Transcript The New, American Order

SOVEREIGNTY,
SECURITY & TRADE
Trends Challenging the International Order
2016 Financial Planning Forum
Richmond, VA
June 9, 2016
Presented by: Christopher Coughlin
The Indispensable Country
“Free Trade”
&
The “Vacation From History”
THE NEW, AMERICAN ORDER
Bretton Woods Agreement (1944)
• End of “Balance of Power” and “Spheres of Influence”
• Nullify the catalysts of political contests based on economic
interests
• Integrated world market:
• Rationalized exchange rates
• Low tariffs
• Reconstruction and Development Assistance
RESULTS
Measure
1950
2015
Difference
Global Population
2.5 Billion
7.3 Billion
+192%
Global GDP
$5 Trillion
$74 Trillion
+1380%
Global Extreme
Poverty
55%
10%
-81%
Global Literacy
52%
86%
+65%
1991: “THE END OF HISTORY”
AND A
NEW WORLD ORDER
THE RISE OF CHINA
In 10 years China’s economy has experienced historically unprecedented
growth:
CHINA: NEW WEALTH –
NEW AMBITIONS
CHINA’S STRATEGIC INTEREST
Continued Economic Growth and Expanding Political Power:
Dependent on Securing Sea Lanes to Energy & Trade
SOUTH CHINA SEA
SOUTH CHINA SEA: OIL &
NATURAL GAS RESERVES
CONFLICTING CLAIMS ON THE
SOUTH CHINA SEA
WELCOME TO THE NEXT CRISIS
PROVOCATIVE SOVEREIGNTY
• China creating and arming habitable islands from reefs in
contested region
• The islands project Chinese military power into disputed
territory
• Philippines has filed a complaint at the Permanent Court of
Arbitration at The Hague
• Triggering an ‘arms race” in Asia
LARGER US & GLOBAL
INTEREST
IN THE SOUTH CHINA SEA
SOUTH CHINA SEA: ENERGY SHIPPING
US TRADE ACTIVITY IN THE
ASIA/PACIFIC REGION
INVESTMENT SNAPSHOT:
ASIAN EXCHANGE TRADED FUNDS (ETFS)
CHINA IS THE LARGEST SINGLE HOLDER
OF US DEBT
WHY NOW?
Demographic Time Bomb:
• “4-2-1”
• 200 million Chinese are over 60
• By 2040 30% of China’s population will be over 60
• China must secure what it needs soon before:
• Necessary reallocation of state resources
• Huge gaps appear in working age/military age citizens
• Declining economic and military power
CHINESE DESIGNS ARE AT ODDS WITH ITS
IMMEDIATE ECONOMIC INTERESTS
THE SOUTH CHINA SEA IS VITAL TO US AND
CHINA
SHORT OF AN ATTACK ON JAPAN, SOUTH
KOREA, PHILIPPINES OR TAIWAN, US NOT
COMMITTED TO SPECIFIC ACTION
AMBIGUITY = DANGER
Russia and the Modern World
• Largest country in the world (6 million square miles)
• 9th largest economy (by GDP $2.1 trillion)
• 9th most populous nation (143 million)
RUSSIAN GDP 2000-2015
Russian GDP has increased 10 fold since 2000:
RUSSIA IS CRITICAL TO EUROPE
Two-way global trade with Russia is nearly $800 billion annually (2014)
Russia is the source for:
36% of the European Union’s natural gas (36% for Germany)
31% of the European Union’s crude oil (40% for Germany)
31% of the European Union’s coal (33% for Germany)
The European Union is the destination for:
80% of Russian crude oil exports
70% of Russian natural gas exports
50% of Russian coal
RUSSIAN PIPELINES FUEL EUROPE
The EU and Russia together generate nearly
$16 trillion in goods and services
• Virtuous “Symbiotic” relationship
• Russian extractive exports power/sustain EU’s growth
• EU hard currency revenues fuel Russian growth
However…
Growing dissonance between
Russian economic interests and
perceived security interests
THE GRIEVANCE
In 2005, Russian President Vladimir Putin said the
collapse of the Soviet empire “was the greatest
geopolitical catastrophe of the century.”
“Auto-pilot” Western expansion = unfavorable balance
of power for the Russians
THE “LAST STRAW(S)”
1999-2009 – 12 Eastern European nations and former Soviet
republics join NATO
2001-14 – NATO fights w/US in Afghanistan
2011 - NATO bombs Libya/ “Regime Change”
2008 - Ukraine becomes a candidate membership in NATO
2014 – Ukraine prepares to sign cooperation agreement with
EU over Russian objections
NATO: 1990 AND TODAY
FACTORS IN RUSSIAN INSECURITY
• Russia doesn’t make anything – “extractive economy” – completely
dependent, no industry
• Least geographically secure nation on earth – no natural boundaries
• “Demography is Destiny”
•
•
•
•
•
Male life expectancy is between 59-63 years (75 in US)
By 2040 Russian population will shrink to 120M
Fewer replacement workers/soldiers
Declining power/vulnerable borders
8 years to act
PARADOX OF OPPORTUNITY IN THE WEST
• NATO enlarged but hollow
• US military power re-focused in other regions
• Ukraine is in a grey area
• Ethnic Russian populations provide pretext
PARADOX OF OPPORTUNITY IN THE WEST
• EU at a Cross-Roads
• Monetary Union w/o Political Union has been a failure
• Debt Crisis in the south, “Brexit” in the north
• Regulatory “strangulation” from Brussels/meager growth
(World Bank estimates 1.6% growth 2016)
• Mass immigration and terrorism/populist backlash
• Complete reliance on US/NATO for military support
THE RUSSIAN BLUEPRINT
THE BEGINNING: CRIMEA & UKRAINE
US/EU RESPONSE TO RUSSIA:
ECONOMIC SKIRMISHING
• Travel Bans
• Asset Freezes on Individuals and organizations
• Restrictions on dual-use technology (energy sector)
• Sanctions on banks, energy and defense firms
• Exclude entities from western capital markets
Focused on institutions associated with Putin
IMPACTS ON RUSSIAN ECONOMY
THE GREAT GAMBLE
For Russia: Economic Pain vs Territorial Security vs Time
For the West: Russian Energy vs Political Unity vs Economic
Uncertainty
Ukraine is a grey area
• On the Table:
• EU’s continued viability as a union and currency
• NATO’s credibility (Article V)
• AMIGUITY = DANGER
SUMMARY
Bretton Woods created unprecedented prosperity, anchored by the US
and the Soviet Union
The aftermath of the Soviet collapse catalyzed a rise in sovereign
nationalism that subordinates collective economic interests to individual
national interests, even if they conflict
In the case of Russia and China, these pressures are magnified by
adverse demographic trends that cannot be reconciled in the short term
Ambiguity drives renewed economic uncertainty with potential
significant impacts on the global trade and investment
“May you live in interesting times.”
Frederic R. Coudert
“Praemonitus, praemunitus.”
(Forewarned is Forearmed)