Imagine a geopolitical threat emerges while you are running a textile company that depends on imported raw materials, sells products to several countries, and even has branch offices in various regions.
One day, a conflict suddenly breaks out in one of the countries where your supplier is located. Ports are shut down, the local currency plummets, and the government imposes export restrictions. Then, in just a matter of days, your entire operational plan is shaken. This is what we call geopolitical risk.
The explanation above shows that geopolitical risk can no longer be ignored. Not because companies need to get involved in politics, but because politics itself has entered the realm of business.
The Ukraine crisis, the US–China trade war, conflict in the Red Sea, coups in West Africa, and ongoing tensions in the Middle East—these are no longer just international news stories. They are realities that business players must pay attention to in order to turn risks into opportunities.
What Is Geopolitical Risk?
Geopolitical risk refers to any form of uncertainty that arises from inter-country political dynamics, foreign policy, armed conflict, or drastic shifts in power, which can directly or indirectly affect economic stability and business operations.
Unlike internal risks such as management or production errors, geopolitical risks often arise beyond a company’s control—but their impact on the company can be highly significant.
The escalating conflict between Iran and Israel since early 2024 until now (2025) is a real-life illustration of a geopolitical risk with global consequences. Iran’s direct attack on Israeli territory and Israel’s military response have triggered massive turmoil in the global energy markets, causing oil prices to surge, shipments to be disrupted due to potential blockades in the Strait of Hormuz, and commercial port infrastructure investments to become threatened.
Moreover, global stock markets were shaken, with investors reallocating their funds into safer assets. For many businesses, this conflict has resulted in higher logistics costs, delayed development plans, and the need to reassess overly concentrated supply chains in conflict-prone regions.
The Impact of Geopolitics on Business
Sometimes we assume that a conflict in a distant part of the world has nothing to do with our business. But in reality, the opposite is true—one outbreak of political tension in a particular region can be immediately felt in corporate boardrooms thousands of kilometers away.
For example, imagine a manufacturing company in Indonesia that relies on components supplied from Eastern Europe. Suddenly, war breaks out in that region. Logistics routes are disrupted, raw materials are delayed, and production costs surge dramatically. And all of this happens not because of any internal failure, but due to geopolitical dynamics beyond the company’s control.
Here are several impacts that may arise from geopolitical events:
1. Disruption of Supply Chains and Logistics
The global supply chain system can be likened to a complex wristwatch—if one small gear gets stuck, the entire mechanism can stop. When conflict paralyzes distribution routes, especially in strategic regions, the entire production process is hindered. Companies may face shipping delays, production stagnation, and even customer loss due to missed deadlines.
2. Instability in Energy and Commodity Prices
A sudden spike in oil prices due to a Middle East crisis isn’t just a media headline. It can mean a sharp increase in shipping costs, factory electricity bills, or raw material prices soaring out of control. Sectors heavily dependent on energy, such as manufacturing and transportation, are usually the first to feel the impact.
3. Reputational Risk and Public Perception
A company’s reputation is built slowly, but it can collapse in an instant when it becomes entangled in political conflict. Even merely doing business with a partner located in a sensitive region or having certain political affiliations can trigger backlash from the public and regulators. Today’s world demands not only efficiency but also ethics and sensitivity.
4. Regulatory and Policy Uncertainty
When the power map changes, regulations often follow suit. A company may suddenly need to adjust to new policies, face trade sanctions, or deal with import-export regulations that shift direction overnight. This kind of legal uncertainty complicates long-term business planning.
5. Threats to Long-Term Sustainability
Geopolitical risk isn’t just about today—it’s also about the future. Without a solid risk mitigation system, even small disturbances can lead to major losses down the line. Not only in financial terms, but also in terms of losing strategic direction and eroding the company’s perceived value in the eyes of stakeholders.
In the era of globalization, what happens in one corner of the world can affect companies on the opposite side. Geopolitical risk teaches one crucial lesson:
“Uncertainty is inevitable, and preparedness is a competitive advantage.”
How to Measure Geopolitical Risk
Measuring geopolitical risk is not merely about data and numbers—it’s about reading uncertainty. It involves more than just statistics; it also requires business intuition. Still, behind it all, companies need a systematic framework to estimate and assess the extent to which geopolitical unrest may impact their operations.
Because geopolitical risk is inherently complex, the approach must also be specialized. One commonly used method is geographical risk mapping. In this method, companies map regions currently experiencing political pressure, conflict, or legal instability, and then trace how deeply these areas are connected to the company’s supply chains, core resources, or market share.
Then the question arises: how do you measure something that hasn’t happened yet? This is where scenario analysis and quantitative approaches come into play. One frequently used method is to assess the potential loss using the expected loss formula:
Risk Exposure = Probability of Event × Impact of Event
For example, if the probability of conflict in a key supplier country is 30% within the next 12 months, and the potential loss from disrupted supply is valued at $10 million, then:
Risk Exposure = Probability of Event × Impact of Event
Risk Exposure = 0.3 × 10,000,000 = 3,000,000 dollars
Based on this example, the resulting figure can be used as a foundation for mitigation priority, whether it’s necessary to find alternative suppliers, build buffer stock, or even exit that market entirely.
Now, what if the situation worsens? How much potential business loss could occur in the long term? This is where the Future Value approach becomes relevant—not to calculate profit, but to evaluate the value lost if the situation remains unresolved.
Measuring geopolitical risk is not just about calculating what has already been lost, but also about anticipating what may never be achieved if mitigation steps are not taken. Formulas such as Future Value and Expected Loss may not map out the full complexity of the world, but they help us make more precise decisions with clearer reasoning.
Future Value
In concept, future value is an estimate of how much an investment or potential business gain could be worth in the future, after factoring in interest, time, and risk. It can be measured using the following formula:
FV = PV × (1 + r)^n
Where:
FV = Future Value (value in the future)
PV = Present Value (current value)
r = rate of return or inflation
n = time period (in years/months)
Imagine you want to invest $1 million in building a new factory in Region A. However, the region has just experienced diplomatic tensions. In this case, we can calculate the future value of the investment both with and without geopolitical risk. The difference in FV results reflects the indirect cost of geopolitical risk.
What this means is:
- Without disruption, the future value of the business might be $1,500,000
- But with geopolitical risk (such as delays, embargoes, etc.), the realistic value may drop to only $1,100,000
So, in this scenario, geopolitical risk reduces the potential future value of the investment by $400,000.
Expected Loss
Expected loss is a quantitative approach used to estimate how much potential loss may occur due to a specific risk, by factoring in the likelihood of that event happening.
In a geopolitical context, this formula is highly useful for estimating the financial impact of international tensions, armed conflicts, or economic sanctions.
Expected Loss = Probability of Event × Loss Given Event
Where:
Probability of Event (P) = the likelihood of conflict, sanctions, or unrest
Loss Given Event (L) = the amount of financial loss if it actually happens
For example, if there is a 30% chance that a country supplying raw materials will face an embargo, and if the embargo occurs the company would incur a $2 million loss due to supply chain disruptions, then:
Expected Loss = 0.3 × 2,000,000 = 600,000
This means the company should anticipate a potential loss of $600,000 from just one type of geopolitical risk.
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Steps for Managing Geopolitical Risk
Managing geopolitical risk requires more than simply reacting quickly to international news. It demands strategic awareness built on a deep understanding of global dynamics, along with the readiness to respond effectively and swiftly.
There is no single formula that applies to all types of businesses, but several general principles can serve as a foundation for navigating geopolitical uncertainty:
1. Build Situational Awareness
The first crucial step is realizing that geopolitical risk doesn’t always come in the form of an obvious crisis. Sometimes, early signs appear as diplomatic shifts, foreign policy changes, or underlying social dynamics in a country or region. Companies should establish continuous risk monitoring systems—whether through internal teams or with the support of external consultants. This helps in understanding geopolitical trends and their potential impacts on business.
2. Identify Points of Risk Exposure
Not all geopolitical risks affect every industry equally. A logistics company faces different vulnerabilities than a pharmaceutical or tech company. That’s why it’s important to specifically map out: which countries are part of the supply chain, whether raw materials come from high-risk regions, or if there are branch offices in conflict-prone areas. Clear identification allows companies to determine which areas require mitigation priority.
3. Use Scenario Planning and Impact Analysis
Once risks are identified, companies can build scenario planning. This includes simulating various possibilities—ranging from trade restrictions, logistical route closures, to asset freezes in certain countries. The goal isn’t to predict the future perfectly, but to train the organization’s responsiveness and flexibility as situations change. This strategy helps businesses not only survive, but remain competitive amid uncertainty.
4. Diversify Supply Chains and Operations
Reliance on a single country or partner can become a vulnerability. Therefore, diversifying suppliers, manufacturing locations, and distribution channels is one of the most effective ways to reduce geopolitical exposure. Many companies are now implementing China+1 or Nearshoring strategies to reduce dependency on high-risk countries.
5. Strengthen Communication and Reputation Resilience
In sensitive geopolitical situations, public perception and the speed of information can be just as impactful as other disruptions. Therefore, companies need a mature crisis communication strategy and should maintain a politically neutral reputation whenever possible. Clarity of stance, transparency, and sensitivity to local issues are all essential to maintain the trust of global stakeholders.
Case Study: The Iran–Israel Conflict and Its Impact on Global Business
The geopolitical tension between Iran and Israel stands as one of the clearest examples of how a regional crisis can shake global economic stability. This conflict is not merely about territorial disputes or political interests—it also concerns vital trade routes, global energy security, and the diplomatic architecture of the Middle East.
Several major airlines rerouted their flights to avoid the conflict zone, resulting in higher operating costs and longer travel times. Insurance companies raised cargo shipping premiums, while some multinational corporations postponed their expansion plans in the Gulf region to maintain portfolio stability.
Then, when Israel launched a limited strike in response to Iran’s military threats, the oil market reacted instantly. Crude oil prices jumped by more than 5% within just 48 hours, driven by fears of disrupted flows through the Strait of Hormuz—a chokepoint through which roughly 20% of the world’s oil trade passes.
This reaction was not an overreaction. As IMF Managing Director Kristalina Georgieva once said:
“Geopolitical tensions increase the risks of fragmentation of the world economy. And, as we learned over the past few years, we operate in a world in which we must expect the unexpected.”
Her statement reflects the reality that businesses can no longer rely on assumptions of stability as they once did. In today’s fast-changing landscape, understanding geopolitics is no longer a luxury reserved for large corporations, it is a necessity for any business seeking to survive and grow.
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Conclusion
Geopolitical risk is no longer something that can be dismissed with the assumption of being “too far away.” Today’s business world is deeply interconnected—one tension in the Middle East, one sanction in East Asia, or one embargo in Eastern Europe can send shockwaves that are felt even in domestic markets. Business resilience is no longer measured solely by capital strength and operational efficiency, but also by the ability to read, map, and respond wisely to global dynamics.
What separates companies that survive from those that collapse is not the size of their assets, but how fast and accurately they respond to a changing world. In this context, a strategic, data-driven, and geopolitically informed risk management approach becomes essential.
Need the right strategy to face geopolitical risks? Arghajata Consulting is ready to help your business identify threats, develop mitigation plans, and ensure business continuity amid global uncertainty.
