While many use these terms interchangeably, there are some important definitional distinctions between political and geopolitical risk.
POLITICAL RISK
Political risk refers to the potential for political events, both foreign and domestic, or political conditions to have an adverse effect on business, economic, or financial events over the short or long term. Some of these factors might include changes in government, political instability, breakdown of political institutions and the rule of law, social instability caused by political, economic or cultural dysfunction, legislative, policy, and regulatory actions on the part of a government, and geopolitical conflict. These risks can impact both domestic and international governments, businesses, financial institutions, and investors, impacting operations, stability, operational efficiency, and, in some cases, financial and business sustainability and survival.
GEOPOLITICAL RISK
Geopolitical risk refers to the potential impact of political and economic events on international relations and global stability. Geopolitical risk examines the relationships between politics, economics, history, geography, and the interactions between international actors (power dynamics). Geopolitical risks can can occur due to territorial disputes, trade disputes, sanctions, shifts in global power relationships (unipolar, bipolar, multipolar), and/or armed conflict.
WHY IT IS IMPORTANT TO MANAGE POLITICAL AND GEOPOLITICAL RISK
Whether a multinational corporation, a small or medium sized business with international supply chains, a farmer who is dependent on exports and is exposed to market and financial risk due to regulatory changes or currency exchange rate risk, or an individual investor exposed to market risk, political and geopolitical risk is a fact of life and cannot be ignored.
Understanding and managing political and geopolitical risk is essential in our globalized world and interdependent global economy. It is a critical element of the decision making process for any business, no matter how large or small, or individuals who have exposure to national and international debt and equities markets. Understanding political and geopolitical risk is an essential part of sound tactical and strategic decision making.