Vector vintage poster of a bomb with World map and match in fire.
Geopolitical risk is back and rapidly re-shaping the global business environment. Artificially suppressed during the period of super-empowered central banks and historically regarded by business as a sort of driverless car, impossible to model, geopolitical risk has moved to center-stage.
Witness the emerging Sino-Russia partnership, NATO expansion, Saudi-Iran diplomatic deal, U.S. tech tariffs and industrial policy, a wave of strikes and mass protests, and the mega-election year to come in 2024, where billions of people in systemically significant countries will go to the polls.
What can boards and the C-suite do to prepare?
The proposal that Geopolitics is a second "G" in ESG is a start, but fails to capture the urgency of the challenge, especially against the complex backdrop of the sudden return of banking sector risks, likelihood of continued interest rate hikes and rising prospect of a recession. In short, the potential for a tipping point into systemic risk.
Managing through this constellation of risk factors is unprecedented, with today’s business leaders having come of age during a mostly benign era dominated by globalization, opportunity—and low or zero interest rates.
A Supercycle, a term borrowed from astronomy, is, in its early stages characterized by rapid expansion. The dramatic shifts in the international system, accelerated by the pandemic and compounded by the Russian invasion of Ukraine, have strained global leaders, exacerbated socio-economic tensions, reduced living standards, prompted new, opportunistic alliances, tested military capabilities, redrawn supply chains and technology flows and re-shaped global dependencies at a breakneck pace.
The likelihood of a highly contentious U.S. presidential election in 2024 that is framed as "make or break" for American democracy is already causing jitters around the world, judging by the conversations I am having with global boards, for whom worries about Trump 2.0 and the U.S. global role top the list of concerns. U.S. elections are likely to test American institutions and social cohesion in new ways, and could generate unprecedented volatility as well as spawn further copycat effects in the realm of challenging democratic norms, as observed recently in Israel, Mexico, Brazil, Turkey and India, for starters.
What should leaders do to prepare for the geopolitical Supercycle? First and foremost, pro-actively engage in an audit of exposure to asymmetric risks and consider their inter-linkages (This is true even for businesses with modest exposure to global supply chains.) Second, look systematically and holistically at the macro data and factors impacting your business ecosystem—and consider the exogenous shocks that could shift the trajectory. Third, guard against cognitive biases, especially recency bias: “It’s always been this way, we’re experiencing a blip,” and confirmation bias: “I don’t believe Leader X would take that kind of risk, it would damage the economy.”
The question I’m asked most frequently by executives is what “hidden risk” they’re not looking at closely enough. My reply to this—based on 25 years of assessing the relationship between geopolitics and markets-is that there are very few genuine “Black Swans”—most risks are hiding in plain sight. If we don’t see them, it’s usually because we’re either not looking, or in denial.
