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The end of the Cold War signalled the start of a process of global convergence, whereby countries around the world became far more interconnected than ever before. Democracy seemed to be spreading to countries previously under staunch autocratic rule and the standoff between communism and capitalism appeared to be easing. This period saw the early days of globalisation, which steadily expanded over the next five decades with economic, technological, political and social integration. The interdependency of countries around the world served the global economy well and from this environment emerged a unipolar world order, with the US at the helm as the economically and politically dominant global powerhouse.

A turning point

The global financial crisis, however, marked a turning point in the growth of globalisation when people began to question globalised capitalism as the domino effects of the sub-prime crisis were felt around the world. Since then, opposition to globalisation has arisen in various forms such as Brexiteers, xenophobic nationalists, populists like Donald Trump and the anti-globalist left. Added into this mix, was the global ambitions of China and Russia, intent on usurping the US as world leaders and changing the global pecking order. 

Following the 9/11 attack, the US became increasingly pre-occupied with wars in Afghanistan and Iraq, which dominated much of its focus and resources. These military conflicts have left an overly indebted US reluctant to engage in expensive overseas conflicts at a time when China is doing the opposite. With the aggressive military moves made by China in the South China Sea against Taiwan and in Hong Kong, China is now the dominant military player in the Asian waters, underpinning their naval and air power by establishing military bases in key strategic positions in the South China Sea (using old coral reef atols as their infrastructure). 

Russia too, had been strategically weighing up their military options, steadily encroaching on European territories with the annexation of Crimea and Georgia, as it sought to bolster its territory, confident that the US and its Western allies wouldn’t take any retaliatory steps to stop them.

The rise of the Eastern Power Bloc

The economic power dynamics are also now shifting. Since its admission to the World Trade Organisation in 2001, China has experienced significant economic growth. And through their well-known Belt and Road Initiative they are now expanding their economic power across to the Atlantic Ocean. Russia has also cleaned up its balance sheet, with its successful energy trade, emboldening Vladimir Putin in his pursuit of further Ukrainian territory.

But considering its modest-sized economy, Russia needs its partnership with China. Iran, meanwhile, is also cosying up to China and this new China/Russia/Iran axis will form the core of the Eastern Power Bloc – all armed with nuclear weapons (Iran is close to or already has achieved nuclear capability, posing a major threat to Middle East stability). The weakening state of the US and its Western allies has allowed these other powers, particularly China and Russia, to exploit this window of opportunity as they attempt to assert their own geopolitical ambitions, all while challenging the historically influential role held by the US, which can no longer sustain its position as the sole global superpower.

Therefore, while the steady decline of globalisation was already well underway before Russia’s invasion of Ukraine, the war has undoubtedly escalated the process. Therefore, the transition towards a more multi-polar world isn’t exactly new; but what is new is how the various global players have used the conflict and the global connectivity involved to drive their own various national agendas. 

War and the global power architecture

The Russia-Ukraine war has revealed the complexity of the architecture of global power. For example, while China has supported Russia diplomatically in the war, accusing the US and NATO for using the conflict to attempt to “contain Russia and China”, this support is not unlimited given China’s concerns over the global economic impact of a prolonged Ukrainian conflict in Ukraine, as well as potential secondary sanctions by the US on Chinese companies. Countries such as India and Turkey have also refused to speak out against Russia’s invasion given their beneficial relationships with Russia, but they have also not exactly lent their outright support to Russia through direct opposition to the US and its Western allies or military support.

However, perhaps one of the most telling indicators of the changing multi-polar order is the actual invasion itself, which illustrates – as with its previous military action against Crimea and Georgia – Putin’s calculation that the US and NATO would not intervene directly to stop it. While he may have underestimated the West’s response and level of sanctions this time around, its weakened state was certainly one of the factors that emboldened Moscow to carry out the invasion.

The role of excess money

So where does this leave us on the macro stage? The increased money supply of quantitative easing (QE) programmes of the US Federal Reserve (Fed) and other Central banks since 2008 has eventually led to rising inflation, which has only been exacerbated by the Covid pandemic and the war in Ukraine.  Another repercussion of QE has been that, because the money printed went to buy Treasury bonds (the mechanism to get the money into the economy), this lowered the cost of government borrowing (financial repression) – so governments went on a spending spree. Western government debt levels have doubled over the past decade to today’s unsustainable levels. This means the West cannot afford to engage in any meaningful way globally, even if it wanted to.

And the final effect is the one just accelerated by the Fed and European Central Bank (ECB) by effectively removing the status of the US dollar as the world’s reserve currency – a lower US dollar. This is simply because there are more US dollars around, and supply and demand eventually come to bear. However not quite yet – because the US dollar has for decades been the world’s reserve currency and has been strong for years as a result.

However, if the dollar’s reserve currency status is effectively revoked – and China and Russia are already in the past month looking to price oil and gas in Rubles and Renminbi, as well as shifting their banking transactions to their own CHIPS (SWIFT) system – then that prop for the dollar falls away, leading to a long a severe decline. And when a country’s currency is weak it too is weak. Which will make the West weak, and the Eastern Bloc all the stronger.

The Russia/Ukraine conflict is a humanitarian disaster, with its repercussions, as well as those of the response of the West, sure to be felt for decades to come. But the conflict has certainly been a product of the changing global power structure and more change is coming, whether you like it or not. The question for us as investors is, how do we adapt? DM/BM

Author:  Hywel George, Director of Investments

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