Even if more stability prevails, the bill will come due on the post-pandemic recovery, the social costs of warfare, and society’s green transition and digitalisation. Dr. Antonia Colibășanu, Senior Geopolitical Analyst with Geopolitical Futures, Co-Founder & Principal at Allonia Group and Senior Fellow in the Eurasia Programme at Foreign Policy Research Institute, reports for TWM on how companies should prepare.
For most of us in international business, the year of 2023 was better than expected. This is because most forecasts for 2023 were pessimistic, considering the year of 2022 was both the first post-pandemic year and the year when Russia started the war in Ukraine. It was clear that a global restructuring process was under way, one that was affecting mostly the world economy. We have not entered global economic depression as some were announcing, and we are still debating whether we have entered recession.
Therefore, if 2022 was the year we entered the global economic war, the year of 2023 was the year we adapted to it. In this sense, 2024 will be defined by the first steps in the resolution of the current global economic war.
From restructuring to re-settling
The restructuring economic processes that began before 2020 and were accelerated since are slowly coming to an end/conclusion in 2024. Even if military conflicts are likely to continue (beyond Ukraine and most recently Gaza), the global economy is already changing and the flows of trade and investment are likely to stabilise during 2024, at least in what regards their direction and dynamics. In other words, we are beginning to understand the most important components of the post-war global economy. There are two factors shaping them out:
1) The reconstruction plans for Ukraine
This is a key factor because it is dependent on the war scenarios for Ukraine and generally, the balance of power between Russia and the West.
While wars always end in negotiations, the potential for such negotiations to happen sooner rather than later is limited. Politically, both the US and Europe will go through election seasons in 2024. The US and Russia will both have presidential elections in November and March 2024 respectively. Europe will have EU Parliament election season and several other national-level elections. Ukraine will also witness presidential elections at the end of March next year.
Politics are influenced by socioeconomic stability; the more economic problems a country’s people have, the less likely the government will be re-elected. Therefore, while geopolitics doesn’t explain politics, it must look into social problems to understand the political environment and if major changes are likely to come.
Perhaps the big question mark on political stability refers to Russia. A potential change in government would significantly affect the way the war in Ukraine is conducted. However, change in Moscow is very unlikely. Economically, Moscow focuses on growing its autonomy and resilience by building new routes that allow it to avoid the West and its sanctions.
Meanwhile, the West is still coping with the negative effects of both the pandemic and the war and focuses on keeping its socio-economic stability. In the US, it is hard to predict the election results, but the growing social polarisation makes the political environment tense for 2024 with few decisive changes concerning Ukraine and the global economic war that started in 2022.
Both in the US and Europe, the economy is going through systemic changes that have to do with both post-pandemic priorities and a switch to match Russia’s shift to the war economy. The West has only begun to increase military spending in 2023, on top of having to keep subsidies up for covering the social costs associated with the war and the pandemic. Continuing to do so while also sustaining the green transition and digitization will increase the cost and get developed Western countries into a world of high-interest rates and potentially high taxes. This may not be visible during the first half of 2024 due to election campaigns, but will increasingly become obvious towards the end of the next year, especially if the kinetic warfare in Ukraine continues (at least in the Eastern and potentially Southern provinces, as is expected).
All of this creates a climate in which investment in rebuilding Ukraine becomes prohibitively expensive if we only consider financial markets. Government money is not just needed – it is a must. Companies would welcome access to government finance, which should be less expensive than lending from the banking sector given the current high interest rate environment. Not to mention businesses trust on government backing whenever they seek de-risking their investments. However, due to the election season in 2024, spending decisions will be carefully considered and likely delayed in most developed countries, especially in the US. This doesn’t mean that the reconstruction project stops. It does mean, however, that most of it will refer to continuing building up Ukrainian military resilience (defense-related funds).
However, the Ukrainian economy is almost completely dependent on Western help – even for exporting its goods, Kyiv needs the West to facilitate its trade routes through Europe and secure whatever shipments are sent through the Black Sea. With an attrition war continuing into 2024 and beyond, internal election results will likely be decided by the society’s war fatigue. At the same time, considering reports about corrupt practices within the current regime – and the population’s dissatisfaction with it, it is likely that the political campaigning season is a milestone for both Western and Russian influence in the country. If the West doesn’t secure a political candidate for Kiyv, Russia will likely grow its influence in the country, something that will not only make the reconstruction project difficult (and likely limited at managing the Western frontier) but will also trigger the way that the war evolves and eventually ends. After all, Russia seeks to control Ukraine in its entirety – in this sense, holding Kyiv has always been the key strategic element for Moscow. But this is something to consider after 2024.
2) The potential for further major supply chain disruptions due to growing global fragmentation due to increased security risks
The war in Gaza is a major case in point – and a major question to resolve in 2024. The last months of 2023 have been among the most brutal in recent Israeli and Palestinian history.
For businesses, this translates into the potential for the conflict to disrupt global oil supplies. A bigger confrontation including Iran or other major oil producers might result in an oil price surge equivalent to the height of the Russia-Ukraine war.
In 2022, the surge in inflation led to quick interest-rate hikes in several nations, limiting governments’ capacity to utilise expansionary fiscal policy to fight the weakening economic activity. Despite falling inflation, high-interest rates and weaker growth remain. Therefore, with not much growth during the last years, a certain demand resilience has developed. This means that while energy prices (potentially coupled with harsh climate conditions) may trigger an increase in food prices, the adaptation will continue. Considering that developed countries have their population lower threshold to food supply disruptions, which include price increases, it is likely that they are the most affected by such a scenario.
At the same time, given the Chinese prospects for limited growth coupled with its visible opening to the US, considering both countries’ strategic need to maintain good bilateral relations (for different reasons), it is likely that energy demand will grow – even modestly – during 2024, which could also translate into an increase of the price of energy. While China and the US seem to have gotten to an understanding, this doesn’t translate into a halt of the “decoupling” or de-risking policy that the West has promoted in response to problems resulting from too much dependency on the global supply chains.
Considering the current security environment – where regional kinetic warfare seems to be on the rise, de-globalisation will only continue to accelerate. Higher insurance costs for all merchandise being shipped internationally since 2022, especially in areas affected by war, such as the Black Sea and the Eastern Mediterranean, resulted in more countries changing from free trade to secure trade, and from economic integration to decoupling and “de-risking.” Reshoring, near-shoring, and “friend-shoring” all suggest a trade-off between efficiency and robustness, with just-in-time global supply chains giving way to “just-in-case” arrangements. Furthermore, societal aging in Europe, Japan, and China reduces labour supply at a time when immigration restrictions in most developed countries impede the transfer of labour from poor to rich countries, all of which raise labour prices.
All of this makes for a difficult business environment but because we are no longer in an acceleration mode of change, firms are more or less accustomed to making adjustments as events unfold. As the end of the cost-of-living crisis will relieve some short-term constraints on policymakers, they will need to become fiscally creative to rebuild public finances and protect governments from increasing borrowing costs – all while trying to stay away from austerity measures which will be increasingly unpopular. All of this means that while political support for moderate, liberal policies will remain weak, economic policymaking will become more insular, which, while potentially effective at the national level, will likely harm international cooperation on important climate and technological challenges.
In times of crisis, innovation usually results from flexibility in adaptation to the market environment, including to those elements that stem from geopolitical events. In this sense, several factors help mitigate geoeconomic risks in 2024. Rising productivity and rising market power are the twin outcomes of the innovation process.
First, agility – responding swiftly to changing market conditions entails recognising new opportunities, revising business models, and adapting operations to new client demands. Second, financial adaptability – maintaining a healthy cash flow which means having enough reserves and access to capital while cutting needless costs and improving processes to free up resources for critical activities and avoid excessive debt. All this makes for ensuring financial sustainability. Third and perhaps most important – keeping the focus on the customer, and keep effective communication both with the customer and the staff, especially when crisis hits. Because crisis conditions can have a big impact on customer behaviour, firms must be adaptive and sensitive to their needs. At the same time, maintaining good communication with your staff and customers fosters trust and collaboration.
These three layers are not new for the business environment. However, in 2024, two years after the war in Ukraine started and the pandemic ended, and as the world adapts to a new global reality and as de-globalisation continues, firms need to continue adapting by increasing their flexibility in making decisions.