Political Risk

Political Risk

Political risk is the possibility that political changes or instability in a country will reduce an investment’s returns or prevent capital repatriation. Also called geopolitical or jurisdiction risk, it becomes more significant the longer an investment’s time horizon.

Why it matters

• Political events can directly affect asset values, operating costs, supply chains, and legal protections.
• Outcomes range from reduced profitability to expropriation or an inability to withdraw capital.
• Political risk is difficult to quantify because national situations are unique and historical samples are limited.

Common sources of political risk

• Government change or instability (coups, regime shifts)
• New or changing legislation and regulation (taxes, environmental rules, labor laws)
• Trade policy changes, tariffs, sanctions
• Currency controls or sudden exchange-rate restrictions
• Nationalization or expropriation of assets
• Civil unrest, terrorism, or war
• Regulatory or licensing actions that restrict operations

How political risk affects businesses and investors

• Higher compliance and operational costs
• Disruption of supply chains and sourcing
• Reduced market access or demand due to trade barriers
• Enforcement uncertainty for contracts and property rights
• Volatility in currency and capital flows

Mitigation strategies

• Country and political-risk analysis: monitor political developments, fiscal and regulatory trends, and scenario planning.
• Geographic diversification: spread investments across jurisdictions with different risk profiles.
• Contractual protections: include arbitration clauses, stabilization clauses, and force majeure provisions.
• Financial hedging: hedge currency and commodity exposures where feasible.
• Local partnerships: joint ventures or local partners can ease regulatory navigation and reduce political exposure.
• Political risk insurance: purchase coverage from private insurers or multilateral/government-backed agencies to protect against expropriation, political violence, and certain currency-transfer losses.

Where to look for risk disclosures

Companies with international exposure often disclose political and country-specific risks in regulatory filings (e.g., annual reports or prospectuses), which can provide insight into the specific vulnerabilities affecting their operations.

Example

A multinational retailer highlighted in its annual filing that suppliers in certain countries face political and economic instability, labor issues, and changing trade policies. The company also cited regulatory, tax, and local-law complexity—illustrating how multiple political factors can compound operational risk.

Key takeaways

• Political risk can materially affect returns and is especially relevant for long-term, cross-border investments.
• It is multifaceted and often hard to quantify, but it can be managed through analysis, diversification, contractual measures, hedging, local partnerships, and insurance.
• Investors should review company disclosures and incorporate country-level risk assessments into investment decisions.