Beyond the Lines | The politics of risks: Why geopolitics matters more than ever to businesses and economies

When Covid-19 struck the world in 2020, it set into motion a pattern of global events that redefined the phenomenon of Black Swan events. Black Swan events are rare events of extreme impact that are not typically foreseen when they occur but are rationalised to have been inevitable. Covid-19 and its impact was a Black Swan event, but its reoccurrence wasn’t. Russia’s invasion of Ukraine was inevitable but of an extreme impact on the global economy. The war in Gaza is likely to be an event of extreme impact for global trade such as oil and supplies. There is much apprehension about China’s potential takeover of Taiwan. Is that an event we can rule out? Is that an extreme impact event, if it occurs? Does it impact the semiconductor industry, the tech sector and consequently, the global economy? Geopolitics, global economy and its stakeholders At no point in time in the past has geopolitics impacted the business philosophy of corporations as much as in the current times. This situation is a derivative of an interconnected world where the mobility of people, finances and ambitions carry consequences of events and actions quickly to farther reaches of the world. And if those events continue to happen with terrifying regularity, should the world be worried? How have we come to a point when conflicts and wars are returning to the 1970s-80s era? In the 1940s, the end of the World War and the emergence of two superpowers heightened the significance of geopolitics. By 1990s, the decline of one of the two superpowers meant that geoeconomics – the economic factors driving global politics and trade — became an influential context of understanding. A unipolar world order catapulted geoeconomics to a position where trade and economics dictated the impact on international relations. The global financial crisis (GFC) of 2008 was a typical example of how murky economics hurt corporations, jobs and businesses. It was a Black Swan event in a decade. An interconnected global economy resulted in trade dynamics and local market conditions influencing investment decisions and prospects of firms. For multinational corporations and sovereign funds focused on cross border investments, macroeconomic indicators and policy positions of investee countries assumed significance in understanding volatility since wars, conflicts and political posturing began to turn less impactful. In such a scenario, an event such as GFC became an important marker of how an interconnected global economy was impacted by the housing economy in the US. Emergence of China as a determinant The emergence of China as a balancing superpower began to change the factors that impact global businesses. Unlike the 1980s, the global economy today is much more entwined and interdependent. Even the political grouping is complex and overlapping: China and India, rivals otherwise, appear sympathetic to Russia in the war. The US and its allies are closer to India via the Quad but Russia is against the Quad and sides with China, though it isn’t against India. Thus, the impact of wars, the pandemic and political posturing can open and shut different supply lines and foodgrain routes, initiate new backend manufacturing opportunities, reassign energy and semi-conductor markets et al. Business corporations and political risks Noted economist Nouriel Roubini sets the complex truth into perspective when he says that “there is a relatively high chance — 65% — of the (Gaza) conflict not escalating regionwide, implying that the economic fallout would be mild or contained. The bad news, however, is that markets are currently assigning only at best a 5% probability to a regional conflict that would have severe stagflationary effects around the world when a more reasonable figure is 35%.” Thus, he hints at the lack of appropriate context when assigning risks. For business corporations, the tricky secret about wagering on the role of geopolitics in their business decisions starts from the point of thinking about those events on the horizon and estimating the chances of their occurrence. If the chances are high, companies would do well to know about the impact on the industry and then on to the specific business transaction. Corporations with cross border interests have begun to assess how well prepared they are to tackle direct or indirect risks. For instance, the China-Taiwan war risk in future is seen as impacting the semiconductor industry and thus impacting the sectors dependent on the chip. Which is, virtually every modern industry operating across geographies. And that’s a reason why backend chip manufacturing has become one of America and India’s top priorities. China has been trying to develop its domestic semi-conductor industry. The US plans to stymie the hypergrowth of the Chinese semiconductor industry by ensuring that ASML, the Dutch supplier of semiconductor raw material wafers, does not supply to Chinese firms. The geopolitical rivalry saw the introduction of the Uyghur Forced Labour Prevention Act, which prevents purchase of solar panel components from Xinjiang in China. A McKinsey report states that geopolitical instability has been the foremost risk for business leaders in the last year that is also connected with factors such as inflation and interest rates. ‘Governments are increasingly using “financial levers” to advance national security goals’, said Lindsay Newman, head of geopolitical thought leadership for S&P Global Market Intelligence. Recently, while speaking at a prominent management school, I felt the need for young professionals stepping out into a corporate world to be more conscious, than professionals in the past, about geopolitics and their bearing on policy, sector and their cumulative impression on corporations and more importantly on the firm they would be part of. The pandemic carried geopolitical undertones right from the start which demanded that younger leaders adapt to a changed environment of business governance. At a strategic level, the alleged role of China at the onset of Covid, the mysterious stance of western pharma companies and the political posturing between nations during the pandemic simultaneously threw open both a medical crisis and a new geopolitical normal, where economic outcomes became subsets of geopolitical events. Geopolitics underwent change post Covid in the form of a fundamental shift in the manifestation of geopolitical tension which consequently affects the way businesses think. For instance, tensions between Russia-Ukraine or Israel-Hamas had traditionally simmered below the surface for years, occasionally rearing their ugly heads. However, the pattern has changed and those tensions now have exploded in the open. An increased instability in economic outlook has resulted in companies dialling down revenue forecasts for the coming year. How do global risks impact innovation? The recent wars in Europe and in the Middle East are interestingly in the orbit of essential supplies and key trade routes. Supply chain disruptions due to the situation in Europe caused spikes in prices of food grains, natural gas, and fossil fuels. Western nations that were beset with high inflation were hit by the war that increased the burden on their economies. As Europe struggled, the war in Gaza threatens to spike oil prices like the oil crisis of 1970s. Although the ongoing war hasn’t impacted the commodity markets majorly yet, the World Bank believes that a continued war could result in oil prices rising by 75%. An HBR (Harvard Business Review) Report says that for every increase in a percentage of global political risks, the number of patents are reduced by 0.18%. Which means that an increase in geopolitical risks could impact tech innovation over time, which can also have a domino effect on prospective funding made available towards tech innovation. Though it’s early in the day, an acceleration in continued risks could also influence the plans of companies seeking expansion in developing markets. Geopolitical risks and business investments concerning India India’s neighbourhood is characterised by a constant surrogate sparring between the region’s two big powers: India and China. For instance, the Trade and Transit Agreement signed between Nepal and China in April 2016 was meant to allow Nepal access to several seaports in China for trade with other countries. Expectations in Nepal were raised that they would be able to import petrol from Kazakhstan but as Hari Bansh Jha of ORF writes that “30 percent of its total needs of petroleum products from Kazakhstan (was expected) through the Chinese pipeline, but not a single drop of petroleum products could trickle into Nepal”. The much touted example of China’s loan diplomacy landing Sri Lanka in a soup is well documented. Of late, the Americans have stepped in with a more active role around investments and business support to reinforce India’s political bargaining capacity. For instance, aside from the attempts to develop India as a key node for semi-conductors, the US, through the International Development Finance Corporation (DFC) has bolstered Indian interests in Sri Lanka and sought to check China’s growing influence. How do geopolitics and geoeconomics collude? The US plans to invest half a billion dollars in a port terminal in Colombo (Sri Lanka) involving the Adani Group. Though the infusion is a fraction of the overall Chinese investments in Sri Lanka, this move signals America’s intent on executing more strategic investments, given the long-term objective. Governments have taken a page off Beijing’s long practiced geopolitical expansion in Africa and Asia through government-represented economic sops. In Sri Lanka, the US has shown its keenness to diversify its business presence and strengthen its strategic goals. There is however some distance to be travelled before corporations and governments are able to see the impact of global political risks as affecting both. For instance, the China-Taiwan conflict scenario is predicated commonly through the lens of a military invasion, though the probability of swathes of Chinese money swarming into the Taiwanese economy to own assets and swing political power in its favour does present a more realistic picture. Given the increasing footprint of Chinese investments — via holding companies — into Taiwan and the attempt to leverage local political divisions ahead of Taiwan’s 2024 elections, future geopolitical risks might be better addressed by governments such as the US and its allies taking business corporations onboard in their plans. Since the last four years, the occurrence of extreme impact events has ceased to be rare for the world. This is an age when there are no such things as Black Swan events for global business because globally impacting events are likely to happen more frequently. Corporations operating in developing markets will need to develop a constant understanding of fluctuating developments and include their impact into decision-making. In a reimagined world of frequent regional skirmishes, governments, business leaders and corporations would do well to work in tandem to anticipate and balance risks to global business emanating from a potential expansion of war (Gaza) or continuation of conflict (Eastern Europe) or from Chinese expansionist designs (Taiwan). The writer is the author of ‘Watershed 1967: India’s Forgotten Victory over China’. His fortnightly column for FirstPost — ‘Beyond The Lines’ — covers military history, strategic issues, international affairs and policy-business challenges. Views expressed in the above piece are personal and solely that of the author. They do not necessarily reflect Firstpost’s views. Tweets @iProbal