Political Risk From Government Interference

All investments are subject to shifts in business climate and geopolitics and the whims of the investor and host government alike. For global businesses in 2024, government intervention is increasingly a real and critical concern that must be recognized and addressed. This can include greater state control over the investment itself (up to outright expropriation), or other demands from the investor that rebalance the economics of the investment, such as higher royalties.

Businesses investing abroad will need to stay aware of the prevailing political trends and be alert to early warning signs that an investment environment may change, for the better or worse.

Global Risks for Business

Political tensions and changes of government

The risk of sudden radical actions by governments increases during politically fraught times, such as ahead of competitive elections. Although autocratic rule can bring stability, a swing to a more autocratic or nationalistic regime could increase the risk of hostile actions. This is especially true if investor-state tensions are already high, and / or the government is looking to bolster its legitimacy with an appeal to the national interest.

Common ground between the host government and local population becomes increasingly difficult

Some governments may be tempted to deflect any resulting discontent among the population toward “greedy” foreign investors, exacerbating any difficulties the investor is already experiencing in convincing locals of the benefit of its investment.

Financial pressures

Governments facing financial pressure could be more tempted to increase their revenue intake from foreign investors. Examples include a government struggling to balance its budget or experiencing a fall in foreign exchange reserves. At a minimum, the risk of the government revoking or failing to honor contracts with foreign suppliers will increase.

Sensitive sectors to watch

Where there are tensions and heightened geostrategic competition between the host government and the investor’s home jurisdiction, areas of increased risk will include sensitive sectors such as critical minerals, AI, energy storage and related technology.

Further restrictions on rival states’ conventional and social media

Restrictions on social media usage may also be possible especially as AI becomes more powerful, heightening the threat from geopolitical adversaries in so-called “information wars.”

The level of protection of company assets

Beyond the most obvious, direct forms of investment protection, such as bilateral investment treaties, investors may get further reassurance from concrete indications of firm bilateral co-operation, such as free-trade agreements. This, coupled with a jurisdiction’s track record in maintaining relative rule of law and generally staying “above the fray” of the current geopolitical fracturing, could lessen the risk of an investment getting caught up in any geopolitical dispute. Sometimes, however, investors may reason that the potential return on investment outweighs the risk of investing in less stable jurisdictions and / or in highly sensitive sectors. Extra pre-emptive steps to protect their investments could include:

Ensuring a high level of protection for any sensitive intellectual property, such as patents, trademarks, and trade secrets since they could be at risk. Company executives need to account for their corporate IP and decide what is essential and needs to be protected, as well as who has access to the intangible assets.

Obtaining political risk insurance, carefully ensuring that the most relevant and prominent risks are covered.

Global Opportunities for Business

The rush for critical minerals for the energy transition will create downstream opportunities

The high demands for minerals essential to the energy transition mean investors need to make themselves stand out. Many commodity producers are seeking commitments from investors to add value downstream, such as in processing and manufacturing, as well as extraction. Becoming indispensable in this manner can help curb any temptation by the government to derive greater value from investors in other more intrusive ways.

There may still be plenty of opportunities at home or in allied countries

Commodity or critical metal-producing countries that have strong political and trading / investment relations with one’s host country or its allies are safer investment choices than in jurisdictions more hostile to the West. The US and EU are notably increasing policy and financial support for critical minerals and related industries.

Don’t let hype make you miss opportunities

Tariffs and other protectionist measures and increased state involvement (in cooperation with investors), are far more common than the most aggressive forms of government intervention, such as forced divestment and outright expropriation.

Keep listening and talking at the local and central level

Businesses committed to, and skilled at, taking the needs of local communities and governments into account and listening to their concerns, will usually be better placed to allay any issues as they arise, compared with peers who disregard local sentiment.

Understanding political nuances will bring benefits

Before reacting instinctively to hostile rhetoric by officials, investors should consider that politicians – especially at politically troubled times – may speak rashly to boost their populist credentials without any intention of acting on their words. The media also has a tendency at times to sensationalize greater government intervention and make plans appear more onerous and hostile than they may be in practice. A nuanced understanding of the political landscape and outlook, and of the likely trajectory of planned legislation, will therefore be essential and advantageous.

There will be increased demand for political risk insurance

There is likely to be increased demand for policies covering expropriation – including creeping expropriation such as increased tax rates – as well as contract frustration, and war and violence risk.

Government intervention may generate large volumes of work for disputes lawyers

One example of government intervention is illustrated by the ongoing litigation stemming from asset seizures and forced discounted sales in Russia. Similarly, lawyers specializing in IP and corporate restructuring / re-domiciliation can expect increased demand for their services.

92% of companies surveyed said they experienced a Political Risk loss in 2022 compared with only 35% in 2020

Broader global political and economic trends are increasing the risk of government interference for investors. The fractious relations between major states / blocs – such as between Russia / China and the West – are manifesting themselves in some cases through more hostile attitudes and actions by states toward investors.

Governments are promoting economic and other forms of national security over previously valued tenets, such as free trade. This is driving trends such as “decoupling” and “de-risking,” whereby Western countries and China are imposing mutual investment and trade curbs, and hedging their exposure, without necessarily breaking ties completely.

National security is often the main driver: fear of espionage, or of letting a rival state into a highly strategic sector, or to prevent a competitor from posing a direct physical security threat to allies (such as imposing sanctions on Russia after it invaded Ukraine).

Some of the most stark and palpable national security-related investor / state acts in recent years occurred in the context of Western sanctions on Russia and Moscow’s countermeasures. Incidents of tit-for-tat sanctions and seizure of key hydrocarbon assets by Russia and EU states have reinforced a trend whereby many governments are preparing to reduce dependence on rivals for strategic resources.

National security can also be a fig-leaf for protectionism, as evidenced by mutual tariffs by the EU and the US. Seeking to prevent a rival’s economic and technological advancement is also often an important factor behind protectionism.

The risks of government intervention extend beyond the most fractious examples of bilateral relations. Even in cases where relations between the investor’s home country and the host government are more positive, other factors are driving state intervention. These include environmental activism, which has led governments otherwise supportive of investors to revoke licenses for mining projects. Additionally, states are keen to derive greater benefits from foreign investment projects, with these goals often cast in the populist language of “resource nationalism” or nationalization of industries.