The Economic Actor in the Face of Geopolitical Disruptions: Role, Reaction, and Engagement?

On Thursday, February 24th, 2022, at 4:35 in the morning, Russia invaded Ukraine, triggering a war in the heart of Europe. In response to this act, the European Union (EU) and the United States, in support of the Ukrainian people, first turned to economic measures. No one can yet predict the outcome of events. But what is becoming more apparent than ever is how strong and decisive the interdependence of economies has become in managing geopolitical crises. Equally strong is the pressure exerted on businesses to position themselves in this context.

The Company in the Face of the Use of Economic Measures in Geopolitics

With the conflict in Ukraine, for the first time, countries have decided to sanction a country with they have important economic relations which, despite the consequences of these sanctions will be very costly for them. These countries are willing to pay the risk of these sanctions in exchange for not going to war. If we go back to the Cold War, it is clear that the nature of economic sanctions has evolved: at the time, sanctions were quite radical since it was understood that there were a part of the world with whom trade was forbidden, and companies had to comply with these decisions made by states.

Since the early 1990s, the system has changed and leaders or regimes that do not respect international law are sanctioned, under the aegis of UN principles and treaties. However, the Ukrainian crisis has shown the limits of the UN system, where the Security Council composed of 5 countries, including Russia, has a veto right that can paralyze any sanction and lead to a blockage of the international system. This potentially results in a fragility of the economic sanctions imposed by the European Union and the United States against Russia.

However, these sanctions carry underlying principles and specifically one : it is forbidden to invade a sovereign country. In the context of sanctions imposed by states, companies are faced with a significant difficulty: distinguishing between what is right and what is not. There are traditionally two types of foreign policies of states: one based on values, and the other based on interests – realpolitik. The same distinction could be applied to companies, which also share a foreign policy based on values and realpolitik.

Towards a Foreign Policy of Businesses?

For a long time, businesses have practiced realpolitik or “realbusiness.” The responsibility of businesses was primarily to make profits and create wealth. Then came the concept of Corporate Social Responsibility (CSR), and businesses began to feel invested in values.

During every crisis, businesses must balance between continuing to do business as usual or defending their values, including deciding whether to stay or withdraw from a country during the current crisis. This decision can be complex in many cases. Should businesses speak about values or principles? And in the face of this dilemma, can international businesses continue to exist? Answering this question requires inventing a coherent approach. These hesitations are extremely harmful to businesses and the economic system as a whole. They also question our democracies. Therefore, the notion of “principle” seems more interesting and relevant to structure such an approach.

Moreover, the war in Ukraine highlighted the lack of anticipation by businesses on geopolitical issues and the risks posed by the countries or regions in which they operate. Businesses have not yet fully integrated the idea that they are full-fledged geopolitical actors. They must imagine a foreign policy that is unique to them, integrating the geopolitical context, leading them to define principles that will guide their decisions and make them objective and clear: whether to stay or leave, or negotiate with a government at a given time to move the lines.

Sovereignty & the Role of Businesses: Mastering Interdependence

It is difficult to define the contribution of businesses to sovereignty. It is primarily the responsibility of states to provide the framework for economic actors. The pandemic showed the risks associated with economic interdependence in key areas and had already led to changes in sovereignty. The war in Ukraine is accelerating this movement.

Sovereignty has become a concern for everyone. For example, today, all countries control their foreign investments within the EU, except for Portugal. Sovereignty must be created based on controlled independence and interdependence: no country will be able to produce everything on its territory, and the question of access to raw materials arises for many of them. There are activities on which we will need to be more attentive than others: energy, land, in addition to military or information issues.

Globalization, international relations, and geopolitics will continue to exist. Companies operating in foreign territories also participate in sovereignty. For example, if TotalEnergies leaves Russia, discussions between Russians and Chinese could materialize to preempt the absence left by this actor. A questionable movement from the standpoint of sovereignty in the long term. In the context of the war in Ukraine, the authorities’ position on the attitude that companies should adopt has been very un courageous. They were told that it was better to leave because things were going to “go badly.” But the authorities believed that they could not go beyond this position, since companies are private actors… In reality, no one has an answer on the right decision to make between staying or leaving Russia. This is the limit of companies’ responsibility in the face of conflict.

The cultural dimension will also be important to consider. If we move towards companies developing a foreign policy imilar to the foreign policy of states, there will be competition between different approaches to foreign policy strategies. We are entering a world of confrontation between democracies and autocracies, with significant geopolitical risks. In this context, companies must build a real analysis of geopolitical risks.

In fact, companies have a “geopolitical footprint” and will need to develop a real “foreign policy,” similar to what states do. These should reflect their CSR and international development strategies. They would help to define the overarching principles governing the company’s actions in the various countries where it is present, particularly with regard to its country of origin.

What is the relationship between CSR and companies’ foreign policy?

Tools exist to build a company’s foreign policy: it can be placed at the crossroads between the company’s international strategy and its CSR roadmap. This would create a bridge between the two, reinforcing principles in the CSR approach on one side and feeding the international strategy on the other.”

The more companies broaden the scope of factors contributing to their thinking, the more they will identify potential signals to enhance future scenarios, even disruptions. And the better their geopolitical analyses and predictions will be. The challenge is to figure out how to incorporate this material into models. One option would be to address a few key issues to identify major trends and geopolitical scenarios. These scenarios, applied to CSR, would enable the integration and prioritization of geopolitical risks in the roadmap.

Companies have always understood geopolitics as a context, an environment in which they operate. They have given little thought to the impact they may have and the footprint they may create by being present in a country (or the weight that this may give to the country they come from). And states have often used companies for this purpose.

The paradigm shift must enable the company to position itself in a more conscious way and in accordance with the direction it has set for itself. The impact of the company’s foreign policy will be twofold: in the country where the company operates and in the country it comes from.

In conclusion, the globalization we have known is no longer sustainable from any point of view. In front of this challenge of changing business model, we have two choices: one is to preserve the fundamentals while meeting the challenges of energy transition and climate change, which will allow us to continue living in a democratic model, the other is to turn a blind eye to this necessary transformation.

This article is based on the Dialogue conducted by Marine CHAMPON, Founder & President of INITIATIK, with Sylvie MATELLY, Deputy Director of IRIS – Institute of International and Strategic Relations. You can find the full Dialogue in Podcast.