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Assessing and Mitigating the Geopolitical Risks for Businesses

Authors: Sana Gupta
Published on: January 23, 2025

Introduction

Multinational corporations are currently walking a tightrope because of the escalating geopolitical risks. These Geopolitical risks refer to the potential negative impact of political, social, and economic factors on interactions between two countries. According to J.P. Morgan’s survey, the likelihood of geopolitical risks hindering the businesses’ operating and investing activities is 34% followed by a potential recession.

 

 

There are only 3 possible alternatives for the next decade; The optimistic being International Cooperation, the moderate being (with high probability) Multipolar Rivalry, and the most chilling and pessimistic, yet with moderate probability being Global Escalation where the economic and military confrontations take place in various locations with deep involvement of major powers.

J.P. Morgans also states, “The geopolitical backdrop remains uncertain and carries more risk than it did before, but so far, there appear to be arguments against a wider conflict.” This statement becomes even more relevant with the emerging multipolar world leading to an intense multipolar rivalry, where several blocs and groups of countries coexist in a rebalanced global dynamic where major powers avoid direct conflict, norms and institutions differ among blocs, and trade lanes align to new political and economic structures. The system shaped by Western-inspired institutions, trade, and security regimes is fraying as post- Cold War international cooperation gives way to increasingly acrimonious competition.

Therefore, these risks can hinder businesses activities and have a high probability. To combat with these risks, companies need to develop geopolitical muscle and establish controls to mitigate them.

 

Risk Drivers

The geopolitical risks are influenced by a variety of factors which can broadly be categorised into political, economic, social, technological, environmental, and legal domains.

Political Drivers:

  1. Political Instability: With about 50 countries (including US and Europe) holding elections in 2024, there seems to high political instability. This uncertainty is even more acute because of the populist leaders becoming in charge of running economies significant to the global trade.
    • Iran: There are succession uncertainties as potential leaders emerge to succeed
    • Israel-Palestine: Global protests seem to be intensified which could impact the political dynamics ahead of United States elections
  1. Government Policies: With the changing governments, and shifts in foreign policy along with international relations, trade agreements, tariffs, sanctions, and regulatory changes can impact international trade and investment.
    • Saudi Arabia: Oil markets shift due to fluctuating geopolitical tensions, impacting global oil prices and supply chain dynamics. Saudi Arabia’s oil production and export policies play a crucial role in global energy markets, thereby influencing trade agreements and international relations.
    • Tunisia: Presidential elections set for 2024, can lead to changes in foreign policy, trade agreements, and regulatory frameworks, which could potentially affect international trade and investment. The election outcome could shift Tunisia’s approach to international relations and economic policies
  1. Military Activities: The ongoing and potential military confrontations like the Russian-Ukraine war involving world’s 11th largest economy; disrupt supply chains, the energy, food security, etc. These black swans and grey rhino events are inherently posing a great risk to disrupting the international trade causing shortages of the raw materials and energy.

 

Economical Drivers:

  1. Economic Sanctions: These are imposed by one country or a group of countries on another, affecting trade and investment flows. These are becoming more relevant because of the surging rise in the international conflicts, especially the conflicts having military confrontations; and the rise of a multipolar world.

North America

    • United States: The United States continues to impose extensive sanctions on Russia, targeting many entities and individuals involved in military supply chains and future energy revenues. These sanctions are coordinated with G7 and other international partners. They aim to decline Russia’s ability to wage war against Ukraine by cutting off necessary inputs and financial resources Additionally, the U.S.A. has recently sanctioned Chinese companies and organisations for human right abuses under the Global Magnitsky Act.

Europe

    • European Union: The EU has placed and expanded the sanctions against Russia. These sanctions have been intensified since 2022.

Asia

    • China: While China has not imposed sanctions, it has been affected by secondary sanctions from the United States for its role in supplying dual-use goods to Russia. The S.A. continues to monitor and address potential sanctions evasion involving Chinese companies).
    • Japan: Japan has aligned with G7 sanctions against Russia, and has imposed restrictions on financial transactions, exports of high-tech goods, and imports of Russian energy products. These measures similarly aim to weaken Russia’s economy and military capabilities.

Middle East

    • Turkey: Turkey has emerged as a destination for re-exporting goods to Russia, which has drawn scrutiny from America and its allies. While Turkey has not joined Western sanctions, it faces ongoing pressure to prevent sanctions evasion.
    • Iran: Iran has been facing sanctions from the EU and the United States due to its support for Russia’s war efforts, including the provision of drones used in These sanctions aim to cut off Iran’s ability to support Russian military operations.
  1. US-China strategic competition: The US-China strategic competition is an important risk driver because of the increasing trade tensions, technological disputes and cybersecurity concerns; this significantly impacts global supply chains, regulatory environments and financial markets for MNCs.

Social Drivers:

  1. Social Unrest: The potential escalation in social unrest fuelled by widespread inflation, the erosion of trust in politicians and the widespread dissatisfaction of voters. The social and political vulnerability of European countries has been increasing rapidly in the recent days as well as in Asian and African countries.
    • France: Strikes and protests seem to continue over pension

Technological Drivers:

  1. Cybersecurity Threats: The world has witnessed an increase in Ransomware threats, even the U.S. Government and European government is not safe from it. These attacks are not just limited to governments, although these seem to be fuelled by the government’s positions on certain sensitive matters and its policies but are targeting major corporations as well. The repercussions of persistent cyberattacks could have a wide-reaching impact on financial markets and the Government networks, private sector networks and infrastructure are all susceptible to hacking and espionage.

America

    • United States: The United States has been the most targeted for ransomware. Lockbit group seems to be very active in the country targeting many businesses including the Sierra Front Group.

Europe

    • United Kingdom: In the U.K, attacks by BlackBasta and Play Ransomeware have been increasing in number.

Legal Drivers:

  1. Legal and Regulatory Change: Because of new governments forming with different ideology than the existing ones, new laws and regulations are bound to be formed, both at a domestic and international level; impacting business operations and compliance requirements.
  2. Intellectual Property: Depending on the type of IP, the rules differ across different countries resulting in legal issues for corporations because IPs might be valid in some countries and not in others.

Environmental Drivers:

  1. Climate Change: Climate change has resulted in more frequent and severe weather events such as hurricanes, droughts, floods and wildfires, which have damaged infrastructure and disrupted supply chains leading to resource scarcity and economic instability. Blackrock explains this risk(with medium probability) as “Developed economies fail to increase public investment or take action to achieve net-zero emission targets.”
    • Middle East: The ongoing Gaza conflict, Red Sea conflict (Yemen) and political instability in the Middle East, particularly in the Red Sea and surrounding regions pose a significant risk to the global energy supplies by destroying the critical shipping lanes and forcing detours which increase shipping time and emissions. This is threatening roughly 30% of the world’s oil supply leading to a spike in the energy prices.
    • China: Current economic deceleration of China’s economy would impact the sustainable infrastructure as China is a key player in renewable energy.
    • United States: The United States is at the forefront of global efforts to combat with climate Therefore its actions affect the renewable energy industry.

Key Risk Indicators

  • Political instability:

      • Lead indicators-
        • Protest Frequency: of protests occurring every quarter.
        • Corruption Scandals: News articles about corruption scandals in a quarter. Such scandals can erode public trust in government.
      • Lag indicators-
        • No. of government changes: No. of government changes in a quarter.
        • Displacement and Migration: Total number of Internally Displaced People in a quarter, citizens flee the country during such times, as well as countries witness an increase in IDPs (Internally Displaced People).
        • Increase in Violence: Count of Violence events in a quarter. These events are accompanied by an increase in number of causalities in such incidents.
  • Government Policies:

    • Lead indicators-
      • Trade Agreements: of new trade agreements signed or under negotiation.
      • Regulatory changes: No. of major regulatory changes affecting trade and
    • Lag indicators-
      • Trade balance: %age Change in the difference of export and import volumes in a quarter.
      • Trade Disputes: of trade disputes filed with WTO by the country.
  • Military Activities:

    • Lead indicators-
      • Defence spending: Change in the defense spending by a country. This change(if positive) can signal a probable escalation in geopolitical
    • Lag indicators-
      • Shipping time: The increase in shipping time in the conflict
      • Logistics and transportation Cost: %age increase in transportation and logistics cost due to supply chain disruption.
  • Economic Sanctions:

    • Lead indicators-
      • Trade restriction announcements: of trade restriction announcements by a group of countries.
      • Public Statements and Threats: Increase in no. of public statements and threats made by the government regarding potential sanctions.
    • Lag indicators-
      • Trade Volume: %age decline in trade volume.
      • FDI inflows/outflows: %age decrease in FDI inflows/
  • Social Unrest:

    • Lead indicators-
      • Inflation Rate: %age Change in the inflation rate, any rapid increase in prices of necessities can cause economic dissatisfaction and potential unrest amongst the public.
      • Unemployment Rate: %age change in the unemployment rate, especially increase in youth unemployment can contribute to social unrest.
  • Cybersecurity Threats:

    • Lead indicators-
      • Phishing emails: %age increase in phishing emails, a higher percentage signals potentially larger cyber security threat.
    • Lag indicators-
      • Financial losses: Financial losses due to such cyber-attacks, maybe via ransom payments or recovery cost.
      • Media coverage: Increase in number of news articles by reputable sources that mention cyberattacks and ransomware incidents.
  • Legal and Regulatory Change:

    • Lead indicators-
      • Legislative Proposals: Increase in the number of new bills or legislative proposals introduced that aim to change existing laws or regulations.
    • Lag indicators-
      • Compliance costs: %age increase in costs associated with complying with new regulations. Since there might be some financial impact on business due to the change in legal process and regulations.

Impact

In today’s globalised yet multipolar world, businesses and companies face high geopolitical risk which stem from various drivers discussed above: political, economic, social, environmental, legal, and technological; all of which impacts a businesses’ activities, finances and operations.

Economic Impact:

  1. Operational Costs: Companies may face an increasing surge in costs due to heightened security measures to protect themselves from frequent cyber-attacks and compliance with changing regulations of unstable governments.
  2. Market Access: Because of the populist leaders coming into power, and increasing social unrest, Companies may have limited access to markets due to sanctions, trade barriers or protectionist policies. This infographic, from IMF, clearly shows how trade restrictions are increasing over time as well as the current rise in the probability of geopolitical risk and the direct relationship between the two.

  1. Capital Access: According to P. Morgan Wealth Management, these factors will most likely contribute to high market volatility, economic instability and loss of investor confidence leading to reduced access to capital and investment due to economic instability and loss of investor confidence. When geopolitical tensions arise, markets would experience sharp movements, causing investors to pull back from riskier assets and invest in relatively safer options. This shift will reduce the capitalflow into markets, affecting overall liquidity and makes securing funding a challenging task for businesses.
  2. Revenue Loss: The above drivers are likely to result in disrupted sales channels for companies leading to huge revenue losses to corporations.

Supply Chain Disruption:

  1. Logistics and Transportation: Major geopolitical events tend to have negative impact on the supply chain; frequent transportation interruptions and logistics network. Hindering in logistics and transportation leads to increased costs, significant increase in the duration of lead time, and decrease in overall efficiency.
  2. Inventory Management: Due to sudden and unprecedented nature of these events which tend to disrupt supply chains, they pose a challenge to efficient inventory management by causing potential delays in shipments, causing shortages in market for raw materials, and altering demand forecast due to uncertain policies.

Legal and Regulatory compliance:

  1. Regulatory compliance: Because of frequent changes in regulations because of political instability leads to increase in costs to comply to such regulations, and operational adjustments to these new regulatory compliances.
  2. Intellectual Property: In 2024, over 50 new governments are supposed to be formed with leaders having different philosophies. This situation poses a risk of change in foreign policy of the country, which might even lead to some Intellectually Property not being recognised as owned by a certain corporation; an added risk is replicating this IP and selling it as the competitor of the “actual creator of the Intellectual ”

Strategic and Competitive Position:

  1. Market Position and Strategic planning: There might be a loss in competitive edge due to reduction in efficiency or inability to maintain a market presence in unstable regions. Also due to uncertain geopolitical landscapes various complications arise in strategic planning.

Impact on trade:

  1. Trade flow: Limited market access, increase in trade barriers, sanctions, and other forms of restrictions; the trade flow of most of the multinational corporations get disrupted, thereby reducing the volume of Global Trade.

This graph by UNCTAD shows the consistent decline in the volume of global trade following the Russian invasion in Ukraine in 2022 and has been declining ever since.

  1. Export and Import: Because of the frequently changing trade policies and barriers, challenges such as trade barriers, currency fluctuations, regulatory changes, supply chain disruptions and reputational risks are being faced by majority of corporations.

Controls Implemented by Corporations

  1. Building Organizational Resilience: Companies are strengthening their internal structures so that they can better respond to geopolitical risks. This involves creating inclusive governance structures that reflect diverse geographic viewpoints, ensuring that all parts of the organization feel represented in risk discussions. Open and honest dialogues led by top executives, including the CEO, help acknowledge global stresses and empowers employees to share their views on risk management .
  2. Enhancing Reputational Resilience: Companies are working towards internal alignment oof operations in geopolitically sensitive markets. These companies are developing clear stances and values-driven narratives to explain their actions and positions on various issues, especially in high-risk markets. This helps in managing reputational risks and maintaining a coherent public image across different regions.
  3. Strengthening Risk Management Frameworks: Companies and firms have been heavily investing in their corporate affairs, legal, and government relations teams to better navigate regulatory changes and geopolitical tensions, by developing market- specific risk assessments and maintaining close communication with the ground contacts to stay informed about local developments.
  4. Fostering Supply Chain Resilience: Companies are re-evaluating their supply chains to ensure they can withstand geopolitical disruptions. This includes diversifying suppliers and creating redundancies to avoid reliance on a single region. Example: Intel has emphasized the need for resiliency and redundancy in manufacturing, supply chains; and Research & Development to manage risks posed by geopolitical conflicts like the Russia-Ukraine war.
  1. Leveraging Technology and Data: Organisations are also using advanced data analytics to monitor geopolitical risks in real-time. This helps them anticipate and respond rapidly to emerging threats. Firms have also been focused on protecting their data from cyber threats and ransomware, which are increasing amongst geopolitical
  2. Engaging in Public Policy and Advocacy: Business leaders are becoming more involved in public policy discussions to shape the regulations in ways that support their operations; they are doing so by participating in forums, collaborating with governments, and advocating for policies which promote stability and fair

Conclusion

In an increasingly complex and interconnected world, geopolitical risks have emerged as significant challenges for multinational corporations. These risks, stemming from political, economic, social, environmental, legal, and technological factors, can disrupt business operations, impact financial stability, and erode market competitiveness. As highlighted by J.P. Morgan’s survey, the probability of geopolitical risks hindering business activities is substantial, underlining the critical need for active risk management strategies.

The current geopolitical environment offers three potential scenarios for the next decade: optimistic international cooperation, moderate multipolar rivalry, and a chilling global escalation marked by economic and military confrontations. Amidst these possibilities, businesses must navigate uncertainty with resilience and foresight.

To mitigate these geopolitical risks, Multinational Corporations are adopting various strategies; focused on building organizational resilience, enhancing reputational management, strengthening risk frameworks, fostering supply chain resilience, leveraging technology for real-time monitoring, and engaging in proactive public policy advocacy. These measures do not only help mitigate immediate impacts but also position companies to adapt easily to evolving geopolitical dynamics.

A company’s geopolitical muscle is not built overnight. It takes commitment, dedication, and effort to strengthen and maintain resilience in the face of geopolitical uncertainties. By investing in resilience, innovation, and global cooperation, businesses can mitigate risks, seize opportunities, and thrive in an uncertain geopolitical landscape.

 

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