Finance Continued political instability Business hates uncertainty. And, generally speaking, the more uncertain and politically volatile a given jurisdiction, the less sure businesses and investors can be of the economic outcome of a given investment. Consequently, the more volatile an investment made in that jurisdiction will be, and the more the price in your portfolio will fluctuate. This is perhaps the primary risk when it comes to investing in many emerging market economies where the rule of law is still very much a work in progress. Jurisdictions with a long history of political upheaval, radical changes in government and rampant corruption obviously make it much more difficult for companies to do business. Investments made in companies that do business in such countries can be subject to severe volatility as governments change, the national economy experiences booms and busts, and government repression remains an ever-constant concern. One notable example of such instability is Argentina. While the country is rich in resources, boasts an educated, literate workforce and is blessed with a temperate climate, it has been subject to near-constant political instability for the past 100 years with numerous coups, industry nationalizations, a war with Great Britain and near-constant economic crises. For bond investors, the possibility of government default has frequently been a worry; for equity investors, government interference or nationalization is always a consideration. This is not to say that investors can’t make money in Argentina—it’s just that politics present a persistent risk that must be clearly acknowledged before investing there. Civil unrest and war This is the most obvious example of political risk, and a particularly poignant one given the current war in Ukraine. With very few notable exceptions, conflict and violence are very, very bad for business. And if a country is unfortunate enough to find itself drawn into a war (or the threat of such war looms as a real possibility), then companies that do business there can be subject to rapid and dramatic swings in investment value. By now, you’re probably well aware of how the war in Ukraine has had a direct and tangible impact on any company doing business within either Ukraine or Russia − by now, most large Western companies have completely exited their Russian businesses. It has also made many large, well-known Russian firms such as Lukoil and Sberbank largely un-investible. When will the investment environment return to “normal” in these places? Who knows? This kind of political risk also has “spillover” effects that are sometimes not as obvious. For example, the invasion of Ukraine has affected not only the two belligerents, but also many of the economies in neighbouring countries such as Poland, Romania and Belarus. The Polish stock market has taken a big hit. Travel and tourism companies doing business in Eastern Europe are reeling. And the price of potash fertilizer − a major export of Russian ally Belarus − has soared lately, largely in response to the difficulty that Belarus will have in shipping its product to overseas markets. CSANews | SPRING 2022 | 31
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