Dragons and Eagles and Bears, oh my! Geopolitics among global powers | 21st January 2015

Dragons and Eagles and Bears, oh my! Geopolitics among global powers in 2015  |  Tensions between the world’s major powers are expected to continue in 2015 but are unlikely to develop beyond sabre-rattling. At this stage, we expect potential crises (for example, in the South China Seas in Asia and Moldova and Ukraine in Europe) to have greater regional, rather than global, significance. However, oil prices are a potential flashpoint with global repercussions.

A recent report released by the Eurasia Group wrote that 2015 will herald the return of geopolitics; in reality, geopolitics never went away. At Delta Economics we identify trends and patterns in world trade so the implications of political events for markets have long been evident in our forecasts. Indeed, in the run-up to a geopolitical crisis we often see a noticeable impact on trade.

For example, analysis of the historical trade data in the years before the 2008 Georgia conflict shows an unprecedented increase in Russian trade with Georgia (Figure 1). Interestingly, this increase began almost immediately after Putin’s State of the Nation Address during which he declared that ‘the collapse of the Soviet Union was the greatest geopolitical catastrophe of the century’.

 

2015-01-21_CommentsAnalysis_010_geoRisk2015_fig01

Figure 1  | Russia-Georgia Total Trade, 2001-2008
Source | DeltaMetrics 2015

 

In fact, trade may even anticipate social and political upheaval in a timely manner. For example, in the months preceding the revolution in Ukraine last year we noted a substantial year-on-year spike in Ukraine’s imports of riot gear and ammunition from Russia at 20.1% and 13.6%, respectively. This was compared with just 1.8% growth in Ukraine’s imports generally.

So what do we think will happen in 2015? Relations between the major global powers have not been this strained for decades and China, Russia and the US are likely to continue to dominate the headlines. Our trade data reflects this suggesting ever-strengthening trade patterns on clearly delineated East-West lines: for example, Russia’s trade is set to spike in 2015 according to our latest estimates prompted by at 14.5% increase in trade with China and an 8.8% increase in trade with Iran. This compares with growth in trade with the US which we expect to fall from nearly 12% growth in 2014 to 4% growth in 2015.

 

In spite of a weakening economy, Russia is still a threat to European stability |  The crisis in Ukraine has not been resolved. Russia is certain to continue to support separatists in the Donbas, while the West is also likely to keep sanctions in place. This will leave the Ukrainian economy in precarious position. We expect Ukrainian exports to continue to suffer, contracting from 0.5% in 2014 to -0.2% in 2015.

Another region to keep an eye on in 2015 is Moldova. The country is politically significant to both the EU and Russia. It has been a “frozen conflict” since violence broke out in the breakaway region of Transnistria in 1992. Russia responded by stationing a small number of troops and a large arms stockpile. Russia also continues to offer the region substantial financial support.

However, an election in late 2014 saw Moldova deepen ties with Europe, with pro-European voters gaining 45.5% of the vote. This unlikely to sit well with Russia or the 370,000 ethnic Russians of Transnistria who accused Moldova of rigging the vote. Figure 2 shows that we expect a substantial increase in both imports and exports to Moldova to 2017. Worryingly, the trade pattern seems to reflect the spike in trade seen before the Georgia Conflict (Figure 1).

 

2015-01-21_CommentsAnalysis_010_geoRisk2015_fig02

Figure 2  | Russia-Moldova Total Trade, 2013-2017
Source | DeltaMetrics 2015

 

We expect China to continue to challenge US hegemony, but tensions may flare with neighbours in the South China Seas  |  Our forecasts show a return to healthy levels of import and export growth at 8.9% and 7.2%, respectively. This growth is largely a result of Xi Jinping’s political reforms: there has been a formal recalibration of China’s economic priorities away from traditional export-led growth towards greater domestic consumption. While crackdowns on corruption will reduce factional power struggles and ensure party policy is more consistent – crucially in the area of foreign and security policy.

However, Xi’s pivot away from the notion of individual prosperity towards a collective sense of Chinese greatness has been characterised by growing economic and political nationalism. This manifests itself in regular military posturing – particularly in the South China Seas. Some regional powers see China’s behaviour, specifically the construction of factories across the Nine-Dash line, as an attempt at a land grab. Last year Vietnamese and Chinese vessels came to blows and there is an ongoing arbitration dispute with the Philippines. Sino-Japanese relations are also strained over the Senkaku/Diaoyu island dispute. There will be no easy solution to these problem and we expect it to rumble on throughout 2015.

The biggest risk to China is perhaps that it is alienating itself in the region and therefore inadvertently aiding their main rival: the US. At Delta we are already seeing evidence of this trend in our forecasts with rates of US total trade growth to the Asia Pacific region set to jump from 2.7% in 2014 to 4.2% in 2015.

 

Russia and China may emerge as strong economic partners  |  It is unlikely that China will curb its military spending or industrial production in the near future. Chinese demand for energy is huge in China and, after the Ukraine crisis, it appears China has found a key partner to meet its burgeoning demand for oil.

We expect a significant increase in trade between the two nations. Bilateral trade growth was a paltry 0.7% in 2013 but 9% in 2014; this is clearly indicative of a booming relationship. This has been epitomised by recent deals such as the Gazprom-CNPC contract which is worth an estimated $400 billion. As well as the recent Vankor pipeline deal, referred to by Putin as “the biggest construction project in the world”. The Vankor oil project is estimated to be completed in 2019; a sign of Russia’s long-term commitment to trade with China.

So, although 2015 is unlikely to see any catastrophic bust-ups between the world’s major powers, tensions are certainly simmering. If there is one factor which has the potential to be the proverbial “straw that breaks the camel’s back” it is oil. Russia is also deepening ties with oil-producing Latin American countries. Russia, of course, has little need of oil itself and is clearly attempting to undermine US interests. Oil trade may well turn out to be a metaphorical battleground as the year progresses.

 

Dragons and Eagles and Bears, oh my! Geopolitics among global powers  |  Author  |  Jack Harding  |  Analyst and Publications Manager