Shapiro: Chapter 11 Country Risk Analysis. Types of Political Risk Expropriation.

Shapiro: Chapter 11

Country Risk Analysis

Types of Political Risk

• Expropriation

“Venezuela Seizes Control of Two Oil Fields”

- New York Times, 4/3/06

• “… Venezuela’s populist government said Monday that it had taken control of fields operated by two European energy giants after they challenged new rules that give the state extensive control of 32 mostly marginal fields that, until now, had been managed by foreign multinationals.”



• “The move was the latest in the government’s efforts to assert itself over the country’s oil reserves, the hemisphere’s largest, and end the preferential deals that were offered by Venezuela in the 1990’s to entice companies to explore for oil.”



• “In the Orinoco heavy-oil region… where giant multinationals like ExxonMobil and Chevron have much of their investments, the government has increased royalties to 16.6 percent from 1 percent and is now planning on raising taxes to 50 percent from 34 percent.”



• “Venezuela, though, had never taken over fields as it did on Saturday, after the contracts that Total and Eni had with the Energy Ministry were ended.”

“Chavez Threatens to End Oil Exports to U. S. in Exxon Feud”

- The New York Times, 2-11-08

• “President Hugo Chavez threatened Sunday to halt oil exports to the United States if the oil giant ExxonMobil succeeds in freezing billions of dollars of foreign petroleum assets controlled by Venezuela.”



• “Venezuela’s government has been seething since Exxon recently won orders in British, Dutch and American courts freezing as much as $12 billion in Venezuelan oil assets abroad – refineries and other oil-related infrastructure that Venezuela owns.”



• “In fact, despite a deterioration in political relations, the United States remains Venezuela’s top trading partner. Venezuela is the fourth-largest supplier of crude oil to the United States, sending 1.2 million barrels a day to American refineries …”


• Expropriation

• Currency controls

• Trade controls

• Tax and labor laws


• Expropriation

• Currency controls

• Trade controls

• Tax and labor laws

• Regulatory restrictions


• Expropriation• Currency controls• Trade controls• Tax and labor laws• Regulatory restrictions• Local production requirements

Country Risk Analysis

• Political Stability

• Economic Factors

• Subjective Factors

Political Stability

• Frequency of government change

• Level of violence

• Number of armed insurrections

• Conflicts with other states– ie., India vs. Pakistan

Political Stability

• Third World Countries:

• “They lack social cohesion, political legitimacy, and the institutional infrastructure necessary for economic growth.”

Economic Factors

• Inflation• Balance of payments• Growth rate of per capita GDP• “In general, the better a country’s

economic outlook, the less likely it is to face political and social turmoil that will inevitably harm foreign countries.”

Subjective Factors

• Attitude toward:– private enterprise

– multinationals

–foreign direct investment (FDI)

“Wal-Mart’s German Retreat”[BusinessWeek Online, 7-28-06]

• “The U. S. price-cutting retailer made a series of bad moves and has now sold its stores to the competition.

• After nine years of trying to make a go of it, the … retailer said July 28 it will sell its 85 stores to German rival Metro.”


• “Wal-Mart (WMT) will pay dearly for its about-face, which comes amid declining market share at its Asda stores in Britain and follows its retreat from South Korea two months ago. The company is taking a $1 billion hit to quit the market, …”


• “The retreat is hardly surprising given Wal-Mart’s numerous missteps in Germany. Perhaps its most glaring was misjudging the German consumer and business culture.”


• “For instance, German Wal-Mart’s adopted the U. S. custom of bagging groceries, which many German consumers find distasteful because they tend not to like strangers handling their food.”


• “It also imported its U. S.-style company ethic, which includes strongly discouraging interoffice romances. Many employees found the code intrusive. The company also had repeated clashes with unions.”


• “Wal-Mart was not very humble when they went in, … They wanted to impose their own culture.

• … Wal-Mart’s apparent under-estimation of the competition and its miscalculation of the market.”

Political Risk & Property Rights

• Uncertainty over property rights

• Government’s ability to expropriate:– legal title

– stream of income

• Constraints on use of property

Key Questions to Ask

• Has reform been institutionalized?

• Are regulatory and legal systems fair?

• Is the government competent in maintaining currency and political stability?

Capital Flight

• Export of savings; legal and illegal• Fear of safety of capital (purchasing

power)• Impact of:

– inflation – devaluation (Mexico-1994)– artificially low interest rates

“Polo-Loving Banker Lives Really Large In Chávez Socialism”

[The Wall Street Journal, 1/29/08]

• “Venezuela’s 22.5% inflation rate is the highest in the Western Hemisphere. Its currency has lost half its value in the past year on a thriving black market for dollars.



• “To prevent capital flight, Mr. Chávez banned overseas money transfers and has barred Vene-zuela’s media from mentioning the black market. Some now call it the ‘market that cannot be mentioned’.”



• “Bankers have made money playing the huge gap between the official and the black-market exchange rates.”



• “One common way, which is legally permitted: buying dollar-bonds from the government at the official rate of 2.15 “strong bolivars” per dollar, and reselling them to investors for a price close to the black-market rate of 5.50 per dollar.”

Country Risk: Europe

• Over-regulated economies

• Inflexible labor markets

• Overly expansive social welfare programs

Country Risk: United States

• Litigation risks

• Employment laws

• Environmental laws

Country Risk: Japan

• Rigid business system

• Extensive government regulation

• Strong social traditions

Economic Risk Factors

• Fiscal irresponsibility

• Monetary instability

• Controlled exchange rate systems

• Wasteful government spending

Country Risk Factors (1)

Large government deficit relative to GDP

High rate of monetary expansion Low yielding government expenditures Price controls Interest rate ceilings Trade restrictions

Country Risk Factors (2)

• Rigid labor laws

• High tax rates

• Many state-owned firms – “statism”

• Socialist philosophy – “government’s responsibility”

• Pervasive corruption

Positive Economic Factors

• Economic incentives

• Secure legal rights

• Low taxes

• Free markets

• Minimal regulations

• Stable economic policies

Shapiro: Chapter 11 Country Risk Analysis. Types of Political Risk Expropriation.

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