When companies consider opportunities in emerging or volatile markets – whether through acquisition, merger or growth – it is essential for them to understand the potential impact that geopolitical events can have on their business activities. Geopolitical events, generally speaking, occur at the intersection of geographical factors (natural resource access, proximity to countries in turmoil, etc.), policy decisions (limits to foreign direct investment, tolerance of corrupt elites, etc.) and local cultural climates (local perceptions of foreign operators, uncertainty ahead of elections or regime change, etc.).
What Are Some Examples of Geopolitical Risk?
Geopolitical events can manifest themselves in many ways. Each event carries it own risks, and each risk its own consequences.
Expropriation
Governments can confiscate assets, nationalize property, breach contracts, impose embargos or prohibit trade with specific countries. In 2016 following a failed coup d'état, the Turkish government targeted domestic companies associated with the Turkish cleric Fethullah Gülen, who it claimed was behind the attempt. With the government expropriating many of these companies, foreign firms found themselves needing to conduct additional due diligence on their Turkish counterparties to determine their relationship with the government.
Regulatory Burdens
Short of outright expropriation, governments can discriminate against foreign firms by imposing stringent regulatory requirements, limiting foreign direct investment and allowing domestic industry monopolies to form. Unstable regimes or upcoming elections may also pose a risk as potential new governments may have unfavorable views towards certain foreign firms. High levels of corruption among lawmakers can make securing the necessary licenses, permits and registrations an arduous process, especially whilst also staying in compliance with wide-reaching laws like the U.S. FCPA.
Violence and Civil Unrest
Organized crime syndicates, terrorist organizations or rebel groups can also threaten the supply chains, assets and personnel of foreign firms. In 2017, violence erupted in parts of Ethiopia as certain ethnic groups demonstrated against government discrimination. Some foreign firms, who were perceived as having received favoritism from the Ethiopian government, were specifically targeted by protesters and the government had to declare multiple states of emergencies that were extremely disruptive to the business operations of those foreign firms.
Cultural Missteps
Careless efforts to understand the social and cultural dynamics of the communities in which foreign firms operate, and superficial attempts to engage local stakeholders, can quickly turn into biases and resentment and lead to boycotts, protests and negative media attention. In 2016, Brazil’s Kayapó indigenous community successfully stopped the construction of a gold mine, claiming that mercury and other pollutants from the mine would leak into the river Curuá, the community’s main source of food and livelihood.
Human Rights Violations
Operations in countries with poor human rights records can cause supply chain disruptions but can also lead to reputational damage and give rise to class action lawsuits, public boycotts or stockholder divestment campaigns. Many governments have introduced laws requiring companies to take actions to mitigate the risk of adverse human rights impacts. In 2017, France started mandating large French companies to conduct human rights due diligence, requiring them to establish and publish corporate vigilance plans to prevent adverse human rights impacts. Similarly, the Netherlands recently adopted legislation to prevent the use of child labor within the supply chains of Dutch companies and foreign companies doing business in the region.
How to Mitigate the Impact of Geopolitical Risk
Having an intimate knowledge of these diverse, complex and developing dynamics is critical in order to identify challenges before they become problems. As geopolitical events can influence market conditions in industrialized countries just as much as they can impact developing countries, assessing and understanding them through the conduct of an effective geopolitical risk assessment will help mitigate risk exposure. Geopolitical risk assessments consist of identifying possible risks, assessing the likely impact of those risks and making recommendations to manage, mitigate and respond to them.
Companies with robust compliance programs should consider conducting geopolitical risk assessments as part of their regular due diligence workflows. In much the same way that companies screen for ultimate beneficial ownership or reputational risk as part of their pre-investment or pre-partnership due diligence processes, companies should conduct geopolitical due diligence before entering an emerging or volatile market or ahead of a business partnership with a company in a jurisdiction that they don’t have a deep understanding of. Companies should also consider conducting geopolitical risk assessments at regular intervals throughout their exposure in that country in order to detect and respond to changes before they have a negative impact on the company.
Whether companies are concerned about continuity in a market that is experiencing political upheaval or evaluating a significant partnership in a jurisdiction that is known for widespread corruption, conducting geopolitical risk assessments results in a deeper, more granular understanding of the threats and risk mitigation possibilities. Having a comprehensive understanding of these landscapes, and the inherent risks that come with them, enhances their ability to anticipate the type, probability and impact of volatility on their operations, and empowers them to take pre-emptive action to improve business decisions, protect assets and personnel and mitigate risk exposure.
What Does a Geopolitical Risk Assessment Analyze?
Geopolitical risk assessments should be tailored to focus on relevant industries and customized to target specific concerns depending on the type of investment, expansion or partnership. Among many other things, effective geopolitical due diligence can:
- Detail political uncertainty in view of elections or regime change
- Identify discriminatory government actions restricting business operations
- Highlight control mechanisms affecting foreign investors such as barriers of entry, regulatory changes or limits to foreign direct investment
- Assess levels of corruption in the public and private sectors and the judiciary
- Evaluate foreign relations with neighbors, competitors, trade partners and the international community
- Analyze the stability of the economy
- Evaluate key infrastructure and access to electricity, internet, labor, etc.
- Examine local perceptions of foreign operators
- Provide a granular understanding of industry stakeholders and their relations with key domestic, government and international actors
- Provide intelligence, analysis and insight into various security threats facing the client’s people, assets and operations
- Evaluate the preservation of human rights, with a focus on freedom of speech, treatment of women and the LGBT community, and discrimination of ethnic or religious minorities
The Value of a Kroll Geopolitical Due Diligence Report
Kroll, a division of Duff & Phelps, specializes in providing bespoke, client-focused, industry-specific research and support to help clients make critical business decisions with the best information possible. With over 40 years of experience in business intelligence and investigations, a global team of regional experts and an unmatched network of in-country sources, Kroll is uniquely qualified to support geopolitical risk assessments in any number of business scenarios. Below are several examples in which Kroll was able to help clients anticipate the type, probability and impact of geopolitical volatility on its operations in key emerging markets.
Case Study 1
A client operating in the entertainment industry was seeking to incorporate in a foreign jurisdiction from which it would base its regional activities. Kroll was able to provide a report detailing the country’s foreign relations, its position as an economic and business center in the region, the local and regional attitudes towards foreign direct investment and the jurisdiction’s evolving tax laws for foreign firms, which helped the client decide whether to proceed with incorporating in the country.
Case Study 2
A sports industry client was exploring hosting a large televised event in a Middle Eastern city. Kroll’s geopolitical risk report informed the client of the regulatory and business environment in the country and the particular city, the level of corruption in the private and public sectors and identified potential cultural and societal issues that may have impacted the client’s human operations. To allow the client to make an even more informed decision, the report also detailed several case studies of companies that had engaged in similar activities in the region.
Case Study 3
A multinational oil and gas company engaged Kroll to assess the stability of the Turkish government in the aftermath of the aforementioned 2016 Turkish coup d'état attempt. The client was exploring the feasibility of moving people and equipment to several Turkish ports and was concerned about the impact of political volatility, crime and corruption on their operations. Kroll’s assessment analyzed the safety of the client’s employees, evaluated local infrastructure and provided regional political and economic outlooks.
Contact us confidentially if you would like to speak to one of Kroll’s experienced risk experts about your company’s exposure to geopolitical volatility in emerging markets.
