Our March Connections session commenced exactly one month after the Russian invasion of Ukraine began. The human tragedy unfolding in Europe has inspired global response and has shown indications of unifying Americans even in our hyper-partisan environment.
As a global economy, what happens in Ukraine impacts daily life and business realities here in the US. Understanding these interdependencies and recognizing the signs to heed in strategic planning will equip leaders to make better choices. This was our focus in last month’s session.
Bruce Blakeman, Heart+Mind SVP and Public Policy + Issues Practice Leader, joined Chet Wisniewski, Principal Research Scientist at Sophos, Mikkal Herberg, Research Director at the National Bureau of Asian Research, and Duncan Wood, VP for Strategy at the Wilson Center, to discuss the current state of geopolitics, agriculture, supply chain, the global energy and oil outlook, and cybersecurity concerns.
We were also lucky to have Richard Wirthlin, of Latham Watkins, share a very personal look at how this war is affecting everyday Ukrainian and Russian people and their families. Wirthlin, who returned just before the invasion after three years in Ukraine, shared personal stories and struggles coming out of the war-torn area of Mariupol, Ukraine.
Hyper-Partisan Divide Remains, But War Uniting Americans On the Surface
An important backdrop to this story is the current American psyche as rising gas prices and concerns about war in Europe are added to the ongoing realities of navigating COVID and inflation. Our most recent Pulse national survey results show people are becoming more concerned (52% to 59% February to March) and worried (jump from 39% to 49%). Only 20% of Americans today are optimistic and 27% hopeful, nearly the lowest levels measured since March 2020.
But the silver lining appears to be found in the collective impact of the war is having on how we feel as a country. While most Americans (62%) see COVID driving us apart, a plurality (45%) believe the Russian invasion of Ukraine is bringing us as a country closer together. History has shown a common enemy can unify a divided people – 77% of Americans believe we are a divided country today. How far will this unity grow and how long will it last?
Presently, our country’s psyche is very mixed. Economic realities are driving worry. People want to feel united in our response as a country, but underneath we remain very divided. There is a leadership vacuum people want to have filled. The war in Europe will only drive this need to be more important.
War in Ukraine is Dramatically Revealing Realities of Globalization
The war and related sanctions have forced movement away from Russian oil and gas, driving the need to rethink diversification in sources of energy rather than overreliance on one specific country or market.
Similarly, supplies for wheat, fertilizer, and the inert gases required to manufacture computer chips have all been impacted and are resulting in shortages and delays across the globe.
At the same time, power dynamics are shifting in Europe with changes in defense spending and partnerships. NATO is mobilizing 40,000 more troops to Eastern Europe and Germany made almost overnight investments in their military at levels not seen since WWII. It was only a few years ago when the future of NATO was brought into question by President Trump and other leaders.
“[Talking about Germany] giving lethal assistance to Ukraine and boosting its military budget in such a way that it will become the largest military force in Europe… Once that money begins to flow through to its armed forces, that is a stunning change because since 1945 we have seen a weakened Germany, a Germany that does not want to project power, and this completely changes the game in new Europe.”Duncan Wood, Wilson Center
What this new Europe looks like is yet to be determined, but the emerging forces around this war undoubtedly will shape it. The dynamics also illuminate challenges with globalization that must be accounted for when considering supply, resource dependency, and even potential guilt by association.
The CEO of the BlackRock investment corporation, Larry Fink, recently wrote to shareholders noting that “globalization as we know it is now over.” Wood believes many companies will be looked at carefully going forward for their links and dealings with countries who do not “meet global standards of democracy” or demonstrate corruption or ignore human rights.
“Economic sanctions are there, but I see this actually as a real watershed [moment] in our understanding of geoeconomics. From this point forward, companies are going to be held responsible by governments, by watchdogs, by shareholders, by consumers, by the gatekeepers; by that I mean particularly investors.”Duncan Wood, Wilson Center
This trend is highlighting the increasing importance of a practice Wood refers to as “ally reassuring” when it comes to supporting US businesses in a global market. This means making manufacturing process and supply chain platforms integrated among “friendly” nations and not simply with the lowest bidder.
Energy Crisis Driving Toward European Recession
A unique impact of the war in Ukraine, as compared to prior energy crises due to war, is its impact on all fossil fuels: oil, natural gas, and coal. Europe depends on Russia for close to half of its coal and natural gas imports and about a quarter of its crude oil imports.
Mikkal Herberg noted the impact to crude oil supply will be finding long-term replacement for between 3 to 7 million barrels of crude oil per day (up to 7% of the global supply that comes from Russia).
“If you lost 7 million barrels a day of Russian crude [oil] in the marketplace, it’s hard to imagine what the price impact of that would be as we go through the year.”Mikkal Herberg, National Bureau of Asian Research
In the short term, many countries have turned to coal to help supplement the immediate decrease in gas supply. But the EU recently announced the intent to ban Russian coal imports, immediately driving up the price of coal. The same is happing in the already tight global natural gas market and will rapidly worsen if embargoes and sanctions stop the flow of Russian liquid natural gas (LNG), something European countries may simply not be able to afford to take on to punish Russia’s aggression.
These trends are expected to lead to a recession in Europe with manufacturing plants and businesses closing due to the high price of gas. More European powers will start to turn to renewables, but such moves will require significant time to have an impact and will not curb the near term shortages.
“You’re likely to see a sharp recession in Europe. These gas and oil prices are crushing the European economy,” Herberg said. “This is a decisive inflection point in global energy markets, oil and gas. It’s like an earthquake or tectonic shift.”
Unlike the concept of what happens in Vegas stays in Vegas, the reality is what happens in Europe certainly will not stay in Europe. The economic pressure will hit US markets. Herberg expects we are in for a 5-year period of very high energy costs.
The energy crisis also points to a likely secondary position for climate change priorities as energy security moves to the forefront across the globe. Nuclear energy is likely to be reconsidered in light of current events as a stable and even sustainable source of energy in the future.
Renewal of American “Soft Power” Influence in the World
The war has also reinvigorated the profile of US leadership to shape global response to Russia’s aggression, something that reverses a perceived decline of US influence in recent years. Wood explained recent events demonstrate the US is still the “indispensable partner” as it pertains to dealing with the unrest. US leadership has mobilized public opinion against Russia in Europe through effective deployment of its “soft power” to effectively preempt the Russian disinformation machine. These efforts have produced far-reaching sanctions from much of the world going beyond solely targeting government and business to also locking down personal assets of individuals such as Russian oligarchs.
But there is less evidence the US has been very effective in recent years with its “sharp power” to help shape public opinion within Russia about the central issues at play.
“We need to see how effective the United States and its allies are in terms of exercising, sharp power inside Russia, to begin to change public opinion. That’s where we are less effective.”Duncan Wood, Wilson Center
Disinformation, Chaos and Disruption Via Cyber Attacks
Russian activity in cyberattacks has been on the radar increasing significantly since 2008, Chet Wisneiski explained. Disinformation is central to the “cyber doctrine” of Russia’s military forces according to Wisnieski. We saw their use of it in the 2016 US election and in other Russian conflicts in Georgia and Crimea. But it is only one of many growing tactics being deployed.
“[Cyberattacks involve] incredibly fast-moving types of tactics and techniques that both nation states and criminals use to break into networks and cause disruption, whether to steal information or intellectual property, or just to sew chaos. It is an evolving thing.”Chet Wisniewski, Sophos
There is a very low probability, Wisniewski noted, of Russia doing anything major and politically disruptive such as turning off the lights by hijacking the power grid, an action that would immediately draw more players into the war. Instead, he said most of the attacks to date related to this war have been to disrupt rather than to steal information, property, or currency.
“They’re mostly just to make your business inoperable and to disrupt your ability to provide services,” Wisniewski explained.
The risk profile for US companies depends on both market presence and network vulnerability. Those dealing with Ukraine or Ukrainian businesses should have isolated networks as much as possible. More likely, exposure to impact by vulnerable supply chain partners will be a larger risk.
“[Make sure] authentication standards are current, meaning that they’re multifactor and that you have the ability to sort of firewall off if you need to be able to drop that iron gate and close off that part of the network, if necessary from the rest of the international network, in the event of a compromise,” he explained.
Recent announcements by the White House regarding cybersecurity warn of the expectation of increased activity in different sectors in the US.
“Russians are kind of letting everything loose and looking for vulnerable assets around the United States.”Chet Wisniewski, Sophos
Ransomware initiated in Russia is showing up to create disruption in US manufacturing, food chain, supply chain, etc. Vulnerable businesses with no seeming strategic role in infrastructure are likely to be at risk of such attacks by cyber criminal groups either “conscripted or encouraged to be more aggressive” in the market to cause damage.
“If you scan a million American businesses, the bottom 10% are the ones that are going to get hacked and have disruptions caused,” Wisniewksi explained, “When it’s a non-targeted activity, if you’re just trying to sew disruption and cause problems, you just get the largest number of vulnerable assets that are easy to hack into and you do it.”
Such realities should raise the level of attention paid to the basics of cybersecurity. The war activities are only likely to increase such attacks with seemingly no rhyme or reason behind who is targeted.
The Human Reality of War
Richard Wirthlin recently returned from a religious service mission for three years in Ukraine. For four years as a partner at Latham Watkins he also ran their office in Moscow. In other words, more than most, he knows the people and culture involved on both sides. And he is headed back to the area to assist with refugees with people he knows personally.
Wirthlin has seen a rapid growth of anti-Russian sentiment coupled with a firm bolstering of Ukrainian identity in the last month. Putin expected to be a liberator in this conflict and is facing an oppositional reality. The response of the Ukrainian people, most visibly demonstrated by President Volodymyr Zelensky, continues to inspire people across the globe.
But the practical reality of the war is also creating a diaspora among Ukrainian citizens who do not plan to return to the country now that they have fled. This will lead to long-term effects on the economic and societal infrastructure of bordering nations due to the influx of refugees.
Key Takeaways for Business Leaders
- Global phenomena are going to impact the market, regardless of the firm or sector there is an effect to your business.
- For cybersecurity, “the best time to be prepared was yesterday, but the next best time is to start today.” Invest now in protections against all cyber threats, invest evenly in detection, protection, and response. Efforts will have a payoff far beyond the current cyberattacks related to Russia. Resource: https://news.sophos.com/en-us/2022/03/21/russia-ukraine-war-related-cyberattack-developments/
- Brace for high oil and gas prices for a more extended period for the next 5 years.
- Diversify your supply chain and make it shorter to lessen costs during this time of increased pricing in transportation due to the oil and gas shortages.
- Do not source supplies from Russia or Russian allies.
- Remember while Americans are feeling more unified through this common global enemy because of Russia’s invasion of Ukraine, that unity is shallow and is operating in a context of increased anxiety over current events. Reassurance, transparency, and vision will translate to leadership, now more than ever.
- Be careful with whom you do business. Partners matter. Allies matter.