Seven Trends to Kickstart a Major World Conflict

Seven Trends to Kickstart a Major World Conflict
Photo: Dawn Endico, Creative Commons, Flickr
Apologies for the sensational headline. To put it more academically, following are seven issues that might significantly negatively affect the global political economy:

Photo: pingnews, Creative Commons, Flickr
Trend 1: Russia has already demonstrated that it is not friendly to Europe

A little more than a year ago Russian President Vladimir Putin sent a chilling message to world leaders on the eve of the G8 summit. At the time, the U.S. announced plans to place ten interceptor missiles in Poland and a radar station in the Czech Republic to counter possible rocket attacks from “rogue states” such as Iran. Putin felt threatened by the plan and threatened to aim Russian nuclear missiles at European cities for the first time since the Cold War, arguing that American plans to erect a missile defense shield in Eastern Europe had left him with no choice but to retaliate.

Trend 2: Russia’s recent behavior shows that they will use energy as a tool of imperialism
The year 2006 began with a European energy crisis caused by Russia’s halt of gas supplies to the Ukraine, where a democratic government that Putin disapproved of had taken power. Because Russian gas passes through Ukraine on its way to Western Europe, the Europeans depend on Russia for electricity and warmth. Russia supplies anywhere between 30% and 100% of the gas consumed by European Union countries, as well as much of their oil.

Trend 3: Talks about a Poland-based U.S. missile system have resumed in Warsaw
Plans to install part of an American missile defense system in Poland are back on the agenda as senior U.S. officials arrived in Warsaw yesterday for talks. Polish Prime Minister Donald Tusk has said he is optimistic that an agreement will be reached, citing Georgian events as justification for Polish demands that have left talks deadlocked. In exchange for hosting 10 interceptor missiles in northern Poland, Mr Tusk wants the U.S. to station additional Patriot missiles in Poland permanently; Washington has, to date, only been prepared to lease the missiles.

"Today it’s much more probable than a few weeks ago that the American side will take into consideration the proposition of my government," said Mr Tusk, with a nod to the unrest in Georgia. The Czech government has agreed to host a radar station, the other part of the system, and now has to win approval in parliament.

Trend 4: There are half a dozen pending arms deals between Russia and Iran
"Will Moscow try to team up with Tehran?" asks the latest issue of Time magazine. "One thing we should pretty much count on is that Moscow right now is casting an eye toward Iran, the most direct route to restoring its influence in the Middle East." Russia sitting on Eurasian oil exports and Iran on the Strait of Hormuz would put 22 million barrels a day under the control of a Russia/Iran alliance, about 25% of the world’s current oil demand.

Considering that Russia has already demonstrated that it will use energy as a tool of imperialism (trend 2), an alliance with Iran will make sense. Iran would also welcome an alliance with Russia. Time magazine points out that Russia can offer Iran the Russian S-300, an air-defense system that would make an aerial attack on Iran very costly.

Trend 5: Globalization is breaking down
"The cost of shipping a 40-foot container from Shanghai to the U.S. has risen to $8,000, compared with $3,000 early in the decade, according to a recent study of transportation costs," according to a recent article in the New York Times. "The cost of moving goods, not the cost of tariffs, is the largest barrier to global trade today," the report concludes, and as a result "has effectively offset all the trade liberalization efforts of the last three decades."

Dissatisfaction with globalization has led to the election of governments in Latin America hostile to the process. A somewhat similar reaction can be seen in the United States where, during the Democratic primary season, both Senators Barack Obama and Hillary Rodham Clinton promised to "re-evaluate" the nation’s existing free trade agreements." My argument: If globalization slows down, it undermines the need for international cooperation and increases the incentive for nations to acquire resources at the expense of other nations, i.e. war becomes more likely.

Trend 6: The financial market is underestimating the risk of a major conflict
Historian Niall Ferguson has spent the last decade writing about the paradox of diminishing risk in an apparently dangerous world. Ferguson compares our time with the period from 1880 to 1914, which he calls "the first age of globalization." He argues that the pre-war era was characterized by relatively steady economic growth, low inflation, growing world trade, benign and liquid capital markets and a widespread belief in the ability of Great Britain, the world’s reigning military power, to keep world peace. It should be obvious that similar circumstances prevailed until recently.

Ferguson says that he is intrigued by the behavior of the financial markets on the eve of World War I because stock and bond prices at the time registered very little concern about the impending disaster. My argument: Even though financial markets don’t show that we are on the verge of a major conflict, it doesn’t really count for much. Besides, there are incentives for investors and financial professionals to ignore the risk of crises (financial managers can lose their jobs if they are excessively defensive and hold too much cash in a rising market).

Trend 7: Global arms expenditure is increasing

"Since 2001, global arms expenditure has increased by a quarter," writes The International Herald Tribune. "In 2005, it amounted for the first time to the inconceivable sum of $1 trillion, 46 percent of which was spent by the United States alone."

I’m not going to pretend to be an expert on geopolitics, but here’s my theory on recent events: Russia is becoming increasingly imperialistic and wants a war. The U.S. missile shield proposal provided a perfect excuse for Russia to flex its muscle, but talks between Poland and the U.S. ended in a deadlock a few months ago. Russia then used Georgia to provoke the United States. After the attack on South Ossetia, the U.S. has been forced to reconsider the missile defense plan, which the Russians can now once again use as an excuse to act more aggressively. Why the market is not reacting to latest developments is beyond me.

Disclaimer: I own SDS (UltraShort S&P500)