The three geopolitical red herrings that the markets can safely ignore
EACH year, Eurasia Group releases its top risks report, where we consider the ten biggest geopolitical threats to markets and economies, judged by probability and potential impact.
So what’s on our radar for 2013? The top risk is now found in emerging markets, as the world’s focus shifts back to the developing world and away from America’s slow-to-recover economy and the travails of the Eurozone. The second lies in China: the country’s authoritarian ruling elite will find it increasingly difficult to manage the flow of information both within the country and across national borders. Number three is the still-developing turmoil in the Middle East, from Syria to North Africa.
But international politics and the global economy are also shaped by the risks that don’t develop, and we have identified three specific threats that we consider overrated. These are the year’s “red herrings.”
Our biggest red herring for 2013 focuses on the geopolitics of energy. In recent years, political threats in oil-exporting countries have added significant upward pressure to energy prices. At times, this political risk premium can send prices surging. Brent Crude reached $119 per barrel just last week. And with so much upheaval in the Middle East, and rising demand for energy in the developing world, why do we believe that 2013 will not be a year of geopolitical risk for energy markets?
First, most risk in the the Middle East doesn’t involve the major energy producers – it’s about everywhere else, from Syria, Jordan and Lebanon to Mali. Problems in Iran are still very present, but with sanctions in place and little appetite among outsiders for another regional conflict, the likelihood of an Iran-related energy shock is exaggerated – at least in 2013.
More important is the supply-side of the equation. Technological breakthroughs in energy production in the US and Canada have sharply altered the outlook for the world oil market, reducing imports into North America and alleviating unease about supply scarcity. New fossil fuels are increasingly coming from the developed world, as well as from stable developing countries like Brazil and Mexico. That’s good for all global consumers. Even a modest economic recovery isn’t leading to overwhelming demand growth, with tighter fuel efficiency standards and shifts in consumer behaviour continuing to have an impact.
But there are two sides to every coin. This red herring is not great news for poorly-governed resource-rich countries like Russia or Venezuela, which need high energy prices to keep their books in balance and their people happy. After all, the oil price required to keep Russia’s budget in the black ballooned from $34 in 2007 to $117 last year. But 2013 isn’t the year to worry about this.
There are other red herrings. For one, fears of a surge of global protectionism ignore some important developments. Since the financial crisis hit in 2008, we’ve heard constant worries about an impending increase in trade barriers, and the threat this poses to the global economy, as countries enact tit-for-tat policies to get a leg up on the competition.
But in G20 annual meetings, curbing global protectionism has been about the only issue where leaders maintain a strong consensus. There have been no commercial restrictions in most countries, but there are big developments leading the broader global economy in the other direction. Competitive trade liberalisation efforts are accelerating. Just this week, the EU and the US announced the launch of talks for a new major trans-Atlantic economic cooperation package. And there’s momentum behind a trans-Pacific partnership in both Asia and the Americas.
Finally, there are currently exaggerated concerns about European separatism. Pressures in Catalonia and Scotland are real, but these issues won’t come to a head as soon as many fear. Catalonia will take the first steps toward holding a referendum in 2013, but a vote is unlikely until 2014 and a new fiscal deal with Madrid could even contain the push for self-determination. We’ll also see an intensifying debate on the effects of independence for Scotland, but there won’t be a referendum until 2014. Next year, this risk could vault from red herring to reality. But for now, it’s simply fodder for spirited arguments.
Ian Bremmer is founder and president of Eurasia Group. His most recent book is Every Nation for Itself: Winners and Losers in a G-Zero World. www.eurasiagroup.net