Could today’s crisis lead to future growth?

The opinions expressed by Eurasia Group analysts in this podcast episode are their own and may differ from those of Citigroup Inc and its affiliates. In an environment where the near term has more losers than winners, the near term looks more problematic and more crisis prone, you actually are creating a lot of the opportunities for the medium and long term. When people are investing well, they're not thinking about their portfolio value one day, one week, and one month from now. They're thinking about creating wealth by putting their dollars in the right places, the right industries, the right technologies, and doing that with a view two years to 10 years out.

Welcome to Living Beyond Borders, a podcast from Citi Private Bank and GZ Media. On this program, we examine global risks and opportunities from the angles of both politics and economics. I'm Shai Friedman, Managing Director of Climate and Sustainability at Eurasia Group. A Roman leader who presided over the Empire during one of its longest periods of peace and prosperity had this to say about trying to predict the future: 'Never let the future disturb you. You will meet it, if you have to, with the same weapons of reason which today arm you against the present.' What Emperor Marcus Aurelius believed in the 2nd century AD still rings true today. And while we can't predict the future, we can still think, plan, and prepare for it. It's hard to believe that we're already halfway through this year in the 21st century, 2022. But as we look ahead to the rest of the year and what some of the greatest risks and opportunities will be for all of us, we wanted to bring in two experts to track the evidence and help us better understand and better inform our decisions. We're joined today by David Bailin, Chief Investment Officer and Global Head of Investments at Citi Global Wealth, and Ian Bremmer, President of Eurasia Group and GZ Media. Welcome. Hi there, thank you for inviting me.

Ian, what are you looking for or expecting, particularly looking at the second half of this year? Well, the geopolitics and their impact on the markets are greater right now than at any point in my professional life. And there are a lot of structural reasons for that, but most immediately the playing out of the Russian invasion into Ukraine has global impact. I want to be clear, this is the first time we have ever seen this level of economic sanction being placed on a G20 economy, much bigger than Iran, much bigger than Venezuela, and integrated with the global economy. But the Americans, the Europeans, the Asian allies, all of the advanced industrial economies are basically saying we are going to forcibly decouple your economy from us. And of course that first of all meant that a massive contraction in Russian GDP, expectation of 10 to 15% down this year, and that's just the beginning. And so concerns of what it will mean when you try to implode the economy of an adversary that has 5,000 to 6,000 nuclear warheads, that's a longer term market concern. But more immediately, you have the Europeans saying we are no longer going to buy coal, and soon oil, and in relatively short order gas from Russia. And that has spiked oil prices well beyond $100. And it's not just about the fact that the Europeans used to get so much energy from Russia, it's also that most of the shipping and the shipping services and the insurance and the reinsurance, that's a European market. And if they're boycotting that from Russia, then the Russians don't have another place to get that out. And if they do, then that's taking away from energy that the Iranians are exporting or others that have worse shipping services. So the reality is that we are going to see far greater inflation that is purely geopolitically driven coming off of energy and fertilizer and food that is structural. We will certainly see that for the remainder of the year because there is no real possibility of ending this war anytime soon, and it likely has medium-term implications which are easily as big.

Where are you seeing moving forward the biggest economic risks globally?

Well, structurally the big problem is that you've moved from a world of globalization where the biggest trend is completely aligned with efficiency and growth. For 50 years, the biggest trend in the global economy has been let's move goods and services and people and data and capital faster and faster across borders. And the markets love that, and multinational corporations love that, and rich people love that, and a global middle class loves that too. It has been accompanied with an extraordinary growth in human development. But what we are now seeing are three different types of decoupling. The first I've already mentioned, which is the decoupling of Russia from the advanced industrial economies. It is the single biggest geopolitical decouple of any economy in history, and it's happened all of a sudden. It was not happening four months ago, now it is. That is a very big deal and that is driving markets. You have a broader decoupling between the United States and China that's been going on for a while, and it's not a whole decoupling, it's not ending in economic interdependence, thankfully, between the two largest economies in the world. But it certainly is making it much harder in areas that are broadly defined as connected to national security, and the Americans and the Chinese define those things differently. And then finally, you have a decoupling that is happening as an incremental move from the anti-establishment political trends in countries all over the world, developed and developing, mostly democracies, where their populations are saying we're not getting what we thought we were getting out of free trade, we're not getting what we thought we were getting out of you supporting corporations, so we want you to insource, we want you to cut off your exports to other countries. And you see that with chicken in Malaysia and palm oil in Indonesia and wheat in India, and you see it with infant formula in the United States. And all of these are functional taxes on the global markets driven by domestic political trends where governments were not dealing with fraying social contracts for decades, and now those populations have become restive, they've become powerful, and they're forcing greater redistribution, even if that's inefficient, from their political leaders presently. And that's going to keep happening.

David, everything that Ian just laid out affects markets and investments, and I know that Citi has written a lot about beating the cash thief. So could you talk a little bit about what that is and why beating the cash thief is a top priority right now?

One of the unstoppable trends that Citi is looking at right now is digitization. Why is that such an important trend despite all the volatility that we've seen this year?

Digitization has been a part of a conversation about the relationship between China and the US, and I think that it clearly broader. There's so much to bring into that conversation as well. What, if any, shifts have we seen in that relationship, China and the US, in recent months because of Russia's war in Ukraine or other reasons, and what might be likely to happen later this year?

Well, first I want to say that in the same way that the relationship between the US and the Soviet Union never tipped into hot war and was constrained in doing so because of the mutually assured destruction of having all these nuclear warheads aimed at each other, the relationship between the US and China is actually constrained from tipping into Cold War because of the immense economic interdependence that continues to exist between the two countries. And you wouldn't know that or think that when you read the headlines because there's no trust between the two countries and the politics are expedient for beating each other up. But it is a reality, and it's also a reality that Biden and Xi Jinping know each other reasonably well, unlike Biden and Putin. And Biden is someone who believes in the great man theory of sit down with somebody and work things out, and they do feel like they understand each other even if they don't agree on an awful lot. And I think that helps. So that when Biden makes a mistake on Taiwan or misspeaks and people say, 'Oh, he's changing policy,' and then the White House walks it back, Xi Jinping's inclination is not to beat up on the United States and jump on that because he kind of has a decent sense of what Biden's about, and vice versa. I think that actually helps, and people don't talk about that enough. When I have conversations with Biden, he brings that up. He talks about that in a way that he would never say with Putin. And I think it makes the US-China relationship more stable. But more broadly than that, let's be clear that Xi Jinping stood up on February 4th and told Putin and told the world that we have this new friendship without limits. And that was when China thought that if there was going to be any military incursion into Ukraine, that it wasn't going to be a big deal, that it wasn't going to lead to what we've seen. This was a huge surprise, obviously for Putin. He made the biggest misjudgment of any leader on the global stage since the Soviet Union collapsed, since the wall fell, and he's been massively punished for it. In fact, I think if Putin had any idea of what was the fate that would befall his country once he invaded, I don't think he would have done it. But Xi Jinping is now stuck with this statement and relationship, and the reality is that he hasn't done an awful lot to provide support for Russia. I mean, a lot of Chinese companies that were doing business in Russia before February 24th aren't anymore. And that's because even though they may have shared worldviews, they also have lawyers and they understand that the United States putting sanctions on these companies would be really problematic if they fall afoul of it. And so when the Americans told the Chinese, 'Don't you break these sanctions and don't you provide military support for Russia,' the Chinese have largely gone along, even though their diplomatic posture has been much more aligned with Russia and their votes at the UN have been more aligned with Russia than they have with the United States and with Europe. And most recently, Xi Jinping has had a couple phone calls in the last couple weeks with Macron and with Olaf Scholz. And in both cases, what he was privately saying is, 'Look, we recognize Ukrainian territorial integrity, we recognize their right to self-determination. This war is a disaster for us, it's a disaster for you. We need to get a conversation going.' The Americans say that there has to be victory, but we know that you, the French and the Germans, actually just want this war to be over. So do we. Let's find a way to work together. And Macron has reflected that publicly a little, the Germans certainly have privately. But the reason I say all of this is not because I think we should suddenly start trusting the Chinese, but rather that we aren't on the precipice of Xi Jinping being tarred with the same brush that Vladimir Putin has been. And I think that should come as a huge relief to the markets.

David, following on to what Ian is saying, where are the markets finding relief and where are you seeing the biggest political and policy risks in terms of their impacts on the economy and on investors?

And pivoting over a little bit to the opportunities, I know that you live in this political risk world, but what people may not know is that you're really an optimist at heart. So what are the opportunities or bright spots that you're seeing when it comes to these trends that we've been talking about?

Well, if you followed my writing for the last 10, 15 years on the macro side, what I've been describing has been a likely descent, an expected descent into a geopolitical recession, which is a long cycle where the institutions of the world order increasingly don't align with the balance of power, and that leads to more crises. And we've seen that happen on the economic side, on the security side, on the geopolitical side. It's why you say NATO is brain dead, it's why you say that the WTO isn't functional the way it used to be, it's why you say the Security Council is broken, as the Secretary General just recently said. When that happens, you get more crises. But in those crises are the seeds for the new global order, are the seeds for the institutions that you will need to reform or build anew for the 21st century. And that's indeed what we see happening right now. I mean, no one four months ago thought that NATO was going to be effective, thought that NATO was working. And all these American presidents were trying to get the Europeans to pay attention to national security and defense, they refused. And then Putin invaded, and now suddenly NATO is getting much more resource, and it's expanding to include Finland and Sweden, and it's focusing more on cyber. And the Asian allies are also becoming more aligned with it, where before the conversation was pivot to Asia, don't care about transatlantic anymore. Well, now there's an opportunity to reform NATO and to strengthen the G7 and to incorporate the Quad as it's being developed to create something that feels more sustainable and more fit for purpose in the 21st century. And I also see that happening in response to climate change. It took decades to get to the point where people saw climate change as a problem that was global, that was not about fake news, it wasn't about fake science, it's real. We've got 1.2 degrees of centigrade warming that's already occurred. Everyone agrees on that, they didn't 10 years ago. And that leads to the creation of institutional frameworks and infrastructure that allows you to invest a lot more and sustainably into post-carbon energy. And you can do that even when the Americans and the Chinese hate each other, because certainly the US doesn't want China to become the dominant energy superpower in a post-carbon environment, so they're going to invest too. When you frame the problem appropriately and you all understand what it is, even if there's competition, the competition becomes more virtuous. So in an environment where the near term has more losers than winners, the near term looks more problematic and more crisis prone, you actually are creating a lot of the opportunities for the medium and long term. For the last two decades, all you've seen are consumers getting more anxious, people saying, 'Oh my God, this stuff is broken and we can't do anything to fix it.' No, that's actually not true anymore. It puts everything in motion as opposed to sort of sitting in that moment of potential where you don't really know what's about to happen, and it puts everything in perspective, which is what people have been lacking as you only focus on polarization and disinformation and how much you hate the other tribe over the past decades.

And David, if you could also touch upon, as everything's moving, how can investors identify and protect themselves from some of the biggest pitfalls and from making mistakes? Are there ways to do that?

And just one final question to you, David. Are there any big economic trends that we haven't noted today that are worth looking at?

Ian, I want to give you the final word. A lot of these are pieces that I know that you've looked very closely at. Do you want to comment on any of the other big global trends that you're seeing?

Well, I'll maybe say one thing since this is a macro kind of conversation. For me, the support that democratic governance has had was for a very long time bolstered by trends in technology. The idea that technology was decentralizing, the communications revolution is what helped you end the Soviet Union, it's what helped you create the Arab Spring and the colored revolutions, and it really bolstered democracies. It's one of the reasons why a lot of people in Washington believe that China would have to ultimately either politically reform or they'd fail. But technology no longer works like that. Technology is now primarily a centralizing driver, it's a top-down driver because of the surveillance revolution and the data revolution. And it's putting power in the hands of a much smaller number of very wealthy and very powerful governments and corporations. And it also is fundamentally destabilizing civil society and democracies and empowering technologically sophisticated authoritarian regimes. That trend is, I think, the most important that has weakened the balance of power between the US and its allies on the one side and China on the other, and Russia with it. And if that persists, we have a big problem in the way we think about the global markets because it will be fundamentally different. The free market will ultimately lose a lot of influence if that trend is still with us in 10 years' time. And that is largely really underappreciated by people that are thinking about the global marketplace longer term.

Right now, we're going to have to wrap up. David Bailin, Chief Investment Officer and Global Head of Investments at Citi Global Wealth, and Ian Bremmer, President of Eurasia Group and GZ Media. Thanks so much to both of you for being here.

Good to be with you guys.

And that's it for this episode of Living Beyond Borders. Stay tuned for more episodes throughout the summer, including discussions of the US-China relationship, cyber crime, and the future of women at work. For more, head to www.gzmedia.com/livingbeyondborderspodcasts or subscribe wherever you get your podcasts. I'm Shai Friedman, Managing Director of Climate and Sustainability at Eurasia Group. Thanks for listening.

You're listening to the GZ World with Ian Bremmer podcast, your weekly geopolitical deep dive into the world's biggest news stories, featuring in-depth conversations with global leaders and newsmakers. To get more of GZ's insights on global politics every morning, sign up for our free newsletter GZ Daily at gzmedia.com.