France is Ready to Send Troops to Ukraine

Amidst everyone’s focus on Russia and the fabricated presidential election, we wanted to highlight other, arguably more important news, including major central bank decisions worldwide this week and geopolitical dynamics that could significanty impact the Russian war in Ukraine and the Israel-Hamas war.

In this publication:

• French troops is ready to defend Ukrainian-Belarusian border

• Russia and China seal deal with Yemen’s Houthis

• Total debt relief for one of the world's poorest countries

• Surprising interest rate cut, the first among major central banks

• The end of Japan's negative rates era with the first hike in 17 years

Let’s dissect

We Also Recommend

Markets Snapshot

• IMF's Managing Director, Kristalina Georgieva, emphasized the vital role of central banks in combating inflation, especially during a year when over 60 countries, including the US, UK, and India, are heading into elections. She highlighted the potential pressure on central banks to prematurely lower interest rates and underscored the risks of political influence on such decisions. This concern is particularly notable given suggestions from former President Donald Trump and comments by President Joe Biden hinting at anticipated policy easing, raising concerns about the Fed's independence.

Bond Markets

• US: On Wednesday, the Federal Reserve maintained the federal funds rate at 5.25%-5.5%, the highest level in 23 years, in line with market expectations. The central bank also projected three quarter-percentage point cuts by the conclusion of 2024. These would mark the first reductions since the onset of the Covid pandemic in March 2020. The committee foresees three more cuts each in 2025 and 2026, then two more afterward, until the fed funds rate stabilizes around 2.6%, nearing what policymakers consider the "neutral rate" - neither stimulating nor restrictive.

  Fed also revies the GDP growth projections sharply upwards, now anticipating a 2.1% annualized rate for this year, compared to the previous estimate of 1.4% in December. The core inflation forecast rose to 2.6%, up by 0.2 percentage points.

• EU: The EUR dipped towards USD 1.08, hitting its lowest point since early March, driven by market reactions to cautious comments from ECB officials regarding interest rate cuts. ECB President Lagarde suggested a possible rate discussion in June, depending on forthcoming economic data. February's inflation in the Euro Area remained elevated at 2.6% year-on-year, surpassing the ECB's target. Energy prices experienced a decline of 3.7%, while core inflation held steady at 3.1%.

• Switzerland: On Thursday, the Swiss National Bank surprised the market by lowering its main policy rate by 0.25 percentage points to 1.5%, becoming the first advanced economy to cut interest rates amid sustained inflationary pressures.

• Japan: Unlike other centrals banks, The Bank of Japan (BOJ) has ceased its era of negative interest rates, marking the first increase in borrowing costs in 17 years. This historic decision comes as the country transitions beyond decades of spiral deflation. The BOJ raised its overnight rate to a range of zero to 0.1 percent from -0.1, becoming the last central bank to abandon negative rates as a monetary policy tool.

  Central bank policymakers expect that surging salaries, with workers at major Japanese firms seeing their largest pay hike since 1991, will fuel domestic demand, spurring inflation. The BOJ’s decision triggered a sharp decline in the Japanese yen, reaching its weakest level against the euro since 2008 and a four-month low against the dollar.

  Investor confidence in the Japnase economy has also increased, with the Nikkei 225 stock index in February surpassing a level not seen in 34 years.

Commodity Markets

• Oil: Crude oil prices remain steady at $85 per barrel with limited fluctuation throughout the week. Factors such as the strength of the USD impacting global oil affordability, signs of a slowdown in US crude inventory declines, and geopolitical tensions, along with supply adjustments in Ukraine, Iraq, and Saudi Arabia's oil export figures, are all influencing market dynamics.

  In another development, Côte d’Ivoire strides towards OPEC membership fueled by multinational energy company ENI's vast offshore oil discoveries, including a well potentially holding 1.5 billion barrels.

In Motion

Global Finance

Paris Club Cancels $2 Billion of Debt for Somalia

• Somalia has reached an agreement with international creditors to cancel over $2 billion in debt, as confirmed by the Paris Club of creditor nations. The $2 billion represents 99 percent of the debt owed by Somalia to the Paris club members as of January 2023. It's particularly significant for the country, given its annual budget for 2024 of only around $1 billion, with a substantial portion still reliant on international grants!

• The Paris Club of creditors is an informal coalition of nations dedicated to offering debt relief to countries in need. Under the framework for Somalia, a portion of debt would be forgiven through voluntary and bilateral agreements with individual creditor countries, while the remainder would be addressed through the Heavily Indebted Poor Countries Initiative (HIPC) led by the IMF and World Bank. Somalia became elegible for $4.5 billion debt relief under HIPC initiative last December.

• Located in the easternmost part of continental Africa, Somalia is one of the world's poorest nations, with 70% of its population living on less than $1.90 a day. The country has been enduring decades of civil wars and facing recurring climate-related catastrophes. It also grapples with insurgencies by Al-Shabaab, an Islamist group affiliated with al-Qaeda. The majority of Somalia’s debt was accrued in 1991 when former President Mohamed Siad Barre was ousted, leading to the collapse of the dictatorship regime.

Our thoughts

• Successful negotiations for debt relief mark the beginning of Somalia's path toward normalizing its relations with international financial markets, ending three decades of exclusion. However, it remains crucial for the government to enhance domestic revenue and expand its source base, as it currently only covers about a third of the annual budget.

Geopolitics

French Soldiers on Ukranian Soil?

• Last week, Macron reiterated his openness to sending troops to Ukraine. Back in February, he already vowed to form a coalition to equip Ukraine with long-range weapons, suggesting French troop deployment and emphasizing the gravity of the Ukrainian conflict. After the president's comments, General Pierre Schill, France's ground forces chief, declared that his troops are ready for the 'toughest engagements' and added that he would be able to command a force of around 60,000 soldiers, comprised of French and other allied troops. Macron's increasingly assertive stance has raised tensions between Paris and Germany, particularly as Chancellor Olaf Scholz has adopted a more restrained tone regarding the war.

• Adding to the intrigue, a leading member of the Ukrainian parliament Oleksiy Goncharenko revealed a few days ago that Macron is seriosuly considering deploying French troops specifically to the Belarusian border. This strategic maneuver aims to ease the burden on Ukrainian forces, enabling them to intensify their engagement in the eastern front. Currently, tens of thousands of Ukrainian troops are deployed at the northern border with Belarus to prevent another potential invasion from the territory of Russia's so-called "friendly ally."

Our thoughts

• If European troops are deployed, this is as significant as it gets for Ukraine since the successful counteroffensive in autumn 2022, which liberated 3,000 square kilometers of territory in just six days. The presence of French troops, in any capacity, on Ukrainian soil would also effectively imply NATO involvement in the war.

• In a span of more than two years since the start of the war, Macron’s stance has shifted dramatically, from reluctance to "humiliate Russia" to now keeping all options open. Nonehteless, the EU and the US collectively remain paralyzed by fear, particularly when it comes to crossing the so-called 'red lines' , even though these lines have been crossed multiple times by the West adversary without a response.

Houthis Will Spare Chinese, Russian Ships in the Red Sea

• Yemen's Houthi rebels have provided assurances to Russia and China regarding the safe passage of their ships through the Red Sea and the Gulf of Aden according to Bloomberg. In exchange, both China and Russia have pledged some "political support" to the Lebanese Islamist political party and militant group Shia. While the specifics of this support have not been disclosed, it may involve backing the Houthis in international institutions, such as by blocking resolutions aimed at them in the United Nations Security Council.

• Earlier this year, a Houthi delegation visited Moscow to meet with Russia's Ministry of Foreign Affairs. Discussions centered on exerting pressure on Israel and the US to resolve the conflict in Gaza, where tens of thousands of Palestinians have lost their lives.

• Since November, Houthi rebels have targeted vessels in the Red Sea, endangering a critical shipping lane. They claim to only attack ships linked to Israel, showing support for Palestinians in Gaza. These waterways, including the Bab el-Mandeb strait connecting the Red Sea and Gulf of Aden are vital for global trade, with around 30% of container cargo passing through them.

Thank you for checking out the latest SovereignBeat newsletter! Share your thoughts on the topics covered and let us know if there's anything specific you'd like us to explore.

Read our other publications here

Our Further Reading Recommendations

• Argentina President Javier Milei's aggressive campaign to overhaul state-owned companies (FT)

• Deglobalization, protectionism, and governments’ failure to pick winners (FT)