3 types of political risks and how to manage them

International trade can be a risky business at the best of times even in the most developed markets, but Canadian exporters need to be extra vigilant when venturing into emerging markets where the political risk may be more difficult to discern and deal with.

The challenge has become more pronounced as Canadian companies increasingly look to diversify their trade with faster growing emerging markets.

While political risk is unavoidable in the global marketplace, risk also comes with reward. These emerging markets are becoming major consumption hubs with attractive opportunities for Canadian businesses.

To better understand the impact that certain political risks can have on your business, let’s look at three of the most common types and real-world examples.

This risk measures the likelihood of government action or weak governance conditions having a significant impact on a country’s commercial environment.

Real-world example: Following a coup attempt in 2016, the Turkish government targeted those domestic companies associated with the Gulen movement, which it claims was behind the attempt. The actions have included arbitrary impositions of regulatory requirements up to outright expropriation. The impact to Canadian companies has been that they have needed to add a further level of counterparty due diligence to any business dealings with Turkish companies to determine their relationship with the government.

Measures the likelihood of a government imposing conversion or transfer restrictions, which would significantly affect the commercial environment.

Real-world example: Faced with an economic and financial crisis, Lebanon has been looking at formally instituting capital controls to conserve the limited foreign exchange reserves that remain in the country. This would significantly impede Canadian companies doing business in Lebanon to transfer funds out of the country.

Political violence is defined as any violent or hostile acts undertaken with the primary objective of either changing or overthrowing the government of the country or changing its policies.

Real-world example: A recent example of political violence is the conflict in Ukraine. Russia’s invasion of the country in early 2022 has significantly increased the risk to Canadian companies operating in Ukraine. Political violence can also take the form of social unrest as seen by recent events in Pakistan.

The impact of any one of these events on a Canadian exporter’s business is unlikely to be isolated or short-lived, and may ripple across the entire company, aggravating other types of risk all the way back to Canada.

So, how can Canadian exporters prepare for what may be sudden and unexpected political risks?

• Due diligence, ongoing research and political risk analysis are perhaps the most important foundational elements of any emerging market business strategy. Speak with EDC and the Canadian Trade Commissioner Service who have experts on the ground in most emerging markets.
  
• Consider diversifying your overseas investments, so that all your risk isn’t concentrated in just one or two emerging markets. Have a clear and current political risk mitigation strategy based on the “what ifs” in your market. Know ahead of time how you’ll respond to a range of risks.
  
• If possible, involve your key external stakeholders in political risk mitigation. Brief customers, suppliers and agents on your contingency plans for dealing with unexpected political risk and if appropriate, co-ordinate your risk response.
  
• Recovering from an adverse political event is likely to be quicker and easier if you prepared for it ahead of time and can co-ordinate your response with your most important stakeholders.

Trading in emerging markets can be daunting, which is why having a detailed plan and risk mitigation strategy in place from the outset is essential.