Exclusive markets – when geopolitics polarises business

The ability to move capital across borders underpins global re/insurance business by keeping the cost of capital low, thereby enabling re/insurers to help legal entities around the world strengthen their risk readiness. Currently, a number of developments threaten free market access and movement of capital, and also efforts to diversify insurance risk globally. 

A main benefit and ambition of globalisation has been the long-term reliability of legal and regulatory environments for domestic and international enterprises. Competition among countries to attract business serves as a strong deterrent to overly politicise trade and investment relations.

However, things have changed. There has been an increase in trade barriers since the global financial crisis of 2008–09, and these now cover a wide gamut of goods and services.¹ In addition, governments have made defensive use of financial and technological dependencies to weaken competitors. An example are protectionist US policies like reshoring of chip manufacturing facilities to prevent China from gaining a decisive technological and strategic edge.² Though driven by different motivations, western sanctions on Russia carry a similar idea: by cutting off access to the international economy, Russia’s ability to wage war on Ukraine is undermined.

Also, secondary sanctions which first appeared in the 1990s are making a comeback. The seizure of assets of individuals without criminal conviction has made its way onto the political agenda. For instance, a current debate focuses on whether to confiscate the fortunes of wealthy Russians to compensate Ukraine for war damages.³ Lastly, new payment systems have emerged, for example in India, Iran and Russia, making these countries less exposed to efforts by the West to close existing financing conduits.⁴ And a few countries use crypto currencies to evade sanctions.⁵

These developments have seen a re-shaping of geopolitical alliances, which could potentially lead to a decoupling of polarised political blocs.⁶ Three key developments signal the development of mutually exclusive economic blocs. The first is the growing popularity of economic sanctions in the case of conflict. The second is political realignment (notably in advanced markets) of the traditional left vs right divide, to nationalists vs globalists.⁷ And the third development is the trend of friend-shoring, whereby firms relocate production operations to states with aligned values rather than set up in lowest-cost locations.⁸ All three could impede the free movement of capital that allows businesses to operate “normally”.