The global economic recession is likely to cause increasing geopolitical instability that may pose problems for international businesses, reveals a report issued by Lloyd’s.
Recession and economic hardship is likely to lead to growing political and social discontent, which will have a significant impact on political risks across the globe, warns the report, Global Recession: The Magnifying Glass for Political Instability, written with Control Risks.
“Political risk is not new and threats, such as piracy and civil unrest, have been around for centuries.
However, in the current economic environment these risks are being re-defined and (are) evolving in response to the global financial crisis and general economic downturn,” writes Richard Ward, the CEO of Lloyd’s.
Risks to business
The threat of expropriation could increase as the deepening recession causes a surge in political populism.
Falling commodity prices have caused some hostile governments to take a more emollient tone with international businesses.
But these governments’ attitude could harden if their domestic economic situations worsen, putting their national coffers under increasing strain.
Expropriation risk is higher in Latin America than in Africa, particularly where a ‘victim culture’ pervades national politics, such as in Venezuela, Bolivia and Ecuador, in which international firms are characterized as plunderers of local natural resources.
In Africa, states may lack the infrastructure to take control of a company, but a form of ‘creeping expropriation’ could occur, in which contracts governing joint ventures are continually reviewed.
In the process, foreign firms may see their managerial control, ownership stakes and profits whittled away.
The deteriorating economic climate has caused simmering discontent to overflow on to the streets of some European cities, and triggered demonstrations around the world. But these are unlikely to pose a major threat to international businesses, says the report.
Low profile and isolated disputes
It is rather the lower profile and more isolated disputes that present the bigger risk to companies. Labour and business quarrels are on the rise and a long recession will only worsen this trend.
The deteriorating economic climate could sour relations between international and local partners in joint ventures.
The legal dispute between Danone and China’s largest beverage maker, Wahaha, shows how such a spat could cripple an international firm’s prosperous operations in an overseas market and dent its reputation.
Piracy
The report says “if current piracy levels continue, companies everywhere will pay a growing ‘piracy tax’ to maintain their global trading networks over the next few years,” adding an extra strain to the burden created by the recession.
The focus of piracy has shifted from Asia to Africa, with Somalia and Nigeria accounting for more than half of the piracy incidents in 2008. Somali pirates have seized 60 merchant vessels in the past 15 months.
It is likely that the audacious tactics of the Somali pirates, which have been widely reported, will be mimicked in other parts of the world that have been ravaged by the recession.
Recession amplifies economic problems
Not only are incidents of piracy likely to rise, the numbers of hijackings, armed robberies and kidnappings are set to increase also as economic problems amplify political tensions.
“With political instability heightening and the global political risk map likely to change, it is more important than ever that businesses undertake thorough risk assessments across all their global operations and investments and plan thoroughly for future potential instability,” writes Ward.
“To enable companies to do this it is vital they understand the dimensions and nature of the threat they face and the key trends and issues in political risk,” Ward adds.
Risk management
But no matter how effective a company’s risk management strategy it cannot prevent an act of expropriation, a robbery from one of its ships or factories or the kidnapping of a member of staff.
Insurance offers firms a valuable backstop in such circumstances and can allow global trade to take place where otherwise uncertainty and mistrust would cause commerce to break down, the report concludes.
