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Are You Prepared for World War C?

Dec 16, 2016

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It's the conflict that will define Donald Trump's presidency. It doesn't just involve China and Taiwan. In fact, it's a global conflict - a war that we affect us all, one way or another.

Let's call it World War C. The cyberwar.

There are two key elements to the conflict. The first is use of information. The second is the degradation of physical infrastructure like power and water supplies. They may not directly result in loss of life in the way that bombs and bullets do. But they're still dangerous weapons.

I'm going to predict that Trump's presidency will be defined by an escalation of aggressive cyber-attacks between the world's most powerful nations. I'll show you why in just a second.

Of course, you could argue that cyber-attacks shaped his presidential campaign from the very beginning. Trump himself denies this. But it is now widely accepted that the email hacks on the Democrats and Hillary Clinton herself were carried out by the Russians. According to The New York Times, the hacks originated with a cyberespionage ground code named "the Dukes" and linked to Russia. Reports claimed the hacks "started as an information-gathering operation, intelligence officials believe, ultimately morphed into an effort to harm one candidate, Hillary Clinton, and tip the election to her opponent, Donald J. Trump."

Those hacks became a key part of the campaign. And for a politician like Clinton, who has a problem being seen as trustworthy, those leaks were kryptonite.

Why the Russians would do that is a something of a mystery. Perhaps they wanted to expose the hypocrisy of Western democracy. Perhaps they wanted Trump to be elected. Or maybe they just wanted to show they can. Motive is a story for another day.

But what should be clear is just how powerful the "hack and leak" is. Done correctly it can have a highly influential effect. I wouldn't say it is entirely responsible for putting Trump in the White House. But it certainly helped. And it wasn't the first time...

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The old hack and leak

Obtaining and then publicising sensitive information to achieve a destabilising effect isn't new. It's not just a cyber tactic, though cyber certainly beefs its effectiveness up considerably.

If you're a fan of history you'll know about the Zimmermann telegram. It's probably the best example in history of information being used as a weapon - it brought the US into World War One.

The short version of the story is this. It was January 1917. The Germans were about to launch unrestricted submarine warfare. The US wasn't yet in the war - and it wasn't clear whether it ever would be.

In preparation of unrestricted warfare, the German foreign secretary sent a telegram to its ambassador in Mexico. It said:

  • We intend to begin on the first of February unrestricted submarine warfare. We shall endeavor in spite of this to keep the United States of America neutral. In the event of this not succeeding, we make Mexico a proposal of alliance on the following basis: make war together, make peace together, generous financial support and an understanding on our part that Mexico is to reconquer the lost territory in Texas, New Mexico, and Arizona.

It was a private message, just like the emails between Democratic Party staffers. But what Germany didn't know is that Britain had "tapped" the line - the telegram equivalent of hacking an email account. Britain then shared the telegram with the US. Days later, the US was in the war.

It's a graphic illustration. But sensitive information used correctly can have a dramatic effect on policy. If reports are to be believed it helped shape the US election.

I think that's the start, not the end, of the trend. The next four years could be defined by increasing attacks on political and democratic infrastructure as "bad actors" seek to shape world events with a hack and leak strategy. That's to say nothing of hacks on real world infrastructure.

That's why I'm predicting cyber-attacks will likely play a big role in Trump's administration. He's already started preparing the way for this. Yesterday he hosted key tech leaders - people who'd opposed him throughout the campaign - for a meeting, a key element of which was expected to be cyber-security and the role it plays in national security. As a piece from New York magazine put it:

  • For more data-driven and consumer-facing companies, like Facebook and Google, the issue is national security and surveillance operations, more so than the economy or jobs. The Trump camp will probably press for access to their proprietary information. Trump himself might not have a clear understanding of how information technology works (yesterday morning on Twitter: "Unless you catch 'hackers' in the act, it is very hard to determine who was doing the hacking.") but he knows which companies he'll need to butter up (or alternatively, intimidate) to get what his national-security team is looking for.

The same story seems to be true in Germany, too. Georg Maassen, head of Germany's BfV spy agency, told Reuters earlier in the week that: "We see aggressive and increased cyber spying and cyber operations that could potentially endanger German government officials, members of parliament and employees of democratic parties". He pointed the finger at Russia, saying it was an attempt to "weaken or destabilise the Federal Republic of Germany".

Elections are looming in Germany. So you can see the worry. An attempt to obtain sensitive information on Germany's key politicians, then leak it at opportune moments, would likely shape the campaign just as it did in the US.

You could argue that this is all an attempt to expose hypocrisy. The same arguments people use to support things like the "snooper's charter" - "if you've done nothing wrong you have nothing to fear" - probably apply. A hack and leak only works if there's private information that would change public perception of someone if exposed. But to me that's beside the point. The point is, cyber warfare has moved into the political, diplomatic and economic arena. And that's significant.

Britain's role in the cyberwar

If MI6 chief Alex Younger is to be believed, Britain won't be immune from an escalation in cyber conflict. Last week he gave a speech in which he outlined the growing threat of "hybrid warfare": use of both real world and virtual attacks in conjunction with one another.

After explicitly naming Russia as the perpetrator of high profile cyber-attacks, Younger outlined the problem: "The connectivity that is at the heart of globalisation can be exploited by states with hostile intent to further their aims deniably. They do this through means as varied as cyber-attacks, propaganda or subversion of democratic process."

There's an investment angle to this whole story, though. For companies that defend against cyber-attacks - and those with the authority to pre-emptively strike - cyber conflict leads to opportunity. The firms with the expertise and experience to operate on the front lines of the cyberwar can command a premium for their services, as well as receiving government funding (and the right to attack as well as defend).

One of the firms Eoin Treacy has pinpointed in Frontier Tech Investor is one such company. It's tiny; it only spun out and listed in 2014. But it's one of only six firms to be selected by the US government to take part in "pre-emptive" cyber-attacks. If the cyberwar is Trump's war, he'll need those firms. That could spell big opportunity for investors.

I'll keep you posted on that one as time goes on.

Please note: This article was first published in Capital & Conflict on December 15, 2016.

Nick O'Connor is a writer and editor at Moneyweek. He is also the publisher of Exponential Investor.

Disclaimer: The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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