This article will provoke thoughts and create awareness about the new political world order, the changing influence of Western and Eastern powers as well as the emergence and formation of a new centre of gravity in the global economy. It takes a close look at an emerging geopolitical dominance and focuses on the new crossroads between the West and the East – the New Silk Roads.
The past two and a half years have been extraordinary in terms of rising levels of macroeconomic uncertainty and business cycles. The troubling combination of a global pandemic exacerbated by energy shortages, soaring inflation and geopolitical tensions poses serious challenges to businesses in managing emerging risks and opportunities. The systems, institutions and orders that have supported global stability and security for decades are now unravelling and taking on new forms.
Geography will shape future politics
Over the past hundred years, geo-politicians have proposed three theories depicting the control of the world from a geographical perspective:
Not so long ago, former White House Strategic Adviser Steve Bannon proposed that China’s “Belt and Road” initiative embodied all three theories, intending to control the world by promoting this initiative.
Geopolitical risks are reshaping the world
Geopolitical risks refer to a situation involving power struggles such as wars, aggravated tension between states or terrorist attacks that cannot be resolved peacefully. Up to now, geopolitical risks were always related to growing geopolitical tensions between the world’s major powers.
It would be correct to define the current geopolitical situation in the world as a period of uncertainty. The 20th century saw two world wars. After World War II, the United Nations was formed to prevent similar catastrophes and disasters in the future. Soon thereafter, it became obvious that the two existing superpowers USA and USSR were engaged in a fierce competition known as the Cold War. Alarmingly, and as a result of the arms race, a large amount of the weapons of mass destruction (nuclear, chemical, biological) were produced. The Cold War ended after the collapse of the Soviet Union and the Russian Federation as its heir took control of the former Soviet Union’s weapons of mass destruction.
Today, the economic impact of Russia’s war in Ukraine has many facets that will aggravate numerous problems associated with it:
Russia’s war in Ukraine also heightened another possible risk: that of accidental shelling on the territory of a NATO member state. The severity of the consequences of such an incident cannot be predicted. A nuclear threat – or more precisely the spread of radiation – exists even without weapons being used because the biggest nuclear power plant in Ukraine has been under heavy shelling. Intentional damage to the nuclear power plant would create a real disaster, not only for Ukraine but for Europe as a whole, as well as for the rest of the world.
Geopolitical transformation will create a new centre of gravity in the world
“Ancient Greece begat Rome, Rome begat Christian Europe, Christian Europe begat the Renaissance, the Renaissance the Enlightenment, the Enlightenment political democracy and the industrial revolution. Industry crossed with democracy in turn yielded the United States, embodying the rights to life, liberty and the pursuit of happiness.” This is the story we have been told – the mantra of the political, cultural, and moral triumph of the West. However, watching current events unfold, this account seems flawed. There are other ways of looking at the world and its past ways that do not take the perspective of the winners of recent history.
Today, much attention is devoted to assessing the likely impact of rapid economic growth in China, where the demand for luxury goods is forecast to quadruple in the next decade. Similarly, social change is happening in India, where more people have access to a mobile phone than a flushing toilet.
On the other hand, the halfway point between the East and the West, running from the Eastern shores of the Mediterranean and the Black Sea to the Himalayas, might seem to be an irrelevant position from which to assess the world. This region is home to Kazakhstan, Uzbekistan, Kirgizstan, Turkmenistan, Tajikistan, and the countries of the Caucasus.
It is a region that is associated with regimes that are unstable, violent and a threat to international security, such as Afghanistan, Iran, Iraq, and Syria – or ill-versed in best practices of democracy, such as Russia and Azerbaijan. Overall, it appears to be a region that is home to a series of failed or failing states, led by dictators who win impossibly large majorities in national elections and whose families and friends control sprawling business interests, own vast assets, and wield political power. These are places with poor human rights records, where freedom of expression in matters concerning faith, conscience and sexuality is limited, and where control of the media dictates what does and what does not appear in the press.
These countries seem foreign to us and are treated by the Western world as obscure and political backwaters. Yet, in fact, they are the bridge between the East and the West. They represent the very crossroads of civilisation – as they have always been since the beginning of history: The New Silk Roads.
Ways to manage geopolitical risks
Our world is already undergoing a global transition to the next economic era. This transition can be considered through the prism of the PEST analysis. However, we have replaced the traditional economic factors with factors concerning energy:
These factors pose new geopolitical and macroeconomic challenges for businesses. They, in turn, must respond through effective risk management and insurance systems. An effective risk management strategy serves as a compelling tool for increasing enterprise value through its risk function. Any decision made by the company’s management increases, preserves, or reduces the enterprise value of that company.
Due to risk being an integral part of value creation, leading strategically oriented businesses do not seek to eliminate a risk. Their approach creates a new perspective of risk management, as opposed to past traditional views of risk that considered it as something to be avoided. Rather, these businesses seek to manage risk across all parts of their organisation so that at any given time, they are taking just the right types of risk necessary to effectively achieve the company’s strategic goals. This optimal risk appetite or optimal risk zone is shown in the picture below.
The most versatile and effective risk management tools that effectively describe and manage geopolitical risks include the following:
The role of a company’s risk function is crucial in correctly assessing the geopolitical risks and defining the optimal risk appetite that will, in turn, enable a company’s enterprise value to grow. After mapping geopolitical risks against the company’s optimal risk appetite, one can work with the risks above it and address the insurance market for transferring these risks. The role of the insurance broker is to collaborate closely with the company’s risk function in tailoring an effective insurance program that meets the exact insurance demand of the company and maximises the insurance value.
References:
Peter Frankopan, The silk roads: a new history of the world
McKinsey Global Institute, On the cusp of a new era?
About Mykhailo Rushkovskyi:
– MBA, PhD researcher
– Founder of RUNDERC.com
– Winner of the European Risk Management Awards 2022 – Business Continuity Programme of the Year
Mykhailo Rushkovskyi
Head of Research & Analysis
Kyiv Consulting
Zviadi Vardosanidze
General Manager GrECo Specialty
T +43 664 962 39 04
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