Lloyd’s ‘360 Report’ Analyzes Impact of Global Political Instability

June 15, 2009

A new report from Lloyd’s – “Global Recession: The Magnifying Glass for Political Instability” – written with Control Risks, concludes that the “global economic recession is likely to cause increasing geopolitical instability that may pose problems for international businesses.”

Richard Ward, the CEO of Lloyd’s, noted: “Political risk is not new and threats, such as piracy and civil unrest, have been around for centuries. However, in the current economic environment these risks are being re-defined and (are) evolving in response to the global financial crisis and general economic downturn.”

Among the “threats to business” Lloyd’s report singles out threats “of expropriation,” which “could increase as the deepening recession causes a surge in political populism. Falling commodity prices have caused some hostile governments to take a more emollient tone with international businesses. But these governments’ attitude could harden if their domestic economic situations worsen, putting their national coffers under increasing strain.”

According to the report the risks are higher in Latin America than in Africa, “particularly where a ‘victim culture’ pervades national politics, such as in Venezuela, Bolivia and Ecuador, in which international firms are characterized as plunderers of local natural resources.”

By contrast African states “may lack the infrastructure to take control of a company, but a form of ‘creeping expropriation’ could occur, in which contracts governing joint ventures are continually reviewed. In the process, foreign firms may see their managerial control, ownership stakes and profits whittled away.”

Third world countries aren’t the only ones who face an uncertain future. Lloyd’s report points out that the “deteriorating economic climate has caused simmering discontent to overflow on to the streets of some European cities, and triggered demonstrations around the world.” However, such events are “unlikely to pose a major threat to international businesses.”

These concerns are nonetheless real, as tension between business and labor increases due to the prolonged recession. In addition, “the deteriorating economic climate could sour relations between international and local partners in joint ventures.” Lloyd’s cites the case of the legal dispute between Danone and China’s largest beverage maker, Wahaha, which “shows how such a spat could cripple an international firm’s prosperous operations in an overseas market and dent its reputation.”

Piracy also remains a problem. Lloyd’s report points out that, “if current piracy levels continue, companies everywhere will pay a growing ‘piracy tax’ to maintain their global trading networks over the next few years,” adding an extra strain to the burden created by the recession. Somalia and Nigeria account for more than half of the piracy incidents in 2008. Somali pirates have seized 60 merchant vessels in the past 15 months.

Moreover, Lloyd’s warns that “it is likely that the audacious tactics of the Somali pirates, which have been widely reported, will be mimicked in other parts of the world that have been ravaged by the recession.” In addition to the ongoing threats from pirates may also result in greater numbers of “hijackings, armed robberies and kidnappings.”

“With political instability heightening and the global political risk map likely to change, it is more important than ever that businesses undertake thorough risk assessments across all their global operations and investments and plan thoroughly for future potential instability,” Ward wrote. “To enable companies to do this it is vital they understand the dimensions and nature of the threat they face and the key trends and issues in political risk.”

Lloyd’s concluded that no matter how effective a company’s risk management strategy is, “it cannot prevent an act of expropriation, a robbery from one of its ships or factories or the kidnapping of a member of staff. Insurance offers firms a valuable backstop in such circumstances and can allow global trade to take place where otherwise uncertainty and mistrust would cause commerce to break down, the report concludes.”

The full report and additional information is available on the Lloyd’s web site at: www.lloyds.com.

Source: Lloyd’s of London

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