European elections, policy challenges of climate and agriculture, Argentina’s economic reforms, and more

War in Ukraine unlikely to end soon

Following military advances in early 2024, more recent Russian offensives have yielded only limited gains in terms of territory, although bombings continue to damage Ukraine’s energy sector. As highlighted by the Ukraine-Switzerland peace summit held in Switzerland in June, Ukrainian President Volodymyr Zelensky’s objectives include territorial integrity, exchange of prisoners of war and nuclear safety. A ceasefire remains unlikely in the short term.⁸ On July 9-11, NATO held its 75th annual summit in Washington, DC, during which member states reaffirmed commitments regarding Ukraine’s future membership, military aid and reconstruction, including energy infrastructure.⁹ With a record 23 out of 32 states meeting the 2% defense spending target in 2024, the coordination of military aid for Ukraine will shift from the US to NATO.

Defense companies will likely continue to face increased demand as NATO governments boost defense spending and increase contributions to Ukraine’s defense manufacturing industry. Global companies should continue to monitor their exposure to evolving sanctions against Russia, which are likely to expand in scope and geography to also include third countries perceived to be supporting Russia’s defense industry, possibly including China.¹⁰ In the longer term, international investment in reconstruction could help unlock private capital in Ukraine given the strong interest from foreign companies.

For more information, contact Famke Krumbmüller and Natalie Jaresko

Argentina’s economic reform program progressing 

Scaled-back versions of President Javier Milei’s proposed economic and tax reform packages passed the Argentine Congress on 28 June, handing Milei his first legislative victory. The two pieces of legislation contain substantial foreign investment incentives, allow privatizing some state-owned companies, give the government “emergency” powers over certain administrative, economic, financial, and energy issues for the next year and reintroduce an income tax, among other measures. Separately, the International Monetary Fund (IMF) authorized another US$800 million disbursement under the Extended Fund Facility for Argentina and the government also renewed a US$4.9 billion currency swap agreement with China, which will ease pressure on central bank reserves.¹¹

The IMF highlights¹² the potential of the economic reform package to increase the flexibility of the labor market, encourage long-term investments and privatize parts of the economy – all of which would enable Argentina to capitalize on its economic potential¹³, including strong natural resources endowments, agricultural production and human capital. Markets generally welcomed the legislation’s initial passage as an important first step toward stabilizing the economy. Implementation may be challenging, however, given societal discontent (and resulting protests) regarding some of the provisions.¹⁴ Milei’s government will need to build more popular support by demonstrating that its program can control inflation, increase growth and employment, and encourage investment.

Middle East escalations challenge the regional business environment

Tensions between Israel and Hezbollah at the Lebanon-Israel border have been steadily growing, spurring global concerns of a more severe escalation of the conflict in the region.¹⁵ Recent threats against Cyprus further highlight the potential widening risk, even as US-backed mediation attempts continue.¹⁶ Meanwhile, observers indicate Israel’s operations in Gaza will likely enter a lower-intensity phase as focus shifts to the border with Lebanon. Following a recent UN Security Council resolution¹⁷ and G7 statements, international diplomatic¹⁸ and domestic public pressure around a Gaza ceasefire will likely intensify.

A cessation of hostilities in Gaza could present an offramp from recent political and security escalations, which would lead to a more stable regional operating environment. Alternatively, a widened conflict in Lebanon could lead to an intensified regional conflict. In addition to any direct damages, business impacts could include talent shortages, increased costs and reduced productivity to regional businesses. Companies dependent on regional production sites, suppliers or energy sources should revisit supplier resiliency or inventory management strategies. And executive teams and boards should conduct scenario planning to prepare for different ways in which the crisis could evolve.