World Politics and Business at Home

In the global world of business, international political unrest can have far reaching effects on economies and industries worldwide. Many of us have read recent headlines describing the instability and unrest in the Ukraine, Russia, and Middle East, and have learned about the impact of such conflict on the regions immediately surrounding these areas.

We may seem geographically far removed from the current situations of international unrest, but the question remains – what ways does geopolitics affect particular sectors of business—changing risk profiles, imports, exports, and influencing overall consumer behavior here at home?

Two Opus College of Business faculty members, Dave Brennan, professor of marketing and co-director of the Institute for Retailing Excellence, and Peter Young, professor of management and 3M Endowed Chair in International Business, weighed in on this important question and shared additional insights about the impact of political instability on the U.S. business environment:

Q: How is international political uncertainty in the Ukraine, Russia, and Middle East impacting the U.S. business environment and/or economy? Are there any effects particular to the Twin Cities?

Professor Young (PY):Interestingly, there was a recent article in the Financial Times that wondered whether these kinds of political events actually impacted global financial markets at all over the medium to long term. Yes, there are big impact events—like WWII or even OPEC in 1974—that can have transformative and long term effects, but short of such sizable events, most investors tend to look at such things as Ukraine both as an investment threat and opportunity. So, while there may be short term impacts, there is not a lot of evidence to demonstrate that regional events have permanent effects on investors.

At a purely business level, of course events like Ukraine can have significant impacts on individual firms. Right now the uncertainty in Eastern Europe is creating all sorts of immediate challenges for European firms (and countries). The impacts on the U.S. business and the economy are not huge right now, and my impression is that the direct impact on the Twin Cities’ business community is not great in a general sense, though it undoubtedly is having specific effects on firms actively doing business in these troubled regions.

Professor Brennan (PB): The impact is much greater on Europe than the United States. The sanctions against Russia because of Ukraine are decreasing exports to Russia. This is softening a number of economies, with some falling into recession.  The U.S. impact is fairly low so far.

The U.S. does about a third of the exports to Russia that it does with Europe. Exports of farm products might be one of the sectors that gets hit, which will obviously have an impact on the Minnesota economy. This would include any of the grain exporters like Cargill.

The Ukrainian situation has had a significant impact on the stock market. Each event, e.g., the Crimean invasion, eastern Ukraine disruptions, Russia moving troops and equipment into eastern Ukraine, and the downed plane all resulted in a drop in U.S. stock markets.

Oil availability and price was impacted in the early summer when ISIS/ISIL was overrunning northern Iraq. They still control three oil fields and a large refinery, but are selling oil to illegal trades at huge discounts, e.g. $45-65/barrel, when the market price is $90 to $100.

Q: Are these effects on U.S. business similar or dissimilar to what you have observed or experienced in situations of international unrest in the past?

PB: These [effects] are similar to other [past] events, but still modest at this point. Unless something big occurs like the destruction of the large oil refinery or a full out invasion of the Ukraine, the impact will be relatively minor for the U.S., but modest for Europe.

[The oil embargo in 1973 and reduction in 1979 resulted in huge impacts. The price of oil shot up, with gas prices skyrocketing. This also had an impact on anything that used petroleum, e.g. plastic, synthetics, etc.]

Q: What are some other effects of world politics on U.S. markets that may arise in the coming months should instability in the aforementioned regions persist?

PB:  More sanctions on Russia.  The Society for Worldwide Interbank Telecommunication Financial Communication (SWIFT), which processes transfers and transactions for most banks, could be forced to stop processing transfers and transactions of Russian banks. If this happens, Russia may be hurt more. This might create a situation where they do something irrational, e.g., invade the Ukraine or other countries, [or] cut off fuel to Europe, especially for heating purposes.

PY:  In my coming article for B. Magazine, I reference the World Economic Forums Top 10 Global Risks for 2014-2015. If the thousands of global survey respondents are to be believed, the most worrisome global risks are:

  1. Fiscal crises in key economies
  2. Structurally high unemployment/underemployment
  3. Water crises
  4. Severe income disparity
  5. Failure of climate change mitigation and adaptation
  6. Greater incidence of extreme weather events (e.g. floods, storms, fires)
  7. Global governance failure
  8. Food crises
  9. Failure of a major financial mechanism institution
  10. Profound political and social instability

Obviously, politics is directly or indirectly connected to a number of them, but what is interesting is that several might be better thought of as ‘chronic’ problems; not ‘event specific’ problems. Notoriously, chronic issues like the environment are difficult to address—not just technically, but politically as well. There is emerging research that details some fundamental human and institutional weaknesses that make it very difficult to develop comprehensive responses to chronic global problems.

Q: What can U.S. consumers expect going forward should international politics and relations become increasingly unstable or strained?

PB:When any type of uncertainty increases, consumers stop or slow down their purchases, particularly those that are considered consumer durables (last three years or more). This would include cars, furniture, etc. They are also more likely to postpone travel plans, especially [those that are] more expensive. If [plans] involve foreign travel [consumers] are even more likely to postpone, especially if it is an area they perceive as being more dangerous. If terrorist events [happen] in the region, people generally avoid that city/country and may avoid nearby countries as well.

PY:I think the general impact of all such events is ‘increased uncertainty’ for the foreseeable future, which obviously has a dampening effect on almost all aspects of commerce. But as noted above, markets tend to look at turbulent times as producing both threats and opportunities (see how Middle East uncertainties have led to the U.S. becoming—or about to become—a net exporter of oil and gas), so I would expect that we will see subtle adaptations occurring in response to regions of unrest.

Q: What do you believe is the most significant impact of international political unrest on the U.S. business environment and economy?

PB: The Ukrainian situation is potentially the most threatening, because it involves Putin and Russia. This could have major ramifications if Russia were to try to take over the Ukraine or possibly other countries, most notably the Baltic States.

ISIS/ISIL has the possibility of impacting the psychology of Americans and consumption. If there were terrorist attacks on the U.S., I suspect we would see a great deal of uncertainty and a slow-down in consumption.

PY: We are doing ourselves a disservice if we look at political unrest primarily through a ‘business’ or ‘economic’ lens. There is immense human suffering resulting from the situation in Syria and Iraq, and—indeed—in the Ukraine. Of course, this can translate into economic and political impacts (managing refugee populations is just one obvious consequence), but the most significant impacts must be responded to—in the first instance, anyway—on the basis of basic human decency and compassion.