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Does geopolitics matter for the economy and financial markets?

Natale Labia
By Natale Labia
10 Dec 2024
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If this retreat of the global powers into bipolarity and isolationism continues, the consequences are likely to be more chaos, unpredictability and macroeconomic uncertainty.

In a year defined by relentless geopolitical upheaval, the connection between geopolitics and financial markets remains unclear.

Despite the bloody conflicts in Gaza and Ukraine, neither has significantly disrupted oil markets or derailed surging global stock markets. A wave of elections ousting incumbents or shocking political establishments across countries like India, France and indeed even in South Africa have had minimal impact on global capital markets.

Recent geopolitical shocks are a case in point. Clearly, no investment strategist could have predicted that South Korea’s government might declare martial law, or that Syria’s dictator, Bashar al-Assad, could be forced from power.

Yet both have happened in the past week. It is almost impossible to overstate the surprise of both of these. Syria had existed for 13 years in a limbo of civil war, and as a proxy for regional actors in the region. Then in 13 days, a dynasty that had ruled the Middle Eastern country since 1971 came crashing down.

Syria does not matter for financial markets


Does any of this matter first of all to financial markets? Almost certainly not. For decades, Syria has been a quasi-pariah state which recently produced next to no oil. After 13 years of bloody civil war, and with millions of its inhabitants living as refugees in Turkey and around the world, its economy is a shadow of its former self. It is, effectively, economically insignificant.

Of course, geopolitically, and in terms of humanitarian fallout, the effects are profound. While Assad was unquestionably one of the most bloodthirsty and ruthless dictators seen for many decades, and for at least a fleeting moment one should celebrate alongside the millions of overjoyed Syrians flocking back into their country in the hope of peace and prosperity, the reality will of course be more complicated.

As with the deposing of Muammar Qaddafi in Libya and indeed Saddam Hussein in Iraq, such power vacuums have usually been followed by domestic anarchy and a failed state. It remains to be seen whether Syria can escape that fate.

Yet if it is clear that such geopolitical earthquakes do not impact on financial markets in the short term, they are symptomatic of longer-term structural shifts which shape the global economic context in which financial markets operate. Perhaps here are the truly fascinating feedback loops; how economic and financial realities influence geopolitics, and then over the longer term how these geopolitical shifts impact the economy.

Exiting superpowers leave the global economy in chaos


In this sense, maybe underlying all the geopolitical upheaval in 2024 was this sense that the world economic order is crumbling.

For example, behind recent ructions in countries such as France, Germany and Japan is a sense that the US is no longer willing to act as an economic backstop for its allies. Similarly, the collapse of Assad can likely tell one about the economic strength of Iran and, indeed, of Russia.

Assad’s reliance on Russian support, and the ease with which a ragtag militia toppled his regime, underscores the limits of Moscow’s assistance. While recent gains in Ukraine have given the impression that Putin holds a strong position, his reluctance to intervene in Syria (and the likely loss of critical Russian air and naval bases in the country) suggests otherwise. The ongoing war in Ukraine appears to be depleting Russia’s ability to support its client states effectively. After nearly three years of grinding conflict, Russia is stretched too thin to uphold its commitments on multiple fronts.

Russia’s economic struggles further highlight its vulnerabilities. Early success in mitigating the impact of Western sanctions following the Ukraine invasion fuelled a sense of defeatism among its adversaries.

More recently, however, Russian economic inflation has surged to over 8%, prompting the central bank to raise its policy rate to 21% – the highest level since the early months of 2022. Its currency is also battling. A recent US decision to impose sanctions on 50 Russian banks, including Gazprombank, triggered a sharp decline in the rouble, pushing it to near its lowest levels against the euro in three years. Although the rouble has partially recovered after the central bank halted foreign currency purchases and Putin eased requirements for gas transactions through Gazprombank, the situation remains precarious.

But Russia is not the only one pulling back from propping up its proxies. As Donald Trump openly threatens to pull the US out of Nato, and to slap tariffs on imports from historical allies in Europe, both Russia and the US are retreating into themselves. China, too, has stated under its most recent stimulus package the need to stimulate domestic investment and consumer demand, to become less dependent on exports to the US and Europe.

Geopolitics does matter. While its effects are not immediately apparent, it is both a result of and the shaping context for the global economy.

If this retreat of the global powers into bipolarity and isolationism continues, the consequences for the rest of the world for 2025 and beyond are likely to be more chaos, unpredictability and macro-economic uncertainty, which can only weigh on growth. For those countries not lucky enough to be self-reliant superpowers, this does promise to be a far trickier, and more dangerous, Brave New World. DM

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