19
may
2014
infrastructure
investor
times of economic or political disruption.
For investors with assets in the Crimea,
there is now uncertainty over agree-
ments and even the current ownership
of assets.
Western investors that have loaned
money to Ukrainian companies may now
find these companies have ceased to exist.
An even more difficult scenario is that a
foreign investor may not lose their assets
or company, but may find they have a
new ‘partner’. Only losing 30 percent of
an asset (or operation) may make inves-
tors unable to easily get out of a difficult
situation. Downstream risks here could
include the ongoing loss of proprietary
systems and intellectual property.
Legal risk:
At best, foreign investors
may now find that they are now working
under a new legal regime. Agreements
made under Ukrainian law are now under
Russian jurisdiction. The legal issues of
the Ukraine/Crimea situation are com-
plicated (and no doubt expensive) and the
practical realities of obtaining legal redress
for any subsequent loss of investment as a
result will not be straightforward.
In a situation like Ukraine/Crimea,
risk managers and insurers need to
undertake legal risk analysis. Are licens-
ing agreements still valid? Is your insur-
ance still valid? Russian and Ukrainian
insurance are very different beasts. Are
your hard assets and property still covered
and protected?
Recriminations and social unrest:
The Balkans, East Timor, Yugoslavia,
Syria, and Libya (to name but a hand-
ful) are all tragic examples of what can
happen when countries are divided and
local, regional, and religious tensions
are forced to the surface. In a worst case
scenario, the collapse of political, social
and legal constraints can have a long-
term effect on investment, cross-border
finance and general business operations.
Sanctions:
We have already seen
Russian businesses being affected by ini-
tial US sanctions targeting the business
interests of senior Russian officials. Mas-
terCard and Visa have suspended opera-
tions with a number of Russian banks
and – as sanctions on Russia become
more entrenched, expanded and better
understood – the impact on investors will
expand beyond just Ukraine.
Investment and finance:
Another
effect infrastructure investors may face
as a result of this crisis is the drying up of
investment funds for projects in Ukraine
and the emerging Eastern Europeanmar-
kets – any place where Russian interven-
tion is a risk. Refinancing of bonds will
also be a major issue for infrastructure
investors. As funding becomes harder
to obtain, companies will face the very
real prospect of running out of money.
As many infrastructure assets are seen
as being part of the national interest,
even the suggestion of an infrastructure
provider failing increases the chances
of nationalisation – thus completing a
vicious circle for infrastructure investors.
Mitigating and minimising political
risk:
Companies must consider political
risk insurance as a form of investment
protection and risk mitigant as they move
into new markets. Some key considera-
tions and risk indicators include:
• The strength or weakness of the cen-
tral government: The weaker a coun-
try’s central government, the greater
the risk. The political divisions and
central government weaknesses evi-
dent in Ukraine during the European
Union versus Russia economic debate
highlighted wider areas of political
risk.
• Social cohesion: Ethnic and religious
divisions should always be factored
into an investor’s political risk assess-
ment. For Ukraine and Russia, the
Crimea was always a potential flash-
point. The question now is whether
there are other possible areas of divi-
sion in the Ukrainian state?
• Nationalism, extremism, and national
identity: The levels of extremism in a
county are a strong indicator of likely
social unrest. Likewise, a strong and
universally respected figurehead, such
as a king or queen, can bind various
political views and minimise the over-
all impact of political disruption.
• Economic resilience. Political risk is
greatly reduced in countries where
economic conditions are strong. This
has been evident in Thailand where,
despite ongoing political protests, the
local economy has continued to func-
tion and develop.
CRIMEA: A POLITICAL
RISK ADVERTORIAL
Saving a few dollars on political risk
insurance makes sense until a situation
like Ukraine develops. Banks, traders
and infrastructure investors should
take this type of risk very seriously, even
though it is hard to predict. Foreign
investors are easy targets and they are
the ones with the most at stake.
Unfortunately for investors affected
by the Ukrainian/Crimean crisis, the
time to look for political risk insurance
has long passed.
The current situation in Ukraine has
shown that, even in countries where the
level of political risk was assumed to be
relatively low, the situation can quickly
change. For investors with significant
amounts of money tied up in immovable
assets, the implications of nationalisation
and sudden border changes should be
factored into all business plans.
n
Mark Thomas
is a regional director and head
of political & credit risks at Asia Pacific Lockton
Companies (Hong Kong) Ltd.
RISK
