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. 

1. Despite the Israeli strike, the Lebanese border is likely to remain status quo.  

2. 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. 

3. Saudi-Israel normalization is still alive, with implications for defense and energy industries.

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. 

4. 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.

5. US secondary sanctions on Russian military technology pose implications for banks.

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.

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