Protecting businesses from geopolitical storms

In 2014 the Bank of England surveyed business executives to understand what they consider to be the biggest risks for their businesses. Whilst cyberattacks and financial disruption were high on the list, a striking 57% cited geopolitical risk as the greatest challenge their business faced. This was up from 13% in the previous year, a direct result of current problems in Crimea and Ukraine.

Other studies support their concerns: the 2015 World Economic Forum/Zurich Insurance Group Global Risks report saw geopolitical risk accounting for three out of the five top global risks to business (it was the first time geopolitical risk had even been included in the survey); and a KMPG survey saw c-suite executives list geopolitical risk top of its most threatening risk scenarios.

There has been no downturn in geopolitical problems since 2014, especially not within Europe’s borders, including Britain’s vote to leave the EU. The most recent political shock to Europe, and to the businesses operating within it, is Catalonia’s bid for separation from Spain.

The Spanish problem

The situation in Catalonia is a good example of cases where regional politics impact business. Catalonia is responsible for 20% of Spain’s GDP and is home to the city of Barcelona with hugely important tourism, manufacturing, gaming and telecoms industries. A disputed referendum set the region on a path to independence which was swiftly blocked by the Spanish government in Madrid.

At the time of writing (November 2017), the leaders of the movement in the Catalonian government are awaiting trial, and the question of independence is still in the air. Independence is considered a major threat to local and international businesses, especially as the EU warn an independent Catalonia would also be leaving the European Union.

So who is affected by the current situation, and how is the unrest impacting them?

Startups

Barcelona is a vital part of Europe’s startup ecosystem. 1,200 startups call Barcelona home and almost 12,000 people are employed by the startup industry in the city. It’s an industry with an international focus:  14% of founders and 23% of the employees are from outside Spain.

It’s not hard to see the impact independence might have on the Spanish startup scene – after all, we’ve seen it happen with London and Brexit. Six months after the referendum, it was reported that one in 10 tech startups in London were struggling with investment, with funding either being withheld or pulled after the announcement, and a third said it was harder to grow their business post-Brexit.

This is worrying for both Spain and its startups – and businesses should be watching their progress closely. If Catalonia becomes independent, then Spain loses a tech and entrepreneurial hub that not only generates money, but also helps younger generations overcome Spain’s high unemployment rate (currently standing at 17%, but 38% for 15-24 year olds).

Startups have had a positive effect on Spain’s worth in the eyes of venture capital firms, bringing in around €4 billion euros. In terms of next steps, startups in the region need to know whether their attractiveness to investors is being affected either locally or internationally. Startups in other Spanish cities such as Madrid or Valencia need to look at whether they can capitalise on this hesitation to fund Catalonian firms.

International companies

As if Brexit wasn’t enough of a cause of concern for the car industry, Catalonia is home to three major factories that make 2,000 cars a day for Volkswagen’s Spanish brand Seat – a huge part of Germany’s investment in Spain. Regional politics has already impacted the carmaker: parts supplies were disrupted when protests broke out in Catalonia, and the company decided to delay the launch of its new SUV when the independence vote was impending.

Carmakers aren’t the only brands facing potential disruption. IAG owns two airlines in Catalonia – Vueling and Level – and Ferrari, Nestlé and Airbnb all have offices in the area. Airbnb will feel the impact twofold if the split impacts tourism in Barcelona (already a reported 15% slump – much higher even than the slump following recent terrorist attacks). Amazon is also heavily invested in the region now: it opened a $35 million airport warehouse in 2017 and it plans on opening an machine-learning R&D hub and a Seller Support Hub in Barcelona in 2018.

As ING Economist Steven Trypsteen told the Guardian: “These international companies do not like uncertainty and if they have to choose between Catalonia and the EU they may choose the EU.”

The financial landscape

The political impact invariably has a knock on effect for the financial landscape of a country. Whether a domestic or international company, businesses need to keep an eye on the political implications of unrest on the nation’s banks.

Spanish banks in Catalonia are currently in the process of moving to escape the consequences of any independence movement. The decisions made by CaixaBank and Banco de Sabadell, two of Spain’s largest banking institutions, speak volumes. CaixaBank wants to move its legal quarters down the coast to Spain’s third biggest city Valencia, in a move that the FT says: “offers protection from the risk that the bank could find itself legally headquartered outside the EU or the eurozone.”

The 135-year-old Banco de Sabadell has made a similar decision and moved its legal headquarters to Alicante, another city in the autonomous community of Valencia. The move was widely approved: Sabadell’s stock rose by more than 6% following the announcement.

Borrowing is more expensive, investment is faltering, and ‘uncertainty’ is the word of the moment. As Angel Talavera, an economist at Oxford Economics in London, told the NY Times: “Money doesn’t like uncertainty. As long as this situation is so confusing and no one really knows what’s going to happen, money is going to start leaving Spain. Money moves fast.”

What should companies do?

We’ve seen the impact regional issues can have on businesses big and small, international and local. So what do companies need to do to mitigate these risks?

Keep an outward-looking approach

Keep an eagle eye on the politics in regions where your business operates, whether that’s a factory making their parts on the other side of the world or HQ. Learn from the successes and pitfalls of other companies operating in similar geographies.

Look at the data

How is your brand reputation doing in an area of political unrest? What are your customer satisfaction reports, social media and media mentions in the area like? Monitoring online conversations is an effective way of staying ahead of public opinion and avoiding any corporate gaffes.

External data can also show you problems on the horizon before they become an issue. Sentiment tracking is an ideal way to do this. On October 27th, for instance, Meltwater data showed  positive sentiment around Catalonia, even though there was still plenty of negative sentiment about. This was the day that the Spanish government dissolved the Catalan government, took control, and announced elections in December. The most negative sentiment can be seen on the day the controversial referendum took place.

Be prepared

John Chipman, Director-General and Chief Executive of the International Institute for Strategic Studies, recommends all businesses create a ‘corporate foreign policy’ and carry out ‘geopolitical due diligence’. Assessing risk at all levels, paying attention to regional political movement, keeping an ear to the ground and having a thorough strategy set aside if issues do arise is a sensible plan when geopolitics becomes difficult.

Being a bystander in local politics can be as dangerous as making an active mistake – a thorough corporate foreign policy would make sure a company is conscious of itsplace in the political landscape.