Political instability is fuelling unprecedented business losses - how to manage the threats

What’s happening?

Global political instability is fuelling corporate losses on an unparalleled scale.

The war in Ukraine, tension between China and Taiwan, climate change, conflict in Sudan, rogue states, such as North Korea and Iran, have all added to the geopolitical risk facing companies.

A recent survey by Oxford Analytica/WTW (insurance brokers) indicated that 93% of multinationals had incurred losses linked to political upheaval within the past year. In 2020 that figure was 35%.

War in Ukraine and subsequent sanctions applied to Russia have seen BP and ExxonMobil write off $23 billion between them as a result of relinquishing stakes in Rosneft and other related projects. One US tech company reported it had ended all its operations in Russia and Belarus and suffered a loss of $1 billion.

”Risk managers are now having to adjust their expectations and hedge against a new raft of business uncertainty.”

Penalties apply for breaching both broad transactional activities in designated economic areas, such as oil and gas, and the specific freezing of the assets of individuals and entities close to the Russian government.

What does it mean for risk managers?

KCS Group Europe (KCSGE) CEO Stuart Poole-Robb says: “Where once multinationals and big corporations sat above politics, risk managers are now having to adjust their expectations and hedge against a new raft of business uncertainty.

”Moreover, those risks - like natural disasters - are difficult for companies to model and their effects can be devastating.”

Compliance depends on meeting the requirements of regulatory regimes applying in different regions, eg: the EU and the US. But after twenty-five years of a globally interconnected economy, determining what constitutes a breach isn’t always straightforward.

”Risk managers may be required to take a more strategic and proactive approach”

Many companies have been genuinely unsure and unwilling to take that risk.

Globalisation has compounded the effect of political and economic upheaval. The war being fought in Ukraine directly affects its economy, but the impact of that can be felt in supply chains halfway across the world.

Poole-Robb adds: “Risk managers may be required to take a more strategic and proactive approach. Supply chains should be adjusted to match geopolitical realities where possible. And some firms are introducing an additional level of supply chain due diligence.”

All the companies which responded to the survey had made some enhancement to their political risk management and most were less optimistic about geopolitical trends.

How to move beyond just mitigation

Risk managers can do more than mitigate political risk, making it central to the company strategy and incorporating risk assessments from the start. Some companies are also setting out short-term, mid-term and long-term responses to disruption in order to maintain agility and stay resilient.

Poole-Robb says:  “Peak globalisation has passed and many corporates are cautious about their investment and security. In some cases, this has resulted in a decoupling from multinational production and shared systems. But there are steps companies can take to minimise risk.

”A proactive approach, good intelligence and expert knowledge can provide risk managers with the confidence to make decisions and maintain resilience for their companies.”

“Due diligence can provide detailed information of how markets and individuals operate at a granular level. A proactive approach, good intelligence and expert knowledge can provide risk managers with the confidence to make decisions and maintain resilience for their companies.

“A working knowledge of the markets is essential now, more than ever. There is an over-reliance on OSINT (Open Source Intelligence). Sources on the ground and an intimate knowledge of the risks, weaknesses and threats inherent within a country are vital.”