Political Risk, broadly defined, is the potential of losing (or gaining) something of value as a result of political decisions and events. Geopolitics is related to politics, especially international relations, as influenced by geographical factors. These factors include but are not limited to climate, natural resources, and demography. We expect the significance of these variables to increase with time, and additionally, wish to bring environmental risk into the fold as it affects society, business, and national security. There exist different types of geopolitical risk, all of which have varying degrees of impact upon the operations of state and private entities, e.g.
- International tensions: arising from territorial disputes and cultural differences.
- Domestic unrest: arising from hazardous factors such as repressive regimes, military intervention in politics, low-intensity warfare, and coups. (e.g. Turkey’s instability, and its effect on tourism, or the effects of civil war on small businesses.)
- War: potential for long-term humanitarian, social and economic crises and catastrophes and complex interaction with all other factors.
- Terrorism: can be both the catalyst or symptom of broader tensions and unrest and affects security policies with wide-reaching implications for the economy, politics and civil rights.
- Environmental Risk: the threat posed to our security by extreme weather events and the unsustainable character of our global exploitation of the environment and its resources. (e.g. Fishing industry in the South China Sea)
- Expropriation: involves the seizing of company assets by the host government – (e.g. Venezuela, 2010 )
Why is [Geo]political Risk Relevant?
For businesses, some high risk environments present growth opportunities, for NGOs those environments dictate a required presence, for defence planners and the intelligence community, keeping abreast of the latest developments and positioning oneself accordingly is vital to national security. Some in the fatalist camp will discount political risk, comparing it to the weather; a phenomenon that can be insured against, but is ultimately beyond our control. There are however a variety of levers we can use to manage risk; these include scientific, social, diplomatic, economic, and military efforts. It is vital that future government and corporate leaders have an understanding of risk principles.
How Do We Manage Risk?
For most, risk avoidance by exit is simply not an option- this is where risk management enters the scene. Risk avoidance and risk reduction are both forms of risk management. With risk avoidance, a business, individual, or NGO will forfeit any potential opportunities or successful operations. This is why entities may seek to reduce risks instead of avoiding them entirely.
Example 1: Technology
Suppose we are a technology company providing a VPN service to customers internationally. We’ve identified a lucrative market, but are faced with the risk that this country might change the laws governing ‘logging’ on servers. Nevertheless, we are keen to seize the opportunity, and to purchase servers in this country. How might we manage our risk exposure? One option is to forego the opportunity entirely, losing out on any potential gains. Otherwise, we might seek to reduce the potential of any loss, perhaps by diversifying our operations and expanding into different markets, we might transfer the risk (purchase political risk insurance), or we might simply be willing to take the hit should anything happen.
Example 2: Oil & Gas
Consider an oil company operating in a country where their infrastructure is likely to be sabotaged, and workers are at risk of being kidnapped. The company may seek to manage risk by establishing relationships with local entities – either by engaging them economically, or obtaining their assistance for security planning and risk intelligence. Beyond that, high risk operating environments may require bringing physical and information security resources on board.
Challenges in Risk
The topic of risk is not without its challenges. It has become a buzzword for myriad phenomena. And has to some extent lost meaning in the process. The fact that different sectors define and measure risk and its scope differently only exacerbates the problem. Some of the biggest challenges in risk are the measurement, communication, management, and perception of risk.
- Measurement: risk models are often broken, or founded on poorly supported assumptions. Numbers are often seen as objective truths, though they are often merely indicative of subjective credences of belief. Risk is interpreted incorrectly, the conflation of the two independent variables of probability and outcome runs errant. This is all compounded by the fact that political risk primarily deals with human agency; political ambitions, the whims of a dictator, or sentiment of society, for example – variables that are not easily quantified. The big data / analytics trend has led us to a state ‘where wisdom once was, and quantification will now be’ – while with a qualitative approach, cognitive issues affect even the most rigorous applications of analysis.
- Communication: problems affect the analyst-policymaker relationship in the intelligence community. In business, these problems affect the consultant-board relationship. The intelligence-led hunt for Osama Bin Laden is a classic example of the confusion surrounding estimates.
- Management: there is no such thing as a silver bullet. Political risk insurance certainly has its own issues, and establishing relations in the local political landscape can give rise to compliance issues related to governance.
- Perception: we are terrified of sharks and terrorists but have no qualms with toasters and cars. These perceptual illusions affect both the analyst and policymaker.