Political Risk
Risk and Reward in World Markets
Managing Risk in an Unstable World
As emerging markets generate greater shares of global supply and demand, companies need better methods to weigh political risk againstfinancialreward.
by Ian Bremmer
C
ountries in turmoil elbow one another off the front page at a dizzying pace: Lebanon follows Ukraine follows Sudan follows Argentina. Companies, meanwhile, fear unpredictable change, even as they seek profit from the opportunities change creates-a freshly privatized industry in Turkey, recently tendered oil blocks in Libya, a new pro-Westem govemment in the former Soviet republic of Ukraine. To help weigh dangers against opportunities, corporations mulling foreign ventures routinely consult economic risk analysts. But basing global investment decisions on economic data without understanding the political context is like basing nutrition decisions on calorie counts without examining the list of ingredients. Reassuring data on countries' per capita income, growth, and inflation -the bread and butter of economic risk analysis-often obscures potential threats from other sources. Iran's parliament, for example, last year passed legislation that complicates foreign companies'abilities to plant stakes in that country's telecom sector. The 2003 revolution in Georgia altered the strategic calculus for investment in Caspian Sea energy development. The Kremlin's politically motivated prosecution of business tycoon Mikhail Khodorkovsky sent a chill through Russia's oil market. And Brazil's 51
JUNE 2005
Risk and Reward in World Markets. government is pressing both its agencies and its citizens to adopt open-source software, a policy that could inflict some nasty wounds on Microsoft and other technology companies. These are examples of political risk, broadly defined as the impact of politics on markets. Political risk is influenced by the passage of laws, the foibles of leaders, and the rise of popular movements - in short,
Managing Risk in an Unstable World
As emerging markets generate greater shares of global supply and demand, companies need better methods to weigh political risk againstfinancialreward.
by Ian Bremmer
C
ountries in turmoil elbow one another off the front page at a dizzying pace: Lebanon follows Ukraine follows Sudan follows Argentina. Companies, meanwhile, fear unpredictable change, even as they seek profit from the opportunities change creates-a freshly privatized industry in Turkey, recently tendered oil blocks in Libya, a new pro-Westem govemment in the former Soviet republic of Ukraine. To help weigh dangers against opportunities, corporations mulling foreign ventures routinely consult economic risk analysts. But basing global investment decisions on economic data without understanding the political context is like basing nutrition decisions on calorie counts without examining the list of ingredients. Reassuring data on countries' per capita income, growth, and inflation -the bread and butter of economic risk analysis-often obscures potential threats from other sources. Iran's parliament, for example, last year passed legislation that complicates foreign companies'abilities to plant stakes in that country's telecom sector. The 2003 revolution in Georgia altered the strategic calculus for investment in Caspian Sea energy development. The Kremlin's politically motivated prosecution of business tycoon Mikhail Khodorkovsky sent a chill through Russia's oil market. And Brazil's 51
JUNE 2005
Risk and Reward in World Markets. government is pressing both its agencies and its citizens to adopt open-source software, a policy that could inflict some nasty wounds on Microsoft and other technology companies. These are examples of political risk, broadly defined as the impact of politics on markets. Political risk is influenced by the passage of laws, the foibles of leaders, and the rise of popular movements - in short,