High geopolitical tensions are at risk of using corporates as collateral, warns a new report from intelligence firm Verisk Maplecroft, which says rising troubles between the US and China should be at the top of corporate risk radars.
The Political Risk Outlook 2021 report says political rivals could use sanctions and export controls that will impact business because the corporate sector seems to have become a “legitimate target” in power disputes between nations.
The research flagged up five political rivalries running more than 50% risk of some form of military confrontation in 2021. The chance of conflict between US and China in 2021 is 58% (up from 19% last year), according to Verisk Maplecroft.
Other political rivals flagged up by the company’s algorithm include North Korea vs South Korea, with the threat of conflict unchanged at 60% this year, and India vs Pakistan, also unchanged at 59%.
The chance of conflict between Azerbaijan and Armenia has spiked from 25% last year to 62% in 2021, and is the biggest threat according to Verisk.
The risk of conflict between Greece and Turkey, meanwhile, has risen to 54% from 45%.
Verisk Maplecroft said competition between US and China has gathered pace since Joe Biden was last in office as vice-president in 2017. While neither side is likely to want to resort to force, Verisk said there is an increased chance both will use military threats and posturing to exert power.
“The danger is that such muscle flexing, through a combination of miscommunication, misunderstanding and miscalculation, will inadvertently result in the actual use of force in theatres such as the South China Sea or the Taiwan Strait,” says Hugo Brennan, principal analyst at Verisk Maplecroft.
He adds that further deterioration between US and China could trigger a retaliatory policy response that will impact global markets and corporates. Such policies could include tighter export controls and an extension of sanctions from the US. Meanwhile, China’s import restriction on US fuel and agriculture, as well as politicised regulatory probes against US firms in China and cyberattacks, could rise.
Mr Brennan warns that the corporate sector is “increasingly viewed as a legitimate target by sparring strategic rivals, and the unwary risk getting caught in the crossfire of one of the world’s various geopolitical flashpoints”.
The report adds that the trajectory of US-China relations is “unsurprisingly the geopolitical trend that is set to have the greatest impact on global markets”.
“Bilateral tensions between the world’s two largest economies have been on the rise over the past decade, but a spillover into a military confrontation would likely trigger an aggressive tit-for-tat policy response,” it says.
President Biden will also face challenges from emboldened rivals Vladimir Putin and Recep Erdogan, after Donald Trump disrupted international norms and ended his term with deep domestic divisions exposed in the storming of the US Capitol, Verisk says.
The risk of conflict between the US and Russia measures low at 3%, but Verisk said President Biden’s warning that the US will not “roll over” for Russia could see the threat increase in future algorithms.
The research also finds that tensions in the Gulf have somewhat diffused and the region is the “silver lining” of the report. Saudi Arabia’s three-year blockade against Qatar has ended and helped create more unity between the US allies in the Middle East.
Verisk says the risk of conflict between Saudi Arabia and Iran has cooled from 50% last year to 36% in 2021, and dropped from 23% to 11% between Saudi Arabia and Qatar.