Four plus one

What is going to dominate global business and politics? This is a question that is being asked now with a great sense of urgency because of the contexts – a new President at the White House, escalating conflict in West Asia together with a redrawing of relationships within the Arab world and between them and other countries, especially Russia and China, and with Saudi Arabia redefining itself as more than just a source of fossil fuels, continued conflict between Russia and Ukraine, changing equations within South Asia, to mention just the most prominent.

Defence: Realignment and Reinforcement

Four areas – Defence (both for security and as a business), Energy security, Minerals & metals, Semiconductors will dominate the agendas, all in turn affected by technology especially the increasing militarization of technology (the plus one). The European Union’s response to President Trump’s refusal to support NATO is to increase the allocation to the budget to defence – the EU Commission President Ursula van der Leyen announced that the EU will spend $800 billion over the next four years, a single decision that will decisively impact many other areas especially welfare.

Defence spending is a misleading term; it is more useful to see defence as a business which has national security as one of its essential objectives. Now more than ever before, defence is an immensely large business. India’s defence exports surge to a record high of Rs 23,622 crore in Financial Year 2024-25, a growth of 12.04% over 2023-24, and marching towards achieving Rs 50,000 crore target by 2029. The destinations are the US, France, Armenia, Germany, Philippines and Mauritius.   Defence exports cannot but be linked to political alliances. A study by the Australian Institute of International Affairs observes that India is using defence exports as a strategic tool to enhance its position and assert itself as a global power. Recall that the late Shinzo Abe argued for an active defence policy in Japan, which has not had an active defence policy since they signed the surrender agreement at the end of World War II.

Militarization of technology

I have deliberately named it ‘Plus One’ because it is a ‘plus’ to everything and important on its own. Lest anyone think the world has entered some unchartered path, let us emphasise that this has been the chosen path since the beginning of the cold war. Much of what became the Silicon Valley owes a great deal to this phenomenon which accelerated with the race to space between the then USSR and the US. One can confidently state that but for the cold war, the world would not have had the Silicon Valley that we know of.

The commonest example of militarization of technology today is drone technology, which will become more and more potent once countries crack the frequency and range – longer range and unbreakable frequency. This militarization of technology means a bonanza for metals, electronics, light-based industries, software, robotics, glass (lidar, radar etc) and of course satellite communications. 

Energy security is national security

Perhaps this was always true but the criticality it has assumed in the last five years is new, especially after the Russia-Ukraine war, with Europe hesitating to take  a firm stance because 25% of its gas supplies come from Russia and a chunk of it through pipelines in Ukraine. A report by Thomas Wackman for the Institute of Energy Security, in April 2023 starts like this: “One cannot exist without the other, and a lack of either can have serious ramifications. For evidence of this, look no further than Europe, where Germany is reeling from the twin blows of ill-conceived domestic energy policies and wholesale energy dependence on its chief geopolitical adversary: Russia”. The ill-conceived domestic energy policies includes the decision to go off nuclear power. However, Germany will likely revisit its policy, while China did not change its stance in the wake of Fukushima. Every country will re-evaluate the nuclear option in energy, while fully aware that dealing with nuclear waste is an unimaginably complex task.

In the same vein, it must be acknowledged that countries with sizeable coal deposits will continue to attract investors’ attention, an example of this being the Adani Group’s investments in coal mining in Australia, which has high quality coal deposits. Thermal power is not going away. The discovery of shale gas in the US a few years ago was hailed as a major political factor but the effect has worn off. It is a major source of gas but wields no political clout.

The reemergence of the Middle East (West Asia for us) as a major regional political power going beyond fossil fuels, wooed by every major country, with Russia and China particularly active, alters the power balance and we cannot be completely confident of its outcomes.

M&M

China was the first country to grasp the need to develop new and strong alliances in Africa to secure firm access to minerals and metals, catching everybody by surprise. That alliance has seen some rough weather but China will find ways to hold on these agreements.

Every company in the business of semi-conductors, mobile phones, electric vehicles will strive to create and sustain alliances in specific metals such as cobalt, lithium ion and so on. The discovery of lithium deposits in Jammu & Kashmir will be a critical factor in its further development. We must not forget ‘traditional’ metals such as aluminium whose importance only grows with the growth of automobiles and construction businesses. Natural endowment coupled with technological sophistication is a lethal, political combination. Africa has one of the two and has to yield in negotiations if it wished to make a business of what nature has endowed it with.

Semi but in full control

The semi-conductor industry’s importance became national security in the wake of the pandemic, the troubled supplies in chips leading to the call for ‘resilience in supply chain’ by both industry and business.. An extraordinarily complex business to build, few will succeed, at least on the scale that Taiwan has accomplished. Naturally, new centres, which means new supply chains, will emerge in this business which will lead to new regional political alliances of the sort that QUAD has come to be. Countries that come to mind immediately are Japan, South Korea, and Taiwan of course, with India as the fourth member.      

Redirection of trade

There will be a redirection of global trade towards regions seen as safer to negotiate, an increase in regional trade flows which is partly or substantially the result also of the redrawing of manufacturing. This is because manufacturing bases have geographically expanded and are used to cater to domestic needs and trade. Witness the use of India as a manufacturing base by many global companies, which comes with export obligations, to cater to countries easier to trade with from India.

This redrawing will impact and in turn be impacted by the growth of currencies as alternative to the dollar, an extremely challenging task. The dollar is the principal currency of invoice for oil and gas. Some exporting countries (and importing ones too) have tried to shift the currency of invoice but it is not a simple matter as currencies bring in their own influences because money is not just a medium of exchange but also a store of value, an asset on its own.

The first rupee payment for oil began in 2023 but has not taken off as expected. In 2022, Russia decided to invoice gas in ruble, a move that created a great sense of uncertainty as it brought political tensions within the gas trade. As Financial Times noted, “Analysts said that changes to the payment currency would probably create significant practical difficulties for European importers of Russian gas. Putin gave the central bank and the government a week to find a way to allow buyers to acquire roubles on the domestic market”. Meanwhile, we might see increased volatility in forex markets with corollary impact in oil futures.

This is the perfect time for genuinely strategic thinking.