Where Political Risks Are Growing

Earlier this month, Marsh Specialty released its “Political Risk Report 2022.” Not surprisingly, the area of risk that experienced the most growth is war and civil war—although for most of the world, the probability of such an event remains low.

Marsh generates its geopolitical risk ratings using a proprietary, algorithm-based modeling system that incorporates more than 200 international indices across 197 countries. The model scores each risk on a scale of 0.1 to 10.0, where 0.1 indicates the lowest possible risk and 10.0 the highest.

The world’s most prevalent political risks in 2022, according to Marsh’s model, are strikes, riots, and civil commotion, followed by terrorism and contractual agreement repudiation. For the United States, the model gave the risk of strikes, riots, and civil commotion a score of 5.0, terrorism a score of 4.4, and contractual agreement repudiation a score of 4.1. Meanwhile, war and civil war and country economic risk both rated 3.0. Sovereign credit risk (1.0), expropriation (1.1), and currency inconvertibility and transfer risk (1.4) received the lowest risk ratings for U.S. businesses.

However, the report also highlights a few countries where business is quite risky. Russia is the leader in this area, for obvious reasons. The model places the Russian Federation’s sovereign credit risk at 6.7—up 2.2, compared with last year, on the scale of 10.0. The risk of expropriation there is 7.1, contractual agreement repudiation risk is 6.5, and currency inconvertibility and transfer risk is 6.2.

“The conflict between Russia and Ukraine is a stark reminder of how quickly geopolitical risks can escalate and have a terrible local humanitarian impact, as well as affect businesses and investors around the world,” says Nick Robson, head of credit specialties for Marsh Specialty.

Brazil also received some alarming risk ratings, particularly in strikes, riots, and civil commotion (6.1) and sovereign credit risk (5.0). France received a 6.4 rating in the area of strikes, riots, and civil commotion and a 5.0 in terrorism. Indonesia also ranked high for terrorism (5.8), as well as legal and regulatory risk (5.8) and strikes, riots, and civil commotion (5.7).

All in all, risks in the United States have fallen since 2021—with expropriation risk dropping nearly a full point (0.9)—but globally, the Marsh model estimates that risks have mostly increased over the past year. Interestingly, the report also delves deep into three areas of long-term and global-scale risk: oceans, minerals, and space.

For more on managing lines of business in the developing world, don’t miss the live Treasury & Risk webcast — Wednesday, June 8 • 2 p.m. ET • 11 a.m. PT — when we will celebrate the winners of the 2022 Alexander Hamilton Awards in the category “Best Practices in Restricted/Emerging Markets.” The International Fund for Animal Welfare and Coupang will share their award-winning strategies, and attendees may receive AFP recertification credits (approval is pending). Register today!

The Marsh report describes a “great mineral rush,” in which the drive toward sustainability and net-zero carbon emissions have increased demand for specific minerals that ratchet up geopolitical tensions. Specifically, vanadium, graphite, and lead are mostly produced by Russia and China, with molybdenum close behind.

Vanadium, the report explains, is a metal used in the steel and automotive industries to strengthen other metals. It also can serve as a supercharger for batteries and can support decentralized generation of electricity. In 2020, 83 percent of the world’s vanadium “was sourced in countries whose legal and regulatory fields are riskier than the world average, and have deteriorated during the pandemic,” the report states. Thus, “political violence may become a substantial risk should supply from China or Russia be scaled back. … Such a development in producing countries could lead to protests and demonstrations, given the amplifying effect that such disruptions could have on industries and countries hosting consumers of the mineral.”

In the world’s oceans, minerals are increasingly being extracted from seabeds, threatening irreversible damage to underwater ecosystems. Deep-sea oil-and-gas production remains big business, and “oceans represent one of the most promising frontiers for meeting the growing demand for food, raw materials, and even space to expand,” the report says. That’s why Marsh sees a “blue acceleration toward ocean resources fueling tensions and geopolitical ambitions. … Exclusive economic zones expand areas of intersection between countries, potentially heightening political tension.”

In the report’s final geopolitical risk frontier, Marsh sees “the risk from the growing number of satellites in low Earth orbit [as] poised to become a ‘grey rhino’—a highly probable, high-impact event that is nonetheless ignored.” As the number of satellites (most of them commercial) skyrockets, countries face risks to their national strategic interests, risks of license and contract revocation from other countries worried about strategic interests, and “expropriation-like events if a launch base or supporting infrastructure is located in third countries.”

Global leaders’ unquestioning support for globalization has begun to wane as trading partners’ unilateral actions throughout the pandemic have crippled supply chains. The Marsh report captures some of the geopolitical tensions of this moment, when both businesses and investors should be looking at global risk in a new light.