Global geopolitical backdrop
The Russia/Ukraine war is a geopolitical crisis of the highest order, one whose global implications will be felt for months and perhaps years. There’s simply no going back to the world that existed before the February 24 outbreak. Geopolitical risk and, in particular, a world increasingly shaped by “great-power” competition is the new normal, in my view.
Given the unpredictable nature of geopolitics, I think the set of possible outcomes is wide — from “frozen” conflict to a broader war with NATO, regime change in Moscow or Kyiv, and maybe even the use of weapons of mass destruction. As of this writing, my base case for the foreseeable future remains a frozen conflict and a still-sovereign, though effectively partitioned, Ukraine.
Assuming that proves correct, and if oil and gas prices stay relatively stable (admittedly a big “if”), I think markets can begin to look past the most dire worst-case scenarios. It may take several weeks or longer to reach that point, with multiple cease-fires and eventually an unstable peace agreement, but probably not before we’ve seen more civilian deaths and infrastructure damage, as both sides remain incentivized to achieve military gains ahead of any peace deal. I also expect additional NATO supplies and other Western aid to flow into Ukraine, further prolonging the conflict. And Western leaders will likely face continued pressure to ratchet up anti-Russia sanctions amid ongoing reports of civilian atrocities.
As a result, I believe the risk of spillover to NATO countries remains on the table, as do other potential surprises for markets to digest. So again, I think we should be prepared for a variety of possible paths from here; but in any case, make no mistake that we’re likely headed for a world of persistent geopolitical frictions between NATO countries and Russia for years to come (or as long as President Putin remains in power). It’s a potentially dangerous moment for global security and stability that could reverberate far beyond the borders of Ukraine.
On the upside, this new geopolitical environment may produce the longer-term benefits of a stronger, more unified, and maybe enlarged NATO, as well as a renewed commitment to defense spending in Europe (as we’ve seen with Germany) and elsewhere. War has a way of clarifying government priorities, so I believe a top priority for many countries will now be their national defense and security. Energy security will also be a new and enhanced strategic focus in Europe and globally.
Finally, however the crisis might unfold from here, I think Russia’s aggression is likely to sharpen the division of the world order into two large ideological camps, which may lead to greater policy focus globally on strategic sectors that are deemed central to great-power competition.