The Russia-Ukraine War and other geopolitical risks

The war in Ukraine dominates the headlines. Currently.

But the conflict’s indirect effects will reach far beyond the borders of its combatants and their allies. In fact, they could lead on to recent and diverse geopolitical risks worldwide.

Particularly alarming is the war’s potential impact on global grain supplies and food inflation. Ukraine is taken into account the “breadbasket of Europe” and, along with Russia, supplies wheat to developing countries in Africa, the Middle East and Central Asia.

There are already reports that many Ukrainian farmers are leaving their fields to defend their land as soon as sowing begins. The world can pay a price.

The war could lead on to an entire or near-complete failure of Ukraine’s 2022 wheat crop. Meanwhile, Russian wheat exports could fall to zero because the country diverts its food for domestic consumption within the face of crippling international sanctions.

Many countries depend on grain imports from Russia and Ukraine to feed their populations. The warring nations are accountable for a minimum of 80% of the grain supply in Benin and Congo in Africa; Egypt, Qatar and Lebanon within the Middle East; and Kazakhstan and Azerbaijan in Central Asia. All of those states must find recent sources of grain and pay significantly higher prices for them.

And that can make an already dire situation even worse. Even before the conflict, food inflation was rising. Last 12 months, it reached 17.6% and 4.8% year-on-year in Egypt and the United Arab Emirates (UAE), respectively. These values ​​are harking back to those before the Arab Spring uprisings in 2011. The situation is much more extreme in Turkey, where a rapid decline within the lira caused food inflation to rise to 64.5% year-on-year.

In the long run, several aspects could push food prices even higher. Aside from the dearth of grain exports from Ukraine and Russia, rising energy prices will increase transportation and fertilizer costs. With Russia, a significant fertilizer exporter, facing severe sanctions, upward pressure on fertilizer prices will only increase. This will add fuel to the fireplace and push food inflation even higher. While problems vary across income spectrums in developed countries, such trends can largely be mitigated by reducing consumer spending on consumer discretionary goods: people adapt by paying more for groceries and fewer for travel, entertainment, etc. If With a bigger share of total living costs and fewer discretionary spending, hunger is a more acute risk.

The Arab Spring is a vivid example of how such conditions can trigger unrest and geopolitical tensions. This will not be an isolated event. For example, the peasant revolts of the Middle Ages, the French Revolution, and the revolutions of 1848 show how increasing food insecurity can trigger political and social upheaval. The effect is so strong that Rule 6 of my “10 Rules for Predictions” states:

“A full stomach doesn’t make a fuss.

“Revolutions and uprisings rarely occur among people who are well fed and feel relatively safe. A lack of personal freedom is not enough to trigger riots, but a lack of food or water or widespread injustice is.”

The chart below shows the countries that depend on grain from Russia and Ukraine and the proportion of their populations that were at medium or high dietary risk before the recent conflict. Kazakhstan and Azerbaijan, in addition to Egypt and Congo, are amongst probably the most vulnerable countries attributable to their dependence on Russian and Ukrainian grain imports, their existing food insecurity, or a mixture of each.

Food insecurity and dependence on grain imports from Ukraine and Russia

But high food inflation will not be the one reason for possible turbulence. Building on recent insights from Chris Redl and Sandile Hlatshwayo, that use machine learning to discover the predictors of social upheavalWe created a Civil Strife Risk Index that ranks countries based on five key stability metrics:

1. The share of their total grain imports from Russia and Ukraine is in accordance with UN comrade given
2. The proportion of their population experiencing moderate or high levels of food insecurity, in accordance with the World Bank
3. Their youth unemployment rate is predicated on data from the World Bank and Bloomberg
4. The variety of cell phone subscriptions per 100 people, in accordance with the World Bank
5. Your rating within the Democracy Index from the Economist Intelligence Unit

Why these five components? There is evidence that countries with high proportions of young and unemployed men are more vulnerable to instability; Mobile phones are essential for organizing mass protests through social media platforms. and an absence of democratic institutions implies that the population sees no solution to change political leadership outside of direct motion.

The combination of those five indicators provides insights into which countries are most susceptible to unrest. The table below lists only those who import grain directly from Russia and Ukraine. So it only includes those countries that can suffer directly from the implications of the war in Ukraine.

The civil war index by country

The oil exporters – Saudi Arabia and the United Arab Emirates – in addition to Turkey, with its close trading ties with the United Kingdom and the European Union, are probably the most worrisome from an economic and investment perspective. Instability in these countries could have a spillover effect, disrupting energy supply chains and global trade and resulting in renewed inflation spikes in 2022.

Of course, Saudi Arabia and the United Arab Emirates have largely avoided the unrest related to the Arab Spring and are expected to profit from the rise in oil prices. Nevertheless, their high rankings within the index, due specifically to Saudi Arabia’s youth unemployment rate and the UAE’s dependence on Ukrainian and Russian grain, in addition to their low scores on the democracy index, may deserve some attention.

The situation in Turkey is especially worrying given the country’s already huge inflation rate and the high probability of a national bankruptcy in the subsequent 12 months attributable to the devaluation of the lira.

Investors have to deal with political developments in these countries in the approaching weeks and months. They can function an early warning sign of potential global supply chain disruptions that might impact the UK and Europe.

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Photo credit: ©Getty Images/alzay