The 4 Major Geopolitical Challenges Investors Must Face
Looming crises in Asia, Europe, the Mideast and the U.S. are positioned to rattle the global economy — and investors’ portfolios.
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.
The Crisis in the Middle East
In 2003, when Washington led the charge to oust Saddam Hussein, it took out nearly all of Iraq’s military and political infrastructure along with him. This comprehensive dismantling of a four-decade-old political system — unlike say, the ouster of Egypt’s Hosni Mubarak — opened a power vacuum in which Iraqi governance could barely function without significant American military presence and economic aid. Once that dried up, there was little left to maintain Iraq’s territorial integrity as a single state.
Sectarianism is the primary form of allegiance in Iraq today. Extremism has grown dramatically as a consequence, particularly among the now-disenfranchised Sunni population. Next door a civil war in Syria has opened a similar expanse of ungoverned territory.
This all happened against the backdrop of another trend playing out across the post–Arab Spring Middle East, as hopes for democracy and moderate governments quickly faded. Take Egypt. The military coup against Mohamed Morsi strengthened the arguments of religious radicals that power and liberation can’t be won through the ballot box — the more viable route is through bloodshed. But in Egypt under President Abdel Fattah el-Sisi, though isolated militant attacks continue, the military government has established firm control of the country’s territory. Iraq’s and Syria’s governments have established no such dominance and make for much easier targets for violence.
Islamist extremists boxed out of the political process back home are following the path of least resistance into Syria and Iraq. Since 2010 the number of known jihadist fighters has more than doubled. Many of them have helped fuel the meteoric growth of ISIS, which has become a magnet for the region’s disaffected fighters.
Bolstered by battlefield experience in Syria and a stream of extremist conscripts, ISIS has become the best-funded and most dangerous terrorist organization in modern history. Unchecked, it will threaten the future of Iraq and could push the entire Middle East into conflict. Its rise creates underappreciated risks for the global economy. The organization’s vast ambitions hint at how far its shock waves are reverberating: ISIS wants to create a Sunni caliphate that extends across the Middle East and North Africa and into Europe.
The terrorist risk is real. A frightening number of ISIS members hold Western passports and may have influence over would-be radicals back home. European and U.S. officials are now working overtime to monitor these individuals. In September, Australia conducted the largest police operation in its history to thwart a potential beheading in Sydney orchestrated by a high-ranking Australian member of ISIS back in the Middle East and his contacts Down Under. In years to come ISIS-held territory will function as an incubator for terrorist collaboration and innovation.
Markets, by nature, underappreciate these kinds of fat tail risks — the unpredictable, low-probability events that we rarely see — not to mention the enormous retaliation they can elicit from the West. All of that gets priced in only after disaster has struck.
The response to ISIS will be costly in terms of the equipment and expense of the U.S.-led coalition’s offensive and the difficulty of defending against reprisals targeting local assets and homelands. Equally important, the drive against ISIS will leave the West too distracted and intervention-fatigued to address other geopolitical hot spots.
In its infancy ISIS served the interests of Sunni governments focused on keeping Iraq and Syria’s Shia-led regimes off balance to deny Iran powerful allies. But ISIS has grown to become a problem all its own, drawing Middle East heavyweights into a high-stakes proxy fight. Here the Iran-Saudi rivalry and the radicalization of Islamist politics come together to generate bloodshed and turmoil — and a conflict that will continue to develop over many years. If the Shia-Sunni sectarian upheaval metastasizes into a broader regional war, Saudi Arabia could come into the crosshairs, which would trigger severe oil price contortions and shock global markets.
But well before any of these broader risks come to fruition, there is a crucial regional turning point just around the corner that some consider a rare cause for cautious optimism: the Iranian nuclear negotiations. The two sides have been seeking a swap in which the U.S. will lift sanctions if Iran makes serious concessions on its nuclear program. ISIS is so universally reviled that it has aligned the U.S. and Iran in opposition to it. Could that help Washington and Tehran cement a critical deal?
If anything, ISIS makes the odds of a nuclear deal slimmer — and makes the consequences of that failure more dire. ISIS has distracted both Iran and the U.S. from what was previously their most urgent regional priority. It has also empowered Iran’s Revolutionary Guard — the group tasked with protecting that country against terrorist threats — tilting the balance of power in Iran more toward hardliners who aren’t as amenable to a deal. Both the U.S. and Iran have asserted that there is no linkage between potential cooperation on ISIS and the nuclear talks. But many Iranian officials blame the U.S. for ISIS’ rise, arguing that Washington did nothing to curb aid pouring in from the Gulf states and Turkey to fund the terrorists. The U.S.-led coalition against ISIS includes the Sunni Gulf states, exacerbating Iran’s sectarian suspicions. There is also a fundamental disconnect between the two countries’ priorities: Iranian officials fully support Syria’s Bashar al-Assad and were outraged by the U.S. decision to arm the moderate Syrian rebels, whom Iran calls terrorists.
All of these ISIS atmospherics are secondary to the fundamental impasse: Iran and the U.S. haven’t made progress on key sticking points of the negotiations, including the fate of Iran’s centrifuges and the sequence by which each side would follow its end of any bargain. An 11th-hour deal could still happen, but it seems unlikely in the absence of any momentum.
Back in July, as the negotiating clock wound down, the sides agreed to a four-month extension of the talks. Another grace period is unlikely to be sustainable. The combination of diplomacy’s failure and tense U.S.-Iran relations will likely prompt Congress to enact further sanctions in the coming months, shattering fragile negotiations.
Failed negotiations would usher in a new phase of Middle Eastern volatility, with deep market impact. New U.S. sanctions would take a good deal of Iranian oil exports off-line in the year to come. Israel would seriously consider air strikes to impede Iran’s nuclear progress. For its part, Saudi Arabia would seek a nuclear option to counterbalance Iran’s progress. It would be a new, more volatile phase of the Iran conflict, against the backdrop of war in Syria and Iraq, and the growing ISIS threat.
The Economic Reforms Reshaping China
Beyond the active clashes in Ukraine and Iraq and Syria, there are two simmering geopolitical points of tension that are primed to boil over. The first is in Asia, which faces the consequences of an increasingly powerful and assertive China. The growth of China’s influence remains the world’s most important geopolitical story by a long margin. But, at least to date, that story has been mostly positive. China’s growth is largely an opportunity for the rest of the world. For the Middle East, China is the principal new source of energy demand at a time when the U.S. is weaning itself off sources from beyond the Western Hemisphere. For many African countries China provides the best opportunity to fund much-needed infrastructure across the continent. For Europe and even the U.S., it’s a critical source of credit propping up currency, a core producer of inexpensive goods and a rapidly growing consumer market for Western products. So far, China has been more a business opportunity than a threat for much of the world.
In its own neighborhood, however, China’s rapid rise is perceived as an encroachment. The greater comparative importance of the Chinese economy has translated into more political influence — formal and informal — for Beijing. Meanwhile, China’s dramatic military buildup has fundamentally changed the balance of power in Asia, even as in other regions China continues to promote itself as a poor country that needs to focus on its own development and stability. In East and Southeast Asia, China is actively defending its core interests, and it is increasingly willing to challenge the status quo as its influence becomes asymmetrically greater.
To assert its growing regional influence and to appease demand, particularly within the military, for a more assertive foreign policy, Beijing has already become more confrontational, especially in the region’s disputed waters. For the moment, China is challenging Vietnam most directly, in part because the fallout from this confrontation is much less economically dangerous than a face-off against Japan and because Vietnam, unlike Japan and the Philippines, does not enjoy formal U.S. backing. For the time being, geopolitical headlines in the South and East China Seas will continue to feel local, much like the risks we’ve seen in the six years since the financial crisis.
In the near future we could continue to enjoy relative serenity in China’s neighborhood, with conflicts remaining localized. That’s in large part because the newly empowered leaders in Asia’s three biggest economies — Xi in China, Shinzo Abe in Japan and Narendra Modi in India — have all taken charge with mandates for fundamental change at home. Xi is focused on economic reforms to fundamentally transform China’s state spending and export-driven model. Abe needs to jump-start his country’s economy after two lost decades. Modi is tasked with restoring economic growth to levels not seen in years.
All of these leaders have incentives — and the political leverage — to play down regional conflicts to tackle these domestic challenges. They all understand their stake in the sustained success and stability of the others. In September, Modi’s trip to Japan yielded pledges of some $35 billion in Japanese investment for Indian infrastructure. Xi’s September trip to India resulted in an additional $20 billion. China and Japan are actively dialing down their bilateral tensions, an effort most recently on display when Abe had conciliatory words at the United Nations General Assembly meeting in September.
But looking ahead, Chinese aggression in its backyard is more than just a local risk. The region is too economically dynamic and vital for global growth in years to come, and this relative serenity cannot last long. The Obama administration continues to believe that America’s core national security interests, now and in the future, are in Asia. If tensions escalate significantly in the neighborhood, the U.S. is unlikely to sit as idly by as it has on Syria or Ukraine.
Today, China has solid political stability and isn’t looking for trouble outside the region. It has no interest in the kind of escalation that would drag in international players and undermine market confidence. The principal danger is in what will happen if this dynamic changes because of upheavals or new calculus within China.
China can’t keep growing the way it has for the past three decades, on the back of state-driven investment and cheap labor. President Xi understands that his country must shift to a more consumer-driven, liberalized economic model. He has begun making transformative first steps with an ambitious reform agenda centering on the environment, the financial sector and inefficient state-owned enterprises.
But this economic experiment, its scale unprecedented in human history, will trigger immense pushback within China. Beijing’s reformers are already under pressure: from ordinary Chinese eager for real change, from workers who fear that real change will cost them their jobs and from some of the country’s wealthiest and best-connected power brokers, who are clinging to the status quo to protect the privileges and protections it has afforded them.
To overcome these challenges, Xi has launched an ambitious anticorruption campaign, which has already taken down some very powerful people, both to sideline opponents of reform and to earn greater trust from a cynical Chinese public. The downside of this strategy is that it will provoke greater resistance over time from threatened officials who feel they have nothing to lose, raising the risk that a fight within the leadership will spill out into the open, generating frightening levels of unrest across the country.
In such a combustible environment, Xi is looking for ways to deflect anger and defray the pain that domestic companies will feel as he opens the economy. Western companies are an easy target. As a result, the notion that China has been more of a business opportunity than a threat may no longer hold true. We have seen a jarring shift of late, with foreign companies scrutinized and investigated by the government on an entirely new scale. In August, China’s National Development and Reform Commission fined ten Japanese auto-parts makers a combined $200 million for price collusion and related antitrust activities.
As Xi continues to clamp down politically to clear space for his push to open China economically, there is zero tolerance for dissent. Hong Kong is learning this lesson, as protesters recently flooded the streets with demands for more Western-style freedom only to find little sympathy from Beijing. Chinese government officials understood the negative consequences of any severe crackdown: An overly harsh retaliation to protests could bring international condemnation and end this period of relative tranquility in China’s neighborhood. But Beijing also knows that conceding anything to a protest group sets a dangerous precedent, one that any number of factions could seize across China. Beijing would rather crack down than countenance an alternative political voice. The crisis in Hong Kong showed just how many such voices may emerge as Xi pushes forward with reforms. It is precisely the kind of local crisis that could grow to threaten the survival of the Chinese leadership — and thus the strength of the global economy.
Xi’s commitment to economic reform has been unwavering thus far. But the uncertainty around China’s trajectory is radically greater than that of any other major economy. Should significant instability emerge in China — which is not unlikely — its willingness to take on a far more assertive security strategy in the region, promoting nationalism much like Putin has built his own support base of late, would become far more probable. The country’s government might choose to engage in a more hostile foreign policy — even outright regional conflict — designed to distract China’s people from the government’s failings and rally them to their flag.
That’s a collision course with global implications. Not to mention that China’s economy is the world’s second largest, globally integrated and the anchor of global growth. If internal friction hits this artery, the whole world will feel the shock.
The Widening Divide Between Europe and the U.S.
America and Europe represent the most powerful coalition of capable and like-minded allies the world has ever known. Their united political vision has been the foundation of the post–World War II global order. But the relationship is becoming increasingly strained.
The U.S. and European powers share values that have provided the backbone for globalization. In the aftermath of World War II, aligned Western countries built the global institutions that are now losing influence — an Americanized world order predicated on common values like democracy, free-market liberalism, rule of law and human rights.
Beyond all the global challenges that are undermining this American-led global order, what is specifically rattling U.S.-Europe ties? It’s an explosive mix of shifting preferences and power bases. In part, it’s because of a more divergent Europe that is increasingly German-led, at the expense of powers like France and Britain that historically have taken a more American approach to foreign policy. It’s also a reflection of the diminishing importance of security and foreign policy in defining the U.S.-Europe relationship. In its place, economic concerns, where the two are not nearly as aligned, are increasingly driving alliances.
The U.S. and Europe still generally see eye to eye on the need to beat back threats from Islamic radicals, but relations with Russia will continue to divide opinions because the U.S. is much less vulnerable to fallout from bad relations with Moscow than are major European powers. Just as varying levels of vulnerability within Europe will exacerbate Ukrainian tensions, they may help widen the rift between the U.S. and Europe as a whole.
The Russia issue is just the tip of the iceberg for divisions within Europe. Public frustration is growing in countries like Greece, Spain, Italy, Portugal and even France with demands for more austerity from wealthier states like Germany and from European institutions. The growing impatience has been on full display in European parliamentary elections, in which anti-EU parties have done exceptionally well in recent years.
In the aftermath of the euro zone sovereign debt crisis, Angela Merkel’s Germany is making a strong case that it should take the reins in Europe, corraling diverging member states. On questions of euro zone stewardship or foreign policy, Merkel is increasingly calling the shots. Accounting for nearly 30 percent of the euro zone’s GDP and bankrolling much of the periphery through the crisis, Germany holds dominant influence within the political union. Berlin understands just how much it benefits from keeping the EU and euro zone intact. As a result, it is committed to funding its survival — and threatening severe punishment for any country that might leave.
But even as Germany rises to the occasion as a European leader, the other traditional powers — Britain and France — are defaulting on their broader leadership responsibilities. To say French President François Hollande lacks Merkel’s leadership mandate is a considerable understatement. Late last year, with economic troubles mounting, Hollande’s approval rating sank to the lowest on record since the founding of the Fifth Republic, in 1958. Britain, for its part, has just survived a contentious referendum on Scottish independence. Prime Minister David Cameron has already promised that the U.K.’s next major referendum will take place before 2017 — on whether the entire country should remain in the European Union.
As Europe becomes increasingly German-led, it makes the particularly acute deterioration of U.S.-Germany relations even more problematic. Last year Germans were deeply angered when documents leaked by Edward Snowden revealed that the U.S. National Security Agency had been monitoring Merkel’s cell phone for more than a decade. In a survey over the summer, only 38 percent of Germans still considered the U.S. a trustworthy partner.
But as jarring as recent gaffes, scandals and betrayals of trust have been, the strains on the relationship are much deeper and more intractable. America’s foreign policy disengagement and the erratic message Washington is sending to allies are a big piece of the puzzle. Many European powers are questioning U.S. security guarantees, along with their ally’s willingness to put sufficient military, economic and diplomatic skin in the game for foreign policy.
The changing nature of geopolitics is creating a rift between the U.S. and Europe. Collective security was the core element holding together the transatlantic alliance, but that’s no longer the case. The relationship is increasingly driven by economics — reflecting in large part the growth of German leadership in Europe — and the economics are much less closely aligned than they were in the past.
The Russian aggression in Ukraine has made this transition particularly clear. NATO has become suddenly more relevant, but the underlying shift from security-driven to economically driven ties is on full display in that institution. The U.S.’s defense budget represents three quarters of the entire NATO alliance’s spending on defense, up from half during the cold war; Germany accounts for less than 5 percent. Poland is much more concerned about Russian aggression and wants more NATO engagement; the same goes for the Baltic member states. But Germany’s position is more opaque.
A German-led Europe will be driven by economic outcomes more than by security or political ties. The more that Germany leads the Continent, the more important its budding strategic relationship with China will be. On Merkel’s seventh trip to China as chancellor, Chinese Prime Minister Li Keqiang expressed mutual frustration with an overreaching U.S.: “China and Germany, it can be said, are both victims of hacking attacks.” Both countries are willing to engage in a transactional, mutually beneficial relationship. China is the leading foreign investment destination for German companies.
In the longer term, European powers are unsettled by areas of increasing economic conflict between the U.S. and a German-led Europe. Even as a global leadership vacuum grows, the U.S. still enjoys some important extraterritorial privileges. The dollar’s role as the world’s reserve currency, the broad reach of the U.S.’s sanctions regime and its cyberspace surveillance capacities are all American competitive advantages. Sanctions can target the non-American branches of foreign institutions that have a U.S. presence, even when there are no U.S. citizens involved. That was the case for French bank BNP Paribas when it recently pleaded guilty to criminal charges and paid out an eye-popping $8.9 billion. The U.S. has now levied fines exceeding $15 billion, hitting more than 20 international banks.
As the global power vacuum swells, we will see the U.S. looking to enforce more unilateral economic standards that the Europeans resent and resist. The Europeans will look to other countries more strategically as counterbalances to U.S. economic hegemony. All of this means a much less cooperative transatlantic relationship is in store. A zero-sum attitude between the U.S. and Europe would create a more fragmented and much less efficient global marketplace. It would rapidly exacerbate the other three major crises for markets, as an increasingly uncoordinated Western response would let them grow without check.
In coming months these four geopolitical challenges will feed off one another. On top of dividing European member states, a more revisionist Russia will actively undermine the West on Middle East policy. Russia also wants to eradicate ISIS, but for different reasons. Moscow doesn’t share the West’s opinion of its close ally Syrian President Assad; undermining ISIS strengthens him. Russia’s cratering relations with the U.S. offer Iran hope that Russia could be a viable economic partner, willing to bust sanctions if the nuclear negotiations fall through. That makes a no-deal world easier for Iran’s leaders to live with, in turn letting them toe a harder line in negotiations. If the Kremlin undermines American sanctions on Iran, the U.S.-Russia dynamic will be even more combustible.
And as Russia breaks ties with the West, it is cozying up to China. A 30-year, $400 billion gas deal was finalized after Moscow dropped its asking price as a result of deteriorating relations with the U.S. and Europe. China is more than willing to lock in sweetheart deals on Russian energy and plug the gap left by Western companies that have fallen out of favor in Russia. The larger worry for the West comes down the road. China views tighter ties with Russia as a valuable hedge against its own eventual fallout with the U.S. and its allies. If that scenario begins to play out — with an increasingly assertive China lashing out in its neighborhood and beyond — the Russia-China alignment could become a more formal alliance.
The world’s leadership vacuum and these four crises will get much worse before they can get better, but any widespread, coordinated response to severe geopolitical challenges will come only if a crisis threatens key players at the same time — and to the same extent. We saw that with the financial crisis, when free-falling markets seemed to pose an existential danger for any country with a globally connected economy. Held to the fire, leaders came together to respond decisively. As soon as the pressure abated, that coordination broke apart.
In the absence of core interests or a perceived collective threat, fires are left to burn. Take the recent spread of Ebola: Despite the massive health risk and crescendo of humanitarian damage, we’ve seen a woefully inadequate international response. Few countries have meaningful commercial interests in and around the core African countries facing the epidemic. There was growing exposure on iron ore and cocoa, but it was too small to galvanize an effective global response based on economic interests. As a result, even as the disease spread exponentially, the international community’s response remained piecemeal and behind the curve.
Yet every major power is unified in its desire to see Ebola eradicated. The four most significant geopolitical challenges that I’ve discussed are even more difficult to handle collectively. That’s because many of the key drivers are internal, with some of the essential decision makers in direct conflict with one another. All four crises create complex webs of winners and losers; they are impossible to construe as common global threats to governments even as the threat to the global economy grows.
Washington remains relatively insulated. The Western Hemisphere is removed from the most acute consequences that will reverberate across Europe and Asia. The U.S. feels it can afford to improvise its foreign policy. No one else will do more. By the time enough leaders have their backs against the wall, the challenges will loom larger — and their capacity to build a coordinated response will have diminished even further.
Geopolitics are back, and markets are beginning to notice. If investors are jittery over European growth and the end of Fed tapering, imagine how they’ll react to the next geopolitical bolt from the blue. • •
Ian Bremmer is the president of political risk research and consulting firm Eurasia Group and a global research professor at New York University. You may follow him on Twitter @ianbremmer.
See also Bremmer’s previous feature, written in collaboration with economist Nouriel Roubini, “Ian Bremmer and Nouriel Roubini Unveil the New Abnormal.”