We at RDM Advisory see the following major risks over the next 12 to 18 months, that could result in political and financial instability, which in turn could have implications for the global economy.
Despite US-China trade war risk is now lower as both powers have resumed talks following the G20 in June 2019, the potential for conflict with Iran is escalating. As the Trump administration pulled the US away from the Iran nuclear deal in 2018 and snapped back sanctions, the Iranian government is reacting by producing more low-enriched uranium than set out in the UN-monitored agreement. Although the E3 (Britain, France, Germany) sanctions lifeline -the INSTEX banking mechanism- is in action, Iran is not happy with its current status which allows transfers limited to humanitarian goods and is threatening to breach the agreement further.
This picture puts the whole agreement in danger, paving way for greater destabilization in the Middle East, especially with repercussions in Syria, Iraq and the Gulf, through Iran-backed militias. Although there is low appetite in Washington for direct military action against Iran, naval mobilization in the Gulf and the prospect of additional troops in the region add to political and financial instability. The situation in Syria’s north-west which is escalating since late April is another issue to look out for, with humanitarian implications for Europe and beyond, as it could turn into the largest refugee flow since 2015, if unhindered.
The ‘unprecedented’ pressure on Iran is affecting neighbouring countries such as Turkey and Iraq, limiting their oil, gas and electricity supplies, and pushing them closer to Russia. Turkey with its now imminent S-400 missile system deliveries in July despite US and NATO objections and nuclear power plant deals with Russia, Iraq with its replacement of US tanks with Russian ones for one of its brigades and increased Lukoil investments, are increasing the chances of US military and financial sanctions, which would create another impediment for trade, as the global economy growth is forecast to be slowing down in 2019 and 2020.
Another major political risk is a no-deal Brexit, in the context of likelihood of a populist British Prime Minister, the new leadership at the EU and the rise of populist governments in Europe, lately Italy. The incoming EU Commission President Ursula von der Leyen has lately signalled that she will not re-negotiate Brexit, widely seen as blow to frontrunner candidate Boris Johnson. Bank of England already stated that Brexit-related slowdown is negatively affecting the sterling and prices of UK-focused equities. Significant market and exchange rate volatility is to be expected, should a no-deal Brexit occurs. One possible solution could be a second referendum, should the new Conservative Party leader and Prime Minister accept the Labour Party’s proposal. That would require another EU extension and a possible vote set before the new year.
Despite the newfound optimism on US-China trade talks, a deal is far from being concluded and another deterioration, like further action against Huawei, could cause market volatility. Likewise, Iran’s retaliation to US by breaching the nuclear deal, could pave way for the deal’s collapse and increase the likelihood of further destabilization in the region, including covert military action. The energy embargo on Iran and the US policy in the region, especially on Syria seem to be pushing Iran’s neighbours such as Turkey and Iraq to Russia. We will closely watch the prospect of US military and financial sanctions, including possible removal of Turkey from the F-35 program following Ankara’s imminent purchase of the Russian S-400s. We will also keep monitoring Britain’s Brexit saga with the new EU leadership, whether a soft Brexit or another referendum will be acceptable to UK’s new conservative leadership.
Erdem Aydın, RDM