Know the Risks – Customer Payments can be blocked by Foreign Governments

We all live in a world of probabilities; we just rarely pay it any thought. The fact you get in your car everyday there is a risk of an accident.  Usually when risks are highly unlikely we hedge and take the easy way out, we hope they dont happen.

I recall one trading company telling me of a bid they did in Venezuela where they sold tin plates to Sidor, the Venezuelan state owned steel company. Before currency restrictions really ramped up, they used to get 100% prepayment, but after more severe controls, Venezuela only wanted to pay 50% upfront.  So what did the company do?  They doubled their price and there were no other bidders.  They never were paid the remainder, but it still worked.

But life is not always that straightforward.

More and more companies, to increase sales, do business in emerging markets, and sometimes getting money out of these countries for payment can be problematic. If you are a $500 million manufacturer or $300 million engineering services company and have a customer default on a $5 million dollar payment, that can be catastrophic to your bottom line.   Imagine that conversation with your bankers, private equity supporters and your own board.

So what can you do short of hope and pray when you are doing business in Brazil, Cambodia, Africa, etc.

Marc Wagman, executive vice president, trade credit and political risk, for Arthur J. Gallagher Risk Management Services, commented,The historical record shows that currency inconvertibility, political violence, and asset-confiscation events all over the world dating back to the 1950s have imposed hundreds of billions of dollars of losses on American and British companies.”

So what risk-mitigation strategies can be deployed? Marc mentioned a few:

    1. Currency Inconvertibility Coverage - OPIC inconvertibility coverage can insure conversion and transfer of earnings, returns of capital, principal and interest payments, technical assistance fees, and similar remittances.
    2. Political Violence insurance - Political risk insurance policies provide coverage for several risks, including political violence, expropriation, currency inconvertibility, non-payment, and contract frustration. Given the rise of populism in today’s world, this threat has certainly increased.
    3. Confiscation, Expropriation, Nationalization, and Forced Divestiture coverage - Political risk coverage purchased by businesses that have an ownership interest in property abroad, to cover loss resulting from government nationalization of the property or other action by the government that effectively deprives the insured of the property or restricts its operations.

Life is full of probabilities. Doing business in emerging markets entails many risks.  If the figures are big enough, it pays to do your due diligence.

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