inadequate technology,
not implement banking reforms that it has poor corporate governance, weak risk management
introduced in other rural areas like Zhejiang and and the fragile credit quality of individual institutions.
Guangdong provinces.

China’s Wealth Disparity

Per capita disposable income by administrative division, 2019 (Annual, national average = 100)

Note: Approximate USD figures based on average 2019 USD-CNY exchange rate of 6.91
Source: China Statistical Yearbook 2020

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China’s broader economic problems and the By improving regulatory and governance
systemic problems facing its financial sector mechanisms in small rural banks, the latter will be
constrain Beijing’s ability to directly address the able to improve their business strength, capital
banking crisis. Larger banks facing mortgage strength and risk management capacity. But
boycotts and mounting debt problems in the this requires uprooting influential business and
real‑estate sector threaten to collapse a major political leaders across affected provinces and
sector of the economy. Huge amounts of shaking the pillars of rural economies. It’s a recipe
government funding are still being diverted to mass for destabilization.
COVID-19 testing and related lockdown measures.
Unsurprisingly, Beijing has decided to focus on
This is, of course, in addition to government funding
containing the political fallout from bank failures
used to prop up local industrial production, secure
rather than to address the financial problems
expensive energy imports and support agriculture
head on. The government first showed signs of
projects to make sure the country can feed its
this strategy back in 2020. At the time, local banks
people. Compounding all of this is the contentious
successfully regulated their systemic issues and
trade and investment with the U.S., both a key
increased their money by selling deposit products
consumer of Chinese goods and an important
through third-party online platforms. By partnering
source of investment. Beijing is simply unable to
with these platforms, smaller banks were able to
offer financial measures on a large enough scale to
offer better rates and rewards for customers as well
effectively aid rural banks since doing so would divert
as easier channel access. The practice has since
funds from other projects and provoke backlash from
been officially banned by national regulators who
stronger business and political entities.
feared that expanding the mostly unregulated and
In theory, the government could enact financial uncontrolled fintech sector could increase risks in
reforms, but this too is easier said than done. The the wider financial and social system.
reforms needed to address the structural problems
facing small rural banks require political capital that
is currently in short supply. The problems afflicting
small rural banks have a common source: rising debt
and property prices, illegal activities, corruption, and
the growing distrust of depositors and investors.

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From the outside looking in, the decision may working against them. Xi can’t afford to give them any
seem unreasonable. But policymakers in Beijing more political ammunition.
are hypersensitive to even the smallest amount of
social unrest, especially in interior regions. To them, Nor can China risk the foreign investment that
depriving local banks of the opportunity to replenish political unrest could endanger. Unprecedented FDI
their capital was an acceptable risk. And history outflow caused by the country’s recent economic
shows that the discontent that starts in the interior downturn has plagued Beijing for months. Beijing will
regions can spread like fire. Already there are forces have a difficult time solving its banking crisis — not
within the Chinese Communist Party that oppose to mention stabilizing its economy and boosting
President Xi Jinping’s recovery plans and are actively GDP growth — without foreign and especially
dollar‑denominated investment.

China’s Foreign Direct Investment

Net flows, quarterly, billion USD

Source: China’s State Administration of Foreign Exchange

There’s a lot at stake in China’s small, rural banks

— much more than their size would suggest.
Expect Beijing to do everything it can to keep
the problem in check with modest reforms and,
should that not suffice, police suppression and
censorship. Just don’t expect the government to
tackle it head on.

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If the Lights Go Out in Europe

SINCE THE SHUTTERING OF THE NORD That means Europe would need to come up with as
STREAM PIPELINE, the European Commission, much as a third of its energy from otherwise marginal
in conjunction with European energy ministers, has suppliers to offset the losses — suppliers who are
since submitted a plan to see Europe through the now setting the price of energy on the Continent.
rest of the year, but even their best efforts won’t (And the market has restructured itself around that
change the fact that energy markets will be mercurial reality. Why wouldn’t it? When gas prices in a market
for months to come. What is now an energy crisis as big as Europe are $70/MMBtu, compared with
could easily become a political crisis as leaders are $5-8/MMBtu in North America and $2-3/MMBtu
forced to make the best of a more cash-strapped in the Middle East, virtually every producer and
and energy‑poor environment than they’re used to. marketer is trying to get in on the action.)

In Europe, dependence on Russian energy varies

from country to country, but in broad terms, it would
lose anywhere from 10% to 30% of its energy needs
if Russia cut off supplies.

Europe’s Dependence on Russian Gas

Russian gas as a percentage of total energy consumption, 2020

Source: IMF

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Germany — the economic engine of the Continent, (Though LNG exports from the latter have plateaued
the de facto leader of the EU and a huge buyer of lately, many are optimistic that they will rebound.
Russian gas — began planning for this contingency The Texas Freeport LNG terminal will be back online
months ago, meeting its natural gas inventory target as early as November, and Qatar appears to have
of 85% of storage capacity, increasing coal-based agreed to supply Europe with LNG from Texas’
energy generation and agreeing to keep some Golden Pass plant.)
nuclear power plants up as a failsafe for consumers.
This is good news for a global LNG market that
Berlin has also supported the rapid expansion and
has proved quite flexible when sellers share pricing
improvement of the national and European liquefied
incentives with contract buyers. It means there will
natural gas (LNG) infrastructure.
be enough supply for Europe in the coming months.
Other European states have taken similar measures. It also means it will be more expensive: The newer,
Most reduced their overall energy consumption by smaller suppliers entering the European market
10% to 15%, giving them time to fill their reserves are located farther away than Russia, and the other
and, just as important, to negotiate with new alternative — LNG — is appreciably more expensive
suppliers. France, Poland, Germany and others have than natural gas.
thus been courting the likes of Algeria, Nigeria and
Azerbaijan, even as they coordinate policy with the
United States.

EU Natural Gas Consumption

Monthly, year-over-year % change

Source: Eurostat

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If the lights go out in Europe this winter, it’ll be Naturally, the countries most vulnerable to the
because Europeans will have a hard time affording crisis are the ones with a higher percentage of their
it, not a hard time finding it. European governments respective populations having trouble making ends
can’t afford to let their people die, but neither can meet. Last year, at least 25% of the populations of at
they foot the bill for endless subsidy regimes, so least 12 countries said they found it difficult or very
expect them to set more energy reduction targets difficult to get by on their current incomes. Though
for consumers and to enact measures prohibiting data isn’t available for every country this year, the
major companies from exploiting them. It’s unclear percentage of the population finding it difficult to get
what the targets will be exactly, but many observers by has risen to 16% in the United Kingdom and 11%
believe consumption needs to drop by about 20% in Denmark. If those figures have risen in traditionally
to 30% in the next few months. Any more than that more affluent countries, it is reasonable to expect
will almost certainly require a reduction in industrial them to have risen in others.
output, which no one is eager to do.

Europeans’ Feelings About Their Current Household Incomes

Which one of these phrases comes closest to your own feelings about your household income these days?
% Finding it difficult/very difficult to get by

Gallup, 2021

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Germany is in arguably the most difficult position At best, this is a recipe for political protest. As
come winter. Like all European countries, it will Germany opts for cutting industrial demand, keeping
struggle to keep consumption down in the coldest direct negotiations with Russia off the table will get
months of the year and so will have to walk a more difficult as the winter gets colder.
tightrope between reducing household demand
There is, however, a potential lifeline. The United
and industrial demand. Leaving its people to freeze
States is the most important destination for German
is such a self-evidently bad idea that it will be all
goods and has a vested interest in the outcome of
but forced to curb industrial output. Businesses
the Ukraine war. To some degree or another, it will be
already expect as much. The latest surveys
for Washington to decide whether or not it wants to
published by Ifo — a Munich institute measuring
save the heart of German manufacturing and thus
the German business climate index — indicate the
the European economy.
German business community is expecting a drop
in production and its expectations are “extremely
pessimistic” for the months to come.

The problem, of course, is that industry, especially

manufacturing, is the heart of the German economy
and, by extension, the European economy. An
industrial recession in Germany will very likely lead
to a recession in every country in the German
production chain — the Netherlands, Belgium,
Austria, Poland, Slovakia, Hungary, the Czech
Republic, Romania, Bulgaria and most of the Western
Balkans — even as unemployment rises.

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Iran’s Nuclear Negotiations:

Tactics and True Position
THE WAR IN UKRAINE has resurrected Even so, U.S. President Joe Biden expressed a desire
Cold War corpses long thought dead. NATO to resume nuclear talks after his predecessor, Donald
matters once more, Germany is rearming and the Trump, essentially nullified the original deal shortly
prospect of nuclear war, however remote, is a after taking office. And this time around, Iran has
frequent subject of conversation again. every intention of dragging out the negotiations. The
government in Tehran knows how eager the West in
With so much new-old stuff to worry about, you’d general and the U.S. in particular is to score a political
be forgiven for forgetting about Iran’s pursuit of its
victory, and it understands the war in Ukraine has
own nuclear program and the Western-led efforts to given it leverage as it presents itself as an alternative
stop it. In fact, the world has tried to negotiate with energy provider to Russia — that is, if sanctions
the Islamic Republic for more than four decades, but are lifted.
despite the short-lived “success” of the Iran nuclear
deal, it has little to show for it. Tehran’s intransigent
negotiating posture gives the impression that the
covenants it signs and the international organizations
it joins are merely platforms used to preach its
ideology or legitimize its government.

Nuclear Facilities in Iran

Research Enrichment/energy Military complex Uranium mine

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For Iran, a nuclear program is more than just a Iran’s approach to those talks is to hard-bargain on
new weapon; it is a means to reshape the power a host of peripheral issues in the hopes of wearing
structure of the Middle East. Building a regional down U.S. negotiators before bringing the real issue
system with Iran on top is an old dream that to the table. But Tehran also knows the limits of
refuses to die, even if the tools to reach and the possible. It understands that President Biden
achieve it differ. Tehran failed to do so after both cannot issue a formal treaty because it would never
world wars, but after the revolution in 1979, it be ratified by the Senate. It has abandoned its
began a campaign of expansionism throughout demands to have the Islamic Revolutionary Guard
the region. Corps removed from the U.S. terrorist list (thanks to
the efforts of Qatar, which persuaded Washington
But Iran knew its expansion had to be measured. to allow the group’s financial companies to transact
The Iran-Iraq War taught it as much. The conflict business with foreign banks). And it has given up on
killed as many as a million Iranians and cost more seeking guarantees that a future U.S. president will
than $700 billion while revealing Iran’s military not withdraw unilaterally from the deal.
weakness and inefficiency in conventional warfare, Still, Iran refuses to make meaningful concessions
the obsolescence of its weapons and the absence about its missile program as a sovereign right and a
of significant international allies. The war convinced deterrent force, and it rejects internationalizing the
Tehran to craft a new security doctrine based on the issue of regional dialogue, insisting that the region’s
premise that it would never fight a direct war again, countries can resolve the matter themselves.
and if it had to, it would not do so on its own soil. This is both tactic and true position: Keeping the
And so it decided to infiltrate the fragmented discussions going, even with lengthy suspensions,
societies of the neighboring Arab countries to ensures that the U.S. will not authorize a military
woo the marginalized Shiites, most notably and solution while diplomatic solutions exist. And the
most successfully through Hezbollah in Lebanon. longer the talks drag on, the longer Tehran has to
It adopted the use of proxy wars to achieve its gain concessions on regional issues that it considers
regional objectives at the lowest possible costs. more important than its nuclear program qua nuclear
It commandeered the Palestinian issue when the program, and it will not compromise on any of them.
Arabs abandoned it, giving arms to Hamas and the Iran’s fixation on regional dominance makes reaching
Palestinian Islamic Jihad to win over Arabs who were a nuclear deal in Vienna more unlikely than likely.
still sympathetic to the plight of Palestinian refugees.
The strategy has mostly paid off. It has reduced
the risk of direct involvement in armed conflict,
deterred Iran’s enemies from attacking it, and offset
its conventional weaknesses and vulnerabilities.
Unsurprisingly, the strategy has also become a major
sticking point in the ongoing nuclear talks.

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M E T H O DO LOGY

Global Stability Index

AS ITS NAME IMPLIES , the Global Stability Index Geopolitical Futures’ model tracks the functions and
(GSTAB) is a measure of global stability. The higher its features that compose the stability profile of nation-
value, the more unstable the world is. states and regions. These include government
characteristics, economic performance, the potential
The GSTAB is holistic, measuring the political, to encounter strategic disruptions, risk of domestic
economic and military profiles of much of the unrest and military capabilities. All of these features
world, but it is fundamentally tied to the fate of the are tracked, quantitatively analyzed and weighted.
most important geopolitical actors — the United Each month, a number is produced, and when
States, the European Union, Russia, China, the compared to the previous months’ data, that number
United Kingdom, India, Japan, Brazil and Türkiye gives a sense of how the world is faring.
— and its calculation is derived from Geopolitical
Futures’ unique methodology in conjunction with The war in Ukraine has been the defining feature of
a modified version of the quantified judgement the GSTAB since April.
method (QJM). (The QJM is essential to studying
military conflict, and military conflict is essential to GSTAB
date

determining stability.) April 2022 781.88

May 2022 657.68

June 2022 509.10

July 2022 615.92

August 2022 658.44

September 2022 est. 739.84

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