Tag: Russia
Bi-Weekly Geopolitical Report – Parsing the World’s New Geopolitical Blocs (May 9, 2022)
by Patrick Fearon-Hernandez, CFA | PDF
For more than a decade, we at Confluence have been tracking and writing about the waning commitment of the U.S. to its role as global hegemon. We’ve shown how U.S. retrenchment and protectionism have helped erode globalization. Factors like deregulation, falling transportation costs, improved technology, and easing geopolitical tensions following the end of the Cold War may have promoted political and economic integration for decades. Now, however, governments across the globe are erecting barriers to trade, investment, and migration, leaving authoritarian strongmen emboldened to assert themselves. The latest example of that has been Russian President Putin’s invasion of Ukraine.
Amid these developments, we’ve argued the world will fracture into at least two main political and economic blocs: a U.S.-led bloc consisting mostly of liberal democracies and a China-led bloc of mostly authoritarian states. This report discusses which nations are likely to join each bloc, which will merely lean toward one bloc or the other, and which may try to stay neutral. Based on our predicted makeup of each bloc, we describe their differing political, economic, and financial characteristics. As always, the analysis also includes ramifications for investors.
Don’t miss the accompanying Geopolitical Podcast, now available on our website and most podcast platforms: Apple | Spotify | Google
Bi-Weekly Geopolitical Podcast – #8 “The Russians Respond” (Posted 4/25/22)
Bi-Weekly Geopolitical Report – The Russians Respond (April 25, 2022)
by Bill O’Grady | PDF
In mid-March, we wrote a report detailing the effects of financial sanctions on Russia. And now, about six weeks later, we are seeing the response from Russia. As we noted in our earlier report, Western sanctions on Russia were extensive. Although something similar was deployed against Iran, never before had such sanctions been used against a major country.
The initial response from the financial markets was swift; the ruble (RUB) plunged. However, over the past couple of weeks, the RUB/USD has recovered all of the initial losses. It should be noted that some of the recovery is due to capital controls as Moscow has made it very difficult to move money out of Russia. Exporters who acquire hard currency are required to turn 80% over to the Russian Central Bank. The bank also lifted interest rates to 20%, yet recently reduced its policy rate to 17%. But perhaps the most radical action the government has taken is to demand payment for energy in RUB.
In this report, we will begin with examining the concept of money and the complications that international trade creates, including a discussion of the reserve currency concept. Using this construct, we will apply it to the specific case of Russia. Our contention is that the dollar/Treasury reserve system is, at best, being tested, and at worst, unraveling. We will also include comments about emerging reserve currency blocs and conclude with potential market ramifications.
Don’t miss the accompanying Geopolitical Podcast, now available on our website and most podcast platforms: Apple | Spotify | Google
Bi-Weekly Geopolitical Podcast – #7 “The Bosnian Divide” (Posted 4/11/22)
Bi-Weekly Geopolitical Report – The Bosnian Divide (April 11, 2022)
by Thomas Wash | PDF
It took just two shots from Gavrilo Princip to change the world. That day in Sarajevo marked the end of the Habsburg dynasty, ignited the first of two intercontinental wars, and laid the groundwork for the present-day global order. Gavrilo, a Bosnian Serb, thought he would pave the way for a common South Slav state by killing Archduke Franz Ferdinand, the heir to the Habsburg throne. Almost 110 years later, the dream of a common South Slav state has yet to be fulfilled, although the sentiment is still shared among many Bosnian Serbs today.
On October 2, Bosnia-Herzegovina will hold its ninth general election since the signing of the Dayton Accords in 1995. The election has garnered international attention as there are growing concerns that the outcome could lead to another civil war. Bosnian Serbs are pushing for secession, while Bosnian Croats have called for their own entity. Both groups have threatened to boycott the upcoming election unless electoral reforms are made and there doesn’t seem to be an obvious solution.
Meanwhile, there are also growing fears that Bosnia could become Russia’s next target after Ukraine. Tensions between the two countries have risen since Bosnia-Herzegovina expressed interest in joining NATO. Last year, Russian foreign minister Sergei Lavrov warned that his country would react if Bosnia-Herzegovina joins the military alliance. Lavrov’s threat, although somewhat vague, has led many to speculate that Moscow could be plotting an intervention in Bosnia-Herzegovina. We suspect that Russia will use this election as an opportunity to assert itself within the region.
In this report, we will examine the history of Bosnia-Herzegovina, why Russia has a vested interest in the country, and how the election could play out. As usual, we will conclude with market ramifications.
Don’t miss the accompanying Geopolitical Podcast, available on our website and most podcast platforms: Apple | Spotify | Google
Bi-Weekly Geopolitical Podcast – #6 “The New Era of Higher Defense Budgets” (Posted 3/28/22)
Bi-Weekly Geopolitical Report – The New Era of Higher Defense Budgets (March 28, 2022)
by Patrick Fearon-Hernandez, CFA | PDF
The Russia-Ukraine war has transformed the world in the blink of an eye. We think the war and its aftermath will reverse much of the economic globalization of recent decades and cleave the world into two or more blocs with only limited interplay. We believe sanctions on Russia will discourage many central banks from seeing the U.S. dollar as their preferred reserve currency. We see an isolated Russia being forced into an even tighter relationship with China, where it will be the junior partner.
Now that it’s easier to see the geopolitical and military threats from authoritarian leaders in China, Russia, and beyond, we believe the war has also ushered in a new era of high defense spending. We expect that countries around the world will now invest much more in national defense than they have in decades. This report examines the implications of higher defense spending within NATO and the potential ramifications for investors.