Political Risk Management – Part 1: Dancing With The Dictators: Why Political Risk is Every Business’s Problem

The postings on this site are my own and do not necessarily represent FTI Consulting’s positions, strategies or opinions.

 Introduction

Let me take you on a journey into the unpredictable, chaotic, and often absurd world of Political Risk Management (PRM)—where the fate of our carefully planned investments can depend on a politician’s afternoon tweet, an unexpected election result, or even a country’s sudden decision to nationalize our assets. If I had to describe PRM, I’d say it’s like corporate crystal ball gazing, except instead of seeing the future, we get a front-row seat to the wild ride of geopolitical instability, government policy shifts, and—if we’re lucky—a few tariffs that send our entire supply chain into a tailspin.

Now, if you’re anything like me, you’re probably wondering: Why should I care about political risk? It seems like something that only multinational giants or adventurous companies expanding into volatile regions need to worry about. But the truth is, political risk is the silent storm looming over every international venture. It doesn’t matter how stable or friendly the government seems today—trust me, things can change in the blink of an eye. It’s like building a beachfront café and ignoring the weather forecast. Sure, the sun’s shining now, but hurricanes don’t exactly RSVP.

Whether we’re expanding into a new market or already knee-deep in foreign operations, political risk is always lurking. Just look at the companies that thought Brexit would never pass, or the ones blindsided by the U.S.-China trade war. We’ve all seen it happen—one minute, everything’s smooth sailing, and the next, we’re scrambling to figure out what just happened.

Why Political Risk Management (PRM) Matters

Political risk isn’t just about coups or revolutions—though those certainly add some excitement to the mix. It’s also about the quiet changes that can, overnight, turn our best-laid plans into a costly disaster. Maybe it’s new regulations, a surprise tax hike, a sudden trade embargo, or even a leader who wakes up one morning and decides to nationalize half the industries in the country. Sounds extreme? It happens more often than we’d like to admit.

And here’s the kicker: many of us in business walk around with this comical overconfidence that we’ve got it all under control. We think we have consultants, lobbyists, or insider connections that will give us the heads-up before things go south. But here’s what I’ve learned—politics doesn’t care about our timelines or projections. One minute we’re shaking hands on a deal with a stable government, and the next, we’re watching that same government collapse on the evening news, with our factory smack in the middle of the chaos.

That’s where Political Risk Management (PRM) comes in. It’s not about stopping these surprises—it’s about being ready for them. It’s about building a business that can survive and adapt no matter how turbulent the political waters get. Optimism is great, but if we’re not prepared, we’re just hoping the storm won’t hit us. Spoiler alert: it will.

The Importance of Humor in PRM

As bizarre as political risk can be, sometimes all we can do is laugh. I’ve seen companies pour billions into a country, only to have their assets seized by a sudden government power shift. Or take the businesses that cozied up to regimes, thinking they’d found an ally, only to watch those same governments get overthrown. Not to mention those who bet on stable currency markets, only to watch their earnings evaporate as exchange rates crashed.

If I’ve learned anything, it’s that political risk has a way of making even the sharpest business minds look like they’ve been outmaneuvered by a coin toss. But through humor—and maybe a bit of humility—we can keep things in perspective and navigate these turbulent waters with a little more clarity. If we can’t laugh at the absurdity of geopolitical events disrupting our plans, then we’re in for a long, stressful ride.

In the sections that follow, I’m going to break down just how unpredictable political risk is, how it can impact our businesses, and why all of us—no matter the size of our operation—need to stop pretending we’re immune. Let’s dive into the chaos and figure out how we can dance with dictators and still come out ahead.

What is Political Risk?

Let’s get something straight: political risk isn’t just about sudden revolutions or dramatic coup d’états, though those make for great headlines and can certainly turn a business upside down overnight. No, political risk is broader—and sneakier—than that. It’s about all the little (and not-so-little) ways that governments, elections, policies, and even international relations can throw a wrench into our well-oiled business machine.

Definition and Scope

When I talk about political risk, I’m referring to any uncertainty that stems from changes in government policies or actions that could negatively affect our business. And let me tell you, these changes can come in many flavors. You’ve got your classic government policy changes, which can range from new tax laws or environmental regulations, to full-on nationalization of industries. Then there’s political instability, which includes everything from civil unrest and protests to unexpected regime changes and elections that didn’t go the way the pollsters promised.

And if that’s not enough, we also have to keep an eye on geopolitical tensions—those lovely international squabbles that lead to trade wars, sanctions, or embargoes. One day, we’re doing business in what seems like a calm, growing market; the next, we’re hit with tariffs that drive up costs or even sanctions that cut off our supply chain entirely.

Domestic vs. International Political Risk

We’ve all heard that old line about thinking globally and acting locally, but when it comes to political risk, we have to think both globally and locally—and then pray we’re not missing something. Political risk can be either domestic or international. Let me explain the difference:

• Domestic Political Risk happens right here at home. Think of sudden tax hikes, labor law changes, or new environmental regulations that can disrupt operations overnight. And don’t get me started on how local elections can throw us for a loop, especially when they result in a new leadership that’s not exactly business-friendly.
• International Political Risk, on the other hand, comes from outside our borders. It’s the kind of risk that catches us off guard when foreign governments decide to tighten regulations, restrict trade, or—my personal favorite—decide to nationalize foreign assets (because why not?). For those of us with international operations or suppliers, this can be a nightmare waiting to happen.

The bottom line is, whether we’re dealing with domestic politics or the whims of international governments, political risk is always in play. And no matter how much we think we’ve got it under control, it has a way of surprising us just when we’re least prepared.

Real-World Examples

Now, let’s talk about some real-world cases where political risk reared its ugly head and left companies scrambling. Take Venezuela, for example—a cautionary tale if I’ve ever seen one. For years, businesses flocked there to take advantage of its oil wealth and growing economy. Everything seemed great until, almost overnight, the government decided to nationalize several industries, leaving foreign companies out in the cold. I can only imagine the frantic phone calls back to headquarters that followed.

Then there’s the infamous Brexit saga. Remember how confident businesses were that the UK would never actually leave the European Union? Who could blame them? The polls said it was unlikely, the economists were mostly against it, and yet, here we are, with companies still trying to untangle the bureaucratic mess it left behind. It’s the kind of political risk that blindsides even the most seasoned executives.

And finally, let’s not forget the U.S.-China trade war. One minute, American companies were happily manufacturing goods in China, enjoying the benefits of low-cost labor. The next, tariffs were slapped on imports and exports, sending supply chains into chaos and forcing businesses to reevaluate their entire strategy.

These are the kinds of risks that don’t just disrupt our operations—they can decimate them if we’re not prepared.

Why Political Risk is Unpredictable

Here’s a truth that many business leaders, myself included, have had to come to terms with: political risk is inherently unpredictable. We like to think we can forecast it—after all, we’ve got data, polls, and experts on our side, right? But let’s be honest. If there’s anything that the last few years have taught us, it’s that political risk can throw us curveballs that no amount of analysis or “gut instinct” can prepare us for.

The Myth of Predictability

Now, let’s talk about the myth we all love to believe: that political risk is something we can see coming. We tell ourselves that if we hire enough political consultants, stay tuned to the latest news, or lobby hard enough, we’ll have a sense of what’s going to happen. But reality tends to disagree.

Take elections, for example. I think back to Brexit again because it’s the perfect case study. I mean, who didn’t trust the polls on that one? The experts, the economists, and most of the media told us there was no way it would pass. But what happened? People woke up the next morning, staring at their phones in disbelief, realizing that the political landscape had just been turned on its head. Businesses suddenly had to scramble to figure out what this meant for trade, regulations, and their future in the UK market.

It’s not just Brexit, though. Look at U.S. presidential elections or elections in any major country. Every few years, the entire business world holds its breath, waiting to see if the incoming leader will impose new tariffs, roll back regulations, or change foreign policy in a way that upends everything we’ve been planning. And let’s not even get started on surprise elections or regime changes in less stable regions.

“We’ve Got It Under Control”

Now, I’ve had my fair share of moments where I thought, “It’s fine, we’ve got this under control.” And you probably have too. It’s that comforting thought that as long as we’ve got a good relationship with the local government, maybe even a bit of lobbying muscle, we’ll be safe from whatever political turmoil is brewing. It’s a nice idea, but reality has a way of shattering those illusions.

I can’t help but think of the businesses in countries like Turkey or Russia, where some executives believed that having strong ties to the government meant they were protected. And for a while, maybe they were. But all it takes is a sudden shift in leadership, or a government deciding that foreign companies are no longer welcome, and suddenly, those cozy relationships don’t look so secure anymore.

It’s like playing a game of musical chairs. Sure, everything seems fine as long as the music’s playing. But the second it stops, and the political winds change, it’s every company for itself. And guess what? If we’re not prepared, there may not be a chair left for us when the dust settles.

The Election Shocks

Let’s not forget the shocks that come from political elections—especially when we think we’ve got the result pegged. We’ve all been there. Maybe we’ve even adjusted our strategies to align with the party we think will win. But when election night rolls around and the unexpected happens, it’s like watching a slow-motion car crash. One minute, we’re sure the pro-business candidate will win, and the next, we’re facing a government that’s leaning hard on populist, protectionist policies that could dismantle everything we’ve built.

And this isn’t just limited to Western democracies. Take Brazil, for instance. One day, the market’s booming, and the next, a populist candidate sweeps in, pledging to completely overhaul the country’s economic policies. Suddenly, businesses have to reevaluate whether they’re still viable in this new climate. It’s the kind of unpredictable shift that can make even the most experienced CEOs wish they’d spent more time hedging their bets.

The point is, no matter how confident we are in our ability to predict political outcomes, the truth is we can’t. Politics, by its very nature, is full of surprises. And while we might be able to mitigate some of the risk, we’ll never be able to predict it with absolute certainty.

How Political Risks Affect Business Operations

I’ve been in enough strategy meetings to know that most of us like to think we’ve got our risks mapped out. We’ve budgeted for market fluctuations, kept an eye on competitors, and maybe even built in some buffer for economic slowdowns. But political risk? That’s a whole different animal. It doesn’t just nibble at the edges of our business; it can bulldoze right through the middle, upending everything from supply chains to investor confidence. Let’s talk about how these risks really play out.

Economic and Financial Risks

First up: the money. Political risk can wreak absolute havoc on our financials, often in ways we didn’t see coming. One day, everything’s fine, and the next, a sudden tariff or sanction makes our cost structures go haywire.

Think about currency volatility. There’s nothing quite like waking up to find that overnight, a political crisis halfway around the world has sent the currency of the country where we’ve just invested millions of dollars plummeting. One moment, we’re happily running operations in a market where the exchange rates work in our favor, and the next, we’re scrambling to figure out how to keep our profits from evaporating as the currency takes a nosedive.

Then there are the increased costs that come out of nowhere thanks to political decisions. A perfect example is the U.S.-China trade war. Overnight, tariffs were slapped onto goods, driving up costs for companies that had been relying on low-cost manufacturing in China. Suddenly, supply chains that had worked like clockwork became a financial nightmare. And don’t even get me started on the uncertainty that followed, with businesses trying to guess whether the tariffs would be temporary or stick around long enough to make relocating factories the only viable option.

Reputation and Brand Damage

Now, here’s a side of political risk we don’t always think about right away: the damage to our reputation. When political situations get messy, businesses can quickly get caught in the crossfire, and before we know it, our brand is taking hits we never anticipated.

Aligning too closely with certain governments or regimes can backfire spectacularly. Remember the fallout from some Western companies continuing to do business in Russia even as political tensions escalated? Suddenly, these companies found themselves the target of not just political backlash, but also consumer boycotts. One minute, our brand is thriving in a global market, and the next, we’re facing public outrage because we’re seen as being too cozy with a controversial regime.

It’s a delicate balancing act, isn’t it? We want to expand into new markets and capitalize on opportunities, but if we’re not careful, we can find ourselves stuck between government policies and public opinion, with our reputation taking a hit from both sides.

Supply Chain Disruptions

Supply chains—they’re the lifeblood of so many businesses. We rely on them to keep everything running smoothly, and when political risks hit, they’re often the first thing to take a beating. A single political event can ripple through the entire chain, disrupting operations from top to bottom.

Let’s talk about trade wars again because, frankly, they’ve been one of the most visible forms of political risk in recent years. When countries like the U.S. and China decide to start slapping tariffs on each other’s goods, businesses get caught in the middle. It’s not just the price of goods that goes up—it’s the timing of deliveries, the reliability of suppliers, and, eventually, the ability to meet customer demand.

Take Brexit, for instance. It didn’t just affect companies in the UK—it sent shockwaves through supply chains across Europe. Companies that had spent years building efficient, cost-effective supply chains suddenly found themselves grappling with customs delays, new regulatory hurdles, and the added cost of tariffs between the UK and the EU. What was once a well-oiled machine became a logistical nightmare practically overnight.

And that’s the thing about political risk—it doesn’t politely stay in its lane. It bleeds into every corner of our operations, and if we’re not paying attention, it can grind our business to a halt faster than any competitor could.

Key Indicators of Political Risk

If there’s one thing I’ve learned, it’s that political risks rarely hit us out of the blue. Sure, the actual event—whether it’s a new regulation, an election upset, or a sudden tariff—might seem like a surprise, but if we look closely, the signs were probably there all along. The trick is knowing where to look and what to look for. While we can’t always predict political risk with pinpoint accuracy, we can certainly spot the early warning signs and prepare for the worst.

Early Warning Signs

Let’s face it, politics is unpredictable, but not totally without clues. Unusual political behavior or shifts in government policy are often the canary in the coal mine. We’ve all seen the writing on the wall in some countries—the rise of anti-business rhetoric, populist movements, or leaders suddenly starting to talk about “protecting national industries.” These are often clear indicators that the political climate is about to change, and not in ways that are friendly to foreign businesses.

Another red flag? Protests, strikes, and civil unrest. When we see people taking to the streets, demanding government action or protesting against economic policies, it’s usually a sign that things are starting to boil over. It doesn’t matter if the issue seems unrelated to our business—protests are like the political tremors before the earthquake. A government under pressure is a government that might make hasty decisions, and we all know how quickly those decisions can ripple through markets and industries.

And then there are the economic signals—currency fluctuations, capital flight, or rising inflation. These are often the byproducts of political instability, and if we’re seeing these trends in the countries where we operate, we should be on high alert. It doesn’t take much for an economic crisis to turn into a political one, and when that happens, businesses like ours are often caught in the crossfire.

The Illusion of Control

We’ve all been there, right? That moment when we tell ourselves that the situation is under control, that we’ve got enough information to navigate through any political turbulence. It’s a comforting illusion, but it’s just that—an illusion.

Here’s the thing: many of us believe that if we’re paying close attention, or if we’ve got a good relationship with local politicians, we’ll get some kind of insider’s scoop before things go south. But the truth is, political risks often unfold so quickly that no amount of backchannel conversations can save us. Even the best political advisors can’t predict every twist and turn, and by the time we get the “inside” information, it’s often too late to change course.

Remember the companies in Argentina in the early 2000s? Many thought they had things under control, despite warning signs of economic instability. When the government froze bank accounts and devalued the peso almost overnight, businesses were left scrambling, realizing that their political connections had done nothing to protect them from the fallout.

The same thing happens all over the world, time and time again. Political risk is like a game of chess where the board can flip upside down at any moment. We might think we’ve got the upper hand, but in reality, we’re at the mercy of political forces that we simply can’t control.

Categories of Political Risk

So, now that we’ve talked about the unpredictable nature of political risk and the signs we need to look for, let’s break it down a bit further. Political risk isn’t just one big, nebulous thing—it comes in a lot of different forms. And while it might all feel like chaos at times, understanding the specific categories of political risk helps us prepare better. Let’s take a look at the major types.

Regulatory and Legal Risks

This is one of the more common, and frankly, frustrating forms of political risk. We make an investment in a market, start building up operations, and then—bam!—the government changes the rules. Maybe it’s a new tax law that suddenly makes everything more expensive, or maybe it’s an environmental regulation that forces us to overhaul our entire production process. Either way, the bottom line is the same: the government changes the legal or regulatory framework, and suddenly we’re left scrambling to adjust.

Take India, for example. Businesses operating in the country have had to deal with a whirlwind of regulatory changes over the years, especially in sectors like tech and manufacturing. One minute, it’s open for business, and the next, companies are facing new taxes or restrictions that completely shift the playing field. The worst part? These changes often come with very little warning, leaving companies to figure out compliance on the fly—or risk fines, penalties, or worse.

Sovereign Risks

Ah, sovereign risks—the big, dramatic ones that make headlines. This is when a government decides, for whatever reason, that it’s going to seize or expropriate foreign assets. And let me tell you, there’s nothing quite like waking up to find that a government has just declared ownership over the factory or mine you spent years building. It’s not common, but when it happens, it’s devastating.

Take Venezuela again, or Zimbabwe in the early 2000s. Governments in both countries nationalized foreign-owned assets, leaving businesses high and dry. It’s the kind of risk that can destroy a company overnight if they haven’t thought through how to hedge against it. And let’s not kid ourselves—no amount of lobbying or cozying up to officials will help when a government decides that foreign ownership is no longer in its national interest.

Security Risks

Security risks aren’t always top of mind when we think of political risk, but they should be. Political violence, terrorism, or even military conflict can have a massive impact on our operations. If a country we’re operating in suddenly erupts into civil unrest or worse, it’s not just our physical assets at risk, but our people, our supply chains, and our ability to continue doing business at all.

Look at Syria. Before the civil war, it was seen as a potential investment destination in the Middle East. Businesses were slowly entering the market, seeing opportunity. Then, practically overnight, the country descended into chaos, and those investments became liabilities. What once seemed like a growth market turned into a war zone, with businesses forced to abandon operations and take heavy losses.

Trade and Investment Risks

Another fun one for businesses operating across borders is trade and investment risk. This comes in the form of tariffs, embargoes, and sanctions—government actions that suddenly make it impossible (or incredibly costly) to keep doing business as usual. Trade wars, like the one between the U.S. and China, are prime examples. One minute, goods are flowing freely between countries, and the next, we’re slapped with tariffs that make everything twice as expensive, or worse, block access to key markets entirely.

Sometimes it’s not even our home government we have to worry about—it’s the countries we’re trading with. A sudden tariff on a key import can send shockwaves through our supply chain, forcing us to either absorb the costs or pass them on to customers. Either way, it’s a lose-lose situation that’s impossible to avoid if we haven’t accounted for the risk ahead of time.

The Costs of Ignoring Political Risk

Here’s where it all comes together. We’ve talked about the different categories of political risk, and by now, you might be thinking, Sure, that sounds bad, but how often does this really happen? The answer? A lot more often than we’d like to admit. And when businesses ignore political risk, the costs are enormous.

Financial Losses

Let’s be honest—money talks. When political risk strikes and we’re not prepared, the financial losses can be catastrophic. We’ve all seen companies that failed to plan for political upheaval get wiped out. Whether it’s a factory being seized, a supply chain grinding to a halt, or tariffs doubling our costs overnight, the impact on the bottom line is immediate and brutal.

Take the oil companies in Nigeria that have, over the years, faced disruptions due to political violence, government intervention, or sudden policy shifts. Billions of dollars in potential revenue, gone in an instant, because no one saw the political risk coming—or at least, no one planned for it.

Reputational Damage

Financial losses are bad enough, but the reputational damage can be even worse. Imagine being the company that stuck by a corrupt or authoritarian regime too long. When that government is overthrown or sanctions are imposed, we’re left looking like we prioritized profits over ethics—and that’s a hard reputation to shake.

Remember when companies continued doing business in Russia after sanctions were imposed? The public outcry wasn’t just about politics—it was about values. Consumers and investors alike punished brands for aligning themselves with controversial regimes, and some companies are still recovering from the backlash.

Missed Opportunities

And then there’s the flip side: the companies that, out of fear of political risk, miss out on incredible opportunities. It’s tempting to avoid any market that seems even slightly unstable, but sometimes those are the markets with the highest growth potential. The key is learning how to navigate political risk effectively, not avoiding it altogether.

Emerging markets, like Vietnam or Brazil, come with their fair share of political uncertainties, but businesses that understand and manage the risks can position themselves for major long-term growth. The problem is, when we let political risk paralyze us, we miss those chances entirely—and by the time we realize it, the window of opportunity has closed.

Conclusion

So, here we are, at the end of Part 1, staring into the chaotic, unpredictable abyss of political risk. It’s not exactly comforting, is it? But that’s the reality we face when operating in a world where governments can flip on a dime, elections can defy all predictions, and the smooth flow of global trade can be shattered by a single headline. If we’ve learned anything so far, it’s this: political risk is everyone’s problem, whether we’re running a multinational conglomerate or a smaller business with international aspirations.

A Final Note

I’ll be the first to admit that political risk has a way of making even the most confident executives look foolish. And yet, time and again, we convince ourselves that “this time is different,” that our relationships, our forecasts, or our “inside knowledge” will somehow protect us from the next political upheaval. But the truth is, no amount of optimism can shield us when the music stops and we find ourselves without a chair.

We can laugh at it (and we should, because otherwise we’d cry), but we also need to take it seriously. The next coup, trade war, or policy shift is just around the corner, and if we’re not prepared, the consequences can be devastating. Political risk management isn’t about predicting the future—it’s about being flexible and resilient enough to handle whatever comes our way, no matter how absurd or unexpected.

Looking Forward

Now that we’ve laid the groundwork and acknowledged that political risk is, indeed, a real and unavoidable part of doing business, the question becomes: What do we do about it? In Part 2, we’re going to dive into real-world case studies—stories of businesses that have navigated political risk successfully, and others that, well, didn’t fare so well. We’ll learn from their experiences, laugh at their mistakes, and, most importantly, figure out how we can avoid making the same ones.

Because if there’s one thing we can count on, it’s that political risk isn’t going anywhere. It’s time to stop pretending we’re immune and start figuring out how to survive—and maybe even thrive—in this unpredictable dance with dictators.