Managing Geopolitical Risk Under Uncertainty

September 28, 2022

Geopolitical shifts born out of the US-China-Russia rivalry have manifested in supply chain interruptions, divestments, national security directed decoupling, hyperinflation, and reorganisation of energy and trade relations. International corporations now have to deal with an added layer of uncertainty created by these dynamic disruptions.

Macroeconomic conflict and geopolitical volatility were among the top five threats to growth anticipated by CEOs, according to the latest PWC survey, published in January 2022. After Russia’s invasion of Ukraine in February of this year, geopolitical volatility and macroeconomic conflict have the potential of leading the threat to growth as reflected in the latest McKinsey’s Economic Competition Outlook. For US international corporations, emerging geopolitical trends are affecting the operational environment in host countries around the globe in five major ways.

Shifting alliances.

New and shifting regional economic blocs and security alliances are complicating market entry. As an example, firms in the US looking to enter the Chinese market may experience political and regulatory challenges that can increase the cost of doing business. The same can be said about Chinese firms looking to enter the US market. Similarly, countries with increasingly close relationships with either the US or China can reap economic rewards as a result of their alliance. Driven by China, one of the leading examples is the Regional Comprehensive Economic Partnership (RCEP). RCEP is the world’s largest trading bloc, overtaking NAFTA and EU-28 and encompassing 30 per cent of global GDP.

Political interference and legal challenges.

Government policies and the legal and regulatory environment have a direct impact on business operations and trade relations. Economic sanctions on Russia by the US as well as European governments derailed the business development plans of some companies and had an adverse effect on the profitability of many companies around the world. Numerous challenges relating to international legal, tax, and governance issues have emerged from these evolving government interactions.

Company and product perception.

The marketability of products and services exported from countries of different geopolitical leanings diminishes, due to negative perceptions and biases. In certain cases, some of the companies that used to buy oil products from Russia had started to look for alternative sources to please their governments and customers.

Operational clout and influence.

US international clout and hegemony have been reduced in some parts of the world. This reduction in influence can decrease transaction volume in important industries such as construction, government contracting, defence equipment sales, and real estate and infrastructure projects, among others. The 2021 National Trade Estimate Report on Foreign Trade Barriers published by the Office of the United States Trade Representative points to the numerous types of non-tariff barriers facing US products and services.

Business rivalry.

Rivalry intertwined with political and economic agendas is dictated by domestic politics and elites. A heightened level of competition across countries can result in higher tariffs and complex administrative policies that would have an adverse effect on business.

An important question in the minds of multinational executives is this: “How can I manage these geopolitical challenges amidst an increasingly uncertain global environment?”

Finding answers requires an unprecedented level of operational flexibility and a paradigm shift.

Local Is King Again

Geopolitical trends put breaks on globalisation, measured by trade and capital flows. One could argue that geopolitical trends have reversed globalisation gains in the past five years, due in part to COVID-19. Far from predicting the collapse of globalisation, however, and as international flows are regaining their pre-pandemic growth rate, current assessments anticipate a change in the geography of international flows as regional economic blocs are taking shape on either side of the US-China competition fault line.

Due to these geopolitical developments, emerging and developing markets have gained bargaining leverage, which translates to greater autonomy regarding trade and FDI flows. The Local represented by domestic politics, geopolitical leanings, governance, regulatory, and socio-economic trends is increasingly the deciding factor guiding opportunities and creating barriers for international businesses.

The Metis Advantage

Intelligence, or metis as it was called in ancient Greece, was seen as superior to physical power or bie. Metis as strategic intelligence is forward-looking, with elements of anticipation, planning, and resourcefulness. Metis is valued when circumstances are fluid, uncertain, and fast-moving, as it creates sufficient pliability and ability to adapt to changing circumstances.

Political risks, which include geopolitical risks, are a lived reality that directly affects business operations and shapes the future operational environment. Intelligence about prospective markets beyond due diligence and economic feasibility studies is a crucial component of understanding the operational environment. Macro- and micro/sector-specific intelligence create the capacity to think ahead, attend to details, and proactively have resources and controls in place to face possible risks and take advantage of opportunities in the host country. Metis for today’s international corporation must meet a higher standard with the following core components:

1. Heightened context intelligence piercing through language and cultural barriers.

In the Middle East and North Africa (MENA) region for example, intercultural competence and cross-cultural business communication enables international corporations to establish realistic understanding of the opportunities and the cost of doing business, and establish crucial relations in a host country, a capability most useful for verifying official statistics and gaining equal footing during negotiations. In addition, understanding drivers of rapid growth of local industries, such as ACWA Power’s transformation from a Saudi energy and desalination company in 2004 to a global energy and water company spanning three continents by 2011, can provide perspectives that are helpful in joint venture collaborations and market entry initiatives in international locations.

2. Ability to combine data with complex systems analysis.

Data analysis of country statistics has to be integrated with the wider network of interrelated dynamic factors that shape the region. In MENA, for example, understanding the host country risk profile is not enough. Cross-national factors such as political instability, food insecurity, supply chain disruptions, energy connectivity, shifting alliances, capital flows, and expanding Chinese and Russian commercial presence are crucial in understanding the moving parts that are shaping the future of the host country.

3. Assessment of plausible future scenarios for medium- and long-term planning.

Foresight and anticipating possible future outcomes stem directly from context intelligence, which enables meaningful interpretation of developing socio-economic, political, and geopolitical trends and warning signs. Past data is not a reliable indicator of future situations in volatile environments; hence the importance of monitoring warning signs and developing trends through Open Source Intelligence and Human Intelligence. As volatility and uncertainty increase in an operating environment, so does the need for scenario planning, as it challenges the conventional and linear mindset and prepares executive decision makers for a broader range of potential high-impact events.

4. Ability to provide proactive and adaptive strategies for stakeholders.

Far from forecasting the future, scenario planning provides the necessary elements for strategic intelligence by anticipating what is possible, mainly in the domain of risks and opportunities and its implications to those potentially impacted by unfolding changes. The British Shell Oil Company’s scenario planning famously enabled it to mitigate the 1973 oil crisis that engulfed the global energy market. Its actions led to multiple benefits to customers, employees, investors, suppliers, communities, and even governments. With the current developing geopolitical disruptions, having proactive and adaptive strategies creates corporate resilience in times of uncertainty and can favourably impact stakeholder relationships.

Beyond Intelligence

Traditional corporate intelligence and enterprise risk management is no longer sufficient to meet the standard of metis that is essential in order to compete in today’s competitive and uncertain environment. Companies need to step up their game and elevate their corporate capabilities to include strategic intelligence, context intelligence, and efficient foresight to compete and sustain their operations. There is a need to elevate the practice of context intelligence and weave it into corporate strategy.

With strategic intelligence, companies can transform uncertainties into known risks, thereby gaining the ability to think ahead and plan for possible disruptions as well as opportunities. Horizon scanning, monitoring warning signs, and bespoke scenario planning is a competitive advantage that keeps a company ahead in planning and preparation.

Conclusion

Geopolitical changes around the world, such as the US-China-Russia rivalry, Brexit, BRICS possible expansion, monopoly over rare earth minerals, and many other sociopolitical and economic realignments, are on the upward trajectory and have a growing influence on the corporate world. Executives ignoring political and geopolitical risks in their international business activities face elevated business risks and operational blunders. Those with elevated metis are poised to find unique pockets of opportunities that others missed. Within this playing field, thinking through several steps ahead – much as a chess grandmaster anticipates competitive moves and shifting scenarios – becomes a quintessential corporate competency.

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About the Authors

Ghaidaa Hetou is the founder of I-Strategic LLC, a political risk advisory firm providing risk intelligence to corporations in the Middle East and North Africa region. She is also a published author and lecturer at Rutgers University.

J. Mark Munoz is a Professor of Management at Millikin University, former Harvard Visiting Fellow and editor of the books Handbook on the Geopolitics of Business, Advances in Geoeconomics, and Global Business Intelligence.