Putin thought he could hold the world to ransom

By Felix Gummer

The inconvenience of upholding moral standards when weighed against need and interest has never been in sharper focus.  By many accounts Putin has been stunned by the rest of the world’s reaction to his actions.  He, no doubt, expected a repeat of the strong words and the rhetoric he felt before when he invaded Georgia and, let us not forget, the previous time he invaded Ukraine, annexing Crimea.  However, he judged that western self-interest, addiction to his exports and huge wealth scattered around the globe would stop any meaningful action, as they had in the past.

But how have we got ourselves into a situation where a small number of the nastiest regimes, including Putin’s Russia, feel, not unjustifiably, that they can act as they wish without reproach or consequence?  The incredulity of anyone under 30 at this sorry situation is met with a resigned, ‘it’s the way of the world’, from anyone older.  Putting the planet and climate change to one side, our utter reliance on the energy produced by a handful of nations has been the single largest distortion of geopolitics for 75 years.

The plight of the Ukrainians is absolutely heart-breaking, images that will stay with us for the rest of our lives and a country that, whatever the outcome, will never be the same again.  But the effect of this war will be felt far beyond the borders.  Increases in energy and food prices are not balance sheet irritations, they cause destitution and death in even the most supportive and progressive economies.  Right across Europe the war is already increasing energy bills by an additional 20% on top of the already surging costs and this could rise by as much 70% if demand outstrips supply. The looming spectre of blackouts are now a very real possibility.  Food prices are already under pressure and input costs, in addition to energy, are on the increase.  Fertiliser cost, one of the key variables in any arable farmer’s balance sheet, is set to rise by over 50%.  Its production relies not only on natural gas but on sulphur, nitrogen products, and phosphates, all major exports from Russia.

Yet it need never have been this way. International trade is, of course, vital for prosperity, enabling exchange of abundance in one place and need in another. But these two examples, energy and fertiliser, are not vital raw materials, they are consumables, which, for the most part, could be significantly reduced or indeed eliminated.  The problem with these consumables is that we are addicted to them.  We buy them, use them, and then come back the next day and need more. We buy Russia’s gas because we haven’t harnessed the wind in the North Sea, which can supply the needs of the whole of Europe three times over. We buy fertilizer in the most part to replace the nutrients in our soil that we have depleted due to mismanagement and short termist farming practices. This is insanity, putting us not only in a moral conundrum, but also in a financial headlock entirely of our own making.

The irony of a post-Brexit world, where much has been made of Britain’s self-determination, is that whilst we may wish and legally have the freedoms to go our own way, our current business model makes that impossible. As long as our systems are reliant on inputs we could choose to replace but have not, taking back control will be largely theoretical.

The macroeconomic picture may sometimes seem remote to business and outside its control, however devastating its consequences, but there are significant lessons to be learnt.   Over ten years ago, I went on the road to embed Tesco’s zero carbon strategy amongst the store managers. Speaking to hundreds of hardnosed practical and pragmatic individuals about the importance of coming off fossil fuels, only one theme consistently resonated: in a world of razor-thin net margins (just 5% at the time), if your exposure to fluctuating global energy prices is less than that of any of your competitors, who do you think will succeed in a crisis?

Sadly, this was not prescience on my part but just a hard lesson from history that for some reason we are still learning.  The fact that in 2022 Foreign Secretary Liz Truss can call for an end to dependence on “hostile and authoritarian states” and think it revelatory is testament to that fact.

So, what’s the lesson for business?  Of course, we can’t eliminate our reliance on others completely and overnight, nor can we ever be total masters of our destiny, but ESG is the discipline of understanding that no business operates in a vacuum.  It is about maximising the business opportunities in the future, whatever it holds.

It may sound simple, but it means reducing wasteful practices, moving to renewables and towards a circular economy, treating everyone in your business, your supply chain and your customers with respect and decency and setting up your governance structure to give constant insight into what that means for your business and how to plan for it.  All this will put your organisation in a stronger position to be the most effective business you can be.

International disasters will always be a sad fact of life and we as individuals and businesses may have little power to influence such events. But how they affect you and your organisation, how deeply, and how you can respond is often much more in our control than we might have thought.

If you would like to find out about how we can help you explore opportunities related to ESG, please get in touch with me at felix.gummer@sancroft.com.