Global econ­omy con­fronts four geopo­lit­i­cal risks

Financial Mirror (Cyprus) - - FRONT PAGE -

The end of the year is a good time to con­sider the risks that lie ahead of us. There are of course im­por­tant eco­nomic risks, in­clud­ing the mis­pric­ing of as­sets caused by a decade of ul­tra-low in­ter­est rates, the shifts in de­mand caused by the Chi­nese econ­omy’s chang­ing struc­ture, and Euro­pean economies’ per­sis­tent weak­ness. But the main longer-term risks are geopo­lit­i­cal, stem­ming from four sources: Rus­sia, China, the Mid­dle East, and cy­berspace.

Al­though the Soviet Union no longer ex­ists, Rus­sia re­mains a for­mi­da­ble nu­clear power, with the abil­ity to project force any­where in the world. Rus­sia is also eco­nom­i­cally weak be­cause of its de­pen­dence on oil rev­enue at a time when prices are down dra­mat­i­cally. Pres­i­dent Vladimir Putin has al­ready warned Rus­sians that they face aus­ter­ity, be­cause the gov­ern­ment will no longer be able to af­ford the trans­fer ben­e­fits that it pro­vided in re­cent years.

The geopo­lit­i­cal dan­ger arises from Putin’s grow­ing reliance on mil­i­tary ac­tion abroad – in Ukraine and now in Syria – to main­tain his pop­u­lar­ity at home, us­ing the do­mes­tic me­dia (now al­most en­tirely un­der Krem­lin con­trol) to ex­tol Rus­sia’s global im­por­tance. Rus­sia also uses its gas ex­ports to Western Europe and Tur­key as an eco­nomic weapon, al­though Tur­key’s re­cent de­ci­sion to source gas from Is­rael shows the lim­its of this strat­egy. As Putin re­sponds to this and other chal­lenges, Rus­sia will re­main a source of sub­stan­tial un­cer­tainty for the rest of the world.

China is still a poor coun­try, with per capita GDP at roughly a quar­ter of the US level (on the ba­sis of pur­chas­ing power par­ity). But, be­cause its pop­u­la­tion is four times larger, its to­tal GDP is equal to Amer­ica’s (in PPP terms). And it is to­tal GDP that de­ter­mines a coun­try’s abil­ity to spend on mil­i­tary power, to pro­vide a strate­gi­cally sig­nif­i­cant mar­ket for other coun­tries’ ex­ports, and to of­fer aid to other parts of the world. China is do­ing all of th­ese things on a scale com­men­su­rate with its GDP. Look­ing ahead, even with the more mod­er­ate growth rates pro­jected for the fu­ture, China’s GDP will grow more rapidly than that of the US or Europe.

China is now ex­pand­ing its strate­gic reach. It is as­sert­ing mar­itime claims in the East and South China Seas that con­flict with claims by other coun­tries in the re­gion (in­clud­ing Ja­pan, the Philip­pines, and Viet­nam). In par­tic­u­lar, China is re­ly­ing on the so-called “nine-dash line” (orig­i­nally cre­ated by Tai­wan in 1947) to jus­tify its claim to most of the South China Sea, where it has cre­ated ar­ti­fi­cial is­lands and as­serted sovereignty over their sur­round­ing wa­ters. The US char­ac­terises China’s pol­icy as “an­ti­ac­cess area de­nial”: an ef­fort to keep the US Navy far from the Chi­nese main­land and from the coasts of Amer­ica’s al­lies in the re­gion. China also is ex­pand­ing its geopo­lit­i­cal in­flu­ence through ini­tia­tives like the Asian In­fra­struc­ture In­vest­ment Bank, aid pro­grammes in Africa, and its “One Belt, One Road” plan to es­tab­lish mar­itime and ter­ri­to­rial links through the In­dian Ocean and Cen­tral Asia, ex­tend­ing all the way to Europe. The cur­rent Chi­nese po­lit­i­cal lead­er­ship wants a peace­ful and co­op­er­a­tive re­la­tion­ship with the US and other Western coun­tries. But, look­ing to the fu­ture, the chal­lenge for the US and its al­lies will be to de­ter fu­ture gen­er­a­tions of Chi­nese lead­ers from adopt­ing poli­cies that threaten the West.

In the Mid­dle East, much of the world’s fo­cus has been on the threat posed by ISIS to civil­ian pop­u­la­tions every­where – in­clud­ing Europe and the United States. But the big­ger is­sue in the re­gion is the con­flict be­tween Shia and Sunni Mus­lims, a di­vide that has per­sisted for more than a thou­sand years. For most of that time, and in most places, the Shia have faced dis­crim­i­na­tion – and of­ten lethal violence – at the hands of Sun­nis.

Thus, Saudi Ara­bia and other Sunni-ruled Gulf states view Iran, the re­gion’s Shia power, as their strate­gic neme­sis. Saudi Ara­bia, in par­tic­u­lar, fears that Iran wants to set­tle old scores and at­tempt to shift cus­to­di­an­ship of Is­lam’s holy sites in Mecca and Me­d­ina to Shia con­trol. A con­flict be­tween Saudi Ara­bia and Iran would also be a fight over the vast oil riches of the Ara­bia Penin­sula and the enor­mous fi­nan­cial wealth of small Sunni states like Kuwait and Qatar.

The fi­nal source of risk, cy­berspace, may soon over­shadow all the rest, be­cause bor­ders and armies can­not limit it. The threats in­clude de­nial-of-ser­vice at­tacks on banks and other in­sti­tu­tions; unau­tho­rised ac­cess to per­sonal records from banks, in­sur­ance com­pa­nies, and gov­ern­ment agen­cies; and in­dus­trial es­pi­onage. In­deed, wide­spread theft of tech­nol­ogy from US com­pa­nies led to a re­cent agree­ment be­tween China and the US that nei­ther gov­ern­ment will as­sist in steal­ing tech­nol­ogy to ben­e­fit its coun­try’s firms.

Th­ese are im­por­tant is­sues, but not nearly as se­ri­ous as the threat that mal­ware poses to crit­i­cal in­fra­struc­ture – elec­tric­ity grids, air traf­fic sys­tems, oil pipe­lines, wa­ter sup­plies, fi­nan­cial plat­forms, and so on. Re­cent cases of mal­ware use have been at­trib­uted to China, Iran, Rus­sia, and North Korea. But states need not be in­volved at all: In­di­vid­u­als and non-state ac­tors could de­ploy mal­ware sim­ply by hir­ing the needed tal­ent in the in­ter­na­tional un­der­ground mar­ket­place.

Cy­ber weapons are rel­a­tively cheap (and thus widely ac­ces­si­ble) and ca­pa­ble of reach­ing any­where in the world. They are the fu­ture weapons of choice for at­tack­ing or black­mail­ing an ad­ver­sary. And we still lack the abil­ity to block such at­tacks or to iden­tify un­am­bigu­ously their sources.

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