18
infrastructure
investor
may
2014
Political risk is defined as the risk of a
foreign government acting against inter-
national law in relation to an investment
or receivable owned by a foreign govern-
ment or company. It is safe to say that
the recent events in Ukraine, Crimea
and Russia caught everyone off-guard
and have highlighted the political risks
facing businesses operating in emerging
markets.
Now the emerging Eastern European
markets are engulfed in geopolitical strife,
infrastructure investors find themselves
in an uncomfortable position. Difficult
questions must be asked: Can infrastruc-
ture assets be protected? What will be the
extent of possible losses? Will the disrup-
tion stop with the Crimea, or will other
parts of Europe also be at risk?
If the international community
thought Russia’s move into Georgia in
2009 was a one-off event, the annexation
of Crimea has represented a worrying
repeat. The borders of two European
countries have changed yet again, not
exactly an uncommon event in the con-
tinent’s history, but few commentators
thought this would become a regular
event today. The Crimean situation has
shown that businesses need to protect
themselves against this sort of ‘political’
risk, even in countries where an environ-
ment of stability was commonly assumed.
Much of the recent financial and
economic media focus on the Ukraine
debate has revolved around gas supply
and infrastructure. This is unsurprising
given the wider ramifications of disrup-
tion to either. However, East-West gas flow
has proved to be remarkably resilient to
political upheaval. Even in the ColdWar,
the European need for gas and the Rus-
sian need for cash ensured steady flows.
WHAT RISKS DO
INFRASTRUCTURE COMPANIES
NOW FACE IN UKRAINE?
Although it is impossible to predict how
the current situation in Ukraine will
develop, there are a number of scenarios
that could play out. These range from:
the new and uncomfortable status quo
remaining in place; Ukraine further
breaking up (potentially driven by the
Polish-dominated north-east of the coun-
try looking to separate); increasingly
aggressive and disruptive sanctions being
imposed on Russia; and the horrific pros-
pect of an all-out infantry war between
Ukraine and Russia. All of these possible
scenarios contain different levels of risk
for European infrastructure investors.
There is also the very real chance of
an economic war being fought between
the West and Russia. This is a very sober-
ing prospect for those investors with assets
in Russia or for those who have business
connections and agreements with com-
panies that are linked to senior Russian
officials.
Regardless of how this situation devel-
ops, there is a checklist of typical ‘political
risks’ investors should start considering:
Nationalisation and expropriation:
Infrastructure, especially that which
involves an aspect of ‘national’ inter-
est is always at risk of nationalisation in
Upheaval in Crimea has shone a spotlight on the fragility
of infrastructure investments when political crises erupt.
Mark Thomas
of Lockton examines the consequences
The lessons of Ukraine
“Western investors
that have loaned
money toUkrainian
companiesmay now
find these companies
have ceased to exist”
p o l i t i c s
RISK
