Geopolcast: Season 1 – Episode 11
In this episode of Geopolcast, join host Elisabeth Braw and expert speakers Sam Wilkin and Arto Räty as they discuss developments in the world of political risk as seen in our latest political risk survey report.
This episode also dives into why Western businesses are prime targets for geopolitical risks, explores the diverse challenges companies encounter, and uncovers actionable strategies to mitigate these threats.
Episode 11: Navigating geopolitical risks for businesses
Transcript:
ARTO RÄTY: has not been a proper strategic planning existing in Western companies. There have been plans for two to three years ahead without good scenarios established. Now this scenario seems to be popular, and companies are applying them and really carefully considering what are the plausible developments and what should they do to prepare themselves.
ELISABETH BRAW: A warm welcome to Geopolcast, the podcast from WTW exploring geopolitics and its impact. My name is Elisabeth Braw. I'm a senior fellow at the Atlantic Council, where I focus on the intersection between geopolitics and the globalized economy. I'm also the author of Goodbye Globalization.
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In each episode, I'm joined by experts who can help us better understand geopolitically related issues of the day. In recent episodes, we've discussed attacks on global shipping, risks facing the oil and gas sector, and threats to seabed infrastructure, among many other things.
And today, I'm delighted to be joined by two guests with enormous insights into the geopolitical risks and threats facing companies today. ARTO RÄTY, retired from the Finnish Defense Forces with the rank of Lieutenant General.
While in the armed forces, he led Finland's crucial National Defense Course, where rising leaders from the private sector, academia, NGOs, education, and the government, in fact, all sectors spend several weeks learning about threats facing Finland and how the country defends itself. The National Defense Course is so popular that admission is highly selective. As intended, graduates stay in close touch.
Sam Wilkin is head of political risk analytics at WTW and leads the work on its political risk reports and surveys. Speaking from personal experience, these are extremely useful reports because they not only document politically motivated risks and threats, but also survey companies.
As a result, we know, for example, that last year 69% of companies surveyed experienced supply chain disruptions due to geopolitical events. We also know that 72% experienced political risk losses and that 96% invested in new political risk management capabilities.
70% believe that the decoupling between China and the West will strengthen, while only 8% believe it will weaken. 74% believe economic nationalism and deglobalization will grow. 60% believe that disruption to globalized business due to gray zone aggression, which is geopolitically motivated aggression, not involving military means, will increase. Arto and Sam, welcome.
SAM WILKIN: Thank you. Delighted to be here.
ARTO RÄTY: Thank you.
ELISABETH BRAW: Sam, let's start with these figures. We've seen some extraordinary changes in geopolitical risk over the past few years. And what we've seen, as you've documented, is an extraordinary growth in these risks.
Barely a week goes by without more news of Western companies seeing that Russian operations expropriated or the Russian government saying there will be more expropriations. And now, what are the most important developments you're seeing in the 2024 survey compared to, let's say, 2020?
SAM WILKIN: So there has been over the past few years, maybe the past decade or so, a tremendous geopolitical shift in for the last 50 years, the number of democracies in the world had been increasing. Now, that trend reversed, and the number of democracies is falling.
For the past, probably close to 50 years, the level of trade freedom in terms of tariffs and restrictions on trade had been increasing. That trend also has gone into reverse. And of course, most famously, the number of international violent conflicts involving governments has soared to I think there's around 30 or so conflicts ongoing today. Most dramatically, of course, conflicts in Ukraine and the Middle East.
And by pure dumb luck, we happen to be conducting this survey at a time when we had this tremendous geopolitical shift. So over the past eight years of the survey, you can see a lot of changes. So the survey looking back through time, you can document these geopolitical shifts and what the impact on companies were.
You've already alluded to some of the figures. We used to get figures like 20% or 30% of companies had a political risk loss every year. Now it's 70% to 90%. I think one of the really interesting shifts that occurred, I think 2020 was the last normal year.
The top countries where there were political risk losses were Iran, Venezuela, Zimbabwe, Angola, Argentina, and that's kind of the countries where you would expect there would be political risk losses. They are very obviously risky. They're mostly small economies. If you went in, you probably did so because you thought there'd be a great return. But you knew there was going to be risk, Let's be honest.
And now 2023 and 2024, the situation is completely changed. The major losses are Russia, China, the Red Sea, Ukraine, and the United States. Ukraine, okay; a Red Sea, I get that; a United States, mostly due to sanctions and export controls.
But broadly speaking, Russia, China, the US, these are countries where most companies thought they were great places to do business and didn't expect there to be risk. And also they're pretty large economies.
So the scale of losses, in addition to these losses being harder to predict because they're not in the obviously risky countries, the scale of losses can be a lot larger because these economies are much more vital to any kind of globalized business.
ELISABETH BRAW: And Arto, you are now in the private sector. And what you are seeing in that role, and it links to your previous role, is that Western businesses are truly in the line of fire. And that raises a question, why have they become such a target? Why do hostile states decide to try to harm businesses in our countries?
ARTO RÄTY: If I take the example from Russia, which is an easy case here to discuss about, and there are actually very clear reasons in Russia why Russia is doing the expropriation and take over and, let's say, nationalizing their companies.
My background includes six years in Fortum Corporation, which at that time was the biggest Nordic energy company. And they invested, I went there in 2016 and retired in 2021. But they invested in 2008 a lot in the Russian energy systems.
And even I, with my background, who was definitely very much aware of the Russian risks and what kind of risks this kind of leadership may cause, I said that, hey, this will be the last case they can do to nationalize, or to take over, or to expropriate energy companies which are running in the best way in their system, because what we did, they were definitely the best companies they had. But now we see what happened.
ELISABETH BRAW: Just to clarify, Arto, what happened is what?
ARTO RÄTY: They actually took over the Fortum Corporation assets in Russia.
ELISABETH BRAW: Yeah.
ARTO RÄTY: They say temporary. But "temporary" in Russia means something different. So in practice, it was a process to expropriate the Fortum assets in Russia, which is several billions worth of assets.
ELISABETH BRAW: Yeah.
ARTO RÄTY: Why this happened? Actually, the reasons behind Russia's behavior, that's the only way for them to hit back against those nations who are involved in sanction policies. Second one is, of course, that they are trying to show to the domestic audience their determination in the leadership, especially in Putin regime.
And thirdly, economics, because it gives some benefits for the company because the money stays in the country. But the outcome, of course, at the end is more complicated. When it comes to global arena, it's more complicated. I would say that one of the reasons why the Western companies are attacked that they are stronger than individual nations at the moment in some cases.
They are global companies who can influence politics in individual countries, especially social media companies, and then technological companies, which are bigger than their budgets are 10 times bigger than smaller countries' national budgets. So there are big, big players, and they represent values which may not be shared by those nations.
And there are many other reasons behind it. And one of the issues I would say in the Western world, which we have to have a look, is the ESG at the moment because that's also one of the issues dictating the behavior of our countries. But that's in short terms.
ELISABETH BRAW: Yeah. And Sam, as Arto said, Russia does indeed offer worrisome example of what happens when there's a real clash between the West and a country where many Western companies operate. And some companies pulled out of Russia straight after the invasion of Ukraine in February 2022. But many stayed thinking they could sort of outlast the turbulence.
And then, when they tried to get out, they encountered an extraordinary range of hurdles and delays. And most or many haven't been able to get out to this day. And as Arto said, some have seen their operations seized by the Russian government.
Now, what lessons do you think companies should draw from this experience now with the global geopolitical standoff is increasing? And it's not just in Russia. For example, should companies operating in countries where the regime uses the Wagner Group, which is now called the Africa Corps to remain in power? Western companies operating in such countries, should they be worried about similar scenarios.
SAM WILKIN: Yeah, so I think it's really hard to get the Russia situation right. You had companies that pulled out and got expropriated, companies that stayed in and got expropriated, companies that continues to yes, some US companies continuing to do business.
Now I heard a case of a US company still continuing to do business in Russia, and now it's been hit by Ukrainian missiles a couple of times. So you just can't win. I think that is one lesson that it's hard to win these kind of geopolitical shifts happen. It is pretty hard to win, doesn't matter who you are.
So you have to really be prepared for the worst, maybe work through, as you said, the scenarios, work through the scenarios, understand what the implications for your business is going to be. I also think, as you pointed out, in Africa, there are more subtle shifts going on between East and West, where countries are well, it's not a Cold War maybe yet. Well, we can debate.
It maybe not a totally cold war yet, but there are countries kind of leaning towards one side or the other. And when they do flip sides, as we've seen in Africa, especially in the mining sector, then you often find that companies where the world in sectors where the world is increasingly bifurcated I'm thinking here, particularly of tech and of energy, now with Western sanctions, there are two separate ecosystems, like an Eastern one and a Western one.
It's really hard as companies are accustomed to doing in the past, really hard to have one foot in both, and you tend to be at a much greater risk specifically of expropriation, also losing contracts if the country where you're operating flips its geopolitical alignment from one side to the other. We've seen that really dramatically in Mali and Myanmar with lots of losses for companies, but there are other countries as well where that alignment is contested.
ELISABETH BRAW: Yes. And we'll probably see more such countries. Now, Arto, one country that whose geopolitical alignment is very clear these days is Finland, which used to have extremely close commercial links with Russia until the war broke out.
And since then, we have seen a range of different companies take different actions to reduce their exposure to risk in Russia. And now what do you think other countries' companies can learn from Finnish ones considering that the case for them was much more urgent?
ARTO RÄTY: It's difficult to say what can they learn from us. But I would say that and someone mentioned the scenario exercises and studies. And that's the key element for companies to survive them, to build up a good scenarios to see what are the plausible developments in the future.
And that's what we try to do in Finland. But unfortunately, our scenarios were not good enough in many ways. But the scenario is one of the issues. And of course, even though we had a large-scale business going between Russia and Finland, we never laid our eggs into one basket. And so we were not depending on Russia and Russian resources.
So we were never taking all the resources from Russia, like in one country in Europe whose gas was coming from Russia and became a very let's say whose energy situation became very difficult because of that one when the gas pipes were closed.
So that's one advise, you don't put your eggs in one basket. And of course, when it comes to supply chain, that's one of the issues we are trying to figure out how to do it in the future. Because every country should have a careful look at the moment on their supply chains, and every company, especially.
And we are depending on China in many ways. And unfortunately, this dependency is not easy to take away. But we just have to find new solutions. And I'll give you one example, which is the semiconductors. And that's a long way to go. It takes 10 years to build up a good production capability in Europe. We are starting this process.
So we're very much depending on the Asian countries, especially China, Taiwan, and South Korea. Of course, the biggest exporter is Taiwan. And others, Japan and Taiwan, are making semiconductors for their own use by their own companies. These kind of issues are now on the table in many areas.
I can't say that Finland is a good example of this one. We are similar like the others and the Western companies in our countries. They have similar problems in every single country at the moment. And the biggest problem is that there has not been a proper strategic planning existing in Western companies.
They have been planning plans for, I would say, two to three years ahead without good scenarios established. Now this scenario seems to be popular, and companies are applying them and really carefully considering what are the plausible developments and what should they do to prepare themselves.
I will say that our nation can be an example in one area. That's societal preparedness, which we have executed since second World War in a very constructive way until today and will carry on in the future.
That is something special, especially in security of supply where we have own agency who is taking care of this area. And it goes through all the sector of society. But still there's a lot to do in Finland, too.
ELISABETH BRAW: Yes. And we'll be watching what Finnish companies do, especially as they try to leave Russia, but also in establishing themselves in new markets, and what are those markets? What are the markets that are safe enough in this geopolitical confrontation? We don't know.
Sam, sorry to put you on the spot, but since Arto mentioned strategic planning, I think one thing that I've been wondering about is when companies realize that something is becoming a risk or a threat in your surveys, how does that discovery happen?
Is it because you and your team flag up various emerging risks that companies say, oh, we should worry about this? Or is it that they come to you and say, this is what we are observing, please include it in your report?
SAM WILKIN: Interesting. So there's a mix of that kind of thing. So we definitely see situations where we will do an analysis, figure out what a company's exposure is to a particular region, or a particular scenario, or a particular country, and that comes as a surprise, and that triggers some further work.
But other times, the company will bring it up, will realize that this is an issue. I think the challenge is that there were relatively well-understood rules of geopolitical risk in the kind of old world order, if you will.
If you look at the geopolitical textbooks which, I may have been guilty of writing one or two myself some 15 years ago. If you look at those textbooks, they would look at data from political risk events, like the expropriations that happened in the 1970s or all the independent power arrangements that came in the 1990s. And I think half of them failed for political risk reasons.
And so you had a sort of rich data set to draw on to see what drives political risk. And examples for instance, were, well, high tech investments are less risky because the host government needs the foreign investor because they don't have access to this technology. And so the host government would typically not mess with any kind of really high tech investment.
Or another one, offshore oil platforms tend to have pumped their way through more African civil wars than one cares to remember. And they were almost never attacked because part of the objective of the Civil War I'm really oversimplifying here was to get access to the oil. And obviously, the rules have completely changed.
After the conflict in Israel starts, the first thing the Israeli government does is shut off the offshore gas production because they're concerned that Hamas is going to target it with some kind of gray zone weapon you've written one or two things about the gray zone, I think Elizabeth is going to target it with some kind of gray zone remote attack.
And then tech companies, now high tech is the absolute forefront. All those losses in the United States mostly come from US export controls and sanctions and mostly apply to the technology sector. And so technology has gone from the lowest risk to the highest risk.
So all the rules have changed. I don't think anyone really completely understands what the new rules are. And we've certainly seen the most profitable and highly remunerated, most clever people being blindsided again and again.
So these things do come up by surprise. There can be cases where you just aren't aware that no one knows what the rules are. We're figuring out as we go along. Being surprised is not unusual in those circumstances.
ELISABETH BRAW: No, it's not unusual. And as you both pointed out, because the situation is so unclear and so muddled, it's hard to write any sort of strategy, corporate strategy or national strategy. So what we have are case studies, successful ones and unsuccessful ones, that businesses can learn from, essentially learning from watching what other companies have done.
And that's where we are at the moment. And it's very unsatisfactory, I think, for most corporate leaders. But they can listen to you, Sam, and you, Arto, and that's where a lot of insight can be gained. And I hope you have all gained new insights in this episode. Thank you, Sam. Thank you, Arto, for joining us. And thank you all for listening.
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