Political Risk Management
Political risk refers to the risk that policy makers in the host country and their factions will make political decisions that have adverse effects on a multinational's profits and/or goals. Whether policymakers implement changes to regulatory frameworks or protectionist policies that restrict access to certain markets/industries, host governments often disrupt foreign investors’ projects in order to curry favor with their constituents. Investors (portfolio and direct) with potential and existing projects in foreign markets need to manage these risks by assessing their unique exposures and implementing customized strategies for mitigating and/or avoiding adverse consequences.
RBG Global's Assessments
While these factors commonly fall under the category of "political risk", an understanding of their potential impact on foreign investors requires a nuanced assessment of political, regulatory, and legal frameworks in host countries. With a background in political and country risk analysis, international law, and cross-border compliance, RBG Global's leadership has created a multidisciplinary model for identifying and monitoring clients' unique exposures in host countries. An example of the variables used in a recent assessment follows:
• Political: General (political stability); Specific (expropriation, repatriation)
• Legal: General (rule of law); Specific (intellectual property rights, contract enforcement)
• Regulatory: General (regulatory stability); Specific (regulatory quality, regulatory discrimination)
• Economic: General (economic stability); Specific (capital controls, currency devaluation)
Strategies for Mitigating Exposures
There are several effective ways to manage political risks. These methods range from strategies that minimize exposures to mechanisms that transfer potential losses to other parties. The two ways to transfer political risks are bilateral investment treaties and political risk insurance. Whereas investment treaties enable foreign investors to pursue remedies/ compensation from host governments at international arbitration, insurance companies promise to indemnify foreign investors who suffer losses that are covered in the insurance policy. These tools can also deter host governments from interfering with investments in the first place. There are many different versions of political risk insurance policies and treaties. In order to identify and negotiate optimal coverage for their specific exposures, companies need to understand the contents of myriad versions of both tools.
International Investment Treaty Planning
RBG Global’s assessments determine whether or not certain foreign investors qualify for protections under specific treaties and review the type and scope of protections therein. In order to provide its clients with maximum coverage under the treaties, RBG Global performs the following services:
- Consider jurisdictional requirements under BITs and help companies structure their investments in ways that help them qualify for treaty protections
- Review the type and scope of protections and exceptions in BITs to determine ways in which specific projects are covered
- Structure or restructure investment accordingly (can dovetail with tax planning)
- Advise clients on the costs and procedures connected with investor- state arbitration
Political Risk Insurance
In order to find the political risk insurance policy that meets the specific demands of each client, companies need to consider the effectiveness of different wordings and understand the PRI market place. RBG Global advises clients on the effectiveness and pricing of different political risk insurance policy options.
- Review the type and scope of protections and exclusions in insurance agreements to assess a company’s options
- Connect clients with brokers
- Advise clients on the costs and procedures and political risk insurance negotiations
- Ongoing advice to clients on policy compliance and maintenance throughout the policy period
- Evaluation of existing PRI policy coverage
As mentioned above, clients can use PRI on a stand-alone basis or supplement BIT coverage with tailored policy language that fills gaps.
Other Strategies for Minimizing Risk Exposures
In addition to options for transferring political risk, there are a series of measures that foreign investors can take to minimize the likelihood and impact of political risk that manifest. RBG Global helps companies understand these options and consider them in conjunction with the risk transfer tools.