Tensions appear to be rising across the globe as two conflicts commanding the world’s attention persist. The destructive Russia-Ukraine war is now in its third year, with western nations putting up a less unified front against Russia than was initially the case. In the Middle East, there are growing concerns that the Israel-Hamas conflict which began with a surprise Hamas attack on Israel in October 2023 could turn into a wider war. Israel and Iran have undertaken significant military actions against each other in recent weeks.
One of the initial consequences of the Israeli-Hamas conflict was a series of attacks by Yemen-based Houthi rebels on cargo ships in the Red Sea. These have continued, and the U.S. military has, in a limited way, been pulled into the conflict, focused chiefly on efforts to protect Red Sea shipping lanes.
Such geopolitical events force government policymakers, central bankers and corporate leaders to contend with unique variables on a scale not experienced in decades. The impact on capital markets, to this point, appears limited, as investors remain more focused on factors such as central bank policies, the interest rate environment, economic growth and corporate earnings. Is it possible that current geopolitical conflicts could eventually cause issues for the economy and capital markets as well?
A new phase of the Russia-Ukraine conflict?
The Russia-Ukraine conflict was seen as a stalemate for an extended period, but in recent months, Russia appears to have made some advances. In addition, Russia continues to wage air strikes on various Ukrainian targets. Nevertheless, entering the war’s third year, neither side seems to be close to achieving its objectives. “Russia is struggling against the backdrop of a supreme leader [Putin] who is bound and determined in his objective of taking military control over Ukraine,” says David Bridges, senior geopolitical and security advisor at Fidelity Management and Research Company. Bridges, who had a former operations officer at the CIA, including significant time in the former Soviet Union and Eastern Europe, says Putin may have deceived himself about the level of effort that was required to potentially claim a victory in Ukraine. Yet Putin has remained persistent in maintaining military pressure despite significant casualties that have accumulated over the war’s first two years.
“Putin went into the war convinced that he can prevail, and that all he needs to do is push harder,” says Bridges. Over the first two years of the war, the U.S. and other Western nations contributed significant financial aid and military equipment to support Ukraine’s army and its ongoing operations. In late 2023 and early 2024, additional U.S. funding ran into Congressional roadblocks. However, in April 2024, a breakthrough occurred, and Congress approved a $61 billion aid package to support Ukraine’s military efforts. In the meantime, the fighting continues with Ukraine determined to prevent a further takeover of land.
Expanding conflict in the Middle East?
The Israel-Hamas conflict is the latest in a long series of Middle East military encounters that have occurred frequently. The situation intensified following the October 2023 attack on Israeli territory by Hamas. Israel responded with its own invasion of the Gaza Strip, using ground troops and massive aerial bombardment. In response, Houthi rebels have attacked commercial and military ships in the Red Sea, a major navigation waterway leading to the Suez Canal. More recently, Israel bombed Iranian targets, leading to a retaliatory strike from Iran and a similar response back from Israel. These events raised concerns that the Middle East situation could become more widespread. However, to this point, hostilities have been primarily limited to Israel and the Gaza Strip. The April funding package for Ukraine also directed funding to Israel and humanitarian aid for residents of the Gaza Strip.
Geopolitical implications
One result of Russia’s aggressive stance toward Ukraine is an expansion of NATO membership. Finland, which shares an 830-mile border with Russia, was accepted as part of the alliance in 2023. Sweden was added in 2024. Along with military equipment to support Ukraine, western nations continue to apply severe economic sanctions on Russia. President Joe Biden announced stepped-up sanctions against Russia in late February 2024.