Political Risk

Political Risk Has Increased Across the Globe, Leaving a Lasting Threat for International Business

Deteriorating trade relationships, election uncertainty and violence continue to threaten multinational companies’ overseas operations.
By: | October 15, 2018 • 4 min read

Whether through brick-and-mortar operations, trade relationships or investments, most businesses today have some type of international involvement. Which means most businesses are vulnerable to the unpredictable consequences of political tensions around the globe.

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Souring of political relationships can lead to adverse regulatory actions against foreign companies; instability creates credit risk that can result in nonpayment; and violence threatens the health and safety of employees and partners abroad.

In its report “Political Risk Map 2018: Tensions and Turbulence Ahead,” broker Marsh assessed the risk environments of North America, Latin America, Europe, the Middle East and Asia/Pacific, citing developments most likely to increase political risk for multinational companies this year. Some of the issues identified have already come to fruition.

The map is based on findings by BMI Research, which conducts independent political, macroeconomic, financial and industry risk analysis.

The firm scores countries on a 1 to 100 ‘short-term political risk index’ (STPRI), taking into account “a government’s ability to propose and implement policy, social stability, immediate threats to the government’s ability to rule, the risks of a coup and more.”

Lower scores represent less stability and greater risk. The U.S., for reference, has a STPRI score of 85, while Syria’s score is currently 27.9.

Trade Protectionism

A rise of protectionism around the world has led to the shredding of multiple trade agreements, and the Trump Administration has led the charge by pulling out of the North American Free Trade Agreement and imposing tariffs on China, sparking a trade war that could claim American consumers as victims.

The latest set of U.S. tariffs imposed in September on $200 billion worth of Chinese goods will likely force retailers to raise prices.

In Europe, the increasing likelihood that the UK will exit the European Union without a clear deal increases the risk of supply chain disruption, tariffs, regulatory penalties and snarled travel.

According to Marsh, “companies may need to prepare for such an eventuality.”

Uncertain Elections

In the U.S., November’s mid-term elections loom large. According to Marsh’s report, “A shift in power to the Democrats could create greater political gridlock.”

Overall, “changes in U.S. policy have been somewhat unpredictable,” a trend that “is expected to continue.”

Several Latin American countries are also holding presidential and legislative elections in 2018, which increases the risk of instability in the region.

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Italy’s general elections in March also saw the rise of populist, Eurosceptic parties that could weaken the country’s relationship with the rest of the EU and create uncertainty over its economic future.

However, “Eurosceptic parties have recently backed away from calls for a referendum on Italy’s eurozone membership, and the robust macroeconomic backdrop in Europe should prevent market confidence towards Italy from declining.”

Overall, “changes in U.S. policy have been somewhat unpredictable,” a trend that “is expected to continue.”

In Africa, some countries saw marked reductions of political risk after smooth elections and transitions, including Zimbabwe and Angola.

Zimbabwe’s STPRI score increased from 37.7 to 45.4. Others, however, have experienced more contested successions resulting in military mutinies and violent unrest, including Kenya, Gabon and Cote d’Ivoire.

Democratic Republic of the Congo, in particular, has seen a decline in the authority of its president Joseph Kabila and uncertainty over when elections will take place.

As the most unstable country in the region, its STPRI fell from 32.7 to 25.4.

Terrorism and Violence

The Islamic State remains a prominent threat in the Middle East — and globally — but other conflicts continue to plague the region.

According to the Marsh and BMI Research, “the threat of violence in Syria, as well as Iraq, Bahrain and Yemen, persists.

At the same time, Qatar continues to face a diplomatic crisis, while tensions between Saudi Arabia and Iran remain heightened.” Ongoing conflict between Israel and both Hezbollah in Lebanon and Hamas in Gaza also adds volatility.

Overall, “the threat of terrorism remains a concern, evidenced by attacks in Europe, Africa, Asia and elsewhere in 2017.”

Tensions between North Korea and the U.S. and other Asia/Pacific countries also casts a constant threat of nuclear attack and military action. The country’s latest missile test proved its capability to reach the U.S. mainland.

Adding to this exposure, Marsh’s report states that multinational companies can easily find themselves lacking coverage whether they buy political violence or terrorism policies.

“Whether it is a political violence or terrorism insurance policy that responds to a claim often depends on how insurers and governments view specific events.

“In some instances, terrorism and political violence insurers have denied coverage, claiming that a particular event should be covered under the other type of policy.”

Cyber Interference

Though not covered in Marsh’s survey of political risks, the emergence of cyber espionage, theft and release of private data, and social media subterfuge has had a significant impact on the political environments of several countries as well as international relationships.

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Russia’s meddling in the 2016 U.S. presidential election is well-recognized, but according to data compiled by the Washington Post, Russia has intervened in 27 elections since 1991.

According to their report, most of these efforts failed or made little difference in election outcomes.

However, “disinformation campaigns” launched via social media platforms have helped to sow distrust and amplify partisanship.

This summer, Twitter and Facebook identified and removed hundreds of fake profiles tied to propaganda campaigns run by Iran and Russia. &

Katie Dwyer is a freelance editor and writer based out of Philadelphia. She can be reached at [email protected]

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The R&I Editorial Team can be reached at [email protected]