Russia Joins Somalia, DR Congo and Iraq in Top 10 Volatile Environments
Despite its growing economic power, Russia now joins the 10 nations most affected by fast-changing, dynamic political risks, according to the third annual Political Risk Atlas by risk analysis and mapping firm Maplecroft.
The Political Risk Atlas 2011 includes 41 risk indices evaluating 196 countries. It provides a comprehensive appraisal of traditional or ‘dynamic’ political risk areas including: conflict, terrorism, the rule of law, and the regulatory and business environment. The term ‘dynamic’ is used by Maplecroft to describe risks that can change rapidly as a result of actions by government, regional authorities or politically-motivated groups.
Dynamic political risks constitute immediate threats to business and Maplecroft rates 11 countries as ‘extreme risk.’ Most significantly, the emerging economy of Russia has moved up five places from 15th to enter the top 10 for the first time, making it one of the world’s riskiest locations for business to invest in.
The ‘extreme risk’ countries now include: Somalia (1), DR Congo (2), Sudan (3), Myanmar (4), Afghanistan (5), Iraq (6), Zimbabwe (7), North Korea (8), Pakistan (9), Russia (10) and Central African Republic (11).
Russia’s increased risk profile reflects both the heightened activity of militant Islamist separatists in the northern Caucasus and their ambition to strike targets elsewhere in the country. Russia has suffered a number of devastating terrorist attacks during 2010, including the March 2010 Moscow Metro bombing, which killed 40 people. Such attacks have raised Russia’s risk profile in the Terrorism Risk Index and Conflict and Political Violence Index. The country’s poor performance is compounded by its ‘extreme risk’ ratings for its business environment, corporate governance and the endemic nature of corruption, which is prevalent throughout all tiers of government.
Challenges for companies operating in Russia also stem from an ineffective legal and regulatory system, which includes a lack of judicial independence from the government. This was seen most recently in the politicised case against jailed Yukon oil tycoon Mikhail Khodorkovsky, which most commentators dubbed a show trial. Russia is rated ‘high risk’ in Maplecroft’s Rule of Law Index, and companies should monitor the increasing risk of poor contract enforcement and expropriation.
“An appreciation of the dynamic aspects of political risk is vital to ensuring uninterrupted business operations. Short-term factors such as regime stability or political violence play an essential role in informing business decisions,” said Anthony Skinner, an associate director at Maplecroft. “Dynamic risk must factor in the calculations of businesses that are either seeking to invest or expand their business presence in target markets such as the BRICs and N11.”
According to the World Bank, foreign direct investment in the emerging economies is expected to have increased by 17% over 2010, with the BRICs nations of Brazil, Russia, India and China accounting for half of this. However, the emerging economies present significant challenges to investors in terms of their exposure to political risks and Maplecroft advises companies to undertake strict monitoring of these risks to reduce potential threats to investments.
India (26) and China (62) are rated by Maplecroft as ‘high risk,’ while Brazil (94) is categorised as ‘medium risk.’ Other important emerging economies that expose investments to high levels of ‘dynamic’ risk include Nigeria (15), Philippines (19), Bangladesh (42) and Indonesia (50).
The Political Risk Atlas 2011 also focuses on emerging risk areas and structural challenges affecting political stability, such as resource security, human rights, climate change and poverty. All four BRIC countries are witnessing increasingly worse structural political risk trends for 2011, with China (25), India (32) and Russia (51) rated ‘high risk’ and Brazil (97) categorised as ‘medium risk.’