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Political Risk is Every Risk Manager’s Responsibility

The ability to effectively manage cross-border risk used to be considered either something an international business may not need or could not afford, but the risk management landscape has experienced a transformation over the past 20 years. Traders, investors and lenders no longer have the luxury of assuming everything will work out, or maintain the mistaken belief that the horror stories that have happened to other organizations will not happen to them.

Conventional wisdom used to dictate that because everyone else is investing in a given country, it must be the right place to invest, the idea being that strength lay in numbers, and, surely, not everyone could be wrong. Yet, the ‘herd’ mentality and chasing the ‘hot dollar’ has gotten many companies into a lot of trouble. While global investors know that Putin’s Russia is fraught with risks, and while Brazil’s economy has failed to perform even close to its potential (or expectations), they continue to invest, in the belief that eventually, things will get better. We know that is often not the case. Mr. Putin isn’t going anywhere any time soon, and Brazil’s economy is in a dire state.

While most risk managers would probably say that they do not have any particular expertise in assessing and monitoring political risk, the truth is that they do so every day in an international business, whether they realize it or not. And since most businesses (apart from banks and natural resource companies) tend not to have political risk specialists on their staff, it is incumbent on risk managers to become political risk managers.

This may appear as a daunting task – and it is. Political risk management is an art, not a science, and the average risk manager will have had no formal training in the subject. Managing political risk is all about creating a mosaic of risk factors that form a unique risk profile for each transaction, whether it involves investing, lending or trading.

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