17th February 2016
Jan Dehn, head of research at Ashmore, asks whether the Cold War is coming back. Judging by recent exchanges between NATO officials and Russia’s Medvedev, the answer is yes. But is it? And what should emerging market investors make of the rising tensions between Russia and NATO?
Dehn outlines why this question is extraordinarily important for Emerging Markets (EM) countries and explains why fears of a return of the Cold War of old are unfounded…
Is the Cold War coming back?
Let there be no doubt about the importance of this question – it is of extreme importance to EM investors. Recall that the original Cold War, which lasted from the end of World War II to the collapse of the Soviet Union in 1989, was an unmitigated disaster for EM.
The Cold War period was damaging for EM because the otherwise natural forces of economic convergence, which cause EM countries to outgrow developed economies, were actually put into reverse. The result was horrific political and economic conditions. Indeed, conditions were so bad that it took EM countries the better part of the 1990s to adjust before they had finally overcome the hangovers from the Cold War. Only by the 2000s were EM countries able to begin to realise their growth potential.
The Cold War was damaging for EM countries for two reasons. One was that the protagonists in the conflict – the Soviet Union and NATO – fought numerous ‘hot’ wars with EM countries as proxies. Examples include the Greek civil war, the Korean War, the Vietnam War, the Angolan civil war, various iterations of Middle East conflicts, the Indo-Pakistani war, the Soviet war in Afghanistan, the US invasions of Grenada and Panama, the Cuban Missile Crisis, various crushed uprisings against the Soviet Union in Easter Europe, etc. Needless to say, these wars had substantial economic costs.
The other less recognised, but far more important reason why the Cold War was so devastating for EM was that the Superpowers installed unaccountable dictators in countries right across the EM world. Nearly all of EM was impacted. The complete lack of local political accountability led to rampant corruption, populism, economic mismanagement and human rights abuses on a scale that seems almost incomprehensible today. Needless to say, coups were frequent, often bloody. No one in their right mind invested in such countries, except for short spells during commodity price booms. Much of the now outdated perception that EM investing is a ‘commodity play’ dates back to this period.
EM countries differ today from those of the Cold War
The good news is that the Cold War is not coming back as far as the vast majority of EM countries are concerned. The most obvious reason is that none of the original Superpowers have the financial or political clout to re-install and control puppet governments across the 165 odd EM countries. EM countries themselves are much richer and stronger militarily. And China, the new Superpower kid on the block, has never harboured ambitions to exercise global control and its strategic political ambitions do not reach far beyond its most strategically important neighbours. In particular, the long reach of China’s economic power has not been accompanied by an equally ambitious military and political agenda.
There is another reason why it is wrong to conclude from the rising tensions in Syria that the Cold War is coming back. The truth is that the Cold War never actually ended in the Middle East, which retains its essential strategic importance on account of the region’s enormous wealth of energy resources. The 2008/2009 crisis in developed economies may have forced the West to rationalise its support of authoritarian governments in Middle Eastern periphery resulting in the Arab Spring in North Africa, but the fight between Russia and the West for influence over the core Middle Eastern countries never abated.
Russo-Western tensions reflect confluence of transitory domestic weakness, not evidence of Cold War
It is also important to consider the domestic political context of the alleged new Cold War protagonists. President Obama, Chancellor Merkel and Prime Minister Cameron are all in their second/final terms in office. It is customary to conduct foreign policy in second terms, because leaders usually do not have enough political capital left in order to undertake domestic policy changes. In Russia, the situation also calls for more foreign policy activism, albeit for different reasons.
Russia is undergoing a painful adjustment to lower prices, so President Putin has a strong incentive to whip up a few distractions in the Middle East to detract attention from issues at home. In other words, the rise in Russo-Western tensions may not be evidence of Cold War per se as much as simply a confluence of transitory domestic weakness in both the West and in Russia.
If anything, there are signs that another remnant of the Cold War in EM is in the process of collapsing. Three populist governments in Latin America that have, at various times, made heavy use of anti-American Cold War style rhetoric to win and hold on to power have recently fallen or are well on the way to falling. They are Argentina, Venezuela and Brazil. Cuba is also thawing relations with the United States. Ecuador, Nicaragua and Bolivia have become far more pragmatic. It is extremely positive that the false political choice between right-wing and left-wing authoritarian and populist governments in a region as burdened by inequality as Latin America gives way to more technocratic governments that have a genuine chance of delivering sustainable economic progress.