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Political risks

Political risk is the potential for loss or loss of profits resulting from public policy. Thus, the political risk is related to possible changes in the course of the Government, changes in the priority areas of its activities. Political risk management is particularly important in countries with weak legislation, a lack of tradition and a culture of entrepreneurship.

Political risk is inevitably inherent in business activity, it cannot be avoided, it can only be correctly assessed and taken into account.

It should be noted that attempts were made to take into account the political risks caused by the actions of individual statesmen or Governments as early as the 19th century. Thus, the famous banker Rothschild so organized a system of information about political events that he received reports about them a few days earlier than the government.

The concept of "political risk" appeared in the lexicon of American corporations in 1959 after F. Castro came to power in Cuba. One of the first works on this problem is F. Ruth 's book "US Business Abroad and Political Risk," which analyzed the political risk to which American companies are exposed in other countries.

The importance of taking into account the impact of political risk on the results of an enterprise firm is demonstrated by the fact that a global network of specialized think tanks, both commercial and non-commercial, has been established to analyse and assess political risk. There are over 500 such centres in developed countries, the bulk of which are located in the United States. The most prominent non-profit centers studying political risk mostly in theoretical terms are the Center for Strategic and International Studies at Georgetown University, the Research Center for International Change at Columbia University (New York).

Political risks can be divided into four groups:

  • risk of nationalization and expropriation without adequate compensation;
  • transfer risk associated with possible local currency conversion restrictions;
  • Risk of termination of the contract due to the actions of the authorities of the country in which the counterparty company is located;
  • Risk of military action and civil unrest.

The risk of nationalization is in practice interpreted by entrepreneurs very widely - from expropriation to forced purchase by the authorities of the company 's property or simply restriction of investors 'access to asset management. In determining the risk of nationalization, the difficulty is that in any country the authorities never advertise the possibility of expropriation or nationalization. As a consequence, no instrument legally defines exactly how nationalization differs from confiscation, for example.

Transfer risk is related to transfers of local currency to foreign currency. An example is a situation where an enterprise operates cost-effectively, making a profit in the national currency, but is unable to convert it into the investor 's currency in order to settle for a loan. There may be many reasons - for example, a forced long queue for conversion.

The risk of termination of a contract provides for situations where neither the penalties provided for in the contract nor arbitration help: the contract is broken for reasons beyond the control of the partner, for example, due to changes in national legislation.

The last of the political risk groups is the risk of military action and civil unrest, which can lead to heavy losses and even bankruptcy for business firms.

Political risk can also be conditionally divided into country, regional, international. Country political risk refers to the instability of the country 's domestic political environment, which affects the performance of business firms, which increases the risk of deterioration of the financial condition of firms, up to their bankruptcy. Especially it affects the enterprises of various forms of small business as tension of a political situation in the country leads to violation of economic communications that most noticeably affects activity of the small enterprises, puts them on a bankruptcy side owing to neediness of raw materials, materials, the equipment.

Regional political risk should be understood as the instability of the political environment in a particular region, which affects the performance of business firms; In particular, it may be the possibility of losses due to military actions in the region, as well as interference in the business activities of regional governments.

Taking into account international political risk is important for business activities both for firms with entry to the international market and for firms with foreign partners.

Since political risks cannot be directly influenced by the entrepreneur, as they do not depend on the results of his activities, political risk should be classified as a group of external risks.