The Impact of Geopolitical Tensions on International Capital Flows

Abstract

The study examines the impact of geopolitical tensions, which have increased sharply in recent times, on international capital flows. It shows that geopolitical tensions affect cross-border investment flows through three main channels: increased geopolitical risks that encourage international investors to reduce investments in countries with different foreign policies; tighter controls on incoming FDI in many countries to ensure national security; and financial sanctions imposed by Western countries to put pressure on other states. Based on the analysis of investment relations between the United States and China, the contradictions between which are the main source of geopolitical tension in the world, the author confirms the conclusion that the influence of geopolitical factors on capital flows between the countries has increased since the second half of the 2010s. However, the study substantiates that the emerging fragmentation of cross-border capital flows can have not only negative, but also positive consequences for the global economy and finance. The compression of capital flows between the countries of the global North and South may push the latter to establish closer integration ties in the financial sector, create financial infrastructure independent of the West, focused on the needs of developing countries, and accelerate the internationalization of their currencies. As a result, these processes could weaken the dominance of Western countries in the global financial system and facilitate its transition to a more equitable multipolar configuration.

Keywords

• international capital flows
• geopolitical tensions
• geopolitical risks
• foreign direct investments
• portfolio investments