The US easing sanctions on Venezuela, OPEC's production cut, and the WTO report on global trade

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CWA # 793

The World This Week

The US easing sanctions on Venezuela, OPEC's production cut, and the WTO report on global trade

GP Team
9 October 2022

TWTW#185, 09 October 2022, Vol. 4, No. 34

Ankit Singh and Bhoomika Sesharaj

The US: Courting dictators to keep a favourable energy market

What happened?
On 5 October, Wall Street Journal reported that the White House may ease sanctions on Venezuela and its dictator Nicolás Maduro to increase the supply of oil for the global market.

Another energy-related development was the decision by OPEC+ to reduce oil production by 2 million barrels per day. The group currently supplies around 44 per cent of the world crude oil exports. The decision to reduce productions was not appreciated by the US which expected an increase in production.

What is the background?
First, the premise of the decision. The development came after Venezuela, on 1 October, released seven American prisoners, five of which were oil executives. In the same week, Venezuela’s opposition leader’s team consulted the US for the preliminary technical service agreement reached between Petróleos de Venezuela, S.A. (PDVSA), a Venezuelan state-owned oil and natural gas company and Chevron, an oil major from the US to further expand the joint ventures in Venezuela.

Second, oil is primary and democracy is secondary. After the presidential elections in Venezuela in 2018, a sanctions policy led by the US was enforced on Maduro’s cabinet members for rigging elections. Venezuela was primarily isolated in the Americas. However, the joint venture between Chevron and PDVSA in oil production continued. The joint venture is set to expire on 1 December and the tight oil market might nudge Biden to cooperate with Venezuela while Maduro agrees to provide constructive steps in conducting elections. Parallelly, the US also restarted talks on Iran's nuclear deal so that, as an outcome, Iranian oil in the global market could offset the shortage caused by disruptions in oil supplies due to conflict between Russia and Ukraine.

Third, Biden’s climate change promise and upcoming mid-term election. When Biden was elected as the President, he announced that the US would re-join the Paris Climate Agreement. Since then, Joe Biden has taken several steps to curb domestic fossil fuel production. Stringent climate disclosure rules for the private sector and environmental regulations have affected the growth of fossil fuel-based energy production. However, the approval rating of Joe Biden has dropped way below the 50 per cent mark and any positive news on easing of oil supplies from outside will help the US populace and Joe Biden in long term.

Fourth, contracting the US economy and geopolitics. Since the onset of the Russia-Ukraine conflict, the US has imposed sanctions on Russia’s oil and gas business. The West, led by the US, has been hit by disruptions in oil supplies and that problem is further complemented by recessionary trends across the world as all central banks have been raising interest rates to cool off demand while supply stabilizes. The recalibration of supply chain networks which might result in ousting of Russian oil and gas stakes needs further support from outliers and hence the US is courting dictatorial regimes like Venezuela.

What does it mean?
First, challenges to sanctions policy. The US is in the concessionary corner now and that might give space for dictatorial regimes like Venezuela and Iran to wait further and seek maximum concessions. The sanctions policy has proven to be temporary and it might mean more than just sanctions to bring everyone on board to ensure a global recovery from the pandemic-induced disruptions. This will make the fiscal challenges for developing economies far worse as they would have to pay for uncertain import energy bills for a longer time.

Second, higher credit bills and mortgage rates will push lower-income families in the US to pay for higher bills and subsequently higher guarantee from the US federal reserve to remain the leader in driving market-led development and growth. The soft landing of the economy may remain a distant dream for the US for now. The alliances of the west may become more de-hyphenated as oil economies, most of them dictatorial, will not concede to the larger policy perspective of the US in the current development paradigm.

Third, the US might have to release more reserves from its strategic petroleum reserves until the oil dictators come in confidence with restoring supply chain disruptions. That will make the US more prone to any global disruptions and it will cause a blood bath in markets based on the speculative practices in the market.

OPEC: The curious case of OPEC's production cuts

What happened?
On 5 October, the 13 members of the Organisation of Petrol Exporting Countries (OPEC) and 10 allies of the group forming the OPEC+, which includes Russia, met in Vienna to drop oil production quantities by two million barrels per day (bpd). Producing about 30 per cent of the world’s crude oil, this decision comes as the world grapples with an undersupply of oil by 1 million barrels per day and creates a tight supply of oil to the West which is already sifting through an energy crisis.

“A recession is one of the challenges we are looking at. We all know a recession affects supply and demand,” UAE’s Energy Minister Mazrouei said, and said that economic stressors were the key reason why the agency decided to cut production. The oil quota reduction came as a surprise to the West as they warned the organisation against such drastic measures, but the meeting offered no resolve to countries like the US, the UK, and the EU.

The OPEC defended its stance to say that the cuts were not meant to pit one country against another, but was a “pre-emptive measure”. Citing that the move was necessary, the decision was met with criticism by the US which said that OPEC was "aligning” with Russia. This decision was also considered a blow to the European Union, as sanctions on Russian crude oil and oil production are set to take effect starting in December. This said that OPEC+ does not target pricing but strikes “a balance in supply and demand.”

What is the background?
First, the evolution of the organization. The OPEC is a permanent, intergovernmental organisation created at the Baghdad Conference in 1960, and was initially a five-member organisation, including Iraq, Kuwait, Saudi Arabia and Venezuela. Later joined by eight others, and other non-OPEC allies, the OPEC was formed to stabilise oil pricing and strengthen oil production in the global market. The OPEC sees prominence in the control of domestic petroleum, and battled excessive volatility in the 1980s and 1990s, with the Southeast Asian economic downturn and economic recession. The OPEC strives to string a well-oiled supply of crude oil to the market and has developed as an essential organisation over the years. The OPEC, however, has a history of battling with the West regarding its pricing and oil policies.

Second, significance of the recent decision to reduce production. OPEC nations, along with Russia, produce over 10 million barrels per day and add a great deal to the demand and supply of the global market. The OPEC deals strongly with the US dollar, as oil production and crude oil are dominated by the currency. OPEC’s decision to cut output by 2 million barrels per day comes at a time when the global market seeks saving from inflationary rises and high pricing, leading to an extensive dependency on short-term energy services.

Third, implications for the US. The US is grappling with soaring interest rates and President Joe Biden’s campaign for mid-term elections long-standing assurance of capping oil prices. The refinery issues plague the West coast and Midwest putting the US in a considerably stiff position, where the US already sees an undersupply of oil. The country’s dependence on Strategic Petroleum Reserves (SPRs) leads to a concerted decline in its overall reserves and leaves a depleting graph for the US to work with.

Fourth, implications for Russia. Russia seeks to increase prices while maintaining a balanced output as it already produces over 9.9 million barrels per day, short of its 11 million barrels per day. The undersupply sees a larger output for Russia to work with, with sanctions on the country coming to effect later this year. The country is speculated to side with Saudi Arabia against the US, the New York Times reported. This move could mean the alignment of the two against the West’s concerted efforts to restrict Russian oil.

Fifth, implications for the global market. OPEC’s move highlights the increasing rates of inflation, consumer prices and intensive political tensions as the EU’s position in the global economy recedes with the quick transitory trends of the energy sector. The reduction in oil would create divisions between EU leaders over capping oil prices and fighting over the lack of fuel. The decision comes as a forecasting warning to the energy security crisis that the EU could face in the winter, and lead to a larger economic problem of juggling between consumption, saving and selling of oil. This comes as a shock to India as well, with the freezing price of petrol and diesel seeing a potential rise, with producers forgoing their previous small profits of INR 5 before the decision came out. The underlying realisation of this decision lies at the overall scenario of the world economy as it strikes against unsustainable energy budgets, implications of a stronger dollar, and the economic risks of selling assets.

What does it mean?
For the US, the cut could lead to a reproaching of a kind, with the US seeking Venezuela and Iran out of its ‘pariah’ state and looking for sustainable options to produce its own domestic oil. For Russia, there is no reduction in output as part of the production cut decision by OPEC, rather it sees a slight balance in its reach. For the global market, the decision would incite a lower energy demand in the long term, with consumers seeking less energy-consuming services in the future.

Trade and Statistics Outlook 2022-23: Four takeaways
By Madhura Mahesh

On 5 October, the World Trade Organisation (WTO) released its Trade Statistics and Outlook for the year 2022-2023. The report emphasises the impact of the global economic slowdown on global merchandise trade. The WTO has expressed its concerns that a global trade slowdown can have direct consequences on inflation, the standard of living and economic growth. The report also highlights that with a decrease in the volume of trade, the value of trade has increased due to high prices.

Four takeaways
First, the report provides a revised projection for 2022 and 2023. The projection of the global merchandise trade growth rate for 2022 is 3.5 per cent and 1.0 per cent for 2023 which previously was set at 3.4 per cent. Similarly, the world GDP at market exchange rates is expected to rise by 2.8 per cent in 2022 and 2.3 per cent in 2023 which was previously set at 3.2 per cent. The reasons for this revision have been attributed to high energy prices, inflation, and the Russia-Ukraine war.

Second, there is a direct impact of the Russia-Ukraine war on global trade. The data shows that the war has had a direct effect on the prices of crucial commodities. In August global energy prices had risen by 78 per cent year-on-year, grain prices had risen by 15 per cent year-on-year and wheat prices had risen by 18 per cent. Prices of fertilisers had also risen by 60 per cent year-on-year which raises concerns for future crop yields and their effect on a potential increase in food insecurity.

Third, global trade experienced different gains and losses in different regions. In 2022 the Middle East saw the largest increase in both export and import trade. Export trade grew by 14.6 per cent and import trade grew by 11.1 per cent. The CIS region or Eastern Europe and Asia saw a huge contraction in both export and import trade in 2022. Export trade grew by -5.8 per cent and import trade grew by -24.7 per cent. This has been attributed to the sanctions placed on Russia, which these countries depend upon for trade infrastructure.

Fourth, there are three factors which can change these figures. WTO has identified three main factors which have the potential to change these figures. First is the interest rate manipulation by central banks. This is done to control inflation but if it goes too far it can induce a recession and affect imports and investments. Second is the intensification of the Russia-Ukraine war which can disrupt the global economy. The third is the dissociation of major economies from the global supply chain. This can happen when countries decide to decrease the production of goods which will increase supply scarcity.

Also, in the news...
Regional round-ups

East and Southeast Asia This Week
China: UN Human Right Council rejects proposal to hold debate on Xinjiang
On 6 October, the United Nations Human Rights Council rejected a motion to hold a debate on the alleged violation of the minority community in Xinjiang, China. The proposal to hold the debate was initiated by the US, Canada, Turkey and Britain. However, 17 countries voted in favour of the proposal, 19 voted against while 11 abstained from voting. The vote resulted in a victory for China while political analysts believe that the decision is a setback to the accountability efforts and moral compass of the West. The council has only rejected one other proposal in its 16-year history until the Xinjiang debate. The President of the World Uighur Congress Dolkun Isa expressed his disappointment with the council’s decision and said that he had hoped the Muslim countries would act to help the Uighur community.

China: Oxfam reports dramatic increase in financial inequality in Hong Kong
On 5 October, Oxfam, an international charitable organization, reported that the inequality had dramatically worsened in Hong Kong during the coronavirus pandemic. The report explained that the richest households in the city now make 47 times more than the poorest families. The figures indicate a sharp incline from the pre-pandemic times when the richest families made 34 times more than the poorest. The report also highlighted that one out of four Hong Kongers were unemployed in 2022 and 1.09 million out of the 7.3 million people in the city were economically inactive. A significant part of this group is made of the elderly who have no financial support.

Taiwan: President Tsai Ing-wen says that country will defend itself and not rely on others
On 6 October, Taiwan’s President Tsai Ing-wen virtually addressed the Global Taiwan Institute think tank in the US and said that the country would not depend on any country for its defence. During her speech, she first appreciated and thanked the US administration for upholding the US commitment to Taiwan’s security and the recent arms sale. She then said: “But we will not depend on others to come to our own defence. That is why I want to reiterate that Taiwan is fully committed to protecting our security and maintaining our democratic way of life. We're also working to adapt our defence strategy to the changing threats we face."

Philippines: Marco plans to seek Russia help for the fuel needs of the country.
On 6 October, President Ferdinand Marcos said the nation may need to turn to fulfill its fuel needs amid rising global energy prices, bucking pressure from Western allies for countries to shun Moscow. He further said the Philippines may also deal with Russia for the supply of fertilizer. The comments, which Marcos made during an address at the Manila Overseas Press Club, are the latest sign that the Philippines is prioritizing its domestic economic situation over the international campaign to isolate the Russian government for its invasion of Ukraine.

South Asia This Week
India: Free Trade Agreement with the UK
On 4 October, the Home Secretary of the UK during an interview with Spectator (a British magazine) addressed the issue of FTA with India. She said: “I have concerns about having an open borders migration policy with India because I don’t think that’s what people voted for with Brexit,” She added: “I do have some reservations. Look at migration in this country — the largest group of people who overstay are Indian migrants. We even reached an agreement with the Indian government last year to encourage and facilitate better co-operation in this regard. It has not necessarily worked very well,” India and the UK are working towards signing the FTA.

Sri Lanka: UNHRC resolution adopted
On 6 October, the UNHRC adopted a resolution on Sri Lanka titled “Promoting reconciliation, accountability and human rights in Sri Lanka.” Twenty countries voted for the resolution, twenty countries abstained from the voting and seven countries voted against the resolution. China and Pakistan were among the countries against the resolution. India, Nepal, Qatar, and Japan abstained from voting. Countries that voted for the resolution include the UK, the US, Argentina, Finland, France, Germany, Mexico, the Netherlands, Paraguay, Poland, and the Republic of Korea.

Afghanistan: UNDP releases annual report on the economic situation
On 7 October, the United Nations Development Program released a new report on Afghanistan’s economic situation titled “One Year in Review: Afghanistan Since August 2021.” The report stated that the already-declining Afghan economy lost nearly USD five billion after August 2021 and is reversing “in 12 months what had taken 10 years to accumulate.” Following the release of the report, the Assistant Secretary-General and Director of the Regional Bureau for Asia and the Pacific said that even before the Taliban’s takeover, Afghanistan had a small economy of USD 20 billion, saying: “What was already a very small economy. If you think about pre-Taliban, it still was a $20 billion economy but then in a year though, lost about $5 billion.”

Pakistan: COAS Gen Bajwa meets with US Defence Secretary
On 5 October, Chief of Army Staff General Qamar Javed Bajwa met with US Defence Secretary Lloyd J. Austin, National Security Adviser Jacob Sullivan and other officials during his five-day visit to the United States. During the meeting, matters of mutual interest, regional security and bilateral cooperation in various fields were discussed. A statement released by the Inter-Services Public Relations (ISPR) said: “Both sides had convergence on major international issues, including Afghanistan,” and also on the “need for cooperation to avoid humanitarian crisis and improving peace and stability in the region.” Meanwhile, Secretary Austin via Twitter said: “This year marks the 75th anniversary of relations between the U.S. and Pakistan. It was my pleasure to host Pakistan’s Chief of Army Staff, General Qamar Javed Bajwa, to the Pentagon where we discussed our long-standing defence partnership and areas of mutual interest.”

Central Asia, Middle East and Africa This Week
Armenia-Azerbaijan: Leaders agree to a civilian EU mission along the border
On 7 October, the European Council stated that Armenian Prime Minister Nikol Pashinian and Azerbaijani President Ilham Aliyev met with European Union Council President Charles Michel and President Emmanuel Macron along the sidelines of the European Political Community in Prague. During the meeting, the two Caucasian leaders agreed to a civilian EU mission alongside their common border. According to the council, the civilian EU mission will start later in October and would continue for a period of two months. Additionally, the next meeting of a border delimitation commission will take place in Brussels by the end of October.

Oman: Jordanian Foreign Minister follows up on recent talk with King Abdullah
On 5 October, Jordan and Oman’s foreign ministers met at Muscat to follow up on the recent talks between King Abdullah of Jordan and Sultan Haitham-bin-Tariq al-Said of Oman. The two ministers discussed the important bilateral concerns and signed agreements on higher education, scientific research and innovation for the period 2023-25, and signed a tourism cooperation agreement for the period 2023-26. They also discussed the preparations for the Jordanian-Omani Joint Higher Committee meeting to be held in Amman in 2023.

Iran: More US sanctions imposed following Mahsa Amini’s death and curbing protests
On 6 October, the Biden administration has issued more sanctions against Iran officials over the suppression of protests in the country following Mahsa Amini’s death in police custody. The new sanctions target Iran’s interior minister Ahmad Vahidi, communications minister Eisa Zarepur, and head of Iranian cyber police force Vahid Mohammad Naser Majid. The US Treasury official Brian Nelson said that “the rights to freedom of expression and of peaceful assembly are vital to guaranteeing individual liberty and dignity.”

Africa: Ukraine foreign minister begins 10-day tour
On 3 October, Ukraine's Foreign Minister Dmytro Kuleba commenced his 10-day tour in Africa after he met Senegal's President, who is also the Chairperson of the African Union, Macky Sall and Foreign Minister Aissata Tall Sall. Kuleba said Ukraine will try its best to export grain to Africa to ensure food security. The visit comes months after Russia's Foreign Minister Sergei Lavrov conducted an Africa tour. The New York Times quoted Kuleba: "Russian narrative has been very present here...Now it’s time for Ukrainian truths."

Burkina Faso: Traore appointed as new president
On 5 October, Captain Ibrahim Traore was appointed as the president days after he overthrew Lt Col Paul-Henri Damiba on 30 September. The spokesperson for the military government announced the appointment and said that Traore would be the “guarantor of national independence, territorial integrity... and continuity of the State." Prior to this, on 4 October, the Economic Community of West African States (ECOWAS) held a meeting with Traore and other leaders, wherein the latter said the meeting was held to “make contact with the new transition authorities.”

Ethiopia: Government and TPLF accept invitation for peace talks
On 5 October, the National Security Adviser to the Prime Minister said the government had accepted the African Union’s invitation for peace talks on the conflict in Tigray. The spokesperson said the invitation met the principles of peaceful resolutions and the government's demands of holding talks without preconditions. Similarly, the Tigray People’s Liberation Front (TPLF) leader said the group would send negotiators to the talks but enquired about the participants, observers and guarantors.

Europe and The Americas This Week
Europe: The European Commission imposes energy price cap along with the G7
On 5 October, the European Commission imposed a ban to import Russian oil through tankers from 05 December 2022 to 05 February 2023. It will be applicable only to the EU member states along with the G7 countries. Greece, Cyprus and Malta, which are known for having huge tanker shipping, will be allowed to transport under the given price cap. The rule will also apply to the EU ships operating overseas in Panama or Liberia to abide by the price limit. Although the price is yet to be finalised, it is expected that it would not be lesser than the amount before the invasion began. Another issue is Balkan states and Serbia which does not have a seaport, imports Russian oil through Croatia, the EU is yet be decide if it can allow the exports. However, oil exported through pipeline will not be come under the price cap, this is beneficial especially for Hungary, Czech Republic and Slovakia.

Latvia: New Unity party win for the second time in 2022 elections
On 2 October, the New Unity party was declared winner by the Central Election Commission upon the majority of votes in the Saeima elections. On 01 October, 14th parliamentary elections were held in Latvia to elect the leader and the Members of Parliament. In total 19 political parties competed in the election with at least 1800 candidates running for four-year term, out of 1800, 100 members will be elected by the people. The parties include, New Unity, Union of Greens and Farmers, National Alliance, Socialist Democratic Party “Harmony” and United List are some of the parties contesting the election.

The UK: Government withdraws the tax cuts plan
On 3 October 2022, The Chancellor of Exchequer Kwasi Kwarteng announced that the government is scrapping the 45 per cent rate of income tax on income over GBP 150,000 tax-cut plan in response to widespread criticism. On 26 September, the pound fell to USD 1.03 as a response to the growth plan announced on 23 September and investors started to demand a high rate of interest. On 23 September, Kwarteng proposed the "Growth Plan" to the parliament to pull up the declining British economy to help address inflation, helping the public tackle the cost-of-living crisis, and helping businesses.

Europe: Member-states submit proposal to impose sanctions on Iran for violent action against growing protests
On 03 October, new proposals were submitted to the EU to impose sanctions against Iran for its violent response to the ongoing protests. Germany, France, Denmark, Spain, Italy, and the Czech Republic have put forth 16 proposals for new sanctions which are said to target institutions and individuals primarily involved in the suppression of the protests. These proposals will be discussed by the EU foreign ministers on 17 October. Germany’s Foreign Minister Annalena Baerbock called the crackdown due to the fear of the power of education and freedom. She also expressed the limitations of their actions in a tweet which said, "It is also difficult to bear that our foreign policy options are limited. But we can amplify their voice, create publicity, bring charges and sanction. And that we are doing." These protests erupted nationwide due to the death of women in police custody over the issue of hijab.

Brazil: Bolsonaro and Lula focus on economic policies as race to president intensifies
On 6 October, Brazil president Jair Bolsonaro announced a tax dividends and debt pardon owed by 4 million Brazilians and 4000 companies. His challenger Lula has also in the past questioned the ceiling gap on spending by federal government for welfare programs. There is a constitutional cap on spending by federal government which has been challenged by both Bolsonaro and Lula.

Haiti: UN calls for ‘humanitarian corridor’ amid fuel and food shortage
On 6 October, UN called for the creation of ‘humanitarian corridor’ to allow distribution of fuel and food supplies amid a gang blockade of country’s primary fuel terminal. Haiti also faces a shortage of water while there is a cholera outbreak prevalent in the country. US lawmakers has demanded that the USA should sanction Haitian gangs and those who help finance them.

The US: Biden administration announces new export curbs on Chinese access to US semiconductors
On 8 October, Biden administration announced new export curbs to cut off China’s access to high-tech US semiconductors, in its latest move to stymie Beijing’s efforts to develop the country’s chip industry and military technology. The US Commerce Department’s Bureau of Industry and Security (BIS) said the new rules are aimed at restricting China’s ability to “obtain advanced computing chips, develop and maintain supercomputers, and manufacture advanced semiconductors”.

The US: DARPA’s new POWER program unveiled
On 6 October, the Air Recognition defence daily reported on Defense Advanced Research Projects Agency (DARPA) forays into wireless energy project called Persistent Optical Wireless Energy Relay (POWER). The power is an airborne optical energy relay project which is like internet for the energy. The POWER project will be useful for ground-based laser systems, multi-path wireless networks and increase endurance of drones on surveillance missions.

The US: Lockheed and Thales to build advanced missile manufacturing capabilities for Australia
On 4 October, Lockheed Martin along with Raytheon and French defence firm Thales announced a sovereign missile project which will manufacture and transfer to Australia same level of technology and development and advanced programs in cruise missile manufacturing like Hellfire and Joint Air-to-Surface Standoff Missile (JASSM).

The US: THOR-ER achieves important milestone
On 5 October, US department of Defense gave a press release notifying on THOR-ER program, a collaborative effort between the USA and Norway to develop a solid fuel ramjet vehicle (SFRJ). The test vehicle successfully fired several times, showing the viability of ramjet propulsion technology and demonstrating significant increase in effective range. Ramjet technology is useful in developing technologies applicable to long range high speed and hypersonic weapons.

About the authors
Ankit Singh, Harini Madhusudan and Rashmi Ramesh are PhD Scholars in the School of Conflict and Security Studies at the National Institute of Advanced Studies. Avishka Ashok, Apoorva Sudhakar, Padmashree Anandhan, Rishma Banerjee, Sai Pranav, and Anu Maria are Research Associates at NIAS. Bhoomika Sesharaj and Madhura Mahesh are research interns at NIAS.

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