War may not be probable, but geopolitical clouds threaten the world economy

War may not be probable, but geopolitical clouds threaten the world economy

Some point to rising interest rates, since central banks across the world can no longer ignore inflationary trends and will have to raise interest rates. Others fear that the Omicron strain of Covid-19 will pull the world economy down, and an even more virulent strain might strike.

Agencies
History rarely repeats, and new crashes often have completely unanticipated causes.
Stock markets have soared to absurd heights this year, and the current correction is no surprise. Fears remain that the downtrend will gather momentum and become a crash. Which factors will most likely produce a crash?

Some point to rising interest rates, since central banks across the world can no longer ignore inflationary trends and will have to raise interest rates. Others fear that the Omicron strain of Covid-19 will pull the world economy down, and an even more virulent strain might strike.

History rarely repeats, and new crashes often have completely unanticipated causes. The taper tantrum of 2013 warned everybody about the dangers of interest rate increases, and those risks are already baked into economic expectations. So are the risks of a more virulent Covid strain.

Hot Action in Cold War

The big new risks are geopolitical. A Coldish War between the US and China began some time ago, slowing world growth. But the problem now threatens to escalate into hot war.

The two major danger spots are Ukraine and Taiwan. US intelligence experts have warned of a Russian invasion of Ukraine 'as soon as early 2022'. Meanwhile, US Defence Secretary Lloyd Austin says that China's recent military manoeuvres near Taiwan look like rehearsals for an actual invasion. Neither war may ultimately come about. But the probability is no longer negligible.

A US intelligence official says Russia is planning to deploy 175,000 troops in its new Ukraine offensive, of whom half are already in position. Russia has increased its calls on Joe Biden to not allow either Ukraine or Georgia to become members of Nato, and not allow any Nato weapons to be stationed in those two countries. US officials say that Russia plans to move 100 battalion tactical groups along the Ukraine border with armour, artillery and equipment. They have also seen an uptick in Russian propaganda efforts using proxies and media outlets to denigrate Ukraine and Nato ahead of a potential invasion. Russia says it seeks nothing more than security for ethnic Russian citizens of eastern Ukraine.

Biden is against entanglement in foreign wars, and will be very reluctant to send troops to either of the two potential war zones. But he will unquestionably impose extremely stiff economic sanctions on any invader, including the freezing of dollar accounts and bans on trade and investment. That will be a huge shock to the world economy and could plunge it into recession.

The European Parliament has already approved a non-binding resolution to cut off Russia from the international payments system called SWIFT (Society for Worldwide Interbank Financial Telecommunication) if Russian troops enter Ukraine. This goes well beyond the much milder sanctions imposed after Russia took over Crimea and occupied significant chunks of eastern Ukraine in 2014. The US could go further and apply the sort of sanctions it has applied to Iran, virtually banning any trade and investment by third parties (including Indian parties) with the targeted country.

US law already empowers the president to impose sanctions on countries that buy sensitive arms from Russia. India views Russia as an important valued arms supplier and has taken the risk of shrugging off American pressure on this. India is buying S-400 Triumf missile systems from Russia, and plans to buy S-500 Prometey missiles when those become available. Till now, the US has accommodated India's breach of its rules. But no such latitude can be expected if the Ukraine situation escalates into hot war. All countries and companies buying Russian arms may suffer sanctions.

China Raises the Stakes
Meanwhile, Beijing has never made any secret of its determination to take over Taiwan, which it views as an inalienable part of China. Beijing's military rhetoric has risen alarmingly in recent months as it seeks to assert its muscle in its sphere of influence. It views Biden's 'Summit for Democracy' as aimed squarely at Russia and China, but is determined to ensure that the 21st century is China's century.

Taiwan accuses China of already starting 'grey zone aggressions'. These include frequent incursions by the People's Liberation Army (PLA) into Taiwanese airspace, shows of force by Chinese warships around Taiwan, cyberattacks and disinformation campaigns. If the Ukraine conflict escalates into hot war, Taiwan fears that US attention will get diverted to that zone, and China may seize the opportunity to seek military gains across the Formosa Straits.

China has long enjoyed good economic and investment ties with Taiwan. Thousands of joint ventures between the two are parts of major global supply chains. The whole world, including China, depends hugely on microchips from Taiwan Semiconductor Manufacturing Co, the largest producer by far in the world. This supply could dry up in the event of hostilities. That would badly hit downstream users of chips, especially the auto sector, the world over. It would be a global economic disaster, deepened if the US cuts China off from SWIFT or imposes Iran-style sanctions.

Let nobody think war is probable. The major actors do not want it. But in the current brinkmanship, the best made calculations can go awry. The risk is significant.

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