Key Political Risks in Ukraine
KEY POLITICAL RISKS IN UKRAINE 2
Analyze the key �political risks� in a country of your choice. Critically discuss using examples, in what
ways firms can deal with these political risks.
Key Political Risks in Ukraine
Multinational companies operate in different nations having different political
backgrounds. Such companies often face different political risks such as insurrection,
expropriation, corruption, and prejudicial actions not in favor of multinationals operating in the
country (Sadgrove, 2015). Political risk can be termed as the risk that a host country will approve
political verdicts that may have negative effects on the multinational’s objectives or revenues.
Political risk is a reality and often varies in extent and nature from one nation to another. A
political risk may be as a consequence of policy adjustments by the ruling government to alter
the controls put in place with respect to exchange rates and interest (De Grauwe, 2013). Political
risks may also be an outcome of actions of legitimate governments. For example controls on
outputs, activities, prices, currency, and remittance restrictions. However, it is imperative to note
that political risk may also arise from events that are beyond government control. Such as
terrorism, labor strikes, extortion, war, and revolution.
However, this paper discusses political risks that exist in Ukraine giving examples of
such risks. On the same note, the paper provides ways in which firms can deal with those
political risks they may face in a foreign country.
Ukraine is located in Eastern Europe. The country is bordered by Russia, Belarus,
Poland, Hungary, Romania, and Moldova. The country is headed by a president put in place
according to the constitution and democratic voting. The country GDP is USD 177.4 billion
ranking number 55 in the world according to World Bank. However, Ukraine economy had been
exposed to high risk even before the beginning of a series of conflicts and political crisis that
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happened in 2013/2014 (Overseas Busines Risk, 2015). The country economy went into chaos
after the suspension of an IMF funding program in the year 2011. This crisis has resulted in
macroeconomic imbalances such as fiscal deficit and account deficit. The country’s foreign
exchange reserves have been declining fast because of recurrent central bank intervention to
protect the quasi-fixed exchange rate, financing of fiscal deficit and protection of capital flight.
The Ukrainian economy has faced recession since mid-2012.
Since 2014, the Ukrainian government forces have been in conflict with separatists found
in the eastern part of Ukraine. The country is also involved in a serious dispute with Russia,
which has seriously hampered the economic crisis in Ukraine (TRINDLE, 2015). The foreign
exchange reserves have continued to dwindle regardless of the massive international support, the
balance of payment has also continued to persist, and the recession in Ukraine has seriously
deepened, the country is planning to do a sovereign debt restructuring during this financial year.
The Eastern European nations are also undergoing transition. These nations are
attempting to upgrade their political, legal and economic framework to merge with the European
Union standards. However, Ukraine economic growth in the recent years has been hampered by
the recession, economic upheavals, and bureaucracy. The country’s economic growth is expected
to increase though the political risk existing is still high.
Key Political Risks
The level of bureaucracy and legal system in Ukraine is high. Therefore, it is
cumbersome for the organization to establish their firms in the nation (Overseas Business Risk,
2015). On the same note, enforcement of contracts is tied bureaucracy and political influence
making it more cumbersome to operate a business in Ukraine.
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The president of Ukraine proposed an economic and political reform dubbed “Ukraine
2020.” The reform is supported by most of the western government as well as the International
Monetary Fund (Wolczuk, 2014).. The project seems ambitious yet it is unpopular and may prove
to be difficult when implementing the reform.
There is an ongoing violence between the government, pro-Russian separatists in the
Southern, and Eastern part of the country. This violence has seriously hampered the government
operations as well as the economic growth. Currently, there is a ceasefire but because of the
consistent violations of the cease-fire has resulted in the marginalization of government power
and reduced soldier’s morale (TRINDLE, 2015). It is clear that the ongoing political and
economic instability is not going to stop shortly. The Russian government seems not to respect
the cease-fire order. Therefore, it may result in a further economic recession and widening the
gap existing in the political environment of Russia.
Ways in Which Multinationals can minimize political Risks
There are various factors that multinationals must consider before entering a new foreign
market. There are three broad categories that define international trade. That is the foreign direct
investment, international licensing and technology, and trade (Terpstra et al., 2012). A firm
should consider these categories before making a choice of entry. It is also important for a firm
to consider the capital resources, nature of its products or services. As well as a number of risks
the firm is willing to take before making the most appropriate choice of entry.
A multinational company should also consider political risks and develop ways to
mitigate such risks before entering into a foreign market. There are quite some measures that can
be adopted even before investing in a foreign market. Firstly, a firm should conduct research to
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understand the domestic and international affairs of the potential foreign market (Curlb, 2012).
Some of the critical areas that should be researched are political stability of the nation and
strength of its institution. The firm should also find out if there are any religious or political
conflicts, minority rights, and ethnic composition. It is also paramount to consider other factors
such as relations with neighbors, recognition of international law, membership with the
international organization as well as border disputes (Bremer, 2015). The company can obtain
the mentioned information above by conducting research. However, they can find such
information from insurance companies, international business consulting firms, international
chambers of commerce, foreign embassies as well as international businesspeople.
Multinationals can also negotiate terms of compensation with the host nation. This
strategy helps to establish a legal basis for taking action in future in the event that something
happens that may disrupt the firm activities (Howes, 2013). Therefore, a firm can take a legal
course to defend its position or claim compensation for any damage that might have occurred
due to political risks in the host country. Such strategy can be fruitful because most nations
respect agreements they made with multinationals because of their respect for international law
and they have to honor the agreement (Jervis, 2015). The government may also provide
insurance coverage to foreign firms as a strategy to encourage foreign direct investments and
international trade in a country. However, this strategy may not work because the legal systems
in most countries may not be advanced and is prejudiced against foreign companies. With time, a
new government may be born who may not honor contracts entered by the previous
governments.
Another possible solution is purchasing a political risk insurance cover after entering a
nation that is considered risky (Curlb, 2012). A multinational company can approach an
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organization that are experts in selling political risk insurance and buy a policy that will cover all
the adverse risks that may occur in the course of business. The premium that the company can
pay is dependent upon many factors such as a number of risks insured, the country, cost of doing
business and the industry in which the firm operates. Political risk insurance can cover the
following types of political risks such as political violence for example insurrection, terrorism,
civil unrest, war, and revolution. Secondly is insurance against confiscation of assets or
governmental expropriation. They also cover business interruption, the frustration of contracts as
well as inconvertibility of currency among another risk that a firm may face in a global market.
Multinationals often use political risk insurance to boost their confidence of trading in
markets that is seen to be risky as compared to the home market. Political risk insurance enables
multinationals to focus their energy on the commercial aspects of trade leaving the political risk
insurance provider to take care of any potential losses and gather for any damages resulting from
any political risk.
In conclusion, political risk is one of the risks that business faces in the international
setting. With increasing globalization, political risks are taking new dimensions. In the
contemporary economies, states have to deal with real and perceived income inequalities.
Nations also focus on solving challenges resulting from high sovereign debts. The government
may also take actions meant to promote state-owned companies, build trade barriers among other
public policies (Jervis, 2015). Multinationals may face challenges that may lead to loss of
revenue or disruption due to political risk. Therefore, firms should always consider the potential
consequences that may arise due to political risks even before entering a foreign market. Ukraine
is not left out in this case. The country has been in recession since the year 2012 after IMF
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stopped providing funding. The country is also facing numerous political differences that result
in political imbalance making business it hard to do business operations.
Some of the key political risks that a multinational firm may face in Ukraine include
high bureaucracy and corruption in the Ukraine government that may make it hard for
multinationals to set up operations (Overseas Business Risk, 2015). Secondly is political unrest
in the country and reforms that may hinder business operations. However, a multinational can
still invest in the country because high risks often result in high profits. But still, the firms
wishing to invest in Ukraine should develop effective strategies that may help to mitigate any
risk that may result due to political unrest.
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References
Sadgrove, M. K. (2015). The complete guide to business risk management. Ashgate Publishing,
Ltd..
De Grauwe, P. (2013). Design Failures in the Eurozone: Can they be fixed?.LEQS Paper, (57).
Jervis, R. (2015). Perception and misperception in international politics. Princeton University
Press.
Terpstra, V., Foley, J., & Sarathy, R. (2012). International marketing. Naper Press.
Bremmer, I. (2015, June). Managing Risk in an Unstable World.
