Geopolitical Monitoring Report | August 26, 2022
Ukraine War, Extreme Weather, and Energy Shortages Foreshadow a Long Winter
Energy and food shortages stemming from the Russian invasion of Ukraine – coupled with widespread drought in Europe and China – are likely to have a significant impact on the political stability of governments around the world, with those in Europe, the Middle East, and Africa being most severely affected.
Russia and Ukraine are both making preparations for a protracted conflict: Russian President Vladimir Putin has issued a new order to expand the size of the Russian military by 137,000 troops and the United States providing an additional $3 billion in military assistance to Ukraine and name the military mission supporting the country, which entails appointing a general to run the operation. With neither side discussing potential negotiations to end the conflict, it is clear that the conflict in Ukraine will drag on and so too will the disruptions it is causing to the production of agricultural staple goods – like wheat – and the flows of natural gas to Europe.
Russian gas giant Gazprom has been seen burning off approximately $10 million worth of gas a day from a facility near the border with Finland, as Moscow is refusing to export gas to Germany and has no alternative market. Shortages of natural gas have already resulted in the United Kingdom’s energy regulator warning of an 80% increase in energy bills this Winter, cities across Germany cutting back on lighting and hot water to conserve scarce supplies as the benchmark natural gas futures rate for Europe hit an all-time high, and Norwegian fertilizer giant Yara announcing further production cuts due to high gas prices.
In addition to the pressures that have been placed on global food supplies by the war, severe weather events have also severely impacted crop yields. High temperatures have reduced potato crop yields across Europe, drought and heat have negatively impacted cheese production in France, the ongoing drought in the Horn of Africa is expected to enter its 5th year, and widespread drought in China that led to the government issuing orders to conserve water to prevent crop failures.
Rising energy and food costs will continue to drive inflation, which will destabilize the political systems of countries around the world and drive social unrest. Higher prices have already led to French President Emmanuel Macron to lose his parliamentary majority to far-left and far-right parties in the country’s recent legislative elections; contributed to the downfall of British Prime Minister Boris Johnson, whose party became less tolerant of his many scandals amid the high inflation; and led to the collapse of both Pakistan and Sri Lanka’s governments amid waves of civil unrest in those countries.
The trend of political upheaval looks to continue, as the far-right Brothers of Italy party appears likely to emerge as the largest party in Italy’s upcoming elections on Sept. 25.
However, the snap elections in Italy are unlikely to be the last that are sparked by rising costs and widespread election interference efforts are likely to occur, and not just by Russia. China, Iran, and other countries will likely seize any opportunity to influence elections around the world.
In addition to unease in the political sphere, rising costs have begun to impact labor markets, resulting in work stoppages across the world as workers demand increased pay to defer inflation.
For example, the United Kingdom has dealt transit worker strikes throughout the Summer and postal workers across the country have just launched the largest strike the country has seen since 2009 during the financial crisis; transport workers in South Africa announced they will be striking soon over a wage dispute; and German airline pilots at Lufthansa have recently rejected a contract offer and could strike at anytime. These labor disputes are only likely to increase as prices do.
Organizations should be prepared to pay higher food and energy costs for the foreseeable future, as the war in Ukraine shows no signs of stopping, sanctions on Russia are likely to remain after its conclusion, and fertilizer shortages are likely to negatively impact the 2023 and potentially the 2024 growing seasons.
In addition, political instability and the rise of extremist and populist parties in elections around the world could result in these parties blaming foreign businesses in their country for their economic woes, which could lead to increased tax and regulatory burdens in many of these cases and actions as extreme as asset seizures in the worst possible scenarios.
Companies that have significant operations abroad or rely on supply chains that have significant links to foreign countries where this could be a risk should monitor public sentiment towards their organizations and the domestic politics in those places to ensure they are prepared for any eventuality.
In addition, protesters may also target foreign companies in the event of civil unrest too. These risks highlight the importance in completing threat landscape assessments for all company facilities and operations. High level decision makers of a company, such as C-suite executives, may be targeted by protesters or aggrieved individuals in atmospheres of economic turmoil.
Therefore, it is essential to ensure that the private contact information of these individuals is not publicly available and organizations should take steps to remove any public information on these individuals and their family members that is available.
Finally, organizations should prepare for workers demanding wage increases and strikes among unionized workforces. While their organization may not be directly impacted, mitigation will be required if there is a widespread strike among essential public services, like transit workers, shipping, and the postal service.
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