Donald Trump’s election as US president, as well as the Republican Party’s win of control over the US House and the Senate has a range of repercussions for multinational companies operating in EMEA. Detail on Trump’s views on a range of foreign policy issues is somewhat limited, and implications and ripple effects will become clearer over time.
General implications for multinational executives in EMEA:
- Companies will have to re-assess some of the assumptions behind 2017 plans and budgets. At minimum, they would need to review their FX exposure and rate expectations as the currency volatility created by Trump’s election is likely to continue given his unpredictable policy agenda and temperament
- US firms with plans to enter or expand in Iran need to build a contingency plan that looks at a scenario for what happens if a hardliner is elected Iranian president in May 2017 and the country stops cooperating with the IAEA, prompting snapback sanctions. At minimum, US firms should be factoring in much slower opening up of Iran, as guidance from US agencies about sanctions relief is likely to stall
- Companies should review their exposure to markets that can be substantially disrupted by an abrupt shift in US policy and seek to balance those out with markets that are more insulated. Over-exposure to vulnerable markets should be factored into a broader contingency plan for alternative avenues to hitting cross-regional targets for 2017. Companies that haven’t pressure-tested their market prioritization assumptions should do so before finalizing 2017 plans at least in a scenario context
- Maintaining perspective on the practical implications for the business would remain critical. While a Trump presidency is likely to bring a fresh crop of political risks and disruptions across the region (see analysis below), not all of these are likely to be disruptive to businesses. In some cases, there may be winners (ex. defense spending will tick up from the Baltics to Saudi Arabia), and in others, the impact on demand and the ability of businesses to operate at a normal cost of doing business will remain unaffected
Trump has been quoted as admiring President Erdogan for turning around the coup attempt in July, and that as president, he would want to see Turkey take more of an active strategy against ISIS. Trump has stated the need for improving relations with Turkey once he becomes president. This would be a significant change that would allow Turkey to increase its military presence in Syria and Iraq, raising the risk for more ISIS and PKK attacks inside Turkey. Trump’s advisors have also implied that they may align more with Turkey in their fight against Kurdish groups. Expect more volatility in the lira, and continued growth underperformance in the market.
Broader Middle East
Trump has sounded an isolationist note on the Middle East, and will most likely want to leave it to regional powers like Turkey and Saudi Arabia to take action. As Russia continues to support Bashar al-Assad in Syria and partner with the Iranian government, the lack of direct support from the US to Saudi Arabia and other powers will exacerbate regional tensions, and could cause more regional proxy conflicts, particularly if a hardliner is elected President of Iran in May 2017. Between now and January, however, the Obama administration may take more decisive action to achieve more strategic gains against ISIS in Iraq and Syria.
Trump has been very negative about the Iran deal, making it highly likely that at minimum, there will be a significant slowdown in further sanctions removal guidance from US agencies, particularly OFAC about the ability of US companies to engage in Iran as well as the processing of financial transactions with the market. This makes our downside scenarios on Iran more probable, and is likely to leave US firms at a disadvantage in accessing the Iranian market for a longer and more uncertain period of time. A worst-case scenario of snapback sanctions would require Iran to also stop cooperating with the IAEA, which would become more likely if a hardliner is elected president in Iran in May 2017.
Donald Trump would likely attempt a warming of the US relationship with Russia (although whether that would be a long-lasting partnership is highly uncertain). This would likely require at least partially satisfying Russian demands for a lifting of US sanctions against Russia, a scaling back of NATO’s missile defense system in Eastern Europe, and greater collaboration on issues in the Middle East and Ukraine. This could support a somewhat brighter outlook for the Russian economy, especially as it makes a lifting of EU sanctions on Russia in 2017 a more likely prospect.
The US under Trump could not only lift sanctions on Russia, but also potentially recognize the annexation of Crimea and strike a grand bargain with Russia that Ukraine remains within Russia’s effective sphere of influence. This will cause havoc in Ukraine’s internal politics, likely bringing populist parties to power, and substantially delaying improvements in the rule of law, reform, and economic recovery prospects for the country in the absence of US pressure. A federalization of Ukraine, where Russia exerts substantial influence in Eastern Ukraine, and potentially even with the Kiev government, becomes a real possibility in this scenario. These dynamics would undermine the long-term investment case for Ukraine across a range of sectors.
The US commitment to its NATO allies comes under question under President Trump. This would at minimum lead to increased defense spending in Central Europe and the Baltics, potentially at the expense of other areas such as infrastructure and healthcare. At worst, it could prompt Putin (his relationship with Trump notwithstanding), to try and test the credibility of NATO’s Article 5 mutual defense obligation by creating an ambiguous threat in the Baltics that prompts the affected country to trigger Article 5, to which the US does not respond, effectively invalidating the power of NATO to serve as a deterrence force.
Trump’s protectionist leanings would amplify those of Republican legislators who are pushing for revisions to AGOA, the legislation that gives African countries easy access to the US market. If access was tightened, South Africa would be the worst affected. His much tougher stance on immigration would likely hurt countries that receive significant financial inflows via remittances (Nigeria). For some states with large diaspora populations in the US (such as Liberia), remittances are one of their most important sources of dollars and help support consumer demand. Under Trump, budgets for foreign aid (for health, education, human rights programs, etc.) would probably all come under pressure, affecting recipient governments in Sub-Saharan Africa
Relations with the EU are likely to be strained, and European far-right parties strengthened leading up to a series of important elections next year. Trump’s election could have the strongest impact on France’s presidential elections and the candidacy of Marine Le Pen, and the Dutch parliamentary elections in May 2017, strengthening the Dutch Party for Freedom. It would also somewhat increase the strength of Italy’s Bebe Grillo’s Five Star movement in the case that Italians vote against constitutional reform in the referendum on December 4th. The uncertainty surrounding these elections is likely to depress investment in Western Europe and put pressure on the region’s fragile banking sector.
The US trade agreement with the EU is, at best, likely to stall for a prolonged period of time; and at worst, negotiations could fall apart. Combined with a reduced push for global trade liberalization across other regions and in the US’ other trade partnerships, this would push countries toward more regional and bilateral trade agreements.