As the world struggles with the looming prospect of a widespread economic slowdown, we begin our look at the Day After with an analysis of how the EU is preparing itself for a recession. From there, we look at the dynamics of the food shortage shaping politics in the developing world, before moving on to investigate how China’s Belt and Road lending has put it at risk of a debt crisis. Finally, we conclude with a summary of developments in the oil markets for the past two years, examining how the dynamics of the energy industry have shaped and been shaped by geopolitics. Even in the midst of such pre-eminent risk, reasons for optimism abound – the process of creative destruction is in full swing, and if we can bear with the pains of today, we will see them transformed into the benefits of tomorrow.

Europe Is Tested Anew, This Time by Energy, Inflation and Putin

Stephen Fidler and Kim Mackrael, The Wall Street Journal

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The European Union (EU) is facing a double-headed crisis: energy dependence on Russia and rising inflation. The EU has been a strong, unified supporter of Ukraine so Russia’s manipulation of its gas supplies is being seen by EU officials as a tactic to split the bloc and eventually reverse some of the sanctions that have crippled Russia’s economy since its invasion of Ukraine in February. Meanwhile, the energy crisis that has been created by Russia’s war has exacerbated the already high inflation. In response, the European Central Bank (ECB) raised interest rates by 0.5% for the first time since 2011. The central bank also launched a new mechanism aimed at protecting the bloc’s most heavily indebted countries from spiraling borrowing costs. Unlike in some past crises, the EU has identified the dangers and made moves to prepare itself for the worst-case scenario. European Commission President Ursula von der Leyen unveiled a package of measures to address a very possible partial cut-off or total cut-off of Russian gas, including a voluntary (that could become mandatory) 15% cut in natural gas consumption. The plan will require the approval of at least 15 of the 27 member states. As President Von der Leyen warned, “Our worst enemy is fragmentation.” Critical to Europe’s success is the execution of the ECB’s new policy tool as well as how much natural gas Germany keeps for itself. Germany is a major transshipment and storage center for gas, which means it is much more dependent (if not the most dependent) on Russia than many other EU member states. However, if Germany re-exports too much natural gas to aid other European countries and its industry crashes, the ripple effects will be felt throughout the bloc and there could be serious economic consequences. 

The Global Food Crisis Shouldn’t Have Come As a Surprise

Christopher B. Barrett, Foreign Affairs

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The current global food crisis was predictable. While many media outlets give the impression that the global food crisis is a direct result of Russia’s war in Ukraine, there were severe weaknesses in the global food system prior to the war: “Indeed, Russia’s invasion of Ukraine didn’t cause the food price crisis so much as it aggravated an already existing problem.” According to the World Food Programme, 323 million people are now or are at risk of soon becoming, acutely food insecure, and a rapid humanitarian response is needed so that unnecessary deaths are avoided. Even amid the current food crisis, there is plenty of food to go around. Global daily food supplies average roughly 3,000 calories, 85 grams of protein, and 90 grams of fat per person, proving that the issue isn’t insufficient agricultural production. Driving hunger and malnutrition is poverty, maldistribution, and excessive food waste. The author of this article, Christopher B. Barrett, calls on global leaders and policymakers to address the global food crisis “promptly and fully” because “ignoring food emergencies doesn’t make them go away nor cheaper to address later.” One solution he recommends is the creation of automatic global safety nets established through a combination of financial arrangements contractually triggered by disasters and treaty commitments among governments. Barrett also says it’s time for new trade agreements that tie governments’ hands when domestic political forces pressure leaders to issue export bans. “Ill-advised” export bans by countries attempting to protect domestic consumers from spiking food prices have actually contributed to the spike in costs. Finally, Barrett calls on policymakers to promote innovation in agri-food systems so that productivity is boosted, food waste is reduced, and more agricultural commodities can be used as livestock feed and transport fuels. The global food system can be fixed. 

China Reckons With its First Overseas Debt Crisis

James Kynge, Kathrin Hille, Benjamin Parkin, Jonathan Wheatley, Financial Times

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Sri Lanka’s 350-meter Lotus Tower stands as a testament to the benefits (and excesses) of China’s Belt and Road Initiative (BRI) spending. The island Sri Lanka is a case study in China’s lending politics as the nation defaulted on its debt in May amid popular unrest. A growing number of China’s development loans have fallen into the “non-performing” category, forcing renegotiations and infusions of hard currency from the CCP to prevent borrower nations from defaulting. Indeed, the CCP had been propping up the Sri Lankan government for years to prevent a credit downgrade and keep the nation paying its debts. But as more and more developing nations struggle to meet their debt obligations, China is increasingly mirroring the role played by the IMF – providing emergency loans to get its borrowers through their debt crises. Of little help is the fact that much of the money was spent on flashy projects which did little to stimulate actual development, such as sports stadiums or the aforementioned tower. While this is certainly not the case for all of China’s development projects, the corpus is large enough to have even China’s most loyal borrowers questioning the wisdom of Chinese capital. As its lending program has met with resistance, Chinese officials have begun rethinking the methodology of the BRI dumping huge sums into areas with questionable credit. This has been exacerbated by China’s general unwillingness to cooperate with multilateral debt relief organizations. All these factors are raising the temperature of China’s debt economy – if relief valves are not quickly identified, it may well boil over into the global economy.

The Madness of the Oil Market

David Hindley, Financial Times

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If Nostradamus were an oil trader, he would have bought West Texas Intermediate crude oil on April 20th, 2020 at a price of -$40.32/barrel (yes, negative forty) and sold on March 7th at $130.5/barrel of this year for a total profit of $170.82/barrel (the benchmark currently trades around $98/barrel). This level of volatility has not been seen since the Great Financial Crisis in 2008 when oil prices plunged from $150/barrel to below $40/barrel. Back in 2020, as the world began to go into lockdown due to the Covid pandemic, Russia capitalized on the decreased demand to flood the market with oil, trying to hamstring US shale production. Saudi Arabia, bristling at Russia’s cut-in, also boosted production, to the point where US energy hubs could not physically store all the oil being imported. This resulted in prices plummeting into sub-zero territory as storage hubs briefly paid buyers to take their bloated inventories. As oil companies took massive hits to their disappearing margins, activists pushed for an accelerated energy transition to move energy supplies away from fossil fuels. This effectively froze financing for new drilling projects, capping supply for a time. Crude oil prices eventually climbed with rising demand as the world returned to normalcy. Then, Russia invaded Ukraine, instigating a broad array of sanctions which included the country’s energy exports. Prices spiked nearly 40% in the immediate aftermath of the invasion, before settling into the $95-120 range they have traded in since the invasion began. The fragility of global energy markets creates a mixed case for the energy transition, forcing governments to balance energy security with decarbonization. This uncertainty has had a chilling effect on new investments as world leaders struggle to articulate a coherent vision for global energy needs. As long as the uncertainty around Ukraine and global energy security continues, the crude oil markets are in for a rough ride – and as this contributes to inflation through the cost of gasoline, global consumers will take the hit too.