Forecasting and responding to geopolitical risk in 2017

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Charles Hecker – Senior Partner & Jonathan Wood – Director of Global Risk Analysis, Control Risks

 

If only boardrooms had periscopes. What a great way to see what’s coming. Oh, wait. The board is supposed to be a company’s periscope, isn’t it? OK, let’s try again. If only boardrooms had crystal balls. Regrettably, at a time when they would be more useful than ever, crystal balls are in their usual short supply.

Fear not. You are right to think that 2017 will bring political and economic uncertainty but, crystal ball or not, we still have the tools to examine what the future brings and how companies should prepare themselves.

International companies will experience different levels of risk in the coming year, depending on their business models, their global footprints, the length of their supply chains and a host of other factors. Events in 2017 will affect all of us differently. Still, every company and boardroom should keep in mind an important set of looming risks – some carried over from the current year.

Globalisation and its discontents

It is premature to say that globalisation has shifted into tyre-burning reverse. The expansion of the global economy to the world’s most distant outposts is, however, in a deep shudder. The election of an economic nationalist to the Oval Office will keep it in that agitated state for some time to come. This poses a series of important risks in the spheres of politics and commerce.

Monitor carefully the relationship between the US and China. Over the years, economic interdependence has kept a lid on periodic China-US tensions, preventing small incidents from escalating into major conflicts. As a Trump presidency places pressure on the economic ties between the US and China, watch the political sparks fly. It remains to be seen whether those sparks will ignite a security incident. The likelihood of a severe escalation is, however, relatively low.

A Trump administration will not impose a threatened 45 per cent tariff on imported Chinese goods. Economic reality knows how impractical, not to mention destructive, that would be. Short of that, though, Washington could significantly change the optics of the relationship with Beijing. Economic relationships across a host of sectors will become the subject of elevated tension. Remember, a Trump White House is not the only source of global indignation. Like his Washington counterpart, Chinese President Xi Jinping also feels that the global economic system – China joined the WTO in 2001 – has placed a tiresome yoke around his country.

Of course, China and the US are not the only players in the globalised economy, but they are the biggest. In Asia, more broadly, the anticipated US withdrawal from the Trans Pacific Partnership (TPP) threatens to redraw the commercial map of trans-Pacific trade. A move towards economic nationalism would jeopardise the US position in trading blocs and in bilateral negotiations with partners, such as Mexico and the EU, though the latter is now busier absorbing self-inflicted wounds than external shocks.

The EU and Brexit

The UK’s exit from the EU will probably start later than the March 2017 date Prime Minister Theresa May has trumpeted. Once that process does begin, it will take far greater effort on behalf of the British government than proponents claim. The real challenges are on the other side of the English Channel.

In 2017, the EU will continue to grapple with an unmanageable refugee crisis. Tackling Greece’s debt and reform challenges remain beyond its capabilities. Temporary suspensions to the Schengen Agreement are rapidly ossifying. The Italian referendum on legislative procedures in December 2016 will have merely been a warm-up act for elections in France (non à Le Pen) and Germany (noch ein Mal for Merkel).

Right and left-wing anti-EU groups will whip themselves into a populist frenzy, but will not rend the EU asunder. Short of that, though, there is no shortage of areas of concern.

Moscow calling

“Events in 2017 will affect all of us differently. Still, every company and boardroom should keep in mind an important set of looming risks — some carried over from the current year”

Do not believe the hype of a bromance between Trump and Russian President Vladimir Putin. It never existed and may never come to pass. But, as the TV advert from the phone company likes to say, “It’s good to talk”. Putin was one of the first world leaders to call to congratulate President-elect Trump and the two of them apparently admitted that their countries’ deplorable relationship needed work.

To be sure, some of the heat will come out of the dialogue between Moscow and Washington. You will not hear Trump criticise Putin for his domestic or, even, international behaviour. Spare a thought here for Ukraine, if you will. A serious rapprochement between Moscow and Washington could come at Kiev’s expense. Putin will push for Trump either to recognise the annexation of Crimea or to stop forcing peace negotiations.

But Russia remains one of the US’s foreign policy and military establishment’s most beloved demons. That hostility will likely dampen some of the passion in Trump’s so-far rhetorical embrace of Putin. That same establishment – not to mention the organisation’s 27 other members – will also limit Trump’s ability to inflict much damage on NATO (though Trump’s criticisms of the alliance will be music to Putin’s ears). Sanctions will remain a political football for the year to come. If relief comes, it will be toward the end of the year and will come first from the US. The EU may follow with limited sanctions relief later.

Syria will be a significant and early test of the relationship between Russia and the US. The two countries will profess to work together on counter-terrorism issues. Reconciling their differences on the status of President Bashar al-Assad, however, will keep the two from a meaningful meeting of minds on the Middle East.

Terrorism in turmoil

The coming year will see Islamic State (IS) come under near debilitating pressure in Iraq and Syria. The organisation will no longer be able to finance its activities, recruit militants or wage attacks in the way it has since its creation as a breakaway from al-Qaida in 1999. Instead of a strong centralised presence in Syria and Iraq, IS will now have a diaspora. This fragmentation – not to mention the ongoing activities of al-Qaida – will pose a more dispersed terrorist threat in 2017.

Moreover, Islamist extremists are only part of the emerging terrorist landscape. Domestic radicalisation – something that breeds quietly in suburban climes and is difficult to detect – will become a more prominent threat in 2017. This threat will emerge from sympathisers with rebels in the Middle East, but also from lone wolves with individual and independent agendas. This last category is the primary source of the ‘active shooter’ – the gunman who terrorises his workplace from within, often without warning signs.

You will not need a bodyguard for a business trip to Paris. Armoured cars are not required to traverse the streets of Brussels. But these sorts of concerns – particularly in combination with the active shooter phenomenon – are transforming the concept of a company’s duty of care. Organisations that do not re-examine their programmes for crisis prevention and impact mitigation will be seen as falling short of best practice.

Regulate this

We have grown accustomed to the proliferation of regulation. We have also, more recently, grown accustomed to its weaponisation. The propagation of regulation from country to country and sector to sector is genuinely a growth industry.

Or is it? Another source of uncertainty for 2017 is the potential trajectory of the US and, by extension, the global regulatory climate. Armed with the razor-sharp ink nib of the executive order, the White House is poised to scratch a raft of regulations and may even put paid to entire regulatory agencies. The US’s adherence to the Paris climate accords is in question. The Dodd-Frank Act, the legislation the financial services sector loves to hate and even the Foreign Corrupt Practices Act may be modified, gutted or scrapped. Candidate Trump called the FCPA a ‘horrible’ law that ‘should be changed’.

The newest regulatory frontier is, as ever, in cyberspace and the universe of big data. There, contrary to the laws of nature, the universe may actually be contracting. The world of regulation is not.

Cyber that

As globalisation shudders, so the world of cyber quakes: economic nationalism has an evil twin – data nationalism. International accords in cyberspace were never easy to come by and in 2017 they will be even harder to strike. In their stead, we will have piecemeal legislation as nation-states seek to protect their own agendas on the storing and transfer of data. The casualties will include international companies, who will no longer be able to manage their electronic assets uniformly or consistently across borders. E-commerce may suffer. Data protection compliance will almost certainly become considerably more expensive.

“Organisations that do not re-examine their programmes for crisis prevention and impact mitigation will be seen as falling short of best practice”

National-level regulations will also spike in anticipation of a world more penetrated by cyber espionage. Some nations will focus on penetrating others’ systems for the commercial jewels they harbour. Others will play politics and seek to influence political processes to their advantage. Both types of activity pose an equally significant threat.

What’s a board to do?

Just as companies experience risk differently, so they respond differently, too. The current landscape will likely produce at least three different corporate responses – the ark, the shark and the whale.

Arks will pull up the oars and assume a defensive posture, focussing on core businesses and markets. Non-performing assets, debt and excess costs will all go. Expansion moves to the bottom of the to-do list. Some companies will become arks voluntarily – they don’t like what’s coming in on the tide and they act accordingly. Others will be made into arks by external shocks, regulation or strategy failures. Arks can also be victims of an increasingly complex and competitive global business environment. Being called an ark may not sound like flattery. Don’t worry. These companies may be best poised to rebound when external variables improve.

Sharks will be sharks – they will cruise on the hunt for risk and opportunity, either in new activities or new markets. Low (and even negative) interest rates have increased the urgency and decreased the costs of hunting yield. Economic reforms and relaxed sanctions regimes (see Cuba, Myanmar and, well, maybe Iran) have made once verboten markets more attractive. Companies with a healthy risk appetite – and the risk management practices to support that appetite – will look for opportunity in those and other markets. Finally, growing middle classes continue to present the opportunity for risk-adjusted returns that beat anything on offer in the core economies.

Whales will try to get too big and too diverse to sink in anticipation of a prolonged period of strategic uncertainty. Taking advantage of cash stockpiles (around $6trillion at the outset of 2016) and historically cheap financing (buffered by the ‘lower for longer’ mantra of global central banks), this strategy focusses on mergers and acquisitions to create diverse, integrated businesses that can dominate select markets or sectors.

Whales want to compete and operate globally as new markets emerge on the back of rising incomes or better technology. Though being a whale pays some immediate dividends in terms of revenue, market share and efficiency, it is fundamentally a long-term strategy, increasing resilience to risk and competition while targeting underlying trends in consumption, demographics and technology.

 

About the Authors:

Jonathan Wood leads Control Risks’ Global Issues practice, providing analysis and consultancy on global political, operational, security and integrity risks to multinational organisations in the oil and gas, mining, insurance, financial services, retail, construction and technology sectors. Jonathan’s subject matter expertise encompasses geopolitics, global governance, economic development and transnational security issues.

He leads Control Risks’ analysis of transnational terrorism, single-issue direct action, and geopolitics. Prior to joining Control Risks, he evaluated multilateral development bank procurement policies for a consultancy based outside of Washington, DC, and worked on defence sector integrity issues at Transparency International in London. Jonathan also previously worked as an analyst and organiser for leading US food security organisations based in Washington, DC, and Boston (United States). Jonathan graduated magna cum laude with a BA in History and Literature from Harvard University and completed an MSc with distinction in Global Politics from the London School of Economics (LSE), focusing on globalisation, international relations, and global energy security.

 

Charles Hecker is responsible for shaping Control Risks’ thought leadership on geopolitics, global security, macroeconomics and political risk methodology issues, and their impact on international business. Charles speaks at industry, policy and academic conferences and represents the company’s work to the international media. Charles also oversees Control Risks’ global political risk output and has lead responsibility for the company’s annual flagship publication, RiskMap. In this capacity, he works with our regional heads of analysis. Charles also contributes to the content and production of Control Risks’ research services, including our subscription offerings and white papers. In addition, he designs and delivers complex, multi-jurisdiction political and security risk consultancy.

Prior to assuming his current role, Charles was Director, Europe & Africa, Corporate Investigations. In this capacity, Charles supervised all of Control Risks’ investigations activities across one of the company’s largest regions. These included due diligence, business intelligence, problem-solving and anti-fraud/anti-corruption services.

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