PRS GEOPOLITICS: Insights and Happenings, June 2026

The official announcement by Iran via the state-affiliated Tasnim News Agency that it will halt all mediated message exchanges with the United States and move to fully close the Strait of Hormuz appears to introduce another shock to global supply chains. Within the International Country Risk Guide (ICRG) framework, this development forces a clear divergence between political and economic risk scores across regional and global actors. 

However, a data-driven look at the underlying mechanics strongly supports the thesis that this total closure is a calculated, tactical bargaining chip rather than a permanent doctrine of unresolvable war. Rather than an impulsive disruption, Iran is leveraging its geographic control over this critical artery—which handles roughly 20% of global oil—to hopefully force diplomatic concessions from Washington.  

Concrete proof of the transaction-oriented nature of this crisis is visible in ongoing bilateral communications. Before the current pause, the US and Iran were actively exchanging drafts of a Memorandum of Understanding (MOU) mediated via Pakistan. This framework proposes a 60-day cessation of violence, explicitly tying the physical reopening of the Strait to the removal of specific highly enriched uranium and the potential unfreezing of billions in Iranian assets. The current suspension of talks is a public negotiation maneuver tied directly to demanding a complete military pullback in Lebanon. 

Further indicating a desire for transactional control over destruction, Tehran’s newly announced Persian Gulf Strait Authority is designed to administer and levy toll fees on passing vessels. This structural approach confirms that Iran intends to maintain the chokepoint as a long-term economic and political lever, rather than engaging in a permanent hot war. 

While Brent and WTI futures spiked over 7% immediately following the Tasnim report, macro trading desks have consistently faded these peaks during recent negotiation rounds. This pricing behavior underscores that institutional markets view the escalation as cyclical brinkmanship aimed at securing final treaty text modifications.

The ICRG Cross-Country Spillover Impact

For Gulf Cooperation Council (GCC) nations (e.g., Saudi Arabia, UAE), this calculated threat causes an immediate drop in their Political Risk Index, specifically within the External Conflict (Max 12 points) metric due to the heightened threat of maritime interdiction. Paradoxically, their Economic Risk Index (Max 50 points) improves in the short term, as spiked oil prices boost Current Account as a % of GDP and Budget Balance metrics. When political scores drop while economic metrics spike, it signals an unstable, commodity-driven cushion that usually precedes sudden capital flight once the bargaining phase concludes. 

Conversely, Net Energy Importers in Europe and Asia face an immediate double downgrade. Elevated energy costs increase structural inflation, lowering public purchasing power and dragging down Socioeconomic Conditions. Simultaneously, their broad Economic Risk profiles deteriorate as import costs expand their current account deficits. Historically, a 3-to-6-month decline in these specific ICRG sub-components serves as a reliable leading indicator for currency depreciation.

The AI Rally: Structural Weakness Behind the U.S. Safe-Haven Illusion

The global artificial intelligence rally has rewired international capital allocations, creating a unique set of political and financial risk dynamics for US sovereign debt and the USD. While the surge in technology equities has pushed major stock indices to record highs, it has simultaneously introduced structural imbalances that directly impact ICRG risk metrics.

The heavy concentration of global capital entering American technology firms has created an artificial, equity-driven demand for the greenback. This influx of foreign portfolio investment strengthens the currency on paper, but it effectively hides a steady decline in the US’ Political Risk Rating. The domestic political landscape in the US continues to face legislative polarization and persistent fiscal gridlock. Within the ICRG model, these factors negatively affect the Government Stability and Investment Profile metrics, as recurrent budget disputes prevent long-term structural governance improvements.

This divergence presents a direct challenge to the traditional status of US Treasuries as the global safe-haven asset. Historically, institutional investors moved capital into US bonds during times of geopolitical tension. However, the AI rally has created an alternative destination, drawing liquidity out of fixed-income markets and channeling it into technology equities. This shift erodes the protective insulation that the US bond market traditionally provided against external shocks. Furthermore, the massive national debt required to fund Washington’s. fiscal deficit puts downward pressure on the ICRG Financial Risk Rating, specifically affecting the External Debt Service and Exchange Rate Stability sub-components. 

For global macro traders and PRS’ prop trading desk, tracking this decoupling between equity-driven currency strength and declining institutional quality scores provides a vital signal. When speculative stock market flows artificially inflate the dollar while structural political risks mount, it suggests the currency may be reaching an unsustainable top, offering a strategic window to hedge against long-dated dollar volatility.

3/ South Korean Won (KRW): Deconstructing Structural Disconnection

The underperformance of the South Korean Won provides a clear example of how economic vulnerabilities and structural political risks interact within our framework. Despite South Korea’s position as a vital hub for advanced semiconductor manufacturing and AI hardware supply chains, the Won has consistently underperformed its regional peers.

Within the ICRG model, the primary driver behind this depreciation is the nation’s vulnerable Investment Profile score. Foreign institutional investors remain cautious due to long-standing domestic corporate governance challenges (the “Korea Discount”) and regulatory friction. During global trade transitions, foreign capital frequently flows directly to final-tier US tech companies rather than remaining with the upstream manufacturers in Seoul, leading to consistent capital outflows that weigh heavily on the currency.

Furthermore, South Korea’s geopolitical exposure acts as a constant drag on its Political Risk Index. Periodic spikes in regional rhetoric and security concerns can directly depress the External Conflict metric, causing foreign asset managers to demand a higher risk premium for holding Won-denominated assets. On the economic front, while high-tech export volumes appear robust in headline data, the high cost of imported raw materials and energy heavily compresses the nation’s Current Account as a % of GDP score. Empirical research utilizing the ICRG model demonstrates that currency appreciation is heavily reliant on improvements in institutional metrics like Law and Order and Internal Conflict. Because South Korea’s institutional metrics have remained flat while its import costs have risen due to global energy disruptions, the technology sector’s success has not been enough to support the currency. Traders watching these monthly ICRG data updates can identify clear shorting opportunities on the Won against the USD when technology export data remains high, but institutional quality scores continue to decay.

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One of the ‘tasks’ my analytical group undertakes regularly is to continuously review the latest academic literature, peer-reviewed journals, and quantitative geopolitical risk studies to track exactly how researchers utilize our data. During our ongoing literature reviews, they came across a foundational body of work that has been meticulously vetted over the past two decades—research that ultimately culminated in the highest honor in economic science: the 2024 Nobel Prize.

The awarding of the Sveriges Riksbank Prize in Economic Sciences to Daron Acemoglu, Simon Johnson, and James A. Robinson dismantled decades of prevailing assumptions regarding geographic and climatic determinism. In its place, they established a rigorous framework proving that the structural integrity of political and economic institutions is the primary driver of long-term national wealth.

For scholars and practitioners utilizing quantitative geopolitical analysis, this milestone holds a unique and profound significance. The empirical architecture of the laureates’ foundational papers—most notably their 2001 breakthrough, “The Colonial Origins of Comparative Development,” and their 2002 follow-up, “Reversal of Fortune”—relied directly on the International Country Risk Guide (ICRG) database to operationalize their core hypotheses.

How that data was utilized to challenge economic orthodoxy, solve a foundational mathematical hurdle, and provide the empirical substrate for a Nobel Prize-winning school of thought is below.

The Orthodox Consensus: The Geography Trap

To understand the impact of the laureates’ research, one must first understand the academic consensus they set out to challenge. For generations, mainstream macroeconomics was heavily dominated by geographic determinism. Pioneered by influential figures like Jeffrey Sachs, this school of thought argued that immutable factors—such as tropical climates, disease ecology, crop viability, and proximity to coastlines—were the primary reasons some nations grew wealthy while others remained trapped in poverty.

While intuitive, this theory offered a bleak outlook for global development. If geography is destiny, poor nations have little recourse to change their economic trajectory.

Acemoglu, Johnson, and Robinson posited an alternative hypothesis: institutions matter most. They argued that a society’s legal structure, the security of its property rights, and its level of political risk dictate whether individuals invest capital, innovate, and generate sustainable economic growth.

However, proving this hypothesis presented a monumental econometric challenge.

The Methodological Hurdle: Resolving Endogeneity

In macroeconomic modeling, a compelling theory is worthless without empirical proof. To convince the scientific community that strong institutions cause wealth, the authors faced a classic statistical dilemma known as endogeneity, or reverse causality.

While a clear correlation can be observed between high-quality institutions and a high gross domestic product (GDP) per capita, the direction of causality is ambiguous. Do strong property rights foster economic expansion? Or do wealthy nations simply possess the excess capital required to fund robust courts, police forces, and legal registries?

To isolate the true causal effect, the authors engineered a pioneering two-stage least squares (2SLS) instrumental variables strategy. They needed a historical anchor—an “instrument”—that affected modern institutional quality but did not directly affect modern GDP.

They found this anchor in history: the mortality rates of European settlers in the 18th and 19th centuries.

Where settler mortality was high (due to malaria or yellow fever), Europeans did not settle permanently. Instead, they established extractive states designed purely to drain resources, leaving behind weak property protections.

Where mortality was low, they settled in large numbers and replicated European legal frameworks—creating inclusive states that heavily protected private investment.

This solved the historical half of the equation. But to complete their mathematical proof, the authors needed a way to measure the modern legacy of those colonial choices. They required an objective, standardized, time-series instrument to quantify the persistent state of institutional quality across 140 countries.

To solve this, they turned to the ICRG dataset.

The Linchpin: ICRG Protection Against Expropriation Risk

The laureates selected the ICRG’s “Protection Against Expropriation Risk” index as their primary proxy for modern institutional health. This proprietary metric evaluates the probability that a sovereign government will confiscate, nationalize, or otherwise seize private capital investments.

The ICRG data was not merely an ancillary variable used to fill out a table. It served as the modern dependent variable in their first-stage regression, bridging the gap between centuries-old history and modern economic outcomes.

In “The Colonial Origins of Comparative Development” (2001), the authors explicitly outlined why they chose the ICRG index over alternative metrics, noting its unique ability to capture the operational reality of political risk rather than just nominal laws on paper:

“We use as a proxy for institutional quality the index of protection against expropriation risk… This index was purchased by Knack and Keefer (1995) from the International Country Risk Guide (ICRG)… [It] is a measure of the risk of expropriation of private investments by the government… This index is particularly relevant for our purposes because it measures the security of property rights, which is central to our theoretical framework.”

By plotting historical settler mortality against modern ICRG risk scores, the authors demonstrated a striking, statistically significant causal chain:

Historical pathogen environments dictated colonial settlement strategies.

These strategies birthed early institutional frameworks that persisted across generations.

This persistence directly explains modern variations in the security of property rights—as indexed by the ICRG—which heavily dictate current global income disparities.

The authors confirmed this direct relationship, stating:

“Our empirical results show a robust relationship between settler mortality and modern institutional quality, as measured by the ICRG index. Countries with higher settler mortality in the colonial era have significantly lower protection against expropriation risk today.”

The Second Proof: The “Reversal of Fortune”

In their 2002 follow-up paper, “Reversal of Fortune: Geography and Institutions in the Making of the Modern World Income Distribution,” the authors expanded their theory to deliver a final blow to geographic determinism.

They observed a historical paradox: among the countries colonized by European powers, those that were the richest and most densely populated in 1500 (such as the Aztec and Inca empires) are relatively poor today, while sparsely populated areas (such as the United States, Canada, and Australia) became highly prosperous.

If geography or climate were the primary drivers of wealth, the rich areas should have stayed rich, and the poor areas should have stayed poor.

Using the ICRG dataset once again to measure modern institutional quality, the authors proved that European colonizers introduced extractive institutions into densely populated areas to exploit existing labor forces, while introducing inclusive institutions into empty areas to encourage new investment. The institutional environments—measured precisely by the ICRG—had completely reversed their economic fortunes.

As they noted in the 2002 text:

“The institutional explanation predicts a reversal: industrialization and economic growth should be faster in countries with better institutions… Using the ICRG index of protection against expropriation risk, we find strong empirical support for this institutional hypothesis over geographic explanations.”

From Working Papers to the Nobel Prize: A 23-Year Legacy

The journey from the publication of these papers to the 2024 Nobel Prize illustrates how rigorous data shapes long-term intellectual history.

When these papers were first introduced as working drafts in late 2000 and early 2001, they sparked intense debate. To withstand decades of academic scrutiny, the empirical calculations had to be flawless. Subsequent researchers attempted to replicate, challenge, or expand upon the authors’ work.

Throughout this 23-year vetting process, the stability and longitudinal depth of the ICRG dataset remained the anchor of the paradigm. Because the ICRG has consistently tracked risk variables using an unchanging, math-based methodology since 1984, it provided a clean, unbiased baseline that other scientists could reliably test.

By the time the Royal Swedish Academy of Sciences awarded the Nobel Prize in October 2024, the “Institutions Rule” theory had transformed from a provocative hypothesis into the global standard for development economics.

The Nobel Committee’s official scientific background paper explicitly highlighted this exact body of research and the specific institutional variables—such as property rights protection—that the laureates quantified using the ICRG.

The Imperative for Empirical Precision

The Nobel recognition of this body of work underscores a reality that political economists and sovereign investors have long recognized: strategic forecasting cannot operate effectively on subjective observations or fleeting commentary. In econometric modeling and global asset allocation alike, unstructured data introduces statistical noise, invalidating long-term strategic decisions.

The structural components of the ICRG model—encompassing political, financial, and economic sub-indicators—do not track headlines. They measure the institutional bedrock that dictates whether a nation will compound wealth or stagnate under structural risk.

As the modern geopolitical landscape undergoes rapid fragmentation, the mandate for empirical precision is more critical than ever. The PRS Group is proud that our historical metrics – notably those contained in the ICRG – served as a foundational element for a Nobel Prize-winning paradigm shift, and we remain dedicated to providing the precise data points necessary to navigate global structural risks in the years to come.