December 29, 2008, 9:52 AM — Anyone who reads the headlines these days knows the world is an uncertain place. And 2009 will be one that brings even more changes and uncertainty, according Control Risks, an independent, specialist risk consultancy.
The company recently released its 2009 annual forecast of the global political and security risk environment. Control Risks Analyst and Author Daniel Linsker spoke with CSO about some of the highlights that businesses need to consider before investing.
The Financial Crisis
The report indicates that while Asia at one point was thought to see little impact from the financial crisis, it now appears it will not be immune. Can you tell me more about that? That applies not only to Asia, but to countries across the world. At the beginning of 2008, the eye might have been placed in the wrong places. A lot of attention was placed on the exposure of particular countries to the crisis. But the impact of the crisis is not so much dependent on the exposure of a country, but on its specific capability to address the risks and challenges of the crisis.
A lot of attention was placed on Russia and Venezuela; large oil-producing countries. Those countries will face problems, but they don't run the risk of collapse. The capacity of those governments to react is quite large. On the other hand you might have countries that wouldn't expect to be troubled, for example The Ukraine or Poland. These are countries that were competing favorably and were good investment destinations. But suddenly there is a downturn and the countries' stability is being brought into question. So the emphasis now is on a country's capacity to react instead of its exposure.
Our message to clients, which we highlight in the report is: It is necessary to do your homework. Each country will face particular challenges. Do your homework in the countries.
What are businesses doing to make sure they are informed? A lot of companies have started a process of internal reckoning. Many are seeing the first few months of 2009 as a time figure out where they stand, figure out what their exposure is like. You might have operations in a number of companies you thought were fine. But the prospects for different countries vary.
One thing I would add is you have to be careful not to fall into false sense of confidence that the crisis is not going to affect a particular country. At beginning of the year, many regions were confident and thinking "We aren't going to be affected. We have been decoupled from the US. The downturn in the US or Europe will not affect us."
Now, if you look at the global situation, many countries around the world are looking to put through some kind of economic stimulus package and sets of measures to combat the impact of the crisis.
The report indicates scarcity will be a major risk factor for global business in 2009. Why? There are two things they should look at. The first point and perhaps the more superficial, is that the sudden decline in worldwide commodity prices might just be temporary. There is a financial crisis so global slowdown has lifted a lot of the pressure on commodities. But basically the underlying fundamentals of scarcity are there. Even when the global economy starts speaking up again, you will get a renewed sense of urgency in terms of finding the resources and getting them to market.
Scarcity will probably be one of the main strategic challenges for business going forward; not only in 2009 but beyond. It affects everything from your supply chain to your capacity to operate. If you are operating in certain parts of the world, some countries in Africa or Latin America for instance, you will experience electricity shortages. And that is a complete no-no. You won't be able to operate what you need to operate without power.
So, scarcity, as a whole, which might have dropped of the radar a bit because of the financial crisis, is going to be one of the most strategic challenges that companies are going to have to deal with in the future.
What about food shortages? How can that impact a business? Food is an issue because unless you are part of the food industry you might think: "Well, that won't affect me." But this year we saw food drives in some places with governments that were stumbling with trying to manage and control food shortages.
Food shortages and their associated problems bring in to question the stability of regimes and their commitment to maintaining the rules of the game. You might be exposed if your workforce in affected countries don't make enough money to be able to sustain their families. You could even look at the angle of companies in Africa endemic disease. It is a massive challenge to handle that.
Does scarcity also create security risks as well? The problems might not be the traditional problems and they might not be where you expect them to be. I will give you hypothetical example: A fairly stable country is impacted by the crisis and unemployment shoots up. Suddenly you have massive demonstrations and you have a feeling of xenophobia in that country. So your personnel are affected. You have demonstrations against your company and there is pressure on company to nationalize industries.
So, what we might see in 2009 are a lot of low level security challenges in some countries because of problems created by scarcity
Kidnapping and Piracy
Kidnapping seems to have grown to an out-of-control problem in Mexico. The report indicates this is not just a problem in Latin America anymore. What's changed? Kidnapping is a very good example of the changes in patterns of crime. We tended to associate kidnapping with Colombia awhile ago. For the last decade or so, it was associated mainly with Latin America. Suddenly it's not so much Latin American as it is a phenomenon elsewhere.
What you are seeing, to some extent, is a globalization of crime. By that, I dont mean we have transnational crime syndicates. What I mean is basically criminals across the globe are copying activities and techniques from other places.
What you see in Mexico, and to some extent in Venezuela and Ecuador, is very similar to what you saw in Colombia when Colombia was going through its drug wars. The police were quite weak and there was an easy state to exploit. They have copied the technique. Criminal gangs realized there was a lot of money to be made from kidnapping. They've realized they can exploit weaknesses in systems and protection of personnel and they've gone for it.
So, the challenge for companies is going to be translating the lessons from these countries to places like India and Nigeria in which there is a lot of kidnapping going on now. And its a problem elsewhere as well.
We've also seen the problems with piracy spiral out of control in the waters off of Somalia. Will this become a global issue? Yes, but with some limitations. I think what is going on in Somalia is a specific situation. Somalia is a failed state which facilitates being able to park a tanker for two months while you negotiate. That is not something you can replicate in other places.
Having said that, what we'll probably see is the technique and idea pick up in other places. Pirates, like kidnappers, are realizing it is a lucrative business. It is only a matter of time before that gets replicated in other places, but probably not on the scale of what is happening in Somalia.
Your report breaks down the risks in regions around the world. Are there any countries now that are considered just too volatile for your clients? Our mission as a company is not to tell where they should and should not do business. And I dont think there is a country, with the exception of Somalia, where business is impossible. We have advised clients on some of the most hostile regions in the world; Afghanistan, Nigeria, Mexico, Colombia. In the end, it is a business decision. In a lot of places, you can do business if you do your homework and understand what you need to do to operate successfully there.
What we tell our clients is it is right to understand and figure out your risks and exposures. But 2009 can be a year of opportunity, too. The world is changing. We will see massive fluctuations in where opportunities lie, but they are out there. So its a good time to have a look around and maybe make moves.