January 8, 2024
By Daniel Silverberg and Elena McGovern, co-heads of Capstone’s National Security Team
While the Middle East boils, fueled by the ongoing war in Gaza, the Biden administration remains focused on longstanding strategic challenges posed by Russia’s war in Ukraine and the need to pursue “managed competition” with China. We believe there are several significant foreign policy developments to which companies and investors should pay attention as they are indicative of longer-term trends impactful for US defense, energy, technology, banking, critical minerals industries, and more.
- Despite the Israeli strike, the Lebanese border is likely to remain status quo.
Capstone believes Hezbollah will continue to avoid direct confrontation with Israel despite an alleged Israeli strike in Lebanon against a senior Hamas official last week. For now, we do not expect further regionalization of the Gaza war. Israeli Prime Minister Benjamin Netanyahu was uncharacteristically effusive in welcoming US envoy Amos Hochstein to Israel this week, likely a signal of Netanyahu’s support for Hochstein’s effort to negotiate a border deal between Israel and Lebanon and to signal to Israel’s voters that he is focused on returning displaced northern residents to their homes. This is a different tone than Netanyahu struck two months ago when the Israeli government actively explored a preemptive strike against Hezbollah. Likewise, Hezbollah has not launched unusual activity against Israel, signaling support for a diplomatic resolution to the border dispute.
Capstone believes Hezbollah will continue to avoid direct confrontation with Israel… For now, we do not expect further regionalization of the Gaza war.
- Commerce Department survey is a likely prelude to further trade restrictions with China.
This month, the US Department of Commerce initiated a survey on the US semiconductor supply chain and national defense industrial base. The survey is likely a precursor to efforts by the Commerce Department to restrict additional Chinese semiconductors from entering the US market and, concomitantly via the CHIPS Act, enhance US semiconductor manufacturing. This will further strengthen the need for US semiconductor manufacturing investment while creating additional risk for those invested in US semiconductor exports or industries heavily dependent on legacy Chinese semiconductor chips.
This action parallels efforts from 2018 to 2022 to prevent Chinese telecommunications companies Huawei and ZTE from infiltrating US defense supply chains and, eventually, the entire US market. To date, US restrictions have focused on the export of advanced semiconductor technology and related capital to China—highlighted by the Commerce Department’s October 2022 order on exporting dual-use technologies. The new survey will involve the inverse; it will likely identify legacy Chinese semiconductor technology supporting critical US industries (e.g., automotive and telecommunications) and the defense industrial base. Those technologies then would become targets for outright restrictions or significant trade tariffs. China will likely reciprocate, which could result in further bans of US technology products, such as legacy semiconductors, in China.
- Saudi-Israel normalization is still alive, with implications for defense and energy industries.
Before October 7th, the biggest news story in the Middle East was Israel-Saudi normalization, which would be premised on signing a US‒Saudi defense treaty and, consequently, would be a boon for US defense companies. After October 7th, many believed those diplomatic efforts were dead. Capstone believes, however, that normalization remains very much on the table despite the ongoing war in Gaza. First, recent Houthi attacks in the Red Sea are likely strengthening Saudi interest in pursuing a normalization deal to secure a US defense treaty. Partnering with the US still looks far more attractive for Saudi leadership than other options, including rapprochement with China. Second, US National Security Advisor Jake Sullivan last month visited Saudi Arabia and allegedly discussed Israel’s normalization with Saudi leadership, likely in light of ongoing regional instability. Finally, Israeli opposition leader Yair Lapid gave an interview in December with a Saudi newspaper, claiming there is still an opportunity for a two-state solution.
Normalization would significantly impact investors in the Middle East, defense companies seeking an expanded presence in the Kingdom of Saudi Arabia, and US energy companies pursuing clean energy deals that could benefit from Saudi investment.
The fact that a Saudi newspaper requested an interview with an Israeli politician—an unusual event for a state-run media entity—hints at their enduring interest to engage with the Israelis and to solicit critical points for their domestic audience that a two-state solution is not dead. These are necessary, albeit insufficient steps, to keep a normalization deal alive. Nevertheless, we believe normalization efforts will get back on track.
Normalization would significantly impact investors in the Middle East, defense companies seeking an expanded presence in the Kingdom of Saudi Arabia, and US energy companies pursuing clean energy deals that could benefit from Saudi investment.
- Congo election heightens battle for critical minerals.
The Democratic Republic of Congo (DRC) declared incumbent president Felix Tshisekedi the winner in a highly controversial election—one with critical stakes for electric vehicle manufacturers and renewables companies dependent on critical minerals.
The DRC is rife with critical minerals, particularly cobalt, that power electric vehicle batteries, iPhones, and key green technologies (some estimate the value of these metals as high as $24 trillion). Despite its immense wealth, the country remains mired in poverty and dysfunction while China has been buying up mines during the past decade. US policy is now focused on trying to secure access to some of these critical minerals for US and Western economies, at China’s expense. In doing so, the US invested extensive diplomatic and economic capital to stabilize the country and secure a ceasefire among warring factions before the election. Tshisekedi, who has maintained close ties with the US and supports a $250 million railway to export commodities via Angola, ultimately was declared the winner in the election, and we expect him to continue opening mining contracts to foreign entities besides China, which will be helpful for Western mining interests and those dependent on critical minerals supply chains. Post-election instability remains a key risk, however.
- US secondary sanctions on Russian military technology pose implications for banks.
In December, the US Department of the Treasury announced further restrictions on financial institutions facilitating transactions for Russia’s defense industry. This matters for investors and companies invested in the European banking sector, which will be all the more cautious about supporting Russia’s efforts to evade sanctions.
The Biden administration in 2022 imposed sanctions directly on Russia’s defense industry and restricted the export of specific technologies that could be used in Russian weapons systems. As a result, European tech companies could no longer provide semiconductors or advanced technologies critical to power Russian weaponry, resulting in Russia turning to Iran and black-market sources to rearm.
As 2024 begins, it is clear that foreign policy will play pivotal, nuanced, and underappreciated roles in global markets and supply chains.
Treasury’s actions will target banks (mostly European) that facilitate the purchase of those technologies banned (i.e., the financiers, not just the companies providing the actual equipment). The broadening of sanctions will force investors and companies to further distance themselves from the Russian market, and it could be a prelude to eventual restrictions on entities facilitating energy transactions with Russia.
As 2024 begins, it is clear that foreign policy will play pivotal, nuanced, and underappreciated roles in global markets and supply chains. Capstone will continue to closely follow the fast-changing dynamics that will continue to have implications for our corporate and investor clients.
Daniel Silverberg, Co-Head of Capstone’s National Security Team
Read more from Daniel:
Biden’s G20 China Play: Doubling Down on Infrastructure
Three Underappreciated Global Developments Impacting Energy Security
Why Global Infrastructure is the Most Consequential Aspect of Biden’s China Policy
Read Daniel’s bio here.
Elena McGovern, Co-Head of Capstone’s National Security Team
Read more from Elena:
The Strategic Shift: Why US-China Policy Will Shift to More Subtle Posturing
Biden’s Restrictions on Investment into China Is Just the Start of Chinese Investment Risk
The Growing Disaster Resilience and Recovery Economy
Read Elena’s bio here.
