Joachim Klement, CFA, is the creator of Geo-Economics: The Interaction between Geopolitics, Economics, and Investments from the CFA Institute Analysis Basis.
The struggle in Ukraine is dominating the headlines. For now.
However the battle’s oblique reverberations will ripple far past the borders of its combatants and their allies. Certainly, they might give rise to new and diversified geopolitical dangers all through the world.
The struggle’s potential impact on the worldwide grain provide and meals inflation is particularly alarming. Ukraine is called the “bread basket of Europe,” and along with Russia, it provides wheat to creating international locations throughout Africa, the Center East, and Central Asia.
There are already reviews that many Ukrainian farmers are abandoning their fields proper at first of the sowing season to defend their nation. The world can pay a value.
The struggle might lead to a whole or near-complete failure of the 2022 Ukrainian wheat harvest. Russian wheat exports in the meantime might drop to zero because the nation diverts its meals commodities for home use within the face of crippling worldwide sanctions.
Many international locations depend upon Russian and Ukrainian grain imports to feed their populations. The warring nations are chargeable for at the least 80% of the grain provide in Benin and Congo in Africa; Egypt, Qatar, and Lebanon within the Center East; and Kazakhstan and Azerbaijan in Central Asia. All these states must discover new sources of grain and pay a lot increased costs for them.
And that may compound an already unhealthy scenario. Even earlier than the battle, meals inflation was rising. Over the past yr, it reached 17.6% and 4.8% yr over yr (YoY) in Egypt and the United Arab Emirates (UAE), respectively. These ranges are harking back to those who preceded the Arab Spring uprisings again in 2011. The scenario is much more excessive in Turkey, the place a quickly declining lira propelled YoY meals inflation to 64.5%.
Going ahead, a number of elements might propel meals costs even increased. Past the dearth of grain exports from Ukraine and Russia, spiking power costs will improve transport and fertilizer prices. With Russia, a serious fertilizer exporter, going through extreme sanctions, there will probably be much more upward stress on fertilizer costs. It will add gasoline to the fireplace and ship meals inflation ever increased. In developed international locations, whereas the ache varies throughout the revenue spectrum, such tendencies can largely be ameliorated by reductions in client discretionary spending: Folks alter by paying extra for meals and fewer on journey, leisure, and so on. However in creating nations, the place meals takes up a bigger share of complete residing bills and there’s much less discretionary spending, starvation is a extra acute danger.
The Arab Spring is a vivid instance of how such circumstances can ignite civil unrest and geopolitical tensions. It isn’t an remoted occasion. The peasants’ rebellions within the Center Ages, the French Revolution, and the Revolutions of 1848, for instance, all show how rising meals insecurity can set off political and social upheaval. The impact is so sturdy that Rule 6 of my “10 Guidelines for Forecasting” states:
“A full abdomen doesn’t riot.
“Revolutions and uprisings hardly ever happen amongst people who find themselves nicely fed and really feel comparatively secure. An absence of private freedom isn’t sufficient to spark insurrections, however a scarcity of meals or water or widespread injustice all are.”
The international locations that depend upon grain from Russia and Ukraine together with the share of their populations that have been at medium or excessive meals danger earlier than the current battle are charted within the graphic under. Kazakhstan and Azerbaijan together with Egypt and Congo are amongst these on the most danger given their reliance on Russian and Ukrainian grain imports, their present meals insecurity, or mixture of the 2.
Meals Insecure and Depending on Grain Imports from Ukraine and Russia
However excessive meals inflation isn’t the one driver of potential turmoil. Constructing on current insights from Chris Redl and Sandile Hlatshwayo, who use machine studying to determine the predictors of social upheaval, we constructed a Civil Strife Threat Index that ranks international locations primarily based on 5 key stability metrics:
- The proportion of their complete grain imports from Russia and Ukraine, in line with UN Comtrade information
- The share of their populations with average or excessive meals insecurity, in line with the World Financial institution
- Their youth unemployment fee primarily based on World Financial institution and Bloomberg information
- The variety of cell phone subscriptions per 100 individuals, in line with the World Financial institution
- Their Democracy Index ranking from The Economist Intelligence Unit
Why these 5 parts? Proof means that international locations with excessive proportions of younger and unemployed males are extra vulnerable to instability; cell phones are important for organizing mass protest through social media platforms; and a scarcity of democratic establishments implies that the inhabitants sees no alternative to vary the political management outdoors of direct motion.
Combining these 5 indicators yields perception into which international locations are most vulnerable to civil unrest. The chart under solely contains those who immediately import grains from Russia and Ukraine, so it’s composed of solely these nations that may immediately undergo from the fallout of the struggle in Ukraine.
The Civil Strife Index, by Nation
| Rank | Nation | Threat of Civil Strife Index Worth | Youth Unemployment Charge | Cell Telephone Subscriptions/ 100 individuals | Inhabitants with Average or Extreme Meals Insecurity | Share of Whole Grain Imports from Russia and Ukraine | Democracy Index |
| 1 | Congo, Rep. | 40.5 | 42.7 | 88.3% | 76.7% | 2.8 | |
| 2 | UAE | 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 |
The oil exporters — Saudi Arabia and the UAE — and Turkey, with its shut commerce hyperlinks to the UK and the European Union, are essentially the most troubling from an economics and investing perspective. Instability in these international locations, might have a spillover impact that disrupts power provide chains and world commerce and triggers renewed spikes in inflation in 2022.
To make sure, Saudi Arabia and the UAE largely averted Arab Spring-related unrest and may profit from the rise in oil costs. Nonetheless, their excessive rankings on the index, pushed particularly by the youth unemployment fee in Saudi Arabia and the UAE’s reliance on Ukrainian and Russian grain mixed with their low Democracy Index scores, might warrant some consideration.
The scenario in Turkey is especially worrisome given the nation’s already monumental inflation fee and the sturdy chance of a sovereign default within the subsequent 12 months as a result of devaluation of the lira.
Traders have to give attention to political developments in these international locations within the weeks and months forward. They could function an early warning signal of potential world provide chain disruptions that would have an effect on the UK and Europe.
For extra from Joachim Klement, CFA, don’t miss Threat Profiling and Tolerance and 7 Errors Each Investor Makes (and The right way to Keep away from Them) and join his common commentary at Klement on Investing.
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All posts are the opinion of the creator. As such, they shouldn’t be construed as funding recommendation, nor do the opinions expressed essentially replicate the views of CFA Institute or the creator’s employer.
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