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Russia's regional ambitions represented a longstanding, open
test. Yet, with the invasion of Ukraine on 24 February, Europe's
security environment, Ukraine and Russia's economic outlook, the
stability of markets have been thrown into the air and are in the
process of reshuffling. So too are a host of geopolitical
challenges that remained unresolved in a post-9/11,
post-Afghanistan, post-Brexit world. Interconnected challenges like
supply chain security, financial system
integration, trade relationships and
migration are no longer simmering in the
background as the world seeks to recover from a pandemic.
The deeper dive
Despite intermittent ceasefire talks, no clear offramp to the
conflict in Ukraine has yet emerged. In line with the Economics
& Country Risk team's forecast for the six-month outlook,
Russia continues to pursue an escalation pathway, most recently,
with a 'Phase 2' focus on capturing all of the Donbas region. Even
in the event of an internationally-negotiated ceasefire
arrangement, we expect to see prolonged, lower intensity conflict
continue unless a true Russian collapse pathway (an outside
likelihood) is reached.
While, in our most likely scenario, the conflict remains
confined to Ukraine, we contemplate war trajectories where Russia
seeks to extend and sustain fighting beyond Ukrainian borders. This
looks like spillovers to non-European Union, non-NATO states
including Moldova and Belarus, and less likely to broader EU/NATO
territory. Russian deployment of Chemical, Biological, Radiological
and Nuclear weapons, also remains on the table, albeit from an
extremely low likelihood.
Beyond the nearer-term implications for Russia's economy - our
economists forecast an 11.1% contraction in real GDP in 2022 - and
for Ukraine - which is expected to see a staggering 45.7%
contraction in real GDP in 2022, the conflict is expediting a
rethink of a host of longer time horizon strategic challenges.
On global security, everything from the future
global political architecture to security alliances and nuclear
proliferation are under scrutiny. An emerging narrative of the
conflict, thus far, has been around a growing consensus of the
unification of states against the Russian offensive and, thus
Russia itself. Yet, votes at the United Nations, its Human Rights
Council and a recent walkout at the Group of G20 in response to
Russian participation, bely growing misalignments between advanced
and emerging economies.
Similarly on global financial integration,
spanning the future of globalisation, regionalisation, to trade
relations and sanctions, much is now in flux. The broadly-applied
sanctions campaign against Russia's banking, defence and
commodities sectors, its individuals and institutions, led by the
United States and its European allies, has been championed for its
effectiveness in isolating Russia from the global economy. A
follow-on wave of corporate self-sanctioning has been viewed as
corroboration of the global appetite to rely upon economic tools of
foreign policy rather than boots on the ground or diplomacy alone.
Yet, concern over the precedent being set by the current sanctions
and the potential future risk to others of facing such economically
consequential penalties is growing across economies in
Asia-Pacific, Latin America and sub-Saharan Africa.
The pandemic catapulted supply chain interlinkages and
vulnerabilities to the fore. Russia's invasion of Ukraine
presents another consequential supply chain shock. The
sanctions on Russia have precipitated a renewed conversation around
sources of energy reliance and the pace of the energy transition.
Equally, the infrastructure disruption and destruction in Ukraine
brought by the war has raised new concerns over agricultural
commodity availability and food security risks. Whether and how to
delink supply chains, whether and how to ensure commodity security
are now top of the global agenda.
Irregular migration of those fleeing conflict
for Europe is not new. 2015 brought a surge of migrants seeking to
escape the war in Syria. Yet, the rapid acceleration of migration
from within Europe across Europe - nearly six million have left
Ukraine and another seven million internally displaced -
precipitated by Russia's invasion has no recent comparison. Beyond
the nearer-term impact to Ukraine's economic outlook, a refugee
crisis at the centre of Europe will raise long-term implications
around border patrolling and cargo disruption, civil unrest,
insurgency, policy responses and to labour markets.
The takeaway
We always knew Putin's ambitions for Russia's neighborhood would
likely jockey for attention. We just did not know when. Since we
watched Russian military personnel and resources accumulate at the
Ukrainian border and then cross it on 24 February, Ukraine's
economic and security outlook, Russia's role in the world, market
volatility around inflationary pressures and commodity pricing are
all being closely watched. Alongside these nearer-term trends, the
reevaluation of longstanding challenges to the global security
environment, global financial architecture, supply chains and
migration are also shifting. The cumulative effect of each of these
shocks will play out over the years ahead, setting us forward on a
new course.
