Why Political Risk Matters
19/5/2009Duncan Wood for Treasury and Risk:
Political risk can be devastating. Ask the mining companies in the Democratic Republic of Congo (DRC) that have been forced over the past two years to renegotiate their contracts. Ask HSBC, whose headquarters in Istanbul was wrecked by a terrorist attack in 2003. Ask the hedge funds that bet Brazilian stocks would tank after firebrand left-wing president Luiz Inácio Lula da Silva took office in 2003, then suffered heavy losses when the exact opposite happened.
Companies have always faced these kinds of risks: terrorism, civil unrest, regulatory change, the seizure of assets. But the exposure has never been as great as it is today, argues Christa Davies, CFO of Aon Corp., the global risk-management consultancy and insurance brokerage based in Chicago: “People are doing business in more countries—and a more diverse range of countries—than ever before. They might have operations on the ground, or they could be exposed through their supply chains, by sourcing product components or services in certain locations, or simply through the customer base. It absolutely has to be a core consideration in the way people run their business.”
… “while companies have a formal, rigorous approach to the management of other exposures, like currency risk or business continuity, they usually tackle political risk on an ad hoc basis.”
Simply said, political risk refers to political decisions unduly affecting businesses. However, in many occasions political decisions are caused by geopolitics, that is, by the country’s position both in the global and in the regional political system, and/or by its internal ethnic, religious, and territorial configuration.
Therefore, a thorough understanding of political risk must encompass geopolitics.
