The situation there now pits Russia against western Europe and the US in a manner more reminiscent of old-fashioned cold war dynamics than modern day diplomacy. The nucleus is a country that is a major east-west conduit for energy supplies. The country’s internal social and political situation is far from stable. And many believe President Vladimir Putin’s ambition may extend to other parts of Ukraine.
After an initial flurry, markets have brushed aside these and previous geopolitical concerns, whether over Iran, Iraq, North Korea or Syria. They are now similarly relaxed about the Turkish government’s tensions, Venezuela’s volatile situation and Thailand’s struggles to fully restore socio-political calm.
There are a number of reasons for this market tranquillity.
Smaller is safer
Finally, a powerful dose of adaptive expectations and behaviour is acting as a strong reinforcement. After all, markets love consistent trends, and the pattern of quickly fading geopolitical disruptions has been profitable for some time.
There would be little reason to doubt this would continue were it not for the way these political crises are evolving.
While each geopolitical shock has been small on a standalone basis, in aggregate they are starting to affect a more meaningful part of the global economy. And few, if any, can be resolved easily. Meanwhile, leaders in Europe and the US will come under increasing domestic pressure to act more forcefully externally, weakening the circuit breakers.
Do not look to global co-operation as a way to diffuse most of today’s geopolitical tensions. Hampered by national politics, the effectiveness of multilateral institutions has failed to keep up with the increasing complexities on the ground.
Should this indeed materialise, markets would again feel vindicated in having responded rather calmly to the Crimea crisis. Yet they should guard against complacency based on a simple extrapolation of the past.
Underlying geopolitical tensions around the world have been gradually building towards a tipping point. Should this continue, it would quickly become evident that many markets are underpricing geopolitical risk.
Mohamed El-Erian is chief economic adviser to Allianz, chair of President Barack Obama’s Global Development Council, and author of ‘When Markets Collide’