2024 JS held report on global risks: political risk due to government interference | JS detained

Introduction

All investments are subject to changes in the business climate and geopolitics, as well as the whims of the investor and the host government. For global businesses in 2024, government intervention is increasingly a real and critical concern that must be recognized and addressed. This may include greater state control over the investment itself (up to and including outright expropriation) or other investor requirements that rebalance the economics of the investment, such as royalties. higher.

Companies investing abroad will need to remain aware of prevailing political trends and be alert to warning signs that the investment environment may be changing, for better or worse.

Global risks for businesses

1. Political tensions and changes of government

The risk of sudden drastic actions by governments increases during times of political tension, such as in the run-up to competitive elections. Although an autocratic regime can provide stability, moving to a more autocratic or nationalist regime could increase the risk of hostile actions. This is particularly true if tensions between investors and states are already high and/or if the government seeks to strengthen its legitimacy by appealing to the national interest.

2. Common ground between host government and local population becomes increasingly difficult

Some governments may be tempted to divert the resulting discontent among the population towards “greedy” foreign investors, thereby exacerbating the difficulties the investor already experiences in convincing the local population of the benefits of their investment.

3. Financial pressures

Governments facing financial pressures may be more tempted to increase their revenues from foreign investors. Examples include a government struggling to balance its budget or experiencing a decline in its foreign exchange reserves. At a minimum, the risk of the government revoking or failing to honor contracts with foreign suppliers will increase.

4. Sensitive sectors to monitor

Where there is tension and increased geostrategic competition between the host government and the investor’s home jurisdiction, areas of increased risk will include sensitive sectors such as critical minerals, AI, energy storage and related technologies (e.g., “Internet of Things”).

5. New restrictions on conventional and social media from rival states

Restrictions on the use of social media could also be possible, especially as AI becomes more powerful, increasing the threat from geopolitical adversaries in so-called “information wars.”

6. The level of protection of company assets

Beyond direct and obvious forms of investment protection, such as bilateral investment treaties, investors can be further reassured by concrete indications of robust bilateral cooperation, such as free trade agreements. This, coupled with a jurisdiction’s ability to maintain a relative rule of law and generally remain “above the fray” of the current geopolitical divide, could reduce the risk of an investment being caught in a geopolitical conflict. Sometimes, however, investors may believe that the potential return on investment outweighs the risk of investing in less stable jurisdictions and/or highly sensitive sectors. Additional preventive measures to protect their investments could include:

• Ensure a high level of protection for any sensitive intellectual property, such as patents, trademarks and trade secrets, as they could be at risk. Business leaders must account for their company’s intellectual property and decide what is essential and needs to be protected, as well as who has access to intangible assets.
• Obtain political risk insurance, carefully ensuring that the most relevant and important risks are covered.

Global Business Opportunities

1. The rush for minerals essential to the energy transition will create downstream opportunities

The strong demand for minerals essential to the energy transition requires investors to stand out. Many commodity producers are seeking commitments from investors to add value downstream, such as in processing and manufacturing, as well as extraction. Becoming indispensable in this way can help curb any temptation by the government to extract more value from investors through other, more intrusive means.

2. There may still be many opportunities within the country or in allied countries

Countries producing critical raw materials or metals that have strong political and trade/investment relationships with the host country or its allies are safer investment choices than in jurisdictions more hostile to the West. Notably, the US and EU are increasing their political and financial support for critical minerals and related industries.

3. Don’t let hype make you miss opportunities

Tariffs and other protectionist measures, as well as increased state involvement (in cooperation with investors), are far more common than the most aggressive forms of government intervention, such as forced divestment and expropriation pure and simple.

4. Continue to listen and speak at local and central levels

Companies committed to and skilled in considering the needs of local communities and governments and listening to their concerns will generally be better placed to quell problems as they arise, compared to their peers who ignore sentiment local.

5. Understanding political nuances will bring benefits

Before instinctively reacting to hostile speeches from officials, investors should consider that politicians – especially in times of political turmoil – may speak recklessly to bolster their populist credibility without any intention of following through on their words. The media also sometimes tends to sensationalize greater government intervention and make projects appear more expensive and hostile than they are in practice. A nuanced understanding of the policy landscape and outlook, as well as the likely trajectory of proposed legislation, will therefore be essential and beneficial.

6. There will be increased demand for political risk insurance

There is likely to be increased demand for policies covering expropriation – including creeping expropriation such as increased tax rates – as well as frustration of contracts and the risks of war and violence.

7. Government intervention can generate large volumes of work for litigation lawyers

An example of government intervention is illustrated by ongoing litigation arising from asset seizures and forced sales at a discount in Russia. Similarly, lawyers specializing in intellectual property and corporate restructuring/redomiciliation can expect increased demand for their services.

Key Takeaways

1. Broader global political and economic trends increase the risk of government interference for investors. Strained relations between major states/blocs – such as between Russia, China and the West – are in some cases manifested in more hostile attitudes and actions by states towards investors .
2. Governments favor economic security and other forms of national security over once-valued principles, such as free trade. This is leading to trends such as “decoupling” and “de-risking,” whereby Western countries and China impose mutual restrictions on investment and trade, and hedge their exposure, without necessarily completely severing ties. .
3. National security is often the main factor: fear of espionage, or of letting a rival state enter a highly strategic sector, or of preventing a competitor from posing a direct threat to the physical security of allies (e.g. imposing sanctions on Russia after its invasion of Ukraine). .
4. Some of the most egregious and palpable acts of investors and states related to national security in recent years have occurred against the backdrop of Western sanctions against Russia and Moscow’s countermeasures. Tit-for-tat sanctions and the seizure of key hydrocarbon assets by Russia and EU states have reinforced a trend in which many governments are preparing to reduce their dependence on rivals for strategic resources.
5. National security can also be a fig leaf for protectionism, as evidenced by mutual tariffs imposed by the EU and the United States. Seeking to prevent the economic and technological progress of a rival is also often an important factor in protectionism.
6. The risks of government intervention extend beyond the most confrontational examples of bilateral relations. Even in cases where relations between the investor’s home country and the host government are more positive, other factors provide incentives for state intervention. These include environmental activism, which has led otherwise investor-friendly governments to revoke licenses for mining projects. Furthermore, states want to reap greater benefits from foreign investment projects, with these goals often expressed in the populist language of “resource nationalism” or the nationalization of industries.