The Rivers Run Through It

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Geopolitical risk is real, with human and business consequences for the unfortunate, the unlucky, and the oblivious. Parsing and understanding this form of risk will not come from just a sole recourse to normally distributed historical data. The successful global risk taker is a student of geopolitics and does the requisite homework. Risk managers must become sensitive to aspects of global resilience and especially to areas where the international system may be vulnerable and prone to dislocation – the hatchery spot for gray and black swans. In a way, this puts an entirely new spin on the idea of a “diversified portfolio”. It is here where thoughtful position-taking, intelligent hedging and/or speculation can benefit the risk manager, investor and lender.

Among other things, the Russia’s invasion of Ukraine toward the end of February prompted analytical types to peruse again their bookshelves. They have been seeking a greater understanding as to why such a mid-twentieth century event should have taken place in a fully integrated, post-modern world. We were supposedly beyond such instances of military incursion, beyond all that.

In a post-modern world, where we consider every viewpoint to be valid in its own way and where we can be pluralist in the extreme, well…that kind of world requires unassailable international institutions and an uncontested buy-in from all parties in the international environment as its bedrock. After all, the big points must be solid and convincing, if we are to devote time debating the much smaller ones.

From my own nearby book stack, I pulled a copy of John Mearsheimer’s insightful analysis “The Tragedy of Great Power Politics” (New York: W. W. Norton & Co, 2014). Mearsheimer is a social scientist at the University of Chicago and is a proponent of the realist school in international affairs, or more specifically, the school of offensive realism – which sounds perhaps like some in-your-face behavior from a work colleague, but is in fact a view on how nations will ultimately deal with each other.

No matter how well-intended and how well-executed an international institution may be, the agency of sovereign nations trumps everything. In Mearsheimer’s realist world, nations have no recourse to an over-arching power that can broker and adjudicate in a definitive irrevocable way disputes between nation states.

Further, nations can never be sure what the ultimate goals and intentions of fellow nation states may be. No one is a mind reader, and no one can look into an enterprising foreign leader’s head and discern what his or her ultimate intent is. This means that manifest tangible deterrence and understood mutual advantage underwrite the world – one must watch what people do, as opposed to listening just to what they say.

According to Mearsheimer, national leaders must be “realistic” about the world around them, and they must be “offensive”, seeking to accumulate as much international discretion and capacity as they can, if only to position their countries in the most resilient and defensible way vis-à-vis other states – whose true and sincere intentions can never be fully known.

And, of course, in this fog stemming from uncertainty and human nature, nations encounter limits and challenges: Who should have what, and when? Who should be able to do what, and when? These raise the stakes and can lead to conflict, even to “kinetic” conflict. And potential impasses, misunderstandings, unmet resource needs in the face of limited resources, and contested claims are all around us.

To cite one, Mearsheimer points to the rarefied Tibetan Plateau, which he notes is “the third largest repository of freshwater in the world, ranking behind the Arctic and Antarctic”. The Tibetan Plateau, Mearsheimer goes on to explain, “is also the main source of many of Asia’s great rivers, including the Brahmaputra, the Irrawaddy, the Mekong, the Salween, the Sutlej, the Yangtze, and the Yellow…”.

Being a country of roughly 1.4 billion people, China sees the hydrological and agricultural use of these different river systems, Mearsheimer tells us. And China is seeking to make use as such, developing water infrastructure and diverting the flow of different river systems toward the “heavily populated areas in eastern and northern China”. Carried out fully, this would of course have consequences for the survey of regional states that otherwise depend on these rivers downstream.

Is there effectively an international institution or set of international institutions which can adjudicate and manage China’s actions as it seeks to re-engineer these vital river systems? Not apparently. Can China continue to pursue such steps if it chooses to? As a developing regional hegemon, it probably can. Where does this leave China’s regional neighbors? In a position where they must negotiate and maneuver, relying on their ability to form balance-making alliances and on inducements they can offer a strong regional neighbor to behave in more preferable ways.

The parceling out of the Tibetan Plateau watersheds is not the only such instance. Other areas in the world are disputed, other rights and prerogatives are contested. Ultimately, nations respond to deterrence – testing or complying with it – and perhaps shared interest – if it is demonstrable, cultivated enough, and convincing. As Mearsheimer might say, they – nation states – must take care of themselves first, because no one else will do so. Each is fundamentally responsible for its own survival, as Ukraine now sees. There is no global platonic guardian to appeal to.

This means, in essence, that the investor or lender must consider the geopolitical – where things can break, where discontinuities can appear. Such an exercise will inform an awareness of where returns can more easily compound and where a more speculative situation may be developing. Geopolitics reminds us that investment results are not a matter of blind (modeled) extrapolation, they will always depend on due diligence, analysis and judgment.

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