How to Manage Political Risk in the Financial Field

By Aaron Brown

Part of Financial Risk Management For Dummies Cheat Sheet

Political risk is ever-present and uncontrollable. As a financial risk manager, you can only hope to avoid the obvious dangers and benefit from government actions.

The dangers of political risk are many: governments have been known to seize property, outlaw certain types of businesses or business practices, throw business leaders in jail or even kill them. On the less harmful but irritating side, government officials can make your life miserable with red tape, petty injustice, corruption and doubletalk. Sometimes they have good reasons, sometimes not, but such things are rarely predictable.

On the positive side, governments have been known to protect rights, take care of business needs, provide opportunities, create general peace and prosperity, and make you proud to be a citizen. Working with and supporting governments can be very rewarding.

Investors like governments to set clear rules and stick by them, so they can plan things like taxes, legal structure, contracts and so forth. However, they also want government entities to be flexible enough to consider new ideas and to weather changes in the world around them. Ideally, you want government relationships that are close enough that you’re on the same side, but not so close that you become cronies, or capture regulators, or agents of the state.