Recent Searches
The CEO Imperative series
In brief
The war in Ukraine heralds the most significant geopolitical shift since the end of the Cold War. The world order has been increasingly volatile since the global financial crisis of 2008-2009, which began a shift from a unipolar to a multipolar world – that is, from one global superpower to several great powers.
Recent events have solidified the multipolar world. They’ve also ended the period of expanding globalization during the past three decades. International commerce will continue, but fundamental changes in the global business environment are likely to shift companies’ operations, their approach to customers and their strategies in the years ahead.
Current geopolitical dynamics are amplifying and accelerating the three themes identified in the EY 2022 Geostrategic Outlook:
CEOs need a comprehensive understanding of these dynamics to inform a more strategic approach to managing political risk. That’s why this is part of the CEO Imperative Series, which addresses critical issues and actions to help CEOs reframe the future of their organizations.
The war in Ukraine has both accelerated and altered ongoing shifts in geopolitical power. We now live in a multipolar world, comprised of three emerging blocs:
Five generative AI initiatives leaders should pursue now
Learn how to move beyond quick efficiency gains to a cohesive AI strategy that maximizes your growth potential in a fast-changing space.
Regardless of how and when the war in Ukraine ends, these blocs are likely to persist in the medium- to long-term. The key questions going forward are what roles China, India and other key emerging markets will play, and how sharp the dividing line between the blocs will be.
In this emerging multipolar world, companies are likely to see increased government intervention in their supply chains, limitations on or rejections of cross-border investments, export controls, restrictive trade measures and greater regulatory scrutiny.
Companies are therefore likely to face lower levels of political risk associated with investments in markets aligned with their home country’s bloc. This will apply to both new and existing investments relating to R&D collaboration, manufacturing and commercial sales. It will be particularly true for companies in the growing number of sectors deemed strategic for economic or national security reasons, such as: semiconductors, computer and telecommunications equipment, electric vehicles (EVs), pharmaceuticals and critical infrastructure.
In the near term, sanctions on Russia and broader efforts to diversify energy sources are increasing global demand for fossil fuels to satisfy the immediate needs of businesses and households. This will likely provide a boost to other oil and gas exporters in terms of both export revenue and geopolitical leverage.
In the medium- to long-term, however, the current situation is likely to accelerate the energy transition. Governments will act with more urgency to diversify their energy sources to improve both security and sustainability. This is already underway in many European countries, which have been hardest hit by the recent global energy crunch.
However, finding sufficient supplies of so-called “green minerals” could challenge the speed with which the energy transition can progress. Russia is a key source of green minerals – accounting for about 11% of nickel and 5% of cobalt production worldwide – exacerbating already tight global supplies. Companies and governments will need innovative supply chain strategies, including joint ventures with miners or circular economy initiatives, that recycle green minerals from old electronics.
More broadly, a variety of climate policies are likely to prompt a continued reassessment of business models to identify areas to reduce carbon footprints or unleash new revenue streams. Governments are likely to provide sustainability tax incentives, for instance, providing an opportunity for companies to utilize these incentives to help finance green R&D or their own energy transition.
And as newer and more rigorous sustainability reporting mandates are implemented, opportunities could emerge from analyzing these metrics to identify strategy shifts to adapt to a more sustainable economy.
The war in Ukraine is reinforcing a lesson that many governments took from the pandemic: supply chain resiliency and self-sufficiency in strategic sectors are of critical importance to national security.
Just as the pandemic elevated pharmaceuticals and medical supplies to a strategic sector, the war in Ukraine is elevating agriculture and food. Some governments have already restricted agricultural exports to protect domestic supply. Countries reliant on imported food face the prospect of rising prices, food shortages and social unrest.
The digital technology sector will also continue to be at the forefront of government intervention and geopolitical competition. Export controls on advanced technologies are a key part of the US’s, EU’s and others’ sanctions on Russia. These sanctions will divide the world into two digital technology blocs.
Relatedly, state-sponsored cyber-attacks for espionage, IP theft and disinformation are expected to increase. And as hackers continue to attack commonly used software as a means of gaining access to other organizations, companies across sectors will face heightened cyber risks from within their supply chains.
The push by governments to achieve self-sufficiency in strategic sectors will complicate traditional cross-border supply chains. Technology companies, manufacturers, automakers, life sciences companies, agribusiness and renewable energy companies will be among the most affected by these policy dynamics.
Continued disruptions to operations and logistics – driven by the war, the pandemic, social unrest, cyber attacks and extreme weather events – will further complicate global supply chains. Executives should re-examine their companies’ supply chains for nearshoring, onshoring or friendshoring strategies to improve resilience.
The war in Ukraine is creating challenges for companies around the world. While specific political risk mitigation and geostrategic actions will vary by company, CEOs should have three broad priorities as they seek to adjust to the new geopolitical environment:
Use a structured approach for identifying, monitoring and assessing political risks arising from long-term changes to the world order accelerated by the war in Ukraine, and incorporate these assessments into enterprise risk management (ERM) frameworks.
Include representatives from across the political, operational and financial aspects of political risk management, as well as from both the C-suite and relevant functions or business units, and regularly update the board on these issues.
Conduct a global footprint assessment for political risks and adjust accordingly, and proactively include political risk analysis in strategic planning processes, especially supply chain and market entry strategies.
The war in Ukraine and sanctions on Russia have elevated the importance of understanding geopolitical dynamics and proactively managing political risks. Executives need to reassess their company’s operations, supply chain and strategy to adapt to the new multipolar world.
The CEO Imperative: How can policymakers help you weather today’s geopolitical storms?
Global disruption has been intensified by the war in Ukraine, find out how companies can work with governments as they address critical policy dilemmas.
Through relentless disruption, how can you stay the course?
Ever more frequent shocks are reshaping the globe and our economy. Companies must plan for a more local, sustainable and digital world. Learn more.
