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How can business navigate geopolitics?

07 Nov, 2022

The last few months have been a whirlwind. With so many moving parts in global politics and economics it is hard to understand, let alone anticipate, events.

Back to the future

It’s been clear for some time that we have entered a new phase of geopolitics, though we don’t yet have a name for it. After 1989 we felt a broadly shared direction of travel. Now we are back to fractures and rivalry between major powers and more naked pursuit of national interest.  

This year a rump twentieth century superpower invaded a former colony of 40 million people, threatening the post-cold war European security system. The signs were long there, but we were slow to read them.

Putin made at least three mistakes. He overestimated Russian military power and competence. He underestimated Ukrainian identity and will. And he misjudged Western unity and capacity after Trump, Brexit, Covid and Afghanistan.  

Where this leads is unknown, though the breakdown of relations with a Putin-led Russia is irreparable. The war is likely to run on, with the real risk of escalation. The lesson of recent years is not to dismiss what we see as irrational behaviour.

Yet there is a fair chance that the upshot will be a more robust Ukraine, a constrained Russia, and a renewed purpose in Western democracies. Who predicted that six months ago?

Systemic fragmentation

The Ukraine war is speeding up the fracturing of the global system into competing blocs. Sweden and Finland have joined NATO. America and Europe have come back together. Russia has moved economically closer to China and possibly India.   

Many other countries have avoided taking sides. A new form of non-alignment is emerging – balancing the political ties of Chinese investment, residual relationships with Russia, and ambivalence about the West. Turkey’s Erdogan, still a NATO member, and India’s Modi are pursuing a policy of pick-and-mix.    

America and China – a lasting downturn

The confrontation between America and China is still the defining geopolitical fault-line. For Europeans, America is no less essential, but now less dependable, partner and protector. Biden has made mistakes, such as in Afghanistan, but he has done well in rebuilding relationships and alliances in Europe and Asia Pacific. The return in America of Trump, or someone with the same playbook, would weaken Western security and cohesion.

The mid-terms are around the corner, and the Democrats seem likely to lose at least the House. Whatever happens, we will move straight into the Presidential campaign. America’s deep divisions over culture, identity, gender and race look like being the main battle lines in 2024.  

China is still the geopolitical game-changer. This month President Xi will be handed a third term as leader. As in Russia, constitutional rules are being adapted to suit the autocrat.

But China is not sitting comfortably. There are serious problems of slow growth (3%), the consequences of zero covid, and property market liquidity. Security, at home and abroad, is the top priority.

China has ambitions to dominate her region and will be learning from Ukraine as they look to Taiwan. Is the lesson don’t invade? Or if you invade, do it with overwhelming force? Or rely on an economic blockade? Or sit tight and build more self-sufficiency? Chinese aggression would meet a tough economic and military response from the US and allies. This may encourage prudence, but there is ample scope for miscalculation.   

The downturn in West/China relations will be lasting. Security concerns will grow – not only in conventional military terms but on the new frontlines of technology transfer, data, cyber-security, infrastructure and digital espionage.  

Screening of foreign investment in sectors linked to national security and sovereign capability will intensify. Decisions in sensitive cases will be heavily influenced by international and domestic politics.    

On the brighter side, in less sensitive fields economic globalization is changing rather than stopping. The recent US China agreement on audit was a counter-indicator, reflecting the expansion of technology-enabled services trade.

Europe and the UK – back on the frontline

Europe has been dragged back into the world of hard power, having spent too long theorizing about strategic autonomy from the US, its closest ally, while turning a blind eye to economic strategic dependence on Russia, its biggest threat.

Europe’s response on Ukraine, though not perfect, has shown clarity of purpose and the beginnings of lasting strategic shifts in energy and defence policy. It involves stronger focus on NATO and America.

The Ukraine war may weaken the political grip of France and Germany in the EU as Poland, the Baltic countries and perhaps Ukraine gain influence. That does not diminish the value of the EU (just ask Ukrainians). But a homogeneous Union of rich countries seeking ever closer economic integration looks increasingly like the answer to an old question. 

The UK has been strong on Ukraine and in NATO and has called Putin right in recent years, though failing to follow through on dirty Russian money.  

But Brexit remains a totemic divide about national identity and has weakened international relationships. We are experiencing unusual political and constitutional instability. With lower growth and productivity than our competitors, the markets were already leery before the new government made its early missteps.

How can business respond?  

Political instability and risk is here to stay, changing the priorities of governments. With bandwidth so heavily loaded, the business community cannot rely on government to get things right and needs effective engagement.

Patterns of international trade and investment will continue to change, especially in sensitive sectors. We need commercial strategies to identify opportunity and hedge against political risk and technological decoupling. This involves clear mapping of dependencies, from commodities and materials to skills and workforce.

Regulatory decoupling is an issue for post-Brexit Britain, and also more widely. On ESG for example, one can imagine different reporting requirements emerging in Europe and America. Business and investors should continue to show leadership on matters of sustainability and social justice, but it will be a contested and complex area.

Although political crisis management will be top of the agenda, the long-term challenges of environmental sustainability and climate will inevitably reassert themselves. Businesses and investors can help governments stay focused on viable long-term policies and create the right incentives for partnership and investment.

Author

Sir Simon Fraser is a co-founder and Managing Partner of Flint. He advises clients on policy, political and regulatory issues in the UK and Europe.

From 2010 to 2015 Simon was Head of the UK Foreign Office and Diplomatic Service. He ran the global network of British embassies and was on the National Security Council.

To find out more about how Flint can help you navigate the risks and opportunities of these developments, get in touch.

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