Global Shipping Comes Under Attack

Cargo ship with containers

While oil is still moving through the Strait of Hormuz, flows remain a fraction of pre-war levels.

Some tankers have made it through by using tactics similar to the shadow fleet, obscuring their movements to avoid detection. Once the tankers clear the Strait, they conduct sea-to-sea transfers under American protection. But this strategy is extremely expensive, and the U.S. cannot sustain it indefinitely.

More importantly, it demonstrates how difficult it is for even the world’s most powerful navy to protect critical maritime chokepoints from relatively small-scale disruptions.

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Transcript

Hey everybody, Peter Zeihan here. Coming to you from the Denver International Airport. Before I get on a plane, I just wanted to give people an idea of what was going on at the Strait of Hormuz, because there’s been a lot of confusion lately. Statements from the administration, from the Iranian government. It’s kind of a mess. Short version is that some crude is getting out. The Trump administration says it’s 9 million barrels a day. The Iranians say it’s something closer to zero. The truth is undoubtedly someplace in between. I don’t have a number for you. Independent Western consultants that track traffic say it’s probably in the 3 to 5 million barrels a day range, which is, you know, better than nothing. But this is down from 20 million barrels a day, 22 million barrels a day at the start of the war. And even if you include all the bypass pipes running at full capacity, we’re still somewhere between 4 and 10 million barrels per day short, based on whoever’s numbers you’re using. Still more than enough for an energy crisis. Anyway. A few things. 

Number one, what’s happening is that the United States is providing overwatch for tankers that are going through, if they originate in countries on the Arab side of the Persian Gulf. So that’s Kuwait, Saudi Arabia, Qatar, United Arab Emirates. Second, what’s going on is kind of an echo of what the Russians and the Iranians did with the shadow fleet. So the shadow fleet is a bunch of tankers, thousands at this point, that run with the transponders off. Their ownership is obscured through shell companies, and you never know where they’re going to be. And oftentimes they will do sea-to-sea transfers to mix their crude with somebody else’s crude, to obscure where it came from in order to evade sanctions. Well, what we’re seeing in the Persian Gulf is that local state companies, whether it’s Kuwait or Saudi or the others, are using their own tankers to load up their own crude and then sailing with the transponders off under American Watch through the southern approaches to the Strait of Hormuz, as far from Iran as they can get. And then when they get on to the Indian Ocean, the Gulf of Aden, they will then do a sea to sea transfer to a buyer, which is India, China, whoever else. So basically, the United States is encouraging, kind of an echo of the shadow fleet happening in the Persian Gulf. And so far that has succeeded in getting some crude out. Again, the specific numbers are in question by everyone. Third. This is not something the United States can sustain indefinitely. The cost to the United States is in probably the dozens of millions of dollars a day, because we’re basically having a carrier anchored task force basically just parked in an area. And as long as it is there, it can’t do anything else. And since it’s not involved in combat, at least at the moment, this is a really high cost, low utility approach for using American military power. The Trump administration says that, you know, only do this into Iran completely capitulates. But if Iran was going to completely capitulate, it probably would have done so in the four decades before now, at some point. So if you want Persian Gulf crude to get out, you basically need a force of this size all the time. Which brings us to the next point. 

There are eight major transit chokepoints in the world, like the Strait of Hormuz, like the Bab-al-Mandab, like Malacca, like Panama. No country has the ability to defend all of them at the same time. The U.S. can probably manage 2 or 3, but that would consume all of its deployable assets, meaning that the world’s largest and history’s largest expeditionary power would be locked down to a couple of footprints, which would be strategically, incredibly stupid. So I wouldn’t count on that happening. In addition, the United States can’t do this very well. So, for example, Hormuz is a problem, but the United States is not making any effort to keep the Bab-al-Mandab open, even though the Yemenis are now launching attacks on shipping there. And we even have Somali pirates back in the action. What we discovered with the Somali pirates over the last 20 years is if the United States anchors an international force to patrol the area and everybody joins, including China, then the Somali pirates basically go away. But the amount of territory here is extreme. You’re talking about a territory roughly the size of Texas, and the US Navy just doesn’t have that kind of capability. And so even though it’s just at the next checkpoint over in Hormuz, we’re now starting to see piracy again. This is going to be our new normal. 

No country, including the United States, no coalition of countries can keep the seas safe any longer. So it’s just a question of when and how and where it breaks down first. I do want to hold one other little bit of information out there, however, before I sign off. And that’s that keep in mind, while protecting sea lanes, patrolling them, convoying ships is very, very hard and very, very expensive and very, very naval ship heavy. Interrupting those flows is very easy. And so, yes, the United States lacks the ability to patrol the world’s oceans and to keep the checkpoint safe, but it perfectly, perfectly, easily can disrupt all of them at the same time, should it so choose. It’s basically an echo of what we’re seeing with drone warfare. Defense is really hard, but if you just want to stick it to someone, you can do that in an afternoon.

China’s Real Estate System Is Failing

Image of Chinese home and real estate

You know what happens when you do exactly what the Chinese government tells you to do? You get sentenced to life in prison. That just happened to Evergrande’s former chairman, and it tells you everything you need to know about China’s failing real estate system.

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Transcript

Hey everybody. Peter Zeihan here, coming to you from Colorado. The news today is that the Chinese government just sentenced the former chairman of the real estate company Evergrande to life imprisonment. Because that’s what happens when you do exactly what the government tells you to do, when it doesn’t work out. Very, very short version of the history. There aren’t a lot of investment options for Chinese citizens. Foreign investment is sharply restricted because the Chinese know that their own system provides very, very, very poor returns. And if they opened their accounts to the world that the money would just flow out in the tens of trillions. And at home, everything is driven by throughput and employment rather than profitability. So if you invest in a specific company, your chances of actually getting a return are minimal because those companies are able to access subsidized loans from the government at negative real interest rates. And if you’re an investor, you get a negative real return. So local governments had for the last 20 years, basically encouraged property companies to come in and buy land from them, which is where they got over half of their income; the state governments, local governments got over half their income. And then take money from individual citizens to build condos. And the result, because we had widespread urbanization going in China at the same time, remember, this is the same time the Chinese are going through their industrialization pulse. The thought was that this would just go on forever. So prices would rise, you’d build more homes, there would be more demand, blah, blah, blah. And on and on and on and on. There are two problems with that theory.  

Number one, eventually you created more housing than China needed by a factor of 4 or 5 by some measures. And then second, nobody was being born. The Chinese demographic bust probably started, data’s a little sketchy, but probably started back in the early 90s. That’s when we now know, according to official Chinese statistics, that the Chinese birth rate dropped below the American birth rate 35 years ago. Anyway, nobody gets born for 35 years. All of a sudden, the demand for the housing goes down. And eventually this bubble popped in the early 20s, which is when Evergrande went bust with something like $300 billion of losses, which even by Chinese standards, that’s a pretty big number. Anyway, people who invested in Evergrande directly or indirectly by having Evergrande build them an apartment basically lost their shirts. And now we’ve had this complete collapse in the system. New construction in China is down by 75% in just the last five years since this went down. And that’s data as of the end of 2025, which is the most recent we have best estimates, is that there’s going to be another 20% collapse this year. And to put it from the point of view of the individuals, the people who are buying these homes, to give you an idea of how screwed they are. In inflation index terms, and keep in mind the Chinese doctor their data so their inflation does not look as bad as it is according to the official statistics. Homes today are worth less than they were at the start of the boom in 2005. So in the United States, when we had the adjustment with the great financial crisis in 2007 to 2009, and home prices dropped back to like 2005 levels, and we all kind of lost our mind. Can you imagine a 20 to 25 year loss in appreciation and the impact that has on the mindset of the average Chinese? Now, this hasn’t translated into a stock route because the Chinese regulate that on one hand. But more importantly, the Chinese citizens know that investing in the stock market in China is a fool’s errand. Again, Chinese companies have access to below market prices, below inflation prices, real negative prices for loans. So any investment there honestly is a fool’s errand. And if you happen to invest in Chinese equities, I also have a bridge that I would like to sell you that I think you’ll really, really like. 

Anyway, bottom line is that the Chinese government is now trying to get this money somewhere else. We have something like 22 trillion US equivalent in deposit accounts. It’s just Chinese citizens who don’t know what to do with their money, because they don’t want to put in the stock market. They now know that housing is a trap. So it’s just sitting in a deposit account in their local bank. And so the Chinese state has reduced deposit rates to below 1%. So this money isn’t really earning anything. And they’re trying to force the Chinese citizens to invest in the stock markets. But the Chinese citizens at the moment are smart enough to realize that that is a fool’s errand. The only other possible way for it to go would be out of the country and go somewhere else where it could be more productive and be, you know, safer. But the Chinese keep that locked down. So I always find it very amusing of the people who want to get their money into China to make money, when the people who are in China are desperate for any way to get the money out. Anyway, that’s it for now. See you next time.

Russia Is Struggling to Defend Its Own Capital

Image of St. Basils Cathedral and the Kremlin in Moscow, Russia

A leaked Moscow memo stated that Russian air defenses are being concentrated around the Kremlin. This leaves the broader Moscow region, including refineries and key infrastructure, vulnerable to Ukrainian attacks. And if Moscow is this vulnerable, it gives you an idea of just how bad things are throughout the rest of Russia.

In addition, the Russians are looking to kick off a peripheral mobilization of ~300,000 people. However, all of the recruitment sources carry political risks for the Kremlin. If they depopulate the Far East, it weakens the border with China; if they take non-ethnic Russians and could fuel unrest; or you target immigrant workers and worsen the labor shortage.

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Transcript

Hey, everybody. Peter Zeihan here, coming to you from Colorado. Today we’re talking about the combination of things that have come out of Russia. We’ve got two things. The first one is that a memo that was being circulated among the Moscow mayor’s senior staff has leaked. And basically they are admitting that even with the government, the national government, the Kremlin, redirecting the bulk of the country’s air defense to the Moscow region, the defenses are so concentrated around the Kremlin itself that they’re not providing enough anti-air defense for the broader metro region, which is the economic and political and cultural hub of the country, which means that refineries which are on the outskirts can’t really be protected at all. And they are expecting the refining system to not simply continue to come under attack. But they’re expecting the city to run out of fuel before the end of the year, and perhaps a lot sooner than that. So they are spitballing ideas of what to do about that. And the leading candidate right now is to break up Russia’s refining complex instead of the 100 odd refineries it has right now, and build a thousand plus that are just much, much, much smaller. 

Now, it isn’t so much that this is a good idea because it’s not. You’d lose economies of scale. You’d still have to cluster the refineries around pipelines. So you have like five refineries, smaller refineries, where a bigger one used to be. That doesn’t really solve the problem, but more importantly, it would take years to build out and require lots and lots of equipment that the Russians can’t build and would have to import. So all of a sudden the sanctions come into place. So it’s really not feasible. But the point that the smartest people in the largest and most successful city in Russia are now desperate for options simply to keep the fuel flowing, tells you everything you need to know about the stability of the Russian economy right now. Because this is the capital, this isn’t some far flung province out on the edge. That’s piece one. 

Piece two came out of Kyiv with the Ukrainian President Zelensky sharing some intel that they’ve been garnering on the Russian military system. Apparently, according to Zelensky, the Russians are preparing a fresh what they call peripheral mobilization for this coming September immediately after elections. And when they say peripheral in Russia, what they mean is non-ethnic Russians. Ethnic Russians, according to Russian statistics, are probably about 75% of the population and of course make up the super majority in the major cities, most notably Moscow. But when you move out of the Moscow region, out of the Saint Petersburg region, you’re going to be hitting higher and higher ethnic minority concentrations. And there are several republics, several dozen republics across Russia where non-Russian are either the full majority or the near majority. So far in the war, the Russian government has done everything it can to not pull ethnic Russians into the fight, favoring the forced recruitment of non-Russian ethnics whenever they possibly can, because they’re feeling is if those people rebel, you can just kill them. But if Russians, ethnic Russians rebel and you put them down like the Russians like to, that might spawn more protests in other Russian regions. And if you don’t have the buy in of the Russian population, or at least it’s apathy, then that is how the Kremlin falls, because that’s happened before. Reasonable, reasonable political analysis. The problem, of course, is that this is not the first time the Russian government has done this. It’s done this in three rounds so far in the war to date. And with the Russian government losing somewhere between 25 and 45,000 people a month in this war, the question is, how long can this hold the line before things break? 

According to Zelensky’s Intel? And so far, when the Ukrainians have shared things like this on the development of the Russian military, they tend to be right, I’d say 90% of the time. But, you know, some of the details might be fuzzy. The Russians are talking about this peripheral mobilization, about 300,000 people, which would be enough to supply troops to maintain what the Russians have been doing at the last years burn rates for another 6 to 9 months. So it doesn’t really change the math in the long term. It simply allows the Russians to continue to plot on with what they’re doing as to where the people would come from. The greatest hits, where the greatest percentage of the local population would be drawn out, would probably be from the Far East. These are areas that are relatively lightly populated, relatively low urbanization, penetration. And basically the Russian state just goes through and rounds people up when they’re going about their daily business. The second big concentration would be recent passport holders. So there are a lot of people who have moved from Central Asia to Russia because as bad as the economy is in Russia, it’s worse in Central Asia. So especially in places like Tajikistan or Kyrgyzstan, you’ve got several million people over the last 20 years who have moved north. And because they’ve had to get passports, they are in the system. And so basically what the Russians are doing is saying, hey, you’re in the system, we know where you are. Come work in the war because you don’t have a choice anymore. Getting Russian citizenship, the price is dying in Ukraine. The biggest concentration, the biggest numbers are going to be from ethnic republics that are closer to Moscow, that are more densely populated. So you’re talking here about places like Chechnya, Tatarstan, and Bashkortostan, densely populated provinces with reasonably high birth rates, especially compared to the ethnic Russians, where you do have a presence of the Russian state that can basically force people in. 

All of these come at certain risks. When you start taking out people from the Far East, you’re depopulating them to the point that there’s an open question about relations vis a vis the Chinese, who have 100 million people just on the other side of the border. When you start going after the people who are recent passport holders, you disincentivize people to come into Russia where there’s a demographic bomb going off in real time even before the war, and you’re losing the workforce, you need to keep the system going. And when you go after groups like Chechnya, Tatarstan, and Bashkortostan, you’re talking about big population centers that if they ever did rebel, it’s not clear whether the Russian state could resist them. A new Chechen war would be as bad for the Russians as what’s going on in Ukraine right now. And if the Tartars or the Bashkirs rebel in any meaningful way, the Russians lose all the infrastructure connections they have to Siberia and Siberia, at the moment, is the only part of the oil complex that is likely to still be exporting a year or two from now. So none of these are good decisions, but it’s not like there’s a better one on offer, and we’re now seeing the entire system start to seize. 

Russia, though, is capable of maintaining an incredibly high tolerance for pain, basically suffering as the Russian equivalent of baseball. And none of these by themselves are enough to break the system. But we’re seeing the weight increase at the same time as we’re seeing the Russians start to not just stall on the front, but be turned back. And every major Russian revolution in the past 300 years has been because the Kremlin has lost a military conflict. So you take the social pressures that this mobilization are likely to generate, play that against the battlefield situation. And yeah, this is looking pretty bad for the Kremlin.

Trade War Revival: Trump, Canada, and Tariffs

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Crippling one of the world’s most deeply integrated manufacturing systems probably isn’t a great idea, but here we are again.

Trump has ensured that the trade war between Canada and the U.S. is alive and well, following the announcement of another series of tariffs. The U.S. isn’t just shooting itself in the foot; it’s shooting all of its closest friends’ feet in the process…

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Transcript

Hey, all. Peter Zeihan here, coming to you from Colorado. And the news is that between the 21st and the 22nd, at midnight, the United States kicked in 50% tariffs on a suite of Canadian goods, basically ensuring that the trade war between the Trump administration and Canada is alive and well. What this is what this isn’t first. What this isn’t. 

These weren’t NAFTA talks. Bilateral talks with Canadians on NAFTA, much less tri-level talks with the Mexicans have yet to begin. So the world’s deepest economic integration, the most successful supply chains humanity has ever put together are still in limbo. And now with the United States throwing a 50% tariff on top of that and saying flat out there are no plans for future negotiations. This really is getting into a no man’s land when it comes to the future of North American manufacturing. Keep in mind that the United States needs to at least double the size of its industrial plant simply to have access to the products it’s going to lose as the global really kicks in, especially in China. And doing that without our North American partners means we actually have to increase our industrial plant by the volume of theirs as well. 

At the same time, the Trump administration keeps changing policies. We’ve now had over 8500 tariff changes. This new batch adds a couple more hundred to that. And so no one who wants to invest in North American, and especially U.S. manufacturing, is going to do so because the rules of the game keep changing and they don’t even know who they can approach for partners. 

So one of the things that we’ve seen during the Trump administration is that industrial construction spending has dropped every single month of this administration, but one where there was a slight uptick, I think earlier in this year. This is certainly going to exacerbate that plan, because we’re now at the point where the business communities trust in the Trump administration has basically evaporated completely, and they will not start investing in new plant until such time as they know what the real rules of the game are. That will be on the other side of negotiations with Canada, on the other side of negotiations on whatever the next NAFTA is. And at this point, none of that has even started yet. So, if you were looking for the realization of the United States under the Trump administration, we now have 18 months of data indicating that we’ve gone screaming in the opposite direction. And we’re actually farther away from clarity now than we were in January of 2025. This is unambiguously horrible news for the U.S. economy long term, because it’s raising the very real possibility that not only will we not have the replacement product supply chains in place when the globalization really hits hard in the next couple of years, but we won’t even be able to be functional with where we were two years ago. And the industries that are hit hardest by that by far are agriculture, because their primary customers are Canada and Mexico, and automotive manufacturing because the average part that is in an American crafted vehicle crosses the border 5 or 6 times overall in in its manufacture going to Mexico and Canada. And anything going to Canada is now facing potentially compounding tariffs. And if you happen to be headquartered in Detroit and producing cars in Michigan or the northern tier of the Midwest, you’re talking about parts crossing maybe seven times. This is this is bad. Anyway. You look at it. 

One more thing. I’m going backpacking in Yosemite for the next few weeks and the next phase of this. I will not be here to talk with you about. In September, the Canadians have already promised that they’re going to announce reciprocal tariffs designed to pressure the Trump administration specifically. It is unclear what those tariffs will be on. In the past, when countries try to target political decision making, they go after things that are politically sensitive, specifically in areas that really matter to the political policymaker. I don’t know what that’s going to look like at present, but I have a real big doubt that it’s going to work. Trump has made it very clear over the last year that it doesn’t matter who he thinks his constituents are. He’s willing to do whatever he thinks his version of math supports. So, for example, the beef industry has been absolutely screaming for the last few weeks as Trump has been opening up their market to foreign imports and or an attempt to lower prices. So actually suppressing long term supply in the United States in order to give him a short term boost in preparation for the midterms. And none other than, say, the National Cattlemen’s Association has just been screaming bloody murder about how damaging that is for them in the country midterm. You’re seeing this across almost every economic sector. So the idea that that strategy is going to work is very unlikely. Second thing is the Canadians, if they do decide to target things like the manufacturing sector, that would really reverberate in places like Michigan and swing states. Two things to keep in mind. Number one. Trump’s a lame duck already. He doesn’t care about presidential elections, so that’s unlikely to work. And then second, three quarters of Canada’s exports come to the United States. Anything that they do that is real, that will cause structural damage in the United States is actually going to hurt them more.

Relocate or Move On from the Middle East

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Following the dumpster fire that was the Iran war, the U.S. is contemplating how and where to redeploy forces to the Middle East.

Iran has demonstrated an increasingly capable drone arsenal, striking U.S. facilities across the region. So, can the U.S. just plop a couple bases in Jordan or Israel’s Negev Desert and call it a day?

Not exactly. The U.S. relies on the Patriot systems to shoot down Iranian drones, but there’s a scale problem. Iran can pump out thousands of drones in the time it takes the U.S. to make a dozen or so Patriots. That means that without creating a new interceptor, the U.S. is only buying itself a little time by moving its bases further away; eventually, even these new bases will fall within Iran’s range.

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Transcript

Hey, everybody. Peter Zeihan here, coming to you from Banff, Canada in Alberta. Today we’re going to talk about the American in progress plans to redeploy its forces throughout the Middle East. One of the many things that we saw as a result of the Iran war is that the Iranians now have a limited number of precision weapons. As we’ve been watching the Ukraine war, we’ve seen the accuracy in the reach of drone warfare extending incrementally ever since February, which is the same window that the Iran war happened in. And what we now have are a new type of drone that I call memory drones, where you can program in a limited decision tree, and when the drone gets to the general vicinity of its target, the pilot releases it and the drone looks at its targeting criteria, selects a target itself, and then goes in. And since the decision was made on board, it can’t be jammed at that point. It can only be shot down. And most of the damage that we have seen to U.S. military facilities in places like Kuwait and the UAE and Saudi Arabia were by these drones. And it’s not just that they hit the United States. They hit with extreme precision hitting, whether it was a barracks or a radar dome. 

Anyway, bottom line is that the United States lacks a good defense for these systems. The Patriots are absolutely the preeminent system that the Americans have for shooting down those drones, and they’ll definitely do that. But the United States can only build about a dozen of those things a week. Whereas the Iranians can assemble several thousand drones per week. The math was always going to be against the US’s favor. So the discussion now is to where to move these facilities and the two countries that keep coming up over and over and over again are Jordan and Israel, where you’d probably put them in the Negev desert. And the theory is, you would put them outside of Iran’s range. 

But no, there are multiple versions of the drones that the Iranians are using. But what we’ve seen in the Ukraine war is that the range gets incrementally longer every single day. The Ukrainians are now regularly striking targets that are over a thousand miles away from the Ukrainian space. And in the case of Iran, they’re nowhere near that long. But they’ve certainly breached 600. And 600 miles range can bring those Iranian drones all the way to the Mediterranean, hit anywhere in Israel already. So if the American goal is to have a close in military facility in the Persian Gulf region or the Middle East in general that can threaten Iran. The interceptor problem has to be solved. It isn’t an issue of distance. Iran has already demonstrated has robust capability of hitting anything in the region all the way to Israel, all the way to the Red sea, all the way to Yemen. Moving the bases isn’t going to change anything, except for maybe buy just a few months while the Iranians tick up their drone range just a little bit. And that’s all it would take, just a little bit. So no, this isn’t a good solution. So we’re probably going to be seeing a broad scale American withdrawal from the region unless and until the interceptor problem can be solved. And it will not be solved with Patriots.

Israel and Turkey Call Dibs on Syria

Syrian flag waving with a syrian box airplane in the background

It’s always something in the Middle East…and today, it’s Syria. Israel and Turkey are competing over what comes next for this country.

Syria is creeping closer to civil conflict as diminished support from outside powers has created a power vacuum. Israel and Turkey would both love to be the new puppetmaster of Syria, which puts these two countries directly at odds.

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Transcript

Good morning, everybody. Hello from Banff and Alberta, Canada. Peter Zeihan here. Today we’re going to be talking about what’s been going on the last few days in Syria. We’ve seen renewed military activity out of the Israelis and then bombing a number of military assets throughout the northwestern part of the country, a province called Idlib, which was kind of where the civil war turned a little over a year ago. 

If you remember back, we basically had always had rebels in this region, but the Turks became more involved, provided more intelligence and more weapons, and in a series of blitz attacks, basically overthrew the government of former dictator Assad. What’s happened since then is that the Turks and the Israelis are spatting over the future of the country, and so the Israelis are preemptively bombing areas that they think the Turks are about to go in and evaluate with the intent of establishing air denial assets, or maybe even stationed some aircraft. 

The Turks say, of course, that this is nonsense, kind of tend to side with the Israelis on this one, because what we have here is a clash of long term interests. Syria has always been an artificial state. And so the idea that it would preserve as long as it did is kind of a bit of a stretch. And it only did so because of globalization. The United States created a system where everything could be on the water, and when everything was on the water, well, then anything that was on land that relied on land transport roads like Syria, kind of withered. Unless you had a strategic environment where foreign sponsors could get in and support it. So Russia was one of those. Iran was one of those. 

Now we’re in that environment where it’s gone. And so Syria is kind of returning to a no man’s land at this moment. And we’re kind of on the verge of a second stage of a civil war. Well, there are countries in the region who have the power that’s necessary to project throughout this region, and they’ve got some opinions. 

So in the case of Israel, they want to maintain basically the entire country as a no fly zone so that any nascent Syrian state is going to be weak and broken and can never cause a threat to Israel ever again. The Turks, for their part, see a refugee issue on their southern border and also a power projection possibility. And so they would like to establish a bubble over Syria where they can project power without risk, which basically brings the two into direct conflict. Israel doesn’t want anyone to have any air assets or any air defense, and the Turks absolutely want to build specifically that sort of institution. How this will play out doesn’t have to be a military clash, but we’re definitely going to see these two countries struggling over this region. And the Israelis right now coming off of the Iran war are definitely a little itchy on that trigger finger. And that’s before you consider that it’s election season in Israel. And now that Iran is in the rearview mirror, all the Israelis are trying to decide who needs to be toughest on Turkey. Welcome to the Middle East.

The U.S. Chooses Favorites: North Korea over South Korea

I’m not sure how crossed your wires have to be to side with North Korea over South Korea, but that’s exactly what Trump did over the weekend. So, what will this mean for the future of U.S. and South Korean relations?

South Korea is much more than a security ally; they are a global leader in shipbuilding and DRAM production…and guess what two things the U.S. will need in the coming years? If the U.S. continues to pull back from South Korea, expect it to restructure its military and pursue nuclear armament.

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Transcript

Hey, everybody. Peter Zeihan here  coming to you from Colorado. I was just listening to the radio, and I had to pull over because I couldn’t believe it. I thought I was listening to some sort of satire radio, but no. Donald Trump is in the process of functionally ending the alliance with South Korea, specifically, the South Koreans and the United States have annual exercises to basically prepare for North Korean invasion. And, Trump has largely ended U.S. participation of it, which is a long standing North Korean propaganda demand. In his Truth Social post, Trump said a lot of bad things about South Korea, specifically called out Chairman Kim of North Korea, the despot, as one of his good friends and as a respectful leader and whew… 

Three big things here. Number one. Bothers me that I have to say this out loud, but North Korea is not a friend. North Korea is literally pointing to their nuclear tipped, nuclear weapons at us, and is one of the world’s greatest concentrations of cyber crime, specifically crypto crime that disproportionately attacks Americans. So the idea that Trump has a personal relationship with the dictator Kim, and that is somehow benefiting the United States, is delusional at best. 

Number two, yes, South Korea is a beneficiary of the United States. But I would argue in a post globalized world, South Korea is one of the top five countries that we really, really want to have a strong relationship with. Once you get past the trade disputes that the Koreans and the Americans have, which I might add were largely addressed by a free trade agreement negotiated by Trump One. There are two really big things that we need them for. Number one, South Korea is one of the world’s best shipbuilders, and the US Navy was relying upon Korean tech, Korean technicians and Korean modules in order to jumpstart U.S. naval ship building. We can probably now kiss that goodbye, which means that the rate of building new ships is going to continue to be very slow. 

The second piece is in computers. Everybody obsesses about GPUs, which are primarily the product of TSMC out of Taiwan high end processing nodes. People forget that you also need something called DRAM, dynamic random access memory. It’s a high end memory chip, and the Koreans make almost all of those, all the good ones anyway, and are really the only ones researching how to make better ones. So whereas Biden and now Trump are pushing to get GPUs produced in the United States have kind of forgotten about the other piece of high end computing. And without the Koreans, it’s just that goes away. Third, yes, Korea is a security beneficiary, but they’re not a free rider. In fact, aside from North Korea, special case because they impoverish their people, making them eat grass in order to have a big military with 25% of their population under arms, and Ukraine and Russia, which are in a hot war, the Koreans have regularly outspent everyone on the planet going back to 1950. Yeah. 

But they have focused at American insistence on defensive weaponry and on short range weaponry. So they don’t have a ballistic missile program, they don’t have an independent jet program, and they certainly don’t have a big naval program. So Trump called out in his Truth Social post about how the Koreans refused to assist in the denuclearization of Iran. And let’s put to the side first, that the Trump administration, six months in, still doesn’t have a plan for that. 

The South Koreans guess how many ships they have that can make it to the Strait of Hormuz? Zero. So, I mean, what were they supposed to do? Swim. 

Now, if the United States really is backing away, and the South Koreans are going to have to face the North Koreans alone and defend themselves in a neighborhood with superior military forces like Japan and China themselves. Well, they’re kind of in a similar situation to the Europeans. There’s no point in them getting a lot of artillery and tanks and rocket systems and jets, because it would take too long to build. And the Trump pullback is being so rapid that just won’t work. So they’re doing two things. Number one, they have a very aggressive partnership with the Ukrainians to mass produce drones. Expect to see a lot more of that. So the marriage of South Korean technical skill and manufacturing prowess with Ukrainian innovation and field testing, we’re going to see a new generation, several new generations of advanced attack drones and offensive drones that the United States now will not have access to, but will form the backbone of this new Korean military structure. 

Second, there’s one other thing that they can do that has a big bang for the buck and you can do pretty quickly, and that’s built nuclear weapon. The Koreans have always tried to stay just a couple of steps shy of weaponization, because they were never quite sure in the long run, if the United States was going to stick around or not. 

Now, they more or less have an answer to that question, and that means we’re going to have a third nuclear power in Northeast Asia. If the Koreans decided to pull the trigger today, they could have a device in days. They’ll probably be able to have a deliverable nuclear weapon within months. And then this strategic balance that existed in relative peace in Northeast Asia for the last 75 years. You can kiss that goodbye, because then the Taiwanese and the Japanese really will have no choice but to follow suit. So there we are. I would love to say that there’s some sort of strategic goal here the Trump administration has. Unless it’s having dinner with the North Korean dictator, I don’t see what it could possibly be. 

And that’s all I’ve got for now.

The Collapse of the World’s Strategic Straits – Part 2

Shipping containers being transported by a cargo hauler in a strait | Licensed by Envato Elements

Should Iran manage to turn the Strait of Hormuz into a toll-based waterway, what does the domino effect look like?

There are a handful of straits and chokepoints that will follow suit, including the Bab al-Mandab, Turkish Straits, and Danish Straits (the Strait of Malacca will likely remain open). Each of these has regional players with strong incentives to adopt their own version of the Iranian model. Just another line item pushing us toward a more regionalized world.

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Transcript

Hey, all. Peter Zeihan here, coming to you from Colorado’s Front Range, taking a break to talk about Hormuz and what’s next. We’re probably going to have some sort of format before the end of the year where Iran is able to gather charges, whether it’s a service fee or toll, whatever you want to call it, for ships passing through. 

Once that happens, there’s going to be a lot of dominoes falling as other states realize that they, too, can demand control of a waterway and gain financial assets from that. Until this point, international law has made it very clear that any naturally occurring waterway cannot be regulated in such a way. So we’re breaking with a century plus of tradition here. 

Artificial waterways like the Panama Canal or Suez are exempt because they are fully within sovereign territory. There’s infrastructure that has to be maintained. And so that’s not new. You can charge tolls there. But once Hormuz goes the other direction into something that is regulated, other places are going to follow. And the first one will be the Bab al-Mandab. 

So Hormuz is in the eastern corner of the Arabian Peninsula that connects the Persian Gulf to the Indian Ocean. The Bab al-Mandab is on the southern tip of the Arabian Peninsula, which separates the Red sea from the Indian Ocean. Now, the countries that are clustered around Bab al-Mandab are oddities. One is Djibouti, which in for nearly all intents and purposes, remains a partial French colony. One is one of the remnants of Somalia, which is not exactly what it screams state function. And the last one is Yemen, which is a country only in name. The central government in Sanaa is weak at best. It’s been in and out of civil war really, ever since it’s united back in the 90s, and now the single largest group in the country, the most powerful, and are the Houthi rebels, which are backed by Iran and have been using the Iranian connection to get weapons, most notably missiles and more recently, drones to attack ships in the Red sea. 

If we have Iran succeed in Hormuz, the Houthis are absolutely going to try to do the same thing in the Bab, and they won’t be alone as the important thing. Because remember, the Houthis are not a state power. They’re a rebel group. And if they start to have the ability to carve out a little bit, Sanaa, the capital, will certainly follow. And the idea that you’ve got a broken state of Somalia that doesn’t need income is silly. And it’s already the land of pirates, so they already have a way to enforce that, too. And then you’ve got Djibouti, which for all intents and purposes, is in France’s pocket. And if there is any first world power that senses an opportunity here from a changing in the international order, it would be France. 

So it very quickly turns into a multi-sided argument/conflict over how to regulate it. And probably what would happen is that all four of these entities would be able to extract value from the Bab, because basically what we’re talking about here with Iran and Hormuz is protection money. You pay us and we won’t attack you. And while the entities of the Bab aren’t as powerful as Iran, you know, the French can send a ship or two. Somalis can always dispatch pirates. And the Yemeni have already proven that missiles are more than enough to cause damage. So there you’ve got two of the places where international energy flows that are going to be facing much higher fees. There’s two others that I want to draw to your attention to. Well, actually, you know, first let’s eliminate one. 

Let’s eliminate the Strait of Malacca. Malacca is off the coast of Singapore. It’s between the Malay Peninsula and the Indonesian and Malaysian archipelagos. It’s the busiest waterway in the world. Most of the things that flow out of Hormuz eventually go to Malacca and on to Northeast Asia. And most of the things out of Northeast Asia that don’t cross the Pacific go around Malacca on their way to Europe. So busy, busy, busy busy, busy. But what about Malacca compared to, say, the Bab, is that the states around it are more capable and more importantly, they’re more regularized and they benefit from that trade. So the big three Malaysia, Indonesia, Singapore, these are trading countries. And not only do they benefit from the transoceanic trade that goes through the strait, they are part of a group called the Association of Southeast Asian Nations, Asean. That’s a regional trade grouping where most of that trade goes through the strait, too. So the countries that would suffer the most from some sort of toll regime would be the countries that would be responsible for implementing a toll regime. So, Malacca, I don’t expect to fall into this trap. There have been problems with pirates in the past, but Singapore, Malaysia and Indonesia working together have usually been able to keep a lid on that. I don’t see that changing in the near future. So not there, but the big one that would absolutely flip almost overnight would be Turkey, the Turkish Straits, the Bosporus and the Dardanelles connects the Black Sea to the Sea Marmara, to the Aegean Sea, and on to the Mediterranean and the wider world. The international laws that regulate international waterways were basically built with Turkey in mind at the end of World War One, and they basically say that the Turks cannot regulate this waterway, despite it being the narrowest of the natural ones, and despite the fact that it flows through the largest city in Turkey, which is Istanbul. 

The second it becomes apparent that the Iranians can enforce their will on the Persian Gulf. In this way, you can bet your ass at the Turks are going to be doing the same thing. And the Turks have a functional navy. They have a functional army. They can physically interdict every single ship that passes through these waterways without really breaking a sweat. And so you should just kind of file that in as a done deal as soon as something gets regularized in Iran. 

And then the fourth one to consider, fifth one consider excuse me, is the Danish Straits. The Baltic Sea empties into the North Sea and onto the Atlantic, and in doing so, it passes through a series of straits that are controlled almost exclusively by Denmark, plus Sweden. Now, these are two countries that haven’t really tried to regulate the strait in modern times. But if you go back to the times before World War one, this was one of the big hullabaloo things in northern Europe. With the Germans ultimately building the Kiel Canal that crosses that narrow little section of northern Germany in order to bypass anything that the Danes could do. As soon as that canal was built, everyone basically stopped paying the sound dues as they were called, and simply it was a free waterway. But once it becomes clear that the rules are changing, expect the Danes to get in on this, because pretty much all Russian commerce that flows out of northern Russia comes out of Saint Petersburg and Vyborg, and then onto a boat and then through the Danish straits. And the Danes have not been happy about that for the better part of a century, and certainly not since the Ukraine war started. And now that Sweden and Finland are no longer neutral countries, you can count on the Scandinavians working as a group. So Norway, Denmark, Finland and Sweden working as a group to enforce some sort of structure on this waterway because it is to their economic and especially national security interests versus the Russians. 

Now, if you step back and look at all of these in unison, you see two big patterns. The first is that anything that wants to flow out of the Middle East in terms of oil has to use either Hormuz, the Bab or the Suez Canal. And so all of a sudden, the countries that hold the leverage there have huge leverage when it comes to energy. And if I were them, part of the tolls in my mind would simply mean making sure that I never had to pay for oil again. Just something to think about. And since France has a thumb on that scale, that gets really interesting really fast. 

When you’re talking about the Turkish Straits and the Danish Straits, however, the THE issue is Russia, because almost all of their exports in the post Ukraine war environment flow through those two waterways. And all of a sudden you’ve got countries that are in NATO completely controlling their access. That doesn’t mean that deals can’t be cut, but it does mean that Russia’s access to the world as an exporting power becomes limited to just what it can get out through the Pacific. And that is a small fraction of what goes west simply because of the nature of the infrastructure in the distances involved. 

Most of the people, most of the refineries, most of the oil flows west, not east. So we get a rewiring of what’s left of global commerce in the scenario. And all of a sudden a lot of these products are trapped regionally rather than being able to go globally. And so the closer you are to these things, the easier it is for you to cut a deal with the powers that hold the knife over the roots. And the farther away you are all of a sudden, you’re talking about needing to find a way to source things that are not coming from these two zones. And for a lot of countries, there aren’t a lot of good options for that.

Ukraine’s Flamingos Crush Russia’s Space Program

A cruise missile launching into a starry night sky | Licensed by Envato Elements

Ukraine sent a flamboyance of Flamingos (cruise missiles, not those pink things) and struck a Russian space complex in Samara. This complex was responsible for assembling Soyuz-2 rockets, as well as electronics and precision testing.

The missiles used, the Flamingos, are Ukraine’s version of the U.S. Tomahawk; dumber than the Tomahawk, but cheaper and easier to produce. These strikes and Ukraine’s growing large-scale strike capability are crushing Russia’s industrial and technological base.

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Transcript

Hey everybody. Peter Zeihan here, coming to you from Colorado. It is the 15th of August. And the news is that Ukraine, using a modified weapon system, has just attacked the city of Samara in Russia and severely damaged one of the space complexes, specifically the place where the Russians assemble the Soyuz-2 rockets. This is the primary Russian launch vehicle to get satellites up into space. Damage levels at this point are questionable, but we know there have been hard hits on the major buildings that actually do the work, especially for things like electronics and precision testing. So for the moment, Russia’s space program is now offline, and the idea that the Ukrainians won’t hit again is kind of silly. 

Right now, Russia has kind of a hybridized space program. They’re still participating with the United States on the ISS, although I wouldn’t expect that to last a whole lot longer. ISS is the International Space Station, and they do have some legacy satellites up there, but they were hoping to build their own network of a couple hundred satellites. That to be kind of a local Starlink equivalent, so that they have independent military observation and independent communications, that is at a minimum on hold now. 

They were really only planning on launching ten, maybe, if they’re really lucky, 20 satellites a year. And now that’s completely at zero. In addition to that, there’s the question of how the Ukrainians did this. It’s something called a flamingo missile. Now, if you remember back a year or two ago, there were some conversations about the United States sending some of its new truck mounted Tomahawk missiles, which is the United States premier mid strike cruise missile. Anyway, sending them to Ukraine. Ukraine lobbied very, very hard for that. But ultimately the United States decided no. So the Ukrainians, for all intents and purposes, built their own. The Flamingo has a warhead that is significantly more powerful than the Tomahawk. It’s modular, but it can be up to 1000kg, which is well over twice what the typical tomahawk carries. It has a slightly better range with a lighter warhead. It’s not quite as fast. Probably the biggest weakness of the Flamingo versus the Tomahawk is that the United States can use, off course, it’s satellite network to retask it on the fly, where the Ukrainians cannot yet do that. Although, considering, what they’re doing with drones, some version of that is probably going to be possible in the not too distant future anyway. 

It, in essence, is a flying truck bomb. It’s not as accurate as the Tomahawk, but because it hits so much harder, it is almost as good. And the really important thing is it’s because it’s a simpler piece of equipment. Fiberglass instead of titanium. The Ukrainians can crank out three of them a day where as the tomahawk, they can only produce about 60 a year. So that’s what, five a month? Yeah, five a month. So a half a dozen of these things were used in the attack on Samara. Most of them were shot down, but with three a day being the production rate, it’s very, very simple to see this being a major industrial factor in the weeks and months to come. 

So in summary, the Russians probably won’t have a space program by the end of the year that makes them completely dependent upon third party reconnaissance, primarily from China. The Ukrainians are being able to throw so much tonnage into the air that there’s really no industrial facility in Russia within a thousand miles of the border now that is safe at all, because if you’re not going to defend your space program as Russia, there’s really not much left that is more important aside from Moscow itself. And we’ve seen a contraction of Russian air defense around critical sites in Moscow and very little else. What we’re seeing is the disembowelment of Russia’s capability of being a technological power, and all that’s left is for it to be a resource power, exporting raw materials such as crude oil, in order to get the currency it needs in order to purchase Chinese product. But as the Ukrainians basically march with drones through the entire industrial plant, that capacity is disappearing. And we’ll probably see an end of Russia’s ability to be a large scale resource exporter before the end of the year as well, at least as regards the Black Sea and the Baltic Sea. And that’s going to be over two thirds of the total. So we really are seeing the industrial destruction and removal of Russia from the global space. 

That has thousands of downstream impacts. And that is a topic we will revisit at length in the days and weeks to come.

The Collapse of the World’s Strategic Straits

Shipping containers being transported by a cargo hauler in a strait | Licensed by Envato Elements

The Strait of Hormuz needs a new model for running things, but copy/pasting the voluntary system used in the Strait of Malacca isn’t going to work.

Iran isn’t just concerned about security; it wants international recognition of its right to control access to Hormuz and collect the associated access fees and tolls. With a clear ability and willingness to disrupt traffic through Hormuz, Iran has forced everyone to take these demands seriously.

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Transcript

Hey everybody. Peter Zeihan here. Coming to you from Colorado’s Front Range…found a gap in the wind. So we’re taking a question from the Patreon crowd. Specifically, there is a lot of talk from all corners true about what to do about the Strait of Hormuz. True. What about replicating what has happened in the Strait of Malacca these last 30 years? Is that a model? Because it’s one that’s being discussed. Great question. The short answer is no. 

Let’s talk about what the Iranians are after and then go into the Malacca model. So what the Iranians are trying to get is any sort of even tangential acceptance by the United States that they should be able to regulate the Strait of Hormuz as they see fit, and that includes charging tolls or service fees or whatever. The numbers vary wildly from the equivalent of $0.10 a barrel to $2 a barrel for the equivalent cargo. 

So like a supertanker that comes through with a million barrels, that could be anywhere from $100,000 to $2 million per passage. And the Iranians think they should be able to say, whenever a ship comes or goes, that they have the ability to say, you either can’t come, and here’s the toll you have to pay before you can proceed. 

And in many ways, they’ve already set something like that up on their side of the Gulf that has been obeyed erratically, I might add. Sometimes they shoot at them even if they’ve paid the toll. But overall, their ability to strike across the entirety of the strait means that people have to take these threats seriously. And it’s very rare now that we have 10% of the cargo going through that used to go through back in January before the war started. So their threshold is pretty high, and they’re demonstrating that if they don’t get their way, they can impose a cost on anyone who defies them, including the US Navy. 

Let’s talk Malacca. Now, Malacca, obviously an international waterway, busiest waterway in the world, significantly more so than Hormuz, because most of the stuff that comes through Hormuz ultimately goes through Malacca. In addition to cargo going between the manufacturing countries of Northeast Asia and the consumer economies of Europe. Now, Malacca has a voluntary system that was set up roughly 30 years ago, where countries and governments and bureaus of those governments can voluntarily contribute some cash to maintain safety procedures in the waterway. Sometimes aids to navigation, things like buoys. Sometimes it’s satellite navigation assistance. Sometimes it’s search and rescue, and sometimes, if, and God forbid, there’s a collision, it’s port facilities to help with recovery and repair. The thing is two things. Number one, voluntary. And so a lot of countries, a lot of companies just don’t do anything. And number two, because it’s voluntary, what gets donated is chump change. In the 30 years that this structure has been in place, the grand total of all fees paid, voluntarily paid, is under $50 million. And from the Iranian point of view, that should be in the vicinity of the income they get every 1 to 3 days.  

So not a good model. Not saying there is a good model. The question really is a different one, I would argue. We are clearly in a position where the world’s the strongest naval power in human history, the United States, is unable to force a country that doesn’t even have a hull in the water, from making what needs to be a busy waterway nonfunctional. And in that sort of scenario, it’s honestly just a matter of time before the rest of the world, grudgingly, and maybe looking the other way, accepts that fact. 

And when that happens, we will have taken one of the world’s great international waterways, Hormuz, and turned it into some sort of toll system. And when that happens, we will have formally or informally broken with over a century of international maritime law that makes specific waterways open for all for free. Because once Hormuz falls, we have to revisit that issue with every other waterway that is like Hormuz. 

That’s a better question. We’re going to tackle that one tomorrow.