Two years into the Russia-Ukraine conflict (February 24, 2022) and almost five months since the Israel-Palestine military clash began (October 7, 2023), corporate finance and treasury executives have found themselves dedicating more time to managing a panoply of global challenges than they have in the recent past.

If one thing is certain it is that wars are inevitable. Countries will continue to fight primarily due to irresolvable territory matters, ideological differences, political, economic or religious reasons.

To shield corporate treasury departments from future geopolitical conflicts or unexpected political threats, we outline five key lessons that treasurers and their teams can learn from the recent wars:

Anticipate, identify, and analyse potential ‘war’ risks that could impact business operations

Recognizing corporate treasury’s role as the steward of financial risk management, it is imperative for them to adopt a proactive approach to risk management by anticipating, identifying, and analysing the potential war risks that could impact their business operations, threaten the bottom line or disrupt business continuity.

In order to comprehensively assess the potential threats that could arise, treasury professionals should understand and identify the various types of risks (country/geopolitical, human resources, cyber, supply chain, currency, credit, interest rate, liquidity, commodity, market, regulatory, and environmental risks) and recognize how the interconnectedness of these individual risk components can affect the organization’s strategy, cash flow, reputation, growth and value.

For instance, corporations, customers, counterparties and suppliers are becoming more interdependent and interconnected along the entire value chain. Consequently, their risks and vulnerabilities are also intertwined. This indicates that a war risk originating locally can escalate into a global issue, and a disruption in one region can spread out quickly to other locations, as evidenced by the recent armed conflicts.

The Russia invasion of Ukraine and Hamas’s attack on Israel are wars of surprise that escalated within hours and have had an immediate and irreversible impact on corporations worldwide. These combats and the associated risks were not ones that most business leaders, finance chiefs, or treasurers could foresee.

However, knowing that wars will happen in the future, and anticipating and preparing for potential military clashes can be vital for identifying, evaluating, managing, mitigating, and monitoring expected and unexpected risks accompanying such conflicts or disasters. After all, the identification of risks of various types, and their analysis and management, are at the heart of treasury management and remain crucial responsibilities of the corporate treasurer.

Supply chain diversification and cybersecurity risk mitigation for resilience

The US-China trade war, the Russia-Ukraine confrontation, and more recently, the renewed Middle East conflict have prompted more multinational companies to redraw their supply chains to hedge against risk and uncertainty. Diversifying their supply chains aims to reduce dependence on a specific region or country – as a market and as a supplier.

Supply chains lie at the heart of global trade, and diversification across geographies should become a priority for corporate treasurers and finance chiefs. This urgency is underscored by China’s military buildup around Taiwan, and North Korea turning more aggressive against South Korea.

Geographical diversification of supply chains will mean that more global corporations would need to move towards an amalgam of  reshoring (bringing manufacturing back home), nearshoring (moving production closer to home) and friendshoring (shifting manufacturing and sourcing toward allies or friendly countries) in their pursuit of self-sufficiency. Such measures will enhance supply chain resilience and enable transnational companies to navigate supply chain snarls more effectively in the event of a regional or locational conflict.

The recent wars have also brought the issue of supply chain cybersecurity attacks into the mainstream. For global companies, wars pose a dual threat, encompassing not just cyberattacks on their assets but also potential risks to their suppliers and vendors.

The inherent global nature of a supplier network that connects software, employees, customers, suppliers, vendors and other third parties heightens the risk that a single cyberattack on one business or digital supply chain can expose numerous organizations to fraud. Put simply, a single compromised supplier or third-party vendor can result in attacks on hundreds of thousands of companies globally.                                                                                                         

An important measure that we recommend corporate treasures embrace to minimize the risk of war-induced supply chain attacks is to perform cybersecurity due diligence within all tiers of a company’s supplier network.

While many corporations concentrate on tier 1 suppliers, the ongoing threat of supply chain cybercrimes necessitates a broader focus. It is becoming increasingly important for companies to evaluate the cybersecurity hygiene of their tier 2 vendors and beyond. This proactive approach is essential to mitigate the impact of supply chain attacks triggered by wartime conditions.

In this context, conducting a cyber risk assessment prior to onboarding a new vendor or granting third-party access to business-critical systems is paramount. Additionally, promoting greater collaboration and cooperation among all supply chain stakeholders is vital for the protection of individuals, networks, devices and programmes.

Furthermore, nation-state cyber threat actors know that wars open a fault line in supply chain cybercrime that can have ripple effects. To respond promptly and reduce the risk exposure, it is important for corporate treasury to assume that no user or third party can be presumed trustworthy.

This involves integrating a zero trust security approach into the supply chain security framework. By enforcing validation at every stage and limiting user access exclusively to designated systems, zero trust thwarts cyber hackers from manoeuvring laterally through the network and causing further damage. Such a preventative measure has the potential to significantly diminish future supply chain attacks.

Use scenario analysis, stress and reverse stress testing to alleviate impact of war-related risks

Given that global economic fragmentation has intensified in recent years amid rising geopolitical tensions, staying resilient, vigilant, informed, and farsighted, while leveraging risk intelligence to gain a competitive advantage, and testing risk appetite and limits under stress scenarios (scenario analysis, stress and reverse stress testing) will help treasury and finance professionals safeguard their organizations from future geopolitical conflicts or risks and their associated potential ramifications.

Scenario analysis, stress and reverse stress testing are powerful tools in corporate treasury’s arsenal for identifying, analysing, managing, and reducing risks.

Scenario analysis explores various potential outcomes under different economic, geopolitical, or market conditions, ranging from best-case to worst-case scenarios. However, infusing more imagination or creativity into scenario analysis is important and involves examining incidents or events that didn’t escalate into major crises through the lens of what-if scenarios. By contemplating how these minor events can unfold into more substantial challenges, organizations and their treasury departments can evaluate the resilience of their strategic plans.

Stress testing is another critical component that enables treasury departments to identify key vulnerabilities in their risk management processes before they threaten the financial stability of their organization. Stress tests should be conducted regularly to help make informed decisions, manage risks prudently, and develop contingency plans to withstand the potential impact of adverse events, ensuring business continuity.

Reverse stress testing is the third powerful tool available to treasury professionals. It involves working backward from a predefined adverse outcome to identify and assess the specific factors, events, or triggers that could jeopardize or sink their corporations or render them unviable.

By pinpointing plausible conditions, events, or scenarios that could lead to severe losses or systemic failures, reverse stress testing helps treasury executives gather valuable insights for addressing gaps and vulnerabilities in an organization’s business model and strategy. This forward-looking technique aims to mitigate the likelihood of adverse repercussions.

Establishing a well-defined crisis decision-making protocol and crafting a comprehensive crisis communications plan ahead of time will also offer organizations a crucial head start.

Speed up digital transformation through treasury technology and intelligence

With the Russia-Ukraine war dragging on, the Middle East conflict spiralling, and the realignment taking place between China, Russia, Iran, and North Korea (CRIN), geopolitical risks seem higher than at any point in the recent past. This is a cogent indicator that corporate treasury must accelerate digital transformation and automation through treasury technology and intelligence, spurring the momentum towards a data-driven treasury.

Embracing digitization can enhance cash flow visibility and optimize liquidity throughout the corporation, while also bolstering risk management and cybersecurity.

Key technologies dominating conversations in corporate treasury and finance include blockchain, open banking and application programming interfaces (APIs), cloud-based TMS, robotic process automation (RPA), artificial intelligence (AI), machine learning (ML), and big data analytics.

Harnessing these tools empowers global corporations to access real-time data and improve cash flow forecasting capabilities, increase supply chain resilience, create more insightful scenario planning, and strengthen business intelligence to quickly unlock insights that will help mitigate potential war risks.

Nurture and demonstrate effective wartime treasury leadership mindset

Having treasury domain expertise alone will not suffice to lead the corporate treasury department. The treasurer must be able to navigate geopolitical tensions, which means developing and demonstrating an effective wartime leadership mindset.

This entails being decisive, capable of leading under pressure, communicating clearly, displaying empathy, and building trust within their team – all while keeping an eye out for the next crisis.

Additionally, creating a culture that nurtures continual learning and development, the power of collective intelligence and adaptability in the workplace enables the treasury team to respond effectively to unexpected events or threats as they arise in the future. These are important characteristics that will help treasurers build an effective wartime treasury leadership mindset.

To conclude, escalating military offensives in the Middle East and Ukraine, China’s assertiveness over Taiwan, and North Korea’s aggressive stance towards South Korea are signs that geopolitical risks will likely remain a major threat to governments and corporations worldwide.

In a politically fragmented world, multinational companies and their treasury departments must be prepared for future warfare that could impact their revenue and drag on profit margins.

To that end, leveraging the key lessons from recent wars to prepare for future conflicts or unexpected political threats can help corporate treasurers navigate and combat risks with greater thought and resilience.