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Financial Risk

Is geopolitics your biggest risk?

Alessandro Sanos, CAIA

January 31 2017

Photographer: Kevin Lamarque

From the policies of President Trump to European populism, the list of geopolitical risks facing companies and their supply chains is extensive. How can your organization protect itself?

With so many unknowns and so much uncertainty, ranking the severity of the geopolitical risks confronting commodities, trade and financial markets at the start of 2017 is an impossible task.

Find out how you can detect, assess, and minimize potential risks using Thomson Reuters Third Party Risk management solutions

Three of the biggest areas of risk appear to be coming from the United States, China, and the European Union where there is a state of political change, but just as significant are Russia, Turkey and North Korea.

One thing is for certain: highly regulated financial institutions and corporations with complex international supply chains cannot ignore geopolitical risk any longer. A view reinforced by a recent announcement from Howard Schultz, Starbucks chairman and CEO, when expressing his concern over the impact President Trump’s Mexican wall policy will have on the company’s relationship with Mexican suppliers and the impact the immigration policy will have on current and future employees.

In this blog we analyze the main risk factors and the ways to minimize exposure.

America First

There has been significant speculation that President Trump will place a moratorium on any new financial regulation.

In addition, his willingness to take on global corruption will be another big regulatory question looming over the new administration, as he assumes office having done business in high-risk and sanctioned countries and in the past has called the 40-year old Foreign Corrupt Practices Act “a horrible law” that hampers U.S. competitiveness.

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U.S. Republican presidential candidate Donald Trump hugs a U.S. flag
Photographer: Brian Snyder

Compliance professionals will need to understand the implications of any possible repeal of existing regulations such as the Dodd-Frank Act, which was passed in the aftermath of the 2008 financial crisis.

There is also growing evidence suggesting that President Trump’s America First approach may rewrite America’s role as the global super power.

In its list of top ten risks, Eurasia Group summarized Washington’s approach as one where “if there’s not an obvious, near-term benefit for the U.S., or if it’s the provision of a “public good” where others are free riding, it’s not something the U.S. should be doing”.

The consequences of this uncompromising style of U.S. presidency and new approach to international trade are most likely to be felt by China.

There are already increased tensions over the South China Sea, and any undermining of the One China policy on Taiwan could lead to frictions with Beijing that may culminate in a trade war.

Protectionism vs free trade

President Xi Jinping recently became the first ever Chinese president to attend the World Economic Forum in Davos, during which he offered a defense of free trade and likened protectionism to “locking oneself in a dark room”.

After decades of economic boom and with high levels of debt, China will probably focus its attention on economic stability until this autumn’s National Congress of the Communist Party, an event that occurs every five years.

It is likely that Beijing will try to profit from President Trump’s potential opt out from the U.S. led geopolitical order in order to advance China’s interests, which in turn could result in some U.S. allies in Asia shifting allegiance.

The European flag flies outside of the La Canada shopping centre in Marbella, southern Spain
Photographer: Jon Nazca

Europe – an uncertain future

The insurgency of populist forces hostile to the EU has the potential to affect national elections in the Netherlands, France, and Germany and put at risk the whole project of European integration.

Elections have not been called in Italy this year yet, but with 63 governments in 70 years, it is still possible that Italians will be called upon to vote. Greece, where the economic crisis is dragging on without resolution, may follow suit.

And with the Supreme Court ruling that parliament must vote to trigger Article 50, the UK’s future in Europe is still far from certain.

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Russia, Turkey and North Korea

It is likely that there will be growing pressure to lift the economic sanctions imposed on Russia in 2014 as a result of upcoming elections in a variety of countries where candidates have expressed pro-Russia leanings.

This, in conjunction with a possible growth in revenues from oil, may induce President Putin to pursue an expansion of Russia’s interests abroad and potentially confront NATO.

The Kremlin is also trying to diversify its foreign partners and has offered to supply the Philippines, a long standing U.S. ally, with sophisticated weapons including aircraft and submarines.

In Turkey, the failed coup and President Erdogan’s consolidation of power, have introduced additional uncertainty in the area.

Ankara will also strongly oppose any expansion of Kurdish-controlled territory in Syria to prevent the creation of a separate state and an alternative route to the Kirkuk-Ceyhan Pipeline.

With regards to North Korea, concerns have grown more urgent as Pyongyang’s nuclear and intercontinental missile capabilities are expanding fast.

Download report — How organizations today are really managing third party risk

How can companies protect themselves from geopolitical risk?

Minimizing geopolitical risk exposure begins with awareness.

In an era where disinformation is deliberately promoted, access to trustworthy, independent, and unbiased information is crucial.

Governed by its trust principles, Reuters strives to preserve independence, integrity and freedom from bias in the gathering and dissemination of information and news.

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Over the past few years, regulators have tried to ensure a greater harmonization in financial regulation globally.

However, there are now signals that this harmonization effort may be running out of steam, with different regulators taking different regulatory approaches.

As a result, organizations need to be able to anticipate and navigate global regulatory compliance confidently with the most comprehensive and trusted intelligence available.

Thomson Reuters Regulatory Intelligence cuts through the complexity and sheer volume of content and developments within the regulatory compliance environment.

Find out more about Regulatory Intelligence

Organizations with global business activity also need an accurate and up-to-date view of their location-based risk exposure.

Thomson Reuters Country Risk Ranking offers detailed, risk-based information on more than 240 countries and territories, divided into political, economic, and criminal factors, and helps organizations identify location risk attached to customers, partners, vendors, suppliers and transactions.

Politically Exposed Persons (PEPs)

To protect themselves against reputational damage in countries with upcoming elections, organizations should monitor their exposure to PEPs who, due to their position and influence, may abuse their position for the purpose of committing money laundering offences and related predicate offences, including corruption, bribery, and terrorist financing.

Thomson Reuters World-Check risk intelligence and Enhanced Due Diligence reports help reveal hidden risks such as PEPs that could breach compliance regulation or cause reputational damage.

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Find out more about World-Check

Companies with international value chains also face physical supply disruptions and shocks caused by geopolitical upheavals.

The Interactive Map on Thomson Reuters Eikon is the most direct way to monitor and analyze commodity production interruptions, supply outages, and transportation difficulties that affect the supply chain and impact prices.

Find out more about Eikon 

Watch video – Thomson Reuters Eikon Interactive Map

To keep up-to-date on all the latest geopolitical risks that could impact your organization follow @riskmanagement and join the discussion @AlessandroSanos.

The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of Thomson Reuters.

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