In October 1998, three British engineers working for Granger Telecom in the breakaway Russian republic of Chechnya were taken hostage. Two months later, their severed heads were found in a sack by a road near the state’s capital, Grozny. At the time, there was anger that more might have been done to save the men, and there were claims that their deaths followed a bungled rescue attempt. But this furore obscured one important fact: namely that companies such as Granger Telecom thought doing business in the region was worth the risk.
Many businesses shy away from trading in the world’s trouble spots. In Chechnya, for example, hundreds of Russian and Western nationals were kidnapped throughout 1997, 1998 and 1999, and ransoms worth millions of pounds were paid for their safe return. But there are often lucrative contracts on offer for those companies that are willing to take the risk of working in such dangerous areas.
Take the proposed oil pipeline through Afghanistan, which is designed to provide affordable transportation for central Asian oil reserves to energy-hungry south and south-east Asian countries. US firm Unocal withdrew from the project in 1998, citing low oil prices and a general need to cut costs. However, US military action in pursuit of international terrorist Osama bin-Laden, and the fact that the de facto government of Afghanistan, the Taliban, is barely recognised outside the Afghan borders, hardly helped Unocal’s position. And the company also came under pressure, albeit fairly mild in comparison to the other risks involved, from various groups opposed to the Taliban’s record on human rights and the oppression of women. It is notable that Saudi Arabia’s Delta Oil is still involved in the project – it obviously helps that its home government is one of the few to recognise Taliban rule.
Fortunately, the kinds of political and criminal risks mentioned so far are rare. “Default and insolvency are by far the largest areas of risk on which we end up paying claims,” says Colin Hatton, head of special risks at international credit insurer, NCM. “Those depend to a degree on economic factors, but also on the performance of the specific trade sector, both within the national market and globally. Political risk is less usual, but its effects tend to be more severe and they can come out of the blue. BSE, for example, caused a major problem overnight for anyone exporting beef.”
You don’t have to be trading in an established crisis zone for political problems to be relevant. The invasion of Kuwait in 1990 was another case of unexpected political risk. “A lot of companies saw Kuwait as a low risk trading partner,” says Hatton. “It was triple-A rated and many of the customers there were considered totally solid, so a lot of companies didn’t bother to credit insure their orders. When Iraq invaded, that caused major headaches; one company lost #42m on Kuwaiti orders as a consequence.”
Social and ethical issues are also becoming more tangible risks for UK-based companies. Doing business in Burma, for example, might put your company on blacklists maintained by pro-democracy activists and human rights groups. There are other, softer risks as well – bribes and kickbacks are a fact of life in many countries, and they are often seen, not as an immoral skew to efficient markets, but a natural part of business culture.
Hatton also points out that regulations on export and import can cause problems, particularly, he says, for high-tech firms.
All this paints a picture of the developing world as troublesome to trade with. But that would be a misconception. Not only are many “developing” countries actually highly sophisticated, if occasionally troubled, but it ignores the fact that many developed countries have their own problems.
Exporting to a country with severe product safety legislation, for example, can be more difficult than a well-executed deal, complete with export credit insurance, with a developing nation.
Even strong economies have their foibles. “There are still major concerns over Japan, partly due to the lack of transparency of company information,” Hatton says. Daiwoo’s well-catalogued problems highlight the same problem in Korea. “Over the past ten years, some of the most difficult markets to assess have been close to home. In Italy, for example, it can be hard to get proper information on some businesses. France has one of the highest levels of insolvency.”
As to major trouble-spots, Hatton points out that the really dangerous areas are pretty obvious. “Africa is the major example of the dangers of bankrupt customers,” he says. “Other countries and regions tend to become higher risk on a cyclical or ad hoc basis. South America, for example, has had its troubles, and some Brazilian companies still have problems.
Companies exporting there are vulnerable.” He also cites Indonesia and some Middle Eastern states as a problematic export destinations – again, for obvious reasons.
Credit insurers make it their business to know which countries, companies and markets have vulnerabilities. “We’re doing that analysis and our ability is to make the judgement about which buyers will survive,” Hatton says.
“It’s worth stressing that, even within good markets, you get bad risks, and, within bad markets, there are good risks. Working out where they are is what good insurance management is all about.”
NCM tends to have a flat rate for a majority of the markets with which exporters might want to trade. “Some do have a loading,” Hatton admits, “and when someone wants to trade with those states, they can be reluctant, during good times, to pay the premium. But when problems occur, it can be expensive to cover the damage and losses to businesses, and as insurers, we take account of that.”
SPOT THAT RISKY EXPORT MARKET
The following is a list of factors that could increase the likelihood of your company not being paid:
– Currency inconvertibility or transfer difficulties. A country may have difficulty making ends meet in its balance of payments. So, to conserve scarce foreign currency, the government can prevent or delay your buyer exchanging local for foreign currency to pay you – or require the buyer to pay at a discriminatory exchange rate.
– Currency devaluation risk. Sometimes a country can be highly devaluation-prone. While your buyer may have been willing and able to pay at the old exchange rate, they may be less so at the new one.
– War or warlike events. War, revolution or insurrection can sometimes obstruct a credit-worthy buyer from paying – or you from carrying out your contract. These events can also damage or destroy your investment abroad.
– Expropriation. Expropriation without compensation can threaten your control over a work site or your investment abroad.
– Foreign debt rescheduling. Sometimes access to foreign exchange in a country becomes so tight that the government is forced to reschedule its debt with official or commercial creditors or both.
– Government payment delay and default. Budgeting difficulties may prompt a government to dishonour some commitments to creditors in order to restore balance to its fiscal accounts.
SOURCE: Website of EFIC, the Australian state import/export agency (www.efic.gov.au).
WEB LINKS FOR COUNTRY RISK
Many of these links are US-based, although the information they contain is generally applicable to UK firms. Most of these sites provide their information free of charge, although there are many paid-for services which are worth considering – Standard & Poor’s, Dun & Bradstreet and the Economist Intelligence Unit, for example.
Control Risks Group undertakes specific consultancy assignments on security matters as well as producing assessments of the risks in most countries around the globe.
Euromoney offers an annual assessment of risk in a country-by-country survey – available on the web to subscribers.
The International Monetary Fund has an archive of material for each country. The reports are detailed and often technical, but provide a thorough background to fiscal policies.
The US Library of Congress provides an excellent catalogue of countries, covering not only economic and political situation, but also history and culture.
The International Trade Centre is a UN and WTO sponsored body aimed at improving trade links with developing countries. Includes analysis of import and export trade.
An EU guide to tariffs and other controls – a technical, rather than reference, site.
Michigan State University’s international business page has a huge number of links to third party sites covering regions, sectors and individual countries.
Click on the “Economic reports” link on the left hand menu – limited number of reports, but good detail and well presented.
Apologies for the long URL, and the US bias, but a sound resource for quick reference when considering exporting.