Autumn 2022

What’s in store for geopolitics

The economic consequences of geopolitical conflict are more serious now than during the cold war, writes Meghnad Desai, chairman of OMFIF’s advisory council.

In recent years, geopolitical concerns have taken a backseat amid a global pandemic. The cold war, which lasted 46 years, ended in 1991 with the collapse of the Soviet Union. The long-standing rivalry between the US/West and USSR/communist bloc ended in a triumph for the West.

But there came in its place Islamist extremism which spanned the 20 years from 9/11 to the departure of the US from Afghanistan in 2021. That conflict has cooled down but not ended. There has also been awareness that China has been building up formidable fighting power in air, on land and at sea. Its ambition is clear: it wants to be the top power. China poses a long-term threat.

The upheaval in geopolitics has been caused by Russia’s invasion of Ukraine in February. This expedition by Russia was not unexpected, but its timing was. Russia had annexed Crimea in 2014. It had also expressed its desire to acquire the Russian-speaking areas of eastern Ukraine, Donbas in particular.

But no one expected the sudden action or predicted Russia would begin the invasion in the west and target Kyiv. And no one thought it would be resisted so strongly by Ukraine that now Russia’s military situation is in a critical state. In September, President Vladimir Putin hinted that he has called for a large mobilisation of troops and threatened to use nuclear weapons.

That threat is a sign of weakness rather than strength. But the global situation has been affected much more severely. It all began with a meeting between Putin and Chinese President Xi Jinping during the Winter Olympics in China. Until recently, China was a junior partner to the Soviet Union. But within three decades, the roles have been reversed. China is the big brother now and has offered support to Russia. Thus far there has not been military assistance, but China has helped Russia bear the weight of financial sanctions.

Along with the China-Russia axis, India as well as South Africa and Brazil are supporting Russia actively or at least not joining in the financial sanctions regime. India normally purchases its military weapons from Russia and has been paying for gas in the rupee to avoid dollar sanctions.

This is a bit like the cold war camps, but the difference is that India at least is playing footsie with both sides. But there is tension, and the division could solidify. While Indian Prime Minister Narendra Modi did say publicly to Putin that this was no longer a time of war at the September Shanghai Cooperation Organisation meeting in Uzbekistan, a day later, Putin issued his nuclear threat. Who was acting for public consumption and who was sincere is anyone’s guess.

The era of the 2020s is too new to be able to say when and how it will end. But it will be dramatic.

The geopolitical situation is building up to a challenge to US hegemony. China has expressed its resentment and so has Russia. Brazil, South Africa, Iran and North Korea are in this as well. The situation has been exacerbated by the likelihood of a conflict between China and Taiwan. China does not acknowledge Taiwan as an independent nation. Nancy Pelosi, speaker of the US House of Representatives, visited Taiwan in August and provoked Chinese anger, but so far there has been no military invasion. This situation remains tense.

The economic consequences of geopolitics are more serious this time than during much of the cold war. A major problem arises from Russia being a primary supply of energy sources to countries in the European Union, especially Germany. The war has put severe pressure on energy prices for EU economies reminiscent of the quadrupling of oil prices by OPEC in 1973 which set off two decades of stagflation. At present, it is not clear how and how soon the EU could find alternative energy supplies without resorting to sources which may exacerbate the climate change challenge.

There is also a lot of evidence that China has been using its massive export surpluses to make inroads into Europe, offering port facilities, nuclear power generation and cyber capabilities. No one is certain how far this is a trojan horse. Any future conflict will be very modern, using cyber technology as well as robotics. China is ahead of the West in some areas here.

The last stagflation episode of 1973-90 led to the challenge to Keynesian economics and the rise of monetarist orthodoxy (though the financial crisis of 2008 led to a general bonfire of all schools of economics). But politically the Soviet Union also dissolved. It remains to be seen what political changes will follow the current stagflation plus military conflict in the Eurasian theatre. There are other fissures such as deep divisions emerging in the US within the bipartisan political structure, the differences within the EU and the unresolved crisis in the Middle East, to say nothing of the likely exodus from low lying island settlements due to climate change, recurrence of the pandemic or a similar shock.

The world has had a marvellous time with globalisation from 1990-2007. That was the Davos era. Since then, we have had more than a decade of quantitative easing, low yields and low growth but political quiescence. The era of the 2020s is too new to be able to say when and how it will end. But it will be dramatic.

Further reading: Gaurie Dwivedi, Blinkers Off: How will the World Counter China, Pentagon Press, New Delhi (2021)

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