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May 03, 2019

The pro-Brexit message from the local elections

We see the main effect of last night's local elections results in the UK as pushing Labour further towards a deal with the Tories on Brexit. Both parties did badly - the Tories as expected but not so badly as some forecasts suggested, and Labour much worse than expected but not as badly as the Tories. It was a night of Brexit protest votes. 

Labour lost seats in pro-Brexit constituencies in the north while the Tories were weak in pro-Remain constituencies in the south. In this year's local elections, only the shires and small towns voted, while the large urban areas vote in a different electoral cycle. So the political message is clearly skewed in favour of the pro-Brexit crowd. There were more angry Leavers than Remainers out there able to vent their frustration yesterday. As of early this morning the Tories were down by some 400 council seats. There will be a few more as further councils will declare their results during the day. But since the Tories started out from an unusually large number of seats, this is not a particularly catastrophic result - nothing compared to the 2000 seat wipe-out suffered by John Major in 1995.

But the real focus last night was on Labour. What struck us in particular was an interview by the BBC of a despondent leader of a Labour-run local council who said the main message he received from voters was unhappiness about the the party's unwillingness to respect the referendum result. Labour's subtle position on the referendum does not go down well with voters. Another Labour councillor spoke of spoiled votes with messages of betrayal. 

It was interesting to see the reaction of Barry Gardiner, one of the more senior member on Labour's front bench, gradually ending up agreeing with this assessment as the evening progressed. During the course of the night he became increasingly clear that Labour was a party that accepted the referendum result. We expect to hear more of this as we are heading towards the European elections on May 23 that would pitch three versions of Leave against one another: that of the Brexit party which did not stand in yesterday's local election; of Theresa May's and Labour's customs union.

The latest YouGov poll has the Brexit Party far in the lead with 30%, well ahead of Labour. The sudden emergence of the Brexit Party constitutes the perfect political storm for both the Tories and Labour. The new party has a clearly identifiable name - unlike the nebulous and ineffective name of the Change UK party. It was quick off the ground. And Nigel Farage is highly effective as its lead candidate. As UK voters generally do not care about the European Parliament, the Brexit Party will manage to attract support from disgruntled Labour and Tory voters. If the European elections were held, both Labour and the Tories would lose seats relative to 2014. This tells us that May and Jeremy Corbyn have an overwhelming incentive to reach agreement next week. For otherwise they will wake up on May 24 to the same news headlines as they did this morning, like the BBC's: "Main parties hit Brexit backlash in polls".

The main obstacle for a Brexit deal is political. The substantive differences are so subtle that even the main negotiators themselves find them hard to understand. The beginning phase of the negotiation consisted mostly of briefings from civil servants, who got everybody acquainted with the concept of a customs union, and the extent to which the May's version of a future relationship differs from a plain-vanilla customs union. The main difficulty will not be to find a technical compromise, but for both leaders to persuade a large number of extremists in their own ranks - the second referendum evangelists in the Labour Party and the no-deal fanatics among the Tories. We still expect that a majority of MPs would want Brexit no longer to be an issue when they meet voters face-to-face at the next general elections. If the Tories replace their leader this year - as we expect to happen under any scenario - a general election is very likely.

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May 03, 2019

Putin's silk road

FAZ has a detailed report about one potentially positive impact of climate change on Russia's and China's economy. The melting of the Artic ice could facilitate shipping from Europe to Asia through the north-eastern sea route - the icy stretch of sea between the north of Russia and the Arctic. The shipping distance from Germany to China would be cut by around one third. But heavy ice makes the route non-viable for most transportation, except for liquid gas that is extracted in the region.

Russia believes that the region also harbours natural resources like oil, gas and minerals that are not accessible now. Russia is currently applying for UN recognition of 1.2m square kilometres of Russia's continental shelf. Putin is pushing investment into the new route and has set a target for an increase in an annual transport volumes from 20m tons in 2018 to 80m in 2024, which is less than a tenth of the volumes that ship through the Suez canal annually. Best to see this as a very, very long term infrastructure shift. 

At this point, transport through the north-eastern passage still constitutes a battle against the elements. The route is ice-free only for four months each year. Transport ships need to be accompanied by heavy icebreakers. And the route lacks the port, shipyard and coastguard infrastructure needed for a commercially viable route. The author of the article casts doubt that the project will become commercially realistic, but notes that China has shown interest in it as well. The Chinese see this as the icy silk road - part of its wider belt-and-road initiative.

Since global warming is a gradual process, the obstacles to a commercial penetration of the north-eastern route will likely remain formidable for a long time. But with the right volumes of investment, this could potentially develop into a viable sea route - with important industrial implication for the northern Eurasian economies. A word of warning is in order, though: Global warming cuts in mysterious ways. While it melts the ice in the north-eastern route, it also swamps the northern Russian coastal regions, including the existing harbours and coastal towns. The investments needed to make this work will be huge, but so will be the strategic and commercial benefits.

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