Overseas Businesses Endangered by Political Risks

Political instability and unrest is a growing risk factor encountered by businesses that venture into potent or emerging markets. Organizations have witnessed powerful national regimes like Ukraine and Egypt, which were once stable, dismantle rather quickly. The former, renowned for its foreign trade and investment, and the latter as a prosperous tourist destination, lost a big bite of their economic turnovers due to political turmoil.

Political risks are linked to extreme dangers like terrorism, riots, vandalism, expropriation and resource nationalization..

Areas of a business significantly affected during political crises are:

Supply chain

A large number of companies, especially in emerging sectors, depend on resources and materials from nations across the world. When they get subjected to political risks, a drastic disruption of supplies becomes unavoidable.

Another major political risk troubling supply chains around emerging markets is their exposure to fluctuating prices. Companies end up dealing with fast-changing product and transportation costs. Labour disputes and issues are also listed among the top causes for supply chain disruptions.

Companies should ensure that they have effective contingency plans in place, to mitigate these types of risk.

Unfortunately, many companies don’t have a sufficient or effective contingency plan. MIT Scale Network study shows that approximately 60% of the surveyed managers either don’t work actively on supply chain risk management, or believe that their existing risk management practices are ineffective.

Companies should estimate the impact of political unrest in other countries and protect the interest of their assets, employees, customers and key stakeholders.

Communication

In a state of political chaos, communication is critical and gets affected immediately. Autonomy and intervention of a governing body, black outs, or destruction of communication channels and networks are concerns companies often encounter.

Companies should attempt to set up alternative communication channels like satellite phones and locator beacons for emergencies, and store detailed employee records at multiple stations.

Information security

Losing information is highly probable during political crises. Important documents like asset and employee records, insurance policies, client information and financial accounts should be secured in hard and soft copies at alternative locations. It is essential to keep such data and documents secured in order to claim for the damages caused to business as well. Further, filming or capturing the damage for evidence helps ease the claim settlement process.

The impact of political risks may not be prevented, but insurance can protect companies’ interests to a large extent. When all the essential business areas of a company like supply chain, communication and information are under threat, insuring assets and resources are definitely a requisite.

Although possible, insuring a business outside the home country can be complicated, as each country has its own laws and policies. Be thorough with the limitations, sub-limits, deductibles, loss-reporting requirements and the specified exclusions of every insurance program. There are a myriad of insurance policies to safeguard a company against political risks when operating outside its home country.

Political instability is unpredictable and it can be quite radical in nature. It is better to be safe than sorry in such matters of high risk. Be open to alternatives and enrol for coverage that will protect your business against a wide range of political risks.

Overseas Businesses Endangered by Political Risks was last modified: January 7th, 2015 by Mohammed Nasser Barakat
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Mohammed Nasser Barakat

Partner at CAREWeb
(Mohammed Nasser) Barakat, is the BRS Service Line Leader for the ME region. Nasser has an MBA in Professional Accounting and a BS Degree in Banking and Finance.He is a Certified Public Accountant in Colorado State, USA, a Certified Control Self Assessment Practitioner and a Certified Fraud Examiner. Find me on