In Geopolitics Today: Wednesday, March 6th
Brexit Continues to Weigh on the UK Economy, Egypt Liberalizes Currency & Hikes Rates, and other stories.
Brexit Continues to Weigh on the UK Economy
Nearly eight years after the United Kingdom's decision to leave the European Union, the economic consequences of Brexit are becoming increasingly apparent. The UK economy has consistently underperformed relative to both its pre-Brexit trajectory and its European peers.
The United Kingdom's withdrawal from the EU has deterred investment, eroded confidence, and increased trade costs with its most important partner. Despite promises of a “Global Britain” forging new trade relationships, the UK government has struggled to secure meaningful agreements to offset these losses. Major deals with the United States, China, and India remain out of reach, while the UK's impending accession to the CPTPP is expected to yield only modest benefits. Faced with these challenges, future UK governments may seek closer cooperation with the EU to mitigate the ongoing economic drag. However, the political hurdles to rejoining the bloc remain substantial. In the absence of a dramatic reversal, the United Kingdom appears set to continue grappling with the long-term economic fallout of its choice to go it alone.
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Europe Scrambles for Gunpowder
Europe is racing against time to supply Ukraine with artillery shells, but a critical shortage of gunpowder is hampering the effort. As Ukrainian forces burn through tens of thousands of shells per day, European leaders are confronting the urgent need to ramp up production. In the process, Europe is learning hard lessons about strategic dependencies and supply chain resilience.
At the heart of the problem is a scarcity of key gunpowder components, especially a specific type of cotton primarily sourced from China. Recent Chinese supply disruptions have European officials crying foul, though some Nordic countries claim to have found alternative ingredients. Relocating production and sourcing new materials still takes precious time. Beyond cotton, Europe has only a handful of gunpowder producers, like Eurenco and Rheinmetall's Nitrochemie. France is moving to re-shore some production, while the EU is preparing grants for suppliers under its Act in Support of Ammunition Production (ASAP). The aim is to boost the bloc's annual artillery shell capacity to 1.7 million by year-end.
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Rare Earths Market Rattled by Plunging Prices
The rare earths market is experiencing significant turbulence, with the Rare Earths MMI (Monthly Metals Index) plummeting 24.73% month-on-month. Weaker than anticipated downstream demand has hit rare earth magnet-related metals particularly hard, while a global shift away from Chinese sources is reshaping the industry landscape.
China's long-standing dominance in rare earths is facing mounting challenges, most notably from a major new discovery in Wyoming, USA. This find may significantly reduce reliance on Chinese supply and potentially sparking a mining boom in the Mountain West. As nations seek to diversify their rare earth sourcing, China's market share is under increasing pressure. However, China is not relinquishing control without a fight. Its recent ban on exports of some rare earth elements and technologies aims to preserve its competitive edge, though the move risks straining trade relations and provoking conflicts with dependent nations. As this market navigates a period of upheaval, the complex interplay of geopolitical tensions, shifting supply chains, and evolving demand patterns is set to keep rare earths in the spotlight.
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Egypt Liberalizes Currency & Hikes Rates
Egypt has taken drastic steps to stabilize its economy, letting its currency trade freely and hiking interest rates to a record 27.25%. The Central Bank of Egypt's move aims to unify the official and black market exchange rates, eliminate foreign exchange arrears, and pave the way for a new IMF credit line. The Egyptian pound immediately plummeted by over a third against the dollar, reaching approximately 48 EGP. With annual inflation nearing 40%, the crisis has pushed many Egyptians into poverty.
Egypt's economic woes are mounting. Foreign debt has quadrupled to $164bn, with debt servicing consuming most state expenditure. The country owes $34.8bn in external debt payments in 2024 alone, nearly equalling its total foreign reserves. Short-term debt has doubled to over 80% of reserves. Desperate for hard currency, Egypt has turned to Gulf allies. A recent $35bn UAE deal to develop its northwestern coast, with more Saudi investments expected, may help prevent a currency free-fall. But painful economic reforms remain inevitable as Egypt grapples with a precarious fiscal position.
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China's Growing Middle East Clout Reshapes Regional Geopolitics
The Middle East is undergoing a significant transformation as China's influence in the region grows. While the United States remains the dominant external power, China has been steadily expanding its economic, diplomatic and strategic footprint. Beijing's pragmatic approach of engaging with all sides, including rivals like Israel, Iran and Saudi Arabia, has allowed it to carve out a larger role as a mediator and alternative partner.
This shifting balance of power is also empowering middle powers like Iran and Saudi Arabia to pursue more assertive and independent foreign policies. The long-standing Saudi-Iranian rivalry has been a defining feature of regional geopolitics, fuelling proxy conflicts from Yemen to Syria. But China's efforts to facilitate diplomatic re-engagement between Tehran and Riyadh reflect a new multipolar dynamic taking hold. The 2020 Abraham Accords between Israel and several Arab states, driven by shared antipathy toward Iran, added another layer to these complex realignments. As US commitment to the region wavers, China stands poised to fill the void and shape a new geopolitical equilibrium in the world's most volatile theatre.
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EU Braces for Russian Gas Shortfall as Ukraine Transit Deal Ends
The European Union is preparing for a further reduction in Russian gas supplies, as a key transit agreement between Russia and Ukraine is set to expire at the end of the year. Ukraine has signalled it will not renew the five-year deal, which currently accounts for 5% of the EU's total gas imports, while EU energy chief Kadri Simson has indicated no interest in pushing for an extension.
The potential loss of these gas flows, coupled with the risk of a harsh winter, has the EU warning member states to brace for a worst-case scenario. Austria, Hungary, and Slovakia are likely to be hit hardest, as they struggle to replace Russian imports with supplies from Germany, Italy, or Turkey. Berlin's recent decision to tax gas exports has further complicated the situation. Despite these challenges, Europe's gas storage levels are at historic highs, providing a buffer. The continent will finish the withdrawal season with record inventories, setting the stage for low summer prices. However, some lost industrial demand may never return, having permanently shut down or shifted to other regions and feedstocks.