For decades, economic analysts and investors treated war as an “exogenous shock”: an unpredictable tail event that briefly disrupted markets before an eventual reversion to the mean. That paradigm is over. War has evolved from an unforeseen risk into an endogenous and persistent factor in modern economic and investment analysis.
The direct costs of destruction remain devastating at a regional level, as analyses of conflicts in the Middle East and North Africa (MENA) show, where millions of lives are directly affected.1 However, the indirect, global impacts are proving to be more structural. The 2025-2026 economic forecasts issued by the International Monetary Fund (IMF) and the World Economic Forum (WEF) no longer treat geopolitical risk as a footnote.3 Instead, “fragmentation” and “geopolitical uncertainty” are now central variables in baseline models that predict muted global growth and “tenuous resilience.”6
The IMF, in its October 2025 World Economic Outlook (WEO), projects moderate global growth of $3.2\%$ in 2025 and $3.1\%$ in 2026, below historical averages.7 This structural slowdown is attributed, in large part, to geopolitical frictions that curb trade and investment. Geopolitical risk has shifted from a “tail event” (a low-probability, high-impact risk) to a “persistent variable”: a constant drag on growth and a driver of inflation.
The thesis of this report is that modern conflicts are fought as much in commodity markets, SWIFT payment networks, and maritime shipping routes as they are on the physical battlefield. This analysis examines the economic anatomy of this new paradigm, demonstrating how war has become a structural factor defining capital allocation, monetary policy, and corporate strategy in the post-globalization era.
The Commodity Shock: Inflation as a Weapon of War
The most immediate transmission channel of conflict to the global economy is through commodity price volatility. Recent conflicts in Ukraine—Europe’s “breadbasket” and “gas station”—and the Middle East—the global energy nexus—have demonstrated how supply disruption functions as a formidable economic weapon.5
The “Weaponization” of Energy and the Lesson of 1973
Modern conflict has revitalized concerns about energy security, a lesson thought to have been learned after the 1973 oil crisis.11 Back then, the OPEC embargo demonstrated the West’s vulnerability to energy dependence.12 The response, as a Cesce analysis notes, was the diversification of supply sources and the development of alternatives.12
The war in Ukraine, however, triggered an even sharper and more concentrated price shock in European energy markets. European Central Bank (ECB) data on the immediate impact is stark: in the first two weeks after the invasion, Brent crude oil prices rose by approximately $40\%$, Rotterdam coal by $130\%$, and Dutch TTF natural gas prices soared by $180\%$.13
Europe’s response was a forced and costly reconfiguration of its energy security.14 The loss of Russian pipeline gas 16 was managed through what the Center for Strategic and International Studies (CSIS) terms a “survival strategy.”15 This strategy involved doubling imports of Liquefied Natural Gas (LNG) from the United States, which rose from 29 billion cubic meters (bcm) in 2021 to 70 bcm in 2022.15
This rapid pivot to global LNG, however, should not be confused with “strategic autonomy.”12 While the 1973 crisis taught the West to diversify its sources of fossil fuels, the 2022 crisis taught Europe a deeper, more expensive lesson. It merely swapped dependence on relatively cheap Russian pipelines for dependence on more flexible but structurally more expensive U.S. and Qatari LNG tankers.15 The true strategic lesson now being implemented is that real autonomy comes not from diversifying imported fossil fuels, but from reducing demand for them through a massive acceleration of investment in domestic renewable energy sources.15
This asymmetric energy shock also created a fundamental divergence in monetary policy. While the United States, as a net energy exporter 15, experienced inflation driven more by domestic demand 19, Europe was hit by a direct and debilitating energy supply shock.13 This difference in the nature of the inflationary shock largely explains the divergence in the timing and aggressiveness of interest rate-hiking cycles between the U.S. Federal Reserve (Fed) and the ECB.20
The Food Shock and Global Insecurity
The war in Ukraine did not just hit energy; it disrupted the “breadbasket of the world.”22 The blockade of Black Sea ports and the impact on agricultural production in one of the planet’s most fertile regions had immediate repercussions. Russia and Ukraine are crucial exporters not only of grain but also of fertilizers.24 The war threatened to collapse the global food system 22, with prices spiraling and creating severe food insecurity risks, disproportionately affecting the most vulnerable importing nations, particularly in the Middle East and North Africa.1
The Conflict-Driven Inflation Shock (2022-2024)
| Commodity | Peak % Increase (Post-Ukraine Invasion) | Conflict Driver | Data Source |
| Natural Gas (TTF) | $\sim 180\%$ | Weaponization of Russian gas; Nord Stream disruption. | 13 |
| Coal (Rotterdam) | $\sim 130\%$ | Gas-to-coal switching for power generation. | 13 |
| Oil (Brent) | $\sim 40\%$ | Sanctions and fears of Russian supply disruption. | 13 |
| Wheat | $\sim 50-60\%$ (Futures indices) | Black Sea port blockade; crop destruction. | 22 |
| Fertilizers | $\sim 30-40\%$ (Key indices) | Sanctions on Russia & Belarus (key potash producers). | 24 |
Trading Arteries Under Fire: The Supply Chain Crisis
If the commodity shock was the first blow, the second has been the sustained attack on the arteries of global logistics. Modern conflicts are increasingly fought at maritime chokepoints, where a regional conflict can inflict disproportionate global economic pain.26
The clearest case study is the Red Sea crisis. Houthi attacks on commercial shipping, in response to the conflict in Gaza, forced virtually all major shipping lines to reroute their Asia-to-Europe journeys, avoiding the Suez Canal and circumnavigating Africa via the Cape of Good Hope.27
The impact on supply chain data was immediate and severe:
- Transit Times: Rerouting added 10 to 15 days to voyages. A February 2024 report quantified the percentage increase in transit times from Asia to Europe: a $46\%$ increase to Rotterdam and a staggering $51\%$ increase to Algeciras.27
- Insurance Costs: Maritime war risk insurance premiums, which were nominal before the crisis (around $0.05\%$ – $0.07\%$ of hull value), skyrocketed.28 At the peak of the crisis, premiums reached between $0.7\%$ and $1.0\%$ of the vessel’s value for a single 7-day transit.28 For a modern container ship valued at $150 million, this represents an added cost of $1.5 million per journey. Tensions in the Strait of Hormuz in 2025 have added similar pressure.31
- Freight Costs: This disruption caused extreme volatility in container rates. The Drewry World Container Index (WCI), which had been falling from its pandemic highs, saw a sharp rebound.32
The impact of a $51\%$ increase in transit time goes beyond the simple cost of fuel. It represents the death knell for the “Just-in-Time” (JIT) inventory model, which has dominated supply chain management for thirty years. JIT relies on absolute predictability; a 15-day delay is not an inconvenience, it is a model failure that leaves assembly lines idle and shelves empty.
As a result, corporations are forced to shift from “Just-in-Time” to “Just-in-Case” (JIC), holding much larger buffer inventories to hedge against these disruptions. This seemingly simple change immobilizes billions of dollars in working capital in warehouses around the globe. It is a hidden, permanent cost of war that reduces capital efficiency and acts as a drag on corporate profit margins.
Paradoxically, this crisis has been a financial lifeline for the shipping industry itself. The sector was facing a severe risk of oversupply in 2024-2025 due to a wave of new vessel deliveries.33 The diversions around Africa are artificially absorbing this overcapacity by tying up ships on much longer journeys. As a result, rates remained elevated in 2024, benefiting carriers.35
This leads to a key investor takeaway: the greatest financial risk to the shipping industry in 2025-2026 is, ironically, peace. A durable ceasefire in the Middle East that reopens the Red Sea routes 34 would immediately release all that vessel capacity “trapped” on long routes, flooding the market and causing freight rates to collapse.
Quantifying the Red Sea Disruption (2024-2025)
| Impact Metric | Baseline (Q3 2023) | Peak Data (2024-2025) | Business Impact | Data Source |
| Transit Time Increase (Asia-Rotterdam) | N/A | $+46\%$ | “Just-in-Time” disruption; fuel costs. | 27 |
| Transit Time Increase (Asia-Algeciras) | N/A | $+51\%$ | “Just-in-Time” disruption; fuel costs. | 27 |
| War Risk Insurance Premium (% Hull Value) | $\sim 0.05\%$ | $\sim 1.0\%$ | Drastic increase in fixed shipping costs. | 28 |
| Drewry WCI ($/FEU, Nov 2025) | $\sim \$1,500$ (2019 Avg) | $\sim \$1,959$ | Variable cost volatility; imported inflation. | 32 |
The “Weaponization” of Finance and Monetary Fragmentation
The most significant and lasting conflict may not be physical, but financial. The “weaponization of finance” 37, a term describing the use of economic tools and infrastructure as state weapons, has moved from theory to practice. The coordinated Western response to the 2022 invasion of Ukraine, targeting a G20 country, has triggered a fundamental reassessment of the dollar-dominated global financial architecture.
The Financial “Nuclear Option”: SWIFT and Reserve Freezes
The Western response was twofold and unprecedented. First, the exclusion of major Russian banks from the SWIFT (Society for Worldwide Interbank Financial Telecommunication) messaging system.39 SWIFT does not move money, but it is the secure messaging “plumbing” that allows banks to communicate about cross-border transactions.41 Cutting off SWIFT access effectively disconnects a banking system from global finance.40
Second, and even more shocking, was the freezing of hundreds of billions of dollars in Russian Central Bank foreign currency reserves held in Western jurisdictions.37 This action pulverized the long-held notion that sovereign bonds held abroad were untouchable reserve assets.
The Backlash: Building a Parallel System
While these sanctions had an acute impact on the Russian economy 39, their more profound long-term effect was to incentivize non-aligned nations to build alternatives. The message to Beijing, New Delhi, or Riyadh was clear: if your foreign policy objectives diverge from the West’s, your financial reserves and trade access can be revoked.37
This realization has accelerated the development of parallel payment systems, creating a bifurcation in the global financial system:
- Russia’s Alternative (SPFS): Following initial 2014 sanctions, Russia developed its own System for Transfer of Financial Messages (SPFS). After the 2022 SWIFT exclusion, Moscow accelerated its expansion. By 2025, SPFS has grown to connect hundreds of institutions in over 20 countries, creating a sanctions-resilient channel for trade.38
- China’s Alternative (CIPS): China has been promoting its Cross-Border Interbank Payment System (CIPS).43 It is crucial to understand that CIPS is not a simple SWIFT clone. SWIFT is a messaging system, while CIPS is an actual settlement system for renminbi (RMB) transactions.43 Its growth is notable: in 2024, CIPS processed 175.49 trillion RMB (approx. $24.47 trillion), a $42.6\%$ year-on-year increase. By June 2025, it has 176 direct participants and over 1,500 indirect participants in 121 countries.45
- BRICS Alternative (BRICS Pay): The expanded BRICS bloc is actively developing “BRICS Pay.”46 The goal, ratified at the Kazan summit, is not to create a new currency, but a decentralized platform to connect existing national payment systems (like Russia’s SPFS, China’s CIPS, and India’s UPI) to facilitate trade in local currencies, bypassing the dollar.47
Is the Dollar’s Dominance Threatened?
Analysis from the Richmond Fed argues that de-dollarization is harder than it looks.50 The dollar’s dominance is built on deep network effects, the unparalleled liquidity of its capital markets, and the fact that SWIFT is, itself, currency-neutral.50 Furthermore, key alternatives like the renminbi remain constrained by China’s capital controls, making them unattractive as true global reserve currencies.51
However, this analysis may be missing the point. The real risk is not that CIPS will replace SWIFT or that the RMB will replace the dollar overnight. The risk is bifurcation. The world is not heading toward a post-dollar future, but a financially bifurcated one.52
In this future, a dollar/euro-centric (G7) financial bloc will exist operating on SWIFT, and a parallel (BRICS+ and “Global South”) bloc will use a network of CIPS, SPFS, and BRICS Pay for energy and commodity trade in local currencies.53 For multinational corporations, this scenario is a compliance and treasury management nightmare, as they will be forced to operate in two distinct payment systems with different rules and risks.42
This “weaponization” has also fundamentally changed the definition of a “reserve asset” for central banks. Prior to 2022, U.S. Treasuries were considered the ultimate “risk-free” asset. The freezing of Russia’s reserves demonstrated that they are not risk-free: they carry geopolitical risk. For a non-aligned central bank, holding dollar or euro reserves means their national savings are subject to Western foreign policy. This explains the move toward gold—a physical, unseizable asset—discussed in the next section.
The Pulse of the Markets: Volatility, Defense Spending, and Safe Havens
Capital markets process war risk in real-time, translating geopolitical uncertainty into price action and capital flows. This behavior reveals a dual investment strategy: one defensive (risk-averse) and one opportunistic (profit-seeking).
The Fear Gauge (VIX) and Safe Havens (Gold)
Geopolitical tension is a prime driver of volatility. The CBOE Volatility Index (VIX), popularly known as the “fear index,” measures the 30-day implied volatility of the S&P 500.55 This index spikes sharply during crises, often jumping above the 20 level (alert zone) or even 40 (extreme panic) during conflicts.56 In fact, geopolitical volatility has become so persistent that analysts are developing more granular tools, such as “Geopolitical Risk” indices (sometimes dubbed VIX-GEO), to isolate this source of volatility from more traditional economic policy uncertainty.59
In response to this structural uncertainty, investors and, crucially, central banks have flocked to traditional safe-haven assets. Gold has hit record highs in 2024 and 2025.62 A March 2025 analysis from J.P. Morgan Private Bank maintains a positive view on gold, identifying “elevated geopolitical uncertainty” and “solid demand from central banks” as key drivers.64
This central bank gold-buying is not just a traditional “flight to safety.” It is the physical manifestation of distrust in the dollar-based financial system, as discussed in the previous section. Central banks of non-aligned nations are actively diversifying their reserves out of Western financial assets (which can be frozen) and into a physical, neutral, and politically unseizable asset (which cannot).
The New “Growth Industry”: Defense
The most direct and predictable economic consequence of war is the demand for more weaponry. The era of the “peace dividend”—the post-Cold War period characterized by shrinking military budgets—has abruptly ended.
Global military spending has skyrocketed. An April 2025 report from the Stockholm International Peace Research Institute (SIPRI) reveals that world military expenditure reached $2.718$ trillion in 2024. This represents a staggering $9.4\%$ real-terms increase, the steepest year-on-year rise since at least the end of the Cold War.65
Spending grew in all regions, but the most dramatic increases were in or near conflict zones 65:
- The top five spenders (U.S., China, Russia, Germany, India) account for $60\%$ of the total.65
- Germany increased its spending by $28\%$ (to $88.5 billion), becoming the world’s fourth-largest spender.65
- Poland, on NATO’s front line, increased its spending by $31\%$ (to $38.0 billion).65
- Israel, embroiled in the Gaza conflict and regional tensions, increased its spending by $65\%$ (to $46.5 billion).65
This massive, taxpayer-funded spending has created a secular boom for defense stocks. A March 2025 Morningstar analysis describes the defense spending surge as a sustained “tailwind” for the sector.67 European firms like Rheinmetall and Rolls-Royce have seen their order books swell to record levels. The Morningstar analysis has raised defense revenue forecasts, expecting European defense spending to hit $3.1\%$ of GDP by 2029 (up from a previous $2.4\%$ forecast) and $3.5\%$ by 2032.67
Capital flows in 2024-2025 reveal a profound contradiction in market sentiment. Investors are running a “barbell trade”: they are simultaneously buying insurance against the system’s collapse (gold) and the stocks of companies that profit directly from the causes of that collapse (defense). This dual strategy is the quintessential investment thesis for a fragmented, multipolar world.
The Defense Spending Boom (2024 Data)
| Country/Region | 2024 Spending (USD) | Real % Y-o-Y Increase | Conflict Driver / Implication | Data Source |
| Global | $2.718$ Trillion | $+9.4\%$ | Steepest rise since Cold War; end of the “peace dividend.” | 65 |
| Germany | $88.5$ Billion | $+28\%$ | Reaction to Ukraine war; meeting NATO target. | 65 |
| Poland | $38.0$ Billion | $+31\%$ | Massive military modernization on NATO border. | 65 |
| Israel | $46.5$ Billion | $+65\%$ | Gaza war and regional escalation (Lebanon, Iran). | 65 |
| Russia | $149$ Billion | $+38\%$ | Full war economy; $7.1\%$ of GDP. | 65 |
| Stocks (STOXX Europe Defence) | N/A | Record Highs | Investment thesis based on guaranteed state revenues. | 67 |
The Structural Reshuffle: The Advent of “Friend-Shoring”
Beyond the short-term shocks in commodities and logistics, the most profound and lasting impact of conflict is the permanent reconfiguration of global supply chains. The globalization model of the past three decades, built on the primacy of efficiency (seeking the lowest-cost production), is being dismantled and replaced by a model based on resilience (seeking the most secure supply).
This new paradigm goes by several names: “near-shoring” (moving production closer to home), “reshoring” (bringing it back home), or “friend-shoring” (relocating to countries with shared political and economic values).68 The strategic goal is to reduce dependence on adversarial nations or on supply chains vulnerable to geopolitical chokepoints.69
This strategy is the logical, long-term boardroom response to the tactical problems identified in sections II and III. A CFO watching gas prices spike 13 and freight costs multiply 28 can no longer justify to shareholders a supply chain that relies on a single supplier in a hostile geopolitical region or a single shipping route through a conflict point.
“Friend-shoring” internalizes geopolitical risk as a Cost of Goods Sold (COGS). While building a new factory in Mexico or Vietnam may have a higher unit cost than in China, the “risk-adjusted total cost”—which now includes the price of a months-long disruption—is significantly lower.
Of course, this reconfiguration has its own costs. The IMF and the Centre for Economic Policy Research (CEPR) warn that this trend leads to greater fragmentation of world trade.69 This fragmentation reduces efficiency, raises costs for consumers (by undoing the gains of globalization), and can exacerbate geopolitical tensions by creating rival economic blocs.69
Despite the costs, Foreign Direct Investment (FDI) flows show this reshuffle is already underway. The data identifies two clear winners:
- Case 1: Mexico (Nearshoring): A direct beneficiary of the U.S. “near-shoring” strategy, Mexico surpassed China as the top U.S. import partner in 2023.71 FDI flows confirm this: Mexico attracted $34.3$ billion in FDI in the first half of 2025, a $10.2\%$ year-on-year increase.72
- Case 2: Vietnam (Friend-shoring): As part of the “China+1” strategy to diversify Asian manufacturing, Vietnam has become a nerve center.73 FDI has been a vital driver of its growth, with an accumulated FDI stock of over $322$ billion by the end of 2024 73 and inflows hitting an all-time high of $25.35$ billion in December 2024.74
However, a deeper look at the Mexico FDI data reveals a more nuanced trend. Of the $34.3$ billion in FDI in 1H 2025, an overwhelming $84.4\%$ came from the reinvestment of earnings by already-established firms, not from “new investments.”72 A report from the Dallas Fed explains this puzzle 75: companies are not (necessarily) taking on the massive capital risk of building new mega-factories from scratch. Instead, they are using “asset-light” models—such as subcontracting, contract manufacturing, and using “shelter companies” under Mexico’s IMMEX program.75
This is “stealth nearshoring.” Firms are rerouting production and using existing infrastructure in Mexico to diversify away from China, thereby gaining supply chain resilience without a massive capital outlay—hedging their bets in an uncertain political and trade environment.19
“Friend-Shoring” Winners: FDI Flows (2024-2025)
| Country | FDI Metric | Data (Period) | Source / Nature of Investment |
| Mexico | Total FDI (1H 2025) | $34.3$ Billion ($+10.2\%$ Y-o-Y) | 72 Strong U.S. “Nearshoring” pull. |
| Mexico | % from Reinvested Earnings (1H 2025) | $84.4\%$ | 72 “Asset-light” growth; expanding existing ops.75 |
| Vietnam | FDI (Oct 2025) | $21.3$ Billion (cumulative) | 74 Key beneficiary of “China+1” diversification. |
| Vietnam | FDI Stock (End 2024) | $ >322$ Billion | 73 Deep, long-term integration in global supply chain. |
The Innovation Paradox: The Technological “Spin-off” from War
In economics, the “broken window fallacy” 76 correctly teaches that the destruction of war is a net loss. Rebuilding a destroyed factory does not create new wealth; it merely replaces lost capital that could have been used for other productive purposes. However, while destruction is a loss, targeted military spending does accelerate innovation in specific sectors, creating technological “spin-offs” 77 with dual-use (military and civilian) applications.78
The war in Ukraine, in particular, has become a real-time R&D laboratory for 21st-century military technology.80 The world has witnessed an incredibly rapid evolution in:
- Drone Warfare: The use of cheap, adapted FPV (first-person view) drones 81, drone swarms 82, and 3D-printed weapons.83
- Artificial Intelligence: The use of AI on the battlefield for target recognition and autonomous warfare.83
- Naval Warfare: Ukraine’s development of naval drones (USVs), which have effectively neutralized Russia’s Black Sea fleet.85
This innovation cycle is being fueled by a new ecosystem of DefenseTech “startups.” Driven by the war’s urgency and the need for European strategic autonomy, European military tech startups have raised a record €1.4 billion in 2025 alone.87
This phenomenon represents an inversion of the 20th-century military innovation model. In WWII, massive government spending (Manhattan Project, V2 rockets) created technology that had civilian “spin-offs” decades later.76 Today, the flow has reversed. It is civilian technology (consumer drones, commercial AI software, 3D printers) that is being adapted for the battlefield by agile, venture-funded startups.87
This means the “spin-off” back into the civilian economy will be almost instantaneous. The AI 84 and autonomous navigation 85 solutions perfected in the Black Sea have direct, immediate applications in autonomous cargo shipping, warehouse logistics, precision agriculture, and infrastructure management.
However, this rapid proliferation of low-cost technology also creates a new economic risk. The “spillover” effect of the conflict is no longer just economic (gas prices), but physical. Russia is rapidly scaling up its own drone production.80 In September 2025, multiple Russian drones penetrated Polish airspace, forcing the temporary closure of Warsaw’s airports.89 This incident demonstrates a new vector of economic attack: the ability to paralyze an economic hub and critical NATO infrastructure using low-cost weapons.
Navigating a Fragmented Global Economy
The 2025-2026 global economy, as described by the IMF, is characterized by “tenuous resilience” 6 and moderate global growth of $3.2\%$.9 This structural weakness is not a cyclical dip; it is the result of the steady erosion of the post-Cold War pillars of globalization—a process accelerated and driven by conflict.
The era of the “peace dividend”—the period of low defense spending, cost-optimized supply chains, and integrated energy markets that fueled prosperity since 1990—is over.
We have entered an era defined by a permanent “geopolitical tax.” This tax does not appear on any filing, but it is paid by every corporation and consumer. It is a tax paid in the form of:
- Higher Energy Prices: The cost of prioritizing the security of LNG supply over the efficiency of pipeline gas.15
- Higher Shipping Costs: The cost of war risk insurance premiums 28 and the extra fuel for rerouted journeys.27
- Higher Goods Costs: The cost of building redundant and “friend-shored” supply chains instead of cost-optimized ones.69
- Higher Government Budgets: The cost of record-high defense budgets required to operate in a more dangerous world.65
- Higher Capital Costs: The cost of tighter monetary policy needed to fight the structural inflation generated by all this geopolitical friction.19
For investors, executives, and analysts, geopolitical risk is no longer a tail event to be managed, but a core variable to be priced. In today’s fragmented economy, capital allocation, supply chain management, and corporate strategy must now begin with the economic analysis of war.
