After decades of relative calm, geopolitical risk has re-emerged as a defining challenge for businesses worldwide. The assumption that globalisation created a stable, predictable order has given way to renewed uncertainty. Today, firms must recognise that political disruption is once again shaping markets, demanding sharper risk awareness, assessment and adaptation.
Recognising the threat
Importantly, firms need to dedicate resources to intelligence gathering to understand where the risks actually are. It would be nice if every firm had an expert on countries or regions that the firm was working in, but this is not always feasible. On-the-ground intelligence can substitute for and complement any headquarters expertise, with firms reaching out to locals who can perhaps better discern the pulse of their country.
Part of this gathering is actually listening to politicians and, in particular, diplomats. For example, in the case of Ukraine, Russian television pundits and diplomats had been saying for months in the run-up to the full-scale invasion in 2022 that they did not believe Ukraine had a right to exist. Although Russia had already occupied some parts of Ukrainian land since 2014, there was an increase in quantity and in the pitch of threats made from Moscow throughout late 2021. An astute observer, one who knew history, would know that these were no idle threats. And firms that refused to believe the warning signs were among those that were most impacted.
Building a risk assessment thus takes time and resources but is necessary to understand not only general risk, but the specific risks to the specific firm. A war between Thailand and Myanmar or violent protests in Nepal may not harm a financial services firm in Cork, but it can have severe repercussions for furniture manufacturers in Monaghan reliant on Thai plywood. Indirect risks also abound, as a cereal manufacturer may not have any production or even any inputs from southeastern Ukraine, but the commodity price volatility created by the invasion can still reverberate globally.
Along these lines, top management teams in every business need to analyse intelligence with a recognition of their own biases. Perceptions of the risks of certain countries can harden over time and bear no relation to reality - for example, China has moved closer to Russia and North Korea over the past three years while the fragility of international supply chains were exposed with the advent of Covid-19. A belief in the benefits of investing in and working in China without a recognition of the actual risks associated with such a venture does a firm no good.
Similarly, managers may base decisions on political ideology or perceptions which also do not correspond with conditions on the ground. Being aware of biases is the first step to overcoming them.
Conclusion
Geopolitical risks are not new, but their manifestation in the 2020s is different than in the past. Current and future instability means that resilience and agility are new metrics to track as well as efficiency. It also means that resources must be devoted to coping with geopolitical risks, in order to minimise their damage.
Firms - even those working only in a domestic capacity - need to have their eyes open to geopolitical risk. The ways to do this require remembering some key points:
- Risks are different for every company
Huge multinationals have always faced some level of political risk, they just now face more than they did even 15 years ago. Similarly, small and medium enterprises may now face risks that are not of their own doing or that they never have encountered before, meaning a change to risk management plans. - Assessing geopolitical risk requires a sober assessment
Bias is present in every single one of our decisions, no matter how hard we might try to ignore it. The same is true with risk assessment, where our preconceived notions about certain countries and cultures might interfere with our assessment of risk. - Know when to act and when not to
When facing geopolitical risk, timing is everything. Acting too late can mean lost opportunities, but overreacting to sudden shocks can be just as damaging. The key is balance - assess not just the costs of waiting or moving, but also the likelihood and duration of threats. Informed judgment, not hope or panic, should guide decisions. - There are no solutions, only trade-offs
Economics teaches us that, in a world of scarcity, not every wish is fulfilled. Some things must be sacrificed for others. Geopolitical risk requires this same approach, in that some efficiencies in production may be left on the table in order to build in redundancies. Likewise, the lowest cost supplier might not make sense if they’re located in an area of heightened geopolitical risk. Firms need to understand trade-offs as part of their risk matrix and choose accordingly.
There is no way to fully eliminate geopolitical risk - it is caused by politicians and leaders wholly external to the firm. But by being aware of the possible risks, understanding probabilities and biases, firms may be able to weather the worst of the storms.
