Why Geopolitics Matters More Than Ever

Events in 2022 demonstrated the impact of geopolitics on businesses across all sectors. By Stephanos Chaillou

The Russian invasion of Ukraine has transformed prevailing power structures and the overall security architecture of Europe, while expansive Western sanctions have left many businesses facing a sudden loss of commercial activities linked to Russia. Even prior to the conflict in Ukraine, policy responses to the coronavirus (COVID-19) pandemic presented both operational and strategic-level risks for organisations that still need to be considered as we enter 2023.

Geopolitical risk outlook
An increasingly volatile geopolitical climate will be a key feature of this new year. The present trajectory of the conflict in Ukraine suggests that a protracted war is the most likely outcome, with high-intensity military clashes and aerial bombings continuing to impact large parts of the country. At present, conditions are unfortunately unfavourable for any meaningful diplomatic engagement while the war continues to inflict a devastating humanitarian cost. Fundamentally designed as long term measures, Western sanctions on Russia are unlikely to be relaxed in 2023 and, while tested, EU unity on Ukraine will probably remain largely intact. The potential for more restrictive measures against Russia will remain heightened and, in all likelihood, increase as a result of further escalation.

The relationship between the US and China is an especially important one to monitor, particularly as organisations will need to adapt to a new reality where a de-coupling of economic interdependencies in strategic sectors is being prioritised on national agendas. A concentration of military vessels in the South China Sea will be seen as a provocation from both sides. Meanwhile, any escalation involving China and Taiwan will have wide-ranging commercial implications on a global scale.

Moving closer to home, as Turkey, Greece and Cyprus are set to hold elections this year, domestic political considerations will be the primary drivers of foreign policy. Assertive nationalistic rhetoric is expected to continue, particularly as it already forms an integral part of Turkish President Recep Tayyip Erdoğan’s bid to galvanise voters as part his re-election bid, which looks far from guaranteed given the declining popularity of the ruling AKP party. An unusually high number of Greek airspace violations by Turkish military aircraft in 2022 – 8,880 from January to October compared to 2,744 in 2021 – signals that an uneasy security landscape will become the new normal in the region. Despite rising tensions in the Eastern Mediterranean, there is a low probability of a large-scale conflict, though any substantial effort to resolve long-standing disputes will remain elusive.

The regionalisation of supply chains
In many ways, the conflict in Ukraine has exposed substantial shortcomings with logistics infrastructure in parts of Europe, leading to congestion, particularly along the Poland-Ukraine border. Efforts are being made to address high traffic levels, including through the Poland-Ukraine ‘Open Border’ initiative but any material gains will only be felt well into 2023. Moreover, a lot depends on the success or failure of the UN-brokered grain deal, which allows the export of selected food products from three Ukrainian ports in the Black Sea. Any breakdown in the agreement will reverberate through already strained land-based supply chains and compound inflationary pressure on consumer markets. In this context, organisations will continue to look at ways to protect themselves from external shocks and supply chain volatility. The regionalisation of supply chains, where production is moved closer to domestic markets, will become a more established trend in 2023. However, this process will be gradual and organisations sourcing goods from abroad will continue to face varying levels of delivery delays, price volatility, and operational uncertainty.

The ‘weaponisation’ of energy
A series of recent security incidents impacting energy infrastructure in Europe may appear isolated, with few common linkages. However, growing evidence since last September that the Nord Stream 1 and Nord Stream 2 Baltic Sea pipelines were deliberately targeted in a sabotage attack suggests that similar incidents targeting energy infrastructure in Europe are possible, though unlikely. Norway has expanded security patrols around offshore energy facilities following reports of suspicious drone sightings. The interception by Israeli forces of three drones launched from Lebanon heading towards an offshore gas field in July 2022 illustrates a regional relevance, even though repeat incidents of this nature in the immediate area are less likely after Israel and Lebanon reached a landmark maritime border deal in October.

Even if the modus operandi, intended targets, and actors involved differ, there is one important commonality: they all point to an increasing willingness of both state and non-state actors to ‘weaponise’ energy in a bid to gain a strategic leverage over rivals. Indeed, this extends to the cyber sphere and the 2021 Colonial Pipeline ransomware attack highlights a growing risk to critical national infrastructure from digital threat actors.

Moreover, as countries seek to offset the shortfall in energy imports from Russia, there will be an elevated risk of shortages in the first few months of 2023. Blackouts in EU countries may occur but only in very isolated cases and as a result of unusually cold temperatures. An EU embargo on Russian oil imports from February will accelerate efforts to secure non-Russian alternatives of energy.

More political intrusion in private markets
On the micro level, national governments in Europe will face the prospect of an economic slowdown and rising social tensions in 2023. As a result, more political intrusion in private markets will appear as a sensible policy response to shield vulnerable groups and strategically important sectors. In a sense, this will be an extension of a trend we witnessed at the height of the pandemic, with a number of governments preventing purchases of strategically important firms by foreign investors. Transactions involving strategically important companies in sectors like telecommunications, defence, energy and technology will attract greater regulatory scrutiny, which may delay or in some cases even prevent acquisitions altogether.

Emerging regulatory frameworks focused on sustainability
The pandemic acted as an accelerator for the energy transition, coinciding with consumers becoming increasingly environmentally conscious. On 1 December 2022, a meeting of EU ministers led to an agreement on a common negotiating position for the EU Corporate Sustainability Due Diligence (CSDD), proposed by the European Commission and which, once adopted, will establish a ‘corporate due diligence duty’ for large EU and non-EU companies operating in the bloc. Under the CSDD, companies will be required to identify as well as actively prevent human rights and environmental breaches in value chains. This forms part of converging regulatory frameworks that will lead to increasing reporting requirements. A growing number of companies will also focus on voluntary initiatives to showcase sustainability credentials in line with global ESG standards and meet higher consumer expectations.

Navigating the above risks in 2023 will be difficult but forward-looking organisations will be able to leverage challenging circumstances and be better positioned to identify commercial opportunities. Businesses across different sectors will need to demonstrate a high degree of flexibility, proactive responsiveness to global events, and focus on strengthening their resilience in order to effectively mitigate political risks in 2023.

Info: Stephanos Chaillou is a political analyst specialising on Europe and the founder of EastMed Macro, a geopolitical risk advisory firm.