Quick Bite – A few geopolitical thoughts on the war in Ukraine
Many of us would like to think that “what happens in Donbas stays in Donbas”, but we all know that’s not true. The illegal and provocative Russian invasion of Ukraine will have reverberations across the globe for years if not decades to come. Putting aside the brutal loss of life and property destruction that has unfolded over the past 17 months, the spike in energy and food prices has had immense implications for inflation and interest rates. However, the geopolitical consequences are also worth reflecting upon.
Russia becomes a vassal state to China
China is fast becoming the key customer and beneficiary of Russia’s vast resources. Russia has been significantly weakened by its failed invasion and is now very much the junior partner in its “without limits partnership” with China. China benefits from access to cheap adjacent and secure energy supplies plus a dominant position in Russia for its manufacturing industry. This allows China to achieve land-based primacy in Eurasia, the Soviet Union having previously been the dominant power in much of the region. China’s approach will likely see the slow “Sinification” of Russia’s south eastern regions. The US will continue to aim to be the dominant sea power in the Pacific Ocean, and will seek the co-operation and assistance of India, Japan and Australia in its endeavours.
Source: NationsOnline Maps
A reinvigorated and enlarged NATO
With an eye on the US’s shambolic withdrawal from Afghanistan, Putin’s war objective was to take advantage of a weakened and disunited West to reshape the security structure of Europe in Russia’s favour. But his strategy to reverse the Soviet Union’s imperial collapse has backfired badly, resulting in a reinvigorated and enlarged NATO with the additions of Finland and Sweden. The “peace dividend” of reduced defence spending over the last 2 decades is over and the global trend towards rearmament has begun. American, French, German, Japanese, British and Australian defence equipment manufacturers, in particular, stand to benefit given the inferiority of many Russian defence systems as has been demonstrated in the war. Turkey’s drone technology and market has been a standout beneficiary.
Acceleration towards strategy-driven economies
This trend is being reinforced as strategic imperatives drive economic policy, with “near-shoring” and “friend-shoring” accelerating as Western countries seek to reduce their reliance on Chinese manufacturers. Beneficiaries are countries like Mexico, Canada, Vietnam, Bangladesh, India and Indonesia. High-end manufacturing where a degree of automation is feasible is coming back to the US in a Biden-led industrial policy, leading to massive capital investment in tech manufacturing. Automation service providers and related component manufacturers have already begun to experience strong demand, with artificial intelligence (AI) likely to play a role.
China benefits nonetheless because of its strong positioning as a manufacturer of the consumer products and infrastructure build-out that the “Global South” needs, to develop its economies, as well as its dominance in the manufacture of the inputs needed for the energy transition (e.g. electric vehicles, wind turbines, solar panels, plus a range of strategic metals and minerals).
A faster energy transition
Energy security has been a driver of the energy transition in China and this has become a more immediate imperative in Europe, which needed to rapidly reduce its over-dependence on Russian oil and gas. The US enjoys energy security as it benefits from its position of being a major producer of oil and gas. That said, participation in a global renewables boom will be a focus for all countries, not least Australia. Germany will be damaged by the loss of its industry’s access to cheap sources of energy, representing a significant challenge to the German economic model.
The rebuilding of Ukraine
Depending on the eventual outcome of the conflict, the rebuilding of Ukraine could see a Marshall Plan-style reconstruction funded by the West. It will certainly be in the West’s interest to ensure that Ukraine comes out of this tragic war with hopes of eventually recovering some stability, including the return of many of the 6 million refugees that fled the country. Re-building Ukraine could provide strong demand for all sorts of materials and commodities for years to come, providing commodity suppliers with new markets. Proximate Europe would be the major beneficiary of a re-building program, with the emphasis on neighbours, such as Poland.
Cold War 2.0
Despite its claims, China is not neutral and will not abandon Russia because it is not in its geopolitical or geoeconomic interests to do so. The vacuum created by a weak Russia in Eurasia will be filled by China. Somewhat ironically, this probably weakens the case for China to seek military domination over Taiwan – after all, it will have its hands full expanding into the vacuum left by Russia. The major tail risk is that the competition between the two great global superpowers, the US and China, intensifies and creates even more of a split in the global economy into two separate and antagonistic trading zones.
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