Political Risk & Commodity Markets
Commodities are not merely instruments of trade; they are functions of geopolitics. Control of oil and gas resources transforms a crumbling power like Russia into a global political power broker, while access to cheap wheat underpinned the dictatorial regimes of the North Africa for decades.
By Elizabeth Stephens
WHILE THE VERY nature of commodity trading – operating in a global marketplace of buyers, sellers, producers and consumers based in every region of the world – leaves the sector vulnerable to a range of events from bad weather to disease, it is political risk that is one of the key drivers of fluctuations in supply, demand and price. So what is political risk? We all have a good idea,
but there is no generally accepted or legally agreed position on what constitutes political risk. A broad definition is “the risk of the occurrence of any action or inaction of a government authority that has the effect of impairing, jeopardising or terminating a transaction or the returns of shareholders or other stakeholders on their participation in a transaction.” The scope of government action or inaction that constitutes a political risk event is as broad as the definition and while investors may be adept at spotting headline events such as war or regime change, political risk events that occur following subtle changes in a country’s political, economic and security risk landscape, are less immediately evident. Macro trends affecting world markets
such as globalisation, disintermediation and commoditisation are relatively easy to identify although their impact may be more challenging to anticipate. At the micro level, triggering events which have the potential to catapult an issue from relative obscurity to a place of prominence on the decision making agenda may be missed by all but the most astute risk manager. The underlying trends and proximate trigger that gave rise to the Arab Spring provide a pertinent illustration; one in which commodities played a crucial role.
Trends & Triggers The pressure rising soft commodity
prices put on the ability of the poor to purchase food acted as an accelerant for the wave of protests that swept across the Middle East and North Africa. Beginning with the fall of Tunisian President Zine El
28 March 2013
Abidine Ben Ali, the tide of protest went on to engulf Egyptian President Hosni Mubarak, Colonel Muammar Gaddafi of Libya and plunged Syria into civil war. The trends that gave rise to the underlying currents of discontent were in evidence several years before the Arab Spring hit the headlines in 2011
... there is no generally accepted or legally agreed position on what constitutes political risk
Food subsidies have been used as a tool to buy
loyalty and ensure political stability for decades. Yet this form of appeasement lost its lustre in 2008 when grain prices reached record levels and unemployment soared; while for those governments in the region who lack a revenue stream from hydrocarbons reserves, the cost of subsidies became unsustainable. By 2010, the Egypt government’s bread subsidy bill topped US$3 billion a year. Much of this took the form of selling subsidised flour to local bakeries; an inefficient
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