As one of the most erratic aspects of global expansion, political risk is often a decisive factor when companies consider emerging markets. Although potentially a lucrative venture, investing in countries and areas with unreliable political and economic currents brings both a chance for advancement and an option of failure.
To identify with this problem and comprehend the position of both emerging markets and their relation with potential investors, we will use the example provided by the certain American investor, Mr. Neil Emilfarb, and his real estate projects on the coast of Montenegro, on the Balkan Peninsula.
Measuring and managing political risk is a complex task, but we will try to process this case through a simple three step formula that will show us how to identify and conduct business on a potentially unsafe ground.
Identifying the Risk
The Montenegro is an independent country which once was a part of the former Federative Republic of Yugoslavia. The entire republic was destructed in the course of infamous Yugoslavian wars, but this particular state wasn’t involved in any sort of combat on its own ground. The economic downfall, however, was inevitable.
For the time being, the World Bank classifies Montenegro as an upper-middle-income country with enormous growth potential. However, this state is still in its transitional period, and since the global economic crisis affected this area profoundly as well, it suffered a deeper recession than anticipated, and to even a greater extent when compared to the more advanced, Western-European countries.
Factors that we need to consider are: the fact that this particular country gained its independence in 2006, which makes it a moderately young state with underdeveloped institutions; the fact that there are still ongoing disputes about its territorial jurisdiction; and as one of its most disputable factors, the questionable inclination of the government towards structural and social reforms.
These are the factors that could endanger the interest of investors and companies considering this emerging market, and now we will measure the risk and its potential effect on interest.
Measuring the Risk
Whilst on its road to recovery, the state officials built up a negative reputation among the citizens. Although the economic growth is expected to increase at approximately 3.2% in the following year, and the Montenegro always was a popular touristic destination with a number of visits rising on an annual base, plus it is on its firm way to become a part of the European Union, still we have to count on the fact that this country may not be the perfect host.
There isn’t any reliable mechanism to assess business risks in situations such as this one is. It is solely up to investors to develop strategies which will ensure their assets in case of unpredicted problems. The final decision may be reached through governmental initiatives and insurance policy with a clause that would address this particular policy risk.
Mr. Neil Emilfarb faced previous owners in court, since they’ve misused their rights and didn’t follow the rules of obliging contract, resulting in € 5.87 millions in damage to his behalf. Upon completion of construction work, he was once again involved in a dispute with local protestors, arguing his right to use the town’s marina. They implied that the government breached its rights and questioned the methods and circumstances of the contract between the investor and the officials.
Scenarios like previously mentioned are simply factors that you cannot predict, and they are exclusively based on the indicators which are extremely hard to calculate.
Image source: dukley.com
Managing the Outcome
In this case, Mr. Neil didn’t lose profit in the term of selling the property he invested in. However, it did significantly affect his future ventures, since his personal contacts and possible investors were discouraged to visit the Dukley Gardens because of the protestors.
His response was that he will gladly sell the rest of his complex and leave the town of Budva if the government and the locals inform him to do so, stressing out the fact that his work was only beneficial for the country and its economy thus far.
In conclusion, policy risk as an unpredictable aspect of any expenditure will still continue to discourage investors in emerging markets. Although Mr. Neil Emilfarb’s venture was a profitable one, and his company Stratex will still gain a significant income to the satisfaction of both the parties involved, there is always a flipside that cannot be perceived from the third point of view. In this case the inconsistency of a country in transitional period.
