Report

Political Risk Analysts See Ukraine as a Risky Bet Over the Next 10 Years

Consultants predict how much investors could lose to political turmoil around the world.

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Subject to Western sanctions and accused of stirring instability, Russia is, unsurprisingly, a bad bet for global investors. A new analysis out Wednesday concludes that a $100 investment in Russia over 10 years would lose $30 to political turmoil. But Russia’s chief victim in nearly a year of strife, Ukraine, is an even riskier place to bankroll, and the same investment there would lose $34.

The findings, by insurance broker Willis Group Holdings Plc. and U.K.-based consultancy Oxford Analytica, illustrate the impact that political conflicts and war wreak on business. Evaluating the political environment is an inevitable part of deciding where to invest money, so risk consultants make a living trying to predict which governments are most likely to end up mired in military conflict. In turn, insurance companies sell policies based on those forecasts to protect investors against suffering potentially huge financial losses.

The world’s riskiest nation for investment, for example, is North Korea. A decade-long $100 investment in the reclusive country is projected to lose $40, according to the analysis.

The Willis analysis was the product of its new model — dubbed “VAPOR” — for predicting political catastrophes.

“VAPOR offers a potential solution to the challenge of putting dollar values on political risk — for the first time,” Paul Davidson, CEO of Willis Financial Solutions, said in a statement.

The new tool would give companies the “ability to compare the financial impact of political risk exposure, in real dollar-value terms and by industry,” Davidson said.

A $100 investment in the United States or Britain, for instance, would likely only lose $1 to political upheavals such as war, trade sanctions, or expropriation over 10 years, the analysis concluded. By contrast, an investment in Venezuela could lose $20, according to VAPOR.

Predicting the future, however, is fraught with risk and, likewise, forecasting political upheaval is notoriously difficult.

Curtis Ingram, a broker who sells political risk insurance at Aon, said it’s much harder to quantify political risk than the kinds of financial pitfalls that are covered by other types of insurance that can rely on historical statistics to gauge the future.

“It’s just not life insurance or auto insurance or even windstorms,” said Ingram, vice president of Aon Risk Solutions’ political risk practice, who was interviewed for an earlier story. “It’s profoundly unpredictable.”

And insurance companies often only want to insure against investments in relatively stable countries. After Russia annexed Crimea last March, many companies started calling broker Marsh & McLennan for policies to protect their Russian investments. By then, however, it was too late: Like buying insurance when your house is already on fire, the situation in Ukraine was deemed by insurance companies to be already too volatile to insure.

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 @jtrindle

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