Geopolitics and resilient systems

The long honeymoon of global business is over, geopolitics is back on the corporate agenda. Our systems will change to become more resilient.

Like the pandemic, Russia’s invasion of Ukraine has been a wake-up call for Western societies. But do we learn our lessons? And how resilient are our systems? General Sir Richard Barrons, who will speak at NEXT22 in September, puts it this way:

We have to come to terms with the fact that we in the West exist as strategic snowflakes, where our daily life is enormously fragile.

Over decades, we didn’t really care about disruption, even though one crisis closely followed the other: 9/11, the Great Recession, migration, climate change and two (!) pandemics, just to name a few. And that’s without mentioning the digital revolution. Now, Germany again finds itself at a breaking point, as in the Cold War era. Currently, the country is highly dependent on natural gas deliveries from Russia, which is waging war not just against Ukraine, but against the West. German energy systems aren’t resilient.

Historian Martin Schulze Wessel comes to a harsh verdict:

With the Russian attack on Ukraine, Germany has in a sense lost a bet that could only be justified by ignoring history. For decades, the political rationale of German-Russian relations was to make itself dependent on Russia with a clear eye and without need. […] The high-risk and ultimately failed policy was based on the assumption that they were dealing with an actor who followed the rules of rational choice.

Over decades, globalisation had created so many interdependencies that they were often believed to be peace guarantees. Turns out that Russia, and possibly China, didn’t get the memo. Does this mean we’re back to the USA being the world’s policeman? There is a long history of proxy wars, and columnists describe the current war as another example – thus taking up Russia’s talking points.

The honeymoon is over

For businesses, all this means that the long honeymoon of global business is over. Many global companies have terminated their business in and with Russia. In the foreseeable future, it will get harder to discern who you can and cannot do business with. Geopolitics is back on the corporate agenda. Companies will need more expertise on this. It’s not possible anymore to do global business without taking geopolitical issues into account.

To take the most obvious example: energy supply is no longer first and foremost a question of market prices. It’s a question of geopolitical strategy. Politics will get more involved, and already is. We’ve been there before. And let’s not forget that the liberalisation of energy markets is a quite recent, post-Cold War phenomenon. With the bailout of Uniper in Germany and France nationalising power giant EDF, we already see the trend reversing. It may be temporary, but who knows?

German economists and energy experts are now calling for the development of a European energy strategy toward Russia:

Europe could assert its economic and security interests much better if it made strategic use of the modalities of energy imports as a foreign policy instrument.

In essence, it’s about the interplay of economic value and ethical values. Resolving conflicts between value and values is a matter of policy and politics. Consequently, the German government is soon to issue a national security strategy:

Tellingly, that is Germany’s first such effort at framing its own geostrategic goals.

How resilient are our systems?

Geopolitics is not only about supply chains, which have been under pressure for years now. It’s also about distribution, or the question of where you can deliver your products to. So it’s a double-edged sword. And it even has repercussions for the personnel market, i.e. the question of who you can actually hire. But is it a perfect storm, questioning the resilience of our systems?

So far, systems appear remarkably resilient. But are they really? We can only know that in hindsight. The current pandemic as a stress test turned out to be manageable. Early predictions of a new great depression so far haven’t materialised. Currently, inflation leads to loss of wealth, or is it the other way around (i.e., loss of wealth leading to inflation)? In any event, the result is the same: people need to spend more money for the same amount of goods or services, or they get less for the same amount of money.

Will this be temporary or permanent? If our systems prove their resilience again, the shock and its aftermath will be temporary, and we’ll return to the growth path. If not, things become hard to predict. Increasingly, our crises are interconnected, as our systems are. Geopolitics, migration, climate change and the energy crisis are closely related.

Killing several birds with one stone

The good news is that mid-term measures now point in the same direction: with renewable energy, we can and should crack the dependency on Russian (and other) oil and gas, mitigate climate change and solve the energy crisis in one swift go. Solar energy was cheap even before the war and, with rising energy prices, is now actually cheaper in comparison with other fuels, despite inflation starting to bite. The same is true for wind. This alone will spur investments, accelerate the clean energy transition, and lead to economic growth. It will be a growth programme for decades.

So far, we didn’t even mention other threats Richard Barrons notes: cyber warfare, and social media manipulation. Currently, there isn’t much attention to the former. Mikko Hypponen will give an update on that at NEXT22. But on social media, the war is in full swing. For years, we knew that Russia was playing sinister games in the digital sphere. We were slow to address the issue.

A world of permanent crisis

The issue runs much deeper, since our daily life depends on complex and fragile systems, and these can be brought to their knees by cyber warfare and social media manipulation. According to Richard Barrons, individual citizens need to acknowledge

that there is no written guarantee that it’s going to continue unless they help it to continue. Secondly – and this will be a shock to many – they have to recognize this is not a problem government can solve. Governments can do many things in protecting their societies and their citizens, but the scale and complexity means that this is the duty of every citizen, every enterprise, every institution to build in their own resilience. […] The fact is when bad things happen and they probably will, every citizen is going to have to play their part.

He isn’t too optimistic about political leadership in Western countries:

We’re in a place where we can’t have this conversation in the heat at the moment. It’s too late and states like Russia and China understand this very well.

This leaves us with a call for resilience. In a world of permanent crisis, we need to build resilience into our systems. Or let’s put it another way: expect our systems to change, to become more resilient, in order to ensure their continuity.