Welcome to the Stepwise Risk Outlook, which highlights and contextualizes over-the-horizon developments in key regions of the world and industries of the global market. Today’s featured interview is with Chris Dantes, Intelligence Fellow.

Interview with Chris Dantes, Intelligence Fellow

By Chris Dantes

^{“African Lion 26 capstone combined field exercise“ by Jason Johnston is marked with Public Domain Mark 1.0.}

Chris Dantes is an Intelligence Fellow with Steptoe’s Global Strategic Engagement Team, with a focus on developments in geopolitical and security challenges across Africa. Part of the Global Strategic Engagement Team’s Intelligence Fellowship for graduate-level students, Chris will receive his Master’s in National Security and Intelligence from Texas A&M’s Bush School of Government and Public Service in May 2027. Chris provides market intelligence and political risk analysis in support of client legal proceedings and strategic advising.

Chris sat down with Stepwise Editor-in-Chief Anni Coonan to discuss his takes on ongoing developments in Africa.

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Global

The devastating flash flood in Nepal on Wednesday highlights the risks to lives and critical infrastructure posed by glacier instability caused by warming temperatures. Hundreds of people died, and thousands are missing, with large-scale damage to hydropower dams, roads, building and bridges. The Hindu Kush mountain range stretches from Afghanistan to Pakistan, some 500 miles long, and is home to the highest mountains in the world, including Mount Everest. It contains the largest volume of ice on Earth outside the North and South Pole regions. Researchers report that the glaciers across these mountains are melting at an accelerated rate, with ice-loss rates doubling since 2000. The Nepal disaster risks being the first of many future natural disasters triggered by unstable glaciers.

Together with ice sheets in Greenland and Antarctica, glaciers lock up about 70% of the world’s freshwater reserves. Scientists are warning that the globe may have passed the tipping point to reverse the disappearance of small glaciers across Europe, East Africa, Indonesia and South America. With most glaciers shrinking or disappearing, glacier loss is a threat to natural and human water supplies in many parts of the world, posing additional long-term risks to communities dependent upon these reserves.

Read More: CBS News, United Nations, National Oceanic and Atmospheric Administration

Europe

Some EU countries are demanding reductions in the EU’s next budget. Six countries, all of which pay more into the EU budget than they take out, have issued a call for the EU Commission to cut several hundred billion euros from the current long-term budget proposal. In their joint statement, Germany, Denmark, the ​Netherlands, Austria, Finland and Sweden wrote that the budget of almost €2 trillion should be reduced across all areas of spending. Germany had already called for cuts to the budget in the past. The countries also rejected new joint EU debt.

The countries want more cuts in some areas than others. The six countries also argued that the EU should focus on common priorities like defence, competitiveness, migration and sovereignty. This would come in contrast to areas like cohesion and agricultural policy.

The EU Commission has already begun to push back. The same day, EU Commission President Ursula von der Leyen called for the bloc’s budget to finance the EU’s “independence” from outside powers. At the same time, other countries like Italy and Spain are pushing for a larger budget. Going into the rest of the year, the member states and the EU will have to negotiate a common position, with European Council President Antonio Costa hoping to achieve agreement by the end of the year.

Read More: Reuters [paywall], Politico EU

Middle East

The Kurdish Syrian Democratic Forces (SDF) formally dissolved, a significant step for Syria’s postwar stability. The formal agreement to disband is the culmination of a January agreement. Under this week’s final deal terms, SDF members will be absorbed into the Syrian military, leaders will move to substantive roles in the government, and Kurdish will become an official language of education. Misalignments between Damascus and the US-backed paramilitary group had been a major source of concern for President al-Sharaa’s government as it works to strengthen state authority and govern the war-torn country.

Syria’s continuing stability hinges on credible minority representation and equitable economic progress. For Syria, which has emerged as a major regional FDI destination and destination for Hormuz-alternative pipelines, uniting the country’s myriad ethnic and religious groups and patchwork of armed groups is key. Skeptics worry that promises of inclusion will fall by the wayside now that the SDF is dissolved; even if not, Kurds may struggle to gain political representation (there are just eight Kurds in Syria’s 210-person transitional parliament, while Kurds make up about 10% of the population). SDF integration is a hopeful step for sectarian unity, but deeper fissures must still be healed.

Read More: Reuters [paywall], Newsweek, Al Hurra, KurdPress

Asia-Pacific

Malaysia on Thursday finalized the first phase of a voluntary repatriation program that will see at least 1,500 Rohingya refugees returned to Myanmar beginning September 29. Malaysia’s Home Ministry said the repatriation process will use two Myanmar naval vessels and a hospital ship. As of August 15, 10,388 Myanmar nationals, primarily ethnic Rohingya, were being held at immigration detention depots in Malaysia. Of these, around 4,008 individuals will be channeled into the Refugee Registration Document (DPP) program, while 5,000 are slated for voluntary repatriation under an agreement with Myanmar.

The program is moving forward despite longstanding international concerns over conditions on the ground in Myanmar. Earlier this month, the Malaysian government said it would not proceed if refugees faced risks to their lives upon return. However, international reporting continues to document abuses against the Rohingya by multiple parties to Myanmar’s civil war, with a UN report finding “systematic discrimination by all parties, with absolute impunity.” The move could put Malaysia in a difficult position as it balances its efforts to manage a large refugee population against concerns that repatriation could expose Rohingya to renewed persecution. Malaysia is home to more than 215,000 refugees and asylum seekers registered with the UNHCR, including more than 126,000 Rohingya.

Read More: Nikkei Asia [paywall], Al Jazeera, UN News

Americas

The US and Venezuela are reportedly close to a landmark oil deal that would give the US access to around 90 billion barrels of Venezuela’s proven oil reserves. This would more than double the US’ current proven oil reserves, as the US Strategic Petroleum Reserve hits a 40-year low. The deal, which is still being negotiated but is currently in the advanced stages, could give the US an ownership stake in at least 17 of Venezuela’s most productive oil fields, including fields in the Orinoco Belt as well as Lake Maracaibo. It remains to be seen if the US would create joint ventures or hire companies to develop the oil fields. A final deal could be announced shortly, but there is still a chance that it could fall through.

The negotiations are being led by US Secretary of State Marco Rubio and interim Venezuelan President Delcy Rodriguez. This comes as the Venezuelan government has recently engaged in talks with the Venezuelan opposition leader Denorah Figuera. The talks are aimed at eventually calling elections, raising questions around the interim Rodriguez government’s authority to make such a deal with the US. Legal questions also remain around the mechanisms behind such an agreement. One potential legal model would involve a lease, with auctions to allocate oil fields to US producers.

The US Office of Foreign Assets Control (OFAC) on Thursday released a series of general licenses authorizing activities related to Venezuela’s oil sector. The licenses also authorize certain transactions with Venezuela’s state-owned oil company PdVSA, as well as activities across mineral operations (including gold) and telecommunications. The licenses also provide that the Venezuelan government would not directly receive revenues from this oil production. Rather, monetary payments are to be made into Foreign Government Deposit Funds or other accounts approved by the US Department of the Treasury.

Read More: Axios, The Wall Street Journal [paywall], Al Jazeera, OFAC, La Jornada [Spanish]

Geoeconomics

Federal Reserve Chair Kevin Warsh is set to address the Jackson Hole symposium today as markets look for signs that the central bank’s anti-inflation rhetoric will translate into tighter policy. Central bankers are gathering from August 27–29 for the annual conference, formally focused this year on financial innovation, payment systems, cryptocurrencies and stablecoins. The most anticipated event is Warsh’s first Jackson Hole address as Fed chair. Investors are listening for an indication of what economic conditions would prompt Warsh to tighten policy. The Fed held rates at 3.5%–3.75% in July despite three policymakers favoring an increase, while July PCE inflation remained at 3.7%. Futures assign only a 34% probability to a September hike but a 74% chance of one by December.

The speech will also be a test of Fed credibility and independence. Warsh has rejected conventional forward guidance, but his limited explanations have left investors uncertain about how the Fed will respond to inflation that has exceeded its 2% target for 65 consecutive months. Additionally, Treasury Secretary Scott Bessent’s expansion of long-term bond buybacks as government borrowing costs rise creates the appearance that the Treasury is trying to loosen financial conditions while the Fed considers tightening them. A hawkish stance from Warsh could lift short-term yields and the dollar, while another vague or dovish message might initially support equities but push long-term yields higher if investors demand greater protection against inflation.

Read More: Kansas City Fed, Reuters [paywall], The Wall Street Journal [paywall], Financial Times [paywall], Peterson Institute for International Economics

Disruptive Technology

A cyberattack on three major UK airports last week exposed the data of 8.7 million customers, marking one of the country’s largest recent breaches. Manchester Airports Group (MAG) said Thursday hackers accessed customers’ emails, phone numbers, vehicle registrations and postcodes through WiFi sign-ups and car park bookings at Manchester, London Stansted and East Midlands airports. Bank and payment details were not compromised, and airport operations remained unaffected.

The attack underscores growing pressure on operators of critical infrastructure to strengthen cyber defenses as malicious actors increasingly demonstrate their ability to penetrate sensitive systems. A 2025 attack on check-in systems disrupted operations at Heathrow, Brussels and Berlin airports, causing delays and cancellations, while an Iran-linked attack earlier this month shut down a small UK power generator for four days—the first reported instance of Iranian-linked hackers successfully taking such a facility offline in the UK. As attacks increasingly serve not only to steal data or disrupt services but also to demonstrate access to critical infrastructure, governments face greater pressure to shift from responding to individual incidents toward building systemic resilience before attackers can translate access into wider disruption.

Read More: Financial Times [paywall], The Telegraph [paywall], The Guardian

Energy

New Delhi is in the process of reforming its nuclear energy sector. A new draft framework would place significant additional requirements on foreign reactors, which could deter companies from partnering with foreign suppliers and could limit the inflow of investment and technical knowledge. The framework would obligate companies wanting to deploy imported reactors to have operational and licensing certifications from ​the country of origin and to have design approval from India’s atomic energy regulator before construction. The framework also reportedly leaves some issues like tariffs and financial and technical qualifications unanswered.

The new regulatory framework will have an impact on India’s nuclear energy development plans. India intends to build out its nuclear power capacity almost tenfold in the next two decades, and it will be reliant on investments to meet the industry’s expected $210 billion needs for that goal. India already passed a new nuclear law last year in service of this goal.

Read More: Reuters [paywall], Bloomberg [paywall]

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Welcome to the Stepwise Risk Outlook, which highlights and contextualizes over-the-horizon developments in key regions of the world and industries of the global market. Today’s featured deep dive by Dan Arbell examines Israel and Türkiye's regional competition in Syria.

Israel and Türkiye’s Zero-Sum Strategic Visions for Syria

By Dan Arbell

^{"Air strikes in Syria [Image 4 of 6]" by DVIDSHUB is licensed under CC BY 2.0.}

A recent Israel-Syria scuffle over an airbase near Aleppo has laid bare Israeli and Turkish tensions and mismatched visions of Syria’s role in the region – and has caught the US in the middle. The flare-up stems from Israeli airstrikes on Abu al-Duhur airbase in Syria’s Idlib province, with Israel claiming that Türkiye was planning to deploy troops there in violation of a Syrian-Israeli agreement to maintain a security status quo. Türkiye and Syria have firmly denied any deployment plan and denounced Israeli action, but the sharpest rebuke came from Washington: US Envoy for Syria and Iraq (and Ambassador to Türkiye) Tom Barrack called the strikes “an unnecessary escalation.” The incident is intensifying regional competition between Israel and Türkiye, straining key US relationships and potentially endangering Syria’s postwar redevelopment (a site of significant international investment and the centerpiece of multiple pipeline plans as the region pivots from maritime oil transits).

In today’s full analysis:

• Israel’s Calculus and Türkiye’s Position

• Syria’s Interests

• The US Policy Approach

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Global

Russia warned that it could strike British military targets inside and outside Ukraine, as concerns mount over a potential Russia-NATO confrontation. The Kremlin’s warning came after a Ukrainian attack at a shopping center in Donetsk, allegedly using a British Storm Shadow missile, and the British and French decision to permit Ukraine to directly produce the cruise missile, which has a range of 250 km (155 miles).

Some military analysts assess that the Kremlin is considering testing NATO’s resolve with limited incursions against NATO countries in Europe. A US intelligence assessment was leaked in early August, which assessed that shortfalls in certain critical munitions may have led the Kremlin to believe that NATO’s military capabilities are degraded, reducing the risks that NATO would respond to expanding targeting to include NATO member states. The leak of the intelligence assessment may have been intended to be a warning to the Kremlin not to miscalculate Western resolve, especially given the unusual visit by CIA Director Ratcliffe to Moscow this week. Ratcliffe reportedly delivered a warning not to escalate conflict with NATO allies, particularly Estonia, Latvia and Lithuania.

An attack on NATO and calls to trigger the mutual defense clause would put the US in a policy hard spot. Washington would be pressed between long-standing military commitments and the White House’s desire to stay out of the Ukraine war. The air war between Russia and Ukraine has entered into a new and highly destructive phase, where both combatants are pummeling each other, seeking to destroy critical infrastructure and raise the costs of war for civilians. The flow of Western military support is essential to Ukraine’s ability to continue its war strategy, which creates incentives for the Kremlin to increase the costs to NATO for providing that support.

Read More: Reuters [paywall], Wall Street Journal [paywall], Politico

Europe

The EU is diverging over the bloc’s flagship clean industrial policy initiative. This autumn, lawmakers and member states will develop the finalized version of the EU’s Industrial Accelerator Act. The act is intended to develop the EU’s industrial base while simultaneously driving forward the energy transition. However, Berlin and Paris have already started disagreeing over how the final initiative should look. France wants more “Made in Europe” measures, whereas Germany is worried about potential retaliatory responses from trading partners.

Clean industrial policy isn’t the only area where “Made in Europe” is a topic of discussion. Paris has recently signaled it would like to further restrict Ukraine’s ability to use EU-backed money so that Kyiv can only use EU funds to buy European armaments. The rules around EU-backed funding already limit Ukraine to primarily European suppliers, but there are exceptions for Chinese drone components and US-made Patriot air defense interceptors.

Any move towards “Made in Europe” will meet resistance in Washington. The US has made very clear in the past that it strongly opposes policies that would potentially disadvantage American companies operating in Europe.

Read More: Politico EU, Kyiv Post, Reuters [paywall]

Middle East

Hopes raised for an Iran-Oman deal for the Strait of Hormuz amid a flurry of diplomacy in Tehran. Some outlets reported yesterday that a deal had been reached, although Iranian and Omani sources tempered that reporting. Pakistani representatives also visited Tehran earlier this week to discuss a Strait deal, as well as broader talks with the US, and a Qatari official is in Iran today to discuss “upholding freedom of navigation.”

Still, an Iranian-Omani deal to reopen the Strait hinges on the US ending its blockade on Iran, and other conditions. Iran has made demands including American adherence to the terms of the June MOU (including an end to all hostilities and sanctions relief) to open the Strait, but will at the very least demand that the US ends its blockade on Iranian ports. Reopening the vital trade corridor is likely desirable enough to the US to accept a limited deal that implicitly validates Iranian claims over the Strait, but the US would also be abandoning a significant economic pressure point. However, the US’ efforts to reopen the Strait alone are faltering; US allies are reportedly privately warning vessels that the Strait remains mined, despite American claims that it had been cleared.

Read More: Reuters [paywall], Al Jazeera, New York Times [paywall], Axios, Bloomberg [paywall]

Asia-Pacific

A glacial collapse along the Nepal-Tibet border triggered a cascading flood disaster Wednesday, underscoring the growing risks posed by climate change to the Himalayan terrain. A section of glacier broke away at roughly 17,000 feet and plunged, generating an ice-and-rock avalanche that temporarily blocked the Lhende River before the resulting lake burst downstream. The event produced a 5.2-magnitude earthquake signal and sent water, ice and debris through the river systems. Casualties and missing individuals reporting vary widely, with accounts estimating nearly 1,500 people, including 800 foreigners, missing across Nepal and Tibet, alongside 360 deaths.

The disaster highlights the potential for cascading hazards and limited early-warning capacity in the Himalayas. A separate barrier lake formed upstream is overflowing and could burst today or tomorrow, threatening another surge downstream. The risk is particularly acute given the region’s dependence on vulnerable mountain transport and hydropower infrastructure—Kathmandu is expected to turn to India to cover any electricity shortfalls as the floods damaged over 8% of the country’s generation capacity. The UN has been ordered to release $2 million in emergency funding for medical care, shelter and water as Nepal and China continue search-and-rescue operations.

Read More: New York Times [paywall], NBC News, BBC, Strait Times, Bloomberg [paywall]

Americas

The US military confirmed it killed four people in a boat strike in the Caribbean on Tuesday. USSOUTHCOM posted a video of the strike on a small vessel that was allegedly carrying narcotics. This came after a US military strike in the Eastern Pacific on Monday killed two people accused of smuggling drugs, the first of such strikes in months. Since the boat strikes began in September 2025, a total of 227 people have been killed in 68 total strikes in the Caribbean and Eastern Pacific. The resumption of the strikes indicated that the US is not yet done with “Operation Southern Spear,” despite the hiatus.

Aerial strikes are playing an increasing role in security operations across Latin America. Mexico and the US recently signed an agreement to allow Mexico to procure US drones for anti-cartel and counter-drone capabilities. Latin American governments are now dealing with criminal groups that have acquired and adapted cheap drones, which cost only $600-$1,200 in Mexico and Colombia. Drone attacks have increased sharply in Colombia in recent years, and in Brazil, urban gangs are reportedly using drones as surveillance tools in favelas to track law enforcement activities. While the US sharing aerial technology with Latin American governments may enhance security capabilities, the US has also faced international condemnation for the boat strikes over the past year, which rights groups have described as extrajudicial killings.

Read More: The Guardian, PBS, InsightCrime

Disruptive Technology

The Trump administration is weighing semiconductor tariffs that threaten to deepen tensions between its industrial and AI strategies. Politico reports proposals ranging from sweeping tariffs on semiconductor-containing goods to country-specific tariff rates and quotas targeting foreign chipmakers. The latter would represent an almost inverse of the Biden administration’s proposed AI Diffusion Rule; rather than restricting the outward flow of US AI tech, Washington would constrain the inward flow of foreign-made semiconductors.

Broader restrictions could intensify pressure on an already strained semiconductor industry while threatening the administration’s push for AI dominance. Chip demand is surging alongside data center construction, meaning tariffs could raise costs and complicate access to the components needed to sustain AI expansion. Yet, the administration views broad tariffs as necessary leverage to force foreign manufacturers to expand US production, highlighting a central tension in Trump’s AI approach.

Read More: Politico, CNBC

Energy

The war in the Middle East is driving renewable energy generation globally, but it’s also driving coal use. The global energy crisis has pushed countries across the world to accelerate their adoption of renewable energy sources and to cut their dependence on imports. Currently, the International Energy Agency expects renewable power to become the world’s top electricity source this year. However, coal is also set to rise 1.4% this year, although that growth is far outstripped by the almost 9% jump in renewables. Global emissions are also continuing to climb this year, but the IEA expects them to begin dipping in 2027.

Asian economies have led the charge on both renewables and coal. Asian countries that are most heavily dependent on energy imports through the Strait of Hormuz have driven both renewables and coal. China has pivoted to building out solar capacity, whereas countries including India, Vietnam and South Korea have seen power generation with coal rise. Solar generation has also risen in South Korea and India, although less so than coal.

Read More: Reuters [paywall], CNBC

Transnational Crime & Corruption

Haitian militants killed almost 50 people in a suburb of Port-au-Prince previously insulated from attacks. The attacks took place on Sunday night and Monday morning, with armed actors burning homes, taking hostages and killing civilians. The neighborhood, Kenscoff, had been seen as relatively safe from militant attack since the escalation of civil conflict in Haiti in 2024. A recent UN report found that militant violence in Haiti killed at least 1,408 people and injured 656 from April through June.

By threatening Kenscoff, militants are pushing forward to the city of Pétion-Ville, which hosts Haiti’s provisional government and foreign embassies. UN authorities and expert observers posited that the militants were attempting to show the international community that multinational suppression of militant activities would result in further escalations.

Read More: New York Times [paywall], UN News, Global Initiative against Transnational Organized Crime

Defense

The US Army is planning on building nuclear microreactors at multiple locations in the US. The Army has tapped five firms to construct nuclear microreactors at five bases across the country: Forts Bragg, Campbell, Hood, Benning and Drum. This is part of the Army’s Janus program. Each company will design, construct, and operate its own reactor at its respective military installation. The Army will invest more than $2 billion dollars in building and operating the reactors across the fiscal 2027-2031 timeframe. The military also hopes that the deals will result in additional investment in nuclear technologies and that they will boost the commercial nuclear power industry. The Army initiated the Janus program last year and expects to expand it to other services going forward.

The project has been driven by nuclear energy-related executive orders from the White House. The Trump administration has emphasized American energy sovereignty and nuclear power’s role in American energy security since taking office in 2025. The administration has also issued billions for large nuclear reactors needed to satisfy growing energy demand for data centers.

Read More: Defense Scoop, Defense News, AP

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Legal disclaimer: This Substack is for educational and informational purposes only and does not constitute the rendering of legal counseling or other professional services. Reading, subscribing to, or communicating through this Substack does not create an attorney-client relationship. Do not send confidential information through this platform. Consult qualified legal counsel regarding your specific circumstances. 

Welcome to the Stepwise Risk Outlook, which highlights and contextualizes over-the-horizon developments in key regions of the world and industries of the global market. Today’s featured deep dive by Elton Smole and Carter Spahn examines recent developments in the USMCA renegotiations.

North American Trade War Escalates as US and Canada Impose Tit-for-Tat Tariffs

By Elton Smole and Carter Spahn

^{“Exit to Ambassador Bridge, Detroit, Michigan“ by Ken Lund is licensed under CC BY-SA 2.0.}

Less than two months after the US declined to extend USMCA for another 16 years, a trade war is escalating between Washington and Ottawa, whose trade relationship is close to $900 billion. Tit-for-tat retaliation over recent tariffs threatens to eliminate thousands of jobs and raise costs for businesses and consumers in both countries. With bilateral trade talks between the US and Mexico set to continue in September, the US-Canada trade tensions also threaten to reshape the broader diplomatic balance in North America amid ongoing discussions over the future of USMCA.

In a turbulent week, US President Donald Trump announced a deal last Tuesday night, just hours before 50% tariffs on $20 billion in Canadian imports were due to take effect. Trump’s three-day extension allowed more time to iron out the agreement, but talks collapsed just before the Friday deadline. Canadian Prime Minister Mark Carney instructed negotiators to walk away from what he described as a “bad deal” for Canada, which reportedly would have included restrictions on Canada’s ability to make trade deals with third countries. US officials argued that the package would have placed Canada in the most favorable tariff position of any major exporter to the US. On Saturday, Carney gave a defiant speech to Canadians, described the US actions as an “attack,” and announced that Canada would retaliate against the US with dollar-for-dollar tariffs due to take effect September 8. The Trump administration has since threatened new 50% tariffs on Canadian autos to take effect on January 1, 2027.

In today’s full analysis:

• The Failed Interim US-Canada Deal

• Bilateral Negotiation Updates

• Geopolitical Context and Economic Implications

Read the Full Report Here

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Global

The daily global average sea surface temperature reached its highest recorded level on August 22, exceeding the previous record set in March 2024. Copernicus Climate Change confirmed a record temperature of 21.1 degrees C (70 degrees F). The seas are normally warmest in March and April, with the peak August temperature resulting from an extreme El Niño event in the tropical Pacific coupled with decades-long gradual warming from climate change.

El Niño is expected to strengthen during the coming months, impacting marine life, weather patterns and agriculture. Marine heatwaves stress coral reefs and reduce plankton, shocking habitats and leading to mass die-offs and shifts in migratory patterns of fish. The impact on agriculture will differ by region. Southeast Asia, India, Australia and Central America are expected to have hot and dry conditions, threatening crops and elevating wildfire risks. Parts of the US will be wetter-than-normal. Europe, which suffered from extreme summer heat, expects a milder winter with increased precipitation.

Read More: EU Copernicus, Woods Hole Oceanographic Institution, S&P Global

Europe

Ukraine is coming up against a major budgetary shortfall in defense spending. Kyiv must figure out how to close a €23 billion gap in its defense budget as the country comes under increasing pressure from Russian drone and missile attacks. This is despite the EU’s €90 billion loan to Ukraine, €30 billion of which the EU has already committed to provide this year. Because it had taken so long for the EU to reach agreement on the loan, Kyiv had pulled forward spending originally meant for the second half of 2026.

Ukraine is also in an increasingly tough position according to the country’s former defense minister. Mykhailo Fedorov recently stated that Ukraine is slowly losing its fight against Russia and that Kyiv has a limited window to make changes to its strategy in order to shift the war in its favor. Since he was fired from government earlier this year, an event that triggered public protests, Fedorov has become a major critic of the Ukrainian government. He recently called for elections to occur in Ukraine even if they had to happen while the war continues, but that demand was met with significant pushback within Ukraine.

Read More: Politico EU, Reuters [paywall], Euronews

Asia-Pacific

The Philippines plans to further bolster its unmanned capabilities, aiming to strengthen deterrence against China in the South China Sea while managing significant budget constraints. Philippines Defense Secretary Gilberto Teodoro on Tuesday proposed to allocate 50 billion pesos ($810 million) to its drone modernization program in 2027, a 25% increase from this year, as part of a broader 6.3% increase in defense spending. Drones offer a relatively cost-effective means of maintaining persistent surveillance across the Philippines’ expansive maritime territory while distributing sensors and complicating Chinese military planning. The approach reflects Manila’s focus on improving resilience and deterrence by denial rather than matching China’s capabilities as it combats persistent financial constraints.

Manila is also seeking to build out the domestic systems, connectivity and expertise needed to make the unmanned platforms an effective force multiplier. The Armed Forces of the Philippines is looking to Ukraine’s development of indigenous drones as a model, emphasizing locally produced aerial and maritime systems that could support asymmetric maritime deterrence. Manila and Kyiv are reportedly discussing advancing a drone co-production initiative that could pair Ukraine’s combat-tested technology with the Philippines’ efforts to develop a more technology-driven defense posture. The Philippines already operates unmanned aerial vehicles for intelligence, surveillance and reconnaissance, providing a foundation for further expansion.

Read More: Reuters [paywall], South China Morning Post [paywall], East Asia Forum

Americas

Dozens of people have been killed in a massacre in Haiti this week. The United Nations put the death toll at 47 after gangs targeted the town of Kenscoff, near the upper-class suburbs of Haiti’s capital, Port-au-Prince. The gangs reportedly went on a rampage in the town, burning homes and killing indiscriminately. The US also reported that 50 people had been kidnapped. The figures released by Haitian authorities put the casualties at 25 dead, 15 missing, and 10 wounded, and 25 homes burned.

UN human rights experts described the attack as a strategic terror tactic, with the goal of intimidating the population closer to the country’s seat of power. Gangs have taken control of territory and key roads across Haiti in recent years, preventing elections. There is currently a 5,500-person international force deployed to the Caribbean nation to fight the gangs, and acting Haitian Prime Minister Alix Didier Fils-Aimé described the attack as a challenge to his government and the rule of law, vowing to respond with reinforcements.

Haiti recently scheduled its first election in a decade for December, with a runoff planned for February of next year. Acting Prime Minister Fils-Aimé has been the leading public authority in Haiti since February 2026, with the backing of the US, after the dissolution of the Transitional Presidential Council. Haiti’s government has been in a state of disarray for years, especially after the assassination of President Jovenel Moïse in 2021. Gang terror poses a serious threat to the implementation of the upcoming elections.

Read More: New York Times [paywall], Reuters [paywall], NPR

Africa

Nigerian President Bola Tinubu ordered an immediate rescue operation following the mass kidnapping of civilians in the country’s north. Last Friday, gunmen abducted a large number of civilians at a mosque in north-central Niger State. Residents and African media have claimed up to 600 residents were kidnapped, but this number has not been verified. If true, the incident would mark the largest kidnapping in the country’s history. The incident follows a major rescue operation by Nigerian forces earlier this month that freed 308 hostages. Mass kidnappings are commonly used by jihadist and criminal groups to extract ransom payments from the government.

The major security failure underscores persistent readiness challenges within Nigerian security forces. The killing of Islamic State commander Abu Bilal al-Minuki was a substantial blow to Islamic State West Africa Province (ISWAP), but attacks from ISWAP, Boko Haram, and other jihadist groups persist. The government lacks control over the north and has failed to disrupt terrorist illicit financial networks, including ransom payments. Nigeria continues to respond to terrorist threats reactively rather than proactively, indicating deficiencies in intelligence and early warning.

Read More: Reuters [paywall], Al Jazeera, AP, ISS Africa

Geoeconomics

Several major central banks are expected to hike rates as inflation spreads. The European Central Bank is anticipated to raise its deposit rate by 25 basis points to 2.5% in September after eurozone inflation approached 3%. In Japan, 57% of economists surveyed by Reuters expect a September increase from the Bank of Japan to 1.25%, while nearly two-thirds forecast rates of at least 1.5% by March 2027. Australia’s July core inflation rate surprise of 3.6% raised the market-implied probability of a September hike by the Reserve Bank of Australia from 17% to 38%, with another increase fully priced by February. This comes as the Federal Reserve is expected to hold off on rate hikes, although US inflation of 3.7% and increasingly hawkish policymakers leave the door open to renewed tightening.

The same energy shock is generating different policy responses. Europe’s dependence on imported energy makes it particularly vulnerable to inflation, while the weak yen magnifies Japan’s import costs and Australia’s tight labor market increases the risk that higher prices spread into wages. Rate increases cannot restore energy supplies; central banks are instead trying to prevent fuel costs from becoming embedded in broader prices and inflation expectations. The divergence could strengthen the euro, yen and Australian dollar if the Fed remains on hold, while higher Japanese yields may attract capital back from US and European bonds.

Read More: Reuters [paywall], Reuters [paywall], Reuters [paywall], Financial Times [paywall], BIS

Disruptive Technology

Foreign actors are increasingly targeting EU officials through messaging platforms, using disruptive cyber techniques to penetrate sensitive communications. An EU cyber defense presentation reported on Politico identified account takeovers and “state-sponsored spearphishing” as major threats to EU officials, with more than 190 threat actors targeting the EU ecosystem over the past year. Russian-linked groups were implicated, marking the first time a foreign government has been linked to the cyberattacks. Attackers have used personalized social media to compromise EU official accounts, specifically targeting high-ranking people in politics, the military, diplomacy and investigative journalists.

Moreover, a German industry study found 37% of companies attributed at least one cyberattack in the past year to a foreign intelligence service, with China and Russia accounting for the largest shares of those attributed incidents. The overlap between state intelligence services and criminal networks further complicates attribution and underscores how disruptive technologies are lowering barriers for foreign actors to conduct espionage and influence operations.

Read More: Politico, Euronews, Reuters [paywall]

Energy

Fusion energy companies are deliberately avoiding the term “nuclear” for regulatory purposes. Many startups don’t use the language of nuclear energy in order to distance themselves from preexisting conceptions of nuclear power and to highlight how fusion differs from nuclear fission. In line with that, the Nuclear Regulatory Commission is proposing rules that would place fusion under a different regulatory regime and regulate fusion facilities more lightly than nuclear reactors. Many projects would also be under state instead of federal regulatory oversight.

Fusion energy is a growing field both in the US and globally. Fusion energy startups have attracted significant private capital and offer remarkable opportunities for sectors like AI, since fusion facilities could provide renewable energy for data centers. From July 2025 to July 2026, global investment in fusion energy reached almost $4.5 billion across more than 50 private companies. While the US and China lead in terms of global investment in fusion energy, a number of other countries such as the UK, Germany and Japan also have significant investments in fusion technologies.

Read More: Financial Times [paywall], Reuters [paywall], Deutsche Welle [in German]

Defense

The US Navy is establishing an office for the defense industrial base. Acting Secretary of the Navy Hung Cao announced the creation of a new Office of the Defense Industrial Base, which will take the lead on enhancing supply chains and speeding up work on bringing dual-use technologies into the Navy. Cao has decided to choose Andrew Magliochetti to take over the new office as deputy assistant secretary of the Navy. Magliochetti had served as director of the Navy’s Office of Small Business Programs until recently, and before that he had worked in the financial industry.

The maritime defense industrial base has been a major emphasis point for the White House. Earlier this month, US President Donald Trump released a memorandum titled “Rebuilding the United States Navy and America’s Shipbuilding Industrial Base,” and he has also pursued other major naval products like plans for new battleships. The Trump administration is also reportedly looking to promote nuclear-powered merchant ships as part of the White House’s emphasis on the shipbuilding industrial base.

Read More: Defense Scoop, Financial Times [paywall], Breaking Defense

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^{Legal disclaimer: This Substack is for educational and informational purposes only and does not constitute the rendering of legal counseling or other professional services. Reading, subscribing to, or communicating through this Substack does not create an attorney-client relationship. Do not send confidential information through this platform. Consult qualified legal counsel regarding your specific circumstances.}

Welcome to the Stepwise Risk Outlook, which highlights and contextualizes over-the-horizon developments in key regions of the world and industries of the global market. Today’s featured deep dive by Samuel Bloebaum examines the Trump administration's new anti-cybercrime program.

Private Sector Hackers: The New Frontier of US Cyber Statecraft

By Samuel Bloebaum

^{“Data Security Breach“ by Visual Content is licensed under CC BY 2.0.}

The Trump administration’s announced program to coordinate private sector anti-cybercrime operations creates new opportunities for US offensive cyber statecraft. It represents a more aggressive approach to US cyber policy and could usher in a new industry of offensive cyber contractors, attracting both established technology companies and start-ups. However, the program could also expose participating companies to unforeseen liabilities and heightened cyberattack risks. If not carefully calibrated and monitored, offensive cyber operations targeting foreign criminal organizations could escalate cyber campaigns conducted by US adversaries in coordination with cybercriminals. These foreign cyber-attacks could affect companies participating in the coordination program and private sector bystanders, raising the general cyber risk environment for US companies. Non-US companies also risk being mis-targeted in private sector cyber operations if the coordination program fails to enforce stringent operational review and approval guidelines.

In today’s full analysis:

• Functioning of the Coordination Program

• Target Choice Risks Escalating Hybrid Warfare

• Businesses Caught in the Cyber Crossfire

Read the Full Report Here

Or listen to the full report here:

Listen to the news:

Global

UN Secretary-General António Guterres is warning that a more multi-polar order risked sliding into confrontation unless global institutions adapted to it. In an interview with the Financial Times, Guterres, who is approaching the end of his 10-year stint at the head of the UN, observed that the stalemates in the Russia-Ukraine war and the US-Iran war expose the limits of superpowers’ abilities to impose their will by force.

The global order has shifted during Guterres’ tenure at the UN, creating forces of disorder. The transition from a unipolar world and a Western consensus backing a set of international norms to diffused global powers pursuing divergent interests, UN influence and the power of global consensus building has weakened. With a resurgent Russia as a military force, China as a global economic force and middle powers no longer willing to follow in the wake of superpowers, the UN and multilateral institutions have become less effective instruments. With global fragmentation, minilateralism or coalitions of the willing have emerged as the preferred vehicle for managing regional tensions. The UN has lost relevancy in this new geopolitical period, with the UNSC paralyzed and deep disagreements over priorities of peace and security, climate change and human development.

Read More: Financial Times [paywall], Centre for International Governance Innovation, Gate Center, Carnegie Endowment for International Peace

Europe

Some European countries have renewed their call for a windfall tax on oil companies. The finance ministers of Germany, Spain, Portugal, Italy, Poland and Austria have co-written a letter asking Ireland, which currently holds the EU’s presidency, to set a discussion of a windfall tax for the EU’s next meeting of finance ministers. The six ministers hope to push forward an EU-wide framework for taxing excess energy profits. The ministers also proposed that the potential plan build off of lessons learned from the 2022 energy crisis.

Five of the six countries issued a similar call earlier this year. In April, the ministers in the governments of Austria, Germany, Italy, Portugal and Spain issued a letter asking the EU Climate, Net Zero and Clean Growth Commissioner to work out an EU-wide scheme for taxing windfall profits.

A windfall tax scheme will potentially face obstacles even inside the countries that signed the letters. Although Lars Klingbeil, Finance Minister of Germany, signed on to both letters promoting a windfall tax, the concept faced serious pushback from within his own government. Katharina Reiche, Germany’s Economics Minister, sharply criticized the proposal when it was first floated in April.

Read More: Reuters [paywall], Politico EU, Zeit [in German]

Middle East

Iran still has options to escalate further in response to America’s “Operation Economic Outcast.” New US sanctions – or, more accurately, the threat of secondary sanctions on its trade partners – are being framed in the US as powerful new leverage against Iran. Even if true, the Islamic Republic has significant options left to escalate the conflict and increase costs on the US in turn, transforming Economic Outcast into the next step of an escalatory ladder rather than a decisive “economic D-Day,” as the US has framed it.

The ultimate Iranian goal is to demonstrate to Washington, and the broader international community, that maintaining pressure on Iran carries a growing economic cost. Iran could do this many ways: broadened targeting of maritime shipping via vessel targeting or further destruction of loading infrastructure, pushing the Houthis to escalate in the Red Sea, targeting US or allied warships, attacks on undersea infrastructure, or cyberattacks further afield. These steps risk transforming Gulf and other capitals from observers into participants. But Iran’s calculus that Washington is more susceptible to global economic pain than Tehran remains intact.

Read More: Reuters [paywall], Danny Citrinowicz, New York Times [paywall]

Asia-Pacific

Chinese President Xi Jinping is expected to travel to New Delhi next month to attend the 18th BRICS Summit, marking his first visit to the country in seven years and reinforcing signals that Asia’s two largest economies are ready to rebuild ties. Relations deteriorated sharply after the deadly 2020 Galwan Valley clash along their disputed border, freezing high-level engagement and broader bilateral ties. Since Prime Minister Narendra Modi and Xi met in Kazan in October 2024, the two sides have gradually recalibrated relations through senior-level engagement, resumed direct flights and border trade, and border talks. National Security Advisor Ajit Doval arrived in Beijing today for the 25th round of border talks, though his visit takes place against a backdrop of recent border flares, including reports of Chinese troop incursions.

The diplomatic thaw is spilling into economic ties, though New Delhi appears intent on selectively reopening to China while maintaining safeguards. India’s partial easing in May of restrictions on FDI from countries sharing a land border (introduced after the Galwan incident) now allows investments with up to 10% Chinese ownership to enter through the automatic route within applicable sectoral caps. Since May, more than $500 million in investment linked to the revised rules has entered the country. India has also increasingly allowed Chinese firms to provide technology and manufacturing expertise through partnerships that preserve Indian ownership and control. The emerging pattern is a controlled normalization that balances India’s economic interests with security concerns, a framework that could expand during Xi’s visit.

Read More: Reuters [paywall], The Hindu, Economic Times, Al Jazeera, Channel News Asia, East Asia Forum

Americas

Ruben Rocha Moya, the governor of Mexico’s Sinaloa state, stepped down on Saturday after returning to office just a day earlier. Rocha had returned to office on Friday, after initially stepping down in April when the US Department of Justice unsealed an indictment accusing Rocha of conspiring with cartels. Nine other sitting or former Mexican officials were also indicted along with Rocha, amid rising US-Mexico tensions. The accusations against Rocha alleged that he collaborated with the Sinaloa cartel to traffic drugs to the US, accepting bribes in exchange for protecting the cartel operations. Rocha is part of the ruling Morena party, and has denied wrongdoing, calling himself a victim of political persecution.

As Mexican President Claudia Sheinbaum seeks to unify her Morena party, Rocha has lost the party’s support. Sheinbaum has rallied her party amid strained ties with the Trump administration, which recently revoked the visa of the son of former president and Morena founder Andres Manuel Lopez Obrador. Rocha has been under active investigation, and members of his own party openly criticized his return to office, calling the move inappropriate, with some calling for him to step down again. Rocha succumbed to this pressure over the weekend. The investigation into his involvement with cartels is ongoing.

Read More: New York Times [paywall], Reuters [paywall], CBS

Africa

US envoy Massad Boulos proposed expanding an existing UN arms embargo for Darfur to cover all of Sudan. The UN embargo over the Darfur region was imposed in 2004 in response to ongoing human rights abuses perpetrated by militia groups. Previous efforts by the US to broker a peace agreement between the Sudanese Armed Forces (SAF) and the Rapid Support Forces (RSF) have been unsuccessful, with both factions—backed by external actors—continuing to calculate that they can outlast the other and achieve their objectives militarily.

Although the UN Security Council is unlikely to approve an expansion of the embargo, the proposal signals a growing willingness by the Trump administration to increase pressure on both parties and their external backers. Russia has opposed the proposal, arguing that an embargo could weaken the capabilities of the SAF, which Moscow has supported. Given Russian opposition, a nationwide UN arms embargo is unlikely to be implemented. Washington could instead pursue unilateral measures, including expanding its sanctions regime to target external actors deemed to be providing military or financial support to either the SAF or RSF.

Read More: DW, Stepwise Risk Outlook

Geoeconomics

Treasury Secretary Scott Bessent announced Operation Economic Outcast, describing it as an “economic D-Day” intended to sever every remaining financial connection sustaining Iran. Treasury designated digital assets, technology, gold, aviation and shipping as sanctionable sectors under an existing executive order, supplementing earlier restrictions on Iran’s financial, petroleum and petrochemical industries. The determinations allow the US to sanction foreign actors operating in or supporting these sectors, although they do not automatically block every participant. OFAC simultaneously sanctioned nearly 60 entities, individuals and vessels connected to Iranian weapons procurement, cyber operations and oil-revenue networks. Washington is also privately giving governments deadlines to close identified Iranian activity, warning that entities could lose access to the US financial system if they fail to comply. Bessent said Washington was giving countries time to unwind their Iran-related trade before imposing secondary sanctions and declined to identify which countries face deadlines because, “Why would I want to blow up the global financial system?”

The operation mostly omitted Iran’s largest trading partner: China. The first round avoided targeting Chinese financial institutions suspected of facilitating Iranian oil transactions, even though China remains Iran’s largest oil customer. Sanctioning major Chinese banks could provoke retaliation ahead of the Trump-Xi summit, particularly through critical-mineral controls; avoiding them, however, weakens Washington’s promise of “zero leakage.”

Read More: US Treasury, Reuters [paywall], The Wall Street Journal [paywall], ABC News, The Washington Institute

Disruptive Technology

Nvidia’s growing role as a financier of the AI boom is raising concerns about its financial exposure from circular deals if demand weakens. CEO Jensen Huang has defended the strategy as a means to deploy its substantial cash reserves to support rapidly growing AI customers that remain unprofitable, arguing such financing helps secure the data centers, power supplies and other infrastructure needed to sustain demand for Nvidia’s chips. However, it increases Nvidia’s risk of overextension within the AI ecosystem and could artificially inflate demand signals.

Meanwhile, Nvidia is also increasingly moving beyond its core chipmaking business to invest directly in AI development, further concentrating its exposure to the sector. The company is planning a $6 billion investment in AI startup Poolside to develop a major open-weight model that could compete with Chinese models such as DeepSeek and Kimi K3. While the strategy could boost Nvidia’s portfolio across the AI stack, it also risks leaving the company increasingly dependent on continued growth in AI demand.

Read More: Reuters [paywall], Wall Street Journal [paywall], Wall Street Journal [paywall]

Transnational Crime and Corruption

The US military announced its first drug trafficking boat strike in two months, killing two alleged traffickers in the Eastern Pacific. The strike was carried out under the new Joint Task Force Western Hemisphere, established earlier in August to coordinate military activities between the US and the 18-member Americas Counter Cartel Coalition. Southern Command Commander Francis Donovan celebrated the strike as part of a campaign to disrupt, dismantle and eliminate “cartel terror” in the Western Hemisphere.

The two-month pause in boat strikes is partially attributable to US military relief efforts in South America. US Southern Command forces were deployed in Colombia and Venezuela to provide aid following earthquakes in both countries.

Read More: US Southern Command, New York Times [paywall]

Defense

The US government is going to conduct testing for new directed energy capabilities. Joint Interagency Task Force 401 (JIATF-401), the Department of War-led initiative to align counter-drone activities, will conduct live fire testing of directed energy weapons later this year and could purchase capabilities on the spot if they perform well. This is part of a pilot program run by JIATF-401. The program was announced in May and selected five different military facilities to experiment with directed energy technology for counter-drone missions. Currently, officials are particularly focused on lasers and high-powered microwaves.

The Pentagon set up JIATF-401 last year to coordinate the government’s counter-drone efforts. JIATF-401 brings together representatives from across the federal government, including the FBI, Department of Homeland Security, Federal Aviation Administration and numerous other stakeholders. Task Force leaders gathered with representatives of stakeholder organizations last week for the second Interagency Summit.

Countering unmanned systems has been one of the most important trends in defense technology over the last several years. The ubiquity of different types of unmanned systems in the Middle East and in Ukraine has created an imperative to develop solutions that can successfully scale at an acceptable cost.

Read More: Breaking Defense, Defense Scoop, Center for a New American Security

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The Sanctions Update, compiled by attorneys from Steptoe’s award-winning International Regulatory Compliance team and the Stepwise: Risk Outlook editorial team, publishes every Monday (subscribe here). Guided by the knowledge of Steptoe’s industry-leading International Trade and Regulatory Compliance team, the Sanctions Update compiles and contextualizes weekly developments in international regulatory enforcement and compliance, as well as offers insights on geopolitical context, business impacts, and forthcoming risks, and non-sanctions news updates.

For more detailed analysis on related issues, see Steptoe’s International Compliance Blog. For information on industry-specific monitoring or bespoke services, please contact the team here.

By Evan T. Abrams, Meredith Rathbone, Karl Hopkins, Guy Soussan, Alexandra Melia, Wendy Wysong, Ali Burney, Quentin Johnson, Elliot Letts, Algirdas Semeta, Melissa B. Mahle, Anni Coonan, Thomas Goldstein, Zayna Dembinski, Samuel Bloebaum, Elton Smole, Ian Cameron, Wilson Zhao, Zoey Hong, Hoi Chung Liu, Andy Xu Sofia, Jake Fitzpatrick, Carter Spahn, Chris Dantes

The Lede

US Pivots to Renewed Economic Pressure in Push for Iran Deal

^{“President Trump Signs an EO Sanctioning Iran“ by The White House is marked with Public Domain Mark 1.0.}

Late last week, President Trump escalated his threats of renewed economic pressure against Iran – part of a broader effort to shift the facts on the ground in the Middle East amid stalled negotiations and a deadlocked conflict. On Wednesday evening, Trump threatened an “economic D-Day” for Iran, adding that any country that provides “any type of lifeline to Iran will face tremendous economic consequences.” The statement followed similar comments earlier last week, and a statement from Secretary of the Treasury Scott Bessent previewed applying measures that “have never been seen in the history of the economic isolation of a country.”

The new push for economic pressure comes amid a deadlocked peace process and a war of economic attrition with no off-ramps in sight. Last week, the 60-day deadline for negotiations from Iran and the US’ June MOU passed – a mostly symbolic deadline given the de facto collapse of the ceasefire weeks before. Iran and Oman reportedly came close weeks ago to an agreement on the administration of the Strait of Hormuz, a potential precursor to a broader deal with the US, but the provision of Iranian tolls, continued clashes, US unwillingness to lift its blockade on Iranian ports, and other factors, have kept a deal out of reach.

In a flashback to June, both sides are once again stuck attempting to raise the costs of a continued war high enough that the other is forced to return to the negotiating table, and to make significant concessions. Iran has stuck with its strategy of imposing global economic costs via the closure of the Strait of Hormuz, as well as pressuring US allies by regularly striking Gulf military assets and infrastructure (with room to escalate in the Bab al-Mandeb and strikes further afield, like European assets and Egypt). Meanwhile, the US’ post-MOU strategy of imposing military costs is running up against a hard limit of missile and missile interceptor shortages, alongside military and domestic fatigue. The pivot to economic sanctions, then, is a new tack to raise costs for Iran as well as a tacit admission that the US’ ability to secure a decisive military win is dwindling.

It is unclear what the forthcoming “toughest sanctions in history” will consist of. A Thursday package designating 10 individuals responsible for couriering money to Hizballah, and re-designating Hizballah as a Specially Designated Global Terrorist for its support to Iran, was not a part of the major Iran package, according to media quotes by US officials. Many analysts predict secondary sanctions on Iran’s major trade partners, including China (the primary purchaser of Iranian oil), Türkiye, Iraq, Oman, Pakistan, India, Armenia and Azerbaijan. While the US has threatened to impose secondary sanctions several times since the onset of the war, the White House’s Economic Fury campaign has mostly dealt in direct sanctions on individuals and entities involved in Iran’s illicit oil trade and arms procurement networks. Secondary sanctions would constitute significant new pressure on Iran’s trading partners, although the immediate effect could be blunted due to the limited exposure of the Iranian oil trade to international markets. China, which purchases up to 90% of Iranian oil exports, has created a ring-fenced system of refiners to process Iranian oil that is mostly settled in yuan and involves a chain of difficult-to-track ‌intermediaries. The US may also be limited by how much disruption it is willing to cause in international energy markets. Washington has historically been sensitive to global oil prices, for example by issuing controversial sanctions waivers for Russian oil earlier in the Iran conflict – a sensitivity that could become more pronounced as midterm elections approach.

Analysts worry that even significant new US measures are unlikely to tip the scales of a conflict at a strategic standstill. The Islamic Republic is already enduring significant economic pain: the Foundation for Defense of Democracies estimates that the US’ blockade is costing Iran $35 million per day in lost oil sales, its currency is at near record lows, and its Misery Index (a sentiment gauge that combines inflation and unemployment) hit 91.1, its highest point on record.

But Iranian policies insulating its economy from dollar-denominated international markets have blunted the effects of cumulative sanctions, and domestic policies including cash transfers to the poor and avoidance of rationing have contributed to domestic resilience. An economy can perform poorly for a very long time before collapsing. That runway is even longer for Iran, which does not answer to an electorate and does not have to worry about impacts on the global economy.

The UAE’s announcement of an embargo on Iranian trade, which came amidst US sanctions threats last week, could have a bigger impact. The move, immediately prompted by reports that Iran had unsuccessfully targeted Emirati maritime traffic with two missiles (which Tehran denied), reportedly followed weeks of behind-the-scenes lobbying by Washington and came just hours after a phone call between President Trump and Emirati President Mohamed bin Zayed. The move was something of a pivot for the UAE, which has been quietly seeking détente with Iran in recent weeks (likely including paying tolls to transit the Strait of Hormuz).

A full embargo on Emirati trade will be a significant blow for Tehran: the UAE provides more than 30% of Iran’s imports, with non-oil trade estimated to have exceeded $27 billion from 2023-2024. Less easily measurable is the scale of illicit trade. The UAE has long served as a vital informal trade conduit for Iran, enabling it to access international markets and bypass international sanctions via oil transshipments. The UAE has historically enforced US sanctions on Emirati entities but has not proactively sought to crack down on Iranian investment or transshipments; if Abu Dhabi roots out illicit trade alongside legitimate shipments and transactions, Iran would be left without a viable replacement to get that oil to market.

Still, rising economic costs will likely do little to bring about an end to the war in the coming weeks or months. Even if economic pain forces Iran to the negotiating table and results in an interim ceasefire, like the June MOU, core objectives sought by both sides will remain unresolved. Both Washington and Tehran see their win conditions as the other side making serious concessions on strategic issues. For the US, that includes meaningful limits on nuclear enrichment, action on Iranian proxy activity, and Strait of Hormuz arrangements that do not include Iranian tolls. For Iran, that includes cash transfers (given serious doubts about the durability of sanctions waivers or investment pledges) and recognition of its control of the Strait. Iran’s strategic calculus is – and has been since the onset of the war – that while both sides can impose costs, it is capable of enduring more pain than the US and Washington will blink first. Even intense new economic sanctions appear unlikely to change that outlook in coming weeks or months, dimming any prospects for a near-term solution.

US Developments

Trump and Bessent Signal New Economic Sanctions on Iran

On August 19, President Donald Trump announced that the US will launch the “most crushing economic operation ever taken against any country” against Iran. He warned that “any country that allows its financial institutions, businesses, airports, or government entities to provide any type of lifeline to Iran will itself face tremendous economic consequences.” The next day, Treasury Secretary Scott Bessent reaffirmed President Trump’s position during an interview with CNBC. Bessent said that the US will impose “the toughest sanctions in history” on Iran and warned allies to stand with the US.

Secretary Bessent is expected to provide more detail in a press conference scheduled for August 24. President Trump previously issued Executive Order (“E.O.”) 14382 on February 6, 2026, which established a framework for the imposition of secondary tariffs on countries that directly or indirectly purchase, import, or otherwise acquire goods or services from Iran. Notably, E.O. 14382 was issued prior to the Supreme Court’s ruling in Learning Resources, Inc. v. Trump, in which the Court held that the International Emergency Economic Powers Act (“IEEPA”) does not grant the President the authority to impose tariffs.

US Department of State Imposes Sanctions on Cuban Officials and Entities

On August 20, the Department of State sanctioned nine entities and three individuals allegedly linked to the Cuban government’s alleged repressive activities and influence networks. The action was taken under E.O. 14404, which authorizes sanctions on persons linked to the Cuban government.

The sanctions target the alleged leadership of the Cuban Institute of Friendship with the Peoples, which is a Specially Designated National (“SDN”) that, according to the State Department, advances Cuban government interests abroad through international solidarity and political influence networks. The State Department also sanctioned four state-owned enterprises (“SOE”) connected to Cuba’s mining sector and the Ministry of Construction of Cuba (“MICONS”).

Alongside the sanctions, the Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) issued one Cuba-related Frequently Asked Question (“FAQ”) 1265, which states that OFAC does not intend to target foreign persons, including foreign financial institutions, for engaging in transactions ordinarily incident and necessary to the wind down of transactions involving MICONS, or any entity in which MICONS owns, directly or indirectly, a 50 percent or greater interest, through September 19, 2026. The FAQ advises that persons subject to U.S. jurisdiction have long been prohibited from transacting with MICONS, including in connection with a non-U.S. person’s wind down of activities with MICONS, absent OFAC authorization.

OFAC Targets Hizballah Financial Network

On August 20, OFAC designated 10 individuals allegedly part of a network responsible for transferring cash to Hizballah, a designated Foreign Terrorist Organization (“FTO”). According to OFAC, the network uses couriers travelling on commercial airline flights between Lebanon, Türkiye, the UAE, and Iran to move up to hundreds of millions of dollars between jurisdictions to evade sanctions. The action was taken pursuant to E.O. 13224, which authorizes the US government to block assets and disrupt financial support for terrorists and terrorist organizations.

OFAC also re-designated Hizballah under E.O. 13224 for service to the Iranian government under the command of Iran’s Islamic Revolutionary Corps-Qods Force (“IRGC-QF”). Hizballah was already comprehensively blocked as a Specially Designated Global Terrorist organization and an FTO.

OFAC Sanctions Alleged Ecuador-Based Cocaine Trafficking Network

On August 20, OFAC sanctioned 15 individuals and entities and identified 10 Ecuador-based fishing vessels as blocked property for their alleged role in “shipping thousands of kilograms of cocaine each month from South America to Mexico, destined for distribution in the United States.” OFAC said that the Ecuador-based vessels operate “under the guise of legitimate fishing businesses.” The designated persons are allegedly affiliated with Los Choneros and Los Lobos, two Ecuadorian gangs that the US has designated as FTOs.

This action was taken pursuant to E.O. 14059, which targets international illicit drug trade and production, and E.O. 13224, as amended, which targets terrorists and their supporters.

US Sanctions ICC President, Senior Trial Lawyer

On August 18, the Department of State sanctioned the President of the International Criminal Court (“ICC”), Tomoko Akane of Japan, and ICC Senior Trial Lawyer, Abdoulaye Seye of Senegal. This action was pursuant to E.O. 14203, “Imposing Sanctions on the International Criminal Court.” These designations build on OFAC actions taken on May 27, 2026, December 18, 2025, September 4, 2025, among others, totalling 14 individuals and three entities sanctioned under E.O. 14203.

Additionally, OFAC issued ICC-related General License (“GL”) 12, which temporarily authorizes transactions that are ordinarily incident and necessary to wind down of any transactions involving Seye, Akane, and any entities in which they own, directly or indirectly, individually or in the aggregate, a 50 percent or greater interest. The GL remains in effect until 12:01 a.m. EDT on September 17, 2026.

US Authorizes Certain Transactions and Investments in Venezuela’s Telecom Sector

On August 21, OFAC issued GL 61, “Authorizing the Supply of Certain Items and Services to Venezuela Related to Telecommunications,” and Venezuela GL 62, “Authorizing Negotiations of and Entry Into Contingent Contracts for Investment in the Telecommunications Sector of Venezuela.”

GL 61 authorizes certain transactions that are ordinarily incident and necessary to the provision from the United States or by a U.S. person of goods, technology, software, or services for the installation, maintenance, refurbishment, repair, upgrade, operation, or support of telecommunications in Venezuela provided that (i) any contract with the Government of Venezuela for such transactions is construed and interpreted in accordance with the laws of a state or other jurisdiction within the United States, and (ii) that dispute resolution proceedings relating to the contract occur in the United States, the United Kingdom, France, or Singapore. Covered activities include processing payments and arranging shipping, interconnection and roaming agreements, capacity or infrastructure leases, submarine cable maintenance and support, and the provision, licensing, or maintenance of related software licensing and support.

GL 62 authorizes certain transactions related to the negotiation and entry into contingent contracts for new investment in the telecommunications sector of Venezuela, including the expansion of existing telecommunications operations in Venezuela and the formation of new joint ventures or other entities to support those activities, provided that any such contract is made expressly contingent upon separate authorization from OFAC.

OFAC Extends Russia-related GL Related to the Sale of Lukoil International GmbH

On August 20, OFAC issued Russia-related GL 131I, “Authorizing Certain Transactions for the Negotiation of and Entry Into Contingent Contracts for the Sale of Lukoil International GmbH and Related Maintenance Activities.” The license extends the general authorization for transactions ordinarily incident and necessary to the negotiation of and entry into contingent contracts for the sale of Lukoil International GmbH (“LIG”) and its subsidiaries, from 12:01 a.m. EDT August 22, 2026, to 12:01 a.m. EDT September 19, 2026. GL 131I also extends the general authorization for transactions ordinarily incident and necessary to the maintenance or wind-down of LIG operations.

EU Developments

EU Prepares Broad Expansion of Russia Sanctions Listings

On August 17, High Representative of the EU Kaja Kallas announced plans to present a new package of sanctions listings against Russia that could mark the most significant expansion of EU designations since Russia’s full-scale invasion of Ukraine. According to Kallas, the proposed measures would increase the number of designated Russian individuals and entities by one third. The European External Action Service (EEAS) is reportedly preparing around 1,600 new designations, primarily targeting individuals and entities linked to Russia’s military-industrial complex. The proposed measures would subject listed persons to asset freezes and a prohibition on making funds or economic resources available to them, while listed individuals would also be subject to travel bans.

The EEAS is expected to present the new listings in early September, with a view to adoption in October. The initiative is not anticipated to include new sectoral measures, a move that may facilitate negotiations among EU Member States.

Beyond the Russia listings, the EEAS is also reportedly preparing additional designations under two separate sanctions regimes addressing the trafficking of Ukrainian children and Russia’s hybrid activities, including cyberattacks and disinformation campaigns.

EU Council Updates Sanctions Listing under ISIL (Da’esh) and Al-Qaeda Sanctions Framework

The EU Council recently amended the entries of five individuals and two entities designated under the autonomous restrictive measures regime targeting ISIL (Da’esh) and Al-Qaeda, following an update at the UN level. Changes to Council Regulation (EC) 881/2002 reflect the August decision of the UN Security Council Sanctions Committee to update the identifying information relating to seven entries on the sanctions list.

Individuals and entities listed under the sanctions framework are subject to an asset freeze and a prohibition on making funds or economic resources available to them.

Asia-Pacific Developments

China Urges Dialogue on US-Iran Tensions

China has reiterated its opposition to resolving the US-Iran conflict through military force or economic sanctions, arguing that such measures only intensify tensions and do not contribute to a lasting solution. Foreign Ministry spokesperson Lin Jian called for disputes to be addressed through dialogue and negotiation, stressing that further escalation benefits no party. The remarks came after US President Donald Trump announced plans for severe new economic measures targeting any country supporting Iran, a move that Iran condemned as “economic terrorism” with potentially harmful consequences for global economic stability and national sovereignty.

Australian Senator Calls for Magnitsky-Style Sanctions Over Alleged Transnational Repression

Calls for targeted sanctions were a central focus of Australian Senator Dean Smith’s remarks on China’s new Ethnic Unity and Progress Law, as he urged the government to consider Magnitsky-style sanctions against individuals allegedly involved in overseas intimidation and repression. Smith argued that the PRC legislation could be used to pressure members of diaspora communities in Australia, potentially discouraging them from exercising their political, cultural or religious freedoms.

Japan Pushes Back Against US Sanctions on the International Criminal Court (ICC)

Japan has publicly criticized the United States for imposing sanctions on ICC President Tomoko Akane, a Japanese judge, and senior prosecutor Abdoulaye Seye, reaffirming its support for the ICC’s role in prosecuting serious international crimes. The sanctions, announced by the Trump administration as part of its campaign against the court, were linked to ICC investigations involving officials from countries that do not recognize the court’s jurisdiction, including Israel. The dispute highlights a rare policy divergence between Washington and Tokyo, with Japan emphasizing the importance of the ICC and the broader international legal system, while the court itself condemned the measures as an attack on judicial independence and warned of their potential impact on global justice efforts.

Sanctions Concerns Surround South Korea’s Arctic Shipping Trial

Potential sanctions risks have become a key point of contention as South Korea prepares to test a commercial shipping route to Europe via the Arctic Northern Sea Route, a passage that requires cooperation with Russia. While Seoul sees the voyage as an opportunity to reduce transit times, lower fuel consumption, and advance plans to establish Busan as a major logistics hub, Western diplomats have expressed concern that engagement with Moscow undermines efforts to isolate Russia over its war in Ukraine. Experts have also warned that reliance on Russian assistance during emergencies could expose operators to sanctions-related complications, highlighting the geopolitical challenges accompanying the route’s potential commercial benefits.

Kyrgyzstan Tightens Measures to Reduce Sanctions Exposure

Kyrgyzstan is intensifying efforts to shield its financial system and economy from Western sanctions risks by ordering the liquidation of additional companies deemed high-risk and by prompting banks to sever ties with clients that could attract scrutiny. Although Bishkek has not formally joined sanctions against Russia, mounting pressure from the US, the EU, and the UK has led authorities to crack down on suspected sanctions-evasion activities after several Kyrgyz firms and financial institutions were targeted in recent years. The government is seeking to preserve access to international banking and trade while maintaining economic relations with Russia, but businesses face growing compliance challenges as foreign restrictions increasingly affect the country’s banks, payment channels, and imports.

Global

Norway plans to continue developing oil and gas deposits in the Barents Sea, contrary to EU policy supporting a moratorium on Arctic drilling. Norway is seeking to maintain fossil fuel production and exports at its current levels until at least 2035 for energy security, seeing development of Arctic resources as a necessary part of this strategy. The EU’s current policy on a moratorium on Arctic drilling is under pressure internally and externally. The International Energy Agency is also urging the EU to reconsider its position, finding that future supplies will be needed to support global energy security.

The pushback on Arctic drilling is part of a larger revolt against climate-driven policies that increase costs of doing business. The EU and Canada are following in the US footsteps, albeit more slowly, in walking back climate change environmental regulations. The EU has proposed relaxation of its carbon-pricing system and has given automakers more time to transition away from gasoline-fueled vehicles. Canada has repealed the strict Electric Vehicle Availability Standard, providing more flexibility rather than an outright ban on sales of gas fueled vehicles. However, both the EU and Canada are investing in electrification of their grids and renewable sources of energy, signaling their bet that energy security requires diversification and climate goals remain in place.

Read More: OilPrice.com, Reuters [paywall], Wall Street Journal [paywall], Financial Times [paywall]

Europe

Iceland will hold a referendum on Saturday on whether to reopen EU accession negotiations. This would not necessarily guarantee EU membership because Icelanders would need to approve the final Accession Treaty in another referendum; this vote is purely whether to pick up negotiations where they left off. Iceland applied to open its candidacy in 2009 but ended negotiations in 2013 amid the euro crisis. Iceland, like Norway, has been skeptical of membership to preserve sovereign decisions on fisheries and the local currency.

If Icelanders approve reopening negotiations, the country could join the EU fairly quickly. Iceland is already part of the European Economic Area, which requires regulatory harmonization with EU standards set in Brussels. That alone corresponds to the completion of at least a third of all negotiating chapters. The current Icelandic government also supports joining the EU due to a changed security landscape, in which Russia is building up its Arctic defense installations while the US is making coercive overtures to acquire Greenland from Denmark. EU membership would provide an extra layer of security and negotiating leverage on economic issues, including fishery rights with the UK and Norway.

Iceland’s renewed candidacy could accelerate the EU’s openness to enlargement. Admitting new members is a two-way street: the candidate must make reforms, but all EU members must approve. Many are worried about admitting new spoilers or creating new pressures on the EU budget, and this has slowed down anticipated internal reforms, such as the move toward more qualified majority voting in bloc-wide decision-making.

Read More: Politico, The New Union Post, Stepwise Risk Outlook

Middle East

Syria and Israel held US-mediated security talks in Jordan amid rising tensions. The talks followed days after Israel struck an airbase in Syrian territory, reportedly to stop it from being handed over to the Turkish military. The talks focused on creating mechanisms to stop Israeli operations on Syrian territory and on reviving talks about a security agreement between Syria and Israel.

Open talks are a hopeful sign, but significant misalignments remain around the Israeli vision for Syria’s role in the region. President al-Sharaa has repeatedly signaled openness to diplomacy with Israel, stating that he would be open to a security agreement and first engaging with Israel in US-brokered back-channel discussions last year - the first such talks in more than a decade. But Israel is deeply distrustful of an ascendant Islamist Syria on its borders, and would like to limit Syria’s military development. Syria, Turkiye, and, to a lesser extent, the US see that as hobbling Syria’s efforts to establish good governance and contribute stability to the region.

Meanwhile, Turkiye, which was not a party to the talks, sees Israeli strikes as challenging the Turkish role in the region and the recent Mecca Pact. Israel-Turkiye tensions are at a high after years of war in Gaza, and Ankara sees last week’s strikes as Israel signaling that the Mecca Pact with Saudi Arabia and Pakistan would not deter it from free military action in the region. Israeli signals that it sees any Turkish operations in Syria as unacceptable lay the groundwork for the confrontation as Ankara forges ahead with deepening its security ties with Damascus.

Read More: New York Times [paywall], Reuters [paywall], Al-Monitor [paywall], DW

Asia-Pacific

Indonesia and China on Friday agreed to deepen military cooperation, expanding defense ties as Beijing seeks a larger security role with Southeast Asia’s largest country. Chinese Foreign Minister Wang Yi and Defense Minister Dong Jun met with their Indonesian counterparts in Jakarta for their annual China-Indonesia “2+2” dialogue, with the two sides agreeing to expand military exercises and personnel exchanges. Notably, Wang said the dialogue would “send a clear signal to the world of solidarity and cooperation between our two major emerging-market countries,” suggesting Beijing sees Indonesia not only as a strategic partner but as an important fellow Global South power amid intensifying geopolitical competition.

The two sides also agreed to expand “untapped” economic potential, raising bilateral trade beyond the current $167 billion via cooperation in minerals, energy and technology. China is Indonesia’s largest trading partner and a major investor in its resource sector, with Chinese companies playing a critical role in developing Indonesia’s nickel-processing industry. Beyond natural resource cooperation, China is Indonesia’s second largest foreign investor, with investment reaching $7.4 billion in 2023. That year, Indonesia was the largest recipient of belt and road initiative (BRI) funding, a major project including the Jakarta-Bandung high speed railway. During bilateral meetings last week, the two sides reaffirmed their commitment to continuing BRI project development in Indonesia.

Read More: Reuters [paywall], South China Morning Post [paywall], Antara, Antara, China Global South Project, Asia News Network

Geoeconomics

US-Canada trade talks have collapsed. President Donald Trump initially paused imposing tariff measures for three days after announcing that a deal had been reached, but negotiations broke down over last-minute changes to the proposed terms. The talks foundered partly over whether favorable vehicle terms would cover Canadian-made trucks, while Carney said new US language would have restricted Canada’s ability to negotiate trade agreements with other countries. Washington maintains that Ottawa withdrew from previously accepted terms and demanded additional relief for metals, vehicles and lumber.

The breakdown strains North American economic integration. The US subsequently imposed 50% tariffs on roughly $20 billion of Canadian exports, including wine, dairy products, furniture, cement, clothing and hockey equipment. The affected goods represent just over 5% of Canadian exports to the US but are now denied preferential treatment under the USMCA and join existing US tariffs on Canadian steel, aluminum, lumber and vehicles. Prime Minister Mark Carney suspended negotiations and announced dollar-for-dollar tariffs on US steel, dairy, appliances, agricultural equipment, pulp and paper, and electronics beginning September 8.

The dispute deepens uncertainty after the US declined to extend the USMCA for another 16 years, triggering annual reviews while the agreement remains in force. That uncertainty could delay investment, while Canada enters the confrontation with nearly 70% of its exports dependent on the US market. Despite that exposure, Carney framed the confrontation as unavoidable, declaring, “You’re at war when you get attacked—we got attacked.”

Read More: Reuters [paywall], Financial Times [paywall], The Wall Street Journal [paywall], Peterson Institute for International Economics

Disruptive Technology

Private debt issuance for AI infrastructure spending may be contributing to inflationary pressure and high yields. Last week, the yield for 30-year US Treasury bonds hit the highest level since 2007. This is due to a mix of factors, including ballooned US public debt (now over $40 trillion) and inflationary pressure from the Iran war. But US hyperscalers are also spending more to accommodate AI growth expectations, and that anticipated spending is outstripping their cash reserves. From 2020 to 2024, the top five hyperscalers issued an average $30 billion in debt per year; in 2025, that number ballooned to $100 billion, and so far in 2026, that spend is near $200 billion. This trend has widened the spread of private bond yields above US Treasurys, potentially pulling investors away. Less interest in the Treasury market could push their yields up, increasing the borrowing costs for the US government.

Read More: CNBC, Forbes, The New York Times [paywall]

Energy

Venezuela’s oil exports have hit an infrastructure ceiling. Exports coming out of Venezuelan ports are struggling to surpass 1.25 million barrels per day (bpd) due to infrastructural bottlenecks. Tankers are facing up to 30-day waits before they can load because of old infrastructure, power outages, and other quality issues. This issue is particularly problematic for Washington, which has repeatedly emphasized the desire to boost Venezuela’s oil output and exports. There has also been competition for terminal access among energy companies as they try to gain access.

Washington is working on a $100 billion package for rebuilding Venezuela’s energy sector. However, the package focuses primarily on boosting overall crude production and less on the country’s aging infrastructure. While Venezuela’s crude output is rising, the infrastructural bottlenecks will potentially take more time and effort to overcome.

Read More: Reuters [paywall], Oilprice.com, Council on Foreign Relations

Defense

New Delhi is hoping to join France in developing a sixth-generation fighter jet. France had previously partnered with Germany and Spain on the Future Combat Air System (FCAS) until that project fell apart earlier this year. India, which is behind the global cutting edge in key fighter jet technologies, now reportedly wants to step in to work with Paris on the project. Currently, India’s most advanced jets are its fleet of French Rafales, and New Delhi is also developing a domestic project for a fifth-generation fighter.

France and India have developed a strong defense relationship with a focus on the aerospace sector. Earlier this year, India approved the purchase of more Rafale fighters and missiles for the air force, and the two countries are currently in negotiations over the sale of 114 fighters. In late 2025, New Delhi and Paris also signed a “technical agreement” for building out cooperation in defense R&D.

Read More: Defense News, Reuters [paywall], The Diplomat [paywall]

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Welcome to the Stepwise Risk Outlook, which highlights and contextualizes over-the-horizon developments in key regions of the world and industries of the global market. Today’s featured interview is with Elton Smole, Analyst.

Interview with Elton Smole, Analyst

By Elton Smole

^{"Rio de Janeiro" by PedroKirilos is licensed under CC BY 2.0. To view a copy of this license, visit https://creativecommons.org/licenses/by/2.0/?ref=openverse.}

Elton Smole is an intelligence analyst with Steptoe’s Global Strategic Engagement Team, with a focus on international trade, sanctions and geopolitics across North and South America. Elton provides market intelligence and political risk analysis in support of client legal proceedings and strategic advising. He speaks and researches in Spanish and Portuguese (with additional language skills in German and Albanian).

Elton sat down with Stepwise Editor-in-Chief Anni Coonan to discuss his takes on ongoing developments in the Americas.

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Global

President Trump issued a memo to expand the space transportation industrial base, launching a new national effort for American space superiority. The National Security Presidential Memorandum seeks to enable over 1,000 space launches and reentries on American soil annually by 2030. The memo prioritizes enabling commercial enterprises to lead in the development of a vibrant commercial space economy as a critical asset essential for military readiness and American economic dominance.

The US leads the world in space launches, with China surging to catch up in the space race. There were 324 orbital launch attempts worldwide in 2025, a 25% increase over 2024. SpaceX conducted 170 launches in 2025, deploying about 2,500 satellites, more than the rest of the world combined. China conducted 92 orbital launches, placing more than 300 satellites into orbit through a mix of state-owned and commercial missions. China targets 140 launches in 2026 amid a commercial space surge. SpaceX aimed to reach 10,000 annual launches within five years. The new presidential memo will assist SpaceX and other American space companies by expanding launch sites, expediting permitting and environmental reviews and ensuring wireless spectrum for space launches.

Read More: Reuters [paywall], White House, SpaceNews

Europe

Romania scrambled jets yesterday to destroy an armed naval drone near a Neptun Deep gas platform. The drone was spotted a few hundred meters from the platform around 6:30 am local time and destroyed by two Romanian F-16s without incident. Romanian President Nicușor Dan condemned Russia, the suspected origin, for “intensification of irresponsible incidents”; Russian drones and sea mines have intermittently drifted onto Romanian territory over the course of the Ukrainian war. European Commission President Ursula von der Leyen described the naval drone incident as part of an “escalating campaign” of hybrid warfare against Europe.

The drone attack may have been an attempt to disrupt Romania’s natural gas extraction, which offers a regional alternative to Russian supplies. Neptun Deep is an exclusive economic zone about 80 miles east of Constanța, a coastal town, with an estimated 100 billion cubic meters of recoverable natural gas. A drilling rig has completed 6 of 10 wells and a pipeline connecting the drilling site with the shore has been completed. The project is expected to begin production and export in 2027, thereby easing Europe’s gas pressure owed to the Russia-Ukraine war and the Iran war.

Read More: Romania Insider, Euractiv, The Wall Street Journal [paywall]

Asia-Pacific

China on Wednesday labeled the EU’s probe into e-commerce giant JD.com “improper extraterritorial jurisdiction” and ordered entities and individuals not to implement or assist with the probe. This marks China’s second use of regulations outlined in State Council Decree No. 835, introduced in April, to push back against what it deems demands for “extensive and unnecessary” information located in mainland China and “a serious violation of the international rule of law.” The EU launched its investigation in May following JD.com’s €2.2 billion ($2.5 billion) bid for German electronics retailer Ceconomy, amid concerns JD.com may have received foreign subsidies that could distort competition within the bloc.

Thus far, China has only used this blocking power against the EU in response to scrutiny under the EU’s Foreign Subsidies Regulation (FSR). In May, China issued a similar order against an EU investigation into Chinese security firm Nuctech. The EU began investigating Nuctech in 2024, conducting surprise inspections at its offices before launching an in-depth FSR investigation in December 2025. Unlike the Nuctech probe, which was initiated independently by the EU, the JD.com investigation falls under the FSR’s M&A track, which carries strict statutory deadlines and requires a decision by October 2, 2026.

Previous FSR investigations have produced outcomes ranging from strict behavioral commitments to companies withdrawing bids altogether to avoid disclosing sensitive financial information to EU authorities. JD.com now faces a similar dilemma: complying with the EU could expose it to administrative or civil penalties in China, while refusing to cooperate could leave the EU to make its determination based on available information, potentially increasing the risk that the deal is blocked. The broader concern is that EU-China trade tensions are increasingly spilling into the legal and regulatory sphere, creating conflicting compliance obligations for companies caught between the two jurisdictions.

Read More: Ministry of Justice of the People’s Republic of China, Reuters [paywall], Financial Times, China Daily

Americas

Ecuadorian President Daniel Noboa visited China this week to meet with Chinese President Xi Jinping. The agenda included talks on trade and investment, amid Chinese suspensions on Ecuadorian shrimp processors over the use of sodium metabisulphite and detections of white spot syndrome virus. Shrimp is Ecuador’s largest non-oil export. Another point of negotiation is a contract related to a Chinese-built hydroplant in Ecuador. Other topics included mining, green development, and artificial intelligence. Noboa is also scheduled to visit Singapore and Vietnam before August 28.

Ecuador is balancing its economic ties to China with a growing political alignment with the US. USSOUTHCOM General Francis Donovan also visited Ecuador this week to meet with Ecuador’s defense ministers and senior leaders to discuss joint efforts to combat narco-terrorism. The US has recently been involved in boat strikes off the coast of Ecuador in the Pacific Ocean, and Ecuador is one of a handful of Latin American countries to authorize joint land strikes with the US to target narco-terrorist groups. The first of these in Ecuador took place in March.

Read More: Mission of the People’s Republic of China to the EU, South China Morning Post, ABC

Africa

A tanker off the coast of Yemen was hijacked and is being diverted to Somalia. The Seamull, a tanker sanctioned by the US for reportedly being part of Iran’s shadow fleet, was traveling 136 nautical miles east of Mukalla when it was boarded by six armed men. The vessel remains en route to Somalia according to the most recent update from UKMTO.

The hijacking follows a significant increase in Somali piracy around the Bab el-Mandeb and Gulf of Aden. On Monday, a Cameroon-flagged cargo vessel carrying weapons was hijacked off the coast of Puntland. In total, six cargo ships and over 100 crew members are currently being held by Somali pirates. The resurgence in piracy exacerbates the security risks to Red Sea shipping, which has already been disrupted by attacks from the Houthis in Yemen.

Read More: Reuters [paywall], Al Jazeera, UK Maritime Trade Operations, The New York Times [paywall]

Geoeconomics

US public debt has crossed $40 trillion while the deficit remains near crisis-era levels. Treasury reported gross debt of $40.047 trillion on August 18, comprising $32.266 trillion held by investors and $7.782 trillion recorded within federal accounts. Debt held by the public, the amount financed through markets, now equals roughly 101% of GDP. Gross debt rose from $39 trillion in less than five months. Through July, the fiscal 2026 deficit reached $1.799 trillion, already exceeding the entire 2025 deficit, although benefit-payment timing and tariff refunds inflated the latest figures. Even after those distortions, the year-to-date gap was 5% larger than a year earlier. Tax cuts have constrained revenue while Social Security, Medicare, defense and interest costs continue to rise; net interest is now running above $1 trillion annually.

The debt burden is feeding directly into the price of capital throughout the US economy. The 30-year Treasury yield reached 5.333% this week, its highest since 2007, as investors confronted persistent inflation, heavy government issuance and competing demand for capital from AI infrastructure. Treasury expects to borrow $739 billion in privately held marketable debt this quarter and another $628 billion next quarter. Its decision to double long-term bond buybacks to at least $4 billion per operation briefly lowered yields, but the purchases are designed to improve liquidity and are financed through new issuance, meaning they do not reduce the debt. If investors continue demanding a larger premium, refinancing will push interest costs higher and require additional borrowing. CBO projects publicly held debt reaching 120% of GDP by 2036 and 175% by 2056, while annual interest costs rise to $2.1 trillion. Higher Treasury yields will simultaneously raise mortgage and corporate financing costs, weaken investment and leave Washington with less capacity to respond to recessions or fund defense and industrial policy.

Read More: Financial Times [paywall], The Wall Street Journal [paywall], Reuters [paywall], US Treasury, CBO, Bipartisan Policy Center

Disruptive Technology

The US released a National Security Science and Technology Strategy earlier this week. Notably, the document highlights three priority areas for the US to achieve “battlefield dominance” in: undersea, space, and AI and autonomy. The document also underscores the need to remain resilient to (i.e., maintain leadership in) potentially transformative technologies—like AI, biotech and quantum—while developing “optimal” redundancy across the national security architecture to deny attacks on the homeland and critical infrastructure. The strategy also emphasizes the need to bridge the research and national security community, including through relaxed procurements through Other Transaction Authorities (OTAs). Lastly, the strategy calls for a strengthened CFIUS investment screening process for critical technology projects. A better resourced CFIUS would aim to prevent information leakage to potential adversaries while accelerating investments from allies and partners.

Read More: The White House [pdf], Breaking Defense

Energy

The US military has been covertly helping oil move through the Strait of Hormuz. The US has set up a shipping corridor to facilitate the movement of millions of barrels of oil through the Strait of Hormuz every day. The operation, which has been underway for several weeks, sees around 15-20 tankers move along a southern section of the strait each night. The operation has been enabled by the military’s degrading of Iranian radar and maritime surveillance systems. However, despite US efforts, only about half of prewar oil volumes are going through the strait currently.

Despite the operation, oil prices remain elevated. Over the last weeks, oil prices have been inching upwards and yesterday reached the highest level in almost a month. The jump on Thursday followed a warning by US president Donald Trump of potential retaliation against countries supporting Iran. Brent crude ended the day at almost $94 a barrel.

Global energy markets are still under stress from other areas. Oil exports out of Russia’s western ports in the first half of August dipped about 15% below the initial loading plan. This is due to disruptions at Russia’s Black Sea port of Novorossiysk, which is also the primary entry point for Kazakhstan’s oil exports to reach global markets. Oil coming out of Novorossiysk dropped to around 0.4 ​million bpd compared to 0.8-1 million bpd in June and ‌July.

Read More: Axios, Reuters [paywall], Reuters [paywall]

Transnational Crime & Corruption

New US sanctions target Ecuadorian fishing enterprises allegedly involved in cocaine smuggling. The US Department of the Treasury’s Office of Foreign Assets Control (OFAC) designated 15 individuals and entities and 10 vessels for either transporting drugs in the eastern Pacific or supporting other narcotrafficking boats. The trafficking enterprise was allegedly connected to the Mexican Sinaloa and Jalisco New Generation cartels and the Ecuadorian group Los Choneros and Los Lobos.

The designations coincide with US and Latin American maritime interdictions against eastern Pacific vessels. In August 2025, the US Coast Guard launched Operation Pacific Viper targeting alleged drug traffickers in the eastern Pacific. The OFAC press release claimed that the operation led to the seizure of over 112 tons of cocaine as of June 2026. The operation was coordinated with elements within the Department of Homeland Security, the Drug Enforcement Administration, the Florida National Guard, SOUTHCOM and the Office of Naval Intelligence. It also coincides with reports of CIA-assisted attacks on fishing vessels in the region.

Read More: Department of Treasury, Department of State, Stepwise Risk Outlook

Defense

The army is going to disband an experimental drone unit after less than a year. The battalion, which was established in Europe in January by the former Chief of Staff of the US Army, was intended to learn from Ukraine’s battlefield experience with drones. The unit will report its findings to help steer future experimentation and then “refocus on its core warfighting tasks as an airborne infantry battalion.”

The unit’s dissolution is part of a larger debate about the future of drones for the military. Acting Chief of Staff of the US Army Christopher LaNeve has moved to implement a “back-to-basics” for the Army since taking over his position. The decision has been criticized by some as potentially slowing down the military’s progress in adapting to the new realities of conflict, evidenced by the wars in Ukraine and the Middle East.

The Pentagon is still very focused on the role of drones in future conflicts. Yesterday, administration leaders met with drone companies for the first White House ‘Drone Dominance’ meeting. In June, Secretary of Defense Pete Hegseth established a new office to consolidate nearly all the Pentagon’s drone and autonomous systems programs. The new office reports directly to Hegseth’s deputy.

Read More: Wall Street Journal [paywall], Defense News, Breaking Defense

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Welcome to the Stepwise Risk Outlook, which highlights and contextualizes over-the-horizon developments in key regions of the world and industries of the global market. Today’s featured deep dive by Thomas Goldstein examines impact of the new congressional sanctions bill.

The Lindsey O. Graham Russia Sanctions Act of 2026: Outlook for Markets and US Trade Policy

By Thomas Goldstein

^{“16/10/2016 - Foto oficial dos Chefes de Estado e de Governo do BRICS“ by Michel Temer - Fotos livres, com o crédito. is licensed under CC BY 2.0.}

The Lindsey O. Graham Russia Sanctions Act of 2026 is waiting in the House hopper once it returns from recess on September 1. The bill would authorize the White House, at its discretion, to impose secondary tariffs of up to 100% on the top five importers of Russian oil and gas, in addition to the top five countries facilitating sanctions evasion and any country that knowingly makes additional crude or natural gas purchases. The bill is slated to pass if President Trump continues to prioritize it, and if adopted, the White House may treat the secondary tariff authority as negotiating leverage against China and India, or possibly the EU bloc, to extract political concessions. In terms of upside risks, the Russia sanctions bill could improve US alignment with the G7 Russia sanctions regime, simplifying the compliance environment. On the downside, a flexible tariff authority could return trade policy whiplash, and secondary tariffs by themselves are unlikely to reroute global energy markets in line with US policy objectives.

In today’s full analysis:

• Inside the Russia Sanctions Bill

• Congressional Outlook Towards Adoption

• Assessing the Risks of the Graham Sanctions Bill

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Global

The US Department of War has ordered 30 US universities to audit their partnerships with foreign universities and military training institutes. The Pentagon seeks to protect US government-funded research from theft and exploitation by “malign foreign influence and intellectual property theft.” In July, the Pentagon updated the Section 1286 list, which now includes 130 academic and research institutions located in China, Russia and Iran alleged to be engaged in activities that increase the likelihood of taxpayer-funded research and development efforts being misappropriated.

The expansion of the 1286 list is part of a growing trend to securitize academic research in specific fields. The European Commission has blocked Chinese entities from participating in sensitive portions of the Horizon Europe research program, targeting fields like health, digital technology, and civil security. Chinese academic institutions dominate the US’s Section 1286 list. These policies seek to de-risk international research collaboration from assisting China’s military-civil fusion strategy in the context of strategic competition and economic security.

Read More: Associated Press, US Department of War, European Commission

Europe

The UK and EU are advancing post-Brexit negotiations around a youth mobility scheme. The previous Labour government under Keir Starmer prioritized a “reset” with the EU that got stuck on this issue. In general, Brussels wants a return to the system before the UK left, with full access for EU citizens to UK universities at the same tuition as British students. Meanwhile, London wants to base the scheme similarly to Australia or New Zealand, in which British students still pay less, and EU students would be given time-bound visas. London is pushing for a cap of 50,000 students per year, while the EU wants more than 100,000.

Striking a deal on youth mobility may be crucial for a broader UK-EU reset. UK Prime Minister Andy Burnham has suggested he personally wants the UK to rejoin the EU, although not under the current government mandate. Nonetheless, he will continue Starmer’s work in trying to qualify the UK for a host of EU initiatives. These could include UK participation in the EU’s defense industrial investments or qualification for “Buy European” procurement standards in clean energy technology or cloud computing. A previously planned reset summit for July 22 was postponed after Burnham took over Number 10 from Starmer.

Read More: Telegraph, Independent, Financial Times [paywall]

Middle East

Yemen risks a return to all-out war if strikes continue, per UN warnings. On Monday, the UN human rights chief warned of a risk of return to “full-scale conflict” following new Houthi strikes on the government-controlled cities of Marib and al-Makha early this week. The return of the ground war has largely been eclipsed by the Houthi blockade on Saudi exports in the Bab al-Mandeb Strait, but the Houthis have traded escalating attacks with the Saudi-backed government in eastern Yemen and Saudi Arabia itself for over a month.

Saudi Arabia isn’t interested in all-out war, and the Houthis can’t execute one – meaning both seek to increase the costs of engagement for the other side while avoiding significant escalation. Now embroiled in a war they earlier appeared eager to avoid, the Houthis will press their advantage to reshape the political environment in Yemen by raising the costs of the status quo for Saudi Arabia. Their longstanding demands include unrestricted flights into Sanaa and Saudi payment of public sector salaries in Houthi territory. Saudi Arabia, for whom the conflict from 2016 to 2022 was a reputational disaster, wants to avoid an all-out war while imposing new costs for escalation against it (see the Multinational Maritime Defense Alliance and the Mecca Joint Defense Agreement, both signed this month).

Nonetheless, the conflict will destabilize international shipping and further globalize the US-Iran war. This conflict is increasingly being fought via airstrikes and maritime attacks, unlike earlier rounds, which will limit escalation but concentrate costs on international shipping and logistics. The continuation of the war also serves Iran by broadening the borders of the regional conflict and raising hurdles to resolve its various moving parts.

Read More: EuroNews, Al Jazeera, International Crisis Group, Al Jazeera

Asia-Pacific

The Pakistani government on Wednesday filed a review challenging a Supreme Court order announced Tuesday to transfer former Prime Minister Imran Khan from prison to a private hospital, arguing prisoners should generally receive treatment at public facilities. The move comes despite months of increasing concerns over Khan’s health from his sons, lawyers and supporters, including reports of deteriorating vision and the transparency of his medical treatment. The Court ordered Khan to be transferred to Shifa International Hospital in Islamabad within 48 hours for examination by a medical board that includes his personal physician, while also ordering weekly family visits and phone calls with his sons.

Khan and his supporters maintain the prosecutions are politically motivated and linked to the military-backed government’s efforts to prevent his return to power. He led Pakistan from 2018 until his ouster in a parliamentary no-confidence vote in 2022 and has been imprisoned since August 2023 amid a sprawling series of legal cases. Khan has faced more than 100 cases, including corruption and state-secrets charges, although several have since been overturned or suspended. His Pakistan Tehreek-e-Insaf party remains highly popular despite sweeping crackdowns. The episode highlights the increasingly blurred boundary between Pakistan’s formal judicial institutions and its political power structure, particularly notable given recent sweeping changes to Pakistan’s judiciary, which transferred constitutional jurisdiction from the Supreme Court to a newly established Federal Constitutional Court.

Read More: Reuters [paywall], CNN, Amnesty International, Middle East Monitor

Americas

The US Drug Enforcement Agency (DEA) is co-hosting the 40^th International Drug Enforcement Conference (IDEC) in Buenos Aires this week. In coordination with Argentina’s National Ministry of Security, the summit is taking place from August 18-20 with hundreds of senior law enforcement officials and delegates from IDEC member countries. The focus of the summit, under the theme of “Justice Through Strength and Unity,” is on confronting transnational organized crime and global drug trafficking networks. Discussions are aimed at operational cooperation, intelligence sharing, and coordinating enforcement priorities across international trafficking, money laundering, and narco-terrorism.

The location of the summit in Argentina this year underscores the close ties between Washington and Buenos Aires. US President Donald Trump and Argentinian President Javier Milei are closely aligned on economic and foreign policy, amid a broader regional alignment across Latin America. Right-wing governments have recently been elected in the last seven regional elections, drawing support for anti-crime policies in response to rising violence. The US has taken a stronger role in combating criminal groups in the Western Hemisphere, imposing sanctions on cartels and designating some gangs as foreign terrorist organizations.

Mexico’s security minister attended the summit despite US-Mexico tensions. The two North American neighbors are engaged in an ongoing dispute over security, sovereignty, and the recent US targeting of Mexican officials, including the son of former president Andres Manuel Lopez Obrador, whose visa was revoked last week. Mexico is balancing security cooperation with concerns over unauthorized CIA operations on Mexican soil, as well as US indictments of members of President Claudia Sheinbaum’s Morena party.

Read More: US Embassy in Argentina, El Pais, Mexico Business News

Africa

The US International Development Finance Corporation (DFC) committed $62.8 million to rare-earth projects in Malawi, Angola, Madagascar and South Africa. Of that funding, $50 million will be allocated to the Phalaborwa project in South Africa. The site contains commercially extractable concentrations of neodymium, praseodymium, dysprosium, terbium and other rare earths essential to producing defense systems, electric vehicles and wind turbines.

The move comes amid efforts by the Trump administration to incentivize private investment in African mining sectors. Two DFC executives stated that private investors remain unwilling to fund rare-earth projects in African countries due to their higher risk profile and concerns that US-backed projects may be outcompeted by Chinese companies, which have significant economic influence in a majority of African countries. The US DFC is likely to expand financing of rare-earth and critical minerals projects across Africa to mitigate those risks.

Read More: Reuters [paywall], Africa’s Point

Geoeconomics

The UAE has suspended all trade and financial transactions with Iran until further notice. Abu Dhabi announced the measure after claiming two Iranian ballistic missiles targeted maritime traffic before falling into the Gulf, an accusation Tehran denied. The exposure is substantial, with World Trade Organization data showing that the UAE supplied more than 30% of Iran’s imports, about $21 billion, and received nearly 13% of its exports, worth roughly $7 billion, in 2024. Dubai also functions as a re-export hub through which Iranian businesses obtain third-country goods, settle payments and access international commercial infrastructure. Much of this activity had already stopped during the early fighting and only partly resumed in late June, meaning the immediate decline may be smaller than the prewar figures would imply.

The suspension targets the intermediary system supporting Iranian commerce under sanctions. Blocking UAE-based payments, trade finance and re-exports will raise transaction costs and force Iranian companies toward slower and less transparent channels for goods. That pressure comes as the IMF forecasts Iranian inflation approaching 70% this year and a 5.4% economic contraction. Informal transfers and shell companies may preserve some trade. The UAE will also lose port, financial and retail activity, but the decision shows that the nation values protecting maritime security and access to Western financial markets over its commercial relations with Iran.

Read More: Associated Press, Reuters [paywall], Financial Times [paywall], Washington Institute

Disruptive Technology

Leading Chinese AI developers have purchased and received batches of 10,000 Nvidia’s AI-enabling H200 chips in recent weeks. The relaxing of import restrictions partially loosens China’s AI policy, which focuses on cultivating a homegrown AI technology stack, thereby insulating the value chain from chokepoints controlled by the US. China is continuing its policy but offering some exceptions on the case-by-case requests of its leading AI developers as they seek to procure enough compute for AI model training. Chinese regulators are also allowing for larger shipments of the H200 to Hong Kong, which has a separate customs policy, but the city does not have much space for new data centers. China’s domestic chipmaking capacity has improved its capabilities, but not its scale due to the lack of manufacturing technologies equivalent to the Netherlands-based ASML.

Increased imports of H200s may improve the prospects of a US-China trade truce renewal. The import of American hardware is a tacit sign that China’s most advanced AI models still cannot rely entirely on Chinese-manufactured chips to stay competitive. This gives China an incentive to keep export controls disarmed across emerging technologies. However, China is alarmed by increased US prohibitions on some equipment, like drones and humanoid machines, through the Federal Communications Commission.

Read More: Engadget, Financial Times [paywall]

Energy

Russia expects to begin construction of a nuclear small modular reactor (SMR) in Myanmar in 2027. Myanmar’s current president, Min Aung Hlaing, visited Moscow on August 18 and met with Russia’s president Vladimir Putin and Russia’s prime minister Mikhail Mishustin to discuss bilateral cooperation. Following the meetings, the head of Rosatom, Russia’s state nuclear energy company, announced that Russia expects to sign a contract by the end of this year and begin construction of a nuclear plant in 2017. After the meetings, Putin stated that the two countries intend to deepen cooperation across a number of areas such as energy and defense policy, and Putin also mentioned potential cooperation on oil or gas production on Myanmar’s continental shelf.

Myanmar and Russia have been moving closer together recently. The visit to Russia was Min Aung Hlaing’s first visit to a non-neighboring country since becoming president, although he has visited Russia repeatedly in the past. The original cooperation agreement between the two countries on SMRs was signed in March 2025, and earlier this year Moscow and Naypyidaw signed a military pact.

Rosatom is undertaking a global push for new nuclear energy deals. Rosatom is piloting the foreign deployment of its SMRs in a project with Uzbekistan, and the company has plants under construction in a number of countries globally. Specifically, Russia has targeted nuclear cooperation agreements with the Global South.

Read More: Reuters [paywall], Vedomosti [in Russian], World Nuclear News, Defense Post, Stepwise Risk Outlook

Transnational Crime and Corruption

Ukraine President Volodymyr Zelenskyy fired a senior advisor after she was the target of an anti-corruption raid. Ukraine’s National Anti-Corruption Bureau (NABU) raided the home of Iryna Mudra, Zelenskyy’s deputy chief of staff, as part of an investigation into corruption in Ukraine’s energy industry. Nabu accused Mudra and other government officials of laundering about $3.4 million through Ukraine’s central bank to cover the bail of a former energy minister jailed for corruption.

The allegations compound corruption scandals affecting Zelenskyy’s government. NABU investigations have also targeted a presidential chief of staff, a deputy prime minister, the Ukrainian ambassador to the US and several members of parliament from Zelenskyy’s party. Former Defense Minister Mykhailo Fedorov specifically cited corruption in his recent call for parliamentary elections, calling it a threat to Ukraine’s national security amid its war with Russia.

Read More: Financial Times [paywall], Wall Street Journal [paywall]

Defense

The US is unprepared to deal with threats posed by unmanned systems. A senior US military official speaking at the recent Space and Missile Defense Symposium has warned that the US lacks both the sensors and the interceptors to deal with potential threats to US territory from swarms of low-cost drones. To adapt, the US military is trying to improve interoperability between military radars and assets from law enforcement agencies and to deploy new mobile Fly-Away Kits for rapid detection and response.

Figuring out how to counter low-cost drones is a global issue. Germany has recently had two instances of drones creating threats to airports. Earlier this month, a drone carrying explosives was found at the Leipzig airport, which is a major hub for shipping and the military. Two drones were also observed flying over a German military base two days after the incident at the Leipzig airport. In general, sightings of drones flying near civilian and cargo airports have picked up in Europe in the last year.

Read More: Drone Front, The Guardian, CBS

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^{Legal disclaimer: This Substack is for educational and informational purposes only and does not constitute the rendering of legal counseling or other professional services. Reading, subscribing to, or communicating through this Substack does not create an attorney-client relationship. Do not send confidential information through this platform. Consult qualified legal counsel regarding your specific circumstances.}

Welcome to the Stepwise Risk Outlook, which highlights and contextualizes over-the-horizon developments in key regions of the world and industries of the global market. Today’s featured deep dive by Carter Spahn examines the US' foreign direct investment deals.

The Economic Risks Behind the United States $10 Trillion Investment Deals

By Carter Spahn

^{“President Trump Signs a Presidential Memorandum“ by The White House is marked with Public Domain Mark 1.0.}

Increasing foreign direct investment (FDI) into the US was a key component of the Trump administration’s bilateral trade deals. The White House touts its trade and investment diplomacy as securing $9.49 trillion for the US. If successful, the historic wave of foreign capital would be a once-in-a-generation investment into the corporate fabric of America. However, these pledges are less straightforward than they appear: based on a line-by-line reclassification of the Department of Commerce’s published figures, only an inclusive upper bound of roughly $4.12 trillion can be classified as US-directed investment language, although that figure contains nonbinding, project-contingent and potentially overlapping components. Of that, only $217.7 billion is new spending that has been explicitly or officially connected to named projects under the agreements so far. The remainder of Commerce’s total consists largely of broader commercial activity and corporate spending that the administration attributes to its policies.

The gap between the announced figures and capital reaching the economy is due to the structure of the agreements. Most require no immediate payment, while several depend on investment decisions that foreign governments cannot control. For businesses, the risks run in both directions: slow implementation could leave suppliers and communities preparing for demand that never arrives, while rapid implementation could put serious pressure on the dollar and the US economy. The inflow of capital would create a stronger dollar, harming the competitiveness of US exports, and rapid construction could simultaneously cause inflation in sectors that cannot expand quickly, potentially prompting tighter monetary policy.

In today’s full analysis:

• The Headline Combines Several Kinds of Deals

• Why Capital Has Not Yet Reached Projects

• Full Delivery Would Test the US Economy

Read the Full Report Here

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Global

With the expiration of the 60-day US-Iran MOU and the Strait of Hormuz mostly closed, concerns over risks to global oil supplies have returned. The price of oil is edging up, hitting a three-week high, as the market prices in the risk of prolonged closure of this key chokepoint for the export of oil, gas and byproducts from the Gulf. Almost six months into the conflict, the market has rebalanced from oversupplied to exceptionally tight, especially for refined products. While the forecasted global energy shock did not materialize when the Strait was initially closed, the drawing down of supply buffers exposes a new economic vulnerability of supply disruption and rising energy prices.

Energy security also requires strong global buffers against supply disruptions. The US, Europe and China have been able to manage the disruptions by tapping into strategic reserves, diversifying suppliers, surging US energy exports and retooling refinery operations to higher-demand by-products. China banned exports of certain by-products to prioritize domestic demand. Many countries were not so fortunate, forced to shut down factories or pay premium energy prices, public finances weighed down by efforts to cushion the impacts on vulnerable communities. A prolonged energy shock now risks destabilizing these vulnerable economies in Asia, the Americas and Africa, and the US and Europe will not be insulated if prices surge beyond the April peak of $126 per barrel towards $200 per barrel, triggering demand destruction.

Read More: Reuters [paywall], Business Insider, Foreign Affairs

Europe

Ukraine’s former Minister of Defense is demanding that the country hold elections. Mykhailo Fedorov, who was Ukraine’s defense minister until Ukrainian president Volodymir Zelenskyy fired him earlier this year, called for elections to occur even if they must take place while the war continues. He also criticized corruption and bureaucratic inefficiency in the government. Fedorov is highly popular with the Ukrainian public and holds significant influence. His firing earlier this year triggered large public protests calling for him to be reinstated as Minister of Defense.

The call for elections is a direct challenge to Zelenskyy. Zelenskyy’s government has come under increasing pressure from corruption scandals and from his firing of Fedorov, and his own personal popularity has fallen. There are also other potential figures who are interested in challenging Zelenskyy for leadership of Ukraine. Valerii Zaluzhnyi, Ukraine’s current ambassador in London and the former chief of Ukraine’s armed forces, has expressed interest in running. Earlier this year, he reportedly met with Zelenskyy, who attempted to talk him out of running because it would undermine national unity.

Holding elections in Ukraine would be both legally and logistically challenging. Ukraine cannot legally hold elections while the state is under martial law, is facing constant bombardment by Russia and needs to prepare for a tough winter. Ukraine would also have to worry about Moscow trying to influence any elections or to sow chaos and divide Ukrainian society.

Read More: Politico EU, Kyiv Independent, Ukrainska Pravda

Middle East

Israel bombed a Syrian base on the Turkish border, prompting condemnation from Türkiye and the US. Israel struck a defunct airbase in northwestern Syria on Tuesday, claiming that Syria was about to violate an agreed-upon security status quo by permitting the deployment of Turkish troops at the base. US Special Envoy to Syria and Iraq Tom Barrack sharply criticized the strikes,

The episode comes amid rising tensions between President Trump and Prime Minister Netanyahu. In recent weeks, Israel has flatly rejected a US-brokered plan to disarm Hamas in Gaza to progress the peace deal there, and has stalled on the US-brokered deal to disarm Hizballah and end the Israeli presence in southern Lebanon. President Trump increasingly sees Netanyahu – once one of his closest partners – as a hindrance to US objectives in the region. Washington wants the resolution of ongoing conflicts (in service of a deal with Iran, as well as broader stability), while Israel is unwilling to accept a deal that does not eliminate risk to its homeland.

Read More: New York Times [paywall], Reuters [paywall], Axios, Axios

Asia-Pacific

China’s Foreign Minister Wang Yi will begin a two-day visit to South Korea tomorrow, marking his first official trip to the country in five years. Wang is expected to meet his counterpart Cho Hyun, as well as President Lee Jae Myung and National Security Adviser Wi Sung-lac. Talks are expected to focus on Seoul’s push for dialogue on the Korean Peninsula, regional security and the direction of ROK-China relations. Seoul likely hopes Beijing can leverage its political and economic ties with Pyongyang to facilitate President Lee’s long-desired goal of resuming inter-Korean dialogue—a position North Korean leader Kim Jong Un has rejected, with Pyongyang removing references to reunification from its constitution this year.

The trip comes as questions mount over Washington’s broader commitment to the region. This week, President Trump called on the Pentagon to reduce US-ROK joint military drills, citing their cost, his relationship with North Korean leader Kim Jong Un and Seoul’s refusal to support US efforts against Iran. The move also comes alongside signs of a broader shift in US strategic priorities toward the Middle East and Western Hemisphere, notably the redeployment of the USS George Washington from the Pacific to the Middle East, temporarily leaving the western Pacific without a US aircraft carrier. Together, these moves raise questions about the durability of US defense arrangements in the Indo-Pacific—and could give Beijing an opening to position itself as a more consistent regional partner and deepen ties with Seoul.

Read More: The Korea Herald, South China Morning Post [paywall], Reuters [paywall], East Asia Forum

Americas

US President Donald Trump announced a three-day pause on tariffs that were due to take effect Tuesday at midnight. Trump announced on social media just before the deadline that Canada and the US had struck an eleventh-hour deal. Canadian trade negotiators in Washington were directed by the Canadian Prime Minister to offer targeted concessions to the Trump administration to avoid an escalation in trade tensions. Trump claimed that the deal was subject to the finalization of documents. Carney, however, described the negotiations in more cautious terms, claiming that progress had been made, but there was more work to be done to reach a deal.

The 50% tariffs that were set to take effect would have affected $20 billion in US imports from Canada on products ranging from hockey sticks to building materials. They would have been the first use of tariffs under Section 338 of the Tariff Act of 1930, which gives the White House the power to impose duties on trading partners that discriminate against US commerce. Tariffs under this authority would likely face legal challenges in the US. The proposed 50% tariffs were, according to US Trade Representative Jamieson Greer, a response to Canadian retaliation against previous tariffs imposed by the Trump administration. In the negotiations, Canadian officials are seeking to make any deal dependent on the elimination or lowering of Section 232 tariffs on industrial goods including steel and aluminum. Automobile duties are also a point of contention. The US does not want to lower the current 25% tariffs to anything lower than 15%. The final terms of the recently announced agreement remain to be seen.

Read More: New York Times [paywall], NBC, Reuters [paywall]

Geoeconomics

Government borrowing costs are rising and hitting multi-decade highs across major advanced economies. The US 30-year Treasury yield reached 5.33%, its highest since 2007, while the 10-year yield climbed to roughly 4.74%. Japan’s 10-year yield touched 2.95%, a 30-year high, and its 30-year yield exceeded 4.1%. German and French long-term yields reached their highest levels since 2011 and 2009, respectively, while British borrowing costs approached peaks last seen in 1998. Oil prices above $90 per barrel have revived expectations that central banks may need to keep interest rates elevated, and governments are issuing more debt as defense and social spending increase. Technology companies have also issued nearly $220 billion of bonds this year to finance AI infrastructure, creating additional competition for global capital.

The fiscal impact will accumulate as governments refinance maturing debt at higher yields, causing interest payments to absorb a larger share of future budgets. Countries will face less room for spending on critical issues unless they raise taxes, cut other programs or borrow even more. That can create a feedback loop in which higher interest costs enlarge deficits, additional issuance increases the supply of bonds, and investors demand a further premium to absorb them. Sovereign yields also establish the baseline for mortgages and corporate borrowing, so an increase raises financing costs throughout the economy and can slow investment.

Read More: Reuters [paywall], Financial Times [paywall], The Wall Street Journal [paywall], Atlantic Council

Disruptive Technology

ICYMI: On Monday, the European Central Bank (ECB) warned that US technology stocks will “likely” experience a correction. ECB economists argue that the current enthusiasm for AI-driven stocks like the “Magnificent Seven” mirrors earlier precedents, like the railway boom or dotcom bubble. Each of those periods saw transformative technology with productivity-enhancing implications, but investors are engaging in a highly unpredictable exercise of choosing the winners of the boom, which incentivizes investors to demand a risk premium or become overly confident in their bets. The ECB warns that a correction would also affect EU insurers and pension funds, which are heavily exposed to US tech stocks.

Read More: ECB, CNBC, Financial Times [paywall]

Energy

China has spelled out its targets for energy infrastructure development by 2030. The 15^th Five-Year Plan for the oil ​and gas sector set out goals on areas such as LNG receiving capacity, LNG storage capacity, and pipeline construction and capacity. Beijing intends to build capacity for receiving 200 million tons of LNG and for storing natural gas exceeding 13% of total domestic consumption. The plan also mentions several specific pipelines, such as the Hainan–Guangdong natural gas pipeline, Lianyungang–Yizheng crude oil pipeline and the Wen 23–Anqing natural gas pipeline, as well as general goals in expanding pipeline capacity.

China is simultaneously directing more money into its electricity grid. Over the next five years, Beijing will direct a record 5 trillion yuan ($722 billion) into its electricity grid in an effort to address climate and renewable energy bottlenecks. This figure is a 40% increase in comparison to past five-year cycles. At the moment, China’s clean power generation significantly outruns the energy grid’s capacity to absorb power. China leads the world in curtailments, the pre-emptive rejection of wind or solar power due to limits in grid capacity.

Rising curtailment is part of a larger trend globally. Multiple other countries, including Australia, India, and Japan, have all curtailed significant amounts of renewable energy generation due to lacking grid capacity. One potential way forward will be to more efficiently deploy new infrastructure and to scale up battery storage capacity.

Read More: Reuters [paywall], Reuters [paywall], China Daily

Transnational Crime & Corruption

UK Prime Minister Andy Burnham announced new policies to crack down on high street businesses accused of money laundering. Burnham’s plan allows local authorities to block the opening of vape shops, gambling outlets, candy stores, barber shops and other “dodgy” businesses engaged in tax evasion and money laundering. The number of vape shops specifically has risen by over 1,300% since 2016, allegedly due to their easy exploitation by organized crime. The plan is part of a wider initiative to revive local commercial high streets.

Burnham’s plan builds on an ongoing police effort to rein in criminal high street operations. In May 2026, the UK National Crime Agency (NCA) announced a three-year, GBP 30 million effort by a dedicated High Street Organized Crime Unit to crack down on “barber shops, vape stores, mini-marts and sweet shops” engaged in criminal activity across the UK.

BBC investigations have uncovered vast networks of high street shops engaged in money laundering, human trafficking and tax evasion. Undercover journalists found tunnels supplying high street stores with illegal cigarettes, shell companies using stolen identities to hide company ownership and violent conflicts between rival operators. The NCA estimated that high street stores laundered at least GBP 1 billion in criminal proceeds each year.

Read More: Financial Times [paywall], Financial Times [paywall], BBC, Royal United Services Institute

Defense

The Army is getting ready to look for new solutions from the private sector for intelligence-related problems. The Army is putting together an outline of intelligence-related problems, ranging from sensing and collection analysis to data exploitation, that Army leadership wants the private sector to develop tools for. The Army is preparing to release a characteristics of need (CoN) for these issues that will outline the problems and request solutions from industry. This CoN will be the third such document from the Army’s portfolio acquisition executive for command and control and counter-command and control; the first two addressed next-generation command and control and electromagnetic spectrum operations.

Read More: Breaking Defense

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Legal disclaimer: This Substack is for educational and informational purposes only and does not constitute the rendering of legal counseling or other professional services. Reading, subscribing to, or communicating through this Substack does not create an attorney-client relationship. Do not send confidential information through this platform. Consult qualified legal counsel regarding your specific circumstances. 

Welcome to the Stepwise Risk Outlook, which highlights and contextualizes over-the-horizon developments in key regions of the world and industries of the global market. Today’s featured deep dive by Ian Cameron examines Germany's military modernization.

Germany’s Military Modernization Is Shaping the Future of Europe’s Security and Defense Industry

By Ian Cameron

^{“Leopard 2 A5 der Bundeswehr“ by Bundeswehr-Fotos is licensed under CC BY 2.0.}

Germany is currently undertaking an extensive and long-term defense modernization program that has the potential to position Germany as Europe’s dominant military and security player. Berlin is investing money across a range of different capability areas, developing its defense industrial base and defense technology sector, and planning to become Europe’s largest military power by 2039. Defense expenditures have surged this decade and will continue to do so, although over time the focal points of Berlin’s defense investment will change.

Berlin’s new orientation in defense and security policy will play a fundamental role in shaping European security in the coming years. While Germany is well positioned to live up to its NATO commitments, its modernization drive also comes with downside political risks: increased tensions with neighbors like France and Poland, concerns about German industrial dominance in Europe, and greater potential for policy friction with Washington. Meanwhile, its approach to defense partnerships and international procurement is also in flux.  German defense investment will play out in line with Europe’s growing focus on reducing external dependencies and boosting its own economic and industrial system. On the upside, Germany’s spiking need for defense and technology products will create sustained demand across many sectors, and Berlin remains open to defense industrial partnerships and foreign procurement, especially for needs that do not yet have a strong European alternative.

In today’s full analysis:

• Germany’s Defense Modernization: Europe’s Strongest Army

• Disrupting Europe’s Defense Equilibrium

• Risks and Opportunities

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Europe

Ukraine calls upon the EU to sanction Russia’s nuclear sector after safety complaints at Egypt’s El Dabaa nuclear plant, which uses the same VVER-1200 technology as Hungary’s anticipated Paks 2 reactor. The Egyptian Nuclear Power Plants Authority, in an internal letter dated June 4, described some reactors as defective and a safety culture of “deliberate negligence” on the part of the project official. The Authority assessed that the first unit could be delayed by 18 months. After the documents were made public, Ukrainian Foreign Minister Andrii Sybiha stated that Rosatom, Russia’s nuclear champion, is an “instrument” of Moscow’s geopolitical ambitions for nuclear dominance rather than just a reliable private company.

The EU has long hesitated to sanction Russia’s nuclear sector. Reducing dependence on Russian nuclear exports is more logistically difficult than oil and gas, whose markets are more diversified. Many of the nuclear reactors in Europe are built with Russian technology and must use Russian uranium as the sole input source. Moreover, taking one reactor offline is more disruptive than one oil or gas power plant; in Hungary’s case, the Paks nuclear reactor can produce up to half of the country’s electricity at full capacity. For these reasons, the EU failed to include a phaseout of Russia’s nuclear exports as part of its otherwise ambitious REPowerEU regulation.

Read More: Politico, Mezha, The Kyiv Independent

Middle East

The US pulled its last aircraft carrier from Asia to refocus on Iran. The USS George Washington is departing the Pacific and is expected to replace the USS Abraham Lincoln in the Middle East amid growing mental health concerns following a long deployment.

Some analysts see the shift as the death of America’s long-touted pivot to Asia. The “pivot to Asia” is Obama-era language, but successive administrations have professed to be shifting focus to the economically crucial Asia-Pacific region and shifting security burdens to partners in the Middle East. The redeployment adds to a sense in Asia that the US is distracted and overwhelmed by the war in Iran, drawing focus from its promises to Asian allies and signaling a lack of commitment. The shift comes as China has stepped up its exercises in the Pacific recently, and may seek to bolster the narrative that the US is not committed to or powerful in the region amid the Iran war.

Read More: PBS, Associated Press, Semafor

Asia-Pacific

Indian officials on Monday announced they arrested over 200 suspected terror operatives across 14 states in a crackdown on a network allegedly backed by Pakistan’s intelligence agency, Inter-Services Intelligence (ISI). The operation targeting the Shahzad Bhatti Network (SBN) uncovered IEDs, grenades bearing Pakistan Ordnance Factory markings, pistols, ammunition and CCTV cameras allegedly used for surveillance. Indian authorities said the network was preparing “subversive” attacks around India’s Independence Day. New Delhi alleges SBN is a criminal-terror syndicate backed by ISI and run by Pakistan-based gangster Shahzad Bhatti, whose profile has grown this year as authorities uncovered Bhatti-linked recruitment and terror modules, as well as connections to the newly surfaced Tehreek-e-Taliban Hindustan (TTH).

The arrests come amid a sharp deterioration in India-Pakistan relations following the April 2025 Pahalgam terrorist attack and India’s subsequent Operation Sindoor. New Delhi has long accused Pakistan and ISI of supporting militant attacks in India, including by providing or facilitating weapons, training, and logistical support to groups such as Lashkar-e-Taiba (LeT) and Jaish-e-Mohammed (JeM). Islamabad similarly accuses New Delhi of supporting militant activity inside Pakistan and denies India’s allegations. Indian authorities allege Pakistan-based actors are using social media to recruit Indian nationals for propaganda, reconnaissance, weapons trafficking and attacks, potentially allowing Pakistani handlers to expand their reach inside India while maintaining distance from operations. India’s zero-tolerance policy toward terrorism and stronger willingness to respond militarily raise the risk that future attacks could trigger renewed conflict between the neighbors.

Read More: India Ministry of Home Affairs, Reuters [paywall], The Hindu, Times of India, Center for Strategic and International Studies

Americas

Andrés Manuel López Beltrán, the son of Mexico’s former president, has said that the US has canceled his visa. The latest point of tension between the US and Mexico involves the son of Andrés Manuel López Obrador, the founder of the leftist Morena party and political mentor of current President Claudia Sheinbaum. López Beltrán, a prominent figure in Mexican politics, has been accused by his political opponents of corruption. The Trump administration has been more frequently using visa cancellations to pursue diplomatic goals in Latin America. In 2025, the US revoked the visa of former Colombian President Gustavo Petro, Colombia’s first left-wing president. More recently, the US revoked the visa of Brazil’s ambassador to the US over Brazil’s delayed approval of the Trump administration’s nominee for US ambassador to Brazil.

Amid the ongoing political tensions, Washington and Mexico City have continued to negotiate over security and trade. Over the weekend, US officials celebrated US-Mexico security cooperation with the announcement of a drone purchase agreement, which will allow Mexico to procure US drones. Sheinbaum has also allowed the planned attendance of her Security Secretary Omar García Harfuch at the DEA conference in Argentina to go forward. The US and Mexico are also continuing to negotiate on trade after the deadline to automatically renew USMCA passed without an agreement, with further negotiations expected in September.

Read More: New York Times [paywall], El Pais [paywall], Reuters [paywall]

Africa

Zambia’s incumbent President Hakainde Hichilema won reelection amid reports of a crackdown on opposition candidates. The presidential election began on August 13, with Brian Mundubile emerging as Hichilema’s most prominent challenger. Mundubile has criticized the ruling party over the country’s continued high cost of living. Vote counting was temporarily suspended over the weekend, reportedly due to violence against poll workers in several districts. On Sunday, however, several of Mundubile’s associates were arrested, with the Zambian government alleging that they were plotting an insurrection. Mundubile is currently in hiding.

Hichilema has pledged to deliver further economic growth following policy successes during his first term that contributed to Zambia’s debt recovery. His largely successful post-COVID debt restructuring, combined with the prospect of stronger growth in the mineral-rich nation, has helped attract foreign investment. However, signs of democratic backsliding could increase the risk of future political instability, making Zambia’s economic outlook more uncertain.

Read More: BBC, Reuters [paywall], Reuters [paywall], The Conversation

Geoeconomics

China’s latest GDP and July activity figures continue to show a staggering, unbalanced economy. GDP expanded 4.3% year over year in the second quarter, down from 5% in the first and the slowest pace in more than three years, leaving first-half growth at 4.7%. Momentum weakened further in July: industrial output grew 4.5%, compared with 5.3% in June, while retail sales increased just 0.6% and the services production index rose 4.3%. Exports remained the principal counterweight, rising 17.8% in yuan terms, while high-tech manufacturing output increased 13.8% over the first seven months. The economy is still producing competitively for global markets but generating insufficient demand at home.

A 6.7% decline in fixed-asset investment during the first seven months is the most worrying sign for the CCP. Property investment fell 19.2%, while infrastructure and manufacturing investment declined 3.6% and 1.7%, respectively. Private investment contracted 9.4%, even as investment in favored high-tech industries grew 5%. Housing demand remains weak: new-home sales by floor area fell 11.8%, prices declined 3.2% from a year earlier, and only 17 of 70 surveyed cities recorded monthly price gains in July. Falling property values weaken household confidence and consumption, while declining sales reduce developers’ ability to complete projects. Lower land-sale revenue also constrains local governments that previously financed infrastructure through the property boom. As households stop channeling savings into housing, China is left with excess domestic savings and production capacity that flows into exports, deepening trade surpluses and friction with major trading partners.

Read More: National Bureau of Statistics, Reuters [paywall], Financial Times [paywall], PIIE

Disruptive Technology

ICYMI: Anthropic will not release its so-called “Model 2,” an internal model more powerful than Mythos, for the foreseeable future. According to Anthropic, Model 2 performs better than Mythos 5 on some tasks, but is not a huge shift in capability. Nonetheless, in their latest safety disclosure, Anthropic acknowledged that there is increased uncertainty about the capability of powerful AI models to become misaligned with their assigned tasks in a way that increases the risk of harm. However, Anthropic believes the risk remains low, and its current safeguards and oversight mechanisms should prevent most misalignment. The hesitation to put the release of “Model 2” on a clear timeline could reflect increased deference to AI safety oversight or the review mechanism through the Department of Commerce.

Read More: Anthropic [pdf], Axios

Energy

London is assessing how to move forward on the future of oil and gas in the North Sea. The energy secretary for Andy Burnham’s new government is to approve continued development of the Rosebank oilfield and the Jackdaw gas project in the North Sea. Burnham is trying to walk a line on how to approach Britain’s oil and gas industry. He intends to hold to Labour’s 2024 commitment to no longer issue oil and gas licenses for new fields in the North Sea. However, both projects already have licenses, and Burnham has adopted a more positive approach to the traditional energy industry in the UK.

Oil and gas production has become a major issue in the UK. Concerns around energy security and economic growth have turned the future of the country’s oil and gas industry into a significant political flashpoint. However, there has also been pushback from climate groups and from those who claim the projects do not meaningfully contribute to UK energy due to a lack of domestic refining capacity.

Burnham’s approach is a departure from Kier Starmer’s government. Starmer had argued that he did not have legal authority to handle issues regarding North Sea oil and gas. He instead left the question to his energy secretary, Ed Miliband, who was reportedly strongly opposed to oil and gas production in the North Sea.

Read More: Financial Times [paywall], The Guardian, Oilprice.com

Transnational Crime and Corruption

FBI data shows violent crime in the US dropping almost 10 percent from 2024 to 2025. The decline is most pronounced in urban areas, where cities with between 500,000 and 1 million people saw an over 15% decline in violent crime. The declines were the largest since data collection began in 1936.

The decline follows both short-term and long-term trends. Crime spiked in 2020 and 2021 amid the COVID-19 pandemic and nationwide protests but began declining every year since 2022. Wide varieties of crime peaked in the early 1990s after rates nearly quadrupled between 1960 and 1991. Since 1993, violent crime rates have fallen by over 75%.

Read More: Federal Bureau of Investigation, New York Times [paywall]

Defense

German drone company Helsing is looking to break into the Japanese market. Helsing is moving to finish a deal with Japan’s army to sell it unmanned systems, specifically Helsing’s HX-2 strike drone. The agreement is being facilitated by the Japanese firm Rakuten. Field testing of the drones will take place until the end of September. The Munich-based company, which started in AI before expanding to work on unmanned strike drones, also works with Ukraine and other European governments.

Both Germany and Japan are expanding and modernizing their militaries and defense industries. Berlin has surged its defense spending in recent years, and German companies have landed major export agreements such as a recent deal with Canada to provide submarines. Helsing has also partnered with Kyiv to provide drones for Ukraine, and it is one of Europe’s largest unicorns. Tokyo has also expanded defense spending and loosened regulations governing arms exports, which has in turn attracted interest from global defense firms.

Berlin and Japan are developing their defense relationship. German chancellor Friedrich Merz is scheduled to make his first visit to Japan in October to discuss defense technology and Indo-Pacific security with Japanese Prime Minister Sanae Takaichi.

Read More: Nikkei Asia [paywall], Reuters [paywall]

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The Sanctions Update, compiled by attorneys from Steptoe’s award-winning International Regulatory Compliance team and the Stepwise: Risk Outlook editorial team, publishes every Monday (subscribe here). Guided by the knowledge of Steptoe’s industry-leading International Trade and Regulatory Compliance team, the Sanctions Update compiles and contextualizes weekly developments in international regulatory enforcement and compliance, as well as offers insights on geopolitical context, business impacts, and forthcoming risks, and non-sanctions news updates.

For more detailed analysis on related issues, see Steptoe’s International Compliance Blog. For information on industry-specific monitoring or bespoke services, please contact the team here.

By Evan T. Abrams, Meredith Rathbone, Karl Hopkins, Guy Soussan, Alexandra Melia, Wendy Wysong, Ali Burney, Quentin Johnson, Elliot Letts, Algirdas Semeta, Melissa B. Mahle, Anni Coonan, Thomas Goldstein, Zayna Dembinski, Samuel Bloebaum, Elton Smole, Ian Cameron, Wilson Zhao, Zoey Hong, Kiki Dong, Kuangqi Zhong, Andy Xu Sofia, Jake Fitzpatrick, Carter Spahn, Chris Dantes

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The Lede

US Senators Propose Lebanon Sanctions Bill as Peace Plan Faces Early Roadblocks

^{“Hizballah Headquarters Airstrike” by Jimmyp84 - Public Domain}

On August 7, US Senators James Lankford (R-OK) and Jeanne Shaheen (D-NH) introduced the Lebanon Sanctions, Stabilization, and Support Act which aims to sanction foreign persons aiding Hizballah and support the Lebanese government’s efforts to disarm the group. The bill would expand Foreign Military Financing and other security assistance to the Lebanese Armed Forces (LAF) and Internal Security Forces (ISF), conditioned on verifiable and meaningful progress toward Hizballah’s disarmament. If passed, the bill could strengthen US efforts to broker a durable settlement in Lebanon by building the security and governance capacity of the Lebanese government. However, mutual distrust between Hizballah and Israel as well as misaligned US and Israeli objectives risk derailing the Trump administration’s peace plan, potentially limiting the effectiveness of future sanctions and security assistance.

The proposed legislation would impose sanctions on foreign persons that support Iran’s financing of Hizballah, obstruct efforts by the LAF and ISF to exercise a state monopoly over all arms, or impede reforms to the country’s banking and financial sector. The bill also authorizes $200 million annually in security assistance to the LAF and ISF, with the opportunity to increase this amount to $300 million if the Secretary of State certifies that there is demonstrated progress toward disarming Hizballah. The proposed assistance follows a $230 million security package to the LAF and ISF, which was approved in October 2025 following commitments by the Lebanese government to disarm all nonstate armed groups. An additional component of the bill is humanitarian assistance and the creation of an incentive fund for the reconstruction of government services and infrastructure.

If passed, the act could reinforce the Trump administration’s ongoing efforts to broker a lasting peace agreement between Hizballah and Israel. Under the US’ proposed framework, Lebanese forces are expected to assume control of southern Lebanon as Israeli forces withdraw, while Hizballah is expected to disarm and dismantle its military infrastructure as the withdrawal proceeds. Sanctions could further constrain Hizballah’s illicit financial networks, making it more difficult for the group to finance or rebuild its military capabilities.

Beyond weakening Hizballah, the bill seeks to address the other driver of instability and conflict: limited capacity and legitimacy of the Lebanese state. Increased security assistance could bolster the capabilities of the LAF and ISF, ensuring the government can maintain control in southern Lebanon after Israeli forces withdraw. Furthermore, the bill’s incentive fund could support stabilization efforts by helping the Lebanese government provide basic services to communities historically reliant on Hizballah for security and social assistance. By strengthening state institutions and reducing Hizballah’s ability to provide those services, the act could gradually diminish sources of the group’s influence.

A major obstacle, however, is mutual distrust between Hizballah and Israel. Hizballah has rejected disarmament so long as Israeli forces remain in Lebanon. Meanwhile, Israel has maintained that Hizballah must completely disarm before it can withdraw, arguing that the group still poses a threat to its northern territory. Peace talks have stagnated as both sides remain unwilling to make concessions until the other does so first. Should the US fail to convince both sides that the process will be reciprocal and enforceable, sanctions and stabilization efforts are unlikely to make meaningful progress.

Compounding this issue are the mismatched objectives between the US and Israel. For the US, brokering peace in Lebanon has become intertwined with ending its own war with Iran, as Tehran continues to condition a broader peace deal on Israel’s withdrawal from the country. Rising domestic criticism of the war and operational costs have placed greater pressure on the US to secure a comprehensive peace deal. By contrast, Israel has signaled little urgency in ending the conflict. Israeli withdrawals from “pilot zones” in Lebanon occurred following US pressure but were limited. Israeli Defense Minister Israel Katz stated last week that the IDF was prepared to maintain long-term occupation of designated security zones in southern Lebanon, drawing criticism from the US. The Trump administration’s 15-point peace plan in Gaza has also contributed to the widening rift between the US and Israel. Israeli Prime Minister Benjamin Netanyahu rejected the plan, stating that Israel would withdraw only when Hamas is “genuinely disarmed.”

With increasingly conflicting strategic objectives between Netanyahu and the Trump administration, Israel may delay or resist implementation of the US framework for Lebanon if it determines that the enforcement mechanisms are insufficient. Given bipartisan support for disarming and demobilizing Hizballah, it is possible that the bill is taken up next year by a new Congress. Even if the act is passed, however, its effectiveness will ultimately depend on whether Washington can secure reciprocal commitments from Hizballah and Israel and maintain the process long enough for Lebanese state institutions to assume greater control over the country’s security.

US Developments

OFAC Reaches Settlement Agreement with Wisconsin Manufacturer for Exports to Iran by Its Italian Subsidiary

On August 12, 2026, the Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) announced a $60,764 settlement with Rice Lake Weighing Systems, Inc. (“Rice Lake”), a Wisconsin-based manufacturer of weighing equipment, in which Rice Lake agreed to settle its and its Italian subsidiary’s potential civil liability for eight apparent violations of the Iranian Transactions and Sanctions Regulations § 560.215(a). According to OFAC, Rice Lake’s Italian subsidiary, Dini Argeo S.r.l. (“Dini Argeo”), exported goods to Iran through a distributor in the United Arab Emirates (“UAE”) while knowing that the goods were ultimately destined for Iran. OFAC does not allege that Rice Lake knew of the exports, but rather that it failed to take sufficient steps to ensure Dini Argeo understood and complied with the prohibitions of US sanctions on Iran. The amount of the settlement agreement reflects OFAC’s determination that the apparent violations were voluntarily self-disclosed and non-egregious.

The settlement agreement highlights the potential sanctions liability US companies with global operations face for the activities of their subsidiaries or affiliates. OFAC has consistently communicated that US parent companies bear some responsibility for the sanctions compliance of their non-US subsidiaries. The Iran sanctions regime in particular extends primary sanctions prohibitions to non-US entities owned by US persons. Notably, Dini Argeo’s alleged conduct also took place while the EU’s blocking statute restricted EU companies from complying with certain US sanctions against Iran that were previously suspended or waived pursuant to the Joint Comprehensive Plan of Action, which underscores the compliance challenges faced by foreign subsidiaries of US companies operating under potentially conflicting legal regimes.

Treasury Secretary Scott Bessent Signals Further Escalation of Pressure on Iran

On August 13, 2026, Treasury Secretary Scott Bessent announced that the Trump administration will introduce additional measures against Iran next week as part of its “maximum pressure” campaign, with the goal of further isolating Iran economically. Bessent said the administration’s “Economic Fury” strategy has targeted Iran’s financial system, oil sector, sanctions-evasion networks, weapons procurement activities, and cryptocurrency holdings, disrupting significant revenue streams for Iran and its proxies. He also indicated that new economic measures will be paired with continued restrictions on Iranian maritime trade and port access.

The anticipated measures follow a renewed sanctions and enforcement campaign launched in July 2026 after President Trump resumed military operations against Iran and reinstated a blockade of the Strait of Hormuz. Recent actions included OFAC’s July 14 designations targeting an alleged oil-shipping network of Iranian businessman Mohammad Hossein Shamkhani and July 15 sanctions against seven individuals and entities allegedly involved in weapons procurement activities on behalf of the Islamic Revolutionary Guard Corps.

Senate Democrats Ask Why Administration Hasn’t Resumed Russia Sanctions Updates

On August 12, 2026, Senator Elizabeth Warren (D-MA) and Senator Chris Coons (D-DE) sent a letter to Secretary of State Marco Rubio and Secretary Bessent demanding an explanation for the Trump administration’s 17-month pause in issuing regular Russia-related sanctions, despite administration officials acknowledging that peace talks with Moscow have stalled. In the letter, the Senators argue that the lack of routine sanctions and counter-evasion measures has weakened US leverage and may have allowed more than 1,000 companies, individuals, and vessels supporting Russia’s military-industrial base to operate without US sanctions.

This letter comes after Members of the House introduced the Senate-passed Lindsey O. Graham Sanctioning Russia and Iran Act of 2026, which grants the President waiver authority in relation to certain Russia-related sanctions and authorizes the President to impose tariffs of up to 100 percent on the largest purchasers of Russian oil and natural gas, as well as countries facilitating Russian oil sanctions evasion.

UK Developments

OFSI Amends and Extends Lukoil International and Lukoil Bulgaria General Licences

OFSI has amended General Licence INT/2025/8031092 (Continuation of Business of Lukoil International Entities) (the “Lukoil International Licence”) and General Licence INT/2025/7895596 (Continuation of Business of Lukoil Bulgaria Entities) (the “Lukoil Bulgaria Licence”) (together, the “GLs”). The GLs were originally introduced to permit the continuation of certain business operations involving Lukoil International GmbH and its subsidiaries, and specified Bulgarian subsidiaries of PJSC Lukoil, respectively, notwithstanding applicable Russia asset-freeze restrictions. Permitted activities include certain payments under existing or new obligations or contracts and the provision and receipt of economic resources. The amended GLs introduce a new one-off notification requirement: entities relying on either licence must notify OFSI and provide current contact details within 14 days of first use where this occurs on or after August 12, 2026, while existing users must notify OFSI within 14 days of that date. Further notification is required if contact details subsequently change, and OFSI makes clear that notification does not constitute confirmation that the relevant activity is permitted. The Lukoil International licence has also been extended until February 26, 2027, while the amended Lukoil Bulgaria licence currently expires on October 29, 2026.

Asia-Pacific Developments

Japan weighs sanctions after Putin’s first visit to disputed Kuril Islands

On August 14, 2026, a senior Japanese Foreign Ministry official stated that Japan may impose additional measures on Russia, potentially including new sanctions. The statement followed President Vladimir Putin’s visit to the island chain off Hokkaido, which prompted strong protests from Tokyo. The visit has further intensified tensions over the long-standing territorial dispute between Japan and Russia regarding the islands, preventing the two countries from concluding a peace treaty after World War II.

Chinese Spokesperson Says Expanded US Sanctions Against Russia Could Harm US Interests

On August 11, 2026, Liu Chang, a spokesperson for the Chinese Embassy in Washington, criticized proposed new US sanctions on Russia, arguing that the measures and broader pressure tactics will ultimately backfire on the US rather than achieve their intended goals. The comments came after the US Senate approved a sanctions bill targeting Russia, which includes restrictions on major Russian banks, a ban on new US investment in Russia, limits on purchases of Russian sovereign debt, and potential tariffs of up to 500% on Russian goods.

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Global

The US plans to compel countries to choose between China and the US on AI cooperation. Reportedly, the US State Department is planning to tell the 35 countries that have signed the US AI Opportunity Statement that they cannot benefit from the US framework while also benefiting from Beijing’s competing framework, “World Artificial Intelligence Cooperation Organization,” which promotes Chinese open-weight technology in a challenge to US influence over emerging technologies. Of the 35 countries, which include major technology partners such as Japan, Australia and South Korea, only one country – Kazakhstan – has joined both frameworks.

AI Opportunity Statement is a non-binding diplomatic agreement signed in June 2026. It establishes a shared, pro-growth, and pro-innovation vision for artificial intelligence regulation, digital infrastructure, and trusted tech supply chains aligned with the US. The US intends to use the leverage of access to Pax Silica’s trusted supply chain, which includes advanced manufacturing, critical minerals, chips and AI infrastructure, to create a US-influenced ecosystem for technology and innovation.

Read More: Reuters [paywall], US State Department, US State Department

Europe

Russia steps up strikes on Ukrainian cargo vessels on the Black Sea, cutting off Ukrainian grain exports. The campaign appears to be retaliation after Ukraine’s sustained long-range strikes on Russian military and “shadow fleet” vessels in the interconnected Sea of Azov and the Black Sea ports of Novorossiysk, Taman, and Tuapse. Since June, at least 50 Ukrainian vessels have been hit. Typically, Ukraine exports 90% of its grain and seeds through the Black Sea, putting significant logistical and cost pressure on Ukrainian farmers. The supply glut could affect global markets, as Ukraine comprises 50% of the global sunflower seeds and oil supply, 18% of global barley, and 12% of global wheat.

Türkiye has attempted to mediate a new Black Sea ceasefire, but Russia has refused to sign on. Moscow wants to prevent Ukraine from continuing its “kinetic sanctions” against energy and export infrastructure, essentially escalating to de-escalate. Ukraine has approached Poland and Romania about reopening the “solidarity lanes” initiative where Ukrainian products were exported by river and land through EU states. However, this flooded local agricultural markets and hurt farmers, a key constituency before Poland’s 2027 parliamentary elections, plus it is less profitable.

Read More: Politico, Euractiv, The Conversation, Stepwise Risk Outlook

Middle East

The US-Iran MOU expires today, with no clear plan for what comes next. The MOU, which fell apart everywhere but on paper last month, was already effectively dead, but some voices had signaled hope that the milestone could trigger new talks (with erroneous reporting last week even claiming that both capitals had renewed the ceasefire). Instead, the lapsed MOU highlights the strategic quagmire the war is in: a war of economic attrition with escalating global costs and growing fatigue.

Iran is reportedly exploring options to escalate. Arab intelligence has reportedly picked up evidence of a strategic shift inside Iran, with hard-line IRGC figures pushing for broader escalation against the US and its allies in the region (alarming the US’ Gulf partners, already apparently increasingly agitated with the US). The reporting is in line with Iran’s growing efforts to dictate the pace of the conflict, an effort that has successfully given Tehran significant power over the direction of war.

Meanwhile, the US is seeking new ways to pressure Iran economically. President Trump vowed on Friday to hit Iran hard economically, following comments by Treasury Secretary Bessent that the US would impose measures that had “never been seen.” Efforts will likely include further sanctions on Iranian weapons and fuel networks, potentially Iranian customers (like Chinese teapot refineries), and maybe even a land blockade. But economic measures have had little impact on Iran thus far, given years of insulation and no consumer input.

Read More: Al Jazeera, Wall Street Journal [paywall], Reuters [paywall]

Asia-Pacific

President Trump instructed the Pentagon to substantially reduce joint military exercises with Seoul, citing their cost, South Korea’s refusal to support US actions against Iran and his relationship with North Korean leader Kim Jong Un. The announcement came just hours before the annual Ulchi Freedom Shield joint exercises began. The 11-day exercise, which commenced Monday as scheduled, runs through August 27 and is designed to strengthen US-ROK readiness against threats to the Korean Peninsula, including drones, GPS jamming and cyberattacks.

Trump said the drills send a “signal that is totally inappropriate and hostile” to North Korea, underscoring his preference for preserving an opening to Kim. The announcement came one day after Trump posted a photo with Kim, writing that the two “get along great.” While reducing exercises could support Trump’s efforts to revive personal diplomacy with Pyongyang, it risks creating a tradeoff between that diplomatic strategy and the credibility of US-ROK deterrence.

The directive comes as alliance tensions have grown under Trump, who has pressed Seoul to assume greater responsibility for regional security and repeatedly criticized South Korea’s financial support for the roughly 28,500 US troops stationed there. Further reductions could deepen uncertainty in Seoul over Washington’s long-term commitment to the alliance—and concern among other US allies that Washington may be willing to scale back military commitments despite North Korea’s expanding nuclear and missile capabilities and growing alignment with Russia.

Read More: Truth Social, Reuters [paywall], New York Times [paywall], Military.com, Peninsula Dispatch

Americas

Defense Secretary Pete Hegseth traveled to Panama last week to attend the Americas Counter Cartel Coalition (A3C) forum. A3C is a US-led security initiative launched by the Trump administration to combat transnational criminal organizations across the hemisphere. During meetings with defense ministers and military leaders from 19 partner countries, Hegseth emphasized expanding cooperation against drug trafficking networks, stating that Colombia, Honduras, and Ecuador were among the countries working with Washington on enhanced counter-cartel efforts. Hegseth met with Panamanian President José Raúl Mulino and observed joint military training activities including jungle operations training with US and Panamanian service members.

The forum comes amid growing US counter-narcotics operations across Latin America. Since returning to office, the Trump administration has designated several Latin American criminal groups as foreign terrorist organizations and broadened military operations targeting trafficking networks, including maritime strikes in the Caribbean and eastern Pacific. Washington is now seeking closer operational cooperation with regional partners, particularly right-wing governments that are prioritizing tougher anti-crime policies, to expand strikes on land. The US approach has raised concerns among some regional governments, like Mexico, over sovereignty, civilian casualties, and long-term political risks of a larger US military footprint.

Read More: AP, Department of War, New York Times [paywall]

Africa

The release of an American held hostage by jihadists in Niger was reportedly facilitated by Libya, underscoring Khalifa Haftar’s emerging role as a power broker for the Trump administration across the Sahel. US missionary Kevin Rideout was abducted by Islamic State militants in October 2025 and later moved to Mali. Securing his release has been among the primary drivers of the Trump administration’s recent engagement with the central Sahelian states. Negotiations were reportedly assisted in part by Cherif Oud Tahar, a prominent regional drug trafficker with ties to terrorist groups, but sources also stated that the Libyans paid a ransom to free Rideout. A senior source within Haftar’s Libyan National Army (LNA) gave a different account, claiming the LNA launched a military operation to rescue him.

The reported ransom payment reflects a broader trend in which al-Qaeda and Islamic State affiliates increasingly rely on hostage payments to fund their operations. The UN Sanctions Monitoring Team found that a $50 million ransom payment reportedly paid by the UAE to free an Emirati hostage was used by al-Qaeda affiliate Jama’at Nusrat al Islam wal Muslimin (JNIM) to finance its April 2026 offensive against Malian and Russian forces. Portions of the ransom payment were also allocated to al-Qaeda in the Arabian Peninsula (AQAP) in Yemen and al-Qaeda in the Islamic Maghreb (AQIM). Ransom payments provide jihadist groups with financing to sustain more sophisticated operations and regional networks. Accordingly, foreign nationals face an elevated risk of kidnapping in Mali, Niger, and Burkina Faso, and businesses or governments may be compelled to pay substantial sums to secure their release.

Read More: ABC, Reuters [paywall], Reuters [paywall], United Nations Analytical Support and Sanctions Monitoring Team

Geoeconomics

Russian state development bank VEB dismissed chief economist Andrei Klepach after his warning that Russia was losing the economic and technological competition with the US, China and, in some respects, Ukraine. Klepach argued that mounting war costs and deteriorating governance could eventually produce a social crisis. His assessment broadly matches official data: the Bank of Russia expects growth of just 0%–1% in 2026, after GDP expanded 0.8% year over year in the second quarter, and forecasts further slowing to 0.5% in the third. Annual inflation remained near 6% in July, while the central bank’s 14% policy rate continues to restrict borrowing and investment.

As a result of the war, there is a divided economy in which the government prioritizes military production at the expense of civilian business sectors. Defense manufacturers benefit from state orders and subsidized credit, but other businesses face high financing costs, additional taxes, labor shortages and restricted access to Western technology. Russia’s federal deficit reached 6.46 trillion rubles, or 2.8% of GDP, during the first seven months of 2026, already well above the government’s full-year target, while oil and gas revenue fell 16.8% despite the temporary global energy windfall. However, low public debt, capital controls, state-directed banks and continued trade with China and India make a sudden collapse unlikely.

Russia is risking cumulative deterioration as war spending crowds out civilian investment, directed lending conceals weaker bank assets and attacks on refineries raise domestic fuel and transportation costs. Klepach’s firing suggests the Kremlin is prepared to tolerate that erosion rather than reconsider the economic demands of a prolonged war.

Read More: Reuters [paywall], Bank of Russia, KSE Institute

Disruptive Technology

France’s Constitutional Council struck down a social media ban for under-15s, providing a legal obstacle to the EU’s broader social media plans. The Council clarified that the bill, slated for enforcement in September, disproportionately infringed on the freedom of speech of minors due to the blanket ban on social media. French President Emmanuel Macron instructed Prime Minister Sébastien Lecornu to begin working on a new “legally robust” version of the bill with a target of implementation in Spring 2027. The new draft will likely have to loosen the social media restrictions or allow some exceptions to the ban. The Council emphasized that freedom of speech is a fundamental freedom, implying that it is covered by the European Convention on Human Rights and applicable across the bloc.

The European Commission will have to refine its anticipated social media restrictions to the French ruling. Commission President Ursula von der Leyen personally backs social media restrictions for minors and is anticipated to advance a specific proposal by September. The Commission has already formed a working group on the issue that proposed a phased unlocking of social media and online platform rights. The legal obstacle to France’s blanket ban could cast a larger shadow over how social media restrictions are implemented across the EU.

Read More: Euractiv, AP, Politico

Defense

President Donald Trump has opened the possibility of the Navy using foreign-built ships. Trump recently signed a national security memorandum on naval issues that includes allowing foreign shipbuilders to build American naval vessels in their parent shipyards. However, there are conditions attached to the possibility. Only foreign shipbuilding companies that have made “substantial and durable ​investments” would be eligible for this. Specifically, the yards would need to either build a new shipyard in the US or take “ownership or a majority equity position” of an existing yard. They would also only be allowed to build up to two ships in foreign shipyards as a bridge solution for gaps in the US Navy.

Trump linked the decision to issues with the US shipbuilding industry. The memorandum also tasked the DOW with reintroducing “both capacity and competition to the maritime industrial base” as part of the administration’s efforts to develop the American shipbuilding industry. The change is significant since, by law, American warships are required to be built in the US, although the president has wide authority to waive that requirement. Congress has voiced objections to the push for foreign shipbuilding.

The Trump administration is already pursuing this model with the Coast Guard. The administration is working with Finland on icebreaker production to have two different icebreaker classes, one built in the US and one built simultaneously in Finland. The memorandum cites this model as how the Department of War (DOW) should approach these new possibilities for partnering with foreign shipyards.

Read More: Reuters [paywall], USNI News, Breaking Defense

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Legal disclaimer: This Substack is for educational and informational purposes only and does not constitute the rendering of legal counseling or other professional services. Reading, subscribing to, or communicating through this Substack does not create an attorney-client relationship. Do not send confidential information through this platform. Consult qualified legal counsel regarding your specific circumstances. 

Welcome to the Stepwise Risk Outlook, which highlights and contextualizes over-the-horizon developments in key regions of the world and industries of the global market. Today’s featured interview is with Ian Cameron, Analyst.

Interview with Ian Cameron, Analyst

By Ian Cameron

^{“Mark Rutte’s visit to the European Commission - 202410 - P064674-270218“ by Christophe Licoppe / European Union is licensed under CC BY 4.0.}

Ian Cameron is an analyst and researcher with Steptoe’s Global Strategic Engagements Team, with a focus on US foreign policy, international security, and European and Russian geopolitics. Ian provides forward-looking analysis on domestic and geopolitical developments for international clients, providing assessments and key takeaways to guide strategic decisions and stakeholder engagement plans. He speaks and researches in German and Russian.

Ian sat down with Thomas Goldstein, the team’s other lead Europe analyst, to discuss current developments in European politics and security.

Read the Full Interview Here

Or listen to the full interview here:

Listen to the news:

Global

A new US government report names 40 countries as transshipment risks, enabling Chinese trade diversion to avoid tariffs. The report, led by China hawk and White House advisor Peter Navarro and entitled the Great Transshipment Scam, finds that illegal transshipments cost an estimated $19 billion to $26 billion in lost annual tariff revenue, based on an estimated $40 billion to $303 billion in transshipments. The report names major trading partners, including the EU, Canada and Mexico, in addition to many smaller trading partners in Asia and the Middle East.

The US’s uneven tariff rates have created incentives for Chinese businesses to find alternative trade pathways to continue selling their goods to the lucrative US market. Low-tariff countries can benefit either by being passive transshipment hubs or by adding value through local assembly and repackaging for the US market. The US government has been aware of the transshipment risks but has yet to develop effective tools to systematically identify and counter transshipment. Some of the new trade agreements include specific anti-transshipment restrictions with penalties, but determining and enforcing rules of origin has proved challenging. The report suggested measures including AI tools at the border to scan cargo and documents, and tightening standards that define a product’s country of origin. The report signals that the US plans to elevate enforcement measures, including steep penalties, and is likely to add to trade tensions with China and many US trading partners.

Read More: Wall Street Journal [paywall], YahooFinance, White House

Europe

Moscow is bringing its own low-orbit satellite connectivity constellation online faster than expected. The Russian constellation, which is called Rassvet (Dawn), would provide Russian forces in Ukraine with better and more reliable connectivity and communications. Rassvet would also improve Russia’s ability to strike Ukraine with drones controlled via satellite. Russia had been using unauthorized Starlink terminals until February, when those terminals were disconnected following coordination between SpaceX and Kyiv.

Rassvet is still in its infancy, but Moscow is moving as fast as possible to develop the constellation. Russia launched its first package of satellites in March and its second in July. According to Ukraine, Russia has placed about 40 satellites in orbit so far and plans to have almost 300 satellites in orbit by 2027. Due to its small number of satellites, Rassvet doesn’t provide continuous coverage over Ukraine, but it has already started to provide partial capabilities.

Kyiv is asking SpaceX to allow Starlink use for targeting Russia in response to Rassvet. Since Russia will be better able to target Ukraine with long-range capabilities once Rassvet comes online, Kyiv wants to use Starlink to more reliably target launch sites inside Russia. SpaceX has consistently refused to allow Starlink to be used for strikes on Russian territory. Ukrainian president Volodymir Zelenskyy reportedly asked US president Donald Trump to intercede with SpaceX owner Elon Musk on the issue.

Read More: Kyiv Independent, Politico EU, The Atlantic

Middle East

Saudi Arabia formally created its Red Sea defense coalition. The grouping, announced in concept as the Multinational Maritime Defense Alliance, at the end of July, is intended to safeguard freedom of navigation through the Bab al-Mandeb Strait, the Red Sea and the Gulf of Aden. Fifteen countries have reportedly pledged to join, with 13 announcing their accession so far, including Bahrain, Turkiye, Egypt, Jordan, Kuwait, Qatar and Djibouti.

The coalition is an attempt to deter the Houthis and globalize the Red Sea issue, but will have little military heft. According to the Saudi government, the coalition will exchange information and intelligence, develop operational planning, and conduct joint naval exercises and drills, and potentially carry out joint naval operations. Significant joint military effort is unlikely, though; non-littoral states are wary of wading into the Iran quagmire.

The coalition notably excludes the UAE, underscoring shifting security alliances in the region and fading US primacy. Long the primary security guarantor and nuclear umbrella for the Middle East, the Iran war has scrambled regional security outlooks, leading regional capitals to diversify beyond US partnership. The new maritime coalition mirrors the Mecca Agreement on mutual defense between Saudi Arabia, Pakistan, and Turkiye, a recent sign of the ascent of new security groupings.

Read More: Al Jazeera, Middle East Eye, Council on Foreign Relations

Asia-Pacific

Russian President Vladimir Putin on Thursday visited a disputed island near Japan for the first time, prompting strong condemnation from Tokyo. The island, known in Russia as Iturup and Japan as Etorofu, is part of the Kuril chain east of Japan’s northernmost main island. Russia seized the islands following Japan’s surrender in World War II, though Tokyo continues to claim them as “inherently Japanese territory” and regards their return as a prerequisite for a formal peace treaty with Moscow. Putin’s visit marked the first by a Russian leader since then-President Dmitry Medvedev visited in 2010. Japanese Prime Minister Sanae Takaichi called the visit “absolutely unacceptable.”

The visit reinforces a broader regional narrative that Japan is abandoning its postwar security constraints. Since Takaichi’s November remarks that Japan could intervene militarily if China attacked Taiwan, Beijing has repeatedly framed Tokyo’s defense expansion as evidence of a shift toward militarization and a revival of its imperial past. Moscow has echoed the narrative, with its Pacific Fleet commander on Wednesday accusing Japan’s “military-political leadership” of pursuing “open militarization.” North Korea, meanwhile, has intensified rhetoric warning that Japan’s military buildup reflects a “re-invasion” mindset. The convergence suggests Tokyo’s security shift is increasingly becoming a point of alignment among its regional rivals, risking a more hostile and fragile environment for Tokyo to navigate.

Read More: Wall Street Journal [paywall], Reuters [paywall], Brookings Institute, East Asia Forum

Americas

Strikes against fishing boats off the coast of Ecuador earlier this year were part of a covert CIA program, according to recent reports. Eight Ecuadorian nationals are still missing after the Fiorella disappeared near the Galapagos Islands. Flight data shows that an American patrol plane approached the boat multiple times in January, including on the day it disappeared. The patrol plane is registered to a company whose address is a mailbox at a UPS store in Richmond, Virginia. Witnesses who survived strikes in March on two other boats, the Negra Francisca Duarte II and the Don Maca, reported in interviews that they were attacked by drones, detained and taken to El Salvador, only to be later returned to Ecuador.

The Trump administration has broadly expanded the CIA’s role in combating drug trafficking in Latin America. In some cases, this has included authorizing covert operations, including the potential use of lethal force. Agency personnel and resources played a key role in locating and tracking Venezuelan President Nicolás Maduro before his capture by US forces on narcotics-related charges. The agency has also reportedly deployed and is seeking to recruit intelligence assets in Cuba. In Mexico, two CIA officers were killed in a car accident in April following a joint operation with Mexican state-level security officials, which Mexico’s president later said she had no knowledge of, raising diplomatic tensions with the US.

Read More: Washington Post [paywall], New York Times [paywall]

Africa

The US and Nigeria held the second Joint Working Group to discuss Abuja’s Country of Particular Concern designation. The US and Nigerian delegations discussed progress made in dismantling jihadist networks and protecting Christian communities. The Trump administration designated Nigeria as a Country of Particular Concern in November 2025 following claims that Abuja failed to protect Nigerian Christians against violence from jihadist groups, causing some tension in relations. However, positive diplomatic engagements and enhanced security cooperation in recent months, including a joint operation that killed the leader of the Islamic State West Africa Province, have improved ties.

As the US and Nigeria continue to rekindle relations, the designation could be removed in the near term. While the US has stated that more work is needed to address Nigeria’s security challenges, the Trump administration’s continued diplomatic engagement and expanding security cooperation suggest that Washington is pursuing a more constructive approach. If current trends continue, the designation could be removed within six months, barring a sudden deterioration in bilateral ties or a significant increase in sectarian violence.

Read More: US Department of State, The Conversation, Africa Defense Forum, Reuters [paywall]

Geoeconomics

Global shipping costs are rising as Middle East rerouting collides with water-constrained capacity at the Panama Canal. Auction bids for scarce transit slots averaged $1.1 million in early August, more than 16 times their year-earlier level, while one 10,100-container vessel reportedly paid about $4 million to bypass the queue. More than 100 ships have been waiting roughly 10 days for passage as El Niño lowers Gatun Lake, prompting draft restrictions that can force vessels to carry less cargo. At the same time, instability around the Strait of Hormuz and Red Sea is redirecting energy and container traffic toward the Americas. MSC and CMA CGM have consequently introduced or raised Panama Canal surcharges to $100 per container.

Panama is a concentrated example of the broader capacity problem that Maersk now identifies as the principal force pushing container rates higher. Chief Executive Vincent Clerc pointed to port and inland congestion, including berth waits reaching 12 days in Shanghai and years of insufficient investment in terminals, railways and trucking infrastructure across China, northern Europe, South America and West Africa. Strong Chinese exports are adding volumes faster than these networks can process them, and the resulting delays keep vessels and containers tied up for longer, effectively reducing available shipping capacity even when the global fleet remains ample. If sustained, these higher freight costs could put renewed upward pressure on goods inflation, which will begin to appear in the data as existing inventories are depleted and transport costs pass through supply chains.

Read More: Financial Times [paywall], Reuters [paywall], Maersk, Supply Chain Dive, Atlantic Council

Disruptive Technology

Anthropic investors anticipate an IPO of $2 trillion in October. The company itself has managed expectations and reportedly does not have a specific target, but its institutional backers foresee annualized revenue between $100 billion and $120 billion. Annualized projected sales based on quarterly results are Anthropic’s preferred metric. If Anthropic does reach a revenue of $120 billion, it would represent up to tenfold growth over 2026. According to Anthropic’s investors, a $2 trillion valuation, just double the company’s May valuation of $965 billion, could be modest for the tech sector, where AI beneficiaries like Palantir trade at a valuation 55 times their revenue and SpaceX around 56 times after its IPO.

Anthropic filed for an IPO confidentially in June, giving it flexibility on when to IPO. As the company continues to sell its models to corporate consumers, it may decide to wait and maximize expectations based on continued growth. Anthropic will also navigate market risks, such as an emerging regulatory framework from the Trump administration, competition from China-based open-weight models, and volatile expectations from the market on AI capital expenditures.

Read More: CNBC, Quartz, Financial Times [paywall]

Energy

Yesterday, Romania shut off the second nuclear reactor at the Cernavodă power plant due to declining water levels in the Danube River, which are at a 90-year low. Due to a drought, Romania’s state-owned Nuclearelectrica does not believe it can safely cool the reactor core, requiring the plant to shut down operations. Romania previously shut off Cernavodă’s first reactor on July 28. Both reactors together typically generate about 20% of the country’s electricity and cannot be switched back on for about two weeks according to current weather forecasts, placing sizable energy pressure on Romania’s energy market. To offset the crisis, Romania is looking to import emergency electricity assistance from neighboring countries under an EU framework, as well as prolonging the operation of coal-fired plants.

Neighboring Hungary is currently implementing its own measures to prolong the water supply of its Paks nuclear reactor, such as constructing a riverbed barrier and deploying barges to sink to raise the water level.

Read More: Romanian Ministry of Energy [in Romanian], Politico, OilPrice

Transnational Crime and Corruption

A White House memorandum ordered the creation of a program to coordinate cyber operations by U.S. private companies against transnational criminal organizations. The program, overseen by representatives from the Departments of Justice and Homeland Security and reporting to White House advisors Steven Miller and Sean Cairncross, would allow participating companies to pitch and carry out cyber surveillance and “effects operations.” The initiative reportedly grew out of a White House push to revive “privateering” as a strategic option for anti-crime campaigns.

The program includes several restrictions on these proposed private sector cyber operations. Participants would be banned from targeting U.S. persons or groups part of or controlled by foreign governments. Participants are also required to put up a $1 million bond in case of noncompliance with the program.

The initiative mimics other state-affiliated hacking campaigns. Russia and other U.S. adversaries have been accused for years of using independent hacking groups as proxies to carry out foreign cyber-attacks. This hybrid warfare strategy creates plausible deniability for the directing government, though it requires careful calibration to not trigger escalations with targets. The new White House directive raises questions of legal liabilities for participating companies as well as new risks for diplomatic incidents where foreign governments retaliate against private operations against allied cyber groups.

Read More: White House, Financial Times [paywall], Royal United Services Institute

Defense

Poland is moving forward with its naval modernization and expansion program. The first of three multi-role frigates for the Polish navy launched into the Baltic Sea yesterday from Gdansk. The Wicher, which is part of Poland’s Project 106 Miecznik (Swordfish) class, is the largest Polish surface combatant since the early 20^th century, and it represents a major step forward in Poland’s military ambitions and capabilities in the Baltic Sea. The Miecznik class will replace Poland’s two current frigates and is primarily designed for air defense and anti-submarine warfare (ASW), and the Wicher is set to be commissioned in 2029.

The Miecznik class is also a strong sign for Poland’s defense industrial base. Poland’s defense industrial base has historically been relatively weak despite the country’s status as one of Europe’s biggest defense spenders. American and South Korean firms in particular have profited from Warsaw’s spending. The frigate program, which is a partnership between Warsaw and London, uses a design from a British company but has production of the frigates in Poland through the Polish state arms company.

Poland has been advancing a large military modernization effort for several years. Warsaw’s military ambitions have the potential to place Poland as a linchpin in NATO’s land capabilities and in other areas like the Baltic Sea, and Poland’s defense industry can also profit from Warsaw’s efforts. However, the modernization program also could weigh on Poland’s financial position going forward.

Read More: Breaking Defense, The War Zone, Politico EU, Rand

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^{Legal disclaimer: This Substack is for educational and informational purposes only and does not constitute the rendering of legal counseling or other professional services. Reading, subscribing to, or communicating through this Substack does not create an attorney-client relationship. Do not send confidential information through this platform. Consult qualified legal counsel regarding your specific circumstances.}

Welcome to the Stepwise Risk Outlook, which highlights and contextualizes over-the-horizon developments in key regions of the world and industries of the global market. Today’s featured deep dive by Zayna Dembinski examines Myanmar’s junta’s efforts to gain political and diplomatic legitimacy.

Myanmar: Normalization Without Stabilization

By Zayna Dembinski

^{“MAF bombing Kyauktaw Township 2025-01-12” by Chun Nrein/MPA is licensed under CC BY 3.0.}

Myanmar’s junta is increasingly pursuing political and diplomatic normalization despite having failed to resolve the civil war, creating a widening gap between the appearance of political stabilization and conditions on the ground. While elections and renewed engagement with regional governments may improve the junta’s international standing, they are unlikely to resolve the underlying conflict in the near term. For businesses, this means Myanmar may become more accessible diplomatically without becoming materially less risky, particularly given sanctions exposure, human-rights concerns, conflict-related disruptions and weak governance.

In today’s full analysis:

• Where Myanmar Stands Today

• The Junta’s Push for Political Normalization

• International Reception: From Isolation to Pragmatic Engagement

Read the Full Report Here

Or listen to the full report here:

Listen to the news:

Global

Russia and Ukraine are attacking grain shipment infrastructure, increasing risks to exports and the global food supply chain. Both countries are targeting seaport infrastructure and vessels, bringing commerce in the Black Sea to a near halt. Russian air strikes on cargo ships in the Black Sea have stopped nearly all ship traffic in and out of Odesa, a key export terminal for Ukrainian grains. On Tuesday, Ukraine carried out another assault on the Russian Black Sea port city of Novorossiysk. Ukraine’s primary targets are military installations, oil and gas infrastructure and the shadow fleet, but grain export infrastructure is also being hit. Novorossiysk hosts two of Russia’s largest grain terminals, which have halted operations.

Both countries are seeking alternative export routes for grain, which are limited and costly. Ukraine is the 9^th largest wheat producer in the world, while Russia ranks third. Russia can redirect some grain to ports in the Baltic region or use direct rail and truck shipments to neighboring markets in Central Asia and China. Ukraine has railway networks feeding into European terminals, but transport is hampered by differing track gauges at borders. Ukraine has also used the Danube River for barge transport to Romanian ports, but drought has restricted the waterway with record-low water levels. Overland transit can only handle about 50% of the monthly volume normally shipped via deep-water Black Sea ports and adds to transportation costs, which will drive up commodity prices.

Read More: New York Times [paywall], Reuters [paywall], Wall Street Journal [paywall], Reuters [paywall]

Europe

Today, the Clacton-on-Sea constituency votes whether to keep Nigel Farage, the leader of the populist right Reform UK party, as MP. Farage gambled that triggering a by-election would redirect attention from an ongoing parliamentary inquiry. However, no major party is running a candidate, taking the wind from Farage’s sails. Farage’s nearest opponent appears to be longtime satirist candidate Count Binface, a self-declared intergalactic space warrior.

Beyond the comedy, Farage’s showing will be one of his first tests since Prime Minister Andy Burnham took the reins of the Labour Party in late July. Farage previously called for snap elections to challenge Burnham’s unelected mandate, which is primarily about transferring financial power from Westminster to municipalities and regions. However, Farage’s fortunes have diminished, with his net approval hitting negative 32 points in late July. Moreover, a revolt by Rupert Lowe, who was kicked out of Reform UK and formed his own party called Restore Britain in February, threatens to siphon votes from the populist right in new elections. Although Reform remains more powerful, lost votes are a major problem in the UK’s plurality-based district representation system.

In most recent polling, Burnham has reversed Labour’s downward trend with a seven-point bump since his Makerfield by-election, breaking Reform UK’s 16-month streak as the most popular party. With renewed enthusiasm, Burnham may indeed mull over a snap election to secure Labour’s agenda after 2029—and that calculation may hinge on Farage’s result.

Read More: BBC, Politico, Financial Times [paywall]

Middle East

Israel deployed additional troops to the West Bank to “restore order” amid a flare of settler violence in a village there. Over the last several days, a group of settlers besieged the homes of several Palestinian families. A small army presence on Wednesday failed to defuse the situation, and Jerusalem has now effectively put the village on lockdown, reportedly dismantling most of the settler siege although clashes persisted.

The episode comes amid intensifying politicization of the settler movement ahead of October elections. In recent months, emboldened Israeli settlers have been testing the boundaries of a government that has shown them unprecedented support and has rarely punished them for overstepping the law. The environment has only grown more tense in the run-up to elections, with Prime Minister Netanyahu fighting to maintain his far-right, pro-settler allies and voting bloc. As of July, Israeli settlers were on track to kill twice as many West Bank Palestinians in 2026 than in 2025.

Read More: BBC, Wall Street Journal [paywall], NPR

Asia-Pacific

New Zealand Prime Minister Christopher Luxon on Wednesday survived a National Party caucus confidence vote, just 87 days before the November 7 general election. The challenge was brought by now-former Defence Minister Chris Penk, whom Luxon swiftly removed from his defense, intelligence, space and building portfolios. Penk subsequently announced he would leave politics and not seek reelection.

Luxon’s confidence vote was likely set in motion by a series of public troubles, calling attention to his relative lack of political experience. Luxon drew public criticism for floating the idea of a possible referendum on New Zealand’s electoral system if reelected without consulting colleagues, telling business leaders to “be adult” and returning to Wellington from a political fundraising party on the New Zealand Defense Force aircraft. Luxon, with a longtime business executive background, is often criticized for failing to connect with voters, and the country’s economy is no better than when he took office, with growth weak and unemployment at an 11-year high.

The challenge is Luxon’s second since April, underscoring persistent divisions within the National Party. While Luxon survived, the vote exposes vulnerabilities ahead of an election in which National is already narrowly trailing its main opposition party, Labour, in the polls. Further infighting could cede more ground to Labour, leaving Luxon with little room for additional missteps as he seeks to demonstrate party cohesion and rebuild voter confidence before November.

Read More: Reuters [paywall], The Guardian, AP

Americas

Venezuela and Israel announced on Tuesday that they will restore consular relations after 17 years. Venezuela previously cut ties with Israel in 2009 under Hugo Chavez. The thaw comes as Venezuela has shifted its foreign policy to align with the US, following the capture of former President Nicolas Maduro in January. Venezuela’s foreign minister announced that the decision to restore ties came after Israel sent a team to contribute to earthquake recovery efforts in Venezuela. While the shift signals a warming relationship, the two countries have not yet agreed to re-establish full diplomatic ties.

Israel has more broadly strengthened diplomatic relations with Latin American nations as the region experiences a historic shift to the right. Upon taking office in Colombia over the weekend, Abelardo de la Espriella recognized Israel’s claims over the Golan Heights, making it only the second country to do so after the US. De la Espriella has said he also plans to open an embassy in Jerusalem. Colombia had cut diplomatic relations with Israel in 2024 under leftist President Gustavo Petro. Last week, Chile and Honduras both restored their ambassadors to Israel, and Argentina’s President Javier Milei moved the Argentine embassy in Israel to Jerusalem last year. These moves signal a broad effort by regional leaders to align their foreign policy with the Trump administration.

Read More: Al Jazeera, Al Jazeera, El Pais [Spanish]

Africa

US AFRICOM signed an agreement with Somalia’s Puntland state to deepen counterterrorism and maritime security cooperation. Details remain limited, but the Puntland State House stated that the agreement will expand the US military presence in Bosaso, Puntland’s main port, to support operations against the Islamic State and protect maritime trade in the Red Sea and Gulf of Aden. US Special Operations Command Africa is seeking more direct cooperation with Puntland’s semi-autonomous government and reportedly negotiated the agreement without input from the Federal Government of Somalia (FGS), the country’s central government.

The partnership could improve the US’ ability to quickly respond to jihadist and maritime threats, but risks further weakening the FGS’ authority. The agreement comes as relations between Mogadishu and Puntland have deteriorated, with the two sides engaged in an increasingly militarized political dispute. Greater cooperation with Puntland authorities could strengthen the local forces best positioned to counter jihadist groups. While this may improve the effectiveness of joint counterterrorism and maritime operations in the short term, it could also deepen Somalia’s political fragmentation by encouraging other semi-autonomous governments to pursue similar bilateral agreements. This, in turn, could worsen tensions with Mogadishu and increase the risk of military confrontation between the FGS and regional authorities.

Read More: Ecofin Agency, Responsible Statecraft, Critical Threats, Critical Threats

Geoeconomics

US inflation moderated in July as cheaper gasoline reined in the headline rate and underlying price growth remained contained. The Consumer Price Index rose 0.1% from June, when it fell 0.4%, while the annual rate eased from 3.5% to 3.4%. Core CPI, which excludes food and energy, increased 0.2% for the month and 2.5% from a year earlier, down from 2.6% in June. Gasoline prices fell 2.9% and the broader energy index declined 1.5%, offsetting modest increases in food and shelter. Shelter rose just 0.1% but accounted for roughly two-thirds of the monthly headline increase.

The report lowers immediate pressure on the Federal Reserve to raise rates. Traders reduced the implied probability of a September rate increase to about 38%, from 48% before the release. Some of July’s softness may prove temporary: lodging prices fell 2.8% following the World Cup, oil prices have since risen and core goods gained 0.2% after two monthly declines. Economists estimated that annual core PCE inflation, the Fed’s preferred measure, remained around 3.3%, well above its 2% target. Real hourly earnings also fell 0.2% from a year earlier, showing that slower inflation has not restored household purchasing power. The combination of weaker employment and persistent inflation makes a September hold more likely, while preserving the possibility of a later increase if higher energy costs spread through the economy.

Read More: Reuters [paywall], BLS, AP, Dallas Fed

Disruptive Technology

In early July, suspected China-based hackers utilized AI agents to conduct the first end-to-end autonomous cyberbreach against Taiwan government and energy company websites. The company that identified the breach, Israel-based cybersecurity firm Dream, stated that more than 2,500 personnel files were retrieved by AI agents originating from one of two possible open-source models, Hermes and OpenClaw, which can be downloaded and tinkered with. In order to conduct the attack, the hackers likely bypassed the model’s underlying safeguards with a jailbreak method of tasking the AI with an authorized exercise to test for system vulnerabilities. Multiple agents scanned for vulnerabilities, attempted cyber intrusions, and adapted tactics when attempts failed. As many as eight agents were deployed simultaneously.

This incident demonstrates AI’s disruption to cybersecurity and its geopolitical weaponization. The US has scrambled to find a new AI safety approach after frontier AI developers have disclosed that latest models have escaped testing environments and hacked other companies during training. However, there remains no international convention on the use of AI, and the coordinated network of AI safety institutes has lost momentum. The US’ voluntary but strongly encouraged AI review system by the Department of Commerce does not apply to China’s open-weight models, which are peer to American models in cybersecurity capabilities—and more powerful than the agents that conducted the July attack.

Read More: Financial Times [paywall], Cyber Security News, Tom’s Hardware

Energy

JD Vance reportedly intervened with Kyiv to stop Ukrainian strikes on a Russian port in the Black Sea. Ukraine’s strikes on the Russian port of Novorossiysk, which had disrupted exports of Kazakh oil through the Caspian Pipeline Consortium (CPC) connecting Kazakhstan to the Black Sea, had created concerns in the White House about further destabilization of global energy markets. Since Vance spoke with Ukrainian president Volodymir Zelenskyy, Ukraine has continued to target other Russian infrastructure around the port, such as the Russian naval base in Novorossiysk.

Ukraine’s strikes had severely restricted Kazakh export flows. Astana sharply curtailed oil production after the CPC terminal in Novorossiysk halted operations. The CPC loaded 600,000 fewer barrels per day in July than in May. Kazakhstan has served as a key replacement for European energy supplies in recent years and has become even more important to global markets since oil from the Middle East has dropped.

This isn’t the first time the US has tried to rein in Ukrainian attacks on the CPC. In February, the US issued a diplomatic démarche to Ukraine over a Ukrainian strike on the Novorossiysk port in late 2025. The US has also been highly aware of the impacts of the war between Russia and Ukraine since Washington’s war with Iran began. The US repeatedly issued sanctions waivers for specific categories of Russian oil earlier this year in order to assuage countries in Asia experiencing supply crunches and to keep global prices lower.

Read More: Financial Times [paywall], Reuters [paywall], Euronews, Moscow Times

Defense

Rocket Lab Corporation is expanding its international business in Europe. Rocket Lab, a launch services and space systems provider based in the US, recently founded a subsidiary in Germany to potentially build out its satellite and component production in Europe. The company sees its European presence as a way to build a regional presence for satellite constellations and to meet growing European demand.

Interest in access to space is growing across Europe. Space’s importance for defense and commercial uses is driving new initiatives and new spending. Berlin is reportedly considering the construction of its own launch site for the German military in order to secure Germany’s access to space for defense purposes, and last year Germany announced a major package of defense spending on space. Similarly, the EU announced earlier this month that it will expand the number of satellites in its IRIS2 constellation. IRIS2, which is the EU’s broadband communications satellite network, plans to begin satellite launches in 2029.

Read More: Hartpunkt [in German], NTV.de [in German], Breaking Defense, Defense Post

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Contact Us

Karl Hopkins
Partner
+1 202 429 6499
khopkins@steptoe.com

Melissa B. Mahle
Senior Advisor
+1 202 261 0577
mmahle@steptoe.com

Anni Coonan
Senior Intelligence Analyst
+1 212 506 3979
acoonan@steptoe.com

Samuel Bloebaum
Senior Due Diligence Analyst
+1 602 410 6240
sbloebaum@steptoe.com

Zayna Dembinski
Analyst
+1 202 778 3567
zdembinski@steptoe.com

Thomas Goldstein
Analyst
+1 202 862 6735
tgoldstein@steptoe.com

Ian Cameron
Analyst
+1 202 327 6908
icameron@steptoe.com

Elton Smole
Analyst
+1 202 261 0556
esmole@steptoe.com

Carter Spahn
Intelligence Fellow
+1 202 261 7555
cspahn@steptoe.com

Chris Dantes
Intelligence Fellow
+1 202 327 6904
cdantes@steptoe.com

Legal disclaimer: This Substack is for educational and informational purposes only and does not constitute the rendering of legal counseling or other professional services. Reading, subscribing to, or communicating through this Substack does not create an attorney-client relationship. Do not send confidential information through this platform. Consult qualified legal counsel regarding your specific circumstances. 

Welcome to the Stepwise Risk Outlook, which highlights and contextualizes over-the-horizon developments in key regions of the world and industries of the global market. Today’s featured deep dive by Samuel Bloebaum examines the status of the Clarity Act.

Clarity Delayed: Legislative Delays Threaten Crypto Market Structure Framework

By Samuel Bloebaum

^{“Cryptocurrency Regulation & Laws“ by CryptoWallet.com Images is licensed under CC BY 2.0.}

The Digital Asset Market Clarity Act (“Clarity Act”) faces increasingly formidable obstacles to congressional approval. According to its proponents, the act will provide regulatory frameworks for digital assets and related facilitators and bring greater stability and confidence to a cryptocurrency industry that has faced years of inconsistent regulatory standards. While a limited path to passage in September remains, digital asset service providers face heightened regulatory uncertainty heading into 2027. The failure of traditional banking and digital asset service providers to reach a compromise on the legislation, combined with the increasing polarization of cryptocurrency in US politics, contributed to a series of congressional delays that may push the debate past the window of opportunity for passage. Failure to pass the Clarity Act in 2026 will not restore the US financial system to the status quo ante, given the cryptocurrency industry's continued growth despite regulatory uncertainties. However, it will lead to a prolonged period of instability for digital asset service providers and their significant user base.

In today’s full analysis:

• A Promise of Clarity

• Cryptocurrency Politicization

• Continued Regulatory Instability for Crypto

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Global

Russian President Putin warned that Russia will respond in kind if European countries start to seize Russian merchant vessels. The Russian president’s comments are in reaction to increasing pressure on the Russian shadow fleet by European countries, from new sanctions to detaining some ships and their crew for inspections to ferret out sanctions evasion activities. European states are moving from symbolic boardings towards sustained maritime law enforcement intended to disrupt Russia’s shadow fleet and raise the costs of sanctions evasion. Over the past three months, Italian, French, UK and Swedish navies have boarded and inspected sanctioned oil tankers.

Tensions between Russia and Western Europe are escalating amid growing risks of a direct confrontation. German military officials are warning that Russia has been systematically using drones to probe air defenses in Europe, looking for weaknesses to exploit for a wider conflict with the West. A US intelligence assessment similarly advised that President Putin’s risk calculus has shifted and is testing NATO’s unity and the Trump administration’s willingness to respond to an attack on a NATO ally.

Read More: Reuters [paywall], International Institute for Strategic Studies, Wall Street Journal [paywall]

Europe

The German government is set to advance intelligence agency reforms today. The draft law would enable the Bundesnachrichtendienst (BND), Germany’s equivalent of the CIA, to not only collect information but also conduct operations abroad once an active threat is declared. These activities could include conducting cyber operations to disable a hostile threat or, say, disrupt the production of weapons systems. The law will loosen the data protection procedures for collected signals intelligence and also enable the BND to collect information domestically if it is related to a foreign file, including domestic telecoms data. Once the draft is approved by the German government, it will be sent to the lower and upper chambers of the legislature for debate after the August recess, possibly in September.

Reforms empowering the BND have been in the works for months but are emboldened after last week’s failed drone attack at the Leipzig airport. The original BND reform push was delayed so that an interconnected reform of the Federal Agency for the Protection of the Constitution (BfV) could be adjoined. Germany’s restrictions on the BND have historically been tighter than those of most European countries as a legacy of both Nazi Germany and the East German Stasi. But as a consequence of Germany’s Zeitenwende to independent military power, the government anticipates elevating the BND’s competencies to that of most other European states.

Read More: Welt [in German, paywall], Politico, The Economist [paywall]

Middle East

Hopes for a deal to open the Strait of Hormuz faded. After Iran and Oman appeared to come to an agreement on an arrangement to administer the Strait (with “voluntary” tolls), Iran demanded concessions (essentially including a return to the June MOU) from the US. But the Strait remained closed and the blockade actively in force as the US continued to apply economic and kinetic pressure to get a better deal.

What will it mean for the region if there is no deal in the long term? The oil market will be reordered. The oil market is hanging on for now, but largely on the back of reduced Chinese demand that cannot continue forever. Major exporters are already rerouting away from the Strait of Hormuz, with some analysts predicting that it will be obsolete in two years. For Strait-locked states like Qatar and Kuwait, pipeline construction cannot come soon enough. Long-term elevated prices will be normalized.

Prolonged instability will also damage regional non-oil economies and further fracture security arrangements. Tourism has cratered, and while investment in major Gulf economies has mostly barely lagged, long-term revenue dips from Strait closure could harm the sovereign wealth funds that back economic diversification. Finally, American primacy is being called into question, with US partners diversifying their partnerships and seeking bilateral detente with Iran.

Read More: Reuters [paywall], The Economist [paywall], CNBC, Atlantic Council, Stimson Center

Asia-Pacific

Forty-one nations issued a statement on Tuesday calling on nuclear-armed states to provide at least 24 hours advance notice of ballistic missile tests, an apparent response to growing concerns over China’s recent firing. On July 6, China launched an unarmed, nuclear-capable ballistic missile from a nuclear-powered submarine into the South Pacific. While Beijing provided advance notification to some governments, many said they received only a few hours’ notice with insufficient detail. Many governments, including Pacific Island nations, quickly criticized the test, while Beijing defended it as routine military training and said its notification demonstrated transparency.

The episode highlights broader concerns over strategic signaling in the Indo-Pacific. North Korea launched its 11th suspected ballistic missile of 2026 on Wednesday, sending it roughly 700 kilometers toward waters off the Korean Peninsula just days before the US and South Korea begin the Ulchi Freedom Shield exercises. While the launch may have been scheduled, its timing likely also served as a signal of defiance toward the allies. Together, the tests underscore how missile activity is increasingly being used not only to develop capabilities but also to signal strategic intent, test regional reactions and shape perceptions of military reach.

Read More: US Department of State, CGTN, Reuters [paywall]

Americas

Deputy Secretary of State Christopher Landau traveled to Trinidad and Tobago and Guyana from August 9-12 to advance US engagement. In Trinidad and Tobago, Landau met with Prime Minister Kamla Persad-Bissessar to discuss energy cooperation, regional security, and economic ties, while also participating in the ribbon-cutting ceremony for Ibis Steel Company T&T Ltd. In Guyana, he met with President Irfaan Ali and senior cabinet officials to discuss expanding bilateral economic cooperation, increasing investment opportunities, and strengthening collaboration in strategic sectors. The visit comes amid a broader US effort to deepen partnerships in the hemisphere and promote shared priorities related to energy and security.

Both Caribbean countries’ roles are evolving in regional and global energy markets. Guyana has emerged as one of the world’s fastest-growing oil producers following a series of major offshore discoveries, transforming the country’s economic outlook and making it an increasingly important supplier of crude oil. Trinidad and Tobago is seeking to leverage its long-standing oil, gas, and petrochemical expertise to become a regional leader in the production of green hydrogen and associated products such as green ammonia and methanol. Under its 2022 Green Hydrogen Strategy, Trinidad aims to use renewable energy and existing industrial infrastructure to build a large-scale green hydrogen industry over the coming decades, positioning itself as a hub for low-carbon fuels and exports.

Read More: State Department, Trinidad Express, GH2

Africa

Attacks against energy infrastructure in Libya and the killing of an intelligence chief underscore the persistent roadblocks to stability in the country. Drone strikes against energy infrastructure in Zawiya ignited a large fire at a fuel-storage facility within the Zawiya oil complex, which houses Libya’s largest operating refinery. The refinery itself was reportedly not damaged, and operations were temporarily disrupted. Separately, Major General Fawzi al-Mansouri, the military intelligence chief of Khalifa Haftar’s Libyan National Army, was killed in a car bombing in Benghazi. No group has claimed responsibility for either attack, and it is unclear if the incidents are related. However, the strikes in Zawiya followed clashes earlier this month between the First Support Brigade and the 103rd Battalion, local militias that appear to be affiliated with elements of the western government in Tripoli.

Disarming militias and continued hostility towards Haftar-aligned figures present substantial challenges to the Trump administration’s proposed power-sharing agreement. It is unclear whether the US and other mediators have established a concrete process for disarmament, as public reporting on US envoy Massad Boulos’ proposal has focused primarily on efforts to unify the rival western and eastern governments. However, establishing a unified military would require integrating the numerous armed groups operating throughout the country. Failure to resolve the status of these militias could produce future conflicts over influence, threatening the country’s recovering energy sector and sowing greater political instability. Furthermore, should evidence emerge that a Tripoli-aligned individual or group was responsible for al-Mansouri’s assassination, tensions between Haftar and the western government could flare, risking a prolonged pause in peace talks.

Read More: Al Jazeera, Reuters [paywall], AP, Libya Herald, The National, Stepwise Risk Outlook

Geoeconomics

Brazil’s central bank is preparing Pix, its proprietary system for making instant transfers and payments through banking apps, for cross-border use. Its new management report says officials are considering direct links with foreign instant-payment systems and participation in multilateral payment hubs. These connections could allow remittances and purchases to settle in local currency within seconds, lowering costs and reducing intermediaries. This remains an assessment, with no partner or timetable announced. Still, Pix has the scale to support expansion: in 2025, it processed nearly 80 billion transactions worth more than 35 trillion reais, while consumer-to-business payments accounted for 43% of all transactions.

The expansion would create a larger geoeconomic challenge for US payment companies while only modestly reducing Brazil’s reliance on dollar-based finance. USTR cited policies favoring Pix and the central bank’s dual role as operator and regulator among the grounds for its Section 301 action, which imposed new 25% tariffs on certain Brazilian goods. Connecting Pix internationally would intensify competition with Visa, Mastercard and correspondent banks by shifting more commerce onto public instant-payment platforms. It would not, however, eliminate the dollar’s role, as cross-border payments still require foreign-exchange conversion and liquidity. Countries must also align rules for customer identification, fraud, data sharing and settlement. If these issues are resolved, Brazil could export its payment model and gain influence over the infrastructure supporting regional commerce.

Read More: Reuters [paywall], Banco Central do Brasil, USTR, PIIE

Energy

AI could end up being more of a boost for traditional energy sources than for renewables. According to one study, productivity gains in oil and natural gas industries could end up outweighing potential AI-related increases in renewable energy. The report concluded that AI would have to create at least a 4% increase in renewables to balance out a 1% increase in oil and natural gas productivity gains.

Changes in productivity could also be more important than power generation for data centers. The relationship between energy and AI covers data center construction and how data centers will be powered going forward, whether that be with renewables or with traditional energy sources. The report found that the potential impact on productivity in the oil and natural gas sectors would outstrip the direct impact of how data centers are powered. Overall estimates of power demand for data centers vary widely, which will also have an impact on the relationship between AI infrastructure and energy infrastructure.

Read More: Financial Times [paywall], Axios

Transnational Crime and Corruption

Hungary’s Prime Minister’s Office announced it filed a criminal complaint over alleged misuse of state funds for Viktor Orbán’s social media campaigns. The announcement alleged that, since 2022, HUF 4 billion (~USD 12.7 million) of public money was spent on a noncompetitive public contract for online photograph and video campaigns as well as social media monitoring summaries. The Prime Minister’s Office alleged that Orbán and his advisors improperly avoided public procurement processes in awarding the contract, which was priced far above international standards. The contract was awarded to a company owned by Fanny Kaminski, who acted as a press adviser to Orbán.

Orbán’s party Fidesz accused the Hungarian government of political persecution. Since assuming office in May, Prime Minister Péter Magyar has orchestrated sweeping anti-corruption investigations targeting initiatives from Orbán’s time in office.

Read More: Bloomberg [paywall], The Budapest Times, Telex (in Hungarian), Cato Institute

Defense

Australia will potentially be the first non-US user of new American air-to-air missiles. Australia’s defense minister Richard Marles announced earlier this month that Canberra will spend around $520 million USD on procurement of the AIM-260A Joint Advanced Tactical Missile (JATM) for the country’s fighter jet fleet. While the exact quantity of missiles is not known, the total price tag for the deal suggests that it is under 100 missiles. However, the procurement will take years to come to fruition, with missiles likely not being delivered until the beginning of the 2030s.

The US is currently engaged in a major push to build out missile production capacity. Earlier this year, the Pentagon initiated new framework agreements to accelerate production of a number of different missile systems and their components, including air defense interceptors. More recently, the Pentagon has moved aggressively to triple production of Patriot interceptors and quadruple production of THAAD interceptors as the US’ war with Iran has eaten into stockpiles and created concerns about defense readiness.

Read More: Defense News, Defense News, Military Times, Center for Strategic and International Studies

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Welcome to the Stepwise Risk Outlook, which highlights and contextualizes over-the-horizon developments in key regions of the world and industries of the global market. Today’s featured deep dive by Anni Coonan examines the potential ramifications of the US-Saudi nuclear deal.

The US-Saudi Nuclear Deal: Ramifications for Global Proliferation and the Fracturing Regional Strategic Landscape

By Anni Coonan

^{"Barakah nuclear power plant" by Wikiemirati is licensed under CC BY-SA 4.0.}

The civil nuclear cooperation agreement signed between the US and Saudi Arabia last month was a historic and long-anticipated step for the bilateral partnership. For Saudi Arabia, the deal is a move to cement long-term US partnership amid anxieties around American retrenchment, and to free up more oil for export. For the US, it is an effort to reestablish its leadership in nuclear technology (and thus, proliferation norms), create new opportunities for America’s nuclear sector, and bolster its regional standing amid ongoing conflict. But misalignments over the content of the deal have prompted concerns of a regional arms race and laid bare the diversifying strategic landscape of the Middle East, not to mention cast doubt on whether it will move forward at all. A successful deal presents upsides for the American nuclear sector and the bilateral US-Saudi relationship (a key strategic and economic partnership), but also presents risks for global proliferation. Either way, the deal sheds light on the shifting Middle Eastern security architecture, featuring accelerated hedging, multiplying mini-lateral blocs, and a reduced guarantor role for the US.

In today’s full analysis:

• What is (and is Not) in the Deal

• Global Arms Race Concerns

• The Nuclear Agreement amid Rising Regional Great Power Competition

Read the Full Report Here

Or listen to the full report here:

Listen to the news:

Global

The Chinese central bank has named Deutsche Bank as the first European clearing house for renminbi. Until now, a European company settling in renminbi (RMB) typically went through correspondent banking — a chain of intermediaries, each adding a day and a fee. Direct clearing removes the chain. Clearing in Frankfurt will provide financial institutions and companies with direct and rapid processing, clearing and settlement of cross-border renminbi transactions, helping to strengthen financial links between Europe and China.

China is seeking to promote global use of the RMB. Selection of Germany’s Deutsche Bank is a logical choice for Beijing. It deepens financial integration just as Berlin is pushing German companies to reduce their dependence on the Chinese market. China was Germany’s largest trading partner in 2025. Deutsche Bank is the top-ranked non-Chinese bank for panda bond deals (RMB-denominated debt issued by foreign institutions in mainland China). In terms of replacing the dollar, RMB use remains a small share of global payments, and as long as China maintains capital controls, the risk will push the currency market towards fully convertible currencies, namely the dollar and euro.

Read More: Financial Times [paywall], Reuters [paywall]

Europe

Relations between Armenia and Azerbaijan remain on a positive but fragile trajectory one year after a US-brokered peace framework. Since August 2025, the US and Armenia formalized the corporate structure of the TRIPPs Development Company, which will build the 43-km Zangezur transport and ICT corridor interlinking Azerbaijan’s Nakhichevan exclave through Armenia. Trade links between Armenia and Azerbaijan have also increased, and Türkiye has lifted its longtime trade embargo against Armenia in May. These efforts have enabled Yerevan to drift Westward, including through signing a connectivity partnership with the EU.

Armenian Prime Minister Nikol Pashinyan walks a political tightrope over the peace framework. Before a final peace agreement is signed, Azerbaijan wants Armenia to amend territorial references to the ethnic Armenian Nagorno-Karabakh exclave from its Constitution. However, Pashinyan does not have a constitutional majority to call the necessary referendum, and many Armenians maintain affinities to Russia, which has engaged in a geoeconomic pressure campaign against Armenia. Russian measures have included import bans on produce and flowers and threats against duty-free gas exports, which Armenia remains dependent on.

Read More: US Department of State, Reuters [paywall], The Irish Times, Stepwise Risk Outlook

Middle East

Syria sentenced former dictator Bashar al-Assad in absentia. A Syrian court sentenced al-Assad, who ruled the country for over 24 years, to death for crimes including killings, torture, and arbitrary arrest ‌during the country’s nearly 14-year civil war. Al-Assad is currently residing in Moscow, to where he fled as rebel fighters closed on Damascus in December of 2024. Al-Assad is unlikely to be extradited from Russia, where he and his family were granted asylum on humanitarian grounds.

The sentences come as Syria attempts to navigate a complicated relationship with Russia. Moscow was a key ally to the Assads, but did not interfere in the insurgency that led to their ouster and remains an important strategic and economic presence in the country – although the US would like Russia out of the region. Earlier this week, Russia agreed to hand over control of two military bases on the Mediterranean coast, which will become jointly-run training centers. And last week, Syria promised to drastically reduce its Russian oil imports as part of discussions to lift remaining US sanctions.

Read More: Reuters [paywall], AP, Reuters [paywall], Foundation for Defense of Democracies

Asia-Pacific

Chinese and Indonesian navies are set to hold a joint navigation exercise in waters east of Taiwan later this month, adding to growing Chinese maritime activity around the self-governed island. The exercise will focus on strengthening joint operational capabilities and cooperation through communications drills and at-sea replenishment. The announcement follows China’s deployment of coast guard vessels to the area earlier this year, where Beijing has said it will continue strengthening its “law-enforcement patrols.” China began patrolling the waters shortly after Japan and the Philippines began discussions over overlapping EEZ and continental shelf claims east of Taiwan, discussions which Beijing believes it should be part of.

The exercise also comes amid growing maritime tensions between China and Indonesia’s Southeast Asian neighbor. A confrontation near Second Thomas Shoal in July, which coincided with the ASEAN Foreign Ministers’ Meeting, renewed pressure on regional discussions on security and a long-delayed code of conduct for the South China Sea. The drills highlight the increasingly difficult balancing act facing Southeast Asian governments: as China expands its maritime presence, regional states must balance growing security concerns and their individual economic ties to Beijing, further complicating ASEAN’s ability to reach consensus on how to collectively manage relations with China.

Read More: Reuters [paywall], Firstpost, USNI News, Asia Maritime Transparency Initiative

Americas

A 7.4-magnitude earthquake struck western Colombia on the morning of August 10, causing widespread devastation across the country’s coffee-growing region. The quake, centered near San José del Palmar in Chocó province, killed at least 164 people and injured nearly 1,500 others, with authorities warning that the death toll is likely to rise as rescue operations continue. Cali, Pereira, and Manizales suffered heavy damage, with dozens of buildings collapsing and key infrastructure affected, including hospitals, schools and airports. In Cali, part of a major hospital collapsed, trapping patients and forcing medical personnel to treat hundreds of people outdoors while emergency workers searched through rubble for survivors.

The disaster presents an immediate challenge for the new administration of President Abelardo De La Espriella, who took office only days before the quake. His government is now being judged on its ability to coordinate rescue operations and deliver aid to affected communities. De La Espriella has declared a state of emergency, assumed direct leadership of the response, and deployed additional security forces to Cali amid reports of looting. Beyond the immediate crisis, the administration will face pressure to manage a costly reconstruction effort after one of Colombia’s worst natural disasters in recent memory.

Read More: Reuters [paywall], New York Times [paywall], Al Jazeera

Africa

Burkina Faso has quietly deepened diplomatic engagement with Israel, likely seeking advanced security technologies as the military junta intensifies its crackdown on dissent. Junta leader Ibrahim Traore approved Israeli diplomat Simon Seroussi as ambassador to Ouagadougou, signaling a willingness to strengthen ties despite Burkina Faso’s growing security cooperation with Iran before the Iran war. Ouagadougou is reportedly seeking unspecified Israeli security technology, potentially including surveillance capabilities that could help the junta monitor political opponents and other perceived threats. Meanwhile, Israeli intelligence services have reportedly expanded contacts with counterparts in Alliance of Sahel States (AES) member countries.

For Israel, deeper engagement with Burkina Faso and the AES would extend its broader effort to expand its diplomatic and security footprint across Africa. Israel has strengthened ties with countries including Chad and Sudan in recent years, creating channels for diplomatic and security cooperation. Closer ties with the AES could advance several Israeli interests simultaneously: expanding its diplomatic reach, countering Iranian influence and improving intelligence cooperation against jihadist groups operating across the Sahel.

Read More: Africa Intelligence [paywall], al Hurra, Institute for National Security Studies

Geoeconomics

S&P Global’s new benchmarks allow businesses to see the higher cost of sourcing rare earths outside China. On June 30, Platts launched monthly FOB China prices for neodymium-praseodymium, dysprosium, terbium and samarium oxides, complementing its CIF North America assessments for alternative-origin material. The first comparison revealed a substantial security premium: dysprosium oxide was assessed at $2,100 per kilogram in North America versus $220 in China, terbium at $4,800 versus $1,000 and samarium at $600 versus $100. Different delivery terms account for part of the spread, but the multiples primarily reflect scarce non-Chinese processing capacity and Chinese export controls.

The assessments are commercial benchmarks, not official price floors, but could still help fuel investments to diversify supply chains. Standardized third-party prices give relevant parties a reference for contracts, valuations and government support. They also expose the near-term cost of resilience: China controls about 91% of rare-earth refining, leaving Western buyers to pay multiples of Chinese prices for some heavy rare earths. The limitation is liquidity, with these markets remaining thin and being assessed monthly from relatively few transactions, making the benchmarks more fragile than exchange-based prices. Even so, credible ex-China references can support longer contracts, financing and eventually hedging instruments, gradually reducing China’s influence over both mineral supply and price discovery.

Read More: S&P Global, Reuters [paywall], IEA, CSIS

Disruptive Technology

The CLARITY Act’s prospects narrow as Congress begins the August recess. The bill would clarify how cryptocurrencies are regulated, putting most crypto activity under the oversight of the Commodity Futures Trading Commission. However, other provisions have proven more controversial. Banking groups continue to lobby against the bill, which would not interrupt the right of stablecoin issuers to grant rewards to stablecoin holders, replicating a traditional savings account without the same regulations or insurance. Democrats want stronger ethics provisions preventing government officials and their immediate family from profiting off crypto while in office. Senators Thom Tillis (R, NC) and Ruben Gallego (D, AZ) have offered a provision to force President Donald Trump to divest from crypto holdings and allow state attorneys general to sue the Justice Department if it does not enforce the ethics provisions, but it remains unclear if this will prove to be a sustainable compromise.

Beyond the CLARITY Act’s impasses, Congress’ attention is scattered elsewhere. The Senate will attempt to discuss the CLARITY Act once Congress reconvenes in September, but Congressmembers will turn their focus to midterm elections. More politicized issues, such as the SAVE Act, a national voter registration bill, may occupy the agenda.

Read More: Politico, BeInCrypto, The New York Times [paywall]

Energy

Backlash to AI is fueling interest in Texas as a site for data center construction. Across Texas’ Permian Basin, the largest oil field in the US, companies are looking at building data centers due to the business-friendly environment, plentiful energy, and sufficient open land. While the trend is still in its infancy, there are undeniable synergies between data centers and the Permian Basin: very low population density, sufficient water, and energy resources that can help electrify technology infrastructure.

Data center construction will still face regulatory hurdles. Texas Governor Greg Abbot recently instructed state authorities to audit all data centers’ power and water usage before any new data centers can connect to Texas’ electricity grid. While this approach doesn’t go as far as New York’s moratorium on state construction, Texas’ government seemingly wants to slow construction and improve information gathering on how data centers will affect the state.

Depending on how data centers generate power, there is potential for political pushback on environmental grounds. Senator Chris Van Hollen has criticized data center plans in Texas that would rely on gas-fired power and not on renewable energy. Other environmental groups have also joined Van Hollen.

Read More: Wall Street Journal [paywall], The Hill, Axios

Defense

Lithuania is considering new defense procurement deals with South Korea. Vilnius will potentially buy South Korean air defense and counter-drone systems, with part of Lithuania’s rationale focusing on delivery timelines. Robertas Kaunas, Lithuania’s defense minister, met with Seoul’s ambassador to Lithuania to discuss potential procurements as well as defense industrial cooperation and options to produce equipment in Lithuania.

Seoul has rapidly expanded its defense industrial footprint in Europe in recent years. South Korean defense companies have signed agreements for business opportunities in Norway, Germany, and Poland. Warsaw in particular has pursued very close defense ties with Seoul. Since Poland began a major defense investment program in 2022, South Korea has been the largest beneficiary, making up 47% of Polish defense imports. Polish-South Korean defense industrial partnership has involved production of some materials in Poland. South Korea has also moved to institutionalize its ties with NATO over the last several years.

Read More: Defense Post, Notes From Poland, Atlantic Council

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The Sanctions Update, compiled by attorneys from Steptoe’s award-winning International Regulatory Compliance team and the Stepwise: Risk Outlook editorial team, publishes every Monday (subscribe here). Guided by the knowledge of Steptoe’s industry-leading International Trade and Regulatory Compliance team, the Sanctions Update compiles and contextualizes weekly developments in international regulatory enforcement and compliance, as well as offers insights on geopolitical context, business impacts, and forthcoming risks, and non-sanctions news updates.

For more detailed analysis on related issues, see Steptoe’s International Compliance Blog. For information on industry-specific monitoring or bespoke services, please contact the team here.

By Evan T. Abrams, Meredith Rathbone, Karl Hopkins, Guy Soussan, Alexandra Melia, Wendy Wysong, Ali Burney, Quentin Johnson, Elliot Letts, Algirdas Semeta, Melissa B. Mahle, Anni Coonan, Thomas Goldstein, Zayna Dembinski, Samuel Bloebaum, Elton Smole, Ian Cameron, Wilson Zhao, Zoey Hong, Kiki Dong, Isabella Rao, Andy Xu Sofia, Jake Fitzpatrick, Carter Spahn, Chris Dantes

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The Lede

China Broadens Countermeasures Against US Technology and Forced-Labor Restrictions

^{“MOFCOM” by 維基小霸王 is licensed under CC BY-SA 4.0.}

On August 5, China announced a coordinated package of countermeasures in response to recent US restrictions on Chinese technology companies and supply chains. The measures place seven US entities on countermeasures lists, subject controlled drones and related items destined for the US to stricter licensing review, suspend the use of US-based certification bodies for certain factory inspections and open a national-security investigation into imported office equipment using foreign software. Unlike China’s July 24 retaliation against European companies, which relied principally on entity-specific dual-use export restrictions, the latest response spans several agencies and legal authorities.

The package signals a broader change in how Beijing applies economic pressure. China is increasingly targeting the compliance infrastructure through which US restrictions operate. Yet the measures remain targeted and potentially reversible, allowing Beijing to impose costs without resorting to country- or sector-wide cutoffs.

Targeting the Infrastructure Behind US Restrictions

Under China’s Anti-Foreign Sanctions Law (AFSL), the Ministry of Commerce (MOFCOM) prohibited organizations and individuals within China from engaging in relevant transactions, cooperation, or other activities with seven US entities. One company was listed for allegedly supporting the Federal Communications Commission’s (FCC) decision to block the import of new foreign-produced humanoid and quadruped robots, which affects Chinese companies. Six companies were listed for allegedly supporting recent US sanctions related to forced labor in Xinjiang.

MOFCOM acted days after the Department of Homeland Security added 43 Chinese entities to the Uyghur Forced Labor Prevention Act Entity List (UFLPA). US importers must trace supply chains to rebut the law’s presumption that goods produced wholly or in part by listed entities are inadmissible to be sold in the US. The countermeasures signal Beijing’s willingness to retaliate against entities that help make foreign restrictions enforceable, even if the immediate effect varies with each entity’s exposure to China.

China also tightened, but did not prohibit, exports to the US of drones, key components, and related technology already included on China’s dual-use control list. Effective immediately, MOFCOM will review license applications strictly on a case-by-case basis and will not apply licensing-facilitation measures. Further, China’s certification regulator suspended Chinese bodies designated under the China Compulsory Certification system from commissioning US-based certification bodies to conduct post-certification factory follow-up inspections. And the most novel measure may be MOFCOM’s first-of-its-kind foreign-trade national-security investigation, looking into imported office equipment with printing or copying functions containing system software developed, tested, or maintained by foreign persons.

Calibrated Pressure, Broader Precedent

Together, the measures closely resemble the structure of the US actions that China is responding to. Washington has used an array of trade barriers and national-security determinations to narrow Chinese access to the US market. Beijing is increasingly responding through its expanded legal and regulatory systems, which have allowed it to better target countermeasures. The systems are not completely equivalent, but technical regulatory processes are becoming instruments of geopolitical competition.

MOFCOM characterized the response as restrained, said China wished to preserve the “hard-won stability” in bilateral economic relations, and warned that new US restrictions would bring further countermeasures. The package may be more important for the model it establishes than for the immediate disruption any one measure produces. If Beijing repeats this approach, private compliance providers and the technical systems that determine whether products and supply chains can enter a market will move closer to the front line of US-China economic competition.

The timing also places the measures in the run-up to Xi’s planned September 24 visit to Washington, where President Trump has said the leaders will discuss artificial intelligence and are expected to review the trade and investment framework established at their May summit in Beijing. Rather than abandoning the “strategic stability” endorsed at that meeting, Beijing appears to be defining its limits, with high-level engagement allowed to continue, but new US technology and forced-labor restrictions still drawing a response. The measures may therefore serve both as retaliation and as bargaining leverage, giving China several targeted tools that could be altered as negotiations develop.

US Developments

Senate Passes Lindsey O. Graham Sanctioning Russia and Iran Act of 2026

On August 7, the US Senate passed the Lindsey O. Graham Sanctioning Russia and Iran Act of 2026 by a bipartisan vote of 86-11. The bill, previously known as the Sanctioning Russia Act of 2026, now moves to the House of Representatives, which is in recess until September.

Originally introduced in April 2025, the legislation gained momentum after President Donald Trump signaled support last November, subject to him gaining new tariff authorities and retaining flexibility over the imposition of sanctions. We covered several of the most notable revisions included in the July 16, 2026 version of the bill in a prior update. The version passed by the Senate grants the President waiver authority in relation to the Russia-related sanctions, and authorizes the President to impose tariffs of up to 100 percent on the largest purchasers of Russian oil and natural gas, as well as countries facilitating Russian oil sanctions evasion. In addition to the inclusion of these key administration priorities, lawmakers amended the bill to extend the Iran Sanctions Act of 1996 through 2031 after President Trump’s July 30 call for Congress to add Iran-related tariffs to the legislation.

Although the bill passed the Senate with broad bipartisan support, some lawmakers have expressed concerns about its expanded tariff authorities. We previously reported that Senator Ron Wyden (D-OR) and Representative Richard Neal (D-MA) opposed the measure, arguing that it grants the president excessive unilateral tariff authority. A subsequent amendment offered by Senators Rand Paul (R-KY) and Wyden to remove the tariff provision failed by a vote of 64-32. The bill now heads to the House, where it faces uncertain prospects for passage, with concern driven by the new sanctions waiver authority and tariff authorities.

US Imposes Sanctions on Iran-linked Financial Networks, Exchange Houses, and Crypto Exchanges

On August 7, 2026, the Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) sanctioned seven entities and five individuals for allegedly “enabling Iran’s ‘rahbar’ banking system to move hundreds of millions of dollars.” Among the designations are two UAE-based exchange houses allegedly involved in supporting Shahr Bank’s role in helping the Iranian regime retrieve revenue from overseas oil sales. The Treasury Department said multiple shell and front companies “work with and enable other actors throughout Iran’s shadow banking apparatus,” including entities based in Hong Kong, Singapore, and Dubai.

In a separate action on the same day, OFAC sanctioned a multinational cryptocurrency exchange network and related entities for allegedly facilitating illicit financial activity and supporting Iran’s Islamic Revolutionary Guard Corps (“IRGC”). OFAC also designated a digital asset exchange pursuant to E.O. 13902 for operating in Iran’s financial sector.

These actions were taken pursuant to Executive Order (“E.O.”) 13902, which targets persons operating in Iran’s financial and petroleum sectors, and E.O. 13224, which targets persons who commit or support terrorism.

US Issues Cuba-Related Designations and FAQ

On August 6, the State Department designated five Cuba-related entities and six individuals allegedly related to Cuba’s armed forces and military-industrial sector. The action was taken pursuant to E.O. 14404, which authorizes the imposition of sanctions on individuals and entities connected to Cuba’s government. According to the State Department, the entities and individuals facilitated the Cuban government’s foreign military cooperation and the procurement of military equipment, including for Cuba’s Ministry of the Revolutionary Armed Forces and security services.

Alongside the designations, OFAC issued Frequently Asked Question (“FAQ”) 1264, which states that it does not intend to target non-US persons under E.O. 14404 when providing food; agricultural commodities; medicine; or medical devices and related parts or software updates to Cuba for humanitarian purposes. This policy applies even when transactions involve E.O. 14404-designated persons or entities in which such designated persons own, directly or indirectly, individually or in the aggregate, a 50 percent or greater interest.

OFAC Extends the Delay of PdVSA Bond-Related Authorizations

On August 3, OFAC issued Venezuela-related General License (“GL”) 5Y, which authorizes certain transactions related to, the provision of financing for, and other dealings in the Petróleos de Venezuela, S.A. 2020 8.5% Bond that are otherwise prohibited by EO 13835, as amended, on or after September 17, 2026. GL 5Y is the most recent extension in a long-running delay in the effective date of GL 5’s authorization. Unlike the recent 60-day extensions of GL 5, GL 5Y only extends the delay of the authorization by approximately six weeks, which suggests that OFAC may be prepared to allow the authorization to come into effect in the near future.

UK Developments

UK Announces Further Russia Sanctions Targeting Banks, Shadow Fleet and Military Supply Chains

The UK Government has announced a further package of sanctions under the Russia (Sanctions) (EU Exit) Regulations 2019, designating one individual, 12 entities and six vessels in a continued effort to disrupt Russia’s war economy. According to a UK Government press release, the measures target six Russian banks, six recently acquired shadow fleet tankers used to circumvent Western sanctions, and four Russian companies involved in importing tantalum and niobium, rare metals critical to Russia’s military-industrial base. The designations also seek to disrupt the financial institutions and procurement networks that enable Russia to sustain military production and generate revenue despite existing sanctions.

The latest package forms part of the UK’s continuing strategy to increase economic pressure on the Kremlin by targeting key sectors underpinning Russia’s war effort, including finance, maritime transport and military supply chains. It also reflects the UK’s continued focus on countering sanctions evasion, particularly through the shadow fleet and the acquisition of critical materials used in the manufacture of military equipment.

OFSI Expands Russian Oil Exempt Projects General Licence

OFSI has amended General Licence INT/2025/5635700 (Russian Oil Exempt Projects) to include the Kurdistan Export Pipeline as an exempt project until October 14, 2027 (the “GL”). The GL permits specified business operations involving subsidiaries of certain UK-designated Russian energy companies where they relate to strategically important international energy projects, including the making and receipt of payments and other activities necessary to support those projects, subject to the licence’s conditions. The Kurdistan Export Pipeline now joins a number of existing exempt projects covered by the GL, reflecting the UK’s continued approach of safeguarding critical international energy infrastructure while maintaining broader sanctions against Russia’s energy sector. Businesses intending to rely on the GL should review the amended version to ensure compliance with its updated permissions and conditions.

EU Developments

EU Council Updates Russia Asset Freeze Sanctions Listing

The EU Council recently designated five individuals under the Russia asset freeze regime for materially supporting Russia’s military and industrial complex. The newly listed individuals hold senior positions in Russian companies involved in the development, production, or supply of military technology and equipment, including ballistic missile systems, military communication systems, software for unmanned aerial vehicles, and space-related military technologies. Among those listed are Ramil Nailevich Badgutdinov, General Director of JSC Serpukhov Plant “Metallist”, whose company is involved in the manufacture of navigation systems for the Iskander-M ballistic missile, and Aleksandr Yurevich Dyukarev, General Director of JSC “Krasnoyarsk Machine-Building Plant”, which produces the RS-28 “Sarmat” ballistic missile.

The designations follow the EU Council’s call in its June Conclusions to step up pressure on Russia through further sanctions in response to Russia’s continued war of aggression against Ukraine and its intensified attacks against civilians and civilian infrastructure. As a result of their designation, the individuals are subject to asset freezes, a prohibition on making funds or economic resources available, and an EU travel ban.

Asia-Pacific Developments

Australian Sanctions Reportedly Fail to Curb Israeli Settler Funding

On August 7, 2026, Independent Australia reported that Israeli government support for the settler movement had increased despite three rounds of Australian sanctions since July 2024 targeting Hilltop Youth, associated individuals, outposts and other entities, including Finance Minister Bezalel Smotrich and National Security Minister Itamar Ben-Gvir. Several media outlets reported that Israel allocated about AUD 41 million for young settlers in West Bank outposts, including stipends and other assistance, and that Ben-Gvir’s ministry granted an estimated USD 1.3 million to Havat Gilad, a sanctioned settler organization. Although Hilltop Youth’s decentralized structure complicates enforcement, direct government funding for a named sanctioned entity raises questions about the effectiveness of existing measures.

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Global

El Niño is set to disrupt the global food supply, with weather patterns causing severe rains and droughts, aggravating world hunger. The UN World Food Programme estimates that 49 million more people could face acute hunger because of El Niño beginning in September. Central America and southern Africa are expected to be among the hardest-hit regions. El Niño is expected to peak between September and December 2026, but the effects will be felt throughout 2027 in many countries, owing to impacts on future harvests. The UN is scaling up anticipatory action plans to help high risk nations prepare.

The European Central Bank calculates that strong El Niño events typically raise global food commodity prices by 9%. Strong El Niño events primarily threaten staple grains and heat-sensitive soft commodities like rice, maize, cocoa, and coffee. Arabica coffee prices have risen about 30% since early June. Unusually warm waters can impact fishing. In Peru, anchovy fishing was suspended from May due to unusually warm waters in the Pacific.

Read More: United Nations, Financial Times [paywall], UN Food and Agriculture Organization

Europe

US intelligence agencies warn that Russia may escalate “hybrid” warfare against NATO allies by this autumn. The intelligence assessment suggests that Moscow’s risk tolerance of provoking a NATO ally will increase as Russia struggles to make battlefield gains and to defend domestic energy infrastructure from Ukrainian long-range strikes. Moscow’s options range from established tactics like cyberattacks to new methods like attributing a false flag attack to Ukraine, or conducting a small-scale land incursion by troops not directly attributed to the Russian state (i.e., “little green men”). Moscow’s goal would be to divide the alliance and deter further aid to Ukraine, but operate at a level below triggering NATO’s Article 5.

Russia’s “grey zone” activity has increased over the past few years. In September 2025, Russia probed NATO’s integrated air defense by sending 19 drones over Poland, three of which were armed with explosives. The tempo of further airspace breaches has remained consistent but normalized. Last week, a drone armed with Semtex, which is about as explosive as C-4, was found at Leipzig Halle airport, a logistics hub for Ukrainian cargo company Antonov. Russia has not officially been attributed, but German authorities believe that Ukrainian planes were the intended target.

Read More: CBS News, The Wall Street Journal [paywall], Stepwise Risk Outlook

Asia-Pacific

Seoul today announced a host of large-scale funds dedicated to expanding its domestic semiconductor industry, aligned with President Lee Jae Myung’s semiconductor megaproject initiative launched in June. The funds include 5 trillion won ($3.2 billion) for a semiconductor fund supporting chip materials, components, equipment and fabless companies; 5 trillion won in trade finance for suppliers; and 1 trillion won for a 10-year program supporting cooperation between large companies and suppliers across the semiconductor supply chain. Moreover, Seoul is looking to pass its Mega Special Zone Act, which would expedite permitting, environmental reviews and infrastructure construction.

The measures come as intensifying US-China tech competition forces countries to navigate an increasingly complex regulatory environment. South Korea’s booming semiconductor industry, which saw exports jump 119.5% year-on-year in June 2026 to $44.8 billion, accounting for 43.8% of total exports, remains reliant on China as both a major market and production base. While South Korean firms continue to invest in their Chinese operations, next-generation chip investments are increasingly being directed toward the US. Seoul’s push to strengthen domestic semiconductor capacity reflects a broader effort to build resilience against geopolitical and supply-chain disruptions while preserving its position across both the US and Chinese markets.

Read More: Reuters [paywall], East Asia Forum, Policy Center for the New South

Americas

A car bomb attack on Colombia’s Pan-American highway on Saturday was attributed to FARC dissident groups by the Colombian army. The attack on a highway toll booth in the southwest of the country, which injured two security personnel, came just a day after the August 7 inauguration of President Abelardo de la Espriella in Cali. De la Espriella has pledged to crack down on criminal armed groups in Colombia. In his inaugural speech, he warned armed groups to either submit to the government or face military confrontation. After the bombing, De la Espriella pledged a forceful response.

In a statement on August 7, the US State Department announced plans to provide Colombia with $1 billion in security assistance. In response to De la Espriella’s election, the Western War Front of the decentralized ELN guerilla group vowed to go on the offensive against the Colombian government, threatening to attack in cities and rural areas alike. The US support to Colombia will focus on strengthening the government’s security forces to combat transnational narco-terrorism networks, as well as unlocking economic opportunity through a Bilateral Prosperity Dialogue as a platform to create opportunities for US investors.

Read more: The Guardian, AP, Al Jazeera

Geoeconomics

Canada is considering major concessions to prevent a new 50% US tariff package from taking effect on August 19. Ottawa may remove tariffs on US automobiles, accept Washington’s interpretation of Canadian dairy quotas and urge provinces to restore US alcohol sales. In exchange, Washington would withdraw the new duties and reduce existing tariffs on Canadian steel and aluminum. The threatened package covers nearly $20 billion in annual imports, including wine, dairy, cement and furniture, and would apply even to USMCA-compliant products. Canadian and US negotiators are expected to meet daily through the deadline, although neither government has indicated that an agreement is close.

The negotiations create more complications for USMCA talks. Conceding ahead of trade agreements renewal would secure Canada immediate tariff relief at the cost of weakening Prime Minister Carney’s economic-resilience strategy, indicating that Washington can use unilateral tariff threats to obtain sector-specific gains outside the pact’s formal negotiations.

Read More: Reuters [paywall], Global News, CSIS

Disruptive Technology

Peak Energy, a California-based startup, is advancing toward the first operational sodium-ion battery manufacturing facility in the US by early 2027. Sodium-ion batteries currently make up about 1% of the global battery market, but some financial analysts believe they could comprise a third of the market by 2030. Sodium is abundant, making the production of sodium-ion batteries scalable; moreover, sodium-ion batteries are less prone to overheating or a “thermal runaway” leading to fire. This is an advantage for sodium-ion batteries when deployed on the grid, as they require fewer cooling systems, maintenance, or replacement—which comprise 90% of the operational cost of conventional lithium-ion batteries on the grid. In early July, Peak Energy announced plans to open its mega-facility by 2027 and produce up to four gigawatt-hours of storage capacity per year.

Read More: The Wall Street Journal [paywall], yahoo!news

Energy

Russian oil output ticked up in July after months of decline due to Ukrainian targeting of oil infrastructure. Production only moved up approximately 100,000 barrels per day (bpd) out of total production of around 9 million bpd, but the change is nonetheless welcome for Russia’s budget and economy. The changes are likely the result of strong export numbers as well as Moscow’s improving efforts to bring about recovery in refining output. However, it is unclear if this change will last. Ukraine has refocused its strike campaign against Russian shipping in the Black Sea, which could force a reduction in output if producers struggle to get crude oil out of the country. In 2025 Russian average oil output was 9.129 million bpd, according to OPEC.

More aggressive American sanctions are potentially also on the horizon for Russian energy exports. The US Senate recently passed the sanctions legislation of the late Senator Lindsay Graham, which would introduce new sanctions on Russia as well as provide the White House with authority to tariff top purchasers of Russian oil and gas. However, the bill will still need ot pass the House, which is in recess until September.

Read More: Reuters [paywall], Oilprice.com, CNN

Transnational Crime & Corruption

The UAE extradited the head of an alleged transnational organized crime group to Ireland. Daniel Kinahan is Ireland’s most wanted criminal since being charged with directing his criminal gang between 2015 and 2017, including during a violent gang war in Ireland. Kinahan was arrested by UAE authorities in April and lost a local appeal against being extradited.

Kinahan lived openly in the UAE for years before an increase in Emirati law enforcement cooperation. Another senior member of Kinahan’s gang was extradited from the UAE to Ireland earlier this year and was sentenced to 24 years in prison in June.

Read More: Financial Times [paywall], The Irish Times [paywall]

Defense

The Senate has confirmed a slate of new Pentagon appointees, including a new comptroller. Jules Hurst was confirmed as comptroller on Friday, after a year and a half during which the Pentagon had had no confirmed comptroller. Hurst had been performing the duties of the comptroller since August 2025 and only stepped back from the role when the White House chose to nominate him for the position permanently. Hurst’s confirmation hearing focused on three priorities: passing an audit by 2028, adapting the Pentagon’s budget to new trends in warfare while building the defense industrial base, and improving financial management systems.

Hurst will immediately face several challenges following his confirmation. He will have to craft the Pentagon’s FY28 budget request, manage spending and supplemental funding for the war with Iran, and simultaneously move over $150 billion in reconciliation spending to actual contracts.

The Senate also confirmed other Pentagon figures alongside Hurst. Erich Hernandez-Baquero was confirmed as the Air Force assistant secretary for space acquisition and integration, where he will manage all acquisitions for the Space Force and oversee a rapidly growing budget. Roger Mason also received confirmation to lead the National Reconnaissance Office (NRO).

Read More: Breaking Defense, The Hill

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^{Legal disclaimer: This Substack is for educational and informational purposes only and does not constitute the rendering of legal counseling or other professional services. Reading, subscribing to, or communicating through this Substack does not create an attorney-client relationship. Do not send confidential information through this platform. Consult qualified legal counsel regarding your specific circumstances.}

Welcome to the Stepwise Risk Outlook, which highlights and contextualizes over-the-horizon developments in key regions of the world and industries of the global market. Today’s featured interview is with Zayna Dembinski, Analyst.

Interview with Zayna Dembinski, Analyst

By Zayna Dembinski

^{"President Trump at the G20" by National Archives and Records Administration is marked with CC0 1.0.}

Zayna Dembinski is an analyst with Steptoe’s Global Strategic Engagement Team with a focus on US foreign policy and Asia-Pacific geopolitics. Zayna provides forward-looking analysis on domestic and geopolitical developments for international clients, providing assessments and key takeaways to guide strategic decisions and stakeholder engagement plans. She speaks and researches in Urdu.

Zayna sat down with Stepwise Editor-in-Chief Anni Coonan to discuss her take on ongoing developments in Asia-Pacific.

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Global

Saudi Arabia, Türkiye and Pakistan signed a defense pact today, seeking to deepen regional security co-operation. In Mecca, the three Sunni Muslim-majority countries agreed to strengthen collective deterrence against rivals; the Mecca Joint Defence Agreement includes a mutual defense clause, with an attack against one considered an attack against them all. Saudi Arabia and Pakistan already have a mutual defense pact, signed last September. The addition of Türkiye, a NATO member, brings in military capabilities and a strong defense industrial sector.

The regional balance of power is shifting, as a consequence of the weakening of the Arab heartland, Israel’s military dominance and Iran’s power projection across the Gulf. Each country faces instability along its borders: Saudi Arabia from Iran and Yemeni Houthis, Pakistan from India and Afghanistan, and Türkiye from Kurdish separatist movements. All three of these countries have invested political equities in de-escalating the Iran war, each critical of Iran, the US and Israel for destabilizing the region. The trilateral framework demonstrates the intention of powerful regional players to assert more influence over the region’s future through a new security architecture.

Read More: Financial Times [paywall], Reuters [paywall], Steptoe Risk Outlook

Europe

German federal police discovered drones laden with improvised explosives at Leipzig Halle airport on Wednesday. The airport is used as a logistics hub for Ukraine’s Antonov cargo planes, some of which had transported munitions earlier in the day and were parked at the airport when the drones were discovered. German Interior Minister Alexander Dobrindt stated that the incident represents a “new threat scenario” and is being investigated as a planned hybrid attack, but he fell short of attributing a specific state actor. Some German officials suspect Russian intelligence services could be connected due to an attempted July 2024 hybrid attack, in which parcels laden with incendiary devices ignited at the Leipzig airport before taking off on a plane. Coinciding with the Leipzig incident, a plane collided with a drone in Hanover but landed safely, and that drone has not been found.

Read More: Politico, Deutsche Welle, Financial Times [paywall]

Middle East

On-the-ground tensions between the Houthis and Saudi-backed forces in Yemen are reigniting alongside maritime escalation. A Houthi attack on military camps in central Yemen on Thursday reportedly killed about 45 government troops, the latest in several recent escalatory steps beyond the renewal of the Houthi blockade on Saudi ships. Last month, Saudi Arabia struck a Houthi airport following alleged arms shipments from Iran, and regional reports indicated that at least 50 Houthi fighters were killed in clashes over Red Sea littoral territory.

Saudi Arabia is reportedly preparing for a potential sea and ground offensive even as it pursues diplomacy. Reports of Saudi troop movements in eastern Yemen earlier this month could indicate planning for a larger-scale intervention against the Houthis, although Riyadh is also reportedly seeking indirect talks to contain the conflict (seen as a major quagmire for Riyadh until the 2022 ceasefire) and reopen the Bab al-Mandeb Strait.

Read More: BBC, Foundation for Defense of Democracies, Al Jazeera, The Guardian, Bloomberg [paywall]

Asia-Pacific

Japan’s 2026 defense white paper presents a strong defense industry as both a strategic necessity and an economic asset, reflecting Tokyo’s growing effort to link industrial policy, technological innovation and national security. The report argues investment in defense is critical to strengthening Japan’s industrial base, supporting startups, and enhancing long-term economic competitiveness. Compared with previous editions, the report places greater emphasis on emerging forms of warfare, highlighting drones, AI-enabled systems, and other dual-use technologies as increasingly central to Japan’s future defense posture.

Beijing sharply criticized the report, accusing Tokyo of promoting a “China threat” narrative and exaggerating regional security risks. While the white paper maintains Japan’s longstanding assessment that China’s external posture and military activities constitute its greatest strategic challenge, its publication comes amid heightened bilateral tensions following Prime Minister Takaichi’s November remarks that Japan could intervene if China attacked Taiwan. Beijing’s response builds on its rhetoric that Japan’s military modernization is not a defensive adjustment but part of a broader shift away from its postwar security posture and reviving its imperial past. Notably, Seoul also protested the white paper’s reiterated claim that Takeshima, known in South Korea as Dokdo, is Japanese territory. The two maintain competing claims to the islets.

Read More: Japan Ministry of Defense, Japan Ministry of Defense, Japan Times, Reuters [paywall], Xinhua, Korea JoongAng Daily, Stepwise Risk Outlook

Americas

The US State Department increased the reward on Wednesday for information leading to the capture of Juan Carlos González (”Pelón”) from $5 million to $25 million. Authorities identified González, the stepson of slain cartel leader Nemesio Rubén Oseguera Cervantes (”El Mencho”), as the new leader of Mexico’s Jalisco New Generation Cartel (CJNG). The State Department also announced more than $100 million in total rewards targeting CJNG leaders. At the same time, the Justice Department unsealed indictments against several senior cartel figures for alleged drug trafficking, firearms offenses, and money laundering. U.S. officials say CJNG remains one of Mexico’s most powerful criminal organizations, with extensive involvement in fentanyl, cocaine, methamphetamine, and heroin trafficking despite recent leadership losses.

The Trump administration has increased pressure on the Mexican government to take stronger action against cartels. US authorities have cited the flow of fentanyl and other drugs into the US as a major national security concern. Washington’s response has paired rewards, sanctions, visa restrictions, and criminal indictments with intelligence-sharing and law enforcement cooperation. While both the US and Mexican governments share an interest in combating organized crime, the active US approach has fueled tensions with Mexico over questions of sovereignty and cross-border security responsibilities in the process of weakening transnational criminal organizations that operate across both nations.

Read More: CBS, NBC, USA Today

Geoeconomics

The Democratic Republic of the Congo has tightened a long-standing ban on copper and cobalt concentrate exports, pressuring miners to process more material domestically. The June 29 order repeals the 2023 framework and its exemptions, takes effect immediately and permits one-year waivers only in undefined “strategic” circumstances. It does not cover all copper and cobalt exports: Congo shipped 696,725 tonnes of copper cathode in Q1 2026, versus 53,926 tonnes of concentrate containing 18,863 tonnes of copper. The immediate supply shock should therefore be concentrated among mines still dependent on waivers, although benchmark copper rose as much as 1.8% after the order became public.

Kinshasa is using its critical mineral mining as industrial policy. Kamoa-Kakula, owned by Ivanhoe Mines, Zijin Mining and the Congolese state, has historically exported some concentrate under waivers, although Ivanhoe says its output is also processed at two domestic smelters. The government wants to retain jobs, tax revenue and value added while strengthening its leverage with Chinese operators and Western governments competing for critical minerals and the Lobito Corridor. Yet similar restrictions since 2013 repeatedly required exemptions because domestic smelting and electricity capacity lagged mine output.

Read More: Reuters [paywall], Ivanhoe Mines, IEA, Chatham House

Disruptive Technology

A Stanford research team announced that it used AI to create an unfound genome of viruses capable of infecting bacteria, not humans. This is a step forward for using AI to design not only proteins but also DNA sequences that encode proteins. The AI models, Evo 1 and Evo 2, still require some inputs from human researchers on related genome clusters to emulate and build upon; otherwise, it may hallucinate a DNA sequence that does not work. For the Stanford study, researchers provided AI with DNA sequences of viruses that infect E. coli, which are single bacterial cells, and sequences from other viruses in the Microviridae group; then AI predicted new genome clusters with related functions to essentially “create” a new virus.

The upside and downside risks of AI-augmented biological research are enormous. On the downside, scientists seeking to weaponize this technology could create viruses that infect complex cells, enabling the creation of biological weapons that have not been experienced before. AI is also becoming more powerful. Frontier AI developers all disclosed incidents in July where models escaped their testing environment and hacked third parties; and theoretically, AI could become so powerful that it goes “rogue” and interprets new workarounds on safeguards. Politically, “gain of function” research is increasingly unpopular. On the upside, research into unfound viruses could significantly accelerate the speed of medical breakthroughs and vaccines to mutated diseases.

Read More: Axios, Ars Technica, The Wall Street Journal [paywall]

Energy

Europe’s gas storage levels are at historic lows as the continent prepares to head into the winter. The last time Europe’s gas levels were this low, slightly under 58% full, at this point in the year was in 2011. Last year they were at approximately 70% capacity by early August. This potentially leaves Europe open to energy security issues in the winter that are reminiscent of the winter gas crisis that followed Russia’s invasion of Ukraine. In response to that crisis, the EU created a target to fill storage capacity to 80% by December.

While Europe uses less gas than it did in 2022, more of that gas is LNG, which opens Europe to price spikes. The closure of the Strait of Hormuz has taken the 20% of global LNG supplied by Qatar off the market, which has raised global prices and complicated Europe’s search for LNG heading into winter. Markets have been in backwardation, where near-term gas costs more than winter gas, which in turn disincentivizes building storage levels for sale in winter. Prices are already high, reaching 60 euros per megawatt-hour in June. Price estimates vary significantly for winter, but depending on how shipping in the Strait of Hormuz develops, European gas prices could hit very high levels. However, analysts say there is relatively little danger of Europe’s gas supplies running completely dry.

Issues with natural gas can potentially compound with other challenges to European energy infrastructure and security. Extreme weather this summer has forced nuclear power plants offline at the same time it has spiked electricity demand due to heat waves.

Read More: Reuters [paywall], Oilprice.com, New York Times [paywall]

Transnational Crime and Corruption

US Treasury Secretary Scott Bessent announced a crackdown on illicit financial activities by transnational criminals. At a conference of Arizona community bankers on Thursday, Bessent warned that smaller financial institutions bordering Mexico were especially exposed to abuse by cartels and criminal organizations. The announcement built on initiatives from the Financial Crimes Enforcement Network (FinCEN) and the Office of the Comptroller of the Currency (OCC) to identify and shut down financial activities linked to illegal migration, shell companies and payroll tax evasion.

The Treasury efforts support the implementation of the executive order “Restoring Integrity to America’s Financial System” from May. The order sought to strengthen know your customer rules and risk ratings for borrowers without work authorization. New due diligence rule proposals are due from financial regulators in mid-August. A customer identification proposal is due in mid-November.

Read More: Department of the Treasury, Arizona Republic [paywall], CBS News

Defense

European governments are becoming increasingly skeptical of American ITAR regulations on arms. European capitals increasingly see the US’ International Traffic in Arms Regulations (ITAR), which restricts how foreign governments can sell or transfer weapons that contain certain components from the US, as a significant factor in arms procurement decisions. European governments are likewise concerned that ITAR could create complications if the US government has political objections to a foreign government’s defense and foreign policy decisions. Some industry players in Europe are already using “ITAR-free” as a way to promote their products and better compete with American defense firms. However, producing items that are free of US components can be easier said than done, and there are also some products and systems that are largely unavailable outside of the US.

There is a larger trend of European governments trying to boost their own technological sovereignty and defense industrial capacity. European firms are looking to diversify away from reliance on American firms in sensitive areas that involve national security data, intelligence, and law enforcement. Earlier this year, France and Germany announced plans to jointly develop a “European sovereign digital backbone” that could replace American vendors in sensitive areas of government. Moreover, both the French and German intelligence agencies opted for European companies over American competitors.

Read More: Breaking Defense, Politico, Stepwise Risk Outlook

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Legal disclaimer: This Substack is for educational and informational purposes only and does not constitute the rendering of legal counseling or other professional services. Reading, subscribing to, or communicating through this Substack does not create an attorney-client relationship. Do not send confidential information through this platform. Consult qualified legal counsel regarding your specific circumstances.

Welcome to the Stepwise Risk Outlook, which highlights and contextualizes over-the-horizon developments in key regions of the world and industries of the global market. Today’s featured deep dive by Elton Smole examines the impact of Columbia's new President.

Colombia’s New President Fuels Market Optimism but Faces Barriers to Policy Agenda

By Elton Smole

^{“Abelardo de la Espriella Candidato presidencial Colombia" by Abelardo de la Espriella is licensed under CC0 1.0 Universal.}

On August 7, Colombia’s President-elect Abelardo de la Espriella will be inaugurated with a mandate to tackle crime and reverse the policies of his leftist predecessor. His long-shot campaign, in which he challenged Colombia’s political establishment as an outsider, benefited from a wave of popular support fueled by fears of rising violence from armed groups. He now seeks to reverse the course set by outgoing President Gustavo Petro, Colombia’s first-ever left-wing president, through business-friendly tax adjustments and a “Great Deregulation Revolution.” De la Espriella’s priorities will include fiscal reform, national and regional security, geopolitical alignment with the Trump administration, expanding Colombia’s hydrocarbon sector and seeking commercial exchange with Venezuela.

De la Espriella’s electoral victory makes Colombia the latest country to join the broader right-wing shift across Latin America. De la Espriella received US President Donald Trump’s endorsement and takes inspiration from other regional right-wing leaders including El Salvador’s Nayib Bukele and Argentina’s Javier Milei. While markets have reacted positively to his win, major legislative barriers remain for his policy agenda. Risks for investors revolve around Colombia’s delicate fiscal status, energy insecurity, rising rebel violence and transnational criminal activity.

In today’s full analysis:

• What is on De la Espriella’s Agenda?

• Roadblocks for the New Administration

• Risks on the Road Ahead

Read the Full Report Here

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Global

North Korean deployment of a missile unit to western Russia adds more fighting capabilities as the Kremlin faces a domestic shortfall in military recruiting for the war in Ukraine. According to Ukrainian military intelligence, the unit has 90 North Korean personnel and is expected to be based in Russia’s Voronezh region. North Koreans had previously been deployed to Russia’s Kursk region, numbering around 14,000-15,000, with around 9,500 remaining in non-combat support positions. Ukraine estimates that North Korea had delivered 4 million artillery shells from mid-2023, excluding mortar rounds, and 148 KN-23 and KN-24 ballistic missiles by the start of 2025.

Russian military recruitment was down by 20% in the first quarter of 2026 compared to 2025. The Kremlin is reportedly moving from positive incentives of $80,000 bonuses to more coercive pressure tactics to compel volunteerism. Nearly 500,000 Russian soldiers have died in the war, and reports of ill treatment at the front have permeated society. The Kremlin is reportedly considering a mass mobilization to shore up manpower needs. However, the move would be unpopular and risk unleashing overt opposition to the growing costs of the war. With volunteer numbers dwindling, Putin may be forced to increase mobilization at home if sizable numbers of foreign forces cannot be recruited.

Read More: Reuters [paywall], CNN, Atlantic Council

Europe

The European Commission will disburse a further €1.4 billion to Ukraine from the interest of immobilized euro-denominated Russian bonds, mostly to pay off borrowed assistance. In Summer 2024, the G7 agreed to loan Ukraine a collective $50 billion and pay off these funds through the interest of Russian immobilized assets, which continue to sit and accrue interest but cannot be transferred out of depositories like Euroclear due to sanctions on the Russian Central Bank. The G7 solution does not touch the principal owed to Russia, which amounts to about $300 billion in mostly (matured) bonds, but only the interest, which corresponds to about €8 billion since sanctions were imposed. About 95% of the €1.4 billion tranche will pay off part of the EU’s contribution coordinated in the G7 scheme, but another 5% (€70 million) can be used for Ukraine’s direct military spending. The transfer occurs after Russia’s early Wednesday strikes against civilian areas, which killed 17 people and wounded 51.

Read More: Politico, Euronews, Reuters [paywall]

Middle East

Iran and Oman appear poised to ink a deal that would give Iran significant control over the Strait of Hormuz. The prospective deal would grant Iran control over inbound traffic into the Strait and Oman control over the outbound route, and permit Iran to collect “voluntary” fees for the operation of the waterway (a concession analysts read as tolls). The deal is reportedly on the brink of signing, with details such as coordinates of traffic routes already worked out. Gulf countries have reportedly signed off, and the US has received a copy.

The deal is deeply imperfect from the US point of view but may be the only off-ramp from the current round of conflict. The deal – which concedes an Iranian right to control of Strait of Hormuz traffic – is a far cry from the US’ initial objectives or even the text of the June MOU, which characterized the Strait as international waters and granted Iranian control for only 60 days. In order to implement the deal, the US would need to end the naval blockade on Iran.

Opening the Strait could be a first step to broader negotiations or simply a pause in fighting. The US’ military options are dwindling, and Iran has set the pace of escalation in recent weeks, making a decisive military victory less likely than protracted mid-level conflict. But both sides need a settlement they can present as a win, a middle ground they have consistently struggled to identify.

Read More: Wall Street Journal [paywall], Reuters [paywall], Axios, Al Hurra

Asia-Pacific

Pakistan has introduced new restrictions on international media from reporting in most of the country amid protests in Pakistan-administered Kashmir. Under the new rules, foreign journalists, including Pakistani nationals working for foreign outlets, must obtain government permission before traveling beyond Pakistan’s three largest cities. Authorities may also revoke journalists’ accreditation for acts deemed contrary to Pakistan’s “ideology, sovereignty, security, or public order.” Since restrictions were imposed, access to Al Jazeera’s website has been blocked, two Pakistani journalists have been detained, and journalists working for foreign media organizations have been ordered to leave Pakistan-administered Kashmir.

The measures deepen longstanding concerns over Pakistan’s suppression of press freedom. Several international organizations have condemned the restrictions, with some describing them as more severe than those imposed during General Zia ul-Haq’s military rule. Combined with the indefinite internet and mobile communications blackout in Pakistan-administered Kashmir, the measures significantly limit any form of independent reporting from the region, giving Islamabad greater control over the narrative surrounding the unrest and risking further crackdowns on protesters in the territory.

Read More: New York Times [paywall], The Guardian, Committee to Protect Journalists, Al Jazeera

Americas

The US has recently expanded CIA operations in Cuba, reportedly sending intelligence assets to the island. The CIA has also established a secret task force and tasked case officers with recruiting intelligence assets on the island. The task force’s mandate is to create fissures within Cuba’s political establishment and to create favorable conditions for practical leaders to gain influence compared to hardliners. The US seeks to replicate the style of leadership under Delcy Rodriguez in Venezuela, who has largely accommodated US interests, despite maintaining Venezuela’s top-down political structure. However, political power in Cuba is highly consolidated around the Castro family and the military conglomerate GAESA, while the highly centralized Communist Party of Cuba has proven resilient to internal fractures.

The Trump administration recently revised the National Intelligence Priorities Framework (NIPF), designating Cuba as a Priority 1 country. This puts Cuba in the same tier as China, Russia, and Iran. The US ramped up intelligence-gathering flights near the island earlier this year, and the State Department released a report on Cuba in July, describing Cuban communism as a threat to US domestic security. The CIA previously closed its Havana stations during Trump’s first term amid reports of the mystery “Havana Syndrome.” CIA Director John Ratcliffe visited the island in May, warning the regime to make reforms. The increased intelligence activity points to potential US military action to initiate regime change. According to recent statements from sources with knowledge of the Trump administration, the administration prefers a diplomatic route but may take action in Cuba before the end of the ongoing war in Iran.

Read More: Politico, New York Times [paywall]

Africa

Libya’s UN mission announced that the country’s rival political factions have agreed on a new mechanism to appoint the head of the High National Elections Commission, marking a modest step toward reviving the long-stalled electoral process. National elections have repeatedly been postponed amid power struggles between the internationally recognized government in Tripoli and eastern authorities aligned with Khalifa Haftar. The agreement follows renewed diplomatic efforts by the US and Türkiye to broker a power-sharing arrangement between Libya’s eastern and western factions. Washington announced plans to reopen its embassy in Tripoli, signaling a renewed commitment to deepening ties, while Türkiye’s intelligence chief recently held meetings with senior Libyan officials to advance negotiations over a unified governing framework.

Despite these developments, Libya remains far from achieving lasting political stability. The US-backed power-sharing framework has already drawn criticism from political and military factions over its reported inclusion of the Haftar family in Libya’s future political structure. Washington reportedly supports appointing Saddam Haftar as head of a newly created presidential council, fueling concerns that the framework could entrench existing power structures rather than facilitate a genuine political transition. While the agreement on the elections commission represents incremental progress, national elections remain highly unlikely without sustained commitment from rival factions to implement a comprehensive political settlement.

Read More: The New Arab, Al-Monitor, Middle East Eye, Stepwise Risk Outlook

Geoeconomics

China’s July surveys show that its economy continues to falter. The official manufacturing PMI fell from 50.3 to 49.2, its lowest reading in five months and below the 50 threshold separating expansion from contraction. Production slipped to 49.9, while new orders dropped from 51.2 to 48.5 and export orders fell to 49.6. The official non-manufacturing PMI declined from 50.2 to 49.0, its weakest level since December 2022; services registered 49.3 and construction 47.0. Private surveys were less severe but showed the same direction. The RatingDog manufacturing PMI eased from 51.7 to 50.9, while its services index plunged from 54.1 to 50.4, the slowest expansion since September 2024. Its composite index consequently fell from 53.6 to 50.8. Although the official and private surveys cover different groups of companies, both indicate that economic momentum weakened sharply in July.

The underlying problem remains insufficient domestic demand. High-tech and equipment manufacturing continued expanding, supported by AI investment and exports, while consumer-goods producers, construction and real estate contracted. Official service-sector new orders fell to 45.2, construction orders dropped to 40.1, and service employment remained weak at 46.2. Private data similarly showed domestic services demand slowing even as export business continued growing. This imbalance helps explain why second-quarter GDP growth decelerated from 5.0 to 4.3 percent, below Beijing’s 4.5–5 percent annual target. The high savings culture in China, amplified by the nation’s lack of a robust social safety net and limited places to invest savings, continues to drag down personal consumption.

Read More: Reuters [paywall], New York Times [paywall], MERICS

Disruptive Technology

The White House’s voluntary AI review framework, which remains confidential, will only apply to closed frontier models. This means that open-weight models whose parameters can be downloaded and tinkered with, such as China’s leading models, will be exempt from review for now. Under the voluntary review framework defined in a June executive order, the White House and “trusted partners” in industry will have up to 30 days to review new “state-of-the-art” capabilities before public release to improve the cyber safety of the models, in a sort of government-facilitated version of Project Glasswing.

The benchmarks that the government uses to determine a “covered frontier model” also remain private, so some near-peer developers may hesitate on whether they should participate in the voluntary review framework. Leading developers like Anthropic want to participate in the framework to avoid disruptive government reactions to protect AI safety, such as export controls on foreign national use of Mythos 5 and Fable 5 in June after a suspected jailbreak was discovered.

Read More: Axios, The White House, The New York Times [paywall]

Energy

A startup in Japan is looking to partner with Tokyo to drive its nuclear fusion project forward. Starlight Engine hopes to harness growing government interest in fusion energy to receive public funding for its prototype fusion power plant, citing energy security concerns as one of the primary justifications for pursuing fusion energy. Pursuing nuclear fusion requires intensive capital investment, and over the last several years Japan has lagged behind other leading states like the US and China in terms of funds dedicated to fusion energy. However, the Japanese government recently designated fusion as a strategic field for promoting investment.

Germany is also taking steps to develop its fusion industry. Berlin recently announced the locations of three “hubs” for fusion research, which will receive public support, seek to draw in private investment and create regional ecosystems for fusion research. Berlin has set a goal of building the first fusion power plant in the world.

There is a larger global trend towards nuclear energy. The energy shocks generated by the US war with Iran and Russia’s invasion of Ukraine have underlined energy security’s importance. Now, many countries are looking towards nuclear energy as a potential path to diversify their energy supplies and reduce reliance on chokepoints. Simultaneously, providers of nuclear technology are increasingly interested in nuclear energy partnerships.

Read More: Financial Times [paywall], Golem.de [in German], Stepwise Risk Outlook

Defense

France is cooperating with car manufacturers to scale its drone production capacity. Since the beginning of this year, at least six partnerships between defense and automotive companies have been announced as Paris pushes to leverage existing industrial capacity for building military drones. France’s armed forces ministry has been actively involved in promoting these tie-ups, showing the emphasis Paris is placing on expanding French drone production capacity in light of the military lessons from Ukraine and from the US war with Iran. The agreements, which indicate potential for industrial capacity of tens of thousands of drones per year, also have potential for developing France’s defense exports business.

Building drone capacity is a larger trend across Europe. The EU has looked to develop its defense industrial capacity in recent years with initiatives like the European Defence Industry Programme as well as subsidies for manufacturing key components for drones. In July, the EU and Ukraine also signed a deal to fast-track production of unmanned systems, with the intention of combining Ukrainian technical expertise and experience with the EU’s overall industrial scale. The agreement envisions joint ventures between selected Ukrainian and European defense companies for speeding up development and manufacturing.

Read More: Breaking Defense, Reuters [paywall], Defense Post

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^{Legal disclaimer: This Substack is for educational and informational purposes only and does not constitute the rendering of legal counseling or other professional services. Reading, subscribing to, or communicating through this Substack does not create an attorney-client relationship. Do not send confidential information through this platform. Consult qualified legal counsel regarding your specific circumstances.}

Welcome to the Stepwise Risk Outlook, which highlights and contextualizes over-the-horizon developments in key regions of the world and industries of the global market. Today’s featured deep dive by Thomas Goldstein examines Ukraine's "kinetic" sanctions against Russian energy infrastructure.

Ukraine’s “Kinetic” Sanctions Against Russian Energy Infrastructure Add New Pressure to Global Energy Markets

By Thomas Goldstein

^{“Oil Tanker in the Bosphorus" by MrHicks46 is licensed under CC BY-SA 2.0.}

Ukraine is leveraging its newfound indigenous long-range strike capability to escalate pressure on Russian refineries, export terminals and shadow fleet vessels, aiming to level the fiscal playing field in a war of attrition. Some of the results of the campaign are striking, including the reduction of Russian refining to about 57% of total capacity and inducing Russian export bans on refined products like diesel to contain shortages. However, the campaign has not yet reduced Russian export volumes of crude, so Ukraine has escalated strikes on Russia’s broader industrial economy and shadow fleet vessels in the Black Sea. The kinetic sanctions campaign creates downside risks of divergence between Ukraine and its Western backers, which want to constrain Russian fuel revenues as opposed to supply. Kinetic sanctions in the Black Sea have also created commercial spillovers, intermittently halting the export of Kazakh crude, one of Europe’s main diversification sources, and spiking maritime insurance for civilian sectors. On the upside, Ukrainian strikes on shadow fleet vessels may compel Russia to utilize more vessels covered by Western insurance and the G7 oil price cap.

In today’s full analysis:

• Understanding the Scale of Ukraine’s “Kinetic Sanctions” Campaign

• Kinetic Sanctions Are Pressuring Both Russia and the West

• Risks of Kinetic Sanctions

Read the Full Report Here

Or listen to the full report here:

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Europe

EU home affairs ministers commended Spain’s response to the weekend’s Ceuta incident, which saw the rapid influx of 72,000 people and the deaths of 86 in the rush into Spain’s closest African enclave. The emergency council session emphasized that the free-movement Schengen zone was not at risk and 70,000 of the migrants have since returned to Morocco. Magnus Brunner, the EU Commissioner for Migration, said the influx has been “instrumentalized” by smugglers and human traffickers, but did not comment on a presumed role of Morocco, which cooperates with Spain on migration but is wary of Madrid’s growing relationship with Algeria, a regional rival.

The rhetoric from the home affairs council could cool interstate tensions on migration policy. At the onset of the Ceuta incident, Italy suspended Schengen privileges to Spain, and Italian Prime Minister Giorgia Meloni led a letter signed by 22 other heads of government that implicitly condemned Spain’s relatively liberal migration policies as a possible spark. Now, EU home affairs ministers want to utilize the crisis to strengthen EU coordination on migration policy, such as through better early-warning systems, a strengthened Frontex, faster work on so-called return hubs outside the EU, and other mechanisms to filter out invalid asylum requests. Spain may have strengthened an image of reliability.

Read More: Politico, BBC [paywall], Financial Times [paywall]

Middle East

Türkiye’s government unveiled a draft law meant to finalize the years-long peace process with the Kurdistan Workers Party (PKK). The PKK, a separatist Kurdish armed group, was in active conflict with the Turkish state for decades, but reached a preliminary peace agreement in 2024 (in part due to fading US and Syrian support for Kurdish armed groups following the end of the Syrian civil war). PKK militia members symbolically burned their weapons last year, but a final peace had been stalled over legal details, and some PKK elements remained active.

The bill, which appears likely to pass, aims to progress peace by providing limited amnesty in exchange for verified disarmament. Western media reports indicate that the law will protect “many” former militants from prosecution and suspend prison sentences for many convicted of membership, in exchange for a disarmament and surrender process monitored by Türkiye’s intelligence agency. However, it may not satisfy earlier PKK demands for broad amnesty from prosecution. It also does not appear to address the hot-button issue of the legal status of Abdullah Öcalan, the PKK founder imprisoned by Türkiye since 1999 and who issued initial calls for the group to disband.

Read More: Reuters [paywall], Deutsche Welle, International Crisis Group

Asia-Pacific

China unveiled a series of retaliatory measures today against the US in response to recent US actions targeting Chinese firms. In response to recent US measures, the Ministry of Commerce (MOFCOM) placed seven US entities on its countermeasures list, prohibiting Chinese firms and individuals from conducting transactions or cooperating with them, alleging that six assisted Washington’s UFLPA designations. MOFCOM also tightened export controls on drones and other dual-use items destined for the US and launched a national security investigation into imported printers and copiers equipped with foreign software—the first inquiry initiated under China’s new national security provisions.

The exchange marks another escalation in US-China economic competition and increases pressure on an already fragile trade truce ahead of the September Trump-Xi meeting. The retaliation suggests Beijing is broadening its use of economic and regulatory tools to impose costs on US firms. Meanwhile, Washington has signaled it will continue to expand its own restrictions, with the FCC reportedly preparing to ban imports of new Chinese optical transceivers over security concerns. This escalatory pattern mirrors the weeks leading up to last year’s Busan summit, suggesting the cycle of reciprocal economic and regulatory measures is likely to continue even as diplomatic engagement resumes.

Read More: MOFCOM, MOFCOM, MOFCOM, MOFCOM, Nikkei Asia [paywall], South China Morning Post [paywall], Reuters [paywall]

Americas

The US State Department has revoked the visa of Brazil’s ambassador to Washington. The move was in retaliation after Brazil denied visas to two US officials seeking to visit Brazil ahead of the October elections, and in response to the stalled approval of Trump’s nominee for Washington’s ambassador to Brasilia. A US official confirmed that Brazil’s ambassador, Maria Luiza Ribeiro Viotti, would be able to remain in the US, and her visa would be reinstated if Brazil approves the nomination of Daniel Perez as US ambassador to Brazil.

The visa dispute is the latest in a year of diplomatic tensions between Washington and Brasilia. The Trump administration did not consult Brazil before selecting Perez as ambassador, breaking with a long-held diplomatic norm. In March, Brazilian officials revoked the visa of Darren Beattie, the US policy adviser on Brazil, who they believe planned to visit Jair Bolsonaro under house arrest. Bolsonaro’s son Flavio is challenging current President Luiz Inacio Lula da Silva and has lobbied the Trump administration for support. The recent designation of two Brazilian criminal organizations, the Primeiro Comando da Capital and the Comando Vermelho, came shortly after Flavio Bolsonaro’s visit to the White House. However, recent US tariffs on Brazil have had the effect of increasing Lula’s support in the polls.

Read More: AP, New York Times [paywall], CBS

Africa

Benin inaugurated a second chamber of its parliament to promote greater oversight following years of democratic backsliding. The newly established Senate will oversee proposed changes to the constitution, electoral rules, and laws governing political parties. Benin was among the more politically stable states in West Africa until the election of President Patrice Talon in 2016, who later excluded opposition parties in 2019 and deployed security forces to suppress protests. The election of Romuald Wadagni in April 2026 was comparatively more competitive, although opposition parties continue to express concerns that they are being marginalized.

The struggle to establish democratic institutions follows a trend of rising authoritarianism across West Africa, which risks undermining regional cooperation on security and economic issues. The military coups in the central Sahelian states led to sanctions and political isolation from the Economic Community of West African States. Similarly, continued political instability in Benin could complicate coordination within ECOWAS on shared security priorities, particularly counterterrorism efforts against jihadist groups. Diminished political trust among member states could also hinder economic cooperation, slowing progress on regional trade and investment.

Read More: Radio France Internationale, Atlantic Council, Institute for Security Studies Africa

Geoeconomics

Russia is expanding its shadow shipping system to preserve LNG exports after European sanctions, but the trade is becoming costlier and more concentrated. Moscow added at least eight second-hand LNG carriers in six months, expanding its fleet to 25 before the EU bans Russian LNG in 2027. The EU has accounted for 49 percent of Russian LNG exports since December 2022, compared with 23 percent for China and 18 percent for Japan, while its June purchases remained 14 percent above their year-earlier level. Russia is copying its oil fleet’s use of shell companies, false flags and ship-to-ship transfers, but $300 million LNG carriers require specialized containment, ice capability and compatible terminals. Russian LNG volumes rose 7 percent in June, yet total fossil-fuel volumes increased 7 percent while revenues fell 1 percent to €734 million per day. Exports are holding, but profitability is not.

Russia is also losing customers while Ukrainian strikes damage its refineries. Damascus reportedly told Washington it would sharply reduce Russian oil purchases during talks over US sanctions relief. Deliveries to Syria rose 75 percent this year to about 60,000 barrels per day, but Damascus lacks an immediate replacement. Ukrainian strikes have cut Russian gasoline production by roughly one-quarter; more than two-thirds of Russian regions report gasoline or diesel restrictions, and seaborne oil-product loadings fell 21 percent in June to a record low. Moscow extended its jet-fuel export ban and may restrict diesel, which generated $2.9 billion, 14 percent of Russia’s oil-export earnings, in May. Government payments to keep refiners serving domestic customers jumped from $220 million in the first quarter to more than $2.5 billion in May alone. Each workaround preserves supply by sacrificing revenue or increasing dependence on a few buyers.

Read More: Financial Times [paywall], Reuters [paywall], Centre for Research on Energy and Clean Air, Royal United Services Institute

Disruptive Technology

Texas Governor Greg Abbot announces an effective moratorium on new data centers, ordering the Public Utility Commission of Texas and the ERCOT, the grid operator, to conduct audits on requests for new grid interconnections. Projects will be required to disclose their tax break information, power use and generation, water use and cooling, facility ownership, and impact on local communities. The order follows efforts to create a voluntary disclosure system, which did not take off among data center operators. The order only applies to data centers seeking grid interconnection, so projects utilizing on-site power generation (i.e., through renewables) should be unaffected.

Texas is one of the friendliest states for data centers, but they remain a political flashpoint amid affordability impacts on the electric grid and water use. Requests for interconnection to ERCOT have rapidly risen from 233 GW at the beginning of 2026 to 474 GW; about 90% of the 1,800 projects in the request queue are for data center interconnections. Texas already hosts the second-most data centers in the US behind Virginia, with 335 data centers operating and a further 248 in advanced planning phases. Nonetheless, a red state like Texas following blue states like Maine and New York reflects a more bipartisan and potentially populist backlash against disruptive data center development.

Read More: The Texas Tribune, TechCrunch, Ars Technica

Energy

The Trump administration is planning to revise Obama-era regulations on the Arctic. The US Department of the Interior intends to revise a federal regulation, the 2016 Arctic Exploratory Drilling Rule, governing exploratory oil and gas drilling on Alaska’s Outer Continental Shelf. The proposal, which would be enacted through the Marine Minerals Administration, would “reduce unnecessary regulatory burdens, improve clarity and operational efficiency, and better reflect technological advancements and implementation experience.” Specifically, the proposal would affect oil spill prevention and containment rules.

The proposed change is part of a larger push by the Trump administration to “unleash American energy dominance” and open the Arctic to energy production. On his first day in office, President Trump issued an executive order titled “Unleashing Alaska’s Extraordinary Resource Potential.” The administration has also repeatedly tried to attract companies to bid for exploration rights in the Arctic, with varying degrees of success. An auction in March for rights in the National Petroleum Reserve-Alaska attracted record interest. However, a June auction for oil and gas leases in Alaska’s Arctic National Wildlife Refuge received offers from only two bidders on five tracts out of 58. Reluctance from oil companies to move forward in some parts of the Arctic is due at least in part to the difficulties associated with drilling in conditions that far north.