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June 13, 2022 | MENA Region

Executive Summary Despite its rapid expansion since 2013, China’s Belt and Road Initiative (BRI) has been slowed by both the COVID-19 pandemic and Russia’s war on Ukraine . The EU’s Global Gateway policy, and the American-led Build Back Better World (B3W) global infrastructure initiative of the G7 have emerged as the key rivals to the BRI . So far, though, the West’s alternatives to China’s BRI are beset by lack of specific projects and an overreliance on risk-averse private capital necessary for planned public-private partnerships. Implications for International Business The current headwinds for the BRI, including dissatisfaction in receiving countries, provide opportunities for Western firms, especially in green energy and health infrastructure. Companies seeking to capitalize on B3W and Global Gateway programs, however, face high economic and political risk in infrastructure projects in Asia, Africa and Latin America. State of Play Infrastructure development as a foreign policy tool In the last decade, the countries financing and building overseas infrastructure have increasingly linked their investments to geopolitical and commercial goals. China’s Belt and Road Initiative (BRI), the signature foreign policy of President Xi Jinping, is the most renowned of such efforts. Divided into an overland “belt” and a maritime “road”, it has enabled Chinese banks and firms to develop transport, energy, and digital infrastructure from Asia to Europe and extending to Africa and Latin America. While expanding rapidly, BRI has resulted in controversy about unsustainable debt and climate impacts in developing countries, even before the COVID-19 pandemic and now the Ukraine war have slowed its momentum. In the meantime, countries like Japan and the United States began to promote “high quality” infrastructure alternatives, culminating in a 2021 G7 commitment to pursue a Build Back Better World (B3W) agenda to counter China’s BRI. The EU’s December 2021 Global Gateway strategy, building on an earlier EU “connectivity strategies”, is only the latest such program and open to complement B3W. Key Issues The West facing challenges in countering China’s BRI Western governments’ efforts to – often implicitly – offset China’s influence through own infrastructure programs face a number of challenges. First, despite expressed commitments to cooperate and coordinate, these strategies, including Japan’s “Partnership for Quality Infrastructure” and the UK’s “Clean and Green Initiative,” so far are long on lists of priority areas and short on details about actual implementation. Next, China has relied on state-owned “policy banks” to finance, and on state-owned firms to construct, BRI projects. Yet, Western programs rely on private capital in often high-risk settings. Concerns about the sustainability of political support for Western BRI alternatives constitute another challenge, especially given the volatility of American politics and the slow member state take-up of the EU’s Global Gateway. Without clear and concrete achievements as proof-of-concept, emergent Western alternatives to the BRI may soon lose focus and momentum. Moreover, the appeal of China’s “development”-focused, “South-South” framing of its relations with partner countries is hard to beat. Despite the debt impact and environmental concerns about the BRI, developing countries are attracted to China’s basic proposition that building infrastructure drives economic growth and that China’s hands-on support gets infrastructure projects built. The West’s efforts to offer a geopolitical alternative, in contrast, has been hampered by the perception that it does not adequately understand the needs of developing countries. Governments in Southeast Asia, Africa or Latin America will assess B3W based on what it can actually provide and will welcome viable competition to Chinese offers – but, less so if they are asked to explicitly reject or criticize China as part of the deal. Global infrastructure competition bears new geoeconomic risks and opportunities In the past decade, China has used trade, investment, and financial interdependence to boost its political and geostrategic leverage over its immediate neighbors and BRI partners worldwide. The rationale behind the alternative initiatives now promoted by the U.S., the EU and others is not to cede opportunities and influence in specific regions and sectors to China. The “Indo-Pacific” will be a focal point for competing Western and Chinese spheres of influence over different types of connectivity, especially as the EU and the U.S. included elements of their infrastructure-promotion plans into their newly articulated strategies for this region. Besides Southeast Asia, the EU’s Global Gateway will focus more on Africa while the U.S., through B3W, will seek to provide infrastructure alternatives in Latin America and the Caribbean. Also, as Russia’s war on Ukraine has highlighted the importance of energy security, including the role of both traditional fossil fuels and alternative energies, the nascent Western initiatives will likely focus on promoting the energy transition in the Indo-Pacific and beyond. The global economic volatility and the uncertain outlook on the COVID-19 pandemic add to the difficulty of assessing and managing financial and political risks associated with infrastructure development in developing countries through “building back better” initiatives. China itself has not always understood or managed such risks well. Examples include massive unpaid loans to Venezuela or Myanmar’s backlash over disputed dam and mining projects. Already before 2020, China began drastically scaling back the size and scope of its policy bank lending to partner countries. Although Western governments focus on mobilizing private capital as part of B3W and Global Gateway public-private partnerships, they will have to confront the headwinds of tightened monetary policy and the end of the era of cheap capital. Western firms are thus likely to be even more sensitive to financial and political risk for large infrastructure projects. However, as countries seek alternatives to Chinese-backed coal-fired power plants or from dependence on Chinese digital infrastructure, Western governments and companies should have both economic and political openings. But, to be successful, they have to provide clear and viable financial and technological packages that respond to host countries’ needs and realities. A clear starting point would be to build on the new EU-U.S. Trade and Technology council to establish effective demonstration projects in the field of digital trade in Southeast Asia.

Executive Summary With new and expanding Covid-19 lockdowns in important industrial centers, China’s domestic economy will be slowed, requiring more fiscal and monetary stimulus to meet 2022 growth targets. Despite Chinese government claims of its ‘limitless friendship’ with Russia, China continues its wait-and-see approach to the war in Ukraine, all the while attracting growing Western ire. Concerns about international and domestic market volatility prior to China’s important Party Congress in the fall of 2022 mean Chinese leaders will emphasize economic and social stability. Implications for International Business Growing supply chain disruptions may result from intermittent lockdowns of manufacturing and export centers along China’s Eastern coast Increased government efforts expected to drive market stability, particularly regarding domestic real estate and tech platforms as well as limited appetite for future deal-making with Russia. State of Play The Challenges of “Dynamic Zero Covid” in China China’s zero Covid strategy had kept infections to a minimum for two years, but the virus is resurging. While the main impact has been in Hong Kong, where a rapidly increasing death toll has led to social anxiety, the mainland is experiencing its largest wave since the original Wuhan outbreak. Most recently, the manufacturing and export hub Shenzhen was locked down, with potential knock-on effects on tech and other supply chains. China’s leaders will maintain the zero Covid policy until the Party Congress to ensure social stability. Meanwhile, reaching the targets set by the National People’s Congress (NPC) of 5.5% economic growth, 3% inflation, and the creation of 11 million new urban jobs, will require significant fiscal and monetary efforts. These include enhanced support for domestic semiconductor production, linked to longer-term efforts to promote technology innovation and self-sufficiency, as well as support for pandemic-hit sectors such as travel and tourism. The tax burden on SMEs is expected to decrease while spending on infrastructure aims to boost local revenues and employment. Key Issues China’s Economy: Government-Induced Optimism Despite Strong Headwinds In Q2 2022, China’s economy faces important headwinds. Besides the rise in Covid infections, these include real estate sector woes linked to a crackdown on lending to over-indebted firms like Evergrande and the economic and political fallout from Russia’s invasion of Ukraine, including rising prices for energy imports. To boost flagging real estate investment, the government vowed to hold off on proposed new property taxes while also reducing mortgage rates. The government has pledged to support green consumer technology for household appliances and electric vehicles, especially in rural areas, thus providing potential opportunities for foreign firms. Given the importance of foreign investors in key Covid-impacted manufacturing and export hubs in the Pearl River and Yangtze River deltas, local officials may prioritize revitalized commerce over strict regulatory enforcement. While some U.S. and European firms will continue to diversify parts of their sensitive technology supply chains to Southeast Asia, Europe and North America, there is little indication of wholesale supply chain relocation away from the mainland. ​ Key for both Chinese and foreign firms was the government’s response to extreme volatility in China’s equity markets since the NPC’s conclusion in early March. The MSCI China Index was down nearly 30% for the year on 15 March, prompting Vice Premier Liu He to commit to support Chinese firms’ overseas IPO listings and “stabilize” the domestic market, including struggling technology platforms like Alibaba. Given increased uncertainty in international markets related to concerns about rising commodity prices and industrial supply chains, and the range of domestic economic challenges, China’s top economic officials are keen to minimize market volatility in the lead-up to the 20th Party Congress this fall. The Challenges of China’s “limitless friendship” with Russia In recent years China intensified its political and economic relationship with Russia for strategic reasons. The two president’s declaration during the Winter Olympics that the two states’ friendship “has no limits” as well as a US$118 billion oil and gas deal symbolized this trend. Yet, there are limits to the economic dimensions of this partnership that will constrain future cooperation in the wake of the war in Ukraine. Russia is a key energy partner for Beijing. However, China has been eager to diversify its energy sources and will have heightened awareness of Russia’s willingness to use its energy supplies as a tool of coercion. Despite China’s recent lifting of restrictions on Russian wheat exports, China imports less than 6% of its domestically consumed wheat. In addition, Chinese state-owned and private firms are strongly integrated into global supply chains and financial markets and are wary of being cut off from the SWIFT payments system if they run afoul of Western sanctions against Russia. ​ Moreover, Chinese shipping, port and commodity firms have built up trade, investment and logistics ties with Ukraine, signing nearly US$7 billion in investment contracts in 2021. China will not only be leery of the war’s impact on its interests in Ukraine, but it will also be loath to see large swaths of the Belt and Road Initiative (BRI), which lie along Russia’s former or current sphere of influence in Central Asia and Eastern Europe, destabilized. As part of any ongoing withholding of criticism of Russia’s war in Ukraine, expect China to demand a large discount on Russian oil, gas and transshipment infrastructure. In the past, such demands have stymied the completion of Russian oil and gas pipelines to China and led to years of stalled negotiations on long-term contracts. Three scenarios in the evolving China-Russia relationship exist, out of which the first is the most likely: (1) despite continued anti-US and anti-NATO rhetoric, China bargains with the West over terms to moderate its support for Russia by demanding assurances that it will not be hit by sanctions nor targeted by an Asian version of NATO; (2) China reverses course on its support for Russia by playing an active role in mediating a peaceful settlement to the war; (3) China doubles down on its support for Russia’s invasion of Ukraine through increased military and economic assistance in return for Russian support for China’s claims to Taiwan. Xi Jinping will not use military means to reunify China and Taiwan in the near future. While strong US signals deter China from any provocative behavior in Taiwan, China will push to isolate Taiwan.

Executive Summary The low cost of conducting cyber-attacks and the impunity of the perpetrators has led to an increase of both the incidents and their severity, including government-sponsored acts. Amid the growing geopolitical rivalry in cyberspace, the emphasis by great powers is placed on spying on adversaries and strategically using existing information to weaken opponents. So far, the cyber dimension of Russia’s war in Ukraine has translated into few damages for international firms, but companies must remain vigilant and brace for unintended consequences. Implications for International Business Companies should increase their cybersecurity, since Russian cyber operations against Ukraine are likely to have accidental effects outside the immediate conflict zone. Beside a cyber risk assessment, building redundant parts into systems can drive firms' cyber resilience. A major quarrel over who pays for cyber incident damages is fought between companies and insurance firms, with the former having had some success recently. State of Play The rise of cyber offensive capabilities renders cyberspace more dangerous Cyberspace consists of the network of information technology infrastructures and resident data, including the internet, telecommunications networks, computer systems, and Internet of Things (IoT) devices. The main drivers of cyber threats are the low cost of conducting such attacks and the likely impunity of the perpetrators. While criminals often conducted cyber-attacks in the past, attacks have also become state-driven. For the past eight years, Russia has led disruptive cyber operations against Ukraine’s energy sector (shutting down power plants), election infrastructure (meddling with tallying of votes), public sector (using data wiper malware), and financial institutions (overloading of bank websites). In turn, within a few hours of Moscow’s invasion of Ukraine, the hacker group Anonymous responded by declaring a “cyber war” on the Russian government. Anonymous disabled the websites of Russian state TV channels, the Kremlin, and the Duma. To protect its critical infrastructure, the EU is revising its directive for network and information systems security (NIS2) to require telecoms providers, banks, energy grid operators, and other critical services to promptly report cyber incidents to national authorities. The Cyber Resilience Act, another EU legislative act expected for Q3 2022, introduces joint certification standards for IoT devices. Key Issues Cyberspace as new playground for great power competition Russia has for years worked towards creating a national state-controlled alternative to the privately-owned internet that is common in most other countries. The increasing regionalization of the internet raises the cost for businesses that have to comply with diverging national technical standards and that have to establish local data storage centers. The Kremlin has also been notorious for leveraging cybercriminal groups to achieve geopolitical goals. It has tolerated cybercrime activities emanating from Russia as long as these spared Russian businesses or individuals. When Western businesses and government entities were targeted abroad it played into Russia’s goal of highlighting the weakness of democracies. Non-state actors provide plausible deniability for Russia. During the major cyberattacks on Estonia in 2007, Russia fended off any criticism by claiming non-state actors had conducted these attacks. This rhetoric continues until today. ​ An important dimension of geopolitical cyber rivalry is spying on adversaries and strategically using information to weaken opponents. In Germany, Russian hackers targeted members of the Bundestag in the 2021 Ghostwriter campaign, supposedly aimed at leaking information to embarrass the MPs and compromise their online presence. As Putin’s current war against Ukraine shows, the military dimension of cyber operations appears to be for now much subtler, given that no cataclysmic cyber operation has yet been observed against Ukraine with the exception of the cyberattack against satellite network provider Viasat, which limited the Ukrainian military’s situational awareness at the onset of the invasion. In cyber, intelligence also aligns with ideological factors. China is one of Russia’s few partners in the global cyber competition, assisting Moscow to shield off the Russian information environment from the world. Sino-Russian technological transfer may face major challenges, especially due to US sanctions on Chinese equipment. If Russia used the equipment in its own products, it would violate sanctions and it would be unable to export any of that equipment abroad. Geo-economic consequences for international firms Geo-economic consequences for international firms So far, the major geo-economic consequences of the current cyber rivalry have been unintended. The Russian NotPetya malware was meant to target Ukraine. But, as the code was written hastily, it also disrupted the global operations of German multinational Beiersdorf, logistics giant DHL, Danish shipping company Maersk and many others. It is believed to have been the costliest cyberattack in history. Insurance companies have been in the spotlight in the discussion about how to mitigate the costs of such attacks. In January 2022, Merck, a pharmaceutical company also affected by NotPetya, won a lawsuit against insurer Ace American. The insurer had claimed that the malware was an “Act of War”, which it cannot cover. A U.S. court decided, however, that Ace American had failed to update their policy language to include cyberattacks as acts of war and that Merck will be compensated for damages of up to $1.4 bn. ​ Much damage can be avoided when businesses conduct a cyber risk assessment, mapping their assets, identifying potential risks, and defining mitigation measures. To ensure the continuation of business operations, redundant parts must be built into systems, thus increasing resilience. For example, backups which are segregated from the rest of the company can quickly turn companies operational again after a ransomware attack. In a business where the confidentiality and integrity of data is of utmost importance, encryption within company networks as well as multifactor authentication can fend off most attacks.

Executive Summary Even without a Russian attack on Ukraine, Europe’s energy crisis is set to worsen The Kremlin has manufactured a crisis in Europe to achieve political and strategic goals regarding both Ukraine and NATO, with an endgame that remains obfuscated but could result in war. As last-minute shuttle diplomacy to avert military aggression against Ukraine is underway, the broader effects on Europe’s energy security will be felt for much longer. While China does not contribute to defusing the crisis, it plays an important part when it comes to exerting sanctions pressure on Russia should deterrence and de-escalation fail. State of Play A Kremlin-engineered military crisis in Europe Europe is facing the immediate threat of war, as Russia has amassed 150.000 combat ready troops at Ukraine’s borders, in Belarus and on landing ships entering the Black Sea. Despite U.S. efforts to expose Russia’s plans and thereby remove the element of surprise, this year-long buildup amounts to the largest concentration of troops in the region since World War II. Amid high-level phone calls and shuttle diplomacy by Western leaders, Moscow insists to turn Ukraine into a ‘buffer zone’ to protect itself from perceived military encroachments from NATO. Yet, Washington is convinced that President Vladimir Putin’s ultimate goal is war and partitioning of Ukraine, despite substantiated threats of unprecedented economic sanctions from both the U.S. and the EU. So far, the crisis has been unfolding on Russia’s terms, and the current stalemate leaves the West with few options. Key Issues Europe is facing a worsening of the existing energy crisis amid standoff with Russia In case of war, there will be severe consequences even beyond the disruption of business in and around Ukraine. On the energy front, Russia will not immediately stop shipping gas and oil to Europe because it relies on those revenues. The U.S. is also unlikely to push for an all-out embargo, given the severity of the energy crisis in Europe and global inflationary concerns. For 2022, Europe is expected to spend $1trn on energy, up from $500bn, even without a reduction in Russian gas supplies. Sanctions to target Russia’s financial sector will be priced by markets as a risk factor even without an actual tightening of supply. In turn, Western markets will see sectoral sanctions potentially affecting prices in metals (iron, copper, etc.), chemical production, machine parts, and timber. Furthermore, major risks to Europe’s natural gas supplies stem from disruptions of Ukraine’s direct supplies to Europe in case of war. Plus, the certification of Nord Stream 2 will be stopped, suspending the project for the foreseeable future, if not altogether. While Russia has enough pipeline capacity to pump gas through Nord Stream 1 beneath the Baltic Sea and the Yamal-Europe pipeline via Belarus, the Ukrainian route would be vulnerable. Internally, Russia would, however, be less hit, since oil sales contribute significantly more to its budget (55%+) than gas exports (ca. 15%). In the short run, Europe would likely be able to obtain additional gas from the U.S. and the Gulf region to prevent further price hikes. War in Ukraine would also be an incentive to restore the nuclear deal with Iran and resume imports of Iranian hydrocarbons. However, it takes around five years to launch new gas projects, and the trans-Caspian pipeline from Central Asia is unlikely to materialize due to strong opposition from Russia and China. Europe will thus need to speed up its energy efficiency efforts, while trying short-term fixes through coal and oil-fired power generation and possibly the extension of other energy sources in the medium-to long-term. China wisely weighs its economic interests to decide how to back its junior partner Russia China publicly supported Russia’ demand vis-à-vis NATO in a joint statement by Presidents Putin and Xi Jinping in early February. Yet, should war erupt, Beijing is unlikely to take a public stance; instead, it may react similarly as during the 2014 annexation of Crimea: no criticism of Russian actions, but no overt support for war, coupled with calls for peace. One immediate effect of military conflict on China would be through its substantial wheat imports from Ukraine as well as the functioning of the country’s ports in Odessa and Nikolaev. Already, Beijing is looking to Latin America and Russia for a diversification of grain imports. In the coming weeks, China will carefully monitor the introduction of new sanctions by the U.S. and the EU, avoiding transacting with U.S. designated entities as it did in the wake of 2014. However, China will exploit all legal means through its policy banks (ExIm, China Development Bank) and will create special infrastructure to work on some projects with Russia (as it does in Iran and North Korea). The most sensitive parts of the relationship, including the supply of Chinese-designed semiconductors and chips, will be moved to secrecy. A likely byproduct of the crisis will be the increased use of yuan instead of dollar and euro in business with Russia, despite existing capital controls. Chinese leverage will increase, driving up Russia’s reliance on China, and rendering the partnership more unequal. Some projects will thus be executed with significant concessions, e.g. the 50 bcm/year Power of Siberia 2 project that will bring gas to China from the same Yamal fields that serve Gazprom’s customers in Europe. All told, while carefully calibrating its response to the conflict itself and to possible Western sanctions, China will gradually move closer to Russia in joint opposition to the U.S. and an attempt to challenge the existing world order.