The Russia-Iran Axis Is Deepening, And China Appears Committed To Being Structurally Supportive Of Both Countries
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Geopolitical implications are permanent
Kazakhstan Republic of Koreaa 4.42% Japan 3.11% 2.43% Vietnam 1.67% Turkey 2.22% UK 1.52% It is now clear to us that the North Atlantic Treaty Organization (NATO) is well and truly revitalized. The European Union, the United States, the United Kingdom, and NATO are more robust, more coordinated and more supportive of Ukraine than analysts had generally expected. Indeed, with Sweden’s and Finland’s imminent entrance into NATO, the alliance is significantly stronger militarily and benefits from the commitment from member states to increase their defense spending to at least 2% of GDP—a radical structural change. These structural changes are secular and permanent. Long after Russia ceases to be viewed as a security threat to Europe, we believe this will be the new reality.
Europe did not stumble under the energy crisis
In Europe, the fears around energy shortfalls and blackouts causing deep recessions and stagflation did not materialize. The need to switch away from the use of Russian gas triggered an aggressive and inflationary drive to secure new sources of gas, using the liquefied natural gas (LNG) infrastructure in southern Europe, and accelerating plans for LNG import terminals in Germany. In 2021, Europe imported around 155 billion cubic meters (bcm) of gas from Russia.7 In 2023, this will be reduced to zero. LNG is the biggest component of this replacement. Increased volumes from wind power and Algerian and Norwegian gas pipelines have played a vital role, but the most surprising and impressive element has been a significant reduction in overall demand, which is estimated at nearly 40 bcm, in the space of less than a year.8 This has come from an acceleration of the European Union’s Green Deal and from a sharp increase in capital expenditure by industrial companies. These companies are investing in modernization of facilities to become more efficient users of energy, and therefore securing lower operating expenses in the future. Meanwhile, there is a window of opportunity for friendly producers to lock in, as trusted suppliers in a shrinking, but still significant market.
Russia’s trajectory is negative for everyone
Another factor is that this asymmetric warfare is going to be played out in what is often referred to as the global South.These countries—in Latin America, Africa and Asia—will probably try to avoid aligning with either side to avoid the economic cost of offending China.
One challenge is that the Russia-Iran axis is deepening, and China appears committed to being structurally supportive of both countries. The probable trajectory for Russia is to become a bigger and an even more resentful “Iran 2.0”,9 which is problematic for the West. Over the past decade, evidence points to Iran’s support of proxy groups threatening the stability of the Middle East, despite the weight of economic sanctions. Arguably Russia’s expertise in cyber espionage and disinformation campaigns, coupled with its long experience and knowledge of the workings of western democracies, suggest the likelihood of entrenched asymmetric warfare. This may signal a period of intense cyberattacks, forcing companies as well as governments, to invest heavily in their security.
