KANSAS CITY, MISSOURI, US — Risk is all around us. One of the important reasons for this is that intergroup conflict is a basic characteristic of every human society. Each of these conflicts has the potential to become an explosive situation, although most do not escalate in ways that bring the tensions to such a boil.
But Russia’s unprovoked and aggressive war against Ukraine offered a stark reminder of a lesson from history: the most damaging conflicts are those involving nation-states engaged in large-scale organized violence. These are ever-present possibilities, even in those regions of the world (like post-Cold War Europe) where it had been widely assumed that such possibilities were extremely remote.
The outbreak of war in Europe adds significantly to the challenges that nearly every company in the world now faces. Many companies, big and small, are actively reviewing the long list of the world’s riskiest situations. Some of the names on this list are violent conflicts, pitting human against human, and many of these have been caused by human actions. Others are the result of natural events, which in turn cause harmful interruptions to the natural flows of goods, capital and people.
In the current situation, marked as it is by unprecedented geopolitical turbulence, corporations that are anxious to succeed have been seeking to define their own geopolitical risk mitigation strategy.
In the current situation, marked as it is by unprecedented geopolitical turbulence, corporations that are anxious to succeed have been seeking to define their own geopolitical risk mitigation strategy. They are paying attention to a knotty complex of interlinkages that help to determine which risks are most likely to create the toughest conundrums for executives. One key goal that all corporate leaders have in mind is to secure early and accurate insights into the most critical of the fast-changing and evolving conflict situations.
While the modern world always has been rife with complex regional crises and global risks, one new feature has emerged during the 21st century: a growing number of the world’s “hot spots” are hot because of the interplay between broken human systems and broken natural systems.
Consider, for example, the case of Syria, a once influential Middle Eastern power. A seminal research article was published in the Proceedings of the National Academy of Sciences (PNAS) journal in 2015: “Climate Change in the Fertile Crescent and Implications of the Recent Syrian Drought.” Five scholars made a strong case for Syria’s heightened vulnerability to large-scale violent conflict as a direct effect of the mega-drought, which itself resulted from human-induced climate change.
Here is their view, in summary: “There is evidence that the 2007-10 drought contributed to the conflict in Syria. It was the worst drought in the instrumental record, causing widespread crop failure and a mass migration of farming families to urban centers. Century-long observed trends in precipitation, temperature, and sea-level pressure, supported by climate model results, strongly suggest that anthropogenic forcing has increased the probability of severe and persistent droughts in this region, and made the occurrence of a three-year drought as severe as that of 2007−10 two to three times more likely than by natural variability alone. We conclude that human influences on the climate system are implicated in the current Syrian conflict.
“Before the Syrian uprising that began in 2011, the greater Fertile Crescent experienced the most severe drought in the instrumental record. For Syria, a country marked by poor governance and unsustainable agricultural and environmental policies, the drought had a catalytic effect, contributing to political unrest.
“We show that the recent decrease in Syrian precipitation is a combination of natural variability and a long-term drying trend, and the unusual severity of the observed drought is here shown to be highly unlikely without this trend. Precipitation changes in Syria are linked to rising mean sea-level pressure in the Eastern Mediterranean, which also shows a long-term trend. There also has been a long-term warming trend in the Eastern Mediterranean, adding to the drawdown of soil moisture.
“No natural cause is apparent for these trends, whereas the observed drying and warming are consistent with model studies of the response to increases in greenhouse gases. Furthermore, model studies show an increasingly drier and hotter future mean climate for the Eastern Mediterranean. Analyses of observations and model simulations indicate that a drought of the severity and duration of the recent Syrian drought, which is implicated in the current conflict, has become more than twice as likely a consequence of human interference in the climate system.”
Credit: Adobe StockInter-state and internal conflicts
Within any list of the various types of risky situations facing the world economy, there are two that are worth special attention:
inter-state conflicts that could create severe chokepoints in the global transport system. These can be violent or non-violent conflicts.
internal conflicts within a particular country that creates a severe chokepoint in the global transport system. These too can be violent or non-violent conflicts.
In 2022, the world’s top hot spot is located inside the former Soviet Union. In the face of Russia’s on-going and bloggy war, farmers across Ukraine have been trying to salvage what remains of their planting season while coping with broken supply chains, a shortage of supplies and scarce manpower. Elizabeth Stephens of Geopolitical Risk Advisory Corp. said, “the disruption to the agricultural sector caused by the Russian invasion will not only affect the food security of millions of Ukrainians, but also that of a billion people far beyond the country’s borders.”
Here are some of the aftershocks that Stephens noted: The loss of Ukrainian wheat, corn, barley and sunflower oil from international markets will fuel food price inflation at a time when the global economy is recovering from the COVID-19 pandemic. Egypt buys almost two-thirds of the wheat it consumes from international markets, making it the world’s largest wheat importer. It relies on Russia and Ukraine for more than 80% of the wheat it imports. Ukraine accounts for 80% of Lebanon’s imports, 44% of Libya’s imports and is a major supplier for Somalia, Syria and Libya. In India, 77% of the domestic supply of sunflower oil came from Ukraine in 2019. In China, it was 63%.
But Stephens pointed out that many countries that buy directly from the two countries are not the only ones that are being affected.
“Global trade has been built around the expectation of uninterrupted supply flows, and the impact of the war has rippled throughout the international grain and vegetable oil markets, as the cost of livestock feed and fertilizer soars,” Stephens said.
Governments in developing countries, where food costs make up a substantial proportion of household spending, are anticipating social unrest — and readying their spying agencies, police forces and uniformed troops. Stephens pointed out that “they are confronting the unpalatable trade-off between increasing already high food subsidies when public finances are already severely stretched.”
Looking back into recent history, Stephens noted that the last significant spike in food and fuel price inflation, in 2008, triggered protests across the developing world, culminating in the “Arab spring” and the removal of leaders in Tunisia, Egypt and Libya.
“Ironically, those leaders who actively or tacitly support Russia’s actions in Ukraine are the most likely to be negatively impacted by the supply chain disruption and food and fuel shortages that Putin’s war has unleashed,” she said.
Climate change’s impact
Climate change also has emerged as a destabilizing force in recent years. The geopolitics of decelerating climate change through a cut in fossil fuel emissions already is being felt. Russia is a declining power by every metric (diplomatic, economic, demographic). And as Stephens pointed out, “the strategic and economic value of its oil and gas reserves are being downgraded by the global pursuit of net zero.”
Russia has attempted to reverse its decline and increase its strategic relevance by resorting to land grabs in Georgia, Moldova, Ukraine’s Crimea — and now with the attacks against all of Ukraine. The stage is being set for an intensification of great power rivalry and geopolitical competition.
Stephens’ judgment is straightforward: “We can expect to see more military incursions and conflict as states that are economically reliant on fossil fuels try to assert themselves before consumption declines.”
China’s heavy clean-tech investments over the past decade has made it hard on the United States, which is arriving late to the dance. Stephens said the Chinese do not see climate action as saving the ice caps, but rather as an opportunity for Beijing to dominate the post-carbon energy environment.
“In the world of clean energy, a new set of winners and losers will emerge, engendered by competition for raw materials and the control of supply chains,” she said.
Translating geopolitical insight into business foresight creates a competitive advantage for corporations. To achieve this, Stephens reminded her clients that “geopolitical risk should not be viewed as a standalone risk, but one that impacts a wide-range of other business-critical risks, which requires an integrated approach to risk management.”
For example, if an internal audit function is auditing supply chains, you would expect geopolitical risk factors to be integrated into that audit. The same can be said for cybersecurity, reputation, business continuity and financial stability audits.
Stephens concluded that the corporate world increasingly realizes the profound effect that geopolitics has on business resilience and corporations are increasingly seeking to manage these issues through the integration of geopolitical risk into their enterprise risk management frameworks.
The US domestic situation
A growing number of geopolitical risk experts, such as Elizabeth Stephens of Geopolitical Risk Advisory Corp., are predicting social unrest, riots, the fall of political leaders and widespread migration caused by hunger, to punctuate the latter part of 2022 and 2023.
The imposition of economic sanctions against Russia is likely to lead to an acceleration of the decoupling of the global financial system.
The imposition of economic sanctions against Russia is likely to lead to an acceleration of the decoupling of the global financial system. The ability and willingness of the United States to freeze the Russian central bank’s dollar assets, has put China on notice that in the event of a confrontation with the United States, its $3.2 trillion in foreign reserves may rapidly become a liability rather than an asset.
To circumvent US economic power, China increasingly will conduct trade with developing nations in renminbi. While the dollar will remain the reserve currency, parallel payments systems will emerge, creating competing trading blocs. This will disrupt the flow of capital and credit and increase the cost of trade.
As they cast their eyes around the world, Stephens and other notable analysts like her have been looking closely at the internal political dynamics within the United States. Although it has been politically stable throughout modern history, the US political system has now, in her view, “become a core geopolitical risk. The United States is not in decline in terms of its military power, economic power, educational capacity and influence of its companies. In fact, the United States is asymmetrically more powerful than its allies in terms of the influence of its tech companies and by its response to the pandemic. On the other hand, the influence of the United States as a democracy has become fundamentally eroded.”
The question that Stephens asks is a very basic one: “Will Democrats and Republicans de-escalate tensions before there is an implosion?”
Unless the radical wing of the Democratic party and the base of the Republican party are quelled by moderates within both parties, tensions will continue to escalate.
What form could this escalation take? For the first time in over 150 years, a growing chorus of professional political scientists and commentators are actively discussing the possibility of a civil war inside the United States. How likely is this? Stephens’ judgement is that “a nationwide crisis of political legitimacy could provoke domestic terrorism and create autonomous zones of protest around the country. The federal government would become structurally dysfunctional. Secessionist movements would gain traction.”
Consumed by problems at home, the United States would fail to project influence abroad, allowing other powers to challenge the status quo.
Since the end of the Cold War, there has been a presumption that democracy was going to win globally as the most prevalent political system.
“This outcome can no longer be taken for granted,” Stephens said. “Some of this uncertainty derives from the lack of confidence in whether US institutions are fit for purpose,” while some is due to the utilization of new technologies that are enabling governments to implement control by means of surveillance.
Stephens has concluded that “factionalism undermines the ability of a state to govern itself effectively and project its power internationally. Unchecked, political factionalism contaminates the economic environment, hampering economic growth, depressing entrepreneurship and stock market valuations and undermining the attractiveness of a country as an investment destination.”
Gordon Feller is a Global Fellow at the Smithsonian Institution/WWIC. He may be reached at [email protected].
