Political Risk

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  • Topic: Risk, Political risk, Politics
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  • Published : March 29, 2011
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Risk and Reward in World Markets

Managing Risk in an Unstable World
As emerging markets generate greater shares of global supply and demand, companies need better methods to weigh political risk againstfinancialreward.

by Ian Bremmer


ountries in turmoil elbow one another off the front page at a dizzying pace: Lebanon follows Ukraine follows Sudan follows Argentina. Companies, meanwhile, fear unpredictable change, even as they seek profit from the opportunities change creates-a freshly privatized industry in Turkey, recently tendered oil blocks in Libya, a new pro-Westem govemment in the former Soviet republic of Ukraine. To help weigh dangers against opportunities, corporations mulling foreign ventures routinely consult economic risk analysts. But basing global investment decisions on economic data without understanding the political context is like basing nutrition decisions on calorie counts without examining the list of ingredients. Reassuring data on countries' per capita income, growth, and inflation -the bread and butter of economic risk analysis-often obscures potential threats from other sources. Iran's parliament, for example, last year passed legislation that complicates foreign companies'abilities to plant stakes in that country's telecom sector. The 2003 revolution in Georgia altered the strategic calculus for investment in Caspian Sea energy development. The Kremlin's politically motivated prosecution of business tycoon Mikhail Khodorkovsky sent a chill through Russia's oil market. And Brazil's 51

JUNE 2005

Risk and Reward in World Markets.
government is pressing both its agencies and its citizens to adopt open-source software, a policy that could inflict some nasty wounds on Microsoft and other technology companies. These are examples of political risk, broadly defined as the impact of politics on markets. Political risk is influenced by the passage of laws, the foibles of leaders, and the rise of popular movements - in short, all the factors that might politically stabilize or destabilize a country. The significance of any given risk, of course, depends upon the context ofthe investment decision. A hedge fund manager worries about developments that could move markets tomorrow, while the leader of a corporation building an overseas chemical plant needs a longer view. Strategists evaluating emerging markets must be especially vigilant (in fact, an emerging market may be defined as a state in which politics matters at least as much as economics). But even those businesses active only in developed nations should factor political risk into their planning scenarios. Most companies are already navigating the choppy waters of globalization, and none, presumably, are sailing blind. But corporate leaders may lack the sophisticated understanding this very complex subject requires. Political risk analysis is more subjective than its economic counterpart and demands that leaders grapple not just with broad, easily observable trends but also with nuances of society and even quirks of personality. And those hard-to-quantify factors must constantly be pieced into an ongoing narrative within historical and regional contexts. This article will help corporate leaders become better appraisers of information about the myriad shifting infiuences on global investments. Armed with that understanding, business strategists can minimize risks and seize opportunities far beyond their home shores. lan Bremmer is the president of Eurasia Group, a political-risk consulting firm, and a senior fellow at the World Policy Institute in New York. 52

Politics Is Everyone's Business
Corporations with investments in such opaque countries as Zimbabwe, Myanmar, and Vietnam have long understood how political risk affects their bottom lines, ln fact, historically, some of the business world's best political risk analysis has come from multinational corporations, like Royal Dutch/Shell and American Intemational Group (AIG),...
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