The current situation in the Red Sea with continuing attacks on the cargo ships and tankers coupled with a real possibility of complete blockade of the Suez Canal cause major concerns for the global trade and economic perspectives of the European Union. Although the Red Sea transportation corridors are not the world’s largest supply lines^[1], they are essential for the EU economic stability.

The following is a brief analytical overview of the effects and likely concerns of the Red Sea crisis for global trade and EU economy. The commentary covers economic concerns for the EU, global concerns, strengthening of regional powers and the formation of new geopolitical alliances, and lastly possibility of forming new alliances and establishing alternative routes.

Shortages of consumer goods

In addition to rising prices, the crisis in the Red Sea could lead to a shortage of several goods, negatively affecting consumers and businesses. The key factors influencing this situation include:

• Dependency on key routes^[4]: The EU heavily relies on supplies through the Suez Canal and the Red Sea for raw materials and components necessary for various industrial sectors. A blockade of the canal or disruptions in navigation in the region could lead to serious supply chain disruptions.
• Limited alternatives: Not all goods can be easily rerouted through alternative routes. Transport through other channels, such as the Panama Canal or the Northern Sea Route, is more expensive and less efficient.
• Duration of the crisis: The longer the crisis lasts, the higher the likelihood of shortages^[5]. Producers may deplete their stocks of raw materials and components, leading to production disruptions and delays in the delivery of finished products.

Rising inflation and slowing economic growth

The increase in prices for goods and services, as well as possible shortages, can lead to further inflation growth in the EU^[6], which is already at a high level.

This can reduce consumers’ purchasing power and investment activity, negatively affecting the EU’s economic growth. The increase in prices^[7] for goods and services, along with possible shortages, can lead to further inflation growth in the EU, which is already at a high level. This can have several negative consequences for the economy:

• Decrease in purchasing power: Higher prices reduce consumers’ purchasing power, leading to a decrease in demand for goods and services. This negatively affects business sales and can lead to job cuts.
• Increase in interest rates: To combat inflation, central banks may increase interest rates, making loans more expensive for businesses and households. This can lead to a decrease in investments and a slowdown in economic growth.
• Uncertainty for businesses: The uncertainty caused by the crisis can lead businesses to postpone investments and hiring, further impacting economic growth.

• Impact on trade volumes: The increase in transportation costs can make trading certain goods unprofitable, which would inevitably cause a decrease in their volumes. Supply disruptions can also disrupt production chains, limiting the production and export of finished products.
• Concerns for developing countries: Many developing countries depend on trade through the Red Sea for the export and import of goods. The crisis could lead to a reduction in their revenues and, as a result – worsen their economic situation.
• Possible geopolitical consequences: A decrease in global trade can lead to increased competition between countries for resources and markets, which in turn would exacerbate the already existing geopolitical tensions.

Threat to the Dominance of the Dollar and Euro in International Trade

The crisis in the Red Sea could accelerate the search for alternative trade routes. This will push the traders to seek alternative settlement systems, which are not linked to the dollar and euro. This could lead to a weakening of these currencies’ positions^[10] on the global stage. In addition to direct economic damage, the crisis in the Red Sea could have several long-term geopolitical consequences, including:

• Geographical position:
  • Saudi Arabia controls^[12] the Bab-el-Mandeb Strait, the southern entrance to the Red Sea.
  • Egypt controls^[13] Suez Canal.
  • Iran has access to the Persian Gulf and can influence^[14] routes through the Strait of Hormuz.
• Economic Opportunities
  • Saudi Arabia is the largest^[15] oil exporter with many countries relying on fuel supplies for their economies as well as armed forces.
  • Egypt and Iran also possess^[16] significant economic resources.
• Military Potential:
  • All three countries have developed armed forces^[17] with regional outreach and considerable capabilities.
  • All three countries have seasoned military personnel, which participated in various conflicts in the region over the past three decades.

Saudi Arabia, Egypt and particularly Iran are likely to use the geopolitical opportunity and leverage their advantages, which can include the following aspects:

• Control over trade routes:
  • Countries can increase revenues from transit fees and exert political influence over dependent countries^[18].
  • Attract investments in port and transport infrastructure are possible.
• Form new regional alliances:
  • The crisis may stimulate the creation of new groups and blocs excluding the US and EU.
  • New alliances and blocks will further strengthen regional economic and political independence^[19] and distance the region from its traditional western patronage.

Weakening of US and EU Influence

As was noted, the crisis in the Red Sea and the changing geopolitical landscape are likely to have far reaching consequences. One such consequence is the eventual weaking of the US and EU influence in the region and globally.

The following are the main precipitators of the expected shifts:

• Decrease in trade volumes: The reorientation of trade flows can reduce trade volumes with the region.
• Loss of control over key routes: Weakening control over maritime routes can reduce influence on regional security.
• Rise in anti-Western sentiment: The strengthening of regional powers can lead to anti-Western sentiments.

Central Asia and Caspian Sea Alliance

TITR is a multimodal corridor with a length of 6,180 kilometers. The total Trans-Kaspian International Corridor throughput capacity is estimated to be at six million tons, including 80,000 TEU.

• Participants: Kazakhstan, Turkmenistan, Azerbaijan, Russia.
• Route: The Trans-Caspian International Transport Route (TITR), connecting Central Asia with Europe via the Caspian Sea and the railways of Azerbaijan, Georgia, and Turkey.
• Motivation: To develop the transit potential of Central Asian countries, reduce dependence on the Suez Canal, and increase economic ties with Europe.
• Challenges: Underdeveloped infrastructure, political instability in some regions.

East Africa and Red Sea Alliance

• Participants: Ethiopia, Djibouti, Kenya, Saudi Arabia.
• Route: Ports of Djibouti and Mombasa, Ethiopia-Djibouti railway.
• Motivation: To develop the port infrastructure of East Africa, attract more maritime traffic to the Red Sea bypassing the Suez Canal, increase transit revenue.
• Challenges: Limited port capacity, piracy in some areas.

South Asia-Persian Gulf Alliance

The South Asia-Persian Gulf alliance represents a potential alliance of the countries forming two separate corridors – Persian Gulf segment (Iran and Oman) and South Asia – Russia segment (Azerbaijan, Russia). The second segment is also known as the International North – South Corridor (see further in the text).

• Participants: India, Iran, Oman
• Composite Route: Chabahar Port (Iran) and Duqm Port (Oman), International North-South Transport Corridor (INSTC) through Iran and Central Asia
• Motivation: To develop alternative routes for trade between India and Europe, reduce dependence on the Suez Canal, and improve economic ties with Central Asia
• Challenges: Sanctions against Iran, political instability in the region

International North-South Transport Corridor (INSTC) via Russia

The International North-South Transport Corridor (INSTC) is a 7,200-kilometer multimodal transport route connecting India, Iran, Azerbaijan, Russia, Central Asia, and eventually Europe.

Route:

The INSTC utilizes a combination of sea, rail, and road routes:

• Maritime Route: Indian ports like Mumbai and Mundra to Iranian ports like Chabahar and Bandar Abbas.
• Western Branch: Railways through Azerbaijan and Georgia to Black Sea ports and Europe.
• Eastern Branch: Railways through Turkmenistan, Kazakhstan, and Russia to Baltic Sea ports and Europe.

Motivation:

• Develop alternative trade routes between India and Europe, reducing dependence on Suez Canal.
• Improve economic ties between India, Russia, and Central Asian countries.
• Decrease transport costs and time compared to traditional routes.

Challenges:

• Sanctions against Iran: Limits investment and infrastructure development in Iran, a crucial segment of the route.
• Political instability in the region: Security concerns and bureaucratic hurdles can disrupt operations.
• Underdeveloped infrastructure: Requires significant investment in ports, railways, and roads across various countries.
• Limited cargo volume: Currently handles relatively low volumes compared to established routes.

Current Status:

• Some sections of the INSTC are operational, like the maritime route and parts of the western branch.
• Completion of the entire corridor faces challenges mentioned above.
• Recent developments indicate increased interest from Russia and India in developing the INSTC due to geopolitical tensions and potential disruptions to other routes.

Additional Information:

• The INSTC is part of a larger initiative called the North-South Transport Corridor, which also includes plans for a separate route via the Caspian Sea.