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.
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.
Photo 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.
Assessing country or regional risk is a crucial part of a trade risk strategy and is necessary for conducting international trade. Understanding laws, customs, and regulations of any country are paramount but it’s also prudent to anticipate how external factors such as your buyer’s creditworthiness, conflict, violence, or other political/economic uncertainty can impact trade or cross-border investments.
Risk insurance provides US exporters with protection against buyer non-payment as well as cross-border investments against political risk such as confiscation, expropriation, nationalization, forced abandonment or political violence. Trade credit and political risk insurance is a specialty risk transfer solution that helps US companies on many levels when trading and operating in the global economy.
For companies seeking to begin or expand their overseas operations, exporting remains a great opportunity to generate growth, but there are always risks. Right now, here are five major risk areas/issues that impact global trade:
1. China
The ongoing trade dispute between the U.S. and China has garnered the attention of world markets and taken a sort of on-again, off-again nature. After over a year of negotiations, a trade deal between the two countries seemed to be closer to reality after a meeting between President Trump and Chinese Premier Xi Jinping in December 2018 (in which a 90-day deadline for an agreement was agreed upon). While that deadline has come and gone, the trade war has again ratcheted up along with raised concerns of overall global trade risk. The Trump Administration announced an intention to place a new set of tariffs on August 2, 2019 which again roiled global markets but also led to China retaliating by devaluing its currency on August 5. In the most recent salvo, the U.S. has labeled China a currency manipulator. It remains unclear whether this new round of back-and-forth will delay the anticipated trade agreement, which is likely to include language as well as specific targets for increased U.S. exports to China.
While a recent economic report appears to show that China is weathering the impact of the trade war, second quarter numbers from China showed that overall growth slowed, the slowest rate of growth since 1992. While the trade war has notably hurt a number of U.S. exporters, such as soybean producers, slowing domestic demand in China also presents a concern for potential U.S. exporters.
Added uncertainty in China relates to growing protests in Hong Kong. Initial protests over a bill to allow suspects in Hong Kong to be tried in courts in mainland China have now spiraled into their fourth month with protests growing larger, more aggressive, and taking on a more broadly pro-democracy tone. While worries of a heavy-handed crackdown are present, it remains unclear how or when the protests will end in what is a vital trade and business hub for the Chinese economy.
2. Brexit
While the UK’s referendum on leaving the European Union was over three years ago, the details of translating the narrow victory of “Leave” voters into a workable political and economic agreement has been agonizing. While new Prime Minister Boris Johnson has pledged that the UK will leave the EU “do or die” on the new deadline of October 31, 2019, his narrow one-vote majority in the British Commons leaves him, like his predecessor Theresa May, little room to maneuver.
Significant concerns over the economic and social impact of Brexit, as well as its impact on the hard-won peace in Northern Ireland has UK politics split 3-ways with no consensus – between those who want to an immediate or “hard” Brexit regardless of consequences, those who want to remain in the EU, and those who want a negotiated, gradual exit from the EU that avoids a hard border between Ireland and Northern Ireland. These divisions internally divide both UK’s two main parties, Labour and Conservative, with only the smaller Liberal Democrats being fully committed to remaining in the EU.
U.S. and UK trade negotiators have met to discuss a possible post Brexit free trade agreement that could hold a number of opportunities and risks for U.S. exporters.
3. The Middle East
While hardening battle fronts and shifting alliances have the Syrian civil war in a current stalemate, the rivalry between Iran and Saudi Arabia is center stage, with the two in proxy conflict both in Syria and in the ongoing civil war in Yemen. U.S. – Iran tensions have again raised tensions in the Persian Gulf with Iran taking a more aggressive stance toward U.S. and British economic interests. The United States’ NATO ally Turkey adds another element to the overall regional turmoil, with the two countries at odds over Turkey’s purchase of military hardware from Russia and its antipathy to U.S.-backed Kurds in both Syria and Iraq.
In North Africa, Egypt’s economic growth is notable (5.6% annual GDP growth in July 2019). The country enacted several IMF-backed economic reforms in recently years and labelled itself a “global investment destination” as part of the effort in 2018. However, there is uncertainty as to the long-term sustainability of the reforms, with a recent report noting that poverty actually increased since 2015. The country’s ability to help extend economic growth more broadly is key to reducing uncertainly among investors.
Tunisia, the lone success story of the Arab Spring, recently lost its 92-year-old President Beji Caid Essebsi after a long illness. Caid Essebsi, elected president in 2014 after fall of the Ben Ali dictatorship, was the country’s first directly elected head of state. His willingness to broker compromise played a central role in guiding Tunisia’s democratic transition and the country’s ability to democratically replace the deceased leader will again test the strength of its political institutions. The long-time president of neighboring Algeria, Abdelaziz Bouteflika resigned on April 2, 2019 after a wave of protests. While the country’s military has taken over the role of stewarding the country’s government, the end of Bouteflika’s notably corrupt 20 year rule has raised expectations among Algerians for possible political and economic reform.
4. Latin America
The issue of migration and its impact on relations between the United States, Mexico, and the countries of Central America has come to dominate political dialogue and rhetoric. For the U.S. and Mexico, the border issues have somewhat obscured progress toward a new continental free trade agreement called the United States Mexico Canada Agreement or USMCA. Mexico, which has become the United States’ largest trading partner, ratified the new deal in June 2019. A more difficult ratification fight is expected in the United States Congress. (For more information about the USMCA, see here.)
South America’s large economies, Brazil and Argentina continue to be mired in decline. Brazil’s downturn, which began in 2016, has not improved under a new government. Economists anticipate positive economic growth not until 2020 at the earliest. In Argentina, a mid-2018 currency slide, economic recession and high inflation continues and is likely to result in the country electing a new, more populist government. At stake are a number of difficult economic policies seen as necessary to pull Argentina out of “perennial volatility.”
Venezuela’s economy continues to bump along the bottom in a what one analyst calls a “perverse equilibrium,” with no resolution in sight for the country’s political impasse. In the meantime, a growing humanitarian crisis has led to a boom in outward migration, as many Venezuelans seek to flee what appears to be an unending cycle of hardship.
5. Russia
U.S. – Russia relations are at a low point, with the two countries in protracted disagreement over Ukraine and Turkey (see Middle East above) to say nothing of proven Russia’s efforts to disrupt U.S. elections or both countries recent exit from the 1987 Intermediate-Range Nuclear Forces (INF) Treaty. Sabre rattling and regular efforts at deflection from the Russia government draw attention away from the fact that Russia’s economy is stalled with 0.4% economic growth between 2014 and 2018. Rising political protests in the country have drawn notice and speculation about the rising impact of economic stagnation on the seemingly air-tight political regime of Vladimir Putin.
As an insurance broker rather than an insurance agent, Securitas Global Risk Solutions is able to apply to multiple carriers to find the best contract, with the most coverage, for the least cost. A carrier’s agent can only advise you as to that carrier’s specific contract. We have a team of experts who are available to you 24/7 to answer any questions or concerns. Additionally, our service comes at no charge to you.
Securitas Global Risk Solutions is delighted to announce that Pamela Bates has joined our team to provide customized solutions to mitigate credit and investment risk in global markets. Pamela will be based in Virginia, where, in addition to risk mitigation, she will provide strategic and policy advice to assist our clients in navigating international business opportunities. Working for the U.S. Department of State for over two decades as a foreign service officer, Pamela managed U.S. diplomatic efforts on energy, information technology and government procurement issues. In addition, she earned an MBA from the Wharton School. Pamela brings the skills, knowledge and network to support our clients’ international expansion goals.
International markets provide outstanding opportunities for U.S. exporters to diversify their customer base. Securitas provides risk mitigation strategies to help reduce the uncertainty associated with approaching new markets. Pamela will concentrate on solutions ranging from mitigating private sector credit risk, sovereign contract frustration risk, financing international trade, protecting equity investments against political risk, along with government relations strategies, to bring products to global markets.
Having previously lived and worked in France, Germany, Switzerland, and Brazil, Pamela has an extensive network of contacts around the world. She speaks Spanish, Portuguese, and French, along with English. While a State Department employee, she taught classes on diplomatic tradecraft, including how to evaluate sources of risk. In addition to her MBA, Pamela earned a Bachelor’s degree in Economics and Environmental Studies from Bowdoin College in Maine and a Master’s degree in International Affairs from the Johns Hopkins University, School of Advanced International Studies.
Most Americans did not expect the quick succession of events in Ukraine leading to the removal of President Viktor Yanukovych or the emergence of Crimea as a flashpoint in Ukraine-Russia relations. The situation in Crimea is just the most recent example of how quickly and unexpectedly the international political and economic landscape can change. These changes can adversely impact U.S. business people and investors who have exposure in places such as Russia and Ukraine.
For example, the U.S. and EU have introduced a series of selective sanctions against Russia and some individuals for their role in the current crisis but have indicated that broader sanctions against certain sectors of the Russian economy are possible. Russia has responded by putting a travel ban in place for several American officials. One of the Russians included in the U.S. sanctions, parliamentarian Andrei Klishasa, went further- introducing a bill to allowing for the confiscation, expropriation and nationalization of western assets in response to these U.S. / EU sanctions although it is unclear whether this bill will gain any momentum. Given the interconnectedness of the global economy (including Europe’s reliance on Russia for about 30% of its natural gas), a widening of the crisis or quid pro quo sanctions could impact U.S. businesses with exposure in Russia, Ukraine or Europe.
Fortunately there are solutions which can mitigate the risk of loss due to political risks. These solutions include coverage against political violence, war, confiscation, expropriation, nationalization, forced abandonment and selective discrimination. In addition to coverage, these solutions often provide access to a global network of experts who continually monitor political risk in emerging or frontier markets.
The deterioration of relations between Russia and the U.S. and Europe and events in Crimea are a reminder of the value of protecting your investments and assets (fixed, mobile or inventory) against the perils of political risk. You may also wish to consider protecting your trade receivables against buyer non-payment especially for your international accounts.