In the absence of any major economic news, this week we take the opportunity to revisit the shifting sands of geopolitics. More usually contextual rather than of immediate direct relevance, nevertheless developing world events tend to inform investor perceptions of over-arching risk, particularly reflected in the fixed income markets through term and risk premia, as well as having a bearing on exchange rates.

 

Now is an opportune time as global leaders begin to meet each other face-to-face again for deeper, more substantive talks than allowed with the inherent constraints and the linear nature of conversations so often experienced with online audio-visual platforms such as Zoom or MS Teams.

G7: nearly normal diplomatic niceties restored

Nobody can deny that the most recent G7 Summit hosted by Boris Johnson in Cornwall was a very different experience from its predecessors when Donald Trump was representing the US. Trump was scheduled to have hosted the 2020 summit, cancelled thanks to Covid much to the relief of many heads of government after the car-crash episode in 2018 when Trump, having just announced his tariff war, refused to sign the common economic statement.

 

Apart from the simmering tensions between the UK, Ireland (not represented at the talks), the EU and the US (the latter officially the guarantor of the Belfast Agreement) caused by the all-too clearly failing Northern Ireland Protocol as part of the Brexit Withdrawal Agreement, the overall tenor was the restoration of diplomatic kumbaya, normal service largely resumed.

 

Having reached agreement on the Covid vaccine-rich countries needing to help the vaccine-poor nations to help try and break the virus’s ability endlessly to circulate around the globe mutating as it goes, the central thrust of the Summit was the reassertion of ‘western values’ and confronting the threats posed by autocracies, in particular China, Russia, Iran and North Korea.

China: if you can’t beat ‘em, join ‘em

While President Biden tried hard but failed to build a solid consensus against China, with the EU taking a far less hawkish stance (“cooperation not confrontation”), nevertheless the western democracies are concerned that General Secretary Xi is stealing a significant strategic march. In reality, stopping China spreading its economic, social, political and military influence through its New Silk Road initiative is almost impossible, short of using hard power. The Summit resolved that the only solution is to meet the threat through competition. The result is the “Build Back Better World” initiative (already shortened to B3W) centred principally on sub-Saharan Africa.

 

The New Silk Road is substantially the world’s biggest infrastructure project; but it is much more than that: what it has, and what the B3W so far lacks, is strategic coherence. China’s project has been years in the planning and it will be years in the execution, but what it explicitly does, however far those tentacles extend from China’s borders, is link China to all the countries along its route, and link all those countries to each other and then back to China.

 

Whether through ports, roads, rail, air, power lines, water grids, fibre-optics, new cities, the centre of gravity is incontrovertibly China; if 2000 years ago, all roads led to Rome, China’s idea in the 21st Century is that all roads will lead to Beijing. Biden’s idea, to the extent it is developed at all yet beyond media soundbites, is so far limited to a scatter-gun approach to many targets in a part of the world which, thanks to the Sahara and the Red Sea, is virtually cut off from the rest of the globe. It is completely cut off from the US by dint of being on an entirely separate land mass.

 

Which leads to the other structural weakness: B3W is supported by a group of western democratic leaders, all of whom are on short electoral cycles and all at the mercy of their electorates. Those constraints apply neither to the Chinese Communist Party, celebrating its centenary this week, nor General Secretary Xi. China has the self-interested reason and the means to see its own project through. B3W will survive only to the extent that the current crop of western leaders’ successors, and their successors in turn, agree to continue the support in a faraway land (the UK is a good example of contradictory thinking: we support B3W, yet we have just slashed the overseas aid budget). Beyond well-meaning virtue-signalling, what it aims to achieve remains to be seen, though it would be surprising if this programme of benevolence-with-strings (financing is conditional on the adoption of ‘western values’, treading the fine line between a worthy cause and economic neo-colonialism) did not have in mind security of access to areas rich in the rare earth minerals such as cobalt and lithium, those critical to the global decarbonisation programme. On which subject, several NATO and UN members are meeting to discuss the rising threat posed by ISIL in the sub-Saharan region: like a game of Whack-a-Mole, ISIL has not been defeated, as claimed by former President Trump about the Syrian campaign, it has merely emerged somewhere else, again in a strategically important area.

New leadership in Iran and Israel

Meanwhile in the Middle East, Iran and Israel, each the other’s implacable foe, are both under new administrations adding a further frisson of risk through being as yet an unknown quantity in an already volatile region. The change of leadership in Iran, notably to a hard-line conservative leader, as Tehran and Washington negotiate through an interlocutor the readmission of the United States to the Iranian Nuclear Containment Treaty is particularly sensitive, a process in which Washington is demonstrably not in the driving seat.

Russia: poke a bear with a stick…..

Notwithstanding Biden’s meeting with President Putin immediately after Biden’s post-G7 meeting at NATO, and a slight thaw in their mutual antipathies, last week’s British/NATO provoked clash between the Royal Navy and Putin’s forces in the disputed waters of the Black Sea reminds us that Russia has a propensity to shoot first and ask questions later when confronted with a perceived threat. As the Chief of the Defence Staff, General Sir Nick Carter, said in an interview this week, the one thing that keeps him awake at night is the possibility of a local spat such as that witnessed off Sevastopol suddenly escalating out of control. As the technological development of cyber warfare accelerates rapidly, and with it our ability and that of our allies and our potential foes to render each other’s satellite-dependant command and control systems useless, applying the “use it or lose it” axiom, so the risk rises that one side deploys its nuclear arsenal early before it cannot deploy it at all. As General Shirreff, a British former Deputy Supreme Allied Commander Europe once replied memorably at a Jupiter Investment Conference when asked what the economic ramifications would be of a limited, tactical nuclear war in Europe, “when talking about nuclear weapons, forget the words ‘tactical’ and ‘limited’; you’ll be far less worried about the economy than being urgently and immediately preoccupied with not being burned to a crisp”.

 

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