Geopolitics has become an increasingly pressing issue for businesses as the global power dynamics continue to evolve. The rise of a multipolar world and emergence of countries such as China, India and Russia have resulted in companies being increasingly entangled in political tensions.
This shift in the global landscape has forced businesses to navigate how they will approach new complex geopolitical challenges. However, it also offers valuable lessons for them.
The stability of the Cold War era is a thing of the past, giving way to a more unpredictable world where trade wars, sanctions and supply chain disruptions can arise unexpectedly. In today's era, businesses must remain vigilant and agile to swiftly respond to sudden geopolitical shifts, in order to ensure their survival and maintain competitiveness.
Emergence of bipolar world
For a long time, the world was relatively easy to understand. Throughout the initial Cold War, spanning from the conclusion of the Second World War until the collapse of the Soviet Union in 1991, the global arena was clearly divided between the US-led West and the Soviet Union. These two superpowers operated in distinct spheres, rarely crossing paths in the business world.
Businesses enjoyed a relatively stable environment with minimal risks associated with global politics. Conflicts such as the Korean and Vietnam wars were confined to smaller or developing markets that did not really ruffle the feathers of big corporations, as those markets were not as economically important at the time.
However, all that clarity went out of the window when the Soviet Union collapsed in 1991. Suddenly, communist nations in Eastern Europe were ditching their state-controlled economies in favour of market economies driven by supply and demand. The business world had been hit with a seismic shift, and companies had to adapt.
The world shifted to a US-dominated global order, where the American economic model was seen as the default path to success. Even China and Russia hopped on to the bandwagon for a bit, dabbling in more market-friendly systems and cosying up to private businesses and international trade.
China's rise as an economic powerhouse
However, this era of stability was short-lived. China's meteoric rise as a global manufacturing giant, which began in the late 1970s and gained momentum after its entry into the World Trade Organisation in 2001, disrupted the status quo.
Over the years, the rapid advancements in automation and globalisation sparked new internal disagreements over trade and climate policies among the G7 economies, comprising the US, Canada, France, Germany, Italy, Japan and the UK. The future of the G7 is also facing challenges due to continuing tensions with Russia and China.
Another impactful change sweeping through the last decade has been the rejection of globalisation in many countries. In the US, for example, many people became disillusioned with its effects. A prime example is “Make America Great Again” – Donald Trump’s 2016 presidential campaign slogan – which reflected broader frustrations with job losses and the decline of traditional industries.
In response, the US began to step back from the leadership role it had once held in the global economy, creating a power vacuum. For example, the US withdrew from major international agreements such as the Trans-Pacific Partnership in 2017, and placed more focus on protectionist trade policies, such as imposing tariffs on China.
These moves left space for other nations to expand their influence in global trade and economics, particularly China which has long been a dominant force in global supply chains. Emerging economies such as India, Russia and Brazil also started to flex their muscles, adding more complexity to the global picture.
Despite stepping back economically, however, the US still holds tremendous influence through its financial and military power. Despite some recent weakness, the US dollar remains the dominant global reserve currency, widely used in trade, finance and central bank reserves.
Also, US Treasury bonds are considered among the safest assets, because of the stability of the US economy and the government’s solid track record of paying its debts.
This gives the US significant leverage over other countries, even if it no longer leads in every economic aspect, such as global manufacturing output. Indeed, many international transactions, including those involving commodities such as oil, are conducted in dollars.
Also, the US oversees key financial systems including the international payments network Swift. US sanctions have the power to limit access to these systems, affecting countries and individuals around the world.
Fragmentation of the global order
But this new world order – where America leads in military and financial matters, while China dominates manufacturing – creates a more fragmented and unpredictable landscape. It is unlike anything we have seen before, and many businesses are struggling to navigate the new normal.
Ian Bremmer, a political scientist, calls this era the “G-Zero world”, where no single nation or group of nations oversees global affairs. As a result, regional powers such as India, Russia, Turkey and Brazil are becoming more assertive and filling the leadership gap.
For example, Russia has become more assertive through its military actions in Ukraine and its influence in the Middle East. India is increasing its global presence through its Make in India campaign, which aims to boost the country's manufacturing sector and offers manufacturers various incentives.
This lack of a single, global leadership creates what many business leaders refer to as a Vuca world, characterised by volatility, uncertainty, complexity and ambiguity. In this environment, companies are increasingly caught in the crossfire of geopolitical struggles, sometimes with little warning.
For example, Chinese telecoms firm Huawei faced sanctions and restrictions from the US due to America’s geopolitical tensions with China. Similarly, many western companies operating in Russia were forced to exit or face sanctions after its invasion of Ukraine.
It is therefore clear that businesses play a huge role in economic interdependence, and that is why they are often pulled into geopolitical battles. Governments are using companies as pawns in their struggles for power, imposing sanctions, tariffs or trade restrictions that can hit foreign firms overnight.
A company might find itself cut off from a key market or supplier simply because of shifting political winds. During the trade war between 2018-2020, for example, the US imposed tariffs on Chinese goods.
This had a significant impact on companies that relied on Chinese suppliers, particularly in industries such as electronics, textiles, and manufacturing. These companies were faced with unforeseen increases in production costs, causing disruptions in their operations and financial stability.
To not only survive but also thrive in today's ever-changing business landscape, companies must be proactive. This means constantly scanning the environment, creating strategic plans, and establishing structures that allow for quick reactions in urgent situations, as well as thoughtful planning for long-term scenarios.
Geopolitics is no longer a distant concern for businesses; it is a critical factor that can have a direct impact on their financial success.
Richard Baldwin is professor of International Economics at IMD
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One in nine do not have enough to eat
Created in 1961, the World Food Programme is pledged to fight hunger worldwide as well as providing emergency food assistance in a crisis.
One of the organisation’s goals is the Zero Hunger Pledge, adopted by the international community in 2015 as one of the 17 Sustainable Goals for Sustainable Development, to end world hunger by 2030.
The WFP, a branch of the United Nations, is funded by voluntary donations from governments, businesses and private donations.
Almost two thirds of its operations currently take place in conflict zones, where it is calculated that people are more than three times likely to suffer from malnutrition than in peaceful countries.
It is currently estimated that one in nine people globally do not have enough to eat.
On any one day, the WFP estimates that it has 5,000 lorries, 20 ships and 70 aircraft on the move.
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Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.
Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.
“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.
Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.
“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.
Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.
From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.
Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.
BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.
Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.
Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.
“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.
Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.
“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.
“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”
The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”
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Date started: Okadoc, 2018
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Based: Dubai, UAE
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Name: HyperSpace
Started: 2020
Founders: Alexander Heller, Rama Allen and Desi Gonzalez
Based: Dubai, UAE
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Who inspires you?
I am in awe of the remarkable women in the Arab region, both big and small, pushing boundaries and becoming role models for generations. Emily Nasrallah was a writer, journalist, teacher and women’s rights activist
How do you relax?
Yoga relaxes me and helps me relieve tension, especially now when we’re practically chained to laptops and desks. I enjoy learning more about music and the history of famous music bands and genres.
What is favourite book?
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Hala2 Lawen (Translation: Where Do We Go Now?) by Nadine Labaki
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Mamma Mia
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How to avoid crypto fraud
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