Opinion Ukraine war, Gaza conflict and Middle East strikes: It’s time businesses prepare for political risk

The electoral results in some countries are predictable. President Vladimir Putin will, for instance, win the elections in Russia. And if elections are held in Israel as demanded by the public, PM Benjamin Netanyahu will be out of office. The results in others may not be so definitive but political pundits have already called them. PM Narendra Modi will win a third term; PM Rishi Sunak will sit with the Opposition. And the results in a few will depend on the preference of a minority of fence sitters or a “non-playing” captain. The next president of the US will be decided by the voting outcome in just four (or perhaps five) of the 50 states and according to one analyst, the side of the fence towards which 1,00,000 or so voters in these four swing states jump. The elections in Pakistan will rest on the choice of its military.

At the level of international geopolitics, the conflicts in the Middle East, Ukraine and the “Cold War” between China and the US remain front and centre on the global agenda. The Middle East conflict has, in recent weeks, ratcheted up in intensity with the US and UK bombing the Iranian-backed, Yemeni Houthis that have disrupted international trade through their attacks on international ships crossing the Red Sea. This has led to shippers including Maersk and BP rerouting their traffic around the Cape of Good Hope, rising freight costs and causing supply chain delays. Last week, three US soldiers were killed in an attack allegedly by an Iranian proxy, prompting President Joe Biden to echo President George W Bush’s muscular response following 9/11. The concern is whether such a response will trigger an escalatory chain reaction engulfing Syria, Lebanon, Iraq and Iran.

The Ukraine war, now in its second year, is stalemated. Ukraine needs more money and ammunition but its allies are divided on how much and for how long to bankroll it. Putin is in no mood to compromise, especially now that Trump looks like he will be riding out his legal troubles into the Republican nomination.
The “Cold War” between the US and China seemed like it might lurch towards the edge with the election of the separatist leader Lai Ching-Te as President of Taiwan. Thankfully that has not happened yet, but no one should discount the possibility of “macho” adventurism triggering a “hot” reaction.

Technocratic business leaders have never found it easy to handle political risk. They recognise the problem but tend to sidestep a granular conversation on its impact. This may be because it is a “known” but “unknown” uncertainty. It cannot be easily “price tagged”.

My view is that this lacuna must be filled. Given current world conditions, this is a risk that if not managed and/or mitigated could well tip companies over the edge. There is no one-size-fits-all process for tackling such uncertainties. One oft-adopted way is to “outsource” the process to political risk consultants — former civil servants, politicians, and academics. This is better than pushing the issue under the carpet but it provides no more than a useful ballast. It is not sufficient. What is required is a process that engages leaders across all functions and stretches management’s mindsets to countenance the “what if”.

In this regard, I am a votary of the scenario planning process. I like that this process does not generate predictions, but based on predetermined trends develops descriptions of different but logically consistent and plausible futures. It is led by the planning department but it proves useful only if it is a multidisciplinary, non-linear exercise. It compels intellectual and subjective reflection of the counterfactual but it allows for the translation of these reflections into quantifiable metrics.

The World Bank has, for instance, recently prepared three scenarios regarding the future trajectory of oil prices. Each of these scenarios is built around predetermined levels of supply disruption. There is the “small supply” disruption scenario wherein supplies are reduced by between 500 kbd and 2 mbd equivalent to the amount taken off the market during the Libyan Civil War of 2011; the “medium disruption” scenario leading to a supply hit of 3-5 mbd equivalent to the impact of the Iraq war of 2003; and the “large disruption” scenario wherein supplies contract by 6-8 mbd a la the Arab Embargo in the aftermath of the 1973 Yom Kippur war.

For each of these scenarios, the Bank has provided an oil price range rather than a single line forecast; viz $93 – 102/bbl in “small” disruption; $109 – 121/bbl in “medium” and $140-157/bbl in “large” disruption. I find this approach constructive as whilst it enables the leaders to deliberate the ramifications of the current Middle East crisis against hard metrics, it deters them from fixating on a number that given market conditions would most likely mislead.

Businesses confront such a complex of potentially disruptive risks. There is no one recipe for managing them. Scenario planning is not a panacea, but it does offer a methodological process for better preparing corporate leaders to respond to the unexpected.

The writer is chairman and distinguished fellow, Centre for Social and Economic Progress (CSEP)