A special interview with Global Security Consultant and Political Risk Expert, Paul Crespo
This is the first in a series of posts dealing with global security and risk management. While companies doing business internationally generally protect themselves against numerous risks, political risk is often ignored or accepted as fate. While there are many ways to manage and mitigate political risk, this post we will focus on political risk insurance (PRI).
Why is political risk a hot topic for international business today?
Paul Crespo: Riots in Brazil, uprisings in Egypt, nationalizations in Argentina, bailouts in Cyprus and economic crises across the Eurozone countries, official corruption in Russia, political uncertainty in China, systemic violence in Mexico, conflict in Syria, all remind us that the world can be a dangerous place to do business. With the tremendous increase in globalization, more and more small and mid-sized companies are expanding globally; often into very risky countries they know little about.
What exactly is political risk, and how is it different from say war risk?
Paul Crespo: Political risk is the risk of doing business in a given country based primarily on political factors. Political risk sometimes includes risks associated with war but is generally limited to interruption in business, or other loss, due to political conditions, political violence, civil unrest, revolution, insurgency, governmental confiscation of assets, wrongful calling of letters of credit, or other similar demands. These losses can occur with or without war. War risk is more specific and usually refers to these and other damages arising only during wartime and due to acts of outright war.
Political risks are usually assessed on macro-economic factors and political and social stability. These risks include political interference, legal and regulatory issues, integrity of rule of law, supply chain interruption, political violence, and the ease of doing business in a given country. But many other factors also play a role. Political risk also needs to be analyzed in a regional and global context.
What countries today have the biggest political risk?
Paul Crespo: Most of the countries with highest risk are in the emerging or “frontier” markets, but as we have recently seen from some European countries, no country is totally immune. Countries in active conflict such as Afghanistan, Iraq, Sudan, Chad or Syria would be high on the list, while highly repressive or unstable countries such as North Korea, Cuba, Somalia, Haiti, Iran and Venezuela would also be extremely risky.
According to Aon Risk Solutions, countries with downgraded risk ratings in 2013 were Algeria, Cameroon, Chad, Ethiopia, Madagascar, Mali, Namibia, Moldova, Turkmenistan, Uzbekistan, Panama and Paraguay.
But these lists leave out a lot of countries. Each country has to be assessed individually. In Latin America for example these recent political events have made investment in these countries more risky.*
- Argentina’s expropriation of Repsol;
- Bolivia’s seizing of power-grid company Transportadora de Electricidad and the nationalization of Glencore’s Colquiri mine, making the country a serial ‘nationalizer’;
- Paraguay’s impeachment of President Lugo by the country’s Parliament, which has been read as a “parliamentary coup”;
- Venezuela’s vast, ongoing expropriation program, with Siderurgica de Turbio, the latest victim.
What are the risks typically covered by political risk insurance?
Paul Crespo: Political risk insurance exists because most standard insurance policies exclude damages caused by state action, war, revolution or insurrection. One of the primary benefits of getting PRI is to facilitate financing for investments in risky countries.
Political risk insurance has been expanding to cover ever more sophisticated risks, including things such as arbitrary and confiscatory tax increases, or arbitrary “legal” business restrictions, and insurance policies can be tailored to specific needs, but the more common risks covered by political risk insurance include*:
- Sovereign non-payment. Failure of a foreign government or government entity to honor its obligations in connection with loans or other financial commitments.
- Political violence. Strikes, riots, sabotage, terrorism, malicious damage, civil war, revolution, insurrection or coup d’état.
- Expropriation of assets. Confiscation, expropriation, nationalization, and other foreign government actions which would deprive you of your rights of ownership or control of your assets.
- Exchange transfer. Being unable to make hard currency payments as a result of the imposition of local currency controls.
- Legal and regulatory. Financial or reputational loss as a result of difficulties in complying with a host country’s laws or regulations.
- Political interference. Host government intervention in the economy or other policy areas that negatively affect overseas business operations.
- Supply chain disruption. Disruption to the flow of goods and/or services into or out of a country as a result of political, social, economic instability.
* Aon Risk Solutions (www.aon.com/2013politicalriskmap)
Where can companies get political risk insurance? And how much can it cost?
Paul Crespo: There are a few established private insurers such as Zurich North America, AIG, Chubb, Lloyd’s of London syndicates, and new entrants like the Brit Group.
US companies can also benefit from independent government agencies such as the Overseas Private Investment Corporation (OPIC) and the Export Import Bank (Ex-Im Bank). These agencies provide political risk insurance to U.S. investors, lenders, contractors, exporters, and NGOs for investments in 150 developing countries, including “high-risk” countries.
Most international businesses can also get PRI through the Multilateral Investment Guarantee Agency (MIGA), an agency of the World Bank.
Political risk insurance is expensive, typically measured in percentage terms rather than “per mill,” or a tenth of a percent, as in standard property/casualty policies. Depending on the investment and the country though, political risk insurance could mean the difference between a catastrophic loss costing millions or more, or a minor hindrance to your business operation. The protection can be well worth the cost.
Be sure to read the other posts in this series:
Paul Crespo is a global security and political risk expert. A Senior Consultant with Trident Crisis Management Group, he has appeared on Fox News, CNN and other major TV news venues. He has varied experience in corporate security, kidnap and ransom negotiations, intelligence and diplomacy as well as military operations in hotspots from the Balkans to the Persian Gulf. A former officer in the US Marine Corps he was also assigned to the Defense Intelligence Agency (DIA) as a military attaché and posted to several US embassies overseas. Paul graduated from the Georgetown University School of Foreign Service, and has a Masters degree in War Studies from Kings College, University of London, and a Masters degree in International Relations from Cambridge University in the UK. Paul Crespo can be reached at firstname.lastname@example.org