Con­flicts of Busi­ness In­ter­est

In­ter­con­nected geopo­lit­i­cal risks are a grow­ing source of con­cern for busi­nesses, high­light­ing the need for mea­sures to im­prove re­silience

Bloomberg Businessweek (Asia) - - NEWS - — Mike Olson

There are pros (de­li­cious) and cons (un­healthy) to cheese­burg­ers, but they are rarely caught up in geopo­lit­i­cal ten­sion that di­rectly af­fects a busi­ness. Last year, how­ever, an iconic Amer­i­can fast food com­pany had sev­eral of its Moscow lo­ca­tions tem­po­rar­ily shut down by Rus­sian au­thor­i­ties in a thinly veiled re­sponse to U.S.-led eco­nomic sanc­tions. The sanc­tions fol­lowed Rus­sia’s mil­i­tary ac­tion in Ukraine, and the clo­sure of the eater­ies was ac­com­pa­nied by a pro­posal to launch govern­ment-backed, pa­tri­otic-themed Rus­sian com­peti­tors.

The blur­ring of geopol­i­tics and busi­ness is not new, but in­ci­dents of it ap­pear to be on the rise. “We have seen an in­crease in losses by cor­po­ra­tions due to geopo­lit­i­cal risks, specif­i­cally dam­age to as­sets and busi­ness in­ter­rup­tion af­ter that dam­age oc­curs,” says Jim Thomas, Global Head, Credit and Political Risk, Zurich In­sur­ance Group.

“In some cases, we’ve seen busi­nesses forced to aban­don projects al­to­gether when the sit­u­a­tion be­came too dan­ger­ous. Dis­rup­tion of sup­ply chains as a re­sult of geopo­lit­i­cal risks has also be­come a very real is­sue,” Thomas says.

Re­port high­lights con­cerns

For the se­cond year run­ning, a sur­vey of its mem­bers by the World Eco­nomic Fo­rum (WEF) re­vealed that geopo­lit­i­cal risks are top of mind among global lead­ers. The re­sults of the sur­vey were re­ported in “The Global Risks Re­port 2016,” which the WEF pub­lishes in col­lab­o­ra­tion with Zurich In­sur­ance Group. The re­port cites a “vac­uum cre­ated by frail or weak­en­ing states” and a “re­turn of strate­gic com­pe­ti­tion be­tween strong states with con­flict­ing in­ter­ests” as the prime rea­sons why “com­pa­nies are vul­ner­a­ble even if they have no im­me­di­ate pres­ence in the ge­og­ra­phy where the risk arises.”

“Geopo­lit­i­cal risks” cov­ers an ar­ray of threats to busi­nesses that in­cludes in­ter­state con­flict, ter­ror­ism and fail­ure of na­tional gov­er­nance. For busi­nesses, new risks and costs arise from the dif­fi­cul­ties of work­ing in an un­pre­dictable en­vi­ron­ment and com­ply­ing with in­ter­na­tional stan­dards when frag­ile gov­ern­ments do not them­selves ad­here to in­ter­na­tional reg­u­la­tions. Th­ese costs can be se­ri­ous enough to be­come un­sus­tain­able in the long run.

The Global Risks Re­port 2016 in­di­cates that ex­ec­u­tives in 14 economies per­ceive fail­ure of na­tional gov­er­nance as the high­est risk to con­duct­ing busi­ness. Half of those economies are in South Amer­ica—many at the mercy of the com­modi­ties cri­sis—and gov­er­nancere­lated risks could se­ri­ously un­der­mine the com­pet­i­tive­ness, job cre­ation and eco­nomic de­vel­op­ment of the ma­jor­ity of the con­ti­nent.

At the same time, not all busi­nesses have the lux­ury of choos­ing sta­ble lo­ca­tions. Min­ing and en­ergy com­pa­nies, for ex­am­ple, must op­er­ate where the nat­u­ral re­sources are found.

“There are many strate­gic as­sets and in­vest­ments around the world that com­pa­nies can­not walk away from,” says Thomas. “To stay com­mit­ted to those op­por­tu­ni­ties, busi­nesses must stay very risk aware and build re­siliency into their sys­tems. The key is to de­velop a sys­tem­atic ap­proach to the risks you know you face, and to re­act­ing to new risks as they arise. Th­ese are times of chal­leng­ing geopo­lit­i­cal risks, but they are not un­prece­dented. With a risk man­age­ment strat­egy fo­cused on re­silience, busi­nesses don’t have to im­me­di­ately rule out a po­ten­tial mar­ket based solely on sur­face ap­pear­ances.”

“There are many strate­gic as­sets and in­vest­ments around the world that com­pa­nies can­not walk away from.” — Jim Thomas, Global Head, Credit and Political Risk, Zurich In­sur­ance Group

Geopo­lit­i­cal risks don’t mean the end of op­por­tu­ni­ties if you build re­silience in your com­pany.

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