POLITICAL RISK
Cote d’Ivoire Cocoa Embargo
The cocoa crisis began in November 2010, when incumbent president, Laurent Gbagbo, refused to relinquish power to opposition candidate, Alassane Ouattara, who was judged by international observers to have legitimately won the presidential election. A total ban on cocoa exports was imposed by Ouattara, with EU and US backing, in January 2011 to starve Gbagbo of revenue to finance his government and supporters.
Since the cote d’Ivoire is the world’s largest cocoa exporter, accounting for 30 percent of the global market., thishalt in exports of up to 99 percent of the country’s crop caused cocoa prices to reach a 32-year high of USD 3,714 a
tonne.The ban remained in place until the arrest of Gbagbo in April 2011. Commodity traders suffered losses due to non-delivery, mark to market indemnity, and the cost of damaged goods and storage.
environment is more complicated. The governments of many newly democratising countries in promising mining locations, including Liberia, Sierra Leone and Guinea, recently beset by turmoil, have sought to rescind and renegotiate mining and oil and gas contracts signed by previous military or authoritarian governments for a larger share of the profits. Such action contradicts the standard business position
which relies upon the sanctity of contracts irrespective of the circumstances in which they were signed, subject to those signing the contracts having the authority to do so. It raises the highly subjective concept of ‘legitimacy’ in contractual agreements and the circumstances under which a contract should be considered secure. If a contract were entered into when the host country was in extremis does the foreign investor have the right to expect it to be honoured when the country moves into a period of political stability, even if the process of winning the contract was transparent? This is a challenge confronting many investors in Western Africa and, as a consequence, few of the natural resources companies are completely confident in the security of their investments or future contracts.
The Political Risk Outlook Pressure on natural resources and the insatiable demand for commodities by a rapidly growing and industrialising global population indicates that the
Elizabeth Stephens is Head of
Credit and Political Risk Analysis with JLT Specialty Ltd, the
specialist London market member of the Jardine Lloyd Thompson Group of Companies.
JLT is a recognised market leader in many of its specialist areas
including Energy, Communications and Technology, Financial &
Professional Services and Credit, Political and security risk.
www.jltgroup.com 32 March 2013
medium to long term is high prices and high demand, with the competition for resources potentially leading to social and political instability and in some cases, war. However, while commodities markets will remain
vulnerable to political risk, new technology and the discovery of new resources may serve to reduce price and supply volatility engendered by such events. Traders in the oil & gas sector may be the amongst the first to witness this evolution due to technological advances in the techniques of horizontal drilling and hydraulic fracturing unlocking gas reserves that had not previously been accessible at commercially viable rates, enabling a boom in supplies. According to the Energy Information Administration, technically recoverable natural gas is estimated to exceed 2,200 trillion cubic feet(tcf), meaning the US could become an exporter of liquefied natural gas by 2016. In response, the price of natural gas in the US dropped to a 10-year low. The exploitation of shale gas reserves will be a game changer for energy security and will alter the political power parity between states. In the agricultural commodities sector, fluctuations
in prices are caused by poverty and inequality not scarcity. The rate of global food production has increased faster than the rate of global population growth over the past two decades and the world already produces more than one and a half times enough food to feed everyone on the planet. For the first time, the food crisis of 2008 was not about lack of supply but the inability of the poor to afford high food prices. Much of the industrially produced grain is used for animal feed for the production of meat or for the production of biofuels. Future conflicts over access to food resources will focus on market forces allocating food stuffs to those who can pay rather than to those who are hungry.
Political Risk Management Commodity investors and traders operate in a global
market place where trading in high risk territories is inevitable. As a consequence of the economic crisis, the Arab Spring and populist politics, political risk poses a greater threat and greater opportunity for traders and investors than in the recent past. Today we recognise that whilst businesses cannot manage all aspects of political risk, they do have influence on the political risk environment in which they operate and a robust political risk management strategy can make all the difference. It is a proven fact that organisations with more advanced risk assessment capabilities experience fewer cases of expropriation, government payment default, import/export licence cancellation or currency restrictions as they are able to devise effective strategies to help manage risk. Of all the global uncertainty that has emerged in recent years, one thing is clear, political risks are here to stay – and they need to be managed. •
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