Xi Turns West - Turn 1 (2025)

The first turn in any game is always a little tentative as the players get to grips with what they are supposed to be doing and as the relationships between the players start to form. The structure of the game channels players along a number of lines. This game was no different. The aim of the game was for China to build a transport and hydrocarbon corridor across the map. To do so, they would need the active co-operation of Iran, Russia, and Turkey, three nations whose objectives may not be necessarily aligned. Ranged against this is a Saudi Arabia looking to contain Iran, and seeking the assistance from a disengaging United States to do so. Caught between these forces are Iraq, Syria, and Kurdistan. The initial moves in Turn 1 followed more or less those lines.

The Kurdish regional government in Iraq sought to develop the Khor Mor gasfield and the Bina Bawi gasfield. These two gasfields were to be linked by a pipeline. This was largely achieved due to the provision of funding from the US. The intention was to export the gas, but no developmental pipework was undertaken to any of the export outlets in the region. The anticipated economic windfall failed to materialise and the hoped for gas revenues remain in the ground. In the process, Kurdish-US ties were strengthened, but an export route for Kurdish gas remains elusive. The Kurdish wealth and reputation has not been enhanced by more than a very slight degree.

Elsewhere in Iraq, the government in Baghdad continued to work upon delivering broader economic prosperity within the country. This was based upon the relatively high price of oil and the relative lack of volatility in the global energy markets. Oil and gas exports continue to grow, underpinning a wider expansion of the non-oil private sector, which has allowed a shrinkage in public sector employment. The relative prosperity has allowed the government to propose a conference to discuss constitutional reform in the near future.

Iraq has seen little attention from Iran to date, despite the running down of US base facilities in the Iraq. This is largely because Iran has focussed on internal economic development. A network of de-salination plants have been constructed along the Persian Gulf, using electricity from Iranian oil fired power plants and capital derived from the proceeds of Chinese involvement in the economic development of Iran. Associated with the de-salination plants is the construction of a network of water delivery pipelines to large centres of population and areas of high demand for agricultural irrigation.

This process has been enhanced through the involvement of Chinese entities in Iran. The surveyed BRI route has been built out. An accompanying oil pipeline has also been built. The gas route from Bandar Abbas to Tehran, via Eshfahan, has been surveyed and will be ready to build out at a later date. In 2024, a naval presence was initiated by the visit of a Chinese carrier group to various Iranian naval installations. A Russian naval group had been planned to take part in the exercises, but these plans didn't materialise. There are rumours of Chinese naval surveyors taking particular interest in the port facilities at Basheri.

The economic stimulus created by the construction work in Iran, along with the provision of water for human consumption and irrigation in agriculture has led to a rise in prosperity in Iran. As the economic situation has started to improve, a happy face has been placed on Tehran to demonstrate the growing public approval of the regime.

Russia had hoped that a degree of accommodation between the US and Iran over the Joint Comprehensive Plan of Action could be accomplished. This didn't happen. It acts as an impediment for the Russian plan to establish a new co-operative multilateral framework for the Middle East. Saudi Arabia and Iran have made expressions of support for this move, but these have remained vague expressions rather than having anything tangible attached. The regional framework proposed by Russia is in it's early days and hasn't really got off the ground just yet.

Russia - along with Iran - continues to support the Syrian government in military terms. The Syrian government took steps to assert control over it's core areas in Syria with some degree of success. Whilst attempting to keep a focus on purely military targets, some civilian collateral casualties were inevitable, given the nature of the conflict. There has been a tightening of security restrictions within the area, which have proven to be rather unpopular. Whilst remaining loyal to the government, the control over movement exercised by Russian and Iranian military elements, and the sheer corruption of Syrian governmental elements, is embittering the Aalawite population. The loyal population has become deeply unhappy with the regime, which is reflected by an unhappy face in Damascus.

The Syrian economy continues to deteriorate. The sale of oil continues to be inhibited through the imposition of western sanctions on the regime. This continues to limit the amount of public funds available. There are persistent rumours of significant arrears in army pay. This will limit the effectiveness of the Syrian military in the coming years.

The Russian naval facilities at Tartus are now fully operational, allowing the re-supply, refuelling and re-arming of Russian naval warships of all categories in the Mediterranean.

An agreement of sorts has been reached between Syria and Turkey concerning their common border and their policy towards the Kurdish population of their respective nations. This has led to a degree of stability to northern Syria, but the promised Turkish embassy in Damascus has yet to be opened.

The focus of Turkish policy is presently to enhance the standing of the Turkic culture. A cultural centre was opened at Erzurum. It is hoped that this centre would provide a cultural focus point for co-operation in the Caspian and Black Sea basins, and provide a bridge between the Asian nations and Europe.

Saudi Arabia pressed ahead with plans to develop the city of NEOM. Eventually, this is planned to become an economic and educational centre and a focus for diplomacy within the 'Arab Family'. Investments have been made in the new green economy and a variety of emerging technologies. This cultural and environmental research centre is intended to act as a focus for Arabic culture within the region that enhances the influence of the Kingdom.

In the years 2026 to 2030, the price of oil rises from $70 a barrel to $75 a barrel.

Stephen Aguilar-Millan

© The European Futures Observatory 2022

Xi Turns West - The Starting Point In 2020

From the outset, we felt that the more interesting game for this region would be the continuation scenario. What would the Middle East look like if current trends and policies were to play out? Of course, this means that we have to highlight those trends and policies, convert them into player objectives, and see how they play out. 

There are three large geopolitical trends that influence this game. All of them occur at the level of civilisational conflict. First, there is the emergence of the 'Biden Doctrine', which we take to mean that the United States will no longer act as the global policeman and will not be the guarantor of peace in the world. Second, we have the expansion of Chinese influence across Asia through the BRI programme. Third, there is a drive from Russia to escape from the strategic encirclement achieved during the Cold War. 

These trends are reflected in the objectives of the three actors. The US was tasked with maintaining a degree of influence in the region, whilst also countering the expansion of Russian and Chinese influence. China was tasked with the expansion and building out of the BRI across the region, and Russia was tasked with acquiring warm water ports in Syria and Iran whilst providing assistance to Russian client states in the region.

We wanted to include a degree of co-operation between Russia and Saudi Arabia over the price of oil, which allowed us to access the overlay of regional conflict. Saudi Arabia was tasked with keeping the United States engaged in the region, as a counter to Iran, and using Saudi financial assets to maintain a degree of internal stability on the southern shores of the Persian Gulf. The regional and religious conflict between Saudi Arabia and Iran gave us an ability to introduce a bit of tension within the game. Iran was tasked with developing its sale of hydrocarbons, internal development despite western sanctions, and becoming a nuclear state.

The potential for regional tension between Iran and Saudi Arabia also gave rise to the possibility of regional tension between Russia and Turkey. Turkey is an interesting case in hand. Formally part of the NATO infrastructure, Turkey has been drifting away from European influence in recent years and starting to embrace being an Asiatic nation. We assumed that this trend would continue and tasked Turkey with ensuring that she remained the Asian destination point for the BRI - largely through collaboration with Iran - and to secure the stability of the southern border by encouraging stability in Syria - this time, through collaboration with Russia - and by thwarting the national aspirations of the Kurds.

This final objective introduces quite well the local themes within the game. We represented two different types of state - the unitary (Syria) and the federal (Iraq). We wanted to explore these themes within the game. We did this by including the Kurdish element in Iraq, but by not including the opposition in Syria. The Iraqi government were tasked with holding the country together. This was despite a drive from the Iraqi Kurds for independence and despite a high degree of Iranian influence in eastern Iraq. The Kurdish element was tasked with achieving national sovereignty, but across Iraqi Kurdistan, Iranian Kurdistan, and Turkish Kurdistan. Syria, on the other hand, was tasked with holding the country together by maintaining the support of the Russian elements and by restricting an expansion of Saudi influence.

By 2020, much of the core infrastructure in the region was in place. However, we felt that the impact of a changing climate ought to have a sharper focus in the game, so we highlighted the development of resources to mitigate the impact of a changing climate - mainly water and food resources. We felt that we had scope to make the changing climate more of a factor than in previous games. This would have an impact upon society throughout the region and become a consequential driver of politics. Everything was set up for a collision of interests within the region. What would the players make of it?

Stephen Aguilar-Millan

© The European Futures Observatory 2022

Introducing Xi Turns West

We naturally tend to focus on the expansion of the Belt and Road Initiative (BRI) in Central Asia. This is an area that is contiguous with the external borders of China and it seems natural that this is to where our attention ought to be paid. In doing this, we naturally gravitate towards considering the relationship between China and Russia in Asia, to the neglect of other areas in which points of contact are made. This may be a mistake.

The BRI provides a grand geopolitical narrative for Chinese foreign policy out to the middle of this century. It is vast in its scope and ambition, which is nothing less than to bring the Eurasian landmass - the 'Heartland' of Mackinder - under Chinese dominion. In true Chinese diplomatic style, which goes back over three millennia, the aim is dominance rather than conquest. It is an expression through the soft power of commerce, trade, and diplomacy; rather than the hard power of military ambition and force. In this, it is distinctly Asian rather than European.

One neglected aspect of the declared plans for the BRI is the southern route - from Central Asia, south of the Caspian Sea, across the Middle East, and thence over the Mediterranean into Europe. The purpose of this game was to examine the challenges associated with achieving this ambition.

One of the more striking aspects of designing a game around this question is the degree to which a large number of layers of conflict can be found in a small space. That influenced our game design. We constructed a game that had four layers of conflict - the civilisational, the religious, the regional, and the local. Each layer had a dimension within the game, and each added a layer of complexity to the game.

At the civilisational level, the Middle East has the potential to see the approach of western civilisation - as championed by the United States - come into direct contact with the approach of the Chinese civilisation. We slotted into the game assumptions about the 'Biden Doctrine', which, admittedly, is in formation, that the United States will no longer act as the global policeman and that America no longer is willing to provide unconditional support to regimes that do not contain core US interests. This could create a power vacuum into which China could expand.

We decided to include Russia at the civilisational level. It could be argued that Russia is not quite a civilisational state in that it does not represent a way of life. However, we wanted to explore the relationship between China and Russia, and the Middle East provides a nice point of contact in which to do so. In previous games, Russia came out as the junior partner to China by 2050. We wanted to tease out the possibility that this may not be so and the game was designed to give Russia a more equal footing with China. It represents our view that if this happens anywhere, it will happen in the Middle East, which is a core territory for Russia, and which is vital to the plans for the BRI.

We placed China and Russia as broadly co-operative powers. On top of this lies the great religious struggle of the first half of the twenty-first century: that between Iran and Saudi Arabia. We added this dimension to the game, but we placed both powers as representing a more modern approach to Islam. History and geography allowed us to align Iran with China and Russia, and Saudi Arabia with the United States. These would provide the civilisational underpinnings to the religious conflict.

We also wanted to capture some of the regional rivalries. Within the dimension of the religious conflict between Iran and Saudi Arabia, we added the more regional actors of Turkey and Russia. These are potential rivals across the Black Sea. In order to roll out the BRI, China needs both Russia and Turkey to lay aside their regional differences. Turkey has been inclined more towards Europe and North America in the past, but this is now changing. Rebuffed by Europe and spurned by America, Turkey is now in the process of turning more towards Asia, with a little encouragement - and development funds without conditions - from China. We wanted to encourage this process and nudged the game into greater co-operation between Turkey, Russia, and Iran. This had the potential to act as something of a check to Saudi ambitions in the region.

These ambitions would have been felt at a local level. On this level, we wanted to examine a unitary Syria, largely backed by Russia and Iran, against a federal Iraq, largely backed by the United States and Saudi Arabia. We tested the federal nature of Iraq by giving voice - backed by Iran - to the aspirations of Kurdistan. That provided the final element in a very confused - and confusing - game.

The game was designed to represent the period 2020 to 2050, with six turns of five years duration each. The umpire team would represent a worsening climate, the energy markets, the bond markets, and all other countries not represented by players in the game. It was hard to decide who to leave out. We had a great deal of discussion about the exclusion of Israel in the game. However, the impact of Israel upon the BRI is fairly minimal, even if they are a large player in the Middle East, which we felt justified the exclusion. With nine players and three umpires, we felt that the game had the potential to become unmanageable, so we set the limit, for good and for ill, where it was.

Once we had the basic game structure, the next task was to design the opening positions for each of the nine actors. We shall turn to this in our next post.

Stephen Aguilar-Millan

© The European Futures Observatory 2022

A buyer's guide to foresight.

"How do I know that it works?", is a common objection encountered by many foresight practitioners. In order to counter that objection, it would be helpful to be able to demonstrate to potential clients examples of where foresight has worked in the past and to explain how it could well work in the future. To do this, we need some form of framework that allows us to compare what was expected from a foresight project against what it actually delivered.

We can do this within three contexts. First, before a specific project is commissioned - almost as a feasibility project that explores the proof of concept. In this respect, the framework can act as a template for building a project at the conceptual stage. This is an ex ante foresight evaluation. Second, after project has been delivered, we can use the framework to explore how well the project performed against expectations, assess whether or not the project delivered value for money, and review how convincing we find the conclusions of the project. This is ex post foresight evaluation. Third, in between the start and the finish of a project, we can use the framework to evaluate the progress of a project. This is more of a management tool to either keep the project running to plan, or to change the plan because it is no longer appropriate. This is process foresight evaluation. 

While each of these contexts has a different purpose, the general use of the framework is broadly applicable to each of them. In this piece, I shall focus mainly on ex ante foresight evaluation. In following work, I will develop the theme a bit more to apply it to ex post foresight evaluation and to process foresight evaluation.

When constructing a foresight project, we need to be mindful of three things - the shape of the project (which is the larger decision frame), the depth of the project, and the staffing of the project. I should say at the outset that different practitioners have their own favourite frameworks that determine the shape of a project. No single framework is inherently better than another, they merely reflect the mode of thinking about strategic foresight by that particular practitioner. It reflects where they learned their trade, which elements they think are more important, and, to a certain degree, their attitude towards the future.

For my part, I prefer the framework set out in Andy Hines and Peter Bishop's 'Thinking About The Future'. As I said, there are other frameworks that are equally as useful, but we have been using this one for nearly two decades and it is as valid today as it was nearly 20 years ago. The framework breaks the process of foresight into six elements - Framing (working out what the foresight project is looking to achieve); Scanning (looking at what is happening within the decision frame); Forecasting (rolling forward the scanning into the future); Visioning (examining alternative futures within the decision frame); Planning (turning the abstractions of the visioning into things that could be done); and Acting (determining a course of action and then executing it). 

It should be said that the elements within the framework make no reference to the tools and techniques of foresight. These naturally help to gravitate the practitioner to one particular element. For example, the much used 2x2 matrix can be quite useful in the visioning process in teasing out alternative futures. It can also help in the planning stage, when competing alternatives are the focus of concern. Equally, the 3 Horizons model can serve in the framing process as it helps us to clarify what it is that we are looking at. It also serves well in the scanning and forecasting element, where we need to set a temporal dimension to the project.

It also has to be said that different projects might want to give differing emphases on different elements. For example, if the emphasis of the project is to explore possibilities for the future, then it might want to focus more upon the scanning and forecasting elements, even at the cost of not really coming to grips with the acting element. Alternatively, if the project is happy to have external visioning as an input in order to focus on planning and acting, then a consequence of that decision will be to accept the assumptions about the future that are baked into that external input. It is important to note that those undertaking the project do not have to undertake each element themselves. However, a well balanced project would contain each of the elements.

Once we have set out the foresight framework we are to be using, we then have to give some consideration to the depth of investigation we need to undertake. There is a model that we can use to help us here. The Foresight Maturity Model was developed to work in tandem with the Foresight Framework. It sets out five levels of depth to which a project can aspire. These are: Ad Hoc (this is a cursory review of the issue); Aware (where the review is more than superficial); Capable (where the a degree of consistency has been developed within the foresight capability); Mature (where a degree of advanced practice has been developed); and World Class (where the project might be considered a leader in the area). 

Needless to say, whilst we all might want to undertake world class work, this does have a budgetary implication. It is generally the case that the more depth that is given to a project, the more cost will be attached to it. It can be a delicate process of scaling back ambitions to fit the budget available. One way of squaring the circle could be to trim back the ambitions with regards to the framework to be used. This reflects a process of finding a compromise between competing alternatives. For example, if we trim back the trend analysis in our scanning, could we use that budget to push the result from capable to mature? Or if we used a set of external visions, could we use the budget saved to enhance the results from ad hoc to aware? These are the trade offs that the framework can inform. They set out the range of choices that are open to a project.

As most projects are labour intensive, the cost of staffing a project provides the third dimension to constructing a foresight project. Fortunately, there is a model that we can graft on top of the Foresight Framework and the Foresight Maturity Model - the Foresight Competency Model. This model establishes professional competence in three levels - Entry Level (someone starting to learn the craft); Associate Level (someone with a degree of technical competence); and Senior Level (someone technically competent and able to instruct others). 

Once again, there is a degree of trade off between seniority and cost. Whilst we may want a project to be undertaken by people at the senior level alone, we have to accept that as seniority rises, so does the daily fee rate which they can command. There has to be a certain degree of trade off between the staff cost of the project and the budget of the project. The preceding two steps can help to inform us in this area. If we are considering a part of the foresight framework that we don't find particularly compelling, and if we do not intend to go too deep into this area, then do we really need to hire someone especially senior on this aspect of the project? All foresight projects have to trim themselves to fit the resources available. This approach allows us to do this in a reasonably systematic way.

The three components are all designed to telescope into each other. The foresight framework is designed to answer questions such as what are we looking at? Over what time horizon? With what purpose? Using what tools and techniques? The foresight maturity model is designed to carry forward that discussion onto the depth of study we wish to undertake. It also starts to place a degree of resistance, normally in terms of a budgetary constraint, to our ambitions. Finally, the foresight competency model starts to address the question of who is to do what within the project. This will bring the question of cost to the front of the project planning exercise.

So far, we have discussed this in terms of ex ante foresight evaluation. The same structure, after the project has ended, can be turned around to consider the delivery of the project in terms of an ex post foresight evaluation. It also can be used to assess whether a project under way is still worth undertaking or needs some changes in an exercise of process foresight evaluation. The detail to all of this framework needs to be specified further, but is does provide the first steps towards a buyer's guide to foresight.

Stephen Aguilar-Millan

© The European Futures Observatory 2021

Does climate change threaten financial collapse?

It may appear to be a tenuous link, but it is worth spending some time thinking about the links between climate change and the world of finance, and on how the one could impact upon the other. It is generally accepted that the climate is changing. The atmosphere is warming, with a number of climatological consequences. Some parts of the world are suffering droughts, whilst other are experiencing abnormal levels of flooding. The overall level of rainfall has not changed to a large degree, but the number of rainy days seems to be diminishing. This has resulted in fewer rainy days, but those which do occur have more violent storms dropping larger than average amounts of rainfall in shorter periods of time. As the planet warms further, the Polar ice caps are likely to melt, having an adverse impact upon the levels of the sea. Some areas are likely to be abandoned, with the potential for creating surges of climate refugees. There are few who would dispute this picture. However, perhaps it is worth teasing out some of the consequential impacts upon the financial sector?

The impact of climate change upon the financial sector is likely to be felt from three directions. First, there is the direct impact of climate change upon the business models of existing firms. Second, there is the exposure of the financial sector to the hazards impacts of climate change. Third, there is the risk of wider economic damage that affects the financial sector. In each of these, it is worth examining what the risks look like, identifying the key uncertainties, and thinking about how they might be hedged against.

Climate change is likely to make some business models unviable. These are seen as 'transition risks' as the economy moves from one mode to another. A classic example here might be the move from an oil based economy to one powered by green energy. In this respect, the transition risk lies in the assets of the old sectors becoming stranded - i.e. having their value written down a long way in a short period of time. This, in turn, may lead to those companies defaulting on loans and possibly seeing their share price collapse. Companies in this category are mainly in the oil & gas and transportation sectors. They are currently hedging their position by expanding their green energy operations. It may be that this transition can be achieved successfully, but it is by no means certain that they have the technology and organisational culture to make this change. This is one area to watch.

The physical impact of climate change - heatwaves, drought, flooding, storms, and so on - is felt directly in the insurance markets. This may entail a key change in consumer mindsets because these providers may pull out of certain cover entirely. Flood insurance is particularly at risk here. However, this will have an impact further up the value chain. If flood insurance is difficult to find and expensive to acquire, who would buy a house on a flood plain or a water meadow? In this respect, the land banks of housing developers could become stranded assets if it becomes uneconomical to build on those plots. There appears to have been very little mitigation in this area to date. We shall watch carefully to see how the issue develops as and when climate change becomes more disruptive.

The question of wider economic damage is the least certain area in which climate change can impact the financial sector. No doubt there would be some impact, but whether or not is would be a serious impact is debateable. A number of central banks have conducted stress tests around this, to find a degree of resilience within the financial sector. However, stress tests tend to be a bit one dimensional and fail to capture the full volatility and uncertainty associated with very complex changes. This is the area in which the full impact of climate change is the most uncertain, and where the risks are the greatest. So what can we do? As always, in times of acute uncertainty, we can keep relatively high levels of liquidity - literally rainy day money - and a good capital buffer so that if we hit a bad patch, we can come out the other side. Illiquid and poorly capitalised businesses may suffer in this case.

The fear of disruptive climate change leads us to exaggerate the impact and the costs. If we are to manage these as we move forward into that time, we first need to identify them and take a view on their quantifiable impact. It is unlikely that we shall see the end of humanity. It is unlikely that we shall see the end of capitalism. It is far more probable that we shall muddle through and adapt to change as it comes our way. That confidence ought not to blind us to the risks and uncertainties associated with climate change. It does suggest that the first step is to accept that change is coming and that we now have an opportunity to prepare for it. Climate change does carry the threat of financial collapse, but it is by no means certain that it will occur. It is up to us, through our current behaviours, to prepare for it's onset.

Stephen Aguilar-Millan

© The European Futures Observatory 2021

How would we cope with a Cryptocalypse?

Crypto-currencies are one of those features of modern life that tend to polarise people. To their supporters, they represent the future of payments mechanisms, a non-centralised currency in the making, and a means to move away from extractive capitalism by breaking the monopoly over money that the banks hold. To their detractors, crypto-currencies are nothing more than a Ponzi scheme, of no more value than a bag of magic beans. 

The supporters of crypto have been growing in recent times. This has, undoubtedly, been given a boost during the pandemic. A mainly younger demographic, new to investing, bored by living through a sequence of lockdowns, funded by public largesse, have discovered the attractions of casino capitalism. Egged on by investing 'tips' on sites such as Reddit, this demographic has piled into crypto. Today, there are about three times more digital wallets (the means by which crypto-currencies are held) compared with 2018. At this point in time, the supporters of crypto could be right. As could the detractors.

Despite small economies such as El Salvador adopting crypto as legal tender, there have been few signs of crypto replacing more traditional currencies. This is despite the market capitalisation of all crypto-currencies rising from $330 billion to $1.6 trillion in the past year. The detractors ascribe this lack of uptake to one key factor - the widely fluctuating value of crypto-currencies. This rather undermines the use of crypto as a means of exchange. In El Salvador, where Bitcoin is legal tender, prices are quoted in dollars and then converted to Bitcoin at the prevailing rate at the point of sale. The wild changes in the price of crypto also undermines it's function as a store of value and a standard for deferred payments. In the absence of an authority to stabilise the value of crypto - a central bank, in other words - it will continue to fail to perform the functions that are needed from a currency.

If that's the case, what are we left with? All that is left is an asset with little in the way of intrinsic value - it is not guaranteed by a monetary authority or secured by an underlying asset. It is an asset that rests solely upon trust. The investment case for the asset is the 'bigger fool' approach. I may be a fool for investing in crypto, but there is always a bigger fool than me who is willing to buy it from me. This is the dimension that allows the detractors to accuse crypto of being nothing more than a Ponzi mechanism. What happens if the supply of fools dries up? What happens if there is a crisis of confidence in crypto and the demand for crypto assets collapses? In the absence of a central authority to stabilise the value of crypto, in the face of widespread selling of the assets, there is nothing to stop the value falling to zero. What would happen then? Would it matter?

It is useful to divide crypto investors into three camps. First, there are the 'diehards'. These are the true believers in crypto who provide the most ardent support. Second, there are the 'fellow travellers'. These are the investors who see the rising trend of crypto values and who want to participate in this momentum. Third, there are the 'crazies', who simply want the gambling aspect of crypto investment. In the event of a crash, we can expect the diehards to stay with crypto. To sell would represent a fundamental challenge to their belief systems. The crazies would be very quick to leave the market and move on to better things, such as sports betting. For a crash to have a mild impact, the diehards need to persuade the fellow travellers to stay with it. If they can do this - perhaps by replacing the market weight of the crazies - then the fellow travellers will stick with it as their losses would be manageable. If they fail to do this, then the fellow travellers are likely to cut their losses and the value of crypto would fall a very long way, possibly to zero.

The impact of the value of crypto falling to zero would depend upon how long the investors have been in the market. The diehards - who have been invested for more than 12 months - would lose a great deal of unrealised gains (paper profits), but less so in relation to how much they paid for their assets in the first place. The crazies - those invested for less than 3 months - would be likely to be wiped out. If they are leveraged holders of crypto, the losses could well exceed their market capitalisation. The fellow travellers - those invested between 3 to 12 months - would fall in between the two. What is more concerning is that institutional investors (hedge funds, university endowments, mutual funds and a number of companies) are disproportionately situated as either crazies or fellow travellers. These investors are not noted for an overwhelming appetite for risk.

The Economist estimates that the first shockwave of a crypto collapse could be in the region of $2 trillion - about the market capitalisation of Amazon. The secondary impacts are not difficult to see. Loans secured by crypto assets would face calls for liquidity. Leveraged loans to purchase crypto assets would face margin calls. There would be a rush for liquidity leading to investors to cash in conventional assets - firstly financial instruments, and then property assets. At this point a cryptocalypse has the potential to bleed into the real economy. It is likely that interest rates would rise as credit would become scarcer because banks would face difficulties in valuing assets used as collateral in loans. The financial system would start to slow the operation of the real economy, which could lead to a degree of retrenchment on the part of consumers. It is hard to estimate how bad it could get, but it has the potential to give rise to a situation far worse than the financial crisis of 2008.

Of course, this doesn't all happen in a vacuum. The monetary authorities can currently take action to protect the real economy from a cryptocalypse from happening. The crypto system could be isolated from the monetary system by, for example, requiring that collateral on loans within the crypto derivatives market is restricted to conventional cash. The authorities could require the tighter regulation of crypto exchanges. The authorities could insist that crypto holdings are valued at zero in calculations of capital adequacy. There are a whole raft of measures that could be undertaken to make the world safe from crypto. It is comforting that this is the current direction of regulatory travel, even if the pace is a bit slow.

Stephen Aguilar-Millan

© The European Futures Observatory 2021

What does regime change in Afghanistan mean?

We recently asked if small nations matter? Recent events in Afghanistan have shown that at times they can. The speed with which events have developed in Afghanistan raise a number of important questions. Could this turn of events have been foreseen? What are the causes of such a rapid turn of events? What does this mean for Afghanistan? What does it mean for the region? And what does it mean from a wider perspective? Each of these questions deserves some form of answer.

Let's start with the degree to which we could have anticipated this turn of events. Last year we played a game that looked at the geopolitics of Central Asia, in which Afghanistan had a central role. This underlined the importance of the country as a geographical pivot for the region. The Taliban in the game concentrated upon building civil society, whilst the Americans in the game tended to prop up a variety of corrupt administrations. Poverty, hunger, and a lack of basic justice and fairness in the system - coupled by a dislike of foreigners determining the fate of Afghanistan - led to the collapse of the Afghan government and the expulsion of US forces. This was the template set by the game, much of which has been reflected in recent events.

News from Afghanistan is currently sketchy and partial, but it appears that the collapse of the Afghan National Army is more in the nature of a mutiny than anything else. The Afghan soldiers haven't been paid for some weeks, and there are allegations that their paymasters in government have squirrelled away the military payrolls into untraceable overseas bank accounts. This is a symptom of a wider corruption within the country. The Taliban haven't met with greater resistance because Afghan civil society isn't particularly loyal to the Afghan government.

In the west we tend to think of the Taliban as a monolithic and unified religious and political force. This is a mistake. The Taliban, like most factions and movements, contains internal differences of opinion. There are the traditionalists, who are currently receiving the most attention at the moment, who tend to represented amongst the military leaders on the ground right now. However, there are also the modernists, who tend to represent the political leadership, which has been exiled within the Middle East and are now returning to the country. We can expect the outcome of this difference of opinion to dominate the future course of Afghan affairs. At present, it is not certain which view will prevail.

This will have consequences within Central Asia. Although Afghanistan is the centre of Taliban support, they also have a presence in Turkmenistan, Uzbekistan, Tajikistan, and Kyrgyzstan. These countries have a structure of civil society similar to that of Afghanistan and must be seen as vulnerable to Taliban influence. There is also the complication of them being hydrocarbon exporters. In our game, the government of Turkmenistan was seized by the Taliban following a period of poverty alleviation and the elimination of corruption. As things stand today, we ought not to rule out this possibility in the years to come.

The Taliban also have a presence in the eastern part of Iran and links to the East Turkistan separatists in the Chinese province of XingJiang. This widens the possibilities to include Iran - and the struggle between the Shia and Sunni worlds - and the global ambitions of China. A key potential overland route on the BRI transits across the region, along with significant mineral potential in northern Afghanistan. It is unsurprising that China has sought an accord with the Taliban. With the Americans withdrawn from the region and with Russia cautious about renewed involvement within the Hindu Kush, China has been presented with an almost uncontested space for influence in the region. America appears to have lost a pawn in the great game of the twenty first century.

Appears to, but may not have done. The factors that led to the withdrawal of American forces are now a strength for the US and a weakness for the Taliban. The Taliban need to win over the local warlords across Afghanistan - especially in the north of the country, which presents an opportunity for the US. In the coming years, we may well see what covert operations, special forces operations, drone warfare, and high altitude airstrikes with precision munitions can achieve. We must not think that because American forces have left Kabul, the war is over. It may well be continued in a different way in the years to come. In which case, what we are witnessing is the opening of a new chapter in the saga rather than an end to it.

How it all unfolds depends upon a number of factors, but the key uncertainty revolves around the struggle within the Taliban. If the traditionalists gain the upper hand, the we can expect a future that is confrontational and violent. If the modernists gain the upper hand, then we can envisage a future in which Afghanistan could be coaxed into becoming a functioning nation by the standards of the region. That event would involve a process of engagement right now. It is interesting that this is exactly what China is doing. More 'Jaw Jaw' and less 'War War'.

Stephen Aguilar-Millan

© The European Futures Observatory 2021