The rise of the Crimea conflict and territorial disputes in the South China Sea suddenly raise the specter that warfare may no longer be a thing of the past. After all, politics is cultural mixing without violence and war is cultural mixing with violence.

The reason why we need to think seriously is that war will disrupt any plans for the future of Asia and our investment strategies.

We have gone through the longest peace time enjoyed in recent history (1945-today), longer than the four decades of peace between 1871-1914 and after the fall of Napoleon) 1815-54.

These long years of peace have blinded us to the risks of war, but investment allocation strategy cannot ignore the reality that even the expectations of war changes fundamental market behavior. The old adage “buy with the cannons and sell with the bells” suggest that we should buy when everyone is afraid, and sell when everyone thinks prosperity is forever.

During my travels in France this month, I had the chance to read Israeli military historian Professor Azar Gat’s monumental book, “War in Human Civilization” (Oxford University Press, 2006). His survey on the anthropological, geographical, cultural and sociological origins of war concluded that war and civilization co-evolved in ever-growing complexity.

Professor Gat has discerned that in the 20th century period of Anglo-Saxon hegemony, there is a pattern away from war, because the British and American empires tended to deal with competitors and rising powers through a sequence: “from isolationism to appeasement, to containment and cold war, to limited war, and, only most reluctantly, to fully fledged war.”

The engagement phase works on the assumption that with increased prosperity through free trade and investment, prosperity and wealth would commit the rising powers to peace, because war would create such losses that no one wins from armed conflict.

But Gat reminds us that throughout history, competition between different powers often enter into arms races that eventually led to war. War was not intended, but policy mistakes, misunderstandings and populist anger from nationalist, religious or revenge motivations can trigger off such arms races. For example, one of the reasons why the Pacific War occurred was because of the denial of oil and strategic resources by the Allies to Japan.

The push for liberal democratic movement on a global scale arose from the assumption that when everyone is rich, there will be a peace dividend. Unfortunately, inequality from a whole host of reasons, including water, food and energy scarcity, is rising which is stoking civil unrest, failed states and the rise of terrorism and illegal migration. Conflict tensions also rise because of competition for resources and revival of nationalist and religious fervour.

In the Crimea case, Russian nationalism arose from a mixture of national anger after the collapse of the Soviet empire, where a large number of Russians were left behind in Crimea and other neighboring areas.

There is also an ideological difference in worldview. Under the common law perspective of the West, the default governance model is the Montesquieu Trinity ― the balance of powers between the Executive, the Legislature and the Judiciary. In the East, using China as one historical model, the balance was between the trinity of the civil and military bureaucracies and a censorate or inspectorate that checks that the civil bureaucracy would not be too corrupt and that the military would not engage in coups against the state.

Notice that the signal difference between the two models is that the Western model assumes that the military is not a major factor in national governance. The fact that in Eygpt and Thailand, generals are back in charge suggests that this model is not always valid.

The possibility of war changes completely the investment calculus. Gold prices should have fallen with the prospect of higher interest rates. They are holding up because during periods of uncertainty, gold has a certain risk premium.

The price of oil and gas will be key to future global tensions. Sixteen percent of European energy needs flow through Ukraine, and half of Russian government revenue depends on oil and gas production. High oil and gasprices will benefit Russia and the oil producers, whilst hurting the oil importers. Since the U.S. has become the world’s leading energy exporter with onstream production of shale oil, geopolitical reasons suggest that low energy prices may be used to reduce conflict tensions.

The first is that low oil prices will be inflationary and this will be important for the recovery of the U.S., reduction of the real value of U.S. debt and helpful for the recovery of Europe and Japan, which are both oil importers.

The other effect will be the reduction of the economic capacity of Russia and oil producers in the Middle East to spend on the military. Drilling for expensive oil in territorially sensitive waters will not be so economically viable.

Low energy prices have other side effects. One dilemma for investors is the ongoing and possible write-downs for huge investments of listed oil and energy companies in exploration for oil reserves, thinking that high price oilwill be forever. In fact, recent research suggest that if o il prices remain low, then a lot of reserves of the listed companies found in deep water and high cost production areas will be in trouble. For example, if the world were to agree to limiting carbon emissions to the current levels, many of these reserves of the listed companies would not have high value. In other words, oil and gas shares may suffer because these reserves are unlikely to be tapped.

For these reasons, if risks of war and inflation were to increase, higher interest rates will slow Asian economic growth, unless some governments decide to use military expenditure to push up economic activity. Share prices in armament industries will rise. That of course is exactly where the arms race led to world wars in the 20th century.

With nuclear capacity spreading throughout the world, logic tells us that a 2lst century war will end up with no winners.

If we want to prevent war, start investing in peace. 

By Andrew Sheng

Andrew Sheng is distinguished fellow of the Fung Global Institute. ― Ed.

(Asia News Network)