Is a Digital Iron Curtain Descending?

At the dawn of the internet in the early 1990s, our geopolitical and economic path seemed clear. Capitalism had clearly won. It made perfect sense that its close cousins of political democracy and globalisation would naturally follow. Yet a generation later, political democracy and globalisation appear to be at risk.

Just a few decades ago, it was considered logical that the nature of borderless digital technology would make these economic and social freedoms inevitable. How could authoritarian rule possibly circumvent emergent technology? But in times of war, we’re quickly reminded that our world and economy are inextricably physical and boundary-oriented.

The sun seems to be setting on the era of unfettered globalisation. It may well be that geographic schisms are likely to occur, redefining boundaries of the Total Addressable Market (TAM) within a global context. This would apply not only to resources, but also the technology sector. Where tech stocks can and do play could become as important as (and possibly more than) their performances in market.

Strategic Targets and Big Tech

As military theory will tell you, the first job is to take out the core infrastructure and utilities of the enemy. Roads, rail, energy, water and… telecommunications.

While the US has not directly involved itself in the Russian-Ukrainian conflict, they do happen to control the world’s largest digital utilities. The economic sanctions enacted by Big Tech have been broad. However, the Big Tech players predictably lack consistency. Their initiatives more closely resemble behaviour from small unaffiliated nation states, rather than a digital trojan horse from the leader of the free world, the USA.

Alphabet suspended sales of all online advertising in Russia, including search, YouTube and display marketing, and blocked live traffic in Google maps. Alphabet’s entire annual revenue in Russia is only around $US800 million.

Apple has halted sales of new products in Russia and removed a number of state-based media apps from its App Store. Apple’s annual revenue in Russia is around $US2.5 billion. Microsoft has also paused all sales of products and services within Russia, as have Oracle, Dell and SAP.

On the flipside, we have Meta Platforms, which controls the Facebook, WhatsApp and Instagram social media platforms. Meta Platforms has announced that it has blocked access to Russian state media within the European Union. The moves are intended to limit the spread of Russian propaganda (yes, somewhat ironic) during the country's invasion of Ukraine.

Retaliation came swiftly. Both Facebook and Twitter were banned in Russia, but WhatsApp and Instagram were strangely left untouched. Seems like a more united effort from every single US and EU-based tech firm to send the Russian nation into virtual darkness could have enhanced the economic sanctions, making it harder for Putin to execute his plan.

Iron Curtain 2.0

Russia is the world’s biggest nuclear power, yet economically, it is a bit player with a GDP just slightly above Australia’s. The size of the Russian market makes the earnings impact on Big Tech stocks minimal. It’s also worth noting that Alphabet, Apple and Microsoft haven’t entirely blocked the use of their services in Russia. There is a chance that if Putin remains in power, Russia will take a similar path to China and block services from the West entirely.

In my Eureka Piece about the Splinternet in 2021, I reminded readers that Google once boasted a 30 per cent online search market share in China. The real risk here for investors isn’t the size of the downside in blocking Russia from doing business with them. The risk is whether this marks the beginning of a “digital iron curtain” that spreads further east into China, and potentially other autocratic Asian nations.

Given that China has not explicitly condemned the actions of Putin, it is also an opportunity for the Middle Kingdom to expand digitally. All of the internet services we enjoy in the west have fully functional Chinese clones. They are all well-established in the marketplace, with an added product feature of being able to unequivocally track individual users. The benefit of these Chinese internet tools is that it can quickly and effectively block content any authoritarian government doesn’t want its citizens to see.

All this can mean the world will be divided into two economic spheres of belief once more: on one side, the west’s version of laisse-faire capitalism and, on the other, authoritarian capitalism.

The Price of an East-West Splinternet

The economic impact of wars on commodity prices has been well documented throughout history. Likewise, many wars have been started over the same commodities. Since Russia first invaded Ukraine, the price of crude oil has risen from $US81 to $US118 a barrel. It has also been common practice for sanctions to be enacted where commodities can’t be traded with “bad actors”, who have a track record of ignoring international treaties and sovereign borders.

There is far less clarity on what wars will mean for the digital behemoths who have emerged in the last two decades. They may well be kicked out of less open markets before they have a chance to leave. Alternately, their governments may enact legislation making it illegal for them to trade in certain countries. This also reveals that pesky elephant in the room once again — supply chain. Despite the fact that the US (and Australia, for that matter) are energy independent, neither of us are technologically independent. The truth is Big Tech relies heavily on China. Geopolitical hiccups, like wars, could rapidly change the fortunes of the tech sector more than any impending regulation ever could.