Political & Country Risk

Political and country risk are inherent to commodity trading. Commodities come from countries with varying political stability, and government actions can dramatically affect trade flows, asset values, and contract performance.

Types of Political Risk

Risk Categories

Category	Description	Examples
Expropriation	Government seizure of assets	Nationalization of mines
Transfer risk	Currency controls	Cannot repatriate payments
Contract frustration	Government interferes with contract	Export ban mid-contract
Political violence	War, terrorism, civil unrest	Disrupts operations
Sanctions	Trade restrictions	US/EU sanctions programs
Regulatory change	New rules affecting business	Environmental regulations

Country Risk Factors

COUNTRY RISK ASSESSMENT
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POLITICAL FACTORS (40%):
- Government stability
- Policy predictability
- Rule of law
- Corruption level

ECONOMIC FACTORS (30%):
- GDP growth
- Inflation
- Debt levels
- FX reserves

FINANCIAL FACTORS (20%):
- Banking system health
- Capital controls
- Currency stability
- Access to funding

STRUCTURAL FACTORS (10%):
- Infrastructure
- Trade openness
- Commodity dependence
- Demographics

Sanctions Compliance

Major Sanctions Programs

Program	Issuer	Key Targets
OFAC	US Treasury	Russia, Iran, Venezuela, etc.
EU	European Union	Similar to US, some differences
UN	United Nations	Specific countries/individuals
UK	HM Treasury	Post-Brexit, follows US/EU closely

Sanctions Screening

SANCTIONS COMPLIANCE PROCESS
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BEFORE TRADE:
1. Screen counterparty name
2. Screen beneficial owners
3. Screen vessel (if applicable)
4. Screen ports of loading/discharge
5. Screen cargo origin
6. Check for secondary sanctions

SCREENING DATABASES:
- OFAC SDN List
- EU Consolidated List
- UN Sanctions List
- World-Check / Dow Jones

RED FLAGS:
- Counterparty in sanctioned country
- Vessels flagged by sanctioned state
- Ownership links to sanctioned persons
- Unusual transaction patterns
- Request to avoid certain banks

ESCALATION:
Any hit → Legal/Compliance review
Confirmed → Do not proceed

Secondary Sanctions Risk

SECONDARY SANCTIONS ANALYSIS
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PRIMARY SANCTIONS:
US persons cannot deal with sanctioned parties

SECONDARY SANCTIONS:
Non-US persons who deal with sanctioned parties
may be penalized by US

RISK FOR NON-US TRADERS:
Even if legal under local law,
US can:
- Deny access to US financial system
- Block US transactions
- Sanction individuals

MITIGATION:
- Many traders avoid sanctioned countries entirely
- Even without direct exposure
- Due to US financial system importance

Country Limits

Limit Framework

COUNTRY LIMIT STRUCTURE
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COUNTRY TIER SYSTEM:

TIER 1 (Low Risk):
OECD, stable democracies
No country limit (exposure limits by counterparty)
Examples: US, UK, Germany, Japan

TIER 2 (Moderate Risk):
Stable emerging markets
Country limit: $500M
Examples: Brazil, Mexico, UAE

TIER 3 (Elevated Risk):
Political volatility, developing markets
Country limit: $100M
Examples: Nigeria, Indonesia, Egypt

TIER 4 (High Risk):
Significant instability
Country limit: $25M, L/C required
Examples: Various frontier markets

TIER 5 (Restricted):
Sanctions, extreme instability
Country limit: $0 or case-by-case
Examples: Sanctioned jurisdictions

Country Exposure Monitoring

COUNTRY EXPOSURE REPORT
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Country        Tier    Exposure    Limit     Status
──────────────────────────────────────────────────
China          2       $380M       $500M     76% ✓
Brazil         2       $210M       $500M     42% ✓
Nigeria        3       $85M        $100M     85% ⚠️
Russia         5       $0          $0        N/A ✓
Indonesia      3       $62M        $100M     62% ✓
UAE            2       $145M       $500M     29% ✓
Egypt          3       $48M        $100M     48% ✓
Venezuela      5       $0          $0        N/A ✓

ALERTS:
⚠️ Nigeria approaching limit
   Action: Review and prioritize positions

CONCENTRATION:
Top 3 countries: 45% of total
Policy: Max 50% in top 3
Status: ✓

Political Risk Insurance

Coverage Types

Coverage	Protects Against
Confiscation, Expropriation, Nationalization (CEN)	Government seizure
Political Violence	War, civil unrest, terrorism
Currency Inconvertibility	Cannot exchange local currency
Contract Frustration	Government actions prevent performance
Non-Payment by Sovereign	Government buyer doesn’t pay

PRI Example

POLITICAL RISK INSURANCE STRUCTURE
──────────────────────────────────

INSURED: Trading House

EXPOSURE:
Prepayment to producer in Country X: $200M
Assets (terminal): $50M
Total: $250M

COVERAGE:
CEN: 90% of $250M = $225M
Political Violence: 90%
Currency Inconvertibility: 90%
Contract Frustration: 90%

PREMIUM:
1.5% per annum = $3.75M/year

PROVIDERS:
- MIGA (World Bank)
- Bilateral agencies (OPIC, ECGD)
- Private insurers (Lloyd's syndicates)

CLAIM PROCESS:
Event occurs → Waiting period (180 days typical)
→ File claim → Investigation → Payment

Managing Sanctions Events

Sanctions Event Response

SANCTIONS EVENT PROTOCOL
────────────────────────

DAY 0: New sanctions announced

IMMEDIATE (0-24 hours):
1. Freeze all activities with affected parties
2. Identify all exposure (contracts, cargo, payments)
3. Notify legal counsel
4. Brief senior management

SHORT-TERM (1-7 days):
5. Assess scope of sanctions
6. Apply for licenses (if wind-down allowed)
7. Develop exit strategy
8. Communicate with counterparties

MEDIUM-TERM (1-6 months):
9. Execute wind-down under license
10. Reroute flows if possible
11. Write off unrecoverable positions
12. Document compliance efforts

EXAMPLE: Russia Sanctions 2022
- Immediate halt to Russian crude purchases
- Wind-down of existing contracts under license
- Rerouting of flows to non-Russian sources
- Write-off of trapped prepayments

Case Studies

Case 1: Nationalization

NATIONALIZATION SCENARIO
────────────────────────

SITUATION:
Trading house has $100M prepayment to oil producer
Government nationalizes oil sector
New state company doesn't honor contracts

LOSSES:
Prepayment: $100M at risk
No deliveries received

MITIGATION OUTCOME:
Political risk insurance: Recovered $85M (90% - deductible)
Legal action: Ongoing arbitration
Net loss: $15M + legal costs

LESSONS:
- PRI essential for large country exposures
- Diversify producer relationships
- Structure prepays with collateral

Case 2: Export Ban

EXPORT BAN SCENARIO
───────────────────

SITUATION:
Grain trader contracted 500,000 MT from Country Y
Country Y imposes export ban due to food security

IMPACT:
Cannot fulfill downstream sales contracts
Must source replacement grain elsewhere
Replacement cost: $30M higher

MITIGATION:
Contract had force majeure clause
Downstream buyer accepted delay
Eventually sourced from alternative origin
Net cost: $15M (partial replacement premium)

LESSONS:
- Force majeure clauses important
- Maintain alternative supply sources
- Don't over-concentrate sourcing

Key Takeaways

Country risk is real — Governments can and do disrupt trade
Sanctions compliance is non-negotiable — Consequences are severe
Insurance can mitigate — But doesn’t eliminate all risk
Diversification reduces impact — Don’t concentrate in one country
Monitor continuously — Political situations change rapidly
Have contingency plans — Know what to do when events occur

References

OFAC Sanctions Programs
World Bank MIGA
Marsh Political Risk Practice
Control Risks Country Reports
EIU Country Risk Service