We are living in a time when the world is mired in turmoil. Due to the widespread terrorist activities, physical wars between countries, hybrid warfare, cyberattacks, trade barriers, etc., we are going through a geopolitical crisis that is having a cascading effect on the normal and peaceful course of international relations.
Geopolitical risks stem from one or more of the above reasons. Some recent examples are events like the Russia-Ukraine conflict and the COVID-19 pandemic, which have had a ripple effect across the globe. These geopolitical risks shape:
- Market outlook
- Industry stability
- Business operations
- Fluctuations in prices
- Supply chains
- Investment flows
This article explores the challenges and opportunities that the geopolitical crisis presents to the world.
Challenges to the Global Economy
Conflicts and Covid
The conflicts between Russia-Ukraine, Israel-Hamas, and Covid have pulled the global economy southwards. As per the International Monetary Fund, this has been the weakest global growth profile since 2001. The impact has been felt globally as most of the developed countries have gone into recession. As a result, growth has stagnated, and significant downturns have occurred.
Shortage of Labor
Another challenge that we have witnessed is the dwindling demand and shortage of labor, leading to a supply chain crisis. Due to Covid, factories shut down in China and the production took a backseat impacting the global supply chain.
Election
The US Presidential election will also pose a challenge to the global economy as organizations and candidates will pump in money to get the desired results.
Global Migration
Stringent laws and regulations are put in place to ensure that refugees are being sent back to their home countries in case they do not have valid documents. This has a geopolitical impact, as we have seen in the case of Syria.
Climate Change
Last but not the least is climate change. With climate change, big business houses will try to operate out of countries with predictable climates.
Opportunities
Some of the opportunities that these present are having a regular competency review to ascertain the geopolitical efficiency of the Board members and having a contingency plan in place to overcome the crisis if the geopolitical risks impact any organization.
Most organizations follow the PESTLE framework to analyze the macro environment. Organizations and countries must be proactive rather than reactive towards geopolitical risks.
Geopolitical risks are akin to the world beyond Covid-19. Countries must have contingency plans handy to ensure that they are not impacted hugely due to geopolitical risks and have minimal impact on their citizens.
Frequently Asked Questions
1. What measures are multinational companies taking to diversify their supply chains and mitigate geopolitical risks to ensure business continuity?
Most organizations are mitigating this by ensuring that the supply chain is not concentrated in one place. They are diversifying the process right from procurement to delivery to ensure that the end customer is not impacted and it is business as usual. Diversifying the process also helps mitigate the concentration risk.
2. What tools and methodologies are available for assessing and quantifying geopolitical risks, and how effective are they in guiding business strategies?
Some of the broad categories for assessing and quantifying geopolitical risks are National Security, Economic, and Financial. National Security tools, like armed conflict, might directly or indirectly impact the country’s resources, people, or borders. Economic tools are used for co-operative or non-cooperative stances through economic means. For eg., WTO and FATCA.
3. What factors should businesses consider when conducting political risk assessments and evaluating investment opportunities in emerging markets and conflict-prone regions?
Political Risk Assessment
Some important factors to consider while conducting a political risk assessment are a stable government at the Centre, social fabric, terrorism, monetary policy, currency stability, and employment laws.
Evaluating Investment Opportunities
While evaluating investment opportunities in emerging markets and conflict-prone regions, some important factors are labor force, physical infrastructure, demographics, and current account balance to gross national product(GNP).
4. How are digital technologies and data analytics used to optimize supply chain operations and mitigate the impact of geopolitical risks on business continuity?
Through data analytics, organizations can collect and analyze data in real-time, identify bottlenecks, and monitor supplier performance, thus predicting demand patterns, identifying seasonal fluctuations, and optimizing inventory levels.
By analyzing diplomatic relations, economic sanctions, and regional stability, organizations can assess the potential impact of geopolitical events on their operations and make informed decisions.
