Businesses Buffeted By Changing Geopolitical Risks

Overview

In Russia, leading businesses have been left reeling by the latest rounds of trade sanctions imposed on Moscow. Meanwhile, on the other side of the world in Nicaragua, violent protests against pension reforms have forced the government to reevaluate the proposals.

Economic headwinds, protectionism and populism, and the changing tactics of terrorists are just some of the forces that are fueling an increase in political risk around the world and forcing organizations to reassess the way they do business.

Among the challenges businesses face related to political risk are supply chain disruption, business interruption and even asset nationalization. Aon’s 2018 Risk Maps for Political Risk, Terrorism and Political Violence measures political risk in 163 locations and territories. Only two of those countries surveyed saw reduced political risk in 2017 with 11 of them showing increased levels of risk, which were driven by internal conflicts, the erosion of democratic governance and corruption scandals.

Understanding a country’s changing political risk profile is essential to managing exposure.

In Depth

Because a change of policy – or government – can have a significant impact on organizations’ people, assets, operations, revenues and supply chains, businesses will need to challenge their assumptions about the political environments they work in. Vlad Bobko, Head of Crisis Management at Aon, notes, “Terrorism, political violence and political risk are esoteric and fast-moving. Consequently, businesses find themselves uniquely challenged as they seek to respond to existing and emerging vulnerabilities.”

Here, we take a look at some of the risks that should be on an organization’s radar.

The Rise of China and Shifting Supply Chains

The increasing threat of protectionism looks set to reshape supply chains around the world. For example, as U.S. trade policy continues to evolve, many companies may be forced to look for new suppliers and customers. Meanwhile, climate shocks and weak fiscal positions also threaten to disrupt supply chains in many countries. Organizations prepared to deal with those shocks will be best able to prevent supply chain disruptions.

A significant supply chain adjustment has already been under way for nearly two decades in Asia, where Asian countries have been shifting their export focus away from the U.S. and toward China. From 2000 to 2017, Asian countries’ exports to the U.S. went from roughly 23 percent of their total to about half that amount. Meanwhile, the same countries’ trading relationship with China has strengthened, with exports growing from less than 10 percent in 2000 to 23 percent in 2017.

As businesses reexamine impacts to their supply chains, they must consider the political risk landscape in the countries in which they’re establishing essential relationships to minimize the potential for business-crippling disruptions.

Terrorism and Political Violence: Islamic State Poses a Sustained Threat in Southeast Asia

According to Aon’s 2018 Risk Maps, the country risk level for Singapore remains “low” a year after it was raised from “negligible.” While the terrorism peril is still in place – particularly from attacks mounted by lone actors using improvised weapons – Risk Advisory has not recorded any terrorist attacks in Singapore over the past 12 months. Singapore is seen as a prized target, and this peril and risk scoring reflect the arrests of purported extremists and disruption of plots in the country in recent years.

The threat is more severe in the Philippines where the overall country score is upgraded to “high” in 2018 from “medium” in 2017. This change comes after Islamist extremists seized control of the southern city of Marawi for five months in 2017. Last week, the U.S. Department of State warned that the Islamic State is looking for new safe havens worldwide, in particular in the southern Philippines.

Dan Bould, Regional Director of Crisis Management, Asia, Aon Risk Solutions, notes, “In 2018 we expect a continued increase in terrorist activity within Asia. While the global reach of IS appears to have peaked, they will continue to agitate for attacks in areas where they have traction, notably in the Philippines and to a lesser degree in Malaysia, Indonesia and Singapore. The property damage sustained in such attacks is historically minor while the effect on operations and business interruption may well be substantial.”

A Super-Election Cycle in Latin America

A “super-election cycle” in Latin America is clearly a factor in changing political risk exposures in that region.

“If we include the six elections scheduled for 2019, 14 out of the 18 Latin American countries will hold their presidential elections within a two-year period,” said Sarah Taylor, Head of Structured Credit and Political Risks, Aon. “Such activity could mean unrest in the region.”

Upcoming elections are delaying pension reforms in Brazil and raising worries that similar reforms might be reversed in Mexico. Regional elections raise the prospect of the emergence of populist governments. In Venezuela, where a presidential election is set for May 20, the international community’s perception of a lack of real democratic institutions in the country will likely undercut the outcome’s legitimacy.

Other Latin American countries with election activity in 2018 include Costa Rica, El Salvador, Cuba and Paraguay.

High Risk in the Middle East

Iraq, Syria and Yemen rank among the highest-risk countries in the world, and neighboring countries frequently feel the knock-on effects of those nations’ political risk and violence. Coupled with country-specific economic and institutional exposures, Aon’s Risk Maps rank the Gulf region’s political risk as high to very high.

Another factor adding to political instability in the Middle East was a move in June 2017 by several Middle Eastern countries to cut their ties to Qatar over Saudi Arabian concerns about the country’s connections with terrorism.

The resulting trade and travel bans left Qatar isolated from the rest of the region. Still, the blockade’s impact on Qatar’s economy has been limited, largely because the country relies on the blockade countries for just 10 percent of its exports, instead counting South Korea, Japan, India and China as its major trading partners.

Making Sense of Political Complexities

The forces driving changes in countries’ political risk profiles can be varied and complex. Economic issues, institutional and structural factors, the lingering impact of natural disasters, political rivalries and a shift from liberal democratic governance to populism and authoritarianism are just some of the factors that can influence the extent of a country’s political risk.

For multinationals operating around the world, understanding potential political exposures in the areas in which they do business is critical to minimizing risk. Regional balances of power can shift, elections can change governments and new policies can alter trading relationships. Taylor states, “In the face of various cross-border changes, having a clear understanding of the risks themselves can help leaders best prepare for them.”