How do political risks affect business?

How world politics becomes a risk for companies

Military strikes in the Middle East, trade war between the USA and China, unchecked climate change: politics is causing uncertainty around the world and harbors many risks for companies. How do you deal with it?

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Globalization is a double-edged sword. It brings economic benefits and the diverse relationships can help keep political conflicts in check. At the same time, thanks to networking, dangers can also quickly have an impact worldwide. Verbal and other attacks, such as those by US President Donald Trump, Turkish President Recep Tayyip Erdoğan or Brazil’s President Jair Bolsonaro act like tinder. Regardless of whether it is about the conflicts between the USA and China and Iran, the Turkish invasion of northern Syria, Brexit or climate change: the business activities of many companies will be affected.

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US election campaign with geopolitical implications

Against this background, it is not surprising that political aspects play a decisive role in the most important global risks for companies in 2020, which the risk advisory firm Control Risk has identified:

Top 5 global corporate risks 2020

1. Geopolitics overshadowed by the US election campaign

The way in which allies and opponents will deal with the massively ideologically charged election will have a major impact on the geopolitical risk landscape for companies in 2020.

2. An increasingly activist society

Worldwide social pressure and coordinated activism lead, for example. in terms of environmental protection, human rights, inequality and data protection to ever greater demands on companies.

3. Cyber ​​warfare on an ever larger scale

In conflict areas of strategic importance, where classic military measures are out of the question, these will increasingly be replaced by cyber attacks. While leading companies achieve reliable resilience, national infrastructures worldwide do not.

4. Economic worries meet political vulnerability

Even the most optimistic forecasts assume that global economic growth will be very low in 2020. Should it collapse, it cannot be expected that an increasingly politically fragmented world will be able to provide a coordinated political response.

5. Political leaders without strategic visions

Some of the most important countries in the world are run by politicians who do not look beyond the next crisis. 2020 promises to be a year in which no one de-escalates; volatile and nervous actors determine the events. Companies need a strategy for a world that is heavily influenced by tactical small and small.

Source: Control Risk

Keep an eye on the world's hot spots

Harald Nikutta, Senior Partner and Managing Director of Control Risks in Germany, draws the conclusion from the risk analysis: "A precise determination of the threats to business activity, including the potential political, economic and security risks, and a good understanding of where in the If there are weak points in a company, 2020 will be the decisive factor in success or failure in an unpredictable year. "

The Risk Map 2020 from Control Risk provides a rough guide to the extent of security and political risks around the globe. The Scandinavian countries as well as Switzerland and mini states such as Luxembourg perform best here. As expected, the consultants rate the current crisis areas as extremely risky. Meanwhile, for China and Argentina, for example, the general security risk is classified as low, but the political risk is classified as medium or high.

Sword of Damocles economic sanctions

Political risks include, on the one hand, violence in the form of war, revolution and terror, as Carsten Giersch explains in his article on "political risk analysis". On the other hand, foreign activities also include "nationalization and expropriation of foreign companies by the government of the host country, breaches of contract by public clients and disregard of state payment obligations as well as restrictions on currency exchange and profit transfer". (Page 584) However, most states do not want to scare off foreign investors with such regulatory measures. "Interventions in entrepreneurial property and control rights for certain political motives usually take place in a more subtle way [...].", Writes the Springer author on page 585. Globalization, especially in the direction of the BRIC countries, has led to also broadened the understanding of political risks.

Political risk analysis pays great attention to every form of regulatory and bureaucratic action with which a state could adversely affect the business activities of companies through legal measures or other activities. One example is the imposition of economic sanctions. The USA, in particular, as an important trading partner, is often flexing its muscles, for example recently against the companies involved in the construction of the German-Russian Nord Stream 2 gas pipeline. As a result, the Swiss company Allseas withdrew from the project at the end of 2019.

Climate change global long-term risk number one

Furthermore, legal requirements for climate protection are becoming increasingly important. After all, the World Economic Forum (WEF) names climate change as an overshadowing global risk in its 2020 World Risk Report. The five largest long-term risks of the current analysis are therefore all due to the climate catastrophe:

  • Extreme weather
  • Failure of politics and business to contain or adapt to climate change
  • Species extinction and collapse of ecosystems with irreversible consequences
  • Natural disasters
  • Environmental crime and man-made environmental damage

In addition, there are short-term global risks such as economic conflicts and political polarization. But now it is important to work together to promote sustainable economic growth. Otherwise, the climate risks cannot be mastered, warn the authors of the WEF report.

Kai Andrejewski from the management consultancy KPMG points out in the podcast "Klardenker on air" that the otherwise relatively low-risk Germany is also increasingly affected: "The extreme weather events affect the supply chains. [...] We have to assess the actual effects of climate change Example in Germany: Last year we had low water in the Rhine. That has had a very strong impact on the profit and loss accounts of one or the other company. "