The Russia–Ukraine War and Other Geopolitical Risks

Joachim Klement, CFA, is the author of Geoeconomics: the interaction between geopolitics, economics and investments from the CFA Institute Research Foundation.

The war in Ukraine dominates the headlines. For now.

But the indirect repercussions of the conflict will spread far beyond the borders of its combatants and their allies. In fact, they could give rise to new and varied geopolitical risks around the world.

The potential effect of war on world grain supply and food inflation is particularly alarming. Ukraine is known as the “breadbasket of Europe” and together with Russia, supplies wheat to developing countries in Africa, the Middle East and Central Asia.

There are already reports that many Ukrainian farmers are leaving their fields right at the start of the planting season to defend their country. The world will pay a price.

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The war may lead to a complete or near-complete failure of Ukraine’s 2022 wheat crop. Meanwhile, Russian wheat exports may drop to zero as the country diverts its food products for domestic use in the face of international sanctions paralyzing

Many countries depend on Russian and Ukrainian grain imports to feed their populations. The warring nations are responsible for at least 80% of the grain supply to Benin and Congo in Africa; Egypt, Qatar and Lebanon in the Middle East; and Kazakhstan and Azerbaijan in Central Asia. All these states will have to find new sources of grain and pay much higher prices for them.

And that will make an already bad situation worse. Even before the conflict, food inflation was rising. Over the past year, it reached 17.6% and 4.8% year-on-year (YoY) in Egypt and the United Arab Emirates (UAE), respectively. These levels are reminiscent of those that preceded the Arab Spring uprisings in 2011. The situation is even more extreme in Turkey, where a rapidly declining lira pushed year-on-year food inflation to 64.5%.

Going forward, several factors may push food prices even higher. Beyond the lack of grain exports from Ukraine and Russia, rising energy prices will increase shipping and fertilizer costs. With Russia, a major fertilizer exporter, facing severe sanctions, there will be even more upward pressure on fertilizer prices. This will add fuel to the fire and increase food inflation. In developed countries, although the pain varies across the income spectrum, these trends can be largely ameliorated by reduced discretionary consumer spending: people adjust by paying more for food and less for travel , entertainment, etc. rises a larger share of total living expenses and there is less discretionary spending, hunger is a more acute risk.

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The Arab Spring is a vivid example of how these conditions can lead to civil unrest and geopolitical tensions. It is not an isolated incident. Peasant rebellions in the Middle Ages, the French Revolution and the Revolutions of 1848, for example, demonstrate how growing food insecurity can trigger political and social upheaval. The effect is so strong that Rule 6 of my “10 Rules for Forecasting” says:

A full stomach doesn’t get tired.

“Revolutions and uprisings rarely occur among well-fed people who feel relatively safe. Lack of personal freedom is not enough to cause insurrections, but lack of food or water or widespread injustice is.”

The chart below shows the grain-dependent countries of Russia and Ukraine, along with the proportion of their populations that were at medium or high food risk before the recent conflict. Kazakhstan and Azerbaijan, along with Egypt and Congo, are among those most at risk given their dependence on Russian and Ukrainian grain imports, their existing food insecurity, or a combination of the two.

Food insecurity and dependence on grain imports from Ukraine and Russia

Chart showing the countries that

But high food inflation is not the only driver of potential turbulence. Building on recent insights from Chris Redl and Sandile Hlatshwayo, who use machine learning to identify predictors of social unrest, we built a civil conflict risk index that ranks countries based on five key metrics of stability:

  1. The percentage of its total grain imports from Russia and Ukraine, according to UN Comtrade data
  2. The proportion of its population with moderate or high food insecurity, according to the World Bank
  3. Its youth unemployment rate is based on data from the World Bank and Bloomberg
  4. The number of mobile phone subscriptions per 100 people, according to the World Bank
  5. Its Democracy Index rating from The Economist Intelligence Unit
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Why these five components? Evidence suggests that countries with high proportions of young, unemployed men are more prone to instability; mobile phones are essential for organizing mass protests through social media platforms; and the lack of democratic institutions means that the population sees no opportunity to change political leadership outside of direct action.

The combination of these five indicators makes it possible to know which countries are most at risk of civil unrest. The chart below only includes those that directly import grain from Russia and Ukraine, so it only consists of those nations that will directly suffer the consequences of the war in Ukraine.

The index of civil conflicts, by country

classification nation Value of the civil conflict risk index Youth unemployment rate Mobile phone subscriptions/ 100 people Population with moderate or severe food insecurity Percentage of total grain imports from Russia and Ukraine Index of democracy
1 Congo, Rep. 40.5 42.7 88.3% 76.7% 2.8
2 United Arab Emirates 32.5 9.0 185.8 53.5% 2.9
3 Saudi Arabia 32.0 28.2 124.1 8.1% 2.1
4 Belarus 31.3 11.2 123.9 48.6% 2.4
5 Lebanon 29.0 27.4 62.8 95.7% 3.8
6 Nicaragua 29.0 11.7 90.2 78.1% 2.7
7 Tajikistan 29.0 17.0 5.3% 1.9
8 Turkey 28.5 24.5 97.4 74.8% 4.4
9 Armenia 28.4 36.6 117.7 12.7% 99.8% 5.5
10 Egypt 28.4 23.4 93.2 27.8% 86.0% 2.9

Oil exporters — Saudi Arabia and the United Arab Emirates — and Turkey, with their close trade ties to the United Kingdom and the European Union, are the most worrying from an economic and investment perspective. Instability in these countries could have a spillover effect that disrupts energy supply chains and global trade and triggers further increases in inflation in 2022.

To be sure, Saudi Arabia and the United Arab Emirates largely avoided unrest related to the Arab Spring and should benefit from higher oil prices. However, their high rankings on the index, driven especially by the youth unemployment rate in Saudi Arabia and the UAE’s dependence on grain from Ukraine and Russia combined with its low scores on the democracy index, may deserve some attention.

The situation in Turkey is particularly worrying given the country’s already huge inflation rate and the strong likelihood of a sovereign default in the next 12 months due to the devaluation of the lira.

Investors should focus on political developments in these countries over the coming weeks and months. They can serve as an early warning sign of potential global supply chain disruptions that could affect the UK and Europe.

For more information from Joachim Klement, CFA, don’t miss out Risk profile and tolerance i 7 mistakes every investor makes (and how to avoid them) and subscribe to his regular comment a Klement on investment.

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All posts are the opinion of the author. Therefore, they should not be construed as investment advice, nor do the views expressed necessarily reflect the views of the CFA Institute or the author’s employer.

Image credit: ©Getty Images/alzay

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Joachim Klement, CFA

Joachim Klement, CFA, is a trustee of the CFA Institute Research Foundation and provides regular commentary to Klement on investment. He was previously CIO at Wellershoff & Partners Ltd., and before that, Head of the Strategic Research Team at UBS Wealth Management and Head of Equity Strategy at UBS Wealth Management. Klement studied mathematics and physics at the Swiss Federal Institute of Technology (ETH), Zurich (Switzerland) and Madrid (Spain), graduating with a master’s degree in mathematics. In addition, he has a master’s degree in economics and finance.

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