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Geostrategic risk: be prepared

07 Jun 2016 - 17:37
Source: Carolyn Kaster/Associated Press

More and more company executives are worried about geopolitical, political and macroeconomic instability in the world.  A recent McKinsey survey shows that eighty-four percent of the 1,316 respondents expect substantial impact from geopolitical instability on global business in the next five years. Geopolitical instability is even considered to have a greater impact than cybersecurity risks and big data management techniques. Most respondents expect these so-called geostrategic risks to affect their companies and have a negative impact on profits.

However, it is not only companies that are vulnerable to the impact and consequences of these risks on their economic activities and interests. The same goes for national economies, as was indicated by a Clingendael study in 2015, which highlighted the impact of these kinds of risks for the Dutch economy. With the high global interconnectedness of the Dutch economy, it is clear that geopolitical developments will have a significant effect. The study identified three developments that make the Dutch economy vulnerable.

The first development is the potential increasing usage of sanctions, such as by Russia and China. These sanctions are mostly directed against the whole country, but they can also be directed at specific companies (smart sanctions). One example is the problematic securing of new contracts that some Dutch companies experienced in Saudi Arabia after a Dutch political party started issuing anti-Islamic stickers with the Saudi national colors. In addition, the Netherlands can be indirectly affected by sanctions between other countries, so any prospective sanctions by the United States towards Chinese targets (and vice versa) could have serious consequences for Dutch business interests.

The second form of Dutch economic vulnerability concerns the potentially harmful effects of the strategic economic policies of other countries. An example here is the Chinese One Belt, One Road initiative. This ambitious long-term programme for infrastructural projects in Europe, Asia and Africa can strengthen China’s ability to influence the Netherlands’ role as a logistical hub.

And third, there are three unstable regions that can affect the Dutch economy: East Asia; the Middle East and North Africa; and Eastern Europe. The potential threats of these regions are many and obvious.

The Dutch government is aware of the above-mentioned risks and is mitigating them by increasing the resilience of the Dutch economy. Potential strategies to implement include risk diversification, risk reduction and economic countermeasures. Coming back to the McKinsey survey, it is rather amazing that - despite the growing awareness of geostrategic risks - most executives indicated that their organisations have not done much to tackle these risks. One-third of the respondents indicated that understanding geostrategic risks is well integrated into their company’s overall strategy, while only 13 percent say that their company has taken active steps to address them.

What does US President Barack Obama’s recent visit to Vietnam or the progressive diversification of the Saudi Arabian economy mean for companies? What could the consequences be of a potential ‘Arab Spring’ in Kazakhstan and Uzbekistan? Forecasting the future and producing thick reports will prove inadequate, yet simple techniques such as trend analysis and relevant scenarios can support companies in understanding and preparing themselves. The advice for companies is to embed the capabilities for geostrategic analysis into regular decision-making and risk-management processes, just as governments already do.

Contact
For more information on Clingendael Geostrategic Risk, please contact: Marcel Baartman +31(0)70 3746 658  or Frans-Paul van der Putten +31(0)70 3746 607 .