In Geopolitics This Week
Suez Crisis Compounds Egypt's Economic Peril, Ukraine Gambles on Military Leadership Change, South Korea Leverages Defence Export Growth, and other stories.
Suez Crisis Compounds Egypt's Economic Peril
Houthi attacks in the Red Sea have sparked a major Suez Canal revenue crisis for Egypt. Suez traffic has plummeted 47% as shipping companies divert routes. This compounds Egypt’s pre-existing economic troubles including rampant inflation, high unemployment, a collapsing currency hitting new lows, dwindling foreign reserves, and an unsustainable $164.5 billion external debt burden. Cairo desperately depends on Suez earnings, tourism receipts and gas exports for foreign currency essential to import subsidies, service debts to Gulf states and pay public sector wages. But regional conflicts, ageing energy infrastructure and acute exposure to commodities price shocks have converged to undercut these income streams when Egypt can least afford it.
Specifically, January's 47% Suez traffic decline translates to over $350 million in lost revenues, equivalent to almost 2% of Egypt’s entire annual earnings from the Canal. Beyond direct earnings losses, reduced Suez activity impacts countless livelihoods tied to Egypt’s logistics industry. These ripple effects will dampen economic productivity and tax receipts at a time when Egypt must urgently expand output, exports and investments to stabilize finances strained by heavy IMF obligations. Even if traffic normalizes, 2024 Suez revenues appear sharply lower. This risks wider hardship from potential subsidy cuts or wage freezes if alternative financing sources fail to cover state expenses.
The temporary closure of Israel’s offshore Tamar gas field exports to Egypt during October/November 2023 underscored Cairo’s worrying energy dependence. Natural gas fuels vital electricity generation for Egypt’s booming, electricity-hungry population, tourism sector and export facilities. But output consistently lags demand, compelling over $1 billion in annual import purchases from Israel even amid repeated devaluations raising input costs. This outsized gas reliance reduces Cairo’s appetite for assertive policy towards Israel over Gaza issues that enjoy widespread public sympathy.
With twin economic blows from ebbing Suez revenues and Israeli gas imports weakening Egypt’s finances, Cairo has limited fiscal options as external debts balloon. Urgent spending discipline is compelled to retain IMF support, but risks provoking public protests given eroding living standards. Meanwhile, selling domestic assets like the Ras El-Hikma resort to boost reserves may draw accusations of prioritizing Gulf allies over its own citizens. As economic frustration mounts, deft crisis management will be critical to navigate regional headwinds and placate restless, impoverished citizens.
Ukraine Gambles on Military Leadership Change
Ukraine’s President Zelenskyy has dismissed senior general Valery Zaluzhny. This sacking of the highly regarded army chief, supposedly over failed offensives and disputes on expanding conscription needs, is fraught with political risks for Zelenskyy. It underscores his government's increasingly constrained position after Russia consolidated territorial control across occupied areas in 2023, now boasting superior troop numbers and fortified frontline defences to prosecute a war of attrition. With little path forward for recapturing lost ground, Ukraine faces the stark reality of managing a defensive fight in 2024.
Zaluzhny's replacement, General Oleksandr Syrskyi, is seen as a close ally of President Zelenskyy and considered more accessible by some US commanders. Syrskyi drew praise for commanding the defence of Kiev in 2022, as well as for later battlefield gains, recapturing territory in the east and south during 2022 counteroffensives. However, his reputation among many Ukrainian servicemen is reportedly mixed, with some describing him as a “butcher” for his willingness to sacrifice troops during the battle of Bakhmut in 2022 and 2023. This mixed perception among the troops risks further eroding morale at an already perilous moment.
At this time, the arithmetic of national power weighs heavily in Russia's favour as Ukraine struggles to mobilize sufficient forces. Mounting resistance to expanded conscription complicates efforts to deploy additional forces. Continued US Congressional hesitation around approving additional military aid also threatens Ukraine's ability to sustain itself on the battlefield absent a re-supply of ammunition and weapons. Meanwhile, Russia's steady oil and gas revenue undergirds its ability to fund immense domestic arms production and withstand economic pressures. With victory a remote prospect barring a dramatic crisis inside Russia, moves towards an eventual compromise seem increasingly likely.
Still, the overwhelming domestic costs of conceding hard-fought territory through negotiation after such staggering sacrifice ensures massive resistance within Ukraine to any near-term compromise. As possibilities narrow, developments on the ground may end up dictating eventual settlement terms more than statecraft if NATO members prove unwilling to indefinitely support a Ukrainian military force. For Ukraine's military leadership, political unity will be tested by these increasing strains of adjusting strategy to operate with far more limited means. Absent a massive influx of advanced weaponry enabling a technological leap, a grinding, protracted war of attrition appears the dominant trajectory.
While 2024 sets up as a year of retrenchment for Ukraine, things may be different by 2025. Expectations of wider ammunition access with increased US/European production may prove optimistic, however, especially amid a global economic slowdown and wavering political commitment. And enhanced fortification in the south will still pose prohibitive barriers. With breakthrough potential limited, bringing the fight directly onto Russian soil may become Ukraine's last strategic lever to foment sufficient domestic turmoil to force a managed exit by Moscow.
South Korea Leverages Defence Export Growth
South Korea has signed a $3.2 billion contract to export 10 KM-SAM medium-range air defence missile systems to Saudi Arabia. The deal represents Seoul’s swelling defence sector, as domestic manufacturers like LIG Nex1 and Hanwha leverage price competitiveness and technologies to make inroads in markets eager to upgrade capabilities. For South Korea, whose total annual arms exports languished at around $1 billion 10 years ago, 2022 sales exceeded $17 billion. With domestic defence production also a government priority, foreign capital furnishes funding for domestic upgrades like new extended-range artillery shells.
Eclipsing all expectations, South Korea's 2022 defence exports virtually quintupled the $3 billion achieved just two years prior. This rise reflects a concerted government push towards defence industrial self-sufficiency and global supplier status. Key domestic investments spawned competitive technologies and capabilities to fill demand, with opportune timing as US and European capacity bottlenecks grew post-Ukraine. The $17 billion in export bonanza was led by over $14 billion in Polish orders for tanks, rocket systems, aircraft and more made in South Korea. As more states budget higher defence spending, Seoul offers itself as a reliable alternative channel for quality armaments.
Beyond major Polish and Saudi contracts, a new bilateral defence collaboration agreement signed with Riyadh to jointly research, develop and produce weapons is also a part of Seoul’s efforts to cultivate long-term defence partnerships. This pact sets up coordinated technology sharing and knowledge transfer with a lead Gulf security partner. As Saudi Arabia rapidly modernizes its military to counter regional aerial and missile threats, deepening ties with South Korea boosts indigenous capacity while securing reliable resupply channels for purchased capabilities like the Cheongung II air defence system. For South Korea, these defence export increases furnish capital for continuous military upgrades at home. Given vast untapped markets and competitive offerings, South Korea appears poised to rapidly consolidate its standing as a major defence exporter.
Brilliant piece again Janis and really interesting about Egypt - thank you