Geopolitical Risk: Does it Affect Businesses in Colombia and Latin America?
In the current global scenario, geopolitical risk impacts a large number of companies, regardless of their size, origin, sector, or geographical scope of operation. This situation arises as a result of market expansion and long, globalized supply chains, within an increasingly complex, tense, and conflictual geopolitical framework.
Before delving into this matter, it is important to define what we understand by geopolitical risk. Conceptual clarity is essential for more accurate political and geopolitical risk analysis.
1. Political Risk, Geopolitical Risk, and Geo-economic Risk
Based on the conceptual framework provided by Condoleezza Rice and Amy B. Zegart in their book ‘Political Risk: How Businesses and Organizations Can Anticipate Global Insecurity’, at CC&PRMC, we classify geopolitical risk as one of the risks that constitute political risk.
Another example of a risk that falls within political risk is regulatory or normative risk. As we lawyers say, political risk is the genre, and geopolitical risk is the species.
Within this framework, we fundamentally understand political risk as the uncertainty of the private sector as a result of decisions made by political and public authorities.
In particular, we understand geopolitical risk as the uncertainty of the private sector resulting from geopolitical events that impact the balance of power and markets. Examples include tensions between states, wars, significant shifts in power, the imposition of multilateral sanctions, or military interventions.
In addition, we understand Geo-economic risk as the uncertainty faced by the private sector as a result of geo-economic events that impact (i) the decisions of national and international public and political authorities, and (ii) national and international markets. Key examples include: (i) changes in interest rates by major central banks, (ii) fluctuations in commodity prices such as oil, (iii) movements in the value of major currencies like the dollar, (iv) effects of trade conflicts and tariffs, (v) repercussions of regional economic crises, (vi) impacts of adjustments in international trade agreements, (vii) consequences of natural disasters on supply chains, (viii) variations in energy markets, (ix) demographic changes that influence market strategies, and (x) disruption caused by technological advancements.
2. Geopolitical Risk in Business within the Current Context
A recent article in the Financial Times noted that “businesses around the world are taking steps to boost their geopolitical expertise to help with increasingly delicate judgments about target markets and supply chains.”
What is noteworthy is not that this occurs in companies traditionally exposed to this risk, such as those in the oil and gas industry, which often have significant operations in volatile areas of the world. What is interesting is that companies of various sectors and sizes are also seeking advice in this field.
A recent Deloitte report that surveyed executives from 40 countries, from companies of various sizes and sectors, found that business leaders worldwide identify geopolitical and inflationary challenges as the main risks in their relationships with third parties.
Thus, when asked about the main challenges affecting their relationships with third parties, respondents highlighted geopolitical challenges (61%), inflationary trends (46%), and concerns about their ability to meet growing expectations in environmental, social, and governance (ESG) aspects (40%).
Conducted between February and April 2023, this report surveyed 1,356 executives of various levels, from large, medium, and small companies. The sectors they belong to include (i) consumer, (ii) energy, resources, and industrials, (iii) financial services, (iv) life sciences and healthcare, (v) government and public services, and (vi) technology, media, and telecommunications.
Another similar report from EY confirmed this perception. After interviewing 1,200 CEOs of major global companies in September and October 2023, the study found that 78% of executives expect geopolitical conflicts or tensions to impact their organizations’ results. It also found that 80% of CEOs recognize that macroeconomic or market volatility is a risk that affects their business.
Given the close relationship between geopolitical and macroeconomic risk, the similarity of these results in both reports is not a coincidence. This is evidenced, for example, by the relationship between oil prices, which are especially sensitive to geopolitical events, inflation, and central banks’ interest rates.
“If one does not understand politics, one does not understand economics. If one does not understand economics, one does not understand politics. And if one does not understand both politics and economics, one does not understand law, and vice versa” is the fundamental perspective guiding our approach to the management of political, geopolitical, and compliance risks.
Although the EY study focuses on large corporations, it also covered numerous countries and sectors. Among them, representatives from 21 nations such as Brazil, Mexico, the United States, Germany, the United Kingdom, China, or Japan, from areas of consumer, health, financial services, industry, energy, infrastructure, and technology.
The Financial Times article explains that this heightened concern for geopolitical risks is a result of companies having “expanded their markets and supply chains.”
An effect of the global scenario described are the increases in security investments. Morgan Stanley estimates that companies in the United States and the European Union will spend up to one and a half trillion dollars to reduce risks in their supply chains. Concern about geopolitics has been growing since 2017, intensifying after events such as the Russian invasion of Ukraine, as indicated by an analysis conducted by the Financial Times referenced in the same article.
And as interesting as the extension of concern about geopolitical risk, is the demand for these specialized consulting services by companies without international projection. The same Financial Times article gives an example of an American construction company with 3,000 employees based in Michigan. The company hired a geopolitical risk consultancy to assess threats like the conflict between China and Taiwan.
The growing complexity of the geopolitical landscape and the internationalization of markets and supply chains have thus placed geopolitical risk at the forefront of business concerns worldwide.
3. The Geopolitical Environment Concerning Businesses
Continuing with the Financial Times article, “Russia’s invasion of Ukraine last year caught a number of businesses unprepared for the fallout. Now they are looking much more closely at political flashpoints such as China’s relations with Taiwan, the fallout in the Middle East from the deadly Hamas attack on Israel, and a possible second presidential term for Donald Trump.”
I will delve deeper into the geopolitical environment impacting businesses and its various components in future articles. For now, it suffices to say that the fundamental geopolitical aspect, the big picture, is that we are increasingly living in a world with greater tensions between powers and higher real risks of armed conflicts, even direct ones between them.
As Professor Graham Allison explains in his book ‘Destined For War: Can America and China Escape Thucydides’s Trap?’, this is the logical and natural result of China’s rapid and extraordinary economic, political, and military rise. The history of humanity shows that the anxiety, whether justified or not, generated in the dominant power, in this case, the United States, by the rise and natural ambitions of an emerging power as it gains specific weight, in this case, China, has always led to tensions and, most often, to armed conflicts. This is essentially what he refers to as Thucydides’s Trap.
Of course, this does not necessarily mean that there will be a direct armed confrontation between the United States and China and their respective allies. As Allison himself indicates, “obviously, no one knows.” But the lesson of history is that such a confrontation is a real risk and that tensions are likely to increase.
4. Are Colombian and Latin American Companies and Startups the Exception?
Of course not. Geopolitical risk management is not only for large corporations based in the United States, Great Britain, or Japan; it also applies to businesses of all sizes, in various sectors, markets, and countries. The aforementioned studies indicate this, and there is no reason to believe that Colombian and Latin American companies are not exposed to essentially the same geopolitical risks as others around the world.
For example, a Colombian, Mexican, or European airline would be impacted by an increase in oil prices as a result of a regional escalation of the conflict between Israel and Hamas in the Middle East.
Therefore, it is advisable for Colombian and Latin America companies, just like others across the globe, especially those more exposed to geopolitical risk due to their supply chains and markets, to take the necessary steps to manage it properly.
5. Conclusions
- Companies worldwide, of various sizes, sectors, and markets, require consultancy services in geopolitical risk management, according to their needs. This is due to the expansion of markets and long, globalized supply chains, within a context of increasing geopolitical tensions. Colombian and Latin American companies are no exception.
- This internationalization of markets and supply chains, along with an increasingly complex geopolitical reality, makes geopolitical risk management a priority today for leaders and executives around the world.
- Political tensions and the risks of geopolitical conflicts, even among powers, are likely to grow in the coming years.
- Consequently, it is probable that risks to the supply chain, markets, security, operations, finances, and the reputation of companies will increase as a result of geopolitical risk
- Therefore, Colombian and Latin American companies must also effectively prepare to manage geopolitical risk, as they face essentially the same risks and challenges as other companies around the world. We all live in an increasingly smaller and more conflictive world.
6. Recommendations
- Recognize geopolitical risk as a reality of the business world today and in the coming years.
- Properly manage this geopolitical and business reality in order to protect the supply chain, markets, security, operations, finances, and the reputation of companies, as well as to take advantage of the opportunities it also presents. This means, among other things:
- Constantly monitor the geopolitical landscape that may affect or create opportunities in your supply chain, markets, security, operations, and finances. Recent examples include Russia’s invasion of Ukraine, the conflict between Israel and Hamas, and tensions between China and Taiwan.
- Identify, assess, and take appropriate measures to control risks that may negatively affect companies and to maximize the potential that geopolitical risk also presents.
At CC&PRMC, we deeply understand the dynamics of geopolitical and political risk, and its impact on businesses, both locally and globally. We specialize in the political, geopolitical, economic, and business environment of Colombia and Latin America.
For those interested in delving deeper into how geopolitical and political risks can impact their organization and how they can be effectively managed, we offer a range of personalized services.
If you are looking for specialized advice to understand and manage political, geopolitical, and compliance risk in your organization, do not hesitate to contact us at contactenos@ccprmc.co or visit our website https://ccprmc.co/ for more information.
At CC&PRMC, we provide you with the necessary tools and knowledge to not only minimize geopolitical and political risk but also to take advantage of the opportunities it presents.
* The author is the Managing Partner at CC&PRMC, a firm specializing in political, geopolitical, and compliance risk. Connect with him on LinkedIn for further insights and discussions here.
© 2023, Jorge Enrique Gómez Pardo. All rights reserved. If you use this content, please give credit to the author.
