KEY POLITICAL RISK CONSIDERATIONS FOR U.S. COMPANIES APRIL, Editorial credit: GMEVIPHOTO / Shutterstock.com

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1 KEY POLITICAL RISK CONSIDERATIONS FOR U.S. COMPANIES APRIL, 2017 Editorial credit: GMEVIPHOTO / Shutterstock.com

2 GENERAL MOTORS EXPROPRIATION IN VENEZUELA: A Sign of a Global Issue for U.S. Investors Amid violent anti-government protests, on April 20, 2017 the Venezuelan government seized a vehicle assembly plant in Valencia belonging to the U.S. s largest car manufacturer, General Motors (GM). The company was forced to cease operations in the country and lay off around 2,700 workers. The incident is the latest in a string of expropriations in Venezuela, as the economy collapses and the government s position weakens. In July 2016, an industrial plant belonging to U.S. consumer care company Kimberly Clark was seized, while in 2013 Superior Energy Services had 2 oil rigs seized by Venezuelan state oil company PDVSA. Not only is the risk of expropriation significantly elevated in Venezuela, compensation is rarely offered. Of 1,284 expropriated companies between 2002 and 2013, only 30% received compensation offers. The Venezuelan domestic context is distinct. With the economy contracting by 13% in 2016, widespread food and medicine shortages, intensifying violent protests, and centralized economic planning, there are few countries where the government has the same desire and motivation to expropriate assets as in Venezuela. However, it is an example that is resonating beyond Latin America and actions against U.S. firms in the country are indicative of the political risks which can face investors globally. It will be easy to dismiss events in Venezuela as an outlier but with growing global trends it would be at your peril. U.S. companies operating internationally must contend with a volatile political risk environment in With conflict risks rising on the Korean peninsula, the outlook for Chinese-U.S. relations is uncertain. A sustained deterioration could disrupt investment flows, while the U.S. s withdrawal from the Trans-Pacific Partnership will boost Chinese primacy in Asian trade and investment. At the same time the diplomatic relationship between the U.S. and Russia remains fraught with tension. There are also many lower profile concerns for U.S. investors whether it be South African potential land expropriation, payment flows out of Brazil, new laws and regulations in the Egyptian energy sector to name just a few of the ongoing shifts in risk profile which are unfolding around the globe. Exposure to political risks can shift quickly. Elections, coups, and successions can all lead to political violence and rapid changes in policy direction, elevating the risk of expropriation, contract cancellation, contract alterations, and/or nationalization. The economic situation of a region or country is intertwined with political risks and this has been demonstrated countless of times as an economic situation deteriorates in a country. U.S. firms could be specifically targeted if an incoming government seeks to realign itself to another major power, particularly in Asia. The Trump administration is likely to take a tough stance on governments which expropriate U.S. companies assets, using targeted sanctions against officials involved. This is particularly likely in the GM case. However, strengthening sanctions could make the business environment in high risk countries more difficult for U.S. firms to navigate. Similarly, economic shocks can leave sovereigns unable to meet their payment obligations or force the introduction of capital controls. For example, in April 2017, El Salvador missed a USD 28.8 million interest payment to a local pension fund as a result of congressional deadlock, leading to downgrades from major ratings agencies. This could lead to further defaults on payments due to U.S. firms with contracts in the country. JLT Specialty USA Global Political Risks For U.S. Investors April

3 CASE STUDY 1: Export Embargo in Indonesia In February 2017, U.S. mining firm Freeport-McMoRan declared force majeure, as an export ban on copper concentrate brought production at its Grasberg mine to a standstill and prevented the company from meeting its contractual obligations. By April 2017, the ban had reportedly cost the company USD 1B in lost revenues. CASE STUDY 2: Expropriation in Colombia Early in 2017, the Colombian government liquadiated the Spanish investor s, Gas Natural, interest in Electricaribe. Currently, Gas Natural has filed for arbitration and is demanding more than USD 1B in compensation to cover the loss of their investment. CASE STUDY 3: Currency Controls in Argentina In 2012, U.S. luxury fashion brand Ralph Lauren closed its 3 stores in Argentina due to import limits which disrupted stock from entering the country and currency restrictions which substantially restricted the repatriation of profits. Responding to Political Risks: One of the challenges facing an international business is how to manage a complex range of political risks across a diverse portfolio in today s challenging geopolitical environment. JLT Specialty s Credit, Political, and Security Risks (CPS) division is uniquely placed to provide a comprehensive and bespoke political risk management strategy, through our specialist broking team and analytics service. It is essential for any U.S. company investing overseas to identify and understand the complexity of the risks faced in the foreign territory. Once the risks have been understood and identified then a bespoke risk management plan can be put into place to reduce or remove the risks faced from a country and political perspective. This risk management strategy can include the utilization of Political Risks Insurance. A sometimes commonly held view is that Political Risks Insurance is too expensive and doesn t ultimately cover the risks required. This view may have had some merit in years gone by, but with the evolution and significant growth of the insurance market both in product and capacity this is now a very outdated view and a risky one to maintain. Coverage has never been more readily and easily available and at its broadest point in terms of risks covered. The Political Risks Insurance market can cover the risks to your investments, assets (fixed and mobile), contracts and people. As a general guide, the headline perils usually covered are (noting that each policy is individually crafted to ensure complete coverage for your unique risk profile): JLT Specialty USA Global Political Risks For U.S. Investors April

4 Confiscation, Expropriation, Nationalization Covers the risk of expropriation to the foreign enterprise or assets by the host government and other expropriatory action Currency Inconvertibility/Non Transfer Covers remittances, shareholder loan repayment, dividends against inconvertibility, and transfer risks Selective Discrimination Covers foreign enterprise and assets against risk of host government applying selective measures against the operations Forced Abandonment Covers abandonment of the operation due to the security environment and political force majeure events such as political violence and government action Forced Divestiture Covers where the U.S. government requires an organization to divest itself of its investment and exit the host country Political Violence Covers physical damage or loss to assets due to political violence acts such as war, terrorism, and civil unrest License/Concession Cancellation Covers cancellation of agreements outside of the terms of the agreement causing the abandonment of the operation Import/Export Embargo Covers the inability to import or exports goods due to host government actions Breach of Contract/Non Honoring of Arbitration Award (if applicable) Covers where the host government/contracting counterparty breaches a legally enforceable contract obligation as well as subsequently failing to honor arbitration award in the company s favor Business Interruption following any of the above events JLT Specialty USA Global Political Risks For U.S. Investors April

5 JLT USA JLT Specialty USA (JLT USA) is the U.S. platform of Jardine Lloyd Thompson Group plc (JLT Group), the largest specialty focused broker in the world. We are specialists not generalists. JLT USA offers clients the same deep industry and product expertise that companies worldwide have trusted with JLT Group for decades. We provide clients with insurance, reinsurance, and wholesale insurance brokerage services, in addition to claims advocacy and specialist consulting and analytics services. JLT USA comprises more than 300 colleagues and dedicated specialists working across 17 offices in the U.S. and Bermuda. These resources work seamlessly as one team to ensure flexible, efficient, quality solutions are delivered to our clients Specialist Broking Capabilities: JLT s CPS business is a core global business unit for JLT. We have been a leading broker in the credit, political, and security risks area for 30 years. We are proven pioneers in our field. We have a global team of 102 specialists with a presence in 17 key financial hubs around the world. We work on behalf of large multinational clients, financial institutions, government entities, funds, and high net worth families and individuals addressing their country, credit, and security concerns whether it is for a financial, physical, or personal exposure. Analytics Service: JLT is the only insurance broker in the market to retain a specialist, in-house analytics team which allows us to provide support and solutions to help our clients identify, understand, manage, and transfer risk. Starting point for a coherent risk control strategy is a detailed understanding of the risks. JLT s CPS analytics service brings perspective to these risks, helping our clients to gain clarity and make better informed decisions by delivering a range of services and technology solutions to assist in our work. Our team offers a key tool to assist in the management of political risks: World Risk Review (WRR): JLT s proprietary country risk rating platform providing risk ratings across 9 different perils for 197 countries. At the heart of WRR are our country risk ratings, which are generated by a proprietary, algorithm-based modelling system incorporating 60 international sources of data. By using a quantitative approach, our clients can use the ratings to benchmark political risk across a portfolio. Ratings are updated monthly, allowing our clients to monitor how the risk environment changes over time. The ratings deliver, quickly and easily, an understanding of political risk in any given country upon which a management strategy can be built. We are true specialists and have an outstanding track record in delivering economic and comprehensive risk solutions to our clients and in claims settlements. JLT Specialty USA Global Political Risks For U.S. Investors April

6 CONTACTS MATT STRONG Head of Credit, Political, and Security Risks T: E: CORINA MONAGHAN Senior Vice President T: E: REID SAWYER LTC U.S. Army (ret.) Senior Vice President T: E: JLT Specialty USA is the U.S. platform of the leading specialty business advisory firm, Jardine Lloyd Thompson Group. Our experts have deep industry and product experience serving leading U.S. and global firms. Our key to client success is our freedom to be creative, collaborative, and analytical while challenging conventions, redefining problems, creating new insights, and exploring new options to deliver solutions for each client s unique business and risks. JLT is one of the world s leading providers of insurance, reinsurance and employee benefits related advice, brokerage and associated services. We are specialists. Our deep expertise and entrepreneurial culture give us the insights, creative freedom and tenacity to go beyond the routine and deliver better results for our clients. At JLT, clients come first. JLT owns offices in 40 territories and has more than 10,600 colleagues. Supported by the JLT International Network, we service clients in over 135 countries JLT Specialty USA