Number 14

In the second half of the 20th century, analyzing political environments became an increasingly crucial component of risk assessments for financial, commercial, and operational activities by banks, insurance firms, multilateral organizations, and other lending institutions. The objective was to evaluate the political context of financial assets, direct investment projects, and virtually all types of operations requiring the calculation of payment guarantees and default probabilities. This approach applied to both government-issued debt and commitments as well as private companies, based on similar principles: every organization must manage uncertainties.

Overall, risk analysis must assess both an organization’s capacity and willingness to meet its payment obligations. Estimating payment capacity is typically the responsibility of the economic analyst, while assessing willingness falls primarily to the political analyst. For instance, when analyzing sovereign debt, the economic analyst evaluates whether the issuing state has the capacity to meet its obligations—considering factors such as available reserves, projected revenues, growth outlook, and other macroeconomic indicators. In contrast, the political analyst focuses on identifying factors that might interfere with such capacity to do so in a timely and proper manner. Assessing capacity is often viewed as quantitative, universalizable, and dependent on high-quality data, while evaluating willingness is qualitative, inclined toward particularism, and frequently reliant on confidential information.

This divergence in focus and approach has traditionally created a sort of tension between economists and political scientists in the “kitchen” when a composite risk index is concocted. Macroeconomic indicators are internationally standardized, typically public, and backed by time series with verifiable data. In contrast, political analyses rely on a wide range of variables, studied through diverse methods and models, which are highly dynamic, context-dependent, and evolve with time and place. To make matters worse, in addition to suffering from “incoherence” (Janbaz et al., 2022), these factors would often become decisive in the final outcome of the estimation. Along with this disciplinary and task-based division between the economic analysis of payment capacity and the political analysis of willingness to pay, another controversial concept arose, one we will revisit later: the notion that economic risk is endogenous to the contract, while political risk is an exogenous factor. This created an artificial separation between politics and economics within the same decision-making process.

To these 20th-century challenges—arising from the incorporation of political variables into the comprehensive analysis of credit and investment risk by banks and insurers—a new layer has been added in recent years: the shift toward the notion of geopolitical risk. This concept is being advanced both in academic and public policy research (e.g., Caldara & Iacoviello, 2022; Engle & Campos-Martins, 2020) and by private banking and corporate consultancy (e.g., Haider et al., 2023). According to Caldara & Iacoviello (2022, 1194), the notion of geopolitical risk has been adopted by institutions such as the Bank of England, the European Central Bank, the World Bank, and the International Monetary Fund. It is primarily based on estimating the adverse effects of high-impact “geopolitical events” on international economic relations, including wars, terrorist attacks, and tensions between states and political actors. Along the same lines, Engle & Campos-Martins (2020, 2) describe “volatility shocks” in financial markets triggered by events they categorize as geopolitical. They expand this definition to encompass natural disasters driven by climate change, pandemics, trade wars, cyberattacks, and any other events with the potential to disrupt global financial stability. Notably, they highlight the Brexit vote in 2016 as a pertinent example. Geopolitics is defined here as a scale: an event occurring at the global level that impacts other levels.

In this context, the “new” geopolitical risk does not replace traditional political risk, which is rooted in national political economy, but rather complements and amplifies it. The observation of global financial volatility events introduces new variables into the analytical framework. That said, we must ask: Is the focus on emerging risks an incremental shift, or does it reflect a broader historical transformation? In the context of the analyst’s toolkit: Are we simply adding new risks, or is our understanding and perception of them evolving in response to transformations in the global order?

Geopolitical order and sovereign risk analysis

At the outset of the Cold War, the most feared risk event in Ibero-America was the possibility of a political revolution, similar to Cuba’s, that could trigger a widespread suspension of payments amid a radical shift in the economic regime. Consequently, the approach was to closely examine the subject at hand in order to effectively address this pivotal question.

Decades later, in the 1990s, risk analysis no longer focused on increasingly improbable scenarios of regime change. Instead, it refined its focus on institutional dynamics, economic governance, social conflict, and power struggles within the new democracies.  Undoubtedly, a political risk analyst in 1996 who only focused on the likelihood of a communist revolution was outdated. In the post-Cold War era, while the possibility of a revolution or regime change could not be entirely ruled out, we were facing something substantially different. The focus of political risk analysis had shifted from concerns about radical regime instability, typical of the Cold War, to the issue of governance within relatively consolidated political regimes operating as part of a global political economy characterized by the stabilizing leadership of the United States. For this reason, the political risk analysis adopted by major banks and international organizations was more oriented toward a detailed understanding of the institutional environments of the new democracies in Latin America, Africa, and Eurasia—emerging markets that had recently undergone transitions and displayed diversity in terms of legality, statehood, and political culture.

Therefore, it was not merely a matter of expanding the matrix of risk indicators and observations. The relative weight of the variables to be analyzed had shifted as a result of a transformation in the global geopolitical order. We are likely facing a similar scenario today.

Epistemologically and ontologically, the models of political risk analysis that explore the institutional (i.e., national) environments of markets are rooted in an International Political Economy (IPE) characterized by competition and conflict, driven by geoeconomic rivalries among powers, yet underpinned by shared trade rules, the regulatory ambitions of international and regional organizations, and the commitment of major global governments to maintaining these frameworks. Post-Cold War political risk analysis models largely focused on assessing how sovereign states and major corporations navigated and adapted to this rule-based framework.

However, the world of 2025 looks increasingly different from that era. The intensification of geoeconomic competition among powers and the rise of nationalism in the United States, Europe, and other major players are shaping new models of sovereignty within the global geopolitical order.

In my view, as was the case in the post-Cold War period, the emergence of these initial analytical models of geopolitical risk is not merely an expansion of the matrix of variables. Rather, it seems to represent the first conceptual attempts to acknowledge that we are witnessing yet another transformation of the global geopolitical order—one that will require analytical models designed to match its complexity. The very notion that geopolitical events (those on a global scale) drive international financial volatility underscores that the most pressing sources of risk are not rooted in the political-institutional frameworks of emerging economies but in the shift of the global order itself. We can no longer view political risk factors as simply governments changing regulatory frameworks, imposing tariff or non-tariff barriers, or disregarding OECD recommendations, especially when these actions are taken by global powers within the context of a shifting geopolitical order. Similarly, events like Brexit, the Russia-Ukraine conflict, or the technological and trade war between the United States and China should not be considered as external shocks to the international political economy. Rather, they are geopolitical decisions made by the leaders of major powers, driven by ongoing transformations in the global order. Therefore, risk analysis must draw more from the old models; in a more politicized and polarized world, it is crucial to assess politics and power struggles as a more substantial source of risk.

A more classic approach to analyzing contemporary geopolitical risks

Building on the premise that revisiting geopolitical risk as an impactful factor is a valuable insight, the suggestion is to explore its meaning in greater depth. Geopolitics is not merely an event with global impact; it is both a field of study and a framework for understanding the construction of the political arena. It is particularly useful in contexts of change, such as the current one.

Sovereign, commercial, and operational risk studies must learn from the methods of contemporary geopolitics, as its approach differs from the deterministic models of the first half of the 20th century, focusing instead on the social dimension of international politics (Burdman & Cabrera, 2021). The innovation of the contemporary geopolitical approach lies in the study of codes (Flint), geopolitical orientations (O’Loughlin & Total, 2022), world models and representations (Agnew, 2005), and the analysis of territorial power conflicts (Lacoste, 2009). Moreover, it is a particularly valuable approach for studying the behavior of great powers and disputes over natural resources, markets, and technologies.

The various approaches and methods of 21st-century geopolitics seek to restore what has been lost in political risk analysis over recent decades: an overemphasis on detailed institutional and econometric analysis of a limited set of variables, which led to the sidelining of a more holistic and qualitative assessment of a broader range of factors. Precisely, in a world of change, where new sources of political risk emerge for financial assets and investment projects due to transformational decisions that governments may make in a context of global polarization, banks and insurers must study societies and cultures in depth, the social dynamics of populist leadership, and the shifting strategic alliances between states and regions. This is essential in order to answer questions such as the following: What would be the consequences if Turkey or Indonesia joined BRICS+, or if nationalistic presidents were elected in South Korea or France who sought to withdraw from their respective regional integration processes? What does Donald Trump plan to do to fulfill his promise of strengthening the dollar in the global economy? What impacts would a rapprochement between Trump and Putin have for Europe? To estimate geopolitical risk in a world that presents these types of uncertainties—and cannot guarantee the stability of risk calculations derived from the post-Cold War IPE—risk analysts must possess the expertise to address such questions. These questions require a qualitative, comprehensive, and multiscalar understanding of the policies of states and other actors with global power.

Similarly, new political risk analysts with a classical approach must master advanced qualitative research techniques, as they are tasked with addressing increasingly complex questions, yet have fewer resources than their predecessors 50 years ago. Therefore, in addition to having a deep understanding of their areas of study, they must be skilled in open-source intelligence methods, expert surveys, and AI-assisted document analysis, while continuously honing their analytical capabilities.  In this context, expert and investor surveys become particularly important for estimating risks, impacts, and forward-looking projections, as they are highly effective methods for consolidating dispersed knowledge from multiple actors, including organizations’ own client networks. This approach helps produce assessments or estimates of complex issues within a network-based model.

Conclusion

The 21st-century world is witnessing a resurgence of the notion of geopolitics, both in its foreign strategies and in theoretical and public debates. This shift has also reached the field of financial, commercial, and operational risk studies, where various authors and leading institutions are proposing, or calling for, geopolitical risk models to assess global financial volatility. In general, geopolitical risk has been defined as the set of global-scale events that impact international financial assets. However, in this article, we propose going beyond this characterization. Rather than focusing solely on geopolitical events, what truly defines our international politics are the geopolitical practices of major states and powerful actors, who are the ones driving transformations on the global scale. Therefore, instead of continuously developing more refined techniques to estimate the impacts of geopolitical (global) events, the proposal outlined in this text is for banks, consulting firms, multilateral organizations, and insurers to return to the classical tradition of political risk analysis, with a focus on the qualitative and comprehensive study of the powerful actors who shape international financial values. In this context, the suggestion is to delve further into the methods of contemporary geopolitics, particularly regarding the analysis of conflicts and geopolitical coding, as well as the use of expert surveys to establish composite investment risk indicators. The world of 2025, with its polarizations, bloc alignments, intense geoeconomic competition, and binding strategic alliances, bears little resemblance to the late 20th century, when the current models of political risk analysis were conceived. Along with the world itself, our ways of understanding it must also evolve.

References

• Agnew, J. (2005). Geopolítica: una re-visión de la política mundial. Editorial Trama

• Burdman, J., & Cabrera-Toledo, L.-. M. (2021). Ciencia Política, estudios internacionales y geopolítica latinoamerican(ist)as: diagnóstico crítico de un diálogo inexistente. URVIO. Revista Latinoamericana De Estudios De Seguridad, (30), 8–21. https://doi.org/10.17141/urvio.30.2021.5049

• Caldara, D. & Iacoviello, M. (2022). Measuring Geopolitical Risk. American Economic Review, 112(4): 1194–1225. https://doi.org/10.1257/aer.20191823

• Engle, R. & Campos-Martins, S. (2020). Measuring and Hedging Geopolitical Risk. NYU Stern School of Business Forthcoming. http://doi.org/10.2139/ssrn.3685213

• Flint, C. (2021). Introduction to Geopolitics. Routledge

• Haider, Z. et al. (2023). Geopolitical resilience: The new board imperative. McKinsey / Commentary. https://mck.co/3OOcVES 

• Janbaz, M., Kabir Hassan, M., Floreani, J., Dreassi, A. & Jiménez, A. (2022). Political risk in banks: A review and agenda. Research in International Business and Finance, 62(2):101713. https://doi.org/10.1016/j.ribaf.2022.101713.

• Lacoste, Y. (2009). Geopolítica: la larga marcha del presente. Editorial Síntesis.

• O’Loughlin, J., & Toal, G. (2022). The geopolitical orientations of ordinary Belarusians: survey evidence from early 2020. Post-Soviet Affairs, 38(1–2), 43–61. https://doi.org/10.1080/1060586X.2022.2030126