Markets and Geopolitical Risks

Published on 22nd October 2014

If  one  were  to  believe  the  markets  these  days,  nothing  could  possibly  be  better.   Volatility in financial markets is at an all - time low, stock markets across most parts of the world, particularly those of  the West are at record highs, gold prices which have often rallied during uncertain times are down massively, and geopolitically the United States and its allies appear to have played the right  cards  when  it  comes  to  the  containment  of  current  and  future  challengers. 

For a very long time, most of us actually thought that the cold war was over. After the collapse of the former Soviet Union, the western advisors flocked to Russia in an attempt to restructure its failed economy and bring it firmly within the western prism. By the early 2000s, only about 20 cents for every dollar of Russian oil exports actually ever made it to the state coffers. Most of the rest, if it was not lost to the corrupt few, actually went to western oil and gas companies.   Russia under Yeltsin was weak and its military was in shambles. Russia  by  itself  was  in  no  position  to  ever  threaten  the  West anymore, but that did not end the policy of containment.  

Indeed NATO continued  to  expand  throughout  the  90s  and  early  2000s, inching  ever closer to Russian  borders.   Under the banner of democracy, NATO expanded eastwards even though Russia was no longer a threat. The chess game did not end just there.  The United States and its allies took the opportunity to isolate Iran and corner Iraq following the Gulf War in order to control the sources of oil coming from the Middle East and strategically checkmate China.  

While the Chinese attempted to gain geopolitical traction by building a seaport in Pakistan’s Baluchistan, the continued  radicalization  of Pakistani  society  meant  that  this position  was not a safe oil route anymore. Gradually, the  US has been able  to convince  the  Japanese to rearm themselves in order to create balance in East Asia. In order for a super power to prosper, it must not only have economic and military might and influence, but its borders must be safe.  

Don’t miss out on the geopolitical chess games 

The US is separated from the rest of the old world by thousands of miles of ocean on both sides, and its borders with Canada and Mexico are secure geopolitically. The US is a safe haven and as long  as  it  is  perceived  to  remain  so,  allies  will naturally gravitate  towards it. In contrast, the Chinese are  surrounded by nervous  neighbours  who  do  not  trust its intentions. China is surrounded by potentially hostile neighbours  from  Japan  to emerging  competitor India while  the Vietnamese, Taiwanese  and, to a certain degree, the South Koreans do not always see eye to eye with China. 

China also faces a ticking time bomb, for its population is quickly ageing. Its manufacturing power has more often than not been export oriented and has always operated under razor thin margins. China faces significant challenges when it comes to reorienting its economy. The Communist party has in fact spent tremendous resources in internal security and internal  propaganda in order to maintain cohesion. A healthy dose of nationalism has kept things calm.
Russia on its part still has an oil and natural gas dependent economy and, beyond arms exports, is not known to manufacture  much  else. Nationalism and the rise of xenophobia also prevent it from rejuvenating its ageing population. The most recent conflict in Ukraine has certainly turned its buffer state hostile to it, especially western Ukraine. While there is no doubt that the West had a role to play in fermenting trouble in Kiev, going as far as even supporting a Government which had  Neo Nazi elements, Russia  gambled  heavily and the current  stand  off and civil war (with active Russian troops participating  covertly) can be interpreted as a desperate attempt by Vladimir Putin to keep the cost of war high enough in order to eventually negotiate a more federal Ukraine  with a weak Kiev. The latter would then  be  unable  to move towards NATO while still being allowed to move closer to the European Union economically.  

No wonder the US Dollar has become king again. When one looks at markets, one should not miss out on the geopolitical chess games. The Russians are already beginning to talk about alternative global currencies. The last countries which did this got bombed, but Russia is no Iraq or Libya. It seems like  financial markets drugged up with central bank support  these  days  have completely ignored geopolitical risks.  

In the Middle East, the war in Iraq was a disaster for the United States. Despite more than a trillion dollars spent in the war and on reconstruction, Iraq has turned out to be a failed state. The US has learnt the hard way that when you play the democracy card in the Middle East  and replace a dictator, you  get  something  much  worse in  return. The West supported by Turkey wanted to isolate a resurgent Iran by destabilizing Syria. Millions were channelled and augmented of course by the Saudis and Qataris in propping up a rebel fighting force there, but this has ended up creating a monster in the form of ISIS.Today the US finds itself working alongside the Iranians in fighting the monster it created. The same story occurred in Libya, for the current plethora  of rulers currently controlling the country can teach their former dictator a trick or two when it comes to being murderous and being extreme. 
The US can win conventional wars, but its leadership has realised the limits of its power. It cannot control the democratic process and get the results it wants. It is safer and better to play  off against  sovereign states  such  as  Russia and  China, for their responses  are  likely  to  be  more predictable. Keep  those  within  the  US fold happy and integrated,  let the rest fight out their thousand year old battles, but ensure that future threats are contained today.  

The  winning  streak  of  the  US  hegemony  does  not  mean  that  the  world  has  become  a  less dangerous  place,  for  in  many  ways,  we  are  a  few  mistakes  away  from  something  which  can potentially become quite dangerous.  The United States leadership appears to be unable to evolve out  of  cold  war  thinking,  for  if  this  was  not  the  case,  NATO  expansion  towards  Russia  with  the inevitable  reaction  of  the  latter  would  not  have  happened.  The US leadership of various administrations views its actions throughout the world, as aggressive as they may appear to the rest of us as benign. 

The US is shaping up a new world order, and destiny has given it the almost divine right to rule over this new order.  The rest of the world should not fear US motives as they too can potentially benefit from this order.  The Germans and the Japanese, former enemies of the United States are often  given  as  examples  of  how  the  US  treats  those  who  accept  to  come  into  the  fold.  Are the Germans and the Japanese not well off today, they argue? 

What is dangerous with the US today  is  perhaps the lack of debate on US foreign policy. The media appears to have become  a propaganda  conduit  where  the  US  is  more  often  than  not projected as being good and right while the other side is projected as being bad. The middle path, the path towards greater light and wisdom, is never followed.
During the late 70s and 80s, there was more debate within the leadership and the media on US foreign policy. There used to be the  “detentists” who argued for better ties with the USSR, fighting it  out  with  the  predecessors  to  the  neoconservatives  who  believed  in  confrontation,  both  formal and  informal. The “ detentists”  were  in  a  minority, but  at least  there  was  a  debate  at  that  time.

Today once the US leadership gets into its good versus evil rhetoric, it finds it increasingly difficult to capitulate. The military industrial complex has become too powerful, and this often forces the US  to  overplay  its  hands  on  the  global stage  leading  to  unpredictable  reactions.  What has happened in the Middle East is one such example.
On the Russian side, the populace has become so nationalistic lately  that  even  Vladimir  Putin  cannot  find  the  space  to  back down.   Despite the reassurances being thrown around by world leaders that the situation is under control, the setup of a rapid reaction force under NATO, when everyone knows that covert Russian  troops  are  already  present  in  Eastern  Ukraine,  can degenerate  very  quickly  if  Putin  gambles  that  the  west  is  too weak.  A  rapid  reaction  force,  which  could  then  enter  Ukraine from the west to maintain NATO credibility, could quickly face a nuclear armed  enemy. 

A muscular US foreign policy in fact can be quite dangerous for the world.  The US Republicans are  already  calling  for  more  covert  action  in  Ukraine,  so  the  scenario  of  quick  degeneration cannot be dismissed. At the same time, the Russians have doubled their efforts in improving ties with their South Eastern neighbours with the recent Sino- Russian gas pipeline deal symbolising Russia’s shift from west to east.  The Chinese too know that if the Russians are checkmated, they will  come  under  even  greater  pressure  from  the  US  pacific  fleet  and  other  Asian  allies  and  be contained before they ever dream of challenging the hegemony. 
The power dynamics of the African continent 

The US is also ensuring  that  it  contains  Chinese  advances  in  Sub  Saharan  Africa  and  wields considerable  influence  in  the  entire  region,  but  has  tolerated  Chinese  inroads  into  the  continent as long as this does not change the power dynamics of the continent too much.   Western Africa remains under the influence of the US and the Europeans, and the dynamics of East Africa still favour the US.   While Africa has all the ingredients to make it in the 21st century, it also has all it takes to fail as well. 
While regional blocks are likely to be reinforced in the coming years, we are unlikely to  see further integration  (beyond  French  speaking  Western  Africa)  in  terms  of  monetary  and  regulatory convergence. There are certainly plans to do so with a vision to even have one central bank one day,  but  anyone  who  understands  Africa  knows  that  the  required  politics  to  get  the  necessary fiscal  convergence  will  be  very  tough.  That  being  said,  greater  inter - continental  trade  is increasingly becoming a reality, and capital flows from both west and east towards the continent is likely to continue to grow in the coming decades. 

By Sameer Sharma 

The author is  a  chartered  alternative investment analyst and  a certified financial risk manager. This article reflects solely the personal views of the author. 

Courtesy: Conjoncture  Bilingual Journal  of PluriConseil.

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