Even before the invasion of Ukraine, the five-decade growth of post-WWII globalization was in retreat, with myriad unintended consequences, and opportunities as well.
Author and advisor to CEOs and C-Suites Peter Zeihan has been watching it all play out, supplying a rich vein of geopolitical insights in books like The Accidental Superpower, The Absent Superpower and Disunited Nations. Zeihan has been a regular speaker at our Chief Executive leadership events, sharing his knack for mapping big-picture perspective to pragmatic business advice.
This June, he’ll publish The End of the World Is Just The Beginning, his take on, as he puts it “what happens with the major economic sectors post globalization”—a world where countries and regions make their own goods, grow their own food, secure their own energy and “do it all with populations that are both shrinking and aging.”
Amid the carnage and chaos of Russia’s unprovoked assault on Ukraine, I reached out to Zeihan to get his take on the invasion, and more, what happens further down the road—this month and the next and into the decade to come. What patterns does he see developing that will reshape business and society and how will Russia’s attack ripple through them? How should CEOs—especially at mid-sized firms—prepare?
What follows are excerpts of that conversation, edited for length and clarity.
What’s your take on how Russia’s invasion plays out? What do you think happens in the medium term as a result?
There seems to have been a belief at the top [of Russia’s government] that this might’ve been a rollover war. That’s where we saw some of those Hail Marys in places like Kharkiv or Kiev in the early days. It’s very clear that that’s not how it’s going to go.
So, the Russian army is falling back onto what it’s very good at and that’s artillery use. We already had the most serious artillery assault on a populated area since the Chechen War in the case of Kharkiv and it’s probably going to have a larger one starting in Kiev. From a military point of view, this is in the process of getting very, very bloody.
In the medium term, the Ukrainians don’t have a chance. They’re outnumbered, they’re outgunned, they’re outmaneuvered, they can’t control the airspace, the Russians have better equipment with longer reach that’s more lethal. It’s just a question of how much are the Ukrainians able to bleed them during the war and from partisan activity in the occupation to come.
That’s probably pretty high. This is a country with 45 million people and this is not Iraq or Afghanistan. You go out of the cities in Ukraine and you get into hinterlands that have fields, that have farmhouses and villages and small towns. There are endless places for partisans to hide.
The Russians are going to be very, very brutal moving forward. We’ve already seen footage of what are almost certainly war crimes coming out in almost real time. Since Ukraine still has a bit of an infrastructure and it borders a number of other countries that have cell towers, it’s not like the world is going to be unaware of this. It’s going to be in our faces pretty much constantly from now on.
What are you going to be watching for that CEOs should be paying attention to and watching for over the next couple of weeks?
The first thing is probably going to happen in the next few days. There are a number of armored pushes that the Russians are making. The most significant one from an economic point of view is coming out of the separatist-held territories in the southeast and out of Crimea. They’re moving to meet on the coast of the Sea of Azov and right now, last I checked, the city of Mariupol was completely surrounded and under constant artillery barrage and I’m sure it’s going to fall in the next day or two.
Once that happens, there will be nothing restricting the Russians from sending whatever forces they want from Russia proper through southern Ukraine by the Crimea and targeting the economic capital in Port of Odessa. That is the single largest loading facility for wheat in the world and we have a situation where the world’s largest wheat exporter is invading the world’s fifth largest wheat exporter and it has decided that it needs to destroy any infrastructure in order to control the country.
Wheat has been very unsexy in the world for a very long time and that ends right now. We’re going to see record prices for wheat coming by the end of the year. The Russians are also interrupting the fertilizer market—40% of global potash and anything that happens in the energy market hits the nitrogen fertilizer market.
We’re already at levels of fertilizer prices that will prevent a lot of farmers in a lot of parts of the world from using them, which means we’re going to have shockingly lower yields this harvest season on top of the wheat shortage. One of my big concerns in the long run has always been that when globalization breaks, it takes a whole wider culture with it and that costs us lives. That starts now.
What’s your sense of what’s going to be happening longer term in the energy markets?
Probably this month, certainly next month at the latest we’re going to see an end to Russian exports of energy going to the West. There are relatively limited supplies that cross Ukraine proper, roughly 2 to 3 billion cubic feet a day of natural gas, roughly 1 million-ish barrels of oil. But there are a bunch of pipelines that are just north of the Ukraine and Belarusian border that are going to be easy targets for partisans.
And whether it’s because the Russians cut off energy flows to punish the Europeans or to influence the Europeans, or the Ukrainian partisans blow up their own infrastructure, or sanctions take it offline, or the Turks interrupt it because they’ve activated the Montreux Treaty which allows them to restrict shipping through the Turkish Straits, one way or another, all of the Russian flows that go west are going to stop this year.
That’s the second largest flow of oil in the world. That’s the single largest flow of natural gas in the world. There are dozens of follow-on implications.
How do you see this impacting the receding globalization that we’ve been seeing in the last few years, the rise of nationalism? Does this cause a deeper retrenchment or does this somehow ignite a spirit of internationalism?
I would love the latter. I really would. I would love for the whole world to come together the way the Europeans have come together, much to my shock, a pleasant shock, in the last week. I would love for everyone to use this as a warning of how it can all go to hell so very quickly.
I am not hopeful. I have a feeling that everyone’s going be scrambling. In fact, I would argue that everyone already is. So, for example, the food issue. The Chinese have a lot of problems. They’ve mismanaged COVID, their vaccine doesn’t work, their leader has dropped into a neo-Maoist tyranny. He’s mismanaging everything. He struck the messenger so many times, nobody wants to bring him bad news.
In that environment, the bureaucrats are getting into knife fights because they fear if they don’t carry out their orders as he explained it to them, that they’ll be killed. And the other bureaucrats feel the same way and if those issues clash, no one wants to tell the boss.
So, you get power outages. You get health issues. You get trade issues. And in that environment when the Chinese Communist Party can’t guarantee jobs or health or electricity, all that’s left is food supply. So, they banned the export of phosphate fertilizers. That’s never coming back to the market, not unless the Chinese political system changes dramatically at the top.
We’ve already got countries melon-scooping out the parts that they think they can keep for themselves. I don’t mean to exempt the United States from this because we’re gonna be doing it very soon because once that Russian oil goes offline, Joe Biden is going to have a choice. Do we continue to subject the U.S. population to higher energy prices? And we’re not talking about $100 [barrel oil] here. We’re talking $200. Or does he use the power that was granted to him by the 2015 Energy Bill to bar American oil exports and keep it all bottled up here to keep prices under control? He’s a populist. He’s gonna go with option B.
In the environment we’re moving into very quickly, the world is going to lose access to Russian crude and American crude at the same time. That’s going to be catastrophic.
I find it really hard to imagine that the [much] of the world will ever get above or below $150 again, and in places that are at the end of those long supply lines that go out of the Persian Gulf, you know, Japan, China, Korea, I think $250 is going to be their new normal. And that assumes no one else tries to take their own melon scoop to how they perceive the problem. In that sort of environment, I don’t find that very likely.
Does this potentially accelerate the transition to a more electric economy, EVs?
No. Let me kill that EV idea right now.
It’s so far past ridiculous to think that we can do EVs in a deglobalized system. Oil has a complicated supply chain. It uses Venezuela and Canada and Iraq and Iran and Kuwait and Russia. It’s messy. We’re familiar with what that mess looks like because we’ve been dealing with it since World War II.
But EVs need aluminum and chromium and rare earths and lithium and lead and silver and gold. You are replacing one problematic supply chain with 13 more and you still need Russia to make it work.
So, no, EVs are dead. You might be able to have a few in North America because we could source a lot of things from Australia, Southeast Asia and Western Hemisphere but in a global trend, they are dead with deglobalization.
What are you bullish about?
I’m not a financial analyst so take this for what it is but I look for things that are American-based so you don’t have to worry about security issues, demographically driven for the demand because the United States actually has a population that is replacing itself, not nearly as quickly as we probably would like but it’s certainly nowhere close to terminal. And if you factor Mexico in the equation, Anglo-America by far has the healthiest demography on the planet.
If there is a product that is energy intensive for its production, courtesy of the shale revolution and with some contribution from solar in the southwest and wind in the Great Plains, the United States has by far the cheapest electricity in the world. So, if it’s something that requires energy to make it work, I think it’s going be great [to make it in the U.S.]
We have 11 steel foundries under construction in the country right now and we’re seeing a huge amount of reshoring coming back from China because we’ve discovered that there’s not a single manufacturing supply chain that we are aware of that can be done in East Asia more cheaply than here.
The only reason we even think of China today as a significant manufacturing power is because of the preexisting sunk cost of the industrial plant. You don’t lose that overnight. But wow, we’re moving faster than we did during World War II.
And as a kicker, if the product from that sector, demographically driven, American based, cheap energy, if the product is something that you can put in a box or a barrel and export it, that’s kind of the gold standard. Because if you can make it reliably at high quality and low prices in the United States and then send it to somebody who can’t, that’s some serious arbitrage.
Talk a little bit about the impacts of all of this on smaller companies, on mid-market companies? What are these trends going to mean for them?
Well, it’s going to really depend upon what sector they’re in, of course. One of the things that we’re seeing a devolution in the system right now is those small companies are going away on a global basis and they have been for 30 years. In any system where security is taken care of, where transport is safe and reliable and cheap, the little guys get squeezed out because then it’s all about scale, it’s all about efficiencies.
But in the world we’re moving to, that’s not the play anymore. We’re moving to a world that’s more broken out, more sequestered, competing economic systems instead of cooperating ones. And in that sort of environment, speed matters. First mover advantage matters.
The fact that we still have a relatively large bevy of midcap companies, I think is going to do us very well moving forward because those are the people who are going to be remaking what it means to manufacture in this country, and those are the people who are gonna be taking these big trends like agricultural shortages and finding a way to package that food and sending to places that normally we don’t.
Our normal trade relationships are breaking. The normal supply chain relationships that we’ve depended on, the whole world for the last 50 years are breaking. So, they have to be remade from the ground up starting here.
If you don’t care about that, I’m assuming you’re really not interested in growth because the opportunities for that space are massive.