Dear Partners in Thought,
The world drastically changed in early 2022. The Russian invasion of Ukraine brought “a return of history” not seen for 77 years in Europe, and triggered gradual (and often inadequately noticed) shifts in the global geopolitical order. A new cold war, at times quite warm, now seems to be in motion, with the West facing opponents that will act on and off together—and to different degrees—on specific issues that serve their strategic purposes. This new cold war may also encourage more drastic and less diplomatic developments among many countries globally that may starkly focus on their own strategic needs in a less collegial world.
The West, which had shaped the world for centuries, and which still represents the key force in international affairs, is no longer without major rivals. Rivals, indeed, who are more assertive than they were in the past. Some of these, like Russia, who had been in deep relative decline, have resorted to old ways of supremacy—like full scale wars for existential purposes (and likely to secure a dual “negative power” in the energy and grain sectors). Others, like China, with world leading ambitions (but also deep internal challenges and a more dangerous Taiwan focus), have taken advantage of the current turmoil to play tactical games in relation to a resurgent Russia and the likes of key oil rich Saudi Arabia—the latter also tactically wanting to create a more “balanced” relationship with the US.
At the same time, Iran is going through a largely self-induced 1979-like existential crisis, all the while using theocracy to justify its inhumane ways, and thus digging itself further into an unmanageable situation. North Korea seems happy to follow an increasingly erratic and dangerous demonstration of its relevance, affecting not only Seoul now but also the whole world. Turkey, while a NATO member, has been able to play a useful mediator role in the Ukraine crisis, though at the cost of not having a clear identity in relation to the West. Only these past weeks the world has seen disruptions of different magnitudes at the country and leadership levels in Pakistan, Bangladesh, Jamaica, Tunisia, Peru, Brazil and even South Africa —to name but a few.
The West itself is no stranger to political disruptions—as seen by the impact of Brexit, that made both Britain and the EU weaker, or in the travails of Brussels with Budapest and its veto power on key EU programmes. Even Germany, a model of democratic stability, unimaginably faced the recent prospects of a coup led by an extremist group intent on restoring the monarchy. America itself, the leader of the Free World as it was known, has been weakened by a political divide since the mid-2010s that has hampered its very essence and smooth functioning. Extremism has been more vocal, and the two main parties have seen their very existence and nature challenged. More generally, globalisation (while not yet in peril) is receding. Supply chains are redefined, with a gradual repatriation to domestic markets. The fight against climate change, while supported by many (if not all) countries is taking a back seat to energy independence. Geopolitical risk has risen and created many challenging issues requiring management at all levels.
Planning for the future has become arduous not only at the country and government levels, but also at the corporate and investment levels. Geopolitical risk management has become the rising key focus of corporations and investors acting globally but also domestically. The key features of market entry, management and exit, have become essential steps to be reviewed with great attention to geopolitical risk. Due diligence is no longer mainly about numbers and whether there is a market to develop. Political stability and partner identification have become key. All these geopolitical risk aspects are still mainly related to emerging markets, although they increasingly need to be considered for domestic or outward investments also in the West, mainly due to the rise of populism and its unpredictability. The Private Equity sector, with its USD 10 trillion of investments worldwide, is one of the natural business segments needing to assess geopolitical risks globally, much like corporations when conducting mergers & acquisitions internationally to develop their business. Even a private equity manager mainly focused on its domestic market will need to assess the quality of a foreign investor coming from a less well-known geography, or plan for the potential impact on its investment activities of the vagaries of a currently divided legislature, like in the US. In this new era of world disorder that can still be managed efficiently, it will be key for world actors to receive the proper geopolitical risk management input that combines superior human and digital intelligence—the former remaining crucial even in our fast-changing tech world. Experience, judgement and networks will be essential in managing geopolitical risk as a key component of corporate and investment decision-making.