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This morning, the High-Level week of the 78th session of the United Nations General Assembly gets under way in New York. This is the annual gathering of the heads of state and government of most of the UN’s member states. Notably absent this year, however, are four of the five permanent members of the UN Security Council—Russia, China, and France are not sending their presidents, and neither is the UK prime minister attending.
What will the main focus be for the General Assembly?
Two items will likely dominate the 78th UN General Assembly High-Level Week—the war in Ukraine and progress on the Sustainable Development Goals, on which there is a special summit in New York that is expected to conclude with the adoption of a political declaration today.
Will the war in Ukraine dominate?
The war in Ukraine will probably not dominate, but it will be a key item on the agenda, given especially that Ukraine's president, Volodymyr Zelensky, is one of the speakers scheduled to address the General Assembly on the first day of the debate. The war in Ukraine will also be critical in more indirect ways. Many countries have been affected by the war, including in terms of their food security, in terms of the inflation of energy prices, and in relation to the increasingly tense and fractious relations between Russia and the West which has added to global instability and negatively affected the ability of the international community to tackle key issues, such as development and climate change, more effectively. These issues are likely to be raised by several speakers in the debates and in meetings, like the one between Britain’s Prince William and UN Secretary General Antonio Guterres yesterday.
Who will the main players be given the leaders from the UK, France, Russia and China won’t be in attendance?
Given that of the permanent five, veto-wielding powers of the Security Council only the US will be represented at the highest level, with President Biden addressing the General Assembly this morning in New York, we can expect key leaders from the Global South playing a more important role this year.
President Lula of Brazil will be the first speaker after the report of the General Secretary. South Africa, another key actor for the Global South, will also be there with its president speaking this morning, while the new Nigerian president will speak in the afternoon.
Apart from the US, key Western players sending their heads of state or government include Switzerland, Germany, and Japan. But in general, we would expect the so-called Middle Powers, including those from the Global South, which have for years pushed for a greater recognition of their role, to take at least part of the limelight. This will also include countries like Turkey, Argentina, and Qatar.
Is it surprising to see that the leaders of these superpowers won’t attend?
Yes and no.
Yes, because the High-level Week at the General Assembly is one of the major universal platforms not only for addressing the assembled international community and raising key issues in front of a global audience but also for these heads of state and government to have bilateral and small multilateral meetings in the margins of the general assembly. This is where a lot of important business gets done--for example, President Biden will host the leaders of five Central Asian states today for the in the first-ever presidential summit in the so-called C5+1 summit.
At the same time, it's also not surprising, for example, that Russia's president Vladimir Putin is not attending given that there is a warrant out for his arrest by the International Criminal Court. And the Chinese president, Xi Jinping has avoided any potential direct encounters with his US counterpart for quite some time.
The absence of the heads of state and government of Russia, China, the UK and France, however, should also not be overstated -- regardless of their high-level presence or not, they remain the key players in the UN system because of their privileged position as veto powers on the Security Council, which, compared to the General Assembly, is the more powerful of the UN organs. And the US Secretary of State, Antony Blinken, met the Chinese Vice President, Han Zheng, yesterday in New York, so the superpowers still interact at the UN, even if not at the highest levels.
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The 15th BRICS Summit, held in South Africa from the 22nd to the 24th of August was predictably underwhelming in its lack of concrete outcomes. The BRICS, even after the addition of six new members next year, will be anything but an alternative or rival to the G7. For all the talk about multipolarity, the BRICS, and their expansion, contribute further to the consolidation of a new bipolar order with just two rival blocs—led respectively by the US and China. It remains to be seen, however, whether dislike of a US-dominated order is enough to sustain the current lure of the BRICS.
What it’s about: The 94-paragraph Johannesburg II Declaration issued at the summit of currently five members of the BRICS—Brazil, Russia, India, China, and South Africa—is a mostly aspirational and self-congratulatory document. The only truly notable outcome of the summit is contained in paragraph 91:
We have decided to invite the Argentine Republic, the Arab Republic of Egypt, the Federal Democratic Republic of Ethiopia, the Islamic Republic of Iran, the Kingdom of Saudi Arabia and the United Arab Emirates to become full members of BRICS from 1 January 2024.
This is preceded by the announcement that “BRICS countries reached consensus on the guiding principles, standards, criteria and procedures of the BRICS expansion process” but without any further elaboration of what these might be. And the announcement of expansion is followed by a commitment “to further develop the BRICS partner country model and a list of prospective partner countries”.
Apart from that, the Declaration is hardly a revolutionary document. It repeats calls for reform rather than replacement of key international institutions, such as the UN, the World Trade Organisation, and the IMF. In addition, the BRICS “reaffirm the importance of the G20 to continue playing the role of the premier multilateral forum in the field of international economic and financial cooperation”.
There are the usual expressions of concern about war and conflict, with Sudan, Niger, Libya, Western Sahara, Yemen, Syria, the Occupied Palestinian Territories, and Haiti all name-checked.
On Ukraine, the language is predictably vague to accommodate the different stakes that the five members have:
We recall our national positions concerning the conflict in and around Ukraine as expressed at the appropriate fora, including the UNSC and UNGA. We note with appreciation relevant proposals of mediation and good offices aimed at peaceful resolution of the conflict through dialogue and diplomacy, including the African Leaders Peace Mission and the proposed path for peace.
On the other big issue in the run-up to the summit—de-dollarisation and the possible establishment of a BRICS currency—the Declaration stretches as far as “stress[ing] the importance of encouraging the use of local currencies in international trade and financial transactions between BRICS as well as their trading partners” and “encourag[ing] strengthening of correspondent banking networks between the BRICS countries and enabling settlements in the local currencies” with BRICS finance ministers and central bank governors to report back on these issues at the next summit.
Why it matters: In their current five-member composition, the BRICS constitute just over 40% of the world’s population and account for one-quarter of global GDP ($26tn out of $104tn, according to World Bank data). The six new members will not significantly increase either of these figures: based on 2022 data, the enlarged BRICS’ share of global GDP will only increase by three percentage points. But with the addition of major Chinese oil and gas suppliers—notably Saudi Arabia and the UAE, less so, for now, Iran—what will, from 2024 onwards count as BRICS-internal trade is likely to increase. The same is probable to occur for BRICS-to-BRICS FDI.
All five current members are part of the G20. With Argentina and Saudi Arabia joining the BRICS in 2024, seven G20 members will also be BRICS countries. If current, and future, members of the BRICS are serious about the G20 as “the premier multilateral forum in the field of international economic and financial cooperation” and if they are able to align and coordinate their approaches to global political and economic issues, dynamics at the G20 may change under the Brazilian presidency in 2024. But this is a very big ‘if’.
Our take: The BRICS do not constitute an alternative world order in either a geopolitical or geoeconomic sense.
The BRICS are not an international organisation in the traditional sense with a legal personality and a permanent secretariat, often established by a formal treaty, and united by a common purpose. Their ‘creation’ was almost accidental, based on an assessment in 2001 that GDP growth in the emerging markets of Brazil, Russia, India, and China would accelerate significantly and consequently have an impact on the global economic and financial system. Their first formal summit was held in 2009 in Russia’s Yekaterinburg. South Africa was invited to join in 2010, turning the BRICs into the current BRICS.
The BRICS’ share of global GDP—25% at present, 28% after their enlargement next year—sounds impressive. However, almost 70% of that is due to the size of the Chinese economy. China similarly dominates in trade terms. Our calculations based on the UN Comtrade Database indicate that Chinese trade in goods with BRICS partners in 2022 came to just over $550 billion, which, however, constitutes less than 10% of China’s total global trade. Expansion will add another $273bn to this figure, based on 2022 data, making BRICS trade worth approximately 15% of China’s total trade.
The single most important trade partner among the current BRICS for China is Russia with just over $190bn, but this was just over 3% of China’s total global trade in 2022. By comparison, trade with the US in 2022 was slightly more than $761bn, making the US China’s single most important trade partner overall, accounting for 12%.
China’s most important trade relationships are with other blocs. First among them is the Regional Comprehensive Economic Partnership, a free trade area including China, all ASEAN member states, and Australia, Japan, New Zealand, and South Korea. Trade with this bloc amounted to $1.9tn in 2022, equivalent of just under 31% China’s global trade. China’s trade with the EU was worth close to $900bn (14% of global Chinese trade in 2022). Trade with all the individual members of the G7, which do not constitute a free trade area, was worth just over $1.7tn, or 27% of all Chinese trade in 2022.
While China’s trade with the BRICS as a whole and its individual members may be less important for Beijing than other trading relationships, the reverse is not true. For Brazil, trade with China constitutes just over 27% of its total trade. Corresponding figures for Russia (based on 2021 trade volume) are 24%, for India 11.5%, and for South Africa 24%. For new members, the data differ slightly. Oil and gas exporters Saudi Arabia and United Arab Emirates depend on China for 26% and 13%, respectively (both 2021 data). For Argentina (2022), Egypt (2022), and Ethiopia (2021), the corresponding figures are 13%, 14%, and 15%.
From a geoeconomic perspective, China, thus, clearly dominates the current BRICS and will continue to do so after enlargement. But its trade relationships overall will still be highly diversified and the BRICS, even after enlargement, are unlikely to become a major trading bloc or a key driver of geoeconomic fragmentation. For that to happen, membership would need to grow significantly more, members would need to agree on a free trade arrangement, and they would need, collectively, to decouple more from the G7. None of this is impossible, but it is highly unlikely to occur anytime in the near future.
Geopolitically, the picture is only slightly different. Since 2010, the BRICS have developed a stronger sense of common purpose, which can loosely be described as gaining more influence in the international system—be that in the UN, in international financial institutions, or when it comes to tackling global challenges like climate change. The BRICS often present themselves as defending the interests of the global south within in an unfair and unjust international order that is dominated by, and primarily serves the interests of, the US and its allies.
This is an attractive proposition to the current five BRICS countries, the six new members, and the reportedly dozens of other countries that have expressed an interest in joining. But for each of them, this means something different and their interests are often not aligned in a meaningful way.
The current five members can all subscribe to supporting “the legitimate aspirations of emerging and developing countries from Africa, Asia and Latin America, including Brazil, India and South Africa, to play a greater role in international affairs, in particular in the United Nations, including its Security Council.” However, while Brazil, India, and South Africa may see this as a pathway to permanent membership in the Security Council, neither Russia nor China have been overly enthusiastic about this prospect.
Similarly, the Johannesburg II Declaration is full of recognition of the challenges posed by climate change and the need to tackle it. Yet, it was India and China at COP26 in Glasgow who were responsible for opposing a firm commitment to “phasing out” coal.
In addition, there are also significant bilateral issues between the current five members, including a long-standing border dispute between India and China. Notwithstanding the China-mediated resumption of diplomatic relations between Iran and Saudi Arabia earlier this year, inviting these two traditional Middle Eastern rivals into the BRICS is unlikely to increase BRICS coherence. And decades-old tensions between two other incoming members—Ethiopia and Egypt—over the Grand Ethiopian Renaissance Dam on the Nile are not a recipe for harmony either.
Crucially, though, the BRICS have increasingly turned into yet another mechanism for China to rally support, especially in the global south, in its ongoing rivalry with the United States. The weakening of Russia, especially since the start of the Kremlin’s war of aggression against Ukraine in February 2022, has made China the default leader in the BRICS, as well as other gatherings, like the Shanghai Cooperation Organisation. While China commits rhetorically to lofty notions of “inclusive multilateralism”, of “an environment of peace and development”, and of partnerships for “mutually accelerated growth” and “sustainable development”, these are ultimately serving the singular purpose of strengthening China’s position vis-à-vis the US.
The Johannesburg II Declaration reaffirms the BRICS’ commitment “to ensuring the promotion and protection of democracy, human rights and fundamental freedoms for all with the aim to build a brighter shared future for the international community based on mutually beneficial cooperation.” While the irony of such a commitment seems entirely lost on the signatories, this ‘vision’ will work for BRICS members now and in the future—under certain conditions. One of these conditions is that none of the leaders who signed up to BRICS membership will ever be held accountable for delivering on this vision. Given that the 2024 enlargement will do little to increase the number of genuine democracies among the BRICS, this is perhaps a lesser concern for current and future leaders. Another condition may be more important: that a China-led dictators’ club continues to remain attractive, especially for other middle powers whose support China will need if it seriously wants to take on the US. It is unlikely that the mere dislike of a US-dominated international system will be enough of a long-term attraction to keep rising middle powers like Saudi Arabia committed to the BRICS or to attract others like Indonesia or Turkey.
Herein lies a real challenge and opportunity for the US and its allies: to offer a genuine alternative to a China-led bloc in the emerging new bipolar order. At the end of the day, the first step in that direction is not to dismiss the BRICS as yet another failed Chinese project to take over the world but to see it for what it is: another BRIC in a new Chinese wall that seeks to carve up an ever-growing sphere of influence.
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In this emergency episode of the "Navigating the Vortex," podcast Lucy P. Marcus and Stefan Wolffprovide a detailed analysis of Prigozhin’s fast march to Moscow, the role of key players, and the potential consequences, and opportunities, for the region and the world.
Lucy and Stefan delve into the many facets of the aftermath: the implications for the war in Ukraine, the changing power dynamics inside and outside Russia, and the kaleidoscope of players, from the African nations to multinational boardrooms, and from Washington DC and New Delhi to Beijing.
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Two reports out this week — the World Bank’s Global Economic Prospects and the OECD’s Global Economic Outlook — paint a picture of slow growth and incremental recovery threatened by persisting economic, political, and environmental risks. Both reports emphasise the importance of sound macro-economic policy, including addressing inflation, responsible debt management, and structural policy reforms that enhance productivity and can sustain longer-term growth.
What it’s about: The prospects of global economic growth remain bleak. Both the World Bank and the OECD project very moderate growth across all regions for 2023 and 2024. The projections are not identical in the last detail of every percentage point, but the underlying message is clear: growth is at best fragile and risks remain significant. Above all, whatever economic growth might be possible is unlikely to be sufficient to create the fiscal space for governments to address a vast number of socio-economic, political, and environmental challenges by simply throwing money at these problems.
Instead, the World Bank and the OECD both point out the need to return to the fundamentals of macro-economic policy making; that is, to move away from a permanent crisis mode that responds to whatever appears as the most pressing issue of the day and ensure that foundations are (re-) built that will enable sustainable long-term growth.
The growth required to deal with the challenges that lie ahead is substantial. Populations are growing globally, but unequally; climate change requires a transition to net-zero and much greener economies than we have today; workforces need to become more diverse and inclusive and will need a whole range of new skills.
Why it matters: This is not the first time that key economic and financial institutions have pointed out that the underlying drivers of economic growth are weak and that the prospects for achieving levels of sustainable growth that would be sufficient to deal with challenges as diverse as climate change, sovereign debt crises, and demographic change are mixed at best.
“Is global growth doomed?” was a question that we discussed some two months ago (On Our Radar, 5 April 2023), the problems are deep-seated, the consequences of not addressing them will be negative and long-lasting, and the solutions, while in many ways obvious, difficult to achieve at a time of geoeconomic and geopolitical fragmentation.
In this sense, the World Bank’s Global Economic Prospects and the OECD’s Global Economic Outlook don’t tell us anything new per se. They identify similar underlying trends — inflationary pressures, the risks to global trade from ‘de-coupling’ and ‘de-risking’, etc. Both note the lasting impact of the COVID-19 pandemic in terms of the unsustainable loosening of fiscal policies. Both point to Russia’s aggression against Ukraine as an exacerbating factor.
Counter to the perennial call for everyone to “think outside the box” to find the solutions, what is important, is the emphasis on “getting back in the box”. That a permanent crisis mode of economic policy making can all too easily become a self-fulfilling prophecy by making the crisis itself permanent. For that reason alone, both reports are important, and their advice needs to be heeded by policy makers around the world.
Our take: Resilience is at the top, front, and centre of a seemingly never-ending series of global summits, as we covered in our On Our Radar pieces on 22 May and 5 June — “Moving on from Ukraine? China-West relations between Xi'an and Hiroshima” and “Summitry continued: the EU and Central Asia, BRICS and Friends, and the European Political Community”.
And if any further proof of the focus on resilience was needed, the OECD’s 2023 Ministerial Council Meeting, which endorsed the Global Economic Outlook report, was imaginatively titled “Securing a Resilient Future: Shared Values and Global Partnerships”. Its Key Issues paper identified Ukraine, trade, energy, and innovative technologies as key factors in “a world [that] faces economic, social, environmental, political and development challenges on a scale not witnessed for decades” and in which “geopolitical uncertainty grows”.
Yet, many of the prescriptions on how to achieve resilience are driven primarily by geopolitical imperatives around national security concerns. These may be narrow in their intended economic impact as evident, for example, in speeches given by European Commission President Ursula von der Leyen on 30 March 2023, US Treasury Secretary Janet Yellen on 20 April 2023, US National Security Advisor Jake Sullivan on 27 April 2023. However, their broader perception and consequences reinforce exactly the kind of geoeconomic and geopolitical fragmentation that has been repeatedly identified as one of the key risks to sustainable economic growth.
Pointing out the risks of ‘de-risking’ is one thing, offering an alternative is quite another, especially when the risks of an over-reliance, for example on Russian oil and gas, were so obvious to see once they materialised in the context of Moscow’s aggression against its Ukrainian neighbour. The other lesson learned from this, especially in Europe, was that a straightforward decoupling from Russia, though slow and painful initially, was possible.
The challenges of ‘de-risking’ in relation to China are a multiple of what they are in the context of Russia, and crucially they extend beyond trade. True resilience, therefore, needs to be conceptualised beyond supply chains, Chinese access to advanced technologies, and inward and outward investment.
And this is where some of the policy recommendations from the World Bank’s Global Economic Prospects and the OECD’s Global Economic Outlook come in, because they help us refocus on some of the fundamentals of sound economic policy making that goes beyond this crisis or that and, in fact, makes our economies more resilient to future crises. Reigning in public spending and focusing it on both those most in need and on job creation will benefit economies because it will reduce inflationary pressures while protecting the most vulnerable in societies and open opportunities for increasing government revenue. Expanding the workforce both by investing in skills development and by making it more gender-inclusive will have additional growth-generating effects. Stimulating private investment, and supplementing it as needed with public investment, in the transition to a green economy is also likely not only to stimulate growth but also to mitigate the key challenge of climate change. It may not prevent this particular crisis in the future, but it will better equip us to manage it.
These domestic policy measures will need to be flanked with a similar re-focus on the fundamentals of international (economic) relations. This would require strengthening the World Trade Organisation, a global re-commitment to the UN and its specialised agencies, such as the World Food Programme, the Food and Agricultural Organisation, and the World Health Organisation, among others. It will also mean making a success of COP 28, regardless of the misgivings one might have about its President-Designate or the potential participation of Syrian president Bashar al-Assad.
At a time when it is all too easy (and justifiable) to get lost in the flurry of crises from the escalating war in Ukraine to the stand-off in Kosovo and to the civil wars in Afghanistan and Sudan and all too tempting to share in the outrage over Donald Trump and Boris Johnson, we must always look to the lesson that can be gleaned from these, and recognise that these are symptoms of failing institutions and a mix of self-serving and incompetent people within them. Going back to the fundamentals of what sound and responsible policy making used to look like will not fix all of these and other problems but it can restore, and lay, the foundations not just for sustainable future economic growth but for more security and stability in a world that might otherwise be doomed to long-term decline, and not just of the economic kind.
Note: We will be discussing this topic of how we get from crisis to resilience in greater depth on the next episode of the podcast. If there is anything you'd like us to focus on in particular, please email us and let us know.
A big thanks to all of our readers, listeners, followers and subscribers. We launched Navigating the Vortex two months ago, and now more than 100k of you get our newsletter and podcast delivered straight to you all over the world. We are very grateful for your enthusiasm, feedback, suggestions, and commitment!
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Last week saw another three summits in quick succession: the foreign ministers of the BRICS countries met in Cape Town, South Africa; the European Political Community met at Mimi Castle in Bulboaca, Moldova, and the Heads of State of Central Asia and the President of the European Council came together in Cholpon-Ata, Kyrgyzstan. None of the meetings produced much in terms of concrete outcomes, but even as mere talking shops they are indicative of geopolitical and geoeconomic flux and uncertainty.
What it’s about: The foreign ministers of Brazil, Russia, India, China, and South Africa — collectively also known as the BRICS — met in Cape Town. Their Joint Statement emphasised a common commitment to challenge what is, in the BRICS’ view, a western-dominated international order, often couched in calls to both strengthen and reform existing multilateral institutions like the UN and to promote “a more agile, effective, efficient, representative and accountable international and multilateral system.”
The three stated pillars of the BRICS — political and security, economic and financial, and cultural and people-to people cooperation — are not very different from discussions at the second meeting of the European Political Community. Held in Moldova in a not-so-subtle endorsement of that country’s EU ambitions, the forty-five gathered leaders discussed peace and security, energy resilience, and connectivity and mobility in Europe. Intended as an informal policy coordination forum, there was no official communiqué and only a brief pre-meeting statement by the Head of the European Council, Charles Michel, as well as an even shorter statement by him following a separate discussion he chaired between the leaders of Armenia, Azerbaijan, France, and Germany.
The brevity of these two statements could be explained either with the secrecy (or vacuousness?) of the discussions in Moldova or with Michel’s busy schedule, as he headed straight to Cholpon-Ata to the second EU-Central Asia summit from there. While this meeting did produce a more fulsome joint press communiqué, it was perhaps the one most devoid of concrete results, reaffirming intentions that had already been reaffirmed in a similar communiqué after the first summit on 27 October last year.
Why it matters: As we discussed in our earlier piece, Moving on from Ukraine? China-West relations between Xi'an and Hiroshima (On Our Radar, 22 May 2023), the war in Ukraine remains an important driver of the current flux and uncertainty in the international system, but not the only one, and it certainly gives rise to, and exacerbates, any number of other factors that add to the current conflagration of multiple crises.
Last week’s three summits are no different. The BRICS statement did not mention Ukraine, but noted “concern about the use of unilateral coercive measures, which are incompatible with the principles of the Charter of the UN and produce negative effects notably in the developing world” before doubling down by recognising “the impact on the world economy from unilateral approaches in breach of international law and they also noted that the situation is complicated further by unilateral economic coercive measures, such as sanctions, boycotts, embargoes and blockades.” A charitable reading here might consider the reference to “unilateral approaches in breach of international law” as including Russia’s invasion of Ukraine, but the key point that permeates these and other passages of the statement is the concern about the economic impact of the war in Ukraine and the intensifying economic conflict between China and the US. An impact that is primarily borne by the global south — of which the BRICS consider themselves the leading voices and which they also seek to shape more, including through a potential expansion of the format.
This desire to remould the BRICS from an alternative to the G7 into to an alternative to a US-led global West that combines elements of the old Cold War Soviet block and the erstwhile non-aligned movement was particularly obvious in the “Friends of BRICS” gathering on the sidelines of the summit in Cape Town. Not exactly or exclusively great company — Iran, Saudi Arabia, the United Arab Emirates, Cuba, the Democratic Republic of Congo, Comoros, Gabon, and Kazakhstan were physically present with Egypt, Argentina, Bangladesh, Guinea-Bissau, and Indonesia joining online — it indicates the potential attractiveness of an enlarging BRICS to a wide range of countries.
Our take: The BRICS are still quite a bit off from being able to mount an effective challenge to the current international order. But that order is clearly in trouble and will change. Yet neither the US nor China, and their respective allies, have a clear vision of what it might look like, and above all none that would be credible in the sense of accommodating whatever individual visions might exist and how they could ensure a return to some semblance of stability and predictability in international relations.
This continuing uncertainty is neither cost- nor consequence-free. The costs are borne by many of the poorest countries around the world, and the Global South is right to point to this out. But we should equally not forget that a much higher and much more direct cost of Russia’s aggression is borne by Ukraine and Ukrainians.
The widespread sentiment in the Global South that the war should end as soon as possible and regardless of the impact on Ukraine may be understandable from the perspective of a country like Indonesia — whose foreign minister proposed a new peace plan at the IISS Shangri-La Dialogue 2023 on 3 June — but it is insensitive to Ukraine’s rights and potentially endorses, and encourages, the flagrant violation of fundamental principles of international law.
What is more, it is short-sighted. Never mind disputes in and near the South China Sea, including Indonesia’s own Natuna Islands, and not only because such a stance effectively accepts Russia’s territorial dismemberment of a sovereign neighbour. But also because it will likely have unintended and unwanted economic consequences.
The G7 remain the world’s most prosperous and powerful economies by some margin. As we covered in last week’s podcast “The Debt Ceiling, Summitry, and Corporate Governance in Japan…or just follow the money”, they now put significant emphasis on economic resilience, including the security of supply chains and the associated re-shoring, near-shoring, and friend-shoring. The implication here is clearly that you don’t recommend yourself as a ‘shore’ going so obviously against the Western understanding of the principles that should guide a just and sustainable settlement of the war in Ukraine.
Yet, continuing uncertainty also has consequences for the west and its allies. The EU, despite its focus on Ukraine, is also keen to consolidate its neighbourhood, now referred to as ‘wider Europe’. One of the few notable outcomes of the European Political Community summit in Moldova was a mini-lateral summit on the conflict between Armenia and Azerbaijan over Nagorno Karabakh which kept the momentum in the EU’s mediation efforts alive. Were the Union to succeed in brokering a normalisation between the conflict parties and even a peace treaty, this would have a significant and positive impact on supply chains along the Middle Corridor, including energy supplies from Kazakhstan.
Speaking of Kazakhstan, here is an obvious example of the many countries that are still hedging their bets in the current turmoil. Courted by China, the country was present at the BRICS summit as a ‘friend’, while its President attended the EU-Central Asia summit, signing up to the joint commitments made there, including “to formalise and advance the implementation of the Joint Road Map for Deepening Ties between the EU and Central Asia.” This may be more limited than the plethora of agreements signed at the China-Central Asia summit in Xi’an two weeks earlier, but it does nonetheless indicate that nothing is quite set in stone yet when it comes to an emerging new geopolitical and geoeconomic order.
Within this uncertainty, others are also hedging. China-US relations may not have bottomed out quite yet — although the trip by CIA director Bill Burns to Beijing in May for talks with his Chinese opposite number indicates that there are still high-level channels of communication, the refusal of the Chinese defence minister to meet his US counterpart at the Shangri-La Dialogue was a new low in the recent downward spiral. Meanwhile, Beijing appears to be keen to court US business elites as evident in the meetings that Elon Musk and Jamie Dimon, respectively the CEOs of Tesla and Twitter and JPMorgan Chase, were able to secure with senior Chinese government officials last week.
Perhaps then, the direction of travel in the current upheaval is less clear beyond the seemingly confident statements uttered by leaders at the various summits that we covered over the past weeks. This creates opportunities for governments and private sector organisations alike. Even NGOs, like IISS with its Shangri-La Dialogue, have a role to play in this kind of summitry. Ultimately, however, summits are only as useful as their outcomes and any follow-through. And what these are depends on the visions, skills, and determination of the political, business, and civil society leaders that attend them.
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Join hosts Lucy Marcus and Stefan Wolff for a deep dive into some of the most pressing issues of today and tomorrow.
In this episode of Navigating the Vortex, Lucy and Stefan talk through the continuing impact of the potential US default; the regional and global summits that tell us about China's growing influence in Central Asia, Ukraine's diplomatic efforts, G7 concerns regarding China; and how money is the glue that ties the threat of default by the US government, the recent banking sector crisis, and Japanese corporate governance together.
Too late to avoid the consequences of a potential default?
Lucy and Stefan begin with an update on the potential US default and the ongoing negotiations to raise the debt ceiling. They talk about the geoeconomic consequences of a default and the credit rating agencies' concerns about political partisanship hindering a resolution.
Summit-palooza
Then it is on to recent and upcoming regional and global summits. Stefan talks through China's Belt and Road Initiative and its economic and political influence in Central Asia, the runners and riders embracing China's investments, as well as where the war in Ukraine, President Zelensky's diplomatic efforts, and support from Western partners fit into all of it.
Lucy and Stefan delve into the G7 summit particularly regarding its focus on China and concerns about economic resilience and security. They highlight the implications for the private sector, such as evaluating equipment, protecting advanced technologies, and considering foreign investment strategies.
Coming up, there is more summitry to be had with the Nato foreign ministers meeting, the European Political Community gathering, and the 25th anniversary of the European Central Bank—Lucy and Stefan will brief you on key issues from these summits as and when they arise.
The hum of instability, both economic and political, balanced by borderless money
Lucy and Stefan outline some of the threads of the interconnectedness of geopolitics and geoeconomics, drawing together the threat of US default, the recent banking sector crises, and corporate governance issues - this time looking at Japan.
Above all else, they emphasize the fragility of global economic stability and the importance of vigilance.
Deeper Dive
As promised in the podcast episode, here are links to several items mentioned for those who’d like a deeper dive:
Stefan and Lucy first discussed the potential impact of a US debt default on the global economy several weeks ago. Starting with an explanation of what the debt ceiling actually is, they talk through severe consequences for the US economy and that a US default would have significant global consequences due to the US's central role in the global economy and financial system. Here is that episode:
Stefan mentioned a webinar that he co-organised with the Foreign Policy Centre in London, where he is a Senior Fellow. The video of the webinar “The impact of the war in Ukraine on connectivity in Eastern Europe and the South Caucasus” is below.
Lucy mentioned a piece she wrote, The Better Corporation, about the forced transformation of corporate governance in Japan, prompted in no small part by international investors expecting Japanese companies to adhere to universal principles of good corporate governance.
Also, this link takes you to a collection of all of the columns on corporate governance on Navigating the Vortex.
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Four weeks ago, on 26 April 2023, Presidents Xi and Zelensky spoke on the phone for the first time since Russia’s invasion of Ukraine in February last year. This was an important first step in the direction of at least some cooperation between China and the West to work together on ending the war in Ukraine. But progress in this direction has been slow, and fighting in Ukraine has further intensified since. As China and the West have continued to shore up their respective alliances, Ukraine remains a major divisive issue but one that is becoming more and more a sideshow in the competition to shape a new geopolitical and geoeconomic order.
What it’s about: When Xi and Zelensky spoke for almost an hour about their countries’ bilateral relations and the war in Ukraine, the Chinese president focused on the importance of dialogue and negotiation “to bring lasting peace and security to Europe” while his Ukrainian counterpart confirmed “a just and sustainable peace for Ukraine” was inextricably linked to restoring “the territorial integrity of Ukraine … within the 1991 borders.”
This is the position that the G7 leaders’ communique supported as well, specifically calling on China “to support a comprehensive, just and lasting peace based on territorial integrity and the principles and purposes of the UN Charter, including through its direct dialogue with Ukraine.”
The corresponding Xi'an Declaration of the China-Central Asia Summit was unsurprisingly less specific in this regard, but the six presidents nonetheless “reaffirmed their commitment to the purposes and principles of the Charter of the United Nations and stressed that the territorial integrity and sovereignty of States cannot be undermined.”
Why it matters: The war in Ukraine so far has cost hundreds of thousands of lives on both sides, caused hundreds of billions of dollars’ worth of damage to Ukraine’s economy and infrastructure, and contributed to a global cost-of-living crisis by driving up the prices of energy and food. Western sanctions on Russia and the increasingly tough stance by the G7 on sanctions evasion and circumvention have accelerated a trend of geoeconomic fragmentation that reinforces the geopolitical reconfiguration of the international order into a US- and an emerging China-led block.
China’s consolidation of its relations with Central Asia at the summit of the presidents of all five Central Asian states with Xi Jinping in Xi’an indicates Beijing’s expanding influence in a region traditionally dominated by Moscow. Meanwhile, G7 leaders in Hiroshima re-committed to “de-risking, not de-coupling” in their quest for a common approach among them to economic resilience and security.
China and the West both try to maintain some momentum in shaping their respective alliances, and the war in Ukraine continues to matter in this context. But it is increasingly becoming a distraction from a range of other issues that China and the West, as well as the rest of the world, are grappling with. There can be no question that the war needs to be brought to an end but given the broader stakes in the China-West relationship, managing it by containment in the absence of a credible peace plan is becoming a more likely approach—and one that will intensify the political and economic rivalry between China and the West.
Our take: Bringing the war in Ukraine to a just and sustainable end will not be quick or easy, but China’s overt commitment to attempting a process of mediation is now evident with the visit last week by China’s special envoy on the issue, Li Hui, to Kyiv. While any Chinese mediation will play out only slowly, even if it is reluctantly supported by the West, both sides will continue in their efforts to reshape the international order in which a settlement of the war in Ukraine will eventually happen. The two rival summits in Xi’an and Hiroshima clearly demonstrate that the contest over the shape of this new order has taken centre-stage, and the war in Ukraine, and its two main protagonists, are turning into instruments of China and the West in their intensifying rivalry.
To understand why and how this happened, we need to look at the bigger picture. A flurry of European visits to China sought to convey one key message to Beijing, namely that another ‘forever-war’ is in nobody’s interest, especially not one like that in Ukraine near the centre of Europe with the enormously destabilising consequences for the global economy and international peace and security.
Although he was much derided for various comments during and after his trip to China, it seems as if President Macron of France was able to impress this point on President Xi. This was not Macron’s doing alone, and it is important to bear in mind that other ‘messengers’ played an important role as well—EU Commission President Ursula von der Leyen travelled with Macron to China, and German Foreign Minister Annalena Baerbock followed them a week later. Similarly important for Beijing to hear, von der Leyen’s earlier speech about de-risking the EU’s relationship with China, rather than de-coupling from it, was echoed in a speech by US treasury secretary Janet Yellen just days before the Xi-Zelensky call.
As we wrote in an earlier piece, Europe-China relations: still just muddling through? (On Our Radar, 9 April 2023), maintaining channels of dialogue between Europe and China “is by no means a bad thing at a time when communication is often the first victim of intensifying geopolitical and geoeconomic rivalry.” Yet, not only is this rivalry between China and the West far from over but it appears to be intensifying despite the war in Ukraine which is unlikely to come to a sustainable solution without cooperation between Beijing, Brussels, and Washington.
At the time of the Xi-Zelensky call, China and the West were seemingly treating the war in Ukraine as an issue where they might demonstrate to each other that progress towards a settlement reflected their self-interest in restoring even a modicum of geopolitical and geoeconomic stability, including in their own relationship.
This may still be the case, to some extent, but the two summits in Xi’an and Hiroshima also indicate that things have moved on. Through the Xi’an Declaration, China has firmly locked the five Central Asian states into its expanding sphere of influence. Economically, this has been a trend for the last decade since President Xi launched the Belt and Road Initiative in Kazakhstan in September 2013. Politically and in terms of security, China’s influence has gradually and substantially increased as well—partly because of the crisis in Afghanistan, partly because of the war in Ukraine. The statement in the Xi’an Declaration that “China firmly supports the development path chosen by the Central Asian countries and supports all countries in safeguarding their national independence, sovereignty and territorial integrity and in adopting independent domestic and foreign policies” leaves little doubt that the days of Russia’s dominance in the region are over while also sending a clear message to the West that China will not tolerate any rival influence there.
The G7 Hiroshima Leaders’ Communiqué is similarly unequivocal about the rivalry between China and the West being the defining feature in the contest over the geopolitical and geoeconomic shape of the new international order. While there are some proverbial olive branches extended to China in relation to cooperation on climate change, biodiversity, debt sustainability, global health, and macroeconomic stability, there follows a long list of concerns regarding China’s conduct. These include practices of economic coercion, market distortion, industrial espionage, and so on, leading the G7 leaders to conclude that “economic resilience requires de-risking and diversifying.”
As we wrote earlier in Black Swan Events & Business Resilience: Insights from Ukrainian Companies amid War (On Our Radar, 15 May 2023), many of the measures adopted by states to ensure their economies’ resilience to both external shocks, like the war in Ukraine, and the effects of increasing rivalry with China have a significant impact on businesses as well. That this will continue to be the case, and perhaps even more so, is also apparent from the separate and more detailed Statement on Economic Resilience and Economic Security. Here, the G7 Leaders acknowledge that they have yet to “provide clarity to the private sector” regarding the implementation of policies on economic resilience and economic security. Yet, the overall direction of travel is clear, including, among others, more export and investment controls when it comes to critical and emerging technologies, more protection of global value and supply chains against “illegitimate influence, espionage, illicit knowledge leakage, and sabotage”, more “coordinated responses, [to] deter and, where appropriate, counter economic coercion”, more due diligence regarding the “political, economic, and other risks of a non-technical nature posed by vendors and suppliers”, and more “resilient supply chains through partnerships around the world, especially for critical goods such as critical minerals, semiconductors and batteries.”
There can be little doubt that if implemented this strategy will involve far more decoupling than political leaders are willing to admit, or perhaps imagine, at the moment. It will put significant burdens on the private sector to re-shore, near-shore, and friend-shore, while potentially leading to lost market and investment opportunities. It could also mean a higher burden on taxpayers if states were to decide that some of the likely costs borne by the private sector should be absorbed by the public purse.
To be sure, this emphasis on economic resilience and economic security is politically driven and one of the key lessons from the war in Ukraine—to avoid economic dependencies (like Europe’s dependence on Russian energy in the run-up to February 2022) and to limit the transfer of defence-critical technologies to potential adversaries.
Even if limited, the inevitable de-coupling of China and the West in some sectors of the global economic and financial systems will have ripple effects beyond these imagined narrower boundaries. It will be more difficult for countries in the Global South not to take sides and thereby contribute to the ongoing process of fragmentation. It will also limit the availability of resources and goodwill to cooperate on truly global problems like climate change, health, and poverty reduction.
And it will turn issues like the war in Ukraine even more into one of the instruments of this new great-power rivalry. China’s focus on Central Asia and the West’s depressing long list of broad global security concerns, however, also make it abundantly clear that as the war in Ukraine is well into its second year, neither side has a workable plan of how to end it. And even if a carefully hatched plan between them did exist, it may not survive contact with a reality in which Kyiv and Moscow have very different ideas about how to end this war and when.
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The McKinsey report Survival through purpose: How Ukrainian businesses endured amid extreme uncertainty offers fascinating insights on how Ukrainian companies were affected by Russia’s invasion in February 2022 and how they responded to the extreme challenges that this created. While specific to Ukraine, some of the observations in the report led us to consider the broader implications of war, and similarly rare but extreme events, on public and private sector companies — and the importance of planning and thinking on your feet.
What it’s about: More than a year into the war in Ukraine, McKinsey surveyed 122 Ukrainian companies about how the dramatic events since February 2022 had changed their business environment, what strategies they had adopted to mitigate these impacts, and which of them had worked to date (or not).
The consequences of the Russian invasion have been enormous in terms of lives lost, infrastructure destroyed, and people displaced. This has affected businesses of all shapes and sizes and in all sectors — it disrupted their ability to operate normally and, for the most part, decreased demand for their goods and services.
Yet, of the organisations McKinsey surveyed, only 2% ceased operations, despite the fact that 47% recorded a drop in sales of more than 30%. This remarkable resilience, the report outlines, comes down to four factors: providing employees with safety and purpose; quickly shifting to a “wartime operating model” of agile decision making; implementing existing contingency plans; and senior executives leading from the front and by example.
Why it matters: One of the rationales behind McKinsey’s report is that events like the war in Ukraine generate lessons that “apply to any company hoping to create a tool kit to deal with true black swans.”
War, like major natural disasters, large-scale terrorist attacks, and man-made catastrophes, is often considered a black swan event — an event that is extremely impactful, but also extremely rare. Taken as singularities, this is probably true. Looking at it from a more cumulative perspective, it is more doubtful that we are really dealing with events that only occur once in a blue moon.
Over the past decades, hardly a year has passed without testing the resilience of states and societies in different parts of the world and around the globe, often to, and sometimes beyond, breaking point.
The end of communism and the collapse of the Soviet Union, German unification, the wars in the former Yugoslavia, 9/11, Afghanistan, Iraq, the global financial crisis, the war in Georgia, the Arab spring, Fukushima, the annexation of Crimea, the COVID-19 pandemic, the return of the Taliban, and now the full-scale Russian invasion of Ukraine and the escalating civil war in Sudan are just some examples of such events, many of which had not just an immediate impact but lasting consequences.
Add to this natural disasters like earthquakes, tsunamis, and climate-change related events like floods, droughts, and wildfires that occur more frequently and with greater regularity, and it becomes clear that many black swans are taking on a decidedly lighter shade of grey.
Our take: War is a man-made disaster in both its immediate consequences and in how states and societies respond to it — not only those immediately affected by it but also further afield. This adds complexity to how businesses can cope, and, crucially, prepare for such an event.
The war in Ukraine demonstrates this complexity in a number of ways. For companies in Ukraine, as the McKinsey report highlighted, the key impacts were on operations and demand. Businesses further afield are similarly affected, as we have seen in terms of inflationary pressures, which increase operational costs but can also depress demand because inflation hits consumers as well. Supply chain disruptions are another factor, as are the broader impacts of increasing geopolitical and geoeconomic fragmentation.
This fragmentation — sometimes also referred to as decoupling or de-risking — is partly a choice made in response to war and in an effort to deal with its consequences, as we discussed in an earlier piece, Mitigating the risks of geopolitical fragmentation: regulation, oversight, and good corporate governance. One of the West’s responses to Russia’s invasion of Ukraine has been a significant up-scaling of sanctions since February 2022. This has not only had an effect on Russia’s war effort, as detailed, for example, by the World Economic Forum in a report last December, but it has also increased the regulatory burden on companies and the costs of non-compliance.
Non-compliance is wide-spread, partly because of deliberate circumvention of sanctions, partly because of the complexity of the sanctions regime. With sanctions widely used by the US, the EU, and their G7 partners as geopolitical and geoeconomic tools of statecraft, ensuring compliance has become a major, and constantly evolving, task for business organisations.
Non-compliance can have a serious effect on company profits. Even before the Russian invasion of Ukraine, Standard Chartered Bank was fined just over £20m by the UK Treasury in 2020 for breaching sanctions imposed by the European Union over Russia’s annexation of Crimea. Unrelated to the war in Ukraine, Royal Bank of Scotland and French bank Credit Agricole were fined $100m and $800m, respectively, in 2013 and 2015 by the US Treasury for violating various sanctions then in place against a number of countries, including Iran, Sudan, Myanmar, and Cuba.
Given that sanctions violations remain high on the radar of western governments and international financial institutions, compliance should also become, or remain, a priority for companies in their corporate governance efforts.
At the same time, war has always created opportunities for growth, investment, and innovation as well, and the war in Ukraine is no exception in this regard, as detailed in a recent report by the Financial Times. This, however, also indicates a shift in public and private financing priorities in times of war, which means that in sectors other than those relevant to the war effort, access to capital and skilled labour will be more difficult and potentially have long-term negative impacts. The longer wars last, the more entrenched shifts to war-time economies become, and the more time- and resource-intensive post-war transitions will be in economic terms.
The bottom line — regardless of whether one looks at war or other black or not so black swan events — is that risk management and contingency planning are important aspects of any organisation’s resilience to major external shocks. But they are only part of the answer. What is equally, and perhaps more significant, is having well-qualified and well-motivated people working for the organisation from top to bottom who can think on their feet when any kind of event requires activating these contingency plans. This means realising that resilience is above all about people, and that investing in people is key to increasing resilience.
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Join hosts Lucy Marcus and Stefan Wolff for a deep dive into some of the most pressing issues of today and tomorrow.
In this episode of Navigating the Vortex, Lucy and Stefan discuss Italy, corporate governance, the energy sector, multinational companies, politics, the debt ceiling, the OSCE, NATO, Sudan, Ukraine, Russia, and, of course, Eurovision.
Italy's Enel AGM and the Shakespearean drama of corporate governance
AGM season continues and Lucy and Stefan do a bit of a deep dive on one Italian company that brings together politics, energy, power, leadership, governance, money and more. By the end you'll wonder if it is a Shakespearean play or corporate governance, or both.
Corporate governance rules for appointing directors to public companies in Italy are structured in a way which is supposed to emphasize transparency, accountability, and diversity in the boardroom, and to seek to ensure that all shareholders have a voice in the governance of the company. Enel, an Italian multinational energy company, is the largest-listed company in Italy and operates in the production, distribution, and sale of electricity and gas. They had their AGM on 11 May, and the vote was seen as a test of the influence that the Italian government has as a majority shareholder over Enel and other powerful state-backed companies. Because Enel operates in numerous countries around the world, across Europe, North America, South America, and Africa, the right-wing government's power to have a strong say over who is appointed to the board, means that they also have a great deal of influence over the company's operations in other countries, and by extension that expands their power on a global basis.
The Global Impact of a US Debt Default: What You Need to Know
Stefan and Lucy also discuss the potential impact of a US debt default on the global economy. Starting with an explanation of what the debt ceiling actually is, they talk through severe consequences for the US economy and that a US default would have significant global consequences due to the US's central role in the global economy and financial system.
They note it could cause economic turmoil, trigger market instability, and lead to currency fluctuations, potentially causing political instability and reducing US influence in international affairs. The consequences of a US default could be severe and long-lasting, affecting not only the US but also other countries, particularly those that hold a significant amount of US debt, such as China and Japan.
A US default could undermine the stability of the global financial system, and a downgrade of the US credit rating could increase borrowing costs for other borrowers as well. They also talk through the reverberations that will begin to be felt as the US gets closer to the chance of default: we may see increased volatility and uncertainty in financial markets around the world, making investors more risk-averse and leading to a sell-off of assets that are perceived to be risky.
Eurovision and Geopolitics: Behind the Glitz and Glamour
Of course, the episode would not be complete without a vital conversation about the Eurovision song contest, including the finer points of the geopolitical implications and influence on Eurovision voting, and the special significance of this year's event.
Note: A big thank you to all of our subscribers, listeners, and readers! Since its launch, the Navigating the Vortex newsletter and podcast have been read and listened to by people from 43 countries. Thanks for continuing to read, listen and share.
We love hearing from you so please be in touch with your questions and feedback via the comments. We read it all.
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Join hosts Lucy Marcus and Stefan Wolff for a deep dive into some of the most pressing issues of today and tomorrow.
In this episode of "Navigating the Vortex," Lucy and Stefan discuss the ongoing crisis in Afghanistan, the impact of Brexit on Northern Ireland, the escalating conflict in Sudan, and the role that business and investment can play in promoting political stability.
They also touch on the impending Ukrainian counteroffensive and the impact of the conflict on corporations, with knock-on economic and supply issues that are reaching beyond the region and into boardrooms around the world.
Plus, they talk about corporate governance and the overarching theme of accountability that is emerging from Annual General Meeting (AGM) season this year, as investors hold companies to account for the promises they made in the past and the commitments they’ve made for the future.
Note: A big thank you to all of our subscribers, listeners, and readers! Since its launch, the Navigating the Vortex newsletter and podcast have been read and listened to by people from 41 countries and 20 US States. Thanks for continuing to read, listen and share.
We love hearing from you - this week we had some fascinating and thought-provoking feedback, including from readers in Pakistan about our piece on Afghanistan. Please be in touch with your questions and feedback via the comments. We read it all.
We hope you'll continue to share Navigating the Vortex far and wide, with friends, family, colleagues, across social media, and even strangers on your commute…
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One of the stories that we have followed for some time is the circumstances in Afghanistan. The situation of the UN mission, UNAMA, has become ever more precarious and its ability to improve the humanitarian and economic situation of ordinary Afghans has been seriously impeded. Within that context, it was intriguing to see China’s foreign ministry release a position paper on Afghanistan.
What’s it about: On 12 April, the Chinese foreign ministry issued a position paper on Afghanistan. Four of its eleven points deal with the threat of terrorism and narcotics that Afghanistan poses, indicating the serious concerns that China has in this respect. Unsurprisingly, the paper also condemns past and current US actions in relation to Afghanistan and juxtaposes them to China’s respect for the country’s independence, sovereignty and territorial integrity and Beijing’s commitment to never interfere in Afghanistan’s internal affairs, never seek selfish interests in Afghanistan, and never pursue a sphere of influence. That, however, does not stop the Chinese foreign ministry from demanding moderate and prudent governance from the Taliban, including the protection of the basic rights and interests of all Afghan people, including women, children and all ethnic groups. Moreover, China commits itself to supporting peace and reconstruction in Afghanistan, including through facilitating a solution to Afghanistan’s humanitarian and refugee issues and through strengthening international and regional coordination on the Afghan issue.
Why it matters: Afghanistan has not been in a good place for as long as many people’s living memory. Foreign occupation and civil war have been a near-constant feature of life in Afghanistan for several decades. The Taliban takeover of power in August 2021 has done little to improve this. On the contrary, the economic situation in the country is dire. Women and girls are more and more excluded from education and the labour market. Levels of violence may have decreased, partly because of the harsh rule imposed by the Taliban, but the threat posed by Islamic State and other terrorist groups to Afghanistan and the region remains. Addressing this complex set of challenges requires a coordinated and thought-through approach by Afghanistan’s neighbours and the broader international community—an approach that recognises the urgent needs of Afghans and at the same time takes an ethically principled stance on the Taliban regime that causes much of their suffering.
Our take: While Afghanistan remains one of the most deprived countries in the world with no hope of imminent improvement, the UN simultaneously contemplates pulling out its mission and taking steps towards recognising the Taliban regime. The dilemma that the UN is facing is that its operations have become more and more constrained with the Taliban now prohibiting women from working for the UN mission in the country. If any final confirmation was needed that attempts to engage with the Taliban since August 2021 have not led to any positive change, this should be it. The approach of give and take, of humanitarian relief, of economic engagement, of exploring trade and transport links has been futile.
It seems intuitively right to argue that the world cannot turn its back on Afghanistan and abandon its people. But this argument ignores the fact that whatever engagement has been possible to date has not improved the situation of ordinary Afghans at all and in fact it has worsened that of women and girls. Moreover, calls for more engagement with the Taliban, especially when it appears to be unconditional—as expressed by China in its position paper and pursued by many of the Central Asian states for the past twenty months—also mask the underlying economic interests of such an approach.
Afghanistan has vast mineral deposits, including critical rare earth minerals, that are of significant interest to China, as are the country’s oil reserves. China is known to have invested in Afghanistan’s lithium sector and China and the Taliban also agreed a deal in January this year enabling a Chinese company to drill for oil in the Amu Darya basin. For Afghanistan’s northern neighbours in Central Asia, engagement with the Taliban is meant to lead to infrastructural, trade, and energy cooperation that would supposedly create opportunities for economic development across Central and South Asia and connect Central Asia better to the global economy at a time when many of its traditional connections to and through Russia have been disrupted by the war in Ukraine.
Economic engagement with, let alone diplomatic recognition of the Taliban regime, is not a promising approach to either achieving the regional security and stability that China and other neighbours of Afghanistan crave or to relieve the suffering of ordinary Afghans. While it is important to engage with China on Afghanistan, engaging with the Taliban regime can only lead to desirable outcomes if it remains steadfast in the commitment to key principles like the protection of the basic rights and interests of all Afghan people, including women, children and all ethnic groups which China’s position paper also calls for.
Even if an unconditional engagement with the Taliban regime now would result in short-term economic and perhaps even security gains, the Taliban’s track record in power—between 1996 and 2001 and since August 2021—suggests that this is neither a sustainable business proposition nor one that would be politically prudent.
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In this first episode of the Navigating the Vortex podcast, hosts Lucy Marcus and Stefan Wolff introduce themselves and the premise of their podcast, which is to have insightful and thought-provoking conversations with guests about current events and big ideas. They discuss their backgrounds and expertise and how discussions around their kitchen table led them to create this podcast.
The hosts also review their recent columns, which focused on geopolitical risks and their impact on economic growth, global trade flows, foreign direct investment, and technological advancement. They examine why geopolitical risks are so important and how they impact economic development. They emphasize the role of the private sector, which is as much affected by global events as the public sector, and examine how public-private partnerships are essential for the international community's ability to tackle global challenges like climate change and future pandemics.
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Two reports released by the International Monetary Fund — on global financial stability and the world economic outlook — echo findings from an earlier report from the World Bank about the weak prospects for sustainable economic growth. Like the World Bank report (which we covered here, asking “Is Global Growth Doomed?”), the IMF points to geopolitical risks as a major driver of suppressed growth potential. While the IMF is sceptical about reversing the trend of geopolitical fragmentation anytime soon, it emphasises the importance of risk monitoring and strengthening oversight to improve the resilience of banks.
What it’s about: The IMF’s April 2023 Global Financial Stability Report and World Economic Outlook paint a picture of a global economy strained by high inflation, fiscal tightening, a looming sovereign debt crisis, and uneven post-pandemic recovery. Added to that, and exacerbating these downside risks, is a persistent trend of geopolitical fragmentation — a deliberate reversal of global economic and financial integration, driven by strategic considerations, especially of major powers.
Why it matters: Geopolitical fragmentation, according to the IMF, has a negative impact on global trade flows, foreign direct investment, labour mobility, and technological advancement. It affects developing economies more, and more negatively, than advanced economies but also limits the ability of the international community as a whole to tackle global challenges like climate change and future pandemic threats. In a context in which many people are already severely exposed to the consequences of the energy and food crises, reduced capacity to support the most vulnerable populations is likely to contribute to more, and spreading, social unrest. This, in turn, has increased the risk, and cost, of doing business for many companies, according to a recent study by Allianz.
Our take: Geopolitical fragmentation is not a new trend, but it has accelerated since the beginning of Russia’s invasion of Ukraine. It is likely to continue as competition between the US and China increases. In fact, US-style decoupling is a prime example of geopolitical fragmentation. It also indicates that fragmentation will become more pervasive as countries will have few options but to choose between a US-led western bloc and a China-led bloc. That choice will be shaped by ideology as much as geography, evident in terms like ‘friend-shoring’ and ‘near-shoring’ that have been added to the vocabulary of geoeconomic strategies and that complement the trend of ‘re-shoring’ which became popular as a result of the COVID-19 pandemic.
While the most obvious countermeasure to geopolitical fragmentation would be strengthened multilateral cooperation, this is, for the time being, also the most unlikely path to be chosen by the world’s major powers. Consequently, other mitigation measures are required. These might not treat the root causes of fragmentation, but they can increase the capacity of national and international financial actors to deal with some of the symptoms.
Both policy makers and the private sector need to rise to this challenge. As the IMF points out, risks need to be more systematically monitored. This can improve early warning, which is important, and needs to be followed with early, and decisive action. Decisive action, in turn, requires that resources be available, and are made available, for targeted interventions. This can be aided by strengthening oversight of the banking and non-bank financial sector to ensure that financial regulations are not only in place but adhered to when it comes, for example, to capital and liquidity requirements.
It is important to note, that oversight is not merely a question for financial regulators but also goes to the heart of the short- and long-term health and governance of all organisations. Nor does it only impact traditional multinational companies. Any organisation buying or selling abroad or operating in sectors that could be impacted by local, regional, and global upheaval — from sovereign debt crises and expanding sanctions regimes, to cyber threats, currency fluctuations, and protectionist trade policies — must have a system of risk assessment and monitoring in place. Public or private, profit or not-for-profit, no-one is immune, and as a matter of corporate governance, boards must keep a finger on the pulse of how the shifting winds of policy in myriad areas impact their organisations.
At a time when multilateralism is unable to provide more than at best minimal guardrails against a prolonged global economic downturn, the public and private sectors need to work more closely together nationally and across politically like-minded economies to put in place mitigations against the negative impacts of geopolitical fragmentation. This requires a sense of common purpose in which regulation and oversight go together with good corporate governance. The more resilient national economies emerging from this will be better able to weather continuing fragmentation and be better placed to re-engage globally when the time comes.
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One of the stories we have been following in the past couple of days is the trip by French president, Emmanuel Macron, and European Commission president, Ursula von der Leyen, to Beijing. Not much seems to have changed in the relationship or in either side’s attitude, but this is by no means a bad thing at a time when communication is often the first victim of intensifying geopolitical and geoeconomic rivalry.
What it’s about: The not-so-joint visit by Macron and von der Leyen to China just before Easter produced no concrete political outcomes and few economic ones. Rolling out the red carpet for Macron and pretty much cold-shouldering von der Leyen confirmed that China prefers bilateralising its relationship with EU members, especially ones that reflect well on the image of its own leader, rather than dealing with the bloc as a whole.
Why it matters: The EU and China are among each other’s largest trading partners—China is the primary source of imports for the EU and its third-largest destination for exports. European companies, too, have a stake in this. For the German automotive industry, for example, China is the most important export market, with every third German car sold there. Germany and France together account for almost a quarter of all EU exports to China.
The EU and China, thus, have a keen interest in global economic and political stability, but they don’t see eye-to-eye on many issues. From democracy and human rights, to Taiwan and the war in Ukraine, and to the lack of a level playing field for European companies in China, there are many issues where both sides do not simply agree to disagree but have profound differences that shape their foreign, security, and economic policies.
Our take: In a speech just before her departure, von der Leyen outlined a policy of ‘de-risking’ in the EU’s approach to China. Short of US-style ‘de-coupling’, the approach is meant to be more assertive and protective of EU economic interests and balance them carefully with the bloc’s political interests. This is insufficient from a US perspective, and US pressure on the EU and key member states like France and Germany will continue to align more with Washington’s policy of containing China.
President Xi’s efforts to drive a wedge between Europe and the US are evident in his differential treatment of Macron and von der Leyen, as are his intentions to exploit divisions within Europe among member states who back the Commission’s approach and those that think it either goes too far or not far enough. There is no indication that Xi has been particularly successful in achieving this.
The persistent lack of a level playing field for European companies in China has meant that the landmark 2020 Comprehensive Agreement on Investment has effectively been abandoned and was not even discussed at the recent meetings in Beijing. This does not imply an end to the trade relationship between the EU and China, but it also means that there will not be the kind of step-change in deeper integration that the 2020 deal could have offered. Like German chancellor Olaf Scholz before him, Macron has demonstrated that individual deals—such as for Airbus or French energy giant EDF—will remain possible.
Like other European leaders before them, von der Leyen and Macron both emphasised the importance of the war in Ukraine as a determining factor in the relations between Europe and China, but they got little from China in return, apart from a re-statement of its “Position on the Political Settlement of the Ukraine Crisis”.
Ultimately, there was nothing groundbreaking in the joint declaration by Macron and Xi, and there was not even one between Xi and van der Leyen. But not breaking things in one of the most important global political and economic relationships is perhaps as good an outcome as one could and should have expected. Above all, it means that dialogue between the EU and its member states and China will continue in areas where they agree and disagree alike.
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One of the stories we have been following is a new report by the World Bank, published at the end of March, which paints a gloomy picture of the prospects of sustained global growth. What it's about: World Bank researchers investigated the drivers of global growth and found that almost all of them have weakened and are unlikely to recover before the end of the decade; and even then only if national governments individually and collectively adopt pro-growth policies, especially "a major investment push grounded in robust macroeconomic frameworks".Why it matters: According to the report, slow growth limits the resources available for addressing major global challenges, such as climate change. Slow growth, and even more so, a sustained recession, will have an adverse impact on poverty reduction, on the delivery of basic services like education, healthcare, and sanitation, and on the achievement of other United Nations Sustainable Development Goals. This, in turn, is likely to increase social tensions and potentially lead to more conflict, especially in already fragile states, many of which are also facing mounting debt problems.
Our take: The consequences of limited growth and the challenges to overcoming them are profound. While sound macroeconomic policies may well be at the heart of the solution, as the World Bank report suggests, they are unlikely to succeed in reviving sustainable growth if the geopolitical conditions in which they are applied worsen. The war in Ukraine--a major man-made shock to the system--is but the tip of the iceberg. And it is also a major bellwether of how major powers can, or cannot, manage their rivalries. Ukraine is in danger of becoming not only the battleground of a proxy war between Russia and the West, but also another front in the increasingly antagonistic relationship between China and the United States. Driven by Beijing's growing assertiveness and Washington's attempt to contain China's rise, the geopolitical and geoeconomic decoupling of the world's two major power centres is the exact opposite of what is needed: more global trade, more cooperation on debt management, more coordinated investment into addressing shared challenges like climate change. Geopolitical and geoeconomic tensions also increase uncertainty for businesses, limiting the promise for private sector investment on a global and national scale, as well as hampering meaningful public-private partnerships. Without private-sector buy-in, and a concerted effort to align the incentives for policy and business to work together, it will be impossible to revive the prospects for sustainable growth anytime soon.
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