Doing business in the Global South
Black Swan Event
After months of Russian military build-up and increased tensions in the region, on February 24, Russian tanks entered the territory of Ukraine. By doing so, the Kremlin escalated a conflict that had begun in 2014 as a relatively localised affair to one with grave worldwide reverberations. In the year that followed, energy prices and the cost of public goods skyrocketed across the globe, which consequently impacted lives all around the world.
An event like the Russo-Ukrainian war can be considered a ‘black swan event’; an unprecedented and unexpected event with major global consequences. Black swan events, like the Russian invasion, can have far-reaching and long-lasting impacts for the business continuity of companies, as the events have the potential to severely disrupt supply chains, investment flows, trade, and financial markets.
As a Western company, doing business in the Global South — a term used to identify countries mainly situated in Latin America, Africa, and Asia characterized by low income, poor infrastructure, and political marginalization — might already be challenging in terms of culture, infrastructure, safety and security. In addition, the consequences of the Russo-Ukrainian war were felt severely in these countries, amplifying the already existing challenges. The developments that have taken place within these countries during the past year exemplify that regional issues can make a long-lasting impact on the local security situation in countries all across the world; thus, they can have geopolitical effects.
This publication of ‘Connecting the Dots’ emphasises the importance of resilience within companies that operate in the Global South. It does so by providing an explanation on how a black swan event, like the Russian invasion of Ukraine, can impact the business continuity of Western companies operating in countries thousands of kilometres away, one year after the invasion took place. Three cases will be discussed further: Cuba, Libya, and Pakistan. These states are positioned across the world in different continents, but each will show the severe global impact of the Russo-Ukrainian war and the way in which this has impacted business continuity.
How the Russo-Ukrainian war has affected states in the global south
During the past decade, Cuba has been a relatively stable country. Despite economic difficulties, the totalitarian communist government was able to suppress unrest rather successfully; in fact, public protests had become a rare occurrence. However, on July 11, 2021, the country experienced an outbreak of large-scale social unrest which had been unseen for years. Nonetheless, order was quickly restored; in the following months, the Cuban authorities were successful in their increased efforts of suppressing domestic dissent. However, Cuba’s economy continued to deteriorate gradually.
It should be noted that the country’s economy was already in a dire state at the dawn of the Russian inva-sion of Ukraine, which had caused thousands to flee the country for a better future in neighbouring states. However, the consequences of the invasion reached far and wide — they could even be felt in the Caribbean. Figure 1 shows that the events in Europe sparked a serious rise of inflation, which exacerbated the pre-existing shortages of basic goods, including food and medicine. To put this into further perspective, the bottom line shows the inflation rates of the Organization for Economic Co-operation and Development (OECD), which has 38 member countries of which the majority are high-income economies with a high human development index.
Additionally, there have been significant fuel shortages, more power outages and less public transport since the war started. The situation deteriorated to such an extent that even the government’s repression campaign could not adequately avert a wave of protests starting in June 2022. These protests persisted until autumn, and this remarkable outing of nationwide public discontent caused the highest number of protests occurring in Cuba in decades (Figure 2).
Libya shows that the case of Cuba is not unique; similar events can be identified in Libya. On July 22, 2022, Libya experienced the largest occurrence of social unrest in years. Ever since 2014, Libya has been stuck in a persistent political deadlock while hardly being in the world’s spotlight. However, it suddenly made the world’s headlines when demonstrations broke out across several Libyan cities. Most notably, this resulted in the storming and torching of the parliament building of the House of Representatives (HoR) in Tobruk on July 1.
This eruption of unrest did not come out of nowhere. Following the Russian invasion, the country suffered from a heavily deteriorating economy. Libya is heavily reliant on wheat import; for instance, 90% of Libya’s cereal consumption requirements — which includes mostly wheat and barley — is dependent on imports from Ukraine and Russia. Although Libya might seem to have relatively low inflation numbers in comparison to the OECD, the high dependency on wheat imports renders food security in Libya extremely vulnerable and makes consistent high inflation more damaging.
In addition to this, political tensions arose over a persistent oil blockade instated by several militias, including the now infamous Russian Wagner Group. When taking this into account along with the frustrations among the Libyan population, the situation was bound to reach a boiling point at the beginning of summer. As a result, the number of protests has increased significantly, highlighting the effects of the Russo-Ukranian war on the social stability of Libya (Figure 4).
A third clear example is Pakistan, which has built up a reputation for political and economic volatility in the past decade. Amid a difficult economic situation in April 2022, Imran Khan was ousted as prime minister and Shehbaz Sharif was elected as his successor. Ever since, the country has been embroiled in persistent upsurges of large-scale unrest. The situation has severely exacerbated due to the energy crisis that followed after Russia’s invasion of Ukraine.
Europe’s detachment of the Russian energy network provided petrol companies on other sides of the globe with new opportunities to conduct business with European countries. Petrol companies started to back out of their contracts with Pakistan in order to exploit more lucrative or stable markets in Europe. As a result, energy costs in Pakistan increased severely and disproportionately in comparison to Western states. The rise in energy costs caused inflation rates to soar (Figure 5), making day-to-day life extremely expensive. Additionally, gas and fuel shortages have resulted in large-scale power outages.
Amid soaring inflation rates, gas and fuel shortages and large-scale power outages, the incumbent government’s opponents have found a steady base of support for their efforts in organising large-scale demonstrations (Figure 6), attended by thousands of supporters and often involving violence with security forces or other protesters.
Even though the invasion of Ukraine took place over a year ago, countries in the Global South are still dealing with the severe consequences of this black swan event. Power disruptions and high inflation have led to a large number of protests and will most likely grow in size even further in the near future. Governments were walking on eggshells in their ability to keep the economy steady and the population relatively calm (by subsidising food and fuel) before the invasion. However, these shells were easily broken as these governments are facing severe supply chain disruptions and global inflation, which they are incapable of addressing. Therefore, social unrest is expected to grow and increasingly threaten political, economic and sociocultural stability.
As the protests increase, they have the potential to turn violent by either the protesters or police interference. In a most likely scenario, protests result in a reduced workforce and a significant decrease in a company’s supply chain, and freedom of movement to and from hub locations, plants or sites. A worst-case scenario is getting caught in the midst of a demonstration that can result in serious injuries and even loss of life.
Moreover, the population might not only turn against their governments but also against Western companies and their employees. If people are desperate for food or fuel, they might turn to Western people or companies, that are considered wealthy. Companies active in the fuel industry might even be accused of stealing the country’s resources. Western people and companies might therefore become the victim of robberies or violence.
It can thus be concluded that a black swan event — such as the Russo-Ukrainian war — can have long-lasting consequences for countries all over the world. For this reason, (Western) companies that operate in countries situated in the Global South should be prepared for the consequences that can heavily impact business continuity.
The cases of Cuba, Libya and Pakistan underline the need for adequate awareness, monitoring and analysis of geopolitical trends and events. Black swan events can have a worldwide impact and may affect your business environment. Therefore, having comprehensive insight into possible risks and consequences in the countries you operate in is vital for the security of not only your assets, but also your personnel and business continuity. Failing to anticipate on geopolitical developments will leave your company vulnerable and might lead to a decrease in profitability and viability.
Proximities can help you gain these key insights and turn them into tangible material. Using our ‘What?’, ‘So What?’, ‘What (if)?’ and ‘What Now?’ narrative we help partners and clients to not only understand the importance of trends and events, but more specifically, to understand what it means for you and your business from strategic to operational consequences. Curious and interested to see how we could help you? Don’t hesitate to contact us, we are happy to support you.
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