Expropriation Risk in Bric Nations

Expropriation Risk in BRIC Nations:

The BRIC nations (Brazil, Russia, India, and China) contributed 36.3% of world GDP growth in PPP terms (or 27.8% in USD) during the first decade of the century. They have also steadily increased their share of global output and the share is only set to increase. Currently, they make up about a quarter of the global economy (in PPP). Almost all the major MNCs have some presence / interests in the BRIC nations. Hence it becomes imperative that we analyse the expropriation risk in these nations in detail.

Brazil

Traditionally the leaders of Brazil have faced sustained pressure from radical left-wing parties to nationalise companies operating in sectors deemed strategic. However, these calls are unlikely to be heeded. The main expropriation risk affects farms alleged to condone the use of slave labour. A bill was originally proposed in 2001 to allow for the seizure, without compensation, of these farms but lawmakers sympathetic to farmers managed to stall the process. They say the bill's definition of slave work opens the door to arbitrary decisions, and that the supposed slaves are just part of the estimated 59% of Brazilian workers who are unregistered.

Russia

Most experts unanimously agree that expropriation risks across all sectors will decline in Russia over the next three years, with the exception of the highly lucrative extractive industries. In order to achieve its goal of state dominance in strategic extractive sectors, the Russian government now prefers to exert influence indirectly: by imposing back-taxes, threatening environmental fines or exploiting its powerful presence in the energy sector.

India

The government's policy of attracting foreign investment means that the risks of government expropriation are minimal. However, foreign investors in India do face issues concerning regulatory uncertainty. The recent 2G scam bears a testimony to this fact. With the opposition putting tremendous pressure on the incumbent government to scrap the existing contract, companies face the risk of foregoing all the payments till date.

Also, the legal system puts a number of restrictions and imposes a stamp tax on the transfer of land. Land titles lack clarity, making it difficult to buy and sell land. Moreover, in India, state governments possess broad regulatory powers and important issues such as zoning, land-use and environment can vary from one state to another.

China

Since 1978, when the country officially launched its so-called 'open door' policy, there have been no incidences of expropriation of foreign assets in China.

Chinese law now allows foreign businesses to hold long-term land-use rights. Nevertheless, China still lacks a comprehensive system of real estate registration, and the government only published its first complete registry of ownership in 2004. In addition, as land ownership rests exclusively with the state, it has the legal right to confiscate land on the grounds of national security and public interest. However, the government is again unlikely to confiscate foreign assets unless the asset in question specifically compromises China's national security.

The Management of Political Risk

Efforts to manage political risk must begin before the investment is made, continue while theinvestment is negotiated with the host government, extend throughout the investment andoperational period, and may be concluded sometime after the investment is liquidated orsold. On the corporate level, political risk management is of vital importance in elaboratingand implementing responses to political risk problems. The management of political risk includes the identification and assessment ofpolitical risk, the valuing of political risk, the anticipation of losses, the prevention orreduction of incidences of losses. Management of political risk in foreign investment includes following five steps:

1. The identification and analysis of loss exposure

2. The measurement of losses associated with these risks

3. The development of alternative techniques for treating each exposure

4. The reduction and implementation of the best technique or combination of techniquesforecasting each exposure

5. The evaluation of results in an effort to improve the procedures of identification,measurement and treatment.

Political risk assessment

A corporation's strategic planning is an importantdeterminant of its profitability and that environment scanning, including political riskassessment is a vital input to this strategic planning process. Politicalrisk assessment encompasses the problems of trying to understand and foresee potentiallydangerous consequences of future political situations or the potential course of politicalactions.

There are mainly 2 types of approaches that can be used for political risk assessment:

1. Objective Approach and

2. Subjective Approach

The objective approach attaches importance to methodological and procedural solutions tothe assessment of political risk. Proponents of objective approaches therefore view themethod and procedure as bulwarks against the fallibility and limitations of human judgment.

The second approach, known as subjective approach, makes use of humanjudgment, intuition and experience to predict and forecast the evolution of the politicalenvironment. Thus the