Geopolitical instability and the business agenda

27/06/2023 In the C-suite barometer 2023, geopolitical instability was identified by business leaders as a key factor holding back growth this year. In this roundtable discussion Mazars’ George Lagarias is joined by Thomas Gomart of the French Institute of International Relations (IFRI) to discuss the outlook and how businesses should respond.

What is the geopolitical outlook for 2023?

Thomas Gomart (Director, IFRI): I think that we are currently facing three deep conflicts. The first one is obviously Ukraine and its main direct consequence is a separation from Russia in the energy sector and a high level of attrition; it’s a real war. The main consequence is that Europe has lost its main competitive advantage at a global level, which was its strategic stability.

The second big crisis is in the Middle East and the antagonism between Iran and Israel. We have two things. First, is the degree of repression by the Iranian regime against its population and the continuation of the nuclear programme. And on the other side, the political evolution of Israel and its permanent antagonism of Iran.

The third conflict is the situation in North Korea and its consequences for Japan and South Korea, which are directly in touch with three nuclear powers in North Korea and its direct allies, China and Russia.

The link between these three conflicts is, in my opinion, nuclear crises. That’s because in Ukraine, you have had a nuclear dimension since the start, it’s at the core of the antagonism between Iran and Israel, and then also in North Korea. For me, the geopolitical outlook for 2023 can be summed up by these three conflicts.

George Lagarias (Chief Economist, Mazars): I’m going to come at this from a cycle perspective. If you think about what happened until 1990, we had a bipolar world – with the United States and the Soviet Union – and that collapsed.

Then, for the next couple of decades the world turned unipolar. The US sought to consolidate its position as the world’s sole economic and military superpower and proliferate trade. This era ended at some point after the 2008 global financial crisis, when China sought to increase its focus on its internal market and at the same time expand its footprint in Asia and Africa. The 2017 trade wars were an acknowledgment that a second superpower had emerged, around which many disaffected with the Pax Americana could now coalesce.

So, we are currently in a big geopolitical shift, moving from a unipolar world into a multipolar world. That has a profound impact on global supply chains. That’s because we built those supply chains for a unipolar world, with a seamless flow of goods. And what this means for companies is that they have to rethink their whole supply chains. This is a big thing because a supply chain is not a country or two – it’s often 15 countries and all you need is one link missing, and suddenly you don’t have a supply chain anymore.

We have a world that’s not destabilised, but definitely out of balance. Because from unipolar to multipolar means change so massive that the world we knew from the 1990s to the global financial crisis in 2008 no longer exists. And the impact on global supply chains is profound. In 2008, it was the financial system affecting geopolitics. If you ask me, it’s part of the same cycle anyway, but now it’s the other way around with geopolitics affecting global economies.

Thomas Gomart: I agree with George on this idea of cycles, which is very important. The problem we face now is a desynchronisation of the strategic cycle, the political cycle, the economic cycle and the technological cycle. The current economic cycle started in 1979 with Deng Xiaoping’s reforms in China. And the technological cycle started in 1969 with the Arpanet. In my opinion, the current strategic cycle started in 1950 with the war in Korea and the confrontation between China and the US. The current political cycle started in 1989 with Tiananmen and the fall of the Berlin Wall.

How do businesses begin to navigate uncertainty like this?

George Lagarias: First of all, from a stock market perspective and from a market perspective, businesses should expect that risk premiums will go up, which means they should expect lower valuations going forward.

Thomas Gomart: For European companies, especially for top business executives, addressing geopolitical risks has become a top priority. For instance, in 2021, China became the first economic partner of the European Union. Furthermore, because of the war in Ukraine and because of the underinvestment made by Europeans in defence and security over four decades, Europe is more dependent on the US in military, energy and technological terms.  

In addition, in terms of anticipation for business leaders, you have a contradiction in the information you should manage and understand. For example, at the beginning of this year you had a General Commander of the US Air Force saying publicly that we should be prepared for a war regarding Taiwan in 2025. On the other side, you had a very well-known car manufacturer saying just a few weeks later that it’ll invest massively in China and the US because according to their own evaluation of geopolitical risk, there is no risk regarding Taiwan in the medium term.

George Lagarias: Business leaders need to take a step back, see the world again, and make sure their business strategy reflects the current strategic backdrop, the current political backdrop, the current economic backdrop and the current technological backdrop. First and foremost, they need to understand where they are, and they can make no assumptions. Making assumptions is going to put a lot of businesses out of work.

That is the reality. Sometimes things get to a point where you simply cannot turn things around. So they need to make sure they’ve asked the right questions early enough. If you haven’t asked those questions already, there is a possibility that you’re already too late.

More information

Current and past editions of the C-suite barometer are available to read online here.

More on IFRI’s work can be found on its website.

Related content