The war in Ukraine appears to be shaping up to be one of those epoch defining events in which history turns on to a different path than it had previously been on. The wars in the Middle East, for all of the blood and treasure that the U.S. has expended there over the last 20 years, haven’t really reshaped geopolitics beyond the region.
The combat, which is potentially disrupting the food supply for a significant segment of the globe, will give further impetus to current trends. The trends that I refer to is to give more weight to security considerations and less to purely economic considerations. The world of the last 30-40 years has been relatively stable by historical measures. This has allowed the major economies & companies of the world to focus on squeezing every last economic inefficiency out of their operations, thereby improving the bottom line of their companies. Companies were able to off-shore operations to cheap, relatively remote locations and then import their products back into their home countries where their customers were located. In addition to freer trade policies pushed by Western countries, improvements in transportation and logistics systems not only helped companies move their products around the world cheaply and quickly, they also helped companies lower their inventory costs by adopting Just-In-Time supply chains that would, in an ideal situation, have the materials arrive at the factory just at the moment that the company was ready for them to be put on the assembly line. The stable, globalized supply chains allowed materials needed in the production of certain goods, to be produced in certain regions and transported to the factories in other regions over long distances to arrive “just-in-time”.
This world is now coming to an end.
Even before COVID, dissatisfaction in many countries with the results of globalization that seem to have left segments of the population worse off, were fueling political movements that were calling for trade restrictions and other changes to globalized systems. Brexit, Donald Trump, National Rally in France, 5 Star Movement in Italy, and others are movements driven by folks who feel left behind by the trends of the last 30-40 years.
These political trends not withstanding, the COVID pandemic and the resulting supply-chain crisis have pushed many countries towards shortening supply chains and reshoring some production capabilities, even if this isn’t the most economically efficient or profitable option. In other words, companies/countries are giving more weight to security/stability concerns and not just economic ones. Now, with the Russian invasion threatening global food supplies, and with it the political stability of countries in several regions of the world, expect these trends to continue.
Finally, this war is reshaping the geopolitical chess board. This is the kind of war from which some countries emerge stronger and others emerge weaker. What follows is an analysis and prediction of what the geopolitical fall-out is likely to be long term, as well as some potential long-term investment opportunities.
One of the more important geopolitical relationships going forward will be that of Russia and China. Russia’s sub-par performance on the battlefield weakens its position as a potential strategic ally/partner for China in a confrontation with the West. While some in the West have grumbled about Chinese support for Russia, China’s support has largely been tepid. While they have supported Russia (as opposed to India’s more benign neutrality), they have been careful to try and avoid antagonizing the United States. In other words, their heart may be with Russia, but their wallet is with the U.S. and EU as these are currently China’s #1 and #2 export markets, on which China’s economic and political stability depends.
If anything, a weakened Russia creates opportunities in Central Asia for China to expand its influence at Russia’s expense. If the aftermath of this war sees a strengthened partnership between China and Russia, it is Russia who will be the junior partner in the relationship. It’s not hard to imagine that Russia could end up as something between a partner and a client state. China will demand a steep price for its’ support. Territorial concessions and/or sale of certain Russian oil/gas assets in Siberia to Chinese companies are not out of the question. In the 1960’s, French President Charles De Gaulle is reputed to have said that by the year 2000, Russia would be out of Eastern Europe and by 2100 they would be out of Siberia. Whether or not he actually said this, it’s not hard to see it happening as the aftermath of this war is likely to create a weakened Russia, which would be a precondition for a Chinese move in this general direction.
Apart from its relations with Russia, China is facing some well-known challenges. China’s demographics are starting to turn against her due to the decades long one-child policy. Her financial system appears to have a significant level of bad loans sitting in it due to long-standing policies which resulted in political-based, rather than economic-based, allocation of credit. In addition, increased wages have resulted in companies moving production out of China to lower-cost locations. The globalized world of the last 30 to 40 years has fueled China’s rise to a global power. However, trends in the U.S. that have looked to de-couple the U.S. economy from China (pre-pandemic), trends towards shortening supply chains, as well as an increasing realization in European countries that China might not be a reliable partner means that the system that has fueled China’s rise is changing and policy changes resulting from this are not likely to be helpful to China going forward. In addition, despite China’s boasting and threatening of Taiwan, Russia’s performance on the battlefield is likely to cause Chinese military planners to question whether they would be able to pull off an invasion and occupation of the island. The next few months of the war are going to reveal the effectiveness or ineffectiveness of the latest Western weapons systems. If these systems prove highly effective, expect that China’s calculation of whether it could take over Taiwan to be recalibrated towards the negative.
With all of these trends against it, expect China to be on more of a declining trajectory over the next couple of decades.
As long as Russia is perceived to be a threat, Europeans will remain more serious about their defense than they have been in the past decades. While U.S. is still carrying the majority of the defense costs both for NATO and the military assistance currently flowing to Ukraine, European governments at some level can expect to see increased domestic political support for building out their own defense capabilities. There will be resistance in some quarters, as the pacifistic tendencies of European political culture (especially in Germany) are still there. However, Putin’s war has given impetus for those on the continent who favor a stronger European defense posture to have a louder voice, which they are likely to maintain even after a ceasefire happens. Expect more money for European defense contractors and a general heightened spending on European defense in the coming years.
In addition, expect the U.S. to prioritize its relationship with frontline states such as Poland, Ukraine, Romania, Bulgaria, the Baltic states and Finland. Over the last 70 years, South Korea has gone from a backwards little country to the 12th largest economy in the world. The reason it was able to do this is because the U.S. needed it to be strong and so went out of its way to use its clout to make sure that South Korea would be economically strong, including one-sided trade deals that have grown unpopular with certain segments of western populations. The point is that the U.S. and Europe need these front-line states to be strong and will invest in them (both directly, and indirectly) by offering them preferential trading terms, and perhaps encouraging firms to open locations there, among other tools. Expect the next new economic powerhouse in Europe to come from one or more of these countries.
Regardless of the financial, economic, and political challenges that Turkey has right now, their geopolitical position has improved and we can expect to see them moving up in the world of geopolitical power politics. First, Turkey’s value to NATO has been proven as it has prevented Russia from moving its ships out of the Mediterranean into the Black Sea to support its operations against Ukraine. At the same time, it has gained a reputation as a truly honest broker between Ukraine and Russia; maintaining relatively good relations with both parties. And it has had a win for the Turkish-developed & built Bayraktar drone, which has shown its value on the battlefield; thereby raising Turkey’s profile in the defense manufacturing space. Turkey’s location and the increasingly visible role that it is taking in international affairs is likely to give it economic leverage and make it even more of an economic player than it currently is. Right now, Turkey has an economy roughly the size of Poland. As long as Russia is still an enemy, expect the U.S. to try and make Turkey strong, at least to some extent. Also, expect Turkey to play all sides off against each other to its own benefit. In the next two decades, I expect Turkey to become one of the major trading hubs in the world. As Turkey’s power grows and it increases its ability to resist foreign pressure (whether from Russia, China, Iran, or the US), it might even displace the U.A.E as a financial center for people looking for financial privacy (becoming sort of a place like what Switzerland was before the IRS and other governments started cracking down on tax evaders). In any case, I expect that as World War I turned the U.S. into the global player, this war will raise Turkey’s global profile and make it, if not an indispensable country, at least a country with some level of global influence along the level of a U.K. or France today.
The Middle East:
While the Middle East will retain its importance due to oil, Russia’s performance on the battlefield is likely to mean that the Middle Eastern countries will be looking for other arms suppliers. Certain Russian military equipment has proven itself to be more susceptible to western weaponry that previously though. Expect the U.S. to benefit from this, as well as China, India, Israel, and Turkey. While Assad in Syria will remain tied into his Russian patrons, expect Iran and other Middle Eastern countries to start looking for other backers. The U.S. will still likely be the preferred partner, but there will be openings for China and India as well to expand military and economic relationships in the region.
Over recent years, India has raised its profile as a trading and defense partner with many countries. India’s benevolent neutrality in this war will raise its profile even further. Its location gives it a platform to project power into the Arabian Sea and Indian Ocean, and thereby play a large role in Asia-Africa trade. Also, its rivalry with China makes it a useful ally as the U.S. and Japan build a coalition to restrain China. Also, as China has support for Russia has been tepid and as China will likely move to expand its reach into areas previously seen as Russia’s sphere of influence, India could position itself as an alternative source of support for Russia, extract some concessions, and add to its geopolitical influence overall
With Ukraine’s ports blocked, many countries are becoming acutely aware that there is likely to be a shortage, or the threat of shortage of food in the coming months/year(s). This is the kind of threat that even if the crisis is short-lived, sears itself into the collective memory of a society and prompts major, long-term policy changes. This state of affairs will impact various countries differently, but it will hit some quite severely. Expect elevated levels of political instability in the developing world in the next months/years as food shortages upend some governments/societies. In the future, expect food security to become a major topic of conversation, not only in Africa but around the world. The severity of the food crisis will determine how much of a global issue this becomes. However, reducing a country’s exposure to events outside their borders will become a major political theme & challenge that countries all over the world will begin to start grappling with. Finally, expect massive investments in agriculture that will allow countries to achieve reduced levels of food dependence.
Countries To Invest In:
In short, this war is impacting geopolitical order ways that we haven’t seen since World War II. The impact of what is happening will likely be felt for decades to come. Some countries will be destabilized and their governments overthrown. Other countries will find opportunities and see their geopolitical power increase. Certain industries will become more prominent in the minds of the public and in the political realm.
For those looking for long-term investment opportunities going forward, I would suggest looking at the following countries:
Poland, being a front-line state against Russia, will be one of the countries that NATO and Europe have an interest in keeping strong, both economically and militarily. While other countries, such as Finland, are also front-line states, Poland’s geographical location means that is defending the heart of Central Europe. While losing any NATO states to Russian aggression would not be good, the loss of Poland would be catastrophic. With the loss of Poland, Russian forces would be 50 miles from Berlin, the capital of the economic engine of Europe. Consequently, while Western investment is likely to flow into all of the front-line states, expect it to be more heavily concentrated in Poland.
While Ukraine is currently being devastated by war, it also appears likely to survive. While the idea that Ukraine will be able to regain all of its lost territory back to 2013 is a fantasy, the U.S. and Europe have a vested interest in making sure that it comes out of the war and recovers. First, Ukraine is one of the world’s breadbaskets and Europe needs to make sure that it continues to be a reliable source of food. Not only will Europe and the U.S. continue to provide weapons to make the country militarily stronger than it was before the war, but they will also be focused on turning Ukraine into an economically strong member of the European family. Expect there to be something like a Marshal Plan for Ukraine after the shooting stops. While history is no guarantee, it is worth noting that 20 years after being completely devastated by war, West Germany and Japan began to emerge as economic powerhouses. Although Ukraine had Russian levels of corruption before the war, something that could prevent Ukraine from becoming a world-class economic power, Marshal Plan style investment will provide some investment opportunities for a decade or more after the shooting stops. If one is really adventurous, one could try investing in Ukraine now even before the shooting stops. For example, investing in real estate in places like Kiev or Odessa while the shooting is going on can be risky, but assuming your purchase survives the war in Ukrainian hands, the value of your real estate should grow to many times what you pay for it.
As noted earlier, Turkey’s geopolitical position has been enhanced by the war, and Turkey’s influence is likely to only grow. Investing in Turkey over the long term is likely to be profitable. Turkey has had a home-grown defense industry for a long time, something that the world is only now beginning to appreciate. While Turkey is not like the U.S. or Russia in being able to produce multiple types of weapons well (tanks, ships, planes, rifles, etc), they do produce niche systems (like drones) well. With Russian weapons (especially tanks) showing weakness in Ukraine, expect countries currently importing significant amounts of Russian weaponry to begin looking for other partners.
Furthermore, Turkey’s enhanced diplomatic profile and its location makes it possible to act as a middleman between various parts of the world. While the Emirates have gained a reputation as a financial center, especially for parts of the world that generate wealth that likes to remain hidden, they are subject to pressure as well as being geographically vulnerable to Iranian military action. Turkey is bigger and has a greater ability to defend itself against an actor like Iran. It is already showing the ability to project power across the Mediterranean into Libya (among other places). If Turkey plays its cards right (a big ‘if’ considering the internal economic challenges that the country is currently facing), it could eventually displace the Emirates as a financial center. In addition, its recent discovery of natural gas in the Black Sea will eventually likely allow it be a player in the natural gas market as well.
However, serious challenges do exist. The current government appears to be mismanaging the economy, and the value of the Turkish lira has declined nearly 30% against the US dollar since the beginning of the year. Inflation over the last 12 months (through June 2022) is running at nearly 78%, with food & transport costs estimated to have grown by 123%. While this is not yet in hyperinflation territory, it is a factor of major concern for those concerned with the Turkish economy and the stability of Turkey overall. High inflation is one factor that topples governments and fuels political instability. How Turkey manages this crisis will go a long way to determining its suitability for investment over the short-to-medium term.
That being said, overall geopolitical trends are favorable for Turkey. Keeping an eye on Turkey for an appropriate time to invest there could prove to be very profitable over the long run.
India’s position as the world’s largest democracy makes it likely to be more flexible than China at managing this time of major geopolitical shifts. India is likely to be a significant part of the U.S.’s plan to contain China. If thought of in terms of Cold War geography, India would be roughly equivalent to Turkey, a member of the alliance with a land border and history of antagonism towards the enemy against the alliance is directed. Consequently, the alliance has an interest in maintaining the economic and military strength of this member. However, the case of India is more interesting than that of Turkey in that we are looking at country with the potential to be the next global superpower within a generation. India has nuclear weapons, it has over 1 billion people, and it currently has the world’s 7th largest economy (and is within 10% of being the 5th largest economy in the world). In addition, the country has some cultural power too as its film industry (Bollywood) is popular in China and the Middle East. India’s strength and importance can be seen in the fact that while it is not yet a superpower, it has not joined the West in sanctioning Russia. This indicates that it can pursue a foreign policy in line with what it sees as its own interests, without having to adhere to what the West wants.
Overall, India appears to be on the rise. Countries on the rise have tended to generate profitable returns for investors.
Industries To Invest In:
1.) Food Production.
With the potential disruption of the Ukrainian grain supply, food security is, and will become, a major issue in many countries. Saudi Arabia launched agricultural investments many years ago to achieve food independence. While not completely independent, Saudi Arabia is fully independent in certain foodstuffs. Expect countries around the world to start moving towards food independence (or lessening their food dependence on outside sources). In many cases, this will mean turning land that isn’t currently under cultivation into productive agricultural land. To this end, long-term investments in the following industries will likely be profitable.
3.) Installation of Orchards/Vineyards.
4.) Ag Management/Consulting.
5.) Refrigeration containers.
6.) Local transportation providers in certain countries.
2.) Defense Industries.
With the world becoming more unstable and the geopolitical chess board shifting, expect all things associated with defense and security from the international to the local to see an increase in demand. While major defense contractors around the world will certainly see expanded sales and profits in the years ahead, even private security companies are likely to see expanded business opportunities. Shifts in the geopolitics tends to lead to instability with societies as well, as governments that fail to adequately manage negative domestic fallout from the such shifts can find themselves losing legitimacy. Depending on levels of political and social instability, certain governments may find it challenging to provide even basic services like policing. In such cases, people may turn to private solutions to replace services that the governments are no longer willing and/or able to provide. In certain extreme cases, it might even be necessary for governments to outsource military services or intelligence gathering to private companies.
Investments in the companies engaged in the following industry segments should be profitable in the long-term.
A.) Defense Contractors (weakness in certain Russian weapons systems that have been revealed in Ukraine could open additional markets for competitors).
B.) Defense Manufacturers.
D.) Private Security.
E.) Private Intelligence Gathering.
3.) Energy Industries.
Given the turbulence in the oil markets resulting from the invasion and sanctions placed on Russian oil, it is not surprising that the search is on for alternative energy suppliers/sources. While proponents of green energy dream of a future in which all energy comes from sun, wind, or wave power, such a future is a long way off. With Russia looking like it will be playing a shrinking role in energy markets going forward, Europe is going to have to find more reliable sources of energy. While investments in natural gas & oil will fluctuate over time (and money can still be made in these industries), I expect that there will be a push for a renaissance of nuclear power in countries that have been hitherto reluctant to embrace it. Nuclear power is clean and reliable. While there have been some spectacular accidents since the advent of nuclear power, the management of this source of energy has become more reliable over the years. For those pushing a green future, nuclear power is simply going to have to be part of that equation given its cost and its reliability. I expect that there will be many more nuclear power plants constructed around the world in the coming decades. For this reason, I would recommend investments in the following industries.
A.) Nuclear power providers.
B.) Nuclear power construction companies.
4.) Logistics Providers/Supply Chain Management.
This is more of a short-term investment and more of a function of the COVID induced supply chain crisis. Over the last 30 to 40 years, logistics companies built out their global networks and became very adept at moving freight around the world, cheaply and efficiently. Due to the reaction to the COVID pandemic, first from the massive shutdown in production capacity and then from the attempt to massively ramp up production, the world has a supply chain system that has been largely scrambled. As someone with personal experience managing international shipments, I have experienced the difficulty unraveling and correcting a single shipment that has gone bad. An entire world of such shipments is largely a problem that will defy any top-down attempted solution to correct it. In many ways, its not that we have a “scrambled” supply chain system, but rather we now have an inefficient supply chain system with different bottlenecks than before. The conditions that now exist will likely require work-around solutions; solutions that are likely to be created ad-hoc by individual actors. One could say that supply chains are evolving in a different direction.
One of these directions is that there is going to be a global move to shortening supply chains, which will force logistics providers to adapt. History shows that some will be able to and others won’t. A bet on a logistics provider today is really a bet on which company will be able to adequately manage the transition to a less globalized supply chain. While this transition is going on, freight costs (and profits) are likely to be higher than they have been in the industry. To that end, the following types of companies should be looked for potential investments.
1.) Companies that can provide turn-key logistical solutions for companies, including warehouse management services.
2.) Companies well-placed to take advantage of the re-shoring of productive capacity closer to the customer. For example, a company that can take advantage of re-shoring into the U.S. is likely better than a company positioned to take advantage of reshoring into Switzerland.
3.) Supply chain consulting companies.
In recent years in the U.S., the term “isolationist” has been thrown around to try and stigmatize someone as a person who wants the U.S. to withdraw from engagement with the world , concern itself with its own economy, and let the world go on without it. The person is accused of wanting a world like the 1930s, which of course was the time that Hitler rose to power and the world was plunged into the Second World War.
In this sense, the term “isolationist” is really meaningless. There is simply no way to return to a 1930’s world, even if there was significant political will to do so. In the 1930’s, the logistical infrastructure with ships, trucks, modern highways, modern communications, and large numbers of daily transoceanic flights either didn’t exist or was much smaller than today. A world in which people can connect via Zoom or where people can easily be halfway around the world by this time tomorrow isn’t a world that can return to 1930’s-style isolationism.
However, the globalization process that we have witnessed over the last 30+ years in which everything has been moving in a more connected, globalized direction is about to change. To paraphrase an old slogan, the coming decade(s) are likely to be “Less Global, More Local”. While one might see this as globalization going into reverse, I think a better way to look at would be that is being modified. In a unipolar world such as we experienced from at least 1991 to the 2008 financial crisis globalization developed the way it did. Moving to a multipolar world means that there will be multiple centers of power driving the system forward, instead of just one. This process of moving from one system to the other was always going to cause disruption and modification. Some of these modifications would mean the undoing and reversal policies and processes that had grown up during the globalization of the 1980’s, 1990’s, and 2000’s. This doesn’t mean that globalization is going into “reverse”. It just means that these processes are changing to reflect new underlying realities. A company in Poland that decides to import its product from Serbia rather than China to shorten its supply chain isn’t abandoning globalization, it is just modifying how it operates given the new reality.
In short, globalization isn’t ending; it is just modifying. The companies and industries that are well placed to capitalize on these trends and manage through the resulting instability, will be the companies that will be the big winners in the coming decade and will return handsome profits to their investor.