Opening proceedings at this two-day international conference was the observation that 2014 marked a definitive return to the limelight for geopolitics. The transition towards a more unstable era and the ability of the international, institutional and business communities to cope with it served as the central focus for a debate that also sought to map the new geographic and sector-specific risks at play.
While the “flatter” world produced by globalization seemed at one time to have dissipated differences, schisms and conflicts, the participants’ impression was of a prevailing scenario characterized by the emergence of a new increasingly risk-fraught paradigm, stemming in part from the predominance of geopolitical factors. Although the markets were considered to have remained undented thus far, questions were raised as to how long this decoupling between geopolitics and business might last.
It was noted that in the days of ascendant globalization, firms had faced increasing risks but within an essentially manageable framework. The risk management practices then adopted proved efficacious in handling complexity, but today these seem to have lost their effectiveness as conditions become confused, with risk transforming into uncertainty.
This growth in risks was attributed to global interdependence, including with respect to technological innovations, especially in the fields of information technology and communications. It was therefore suggested that the corresponding responses must also be global in scale, with macro-regional and global governance responding effectively to simplify a complex and uncertain scenario, and to reestablish conditions which would enable operators to manage risk. While acknowledging that mechanisms to achieve these ends must necessarily be developed, it was stressed that the real obstacles are the heightening of differences and divergences, geo-economic and geopolitical competition, and fragmentation. Failures of collective action hamper the international coordination needed to implement the available solutions, but even the business world was called upon to rethink its approach in order to meet these new challenges. In this regard, major surveys were cited as indicating that executives are not yet well-placed to address these challenges effectively. Meanwhile, forward-thinking companies are looking to interact with institutions with a more strategic vision with whom to partner on innovative projects.
It was suggested that from a geographical perspective, geopolitical risk stems largely from instability in three “flashpoint” areas, where the influence of the West is waning. The first of these is the Far East, where geopolitical competition between China and neighboring countries that are allies of the US is intensifying. China now aims to establish itself as the uncontested major power in Asia and seeks to weaken the network of US alliances. Its attention seems to be shifting away from Africa and Latin America to the Pacific, adopting a “harder” approach. There are also signs of a realignment of its development model towards a new sectoral mix of activities, with a growth in services at the expense of manufacturing, which would improve its sustainability in both social and environmental terms.
This transition is accompanied by reforms aimed at improving the business environment for foreign investors, though it was remarked that this process has not been – nor will it be – painless, with a slowdown in economic growth witnessed in the short term but the opportunity for more sustainable growth in the long run. It was highlighted that there is a risk of dumping on international markets, which needs to be combated through greater multilateral coordination of foreign trade. Nevertheless, if all goes well with China’s transition, it will be a win-win scenario.
The Russian crisis was pointed to as the second front of major instability. The fall in oil prices has created difficulties for the Russian bear, as have the effects of economic sanctions. The combination of these two factors has brought to its knees a country that is in the midst of a financial and currency crisis, and which is particularly characterized by a weak industrial structure. The ex-Soviet republics of Central Asia are also bearing the brunt, with the risk of a growth in Chinese influence in this region and a “cementing” of even tighter Sino-Russian ties, at a time when rather than determining a reduction in the aggressiveness of its foreign policy, Russia’s weakness seems to be having the opposite effect.
The region bounded by the southern and eastern Mediterranean was seen as constituting the third major front of instability, where attempts to promote the export of democracy have failed. In North Africa, Libya was singled out as the biggest concern, in that it represents a key country for the security of all of Europe. It was felt, however, that no other solution to the disorder and rampant disintegration would appear to present itself apart from the political negotiations sponsored by the UN, which should aim to remove those conditions fueling the “war by proxy” currently being waged, involving the flow of financial resources and weapons to opposing factions by countries such as Turkey, Qatar and other Gulf states. In contrast, a European embargo on oil would be ineffective, while military intervention would be difficult to achieve. It was submitted that a pivotal role in resolving the crisis could be played by Egypt, which has once again stabilized due to military control of its institutions, economy and territory, and which along with having a hitherto untapped growth potential is also a key geopolitical player.
It was noted that in the Gulf region, the succession in Saudi Arabia has also aroused much curiosity. Some key ministers have been confirmed in their posts, but young “hopefuls” have also been inducted in the expectation of injecting impetus and, as much as is possible, a reforming spirit into a country whose stability is always at risk: on the domestic front, due to demographic and socio-political tensions, and on the external front, due to the possible disengagement from the Middle East by its American ally, together with the influence exerted by Iran. The country seems to have come out of recent events unscathed, such that, in the short term, its internal stability and external influence do not appear to have been compromised. In the long term, however, much will depend on developments in the oil market and the possible “thawing” of Iran with the resolution of nuclear talks.
Turning lastly to consider Turkey, the consensus was that the shift towards a profoundly Islamic and conservative direction has not been entirely unwelcomed by Turkish society, which had never really fully assimilated secularism but primarily backed the AKP’s liberal vision that favored sustained economic growth across various social strata. This – it was suggested – accounts for the rise of a pro-Erdogan middle class notwithstanding his authoritarian tendencies, after years of stagnation and restriction of civil liberties by the Kemalist regime. The success of Erdogan is thus not as paradoxical as it might seem at first glance. The threat to the country’s democratic institutions, however, grows stronger and stronger, to the point of now also encroaching on the independence of the Central Bank and watchdog authorities. The participants emphasized that the failure to date of the country’s EU membership bid has highly negative consequences, as a Western-allied Turkey would have been useful today in handling the crises in the Middle East. Instead, Turkey is playing a geopolitical game of its own and this is destabilizing the whole region.
At this point in the proceedings, discussions focused on sector-specific risks, with those in attendance flagging the energy industry as undoubtedly the most fraught sector of 2014. One factor in particular was attributed with upsetting the oil and gas market, namely, the US transition towards energy independence, currently threatened by the collapse in prices. In terms of petroleum, the competition was characterized as playing out between North American unconventional industry and OPEC, which has let prices slide in the hope that the former will contract. The geopolitical implications of the collapse in prices are potentially perturbing. This fall in prices threatens the energy independence of the United States and could make it rethink its planned strategic disengagement from the Middle East, while it would also seem to be weakening its main enemies in Latin America (Venezuela), the Middle East (Iran) and Eurasia (Russia), and may exacerbate their aggressiveness rather than appeasing it.
The crucial importance of energy security for Europe as well was seen as entailing the removal of unnecessary administrative obstacles to oil and gas exploration, but especially to resolving the issue of relations with Russia. Not all the participants agreed that a showdown with Russia would be beneficial, or particularly inevitable. It was emphasized that gas and renewables need to play a key role in the transition towards a more efficient and sustainable economy, which European energy policy should encourage but without continuing to subsidize the adoption of obsolete and inefficient technologies. Instead, it should support the early development stages of innovative technologies fully geared to being non-reliant on subsidies – a necessity made even more imperative in a world where oil and gas prices have plummeted.
The final session of the conference was devoted to discussing Europe’s capacity for innovation and competitiveness, with economic growth deemed a linchpin for turning the financial crisis around. It was suggested that, in the short term, the eurozone must address the issue of the sustainability of public debt, though austerity policies have shown that they cannot function unless sustained productivity growth is reactivated. While tentative signs of recovery in the eurozone are beginning to emerge, they will need to be underpinned by the right policy mix. In this regard, it was felt that the expansionary monetary policy being pursued by the ECB through quantitative easing will not suffice alone, and that – as the risks remain high – steps also need to be taken by the individual member states, including structural reforms, the balancing of public budgets in the medium term, and greater efforts to promote investment.
The fact that structural asymmetries exist between the economies of the various member states was viewed as perhaps militating in favor of a rethink of the architecture of the European Union and an overhaul of its institutions. In particular, there was a perceived need for the process of financial and even political “mutualization” to be stepped up. An appealing suggestion was raised of putting in place a new European Treaty. While the participants conceded that the crisis of confidence among member states might currently present an obstacle to any such proposal, this perhaps in itself provides a compelling reason for the need to rally around a new European pact and governance framework. This crisis of confidence has become evident for all to see, especially in Greece, where everything seems to be coming to a head with a return to recession. Indeed, it is not of out of the question for the situation to be escalated to a political level and for a referendum on exiting the eurozone to be called by the government – something that may well eventuate soon in other EU countries, such as France, should Le Pen win the next election. In closing, it was remarked that the European crisis and the possibility of disaster befalling Europe’s monetary and political union still represent a threat, and that the austerity policies pursued in recent years may very well have underestimated this risk.
