Article

The shift in geopolitics towards China

How should markets respond to geopolitical changes in Ukraine and the Middle East?

| 5 min read

China’s President Xi Jinping is visiting the Russian President Vladimir Putin in a show of friendship, just a few days after the International Criminal Court (ICC) issued a warrant for Mr Putin’s arrest over alleged war crimes. President Xi is getting braver over western opinion on Putin’s conduct, whilst saying he wishes to see a negotiated peace in Ukraine.

Recently, the US claimed that a Russian SU 27 fighter sought to damage one of its drones that was flying in international airspace by drenching it in fuel. In doing so, the Russian plane clipped and bent one of the propellers of the drone. The US then crashed the damaged drone into the sea, stating that were the Russians to retrieve the remains they would not contain usable secrets.

The Russian take was somewhat different. They claimed the drone was flying near Crimea, which they had unilaterally declared to be a temporary no-fly zone owing to its special military operation in Ukraine. Moscow argued the US drone caused the problems and then crashed itself into the sea. The US released video taken by the drone, which seemed to confirm its story. Russia has yet to release any alternative piece of footage.

This is a reminder that the US and Russia are very preoccupied by Ukraine and remain in a tense stand-off. Meanwhile, China is posing as the world’s peacemaker and has acted as a broker to secure an agreement between Saudi Arabia and Iran, two sworn enemies in the Middle East, the respective leaders of Sunni and Shiite Islam.

What next for US foreign policy

These developments pose challenges for US foreign policy. President Biden’s talk over Ukraine was interpreted in ways he did not want when he used the phrase “minor incursion”. This was unhelpful as Mr Putin weighed up military invasion. His decision to withdraw rapidly and completely from Afghanistan without consulting allies in advance led to the victory of the Taliban in Kabul. A lack of US support or sympathy for Saudi facing attacks on its oil installations by Iran, US protests over Saudi’s violation of human rights, as well as a clash over how oil producers should respond to the war in Ukraine, all lie behind Saudi’s decision to consider some moves to peace with Iran brokered by China and to be cooler with the US.

President Donald Trump brought about the peace deals between Bahrain, the UAE and Israel. US foreign policy has been a wide alliance of Saudi, Israel, the Gulf states and others against Iran. Iran was seen as an ally of terrorist threats, backing the Houthi rebels in the Yemen civil war, supporting Palestinian attacks on Israel and assisting Hezbollah in Lebanon. If Saudi changes alliances to settle Yemen with the rebels and Iran, to calm Lebanon and to take herself out of Iran’s firing line the situation looks very different.

The West will have less influence over the Middle Eastern oil market, where producers will want to maximise their profits.

Meanwhile, China poses as the peacemaker and shakes up the current alliance pattern, showing greater influence as Washington loses traction. The US needs to ask how it can reconnect and have more influence. US cries for Saudi to pump more oil and keep the price down when the West-sanctioned Russian energy were not warmly received. US demands that the Middle East adopts Western democratic standards of government and human rights are not popular in many parts of the region. The negotiating parties know that China will not make any such demands, peddling its view that a sovereign country can do within its own territory anything it likes to its own people.

Market implications

So, what is likely to happen that is of significance to markets? Although much remains to be done, it is possible on the upside there could be a truce on the way in Yemen, and even possibly a way forward could be found in Lebanon. Israel will struggle more for Middle Eastern friends. Chinese/Middle East trade and investment flows will grow more.

The US will be concerned about its diminishing influence in the region, although its abrupt departure from Afghanistan made that likely. The West will have less influence over the Middle Eastern oil market, where producers will want to maximise their profits whilst they are still available. The oil producers are not that keen on all the green lectures from the West either. They see China and the emerging world as more reliable long-term markets for their main product.

We still think that the US will keep out of the Ukraine conflict and will not allow Russian provocations to escalate its military into the war. This means a brutal prolongation of the conflict, with neither side securing an outright victory. There will also be continued concern about escalation.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

The shift in geopolitics towards China

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