In the quest for lower costs, efficiency in supply chains and productivity gains, globalisation was pursued relentlessly. It made sense for a long time. Yet, for all the benefits gained from increased globalisation over the last 4 or 5 decades, the Russian invasion of Ukraine has highlighted its major fault lines and flaws. The benefits of interdependent economies and globalised trade in times of war have been exposed as vulnerabilities.
What is evident now is that the world is deglobalizing. But this is happening only to a point. The primary theme emerging is that every nation must make all decisions through the paradigm of their national interest. There can be no sustainability without national security. No trade or investment without first considering the national interest. Moving forward they must go hand in hand. It makes sense that national security and independence of core strategic functions for a nation must be a priority.
Germany will go down in history as the poster child for what can go wrong when economic or ideological objectives are pursued without sufficient emphasis on their strategic national interests. While well intentioned, by becoming increasingly dependent on Russian oil and gas, Germany have left themselves at the mercy of Russia and provided Putin with all the leverage he needed to pursue his military objectives.
When push comes to shove, I have no doubt that Russia will turn off the tap and stop the gas supply to Germany. That will have devastating and far-reaching implication for Europe and its economy. Of course, Germany will give in to any Russian demands before that happens. Look for smaller nations to be hit with cuts in gas supply when the Russians feel the need to fire a warning shot across the bow of Europe. While oil embargos play out well from a PR perspective and placate the masses of concerned citizens across the world the reality is far different. These are relatively ineffective in my opinion.
Firstly, there will be countries that end up buying Russian oil. The opportunity is simply too great for India, China, and a number of other eastern nations to not buy it. The supply of oil will ultimately be redistributed and no doubt other countries struggling without Russian oil will find a willing seller in India or others who are more acceptable nations for the west to deal with. The oil embargo sounds punishing but it’s unlikely to be real and countries will find a way around it out of necessity in my view.
Secondly, Europe is far too fragmented to maintain the unity that initially appeared so promising. As situations within nations become more extreme in relation to both energy and food shortages the leaders of each country will ultimately be forced to do whatever is needed to get their nation through the crisis. Simultaneous food and energy shortages will mean every nation for themselves.
The unity of the European region will face one of its most difficult challenges in its history in the months and years ahead as they face twin crises of energy and food shortages. Putin and Russia, for all their military ineptitude so far, are sufficiently well versed in the region to understand that as the situation for Europe becomes more dire and individual nations suffer that Europe will likely fragment. Putin will press his advantage here in an attempt to divide and conquer.
The changing geopolitical landscape has changed the world forever. We will enter a phase of bifurcation of the global economy. This is a 5–10-year process but it’s already happening. There will be far reaching consequences for the way nations and companies reorganise their operations and supply chains.
This will accelerate the split in the world between the East and the West. On one side US, Europe, and their allies such as Japan, South Korea, and Australia. On the other, I expect far closer bonds to develop between Russia, China, Saudi Arabia, and several eastern European nations, such as Hungry and Serbia. Expect India to walk the tightrope between both sides as they have 1.4 billion people to provide for and are unlikely to have the inclination or luxury of picking sides.
But it is not only nations that need to protect themselves and mitigate these risks. There are significant risks to the world’s biggest companies that need to be addressed too. Having supply chains based in China to build products for customers around the world is now the equivalent of Germany sourcing their energy from Russia. It’s a vulnerability and you can guarantee that companies around the world are working feverishly to build out contingency plans and capacity in other areas of the world. There are many thousands of companies in this position with the highest profile and most exposed being giants such as Apple and Tesla.
While all of this is critical, almost every aspect of this process will be inflationary. From now on the model pursued will not be the cheapest and most efficient method of supply and production, but the one that does not make us vulnerable to our potential enemies. Companies and nations will need to act with urgency to ensure they de-risk their exposure in the decade ahead as the world splits into two competing economies. Any companies that do not address these vulnerabilities will become uninvestable because of the existential risks they face.
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