Risk on: Lord Sedwill comments on the geopolitical outlook

For the past decade, businesses and investors have been wrestling with the ESG agenda, mostly focusing on climate change and organisational culture. While the broader environmental and societal issues will have to be tackled too, the acute new external factor is the resurgence of geopolitics - now the “G” in the “ESG” matrix. Business and investor risk appetites are not always aligned, supply chains and consumer markets are both affected, and few boards have the native expertise to determine, mitigate or insure against the potential business impact. That’s why there’s a burgeoning market in geopolitical advice (much of it over-sold) and why the insurance sector is scrambling to produce products to respond.

The big strategic issues are and will remain climate change and other environmental challenges, demographics and migration, the tech revolution, and shifting economic centres of gravity. Geopolitics is both the fifth strategic question and the one which will determine whether the international community can manage the other four.

That’s why amidst all the international crises which dominate the headlines, the first key question is whether the US and China can maintain a stable enough relationship to cooperate on climate change and other strategic challenges, while managing their inevitable competition for security, prosperity and influence without drifting into conflict. Despite much talk about the Thucydides Trap and Cold War II, so far, they have avoided serious tension over Russia/Ukraine or Israel/Gaza.

Those two crises will continue to dominate the headlines in 2024. Both are locked into strategic stalemate, although, tragically, fighting will continue and the humanitarian impact will worsen. But neither has yet escalated to draw in other states directly and that risk has probably ebbed in the past few months. There is no prospect of a political settlement to either in the short term.

The second big factor in global politics is the resurgence of non-alignment. During the Cold War, the Non-Aligned Movement (NAM) was a loose coalition of countries, mostly developing countries from the Global South, which adopted a position of broad neutrality between the United States and the Soviet Union, and benefited from competition between the superpowers for influence.

That phenomenon is back, and it has money and influence, led by Indonesia, India and Brazil, (the 2022-24 G20 presidencies), and including most of the Global South plus the GCC, ASEAN and others. They are determined to avoiding choosing between the US and China. Two interesting examples are India (despite the strategic threat from China) and Saudi Arabia (despite their dependence on the US for strategic security). The ceremony of President Xi Jinping’s state visit to Saudi Arabia was a contrast to the chillier reception afforded to President Biden a few months earlier. Putin’s recent visit to the UAE was another such example.

The priority for these countries is economic development. Having been in Saudi Arabia several times in the past few months, I continue to be struck by the pace and ambition of MbS’s economic and social reforms, and his determination not to be disrupted by the political turbulence swirling around the region. The same could be said of Modi’s India.

The third big issue of 2024 is elections. We have already seen important polls in Taiwan, Indonesia and Pakistan. India is next, with Modi almost certain to continue into a second decade in power. Although several European countries, including the UK, also have elections this year, most are holding their breath for the US presidential election in November.

Should Donald Trump be back in the White House in January 2025, the extent to which he could pursue his “MAGA” domestic agenda would largely depend on whether the Republicans carried Congress as well. The polls suggest that this is in the balance. Uniquely, both Biden and Trump are running for a second term and neither seems likely to have the “coat-tails” to carry many others into office with him. Second-term presidents always struggle to postpone lame-duck status, particularly after the mid-terms, so, whatever the result in November, the “post-octogenarian” era cannot be long postponed.

However, abroad, even second-term presidents are less constrained. Trump has always been sceptical of foreign entanglements and confident that he can cut deals with America’s autocratic adversaries. Taiwan and Ukraine are nervous. But he saves much of his antagonism for those allies he regards (with some justification) as free-riding. So we should expect the US to withdraw (again) from the Paris climate change agreements, to increase tariffs and other protectionist measures, and to dilute US security guarantees to allies. The long-term impact would depend on whether the rest of the world regarded Trump II as a temporary disruption or a permanent pivot into “America First” isolationism. If the latter, the international consensus on climate change, free trade and collective security could unravel.

Since the end of the Cold War, politics has operated within the framework of the Washington Consensus and the Reagan-Thatcher economic settlement. As we head into the second quarter of the 21st century, politics and geo-politics are not responding to but determining how we manage the green transition, tech revolution, demographic change and shifting economic centres of gravity. However the Russia/Ukraine and Israel/Gaza crises develop, there will be more: Taiwan, North Korea and central Africa should be on corporate risk registers.

For investors, all of the above needs to be viewed – as ever – in the context of the continuing evolution of the business cycle and the biggest inflationary surge in forty years. Interest rates have normalized rapidly and inflation has subsided, but as yet without triggering a major economic setback. This combination of economic resilience with disinflation might yet continue, in which case markets may remain relatively stable, geopolitical strains notwithstanding. It would not be the first time that markets have seemingly held their nerve in the face of profound political change.

The upshot of all this for businesses is simple to explain but far from straightforward to address. Build or buy the expertise to understand the potential impact of geopolitical turbulence on your business, supply chains and customers. Prepare for disruption. Invest and/or insure to strengthen your resilience. Align your and your investors’ risk appetites. And, most important, develop the sophisticated and agile leadership which will be at a premium in this new era.

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