The global framework of nuclear deterrence, a cornerstone of international security for decades, is showing significant signs of strain. With the potential expiration of the New START treaty on and escalating geopolitical tensions, the risk of nuclear conflict is widely considered to be at its highest point in decades, according to a recent United Nations Security Council briefing. This erosion of established norms is prompting a reassessment of global security strategies, with potentially far-reaching consequences for international relations and, crucially, for financial markets.
For nearly four years, Russia has been subjected to missile strikes utilizing systems supplied by other nuclear-armed states, a situation that challenges traditional deterrence models. The United Kingdom’s discussion of developing new tactical ballistic missiles for Ukraine, and the potential deployment of “leading-edge weapons” directly to Ukrainian forces, further complicates the landscape. Russia’s own employment of nuclear-capable intermediate-range ballistic missiles in Ukraine, treated as conventional weapons, signals a dangerous shift in how these capabilities are perceived and utilized.
The current situation isn’t simply about an increase in the number of nuclear weapons, but a fundamental change in their role. The long-held assumption that nuclear weapons would primarily serve as a deterrent against large-scale attacks is being challenged. The war in Ukraine, the first conventional conflict in Europe since World War II fought under the shadow of nuclear threats, demonstrates a willingness to operate closer to the nuclear threshold than previously seen. This is compounded by the actions of other nations. China is actively expanding its nuclear arsenal and investing heavily in technologies like space and artificial intelligence, while concerns persist regarding the military dimension of Iran’s nuclear program.
The fragility of the global nuclear balance is underscored by the impending expiration of New START. President Trump’s comment – “If it expires, it expires” – highlights a concerning lack of commitment to arms control. The treaty, the last remaining bilateral nuclear arms control agreement between the United States and Russia, provides a crucial framework for transparency and predictability. Its demise would remove a significant constraint on the further development and deployment of nuclear weapons, potentially triggering a new arms race.
The implications for financial markets are multifaceted. While a direct nuclear exchange remains a low-probability event, the increased risk of escalation introduces a new layer of systemic risk. Geopolitical uncertainty, already elevated due to conflicts in Ukraine and the Middle East, would be further amplified. This could lead to increased volatility in equity markets, a flight to safety in government bonds, and a strengthening of the US dollar as investors seek a haven from risk.
Beyond the immediate market reaction, a breakdown in nuclear deterrence could have longer-term economic consequences. Increased defense spending by major powers would divert resources from other areas of the economy, potentially hindering economic growth. Supply chain disruptions, already a concern in recent years, could worsen as geopolitical tensions escalate. The erosion of international cooperation could undermine efforts to address global challenges such as climate change and pandemics, further impacting economic stability.
The current situation also raises questions about the effectiveness of traditional risk models used by financial institutions. These models often rely on historical data and assumptions about rational behavior, which may not hold in a world where nuclear weapons are increasingly integrated into conventional warfare strategies. Financial institutions may need to reassess their risk assessments and incorporate new scenarios that account for the possibility of nuclear escalation.
The motivations behind states pursuing nuclear weapons are complex, driven by factors including security concerns, prestige, and domestic political considerations. However, the current environment suggests a shift towards a more pragmatic calculus, where nuclear weapons are seen as a means of deterring not just nuclear attacks, but also conventional aggression. This blurring of the lines between nuclear and conventional warfare is particularly concerning, as it increases the risk of miscalculation and escalation.
NATO’s nuclear deterrence policy remains focused on preserving peace, preventing coercion, and deterring aggression. The alliance maintains that as long as nuclear weapons exist, it will remain a nuclear alliance, while simultaneously seeking a world without nuclear weapons. However, the effectiveness of this policy is being tested by Russia’s actions and the changing geopolitical landscape. The alliance’s ability to maintain a credible deterrent posture will be crucial in preventing further escalation.
The situation is not simply a matter of preventing nuclear proliferation. It’s about managing a world where nuclear weapons are becoming increasingly integrated into conventional military strategies and where the traditional safeguards against their use are eroding. The potential consequences for global security and the global economy are profound, demanding a renewed focus on arms control, diplomacy, and risk management.
the current trajectory suggests that nuclear weapons are no longer functioning as a decisive factor in global security. Instead, they are creating a more dangerous world in which countries are neither safely deterred nor meaningfully disarmed. This erosion of deterrence is a critical issue that requires urgent attention from policymakers, financial institutions, and the international community.
