STEP 6.5

Political instability
Risk mitigation for Canadian exporters

Every Canadian company that sells abroad faces some risk, but certain firms face greater risk factors:

  • If you have little international experience or are entering an unfamiliar market
  • If you have committed a large amount of capital into non-Canadian markets
  • If you limit your international operations to a single market
  • If you receive more income from foreign sources than Canada
  • If your firm depends on non-Canadian supply chains

While there are many types of risk to take into consideration, political risk can have particularly devastating consequences, both because incidents can arise without warning and because in many instances political instability can take control of a situation out of your hands.

Common types of political risk include:

  • Seizure of property by a government or insurrectionist group
  • Sabotage of property by a government or insurrectionist group
  • Breach of contract by a government
  • Imposition of trade sanctions against your target market
  • Currency exchange restrictions
  • Government freezes on currency withdrawals (no money can leave the country)
  • Import or export restrictions
  • Changes in laws or regulations
  • Strikes or political demonstrations
  • War or political violence

Export Development Canada (EDC) and many other financial institutions offer political risk insurance, and if you are doing business in an area of the world where the government isn’t overly stable, or labour disruptions are the norm, it is a wise investment.

We typically associate political risk with the developing world or countries where conflict is a regularity, but political risk exists in every nation on Earth.

In developed nations, snap changes in government policy can create all kinds of headaches for exporters. A relevant example is the Trump Administration’s recent decision to impose softwood lumber duties on Canadian exporters entering the U.S. market over 20 per cent.

Regardless of where you plan to export to, understanding the political risk, be it small or significant, is essential. Based on a thorough assessment, decide whether or not you need insurance, and what other strategies you can employ to protect your firm.

Forming coalitions with other companies within your industry who operate in your target market is one way to insulate your firm from risk, particularly government intrusion. Hedging to guard against currency fluctuations is another.

Whatever methods you choose to protect yourself, understanding the risk and preparing for it is crucial. Becoming a victim of political instability can threaten your operations in that market, as well as your business at home. Companies have been mortally wounded because of lost assets, bad deals or political chaos in foreign markets. Don’t let that happen to you. Be prepared.

Source: EDC

This video from New Zealand’s Massey University explores some of the basics of managing political risks. While the video is geared towards New Zealanders, the concepts discussed are universal:

Fortune favours the bold: smartly investing in high-risk export markets

Some of the world’s most promising markets carry substantial risks, be it from internal instability or conflict with neighbouring states, but there are ways to navigate these waters

Informational Resources

To stay abreast of fluctuating security situations in the world’s most volatile countries, check the federal government’s travel advisory database regularly.

Political risk consultancy the PRS Group publishes the International Country Risk Guide once a month, a forecast that predicts political, economic and financial risk in 140 markets.

The Economist Intelligence Unit, the research division of the Economist Magazine also offers political risk forecasting.

Political Risk Consultancies

For more hands-on support, seek out a consultancy that specializes in political risk. These firms can help guide you through the decision making process of setting up operations in politically sensitive or volatile markets. Political risk consultancies can also provide a wealth of information about fluid political, economic and security issues and uncertainties in your target market, acting as a set of eyes and ears on the ground, and equipping you with the information you need in order to responsibly move forward and adjust to changing circumstances.

High-risk markets present high risks because they lack the political and economic continuity and stability of safer markets. As such, in high-risk markets, things are generally changing often and quickly.

It’s valuable to have a partner on your side who is attuned to the circumstances on the ground, a partner that can inform you about changing situations immediately and give you sound advice, not only on how to react, but how to plan proactively and get out ahead of future challenges.

More information on consultancies can be found in section 2.3.3.


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