Protecting Overseas Investments: What Are the Options?

September 19, 2013

Practical Law company logoExpropriation and nationalization of foreign assets in Argentina; concerns of sovereign debt default in certain European countries; political and civil unrest in Egypt and Turkey, political violence in Burma and Mozambique; and possible war in Syria. These are a few of the events that have occurred in the past few months that could jeopardize foreign investments. While these developments do not apply to all investors, they serve as a reminder that investors with assets and investments in foreign countries should make sure they have identified the political and security risks that apply to their investments and have crafted risk management policies that address these risks.

The risks that apply vary depending on the nature and location of the investment. For example, it is more likely that an oil or mining project may be expropriated than a shoe factory. Similarly, investments in politically unstable countries may be more at risk than investments located in Western Europe or the US. However, while certain risks may be more likely to materialize in certain jurisdictions, there is no such thing as a risk-free country. Investors and their counsel should conduct a comprehensive political risk assessment if any of the following applies to them:

  • They rely on commodities from suppliers located in a politically volatile or unstable jurisdiction, especially if the commodity cannot easily be obtained from suppliers in other countries.
  • They have an equity investment in a company or project or own property (whether real estate, a manufacturing plant or other project) located in a politically volatile or unstable jurisdiction, a jurisdiction that has a history of expropriating foreign assets or a jurisdiction whose government is hostile to foreign investment.
  • They are selling products to a buyer located in a country whose currency may be devalued or that may be prevented from making payments abroad.
  • They have a project that relies on an agreement, concession or license from a government entity.
  • They are extending financing to a government or a government owned entity that has not always honored its commitments.
  • They are developing a mine, exploring an oil field or otherwise engaged in an extractive industry in a country with an uncertain political environment.
  • They have an investment in a jurisdiction that has a history of ethnic, racial or religious strife that may develop into civil or social unrest.

Investors can use a wide range of risk mitigation tools, including political risk insurance, stabilization clauses, social development policies and good relationships with the host government and local stakeholders, to minimize the impact of political and security risks on their investments.  In the article, Protecting Overseas Investments: What Are the Options? Practical Law discusses and analyzes some of these tools.

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