WACHIRA: Conflicts risk upsetting global economic order

A Palestinian man, wrapped in his national flag, inspects the rubble of destroyed buildings and houses in Gaza. AFP PHOTO | MAHMUD HAMS 

By George Wachira

It is said that we live in a “global village”, a cliché that defines globalised communication, financial markets and trade, all achieved over the past two decades. Now parts of this global village are engulfed in war situations, and this is impacting and in some cases re-aligning global economies.

Today, we have war situations in Iraq, Syria, Israel/Gaza, Libya, Ukraine, Pakistan, Afghanistan, South Sudan, and of course in Somalia. In West and East Africa we are also experiencing serious incidents of Jihadist terrorism.

 

When Ukraine is on fire, global wheat supply is affected. When the oil and gas producing countries are at war, risks of energy supply instability loom.

Specifically for Kenya, when Pakistan, Afghanistan and Egypt which are key importers of our tea are in turmoil, our foreign exchange earnings drop.

Recently, a commercial passenger flight was downed by a missile in Ukraine. Although responsibility for the incident has not been assigned with certainty, the impact did not escape the attention of many warring groups across the world. For a few days, the US banned their airlines from landing in Tel Aviv, fearing missiles from Gaza.

Going forward, as airspaces become riskier, airlines may have to re-arrange themselves to mitigate risks. Higher insurance and re-routing costs may increase air travel costs and time. Unfettered air travel is a key ingredient of the globalised world.

The Ukraine crisis is likely to have the biggest effect on global economic re-alignment especially in areas of energy supply and trade.

Within months of the trouble in Ukraine, the EU nations that mostly rely on Russia for their natural gas supplies are already working out alternative modalities to reduce reliance on Russia. This will change the shape of world energy supply and infrastructure in the coming years.

Countries like the UK and Germany which were slow in embracing shale oil and gas are now pushing for accelerated development of these unconventional resources.

Infrastructure investment is planned to re-route supply of non-Russian natural gas to bypass Ukraine while arranging new piped imports from the Middle East. New LNG imports infrastructure is also under consideration.

With the impending reduction of Russian gas, the EU countries that had gone slow on use of coal are now planning to increase its production for power generation.

Even the Germans who had decided to withdraw nuclear power generation are about to reverse this policy. Until all these energy supply alternatives are in place EU (and the US) will likely be cautious on how they relate with Russia.

The Russians, on the other hand, are busy accelerating alternative export routes for their oil and gas through the eastern coast. This will establish a new oil and gas export hub that will eventually compete with other exporters for the lucrative Asia-Pacific energy markets (China, Japan, South Korea etc). This is a clear competitive threat to the new natural gas finds on the East African coast.

The US has threatened economic sanctions against Russia. But there are a number of significant energy joint investments between Russian state companies and Western multinationals in Russia, especially in eastern Siberia.

I fail to see how the West can impose economic sanctions on Russia without jeopardising key Western assets.