NEW DELHI (Bloomberg) — If Russia’s tussle with Ukraine and the Islamic State’s advance in the Middle East roiled markets in 2014, next year could be even worse.
Russia is headed for a prolonged recession, China’s territorial spats with neighbors will probably start to impact trade and Iraq could collapse into full-scale sectarian violence, according to the latest annual outlook from Control Risks, a global risk advisory company whose clients include Fortune 100 companies and governments.
“2015 will be a difficult year for business,” Richard Fenning, Control Risks’s chief executive officer, said in the report. “Not only is the relationship between business and politics at an all-time low, relations between states are at their worst since the height of the Cold War.”
Investors were “caught short” this year by the sudden deterioration in relations between Russia and the U.S. over Ukraine, which caused losses across the finance, agriculture, automotive and energy industries. Similarly, companies aren’t adequately pricing in the dangers of intensifying naval brinkmanship between China and its neighbors, the report said.
“Mind the threat of escalation from seemingly minor confrontations and the scope for accident and miscalculation,” it said. Seas off China’s coast are now Asia’s top flashpoint, eclipsing long-standing concerns over the Taiwan Strait, Korean Peninsula, and India and Pakistan, it said.
More troubling for multinational companies is how politicians are increasingly ill-equipped or unwilling to find solutions, it said. Politicians are finding they lack the power they once had, particularly in the U.S. and Europe, even as international supply chains become more vulnerable to national disputes.
“The nature of modern political power makes fixing international problems so difficult,” the report said. “2015 will be characterized by deflating optimism, continued conflict, and widening failure of global governance to address the issues.”
Geopolitical tensions can spark armed conflicts or trade sanctions that upend business plans. Increasingly complex anti-corruption regulations and data privacy laws make regulatory investigations likelier than ever.
Technology and weak state power are providing more opportunities for terrorists and cyber-criminals with little prospect of the international cooperation and policing necessary to fight it.
“It’s the cheapest form of warfare since the bow and arrow,” the report said said.
Falling commodity prices will bring little cheer as governments from Nigeria to Russia to Iran struggle with less revenue to deliver jobs and ensure stability, it said. Brent crude has fallen about 40 percent this year, according to data compiled by Bloomberg.
“The lines between what have always been considered ‘safe’ and ‘risky’ opportunities blur,” Fenning said. “Opportunities will continue to abound for ambitious international companies. But uncertain economics and volatile politics will make 2015 more than usually challenging.”