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G7 alignment & US political challenges
Ian Bremmer's Quick Take: Hi everybody. Ian Bremmer here and a happy Monday. Quick take to start off your week as President Biden is back in the United States after the G7 Summit in Hiroshima.
What do we think? How did it go? Well, I mean a couple of very different takes. First of all, the G7 is enormously aligned, most particularly on Russia. I have never seen this level of outpouring of support. Every individual member of the G7 engaged personally with Ukrainian President Zelensky, the level of international aid coordination, diplomatic engagement, military support across the board continues to be at exceptionally high levels, not what Putin would've expected, not what the G7 would've expected before the Russian invasion, and that certainly helps to put Zelensky in a stronger position to negotiate with the Russians after a counter offensive over the coming months.
Furthermore, on China, more coordination from the G7, the term of art is de-risking, and everyone is increasingly using that term concerns about Chinese economic coercion. Not that the Chinese are the only country in the world that engages in economic coercion. People have been on the other side of that from the United States, from other G7 economies. But when the G7 gets together and compares notes and sees how the Chinese are willing to use a dominant economic position to engage and lever political pressure on those countries, the G7 realizes they are much better off coordinating their policies than they are by themselves. And you are seeing that.
Now, most of that is the Europeans moving more closely to the United States in concerns about Chinese political security and economic practices. Some of it is the Americans talking less about decoupling and accepting a more proactive continuity of overall G7 China economic relations and interdependence that is important and necessary. But what's significant is that these relations are coordinated and the Chinese see that, and they see that they are not able to drive a bus through divisions between the United States and Canada on one side, Europeans on the other in how China is able to engage politically, and that does matter.
Having said all of that, that sounds like a great G7 for everyone concerned, but of course, a lot of these leaders are quite weak at home, quite unpopular at home, and the big problem is absolutely President Biden who had to cut short a dinner with the heads of state and then had to cancel a trip to Papua New Guinea, doesn't sound all that important, except all of the leaders of the Pacific Island states were coming to PNG in order to meet with Biden. These are countries where the Chinese are dominant economically and the Americans are trying to provide more security relations. Couldn't do that. Canceled on the BRICS summit too, visit to Australia, and to the Prime Minister in his hometown. Kind of embarrassing, at the last minute, he got a phone call, at least from Biden before the announcement. Papua New Guinea only got it afterwards. Well, they're
tiny place, but still doesn't look great.
And why is it happening? Dysfunction in the US political system and everyone gets that the debt limit needs to be resolved. Everyone gets that the Americans have to make good on paying off debts that they have already incurred, and yet Congress and the US president continue to be headlong moving towards crisis. Only 10 days left until June 1st in the so-called X date. According to Janet Yellen, Secretary of Treasury, that is when the debt comes due. And you don't have enough time at this point to get a deal that then can be voted through the House of Representatives without Republicans bolting from McCarthy and undermining his speakership.
So at this point, either there's going to be a short term extension or you're going to hit the X date. One of those two things I think is going to happen. In other words, there is going to be a much bigger crisis, at least sense of crisis before you can resolve this problem and that level of US political dysfunction on display in the G7, on display with the Chinese, on display most everywhere in the world, the biggest challenge to America's strength continues to be at home politically.
That's it for me. I'll talk to you all real soon.
OPEC+ vs. the US
Oil prices soared Monday — and continued rising Tuesday — after a group of OPEC+ members (unexpectedly) announced that they'd slash production voluntarily by more than 1 million barrels per day. It’s the crude cartel’s response to expected sluggish demand for crude triggered by the recent financial turmoil in the US and Europe as well as China’s weak economic recovery.
The lion’s share of the slash — which follows a bigger cut of 2 million bpd in October — will come from Saudi Arabia, which pledged a 500,000-bpd reduction until the end of the year, matching an earlier promise by Russia.
Why are the Saudis doing this? Officially, Riyadh says it aims to balance markets, but it clearly wants to stop the price of crude from plunging further as the global economic slowdown hurts oil demand, says Eurasia Group expert Raad Alkadiri.
Saudi Crown Prince Mohammed bin Salman has ambitious spending plans, and he wants to get ahead of the curve before prices drop too much. (Indeed, the price of benchmark Brent oil hit just $73 per barrel last month compared to over $120 in the summer of 2022.)
But there's also a US angle. The Saudis resent the Americans for dragging their feet on replenishing the US Strategic Petroleum Reserve, which the Biden administration has tapped into several times since late 2021 to bring down domestic gasoline prices from a whopping $5 a gallon to today's average $3.50.
Russia’s President Vladimir Putin, for his part, has been itching for a chance to get back at the US for leading the charge to enforce a $60 per barrel price cap on Russian oil among G-7 and EU nations. The cap is finally starting to hurt Russia's economy, although perhaps not as much as the West expected.
Japan's recent move to carve out an exemption to buy some Russian crude above the $60 limit is the first semblance of a crack in Western unity against Moscow. And the more expensive oil gets, the harder it’ll become to enforce the price cap — not to mention that US Republicans will jump at the chance to blame high gas prices on President Joe Biden.
Are the OPEC+ cuts a good or bad thing? As usual, that depends.
If you're in the US, you're probably thinking: Yikes, that’s pretty awful now that gas prices have stabilized. Even though they likely won’t reach last year’s levels, high energy costs are the last thing that Western central banks need as they fight to bring down inflation, which is extremely sensitive to wild swings in energy prices.
Yet, if you're MBS or Putin, you must keep prices above a certain level to keep your oil-dependent economy humming. We all know that the Russians will do whatever they can to push back against the $60 price cap, but Alkadiri says that "the Saudis are now showing that they are determined to keep prices up too — Washington be damned."
The Graphic Truth: Rich countries feel inflation pinch
Japan’s inflation rate hit 4% last month. Sounds low, right? Compared to many Western countries, it is. But for Japanese consumers, it’s the highest spike in prices since 1981. As a result, the Bank of Japan is under increasing pressure to raise its key interest rate from -0.1%, where it’s been since 2016. Japan’s central bankers are far from alone. In fact, on Wednesday, the Bank of Canada again boosted its benchmark interest rate, this time to 4.5%, but also became the first major central bank to announce it plans to hold off on further rate hikes for now. Most wealthy countries have felt the price crunch due to high energy costs, COVID supply chain issues, and the war in Ukraine. We compare inflation numbers for the past year across all G-7 countries.