Political Risk: A Multi-Dimensional Analysis

Could the global market have predicted the Russian invasion of Ukraine? What were the consequences of Brexit? How would a multinational company navigate the ever-changing geopolitical landscape? Political risk is among the main factors in international economic and trade relationships. It is usually a top concern in any cross-border investment activities and trade flows. The United States recognizes 195 countries around the world. Each one of them may present a unique set of political risks and opportunities. In addition, there are major political and economic zones like the European Union, free trade zones like the North American Free Trade Agreement, NAFTA, and international development organizations like the World Bank. One needs to analyze and assess political risk through a multi-dimensional perspective. At the center of our study will be the critical examination of the key components of political risk. Indicators of political risks, including sovereign rating from major rating agencies, market risk premiums, sovereign credit default swaps, CDS, and the depth of liquidity will be thoroughly discussed. We shall study political risk through several cases. Cases in China, Europe, and Latin America are selected for inactive discussion in the classroom. Qualitative tools might be introduced to offer market pricing of political risk in our sample countries. Political risks used to be associated primarily with emerging market or frontier countries. Over the recent decade, it is evident that almost all the developed countries are sources of political risk as well. From Brexit to the U.S.-China trade war, we are seeing a proliferation of political risks in recent years. We emphasize the market approach in our study, albeit, incorporating the historical and cultural perspectives in our analysis. Our goal will be to develop a thorough understanding of the art and science of political risk, from both bottom-up market indicators and top-down holistic view. The course will incorporate many case studies, closely track the real world events. During the past semesters, the Greek financial crisis, Argentine economic reform, Chinese banking system modernization, Brexit, and U.S.-China trade dispute were discussed, among many other cases. Climate change has added a new set of factors for political risk analysis.