All PostsArticlesBlogRisk Management

“Management of Political Risks” by Marc-Felix Otto, Partner at The Advisory House

todayOctober 11, 2023

Background

Management of Political Risks

Political risks are on the rise. The recent past has been dominated by geopolitical risks, which have the potential to endanger companies, entire sectors, and even national economies. 

Commodity traders are often at the forefront of these developments. On the one hand, they are exposed to new regulations, e.g., supply chain laws. On the other hand, navigating the political landscape can be their core business – with the Marc Rich AG (today, Glencore) facilitating the delivery of Iranian oil forty years ago as pointed example.

For example, commodity traders can profit from enhancing geographic flexibility: A geographically flexible company will achieve an advantage over its competitors, especially in politically uncertain times.  The selection of a target jurisdiction and how to deal with possible defensive measures by the current home country are critical sub-topics. For some companies, Special Administrative or Economic Zones can offer an interesting alternative to the well-known commodity trading hot spots such as Singapore, London, or Geneva. The smaller the jurisdiction, the higher the chances for a significant company to negotiate a specific contract with the Zone operator. Ideally, this results in a high level of legal certainty and favourable business conditions.

The strategic management of political risks not only looks at avoiding or reducing such risks. Rather, the objective is to establish a competitive advantage regarding the management of the risk, analogous to commodity traders’ core business of managing market risk. Areas of competitive advantage may be the risk bearing capacity, an information edge, a best-in-class network with political decision-takers, or a high level of robustness and flexibility to deal with risks materializing.

Market risk can typically be quantified easily based on historical data. Political risk, however, is man-made and quantification is, therefore, much more complex. A reasonable level of risk quantification, however, is required to take a reliable decision. For political risks, this is typically based on scenario analyses, and informed by insight into the political machinations.

While the management of market and supply chain risk is at the core of commodity traders’ business model, political risks are often dealt with in a reactive and/or opportunistic manner. The book “Management of Political Risks” (Springer, 2023) offers a comprehensive and proven approach to identify, assess, and manage these risks.

The book shows how flexibility can be systematically increased across the company’s assets as well as with respect to its corporate structure. We show where political risks find their way into strategic management and how strategic risk management is implemented. The book systematically develops all the options regarding the management of political risks and outlines the decision-taking process. In general, one can build on the well-known methods from generic risk management and adapt them to the special class of man-made political risks.

Throughout the book, three fictional companies—a chemical corporation, an electricity producer, and a commodity trader—accompany the reader and demonstrate how the provided tools can be applied in practical scenarios.

Written by: Commodities People


Previous post


Get Commodity Trading Premium Content to Your Inbox!
Enter your details and topics of interest and we’ll send you fresh commodity news and insights weekly!
Get Weekly Commodity Trading Premium Content to Your Inbox!
Enter your details and topics of interest and we’ll send you fresh commodity news and insights weekly!
You are Subscribed!
Thank you for your subscription. Commodity news & insights will be coming your way soon!
You are Subscribed!
Thank you for your subscription. Energy News will be coming your way soon!
Yes, Hide this Popup.
This website uses cookies to ensure that you get the best experience.
This website uses cookies to ensure that you get the best experience.