The Russia–Ukraine War and Other Geopolitical Risks

Joachim Klement, CFA, is the creator of Geo-Economics: The Interaction between Geopolitics, Economics, and Investments from the CFA Institute Analysis Basis.

The conflict 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 diverse geopolitical dangers all through the world.

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

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

The conflict might lead to an entire or near-complete failure of the 2022 Ukrainian wheat harvest. Russian wheat exports in the meantime might drop to zero because the nation diverts its meals commodities for home use within the face of crippling worldwide sanctions.

Many international locations depend upon Russian and Ukrainian grain imports to feed their populations. The warring nations are liable for not 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 unhealthy state of affairs. Even earlier than the battle, meals inflation was growing. During the last 12 months, it reached 17.6% and 4.8% 12 months over 12 months (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 state of affairs is much more excessive in Turkey, the place a quickly declining lira propelled YoY meals inflation to 64.5%.

Going ahead, a number of elements might propel meals costs even larger. Past the shortage of grain exports from Ukraine and Russia, spiking power costs will improve transport and fertilizer prices. With Russia, a serious fertilizer exporter, going through extreme sanctions, there can be much more upward stress on fertilizer costs. It will add gasoline to the fireplace and ship meals inflation ever larger. In developed international locations, whereas the ache varies throughout the revenue spectrum, such traits can largely be ameliorated by reductions in client discretionary spending: Folks alter by paying extra for meals and fewer on journey, leisure, and so on. However in growing nations, the place meals takes up a bigger share of whole 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 circumstances 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 show how growing meals insecurity can set off political and social upheaval. The impact is so sturdy that Rule 6 of my “10 Guidelines 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 isn’t sufficient to spark insurrections, however an absence of meals or water or widespread injustice all are.”

The international locations that depend upon grain from Russia and Ukraine together with the share of their populations that had been at medium or excessive meals threat earlier than the current battle are charted within the graphic under. 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 studying to establish the predictors of social upheaval, we constructed a Civil Strife Danger Index that ranks international locations primarily based on 5 key stability metrics:

1. The share of their whole grain imports from Russia and Ukraine, based on UN Comtrade knowledge
2. The share of their populations with average or excessive meals insecurity, based on the World Financial institution
3. Their youth unemployment fee primarily based on World Financial institution and Bloomberg knowledge
4. The variety of cell phone subscriptions per 100 individuals, based on the World Financial institution
5. Their Democracy Index score from The Economist Intelligence Unit

Why these 5 elements? Proof means that international locations with excessive proportions of younger and unemployed males are extra vulnerable to instability; cell phones are important for organizing mass protest through social media platforms; and an absence of democratic establishments implies that the inhabitants sees no alternative to alter the political management exterior of direct motion.

Combining these 5 indicators yields perception into which international locations are most liable to civil unrest. The chart under solely consists of people who straight import grains from Russia and Ukraine, so it’s composed of solely these nations that may straight endure from the fallout of the conflict 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 probably the most troubling from an economics and investing perspective. Instability in these international locations, may have a spillover impact that disrupts power provide chains and world commerce and triggers renewed spikes in inflation in 2022.

To make sure, Saudi Arabia and the UAE largely prevented Arab Spring-related unrest and will profit from the rise in oil costs. However, their excessive rankings on the index, pushed particularly by the youth unemployment fee in Saudi Arabia and the UAE’s reliance on Ukrainian and Russian grain mixed with their low Democracy Index scores, might warrant some consideration.

The state of affairs in Turkey is especially worrisome given the nation’s already huge inflation fee and the sturdy chance of a sovereign default within the subsequent 12 months as a result of devaluation of the lira.

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

For extra from Joachim Klement, CFA, don’t miss Danger Profiling and Tolerance and 7 Errors Each Investor Makes (and The best way to Keep away from Them) and join his common commentary at Klement on Investing.

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

Picture credit score: ©Getty Photos/alzay

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