Freshfields Geopolitical Monitor

Geopolitical risks are a significant concern for businesses and investors in the current global landscape. Understanding these risks is crucial for adjusting the risk management system, making informed decisions and mitigating potential negative impacts as well as reporting adequately to shareholders on it. This blog post examines some of the top geopolitical risks and illustrates with real-world examples how these risks have affected, and still affect, companies. 

1. US-China relationship and global trade protectionism: This includes a wide range of issues, including trade disputes, technology competition and military tensions. The US is likely to expand on export controls and investment restrictions to limit China's access to advanced technologies and maintain US tech dominance. One consequence is a global technology decoupling: The increasing separation of technology ecosystems between the US and China has significant implications for businesses operating in both markets and can also disrupt supply chains and increase costs for businesses:
   • Multiple US technology companies have either pulled out or been forced out of mainland China in recent years due to censorship and cyberattacks, which illustrates the challenges of navigating the complex US-China relationship. The US government's restrictions on technology exports to China have also impacted semiconductor companies, which have faced challenges in selling their products in the Chinese market.
   • A telecommunications company has faced significant challenges in expanding its global reach due to US sanctions and security concerns. A social media company has also faced scrutiny and potential bans in several countries due to concerns about data security and censorship.
      
2. Russia-Ukraine war: The ongoing war in Ukraine has heightened tensions between Russia and NATO, with the potential for further escalation and spillover effects on emerging markets. The war also has tremendous effect on business: 
   • Companies across the globe, especially automotive companies have faced immense pressure to cease operations in Russia, while several others, including fast food chains closed their stores and suspended operations in protest of the invasion, fearing reputational damages. 
   • Many European energy companies have faced significant financial losses due to their divestment from Russian energy assets following the invasion of Ukraine. Indirectly, through rising energy prices, a lot of companies were negatively affected, especially in energy-intensive markets like manufacturing, chemicals and construction. 
   • In addition to these corporate actions, Germany has drastically altered its military spending in response to the war, committing to a historic €100 billion defence package. This had direct effects on the industry: Renk for example, a provider of civilian and military propulsion solutions, is experiencing rapid growth, with its tank transmissions becoming increasingly in demand.
      
3. Middle East regional conflicts: The Middle East has always been an unstable region. The recent ceasefire between Israel and the Hamas is encouraging news but uncertainties remain. Syria continued to be embroiled in a complex civil war, with various factions and foreign powers involved and the demise of the Assad regime. Iran remained a significant player in the region, supporting proxy groups like Hezbollah and pursuing its nuclear program, further contributing to tensions. For companies, these conflicts can have direct impact on their business: 
   • The Arab Spring uprisings in 2011 caused significant disruptions to businesses operating in the Middle East and North Africa. In Egypt, the tourism industry suffered a sharp decline due to security concerns and political turmoil. Aviation companies and numerous hotel chains experienced significant losses. 
   • In 2023/2024, the co-founder and CEO of an Israeli company was critically injured in Gaza during the conflict. While the company ultimately survived and was sold for $100 million, his absence as CEO for six months due to his injuries undoubtedly presented challenges and potential losses. 
      
4. Major cyber-attacks: The increasing frequency and sophistication of cyber-attacks pose a significant threat to businesses and critical infrastructure. State-backed hacking and espionage operations have targeted major US presidential candidates and their campaigns and revealed vulnerabilities in US telecommunications infrastructure. US and European companies have been targeted, too. We see the likelihood of Russian cyber-attacks increasing as the Ukraine conflict evolves into an extended war of attrition. In general, attacks are increasing in scope, scale and sophistication: 
   • EasyJet (UK): In 2020, the budget airline disclosed a data breach that affected the personal details of around nine million customers. This raised concerns about data privacy and security, and the company faced regulatory fines and reputational damage.
   • Colonial Pipeline (US): the largest fuel pipeline system in the United States, was shut down for five days in May 2021 due to a ransomware attack that crippled its computerized equipment. This led to a scramble for fuel in the southeastern US and highlighted the vulnerability of critical infrastructure to cyberattacks. 
      
5. Demographic divides, government debt and migration: Aging populations, youth unemployment, and migration patterns could create social and political challenges. At the same time, governments with high debts may explore new taxation strategies to reduce debt burdens, potentially impacting businesses and investors, which could mean political risks for businesses:
   • Demographic changes can impact labour markets and consumer demand, e.g. Japan, where an aging population has led to labour shortages and a shrinking consumer market. The same changes are anticipated for China and Germany. The aging population in many developed countries has created challenges for healthcare systems and pension funds, impacting companies in those sectors.
   • Changes in corporate tax rates can impact investment decisions and profitability, e.g. companies that have shifted their operations to countries with lower tax rates. The introduction of a digital services tax in some countries has impacted technology companies which have faced increased tax burdens in those markets. 

Conclusion

The geopolitical landscape is becoming increasingly complex and volatile. To navigate this challenging environment, businesses need to adopt a proactive approach to geopolitical risk management. Our Strategic Risk Management Group will publish a series of blogs that shall provide valuable insights on how to protect a company from those risks and implement a geopolitical strategy.