The War in Ukraine: Impact on Globalisation and Geopolitics

THE AMBASSADOR PARTNERSHIP

THE WAR IN UKRAINE:

BY YURI POLUNEEV

TABLE OF CONTENTS

FOREWORD 2

EXECUTIVE SUMMARY

CHAPTER 1 WAR AND GLOBAL GROWTH

3

4

examines how the war affected global growth dynamics in 2022 and is likely to continue to impact economic performance across various regions, economic blocs, and continents in 2023 and beyond. The human and material costs of the war have been enormous, with tens of thousands of human lives lost, millions of Ukrainian refugees and internally displaced persons, and significant damage to Ukraine’s economy.

CHAPTER 2 THREATS AND RISKS IN THE SPOTLIGHT

10

analyses how the war has changed global perceptions of risk and impacted on business confidence worldwide. By being a major threat to peace and security in Europe, the continuing war has significantly exacerbated other risks and global threats and has made a macroeconomic assessment of uncertainty a daunting task.

CHAPTER 3 DEFIANT GLOBALISATION

21

considers the impact of the war on globalisation and whether it has led to its significant reversal. It also examines how the conflict has affected global trade and supply chains and the war-related effects on various aspects of globalisation such as fragmentation, economic blocs, reserve currencies, the ESG and climate agenda, and technology.

CHAPTER 4 GEOPOLITICS UNDER STRESS

36

examines various aspects of geopolitics affected by the Russia-Ukraine war, and how it has led to a major geopolitical split based on ideology. The conflict has shifted the global power balance and accelerated a transition to multipolarity. Other aspects include: renewed militarisation, economic security and supply chains, new dimensions in geoeconomics and power politics, weaponised interdependence, US-China technological rivalry and the EU agenda.

CHAPTER 5 BRITAIN IN A BRAVE NEW WORLD

55

looks at what impact the war has had on the UK economy and how it might shape the country’s role in the emerging world order. It reveals a commonality of strategic goals in that both the UK and the EU face creating favourable conditions for geopolitical rapprochement.

Author

Yuri Poluneev is an accomplished independent research analyst based in London, with extensive academic and professional experience. With a PhD in international economics, he has authored over 100 academic and media publications, including 13 books on diverse topics such as country competitiveness, the energy crisis, banking, and economic security. Yuri has also held several senior management positions, including at the International Management Institute in Kyiv, the European Bank for Reconstruction and Development, the Ukrainian Parliament, and the Supervisory Board of the National Bank of Ukraine. He has written this expert report in his personal capacity. The views expressed do not necessarily reflect those of The Ambassador Partnership, who are publishing the report.

Publisher

The Ambassador Partnership is a partnership of some 42 former Ambassadors and senior military from 15 countries who use their experience and their networks of contacts and influence in over 100 countries worldwide for the benefit of private sector and government clients. They are problem solvers and negotiators, typically intermediating between the private and public sectors; and also training international organisations and governments in diplomatic skills, including negotiation, crisis management, media skills and cross-cultural awareness.

FOREWORD

The Russian invasion of Ukraine on 24 February 2022 has had a profound impact on the world economy, the geopolitical landscape, and international relations, marking a new threshold in world history. This war poses the biggest challenge to the international order based on the fundamentals of the rule of law and democratic values, and the UN Charter’s cornerstone principles of sovereignty and territorial integrity. In the words of European Commission President Ursula von der Leyen, this war is “a war on our energy, a war on our economy, a war on our values and a war on our future. This is about autocracy against democracy. And I stand here with the conviction that with courage and solidarity, Putin will fail and Europe will prevail.”

So, this war can be viewed as a “ Huntingtonian ” clash of civilisations, between democracy and autocracy, between law-based order and imperialist revisionism, and between forwardlooking aspirational pragmatism and backward-looking “past glory” nostalgia. Its outcome will shape the course of history in this century and humanity’s progress in solving urgent global challenges.

As the war is still in the making, it is impossible to fully assess the full range of its wide-reaching consequences for the global economy, globalisation and geopolitics. And this study doesn’t attempt to achieve this objective. Many “channels” of the war’s global impact, such as the energy shock and the food security crisis, commodity trade and supply chain disruptions, the effects on FDI and the financial sector, and other aspects have not been dealt with in due detail and depth. These areas of research are vast and merit a separate focus.

The study focused on several broad aspects: the general impact of the war on global economic growth, the new configuration of global risks and threats, the status of globalisation, and some emerging trends in geopolitics. It also offers the author’s assessment of critical factors, the combination of which could shape the potential outcome of the war. While the author has attempted to focus on several broad aspects, it is acknowledged that the entirety of issues relating to the war’s impact on the global economy and international relations cannot be fully covered. This report serves as yet another attempt to systematise the complex and multi-directional consequences of the war.

The recent collapse of Silicon Valley Bank, along with other developments in global banking, has underscored a crucial lesson from the continuing war: not all potential effects and consequences are readily apparent. Consequently, Western policymakers and business leaders must remain vigilant and continuously monitor developments in this geopolitical conflict, staying alert for sometimes unforeseen risks and their spillover effects on various sectors of the global economy.

Indemnity . The conclusions and opinions in this study, except those directly quoted, reflect only the author’s personal views based on research, and shall not commit any organisation or person mentioned or implied.

Yuri Poluneev London, May 2023

EXECUTIVE SUMMARY

The war in Ukraine has had a significant impact on global growth and increased the risk of a recession, particularly in Europe including the UK. Existing economic, fiscal and trade problems have been worsened by the energy crisis, global food security threats, a migration crisis in Europe, and rising military expenditures. This impact can lead to political and social instability, particularly in emerging markets and developing nations.

The Russia-Ukraine war is widely regarded as a significant threat to global security and the economy, with potential escalation posing an even greater risk. The war has brought together four autocratic nation-state global actors whose shared interests have contributed to a range of associated risks, including the potential use of weapons of mass destruction, abuse of emerging advanced technologies, cyber and information warfare. The war, according to some analysts, has put an end to the era of a peace dividend and global prosperity.

While there are concerns that the war in Ukraine could reverse globalisation, evidence suggests that trade will continue to be globalised, although it is likely to be characterized by a new and different nature and dynamics. Global supply chains have been affected by the war, but they are adapting, and the conflict will redraw alliances and global supply chains more based on ideological and governance philosophies than purely on cost of production. The war has marked the beginning of a new phase in geopolitics characterised by fierce competition, confrontation, and power politics. The world has split into a new configuration, characterised by a “clash of civilisations” between democracy and autocracy, with geostrategic competition covering human rights, global infrastructures, development cooperation, energy and commodity supply chains, IT, and new technology. The imperative of supply chain resilience will redefine economic security in the 21st Century, with control over the production and supply of strategic minerals becoming the name of the game.

Despite the challenges, there are opportunities for meaningful reform of multilateralism, open to countries that adhere to fundamental values and willing to abide by established governance rules. The UK, less affected by the direct impacts of the war, has positioned itself as a co-leader with the US in the pro-Ukraine global democratic coalition, the Ukraine solidarity alliance. The war has highlighted strategic commonalities between the EU and the UK, creating a demand for closer cooperation on policy priorities such as defending Europe, supporting Ukraine, maintaining economic sanctions on Russia, and securing supply chains of strategic materials.

Forecasting the outcome of the war is difficult, with several key factors that could shape the potential outcome, including Ukraine’s resilience and internal cohesion, the strength of the Ukraine solidarity alliance and an adequate flow of support, the effectiveness of economic sanctions against Russia, lethal and financial assistance to Russia from its allies, and domestic support for the war and the cohesion of the Kremlin’s power groups. The likelihood of peace negotiations is low, and the threat of escalation remains high, with the war entering a transitional stage characterised by protracted warfare with continuously contested frontlines that could last throughout 2023 and beyond.

CHAPTER 1. THE WAR AND GLOBAL GROWTH

The war that Russia launched against Ukraine on 24 February 2022 has caused significant disruption to the global economy, leading to a “mega shock” that has affected various industries and continents. This conflict has resulted in high inflation, slowed growth, disrupted supply chains and trade, increased militarisation of economies, and geopolitical shifts.

The IMF Managing Director has warned that we live in a more shock-prone world. 1 Harvard Professor Kenneth Rogoff has taken a more radical stance, arguing that the war has compounded several pre-existing global economic trends, such as rising inflation, extreme poverty, increasing food insecurity, deglobalisation, and worsening environmental degradation. Furthermore, the war has put an end to the peace dividend that has long helped finance higher social expenditures, making it challenging to rebalance fiscal priorities even in advanced economies. 2

The IMF and other analytical centres have warned that a third of the global economy will be in recession this year as growth slows down dangerously in the USA, EU, UK, and China due to the COVID pandemic. The World Bank has sharply lowered its growth forecast for 2023, with global growth expected to slow to 1.7%, down from the June 2022 estimate of 3%. Germany, Italy, the UK, and Russia could turn out to be the worst GDP performers this year. However, despite facing the toughest economic sanctions ever imposed, Russia may surprise with its much better-than-expected 2022 GDP results.

1 https://www.imf.org/en/Blogs/Articles/2022/03/15/blog-how-war-in-ukraine-is-reverberating-across-worlds-regions-031522

2 https://www.imf.org/en/Publications/fandd/issues/2022/03/the-long-lasting-economic-shock-of-war

Table 1. Real GDP growth estimates and projections for 2022-2023 (% change on the previous period)

Sources: https://www.imf.org/en/Blogs/Articles/2022/10/11/policymakers-need-steady-hand-as-storm-clouds-gather-over-global-economy; Global Economic Prospects, World Bank Group – June 2022; https://www.oecd-ilibrary.org/economics/oecd-economic-outlook/ volume-2022/issue-1_ae8c39ec-en; https://www.goldmansachs.com/insights/pages/macro-outlook-2023-this-cycle-is-different.html

According to Table 1, Germany, Italy, the UK, and Russia are projected to have the weakest GDP performances this year. However, while the UK and Germany may continue to struggle in 2023, Russia could potentially exceed expectations with a stronger-thananticipated GDP growth rate despite facing unprecedented economic sanctions imposed after 24 February 2022.

The US Congressional Research Service predicts that the war could reduce global economic growth by 0.7 to 1.3 percentage points, push up prices globally by about 2.5 percentage points, and slow global trade growth by up to 2.3 percentage points. The economic impact is expected to be more severe and lasting in Europe than in the USA. 3

The war has had wide-ranging effects on the global economy, with varying degrees of impact across regions and countries. It has led to global food shortages, a sweeping energy crisis in Europe, high inflation causing a massive cost-of-living crisis, peace threats, and significant geopolitical divides. The World Bank has estimated that the war will cause global income to decrease by 0.7%, hitting low-income countries particularly hard.

Europe is the most vulnerable region to the Russia-Ukraine war and has been affected the most. The Russia-Ukraine war has significantly impacted Europe’s fiscal pressures,

aid commitments, and economic prospects, with reconstruction needs and defence spending being the most significant areas of concern.

The energy sector has been the main channel of shock, with supply-chain disruptions and weaponisation of energy by Russia leading to a massive surge in inflation and significantly slowing recovery from the pandemic. Consumer prices are expected to remain high in 2023, increasing the likelihood that the ECB will raise key interest rates again.

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The influx of refugees from Ukraine has also created significant pressures on the budgets of recipient countries in both Western and Eastern Europe. In total, around 7.9 million Ukrainian refugees were registered across Europe, with most located in Poland, Germany, and the Czech Republic. Germany has provided the highest monthly financial allowance for Ukrainians seeking refuge. See Annex 1 on Ukrainian Refugees by Country for more details .

The Russia-Ukraine war has put Europe under significant fiscal pressure, particularly in defence and security expenditures. The conflict has exponentially increased the risk of war in Europe and led to a radical reappraisal of defence and security priorities. Nearly all European countries have made plans to substantially increase defence spending, with the UK’s NATO commitment to keep defence spending above 2% of GDP.

In terms of aid, Ukraine has become a long-term commitment for its allies, with the USA, EU, UK, and Germany being the largest contributors. Bilateral donors committed to Ukraine €101.9 billion in military, humanitarian, and financial aid assistance, while multilateral organizations committed €15.83 billion in urgent assistance: WB Group – €7.42 billion; EBRD – €4.98 and IMF – €3.43 billion. See Annex 2 on Ukraine

The war’s potential impact on the future reconstruction of Ukraine is another serious fiscal effect. As of the end of 2022, Russia still occupied around 18% of Ukraine’s territory, resulting in massive economic, infrastructure, and environmental damage. The country’s real GDP is expected to decline by 35-40% in 2022, with the World Bank’s assessment of total reconstruction needs in July 2022 being USD 350 billion.

These war-related

costs are

haunting the

economic

prospects

of the Eurozone.

According to the latest assessment by Deloitte, “with no clear end in sight to high inflation and global uncertainty, the eurozone is likely to step into a period of stagflation, even if a recession might be avoided”. 4 However, according to Goldman Sachs, in 2022 China had a greater impact on the commodities market than Russia, primarily due to a lack of investment in the production of these goods. This was a more significant factor in affecting commodity prices than the energy crisis in Europe. 5

The economic impact of the Russia-Ukraine war is being felt in various regions around the world, with consequences ranging from inflation and reduced trade to disruptions in tourism and labour remittances.

4 https://www2.deloitte.com/us/en/insights/economy/emea/eurozone-economic-outlook.html 5 https://www.goldmansachs.com/insights/pages/the-bigger-worry-growth-or-inflation.html

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Countries in the Caucasus and Central Asia are at risk due to severed trade and payment links, lower labour remittances, and disrupted tourism flows. Even commodity exporters (like Kazakhstan, Uzbekistan, Azerbaijan, and Turkmenistan), despite some windfall profits from higher commodity prices, may find themselves at risk if sanctions eventually target transportation routes and transit pipelines running through Russia.

The Middle East and North Africa are experiencing setbacks due to higher food and energy prices and tighter global financial conditions. The effects vary due to distinct trade and economic arrangements. Rising food prices and limited fiscal room for manoeuvre can create significant risks for social stability in countries with unstable and unpopular governments. Some, like Egypt, are particularly dependent on grain imports from both Russia and Ukraine. Many countries that used to be popular tourist destinations for Ukraine and Russia will face an increasing squeeze on tourism-related revenues. Rising food prices, together with very limited fiscal room for manoeuvre, can create huge risks for social stability in some countries with unstable and unpopular governments, especially where social safety nets are weak and unemployment is high.

Sub-Saharan Africa faces challenges from interrupted pandemic recovery, high inflation led by food and energy prices, reduced tourism revenues, unsustainable public debt, and limited access to capital markets. These countries are likely to face further economic disturbances and growing social tensions.

Latin America and the Caribbean are experiencing higher inflation from global commodity price increases. The continuing war is likely to further complicate things on the inflation front. Exporters of oil, copper, iron ore, corn, wheat, and metals have a much better capacity to mitigate the war effects by raising prices for exported commodities.

China ’s economy faces accumulating problems related to pandemic-related fiscal stimulus, mounting domestic debt, global supply chain politicisation, and weakening demand in its big export markets. The return of the pandemic remains a powerful factor that could affect China’s economy.

In the Asia-Pacific region , more expensive food and energy imports have had their toll on consumer prices and the cost of living. Countries like Japan, South Korea, and India are particularly vulnerable due to inflation, limited fiscal policy options, and dependence on foreign commodities.

The United States , while less prone to war-related economic shocks, faces inflation at a 40-year high. The global commodities shock has further accelerated inflation and forced the Federal Reserve to push full speed on the rate increase pedal. On top of that, the USA has shouldered so far the biggest financial burden in relation to the war by being number one donor of military and financial aid to Ukraine.

Labour unrest . A new wave of labour unrest and activism in both developed and developing countries may become a persistent feature due to high inflation, layoffs, and lower corporate earnings. Social discontent and a rise in extremism throughout the world may

increase due to expected social unrest and the cost of sanctions to Western economies and households. In countries with weak or no social security nets, the prospects of violent protests and social instability will significantly increase in 2023. As the Kremlin has rigorously emphasised the link between the West’s support to Ukraine and the increasing cost of sanctions to the Western economies and households, expected social disturbances throughout the world will definitely resonate with Russia’s economic and information warfare playbook.

Political stability in countries such as Turkey and Spain may be affected by forthcoming elections, while Montenegro, Bulgaria, Nigeria, Argentina, and Iran face risks of disruptive social instability due to the war-related cost-of-living crisis and the global economic slowdown. For global business, social and related political instability add additional layers of uncertainty, with the risks of rising economic nationalism, regulatory changes, new export controls, and enhanced currency risks.

The combination of COVID-19 and the Russia-Ukraine war has contributed to the much-depressed growth trend observed in 2010-2019 compared to the pre-GFC period of 2000-2007 (see table 2 below).

Data sources: World Bank, UNCTAD, Bank for International Settlements.

2023 is likely to be remembered as a time when the global economy was struggling with a number of challenges, and the year when the resilience of the global economy is put to the test.

The war in Ukraine has had a significant impact on global growth, increasing the risk of recession just as the world was beginning to recover from the COVID-19 pandemic. Europe, including the UK, has been hit particularly hard, with economic and trade problems being compounded by the energy shock and the migration crisis caused by the war. These factors, combined with rising military expenditures, will put enormous pressure on governments, potentially leading to political and social instability, especially in emerging markets and developing nations.

Table 2. Major global economic indicators after Global Financial Crisis6

6 Coping with double shock to the global economy by strengthening international macroeconomic policy coordination. – Wu Zhenyu, October 2022.

KEY INSIGHTS:

• The war in Ukraine has had a significant impact on global growth and increased the risk of a recession. This has happened just as the world was starting to recover from the COVID-19 pandemic.

• Europe, including the UK, has been hit particularly hard. Existing economic and trade problems have been worsened by the energy crisis, which has caused decoupling from Russia's gas exports. The war has also resulted in a migration crisis.

• Governments around the world are facing immense pressure due to depressed growth, high inflation, a cost-of-living crisis, and rising military expenditures. This pressure is expected to cause political and social instability, particularly in emerging markets and developing nations.

• In 2023, the global economy is likely to face a test of resilience. The war-related shocks, combined with existing problems and rising geopolitical tensions, could create high-impact combinations that have far-reaching consequences.

CHAPTER 2. THREATS AND RISKS IN FOCUS

The continuing conflict in Ukraine has intensified the focus on geopolitical risk, highlighting the far-reaching impact it can have on various sectors, such as energy, food security, and reliability of supply chains. Additionally, the war has prompted a re-evaluation of globalisation, as the interconnectedness that binds nations together now simultaneously exposes them to increased interdependency risks.

Governments, regulators, and international businesses have always considered geopolitical risks as important factors in decision-making, as adverse geopolitical developments and realised risk threats can have a direct or indirect impact on significant macroeconomic variables. Geopolitical risks include events such as war, terrorism, and tension among states and political actors that affect the peaceful course of international relations. The lack of a consistent indicator to measure real-time geopolitical tension has limited systematic empirical analysis of the importance of geopolitical factors in shaping macroeconomic outcomes.

One of the most appropriate definitions of geopolitical risk has been proposed by Federal Reserve analysts, who define it as “the threat, realization, and escalation of adverse events associated with wars, terrorism, and tensions among states and political actors that affect the peaceful course of international relations.” 7

The Bank of England, European Central Bank, International Monetary Fund, World Bank, World Economic Forum, and numerous banks and think tanks have routinely monitored, analysed, and commented on the risks posed by various geopolitical events, tensions, and armed conflicts. However, as Caldara and Iacoviello of the US Federal Reserve point out in the 2022 study, “the importance of geopolitical factors in shaping macroeconomic outcomes has not been the subject of systematic empirical analysis. The main limitation has been the lack of an indicator that is consistent over time and measures realtime geopolitical tensions as perceived by the press, the public, global investors, and policymakers.” 8

The world was already an extremely risky and turbulent place before the start of the major war in Europe. The global COVID-19 pandemic, with its new waves and virus mutations, has threatened to cause varying degrees of strict government measures matched by growing and often disruptive public opposition to their introduction. Three full years of the pandemic, now becoming endemic, have already resulted in economic, political, and social problems and fractures usually associated with a major military conflict. The online interactive global risk map illustrates how unsafe the world had become in 2022. 9

In addition to inflation and supply chain disruptions, the post-COVID era posed a threat due to passive but potentially far more disruptive trends such as the loss of ‘drive’ among employees, the “Great Resignation”, and even the “Great Retirement” trends. Furthermore, the disenchantment with government responses to pandemics has deepened divisions between large sections of the population, while the growth of public and household debts

7 Measuring Geopolitical Risk by Dario Caldara and Matteo Iacoviello. – American Economic Review 2022, 112(4), p.1197 (https://doi.org/10.1257/aer.20191823).

8 Ibidem.

9 https://2022.risk-outlook.com/interactive-report/p/1

has increasingly driven government policies and personal decisions. The significant rise in social unrest is leading to destabilisation of national and local political, economic, and social situations, especially in the poorest countries.

The A2 Global Risk chart illustrates how the postCOVID situation has already contributed to the rise in political instability in Africa. 10

The Economist Intelligence Unit in its recently published Risk Outlook 2023 report has identified ten possible risk scenarios that could significantly reshape the world economy, with Russia-Ukraine war and China being the dominant risk drivers. 11

The scenarios include a global conflict resulting from the escalation of the Russia-Ukraine war, inter-state cyberwar, famine, energy crisis in Europe, social unrest due to high inflation, global recession due to aggressive tight monetary policies, China-Taiwan conflict, disruption in China-EU/USA relations, including full economic decoupling, zero-covid policy in China that leads to recession, and a new deadly COVID-19 variant or another pandemic.

10 https://www.a2globalrisk.com

11 https://www.eiu.com/n/campaigns/risk-outlook-2023/

Instability throughout the Sahelian strip

Political Military Economic Environmental

Deteriorating ties between China and the EU/US

Cold winter worsens Europe’s energy crisis

War in Ukraine turns into global conflict Cyberwar erupts Conflict erupts between China and Taiwan

Extreme weather and war in Ukraine prompt famine

High inflation fuels social unrest

Monetary tightening leads to global recession

China’s zero-covid policy

New, highly aggressive variant of covid-19 emerges

Source: EIU.

While some global risks, such as the energy crisis and food shortages, seem now somewhat less likely due to Europe’s well-coordinated energy policies as well as the Black Sea Grain Initiative signed jointly by Russia, Ukraine and Turkey on 22 July 2022, 12 the Russia-Ukraine war remains a predominant risk that could shape the global economy and international relations beyond 2023. Despite the EIU’s low probability of a global conflict, there is a high risk of the escalation of the Russia-Ukraine war, according to the author’s analysis. In Chapter 6 of this paper, the author delves more deeply into this question.

Overall, the Risk Outlook 2023 underscores the importance of monitoring and analysing potential geopolitical risks that could have a significant impact on the global economy. It highlights the need for policymakers and businesses to prepare for a range of possible scenarios and to remain vigilant in the face of uncertainty.

The most recent Annual Threat Assessment of the U.S. Intelligence Community has identified Russia, China, Iran, and North Korea as the main threats to the national interests of the USA and its allies.

The unprovoked, large-scale invasion of Ukraine by Russia has underscored that nationstate competition and conflict are not relics of the past, but rather defining features of the present era. Apart from Ukraine, Russia has also used its armed forces to spread its influence over neighbouring countries (Moldova and Georgia), and globally, through active hybrid and information warfare. Its revisionist and aggressive posture challenges both the USA and its global allies as well as established international norms.

Russia’s military intervention in Ukraine serves as a stark reminder of its revanchist ambitions, as it employs various means to re-establish a perceived sphere of influence, regardless of its neighbours’ desires. This demonstrates Russia’s willingness to defy the collective West on both regional and global levels.

China , on the other hand, possesses the capacity to directly attempt to reshape the rulesbased global order across multiple domains and regions. This increasingly assertive stance raises concerns about potential threats to neighbouring countries and shifts in global norms. China has continued to challenge the West economically, militarily, and technologically while pushing to change the global order. 13

In addition to these two strategic adversaries, local and regional powers are also asserting their influence, often at the expense of their neighbours and the global order itself. Iran continues to pose a regional threat with its far-reaching malign activities, while North Korea expands its weapons of mass destruction capabilities, disrupting both regional stability and creating militarised threats on the international stage.

Apart from the physical threats posed by aggressive national states, other global threats include biological weapons, disruptive use of new technologies, migration, and climate change and environmental degradation. Biological weapons are a growing concern due to rapid advances in dual-use technology, while migration could trigger a new wave of refugees and social tensions.

12 For more detail see: https://en.wikipedia.org/wiki/Black_Sea_Grain_Initiative; https://www.un.org/en/black-sea-grain-initiative

13 https://www.odni.gov/files/ODNI/documents/assessments/ATA-2023-Unclassified-Report.pdf

The war’s collateral risks. One possible collateral risk of the Russian-Ukraine war is the inflow of far-right and right-wing extremists joining the conflict on both sides. While this should be watched, the analysis of extremist scenes in several countries reveals that the war has not yet led to a significant flow of extremists to the war zone. However, the combination of a violence-oriented ideology, potential combat training and experience, access to arms, ammunition, and explosive material in the conflict zone, as well as improved transnational networking opportunities for these extremists, requires mitigation measures.

The other risk is potential proliferation of combatants and mercenaries. The eventual end of the war in Ukraine will release a flood of mercenaries into the market, causing significant repercussions in Africa. With limited job prospects in Ukraine or Russia, these combatexperienced soldiers may join private military companies such as the Wagner Group, leading to an increased rate of mercenary employment in Africa, not seen since the Cold War. This surge of mercenaries threatens to destabilise the Continent, weaken governments, and escalate insurgencies, particularly in vulnerable regions like the Sahel.

African countries already have a history of employing mercenaries, who often prioritize monetary gain over long-term peace and security. The Wagner Group’s involvement in Mali, the Central African Republic, Sudan, and Libya has led to the escalation of local conflicts and civilian casualties. As a result, Africa’s stability hangs in the balance, with an influx of mercenaries from Ukraine potentially pushing more countries towards authoritarianism, civil war, and exploitation of resources.

Addressing Africa’s mercenary challenge requires innovative solutions, such as countering disinformation to build civilian trust and utilising sanctions strategically. African and Western governments should act now to mitigate the threat posed by mercenaries before it worsens. The duration and severity of the war in Ukraine will determine the magnitude of the mercenary influx in Africa, with different scenarios presenting various risks and implications for the continent.

Regardless of the outcome in Ukraine, Russia is likely to escalate its use of mercenaries in Africa, aiming to destabilise Western strategic relationships while expanding its influence. The Wagner Group’s operations in Africa benefit its leadership through resource extraction contracts and political prestige within Russia. The expansion of mercenary deployments in Africa may lead to more aggressive internal security operations, fostering instability, and increasing the influence of private military companies in national politics.14

The World Economic Forum’s “ The Global Risks Report 2023 ” highlights the compounding crises triggered by the pandemic and the war in Ukraine, causing a shift in monetary policy, ending an era of easy access to cheap debt and widening inequality within and between countries. The report identifies short-term risks, with the cost-of-living crisis triggered by the impact of the Russia-Ukraine war on global food and energy supplies at the top of the list. The high risk of geo-economic confrontation is connected to sanctions against Russia and continuing trade and technology confrontation between Russia’s allies, China and, to a lesser degree, Iran, and the USA and its NATO partners. The remaining three risks are also associated with the Russia-Ukraine war.

14 https://warontherocks.com/2023/02/mercenary-shocks-what-the-war-in-ukraine-will-eventually-mean-for-africa/

WEF predicts that in the longer term (10 years), climate change risks, and even the “collapse of nature,” will dominate, but geopolitical risks, cybersecurity threats, and geo-economic confrontation will continue to heavily impact uncertainties. Economic warfare and aggressive statecraft may become a permanent feature of international relations and the global economy.

WEF warns that “intensive geoeconomics weaponisation will highlight security vulnerabilities posed by trade, financial and technological interdependence between globally integrated economies, risking an escalating cycle of distrust and decoupling.”15

Global risks ranked by severity over the short and long term

“Please estimate the likely impact (severity) of the following risks over a 2-year and 10-year period”

Failure of climate change adaptation

Widespread cybercrime and cyber insecurity

Erosion of social cohesion and societal polarization

Widespread cybercrime and cyber insecurity

Natural resource crises Geoeconomic confrontation

Source: World Economic Forum Global Risks Perception Survey 2022-2023.

15 https://www.weforum.org/reports/global-risks-report-2023

The report also highlights an “uptick” in military expenditures and proliferation of new technologies that could exacerbate global inequalities and contribute to geopolitical fragmentation. The longer-term global threat picture could be characterised by "multi-domain conflicts" and "asymmetric warfare", in which high-tech weapon systems could be used on a more destructive scale than ever seen before. The technology sector, driven by investment into dual-use R&D, health, and cybersecurity technologies, will likely be a central focus of statecraft and government interventionism in the years to come.

WEF predicts that the next economic era will bring more risks of stagnation, divergence, and distress, with governments facing a dangerous balancing act between protecting households from the persistent cost-of-living crisis and servicing public debts. The report concludes that “the resulting new economic era may be one of growing divergences between rich and poor countries and the first rollback in human development in decades.”16

The Munich Security Index (MSI) is a highly credible global security policy and analytical platform that assesses public perceptions of various risks and their dynamics in 12 major world economies representing both Global North (G7) and Global South (Brazil, India, China, and South Africa or BICS) as well as Ukraine. The 2023 Index indicates that the Russian war against Ukraine has significantly increased risk perceptions and made the global world a much riskier place. Compared to the 2022 survey, 20 risk indicators have risen substantially in value. In all surveyed countries, except India, the Russia-related risk perception has gone up considerably. The chart with the change in risks perceptions since November 2021 is presented in Annex 3 Munich Security Index. 17

The MSI-2023 survey focuses on 32 major risks, which could be categorised thematically into seven risk groups.

Group 1 - country or region-specific : 1) Russia; 2) China; 3) Iran; 4) North Korea; 5) United States; 6) European Union. 18

Group 2 - war and security-related : 7) use of nuclear weapons by an aggressor; 8) use of biological weapons; 9) use of chemical weapons; 10) mass migration as a result of war or climate change; 11) cyberattacks; 12) radical Islamic terrorism; 13) civil war or political violence; 14) right-wing terrorism; 15) international organised crime; 16) disinformation campaign from enemies.

Group 3 - trade, supply chain, technology, and economy-related : 17) energy supply disruption; 18) food shortages; 19) trade wars; 20) autonomous robots/artificial intelligence; 21) economic or financial crisis; 22) rising inequality.

Group 4 - geopolitics : 23) divisions among Western powers and institutions.

Group 5 - political, social, and governance crisis : 24) breakdown of democracy; 25) political polarisation; 26) rapid change in a country’s culture; 27) racism and other discrimination.

16 https://www.weforum.org/reports/global-risks-report-2023

17 https://securityconference.org/en/publications/munich-security-report-2023/executive-summary/

18 Some of the Global South countries included in the index view the US and European Union as sources of global risks.

Group 6 - global health-related : 28) the coronavirus pandemic; 29) a future pandemic.

Group 7 - climate change-related : 30) climate change; 31) destruction of natural habitats; 32) extreme weather and forest fires.

All G7 countries, with the notable exception of Italy, consider Russia as a top risk in addition to energy supply, economic crisis, China (Japan), and the use of nuclear weapons by Russia (Japan). Germany also considers war-related mass migration as a top risk.

In summary, the MSI-2023 survey highlights the significant impact of the Russian war against Ukraine on global risk perceptions. It confirms that the continuing conflict and related geopolitical tensions have made the world a much riskier place. In addition, climate change and global health risks are significantly affecting the global risk outlook.

Uncertainty and business confidence . The Russia-Ukraine war has caused significant uncertainty in geopolitical, economic, and policy factors, creating a challenge for policymakers and business leaders. The war has become a major contributor to the increase in overall economic uncertainty throughout the world, with nearly half of businesses considering it a key source of concern in 2022. As the Centre for Economic Policy Research has pointed out, “factors such as energy use, demand, trade, and ownership are important determinants of business uncertainty regarding the conflict.” 19

This uncertainty has had a significant impact on CEOs’ confidence in making key business decisions, with the Conference Board Measure of CEO Confidence revealing that CEOs are preparing for inevitable recessions in the USA and Europe. At the same time, they continue to experience inflationary pressures, with input costs remaining the same or rising. Only 19% reported an increase in demand over the past three months, down from 38% in Q3. Over the next 12-18 months, the majority of business executives are preparing for a USA recession (85%) and a deep EU recession with global spill-overs (68%). Energy access and security, directly linked to the war, as well as the continued conflict, will be among the biggest risks. 20

As the war in Ukraine continues, elevated uncertainty due to the much-troubled and riskier geopolitical landscape, record-high inflation, tighter financial conditions, and declining consumer confidence will continue to exert downward pressure on the world’s growth prospects in the near future. The longer the war continues, with dramatic escalation or without, geopolitical threats and perceptions of risks will persist contributing not only to growing pessimism among CEOs accompanied by delayed or reduced investment plans in many sectors but also to war fatigue and stress among governments, businesses and households in the USA, Europe and some other parts of the world. ***

19 https://cepr.org/voxeu/columns/impact-war-ukraine-economic-uncertainty

20 https://www.conference-board.org/topics/CEO-Confidence

The fallout from COVID-19 and the Russia-Ukraine war have prompted many economists and analysts to warn of a new era of "mega threats" and a global crash. Economist Nouriel Roubini has coined this era an "Era of Megathreats," pointing to war, inflation, global warming, and other threats as potentially perpetuating crisis. Roubini suggests that the era of modernisation with strong growth and low inflation is now over, and megathreats are likely to reduce potential growth, increase the cost of production, and lead to overall instability, deglobalisation, dismantling of the global IMF-based financial system, an international debt crisis, climate catastrophe, and a backlash against liberal democracy. 21

Geopolitical conflicts and national security concerns are fuelling trade, financial, and technology wars, accelerating the deglobalisation process, and leading to protectionism and the Sino-American decoupling. Roubini warns that this will leave the global economy, supply chains, and markets more Balkanized and fragmented. According to Roubini, “after years of ultra-loose fiscal, monetary, and credit policies and the onset of major negative supply shocks, stagflationary pressures are now putting the squeeze on a massive mountain of public and private-sector debt. The mother of all economic crises looms, and there will be little that policymakers can do about it.” 22

Historian and author Niall Ferguson also warned of an era of political and economic upheaval similar to the 1970s, but worse. The term "permacrisis" was named Collins Dictionary's 2022 word of the year, and a growing number of researchers have declared the coming of "polycrisis," a tangled knot of interconnected crises spanning the world, entwining and worsening one another. However, we believe that global democracies' ability to face and confront these challenges, work out solutions and common approaches, and strengthen the level of resilience of liberal market economies may provide sufficient comfort vis-à-vis supporters of megathreats/permacrisis/polycrisis narratives.

To become useful research concepts, proponents of these narratives must come up with concrete, action-oriented policy recommendations. Despite a very serious predicament, the war and its effects represent a collective “positive” challenge for global democracies to strengthen economic resilience and efforts to reform the international order.

***

21 https://www.project-syndicate.org/onpoint/age-of-megathreats-war-climate-debt-inflation-technology-by-nouriel-roubini-2022-11

22 Ibidem.

NOURIEL ROUBINI’S 10 ‘MEGATHREATS’

What does much higher uncertainty resulting from war-related risks mean for boardrooms, corporate executives and other stakeholders?

Following the invasion of Ukraine, over 1,000 international companies have suspended operations or completely left Russia, the 11 th biggest economy. 23 This has fully revealed, as underscored by McKinsey, “an imperative for global firms to bolster their ability to anticipate global risks and build resilience.” 24

A primary concern for global CEOs is how to effectively navigate potential future geopolitical developments resulting from potential threats. As Japan’s Prime Minister Fumio Kishida remarked at the 2022 Shangri-La Dialogue global security forum, “Ukraine today may be East Asia tomorrow.” 25 Amid managing the fallout in Europe and the evolving strategic competition in Asia, multinational corporations must also address a range of political risks and conflicts across other regions, such as Africa and South Asia. As boards and CEOs work to enhance their capabilities in managing these risks and fostering geopolitical resilience, the need for forward-looking strategies and anticipating future scenarios has become critical to success.

Scenario planning has re-emerged as a vital tool in this context. Existing research on the subject emphasises the importance of developing frameworks that should help leaders “reperceive” the future and unlock strategic foresight. One of the tools proposed by McKinsey could be a framework for geopolitical scenario planning that categorises geopolitical developments into three categories: “black swans”, “gray rhinos” , and “silver linings” 26

Black swan events are typically characterised as unforeseeable occurrences with significant consequences. Although Russia’s military build-up in 2021 was evident, its subsequent full-scale invasion of Ukraine in 2022 serves as a prime example of a black swan event. Possible black swan events in the context of the Russia-Ukraine war could encompass various situations, such as the collapse of the Russian economy under sanctions, the forceful removal of Putin from office, a major spill-over of military actions into neighbouring countries, escalation of the war with threats of WMD use, etc.

Gray rhinos represent probable, high-impact events that are discernible in the distance, but their full scope may not be entirely understood. While their eventual impact can be anticipated, the exact timing and magnitude of impact remain uncertain. It is essential for organisations to establish a framework to mitigate the effects of gray rhinos when they emerge. Some notable gray rhinos on the global stage include the risk of regional conflicts in Asia escalating amidst wider strategic competition. Other imminent threats could involve a major escalation in the Middle East, where deteriorating relationships and mounting international and domestic pressures against specific regimes could trigger an increase in direct or proxy conflicts.

Silver linings are opportunities created by the risks. For instance, one opportunity arising from Russia’s invasion of Ukraine is the significant disruption of Europe’s energy market, which could facilitate a faster transition to renewable energy and position Europe as a

23 https://som.yale.edu/story/2022/over-1000-companies-have-curtailed-operations-russia-some-remain

24 https://www.mckinsey.com/capabilities/risk-and-resilience/our-insights/black-swans-gray-rhinos-and-silver-linings-anticipating-geopolitical-risks-and-openings

25 John Chipman, “Strategic survey 2022: Strategic prospects,” International Institute for Strategic Studies, December 5, 2022.

26 For more detail, see: https://www.mckinsey.com/capabilities/risk-and-resilience/our-insights/black-swans-gray-rhinos-and-silver-linings-anticipating-geopolitical-risks-and-openings

global leader in this field. Another silver lining, in times when geopolitical tensions cause re-orientation of supply chains, is the emergence of alternative investment destinations like India and Vietnam, which present new opportunities for investment in the context of “ friendshoring .” Business stakeholders should be able to carefully evaluate such opportunities that could create competitive advantages or a safer business environment. The silver linings may be easily obscured by great challenges, yet benefitting from a much riskier world is not only possible but advisable for corporate leaders who demonstrate strategic courage in the face of high risks, increased uncertainty and volatilities.

While it is inherently difficult to predict threats and risks as well as discern the opportunities, it is crucial to consider a wide range of potential scenarios for effective planning and preparedness. Insider knowledge, whether internal or outsourced, of developments in Russia, Ukraine as well as up-to-date and in-depth understanding of factors that shape the potential outcome(s) of the war are a bare necessity for any serious boardroom scenario planning in the new geopolitical arena.

KEY INSIGHTS:

• The Russia-Ukraine war is widely regarded as a significant threat to global security and economy, with potential escalation posing an even greater risk.

• The war has brought together four nation-state global actors (Russia, China, Iran, and North Korea) whose shared interests have contributed to a range of associated risks.

• The scope of war- and security-related risks has expanded to include potential use of weapons of mass destruction, emerging advanced technologies, cyber and information warfare, and risks associated with mass migration.

• The combination of multiple crises, including the war, COVID-19 fallout, debt crisis, negative demographic trends, stagflation, and disruptive technologies, has created a state of perpetual crisis or "polycrisis" that has put an end to the era of global growth and prosperity, according to some analysts.

• While these narratives highlight the seriousness of the situation, most lack concrete recommendations for the way forward. However, the war and its effects may provide a collective challenge for global democracies to strengthen economic resilience and reform the international order.

• Scenario planning has re-emerged as a crucial tool in navigating today's complex geopolitical landscape. Existing research highlights the importance of developing frameworks that enable leaders to "reperceive" the future and unlock strategic foresight. One such framework proposed by McKinsey categorizes geopolitical developments into three categories: b lack swans, gray rhinos , and silver linings

• Black swan events, such as the full-scale invasion of Ukraine by Russia, are unforeseeable occurrences with significant consequences. Gray rhinos , on the other hand, represent probable high-impact events whose timing and magnitude are uncertain. Organisations must establish frameworks to mitigate the effects of these risks. Silver linings are opportunities created amidst challenges, which can lead to competitive advantages or safer business environments for those who exhibit strategic courage in the face of high risks and uncertainty.

• In this new geopolitical arena, it is essential for organisations to consider a wide range of potential scenarios and rely on insider or outside war risk expertise for effective planning and preparedness.

CHAPTER 3. DEFIANT GLOBALISATION

After the COVID-19 pandemic, many analysts have suggested that globalisation is in decline and even reversing. The Russia-Ukraine war and sanctions on Russia have added fuel to the debate, with some predicting dramatic fragmentation of the global trade and underlying financial system, including a possible impact on the US Dollar’s position as the world’s major reserve currency.

Larry Fink, CEO and Chairman of BlackRock, Shamik Dhar, the Chief Economist at BNY Mellon Investment Management and Erik Nielsen, the Economic Adviser to UniCredit broadly share the view that the war has ended globalisation as we know it, and that trade will be shaped by the return of great power politics and the prevalence of friendly trading blocs, which in turn will significantly raise prices and production costs.

However, it is too early to conclude that deglobalisation is underway. According to research by Deloitte, Oxford Economics and McKinsey, even though globalisation has started to level off since its peak in 2008, it would be premature to anticipate broader deglobalisation trends emerging from the Russia-Ukraine war.

A Report in Deloitte Insight “Globalisation is Here to Stay” concludes that deglobalisation has not yet taken firm root and that previous trade shocks have not resulted in deglobalisation. Nearshoring has also been rare during previous shocks, and future supply chain changes will likely have limited macroeconomic effects. Government policies matter, but mostly at the margins.

While the Russia-Ukraine war will result in the decoupling of the Russian economy from the West, it is still too early to anticipate deeper deglobalisation trends emerging from the conflict, such as the likelihood of the USD losing its reserve currency status or the emergence of a powerful “Eurasian world trade axis.” 27

Oxford Economics According to its recent research, there is some evidence of a “levelling off” of the share of world trade in GDP and some measures of financial globalisation, but these developments do not indicate genuine deglobalisation. Additionally, in view of the size of the Russian economy and scope of its trade and financial relations, it seems unlikely that Russia’s decoupling would have a powerful impact on broader globalisation trends.

Furthermore, the establishment of a potential “Eurasian” trade block including Russia, China, India, and Iran cannot potentially disrupt global trade flows or their trajectory. 28 Despite Russia and China’s efforts to switch away from the USD as a reserve currency, the USD’s global position is unlikely to be undermined due to the depth of the US financial markets and the USD’s dominance in global trade invoicing. 29 Even the possible redenomination of some energy trade into Rubles or other currencies poses relatively insignificant risks to the Dollar, as oil trade represents only 10% of global dollar-denominated trade. In summary, while there are some indications of a levelling

27 https://www2.deloitte.com/us/en/insights/economy/changes-in-globalization.html

28 Mutual trade between China, Russia and India amounted to just US$ 200 billion, less than the total imports of countries like Thailand or Turkey, and even if it doubles or triples, it would still be a tiny share of the world trade (https://www.oxfordeconomics.com/resource/deglobalisation-and-russias-war-on-ukraine/)

29 According to Oxford Economics, the redenomination of a fraction of oil trade (i.e. Saudi crude exports to China), should it happen, would not challenge global demand for the USD.

off in globalisation, it cannot be characterised as genuine deglobalisation, while the true impact of the Russia-Ukraine conflict on broader globalisation trends is still uncertain.

McKinsey The latest McKinsey research also offers a rather optimistic view of the impact of war-related geopolitical risks on globalisation prospects. According to their conclusions, technology linked to the 4th Industrial Revolution is currently driving globalisation more than anything else. McKinsey believes that global trade stabilised by the end of 2022, that flows related to knowledge and know-how are now driving global integration. Additionally, every region in the world imports more than 25% of at least one important type of resource or critically needed manufactured goods, with many importing much more.

This means that global value chains may be shaped by new forces in the coming decade. McKinsey also notes that products with origins concentrated in just a few countries exist in all sectors but most notably in electronics and mining. They also believe that multinational corporations play a central role in supporting and driving global flows and in enhancing resilience in the interconnected world. Policymakers are also taking active steps to reconfigure value chains of strategic importance, while resilience, national economic priorities, stakeholder pressures, and factor costs are becoming key drivers of companies’ decisions about their global value chains. And their overall conclusion is that “the globe remains deeply interconnected, and flows have proved remarkably resilient during the most recent turbulence.” 30

Global trade performance According to World Merchandise Trade figures for 2022 ( see Annex 4 ), global trade in physical volumes demonstrated resilience towards war-related shocks, with positive Q-on-Q changes in Q1-Q3 (0.5/0.6/1.3%). 31 However, there was some decline in October and November 2022, attributed in part to sanctions-related bans on energy imports from Russia and energy conservation programs by developed economies, which put downward pressure on global import volume (-3.2%). The same trend was observed in emerging economies. Global export numbers also showed a similar Q-on-Q upward trend with some decline in October and November, attributed to high inflation and slowing down of the world economy. These figures do not provide any serious reason to question the role of global trade in driving globalisation.

Russia’s decoupling While the direct impact of the Russia-Ukraine war on globalisation is still unclear, Russia’s trade decoupling and financial reorientation is likely to have a long-term impact on globalisation. This relates to a major re-direction of Russia’s foreign trade (see chart below). While Russia’s trade with China has been expanding, its share of energy shipments to China remains modest (15%-30%) and there are technical and geographical barriers to its quick expansion (as is the case with increasing Russia’s trade with other potential partners). So, Russia’s reorientation on the export side will take some time, and this process will add to pressures on developed economies to restrict imports over the medium term.

30 McKinsey Global Institute, “Global flows: The ties that bind in an interconnected world”, November 2022. 31 https://www.cpb.nl/en/world-trade-monitor-november-2022

As the war might last longer than expected, while economic sanctions against Russia are likely to persist even after hostilities are over, Russia's isolation from the global economy will continue. However, Russia is a relatively small economy, accounting for only 2% of the world trade, and even if it becomes completely "closed", the direct impact on global trade would be negligible.

The Eurasian Trade Bloc The Eurasian trade bloc and its potential impact on global trade has been the subject of much discussion in the wake of the Russia-Ukraine war. However, the reality is that the mutual trade among its proposed members is relatively modest. The total mutual trade between Russia, China, and India in 2020 was less than the total imports of Australia, Thailand, or Turkey ( see chart below ). Even if mutual trade with other CIS economies were added, the total would still be less than 2% of total world trade. The “Eurasian trade bloc” is simply not a credible “competitor” to globalised trade, and this is unlikely to change even if the bloc doubles or triples in size.

Russia: Direction of hydrocarbon exports

Russia-China-India mutual trade Australia imports Thailand Imports Turkey imports

Furthermore, China, which is the bloc's largest prospective member, is unlikely to risk damaging its trade relationships with the West by relying only on such a structure. Over 70% of China's foreign trade is with the USA and American allies in Europe and Asia, compared to only 4% with Russia and India. While China has a strong interest in Russian exports of raw materials, it relies more on the developed economies as the main destination for exports of manufactured goods and as a source of key technologies.

Beneficiaries of decoupling While it’s true that Russian trade with China, India, and some other economies might grow in the years ahead, the main beneficiaries of the RussiaUkraine conflict have been China, India, Turkey, Iran, and North Korea. They have profited from purchases of Russian hydrocarbons at huge discounts and exploited trade opportunities that Western sanctions open up for them.

China As Russia continues to reorient its economy towards Asia, China is coming out on top of that relationship, giving Beijing a significant power boost. In 2022, China’s trade with Russia grew to a record $190 billion, comparable to its trade with Germany. But China’s trade with the USA also grew above a record $690 billion. 32

India has taken advantage of the situation by purchasing cheap Russian fuel and supplying goods that Moscow can no longer obtain directly from “unfriendly” Western countries.

Turkey has played a particularly prominent role. The history between Turkey and Russia spans centuries, dating back to when Russia was the Czardom and Turkey the Ottoman Empire and frequently engaged in wars. Their relations have evolved through the Cold War era and into the present day. In 2016, Turkey experienced significant losses in trade, tourism, and other sectors due to the downing of a Russian fighter plane, resulting in major economic trauma.

Currently, Turkey maintains extensive relations with both Russia and Ukraine. In 2021, Russia and Ukraine ranked first and third, respectively, among countries sending the most visitors to Turkey, with 4.7 million and 2 million tourists. Presently, Turkey faces the risk of similar losses for reasons connected mainly with the Russia-Ukraine war. But Ankara has enjoyed a privileged position with Moscow after it purchased the Russian S-400 air defence system and had its first nuclear power plant built by Rosatom.

Turkey imports about 35% of its natural gas from Russia and has a trade volume of $32.5 billion with Russia and $7.5 billion with Ukraine. Turkey is heavily involved in construction projects in both countries, and relies on them as major sources of grains, importing 6.7 million tons of wheat from Russia in 2021. This wheat is used for flour exports and local bread production, making Turkey the world’s top flour exporter. A shortage of wheat could lead to export losses and increased bread prices.

Ankara has shown significant diplomatic activism, positioning itself as a mediator between Russia and Ukraine. Turkey has adopted a position characterised by the search for a balance between Western positions (diplomatic support for Ukraine and territorial integrity, including Crimea, blockade of the Black Sea Straits, condemnation of the referenda in the

four Ukrainian regions) and those of Moscow (maintenance of dialogue channels, nonadherence to sanctions against Russia, continuation of energy flow purchases), carving out a prominent space as a mediator and hosting negotiating rounds between the parties in the spring of 2022.

Ankara’s role has been particularly important in three areas related to the war:

1. Mediation and a party to the so-called Black Sea Grain Initiative (BSGI), signed by Russia, Ukraine and Turkey under UN auspices, which allows the safe transit of Ukrainian grain and cereals in the Black Sea and its export to global markets. The agreement, signed in July 2022, established shared procedures for safely transporting grain to partially reduce the food crisis that has affected the North African and Middle Eastern regions. The BSGI was then renewed in November last year for another four months after Moscow’s withdrawal. Turkey’s action was essential in bringing Russia back into the agreement and in facilitating the acceptance of Russian requests related to the export of its fertilisers and food products.

2. Dialogue on prisoner exchange, for which Turkey has also served as a direct guarantor by hosting released Azov Battalion soldiers.

3. Joint discussions at t he International Atomic Energy Agency (IAEA) in Vienna to convince the parties to create a security zone around the Zaporizhya nuclear power plant.

Iran and North Korea have become important partners for Russia in the supply of weapons and ammunition. Russia is expected to expand its trade and economic relations with these rogue states, providing further political, technological, and potentially nuclear support (see Chapter 6 for more detail).

To avoid using USD, increased trade between Russia and its partners may be conducted through clearing arrangements that exist outside normal channels. However, these arrangements are inherently inefficient, often resulting in the exchange of substandard goods or the accumulation of non-hard currency balances. As a result, there is a limit to how much Russian trade partners may be willing to extend them. The trade spike caused by sanctions between the aforementioned countries is unlikely to be significant or consistent enough to disrupt world trade and globalisation.

Russia’s integration into the global economy is likely to continue to decline as a result of the conflict, and this is likely to be a long-term trend that will have an impact on globalisation. Despite this, complete economic decoupling from Russia seems a rather ambitious endeavour. Russia is a top world exporter of grain and fertilisers, the secondlargest producer of platinum, cobalt, and vanadium, the third-largest producer of nickel and sulphur, the fourth producer of silver and phosphate, the fifth-largest producer of

iron ore, and the sixth-biggest producer of uranium. Replacing these important materials, some of which are important inputs in high technology and defence sectors, still presents one of the biggest geopolitical and geoeconomic challenges. 33

De-dollarisation For over a decade, China and Russia have sought to reduce their dependence on the USD, or “de-dollarise” their economies, to shield them from the impact of the USA sanctions and assert their geopolitical power. Despite their efforts, both countries still heavily rely on the USD , with China holding significant USD reserves and not allowing its currency to be traded freely in foreign exchange markets. Similarly, Russia’s Ruble has not been so far widely used abroad. Furthermore, global energy markets, Russia’s primary export, are traditionally denominated in USD.

China has attempted to de-dollarize trade and investment with limited success, pressing trading partners to denominate some trade in RMB and establishing RMB trading centres in Hong Kong, Singapore, and Europe.

In 2016, the Chinese government requested the IMF to include the RMB in its benchmark basket of key international currencies. Despite this effort, the USD remains critical to China’s global economic position. China still holds 50-60% of its foreign exchange reserves in USD-denominated assets, and approximately 20% of its trade in 2020 was conducted in RMB. Moreover, the United States remains a significant export market for China, and the country requires payment in USD for most exports as well as the OneBelt-One-Road projects. The People’s Bank of China manages the RMB’s value based on a basket of currencies weighted towards the dollar, and only 2% of central banks worldwide hold RMB in their foreign reserves.

China is also attempting to increase its influence in USD-centric global payments infrastructure. In January 2021, the PBOC announced a joint venture with Belgium-based SWIFT to establish a data centre and localised network in China. This network will connect to the primary SWIFT network and enable the Chinese government to monitor and control cross-border payments. Additionally, two PBOC-affiliated groups that handle crossborder RMB clearing and settlement services for banking and non-banking institutions are among the joint venture’s other shareholders.

To reduce its dependence on the USD further, China is exploring the use of its digital currency and proposing global financial rules. At the BIS Innovation Summit in March 2021, China submitted a proposal for Global Sovereign Digital Currency Governance that outlined its views on standards for cross-border digital transactions, risk supervision, and data. The PBOC intends to become the first significant central bank to issue a sovereign digital currency to drive RMB internationalisation and lessen reliance on the USD.

World: International uses of currencies

Source: Oxford Economics/ECB/Boz et al (2017)/Ito & Chinn (2014)/Bloomberg

However, the USD remains important to China and its global economic position. Additionally, despite the headlines about "de-dollarization," the USD still dominates international financial markets, accounting for a 40-60% share in FX reserves, trade invoicing, international debt, FX market turnover, and cross-border payments.

The USD’s global role reflects the continued global economic and financial leadership of the USA, and the Federal Reserve’s consistent willingness to bear the costs of backing up the global financial system during crises. This dominance in cross-border transactions provides the USA with a unique lever of influence through policy measures such as financial sanctions, restricting access to the USA financial system or the use of the USD in international trade. The recent sanctions imposed on Russia after 24 February 2022 restricted access to the US payments and financial system, which is generally needed to process USD transactions.

Russia has accelerated its de-dollarisation efforts since 2014, when the USA imposed sanctions on Russia in response to its annexation of Crimea and invasion of Donbas. The Russian government has reduced its USD holdings and its share of USD-denominated trade. In Q4 2020, about 35% of Russia’s exports to other BRICS countries (Brazil, India, China, and South Africa) were invoiced in USD, down from about 95% in 2013 (see figure below).

FX reserves Global import invoicing International debt FX turnover Global payments

Currency composition of payments

About half of Russia’s total exports, however, are still invoiced in USD. Moscow has also developed its payment processing capabilities to reduce reliance on existing USD-centred payments infrastructure and created a national electronic payments system Mir . Despite these efforts, Russian authorities acknowledge that the USD is still a "universal currency."

The USA financial sanctions on Russia, which included freezing part of Russia’s FX reserves, prompted the Kremlin to attempt to introduce Ruble-denominated billing for natural gas contracts with “unfriendly” countries. Although this policy move has not become a major trend due to technical complexities, it supports the de-dollarisation narrative that increasing the denomination of sales of oil and commodities in Ruble, RMB, or other local currencies could undermine the USD international use.

Figure 1. Russia’s Exports to BRICS Countries

Source: Bank of Russia.

World: Oil shares in dollar denominated trade

% of estimated value of world trade denominated in dollars, 2020

However, this narrative overlooks some essential facts. First, the US capital markets are much larger, more liquid, and diversified compared to those in China, which underpins the USD's international dominance. Second, the USD is the dominant international trade billing currency, accounting for 55-60% of world imports and over 80% of imports in Asia, China, and Latin America. The USD also dominates international financial flows, where it accounts for up to 80% of LC-based trade finance.

The de-dollarization narrative suggests that shifting oil sales to other currencies, such as “Petro-RMB,” could lead to a collapse of the mutually reinforcing dollar trade and capital market’s structure. However, the numbers do not support this claim. In 2020, dollardenominated exports worldwide totalled about $7 trillion, but only 10% of this was related to oil sales. Total Russian oil exports accounted for at most 1% of dollar-denominated trade, with sales to China being just 0.4%. While Saudi Arabia has considered selling oil to China for RMB, these exports only amounted to 0.4% of world dollar-denominated trade in 2020. Similarly, oil sales by Venezuela and Iran, past members of the potential dedollarization group, are very small after years of sanctions. Thus, changes in the currency denomination of these trade flows are unlikely to significantly weaken global demand for the USD. However, if China, Russia, and other countries mentioned can significantly reduce their use of the USD in the future, such as by expanding non-dollar trade or developing a joint digital currency, it could have implications for the global financial and geopolitical system. However, the numbers do not support the narrative that changing the denomination of trade flows will significantly weaken global demand for the USD.

Supply chains 34 The EBRD conducted an analysis on the impact of wars on international trade, focusing on the period between 1990 and 2020. The study reveals that, on average, the share of exports in GDP experiences a significant decline during a war, dropping by

Source: Oxford Economics/Haver Analytics

34 See Chapter 4 on geopolitical dimensions of global supply chains and economic security.

4.8 percentage points and remaining below pre-war levels for at least five years after the conflict has ended. Trade shifts towards allied nations, with the percentage of exports directed to allies increasing by 1.8 percentage points during the war and continuing to rise afterward. Overall, these findings indicate that wars generally lead to a substantial temporary reduction in trade and cause a reorientation of supply chains towards friendly or allied partners. 35

First the COVID-19 pandemic and then the Russia-Ukraine war have had a significant impact on global supply chains, which were already reconfiguring after the 2008 global crisis. The war has directly impacted many critical supply chains, raising questions about the effectiveness of long and complex sourcing arrangements across the globe. The Bank of England’s analysis, based on its Global Supply Chain Index (SCI), suggests that “higher energy prices and disruption caused by the war in Ukraine could be a constraint on supply” (chart B below). 36

For many years, supply chain managers prioritised cost optimisation over security and resilience, but the pandemic and the war have disrupted global supply chains to a greater extent than the GDP weights of both Russia and Ukraine would suggest. The energy and raw material dependency on Russia has created a deeper consideration of sourcing and supplying in the future. While Europe is at the forefront of changing its procurement systems, other nations are also re-evaluating the concentration risks in their production systems and keen on reducing them. They plan to avoid trade and business exposure to countries that do not share similar values and have different government systems.

The war will have important consequences for a globalised economy where alliances, strategic partnerships, and supply chains will increasingly be redefined more by ideologies and different philosophies of governance than by pure business and cost of production rationale. Since February 2022, global supply chains have been considered not only

35 https://2022.tr-ebrd.com/

36 https://www.bankofengland.co.uk/bank-overground/2022/what-is-driving-global-supply-chain-bottlenecks

Chart B: There have been a few key drivers of global supply constraints

Source: Harpex Petersen, Refinitiv Eikon from LSEG, S&P Global, JPMorgan, US Bureau of Economic Analysis and Bank calculations.

on cost but also on their vulnerability to political risks and disruption threats. The world has learned since the oil shock of 1973 that supply chains carry political leverage, not only for energy but also for food, pharmaceuticals, computer chips and electronics, and components for batteries and smartphones (copper, nickel, cobalt, lithium, and other rare earth metals). The threat of politically denied access and the interruption of trade links are new risks that can only be mitigated through diversification and alternative "shoring" (friend-, near-, and on-). These approaches, however, do raise costs.

Despite the war pressure, global supply chains have demonstrated some stress resilience and flexibility. The Global Supply Chain Stress index (higher numbers indicate greater delays in delivery), though declined since a peak in April 2022, is still at a crisis level. The pandemic crisis (2020-2021) had the biggest pressure on supply chains, exceeding 4.30 in December 2021. The latest report by global construction consultancy firm Linesight (February 2023) confirms that global supply chains are normalising, and high inflation seen last year is moderating. 38

From 2023 onwards, "friend-shoring", near-shoring, and on-shoring of production systems and value chains will continue to gain traction, minimizing or eliminating dependence on nations that do not share democratic systems and liberal values, while prioritising trade and investment ties between friendly countries.

Still, according to McKinsey’s recent research, despite some re-adjustment and re-orientation, global supply chains still remain affected by two major security-related risks: volatile costs and uncertainties around labour and material supply. Using the oil and gas industry for analysis, the firm concluded that the sector has been struggling with the business repercussions of persistent global inflation, mounting geopolitical risks in Europe and Asia, as well as growing economic challenges, with the most critical being supply-chain uncertainty and geopolitical risks.

As a consequence, operating expenses and costs have been increasing, while production efficiency declining. For example, costs in the oil and gas industry rose by 7 to 15% in 2022. In 2023, an additional increase of 6 to 10% is anticipated, primarily due to

labour uncertainties and raw-material inflation. Marine and aviation logistics have been particularly impacted by escalating prices: fuel now costs 20% more on an annual basis, with prices expected to continue their upward trend. 39

As a result, which may be generic for other material-intensive sectors, capital expenditure budgets as well as project implementation schedules are being missed, while key suppliers are struggling to provide labour and materials in a timely manner. This elevates supply chain security to the top of the global corporate agenda.

Climate agenda The war in Ukraine has had devastating effects on the environment and human lives. The carbon footprint of the armies and the impact of pollution from war materials and metal scrap have contributed to this disaster.

However, amidst the tragedy, the war has also presented an opportunity for the global environment, the climate change agenda, and the ESG movement. As supply chains shift away from long distances, there will be a reduction in transport emissions in the future. Shorter supply chains would require less energy and create lower emissions. Establishing more productive assets in ESG-sensitive countries, such as the EU and the USA, could reduce greenhouse emissions and avoid other adverse environmental impacts if more supply chains end in these countries rather than in those with lower environmental standards, such as Russia and China.

Currently, Europe is discussing eliminating its reliance on Russian fossil fuels by burning more indigenous coal. However, this solution is considered temporary. Developed economies are looking to reduce their dependence on hydrocarbons and fossils for transportation and heating through renewable energy sources in the long term. This strategic policy direction has recently gained momentum as a sustainable solution to the war-related energy crisis.

Renewable power sources, especially those that work well in colder climates, are expected to be the winners of the energy transformation. Hydropower, wind farms, bioenergy, solar power, and geothermal energy will increasingly replace oil and gas. This shift towards renewable energy is now more incentivised than ever before.

IT and cybersecurity the COVID-19 pandemic has led to a significant shift in the use of IT and communication technologies, with the adoption of work-from-home practices becoming widespread due to lockdown restrictions. This has resulted in entire countries producing mainly services and some goods from home, putting existing IT and communication infrastructures to a collective stress test.

The Russian war in Ukraine is further accelerating the trend towards decentralised production. The oil and gas crisis caused by the invasion has resulted in rapidly rising transportation costs, which might disincentivise travel locally, regionally, and globally. As a result, there will be a greater adoption of video conference technology and more integrated production systems to readily assemble a dispersed workforce. However, this shift will also bring the issue of cybersecurity into a new spotlight.

39 https://www.mckinsey.com/industries/oil-and-gas/our-insights/how-oil-and-gas-companies-can-secure-supply-chain-resilience

The Russia-Ukraine war, which is the first of its kind to involve the use of broadband communications, IT solutions, and IT-based weapon systems, has highlighted, as never before, the potential vulnerability of networks and systems to malicious interference and cyberwarfare. Both sides in the war rely heavily on regular cyberunits and armies of “voluntary” hacktivists, and the war has led to a new wave of cyberattacks by rogue states and freelance hackers on Western military, civilian, and corporate infrastructure. While the associated cybersecurity costs may add to overall inflationary pressures, this factor could serve as a powerful incentive for further IT innovation. The adoption of decentralised production systems will require more investment in broadband technologies, 5G telephone systems, data centres, and home IT technology to ensure network and system security.

***

The Russia-Ukraine war has caused concerns about the potential impact on globalisation. However, the suggestion that the conflict has significantly accelerated deglobalisation by fracturing world trade and financial systems is likely overdone. While there may be reshuffling and re-orientation of supply chains and trade patterns, firms will continue to do business globally. The conflict may give further momentum to broader changes in supply chains already underway due to the pandemic and other disruptions, though the effect is expected to be moderate unless the war significantly escalates.

According to Wharton’s Professor Zeke Hernandez, it will take more than an armed conflict between two countries to destroy the economic fundamentals of international trade. However, the conflict marks the end of the period of the peace dividend and relative stability, characterised by conservative global military expenditures and wide-spread international cooperation. National security and questions of sovereignty are moving up the list of priorities.

In the late 20th and early 21st Century, there was a trend towards closer connections between nations. This was facilitated by global production and consumption networks, resulting in increased economic growth and wealth creation worldwide. During conflicts such as the Russia-Ukraine war, authoritarian regimes often isolate themselves from the global marketplace due to ideological, political, or security reasons. Putin’s Russia serves as an example of this. Nevertheless, as a response to sanctions or isolationist policies, corporations tend to redirect their activities to other regions in pursuit of security and alternative opportunities.

However, tangible threats to globalisation do exist. Harvard Professor Dani Rodrik asserts that the 1990s neoliberal hyper-globalisation narrative, emphasising deep economic integration and free flows of goods, capital and labour, ultimately failed due to its inherent contradictions. While it promised benefits beyond economics, such as reduced international conflict and strengthened democracies, it could not overcome the contradiction of relying on multinationals to support domestic social and environmental agendas.

In the wake of hyper-globalisation’s retreat, two emerging economic-policy frameworks are gaining traction. “ Productivism ” focuses on governments addressing inequality,

public health, and clean-energy transition, reasserting domestic political priorities without hindering the global economy. Meanwhile, “ hyper-realism ” emphasises geopolitical rivalry, particularly between the US and China, viewing economic interdependence as a potential weapon in international relations ( weaponised interdependence ). 40

The world economy’s future path will depend on how these competing frameworks evolve and interact. Governments are likely to adopt a more protectionist approach, embracing onshoring, reshoring and friendshoring as well as industrial policies that promote advanced manufacturing and green policies favouring domestic producers. We think, however, that high and evolving risks connected with the Russia-Ukraine war and related geopolitical realities may ultimately dominate, allowing the hyper-realist narrative (or weaponised interdependence) to prevail.

Allowing national security establishments to control the economic narrative could endanger global stability, resulting in a world where military conflict threats between the USA and China force smaller countries to take sides in a struggle that doesn’t serve their interests. To prevent this outcome, reform of multilateralism, which is dealt with in Chapter 4 of this report, must seize the opportunity to establish a better international order focused on shared prosperity and common cooperative agenda.

The coming phase of globalisation will be accompanied by rising “frictional costs”growing military and cybersecurity expenditures, higher on-shoring and supply-chain expenses, more complicated border and transit arrangements, and so on. However, these difficulties could also be seen as an opportunity to address vulnerabilities, weaknesses and inequalities that have built up in the global economy, as well as to find solutions to burning global issues that require global cooperation.

In conclusion, the KOF Swiss Economic Institute’s World Globalisation Index suggests that globalisation extends beyond trade and trade wars, and it is not necessarily reduced by increased resilience. While the Russia-Ukraine war is a human and social calamity, it may serve as a powerful incentive to shape the contours and policies of a more cooperative and cohesive world.

40 https://www.project-syndicate.org/commentary/failure-of-hyper-globalization-creates-need-for-new-economic-narrative-by-dani-rodrik-2023-03

KEY INSIGHTS:

• Despite speculations that the war in Ukraine could break globalisation, evidence from leading research centres and global banks suggests that globalisation has not reversed. Trade will continue to be globalised. However, it is likely to be characterized by a new and different nature and dynamics.

• The financial reorientation and decoupling of Russia towards China and other Asian economies is expected to have a limited impact on globalisation and the role of the USD as the leading reserve currency.

• Global supply chains have been affected by the war, but they are adapting. The conflict will redraw alliances and global supply chains more based on ideological and governance philosophies than purely on cost of production.

• Despite being a catastrophe for the environment, the war has also presented opportunities for clean energy and high environmental standards to govern supply chains.

• Global cybersecurity has become a critical “survival” domain for globalisation that will require huge investment and policy coordination.

• The war has brought an end to the era of relative global stability and peace dividend. The upcoming phase of globalisation will be accompanied by growing “frictional costs,” including military, cybersecurity, onshoring, and friend shoring. These costs, however, also present new high-tech opportunities.

CHAPTER 4. GEOPOLITICS UNDER STRESS

The continuing Russia-Ukraine war has far-reaching implications beyond military, geostrategic and economic dimensions. Due to the global confrontation that has accompanied the Russia-Ukraine war since its start, geopolitics and related security risks have become a major concern across the world. Former UK foreign secretary David Miliband highlighted that “global risks are crashing into the front room and the boardroom of every company around the world”. 41 There has been a growing concern whether this marked the beginning of a new Cold War or even a non-kinetic WW3.

Cold War Two? Several renowned historians do not see this as a second Cold War. Yale Professor Arne Westad pointed out that the Russian invasion of Ukraine differs from the Soviet Union’s invasions of Czechoslovakia and Hungary because it is an attempt to wipe out the Ukrainian sense of nationhood. 42

Similarly, Fredrik Logevall from Harvard Kennedy School also argues that the current confrontation lacks the characteristics of the first Cold War. 43

The global divide This emerging new period of globalisation is marked by growing confrontation, fierce competition, active use of geo-economics, and intense power politics. The geopolitical arena has been undergoing a significant transformation due to the global split that reshapes the world order. In the 2022 State of the Union address, the EU President, Ursula von der Leyen, described Russia’s attack on Ukraine as a war on the European economy, its values, and the future.

The Munich Security Conference 2023 has warned of the intensification of autocratic revisionism, with China’s tacit support for Russia’s aggression in Ukraine and its efforts to promote an autocratic alternative to the rule-based international order. This underscores the main divide in global politics today, which is the rift between democracies and dictatorships.

The EIU chart below shows a geopolitical “tectonic split”, between the Collective North and a significant part of the Global South. By Global GDP, 70% of countries are either directly negative or West-leaning regarding the Russian aggression, while almost 2/3rd of countries by population are directly or indirectly supporting Russia. And Moscow is actively using its economic leverage and disinformation to widen this rift and undermine the geopolitical positions of the USA, UK, and the EU. This split will continue to shape geopolitics, as the world moves towards a new order.

However, the existence of a third so-called “neutral coalition” of “wait-and-see” opportunistic states in Africa, Latin America, and Asia that are not willing to denounce Russian aggression shows that the ideological rift is not the only dividing line. There are also broad lines of dissatisfaction with existing international norms and multilateral institutions. This may strengthen Russia’s narratives towards “wait-and-see” countries. Even though commodity markets are expected to trend downwards from their 2022 highs,

41 https://www2.deloitte.com/us/en/insights/topics/leadership/risks-of-globalization.html?id=us:2sm:3ab:4diUS175976:5awa:6di:021423:dim31&pkid=1011043&dysig_tid=57cec3962f1b44ef8b7409c255f0f175

42 https://www.hks.harvard.edu/faculty-research/policy-topics/international-relations-security/are-we-entering-another-cold-war

the Kremlin would still try to use to its geopolitical advantage and its commodity leverage as global prices remain well above the levels seen in 2019.

The geopolitical divide is also illustrated by the UN General Assembly's vote on the territorial integrity of Ukraine and defending the principles of the United Nations Charter on 12 October 2022, which revealed the following global attitude towards this fundamental principle of the world order:

• IN FAVOUR - 143 countries;

• AGAINST - 5 countries (Belarus, North Korea, Nicaragua, Russia, Syria);

• ABSTAINED - 35 countries, among them: G20 members and serious geopolitical and regional powers (China, India, Pakistan, South Africa), some important commodity and finished goods exporters (Algeria, Thailand, Ethiopia, Bolivia, Namibia), some Russian satellites and post-Communist countries (Armenia, Cuba, Kazakhstan, Kyrgyzstan, Mongolia, Tajikistan), some of the poorest developing countries in Africa, Asia, and Latin America (Burundi, CAR, Congo, Eritrea, Eswatini, Guinea, Lesotho, Mali, Mozambique, South Sudan, Togo, Uganda, Honduras, Lao PDR).

2/3 of the world’s population live in countries that are neutral or Russia-leaning regarding the war in Ukraine

This deepening geopolitical rift has been largely accelerated by the stresses that the global system has previously endured. The "China shock," "Trump shock," and "COVID-19 shock" have contributed to a gradual erosion of the global order and highlighted weaknesses that the system had accumulated. The continuing war between Russia and Ukraine has aggravated not only supply and price shocks but revealed, for the first time, the above-mentioned global divide between two ideological and value-based "coalitions": the Western democracy coalition and the autocratic revisionist coalition.44 And unprovoked aggression launched by Russia against Ukraine has indicated that the world is not only divided between free countries (democracies) and not free (autocracies) but has become a kinetic battlefield between the two and the first 21st Century armed conflict that is likely to profoundly transform the geopolitical landscape.

Multipolarity and strategic competition The exhaustion of three key drivers of globalisation - cheap capital, cheap labour, and abundant energy - has led to a shift in power among centres with differing values and visions. This transformation is giving rise to a world order that is both multipolar and multi-conceptual, with pronounced differences in norms and values among major geopolitical players.

The weakening of the USA’s global role has given birth to regional powers with diverse political values, governance systems, historical legacies, and societal conventions that increasingly exert influence on many important issues. The international scene has become more diverse and complex, and conflicts now include not only more actors but also added layers and new threat vectors. It is now almost impossible for a single world power to dominate every aspect of the international system and influence the outcome of every conflict. That’s why the current international system is sometimes even viewed as multipolar - with China, India, Turkey and many regional powers seen as second, third- or even fourth-tier poles.

Apart from China, India has positioned itself as a non-aligned player between the USA and China, while also advocating for the interests of the Global South on the world stage. India has maintained a long-standing relationship with Russia, including reliance on Russian crude oil imports and military supplies. In this “duality”, India has consistently abstained from United Nations votes calling for an end to the Russian invasion of Ukraine.

The emergence of new power centres has led to systemic and strategic competition that extends beyond the military battlefield. This competition now covers various fields such as human rights, global infrastructures, development cooperation, energy, and commodity supply chains:

• Human rights: China and Russia promote an autocratic vision of collective rights upheld by the state over individual civil and political liberties.

• Global infrastructures: Autocratic regimes weaponise trade links and supply chains to spread their governance visions, such as the techno-authoritarian model versus open access material and digital infrastructure.

• Development cooperation: Health, food security, and climate change finance are emerging as key competition and policy fields. Beijing and Moscow promote their model of development free from conditionalities, versus the market economy, democracy, accountability, and transparency model favoured by liberal democracies.

44 By 2022, 8 out of 10 people in the world (almost 80% of the global population) lived in not free or partially free countries, while countries with liberal democracies accounted for more than 60% of the global GDP and 20% of the global population.

• Energy and commodity supply chains: Russia’s weaponisation of fossil fuel supplies is being countered by liberal democracies seeking to reduce dependence on autocratic regimes. The challenge is to avoid dependence on other autocratic regimes such as China (critical raw materials) and Qatar (natural gas). See Annex 5 on energy resources.

• Nuclear order, stability and deterrence: Russia, with implicit support of the autocratic coalition, has repeatedly threatened the use of nuclear weapons in the continuing war, while China and North Korea continue to invest in modern nuclear capabilities. This requires a new understanding of nuclear and economic deterrence and their importance for global peace and security. That is why, commenting on a nuclear-armed autocracy threatening Taiwan, Anders Fogh Rasmussen, former Secretary General of NATO, highlighted that “the lesson from Russia’s invasion is that deterrence will fail unless the messaging is strong and united before the war starts”45

In this new era of great power rivalries, geopolitics has become the independent variable that determines, to a large extent, economic outcomes. The evolving relationship between the USA and China is at the centre of this upheaval, but patterns of influence, cooperation, and competition are also changing among a broader group of countries that includes Russia, India, and several states in Europe, the Middle East, and the Global South.

The multi-conceptual evolution in geopolitics has also been evident in disagreements among Western democracies about core political values, including some hardening differences among the EU member states. Many institutions that have shaped global politics and the international economy must now be reinvented to fit into the multipolar and multi-conceptual 21st Century geopolitics.

Power shifts, conflicts and security

The realignment of economic power and the emergence of new countries as major players in world geopolitics has led to a significant shift in traditional power structures and opened the possibility for new geopolitical conflicts. While globalisation has led to higher growth, advances in human development, and the elimination of poverty, it has also brought about changes in the power balance and structures of global governance.

This change is reflected in the increased importance of the G20, which has emerged as a critical venue for international economic coordination. The emergence of large institutional investors from emerging markets capable of global influence, such as the Beijing-based Infrastructure Investment Bank , has also contributed to this shift.

This new era of multipolarity has the potential to create both opportunities and challenges, as noted by the World Economic Forum: “The shift to multipolarity creates the possibility of a more balanced and ultimately more legitimate form of global governance. But it also creates new sources of tension, risks and possibilities for armed conflicts.” 46

Geostrategic competition and security have become critical issues in international relations, with great power competition returning to the forefront after a phase of expanding economic globalisation. As the power balance shifts, the competition between the USA and China has particularly intensified, with implications felt throughout the global economic system.

45 https://foreignpolicy.com/2023/01/05/russia-ukraine-next-war-lessons-china-taiwan-strategy-technology-deterrence/ 46 https://www.weforum.org/reports/global-risks-report-2023

This has led to a fundamental reappraisal of the risks inherent in international trade and the dependency of a nation’s production systems on other countries.

The COVID-19 pandemic and Russia’s invasion of Ukraine in 2022 have highlighted the risks associated with such dependencies and underscored that they constitute vulnerabilities posing risks to security and sovereignty. One of the lessons to be learned from the Russia-Ukraine war is that closer economic and financial connectedness, especially without deeper social and political reforms, is not enough to prevent military conflict. As a result, states are resorting to policies that reduce dependence by controlling inflows and outflows of materials, technology, data, and services deemed critical.

The geopolitical paradigm of “change through trade” is being replaced by a desire for more independence and greater autonomy, as seen in the European Commission’s proposal to make Europe independent from Russian fossil fuels before 2030. This new paradigm is being applied not only to Russia but also to China and other nations. The return of war in Europe has also revived trends for defence and technological re-armament in Europe. The conflict has demonstrated that strategic and regional competition with the Kremlin, including the defence sector, will be a defining feature of security architecture in Europe and beyond.

Russia has been preparing for a full-scale war against Ukraine since 2014, covering not only military, economic, and foreign trade areas but also wider geopolitical aspects. The Kremlin has successfully redirected its oil and petroleum supplies away from western countries into China, India, Brazil, and other destinations. Efforts have also been mobilised to achieve objectives, such as involving Belarus as a side in the active war with Ukraine and consolidating the Kremlin’s positions in the BRICS. However, Russia’s role as a security guarantor and regional hegemon in the post-Soviet geopolitical space will continue to evaporate, opening the way for other regional and global powers, notably China, Turkey, and Western countries, to compete for influence.

The security vacuum left by a distracted Russia and shifting power dynamics could result in the rise of other regional tensions and conflicts in 2023. Azerbaijan may continue to put pressure on Armenia for a permanent peace resolution in the breakaway region of Nagorno Karabakh, while Georgia and Moldova could become hosts for renewed tensions provoked by Russia-controlled enclaves. In Central Asia , the Fergana Valley is likely to continue recording clashes and confrontation where the borders of the Kyrgyz Republic, Tajikistan, and Uzbekistan meet.

Militarisation and re-birth of NATO Defence and security have become a top priority on the global, regional, and national agendas. The Russia-Ukraine war ended a 60-year period of peace in Europe and forced NATO members and other nations to re-evaluate their defence and security agendas. The increasing geopolitical confrontation and deepening strategic cooperation between Russia and other autocratic regimes have given a second life to the global defence alliance, which now plays a central role in the European security architecture.

Several NATO and European countries have announced plans to increase their defence budgets to meet the NATO target, which some countries will do years earlier than planned. Germany

announced a significant shift in its defence spending by allocating an additional Euro 100 billion, while Poland increased its defence budget to 2.4% of GDP in 2022, with plans to further increase it to 3% or 4% of GDP. See Annex 6 on Military Expenditures by NATO Member States.

European defence spending has been already on the rise before the invasion. In this context, two spending scenarios have been identified by McKinsey’s study on how war-related risks could affect expenditures (see chart below). Even if Russia had not invaded Ukraine, European defence expenditures were expected to increase from € 296 billion in 2021 to € 337 billion in 2026, a 14% increase. However, in the low-case scenario, expenditures would increase by 53%, while the high-case high-risk scenario could result in an increase of 65%, approaching the € 500 billion threshold.47

Defense spending could increase significantly through 2026 in response to events in Ukraine.

Higher-bound scenario at 3% inflation

Higher-bound scenario at 5% inflation

Although more budget resources have been allocated globally to military needs in absolute terms, government expenditures have grown faster than military budgets. Countries spent an average of 6.0% of their total fiscal expenditures on defence in 2021, down from 6.1% in 2020 and 6.6% in 2012. However, threats associated with Russia's aggression against Ukraine and increased awareness of possible war spillover risks have already led to a 3.0% increase in military spending in Europe.

It is expected that the figure of USD 2 trillion spent globally on military purposes in 2021 will continue to grow. This trend represents a lost opportunity to meet the Sustainable Development Goals and Paris Agreement targets. Various UN initiatives to reverse the upward trend of military expenditure were reaffirmed in 2021, but due to the large-scale war in Europe, these calls have fallen on deaf ears in many European countries.

Economic security and vulnerability of supply chains The war brought high attention to the risks of energy-import dependence and the weaponisation of fossil fuels, grain and other

47 https://www.mckinsey.com/industries/aerospace-and-defense/our-insights/invasion-of-ukraine-implications-for-european-defense-spending

Exhibit 1

1 Our scenarios and modeling cover all European NATO nations, including Turkey. They also include Austria, Finland, Sweden, and Switzerland. Source: Government plans and announcements; NATO; McKinsey analysis McKinsey & Company

NATO defense spending, by scenario, 2021-26,1 € billion

AMBASSADOR PARTNERSHIP

commodities, highlighting the importance of economic security in the 21st Century as well as risks inherent in the uneven global distribution of rare earth minerals essential for microelectronic, telecommunications, and battery technologies.

One of most sensitive economic security areas is Europe’s gas import dependence. Russia, the world’s fourth-largest LNG producer, currently supplies around 15% of Europe’s deliveries. Analysts at Rystad Energy estimate that this figure will continue to rise. The EU is still facing a huge challenge to break free from its reliance on Russian energy imports. Data from the analytical centre Bruegel shows that the EU purchased 19.2 billion cubic meters of Russian LNG in 2022, a 35% increase from 2021’s 14.2 billion. Energy market monitoring group Montel’s analysis indicates that the main importers were France, the Netherlands, Spain, and Belgium, with the UK and Lithuania ceasing their purchases altogether.

As the figure below demonstrates, EU27 monthly imports of Russian LNG that were 1,987 bcm in March 2022 have practically stayed at the same level 12 months later (1,957 bcm). At the same time, imports from America fell from 5,729 bcm to 5,187 bcm in the same period.

Last updated: 14/03/2023 (updated every month)

Source: Bruegel based on Bloomberg

Note: America represents the sum of the United States of America and Trinidad & Tobago. Africa is the aggregate of Algeria, Angola, Nigeria, Egypt, Cameroon and Equatorial Guinea. The Middle East displays the sum of Qatar, Oman and United Arab Emirates. The Other category is the sum of LNG from Argentina, Australia, Brazil, China, Indonesia, Jamaica, Malaysia, Norway, Peru, Singapore, South Korea and the United Kingdom.

Figure 4: EU27 LNG monthly imports by region of origin

In March 2022, Russia ranked second , after the USA, in LNG exports to Europe, with Algeria being the third (1,933 bcm) and Qatar the fourth (944 bcm). In February 2023, the picture looks not much different: USA is the first by volume (5,187 bcm), Russia the second (1,957), Algeria the third (1,758) and Middle East the fourth (1,481 bcm). 48

High dependence on LNG imports from Russia contradicts the EU’s proclaimed policy on reaching independence from the imports of Russian hydrocarbons and carries many geopolitical risks. The Kremlin could block exports to so-called “unfriendly countries” while continuing to supply fuel to Asia. High levels of consumption of Russian LNG may trap Europe, potentially resulting in gas blackmail concerning winter reserves. For the time being, the EU’s strategic target of completely abandoning Russian energy supplies and depriving Moscow of revenue that is used to support the war effort remains unattainable. The International Energy Agency (IEA) reported that Europe may face a shortage of 30 bcm of gas this summer if Moscow shuts down remaining pipelines and China’s LNG demand increases. It seems that the Russian gas will continue to play a crucial geopolitical role, which the Kremlin can easily weaponise in its confrontation with Europe as a key ally of Ukraine.

The COVID-19 pandemic also exposed the lack of domestic manufacturing capacities in many nations, emphasising the need to develop greater domestic production capacities and prioritise shorter, simpler and more reliable supply chains with less exposure to states that may be involved in conflicts, exposed to sanctions or are likely to weaponise the interdependence. This trend has not resulted in a full reversal of investments made in recent decades but has significantly expanded the range of industries and commodities deemed strategic and driven efforts to increase their resilience.

The Russia-Ukraine war shattered the prevailing consensus that closer economic integration of Russia into European political and defence institutions and a common market would lead to increased security through economic interdependence. Moscow turned energy trade into a weapon. And this has led to a new concept of economic security in the 21st Century: security through diversification, nationalisation, and security of supply chains.

Governments and businesses have started to prioritise home-shoring or friend-shoring to create trusted supply chains that ensure supply at a fair price, with energy supply chains being a topic of the day. Other commodities, particularly those critical to support the transition from fossil fuels to cleaner forms of energy, also deserve high attention. Economic security has become a vital concern, and efforts to increase resilience and reduce dependence on critical commodities will remain a priority for governments and businesses alike for some time to come ( see chart below on concentration of energy transition minerals ).

The existing vulnerability of Western supply chains could be demonstrated by the example of the USA. The USA has identified its independence from imports of critical mineral commodities as its top geopolitical priority. Imports provide more than 50% of consumption for 26 of the 50 minerals designated as critical, making the USA’s economic security picture quite challenging. The transition to cleaner energy requires critical minerals, including rare earths like lithium, which are concentrated in a few countries with autocratic regimes

or unstable political and social situations. The global competition for control over these minerals is already underway, with China proposing controls over production and export of 17 rare earth minerals, Mexico nationalising lithium mining and extraction, and Indonesia progressively banning the export of nickel ore.

Production of many energy transition minerals today is more geographically concentrated than that of oil or natural gas

Note: LNG = liquefied natural gas; US = United States. The values for copper processing are for refining operations.

Source: IEA (2020a); USGS (2021), World Bureau of Metal Statistics (2020); Adamas Intelligence (2020).

IEA: The Role of Critical Minerals in Clean Energy Transitions

The USA government mandates stockpiles for certain minerals critical to its defence needs, but this may not be a sustainable approach when demand could sharply increase. Supply at a reasonable price is also essential, with demand for clean energy materials and technologies set to increase several-fold by 2040 to meet climate agenda, particularly for EV-related minerals. Industry experts are calling for a strategy to reduce the USA's vulnerability on critical minerals, including improving mapping, creating incentives for domestic investment, streamlining permitting and review processes, supply agreements with trusted allies and partners, and investment in recycling and reprocessing technologies as well as in technological alternatives.

Weaponised interdependence In today's world, geopolitical considerations have a stronger impact on policymaking than at any time since the end of the Cold War. While the Russian invasion of Ukraine has revived trans-Atlantic cooperation and raised concerns about a new competition between rival poles, the economic growth of China and other Global South economies continue to challenge the dominance of the West. According to WTO, developing countries' share of global economic output increased from 43% to 59% between 1997 and 2017, with China contributing significantly to this growth.

Governments increasingly use economic and financial policy levers to achieve national goals, blurring the line between economics and national security. Economic ties are seen

Share of top three producing countries in production of selected minerals and fossil fuels, 2019

as a tool for advancing geopolitical objectives through “weaponised interdependence.” The COVID-19 pandemic highlighted the vulnerability of supply chains, while the RussiaUkraine conflict has led to their complete reshaping. The global economic governance framework, which has been in place for more than half a century, has shown signs of systemic fragility, with some countries adopting a mercantilist approach to trade and viewing bilateral relations as a zero-sum game.

In today’s multipolar and multi-conceptual world, singular ideas about global affairs have been replaced by a diffusion of power and political values. This raises questions about alliances and multilateral institutions that have been cornerstones of the global order since World War I and risks undermining efforts to address global challenges such as pandemics and climate change. The shift towards economic nationalism and the blurring of lines between economics and national security have weakened support for global economic governance, posing a challenge to the international community.

Geoeconomics Geoeconomics defined by the World Economic Forum as the application of power politics by economic means through a contest waged via global trade and investment rather than on a traditional battlefield, is also transforming the geopolitical landscape. Economic sanctions have become a tool of choice for the West’s collective response to Russia’s invasion of Ukraine. However, this does not mean that the recent developments of hybrid and asymmetric warfare or non-state actors have lost their momentum. Economic coercion, which is the use of the law to force economic agents to cease certain activities, has become an attractive option for major powers, precisely because it is a means short of war to coerce the rivals. The two main types of economic coercion measures are trade and financial measures. The intended effect of such measures is to inflict a degree of economic damage on target states that is greater than the damage being incurred by sending states.

For multinational companies, their strategic planning must always take into account the possible use of such measures and the international security landscape. For governments, both deploying and responding to economic coercion requires specific expertise and a readiness to act quickly and forcefully in relevant markets. The repeated use of strong forms of economic coercion is likely to contribute to greater decoupling between the economies of major powers, as they each seek to become more resilient to the use of economic coercion by others.

The use of financial sanctions by the USA and other Western nations as a tool of foreign policy has led to non-Western nations seeking to develop alternative arrangements to circumvent the impacts. One such effort has been the de-dollarisation movement, which involves the development of digital currencies and alternatives to the SWIFT financial messaging system. As non-Western nations continue to gain economic power, the possibility of these alternative arrangements is increasing over time.

The war has led to a rupture between Russia and the West, and Russia may increasingly rely on Asian powers for economic support. This is likely to lead to a reduction in trust between the G7 economies and major Asian powers, particularly with regards to their

support of Russia. The development of alternative financial arrangements is likely to continue, as non-Western nations seek to reduce their dependence on Western financial systems. This could lead to a further fragmentation of the global financial system making it more challenging to enforce financial sanctions and other economic coercion measures. The long-term impact of this trend on global economic stability and security remains uncertain, but it underscores the importance of finding ways to promote cooperation and reduce tensions among nations.

Economic and financial sanctions, trade restrictions, and foreign direct investment barriers are among the tools used to achieve national goals. China’s Belt and Road initiative, which involves outward investment with a hidden geopolitical agenda, is a controversial example, while a growing number of countries are creating barriers to inward investment perceived as a potential threat to national security.

Decoupling and Balkanisation With the war, the risks of economic decoupling and Balkanisation have much more prominence in the global arena. Major powers are increasingly competing through antagonistic economic policies, and the prospect of a major decoupling is becoming more likely. The deterioration of trust between the USA and China during the Trump Presidency, combined with trade disputes and the COVID-19 pandemic, exposed areas of the USA’s industrial production where dependence on imports, including from China, came to be viewed as a threat to economic security. However, economic realities have evolved in less confrontational ways, suggesting that a cordoning off of security-sensitive sectors and activities is likely to become highly securitised, while the much larger share of non-security-sensitive trade will be left mostly untouched.

Under this scenario, decoupling would affect important but well-defined areas of economic relations, with a risk of fractures or even Balkanisation in terms of rival technical standards, especially in telecommunications technologies. The risks of decoupling and Balkanisation, primarily triggered by the technological rise of China and Western responses to it, could worsen over time, particularly if there is a deepening bifurcation between Western-led and China-led industrial production and standards.

Russia’s invasion of Ukraine delivered an additional major shock that led to economic sanctions targeting Russia, including substantial technological containment measures and severe restrictions on trade, investment, transportation, and travel. Russia has opted on its own to sever areas of exchange even further, leading many Western companies to discontinue business in Russia due to consumer boycotts, investor pressure, and Russia’s degrading business infrastructure. This represents a rupture in the exchange between Western nations and Russia that comes close to what prevailed during the Cold War.

One emerging global pattern may be a partial technological and industrial bifurcation, for strategic and security-sensitive technologies and standards, between a China-led “alliance”, including Russia and some nations in the Global South, and a Western-led coalition. While multinational corporations could manage this process, the risks of decoupling and Balkanisation could have negative impacts on global economic governance and alliances, undermining responses to pressing global challenges like pandemics and climate change.

Diffusion of power and non-state actors Global and regional influence has been continuously diffused under the impact of activities by multinationals, various terrorist and hacker groups as well as private military companies (PMCs). And the war in Ukraine, we believe, has accelerated this trend.

Multinationals Technological giants, such as Facebook and Google, played an important role in countering the Kremlin’s propaganda, while China has been using digital technologies to enhance domestic surveillance. The rollout of 5G by China’s Huawei has ignited geopolitical tensions with the USA and EU, while Musk’s Starlink, an indispensable provider of broadband communications to Ukraine’s armed forces, has also sparked international tensions. Companies with significant economic weight can be at the centre of geopolitical disputes and tensions. This is particularly so, given that only a few countries in the world have a GDP larger than, for example, Apple’s market value.

Hacktivism is another example of how states can exploit widely-used technologies to enhance their power and influence. Russian interference in the USA presidential elections is a prime example of how hacktivists, bots, and online trolls can impact geopolitical realities. During the Russia-Ukraine war, hacktivism on both sides has acquired a new dimension. Both Ukraine and Russia have actively encouraged and financed various cyber hacktivist organisations to disrupt the enemy and influence the information war.

Private military companies have also gained power, engaging not only in ethnic and surrogate conflicts in developing nations but also in inter-state wars. The active deployment of Russia’s notorious Wagner Group on the battlefield in Ukraine is a most recent example. In 2016, the UN Security Council called on countries to strengthen their ability to prevent non-state actors, who often collaborate with organised crime, from acquiring weapons of mass destruction. The unpredictability of groups like Wagner in the context of a possible escalation in Ukraine highlights new global and regional security risks of diffused global power.

The USA-China rivalry The ongoing USA-China strategic competition has been significantly amplified by the Russia-Ukraine war as the two superpowers took different sides and roles in the war. The balance of power between these two axes, the USA led democracy coalition and the China-sponsored autocracy alliance, has been shifting, as shown by a McKinsey chart below indicating that the gap between the share of global material capability held by USA aligned powers and China is now less than ten percentage points, which is smaller than the gap between USA aligned powers and the Soviet Union during the Cold War. This shift in power dynamics can also be observed in the technological sphere, where the availability of major platforms and technologies increasingly depends on political lines that are drawn, leading to a decline in global interoperability and a splintering of the technological stack. 49

The deepening USA-China strategic competition will further contribute to the fragmentation of the global economic and security framework, adding to a long-term trend that has been observed for some time. This trend will also elevate the importance of large neutral economies, such as India, Saudi Arabia, Turkey, and Brazil, in the global geopolitical

49 See: “On the Susp of New Era”, McKinsey 2022 (https://www.mckinsey.com/capabilities/risk-and-resilience/our-insights/on-the-cusp-of-a-new-era)

scene. These countries will increasingly need to balance their relationships with the two axes and navigate the rising tensions between them.

The world is becoming multipolar.

Share of material capability,1 largest nations/alliances, %

1 Composite index including population and demography, production capabilities, military expenditure, and personnel. Share is calculated between largest four nations/groups (those represented on chart, and India).

2 Includes NATO and US-aligned non-NATO members (eg, Australia, Japan).

3 Including Warsaw Pact nations and observers during relevant period.

Source: Composite Index of National Capability v6.0, Correlates of War, July 2021; McKinsey Global Institute analysis

Competition in technology and standards The return of great power competition has coincided with the 4th Industrial Revolution, marked by advancements in AI, IoT, quantum computing, and other emerging breakthrough technologies. Countries are pursuing interventionist policies to maintain or acquire a technological edge, with state-sponsored industrial espionage, intellectual property theft, and abuses of legitimate academic and research exchanges becoming commonplace. The competition in technology is central to future economic competitiveness and military power. McKinsey has identified 14 central (so called transversal) technologies where competition between the US and China will intensify based on the compound annual growth rate of investment in 2018-2021.50

The economic benefits of becoming technology leaders, leveraging interdependence as a strategic weapon, and gaining an edge in new forms of conflict serve as primary motivators for global powers to excel in the technology race. However, the exclusive restriction on exporting the world's most advanced chip-making tools, manufactured by a sole Dutch company, combined with concerns about the security risks of globalised hardware supply chains, has given rise to a third incentive. This incentive is associated with the military applications of emerging technologies.

The Russia-Ukraine war has demonstrated numerous examples of the advantages technology could provide to defence capabilities, AI- and IT-based planning and execution of highly mobile kinetic operations, extensive use of sophisticated navigation technologies and attack drone swarms, cyberattacks on critical infrastructure, and complex information warfare as well as mass media interventions to disrupt an adversary’s domestic political system.

50 See “On the Cusp of New Era”, McKinsey 2022 (https://www.mckinsey.com/capabilities/risk-and-resilience/our-insights/on-the-cusp-of-a-new-era)

The competition to secure the technological high ground has largely become a race among the top 20 USA and Chinese technology giants. The USA and China are far ahead of their peers on key indicators such as patents, funding, and talent in AI research and application. However, a 2018 report from the University of Oxford's Future of Humanity Institute showed that China lagged behind the USA in all AI dimensions except for data. Nevertheless, China has set ambitious goals to become the global leader in AI by 2030 through significant public investments and support for start-ups to attract venture capital.51

China’s explicit and implicit political and financial support to the Kremlin, and the USA and China banning one another’s global tech giants, such as Huawei and Google, have increased the threat of economic decoupling. This process is likely to continue, and it could push many nations into difficult trade-offs on their economic relations with China. On the defensive side, this technology competition will include strengthening IP protection, stricter security screening of FDI and export controls on dual-use goods, stronger counterespionage and counterintelligence efforts, and restrictions on investment in technology companies in rival nations.

51 https://www.mckinsey.com/capabilities/risk-and-resilience/our-insights/on-the-cusp-of-a-new-era

Russia’s invasion has provided Western powers with added impetus to pursue technological containment, including measures taken by the EU, the USA, the UK, and other nations against Russia. These measures may remain in place for an extended period, particularly if a broader and better-coordinated containment policy emerges. However, questions have been raised about the degree of technological cooperation Russia can secure from China, India, and other non-Western powers and whether such cooperation may lead to even deeper rifts between the global ideological blocs. The erosion of the USA’s technological leadership is likely to be viewed as a threat to the national and collective security of the Ukraine solidarity coalition and is likely to encourage other advanced economies to adopt corresponding policies more quickly.52

IP protection and standards With the digitisation of knowledge and the rising number of intellectual property crimes, there is an important geopolitical battleground related to IP protection. The United States and the European Union have implemented strengthened legislation to protect trade secrets, indicating a broader shift away from an open and collaborative approach to innovation based on patents. There is now a greater emphasis on guarding trade secrets and protecting confidential business information. Official state interest in IP protection is also growing. Companies are also becoming increasingly vigilant in safeguarding their cutting-edge commercial secrets and innovations from foreign statesponsored industrial espionage.

The battle for global influence is also extending to the realm of technological standards. Technical and technological standards can have significant implications for global economic and technological power as a country or countries that are able to exert the most influence over technological standards may have an advantage in shaping the direction of technological innovation and development, as well as influencing the adoption of their own products and services on a global scale.

A competition has been underway for dominance in global standard-setting bodies. China has been particularly active in this arena, as demonstrated by its submission in 2019 of more technical proposals to the International Telecommunication Union (ITU) than any other country. In 2020, the ITU approved blockchain standards developed by Huawei and the People’s Bank of China, as well as face-recognition standards from Chinese companies Dahua and China Telecom. China’s leadership in technological standards is enabling it to exercise more soft power influence, with the goal of assuming a more prominent role through its China Standards 2035 strategy.

The USA and its allies are also becoming increasingly engaged in this area, recognising the strategic importance of technological standards. They are taking steps to promote their own standards and counter Chinese influence. For instance, in September 2020, the USA, UK, and Australia announced a trilateral partnership to develop secure and resilient telecommunications infrastructure, with the aim of providing alternatives to Chinese telecom giant Huawei. In addition, the USA and its allies are working to promote their own standards in areas such as 5G technology and artificial intelligence.

The USA green subsidy and the EU response The impact that the Russia-Ukraine war had on energy and commodity prices has triggered technology-related tensions and competition between the USA and Europe. To counteract energy and commodity-driven inflation, the

52 The author’s name of countries that have provided Ukraine with political support as well as military, financial and humanitarian aid after Russian invasion.

US government passed in 2022 the Inflation Reduction Act, which provides $369 billion in subsidies and tax breaks to the USA green tech industry. The EU, particularly France, saw this as a challenge to Europe’s competitiveness and an open recourse to industrial policy.

The EU’s response to war-related geopolitical crisis, to its effects upon the European economy, as well as to the defence and technology-related global challenges has been remarkably swift. During the global financial crisis 15 years ago, it took the EU years to find lasting solutions. Ten years later, when the COVID-19 pandemic occurred, it took the EU several weeks to generate the necessary decisions. After February 2022, the European Union’s response was, in the words of its President, “united, determined and immediate”.

53

The EU’s policy package triggered by the war included political response, support to Ukraine, sanctions against Russia, measures to eliminate fossil fuel dependence from Russia, the European Green Deal, reform of EU economic governance, measures to address labour shortages, an action plan on supply chains and access to strategic materials, defence against malign global actors, and a new global vision for the EU (see Annex 7)

However, some EU member nations, particularly those with a strong sentiment towards free competition, have been sceptical of subsidies and state dirigisme. They believe that a similar subsidised approach pursued by the EU could be over-expensive, inefficient, and distortive of the single market. Moreover, the subsidy race could become global and undermine any attempts towards restructured multilateralism and more adaptive global trade rules.

Possible alternative policy measures to counter the USA’s green subsidy that would tap the EU budget include greater use of the REPowerEU plan, drawing down from the Emissions Trading System (ETS), and establishment of the European Sovereignty Fund.

53 https://ec.europa.eu/commission/presscorner/detail/ov/speech_22_5493

54 See https://www.goldmansachs.com/insights/pages/the-energy-affordability-crisis.html

Exhibit 39: REPowerEU targets imply c.€3.7 tn of capital mobilisation by 2030E Cumulative investments to 2030E under REPowerEU (€ tn and %)

Source: Goldman Sachs Global Investment Research

However, the continuing Russia-Ukraine war presents significant challenges to the implementation of the REPowerEU project, energy transition, and other long-term development plans. Goldman Sachs estimates that meeting the REPowerEU goals would require the EU to mobilise €3.7 trillion, of which more than half (circa €2.2 trillion) could be funded by private investment mostly by green energy companies. 54

Furthermore, policymakers fear that relaxing the EU’s emergency state aid rules so that each government would be able to allocate more funds to industries affected by the USA green subsidy could put small economies at a disadvantage.

Multilateralism The Russia-Ukraine war exposed the weaknesses of the current multilateral order, while a resulting deep ideological split in geopolitics has raised questions about the future of multilateralism in the era of weaponised interdependence. Two competing approaches have emerged: resuscitating and reinforcing the existing system or fundamentally restructuring it. The former calls for more multilateral cooperation, increased funding for multilateral organisations, and improved trade flows. However, the veto power of Russia and China in the UN Security Council limits the effectiveness of this approach. The latter approach calls for reforming the principles and practices of multilateralism and redesigning relevant institutions. This approach, in principle, should be able to address existing institutional flaws such as the failure of the World Health Organization in handling the COVID-19 pandemic and the susceptibility of global value chains to manipulation.

Europe and multilateral institutions seem to lean toward the first approach, while the US favours the second. The same position is shared by multiple actors in Asia, Africa, the Middle East, and Latin America (especially Brazil, India, and South Africa) who have been insisting that the multilateral system needs a major overhaul to become more inclusive, more transparent, more accountable, and better fit to accommodate alternative goals (for instance, by balancing the pursuit of trade liberalisation with the goal of food security). 55

According to Narlikar, a leading researcher on multilateralism, the solution to the current challenges may be found in using the restructuring narrative as a starting point, followed by careful reconsideration of the very purpose of multilateralism and a commitment to the “old system” core values of liberalism, pluralism, and democracy. To achieve this, the Transatlantic alliance should engage with rising global powers like India, given its traditions of liberalism. The restructured multilateralism should be open to countries that adhere to basic democratic values and are willing to abide by tightened rule-of-law principles. 56

However, countries like Russia, North Korea, Belarus, and other authoritarian regimes that preach fundamentally different values and continuously generate geopolitical threats and challenges should have their entry into the new system postponed. In such cases, political dialogue with the “outcasts” should continue. To avoid sending mixed signals, side-deals involving deep integration, such as the EU-China Comprehensive Agreement on Investment, should probably also be suspended.

Under the double shock of the COVID-19 pandemic and the Russia-Ukraine war, global

55 See more in: “Emerging narratives and the future of multilateralism”, Amrita Narlikar (www.orfonline.org)

56 Ibidem.

economic volatility and uncertainty have intensified significantly, and the risks to global growth have risen considerably. To address the challenge, Western partners must strengthen the coordination of international economic policies, enhance the resilience of the global economy in response to shocks, and prevent the global economy from falling into a prolonged period of depressed growth.

While a restructured multilateral order, expected to be accompanied by some decoupling, may result in slower growth and declined prosperity, it could nevertheless lead to substantial gains in global security and survival of the values that make the democratic world what it is. Narlikar warns that the collateral cost could be “a shattered dream of all humanity working together as one towards shared visions and goals. But these losses may well be compensated by gains in security, and survival of the values that make us who we are.” 57

57 “Emerging narratives and the future of multilateralism”, Amrita Narlikar (www.orfonline.org)

KEY INSIGHTS:

• The Russia-Ukraine war has marked the beginning of a new phase in geopolitics, characterised by fierce competition, confrontation, and power politics.

• The world has split into a new configuration - a Collective North that supports Ukraine and a significant part of the Global South that either directly supports Russia or has taken a “wait-and-see” position. This split can be characterised as a kind of “clash of civilisations” between democracy and autocracy.

• Geostrategic competition will materialise not only on battlefields but will increasingly cover human rights, global infrastructures, development cooperation, energy and commodity supply chains, IT, and new technology.

• The imperative of supply chain resilience will redefine economic security in the 21st Century. Control over production and supply of strategic minerals is becoming the name of the game.

• The role of geoeconomics, including sanctions against Russia and other rogue states, will become one of the central tools in the geostrategic competition and confrontation. Economic ties will be increasingly seen as a tool for advancing geopolitical goals through “weaponised interdependence.”

• Western response to threats from the revisionist and imperialist Russia will be a defining feature of security architecture in Europe and beyond. NATO’s newlydiscovered raison d’etre , as well as much higher military budgets, will be one of the growing “frictional” costs in the new world order.

• The new phase in geopolitics will be also accompanied by diffusion of power and an increased role of non-state actors, such as global companies, hacktivism movement, private military companies, and NGOs with global outreach.

• While the world has split into a new ideological configuration, characterised by fierce competition and confrontation, there are opportunities for meaningful reform. A restructured multilateral order, open to countries that adhere to fundamental values and willing to abide by tightened rules, could contribute to a shared productive agenda for such reform.

CHAPTER 5. BRITAIN IN A BRAVE NEW WORLD

The UK has been somewhat less affected by the direct impact of the Russia-Ukraine war than many other European countries because of its reliance on domestic renewable energy sources and natural gas supplied from Norway rather than Russia. However, the war has substantially added to the challenges faced by the UK due to Brexit and the COVID-19 pandemic, and has visibly increased related fiscal pressures.

However, the continuing war in Ukraine still presents some challenges for the UK's energy security. While the country's reliance on Russian gas imports is minimal, a Russian total embargo could potentially affect the availability of gas from the UK's main supplier, Norway, with resulting diversion of supplies to other European countries and potential impact on the UK’s energy market. To reduce its dependence on gas imports, the UK has already taken steps to diversify its energy sources and invest in new technologies, such as wind and solar power. This strategy aligns with the country's commitment to achieving net-zero carbon emissions by 2050 and transitioning to a more sustainable energy system.

As Chatham House noted, the UK’s relatively low dependence on Russian energy and largely service-based economy gives it more freedom to confront Russia and its aggressive policy without significant economic repercussions. 58 This, combined with the country’s longstanding commitment to democratic values, has helped to position the UK as a co-leader, jointly with the USA, in the pro-Ukraine global democratic coalition.

Since the start of the conflict, the UK has provided Ukraine with continuous top-level political, military, financial, and humanitarian support. According to the Ukraine Support Tracker, 59 the UK ranks third among the top 10 donors to Ukraine in terms of total volume (Euro, billion), and second after Norway in terms of aid as a percentage of GDP: 60

There is another tempting conclusion on the possible impact of the war on the UK’s role in the emerging conflict-prone multipolar world order relating to the dynamics of its relations with the European Union.

In our view, the Russia-Ukraine war has created an implicit demand for much closer political, defence, security, intelligence, and economic cooperation between the UK and the EU. The vision for the UK's global role outlined in the HM Government's Integrated Review " Global Britain in a competitive age " (see text box below) is not only highly relevant in the new geopolitical context but also complementary for both Europe and the UK. 61

58 See Lawrence, David (2022), UK Trade and the War in Ukraine, Chatham House, September 2022.

59 Ukraine Support Tracker / https://www.ifw-kiel.de/topics/war-against-ukraine/ukraine-support-tracker/

60 Includes military, financial and humanitarian assistance.

61 HM Government. “Global Britain in a competitive age”. March 2021.

Geopolitical Role: a permanent member of the UN Security Council, a global leader in diplomacy and development (4th largest diplomatic network, a seat in every major multilateral organisation)

Defence, intelligence, security : a nuclear-armed power with global reach and integrated military capabilities; world leader in security, defence and intelligence; 2nd highest defence spender in NATO and highest in Europe, UK is “among the best-resourced behind the US, China and India in terms of combined defence, intelligence, diplomatic and development capabilities.”

Economy: 5th largest economy now and sixth or seventh by 2030

Technology: leadership in green technology to be recognised as a Science and Tech Superpower (3d in the world in research and innovation); 2nd highest number of Nobel Prizes (99 Nobel laureates)

Soft and cyber power: 3rd ranked soft power in the world; 3rd most powerful democratic and responsible cyber nation (defence, intelligence, norms and offensive capabilities), Belfast – a world-leading cyber security hub

Climate change agenda: world leader - in 1990-2018, the UK reduced its emissions by over 40%, the first dedicated diplomatic green network “Climate Change and Energy Network”, Wales – world-leading hydrogen research centre

Global financial centre: 11.5% of all global foreign-listed companies worldwide are listed on the LSE

In particular, the war and the coordinated response by the Western allies have highlighted many strategic commonalities between the EU and the UK, creating a momentum and demand for closer interaction on many geopolitical fronts. The British Government’s Integrated Review " Global Britain in a Competitive Age " identified the EU as its most closely aligned partner across all its global objectives: 1) protecting liberal democracy; 2) promoting international peace and security; 3) tackling climate change; 4) transforming into global services, digital and data hub; 5) enabling global health resilience; 6) championing global tax transparency and equitable economic growth; 7) defending cyberspace.

The war has added several specific policy priorities, such as a common commitment to supporting Ukraine and maintaining economic sanctions on Russia, strengthening defence and cyber capabilities in Europe, and securing the supply chains of strategically important materials. One of the most significant effects of the war for the UK could be the trajectory of EU-Ukraine relations over the next five to ten years. According to Chatham House, “a more radical outcome of the war, with significant implications for the UK, could be an invitation for Ukraine to participate in a new, two-tier model of European cooperation. Such an outcome could provide a model for

a future UK–EU relationship – presumably under a future, more pro-European UK government.” 62

In our view, the UK-EU rapprochement process could be significantly accelerated by shared priorities in European security, defence, and cyber, as well as technological and environmental challenges, and supply chain resilience imperatives. While the outcome of the war’s specific parameters remains difficult to predict, the EU-Ukraine trajectory remains a priority for the future. However, stimulated by the war’s global effects, both the UK and the EU should focus on sorting out existing post-Brexit mutual trade issues and strengthening each other’s positions on several geopolitical fronts. These include European security, NATO, climate change, China’s technological challenge, and the reform of multilateral organisations.

The Munich Security Report 2023 states that “By invading Ukraine, Russian President Vladimir Putin has made the clash of competing visions a brutal and deathly reality. The world’s liberal democracies are awakening to the challenges posed by autocratic revisionists and have taken the first important steps to pushing back. But for liberaldemocratic principles to prevail over the autocratic variants, democracies must revamp their vision of a desirable international order. A re-envisioned liberal, rule-based international order is needed to strengthen democratic resilience in an era of fierce systemic competition with autocratic regimes.” 63

Ukraine’s exceptional performance and determination have created “a new sense of purpose” for the global democratic alliance, adding momentum to enlarge and strengthen the coalition, reform multilateralism, and make the governance format based on democratic values more resilient. This underlines the importance of supporting Ukraine and defending democratic values worldwide to create a more stable and peaceful global order.

62 See Lawrence, David (2022), UK Trade and the War in Ukraine, Chatham House, September 2022. 63 https://securityconference.org/en/publications/munich-security-report-2023/executive-summary/

KEY INSIGHTS:

• The UK has been less affected by the direct impacts of the Russia-Ukraine war due to its reliance on domestic renewable energy sources and gas supplied from Norway but the war added to existing challenges and increased related fiscal pressures.

• The UK, the third among top-10 Ukraine donors, has positioned itself as a co-leader with the US in the pro-Ukraine global democratic coalition.

• The war has highlighted strategic commonalities between the EU and the UK, creating a demand for closer cooperation on policy priorities such as supporting Ukraine, maintaining economic sanctions on Russia, and securing supply chains of strategic materials.

• The rapprochement could also be accelerated by shared priorities in European defence and cybersecurity as well as common technological and environmental challenges

• Ukraine’s exceptional performance and determination have added momentum to enlarge and strengthen the global democratic coalition, reform multilateralism, and make the governance format based on democratic values more resilient.

CHAPTER 6. POTENTIAL WAR OUTCOMES

More than a year has passed since Russia's invasion of Ukraine. The war has evolved through various phases, starting with initial Russian advances and the looming threat of Kyiv's capture, followed by successful Ukrainian counteroffensives later in 2022. Presently, Ukraine has been dedicated to driving the Russian army out of all occupied territories, encompassing the DNR and LDNR regions of Donbas, as well as Crimea, which was annexed in 2014.

There has always been a question about underlying reasons and motives behind Russia’s decision to invade Ukraine. And there have been many media publications on this topic. The reasons why countries revert to military force in international relations are multiple and often intertwined. 64 This research focuses more on the democracy-vs-autocracy paradigm against the backdrop of historical and cultural roots that reflect the nature of this “geopolitical clash of civilisations”. See Annex 8 on Russia-Ukraine history

The Kremlin’s obsession with Ukraine may have been driven, among other reasons, by “geo-economic” factors, in particular the country’s rich mineral resources and strategic location. The so-called Ukrainian Shield (in orange on the map below) contains lithium deposits with significant industrial potential, concentrated around the city of Mariupol, which was occupied by Russia. According to Rod Schoonover, former director of environment and natural resources at the USA National Intelligence Council, Ukraine’s mineral wealth is, without doubt, one of the reasons why Russia considers the country so important and an integral part of its geopolitical sphere of interests. 65

64 See Annex 8 for more information on Russia-Ukraine relations and a chronology of the conflict.

65 https://www.renewablematter.eu/articles/article/ukraine-all-lithium-reserves-and-mineral-resources-in-war-zones

Furthermore, in 2010-2013 the Ukrainian government announced the discovery of 1.1 trillion cubic meters of recoverable gas reserves, which would have made the country's total gas reserves the third largest in Europe after Russia and Norway. Around 80% of these reserves are located in off-shore Crimea, the Sea of Azov, the western Carpathians, and the Dnieper Donitz rift in the East. This would have allowed Ukraine to potentially become Europe's primary gas supplier and a substitute for Gazprom. However, before the 2014 revolution, Ukraine lacked the technology and equipment to explore those reserves as well as the political will under president Yanukovich to challenge Russia's geopolitical interests in Europe. In 2013, Ukraine signed a deal with ExxonMobil, Shell, and Chevron to explore the oilfields near the Carpathians and Dnieper Donitz rift, but Russia's annexation of Crimea and occupation of a significant part of Donbas gave the Kremlin control over much of Ukraine's gas reserves. When pro-Russian separatists occupied the Yuzivska gas exploration region in Donbas, Shell and other Western companies had to abandon a USD 10 billion project in the area.

As the conflict has developed, Russian narratives on the roots of the war have significantly evolved, especially after the failed 2022 blitzkrieg offensive and several humiliating defeats in the East. In a recent state address to Duma, the Kremlin’s autocrat came up with yet another “original” interpretation of the war’s origins and reasons, claiming that Russia didn’t start the war. According to Putin, “it was the war waged by the Ukrainian puppet regime as a part of the masterplan developed by the United States and its allies to destroy Russia. We are trying to stop the war by using military force to protect our country and the lives of our people in four primordial Russian territories that finally reunited with their historic motherland.”

Professor Westad notes that the Russian invasion of Ukraine is a war of conquest not seen in Europe since 1945. He believes that whatever happens on the battlefield, Russia will not achieve its unobtainable goal of wiping out the Ukrainian sense of nationhood, making the conflict all the more intractable and difficult to resolve. 66

The Russia-Ukraine war has so far been a complex and dynamic armed conflict, making it difficult to draw definitive conclusions about its possible outcomes. It is crucial to approach any analysis of the conflict with caution and to consider multiple perspectives. Several reasons contribute to this complexity:

First: the war is continuing, and the situation on the frontlines is constantly changing. The unpredictable nature of the conflict makes it hard to make accur ate predictions.

Second: the sheer volume of information and opinions available makes it challenging to separate fact from speculation. Various media outlets and experts have different viewpoints, and some may have political agendas.

Third: there are unknown or less researched factors that could have significant impact on the conflict’s outcomes, such as, for instance, the health of President Putin, the attitudes to war of the Russian elite, and the sustainability of Russia’s war financing efforts.

Fourth : any specific emphasis on a particular outcome could be politically sensitive and potentially damaging, given the highly polarised nature of the public debate on the conflict.

66 https://www.hks.harvard.edu/faculty-research/policy-topics/international-relations-security/are-we-entering-another-cold-war

In our view, there are several critically important factors that could determine the potential outcome(s) of the war.

1. Ukraine’s resilience and social cohesion. The past year has seen Ukraine unite against the Russian invasion, resulting in an unprecedented level of social cohesion, determination to protect the country, and public support for Ukrainian identity. Recent polls show high trust of the Ukrainians in their armed forces and their unbending resilience as well as remarkable determination and perseverance in defending the country’s sovereignty and national identity. The entire world has taken notice of Ukraine’s unwavering spirit in the face of great hardship and existential threat.

In her passionate 2022 State of the Union address, the European Commission President Ursula von der Leyen praised Ukraine for its bravery, saying, “Today – courage has a name, and that name is Ukraine. Courage has a face, the face of Ukrainian men and women who are standing up to Russian aggression… Glory to a country of European heroes. Slava Ukraini!”. Similarly, during his first visit to Kyiv since February 2022, President Biden expressed his admiration for the Ukrainian people, stating that they had captured his heart.

Recent public opinion polls by the “Rating” company and the Kyiv International Institute of Sociology (KMIS) conducted between December 2022 and January 2023 indicate that Ukraine’s armed forces enjoy the highest trust among the people, with a staggering 95% of respondents expressing confidence in their capabilities. More than 82% of those polled believe that things in Ukraine are moving in the right direction, and an overwhelming 97% of respondents are confident that Ukraine will be able to repel Russia’s aggression. 67

Furthermore, 90% of Ukrainians believe the most significant improvements have been in the country’s defence capability and international image. KMIS reports that President Zelensky’s level of popular support exceeds 84%, while the nation’s support for the government and parliament is also significantly higher than it was before the w ar. 68

The Ukrainians’ willingness, motivation, and resilience in defence of their country were underestimated by the Kremlin and Russia’s military planners, something that eventually may prove to be one of most decisive factors in shaping the war’s outcome. This stands in stark contrast to the Kremlin’s propaganda and manipulation of the Russian population struggling to make Russians believe that their army is liberating Ukraine from imaginary “Nazis”.

2. The strength of Ukraine solidarity alliance. The aggression of Russia against Ukraine has become, to use an appropriate context Samuel Huntington’s catchphrase, an existential “clash of civilisations”. And this clash, based on irreconcilable differences regarding fundamental values and forms of governance, rather than cultural and religious identities between Russia and Ukraine (though they do exist), has united the West and revamped the NATO and the EU projects more than anything else. As mentioned previously, the war has disrupted the global economy, trade and geopolitics, ideologically split the world, brought back the 1960s “nuclear ghosts,” and presented a fundamental challenge to the rule-based global order. The West cannot afford to lose this war since its outcome will influence the future of the world order, the course of globalisation, reliability

67 https://ratinggroup.ua/research/ukraine/ 68 https://kiis.com.ua/?lang=ukr&cat=reports&id=1174&page=1

of supply chains for critical materials, reform of multilateralism and IFIs, climate and other global cooperative agendas.

Cohesion and further support to Ukraine by the “ Ukraine solidarity alliance ” are vital factors that have already significantly shaped the course of the war and will continue to do so. Adequacy and expediency of military and financial aid are especially important. By the end of 2022, 46 countries had joined this alliance, providing Ukraine with growing volumes of essential military and humanitarian assistance. The countries include, among others, all G7 members, 26 EU member states (except Hungary), Norway, Switzerland, major Asian economies like Turkey, South Korea, Taiwan, and India, and Pacific powers (Australia and New Zealand).

The support of the Ukraine solidarity alliance has been critical to Ukraine’s effective and persevering resistance against Russian aggression. In addition to military and financial aid, the alliance has provided extensive diplomatic support and humanitarian aid to Ukraine and Ukrainian refugees, as well as having introduced unprecedented economic sanctions against the aggressor state.

Disparity. The provision of external support to Ukraine remains crucial, considering the considerable imbalance of economic and military power in favour of Russia. The disparity between Ukraine’s and Russia’s economic and military capabilities at the onset of the war indicated that Ukraine initially had limited chances of mounting an effective defence against Russia’s Blitzkrieg offensive. However, Ukraine managed to capitalise on this limited opportunity and has successfully resisted Russian aggression for over a year, demonstrating remarkable military planning and combat skills, economic resilience and determination of the people.

According to the Global Firepower Index , which ranks 145 countries and considers over 60 individual factors to determine a nation’s Power Index score, Russia ranks as the second military-economic power in the world, the 11th largest global economy (fifth in Europe behind Germany, the UK, France, and Italy), the second largest producer of natural gas, and the third largest producer of oil. Russia’s defence budget of $83 billion in 2020 was 2.8 times higher than that of Ukraine, and its foreign reserves were $432.7 billion compared to Ukraine’s $18.8 billion. 69

The Russian army also had an overwhelming advantage over Ukraine in terms of land, air, and naval power. But its might extends beyond conventional military forces. Russia is the largest nuclear power in the world by number of warheads. For a comprehensive comparison of the latest trade and foreign economic data for both countries, please refer to Annex 9 on Russia-Ukraine WTO Trade Profiles

Meanwhile, Ukraine ranks 15th in military-economic power, and its economy has already been severely affected by the war that has taken a significant toll on the country’s economy, with estimates indicating a drop in GDP of 35-40% last year. This sustained damage and the associated financial burden have made Ukraine’s economic and financial situation increasingly fragile. The total amount of assistance required far exceeds Ukraine’s

69 https://www.globalfirepower.com/countries-listing.php

capacity to raise funds domestically or borrow sustainably. Moreover, with every passing day of war, the country’s total financing needs continue to grow, making the situation even more challenging.

While the imbalance of power cannot be ignored, external support to Ukraine, particularly military and financial aid, has been critical in enabling it to hold its ground for so long.

Russia’s attempts to mobilise anti-Ukrainian sentiment in Europe have, in general, failed, as evidenced by the continued and increasing support to Ukraine. The US and some European countries, including Germany, have made generous military assistance pledges, as well as provided unprecedented financial and humanitarian aid to help prevent further deterioration of Ukraine’s public finances. Pro-Ukrainian sentiment in the EU remains strong.

According to the most recent Standard Eurobarometer survey , EU citizens consistently demonstrate their unwavering solidarity with Ukraine. A survey shows that 91% of respondents support providing humanitarian aid, while 88% favour welcoming war refugees into the EU. Financial support for Ukraine is supported by 77% of participants, and 74% back economic sanctions on the Russian government, companies, and individuals. A significant number of Europeans also support banning Russian state-owned media broadcasts (67%) and EU financing for Ukraine’s military equipment purchases and supplies (65%). Overall, 56% of European citizens are satisfied with the EU’s response to Russia’s invasion of Ukraine. A common defence and security policy among EU member states is favoured by 77% of respondents, consistent with last summer’s findings, while 16% oppose it. Furthermore, 80% believe that member states should better coordinate their military equipment purchases, and 69% think the EU needs to enhance its capacity to produce military equipment. 70

As of 2023, the total volume of bilateral and multilateral assistance to Ukraine provided by members of the Ukraine solidarity alliance and three international organisations reached almost €124 billion . The US, UK and Poland have been leaders within the alliance. A recent round of official visits by Prime Minister Rishi Sunak, Presidents Zelensky and Biden reaffirmed further commitment to support Ukraine. Recently, Germany and other European nations have also significantly increased their military aid to Ukraine.

The US military support is particularly crucial for Ukraine’s defence. The coordination of military aid is handled through the Ukrainian Defence Contact Group, also known as the Ramstein Group Format. The group consists of all allies who met at Ramstein Air Base in Germany on 26 April 2022.

The US Congress has passed three aid packages for Ukraine , with a total value of USD 67.3 billion, accounting for more than 60% of all aid provided. The first package (USD 13.6 billion) was approved in March 2022, followed by the second in May ( USD 40 billion) and the third in September ( USD 13.7 billion). If the new Congress approves the fourth aid package of USD 37.7 billion, it would bring the total to USD 105.5 billion. 71

70 https://neighbourhood-enlargement.ec.europa.eu/news/eurobarometer-eu-citizens-remain-strongly-favour-ukraine-and-ensuring-energy-security-2023-02-23_en

71 https://www.csis.org/analysis/aid-ukraine-explained-six-charts

The military aid in the three packages consists of the following four elements:

1. Short-term military support ( USD 17 billion): transfer of weapons and those purchased from allies, training of Ukrainian military, and intelligence sharing.

2. Long-term military support (USD 10.4 billion): funds that Ukraine can use to buy weapons, mostly from the US and elsewhere, but manufacturing and delivery create a long delay.

3. US military operations (USD 9.6 billion): deployment of US troops sent to Europe last spring.

4. DoD general support ( USD 1.2 billion): a wide variety of activities, only indirectly related to Ukraine, to prepare the US for future conflicts. 72

The time lag between military aid commitments and actual delivery presents a significant challenge for Ukraine’s armed forces. The procurement of weapons can take several years to spend as manufacturers are typically paid upon delivery. In the case of the USA, it can take up to five years for funds to be fully disbursed on equipment intended for Ukraine. According to the Center for Strategic and International Studies (CSIS), “it takes about a year to get onto the contract, then two more years before the first item is delivered and another year or more for the remaining items to be delivered.” 73 This delay in delivery puts Ukraine at risk, particularly given the declining stockpiles of weapons and ammunition held by donors. With Russia’s heavy artillery shelling at a rate allegedly from 50,000 up to 70,000 rounds per day, maintaining a parity against such a rate has become a material and logistical challenge for both Ukraine and its Western allies.

Ukraine’s Ministry of Defence has stated that its armed forces have only about 10% of what is necessary to sustain firepower parity with the Russian army. Ukrainian officials have identified a need for a minimum of 1,000 howitzers, 500 tanks, and 1,000 militarygrade drones as part of their immediate needs for heavy weapons. However, Ukraine is not only experiencing a shortage of heavy weapons but also more basic supplies such as ammunition. The efficiency of weapon supply lines has also become a concern. With the declining amount of Soviet-era munitions available globally that can be supplied to Ukraine, the USA authorities have urged other nations with older stockpiles to figure out what could be delivered to Ukraine as a matter of high priority.

Despite the difficulties and challenges, a renewed political commitment by all major Ukraine allies can be expected to meet Ukraine’s need for modern weapons and ammunition. Improved expediency and adequacy of military and financial support to Ukraine by members of the Ukraine solidarity alliance is one of the most important factors that will shape the outcome of the war.

3. Effectiveness of sanctions. Economic sanctions are a widely used policy measure introduced by countries during times of war, conflicts, and state-supported terrorism to exert strong economic and trade pressure on aggressors, malign actors and rogue states. The effectiveness of such restrictive measures can be heightened if global powers closely coordinate their actions.

In 2022, the economic sanctions against Russia, first introduced in 2014 after the occupation of Donbas and annexation of Crimea, were significantly broadened and 72 https://www.csis.org/analysis/aid-ukraine-explained-six-charts 73 Ibidem.

intensified by the establishment of the “sanctions coalition” (US, UK, EU, and other major powers) that effectively turned the sanctions into an “economic war” of unprecedented scale. The primary targets of the sanctions are Russia’s military and defence capability, its access to vital technology, the country’s financial, military and energy sectors, as well as the wealth and assets of Putin’s inner circle, elites, and key decision-makers. 74

Due to the size of Russia’s economy and its significant share in exports of non-carbon critical resources and materials (several strategic metals, chemical gases used in semiconductor production, wheat, and fertilizers) the sanctions have contributed to disruptions in global supply chains and higher commodity prices. In other words, they have become a significant global disruptor. The sanctions have had exemptions to minimise humanitarian costs, such as those related to global food security concernstransactions involving agricultural trade as well as fertilisers have been exempt from financial sanctions.

Continuation of sanctions is likely to have lasting effects on the structure of the global economy. It could create lasting fractures in global trade that may undermine the international rules-based economic order and accelerate efforts by various countries, particularly China, to reduce their reliance on the USD in international transactions. As mentioned before, the freeze of Russia’s central bank assets could also prompt some countries to reconsider their USD holdings.

Therefore, members of the Ukraine solidarity alliance (the “sanctions coalition”) have strategically viewed the sanctions expected outcome - a significant slowdown or disruption of Russia’s ability to finance its war machine - as the most important trade-off to the negative effects of sanctions on the global economy.

As many analysts noted, the economic sanctions have undoubtedly affected the Russian economy, but their impact has been less severe than initially anticipated. Russia has managed to weather the sanctions better than expected, as seen by its lower-thananticipated economic contraction. The IMF estimated last year that Russia’s economy would contract by 3% in 2022, while some experts within the Russian Ministry of Finance and Central Bank were even predicting a decline of 8-12%. Recently, Russia’s official statistics reported that the country’s GDP contracted in 2022 by only 2.1%, while inflation reached 14.2% compared to the 2021 level. 75

Nethertheless, the sanctions have already created a series of painful economic challenges for Russia, with the most noticeable being:

• Russian oil has been selling below market prices, and Russia has practically lost the European natural gas market delivered over the pipelines.

• The Russian defence sector has encountered growing difficulties procuring spare parts.

• Some major Russian enterprises have suspended production due to the lack of foreign-made parts.

• Dozens of affected companies have placed employees on part-time schedules or furlough.

74 See: https://www.whitehouse.gov/briefing-room/statements-releases/2022/02/24/fact-sheet-joined- by-allies-and-partners-theunited-states-imposes-devastating-costs-on-russia/ 75 https://rosstat.gov.ru/storage/mediabank/22_20-02-2023.html

• Hundreds of international companies left the Russian market.

• Russia’s financial sector has incurred losses of hundreds of billions of Rubles.

• The sanctions have restricted Russia’s access to global capital markets, hampered investment, and slowed economic growth.

• The sanctions have also had some impact on ordinary Russians, who have seen their purchasing power decline and their standard of living erode.

The sanctions so far have not delivered the economic “knock-out effect” that many predicted and didn’t force Russia to its knees. The Russian government has taken several steps to mitigate the impact of sanctions, such as increasing import substitution, finding alternative markets for Russian goods, and diversifying the economy away from energy exports. Russia has also made efforts to deepen economic ties with other countries, particularly China and other BRICS nations.

According to professor Oleg Itskhoki, there were several factors that explained last year’s resilience of the Russian economy to sanctions but the “key factor behind the relatively weak impact of sanctions on the Russian economy was the abnormally high export earnings and their anti-crisis effect which was achieved, in part, as a result of import restrictions. This meant that the effect of financial sanctions on the Russian economy was neutralised, and the consequences of various other shocks were mitigated as well. There was no significant need for large capital outflows, which meant that there was also no need to introduce austerity measures.” 76

These factors could be summarised:

1. Effective restrictive measures by the Central Bank that prevented a bank run and massive deposit and capital flight.

2. The “paradox of sanctions during a trade surplus,” where both import and financial restrictive measures introduced by the sanctions actually helped prevent a financial crisis in Russia due to the huge trade surplus it had.

3. Russia’s effective export diversification effort with global and regional powers, as well as countries outside the sanctions coalition, helped to prop up the trade surplus.

4. Abundance of money in the economy, which the government used to support companies in the public and private sectors through massive subsidies to prevent bankruptcies and labour layoffs.

5. Well-prepared anti-sanction response by the Kremlin, which included a well-coordinated and vertically integrated anti-sanction and economic resilience institutional setup, a sweeping import substitution programme, and intensive and well-financed efforts to increase domestic food production.

It has become clear that sanctions against Russia will remain in place for the long term, with a focus on implementing new measures to tighten sanctions and restrict Moscow’s exports in 2023. The new measures will also aim to close loopholes, particularly in dual-use technology and components, and may include additional restrictions on Russia’s energy sector, such as a tightening of the G7 oil price cap. As a result of the expected new coercive measures, Russia and other targeted countries are likely to make greater 76 https://re-russia.net/en/expertise/051/

efforts to sanction-proof their economies by setting up non-Western financing channels. The EU and the USA will monitor Russia’s circumvention efforts and impose sanctions on countries believed to be aiding Russia with sanctions evasion, such as Iran. 77

In 2023 and beyond, the sanctions, including the new waves, are likely, according to most analysts, to have a much heavier impact on Russia’s budget and its ability to sustain previous financing levels for the war effort. The experts even discuss a possibility of a typical crisis scenario in 2023 (as Itskhoki called it a “sudden stop”), accompanied by further decline in capital inflows, mounting devaluation pressures, and growing problems with financing both the real and banking sectors of the Russian economy.

A well-known expert Timothy Ash predicts that the situation will worsen for Russia over time, with more casualties and equipment lost, and lower energy receipts due to falling oil prices and a significant discount on Urals oil. He estimates that energy receipts could be lower by USD 150 billion in 2023, which would result in the budget deficit tripling to over 6% of GDP and the current account surplus of USD 225 billion rapidly evaporating. This could lead to increased capital flight and reserve depletion, exacerbating the economic challenges faced by Russia. “Putin will have to make guns versus butter choices”, concludes Ash, “and that means risks of social and political unrest at home.” 78 But conditions to determine this choice, in our view, can hardly be expected to materialise in the short-term perspective.

Our conclusion regarding the impact of sanctions on the outcomes is based on the observed trends and facts. As the sanctions take a stronger hold, with Europe’s pipeline gas market lost and global demand deflating due to high energy and commodity prices, along with the increasing threat of tough secondary sanctions on grey market imports of dual-use technology and components, Russia’s ability to financially support its army and defence sector should be expected to decline significantly in 2023 and beyond.

Our conclusion, therefore, is that the “economic attrition war” between a USD 1.8 trillion sanction-hit Russian economy and a combined USD 40 trillion global power of the Ukraine solidarity alliance is becoming increasingly a decisive factor for the war outcome, which will play in favour of Ukraine.

4. Alliance with China and support from autocratic states. The impact of sanctions on Russia’s economy has led to a decline in energy exports to the EU and a corresponding increase in trade diversification towards China, India, and other Asian countries. In 2022, China became Russia’s most significant trading partner, with overall trade reaching a record high of USD 190 billion, a 30% increase from the previous year. Russia has been offering its oil at a discount to willing buyers in Asia, and China’s state-owned oil companies have increasingly used RMB to finance oil purchases. India has also become a large buyer of Russian oil, with imports rising from a low base to potentially making Russia its largest single hydrocarbons supplier.

However, the G7 price cap plan, aimed at keeping Russian exports by sea at or below USD 60 a barrel, could be impacted by lax enforcement, while a total ban on Russian oil

77 Last December, the EC put forward a proposal to harmonise criminal offences and penalties for the violation of EU restrictive measures, with measures ranging from imprisonment (for individuals) to a 5% “tax” on the worldwide turnover of companies.

78 https://timothyash.substack.com/p/outlook-for-the-war-in-ukraine

could lead to market instability and oil price increases. The potential consequences of the price cap on countries such as China and India, who already purchase discounted Russian oil, remain uncertain. Moscow has warned that it may halt exports to countries that adopt the G7’s proposal to enforce oil price caps. However, redirecting oil from Europe to Asia would be a more costly process for Moscow.

Russia has long-term ambitions to enhance its strategic energy partnership with China. In 2022, Russia doubled its liquefied natural gas (LNG) exports to China and increased its delivery of natural gas through the Power of Siberia pipeline by 50%. The pipeline, which commenced operations in 2019, has facilitated a stronger energy trade between the two nations. They have also agreed to construct a new gas pipeline, known as the Power of Siberia 2. Once this pipeline is completed later this decade, Russia may surpass other gas suppliers and become China's primary source of gas.

Transfer of sensitive equipment and technologies. Despite Western sanctions on technology and dual-use components, China has continued to provide sensitive technology products to Russia’s defence sector through state-owned conglomerates. These products include items used in the production of weapons and ammunition for battlefield operations in Ukraine. The Center for Advanced Defense Studies (C4ADS) investigative report

*EU members in orange

US$bn in November 2022

Source: The Observatory of Economic Complexity

Russia’s biggest export destinations

suggests that patterns of data censorship in China and complex corporate networks obscure trade in defence-applicable technology. This opacity conceals the networks of people and companies involved in the trade of military equipment, undermining global non-proliferation efforts.

China Poly Group Corporation , a state-owned conglomerate comprising over 2,900 companies operating in over 100 sectors, supplied anti-aircraft missile radar parts and other strategic components to Russia’s sanctioned weapons systems manufacturer Almaz Antey and other defence enterprises between 2014 and 2022. China, the largest exporter of semiconductors, also sells them to Russia through shell companies in Hong Kong and the UAE. Some Chinese companies have exploited the grey area between military and civilian use by supplying Russia with civilian UAVs that can be converted into attack drones. 79

Lethal support by China, Iran and North Korea. Russia relies on its alliance with China in geopolitical plans and war scenarios, and a “new era” in international relations was initiated by both countries after Chinese leader Xi’s visit to Moscow in March 2023. This followed Putin’s 2022 Beijing visit, where a strategic partnership aimed at countering USA influence was announced, with no “forbidden” areas of cooperation. The platform for strategic partnership is based on the following objectives:

• Russia’s support to China’s stance on Taiwan.

• Opposition to the AUKUS alliance.

• Joint opposition to NATO enlargement and demanding security guarantees for Russia regarding Ukraine.

• Concern about the USA plans to develop missile defence and deploy it in various parts of the world.

• Criticising attempts by “certain states” to establish global hegemony and impose democratic standards.

• Strengthening cooperation in artificial intelligence and information security.

The strategic partnership preceded Russia’s invasion of Ukraine, suggesting possible coordination with China. The Moscow summit confirmed the ideological convergence of both autocratic powers, focusing on the border revisionism, formation of a new geopolitical axis, and confrontation against the USA and the Transatlantic alliance. Talks likely included lethal aid and increased Russia’s exports to China to bolster resilience of its economy against the sanctions.

However, there are serious doubts about the nature and depth of emerging Russia-China axis. The Transatlantic alliance is challenged by Russia that has the world’s largest arsenal of nuclear warheads and China that may soon become the world’s largest economy by GDP. But, as the Center for European Policy Analysis (CEPA) analysis rightly points out, intangible indicators and achievements that characterise the quality of life, levels of corruption well as innovation capacity remain far inferior to the Western standards. 80

For example, the UN Human Development Index (HDI) that evaluates health, education, and income ranked Switzerland and Norway highest in 2022, the USA at 21 st position,

79 https://c4ads.org/reports/trade-secrets/ 80 https://cepa.org/article/putin-and-xi-by-the-numbers/

while Russia and China were behind at correspondingly 52 nd and 79 th places. In terms of freedoms and civil liberties, both countries are in the North Korea and Cuba league. Public discontent in China and Russia is notable, but ordinary people cannot change ruling elites, indicating a persisting sombre outlook. Public discontent is evident, but regime change is difficult if not impossible.

As far as innovation is concerned, the Global Innovation Index ranked Russia 47th and China 11th, with China being the only middle-income country in the top 30. Russia and China’s poor R&D performance is also reflected in Nobel Prize distribution: Russia, together with the Soviet Union has won 4 prizes in literature and 4 in peace, including Mikhail Gorbachev, ostracised by the Kremlin. Russian emigrants won 11 prizes in physics and chemistry and two in economics. China has approximately the same pattern and comparable numbers. Europe’s smaller countries, such as Sweden, Switzerland, Austria, and the Netherlands, have won significantly more Nobel prizes than China and nearly as many as Russia. The USA leads with 406 prizes.

Transparency International’s Corruption Perceptions Index ranked Denmark and Finland as most honest in 2022, while Russia was near the bottom. Finland is the least fragile and least corrupt state globally. Wealthy countries’ per capita incomes generally align with happiness scores, but some gaps exist. Finland, together with Denmark, tops the Happiness Index. Nordic countries perform best overall, but both China and Russia underperform in both human development and happiness. The USA ranks 16th, China 71st, and Russia only 76th.

In addition to non-lethal support, USA intelligence sources suggest that China may be planning to provide the Kremlin with “lethal support,” including weapons and ammunition, which China strongly denies. If this were to happen, it would considerably complicate the situation for Ukraine and potentially escalate geopolitical tensions to an unprecedented level between two global superpowers.

In an attempt to adapt to sanctions, Russia has sought assistance and coordination from several sanctioned states, including Iran. Moscow and Tehran, both experienced in coping with sanctions, have not only shared a narrative of joint resistance against the USA, NATO, and other countries supporting Ukraine, but have also developed full-fledged military cooperation.

One aspect of this cooperation involves Russia procuring Iranian direct-attack munitions and unmanned aerial vehicles (UAVs), areas where Russia has fallen behind. Moscow may be running low on some of its precision-guided weapons, and a new generation of tactical air-to-surface missiles may not have entered the air force inventory in significant numbers. Russia has received the Shahed-136 direct-attack munition and the Mohajer-6 UAV from Iran, and additional types of equipment may have also been secured. The Shahed-136 allows Russian forces to launch strikes using multiple direct-attack munitions at fixed targets, which the Russian army has used for intensive air bombardment of civilian and infrastructure targets inside Ukraine.

Russia and Iran share a common goal of undermining Western sanctions, and they have pursued various joint initiatives since Russia invaded Ukraine. Last August, they began

trading in their national currencies to bypass USA financial sanctions. Both countries engage in barter, exchanging Russian metals for Iranian automobile spare parts and gas turbines. Last September, they held talks with Azerbaijan to revive a dormant project on the rail component of the International North–South Transport Corridor, which aims to connect Iranian and Indian markets. In the energy sector, Iran’s National Iranian Oil Company and Russia’s Gazprom announced an ambitious USD 40 billion investment plan to develop Iranian oil and gas fields, build liquefied natural gas (LNG) facilities, and construct gas pipelines.

Russia’s efforts to decouple from the West will increase its dependence on Iran’s welldeveloped sanctions evasion schemes. As seen in Iran’s provision of UAVs and directattack munitions to Russia, Iran may be able to fill gaps where Russia’s well-financed import-substitution policy has failed. While bartering arrangements and the Ruble-Rial mechanisms may provide marginal trade and liquidity benefits, they are unlikely to constitute a significant lifeline for the Russian economy in the short term.

Moreover, Iran and Russia may become competitors in the clandestine market for access to Western technology. Iran has obtained controlled Western technology by working through networks of intermediaries in Western and Middle Eastern capitals, transhipping prohibited items through large ports, and collaborating with Chinese state-owned companies such as Huawei. To circumvent Western export controls, Russia, whose indigenisation efforts have long fallen short of its needs, will probably come to rely on these same black-market channels, where supply is constrained.

Sanctions on Iran have generally been inadequate and failed to deter Iran from fighting through proxies or advancing its missile programme. Disruption, physical or virtual, of Iran’s capabilities has been more effective, but appetites for instability in Israel and the Gulf are limited. However, Western actors should not hesitate to remind Iran that continuing support for Russia’s illegal invasion, as well as international terrorism, will come at a cost. Nevertheless, applying these costs effectively will be a challenge.

If unchecked, Russia and Iran may develop new and more “ingenuous” ways of cooperation to evade Western sanctions, making it less likely that the West will contain Russian aggression, Iran’s use of militias, or its nuclear programme. However, at present, Iran’s military and economic support for Russia seems unlikely to reverse Russia’s military failures in Ukraine.

North Korea, known for its long track record of arms trade with mostly Soviet-designed weapons, presents a potential source of military aid to Russia. This rogue state possesses a vast arsenal of relatively primitive artillery and rocket systems dating back to the 1950s, which are of a similar type and calibre used by the Russian army to shell Ukraine’s civilian infrastructure. According to an IISS assessment, the regime has approximately 20,000 artillery pieces in service, including multiple rocket launchers, significantly more than any other country in the world.81 Recently, North Korea was implicated in dodging sanctions to supply weapons to Syria and Myanmar, including chemical weapon supplies, ballistic missile components, and conventional weapons such as multiple rocket launchers and surface-to-air missiles.

81 https://www.npr.org/2022/09/07/1121477374/north-korean-ammo-will-stretch-russias-supply-but-with-clear-limits-and-drawback

North Korea has the potential to become one of the biggest sources of compatible artillery ammunition for Russia. However, the RAND Corporation’s experts assess that it is more likely that the regime will supply Moscow with ammunition for small arms and not ballistic missiles crucial for the country’s military posturing against Seoul and Washington. In return for weapons, North Korea could receive shipments of food, fuel, and other materials from Russia, goods that are difficult to import due to the UN sanctions imposed on its nuclear program. For more sophisticated weapons systems, North Korea may seek advanced weapons technologies from Russia, including those necessary for its nuclear program. 82

Supplies of weapons and ammunition from China, Iran, and North Korea, if they gain momentum and scale, could provide Russia with much-needed replenishment for depleting weapons and stocks, thereby becoming a significant factor capable of turning the tide in the war.

5. Domestic support for war and the Kremlin’s inner circle. Given the complexity of the topic, this report will provide only a brief overview of the evolving domestic situation in Russia and the state of the Kremlin’s inner circle, with the aim of understanding how these factors may affect potential war outcomes.

First , it is challenging to develop a comprehensive and objective picture of the true status of attitudes and views inside Russian society, which is closed, highly censored and sensitive to politically charged issues such as the war in Ukraine. 83 Second , Russian society is structured as a typical autocracy, with 80% of the population categorised as poor or low-income households that form a so-called deep stratum characterised by low education standards and limited involvement in social, political or other public activities. Their worldviews, fed mainly with official narratives through state-owned media, are often extremely polarised and aggressive while being biased, stereotyped, dogmatic and dominated by mythology and conspiracy theories. 84

Some figures and facts may help to better understand the levels of support by the Russian society of the war in Ukraine. Despite the possibility of a “Potemkin village” fix of the poll results, the “Special Military Operation (SMO) anniversary” public opinion research conducted by Russia’s main sociological centre ВЦИОМ presents a very unsettling picture:

• Compared to 2022, almost 68% of polled participants support a decision on the war (65% in 2022), while 80% consider the war results so far as positive, and 75% approve the annexation of four Ukrainian provinces.

• Trust in Putin as the nation’s leader has increased from 65% to 78%, and similar support has been expressed for his activities during the war.

• The propensity to emigrate from Russia has decreased from 16% to 8%.

• The share of people satisfied with existing living conditions has gone up from 48 to 57%.

• 48% consider the economic situation satisfactory, and 16% consider it good.

• 70% believe that Russian companies can substitute foreign business that left Russia.

• More Russians (73% vs. 62% a year ago) think that Russia now has a higher influence in international affairs, while 82% (60% in 2022) are confident that Russia has already become or is on the way, in 15-20 years, to become a great global power. 85

These results suggest that Russian society is largely supportive of the war and Putin's leadership, and that there is a growing sense of national pride and confidence in Russia's global power status. However, given the potential for manipulation of the data and the limited access to objective information in the Russian society, these findings must be interpreted with certain caution.

Informal reports suggest a growing conflict between the Kremlin’s two main groups of influence within its inner circle: the radicals , mainly law enforcement and security heads, and the moderates , particularly top technocrats in government and the president’s bureaucracy. The moderates allegedly warned Putin about looming sanctions-related economic decline and massive corruption in the Ministry of Defence and defence sector. However, it is noteworthy that among the Russian klepto-elite , there have been very few, if any, members who are openly disloyal to the Kremlin. Since the war began, there has been no mass exodus of anti-war government bureaucrats and public sector top managers, while large businesses have remained either silent or reiterated a rather neutral stance of “we are for peace.”

Some consolidation among the inner circle became apparent after the first wave of conscription in October 2022, as both groups converged on several important themes:

b) Ukraine’s army is a serious and viable force to reckon with, while Western military support is an important factor to consider;

a) the war is going to take much longer than expected;

c) the country’s economy should be put onto the “military tracks”, with the defence industry and import substitution being top priorities.

This centrifugal shift among the inner circle groups may signify several things:

1) members of the klepto-elite stratum have realised that they will not be able to avoid eventual responsibility for the regime’s war crimes in Ukraine and that their lives are now intrinsically connected only with Russia and confined within Russian borders. Against the background of widening personal sanctions, the line of no return, in their view, has been crossed; 2) the Kremlin’s autocrat has managed to consolidate the klepto-elite , something that has been his long-time objective, through a “carrot and stick” approach. Putin explicitly made it known that all those who might oppose the war would be considered agents of the West and traitors, thus instilling a strong fear of retribution; 3) the klepto-elite may now be less likely to consider any move against the Kremlin’s leader.

With seemingly high public support and a strong propensity to continue the war, this factor will continue to weigh on potential outcomes until the economic situation in Russia starts to deteriorate.

Prospects. The lengthy procurement and delivery of weapons to Ukraine, among other circumstances, has led to what analysts call the transitional stage in the war - a more protracted warfare with continuously contested frontlines. Exhaustion and heavy losses will make carrying out large-scale offensives increasingly costly and difficult for both sides. Both Russia and Ukraine are preparing for a new push this spring, but both sides seem to struggle to gain a conclusive advantage on the ground. According to EIU, Russia’s military problems will continue, including heavy damage to troops and equipment.

This will push Russia to double down on its strategy of inflicting major damage on Ukraine’s critical infrastructure as a means to strangle the economy and demoralise the population. A second Russian mobilisation drive is also likely. At the same time, Ukraine’s war efforts will continue to be constrained by equipment and personnel shortages. 86

Most probably, active military actions will continue throughout 2023, and the battlefield situation will be exhausting for both sides. One of the likely outcomes, according to EIU, could be a truce along a disputed and heavily armed line of demarcation - “neither peace nor war, no winners or losers, no genuine negotiations, and no trust in any agreement.” 87

Russia and Ukraine’s principal objectives for 2023

Given that both sides see the war as an existential issue, the prospects for serious peace talks appear bleak. President Zelensky has proposed a ten-point peace plan for Ukraine, which includes the restoration of the country's territorial integrity to its 1991 borders and a comprehensive international treaty on security guarantees. However, the Kremlin quickly rejected these fundamental requirements. In his recent speeches, Putin has framed the conflict as a battle with the global West that threatens the very existence of Russia with its unique "Russian civilisation." Protection of Russian-speaking residents in Donbas, initially cited as the objective of the special military operation, is no longer emphasised as it once was. Instead, the focus has been shifted towards the civilisational confrontation with the West, which, according to popular narratives amplified by the Kremlin propaganda, seeks “to wipe Russia from the face of the Earth”.

The threat of escalation. The possibility of Ukraine’s success in Donbas and an eventual attempt to liberate and regain control of Crimea could lead to a dangerous escalation and pose new global risks and threats. If Russia’s positions on the frontlines become untenable, accompanied by domestic economic and social deterioration, several potential scenarios could unfold. These might include Putin’s “voluntary retreat” from office, followed by a brutal power contest among various inner circle groups, including

ultra-nationalists. Alternatively, Putin could move towards nuclear escalation, as the loss of Crimea could be constitutionally interpreted as a direct and existential threat to the existence of Russia’s nation-state.

Escalation of risks and possible “war fatigue” among members of the Ukraine solidarity alliance could increase political pressure for a negotiated settlement, potentially requiring concessions from Ukraine. There are already concerning signals of complacency or doubts among the Western public, as some argue that military and financial support to Ukraine may have certain limits, the war may not have a clear winner, and that “a bad peace is better than a good war.”

Outlining potential war outcomes at this stage remains highly challenging. The impending global recession and the economic impact of the war on Ukraine’s primary allies could spark intense political and public debates, compelling Western governments to confront difficult choices and moral dilemmas. These challenges may test the resolve of the Ukraine solidarity coalition and influence the desired outcome of the conflict.

Ukraine’s low economic resilience and heavy financial dependence make it susceptible to external pressures, while any significant pause in combat actions could give the Kremlin breathing space to train new mobilised reservists and procure more weapons and ammunition from rogue state allies. At the same time, a significant deterioration in Russia’s fiscal position, along with further depletion of foreign reserves and resources in the sovereign wealth fund, could undermine the Russian war machine and shift the popular sentiment from “ focus on TV to concern about the Fridge .” This could serve as a decisive signal to the inner circle “ siloviki ” group to consider a power transition in the Kremlin.

In this context, Ukraine’s progress on the battlefields, the effectiveness of sanctions against weapons and ammunition suppliers, and the speed of degradation of Russia’s economy under the burden of sanctions will play a decisive role in shaping the potential war outcome.

KEY INSIGHTS:

• Forecasting the outcome of the Russia-Ukraine war is extremely difficult due to its dynamics, volatility, polarity of expert views, and many unknown inputs about Russia.

• There are several key factors that could shape the potential outcome of the war: 1) Ukraine’s resilience and internal cohesion; 2) the strength of the Ukraine solidarity alliance and adequate flows of support; 3) the effectiveness of economic sanctions against Russia; 4) lethal and financial assistance to Russia from its allies; 5) domestic support for the war and the cohesion of Kremlin’s power groups.

• The effectiveness of sanctions against Russia is increasingly becoming a war not only of military power but of economic attrition and resilience between a crippled Russian economy and a combined USD 40 trillion global power of the Ukraine solidarity alliance . Only significant deterioration in Russia’s fiscal position can seriously undermine the Russian war machine and determine the Kremlin’s propensity to seek peace.

• P ossible supplies of new weapons and ammunition to Russia by China, Iran, and North Korea could significantly change the situation. The support for the war inside Russian society and the cohesiveness of the Kremlin’s inner circle remain rather strong, but this could change once economic conditions deteriorate.

• The Russia-Ukraine war seems to have entered a transitional stage characterized by protracted warfare with continuously contested frontlines, something that could last throughout 2023 and beyond.

• For the time being, the likelihood of peace negotiations is rather low, while the threat of escalation remains not only possible but high.

INSTEAD OF CONCLUSIONS

The war in Ukraine has had a significant impact on global growth and has increased the risk of a recession, particularly in Europe. Governments worldwide are facing immense pressure due to depressed growth, high inflation, a cost-of-living crisis, and rising military expenditures. The Russia-Ukraine war is widely regarded as a significant threat to global security and the economy, with potential escalation posing an even greater risk. The war has brought an end to the era of relative global stability and peace dividends.

The forthcoming phase of globalisation will be accompanied by growing “frictional costs,” including military, cybersecurity, onshoring, and friend-shoring. However, this presents new high-tech opportunities. The war has marked the beginning of a new phase in geopolitics, characterised by fierce competition, confrontation, and power politics.

The world has split into a new configuration - a Collective North that supports Ukraine and a significant part of the Global South that either directly supports Russia or has taken a "wait-and-see" position. The imperative of supply chain resilience will redefine economic security in the 21st Century. Control over production and supply of strategic minerals is becoming the name of the game. Despite the catastrophe for the environment, the war has presented opportunities for clean energy and high environmental standards to govern supply chains.

The UK has been less affected by the direct impacts of the Russia-Ukraine war due to its reliance on domestic renewable energy sources and gas supplied from Norway, but the war has added to existing challenges and increased related fiscal pressures. The war has highlighted strategic commonalities between the EU and the UK, creating a demand for closer cooperation on policy priorities.

The potential outcome of the war is difficult to forecast due to its dynamics and unknown inputs, but several key factors could shape it. The effectiveness of sanctions against Russia is increasingly becoming a war of economic attrition and resilience, and only significant deterioration in Russia's fiscal position can undermine the Russian war machine and determine the Kremlin’s propensity to seek peace.

As the global democratic community anticipates a favourable outcome for Ukraine, a critical question lingers: "Can the core principles of European and global security order prove their resilience?" Considering the growing ideological divide between Russian (autocratic) and Western (democratic) perceptions of these principles in recent decades, and especially since 24 February 2022, the development of a fragmented and polarised security order seems to be the most probable long-term outcome.

ANNEXES

Annex 1. Ukrainian Refugees by Country, 2023

Countries featured in the Refugee Response Plan:

Annex 1. Ukrainian Refugees by Country, 2023

Countries featured in the Refugee Response Plan:

Other Countries neighbouring Ukraine

ANNEX 2. Ukraine Aid (Euro and % to GDP):

ANNEX 2. Ukraine Aid (Euro and % to GDP):

ANNEX 2. Ukraine Aid (Euro and % to GDP):

ANNEX 2. Ukraine Aid (Euro and % to GDP):

ANNEX 2. Ukraine Aid (Euro and % to GDP):

ANNEX 2. Ukraine Aid (Euro and % to GDP):

ANNEX 2. Ukraine Aid (Euro and % to GDP):

Source: Ukraine Support Tracker / https://www.ifw-kiel.de/topics/war-against-ukraine/ukraine-support-tracker/

Annex 3

The change heatmap, October–November 2022, change in index score since November 2021

Annex 3. Munich Security Index - 2023

The risk heatmap, October–November 2022, score

Data and illustration: Kekst CNC, commissioned by the Munich Security Conference

resultofwarorclimatechange

Disinformationweaponsbyanaggressorcampaignsfromenemiesandother discrimination

InternationalUseofbiologicalweaponsbyanaggressor organizedcrime

ChinaUseofchemicalweaponsandpoisonsbyanaggressor

CivilBreakdownofdemocracyinmycountry

warorpoliticalviolence

Afuturepandemic

DivisionsamongstWesternpowersandinstitutions

Tradewars NorthKorea

RadicalIslamic terrorism Iran

Rapidchangetomycountry’sculture

Thecoronaviruspandemic

Right-wingterrorism

Autonomousrobots-artificialintelligence

UnitedStatesEuropeanUnion

THE AMBASSADOR PARTNERSHIP

Figure 1.13

Annex 3. Munich Security Index - 2023

THE WAR IN UKRAINE: IMPACT ON GLOBALISATION AND GEOPOLITICS YURI POLUNEEV

THE WAR IN UKRAINE: IMPACT ON GLOBALISATION AND GEOPOLITICS DR YURI POLUNEEV

The change heatmap, October–November 2022, change in index

The risk heatmap, October–November 2022, score

Useofnuclearweaponsbyanaggressor Foodshortages

EconomicorfinancialcrisisinyourcountryUseofbiologicalweaponsbyanaggressor

Useofchemicalweaponsandpoisonsbyanaggressor Iran

Breakdownofdemocracyinmycountry Civilwarorpoliticalviolence PoliticalpolarizationRisinginequality NorthKoreaTradewarsMassmigration Divisions

resultofwarorclimatechange

Disinformationweaponsbyanaggressorcampaignsfromenemiesandother discrimination

InternationalUseofbiologicalweaponsbyanaggressor organizedcrime

ChinaUseofchemicalweaponsandpoisonsbyanaggressor

CivilBreakdownofdemocracyinmycountry

warorpoliticalviolence

Afuturepandemic

DivisionsamongstWesternpowersandinstitutions

Tradewars

RadicalIslamic terrorism

Iran

NorthKorea

Rapidchangetomycountry’sculture

Thecoronaviruspandemic

Right-wingterrorism

Autonomousrobots-artificialintelligence

UnitedStatesEuropeanUnion

Annex 4 Woorld Merchandise Trade WORLD MERCHANDISE TRADE, PERCENTAGE CHANGES

Annex 4. World Merchandise Trade WORLD MERCHANDISE TRADE, PERCENTAGE CHANGES

(a) Average of the three months up to the report month over average of the preceding three months.

(b) Country data are weighted with shares in world production. Regional aggregates computed with shares in world imports are available in the xlsx file at the CPB website.

Source: https://www.cpb.nl/en/world-trade-monitor-november-2022

ANNEX 5. GLOBAL ENERGY RESOURCES

OIL RESERVES

Venezuela (17.3% of global reserves), Saudi Arabia (15.6%), Canada (10.0%), Iran (9.3%), Iraq (9.0%), Russia (6.4%), Kuwait (5.9%), the United Arab Emirates (5.7%), the United States (2.8%), Libya (2.8%), Nigeria (2.2%), Kazakhstan (1.8%), Qatar (1.5%) and China (1.5%). OPEC controls 71.5% of global reserves.

OIL PRODUCTION

Saudi Arabia (13.4% of global production), the United States (also 13.4%), Russia (12.2%), Iran (5.0%), Iraq (4.8%), Canada (4.8%), the United Arab Emirates (4.4%), China (4.3%), Kuwait (3.4%), Brazil (2.8%), Mexico (2.7%), Venezuela (2.6%), Norway (2.2%), Qatar (2.1%) and Angola (2.0%). The OPEC member states produced 42.7% of the total.

NATURAL GAS RESERVES

Iran (18% of proved global reserves), Russia (17.3%), Qatar (13.0%), Turkmenistan (9.4%), the United States (4.7%), Saudi Arabia (4.5%), the United Arab Emirates (3.3%), Venezuela (3.1%), China (2.9%), Nigeria (2.8%) and Algeria (2.4%).

GAS PRODUCTION

United States (21.3% of global production), Russia (16.3%), Iran (5.7%), Qatar (5.1%), Canada (4.3%), China (3.9%), Norway (3.3%), Saudi Arabia (3.1%), Australia (2.6%), Algeria (2.6%), Malaysia (2.1%) and Indonesia (2.0%).

COAL RESERVES

United States (22.1% of global reserves), China (21.4%), Russia (14.1%), Australia (12.7%), India (8.3%), Germany (3.2%), Ukraine (3.0%), Kazakhstan (2.2%) and Indonesia (2.2%).

COAL PRODUCTION

China (46.1% of global production!), the United States (10.0%), Australia (8.2%), India (7.9%), Indonesia (7.0%), Russia (5.3%), South Africa (3.9%) and Colombia (1.7%).

URANIUM PRODUCTION

Kazakhstan (39.4% of global production!), Canada (22.5%), Australia (10.1%), Namibia (5.9%), Niger (5.6%), Russia (4.8%), Uzbekistan (3.9%), China (2.6%) and the United States (1.8%).

BIOFUEL PRODUCTION

United States (43.5% of global production!), Brazil (22.5%), Germany (3.9%), Argentina (3.4%), Indonesia (3.0%), France (2.7%), China (2.5%), Thailand (2.0%) and the Netherlands (2.0%).

HYDROELECTRICITY (consumption)

China (28.9% of the world total!), Canada (9.7%), Brazil (9.6%), the United States (6.5%), Russia (4.6%), Norway (3.6%) and India (3.2%).

OTHER RENEWABLES (consumption)

China (20.5% of global consumption), the United States (20.0%), Germany (9.0%), Brazil (4.5%), Japan (4.5%), the United Kingdom (4.2), India (3.9%), Spain (3.7%) and Italy (3.6%).

Source: BP Statistical Review of World Energy 2017; World Uranium Mining Production, WNA

ANNEX 6. Military Expenditures by 29 NATO Member Sates

ANNEX 6. Military Expenditures by 29 NATO Member Sates

(% to GDP and volume in million $)

Source: Information on Defence Expenditures - NATO

Note:

1) Iceland is a member of NATO but has no standing military and therefore is not presented.

2) In blue italics : NATO member countries that have not yet met 2014 GDP target.

Annex 7. The European Union Policy Response

Ukraine

Full solidarity confirmed. Measures to help Ukraine’s economy taken. Talks on accession continue.

Ukraine Aid: second largest donor after US.

EU connected UA to electricity grid, suspended import duties on Ukrainian exports; brought Ukraine into EU free roaming area; will ensure seamless access to the Single Market.

Sanctions on Russia

Energy dependence on Russia

European Green Deal

Climate Change Agenda

Reform of economic governance

Assistance to SMEs

Labour market

Immediately taken after 24/02

Ukrainian refugees: more than 7.8 million people hosted Eliminate fossil fuel dependence

Military, financial and humanitarian aid: Euro 30 billion

Fiscal costs of aid and refugee assistance: Euro 43 billion

Toughest sanctions ever

- joint storage;

- new LNG suppliers (US, Norway, Algeria, et al).

- reduced energy consumption (fossil fuel companies to pay special duty;

- temporary state aid framework to allow state guarantees

- reform of electricity market (NextGenerationEU) to boost investment in wind turbines, solar parks, high-speed trains and energy-saving renovations)

- Euro 100 billion disbursed to members

Response to the energy shock and the US “green subsidy”

- Offshore wind power;

- Investment in hydrogen – European Hydrogen Bank and Innovation Fund (Euro 3 billion)

- REPowerEU energy reform

EU will push for global deal for nature

For members to have more flexibility on their debt reduction plans

To open space for investment

- UN Biodiversity Conference in Montreal

- COP27 in Sharm el-Sheikh

- Simpler rules to be introduced

- SME Relief Fund

- single set of tax rules for doing business in Europe BEFIT

- revise Late Payment Directive

To meet the challenge of labour shortage

- Invest in training and education

- attract skilled workers from abroad in a targeted manner

- fast track qualification recognition process

AMBASSADOR PARTNERSHIP

Annex 7. The European Union Policy Response

Supply chains and access to strategic materials

- Demand for rare earths by 2030 will increase fivefold

- European Chips Act (2021)

- diversify from China

- form new supply partnerships (Chile, Mexico, New Zeland, Australia and India)

- vertically integration from extraction to refining

- build strategic reserves

- adopt European Critical Raw Materials Act

- first chips gigafactory will be launched soon

- further strengthen Battery Alliance

- increase financial participation

to Important Projects of Common European Interest

- to create in the future European Sovereignty Fund

European values and democracy

- To rethink EU foreign policy agenda

- Global Gateway (2021)

- deepen and strengthen democracies in Europe

Defence against malign global actors

Anti-corruption

- convene together with President Biden a leaders’ meeting to review and announce implementation projects National and corporate security; Address foreign covert influence

- Foreign agents, shadow companies

- embrace future accession candidates (Ukraine, Western Balkans, Moldova and Georgia)

- for countries beyond accession, establish European Political Community

- climate and digitalisation as instruments of cohesion

- vaccine production in Africa

- legislation to screen FDI in EU companies for security concerns

- Defence of Democracy package to be introduced

- measures to update legislative framework for fighting corruption

- include corruption in human rights sanction regime

New social contract and EU vision

Conference on the Future of Europe

- Citizens’ panels will become regular feature

- new initiative on mental health

Source: BP Statistical Review of World Energy 2017; World Uranium Mining Production, WNA

The new shock: Russia-Ukraine War

Vladimir Putin… in his own words

Vladimir Putin… in his own words

Annex

Source: Defence Intelligence, News agencies, Mapbox, Center for Economic Recovery

(XVIII autonomy (XIX c.) Ukrainian (1917by the (1932Ukrainians, (1944) of collaborating people,

MAP OF UKRAINE AND KEY EVENTS AFTER OBTAINING THE INDEPENDENCE (1991) independence (1994) and the status (2004) after the Viktor (2013) government (2014) Revolution (2022)

• In December

• In February and

• Now, lives

INDEPENDENCE

c.) Limitation of Ukrainian autonomy : In 1764 -1765 the Russian Empire liquidated the autonomy of proto-Ukrainian state "Hetmanate"

c.) Suppression of Ukrainian nationality : Formation of Ukrainian political nation, several antiUkrainian decrees by Russian Empire were adopted, limiting a circulation of Ukrainian language

-1922) Soviet occupation of Ukraine : Despite gaining statehood in 1917, Ukraine was occupied Bolsheviks and included in the Soviet Union

-1933) Genocide of Ukrainian people (“Holodomor”) : Soviet government starved millions of Ukrainians, which was recognized as a genocide by 17 countries

(1944) Deportation of the Crimean Tatars : Indigenous People of the Crimean peninsula were accused collaborating with Nazi Germany and deported from their historical homeland (over 190 thousand people, up to 46% of which died in first few years).

(1991) Independence of Ukraine : The Verkhovna Rada adopted an act of proclamation of independence of Ukraine which was supported by national referendum

(1994) Renunciation of nuclear weapons : The memorandum between Ukraine, Russia, Great Britain the United States on guarantees to Ukraine in connection with its acquisition of non -nuclear was signed

(2004) The Orange Revolution and Constitutional Reform : Ukrainians started the Orange Revolution the Central Election Commission announced preliminary victory of a pro -Russian candidate Yanukovych due to mass falsifications

(2013) Euromaidan : Ukrainians started the Revolution of Dignity (Euromaidan) because pro -Russian government suspended preparations to entering the EU

(2014) Illegal annexation of Crimea and war in Donbas : Several days after the victory of the Revolution of Dignity, Russia brought its troops to Crimea and Donbass

(2022) Full-scale war started by Russia :

December 2021, 130-150 thnd Russian soldiers were concentrated near the Ukrainian border

February 2022, Putin recognizes the “independence” of temporarily occupied regions of Ukraine and orders Russian forces to them. Then Russia launches full -scale invasion of Ukraine Now, 55 days after the start of the full -scale invasion, the war is still in place and already took lives of thousands Ukrainians.

Annex 9. Russia vs Ukraine - WTO Profiles

Russian Federation

Annex 9. Russia vs Ukraine - WTO Profiles

Russian

Russian Federation MERCHANDISE TRADE

Agricultural Products

Russian Federation MERCHANDISE TRADE Agricultural Products Non-Agricultural Products

Products

TRADE IN COMMERCIAL SERVICES

Russian Federation

Ukraine

Ukraine MERCHANDISE TRADE

Agricultural Products