The sudden escalation of events in Ukraine over the past few months is just the latest example of political and social unrest to hit the world stage, following hot on the heels of upheaval in countries including Libya, Egypt, Syria, Iraq and Afghanistan, among others.
Situations such as these create huge disruption and tragedy for those caught up in the areas, but also present considerable challenges to organisations that depend on those parts of the world for trade, whether as customer markets, sources of supply or vital transport routes, or find themselves affected by the knock-on impacts that come from such disruptions, such as sanctions, unexpected currency movements or disruption to commodity markets.
Unsurprisingly, given the near round-the-clock coverage of such situations, the matter of global political and social unrest is now causing greater alarm among UK businesses. “We’ve moved from a position where a year or two ago we were thinking about sovereign debt in Europe and the US fiscal situation and we’re now looking more at these issues,” says Andrew Goodwin, senior economist at Oxford Economics.
“Companies see it as a globally less risky environment than it was, but they’re still worried about the tailwinds in these sorts of areas.”
There are a number of risks UK businesses could face, ranging from extreme but high-profile situations such as the kidnapping of people by a terrorist group, to lower-level disruptions to supply. The most obvious threat is the physical security of those in dangerous locations, says Philip Boulton, senior managing director at advisory firm FTI Consulting, pointing to Libya and Iraq as areas where organisations may feel it is simply too dangerous to operate at present.
But other dangers are more overt. Boulton highlights the threat of sanctions imposed against certain countries or companies, which could jeopardise both trading opportunities and an organisation’s broader reputation. “Not many companies really understand how to conduct business against a context of international sanctions,” he says.
“If you take Sudan, companies are not allowed to engage in substantive dealings with individuals who are believed to be connected to the president. Any company that does could be liable to sanction itself by the UN Security Council, and could find itself fined and even have its operations closed down.” Such dealings can also make it very difficult to trade at all, he says, adding that many banks will steer clear of operating in any territory affected by sanctions. For lots of businesses, it will be potential supply chain disruption that is the biggest concern, with suppliers – or the suppliers of suppliers – suddenly unable to operate or move goods through normal channels.
“Manufacturers with a just-in-time manufacturing process are dependent on key products,” points out Hugh Cox, chief data officer at Rosslyn Analytics. “It doesn’t even have to be disruption in a supplier’s particular area; it could just be they’re passing through an area or there could be a no-go area, be it by ship or air, which suddenly starts a delaying or re-routing process. They could be affected quite severely, quite quickly.”
Supply chain disruption can also affect those working in potentially dangerous areas. Charles Toomer is a former head of risk at the BBC, where he would regularly oversee the organisation’s security arrangements when covering stories in such areas.
“You need to have special supplies of machinery and transmitter equipment to keep going,” he says. “Sometimes it’s not the individual site that is targeted; it’s the fact there has been a revolution in that country and they have shut the airports and the ports.”
Even those organisations without direct links to some of the world’s flashpoints can find themselves affected. A number of businesses, including Carlsberg and Adidas, recently issued profit warnings blaming the disruption in Ukraine for lower sales, while potential disruption to oil supply and other commodities can also have an impact on raw material pricing. “In terms of Russia and the Middle East, it’s very much about what we get from them in terms of commodities,” says Goodwin. “In terms of direct trade, Russia accounts for less than 2% of our goods exports and about 1% of our service exports, so it’s quite a long way down the table. It’s much more a factor for our energy security and the gas pipelines, and potentially the knock-on effect on oil prices.”
Those exporting to such markets could also find themselves caught up in turmoil, particularly around unexpected currency fluctuations that can occur. “If you’re exporting and dealing in foreign currencies, are you prepared to take that risk?” asks Stephen Ibbotson, director of business at ICAEW. “If you’re selling to the Ukraine, you have a currency risk and a political risk. Would you buy forward contracts or hedge in some other way?”
The ability of organisations to handle such situations varies significantly, and inevitably depends on the degree of exposure they have to the world’s most likely trouble spots. “Businesses operating in oilfields in Iraq will have this as a high-level issue within the company,” says Carolyn Williams, technical director at The Institute of Risk Management. “They will have people dedicated to analysing the risks and monitoring what’s going on, preparing plans and buying in specialist services such as security. It then goes down the spectrum; organisations will have arrangements that are proportionate to the risks they face.”
How businesses handle the responsibility for risk also differs, but a typical structure involves a head of risk or risk manager based at headquarters, complemented by teams in the locations where they have a presence or particular vulnerabilities. “One concern is that people in-country may be experts, but they’re not always able to see the wood for the trees,” says Boulton. “Sometimes it needs someone in London or Washington who can step back a bit.”
There can also be tensions between heads of risk and the broader business, including company directors, he adds. “The temptation on the business side is to hope the risks will be taken care of, whereas the risk manager’s agenda is to ensure the risk is understood and worked through before any decision is made,” he says. “Often there are little niggles between those two sides.”
Organisations need to identify the threats most likely to impact their business and plan accordingly, advises John Seddon, principal consultant at Control Risks. “A lot of companies go awry when looking at where their critical exposures are or where they are most vulnerable,” he says. “There can be an over-reliance on the external environment rather than looking at it in conjunction with the internal environment, and considering how these external factors may affect them. That ties into perception around different threats, and how they see risk.”