Markets

Ukraine, Russia, and the bigger picture: 3 important lessons about geopolitics and what they mean for markets

How do markets stand to be affected by the roaring return of geopolitics to the world stage? Galvin Chia takes a closer look.

Lesson 1: policy and geopolitics are now firmly back on the radar for global companies and investors

Whichever region you look at, domestic policy is starting to be felt further afield. The last 12 months has seen multiple events ripple through markets and global supply chains including China’s regulatory crackdown on the technology sector (July 2021), Turkey’s devaluation of the lira (November and December 2021), and Russia’s invasion of Ukraine.

But it is the last of these events that has served as a reminder that the balance of power among countries is relevant once more. Crucially, open conflict between nation-states is no longer inconceivable. In the longer-term, this raises the risk that de-globalisation could accelerate.

The bottom line for markets: investors will continue to diversify away from Russian assets, and we may see that investment diverted towards large, systemically important emerging market economies instead. We are also likely to see greater wariness around investing in regions that could become geopolitical flashpoints in the medium-term. Currencies in stable western countries (where interest rates are also rising) could also benefit.

Lesson 2: China’s engagement with Russia and the West will be important for politics and markets longer-term

China’s stance on Russia’s invasion of Ukraine raises difficult questions that could have a huge influence over how the country is perceived globally. How it balances its role as an aspiring international superpower that both supports its close allies and respects national sovereignty will be crucial. In the near term, China looks to be distancing itself from the conflict while also volunteering its services as a mediator between Russia and Ukraine, though that offer has yet to be taken up by both sides.

Meanwhile, Russia continues to pursue closer ties with China, where it could stand to benefit from greater bilateral trade, particularly in energy, and potentially greater regional clout. Though Russia’s reliance on China for trade is far greater than China’s on Russia, greater bilateral trade could have big implications for yuan valuations, and in the longer-term, potentially reopen the path to the currency’s internationalisation. More widespread use in key commodity markets and trade finance could one day lead global central banks to use the CNY for reserve diversification. But for that to occur in practice, China’s tight grip in the form of capital controls would need loosening.

The bottom line for markets: we think China will seek to remain neutral over the conflict, with stability again being a core strategic aim. But the right balance between supporting Russia, an ally, while not antagonizing the west may be tough to strike. Still, if more bilateral trade with Russia is on the cards, it will lead to greater pressure for more widespread use of the CNY.

Lesson 3: China may seize an opportunity to expand its global influence as the West shifts focus

The war in Ukraine has challenged America’s broader foreign policy stance in two important ways: first, it’s steadfast adherence to international institutions and trade – rather than force – as the primary domain for action on the world stage looks shakier given the events currently unfolding; second, its focus on longer-term “strategic competition” with China while expanding the role of regional allies seems to be giving way to shifting priorities. This could have big implications for China, depending on how it reacts in the months ahead. We see three possible options:

  1. China treads carefully: with Russia increasingly isolated – and that isolation acting as a warning to other countries that buck global norms – China will continue navigating closer ties with the country while attempting to avoid international censure. This remains our base case.
  2. The US gets distracted: in much the same way that the ‘War on Terror’ took the US focus away from China’s international rise in the 2000s, America pivots towards Russia, giving China freer rein to expand its influence elsewhere.
  3. Western solidarity coalesces around China: the US and its allies could instead find renewed impetus to defend the trade and institution-based world order, pushing back more forcefully on China – and nudging it more forcefully into forming regional trade and diplomatic alliances.

The bottom line for markets: both scenarios 2 and 3 could lead China to pursue more regionalised trading and data-sharing arrangement, leading to “near-shoring” and the splintering of prior global network effects (news, financial transactions, or even the internet). This could also lead to a significant appreciation of the CNY as regional allies seek alternatives to the US dollar. Still, we think scenario 1 is likeliest of the three; it is the least costly or confrontational.

Concluding thoughts: de-globalisation ahead?

The biggest takeaway and potentially the greatest risk for markets is that, were much of the above to come to fruition, it would only serve to exacerbate the current trend towards regionalisation and de-globalisation.

For companies, de-globalisation will likely lead to increased supply chain disruption. It may push rising prices higher yet, and should prompt companies to continue strengthening their supply chains. After two years of muddling through a global pandemic, many have of course already prioritised the resilience of their supply chains in the face of cacophonous and abrupt global lockdowns and reopenings. Rising geopolitical tensions only serve as a reminder that global supply chains will continue to face pressure for some time, adding urgency to those de-risking efforts.

Get in touch

To speak with us about the impact of geopolitics on global supply chains, get in touch with your NatWest representative or contact us here.

This article has been prepared for information purposes only, does not constitute an analysis of all potentially material issues and is subject to change at any time without prior notice. NatWest Markets does not undertake to update you of such changes.  It is indicative only and is not binding. Other than as indicated, this article has been prepared on the basis of publicly available information believed to be reliable but no representation, warranty, undertaking or assurance of any kind, express or implied, is made as to the adequacy, accuracy, completeness or reasonableness of the information contained in this article, nor does NatWest Markets accept any obligation to any recipient to update or correct any information contained herein. Views expressed herein are not intended to be and should not be viewed as advice or as a personal recommendation. The views expressed herein may not be objective or independent of the interests of the authors or other NatWest Markets trading desks, who may be active participants in the markets, investments or strategies referred to in this article. NatWest Markets will not act and has not acted as your legal, tax, regulatory, accounting or investment adviser; nor does NatWest Markets owe any fiduciary duties to you in connection with this, and/or any related transaction and no reliance may be placed on NatWest Markets for investment advice or recommendations of any sort. You should make your own independent evaluation of the relevance and adequacy of the information contained in this article and any issues that are of concern to you.

This article does not constitute an offer to buy or sell, or a solicitation of an offer to buy or sell any investment, nor does it constitute an offer to provide any products or services that are capable of acceptance to form a contract. NatWest Markets and each of its respective affiliates accepts no liability whatsoever for any direct, indirect or consequential losses (in contract, tort or otherwise) arising from the use of this material or reliance on the information contained herein. However this shall not restrict, exclude or limit any duty or liability to any person under any applicable laws or regulations of any jurisdiction which may not be lawfully disclaimed.

NatWest Markets Plc. Incorporated and registered in Scotland No. 90312 with limited liability. Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and Prudential Regulation Authority. NatWest Markets N.V. is incorporated with limited liability in the Netherlands, authorised and regulated by De Nederlandsche Bank and the Autoriteit Financiële Markten. It has its seat at Amsterdam, the Netherlands, and is registered in the Commercial Register under number 33002587. Registered Office: Claude Debussylaan 94, Amsterdam, the Netherlands. Branch Reg No. in England BR001029. NatWest Markets Plc is, in certain jurisdictions, an authorised agent of NatWest Markets N.V. and NatWest Markets N.V. is, in certain jurisdictions, an authorised agent of NatWest Markets Plc. NatWest Markets Securities Japan Limited [Kanto Financial Bureau (Kin-sho) No. 202] is authorised and regulated by the Japan Financial Services Agency. Securities business in the United States is conducted through NatWest Markets Securities Inc., a FINRA registered broker-dealer (http://www.finra.org), a SIPC member (www.sipc.org) and a wholly owned indirect subsidiary of NatWest Markets Plc.

Copyright 2022 © NatWest Markets Plc. All rights reserved.