What is a "Political Risk"?

Political risks are notoriously hard to quantify because there are limited sample sizes or case studies when discussing an individual nation. Some political risks can be insured against through international agencies or other government bodies. The outcome of a political risk could drag down investment returns or even go so far as to remove the ability to withdraw capital from an investment.

Political risk analysis is rooted in the intersection between politics and business, and it deals with the probability that political decisions, events, or conditions will significantly affect the profitability of a business actor or the expected value of a given economic action, Many different meanings have been attached to the term political risk over time. Broadly speaking, however, political risk refers to the complications businesses and governments may face as a result of what are commonly referred to as political decisions—or “any political change that alters the expected outcome and value of a given economic action by changing the probability of achieving business objectives. Political risk faced by firms can be defined as “the risk of a strategic, financial, or personnel loss for a firm because of such non market factors as macroeconomic and social policies (fiscal, monetary, trade, investment, industrial, income, labour, and developmental), or events related to political instability (terrorism, riots, coups, civil war, and insurrection). Portfolio investors may face similar financial losses. Moreover, governments may face complications in their ability to execute diplomatic, military or other initiatives as a result of political risk.