Political risk refers to the possibility that there is a chance that your business could be damaged by instabilities or political changes in a nation. This includes conflicts and unrest, changes in regime or government, changes or international relations between countries, or changes in policies, laws, or investment regulations.
Other important factors that contribute to political risk are commodity price volatility and liquidity crises as well as sectoral downturns. Think about conflicts in the Middle East, Arab Spring recurrent military coups, confiscation by local governments of assets, and disputes among nations over natural resources. While these may seem like unique risks to international businesses, they can still have an impact on your local business.
Types And Levels Of Political Risk
Many political risks can impact business, including potential political and economic instability, labor issues, product safety, and environmental laws. Here are some of the most important political risks.
Civil Unrest, Terrorism, And War
War, terrorism, and civil unrest can all pose a geopolitical risk – this is a form of political risk map. Expert comments on the Russian invasion of Ukraine. Companies that have interests in the region were left in a volatile situation due to the unrest in Ukraine at its end in 2013. They could be subject to damage to assets by political violence or broader expropriation.
Unilateral Decision Was Taken By A State-Owned Entity
Another common political situation is a unilateral state-owned entity (or ‘le fait de prince’) that decides to terminate unilaterally a contract signed by a foreign supplier, in retaliation to an unfriendly decision taken by the government of this supplier.
Geopolitical Decisions Made By Governments
While less disruptive, but no less violent, geopolitical decisions can be made at all levels by governments that can cause political risk and adversely affect businesses. These include foreign trading policies, tariffs, and tax regulations. Expert notes that there are many examples of political risk to the business, such as the embargo placed on Qatar by its neighbors, and the tensions between China and Russia.
Sanctions
An international business faces another risk with sanctions. The expert points out, that we expect our insureds to comply with international laws. If they breach sanctions, that would be not covered. And that’s not all. If an insurer paid out on a contract sanction, the insurer would be also exposed to international sanctions.
Jurisdictional Risk
Jurisdictional risks are also a significant political risk in international businesses, regardless of whether your company’s an SME that is expanding or a multinational multi-billion-dollar business. “Jurisdiction” refers to the laws which will govern the agreement that you sign with your partner. If the contract’s terms become unclear, it can lead to problems for the partner who is abroad.
If a European company contracts with an African firm under local law, it will not be subjected to the same legal framework or international arbitration. The expert points out that choosing local law can expose you to unexpected law changes or difficulty in enforcing a decision of a local tribunal. The insured is responsible for choosing the law that governs the contract. It is not an insurance risk. Non-respecting an international arbitration award could be considered a cause for loss and may therefore be covered under some political risk insurance brokers‘ policies.
Understanding the local legal environment and its complexity can make a significant difference in managing political risks.