Shifting Political Risk Perceptions Amid Geopolitical Tensions, ‘Gray Zone Aggression’

As geopolitical tensions escalate around the globe, multinational companies are being forced to confront a new reality of heightened political risk. The 2024 Political Risk Survey Report by WTW and Oxford Analytica reveals how corporate risk perceptions and losses have shifted dramatically in recent years, especially as the shock waves from the conflict in Ukraine reverberate through the global economy.

The focus of political risk concerns has shifted from Asia in 2022 to Europe and Russia in 2023-2024. The impact of the Ukraine conflict has been felt through various types of political risk losses, including currency inconvertibility, losses attributed to Western sanctions, and even an uptick in expropriations as the Russian government nationalized foreign investments, according to the report.

In 2023, there was a tendency to see disaster looming around every corner, with close to half of survey respondents claiming that every geopolitical trend would “greatly strengthen.”

However, in 2024, there is more differentiation in the perception of these trends. While 30% of respondents predicted that “geostrategic competition” would “greatly strengthen” in 2024, but for most other geopolitical trends, roughly 15 % or less have the same expectation, the report noted. Economic nationalism and social unrest are seen as “increasing,” while geostrategic competition and populist politics are viewed as “strongly increasing.”

Rise of ‘Gray Zone Aggression’

A new trend that has emerged as a mainstream business concern in 2024 is “gray zone aggression.” Elisabeth Braw, a senior fellow with the Transatlantic Security Initiative at the Atlantic Council, defines gray zone aggression as an action that takes place “in the gray zone between war and peace and is used to weaken a country using means short of war.”

Gray zone aggression provides a major advantage for perpetrators, as conventional means of deterrence, such as economic sanctions or military action, are only weakly effective against gray zone actors. This is because the intent of the action and the identity of the perpetrator may be difficult to discern, the report stated.

The Houthi attacks on merchant and naval vessels amid the ongoing conflict in Israel have brought gray zone aggression to the forefront of business concerns. Despite U.S.-led airstrikes against the Houthis, there were multiple severe attacks in the first quarter of 2024, resulting in the sinking of a vessel and the loss of sailors’ lives. The Houthi attacks also highlight the vulnerability of offshore assets, such as ships and oil platforms, which were traditionally seen as low risk due to their location out of harm’s way. However, new technologies that enable remote attacks have made these assets ideal gray zone targets, especially when located in international waters, according to the report.

The Costs of War

The shock of losses in 2023 due to geopolitical events was extreme, with over 90% of companies reporting a political risk loss. While not quite as severe, 2024 saw a similarly high level of losses, with 72% of respondents reporting losses, on par with 2022. Supply chain disruption was the most common cause of loss in 2024, the report found.

The financial impact of the conflicts in Ukraine and Israel varied significantly. Over 40% of respondents reported a net adverse impact from the events in Ukraine and Russia, with a striking 20% indicating a material impact that required a restatement of earnings. In contrast, 34% reported a negative impact from the conflict in Israel, with only 4% experiencing a material negative impact, per the report.

The trend of political risk losses occurring in major economies continued in 2024. Prior to 2021, losses tended to occur in obviously risky countries with relatively small amounts of foreign direct investment, usually in natural resources. However, from 2022 onward, losses began to occur in major economies such as Russia and India. In 2024, Russia, China, and the U.S. were the most frequently reported countries of loss, with losses in the U.S. presumably due to sanctions and export control policies, according to the report.

New Capabilities and Approaches

Companies are clearly adapting to a “new normal” of significant political risk losses, with 96% reporting they added new political risk management capabilities in 2024.

The most popular new capabilities centered around enhancements to corporate processes, implemented by 60% of respondents. Standing up new cross-functional teams and making new hires were also frequently reported steps.

In terms of risk management techniques, proactive risk identification and monitoring remained the go-to approach, the report found. Scenario planning and scenario-based stress testing also continued to be popular. However, the use of financial techniques like assigning a risk premium or adjusting the discount rate declined, likely because when geopolitical events are not accurately forecast, these precise financial assessments end up being precisely wrong.

Panelists emphasized their reliance on scenario planning in the current environment.

“We are using scenario planning with a shorter time horizon,” said a panelist in the energy sector. “Because uncertainty is so high, we do scenarios about the near future, not just ten or twenty years into the future.”

A mining sector executive reported using “course of action development and scenario planning based on worst case, most realistic, and ideal scenarios.”

Top Political Risks

As we look ahead to the rest of 2024, the report identified the top risks that businesses and policymakers cited most frequently.

Topping the list of concerns is the potential for further complications and escalations in the ongoing conflict in Ukraine. The war has already caused significant political risk losses, and as one panelist in the European health care sector noted, a Russian decision to escalate the conflict could be an “existential concern.”

Coming in second is the fact that 2024 will be a major year of elections, with national elections scheduled in more than 70 countries, including the U.S., India, and for the European Parliament.

The third top risk is the escalating rivalry between the U.S. and China. Panelists are particularly worried about what actions the U.S. might take in its efforts to maintain global dominance in the face of China’s rise, per the report.

Fourth on the list is the uncertainty surrounding climate policy, as diminished international cooperation and populist backlash against transition costs collide with the increasingly obvious impacts of climate disasters.

Rounding out the top five is the risk of companies mismanaging their exposure to China. As two different European panelists coincidentally noted, “The greatest difficulty the firm faces is dealing with China.” Even slight missteps could lead to exclusion from one of the world’s most important markets, a risk that is becoming harder to navigate.

To obtain the full report, visit the WTW website. &