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Geostrategic Analysis

Iran’s geopolitical role, geopolitical risks affecting investment managers, protests in Nigeria and more

The Geostrategic Business Group’s monthly analysis of key geopolitical developments and their business impacts for September 2024.


This edition of Geostrategic Analysis discusses the ongoing situation in the Middle East with a focus on Iran’s role as a geopolitical “middle power.” Direct attacks between Iran and Israel have increased the risks of escalation toward a regional war.

More broadly, geopolitical fragmentation is altering the operational landscape for the Wealth and Asset Management sector, affecting investment decisions. In other news, US-China policy tensions are likely to rise, protests in Nigeria pose risks to business continuity across multiple sectors, Bangladesh’s political outlook is uncertain, and we highlight scenario analysis of how further trade tariffs between China and the West could affect the global economy.

In the monthly Geostrategic Analysis, the EY-Parthenon Geostrategic Business Group (GBG) provides its insights on key geopolitical developments. Each issue includes our take on recent or upcoming political risk events and what they mean for global business. Subscribe Now

In this issue

  1. Top development: Recent events underline the geostrategic importance of Iran’s role as a “middle power”
  2. Sector in focus: Wealth and Asset Management (WAM)
  3. Other issues we are watching: US-China dynamics, protests in Nigeria, and political instability in Bangladesh
  4. Geostrategic indicator of the month: Scenario analysis of trade tariffs affecting the global economy
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1

Topic 1

Top development

Recent events underline the geostrategic importance of Iran’s role as a “middle power.”

What happened

Ongoing hostilities in the Middle East and direct attacks between Iran and Israel have raised the prospects of a regional war as covered in previous EY-Parthenon Geostrategic Analysis.

 

Iran elected a new President in July, considered by observers to be more reform-oriented than his conservative opponents. While Iran’s foreign policy is unlikely to significantly change, President Masoud Pezeshkian has previously indicated openness to interaction and engagement with the West.

 

Military and industrial ties between Moscow and Tehran have grown, marked by technology sharing and joint defense projects. The conflicts in Ukraine and the Middle East have led Washington and Brussels to adopt increasingly defensive policy stances toward Iran, which has reduced the willingness for both sides to pursue mutual interests.

 

What’s next

Continuation of hostilities between Israel and Iran (and its regional proxies) remains highly likely while the Gaza crisis remains unresolved. Military vulnerabilities on all sides will spur increased defense spending with increased support from their respective allies. For instance, the US is expediting additional arms deliveries to Israel and accelerating deployments of additional military forces to the region.

 

The current crisis reinforces Iran’s continuing role as a geopolitical “middle power,” shaping global dynamics through its interactions with the major powers and other regional players. Most notably, the Russian-Iranian relationship is expected to have both military and economic components since both countries are seeking increased commercial opportunities, notably via rail and road routes connecting the two countries. However, persistent conflicts in Ukraine and the Middle East may lead Moscow and Tehran to focus on addressing their immediate regional concerns. Meanwhile, Iran likely will continue serving as a major petroleum source for China1, which creates some incentives for maintaining Middle East stability.

 

While G7 policy makers will focus on calming tensions, the Gaza ceasefire negotiations and later enforcement2, the apparent acceleration of Iran’s nuclear program3 likely will also require their attention. G7 leaders may look to calibrate effective policy responses that build upon the foundation of existing sanctions and potentially explore other trade and diplomatic tools.  

Business impact

Major sectors affected include Industrials and Energy, Consumer and Retail, Financial Services.

Shipping and airlines are likely to continue facing physical security risks when operating in the region. Companies reliant on trade routes in the Middle East should consider diversifying supply routes, purchasing political risk insurance or utilizing inventory management techniques to build resiliency.

 

Further escalations risk energy supply shocks and short-term price volatility. Commodity traders and energy customers should consider hedging strategies to protect against potential downside risks.

 

Executives should leverage scenario planning to prepare crisis response plans and bolster resiliency given various potential escalatory paths. The most extreme scenarios could involve severe impact to local personnel amid population dislocation, regional economic contraction and elevated financial markets stress.

 

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Topic 2

Sector in focus: Wealth and Asset Management (WAM)

Geopolitical fragmentation creates risks and opportunities for investment managers.

What happened

Geopolitical fragmentation has been impacting where investment managers can do business, what they can invest in and who they can work with. The risk of sanctions is significantly affecting business models. Asset owners that are government-backed or linked are facing especially heightened pressure.

 

New laws may further limit investment opportunities in certain markets or sectors, such as the US Treasury releasing its notice of proposed rulemaking that would impose controls4 on certain outbound investments in China.

 

Additionally, there is a growing concern among investment managers around cybersecurity and the risk that geopolitical tensions could limit international cooperation to tackle any cyber warfare5 that may emerge.

 

What’s next

Geopolitical conflicts will continue and new regulations, including around data sovereignty, enhanced security and resilience, and sustainability policy, will impact investment managers’ operations. This will likely lead to new cross-border partnerships to ensure a robust infrastructure and optimization of technologies such as artificial intelligence (AI).

 

The US and some other “Western” governments will likely continue to push firms to divest from certain strategic sectors in geopolitical rivals. While this may adversely impact business for some firms, it could present some opportunities for investment managers from geopolitical swing states such as Singapore, UAE and Saudi Arabia.

 

Business impact

Investment managers should proactively create operational and portfolio resilience6, with robust governance frameworks in place to build trust among stakeholders. Firms should prepare for potential power shifts in a multipolar world and related regulatory changes that may lead to divergent policies around sustainability and AI.

 

Investment firms should continually test, exercise, and train their staff and systems to reveal scenarios and weaknesses – internally and externally. Collaboration between investment managers, service providers and policymakers is important to navigate a complex cross-border environment and best utilize new technologies and talent.

 

Geopolitics should continue being prioritized by investment managers as a critical area of focus when making any new capital allocation decisions – be it around their investments, operating models or growth strategy.

 

For more information, contact Mark Wightman and Meghna Mukerjee

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Topic 3

Other issues we are watching

US-China dynamics, protests in Nigeria and political instability in Bangladesh.

US-China dynamics will be a focus in Washington

The US Congress was in recess for much of August and returned to Washington on 9 September. The House of Representatives may hold a long-expected “China Week” in September, which would be focused on security issues related to China. While it remains unclear what legislation or activities may be considered, it could include a House vote on the BIOSECURE Act. Separately, the Biden Administration is reportedly planning to release in September proposed rules to restrict Chinese connected vehicle technologies from being used in US cars. And the tariffs on certain strategic products that President Biden announced in May7 could come into effect this month. Beijing is likely to react to any actions taken by Washington, but the specific nature of their response is uncertain.

 

Executives should closely monitor Washington for heightened rhetoric and activity in this arena leading up to the November elections. The perceived over-reliance of the US on China for certain advanced manufacturing capabilities is likely to continue to drive bipartisan US policymaker support for “de-risking” from China and could lead to new products and sectors labeled as “strategic” for national security. Executives should continue to evaluate portions of their business that may be considered as strategic now or in the future and evaluate potential diversification opportunities and risk mitigation strategies.


For more information, contact Courtney Rickert McCaffrey.

Nigeria protests could lead to short-term operational disruptions

Nigeria is grappling with widespread protests throughout the country. Protest action was at its peak in early August triggered by soaring inflation arising from a series of economic reforms8 following President Tinubu’s one-year anniversary in office. This highlights the challenge of balancing the benefits of long-term economic reforms with the cost of short-term hardship. The post-pandemic economic slump and limited fiscal space for governments to boost economic activity, coupled with a large youth population and high unemployment rate, make the Sub-Saharan African region particularly vulnerable to such protests – with Uganda and Kenya having had protests in July 2024.

 

The ongoing protests pose risks to business continuity across multiple sectors in Nigeria, particularly retail, manufacturing and services. Nigeria's economic outlook remains challenging, with inflation and restrictive monetary policies constraining growth. Despite efforts to increase oil production and improve reserves, operational disruptions and theft could exacerbate supply chain challenges at a time when exchange rate volatility and high inflation are impacting business activity and consumer spending. Companies in various sectors, including energy, may face potential policy shifts such as fiscal and subsidy reforms as the government seeks to stabilize the situation.

 

For more information, contact Angelika Goliger.

Bangladesh political instability creates domestic and geopolitical uncertainties

Following widespread civil society protests fuelled by perceived injustices and economic strain, Prime Minister Sheikh Hasina of Bangladesh resigned9 on 5 August, ending her 15-year rule. An interim government, led by Nobel Peace Prize laureate Mohammad Yunus, has been formed with the backing of army leaders. A new election timeline is being negotiated to include Hasina’s Awami League party and the leading opposition, Bangladesh National Party (BNP). Concerns around future political and religious suppression linger.

 

The garment industry – which accounts for nearly 80% of the country’s exports – faces ongoing operational and trade disruptions. Infrastructure projects, including those in the power and water sector, will likely face delays and future investment risks may be elevated. The need for international financial support to alleviate the economic crisis is likely to make Dhaka’s geopolitical relationships with both India and China more complex. While the immediate policy environment is expected to remain stable, the potential for economic and governance reforms after the election is held necessitate ongoing political risk due diligence for existing and future investments.

Cropped hand of a person holding a compass
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Topic 4

Geostrategic indicator of the month

Scenario analysis of geopolitical tensions between China and the West.

The indicator

The EY Macroeconomics team simulated a potential increase of 20 percentage points in average bilateral tariffs on 2025 trade in goods between China and a group of leading Western countries  (consisting of Australia, Canada, EU, UK and the US). The EY UPGRADE computable general equilibrium model finds that this rise in tariffs would reduce global real GDP by 0.24% below the baseline level after three years, with the largest declines occurring in China (1.51%) and Australia (0.8%). In contrast, some economies, such as those in Sub-Saharan Africa and Latin America, would reap modest benefits from trade flow diversion and increased competitiveness.


Business impact

Increased tariffs would lead to higher procurement costs, at least in the short to medium term, as companies would face pricier imports of raw materials and components. This could result in inflationary pressures, with consumers paying elevated prices for goods. This would likely reduce consumer demand more broadly, which could affect sales and revenue for a variety of companies. Global supply chains may experience disruptions as companies seek alternative suppliers in new markets or try to onshore or reshore some operations. This could create growth opportunities for companies in alternative markets, although it could also generate challenges in hiring and retaining workers.

 

For more information, read Global economic outlook: growth strategies in a new normal (via EY US)

Additional EY contributors to this article include Adam Barbina, Ben-Ari Boukai, John Hallmark, Jay T. Young and Hulisani Muloiwa.



Geostrategy by Design

A new book from the Geostrategic Business Group and a professor from the ESG Initiative at the Wharton School, advises executives on how to manage geopolitical risks in the new era of globalization. 

Geostrategy design





In this series


Geostrategic Analysis:
July 2024

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



Geostrategic Analysis:
June 2024

Cross-border M&A, life sciences as a geopolitical sector, new European Parliament, Mexican election, and more



Geostrategic Analysis:
May 2024

Middle East tensions, the geopolitics of deep-sea mining, elections in South Africa and more.            



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Summary

The EY-Parthenon Geostrategic Business Group (GBG) provides its take on key geopolitical developments and the impact of these political risks on international business. Each monthly EY-Parthenon Geostrategic Analysis issue includes assessments of recent or upcoming geopolitical risk events and what they mean for companies across sectors and geographies.

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