Risks Arising Out Of Wars And How Corporates Can Try To Reduce the Impact
In the interconnected global supply chain, interruptions in one corner of the world can have cascading repercussions across many other regions
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The impact of war is far-reaching. In addition to the direct casualties, wars also create numerous other consequences like sanctions, disruption in supply chain, etc., especially today, when the economies of the world are so deeply intertwined into one global whole. In this environment, what is often overlooked is the effect wars have on organisations upon which millions of people are dependent for their livelihoods.
In the interconnected global supply chain, interruptions in one corner of the world can have cascading repercussions across many other regions. Conflicts often develop quickly and unpredictably, which can result in companies not being able to pivot their operational strategies in time. For many businesses, which have already been dealing with COVID-induced slowdown, the impact of war on business continuity could be particularly devastating. It is, therefore, imperative for companies to be proactive in identifying and assessing such events, to understand how they impact the organisations, and ensure the swift deployment of a well-planned crisis risk management strategy as a part of the overall ERM plan. Risk managers must also ensure that organisational risk intelligence is well developed, by putting appropriate processes and systems in place.
Managing financial sanctions
Some of the immediate fallout of war can arise from sanctions imposed against the invading country, including a moratorium on imports and exports of goods and services. Designed to constrain the trading power of the invading country, these sanctions can also extend to their trading partners, putting at risk businesses that have dealings with the sanctioned country, either directly or in their extended supply chain. In a long-drawn-out conflict, the nature of sanctions can also evolve as other countries use increasingly punitive measures to dissuade a warring faction. In addition, these sanctions can differ from country to country, further compounding the challenge of managing these threats.
In a turbulent situation, organisations must be highly diligent about appropriate compliance and in ensuring careful screening of trading partners. They must have processes in place to work with updated data on sanctions and in carrying out in-depth screening for customers across their supply chain.
Emerging geopolitical risks
In a war, risk evaluation by the usual methods, such as leveraging ratings by international agencies, may prove inadequate. As multiple countries get involved, directly or indirectly, they bring forth a complex interaction of geopolitical factors that influence the global economy, making it imperative for risk managers to adopt an all-inclusive approach.
The interconnectedness of the global economy means that even when a country is not directly involved in a war, it can still face secondary impacts, such as a spike in crude and commodity prices, with far-reaching consequences for most industries. This can, further, have a debilitating impact on the currency market which may see persistent downward risks with increased inflation. Global volatility often translates to jittery markets with even safe assets such as bonds becoming less secure. Given this unpredictability, risk managers must be ready with a business continuity plan that takes all such eventualities into consideration.
Supply chain disruptions
Supply chain is one of the sectors that always faces the brunt of any war. A turbulent global economy impacts the smooth flow of goods and materials across the globe, affecting every country. The energy sector has witnessed many such fluctuations during the Gulf Wars, Iran-Iraq war, Yom Kippur War, and now the Russia-Ukraine conflict.
These disruptions in the global supply chain, particularly for those relying on fossil fuels, have underscored the need for alternative suppliers, to accommodate for any shortages. Supply chain screening is essential in identifying areas with potential for disruptions. As a longer-term risk avoidance measure, these wars have also contributed to shifting focus toward sustainable energy resources, and alternative vendor geographies.
Developing an Enterprise Risk Management (ERM) culture
Current events have underscored the importance of establishing an ERM culture that can anticipate, identify, and analyse emerging risks, including black swan and grey rhino events. Black swan events are low-probability, high-impact events while grey rhino events, such as climate change and the current conflict, are slow-emerging threats that are ignored or downplayed by decision-makers.
The current overlap of multiple crises during the same period has the potential of putting a severe strain on the global economic recovery, further jeopardising the business continuity and livelihood of millions. It has also highlighted the importance of developing an ERM culture to manage such threats. Continuous and comprehensive horizon scanning, backed by meticulous scenario planning, empowers companies to plan for grey rhino and black swan events. It may also be worthwhile to explore war risk insurance, particularly for businesses that operate in unstable areas or are vulnerable to sudden political upheavals, however such insurance is typically excluded from standard policies as it extremely difficult to determine the potential damages a future war may cause.
Any war, however localised, has the potential to snowball into a prolonged conflict situation involving multiple nations and jeopardising years of peace, development and business growth.
The displacement of people can also lead to stresses on economies and public services. In these circumstances, as governments across the world endeavour to de-escalate the situation, companies must also share the responsibility of minimising the fallout from such events, through well-planned ERM implementation and ensuring a robust foundation that can remain resilient in the face of war. Organisations should also build a team of qualified ERM experts such as certified professionals as this will enable them to continue pursuing opportunities while successfully managing current and emerging uncertainties through effective risk-based decision making.