What has Happened:

• Key decision-makers in Finland and Sweden are expected to announce their positions on NATO membership later this week.
• Sweden and Finland signed a mutual defense treaty with the United Kingdom on Wednesday May 11^th, which is likely a pre-cursor to applying for broader membership in NATO.
• Historically, Sweden has avoided military alliances and Finland declared neutrality after its defeat by the Soviet Union in World War II.
• However, the Russian invasion of Ukraine (and possible Russian ambitions beyond Ukraine) have changed the mindset of both nations’ leaders.
• Russia (which shares an 800-mile border with Finland) has warned of “military and political repercussions” if Finland and Sweden join NATO.
• Possible Russian responses include the movement of nuclear/hypersonic weapons closer to the border with Finland and cyber-attacks as well as economic and humanitarian measures (i.e., directing migration towards the Russia/Finland border).
• Both countries are already members of the EU and have participated in joint military exercises with NATO in the past, including in Afghanistan and the Balkans.
• Finland already meets NATO’s 2% of GDP defense spending requirement and Sweden is at 1.3%, but could reach 2% by 2028.
• If both countries move forward with the application next week, the process could still take several months.

Why it Matters:

General James “Spider” Marks, who is Head of Geopolitical Strategy at Academy Securities, appeared on CNN yesterday morning to discuss the situation, please see the following link for the interview. In addition, please see below for a few comments from Academy GIG members General Mastin Robeson and General Frank Kearney:

“Hard to see how it does not have an impact, though not sure what that impact will be. Could drive Russia further into the cold, could be used by NATO/U.S. as a bargaining tool to get Russia to back down, and/or could exacerbate/escalate the situation (even if that were only the re-positioning of Russian assets/missiles further west). Also depends on whether Finland and Sweden want to be used as a pawn. My guess is that both will come in (to NATO) and that Russia will make threats, re-position assets, and it will certainly result in greater defense spending by NATO countries. Could even result in Turkey pulling out of NATO.” – General Mastin Robeson

“I think Mastin is on point. As a consensus organization it will be interesting to see if all current members support membership. The discussion will not be about whether they should come in but on what repercussions will result if they are admitted. Both nations have worked with us in peace operations and in the Balkans as part of the Organization for Security and Co-operation in Europe (OSCE). They are both EU members as well. I could see Turkey bargaining for EU admission as a quid pro quo to support Finland’s and Sweden’s membership in NATO.” – General Frank Kearney

• Last night, after shelling by Russian forces, a fire broke out at the Zaporizhzhia nuclear power station, the largest in Europe, and supplies more than 20% of Ukraine’s electricity.
• While the fire was isolated to a training area, firefighters were able to contain the fire before it spread to the nuclear reactors and there were no signs of radiation leaks.
• While the staff is still running the plant operations, Russian forces now control the facility.
• While this incident could have been much worse, NATO is still rejecting the concept of a “no-fly zone” over Ukraine for fear of a broader conflict.
• British Prime Minister Boris Johnson said he will seek an emergency U.N. Security Council meeting.
• Currently, Kyiv is still under siege and Kharkiv is under heavy aerial bombardment.
• Russian forces have taken Kherson and are moving toward Mykolaiv in an effort to take control of the Black Sea coast and potentially cut Ukraine off from international shipping.
• Russian forces are also preparing for an amphibious assault as part of a plan to attack Odessa.
• Secretary of State Antony Blinken will be in Europe for the next week, traveling to Poland, Moldova, Latvia, Lithuania, and Estonia to assure allies of U.S. support.

Why it Matters:

“My view on the attack is that it was to control the nuclear power infrastructure. I believe what we saw was ill-disciplined fire by Russian soldiers and leaders who don’t understand the construction of the plants nor what the outcome could be. A nuclear radiation release from a melt down or core breach would be much longer lasting than the fallout from a surface blast. Until you shut down the reactors in a breach or melt down, the release continues and rides the wind as already indicated. I think Peter’s assessment in today’s T-report is accurate, food and fuel revenue will be what increases pain for the Russian people, but what would it take for them to rise up (against Putin)? Not there yet from news reporting in Moscow.” – General Frank Kearney

• On February 21, Putin announced that Moscow would recognize the Donetsk and Luhansk People’s Republics in eastern Ukraine and sent Russian “peacekeeping troops” into the region.
• Initially, the U.S. announced sanctions on only the breakaway regions, but on February 22, a Russian focused “first tranche” set of sanctions was announced targeting two sizable Russian financial institutions, Russian sovereign debt, and Russian elites (and their families).
• The UK, Japan, and Australia announced that they would levy sanctions against Russia, and Germany announced that it will not grant the final approvals for the Nord Stream 2 pipeline.
• Last night, Putin announced that Russia has commenced a “special military operation” in Ukraine – effectively a full-scale invasion on multiple fronts.
  • Putin said that the intent of the operation was to protect Russians living in the Donbas and that Russia did not intend to occupy Ukraine and demanded Ukraine’s military “lay down their arms.”
• While the initial targets have been Ukrainian air defense systems, communications, and government installations, there have been reports of shelling and rocket attacks on several major cities including Kyiv.
  • Initial reports from Ukraine’s government said that 40 Ukrainian soldiers were killed and dozens were wounded, while Russia announced that they had destroyed 70 military targets in Ukraine, including 11 airfields, three command posts, and a naval base.

Why it Matters:

Are sanctions effective? The concern is that Russia has been preparing for organized sanctions for some time (Russia’s debt to GDP ratio is only 17.88%, it has a current account surplus of $19 billion, and a reserve account of over $630 billion to absorb the impacts of these sanctions). Another mitigating factor is the growing (informal) alliance with China, which signed a 30-year energy deal with Russia earlier this month and has refused to condemn any Russian military aggression in Ukraine. Our team is concerned that the reality is this situation goes well beyond Ukraine and could be just the beginning of an effort by Putin to “avenge” the fall of the Soviet Union and begin to expand Russia’s sphere of influence, countering NATO. The question is where does Putin go from here and what measures are available to be deployed as an effective deterrent?

“I believe that we are witnessing a “coup de main” attempt by Russia to incapacitate and neutralize the Ukrainian military thereby causing a government collapse. Change of government is the strategic objective. The Russian force structure seems sufficient to attempt this high-risk effort to push the government out of Kyiv and install interim Russian supporting leadership. Next, the Russian forces will consolidate and protect the new government breaking the will of the Ukrainian people and their support of the current government. Putin and the Russian military have to do this fast to achieve total overthrow. If not, this can turn into a protracted effort which would lead him to then go back to diplomacy and negotiate a favorable buffer zone. He wins either way as NATO and the world will want to negotiate a cease fire along the line of contact which Russia will then never relinquish and pull that portion of Ukraine into Russia proper.

The U.S. and NATO will likely move troops to more defensive postures with deployment of forces to eastern NATO countries. This will cost money and is a way Putin, in some measure, puts a cost on us and others. I suspect you will see Russia probe with naval and strategic air platforms to intimidate the west.

This is a very bold effort by Putin.”  – General Frank Kearney

After weeks of discussions, the tension between Russia and Ukraine does not seem to be abating. Our GIG has been monitoring the situation closely and our Head of Macro Strategy also provides his perspective in this SITREP. The key developments we highlight include the recent meeting between Russian President Vladimir Putin and President Xi Jinping of China at the opening of the Winter Olympics. Not only did a major gas deal come out of the discussions, but unity against NATO and the West was evident as well. In this SITREP, we provide our latest views on the crisis and analyze the likelihood of a negotiated settlement vs a limited incursion.

Why it Matters:

“The situation in Ukraine has not changed significantly over the weekend. Friday’s announcement by China’s Xi Jinping and Russia’s Putin to further their relations to counter the West and specifically the U.S. demonstrates the willingness of Xi and the CCP to diminish U.S. power even if a war in Ukraine causes a major worldwide backlash for Russia and now China. Xi has joined with Putin to try and block anti-Russian actions by NATO. Putin continues to strengthen his military positions in Belarus with the ruse of conducting a bi-lateral military exercise. Various NATO leaders are set to meet separately with Putin in Russia and Ukrainian President Zelensky next week. All of these actions, along with the Olympics in Beijing, signal that an attack is not “imminent.” Expect Putin to continue boiling the pot as he looks to pressurize the U.S. and NATO into providing him some serious concessions. His strategic goals remain to stop NATO’s further expansion, to undermine NATO, and to break the trans-Atlantic alliance. He remains obsessed with Ukraine to ensure it does not turn further towards the West for European Union economic support and to NATO for political and military support.” – General Robert Walsh

Russia/Ukraine Scenarios and Market Impact Update from Peter Tchir:

After a week of back-to-back videoconferences with several members of our Geopolitical Intelligence Group and clients ranging from banks to asset managers to corporations, it makes sense to update my scenario analysis (and the likely impact). Academy published a SITREP titled Russia on the Warpath on January 19^th (with an update on January 26^th) and then released our Around the World on January 28^th. The situation has evolved since then.

Scenarios

There are three main scenarios to think about:

• Negotiated settlement. The likelihood of this has increased since the previous report and is now at least neck and neck with a limited incursion, if not the front-runner. However, we now see three possible sub-scenarios, which we will examine in more detail, because the type of negotiation will matter.
• Limited incursion. This is still a high probability, though it has slipped from being our base case to not being quite as likely as some form of negotiated settlement. There are still a few ways this could evolve and while many say it won’t happen during the Olympics, we cannot rule out that possibility.
• Full invasion. Despite deploying more troops to Belarus, which could target Kiev and may well be intended to send a message to Warsaw, we see this scenario as being highly unlikely. It would be extremely bloody on both sides and there is absolutely no way for Putin to create a pretext that would seem remotely plausible. If this occurs, trade will be disrupted. Energy prices in Europe and across the globe will soar. It is very problematic, but seems like such a low probability event (<1%) that we won’t focus our time on this.

We will examine the negotiated settlement and limited incursion possibilities in a moment, but need to highlight a few other things first.

Most Interesting Headline of the Week

With everything going on, I found the Russia/China 30-year gas deal to be the most interesting. Basically, Russia is being funded by China to create a new pipeline that will deliver natural gas to China and the transactions will occur in euros. I find this interesting from several standpoints:

• If there was any doubt about how China would treat aggressive Russian behavior, we got a pretty good indication that they aren’t bothered by it, even if they don’t condone it (though they may well condone it).
• These meetings reinforced the fact that China and Russia are united in opposing further NATO expansion. Russia also supports China in their “One China policy” regarding Taiwan. A world where China and Russia grow closer in their opposition to the U.S. and NATO would be a terrible outcome.
• This is a “smart” deal on both sides as it helps alleviate China’s energy problems, while for Russia, it reduces its dependence on Europe. Since Europe is turning towards sustainability and trying to reduce their dependence on Russian fuel, this mitigates that risk. It also, I think, signals how little we should rely on China and Russia in the global efforts on climate change.
• Reducing dollar dependency. The fact that they chose to do this in euros rather than dollars is telling. They clearly want to reduce the dollar influence on their economies. China has already made efforts to trade oil in their own currency (futures contracts listed in Shanghai, etc.), but this is another step to breaking the tradition of energy being a dollar-based commodity.

This announcement has limited to no impact on the current tensions, but I think that it gives us a sense of how we need to be thinking strategically once we get past the tactical aspects of the here and now.

It is also worth mentioning that the media coverage in Europe actually deviates quite substantially from the coverage in the U.S. The question “why is the U.S. media painting a much more aggressive picture than the European media” came up time and again. That plays into some of our analysis, and while it wasn’t one headline (or what I found most interesting), it is something that bears further thought as we develop our scenarios and outcomes.

Don’t Expect Much from Sanctions

With a lot of chatter about sanctions, including the possibility of closing SWIFT to Russia, the subject came up in a lot of conversations. We think that sanctions will have a limited effect on Russia because:

• Putin knows sanctions are likely and wouldn’t have proceeded if he thought they would be harmful. To some extent, this says it all. Putin, whose every action is calculated, would not be surprised we would raise the specter of sanctions so it should be a foregone conclusion that he thinks that they would be ineffective. Russia has also prepared for this eventuality by accumulating a $600 billion+ reserve to ease the impact of any potential sanctions.
• Sanctions tend to have a trickle-down effect. The people most hurt by sanctions are often the poor. In Russia’s case, where you have a small group of elite rich and masses of poor (that the elite already don’t care about), it is hard to see more poverty changing Putin’s stance. One General pointed out that the possibility of a French Revolution style of revolt is virtually impossible given the security infrastructure and weaponry of the Russian military.
• Prepared and finding alternatives. As we already mentioned, Putin and his cronies are likely prepared for this and cryptocurrency is one likely avenue they have used to ensure they can survive, if not thrive, during any period of sanctions. They got such a high price on natural gas sold into Europe that they have accumulated unexpected amounts of money. The UK Natural Gas futures contract spent all of 2017 through early 2021 trading around 50 on average (with a pre-Covid high of 75 and a pandemic low of 10). It broke 100 back in July and is currently hovering around 200 (though is spiked to 350 in December). So, Russia likely surpassed their budget projections, possibly for next year as well, which gives them more flexibility than they would have had. Finally, we also discussed the possibility that even under sanctions, they would find markets for their products (i.e., China). Given the aforementioned deal, that seems even more likely.

Sanctions are unlikely to be very effective at all.

Negotiated Settlement

Two interesting things happened over the course of last week in terms of how we are thinking about negotiated settlements:

• The likelihood has increased that we get some form of negotiated settlement. There is so much pomp and circumstance from Russia (which is so unlike their fast and effective incursions into Crimea and Georgia) that it may signal negotiations are Putin’s preferred outcome. However, many in the GIG still believe that the value of adding land to Russia is the only real “win” the Russian people will understand and support.
• There are basically “three” negotiations occurring. This is new, at least to me, but is extremely important.
  • Ukrainian led discussions. While it is Ukraine that faces the brunt of Russia’s threat, they seem to have had little voice in their own fate and that has been changing. It is highly unlikely that Ukraine can negotiate a deal with Russia on its own, and any such deal is likely to be weak (they may be desperate to keep the revenue generated by gas flowing through pipelines in Ukraine) and not make Europe or the U.S. happy. There is a low likelihood of this happening, but worth mentioning as it is something “new”.
  • A European led deal. Some sort of a deal where Europe comes to a solution with Russia that the U.S. agrees to (somewhat begrudgingly). This is the most probable outcome (in terms of a negotiated deal) and would be somewhat problematic, at least from a U.S. standpoint, and maybe even a global one. This might explain why the coverage in the U.S. versus Europe is so different. Maybe, just maybe, we want to make it look like we are on the brink of war, so that we can “solve” a big problem, while Europe doesn’t want to antagonize their energy supplier.

This would not be the end of NATO, but it would lead to some soul searching. The reason this seems to have gained traction is that some in Europe view us as an interloper on this issue. While they need our military to protect them against Russia, they currently need Russian energy. It is their land that borders the countries involved. The “convenience” factor is why I see this as the most likely path to a deal (i.e., negotiations led by France and Germany create a pact that works for everyone in Europe and only the U.S. feels let down). This is another reason I found the China/Russia deal (denominated in euros) so fascinating.

• A full international deal. More of a NATO than EU deal. Still possible, and at some level this distinction won’t be obvious. The U.S. will go along with any deal, but this is more about figuring out who led the negotiations and who got more from it. Subtle, and maybe I’m overstating this, but I can’t help but think this is one of those potential “turning points” and understanding “who got what they wanted” and “who drove the deal” will be crucial.

In our prior piece, I had negotiated settlement as being less likely than incursion and that weighting has now shifted. However, I was more focused on the “full” deal rather than a European led deal, which I now think (based on many conversations) is the highest probability in terms of getting a negotiated settlement.

If we get a negotiated deal:

• Energy prices drop. We should see some drop in energy prices as not only is the tension removed, but Russia would possibly crank up production and distribution (especially if they have been curtailing some production to increase their leverage).
• Initially European bond yields would drop, as energy prices go lower, but then I think the growth story would take over and we’d see yields move higher again.
• Maybe this is what would allow European stocks to continue their recent outperformance.

Over time, if we get a European led deal, we could see outperformance in Europe continue as this would likely chip away at some economic and trade ties over time. Not urgent, but something to think about.

Limited Incursion

I still have the same two scenarios from the last report if this were to occur:

• Take the Olive Branch. Russia gives some pretext for entering. They claim they are done. They offer a “solution” that gives Europe much of what they want, while keeping the newly acquired land. This happens very quickly (in a week or so) and is the highest likelihood of how an incursion would occur. From a market standpoint, this looks a lot like what happens if we get a negotiated settlement, with the caveat that in the interim, oil prices shoot higher, but that is likely to be a very short-lived reaction once people believe that a resolution will come quickly.
• No “easy” solution. Tensions could run hot. Threats could be made. We could see divisiveness within the European Union or within NATO or both. This will cause energy prices to spike, global bond yields to fall, and stocks would continue their dismal year to date performance (Europe would massively underperform the U.S.) This is a much lower probability outcome than taking whatever olive branch is offered, but it is a real risk in the event of an incursion (call it 25%). It is not as bad an outcome for markets as an all-out assault on Ukraine, but gets closer to that outcome if it drags on with no resolution.

Conclusion

Some new scenarios have been added. The probabilities of a variety of outcomes have shifted, but what impact this has on markets and the global economy for the longer-term will really hinge on two things:

• Does the EU or NATO emerge as more cohesive or do fault lines become more transparent?
• What does China do?

While the story still needs to unfold, it seems clear that China is looking to take advantage of the situation and will benefit from it, even if they don’t encourage it. That fits with the “re-centralization” of China theme Academy has been running with, which is not good for the global economy.

On the EU and NATO, the tensions are evident, but there are many reasons to be optimistic that this “crisis” will enhance the bonds as everyone is forced to address some tough questions and may realize that some bonds that had been taken for granted are in fact needed and should be cherished and nourished.

•  President Biden has announced a willingness to levy sanctions directly on President Putin.
o Putin has not publicly discussed Russian troop movements or acknowledged the tensions publicly since December 23rd. • Diplomatic efforts continue as leaders from Russia, Ukraine, Germany, and France are expected to meet in Paris today.
• The U.S. has promised to support European energy needs, working with MENA energy producers to ensure Western Europe is not without gas should Russia cut resources to the region.
• The U.S. has alerted more than 8,500 troops to be prepared to mobilize should a Russian invasion occur.
• Ukrainian President Volodymyr Zelensky urged calm in a video announcement stating, “Protect your body from viruses, your brain from lies, and your heart from panic.”
o Perhaps a reference to the ongoing cyber, information, and potential false flag attacks from Russia.
• Please also see our SITREP that we released January 19th titled “Russia on the Warpath.”

Why it Matters:

“There are two reasons Putin will not invade Ukraine (limited objective of the Donbass region): NATO agrees not to offer Ukraine membership into the alliance and NATO agrees to pledge no new expansion. With the ongoing dialogue, Russia will demand a response within two weeks. If not, Russia will invade. Xi Jinping’s ostensible request of Putin not to invade Ukraine before the Olympics seems both incredible and irrelevant. Not sure Putin cares about the ski jump, women’s giant slalom, or the half pipe.” – General Spider Marks

“I suspect that Russia is fully prepared for cyber offensive operations against Ukraine and NATO if they engage (both kinetic – a cyber-attack that leads to physical and potentially irreversible destruction and non-kinetic cyber – bringing down networks, denial of service, malware implants, and locking up or destroying data, etc.) as well as misinformation/disinformation campaigns. They are patient and will wait for their time and place to execute. Also, we will see increasing involvement from “Hacktavists” like the group of pro-democracy hackers calling themselves “Cyber Partisans” which claimed to have infiltrated the Belarusian rail network to disrupt Russian rail movements (troop and logistics).”– Admiral Danelle Barrett

After weeks of discussions between the U.S., NATO, and Russia we seem no closer to a peaceful resolution as Russia’s military forces continue its build up on the border with Ukraine. To de-escalate the situation, U.S. Secretary of State Antony Blinken is scheduled to meet with Russia’s Foreign Minister Sergey Lavrov in Geneva on Friday. While President Biden has said that a full-scale U.S. military response to Russian aggression is off the table, the U.S. has supplied the Ukrainian military with $2.5 billion in support since 2014. President Putin has been clear about his demands with respect to NATO and continues to escalate tensions with troop movements and rhetoric. Most recently, it was announced that the Russian embassy in Ukraine would begin evacuations. Below, Academy’s Geopolitical Intelligence Group (GIG) members discuss the current state of grey zone conflict in the region and the potential risk of a larger invasion.

Why it Matters:

“Certainly, there have been no breakthroughs to reduce the potential for invasion. The Russians have stated they want answers from the U.S. and NATO this week (an attempt to pressurize the situation). The Russians have multiple target audiences for their rhetoric, cyber, and social media efforts. One audience is the Russian people who need a predicate to support losing Russian soldiers in ground combat. This must be started by or plausibly blamed on Ukraine. Another audience is U.S. and European nations’ populations with Russia using the potential threat posed by repositioning Russian nuclear capabilities.

The real effort is to cause the West to publicly state they won’t support Ukraine against Russia creating a confidence failure pushing Ukraine back into the Russian orbit. That information objective, potentially supported by another round of annexation by force demonstrating Russian strength versus NATO and U.S. inaction, adds to the erosion of Ukrainian faith in the West. It is important to realize that U.S., NATO, and Western nations’ sanctions will do little to ease Ukrainian short-term pain. In fact, sanctions ultimately hurt the Ukrainians as much as the Russians in the near-term.

At present, this is a major influence and information campaign backed by military power to demonstrate that decisive military action is a real possibility. Russian doctrine does include escalation of force to ultimately de-escalate. That means attacking to take another Russian leaning section of Ukraine is a military course of action to force the political concessions that Russia seeks.

In my view, the current diplomatic stalemate leads to a decisive small scale military operation to force political concession. Putin must have some concession to change course and both NATO and the U.S. have done little to reverse his prior successful small scale military incursions into former Soviet states. Continued Russian military movements toward Ukraine and the targeted influence campaigns directed at Russia’s audiences support eventual military action.” – General Frank Kearney

“I agree with most of what Frank said, but maybe slightly nuanced…I believe one of Putin’s primary goals has long been to re-create the buffer zone the Soviet Union enjoyed before the fall of the Berlin Wall. Putin has been chasing this for decades (invasion of Georgia, Crimea, etc.) He has been strategically and patiently moving in that direction for over 20 years, but he seems to want to achieve his objectives without creating a major flashpoint that takes things kinetic with NATO and the U.S. Also, he has shrewdly established gas line dependance/dominance over Europe (and thus NATO) and has created an environment (i.e., Georgia and Crimea) where his requests and intents cannot be dismissed as mere rhetoric. He has escalated things by sequentially introducing cyber-attacks and positioning of nuclear assets in the Western Hemisphere just to ensure no one is dismissive. The positive is he has not done anything kinetic yet (like he did in Georgia). This plausibly indicates that he is not necessarily “hell bent” on taking more of Ukraine right now. Like others on the GIG, I do not want to be too optimistic about Putin’s rational thought in all of this, but it does seem to give strategic room for intellectual consideration, strategic thought, and negotiation. Like Frank said, one of his key parallel objectives is to reinforce (with his national populous) that Russia remains a respected and influential superpower. Bottom line is it will take a talented and strong diplomatic approach by the U.S. and NATO to negotiate middle ground with Putin…and I still believe he desires to achieve his objectives without tipping the relationship with NATO/U.S. too drastically.” – General Mastin Robeson

Market Impact from Peter Tchir:

European Energy Crisis

The energy problem in Europe is a huge part of the calculus right now. This creates a unique “opportunity” for Putin.

• Huge flaws in Europe’s push to “sustainability” have been exposed, some of which can be at least partially remedied by next winter.
• My understanding is that it has been colder than usual in Europe and there is no guarantee next year will be as cold.
• Germany (in particular) has been “less windy” than usual, reducing power generated from windmills, which are a big part of Germany’s alternative energy. No guarantee this occurs again.

I don’t think this gets enough attention regarding “why now?” and Putin likely believes that this is his leverage.

Various Scenarios

• Status Quo – Unlikely. Putin sits on the borders, we all negotiate, nothing changes. This is a relatively low probability since the energy issue forces Putin’s hand.
• Full Attack with Kiev as the Goal – Unlikely. The GIG almost universally doesn’t think this is realistic. If this were to happen, things get very ugly, very quickly, but it seems unlikely that Putin pushes that hard.
• Putin gets something big in negotiation – Plausible. NATO gives up a lot to appease Putin and he stands down. Seems plausible, because NATO realizes there probably isn’t the will to react strongly to an incursion of Eastern Ukraine, so it may give him something to avoid that embarrassment. This is probably what we are hoping for, and I suspect is “our” side’s base case. The issue is that our politicians may underestimate how important it is to Putin to show the people he can “re-incorporate” areas back into the “homeland.” I think we won’t offer enough to get Putin to change course.
• He takes over Eastern Ukraine – Probable. With everything going on, and press reports, etc., this seems most likely and will “surprise” the West which thinks Putin is negotiating in good faith because we are applying our values and morals on him, rather than truly recognizing Putin’s values, morals, and objectives.

o Europe and NATO accept any plausible pretext – Likely. Europe, with the gas shortage, Covid issues, etc., will probably latch on to any plausible pretext Putin provides. Europe has its own issues. The U.S. might make some noise, but no one will care. Demands and promises will be made, but Putin will have won, and we will try and spin it that he didn’t.
o Europe and NATO defend Eastern Ukraine – Unlikely. This would put us on a war footing with Russia, but that just seems unlikely relative to accepting his pretext and moving on.
o Europe Splinters – Possible. This could get “interesting.” I could see Europe fracturing along the lines of “pragmatic” versus “idealism.” Some countries could be content to allow Eastern Ukraine to be lost in return for the flow of energy and promises that “this is the limit of Putin’s desire.” Others may decide that the slippery slope is too dangerous and it exposes the Baltics, ultimately even Western Ukraine.

Market Reaction

Sadly, the market is largely pricing in an annexation of Eastern Ukraine, followed by some nasty discussions, then promises and free flowing oil/natural gas.

From a market perspective, if this scenario unfolds:

• We may get an initial geopolitical “risk-off” type of trade where stocks are weak while bonds and energy prices rise. Some fear about the uncertainty of the reaction from Europe/NATO will get priced in, but even that reaction will be muted because the logical outcome (given all current info and recent actions) is to expect acquiescence. If acquiescence results in free-flowing energy into Europe, then I would expect the original geopolitical “risk-off” move to be unwound and even reversed. I view “geopolitical risk-off” different from “traditional risk-off” in that energy prices often spike on geopolitical issues since so many occur in energy producing countries/regions.
• While this would be a disaster from a human standpoint, I don’t think that markets would be significantly phased by this annexation scenario.
If the status quo remains in place, little happens to markets.
If we negotiate something with Russia and they pull back, we should see a geopolitical “risk on” trade where energy prices decline (tension is over) and stocks, especially European stocks, rally, and global bond yields rise. Lower oil prices would themselves be deflationary, but I think that would be outweighed by some hedges coming off and it should open the door to stronger European growth. This also takes some “second order” effects off the table.
If Russia take an aggressive posture and targets Kiev, then we should see a very large “geopolitical riskoff” trade. Energy prices would skyrocket. Global bond yields should plunge and growth expectations across the globe would be ratcheted down. But again, this scenario seems unlikely.

The Second Derivative Will Affect Markets More

Assuming I’m correct, and annexation is priced in, the market will quickly look to two things:

1. What does this mean for China? Particularly China and Taiwan, but also for other hotspots with China. I suspect, that within 48 hours of an annexation and some “agreement” going forward, everyone’s focus will be on China and whether this encourages China to be more aggressive. Whether in Taiwan (that will be the first area of concern) or other regions (seems more likely to me). If China acts in a way that not only condones Russian actions, but signals that they will be more aggressive, we should see markets react. I don’t think energy prices will be dramatically affected, if anything, they might drop further as many would assume that China and Iran (for example) would expand their relationship regardless of the sanctions that we have imposed. Away from that, the “global economy” theory takes a huge hit. I have been pounding the table on the re-centralization and de-linking of China and that will be what everyone starts talking about if they head in that direction, and I suspect they will.
2. A Splintered Europe. From what I can tell, the market has priced in a relatively brief time between Russian action and acquiescence. If this is delayed because parts of Europe want to respond aggressively (but others don’t), then we will start seeing all sorts of Brexit type headlines. I cannot even imagine what strange combinations of letters we will get, but that will be a concern. Brexit proves that it can be done. Weirdly, this might be the best outcome for Putin. He was prepared to annex and then negotiate, but if we don’t retaliate and instead show division, it is almost like he gets a “freebie.” He doesn’t need to stand down and would likely encourage division as that opens the path to future conquests. I don’t think we get this result, but it would be destabilizing.

Successful negotiations would prevent the market from having to consider these scenarios, but I don’t see what Russia (or China) get from settling early without trying for Eastern Ukraine.

When is a Superpower Most Dangerous?

The premise is that a superpower is most dangerous once they realize they are in decline.
The theory is that Russia and China see the U.S. in decline as a global superpower. Division at home, pulling away from the global stage, etc. But (and this is the crux of the matter), they believe that the U.S. doesn’t (yet) see itself in decline.
This theory says that if you attack a declining superpower before they realize they are in decline, they are less likely to react aggressively than if you provoke them once they realize that they are in decline. If we feel strong and confident, we don’t feel the need to aggressively project power. Only once we start to realize that we are in decline do we feel the need to be aggressive and overtly project power. This theory would argue for Russia and China to act sooner rather than later because we will be more tolerant of bad actions today than we might be a year or two down the road.
I’m not saying this theory is correct, or that the situation is as described, but it is something people are talking about, and it doesn’t seem preposterous to me.

Bottom Line

Markets are ahead of politicians in terms of pricing in a bad outcome for Eastern Ukraine, where the “happy” ending is acquiescence, free oil, and some protection for the future. I keep thinking about Neville Chamberlain’s “Peace For Our Time,” but some strong language in some new agreement probably appeases enough politicians that they can acquiesce to the incursion.

Following weeks of troop and military equipment movement, U.S. intelligence agencies and military are increasingly concerned that Russia is prepared for a rapid and large scale invasion of Ukraine on multiple fronts. Today, President Biden and President Putin will speak via a secure video call and the rising tensions between Russia and Ukraine are expected to be the primary point of discussion. The U.S. has threatened strong sanctions not only on Russia but on Putin’s closest associates should they attack Ukraine.

Why it Matters:

“Part of the U.S.’s military’s response force is enroute to Europe to plan contingencies for this crisis. I expect that the Intelligence agencies believe Russian military operations are planned and there is a timeline established by Putin. The U.S. and its allies are working against that timeline. I personally think Putin will weigh options after the conversation with President Biden and decide when to act. However, I believe military intervention by Russia is inevitable. The question is when and how fast.”
-General Frank Kearney

“I agree with General Kearney, and I also anticipate contingency movements to increase our ability to monitor and assess. I am also tracking folks headed east as a contingency. I do not see President Biden or NATO doing anything that would effectively deter Putin. Inevitable is the right word…timing is the question. In my opinion, neither President Biden nor NATO is willing to go to war with Russia over Ukraine.”
– General Mastin Robeson

“An invasion will occur. It will be between now and Jan/Feb 2022. Putin’s objective is the Donbass where he has been assisting Ukrainian separatists. Putin will continue to invalidate and weaken Zelensky, essentially creating a crisis of confidence in his leadership. There will be a coup – Zelensky out and a transition of power. No clue who the new leader will be, but s/he will align with Putin. Putin has a “new Bulgaria.”
-General Spider Marks

Macro Impact:

With European energy prices already sky-high, if push comes to shove, is Europe prepared to deal with higher energy prices and even more disruptions to their economy? The Nord Stream 2 pipeline, where Europe and the U.S. seemed to have a disagreement, may play into the calculus on Russia’s side. We have written in the past about the possibility that the size and scope of crypto markets make sanctions less effective than they have been in the past. It will be interesting to see if there is any unusual activity in crypto as Putin’s rich cronies prepare for potential sanctions. Finally, if Russia acts, I expect not only energy prices to spike globally, but for interest rates to drop in a “risk-off” type of trade. Not only would the markets price-in Russia’s activities but markets would start putting higher odds on China or Iran doing something disruptive in the wake of any Russian actions.
–Peter Tchir, Academy’s Head of Macro Strategy

Original Post 12/07/2021

What has Happened:

President Moïse of Haiti was assassinated in an overnight attack on his private residence. The attack comes amid increased unrest and instability in an already struggling economic, political, and security environment in the country. President Moïse had recently made changes to the constitution that would consolidate power in his office. Haiti has faced significant political and economic issues in recent years solidifying the country’s position as the poorest country in the Western Hemisphere. Additionally, Haiti has had six prime ministers over the past four years. Generals Robeson, Walsh, Marks, and Chinn of Academy’s Geopolitical Intelligence Group discuss the possible implications of the assassination and the potential U.S. response.

Why it Matters:

“I do not see this as having any significant impact on Haiti’s potential for a mass migration exit. Historically, migration out of Haiti has been driven more by the perception of a welcoming location to migrate to rather than a desire to depart a politically dysfunctional Haiti (i.e., the early 1993 boat migration to the U.S. following Pres-elect Clinton’s comment on our welcoming those in need). The fact that President Moïse’s tenure (final year) as president was questioned, coupled with his refusal to leave office, further reduces the likelihood of mass migration.” – General Mastin Robeson

“I agree with General Robeson’s assessment. The instability is already within the Haitian government and the assassination of President Moïse only adds to its dysfunction. The situation must be watched but it would have to deteriorate significantly before a large migration to the U.S. becomes a serious option for Haitians. We can expect the Biden administration to continue to support the democratic and peaceful transition of power while watching closely how the chaotic situation unfolds. The biggest fear is that the already present political divisions increase, causing the further breakdown in law and order.” – General Robert Walsh

“I agree with Mastin. The key “instability” issues with Haiti have always been its anemic economy, societal inequality, and proximity to the U.S. The assassination of the president does not fundamentally alter those factors. Haiti remains a hemispheric neighbor so we must pay attention. However, it legitimately is one of the craziest places I have ever deployed. I spent a good deal of time there in the mid 90’s. Remember, I was an intel guy and my troops and I had a very hard time understanding the human intelligence element in the country.” – General Spider Marks 

“I agree with everyone’s comments. Expect the security and armed forces to do their best to maintain law and order. If law and order cannot be maintained, expect the OAS (Organization of American States) to offer to send security forces to assist in providing stability so governance can be re-established with the goal of free and fair elections in the future. Haiti only had a police force while MINUSTAH was supporting Haiti as they recovered from the 2010 earthquake (mission ended in 2017 and was declared a success by the UN). In 2018, Haiti stood up an Army and asked the U.S. to help shape its security and defense forces from the ground up (which was viewed as a rejection of Chinese overtures). A major challenge has been that we provide professional education opportunities to civilian leaders from Haiti at the Perry Center with the hope that they return to Haiti making it more stable, but the political climate and corruption has hindered the ability to lead change.” – General K.K. Chinn

Original Post 07/07/2021

What has Happened:

• Clashes between Palestinians and Israeli police in the contested city of Jerusalem have escalated into large scale conflict.
• The violence includes the conflict between Israeli forces and Hamas, which has killed at least 150 people in Gaza and 12 in Israel, but also a wave of mob attacks in mixed Arab-Jewish cities in Israel.
  • It had been seven years since the last major conflict with Hamas, and 16 since the last significant Palestinian uprising.

Below, Generals Robert Walsh, Spider Marks, and Frank Kearney of Academy’s Geopolitical Intelligence Group discuss the significance of the ongoing and potentially escalating violence in Gaza.

Why it Matters:

“Israel has a set of tactical objectives that they will execute before they are ready to talk. During the quiet times, Hamas and others build their infrastructure – both human and physical. When an escalation occurs, the IDF attacks those targets to reset the competitive landscape.  The Israelis have precision capability but use that sparingly as I believe they want the adversary to pay a price for the very much fewer Israeli lives lost.  The Israelis have never practiced proportional response in my view.  In short, when Israel finishes their military targeting objectives successfully, they will negotiate. The Abraham Accords have the Sunni Arabs less vocal at this point which is allowing the Israelis to finish their tasks.  I think that may be outside the intent of the accords.”  – General Frank Kearney

“The Palestinians own the strategic high ground of world opinion; Israel owns the operational, and therefore, the outcome. No matter how precisely Israeli forces go after Palestinian rocket launch sites, their command-and-control facilities, or their tunnel complex, there will be collateral damage. Resultantly, there will be international calls for a cease fire. However, Israel has no incentive to de-escalate until their objectives are met. Like in the past, it is not clear now what must be achieved for the IDF to back off. Committing ground troops to clear the tunnels is a bad idea. They have learned that lesson. Palestinians own the tactical advantage; Israel would succeed but it would take too long and cost too many lives. Israel cannot afford either. They will continue to attack designated and confirmed targets (Israeli intelligence collection in Gaza is unsurpassed) under the protection of the Israeli Iron Dome air defense system which is quite capable. This will continue until rockets are no longer launched from Gaza. Give it a week. Watch northern Israel. Iran continues to export missiles across the Syrian bridge to Lebanon and southern Syria in a position to threaten Israel. The IDF will not take its eye off that vulnerable flank although it remains “quiet” for now.” – General Spider Marks

“General Kearney made some very prescient points. I will try to focus on the politics since he focused on the military and tactics. The situation on the ground is being fueled by increasing tension not in Gaza or Lebanon, but between the Israeli Arabs and Israel’s far-right Jews.  Internal politics in Israel and with the Palestinians are becoming more extreme and hardline just like we are seeing in the U.S. Within Gaza, the divide and lack of cohesion between the two major political parties, Hamas, and Fatah, has allowed Hamas to take advantage of the situation and conduct the current rocket attacks on Israel.  While the situation to the south has broken out into war in Gaza and the adjacent parts of Israel, the situation on Israel’s northern border with Lebanon (and Iranian backed Hezbollah) could also escalate into violence.  Hezbollah has been held in check by Iran for fear of repercussions on the ongoing nuclear negotiations with the U.S. and the other signers of the JCPOA.  Finally, the Arab countries are starting to renounce Israel’s actions and once again discuss the Palestinian situation.  This could result in unravelling the improved relations achieved through the Abraham Accords.  Keep a close watch of the Israeli ground forces to see how far this could escalate.  For now, Israel is taking advantage of the situation to target those threats that their intelligence has developed over time.” – General Robert Walsh

Original Post 05/18/2021

What has Happened:

As relations with China remain strained economically, politically, and militarily, renewed attention is being paid to China’s dominance of rare earth mining and production. These materials have wide ranging uses in green technology, defense technology, medical systems, and in everyday tech. It was announced that President Biden will sign an executive order requiring the government to assess key U.S. industries (and their supply chains) including semiconductor manufacturing, electric car batteries, medical supplies, and their access to rare earth elements. This action seems like it was expedited after it was reported that China is evaluating how to leverage and potentially weaponize their dominance in the field of rare earth production/export. Academy’s exceptional geopolitical and ESG expertise enables us to discuss the risks and vulnerabilities posed by the increased need for rare earth minerals.

Why it Matters:

“Our major concern with China right now should be focused on China’s dominance in processing rare earth minerals, some almost exclusively. Yes, production is a concern, but the major consideration should be with the supply chains. China has and continues to use exportable processed rare earth minerals for economic leverage and influence against Japan, Australia, and other nations in the region.

 In 2010, China restricted rare earth minerals to Japan for two months after the Japanese Coast Guard arrested a Chinese fishing boat captain near the contested Senkaku islands. Japan recognized the potential impact this could have on its supply chains in the future and partnered with Australia to develop a facility to process rare earth minerals for export/import to Japan, decreasing its total reliance on China. China is now threatening the U.S. by potentially reducing exported rare earth minerals, which will not be the first time China has sought to punish a country for political purposes.

Japan and Australia are grateful that we are waking up and recognizing the challenges China poses to the region. They understand that QUAD/multilateralism is the only way to push back against China and win. The dialogue with respect to rare earth minerals needs to be focused on the strategic minerals used for commercial technologies. Commercially, China is making a specific play with lithium due to the move towards electric/hybrid vehicles. This is not an immediate threat, but something we need to focus our R&D on for the future.

The good news is that we are finally waking up to China as a strategic competitor. No cabinet member will be confirmed without being asked about their view on China. The pivot to the Pacific discussed over 10 years ago may actually happen.”

– General K.K. Chinn, Academy’s Geopolitical Intelligence Group

“My thought is that we have long needed to replace our dependance on lithium. Sealed lead acid looked promising in 1990, but proved challenging to reduce in size and weight. Technology needs to find the “next” power source provider that shifts the dynamic from rare earth dependance.”

– General Mastin Robeson, Academy’s Geopolitical Intelligence Group

“Rare earth resource demand is going to continue to grow rapidly due to electric vehicle growth globally. China’s pollution tolerance currently was mentioned as a condition for its refining capacity. I am not sure the U.S. political conditions are right for added pollution, so targeting R&D money for rare earth refinement capability processes would be smart and would also be better framed as an “allied effort” given that the entire world will need to find a solution. The pandemic has fueled many discussions on China’s global supply chain dominance, but I have not read much lately on supply chain diversification. China’s export controls could rekindle the urgency fires.”

– General Frank Kearney, Academy’s Geopolitical Intelligence Group

“The global power competition for rare earth minerals is more a uniquely U.S. challenge than an external one. We can change the conversation ourselves. However, we should frame the demand for rare earths in terms of our relationship with China and our priority to attack climate issues. This has more to do with Beijing’s sanctioning of U.S. aerospace and defense companies for their military sales to Taiwan. As the new administration gains its stride, the number one national security challenge is the United States’ competition with China. Embedded in that competitive venue is climate change and protecting the environment.

America is part of a global marketplace. Even considering the pandemic, the end of globalization is not imminent. We must have an over-the-horizon reach to global resources. Rare earths exist here in the U.S. and can be exploited, but we have hamstrung our capacity to get them. The U.S. Bureau of Mines was shut down by Congress in 1996 and its functions were either eliminated or migrated to other government agencies such as the U.S. Geologic Survey, Bureau of Land Management, and Department of Energy. Of note, 100% of all munitions in all military weapon systems contain the rare earth antimony. The antimony America uses “to support and defend the Constitution of the United States” is mined and imported exclusively from China…100%.”

– General Spider Marks, Head of Geopolitical Strategy at Academy Securities

“COVID-19 was a wakeup call to most Americans in learning about our deep reliance on China for PPE when they choked our supply chains. During the run up to the election, President Biden was more focused on engaging China over climate and human rights than he was on defense-related national security issues. Since the inauguration, President Biden and his administration have taken a much harder stance on China from a national security perspective, including his comments made during last week’s Pentagon visit.

The shift by the new administration is huge and is expected to follow the Trump administration’s efforts to break our reliance on China for rare earth elements. The national security focus on rare earth elements is driven by the Department of Defense. It is the Pentagon that is leading the discussion for the U.S. to cut its reliance on China for precious metals. This month, the DoD awarded a contract to boost domestic production in an effort to secure our supply chains. Last spring, the DoD awarded a similar contract. Before the end of his term, President Trump signed an Executive Order directing a strategy for critical minerals after heavy influence by the Pentagon through the Defense Production Act.

While the Pentagon is focused on eliminating our reliance on China for critical rare earth elements used in munitions, missiles, micro-electronics, lasers, hypersonic weapons, and vital semi-conductors, the defense sector is also closely tied to the commercial market for batteries and magnets as well as the emerging electric vehicle market. The larger issue beyond defense concerns will be China dominating these markets through state supported subsidies and running U.S. vehicle makers out of the global market as they have done in the solar panel industry. Both the defense and commercial markets should unite in breaking our dependence on rare earth elements supplied by our number one strategic competitor.”

– General Robert Walsh, Academy’s Geopolitical Intelligence Group

“In addition to the national security concerns of rare & critical minerals (R&CMs), including the extraction & production (E&P) taking place in other countries, namely China, there are also ESG/stakeholder concerns. China owns large majority stakes in several mineral operations throughout the Congo, including cobalt and copper. Companies that purchase power storage from China could indirectly be supporting threat actors in a conflict nation like the Congo, as well as Beijing’s treatment of Chinese Uighurs. While it is no longer being enforced by the SEC, Section 1502 of the Dodd-Frank Act required reporting companies to carry out a multi-step process to see if they were sourcing from a conflict nation. Many companies continue to monitor R&CM supply chains and are looking to develop technology that does not require (or requires less) R&CMs like cobalt, while simultaneously bringing supply chains home.

On the environmental front, as countries look to reign in R&CM supply chains, there is the real risk of contributing to further water stress. For instance, extracting and producing lithium, one of the primary components of batteries, is a water intensive process requiring upwards of 500,000 gallons to produce one ton. Parts of South America, where the lithium triangle is located, have reported groundwater depletion and soil contamination as a result of operations. There is also the question of what to do with what’s left when lithium-ion batteries and other R&CMs meet the end of their product’s lifecycle. Recycling will play a critical role, but efficacy will be highly reliant on how accessible recycling services are at the end point of a product’s lifecycle.”

 – Michael Rodriguez, Head of ESG at Academy Securities

A Comprehensive, Prioritized, Science Based Plan of Action with Follow Through

As our macro strategist, I get the pleasure of tying together the wealth of information shared by the Generals, of which this report is only the tip of the iceberg. What I am looking for and think is an absolute requirement, is something along the following lines:

• While rare earths may be the “topic of the day”, let’s not lose sight of all the areas we need to be thinking about. As General Walsh highlighted, PPE remains an issue. Virtually every little blue mask still comes from China and N95 masks remain nearly impossible to obtain as an ordinary citizen. The KN95 masks, which seem somewhat abundant, are also surrounded by quality questions, along with the bigger question of why we can’t get N95 masks. So, as we plan what to do, let’s not focus on one subject at a time and create a scattered approach that doesn’t get us what we really need.
• As Mike Rodriguez points out, the path to sustainable energy is littered with pitfalls and potential risks. Water should be a top priority. Water is the resource that no human can live without for very long. Much like doctors pledge the Hippocratic Oath to do no harm, we all must make sure that we think plans all the way through, incorporating all the issues and ramifications. Michael’s comments resonate with me, as several of the early solar deals, glamorized by the green movement at the time, actually were extremely wasteful of water, especially in areas where water was (or should have been) a greater concern. So, let’s prioritize what we need, and I’d start with clean, safe water.
• Follow the Science. We need to truly “follow the science” and not use it as a catchphrase when someone disagrees with us. As General Robeson succinctly points out, what options are there other than lithium? Getting back to Michael’s water issue, let’s focus on all the consequences. Let’s think about where things are sourced, how they are sourced, how they are used, what is the realistic cost of use, and what are the disposal and recycling options, etc. Just because we want something to be “good”, and on the surface it may be “good”, doesn’t ensure that if we dig deeper, it really is. And if after that full exploration, it is “good” then we are all better for it. Science is about thinking, evolving, incorporating new information, and progress. Sometimes, I fear that gets lost in the shuffle.
• Follow Through. Once we develop this comprehensive plan, we need to then follow through with it. Make the commitment to struggle through the rough patches to get to the ultimate goal. That seems like common sense, but so little common sense seems to make its way to politicians who have a seemingly never-ending election cycle to get through.

As the world shifts more and more attention to rare earths and critical minerals there will be opportunities for investors and corporations to capitalize on those shifts and staying one step ahead of “where we are going” will be critical to outperformance. If oil drove our geopolitical strategy for much of the past 50 years or longer, look for these rare earths and minerals to drive our geopolitical strategy going forward.

With the help of the GIG, we can hopefully gain insight into where we are headed geopolitically, so that you can make good business and investment decisions.

– Peter Tchir, Head of Macro Strategy at Academy Securities

Original Post 02/19/2021

Last week it was revealed that Israeli operatives (at the request of the United States) killed Al Qaeda’s second in command (Abu Muhammad al-Masri) and his daughter on August 7^th, 2020. This operation occurred on the anniversary of the 1998 Al Qaeda bombings of the U.S. embassies in Nairobi, Kenya, and Dar es Salaam, Tanzania. Al-Masri was said to have been the mastermind behind that attack which killed 224 people. While it seemed odd that such a high profile Al Qaeda leader would be residing in Iran (given the Sunni/Shia divide), General Kearney describes the dynamic between Iran and Al Qaeda below. Additionally, after the firing of Defense Secretary Esper, an announcement was made by newly appointed Acting Secretary of Defense, Christopher Miller, that there would be an immediate (partial) withdrawal of U.S. troops from Iraq and Afghanistan. While not totally unexpected (given President Trump’s campaign platform) it does force us to evaluate how the threat of Al Qaeda (which is still active in the region) will evolve in the absence of a large U.S. military presence. Finally, with the UN atomic watchdog report revealing that Iran is now operating centrifuges at Natanz, we look at how a U.S. kinetic response, while unlikely, would be evaluated.

General Kearney, the former Deputy Director for Strategic Operational Planning at the National Counter-Terrorism Center, and an Academy Securities Geopolitical Intelligence Group member, provides his thoughts on the recent headlines concerning Iran and Al Qaeda and how these events may impact future policy.

Why it Matters:

“Iran has harbored Al Qaeda leaders over time and always argued that they were under local arrest but free to move. The “enemy of my enemy is my friend” applies to Al Qaeda leaders in Iran, but also gives them leverage against Al Qaeda activities that don’t align with Iranian interests. In the case of Al Masri, the plan was to keep him safe and allow him to operate without U.S. targeting. For Iran’s benefit, they would know what he and Al Qaeda were doing. 

Al Qaeda leaders often moved through Baluchistan, Pakistan into Iran and then into Iraq or Turkey to pass messages. The movements of couriers and leadership were tracked and, in some cases, the U.S. actually picked up Al Qaeda personnel in Turkey as a result.

It is not surprising that the Israelis would assist in such an operation. They have access and placement to do so. I suspect that they want it known that they did not kill a member of Lebanese Hizballah (as Iran claimed) and that it was the U.S. who requested the operation. It could be that Israeli intelligence feels that now there is a need for this to be public.

As for the Iranians, they are providing a cover story because they do not want more issues with the U.S. The U.S. killing of General Solemani earlier this year was a big statement. I also think that the Iranians are watching U.S. politics and even Democrats would take issue with Iran harboring Al Qaeda leaders, so they need the cover story of Israelis killing Hizballah operatives, which also suits their interests.

Al Qaeda is still active in Afghanistan and Pakistan and is waiting for the outcome of the Taliban/Afghanistan peace process. Certainly, a U.S. troop withdrawl will benefit them. Al Qaeda is resilient and will surface again and rebuild. Also of concern is the announced GCC support of Israeli recognition, which could be a trigger that ignites Al Qaeda’s efforts against the “Apostate” regimes (as they view them) in KSA, UAE, Jordan, and Egypt.

Regarding the Natanz enrichment facility, I believe that military officials may have briefed President Trump on the challenges of attacking Natanz from an Iranian Air Defense System (IADS) perspective. This is not an air attack raid. To defeat Natanz’s underground facilities, it would likely require multiple MOP (Massive Ordnance Penetrator) bombs estimated to be 25,000 pounds each. This would likely require at least a two-day disruption of the IADS to allow multiple strikes. If the centrifuges are functioning, there is a risk of the release of Uranium Hexafluoride gases into the air. Without question an unprovoked preemptive strike would draw world condemnation, especially if the toxic radiological gases produced casualties.” General Frank Kearney

Lieutenant General (Ret.) Frank Kearney is an Academy Securities Advisory Board Member. General Kearney served 35 years in the United States Army as an Infantry and Special Operations officer. Most recently, LTG Kearney served as the Deputy Director for Strategic Operational Planning at the National Counter-Terrorism Center in Washington, DC. In this position, he was responsible for whole-of-government planning with over 29 Inter-Agency partners to achieve the strategic end states outlined in the Obama Administration’s National Counter-Terrorism Strategy. He has been appointed to the U.S. House of Representatives House Armed Services Committee National Defense Panel, the U.S. Secretary of Defense’s WMD Threat Reduction Advisory Committee, and the Iran Project.

Previously, LTG Kearney was the Deputy Commander of the United States Special Operations Command in Tampa, Florida responsible for a $9.3 billion dollar budget execution, and for overseeing, training and equipping 62,000 Special Operations forces from all four Services from July 2007 to July 2010. He commanded all Theater Special Operations Forces in Central Command Area of Responsibility from 2005-2007, before which he served as commander of the Joint Inter-Agency Task Force-Former Regime Elements in Baghdad, Iraq. LTG Kearney has been recognized with the Distinguished Intelligence Service Medal and two awards of the Defense Distinguished Service Medal as well as multiple awards for combat and military service. Until 2019 he sat on the Department of Defense Threat Reduction Advisory Committee (TRAC). LTG Kearney also chairs the board of Team Red, White & Blue, a non-profit organization that seeks to reintegrate military veterans with traumatic brain injuries and Post Traumatic Shock Disorder back into their local communities using sports and outreach. He is a 1976 graduate of the United States Military Academy at West Point, NY, has a Master’s in Education from the University of South Carolina and is a graduate of the United States Army War College.

Original Post 11/19/2020

Please see below for the link to our November 5th, 2020 geopolitical roundtable featuring Academy Securities Advisory Board member Major General (Ret.) James “Spider” Marks as well as Peter Tchir, our Head of Macro Strategy, where they lead a discussion around the elections and the impacts to markets and foreign policy.

Please see below link for our August 4th, 2020 geopolitical roundtable featuring Academy Securities Advisory Board members Lieutenant General (Ret.) Robert S. Walsh and Major General (Ret.) James “Spider” Marks as well as Peter Tchir, our Head of Macro Strategy for a discussion around Treating China as a Strategic Competitor – Implications for Corporations and Investors.

What has Happened:

On May 21^st, it was announced that the Chinese government would move to pass new national security legislation that would be the most significant action against Hong Kong’s civil liberties since the transition to Chinese rule in 1997. The proposed law by Beijing will likely fuel additional protests throughout Hong Kong, which saw demonstrations last year due to an extradition law proposed by China. The new measure will outlaw “treason, secession, sedition, and subversion” and is designed to circumvent Hong Kong’s laws.

Why it Matters:

If this law is passed, the Hong Kong we once knew will be changed forever.  Article 4 of the draft decision (which will be rubber stamped into law by the National People’s Congress), will set up Chinese agencies in HK to “safeguard” national security in accordance with the law. China will also establish “sound legal systems and enforcement mechanisms”. What this will end up doing to foreign investment and the location of corporate offices in HK is yet to be seen, but with the general feeling that the “one country, two systems” framework will not work in the long run, there has been some recent movement into alternative financial centers such as Singapore.

We start off with General (ret.) Marks, who is concerned that the new law should be viewed as a wakeup call to the world, especially Taiwan.

“The current moves by China, specifically Xi Jinping and the National People’s Congress, to crush pro-democracy efforts in Hong Kong, validates the CCP’s second “long march”, this one to achieve global power dominance. The one factor that might moderate the CCP’s rapacious behavior is the legitimate fear of a cash flight from Hong Kong. There are other regional financial safe harbors for China’s banking, such as Singapore, Tokyo, or Kuala Lumpur, but they are not as robust and would limit China’s manipulative free hand. The policy of “one country, two systems” is failing. Beijing has determined it cannot risk a full collapse of its authoritative control over Hong Kong. However, China is not reluctant to ensure its interests and to declare those interests publicly; they’re skilled at “hiding in plain sight.” This move is not just about Hong Kong, it’s a clear message to Taiwan…you’re next.” General Spider Marks

General (ret.) Walsh agrees that this is an opportunistic power grab by Beijing that will have implications for Hong Kong and the region.

“The current moves made by the Chinese government under President Xi Jinping to pass a law that cracks down on the protests in Hong Kong is even more serious than last year’s attempt by China to influence an extradition policy of Hong Kongers to China by the Hong Kong government.  China is taking advantage of the COVID-19 pandemic to begin moves against Hong Kong that many thought would eventually happen.

What we do know is that the Hong Kong protests have been an embarrassment to the Chinese Communist Party and President Xi Jinping and they have been looking for opportunities to move Hong Kong more in line with China’s views and those of the Chinese Communist Party. The current “one country, two systems” approach to Hong Kong is not working to China’s advantage and very few believe that they are willing to wait until 2047 to have it their way. The new law is centered on a national security information campaign for punishing Hong Kongers influenced by outside subversion.

This legislation is another step in taking away the rights of Hong Kongers’ freedom of the press, freedom of speech, and the right to protest that was agreed to in the 1997 China-British Joint Declaration. Whether this is a first step in bringing Hong Kong underneath China’s complete control or just another move to whittle away at Hong Kong’s Democratic rights, is yet to be seen. In the end, this is a very serious move by China and its Communist Party that should be seen as a wakeup call to the world and to Taiwan as to what China is really about.” General Robert Walsh

Bottom Line:

As we have reported previously, the U.S. has labeled China a strategic competitor and expects tensions to rise. In our last edition of Around the World, we commented on the pressure China was putting on our allies as they take advantage of the COVID pandemic globally. We believe that these actions will continue and the U.S. will conduct further freedom of navigation patrols in support of its allies in the region.

Original Post 05/22/2020

What has Happened:

On April 21^st, U.S. intelligence indicated that it believed North Korean dictator Kim Jong Un underwent cardiovascular surgery on April 12^th. There are also reports that he may be incapacitated. These reports have been denied by South Korea and officials there have stated that they have not seen any unusual activity in North Korea. Kim’s last public appearance occurred on April 11^th and he was noticeably absent during the April 15^th national holiday celebrating the birth of Kim’s grandfather and founder of North Korea, Kim Il Sung. Information flow out of North Korea regarding the Kim family is limited and there have been rumors in the past about Kim’s health – in 2014, he was not seen publicly for a month, then he resurfaced with a cane following reports he had a cyst removed from his ankle.

Why it Matters:

North Korea is believed to have between 20-30 nuclear weapons in addition to a highly capable and well-equipped conventional military. And, while President Trump and Kim have met and tried to make progress in denuclearization, North Korea has threatened its neighbors and the U.S. with it’s ballistic missiles, in addition to continued cyber-attacks. As U.S. intelligence watches the situation unfold, it makes sense to think about some of the potential outcomes if the most extreme scenario, i.e. the death (or long-term incapacitation) of Kim were to occur. Our Geopolitical Intelligence Group, led by General James “Spider” Marks, who spent a significant portion of his Army career on the Korean Peninsula focused on North Korea, weighs in on what some of the warning signs could be and what we might expect if these reports prove to be true.

We start with General (ret.) Marks who explores some of the potential considerations in the succession process:

• South Korea downplaying the situation is reason to be worried – they are concerned about this.
• ROK President Moon’s goal is a unified Korea, however unlikely, and wants to maintain calm.
• This is not like 2011 when Kim took over from his father when he passed away; there had been 3 years to prepare for that transition after his father’s stroke.
• Possibility that this is COVID-19 related, i.e. Kim contracted it from one of his foreign medical providers post-operation.
• Warning signs of impending transition, even a peaceful one, could include increased U.S. Naval presence, i.e. a U.S. carrier off both Peninsula coasts and the U.S. long-range bomber force on alert in Guam.
• If a transition of power (temporary or permanent) will occur, options include:
  • Kim has a 10-year-old child (a daughter), but not confirmed. She’s not a successor.
  • Kim’s brother Kim Jong Chol is not a leader and did not get the “dictator” gene. Kim’s half-brother, who was murdered, also has a son in Kim’s bloodline, but also unlikely.
  • Kim’s sister Kim Yo Jong is capable, but has limited public/governance exposure. She is likely a temporary (or permanent) successor to maintain the dynasty, i.e. the “Mount Paektu Bloodline.”
• If Kim’s sister is more of a permanent solution, a purge of all enemies of the Kim family would begin soon after the transition.
• Military is controlled by the Korean Workers’ Party. They will remain loyal to the Kim family.
• No immediate concern about the safety of WMDs unless the Korean Workers’ Party fractures due to some other factor, i.e. COVID-19 starts killing a number of them.
• Ruling party elites will not walk away into uncertainty. If they did, total chaos would ensue. Initially, average North Koreans would freeze in place and then head south.
• China not likely to intervene unless something goes horribly sideways – i.e. with COVID-19 fallout, they will keep to themselves unless the regime fractures and South Korea steps in to try to unify.

General (ret.) Stewart, who was the former Director of the Defense Intelligence Agency, explores some of the potential questions we must consider and be prepared to address:

• Uncertainty about Kim’s condition equals instability in the region. Instability in the age of COVID-19 increases volatility.
• The standard questions begin: who could succeed Kim, his sister has played an increasingly public role, but could she really take on the strong men of North Korea and sustain the Kim dynasty?
• How would a regime change (in the event of Kim’s death) play itself out?  Civil war?  One strong man emerges and continues the Kim approach? Who are likely candidates and what do we know about them?
• How would the international relationship change – China, South Korea, Japan, Russia, the U.S.?
• Could we see a run for the border north or south if the North Koreans see this as an opportunity to escape?  Would they even know if there was an opportunity?
• What would a heavy refugee/migration movement do to the economies of China and South Korea considering the impact of COVID-19?
• Who controls the WMDs?
• Who is best-positioned to take advantage of the uncertainty?  What should the U.S. position be, i.e. how do we maximize our position during the next few days/weeks/months?

Bottom Line:

If a change of control were to take place in North Korea, the ripple effects would have global consequences. Our Geopolitical Intelligence Group will continue to monitor the situation closely and look for potential warning signs of the regime preparing for a leadership change and what that could mean for the U.S. and the region.

Original Post 04/21/2020

What has Happened:

On March 13^th, President Trump declared a national emergency under the Stafford Act to free up additional federal funds to help fight the pandemic. [i]  The administration has allocated two U.S. Navy hospital ships to ease the pressure on the healthcare systems on the East and West Coasts

The Trump administration is now considering the possibility of mobilizing the National Guard at the federal level to help in the fight against the coronavirus.   Members of the National Guard and reserve would also help with logistics and medical support. While 27 states (and growing) have already activated the National Guard, if mobilized at a federal level, the president can deploy those forces across state lines and transfer the cost from the state level to the federal level.

As the situation evolves, the President may take other actions to mobilize the military, but General (ret.) Marks want to make very clear that these other actions are NOT martial law.  General Marks explains how the military, National Guard, and Reserves would act in an “advise and assist” role – which is exactly what it sounds like, they are there to advise and assist existing authorities – not to replace them in any way, shape or form.  This is why any call-up, or mobilization, should be viewed positively by the country.

General (ret.) Walsh is also encouraged by what he sees:

“From what I saw, the administration has put FEMA in charge of the overall response.  This is an indicator that they want to be ready to expand federal support to the state governors on a large scale.  NORTHCOM and the National Guard are very familiar with supporting FEMA in other natural disasters.” General Robert Walsh

Why it Matters:

Two of the members of our Geopolitical Intelligence Group weigh in on what could come next as the U.S. continues to ramp up resources to fight the virus.

We start with General (ret.) Marks who explores what can occur with respect to the Stafford Act and mobilization.

“Here are some options that we could see. I think it is probable that POTUS will invoke additional provisions of the Stafford Act within the next few days. Not sure there’s an external forcing function or event; timing for an announcement has more to do with the administration completing the planning and getting the “whole of government” aligned. 

• Invoke additional provisions of the Stafford Act…additional funds become available and POTUS is authorized to put in place plans for “warning…emergency operations…mitigation.” These are broad powers that any lawyer can liberally interpret. POTUS could, not necessarily will, limit movement and require sheltering in place for a finite amount of time. The time limit would be a medical recommendation…one, two, x weeks.
• If the above occurs, POTUS should federalize the National Guard and mobilize the Reserves for very narrowly defined roles over a “to be determined” time frame. The mission requirements would be: medical, communications, first responders (law enforcement), combat service support commands for logistics missions, and some maneuver units for command and control.
• Establish medical trauma capabilities (combat support hospitals) to free up commercial hospitals so they can focus on covid-19 related illnesses.
• Establish communications (internet) networks to address increased demand.
• Deploy engineers and military police to assist community first responders with construction, mobility missions, and to assist in law enforcement.
• Deploy support units to facilitate transportation and delivery of all necessary life support (food, water, etc.)
• Troops on the ground in communities is a good thing. The presence of soldiers routinely follows a disaster…Detroit 1968, Los Angeles 1992, Hurricanes Katrina and Rita…and is designed to assist civilian authorities. The military remains in an “advise and assist” role. Civil authorities are in charge. However, what remains the same today is that the virus is the disaster. We’re in it and we have no clear understanding of when this disaster will be over. The federalization of the National Guard is an effort to anticipate the increasing pressures on civil authorities and to ameliorate conditions before they accelerate out of control.” General Spider Marks

General Walsh also discusses U.S. Northern Command (NORTHCOM), an entity you might not be familiar with, in more detail.

“NORTHCOM synchronizes the DoD response in the U.S. They conduct planning and exercises at the FEMA/HHS/OSD/JS/NC level annually for pandemics such H5N1, Bird Flu, SARS, etc.  SECDEF issues EXORDS to meet the response needs.  

They normally start with mobilizing National Guard units in each state through their governors, but they can also move them across state lines as required.  The Guard has many capabilities to support pandemics to include each state’s Civil Support Teams that are experts in dealing with weapons of mass destruction and also pandemics.  The National Guard is trained as civilian soldiers within their communities to deal with any emergency response events to include mass casualties and pandemics.  They periodically train to support pandemic events.  The Guard also has field hospitals to support mass casualties.  The two hospital ships, Mercy & Comfort, are in the news from an active duty support standpoint.  The Title 10 Reserve and Active forces normally come in after using the National Guard forces. There are lots of options but as Secretary Esper said, the military should not be the first response option. General Robert Walsh

Bottom Line

These steps should be viewed as positive developments in our efforts to curb the damage done to individuals and the country by the coronavirus.

[i] The Robert T. Stafford Disaster Relief and Emergency Assistance Act of 1988 (Stafford Act) provides the legal authority for the federal government to provide assistance to states during declared major disasters and emergencies (see Stafford Act). FEMA coordinates the response and additional federal support is provided as required/requested to the state and local governments.

Original Post 03/20/2020

Academy Securities Geopolitical Intelligence Group

U.S. Troops attacked in Iraq

What has Happened:

Multiple missile launches, attributed to Iran have struck military bases in Iraq housing U.S. troops.

Why it Matters:

The first reaction from the Academy Team and our Geopolitical Intelligence Group is that we hope there are no casualties. The response from Iran, so far, is well within the bounds of what the U.S. would have prepared and planned for. Force protection levels have been elevated for the past few days and deployed service members have been postured in hardened, defensive, positions.
The view, so far, is that unless Iran does something more, our response to them will be wholly contingent on the number and level of casualties. Additionally, this level of retaliation by Iran has been viewed as the most probable outcome by Academy’s experts. As we await further battle damage assessments, our hearts and prayers go out to those in harm’s way defending our country.
One thing to remember: despite many news reports to the contrary, we believe that the US. risked escalation on purpose and with a plan that leveraged other elements of U.S. power, including economic, diplomatic, and information.

“We are currently not sure what the effects of the Iranian missile strikes are, but that will make a difference on next steps. We have a series of response options planned which I am sure are being updated daily based on Iranian posture. Iran’s warning that if strikes are launched from another country upon them that they will retaliate against the host country can limit some options. I believe our forces in Iraq are defensively postured and a Ranger Battalion and B-52s have been deployed to the region in addition to the brigade from the 82nd Airborne Division. Ground forces will be capable of action inside of Iraq and Syria in response – either reactively or proactively. Our strategic reach gives us a hammer that Iran cannot ignore. With the current administration, it is hard to judge whether responses will be proportional or escalatory. I would guess proportional if no loss of life and escalatory if loss of life occurs. In the coming hours, watch movement of missile shooters, carriers, and air refuelers to judge our response capabilities. While there may be flexible deterrent options, they are also ready to act.”

– General Frank Kearney

Original Post 01/08/2020

Key Points:

• The Trump administration has assured Turkish President, Recep Tayyip Erdogan, that the U.S. would not interfere as Turkey attempts to create a buffer zone

• Turkey views the U.S. backed Kurdish fighters as terrorists

• The U.S-Turkey relationship has deteriorated in recent years

Background:

Tensions between NATO allies, the U.S., and Turkey, have been high in the last few years. The atrophy of this strategic relationship comes in the wake of Turkey’s purchase of Russian air defense weapons, S400s, and the U.S. backing of Kurdish fighters (YPG) in Iraq and Syria against the Islamic State. Turkey views the YPG as a threat due to its link to the Turkish separatist PKK, a group the Turkish government been confronting for decades. There is international agreement that the PKK is dangerous, and the U.S. and the EU consider it a terrorist organization. Turkish forces aim to create a buffer zone in Northern Syria, an area currently occupied by the YPG.

What Has Happened:

On an October 6th phone call with Turkey’s President, Recep Tayyip Erdogan, President Trump offered a reversal of U.S. policy in Syria. President Trump, a longtime critic of U.S. military involvement in Syria and seemingly unending conflicts, assured Erdogan that while the U.S. would not limit Turkish advancement into northern Syria, it would bring harsh economic penalties against Turkey if Turkish troops attacked U.S. trained and armed Kurdish fighters. The first Turkish troops have crossed into northeastern Syria in preparation for a what appears to be a full-scale offensive.

Why it Matters:

“In the long run, it won’t make any difference, much of the attention paid is hype. A thousand or so U.S. boots on the ground in Syria will make no difference in the Turkish/Kurdish balance of power. The U.S. does not need military on the ground to come to the aid of Kurds if necessary. Air power can do that more rapidly and more effectively. Nor should anyone overstate American influence in Syria. Our footprint on the ground in Syria is very small compared with that of Turkey’s, Iran’s, or Russia’s. That said, regarding perceptions, the withdrawal may hurt morale among Syria’s dwindling opposition, but it will not result in the reconstitution of the caliphate.”
Lieutenant General (Ret.) David Deptula

“Our departure leaves a partner (the Kurds) alone and unprotected against what most expect will be a Turkish limited invasion to kill as many PKK as they can with little discrimination as to who is and is not PKK. Our departure is advantageous to Russia and Iran and may solidify those relations with the Turks and the Assad government. I am unsure how the oil and energy market is impacted as the geography of Turkey’s invasion will not likely affect oil infrastructure, but it remains to be seen how an effective Kurdish ally, trained by the U.S., could use those skills in retaliation against economic targets to hurt the Turks, Syrians, or Iranians.”
Lieutenant General (Ret.) Frank Kearney

Original Post 10/09/2019

Key Points:

• Expect restraint or an unconventional response from Saudi Arabia

• The kingdom is concerned with being viewed as rational and self-reliant

• Threats of internal unrest concern the kingdom as much as external attacks

General Stewart, who is currently on the ground in Saudi Arabia, provides his thoughts on the kingdom’s response to the Iranian attack on Saudi oil facilities. 

Saudi Arabia’s Perspective:
At this stage, unless pressured, the Saudis are unlikely to push for a kinetic military response.  Despite early indicators that Iran carried out the attack, they insisted on “conducting an investigation.”  I didn’t get the sense that there is any desire for conventional conflict.  Rather, they want to demonstrate their resilience, get the refinery back online, and demonstrate restraint in the face of this attack – avoiding a wider, more destructive strike on the kingdom.  To Saudi Arabia and Mohammed Bin Salman, their two greatest concerns are the Iranians (and their regional aspirations) and internal unrest in the kingdom that threatens the regime.  When discussing a response, talk of their own proxy forces and hybrid/cyber warfare are more appealing than a conventional approach.

The kingdom cites failure of intelligence to warn and detect the attack in timely manner.  As a result, they want to accelerate their intelligence transformation efforts with an emphasis on indications and warning, integrated intelligence picture, missile defense, and counter-drone capability. They view their oil industry and the religious sites (Mecca and Medina) as the Saudi “source of power” their adversary will do anything, including attacking the holy sites, to undermine their source of power in the region and cause internal instability. Saudis are concerned that the U.S. has lost interest in the region and that Russia and Iran will fill the vacuum, leaving the kingdom on their own.  Currently, there is a lot of talk about self-reliance.

The final sentiment I heard while on the ground, was turning the crisis in to an advantage—translation, resilience and restraint.  The feeling on the street is almost like nothing has happened—limited short-term impact and Saudi Aramco is committed to getting their IPO done.

Academy’s Head of Macro Strategy, Peter Tchir, weighs in on the market impact of this sort of response. 

As Admiral Heinrich pointed out on Bloomberg Radio, the sanctions have been effective and should remain a focus.  The President tweeted this morning that he asked the Treasury Department to look at increased sanctions. I think that this leads to the best outcome for the markets.  Increased economic pressure on Iran and an increased vigilance, without an attack, since any military response leaves room for escalation and/or unintended damage. This approach will also allow  time to build a coalition. Additionally, it should calm oil markets, but more importantly, it leaves open the potential for global growth to emerge as the surprise story of the quarter.  Initial reaction to the attack was more “risk-off’ than it should have been.  The events of this past weekend impact China and play into Academy’s long held view that any trade deal will include commitments to buy LNG as securing a “stable” alternative source of energy should be a priority for China.

Original Post 9/18/2019

Geopolitical Concerns

Panama:

What are the security concerns in Panama? The biggest concern is the Darien region – Panama/Colombia border – migrants crossing through Panama en route to Costa Rica and eventually the USA. There is also concern with rising coca production and Colombian rebels in the Darien.

How is Panama’s relationship with their regional neighbors? Panama has good relations with Colombia and Costa Rica – both Costa Rica and Panama do not have an Army per se for security – only police forces.

How is the U.S.-Panama relationship? Panama installed a new President on Monday – Laurentino “Nito” Cortizo. He was a surprise winner in May by 2 percentage points. He is U.S. educated and will have five years now to work the U.S./China balance (see below on China.) Bottom line is that Panama will continue to work with China and do what is in their economic best interest (keeping one eye on the United States’ reaction) and simultaneously work to soothe U.S. concerns of China’s grasping control of the Canal and country. The goal is to not allow another Sri Lanka port incident where China used debt traps and other predatory policies to secure a strategic advantage with a 99-year lease of Hambantota Port in December of 2017.

What is China’s reach into the country? This is historical info – but it is important to understand:

On June 12, 2017, Panama’s President Juan Carlos Varela announced that his government was breaking relations with the Republic of China (Taiwan) and diplomatically recognizing the People’s Republic of China (PRC). China is the 2nd largest client of the Panama Canal. Panama’s recognition of the PRC has significant implications for the country, for the region, and for the U.S.

While Panama has long been a significant center for PRC commercial activity in the region, the change in recognition will likely allow a significant advance in Panama-PRC relations. Just before the announced diplomatic change, China’s Landbridge Group began construction on a $1 billion investment to build a massive deep-water port and logistics complex – the Panama Colon Container Port (PCCP) on Panama’s Margarita Island. China’s Foreign Minister Wang Yi traveled to Panama to lead the way for an exchange by Panama’s President Varela and China’s President Xi. During these visits, significant PRC loans to and investments in Panama, already subject to discussion behind the scenes, were announced. These included projects in the country’s logistics sector, which will be symbolically linked to the PRC’s “one belt one road” initiative, as well as Chinese warehousing, transformation and region-wide commercial distribution operations in the canal, the storage and movement of petroleum, banking, telecommunications, and hotel investments.

PRC is indeed looking for a door into Latin America and Panama provides it. It will be interesting to see the way ahead with the new President since he is from the opposition party of the former President who established ties with China. President Cortizo’s children have U.S. passports and he did visit the U.S. frequently. This is an opportunity to strengthen the U.S.-Panama relationship as it was a surprise he was elected President earlier this year.

Peru:

What are the security concerns in Peru? Peru is the second largest cocaine exporter in the world. Transnational criminal networks have penetrated the increasingly profitable ventures of illegal timber, gold mining, and wildlife trafficking.

How is Peru’s relationship with their regional neighbors? Peru’s relations with Chile are sound but could always improve. There is consistent talk about the ChilePeru border issue but nothing will come of it as neither nation wants a conflict.

How is the U.S.-Peru relationship? Peru has good relations with the U.S. – though stronger when former President Kuczynski was leading because of his personal relationship with President Trump.

What is China’s reach into the country? China’s reach is getting stronger with an announcement by the Chinese ambassador that Peru will join China’s “Belt and Road” initiative. This increases the opportunity for greater investment in Peru by China.

Chile:

What are the security concerns in Chile? There are no real security issues – the last significant military conflict between South American countries was the War of the Pacific between 1879-1884. Chile won the war and Bolivia lost their port / access to the Pacific. Peru was also humiliated when Chilean troops occupied their capital, Lima, for several years. A treaty was worked out and Chile gave back most of the land they had secured in the war.

How is Chile’s relationship with their regional neighbors? Chile has no diplomatic relations with Bolivia. There are border and territorial disputes with Peru and Bolivia, but this will not lead to a war. Bottom Line – relations are stable and overall positive.

How is the U.S.-Chile relationship? This is a strong relationship – but there is concern with the strengthening Chile/China relationship and a need for a new Trans-Pacific Partnership (TPP) agreement.

What is China’s reach into the country? Chile’s economy is dependent on copper and China is their #1 importer of copper. Relations began in 1970 and Chile was the first country in Latin America to recognize the PRC. They have a strong trade relationship, but Chile is very good at scrutinizing the internal businesses of China in Chile – so China is not making the inroads that they have in other countries in the region. There are many rules/laws in place to limit significant Chinese investment in Chile and as Chile has a developed financial system and access to international capital markets – they do not need loans from the Chinese.

Original Post 7/31/2019

Background:

In a defensive action, the USS Boxer shot down an Iranian Drone near the Strait of Hormuz

Comments from Academy’s GIG:

• Lieutenant General Dave Deptula:

 “A couple of points…

1) This is not unexpected as Iran is trying to get the U.S. drawn into conflict that they know will split U.S. from European participants in JPOCA.

2) We don’t yet know what kind of “drone” this was…a 4 lb hand-launched DJI – Mavic 2 Pro Quadcopter, or a Shahid-129 with weapons.

3) The U.S. is always able to act in self-defense.

4) This is another example of unprovoked aggression on the part of Iran, and while expected, should not be condoned.

5) I’d expect that the U.S. would bring this up at the UN Security Council as another act of Iranian aggression.”

• Lieutenant General Frank Kearney:

“I concur with Dave’s thoughts.  The U.S. has now acted kinetically – raising the bar and no lives were lost. This allows the U.S. Navy to demonstrate that it will shoot without escalating to produce casualties.”

• Lieutenant General Robert Walsh:

“The shootdown today of an Iranian drone by the USS Boxer was almost an expected action based on the severe economic pressure that the U.S sanctions are having on the government of Iran and its people.  Iran’s attempts to work around the sanctions with the Europeans has had very little effect so their only real option is to raise global tensions with military actions without getting to the level of starting a military conflict.  Their goal is to impact global oil prices by causing global concern in the hopes that the U.S. will ease the sanctions based on global pressure. If anything, these Iranian acts are demonstrating to the U.S. that the crippling economic sanctions are in fact bringing Iran to its knees with the goal of an eventual agreement to cease enriching uranium past the limits of the nuclear deal and any attempt to develop nuclear weapons. Additionally, oil prices have been fairly steady and have not been significantly impacted by the drastic military actions Iran has taken over the last several months.

Today’s proportional response is exactly in line with President Trump’s previous action and statements when Iran shot down the U.S. Global Hawk drone.  He then said he canceled a responsive attack on Iranian missile and radar sites because of the potential death that would result and that he felt such an attack was not proportional.  He highlighted today that the USS Boxer’s response was proportional and was a defensive action to protect U.S. Sailors and Marines that were threatened when the drone closed to within 1,000 yards of the USS Boxer.  The Boxer, as part of the Boxer Amphibious Ready Group, includes over 2,000 Marines of 11th Marine Expeditionary Unit.  They have many offensive and defensive capabilities to include strike aircraft onboard that can act as a deterrent to any further Iranian aggression.  The Boxer just entered the Persian Gulf after Iran’s Revolutionary Guard forces seized a Panamanian registered oil tanker on July 14 that Iran said was smuggling oil.

The U.S. maximum pressure campaign is working and is painting Iran as the aggressor.  Iranian actions like today should help towards the U.S. call for a coalition to support Freedom of Navigation operations and protect global commerce.”

Original Post 7/19/2019

Background:

On June 13th, news of two oil tankers engulfed in flames in the Gulf of Oman brought renewed anxiety and attention to a long-simmering situation. While the U.S.-Iranian relationship has been challenged for decades, the current economic and diplomatic strains have escalated since the Trump administration chose to exit the JCPOA (Iran nuclear deal). Academy Securities has led with long term analysis on the growing tensions with Iran and has provided regular updates on the escalating situation since April. At this time, Academy’s Geopolitical Intelligence Group remains concerned about the risk of miscalculation and given the pattern of attacks, we anticipate continued and even increased U.S. military presence in the region. Below you will find links to our previous discussions on Iran and some updated comments from our team of Admirals and Generals.

Comments from our Geopolitical Intelligence Group:

“Today’s reported damaging of two oil tankers near the Strait of Hormuz shouldn’t surprise anyone as tensions have recently risen in and around the Persian Gulf. After the May 12th attacks on four oil tankers off the coast of the United Arab Emirates port of Fujairah and the attack on a Saudi Arabia oil pipeline the next day, fingers will probably again point to Iran. While it is in both the United States’ and Iran’s interests to avoid conflict, events like this risk miscalculation and heighten the chances of escalation towards conflict. Always a factor is Iran’s tendency to move fast when threatened. Another factor is the lack of communication between Washington and Tehran. However, a positive step occurred this week when Japan’s Prime Minister Shinzo Abe met with Iran’s President Rouhani in an attempt to ease the U.S. – Iran tension. At the end of the day, President Trump has continued to emphasize that he prefers avoiding war and has said repeatedly that he is open to a phone call from Iran. The continued uncertainty will certainly continue to drive volatility in the oil market.” Lieutenant General Robert Walsh

“I believe the Iranians are progressively escalating to bring pressure against the U.S. in an effort to either change policy on sanctions or provoke a U.S. response – making the situation more dangerous and bringing international opinion against the U.S. First, the United States needs to gain attribution information and conduct analysis on the damage to determine solid forensics. Second, the U.S. needs to talk to regional partners and other allies to coordinate diplomatic and other supporting efforts. Coalition options to be considered are: transiting the Strait with U.S. task force elements, propose coalition escort of oil tankers (which means less of a U.S. unilateral effort), and lastly, if conclusive proof of Iranian action as the cause, then consider punitive actions against Iranian naval or IRGC naval assets. Doing nothing is not an option.” Lieutenant General Francis Kearney

“This series of attacks demonstrates that the U.S. increased concern and preparedness with respect to Iran conducting aggressive, hostile actions in the Gulf region are fully warranted.” Lieutenant General David Deptula

Original Post 6/13/2019

Background:

The U.S. – Iranian relationship has been strained for decades. However, the U.S. and Iran have only had direct military conflict once (Iran-Iraq War). Today, armed conflict between the U.S. and Iran more often involves proxies and asymmetric warfare. As we’ve discussed in recent weeks, tensions with Iran are already high and continue to escalate. We believe that it is crucial to understand how Iran’s government is run and how its military operates to properly evaluate the threat.  Below we describe Iran’s military capabilities and its historical use of proxy forces in the region.

The IRGC and the Ayatollah Rule Iran:

• Islamic Revolutionary Guard Corps – Born out of the 1979 revolution, the IRGC is the principal defender of the revolution and its ideals. It has evolved to possess enormous political, economic, and military power, and it is Iran’s primary instrument for spreading the ideology of the Islamic Revolution worldwide.
• The IRGC is the main link to its terrorist proxies, which the regime uses to increase Iran’s global influence. In April 2019, President Trump designated the IRGC as a foreign terrorist organization, saying that it “participates in, finances, and promotes terrorism as a tool of statecraft.”
• The Ayatollah is in complete control of the IRGC, though they have their own combatant commanders within the organization. The IRGC’s mission has expanded over the years – imagine a special forces unit nearly 150k strong that acts at the direction of a single leader. The IRGC patrols the Gulf but also is responsible for commanding the proxy forces in Lebanon, Syria, Iraq, and Yemen – very capable and very dangerous elements.
• Iranian cyber command works with IRGC-affiliated businesses on military and commercial espionage, as well as propaganda distribution.
• On May 15^th, the IRGC released a statement claiming Iran was now working at maximum capacity in preparation for a “full confrontation” with its “enemy” – referencing rising tensions with the U.S.
• Iran’s conventional forces number about 400,000 and IRGC forces approximately 150,000. Within the IRGC are the Basij militia and the Quds Force.

Basij militia

• The Basij provides defensive military training to protect the regime against foreign invasion and to suppress domestic anti-regime activity through violence and intimidation.
• They are the eyes and ears of the regime.

Quds Force

• The Quds Force is a branch of the IRGC that provides training and weapons to Iranian extremist proxies around the globe.
• The Quds Force uses violence and bribes to heavily influence the politics in Iraq.
• The Quds Force has established offices near Islamic holy sites to attract devout Muslims from Saudi Arabia, Syria, and Iraq.

IRGC Activity in the Region:

Operations in Lebanon

• The IRGC leverages non-state armed organizations throughout the Middle East (such as Hezbollah in Lebanon) to help compensate for Iran’s generally weak conventional military capabilities.
• Through its close ties with Hezbollah, Iran seeks to export its revolution and ultimately maintain a deterrent against Israeli aggression. Hezbollah shares Iran’s hostility towards the U.S. and Israel, and the 1983 bombings of the U.S. Embassy and U.S. Marine barracks in Beirut were attributed to Iranian forces.

Operations in Iraq

• The IRGC’s activity in Iraq (post-2003 U.S. Invasion) became a significant point of contention between Tehran and Washington. The Bush administration identified Iran as part of the “axis of evil” and accused the Quds Force of providing weapons to Shia militias targeting U.S. convoys. Most recently, the Trump administration attributed more than 600 deaths of U.S. troops in Iraq to the IRGC.

Operations in Syria

• Following the 2011 Arab Spring, the Quds Force deployed to Syria.  At first, Iranian officials only acknowledged its forces were carrying out a limited mission – defending Shiite shrines. However, later it became clear the Quds Force was supporting Syrian President Bashar al-Assad in his efforts to suppress protests. As the uprising turned to civil war, the IRGC became heavily involved in the fighting. Interestingly, many of those fighting with the Quds Force in Syria are not Iranian, but rather militants from Lebanon’s Hezbollah or Afghan refugees recruited by the IRGC.

Operations in Yemen

• In Yemen, Iranian and U.S. allies face off.  The four-year civil war, currently under a cease-fire agreement, demands a Houthi (Iranian back rebel group) withdrawal of Hodeidah, followed by a withdrawal of forces fighting for the Yemeni (Saudi/U.S. backed) government from the outskirts of Hodeidah.

What are the Risks to the U.S. and its interests now?

There are reports that Iran felt the U.S. would strike first in the past few weeks and the IRGC was preparing for counter attacks throughout the region. Academy’s Geopolitical Intelligence Group does not view the current threat environment as one where the U.S. would strike preemptively, though the risk remains for miscalculation and escalation.

The most likely escalation would result from a proxy attack on an ally or non-U.S. shipping, where Iran would attempt to deny responsibility to garner global support, while the U.S. would deem it necessary to respond.

This attack could be conventional, but we can’t underestimate the possibility that Iran will use its cyber warfare capabilities.  Academy’s Geopolitical Intelligence Group has often discussed Iran’s ability to destroy and not just disrupt with their cyber-attacks.  While the U.S. has hardened its defense against cyber-attacks, some of our allies could be more vulnerable to the real and present cyber threat.

Additionally, a mistake could happen at sea as small armed Iranian boats constantly harass U.S. forces. In this heightened threat environment, if one of our ships feels threatened, they may act first in self-defense.

This heightened state and the attention paid to U.S. mobilization may, however, ultimately reduce the risk of direct conflict between the U.S. and Iran.

“With the extensive media coverage of the situation, IRGC understands the consequences of direct action against U.S. forces—that decreases the probability of a direct assault and increases the probability of covert action on the part of Iran.”

General David Deptula

Original Post 5/22/2019

Don’t Poke the Bear

While it may be difficult to prove with certainty, it seems highly likely that Iran was behind the attacks on Saudi ships yesterday. This morning, Saudi pumping stations were hit by a drone attack. Two stations were hit and a pipeline capable of transporting as much as 5 million barrels a day was down temporarily. According to a Bloomberg news story, the perpetrators were “Iran-backed rebels in neighboring Yemini”.

It seems that the intended threat of our carrier movements, meant to deter Iran, is not working. Please see last week’s report on Tensions Rising but Not at Boiling Point for more detailed analysis.

What Our Geopolitical Team Is Saying

Rachel Washburn has been getting constant updates from our geopolitical advisory team.

Army General (ret.) Kearney suspects, “Iran would like to provoke a US or KSA response to deniable sabotage likely directed by them”. The next thing to watch out for from our perspective is if we send a Carrier Battle Group through the straits – which would be designed to “amp up tensions”.

Air Force General (ret.) Deptula goes on to say:

The language emanating from Tehran is not encouraging and is clearly an escalation play. This should not come as a surprise as the regime desperately needs a large-scale distraction to divert the public from its self-inflicted domestic policy woes. This regime does not have a good track record of objectively assessing the reactions of its opponents and has an ideological obsession with martyrdom.  Russia will encourage Iran to pursue a full-scale conflict as it desperately needs to drive up the price per BBL of crude oil.

There is thus a real prospect the regime may attempt to fight a full-scale conflict with the US and its allies in the Gulf. With a major investment in TBMs, ASCMs, armed speedboats and recently delivered Russian S-300PMU2 / SA-20 SAMs it may believe it can win, especially if it focuses its firepower on soft civilian targets, i.e. oil terminals, tanker traffic etc.

The market does not seem to view recent provocation as likely to result in a significant escalation as General Deptula sees it.

While we have stated that deterrence is our first and best option, we are accumulating the forces necessary to accomplish any mission determined to be necessary.

The questions we are trying to answer next, led by General (ret.) Marks are:

• Is Iran just poking the bear, or do they really intend to wake us up?
• Is Iran miscalculating their strength, or our resolve? Have we let acts of aggression go by with a slap on the wrist for so long that they don’t fear our willingness to respond?
• Are we miscalculating their strength?
  • That seems highly unlikely on the traditional military front where our threat assessment and intelligence make our generals universally comfortable.
  • Could Iran believe they have a cyber capability that we aren’t prepared for? This seems more plausible given their activity as one of the worst Nation-State perpetrators of cyberattacks.

One wildcard on our side is, as General (ret) Tata points out, Bolton is known to be hawkish and he and Pompeo are front and center in D.C. right now while the acting Secretary of Defense has had little visibility. Could this tip us toward being more aggressive than the market is pricing in?

Bottom Line

The water still isn’t boiling, but it is starting to bubble.

Original Post 5/14/2019

Carrier Strike Group and Bomber Group Deployed to U.S. Central Command

The USS Lincoln Carrier Strike Group is being deployed to the region from the Mediterranean Sea, where it has been conducting operations with the USS John C. Stennis Carrier Strike Group for the past few weeks. Currently, there are no U.S. carriers in the 5th Fleet Area of Operations.   While this deployment is new, it is not as much of an escalation as it may seem. The Stennis will be heading to Norfolk, VA for mid-life refueling and the Lincoln will be changing homeports and moving to San Diego, which would make its transit through the 5th Fleet Area of Operations part of its voyage to Southern California. Additionally, the U.S. will deploy a Bomber Task Force to the region. The U.S. withdrew its B-1 bombers from the Middle East in March as part of a maintenance rotation, but it is unclear whether the B-1s would return, or another group, such as B-52 bombers, would be sent instead.

The Lincoln Carrier Group will be initially stationed outside the Gulf, because it doesn’t need a high level of proximity to execute its mission. However, the Group will likely continue to ensure safe passage and transit through the Strait to demonstrate our presence and capability.  In April 2019, President Trump announced the U.S. would not provide any exemptions from U.S. sanctions for countries purchasing Iranian oil. Iran quickly denounced this action as illegal, as it became clear that the United States’ goal was to drive Iranian oil exports to zero.

As we discussed in our April 24th Podcast, Iran has a history of causing trouble in the Strait and the rest of region. Of concern, however, is that U.S. intelligence has been picking up “chatter” about Iranian-backed Shia militias in Iraq preparing to attack Americans on land or at sea. The intelligence assessment late Friday also noted U.S. forces may be in danger in other nations such as Syria and Kuwait as well. The specificity of these threats drove Central Command’s request for additional forces to send a message to Iran that it is best not to even think about targeting our forces in the region.

Priority #1 – Deterrence

The Lincoln Strike Group is there to project power and remind Iran of the dangers they face if they risk escalation.  This carrier Group has sufficient firepower for any mission that it could be tasked with (from protection, to a full aerial and cruise missile strike on Iran). That said, the goal is deterrence.

Strait of Hormuz – Disruption? Maybe. Blocking? No.

Iran does not have the capability to block the Strait of Hormuz.  They do not possess the firepower or equipment necessary to block the Strait, especially with the U.S.’ ability to intervene and impede them from any such attempt.  Freedom of Navigation is key. The Strait will be kept open for safe passage by the U.S.

Any provocative action by Iran will be met with a response (or pre-emptive action) from the U.S. that is proportional to the threat. There are three potential ways the current situation could escalate:

• The first scenario, and the most likely point of escalation, would be an exercise in precaution, shipping routes are shifted, ships travel more slowly, or military escorts are provided, slowing the flow of oil, but not stopping it.  Again, the concept of disruption as opposed to blockage. We are not even at this stage yet.

• A second scenario, more likely to be a progression of the scenario above, but that could occur at any time, is action or threat of imminent action by Iran.  This immediate threat or attack will be dealt with by the U.S. and will ensure ongoing access to the Strait – with some possibility of delays and re-routing, but not closure.

• A third scenario, a more difficult one to analyze, is the case where the U.S. intelligence community gains knowledge of a potential threat to American forces or interests in the region by Iranian or proxy forces that must be addressed.  This is more difficult as the U.S. would need to act quickly but would also want to assure our allies (before or after the fact) that the action was necessary.

We are watching for any signs that the escalation scenarios above may be occurring. 
 
Iranian Oil – Sanctions are Against the Buyers, Not the Oil Itself

The U.S. sanctions are a threat against those who buy Iranian oil, or aid and abet them in selling or distributing their oil.

Iran has ships that they use to sell oil to those buyers who are willing to purchase it and face the risk of U.S. sanctions.  Unless those ships were in some way being weaponized, the U.S. would not inhibit their movement.  This is important as the U.S. won’t initiate the risk of escalation in an attempt to stop Iranian oil sales.

It is unlikely, that away from the Iranian tankers, they will find other ways to transport oil -limiting their potential sales. Iraq, a “frenemy” of Iran, will continue to sell some amount of Iranian oil products.

China is an issue.  China, which had a waiver, will in all likelihood continue to buy Iranian oil.  How will we respond to this?  Can we sanction them as they are still allegedly trying to strike a trade deal?  Or, is this another reason that President Trump has suddenly come out with a tougher stance on China?  Of all the discussions surrounding Iran and oil, this might have the biggest impact near-term on markets if it becomes intertwined with trade deal negotiations.

Turkey should support the sanctions.  There is no obvious reason for Turkey to support Iran and many reasons why it should use this as an opportunity to enhance relations with the U.S. and signal its continued desire to be in NATO.  We don’t expect Turkey to do anything against the sanctions and would take any sign of it supporting Iran as a clear indication of further movement from the West and faster than previously thought.

Hamas and Hezbollah 

While tensions and violence have increased, the U.S. will not directly intervene.  We will support our ally, Israel, but it is an Israeli battle and it is capable of handling that on its own from a military standpoint.

Iran’s Nuclear Threat

The U.S. is no longer part of JCPOA, but still has credible intelligence on the status of Iran’s nuclear progress.  At this point the threat of a ‘nuclear’ war, in terms of nuclear weapons is non-existent.

CYBER

Given Iran’s expertise and history of cyber warfare and state-sponsored hacking, this domain of war cannot be ignored as we discuss in our podcast with General (ret.) Tata.

“I think it is rhetoric at this point and not as dangerous as other times in the past.  The carrier battle group is enroute and we will see an escalation of words as it gets near.  If we transit the strait, then the threat goes up and miscalculations can occur on either side.  I would be shocked by a preemptive strike by the U.S. but retaliation for any Iranian small boat attack is probable.  Iraq and Turkey will watch and as long as there is no U.S. provocation, they will be fine as we have done this before, and it is likely that the Department of State will tell them if we will transit the strait – showing freedom of navigation.”

Lieutenant General Frank Kearney

Original Post 5/9/2019

Key Points:

• Turkey is bordering on dramatic geopolitical changes
• Turkey risks continued membership in NATO
• Erdogan needs to make a choice—NATO or Russia
• Turkey’s shift to a theocracy has put their economy into a tailspin
• Deteriorating relationships could force alternate trade partners
• Exposing U.S. technology and IP to Russia

Background:

Academy Securities Geopolitical Intelligence Group has voiced concern over the deteriorating relationship with NATO ally, Turkey. Historically, Turkey represented a moderate Islamic nation that combined two worlds, both the East and West. However, in recent years, Turkey’s President, Recep Tayyip Erdogan has consolidated power, limited freedoms, and cozied up to Russia.

What Has Happened:

The growth that helped lift Turkey’s economy since late 2009 has been snuffed out after a drop in valuation of the Lira, political miscalculation, and acrimonious relations with the United States. Foreign investment has decreased, and Turkish companies and citizens simultaneously must pay down debt. Turkey has officially entered a recession.

In addition to Turkey’s economic woes, the country now faces security challenges. Since 2016, Turkey has been actively involved in operations against the Islamic State and U.S. backed Kurdish forces in Syria. Turkey continues to exert influence well beyond its borders. Turkey has forces deployed to Qatar and Somalia (where it has built bases); in Afghanistan as part of a NATO-led coalition; in the Balkans; warships throughout the Mediterranean and Aegean Seas monitoring Turkish exploration and production operations; as well as troops focused on the historical and continued dispute over land rights with Greece.

Social and political tensions are also escalating; last week Turkish Women marching in Istanbul on International Women’s Day were greeted by riot police and tear gas. After a 2016 attempted coup, portions of Istanbul are under increased enforcement and are unable to be used for protests – including the location where the Women’s Day March took place. Although there are no reports of injuries or arrests, the optics do not play well for a country that once aspired to join the European Union (EU) and is a member of the North Atlantic Treaty Organization (NATO).

As Turkey enters recession, U.S. foreign direct investment could be exposed, as well as major industries that export products and services including aircraft, iron & steel, and machinery. Recently, President Trump has pushed to remove Turkey from the Generalized System of Preferences Program—which allows certain products from certain countries to enter duty free—on the basis that Turkey no longer qualifies, as it has become sufficiently developed. This adds to the already significant challenges for Turkey as it is hoping to meet a $75 billion trade volume with the United States. Turkey’s recession, combined with its increased appetite for militarization (military budget as a portion of its GDP has increased 40 bps to 2.2 percent), may lead it to find other trade partners (notably Russia) to fulfil its needs.

The most troubling element and outcome of Turkey’s new authoritarian identity is its growing relationship with Russia. Retired Lt General Dave Deptula, who commanded a joint task force in Turkey in the late 1990s, said, “Turkey appears to be committed to the purchase of S-400s from Russia. This weapon system is inherently incompatible with the F-35 and other western air defense systems. If Turkey acquired it, it would result in the compromise of valuable information to the Russians. Turkey has a choice to make—to stay a member of NATO or move into the Russian camp—it can’t do both.” Additionally, Turkey and Russia have held joint naval exercises in the Black Sea and are pursuing increased cooperation in Syria. U.S. military leaders and the Trump administration have publicly admonished the S-400 deal in the past, but now, they are starting to put some real heft behind the warnings.

Why it Matters:

General Deptula went on to say, “The increased military cooperation between Russia and Turkey certainly displays a strengthening connection. However, describing the current relationship as a partnership may be too strong – though it’s apparent that may be Erdogan’s desired outcome. Russia’s motivations are clear—it aims to drive a wedge between Turkey and NATO, and it appears to be working. NATO’s response will follow the U.S.’ lead. The U.S. will need to define the “grave consequences” Turkey will face if they go through with the S-400 deal with Russia. The U.S. not selling Turkey the U.S. Patriot missile system and terminating Turkey’s participation in the F-35 program would be significant. However, what Erdogan really needs to consider are the consequences of getting kicked out of NATO. That would have a “grave” impact on the people of Turkey as well as Erdogan himself.”

Original Post 3/13/2019

Does the violence at the border indicate a higher probability of U.S. military intervention?

“I think the violence and the Trump administration’s positioning increases the probability of military intervention. This is akin to Obama’s “red line” for chemical weapons in Syria. If President Trump is not able to follow through on ousting Maduro and ensuring Guaido is president, he will face similar criticism. This increases the likelihood that the President will ensure Guaido’s success.” 

What are the next steps for the U.S.?

“Finding a way to peaceably transition power. The invasion of Haiti could potentially serve as a model where Jimmy Carter, Sam Nunn, and Colin Powell met with General Cedras, the dictator of Haiti. Under the threat of an airborne assault from the 82nd airborne division, with planes in the air, Cedras finally capitulated. A similar carrot and stick approach would work well here. Have a combat force prepared for action with a peacekeeping force also ready to go. Send a high-profile delegation to Caracas and negotiate Maduro a condo in Costa Rica (as was done for Cedras) or threaten U.S. military intervention.”

Who are the most important international players as it concerns influence with Maduro? Lima Group? China? Russia? U.S./EU?

“Organization of American States is the key international player here in organizing a solution. Those actors that run counter to American purposes include China, Russia, Iran, and Hezbollah – though China will back Guaido if he appears headed for power. The others will work hard to undercut American influence and success.”

What are the indicators the U.S. is preparing for a direct military response? 

“Airplanes flying from Fort Bragg. Increased U.S. military presence in the Caribbean. A carrier strike group from the Atlantic Fleet moving into the Caribbean Sea or Atlantic Ocean off the coast of Venezuela.”

What else should be considered when evaluating the crisis in Venezuela?

“Florida is a battleground state politically. It has a huge Venezuelan and Cuban expat population. Both groups are pro Guaido, generally speaking. It makes domestic political sense for the President to support Guaido. Also, Venezuela has the world’s largest oil reserves. Having a friendly Venezuela would be good for the world. Also, disrupting the communist/socialist/terrorist ties with Cuba, Russia, and Iran would be good for U.S. foreign policy.”

Brigadier General Anthony J. Tata 

Original Post 2/26/2019

Key Points:

• Syria remains a complicated and chaotic conflict
• A U.S. departure from the region is likely to exacerbate already volatile conditions
• U.S. presence is vital to countering Russian influence in the region

Background:
The nearly eight-year-long conflict began as protests. The uprising, a product of the Arab Spring, began when a group of children were arrested for spray painting “the people want to topple the regime” on a school wall in March 2011. The children’s arrests and the government’s strong response to their vandalism sparked protests that quickly escalated into all-out war between the Syrian Government and antigovernment rebel groups.

The conflict quickly became more complicated as international players began vying for influence and taking sides. Russia and Iran quickly came to Syrian President, Bashar al-Assad’s, aid. While the U.S., Saudi Arabia, Turkey, and other regional players backed the rebels. Lines of effort in Syria concentrated on the destruction of the Islamic State (which found ideological footing and real estate out of the conflict), violence between Syrian government forces and opposition fighters, and Turkish military operations against Syrian Kurdish fighters (backed by the U.S. and an integral pillar of the successful fight against ISIS).

The rise of ISIS in Iraq and Syria, and the exporting of terror to the Western world, compelled the U.K. and France to join the U.S. led coalition – greatly expanding the air campaign in the region. The U.S. has been involved in Syria (in some way) since 2011 when the U.S. ordered sanctions against Assad for human rights violations. In early 2013, the U.S. sent food and medical supplies to Syrian rebels in an effort to stymie the influence of radical Islamist groups vying for control in the chaos. The fall of 2014 saw the first kinetic intervention by the U.S. when American jets targeted ISIS in Raqqa. By the fall of 2015, the complicated dynamics of Syria became more so when Russia began building its military presence and launched their own airstrikes in support of the Assad regime.

What Has Happened: President Trump has long been critical of U.S. involvement in Syria. His criticism of U.S. intervention began when he was still a private citizen and continued through the first year of his presidency. As recent as this spring, President Trump championed a swift exit from the conflict, only to be challenged by his national security advisors. Despite this counsel and despite the administration’s strong military response in April to Assad’s continued use of chemical weapons, President Trump appears to have decided that it is time for U.S. forces to leave Syria. President Trump has ordered the rapid departure of approximately 2,000 American forces currently operating in Syria. The departure is expected to take less than a month and is justified by the decreased power, influence, and footprint of ISIS.

Why it Matters:

Our involvement in Syria may have started with the mission to counter ISIS but the conflict has evolved to a point where Russia and Iran are larger considerations than ISIS or Assad. The announced troop withdrawal is a reversal of Pentagon policy and position. Secretary Mattis has been a proponent of continued presence and engagement in Syria as a measure to counter Iran and prevent the resurgence of other extremist groups.

Additionally, Syria is important as it offers the U.S. an opportunity to counter Russian influence in the region directly. The conflict in Syria has provided a platform for the Kremlin to act as a broker in the Middle East and it allows for a constant military presence in the strategic region. Given the White House’s priority to counter near-peer competitors like China and Russia, this decision is surprising.

At this stage in the conflict, the U.S. strategy is concerned first with Russia, then Iran, Turkey, and finally ISIS and Assad. Furthermore, Tensions with NATO ally Turkey have been high throughout 2018. Most recently, Erdogan has threatened military action against the U.S.-backed Kurdish fighters in northeastern Syria. This threat was lobbied with the overt understanding and that U.S. forces could be caught in the crosshairs. President Trump has vowed to abandon support of the Kurdish groups that Turkey sees as terrorist organizations, but that promise has been slow to unfold. This announcement could be an essential element in easing tensions between the U.S. and Turkey – an important strategic partnership.

“It’s important to recognize that while U.S. actions in Syria were initiated to terminate the Islamic State, and that mission has largely been accomplished, geopolitics in the region continue to be of concern especially actions by Russia and Iran. Leaving Syria at this time puts in jeopardy U.S. options to counter Russian and Iranian malign behavior and cedes them an advantage counter to the U.S. national security strategy.” Lieutenant General (Ret.) David Deptula

“This departure creates an opportunity for Hezbollah’s expansion and a higher rate of Israeli preemptive strikes. These strikes have the potential for escalation and could draw the U.S. presence back into the region at higher stakes.”  Lieutenant General (Ret.) Frank Kearney

Original Post 12/20/2018

          Key Points:

• The Trump administration has indicated it will leave the INF if Russia doesn’t come into compliance with the treaty
• China’s military advancement is a significant consideration when reevaluating the INF

Background:
In 1987 President Ronald Reagan and Soviet leader Mikhail Gorbachev signed the Intermediate Range Nuclear Forces (INF) Treaty, prohibiting land-based cruise or ballistic missiles with a range between 311 and 3,420 miles. Exempt from the treaty were air or sea launched munitions. The agreement was a reaction to the short flight time and limited warning that existed between the Soviet and NATO forces deployed in close proximity during the Cold War in Europe. As a result, tensions were eased; it is estimated over 2,500 ground-based cruise missiles were destroyed.

What Has Happened:
This week, Secretary of State Pompeo indicated that the U.S. will abandon the INF in 60 days unless Russia begins a verifiable process to dismantle the missiles that violate the treaty. In line with Russia’s predictably aggressive international behavior, Putin maintains a focus on improving his growing military modernization. Despite U.S. led international pressure, Putin publicly boasted earlier this year that Russia would soon have a nuclear-powered cruise missile capable of reaching the U.S. Additionally, the Trump administration is concerned about burgeoning Chinese military capabilities and modernization -a justification for nullifying the treaty and structuring a new one. Secretary Pompeo has correctly assessed that “there is no reason the United States should continue to cede this crucial military advantage to revisionist powers like China.”

Why it Matters:
The Cold War treaty has outlived its value. It must be modernized to match the concomitant modernization realities of our near peer global competitors, Russia and China. In 1987, China was not a consideration. It is today and “a new INF” must acknowledge and reflect that challenge. Russian belligerence in the Ukraine, Syria, and potentially in the Baltics, as well as evolving expeditionary Chinese military activities in the South China Sea, have shown their penchant for pushing boundaries and indifference for international law and standards. These threatening military capabilities coupled with a blatant disregard for normative international behavior practically demand a do-over of the INF.

“Policy should lead actions and the ambiguity of the administration’s goals can be risky. The Secretary of State should announce clear unequivocal policy that we desire to adhere to the INF and our goal is to achieve a Russian roll back while simultaneously seeking to negotiate a similar bilateral agreement with China – then lay out the alternative to pursuing the policy options above. The actions taken by the administration risk producing an arms race with cost imposition. Who is in a better economic position to afford and win an arms race? The United States is currently upgrading its strategic deterrent Triad and will continue to do so while maintaining superiority or parity with its global competitors. The U.S. will accept the cost burden to defend this nation but seek, with Russia and China, to pursue more peaceful economic objectives rather than rekindle a global arms race. “
Lieutenant General Frank Kearney, Academy Securities’ Advisory Board Member.

Original Post 12/11/2018

Key Points:

• National security and foreign policy strategy are unlikely to slow as a result of election outcome
• Cooperation and competition with China will remain a primary focus for the Trump administration
• Russia and the degrading stability in Ukraine require international attention

Background:

On Tuesday, an unusually high level of Americans flocked to the polls, casting their ballots in a critical election for President Trump and his administration. In the end, the Republicans remained in charge of the Senate, but the Democrats gained a majority control of the House.

What has happened:

With the change in the House, we can see a shifting relationship between Congress and the White House that could take the wind out of the sails of the administration’s international efforts. The House will poke and prod, trying to find legal openings to put the administration on its heels. Those efforts will require attention and energy from the White House to address, but global engagement will continue. In fact, the pace of international affairs will increase…the clock is ticking as the nation approaches the 2020 Presidential elections. That’s right, the 2020 campaign is now underway.

Why it matters:

China
General Marks: Tariffs dominate the discussion and are defining our relationship with Beijing. However, expect to see more U.S. efforts towards engaging tactically with China and its military. The U.S. will include allies and partners in those efforts as trust measures are established and validated. Additionally, we need China to help with our stalled efforts vis-a-vis North Korea and its nukes.

Peter Tchir: Moving forward, tariffs and trade with China will be the focus, unfortunately, pushing North Korea to the backburner. As of this morning, it is unclear how President Trump plans to react to the elections in regard to negotiating a trade deal. Do we go for an ‘easy’ win, where China agrees to buy our commodities (soy, LNG, etc.) ahead of the Democrats taking over the House, or does this incentivize the President to dig in his heels and go for an aggressive deal (which could take time and be disruptive)?

Russia
General Marks: Russia is contributing to the civil war in Ukraine and the world pays no attention. Crimea is gone and will not return but the Donbass region in eastern Ukraine could follow Crimea into Moscow’s hands. The U.S. and the E.U. must act together now. Congress must get behind the administration’s efforts, even if they are exploratory. The rationale to support the independence of Ukraine is unimpeachable. Russia will continue to push into the Baltics.

Peter Tchir: Ukraine issued $2 billion in bonds last month, which the market is taking as a sign of normalization, but if General Marks is correct, the market is being far too complacent of the risks associated with Ukraine.

General Marks: The U.S. must engage with Russia to find a way out of Syria that allows our national security objectives to converge. Cooperation is possible. Who follows Assad? Washington and Moscow must find that answer together.

Iran
General Marks: This administration will not tolerate Iran’s efforts to create a nuclear capability… and let’s assume Iran has not already achieved a nuclear capability without our intelligence community’s knowledge. Sanctions will have little initial impact over the next six months, but the pain will begin to set in as we approach 2020. The U.S. will stay connected with partners and allies to ensure sanctions can become more punishing. That’s a long shot but must be the desired outcome.

Peter Tchir: The concept of ‘safe’ energy suppliers should not be overlooked. We should be working hard to encourage countries to rely on U.S. oil and LNG exports as a stable supplier.

Read Our summary of The Intersection of Geopolitics and Energy Here

E.U.
General Marks: More nations will start to cut their own deals for Russian oil and gas. The U.S. must make U.S. oil exports more readily available as an alternative to the E.U.’s dependence on Russia.

Summary Post mid-terms the pace and direction of international engagement by the Trump administration will increase. Our Congress will “investigate and legislate” with the White House as its strategy, but do not expect to see a greater amount of gridlock. Expect business as usual, especially on the international stage.

Original Post 11/13/2018

The Intersection of Geopolitics and Energy

By Peter Tchir and Michael Rodriguez

As many of you know, Academy Securities has an Advisory Board which includes both Wall Street Veterans and Military Veterans that has helped guide the firm in its growth. One part of that growth has been the Geopolitical Intelligence Group which is comprised of 10 former Generals and Admirals. These Generals and Admirals bring a wealth of knowledge and contacts to the table that we share with our clients. Rachel Washburn, who served as an intelligence officer in the army, is exceptionally well suited to getting the most out of this group and is the point person for anything Geopolitical. We provide anything from in depth bespoke projects, to more conversational podcasts, to reports, which we call SITREPS, in keeping with adherence to our mission as a Veteran Owned Firm. Recent SITREPS have been focused on the Kingdom of Saudi Arabia and have provided insights that are proving to be correct.
As we continue to enhance what we deliver to clients, we have been working to link in our Macro Strategy with our Geopolitical Expertise whenever possible. Much of our macro strategy is fixed income and credit market focused and it doesn’t always have a geopolitical aspect, but there are two key areas where Macro and Geopolitics are entwined – Emerging Markets and Energy.
These two areas stick out as it’s nearly impossible to analyze energy production and not discuss geopolitics, while emerging markets and geopolitical risk go hand in hand.

Geopolitical Risk
Michael Rodriguez, a Marine Corps combat veteran, who completed an internship at Academy and has now joined full-time, worked with our Geopolitical Intelligence Group to create a ‘heat map’ of where the Geopolitical Risks, particularly the risk of armed combat, is highest.

It is a scary world when so much of the map is dark red (high risk) and light red (medium risk).

This map helps explain why Geopolitical risk has become a topic of conversation amongst market participants. While today it is the Kingdom of Saudi Arabia attracting the attention, it was just a few weeks ago that it was Syria and Iran and Turkey and Russia. Before that it, was North Korea that was attracting the headlines. While markets may fixate on one region at a time, the reality is that these situations are developing continuously, and Academy Securities has the expertise to not only keep you apprised of the developments but to help you formulate views on the likely outcomes and what that means for your business or portfolio.
One thing that I found most interesting as the Geopolitical Intelligence Group developed this map was the assertion that you really couldn’t have a low risk country next to a high risk country, with Europe and Ukraine being the exception. Effectively, the risk of spillover from high risk countries or regions to their neighbors is high. In some cases, because there would be direct conflict, but as a general matter, instability and risk tend to ignore national borders in much of the world.

Global Oil Production
This chart looks at the world based on oil production data from the EIA. The dark blue countries are heavy producers with light blue representing small to medium size producers.

There should be no obvious surprises on this map. We could tweak it for different types of commodities, but I think it does a good enough job for our purposes, which is really to get to the next chart.

Geopolitics Meets Energy
This next chart attempts to meld the two charts into one. The concept is to identify regions for Academy Securities to focus on in terms of how the Geopolitical Risk can affect markets, but particularly, energy markets.

The dark blue is ‘safe’ energy production.

From a U.S. perspective, not only does energy production/energy independence create good jobs that support the economy, it plays into national defense as we aren’t reliant on foreign sources. Not being subject to the whims of other nations, particularly those with high levels of geopolitical risk is extremely beneficial. Our Geopolitical Intelligence group has also been able to help guide companies and investors through some of possible legislation that could impact the industry.
What is sometimes overlooked, is how important it is for other countries to secure sources of oil and liquid natural gas from stable suppliers. The combination of being ‘safe’ and a big producer is extremely powerful. It will play a role in our trade negotiations with China.
The map also highlights why we should continue to see higher volatility in Brent prices relative to WTI, with that spread often influenced by geopolitical issues.
To be brutally honest, the light red and red areas aren’t that important for our discussions on energy. They are areas of high geopolitical risk and are important in some cases to the global economy and particularly important to investors, especially if they are bond issuers, but they don’t play a major role in determining the price of oil.
Then we get to the heart of the matter – the purple zones. Purple represents the dangerous combination of high Geopolitical Risk with high energy production. These are the ‘hotspots’ that we will focus our geopolitical knowledge and resources on, in our efforts to help the macro analysis on energy prices. Much of the map is obvious, but I think the visual effect of the map is powerful in really drawing your attention to the hotspots.
Mexico jumps out at me.
The Middle East seems to be constantly in the news and while the latest developments in the Kingdom of Saudi Arabia have upped the ante, we’ve already discussed that in the SITREPS mentioned earlier (and we will continue to adapt our view as necessary as information comes out – though hopefully we will turn out to be right – we have been tracking the potential impact on Aerospace and Defense stocks and bonds – which you should have received earlier in the week).
Russia is another obvious area and one that we focus on regularly in our SITREPS and Podcasts.
But on this first cut, it is Mexico that stands out. We have just announced a trade agreement with Canada and Mexico and the currency is much stronger than it was in June, ahead of Mexico’s election, yet it shows up as still being relatively high on the Geopolitical Risk front and is a major energy producer.

Next Steps
The most obvious next step is doing a report on Mexico. We also are in the process of consolidating our geopolitical views on the purple regions to help formulate our views on energy prices.
We certainly think that the ‘safe’ production of the U.S. will play an important role in our trade negotiations with China (liquid natural gas is an obvious choice to reduce the trade deficit as China needs it and we produce it – cheaply and with low risk of unexpected supply disruptions).
On the sales and trading side of things, John Chang, another recently hired Marine Corps veteran, who is one of our agency discount note and corporate bond traders, is starting to send out runs on investment grade (and some high yield) energy bonds so that we can more directly translate our geopolitical and macro views into tradeable ideas.

Thank you for all your efforts and support and we look forward to continuing to grow and develop the products and services that can help you in your business or portfolio.

Original Post 10/22/2018

Key Points:
• The Kingdom of Saudi Arabia (KSA) is being blamed for the disappearance and possible death of U.S. resident and journalist, Jamal Khashoggi

• The Trump administration is considering sanctions against the Kingdom in response

• Mohammed bin Salman (MBS) may have damaged his position as future King

• Long term impact of military contracts with KSA are unlikely to be negative

Background:
• On October 2, Jamal Khashoggi, a Saudi citizen and U.S. resident, was last seen entering the Saudi Consulate in Istanbul

• Khashoggi, previously enjoyed a close relationship with the Saudi Royal Family, serving as an adviser to the director of Saudi Arabia’s Intelligence Agency

• President Trump threatened harsh punishment if it was proven Saudi Arabia was responsible for Khashoggi’s death

• U.S. allies, Britain, France, and Germany called for a credible investigation by Saudi and Turkish authorities

What Has Happened:
It has been reported that the Saudis will take some responsibility for Khashoggi’s death – claiming it was the result of an interrogation gone awry. Given the escalating tensions and international attention and condemnation, Secretary of State, Mike Pompeo, has travels to Saudi Arabia to meet with MBS. The concern over the death of Khashoggi is only complicated by the strained relationship with traditional U.S. ally, Turkey. The Trump administration is facing internal pressure from a Congress already skeptical of Saudi Arabia’s handling of the war in Yemen and the cursory U.S. support for the conflict.

Why it Matters:
“I’m worried about succession challenges now and was not before. This event will be blamed on MBS internationally and it marks him both externally and internally. While his father, the King, can broker this while alive, I suspect others who may aspire to the crown may believe MBS is a marked man internationally. We need to watch how the royals react and keep an ear to the ground about how well this act is accepted internally. Ambitious competitors for the crown could see an opportunity.”

Lieutenant General Frank Kearney, Academy Securities’ Advisory Board Member

“The business environment with respect to KSA will be affected by this situation in the near-term (eg. reduced participation in KSA investment conference next week), but will remain essentially unaffected in the long-term. The geo-strategic importance of the U.S./KSA relationship, relative to larger Mid-East concerns, is too important to let this incident impact long-term business partnerships and/or foreign military sales agreements. That said, the media coverage surrounding this incident will demand some semblance of a response. It will be crafted to be meaningful in the near-term, but not harmful in the long run. “

Lieutenant General David Deptula, Academy Securities’ Advisory Board Member

Original Post 10/15/2018

 Key Points:

·         Brazil is experiencing a surge in violent crime

·         The legitimacy of Brazil’s government is plagued by accusations of corruption

·         Concern is rising over the influx of military leaders running for political office

·         The crisis in Venezuela is a destabilizing factor

Background:

South America’s largest and most populated country, Brazil, is experiencing economic, social, and political turmoil. Seemingly caught in the global trend of right-wing movements, Brazil’s likely next president is running on a platform to end corruption and empowering security forces to crack down on criminals. Brazil, a young democracy, has a history of authoritarian military leadership. Given the population’s general discontent, how vulnerable are Brazil’s democratic institutions?

What Has Happened: 

The murder rate in Brazil has seen a startling increase stemming from rival gang activity vying for territory in a nation bordering the world’s three most prolific cocaine producers. Brazil is not only a significant consumer of amphetamines like crack and cocaine, but it also acts as a vital transportation hub for the drugs’ pathway to Europe and Asia. Increased violence has impacted Brazil’s economy and future by driving away tourists and wealthy, educated Brazilians. While Brazil does not keep accurate records of citizens who have emigrated, there has been a 40% increase in voters registering to cast their ballots abroad. Violence is a primary reason for the exodus, especially in Rio, where the near-bankrupt state government is struggling to provide security forces with necessary equipment.

Why it Matters:

Driven by the rise of violence, Brazil’s respected military class has shown an increased interest in politics and political reform. Brazil’s military dictatorship lasted more than 20 years, leaving many wary of the rise of former military leaders seeking office.  Jair Bolsonaro, a far-right candidate and former Army Captain, is coming in second in the polls, only behind the imprisoned former president, and left-wing leader, Luiz Inácio Lula da Silva. These former Soldiers argue the values of the military will resolve the corruption in government that has led to increased violence and a failing economy. Few believe their country is stronger or financially healthier due to increased infrastructure investments. Spending in preparation for the 2014 World Cup and 2016 Olympic Games only ignited national concerns of political corruption, financial mismanagement, and highlighted the lack of aid to the impoverished population.  As the October elections approach, it remains to be seen how much the population’s dissatisfaction with their government will impact voter turnout. Additionally, it appears those military leaders seeking political reform and influence will likely achieve these ends through legitimate means. The US has identified Brazil as a key ally in establishing stability in South America and has increased their engagement in Brazil over the last eight years. However, even with increased US presence, the delicate situation in Brazil and neighboring Venezuela, leave it vulnerable to extreme political shifts and more economic and security instability. Since early 2017, more than 40,000 Venezuelan refugees have crossed the border into Brazil. Most refugees have settled in Roraima, Brazil’s most disadvantaged and isolated state, burdening an already ill-equipped system. Despite the massive influx of asylum seekers, Brazil’s current asylum system has remained unchanged for two decades.  In the areas affected, most of the support for Venezuelan refugees is provided by small charities and non-governmental organizations.  Much like the refugee crises born out of the conflicts in the Middle East, the United States and Latin America are vulnerable to the same cascading effects faced by Europe.  Xenophobic violence has broken out in the region where most refugees settle and there is a rise in right-wing rhetoric. As it stands, the US has showcased a willingness to prioritize this South American problem before it becomes a global one, but it remains to be seen if the Brazilian people will be as patient and strategic with their vote given the national challenges they face.

 “The South American military culture is one of extreme hierarchy and deference. This is not where Brazil will find a solution. Brazil is an alcoholic. The “harder right” is acknowledging that it’s ill and in a deep economic and social spiral. The “easier wrong” is thinking a military solution is possible.” All elements of power must weigh in, together. That’s called leadership, not cronyism.”

Major General Spider Marks

Original Post 08/24/2018

Key Points:

• President Trump begins a week-long visit to Europe where he will meet with NATO leaders and Russian President, Vladimir Putin
• NATO’s mission remains vital to European and global stability
• Russia’s behavior seeks to disrupt NATO’s coherence and to challenge U.S. global leadership
• Despite the challenges, there are opportunities for cooperation

Background:

Late last month, the Trump administration announced there would be a formal meeting between President Trump and Putin. Trump and Putin have met twice before but on the fringes of international gatherings. Given Russian meddling in U.S. elections and their destabilizing actions globally, tensions between the U.S. and Russia are high.

What Has Happened:

• During the July 16th summit in Helsinki, Finland, the two leaders are expected to discuss shared objectives in Syria, Russian reentry to the G7, nuclear non-proliferation (with a clear emphasis on Iran and North Korea), Russian cyberespionage, and hopefully Russia’s criminal annexation of Crimea in 2014
• The summit will be on the heels of the NATO summit held in Brussels July 11/12
• President Trump and his predecessors have long been critical of the inadequacy of NATO alliance burden sharing:
  • The President’s threat to remove U.S. forces from Europe should cause alarm – it could happen, and it would be disastrous

Why it Matters:

• Russia has effectively undermined 40 years of American foreign policy in the Middle East by filling the vacuum left by the United States’ limited commitment in Syria
• Syria has allowed Iran to exert more influence in the region and they are entrenched with the resilient Assad regime
• Syria, and Iran’s involvement in the conflict, will likely be a primary discussion point and a source of agreement between Trump and Putin:
  • Israelis are on edge given Iranian encroachment into the conflict
  • It is possible that Putin leverages his influence of Iran to gain an advantage in the hopes of lifting sanctions and possible G7 re-entry
• These two summits are inherently connected:
  • Putin is a destabilizing actor, and since his annexation of Crimea, NATO members have increased their defense spending
• Remember, there is the real possibility of a significant decrease in the U.S. military posture in Europe

“If President Trump moves forward with minimizing U.S. military presence in Europe, look for U.S. stocks to weaken as the market will start pricing in a greater rift between Europe and the U.S.; strengthening China’s position in tariff negotiations as they could cozy up with Europe. Russia will likely have the most to gain out of the Helsinki Summit, regardless of points achieved or not achieved by the Trump administration, as it elevates Putin’s position to have the summit in the first place, given Russia’s disruptive deeds. Also, post the Korean summit, the world will be less willing to believe positive headlines without any observable actions.”

Peter Tchir, Head of Macro Strategy at Academy Securities

Original Post 07/10/2018

Key Points:

• Erdogan has won the snap election and will continue to consolidate power
• Turkey is becoming less secular and is aligning with Russia
• Turkey as a NATO ally is no longer given

Background:

President Recep Tayyip Erdogan was just re‐elected Sunday to a five‐year term. Turkey is still in the “state of emergency” imposed following the failed coup in the summer of 2016. The Turkish lira is struggling. Turkish debt is an anchor to growth. The media has been shut down. Political opposition to Erdogan has been neutered. This election eliminated the office of the Prime Minister and consolidated the duties of the Head of Government with those of the Head of State. This Presidential election was accelerated by a year due to this exigent crisis and sets the conditions for Erdogan’s unchallenged rule with anticipated cascading constitutional changes to ensure his longevity. Of course, he’s learned from his new best buddy, Putin, how to stay in power. Do rules limit you? Change them.

What Has Happened:

Turkey has been an important but complicated partner for the United States. The U.S. and Turkey established diplomatic relations in 1927 after World War I, following the founding of the Turkish Republic. When the British government ceased aid to Turkey after World War II, President Truman proposed a $400 million economic and military aid package to Turkey and Greece to counter Soviet expansion. Turkey has been a historically reliable partner, an ally in the Korean War, a willing counterbalance to Soviet adventurism in the Middle‐East, and a host to U.S. Air Force influence in the region. Despite the rebuff during the invasion of Iraq (Turkey banned U.S. staging for the invasion), presently, Turkey plays an important role combating the Islamic State and facilitates the resettlement of refugees fleeing the conflict in Syria. The Muslim democracy joined the North Atlantic Treaty Organization in 1952 and remains a critical eastern member. Turkey serves as a buffer between Asia and Europe, allowing the U.S. to optimize its presence and necessary authority in the region. In return, the U.S. provides Turkey with protection in a region defined by instability. In recent years, however, Turkey continues to strengthen its relationship with Russia, raising red flags of NATO’s relevance in the region. In December 2017, Turkey struck a deal with Russia to purchase approximately $2.5 billion worth of Russian‐made S‐400 surface‐to‐air missiles. After Vladimir Putin visited Ankara in April, he announced his “decision to speed up the delivery of the missile systems.” Russia is also building Turkey’s first nuclear power facility that Putin describes as “laying the foundation for Turkey to have an atomic industry.” Not surprisingly, Russian military systems don’t meet interoperability standards. Turkish President Erdogan deemed the deal with Russia final and recently offered to co‐produce S‐500 missile systems with Putin. Though Russia and Turkey are traditional foes, Turkey’s recent business with Russia is startling and contributes to the deterioration of its relationship with the U.S.

Why it Matters:

It is crucial to understand what is at stake as Turkey becomes more independent and aligned with Russia and Iran. Putin’s campaign to undermine Western‐style democracies has been increasingly effective, especially as the U.S. seemingly takes a wrecking ball to the existing world order. In addition to subversive and overt actions by Russia to exert influence in the Middle East, the U.S. and Turkey have clashed over the U.S.’s support of Kurdish fighters in Iraq and Syria. On a January phone call with President Erdogan, President Trump expressed sharp concern about the possibility of conflict between Turkish and U.S. forces in Syria. He urged Turkey to “de‐escalate, limit its military actions, and avoid anything that might risk both forces coming into conflict.” It’s not inconceivable that NATO allies, Turkey and the U.S., may bump into each other in combat and start a shooting war. The U.S. partnership with Kurdish fighters has antagonized Turkey to the point that Erdogan threatened its NATO ally with an “Ottoman slap.” Kurdish militias, the YPG, (People’s Protection Units) and PKK (Kurdistan Workers’ Party), have been integral to the counter‐ISIS operations in Iraq and Syria. Arguably, the YPG are the most effective regional fighters. However, Ankara recognizes both the YPG and the PKK as terrorist organizations and considers them national security threats. The US officially began to arm and train YPG fighters in 2014. Despite the impact made by Kurdish fighters, Turkey and the U.S. have agreed to remove YPG forces from current engagement areas, a significant concession in U.S.‐Turkey relations. Turkey’s strengthening relationship with Iran is also deeply troubling to the U.S. Iran clearly exercises increasing influence in Syria and can be considered a winner of the Syrian Civil War…if that’s possible. Iran’s officers are embedded throughout the Syrian military and Iranian‐backed forces play a critical role in the regime’s efforts to fight the opposition. The National Defense Forces (NDF), a pro‐government militia in Syria heavily influenced by Iran, will likely form a political movement to enhance Tehran’s influence in the region. Turkey, Russia, and Iran are all jostling for influence in Syria leading to unprecedented and unpredictable cooperation among the three nations. The chaos in Syria serves as an opportunity for destabilizing actors (like Russia and Iran), to exert influence and experiment with methods to impact shifting global power dynamics outside of the region. Syria is a mess and Erdogan is positioned to continue to exploit it to his great advantage. He is aggressively changing the rules and concomitantly the face of Turkey. No longer a secular Muslim democracy, Turkey is an increasingly religious and dangerously authoritarian regime, leaning east, cutting its own deals. NATO is worried.

What we know:

For the last six months, Academy has surveyed its Geopolitical Intelligence Group (GIG), comprised of ten retired admirals and generals, on the rising tensions with Turkey. Consistently, our GIG has identified this deteriorating relationship as a significant foreign policy concern. Additionally, the GIG sees the potential for Turkey to leave NATO by years end as likely. Erdogan’s reelection this past weekend reinforces his tight grasp over Turkey’s new direction. This is the devil we know; it now appears we’ll continue to know him well into the future.

Original Post 06/25/2018

Key Points:
· The Trump administration has canceled the June 12th summit with North Korea
· China’s invitation to participate in the RIMPAC naval exercises has been revoked
· North Korea has nukes… but that may not be our biggest national security challenge

Background:
In the last month, apparent improvements in diplomatic relations between the U.S. and North Korea have been staggering. With China’s influence, North Korea appeared ready to cooperate at the negotiating table. China is essential to any resolution with North Korea; something the U.S. and international community acknowledge; however, as the Trump administration focuses on the Pacific, the threat of Chinese competition may hold primacy over various opportunities to cooperate with China.

What Has Happened:
Following critical statements out of Pyongyang regarding Vice President Pence and the announced U.S.‐South Korean military exercises, the Trump administration canceled the planned summit with North Korea. President Trump left the door open for future engagement. Simultaneously, the Trump administration informed China that they would not be permitted to participate in the international naval exercise RIMPAC. RIMPAC , established in 1971, is designed to ensure the safety of sea lanes and security on the world’s oceans. The U.S. hosts this exercise biennially.

Why it Matters:
North Korea has always been a national security concern and given its antagonistic behavior, one that has amplified in the last year. North Korea’s nuclear capacity has raised the stakes and enabled its relevancy as an international player. The Kim regime knows this. The summit had the potential to begin the process of stabilization in the region but also to ensure that North Korea matters less on the world stage. The summit had an intended outcome to decrease both the risks of a nuclear North Korea and Kim’s longevity. Kim’s the dog that caught the truck…what now? Despite the optimistic outlook these past few weeks, a resolution remained tenuous. Kim Jung‐Un is unlikely to denuclearize, a non‐negotiable for the Trump administration. While tensions with North Korea have monopolized much of the media attention, Chinese competition/cooperation has remained the more insidious threat to U.S. interests and national security.

The decision to uninvite China from participating in RIMPAC is in response to continued Chinese militarization of the South China Sea and the Spratly Islands. China has participated in the last two exercises, and China’s top diplomat responded to the news with disappointment stating, “We find that a very unconstructive move, nonconstructive move, we hope the U.S. will change such a negative mindset.” The challenge with China is finding opportunities to cooperate while still maintaining a competitive edge. China’s involvement in RIMPAC was an opportunity to cooperate in a controlled and measured environment. The Trump administration has taken a hard stance against China on economic factors and is now showing a willingness to respond to Chinese aggression in the South China Sea. Issues on trade have the potential to be resolved as we near the mid‐term elections but addressing Chinese military and diplomatic expansion in the region (and globally) is a much more complicated and potentially existential issue. China’s growth is the result of a messianic focus on its strategic and long‐term objectives. The U.S. has possibly lost sight of its own.

The following commentary is provided by Peter Thcir, Head of Macro Strategy at Academy Securities:
While stock markets reacted poorly to the announcement that the summit was off, that should not have a long‐term impact on markets. As General Marks has pointed out in the past, a deal with North Korea will take time, and tensions are unlikely to escalate beyond rhetoric, which markets have dealt with for over a year now. Without escalation, which still seems highly unlikely given the General’s insights, North Korea can remain on the back burner. The actions we have taken clearly up the ante with China and will likely become part and parcel of a trade deal with China. The harder we push, in my opinion, the more likely it is we get a comprehensive deal; including real protection on Intellectual Property and reciprocal access to markets. That is what markets, and the economy, really need to flourish. My backstop view remains that China offers us some big headline number concerning deficit reduction, which will sound great in the near term but won’t protect our long‐term interests. We all need to remember President Trump’s negotiating style. Upping the ante to cave later is well within his playbook. As General Marks points out, we are moving further apart, but if that is a temporary strategy as part of a broader negotiation, it can be resolved.

Original Post 05/24/2018

Key Points:
• After a few weeks of euphoria between Washington and Pyongyang, something went sideways.
• Secretary of State Mike Pompeo has taken two trips over the past month to meet with North Korean leader Kim Jung-Un. The summit is set for June 12th, in Singapore…or is it?
• The summit will happen as planned.

Background:
Kim Jung-Un announced yesterday that he would abandon the summit with President Trump. Although it can be difficult to ever truly understand the motivation for North Korean statements or actions, Kim appears to be threatened by the routine and ongoing U.S.-South Korea defensive military exercise, Foal Eagle. Kim also indicated that North Korea takes issue with the U.S. position that the North denuclearize.

Situation:
Foal Eagle is part of a series of military exercises that the U.S. and South Korean military coalition routinely conduct. Talk about “showing your hand”… these exercises are never a surprise. In fact, North Korea increases its intelligence collection during these exercises to better understand the coalition’s capabilities. There is no reason to believe Kim was surprised or concerned about the objective of this exercise. He has been through this before.
The U.S. position is that North Korea must denuclearize; however, there has never been a prescribed timeline. In the recent visit Secretary Pompeo had with Kim, the U.S. agreed to provide Kim (and his regime) security guarantees. Kim must have assumed that this “guarantee” would inevitably require him to give up his nuclear leverage.

Why it Matters:
As long as South Korea asks the United Sates to remain on the Peninsula, the readiness level of our military partnership is non-negotiable. The only way to ensure readiness is through aggressive and thorough military exercises. In fact, even Kim has said he understands why the U.S. military is on the Peninsula and that exercises are a necessary part of their presence. Maybe his outburst is simply diplomatic recidivism. He has appeared positively reasonable lately and perhaps felt he must remind the world of his whimsy and unpredictability. Only he knows.
The Kim regime now has a seat at the table. Kim has a nuclear capability, is just shy of weaponizing it (if not already there), and has delivery means that extend his threatening reach beyond Northeast Asia. Without nukes, Kim reverts to a peninsular annoyance. Kim can agree to a nuclear freeze and the requisite inspection protocols necessary to ensure compliance. However, he will never give up his nukes. President Trump will be gone in two or six years. Not Kim. He will not allow his regime to be at risk. He will play nice now but retain flexibility. Our national election cycle is not on his timeline. For Kim, this is a long game.

Original Post 05/17/2018

Key Points:

• A review of possible outcomes of the Korean Summit
• Major General (Ret.) James “Spider” Marks and Major General (Ret.) Mastin Robeson, analyze possible scenarios and bargaining chips
• While an official end to the Korean War is a real possibility, a denuclearized North Korea is less so

Background:

After a year of turbulent exchanges and destabilizing missile and nuclear tests, President Trump and Kim Jong-Un are set to meet face to face. While President Trump is not the first U.S. president to receive an invitation to meet with a North Korean Leader, he is the first to accept.

Possible Scenarios:

Denuclearization:  Not likely. The Democratic People’s Republic of Korea (D.P.R.K.) got to this point by building a nuclear capability with regional and intercontinental delivery means.  North Korea’s viable and deployable, albeit nascent, nuclear and missile capabilities are the primary reason President Trump has agreed to meet with Kim. Without nukes, Kim remains bark without bite. This Kim can bite.

Freeze nuclear and missile development: Likely.  The Summit must establish a baseline for both nukes and missiles. Currently, the intelligence community does not know, nor can it verify the inventory of North Korean nukes and missiles. A pre-condition for an agreement would have to be a complete verification protocol from the U.S. and the International Atomic Energy Agency (I.A.E.A.). In this case, verify before trusting…and then keep verifying.

Cessation of the Korean War: Likely. The war can “end” and the armistice can be replaced by a peace treaty, ending hostilities.  The signed armistice established the Korean Demilitarized Zone (DMZ) and, in fact, recognized the political division the geographic separation put in place between North and South Korea (R.O.K.). A peace treaty is eminently achievable and timely.

A weakening of the six-party talks: Not likely. The six-parties (China, Russia, U.S., Japan, R.O.K., D.P.R.K.) remain intact, relevant, and a compelling voice (not necessarily a vote) in a future U.S.-N.K. agreement. The six-parties will want their independent national security concerns addressed.

Diplomatic recognition: Likely. The U.S. and North Korea will establish diplomatic recognition following a peace treaty.

Modify U.S.-Republic of Korea coalition: Not likely.  U.S. forces will remain on the peninsula. Ironically, Kim Jung-Un has agreed to accept the U.S. military presence, while our President has inferred that there is a real opportunity to modify the U.S. military posture (or completely withdraw U.S. forces). Military exercises will continue and are essential to maintaining military readiness.  If Seoul “requests” that the United States physically depart the peninsula and modify the U.S.-R.O.K. coalition, U.S. leadership would embark on a diplomatic offensive to convince Seoul to reconsider.

Remove economic sanctions against North Korea: Likely. The U.S. will agree to lift sanctions. It will not, however, agree to compensate North Korea for economic gains that North Korea might have realized if sanctions over the years had never been in place.

Reunification: Not going to happen…ever. Over 70 years and a deeply costly war, the separation between the North and South has become intractable. Reunification should remain politically aspirational to Seoul, Pyongyang, and the global community. However, it remains in both political and practical terms, unlikely. The scars and the political alliances are too deep.

Will the U.S. withdrawal from the JCPOA impact the June 12^th talks between President Trump and Kim Jung-Un: Not likely. There is little causality between the situation in North Korea and Iran, especially as it pertains to the international community. Unlike the JCPOA stipulation, the U.S. will not be delivering pallets of money to Pyongyang. Sanctions against North Korea have not included “frozen funds,” as the D.P.R.K. essentially has no capital structure. North Korea has been isolated internationally for seven decades. To survive, it must open up. Although the U.S. will negotiate from strength, the Kim regime’s unpredictable behavior has always given Pyongyang an advantage. Don’t expect it but the U.S.-N.K. summit could be a bust.

“The U.S. position remains that nuclear weapons in the hands of Iran or North Korea is unacceptable, but it is a delicate road to walk.  Our hope is that President Trump’s decision to pull our support of JCPOA sends the signal of a tougher stance.  The ongoing hostilities in the Levant and the threat of hostilities on the Pacific Rim are concerning, and may be indicators that a tougher stance by the world leader is necessary.  It is always better to negotiate from a position of strength.  The timing of North Korea’s stated decision to seek a new path is heartening, and I do not see the decision to pull out of the JCPOA negatively impacting the on-going discussions on the Peninsula.”

Major General (Ret.) Mastin Robeson 

Original Post 05/11/2018

Key Points:

The US should remain in the JCPOA. The President should choose to continue to certify the deal for six months as the current deal is modified.

Background:

President Trump campaigned on a promise to fully review the Joint Comprehensive Plan of Action (JCPOA), also known as the Iran nuclear deal, describing it as “one of the worst and most one-sided transactions the United States has ever entered into.” Last October, the administration completed its review of the JCPOA. By law, the President must certify every 90 days that Iran is technically compliant with the terms of the JCPOA. Additionally, this quarterly certification by the White House must acknowledge that the suspension of economic sanctions against Iran remains “appropriate and proportionate to the specific and verifiable measures taken by Iran with respect to terminating its illicit nuclear program.” Tomorrow, May 8th, the President will make his decision on the status of the JCPOA.

What has happened:

In the past two weeks, the President hosted both President Macron of France and Chancellor Merkel of Germany. Both leaders separately tried to persuade President Trump not to torpedo the deal. Not surprisingly, Iranian Foreign Minister, Mohammad Javad Zarif, declared that Iran would abandon the deal if the US pulled out. Prime Minister Netanyahu of Israel stated that Iran did not disclose a covert nuclear site to the International Atomic Energy Agency (IAEA), the international inspection body promoting the “safe, secure, and peaceful use of nuclear technology.”

Why it matters:

The US should remain in the JCPOA. The President should choose to continue to certify the deal for six months as the current deal is modified. A new and better deal would incorporate two provisions: unannounced inspections (to include both nuclear facilities and military bases housing the missiles that are required to deliver nuclear weapons) and the elimination of the decade-long sunshine clause that affords Iran a pathway to nuclear weapons after 2025.

This clearly would set the agenda for our new Secretary of State, Mike Pompeo. It would be his primary job to modify, not scuttle, the deal. It can be done and there is every reason to believe he can successfully lead the effort.

If this can’t be accomplished, then the deal deserves to be killed. At least by extending the deadline by six months, the 5+1 signatories (the UN permanent security council members China, Russia, France, UK, and the US + Germany) will have time to get it right or better prepare if it goes wrong.

Right now, an inadequate JCPOA is better than no JCPOA, which would unleash Iran to race or buy its way to a nuclear capability. Better to be in the mix, as messy, chaotic, and ambiguous as it is than to walk away. Iranian nuclear ambition may only be tempered by international cooperation and condemnation…but when has Iran ever cared about that?

Original Post 05/7/2018

Background:

In the summer of 2012, Syria’s government confirmed that it had chemical weapons but stated these weapons would not be used against its people but only against “external aggression.” Later that year, President Obama stated that the use of chemical weapons would be considered crossing a “red-line”; changing the US military Response in Syria. Since 2010, there have been more than ten reported chemical attacks by the Assad Regime. In April of 2017, President Trump ordered targeted air strikes against a Syrian airfield from where a recent chemical attack was launched.

What has happened:

• Less than a week after President Trump said that he intended to pull the remaining US troops out of Syria, a chemical weapons attack against the Syrian town of Douma has killed more than 40 civilians.
• In a series of tweets yesterday morning, President Trump condemned the use of chemical weapons and blamed Russia and Iran for enabling the atrocity.
• On the heels of the last month’s nerve agent attack in the UK and escalating diplomatic tensions between the US and Russia, President Trump admonished Vladimir Putin by name in his tweets.

Why it matters:

• Given the President’s “America First” policies, this action by Russia and Assad may strengthen his new national security team’s ability to convince him that remaining engaged in Syria is our most effective tool to influence Russia and Iran…and indirectly Iraq.
• US Central Command Commander, General Votel, and the Chairman of the Joint Chiefs of Staff, General Dunford, have both voiced the need to stay engaged in Syria; additionally, the Chairman has consistently stated that Russia is a significant concern to our national security.
• This is one of the first and most significant military and foreign policy decision points for President Trump and his new national security team; the global community will be observing their response.

 “The Administration will likely wait for confirmation and attribution which is protocol in these situations.  Considering Russia’s recent use of nerve agent on its own spies, followed by this Syrian chemical attack; the President will have to act with a greater effect than the last Syrian chemical strike.  The DOD will expect elevated Syrian air defense alertness and the potential for a Russian-US air to air confrontation.  I expect a coordinated response will take a few days to align capabilities with potential target sets as well as ensure counter-air capabilities and refueling assets are sufficient in the area of operations. The US Government should attack with a proportional response against Syrian forces or assets.  This response should not be a hit on airfield infrastructure which is rapidly reparable; rather it should be a punitive attack on key IADS (integrated air defense systems), aircraft (fixed and rotary wing) and the Syrian forces attributed to the attack.  Anything less will disappoint allies and will be viewed as an impotent response.” 

Lieutenant General (Ret.) Frank Kearney

Original Post 04/9/2018

• CIA Director Mike Pompeo has been asked by President Trump to replace Rex Tillerson, pending senate confirmation.
• Gina Haspel, the current Deputy Director of the CIA and career intelligence professional, will replace Pompeo; if confirmed, she will be the first woman to run the CIA.

• Mike Pompeo, a three-term congressman, Army Veteran, and Lawyer, is known for his hawkish foreign policy.
• Pompeo has been critical of the Iran Nuclear Deal (JCPOA), calling for its rollback.
• Pompeo has supported regime change in North Korea and most recently, stated the US would make no concessions to Pyongyang.
• In Secretary Pompeo, it appears President Trump will have a Secretary of State who more publicly aligns with his foreign policy vision.

“Initial reaction to the President’s announcement was Treasury yields, and the Dollar went lower as we saw a very brief ‘flight to quality’ trade. For the most part, markets seem to be ignoring the cabinet change. This reaction is compatible with Rex Tillerson’s less visible role in recent months. “

Our new administration is at risk if it doesn’t do something about the increasingly elevated tension on the Korean peninsula.  North Korea (NK) is an uncontrolled nuclear state with an accelerated missile development program and the Republic of Korea (ROK) just impeached a failed President.  Conditions are ripe for something to go terribly wrong.  The only moderating voice on the peninsula is Washington’s.

 Without hyperbole, it’s safe to say that we are currently seeing with frightening clarity a future we all hoped we could avoid: a rouge regime of Kim Jun-un in North Korea with nukes, an imminent intercontinental ballistic missile (ICBM) capability, and government in Seoul dealing with a constitutional crisis.  Reassuringly, the U.S. military is a part of the equation on the peninsula.  Realistically, our military may be asked to transition from deterrence to aggression to stop Pyongyang’s wild nuclear ride…a ride designed to strike the United States, not simply North Korea’s regional neighbors.

 The U.S.-ROK alliance is steadfast and has been pressure-tested by Pyongyang, North Korea’s capital, and political turmoil in the south multiple times.  Precisely because of these challenges, the alliance knows what it is doing.

 South Korean democracy has a dark past.  It suffered through two military coups in 1961 and 1980 defined by violence, suspension of civil liberties, and restorative calm but always on the edge.  In my years watching the peninsula, it always felt like South Korea was a heartbeat away from another political crisis that would push Seoul to the point of anarchy followed by a crushing blow by the military to ensure order.

 Well, here we are.  Again.  Thankfully, order was restored during the impeachment some days ago of President park Geun-hye, not ironically the daughter of General-President Park Chung-hee who led the coup in 1961.  The ROK will elect a new President in early May.  South Korean democracy is in equal parts emotional and resilient.  Kim, not a disinterested observer, will be watching and testing that resilience.  It’s something the North Korean regime does quite well but now with even greater consequence.  North Korea has nukes!  That alters the balance.

 Just last week, as the United States and South Korea began their annual “Foal Eagle” joint training exercise, North Korea launched four medium-range ballistic missiles which landed just inside Japan’s Air Defense Identification Zone.  This was not a demonstration of new or enhanced missile technology.  It was, however, perfectly timed to get maximum attention…always an objective of the regime in Pyongyang.

 This past month, Seoul was in political chaos; international media was all over the south covering the increasing vitriol of the South Korean protests; the government was without an effective executive.  Of course, North Korea took advantage.

 Historically, North Korea is totally dialed into what the U.S.-ROK alliance is up to.  Frankly, it’s part of the alliance’s strategy to demonstrate its capabilities and the cost of NK interference.  Military exercises in the south are routing.  Literally, for decades the alliance has conducted a series of command post exercises and field maneuvers to validate war plans, the evacuation of non-combatants, targeting procedures, and the logistical demands of war in an increasingly dense urban terrain.  North Korea has superb human intelligence collection that can hide virtually “in plain sight” in South Korea.  That challenges the alliance’s ability to detect and disrupt it, but the upside is the leadership in Seoul knows that North Korea understands the crushing power of the alliance.

 Pyongyang knows it cannot challenge the foundation of the alliance in the south.  It can, however, have a far moe likely and lasting impact on the peninsula.  A nuclear ICBM cannot be ignored.  Pyongyang is on a path to realize that capability by 2020 with an arsenal of approximately 100 nuclear tipped ICBMs according to open source intelligence estimates.  That’s fare more frightening than another coup in the south and, frankly, more likely.

 Time is the only thing slowing this inevitability.  For years, the international community has tried every means of pressure to modify North Korea’s behavior in its development of a nuclear capability.  Nothing has worked.

 There is not enough money to pay off Kim.  Economic sanctions do not affect his behavior.  His people suffer or starve without result.  Kim has advisors and family members killed if there is a suspicion of disloyalty.  It’s not lunacy or craziness; it’s total control and survival.  Kim wants an equal share internationally of the attention he gets regionally.  He wants to be a “playa.”  He is now.

So what can be done to stop his march to nuclear infamy?  Very simply, Washington has three options: seek China’s help to modify North Korea’s ambitions; diplomatically recognize Pyongyang and end the war on the peninsula (the Korean conflict ended with an armistice); or attach the nuclear missile development capabilities in the north.

 These are all legitimately difficult options to realize.  Inarguably, China is the only neighbor that North Korea has any historical interest in listening to.  However, Beijing’s influence over Pyongyang is diminished.  Without Beijing, Pyongyang is further isolated and will result in an acceleration of Pyongyang’s missile and nuclear development.  Plus, the U.S. and China must agree that a nuclear North Korea is a threat.  Currently, we’re not on the same page.

 Recognition of the regime in Pyongyang is a tough nut to crack but may be THE nut that needs cracking.  Diplomatic recognition scratches the only political itch that Pyongyang has, which is to be treated like an equal.  This option makes me want to throw up in my mouth but the alternative is a nuclear tipped ICBM being launched from North Korea headed toward Alaska or Los Angeles.  Though the recently deployed Theater High Altitude Defense (THAAD) system is an effective deterrent from an ICBM or medium-range missile, we should not accept a North Korean regime with these capabilities.

 If necessary, the U.S. should act unilaterally to militarily take out North Korea’s nuclear test and missile launch facilities.  As abhorrent as it is, a kinetic strike to reduce the nuclear and missile development capabilities of North Korea is legitimate.  A military conflict with the north could also lead to one of the worst refugee crisis in our planet’s history.  It should be the option of last resort.

 The international community can no longer wish away the possibility of a nuclear North Korea.  We have used time to our advantage realizing that nuclear and missile technology development in the north was ongoing but remained nascent and not an imminent threat.  It is no longer either.

 Our ally in Seoul is focused inward to ensure a smooth and democratic transition of power.  The U.S. will encourage the Republic of Korea as it exercises its constitutional authorities.  Seoul will emerge stronger and our alliance intact.  But what about the north?

 Time is not our ally here.  We have for decades planned for the eventuality.  It is upon us.

Academy Securities Geopolitical Research Series: Today we are providing analysis by Major General James A. “Spider” Marks (Ret.) regarding North Korea’s nuclear program. Major General Marks is a member of The Advisory Board at Academy Securities and a CNN national security and military analyst.

This past Sunday morning, I woke up to The Washington Post headline below. I was not surprised. The candidacy of Donald Trump to be our next President is in an uncontrolled descent following the revelation last week of his lurid comments about women.

With this form of misogyny inexorably and sadly now defining the election, the prospects of discourse, topical discussions, debates of substance, and phrases that do not all begin with the first person singular pronoun “I or me” in response to an affront, real or imagined, are ethereal. We expect mudslinging in politics defined by routine challenges on issues and indelicate forays into charges of character weaknesses. However, this election has redefined low: low blows, low bar, low expectations, and increasingly low interest. The electorate is being offered a steady diet of invective and little opportunity to dig into issues of substance that differentiate the candidates.

The truly substantive issues that the American electorate should really be focused on have disappeared. Or have they?

Look at the enlarged picture below. It appears in regular font directly above the headline. It’s about North Korea and its nuclear capabilities. North Korea is not an “aspirational” nuclear power; it is a nuclear power. Now that’s really important, but wait: the readers must hold their interest until page A11 and avoid the marathon of NFL pre-game shows that are inevitably vying for our attention in the majority of American homes on Sunday morning.

North Korea is nuclear-capable but is not a signatory to the Nuclear Non-Proliferation Treaty (NPT). Those two facts should alarm you…greatly. Our intelligence community currently estimates that North Korea has 12-15 nuclear bombs of various yields. While North Korea has been building and testing nuclear weapons (five underground nuclear tests since 2006), North Korea has also been improving its missile technology at an alarming pace equal to its nuclear developments. Left unchecked and impeded only by time, North Korea will possess, probably in less than five years, a nuclear missile capability. The North will have an inventory of close to 100 nuclear bombs, missiles capable of reaching American soil, and the technology to “marry” the bomb to a missile. Although we can see with fairly precise accuracy what North Korea is up to with its development of both missile and nuclear technologies, we have never been confident that our intelligence can peek into the deliberately enigmatic regime in Pyongyang and discern their intentions.

The U.S.-R.O.K. (Republic of Korea) alliance has provided an effective deterrence to North Korean aggression for over 60 years. However, a nuclear North Korea capable of threatening the regional players (China, South Korea, Japan and Russia) and reaching the American mainland alters the existing defense calculus.

A couple of things to consider: First, the U.S. has deployed (in cooperation with Japan and South Korea) an enhanced, networked air defense capability that connects sea and land based surface-to-air missile systems, protecting citizens and preserving our military capabilities to counter strike. Second, under that protective dome, America’s two bilateral military alliances (U.S./South Korea and U.S./Japan) have incentivized global economic growth. While this is a clear positive, neither China nor Russia have contributed to the security conditions on the peninsula that have created this modern marvel of cooperation. That must change. They have to be visible and acknowledged participants in the effort to fashion a future that includes a more accessible North Korea.

North Korea will not change its spots overnight. That’s why our military alliance is so vibrant, capable, integrated, and powerful. But there has to be a more inclusive way to achieve a less bellicose North Korea. The certainty of the regime’s collapse through the application of force has not changed its path towards achieving a nuclear tipped missile capability. Let’s expand our cooperative efforts to include parties already in the circle: China and Russia.

Of course, the Japanese and South Koreans are paramount to the success of any strategy and have been fulsome partners in all previous and ongoing efforts, but neither China nor Russia are ever more than informed of our regional initiatives vis-à-vis the north.

Although their tactics differ, both Presidential candidates have demonstrated that they understand the necessity to change how we engage with China and Russia. We must create trust building measures so that all players can contribute to the solution of a non-nuclear North Korea or, minimally, a North Korea that is an NPT signatory. For example, Candidate Drumpf suggests we engage in trust building measures with Russia and cooperate to destroy ISIS in Syria; however, that’s a reckless strategy. We’ve never acted jointly in a hot war with Russia (or the Soviet Union) and trying to join forces in an ongoing hot war in Syria is an invitation for disaster and a guarantee of loss of American lives. The Korean peninsula, however, is different. Tensions are always high along the demilitarized zone in Korea (the line that separates the north and the south), but there is a choreography to the tension that bounds action.

Without increasing the risk to Japan and with the full and transparent military cooperation of the U.S.-R.O.K. coalition, Russia and China could be included in a more fulsome discourse on how to achieve an agreed-to North Korean solution. To be sure, the historic precedent is difficult to overcome. Since the mid-1980’s, Pyongyang has increasingly distanced itself from Beijing and Moscow. North Korea literally gets away with murder and it’s tolerated by China and Russia because North Korea has demonstrated military independence and a complete disregard for their oversight or engagement. North Korea is a recluse by choice. The only logical or effective way to challenge this isolation is through direct entreaties from their former benefactors.

As it stands now, North Korea will be capable of delivering nuclear tipped missiles by 2020. Our alliance with South Korea is as strong as it has ever been and there is no daylight in our shared view of the North Korean threat. However, our alliance remains predominantly, although not exclusively, a military one. The first job of the alliance is to de-escalate if there are hostilities. This is a defensive mission. To be clear, the U.S.-South Korean military coalition could offensively crush North Korea, threaten and destroy its capital, and reveal what the world no doubt already knows: that its maniacal leadership is bankrupt and exerts unchallenged power exclusively by fear.

By contrast, most planning around alternative futures on the peninsula center on regime collapse in Pyongyang and the resultant flood of 25 million North Koreans into the south. The integration into the west and environmental clean-up of East Germany following the collapse of the Soviet Union in 1991 was a herculean task of money, patience, and human kindness. Consider what will happen on the Korean peninsula if the brutal regime in Pyongyang falls from within. Over seventy years of nepotism, communism, and an imbedded hatred for western values will suddenly slam into free markets, free speech, iPhones, and Uber. That “clean up” will be huge and take decades.

That outcome, as difficult and monumental as it portends to be, is far more desirable than an unregulated, nuclear North Korea. We’ve planned for the former but can only speculate on the latter. Now that’s the headline.