A new Cold War?

What the Russia-Ukraine crisis means for globalisation and markets

The world has become more volatile and unpredictable with Russia’s invasion of Ukraine. But while Vladimir Putin may have dealt globalisation another blow, China and the West will want to prevent the world splitting into two competing blocs.

Read this article to understand:

  • Why some commentators believe the war in Ukraine is the most dangerous international conflict since the Cuban missile crisis
  • What the conflict means for globalisation
  • The implications of heightened geopolitical risk for financial markets

The demise of the Soviet Union brought an end to the Cold War and was hailed by most in the West as an opportunity to forge a more constructive relationship with Russia. More than 30 years on, those hopes have been severely damaged.

“(Russian President Vladimir) Putin read the tea leaves, which were Trump, disorder and growing nationalism in Europe, and then the US’s chaotic withdrawal from Afghanistan. The conclusion was the West was weakened and demoralised,” says Sir Dominic Asquith of Macro Advisory Partners, a geopolitics and markets consultancy.

Major miscalculation?

Putin may, however, have misread the tea leaves, with Russia’s invasion of Ukraine backfiring in various ways. From a military perspective, stiff Ukrainian resistance has meant progress has been far slower, and casualties far higher, than he is believed to have reckoned on.

At the same time, the invasion has galvanised the West into coordinated action. Countries have imposed harsh sanctions, crippling Russia’s economy; sent large quantities of military and humanitarian aid to Ukraine; and vowed to ramp up their own defence spending. Despite threats from Putin, both Finland and Sweden could be set to join NATO as soon as this summer, according to one UK press report.1

Some foreign policy experts, such as the eminent US international relations scholar John Mearsheimer, claim the war in Ukraine is the most dangerous international conflict since the 1962 Cuban missile crisis.

Cold snap

Regardless of the outcome of events in Ukraine, some commentators argue the world is sliding into a new Cold War with far-reaching implications.

However, given the ideological divide between Russia and the West is more blurred than in the original Cold War, and that Putin may have little wish to occupy other countries especially after the problems encountered in Ukraine, others claim such talk is misplaced.

While there is some ideological dimension to what is happening now, it's quite different from what we had in the Cold War

Dr Luca Tardelli, assistant professorial lecturer in international relations at the London School of Economics, agrees it would be a mistake to consider the likely outcome as a new Cold War, partly because it was misleading to frame the original one as such.

“It may have been cold in Europe, but it was pretty hot in much of the rest of the world. In any case, while there is some ideological dimension to what is happening now, it's quite different from what we had in the Cold War,” he says.

Tardelli, like Asquith, nevertheless believes Russia will find itself isolated from the West, economically and politically, for some time, even if some of the harsher sanctions are removed as peace is eventually restored.

No-limits friendship

United in their dislike of US hegemony, Moscow and Beijing have in recent years been busy forging closer ties. That culminated in February with a 5,000-word statement in which Putin and his Chinese counterpart Xi Jinping vowed their countries’ friendship had “no limits”, with Xi declaring there would be “no wavering” in their partnership.2

Beijing and Moscow say they will work with other countries to promote “genuine democracy”

China, for the first time, explicitly joined Russia in opposing any further expansion of NATO, while the two countries denounced Washington’s Indo-Pacific strategy and its new security partnership with Australia and the UK, AUKUS. The nations also described Taiwan as “an inalienable part of China”.

Beijing and Moscow say they will work with other countries to promote “genuine democracy” and counter American-led ideology and institutions. Even if it is unclear how many others would wish to join them, some have concluded the likelihood is a realignment of the world order.

Others, however, are less convinced the world is about to divide into two competing military and economic blocs. Asquith believes, while the world will become increasingly fragmented, it will be one which remains interdependent “in terms of people, finance, technology, data, climate change, you name it”.

Uneasy bedfellows

The longer the conflict drags on, the bigger the risk the scales tip in the other direction. Moreover, the two nations make for uneasy bedfellows, locked in a marriage of convenience which Russia needs more.

China doesn’t want India well armed, but Russia wants to sell it arms

“If you look at India, China doesn’t want it well armed, but Russia wants to sell it arms, while Russia is worried by China’s growing influence in central Asian states like Kurdistan and Kyrgyzstan. Since they too were part of its former empire, Moscow would be as unhappy about China dominating them as it was about events in Ukraine,” says Parton, a former diplomat who spent 22 years working in or on China, Hong Kong, and Taiwan, and advises UK lawmakers.

Furthermore, the US and its European allies may have displayed renewed purpose by strengthening their commitment to defend democracies and challenge the expansion of authoritarianism, but by diverting attention and potentially resources away from Asia, the war in Ukraine is complicating matters.

“What this shows is that the US is too enmeshed to reduce its role in Europe, let alone abandon it. Besides, if you want to compete with China, you need a very strong voice in Europe, otherwise China will gain influence,” says Tardelli, whose research focuses on international security, military intervention, and US foreign policy.

Global divisions

While the perceived threat from Russia and China may have led nearly all countries in Europe to align with the US, the global picture is far from uniform. As many as 35 nations, mainly in Africa and Asia, abstained in the March 2 UN vote to condemn Russia’s invasion.3

Further backing up Asquith’s notion of a more fragmented world, Saudi Arabia and the United Arab Emirates refused to take calls from Biden in March when he wanted to persuade two longstanding US allies to pump more oil.4

Western countries may have felt able to dramatically reduce defence spending after the end of the Cold War, as shown in Figure 1, but that trend is going into reverse.

Figure 1: Defence spending as percentage of GDP
Source: World Bank. Data as of March 20, 2020

The pressure for increased defence spending could hardly have come at a worse time given the extent to which government budgets have been stretched by COVID-19, and in view of competing claims for extra spending on areas such as healthcare and the energy transition.

Weaponising energy

Aviva Investors’ head of multi-strategy funds, Ian Pizer, says the risk of ongoing dislocation in commodity markets means those economic problems could worsen significantly, especially if either the West or Russia were to “weaponise” energy.

Turning off the gas taps for a day or two could create panic and lead to ongoing uncertainty, even once delivery resumed

“You've got this weird sort of interdependence. The longer this goes on, the greater the chance one side views it as in their interest to discontinue this policy of doing business with the other. As we head towards summer, Putin’s got less control, but that changes if this conflict drags on towards winter. Even turning off the gas taps for a day or two could create panic and lead to ongoing uncertainty, even once delivery resumed,” he says.

The war in Ukraine seems likely to prompt a seismic shift in the cost-benefit analysis for the large number of companies that have in recent years relied on doing business with authoritarian regimes.

BP has put its near-20-per-cent stake in Rosneft up for sale, while rivals ExxonMobil, Shell and Equinor of Norway are also pulling out of all their operations in Russia. Although Chinese investors are rumoured to be looking to buy these and other Russian assets at knock-down prices, the danger is the Russian government simply expropriates them, putting billions of dollars-worth of investments at risk.

Just as some reckon the conflict could lead to the creation of two opposing military blocs, others predict it will mark yet another nail in the coffin of economic globalisation.

Pizer says the web of global supply chains will continue to be redrawn as companies shift further away from the just-in-time model. Such decisions will be driven in part by how countries choose to align themselves.

However, there are limits to how fast deglobalisation can happen given the integration of supply chains.

The war in Ukraine is just the latest manifestation of rising geopolitical tensions

Ultimately though, the war in Ukraine is just the latest manifestation of rising geopolitical tensions – a trend that has been apparent for several years. Where that leads to and whether it causes the kind of seismic changes that followed the end of the Cold War is less certain.

“Speculating what might happen over the next year, let alone the next decade, is quite quixotic. The only thing you can really be sure of is that international relations will become ever more complicated and volatile,” says Asquith.

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