Russia & Europe

Economy

Brussels presented European industries with a counteroffer to the U.S. Inflation Reduction Act last week, in an effort to keep burgeoning green industries within the bloc. The Green Deal Industrial Plan aims to ease a path for sustainable companies to access tax breaks, redirect cash toward clean-tech industries and relax state aid rules.

• The plan faces criticism, however, as it primarily draws upon existing – not new – funding lines, and risks pitting smaller EU countries against Germany and France, which could potentially benefit most.

• “We will never be able to compete on level terms with the United States when it comes to financing,” one EU diplomat said. “The whole state aid debate is a double-edged sword. If we relax subsidy restrictions too much, then we compromise the integrity of the single market. But if we do nothing, we concede failure. That isn’t an option.”

Technology / Cyber

According to the Russian business daily Kommersant, authorities in Moscow have completed their investigation into the so-called REvil hacking group, including pursuing materials relayed via the US Federal Bureau of Investigation. Interior Ministry officials concluded eight alleged hackers illicitly acquired funds, but American victims and amounts were impossible to verify.

• Per investigators, stolen bank cards and cash totaling $600,000, as well as hard drives containing malware were found in the suspects’ possession.

• Their defense attorneys claim the findings are insufficient to prove computer theft, as the origins of the funds cannot be traced, and the deployment of the malware cannot be substantiated.

• Commentators say the case is likely to drag out indefinitely. Throughout 2022, REvil remained active on the dark web and even reported three new attacks.

Politics

Amid a push by Azerbaijan to double energy exports to Europe within the next five years, UK oil giant BP has begun two drilling gas exploration wells deep beneath the Caspian Sea.

• Offshore drilling in deep water is enormously expensive – each well will cost many tens of millions of dollars. The first well will produce for a consortium including BP and state oil companies from Azerbaijan, Turkey, Iran, and Russia; the second, for a larger international group including Exxon.

• The developments come amidst signals that a separate project to bring gas from Turkmenistan across the Caspian has likely stalled.

Military

Ukrainian forces are unlikely to be able to recapture Crimea from Russian troops in the near future, senior U.S. Defense Department officials told lawmakers in a classified briefing last week, according to sources. The assessment echoes what General Mark Milley, chair of the Joint Chiefs, has alluded to in recent weeks.

• Russian forces have occupied Crimea since 2014. The peninsula is bristling with air defenses, tens of thousands of troops, and is home to Moscow’s sole Black Sea naval base in Sevastopol.

• The issue of retaking Crimea has been a contentious one for months, as Western officials insist the peninsula is legally part of Ukraine, while often stopping short of fully equipping Kyiv to push into the area. “What is doable? And I don’t think that that’s agreed upon yet. So, I think that there’s going to have to be some pressure from our government and NATO leaders…about what does victory look like,” said House Armed Services Committee chair Mike Rogers.

• For its part, Kyiv insists the West has frequently underestimated Ukrainian troops’ combat capabilities.

Society

The Armenian banking sector boomed in 2022, with record profits pouring in from tens of thousands of Russian citizens relocating to the country since the onset of the war in Ukraine.

• According to Armenian Central Bank figures, transfers and remittances from Russia reached $3.5 billion, up from $865 million in 2021, and accounting for 70% of all transfers. The U.S. ranked a distant second as the source of $670 million in transfers.

• The influx prompted a boost in foreign investments by the banking sector, which totaled $2.58 billion between January and September 2022. The government in Yerevan expects growth figures for the year to reach 14%.

• The volume of lending to the Armenian economy, however, did not keep pace, increasing by only 4.5% year-on-year.

China

Economy

Municipalities across China continue to cut restrictions on the purchase of homes in an attempt to spur demand.

• Despite bullish attitudes by trading firms on Wall Street, Chinese consumers seem much less optimistic. The number of homes built has increased for the last two months—thanks to a reprieve on financing—but consumers are still not ready to bite.

• Upward revisions to global GDP growth by the IMF and World Bank were likely contingent upon China’s undoing of its zero-covid policy. So far, it has been a slow start to any recovery.

Technology / Cyber

Policymakers have recommended charging the CEO of TuSimple, a self-driving vehicle start up in California, with crimes related to economic espionage.

• The CEO took money from investors to research and promote self-driving technology for cars. Afterwards, he incorporated a company in China and transferred the technology to that company—call it a “corporate exit scam.”

• TuSimple had been cooperating with the Committee on Foreign Investment in the United States, but such cooperation was not enough to sway the committee, who recommended the charges to the Department of Justice last week.

Politics

Reports emerged that the White House had reached out to Beijing while its balloon was transiting the US, but that Beijing failed to answer or delayed too long to be effective.

• Despite the balloon being an inflated threat, the inability of the US and PRC to communicate during an emergency is extremely concerning. Avoiding accidental escalation is key to managing competition between nations without spilling into war.

• The bout of poor communication, first made clear by the cancellation of communication between militaries during the Pelosi visit, risks unwanted crises.

• A call between US and PRC foreign ministers indicated a visit by the US may still be forthcoming, but KSG assesses a meeting may not happen until after the 2024 election. With low expectations for the meeting on the US side and the coming presidential election, there will be little incentive for the Biden administration to send a delegation to China. The two countries may meet on the sidelines of other international summits and events, however.

Military

Researchers found evidence that state-owned enterprises in China are sending military equipment to Russia. The support comes after China walked back its early statements of “no limit partnership” with Russia at the onset of the war.

• The finding comes days after the US sanctioned a private satellite provider from China for providing satellite imagery to Russian military forces. At the time, KSG determined such support could have resulted from 1) government policy to assist Russia or 2) the inability to control cross-border goods and services. Now we know that such actions were aligned with PRC policy.

• The significance of China’s support for Russia’s military cannot be overstated—despite the lack of adequate media coverage. For the first time since the 1990s conflict in Kosovo, the PRC is supporting a belligerent in proxy conflict with the US, vis-a-vis Ukraine and NATO support.

• The fervor within policy circles to undercut relations with PRC tech firms and military-use research will increase rapidly. Firms should conduct deep reviews of their ties to all PRC universities, research institutes, and partners in joint-ventures.

• The news may help push the EU towards the US, helping sway reluctant German industrialists and politicians.

Society

Trials of Hong Kong pro-democracy activists began this week for 16 people charged after the 2019 protests. The criminal charges ignore ex-post facto, charging the 16 people for actions committed before they were crimes under the new National Security Law.

• The takeover of the Hong Kong legislature was a red flag to the international community and investors. Across the Taiwan Strait, the news will remind the island’s residents of the hollow promises of “One Country, Two Systems” that Beijing has made—and now very publicly broken.

• If the defendants are punished harshly (the charges can lead to life in prison), it will increase the risk that Taiwanese politicians take a more harsh tact against China, ultimately increasing the risk of conflict.