Conflict in Ukraine remains the top geopolitical risk for investors but there is a chance this is being underestimated as the war drags on, according to Newton macro and geopolitical analyst Richard Bullock. Meanwhile, he says tensions between China and the US, and China and Taiwan, should also occupy investors’ thoughts, albeit the outlook on this front appears more sanguine.

Bullock says he is concerned the market has become complacent about the associated risks stemming from Russia’s invasion of Ukraine, largely because energy prices have come down1, grain supplies have continued to flow², and the war has settled into somewhat of a battlefield stalemate.

“But I think as western support continues to pour into Ukraine in the form of more offensive weapon systems and Russia’s finances become more impaired from the oil sanctions, a Ukrainian breakthrough could be highly escalatory and cause volatility for risk assets, including energy, agriculture and European equities,” he adds.

Bullock also thinks the market is unprepared for a potential attack on western energy infrastructure in retaliation for what Russia sees as America’s role in attacking the Nord Stream pipeline³.

“Ultimately, Russia and Ukraine have to find a way to the negotiating table,” Bullock adds. “China made initial steps to broker that, but it is not clear to me this can occur without significant further geopolitical volatility.”

Different cadence

When it comes to tension between Taiwan and China, Bullock argues the cadence is different. He suspects China will likely revert to the long game, appreciating its goals and interests could be better realised through diplomacy rather than force. He also notes the Chinese Communist Party’s top priority for this year is domestic growth, which it is not likely to want to disrupt by engaging in military activity.

“I think American interference will continue to aggravate president Xi but provided Taiwan doesn’t cross his independence red line, I think we can be a bit more relaxed on Taiwan geopolitical risk, at least in the near term,” says Bullock.

Cautious optimism

Turning to China’s relationship with the US, Bullock observes how the two nations are caught in a so-called ‘Thucydides Trap’. This is a situation in which a revisionist power rises to challenge the incumbent power and in doing so, provokes insecurity in the latter. 

“When you look at the historic record there is more than a 50% chance a Thucydides Trap results in a war⁴ , so the historic omens aren’t great,” says Bullock. “But I think there are a number of reasons for cautious optimism.”

First, Bullock notes how both countries are major nuclear powers which means the threshold for direct confrontation is high given the mutual nuclear deterrence.

Second, China and the US have been in an intense geopolitical confrontation across multiple domains of tech, trade and security for a good five years already and yet bilateral trade remains at record levels⁵ . “The two heads of state are prepared to meet each other as they did at the G20 at the end of 2022 and diplomacy seemed to be improving until the balloon incident⁶ in early February,” says Bullock.

China looks inward

Bullock believes any insecurity China has stems from a sense it is being contained both economically and technologically, but he notes the government is taking steps to address this. Among these it is building a national effort around domestic innovation, evidenced by the streamlining of the Science and Technology Ministry as part of a recent reorganisation of the government’s oversight in key areas, also including financial regulation and data management⁷.

Added to this, says Bullock, China has a highly educated population of some 1.4 billion people, a US$16 trillion industrial economy and government-supported semiconductor funding. “The right incentives could really lead to strong progress and could reduce the risk of direct confrontation,” he says.

Bullock concludes: “We have undoubtedly entered a multi-polar world with multi-polar systems emerging between democratic and autocratic countries. But there are reasons to suggest China is making efforts to promote world peace rather than conflict which includes its Ukraine peace plan⁸ and broking the restoration of diplomacy between Iran and Saudi Arabia⁹.”

¹ Reuters. World Bank projects 11% energy price decline in 2023. 26 October 2022

² Bloomberg. Ukraine Grain Deal Renewed, Clearing Way for Renewed Exports. 18 March 2023

³ Aljazeera. US has questions to answer over Nord Stream blasts, Russia says. 8 February 2023

⁴ Foreignpolicy.com. The Thucydides Trap. 9 June 2017

⁵ Politico. What cold war? U.S. trade with China hits new high. 7 February 2023

⁶ Guardian. Chinese balloon gathered intelligence from sensitive US military sites – report. 3 April 2023

⁷ The New York Times. Why China Is Tightening Its Oversight of Banking and Tech. 9 March 2023.

⁸ Sky News. Ukraine war: China unveils 12-point peace plan as it calls for ceasefire. 24 February 2023.

⁹ The New York Times. Chinese Brokered Deal Upends Mideast Diplomacy and Challenges U.S. 11 March 2023