RISK MANAGEMENT IN UNSTABLE

ECONOMIES
INTRODUCTION
Risk management is the process of identifying, assessing, and controlling financial, legal,
strategic and security risks to an organization’s capital and earnings.
These threats, or risks, could stem from a wide variety of sources, including financial
uncertainty, legal liabilities, strategic management errors, accidents, and natural disasters.
If an unforeseen event catches your organization unaware, the impact could be minor, such as a
small impact on your overhead costs. In a worst-case scenario, though, it could be catastrophic
and have serious ramifications, such as a significant financial burden or even the closure of your
business. To reduce risk, an organization needs to apply resources to minimize, monitor and
control the impact of negative events while maximizing positive events. A consistent, systemic,
and integrated approach to risk management can help determine how best to identify, manage,
and mitigate significant risks.
The increased financial risks that have resulted due to the world economies merging with each
other have increased the role requirements of the chief financial officers of the organizations
around the world. The role requirements of the chief financial officers have increased from just
being ordinary employees to team members of the management teams. The chief financial
officers are more concerned with the long-term strategic management of the organizations
regarding the macroeconomic risks that the organizations are subject to. The chief financial
officers are concerned with formulating strategies which are consistent and overlap with the
organizational goals.

RISK MANAGEMENT PROCESS

A successful risk assessment program must meet legal, contractual, internal, social, and ethical
goals, as well as monitor new technology-related regulations. By focusing attention on risk and
committing the necessary resources to control and mitigate risk, a business will protect itself
from uncertainty, reduce costs and increase the likelihood of business continuity and success.
Three important steps of the risk management process are risk identification, risk analysis and
assessment, and risk mitigation and monitoring.

IDENTIFYING RISKS
Risk identification is the process of identifying and assessing threats to an organization, its
operations, and its workforce. For example, risk identification may include assessing IT security
threats such as malware and ransomware, accidents, natural disasters, and other potentially
harmful events that could disrupt business operations.
RISK ANALYSIS AND ASSESSMENT
Risk analysis involves establishing the probability that a risk event might occur and the potential
outcome of each event. Risk evaluation compares the magnitude of each risk and ranks them
according to prominence and consequence.

RISK MITIGATION AND MONITORING

Risk mitigation refers to the process of planning and developing methods and options to reduce
threats to project objectives. A project team might implement risk mitigation strategies to
identify, monitor and evaluate risks and consequences inherent to completing a specific project,
such as new product creation. Risk mitigation also includes the actions put into place to deal with
issues and effects of those issues regarding a project.

Risk management is a nonstop process that adapts and changes over time. Repeating and
continually monitoring the processes can help assure maximum coverage of known and unknown
risks.

GLOBAL POLITICAL RISKS

Corporations with investments in such opaque countries as Zimbabwe, Myanmar, and Vietnam
have long understood how political risk affects their bottom lines. In fact, historically, some of
the business world’s best political risk analysis has come from multinational corporations, like
Royal Dutch/Shell and American International Group (AIG), that have entire departments
dedicated to the subject. But today, any company with exposure to foreign markets needs early,
accurate information on political developments. There are four principal reasons for this.

1. international markets are more interconnected than ever before. Tremors following a
market shock in Argentina are quickly felt in Brazil and Venezuela, but they also rumble
through Thailand. In 1997, capital flight from Southeast Asia roiled markets around the
world. If China’s rapidly growing economy overshoots a soft landing and crashes into
recession, the impact on Chile, Russia, India, and the United States will be measurable
within hours. China’s political decisions today will have dramatic long-term effects on its
markets. Companies with exposure anywhere in the world that China does business
ignore those decisions at their peril.
2. For good or ill globalization is making the world a more volatile place and that has
changed risk calculations everywhere.
3. the offshoring trend is growing. Businesses shift some operations to countries where
labor is cheap—but the labor is cheap for a reason. In countries such as India (an
established offshoring destination) and Kenya (an emerging one), living conditions for
the working classes can be harsh, and there is greater threat of unrest than in developed
countries with their large, relatively prosperous middle classes. Offshoring presents other
risks as well. The Chinese government, for example, is already cavalier about intellectual
property rights and shows signs of becoming more so. Companies moving manufacturing
and other functions there may be hard-pressed to protect some of their most valuable
intellectual assets.
 4. the world is increasingly dependent for energy on states troubled by considerable political
risk—Saudi Arabia, Iran, Nigeria, Russia, and Venezuela among them. As global supply
struggles to keep pace with rising demand, political instability in these oil-producing
states can quickly produce shocks all over the world.

It is difficult to imagine a business that is not affected by at least one or two of these
developments. And corporations’ exposure will only grow as supply chains become more global
and developing countries increasingly participate in international trade.

ECONOMIC AND POLITICAL RISK ANALYSIS

Economic risk analysis and political risk analysis address two fundamentally different questions.
Economic risk analysis tells corporate leaders whether a particular country can pay its debt.
Political risk analysis tells them whether that country will pay its debt.

EXAMPLE
When 35-year-old Sergei Kiriyenko replaced Viktor Chernomyrdin as prime minister in March
1998, Russia’s economy seemed to be emerging from post–Soviet era turmoil. Inflation had been
reduced to single digits, the economy was growing, and the government appeared committed to a
moderate reformist path. Economic analysts saw clear skies. But political analysts recognized
that an obstructionist parliament intended to block Kremlin attempts to tighten fiscal policy and
streamline tax collection. They saw that an absence of consensus was producing incoherent
monetary policies and that the absentee, alcoholic president wasn’t going to enforce discipline on
an increasingly chaotic policy-formulation process. When oil prices fell, political analysts
underlined the country’s lack of fiscal discipline as a cause for immediate concern.
In short, political analysts produced a darker—and more accurate—portrait of Russia’s market
instability in the period leading up to the financial crisis of 1998.

RISK CONTROL TECHNIQUES

 avoidance of activities which cause loss
 reduction of frequency of loss > risk prevention
 reduction of severity of loss > risk reduction
 contractual transfer of responsibility for loss occurrence

RISK FINANCING TECHNIQUES

 Retention of losses either by design or omission.
 Borrowing of funds or use of bonds or use of other forms of capital
 Contractual non-insurance transfer of responsibility for loss payment.
 Insurance transfer to a non-owned insurance company when and if the exposure is
insurable and the cost is not prohibitive.
CONCLUSION
The increase in the integration of the global markets has led to the generation of more resource
supplies and demand globally and this rise in the need of the global supplies has also convinced
the firms to assess the political risks of the countries worldwide which might at times outweigh
the financial rewards of such transactions. The firms operating around the world are subject to
many financial as well as the country related risks. Many firms around the world have been
subject to various financial losses that have resulted from the nationalization of the firms. Many
multinational firms have also fallen prey to the political expropriations which have rendered
them to bear huge financial losses as they are not paid for their assets taken over by the elitist
and ruling political party.
But abiding by the rules of risk management countries and companies can mitigate risks and
prevent colossal damage to financial stability.