Political Risk: Countering the Impact on Your Business

by Ian Bremmer, for QFINANCE.

Introduction

Over the past several years, and across a broad range of companies, corporate decision-makers seeking opportunities overseas have learned that it is not enough to have a knowledge of a foreign country’s economic fundamentals. They also have to understand the forces and dynamics that shape these countries’ politics. This is especially true for emerging markets, where politics matters at least as much as economic factors for market outcomes. Of course, understanding that political risk matters is one thing. Knowing how to use it is another.

Stability

Starting with the basics, when committing a company to risk exposure in an emerging market country, it’s essential to understand how political risk impacts the underlying strength of its government. There are two key elements to consider: stability and shock. Shocks are especially tough to forecast, because there are so many different kinds and because shocks are, by definition, unpredictable. We can’t know when an earthquake will strike Pakistan, an elected leader will fall gravely ill in Nigeria, or a previously unknown group will carry out a successful terrorist attack in Indonesia.

But we can take the measure of a state’s stability, which is defined as a government’s ability to implement policy and enforce laws despite a shock to the system. The global financial crisis, a potent shock, has inflicted heavy losses on Russia’s stock market. But Prime Minister Vladimir Putin has amassed plenty of political capital over the past several years, and President Dmitry Medvedev, his handpicked successor, basks in Putin’s reflected glow. Neither need fear that large numbers of Russian citizens will turn on them anytime soon. In addition, a half-decade of windfall energy profits has generated more than $500 billion in reserves, ready cash that can be used to bail out stock markets, banks, and, if necessary, an unpopular government. That’s why, for the near-term, Russia will remain stable…

To read the complete article click here.