Ukraine and Everywhere: Second Order Effects Radiate
By Cameron Munter, Skytop Contributor / May 23rd, 2022
Cameron Munter served as ambassador to Pakistan at the time of the Bin Laden raid. He was ambassador to Serbia during the Kosovo independence crisis. He served twice in Iraq, in Mosul as Provincial Reconstruction Leader and in Baghdad as Deputy Chief of Mission. In the course of three decades as a career diplomat, he was also NSC Director in the Clinton and Bush White Houses, and served overseas in Warsaw, Prague, and Bonn.
Munter studied at Cornell and earned a PhD in history from Johns Hopkins, and has taught at Pomona College, Columbia University School of Law, and UCLA.
Currently a global consultant living in Prague, Munter was President and CEO of the East West Institute, a nonprofit engaged in global conflict prevention. He is a member of the Council on Foreign Relations and the American Academy of Diplomacy and serves on numerous corporate and nonprofit boards.
Two Months In
Waves of refugees continue to flood into neighboring Eastern European countries, lives torn and spirits worn, as Ukraine heroically fights to defend its sovereignty–Kyiv, and points south and east–against Russian President Vladimir Putin. Real time media coverage, including interviews with tear-soaked eyes and trembling hands, lock in images of the ravages that qualify as human rights abuses against noncombatants. Yet their quest is simply to find a path out from underneath the weight of their months-long persistent horror.
Russia’s invasion and its costs are immediately palpable.
The Cold War is over. At least, we grew to believe that views on building walls and separating people were as alive as fallen trees petrified into rock. However, we now consider that our optimism may have gotten lost in the forest of Putin’s fossilized albeit perpetuitous Soviet Era pride. As we turn the page, the world is likely to experience a new kind of climate change, one of the geopolitical kind, and one that is likely to lay a frosty resolve onto world order and the global economy.
Prepare for an autumn chill, and yet perhaps in some markets, a spring breeze.
Sanctions and Side Effects
But don’t think that just because the developed countries of the world are siding with Ukraine that Russia is entirely isolated. Significant countries of the global south are still weighing their options
Sharp sanctions against Russia are likely to have the same effect as hitting the pause button on your streaming channel. They could ground commercial air travel in Russia, disable Russia from participation in global financial markets, and bring a grinding halt to certain Russian industries. This includes–worthy to note–key defense related areas like tank production. Russia assets abroad are frozen, and senior officials and businessmen are levied in a crippling fashion.
All these are the present immediate effects caused by Putin’s actions. However, like most world events, the greater impact is experienced in significantly felt second-order effects. They have long term implications: geopolitical effects are beginning to take place now.
To start, consider China. Recently, prior to the Russian attack, it agreed to far-reaching cooperation with Russia. However, China has recently begun to weigh the cost of embracing Russia too closely, lest it jeopardize its global position in trade and finance with the developed world.
On the other hand, India, Pakistan, Iran, and South Africa seem determined to play all sides and make the best of their own interests. The immediate impact of the war has been to strengthen America’s system of global alliances, from NATO and other interlocking relations with European democracies to ties with key Asian allies like South Korea, Japan, and Australia.
Blowback onto Developed Countries
Let’s go long and consider the damage the war will have on emerging and frontier markets. These markets affect the performance of leading economies. The impact of economic downturns is not isolated, and they have an effect on prospects for global political stability, especially, in years out onto the horizon line, well after most of us have moved on from current events and their contexts.
Supply Chain Issues Magnified
Before Russia’s attack, global supply chains were already unsettled. Countries such as Thailand, Vietnam, and Malaysia, as beneficiaries of globalization, became significant exporters of textiles and assemblers of higher added-value products. Under pressure in recent years, they added to existing tensions between the U.S. and China.
Russia As a Commodities Supplier with Global Impact
Russia is a key supplier of oil and gas, not only to the developed economies of Europe, but worldwide. Rippling effect further experienced, there’s the cost of Russia’s war on the commodities trade, starting with the disruption of availability of hydrocarbons along with the growth killing volatility of pricing.
Consider foodstuffs, most notably wheat and cooking oil, and the related supply of agricultural fertilizers. Most estimates claim that Russia and Ukraine accounted for about 30 percent of global exports of wheat and other grains, and both exported large amounts of rapeseed, sunflower, and other cooking oils. Currently, these products cannot be shipped from Ukraine because of the illegal Russian naval blockade in the Black Sea. Sanctions and skyrocketing insurance costs keep Russian wares from foreign markets, adding to an already stressed supply chain.
Wealthy European countries can absorb the price shock of rising commodity prices, and indeed have other sources if supplies from the war theater are scarce. But near-vicinity countries such as Turkey, Egypt, Tunisia, or others such as Sri Lanka, Bangladesh and Pakistan, depend on substantial imports of grain and food oils to feed their large and growing populations.
Hunger and Its Ravages
Hunger conditions continue to destabilize vulnerable countries. You may recall last year’s headline crisis in Afghanistan. With the departure of American and allied troops, and financial support, we saw mass hunger over the winter. The headlines may have departed, but the prospect of famine in Afghanistan has not. More than a new disruption, it promises a painful fate of the Afghan people, even more tragic than our withdrawal.
Further Freefall for Lebanon
Lebanon has been in an economic free-fall for a few years now. A dysfunctional governing system has coincided with financial crises, and then exacerbated by the misfortune of such accidents as the 2022 explosion that devastated downtown Beirut. This is a country whose constitution, from the 1940s, was an unusual mix of ethnic patronage, foreign relations and arrangements. It has suffered mightily from decades of political instability. Not having enough to eat presents the risk of further instability, and without the ability to cook its constitution, the reforms necessary to rebuild this once dynamic country become even more unlikely. Sadly, even as they are more necessary now than ever before.
On the Other Hand
On the lucky side of the spectrum are countries including Malaysia. Not all countries fare poorly inside the newly realized second order effect. Malaysia, though not an energy producing
power-player, is still an oil exporter. It has used $66 per barrel as its budgeting baseline. With oil hovering at $100 per barrel, its capital position looks solid for now. In addition, as companies try to cope with supply chain disruption, it’s unclear if stable countries like Malaysia will benefit from China’s bullfight with COVID-19 and related uncertainty about its relationship with America.
A dice toss, Malaysia may emerge from this better than many other emerging markets. However, it’s too early to say.
The Butterfly Effect
Second-order effects of Russia’s action cause more than physical destruction and human suffering within the confines of Ukraine. It ripples its way into countries far from the battlefields of Mariupol or Kharkiv. The conflict magnifies and increases the political strengths and weaknesses of countries whose governance, social or economic conditions are susceptible to events even though they are distant from imperceptibly connected physical borders.
Food Supply and Regime Stability
The leaders of Turkey, Egypt, and Tunisia share some form of strongman rule and reel already from serious economic crises. This includes financial mismanagement, demographic change, and unrealized expectations of newly urbanized middle classes. It is important to recognize that there are 100 million Egyptians and a similar number of Turks. Unrest caused by food shortages from Putin’s invasion could occur, and like those leaders whose populous historically experienced `bread riots’, they could and often do end up in a brawl for political power.
This presents an important question about the role of policymakers and what they might consider in preparing for such a scenario.
Two Guesses to Consider
First, given short attention spans and limited strategic planning capacities, it may be that the developed economies of the west are simply too overloaded by other challenges to pay sufficient attention to these potential crises. They will only respond when those crises have erupted, and the unraveling begins to occur. We continue to experience the inability of multilateral institutions, such as the UN and its affiliated bodies, to even deal with COVID-19 and other challenges. One can hope that we “get ahead” of these potentially dangerous situations in emerging and frontier markets. That said, one can hardly count on it.
Second, this appears to be a new situation with a difference of degree such as unstable markets and higher cost of risk capital. It becomes a difference of kind. For example, the breakdown in supply chains leading to multiple theaters of political instability, which then cross borders and disrupt other countries. If people riot in Cairo or Karachi, are they likely to identify Russia or Ukraine as the cause of their unhappiness? No, they’ll identify the weaknesses that already exist in their countries, whether it be from corruption or authoritarianism or a particular problem unique to their ineffective leaders.
It’s hard enough to anticipate investor risks in emerging and frontier markets in the best of times. Crediting Russia’s attack on Ukraine, new and extraneous variables are now in place, stimulating second-order effects far beyond Russia’s relationship with the west.
This should pose a significant concern to institutional investors worldwide, and it should factor into their due diligence in assessing where to place their capital. The risk considerations are likely to spin a capital markets version of Russian Roulette.