HYWEL GEORGE: New sheriff in town — deglobalisation and changing world order

The global financial crisis marked a turning point in the growth of globalisation when people began to question globalised capitalism as the domino effects of the sub-prime crisis were felt worldwide. Since then, opposition to globalisation has arisen in various forms, including Brexiteers, xenophobic nationalists, populists such as Donald Trump, and the antiglobalist left. Added into this mix were the global ambitions of China and Russia, intent on usurping the US as world leaders and changing the global pecking order.

After the 9/11 terror attack the US became increasingly preoccupied with wars in Afghanistan and Iraq, which dominated much of its focus and resources. These military conflicts have left an overly indebted US reluctant to engage in expensive overseas conflicts while China is doing the opposite. With the aggressive military moves made in the South China Sea against Taiwan and in Hong Kong, China is now the dominant military player in Asian waters, underpinning its naval and air power by establishing military bases in key strategic positions in the South China Sea (using old coral reef atolls as their base infrastructure).

Russia too had been strategically weighing up its military options, steadily encroaching on European territories with the annexation of Crimea and Georgia as it sought to bolster its territory, confident that the US and its Western allies wouldn’t take retaliatory steps to stop it.

The economic power dynamics are also now shifting. Since its admission to the World Trade Organisation (WTO) in 2001 China has experienced significant economic growth. And through its well-known Belt and Road Initiative it is now expanding its economic power across to the Atlantic Ocean. Russia also cleaned up its balance sheet through its successful energy trade, one of the factors that emboldened Vladimir Putin in his pursuit of further Ukrainian territory.

But considering its modest-sized economy, Russia needs its partnership with China. Iran, meanwhile, is also cosying up to China, and this new China-Russia-Iran axis will form the core of the future Eastern power bloc — all armed with nuclear weapons. (Iran is close to or already has achieved nuclear capability, posing a major threat to Middle East stability.) The weakening state of the US and its Western allies has allowed these other powers, particularly China and Russia, to exploit this chance as they attempt to assert their own geopolitical ambitions, all while challenging the historically influential role held by the US, which can no longer sustain its position as the sole global superpower.

Therefore, while the steady decline of globalisation was already well under way before Russia’s invasion of Ukraine, the war has undoubtedly escalated the process. And while the transition towards a more multipolar world isn’t exactly new, what is new is how the global players have used the conflict, and the global connectivity involved, to drive their own national agendas.

The Russia-Ukraine war has revealed the complexity of the architecture of global power. While China has supported Russia diplomatically in the war, accusing the US and Nato of using the conflict to attempt to “contain Russia and China”, this support is not unlimited given China’s concerns over the global economic impact of a prolonged Ukrainian conflict, as well as potential secondary sanctions by the US on Chinese companies.

Countries such as India and Turkey have also refused to speak out against Russia’s invasion given their beneficial relationships with Russia, but they have not exactly lent their outright support to Russia through direct opposition to the US and its Western allies or through military support.

Spending spree

However, perhaps one of the most telling indicators of the changing multipolar order is the actual invasion itself, which illustrates — as with Russia’s previous military action against Crimea and Georgia — Putin’s calculation that the US and Nato would not intervene directly to stop it. While he may have underestimated the West’s response and level of sanctions this time around, its weakened state was certainly one of the factors that emboldened Moscow to carry out the invasion.

So where does this leave us on the macro stage? The increased money supply of quantitative easing programmes of the US Federal Reserve and other central banks since 2008 has eventually led to rising inflation, which has only been worsened by the Covid-19 pandemic and the war in Ukraine.

Another repercussion of quantitative easing has been that because the money printed went to buy US treasury bonds (the mechanism to get the money into the economy), this lowered the cost of government borrowing (financial repression) — so governments went on a spending spree. Western government debt levels have doubled over the past decade to unsustainable levels. This means the West cannot afford to engage in any meaningful way globally, even if it wanted to.

And the final effect is the one just accelerated by the Fed and European Central Bank (ECB) sanctions on Russia by undermining the status of the US dollar as the world’s reserve currency. If the dollar’s reserve currency status is in effect revoked — and China and Russia are already looking to price oil and gas in roubles and renminbi, as well as shifting their banking transactions to their own CHIPS (SWIFT) system — that prop for the dollar falls away, leading to a long, severe decline. And when a country’s currency is weak it too is weak. This will make the West weak, and the Eastern Bloc all the stronger.

The Russia-Ukraine conflict is a humanitarian disaster, and its repercussions, as well as those of the response of the West, are sure to be felt for decades. The conflict has certainly been a product of the changing global power structure, but more change is coming, whether we like it or not.

• George is director of investments at Old Mutual.