In this update to our Marketplace Realities, political risk edition, our price prediction for political risk is flat to +2%. There are several locales in which political risks are significant.
Violence persists in Iraq due to the growing conflict with the Islamic State (ISIS). Several cities including Tikrit are under ISIS rule, and French forces have arrived to assist in the struggle. Kurdish Peshmurga soldiers bleed for foreign assistance to secure gains and take back Mosel. A recent video shows Peshmurga soldiers captured in cages is of concern that ISIS is instead spreading and exacerbating the already challenging political environment for Iraq to remain an intact sovereign state. The political risk insurance market remains essentially closed to Iraqi exposures.
The crisis in Ukraine has raised tensions with the West not seen since the demise of the Soviet Union. The US Secretary of State John Kerry has called the Kremlin’s actions ‘craven behavior’ as despite the ceasefire agreement reached in mid-February, it appears that Russia continues to support and supply separatist forces. Moreover, Moody’s rating agency has downgraded Russia bonds to ‘junk’ status, and concern grows over economic and banking crises. The US and EU have threatened further sanctions against Russia. There is concern that Russia could retaliate against foreign firms due to further imposed sanctions.
Former Soviet States
NATO deputy supreme commander General Sir Adrian Bradshaw has said that they foresee Russia indeed testing Article Five of the North Atlantic Treaty and employing their ‘hybrid’ warfare tactics of supporting Russian-speaking populations in other former states under Soviet rule such as the Baltic States, Moldova, Georgia, Belarus, Kazakhstan and others. Markets are still generally reluctant to take on new Russian exposures, and existing programs with Russia are renewed on a case-by-case basis. Markets appear open in other former Soviet satellite states.
Political violence and unrest with separatists in eastern Ukraine threatening Ukraine as a unitary state from the Russian-promoted federalization campaign that would drain centralized power from the capital. Markets are essentially closed to risk in eastern Ukraine and look at risk in western Ukraine on a case-by-case basis, although some markets cannot write any new Ukraine risk regardless of location within country.
Experts suggest that President Rousseff faces an increasingly complicated political landscape. Just two months into her term, the real fell 2.2% against the dollar and the agenda to reverse Brazil’s growing budget deficit through an austerity drive in order to avoid a sovereign credit downgrade, are threatened. In addition to the fallout from corruption investigations into the state-controlled oil major Petrobras, there is growing discontent over tax rises and cuts in social security benefits amid the emerging middle class. Electricity and water shortages may also trigger instability in coming months. Moody’s has even downgraded the Petrobras entity below investment grade amid the corruption scandal.
As 2015 is an election year and will be the end of President Christina Fernandez Kirchner’s governorship because of term limits, politician tensions will be heightened. The country is struggling with a recession and inflation of upwards to 40%. In addition, international reserves have decreased significantly. Companies could anticipate protectionism, price controls, and civil unrest. A bizarre recent suicide or murder of a prosecutor researching the Argentina Iran connection to the 1994 bombing of a Jewish community center and synagogue has released a backlash of unrest and cynicism over the current regime. Reports of currency inconvertibility/non-transfer Continuing interventions in the economy, including the possibility of further renationalization, will continue to discourage investment in many key sectors.
Xi Jingping’s crackdown on corruption is welcomed by most in the investment community; however there is concern that there could be backlash and internal schisms within the provinces versus the central government. Furthermore China’s GDP growth is not on pace to meet the annual target of 7% for 2015. Given the rise of the middle class and their new expectations, there is risk to the regime in the form of social unrest due to the economic slowdown, as well as frustration over the lack of political freedoms as was seen in the Hong Kong umbrella protests.
The government’s limited success with its crackdown on cartel leaders may have been short lived. Coca-Cola suffered a kidnapping of employees and may even pull out of the country. The concern is that if Coca-Cola does pull out of Chilpancingo it could send a message to other companies to pull out too. Such an exodus would be dangerous for the economy and stability of the entire state of Guerrero. Efforts to privatize Pemex and other sectors continue.
Embattled by an overflow of refugees from Syria, Kurdish separatism from the Kurdistan Workers’ Party (PKK), the growing threat of ISIS, Turkey has several challenges to address that cause concern. In addition, some experts have asserted that President Erdogan’s increasingly authoritarian regime could be emulating a pattern seen with Vladimir Putin in Russia…
Guest blogger John T. Lavelle is Willis’ Deputy Managing Director for Financial Solutions, where he heads the North America Political & Credit Risk division. John specializes in providing credit and political risk insurance expertise to financial institutions and large corporations. John has been with Willis since 2004 and has 20 years’ experience as a merchant banker, insurance underwriter and broker.