Ukraine Crisis Poses Business Disruption Risk

For any organization with involvement in Russian territory, recently imposed sanctions due to the unpopular Crimean conflict introduces new potential complications affecting operations, supply chain, personnel and communications. The federation is becoming more assertive, bold and confrontational in areas ranging from financial investment to geographic dominance.
As a result, there is now a legitimate and immediate reason for evaluating the strength of foreign operational resiliency and sustainability in the context of Russian sanctions.

Fundamental Crisis
Recently, the U.S. passed a bill with overwhelming majority to solidify sanctions over Russia for its forced annexation of Crimea.  According to the New York Times, the Obama administration listed 17 banks, energy companies, and investment accounts in its attempts to restrict Russian involvement with the United States. These particular sanctions will freeze any assets in the United States and bar U.S. citizens from doing business with the individuals and firms listed. Additionally, the United States will cut off the export or re-export of American-made products to 13 of the sanctioned companies and will deny export licenses for high-tech products potentially used by the Russian military.

Implications for Risk Managers
Among myriad potential disruptions, a dominant cause for concern during the Crimean conflict is now disruption of connectivity, both locally and at scale. Given the nature of the new “cloud economy” and virtual infrastructure most businesses rely upon, one potential impact of Russian sanctions could be to the fragile structure of the new interconnected world.

The shutdown of communications lines means inaccessibility with international operations and IT servers. A loss of network could be significant and substantial. However detrimental this would be, loss of physical network (such as personnel) can be just as damaging, and planning for consequences of this nature often take far more ingenuity than utilizing a simple off-site data backup center.

The Human Network
People are often the most valued and unique asset an organization must protect. If particular sanctions impede the right of Western workers to hold employment in Russia, this could mean inevitable cuts to staff, layoffs and displacement as the company pursues relocation to an unsanctioned territory.

The case of an international workforce disruption raises other questions for companies to consider. For example, how do we replace people? Can we reassign processes? Is there a way to efficiently cross-train or retrain personnel who are still here? Have we spoken with local managers, contractors, and operation people to find out what is a critical process or component, and what is not?  These questions will give businesses a framework to move forward.

How are Experts Responding?
Methodically outlining potential risks prior to the events actually happening is key obviously, but oftentimes visualizing scenarios of this nature is tricky. It is impossible to predict exactly what will happen, but in a worse case scenario (specifically relating to Ukraine), any fallout between the West and Russia could result in trade sanctions affecting everything from banks, to human resources, to communication infrastructure. Understanding this and moving forward with a contingent plan of action for Russian operations will create a less threatening situation and a more stabilized outcome for businesses who are affected.

Writing on the Wall
As organizations look for answers among the uncertainty that is currently playing out in Russia and Ukraine, one thing is absolute; businesses survive and succeed in fragile situations when a culture of resiliency is embraced. Contingency plans are useless if there isn’t the knowledge, experience and understanding of how to use them.

Sanctions are nothing new and neither is business disruption due to political conflict, though, if any highlight were to come from the current situation in Russia and Ukraine, it would be the need to proactively respond to imminent threats towards business continuity. In reality, for multinational companies heavily invested in the region at this point, there no longer is a choice.

Meteorite Injures 950+ in Russia

Just one day after we posted about an asteroid coming dangerously close (in NASA’s terms) to earth today, we awoke to news about a meteorite streaming through the sky over Russia’s Chelyabinsk region. So far, it is estimated that the shockwave has caused severe damage to property and just under 1,000 are reported injured, though that number continues to climb.

As NBC reports:

The meteor, which was reportedly 10 tons, cut a blazing ribbon across the horizon, leaving a long white trail in its wake that could be seen 125 miles (200 kilometers) away in Yekaterinburg. The Russian Academy of Sciences said in a statement that the space rock entered Earth’s atmosphere at a speed of at least 33,000 mph, according to the AP. Some authorities in Russia, however, have said that the event was a meteor shower, and not a single meteor.

The following amateur videos are, to say the least, shocking.

And the destruction was documented in an online photo album.

USA Today published an interesting Q&A on the topic, which may help clear up some misconceptions about meteorites.

This wasn’t Russia’s first encounter with a massive meteorite. On July 30, 1908, a devastating explosion occurred in the skies over Siberia with the strength 1,000 times that of the Hiroshima blast at the end of WWII. Today’s blast in Russia is now the second largest meteorite to hit earth. The 1908 event ranks as first.

A clip from the History Channel explains:

This is one random, black swan even that unfortunately cannot be prepared for. As Editor in Chief Morgan O’Rourke pointed out in a 2011 piece in Risk Management, “If a large space rock chooses to head our way there really isn’t much we can do about it, regardless of Bruce Willis’ formidable skill set.” Wired backs that up, stating, “All the advanced air defenses that humanity has invested in? The interceptor missile that are (sometimes) able to stop an adversary missile from impacting? The early-warning monitoring systems that are supposed to give humanity enough time to plan a response? They are useless, useless against a meteorite onslaught.”

No need for risk management here.


Lester Brown on How Climate Change Is Catastrophically Straining the Global Food Supply

Lester Brown, founder and president of the Earth Policy Institute

Throughout his distinguished career, Earth Policy Institute founder and president Lester Brown has sought to protect resources across the globe. This morning in his opening address at the World Conference on Disaster Management in Toronto, he stressed the importance of one that may now be as important as any ocean, rainforest or glacier. “Time is our scarcest resource,” said Brown on the urgency for the world to begin mitigating the effects of climate change. “How much do we have? No one knows for sure. When do we reach the point of no return. We don’t know.”

The theme of disaster prevention and catastrophe management will be at the forefront of all discussions that take place this week at the conference. But in Brown’s view, there is one disaster that supersedes all others: runaway climate change. To him, that’s “the Big D … the one that could end civilization.”

In addition to the ticking clock and the world’s inability to meaningfully cooperate on the issue, what makes the threat of climate change so catastrophic today is the volatility it places on the global food supply. More than ever, the world grain supply is being strained. And this comes at the same time that demand is increasing.

In the past, major grain surpluses for U.S. production could make up for unexpected droughts, floods or fires that wipe out crop yields in other areas of the globe. Today, however, those surpluses no longer exist. And this is likely the new normal.

To drive home his point, Brown highlighted the massive heat wave, drought and wildfires that wiped out 40% of the Russian grain harvest last summer. He said that if someone had told him before the disaster that the average temperature in Moscow in July would be 14 degrees Fahrenheit above average, he wouldn’t have believed it. “I’m not a climate denier, but that’s unreasonable,” is how he said he would have responded. “Well, that’s what happened.”

In and of itself, that supply shortage affected global prices and stressed the market. But if a similar event were to occur in Chicago? Grain prices would go through the roof.

Again, in the past, agriculture speculators could just chalk up such events as anomalies. Maybe a disaster wiped out some percentage of the global supply that year, but they could be confident that the next season would balance things out. Brown doesn’t seen that happening anymore, however. “There is no normal to go back to,” he said. “The climate is in a constant state of flux.”

And even without a single, identifiable disaster like the one in Russia, the future of the global food supply is troubling. Brown said that estimates project a 10% decrease in grain crop yields for every additional degree Celsius increase in global temperatures. “Each year, agriculture and the climate are more out of sync,” said Brown.

That’s not the only bad news on the supply side.

There is also an irrigation bubble that means today’s global output is artificially high. The United States, China and India are the three top grain-producing nations in the world. Only one-fifth of the U.S. grain yield comes from irrigated land. Even if the continually strained Colorado River basin or Mississippi River region were to dry up somewhat, the nation could still produce at nearly the same level it does today. It’s a different story in India and China, however, according to Brown.

World Bank data says that in India there are 175 million people being fed with grain produced by the over-pumping of local aquifers. The Earth Policy Institute estimates that number at 130 million in China.

It doesn’t take a scientist to see that this is unsustainable. Eventually, the aquifers that are being aggressively pumped will be depleted and, once they are, the rate of irrigation will only be able to match the natural aquifer’s rate of recovery, says Brown. So eventually the current levels will have to fall. The irrigation bubble will burst.

“That bubble has already burst in Saudi Arabia,” he said, adding that the nation will likely be out of the grain production business altogether in just a few years. Since Saudi Arabia only produces 0.5% of the world’s global grain supply, this won’t significantly hamper the global market. And if anyone can afford to import, it’s the Saudis. But this, in addition to depleting water tables throughout the the Middle East, and the bubbles in China and Israel, spells trouble.

“We are only one harvest away from chaos,” said Brown.

Additionally, demand is increasing. Throughout the developing world, particularly in India and China, there are hundreds of millions of people rising out of poverty who will greatly inflate the world’s middle class in the coming decades. Along with a larger middle class comes more people wanting to live a middle-class standard of life. Perhaps more than anything, this affluence will lead to greater food consumption. And since grain feeds both people and livestock, grain consumption per capita will only rise.

Then there are biofuels. In this sense, ethanol is a non-solution solution. It may cut down on carbon dioxide emissions. But crop yields are now being divided between the dinner plate and the gas tank.

The grim reality of all this is that, as the global food supply becomes more strained, so will nations. Food supply security is something that citizens demand from their government and if it disappears, so could the social order, leading to more failed states. “How many failing states before the whole system begins to unravel?” said Brown. “We don’t know this yet. We haven’t been there.”

And that’s the scariest part of all.

(In addition to listening to Lester Brown’s keynote address at the 2011 WCDM, I had the chance to interview him to get even more insight about climate change and the global food supply. Our Q&A will appear in the July/August issue of Risk Management magazine.)

2010 Disasters Cost the World $218 Billion and the Insurance Industry $43 Billion

Swiss Re’s latest sigma study (full report; abstract) reveals that the final economic losses resulting from disasters (both natural and man-made) across the globe in 2010 was $218 billion — a number that dwarfs the $68 billion in damages caused by catastrophes in 2009.

With unprecedented flooding, Asia was the region worst hit, with $75 billion of the total occurring there. In relative terms, however, the fallout may be worse for the Latin America/Caribbean region. The $53 billion caused by the earthquakes in Haiti and Chile represents a staggering 1.1% of the region’s GDP. (By comparison, Asia’s $75 billion in losses was only 0.28% of its GDP.)

Here is Swiss Re’s regional breakdown of the number of disasters, death toll and financial fallout.

Insured losses in 2010 totaled $43 billion as a whopping 10 different events caused insured losses of at least $1 billion. This was a huge jump from the $27 billion in insured losses for the global industry in 2009.

In all, 2010 had 304 catastrophic events.

The globe has seen a troubling trend of more natural catastrophes nearly every year in recent decades, and 2010 was no different with 167 natural disasters. On the flip side, the declining trend of man-made disasters the world has experienced since 2005 also held true, with just 137 man-made events. This is perhaps the only positive nugget of information in the entire report. (Although even this silver lining is bittersweet as you will see below when we look at the resulting death toll.)

Worst of all, of course, were the 304,000 people killed by disasters last year, making 2010 the third deadliest year since 1970 (the year Swiss Re first began collecting such data).

In 2010, severe catastrophes claimed significantly more lives than the previous year: around 304,000 were killed, compared to 15,000 in 2009. The deadliest event in 2010 was the Haiti earthquake in January, which claimed more than 222,000 lives. Nearly 56,000 people died during the summer heatwave in Russia. The summer floods in China and Pakistan also resulted in over 6,200 deaths.

Man-made disasters accounted for a small percentage of deaths last year, in relative terms, but the 6,446 killed was still a significantly higher number than the 5,970 who died in this manner in 2009. This fact puts a large blemish on the positive news that there were fewer man-made events. There may have been fewer incidents, but the ones that did occur were deadlier and that lower-occurrence/worse-outcome ratio should be going the other way in 2011 as safety, security and other risk management means strive to lessen the impact of catastrophes.

The man-made disasters that claimed the most victims in 2010 were a lead poisoning outbreak at an illegal gold mine in Nigeria in March (400 victims, mainly children), a stampede on a bridge at a festival in Cambodia in November (375 victims) and the collapse of a gold mine in Sierra Leone in March that killed approximately 200 people. Meanwhile, aviation and maritime disasters accounted for more than 800 and 1,100 victims respectively.

Moving beyond the past, the globe has already been badly battered so far in 2011.

The Japanese earthquake and tsunami killed an estimated 18,500 people and caused upwards of $30 billion in insured losses alone, according to some experts. The Christchurch quake in New Zealand also ravaged the insurance industry, Australia floods cost billions and winter storms in the United States did plenty of damage of their own. Who knows what the final fallout will be from social revolutions in the Middle East, but it’s safe to say that there will be some claims.

All this and it’s not even hurricane season yet.

Hopefully, there is no way that more people will be killed by disasters in 2011 than we saw in 2010. But when it comes to economic losses, specifically insured losses, it is already shaping up to be a historic, market-altering year.