What now? Five theses for the future:
1. The war of attrition between Russia and Ukraine, and by extension the West’s proxy war with Russia, will likely continue deep into 2023, at least.
2. The war will accelerate competition and distrust between the West and China, which other non-Western states will attempt to use to their advantage in different policy fields, without choosing sides.
3. This war will go down in history as a geopolitical turning point in the energy markets, rewriting past certainties about supply and demand.
4. Navigating corporate reputations will remain a top priority, with public demand for ethics-driven decision-making here to stay.
5. Global food security will remain a key challenge for policy makers – businesses that can increase output while also promoting sustainability are best placed to succeed in this environment.
Recap & Outlook
"Putin’s Russia will remain a threat to peace and security for the foreseeable future.”
Annalena Baerbock, German Minister of Foreign Affairs
Russia's attack on Ukraine six months ago has initiated dramatic changes in the global geopolitical landscape in a brief period of time. It has called into question policy principles such as "change through trade", caused Europe to rethink its security architecture, shaken global energy markets, exacerbated an existing food security crisis, and focused attentions on the moral expectations that governments and consumers have of companies in this changing environment.
The ongoing conflict in Ukraine has had less impact on companies' day-to-day operations in recent months – in part because many companies have now completed the process of pulling out of Russia, and/or have otherwise adapted their operations to the changes created by the war. Nonetheless, major shifts at the global level will continue to shape the business environment for years to come, whether relating to corporate communications, supply chains, energy costs or other matters.
Five theses on how the war in Ukraine will continue to shape the global business environment
The war of attrition between Russia and Ukraine, and by extension the West’s proxy war with Russia, will likely continue deep into 2023, at least.
Neither Ukraine nor Russia is currently prepared to make the concessions necessary for a successful ceasefire or peace negotiations. Instead, both will focus on strengthening their positions on the battlefield and in the diplomatic realm, hoping to establish a favorable environment for future negotiations.
Ukraine´s ability to withstand and counter Russia´s objectives depends largely on Western allies´ willingness to continue granting weaponry, financial and other support to Ukraine’s military, while carefully avoiding direct involvement in on-the-ground fighting.
U.S. policy will remain focused on helping Ukraine preserve its independence and territorial integrity, while still avoided actions that would involve NATO or U.S. forces positioned in Europe. Achieving this balance will likely create some dissonance with Ukraine’s desire to acquire longer-range weapons that would allow it to target Russian forces, or to seek other escalatory measures.
The domestic situation in Russia is a key variable influencing how long the conflict will continue. Despite several events which Russia could have used as a pretext to call for a mass mobilization of fighting age men – such as the recent attack on an ammunition depot in Crimea, which Russia blamed on Ukrainian “sabotage” – President Putin has abstained from taking this step. Given Russia´s high human losses, its ability to recruit new soldiers will be crucial to it holding the frontline and sustain its occupation of conquered territories.
"The Russian invasion of Ukraine has put an end to the globalization we have experienced over the last three decades.”
Larry Fink, CEO Blackrock
The war will accelerate competition and distrust between the West and China, which other non-Western states will attempt to use to their advantage in different policy fields, without choosing sides.
The war has reenergized Western alliances to act jointly and left Russia significantly more dependent on China. Competition and suspicion between the West and China/Russia will further intensify, even as direct military confrontation in either Europe or Asia remains highly unlikely. At the same time, the current energy crisis and supply chain shortages have revealed how interdependent the world economy is, and how much it costs states and businesses to unwind existing links.
For many Western governments, the strategic goal is to reduce their dependence on China and Russia while avoiding any measures that would compound the difficulties they currently face. Here, rising demand in the Chinese market promises some relief to struggling export-dependent economies in the West. Given this background, how Western countries attempt to enhance economic security while not harming commerce vital to economic growth will likely cause policy uncertainty.
Europe is catching up with the U.S. by building its own apparatus to monitor and enforce states´ compliance with the sanctions it adopted against Russia. These capabilities will stay in place to be used again, prompting competing countries such as China to equally re-assess their vulnerabilities to foreign sanctions and intensify diversification efforts to protect themselves in such cases.
The competition between the West and Russia/China will give non-aligned resource-rich and manufacturing states incentives to pick and choose whom to supply with their resources and goods, as both camps on either side of the conflict are pushing to diversify their trade links. These non-aligned states could, in certain sectors, enjoy greater price-setting power as well as more geopolitical influence in exchange for their commitments.
Despite this trend towards more competition and confrontation, neither the West, nor Russia or China, has an interest in allowing their competition and distrust to descend into direct military confrontation.
This war will go down in history as marking a geopolitical turning point in the energy markets, rewriting past certainties around supply and demand.
Russia's invasion of Ukraine has put a question mark over almost all so-called certainties around energy policy, as well as plans for sustainable transformation. The supply of affordable energy has become a security policy issue for many states, especially in Europe. Within just six months, this has resulted in a reordering of international energy relations.
Politicians have been forced to reactivate old partnerships or enter new agreements. Burgeoning alliances between Western states and suppliers such as Algeria or Kazakhstan have the potential to inflame old grievances, or to open fresh opportunities and markets.
"The skyrocketing electricity prices are now exposing, for different reasons, the limitations of our current electricity market design.”
Ursula von der Leyen, President of the European Commission
Political discussions in Europe show that a variety of unprecedented approaches are currently being considered to slow energy price increases for consumers and businesses. They range from a move away from the region’s current “merit order” pricing system to introducing further requirements to save energy (possibly for companies as well consumers), to levying an excess profits tax on energy firms.
The EU Commission also announced an “emergency intervention” in the electricity market, which could lead to its fundamental transformation by decoupling electricity prices from gas prices, among other moves. Regardless of which measures are implemented ultimately, it will be difficult to return to the former market design once the reforms are in place. Companies must prepare for long-term changes.
"People aren’t falling for atmospherics and superficial spin. There isn’t a both-sides anymore.”
Jeffrey Sonnenfeld, Yale University Chief Executive Leadership Institute
Navigating corporate reputations will remain a top priority, with public demand for ethics-driven decision-making here to stay.
The Russian invasion of Ukraine demonstrated the power of corporate reputation management in the social media era, with consumer expectations of companies rising. Immediately after the war broke out in February, many companies reacted by announcing their withdrawal or suspension of their operations in Russia. Since then, more than 1,000 companies have, to various degrees, left the country.
While exiting the Russian market is a decision that can be justified in moral terms, and was loudly demanded by consumers, Ukrainian politicians (and sometimes investors), as well companies’ business processes and conditions, meant the decision to leave Russia was complicated for some businesses. However, recent developments indicate that many were wise to pay attention to the public mood.
The war has shown that the ethical dimension of globalization has gained unprecedented relevance. Some companies that initially announced they would not stop operations in Russia have since been subject to a backlash that eventually forced them to re-evaluate that decision.
Separately, further regulation to protect human rights along businesses’ supply chains is on the horizon. In Germany, the Supply Chain Due Diligence Act will enter into force at the beginning of 2023, while European regulation on the matter is soon to follow. With the argument for “change through trade” – the concept that commerce can achieve social and political reform – undermined by Russian aggression, more Western countries are rethinking their political and business relationships, including with China. In this context, companies will need to pay attention to the next reputational risk that could follow Russian exposure.
With the demand for ethics-driven decision-making here to stay, companies must remain considered and thoughtful as corporate decisions have never been under stricter scrutiny.
"Let each of us if you're able to stand, stand and send an unmistakable signal to Ukraine and to the world.”
Joe Biden, President of the United States
A winter of political discontent is looming in Europe, lowering the appetite for new sanctions, whereas a tough stance on Russia may play well domestically in the U.S.
The U.S. is set to continue supporting Ukraine through additional weapons provisions and humanitarian funding, though November’s midterm elections could impact the speed, volume, and frequency of future aid packages. It is unlikely that U.S. support for Ukraine will translate into new sanctions supported by the collective West.
Given the diversity of interests and the complexity of decision-making processes across the EU, we do not expect another large-scale collective Western sanction package that would significantly alter the operating environment for businesses in the coming months. Instead, EU governments will try to share the fiscal and energy burden, and project the current sanctions regime against contestations from single member states.
Certain Eastern and Northern European states will continue to push for and implement stricter visa policies for Russians, but this will only have a limited effect on businesses.
In Italy – which is facing a general election – as well as in Hungary and Bulgaria, voices calling for a “rethinking” of the EU´s sanctions against Russia are growing louder. While such voices are still isolated across the EU, public protest against the sanctions is likely to become more widespread as Europe moves into winter and the effects of Russian energy policy weigh more heavily.
The majority of EU member states will focus on managing the economic and financial effects of the war, and existing sanctions packages. Governments will continue to address domestic cost of living crises with new policy instruments and support programmes for businesses and citizens. These may create additional obligations as well as opportunities for businesses, especially in relation to energy savings and energy prices.
Managing the crises requires burden-sharing among EU member states. Potentially divisive talks about which states will pay how much, and for what, are just beginning. Russia will capitalize on any internal division by continuing to utilize energy supplies strategically, hoping to undermine the EU´s cohesiveness.
"Clearly Russia's war against Ukraine has exacerbated across the entire world the problem of food insecurity. […] The war's having an impact beyond Ukraine and it's something that we are very concerned about.”
Janet Yellen, U.S. Treasury Secretary
Global food security will continue to be a key challenge for policy makers – businesses that can increase their output while also promoting sustainability are best placed to succeed in this environment.
The war caused dramatic and fast increases in food as well as fertilizer prices, exacerbating an existing affordability and availability crisis in global food markets. While the recent grain deal will free some important grain exports from Ukraine, the underlying causes of the food security crisis are structural and will persist.
Food security has returned to the global policy agenda as a strategic goal, sometimes in conflict with efforts to increase sustainability in the food and agriculture sector, at least in the short term. Going forward, we can expect further policy efforts aimed at increasing productivity and output, as well as a continuous rebalancing of sustainability and food security goals in European agricultural policy.
One last point: we must not forget about the reality in Ukraine
"How we respond today to what Russia is doing will determine the future of the international system. The destiny of Ukraine is at stake, but our own fate also lies in the balance. We must show the power that lies in our democracies; we must show the power of people that choose their independent paths, freely and democratically. This is our show of force.”
Ursula von der Leyen, President of the European Commission
Russia’s full-scale invasion of Ukraine has presented an unprecedented challenge for countries, bringing existing difficulties to a new level of intensity. And while the crises that have resulted will certainly be a test of endurance for Western democracies, we must not forget a key truth: the war in Ukraine remains a horrific reality for millions of Ukrainians whose lives have been altered forever, whether they have escaped the conflict or remain in their country. Russia’s actions and its flaunting of international law continue to threaten their lives every day.
Have more questions?
The team is happy to further elaborate on our assessment and assist clients in navigating the crisis as the situation develops.
