Security in Kosovo and Serbia. Tensions flared up between Kosovo and Serbia today, threatening to reignite the frozen conflict. Kosovo police forces conducted a raid that resulted in the arrests of 23 individuals and clashes with protesters. The NATO-led Kosovo Force said the raids were in response to investigations of smuggling, bribery and misuse of office and did not target any particular region or nationality. Serbian authorities, however, said the operations targeted Serbs and Bosnians in northern Kosovo. In response, Serbia’s Ministry of Internal Affairs put its special units on full alert and President Aleksandar Vucic ordered the military to be put on full combat alert. There have since been reports of Serbian troop movements headed toward Kosovo. Vucic also launched a diplomatic offensive, asking Kosovo’s Western backers to restrain Pristina. Just yesterday, Vucic told parliament that Serbia needs to recognize it has lost control over Kosovo and identified Serbia’s two options forward as normalizing relations through an agreement or maintaining a frozen conflict. As of publication, no major fighting has broken out, but we will be closely watching as the situation unfolds given the significance of any potential conflict in the Balkans.

The new European Parliament. It’s difficult to draw useful conclusions from the European Parliament elections, but we forecast a continued rise for European anti-establishment parties this year, so we may as well try. The far-right euroskeptic tidal wave that was widely predicted failed to materialize – nationalist parties gained a few seats overall, but only because of the success of the League party in Italy, and they fell well short of projections that had them winning a third of all seats. At the same time, the mainstream conservative and social democrat parties did stumble, mostly to the advantage of green and liberal parties. Overall, pro-European Union parties will continue to run the show, but the landscape is more fractured.

Another fight over Italy’s budget. Now that European Parliament elections are out of the way, the European Commission is reportedly revving up for another round in the budget dispute with Rome. Two anonymous eurozone officials told Reuters on Monday that the commission will probably recommend starting a disciplinary procedure against the Italian government during its regular budget review on June 5. If EU finance ministers agreed, the commission could hit Rome with a 3.5 billion-euro ($3.9 billion) fine, the equivalent of 0.2 percent of Italy’s gross domestic product. The European Commission has never fined a member state over its budget. The de facto leader in Rome, League party chief Matteo Salvini, has countered by declaring his intention to reform “old and obsolete” EU spending rules. This was a hopeless endeavor even before euroskeptic parties failed to meet lofty expectations in the European Parliament elections; Salvini will find no sympathy in the traditionally more hawkish north, and especially not in Berlin.

Meeting prep in the Middle East. Impromptu multilateral meetings tend to create a lot of diplomatic movement ahead of their conventions, and the emergency meeting of Gulf and Arab states, slated for May 30 to discuss growing tensions in the region, is no different. Iran’s foreign minister said Tehran wants balanced relations with its neighbors, so it proposed signing a non-aggression pact with its Arab neighbors – likely a bid to prevent them from supporting or joining U.S. military operations against it. Iraq’s foreign minister offered to mediate between Iran and the U.S., while Washington granted Iraq a third 90-day sanctions waiver for purchasing Iranian natural gas. The commander of the U.S. 5th Fleet, which is based in Bahrain, met with Bahraini King Hamad bin Isa Al Khalifa to discuss regional developments. Shortly thereafter, Prime Minister Khalifa bin Salman Al Khalifa called on Arabs and Muslims in the region to back Saudi Arabia, which called for the emergency meeting in the first place. Stay tuned for more.

Expectation versus reality in Russia. Once again, there are signs of a disconnect between official numbers and Russia’s economic reality. On May 23, the Minister of Economic Development and Trade said annual inflation has slowed below 5.1 percent and may fall below 4 percent by the end of the year. But researchers from ROMIR Holding, one of Russia’s largest market research firms, found that spending has declined after three years of growth. In a ROMIR survey, only 17 percent of respondents said they have not had to reduce their spending (that’s compared to 18 percent in 2017 and 24 percent in 2018). Meanwhile, 24 percent have cut back on food spending (compared to 17 percent last year) and 29 percent have decreased their travel spending (up from 12 percent in 2018).

The Islamic State in South Asia. The Islamic State has claimed responsibility for an improvised explosive device attack against a police vehicle in Dhaka, Bangladesh – the second of its kind since April. In India, IS reportedly threatened to attack two railway stations in Pathankot, Punjab state, near the border with Pakistan. Four days earlier, Indian authorities in Kerala were put on high alert for terrorists sailing to the Lakshadweep Islands. Although little has come from either incident, we can’t help but note that they come just a couple of weeks after IS announced the formation of its Indian chapter. The expansion of IS to other regions, especially as it loses ground in the Middle East, is a trend to observe closely – especially in a country like India, home to historic and often violent rivalries between Hindus and Muslims.

Honorable Mentions

  • Japan announced foreign investment restrictions on 15 IT-related sectors. Starting in August, the government will review investments that have a more than 10 percent stake in companies in Japan to assess if the purchase poses a threat to national security.
  • Canada’s House of Commons received a “ways and means motion” from Foreign Affairs Minister Chrystia Freeland, kicking off the ratification process for the U.S.-Mexico-Canada Agreement.
  • The Israeli Air Force destroyed an anti-aircraft missile launcher in Quneitra, Syria, near the Golan Heights border. Meanwhile, the Israeli military also clashed with 15 Lebanese nationals protesting Israeli security cameras along the shared border.
  • Turkey’s Central Bank increased reserve requirements for foreign currency deposits by 200 base points. The move is expected to reduce the liquidity of foreign currency on the market by $4.2 billion.
  • Afghan politicians and a Taliban delegation will attend a ceremony celebrating Russia-Afghanistan ties today. They will also be given the opportunity to discuss Afghanistan’s peace process.
  • Poland requested a quote from American partners for the purchase of 32 F-35A aircraft along with a logistics and training package. Defense Minister Mariusz Blaszczak explained that Poland plans to replace Soviet-era jets.
  • China and Ethiopia signed a framework agreement for the joint construction of a communications satellite. This will be the two countries’ second jointly built satellite.
  • Kenya’s National Counter Terrorism Centre is complementing the national strategy for countering violent extremism with county-level forums aimed at ending radicalization and youth recruitment. Forums exist in 27 of the 47 counties so far, with the remainder to be completed by the end of June.
  • Chinese industrial profits fell by 3.7 percent in April, the largest drop since late 2015.
  • China paid a record $22 billion in corporate subsidies in 2018.
  • A private Chinese bank in Inner Mongolia will be taken into receivership for one year, according to the People’s Bank of China – the first Chinese commercial bank to be taken over by regulators in the past 20 years. The bank had ties to tycoon Xiao Jianhua, who was abducted by Chinese operatives from Hong Kong in 2017.
  • Ahead of a Monday meeting with Japanese Prime Minister Shinzo Abe, U.S. President Donald Trump said a trade deal with Japan can wait until after the country’s July elections.
  • Credit to eurozone households grew by 3.4 percent in April, its fastest expansion in a decade, defying fears of a credit crunch. Separately, the European Commission’s eurozone economic sentiment indicator rose markedly in May, beating expectations of stagnation.