Joachim Klement, CFA, is the creator of Geo-Economics: The Interaction between Geopolitics, Economics, and Investments from the CFA Institute Analysis Basis.

The battle in Ukraine is dominating the headlines. For now.

However the battle’s oblique reverberations will ripple far past the borders of its combatants and their allies. Certainly, they may give rise to new and different geopolitical dangers all through the world.

The battle’s potential impact on the worldwide grain provide and meals inflation is particularly alarming. Ukraine is named the “bread basket of Europe,” and along with Russia, it provides wheat to growing nations throughout Africa, the Center East, and Central Asia.

There are already studies that many Ukrainian farmers are abandoning their fields proper firstly of the sowing season to defend their nation. The world pays a worth.

The battle could lead to a whole or near-complete failure of the 2022 Ukrainian wheat harvest. Russian wheat exports in the meantime could drop to zero because the nation diverts its meals commodities for home use within the face of crippling worldwide sanctions.

Many nations rely upon Russian and Ukrainian grain imports to feed their populations. The warring nations are answerable for a minimum of 80% of the grain provide in Benin and Congo in Africa; Egypt, Qatar, and Lebanon within the Center East; and Kazakhstan and Azerbaijan in Central Asia. All these states should discover new sources of grain and pay a lot larger costs for them.

And that can compound an already dangerous state of affairs. Even earlier than the battle, meals inflation was growing. During the last 12 months, it reached 17.6% and 4.8% 12 months over 12 months (YoY) in Egypt and the United Arab Emirates (UAE), respectively. These ranges are harking back to those who preceded the Arab Spring uprisings again in 2011. The state of affairs is much more excessive in Turkey, the place a quickly declining lira propelled YoY meals inflation to 64.5%.

Going ahead, a number of elements could propel meals costs even larger. Past the shortage of grain exports from Ukraine and Russia, spiking vitality costs will improve delivery and fertilizer prices. With Russia, a serious fertilizer exporter, dealing with extreme sanctions, there shall be much more upward stress on fertilizer costs. This can add gasoline to the hearth and ship meals inflation ever larger. In developed nations, whereas the ache varies throughout the earnings spectrum, such tendencies can largely be ameliorated by reductions in shopper discretionary spending: Folks modify by paying extra for meals and fewer on journey, leisure, and many others. However in growing nations, the place meals takes up a bigger share of complete residing bills and there may be much less discretionary spending, starvation is a extra acute threat.

The Arab Spring is a vivid instance of how such circumstances can ignite civil unrest and geopolitical tensions. It’s not an remoted occasion. The peasants’ rebellions within the Center Ages, the French Revolution, and the Revolutions of 1848, for instance, all reveal how growing meals insecurity can set off political and social upheaval. The impact is so robust that Rule 6 of my “10 Guidelines for Forecasting” states:

“A full abdomen doesn’t riot. 

“Revolutions and uprisings not often happen amongst people who find themselves properly fed and really feel comparatively secure. A scarcity of private freedom isn’t sufficient to spark insurrections, however an absence of meals or water or widespread injustice all are.”

The nations that rely upon grain from Russia and Ukraine together with the share of their populations that had been at medium or excessive meals threat earlier than the latest battle are charted within the graphic under. Kazakhstan and Azerbaijan together with Egypt and Congo are amongst these on the most threat given their reliance on Russian and Ukrainian grain imports, their current meals insecurity, or mixture of the 2.

Meals Insecure and Depending on Grain Imports from Ukraine and Russia

However excessive meals inflation isn’t the one driver of potential turmoil. Constructing on latest insights from Chris Redl and Sandile Hlatshwayo, who use machine studying to establish the predictors of social upheaval, we constructed a Civil Strife Threat Index that ranks nations primarily based on 5 key stability metrics:

1. The share of their complete grain imports from Russia and Ukraine, in keeping with UN Comtrade knowledge
2. The share of their populations with average or excessive meals insecurity, in keeping with the World Financial institution
3. Their youth unemployment charge primarily based on World Financial institution and Bloomberg knowledge
4. The variety of cell phone subscriptions per 100 folks, in keeping with the World Financial institution
5. Their Democracy Index ranking from The Economist Intelligence Unit

Why these 5 parts? Proof means that nations with excessive proportions of younger and unemployed males are extra susceptible to instability; cellphones are important for organizing mass protest by way of social media platforms; and an absence of democratic establishments implies that the inhabitants sees no alternative to alter the political management exterior of direct motion.

Combining these 5 indicators yields perception into which nations are most vulnerable to civil unrest. The chart under solely contains those who straight import grains from Russia and Ukraine, so it’s composed of solely these nations that can straight undergo from the fallout of the battle in Ukraine.

The Civil Strife Index, by Nation

The oil exporters — Saudi Arabia and the UAE — and Turkey, with its shut commerce hyperlinks to the UK and the European Union, are probably the most troubling from an economics and investing perspective. Instability in these nations, may have a spillover impact that disrupts vitality provide chains and international commerce and triggers renewed spikes in inflation in 2022.

To make certain, Saudi Arabia and the UAE largely averted Arab Spring-related unrest and will profit from the rise in oil costs. Nonetheless, their excessive rankings on the index, pushed particularly by the youth unemployment charge in Saudi Arabia and the UAE’s reliance on Ukrainian and Russian grain mixed with their low Democracy Index scores, could warrant some consideration.

The state of affairs in Turkey is especially worrisome given the nation’s already monumental inflation charge and the robust chance of a sovereign default within the subsequent 12 months as a result of devaluation of the lira.

Buyers must deal with political developments in these nations within the weeks and months forward. They could function an early warning signal of potential international provide chain disruptions that would have an effect on the UK and Europe.

For extra from Joachim Klement, CFA, don’t miss Threat Profiling and Tolerance and 7 Errors Each Investor Makes (and The best way to Keep away from Them) and join his common commentary at Klement on Investing.

Should you appreciated this publish, don’t overlook to subscribe to the Enterprising Investor.

All posts are the opinion of the creator. As such, they shouldn’t be construed as funding recommendation, nor do the opinions expressed essentially replicate the views of CFA Institute or the creator’s employer.

Picture credit score: ©Getty Photographs/alzay

Skilled Studying for CFA Institute Members

CFA Institute members are empowered to self-determine and self-report skilled studying (PL) credit earned, together with content material on Enterprising Investor. Members can document credit simply utilizing their on-line PL tracker.

Joachim Klement, CFA

Joachim Klement, CFA, is a trustee of the CFA Institute Analysis Basis and gives common commentary at Klement on Investing. Beforehand, he was CIO at Wellershoff & Companions Ltd., and earlier than that, head of the UBS Wealth Administration Strategic Analysis workforce and head of fairness technique for UBS Wealth Administration. Klement studied arithmetic and physics on the Swiss Federal Institute of Know-how (ETH), Zurich, Switzerland, and Madrid, Spain, and graduated with a grasp’s diploma in arithmetic. As well as, he holds a grasp’s diploma in economics and finance.