Page 1 of 4

In early September, with the North Atlantic Treaty Organization reeling from a Russian land grab just outside the alliance’s borders, President Barack Obama traveled to NATO member Estonia to deliver a message to the unnerved Baltic states.

"We have a solemn duty to each other," Obama told a cheering crowd. "We’ll be here for Estonia."

It took less than 48 hours for Russia to put the lie to Obama’s stirring rhetoric. On the morning of September 5, armed Russian men moved across the border and seized an Estonian counterintelligence officer in broad daylight, deploying smoke bombs and jamming communications to confound the officer’s backup. Two days later the officer was denounced as a spy in front of television cameras in Moscow.

That same week Islamic State in Iraq and Syria (ISIS) militants pressed their destabilizing insurgency, releasing a video showing the execution of an American journalist in Syria and kidnapping some 40 Kurdish men. In West Africa, Liberian doctors, exhausted from an underresourced fight against Ebola, went on strike.

Until October investors had shrugged off these events as ugly individual stories without direct significance for the global economy. Ukraine is not really an emerging market, they reasoned. Russia won’t actually invade Estonia, a European Union member. ISIS threatens a few Iraqi cities but not the country’s oil production. Ebola will be contained in West Africa.

But these are not isolated problems, and all of them have deepened. And as these situations reveal the inability of outside powers to contain them, they are having a cumulative effect on investor confidence. It’s becoming unavoidably obvious that the current global order is unraveling. Add investor fears that we’ve ignored warning signs of slower growth, particularly in Europe, and that the easy-money days of quantitative easing may finally be coming to an end, and it didn’t take much to send equity markets plunging last month.

A distracted, war-weary America is no longer willing and able to provide global leadership, and no other country is stepping up to take its place. The U.S.’s international disengagement and seemingly improvised foreign policy are leaving allies, distracted by their own problems, looking to hedge their bets. Meanwhile, developing countries have become powerful enough to block U.S.-led plans but are not yet coordinated, motivated or influential enough to offer alternatives. Fast-changing China, revisionist Russia and a host of emerging markets with competing priorities and different political and economic systems leave us with too many major powers with too many divergent interests. The result is a global power vacuum — and markets are afraid of what might come next.

We now live in a world where no single power or alliance of powers is willing and able to provide global leadership. Call it geopolitical creative destruction: The old model is breaking down, but the only things so far emerging in its place are more geopolitical crises, burning hotter, for longer, with greater frequency.

We’ve now reached a crossroads where the outcomes of four combustible geopolitical crises could begin to reshape the global economy. Two of these crises are already reaching a critical point. The conflict between Russia and the West will rage in and around Ukraine, on Russia’s borders with other neighbors, in energy markets, in financial markets, in the defense budgets of countries on both sides, in cyberspace — and anywhere else Moscow may try to undermine what remains of American global leadership.

In the Middle East the battle with ISIS has just begun. On top of the terrorism risk, the conflict could devolve into a regional sectarian war among major Middle Eastern powers, and the Iran nuclear negotiations may well be headed over a cliff.

Two other crises, not yet dominating headlines, are very much in play. Chinese leader Xi Jinping has his hands full with transformational economic reforms that will reshape the Chinese market and his country’s global standing. But as its economic agenda comes under pressure, Beijing will look to deflect frustration and attention onto foreign companies, neighborhood adversaries or Washington. Asia-Pacific is the most dynamic and vital region for the future of global economic growth — and the most incendiary for geopolitics.

Second, new fissures in the U.S.-Europe alliance are taking shape. Divisions among European countries as well as global challenges that disproportionately threaten Europe are widening a structural divide between Europe and America. Shortcomings of the NATO alliance betray evaporating common ground and a relationship increasingly driven by economics rather than by security concerns. We may be witnessing a fundamental reshaping of the transatlantic alliance, one that can inflict lasting damage on the global financial system.

These four crises are all directly linked to this deeper destruction of the old global order. As they accelerate, they may rattle the global economy on a scale we haven’t seen from geopolitical events since the cold war’s end.

The Conflict Between Russia and the West

On November 21, 2013, Ukraine opened Pandora’s box. Under pressure from Moscow, then-president Viktor Yanukovych renounced a much-anticipated free-trade agreement that would have marked a significant step by Ukraine away from Russia and toward the West. The president’s decision sent hundreds of thousands of Ukrainian demonstrators pouring into the cold streets of Kiev. A crescendo of public anger and violent confrontations between protesters and police forced Yanukovych to flee to Russia. Russian President Vladimir Putin, convinced that maintaining influence over Ukraine is his country’s single biggest foreign policy priority, invaded Crimea and boosted support for separatists in southeast Ukraine. That triggered a cycle of escalation: more-aggressive military responses from Kiev, more Russian involvement to counter Kiev’s gains and more sanctions from the U.S. and Europe to punish Russia.

Where will it go from here? Russia will not back down. Putin intends to raise the economic and military pressure on Kiev until, at a minimum, southeast Ukraine is effectively under Russian control, a foothold the Russian president hopes will give him a de facto veto over any Ukrainian bid to join the EU or NATO.

The neighbors are watching. The U.S.’s NATO allies — former Soviet republics Estonia, Latvia and Lithuania, and former Warsaw Pact state Poland, in particular — will be on high alert for years to come. A troubled history with Russia and rising tempers amid the fight for Ukraine make Poland’s the most aggressively anti-Kremlin voice in the EU. Estonia and Latvia are home to an even larger percentage of ethnic Russians than Ukraine is.

This crisis will not be contained in Eastern Europe. All signs point to Russian involvement in a recent cyberattack on JPMorgan Chase & Co., one of the most significant cybersecurity breaches in history, compromising some 83 million households and businesses. Given the Russian government’s well-developed financial hacking expertise and its anger at Western sanctions on Russian banks, this is probably only the beginning. Russia has used its cybercapacity before, most notably against the financial sector and central banks in Estonia and Georgia.

For Europeans, sanctions are a double-edged sword that hurts their economies even as they undermine Russia’s. Sustained economic isolation of Russia will come with huge costs back home — and those costs will not be distributed equally across member states. Germany has an industrial lobby closely tied to Russia; the same is true for the financial sectors of Britain and Cyprus, and the defense sector of France. Overall, Europe relies on Russia for roughly a third of its natural-gas supply; the attempt to diversify away from Russian energy will play out over years, not months. Europeans must brace for Russia to use its natural-gas exports as a political weapon as the weather gets colder, but there is tremendous variance among EU members: Some countries, like Austria and Poland, depend on Moscow for more than half their supply. We may have reached the high-water mark of coordination among European states over sanctions.

For several years the major market concern for Europe has been economic: the potential collapse of the euro zone. That fear has subsided. The primary risk to Europe is now geopolitical: that expanded Russian aggression could push the Continent back into recession.

The longer-term economic risk stems from Russia itself. For now the country can bear the economic punishment inflicted by the U.S. and Europe. Despite massive capital flight and a tilt into recession, Putin still has the will, the means and the popular support — his approval ratings are sky-high — to forge ahead with his offensive. But over time Russia risks a serious economic downturn. Sanctions and the backlash in financial markets will increase the cost of capital for Russia for years to come. Capital flight will continue apace: The $75 billion of capital that left Russia in the first six months of 2014 already exceeds the total for 2013.

More important, Russia is weakening because its government remains dangerously dependent on energy exports for future revenue. Far from diversifying, the Russian economy has become more reliant on oil and gas than on the ingenuity of its people. This dependence leaves Russia exposed like no other major economy to fluctuations in the price of oil. Too many of the country’s energy fields are well past their prime. Without access to shale oil and offshore Arctic deposits — initiatives that would benefit from now-banned Western technological support — Russia can’t maintain current production levels into the future.

Yet with Putin continuing to rely on oil and gas exports as foreign policy tools, Russia is unlikely to reduce its dependence on them any time soon. It’s a recipe for slow and steady decline — of energy production and of the country’s broader economy and international standing. In short, Russia is losing strength, and as it becomes weaker, as Putin’s hold on power becomes more tenuous, Russian foreign policy will become even more unpredictable. When the world’s eighth-largest economy begins acting like a rogue state, the economic implications will be felt everywhere.

Single Page    1 | 2 | 3 | 4