What is Geoeconomic Risk?

Geoeconomic risk is the risk of loss, harm, disruption, or adverse strategic consequence arising from the deliberate or foreseeable use, manipulation, impairment, restriction, or withdrawal of economic instruments, economic relationships, or economic dependencies by a state, public authority, supranational entity, or other actor acting on behalf of, under the direction of, or with the effects of sovereign authority, for the purpose of achieving political, strategic, security, or geopolitical objectives.

In very simple words, geoeconomic risk is the risk that a country uses economic tools such as trade rules, sanctions, export controls, or control of key resources to pressure or harm another country, company, or sector for political or strategic reasons. It is what happens when economics is used as a weapon in international politics.

Simple Example: Country A controls a critical raw material, but country B depends on it to develop technology products. If country A decides to block exports of this material to country B in order to gain political leverage, country B’s companies are affected and cannot produce their goods, lose revenue and contracts, and face supply chain breakdowns.

Geoeconomic risk includes any risk to the stability, continuity, security, or lawful operation of an undertaking, financial institution, critical infrastructure operator, supply chain, or economic system that results from, or is materially affected by, the application of economic measures. These measures include trade restrictions, export controls, investment prohibitions, sanctions, embargoes, energy or commodity leverage, supply chain disruption, currency or financial system restrictions, discriminatory regulatory action, state directed market intervention, or any analogous economic coercive measure undertaken with political or strategic intent.

This risk arises from structural or strategic dependencies on foreign states, foreign controlled entities, or extraterritorial legal regimes, where such dependencies create vulnerabilities that may be exploited for political influence, strategic leverage, coercion, or interference with national security, economic sovereignty, or public policy objectives. Such dependencies include reliance upon foreign supply chains, critical raw materials, technologies, digital infrastructure, financial infrastructures, or other strategically sensitive goods, services, or capabilities.

Geoeconomic risk includes the risk that the economic coercive measures of third countries, or countermeasures adopted in response to such actions, may impair contractual rights, investment positions, market access, regulatory compliance, operational continuity, or financial performance. This also includes risks arising from extraterritorial sanctions, retaliatory measures, economic blacklisting, asset freezes, mandatory divestment, discriminatory licensing regimes, and any similar action by a state or supranational authority that alters the legal or commercial environment for strategic purposes.

This risk exists irrespective of whether the economic measure is lawful under international law or domestic law, and irrespective of whether the affected entity is the direct target or an indirect subject of such measure.

Geoeeconomic risk exists where an economic instrument is used, intended to be used, or reasonably expected to be used as a means of strategic pressure, political influence, destabilisation, systemic disruption, or hybrid activity.

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Must geoeconomic risk be managed in the private sector? Who is the risk owner?

The short answer is yes, it must be managed in the private sector, because it leads to risks governed by binding legal obligations.

Geoeconomic risk is complex. It costists of legal risk, regulatory risk, sanctions risk, export control risk, investment screening risk, supply chain risk, contractual risk, and national security related risks and compliance obligations. Each of these is legally mandatory to manage. Even when we cannot find the term geoeconomic risk in the coprorate governance section of the annual reports, the underlying components are present, because they are legally unavoidable:

1. Sanctions laws and extraterritorial measures.

2. Export control regimes and dual-use restrictions.

3. Investment screening statutes.

4. Critical infrastructure and supply chain obligations.

5. Directors' fiduciary and oversight duties concerning risk management.

6. Contractual and tort obligations relating to foreseeability of harm.

The private sector must manage geoeconomic risk as a matter of legal necessity and commercial prudence. Courts, regulators, and supervisory authorities increasingly view geoeconomic exposures as elements of foreseeable risk, and therefore part of the mandatory scope of enterprise risk management under modern governance standards.

Who is the risk owner?

1. The Board of Directors is the ultimate risk owner. Under corporate law, directors owe duties of care, loyalty, and oversight. These duties require them to monitor material risks, ensure compliance with sanctions, export control, and national security regulations, oversee supply chain resilience, and act when material risk becomes foreseeable.

2. The Chief Risk Officer (2nd line of defence). The Chief Risk Officer is:

a. The functional owner of the identification, quantification, monitoring, and reporting of geoeconomic exposures.

b. The functional owner of risk methodologies, frameworks, reporting, and analysis.

c. The independent assurer that geoeconomic risk is recognized, assessed, and mitigated.

3. Senior Management (1st line of defence). Senior Management is responsible for running the business, implementing controls, ensuring compliance in daily operations, allocating resources, and embedding geoeconomic risk management into operational processes.

4. Functional Risk Owners. Depending on the industry and regulatory regime, additional functions carry functional risk ownership:

Legal Department: Owner of legal risk dimensions such as contract enforceability, extraterritorial sanctions exposure, investment screening obligations, export controls.

Compliance Function: Owner of regulatory implementation, transaction screening, due diligence, and internal sanctions governance.

Internal Audit (3rd line of defence) is never a risk owner. Under every recognised governance framework, owning a risk means participating in operations. Internal audit must remain independent of operations. If auditors own a risk, they cannot legally audit it.

The role of internal audit in relation to geoeconomic risk is to provide independent, objective assurance to the Board of Directors regarding the adequacy, effectiveness, and integrity of the governance, risk management, and internal control framework applicable to this risk category.

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Geopolitical risk and Geoeconomic Risk.

Geopolitical risk is the risk of loss, disruption, impairment, or adverse consequence arising directly or indirectly from political, military, diplomatic, security related, or sovereignty related actions, events, tensions, or developments occurring between states, public authorities, supranational bodies, or organised political actors that possess the capacity to affect the international legal order, territorial integrity, national security, or the political stability of one or more jurisdictions.

This risk includes all risk resulting from armed conflict, military mobilisation, hybrid or covert hostile activity, terrorism, domestic or regional political instability, revolution, regime change, diplomatic rupture, nationalisation or expropriation, territorial disputes, secessionist movements, breakdown of public authority, or the alteration of strategic alignments or alliances, where such events materially affect the legal, regulatory, contractual, operational, or financial position of an undertaking.

Geopolitical risk includes all risks arising from changes in the international legal and security environment, including the imposition of emergency measures, the invocation of martial, security, or extraordinary state powers, the closure of borders, the interruption of international transport routes, the suspension of treaty obligations, or the adoption of public-law measures intended to preserve national security or territorial sovereignty.

Geopolitical risk must be distinguished from political or regulatory risk by its origin in interstate or multistate tensions, hostilities, or security dynamics, and by its capacity to produce systemic or extraterritorial consequences that transcend the normal operation of domestic public law.

Why Geopolitical Risk is different from Geoeconomic Risk?

Geopolitical risk and geoeconomic risk are closely related, but they are distinct categories of strategic exposure. They overlap in that both arise from the behaviour of states and the interactions of political actors across borders. They are doctrinally and legally distinct because the source, instrument, and transmission mechanism of each risk differs.

1. Source of the Risk. Geopolitical risk originates in political or security actions, like armed conflict, diplomacy breakdown, sovereignty disputes, regime change, national security crises. The triggering event is political or military.

Geoeconomic risk originates in economic instruments used with political intent, like sanctions, export controls, trade blockages, forced divestments, supply-chain coercion. The triggering event is economic action, even though the motive is political.

2. Instrument of Risk Creation. Geopolitical risk is created through instruments of coercive state power such as military capabilities, territorial control, diplomatic instruments, emergency legal powers, or security forces.

Geoeconomic risk is created through economic instruments of statecraft, like market access restrictions, sanctions, cross-border investment controls, technology bans, trade retaliation, and control over strategic resources.

Geopolitical risk uses political and military tools. Geoeconomic risk uses economic tools.

3. Legal Transmission Mechanism. Geopolitical risk transmits through the suspension of treaties, border closures, nationalisation or expropriation, armed or paramilitary activity.

Geoeconomic risk transmits through binding sanctions regimes, extraterritorial regulatory measures, investment-screening decisions, export-control restrictions, retaliatory trade law actions.

Geopolitical risk affects private entities through changes in the security environment. Geoeconomic risk affects them through changes in the regulatory and economic environment.

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The evolution of Geoeconomic Risk

The use of economic power for political influence is an ancient practice, but its modern form, embedded in globalised supply chains, technology ecosystems, financial networks, and strategic dependencies, has altered its scale, speed and potential.

In the early post Cold War period, with the collapse of the bipolar military order, scholars and strategists began to observe that states were shifting from overt military rivalry to strategic competition through economic means. In a globalised world, access to markets, capital, technology, and supply chains had become strategic assets comparable to traditional military capabilities.

The geopolitical shocks of the early twenty first century, including the rise of China as an economic superpower, and the emergence of strategic competition in global technology, marked the beginning of a new phase of geoeconomic risk.

States increasingly discovered that control over critical infrastructure, telecommunications systems, payment networks, port facilities, and rare earth minerals leads to strategic leverage. Economic tools such as export controls, subsidies, industrial policy, and sovereign investment funds become instruments of influence. At this stage, geoeconomic risk evolves into strategic exposure.

The global financial crisis of 2007–2008 further accelerated the recognition of geoeconomic vulnerabilities. The crisis demonstrated the extraordinary interconnectedness of financial systems, the fragility of globalised credit networks, and the geopolitical consequences of economic collapse. States observed that economic instability could generate profound strategic effects, altering domestic politics, weakening alliances, and reshaping global power balances. Financial contagion revealed the extent to which economic interdependence had become not only a source of prosperity but also a potential weapon.

In the 2010s, hybrid warfare doctrines explicitly incorporated economic instruments as part of the broader toolkit of coercive state activity. In this period, we had the normalisation of what had previously been considered exceptional. Geoeconomic risk became part of intelligence assessments, strategic planning documents, and hybrid threat taxonomies.

From the late 2010s onwards we see the structural weaponisation of interdependence. States recognised that global supply chains for semiconductors, pharmaceuticals, energy, and critical materials were not merely economic but also strategic assets. Control over chokepoints, trade corridors, and technological standards became instruments of power.

The introduction of comprehensive sanctions regimes, extraterritorial enforcement mechanisms, investment screening systems, and export control frameworks marked the legalisation and normalisation of geoeconomic instruments. Economic actions carried clear geopolitical intentions, and geopolitical confrontations were increasingly fought through economic means. Geoeconomic risk matured into a distinct and identifiable category, the risk that states will employ economic tools with strategic or coercive intent.

COVID-19 deepened awareness of geoeconomic risk by exposing the fragility of global supply chains and the geopolitical implications of resource scarcity. States began to incorporate supply chain sovereignty, technological autonomy, and strategic resilience into their national security frameworks.

Concepts such as economic security, technological sovereignty, and critical infrastructure resilience entered statutory language in multiple jurisdictions. Although geoeconomic risk itself did not yet appear in legal texts, its underlying components, like economic coercion, strategic dependencies, supply chain vulnerabilities, and critical technology control, were regulated through binding law. The legal system had begun to govern the substance of geoeconomic risk, even without adopting the terminology.

In the present era, geoeconomic risk has reached a stage of practical maturity. Intelligence agencies, defence establishments, and hybrid threat centres recognise it as a core dimension of national power competition. Corporations include it in enterprise risk frameworks, particularly those operating in sectors such as energy, semiconductors, telecommunications, defence, and critical infrastructure.

International organisations acknowledge the phenomenon, treating economic interdependence as both a stabilising factor and a vector of vulnerability. Although the term still lacks a formal, codified legal definition, its doctrinal maturity is evident. Geoeconomic risk has become an essential analytical category for understanding how modern states pursue strategic objectives in an interconnected world.

The evolution of geoeconomic risk reflects a broader transformation in global order. It represents the shift from policies conducted primarily through military means to policies conducted through economic leverage, technological advantage, financial dominance, and control over critical resources.

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Sample: Geoeconomic Risk Governance Policy.

1. Purpose and Scope.

This Geoeconomic Risk Governance Policy establishes the principles, responsibilities, and governance structures through which the Organization identifies, assesses, manages, monitors, and reports geoeconomic risk. The Policy applies to all business units, subsidiaries, controlled entities, and employees. It complements the Organization's Compliance Program, Enterprise Risk Management Framework, Operational Resilience Framework, Sanctions and Export Control Policies, and Supply Chain Governance Policy.

Geoeconomic risk is understood as the risk of loss, disruption, impairment, or strategic disadvantage arising from economic measures taken by states, public authorities, supranational bodies, or entities acting under their direction or influence, where such measures are motivated by political, strategic, national security, or geopolitical objectives and materially affect the Organization’s legal, operational, contractual, or financial position.

2. Policy Objectives.

This Policy seeks to ensure that the Organization:

a. Identifies foreseeable geoeconomic exposures across its operations, supply chains, counterparties, and jurisdictions of activity.

b. Ensures compliance with all binding legal obligations arising from sanctions, export controls, investment screening regimes, trade restrictions, critical infrastructure rules, and related national ecurity legislation.

c. Maintains governance structures that allow for proactive mitigation of strategic dependencies, chokepoint exposures, and politically exposed supply-chain vulnerabilities.

d. Integrates geoeconomic risk into strategic planning, investment assessments, and operational decision-making.

e. Ensures effective Board-level oversight and escalation of material geoeconomic risks.

3. Definitions

Geoeconomic Risk is the risk that sovereign or supranational actors employ economic instruments including sanctions, export controls, licensing restrictions, embargoes, investment prohibitions, retaliatory tariffs, supply chain coercion, energy and commodity leverage, or discriminatory regulatory measures for strategic purposes, resulting in possible legal, operational, financial, or contractual harm to the Organization.

Economic Measures include any binding or coercive legal acts undertaken by national or supranational authorities that directly affect market access, contractual performance, cross-border transactions, supply-chain integrity, technological transfer, foreign investment, or corporate ownership structures.

Strategic Dependency is the reliance on goods, services, technologies, or resources originating from or controlled by jurisdictions that pose heightened geoeconomic exposure due to geopolitical conflict, strategic rivalry, or regulatory incompatibility.

4. Governance Structure.

4.1 Board of Directors.

The Board of Directors retains ultimate responsibility and accountability for oversight of geoeconomic risk. The Board shall:

a. Approve this Policy and review it at least annually.

b. Ensure the existence of adequate risk management and internal control systems capable of identifying, assessing, and mitigating geoeconomic exposures.

c. Receive periodic reports on material geoeconomic risks, including sanctions exposure, extraterritorial regulatory impacts, supply chain vulnerabilities, and emerging geopolitical developments.

d. Oversee management’s implementation of mitigation measures, including diversification, contingency planning, compliance enhancements, and strategic adjustments.

4.2. Risk Management Function.

The Risk Management Function is responsible for integrating geoeconomic exposures into the Organization’s Enterprise Risk Management Framework. This includes:

a. Identifying and assessing geoeconomic risks.

b. Maintaining risk indicators, scenario analyses, and stress tests related to geoeconomic developments.

c. Reporting material risks to senior management and the Board.

4.3 Legal Department.

The Legal Department shall serve as the functional owner of legal risks associated with geoeconomic measures. Its responsibilities include:

a. Ensuring compliance with sanctions, export controls, investment-screening obligations, and relevant national security legislation.

b. Advising on contractual protections, including force majeure, change in law provisions, termination rights, and sanctions warranties.

c. Assessing legal conflicts across jurisdictions, including extraterritorial regulatory requirements and conflicting foreign measures.

4.4 Compliance Function.

The Compliance Function shall:

a. Operate and maintain screening systems for transactions, customers, suppliers, and counterparties.

b. Monitor regulatory developments related to sanctions, export controls, and related geoeconomic measures.

c. Conduct regular training of employees on relevant compliance obligations.

4.5 Executive Management.

Executive Management is responsible for implementing this Policy and ensuring that all relevant controls, procedures, and reporting mechanisms are operational. Management shall allocate sufficient resources to:

a. Maintain a robust sanctions and export control compliance program.

b. Conduct ongoing assessments of strategic dependencies and supply chain vulnerabilities.

c. Integrate geoeconomic considerations into procurement, investment, and market-entry decisions.

d. Ensure timely escalation of material risks to the Board.

4.6 Supply Chain and Procurement

Supply Chain and Procurement teams shall:

a. Identify vulnerabilities arising from foreign dependencies, single source suppliers, and exposure to politically sensitive jurisdictions.

b. Implement diversification strategies and supply chain due diligence procedures.

c. Ensure compliance with country of origin restrictions, licensing requirements, and critical technology controls.

5. Risk Identification and Assessment.

The Organization shall identify geoeconomic risks through:

a. Continuous monitoring of geopolitical and regulatory developments.

b. Due diligence on suppliers, customers, investors, and strategic partners.

c. Assessment of exposure to sensitive jurisdictions, restricted entities, and critical technologies.

d. Review of supply chain concentration and dependency risks.

e. Evaluation of potential conflicts between applicable sanctions regimes and foreign retaliatory measures.

6. Risk Mitigation and Controls.

The Organization shall implement controls appropriate to the nature, scale, and complexity of identified geoeconomic risks, including:

a. Sanctions and export control compliance controls.

b. Contractual protections and legal contingencies.

c. Supplier diversification and reshoring strategies.

d. Enhanced due diligence for high risk jurisdictions or sectors.

e. Operationalresilience measures for anticipated disruptions.

7. Reporting and Escalation

Material geoeconomic risks shall be reported promptly to the Risk Management Function and escalated to the Board when necessary. The Risk Management Function shall ensure regular reporting cycles, including updates on regulatory changes, sanctions regimes, supply-chain vulnerabilities, and emerging geopolitical developments.

8. Training and Awareness

The Organization shall ensure that employees in relevant functions receive regular training on geoeconomic risks, sanctions obligations, export controls, and other applicable legal requirements.

9. Review and Amendment

This Policy shall be reviewed periodically, and at least annually, to reflect legal developments, regulatory expectations, and evolving geopolitical conditions. Amendments shall be approved by the Board of Directors.

10. Effective Date

This Policy becomes effective upon approval by the Board of Directors and remains in force until amended or withdrawn.

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