Managing business and export risk

Canadian exporters face two kinds of political risks:

Global political risks: These are the global political trends that affect economies around the world.

Country-specific political risks: Perhaps most crucial to small or medium-sized enterprises (SMEs), these are the political risks specific to your operations in a certain country or regional market.

What is political risk?

Political risk is the probability that government decisions (or actions aimed at a government) will affect the local business or investment climate in ways that cause international companies in the market to suffer losses.

Losses of any kind affect your business. Your due diligence as a Canadian exporter should include a thorough assessment of political risk. This involves understanding and planning for country risk. It’s also important to prepare for financial risks that stem from government action or inaction, given that some of the most common political risks are financial ones.

Legal and regulatory changes

Governments can change the rules of engagement at their discretion. These changes can affect your operations, bottom line and maybe even your expansion plans.

Restrictions on imports/exports

All countries impose import and export controls that determine what tariffs you must pay to do business in the country. For example, Canada’s import controls apply to agricultural products, firearms, textiles and clothing, and steel. When you export goods to an international market, you need to know what government restrictions apply. These can also change at any time.

Restrictions on moving money from the country back to Canada

Drastic changes in foreign currency (FX) rates and government restrictions on currency transfers are usually described as transfer and conversion risks. These currency fluctuations can prevent a customer from paying you what they owe or result in your money being frozen in-country for an unknown time.

Breach of contract by a government

If you are dealing with a national or state government, you may face risks that relate strictly to its status as a government. The possibilities include:

• overthrow of the government
• non-payment by a corrupt government
• illegal termination of a contract by a cash-strapped government, and
• unilateral price or quantity changes to a contract

Expropriation of equipment, inventory or assets

Expropriation involves a government seizing your company’s assets, which can paralyze your operations. If inventory or equipment are expropriated, they may be stuck in the country. Similarly, in some markets, a government may take over an entire industry or sector.

Political violence

Political violence such as war, revolutions or terrorism can impact any staff, equipment or stock that are in the country.

“When exporters read about political risk in one of their markets, the hazard may seem so high-level that they don’t immediately get concerned,” says EDC Senior Country Risk Analyst, Ian Tobman. “That can be a mistake. When Brazil fell into an economic and political crisis in early 2016, it meant major changes to the value of its currency. Some Canadian companies had unexpected payment issues with their Brazilian customers.”

To learn more about potential political risks, consult the EDC publication, Your guide to the Top 10 global risks facing Canadian companies in 2018.

When your company manages political risk, you can:

Predict the effects of political events

This may allow you to pre-emptively exit a market. Or, it may prompt you to find ways to reduce the potential impact political events represent, allowing you to stay in the market.

Gain a competitive edge

Companies that monitor and react quickly to political risks have a distinct advantage over their competitors, as certain political events can create a business boom.

Exploit new opportunities

Managing your risk allows you to make informed decisions about entering markets with high profit potential. You can assess the risks and put plans in place to address them.

Make better decisions

When you take the time to understand political risks, you will create a greater sense of security for your company’s exporting future.

Even the most thorough analysis cannot predict all types of political risk. Here are some ways you can protect yourself against the unknown.

The specific types of data you’ll need will depend on your company and its market objectives. In general, though, market intelligence is built on information about the following areas:

1. Identify your political risks by type and by country.

It is rarely possible to completely neutralize a serious political risk. However, your best bet is to gain an understanding of major risks and less serious ones. Here are some questions to consider:

• What type of political regime is in power?
• Are there indications of political violence risk, such as higher infant mortality, lower trade openness or weaker democratic accountability and political freedoms?
• Is there a history of human rights violations by the state against its citizens?
• Does the country have a history of armed conflict or political unrest?

2. Assess the potential impact on your company.

How might the political risks you’ve identified influence your company’s assets, personnel and bottom line? Develop scenarios that outline possible impacts on your company for a variety of political risks. Does the risk level in a certain market exceed your company’s risk tolerance? Consider insurance to protect your assets and investments.

3. Plan ahead. 

If you are confident that you can actively manage the political risks your company faces in an export market, your next step is to outline your options for dealing with the risks you’ve identified. For example, international companies that are very profitable can be threatening to a country’s government.

“You need to plan ahead to share the benefits of the profits. That includes things like sourcing locally more than you need to, employing local labour, training those people up, building roads, hospitals, things like that. It’s being what people call a good corporate citizen,” explains Ken Shotts, Professor of Political Economy at Stanford Graduate School of Business.

4. Get help. 

If you don’t have an in-house risk management team, consider hiring specialized risk managers who offer political risk services to exporters.

Here are some valuable resources that offer insight into international political realities and risks:

• The International Crisis Group has a global conflict tool that tracks conflicts worldwide, identifies trends and puts out alerts about the risks of escalation.
• Global Risk Insight is a leading international publication for political risk news and analysis. The annual Global Risk Outlook provides information on key political risks and opportunities worldwide.
• The Trade Commissioner Service has trade commissioners in Canadian embassies and consulates around the world. They have extensive knowledge about local political and business conditions.
• The Canadian Commercial Corporation is a Crown agency that helps Canadian companies do business with foreign governments. Their staff can help you understand political risks.
• The Economist Intelligence Unit provides global business intelligence to help manage risks.
• The Council on Foreign Relations is an independent membership-based think tank that offers information and expertise to help understand foreign policy and the world. The Council’s experts analyze defence, diplomacy, economics, human rights, politics and other global issues for its members.