Is a massive breakdown in global systems coming? My response

Is a massive breakdown in global systems coming?  

This question has been posed a few times over the past couple of months by people I consider well-informed and thoughtful. And it is easy to see why.  

But before jumping in, I'll declare my own colours. I call myself a “Apocal-optimist”. Yes, an apocalypse is coming, but I'm optimistic about the developed world's mid to longer-term prospects. Too many potential events and situations could lead to a macro-system breakdown, and it is difficult, and a bit crass, to discount or ignore the massive scale of suffering that will occur as some global systems break down. Yet, there are also both inertial and positive feedback and response mechanisms that may mitigate those situations. I have great confidence in humanity and the human mind.  

So, let's begin with why the world is so scary today. Across Africa, there seem to be more coups, civil unrest, and the spectre of starvation linked to civil war and climate change. In the Middle East, there is the real danger of a far wider war, pulling the US (and allies) into a regional war with Iran (and proxies). Add to that the ongoing war in Ukraine and the appearance at least of weakening resolve in European states. Meanwhile, in the East, China is sounding more bellicose by the day in relation to Taiwan. Global migration and illegal migration appear to be on the verge of overwhelming North America and Europe. Climate Change is impacting temperatures, and summer is becoming “fire season” as much as tourist season, and who knows what is happening to Greenland and the Antarctic.  

And to be clear, this is not a taxonomy of the potential regional or global “system breakdown” trigger situations. The list is too long, so I’ll attempt to discuss, at a very high level, a few situations that serve as proxies for so many others. While each may be "separate", in reality, there is a level of overlap and linkage that would be difficult to communicate in these few words. This is without even considering the risks associated with runaway AI, which I'll purposefully ignore for now.

Depressed and worried yet?  

We should be, because there is a lot of uncertainty and instability, and our complex systems appear to be reaching the boundaries of fragility, boundaries that are not marked by points on a graph or dates on a calendar.  

Self-righting nature of systems  

Many of our systems are very fragile and under extreme stress. But not all. And many of our systems have automatic and unconscious feedback mechanisms that provide stability and recovery. Financial markets, for example, have “corrections” that can appear to be a market system failure. Yet these corrections are merely the unconscious processes by which the complex systems of markets ensure that the financial system does not collapse. Capital disappears, but also is reallocated to more productive (or expected to be more productive) economic activities. And when it appears that the financial markets will collapse, the ultimate backup of sovereign intervention reduces the risk and overall impact. To be sure, even this backup is not always successful.  

Modern societies are complex by nature, and it is easy to extrapolate failures in parts of the system(s) as harbingers of overall system or social collapse. This is not to suggest that there will not be a major breakdown in global systems, but only to confirm that most systems are self-righting and are more robust than we can see. Boats tend to float with the right bits upward. Yachts, with their ballast keels, are even more likely to float right-side-up.  But in the biggest storms or the unexpected super-wave, boats and even ships may capsize or be irreparably damaged.  

And when a system or systems collapse, it is not automatically easy to point to a single cause. The cause of the sinking of the Edmund Fitzgerald, with the loss of all 29 aboard, remains undetermined, with multiple potential root causes and exacerbating causes. “The church bell chimed 'til it rang twenty-nine times”, and then 30 times on 2 May 2023.

Some systems are collapsing, while others are shifting and reshaping.  

Europe  

The Russian invasion of Ukraine resulted in a period of concern that reduced or even halted access to grain by much of the developing world was going to result in mass starvation. That was avoided by the deals negotiated to ensure that grain could be exported from both Russian and Ukrainian ports. The alternative would have required external party guarantees of safe passage, potentially bringing others into the conflict. The danger of a much wider conflict was very real, and remains very real, today or in the coming decade.  

If anything, though, the Russian invasion of Ukraine has highlighted the strength of the (NATO) system of alliances that have been instrumental in keeping the peace for many decades. Neither of the belligerents are members of NATO, and the war itself has encouraged two countries to join NATO that have resolutely avoided membership. In the history of NATO, no two NATO member states have gone to war with each other, a remarkable period in European history. European wars of the past three decades have been on the borders of NATO between non-NATO members or civil wars within non-NATO countries. In Asia, the ASEAN (economic) pseudo-alliance system, with its de-facto assumed defensive alliance potential, has acted as a break on overt aggression by countries whose historical animosities could result in conflict at almost any time.  

Paradoxically, the invasion of Ukraine has increased the prospects for a longer peace in one part of Asia, the Korean Peninsula. Kim’s beating the drums of war is just that, beating of drums, and is for internal consumption only. That external parties, including the US and South Korea, are responding is predictable, but also all part of the game. But North Korea is not, for the next decade or more, a threat to South Korea or anyone else. They are or have shipped a publicly stated 1,000,000 artillery shells to Russia, depleting their own stocks to the point of severely limiting any offensive capability they may have had. That probably represents most of a decade’s production capacity for North Korea, or at a minimum, has diluted stockpiles to the point that sustained warfare with South Korea and the United States is not achievable, and Kim knows it.    

Middle East  

To be sure, some aspects of the global order are coming apart. Out of this “coming apart” will come a new set of global assumptions and alignments.  For example, the presumption of Israeli immunity from human rights scrutiny and sanction. We are in a transition period in which the questioning of Israeli actions in Gaza and the West Bank (and elsewhere) invites being labelled antisemitic. That will change, especially as those who do criticise Israeli policy and actions will do so, having prefaced their statements with a standard caveat that they are talking about the policies and actions of a secular government and not the actions of a religion.  

This will result in a realignment of relationships between the Middle East, Europe and Asia, though the relationship with the US will not fundamentally change. But the rule of the right-wing parties in Israel is coming to an end, and unrestricted exploitation and oppression of West Bank Palestinians will be curtailed in the coming years. This will not be driven by any Israeli awakening to the plight of the Palestinians but will come from a recognition that large-scale consumer-driven boycotts of Israeli goods and Israel as a tourist destination will not be balanced by any increases in foreign aid. Israeli strategic thinkers should probably consider the implications of an economy more isolated and with lower foreign investment and aid.  

Attacks on US forces in the Middle East are nothing new. Deaths of American forces is nothing new. But the idea that the US is too distracted to respond is already being disproven, and even before American retaliation, at least one Iranian proxy group publicly stated that they would not be attacking American forces any longer. They understand the potential cost.  

There are almost too many potential conflicts in the wider Middle East to enumerate, with Iran, Saudi Arabia, Pakistan, Iraq, and Turkey each holding overlapping antagonisms with each other and with internal factions and ethnic groups within each. Any of these could “blow up” into wars significant enough to drag in belligerents from outside the region.

Migration  

Migration will continue to be a common-values-stressing problem, and it will only grow over the coming decade. Arguments for open borders (in Europe) and closed borders (in America) will be met by the reality that a certain number of migrants will be needed in both continental masses simply to look after the ageing populations that do not have younger cohorts coming through to take over the responsibilities historically performed by the next generation.  

Yet managing the flow of migrants will be a challenge that to date has been failed by almost all. It is a challenge that will only grow in severity. There is no question that crises spur migration, whether natural disasters or civil conflict, or either one leading to the other. Nigeria, as one example among many potential examples, is projected to have its population grow from 200 million today to 400 million by 2050. That number of people in that environment is unsustainable. Should 1% decide to migrate, one out of one hundred people, that represents four million migrants. Where will they go? How will they get there? And even if those two are decided, will they be accepted or even allowed to reach their destination.  

In Bangladesh today, the Rohingya fleeing Myanmar are being attacked by those who do not want them to encroach on an already overburdened environment. How will Nigerians, or any others, fair in lands that are inhospitable by nature and unwelcoming by the current inhabitants?

Another danger, closer to Europe, I would posit, is Egypt, with 100 million people living along a single river (effectively). Should 2%, or two out of one hundred people, decide to migrate to Europe in a crisis, that is two million migrants, a volume that will overwhelm any attempts to contain it short of sinking the boats (an ugly but possible worst-case scenario).

The migration issue will transition to how to manage migration, both attracting the desirable and dissuading those on the desirable professions' lists (doctors, nurses, caregivers, IT professionals, skilled professionals, etc). That will require a twofold approach: draconian laws to repatriate illegal migrants coupled with far stronger messaging in the source countries and massively larger foreign aid and development programmes.  

Climate  

Overlay Climate Change onto this mix and the urgency of transition, and the level of interventions required to stabilise migrant-source countries will take on a greater urgency. Will Western developed powers be up to the challenge? Eventually, yes. As Churchill famously said about the US (and now applies to all developed nations), “They can be relied upon to do the right thing, after exhausting every alternative”.  

This is not to suggest that there will not be unexpected traumas and events. That most certainly will happen. And we will not be prepared, no matter how much planning takes place. But the inherent resiliency of global systems, and the excess capacity built-in (yes, there is plenty) will ensure that responses will take place and the greatest possible damage will be averted. That is at the macro level. At the local or regional level, we should expect some catastrophic events. Indeed, many are predictable.  

Too many parts of the world are in crisis and under remarkable stress. There are also areas which appear to be functioning but are stressing the underlying capacity of the environment to support the regional systems, cultures, economies, and food production capacity. Some of these are going to suffer catastrophic collapses in the coming decade.  

Yet, to be cold-blooded about this, the collapses will be “local” and not the entire world or “civilisation” impacting, though our humanity may be challenged. Population growth expectations for some countries are unsustainable in almost any imagined scenario, yet the demographics are "baked in". And some of these countries are in environmentally challenged situations already. The Sahel is one such area, and we are already seeing the strains caused by climate disruption coupled with civil war in a "'which came first” situation. It will only get worse. And it will drive local, regional, and extra-regional migration.  

Other parts of the world will (are already) be impacted by Climate Change. In Greece, the idea of summer has become synonymous with the idea of a “fire season". How much more will burn this year? And that problem is going to come home to much of the developed world. Terrible as it will be, it will not result in a societal or social collapse.  

Aquifer depletion  

Depletion of aquifers around the world creates localised threats should rain patterns change along with the climate. We should be clear that aquifers are being depleted because the agricultural and urban loads already far exceed the environmental carrying capacity of their locations. “A map of groundwater storage trends for Earth's 37 largest aquifers using GRACE data, showing depletion and replenishment in millimeters of water per year. Twenty-one aquifers have exceeded sustainability tipping points and are being depleted, and 13 of these are considered significantly distressed, threatening regional water security and resilience.” 

Disruptions or changes in rainfall patterns, even for a season, could create self-reinforcing cycles of localised environmental collapse and resulting social pressures, including forced migration of large populations from those no-longer-viable locations and regions.  

The specific areas of my own concern are the plains of northern India, whose aquifers have seen such exploitation that the drop in the ground level is measurable by satellite. Depletion of the sources of the Ganges coupled with groundwater depletion could have far-ranging negative impacts on crop production. Couple that with a Climate change-induced change in the timing and/or strength of the monsoons and one or more years of very bad harvests could put millions in danger.  

Optimism  

But there is so much that we should also consider on the positive side. Humanity is probably the ultimate adaptable species; in that we can develop and evolve technology and governance systems to see us through calamities. If anything, the very potential Malthusian risks to parts of the world today are the same problems that were deferred by the “green revolution” of the 1060s and 1970s. We postponed that crisis, but for how long?  

Climate Change will be mitigated, though we cannot say at what cost. Fossil fuel will be phased out over the coming decades and become a niche fuel source for non-transport needs. Solar, wind, and very soon SMR (Small Modular Reactor) technology will fill the electricity production space currently filled by coal, oil, and natural gas. Not completely, but by the middle of the century, the existing non-renewable power production facilities will be awaiting decommissioning.  

In the area of healthcare, the revolution is only beginning. AI and genomics are revolutionising medicine, and coupled with the concept of mass personalisation in manufacturing and marketing, it will not be long before personalised treatment and personalised preventive treatment become, in the developed world, the norm. The reduction in burden that this will have on healthcare systems will free resources to care for the great wave of active elderly (of which I hope to be one).  

The world is changing. Rapidly. But that does not mean it is falling apart, or that it will fall apart.  

I hope.  

The Evidence is the Control

The most comprehensively documented system of internal control does not provide any assurance that the enterprise is effectively, or even adequately, controlled. From a Risk Management perspective, controls are irrelevant; only the evidence of the functioning of the control is the control.

Let's consider the role of Risk Management in providing real assurance, and how to make this real.

I've posted the article on LinkedIn here

And below:

The most comprehensively documented system of internal control does not provide any assurance that the enterprise is effectively, or even adequately, controlled. We are so used to the SOX-generated idea that the system of internal controls needs to be documented, and where there are perceived to be inadequate controls, more controls need to be introduced and documented. This is limited, of course, to “controls over financial reporting”, as required by SArbanes-Oxley (SOX).  

This has resulted in probably hundreds of millions of dollars, probably billions, being spent to document controls over financial reporting, and then Internal Audit (and External Audit) testing of those control. A windfall for the Internal Audit profession and for External Audit firms. After all, well-documented controls, especially when the critical controls are tested, are the backbone of a sound system of internal controls. Or is it? 

We need to move from the paradigm that a documented system of internal controls equates to an effectively controlled entity. Nothing could be further from the truth, and this is why we have both Internal and External Audit. Internal Audit tests the controls, recommends improvements to controls and provides “assurance” to senior management and the board that the controls are functioning. External Audit places limited reliance (anything more and they couldn’t demand the level of fees they do) on the work of Internal Audit and on the controls. 

I’ve missed the “risk” word above. Of course, Internal Audit should determine the controls to test on a risk-assessed basis. Yet too frequently, Internal Audit focuses on the highest-risk areas (that is appropriate) while year after year, the non-high-risk areas effectively get a pass. There simply are not and never will be enough Internal Audit resources to test all areas.  

After all, a fire will destroy the kitchen and house, while the ants will slowly denude the pantry. So we audit the fire alarms, and make sure there is a fire extinguisher (have you checked the date on it recently), but we don’t hunt for ants unless they are right in front of our faces.  

To paraphrase Hemmingway, internal control failures happen slowly, and then all at once.  

So the classic three-year rolling Internal Audit programme never seems to get to the bottom two-thirds of the potential auditable areas. What does this mean? Fundamentally, too much of the entity will never be audited, and there will never the evidence that the controls are or are not functioning.  

And here is our problem. It will be one of those areas, probably not directly related to ‘financial reporting’ that will ‘go bad’, resulting in significant problems and costs. 

The evidence IS the control.  

Who cares if there is a full set of documented controls if operational management knows perfectly well that Internal Audit will never reach two-thirds of the entity? I.E., their function, system, or process? This means more resources that said operational manager could spend on resources, people, supplies, laptops, etc, because they know that the cost of the control can be deferred, because the chances of their every being audited are minimal. 

In some enterprises, the “Second Line” in the form of Risk Management contributes to the identification of appropriate controls, and should be monitoring the control environment. This augments and does not detract from the role of Internal Audit, whose role is to perform detailed reviews of processes, systems, or functions, confirming through testing that the stated controls are functioning.  

So what is the role of Risk Management, as 'second line', in providing assurance over the system of internal controls? Risk Management can provide the framework to ensure that controls are functioning, by providing the repository and process to enforce confirmation of the functioning of controls. So what can Risk Management do?

1. Risk Management assists management in the identification, description (including quantification) of risks, and 
2. Assists management in determining and quantifying the level of risk that is acceptable, and in gaining senior management and board endorsement of the level of acceptable risk (the Risk Appetite applicable to the risk), and 
3. Works with management to identify what ‘controls’ would provide confidence that the risk is being mitigated or otherwise managed within appetite, and 
4. Provides a framework for the regular assessment and reporting on the functioning of the identified controls, and 
5. Provides an independent repository for the collection and retention of the evidence that each control is functioning, and finally 
6. Reporting to senior management and the board on management’s reported assessment of the effectiveness of controls, to confirm that the entity is functioning within Risk Appetite, or 
7. Provide reporting and recommendations to senior management and the board on additional steps that may be required to bring the entity into appetite (which may include the explicit modification, ‘upward’ or ‘downward’ of the actual Risk Appetite. 

In this way, it is not the fact of the existence of a documented control that matters, it is the provision of evidence by management that the control is functioning This evidence is the control. Without the evidence, it must be assumed that the control may not be functioning, and, therefore must be tested by Internal Audit, something that probably will never happen for the vast majority of non-high-risk areas. 

Quite some time ago, you probably started saying, “But this isn’t the job of Risk Management”, and in a purist sense, I agree. But I also know that someone needs to do this, and that someone needs to have access to the board and to management. Relationship management across the first line is critical, as is the ability to synthesise the information provided in the evidence of functioning controls.  

Most importantly, there cannot be an adversarial relationship such as too often exists between Internal Audit and the business, and between External Audit and everyone. Note I’m saying ‘too often’, not that this should be the natural state of things. 

Risk Management has many responsibilities, and this one fits nicely. 

Where there is an ongoing demonstration of performance of the system of internal control, identification of new or evolving risks, and a risk appetite that is both detailed and macro, Risk Management should be there. As risk specialists (both ‘downside’ and ‘upside/opportunity’) with the ability to communicate potential impacts as well as provide  

So consider a framework that includes a quarterly provision of the evidence of each control, coupled with management’s assessment of the effectiveness of that control. Consider also a regular relationship meeting between Risk Management and operational managers to confirm that the range of risks is current, the rating of the risks continues to be in line with management’s understanding of the risk, and the mitigation in place, as evidenced by the provided evidence of the functioning on the controls, ensures that the entity, or at least this risk, continues to be managed within appetite.  

Finally, the evidence provided by management and monitored by Risk Management also enables Risk Management to provide greater confidence in their reporting of the current risk status of the entity, improving the quality of assurance provided.

After all, documented controls by themselves are worthless. The Evidence of the functioning of the control is the Control. 

#Risk #InternalAudit #SOX

One year in, where to now for Ukraine and Russia

Tomorrow marks the 1st anniversary of the invasion of Ukraine by Russia. Things are “clearer” now, certainly, but equally could still go either way. The “End Game” is too far to see. However, there are a couple of outcomes that remain possible:  

  

1. Ukrainian collapse and Russian victory  
2. Russia “holds the line” at the newly conquered territories, and institutes a hot peace  
3. Partial Ukrainian victory, Russia retains Crimea  
4. Russia is pushed out of all Ukrainian territory to pre-2014 borders  

  

Throughout the war, the full depth of Western intelligence support has not been visible to the layperson. We've seen hints, including the latest revelations, that the US military has exercised a de facto veto on HIMARS launches and has suggested targets. It is my own belief, without evidence, that Western intelligence support has been extensive, to the point of telling the Ukrainian military the location of Russian command posts and detailed discussion of Russian tactical plans, possibly on a day-by-day basis.   

  

But the “fog of war” can be beneficial to both sides, but is decidedly dangerous to the side with the greater “fog” in terms of their visibility of adversary objectives, capabilities, and detailed plans. Hannibal knew that Lake Trasimene was prone to fog in the summer months, and on 21 June 217 BC, he used that to his advantage. His armies were arranged on the hills overlooking the edge of the lake and the road along the lake. As the Roman legions passed before them, the Carthaginians charged out of the fog into the side of the Roman legions, forcing them into the lake, resulting in one of the most lopsided victories in history.   

  

When one side can see and (as in Hannibal's case) hear the enemy who is unable to see and hear them, then the results will be very one-sided.   

  

But here is our problem. We know that the West can see and hear the Russians and is passing on a huge amount of information. What we do not know is how much Russia can see and hear. We also have a lopsided information stream on losses by either side, with Russian losses being well-publicised, while Ukrainian losses are not being disclosed.  We have no visibility on the actual losses suffered in the defence of Bakhmut, or the counteroffensive to retake Kherson. Russian losses of tanks and armoured vehicles are shared on various social media and mainstream media outlets. Ukrainian losses are never shown in Western outlets.   

  

But we must assume that the “see and hear” advantage lays with the Ukrainian side, and that ability is being used on a daily basis.   

  

This leads us to the four potential outcomes I mentioned.  

  

1. Russian victory.

Our first consideration is the meaning of “victory”. There seem to be two “definitions” that I'm hearing: total collapse and takeover of all of Ukraine, including Kyiv and the installation of a puppet government controlled from Moscow, or the ability to force Ukraine to the negotiating table and agreement to the forfeiture of the Donbas and Luhansk, Crimea and Zaporizhia Oblast to Russia.   

  

Yes, Ukrainian forces could still be routed. It seems unlikely at this stage, short of the use of tactical nuclear weapons to breach holes in the Ukrainian front lines, but it remains a possibility. After all, we have no idea just how much of the existing Ukrainian capability is being used to plug the potential gap of Bakmut. If the Ukrainians have been throwing reserves into that fight, stripping themselves of a counter-punch capability, then a significant breakthrough could result in Russian forces sweeping into an almost empty backfield. This was the Soviet strategy at Stalingrad, and it worked. With German lines extended, the Soviet forces punched holes north and south, and fought through the snow to meet, cutting off the German 6th Army. Russian forces north and south of Bakhmut are undoubtedly hoping to accomplish the same.   

  

Should that succeed, and a cauldron is created trapping a large portion of the available Ukrainian capacity, then Russian forces might be able to advance further west with limited opposition. A rout of Ukrainian forces would then require the West to either directly engage, which they have said they will not do, or to facilitate a retreat of Ukrainian forces and potentially an evacuation of the government from Kyiv.   

   

2. Stalemate

A second option calls for Russian forces to degrade Ukrainian capacity to the extent that an effective counteroffensive fails to achieve meaningful gains, and stalls with heavy losses of Ukrainian forces and western equipment. Should Russia retain control of their “land bridge” to Crimea, Ukraine's options will be limited Russia does have a material and population advantage over Ukraine, and a longer war will allow, at a terrible economic cost to Russia (and Ukraine, of course) the mobilisation and deployment of significantly larger numbers of troops than Ukraine will ever be able to mobilise.  

  

Should a Ukrainian counteroffensive prove unsuccessful, the patience of the West and suppliers to Ukraine could wear thin. Domestic pressures in Western capitals could force countries to re-evaluate the level of support that they can provide on in the medium term – out one to two years. Western arsenals are not bottomless, and have been strained by the outflow of materials to Ukraine. They will need to ramp up production, and the costs of the war will begin to come home   

  

Likewise, a failed or blunted counteroffensive will have a cooling effect on morale in Kyiv and across Ukraine.  

  

At some stage, both countries, Russia and Ukraine, may decide that it is time to approach the negotiating table. The moment that happens, the fronts will effectively stabilise and become the new de facto borders, just as the borders changed after 2014. The West will look for some accommodation. A new Iron Curtain will certainly have fallen, and a new Cold War will ensue, but a fighting war with the risk of a nuclear exchange will have been averted.   

  

3. Partial Ukrainian victory.

The great Russian offensive does not seem to be making much headway, at least according to Ukrainian and western media sources. Next comes a period of relative quiet while Ukrainian forces prepare for their offensive. Soon we will see the actual effectiveness of Western amour and tactics against a post-Soviet military and doctrine. Will Leopard tanks in their various versions, stand up well to modernised T-series tanks? How will the Bradleys perform? Will NATAO Combined Arms warfare create the breakthrough that Kyiv will require? Will Russian morale be as low as we are told, or will they rally?  

  

Will Ukrainian forces have the stamina to continue, or will they exhaust themselves? An exhausted army will not continue an offensive, but will begin in the face of stiffening opposition to find naturally defensive or symbolic lines for defence.   

  

Regardless, a Ukrainian offensive that liberates all territories to the shores of the Azov would be a remarkable result. Then we will see how seriously Putin takes his Crimea “Red Line”. If it becomes clear that Ukraine will be “permitted” to liberate up to the 2014 lines (ex-Crimea) but that Russia will use nuclear weapons in the face of an attempted liberation of Crimea, we may have conditions for negotiations to begin.   

  

Russia has historical interests and a deeply held ownership of Crimea. Most of the population speaks Russian, and Russians have been the largest demographic group since the time of the Bolshevik Revolution in 1917. Savastapol has been the home of the Black Sea Fleet since the city was founded in 1783.  

  

4. Finally, outright victory by Ukraine.

The coming Ukrainian offensive, if wildly successful, would cut the Landbridge and retake the Azov coast up to the pre-2014 borders. Coupled with ongoing attacks on and damage to the Crimean Bridge, also called Kerch Strait Bridge, Crimea would become a siege province. With the primary water supply cut off, limited or no food imports, and ammunition and weapons replenishment were severely hampered. Yet sieges can last for years.  

  

Taking Crimea will require an assault that will test any military capability. And at the far end of the peninsula, Sevastopol awaits. There will be no negotiated or battlefield solution that does not result in Russian control over Sevastopol and the naval base.