Before my trip to China in December 2021, I optimised my stock portfolio. At that point, Washington had been starting already to write itself checks for over USD 54bn for supplying military aid to Kiev, to be paid by Ukraine by the end of the war. Since Russia’s invasion, my analysis has been confirmed: we have seen both a rising shortage of commodities and the energy supply.
In which industry segments, where, will the strategic winners of this conflict be? Throughout this analysis series, I would like to apply a top-down view into five major areas: Geopolitics, Globalization, USD dominance, and the Chinese and German economies.
A world divided into two triads is emerging: the first tier consisting of America, Russia, and China; the second tier consisting of: the EU (high-income), India/SEA (human capital), and the Middle East/Africa (energy-rich).
America and the EU
The security needs of small EU countries have provided effective leverage for America to strengthen and expand NATO further. Germany and other main EU powers have also fully surrendered their geopolitical, military, and economic decision-making to Washington.
Another prominent example: Berlin completed the North Stream 2 pipeline under Merkel, despite American sanctions, but is now fully committed to wasting this substantial investment. America has completely succeeded in halting any further integration of the continental European economy into the competitive Russian energy supply. Now any future supply of Russian energy must go through the USD system: via a flourishing black market in international waters involving giants like Shell and Exxon Mobile.
The EU, in Brussels, seems not to know the true consequence of all the measures taken against Russia. Why not fight for a better life for voters, without a nuclear escalation risk in continental Europe? The reason is that the decision was made in Washington. Arguments in Brussels over sanctions, weapons, and military aid to Ukraine have been reduced to macho rhetoric. Supposed to induce a foreign regime to change Putin’s aggression, they have blatantly failed.
Apologists now claim that sanctions are merely a deterrent, intended to work in the medium to long term. As war in Ukraine shifts into a different gear, that term could be long indeed. Sanctions may have harmed Russia’s creditworthiness, but the 70% surge in world gas prices alone has supercharged its balance of payments. Its current account trade surplus, according to its central bank, is now over three times the pre-invasion level. At the same time, sanctions are clearly hurting countries in western and central Europe who are imposing them. [Source]
The only credible potential gain for the EU, in the long term, is stopping the expansion of Russian influence in the style of the former East Bloc. The best case-scenario, of course, is regime-change in Russia and a share of its enormous energy resources.
Russia and America
Former US Director of Central Intelligence (1991-93) and Secretary of Defense (2006-11) Robert Gates believed that “almost everything Putin does at home and abroad is rooted in the collapse of the Soviet Union in 1991, which for him marked the collapse of the four-century-old Russian empire and Russia’s position as a great power.” Putin’s restoration of Russia as a great power has also involved significantly strengthening the country’s military capabilities, as well as pursuing an aggressive foreign policy, especially in the Middle East and Africa. He sees the US as the primary enemy and is determined to do whatever he can to exacerbate American tensions at home, disrupt relationships with allies even as he interferes in their internal affairs, and weaken the US position internationally. In these endeavors, he has enjoyed an increasingly close partnership and commonality of purpose with the Chinese. [Source]
Nearly twenty years before the fall of Soviet Union, Former President Nixon and his adviser Kissinger laid the groundwork to destroy the Soviet Union with a visit to Beijing. America got China on board and opened a military front in Vietnam to discredit the Soviet Union’s military commitment towards its allies. Then the war in Afghanistan, against Russia and supported jointly by Washington and Beijing, became the straw that broke the Soviet Union’s back.
Russia and Asia
Russia’s “special operation” in the Ukraine is entirely different. Though Putin may have overestimated Russia’s true military strength, Moscow seems to have learned its geopolitical lessons. NATO’s failure in Afghanistan is still too fresh for all Asian nations. Now none of them want to bet against a Russia rich in energy resources and nuclear power (second only to America). Additionally, America’s treatment of the economic powerhouse that is China, counter to their own immediate interests, has made Asian nations wary. Like the previous situation with the Soviet Union, there is now American confrontation on both sides in the same time against China and Russia, and, understandably, none want to choose.
India—the world’s largest democracy—has taken a neutral stance on Russia’s invasion of Ukraine. At the United Nations, India abstained from votes that condemned the Russian invasion of Ukraine. It has refused to blame Russia for the attack. In more bad news for the West, India was not alone in abstaining from the UN General Assembly resolution that censured Russia for invading Ukraine. Thirty-four other countries declined to take the West’s side. Two-thirds of the global population live in countries that have refrained from denouncing Russia. Even neighboring Mexico refused to condemn Russia or join economic sanctions.
Closer energy relations between China and Russia will help to draw them closer as strategic allies with “no limits” on the Eurasian continent. By having a committed Russian energy supplier in its backyard, China will inevitably obtain more strategic flexibility for dealing with the United States and its Indo-Pacific regional allies, all to the detriment of Western democracies. Russia has also greatly increased its energy business with India since the Ukraine invasion. According to the Centre for Research on Energy and Clean Air, “India has been the main buyer of the cargoes out of the Atlantic that Europe doesn’t want anymore.” Before invading Ukraine, India bought almost no oil from Russia. Now it is importing over 760,000 barrels a day. [Source]
America and China
The Chinese economy and military have been strengthened significantly in the last ten years, thanks to industry innovations and the BRI (Belt and Road Initiative). The Ukraine conflict is now encouraging Washington to play the Taiwan card. Nancy Pelosi’s recent visit provided China with a unique opportunity: to demonstrate its abilities to form a military blockade around the entire island. This show of strength was designed to deliver two messages: First, no need to invade Taiwan, as it would result in a costly and bloody war. Second, America’s military presence in the western Pacific becomes useless in the face of a Chinese blockade, as opposed to an invasion.
Japan set itself apart from most other countries in the region by joining the G7 in calling on China “not to unilaterally change the status quo by force.” In fact, India—the world’s largest democracy—has taken a neutral stance on the Chinese blockade maneuver. India was not alone in abstaining from the G7 decoration that censured China for its military exercise. All other Asian countries declined to take the West’s side and reiterated their one-China policies. Some speculate that South Korean President Yoon Suk-yeol intentionally skipped an in-person meeting with Pelosi to avoid antagonizing Beijing. After infuriating China over her trip to Taiwan, U.S. House Speaker Nancy Pelosi met South Korean political leaders in Seoul on Thursday but avoided making direct public comments on relations with Beijing and Taipei that could further increase regional tensions. [Source]
Europe, the Middle East and North Africa
The additional winners of the war in Ukraine are the energy-rich Middle Eastern and North African countries. Saudi Arabia’s remark that cutting oil production may be necessary to stabilise volatile markets was a ‘warning’ to US President Joe Biden as the Iran nuclear deal nears completion, according to oil experts.
After the price of Brent Crude oil dropped below $100 a barrel on Monday, the Gulf kingdom’s energy minister Prince Abdulaziz bin Salman said oil producers could respond to volatile oil prices “[by] cutting production at any time and in different forms”. This was a message that not only served to revitalise prices, which rose to $102 by Thursday. But it was also intended as a warning to the US as a nuclear deal with Iran nears completion, potentially flooding oil markets over the winter, according to former White House advisers and senior oil analysts. [Source]
Meanwhile, French President Macron has been accused of “humiliating” France by abandoning a walkabout in Algeria in the face of a hostile crowd arguing that he was interested only in the country’s gas. The incident, which came at the end of a three-day visit to France’s former north African colony, was a setback in the president’s efforts to repair diplomatic relations with Algiers. Macron had touted the visit as an attempt to facilitate co-operation on problems such as immigration and the fight against terrorism. He had dismissed as “rubbish” claims that his real aim was to obtain more Algerian gas amid the energy crisis. [Source]
The nuclear threat
US Strategic Command is “furiously” rewriting its deterrence theory to account for a tri-polar nuclear power world — the political equivalent of trying to solve the infamous “Three-body-problem” in physics.
“The global security environment is, today, a three-party nuclear peer reality where the PRC (People’s Republic of China) and Russia are stressing and undermining the rules-based international order,” Strategic Command head Adm. Charles Richard told the annual Space and Missile Defense Symposium in Huntsville, Ala. “I’m not sure what strategic stability looks like in a three-party world.” But, he said, more effort needs to be made to figure out how to handle the unprecedented “three-party problem” of a tri-polar nuclear relationship. “We have never faced two peer nuclear capable opponents at the same time who have to be deterred differently,” he stressed. [Source]
This Triad world must deal with the increasing use of missiles in, for instance, the Ukraine conflict, exemplified by Russia’s use of missiles with dual nuclear and conventional capabilities. Nuclear deterrence also implies usage of tactical nuclear bombs between a 1st tier power and a lower tier conflict nation, to prevent a direct confrontation between two 1st tier nuclear power nations.
Following the success showcased by America in Japan to force its capitulation in 1945, Avril Haines, the U.S. director of national intelligence, predicted in May that Putin might use nuclear weapons if NATO “is either intervening or about to intervene,” in good part because that “would obviously contribute to a perception that he is about to lose the war in Ukraine.”
Moscow would be employing nuclear weapons not in the context of a war with the United States but against Ukraine or even other EU nations in continental Europe. It would do so with little fear of nuclear retaliation, since Kyiv has no nuclear weapons and since Washington would have no interest in starting a nuclear war. The absence of a clear retaliatory threat would make it easier for Putin to contemplate nuclear use. No wonder William Burns, the director of the CIA, remarked in April, “None of us can take lightly the threat posed by a potential resort to tactical nuclear weapons or low-yield nuclear weapons.” [Source]
War is a continuation of both failed and successful politics, and in this case there are already clear winners: the weapons industry, mainly based in America; and the energy supply chain in its entirety across many nations. America and other energy-rich countries are all beneficiaries of the war, so is Russia if one disregards the human suffering. Residents in continental Europe and even the UK are paying for skyrocketing energy prices, thus directly and indirectly financing this war, which in essence is only helping to modernize Russian and American weapons. Essentially, this conflict is becoming an economic cash-out for American and Russian military strength, at the cost of continental Europe (Germany in particular) and the UK. It is, politically, a re-confirmation of both Russian and American influence, and an effort for Moscow to join the top tier club of America and China.
Dr. Meng, Fanchen, September 8th, 2022