MS Risk Blog

UK economic consequences from Red Sea disruption

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Key Judgments:

  1. It is likely that negative market sentiment will drive inflationary pressures in the next 12 months. (High confidence).
  2. It is likely that the Bank of England will not cut interest rates in the next 12 months. (Low confidence).
  3. It is highly likely that the UK GDP will not grow in the next 12 months. (Low confidence).

Interest rates

UK interest rates starting from August 2023 to March 2024 have been set to 5.25%, the highest since the 2008 financial crisis. The inflation rate, as a result of these high interest rates, has dropped from 10% in November of 2022, to 4% as of Jan 2024, which means the high interest rates served their purpose effectively. This drop in inflation has resulted in the prospect of easing interest rates by the Bank of England. Assuming continued disruption in the Red Sea, which appears to be almost certain, a shift of market sentiment will highly likely occur, as well real economic disruption, which are likely to reignite inflationary pressures. Additionally, the government will have to commit more resources to defense and rearmament. With these sustained inflationary pressures on the UK market, it is likely that the Bank of England will keep interest rates high to continue to battle these pressures. It is worth noting that interest rates are determined by many more factors than a singular disruptive event, and thus the Bank of England may still opt to decrease interest rates for other reasons in the next 12 months.

GDP

Of the UK’s £3.1 trillion GDP, £1.74 trillion of this was as a result of trade in 2023. UK exports to countries affected by the Red Sea shipping lane make up an estimated £128 billion, and imports from these countries amount to roughly £120 billion. Sustained disruption of up to £250 billion in trade is likely to affect the ability of the UK to expand its industries. The manufacturing sector has already been impacted, with a reading from the S&P Global composite PMI highlighting a three-month drop to 44.9 for manufacturing output. A reading above 50 indicates growth, and below 50 indicates shrinkage. Given that the UK’s industrial sector makes up 20% of its GDP and has already begun to feel the impacts of the disruption in the Red Sea, it is likely that continued disruption will affect the UK’s ability to grow its GDP.

Escalation

Furthermore, the Houthis announced on 14 March 2024 that they are set to expand their operations, now aiming to prevent Israeli-linked ships from passing through the Indian Ocean towards the Cape of Good Hope, the only remaining supply route aside from the Red Sea between Europe and Asia. Whilst the claim is that its targets will be Israeli ships, this was also the claim in the Red Sea, wherein all ships, regardless of ownership or destination, were targeted by missiles. We can infer then that UK owned or operated vessels will be at high risk even whilst attempting to circumvent the Red Sea, further exacerbating the issues of inflationary pressure and strain on GDP growth mentioned above.

Summary

Assuming that the Houthis continue to disrupt commercial shipping in the Red Sea and successfully expand to the Indian Ocean, the economic consequences on the UK would be felt rather quickly by the population. Effects on the manufacturing sector to name one, as well as up to £250 billion of trade with Middle Eastern and Asian countries, are likely to affect the UK’s ability to grow its GDP. Negative market sentiment due to the uncertainty of disruption and conflict is a driving factor for inflation, which will further impede the UK’s ability to grow its GDP due to the likelihood of the Bank of England maintaining high interest rates.

 

Poland’s Political Situation

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Key Judgement: Within the next three months, it is likely that political disruption of current administration would be continue. It is likely that current government would not strongarm farmer protest.

The current Polish Prime Minister, who first ascended to power in 2007, initially gained recognition for his moderate approach towards political rivals. However, his subsequent administration, following an eight-year hiatus dominated by the Law and Justice (PiS) party, has adopted a more confrontational stance against its predecessor. The PiS party, which secured a majority government through the 2015 parliamentary elections and was re-elected in 2019, draws its primary support from blue-collar workers. These individuals perceive leftist economic policies as neglectful of their needs. The party’s core base—older, religious, conservative, and patriotic citizens—predominantly resides in rural areas and small towns, especially in the southeast, a region historically marked by occupation and brutality at the hands of the USSR in the 20th century. Within this context, PiS has pursued nationalistic campaigns while assuming control over the judiciary, media, and cultural institutions, thereby exacerbating political polarization.

The 2023 parliamentary elections resulted in a coalition government formed by the Civic Coalition, Third Way, and The Left, under the leadership of Donald Tusk, which garnered 54% of the vote. This victory, however, sparked controversy due to PiS still winning a plurality of seats. In the parliamentary system, this scenario necessitates Tusk, the Civic Coalition leader, to forge alliances with the other two parties to secure a majority against PiS. Complicating matters further is the re-election of Polish President Andrzej Duda, a PiS member, in 2020 for a five-year term. Although the presidency is largely ceremonial in Poland’s parliamentary system, it possesses sufficient authority to challenge the current administration with PiS’s support.

Despite these challenges, Tusk is spearheading ambitious reforms to dismantle the legacy of the eight-year PiS rule. Notably, two former PiS ministers were arrested within the Presidential Palace, and the public television station TVP was shut down due to its role as a major propaganda tool for the former administration in December 2023. Tusk’s administration has also initiated efforts to reverse the abortion ban and launched an investigation into the use of Pegasus spyware, allegedly employed by the previous government to target political adversaries. On the international front, Tusk has focused on strengthening ties with the EU and the US, a move that has inspired hope among Poland’s liberal populace while stirring dissent among conservatives. Acts of political sabotage by President Duda, such as pardoning the two arrested former ministers, further complicate the situation for the current administration.

Another critical juncture for Tusk is the upcoming local elections on April 7, which will determine city and provincial leaderships. A victory for PiS, especially in the provincial assemblies, is crucial to maintaining its political influence. Conversely, success in the local elections could stabilize the current government’s position. The European Parliament elections in June also pose a significant challenge for Tusk and the EU, with Poland electing 53 seats, the fourth largest contingent. The outcome could potentially undermine Tusk’s government domestically, especially when PiS supported EU parliament members start anti-EU policy with the help from other European nation’s far right members.

The ongoing nationwide farmers’ protest, fueled by opposition to EU green regulations and cheap Ukrainian imports, has become a pivotal issue. With 77.2% of the Polish population supporting the farmers’ movement, Tusk is compelled to endorse it. The protests, which have led to blockades at the Ukraine-Poland border, place the government in a precarious position, as any aggressive response could bolster PiS’s support, particularly in its stronghold in the southeast. Additionally, framing the protest as undermining Ukraine could contradict Tusk’s anti-Russian foreign policy, offering PiS another opportunity to criticize the government.

In conclusion, the current farmers’ protest serves as a critical leverage point for both the government and the PiS party. It is probable that the protest leaders recognize their advantageous position in the coming months. PiS is likely to capitalize on this for the local and EU Parliament elections, while the government may find itself unable to enact drastic measures to quell the movement. Ironically, the protest inadvertently supports Russia’s campaign in Ukraine, thus challenging Tusk’s foreign policy stance. As such, the political landscape in Poland is expected to remain turbulent in the upcoming months.

Escalating U.S. airstrikes in Syria and Iraq: a new phase of conflict in the Middle East

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In response to a drone strike that killed three U.S. soldiers at the U.S. Tower 22 facility in Jordan, the United States began targeted airstrikes against Iran-backed militia positions in Syria and Iraq. President Biden emphasised a measured approach, while Syrian and Iraqi authorities expressed alarm over sovereignty violation.

The U.S. has launched targeted airstrikes on multiple sites in Syria and Iraq from February 2nd, primarily aimed at Iran-backed militia groups and the Islamic Revolutionary Guard Corps (IRGC) Quds Force, in response to a drone strike that killed three U.S. service members in Jordan and injured more than 30, on January 28th. The strikes, involving more than 85 targets, focused on command-and-control operations, intelligence centres, weapons storage facilities, and logistical supply chains associated with the militia groups and their IRGC sponsors. More specifically, areas that were targeted include Deir Ezzor, Al-Bukamal, Al-Mayadeen, and their surrounds on the Syrian-Iraqi border. President Joe Biden has stated that the U.S. is against conflict but would respond to any harm committed to Americans. U.S. officials have clarified that there is no plan to bomb Iran directly, aiming to avoid further escalation. However, the airstrikes have sparked concerns about regional instability and sovereignty violations, with Iraqi officials warning of potential consequences. The U.S. has indicated that these strikes are the beginning of a broader response, with additional actions planned to hold accountable those responsible for attacks on U.S. and coalition forces.

The centre purpose of the airstrikes was to retaliate against Iran-backed militia groups responsible for attacks on U.S. personnel, to degrade their capabilities, and to deter future attacks. Strategically, the airstrikes aimed to disrupt the militia groups’ operational capabilities, hinder their ability to launch attacks against U.S. and coalition forces, and send a strong message about the United States’ determination to defend its soldiers and interests in the region.

In terms of effectiveness, the airstrikes succeeded in hitting multiple targets associated with the militia groups and the IRGC Quds Force, causing significant damage and reportedly resulting in the deaths of at least 18 Iran-backed fighters. However, the long-term impact on the capabilities of these groups and their willingness to continue engaging in hostilities remains to be seen.

The consequences of the airstrikes on civilian casualties and infrastructure in Syria is not fully clear at this time. While the strikes were reportedly focused on military targets, there is always a risk of unintended civilian casualties or damage to infrastructure near the targeted areas. The UK-based Syrian Observatory for Human Rights has already reported that 23 people had been killed in Syria, bringing the total number killed in both countries to 39. On the other hand, Iraq’s Popular Mobilisation Forces, a state security force that includes Iran-backed organisations, reported 16 of its personnel were killed, including fighters and doctors. The authorities had stated that at least 16 individuals, including civilians, were killed and 23 were injured.

Russian Defector Targeted in Spain

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Topic: An analysis of the targeted killing of Russian defector Maxim Kuzminov in Spain and online Russian disinformation campaigns in Western and Southern Europe: What effects do these events have on the security of Western and Southern Europe?

Key Judgements:

  • Maxim Kuzminov is highly likely to have been killed by the GRU or the wider Russian Intelligence Services in Spain on February 13th 2024. 
  • Russia is seeking to target states in Western and Southern Europe that support Ukraine through conducting online disinformation campaigns. 
  • Russia has an active interest in destabilising Ukraine’s partners in Western and Southern Europe and is able to do so through a “wide range of opportunities”.

On August 9, 2023, Maxim Kuzminov, a captain of Russia’s 319th separate helicopter regiment officially became a Russian defector after he flew a Mil MI8 helicopter into Ukrainian territory and handed himself in as part of a special operation in coordination with Ukrainian Intelligence (GUR). The GUR operation, codenamed “Synitsa” had been in the works for six months. Kuzminov had originally contacted Ukrainian GUR agents in December 2022, expressing that he wanted to surrender to Ukraine in exchange for a large sum of money (€500,000) and to have a new life with his family in Ukraine. After defecting to Ukraine, Kuzminov was awarded the equivalent of €500,000 and spoke critically about Russia’s war in Ukraine at a high level press conference in Kyiv, encouraging other Russian’s fighting in Ukraine to do the same, by stating that “You won’t regret it.” Six months later, on February 13, 2024, Kuzminov was killed in Villajoyosa, a coastal town on the Costa Blanca in Spain. Kuzminov moved to Spain from Ukraine in December 2023. Prior to moving to Spain, he was issued fake documents by Ukrainian officials which stated that the 28 year-old Russian citizen was a “33-year-old citizen of Ukraine”. These documents were found at the scene of the targeted killing and his identity has been officially confirmed by police and Ukrainian Military Intelligence. Kuzminov’s body was “riddled with bullets”. He was shot “at least six times” and had been hit by a car (white SUV, Hyundai) in the targeted killing which occurred outside of a community garage in an apartment complex. The perpetrators fled the scene in a white Hyundai SUV used in the targeted killing. The vehicle was found to have been set on fire, 18km away in the nearby town of El Campello, which is a 20 minute drive away from Villajoyosa.

Whilst some contemporary news reports in the media claim that they are uncertain about who killed him, there is already strong evidence to suggest that Kuzminov was targeted by the General Staff of the Armed Forces of the Russian Federation, known as the GRU or by the wider Russian Intelligence Services. In October 2023, Russian State TV  Channel, Rossiya 1 broadcasted a very brief interview with several Russian Spetsnaz operators from the GRU. In the very brief interview, a Spetsnaz operator states that “the order to (assassinate Kuzminov) has already been received and its execution is only a question of time”. Other operators additionally pitch in commenting that “We will find him and punish him to the fullest extent of the law of or government”. Towards the end of the interview one operator comments “Of course we will find him, we can reach anyone, our arms are long.”

This clearly shows that the GRU  had an active interest in targeting Kuzminov after he had defected from fighting for Russia in August 2023. In light of Kuzminov’s death in Spain, the interview certainly does add weight to the argument that the GRU and Russian Intelligence more broadly  were involved in the targeted killing of Kuzminov. When news of Kuzminov’s death broke out, Sergei Naryshkin, the head of Russia’s Foreign Intelligence Service (the SVR) commented saying that Maxim Kuzminov was a “traitor and a criminal” who “became a moral corpse at the very moment when he planned his dirty and terrible crime”. This supports the fact that the wider Russian Intelligence community had an active interest in conducting a targeted killing on Kuzminov. Before Kuzminov’s identity was confirmed, Russian media were also the first to report on his death in Spain. Multiple news outlets have also reported that Russian ammunition has been discovered at the scene of the incident. One local news source stated that “Sources close to the investigation consider the assassins used Russian ammunition so there would be no doubt the execution, with its exemplary overtones, came from Russia and was the direct and announced consequence of the high-profile desertion.” Again this ties the Russian state and their intelligence services to Kuzminov’s death in Spain.  Recent evidence by Ukrainian sources has shown that prior to his death, Kuzminov had called his ex-girlfriend and “had invited her to Spain… afterwards he was found dead.” It is a realistic possibility that “that call could have been intercepted by Russian secret services”, allowing them to pinpoint his location and carryout a successful targeted killing. The following evidence presented above adds undeniable and transparent evidence that the murder of Maxim Kuzminov is highly likely to have been carried out by GRU,  the wider Russian Intelligence Services or the Russian State. 

As tragic as Kuzminov’s death at the hands of the Russian Intelligence Services and the wider Russian state is, it additionally creates security issues and challenges for countries in Western and Southern Europe. Kuzminov’s death is a “theatrical act of violence”, with the intention of demonstrating that Russia is willing and able to “kill with impunity all over the world”, including in the far corners of Southern Europe. Russia definitely does have long arms, as pointed out by the Spetsnaz operator in October 2023, and indeed ones which are able to pry their way into Europe bringing  mayhem and chaos to the forefront of European security. 

Alongside targeted killings, Russia has also been stepping up  recent disinformation campaigns in various regions in Southern and Western Europe. Viginum, a French foreign-disinformation watchdog revealed in mid February 2024, that it had uncovered “a Russian network of 193 websites” which it concluded Russia had created to use “for a large disinformation campaign in France, Germany, Poland and other European countries, tied in part to the second anniversary of Vladimir Putin’s invasion of Ukraine and the elections to the European Parliament in June.” Current traffic on these sites are low, however, “French authorities think they are ready to be activated aggressively as part of what one official calls a “massive” wave of Russian disinformation”.  Over 50 of these websites have been created since 2022. The aim of these websites is “to spread ‘deceptive and false’ content about the war in Ukraine, both on websites and via social media” and by proxy, attempt destabilise various regions in Western and Southern Europe. Russia’s online disinformation campaigns and its targeted killing of Maxim Kuzminov’s highlights that “as the war in Ukraine protracts, Russia has an interest in creating crises further afield.” The targeted killing of Kuzminov in Spain also shows that despite the GRU’s reach into Europe having originally “suffered real setbacks from the widespread expulsion of Russian intelligence officers and the exposure of its personnel in the lead-up to the invasion of Ukraine… Russia is now actively trying to rebuild the capacity to embark on such operations”, and they are not afraid to do so.

Russia’s targeted killing of Kuzminov and its online disinformation campaigns in Western and Southern Europe ultimately makes clear that “Russia… has an active interest in destabilising Ukraine’s partners” and is able to do so through a “wide range of opportunities”. Ultimately, the targeted killing of Kuzminov is evidently an attempt to destabilise security in Southern Europe and put various countries in Western and Southern Europe on edge, whilst simultaneously sending a message to other Russian defectors who reside in Western and Southern Europe: they are not untouchable or safe despite however far away from Russia they may be.

Subsea Cables in the Red Sea  

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Key Judgments:

  1. The Houthis’ capability to attack subsea cables in the Red Sea is dependent on Iranian intelligence.
  2. There is a realistic probability that the subsea cables will be attacked. Severe disruption, however, is unlikely.

Since October, the Houthi militants have captured the world’s attention by their disruption to the critical shipping corridor in the Red Sea, significantly affecting global commercial shipping and energy flows. Recently, however, new concerns have been raised about a different target in the Red Sea: the subsea fiber optic cables that connect Asia and Europe. In December, a Telegram account linked to the Houthis posted a photo highlighting around a dozen of these subsea cables, with threats against them being shared and amplified by Iranian backed militias, including Hezbollah. These subsea cables carry nearly all the data and financial communications between these two continents, and therefore the Houthi’s interest in them as a target raises many concerns. The targeting of critical infrastructure is not a new phenomenon, as has been demonstrated by the destruction of the Nord Stream 1 pipeline and damage to Nord Stream 2 in September of 2022. This tactic has become of increasing concern in recent years due to economic reliance on international shipping and global connectivity, and the continental consequences to disruptions of critical infrastructure. The question that needs answering is whether the Houthis have the capacity to act on this threat, regardless of their intent.

In 2013, three Egyptian divers were arrested for attempting to damage some subsea cables off the coast of Alexandria, successfully damaging the Southeast Asia Middle East Western Europe 4 (SEA-ME-WE 4) cable and affecting data traffic in Egypt. This demonstrates the relative vulnerability of these cables, being susceptible to damage by just three scuba divers. The Red Sea itself averages a depth of 500 meters, with a maximum depth of 3,040 meters. Whilst the initial thought might be that the Houthis, or even Iran, do not have the appropriate subsea capabilities to target this critical infrastructure, the 2013 incident highlights that advanced capabilities are not a prerequisite to conducting an attack on the cables. With sufficient intelligence of cable locations in shallower depths, an attack on these cables appears plausible.

The Houthis have been armed and trained by Iran since 2015. In a report published by the Defense Intelligence Agency in the US in February of 2024, imagery intelligence was used to demonstrate this connection between the two entities, showing us how the Houthi missiles that are currently being used are direct reworks from Iranian missiles paraded during military exhibitions. This Iranian support extends to the sharing of intelligence with the Houthis, as has been demonstrated by the presence of an Iranian military ship, the MV Behshad, in the Red Sea which the US claim is collecting intelligence on commercial shipping and sharing this with the Houthis to inform their attacks. Whilst the Houthis do not have the naval capabilities to appropriately collect intelligence amidst hostile navies, the MV Behshad may be able to supply the Houthis with intelligence on the ideal locations where a diver may be able to damage the cables. If this intelligence were to be provided, the Houthis will indeed have both the intent and the capability to conduct this attack, meeting the ‘threat’ criteria. This threat is amplified due to the consequences of such an attack. Whilst in peacetime, these subsea cables are often damaged as a result of fishing vessels or ship anchors dragging on the seabed, and most nations have standing units ready to repair these minor damages as and when they occur. In the Red Sea, however, the missile threat from the Houthis significantly degrades the ability to fix any potential damage to these cables, as the risk to the repair vehicle, which will need to remain still for several days to conduct the repair, will be too high.

Whilst the Houthis do in fact present a threat to these subsea cables, it is important to acknowledge that whilst one subsea cable is very vulnerable, there is a lot of resilience built into the system. Damage to one cable results in the rerouting of the data in said cable amongst the other cables in the network, therefore damage to any one cable will not severely affect the intercontinental data traffic. Also, individual divers will not be able to produce the widespread damage that would be possible if the Houthis had submarine capabilities, therefore reducing the scope of the threat.

To conclude, the subsea fiber optic cable network passing through the Red Sea is a vulnerable, critical infrastructure which the Houthis currently have the intent to target. With the support from Iranian intelligence, the Houthis are likely to obtain the capability to act on this intent, marking this issue as a significant threat, despite the resilience built into the network. As a result, the Houthis have a realistic probability to target these cables via diving operations in the shallower areas of the Red Sea. This threat is unlikely to cause severe disruptions to global data traffic, again due to the built-in resilience. A well-coordinated attack, however, certainly has the potential to do so. If this situation occurs, it will mark an escalation in the conflict between the West and the Houthi-Iranian alliance to new heights, and therefore needs to be monitored intently by Western forces in the Red Sea.