There are several factors that can affect a company's profitability and standing, which is why carrying out risk assessments is a must, whether it's a large corporation or a small local business. One thing that many face, whether they realize it or not, is a geopolitical risk. Learning about geopolitical risk and how to safeguard against and counteract issues that arise is vital to a business's success. Our Mastercard Systemic Risk Assessment can help determine which ones are a danger to your company with its risk assessment process and offer ways to mitigate potential damages.
What Is Geopolitical Risk?
The term geopolitical risk refers to the potential for international political events—think war, upheavals, elections, sanctions, trade disputes, and terrorism—to affect the economy. This can then trickle down into the business. In some events, as with a trade dispute that can hinder the availability of supplies, it affects the business directly.
What Is the Difference Between Geopolitical and Political Risks?
Many people use the terms geopolitical and political risk interchangeably, but there are a few noticeable differences. For instance, geopolitical risks refer to the global scale of politics, while political risks are local. Political risks are more likely to directly affect a business in a specific country, but geopolitical risks on a severe scale can also create hindrances.
What Is an Example of Geopolitical Risk?
The most general example of a geopolitical risk is a war. Two countries mired in conflict can cause shortages of materials, particularly if one is damaged in the fallout. One such recent example is the Russia-Ukraine war, which is affecting grain exports. Another example is the conflict going on in the Middle East and the terrorist groups that pose an ongoing threat to the United States.
Examples from the past include the Cuban missile crisis, and the Korean war, which saw North and South Korea separate into the entities they are today.
What Is a Global Strategy?
When a company looks to expand, they often do it domestically first. However, some business owners have higher ambitions and strive to expand globally. A global strategy outlines just how the company plans to achieve that, by growing sales, earnings, and profits. For some, a global strategy involves expanding operations—think distribution centers and factories—around the world, rather than just shipping products.
What Causes Geopolitical Risk?
The most common geopolitical risks stem from interactions between the leaders of countries. It's more than just presidents or prime ministers, it involves all of the top leaders that help create trade relationships, alliances, supply chains, and security partnerships. In some cases, geopolitical risks arise out of territorial disputes.
What Are the Consequences of Geopolitical Risk?
When geopolitical tensions exist, they can bring on unwanted consequences. For some, this is a loss of profit or share in another country's economy. In worst-case scenarios, it can result in retaliation in the form of disruption of supplies needed to create goods. As a result, companies lose out on economic gains and if they're publicly traded, they experience lower stock returns.
What Can Be Done for Geopolitical Risk?
There are a number of steps that a business can take to mitigate geopolitical risk consequences.
- Risk assessment - This is a major necessity for any business, small or large, that plans to grow one day. Your risk management strategies should always include a layout of the potential geopolitical risks and how to address them should the worst come to pass.
- Insurance - Believe it or not, there are multiple types of insurance a business can purchase to protect its assets. Terrorism insurance, for example, can help recover damages done due to a terrorist event.
- Diversification - Putting all one's eggs in one basket is never a good idea and this especially rings true for businesses. Make sure your plan includes backup suppliers or alternate materials you can use, for instance, should geopolitical events result in a complete work stoppage.
- Partnerships - While you'll always have healthy competition, partnering up with local businesses as a means of understanding the political landscape and garnering support is essential. After all, when everyone is in crisis, what was once competition becomes support.
- Boosting cybersecurity - A solid cybersecurity framework is essential because part of terrorism can involve cyber crimes like ransomware or denial-of-service attacks. Making sure your frameworks are up to date and robust is your best defense.
Focusing on these elements as part of the business will undoubtedly make weathering the storm much easier.
How Can I Protect Against Geopolitical Risk?
Protecting against geopolitical risk—or any risk really—entails being proactive. Always carry out risk assessments. Don't just do it once and call it a day. Make sure it's a regular part of your business landscape. Enlist local intelligence that can help warn of impending risks before they become an issue. Invest in the right type of insurance to safeguard your business assets. Finally, include continuity planning as part of your overall strategy—find alternate suppliers or countries to market in, for example.
How Can Geopolitical Risk Be Measured?
Measuring geopolitical risk is challenging, at best, because of the qualitative nature of the information available. However, there are think tanks dedicated to monitoring such factors, and can prove useful in helping to strategize. Measuring risks involves a combination of qualitative analysis (analyzing the information available) and quantitative models (evaluating the data available).
How Do I Assess Geopolitical Risk Threat Intelligence?
Assessing geopolitical risk threat intelligence is a continuous process, like all assessments. It's important to have people collect and analyze information about the potential risks such as the likelihood they may occur and the impact if they do.
How Can RiskRecon Help Me?
We can help by evaluating your company's major risk factors when it comes to the geopolitical realm and offering solutions. With more companies developing a geopolitical risk management appetite, there's no time like the present to reinforce your data with multidimensional assessments. Check us out and try out a Risk Assessment demo today.