May 2022

Shin Onodera, Executive Researcher, Global Business

Dramatic Superficial Changes in Global Markets Due to Russian Invasion of Ukraine

On February 24, 2022, Russian troops started invading Ukraine. It has been almost three months since it began, and the world is facing the biggest crisis since the end of the Cold War. Countries having close connections to Russia are facing the urgent challenge of reviewing and strengthening their national security strategies. Also, in global markets, financial and economic sanctions imposed on Russia by the US and Western countries such as the European Commission have started to have significant impacts on global markets. There are two major impacts.

The first impact is the “disruption of global supply chains.” The crisis in Ukraine became a trigger for revealing global risks related to foreign trade including procurement of raw materials and parts from Russia and Ukraine and logistics with them. For example, Russia had been supplying a large amount of palladium, one of rare metals used in automobile and smartphone parts, and Ukraine had been supplying a large amount of highly pure neon gas for manufacturing semiconductors, to global markets. However, because of the recent invasion, supply stagnation and price hikes have started to be regarded as problems. Also, in the logistics industry, the railroad network of Russia, which had been used as a major transport means for parts and products manufactured in Asian countries, especially China, directed at Europe, has now become inaccessible due to the invasion. Moreover, air transportation as an alternative means has to be rerouted to avoid flying over Russia, resulting in a huge increase in transport costs.

The second impact is the “crisis of energy.” Russia is a leading nation in the energy sector, producing the world’s second largest amount of natural gas and the third largest amount of oil. Particularly, European countries rely on Russia for more than 40% of their total demand for natural gas. The current invasion is an unexpected crisis that started amid while growing dependence of Europe on Russia in the framework of global measures to stop global warming. Europe has been facing a serious dilemma between imposing sanctions against Russia and the long-established policy of taking climate measures that rely on energy produced in Russia. Under such circumstances, on March 8, 2022, the European Commission published a policy document entitled “REPower EU,” revealing a plan to completely eliminate the use of fossil fuels from Russia by 2030. Especially, the EU plans to increase imports of liquefied natural gas (LNG) sourced from countries excluding Russia and natural gas from pipelines outside of Russia in order to gradually exit its heavy dependence on Russian energy. However, this plan is at risk of collapse due to measures taken by Russia against energy supply or sudden military conflicts, and energy-consuming countries will have to shoulder the cost of soaring energy prices. Resultantly, countries highly dependent on Russian energy, notably European countries, are required to revise their energy policies as soon as possible, weighing the two conflicting aspects of ensuring energy security and taking measures against global warming.

 

The True Meaning of Geopolitical and Geoeconomic Strategies that are Becoming Increasingly Important in Establishing Sustainable Business Models

Since the crisis in Ukraine began, significant changes have started to be seen in the world order. In Europe, the breakaway from its dependence on energy from Russia this time was a decisive blow in a way, and decoupling from Russia is considered to be highly likely to become permanent. In addition, in recent years, Germany and other countries have been reconsidering their relationships with China, with which they have established economic partnerships. Also, their policy toward other Asian countries has been at a turning point. The US is moving forward to the formation of international coalitions against China by shifting its attention from Asia to Europe to strengthen relations with European countries through the North Atlantic Treaty Organization (NATO) and by further enhancing the policies toward China. On the other hand, it seems that China, while diplomatically supporting the criticism of Russia, has decided to continue its cooperative relations with Russia. Moreover, China appears to be revising its future national strategies while continuing to show a neutral attitude toward Europe and observing how far the world order will collapse. In addition, India, which is a developing country where the national economy has been growing remarkably in recent years, is a member of the Quadrilateral Security Dialogue (QSD), and thus the relationship with China has been deteriorated. However, the relationship between India and Russia have been good for many years, and it is expected that India’s connections with Russia in terms of trade and military will continue in the future. Similarly, developing Gulf countries, Brazil, etc. that have long-term relationships with Russia are likely to continue their relations with Russia rather than isolate it, and a more complicated world order is being formed with China, Russia, and surrounding countries.

As described above, in the midst of the highly uncertain global situation, the importance of the concepts of geopolitics and geoeconomics is being re-evaluated. Geopolitics is “the study of analyzing the political, economic, military, and a social impact of a nation based on its geographic conditions, from a “macroscopic” perspective.” Geoeconomics is defined as “the study of analyzing strategies that influence the policies of other countries by using economic measures such as a nation’s industrial and trade policies to achieve geopolitical goals.” Recently, in Japan, economic security which is almost the same concept as geoeconomics has been positioned as one of the important national strategies. On February 25, 2022, the Kishida Cabinet approved the bill of “Economic Security Promotion Act,” which is made up of the following four pillars: strengthening supply chains for critical materials; ensuring the security of core infrastructure; promoting the development of key advanced technologies; and keeping patents on sensitive technologies that could be used for military purposes undisclosed, and submitted to the Diet. I would have to say, at the current moment, prior to the enforcement, the impact of the bill on business activities is still unknown. One thing I can say for sure is that the fundamental changes in global markets caused by the Russian invasion of Ukraine have increased the need for business activities incorporating geopolitical and geoeconomic strategies. I firmly believe that Japanese companies will be further required to establish strategies based on the collection and analysis of geopolitical and geoeconomic information covering the industries of the companies and their business activities of themselves, from not only a “macroscopic” perspective but also a “microscopic” perspective. The ability to understand global trends and appropriately introduce them to business will be the savior in turning risks into opportunities and establishing sustainable business models.