Disastrous domino effect in Europe

Disastrous domino effect in Europe

While the apparent reason for the surge in natural gas prices is prosaic – a strike by workers at an LNG plant in Australia who are dissatisfied with an average wage of around $3,000 (according to the Australian Bureau of Statistics) – the true reason for the new shock is a geopolitical conflict, namely the drastic reduction in natural gas supply from Russia. Therefore, the gas price increase is essentially the realization of accumulated political risk.

And political risks – including not only the showdown between the West and Russia or tensions in relations with China but also the enactment of a series of controversial decisions in public policies – are increasingly impacting business operations. This year's highly regarded Oxford Analytics study revealed that 100 percent of major global corporations were working to enhance their political risk management capabilities, while 54 percent increased investments in political risk insurance or financially protected themselves against political risks.

European companies are the hardest hit. Globally, 60 percent of companies in the survey reported a negative net impact from the conflict in Ukraine, with Western European companies estimating direct or indirect losses in 86 percent of cases due to this political risk. Only 33 percent of American companies assessed that political risk was causing them net damage.

These are substantial percentages across the board that unveil the true scale of the planetary business drama fueled by inflated political risks. It's entirely certain that the Oxford Analytics study should become a handbook for policymakers to read before potential harm is inflicted. Indeed, it's a matter of time before the accumulated political risks render Europe and a few of its businesses unmanageable.

Special note: Oxford Analytics has no affiliation with Cambridge Analytica, which was involved in a major scandal. Oxford Analytics sued Cambridge Analytica over name infringement, but the infamous right-winger Steve Bannon stuck with the narrative that he invented the company's name.

Expert analyses from Oxford Analytics suggest that the war shock in Europe has caused a shift in the business paradigm. The percentage of companies that have purchased some form of political risk insurance has risen from 25 percent in 2019 to 68 percent this year.

During the same period, the number of companies anticipating the strengthening of deglobalization trends has increased from 16 percent last year to 50 percent this year. If deglobalization is indeed progressing at this rate, it is likely that within just 2-3 years, it will undo what globalization took 20-30 years to achieve.

The assessment of Western businesses separating from China has risen from 12 percent of companies in 2022 to 42 percent in 2023. According to companies' opinions, deglobalization is gaining momentum. Here's how they describe the nature of the growing problem in the research "The Year When Political Risk Became Everyone's Risk":

"This is how an insurance broker typically describes political risk: 'low frequency, high severity.' Political risk is, in short, a catastrophe or 'tail risk,' akin to many types of natural disasters. We will have to rethink that description: this year, more than 9 out of 10 companies we surveyed reported losses due to political risk (compared to 35 percent just a few years ago). This year, political risk has become everyone's risk."

Oxford Analytics analysts didn't write anything particularly insightful when they concluded that "this year, political risk became everyone's risk," as anyone could see through price movements when going to stores or markets. However, the fact remains that they surveyed many companies and found data indicating that the political risk is more disruptive, or dangerous than it appeared to us after the price hikes in the last two years. It's particularly logical to be concerned in Europe.

Namely, in the US, more companies (42 percent) have acknowledged benefiting from the war in Ukraine, which is more than the 33 percent with established net losses. In other words, Europe is likely the continent most exposed to political risks.

What will European politicians, especially Members of the European Parliament, do about this? Will they act, and will we in the future tremble from a double-digit surge in natural gas prices when someone working in Australian and American mining seeks an increase in base pay and/or bonuses? It's more likely that European politicians won't even realize the extent of the political risk they've accumulated, so they'll continue to exacerbate it.