On the plus side, this makes worldwide commerce easier to transact. Almost anybody may now reach out to new markets or finalize a contract and achieve a sale in a foreign country.
On the flip side, if anything goes wrong in one region of the world, you can feel the impact halfway across the world – either directly, if you are working with the country in issue, or indirectly, due to your varied supply chain. Remember when the 20,000-tonne cargo ship “Ever Given” became entangled in the Suez Canal in March 2021, effectively closing down international trade for a week?
Another good example is when your government chooses to prohibit sending personnel to the country where you are carrying out your contract. You would have to cease executing your contract, the Expert explains, and you would be exposed to additional expenditures and would be unable to continue performing or invoicing and getting money from the customer in that specific nation. This prohibition would certainly result in a loss for the contractor.
As an example, consider legislation or regulation that is extremely restrictive and only applies to foreign firms. That might be viewed as a mild discriminatory action and camouflaged as a political risk, Expert argues. These are the hazards that all business owners face when running a company.
In these instances, political risk management is critical to analyze the risks and outline steps to defend your firm.
Management Of Political Risks
Some risks may be worthwhile in exchange for early access to new markets. However, it is critical to keep your eyes and ears alert at all times since political dangers in international business are not usually well-identified. Sometimes the hazards are only rumors — incidents with little or no substance behind them that one may dismiss.
Political, economic, and social instability are early indicators of political risk:
• The Country’s Political Situation: how is the country interacting with its neighbors? You want to be ready if tensions rise or a conflict breaks out.
• Economic Conditions: what macroeconomic imbalances exist? What is the state of the economy? What is the country’s capacity to honor its payment commitments or debt during your project?
• Social Conditions: is youth unemployment or underemployment high? Are societal tensions boiling over into violence? Riots can also influence economic transactions and contract fulfillment. There is a considerable association, for example, in nations whose economies rely largely on natural resources such as oil and gas.
Do You Require Political Risk Coverage?
Political risk insurance is not a “required” type of insurance. It is a niche market that was originally employed by major exporters, multinational contractors, or banks who faced the danger of contract interruption or non-payment or non-repayment of a loan. However, the political danger is no longer limited to developing countries. Political risk insurance, tailored to your unique engagements by global political risk insurance brokers, may protect your economic and corporate interests.
Political risk insurance may cover, for example, non-payment of a shipment or non-performance of a contract for businesses, Expert adds. We cover the whole spectrum of transactions for banks, from export finance to trade finance, infrastructure finance, asset-based finance, and structure-trade finance. As a result, it is a highly customized solution.