The Next Phase in the War

Geopolitical conflict is unpredictable. One of the major problems for financial markets given the situation in the Ukraine is that it could escalate or deescalate in any number of ways. It’s impossible to know what comes next.

Yet, as uncertain, and unpredictable as the entire situation is in Europe, I think the most probable outcome is very simple. Russia takes Ukraine while the USA, Europe and their allies allow it to happen. It seems the most realistic way it plays out without a major escalation. The alternatives are not great.

The US and Europe have been clear so far in stating they will not put troops on the ground in Ukraine and they will not put in place a no-fly zone over Ukraine. Both of those acts would spark a massive retaliation from Russia and probably lead to World War III. US President Biden said as much in a tweet over the weekend.

So, Putin likely gets Ukraine, for now at least, and probably in name only. In due course the Ukrainian people are sure to take it back. Putin needs to accomplish his objective though, declare victory, and save face, otherwise the stakes are raised higher. But Putin will go no further. The western world has collectively combined to collapse the Russian economy.

The counter measures from NATO countries means Russia have been crippled financially and economically. Not only from heavy sanctions, compounding their downfall is that almost every multinational company in the world is withdrawing and refusing to do business with them.

The most important next phase of the war is how China responds.

China has deep ties with Russia, but Putin’s strategic blunders and the fact that China is still an emerging power, and not the power it will one day be, puts them in a precarious position. Tolerance for a pro-Russian stance is almost nonexistent in Western Society now so it is a rare opportunity for the US to aggressively pursue its agenda without looking like the bad guy.

I would expect the US and Europe to apply maximum pressure on China to definitively choose sides. The current mood globally is very much one of “you are either with us, or you are against us”. The strategic rationale from the US seems obvious; if you are our enemy now and you will be in the future, we would prefer that battle now, before you are any bigger.

While the Chinese economy is significantly larger and more difficult to extricate from the global system than Russia it is now clear to China that a strategic misstep could see their emerging nation face similar devastating sanctions. This would be an economic catastrophe for not only China but indeed for the global economy. But if China continues to support Russia explicitly or implicitly it is very possible that it will come to that.

China though, are masters of passive aggressive business and political negotiations. There is no country better at using capitalist system against the West by punishing a company or an industry. It would not surprise me if the sudden ‘covid lock downs’ of entire Chinese cities, critical to the global supply chain, such as Shenzhen, was a warning from China to show they can do economic damage too.

To nullify a future adversary early in their ascent I expect the US and its allies to fully leverage the current situation to force China to make a call and not sit on the fence. Either way, how China proceeds from here will have a significant and lasting consequences for the entire world and its economy.


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