WHAT IS POLITICAL RISK?

Very simply, "political risk" refers to the possibility that political decisions,

conditions, or events in a country will affect the business climate in such a way that

investors will lose money or not make as much money as they expected when the

investment was made.

"Political risk assessment" is an effort to determine the level of risk or the

probability of losses, given the character of the situation. Assessment includes provision

of a forecast, since there is much less utility in simply describing conditions today than

there is in what the conditions will be in 18 months or five years when investments

achieve some kind of maturity.

"Political risk analysis" is the effort to determine the causes or sources of risk

and to map the relationships between causes. Analysis both relies on and contributes to

theory of political risk. For many risk analysts, the theories are verbal; for others they are

statistical or mathematical. For analysis to be useful to the investor, ultimately theories

must be presented in verbal forms for consumption by the broad base of likely business

users.
POLITICAL RISK ASSESSMENT

In today's global economy, corporations (and individuals) are confronted with a

broad spectrum of risk, among which is political risk associated with foreign ventures and

investment. With the success of overseas operations influenced by the actions of host

governments and competing political actors, political risk management has become an

essential component of any profitable foreign investment strategy.

The economies of the developing world offer a wealth of investment opportunity.

Growth rates in these emerging markets are projected at two to three times those of the

industrialized economies over the course of the next decade. The risks associated with

operations in unfamiliar and potentially hostile environments, however, are also greater.

Violent political conflict (i.e., civil war, terrorism, racial and ethnic discord, coup d'etat,

and systemic collapse) can have profound negative effects on foreign direct and indirect

investment. The business environment is also influenced by elections, government

corruption, labor disputes, institutional reform, and shifts in public policy.

Political risk analysis, however, entails more than simply identifying sources of

risk. It is a dynamic process, which evaluates opportunity as well as risk, providing a

compass for investment in the expanding global marketplace.

Decision-Makers need information in order to make effective judgments on the

level of operational risk an enterprise may face; unfortunately such judgments are often

made without consideration of the 'human variables' that contribute to a specific

operational risk or conflict of interest that an investment may lead to.

To ignore the behavioral factors that impact on risk and create conflict, will

seriously undermine any organizations risk management strategies. Unfortunately, many

organizations fail to understand the relationship between conflict and risk rendering their

risk management strategies inappropriate.

Conflicts are instigated, driven and controlled by people on a micro level, whilst

the influence of group membership, whether Cultural, Ethnic or Political combined with

personality and situational characteristics must be afforded sufficient attention in order to

provide a real insight into the risks an investment may face. Using this ethic we should be

able to identify the potential risks to an enterprise or potential investment and then apply

effective risk management alternatives to negate these risks.

conflict that arises from group membership. The approach would allow providing a new

market intuitive that is reliable when exploring enterprise risk. In essence, it operates

both a 'Top Down' inspection of risk that examines the wider social and Political

variables combined with a 'Bottom Up' investigation of the individual personalities and

Decision Making behavior of key individuals (adversary's) during country risk

assessments.

The analysis should not only provide highly specialized customized reports that

detail government stability, threats from third parties such as Pressure Groups, Local

Government or Rival Competitors, but also examine the psychological foundations of

such behavior, whilst addressing the operational and security implications of the

contributing factors.

We would also need to be able to integrate non-confrontational strategies that are

designed to enhance business continuity, based on resolving predicted conflicts of

interests with third parties that may arise whilst operating within the region of focus.

Such conflicts may arise in the form of environmental or cultural issues, insurgency, local

political bodies, and other groups with rival interests. We should identify potential

operational risks to an investment, and also offer a strategy to resolve these risks. In

addition, an appropriate profiling of key individuals which will be combined to produce

negotiating strategies for key decision-makers, would be in order to pre-empt conflicts

and resolve them before they escalate and damage business continuity.
A MULTI LEVEL APPROACH

Many politically unstable regions are subjected to numerous sub conflicts that

escalate towards extreme levels of conflict, such as Civil War, Ethnic Cleansing and

Terrorism.

These sub conflicts range from cultural and ethnic differences to social and

economic variables, that often have a significant impact on international investments

opportunities. Police, Military, local government corruption and organized crime in a

cocktail of political instability and cultural and ethnic differences, a specialist risk

management support is required when considering investment opportunities in a such

potentially hostile environments.

Overall analytical orientations can address the following risk management variables:

• Political instability, including state corruption and civil war;

• Geopolitical influences, resulting from and including international conflicts;

• Terrorism, including Political, Religious and Environmental terrorism;

• Cultural and ethnic differences which often lead to local conflict issues in

operational implementation;

• Organized crime, including piracy, drugs and arms smuggling routes, kidnap

and ransom;

• Environmental Disasters, whether by the result of sabotage or acts of god;

• Technical Risk.
CONCLUSION

An insightful political risk assessment should provide solid investment prospects

for healthy returns in any countries considered for investments.