Five important business changes that the war in Ukraine accelerated

No matter how the war in Ukraine, started by Russia, ends, the business will change the processes started by the pandemic, US-China tensions, and climate change will accelerate.

So far, the biggest effect is the humanitarian catastrophe with millions of people fleeing the brutal Russian bombing and fighting across the border or seeking security in other parts of the country. The economic consequences of the devastation and sanctions against Russia – more than 5,000 in number – and the start of bans on doing business with Belarus over its complicity in aggression are yet to be felt.

However, analysts from The Economist Intelligence Unit summed up in five points what they predict will change for a long time.

The war will disrupt supply chains in sectors such as the automotive industry, increasing pressure to build them closer to production centers (so-called localization of chains).

The war will disrupt supply chains in sectors such as the automotive industry, increasing pressure to build them closer to production centers (so-called localization of chains).

Rising energy and other raw material prices will accelerate public and private sector efforts to improve food security.

The investment needed to reduce Europe’s dependence on Russian energy will affect funding for clean energy investment in developing countries.

Financial sanctions against Russia could accelerate the transition from US-backed financial systems to interoperable digital currencies of central banks (CBDCs).

Geopolitical tensions over technology (already central to the US-China trade war) will intensify as Russia restricts Internet access and faces already imposed, but impending, technological sanctions.

Supply chains

Supply chains have already been disrupted by the pandemic, as well as by the earlier US-China trade clash. The difficulties caused by the war between Russia and Ukraine will prolong the duration and territory of these disturbances. In sectors such as the automotive industry, companies will be forced to further shorten their supply chains and make them even more sustainable.

This could mean increasing inventories of key components, limiting production to deliver on time, and investing in more local suppliers.

In the first place, this can be felt in the insurance and transport sectors, as increasingly busy transport to factories – by ship, plane, and truck – is likely to be a thing of the past.

Shorter supply chains are less prone to trade and geopolitical disruptions, and suppliers in countries such as China and Russia are already losing the advantage of low prices as labor costs rise, shifting the balance in favor of returning production to developed countries. countries. In addition, car manufacturers are already investing heavily in the local production of electric vehicles (EVs) and batteries, ie. new supply chains are being built for them and their opportunity for closer development of local suppliers is often supported by government investment incentives.

An alternative to expensive and unsafe foods

The rapid rise in agricultural prices will stimulate the adoption of sustainable food policies. Due to the war in Ukraine, fuel, fertilizers, and agricultural products will rise in price for most of 2022.

This will not only increase business costs but will also increase existing concerns about energy and food security. Several governments are already forced to fundamentally reconsider their food and agricultural policies – not only in Europe but also in the Middle East, Singapore, and China.

EU countries, including Germany, are responding by trying to reduce the proportion of feed and meat while promoting alternative protein products. About 60% of cereals in the EU go for animal feed, and such a change would help isolate the region from global supply shocks. This will also help achieve sustainability goals such as reducing high methane emissions from livestock.

The Middle East is likely to increase its investment in agricultural technology and other ways to increase agricultural productivity or reduce water consumption. All of this will provide opportunities for food technology and alternative protein companies that will attract government attention and funding.

The gap in the energy transition between the developing and the developed world will increase

Western sanctions against Russia, while unprecedented in scope, have kept Western Europe’s energy supplies open. For now, European countries will do it by diversifying the sources, but this will require:

  • large investments to increase liquefied natural gas (LNG) imports,
    means for greater energy efficiency and thermal insulation
  • lower demand for gas for electricity generation
  • likely delays in the closure or phasing out of nuclear and coal-fired power plants.

This would also lead to significant public and private investment in renewable energy, even as governments expand their defense budgets and commodity prices rise.

All this will make it difficult for developed countries to provide financial support for the energy transition in emerging economies – support that still does not live up to their promises. The result – developing countries will continue to invest in fossil fuel energy production, including to cope with population growth.

Financial sanctions will change the global monetary order

Unprecedented economic and financial sanctions against Russia, and in particular its exclusion from the SWIFT system, will initially have a limited impact on Russia’s banking system. But in the long run, the use of financial systems as a weapon, including card networks, will force Russia and other countries to look for alternatives to established systems built around the US dollar.

Russia and China already have emerging alternatives to SWIFT, but setting up a full-fledged banking system would be costly and slow. Instead, any particular alternative to a US-backed international money transfer system is likely to use central banks’ digital currencies. Several countries, especially in Asia, are already trying to connect their payment platforms supported by the central bank, and more countries are expected to use this option and speed up the transition.

Technologies – increasingly geopolitical and regional

In the trade war between the United States and China, technological sanctions focused on specific companies. In response to the war, the Western Allies imposed them on a national level for the first time. Technology is becoming increasingly geopolitical and regionalized in two ways:

First, access to technology is seen as a competitive advantage for countries, as evidenced by the US attitude towards the semiconductor sector. The design and production of chips is a fragmented process and the product is complex, with each participant using American equipment in one way or another. Ie any U.S. technology sanction puts a particular country or company in a position to be unable to purchase semiconductors.

Second, the Internet is becoming more “national” and less global. China has sparked this change with a national firewall to restrict access to content the government considers dangerous, a move Russia wants to take. The EU, through its value approach to data confidentiality and the regulation of artificial intelligence, has also created regional barriers to the Internet.

This regionalization of the Internet will not necessarily lead to its fragmentation to the point that the systems are completely separate and incompatible. The bigger battle is between the United States, which wants to maintain a multi-stakeholder model of Internet governance (open, decentralized, and industry-led), and China, which wants a model of cyber sovereignty (closed, centralized, and state-led).

However, tensions are not only between democracies and autocracies but also between blocs, as US-EU relations show.

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