The volatility in the global economy, fuelled by geopolitical tensions, the climate crisis and aftermath of the Covid-19 pandemic, has made doing business in multiple jurisdictions more complicated. How can institutions best deal with the 'new normal'?

Just as the world appeared to be emerging from the Covid-19 pandemic, Russia decided to invade Ukraine on February 24, triggering a wave of sanctions against Russia by Western countries spearheaded by the US. Businesses operating internationally have had to navigate the wide-ranging and swiftly-implemented sanctions.

"There are about 1500 sanctioned parties, if you look at the US, UK, EU, and other jurisdictions' lists of targeted individuals and companies," says Mark Weil, CEO of TMF Group, a global provider of compliance and administrative services. "All firms need to ensure that those parties are appropriately dealt with, which means freezing all activity and payments on their behalf."

Contravening sanctions comes with significant penalties, so the whole process of identifying sanctioned parties and taking the appropriate action needs to be well managed, he adds.

However, unravelling connections to one of the world's largest economies across all industry sectors has been a big shock to the global economy, with knock-on effects well beyond the borders of Russia and Ukraine, as seen in steep rises in energy and food prices.

"Suddenly the general trend towards globalisation [has been set back] and there's a sense of at least a risk of economic Balkanisation,"

says Mr Weil. "There is a feeling that the world's going to become more complex to navigate, with at least some question marks over whether and how to invest in places on the assumption that the rules for doing business may become more onerous."

Geopolitical risks and regulatory complexity is generally bad for investment, whether foreign direct investment (FDI), wealth creation and local capital formation. "Businesses struggle with complex rules," he says.

However, he believes that having a good understanding of the operating environment can also unlock investment.

For example, when dealing with economic nationalism, a business needs a specific approach the problem, according to Mr Weil. "A business may want to invest in China for many reasons, such as its huge consumer market or natural resources. If the rules require high levels of local adaption and presence on the ground, then that's just the way you have to invest. It probably won't change your decision to invest, but it might add to the cost of doing it and certainly the complexity of doing it."

As demonstrated in TMF's annual Global Business Complexity Index, some of the most complex countries are also some of the biggest recipients of FDI. "So, complexity doesn't stop investment, but it does mean you need to go in with your eyes open and figure out how to cope with often very complex, multi-tiered sets of rules Ð local, state and national," he adds.


While organisations are keeping a close watch on the changing geopolitical environment, they are also being challenged with changing environmental, social and governance (ESG) regulations and reporting standards, which are reshaping the way investors and financiers operate. The EU is at the forefront when it comes to climate targets and risk reporting standards, but these are still evolving.

According to Mr Weil, ESG criteria is being driven by a form of activism not only from the investment community, such as funds and private equity firms, but also employees. "Also, the lessons from the situation in Ukraine, with the wave of companies that decided to take action, unlocks a sense that expectations are going to be higher Ð both from governments and employees Ð that companies now take action on issues that aren't immediately about their business but about their ESG responsibilities."

TMF Group, for example, decided to exit clients with Russian ultimate beneficial owners, effectively sending a message of solidarity to colleagues whose lives have been greatly affected by recent events. "That wasn't a result of a regulatory pressure, but from a sense of responsibility, a commitment to a duty of care," he says.

"I think that in the next 10 years, the pressure for firms to act on matters of climate change, ethical standards and duties of care, and their own governance, are going to be very acute Ð almost as acute as what's written in formal regulation."

Many institutions are re-evaluating of their mission statements, promoting a societal purpose that goes beyond their immediate business. "You now have to think about complexity, not just in terms of ESG, but also what you have to do to satisfy those values that you committed to," he adds.

"The formal rulebook is the main aspect of complexity we talk about, but there's an increasing informal one created by those wider stakeholders; and their expectations have been elevated by the wide response to Ukraine. They will be looking to see how we respond to the next thing that comes along, whether a conflict, governmental action, human rights issue or otherwise."

Emerging from the pandemic

Most of the world, with the exception of China, are opening their borders after a long two years and unwinding many of the exceptional measures put in place to support businesses and investment. However, many of those support schemes are now being unwound.

"When the Covid-19 crisis began, we started listing schemes to give links, application help, details, etc. We started with about 20 schemes but, at peak, there were 1500 schemes around the world. While most are now gone, some are still in place but with an end date in sight," says Mr Weil.

"These schemes aimed to ensure businesses didn't unnecessarily go bust and employees were protected. And, in general, world employment stayed high, so you could argue that they've worked or at least they contributed to that outcome." However, he continues, the main tactical issue today when entering new countries is which of those schemes are available, which are not and manage the transition.

Governments' response to the Covid-19 pandemic has also increased expectation that they will do whatever it takes to find solution to big-scale problems, such as rising inflation and a potential recession.

"There's an expectation from voters that governments will intervene much more in economies than they would have historically chosen to," says Mr Weil. "And while there have been positives [from government intervention] during the pandemic, in a period of high inflation and rising food and energy prices, price controls and windfall taxes might be rather less welcome."

He continues, "Again, that's a form of informal complexity. It won't be in the rulebook for how to do business, but you must look at the governments in question and the pressures they're under, and consider what you could be exposed to in that particular location and then factor that into your investment plans."

Investment trends

TMF's Global Business Complexity Index, now in its ninth year, has identified two conflicting forces at work: constructive competition between jurisdictions to attract FDI and economic nationalism.

"We think competition is a healthy thing, especially in offshore centres where businesses aren't there for their natural resources or large labour pools but because of the ease of establishment. Such centres are pioneering in the use of digital processes for incorporation, oversight, etc," says Mr Weil.

"On the other side is the economic nationalism that now feels prevalent, particularly post-Ukraine [invasion], US/China trade stand-offs. This is a worrying signal that, despite the efforts to create global tax harmonisation, for example, we're going to have multi-polar alignment around different blocks. That means we'll have more complexity in different regulatory rulebooks and, potentially, a global rulebook that's in part or not at all adopted, overlayed by local regulations."

As Mr Weil highlights, the proposed global minimum corporate tax of at least 15%, which was agreed by the G7 in October, may be under threat despite the Organisation for Economic Co-operation and Development's best efforts. "With what's happening in the world now, maybe there's a little less cohesion and momentum to implement," he says.

In terms of the consequence, it is less easy to predict how effective such a harmonised tax regime will be. "The key question my mind will be: where does it direct flows for economies that were relying on tax competition to attract FDI?" he says. "On the other hand, there are many other ways such jurisdictions can make themselves attractive to retain an advantage, including infrastructure, education and other forms of investment support for companies."

Digitisation of government services to lessen the red tape around investing and doing business is often identified as a silver bullet to unlock investment. However, in Mr Weil's view, digitisation can be helpful, but it's not a cure in its own right.

"Digitising a bad process still leaves a bad process. It's not as simple as putting a complex process onto a computer terminal for people to navigate," he says. "You have to also think about the end-to-end experience of the investor and the entrepreneur. Therefore, digitisation is one aspect of trying to make it easier to do business, but done purely as a digitisation exercise is probably not sufficient."

Download: TMF's Global Business Complexity Index

Written by - TMF Group experts in partnership with fDi Intelligence

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