Russia and Ukraine. ISIS. Iran and Syria. The Sony hack by North Korea. In 2014, global political volatility reached an intensity not seen since the end of the Cold War. What are the biggest political and economic risks heading into the year ahead? Taken together, what do they mean for global businesses?
For an expert perspective on these questions and more, I talked to Ian Bremmer, president of Eurasia Group. The firm has just published its annual assessment of Top Risks. An edited version of our conversation is below.
Europe is at the top of your risk list for 2015. Why? That seems somewhat surprising given that the Euro economic crisis seems to have tailed off, or at least plateaued.
You notice it’s the politics of Europe, not the economics of Europe. Clearly the economics of Europe are better than they were in the teeth of theEurozone crisis. I hate to say it, but that’s actually part of the problem. In the United States we complain about governance from Washington constantly; and in Europe they complain even more about Berlin. But the fact is that when there’s a big economic crisis, we are capable of responding. When Lehman fell apart, the U.S. put hundreds of billions of dollars together almost overnight. And the Germans were capable of responding with the European governments immediately when there was a true rubber-hits-the-road moment, like the Greek exit or Cyprus.
But they don’t face that right now. So the economics are better, but the politics are worse – and they’re worse on every front. Internally, you’ve got the growth of populist movements within European countries. The potential that Syriza actually wins a snap election in Greece. You look atPodemos in Spain, with elections coming up in 2015. The rise of UKIP in Britain and how that forces Cameron to talk internally about Europe, about Germany, about immigration. The Front National in France. Combine this with fairly anemic growth, no opportunities for Europe’s youth, visceral anti-immigrant sentiment, growing Islamist radicalization – all this is making it much harder for these countries to govern. And it’s likely to start returning governments that are much more alienated from Berlin and from Brussels.
At the same time, you have extremely challenging geopolitics, specifically around ISIS and terrorism, and Russia. Look at the horrific attack this week in Paris. I think we’re more likely to see a kind of metastasis of the ISIS brand and ethos causing one-off attacks in major capital cities in Europe than in the U.S. or in Australia. And certainly Europeans are alarmed about Russia, which is absolutely on a road to ruin: low oil prices, increasing concern about default, about expansion of the fight in Ukraine, about near misses between Russian military aircraft and European commercial aircraft. The geopolitical environment is much worse for Europe now than it has been historically. And because Europe is the world’s largest single common market, all of this redounds very negatively to the global scene.
Russia is your number two risk. Obviously, Russia’s offensive actions in Ukraine last year shocked the world. Should the U.S. have responded differently? And what’s the continuing risk in dealing with Putin?
We could have done a lot of things differently. The U.S. and NATO have spent 80% of our effort in punishing the Russians, and 20% in supporting the Ukrainians. That is exactly the wrong balance. It should have been 80/20 in the other direction. We have pushed the Russians to the point that Putin believes we’re trying to undermine him personally and that our goal is regime change. The U.S. view is that we just want to punish him, enough so that he changes his behavior. But he’s not going to change his behavior. He’s only getting more aggressive. And he does control his country. I don’t know how far he’s going to go, but I know that we’ve seen major cyberattacks against American banks, and against the White Housethat have come from Russia.
Think about the Sony attack. What are we going to do if a major American bank suddenly has all of their dirty laundry exposed and it turns out it came from the Russian government? What happens if next time it’s not anear-miss, but a direct hit of a commercial airliner by a Russian plane that turns its transponder off?
And look at instability in the Baltics. We have pushed the Russians to the point that people are concerned about a default. That doesn’t necessarily mean there will be a default, but it absolutely leads to more capital flight from Russia and the kind of market sentiment that can drive a panic. Combine this with the fact that Russia’s economy is deteriorating quickly, that Putin’s popularity is unlikely to stay at 85% over the course of next year, and that he’s not going to give up on Ukraine. Also, low oil prices – these are generally an enormous good for the world, helpful for global consumers. But major oil producers get hit and Russia’s a big one.
All of these things make Putin and Russia the biggest, most powerful wildcard in the entire world, with the potential to cause a lot of damage to the global economy.
The “weaponization of finance” is also high on your list. Are you talking about the usual economic and trade policy kind of hardball?
A lot of people are talking about how the United States is becoming more isolationist, that we should lead from behind, and that the U.S. isn’t as interested in doing engaged foreign policy. I don’t agree with any of that. I think the U.S. is still very, very assertive around the world in ensuring that its interests are met.
But what’s changed is that the U.S. is becoming much more unilateral. Less focused on collective security and NATO, more focused on drones and surveillance and the NSA. And actually, the biggest projection of American unilateral power is on the economics side. In terms of America being a superpower, U.S. dominance of the global financial system is much greater than if you look at America’s role with regard to nuclear weapons or conventional military forces or even surveillance. And America’s willingness to weaponize finance has grown substantially as a consequence.
When it comes to fighting ISIS, for example, militarily we don’t want boots on the ground, we’re not doing that many bombing runs, we don’t want to kill civilians. But America’s willingness to use the dollar, to use the banking and financial system to squeeze countries that are not doing what the U.S. wants with regard to rogue regimes and rogue actors, that’s getting much more severe.
And what’s interesting is that while the U.S. is the country imposing sanctions, it’s our allies that are actually bearing the biggest cost. This is particularly true for Europe, which has the world’s largest banking system, but whose companies are significantly more exposed to all of these rogues – Russia, Iran, South Sudan. This leads to a growing transatlantic rift, because the Europeans become increasingly frustrated with American unilateralism that the Europeans pay for.
Of course, when the Obama administration imposes sanctions, the intention is to support democracy and to combat terror, in the service of the American national interest and to promote global security. We’re sanctioning bad guys, so who wouldn’t want that? But the point is, a lot of countries are on the wrong side of that, financially.
Your number seven risk, on the rise of business sectors that are strategic to governments, seems to confirm the thesis of your 2014 HBR article, in which you described a world of “guarded globalization,” with emerging markets wary of opening more industries to multinational companies, and an overall economic dynamic that is more selective and nationalistic. Do you see this dynamic continuing?
Yes, it’s going to continue. There are a few things to look at here. First, the U.S. is going to start hiking rates and that’s clearly a challenge for emerging markets. Broadly, China is slowing down, and intentionally so, and that will be a challenge for other emerging markets. So there are definitely some headwinds that make it more difficult if you’re a country like Brazil or Indonesia just opening up and being more competitive. Whether it is populist policy from governments that want to maintain approval, or more hostile sentiment toward foreign companies as a result of the leadership’s geopolitical leanings, many countries will shift more toward nationalism in the marketplace. All of those trends can come hand in hand with deeper government intervention into more sectors of the economy.
Russia is the extreme example on this front. Talk about strategic sectors –McDonald’s has had stores shut by the Russian government because they’re an American company, and perceived as such. The Russians are putting sanctions on Western firms precisely because of politics and because of nationalism, and I think we’ll see more of that. We see Russia orienting itself overwhelmingly toward emerging markets and towards China. This eventually leads to a breakdown of U.S.-led global standards as the Russians form their own ratings agency with the Chinese; their own financial transaction management organization with the Chinese; their own Internet standards. Russia is developing their own Wikipedia. All of this pushes against U.S.-led globalization-slash-Americanization.
China is different, but just as powerful as an example. They’re engaged inserious economic reform at home and it has been very successful. But the Chinese government has no interest in liberalizing their political system. They do not want to create a free market private sector-based economy. They’re still very much state capitalists. As Chinese state-owned enterprises (SOEs) continue to gain more influence on the international stage, China will be able to create and enforce rule sets which reflect their own norms and priorities and values.
That is what the creation of the BRICS Bank was all about. Also the Chinese and the Asian Infrastructure Investment Bank, and the China Overland and Maritime Silk Route programs. All of these institutions are oriented bilaterally between China and other countries in their region, transacting billions and billions of dollars and at the same time making these countries more accountable and leverageable according to Chinese economic and commercial preferences. This is a huge driver towards guarded globalization.
That does start to sound something like a new Cold War. Are we already in it, or not quite yet?
We’re headed in that direction. If you’re a Western multinational company you may have thought, historically, well, OK, I know China’s getting bigger and they may have challenges, but eventually they’ll get wealthy, and then we can work with them. But what if it’s not just China? What if it’s China and Russia? What if it’s China, Russia, and Russia’s neighborhood, and then some of China’s neighborhood? And what if that starts to grow? The potential for this to continue and develop into a more fragmented system where regional powers have enormous sway – from a security perspective, a political perspective, and an economic perspective – over their own peripheries certainly seems closer to reality as a consequence of what’s happened with Russia in recent weeks and months, with the collapse of the ruble, dropping oil prices and continuing tensions around Ukraine.
What does business leadership look like in this changed context? In arecent piece, you said: “We now live in a world where no single power or alliance of powers is willing and able to provide global leadership. Call it geopolitical creative destruction.” How should individual leaders be thinking and acting differently in such a world?
In an environment of geopolitical creative destruction, you will see much more global volatility in the markets. As a result, the quality of returns on investment and the quality of global growth is actually going down. This means that in order to achieve the same amount of growth as in the past, you will have to take on more risk.
For most multinational leaders, that means they need to focus a little less on growth and a little more on resilience and anti-fragility. This is hard to do, particularly for American CEOs because they’re not there for long, with a typical stint of four years or so. They’re focused on increasing shareholder value and getting as much profitability as possible, and not as much on sustainability. I know that’s become a great buzzword, but I’m not talking about climate – I mean sustainability of the corporate models themselves. That’s going to be a big challenge for leaders. It’s easier, perhaps, for a Japanese CEO to think in those terms.