Sovereign Risk; Political Risk; Country Risk

Sovereign risk (sometimes known as political risk, or country risk) is the added dimension of risk associated with doing business with foreign customers.  As it relates to exports, sovereign risk exists in addition to commercial risk.  Commercial risk involves the possibility that the buyer will be unwilling or financially unable to make payment to the seller.  Sovereign risk involves actions or events that are beyond a foreign customer's ability to control.  Sovereign risks include:

• Controls placed on foreign exchange by a foreign government
• Sovereign financial uncertainties and vulnerabilities
• Riots or civil unrest
• Strikes
• War
• Economic and political uncertainties exist now or are expected in the near future
• An unstable or inefficient business environment
• Seizure or destruction of property by the government
• The amount of foreign debt and the possibility that the country may have borrowed more than it can repay 
• Changes in the political, economic or regulatory environment that prevent a customer from paying its foreign creditor(s)
• The risk that unfavorable changes in a customer's overall currency exchange position might prevent payment of a debt owed to a foreign creditor
• Fragility or risk in the commercial banking sector of the country's economy 

Political risk deals primarily with the risk that the value of a foreign investment, such as a decision to offer open account terms to a foreign buyer, could suffer as a result of political changes or instability in that foreign country.

© 2011 by Michael C. Dennis.  All Rights Reserved.  Mr. Dennis is the author of "1001 Collection Tools and Tips"  and can be reached by email at mcdennis13@yahoo.com