The Russia–Ukraine War and Other Geopolitical Risks

Joachim Klement, CFA, is the writer of Geo-Economics: The Interplay between Geopolitics, Economics, and Investments from the CFA Institute Research Foundation.

The struggle in Ukraine is dominating the headlines. For now.

However the battle’s oblique reverberations will ripple far past the borders of its combatants and their allies. Certainly, they may give rise to new and diversified geopolitical dangers all through the world.

The struggle’s potential impact on the worldwide grain provide and meals inflation is particularly alarming. Ukraine is called the “bread basket of Europe,” and along with Russia, it provides wheat to creating nations throughout Africa, the Center East, and Central Asia.

There are already studies that many Ukrainian farmers are abandoning their fields proper at first of the sowing season to defend their nation. The world pays a value.

The struggle could lead to a whole or near-complete failure of the 2022 Ukrainian wheat harvest. Russian wheat exports in the meantime could drop to zero because the nation diverts its meals commodities for home use within the face of crippling international sanctions.

Many nations depend upon Russian and Ukrainian grain imports to feed their populations. The warring nations are accountable for no less than 80% of the grain provide in Benin and Congo in Africa; Egypt, Qatar, and Lebanon within the Center East; and Kazakhstan and Azerbaijan in Central Asia. All these states must discover new sources of grain and pay a lot larger costs for them.

And that may compound an already dangerous scenario. Even earlier than the battle, meals inflation was rising. During the last yr, it reached 17.6% and 4.8% yr over yr (YoY) in Egypt and the United Arab Emirates (UAE), respectively. These ranges are harking back to people who preceded the Arab Spring uprisings again in 2011. The scenario is much more excessive in Turkey, the place a quickly declining lira propelled YoY meals inflation to 64.5%.

Going ahead, a number of components could propel meals costs even larger. Past the dearth of grain exports from Ukraine and Russia, spiking vitality costs will improve delivery and fertilizer prices. With Russia, a significant fertilizer exporter, going through extreme sanctions, there will probably be much more upward stress on fertilizer costs. It will add gasoline to the fireplace and ship meals inflation ever larger. In developed nations, whereas the ache varies throughout the earnings spectrum, such traits can largely be ameliorated by reductions in shopper discretionary spending: Individuals regulate by paying extra for meals and fewer on journey, leisure, and so on. However in creating nations, the place meals takes up a bigger share of complete residing bills and there may be much less discretionary spending, starvation is a extra acute threat.

The Arab Spring is a vivid instance of how such situations can ignite civil unrest and geopolitical tensions. It isn’t an remoted occasion. The peasants’ rebellions within the Center Ages, the French Revolution, and the Revolutions of 1848, for instance, all display how rising meals insecurity can set off political and social upheaval. The impact is so robust that Rule 6 of my “10 Rules for Forecasting” states:

“A full abdomen doesn’t riot. 

“Revolutions and uprisings hardly ever happen amongst people who find themselves nicely fed and really feel comparatively secure. A scarcity of private freedom shouldn’t be sufficient to spark insurrections, however an absence of meals or water or widespread injustice all are.”

The nations that depend upon grain from Russia and Ukraine together with the share of their populations that have been at medium or excessive meals threat earlier than the current battle are charted within the graphic beneath. Kazakhstan and Azerbaijan together with Egypt and Congo are amongst these on the most threat given their reliance on Russian and Ukrainian grain imports, their current meals insecurity, or mixture of the 2.

Meals Insecure and Depending on Grain Imports from Ukraine and Russia

However excessive meals inflation isn’t the one driver of potential turmoil. Constructing on current insights from Chris Redl and Sandile Hlatshwayo, who use machine learning to identify the predictors of social upheaval, we constructed a Civil Strife Danger Index that ranks nations based mostly on 5 key stability metrics:

1. The proportion of their complete grain imports from Russia and Ukraine, in accordance with UN Comtrade data
2. The share of their populations with moderate or high food insecurity, according to the World Bank
3. Their youth unemployment charge based mostly on World Financial institution and Bloomberg information
4. The number of mobile phone subscriptions per 100 people, according to the World Bank
5. Their Democracy Index rating from The Economist Intelligence Unit

Why these 5 parts? Proof means that nations with excessive proportions of younger and unemployed males are extra susceptible to instability; cellphones are important for organizing mass protest by way of social media platforms; and an absence of democratic establishments signifies that the inhabitants sees no alternative to vary the political management exterior of direct motion.

Combining these 5 indicators yields perception into which nations are most liable to civil unrest. The chart beneath solely consists of people who instantly import grains from Russia and Ukraine, so it’s composed of solely these nations that may instantly undergo from the fallout of the struggle in Ukraine.

The Civil Strife Index, by Nation

The oil exporters — Saudi Arabia and the UAE — and Turkey, with its shut commerce hyperlinks to the UK and the European Union, are essentially the most troubling from an economics and investing perspective. Instability in these nations, might have a spillover impact that disrupts vitality provide chains and world commerce and triggers renewed spikes in inflation in 2022.

To make certain, Saudi Arabia and the UAE largely averted Arab Spring-related unrest and may profit from the rise in oil costs. Nonetheless, their excessive rankings on the index, pushed particularly by the youth unemployment charge in Saudi Arabia and the UAE’s reliance on Ukrainian and Russian grain mixed with their low Democracy Index scores, could warrant some consideration.

The scenario in Turkey is especially worrisome given the nation’s already huge inflation charge and the robust probability of a sovereign default within the subsequent 12 months because of the devaluation of the lira.

Traders have to deal with political developments in these nations within the weeks and months forward. They could function an early warning signal of potential world provide chain disruptions that might have an effect on the UK and Europe.

For extra from Joachim Klement, CFA, don’t miss Risk Profiling and Tolerance and 7 Mistakes Every Investor Makes (and How to Avoid Them) and join his common commentary at Klement on Investing.

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All posts are the opinion of the writer. As such, they shouldn’t be construed as funding recommendation, nor do the opinions expressed essentially replicate the views of CFA Institute or the writer’s employer.

Picture credit score: ©Getty Photographs/alzay

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