Current geopolitical and economic impacts

The cost of production. Following the energy crisis we are currently facing due to geopolitical tensions (with interpretations of the 3rd World War or the 2nd Cold War), the cost of energy continues to rise since the start of the Russian-Ukrainian invasion. While the EU and the US impose Russian san...

The cost of production. Following the energy crisis we are currently facing due to geopolitical tensions (with interpretations of the 3rd World War or the 2nd Cold War), the cost of energy continues to rise since the start of the Russian-Ukrainian invasion. While the EU and the US impose Russian sanctions, which is a great pain for Western countries that are heavily dependent on Russia's imports, new-dimensional geopolitical tensions may bring new problems for the US, where Chinese exports are determinant.

The Russian-Ukrainian influence. Russia is the world's 3rd oil producer, 2nd natural gas producer and among the 5 largest steel, nickel and aluminum producers. It is also the world's largest exporter of wheat (almost 20% of global trade). Ukraine is the main producer of corn (6th largest), wheat (7th), sunflower (1st) and is among the top ten producers for sugar beet, barley, soybean and rapeseed. These sanctions caused commodity prices to rise, which directly affected the cost of production. Higher cost of production = higher cost of goods = increased CPI = higher inflation.

Automobile: The crisis is clearly affecting the automotive industry, which is already strained by various shortages and high prices of commodities and raw materials: metals, semiconductors, cobalt, lithium, magnesium… Ukrainian automotive factories supply major automakers in Western Europe. Factories in Europe, other factories around the world are already planning cuts due to the shortage of sawdust.

Airline and Sea freight costs: Airlines and shipping companies will also suffer from high fuel prices and will be the airlines most at risk. First, it is estimated that fuel accounts for about one-third of its total costs. Secondly, European countries, the US and Canada banned Russian airlines from entering their territories, and Russia, in turn, prohibited European and Canadian aircraft from leaving their airspace. This means higher costs as airlines will have to take longer routes. In the end, airlines have little room for increased costs as they continue to face lower revenues due to the impact of the pandemic.

Agriculture: Another issue is the high fertilizer prices. This directly affects agricultural production and therefore product prices.

Chinese benefits. On the other hand, backing Putin's actions, China made a nice discount on such supplies, which led to a reduction in production costs. As a result, the Chinese economy is expected to grow even faster compared to other economies such as the US and Western Countries. However, another issue China is facing and slowing its growth potential is the COVID quarantines, which put businesses and the economy on hold.

What if there is a worldwide conflict? As of today, the main actors are:

-Russia - Ukraine

-China - Taiwan

If a collapse were to occur, we can imagine a battle between the following two teams:

-Team 1, attackers



Iran (they are seen as enemies by the US and Israel, they are supported by Russia, so they will definitely be allies with Russia)

North Korea (allied with China and Russia, they want to take over South Korea)

-Team 2, defenders


-EU due to its NATO obligations with the four main powers







-South Korea

-Israel (as allied with the USA + all enemies of Israel are in team 1)

-Saudi Arabia (the enemies of Iran and the enemies of your enemies are your allies)

-Canada (equal democratic country with Europe)

These teams are purely subjective, it is likely that some countries, such as Canada, are not involved in international conflict and other countries are not subject to an obligation to assist. Seeing how great Erdogan's Turkey's relationship with Putin is, whether they will join the war is another question to be wondered at. We hope Turkey stays where it is and limits its activities during the war, most importantly, Turkish elections are planned for 2023 and a critical ecopolitical process is entered.

We do not believe that war would encompass as many countries as World War II did, because most of the world at that time was colonized by countries in conflict. This time around, the countries of South America, Africa and Oceania are more likely not to be part of the conflict, but will incur direct collateral damage if it goes nuclear, and certainly economic collateral damage.

Beyond being fragile, the geopolitical situation is quite similar to how World War I began, where a single event could have catalyzed an explosion of tension. This may be an issue of such a magnitude that it renders economic problems meaningless. If it goes nuclear, the world as we know it could change forever.

What will happen economically? Obviously, during the war, all trade will stop and the global economy will be hit. However, depending on the outcome of the war, several scenarios can be envisioned:

-China and Russia are losing to allies.

a. They want a truce, allowing them to trade, but their power and influence will be greatly diminished.

b. They use nuclear energy as a last resort, which leads to global catastrophe.

c. The US and its allies are dismantling the Russian and Chinese government to install a democratic regime that would also allow them to trade.

The United States and its allies are unlikely to lose because of the enormous power advantage they have over authoritarian countries. Moreover, the battlefield is not close to giving an advantage to China and Russia.

It is likely to strengthen the bond between the allied countries after the conflict, which will likely lead to the signing of another agreement for the authoritarian countries. If they become efficient democracies, trading with them will be easier than it is today and could lead to an economic boom after a period of restructuring. Moreover, the China Belt and Road Initiative will then become a real asset for everyone, and there will be no way for China to impose its own control over the places in question.

Conclusion? Russia's sanctions brought the following increases:

-Oil, gas, electricity prices

-Prices of raw materials (steel, zinc, aluminum, nickel..)

-Semiconductor prices

-Fertilizers, wheat, corn and other crop prices

These led to a large increase in the CPI for the affected countries (especially Western Europe), but also dealt a serious blow to the Russian economy as it was the main European demand. As a result, Russia diverted its exports to China at discounted prices.

On the shipping side, Russia's land and air routes are prohibited + fuel and raw materials are more expensive = international shipments are getting much more expensive to East Asia. This significantly increases import prices. The good thing is, it increases GDP by making goods produced in importing countries more affordable and attractive.

Kaynak: Tera Yatırım- Enver Erkan
Hibya Haber Ajansı

25 Ağu 2022 - 12:53 - Ekonomi

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