The world is facing an ever-growing number of interconnected geopolitical threats. US sanctions policy, stalled revolutions, protectionism, digital disruption, climate change, political violence, and other forces of disruption have introduced unprecedented levels of volatility for businesses to navigate. Some of the worst business disruptions in 2020 will come not from trade wars or terrorist attacks alone, but from the intersection of multiple geopolitical risks.
To a large degree, the risk inherent in the trends that are shaping the world today comes from the inability of governments to effectively anticipate and manage the coming changes in ways that preserve or create security and prosperity for their citizens. Issues like climate change, digital disruption, and migration will act as threat multipliers in 2020, but a number of country specific threats will complicate the global chessboard as well. There is still a great deal of uncertainty around the fall-out from Brexit, American politics remain fractious, and global leadership is in retreat as heads of state from North America to Asia are mired in domestic crises. China grows bolder on its quest to solidify its position as an international superpower. Russia continues to expand its influence, while tension increases between Saudi Arabia and Iran as they fight for supremacy in the Middle East. The number of stalled revolutions around the world is on the rise. All of this, taken together, is driving a massive shift in the global order.
The challenge in risk forecasting, and indeed the key geopolitical threat the world is facing in 2020, is the unpredictability of both black swan events and human behavior. In 2019, business losses due to political risk were higher than ever. As a result, executives across a range of global industries are starting to take note of the need to get ahead of risk further upstream and to analyze the risk horizon more holistically. Preparedness and comprehensive, systematic risk analysis will be imperative to minimizing losses and maximizing opportunities in 2020.
1. Climate Change
Some of the worst business disruptions in 2020 will come not from trade wars or terrorist attacks, but from the consequences of climate change as they intersect with other geopolitical risks.
When compared to other drivers of geopolitical risk, climate change can be predicted with a relatively high degree of certainty. Rising sea levels, increases in the frequency and severity of extreme weather events, and temperature changes invariably place added stress on the very resources that play critical roles in the security and stability of states — water, food, transportation, and energy systems, to name a few. What are substantially less predictable are the consequences of climate change as they intersect with other risks like growing religious extremism or a contracting economy. The impact of global insured losses from natural catastrophes alone reached $219 billion in 2017 and 2018 combined, a record high over a two-year period. In 2020, extreme weather and the resulting consequences have never been more significant as a business risk: even though policy makers are paying more attention to climate change, infrastructure and planning in the most vulnerable locales has not kept pace with the uptick in severe weather events, rendering near term humanitarian crisis all but inevitable.
2. Russia’s Middle East Strategy
In 2020, Russia will reach new milestones in reestablishing a durable, long term presence in the Middle East.
As 2020 approaches, Russia is continuing the push to solidify its strategic presence in the Middle East. This campaign is a well known but critical portion of Putin’s now decades-old and increasingly blatant mission to extend Moscow’s realm of influence and restore the near hegemonic status his country enjoyed at earlier times in recent history. While the next year is unlikely to usher in major changes in Putin’s grand strategy or position, recent developments in Egypt, Israel, and Syria (and sporadic events in other regional countries) have enabled Russia to achieve a level of influence the likes of which it has not possessed in several decades. Accordingly, policy makers and investors should anticipate a ramping up of Russian dealmaking and interference in the region, factoring in the security risks that such actions will inevitably entail. What is critical to understand and account for in 2020 (and beyond) is that the impact of such interference is not designed to be felt exclusively in the short term: Russian actions are aimed at degrading the autonomy and governance of regional states over the course of future decades.
The geopolitical risks inherent in migration come not necessarily from the existence of refugee populations within national borders, but rather, from large and sudden migrant flows which the existing relief system is not designed to absorb.
Broadly speaking, the number of refugees in the world is tied to levels of conflict, human rights abuses, and the health of a country’s economy at any given time. And while recent history has seen significant spikes in migrant flows depending on the state of the world, as we head into 2020, the differentiating factor has come to be protracted refugee situations. At the end of 2018, 78 percent of all refugees — compared to 66 percent the previous year — were in protracted situations, defined as circumstances in which people remained in exile for five years or more after their initial displacement and without immediate prospects for the implementation of a durable solution. There are two fundamental principles critical to managing the geopolitical consequences of migration: 1) governments must not be afraid to have tough conversations about the cultural, social, and economic realities of migration and 2) they must be able to control their borders effectively and humanely. It is when a country does not have a sufficient level of control over its borders that migrant surges can have a profound and destabilizing effect. At varying times, countries will likely want to expand or reduce the flow of migrants based on moral imperative, available capacity to provide relief services, or economic need. Certainly there must be a balance, but there must also be self-determination. The pressure on countries to take in more refugees will continue to be high in 2020, but doing so may or may not be in the best interests of the sovereign governments or the refugees themselves.
4. Repercussions of the Digital Age
The current digital environment is devoid of boundaries, moral or otherwise. In 2020, new technologies will continue to permanently shift the global balance of power, changing relationships between citizens, corporations, and governments.
In an international geopolitical climate that is already fraught with unprecedented levels of volatility, digital technologies and influence operations have the ability to create and dramatically accelerate political unrest, but there is little consensus about how to regulate the impact of these new technologies, or indeed, whether they should be regulated at all. In 2020 and beyond, the trend of malignant actors — be they state or non-state entities — using social media will continue, as it is by far the most powerful non-military tool available for expanding influence and propaganda, and in some cases, even for what passes as official communication between leaders and their people. Social media and digital disruption are the great equalizer of the 21st century, allowing those who can harness and wield them to defuse asymmetry in the balance of power and challenge the traditional state-centered model of hard power. This power shift is changing political dynamics permanently: until governments, citizens, and corporations adopt a definitive, proactive posture, disruptive actors will continue to erode sovereignty and foster economic vulnerability.
5. Iran’s Proxy Wars
As 2020 approaches, the ground conditions in a number of Middle Eastern conflicts have shifted in ways that are forcing Iran’s hand strategically, laying bare the outsized influence its proxies have over the regional landscape.
Despite ongoing economic diversification efforts and acknowledgement of the challenges posed by climate change, as long as oil continues to dominate the Middle East’s economy, and the rest of the world continues to depend on it, Iran, primarily acting through proxies, will exert exceptional influence on geopolitical stability. The attacks on Saudi oil infrastructure have faded from the headlines, but the incidents will not be the last high profile hostile act attributable to Iran in the coming months. As Iranian President Rouhani feels more pressure at home, he will continue to become emboldened abroad. In part, this is because of the need to divert attention away from domestic politics and in part because international responses to specific acts of Iranian aggression in 2019 have been muted, underscoring that the United States does not have an appetite for another large-scale Middle Eastern war and that Sunni Gulf nations, especially Saudi Arabia, are not prepared to take unilateral military action. Iran will remain focused on securing sanctions relief and getting its oil to market. While there have been a few signs that it is interested in deescalating the uptick in tension, the reality is that the status quo incentivizes additional small to medium scale Iranian aggression, in line with the types of attacks that were perpetrated throughout 2019.
6. Shifting Dynamics in the Gulf
With Saudi Arabia under increasing economic pressure and still struggling to recover from a series of international missteps, the pyramid of leadership in the Gulf is set to flatten in 2020.
Since Mohammed bin Salman (MBS) became Saudi Arabia’s Crown Prince and de facto ruler in June 2017, the country has maintained its status as the kingpin of Gulf politics and international oil markets, but its position is increasingly in jeopardy. Saudi Arabia has been bogged down by a series of international controversies and simultaneously, MBS’ implementation of a laudable but difficult series of domestic reforms has raised eyebrows. While the Saudi-American relationship has arguably grown closer in recent years, cracks in Gulf unity, and the unity of Sunni Arab states more broadly, are starting to show. Roughly two and a half years in, the diplomatic and economic blockade that Saudi Arabia initiated against Qatar has proven ineffective. Similarly, after several years of continuous fighting and unrelenting humanitarian disaster, the United Arab Emirates opted to cease its involvement in the Saudi-led war in Yemen. In addition, Iranian saber-rattling, primarily via proxies, has exposed Saudi Arabia’s defensive vulnerabilities.
As 2020 approaches and regional leaders take stock of the last few years, it has become apparent that hitching one’s wagon to Saudi Arabia is no longer a foolproof bet. Certainly, strong incentives for cooperation remain, but economic and strategic changes also necessitate chartering new paths that insulate other Gulf governments and populations from the volatility Saudi Arabia is experiencing, both domestically and reputationally abroad. The biggest beneficiaries of this shift are likely to be Qatar and United Arab Emirates, but changes in the geostrategic position of Kuwait, Oman, and Jordan should also not come as a surprise.
7. Transnational Crime
In 2020, perhaps more than ever, a critical element of geopolitical risk preparedness must involve understanding and accounting for the role that illicit trade plays in the global economy.
Since the early 1990s, globalization has fostered conditions that have enabled transnational crime to proliferate in a way that has completely changed the international system. In more recent years, the expansion of e-commerce, the growing sophistication of the internet, and the development of cryptocurrencies have created opportunities that didn’t previously exist and that have significantly blurred the lines between licit and illicit commerce. Although it is impossible to calculate, some estimates suggest that the illicit economy now accounts for anywhere from eight to 15 percent of global GDP — an astronomical amount of money that contributes to everything from the distortion of economies and diminution of legitimate business revenues to the fueling of conflict and deterioration of social conditions. In some countries, resources acquired from the illicit economy are used to attain and secure both formal and informal political power. In others, illicit activities have become so intertwined with licit ones that they are difficult to pinpoint or separate out, heightening the importance of incorporating geopolitical risk analysis into supply chain management.
Though transnational crime is not a new phenomenon, 2020 is likely to represent a tipping point, as the rising tide of international disengagement by nations that have been long-time anti-corruption advocates collides with an increasingly complex global money transfer landscape due to an expansion of cryptocurrencies and mobile apps and a controversial but extensive web of sanctions. Nefarious actors, regardless of whether they are terrorist groups, criminal gangs with loose or overt state ties, or individuals engaged in various forms of human exploitation, are presently the leading navigators of the banking frontier and they are becoming bolder in their visibility. Without a renewed commitment to combat illicit commercial channels, even the least corrupt states will face irreparable vulnerabilities.
8. China’s Economic Warfare
The US-China rivalry will continue to create ripples in the lake of geopolitical risk in 2020, but the real global threat is not the trade war: it’s the ideological battle between authoritarianism and freedom.
With the release of its Made in China 2025 blueprint, China all but announced its intention to seek world domination, and Beijing’s actions of late suggest it is willing to do anything it takes to become the world’s sole hegemonic power. Under the leadership of Xi Jinping, China has begun to throw its weight around in ways that harken back to the days of Mao Zedong. Since 2012, Xi has unleashed a powerful set of political and economic reforms, replacing collective rule with a consolidation of personal power and managing to further restrict the flow of ideas and information into China while simultaneously expanding the outward flow of influence and technology. Beijing has also stepped up the use of its powerful economy as a means of coercion, attempting to force both governments and private businesses to march in line with its particular set of norms. But, democracies are not going to accept unlimited restrictions on freedom forever, and in 2020, China’s challenge to resolve the tension it is currently working through between capitalism and its incompatibility with the remnants of the communist system will be on full display. Nothing exemplifies this struggle more than the ongoing unrest in Hong Kong. Foreign firms should not shy away from investing in China, but in the coming year, they must be clear eyed about the state of play:
- Functionally, there is no such thing as a private company in China.
- Foreign companies and individuals must be prepared for the economic and political consequences of public dissent, such as the NBA experienced recently.
- Foreign firms must be prepared to meet Chinese firms where they’re at, especially if a foreign firm is a competitor. Foreign firms must understand why Chinese firms have been successful and accept that, within any legal constraints, they may need to use similar tactics to compete, particularly in Belt and Road nations.
9. The Changing Global Order
Without a significant change of course, 2020 may be the year in which the world order that enabled unprecedented global economic growth, innovation, and improvement in living standards irrevocably shifts.
It is no secret that Europe and the United States, through both active and passive mechanisms, have lost international influence in recent years, but as 2020 approaches and the disintegration of NATO is on full display, questions have arisen as to how much longer the defining alliances of the post-war era will last, whether they are worth preserving, and which countries or entities will fill the leadership vacuum. While it is clear that Russia and China will continue trying to expand their global footprints for the foreseeable future, further solidifying their positions as economic and military counterweights to the West, it is not clear that the United States and Europe are prepared to make the economic and defensive changes that are necessary to prevent the further deterioration of, or potentially reestablish, preeminent influence. Part of this process, for both Western governments and investors, must be to increase involvement in the next frontier of emerging markets. BRIC economies and other previously emerging markets have matured, delivering substantial ROI for investors who entered at the right time, but growth and associated geopolitical risks have been uneven. Recently, those destinations have become less attractive for a number of reasons, but the common stumbling blocks are likely to become more visible as Russia and China in particular push to expand international market influence. 2020 is the year for visionary businesses to break the cycle.
10. Stalled Revolutions
Lack of resolution to political uprisings — what Luminae Groups refers to as “stalled revolutions” — will be a defining facet of geopolitics around the world in 2020, fueled by cross-border disruption campaigns, the proliferation of online communication and information sharing, and low cost, low sophistication protest techniques.
2019 was a landmark year for protests and perhaps the most notable since the Arab Spring swept part of the Middle East in 2011. Unprecedented popular uprisings, with varying degrees of violence, forced leaders from power in Sudan, Algeria, Lebanon, Bolivia, and Iraq. In other countries such as Iran, Haiti, Syria, Spain, and the Chinese administrative region of Hong Kong, ongoing popular uprisings have not brought about the decisive, meaningful change that could set local populations on a new path to greater prosperity and freedom. Rather, the potential of such uprisings has been stymied by a disproportionate force advantage on the part of the state, a lack of easily identifiable, viable alternative leadership, or the competition among various unofficial or unorganized opposition constituencies. While the first of these hurdles is not unique to the current era, the second two are in many ways distinct byproducts of the digital age. With many uprisings starting online and gaining traction via social media, it has become de rigueur for movements to build momentum without clear leadership or a formal articulation of goals beyond regime change. Furthermore, and in the Middle East in particular, the presence of factions that share little in common beyond a desire for regime change and whose ability to productively unite is yet to be tested, is a serious impediment to stability. In the coming year, it is unlikely that the conflict in the locales listed above will resolve — a reality which should prompt investors and foreign governments to factor in current levels of disruption for months, if not years to come. However, it is also likely that the relative success of some movements will inspire more, increasing the extent to which the stalled revolution becomes an entrenched phenomenon.