Recently, in the context of the Evergreen merchant ship blocking the Suez Canal, and alongside it the potential effects of climate change on trade routes, we discussed the extent to which the major global powers are variously assessing the threats and seeking to exploit alternative opportunities (also discussed was the effect of climate change on future rare-earth mineral mining in previously inaccessible regions). Their interests are not just maritime. On land, the geopolitical tectonic plates are shifting too. Sometimes the process is so slow it is virtually imperceptible, at others there is a sudden movement which produces audible seismic tremors.

 

One such period is now. It focuses geographically on a stage which is inherently unstable in virtually every sense, spanning from eastern Europe through central Asia. Central casting provides the leads: America, China and Russia; bit-parts are being played by France, Germany and the UK; additional pyrotechnic props are suspected of being supplied by Israel. China, Russia and Iran are also sure to have heard the new Democrat mood music score written in Washington to cut defence spending. The simultaneous foci under the spotlights, whether they seek the attention or not, are Ukraine, Iran and Afghanistan.

For America and Russia, it is as much political as a power-play

The catalysts behind the sudden surge in activity are largely political, notably the recent US election and the forthcoming one in Russia. President Biden is intent on reversing Donald Trump’s withdrawal from the Iranian nuclear containment treaty. Simultaneously, he wants to deliver his promise fully to withdraw all remaining US military forces from Afghanistan by September, the 20th anniversary of 9/11 and the inception of George Bush’s War on Terror, notwithstanding that the Taliban are still believed by the UN to be actively colluding with Al-Qaeda, the administration is riddled with corruption and with links to international organised crime groups, and the economy remains dependent on the narcotics trade. Meanwhile, in Russia, against a backdrop of the Navalny protests and a falling popularity rating, President Putin has resorted to his increasingly normal diversionary tactics ahead of an election with a show of military strength; as previously, this one too is targeted at Ukraine.

 

Whether really under threat of invasion or not, nevertheless Ukraine is strategically important to Russia; it has a substantial (c.30%) native Russian-speaking population and, having already seen its Crimea peninsula annexed by Putin’s special forces, is actively lobbying to join NATO for protection, guaranteed to be seen by Putin as an aggressive move given the sensitivity of the Black Sea to Russia’s southern naval interests and the prospect of NATO’s direct border with Russia growing even longer. Putin has recently moved 85,000 troops, plus heavy armour, artillery and aircraft for ‘manoeuvres’ on the Ukrainian border. Presidents Biden, Macron and Chancellor Merkel are all making overtures to Russia to ‘cool it’, though arguably new US Solar Winds and other related sanctions (which will inevitably provoke a tit-for-tat response) and the hastily rescinded order sending a naval task force to the Black Sea are/were an odd means of de-escalation; immediate gunboat diplomacy, at least, has been abandoned.  French and German diplomatic leverage is questionable with Berlin and Paris both negotiating with Moscow for the mass purchase of the enigmatically named Sputnik V Covid vaccine, and Germany effectively mortgaging its future energy strategy to Russia with reliance on the Nord Stream 2 gas pipeline.

 

Moving east, the Iranian situation is immensely complex. Iran is Russia’s ally in Syria where, acting in concert, they filled the vacuum when the west largely washed its hands of the situation; it is one of the biggest suppliers of oil to China; it explicitly wants to see Israel destroyed and it loathes Saudi Arabia and America in equal measure. It has demonstrably flouted the terms of the nuclear containment deal, in that respect isolating America from the UK and the EU, something which can only please Moscow and Beijing both of whom are also signatories to the agreement. In the past few days, despite bi-lateral talks beginning between Iran and the US through interlocutors in Switzerland, Iran has responded to an alleged Israeli attack on a nuclear installation with a direct challenge that it will increase the output of top-quality (i.e. weapons grade) enriched uranium. It is a toxic brew.

China’s involvement is self-interestedly strategic

China’s motives in the region are strategic more than politically aimed at the domestic audience (though recent sabre-rattling rhetoric from General Secretary Xi, urging his people to “draw their dazzling swords” and “win wars” directly appeals to the folks at home). Iran is one of the few countries able to exercise real leverage with China: strategically, Iran sits at the nodal point at which the New Silk Road will fork. Using old regional nomenclature (there being too many individual countries involved) one prong will head south into Arabia and the Gulf, the other heads west and north extending through Mesopotamia and the Levant to the Mediterranean and eventually into Europe (arguably Hinckley Point nuclear power station in Somerset is at the far western end of the road in Europe). Iran is critical to China’s global ambitions, otherwise the New Silk Road is merely a central Asian cul-de-sac. If Iran needs China, China needs Iran too.

 

In Afghanistan, as the US tries to broker a pre-departure deal, a power-sharing agreement between the Afghan government and the Taliban (which many argue is a flight of fantasy), China is surreptitiously seeking to fill the vacuum left by the Americans and NATO. China too is talking with the Taliban, presuming that in the next phase of that benighted country’s development, the Taliban will be in control. Why the interest? Again, it is the strategic position of Afghanistan in relation to China, particularly the mutual 47-mile border at the tip of the Afghan Wakhan Corridor, home to an invited Chinese military garrison, and itself a key transit route on the Silk Road, abutting the highly sensitive Xinjiang Province inhabited by the Uighur Moslems. In the context of the One Belt One Road programme the Wakhan salient is integral to the plan to link the project’s main east-west axis with a southbound spur down the Karakoram Highway through Pakistan to the Indian Ocean. History says that the many Afghan groupings, with all their very complex tribal and religious factions, the internecine tensions and alliances which transcend porous borders with Pakistan, Tajikistan and Uzbekistan, look after No 1 first. They shamelessly and pragmatically use foreign influences in their own favour, until of no further utility those foreigners are discarded or worse; over the centuries they have variously seen off the British, Russians and Americans. Will the Chinese be any more successful than many of their predecessors at understanding what they are venturing in to, even if only diplomatically?

From an investment standpoint does all this matter?

It is not of immediate relevance to the extent that major currencies or bond or oil prices are being significantly and directly affected today, though the rouble weakened on the US-Russian sanctions announcement. However, contextually it certainly is of relevance as longer-term the risks become factored into term premia. Further, the geographic regions in question are politically highly sensitive, indeed volatile, some among the players prone to shooting first, the questions follow later. Markets have reacted quite sharply when events have taken an unexpected turn: consider since the end of the Iraq War and the Arab Spring, in 2014 when Putin annexed the Crimea; 2017 when Trump fired 59 Tomahawk cruise missiles at an air base in Syria; or 2020 when a US drone despatched an errant Iranian general visiting Baghdad in violation of US sanctions. It is worth just being aware of the background if/when the next event happens of whatever magnitude and people try to piece together why and how it came about.

 

The Jupiter Merlin Portfolios are long-term investments; they are certainly not immune from market volatility, but they are expected to be less volatile over time, commensurate with the risk tolerance of each.  With liquidity uppermost in our mind, we seek to invest in funds run by experienced managers with a blend of styles but who share our core philosophy of trying to capture good performance in buoyant markets while minimising as far as possible the risk of losses in more challenging conditions.  

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Market and exchange rate movements can cause the value of an investment to fall as well as rise, and you may get back less than originally invested. The views expressed are those of the individuals mentioned at the time of writing are not necessarily those of Jupiter as a whole and may be subject to change. This is particularly true during periods of rapidly changing market circumstances.

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