Preface (Massimiliano Frenza Maxia FIDEURAM ISPB)

The epistemological problem surrounding the evolution of the concept of geopolitical risk

For about thirty years, or since the end of the Cold War, the world has witnessed a process of
progressive globalization and interconnection. This trend, at least until the emergence of the
Covid-19 epidemic, seemed unstoppable and seemed to confirm the predictions of various
scholars who forecasted at the dawn of the 90s, a progressive, albeit not necessarily linear,
evolution of the main nations of the planet towards a liberal economy and towards democracy
(just to name (Fukuyama, 2006) with his famous and controversial The End of History and
the Last Man). Underlying this belief was also the will of the Clinton administration to admit
China to the International Trade Organization1. Barring unlikely turnarounds, China does not
appear to be a candidate to become the guiding beacon for global democracies in the coming
decades.

In these thirty years the world has witnessed various systemic crises, some with repercussions
on a global level. Just to name a few, the dot-com bubble (late 1990s), the attack on the twin
towers (2001) and then, in just twelve years, the crisis triggered by the default of Lehman
Brothers (2008), the sovereign debt crisis (2011) and then the outbreak of the coronavirus
pandemic (2020). Except for the dot-com bubble, all other crises have been generated by geo-
political factors or have had heavy geopolitical repercussions. An example above all is Brexit,
which has its roots in the inability of the European Union to manage the tensions related to
sovereign debt and immigration and which, thanks to the emergence throughout Europe, in-
cluding the UK, of sovereign political groups, and of a toxic debate often fueled by propa-

jects.

Considering this complexity, the portfolio managers and risk managers of the main asset man-
agement companies worldwide have worked on the implementation of increasingly reliable
and predictive risk management models. Not only that, companies like BlackRock, using arti-
ficial intelligence and machine learning, have developed portfolio management software
(Aladdin by BlackRock Solutions), able to constantly perform stress tests on the portfolios of
clients under management, simulating scenarios deriving both from the onset of financial
risks. that, and here lies the big news, from geopolitical risks.

Today, downstream of the pandemic crisis and the onset of digital transformation, the geopo-
litical risk category, albeit conceptually valid, risks being too vague and needs, if anything, to
be updated with a whole series of new sub-categories of risk with possible final effects on the
portfolios invested. A new type of potential damage, for example, is that resulting from geo-
political risk in the era of globalization and digital transformation. Impacts on business result-
ing from tensions or conflicts on local scenarios, from crises on excessively delocalized sup-
ply chains or threats from the cyber world, represent a very frequent reality with which to deal
daily. Paradigm of this is the trend that is occurring in the post-pandemic recovery phase

1
Beijing's official entry into the WTO took place on 11 December 2001.

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which, if on the one hand sees the exponential increase in the demand for raw materials by
manufacturing companies, on the other it produces strong tensions on the supply chain one
step away from chaos. In this perspective, the crisis triggered by the grounding of the Ever-
green Marine container port in the Suez Canal must also probably be seen. Shortages of raw
materials, troubled logistics, overloaded choke points like Suez, are contributing to the rise in
prices, all in the growing concern that an overloaded global economy could fuel inflation.

In aid of risk managers, an interesting essay by Condoleezza Rice (Rice & Zegart, 2018) (for-
mer US secretary of state to the Bush presidency and now a professor at Stanford) and Amy
Zegart (scientist of politics at Stanford University), intervened a couple of years ago with the
aim of defining the scope of geopolitical risk even better.

The same concept is also developed by Cecilia Emma Sottilotta, a scholar of political risk,
where the need is highlighted "(re)starting from the epistemological foundations of political
risk, that is to clearly determine its theory and model the analysis" (Sottilotta, 2016). In other
words, there is a need from many sides to review, expand and update categories and cases in
order to build increasingly predictive models.

In May 2012, the McKinsey Quarterly dedicated to Political Risk (entitled: Agile operations
for volatile times (Doheny, et al., 2012)), concluded with the following words: "In many sec-
tors, the growing wave of corporate volatility, uncertainty and complexity is disrupting mar-
kets and changing the nature of the competition. Companies that are able to perceive, evalu-
ate and respond to these pressures faster than their competitors will be better at seizing op-
. This assumption was part of the scenario that saw
large corporations and entire nations, grappling with the after-effects of the sovereign debt
crisis that exploded in 2011.

The McKinsey Quarterly article described in effect what many, borrowing a term of military
derivation, define a VUCA scenario (acronym formed by the words Volatility, Uncertainty,
Complexity, Ambiguity). The VUCA world was already, to all intents and purposes, the post
September 11th world, even more so will the post pandemic world.

In conclusion, there are four areas of marked geopolitical origin to be included in the context
of predictive models, namely:

the global chaos, introduced by the end of the bipolar world and the US inability (re-
luctant hegemon) to have been able to replace the bipolar model with an American
global pax;
globalization, which has peripheralized and delocalized production in countries with
lower labor costs, extending the supply chain;
digital transformation, which has put the world's "peripheries" and terrorists online,
exponentially simplifying the ease of organizing global campaigns;
the trend towards US-China decoupling and a return to a distinctly multipolar model
of international relations.

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The evidence expressed so far, common sense and, finally, a healthy realism, allow us to say
that the geopolitical risk cannot be eliminated but that it must simply be managed and where
possible anticipated, assuming, as admitted by Amy Zegart herself, that
cal risk is not really quantifiable, it implies perceptions, emotions, and intentions, in other
.

Massimiliano Frenza Maxia

Master in Geopolitics and Global Security cum laude - University of Rome La Sapienza
Master's Degree in History and Society cum laude - University of Roma Tre
Independent analyst in geopolitics and geoeconomics, coordinating the activities of the Man-
agement School of Fideuram Intesa Sanpaolo Private Banking