Joachim Klement, CFA, is the author of Geo-economics: the interplay between geopolitics, economics and investments of CFA Institute Research Foundation.
The war in Ukraine is in the headlines. For the moment.
But the indirect repercussions of the conflict will reverberate far beyond the borders of its combatants and their allies. Indeed, they could give rise to new and varied geopolitical risks throughout the world.
The potential effect of war on world grain supplies and food inflation is particularly alarming. Ukraine is known as the “breadbasket of Europe” and, together with Russia, it supplies wheat to developing countries in Africa, the Middle East and Central Asia.
There are already reports of many Ukrainian farmers abandoning their fields at the start of the sowing season to defend their country. The world will pay the price.
The war could lead to a complete or near-complete failure of Ukraine’s 2022 wheat crop. Meanwhile, Russian wheat exports could drop to zero as the country diverts food to domestic use in the face of crippling international sanctions.
Many countries depend on grain imports from Russia and Ukraine to feed their people. Warring nations are responsible for at least 80% of the grain supply to Benin and Congo in Africa; Egypt, Qatar and Lebanon in the Middle East; and Kazakhstan and Azerbaijan in Central Asia. All of these states will have to find new sources of grain and pay much higher prices for them.
And it will make an already bad situation worse. Even before the conflict, food inflation was rising. Over the past year, it reached 17.6% and 4.8% year-on-year (YoY) in Egypt and the United Arab Emirates (UAE), respectively. These levels are reminiscent of those that preceded the Arab Spring uprisings in 2011. The situation is even more extreme in Turkey, where a rapidly declining lira propelled year-on-year food inflation to 64.5%.
Going forward, several factors could propel food prices even higher. Beyond the lack of grain exports from Ukraine and Russia, soaring energy prices will increase shipping and fertilizer costs. With Russia, a major fertilizer exporter, facing stiff sanctions, there will be even more upward pressure on fertilizer prices. This will add fuel to the fire and send food inflation ever higher. In developed countries, while pain varies across the income spectrum, these trends can be largely mitigated by cuts in consumer discretionary spending: people adapt by paying more for food and less for travel, entertainment, etc. But in developing countries, where food takes a larger share of total subsistence expenditure and there is less discretionary spending, hunger is a more acute risk.
The Arab Spring is a stark example of how such conditions can trigger civil unrest and geopolitical tension. This is not an isolated event. The peasant rebellions of the Middle Ages, the French Revolution and the Revolutions of 1848, for example, show how growing food insecurity can trigger political and social upheaval. The effect is so strong that rule 6 of my “10 prediction rules“States:
“A full stomach doesn’t make a riot.
“Revolutions and uprisings rarely happen to people who are well fed and feel relatively safe. A lack of personal freedom is not enough to trigger insurgencies, but a lack of food or water or widespread injustice all are.
The countries that depend on grain from Russia and Ukraine and the share of their populations that were at medium or high food risk before the recent conflict are shown in the graph below. Kazakhstan and Azerbaijan, along with Egypt and Congo, are among the countries most at risk given their dependence on Russian and Ukrainian grain imports, their existing food insecurity or combination of the two.
Food insecurity and dependence on grain imports from Ukraine and Russia
But high food inflation is not the only driver of potential unrest. Building on recent ideas from Chris Redl and Sandile Hlatshwayo, that use machine learning to identify predictors of social upheavalWe have constructed a Civil Unrest Risk Index that ranks countries based on five key stability measures:
- The percentage of their total grain imports from Russia and Ukraine, according to UN Comtrade data
- The share of their populations in moderate or high food insecurity, according to the World Bank
- Their youth unemployment rate based on World Bank and Bloomberg data
- The number of mobile phone subscriptions per 100 people, according to the World Bank
- Its democracy index by The Economist Intelligence Unit
Why these five components? Evidence suggests that countries with high proportions of young, unemployed men are more prone to instability; mobile phones are essential for organizing mass protests via social media platforms; and a lack of democratic institutions means that the population sees no opportunity to change political direction outside of direct action.
The combination of these five indicators provides an overview of the countries most at risk of civil unrest. The chart below only includes those that directly import grain from Russia and Ukraine, so it is comprised only of those nations that will directly suffer from the fallout from the war in Ukraine.
Civil conflict index, by country
|Civil unrest risk index value
|Youth unemployment rate
|Mobile subscriptions/ 100 people
|Population with moderate or severe food insecurity
|Share of total grain imports from Russia and Ukraine
|United Arab Emirates
Oil exporters – Saudi Arabia and the United Arab Emirates – and Turkey, with its close trade ties to the United Kingdom and the European Union, are the most troubling from an economic and investment perspective. Instability in these countries could have a ripple effect that disrupts energy supply chains and global trade and triggers new inflation spikes in 2022.
To be sure, Saudi Arabia and the UAE have largely avoided Arab Spring unrest and stand to benefit from higher oil prices. Nevertheless, their high rankings in the index, especially due to the youth unemployment rate in Saudi Arabia and the dependence of the United Arab Emirates on Ukrainian and Russian grains, combined with their low scores in the democracy index, can justify some attention.
The situation in Turkey is particularly worrying given the country’s already huge inflation rate and the high likelihood of a sovereign default within the next 12 months due to the devaluation of the lira.
Investors should focus on political developments in these countries in the weeks and months ahead. They can serve as a harbinger of potential global supply chain disruptions that could affect the UK and Europe.
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All posts are the opinion of the author. As such, they should not be construed as investment advice, and the opinions expressed do not necessarily reflect the views of the CFA Institute or the author’s employer.
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