After the Berlin Wall fell in 1991, political scientist and historian Frances Fukuyama famously characterized this epoch and jubilant event as the “end of history.” This view held that the past ideological battles that had roiled post-World War II Europe would now be confined to the ash-heap of history. Though celebrated in the West and former Soviet satellite states with great acclaim, the rapid collapse of the Soviet Union was a historical moment many Russian political elites — including then-KGB head Vladimir Putin — viewed as abject humiliation. When Russian tanks crossed the Ukrainian border on Feb. 20, 2022, the reigning postwar liberal economic order was shattered.
The underpinnings of globalism
After the demise of communism, the consensus view of foreign policy elites was that going forward, a new international economic paradigm, based on free-trade and capitalism, would ensue. The belief was that China’s entry into the World Trade Organization would, over time, put an end to its past belligerency toward the capitalist West and would usher in a new environment of economic and diplomatic tranquility. Russia, too, according to this view of international politics, would come into the new world economic fold as well.
The principle was that the benefits of free trade between nations would trickle down in the former communist countries, leading to democratic institutions that would help maintain long-term stability within the international community and create prosperity for all nations; conflicts between formerly antagonistic nation-states would subside.
Common economic self-interest would ensure the primacy of the free flow of capital and goods between members of the international community. Economics would now take precedence over politics and military conflicts between nation-states. Soft power and deference to international organization would be the new component that would achieve diplomatic comity between countries. These tenets provided the springboard for the genesis and surge in globalization
The foundation of the post-cold war international order was torn asunder by Russian President Vladimir Putin’s quest to resurrect the power and influence on the former Soviet Union; geopolitics and military power was thrust once again to center stage in the management of relations between nations. The economic, political and financial ramifications of this abrupt interregnum of the decades-old international economic structure will have profound consequences for investors that will be felt for years to come.
What salient issues are raised by the return of military force as a viable means to advance a nation’s strategic interests? The Ukraine conflict has brought to the fore two issues of paramount concern for investors.
Energy insecurity
Since Russia is using its oil and gas reserves as a political weapon in support of its strategic aims, one of the most profound consequences of the Ukraine conflict is the price and supply of energy will no longer be determined exclusively by market-based factors. For Western Europe — most notably Germany — energy insecurity has become the new order of the day; the imposition of sanctions has caused immediate economic dislocation and pain.
As the continent shifts to alternative sources of energy, there will be an increased demand in the near to intermediate term for LNG and natural gas. In the short term, this has positive ramifications for American natural gas companies, who have the present capacity to meet the continent’s insatiable need for natural gas. The only limitation on the amount of natural gas that could be imported is the lack of sufficient LNG terminals to process the increased energy exports.
European leaders mortgaged their countries' energy needs on the unrealistic assumption that Russia would be a reliable energy export partner until the continent’s desideratum of a carbon-free, all-renewable energy future arrived. However, energy-dependent European nations were slow to wean themselves off Russian oil and natural gas exports; no realistic timeframe or viable plan to make the switch to an all-renewable electric grid was established.
These calamitous foreign and economic policy blunders have now come home to roost. Putin is now using his country’s energy resources as a political weapon not only against Germany, but against the entire Alliance as well. And he has been ratcheting up the pain with telling effect by slowly shutting off the natural gas spigot. Russia recently reduced the flow of natural gas transmitted through the Nordstream 1 pipeline. As a result, due to a shortfall to meet winter heating and electricity generation needs for industrial production, Germany has been forced to declare an energy emergency and rationing looks entirely possible. So dire is the crisis that shuttered coal-fired power plants will soon be operational.
It is important for investors to note the desired outcome of the sanctions implemented by the West to starve Putin’s ability to wage war is by no means certain. Presently, the boycotts have had little, if any, effect on curtailing Russia’s military incursions. Russia has been selling India and China oil at a discount to spot market prices. This has helped defray some of the economic pain from the boycott. Should the sanctions fail to deter Russia’s continuing military forays in Ukraine, the prospect of a negotiated settlement cannot be ruled out.
As such, Western leaders have learned a painful lesson after putting their energy futures at risk. Namely, sometimes economic self-interest alone does not dictate the foreign policy aims of nations, nor can reliance on soft power by itself deter or influence the actions of belligerent states who seek to dominate their neighbors.
The re-emergence of international power politics has become a consequential factor in the financial risk-reward paradigm. Investors ignore this reality at their peril.
