484-595-0100
Lithium Market Set to Boom – A Risk Focus on the Lithium Triangle

Lithium Market Set to Boom – A Risk Focus on the Lithium Triangle

by | May 2, 2021 | Foreign Investment, Political Risk

As the global economy continues to put the Covid-19 slump behind it, the market for electronic devices and an anticipated surge in electric vehicle demand has re-sparked interest in lithium, a highly reactive and conductive metal vital to the global economy. Found in only a handful of countries, with a small number of companies dominating its production, demand and prices have the potential to boom. In such a scenario, the potentially conflicting demands of consumers, mining companies, and lithium-rich countries warrants a look at political risk, particularly in South America’s Lithium Triangle, the home of 58% of the world’s lithium reserves.

Why Lithium is in Demand

The critical component of lithium-ion batteries, lithium’s demand corresponds to global demand for manufacturing electronics such as smartphones and electric cars, which are expected to have a 70% increase in demand in 2021 and throughout the decade, driven by consumer interest and by growing efforts in many countries to phase out internal combustion engine vehicles. In Europe, lithium-ion battery production is projected to increase from 28 GWh (gigawatt hours) in 2020 to 368 GWh in 2025. United States’ production capacity of the batteries is projected to more than double from 42 GWh in 2020 to 91 GWh in 2025 according to S&P global market intelligence, though it also projects the U.S. share of the market to decrease from 9% in 2020 to 6% in 2025. According to Seeking Alpha, lithium demand will increase by 600% by 2040.

Low Prices and a Potential Boom

An oversupplied market in early 2020 saw a decline in lithium demand, mainly due to Covid-19. According to data from Trading Economics, (shown below), lithium prices declined 45% between July 2019 and July 2020.

Trading economics lithium Prices graph

Yet the chart above shows a recent spike in prices. Lithium prices jumped up 41% in the Chinese market in January 2021, causing a significant rebound in global price. Simon Moores, Managing Director of Benchmark Minerals (@sdmoores) noted the jump in early February.

Who is Buying Lithium?

China is by far the world’s biggest owner and buyer of lithium. China has gained a dominant position (called a “stranglehold” by one mining trade source) of the main precious metals in the electric vehicle supply chain: lithium, cobalt, and nickel. Additionally, China manufactures most electric vehicles made in the world. As countries move to transition away from internal combustion vehicles, a range of countries appear poised to increase domestic production of lithium-ion batteries and electric vehicles, with accompanying demand for lithium resources.

Simon Moores' tweet on global lithium prices

Where is Lithium Being Produced?

Lithium deposits and production are highly concentrated in a few countries, most notably Australia—the world’s largest producer of lithium—and the Lithium Triangle—Argentina, Bolivia, and Chile.  The Lithium Triangle has 58% of the world’s identified lithium resources, according to the January 2021 U.S. Geological Survey. S&P Global also projects a 199% in South American lithium supply as new lithium brines (saline groundwater enriched in dissolved lithium) begin production and existing salars (a lithium brine reservoir) increase production. Between 2008 and 2018, Australian lithium production jumped from 24.7% of the global lithium supply to 60%.[12] This is largely due to its ability to export lithium to China. According to a 2018 survey by Bacanora lithium, four companies produce 73% of the world’s lithium:

(Tianqi Lithium owns an additional 24% of SQM.)

Political Risk in the Lithium Triangle

The anticipated surge in lithium demand and prices has renewed focus on South America’s Lithium Triangle.

Bolivia

Bolivia, owing to its large reserves and a recent political history, garners the most attention regarding political risk.  The left-wing populism of former President Evo Morales has promoted state regulation of key resources for well over a decade. The Morales government nationalized the oil and gas sector in 2006 and power companies beginning in 2010.

Argentina

A painful economic recession in 2019 led to the electoral victory of current President Alberto Fernandez and Vice-President Christina Kirchner, a former president whose previous administration was noted for taking on heavy debt and state intervention into key sectors.  Under her administration in 2012, Argentina nationalized YPF, an oil company.  Just last year, the Fernandez administration expropriated its leading grain exporter, Vicentin, after it declared bankruptcy.  While Fernandez is enjoying a bump in popularity, with 56% of Argentinians expressing confidence in the overall direction of the government in 2020, (up from 24% 2019), the country’s economic struggles remain.  As with Bolivia, Argentina’s recent history of using expropriation and nationalization in economic policymaking makes it a political risk concern regarding how it plans to utilize its lithium reserves as demand grows. 

The Lithium Triangle

 

Argentina

  • Lithium resources: 19.3 million tons
  • 2020 mine production: 6200 metric tons
  • Largest deposit: Sal de Vida, 1.1 million metric tons
  • Estimated percentage of GDP from mining: 5.3%

 

Bolivia

  • Lithium resources: 21 million tons
  • Annual mine production: about 400 metric tons
  • Largest deposit: Salar de Uyuni, 5.5million metric tons
  • Estimated percentage of GDP from mining:
  • 13.5% (2015)

 

Chile

  • Lithium resources: 9.6 million tons
  • 2020 Mine production: 18,000 metric tons
  • Largest deposit: Salar de Atacama 7.5 million tons
  • Estimated percentage of GDP from mining: 10%, mostly from copper.

 

Sources: US Geological Survey, Mineral Commodity Summaries 2020;  Statista.com, Major countries in worldwide lithium mine production from 2010 to 2020; TradingEconomics.com

Chile

Chile has been a major source of lithium in recent years, but has disappointed investors as other countries have outpaced its mining growth.

While Chile has generally rejected expropriation of lithium investment and has historically allowed private investment in the mining sector, the role of the state in taxing and regulating mining is tied up in current debates in Chile about constitutional change, environmental protection, and community rights.  Chile’s legislature has re-opened a charged debate over mining royalities, while Chile’s President Sebastian Piñera vowed to facilitate private and state partnership to double the country’s output of Lithium carbonate to 230,000 metric tons.

Analysis

Despite the recent slump, lithium’s long-term profit potential remains strong owing its importance to the global economy.  In many resource-rich countries, such as those in the Lithium Triangle, lithium mining’s economic potential will draw foreign investors who will face powerful political demands to see tangible community benefits from mining. This political mix raises risk concerns not just of increased taxation or regulation, but of expropriation and nationalization in countries with a history of state-intervention in key sectors such as mining.

For international investors, political risk insurance helps safeguard investments in the event of nationalization, expropriation, confiscation, currency inconvertibility, civil unrest and property damage.

Pie chart of world lithium resources

Since 2004, Securitas Global Risk Solutions (“Securitas”) has helped clients worldwide develop credit and political risk transfer solutions that provides value on numerous levels.  As an independent trade credit and political risk insurance brokerage, Securitas is focused on developing comprehensive solutions that meet the needs of clients, ensuring complete understanding of policy wording and delivering excellent responsive service.

Recommended News

Let’s Get in Touch

Office

900 West Valley Road Suite 701, Wayne, PA 19087

Call Us

484-595-0100

Pandemic Invokes Force Majeure

Pandemic Invokes Force Majeure

by | Apr 16, 2020 | Foreign Investment, Political Risk

In mid-February, during the height of the Coronavirus crisis in China, the China Council for the Promotion of International Trade (CCPIT), a state-run organization, reported that it had issued over 1,600 “force majeure” certificates, in an effort to protect Chinese companies from legal issues related to non-compliance with their contractual obligations.  These certificates at the time covered a value of about $15.7 billion. By the first week of March, the number of Chinese force majeure declarations had risen to over 4,800 companies covering contracts worth $53.8 billon.

What is a “Force Majeure” Declaration?

When a company declares “force majeure,” it is invoking a clause, typically noted in its contract with its clients, that states that due to circumstances beyond its control, it is unable to fulfill the terms of the contract.

Invoking the clause is an effort to typically delay or possibly be released from contractual obligations without legal or financial liability.  According to one legal definition: “Generally, force majeure refers to the occurrence of an extraordinary event beyond the reasonable control of a party and prevents that party from performing its obligations under a contract.”

Force majeure clauses are common, but vary from industry to industry.  On a personal level, property owners may be familiar with mortgage contract language stating various natural disasters or “Acts of God” that can relieve the owner of contractual obligations.

The oil and gas sector and other industries that utilize long-term supply contracts often have extensive force majeure clauses that also include human interventions such as government action, terrorism, war, and strikes that can cause a break in operations beyond the control of one of the parties to a contract.

From industry to industry, and company to company, the details and specificity of force majeure clauses vary widely, and are being tested by the economic disruption wrought by the Coronavirus pandemic.  According to one source, “if you’ve seen one force majeure clause, you’ve seen one force majeure clause.”

According to the World Bank, there is no template or standard wording for force majeure clauses or for the events that may or may not cause a force majeure declaration.

While no template exists, global organizations are attempting to introduce some basic standards. For example, the International Chamber of Commerce (ICC) updated its model force majeure contract language only recently (it includes terms like “plague” and “epidemic”).

While these efforts are useful in moving international business toward common terms and language, declarations of force majeure still remain subject to often dueling legal opinions and the decisions of specific courts and arbitrators.

A Legal Burden

According to one analysis, China’s above-noted attempt to offer companies blanket force majeure certificates are likely to be contested legally.  One reason noted is that the standard for a force majeure declaration may be different domestically in China than it is internationally – where many trade contracts are based on English common law, in which force majeure events are extensively enumerated and specific.

Some contracts may not contain reference to public health events such as epidemics or pandemics.  Additionally, if challenged legally, the burden is on the company making the declaration to prove that the events were unforeseen, unavoidable, and left the company in an impossible situation with no alternatives to meet its contractual obligations.  Already, some companies have taken their Chinese counterparts to task, rejecting their force majeure claims and setting up legal battles.

Seek Legal Advice

To avoid costly legal conflict, companies will often seek out a workable solution to avoid a force majeure declaration. The need to work out the details of myriad contractual obligations is said to be one of the main reasons that the International Olympic Committee and organizers of the 2020 Tokyo Summer Olympics took a longer time than most other sports leagues and planners of sporting events to declare a postponement due to Coronavirus.

The input of a trained legal advisor is invaluable when seeking to understand force majeure clauses and tailor contract language that is either specific or broad enough to account for a range of potential events – including public health crisis.

Legal counsel can also help draft language that conforms with both the details of doing business in a specific industry and existing legal precedents concerning force majeure declarations.

Get Proper Coverage

In the current environment, there is considerable likelihood that companies will face a force majeure declaration from either a supplier or buyer, or may even have to contemplate making a such a declaration due to unforeseen and unavoidable circumstances of Covid-19.

In addition to sound legal advice, companies need to have insurance coverage that meets a range of contingencies including force majeure.  The team at Securitas Global Risk Solutions has the necessary experience to discuss and advise clients on force majeure and trade credit insurance.  If you would like to discuss further, please contact Peter Seneca at 484-595-0100 or email him at pseneca@securitasglobal.com.

Disclaimer: The text above is for informational purposes only, and does not constitute legal advice.  Seek the input of a legal practitioner for more detailed information and advice on contract language and force majeure declarations.

 

Recommended News

Pandemic Invokes Force Majeure

Pandemic Invokes Force Majeure

Apr 16, 2020

In mid-February, during the height of the Coronavirus crisis in China, the China Council for the Promotion of...

Reshaping Global Trade

Reshaping Global Trade

Mar 18, 2020

The rapid and continuing spread of novel coronavirus (Covid-19) continues to have a significant social impact as well...

Let’s Get in Touch

Office

900 West Valley Road Suite 701, Wayne, PA 19087

Call Us

484-595-0100

Reshaping Global Trade

Reshaping Global Trade

by | Mar 18, 2020 | Export Credit Insurance, Foreign Investment, Political Risk

The rapid and continuing spread of novel coronavirus (Covid-19) continues to have a significant social impact as well as a profound hit to the global economy.  At the time of the World Health Organization’s (WHO) declaration of a global pandemic on March 11, 2020, the human toll of the disease stood at over 121,000 reported cases and 4,373 deaths spanning 110 countries.

These numbers are increasing, and the social and economic fallout continues.  Stock market declines in major economies reflect growing difficulty doing business and investor uncertainty about the near future.  Stock markets in the US fell nearly 10% on average on March 12 alone, with European stock markets falling well over 10% on the same day.

It is now obvious that no industry or economic sector will be spared by the impact of the virus.  Notable declines in tourism and airline industries are reverberating across supply chains.  Airline losses are estimated to be near $113 billion with governments mulling an economic stimulus for that industry.

Accordingly, trade flows are down, initially owing to the heavy toll of the virus on Chinese and other Asian manufacturing hubs, but also due to slowing consumer confidence and store closures worldwide.  Initial layoffs in the Port of Los Angeles, the first in the US directly owing to the crisis, have begun while both manufacturing and construction industries are trying to postpone difficult measures.

As businesses close, events are cancelled, and employees are told to stay at home in impacted countries, not only has the now pandemic cause a global downturn, but it’s unclear how long it will last and if it will lead to a recession.  Only recently, Goldman Sachs predicted that the US economy would grow only 0.9% in the first quarter and would not grow at all in the second quarter of 2020.

While the length and severity of the pandemic remains unknown, a fair follow-on consideration is how the global economy will prepare itself for the next crisis, and what the long-term impact will be on global trade flows.

The pandemic has shed a light on rising pre-crisis corporate debt.  Concerns for vulnerably indebted companies and sectors and helped to spur central banks around the world to drop interest rates recently.  Additionally, companies with too much supply chain exposure in China are likely to pursue efforts to diversify their supply chains, likely to other Asian locations or to North America.

As of March 3, 2020, Chinese companies had issued over 4,800 force majeure certificates, stating their inability to meet their contractual obligations with clients.

The need for companies to diversify their supply chain exposure and conduct systematic risk analysis is becoming more and more apparent.  Will there be a shift, and will it help US manufacturers and exporters? As always, the interconnectedness of the global economy makes it difficult to gauge.

While US importers may look to diversify away from China, US exporters to China will no doubt suffer.  Already, some analysts think that China will not be able to meet its obligations to increase purchases of US exports.  It’s possible that North American manufacturers, with a new free trade agreement in place, could present a viable competitor to overseas supply chains that look increasingly risky, post-coronavirus.

Risk is the operative word and what this unfolding pandemic has shown is that preparation and risk assessment are crucial for companies in today’s economy.  A major part of this effort should include proper insurance coverage for a wide range of contingencies.

Securitas Global Risk Solutions (“Securitas”) is an expert in helping companies develop trade credit and political risk transfer solutions that protect businesses from buyer non-payment and geo-political risks.  As a specialty independent brokerage, Securitas is focused on developing comprehensive solutions that meet the needs of their client.

Recommended News

Pandemic Invokes Force Majeure

Pandemic Invokes Force Majeure

Apr 16, 2020

In mid-February, during the height of the Coronavirus crisis in China, the China Council for the Promotion of...

Reshaping Global Trade

Reshaping Global Trade

Mar 18, 2020

The rapid and continuing spread of novel coronavirus (Covid-19) continues to have a significant social impact as well...

Let’s Get in Touch

Office

900 West Valley Road Suite 701, Wayne, PA 19087

Call Us

484-595-0100

Is Global Trade in Quarantine?

Is Global Trade in Quarantine?

by | Feb 27, 2020 | Credit Insurance, Foreign Investment, Political Risk

The outbreak and spread of the Coronavirus disease (COVID-19) has stoked global fear of a pandemic.  Disruptions to business in China and other affected countries are rising as are worldwide disruptions to travel and trade as countries scramble to put safeguards in place to stem the spread of the virus.

For companies with overseas operations and business, this latest public health crisis underscores the importance of planning for the unexpected, including an annual comprehensive assessment to properly mitigate the risk of doing business overseas where situations can change quite rapidly.

Like earlier epidemics such as SARS in 2002-2003 and the Ebola outbreak of 2014-2016, efforts to contain transmissions involve a range of decisions to quarantine the sick and minimize human-to-human contact.  This proves particularly difficult in a global economy in which the flow of goods and people are both commonplace and vital, even in areas of the world seen as remote or rural.  Outbreaks raise public concerns and even outright fear in both nearby countries and worldwide, and can lead to political decisions in non-crisis countries to suspend travel or block the transport of some or all goods.  These actions are often sudden and unforeseen, with reaching consequences for complex supply chains.

Stories of the economic impact of Coronavirus are developing.  At present, the disease remains mostly centered in China and that country is expected to see the most drastic economic impact.  Already analysts are predicting both a significant first-quarter economic slowdown and an overall GDP decline for 2020 as many businesses remain closed or people remain at home, especially in the auto-manufacturing hub of Wuhan at the center of the crisis.  With China’s economy already cooling, (GDP fell to 6.1% in 2019 from 6.6% in 2018) it remains to be seen what the impact will be on China’s export-driven growth, particularly electronics exports or its $280 billion per year textile exports.

Companies doing business in China are in a scramble to adjust their operations and specific industries are noting shocks.  American exporters of agricultural products and machinery are already feeling the effects of the slowdown, as China struggles to keep food supply chains open in the face of quarantines and declining consumption.  West Coast port traffic is already reporting a significant decline in traffic. Other notable examples include the cruise ship industry and tourism in general, beset by virus outbreaks on ships and growing travel restrictions. In addition, the luxury goods industry, which enjoys popularity among wealthier Chinese consumers and tourists, is projecting a $40 billion decline in sales in 2020.

The Coronavirus outbreak highlights the need for international companies to engage in a range of contingency planning to anticipate how to adapt business operations in the face of risks such as public health crises, natural disasters, energy shortages, slow or broken lines of communication and political risk.  An entire field of business continuity planning encourages companies to regularly assess operational and financial risk by actively planning and developing working contingency plans.  Proper insurance coverage, just one aspect of this, is crucial so that cash flows and financial obligations can be protected, even in the case of unforeseen breaks in trade.

Since 2004, Securitas Global Risk Solutions (“Securitas”) has helped clients across the United States develop trade credit and political risk transfer solutions that protect businesses from buyer non-payment and geo-political risks.  As a specialty independent brokerage, Securitas is focused on developing comprehensive solutions that meet the needs of their client.

Recommended News

Pandemic Invokes Force Majeure

Pandemic Invokes Force Majeure

Apr 16, 2020

In mid-February, during the height of the Coronavirus crisis in China, the China Council for the Promotion of...

Reshaping Global Trade

Reshaping Global Trade

Mar 18, 2020

The rapid and continuing spread of novel coronavirus (Covid-19) continues to have a significant social impact as well...

Let’s Get in Touch

Office

900 West Valley Road
Suite 701, Wayne, PA 19087

Call Us

484-595-0100

Officially Launched: U.S. International Development Finance Corporation (DFC)

Officially Launched: U.S. International Development Finance Corporation (DFC)

by | Jan 30, 2020 | EXIM, Export Credit Insurance, Foreign Investment

U.S. International Development Finance Corporation Launches

The end-of-the-year appropriations deal struck by Congress and the Trump Administration brought a number of policy changes offering significant opportunities for U.S. export and investment growth overseas.

A new agency, the U.S. International Development Finance Corporation (called the DFC) began operations on January 2, 2020.  Created by the BUILD Act of 2018, the DFC begins its first year in operation having secured a working $299 million budget for 2020.

Along with the recent seven-year reauthorization of the EXIM Bank, the DFC represents a significant step by the United States in asserting a larger and more capable role in international trade and investment.

What Is the DFC?

The International Development Finance Corporation is a merger of the former Overseas Private Investment Corporation (OPIC) and the Development Credit Authority, formerly housed in the U.S. Agency for International Development, the DFC represents an effort to streamline and bolster American support for private-sector projects in low and lower-to-middle-income countries.

In emerging markets, the role of state-run and multilateral Development Financial Institutions (DFIs) are growing, raising calls for the U.S. to adapt and expand its efforts, while also countering the increasing economic role of China.  While China puts billions into emerging market projects, mainly in infrastructure development, its private-sector development finance role is emerging.  

EXIM Shipping Containers Miami Port

The DFC Brings New Changes

The DFC significantly expands the capacity of the U.S. government to support private-sector-led development projects.  The DFC now has a $60 billion investment cap, up from OPIC’s $29 billion cap.  But unlike OPIC, the DFC has a more explicit mandate to focus on low- and middle-income countries (though waivers can be obtained for high and middle-income country projects that meet U.S. national interest, or that specifically focus on poor and vulnerable populations.)

In addition to adopting OPIC’s debt financing and political risk insurance portfolios, the DFC is now able to fund project feasibility studies and technical assistance grants and can lend in local currency to hedge against currency risk.  The most notable change, however, is the DFC’s new capacity to take an equity stake in investments (Congress approved $150 million for 2020) allowing it to play a stronger role in projects chosen for financing.

The DFC will be allowed to take up to 30% position in any project.  The DFC will also adhere to OPIC’s lending standards for social and environmental risk and impact.  While OPIC was formerly tasked to work with companies that were either U.S. based or included a U.S. partner, the DFC has only a mandate to prioritize U.S. companies. 

Concerns raised since the passage of the BUILD Act in 2018 about the amount allocated for DFC equity investments (considered low), accounting rules about the budgetary treatment of equity investments, and a prohibition on the DFC’s use fees to offset its operating expenses were not addressed in the time between the passage of the BUILD Act and launch of the DFC, but are expected to be raised in the future by congressional supporters of the new agency.

For more information about the DFC, see https://www.dfc.gov/

About Securitas Global Risk Solutions

Since 2004, Securitas Global Risk Solutions (“Securitas”) has helped clients across the United States develop solutions to mitigate credit and investment risk across the world.  As a specialty insurance broker focused on developing trade credit and political risk insurance programs, Securitas is focused on developing solutions that meet the needs their clients.  See our Website at http://www.securitasglobal.com/ for more information, or contact us at:

Telephone: 484-595-0100

Fax: 484-582-0111

Recommended News

Let’s Get in Touch

Office

900 West Valley Road
Suite 701, Wayne, PA 19087

Call Us

484-595-0100

Guide to Political Risk Insurance

Guide to Political Risk Insurance

by | Nov 25, 2019 | Foreign Investment

New and emerging markets offer incredible opportunities for investors and corporations – however, not without risk. Political and economic instability in these markets can pose a significant threat to businesses and can lead to catastrophic losses for investors and lenders.

What Is Political Risk?

Political Risk, also known as “geopolitical risk,” is the risk of loss of assets, income, or property suffered by corporations, lenders, or investors as a result of political changes or instability in a country.  Political risk is present with physical assets located in a host country and when trading with a foreign buyer or a sovereign owned enterprise. 

Political risks can drastically impact a company’s investment in a host country.  Foreign government intervention or political violence can render a company unable to operate or withdraw their capital from a host country.

What are the Common Types of Political Risk?

The most common types of political risk are government confiscation, expropriation, nationalization (CEN); currency inconvertibility (CI) and political violence (PV). 

1. Government Confiscation, Expropriation or Nationalization (CEN): Foreign government action involving seizure or confiscation of assets, forced divestiture or forced transfer of ownership of assets, or policies (such as regulatory requirements or tax laws) enacted to hinder a firm’s business operations in such a way as to have the effect of expropriation, all fall under this heading. Often done by governments to shore up domestic political popularity, increase government revenue, or exert control over a critical economic sector, expropriation usually contravenes international agreements and causes a firm to lose its ability to operate its overseas investments or assets.

2. Currency Inconvertibility: This includes the imposition of restrictions on conversion of local currency revenues to major currencies (such as US Dollars or Euros), or capital controls, which prevent remission of earnings from an affected country. Currency controls are enacted by foreign governments or their central banks often in response to a rapidly accelerating currency crisis or a sudden change in government or economic policy and have the effect of forcing a firm to limit or end its overseas operations.

3. Political Violence: Civil strife such as rioting, violent protests, terrorism, and war are all forms of politically-motivated violence that can either cause the physical destruction of a firm’s assets or the creation of a situation in which business operations are curtailed or impossible.

How to Protect Against Political Risk

Staying engaged and aware of political events and trends in a country or region is important when doing business internationally.  Working with trusted sources of information both domestically and internationally is important to assessing risk and developing strong procedures well before a crisis develops.  Professional risk analysts as well as local sources of information such as business partners can be valuable sources of information. 

Other suggestions to prepare for political risk include:

1. Understand Your Supply Chain: Supply chains are complex and a firm’s international operations and those of business suppliers can be impacted by political crises in nearby countries or even locations far beyond a specific place of business. Think about possible bottlenecks.  Having backup or contingency plans in the case of supply chain disruptions can help mitigate losses or disruptions due to unforeseen events.

2. Know the Decision-Makers: Having partners with a strong economic profile in host country of foreign operations and hiring local employees may reduce your exposure to political risk.  A relationship with local bank or an international or regional bank with local operations may help to hedge against political risk.  Local banking may facilitate foreign exchange conversions and transfers.  Additionally, local banks may be familiar with options to shield some of your assets in the case of a crisis or alert you to political trends in the financial sector that could impact your investment and business operations.

3. Understand Your Credit Risk: An important consideration is that a country’s political and economic difficulties may have implications on credit.  Often political crisis can cause spark a series of events leading to a steep and protracted currency devaluation which leads to buyer payment default. Having a credit risk contingency plan, including a trade credit insurance policy, is another aspect of overall political risk planning to consider.

4. Consider Political Risk Insurance: Political risk insurance is an important part of any risk protection strategy.  Protection against risks noted above such as expropriation, violent conflict, political unrest, and currency controls protects your business, investors, and other stakeholders and allows your company to more confidently conduct international business.  With a strong political risk policy in place, companies can be more focused on their growth strategies in specific countries and in the short-to-long term, particularly in emerging markets or developing economies. 

Protest on the Streets Aerial ViewPhoto by Oscar Chan from Pexels

What Does Political Risk Insurance Cover?

There are many political factors that are outside the control for a foreign investor which could cause a loss.  A political risk policy typically includes but is not limited to:

1. War and Political Violence or (“PV”)

2. Confiscation, Expropriation and Nationalization or (CEN)

3. Deprivation of Capital

4. Embargo

5. License Cancellations

6. Currency inconvertibility / Non-Transfer

7. Forced Divestiture

8. Contract Frustration / Non-Honoring

9. Unfair and Fair Calling of Bonds

Who Uses Political Risk Insurance?

Corporations, lenders, and investors with physical (fixed/mobile) assets, contracts, investments and international operations in emerging markets. Some typical clients include:

1. Corporations and corporate investors with ownership of overseas financial assets, or international business operations such as joint ventures or subsidiaries that are exposed to financial risk from government policies.

2. Corporations or investors that own overseas physical assets that are exposed to property damage from political violence.

3. Financial Institutions that finance trade transactions, international projects, or other international exposure that is potentially threatened by political risks.

4. Importers and Exporters that have agreements with either private companies, foreign governments, or state-owned enterprises and are exposed to risks to trade flows from political factors.

5. Contractors, developers, and other service providers that do business with foreign governments or state-owned enterprises.

6. Companies in sectors such as mining, engineering, construction, and other services, where both contractual obligations may be threatened by political risks or actual physical assets are at risk of being damaged, expropriated, or become inaccessible due to political factors

How Do I Get Political Risk Insurance?

A political risk insurance broker can assist in developing a policy that meets the specific needs of your business and addresses a country’s political risk in a comprehensive way.  A broker can assist in explaining many of the definitions and details of a political risk insurance policy and help you to identify areas of risk you may not have previously considered.

Why Use Securitas Global Risk Solutions?

Since 2004, Securitas Global Risk Solutions (“Securitas”) has helped clients across the United States develop credit and political risk transfer solutions that provides value on several levels.  As a specialty independent trade credit and political risk insurance broker, Securitas is focused on developing comprehensive solutions that meet the needs of their clients, ensures complete understanding of policy wording and delivers responsive excellent customer service.

Let’s Get in Touch

Office

900 West Valley Road
Suite 701, Wayne, PA 19087

Call Us

484-595-0100