Geopolitical Risk

The risk comes from events outside the firm's control: wars, border disputes, coups, trade bans, tariff changes, sanctions and elections that change the rules. It reaches a business through several channels. Supply routes close, energy and commodity prices jump, customers or partners become sanctioned, staff and assets are put in danger, and markets reprice quickly. A narrower form is expropriation, where a government takes over or forces the sale of foreign-owned property, with little or no compensation. Firms usually track it by country and region, run scenarios on a few plausible shocks, and set limits on exposure to the most exposed places. Insurers sell political risk cover for some of it. Geopolitical risk overlaps with country risk but is wider, since a shock in one region can hit firms that have no presence there. Ordinary diversification does little against shocks that arrive within days, so exposure limits set beforehand do most of the work.

A food retailer sources most of a staple from one country. When that government bans exports after a political crisis, shelf prices rise and stock runs thin. The risk team had scenario-tested such a ban, so supply contracts in two other countries were ready, and shortages last only a few weeks.