Andrew Coburn
18 February 2015
The turmoil of 2014 was a timely reminder to businesses that they need to be prepared and have contingency plans for global conflict. The crisis in Ukraine brought Russia and the West to the brink of military confrontation; relations between Japan and China became more fraught; and the year ended with the US and North Korea in something approaching what headline writers like to call “cyber war”.
The period since the end of World War II has seen no armed conflict between major military powers. Historians have dubbed this period “The Long Peace” – but of course even this time span has not been conflict free. In fact, records suggest more than a million deaths in at least 700 conflicts in the past 25 years.
Last year’s tensions have alerted company leaders to this. They have reawakened to the potential for regional conflicts disrupting their international operations, playing havoc with a fragile global economy and causing chaos in the markets. When Malaysia Airlines flight MH17 was downed while flying over conflict zones in Ukraine, causing the deaths of 298 people travelling from Amsterdam to Kuala Lumpur, it reminded the international community of the ease with which what appear to be remote crises can touch us all.
Risk analysis
This is reflected in the World Economic Forum’s annual survey of threats of concern to world leaders and captains of industry. The WEF’s Global Risks 2015 report finds that interstate conflict is now the highest concern – with infectious diseases, water crises, extreme weather events, cyber attacks, unemployment and failures of national governments as other top worries. Only a year ago, interstate conflict didn’t make the WEF’s top 10 risks at all.
In fact, though, the rise of interstate conflict as an area of top concern is long overdue. As 2014 has shown, today’s business leaders need to be aware of the kinds of crises and conflicts that might be expected over the business cycle of the next five to 10 years.
It would certainly be remarkable – unprecedented even – if there were no conflicts during the next decade. Even the most peaceful decades in history have seen minor conflicts every few years. Most decades since the mid-19th century have seen an average of two conflicts involving at least medium-ranked powers. At least one decade in five could be expected to see a regional war involving a G20 nation, most typically a proxy war between superpowers. History shows that supposedly “unthinkable” wars have a nasty habit of surprising people – even the war leaders who instigate them.
Risk hotspots
Analysis for our risk studies centre by Cytora Ltd, a research partner specialising in geopolitical risk, identifies more than 100 potential scenarios for two nation states to spark off a military conflict in the next decade – gauged from recent antagonist statements towards each other, antithetical values and historical enmity.
Map of Interstate Conflict Risk Cambridge Centre for Risk Studies & Cytora Ltd.
The risk map above of future conflicts identifies a number of regional hot-spots, including the obvious Middle East, central and eastern Africa, the eastern European margins, the Indian subcontinent, parts of Latin America and the emerging South-East Asian powers. Wherever they can get the information from, businesses would do well to incorporate this kind of research into their strategic thinking. Forewarned is forearmed. Conflicts threaten employees in the theatre of war, they disrupt supply chains, reduce demand for goods, and unsettle investment markets.
The various stress tests we have developed – for interstate conflict, pandemics, social unrest and more – illustrate what a company might experience from a catastrophic event such as regional war.
Hypothetical stress test scenario
In the hypothetical “what-if” scenario to help businesses assess their resilience to interstate conflict, we imagine an escalating spiral of military tension between China and Japan, based on Pentagon war games. The ensuing outbreak of hostilities disrupts trade across a wide area of South-East Asia.
Map of hypothetical scenario of China-Japan Conflict, showing conflict zones (A); sea exclusion zones (B); and air restriction zones (C ). Military bases are represented by total population within 50km Cambridge Centre for Risk Studies
Many US and European businesses have strong economic stakes in the region, including outsourced manufacturing to the region, providing services to growing markets there, and managing supply chains through and around the region.
China and Japan are the world’s second and third largest economies and they create US$120 billion of exports, much of which are shipped through the South China Sea. The scenario envisions much of this being halted by a naval sea exclusion zone that freezes the activities of six of the world’s largest ports, and prevents almost half of the world’s container traffic passing through it.
Militarised restricted air space prevents commercial air traffic across the combatant countries, which stops flights from five of the world’s top 20 airports, handling 8% of world passenger traffic and 46% of air freight.
The scenario tests the ability of businesses to manage this type and scale of crisis. Supply chains, major markets and regional offices have to be reconfigured quickly. Businesses have to review their global exposures and identify concentration risks and choke points in their operations that could be impacted. Currency exchange rates will fluctuate wildly. Business counter-parties could find themselves in distress, so companies need to consider credit-risk tolerance and cash flows during a crisis of this kind.
Company boards might be tempted to skirt round the idea of such unthinkable catastrophes? But for thoughtful businesses, it is certainly something worth thinking about.
The risk of interstate conflict and its impact on business is presented in the proceedings of a Cambridge Centre for Risk Studies seminar, held in London on February 19, 2015
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