ReutersGeopolitical risk looms large thanks to conflict in Ukraine and the Islamic State insurgency in Iraq and Syria, among other factors. File photo: Valentyn Ogirenko.
Davos - Geopolitical risk is back with a bang due to conflict in Ukraine, the Islamic State insurgency in Iraq and Syria, the politics of anger in Europe and the collapse of oil prices, but partying financial markets have barely registered it, yet.
Before the annual talk-fest of business and political elites began on Wednesday in the Swiss ski resort of Davos, a World Economic Forum survey said the risk of international conflict had now overtaken concerns about the economy, disease or climate change as the biggest threat to business and countries.
Yet investors drunk on cheap central bank money have driven stock prices in the United States and parts of Europe to near record heights, apparently oblivious to dangers near and far.
ECONOMIC GLOOM
That euphoria will be tested this year, especially since the International Monetary Fund has just cut its global growth forecasts for 2015 and 2016, China's economy is slowing, Russia is in a tailspin, and much of Europe remains in the doldrums.
To be sure, the rouble has lost half its value against the dollar since last June due to Western sanctions over Ukraine and tumbling oil prices, while the Swiss franc has soared by more than 14 percent since the Swiss National Bank gave up costly efforts to defend an exchange rate cap against a weakening euro.
Volatility may be rising, but the markets have not yet priced in the scale of potential turmoil.
“Taken together, the regional disputes in the former Soviet Union and Middle East have raised the spectre of a return to conflict over borders and territory, a risk compounded by fears that collective defense agreements such as NATO ... no longer retain their relevance,” said Tina Fordham, chief global political analyst at Citi.
“From the grass roots to the geopolitical, the global system is under immense pressure. In some places, it is cracking.”
SUCCESSIONS, BORDERS IN DOUBT
In the Arab world, uncertainties range from a succession of ailing rulers in Saudi Arabia, Oman and Algeria, to the widening tremors caused by bloodshed in Iraq and Syria that has called Middle East borders into question, sucked in outside powers and fuelled acts of violence on Europe's streets.
Even a possible diplomatic breakthrough to curb Iran's nuclear programme could create as much tension as it defuses, by bringing Tehran out of economic and political isolation to the dismay of Sunni Muslim states across the Gulf.
US Secretary of State John Kerry and Iranian Foreign Minister Mohammad Javad Zarif will bring their intensive nuclear talks to Davos, where they will meet on the sidelines in a race to craft a deal before the US Congress can enact new sanctions that could derail the negotiations.
“The risk ... is that a deal with Iran comes too early because the Saudi leadership of the Gulf Cooperation Council, the main adversaries of Iran, hasn't done the necessary to reach out to Iran in the way the Gulf needs,” said Florence Eid, chief executive of Arabia Monitor, a London-based consultancy.
Gulf Arab oil producers can afford low oil prices for a while without having to cut sensitive public spending at home, but it may make them less willing to go on bankrolling Egypt's army-installed government on the current scale.
If oil revenue stays low for a prolonged period, spending cuts could lead to social unrest from Algeria to the Gulf.
LOSS OF CONTROL
Europe faces potential worsening instability on its eastern flank and political upheavals in its southern rim.
Despite engaging in intensive diplomacy, Russia shows no sign of ending its support for separatist rebels in eastern Ukraine after it seized and annexed Crimea last year, triggering escalating Western sanctions.
President Vladimir Putin and his top lieutenants are staying away from Davos this year, but Ukrainian President Petro Poroshenko will use the forum to appeal for Western financial and political support for his country on the brink of meltdown.
Western officials say they have no way of knowing whether Putin intends to widen the conflict to other former Soviet areas, keep it on a slow-burner to destabilise Kiev or seek a face-saving way out. But they see little sign that the growing economic price of sanctions is softening his stance.
Although EU ministers agreed this week there were no grounds to ease sanctions, differences among European nations may widen as the deadline for renewing the measures approaches in July.
TOO MANY CRISES
Jean-Marie Guehenno, a former head of UN peacekeeping who now heads the International Crisis Group think-tank, said there were so many crises and so many powers involved that it was ever harder for world leaders to focus and engage.
“There is essentially a loss of control,” he told Reuters.
“The United States is no longer so eager to play the benevolent sheriff,” Guehenno said. “It will remain the overwhelmingly dominant military power, but at a time of growing doubt about what that power can deliver and whether there is the will to use it.”
He questioned whether Moscow was in full control of pro-Russian Ukrainian rebels fighting against Kiev and said instability from the conflict could spread into Russia itself.
On the brighter side, he said concerns about a potential clash between China and Japan, which flared at last year's Davos session when Japanese Prime Minister Shinzo Abe drew a parallel with the eve of World War One, had eased. Both countries seemed determined to prevent incidents escalating out of control.
In the European Union, the rise of hard-left and far-right populist parties opposed to austerity and demanding debt write-downs threatens the mainstream policy consensus that has prevailed since the euro zone crisis began in 2010.
Greece's far-left Syriza party is poised to win a general election on Sunday and become the first such radical group to enter government in the 19-nation single currency area, although polls suggest it may need a moderate coalition partner to rule.
Citi's Fordham said despite sympathy for Syriza across the euro zone periphery, scarred by mass unemployment, pay and pension cuts, she did not expect far leftists to gain power anywhere else in Europe.
ReutersGeopolitical risk looms large thanks to conflict in Ukraine and the Islamic State insurgency in Iraq and Syria, among other factors. File photo: Valentyn Ogirenko.
