The western internal market

2022-06-03 at 14:56 Timo Löyttyniemi

Geopolitics has taken centre stage. Geopolitics refers to the exercise of political influence and economic power. As we have seen, it may, at times, mean the exercise of power through the threat of war or even outright war. The Russian war of aggression has shifted the tectonic plates. As a side effect, it is giving birth to a new western internal market. The countries of the world are increasingly being divided into the "West" and the rest.

Geopolitics before the war

In recent years, geopolitics has come to mean the struggle for supremacy between the United States and China. However, as a concept, it has been vague and remote because it can be used to explain a lot of things or, alternatively, be completely ignored as a concept. It is a question of view and attitude. A glass is either half full or half empty.

Over the past few decades, hegemony has been held by the United States. Its market-driven economic power has been overwhelming and its technological dominance has been repeatedly restored thanks to the country’s economic dynamism. Although the United States’ role has at times been challenged by innovations made by companies based in other countries, it has never lost its grip. The technology boom we have experienced over the past few years, partly due to teleworking because of the Covid-19 pandemic, showed that the winners were American companies.

Generally, it is assumed that China will inevitably outperform other countries in the economic competition. Urbanisation and the expanding middle class will give China added economic leverage despite the decline in population growth. China’s pivotal role in many sectors of industry and supply chains first made it a preferred subcontractor and, more recently, an economic dynasty.

Russia was offered a position as an equal partner to the West after the break-up of the Soviet Union in the 1990s and in the early 2000s. It was widely believed that Russia would change and evolve into a civilised state akin to the West in terms of social and even political structures. Maybe it would even turn into a true partner of the West. Gradually, these hopes turned sour as Russia plunged into wars and took a growing number of undemocratic decisions.

The EU has always been strong in vision, but fragmented and powerless in decision-making. It has not taken – or even wanted to take – its rightful place in geopolitics. Even so, it possesses hidden potential and exerts subtle influence. The EU’s GDPR legislation and ESG efforts are prime examples of the global extent of Europe’s capacity to influence others.

Russia’s war of aggression turned the tables

The attack launched by Russia on 24 February 2022 changed geopolitics for years to come. Upon the outbreak of the war, the Finnish President said that “the masks have come off”. Russia proved sceptics right showing that their suspicions were justified.

The world is increasingly divided into democratic (non-authoritarian) and authoritarian (non-democratic) states. Cooperation between the United States, Europe and some other western countries has been strengthened in the face of an explicit enemy. Russia has received tacit support for its actions from China. More conspicuous backing would create a major economic risk for China and strain the geopolitical situation.

Western sanctions on Russia have compelled companies to take action. Moreover, corporate social responsibility made it necessary to adopt measures that used to remain in the grey zone.

The new ”western internal market”

The war has resulted in a range of geopolitical repercussions for the West. Cooperation between western countries has intensified. Already when the coronavirus was creating chaos, there was a widespread perception that companies’ supply chains should be more diversified. Now war has only reinforced this line of thinking.

A new internal market has been created within the West, consisting of supply chains, commercial advantages, investments in security and defence, technological standards and collaborative networks. It is more advisable to stick to cooperation between western companies than to take any geopolitical risks.

As the West grows stronger, so does cooperation between non-democratic states. It is likely to lead to common standards and an internal market consisting of these countries.

Of course, the world will not become completely bipolar. Vagueness will remain one of the tools to be used in future geopolitics. No one really wants to be isolated, and everyone has an interest in working together with others. Fortunately, this fundamental aspiration survives, although right now we are taking steps in the opposite direction.

Risk management and corporate responsibility

Emerging markets have always involved a number of risks. Now one of these risks has been realised in unmistakable and concrete terms. The risk lies in that an authoritarian state misbehaves by starting a war or taking such action within its borders that others cannot approve of. As a result, such an authoritarian state may be subject to effective sanctions while western businesses are obligated to take appropriate ESG action. The combined effect of these two developments poses a major risk to western companies and investors.

In conclusion

Wars have lasting implications. As a result of the war of aggression launched by Russia, the separation line in geopolitics between the democratic West and other countries has become sharper. While there is no going back to the old ways, the war and the sanctions imposed by the West in response to it have paved the way for a new Cold War. The threshold for waging wars or taking unacceptable action has risen.

In many respects, corporate restructuring is necessary if the long-term geopolitical risks are to be managed effectively. For companies, the new world order offers major opportunities. Ideally, the West’s new home market will herald the dawn of a new era in which there will be a strong determination to utilise and strengthen Europe’s resources.

The writer is VER's CEO Timo Löyttyniemi.

TLö blogi 2020

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