Magazine article Risk Management

A New Dawn

Magazine article Risk Management

A New Dawn

Article excerpt

Risk Considerations for Emerging Europe

Almost 20 years have passed since the fall of the Iron Curtain. During this time, the political, social and economic transformation of Central and Eastern Europe has been nothing short of spectacular. Former state-controlled command economies have emerged as some of the most dynamic growth centers in Europe and throughout the world. The risk profile for the region has also changed from one of high risk to one of moderate to low risk. Indeed, certain countries-notably those that have joined the European Union, the Organization for Economic Cooperation and Development (OECD), NATO and other international structures-should likely no longer even be considered "emerging," as they have, in fact, emerged.

Regardless of how the region or an individual country is labeled, all of these markets do pose certain risks and, of course, some have more red-flag risks than others along with varying degrees of threats. So a fundamental starting point for any discussion of risk across Europe's emerging markets is to understand that no single view can be applied to such a diverse region with so many political, historical, developmental and other differences.

For companies looking to do business in these countries, it is then imperative to fully complete a focused, country-specific approach to risk analysis. For example, the overall risk profile for nations such as Poland, Hungary, the Czech Republic, Slovakia and Slovenia (all of which joined the European Union in 2004) is significantly different than that of Romania and Bulgaria (European Union members since only 2007) where concerns over continued corruption have been voiced recently.

While EU membership is extremely significant and reduces the overall risk profile, membership alone does not mean that risks have been eliminated. Similarly, a risk analysis of the Baltic states (Latvia, Lithuania and Estonia) will be different than considerations for Ukraine, Kosovo, Moldova and Macedonia; or Serbia, Croatia, Montenegro and Albania. In short, each country is different and should be approached as such.

Within a broader context of analysis, however, the risk categories within emerging Europe are generally the same as those within any emerging market, aside from certain risk categories that are more common. Importantly, the level of risk varies among countries and categories, and needs to be examined with this in mind.

Political Risk

In the early 1990s political risk was a primary concern for investors and businesses. Political risk coverage was thus priced into most of the major investment projects as the provision of such coverage was a prerequisite for obtaining financing. Today, political risk ranges from what is arguably significant risk in Ukraine and Kosovo on one extreme, to the Czech Republic and Slovenia on the other, where political risk is significantly lower. It is naïve, however, to assume that EU membership alone means no political risk. Political risk remains even where its nature is more subtle, and not always considered an immediate or obvious factor.

In public tenders for infrastructure, privatization or other state-sponsored projects, for example, political realities on the ground require significant local knowledge of "who's who" to maximize chances for bid success. Failure to understand and consider local politics will increase the risk of encountering problems. Other subtle forms of political risk may surface where a project or business gets stalled because of local political forces. Even in a relatively mature EU economy like Hungary, for example, the political infighting of late has deteriorated to the point where business is being negatively affected.

Systemic Risk

Generally, systemic risk refers to a broad range of risk areas that are inherent in the systems and institutions of government in any particular market. Corruption, for example, is a systemic risk in virtually every market in emerging Europe. …

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