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Geopolitical Risks in the way of Investments

Objective: Critical Review of the articles The 4 major Geopolitical challenges investors must
face by Ian Bremmer and Top Risks of 2014 a report by Eurasia group.
As the world has slowly moved out of the Great Recession, the new problems bothering
the Investors are majorly Geopolitical. The cold war between Russia with Europe and U.S., the
turmoil of ISIS and civil protests in the Middle East, the slowdown in the Eurozone, Unstable
Chinese economy and the widening gap between U.S. and Europe are the major blockades for
the Investors. As the U.S. is no longer able to provide leadership to guide the global economy,
there is no other nation to do so. It is also true that U.S. is slowly disengaging itself from the
global issues and improvising its foreign policy to strengthen its financial stability, this is leaving
its allies with limited help. All these matters are effecting the investments on a large scale.
Russia and the West:
After a victory through the Crimea referendum Russia is not looking to stop its aggressive take
out to Ukraine. The author points out that Russia is looking to gather support from the southeast
Ukraine through which it wants to keep Ukraine moving towards Europe. The sanctions from
U.S. and Eurozone are showing a limited effect as Putin is getting a large support from his
public. Russia is mainly surviving over its natural resource exports, it can maintain this status
quo for only limited period as it cannot continue the exports on same scale in the long term. It is
said that a capital flight of $75 billion happened in the last 6 months time, this is a very serious
issue as far as investments are considered. It is evident that Russia is going to face an economic
instability in the long term if this situation continues.
The interesting point the author raised is Russias hand in the cyber-attack on JPMorgan
Chase& Co. which involved 83 million households and institutions, an event of this nature
affects the investor sentiment and the trust over a nation more than the actual sanctions from the
west. The article also puts light over the repercussions facing by European nations because of
their strong trade relationships with Russia. As Europe relies on Russia for almost one third of its
oil needs, it will be very tough to put on the sanctions for a longer time.

Overall Russia is not looking to be investment friendly in the near future because of
geopolitical tensions of it with the West.
Middle East Crisis:
Middle East has become synonymous to Spillover effects after the U.S. invasion into Iraq in
2003 which started the terrorist groups to align and cooperate among themselves. Syria,
Lebanon, Egypt and Iran one after the other is facing political crisis mainly because of religious
tensions between Shias and Sunnis. Now ISIS has become the major problem to the nations
that are worried about terrorism. The barbaric videos released by ISIS have gone viral and are
questioning the basic safety measures in this region. Although these nations are solely dependent
their Oil exports, they cant isolate themselves from trade as investments are needed for a nation
to develop. Everyone knows that these terrorist groups are mainly funded by Gulf countries but
nobody is in a position to question them because of their rich oil resources. But this is not the
only reason, the divergent interests of major nations (U.S., China and Europe) in the natural
resources of these nations has left them with a strong diplomatic position.
On the other hand Irans nuclear developments are increasing the geopolitical tensions
inside and outside Middle East. The article points out that Israel is preparing itself for air strikes
over Iran and U.S. is likely to increase its sanctions over Iran which impedes its oil exports.
Given all this, the Middle East is looking highly risky for investors and there are signs of
recovery in short.
Chinas Slowdown:
After a double digit growth for almost 2 decades, China is now standing at a point where
it has to stop and look back towards its economic and financial policies and the reforms needed
in its controversial Communist rule. Mr. Xi Jingping has shown some changes from his
predecessors towards the Chinas relationship with other countries. A decade back China was
dreaming of becoming the next superpower through its aggressive steps into most of the sectors
like Manufacturing, Science, services etc. for which it has allowed too much leverage over the
funds. Now this has lead China to the verge of financial collapse, as there is some news that
some of the small banks in China had turned bankrupt recently which were managed by the

Chinese government. The most threatening risk in China which is anticipated in the near future is
Credit Bubble and the Shadow Banking.
Chinese government is looking over broad policy to rebalance the economy, easing state
dominance of the financial system by increasing the transparency and coordination of stateowned enterprises to make the system more efficient and less dependent on state-directed
investment. It is also putting efforts to rebuild the Communist Partys legitimacy, mainly at the
top, through savvier public messaging and progress on addressing issues of deepening public
concern, such as environmental protection and social welfare and theres a need for consolidation
of power and the creation of new party institutions, mechanisms to ensure the first two sets of
reforms will work as intended.
The major risks economically are in the financial sector. The leadership has to recognize
significant problems with bank solvency and is should proceed with removing moral hazard in
the banking system to lay foundation for tougher liberalizations in the coming years. To do this,
they must make clear what is guaranteed by government and what is not. This requires more
tolerance for outright defaults over bad loans. Beijing hopes it could smoothly navigate a
transition to normalized banking sector, but this will be difficult without triggering a larger credit
event. Yet politicians are becoming more tolerant of these risks, and with key officials involved
in financial reform such as Wang Qishan and Zhou Xiaochuan set to retire in 2017, these
changes will be among the regimes most front-loaded.
The party has to try to divert public anger toward foreign targets. The Xi governments
first big foreign policy move was to announce an Air Defense Identification Zone in the East
China Sea which is useful for domestic purposes, and given that anti-Japanese sentiment runs
broader and deeper in China than does any other sentiments. It also reflects changing security
efforts in the region. If trouble emerges domestically, the Xi government might be much more
willing to play up this antagonism, by far the most momentous source of geopolitical tension in
the world today.
China is entering into something big, dangerous, and all about China. This year, the potential
knock-on effects from that turning point, internally and externally, are of great importance.
Widening Divide between U.S. and its Alliances:

Europe and U.S. always remained good allies since the world-war II, and they will
remain so in case of any serious problems but whats distracting is their recent stances in their
foreign policies. U.S. is about to stop its Quantitative easing which will have serious
repercussions around the world mainly in Europe which is still not out of the crisis completely.
While U.S. showing strong signs of recovery, the Eurozone is mulling in the curbs of deflation.
Germany is the only nation that is standing strong in Europe which is trying to take in the reins
to control Europe, and we all know the strangled relations between U.S. and Germany.
There is a notable decline in US foreign policy. Some of this is structural: too many
increasingly influential countries with which to coordinate effectively; a distracted Europe led by
Germany (with geo-economic and bilateral sensibilities) rather than a more geopolitically
aligned UK and France; and emerging markets, particularly Russia and China are more willing to
challenge US preferences abroad. The changes in the US domestic landscape: Voters are now
offering less support to an ambitious foreign policy, and the growing income inequality
persuades most of Americans that they may not benefit from US engagement abroad. One of the
issue is specific to the Obama administration, with a tactical and risk-averse approach towards
foreign policy along with a weak (and not well-trusted) second-term foreign policy team. There
are some significant misstepsregarding Syria, the response to the NSA/Snowden affair, and the
need for domestic focus on congressional infighting and the Obamacare rollout fiascoand the
makings of a perfect US foreign policy storm.
The implications are going to be clearest, and most costly, in four different areas. First,
US corporations might face a more challenging landscape. This includes US telecommunications
firms, banks, and credit card companies doing business in France, Germany, and Brazil, when
the regulatory environment becomes more hostile for those sharing information with the NSA or
US defense companies selling into countries such as Turkey and Gulf states, which wants to
diversify defense purchases away from the US. Expect less effective US efforts at
multilateralism, which will lead towards the weakening of US-led coalitions of the willing
both on collaborative side (the Trans-Pacific Partnership and the Transatlantic Trade and
Investment Partnership) and punitive (international support for new sanctions regimes). The
other important consideration is the confusion over US commitments which will complicate
choices for countries balancing political and economic interests between the US and China,

mainly in Asia, where Chinese economic influence is expanding quickly. Some governments will
align diplomatic and economic agendas more closely with Beijing. There might be a weakening
of international standards as the US is no longer seen as a credible driver of a single global
market. This new globalization will include faster fragmentation of the internet, greater disunity
in financial regulation and oversight, the weakening of NATO, and formation of more unilateral
and bilateral security arrangements.

References:
1. http://www.institutionalinvestor.com/article/3396496/assetmanagement-macro/the-4-major-geopolitical-challenges-investors-mustface.html?ArticleId=3396496&single=true#.VIcdaPmSxmV
2. http://www.eurasiagroup.net/pages/top-risks-2014