Framework library · International strategy
Political risk assessment
Political risk is the chance that a government's actions, or political events beyond anyone's control, will reduce the value of a foreign investment: expropriation, blocked currency, broken contracts, sudden regulation, sanctions or violence. Assessing it means naming which of these could hit this asset in this country, scoring each, and deciding what to insure, structure, share with partners or accept before the money goes in.
Use it when
- You are about to commit capital to an asset in a foreign country that will take years to pay back.
- Lenders or an investment committee ask how political risks are covered before approving a project abroad.
- You are comparing countries for an investment and want the political exposure of each in the same terms.
- A change of government, a new law or new sanctions in a country where you operate has made the existing assessment out of date.
Avoid it when
- The exposure is small and easily reversed, such as exporting on secured payment terms. Standard credit insurance and trade terms cover it.
- You want to rank countries on everything that makes them attractive. Political risk is one input; use a country selection matrix for the ranking.
- The risks are commercial or operational rather than political. Keep those in a risk register and this assessment for what governments and political events could do.
- You need a view of how a country's politics could develop over a decade. Build scenarios first with scenario planning, then score the risks under each.
How to run it
Name the asset and its life
Political risk is specific to an investment: a data centre with a 20-year life is exposed differently from a sales office. Write the asset, the amount at stake and the period.
List the risks by type for each country
Work through expropriation, transfer and convertibility, contract frustration, regulatory change, political violence, sanctions and export controls, and corruption. Write each as what could happen to this asset, not as a comment on the country.
Score likelihood and impact
Likelihood over the life of the investment and impact on its value, each from 1 to 5. Use country ratings and insurers' views as inputs, alongside the judgement of people who have operated there.
Choose the main mitigation
Political risk insurance, the ownership structure (such as a holding company in a country with an investment treaty), a local or multilateral partner, contract terms (stabilisation clauses, international arbitration, hard-currency pricing), operational controls, or acceptance.
Put the cost of mitigation into the case
Premiums, partner shares and structuring costs reduce the return. Include them in the investment case before comparing countries.
Name an owner and a review date
One person per risk, and a date or signal that will make you score it again: an election, a draft law, a fall in reserves, a court ruling.
Work through it
Answer the questions below, or load the worked example to see a finished one. The drawing updates as you type. Export the result as a PowerPoint deck, a Word document, an Excel workbook, a PDF or plain text.
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Mistakes to avoid
- Scoring the country instead of the asset. A stable country can still change the rules for your sector, and an unstable one may leave a hard-currency export business alone.
- Treating insurance as the whole answer. Cover has limits, exclusions and waiting periods, and it does not keep the asset running.
- Writing opinions about a country's leaders into a document that may reach its officials. Describe the risk to the asset and the evidence, and keep it factual.
- Assessing once at investment and never again. Political risk moves with elections, commodity prices and sanctions; set a review date for each country.
Where it comes from
No single originator. Stephen J. Kobrin's "Political risk: a review and reconsideration" (Journal of International Business Studies 10(1), 1979) reviewed how managers in multinational companies assessed political risk and refined the concept for planning. The risk types used here follow the categories of cover offered by political risk insurers such as the World Bank Group's Multilateral Investment Guarantee Agency: expropriation, currency inconvertibility and transfer restriction, war and civil disturbance, and breach of contract. Source.
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