We have previously written about the possibility of joining together a sequence of games to generate a set of nested games (see here for more detail). In pursuit of that objective, we have now played one of the middle games to see how it all unfolds. The basic premise is that a set of geopolitical events drives movements in the financial markets. There is a set of actors who can influence outcomes within those markets, and that provides the basis for the game. To complete the description, the game then provides a set of market outcomes which can be used as inputs into a game examining how individual firms respond to rapidly moving markets.
We played the middle game where geopolitics is driving market movements and where actors can respond and influence those market movements. The geopolitical frame we chose was 'The Belarussian Right Hook' (see here for more detail). To recap, the setting is that Russia uses the cover of wargames in Belarus as a launch pad to complete an invasion and absorption of Ukraine. Initially, things go well, but then they start to go off plan. NATO becomes involved, highlighting a tension between NATO and the institutions of the European Union. Eventually the US becomes involved. As that happens, China becomes a bit more aggressive in East Asia. The scenario ends with Russia expelled from Ukraine - but not Crimea - and European (but not necessarily NATO) forces in Smolensk, along the line of the Dnepr River. This represented a 30 day time frame of geopolitical drama.
Within that framework, the markets fluctuated wildly. We played with five actors, representing an amalgam of the Central Banks and Treasuries of the US, the ECB, China, Russia, and Japan. Each player was given a set of indices that they had to defend and a range of instruments to use in defending them. Collaborative play was encouraged and the players took to supporting each other in their game play. The players are gamers and not Central Bankers, so they brought to the game a more general knowledge than that of subject experts. The first four turns were played as part of a session delivered to the Edinburgh Futurists, with the remaining six turns played by e-mail after the event.
The broad results of the game were both interesting and instructive. The players rather rapidly formed two groups. The US, ECB, and Japan on one side (the Allies); Russia and China on the other side. If anything, China and Russia did a bit better than the Allies. To a certain extent, the game deepened the dependency of Russia on sales of hydrocarbons and minerals to China through long term contracts for supply at favourable rates, whilst driving the spot prices for hydrocarbons and minerals on the world markets to prohibitive levels. The Commodities Metals Index rose from 100 to 124 and the price of oil rose from $50 per barrel to $80 per barrel. Further along the value chain, the Chinese Overseas Trade Index rose from 100 to 107 and the Shanghai Composite Index rose from 3,500 to 3,579. From the Russian and Chinese perspective, the geopolitical adventure was good for business.
Russia beggared it's customers in Europe and the US. This was reflected in the falls in the stock indices over the 30 day period. The S&P 500 fell from 30,000 to 19,425; the Stoxx 600 fell from 400 to 191; and the Nikkei 225 fell from 27,750 to 17,610. This had repercussions in the bond markets and the global currency markets. The 10 Year US Treasury went from 1.00% to 0.83%, reflecting it's safe haven status; the 10 Year German Bund went from -0.50% to -0.83%, representing a loss of confidence that induced large doses of QE; whilst the 10 Year Japanese Bond went from 0.25% to 0.17%, representing a loss of faith in equities. As for currencies, the WSJ $ Index rose from 100 to 133, again highlighting the safe haven status of the US Dollar, whilst the Euro moved from €1.25 to the $ to €0.91 to the $. There was a lot of selling of Euros. From the perspective of the Allies, war in Europe was not at all good for their economies.
I think that we can draw some tentative conclusions at this point. The most obvious conclusion is that war is an expensive business, not only in human and financial terms, but also in terms of opportunities forgone. It is much better to stay out of a conflict than to rush into one. That isn't always possible and in the game the US was drawn into this conflict rather reluctantly. However, once the conflict was started, the Allies readily acted in concert and Russia acted to gain support from China, who was more than willing to provide it. This is a conclusion we have drawn from other games, to an extent that we now see this as something of a default future. Towards the end of the game, US involvement in Europe created room for a bit of Chinese adventurism in East Asia. A Chinese expeditionary force had set sail into the East China Sea, possibly towards the Senkaku Islands, possibly towards Taiwan. This is one potential continuation point for the game.
The end of the game left us in a position where the economies of the Allies needed a cessation of hostilities. The unresolved questions of Kaliningrad and Crimea had been left on the table. There was also a question over Belarus that we didn't really tease out. In terms of development, I think we can take this game in two possible directions. The first is to play out the Hedge Fund game - the final tier in the nested game system. That would be a fun thing to do. The second possibility would be to game the peace conference and throw in the thorny questions of Kaliningrad, Crimea, and Belarus. That would make a great matrix game for the future.
On the whole, I'm pleased with the progress that we have made. We are starting to generate sets of games that dovetail into each other quite well. They are generating some interesting ideas for spin-off games, and we starting to reach a wider audience. I guess that's a cue for more of the same.
Stephen Aguilar-Millan
© The European Futures Observatory 2021
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