COVER STORY • Rising Geopolitical Risk — Another Story of the Global Economy • 2

The Scenario Approach to Risk
Management as Applied to
Geopolitical Risks
Author Masahiro Kakuwa

By Masahiro Kakuwa

Foreword
I have been asked to write about managing geopolitical risks.
However, I am an expert in scenario planning, not geopolitical risks
or risk control. So I would like to take this opportunity to do athought experiment, in which I will use the scenario method toreconstruct some part of Top Risks 2016, the annual outlook on
geopolitical risks by Eurasia Group, a consulting firm highly regarded
by the Japan Economic Foundation. The outline of Top Risks 2016
must have been written in 2015; it says that “we don’t think Trump
can be the nominee.” Why did Eurasia Group reach that conclusion?
I will investigate this from my field of expertise. To put it anotherway, I will explore the potential for the scenario planning method in
identifying and analyzing geopolitical risks.
This essay will proceed in the following manner. First, an overview
of scenario planning will be given. Second, the views of Professor
Taketoshi Taniguchi of the University of Tokyo on how risk is
manifested in the world today will be introduced. Third, the scenario
method will be used to reconstruct part of Top Risks 2016 from
Eurasia Group with a focus on the Trump question. Finally, thethought experiment will be reviewed to consider how the scenario
method could be used in managing geopolitical risks.

What Is Scenario Planning?
1. What is a scenario?
A scenario is a story about the future. It is used, for example, in
scripting plays. There, the players and the setting on the stage are
depicted along the flow of time.
A scenario is not a forecast. Generally speaking, a forecast is alook into the future as an extension of the past. For example, aforecast is based on the assumption that current business conditions
will continue. Alternatively, the future may be estimated by using
statistically derived trend lines. Either way, it is difficult to subsume
vague, weak trends and signals of fundamental structural changes
that may occur, or our imaginations and instinct about the things
that could happen. The scenario method is a mechanism that frees
us from these psychological and methodological constraints.
A scenario contains some potentially important things that may
happen, who and what could cause them to happen, what the ripple
effects will be, and how the world of the future will be altered fromthe present as a consequence.
12 Japan SPOTLIGHT • March / April 2017

2. What is scenario planning?
There is, of course, no way to know with certainty what will
happen in the future. Hence we will mull over many possible futures
through research, analysis, and interpretation of the issues currently
in sight. But, in the scenario method, the infinitely varied possible
futures are culled through the following process.
Plenty of data and insights are available at any moment toconsider the future. It is desirable to divide them, boldly andtentatively, into two categories, i.e. one category that indicates an
outlook with a certain level of certainty, and another category thatindicates high uncertainty. In other words, there are issues andthemes that fail to yield a sense of direction when you try to look into
the future. They will be explored in more depth to figure out thereasons why it is so hard to see how they play out going forward.
Pushing our thoughts further along these lines, we begin to move
forward on the interpretation of the various issues and themes as anintegrated system. A framework for scenario analysis will be revealed
from this systematic interpretation. This framework has to be holistic
and robust enough to accommodate multiple different views andopinions, manifested in the data and insights collected. Based on theframework, the issues and themes are arranged along the time line
into scenario stories in accordance with the causal relationships. The
multiple different stories combined with the analytical framework
become the scenario product (Chart 1).

CHART 1

Components of scenario building
Issuesrelatively
certainIssuesHow cancurrently
it bein sight interpreted?

Future1

Framework
Issuesrelatively
for
uncertain
scenario
analysis

Now
Source: Compiled by the author

Scenario Stories
Future2

Future3. How is scenario planning used?
Scenario planning is a tool for organizations (governments, private
businesses, etc.) to help them to test their plans and strategies. The
leader of an organization establishes a vision and a strategy, seeks
consent from its members, and attempts to influence its environment.
However, the environment — the business environment in the case ofa business, the policy environment in the case of the government —is always in flux. There may be discontinuity between the present andthe future. This is where scenario planning comes in. A scenario
product is set up as a tool that enables the organization to test
whether the vision and the strategy currently adopted by theorganization will be able to withstand significant changes that may
occur in the future. Thus, it is critical to make sure that the two or
three completely different futures depicted in the scenario producthave the appearance of having the same plausibility. Care must be
taken to choose the material and rhetoric so that the richness of theinformation and the persuasiveness of the different futures are on thesame level from the perspective of the leader.
The leader cannot help but see multiple developments in theenvironment. Paths can be seen branching off. Some of them will
look auspicious, while others loom ominously; but there is no way topick a single one. “We have a problem,” the leader realizes. And thatis the point.

How Risk Is Manifested in the World Today
Now let’s move on to risk control. The following is a summary of
the views of Prof. Taniguchi on the nature of risks as they are
manifested in the world today.
The world we live in is a complex adaptive system in the form of a
dynamic network connecting countless numbers of diverse agents(the “players” in the scenario method). It contains many feedback
loops, and its overall behavior is manifested as the consequence ofthe perpetual interaction and massive number of decisions on thepart of the multiple individual agents. Thus, it should come as no
surprise that many things, anything, can happen. It order to handle
these circumstances, we should switch our mindset from theconventional focus on the agents that comprise the system to afocus on the networks and mutual interactions.
Risks are always shifting, and hidden. There are issues in ourworld that are unknown to us. The real world is a complex system,
so it is impossible to predict emergent phenomena. We must shed
the notion that “risks are controllable” and switch to an approachthat adapts to risks while securing the resilience of our society.
Prof. Taniguchi’s views are close in some ways to the approachthat the scenario method takes, but different in others. Prof.
Taniguchi and the scenario expert both believe that a forecasting
method that considers the future as an extension of the present is
inappropriate in dealing with the risks of our world today. At thispoint, the scenario expert proposes to conduct a thought experimentin which he/she observes the current state of the world, comes to asystematic understanding of it, then takes an issue or theme whose

future development is seemingly most difficult to foresee as thestarting point, and starts to craft several possible futures. On theother hand, Prof. Taniguchi will say there may be individual issues oragents whose behaviors are foreseeable, but the behavior of thesocial system as a whole is manifested as the outcome of theinteraction among the individual agents. From his perspective, it is
impossible to foresee phenomena that have yet to emerge in acomplex system like our world today.
How does Top Risks 2016, Eurasia Group’s annual outlook forgeopolitical risk, deal with the challenge of foreseeability versus
un-foreseeability? That is, in the world of scenario planning, how torecognize degrees of uncertainty of issues and themes which could
develop and formulate a gross geopolitical risk in the future?

Reading Top Risks 2016
First, my own conclusion. Eurasia Group specializes in politicalrisk. It focuses its analysis on nation states, those who hold thepower of the state and their opponents, and other agents. It analyzes
the current state of affairs, comes to a systematic understanding ofit, and then writes one single story of the near future. It surely musthave considered the possibility of multiple possible futures, but it
places its reputation on the line by putting forward the most likely
future in development.
I will now provide a summary of the Top Risks 2016 announced at
the beginning of the year 2016. Following this, I will use the scenario
method in order to look into the logical process by which the reportcame to the conclusion: “We don’t think Trump can be the nominee.
Even if he is the nominee, he can’t beat Hilary Clinton.”
1. Top Risks 2016
Top Risks 2016 lists the following as the 10 most important risk
themes.
① The hollow alliance: The transatlantic partnership between the
United States and Europe is the most important internationalframework for maintaining global order. But it is now weaker thanit has ever been.
② Closed Europe: “Open Europe”, the principle on which theEuropean Union was founded, is being threatened by a
combination of inequality, refugees, terrorism, and the rise of
populism and nationalism.
③ The China footprint: Never in history has a country at China’s
modest level of economic and political development had such an
influence on the global economic market and geopolitics.
④ ISIS and “friends”: The threat from the world’s most powerfulterrorist organization will grow in 2016.
⑤ Saudi Arabia: The Saudi kingdom will face growing anddestabilizing discord within the royal family this year, and will be
increasingly isolated internationally. This will lead Saudi rulers to
act more aggressively.
⑥ The rise of technologists: Non-state actors from the world ofJapan SPOTLIGHT • March / April 201713

COVER STORY 2

technology are entering the realm of politics. Their influence will
undermine government policies, and citizens will begin to
distrust these actors from the world of technology.
⑦ Unpredictable leaders: Some leaders, such as Russia’s President
Vladimir Putin, Turkey’s President Recep Tayyip Erdogan, andSaudi Arabia’s Deputy Crown Prince Muhammad bin Salman, aredemonstrating erratic behavior.
⑧ Brazil: Brazil is in the midst of a deep, multi-year recession, andPresident Dilma Rousseff is fighting for her political survival.
⑨ Not enough elections: In 2016, there are relatively few national
elections in the emerging economies. Political and social
destabilization in these countries will be the result as there will be
no outlet for their dissatisfaction.
⑩ Turkey: Erdogan will now work to replace the country’s
parliamentary system with a presidential one. The country’s
foreign policy will be infused with nationalism aimed at catering
to Turks’ increasingly conservative views.
2. Red herring
Eurasia Group also listed three themes that it did not see as beingrisks in 2016.
⑪ US elections: “We don’t think Trump can be the nominee. Even if
he is the nominee, he can’t beat Hilary Clinton.”⑫ China: No hard landing. President Xi Jinping has the political
capacity to prevent this.
⑬ Asia will evade geopolitical risk. Japan’s Prime Minister Shinzo
Abe, India’s Prime Minister Narendra Modi, and China’s Xi
Jinping all seek geopolitical stability.

Reconstructing Eurasia Group’s
Geopolitical Risk Analysis/Forecast
through the Scenario Method
Eurasia Group decided that Donald Trump would not
win the US presidential election. Actually, material toconsider the Trump question is embedded all over the
analysis of the 10 top risks. And “① The hollow
alliance”, “⑥ The rise of technologists”, “⑦Unpredictable leaders”, and “⑨ Not enough elections”
are of particular interest.
I will now reconstruct the Eurasia Group’s richnarrative for those four themes using the scenario
method. The scenario method is distinguished by thesystematic and integrated understanding of the themein question. A scenario expert draws up an endless
number of tentative system diagrams. So, let’s go backto Eurasia Group’s analysis of the current state ofaffairs and, without altering it, demonstrate thepossibility of “alternative futures”.
Breaking down each of the four themes into
segments and reorganizing them into a system
14 Japan SPOTLIGHT • March / April 2017

diagram, we can see that causes for Trump’s victory are embedded
in Eurasia Group’s analysis itself.
1. The rise of technologists
This system diagram breaks down the text of Eurasia Group’s
observation and analysis of the “rise of technologists” as a risk
theme, and arranges them according to the causal relationships.
Eurasia Group has the following to say:
A variety of highly influential non-state actors from the world oftechnology are entering the realm of politics — Google, Apple,
Facebook, Amazon (GAFA) and hackers. Because these actors do nothave party platforms or voter constituencies behind them, they will
be difficult to understand and assess. At times, they will oppose
incumbent administrations, generating policy and market volatility.
The political rise of these actors will generate pushback fromgovernments and citizens. There is little doubt that the EU’s scrutinyof American technology giants has been driven, in part at least, by atacit mandate from European populations. Authorities may view local
technology stars with growing suspicion, which may lead to theirfall, as in the case where the Russian government took down theoligarch Mikhail Khodorkovsky. That said, governments will surely
play along when they find the political actions of the actors from theworld of technology advantageous.
I’ve laid out the alternative scenarios implied by the Eurasia Groupanalysis in italics in Chart 2. Against Eurasia Group’s assumption that“the political rise of technologists will create conflicts between
competing centers of power”, I will propose the possibility that thetwo could collude. After all, there are cases all over the world where
those in power made skillful use of information and media
technology to impose political propaganda on its citizens.

CHART 2

The rise of technologists

Current situation observed

Can’t managethem

Lack oftraditional
constituencies
Can’t predict
actions.
Hard to workwith or against

Interpretation

Conflicts b/w
government &technology actors

Creating policy& marketvolatility

Eurasia scenario

Fall of big stars(see
Khodorokovsky
in Russia!)

Non state actors
with politicalambitionsTechnology
stars,
suspicious

Push back from
gov’t & citizens

Source: Compiled by the author*GAFA*Hacker group*Technologyphilanthropist
Collision withgovernment
policies
US technology
community
welcomed
Premier Xi

US sanctions
against Chinesecyber-offences

Gov’t will playalong when it
find itadvantageous...

Politicians withspin doctors
strong ICT/media literacy
Quick mobilizationof mass

Collusion oftechnology
actors &politicians/gov’t

Cold society
with control &surveillance

Alternative scenarios

2. Unpredictable leaders
Eurasia Group has the following to say about this:
There is an almost unprecedentedly wide
constellation of leaders known for erratic behavior,such as Putin, Erdogan, and bin Salman. They have a
proven tendency to pursue loose-cannon foreign
policies. Why the unpredictable behavior? Several
reasons. Some of these leaders have a craving to
attract attention to themselves. Erdogan and Putin arenotoriously big-headed. Erdogan wants an executive
presidency, and bin Salman wants a throne. They put
personal considerations above national interests.
Furthermore, these leaders all benefit from a dearth ofdomestic institutional constraints on their freedom of
maneuver. In 2016, unforeseeable geopolitical risks
will rise from these personalities. Each of these threeplays a role in the Syrian conflict. Their interventions
will overlap and conflict, spelling volatility for theinternational system, and a lot more turmoil.
I believe that the personal qualities of these leaders
also apply to Trump (Chart 3).
3. Not enough elections
In 2016, there are relatively few elections inemerging economies. Slower growth and stagnating
living standards will harness popular discontent. Thereis an absence of national-level electoral relief valves in
Brazil, Turkey, Russia, and South Africa amongst
others. This will lead to street protests and social
unrest. There is also the risk that middle and working
class voters disillusioned with incumbent regimes will
support non-mainstream parties with more radical
agendas. When the middle classes of the emerging
economies see their economies taking a turn for theworse, they will be shaken by the fear of losing sociopolitical status and turn to more populist politicians.
I believe that this risk analysis by Eurasia Group isalso applicable to developed countries, and not just to
emerging economies. It may have been reflected in2016 in the US presidential election (Chart 4).

CHART 3

Unpredictable leaders
Leaders witherratic
behavior

Current situation observed
Access tomilitary & paramilitary proxies

They need to
attract attention
to themselvesInterpretation

Eurasia scenario

Putin, Erdoganand bin Salman,
Big heads

Loose-cannon
foreign policies

Benefit from dearthof domestic
institutional
constraints

Freedom of
maneuverPut personalconsiderations
above national
interests
Born/acquired
personalities

Alternative scenarios

also,
Mr. Trump?

Regional blackswan shock

Volatility for theinternational
system increases

Erratic leaders’interests may
overlap on theconflict e.g. Syria

Source: Compiled by the author
CHART 4Not enough elections
Current situation observed
MarginalizedgroupsUrban poor,
minor religion

Emergent market
Popular discontent

Economic
trajectories won’t
live up to politicalpromises

Interpretation
Eurasia secnario
Broader accessto social media

Emerging market
Few opportunites
for voters

Street protests,
Brazil,South Africa etc.

Disillusioned
middle andworking class

Alternative scenarios
Also in developed
economies?
(such as US?)

Reactionaryreflexes

Weakerinstitutional
resilience
Dysfunctional
governance

Rise of nonmainstream
parties

Source: Compiled by the author

4. The hollow alliance
The transatlantic partnership has been the world’s most durable
and significant alliance, underpinning the global economic order andbolstering peace and stability. But it is now weaker, and less relevant.
The reason for this is that China and other emerging markets arerising and European countries and the US no longer share a common
interest. The UK tries to deepen its economic relationship with China,
France looks to Russia for a solution to the situation around Syria,
and Germany approaches Turkey to stem the tide of Syrian refugees.
Swamped by one crisis after another, European leaders can nolonger afford the luxury of taking the big picture into account. Europe

is divided, and weak.
The US has adopted unilateralism over the last decade or so; now,there is no global policeman to maintain order. The situation in
Ukraine, Syria, and the Middle East will deteriorate. How will the US
handle the transatlantic partnership with Europe under President
Trump?

The Trump Question from Within Top Risks 2016
With all due respect to Eurasia Group, let’s take the liberty of using
the words and phrases of Top Risks 2016 itself to create a set of
scenarios.
Japan SPOTLIGHT • March / April 201715

COVER STORY 2

Trump is demonstrating inconsistent behavior, andthere are several reasons for this. There is the craving
to attract attention to himself. He also made skillful use
of a media strategy and information technology toquickly build up voter support. His support came lessfrom the Republican Party organization than from the
populist movement that he created.
In other words, Trump acts to maximize the freedomof his decision-making activities. He wants to eliminate
institutional constraints to the exercise of his power.
This is what any CEO of a company wants to do.
P o s i t i o n i n g t h i s u n d e r s t a n d i n g o f Tr u m p ’s
characteristics as the key theme in the holistic systemof the “Trump question” enables us to craft several
scenarios.
Scenario 1: President Trump is not interested ininternational politics, which he cannot bend to his will.
American unilateralism intensifies, and Trump will
generate unforeseeable geopolitical risk.

CHART 5

Trump risk?
Current situation observed
Leaders witherratic
behavior

Scenario 1

May put personalconsiderations
above national
interests

Benefit from dearthof domestic
institutional
constraints
Pursuit of
freedom of
maneuver

Loose-cannon
foreign policies

Enhanced
US unilateralism
Globaleconomic &peace-stability
order erodes

Politicians with
spin-doctors
strong ICT/
media literacy

Need to attract
attention tothemselves

Access tomilitary & paramilitary proxies

Scenario 3

Collusion oftechnology
stars &
politicians/gov’t

Push back from
gov’t &
establishment
Fall of big stars(see
Khodorokovsky
in Russia!)

Scenario 2

Quick organizationof mass

Rise ofnon-mainstream
parties

Source: Compiled by the author

Will the “Trump question” stabilize? A future can be seen
developing in which opposition from intellectuals and parts of theestablishment grows. What is hard to foresee is whether his populist
methods of securing support that were so successful in 2016 willcontinue to be effective as the years go by. This leads to two morescenarios.
Scenario 2: The traditional media remain within the establishment.
But technology-driven new media groups with political ambitions
emerge and begin to support the Trump administration. That makes
it possible to rapidly organize the support from 2016. A new, nonmainstream party ardently supporting the Trump administration isborn.
Scenario 3: The Trump administration’s strategy towards thetechnology-driven new media fails, and President Trump is unable toremain in office. The four-year term is no longer able to protect him(Chart 5).

Conclusion
This has been a personal thought experiment in which
I reconstructed some part of Top Risks 2016 around the Trumpquestion using the scenario method. I did not add any themes orinsights other than to propose the possibility of “collusion oftechnology stars and politicians/government”. Even so, the “Trumprisk” emerged when I used the scenario method to create a tentative
system diagram connecting the issues raised in Top Risks 2016,
assuming that technology-driven new media groups with politicalambitions emerge and begin to support the Trump administration.
The following is my conclusion as I look back on this thought
16 Japan SPOTLIGHT • March / April 2017

Also,
Mr. Trump?

experiment.
The geopolitical risk analysis by Eurasia Group in its Top Risks
2016 is a highly regarded, fine piece of work. However, Eurasia
Group, after considering all possible futures, presents only what it
considers to be the most likely outcome. The argument is excellent,and persuasive. But the conclusions should not be read in isolation.
Other possibilities may emerge when it is read while carefully
examining the causal relationships between the issues and themesthat lead to the conclusion.
This is where the scenario method comes in. The guiding principleof the scenario method is that multiple futures are always created. Thismethod forces someone who has discovered one very much potent
story of the future to go back to the system diagram and undertake theintellectual activity of thinking up other, unfamiliar stories. This
experiment could be uncomfortable though, as the scenario productthat is produced as a result (the analytical framework and the multiple,
divergent stories) generates new discoveries and starts stimulating us
to consider even more questions.
Prof. Taniguchi surely knows that the efforts of us human beings,
who cannot stop engaging in the world around us, to come to a
structural understanding of the present, and the intellectual activities
to create the future will not cease. Yet Prof. Taniguchi is resigned tothe idea that risk phenomena that may occur in the future in the realworld cannot be predicted since it is a complex system, andproposes an approach that secures social resilience whileabandoning the notion that risk can be controlled. And on this point,
experts in the scenario planning have no disagreement with theprofessor.
Masahiro Kakuwa is a visiting professor at the Graduate School of Public
Policy, The University of Tokyo, and chief economist at Showa Shell Sekiyu K.K.
He specializes in scenario planning, and also in business and policy making
concerning energy and environment issues.