After the Storm: Long term risks in the aftermath of Covid-19

In July Intelligent Risk, a publication of the Professional Risk Managers’ International Association (PRMIA) published my article on long term risk to the world economy following Covid-19.

In March 2020, millions of office workers around the globe packed up their desks and almost overnight became remote workers. They left behind daily train journeys, coffees with colleagues and crowded meetings for a new world of virtual meetings, makeshift home offices, and juggled teaching with emails.

Now many firms are struggling to survive an unavoidable global recession. However, they also need to react now to the longer-term risks facing the economy.

  • Covid-19 will act like a fast-forward button, accelerating long terms trends such a shift to home working, rising economic nationalism and corporate sustainability.
  • Long-term structural shifts in the economy will permanently reduce demand for many sectors. New working and social patterns will threaten sectors such as airlines, entertainment, restaurants, and international tourism.
  • Shocks like Covid-19 create recession, mass unemployment and most likely major political aftershocks. However, shocks also trigger innovation, ingenuity, and new opportunities.

Globalization Under Fire

Globalization was already under threat from nationalism and trade wars like the US-China disputes. When Covid-19 first appeared in Wuhan at end of 2019, the main concern in the West was around disruption to supply chains that originated in China. Companies dependent on supplies from China faced and experienced shortages of pharmaceuticals, PPE, and many other goods.

These problems may ease soon. However, long-term firms may seek to make their supply chains more resilient. This could mean more “inshoring”, shortening and simplifying these often complex, opaque chains. Economic nationalism or economic independence may also see barriers raised to prevent shortages of critical medical supplies or the supply of goods deemed strategic or valuable such as rare minerals, oil, and food.

A new world means new opportunities and markets. Tech companies that provide work from home services like video chat should have a bright future, as should domestic tourism in a world scared to fly and online delivery services. Zoom a digital communications firm specialising in video meetings had 10 million daily meeting participants in December 2019. In April 2020, just four months later, Zoom counted more than 300 million daily meeting participants.

Less obvious niches like drive in cinemas could also enjoy a boom. The collapse and retreat of many firms due to Covid-19 will result in a wave of consolidation and restructuring. The successful firms of the future will be those that prove resilient now.

Covid-19 and Climate Change

The prospect of economies in ruins, unprecedented recession, and mass unemployment will prompt many to assume that action on climate change is no longer a priority. However, a Covid-19 recession is a stark reminder of how nature can deliver a deadly shock. Covid-19 is a dress rehearsal of how climate risks may soon affect society.

Disruption is a harbinger of change. Deep recession is the time and opportunity to remodel the economy on sustainable lines. This means building back better, sustainably. Kristalina Georgieva Managing Director of the IMF commented: “If this recovery is to be sustainable – if our world is to become more resilient – we must do everything in our power to promote a green recovery”.

Governments and Firms can build on policies already in place:

  • Invest in green resilient infrastructure that can cope with a changing planet. The world will experience more heat waves, sea level rise and extreme weather as climate change becomes more intense.
  • Mandate measures like the Task force for Climate Related Financial Disclosures (TCFD) reporting which identifies climate risks in Bank’s portfolios. Canada launched the Large Employer Emergency Financing Facility (LEEFF) designed to support employment during a Covid recession. Any firms receiving funding with have to publish climate related disclosures (TCFD).
  • Use renewable energy sources to help mitigate climate change.
  • Encourage green infrastructure: cycle paths, electric vehicle charge points, and a faster broadband to make it easier to work from home
  • New stimulus packages combined with a restructured economy could be the impetus for a more sustainable economy. The world will look closely for green credentials in China’s forthcoming economic recovery package. The EU is pushing ahead with its EU Green New Deal in conjunction with its Covid-19 emergency response package.

The Long-Term Risks for a “Brown” Recovery

A “brown” recovery is one based upon traditional energy sources such as oil and coal. These energy sources feed resource intensive sectors such as cement and heavy industry these activities magnify climate risks through greenhouse gas emissions. A world of more extreme weather events, deadly heatwaves and sea level rise will disrupt economies in way that dwarves the current crisis.

Companies that are not reducing emissions may be penalised by governments or consumers. France has made reduction in emissions and domestic flights a condition of its bailout of Air France. Consumers could increasingly shun firms that are not acting responsibly on reducing emissions or taking sustainability seriously.

How to Manage Geopolitical Risk

Introduction

In this guide I outline the major global and geopolitical risks faced by international organisations and how they can be successfully managed.

One of the world’s leading insurance firms Willis Tower Watson labelled geopolitical risk the number one risk corporate risk faced by multi-national companies. From war to climate change to failures of national governance, threats to organisations worldwide are diverse and always evolving.

After identifying the risks I provide ideas about how they can be managed and how to develop a resilient enterprise which can handle a rapidly changing world. Lastly I look at how best to spot geopolitical shifts and global trends and turn them to your advantage.

The Merchant of Prato

Francesco di Marco Datini was a fourteen century Italian Merchant who from humble beginnings created a wealthy pan European trading empire over the course of 50 years.

Datini dealt in anything that would make money, from armour and weapons, saffron and jewellery, money lending to art dealing. Key to his success was a network of informants and agents which allowed him to stay abreast of and take advantage of events across a tumultuous era in Europe. The fourteen century had more than its fair share of warfare, plague and religious schism.

Datini’s shrewd management, his access information and above all his ability to adapt to a changing world were key to his success. This is what we now call managing geopolitical risk.

War between France and England was an opportunity to sell weapons and armour. While peace and royal weddings were a chance to sell luxury goods like spices and fine cloth. Lending money to monarchs and the nobility were generally avoided thanks their unreliability in repaying loans.

Natural disasters like storms and made hazards like brigands were sometimes unavoidable, but careful diversification ensured they were not calamitous.

Datini understood managing geopolitical risk was key to his European trading empire. While times have changed since the fourteenth century, geopolitical risk remains a reality for organisations which can catch the unprepared unaware time and time again.

What is Geopolitical Risk?

Geopolitical Risk is messy, hard to define and even more difficult to predict. The Covid-19 pandemic is a great example. Narrowly defined the virus poses a healthcare risk. However, differing government responses and lack of international cooperation and the economic, social and political fallout seen across the world is a geopolitical risk.

Geopolitical risk is the probability of a political action negatively or positively affecting a company. Global Risks mostly overlap with geopolitical risks and include topics such the shadow economy, environmental risks and cyber risks.

Geopolitical risks can be identified but acting on them can be much harder. Even more difficult is proactively managing risks and turning them into opportunities.

Many companies view geopolitical risk as something that happens to them. Often it can feel that geopolitical risks are out of our hands, and we or the organisations we work for are a passive recipients of global events.

But companies can monitor, engage and even shape geopolitical risks and turn them to their advantage.  But to do this they need to prepare, monitor and understand risks, but above all be ready to act when they arrive.

Conflict

Interstate war or internal conflict

Since the dawn of civilisation, countries and empires have gone to war. It is no surprise to us that war and conflict cause misery, death and can make normal life very difficult. Serious widespread conflict or war may seem remote to most people in developed nations. But many parts of particularly the developing world continue to suffer from conflict.

An arc of conflict cuts through through Africa, the Middle East and Asia. Any company considering investing in emerging economies in these regions have to weigh up the likelihood of conflict in their target country.

Many wars rage on for years but are relatively underreported in the international press. For example, the Yemeni conflict which has drawn in Saudi Arabia the Gulf States as well as western states and Iran. Others like Syria remained more in the public eye, perhaps because of the migrant crisis that affected Europe.

Predicting War

While it is difficult to predict wars and conflicts. It is possible to carefully monitor a country’s political climate, relations with its neighbours and crucially its history of violence. This analysis can at least can give an indication of the likelihood of future war and conflict.

War can break out over resources, nationalist sentiment as well as perceived ethnic or ideological differences. Many modern wars are at first glance civil wars. Syria, Sudan and Somalia are all recent examples. But civil conflicts always end up dragging in neighbouring states. Syria has drawn in Turkey, the USA, Russia and France and others into the country. It is always worth taking a regional view of how a conflict can spread.  

When a war starts a firm’s assets come under threat. In some cases firms can easily pull out of a country. A consultancy for example. Others focused on natural resources or infrastructure cannot easily pull out their mines, roads, tunnels and physical infrastructure.

How staff threatened by war are cared for by the firm is also crucial. Very often staff can be moved out of the country fairly easily before the conflict spreads. However locally hired staff may not want to move from their home, nor is it always possible due to immigration rules.

Cyber Conflict

Conventional wars across land, sea and air are familiar sights across the globe. But the last decade has seen the new theatre of cyber conflict emerge. Cyber conflict has had a low profile but the world is slowly waking up to the reality of cyberwarfare.

The raging global debates over allowing Chinese firm Huawei to develop critical infrastructure in many western states has brought cyber concerns to the top of the security agenda.

The cost of conventional war is high in terms of human life, but also diplomatic and economic fallout.

Cyberwar as an Alternative

Cyberwar offers a powerful alternative. By infiltrating government agencies or critical infrastructure through phishing attacks, systems and networks can be compromised. This can demoralise the enemy and cripple critical infrastructure such as power or water supplies.

Cyber attacks can also be used to steal valuable information. The theft of the US Democratic party emails in 2016 helped changed the result of the US election.

Best of all cyber attacks can be carried out in secret or through proxies. This gives governments valuable cover and plausible deniability. Attacks over the internet are far less obvious than an old fashioned invasion or bombing raid.

Geopolitics and Cyberwar

For example a shadow cyber war between Iran and Israel has been ongoing involving disruption to water supplies and alleged attacks on nuclear facilities.

Companies are vulnerable to cyberattacks by criminals but also governments if they hold important strategic assets or information. Defence and military contractors, national infrastructure (powerlines, ports, systemic banks, rail & road), shipping and firms in the medical sectors are all potential targets.

Recently Australia has recently been the subject of a wide number of cyber attacks which were blamed on China. Australian government agencies were hacked in a major attack which prompted a rare public warning by the head of the Australian Intelligence agency.

The Attack on Maersk

The Danish Shipping firm Maersk was hit by a ransomware attack in 2017. Experts believe the attack originated from the North Korean government was in fact deployed by accident. The attack shut down all the Maersk IT systems. It took two week for IT systems to be restored and cost the company over 300 million Euros to fix and repair the damage.

This form of warfare is on the rise and companies as well as governments will be in the crosshairs. For some companies and organisations the threats will be obvious. Other companies should consider their vulnerability to cyber attacks with a geopolitical motive by thinking about:

  • Are they doing business in countries with a history of using cyber attacks to gain commercial & political advantage such as China
  • Do they partner with sensitive government agencies or ministries that might make them a proxy target or hold valuable information.
  • Are staff easily able to bypass company security and use personal accounts and devices to store information.

Terrorism

Militant groups continue to plot and carry out violent acts across the world impacting both security forces and civilians. Terrorism is widely feared in Western countries for good reason. But in fact it is developing countries such as Iraq and Afghanistan that suffer the most at the hands of such groups.

Widespread terrorism drives instability in countries, terrifying the people and driving away business. Business people are unwilling to travel to danger zones and require additional protection to operate where terrorism is a risk.

Terror groups are closely linked to poor governance as they undermine legitimate governments through violence and in some cases morph in states of their own. The most notable example of this was the Islamic State in Iraq. Terror groups are also linked to crime as very often they engage in drug smuggling, money laundering or wildlife poaching as way to fund their activities.

The Shadow Economy

Financial crime, drug smuggling, people trafficking, and many other activities earn criminals billions a year globally. One estimate puts the shadow economy at US$870 billion in revenues. But these costs companies, governments and society untold damage. Many of these activities cross borders and can be considered global risks.

Networks like Mexican drug cartels can undermine legitimate governments and provoke something close to a state of civil war in that country. In 2018, 33,341 murders were recorded in Mexico. Other networks make alliances with political networks which results in corruption, the undermining of institutions and markets. In some countries such as Afghanistan the distinction between government and criminal enterprise is almost non-existent. 

Criminals can infiltrate supply chains through illegally produced timber, illicitly mined minerals such as blood diamonds, even using slave labour to produce goods. This type of activity feeds corruption and crime but when otherwise legitimate companies are involved it can damage hard won credibility.

Supply chains can be long and opaque with many companies unaware or turning a blind eye to potential criminality. Poor publicity around supply chains can lead to long lasting reputational damage to those involved.

Money laundering is perhaps the biggest element of the shadow economy. In order to legitimatise illicit earnings, criminals need to clean their money. They do this by laundering their gains through legitimate businesses and banks. Some estimates put place illegal earning at 5 percent of the world economy.

New Political Actors

Individuals, NGOs, activist groups thanks to social media and modern campaign techniques can make major political waves. Groups such as Black Lives Matter or Extinction Rebellion have made headlines throughout the globe. These groups have been spurred on by widespread racism and the threat of climate change and their protests have inspired local copycat groups across the world.

The Blackfish documentary exposed cruelty to Orcas at Seaworld Florida. The documentary caught the attention of the public and activists, quickly becoming a viral hit. Eventually it resulted in a major downturn in visitors at the iconic US park. The film cost just US$ 76,000 to make, but made a major dent in Seaworld’s profits with its stock price falling 60% the year it was released.

A small group or individual with the right cause and a savvy media presence can change perceptions and ruin the reputation of a company or institution (like US police forces) and inspire change in companies (witness the promotion of Black Life Matters messages across corporate social media in June 2020).

Environmental Risks

Climate Risk the impact of Climate change

Human activity has raised the concentration of carbon dioxide to over 400 parts per million. It is no coincidence that nine of the ten hottest years on record have occurred since 2005. The world is heating fast and this brings extreme risk.

Given the rate that Co2 levels are continuing to rise the world is on track to experience a 2 C rise in the next few decades. The world faces drought, extreme weather, water shortages and sea level rise on scale never experienced before. The pace of change will leave traditional infrastructure unable to cope with rising seas and higher temperatures.

Crop yields will decline and vast areas of farmland will dry out and become unusable. Extreme weather events will multiply in number causing businesses billions in damages and ever-increasing insurance costs. At the same time rising sea levels will push seaside dwellers inland putting many of the world’s major cities such as New York and Shanghai at risk.

Climate change is a threat multiplier. Existing risks such as extreme weather, drought and heatwaves will increase in frequency and severity. In the long term and given its global nature climate change represents the biggest threat to humankind.

Climate change will create unprecedented disruption to life in the next decades ahead which can only be partly offset by adaptation measures. All organisations should be considering the risks that climate change present.

Environmental Risks

Agriculture and ultimately all human activity is dependent on a functioning natural world, insects to pollinate crops, clean water to drink, fertile soil to grow crops as well as countless other natural commodities.

Deforestation, conflict over resources and water and the degradation of the world’s oceans and rivers all pose a threat to our way of life. The world’s oceans are being plundered by fishing legal and illegal, threatened by pollution and acidification and oxygen depletion.

Huge islands of rubbish have formed in the Pacific Ocean. The world’s forests, jungles and wilderness are also under assault by loggers and developers as humans expand farms and settlements. Deforestation threatens a key carbon sink and habitat to much of the world’s animal and plant life.

Environmentalists have been warning the world about these risks for many years and now the threats are materialising.

The Blue Economy

The “blue economy” (economic value of seas and oceans) has been valued at US$ 24 trillion but in reality is incalculable. Protecting oceans just like climate change depends on collective action among nations.

The open nature of the world’s oceans has meant they have been an easy target for exploitation by fishing fleets

Companies that are that damage the environment will see their reputation under threat from activists and eventually the public who increasingly shun goods they believe unethical.  

Biodiversity Loss

Biodiversity loss is of increasing concern and not just among environmentalists. The 6th mass extinction is accelerating and threats to wipe out not just large charismatic animals like tigers and whales but also insects, plant life and birds.

Climate change, habitat loss, use of pesticides, hunting and poaching have led to spectacular declines in wildlife. Mass die outs of animals can set off catastrophic cascades where entire ecosystems are destroyed. This loss also threatens humans as many indigenous people rely on natural habitats as homes. But those living in the rest of the world will eventually pay for destroying nature.

Farming and is ultimately dependent on healthy ecosystems, clean water and pollinating insects. Depleting farm yields, loss of pollinating insects and loss of natural carbon sinks like forests along with climate change will accelerate a food crisis where previously strong agricultural yields disappear.

A world of declining food yields will create political and economic crisis as more people are pushed into food insecurity and famine. China for example has destroyed much fertile land thanks to pollution and using it for housing and industry. But thanks to its relative wealth is able to import more food to make up the shortfall.

However in the future countries may find it harder to spend their way of food shortages if there are widespread global crop failures and rapidly increasing prices.

Many will wonder if biodiversity loss will really impact on businesses or whether they will care. But there are moves underway to create a global framework for protecting biodiversity in the same way there has been for global emissions and climate risk.

Resource Conflict

Wars may be driven by water conflicts such as the Ethiopia – Egypt dispute. The Grand Renaissance Dam in Ethiopia threatens to cut the water flow of the river Nile which would devastate Egyptian agriculture, industry and society.

No country is more dependent on a river than the Egypt is on the Nile. Hopefully the dispute can be settled peacefully, but given what is at stake war could become a reality.

Egypt is the Nile, and the Nile is Egypt

Herodotus

Oil and gas deposits, diamond and other minerals can also attract war and violence. Conflicts driven by resources include:

  • Conflict in the Democratic Republic of Congo driven by coltan and other minerals.
  • The Gulf Wars in Iraq were driven in part by the desire to control or stabilize a region valued for its oil deposits and strategic significance.
  • Rakine Province in Myanmar: armed militias, warlords and individuals battle for control of the jade rich, but lawless province of the South East Asian country.
  • Baloch Separatists in Pakistan who claim the central government and now China are benefiting from the region’s resources rather than the locals.
  • The Libyan civil war which pits various factions (backed by outside powers such as Turkey and Egypt) the prize being an oil rich country bordering Europe.

Governance Risks

In 1914, little over 100 years ago the world was dominated by multi-ethnic European centred empires. The United Kingdom, France, Germany, Austria-Hungary and Russia ruled massive regional and global empires. The decades before 1914 had seen many colonial wars but overall relative geopolitical stability.

This was all punctured by the calamitous events of August of 1914 where events in Europe spun out of control into a global war. Although the causes of the war have been explained in retrospect by historians, at the time it was a major shock.

Now after many years of US dominance there is a feeling the world is moving into a new unpredictable phase – what author Ian Bremmer called G-Zero. A geopolitical landscape where every country are working towards their own interests rather than trying to work together. As a result global public goods (such as security, global warming mitigation & knowledge production) become harder to provide.

A number of trends are pushing global trade wars and economic dislocation:

  • Surging global migration
  • Fraying international alliances
  • Growing competition between state
  • The rise of nationalism and populist governments

Trends such as the decline of fossil fuels and the rise of renewable technology could shape geopolitics in new unexpected ways. Could states like Saudi Arabia decline along with oil. But new resource powers based on lithium (a key ingredient in electric car batteries) such as Bolivia rise?

Failure of National Governance

Government regulation, interference, and expropriation pose a major threat to companies, usually in developing countries. While many governments taking a long term view and are keen to provide a stable investment framework.

Others seek to extract value from unwary investors. This can come in the form of nationalisation or favourable treatment to local or well-connected firms. Some governments prefer to heavily tax firms which can make their operations unviable.

Uncertainty in legislation or tax regimes leads to friction between companies and governments. The rise of global nationalism and trade barriers threaten to make governments even more hostile to foreign companies. Outsiders, particularly those involved in the extraction of natural resources are often considered an easy target.

For investors understanding the target country and its government and political reality is key. Without this overseas expansions easily fall apart. Western tech giants Google, Facebook and Twitter have all been blocked in China because their business model clashes with the Chinese government’s plans to develop its own tech champions. Tech companies have a great deal of influence over the flow of information, something the Chinese government is keen to control for itself.

Global Migration

The movement of people is often linked to economic dislocation, climate and environmental issues. Mass migration of people within or across borders can lead to geopolitical risks as governments squabble over the impacts of migration. Global migration is predicted to rise as the impact of climate change increases.

Migration from Syria to Europe was triggered by the long lasting conflict afflicting the country. The prospect of further conflict in Africa and the Middle East, along with widespread youth unemployment and climate change raise the prospect that millions of potential migrants will try and enter Europe.

The political response in Europe to Syrian refugees was largely negative with many European leaders making political capital out of demonising migration. In other words gaining popularity by promising to keep out immigrants.

Religious and Ethnic Persecution

Other migrants like the Royingha people of Myanmar many of which have been forced out of their homes into Bangladesh are subject to ethnic and/or religious persecution.

Global migration may be slow thanks to the Covid-19 pandemic, countries closing borders and implementing stricter immigration regimes. In the longer term this will not deter migrants trying to move nor the anti-immigration sentiment pushing governments to reduce immigration.

Migration is primarily an opportunity for companies. They can pick staff from different countries, widening their talent pool. Migrants often fill jobs which locals cannot or will not do. This can be highly skilled tech work or more routine agricultural work.

The risk around migration is that is sometimes leads to a political backlash which nationalist politicians can take advantage of to take or keep power. In turn extremist politicians create their own uncertainty which can be damaging for the business sector.

Technological Competition

The world’s powers and corporations are in a technological arms race to develop the most advanced artificial intelligence, big data applications, the internet of things and cyber capabilities. The advantages in terms of commerce, espionage and military applications are huge.

Countries have always used new technology to gain advantages over their competitors, from using gunpowder weapons in medieval battles, to the 20th Century space race. Now the technologies are different but the competition between states just as real. These areas in tech are the battlegrounds of the present and future.

Weaponization of social media, states use social media to promote propaganda, spread misinformation with the aim of shifting opinion or even winning elections.

Cyber attacks can be used to harvest data (such as the Marriott Hotel data breach) such as the movements of diplomats, military and politicians. Nation states that retain the best techniques for cyber warfare gain a major advantage over rivals.

Artificial Intelligence has become a hot topic, although its yet to realise its potential, becoming a leader in this area will create new opportunities in military and commercial applications. Vladimir Putin said in 2017 the nation that leads in AI ‘will be the ruler of the world”

First mover advantage in technology gives country’s a competitive advantage. The race to build Silicon Valleys full of tech firms has increased as the new products and services created are seen as vital to a modern economy.

The success of major tech firms and their control over the flow of information has gained them enemies. Tech firms monopoly power, dubious data practices and willingness to overlook widespread misinformation on their sites could lead to many protracted legal and political battles.

Global Diplomatic Architecture

The alliances, institutions and governance that have dominated the world in the last 80 years are now under strain. NATO, WHO, IMF have all been heavily criticised by members and outsiders alike in recent years. The roles and usefulness of these institutions have been questioned.

Many have questioned NATO’s role given it was an alliance designed to counter the threat of Communism in Eastern Europe. A threat which is long gone. Meanwhile the rise of China and its financial firepower means it can form its own financial architecture.

New Chinese influenced, some say dominated institutions like the Asian Infrastructure Investment Bank (AIIB) have been set up to emulate or rival traditional relations. At the same time poor relations between the US and European countries have undermined NATO.

Multipolarity – the growing divisions between the world’s powers and the growing strength of rising powers is a major risk. Foremost of these rising powers is China and its flagship foreign policy project the Belt and Road Initiative. The Belt and Road initiative is a label given to China’s outbound investment and trade. It has become a highly visible form of commercial diplomacy with countries queuing up to be a Belt and Road partner.

These shifts in alliance and power projection create uncertainty and change which create risks – such as a trade war between China and the US. It can also be an opportunity – for example Pakistan has seen an influx of Chinese money which has helped boost its economy. Although some say that has come at the price of increased dependence on China.

Nationalism, Populism and Social Cohesion

Fraying social Cohesion driven by narrow political groups, unpopularity with political elites, hate and misinformation spread by social and traditional media along with inequality, unemployment and generational divides has all made the world a more angry, dangerous and harder to govern.

Nationalism and populism are on the rise across the world. The US, India, Hungary, Brazil and the Philippines have all seen the nationalistic leaders rise to power. Populist leaders have tapped into the unpopularity of perceived elites and fear of unemployment, economic uncertainity and migration.

This trend has made it easier for authoritarian states like Russia and China to operate feeling less need to pay lip service to liberal values. The spectre of another recession may make accelerate this trend.

Nationalist leaders also have a tendency towards corruption, nepotism and incompetency – which eventually catches up with them. Nationalist states are also more prone to conflict with its own citizens and other countries. All this helps add to the current feeling of uncertainty, change and pessimism in global politics.

Trade Wars and Economic Nationalism

Many observers see globalisation going in reverse which will disrupt supply chains, create currency disputes and made foreign investment more difficult. The so called weaponization of finance has seen embargos, sanctions and tariffs used in place of warfare.

The most significant examples have been the sanctions on Iran imposed by the USA and others which have put severe pressure on the Iranian economy and made it hard for banks to do business with Iran or face fines enforced by US authorities.

Russia faced similar sanctions following its annexation of Crimea. These sanctions driven by the EU did not have the same impact. Russian gas and oil remain indispensable to Europe. Russia’s economy managed to escape the worst predictions of doom, but undoubtedly suffered. Sanctions are likely to remain a policy of choice for mainly western countries who can punish countries they deemed to have.

Russia and others have criticised sanctions viewing them as hypocritical – pointing out the the US and UK faced none for their invasion of Iraq.

However for a company facing sanctions it is a serious matter, major fines, loss of revenue and markets are a reality for the likes of Societe Generale. The French Bank were hit by US imposed fines (worth US$1.3 billion for dealing with Iranian and Cuban companies.

Supply Chain Risk

Supply chain risk has rapidly increased in recent years. A world economy reliant on international trade routes is one vulnerable to disruption by trade disputes, natural disasters, or reputational issues around the source of manufactured goods or minerals.

Covid-19 has compounded these fears. Many companies are reconsidering supply chains fearful of being left short by factories in China closing or at the mercy of US-China trade wars. Some firms are looking to countries like Vietnam to provide goods, while others may decide to bring manufacturing closer to home

Covid-19 and the Great Reset

Covid-19 is a global health crisis, but the economic and social changes that are still emerging and could create long term risks. While much good can come of a reset, the risks are also apparent.

Economic dislocation and depression, unemployment, rising government debt and in some parts of the world widespread disaffection and anger towards government. To add to that overstrained healthcare systems, disrupted supply chains, corporate and government debt levels and there is a great cause for concern.

For multinationals the geopolitical risks can be clear, but even SMEs and small firms the second order effects can be devastating. For examples see the Covid pandemic or the effect of US-China trade wars on the economies of agricultural states in the US.

How Can My Firm Manage Geopolitical Risk?

Consider the big picture – Scan, Focus and the Act

The first step is understanding the geopolitical risk landscape, and how it applies to your firm.

  • Scanning the environment to monitor, identify and assess geopolitical risk.
  • What appetite does for Geopolitical Risk does my firm have, are we willing to take big risks if there is an upside.
  • What are the firm’s most valuable assets and which are exposed to risk
  • Some firms may prefer to use a outside expertise, but using existing internal knowledge is also invaluable.
  • Remove institutional blindspots – this is where outside expertise can help.
  • Next is to map the company’s profile to the geopolitical risks. This allows focus – which risks are likely to be most important.
  • Does the firm have the capability to manage geopolitical risk.
  • How can it become proactive – managing political stakeholders for example?
  • Does the firm have the right skills/staff to deal with the risk. Can staff be trained or is it preferable to hire outside expertise.

Once Geopolitical Risks have been framed what specific actions can a firm take to develop resilience:

Political Analysis of your firm’s footprint

By analysing and monitoring the countries and regions your firm operate in. Emerging economies which are characterised by unstable politics and seesaw like economic conditions. Analysing, monitoring the country is an obvious action. But more difficult is linking change too how it might affect your firm. If your firm is in a sensitive industry it will be more exposed to political interference.

For example if a new government hostile to foreign companies comes into power in a country you are doing business this should be considered when making investments. Analysis can be done from afar, remotely, but the best information often comes from the ground. Staff and contacts in the country can often give you the best intelligence. This local knowledge combined with a macro view should provide a comprehensive analysis of the target country.

Creating a Resilient Firm

Central to developing a resilient firm is identifying critical functions and activities and how they could be recovered or protected during a crisis. Engaging a business continuity or resilience expert is usually a must, especially for a larger firm. Creating and exercising (see below) crisis plans through simulations or exercises will test their effectiveness. Exercises also help ensure effective communication channels between employees.

Many firms have seen their resilience tested by recent events such as the Covid pandemic. Many companies will not recover from the crisis, most will survive if weakened, a minority will come out stronger. Partly due to luck or government bailouts.

A select few will come back strong thanks to their resilience ability to adapt to new circumstances. Unsurprisingly tech firms have profited from the crisis as people have flocked to social media and ordered more online goods from the likes of Amazon.

Disaster Recovery

Accept that you cannot foresee every risk, but a resilient firm should be able to recover from a major traumatic incidents be it a fire, flood or IT failure. Some of these risks are purely operational in nature (faulty wires leading to a fire). Others disaster such as bombs, wars and some cyber-attacks have a geopolitical element.

Developing a comprehensive disaster recovery plan that will allow for the firm to continue following a disaster is critical. The major features of a disaster recovery plan would be:

  1. Establishing an IT plan disaster recovery plan (such as data centre separate from the firm’s HQ or main centre).
  2. Creating disaster recovery plans the entire organisation detailing actions and procedures following an incident. Crucially these plans need to be tested using an exercise (see below).
  3. Developing an alternative communication system if there is a widespread IT failure and normal communication routes are not available.
  4. Developing a business impact analysis (BIA). A business impact analysis is a major piece of work which identified each critical activity an organisation undertakes and how important it is following a major incident. A well executed BIA can help an organisation effectively recover from a disaster.

For example a shoe manufacturer may plan that following a major incident shutting down part of its manufacturing that continuing to make its biggest selling shoes is critical. But niche shoes and those lines which are soon to be discontinued could be delayed until fully capacity can be restored.

Red teaming – Table Top Exercises – War Gaming – Simulations

There are many different variants, but a simulation or exercise should confront participants in a realistic scenario. These exercises should usually be based on the disaster recovery plans created. Although exercises can be based on any scenario, not just disasters.

The exercise will also bring together teams, cutting across silos in the organisation. Scenarios can be remote, desktop or a live action. They can be run in real time or can look at events occurring over days, weeks or event years. Acting out a scenario will help uncover your strengths and more importantly your weaknesses.

Only direct confrontation with a political, security situation or  and putting executives on the spot will any real knowledge be made. Exercises should generally be run by an outsider to the firm, who will be best placed to challenge the Executives and avoid group think

A crisis response team should be populated by executives. Other staff will provide specific expertise it is unrealistic that the C-Suite would not take charge in a major crisis. However, the CEO of the organisation should not be directly involved in crisis management. As a prolonged crisis will divert their attention from running the business.

A variant on the above is scenario planning which can be done via tabletop. But scenarios can be expanded and transformed into more detailed work which focuses on the response to a realistic scenario. So a firms operating in a conflict zone would develop and workshop plans covering response to attacks on assets, kidnappings, shifts in governments and thousands of other possibilities.  

The result of these exercises should be to develop a crisis response team or teams that are well prepared, have strong communication lines, understand their roles clearly and are prepared to act decisively in a crisis.

Horizon Scanning

Horizon scanning is looking at longer term threats to an organisation. Scanning does not attempt to predict the future. Instead horizon scanning considers potential threats and risks and attempts to develop risk scenarios of events that might affect the firm. The power of horizon scanning is making people aware of future possibilities, challenge assumptions and change mind-sets.

There is no set rules or framework for horizon scanning. The key is to focus on the issues that will affect your firm. Market dynamics in your sector, government action or regulation. Information gathering can be done on desktop, but talking to relevant contacts and monitoring social media is also useful.

The idea is to identify trends and issues which may present challenges or opportunities to the organisation. Not everything identified in horizon scanning will be relevant but an organisation can spot trends early and adapt accordingly.

Adopting Climate Risk Analysis

Climate Risk is a new addition to geopolitical risk. This new field looks to analyse the physical risks faced by companies and countries posed by climate risks such as sea level rise, extreme weather and heat waves. Climate risks also include what is called transition risk.

Transition risk is the changes in government policy faced by firms as a result of climate change. This could include governments closing down coal plants to reduce greenhouse gas emissions.  

Companies across the world are rushing to adopt the Task Force for Climate Related Financial Disclosures (TCFD) which will identify which projects face the highest climate risks.

Opportunities from Geopolitical Flux

Acting on Geopolitical Risks and turning them into opportunities

While predictions about Geopolitics are a dangerous proposition, the world appears to be heading towards a more unstable chaotic period thanks to divisions between the main powers and the growing effects of Climate change.

Geopolitical Risk is not all bad news. Shrewd observers can take advantage of geopolitical trends by investing in industries and countries that stand to benefit.

Geopolitical analyst Milena Rodban coined the term Geopolitical Flux which to me is more apt description. Another way to benefit from geopolitical change is antifragility: Nassim Nicholas Taleb developed this concept in the book Antifragile.

The thrust of the book is that a truly resilient organisation benefits from change, chaos and flux, even thriving from disorder. An antifragile company can thrive in difficult times while competitors fall away, unable to cope with a new world.

Post Conflict Zones

Post conflict countries or fragile states represent an opportunity. As a war ends and peace returns, a country or region can present new opportunities. Many companies will be fearful, but very often assets are relatively cheap and there is little or no competition. The catch of course is that many conflict die down only to be rekindled a few years later.

The end of the Iraq war attracted many western firms particularly in the oil sector. But the resurgence of violence and the rise of the Islamic state soon made the country a war zone again.

However, Angola ended its long running civil war in the 1990s but the country maintained a no go zone for many companies. Chinese oil firms took a chance and built relations with the political and business elite of the country and Angola soon became a major oil exporter to China.

Boat Spotting: Watching out for new emerging opportunities and risks

The most agile companies can turn geopolitical risk or flux into an advantage. By spotting trends as they take off – such as climate risk reporting and adopting it gaining knowledge and a competitive advantage.

Trade and economic disruption causes pain and those with lengthy supply chains suffer. But those who are more flexible or can see the rise of tariffs and protectionism can act. The onset of a trade war between China and the US has seen many firms move operations or source commodities from different places to avoid the worst effects.

The warning signs of trade war between China and the US were visible early on in Trump’s administration. A geopolitically aware firm that operates between the two countries would be sensibly assessing the situation and identifying how any risks could be mitigated. This could include moving some supply chains to Vietnam or other countries.

Conclusion

At time of writing Disney was struggling with a torrent of bad publicity due to its new live action Mulan movie. Part of the film had been shot in Xinjiang province and Disney thanked the region’s publicity department in the credits.

The region has been troubled by multiple reports of internment or re-education camps. Up to a million ethnic Uyghur citizens are said to be in these camps. Disney were condemned by many commentators for working with officials from the region.

The film failed to make an impression on the Chinese public and the bad publicity has not helped Disney make friends in Beijing. Having strong political capital with the Chinese government is key to gaining further market share in the country.

Its not clear whether Disney failed to spot the dangers of working in Xinjiang. Or if they did spot the dangers they did not act on them or anticipate them. Either way those responsible for their geopolitical risk management failed to protect the firm.

The ethical choices behind wanting to film in Xinjiang were also questionable, but Disney and others would argue that plenty of other firms operate in the region and in China without criticism. But perception is important – Disney has a high profile and a family brand. By appearing to align with a regional government associated with internment camps was a step too far.

Above I have tried to outline the main geopolitical risks facing companies across the world. Of course geopolitical risks are international in nature but they vary in their impact depending which country you are in. The corporate sector is also extremely diverse, so different global risks matter to different firms. For example climate risk is a bigger deal for the infrastructure sector than the media industry.

Once risks are identified the next step for a company is preparing and mitigating these risks. Although some risks cannot be identified in advance (Black Swans). Others can be tackled in advance. Some risks are relatively slow moving and there will be time to prepare and adapt. Others will need a crisis team to respond when time is of the essence.

Geopolitical risk is real, ever changing and often unpredictable. Firms that fail to prepare will face serious consequences in terms of financial, operational and reputational damage.

The Fight for Blue Gold: Water and Geopolitical Risk

In June 2020 the Egyptian Minister of Foreign Affairs Sameh Shoukry warned the UN that Egypt faced an existential threat. That threat and regional geopolitical risk is the Ethiopian Renaissance Dam. The construction of the dam threatens to dramatically cut the flow of the Nile to Egypt.

Less water reaching Egypt will could ruin the livelihoods of its farmers and people. Cairo claims that the dam will inflict permanent damage to Egyptian society, but for Ethiopia it promises power to provide light and power for one of Africa’s most populous countries.

Egypt urged the UN Security Council to adopt a resolution that would give international backing to reach a compromise agreement. Ethiopia has rejected the resolution and announced the filling of the dam would begin in the next two weeks.

Egypt has hinted that a military solution could be used if an agreement is not reached. The gravity of the situation has been recognised by the USA, which is attempting to broker a deal between the two countries.

Resource Conflict and Geopolitical Risk

The dispute highlights how conflicts over resources can morph into geopolitical risks. Water wars have long been predicted by analysts. Conflict over water and other resources is as old as civilisation itself. Now the world’s freshwater supplies are under huge strain as rising populations and economic growth drink up ever more water.

Climate change will compound this problem. Rising temperatures will melt glaciers reducing the flow of water from many mountains, drying lakes and allowing sea water to salinate rivers. Control over water by itself may not cause conflict but may act as a catalyst. India and Pakistan are already have a frosty relationship. Disputes over water could put relations between the two into a deep freeze.

Melting Glaciers

Disappearing glaciers in the Himalayas will soon reduce the flow of mighty rivers like the Indus, Ganges and Brahmaputra making the Indian sub-continent one of the most exposed to drought.

Control over the remaining water in the Indus will make the battle around Kashmir where the river emerges more acute. Pakistan and India have been gone to war over the divided province three times and tensions remain high between the two nations.

Pakistan is highly dependent on the flow of the Indus for its agriculture and freshwater supplies. Any attempt by India to exert control over the water will face major resistance from its nuclear armed neighbour.

India recently completed the Kishanganga dam. This has led to an on-going dispute with Pakistan around the Indus River Treaty which has been handed to the World Bank to settle.

The Cradle of Civilisation

The Tigris-Euphrates river is called the cradle of civilisation as it is where the Sumerians and Akkians built some of the earliest recorded cities. Since then the river has been the lifeblood of many countries, cities and empires.

In more recent years the Turkish have built dams which control the flow of water to Iraq and Syria. If Turkey continues to take more water or drought reduces the river’s flow it could cut water flow to Iraqi and Syrian farmers and cities. If crops start failing and cities experience water shortages, Turkey could be the scapegoat.

Somalia and Syria

Internal conflict is another source for potential water wars. As the climate changes and regions used to plentiful rainfall find themselves dry and arid. Farmers and pastoralists are forced off the land it can lead to famine and social breakdown.

People forced to move into new areas often sparks new conflicts. Climate change is at least partly behind conflict in Syria. A long lasting drought in the country forced thousands into cities and new regions. This new poverty stricken population helped to spark protests against the government, which in turn transformed (combined with other factors) into a devastating civil war.

In Somalia a long lasting drought in many regions has hampered the recovery the country and pushed many into food insecurity. Economic uncertainty is a fertile breeding ground for the terrorists, pirates and militants that have plagued the country.

Even developed regions will not be immune to water conflict. Last year Cape Town came close to running out of water after years of low rainfall and rising demand for water for agriculture and domestic use.

Where are the Solutions?

As fresh water faces multiple threats, pollution, climate change and overuse, are there any solutions to a growing crisis? Firstly: humans can be pushed to use less water through efficiency measures and improved infrastructure such as fixing leaky pipes.

Secondly: desalination is currently an expensive option for the energy rich. But there is hope that new techniques can make it a viable and economical option in the future.

Thirdly: its hoped that scarcity will force humans to be more careful with water and treat as a valuable commodity. However, billions of people already experience water scarcity in the present day.

So in the future it is likely that the middle classes will continue to ensure good access to water. While those on the margins will continue to suffer from climate change driven water shortages.

Monitoring Risk from Space: An introduction to Spatial Finance

The global municipal bond market is a worth an amazing US$ 3.8 trillion a year. As one might imagine the owners of these bonds are highly motivated in wanting to protecting their investments.

Growing awareness of climate and geopolitical risks in the form of rising sea levels, floods and wildfires and their impact on the value of bonds is driving new ways to assess these new risks.

Using the information provided by satellites above the earth allows companies to assess risk in real time and react accordingly. The merging of satellite data and finance led to the emergence of a new term – spatial finance.

Constant surveillance by hundreds of satellites and drones allows every part of the globe to be constantly analysed in minute detail for change. This wealth of data combined with powerful computing techniques promises a real time picture of how the world’s environment is changing.

The Rise of Spatial Finance

To help promote this new idea the Spatial Finance Initiative was launched by number of prestigious organisations, namely the Alan Turing Institute, the Green Finance Initiative and the Satellite Applications Catapult.

Its mission is to:

“Mainstream geospatial capabilities enabled by space technology and data science into financial decision-making globally”

Spatial Finance Initiative

The emergence of spatial finance has come at a critical time where the assessment of climate risk has become increasingly important to banks, insurers and major corporations.

The launching of the Task Force on Climate related Financial Disclosures (TCFD) recommendations has meant companies need to understand how their assets will be affected by climate risk. Spatial finance has the potential to pinpoint shifts in the environment and map those a firm’s assets.

Spatial Finance in Action

For instance an agribusiness with farms in across a different regions and countries will be able to see how drought, sea level rise and rainfall has changed over time. Of course, satellites cannot predict the future. But by identifying current patterns of change they can give a glimpse into the future.

Capturing information on the environment is the spatial section. The financial part comes by understanding how the world’s environment is changing in microscopic detail. Putting the two together will allow financial decisions to be made more accurately.

Realising ESG Goals

Farms and agribusinesses can be monitored for their adherence to Environmental Social and Governance (ESG) goals. For example farmers in the Cerrado region of Brazil signed up to a zero deforestation pledge in order to protect forests.

Deforestation has also been linked to lower rainfall in the region which in turn reduces hydropower production capacity. The deforestation pledge is monitored by satellites which can assess whether farmers are encroaching on forests.

Sovereign Debt

Geospatial data techniques are being considered in linking sovereign debt risk with environmental risks. This way both governments and investors can see changes in environmental risk and which can drive sovereign debt risks.

If a country fails to care for its environment it may be considered more likely to default. Early signs of drought in an agriculturally dependent region could be an early warning of poor harvests and financial problems. At the same time crops can be tracked daily to estimate yields and future revenues.

Implementing the TCFD

Implementing the Task Force on Climate Related Financial Disclosures (TCFD) recommendations for example will drive predictions of climate change on physical assets. Measuring the impact of a sea level rise, drought, flood and a variety of other climate related risks can destroy the long term viability of a project.

Geospatial data can be used to track other environmental issues such as illegal fishing. Satellites spotting boats in marine reserves can provide the information required to fight the illegal fishing. Political will and resources are still required to actually stop and catch the perpetrators of environmental crimes.

Tracking Biodiversity

Nature related financial disclosures are the menu for the landmark biodiversity conference in Kumming in China. Companies could be encouraged to disclose their impacts on biodiversity in a similar way many are disclosing their emissions or exposure to climate risk.  

Satellites can track a changing environment in real time and identify where and how companies are making an impact on the environment. 

Satellites and Finance

Hedge funds have been using satellites to get an inside track on changes in demand or the movement of key individuals.

When an Occidental owned private jet was spotted at Omaha airport (home of Warren Buffett). It was a sign that the company were seeking the investor to help on their purchase of Anadarko.

Ten days later Buffett announced he was investing in Occidental. Alternative data companies routinely track private jets as prior knowledge of deals is a powerful source of information.

Monitoring Disasters

The danger to human life from flooding following the catastrophic events of Hurricane Harvey in 2017 was tracked using geospatial satellite imagery. The same data was used to speed up insurance payments requested after the hurricane damage.

The power of satellite imagery and ever larger data sets will increase the ability to spot relationships between geography and financial indicators. Spatial Finance will be an ever more powerful tool for identifying geopolitical risks and improving financial performance.

The Geopolitics of Renewable Energy

The freezing tundra and glaciers of Greenland have become host to a new geopolitical struggle. China has stepped up its interest in the island through Chinese firm Shenghe Resources share in the Kvanefjed mining project in the south of the country.

President Trump reportedly took an interest in buying the island from Denmark (which controls Greenland’s foreign relations) last year but was firmly rebuffed. However the US has made it clear to Denmark that China should be kept out of Greenland.

In 2018 China wanted to invest in an abandoned US naval base called Grønnedal in Greenland. Copenhagen was quickly warned off any such deal by Washington. Now the US is stepping up investment in Greenland in an attempt to build more influence in the region.

Rare Earth Metals

Greenland and the Kvanefjed mine is home to rare earth metals which are used to build mobile phones, tech and batteries. Access to these metals is a key part of modern manufacturing. As a result China has tried to corner the market in rare earth metals to gain leverage over its rivals. This market is what led China to Greenland and the Kvanefjed mine.

For its part US is trying to prevent this by prioritising the supply of rare earth metals through a strategic stockpile. This battle may become more common place as renewables and the batteries that store their energy overnight become more commonplace.

Much of the globe is still addicted to oil but renewable technology has cut into the energy market. Renewables offer the promise of clean energy and a chance to avoid the messy geopolitical risks of the Middle East.

A Changing World

Right now the world stands on the edge of great change. A dramatic fall in cost of renewable energy has made them truly competitive with fossil fuels. This change has been driven by ever more efficient solar and wind technologies, as well as government policies to encourage their use.

At the same time industrial scale electric batteries are becoming a reality. Successful large scale battery use solves the issue of energy storage which is a major constraint on renewables. Despite these advances fossil fuels have retained their grip on world energy output until now.

“Coal consumption will be crushed in 2020”

Benjamin Nelson – Moodys

The Covid crisis crushed demand for energy, pushing down the price of oil and coal as a result.

Covid-19 has sparked many geopolitical risks, but threatening the future of coal was perhaps a surprise. Moody’s predict that coal demand in the US is set to fall 50% in 2020 devastating the industry.

Already under pressure from renewable energy and policy initiatives like the Paris Agreement and the Task Force on Climate Related Financial Disclosures TCFD. These changes have been encouraged by many businesses. The Coal industry will struggle to recover from these double blows. The oil industry could be next.

The Dawn of the Renewable Age?

The rise of renewable technology will also have a major impact on world politics. The oil and geopolitical risk has been a constant theme of the 20th century. Oil drove European Powers to dominate the Middle East and other parts of the world.

Many oil rich states have experienced years of war and conflict thanks to the wealth and influence that oil represents.

The Curse of Oil

Oil wealth has often primarily enriched elites, particularly in poorly governed countries such as Nigeria and Equatorial Guinea. These same nations have often become dependent on oil, unable or unwilling to diversify.

This dependency has stifled their economies and created conflict within and between countries as factions vie for control of a valuable resource.

If you take oil out of the equation then these nations will be forced to adopt new economic models. This could be painful for the elites but may result in more balanced, less corrupt governments.

The Renewable Political Revolution?

But what happens when you take oil out of the equation. The world will look very different as the advent of renewable energy transforms the geopolitical landscape in new and unpredictable ways.

Of course renewable technology does require some resources. Lithium and other rare metals are key components in electric car batteries. If these continue to replace combustion engines as then the supply of these metals will become an important political and economic consideration the same way the supply and production of oil is today.

Metal Super-powers?

While China is currently the world’s biggest producer of lithium and the largest electric vehicle battery maker. Countries like Bolivia and Chile are also major producers of the metal. Could this make Bolivia the future Saudi Arabia’s of electric batteries, the world dependent on their supplies of the metal?

Maybe, but it is also likely that as demand for lithium and other metals rise so will the search for, discovery and mining of these resources. Eventually diversifying the global supply of the metal.

The other wild card is an environmentally friendly one, the potential for recycling these metals is yet largely untapped. Apple has committed to using only recycled lithium in the future.

This trend could continue as demand rises and concerns about the effect of lithium mining and the damage caused by discarded batteries increases. All this could yet ruin Bolivia’s dream of becoming a lithium powerhouse.

The Fall of the Fossil fuel producers

As reality bites the producers of oil, coal and even gas could suffer new crises. Already prone to political instability the authority of the House of Saud, the Gulf monarchies and many African dictators could crumble. If they see their main source of revenue dry up and with it their ability to support key institutions like the military, as well continue the patronage of the political elites that support them.

This time may come sooner than people realise. Even if fossil fuels remain dominant for a long time but renewables look more favourable in the longer term. Companies will realise that the oil and coal reserves have a fast declining long term value and could soon become stranded assets.

Producers may also rationally try to cut production and increase prices to order to gain higher revenues in the short term. However, this would of course make renewables look more attractive. These oil dependent nations benefit from a shift to solar and wind energy.

Many Gulf countries can become solar power giants in their own right. The move away from resource dependency will create more diverse economies and perhaps even transform their political climates for the better.

Technology Rules

Renewables are fundamentally different from fossil fuels in that first and foremost they are technology based. While renewables may depend on the wind and sunlight they do not require the movement of enormous tankers of gas and coal from a mine, or oil from a well.

Instead what matters is which country can manufacture the most efficient and cost effective solar modules and wind turbines. This means that the quality of intellectual property, patents and production centres will determine the winners of the renewable age.

Right now European countries arguably have an edge on solar and turbine technology and the race to build batteries for cars, homes and the grid continues.

Of course that is not the only part of the story, countries can easily buy renewable energy components and set up a network based on overseas technology. But many like Turkey and Brazil feel that this would place them at a long term disadvantage.

Renewable Protectionism

To help overcome this technology gap certain countries have enacted laws which determine that a certain percentage of renewable energy installations have to be built with domestic panels or turbines. The idea being that this will help create local production centres, even if it means increasing the construction costs of renewable installations in the short run.

This has already led to conflicts as countries like the USA seek to restrict cheap Chinese solar module imports to in order to protect its own manufacturers. However, for producers and users of energy, cheap Chinese imports are preferable as they keep capital costs lower.

The Looming Threat of Climate Change

Perhaps the most important geopolitical impact of renewables is if and how quickly they replace fossil fuels. The sooner this happens the more likely catastrophic climate change will be prevented.

Climate change is the most dangerous long term geopolitical risk facing the world. Widely predicted is mass crop failure, water shortages, uninhabitable cities and extreme weather. This new world will certaintly lead to mass migration and widespread conflict and will throw the geo-political framework we know and understand now into chaos.

The Keys to the World: Geopolitical Risk and Maritime Chokepoints

Across the globe there are maritime chokepoints which hold valuable strategic value but also significant geopolitical risk. Below I look at both the history and geopolitics of the Suez Canal, Panama Canal, the Straits of Malacca and Hormuz and the Bosphorus Straits. Historically these places have been important thanks the huge amount of shipping that passes through them, as well as their military and naval value.

The Suez Canal

The Ancient Egyptians were the first to dig a canal from the Red Sea to the Mediterranean. Several different versions of the waterway were dug throughout antiquity but they eventually silted up and were forgotten.

When the modern version first opened in the 1860s the Suez Canal revolutionised international trade. By cutting the travelling distance from India and the Far East to Europe at a stroke. The new route also altered the world’s geopolitical landscape. Suddenly gifting Egypt a new military, geopolitical and economic significance. This was to prove both a blessing and a curse.

“A Key to World”

The Canal was originally conceived and financed by the French. However he British government soon realised its significance and took advantage of the Egyptian government’s weak financial position to buy a stake from them in the 1870s.

Over time shares in the company controlling the canal evolved into direct control over Egypt. The Canal soon became an essential part of British imperial thinking. At once a powerful “key” to control the world’s oceans and trade, but also a weak spot, vulnerable to enemy attack and something to be carefully guarded.

The Canal’s importance was cemented in the early part of the twentieth century as the region’s oil flowed through the narrow channel. Oil supplies became crucial for both industry and eventually the Royal Navy. The Navy switched from coal power to oil in the first decade of the 1900s.

Egypt Takes Control

Now the Canal lies firmly in the hands of the Egyptians thanks to President Nasser’s nationalisation in 1956. A bold move which resulted in a military intervention by the British and French who were set to lose their prize Middle Eastern asset.

“We shall defend [the Suez Canal] with our blood and strength, and we shall meet aggression with aggression and evil with evil”

Gamal Nasser 1956

But in turn these fading imperial powers were ruthlessly undermined by a lack of US support (who threatened to pull the plug on British debt). At once ending British illusions about its superpower status and pushing the French into a long term rapprochement with Germany.

 For the Egyptians it was a moment of national triumph. But a short-lived one, for the disastrous 1967 Arab-Israeli war saw the country defeated and Egypt closed the canal for 10 years.

Enter the USA

The Canal was eventually reopened and today ownership over the canal provides a good income from shipping fees and a useful diplomatic tool for Egypt. Cairo can opt to close the canal to traffic to countries (like Israel) it takes issue with. The Canal also helps bolster Egypt’s reputation as the geopolitical lynchpin of the Middle East. This despite a patchy record of political and economic management.

Egypt’s stewardship of the Suez Canal means strong US support in the form of military and diplomatic aid. Despite the uncertainty of recent years, Egypt is considered “to big to fail”. The geopolitical risk of an unstable Egypt is well recognised by the Washington establishment. It will come as no surprise that Egypt is the second largest recipient of US military aid.

China on the Horizon

The Egyptians also maintains strong links with China. Bilateral trade has blossomed between the two countries in recent years, as has Chinese direct investment in the country. Beijing’s increasing economic presence across the Middle East means it will get further drawn into the regions’ messy geopolitics.

While China presently has good relations with all the major economies of the region. It could one day be forced to choose allies and enemies. If that point arrives you can be sure Beijing will take into account the massive volume of Chinese goods passing through Suez to Europe before endangering relations with Cairo.

The Straits of Malacca

This narrow gap separating Indonesia and the tip of the Malay Peninsula was long recognised by the British as the fulcrum of trade and military power in East Asia and one of the “keys” along with Gibraltar and the Suez Canal that “locked up” the world through naval power.

Singapore lies to the north of the Strait and was the centre of Britain’s Far Eastern military command. The City’s position ensured the construction of huge sea facing fortifications (which in the event proved useless when the Japanese managed to attack by land in World War Two), to protect it and its loss was arguably Britain’s worst military defeat of the twentieth century.

Geography rules

Singapore’s strategic position and good governance has made it one of the world’s great hubs for shipping and commerce. It is by some measures the globe’s busiest port (vying with Shanghai for this particular honour). As well as watching over the immense flow of electronic and consumer goods leaving the factories of Asia to the shopping centres and malls of Europe and the Middle East.

In the other direction the Strait sees a hefty proportion of the world’s oil supplies en-route from the Gulf to China and the US. Overall a quarter of the globe’s merchandise pass through the Straits. This represents a huge geopolitical risk.

 Hostile Powers

Therefore the idea that the Strait could be closed or shipping stopped by a hostile power has long occupied the minds and plans of politicians and military chiefs among the world’s great trading powers. While the US does not have a permanent Naval presence in Singapore, it has a number of aircraft carriers in the region and retains strong relations with Singapore as well as its neighbours.

Beijing also retains good relations with the city-state which has a majority ethnically Chinese population. This undoubtedly helps cement business and social ties between the two nations. 

China is currently developing its naval capacity but remains a long way behind the US. Beijing views protecting its overseas trade as a major priority and lack of control over the Malacca Straits is of huge concern.

A String of Pearls starting at the Isthmus of Kra ?

The next decade will see Beijing become more assertive in its “backyard”. This will be particularly felt on issues such as control over islands in the South China Sea and Taiwan.

There has been speculation that this will manifest itself in a “string of pearls” – a series of naval bases in Asia and the Indian Ocean to buttress Chinese power, but so far there is no sign of this materialising.

In the longer term China will want the US to accept it as more of an equal, something Washington may find very hard to accept, how this particular dynamic unfolds over the coming years is crucial for peace in the region.

Interestingly there were once rumours the Thai government would cut a canal through the Isthmus of Kra, (the narrow central section of Thailand) financed by the Chinese, reducing shipping times and the strategic importance of the Straits of Malacca at a stroke. This kind of bold move could strengthen China’s hand, but at the risk of angering the Americans than their allies.

The Panama Canal

In 2016 Panama Canal saw the conclusion of a huge expansion programme costing US$5.2 billion. This work allowed much larger vessels through the canal. This ushered in a new wave of Panamax class supertankers, which in turn will bring about even greater economies of scale in the shipping industry.

Geopolitical Risk

The troubled and lengthy construction of the Panama Canal helped to forge a new Central American nation. The Canal was also crucial in the USA’s journey to becoming a global power. The opening of the Canal helped reduce shipping times dramatically. With the Canal open ships could avoid the long and arduous Cape Horn route at the foot of South America.

It was the French under Ferdinand Lesseps, the same man who had successfully built the Suez Canal that pioneered the construction of a link between the Atlantic and Pacific. At the outset Lesseps was supremely confident thanks to his experience in Egypt. However, he severely underestimated the difficulties of the terrain. Mountains proved difficult to dig around and the tropical climate had thousands dying of disease.

Enter the USA

Eyeing the failing French effort the increasingly confident and out-going US government authorised the purchase of the project. However when negotiations with Colombia the host country at that point failed, it started a chain of events which led to the US supporting Panama’s independence.

Panamanian rebels were assisted by a US naval blockade and overt political support. All of which allowed the new territory to split away from Colombia and then sign over the rights of the canal to Washington in the Hay-Bunau-Varilla Treaty, part in gratitude for helping them win independence, part in ignorance of the treaty’s consequences. 

Complete Control

Once the Canal was finally complete in 1914 it gave the US control over the most important trade route in the Americas, but also helped to confirm Latin American suspicion over Washington’s motives in the region and it is often cited as a classic case of gun boat diplomacy.

The Canal rapidly became an increasingly significant international waterway, now seeing around 16% of US trade pass through it every year and one the country was willing to defend with arms. The US deposed the increasingly anti-American Panamanian President Noriega in 1989 with a swiftly executed military invasion.

While the US finally relinquished control of the Canal in 1999 – on the condition it became a demilitarised zone. As the preeminent military power in the region it is unthinkable that Washington would allow a potentially hostile power to take any kind of control over the route.

The Prospect of a Rival Canal

China is now the major trade partner with much of Latin America and sees a significant chunk of its imports and exports pass through the canal. From Brazilian iron ore destined for the factories and workshops of the world’s foremost manufacturing nation. In the opposite direction tools, toys and all manner of consumer goods bound for North American shops and malls.

Fear of this vital route being compromised or cut off to Chinese shipping has led to outlandish schemes springing up. These include a Chinese backed alternative waterway through Nicaragua. Another idea is a “land” canal – a new rail line for heavy cargo cutting across Colombia to connect Pacific and Atlantic ports.

China’s Plan?

So far these ideas have made no real progress and remain unlikely to be carried out.  But the confidence and ambition of China has been underestimated before, so nothing should be ruled it out.

In this scenario it would be interesting to observe the US reaction. The idea of a major foreign power de facto controlling a trade route which comparable to the Panama Canal in Central America would not be popular in Washington. The US has already seen China take the economic initiative in its backyard. A Chinese controlled canal would I suspect be a step too far.

At its narrowest point it is only 700 meters wide. But the Strait represents a border between Asia and Europe as well as access to global trade for the Black Sea States. The Straits represent a strategic chokepoint and represents a huge geopolitical risk.

The Geopolitics of The Bosphorus

Istanbul was once called Constantinople. Named after its founder the Roman Emperor Constantine it soon became the most powerful and wealthy city in Europe and the pinnacle of the Byzantine Empire. A position it claimed for nearly 1000 years until its decline along with the Byzantines.

The rise of the Ottoman Empire and its invasion of the Byzantine Empire, culminating in the siege and capture of Constantinople in 1453 marked the eclipse of that great power. For many scholars the event signaled end of the medieval era in Europe. The conquest also represented the rise of a new power that would dominate the Middle East and much of Eastern Europe for centuries.

The Rise and Fall of the Ottoman Empire

In particular control of the Bosporus gave the Ottomans control of the key trading routes in the region. It also cemented their ability to control the Silk Road trading routes to the Far East.

Militarily it gave the Ottoman’s leverage over their northern neighbours, bottling up Russian naval ambitions to the Black Sea. However control over the Silk Road gave others the impetus to find new routes East.

Over time the opening up of oceanic sea routes by the Spanish, Portuguese, Dutch and English diminished its importance as Western Europe states could ignore the Silk Road to trade with China and India. Instead they could look across the Atlantic and Pacific for trade.

All this time other powers eyed the straits jealously. In particular the rise of the Russian Empire to the north and its desire for free access to the Mediterranean and beyond was a major contributor to the numerous wars between the two great Empires. The Ottomans and Russians went to war

The Great War

On land the capture of the city gave the Ottomans the impetus to move West and seize much of Eastern Europe only being halted at the gates of Vienna. That was probably the high point, over time slow decline took hold of the empire. Its last stand was the First World War where despite its technological disadvantage it successfully threw back the British assault on the Bosporus focused on Gallipoli.

Churchill’s doomed plan was to seize the Ottoman capital and knock a major German ally out of the war, while at the same time provide a supply route to their Russian allies and further encircle the remaining Central Powers.

The Turks bravely repulsed the British Empire forces, famously many of them from Australia and New Zealand and attention in the war shifted elsewhere.

The Ottomans won the battle, but the result of the war eventually dissolved the Ottoman Empire and led to the birth of the new Turkish Republic. The new republic brought a desire to move away from what was seen as a capital soaked in the old fashioned corrupt ways of the Sultans and their court and instead make a fresh start in a new capital in centrally located Ankara.

Istanbul and Reinvention

For other cities this might have might have resulted in decline and obscurity. Istanbul’s geography ensured its continuing relevance and since losing its capital status it has grown into a powerhouse. The most populous city in Europe, the commercial hub of Turkey and indeed the Eastern Mediterranean.

The Geopolitics of the Straits

Now with many predicting a global shift of world trade and investment away from the Atlantic and towards Eurasia and one dominated by China rather than Western powers. Istanbul looks set to profit. The Bosphorus holds a pivotal position on the Eurasian landmass. 2.9 million barrels of oil pass through Istanbul every day.

A huge volume of trade also pass through Istanbul, grain and the rich agricultural produce of Ukraine. While in the other direction goods from the rest of world flow to the Black Sea states such as Romania, Bulgaria, Ukraine and Russia. All of this can be cut off in a stroke by the Turkish Government.

The option to block the Strait on one level provides Turkey a great deal of leverage over its northern neighbours. But cutting off access to the Bosphorus would provoke a massive international reaction and represent a huge geopolitical risk. Even the threat of military intervention. But the fact that Ankara is able to take this measure ensures that any move against them will have be weighed up against this possibility.

Russia’s Watchful Eye

The Russian invasion of Crimea gave it a new platform to project power in the Black Sea. This along side military engagement in Syria and the growth of Tartus naval facility in the country enhanced its role in the Middle East.

It has also made Russia naval traffic through the Bosporus route ever more important. But any expansion of Russian naval power is ultimately frustrated by the narrow strait, as its fleet and exports and imports can be bottled up.

Beyond the Bosphorus Turkey is a significant regional power player. Its long standing President Erdogan is keen to extend its influence further into Africa, the Balkans and Middle East. This “neo-Ottomanism” is perhaps the inevitable result of Turkey’s power and economic success. Others see a power with Imperial designs which needs to be checked. Whatever its current stance, the Bosphorus gives Turkey a permanent geopolitical trump card.

The Straits of Hormuz

The narrow Straits of Hormuz connects the Persian Gulf and Indian Ocean. To the North lies Iran, while to the South the United Arab Emirates and Oman. A quarter of the world’s oil and a third of all gas supplies pass through the narrow waterway. Cutting off the Strait or interfering with tankers can send oil prices through the roof in an instant.

The Strait has been the scene of frequent stand offs between US and Iranian Naval vessels. Iran has threaten to cut off the Strait in the past. This power gives it a certain amount of leverage. But actually cutting off the route would incur a US military response as well as heavy criticism from many other states.

A world faced by oil and gas supplies disruptions would not look kindly on Iran. So far Iran has not carried out any of its threats. If however conflict arose between Iran and its neighbour Saudi Arabia or the US, closing off the Strait could be an unconventional and vital tool.

Melting Ice, Freezing Politics: Arctic Geopolitics

Icelandic President Ólafur Ragnar Grímsson made it clear: “The security of Shanghai in the future will be determined in the Arctic.” Shanghai is the world’s major city most vulnerable to flooding in a warmer planet. As more Arctic ice melts sea levels will rise, which in turn will sink China’s financial capital.

Melting Ice, Freezing Politics

China accepts the dangers of climate change and is a leader in environmental technologies that mitigate greenhouse gas emissions. But at the same time it appears more than willing to lend billions to projects like Yamal in the Russian Arctic. Yamal will provide 5 percent of the world’s natural gas supply and raising greenhouse gas emissions. But projects like this also place environmental pressures on the pristine Arctic environment.

Drill, Baby Drill

In contrast the US in the form of State Secretary Pompeo refuses to acknowledge climate change. Instead of seeing climate change as a geopolitical risk. He sees the disappearing ice as an opportunity for US firms to benefit from new mining and drilling opportunities.

The unpredecented melting of Arctic ice is a powerful reminder that reality of climate change has arrived. The rapid rise in average temperatures in recent years has shocked even seasoned climate scientists. Climate change is considered by many the biggest global risk.

The melting ice has allowed ships to traverse through Arctic Russia and even Canada’s Northwest passage. Vessels taking these routes will save time and fuel by avoiding traditional routes.

Russia’s Geopolitical Advantage

The opening up of this sea route transforms Russia’s geopolitical dynamic. As an ice free Arctic gives Russia influence over a new northern trade route. The lack of ice also opens up the possibility of more mining and drilling in the region. A prospect the US and Russians have openly welcomed.

Others like the Norwegians see the damage this would cause to a fragile region relatively untouched by humans until the recent ice melt. The Oslo government have ruled out oil drilling in the region and appear prepared to defend the Arctic’s environment.

Ownership of the region is also disputed. Russia put in a claim to the UN to extend its exclusive economic zone across the region. If applied this would extend the other Arctic state’s zones. The success of this claim would open up similar ones for the US, Denmark (via Greenland), Norway and Canada.

But this extension of territory could also stoke geopolitical conflict between the states, particularly if new mineral or hydrocarbon deposits are uncovered.

Other countries have also taken a keen interest in Arctic affairs through close proximity, Finland and Iceland are fairly obvious members. Others like the self styled “near-Arctic state” China demonstrate its new global role. China is a global power on the lookout for new markets, sea routes and avenues of power to explore.

Polar Silk Road

China has called for a Polar or Ice Silk Road and has sent an exploratory ice breaker Xue Long (Snow Dragon) to the region. China has also been investing in the Arctic such as the Yamal project and the hunt for rare earth minerals in Greenland.  

Every move by China will be carefully monitored by its neighbour Russia who remains friendly with China. Russia has watched painfully as China supplants it economically and diplomatically across much of the world. Russia will not be happy to see this happen in a region it views as its backyard.

Economic Potential

The Arctic region is reckoned to contain massive oil and gas reserves. It is reckoned that there are 44 billion barrels of natural gas and 90 billion barrels of oil. The Arctic is home to many different metal deposits and around 10% of global fish stocks, all of this makes it a hugely tempting target for a resource hungry world.

But the harsh conditions even with global warming make exploiting any of it rather expensive. Some analysts put estimate that the price of a barrel of oil would have to hit over US$ 100 to make it worthwhile drilling in the Arctic.

Currently oil prices are far from supporting that kind of investment. The geopolitical risks involved are significant and the reputational and operational risks are high. An oil spill or mining accident spoiling white ice bergs, killing seals and whales would be an environmental disaster but also a public relations one. The cost, difficulties and risk of operating in a polar region is also high. Most people do enjoy working and living in the freezing cold.

Arctic Risk and Global Risk

The irony is clear, the more climate change melts Arctic ice, the easier it is to exploit the Arctic through mining and drilling, which in turn will accelerate climate breakdown stoking massive geopolitical risk. So while China may well make significant short term investments and geopolitical point scoring. Ultimately it will also be contributing to the long term demise of its populous coastal cities such as Shanghai.

Instead China and the Arctic Council should focus on developing a more resilient region, better able to withstand the coming ravages of climate breakdown.