The IMF warned of the risk of geopolitical splitting of the world

A special operation in Ukraine could lead to the fragmentation of the world economy into geopolitical blocs. This will prevent countries from jointly fighting global problems, including climate change,

The International Monetary Fund (IMF), along with traditional economic and financial risks (tightening of monetary policy, slowdown in economic growth in CHINA, rising energy prices, etc.), attributed the risk of its division into geopolitical blocks to negative factors in the development of the world economy, that arose as a result of a Russian special operation in Ukraine.

“A serious risk in the medium term is that military actions in Ukraine will contribute to the fragmentation of the world economy into geopolitical blocs with clearly distinguishable technological standards, cross-border payment systems, reserve currencies,” the fund said in a report published on July 26.

At the same time, at the moment, the IMF does not see significant signs of "reshoring" (the return of production to their homeland from countries with lower costs) or trade deglobalization. Global trade is more resilient today than expected at the start of the covid-19 pandemic, according to fund analysts .

However, if the trend towards geopolitical fragmentation intensifies, this may reduce the effectiveness of multilateral cooperation, including in the field of combating climate change. Going forward, such disunity could also lead to "the current food crisis becoming the norm," the IMF warns.

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Is the world moving towards a multipolar system

A serious supply crisis in the world is confirmed by indices showing the state of global supply chains. For example, the GSCPI (Global Supply Chain Pressure Index) has been at historically high levels since December 2021, which means a record depth of violations of global supply chains.

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“Against the background of such unprecedented supply shocks and the disruption of global supply chains, reshoring processes, the likelihood of a deglobalization of the world economy or its regionalization is growing. This can lead to the formation of a multipolar system of regulation in the global economy,” predicts Valery Mironov, Deputy DIRECTOR of the Institute for Development Center of the National Research University Higher School of Economics. According to him, the emerging global multipolar socio-economic system, by definition, can be much more unstable than the bipolar one (established during the Cold War, with centers in the United States and the USSR) or the unipolar one that replaced it, when the United States dominated.

Given that the world is unlikely to live in a conflict-free state in the coming years, the expert identifies four scenarios for the development of the world economy (including one that involves the division of countries into blocks):

"economic regionalism"  - a world in which two or three large blocs are emerging, characterized by relatively closed trade flows and financial policies; modified "Western centrism" (preservation of the status quo): a highly coordinated and financially homogeneous world; "fragmented protectionism" , or "war of all against all": a world characterized by division, conflicts, currency controls, temporary alliances; Finally, the most optimistic scenario is building anew balanced international relations and shaping them into a new system of economic regulation that has overcome the shortcomings of a unipolar or bipolar world.

Internal scenarios for the Russian economy should be superimposed on these scenarios for the development of the external environment, says Mironov.

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With whom will RUSSIA unite

The risk of dividing the world economy into geopolitical blocs is exaggerated, says Maximilian Hess, a researcher at the Institute for Foreign Policy Studies in Philadelphia. In essence, China is only interested in trade with Russia, where it sees profitable deals and an opportunity for quick earnings. And since the sanctions regime against Russia is becoming global (and Chinese companies are forced to reckon with Western sanctions), this is pushing Russia to unite on geopolitical grounds with countries such as Syria, Belarus, Cuba, North Korea, Venezuela, Iran, the expert told RBC.

“If it can be called a geopolitical bloc, it is too small. Technological standards will be much lower, cross-border payment systems will be less efficient, and the possibilities for using alternative reserve currencies for Russia are very limited, ”Hess believes.

In April, at a meeting of BRICS finance ministers, Russian Minister Anton Siluanov said that the sanctions are pushing the association countries to the need to speed up work in such areas as the use of national currencies for export-import transactions, the integration of payment systems and cards, and their own financial messaging system.

At the same time, experts from the VEB.RF Institute for Research and Expertise pointed out in a report in June that Russia’s partners (such as China, India and the EAEU countries) are faced with a choice – to strengthen cooperation and mutual trade, taking into account the opportunities that import substitution processes open up in Russia, and strengthen financial sovereignty or weaken ties (including due to the risks of secondary sanctions) and reorient to other, non-sanctioned markets.