With U.S. elections just a month away and with so much going off now in terms of geopolitics, particularly in my regions of expertise, I thought it worthwhile to update my views on a few of these big issues.
First, these U.S. elections are without doubt the most important U.S. elections, and perhaps elections globally, since World War II. That is perhaps an extraordinary statement, but in terms of potential global significance, these elections are huge because I think they will shape the future course of Western liberal market democracy – the very foundation of global markets. We could also perhaps compare the significance of these elections to the fall of the Berlin Wall, and the collapse of the Soviet Union.
A second term of Donald Trump would change the very face of the U.S., and impart deep institutional change which will last generations – we are seeing that I think already with the latest looming appointment at the Supreme Court. This will impact both U.S. domestic politics and the broad gambit of policy significantly and for generations to come but also U.S. foreign policy. A Trump second term would likely see a final rapprochement with Putin’s Russia, likely the formal demise of NATO, and Trump aligning more formally and firmly with more autocratic regimes globally. It could well mark the final demise of the Western liberal market democratic model which has been dominant since WWII and super dominant since the collapse of the Soviet Union in 1991. The new model would be more akin to Russia’s power vertical/sovereign democratic model – a statist/oligarchic elite will dominate the political process – it might also come hand in hand with the death of truth.
Suffice to say these elections are really massive.
Second, I think it is important to understand Trump to comprehend that almost everything he does, and has done over the past three and half years in office, is to ensure victory in these elections. Because of the risks of legal jeopardy he likely faces – just read all the tax stuff – if he leaves office, these are must win elections for Trump. And I think he will do almost anything to win these elections – even to contest the legitimacy of the vote, like many autocratic leaders have done before him. I think we must view his foreign policy stances through this prism that he simply cannot afford to lose. It’s almost akin to similar challenges facing autocratic leaders globally, whether that is Robert Mugabe in Zimbabwe, Muammar Gaddafi in Libya, or Aleksandr Lukashenko in Belarus. These leaders cling to power and stall any succession as they are worried what happens to them after their fall from power. I would argue this is also the case for Trump.
If one takes the above playbook, then this explains Trump’s really perverse stance against his own intelligence community towards Russia, his weird bromance with Recep Erdogan in Turkey, and also I think the decision to move the U.S. Embassy to Jerusalem. Trump seems eager to curry favor with autocratic foreign leaders because they offer him potential bolt holes from the U.S., if he is ever faced by legal threats at home. Israel has no extradition treaty with the U.S., and after the Jerusalem embassy shift and concessions on the Golan Heights and settlements more generally there is no way an Israeli leader would offer Trump up to a U.S. prosecutor. Same could be said about Putin – the PR/intelligence win for Russia of offering Trump an Edward Snowden-like sanctuary would be simply immense. Perhaps the same could be said of Trump’s approach to North Korea, albeit even for Trump’s asylum in North Korea would be a stretch, albeit Dennis Rodham enjoyed his stays.
Third, so it seems clear that Trump will only leave office kicking and screaming, likely quite literally. This means the chances of a contested U.S. election are quite high, even a base case now given the polls. The chances of a U.S. constitutional crisis seem quite high, and that has to be bad for markets, if lasting months. That could mean risk assets struggle, the dollar likely rallies in the near term but it could then lose ground to global safer haven assets, CHF, Yen, Euro and gold. The hope will be of a resolution by inauguration. But the risks are not zero for mass demonstrations, militias and troops on the streets of U.S. cities, and an almost Belarus style round of mass demonstrations and standoffs – perhaps 20-30% chance, if not more. Incredible that this is the USA 2020, literally unthinkable four years ago. But not unthinkable in the Trump world.
Fourth, so what is a good US election outcome for markets?
I would say a decisive win either way, and anything which avoids a disputed, contested election. The hope is either side wins decisively. A Joe Biden win is probably better for Emerging Markets as it suggests win-win deals with China around trade (think more how NAFTA renegotiation panned out), and easing of tensions with Western market allies, a more multilateral, rational, logical attitude to trade deals and foreign affairs more generally. NATO survives, is strengthened and the US rejoins the Paris climate accord, plays ball with the WTO, IMF, WB et al. Things will be different in that a Biden presidency will be eager to ensure the U.S. gets its money’s worth from participation in these multilateral institutions – so no free ride for China on the One Belt One Road, so that means bailing in of China loans to the DSSI initiative. But net, a Biden win would be good for the global economy and global trade, and therein for emerging markets – breathing life back into globalization and it’s near-death experience under Trump. The U.S. will go back to being a global partner, rather than adversary for its traditional allies, and others that are willing to play a constructive role.
A decisive Trump win will initially be good for risk assets – relief of no contested election. And U.S. markets will likely react well given that this means a continuation of policies that are good for Wall Street, if not necessarily Main Street – lower taxes for big business, less regulation, pro Carbon energy policy. But I think it’s less positive for emerging markets as it suggests a continuation of the trade wars mantra, which risks less global trade and less global growth, and less joined-up global development strategy – and I think the lack of a multilateral global approach cost the world heavily in the recent Covid outbreak. The dollar rallies, but it’s hard to see emerging markets foreign exchange doing well. It means less emerging markets growth, more income disparity in these countries, more autocracy, and risks of more social unrest and political instability corruption – with the U.S. looking the other way, even promoting all that. Emerging markets leaders respond with more autocracy, and recession, and I think that is ultimately bad for investment and growth.
Fifth, which emerging market leaders should be worried by a Biden presidency?
It’s tempting to just argue that a New Democratic administration would be bad news for autocrats globally and good news for democracies. But the reality is that the Biden administration will have a first priority at home fighting COVID-19, getting the economy back on track, and foreign affairs will be less of a priority, at least initially. And while human rights are likely to take a more central role in shaping foreign policy – expect Magnitsky sanctions to take center stage – but it is still likely to be a realpolitik foreign policy stance. Priorities will be reshaping the relationship with China in U.S. interests, getting a better trade deal which addresses the structural challenges around IP. But also calling out China on the Uighurs and Hong Kong. Similar.y the Biden administration will have to balance off economic and strategic interests against concerns around democracy and human rights in places like Saudi Arabia, Turkey, Egypt and Russia, amongst others. I think there will be mean reversion, pre-Trump, in many of these relationships, but with more focus on calling out human rights abuses. Russia might be the exception, given the history.
Sixth, but specifically what about Russia?
Russia is I think a bit different to China, as it does not represent a direct economic or even strategic challenge to the USA. Russia does not threaten US global hegemony as China does. But Russia has perhaps presented a more immediate, and perhaps more direct threat to the very way of US life through its intervention in the US and Western elections. Many would argue that Russia is trying to destroy the very system of Western Liberal market democracy, by corrupting that system from within – see Catherine Belton’s book Putin’s People, or Luke Harding’s Shadow State. China is involved in a more straightforward, almost Cold War-style global battle for supremacy and hegemony with the West. But it is not really trying to undermine the U.S. from within – albeit some people might dispute that with China’s OBOR. But I think the fact that Russia so blatantly has tried to undermine the Democratic Party, the Clinton and Biden campaigns, that it is hard to see this going unpunished from the Biden presidency. The Biden presidency will be “eyes wide open” on Russia, much more hawkish, and I think willing to match Putin blow for blow, action for action. It will want to meet strength with strength, learning I think from the Obama administration’s mistakes of failing to call Putin to account or to call him out for his numerous misdemeanors. Inevitably this means a strained and difficult relationship between Russia and the US. The Biden presidency will look to push Russia back in Europe, in Belarus, Ukraine and even Turkey.
On the basis of this, and with polls showing Biden still set to win the US election, I expect Russia to try and remain on the front foot, to set the stage to negotiate with the new administration, and taking advantage of a weak Trump administration. I argued back in a piece in July that we could see Russian intervention in places like Belarus, Nagorno Karabakh and Ukraine. That seems prescience now, as this has played out in at least two of those stress points. I would now watch Ukraine in the period to the elections in the US, and inauguration in 2021 – local election in Ukraine in October are an obvious stress point. The Kremlin will want to get ahead of the Biden presidency, take strategic advantage wherever it can to be in a strong position to negotiate with the incoming administration.
Seventh, what about Turkey?
There are plenty of stress points already between the U.S. and Turkey, be that the Kurdish issue, Syria, S400s and Turkey’s relationship with Russia, the Eastern Med, Libya, Gulen, Halkbank, democracy and human rights. And it’s is fair to say that currently Turkey has few friends in the DC establishment, and Biden himself has been harsh in his criticism of the Erdogan regime. But I think in the end, Turkey is not Russia, it is still a NATO ally, and key partner in the Westen alliance and in a difficult region. Wherever possible I think the Biden administration will try and work with Turkey and bring it back into the Western fold, and I think also mindful that Turkey is still a democracy and Erdogan will not be in power forever. And I think notable that in terms of the Western – Russian tug of war for Turkey, Russo-Turkish relations have recently suffered setbacks in Libya, Syria and NK. Turkey now seems to have more interest in settling back into the Western alliance – indeed recent Israel – Gulf peace deals, leave Turkey increasingly isolated in the region, and arguably more dependent now on the West. I think the Biden team will work to build on this latter fact. We could see the U.S. take a leading role in reaching an Eastern Med energy deal, with a win-win and this could even take momentum into a broader settlement on Cyprus.
Eighth, on Iran the Biden presidency will go back gone JCPOA deal, toughened up, and this will strain relations with Israel and the Gulf states, but they will get over it. It means more oil pumping into global market, but I guess likely with less coming from the US, given the Biden administration’s about-turn to Trump’s energy policy at home. Watch The reset with Iran for how it impacts on the impasse in Lebanon – that country needs some good news.
And on Iran, and connecting back to point two above, I really fear a “wag the dog” scenario from Trump in the dying days of his rule, and in a scenario where he fears losing the election, or he faces legal jeopardy post-election before inauguration. Given the logic he will do literally anything to stay in power I fear he will concoct a foreign policy crisis, requiring US military intervention – obvious places for this would be Iran, Hezbollah in Lebanon or Venezuela, but I am sure there are other dogs he could look to wag.
