Preparing for a Dangerous Year

When we began SIG’s blog in June of this year, our goal was to provide original and timely analysis of trends that the mainstream consensus was missing. Clients told us they had much more information about global markets and political trends than they could possibly process. What they were missing was actionable and fresh information that was not merely canned trend-spotting followed by a company recommendation or two. They wanted to go beyond the obvious.

To address that need, we spent a lot of time on Asia this year — traditionally a strong region for SIG and one of enduring interest for our clients. The nature of Southeast Asia’s growing centrality, and the shifting strategic approaches of Japan and South Korea, kept our attention and helped us not get too stuck in the US-China struggle, crucial as it is.

In 2024, we expect both of these focuses to continue, both because US policy on China is unlikely to change much in an election year and because Chinese policy toward Chinese tech multinationals won’t change much either. American and Chinese experiments with varieties of economic nationalism will continue. They are in turn the main drivers of what we have described as Southeast Asian non-alignment, especially digital non-alignment, and of Korean-Japanese rapprochement.

China’s increasing nationalism is notable, although in the last half of 2024 its opposition to the U.S. was modulated by the dire economic conditions it was facing. Xi Jinping’s opposition to the U.S. eased. Nevertheless, China’s long-term goals and strategic opposition to the US in East Asia have not changed, nor have Xi’s designs on Taiwan. He has stated that reunifying China will be his legacy.

We have also looked closely this year at India. Narendra Modi’s extraordinary consolidation of policy power — combining a market orientation with strong state policies and a cultural nationalism of alarming strength — continued in 2023. Modi’s popular support remained very strong, and state elections earlier this month confirmed his BJP party as the political anchor of the 600-million-person Indian electorate. Most importantly, per capita GDP growth has stayed vigorous as the BJP has made massive transfers to low-income groups and steadily empowered the lower Hindu castes. The BJP has apparently succeeded in generating increased demand domestically by strengthening the lower classes through policy. How sustainable this progress is remains to be seen, but the BJP certainly is in pole position going into national elections next April.

In regional terms, our final major focus since June has been the Middle East. The set of initiatives known as the Abraham Accords, alongside a surge in successful Chinese diplomacy in the region, led many to think the Middle East would be stabilizing after the years of violence that followed the rise of Daesh/Islamic State and the suppression of the Arab Spring. Hamas had something else in mind, and mainstream commentary on the Middle East has swung from mildly optimistic to apocalyptic. But the strong drivers of normalization between Israel and key Arab states will not necessarily weaken in 2024 and might well grow stronger. The relatively subdued reaction of these states to Israel’s reaction to the Hamas attack continues to remain notable. Both the OIC/Arab League solidarity on Gaza and the petrostates’ reluctant acceptance at COP28 of a fossil-fuel phaseout suggest a relative political steadiness in Muslim interstate relations and even some sense of common purpose.

Common purpose is what we have looked for in Europe, without great success. True, hostility toward poorer immigrants has become one source of greater solidarity; so has opposition to Russian aggression in Ukraine. Yet both also contain seeds of disunion as political forces in individual states gain power by sharpening themselves against the European consensus. Given general European declines in both productivity and population, the relative power of Poland and other Central European countries has been expanding as they grow more quickly than the Western states. Germany has begun to imagine what a long-term estrangement of oil-rich Russia might mean for the European solidarity on which Germany bases its positioning of itself in the world. At the same time, Germany and, especially, France are trying to adjust to the continued rise in autarkic industrial policies in both the US (EV subsidies, semiconductor chips) and China. About half of the EU’s population is older than 45. In parts of Western and Northern Europe the median age is above 50. All of this puts European productivity under greater pressure and will increase tension between demographically older and younger parts of the continent. Age will be no guarantee of stability. It also creates a tension around immigration from Africa and the Middle East — the only means for many European countries to have an increased number of younger workers.

Since we launched in June, we have put great emphasis on various technology sectors because the peacetime capacity of economies to innovate in technology has become so wrapped up in major-state calculations about war and military competition. Borders are being erected across the Internet in a displaced strategic competition that is lacking in historical analogies to guide us (and that was predicted years ago by SIG’s Scott Malcomson in his book Splinternet). The level of popular and state-level anxiety about technologies that hardly exist yet is extraordinary. US policy now aims squarely at perpetual superiority to China in any technology that might prove to have strategic significance; Chinese policy aims just as squarely at achieving whatever advances it can on the basis of a military-technological-industrial complex bent to establishing breakneck progress if not primacy. The logic has become well established. In 2024 we will stay focused on identifying its effects.

Which brings us to the Americas. An elected right-wing leader had plunged Argentina into political chaos while an elected left-wing leader in Brazil is pushing through long-needed reforms of investment regulation. Mexico will have elections in 2024 and Canada might too, as large majorities of Canadians say Trudeau should move aside. The American superpower will definitely have an election, this time with a desperately low level of predictability. For almost a decade, mainstream analysis has consistently underestimated both Donald Trump and the level of popular alienation from the Democratic Party consensus. The results in November are impossible to predict with accuracy, but it seems certain that the road to get there will be very rocky indeed. Social unrest and violence in the U.S. cannot be ruled out.

There are national elections in 40 countries in 2024, representing more than 40 percent of the population of the world, many in countries where people have lost faith in institutions and incumbent leaders, resulting in a wide tendency to reject them and their parties, further increasing volatility. 

It has been said that 2023 was the year in which business accepted that politics could not be safely ignored, especially the multi-player geopolitics that we have focused on in our blog and our work. The liberal rules-based order sometimes continued in the letter in 2023 but the spirit was gone and won’t soon—if ever—be back. This leaves the world in a kind of systems vacuum, resulting in movement back toward a balance-of-power, sphere-of-influence geopolitics. The unstable and fracturing conditions within and among nations are still not really priced in to markets, as can be seen by how quickly they continue to bounce back from shocks that in the past would have had significantly more long-lasting negative effects, such as the Israel-Hamas war.

2024 will be a pivotal, perhaps decisive year. We look forward to helping our readers and our clients navigate ways to prosper in a very treacherous time. We will take a break next week and look forward to re-engaging with you in the New Year. 

Faith-based geopolitics: A Russian Example

Modern interstate relations are generally thought to have begun with the 17th-century treaties of Prague and Westphalia, which sought to remove religion from among the causes of interstate conflict: cuius regio, eius religio (“whose land, his religion”) was the legal principle, associating state sovereignty with a single dominant faith, and putting an end, however imperfectly, to wars of religion. Modern international relations were built on this segregation of religion from the struggles of states with each other. The resurgence of religion since the demise of aggressive Communist atheism in the 1980s has often been seen as anti-modern, or as a revival of the pre-modern — certainly as far as international relations are concerned. However that may be, religion cannot be ignored by international investors. Shariah compliance and acceptance of Hindutva priorities are two examples. Less obvious is the type of strategic calculation that has led the unlikely figure of Vladimir Putin to embrace Islam as part of his geopolitical practice.

Putin has been viewed as having a significant connection to the Russian Orthodox church since at least 2000, just after he assumed power, when he referred to Orthodoxy as having “largely determined the character of Russian civilization.” He expected the traditional church to speed “the spiritual and moral rebirth of the Fatherland.” After more than two decades in power, Putin has continued to partner with Russian Orthodoxy in his attempts to solidify Russian cultural nationalism, not least in anti-LGBTQ laws (framed as part of Putin’s struggle with a spiritually degraded West) and in his justifications for the invasion of Ukraine, which has been strongly backed by the Orthodox church. Cuius regio, eius religio.

Yet at the same time Putin has sought to leverage the fact that Russia has the largest Muslim population of any European country, assuming Turkey is not seen as European. On the strength of that fact, Russia acquired observer status at the Organization of the Islamic Conference (OIC) in 2005 and is still the only major non-Muslim-majority country to do so. (India was invited but declined.) As a petroleum exporter, Russia is also in constant communication with Middle East petrostates and shares strategic interests with them. These connections make it slightly less peculiar that Orthodox Russia has embarked this year on a two-year experiment with Islamic banking in four Muslim-majority regions: Bashkortostan, Chechnya, Daghestan and Tatarstan. The experiment is being managed by the Russian Central Bank.

Russia has multiple reasons to position itself as friendly to Islam. Russia’s hinterland from the Caucasus to Mongolia is majority-Muslim and its post-Soviet economy has depended on Muslim migrant labor to compensate for domestic demographic decline. In the Middle East, the Kremlin seeks to establish itself as a significant player in the Arab-Muslim world amid the Washington-Beijing confrontation and the Persian Gulf countries’ pursuit of an augmented role on the international stage. In this context, Russia’s stance on the Israeli-Palestinian conflict and its support for Palestinian refugees, many of whom resettled in the North Caucasus under a humanitarian program instituted by Russian authorities, contribute to bolstering Moscow’s image in the Middle East.

Putin frames the ongoing Palestine conflict as a manifestation of US diplomatic failure and proffers Russia as a potential mediator, leveraging its amicable relationships with both Israel and the Palestinians. Putin’s official visits to the United Arab Emirates and Saudi Arabia last week aimed to weaken the Western narrative of Russian isolation over Ukraine. The Islamic-banking initiative is similarly seen as in part a response to Ukraine-related financial sanctions. The visits themselves had ultimately to do with money as much as politics: the UAE and Saudi Arabia can withstand a drop in oil prices, but Putin faces a pressing need for revenue, given the costs of the Ukraine war and their impact on his domestic support.

Since the inception of the Ukraine conflict, the Kremlin has increased its efforts to strengthen relations with the Arab-Muslim world, orchestrating various events within the territorial confines of the Russian Federation, particularly in regions with significant Muslim populations. The Kazan Forum 2023 was a prominent event featuring Moscow’s ties to Arab-Muslim countries, particularly Gulf Cooperation Council members. The focus was on accentuating Russia's role in ensuring a harmonious, multi-confessional, and multicultural society. Moscow is likely to intensify its relations and collaborative initiatives with the Gulf Cooperation Council members in energy, defense and logistics.

The lesson for investors is that 21st century religious revivalism is both powerful and not simple. For many centuries, Russian Orthodoxy was animated by the dream of retaking Istanbul (Constantinople) from the infidel Muslim usurpers Much of the tsar’s 19th century imperial gains were at the cost of Central Asian Muslim rulers, and after the Bolshevik revolution Islamic culture was often suppressed. Yet now the Orthodox paragon Putin is strengthening Russia’s Muslim ties on multiple fronts, domestic as well as international, and at least some Muslim states are responding in kind.

In Southeast Asia, Non-Alignment Is Development Policy

India may have been the pioneer of political non-alignment in the 1960s — proposing that countries should align themselves neither with the West nor the Communist bloc — but 21st century non-alignment is more economic than political and its homeland is Southeast Asia.

Over the summer, Singapore decided to split its decision on who would build the next tranche of data centers on the island: Chinese companies got two contracts (with an assist from Australia’s AirTrunk) and US companies got two. While the US has been trying, with some success, to corral countries into a kind of digital alliance that keeps China out, states in the global economy’s fastest-growing region are refusing to choose. This will prove to be the non-aligned movement that matters for the near future.

Compared to other of the world’s regions, Southeast Asia has had far more experience of both China and the US in the role of major powers: the US since its defeat of Spain in 1898 and especially since 1942, when it entered World War II; China over two millennia, most recently following a policy of Maoist subversion in the 1950s-1970s and commercial expansion and influence from the 1990s to today. Southeast Asia has also had a unique experience of consistent inward investment from other highly developed economies with labor shortages such as Japan, Korea and Taiwan. Indian capital began to look more seriously at the region a few years ago, as has some European and Middle Eastern capital. The gradual redirection of US capital away from the Chinese mainland after 2016 and the slowing of China’s economy strengthened pre-existing trends favoring Southeast Asian growth.

One result is a regional political culture with a deep tradition of not taking sides. The elevation of Chinese-American strategic and economic competition into the digital realm — begun under Trump and greatly extended under Biden — has been met in Southeast Asia by a determination to maintain digital non-alignment. The term itself has been toyed with by Russia and has been more substantively explored by India since its initial banning of Chinese apps in 2020. But Russia has neither tradition nor credibility as a disinterested actor outside its borders and its declining IT sector is increasingly hostage to China, while India’s mini-hegemonic aspirations and hostility toward Islam hinder its acceptance by others as a leader. Southeast Asia walks the walk as well as talking the talk.

Ultimately the US and China have little choice but to go along, because in the digital realm their strategic positions are decisively shaped by their respective private sectors. The politically driven “techlashes” in both the US and China over the past five years were driven by state and popular (in the US) fears of overweening private-tech power, but the tech sector can only be reined in up to a point or it starts to lose its vitality, as may be happening already to some degree in China — and that leads to the sort of strategic weakening that is precisely what the American and Chinese states are most hoping to avoid. For the good of the state, they need their tech sectors to thrive in private markets. The most important of those, for a great many reasons, is Southeast Asia, which is why the 21st century’s distinctive form of non-alignment is being born there.

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Betting on Different Horse

Today, only the most ideologically committed, old-school liberal internationalist would hold that we have not moved out of the world of the “rules-based international order,” in which countries were all meant to obey a set of common rules — rules established by Western powers during the Cold War and thought to be triumphant after that war’s end.

As Julien Barnes-Dacey and Jeremy Shapiro, both of the European Council on Foreign Relations, wrote in Foreign Policy:

[T]he West has embraced a comforting illusion about a liberal rules-based order . . . International law could tame war, defend sovereignty, and protect human rights, all the same time.

It was a wonderful vision, but it never had a chance. The temptations of power meant that the West repeatedly violated its own rules. Western actors invaded countries when they felt the need (Iraq), hired fancy lawyers to exempt themselves from the laws they expected others to follow (Kosovo), preached human rights while cutting deals with authoritarian regimes (Saudi Arabia), and set up an International Criminal Court to try African leaders (including those from Sudan) while refusing to recognize its jurisdiction over themselves (the United States). For the less powerful countries, the rules-based order based was always little more than hypocrisy on a global scale . . . [and they] have become increasingly vocal in their frustration about the hypocrisy at the core of the global order.

They have taken particular issue with the West’s demand that they sacrifice core material interests in defense of this so-called order, a step that the West has always been wholly unwilling to do itself. So U.S. and European entreaties that global states cut financial and energy ties to Russia following the invasion of Ukraine have fallen on deaf ears, while Western attempts to rally international support behind Israel have faltered.

A key point that is now fully evident — as discussed in a recent post on the SIGnal blog (see “The Pulling Apart,” 1 November 2023) — is that we cannot even agree what the rules might be for a rules-based international order. And it has become clear that many of us do not really want to agree, because different rules reflect different identities. In effect, they say :“I am different from you, I don’t believe what you believe, and I don’t follow your rules.”

So if we have moved de facto if not yet entirely de jure out of the rules-based order, then what have we moved into?  

We now live in a multi-polar world, with two superpowers, possibly two other major powers (Russia and the EU), and many more middle powers — countries such as Turkey, India and Brazil, with powerful economies and sometimes powerful militaries. Most of these are in no mood, and see no need going forward, to kowtow to Western interests, policies or rules. We have moved into a world that is fragmented and continues to splinter, very probably with more transitory international alliances based on the practical or Realpolitik needs of the moment — a world, unfortunately, of more conflict  between states, among states and non-state actors, and within states themselves.

It is also a world in which economic factors will probably not move nearly as much in tandem. In a de-globalized world, what is sauce for the goose is not necessarily sauce for the gander. Events that significantly disadvantage one region or nation have always had the potential to significantly advantage another region or nation. The tightly coupled globalized order has to some extent dampened this effect. The dampening is now likely to decrease or even end.

Climate change and related resource challenges will exacerbate this “performance decoupling” and will do so in ways that are largely unpredictable. Expanded geopolitical conflict — related to all the factors mentioned above — will add fuel to the fire. Finally, these and other factors are rife with feedback loops that can intensify effects, again, in ways that are often not detectable until they are manifest in events.

All of this means that the performance of economies and of investments in different places — and in different sectors in different places — are likely to be far more variable, discontinuous and uncoupled than has been the norm during the past 30 years.

This brings both risk and opportunity. Investors who keep their eyes on the ball can take advantage of opportunities related to performance discontinuities, arbitrage and the like. In other words, they can bet on different horses. Nevertheless, we will not be living in the simpler environment of the past few decades, a time when stable trends could be projected to drive overall macro performance. Change closes off old possibilities and opens up new ones. We need to think differently to maximize them.

An Unexpected Unity at Riyadh Summit

An Unexpected Unity at Riyadh Summit

On Saturday, 57 Arab and Muslim nations called for a halt to military operations in Gaza, dismissing Israel's self-defense rationale for its actions against Palestinians. In an extraordinary joint summit in Riyadh, the 22-member Arab League and the 57-member Organization of the Islamic Conference (to which all Arab League members belong) unanimously called for the International Criminal Court to probe “war crimes and crimes against humanity” being perpetrated by Israel in the Palestinian territories. The summit also urged an arms embargo against Israel and the establishment of an Arab-Islamic committee to supervise diplomatic efforts aimed at securing a ceasefire in Gaza. The summit called for the immediate entry of humanitarian aid convoys to bring food, medicine and fuel into the Gaza Strip. Leaders including Iranian President Ebrahim Raisi, Turkish President Tayyip Erdogan, and Qatar's Emir Sheikh Tamim bin Hamad Al Thani attended: the Sunni and Shia worlds alike, and the newly welcomed-back Syrian President Bashar al-Assad. Raisi’s trip to Saudi Arabia is the first by an Iranian head of state in more than a decade. Saudi Arabia’s Muhammad bin Salman presented himself as leader of the Arab-Muslim world, inviting both allies and foes.

Led by Algeria, certain Arab nations advocated for a total severance of diplomatic ties with Israel. However, other Arab countries that have established diplomatic relations with Israel resisted this stance, emphasizing the importance of maintaining open channels with the government of Prime Minister Netanyahu. Just as interesting was the abrupt resurgence of the Palestinian cause in the awareness of Arab and Muslim nations. Deep divisions continue to impede the formulation of a shared vision to conclude the ongoing conflict and establish a diplomatic framework for what lies ahead. But what led to the merging of the Arab League and OIC conferences was precisely disagreement. The lack of unity created political pressure, and MBS and others responded with a move to show unity. The surprising thing is not that there are still sharp regional divisions but that the joint summit occurred at all.

Hamas’s action on 7 October, grotesque as it was, did have a rationale: To upset the emerging consensus, as the Abraham Accords continued to bring Israel and various Muslim states into a new and less hostile configuration, that the fate of Palestinians could safely be ignored. That message was sent not just to Israel but also, perhaps primarily, to Arab states like Saudi Arabia. The illusion that the Palestinians could be ignored indefinitely as the Abraham Accords process expanded has now been dispelled.

The global community is confronted with a radical Israeli government uninterested in compromise, an ineffectual Palestinian leadership further weakened by recent events, and a U.S. administration preoccupied with impending presidential elections. The conditions for a political initiative are unfavorable.Therapidly diminishing window for peace and regional integration signals a heightened risk for Israel of regression to the conditions of 1948. The swift reversal of the United States' role as a security provider has invited comparison in the region to the speed with which France in West Africa went from the center to near the margins of the regional security balance. What was really striking, then, about the Arab League-OIC joint summit was that it showed the regional players, large and small, willing to get together with some urgency and compromise on reaching a modest common platform. What that might mean for Palestinians is unclear but it does suggest a certain reflex for peaceful discussion and a minimal unity that have not been features of regional politics before.