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Political Risk Atlas 2011 shows long-term structural risks for emerging economies
Despite its growing economic power, Russia now features alongside Pakistan in joining the 10 nations most affected by fast-changing, dynamic political risks, according to the third annual Political Risk Atlas, released 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.
The Political Risk Atlas 2011 also focuses on emerging risk areas and structural political risk affecting longer term regime stability, such as resource security, human rights, climate change, infrastructure readiness, education and poverty.
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 ten for the first time, whilst Pakistan has also moved two places up the ranking to 9th.
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. 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.
Irrespective of these risks, Russia remains an attractive investment destination – particulary for the long term where the country scores well on resource security, infrastructure readiness and education. Russia has approximately 140m consumers and an expanding economy. IMF figures reveal that Russia’s real GDP growth amounted to 4% in 2010 and expects it to expand by 4.3% in 2011. The country also enjoys political stability. So long as risks are assessed, monitored and managed in the short term, Russia remains, as do all of the BRICs, an important growth economy and contributor to global economic recovery.
Political Risk Index 2011 (Dynamic)
© Maplecroft, 2011
“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,” says 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.”
Pakistan continues to be destabilised by the cross-border Taliban insurgency, which is concentrated around Pakistan’s north-western regions. Whilst the number of terrorist attacks covered in this year’s Terrorism Risk Index has decreased in comparison to last year, their lethality has increased. An average of 1.6 persons died per terrorist attack between June 2009 and June 2010. The country is also categorised as ‘extreme risk’ in the Regime Stability Index. The government has struggled to quell violent clashes between Urdu-speakers and the Pashtun ethnic group. Both communities vie for political control over Karachi and this has contributed to political instability within the country.
Foreign direct investment in the main emerging economies is expected to rise by 17% over 2011, according to the World Bank, with the BRICs nations of Brazil, Russia, India and China accounting for half of this increase. However, significant challenges for investors remain as risks such as an absence of the rule of law and a prevalence of corruption and conflict prohibit business and societies from thriving. This is especially true of the resource rich nations in which the BRICs are heavily investing, such as Sudan and Yemen which are rated ‘extreme risk’ by Maplecroft for economic integration with China.
Jim O’Neil, Chairman of Goldman Sachs Asset Management, states: "Growth is happening where political risk is most challenging. So, meticulous monitoring and mitigation now will enable business to flourish and benefit from the opportunities presented by the future growth economies of the BRICs and Next 11".
Looking to the longer term, the BRICs countries are witnessing increasingly worse structural political risk trends for 2011. China (25), India (32) and Russia (51), rated ‘high risk’ and Brazil (97) medium risk, have all seen risks increase compared to scores from last year’s Atlas.
“Structural political risk cannot be overstated,” said Maplecroft CEO, Professor Alyson Warhurst. “Levels of education determine the qualifications and skills of a population from which a corporation will draw its employees. A country’s resource security may determine how successful a corporation is in obtaining the raw products it needs. All of these factors have a profound impact on the sustainability and profitability of business over the long term. They may be as crucial as the threats posed by terrorism and coups d'état. Structural political risk is also a leading indicator of dynamic political risk and requires monitoring.”
China, for instance, is categorised as ‘extreme risk’ across several areas, including: civil and political rights, judicial independence, democratic governance, labour rights, and human rights violations committed by members of the security forces. Companies which are deemed in any way to be supporting a government or its agents in stifling democracy, liberty and human rights may suffer reputational damage, which will ultimately impact the bottom line.
“China’s economic modernisation and a strong position in the global economy have reduced its exposures to specific structural risks,” continues Professor Warhurst. “This is reflected by its ‘medium risk’ ratings for resource security, infrastructure and economic diversification.”
Maplecroft’s Political Risk Atlas 2011 has been developed to enable organisations to identify and monitor risks to operations, supply chains and investments. The Atlas offers 41 indices and maps, as well as scorecards for each country, sub-national mapping of terrorism and conflict, plus two years of trends.
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