Fulcrum Macro Advisors Washington Week Ahead: Will We See A Government Shutdown? And Are We Reaching New Inflection Points in Russia and Iran?

Monday and Tuesday morning will be quiet here in Washington as Congress is out of session for Rosh Hashanah. That leaves them little time to get a stop-gap federal funding bill done before the government runs out of money on Friday.  

Typically, getting a short-term funding bill through Congress is relatively easy – although the markets have experienced their fair share of government shutdowns (10 to be precise since 1980. The longest was in 2018-2019 and lasted 35 days).    

To avoid another shutdown, the Senate returns to work Tuesday afternoon and hopes to pass such a bill, but it is particularly complicated this time around. Why? What to do with Senator Joe Manchin’s (D-WV) oil/gas permitting bill. Recall that House Speaker Nancy Pelosi (D-CA) and Senate Majority Leader Chuck Schumer (D-NY) promised Manchin they would support his legislation that would significantly expand the permitting of oil and gas drilling in return for his support of the Inflation Reduction Act. 

 The complication? More than 70 House Progressive Democrats have gone on record opposing the bill, and most Congressional Republicans also are going to fight it (not that they oppose expanding permitting but because they do not want to give Manchin or the White House a victory this close to the November mid-terms).

You can find a summary HERE for details of what is in the Manchin bill.  The big question: Will Pelosi and Schumer successfully attach Manchin’s bill to the short-term funding bill? Or is there too much risk  it will cause a government shutdown this close to the election?

The temporary funding bill – which will keep the money flowing until December 16th, when Congress is back from the mid-terms and can move to either vote on a final budget or temporarily extend the funding again – will have other add-ons, including $12 billion more in military and economic aid to Ukraine, funding for the water crisis in Jackson, Mississippi, and financing for resettling Afghan refugees as well as heating assistance for low-income families.

 Beyond this bill, Congress is working on getting out of town as fast as possible to campaign for the final four weeks before the November mid-terms. 

Looking abroad, we will be watching closely what is happening in Russia and Ukraine this week. Russia has rushed through a “vote” to annex the Donetsk, Luhansk, Kherson, and Zaporizhzhya regions, making them formally a part of Russia. Hence, any attacks by Ukrainian forces will be categorized by Moscow as an attack on Russia itself. The elections are clearly a sham (there are credible reports that 13 and 14-year-old Ukrainians have been forced to vote at gunpoint for the annexation) and show how desperate the situation has become for Russian President Putin.

Concurrent with the annexation vote, Putin is moving forward to mobilize at least 300,000 new troops. Reports suggest that the State Duma (Parliament) has given Putin the authority to draft as many as 1 million men. Resistance is significant – reports of men fleeing abroad are extraordinary. On Friday, we talked with a friend in Almaty, Kazakhstan, who told us of large groups of young Russian men who had fled the mobilization last week, milling around in public parks, cafes, and hotels, talking about how to find work and not be sent back to Russia.  It is now evident knowledge of the failures of the Russian Army and casualty rates are much better known by the general Russian public than previously thought (we would note the New York Times recently published estimates of between 80,000 and 110,000 Russian troops killed or wounded in the past seven months).  

Add to this news reports in official Russian press of both borders being closed and possible imposition of martial law, and we are hitting a massive inflection point in the war.  

Elsewhere, the situation in Iran also bears close watch. Protests across the country have continued to grow as average Iranian citizens show their anger at police brutality after the morality police arrested a 22-year-old woman for allegedly violating the hijab dress code.  She died in captivity from torture.   This event, along with intense overall frustration with social restrictions and ever-growing economic malaise.  Of note from a US perspective is the US Treasury’s expansion of sanctions on Iran’s morality police as the negotiations with Iran over restoring the Joint Comprehensive Plan of Action (JCPOA) – otherwise known as the nuclear deal – continue and the Biden Administration issuing a license to relax sanctions in internet services in Iran to help “support the free flow of information for Iranians.  We do not see, at this point in time, much likelihood of the protests resulting in a change of government.  But it does show the growing unhappiness among the general Iranian public with little change for improvement. 

Finally, we would note the potential market impact of Italy’s elections yesterday. The right-wing coalition led by Giorgia Meloni won a sweeping victory.  It was a massive political comeback story for Meloni and her party, Brother of Italy, which only won 4 percent of the vote in 2018.  

The question for markets in the short-term is can Meloni get the 2023 budget approved by the EU by the end of the year (as required). And will her coalition government be able to meet the 54 targets/conditions worked out with the European Commission to unlock the 3rd tranche payment (€19 billion)  from the Next Generation EU (NGEU) program? Also, will they honor the terms and repayment schedule of the National Recovery and Resilience Plan (NRRP) or, as Meloni promised in the campaign, seek to renegotiate it? 

Italy drew down the full €191.5 billion allocated to them in the NRRP to help battle the economic impact of COVID.  But Meloni wants to renegotiate the repayment, saying the Ukraine War is presenting Italy with a new set of challenges that need to be addressed, too.   

Read Around the World in a Weekend April

April 29, 2022

RUSSIA

• Microsoft Blog “The hybrid war in Ukraine”

  Microsoft released a report detailing the relentless and destructive Russian cyberattacks they have observed in a hybrid war against Ukraine, and what we’ve done to help protect Ukrainian people and organizations. Starting just before the invasion, we have seen at least six separate Russia-aligned nation-state actors launch more than 237 operations against Ukraine – including destructive attacks that are ongoing and threaten civilian welfare. The destructive attacks have also been accompanied by broad espionage and intelligence activities. 

• Rand Corporation “Russia’s Tragic Failure to Reform Its Economy”

  Russia's invasion of Ukraine and resulting sanctions will likely devastate Russia's economy. If the country had taken a more productive economic course over the past two decades, it might be looking toward a different future—one in which economic reforms had more tightly integrated Russia with the economically advanced countries, enhanced Russian influence and power, and built global trust. Instead, Russia has cast the West as its enemy, and its influence, power, trust, and reputation are shattered.

• Foreign Affairs “What Does the West Want in Ukraine?”

  Council on Foreign Relations President Richard Haass asks the question of how success in Ukraine will be defined and argues it needs to be done now – before it is too late.

China

• Carnegie Endowment for International Peace “US-China Technological ‘Decoupling’: A Strategy and Policy Framework”

  Washington has awakened to find the United States deeply technologically enmeshed with its chief long-term rival. America built those technology ties over many years and for lots of good reasons. China’s tech sector continues to benefit American businesses, universities, and citizens in myriad ways—providing critical skilled labor and revenue to sustain U.S. R&D, for example. But that same Chinese tech sector also powers Beijing’s military build-up, unfair trade practices, and repressive social control. What should we do about this? 

• Rhodium Group “Chinese FDI in Europe: 2021 Update”

  Chinese outbound investment to the rest of the world stalled in 2021. While overall global FDI rebounded strongly, Chinese outbound FDI edged up by just 3 percent to USD 114 billion (EUR 96 billion). Meanwhile, China’s global outbound M&A activity slipped in 2021 to a 14-year low, with completed M&A transactions totaling just EUR 20 billion, down 22 percent from an already weak 2020.

India

• Carnegie Endowment for International Peace “What is in Our Interest”: India and the Ukraine War”

  As Russia’s war in Ukraine unfolds, India’s national interests have so far dictated a position of formal neutrality. Here are the factors New Delhi faces in balancing its foreign policy priorities.

• Brookings Institution Podcast “Why globalization is shifting in favor of India, not China”

  Arvind Subramanian, senior fellow at Brown University’s Watson Institute and Center for Contemporary South Asia, and former chief economic advisor to the Government of India, talks with host David Dollar about a range of trade and foreign relations issues India faces. In particular, he explains why globalization is shifting in India’s favor rather than China’s, how India views trade relations with China, Russia, and the West, and prospects for continued good relations with the United States, especially as India takes a more neutral stance on Russia’s war against Ukraine.

Pakistan

• The Diplomat Podcast  “What’s Driving Pakistan’s Political Crisis?”

  Pakistan’s political arena is in turmoil. Prime Minister Imran Khan, facing a no-confidence vote, made a last-ditch attempt to avoid his fate by dissolving Parliament altogether, alleging a foreign plot headed by the U.S. to oust him. The Supreme Court intervened, allowing the vote to proceed, but Khan and his PTI are refusing to recognize the new government. Most PTI lawmakers resigned, leaving Pakistan’s National Assembly with 100 open seats. Meanwhile, the Pakistani military, the “hidden hand” behind national politics, has attempted to remain neutral – but its lack of support helped crown Khan’s replacement.

Lebanon

• Carnegie Middle East Center “Resurrecting Arafat in Beirut?”

  Hamas, with Hezbollah’s help, is building up a military presence in Lebanon, whose ultimate consequences could be devastating.

Iran

•  Carnegie Sada “The Geopolitics of the Iran-Qatar Electricity Grid Connection”

  Last February, during Iranian President Ibrahim Raisi’s visit to Qatar, the two countries agreed to connect electricity grids. Currently, Iran’s electricity network is connected to Iraq, Azerbaijan, Armenia, Turkmenistan, Afghanistan, and Pakistan. For Iran, this is a step towards strengthening energy diplomacy, but without a change in Iran’s foreign policy — that is, without the removal of sanctions and attracting foreign investment — it cannot use its full potential in the energy sector and, ultimately, will not be able to increase its influence on the international stage.  

Africa

• Council on Foreign. Relations “How Russia’s Invasion of Ukraine Will Impact Africa’s Energy Transition”

  The Russian invasion of Ukraine will shift the geopolitics of decarbonization, with particularly stark implications for energy politics in Africa.

• Foreign Affairs “Rebels Without a Cause: The New Face of African Warfare”

  In the past, most armed groups on the continent were focused on seeking to topple governments or secede and found new countries.  But the new face of many African conflicts today is one where those taking up arms are more likely to do so as a means of bargaining over resources.

Latin America/Caribbean

• IMF Blog “Latin America Faces Unusually High Risks”

  The War in Ukraine, higher inflation, tighter financial conditions, economic decelerations of key trading partners, and social discontent may dim growth prospects.

• Center for Strategic and International Studies “The Caribbean in the Crossfire”

  Between Covid-19, Narcotics, China, and Russia’s Invasion of Ukraine, the Caribbean is facing unprecedented challenges – all of which should be of maximum concern to the United States.

• Americas Quarterly “Latin America Doesn’t Want a New Cold War”

  Regional governments should take steps to ensure they are “not once again a battleground for larger powers,” an Argentine scholar writes.