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This article offers an overview of different types of risk facing businesses in today’s world, and looks at how geostrategic competition underpins them all, thus driving business leaders to dramatically shift operational priorities.
by Evelyne Legaux on 15-02-2023
Investing in Risk management, a pathway to Strategic advantage
The past few years have seen the world becoming more complex & interconnected and also more uncertain, therefore more risky. Over the past 15 years, various crises have sent shockwaves affecting every country, society & global trade transaction across most industry sectors.
As a result, business leaders have been left navigating in the dark to a large extent, thus leading same to prioritise resilience & agility. In such a context, the need for companies to develop & implement a solid Enterprise Risk Management (ERM) strategy has quickly imposed itself as a ‘MUST HAVE’. Ignoring uncertainty altogether in today’s world can not only prove to be a dangerous game as some risks may still be unknown, but also a missed opportunity.
A better approach instead would be to:
After a few years of multiform disruptions, business leaders are now called to move past managing the immediate impact on employees safety, energy security or else critical supply, and develop mid-term strategies.
In actual facts, businesses are faced with an ever-widening array of risks, the lasting impacts of the ongoing war in Ukraine being just one of them. While no one can say today how & when that war will end, it is fair to assume that it has already & will continue to deeply transform the world geostrategic landscape.
The only certainty for business leaders is that the pace of change is accelerating, with further disruptions & new risks expected down the line…
So, let’s Explore what those Risks are
In 2022, global GDP growth reached +2.9% and a global recession is likely to be avoided again in 2023, assuming the war in Ukraine does not escalate & spread to other geographies. This being a major assumption however, the risk of a global recession cannot be completely ruled out, nor should the impact of high commodity prices driving inflation indexes upward, supply chain & trade disruptions, volatile financial markets or increasing interest rates be underestimated.
Additionally, some countries will be more severely impacted, no matter the outcome on a global level, with global insolvencies expected to rise by + 19% in 2023 compared to pre-pandemic levels.
Russia is facing a deepening economic crisis (2022 GDP -2.8%) as a result of international sanctions, withdrawal of many foreign brands, the collapse of the RUB & high inflation.
Ukraine is expecting a GDP loss of -50% over several years as a direct result of the ongoing war that is severely restricting economic activities & reducing human capital.
Europe is also being hard hit despite +3.3% of 2022 GDP growth in the Eurozone & +4.4% in the UK, owing to its significant trade & financial relations with both belligerent countries, the Baltics & Eastern Europe facing a massive influx of refugees and Germany & Italy being strongly dependent on Russian energy supplies. An ongoing challenge is for Europe to remain united at all times & more competitive in the face of protectionist threats.
Although the impact of the war on the US economy is much less, primarily thanks to a high degree of energy independence, 2022 GDP growth only reached 1.9%.
China experienced an economic slowdown in 2022 with a GDP growth of +2.8% vs +8.1% in 2021, primarily caused by headwinds in the real estate sector & the zero-Covid 19 policy. At a deeper level, China is in the process of transitioning from a ‘high speed’ to a ‘high quality’ growth model supported by more environment-friendly considerations, and aiming at restoring trust from its people. Geographically speaking, the landscape is very dichotomic, with cities facing the challenges of rich countries while the countryside faces those of developing countries. Finally, with most young people struggling to secure meaningful jobs & affordable housing while being under pressure to have at least two children, the authorities run a major risk of turning ‘generation Xi’ into a horde of revolutionaries…
Japan is facing many macroeconomic challenges: a weak GDP growth of +1.4%, strong JPY depreciation, sluggish productivity, high cost of living & an aging population, caused by a lack of capital expenditure, innovation & international attractiveness resulting from a demand-focused policy over the past years that neglected the supply side of the economy. The country has a strong potential in renewables, however is currently heavily dependent on fossil fuels & requires a new ambitious energy policy. On a positive note, at 3.6% only inflation remains under control.
In India, GDP growth also decreased to +7% vs +8.1% in 2021 while the country is facing record trade deficits & 85% debt/GDP ratio, due to its high dependency on oil imports. The formerly exuberant tech sector is now looking for genuine value-generation from both a societal & environmental perspective. With 1.3Bn people & 800M bank accounts, the banking sector also offers a huge opportunity for fintech companies to come & help manage money flows & savings products effectively.
Argentina has a huge economic development potential, however is struggling with high indebtedness, strong inflation & a bankrupt SMEs segment. As a result, it largely remains a raw products exporter today as opposed to being an industrialized country.
Brazil’s economy is in a much better shape with +2.8% GDP growth, 8% unemployment, inflation under control & interest rates actually going down… The country also offers a huge potential for food security, clean energy & green-shoring, however requires massive infrastructure investments, a definite end to illegal deforestation in the Amazon and much needed political unification not polarisation.
In the Rest of the world, the global picture is contrasted with energy exporters (Middle East, Norway & Australia) benefiting from the state of the global economy on the one hand, and energy & commodities importers (South-East Asia, Pakistan, Egypt & Africa) paying the high price for it on the other hand.
Some African countries are at risk of recession, default & debt restructuring, a risk that is exacerbated by the US interest rate policy. Other common features are an average fertility rate of 5.6 and a strong dependency of companies on State funding & public contracts.
Elsewhere, an interesting trend to note as well is that global trade going through Central Europe & the Caucasus region is increasing.
The Covid-19 pandemic & the recent Suez canal blockage followed with the war in Ukraine have largely exposed the vulnerability of / risks associated with linear supply chain models which merely rely on single geographies that may prove politically unfavourable if not unstable.
Companies are now shifting priorities from efficiency & cost effectiveness to resilience, supply security, autonomy, sustainability & transparency, thus rethinking their operations models in favour of shorter supply chains. The war in Ukraine is also adding ethical & geopolitical considerations into the business strategy mix.
Multi-sourcing of supply combined with near-shoring or home-shoring is now becoming the new norm, as a result. Even in Africa, the climate agenda is triggering initiatives to build value chains locally as opposed to transforming local raw materials in other parts of the world.
Such a shift though requires an agile mindset & crisis management skills from business leaders, ideally supported by AI-fuelled forecasting models.
Companies that trade internationally are faced with an ever growing complexity in managing compliance with a flurry of international sanctions & countersanctions.
While lack of compliance can lead to civil or criminal punishment, assessing risk here is a sensitive matter & can be challenging. Business organisations must therefore create a culture of trust & respect for awareness to flourish internally, necessary conversations to happen & the ultimate identification of risks to emerge.
Beyond the assessment stage, managing sanctions & countersanctions risk also requires companies to develop & implement ad hoc policies & processes such as screening all tier-customers & end-users alike for trade compliance. The ‘Know Your Customer’ concept is more relevant than ever here, and companies should in particular adopt a screening tool or software for the purpose of eliminating such risk from trading activities.
The world has entered an era of unprecedented expectations from both employees & consumers/end-users in relation to sustainability & value creation by businesses. In the wake of successive climate change reports & the introduction of statutory ESG disclosures, the Covid-19 pandemic has been a catalyst to humanity realising that there is another way to energy matters & investors shifting towards alternative low-carbon energy sources.
The war in Ukraine however, by triggering a strong rise in energy prices & exposing the high degree of dependency on fossil fuels in Europe, has placed the transition to renewables on a temporary hold, in favour of a rush for short term energy security. Considering the high correlation between winter temperatures & energy demand combined with aging nuclear facilities in France & the UK, it is clear that a sense of urgency in this regard is still missing at a political level…
Greenwashing should also be mentioned here as a new type of risk that diverts financial capital from where it should be going. This questions whether businesses are sufficiently encouraged to make clear & precise ESG disclosures? It also challenges the purpose of the IMF & World Bank: should these global institutions play a key role in boosting & regulating climate Finance, going forward?
Here again, the war in Ukraine appears to be threatening the strong momentum of digital technology adoption previously accelerated by the pandemic.
Russia & Ukraine are indeed major suppliers of essential metals to the production of micro-chips & solar panels. International sanctions are also expected to have long-term effects on industrial sectors (aviation, oil refinery, etc …) that heavily rely on spare parts & equipment maintenance. With Russia & China being gradually isolated from the West, shortages & innovation slowdown are most likely.
Elsewhere, cyber threats are on the rise and digital technologies are no exception to that. Business leaders must therefore place cybersecurity at the heart of their risk management strategy.
Climate events & military conflicts trigger higher mobility of people across the planet and, combined with increasing urbanization, give rise to the emergence of new viruses & disease outbreaks in unexpected places.
We don’t know when the next pandemic will happen nor where it will come from, and the impact of climate change remains largely unknown today. What we do know from scientific research however, is that anti-microbial resistance is on the rise & represents a major threat to human health…
What the above tells political leaders is that the world needs to further invest in R&D to develop a new generation of antibiotics, and in epidemiologic surveillance. Likewise, the world needs increased collaboration & trust to come up with a global agreement about the transfer of vaccine IP rights.
While the war in Ukraine diverts minds from health security matters, leaders in the life science & pharmaceutical sector need to build alliances & develop more resilient supply chains. More generally, business leaders should prepare for the next pandemic & embed health threats in their risk management strategy & disaster recovery plan.
The combination of all hereabove highlighted risk types will continue to drive high volatility in public policies enacted by governments or international institutions in the near term. Additionally, one common denominator across all of those risks is the underlying impact of geopolitical developments.
The post-WWII global landscape is currently shifting from a US-led unipolar to a multipolar world, under the double impulsion of:
. Russia whose aim is to deeply divide Western allies through mass refugee immigration & economic hardship, and
. a number of geopolitical swing States (Turkey, India, Saudi-Arabia, etc…) that look to politically leverage relations with multiple global powers by playing them off against each other, rather than align with a particular geopolitical bloc.
Interestingly, the Western bloc appears to be losing ground as dealignment with either blocs – whether West or East – is gaining momentum with many countries shifting towards neutrality. Does this mean that Western democracies are now faced with a growing group of autocratic regimes, thus creating more hazardous trade conditions for global businesses?
In parallel, a rising wave of nationalism & populism across the globe undermines the power & purpose of US-aligned international institutions established in the post-WWII era.
As for the war in Ukraine, while the risk of a nuclear escalation has somewhat receded, the risk of Russian-led cyberattacks or intentional energy & commodities supply shortages remain very present today. The new ban on Russian refined oil products is also expected to trigger more turmoil over the coming months.
Elsewhere, China has the potential to become the number 1 economy in the world albeit a non-democratic one, which represents the biggest challenge to the US today. China also appears more & more assertive with regards to its objectives in Taiwan, thus raising the risk of further tensions & a possible escalation with the US, Japan & South Korea in particular.
Upcoming elections in Turkey & Nigeria along with several African countries (Tanzania, Malawi, Zambia, etc…) facing the harsh prospect of debt restructuring, all constitute potential sources of social unrest.
Let alone, the DPRK is displaying the largest ever number of ICBMs, while Iran is now getting very close to enriching uranium to weapon grade…
Last but not least, the world MUST completely re-invent the farming model in the poorest countries in a way that dramatically shortens farmer to consumer chains through local production, preserves indigenous knowledge & promotes sustainability.
To end hunger though, climate change & related humanitarian crises need to be addressed first, which is the biggest geopolitical risk over the next 20 years…
Elevating Geopolitics, a top Priority & an Opportunity
What this all means is that businesses now operate & trade in a global context that is increasingly dominated by geopolitical considerations as opposed to purely economic & financial ones.
As a result, geopolitics has become central to corporate strategies with business leaders needing to develop systemic approaches to manage those political risks, but also seek related opportunities.
One element of extra complexity here for those operating&/or trading internationally, is that government response policies may significantly diverge from geography to geography. Strategically important sectors will be put under further pressure to on-shore, near-shore or friend-shore, while others will continue to face supply chain disruptions.
So, what actions can business leaders take to mitigate political risk?
Rising geostrategic competition in today’s world is signing the end of the post-WWII US-led international order, thus opening the floodgate for swing States & emerging countries to emancipate themselves from Western imposed conditions on human rights or the rule of law, to obtain financial assistance, development aid or security guarantees.
Dealignment enables countries to redefine their own geopolitical positioning and choose protectionism or foreign investment adverse policies, without having to make concessions to Western values or political governance concepts.
Such a trend is concerning, and surely further raises risks for global businesses & investors.
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