Executive Summary Sub-Saharan Africa’s investment landscape is becoming more diverse as the digital economy, financial services, mobility, logistics, and health tech are attracting more local and foreign investments. The region is a growth market with a 4% increase in GDP in 2021 and expected 3.6% in 2022, an increase in the number of SMEs and an annual infrastructure gap of USD 100 billion. China surpassed the EU in 2020 as Sub-Saharan Africa’s largest trade partner, not least thanks to its Belt and Road initiative, which the G7 now aim to counter with a Partnership for Global Infrastructure and Investment. Implications for International Businesses The new free trade area will harmonize policies on investment, competition, and intellectual property rights, and reduce the risks of shifting regulations to attract more FDI and boost foreign trade. The political uncertainties around upcoming elections In Nigeria and the Democratic Republic of the Congo (DRC), two resource-rich regional powers, have an impact on regional security and economic policy. The region’s startup ecosystem is expanding into sectors like climate control, edutech, healthtech, and agritech, in addition to existing unicorns such as digital payment infrastructure companies Flutterwave and Interswitch and global talent network Andela. State of Play World powers courting a continent on the rise Sub-Saharan Africa has traditionally been a market for American and European goods and a fertile ground for the promotion of US strategic interests. However, US and EU investments in Africa are often tied to strict fiscal and political conditions. China, in turn, takes a more pragmatic, trade-driven approach to engaging with the region. With its Belt and Road Initiative, it has aggressively expanded its economic interests over the last decade. It sees the region as a source of key raw materials, such as cobalt, platinum and oil, as well as agricultural products. A large population offers relatively cheap labor and a growth market for Chinese goods. China has expanded access to the Chinese market for African exporters and has now replaced the EU as Sub-Saharan Africa’s largest trade partner. Besides being a sought-after trading partner of the world powers, Africa has begun to develop its own form of economic integration. The African Continental Free Trade Area (AfCFTA) has begun its pilot phase in September 2022 comprising seven states: Rwanda, Cameroon, Egypt, Ghana, Kenya, Mauritius, and Tanzania. As the agreement gets implemented over the coming years, participating countries will gain access to regional markets at preferential tariff rates, and identify comparable policies in customs, logistics, and legislation to ultimately facilitate continent-wide integration. At the same time, insecurity has been on the rise in the region over the past five years, with a direct impact on irregular migration, transnational crime, and global terrorist activity. The Western Sahel region has become a hotbed for terrorist activity linked to the Islamic State; similarly, there has been a marked uptick in such activity in eastern Africa. Potential threats to progress include conflicts like the civil war in Ethiopia and military coups like recently in Mali, Burkina Faso, Chad, Sudan, and Guinea. South Africa’s economy has been negatively affected by social unrest as a result of the prosecution of former President Jacob Zuma, poverty and unemployment. Generally, graft, inflation, and weak institutions are the main sources of risk in the region. Key Issues The region’s growing geostrategic importance drives the quest for closer partnerships With substantial oil and gas reserves, Nigeria, South Africa, and Angola are among the most important resource-rich countries in Sub-Saharan Africa. Other countries such as the DRC produce strategic minerals like lithium and cobalt, which are in high demand by both Western and Chinese manufacturers. Still, the region consistently ranks low in global development indices and includes some of the world’s poorest countries, characterized by corruption, political instability and a lack of infrastructure. China is present in almost all countries but seems to focus on the resource-rich ones with weak democratic structures, such as Angola, Zambia, and the DRC. It also makes inroads in such larger countries as Nigeria and Kenya, investing in flagship projects like upgrading the Standard Gauge Railway between Kenya’s capital Nairobi and the port city of Mombasa. China’s growing presence opposes Western interests in the region. The US has raised questions about Chinese debt diplomacy and loan sustainability, starting a Prosper Africa initiative in response to Beijing’s growing strategic advantage. Yet, Sub- Saharan countries ignore US concerns and continue to pursue deals with China because of its track record of engagement, regional economic pressures, and a lack of alternative financing on similar terms. The disproportionally high number of abstentions and non-votes on the UN resolution condemning Russia’s invasion of Ukraine shows that many African countries are unwilling to lean too heavily to one – or, indeed, to the Western – side. China’s BRI investments are projected to increase, and Russia and India also have stakes in the region. This makes it even less likely that the G7 investment initiatives will reverse the trend of waning Western influence. Competition between China and the West will provide more financing opportunities for firms, but could weaken fiscal discipline, increase corruption, and worsen the debt profile of a number of countries. Sub-Saharan “rising stars” offer plenty of economic opportunities South Africa and Nigeria have long been the leading economies in the region, accounting for about 40% of Sub-Saharan Africa’s GDP. However, both countries have also been plagued by high levels of corruption, which has limited their ability to maximize revenues from mineral resources and use them to meet the urgent needs of the population. Despite recent inflationary pressures, countries such as Ghana and Rwanda are among the rising economic stars, having consistently demonstrated a degree of fiscal discipline and growth. Ghana’s top exports are oil, gold, and cocoa, while Rwanda’s economy has benefited from investments in tourism, agriculture, and mining. In addition, Kenya and Côte d’Ivoire are buoyant with diversified economies driven by agricultural exports and investments in construction, infrastructure, and other sectors. Kenya is East Africa’s economic hub and Cote d’Ivoire’s economy grew by an average of 8% annually between 2012 and 2019. In Côte d’Ivoire, the government is currently implementing economic reforms to restructure the banking sector and broaden the tax base. The substantial infrastructure gap in Sub-Saharan Africa offers great investment opportunities for international firms. As AfCFTA begins to be implemented, investing in a single African country can potentially provide access to a continental market of 1.3 billion people. By linking the low tariffs, ease of doing business, tax incentives, and regional integration offered by AfCFTA with the new infrastructure initiatives of the US, EU and G7, Western companies can tap into medium-risk opportunities in various sectors. The digital and knowledge economies are also promising, as the region is home to a young population that increasingly uses the internet to shop, trade, and acquire skills relevant to a global market. Potential risks for Western companies seeking to invest in Sub-Saharan Africa include political instability (as recent coups possibly indicate a trend), corruption (especially in the oil sector in Nigeria and Angola), inconsistent government policies, and in some cases difficulties in repatriating profits due to financial regulations, e.g., for foreign airlines in Nigeria due to stricter forex controls.

Executive Summary Polls significantly underrated support for President Bolsonaro and his allies running for Congress, the Senate, and Governorships, but Lula remains the favorite to win the presidency on October 30. Profoundly polarized, Brazil faces the risk of political violence in the runoff’s aftermath and Bolsonaro’s contestation of the result if he loses, potentially compromising governability for years. Whoever wins will face widespread discontent and anti-incumbency sentiment; Bolsonaro, if re-elected, will try to further control the judiciary and undermine checks and balances. In foreign policy, Lula would reconnect Brazil with the West; Bolsonaro would increasingly depend on China. Implications for International Businesses Stagnating or declining economic activity over the past decade coupled with a weakened currency and the pandemic’s toll indicate a difficult macroeconomic environment, no matter who wins. With recently increased social spending likely to become permanent, the next president inherits a challenging fiscal situation. Low approval ratings additionally limit the political scope for spending cuts and reforms. If victorious, Bolsonaro would slowly continue reforms to reduce the cost of business,but Brazil's OECD accession and ratification of the EU-Mercosur trade deal remain unlikely. Lula would engage the country more on climate change but less so on further privatizations and trade liberalization. State of Play A steady business environment despite political instability Despite their fundamentally different political views for Brazil, neither Jair Bolsonaro nor Ignacio Lula da Silva would pursue and visions economic policies as president that negatively impact the country’s business environment. Bolsonaro would continue a slow but steady liberalization policy that is supported by local business elites. Yet, his increasingly poor reputation in the West and the expectation that a second term in office would lead to a deterioration of Brazilian democracy, environmental policies, and the rule of law, with clear drawbacks for investors. As long as Bolsonaro is president, EU leaders are unlikely to ratify the EU-Mercosur trade deal or green-light Brazil’s accession to the OECD. Moreover, a continuation of current environmental policies increases the risk of Western consumers boycotting Brazilian products. Lula, in turn, is expected to move further to the center, e.g., by appointing a mainstream Minister of the Economy and respecting the independence of the central bank. Putting the Mercosur trade deal to work, however, may prove difficult, as his Workers Party has signaled it wants better protection for Brazilian industry, but the EU is unwilling to reopen negotiations. Lula could also delay Brazil’s OECD accession given opposition among his nationalist, anti-neoliberal base. A long-awaited tax reform, facilitating the unwieldly tax code, is conceivable under both candidates. Key Issues Democratic erosion as both a short- and medium-term risk About a quarter of Bolsonaro voters are so radicalized that they do not want their candidate to concede or accept defeat. As Bolsonaro will most likely lose the runoff, the big question is whether his core followers – roughly 12 million people – are ready to turn the page or would attempt to prevent the transition of power. In this case, the Brazilian army will play a decisive role. While they have in the past equivocated rhetorically and at times defended Bolsonaro's bogus claims about bugs in the electoral system, an outright coup is improbable. More likely, even with moderate post-election violence and a non-cooperative stance by the outgoing administration, the transition of power will take place. A more significant risk is that millions of Brazilians will not recognize the legitimacy of the next president. Signs indicate that at least part of the opposition will try to unseat a President Lula from the outset. In recent years, the executive office has continuously lost power to the legislature, so that, in the second half of his term, not Bolsonaro, but Arthur Lira, president of Congress, was the most powerful politician in Brazil thanks to his final say on all budgetary matters. In addition to thethreat of extreme polarization,Brazilian democracy also faces perennial political instability caused by a half-baked parliamentarism forcing the president to hand over extraordinary amounts of money to Congress to avert impeachment. In June, for example, congressmen willing to support Bolsonaro received over U$ 900 million in funds to be spent largely without oversight. Unless the next president regains the capacity to steer the government, political paralysis is set to prevail, inevitably undermining public confidence. This sets the stage for authoritarian-minded leaders to call for a concentration of power in the executive. The election result will determine Brazil’s geopolitical positioning Western government officials and business elites tend to welcome Lula’s possible return to the presidency, as the former president is widely seen as more predictable and pragmatic than Bolsonaro. If elected, he would work to quickly overcome Brazil’s current diplomatic isolation in the West. In particular, he would resume and intensify environmental cooperation with the West. (such as the Amazon Fund financed by Norway and Germany), which has largely ceased under the incumbent. However, on the growing tensions between Russia and the West, Brazil and Europe will inevitably disagree, as neither Lula nor Bolsonaro are willing to abandon the country’s neutrality. Bolsonaro visited Moscow days before the invasion, and Lula affirmed in a TIME Magazine interview that Zelensky was “as responsible for the war as Putin”. Similarly, Brazil would take a neutral stance in a possible crisis with Taiwan. Brazil has long sought to maintain cordial diplomatic relations with all major powers, including China. The intensifying great power politics, the “tech war” between China and the US, and the possible emergence of a “digital iron curtain” between two technological spheres of influence make the implementation of such a strategy of “non-alignment” increasingly difficult. Irrespective of the election outcome, Brazil is set to remain committed to the BRICS group and to counteract any of its members’ diplomatic isolation. There is a cross-party consensus that Brazil stands to benefit from strong relations to China and Russia, which it can use to balance US influence in Latin America. Although Bolsonaro initially ran as an anti-China candidate back in 2018, Trump’s departure from the White House weakened his “anti-globalist” and “anti-communist” foreign policy. Faced with near-complete isolation in both the West and China, Bolsonaro has ceased his attacks on Beijing. He silenced his party’s anti-China faction, and instead chose “globalist elites” and leftist leaders in Latin America and the West as his main targets. The Chinese government now sees the crisis in the bilateral relations as largely resolved and considers Bolsonaro an ally against the West. With him in office, Beijing has far fewer competitors in its quest to consolidate its strategic influence in Latin America’s largest nation.

Executive Summary Rishi Sunak has taken over as prime minister, after a chaotic economic experiment to boost growth through aggressive, but unfunded tax cuts spooked the markets. Trying to rebuild both investor and voter confidence in the Conservative government, he faces continued political and economic turmoil as he implements unpopular spending cuts. With little time for international matters beyond Ukraine, Sunak will focus on ensuring the UK does not become an ungovernable country with a dysfunctional economy. Implications for International Businesses At a time of economic crisis, the UK is facing a similar period of austerity as after the 2008 financial crisis, which is likely further weaken growth forecasts. Corporation tax will rise from 19% to 25%, with further tax rises being likely. Adding to the uncertainty about the UK investment allowance, this dissuades private sector investment. Tensions with the EU are likely to ease, but disagreements around the execution of Brexit, in particular the Northern Ireland Protocol, will remain a source of friction with Brussels. State of Play After the shortest premiership in history, a crisis A ‘mini-budget’ presented in mid-September by then Chancellor of the Exchequer (finance minister) Kwasi Kwarteng contained £45 billion in unfunded tax cuts and plunged the UK into economic turmoil. The Bank of England was required to intervene with £65bn to support a large slice of the UK’s pension sector left vulnerable by the bond market’s instability. Moreover, the yield of long-dated UK government bonds known as ‘gilts’ rose sharply from 3.5% to 5%, adding billions to the UK’s borrowing cost. Kwarteng was sacked on October 14, and his replacement, Jeremy Hunt, immediately tore up most of his ideas. On October 20, after only 44 days in office, Liz Truss announced her resignation as Prime Minister, and former Chancellor Rishi Sunak was chosen by Conservative MPs to replace the party rival who beat him in the leadership race this summer. Having repeatedly warned against Truss’ debt-driven growth agenda, Sunak will send Hunt to announce a medium-term fiscal plan by the end of the month. This will likely include big spending cuts and tax increases to bring the fiscal situation under control, ushering in a period of austerity similar to that which followed the 2008 financial crisis. Key Issues The new government will bring macro-economic stability but faces significant challenges Prime Minister Sunak’s priority is to restore investor confidence in the UK and voter confidence in the Conservative Party. Neither will be easy. Both he and his Chancellor want to prove to the markets that the government is a responsible debtor in order to reduce its current borrowing costs. But Sunak faces a bleak winter of difficult choices because of spiraling inflation, stagnating incomes, labor shortages, an increase in strike action, a record seven million people waiting for hospital treatment, a backlog of 61,000 criminal cases in the court system, the possibility of energy blackouts over the winter months, a government-funded energy support package for households and businesses due to end in March when energy prices will increase significantly, and decades-long structural problems of low productivity coupled with insufficient investment in skills, infrastructure and innovation. Disquiet in public and media about yet another change of prime minister continues – Sunak is the third officeholder in just two months. Calls for an early general election before January 2025 are growing louder, not just from the opposition but also the general public. However, current polling points to the loss of more than half of the Conservatives’ 357 seats, thus making a new poll a suicide mission. Also, at a personal level, Labour leader Sir Keir Starmer is thought to be the better prime minister by 38% of the people compared to 29% for Sunak. The latter still has something going for him, besides appearing as a ‘steady hand’ throughout the latest turbulence and as the one who oversaw a generous furlough scheme during the Covid-19 pandemic . He is also, not insignificantly, the first UK prime minister of Indian-origin and the first Hindu to occupy the office. However, a former Goldman Sachs banker and hedge fund manager who is married to a billionaire’s daughter, Sunak can appear to be aloof when regular Britons are wrestling with a cost-of-living crisis and do not know how to get through the winter. Struggling to avoid irrelevance as an international partner Sunak will also try to bring clarity to the UK’s international policies to restore the country’s reputation, as investors, politicians and analysts fret about the UK turning into a dysfunctional economy and state. Despite being a leading supporter of Brexit, the new prime minister is expected to follow a conventional, less controversial approach to international affairs. Mindful of growing public support for a more pragmatic rather than ideological relationship with the EU and given the state of the economy, he wants to avoid a trade war with Brussels. Nevertheless, Euroscepticism remains powerful within parts of the Conservative party, as the difficulty of ‘getting Brexit done’ is one of the reasons behind the succession of Conservative prime ministers since the EU referendum of 2016. Sunak will continue the UK’s participation in the newly established European Political Community of EU and Non-EU members. The UK’s strong support for Ukraine will remain, but Sunak has only committed to defense spending not dropping below 2% of GDP so some cuts are expected. Despite this, relations with the USA will remain close, especially on military cooperation and over China, with Sunak proposing a ‘NATO-style technological alliance’ against Beijing’s ambitions. However, prospects for a UK-US trade deal have faded. Whether his Indian roots and prominent family – his father-in-law is the owner of the global IT firm Infosys – will win him any friends in the Commonwealth or, more broadly speaking, the Global South will depend on his success at home. The “levelling up” that his predecessor-by-one planned to administer to the UK’s de-industrialized areas may soon be something that the entire country needs.

Executive Summary In the Western Balkans, slow EU accession perspectives and investments are colliding with Russia’s historic influence and China’s new-found business pragmatism. Although Russia cannot offer tangible benefits to the region, it maintains a strong grip on local leaders that exploit anti-Western and Eurosceptic public attitudes. The war in Ukraine intensifies competition between the EU-led Three Seas Initiative and China’s Belt and Road Initiative. Implications for International Businesses The EU’s Economic and Investment Plan (EIP) enables sustained development of the region, but effective investment management is needed to keep China from dominating the green energy sector and to minimize engrained corruption. Serbia and Bosnia and Herzegovina are the only two states to not have adopted EU sanctions against Ukraine, allowing for Russian-Chinese coordination in the region. Over time, the repercussions of the war in Ukraine will negatively impact the business climate in the region unless the activities of China and Russia are kept in check. State of Play Russia still has soft power and economic clout in Western Balkans The Western Balkans stand at the crossroads of rivalling powers. The EU has focused on post-conflict reconstruction and stabilization since the mid-1990s, whereas NATO solidified its presence through the membership of Albania (2009), Montenegro (2017) and North Macedonia (2020). However, the region’s slow progress towards EU accession has undermined the EU’s influence. Not only has this allowed Russia to boast its cultural, religious and political ties, but also to remain a dominant provider of energy to some countries, such as Serbia. China, in turn, has taken advantage by adopting a pragmatic, trade-driven approach. Meanwhile, Turkey is bolstering its economic and financial presence, building on its historical legacy as much as on its companies’ presence. The war in Ukraine has raised the stakes for the above-mentioned players and negatively impacted the region’s economy, security and political stability. This mostly concerns the four heartland states – Bosnia and Herzegovina, Kosovo, North Macedonia, and Serbia. The growing insecurity in the Black Sea region elevated the significance of the Western Balkans as alternative pan-European transport corridor for two competing strategic initiatives: The Three Seas Initiative and Land-Sea Express Route (part of the Chinese Belt and Road Initiative). This geopolitical dynamic has provided local elites with more maneuvering space in the context of the rising inflation and energy prices. Thus, Bosnia and Herzegovina and Serbia, unlike the other states in the region, have not adopted the EU’s sanctions against Russia. Instead, they remain open to both EU pre-accession funds and continued Chinese investments, especially in the energy sector and transport infrastructure. Key Issues As disillusionment with Europe grows in the region, the clash of systems is intensifying The Ukraine war and its repercussions have turned the Western Balkans into a political and economic frontline between Russia and the EU, and with it the United States. This confrontation also benefits China and Turkey respectively, thus giving them a geopolitical edge. On the one hand, Russia’s setbacks in Ukraine have also taken a toll on Moscow’s economic perspectives in the region. Even among the Christian Orthodox population of Serbia and Bosnia and Herzegovina, the perception of dwindling Russian influence has taken hold. On the other hand, and precisely due to the lack of more tangible benefits on offer, Moscow relies heavily on operationalizing the idea of a Serbian World as a conduit for the Russian World concept of unity among Christian Orthodox people. At the end of February 2022, Russia dispatched a special envoy to Belgrade to coordinate the Russo-Serbian activities in the region. The latest threat of Serbian President Aleksandar Vučić on December 14 to dispatch Serbian army units to Northern Kosovo amidst rising tensions between Belgrade and Pristina exemplifies the military component of promoting these concepts. Pivotal for the realization of the latter is the exploitation of the nexus between strategic corruption and the malign interplay of the security services of both states. China, in turn, has taken advantage of Russia’s shrinking economic presence in the region. It is bent on continuing its infrastructure projects along the Skopje-Belgrade-Budapest axis. Chinese investments in renewable energy projects are at odds with Russian vested interests in gas and oil supplies to the region. While such investments do not create enough jobs, they guarantee profits for the local elites through the mandatory buy-back of electricity from renewable energy sources by the state. Lack of EU investment risks leaving the region to Russian and Chinese influence The EU’s substantial €3.2 billion investment package for the Western Balkans as part of the 2022-2027 €30 billion EIP is an expression of the EU’s continued commitment to the region. Together with other EU investment initiatives, it offers opportunities for infrastructure development and the digital economy, despite high emigration rates from the region. The EU program for Competitiveness of Enterprises and SMEs through the Western Balkans Enterprise Development and Innovation Facility and EU-led regional integration also provide medium and long-term incentives for businesses and an improvement in the business climate. Importantly, these financial pledges are now underpinned by granting EU candidate status to Bosnia and Herzegovina, which allows for the protection of EU funds, provided Chinese and Russian firms’ access to these funds is limited. Adjusting to the ripple effects of the war in Ukraine, China has shifted the focus of its Belt and Road Initiative from Central and Eastern Europe to the Western Balkans, prioritizing the Land-Sea Express Route, a transport corridor connecting Europe and Asia. Chinese infrastructure projects are in direct competition with the Trans-EU Transport Routes No.10 (Thessaloniki-Skopje-Belgrade-Budapest), which is still in the planning and development stages, and No.8, which connects the Black Sea with the Adriatic Sea and is funded through the Connecting Europe Facility funding mechanism. Although Serbia became a partner in the Three Seas Initiative in 2021, other countries in the region were left out. Local elites in Serbia seem inclined to prioritize cooperation with China at the expense of the EU initiative. Serbia, for one, is on the verge of signing a free trade agreement with China around the end of 2022, consolidating its position as Serbia’s second largest trading partner after the EU. In Bosnia and Herzegovina, Serbian and Croatian leaders have increased their cooperation to facilitate Chinese investments. In the energy sector, for example, China’s shift towards green energy projects is evident in the growing number of companies such as Clenergy and Geminox trying to enter the regional market. In the long run, this could enable China to remotely control the renewable energy production via the 5G network it also runs. The above-mentioned projects would preposition China for future reconstruction efforts in Ukraine, e.g. by providing the necessary link to infrastructure projects in the Central European and Baltic States. China is actively involved in the development of the Land-Sea Express Route that connects ports of the Baltic Sea, the Adriatic Sea, and the Black Sea. The interaction of Russia and China negatively impacts the business climate in the region. Without financial support, Moscow’s strategy aims to exploit public disillusionment with the slow EU accession process, especially in Slavic-majority countries like Serbia, North Macedonia, and the Republika Srpska in Bosnia-Herzegovina, where local elites heavily depend on Russia. The endemic corruption that accompanies these ties raises concerns about the management of expenditure on any EU-funded project.

Executive Summary India will hold the G20 presidency until November 30, 2023, focusing on creating consensus around contentious geopolitical issues while remaining neutral itself. In particular, Delhi aims to de-politicise the global supply of food, fertilizers and medical supplies to prevent humanitarian crises caused by armed conflicts. Further, it will promote an energy transition based on technology and knowledge sharing, and international collaboration to boost solar and renewable energies. Implications for International Businesses A push for renewable energy and technological advancement in green techno­logies will drive investment opportunities and incentives for joint ventures in research and development and the implementation of renewable energy projects. India’s National Green Hydrogen Mission aims to build five million metric tons of hydrogen capacity by 2030, offering joint ventures in technology, investment, infrastructure, and R&D via private-public partnerships. Digital transformation will be a key priority. India is rapidly digitizing, particularly in retail, fintech and education, allowing global firms to expand inside the country, capture a larger market share, and better understand Indian customers' needs. State of Play India assumes G20 Presidency to lead global recovery and promote unity among the group When India took over the G20 presidency from Indonesia at the Bali summit in mid-November 2022, the group staged an impressive demonstration of unity and determination to tackle global challenges. All leaders bar one condemned Russia's war in Ukraine, a move Delhi helped shepherd after insisting on its own neutrality for months. Also, India announced two new working groups as part of their 2023 presidency - the Disaster, Risk and Resilience Group and the Startup20 Engagement Group - to address the growing economic downturn and the cascading risks and impacts of climate change. Being at the group’s helm for this year, New Delhi has the chance to play an important role in shaping and strengthening global architecture and governance on all major international economic issues. On the sidelines of the Bali summit, the US and Chinese Presidents, Joe Biden and Xi Jinping, held their first bilateral meeting, an effort to reduce tensions between the two countries. India is planning to leverage its G20 presidency to promote equity and inclusion in global governance systems with its motto "One Earth, One Family, One Future" – a very difficult task in an era of heightened international tensions due to the war in Ukraine and a more assertive China. From a geopolitical perspective, however, it also means that India could use the opportunity to leverage its ties with Russia, considering that security issues have significant consequences for the global economy. Moreover, Prime Minister Narendra Modi aims to showcase India's global reach to his domestic audience in advance of the 2024 general election, when he is expected to run for a third term. To this end, he moved the annual leaders' summit forward to September to coincide with the start of the election campaign in India. Modi’s stance at home was boosted in early December 2022 when his BJP party managed to retain power in his home state of Gujarat. Despite the party’s right-wing populism and divisive communal policies, Modi is still popular with the West and big businesses: Projected to be the world’s fastest-growing major economy until 2026, India is seen as a key regional partner to counter China. Key Issues Building consensus as the Global South’s voice India sees its chairmanship of the G20 as an opportunity to move out of ‘crisis mode’ dominating global governance since the start of the COVID-19 pandemic. It also plans to use the presidency to bring in the perspectives of the Global South in response to escalating geopolitical events, such as the Russian invasion of Ukraine and US-China tensions. As evidenced by the G20 compromise statement on the war, India will invest in increased consensus building. Without openly trying to broker a deal between Russia and Ukraine or the West, Delhi will strongly advocate for peacebuilding and open lines of communication while maintaining its traditional position of non-interference. However, it will highlight that the war’s impact – and that of many pressing geopolitical challenges – is felt very differently outside of Europe or the United States. It therefore intends to utilize its presidency to bridge the gap between the West and the global South and to focus on critical topics such as resilient and fair food supply, innovation in agriculture, a clean, sustainable, and inclusive energy transition, digital goods and digital infrastructure as well as health security To this end, India has invited countries and international organizations based in the Global South as observers to the G20. These include Egypt, Mauritius, Oman, Singapore, the International Solar Alliance, the Climate and Development Research Institute, and the Asian Development Bank. Delhi has also organized the January Global South Summit to further this cause. Regarding urgent environment­al challenges, India initiated Mission LiFE, or Lifestyle for the Environment, which it hopes to turn into a global mass movement to promote climate-friendly behaviors among individuals and communities. At national level, the government aims for Parliament to pass the National Green Hydrogen Mission in early 2023, which complements India’s commitments to the International Solar Alliance and the Coalition for Disaster Resilient Infrastructure. Finally, India will push to fortify international co­operation on access, availability, and affordability of pharmaceutical products and medical services. The G20: Still (un)able to address macroeconomic dilemmas? To support global economic growth, India is working towards creating a fairer multilateral trading system that better considers local and regional realities. Under the umbrella of Data for Development (D4D), it explores strategies to use data to accelerate work on the UN’s sustainable development goals. For example, the targeted use of data has enabled over 400 million people globally, of which 56% are women, to open bank accounts in less than a decade. Over the next year, the G20 Finance Track will focus on creating resilient global value chains, addressing the global skills gap, and finding stronger financing for the gig and platform economies - all of which will benefit developing economies in the Global South. Moreover, financial inclusion is a top priority, and India is taking steps to fund tomorrow's cities, climate action, and the goals set by the Bali energy Transition Roadmap. Drawing on domestic plans such as Mission LiFE, India aims to move to renewable energy with its Green Hydrogen Mission. This includes blended financing, subsidies for electric vehicles, and public-private partnerships to scale up hydrogen, battery storage, and low-carbon steel, cement, and fertilizers. Independent of its G20 presidency, India has made strides recently in its economic relations with countries worldwide. In April 2022, it signed a free trade agreement with Australia, to enter into force by the end of 2023. Trade talks with the UK are also progressing, with a deal expected to be concluded by March 2023. In addition, India strives to advance on trade talks with the European Union that have been ongoing for more than a decade. German Foreign Minister Annalena Baerbock's visit to India in early December 2022 is indicative of this renewed interest, with bilateral agreements on migration and mobility with Germany likely to also strengthen India-EU relations as a whole. International businesses stand to benefit from India's efforts to expand its economic relations by gaining access to new markets and opportunities to expand their operations.

The war in Ukraine will remain a major risk factor for international businesses in 2023. This is due to the low prospects for a speedy end to the conflict, as long as both Moscow and Kyiv believe that they can achieve more on the battlefield than in substantial negotiations requiring painful concessions. Instead, further escalation is still possible amid the many uncertainties surrounding the war. The most likely scenario is a relative stabilization of the frontline with continuous heavy fighting but no rapid sizeable territorial gains by any side. Armed conflict will stay mainly within Ukraine’s borders, yet regular drone and missile attacks inside Russia proper as well as subversive activities are likely. Russia seems able and determined to continue to destroy critical, transport, and civilian infrastructure in Ukraine, even when its own economic and military situation deteriorates. The second, less likely scenario would lead to a horizontal escalation of the conflict, i.e., the direct involvement of third countries. The missile incident in Poland in mid-November showed how the war could easily expand into NATO territory, even if the alliance stresses that it wants to stay away from it. Direct involvement of Russian-allied Belarus also remains a distinct possibility, though neither Minsk nor Moscow appear to have an interest in this at the moment. However, as long as Russia launches air and missile attacks on Ukraine from Belarusian territory, the country remains a potential target for the Ukrainian army. The third scenario would see the conflict’s vertical escalation up to the use of weapons of mass destruction by Russia, including tactical nuclear weapons. While unlikely, this could play out if Ukraine continues its successful counteroffensive and comes close to retaking Crimea. Developments throughout 2023 may include elements of all three scenarios, as escalation risks prove difficult to control by the belligerents. The longer the conflict lasts, the more likely its geographical expansion becomes, as neighboring countries like Belarus and Moldova or even Poland could become involved. Such horizontal escalation may then trigger a vertical one, possibly leading to the dilemma of accepting a negotiated ceasefire to avoid, or even shortly after, a Russian tactical nuclear strike. Figure 1: Total bilateral aid commitments to Ukraine, top ten sources and type in €bn Western support (as shown in figure 1) remains a key factor in Ukraine’s ability to resist. Consensus among elites and populations across NATO for military and financial support to Ukraine seems to be holding. The general perception, especially among G7 countries, is that relations with Russia have irrevocably deteriorated, which will likely affect the West’s long-term defense planning and funding. However, the war has had a negative socio-economic impact through rising energy and food prices and by depressing economic growth (see figure 2). This, in addition to the risk of horizontal escalation, is likely to soften the current consensus through 2023, especially in Europe. Instead, the number of voices in politics and society supporting a diplomatic solution are likely to grow. Figure 2: Impact of the war in Ukraine on forecast GDP growth for 2022 in selected countries (as a difference between Dec 2021 and Jun 2022 forecasts, in %) Russian society will also increasingly suffer from the war, the sanctions, and the country’s strategic reorientation away from the West. Nevertheless, living standards will not drop dramatically, while the political system becomes more repressive, allowing Putin’s government to retain majority approval for its domestic and foreign policies. International businesses working in Russia or with Russian companies should assess the risks of increased domestic repression and control of foreign cooperation by state security services. All plausible war scenarios will continue to have a negative effect on stability in the region throughout 2023. Without a functioning security architecture, the region will experience an expanding arms race and further militarization, heightening the risks of the war’s horizontal escalation. The “cold war” atmosphere in Russian-Western relations is becoming a new normal in all areas, not just militarily. Economic and logistical decoupling will continue, and business ties across the new “iron curtain” will become even more difficult to maintain.

With the wars in Syria and Yemen largely out of the public eye, the Middle East and North Africa may appear more stable than in previous years. However, the potential causes of instability have not disappeared; instead, they have shifted to other areas of risk. One important issue is the changing dynamic among GCC countries. The enmity between Saudi Arabia and Qatar has all but ended, just as the economic rivalry between Saudi Arabia and the UAE will increasingly define their relations in the future. The Saudi Vision 2030 challenges the Emirates’ position as the regional business hub, and Riyadh is working hard to draw firms and people away from the UAE in particular. Abu Dhabi responds by liberalizing business and social norms to make the country a more attractive place of residence. This includes greater acceptance of religious minorities, the introduction of a three-day weekend (i.e. extending to Sunday), and offering long-term residencies or even citizenship to foreigners. So, when the CEO of state carrier Etihad recently rejected such incentives and accepted an offer to head Saudi Arabia’s new national airline, Abu Dhabi reportedly was furious. Such spats increasingly pit the two countries against each other and exacerbate tensions between them. It is unclear how the warming relations between Saudi Arabia and Qatar will play into this. Doha will seek to reap the rewards of the successful completion of the football World Cup and the soft power the tournament has brought it across the Arab world. However, most analysts suggest that the respective bilateral relations of the three countries – Saudi, the UAE, and Qatar – cannot be equally harmonious. Elsewhere, Iran is grappling with three months of unbroken unrest that threatens the country’s leadership and, depending on further developments, possibly the region’s stability as well. Despite a heavy crackdown, protesters continue to challenge the Islamic regime, with no return to ‘normalcy’ in sight. The revolt has further complicated the already tenuous prospects for a restoration of the 2015 nuclear deal, as it appears increasingly unthinkable for Europe and the US to lift sanctions on a brutal and repressive regime. The election of Benjamin Netanyahu as old-new prime minister of Israel also increases the risk of military action against Iran’s nuclear program (or the perception of it), although it could also help soften Iran’s position, as was the case when the deal was first struck. The continued expansion of security cooperation between the GCC countries and Israel under­mines Tehran’s influence in the region and its ability to strike certain targets in particular. Through increased early detection, interception, and retaliatory capabilities, Iran has in effect been deterred from renewed drone attacks and missile strikes. Instead, Teheran has repeatedly signalled its willingness to address and resolve differences with the GCC in order to reduce tensions. Since April 2021, five rounds of Saudi-Iran talks have taken place in Baghdad, and Saudi and Iranian officials recently agreed to continue this dialogue when meeting at an Iraq-focused conference in Amman in December 2022. Instead, Iran has taken to destabilizing the region by less direct means. It plays an active role in supporting the weaponization of drug production in Syria, seriously affecting neighboring countries such as Jordan. It also undermines political progress in Iraq after an Iran-friendly government has come to power and former Shiite militia leaders took up top government positions. Quite likely, Iran will also try to threaten the growing gas infrastructure in the Eastern Mediterranean through its Lebanese proxy Hezbollah. Several other factors affect stability in the Middle East, most notably the state of relations between the US and GCC countries and the widespread perception in the Gulf that US security guarantees no longer hold. GCC states like Saudi Arabia and the UAE believe that Washington is too preoccupied with Russia’s war in Ukraine, its rivalry with China, and the domestic political situation to meaningfully engage in the region. The OPEC+ autumn snub to cut oil production shortly before the US midterm election further deepened the estrangement especially with Riyadh, adding to the personal animosity between US President Joe Biden and Saudi Crown Prince Mohammed Bin Salman. Saudi Arabia could even seek Israeli support in containing any harsh US reaction, even though the eventual strength of the GCC-Israel partnership will also be determined by the anti-Arab elements in Prime Minister Netanyahu’s extreme-right coalition. Still, the hosting of Chinese president Xi Jinping in Riyahd in mid-December underlined the country’s desire to keep all options in a geopolitically bifurcated world.

In 2023, global greenhouse emissions are expected to reach a new peak as investment in green energy has slowed due to recovery from the Covid-19 pandemic. With climate-related risks becoming more frequent, economic losses as well as human deaths and displacements around the world will increase. Figure 9 illustrates the exponential increase in global climate-related disasters and the resulting economic costs over the past five decades: What was once an anomaly is now commonplace, costing the world an estimated $520 billion each year in lost consumption, according to the World Bank. Figure 9: Global reported climate disasters and associated economic losses 1970-2019, in absolute numbers and $bn Developing countries are hardest hit by climate change, with 99% of weather-related casualties occurring there. Flooding, extreme drought, heat, changing rainfall patterns, and reduced crop yields are just some of the factors leading to economic damage, loss of livelihoods, and even violent conflict. While still recovering from the pandemic, developing countries will be further left behind by climate change: the African continent, for example, will lose up to 15% of annual per capita economic growth, according to the African Development Bank. Millions of people in countries like Pakistan, India, Bangladesh, Malawi, and Mozambique will be displaced due to floods and extreme droughts. In addition, climate change increases the risks of conflicts over natural resources, creating a favorable environment for armed groups and terrorist recruitment. At the 2009 UN Climate Conference in Copenhagen, developed countries pledged to mobilize $100 billion annually for developing countries by 2020 – a target they still have to reach. At COP27 in Egypt in November 2022, it was agreed to establish a Loss and Damage Fund for countries most affected by climate change, though its structure, donors, and beneficiaries have yet to be determined. Even with an expected increase in contributions, the growing development gap will continue to prevent the Global South from implementing effective and sustainable climate action. Given the urgent need for a comprehensive approach to climate finance that addresses both mitigation and adaptation, new opportunities are expected to emerge. These include the continuous efforts of developed countries to co-design climate finance packages with developing economies and the engagement of financial institutions such as the World Bank and the IMF to create more efficient and adequate climate finance mechanisms. The Climate Finance Summit in Paris in June 2023 will be a key event. Another challenge for developing and emerging economies is food insecurity as a result of climate change, which is compounded by the impact of inflation. With supply chains, ports, and fertilizer markets disrupted, some developing countries experience double-digit food price inflation (with figure 10 showing Morocco’s rate as an example). Food insecurity therefore becomes a destabilizing factor in many emerging and low-income economies, in particular in East and North Africa as well as Central and Eastern Asia: Ethiopia, Nigeria, South Sudan, and Yemen are especially at risk of famine. Figure 10: Food inflation rate in Morocco from Jan 2019 to Jun 2022 (year-on-year, in %) To make matters worse, inflation and food insecurity put pressure on public institutions and increase the risk of social unrest and disruptive strikes. Countries such as Tunisia, Egypt, Rwanda, Ethiopia, and Pakistan already rely on international financial bodies to strengthen safety net programs and expand the agricultural sector. More broadly, donor countries will need to provide $7 billion in aid to vulnerable households, and $50 billion to end food insecurity for 222 million people across 53 countries. In 2023, several initiatives and trends are worth monitoring. In the area of climate finance, the Bridgetown Agenda and the Caribbean Debt Swaps Initiative are particularly relevant for emerging economies. The former was initiated by Barbados to find creative solutions to high debt and financial pressures associated with the pandemic and climate change, including the use of the IMF's Special Drawing Rights to redistribute funds from developed to developing countries. The latter introduces a debt ceiling mechanism that combines dept relief and climate action. Both models are expected to gain traction globally. In addition, the green bond market is expected to grow through initiatives by financial institutions such as the World Bank as well as individual countries such as Egypt, which will issue a new $500 million green bond in 2023. The urgency of climate change is also opening doors to enhance technology and innovation in agriculture, with the climate-smart agriculture approach of the World Bank, and in carbon-offsetting, with the IFC Carbon Opportunities Fund. Although 2023 is expected to see peaks in greenhouse gas emissions and an increase in climate-related disasters and costs, public and private sector initiatives to mitigate and adapt to climatic conditions will continue to grow.

Russia’s assault on Ukraine has made the vulnerability to cyber attacks of critical government and private sector infrastructure and networks a pressing concern. At the onset of the invasion, the hacking of US satellite company Viasat not only beset Ukrainian defences but affected Internet users and web-connected wind farms across central Europe. Two months later, the Pipedream malware was detected in US critical infrastructure before becoming active, showing that direct attacks on a nation’s ‘nerve system’ are no longer a remote threat. In effect, there are more than twice as many Russian cyber attacked against the US than against Ukraine – a country with which it is at war (see figure 7). Germany’s Federal Office for Information Security, for one, has classified the threat level as higher than ever before. Besides Russia, China, North Korea, and Iran are the main perpetrators of state-sponsored cyber operations. Figure 7: Countries targeted by Russian cyberattacks from July 2020 to June 2021, by location of notified customers Ransomware has become a particular headache for both governments and companies, as criminals are increasingly extorting developing countries as well as less protected entities, such as local administrations and small businesses. The industries most affected by ransomware are manufacturing (28%), health (20%), and consumer retail (16%). Attacks are so frequent and severe that insurance companies have increased premiums by 74% in 2021 alone, according to S&P Global Market Intelligence. Figure 8 shows that cyber insurance premiums in the US increased steadily from 2015 to 2021 (at an average annual growth rate of 34%), while the loss ratio – calculated by dividing the direct losses and defense costs by the premiums earned – changed significantly year on year. Moreover, some insurers such as Lloyd’s of London have introduced comprehensive rejection clauses to exclude coverage for state-backed cyber operations, thus leaving struck companies to deal with the damage themselves. Figure 8: Cyber insurance premiums earned (in $m) vs. loss ratio in the US (in %) 2015-2021 In addition to malevolent cyber activities, government policies also requires firms to respond. The EU recently passed several important cybersecurity regulations, most importantly the Network and Information Security (NIS2) Directive. Other legislative initiatives include the Cyber Resilience Act, which addresses the Internet of Things, and the Digital Operational Resilience Act for financial sector regulation. The NIS2 Directive considerably expands the number of entities that must meet heightened cybersecurity standards, e.g., by adding sectors such as social networking platforms and pharmaceutical companies. It also requires firms to follow strict incident reporting procedures (within 24 hours for an initial notification of an incident and within 72 hours for a more comprehensive incident report) and to use multi-factor authentication. In terms of more comprehensive cybersecurity risk management measures, the directive requires companies to, for instance, perform due diligence of their supply chains, implement proper encryption practices, and have business continuity and crisis management plans in place. It also sets standards for robust network segmentation between the corporate and production levels of a company. This would help to blunt a future incident like the ransomware attack on the Colonial Pipeline oil system in the US in May 2021. Set to enter into force by the end of the year, the NIS2 directive gives member states 21 months to be incorporate its provisions into national law. European regulations focusing on the Internet of Things and financial services could be similarly effective in a market that has been only sparsely regulated and where hardware and software providers have had little incentive to provide secure equipment. Like the EU’s General Data Protection Regulation, these acts will have a wider global impact wherever companies do business with the EU. The US, in turn, has been less resolute in regulating the cybersecurity landscape. Instead, it has taken an incentivizing approach by linking higher cybersecurity standards to the procurement of IT hardware and software to the US government. Moreover, the divide between red (Republican-run) and blue (Democrat-led) states has widened after the mid-term elections, hindering comprehensive big tech regulation at federal level. Even so, the proposed American Data Privacy and Protection Act in its current form enjoys bi-partisan support, even though Nancy Pelosi, the outgoing Speaker of the House, has so far blocked passage of the bill. She rejects the limiting effect that does not allow states - like California, which she represents - to go beyond the federally prescribed measures. Democrats also advocate for a “private right of action” allowing individuals to sue companies for wrongdoings. Republicans, in turn, push for a baseline federal law that cannot be exceeded by the states and oppose the said “private right”. The debate on stronger regulation comes at a crucial time when location data, search histories, and other personal information have become critical security issues. With virtually no laws restricting expansive data brokerage practices, American consumers’ personal data can currently be easily acquired by foreign intelligence agencies or criminals. This represents not only a great reputational risk to companies holding such data, but can also do real operational damage. In the end, 2023 may provide first indications of the pros and cons of both the European and American approaches to securing the cyber domain – with companies active across the Atlantic having to deal with both.

Despite the efforts of US President Joe Biden and Chairman Xi Jinping to put a floor under their country’s expanding strategic rivalry during the G20 summit in Bali, fundamental differences remain. Although channels of high-level communication have been reestablished, including restarting a working group on climate, Beijing and Washington will continue to compete vigorously. Each will try to lay the foundations for it to “win” in their increasingly zero-sum race in the decades ahead. In 2023, the competition will develop along three major lines: technology, trade and military preparations in the Taiwan Strait. The battle over dominance in critical cutting-edge technology like semiconductors, super­computers, AI, machine learning, biotech and new materials will be key. Doth China and the US view supremacy in modern technology as a prerequisite for long-term economic prosperity and modern military power. Through its plan to secure critical supply chains and by signing into law the CHIPS Act, the Biden administration in 2022 doubled-down on industrial strategy. It has also encouraged the “friend-shoring” of critical manufacturing and strategic minerals and limited the flow of advanced semiconductor technology to China. In 2023, the main focus will be the drafting and passing of legislation that will allow the US to monitor any outward investment that transfers high-tech manufacturing capacity to “hostile countries” such as China, Russia, Iran, or North Korea. Moreover, Washington will encourage European and Asian partners such as the EU, the UK, Israel, Japan, and South Korea to develop and enforce similar export control mechanisms. With two years left in office, Biden’s team will double down on an effort to build a lasting policy legacy, even though, no matter who wins the White House in 2024, tech rivalry with China will most likely continue to determine the US course of action. In the year ahead, China will try to counter US moves. First, Beijing will try to divide US allies by offering preferential market access and cutting deals with individual countries and companies – German Chancellor Olaf Scholz’s trip to China in November is exemplary. Second, China will pour more money into import-substitution and indigenous innovation in critical technology, as a new State Council team settles in by late March 2023 and drafts its medium-term plans. Third, China will continue to lobby companies to obtain waivers and special licenses from the US government that would allow the flow of technologies and components within the legal framework set by the US executive order limiting the export of semiconductor technology On trade, the US will proclaim its desire to sort out the tariff war with China, but is unlikely to give US Trade Representative Katherine Tai a proactive role, thus leaving trade talks on hold. The WTO will continue to review some Trump-era cases raised by Beijing, as it did with steel tariffs in early December. The US will be slow to implement these rulings, relying on legal push back. The Republican majority in the House of Representatives can be expected to bring new legislation to the floor, but the focus of this effort will likely be on even tighter controls on technology transfers - largely in line with the Biden administration's vision. With regard to Taiwan, the probability of war in 2023 remains low. Beijing prefers to regain control of the island by non-military means, with a timeframe not set in stone. Nevertheless, a number of triggers could lead to an unintended escalation. For example, if the new Republican Speaker of the House visited Taiwan in 2023, China is certain to respond with an even greater show of force than it did when Nancy Pelosi did so in 2022. In turn, Beijing could feel compelled to take action, including through a naval embargo, if Taipei crossed a red line by, for example, announcing independence or definitely deviating from the rhetorical status quo with the mainland. Similarly, China could also become more aggressive if conlcuding that US efforts to strengthen Taiwanese self-defense capabilities would prevent it from using a military option to regain the island altogether. In such a case, Beijing could see a “window of opportunity” for earlier action than planned. In any case, China will continue to rapidly modernize its military and to create the capabilities needed to overwhelm Taiwanese defenses, while the US and its allies (most notably Japan) will continue to buttress Taipei’s military abilities. Although the likelihood of a military confrontation in the Taiwan Strait in 2023 is low, governments and businesses need to ensure that they have plans in place to disrupt maritime trade routes.

Critical raw materials are likely to emerge as major drivers of geopolitical conflict in 2023. With many economies transitioning towards ‘greener’, less resource-intensive models, the world continues to rely on finite resources located in certain countries. Demand for minerals such as lithium, cobalt, and rare earth elements has increased significantly, and is expected to grow over the next years as figures 5 and 6 show. (For lithium, the mean annual growth rate is 21% between 2019 and 2030, thus roughly doubling worldwide demand between now and 2025, and again between then and 2030.) This is largely due to the emergence of new technologies such as green energy, electric vehicles, and 5G networks. As these commodities become increasingly valuable to any country with industrial production, it also heightens interdepen­dence along the value chain. In the end, geopolitical tensions are likely to erupt, because industry needs are set to outpace efforts to access mineral deposits. Figure 5: Actual (2019-21) and projected (2022-2030) global lithium demand (in 1,000 metric tons of lithium carbonate equivalent) Reliable access to critical raw materials is becoming a major global concern as their deposits and/or their extraction and refinement capacities are located in only a few countries. China holds the largest share of rare earth elements, the 17 metallic elements that are essential for products like cell phones, wind turbines, and electric vehicles, followed by the US, Canada, and Zimbabwe. Chile, Australia, and Argentina, in turn, lead in lithium reserves. Cobalt is overwhel­mingly held by the Democratic Republic of Congo, with Russia, Canada, Australia, and Zambia trailing. Nickel is mainly found in Russia, Indonesia, Canada, and Australia. Often also the refining process, which takes place in specialized plants located near the raw materials‘ source, is highly concentrated in a few countries. China, for instance, is the major player in rare earths refining, producing more than 80% of the world’s supply, followed by Japan and the US. Figure 6: Demand for rare earth oxides worldwide in 2019 (actual) and 2025 (forecast) by end use (in metric tons) The enormous local concentration of reserves and refining, coupled with export restrictions and limited access for foreign investment, puts global markets at risk of supply disruptions. China, for one, introduced export constraints on rare earths in 2010, further tightening them in 2014 and 2019. Indonesia imposed new controls for nickel and other critical raw materials in 2019, limiting exports and requiring raw nickel to be refined in the country. If the demand for critical raw materials continues to outstrip available supply, there is a risk of additional countries – such as Russia for Palladium – introducing export restrictions or bans by 2023. For companies facing significant price and supply chain risks, active resource management policies by governments are a key to success. These can lead to more stable prices, managed diversification, and reduced dependence on a few supplier countries. In recent years, the EU has taken a number of measures to secure access to key raw materials. These include the establishment of the European Commodity Observatory monitoring global commodity flows, new legislation on the recycling of raw materials, innovation partnerships to promote new technologies, strategic partnerships with like-minded countries, and the inclusion of a raw materials chapter in new trade agreements. In early 2023, the EU is expected to present the Critical Raw Materials Act, which will include a European raw materials security strategy based on self-sufficiency targets and measures such as an early warning system to identify raw materials becoming critical. Similarly, Brussels seeks to improve the supply of critical raw materials and mitigate the risk of disruption from geopolitical conflicts by pushing for the ratification of trade agreements with Chile, Mexico, and New Zealand, and seeking to advance negotiations with partners such as Australia and India. Diversifying supply can help in the short-term, but Europe needs more than that to guarantee long-term supply security. With no mining or refining capacity for rare earth elements and very little capacity for lithium, it is difficult to bring the value chain back home. EU regulations and lengthy approval processes for new mines make it tough, and recycling efforts are unlikely to yield quick results. Also, the Critical Raw Materials Act may come with additional costs for companies, via quotas, taxes, and higher environmental standards. The US is likewise expected to ramp up efforts to secure critical raw materials. Already in April 2021, President Joe Biden used the Defense Production Act of 1950 to increase the production of several critical raw materials. He directed the Secretary of Commerce to identify, prioritize, and expand the production of these resources as well as to secure their supply through procurement. In addition, there is legislation pending in the US House of Representatives that would codify the president’s executive order. The Critical Mineral Exploration and Develop­ment Act would create a support program for domestic production as well as research and development of innovative technologies to reduce reliance on foreign suppliers. Should the global supply of critical raw materials face a crunch in 2023, bipartisan agreement on this legislation in the Republican-controlled House and the Democrat-led Senate can be expected.

Russia’s invasion of Ukraine has sparked an energy crisis in Europe, drastically reducing gas supplies and driving up prices compared to other regions. Despite forecasts of decreasing gas demand by different EU industries in the medium-term (as shown in figure 3), the possible relocation of energy-intensive production marks a serious risk for Europe's industrial base. Moreover, Russia's cutting of supplies together with EU and G7 sanctions on Russian gas and oil have created new threats to energy security. Major forces driving energy policy in 2023 include the need to slash elevated prices and to transition to renewable sources in response to climate change. The Ukraine war has further led to rising inflation, reduced household incomes, and increased production costs. As a result, a decline in global economic growth and stagnation in the Eurozone are expected for 2023. Figure 3: Demand for natural gas in the EU in selected energy-intensive industries in 2020 (actual) and 2027 (forecast), in terawatt hours Governments striving to address the threefold challenge of energy security, climate change, and economic growth have prioritized short-term supply over long-term objectives. About 65% of gas previously bought from Russia will be imported from other regions (4.090 out of 6,251 petajoules, cf. figure 4). The remaining gap will have to be filled by investments in renewables and new technologies, thus enhancing supply security in the medium and long term. By 2030, coal demand is projected to decrease by about a half, and natural oil and gas demand by nearly a fifth. Meanwhile, cost-effective technologies such as wind and solar will account for 30% and 15% of electricity generation, respectively, by 2030, up from 13% and 5% in 2021. Figure 4: Europe’s changing primary energy mix in response to the reduction in Russian gas imports, forecast 2022-2024, in petajoules per year In the short-term, high-energy prices are here to stay, even with the EU’s just-passed gas price cap at €180 per megawatt hour. That’s because Russia’s oil and gas lack immediate substitutes, and meagre investments in the energy sector in recent years have exacerbated the current shortages. China’s easing of Covid-19 restrictions, in turn, has caused a surge in new cases there, which may temporarily reduce energy demand there. While weaker-than-expected global economic growth may affect the peak of oil demand and the energy transition, global value chains will be reshaped by trade and commodities becoming more expensive. Against this backdrop, Europe has begun to develop its energy relationship in particular with countries in the Middle East and North Africa. This gives these new-found suppliers more political leverage, while increasing Europe’s exposure to the region’s complicated geopolitics. Algeria and Morocco, for example, are important energy, and trade and investment partners, respectively, for European businesses. However, they are also in a long-standing row over Western Sahara, a formerly Spanish-controlled disputed area now claimed by Rabat. Positions taken by European governments regarding the territory’s status have in the past led to retaliation: Either by the Algerian government, which supports an independence movement there, or by Morocco. For example, when Spain recognized Morocco’s sovereignty over the territory in early 2022, Algeria responded by banning the import of Spanish livestock. Similarly, Germany's recent gas agreement with Qatar for two billion cubic meters annually may expose Berlin to risks from future disputes within the Gulf Cooperation Council (GCC) states. Also, the emerging gas infrastructure in the Eastern Mediterranean increases Europe’s security risk from states or non-state actors threatening to unsettle energy markets or disrupt supplies. Iran, for one, may be tempted to target such installations through the Lebanese Hezbollah, after its regional deterrence capabilities weakened due to increased Arab-Israeli security cooperation. Moreover, maritime security at chokepoints such as the Straits of Hormuz or of Bab el-Mandeb becomes more relevant as Europe relies on deliveries along these strategic routes. In their quest for influence, major powers such as China, France, and Russia and regional ones like Saudi Arabia, Qatar, Turkey, and the UAE all have established a presence in the area. This geopolitical competition considerably increases energy security risks. Then, there are a number of stability risks in energy-producing countries that could impact European businesses. Algeria, Egypt, and Morocco all face significant inflationary pressures which, in the worst case, can increase unemployment, drive up food prices, and stoke popular discontent, with a negative impact on political stability if uncontained. At best, they will deplete foreign exchange reserves and undermine public and foreign investment flows at a critical time when countries desperately need both to sustain economic growth. Potential risks also arise from power struggles between countries like Egypt and Algeria, which are vying for the future role as the region’s energy hub. In this current energy context, the strategy of companies should be to increase their energy budgets and diversify their energy mix, including self-generation of renewable energy and further innovation. Investment opportunities in emerging and developing economies for new oil or gas infrastruc­ture have the potential to bring quick returns with minimal impact on climate change goals. The US and the EU, in light of China’s control of the downstream supply chain of critical minerals needed for clean energy sources (such as copper, nickel, and lithium), provide incentives for investments within their territories and through friend-shoring, i.e. the process of re-orienting supply chains to source essential materials from allied countries. Additionally, the energy transition offers long-term investment opportunities in innovative technologies, such as those for renewable energy and electric mobility, carbon-free home heating, carbon capture and storage, and green hydrogen-based fuels. Growing demand for net-zero technologies could create more than $12 trillion of annual sales by 2030, including in transport, power generation, and hydrogen.