We find ourselves in an era of transformation as simultaneous and intertwined global crises reshape finance, security, trade, energy, and diplomacy. This week, we first review the issues driving fears of a global financial crisis. Second, we highlight the ways in which Russia’s and China’s domestic politics are breeding insecurity and instability that extends beyond their borders. Third, we explore the implications of the Biden administration’s new export controls on China which mark the latest escalation in the US-China trade war. Finally, we study how Russia’s invasion of Ukraine has ushered in a new age of energy crisis and diplomacy. 

Why Are Fears of a New Financial Crisis Growing?

Sandy Ward, Morningstar

While conversations as to the depth of the next recession have been ongoing for some time, the discussion has begun to shift toward concern that a financial crisis is brewing. The concern stems from the possibility that unprecedented federal-funds rate increases by the Federal Reserve could have unintended consequences for global financial markets. Two particular fears come to mind: 1) a liquidity event in which a major player in the financial markets will not be able to finance debt or 2) a macroeconomic crisis characterized by a surging dollar bludgeoning other currencies and causing defaults on dollar-denominated debt. The warning “tremors” for such a crisis began shaking the English gilt/bond market beginning in September. Gilts experienced an abnormal degree of volatility, prompting the Bank of England to intervene so as to stabilize the market. Additionally, tremors can be seen in the Financial Stress Index, which currently indicates the highest level of financial stress since 2010.

That being said, there still exist tools and safeguards in the system that can prevent or lessen the risk of financial shock. For instance, the Fed has added two new facilities – the Standing Repo Facility, and the Foreign International Monetary Authorities Repo Facility – which would allow for the temporary exchange of US treasury securities for US dollars. Additionally, banks are well-capitalized and under greater regulatory oversight since the Great Financial Crisis of 2007-2009. Nonetheless, risk still exists in non-bank institutions such as hedge funds, pension funds, and asset managers. Ultimately, then, investors ought to remain cautious and should likewise forebear against overreaction.

The Thaw on Russia’s Periphery Has Already Started

Daniel B. Baer, Foreign Policy

Will Xi’s Paranoia Defeat Him?

Susan Shirk, Foreign Policy

Russia’s losses in Ukraine have caused its influence on neighboring states to dwindle. Nations that have long been influenced by Moscow have begun to look elsewhere for new, more secure, relationships. These power vacuums on Russia’s periphery have opened gates for these countries to make ties to the West. However, these vacuums also risk instability – recall how the dissolution of the USSR and the end of the Cold War influenced the bloody breakup of Yugoslavia. For example, Azerbaijan – long embroiled in a border dispute with Armenia since the end of the Soviet Union – has exploited the Russian focus on Ukraine to reignite the conflict. This has forced Armenia, which has long relied on Russia to mediate the dispute, to look to the US for assistance in making peace. In Moldova, Russia’s reduced power gives the opportunity to reintegrate a Russian-backed breakaway region. However, there is no guarantee of peace and democratic transition in these regions. Georgia, despite being occupied by Russia since 2008, has remained standoffish from the West. Balkan puppets of Moscow may cause disruptions engineered to draw Europe’s attention away from Ukraine. The rest of the world must carefully analyze how to best exploit the situation, as nothing is certain.

On the other side of the world, Chinese President Xi Jinping’s focus on internal security is laying bare his concerns about disloyalty. Despite China having a gargantuan economy, a powerful military, and the government’s high public support, Mr. Xi continues to be hyperfocused on domestic threats. He has consistently elevated political security – the protection of the Chinese Communist Party – at the forefront of his national security policy. Mr. Xi has flexed his power by removing his term limits, purging political opponents, suppressing protests in Hong Kong, mass incarcerating Uyghur Muslims, implementing his harsh zero-COVID policy, and continuing his regulatory assault on Chinese businesses. His brazen power grabs and censure of internal criticism have endangered his own position, however. A culture of purging, censorship, and despotic power threatens to inflame unrest among the party elites. Additionally, his focus on security instead of economic stability may backfire if public support wanes during a potential economic downturn. An implosion of the world’s second-largest economy will certainly have global ramifications. 

Chip Industry Braces for ‘Heavy Blow’ From China Export Curbs

Nick Turner, Bloomberg

The Biden administration’s new restrictions on doing business with China are having a significant impact on the global semiconductor industry. Bank of America analyst Vivek Arya projects that as much as $7 billion in sales for vendors could be shaved off. The regulations will impact a broad spectrum of companies both within and outside of the United States, ranging from Applied Materials, KLA Corp., and Lam Research Group, to Taiwan Semiconductor Manufacturing Co., Samsung Electronics Co., and Tokyo Electron LTD. The news piles onto downside financial trends plaguing the semiconductor industry this year due to oversupply. The Philadelphia Stock Exchange, for example, is down 44% YTD with an additional 12% stemming from the Biden administration’s regulation changes. As a result, earnings in the semiconductor industry continue to be slashed downwards in 2022.

The New Age of Energy Crisis and Diplomacy

Norman T. Roule, The Cipher Brief

Russia’s invasion of Ukraine has ushered in a new age in global energy, bringing about a complex global energy crisis and reshaping the world’s energy landscape. Russia’s weaponization of its energy supplies as a political tool has sent Europe scrambling to find new oil and gas producers, and the rest of the world is searching for any means to bring down elevated energy prices. The current crisis has heightened energy diplomacy, making it “routine”. Newly established relationships, and the restoration of old ones, are bringing about the development of an unprecedented range of energy distribution systems and renewable energy programs. While there has been a surge in the use and development of climate-friendly technologies, fossil fuels continue to play a critical role in promoting global energy stability. This has been particularly evident in the politics surrounding OPEC+. The US and other Western nations have been pressuring Saudi Arabia and its OPEC allies to increase oil production for months now, but oil production and oil prices are far more complicated than many people understand. While OPEC’s relations with Russia and other political dynamics have a significant influence on the group’s decisions, it isn’t as simple as turning on a switch to pump out more oil. Maintenance requirements and aging infrastructure (similar issues are at play in the US oil market) play a role, as do the recessionary pressures that are spreading across the globe. There is evidence of demand curtailment in Europe and the US, and in China, Covid lockdowns continue, and economic growth is slowing. 

What’s next? Norman Roule says predicting energy prices is a “fool’s errand” but there are things we should be watching that could result in another price spike: the end to the Biden administration’s program to release a million barrels of oil a day from the US strategic petroleum reserve, the Chinese Communist Party congress where Beijing may loosen lockdowns and aid its real estate sector to bring a boost to its economy, and Moscow’s response to European sanctions on Russia oil, to name a few. Roule says that while now is a perfect and necessary opportunity to increase renewable energy sources and introduce climate-friendly technologies, the exploitation of existing European energy resources, including those rejected in the past due to environmental reasons, will be critical to enduring the energy crisis. In the medium-term Africa could play a new role in the international energy system with the appropriate investment and development from wealthy nations and assurances from African nations regarding corruption and security. There is no doubt the current energy crisis will create a new Day After in global energy. As new developments emerge each day, the only thing we can be certain of is that “Uncertainty will remain the prevailing theme in energy markets.”