Businesses and Geopolitical Risks

All along, companies have been managing geopolitical risks reactively—responding only when something goes wrong. However, the 20th edition of the World Economic Forum’s Global Risks Report 2025 has ranked State-based armed conflict as number one in the global risk list. The wars in Ukraine, the Middle East, and Sudan, which have introduced unprecedented instability, simply propelled the armed conflict that was ranked ninth last year to the number one spot in the current edition by nearly a quarter of the surveyed experts. 

Unlike financial risks, which are well understood and routinely managed by businesses, geopolitical risks are ambiguous, deeply asymmetric, and fast-changing. Their unpredictable nature can quickly snowball into a crisis. A single tweet from a global leader can wipe out billions of market capitalization of companies. A sudden change in immigration or visa rules can halt all the plans for expansion midway. These risks harm a company’s balance sheet through increased costs, trade restrictions, or the loss of entire markets—causing panic among stakeholders. Over time, they can even impact innovation in corporations, undermining the long-term sustainability of businesses. 

The unprecedented economic volatility, uncertainty, complexity, and ambiguity pervading the global economic landscape owing to the threat of punitive tariffs, supply chain disruptions, weaponization of sanctions, Red Sea disruptions, the menace of rising crude-oil prices, and data localization mandates has brought geopolitical risks to the central stage of corporate business strategy. No company, whether a multinational or a homegrown company, is insulated from these risks. And Indian businesses are no exception to this phenomenon. In fact, with India’s growing global footprint and increasing integration into global supply chains, Indian corporations are becoming increasingly vulnerable to geopolitical risks. 

Thus, the age of treating geopolitical risk as a distant, once-in-a-while disruption is over. So, the way forward is: Corporations have to give it the urgency and attention it deserves. Boards have to institutionalize and prioritize treating it as a core part of the enterprise risk management. Much like management of financial risk through sophisticated mechanisms, corporates, moving away from a reactive to a proactive state, must create a mechanism to build early warning systems, scenario planning, and embed them into their core decision-making process. 

In this context, the recent round of the Israel-Iran war has something to teach corporates. In just 12 days, Israel eliminated the military leadership of Iran, bombed the country’s nuclear sites, and decimated dozens of their missiles and launchers on the ground. Iran, by contrast, failed to take down even a single jet of Israel. All these achievements of Israel underscore the decisive advantage of Israel’s superior intelligence—ability to anticipate and penetrate Iranian regime’s highest ranks—and pre-empting threats using the so gathered intelligence strategically. 

Taking a cue from this, companies must gather robust external intelligence—not just on market trends, but on political, regulatory, and security developments in key geographies. They may have to set up geo-political advisory councils with economists, diplomats, and military experts to advise boards on geopolitical developments. As John Chipman, once said in his HBR article, companies have to, in effect, “privatize” foreign policy—that is, they must internalize many of the elements traditionally employed in statecraft. Companies must define their interests and accordingly collect and analyze external intelligence about the countries where their interests lie. In short, they should draft a foreign policy by adopting elements of traditional statecraft. Prima facie, such a corporate foreign policy must take shape, essentially driven by two elements: corporate due diligence and corporate diplomacy. The former must address issues such as assessment of ‘transnational risk’, ‘local in-country risk’, ‘home and near-abroad risk’, and assessment of the company’s sensitivity to regional political developments. Guided by these risk-assessment studies, a company should draft its diplomatic stance. This shall enable its global business to run successfully on a well-defined strategy framework. 

It is said that to be effective, a corporate diplomacy strategy must operate on four principles: one, it must define its approach to foreign governments, rather than being manipulated by the home country policies; two, it must cultivate a transnational character by publicly pronouncing its global character, by maintaining its reputation both in words and spirit; three, diversifying political relationships by building dynamic relationship with governments, business elite, and civil society; and four, not to sabotage its interests by remaining inept to the political and foreign policy interests of the host country. 

To sum up, corporations must be vigilant of the growing global uncertainties and be resilient to the geopolitical shocks with an institutionalized strategy. It may initially sound strange, but once expertise in international diplomacy is cultivated internally, it is sure to prove a competitive advantage.

image courtesy: https://today.usc.edu