geopolitical-risk

# Geopolitical Risk Analysis

## Overview

Quantify geopolitical risk signals, identify crisis precursors, and build event-driven strategies that convert narratives such as "war / conflict / sanctions / supply disruption" into actionable multi-asset allocation decisions.

---

## Core Analytical Framework

### 1. Risk Layering Model

```
Layer 1: Structural risk (long-lasting, slow-moving)
  └── Great-power rivalry, alliance structures, nuclear deterrence balance

Layer 2: Situational risk (cyclical escalation, monthly / quarterly scale)
  └── Military exercises, election cycles, sanctions escalation, diplomatic friction

Layer 3: Event risk (sudden shocks, daily / hourly scale)
  └── Military action, assassination, sanctions announcements, nuclear tests
```

### 2. Five Dimensions of Risk Assessment

| Dimension | Description | Quantitative Proxy |
|------|------|-------------|
| **Intensity** | Severity of conflict / sanctions | GPR Index percentile |
| **Persistence** | Expected duration of the crisis | Futures curve contango / backwardation |
| **Transmission** | Spillover into supply chains / finance | CDS spread widening, VIX jump magnitude |
| **Predictability** | Whether the event is already priced in | Option implied volatility skew |
| **Reversibility** | Whether the situation can be resolved through negotiation | Speed of reversal in news sentiment |

---

## Monitoring the Six Major Global Geopolitical Hotspots

### 1. Strait of Hormuz — Oil Transport Chokepoint

**Strategic significance**
- Roughly 20% of global oil supply (about 17 million barrels/day) and 20% of LNG passes through it
- Iran has the ability to disrupt the strait through mines, naval assets, and shore-based missiles
- It is the only export route for Gulf states such as Saudi Arabia, the UAE, Kuwait, and Iraq

**Risk triggers**
- Escalation in U.S.-Iran tensions, such as failed nuclear talks or tighter sanctions
- Tankers being seized or attacked
- Iranian blockade drills during military exercises

**Key monitoring indicators**
```python
# Proxy indicators
- Brent-WTI spread widening (signal of regional supply stress)
- Persian Gulf tanker insurance rates (Lloyd's H&M quotes)
- UAE dirham NDF (depreciates under stress)
- Israeli shekel volatility
- Relative strength of VanEck Oil Services ETF (OIH) vs XLE
```

**Asset impact direction**
- Bullish: crude oil, LNG, shipping stocks (BDRY/FRO), defense stocks (LMT/RTX)
- Bearish: airlines (DAL/UAL), petrochemical refiners, emerging-market importers such as INR and KRW

---

### 2. Taiwan Strait — Core of the Semiconductor Supply Chain

**Strategic significance**
- TSMC accounts for roughly 90% of global advanced-node capacity below 5nm
- Taiwan produces about 65% of the world's semiconductors
- It sits on the main southbound route linking Northeast Asia and Southeast Asia

**Risk triggers**
- Larger-scale Chinese military exercises, especially blockade drills
- U.S. arms sales to Taiwan or high-level official visits
- Major policy changes in cross-strait relations

**Key monitoring indicators**
```python
# Proxy indicators
- Abnormal weakness in the Philadelphia Semiconductor Index (SOX)
- TSM ADR (TSM) premium / discount in the U.S. market
- Taiwan CDS spreads
- TWD NDF depreciation under stress
- KOSPI, given Korea's semiconductor linkage
- U.S.-listed Chinese ADRs / Hong Kong Hang Seng Tech Index
```

**Asset impact direction**
- Bullish: Intel / GlobalFoundries as substitute capacity providers, defense stocks, JPY as a haven
- Bearish: Apple / NVIDIA / AMD / Qualcomm as TSMC clients, TSM ADR, Samsung Electronics
- Extreme scenario: global semiconductor shortage leading to collapse across auto and consumer-electronics supply chains

**Supply chain substitution timeline**
```
3-6 months: inventory drawdown, sharp price spikes
6-18 months: partial substitution by Samsung / Intel IDM advanced capacity
2-4 years: ramp-up from TSMC Arizona and Kumamoto Japan
5+ years: Mainland China's independent advanced process catch-up, with major uncertainty
```

---

### 3. Red Sea / Suez Canal — Europe-Asia Trade Artery

**Strategic significance**
- The Suez Canal carries about 12% of global trade volume and 30% of container shipping
- The alternative route around the Cape of Good Hope adds 10-14 days and raises cost by 15-25%
- Houthi forces in Yemen threaten the Bab el-Mandeb chokepoint

**Risk triggers** (already validated by the 2024 Houthi attacks)
- Intensified attacks on merchant vessels by Houthi forces
- Israel-Gaza escalation spilling across the region
- Political instability in Eritrea or Somalia

**Key monitoring indicators**
```python
# Proxy indicators
- Daily changes in the Baltic Dry Index (BDI)
- SCFI Shanghai Containerized Freight Index
- Share prices of Maersk and other container shipping companies
- Share of AIS-tracked vessels rerouting via the Cape of Good Hope (>30% is high alert)
- European TTF natural gas prices, given Red Sea LNG exposure
```

**Asset impact direction**
- Bullish: shipping stocks (ZIM/MAERSK/COSCO), tankers rerouting around the Cape (FRO/STNG)
- Bearish: European manufacturers facing supply-chain delays, inflation-sensitive sectors
- Lag effect: higher freight rates → higher global CPI → tighter rate expectations

---

### 4. Russia-Ukraine Conflict — Energy and Food Security

**Strategic significance**
- Russia is the world's largest natural gas exporter and second-largest crude exporter
- Ukraine is a major global grain exporter (wheat / corn / sunflower oil)
- The war has already driven a permanent restructuring of Europe's energy mix

**Ongoing risk points**
- Escalation in nuclear rhetoric, a major tail-risk driver
- Sanctions expanding to third parties, forcing countries like China and India to choose sides
- Continued attacks on Ukrainian infrastructure such as the power grid and ports

**Key monitoring indicators**
```python
# Proxy indicators
- European TTF natural gas futures
- Ukrainian sovereign CDS spreads
- RUB/USD exc