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While the immediate consequences of the Russia-Ukraine conflict are obvious, particularly in humanitarian terms, the longer-term effects may be harder to grasp. And yet, the war’s effects could have a profound impact on the world’s economic and geopolitical structure in the coming decades. In particular, they are likely to shake up the order that emerged from the Bretton Woods Agreement at the end of the Second World War. This agreement led to the creation of the IMF and what was to become the World Bank, against the backdrop of a move towards international economic cooperation and a global currency zone tied to the US dollar. This was the thrust of a recent speech made by Janet Yellen, US Secretary of the Treasury and former head of the Fed, to the Atlantic Council, a think tank specialising in international relations.
The war in Ukraine certainly looks like it could be the final nail in the coffin of globalisation. The trade war between the United States and China, together with the Chinese desire to create an independent monetary zone in Asia backed by the Yuan, were the first steps along this path. The Covid pandemic, which highlighted Western countries’ dependence on production chains in emerging economies and the need to relocate at least some strategic production, had already accelerated this trend. Russia’s invasion of Ukraine could prove to be the tipping point at which the world’s economy starts moving away from globalisation and towards regionalisation. “History is tragic,” as French philosopher Raymond Aron once said. As the world relearns this truth, it is clearly apparent that the goal is no longer to encourage free trade but to ensure stable trade among States with a shared political vision.
Let us consider a few figures about raw materials. These key elements of the geopolitical battle raging around the Russia-Ukraine conflict enable us to understand the inherently strategic dimension of this paradigm shift. China, for example, accounts for nearly 60% of global manufacturing and one third of the world’s rare earth reserves. While Australia, Chile and Argentina alone account for 80% of lithium reserves, nearly 70% of lithium refining capacity is located in China. This is just one example among countless others. Securing the supply and transformation of raw materials as well as the production chains of the basic components that derive from them (starting with semiconductors) will undoubtedly be one of the major challenges of the future. From this perspective, the United States is well placed – it has significant reserves of oil and shale gas and vast agricultural land in the Great Plains, not forgetting deals with Australia, Canada and some Latin American countries, guaranteeing easy access to minerals. Hence the US desire to encourage “friend-shoring”, i.e. the refocusing of trade with “friendly” countries only.
The challenge for Western Europe will be greater. Apart from coal, agricultural commodities and, to a lesser extent, uranium, the region does not have significant reserves of any strategic resource. The close relations that Western Europe maintains with Africa allow it to partially compensate for this deficit, but these ties are threatened by the emergence of Chinese and Russian interests on the continent. And unless there is a major diplomatic turnaround, the European Union is unlikely to be able to count Russia among its allies. This is a new international context whose consequences have yet to be fully appraised, while global uncertainty would appear to be the paradigm of the decades to come.
Written on 13 May 2022 – Enguerrand Artaz, Fund Manager and Olivier de Berranger, CIO