Political Risk Management Flashcards
Political risk
Political actions have the potential to influence an organisation in numerous ways. Thus, it’s crucial for businesses to stay abreast of such risks.
Why is political risk challenging
- Big impact
e.g. Seaworld example - Hard to understand
- Hard to communicate
e.g. non common terms / language are used - Hard to measure
e.g. it is not as simple as modelling a storm or credit risk. Not enough data. - Hard to avoid controversy
e.g. Taking a stance and forming an opinion on a matter is what advocacy entails. Some organisations oppose this practice, particularly in the United States, where political divisions run deep. - Growing
Many people need to be involved.
The geopolitical recession
- Declining faith in democracy
The financial crisis of 2008 had far-reaching consequences that extended beyond initial assessments. For instance, the search for employment remains a challenge for many individuals even today. Democracy has not sufficiently addressed or resolved these issues, leading some to contrast the situation with the perceived stability in China. - Resurgence of autocracy
- The G-ZERO
- Geopolitical revisionism
Countries like China are challenging this - Regional Competition
Classic kinds
- Contract Default and Sanctions
- Expropriation
- Confiscation
- Nationalisation
- Trade Barriers and Regulatory Change
- Strike, Riots, Civil Commotions and War
General notes
Since 2010, there has been a notable shift in the perception of political risk. Previously, it primarily revolved around factors like international trade and the potential for conflict, as seen in scenarios like the Ukraine war, where goods couldn’t be traded due to destruction. However, with the emergence of longer overseas supply chains, the realms of business and politics have become significantly more interconnected.
Businesses can no longer presume that political stability equates to policy stability. Laws, even in developed nations, have shown the capacity to undergo rapid changes overnight, as exemplified by shifts in taxation and tariffs such as the implementation of carbon taxes. This dynamic has significant implications for various sectors, including property markets and immigration policies affecting labor.
Examples
Seaworld - share price dropped by 60% lost $1billion. Black fish Netflix documentary came out and they never recovered.
Contract default and sactions
Fronted money that they can no longer access - facing total loss of asset. Venezuela example
Expropriation
State takes your property to sell it or restate it. They will pay you or provide compensation.
Confiscation
State takes your land and provide no compensation to you at all.
In Zimbabwe, the black majority historically worked the land. A black politician enforced compulsory land redistribution, transferring ownership from white to black families. This process, known as fast-track redistribution, involved seizing white-owned farms abruptly.
Nationalisation
To do to protect jobs, infrastructure. Strategic industry.
Trade barriers and regulatory change
U.S. and Canada had a great relationship for a long time. Overnight, Donald Trump decided to put in trade barriers against Canada. Businesses was suffering a 30-50% tariffs. This could bankrupt business overnight if they were not prepare with enough cash.
Strikes, Riots, Civil Commotions and War
Insurance policy : War exclusion. So if you call it something different, then it can be insured. War in Malaysia in 1950 for rubber was renamed as an “emergency”.
Apple: Cobalt, they need cover and protect their employees.
Big scale war is making a comeback. E.g. Ukraine war, E.g. Mcdonalds sold their chain to Russia for $1. Loreal fully diversified from Russia however, companies like Zara found it difficult
Corruption
2010, about $300billion in exchange of bribes to Russia 1/3 of funds.
UK bribery act: punishable by 10 years in prison and unlimited fines (long term reputational damage and bankruptcy of company).
Terrorism
Black Swan event: you will never see it coming (e.g. 9/11)
70% terrorist attack has been a lone wolf attack. It takes place in places where you can expect, Iraq, Syria, Pakistan.
This becomes a risk when the business halts operation because of a terrorist attack.
Geopolitical Cyber Attack
Discovery of hackers is average 205 days. Once you detect the hackers are gone and they have already penetrated the system.
Even when things happen, would you want to let the public know?
North korea
