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One thing the Russian invasion of Ukraine has highlighted very clearly is the necessity for company leadership to ensure their business is de-risked against both current and future threats.

The invasion has pushed oil and gas prices to record highs, pushing up costs noticeably for every industry. In Europe, of course, the situation is made even worse by its dependence on Russia for so much of its energy (40% of gas, 30% of oil products and around 50% of coal products) – a dependence that will take until at least 2030, apparently, to break completely.

Was Europe caught napping?

It should not have been, especially given the 2015 report by the ECR which pointed to the need to diversify energy supplies away from Russia given its unreliability in 2006, 2009 and 2013/14, as this article’s links so clearly show.

While it’s all very well to simply blame the politicians who signed these agreements, the fact is that voters have had plenty of opportunity to register concern and unhappiness with this and businesses have had time to make plans to de-risk themselves, too. It was just easier to do nothing.

Now, however, people are pushing businesses to wake up – at least in the case of Russia. The politicians are imposing sanctions on individuals and some organisations, while looking at how to reduce the level of gas, oil and coal imports from Russia, banking and payment systems are being affected and companies, from luxury goods to fast foods, are withdrawing as quickly as they can.

This, of course, not only impacts Russia and the full effects of these moves are still to be felt. Certainly, earnings will be down and some companies – such as aircraft leasing ones – might be forced to liquidate (Russia is suggesting it will nationalise leased aircraft to prevent them being repossessed at the end of this month). At the very least, it requires a great deal of re-strategising for the companies involved.

But the Russian invasion is having even greater consequences.

Not wanting to be caught short and having to react too quickly to major events is leading to companies looking with fresh eyes at other potential risk areas and China is a significant one.

It is increasingly pushing the boundaries of territory, particularly in the South China sea where it has built artificial islands and is now equipping them militarily in defiance of the United Nations.

There are also growing concerns that China might invade Taiwan in the next couple of years, emboldened somewhat by Russia’s actions. The global impact on the electronics industry of such a move would be enormous.

Add to this the problems being experienced in Chinese business – over-leveraged property companies facing default and the huge drop in valuations of major Chinese firms such as Alibaba driving Chinese technology stocks sharply down, while US authorities are moving to delist over 200 Chinese companies from New York stock exchanges due to auditing issues. There is also the way in which China has been handling the Uighur issue – not just from a human rights perspective, but the way it reacts to Western companies that raise concerns, such as Nike and H&M.

And then there’s China’s approach to Covid, which is causing huge disruption as whole cities are closed at very short notice to prevent outbreaks, meaning factories close, shipping is halted, and so on.

Many companies are now actively looking at how to de-risk their exposure to China – not just for supply, but for sales, too, where the rapidly expanding middle class of some 400 million people is feeling a lot of pressure nowadays.

For large companies this will be a complex process and will likely have to be done relatively slowly and very carefully, probably on a product-line by product-line basis – after all it will likely mean a combination of higher input costs and falling sales.

Smaller companies, though, can move more quickly. While they will face similar problems, these will be offset to some extent as local sourcing will mean much lower shipping costs and turnaround times, and perhaps even improved quality control, while sales to China are not generally as significant to these businesses as they are with “the big brands.”

Boards that are actively looking at how to de-risk their businesses from China will almost certainly be a far stronger position in the years ahead than those who are taking a “business as usual” approach. Ensure your board is actively looking at the issues, and is equipped with the skills necessary to do so effectively. And remember, too, that directors of companies have a duty to actively and seriously consider risks to the business and could be held liable for not doing so if the company then suffers harm.

The VUCA world I wrote about in October last year is certainly proving even more volatile, uncertain, complex and ambiguous than ever!

 

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If you’d like to learn more, these articles might be useful: