Companies Can’t Afford to Ignore War Anymore

Once upon a time, a very long time ago, about two years ago, companies—like the beloved children’s character Winnie the Pooh—lived, if not all by themselves, then at least far from geopolitics.

Once upon a time, a very long time ago, about two years ago, companies—like the beloved children’s character Winnie the Pooh—lived, if not all by themselves, then at least far from geopolitics.

How rapidly the world has changed since then. Last year, a staggering 93 percent of multinationals reported losses linked to political instability, up from 35 percent in 2020, a new survey from WTW and Oxford Analytica found. Companies should brace themselves for even more turbulence this year. And next year. And the year after that. Businesses, which have for decades operated in a world where they could float above any squabbling among countries, are discovering that charmed era has ended.

Weeks after Russia invaded Ukraine, BP decided to let go of its 19.75-percent stake in the Russian oil and gas giant Rosneft and two joint ventures in Russia—which meant it had to write down more than $20 billion in the first quarter of 2022. The German DIY chain Obi Baumarkt sold its Russian stores to local staff for 10 euros. The Italian bank UniCredit has lost $1.3 billion, ExxonMobil has lost more than $3 billion, and H&M has lost nearly $200 million. Indeed, every company leaving the country (and hundreds have made announcements to that effect) is incurring substantial losses—if they manage to leave.

Companies wishing to depart need the approval of Russian authorities, and as of March this year, they also have to make a “mandatory donation” to the Russian government. Meanwhile, companies operating in China, or exporting to the country, know that they risk becoming a target if their home governments say or do something that displeases Beijing; this has happened to companies as diverse as Ericsson and Taiwanese pineapple farms. And when President Tsai Ing-wen of Taiwan met U.S. Speaker of the House Kevin McCarthy in California earlier this month, Beijing responded by dispatching an “inspection flotilla” to the Taiwan Strait, where its threat of inspections was certain to wreak havoc on shipping companies and their customers in one of the world’s busiest waterways. This time, the flotilla didn’t carry out any inspections, but global shipping companies and manufacturers rightly concluded there will be more such outings.

Such events have delivered a brutal awakening to companies, which until just a couple of years ago persisted in believing that they could keep operating in a largely peaceful sphere. The 2023 political risk survey conducted by Oxford Analytica for the insurance broker WTW, published on April 18, delivers sobering figures. Last year, 68 percent of companies bought political risk insurance, which provides cover for war, civil wars, coups, government expropriations, and similar misfortunes, up from 25 percent in 2019.

Even compared to last year, the fear of geopolitics has skyrocketed. In the 2022 survey, 16 percent of the executives interviewed predicted deglobalization would significantly strengthen; in this year’s report, 48 percent do (and another 38 percent believe it will simply strengthen). Last year, 12 percent of the executives predicted decoupling from China would significantly increase; now 42 percent do. Beijing has been all too happy to oblige. The Financial Times reported that between mid-February and mid-April this year, China imposed sanctions on the U.S. defense contractors Lockheed Martin and Raytheon; launched an investigation into U.S. chipmaker Micron; and harassed the U.S. due diligence firm Mintz, Japan’s Astellas Pharma group, and the Big Four consultancy Deloitte.

A sizable majority of executives have lost faith in globalization. “It’s a sea change in companies’ attitudes about geopolitical risk,” Sam Wilkin, WTW’s director of political analysis, told me. “There has been a huge change in perception, mostly as a result of the conflict in Ukraine and, for U.S. companies, the confrontation with China. Companies have started taking wars and conflicts seriously.” (Full disclosure: I serve as an occasional advisor to another division of WTW.)

Companies are taking wars and conflicts seriously because they’re being affected by both—including conflicts of the less visible kind. Twenty percent of the companies surveyed have sustained political risk-related losses in Russia or Ukraine, and 48 percent have done so in the BRICS countries—Brazil, Russia, India, China, and South Africa. “Political uncertainty manifested in the war in Ukraine and the growing uncertainty around China and a potential war in the Pacific over Taiwan: Link this to continued uncertainty over rogue states like North Korea and Iran, and it’s no surprise that political uncertainty and the impact it has on international business is growing,” said Simon Bergman, the CEO of M&C Saatchi World Services. “The West’s inability to accurately predict large state actors’ behavior has been manifest over the past 12 months, and this will continue into 2024 and beyond.”

Political risk insurance cover was created years ago with the backing of several Western governments to allow companies to operate in riskier countries. Today, though, simply operating in the globalized economy is so risky that nearly 7 in 10 companies are buying this insurance. “Companies’ ability to do business in Russia and China will continue to deteriorate,” Bergman said. “When, and it’s when, China acts on Taiwan, the international reaction will significantly impact global businesses, and many of them depend on China for commercial products. The impact will be significant if not crisis-bringing.”

Nearly two-thirds of the executives surveyed by Oxford Analytica are concerned about state-backed cyber aggression, and nearly 60 percent worry about sanctions targeting individuals and companies. More than 50 percent worry about state-backed manipulation of financial markets, and more than 40 percent are concerned about state-backed intellectual-property theft.

So dire is the situation for the corporates surveyed that Russia and China now account for the largest political risk losses, followed by India, Brazil, and (thanks to Brexit) the United Kingdom. In 2020, companies sustained their largest political risk losses in Iran, Venezuela, Zimbabwe, Angola, and Libya—a much more predictable bunch of countries, and much more manageable losses because most companies had smaller operations there than in Russia or China. China taking the place of the Angolas and Libyas of the world, measured in business risk, is a dramatic turn of events.

“The risk the business community is most worried about is the West vs. China, because Western countries are showing that they’re willing to treat China as a systemic competitor,” Wilkin said. “And now it’s possible to imagine a major economy leaving the globalized economy. In 2020, we still had some of the usual suspects ranking as the world’s riskiest. Back then, you could operate in politically risky countries because you had diversified operations including many countries with no or little political risk. Now political risk has shifted major world economies that used to be major investment destinations. Companies are worrying about going out of business as a result of political risk.”

It has come to this: Businesses are worried about going bust not as a result of misunderstanding the market or making foolish investments—but as a result of geopolitics. Western companies in particular are extremely vulnerable now that globalization’s ultimate prize, China, is not just battling the United States over global power but also battling its own private sector, lest it become uncomfortably powerful. So severe was Beijing’s recent crackdown of China’s most successful tech giants that the companies’ shares plummeted when President Xi Jinping was reelected to a third term last fall.

“If the rate of change on the outside exceeds the rate of change on the inside, the end is near,” GE’s legendary CEO Jack Welch said. It’s not looking good for the companies that have done precisely what they were supposed to do and spent the past three decades integrating themselves into the globalized economy.

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