In a conversation with Chief Public Affairs Officer Erick Gustafson, Robson takes us on a survey of the critical issues facing humanity, namely the effects of the war in Ukraine, tensions with China and the threat of a global recession.
He sees major demand drivers as a stimulant for economic growth, fostering positive economic and political movement. The challenge is how to mobilize capital to meet demand in a volatile and complex risk environment.
“What we now need to do," says Robson, "is work with insurers to drive some innovation in how risk is underwritten, and to deploy more capital to the right risks, efficiently, to support the investment and trade requirements of the world.”
TRANSCRIPT:
Nick Robson:
In the little village I lived in, I was the kid who played the trumpet. I was asked to do the last post each year on Remembrance Sunday. What I took from meeting these veterans was that this is when you saw and felt almost physically the suffering they had gone through and the way in which they had committed their lives and the lives of their friends and the many people they lost to a greater good. This moment had a deep impact on me, which created in me a deep sense of the value of the liberty that we possess and our need to defend it. And our need not to forget history, but to be deeply grateful for the security and the peace and the freedom and the liberty that we have today.
Erick Gustafson:
Across history people have struggled to make sense of what's going on in the world. Today, major risks have come roaring back - the war in Ukraine, tensions in Asia and the state of the economy. In this episode of ľӰԺ Matters from ľӰԺ, we talk with someone who's devoted his life to studying the world's risks. My guest today is Nick Robson, who leads Marsh's Credit Specialties Practice and manages our political risk solutions. Welcome to ľӰԺ Matters. I'm Erick Gustafson. As a youth in the UK, Nick Robson took an interest in the late 1970s crisis in British politics and began reading his father's newspapers as a teenager in the 1980s. He closely tracked issues as the UK's relations with Europe drew closer, only to later help clients as a professional grapple with issues when the country left through Brexit. His career has been an extension of a personal passion to understand what's happening in the world. In the early nineties, the Cold War ended, the wall came down and Francis Fukuyama famously declared the end of history. Fast forward 30 years, and it certainly doesn't feel that way. We just took a holiday from history rather than witnessing its end. I started the interview by asking Nick how he's thinking about the world today and how he puts words to it.
Nick Robson:
It's interesting to try and grapple with this sense of what the world's mood is and where we're going, because there are so many threats, and the threats seem for the most part to be distinct. And, of course, they're not. They are all linked, but it's drawing the links together that's the challenge. More broadly speaking, the world's mood today is febrile. We're in a period of great uncertainty. People feel unsure for the most part. In countries where we felt confident in our freedoms, we feel less confident now. Politics, especially in the Western world, has become very polarized. The forces that stand against some of the things that we have stood for – freedom of speech, freedom of worship, room to develop with limited government restriction – have multiplied and feel more vocal and feel more powerful. And that speaks to this world of greater uncertainty, a greater sense of volatility. This is also fed by a media which has lost the sense of responsibility that we believed existed in the past where the media would, on the one hand of course, want to broadcast stories and print stories that got attention and had commercial value. But at the same time, there was a sense of responsibility in the media that there were things that perhaps you should hold back on or consider carefully before you printed. Today, if it gets attention, it'll be printed. And the worst of that is that it feeds back into politics. You get this negative feedback loop in politics where very often what's in the media and the public perception is leading the politics rather than the politics leading the dialogue in the media.
Erick Gustafson:
In thinking about the world's mood, have you found a word that kind of gives a name to it?
Nick Robson:
Yeah, the word was found for us by the Collins English Dictionary recently when they announced that one of the words of the last 12 months was "permacrisis," a new word for the last 12 months, which has gone into the commons English dictionary. And that word is supposed to capture the idea that we are living in a constant series of crises, and it reflects the Covid and lockdown crisis we've recently been emerging from – some countries, like China, are only just now emerging from – followed by the Russia-Ukraine crisis, followed by the energy crisis, followed by the food crisis and this concept of a permanent series of crises.
Erick Gustafson:
There's no shortage of items in the world that are impacting how businesses and their employees are working. How are you advising our clients doing business around issues like the war in Ukraine or increased tensions in Asia?
Nick Robson:
As Russia went into the Ukraine, there was a period of intense engagement with clients across all sorts of different types of peril. We try to assess the implications of both the physical impact on the ground in the Ukraine and then the consequential impact of sanctions. This was an enormously complex issue, particularly because the rate at which new sanctions were applied was rapid. They were applied by different authorities, though for many organizations they would've been subject to sanctions from multiple authorities. Our clients were trying to navigate that circumstance. Issues included clients who've had assets which they've had to abandon or which have been damaged by war and political risk. Insurance policies and political violence policies responded to those types of scenarios. Clients who familiarly and regularly traded with Russia and were unable to receive payments from their customers in Russia for goods and services they'd supplied faced credit risks. And that has resulted also in some credit risk insurance losses that we've navigated our way through as we've come through this period of crisis with the Ukraine, which sadly continues with a high level of intensity. There have been different points of evolution that the world has watched and the insurance market has supported where it can. The most public of those was the agreement that was reached for some shipments of grain to be taken from Ukraine and exported. For those shipments to be able to sail they required insurance, but that insurance was required at a time when there was technically a war environment and the insurance would not normally have been available in the immediate area. As Russia agreed at that point in time back in July to allow those shipments to proceed, the insurance market worked to create special facilities. And Marsh was at the forefront of that advice. There's been further complications with the adequacy of insurance for the ships to pass through Turkish waters and another area where Marsh has been heavily involved in providing advice and support for clients. A lot of different things, just a few examples there, but those are some of the things that we've been dealing with in Ukraine and Russia and will continue to deal with as long as these circumstances persist.
Erick Gustafson:
None of this feels particularly normal, but how close to normalcy have the insurance arrangements made things for clients? Is it still cumbersome or is it a solvable challenge with creative thinking and access to good insurance markets?
Nick Robson:
Subject always to the impact of regulation, which of course is something that the entire insurance market seeks to adhere to and work with. Subject to understanding the regulatory impact of any client demand and being confident that we can work within the regulatory environment, creative minds in the insurance market have managed to deliver solutions where there have been opportunities to do so, but it's a long way from normal. And for our clients, the experience is complex and time consuming even when the insurance market is responding quickly. And that complexity and time is driven more by the regulatory environment than the commercial environment in the insurance market.
Erick Gustafson:
Looking beyond the shipping and the grain issue, how might the geopolitical tensions in the east of Europe play out over the next year or two? Obviously, NATO has been strengthened through this process. Western unity has also been strengthened. What are the downsides of this geopolitical scenario that we must address?
Nick Robson:
From a broader perspective, NATO has once again been the entity which has kept the peace in Europe. And there's a narrative in Europe that it's the EU that has kept peace, and it's not a wholly honest representation of what's happened. The EU has kept peace within the members of the EU, but when issues have occurred on the borders of the EU, and there's been two extremely notable ones, Yugoslavia, and then the series of events with Russia, the EU has been impotent and it's been NATO that has had to step in together with other global forces. NATO's importance has been underlined, and that's not a small thing. If you recall that within recent times, very recent times, leaders in Europe have talked about creating an EU army. And you'll remember Macron talked about NATO being brain dead. These things are far from true. The role and significance of NATO in keeping the peace today and into the future has been underlined by this conflict. There is also a narrative that it was the push East that provoked Putin in taking that action. I think it's very important that we don't buy into that narrative. Putin made his own decisions in his own timeframe. The EU may or may not have been wise with hindsight, but Putin has shown himself to be, as most leaders of his nature have been in the past, to be subject only to their own decisions. Excuses can be made, but they shouldn't really be heeded. And as for the subject of Western unity, this is a particularly interesting one. It's difficult to imagine or remember Germany restricting the flying over its territory of any defense items to support Ukraine. This Western unity, it's fantastic in many ways that it's been revealed because it's created a strong counterpoint both to Russia and to some of the challenges that have been identified regarding our relationship with China at a moment when it was well needed. But it has also identified just how fragile that unity is and can be. And we've seen it again with some of the comments that have been made by European leaders regarding the future of the dialogue with Russia about the Ukraine. I think we can take from these issues that some of our multilateral institutions are far more important than we sometimes give them credit for, and NATO is certainly one of those given the criticism it's received. But Western unity is still a long way from being embedded again in the way it was in that period you began this discussion with - post the fall of the Berlin Wall. And it's important that we regain and focus on the points that we can align with rather than the points that divide us. And that's going to be a particular challenge in the years ahead as we deal with complexity. But it's also a particular challenge for business and our clients because it's from this type of issue that the volatility and uncertainty that our clients deal with emerges.
Erick Gustafson:
The need for Western unity no doubt creates fault lines in Europe, as you've described and we're seeing. Are those fault lines confined to Europe or do they expand globally?
Nick Robson:
They do expand globally, sadly, and they're certainly a part of the challenge that we need to confront in other parts of the world. I realize as I talk about this, that some of the vocabulary I use - "Western unity" - is sort of out of date because it's not purely in the West. It's those countries globally which run democratic systems that have relatively open market environments and reasonably high levels of freedom. You would include Japan and Korea, for example, in that group of countries right alongside Australia, western Europe, north America and several other territories throughout the world, including South America and the Middle Eastern Africa. The lack of unity, the lack of confidence in the West and in those countries allied with the West and the divergence of opinions has certainly fed into the strengthening in relative terms of China. And even during this recent period you may have taken note that the chancellor of Germany recently made quite a strong comment about not decoupling from China and maintaining strong Chinese relationships. Not that I'm suggesting we shouldn't maintain strong Chinese relationships. I think it's important for the world that we do, but it was running very much counter to the narrative that many other leaders were giving at the time, which is that we need to adjust the relationship with China, that it's been unbalanced and that several different things over recent years have together created a degree of tension today that needs to be managed. Those several things are not as straightforward as some of the commentators would have us believe, which was the Chinese alignment with Russia, Russia's invasion of Ukraine and the differences that exposed particularly with the West. But the first sign of the complexity of the relationship with China and the challenge for western companies and western business was the impact of the Covid restrictions and lockdowns and the huge dependency that so much of the world had developed on China and how that impacted the supply chains. Now, from a resilience perspective, the level of dependence on one territory and a territory where our relationships are somewhat complex was not a smart move if you were considering this from a pure risk management perspective. Of course, you should work with China, of course we should trade with China, but you should also have some distribution to make sure that your supply chains are resilient. Covid exposed that as an issue for the western world particularly, but not just the western world, across Asia as well.
Erick Gustafson:
As the Covid complications made themselves manifest, we saw increased tensions between China and Taiwan. That notion of reshoring or friend-shoring supply chains very much came into the forefront of the conversation.
Nick Robson:
It was already a trend that companies recognized the level of dependence built upon China in the supply chains over the last 20 years was very high and that there was a genuine risk management need to reconsider that level of dependence. And then of course the tensions with Taiwan and China's alignment with Russia brought that to the fore. China to date has been able to maintain a very bullish stance on international trade, even in the face of low levels of intellectual property security in China and high entry barriers to ownership and operation in China for foreign companies. The West has been so dependent on China that there's been no alignment in challenging some of the things that haven't worked with the China relationship. And then along comes the alignment with Russia and at the same time China exerting its stated rights regarding Taiwan. This again has exposed some interesting challenges. I believe that China felt able to do that, partly because it absolutely believes in its authority over Taiwan and partly because it believed that the western world would not risk its dependence upon the relationship with China by challenging China in a way that was too difficult, too aggressive. It hasn't quite worked out like that. And whilst Speaker of the House to Taiwan was not an official state visit, it highlighted just how concerned China was about the Western position and what that might do regarding the relationship with Taiwan and caused a considerable heightening of the rhetoric. Our own view is that when we talk to our clients, it's clear that there is a desire on the one hand to continue to trade effectively and smartly with China, and on the other hand, to make sure supply chains don't have such a significant dependency on one territory. At the same time, companies are looking at the challenges of the transition to a lower carbon economy. And in that regard, reducing carbon in supply chains by shortening those supply chains is another feature of what's going through corporate planning when they look at China risk and the supply chain dependencies. These two issues are out there at the same time as the broader political issue and the desire to, from a political perspective, moderate the dependency on China.
Erick Gustafson:
And what about the long term? Do you think companies are leaving or is this just a moment where we're taking a pause because of the tensions, because of Covid?
Nick Robson:
When you combine the impact or the realization of the supply chain dependency on China, which we knew about before, but we saw as a risk really properly for the first time after Covid, when you put that together with this other driving issue around transition and reducing carbon emissions in supply chains and then you add into that the highly sensitive issue around the politics, what you see is corporations saying long-term, "of course we need to be in China. It's an important market, it's an important manufacturing base and we'll continue to trade and to operate in China as long as we are allowed to do so." On the other hand, given the politics, the risks that politics could lead to sanctions and disruption to business, given the other issues that I've already described, "it's sensible that we diversify dependencies in supply chains into other territories as well as China." Over the long term, businesses would like to continue to trade in China and probably will unless we do have a more acute political de development. But the rate at which they invest in China will probably reduce and the rate at which they invest in other parts of the supply chain in other geographic locations will increase. Over time the dependence on China will moderate.
Erick Gustafson:
And what risks do you see outside of China? I mean those supply chains are diversifying to places like India or South America, perhaps. Those are not necessarily completely placid locations.
Nick Robson:
There is a challenge with this being coined in the media as a process of decoupling. I think that's probably a little bit too strong a phrase, but nonetheless, if we use it, one of the consequences of the concept of decoupling with China is that as you're seeking to moderate risk in one location, you're taking on new risk. And when you invest in a territory, one of the first and primary risks you must understand is your property rights. How secure is your investment? Can you enforce your rights if you are confronted with a problem, whether it's a commercial or political problem? In many countries, the concept and the property rights are understood, but the ability to enforce your property rights is limited and then you must deal with other forms of disruption. Many countries present significant political risk themselves and if they don't present political risks themselves, the relationships they have with other territories and other regions could create other forms of political disruption. And then of course there is the risk of new customers and new suppliers. You can theoretically address many related issues through analysis. But the cultural issues around payment and performance and security and relationships are different as well. For sure, the experience and need to develop supply chains and other territories brings with it a whole new area of risk complexity. And we often talk about supply chains being restacked, where you are buying and supplying from, and two, there is complexity and the need for understanding of country risk, credit risk and performance risk in that process.
Erick Gustafson:
You've described the tensions between China and Taiwan. Do you see them escalating further? And if they do, what might the impact be to China? Setting aside the potential impact to Taiwan.
Nick Robson:
This is the big question, and of course it's enormously politically sensitive. You need to understand what it is that would drive China to do that and what its priorities are and where its risks lie. One of the lessons I first learned many years ago when I was chairing a political risk panel with some fantastic China experts from China on that panel was the most important thing to the Chinese Communist Party is the survival of the Chinese Communist Party. It sounds like such a simple statement and it is a simple statement, but when you get under the skin of what it means, it really does have a significant influence on what you should reasonably expect China to do in different circumstances today. Now in China, we might think the biggest risk for the Chinese authorities is, for example, their perception of American support for Taiwan or their perception of growing strength across the Pacific, which doesn't involve China or security agreements between certain countries globally to counter China's strength. But the reality is that those are not the biggest risks to the Chinese Communist Party. The biggest risk to the Chinese Communist Party is their own population, their own survival. In China you have this extraordinarily large population and whilst we have seen significant generation of wealth that has trickled into several hundred million people, the size of China's population means that there are at least a billion people in China who are still in a state that we would classify as impoverished for the Chinese Communist Party. If that population can be supported and subsidized and jobs can be created and food can be distributed and opportunity can gradually trickle through society, they have a relative degree of security. But when the population of that size is discontent and is given a reason to rise up, that is the biggest threat to the Chinese Communist Party. You've seen that play out in the protests about the lockdowns. Given the strength that Xi Jinping had reinforced through his confirmation of his third term as leader, many people expected there to be a very strong, possibly violent clampdown on those protests. There was clearly an interesting moment of reflection in China that these protests could gain momentum and that a violent clampdown could lead to accelerating that momentum. And instead, a decision was taken, quite to the surprise of many commentators outside China, that in fact there've been some concessions and China is quickly going to move away from the zero Covid policy and free up society. It's a very nice illustration of the priorities. When you come to thinking about Taiwan, if China were to attack Taiwan, that would create a very strong reaction from the West. Whilst there could be some level of physical impact, I'm not sure that it's realistic to expect America or any other territory to go to war with China over Taiwan. Yes, maybe to supply Taiwan with support, but not necessarily to go to war. But what the west would do would issue sanctions against China and the impact of those sanctions on China at this time, given its diminished economic strength because of the lockdowns, would be dramatic and it would be relatively quick. And the way in which that would impact the Chinese Communist party's ability to fund and support its population would be equally dramatic. The point I make is that for some time we have felt the dependence we have built outside China on China has given China the upper hand. But in fact, in today's scenario, whilst there is some truth that China does have a strong position, the reality that the West is willing and could unify to close out China could have a much more devastating impact for the Chinese Communist Party and their authority because of the economic impact on their country and their ability to support and subsidize their very large population. For those reasons, it's not of course inconceivable, but I think it's a very, very low likelihood.
Erick Gustafson:
Ukraine, China, the state of the economy. We can only scratch the surface of these topics. Each of them fills volume after volume. But our goal here is to provide a starting point even though the economy is fraught with risk, the fallout of the regional banking crisis being a prime example. Is there cause for optimism amid all the concern?
Nick Robson:
Supply chain stress has reduced. If you look at emerging and mid-tier countries, they are for the most part very much more resilient to economic stress than they were in past periods of crisis. A couple of data points you can look at in this respect are foreign exchange reserves in terms of the amount of FX that emerging territories hold to cover months of imports. That's a typical point of economic stress when there's a global macroeconomic crisis and it's a reference to a proxy for a sovereign credit risk. But if you look at what's happened and, taking a reference point of say the Philippines in 1997 in the Asian financial crisis, the Philippines had less than two months’ worth of reserves in terms of months of imports. They now have nearly five – making them nearly twice as resilient in terms of the period over which they can fund import costs with their foreign exchange reserves compared to where they were the last time they faced what was a very significant crisis in their region. That's just one data point. It’s similarly true for almost every country apart from Argentina and Turkey in terms of the emerging world. And another similar kind of aligned reference is the amount of foreign debt that countries hold as a percentage of total debt. If you go back to the Asia financial crisis, again as a reference point '97 '98, the amount of foreign currency debt that a country like Thailand had at that time is very, very substantial. But in 2022 it's about 1% or 2% of the government debt and about 98% is in local currency. That's a much more sustainable, much more resilient position in a macroeconomic crisis. And again, a very significant number of the world's important growth economies, like Brazil, India and South Africa, have a much-reduced dependency on government debt in foreign currency so their resilience is greater. Those are a few things to be optimistic about. And then, right alongside those things, there are four now, very big drivers of demand that are going to progress with or without the challenges of the current geopolitics. And those four big drivers of demand are delayed infrastructure - the kind of core infrastructure that the world couldn’t progress with as it normally would've done during the Covid lockdown periods and the estimates for what's needed from one or two sources. I was looking at a G 20 analysis done by Oxford Economics just to keep on top of the current infrastructure needs. And this does have a little bit of overlap with transition carbon reduction infrastructure, but it's just core infrastructure requirements. They estimate the world must spend about $80 trillion by 2040, and even when you start annualizing that that's a vast amount of capital for ongoing infrastructure needs and a significant amount of which is needed in the short term because it was delayed by Covid lockdowns. Another obvious area is energy security and food security because of the circumstances with Russia that is having positive impact on demand from regions like Latin America and the Caribbean and on some domestic market supplies where those energy needs and food needs need to be responded to in the short term is creating investment and trade. Another area, the third area I would refer to as defense. Defense spending clearly has got a mixed history in many people's minds, but right now I think most of us see a necessary level of defense as a moral good considering how we've seen Putin behave towards the Ukraine. And depending upon who you talk to and which country it is, that the largely democratic world is increasing spending by between about 25% and up to 100% in the next few years as people move to a 2% to 3% of GDP defense spend. Defense supply chains are very, very long and they extend well beyond the frontline defense manufacturers that people would’ve heard of. They go into all sorts of engineering companies, technology companies, et cetera. It's a big stimulant for economic growth up and down. Quite complex supply chains. Last by no means least is what needs to be spent from a climate finance perspective to transition to a lower carbon economy. A lot of people are predominantly focused on the target goals for transition that people have signed up to for 2050. There are intermediate goals for 2030, which is just around the corner. We are less than seven years from 2030. There's some interesting analysis the UN environment program did here and just for what they call climate finance needs. By 2030 there is an additional up to $2.8 trillion that needs to be invested per annum across sectors from power systems to transport to industry to buildings to lower emission fuels like hydrogen sustainable aviation, fuel, ammonia. And then there's agricultural sectors as well. And then the significant needs around the transition to a lower carbon economy, which involves both infrastructure and a huge range of other things across almost every sector. These things are huge demand drivers. These are reasons to be optimistic because these things will drive positive economic engagement and of course collectively will contribute to a stronger, more resilient world.
Erick Gustafson:
Nick Robson is global leader of Marsh's Credit Specialties Practice and manages our political risk solutions. He spoke to us from London. If you like this podcast, you might be interested in other topics in the series on climate change, cyber threats or disaster resilience, all of which can be found on our website, marshmclennan.com. This is, ľӰԺ Matters. I'm Erick Gustafson.
