The view in 2022

Published: Jan 2022

As a tumultuous year draws to a close, Treasury Today Group considers some of the existing and emerging geopolitical risks corporates will have to manage in 2022.

Before we even consider the global pandemic it is clear that 2021 will go down as a year of considerable social, economic and political upheaval. The election of Joe Biden as US president, the revival of the black lives matter movement following the murder of George Floyd, the emerging implications of Brexit, and extreme weather events linked to climate change have all had a profound impact across the world. Covid has been a sobering reminder of how interconnected the corporate world has become and is a theme that straddles several of the risk factors we have highlighted below.

To paraphrase former US Secretary of State for Defence Donald Rumsfeld, there are things that we know we don’t know but there are also things we do not know we don’t know. With that in mind, over the following pages we explore some of the geopolitical risk factors most likely to exercise the minds of corporates over the next 12 months and look at what steps can be taken to mitigate these risks.


State-on-state activity is an obvious geopolitical risk factor, particularly in the grey zone (defined as the space between peace and war) which has been evident recently in the recent activities of Russia on its border with Ukraine and China’s comments on Taiwanese sovereignty.

“Countries are less willing to take each other on directly and will instead push the boundaries of diplomatic and economic action, which includes activities such as cyberwarfare,” explains Neal Croft, Global Client Relationship Director and Head of Geopolitical Risk at Willis Towers Watson.

According to Nicholas Fitzroy, Risk Briefing Director at Economist Intelligence Unit, the way the conflict between Israel and Iran is unfolding has considerable implications for cyber-security. “There were a number of attacks on Iran’s nuclear facilities initially and then that expanded to cyberattacks on national infrastructure such as petrol pumps,” he explains. “Now we have seen Iran hacking online medical records of citizens within Israel to cause reputational damage. So we can see it has quickly expanded beyond just trying to hit the other state in strategic ways and become a broad ‘cyber war’ that affects all types of citizens and businesses.”

Being aware of the specific level of threat is vital. “It is important to track the types of cyberattacks that are coming from these states because the strategies they are using and the targets they look for are constantly shifting,” adds Fitzroy.

For businesses, the current geopolitical and cyber risk landscape means that organisations are at heightened risk of being caught in the virtual cross-hairs of what could be considered a global game of cyber chess.

Croft recommends corporates conduct strategic analysis to identify the risk factors with the highest potential impact. “Once they have done that they can work out a risk management strategy and stress test their assumptions through techniques such as scenario development,” adds Croft. “It makes sense to reduce risk such as cyber-security exposure before insuring what risk remains.”

Energy supply

Gas prices across Europe increased substantially in the autumn due to tight supply, a surge in demand on the back of economic recovery and lower than expected output from renewables. As winter progresses further price increases are likely.

“Eastern Europe in particular is heavily dependent on oil and gas imports from Russia and recent Russia/Europe tensions regarding the former’s possible annexation of Ukraine could leave European consumers exposed to supply disruption and further price increases,” explains Sophie Heald, Head of Modelling at Cambridge Econometrics.

Jason McMann, Head of Geopolitical Risk Analysis for decision intelligence company Morning Consult notes that Germany’s new government will have a considerable impact on energy availability in Europe in 2022. “Olaf Scholz’s administration would potentially have to jeopardise energy access via the Nord Stream 2 pipeline (a new export gas pipeline which runs from Russia to Europe across the Baltic Sea) if it takes a more aggressive stance against Russian expansionism, particularly on the Ukraine issue,” he says.

Corporates can mitigate this risk by diversifying supply sources geographically, investing in low-carbon solutions, and sourcing more sustainable suppliers.

US foreign policy

Joe Biden has been pushing the line that the US is back in full diplomacy mode and the withdrawal from Afghanistan was a very clear example of the country’s reduced appetite for armed conflict.

“Ironically, this might increase the risk of conflict because powers that oppose the US may think they can push harder,” explains Fitzroy. “The US midterm election results at the end of the year will likely ramp up pressure on Biden and the Democrats as they look like they might do quite poorly, increasing internal distractions and reluctance to be dragged into new conflicts.”

Fitzroy says the territories most likely to see conflict are Iran and Ukraine. “When the Russian economy is suffering – and more importantly when the population is showing much less support for Putin and his regime – there is a precedent for expansion of military foreign policy as we have previously seen in Syria,” he adds.

Iran is also a potential flashpoint in the next few months because the prospects for the nuclear deal negotiations succeeding are very low and all the while Iran is ramping up its nuclear programme. “If those negotiations fail there aren’t many options on the table other than some form of military action,” says Fitzroy.

It is therefore important for corporates to understand the knock-on effects of conflict. Assets in Kiev or Iran would face an obvious physical threat in the event of armed conflict and there are broader threats around the imposition of sanctions on entities working in these countries.

US-EU bonhomie has increased markedly since Biden came to office, but whether this translates into closer coordination on the foreign policy front remains to be seen. Both sides have made some progress on resolving transatlantic tariffs issues, but have not yet decided when (or if) to pursue a united front against China, particularly with respect to market access and the Taiwan issue.

“President Macron’s push for a more independent EU foreign policy and struggles in presenting a unified front against Russia remain challenging,” says McMann. “Germany’s new government will likely be the determining factor in the China issue – if it is more willing to push back regarding Taiwan it is likely to suffer economically given its close trade relations with China.”

Vaccine inequality

Pandemic mitigation measures include demanding that employees are vaccinated, mandating the wearing of masks, and limiting the number of people coming in and out of buildings at the same time, although most corporates have already implemented some or all of these strategies.

“More broadly, it is about taking advantage of opportunities that may arise in 2022 because what we saw at the beginning – especially in Europe – was lockdowns that went on for three months or more and I think countries where possible are moving away from that,” says Fitzroy. “There may be local lockdowns and specific types of curfews – and vaccine passports might be introduced – but I think countries have realised they don’t have to lockdown for so long or so broadly.”

Former British Prime Minister Gordon Brown has warned that low vaccination rates in poorer countries has enabled new variants such as Delta and Omicron to emerge and spread rapidly even across countries where the majority of the population are double jabbed. From a commercial perspective, a much more unstable business environment is likely to develop as individual countries create a more fluid lockdown system. This will cause some confusion, but also provides short-term opportunities.

“Corporates need to be aware of the way the political wind is blowing in their particular markets,” adds Fitzroy. “Reluctance to reintroduce full scale lockdowns in some countries is driven by domestic politics, so understanding domestic politics in each country is very important when dealing with unpredictability.”

Rising nationalism

The trouble inflicted on economies domestically by Covid also increases the risk of more authoritarian nationalist regimes pushing for external distractions.

“A global wave of rising populism can coincide with increased nationalism and potential risks to multinationals on two fronts – limitations on their ability to invest in foreign markets and maintain multinational supply chains without government pushback, and ability to sell in foreign markets,” explains McMann.

Should nationalist sentiment rise further in 2022, corporates should aim to determine the extent to which such sentiment is fuelled by popular pushback against foreign companies as opposed to anti-immigration attitudes. The latter has been a flashpoint in recent years but determining which way the needle is likely to swing will help guide corporates’ investment plans and supply chain positioning. McKinsey makes the point that geopolitics is personal and that large organisations are likely to have stakeholders with differing cultural reference points and opinions on issues from human rights to privacy – differences that can dissolve into disagreements about risk and strategy. In a world where nationalistic sentiments are on the rise, no country dominates, and regulations and standards are fragmenting, such situations are bound to accelerate.

Supply chains

Lindsay Newman, a Director on the country risk team at IHS Markit adds supply chain resilience to the list of challenges, noting that corporates will need to predict, assess and manage the changing landscape through intelligence and data analysis, benchmarking and scenario planning.

“The challenge for firms operating globally is not how to exit but how to stay in markets,” she adds. “Firms will face risk as they seek to capture opportunity.”

According to János Hidi, Sustainable Investment Manager at Cambridge Econometrics, uneven access to coronavirus vaccines will further accelerate the trend of deglobalisation and supply chain restructuring. “Current uncertainties appear more risky because they pose immediate risks to businesses,” he says. “For international companies global supply chain risks are material, but are more under their control than political risks although it takes time to reallocate production.”

Sonia Baxendale, President and CEO of Global Risk Institute observes that populism has seen the rise of protectionist practices and barriers enacted due to actual or perceived security concerns, such as in the US-China trade relationship. “Stress tests will feature highly in risk management practices that may include scenarios of embargoes on certain jurisdictions,” she says. “It is important to maintain a conduit of local knowledge to fully understand the nature of the risk rather than hearing it second-hand via media sources, for example.”

McMann acknowledges that restrictions on Chinese firms doing business in the US and/or working with US suppliers and the Taiwan issue do not have easy solutions. “However, our data shows voters are open to reducing tariffs in the interest of driving prices downwards and a clear majority want to avoid direct military conflict with China, suggesting that compromise and reduced tensions are potentially on the cards in 2022,” he says. “For these reasons, we advise corporates to hold tight on their existing supply chains.”

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