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

COVID 19 & World Password Day …

The current COVID pandemic, besides threatening our very life, has thrown a fresh set of challenges. One of them is: Cyber frauds. With the lockdown, people, staying at home have become more dependent on various payment gateways to pay their utility bills, premiums, recharge their mobiles, buy medicines, groceries and vegetables online, etc. Such increased online activities have opened door for spyware and ransom ware attacks. And these attacks are sure to cause huge losses to individuals

Another development during the lockdown is our accessing social websites such as Instagram, Facebook, Twitter, etc more frequently; watching movies and serials on Netflix, Amazon, HotStar, etc., and even playing online games by installing various applications. In the process of availing these services, people tend to give access to their personal information that is readily available on their mobiles, laptops, etc. Many a time, in the process of purchasing apps to access these services, financial information too is shared.

Banks, which are now working with skeleton staff, are advising customers to use internet banking/mobile banking services. Besides making phishing calls/sending phishing mails, with the RBI granting a moratorium by deferring payment of EMIs/interest payments, etc., cyber attackers are reported to be active in calling such loanees posing as bank employees and in the course of discussions relating to rescheduling of instalments, etc., subtly asking for passwords, OTPs, PIN relating to their accounts.     

Another important development during the lockdown is that many people have started working from home. Which means, accessing companies’ systems and data from home. So, any let-up on the part of the employees expose their company’s data to risk.   

The current pandemic has thus thrown open wide scope for online frauds. The only safeguard we have against these cyber attackers is our Password. And that is what the seventh May, designated as the ‘World Password Day’ reminds us, while also stressing the fact that how important it is for online users to strengthen their security posture by adopting good online practices to protect their own interests from cyber risks. For, “a password is the primary method used to confirm the identity of a user to gain access to a wealth of platforms and personal information”, says BSI authorities. They are the gatekeepers to our digital identities. They allow us to access our online accounts to do shopping, banking, etc.  So, cultivating good password habits is the sine quo none for protecting one’s data, property and business.

We are today operating a diverse set of accounts. Thus, the need for passwords to secure safe access to a diverse set of accounts has grown up phenomenally. The common tendency among us is to set a single password for the whole set of accounts. And that is the biggest risk one gets exposed to.  If a malicious person gets to know this password through phishing emails or by any other means, he would get unauthorized access to all the accounts and with that unlimited access he could inflict unlimited loss to the original account holder. Should the same password be used on personal as well as office/work account, the risk would be even more.    

So, to stay safe online, one needs to select a unique and complex password for different accounts differently, so that they cannot be guessed or cracked easily by the criminals. Some of the guidelines issued by experts for designing a strong password are listed hereunder:  

  

·    Passwords should contain a minimum of ten characters comprising uppercase and  lowercase letters as well as numbers and special characters — a good password is a long password

·     One should not use personal information such as a part of an address, a surname, a spouse’s name, date of birth or the name of the platform the password is being created for, etc

·      Do not use a word that would be in the dictionary or letters that are sequential on a keyboard.

·   Consider using a ‘passphrase’ that does not make any sense and will not be forgotten easily, of course, with a mix of characters

·    Never use the same password across multiple accounts and add where possible multi-factor authentication and/or biometrics

·   Always ensure to access a platform online through a secure connection and refrain from auto saving passwords when prompted

·       Do not write down a password on a device or in a notebook.  

·   To keep online identity safe and secure, it is desirable to keep changing passwords at regular intervals. Also, never use the same password ever again.

As incidents of hacking and cybercrime are rising with every passing day, everyone is obviously worried of safety and security. And today many of us are active for most of the time on the internet. So, to keep ourselves safe, what we must learn on this World Password Day is to strengthen the passwords.

Image: Thanks to Gettyimages

Financial Planning Makes All the Difference

Gone are the days, when jobs were for life: once joined in a job, he or she enjoyed the benefit of certainty in earning a fixed sum every month with of course, intermittent raises in pay outs/statuses, till one is told, “You are retired”. Even after retirement, the erstwhile employer used to ensure that the ex-employee’s livelihood is guaranteed through pension payment.

During the last two-and-a-half decades of liberalized economic environment, the employment scenario in the technology-driven market has so drastically changed that no one is sure today how long the present job would continue, when one would be on the bench, and when one will be handed over a pink slip along with slim envelope. Even the very nature of jobs has changed drastically: they became highly amorphous, calling for knowledge from different disciplines and the ability to work simultaneously in different ways.

The cumulative effect of these two developments on the present crop of employable youth is: an all-around uncertainty, which is traumatizing to an individual both psychologically and financially. At times it is even reaching tragic proportions: “Harini, a junior software developer [from Hyderabad] committed suicide by hanging herself from a ceiling fan after her company announced lay-offs”, reported Hindu on November 21.  

This is soon going to be a story of the past, for the future is emerging still more threateningly. The technology-driven world of today is more frightening even to imagine: Cars that drive themselves, machines that read reports and even offer algorithm-driven responses, diagnosis and prescription of drugs by machines and all such manifestations of new forms of automation in the offing, though sure to increase productivity and improve our lives, are all set to displace human labor.

The emergence of these disruptive technologies is sure to alter the very nature of peoples’ occupations: there would be more jobs lost, more jobs changed and perhaps, new jobs created. This transition is going to be more challenging to the workforce than what it has hitherto faced. These disruptive changes will even challenge our current educational system and training methods too. And the most important demand would be: income support to the workforce caught in the cross-currents of Artificial Intelligence-driven automation. 

Simply put, the digital future that is in the offing can cause painful consequences for the workers, for the economy would certainly take time to come to terms with them. Secondly, although economists continue to argue that historically an equilibrium between the supply and demand of jobs in labor markets has always been reached, technology experts are arguing that this time things will be quite different, for they will affect multiple sectors of the economy simultaneously.

All this is going to challenge the stability and sustainability of the individual lives. Now the question is: how to protect the interests of workforce during this transition? And who has to manage it? No doubt, at the macro-level, policymakers will definitely work towards smoothening this transition by initiating necessary policy measures. But that would not suffice. Prima facie, it is the worker at the micro-level who has to brace himself—plan himself to weather the storm. There is yet another important development of the recent past that merits our attention: our average life expectancy has gone up appreciably warranting stretching of one’s monetary resources for many more years than in the past.

The good news is: individuals can manage this transition with a few positive changes in their life style. The starting point is to build confidence in oneself to plan for facing the AI-threat squarely. And the first tool that comes handy to weather the storm is: personal financial planning. For, it helps one in managing today’s cash flows to achieve one’s own economic satisfaction by affording a feeling of security for the future too. Importantly, such financial planning minimizes the stress in life.

The first rule of such planning is: define your life goals clearly, estimate the inflation-adjusted requirement to meet the set goals and then set aside the required amount regularly to fund the goals. This, of course, calls for questioning one’s current consumption pattern: Is it meant for material satisfaction? Or, for delivering ‘psychic gratification’? Incidentally, most of the new-age Indians are today found looking for more of pre-programmed ‘experiences’ than for material satisfaction. So, if one has to navigate through these conflicting demands safely, one must practice paying first for the accomplishment of set goals and use the balance income alone to meet the current expenses. It is always desirable to involve one’s spouse in the financial planning exercise.

All may not be good at investing the set aside sum to maximise the returns and also ensure safety and security of the principle and returns thereof. Such individuals can take professional guidance from wealth planners from banks and other financial services providers. Identifying a good financial adviser is, of course, a challenge by itself. Enquiries with friends may pave the way for selecting one, but once selected, you must take periodic performance review of the adviser. If such analysis warrants changing the adviser, you must exercise your right immediately.  Do not hesitate to put as many questions as you have to the adviser and be not satisfied until you feel you have been answered alright. And, in course of time, you may yourself become a wise investor. But all this involves cost.

Obviously, a man of modest savings cannot afford such luxury. But he need not lose heart. One safe way of investing for a man of modest savings is opting for SIPs of Mutual Funds, for they are professionally managed.  Even prior to that, whether one is a man of modest savings or of high worth, everyone need to take note of the uncertainties of life and secure it from the associated risk – the risk of premature death. One option that immediately strikes the mind is: insurance. Get insured for a sum that enables the family to maintain its present standard of living even in the absence of the bread-winner at a very early age on a long-term basis to encash the benefit of low premium payments to service the policy.      

Lastly, one must always remember the two underlying principles of financial planning: One, that execution of a plan is as important as planning itself; and two, that not planning means planning for a certain failure.

Good Luck!

Dealing Room Operations: Risks & Their Management

With free flow of capital all around the globe and the resultant rise in volumes, the need for risk identification in Dealing room operations and its management has become quite imperative. Let us take a look at different types of risks associated with forex dealing.

1 Open Position Risk

     Long/overbought/plus     –    means bought more dollars than sold

     Short/Oversold/minus     –    means sold more dollars than bought

If one is overbought and currency weakens, one will be able to square up over bought position by selling the currency at a loss. On the other hand, if one is oversold and currency hardens, he can only cover it at excess cost i.e. by incurring loss.

2 Maturity Mismatch Risk

Gaps arising out of merchant transaction position and other trades pose a mismatch risk. Unmatched forward maturities may cause loss if forward differentials go against the bank.

3 Credit/Counter Party Risk

It arises out of failure of the counter party to honour his side of the contract. It also arises due to Contract Risk: Assume one has sold forward $ to a customer say at Rs.43.30 per $. Before the contract matures, if the customer fails, the dealer has to dispose off the earmarked dollars in the market at the going rate even if it has weakened say to Rs.43.10 per dollar. This is nothing but Replacement Cost or pre-settlement risk.

There is yet another kind of credit risk known as Clean Risk: Assume we have sold Euro against $ and accordingly, we have credited Euro to the Bank A/c – say in Germany and waiting for the German Bank to deposit Dollars in our New York A/c. Till German Bank credits Dollars in our New York A/c., we will be running Clean Risk and if, in between the Bank fails, we have to put up with the  loss. This type of risk, also known as Settlement Risk, may arise in international transactions owing to time-zone differences.

4 Interest Rate Risk

Owing to adverse movements in implied interest rates or actual interest rate differentials relating to foreign currency deposits, forward contracts, currency swaps, FRAs, etc.

5 Legal Risk

If the contracts are of a defective nature, they cannot be enforced. This kind of problems are more under swap deals.

6 Operational Risks

Omissions/commissions in operational procedures viz. – Dealing & Accounting functions: Follow-up of dealings and contract confirmation; Settlement of funds; Pipeline transactions; and Overdue bills and contracts.

7 Sovereign Risk

Risk of Externalisation: The countries may suddenly impose instructions on free movement of forex exchanges. It is basically political in nature. This arises in transactions including banks located in other countries.

2. Management of Dealing Room Risks

Banks, assessing the risk involved in trading and non-trading activities, usually put in operation a well-drafted risk management procedure that could be well understood by Dealers, Back Office staff etc., and execute it with much ease. Such a mechanism shall assist in effective monitoring and limiting risk prone activities across the Dealing Room. Some such time-tested mechanisms are:

2.1 Open Position Risk

Since these positions are taken at a particular rate, any adverse movement in the rate leads to loss. To prevent/minimise such losses, banks prescribe various limits consistent with adequacy of its capital to undertake such activities.

·      Day light Limit – Dealer cannot take a position of more than day light limit prescribed by the Bank.

·     Overnight Limit – Fixes overnight limit for an open position in each currency – usually lesser than daylight limits; Global limit for all the currencies put together is also fixed.

·    Cut-loss Limit – While undertaking transactions, if the rate goes on moving against the bank, one never knows, where the loss would end. Hence, banks fix a cut-loss-limit. Irrespective of the Dealer’s view, if the rate moves so adversely that the resultant loss is equivalent to the limit, the dealer has to liquidate the position and book loss.

All deals done in the day should be accounted for against the corresponding limits. The limits when exceeded should be promptly reported to the Senior Management and got approved. People not connected with Dealing room operations should constantly monitor compliance with these limits through timely, accurate and comprehensive MIS.

2.2 Maturity Mismatch Risk

·   Individual Gap Limit (IGL): Bank prescribes limits on mismatch in the currency bought and sold for a particular month.

·    Aggregate Gap Limit (AGL): Aggregate gap limit for each currency on all the O/B and O/S positions for various months.

·       Total Aggregate Gap Limit: Aggregate of all the AGLs in all currencies for dealing room as a whole.

 2.3 Credit Risk

To minimize credit risk, banks impose exposure limits on customers as well as on other Banks. In general, separate limits are fixed for spot and forward, the latter being lower than the spot. In case of Forwards, the limits are prescribed as the maximum level of the net outstanding Forward contracts.

2.4 Operational Risk

Dealing and execution functions are separated for early discovery of any transgression of the imposed limits – by dividing dealing room into front office solely concentrating on dealings and back office for recording the transactions and pursuing settlements etc. Systems and procedures are put in place to obtain ‘deal-confirmations’ in time and prompt follow-up for execution of ‘funds-transfer’ instructions. Back office is also entrusted with the responsibility to monitor export bills and forward contracts for their delivery in accordance with the tenor.

2.5 Legal Risk

To obviate the risk involved in enforcing compliance with contractual obligations/securities, banks usually enter into the following master agreements with counter party banks/clients:

·       Spot & Forward Exchange – International foreign Exchange Master Agreement.

·       Foreign Exchange Options – International Currency Options Market Agreement.

·       All others – International Swap Dealers’ Association Master Agreement.

     Banks also obtain Board Resolutions from their Corporate Clients, specifically authorising their officials to deal and execute contracts. Back offices obtain specific confirmation for each transaction with full details regarding amount, rate, value date, etc., duly signed by the authorised signatories.

2.6 Sovereign Risks

It is managed by prescribing limits against each overseas party based on ‘countryrisk’ perceptions.

Credit Proposition: An Illustrative Risk Profile

Presume, you are financing a company for erecting a factory to manufacture petro products ...

Its risk profile—right from its conception till repayment of debt—could run on the following lines:

Development:

·         Bid Risk :

Bidder does not turn up for execution of project

Bidder turns out to be non-competent

Time lost

·         Resource Risk:

Dull Primary Market

Promoters fail to mobilize equity

Delayed disbursement of loan

·         Cost Estimation Risk:

All costs not factored for

Estimates faulty

Half the way, project execution held up

Running around financial institutions

·         Credit Risk:

Counter party Risk

Multiplier effect of the foregoing

                           

Construction:

·         Completion Risk:

Suppliers,

Capital Markets,

Lenders and

Contractors contribution

·         Technology Risk:

       Obsolete

       Pilot basis

       Too complicated for assimilation

Operation:

·         Market/Off take Risk:

      New competitors have already entered

      Availability of cheaper alternatives

       Poor distribution network

·         Liability Risk:

Natural calamities

Civil riots and commotion

Political disturbances

·         Operating Risk:

Environmental considerations

Inefficient fuel source

Energy bottlenecks

·         Input Risk:
Depletion of natural sources
Changed pricing
Adverse political developments
Too much dependence on overseas markets

Non-commercial:

·         Political Risk:

       Political uncertainty
       Changed capital market perceptions
       Adverse currency movements
       Flight of foreign capital

·         Environmental Risk:

        Liberalization
        Global competition
        Cheaper imports

·         Force Majeur Risk:

Legal hassles
Protracted legal battles

Economic Environment:

·         Interest Rate and Currency Risk:

Weak Capital Markets
Shallow Money Market
Deregulation

·         Inflation Risk:

Interest Rate movements

Currency movements

Increased productions costs

·         International Price Movement Risk:

Less competitive
Sliding sales
Poor margins

      Contagion Effect

Risk Distribution Pattern:

Risk	Contractor	Lender	Supplier	Consumer	Financial Advisor	Gover-nment	Insurance
Bid	*				*
Rsource
Cost		*			*
Credit		*
Completion	*		*
Techno-logy	*
Offtake			*
Liability						*	*
Opera-tion
Input			*
Political
Environ-mental	*					*
Interest and currency
Inflation
Interna-tional Price Move-ments

*  These  risks are usually transferred to other agencies associated with project execution through    guarantees/ contracts/covenants etc. The rest remain with the promoters.