Economic Woes Raising Global Political Risk

Risk watchers say global companies face new challenges as the crisis sows political strife around the world

When angry demonstrators take to the streets in Reykjavik, the Icelandic capital once known mainly for sweaters, smoked fish, and the singer Björk, you know things are getting ugly. Protests in recent months, by citizens frustrated at the destruction of the national economy by overextended Icelandic banks, brought down the Icelandic government in January—just one sign of how the financial stress is fueling popular unrest around the world.

Bulgaria, Greece, and Latvia are other examples of countries once seen as stable that have experienced widespread, unruly demonstrations recently. Even Russia and China have had scattered protests, signs that citizens are unhappy enough to risk reprisal by repressive authorities.

The global financial crisis is making itself felt in the lives of ordinary people, and they're mad about it. As a result, professional risk watchers say, global political instability is rising fast and creating yet another new challenge for companies doing business around the world.

In more developed nations, the rise in political tension could lead to populist policies. French President Nicolas Sarkozy caused a political storm when he criticized French auto companies in February for moving production to countries such as Slovakia—which also happens to be a member of the European Union. "We are seeing some protectionism," Dieter Zetsche, chief executive of German automaker Daimler (DAI), told reporters on Mar. 3 at the Geneva Motor Show.

Expatriate Workers Send Home Less Money

And in emerging nations, the financial crisis is proving to have effects that no one anticipated. A few months ago the conventional wisdom was that poor countries isolated from the global financial system would be relatively immune from the crisis. But it turns out that people don't even have to have bank accounts to suffer from the banking crisis. "Don't underestimate the extent to which the global economy reaches into the smallest market," says Donald Steinberg, a former U.S. ambassador to Angola who is deputy president of the International Crisis Group, a Brussels-based conflict-resolution and human rights organization.

The main conduit of misery is a slump in so-called remittances, the money that expatriate workers send home. Remittances total some $300 billion worldwide, and account for 20% or more of gross domestic product in countries such Bosnia, Haiti, and Lebanon,. But they have slumped as expatriates lose their jobs or trim the amount they send home. Further aggravating the plight of poor nations, the global slump could prompt donor nations to cut international aid and individual givers to curtail their charity.

The former Soviet state of Tajikistan is one example of a country slammed by lower remittances. According to some estimates, as many as half the adult men in Tajikistan are working abroad, primarily in the Russian construction industry. The amount of money they send home has plunged along with the Russian economy. To make matters worse, Tajik authorities have diverted scarce electric power from consumers to the nation's aluminum smelting industry in a desperate bid to generate foreign currency. As ordinary Tajiks freeze in their homes, the risk of political upheaval grows.

Wars and revolutions aren't the only looming effect of political risk. Despite violent outbreaks by students and other protesters in Athens since December, the risk of widespread popular upheaval in Greece is low. The bigger risk is that a feeble center-right government will be unable to reform public finances and take other steps necessary to make the Greek economy more competitive. "It's very difficult for a weak government to take unpopular measures," says Spyros Capralos, CEO of Helex Group (HEHSF.PK), which operates the Athens stock exchange.

Companies Focus on Government Ties

Nor is political risk limited to poorer countries. Ian Bremmer, president of risk consultancy Eurasia Group, includes the U.S. Congress among his list of top 10 political risk hot spots, along with Iran, Russia, and Venezuela. Intervention in the economy by a Democrat-controlled Congress could lead to new regulations or interference in the economy that are bad for business, Bremmer maintains. "The big risk out there is what governments do, how efficiently or inefficiently they act," he says.

The heightened level of risk is prompting companies to pay even more attention to maintaining good relations with governments. That's especially true for companies in highly regulated businesses, such as telecommunications. The carriers that buy Alcatel-Lucent (ALU) infrastructure may invest less if, for example, they are forced to share networks with competitors. "In our business there's a lot of political risk," says Tim Krause, chief marketing officer for North America at the Paris-based telco equipment provider.

Companies will need to get creative as risk takes unexpected forms. For encouragement, they can look to the example of Karim Khoja, CEO of Roshan, the leading wireless carrier in Afghanistan. It's hard to imagine a riskier business environment than Afghanistan, with its protracted war against Islamic radicals.

Trying to outgun the Taliban fighters who have attacked Roshan contractors or base stations is fruitless, Khoja says. Instead, he has turned security over to local village chiefs, who get paid and have an interest in ensuring that their region has cell-phone coverage. Roshan also builds playgrounds and wells, and allows villagers to tap excess electricity from base station generators. "We want to use the power of the people," Khoja says. Roshan's example shows that there are ways to handle the riskiest situations if managers think unconventionally.

New Countries on the Risk-Watch List

The global risk picture is not uniformly grim. Some places that used to show up on lists of hot spots are in better shape to handle a downturn than they were a few years ago. Iraq looks more stable though still very risky, paving the way for U.S. troop withdrawals and the beginnings of investment by companies such as Daimler. China and India will experience slower growth but are expected to withstand the additional political stress. "The underlying fundamentals are really quite strong," says Jonathan Wood, London-based global issues analyst at consultancy Control Risks. "While there is going to be reduced growth, they are going to be fairly resilient politically as well as economically."

It's not news that countries such as Pakistan or Zimbabwe are risky. But the financial crisis has added some new names to the list of countries that risk experts are keeping their eyes on. Here are some examples, based on reports by analysts from Control Risks, the International Crisis Group, and credit insurance company Euler Hermes (ELER.PA):

Turkey: As a NATO member and moderate Muslim state, Turkey is a crucial bridge between Europe and the Middle East, and has aspirations to join the European Union. But industrial production fell 20% in January, the most in more than 20 years, while unemployment is at a four-year high of more than 12%. As the Turkish lira plunges, the country could have trouble financing its current-account deficit. The economic problems add volatility to conflict between Islamists and the secular military and private sector.

Liberia: The nation is emblematic of African countries that have recovered from civil war, but now look fragile again. President Ellen Johnson Sirleaf is well regarded, but the country may face cutbacks in foreign aid that props up the economy. Another risk is that a financially strapped U.N. will curtail peacekeeping forces. Cutbacks in aid and income from expatriates also threaten conflict-prone countries such as Burundi, Haiti, and Lebanon.

Russia: Prime Minister Vladimir Putin owes his overwhelming popularity to energy-fueled largesse. Recent demonstrations, including by 5,000 people in Vladivostok, aren't a serious threat to his power. Russia's dwindling energy income may even make Putin behave more politely to the West—witness his recent attendance of the World Economic Forum in Davos. But corrupt lower-level officials could take advantage of the economic situation by illegally appropriating weaker businesses, which is already a huge problem.

Ukraine: Throughout Eastern Europe, countries are suffering from the end of easy credit from Western banks, which fueled private investment and consumption. At the same time, exports are plummeting, exacerbating double-digit current-account deficits. But the Ukraine's chronically unstable politics, featuring permanent conflict with the Russian minority, add an extra element of danger. The economy is expected to shrink in 2009, and Russia is raising tensions by periodically shutting off the gas supply.

Vietnam: The country's nominally Communist government copied China to become a center of low-cost manufacturing. Vietnam took that business model to extremes. Now exports have plunged, and the government concedes it will have trouble meeting its growth target of 6.5%. Next door, coup-prone Thailand adds an extra dose of political unpredictability to the region.

For a different take on risk, check out our slide show from last fall charting the nations in the world facing substantial economic danger.

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