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

Do small nations matter?

The collapse of the Soviet Union heralded the onset of an era that was seen as a unipolar moment. The United States was the global power without peers. And yet, that didn't quite mean that America could do as it pleased. Small and nimble nations could leverage their unique attributes to frustrate US policy. With a growing rivalry between China and the US, is the unipolar moment coming to a close? If so, what does that mean for smaller nations? Are they likely to matter more or less?

To start at the beginning, size does have its advantages. A large nation, such as the United States, will necessarily have a large population that sustains a large economy. Larger states are bound to be dominant economically by virtue of the size of their financial and commercial activities. These larger economies can support a larger level of governmental activity and a larger military. It also makes them an attractive destination for migration as a cultural magnet internationally. These are the sources of large nation power - economic power, military power, and cultural influence. In this sense, small nations are at a  disadvantage and matter less.

This, however, is not entirely the case. On each of these bases of power, it is possible for smaller nations to find a niche role. The global economy is one that is highly specialised and inter-dependent. If one part of the network ceases to function fully, the whole network becomes vulnerable. We have seen this in a number of cases in recent years. For example, flooding in Thailand in 2011 disrupted the production of key motor components that had a knock on effect to disrupt the production of motor cars on a global scale. This was the result of a natural disaster, but had it been the result of governmental policy, the effect would have been very similar. These vulnerabilities were made quite clear in the vaccine nationalism that occurred during the COVID-19 pandemic. In this sense, size does not matter.

Equally, a large military establishment does not always guarantee the effective use of military power. The various conflicts that have arisen in the Middle East this century amply demonstrates this point. The most recent - the Americans and NATO withdrawing from Afghanistan - suggests that hostile forces, whilst less numerous and not as well armed as their opponents from larger nations, can prevail over mighty military establishments. Whilst size generally suggests a path to victory, this is not always the case.

Cultural influence is a further concept where size counts, but not absolutely. There is a large degree of cultural influence from larger entities, but there is also a role for niche players. For example, American cinematic blockbusters tend to dominate, but European cinema has a role to play in producing films of greater artistic content. The Oscars serve one audience, whilst Cannes serves another. The dominance of the genre does not lead to a blanket monoculture and there are plenty of niche crevasses in which cultural variety thrives.

Even in a period that is seen as unipolar, there has been ample opportunity for smaller nations to exert a degree of influence that is not suggested by their size. If we are moving away from the unipolar moment, it is not unreasonable to expect this situation to change. It is not clear whether this change will favour smaller nations or not. On the one hand, the deft nation will be able to play one of the larger nations against the other, to it's advantage. Turkey provides an example in this case, where the United States is played against both Russia (for military support) and China (for economic support). This has the potential to become a feature of the immediate future as the larger powers vie for influence with the smaller nations.

On the other hand, it is also in the interests of the larger nations to ensure a degree of conformity amongst their client states. It is interesting to see this process in action though the funding arrangements of the various BRI projects. Recipients of China's BRI largesse are left in no doubt about their role as client states and their obligations to support a wider Chinese view of the world. In this respect, small nations do not matter as much as they might because they are expected to follow a given line. Some smaller nations find this conditionality unacceptable, whilst others see it as perfectly acceptable.

Looking ahead, it is likely that we shall see this process in operation at the COP26 meeting of nations later this year. There is a broad desire to construct some form of agreement, but little consensus over how that agreement should be structured. In the end, power politics will come into play and determine that eventual outcome. This will prove to be the key test as to whether or not small nations matter. For effective action, they need to. But will the greater powers be willing to surrender their interest to the lesser powers? That remains to be seen.

Stephen Aguilar-Millan

© The European Futures Observatory 2021

Could NATO fall apart by accident?

The point of running a game like The Belarussian Right Hook is to discern the potential contours of an emergent future. In my form of foresight, the point of studying the future is to outline these potential contours in order to take action to reinforce the futures that we like and to act to resist the ones that we don't. This makes the exercise necessarily analytical, but this act of cognition needs to underpin any action that may affect a future outcome. 

It should be said that many possible outcomes could result, not just the single outcome from a single game. When we previously played this game, NATO was able to destabilise Russia to such a degree that we could question whether the current Russian regime would survive a defeat in the field. Such are the uncertainties of military action. However, our focus is now upon the defeat of NATO in the field that resulted from this game. We ask the question of whether or not NATO is robust enough to withstand defeat in the field?

We identified three key areas of interest. First, does NATO have sufficient political cohesion to survive a defeat in the field? Much of the defeat can be attributed to a piecemeal approach to the conflict, along with varying degrees of commitment from the various NATO members. Second, there is the question of the point at which NATO ought to become involved to counter Russian aggression in Eastern Europe. Had NATO become involved earlier, then it could be argued that things would not have gone so badly. Third, to what extent has long term budgetary parsimony severely degraded the ability of NATO to act in the field? Budget restrictions are a recurring theme, everyone seems to agree that something should be done. Then other priorities emerge for the funding. This had quite an impact in the game.

NATO is essentially an organisation for mutual defence in Europe. It has only been used in anger once - in Afghanistan - which some might argue was a bit of a mistake. Western hubris gave NATO a role outside of Europe. Now that history hasn't ended and the Russian challenge has re-emerged in the 21st Century, the political effectiveness of NATO can be called into question. NATO suffers from three weaknesses. First, NATO is not the only security organisation in Europe. The Common Security and Defence Policy of the European Union blurs the issue. In the game, we had NATO members not in the EU, we had EU members not in NATO, and we had countries that were in neither the EU nor NATO. This fragmentation of authority and decision making made the NATO response hesitant, which proved to be a decisive factor. It would be interesting to play the game again, where NATO can mobilise in Turn 1 of the game, rather than sitting things our.

Second, NATO contains differing views on how warfare should be conducted. Some members are relatively war-like, whilst others tend to incline towards more peaceful solutions. This manifests itself in the willingness for the public in the NATO nations to engage in military action. We didn't model this into the game other than a political hesitancy on the part of some nations to become involved. This touches upon the third weakness - the activities of Russia. Russia has been involved in a campaign of political influence amongst the European NATO nations for some time. It uses a combination of propaganda and commercial interests to influence European opinion. This has an impact on the willingness of the nations affected to undertake and support action at the point of conflict. It certainly has an impact on the second key area of interest - the point at which NATO becomes involved in the conflict.

In this game, NATO only became involved with the triggering of Article 5 by virtue of the Russian invasion of the Baltic States. It was only at this point that NATO started to mobilise for action. By the time that the NATO forces - especially the German and Polish armies - had mobilised, Russia controlled Estonia and Latvia. This had the effect of placing the conflict zone in Lithuania. There were two points at which NATO - given the political will - could have achieved a better result. NATO could have mobilised and deployed in the Baltic States as Russia invaded Ukraine. This might not have deterred Russia, but it would have changed the basis of Russian calculations. We ought to play this game. Second, after crushing Ukraine, it seems obvious that an ambivalent response from NATO would encourage Russian ambitions in the Baltic States. Had NATO mobilised and deployed as the Russian forces re-positioned themselves, that would have changed the basis of Russian calculations. Again, this could prove to be an interesting game. 

However, this presumes the relative effectiveness of the European NATO forces. This is an assumption worth challenging. A decade of austerity across Europe can be believed to have had an impact on the combat effectiveness of the European NATO forces. Many senior officers, upon retirement, have written about the degree to which combat effectiveness has been degraded. Some of this, one suspects, might be vested interests pleading their case. However, some of this might represent an accurate warning of a very real shortfall. We won't know until the point of conflict arrives. A policy that relies upon the European NATO allies as first responders could be questioned on grounds of effectiveness. This is a fairly large unknown. In the game, the German and Polish armies were relatively ineffective and the whole NATO campaign relied upon them. This is from where defeat originated.

A defeat for the organisation would be a significant threat to its survival. It is interesting to speculate how a future NATO would evolve after a defeat in the field. This would make an interesting game in itself. Our game ended when Russia occupied all three Baltic States. We had it that Russia then offered peace terms to the European NATO allies. That peace conference, in itself, would make an interesting game as a precursor to the game about how NATO would evolve - if it survived - after the peace settlement. Those are games for another day.

For now, the conclusion that we draw from this game is that, under the right circumstances, NATO could fall apart by accident. Of course, this future is not a given. NATO can act in the present to avoid this. It can bolster its political cohesion, it can sharpen its defences, and it can act to counter Russian influence in Europe. It remains to be seen whether or not this will happen.

Stephen Aguilar-Millan

© The European Futures Observatory 2021

NATO Falls Apart - The Timeline

The original object of this game was to derive a timeline that could be used as an input into an economic and financial wargame at a later stage. The actual result was something of a surprise for us. Our original thoughts were that Russia would occupy Ukraine. The Russian invasion of the Baltic States was unclear at the start of the game, but as Russia had done so well, and as it had received such little opposition from NATO, Russia could become emboldened to resolve matters in the Baltic States also. This is how the timeline wove itself.

Timeline: D+3

Geopolitical headline: Russia advances from south west Belarus to occupy Lviv and north west Ukraine, before moving southwards to threaten Kiev. Russian columns advance from southern Russia across southern Ukraine to occupy Kharkov and to threaten Kiev. Russian reinforcements arrive from the Central and Far Eastern Military Regions and are deployed along the Russia-Ukraine border.

Response in:

Washington: Outrage at events, diplomatic efforts to contain the situation.

Brussels: Outrage at events, diplomatic efforts to contain the situation.

Tokyo: Concern at events.

London: Concern at events, diplomatic efforts to contain the situation.

Beijing: Concern at events

Timeline: D+6

Geopolitical headline: Russia occupies Odessa and Kiev. The Ukrainian army is destroyed in the field and Russia occupies all of Ukraine.

Response in:

Washington: Concern at escalation of events. Warning issued to Russia about the integrity of territorial boundaries in Europe.

Brussels: Concern at escalation of events. Warning issued to Russia about the integrity of territorial boundaries in Europe.

Tokyo: Concern at escalation of events.

London: Concern at escalation of events. Warning issued to Russia about the integrity of territorial boundaries in Europe.

Beijing: Concern at escalation of events.

Timeline: D+9

Geopolitical headline: Russian forces regroup and are redeployed along the Russian border with Latvia and Estonia. Russian forces deployed along the Ukrainian border with Poland.

Response in:

Washington: Outrage at escalation of events. Warning issued to Russia about the integrity of territorial boundaries in Europe.

Brussels: Under the Common Security and Defence Policy, the Visegrad Battlegroup and the Nordic Battlegroup are alerted to activation.

Tokyo: Concerned by events, places armed forces on alert.

London: Follows US lead within the NATO framework.

Beijing: Concerned by events, places armed forces on alert.

Timeline: D+12

Geopolitical headline: Russian forces invade Latvia and Estonia, defeating their armies in the field. Tallinn and Riga are occupied. Lithuania is invaded and Vilnius besieged. Article 5 is triggered and NATO counter-attacks. German and Polish forces relieve Vilnius and push back Russian troops to Riga. The Visegrad Battlegroup advances across southern Ukraine to occupy Dnepropetrovsk and Donetsk. Romanian forces besiege Odessa.

Response in:

Washington: The United States is placed upon a war footing. Material assistance is provided for European NATO allies and US forces are mobilised for action in Europe.

Brussels: Under the Common Security and Defence Policy, the Visegrad and Nordic Battlegroups are committed to action. Germany supports collective action.

Tokyo: Concerned by events, armed forces remain on alert.

London: Commits RAF and Royal Navy to the conflict, along with land based forces when they are available. GCHQ commences cyber warfare against Russian targets.

Beijing: Concerned by events, armed forces remain on alert.

Timeline: D+15

Geopolitical headline: NATO airpower is committed to action. A small Ukrainian military force is gathered in Kharkov. Russian forces recapture Kharkov and Donetsk, pushing back the Visegrad Battlegroup. German forces besiege Russian occupied Riga and are repelled back to Vilnius.

Response in:

Washington: Congress approves Presidential action, US forces to be committed as they become available.

Brussels: Proposal to commit EU to NATO actions, no decision taken.

Tokyo: Concerned by events, armed forces remain on alert.

London: Commits to supporting NATO action.

Beijing: Concerned by events, armed forces remain on alert.

Timeline: D+18

Geopolitical headline: Air conditions are favourable to Russia, giving overwhelming air superiority. Russia retakes Dnepropetrovsk and largely destroys the Visegrad Battlegroup. Ukrainian forces recapture Kharkov. The German and Polish armies are destroyed outside of Vilnius, which is occupied by Russian forces.

Response in:

Washington: Diplomatic and material assistance to NATO allies, USAF committed to action.

Brussels: Wrangling over the degree of commitment to provide to NATO. Hungary, Greece and Cyprus begin to object to the EU becoming involved.

Tokyo: Concerned by events, armed forces remain on alert.

London: Commits to supporting NATO action.

Beijing: Concerned by events, armed forces remain on alert.

Timeline: D+21

Geopolitical headline: Russia destroys the remaining Ukrainian forces and reoccupies Kharkov. Odessa is relieved and the Romanian army is destroyed. Russian forces consolidate their position in the Baltic States and advance no further.

Response in:

Washington: Diplomatic and material assistance is given to the NATO allies.

Brussels: Wrangling over the degree of commitment to provide to NATO. Hungary, Greece and Cyprus object to the EU becoming involved.

Tokyo: Concerned by events, armed forces remain on alert.

London: Commits to supporting NATO action.

Beijing: Concerned by events, armed forces remain on alert.

As the game unfolded, the collapse of NATO was not readily evident. Germany and Poland were able to field armed forces of reasonable strength on paper. The Visegrad forces in southern Ukraine were able to threaten the Russian hold on that country, and there was a threat to Russian forces along the Polish-Ukrainian border. 

The turning point was the German siege of Riga. Had the German forces occupied the city, Sweden and Finland could have ferried troops into the combat zone, which would have made all the difference. The failure to retake the city, even with air superiority, was the high point of the NATO advance. As it happens, both Riga and Tallinn remained closed to reinforcements from Sweden and Finland. This proved to be decisive. It allowed Russia to consolidate its hold on Riga and provided a launching pad from which the German army could be defeated in the field and from which the Polish army could be expelled from Vilnius, to be destroyed in detail. At that point, 21 days into the crisis, NATO ceased to have any forces in north eastern Europe. It was here that we called a halt to the game.

This is such an intriguing timeline. It has a feel of 1940 to it. The Red Team launches a blitzkrieg offensive that conquers all before it. There are a quick succession of Allied collapses. And with that, the international order prevailing up to that point falls apart. As stated before, this game is the prelude to an economic and financial game. One can wonder what impact this sequence of events would have on the financial markets. I guess we will have to play that game to find out.

Stephen Aguilar-Millan

© The European Futures Observatory 2021

NATO Falls Apart - The Game

My long term commitments have shifted a bit recently. so I found myself with a bit of time on my hands. This is a rarity that doesn't happen too often. However, it does occur from time to time, so I always have in mind a list of things that I would like to do if the tempo weren't so pressing. High on my list of things to do was to revisit The Belarussian Right Hook (more details). To recap, the premise of the game was to consider the possibility that Russia could use the cover of joint exercises in Belarus to launch an operation to tidy matters away in Ukraine.

When we played the game before, we generated some interesting results, but I was left dissatisfied with the game on a number of levels. I felt that the Russian forces grouped around Brest in Belarus at the start of the game should have been deployed at an earlier stage, and I also felt that the Russian reinforcements from the Central and Far Eastern Military Regions ought to have been brought into the game a lot sooner. This version of the game encompassed both of those features. The Russian 20th Army Corps, located in Belarus, was tasked to be the first Russian unit to move. The reinforcements from the Central and Far Eastern Military Regions were permitted to enter the game in Turn 1 (in the first three days), if the Russian player had sufficient movement allowance to effect that.

We retained the complications of the Blue Team player - a complicated structure involving NATO members, EU members who are not members of NATO, and Ukraine and Moldova, who are neither members of NATO nor the EU. We added the complication that elements of the EU Nordic Battlegroup - essentially Sweden and Finland - could only enter the game via the ports of Riga or Tallinn, if they were not under Russian control. We retained the rules regarding Belarus - for it to be on the winning side, regardless of who that might be. And we kept the rule that the nuclear threshold would not be passed.

The purpose of the game was to produce a timeline that we could use in our sequence of nested games. We will publish that timeline in a future post, including reactions from around the world to give us a global perspective to unfolding events in Europe.

Did we achieve something useful? It's hard to answer that question, but we did achieve an interesting result - by D+21, three weeks after the first Russian incursion into Ukraine, NATO imploded. The sequence of events were a lukewarm response to the initial Russian incursion into Ukraine. This encouraged Russia to undertake a Blitzkrieg in the Baltic States. Riga and Tallinn were occupied within three days. The European NATO forces were committed piecemeal, relying heavily on German leadership. First the German, and then the Polish armies were defeated in the field, and NATO couldn't survive the political fallout resulting from those defeats. Russian forces occupied Vilnius, and at that point we called a halt to the game. 

The game provided us with some hard questions that we will explore in a future post. For now, we can place a marker that three avenues of approach suggest themselves. First, how fragile is NATO politically? In the game, NATO fell apart through political squabbling. When things started to go badly, the less committed nations started to weaken their contributions to the collective effort. Second, at what point should NATO become involved? There is an argument that had NATO become involved when the Russian 20th Army Corps besieged Lviv, the blitzkrieg into the Baltic States would have been much harder to achieve. If either Riga or Tallinn had not fallen, then Sweden and Finland could have become involved. Third, just how corrosive is the European skimping on defence spending? How far has the desire for budgetary savings impaired the effectiveness of the European NATO armed forces? We shall look at these questions at greater depth in a future post.

This is one future that we hope not to happen. It suggests a number of courses of action that we can take in the present to avoid that future. It is of some comfort that some of those measures seem to have been taken, but that is a different story for another day.

Stephen Aguilar-Millan

© The European Futures Observatory 2021