Political risk, sometimes called "sovereign risk" has several elements. First, it is found whenever a government prevents a private sector debtor from repaying its obligations. Second, it occurs when the foreign government is itself a debtor and defaults on its own obligations due to its own volition. Third, political risk is present when a government repossesses the assets of a private entity (sometimes referred to as "confiscation," or "expropriation"). Other examples of political risks include imposition of new controls (such as trade restrictions, exchange limitations or monetary controls), and war, revolution or insurrection. Ultimately, the exact definition of "political risk" will be listed in any insurance or guarantee documentation. Interestingly, political risk is not limited to foreign countries. For example, the United States froze Iranian financial assets during the hostage crisis in Iran. This may have been considered a confiscation by the U.S. Government of Iranian assets. In this essay we are going to discuss some method to avoid political risk due to international business.
There are several methods for avoiding political risks, depending on what type of transaction is involved.
Investments: The Overseas Private Investment Corporation (OPIC), a U.S. Government agency, provides political risk insurance and loan guarantee programs to facilitate U.S. private investment in some less-developed nations. To qualify for OPIC insurance, investors must meet certain eligibility requirements. Interested investors should contact OPIC's offices in Washington to apply for its programs.
Foreign sales: The Foreign Credit Insurance Association (FCIA) offers political risk insurance policies to protect exporters from foreign government intervention in selling their products/services abroad. Typically, FCIA coverage is short -term in nature, usually 180 days or less, occasionally up to one year. The FCIA "New to Export," "Umbrella”, "Short-Term Single...