Source: BlackRock Investment Institute

High Risk

  1. Russia’s invasion of Ukraine is the largest, most dangerous military mobilization in Europe since WWII. Russian President Vladimir Putin has failed in his initial plan to deny Ukraine sovereignty. Russian forces have since focused on three short-term goals: taking the Donbas in eastern Ukraine, building a land bridge from Russia to Crimea and cutting off Ukrainian access to the Black Sea, through which the majority of Ukraine’s exports flow. A settlement of the conflict looks unlikely. Instead, this is going to be  an extended conflict, alongside a long-term political, economic and military standoff between the West and Russia. There is a risk of intentional or accidental escalation between NATO and Russia
  2. Strategic competition between the U.S. and China is driving global fragmentation as both focus on boosting self-reliance, reducing vulnerabilities and decoupling their tech sectors. Western sanctions on Russian technology imports may exacerbate fragmentation and deepen the global focus on reliable supply chains. The U.S. Congress is moving on industrial policy legislation aimed at boosting competitiveness in critical technologies. And the SEC is increasing disclosure requirements for Chinese firms listing in the U.S. The U.S. has also announced sanctions against Chinese companies undermining U.S. sanctions on Russia and is considering controls on outbound investment into China, either by legislation or executive action.
  3. The likelihood of Russian cyber attacks is increasing as the Ukraine conflict evolves into an extended war of attrition. Critical government and private sector networks as well as infrastructure across the globe are vulnerable to hacking and spying. Financial market reactions, however, have been muted. Attacks are increasing in scope, scale and sophistication, with the U.S. facing an “epidemic” of ransomware. Repeated attacks could cause significant damage and sustained disruption, which may spill over to financial markets and the economy
  4. A revival of the 2015 Iranian nuclear deal appears unlikely after the United Nations atomic agency’s board rebuked Iran for its lack of cooperation. Without a deal, there are increasing risks of military action and upward pressure on oil prices. Outside of Iran, there has been a general de-escalation of tensions among the Gulf oil producers. The Abraham Accords and diplomatic efforts by the Biden administration are enhancing cooperation between Israel and several Arab states, especially the UAE. The war in Ukraine and subsequent efforts to stabilize oil prices have led to increased cooperation between the U.S. and Saudi Arabia

Medium Risk

  1. Spillover effects from the Ukraine crisis are set to amplify challenges for emerging economies. EMs were already struggling with inflation and a slow economic rebound from the pandemic. They now face compounded pressure from high food and energy prices, higher U.S. interest rates and slowing Chinese growth. Social unrest, already noticeable in various fragile countries, is a risk well into 2022. There is a long history of food shortages and inflation causing instability in EMs. There could be a  wave of sovereign defaults.
  2. Taiwan is a flashpoint in the U.S.-China relationship. Beijing has reiterated its intention to achieve “complete unification” with Taiwan, asserted that the Taiwan Strait is not an international waterway and sent record numbers of sorties into Taiwan’s air defense zones. The U.S. announced a trade initiative with Taiwan in June, and the U.S. Congress has taken steps aimed at supporting stronger Taiwan relations and a clearer commitment to its defense. The next U.S. Congress will continue this trend. Though tensions remain elevated, there is no military confrontation that is imminent, but  the risk will increase as the decade wears on
  3. The Taliban takeover and the release of prisoners in Afghanistan may increase the risk of international terrorism, even as U.S. counter-terrorism capabilities have improved. The Biden administration has underscored the growing risk of domestic terrorism, calling it the most serious and persistent terrorist threat to the U.S. The threat is increasing amid polarization in the lead-up to the November midterm elections.
  4. North Korea’s nuclear program continues unabated across all its dimensions. North Korea has rebuffed talks with the U.S. and significantly escalated provocations, including conducting short-range and intercontinental ballistic missile tests during President Biden’s May trip to the region. There is no imminent threat of regional conflict. Yet tensions will increase this year. There will be  additional long-range missile tests. Markets are underappreciating this risk.
  5. The crisis in Ukraine has brought energy security to the forefront as energy prices remain near record highs. The world will need more non-Russian fossil fuels, and the crisis will make the world’s transition to net zero carbon emissions more regionally divergent. The energy shock is essentially acting as a carbon tax for consumers. In Europe, this will likely boost decarbonization plans and make clean energy more competitive as the oil-importing region seeks greater energy security. In the U.S., by contrast, there is more political polarization around energy and climate. There is also less incentive for the world’s largest fossil fuel producer to transition. Benefits for producers are higher, and the burden of higher energy costs on U.S. consumers will be lower than in the EU.

Low Risk

  1. The Ukraine crisis triggered a strong impulse toward European unity, as governments came together to impose sanctions on Russia and support Ukraine’s military. There is a risk of divisions emerging. Germany, France and Italy are calling for peace negotiations, whereas Poland, the Baltic states and the UK are stressing that Russia must pay a significant price for its aggression.  Europe’s effort to wean itself off Russian energy is among the most significant and difficult challenges ahead

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