9 - geopolitical risk Flashcards
in the recent past, how was geopolitical risk thought of in a corporate setting?
geopolitical risk not formerly thought of as genuinely material, but big change in how political risk thought of.
used to be thought of in terms of international trade - risk that goods are destroyed or stuck somewhere. trade credit insurance used to insure the losses because of this.
developed markets let GPrisk fly under the radar
what made geopolitical risk become more relevant?
after the fall of the soviet union, people believed it was the ‘end of history’ - i.e. all countries were going to be similar to the US in culture and politics was almost not needed anymore
business and politics are much more intertwined, things like war/violance/civil unrest have huge effects. even in ‘safe, stable’ markets like the US and Uk and Canada, regulation can change extremely fast, e.g. taxation. big implications for property or intangibles. reputations especially — protests etc.
businesses have to understand they may fail because they didn’t keep up with political actions that have nothing to do with them - not just because of bad strategy etc.
why is political risk such a challenge for businesses?
big impact
hard to understand
boards/directors generally ignorant of things happening elsewhere. can’t be experts in everything.
hard to communicate
people have very different ideas about perceptions of risk and probability.
everyone understands what a tornado is or a fire - but hard to convey a political mood
hard to measure
hard to model, cat risks and credit risks are easy to measure financially. lack of data in situations to build an accurate model to show.
hard to avoid controversy
have to be able to talk about politics and, usually, have to take a position. companies don’t always like this stance - although some do
growing!
need a lot of manpower to keep on top of it.
what is ‘the geopolitical recession’?
QBE report - political instability and uncertainty has been high for the longest period of time since 1991.
Declining faith in democracy - rely on it less to solve problems
Resurgence of autocracy - losing democracies in the world, until around 2008 we were adding.
The G – ZERO:
used to have the G8 that would help manage crises (they were very stable manufacturing companies)
Geopolitical revisionism - countries starting to push boundaries in politics, like china
Regional Competition - e.g. russia ukraine, japan china
all of this makes job of geopolitical risk managers much harder
what are the classic kinds of political risk?
contract default and sanctions
expropriation
confiscation
nationalisation
trade barriers and regulatory trade
strikes, riots, civil commotions and war
why are contract defaults and sanctions a risk?
hugo chavez, venezuala. recently leader of national assembly (opposition) declared himself leader.
trump imposed a lot of sanctions on their biggest oil seller, and stopped an american subsidiary from buying oil from their venzuelan parent
meant assets were stuck in america and they couldn’t use them, american subsidiary had bought lots of oil and couldn’t get their assets so lost money
why is expropriation a political risk?
state takes property to sell or restate it. if done without permission will likely give compensation.
guatemala - banana republic (gov owned country) - guatemalan revolution and they had a new president. he decided to implement decree 900, bought land back from united fruits and wanted to give it back to farmers. united fruit then claimed land was worth much more than the offer (which was based on what they claimed it was worth for tax purposes). new revolution took this president out and the new gov reversed this, so this risk disappeared.
what is confiscation? how is it a risk?
state takes land and provides no compensation.
mugabe - zimbabwe, wanted to redistribute land from white families owning land to black farmers working it. started wanting to do willing sales, then started taking it from the white owners and giving it back, then escalated. legal challenges are ongoing for compensation. still a political risk now.
why is nationalisation a big risk?
common in developing resource rich markets.
sometimes for job protection or even government security.
example - transiberian railway. also thames water recently.
a lot of the money for the railway came from french bankers, but there was communist revolution takeover and all property was nationalised. they lost everything. when soviet union collapsed, french bank had kept bonds and wanted compensation. this was a huge political risk.
what are trade barriers and regulatory trade in terms of political risk?
canada and us have long history of using these against each other.
barriers without sanctions - step down from those with sanctions. very popular at the minute.
trump doesn’t like free trade, thinks there’s a lot of unfair competition from china. didn’t want to start a proper fight. put tariffs in place, on steel and aluminium. however they were both in NAFTA at the time which made it illegal to put these tariffs in place. dodged it by declaring canada a national security threat. tariffs have now been removed but in the short term can sink a business by doubling their costs or more. need to have enough cash on hand to survive until gov bail you out, as they often do
why do strikes, riots, civil commotions and war present such a big threat?
lots of physical damage and threat to employees.
people refuse to call conflict wars, for insurance purposes. the war exclusion - no insurer will offer to pay for damage caused by war because its endless.
most wars these days are civil. ukraine war set to be biggest single set of insurance losses in history. has presented very difficult decision for companies on whether they stay or go
what are the newer kinds of political risk?
corruption
terrorism
geopolitical cyber attacks
social activism
why is corruption such a big political risk?
business practice involves payment. corruption estimated to add about 10% to business transactions. winning business in corrupt parts of the world can mean making payments. if you know your competitors are making unauthorised payments.
bribery act - unlimited fine, long term reputational damage. companies pay huge fines when they’re caught.
how is geopolitical cyber attack a political risk?
75% of fortune 500 companies estimated to have been hacked. most companies say its not a question of when not if. also big lack of disclosure when these events occur. hard to tell who is individual attacker, who is in a network of criminals and who is geo-politically motivated. market describes these as cyber risk but in essence it is a political risk. smaller countries are generally bigger users of these, easy to deny and cheap to implement.
what is an example of social activism as a political risk?
united airlines carrying dentist off plane example. lost 225mil dollars in shareholder value. huge reputation loss. three days later united’s slot in hong kong was under threat.
