Invasion Of Ukraine Will Forces Countries And Companies To Take Sides

A number of the leading scientists and philosophers of the 20^th century – from Karl Popper to Per Bak for example, have spent time thinking about how systems evolve and break down. Their insights are useful today, as globalization disintegrates, and we wait to see ‘what’s next?’.

In the systems literature, frameworks that have become outdated or failed to evolve are undercut by often events. Per Bak framed this as a heap of sand, collapsing when a marginal grain is added. It is not the marginal grain of sand that leads to the collapse, but rather the growing instability of the ‘system’ over time (the fall of communism is an example).

New World

The crisis around Ukraine is yet another grave case, and it helps to clarify several things – the erecting of another barrier to trade from west to east, the arrival of new geopolitical constellations and a deeper cleavage between the democratic and non-democratic worlds. The day after the invasion of Ukraine, the German foreign minister stated ‘we have woken up to a new world’, but the fact is that ‘new world’ has been in the making for some time.

We have seen other tests in recent years – the subsuming of Hong Kong’s democracy, and the many lessons that need to be learnt from the coronavirus crisis, notably the triumph of humanity and medicine and the failure of governments to collaborate. Taken together they point to the end of globalization, or rather the ‘way we lived’ for the past thirty years.

While there is a growing debate on this important topic, the risk is that politicians, commentators and policy makers remain cosily attached to the idea that globalization can continue and will suffer jolts to their consciousness of the sort that Vladimir Putin is administering. There needs to be a sharp focus on the ‘what’s next?’.

End of globalization 

The chief element of the post-globalization world will be the emergence of a multipolar world, where instead of a singular (Anglo-Saxon) way of doing things, rival value driven approaches will emerge in Europe and China, to complement the American approach to political economy. The idea of a multipolar world is incidentally something Vladimir ascribes to, though beyond a powerful army his country has few of the ingredients – a strong economy, financial system or soft power – required to sustain a geopolitical pole.

The picture that emerges is of a more frictioned (i.e. higher inflation or less lowflation), fractured world, and regular readers will know that I have laboured this point!

What is new is that companies, financial institutions, international institutions and individual countries are being forced to choose sides as political-economic tectonic plates pull apart. The striking example is the Nordstream pipeline. The SWIFT payments hub could be another.

Companies taking sides  

The deeper the crisis in Ukraine, the more (or less) wedded governments will be to alliances and values, and eventually the clearer the geopolitical map of the 21^st century becomes.

For example, Japan has sanctioned Russia but China stands by it. India, a long-time ally of Russia, is an odd example of a democracy siding with a ‘strongman’, something that will cause tension in its relations with the US and UK. Poland is another example – this crisis and the security imperative it brings may present a chance to mend the differences it has with the EU over ‘values’. Turkey could play an important strategic role, and might ‘come back onside’.

Switzerland, which has potentially terrific financial power over wealthy Russians and Russian commodity dealers, has done little, and the quid pro quo for this may be a much tougher attitude by EU and US regulators to its banks. Internationally, fintech companies and payment firms will have to be more careful where, and with whom they do business.

In general, many large companies have tiptoed around widening diplomatic divides, will increasingly have to choose sides, not only with respect to Russia, but China too. This will be especially the case for those in strategic industries – semiconductors is the prime example, and for large multinationals with business ties to China (e.g. Apple

AAPL
). The flip side of geopolitical risk for large corporations is that in some cases, they feel it necessary to deepen relationships with governments, in strategic areas like AI and data.

On this point, the team at the excellent Longview Economics point out that the asset values of two of the actors that have undermined American democracy (Facebook/Meta and the Russian state – rouble etc) have collapsed in recent months.

Restoring democracy 

In that respect it must be hoped that within political systems, there is a hardening of views around the sanctity of democracy, and that politicians on the payroll of foreign governments in the UK, US, France and many other countries (Africa as well as we noted last week) face sanction. It is also to be hoped that the funding of political parties by outside actors is scrutinised and penalised in a tougher way. In Russia itself, and perhaps more so Belarus, any signs of mass opposition to the invasion will be welcome.

As a final point, to all those European policy makers mugged by reality, is to think about what the new world should look like, and provocatively to think how they can turn events, such that in ten year’s time, Russia is applying to join the EU.