Nationalism gains ground as a major political risk

Political risk improves worldwide, but significant challenges continue to emerge

LONDON, 18 January 2007 – Risk complexity, nationalism and arbitrary regulation have emerged as significant threats to multinational corporations� balance sheets, according to the latest global analysis by Aon political risk experts.

Each year, Aon�s political risk and trade credit experts analyse the political and economic risk climate in more than 200 countries. Their findings are illustrated in the annual update of Aon�s Political and Economic Risk Map, now in its 14th year. The latest edition, published today, shows that of the 214 countries surveyed in 2006, 17 pose less of a risk in 2007 compared to 2006, contributing to a decrease in the overall level of global political risk for the first time in three years.

Despite this, 2006 did produce its fair share of political risk events. �There have been coups recently in Thailand and Fiji that seem to have passed relatively quietly so far, but which might yet have the potential to create problems for any companies dealing with those countries. The nuclear issues in Iran and North Korea create enormous political and diplomatic stress,� said Charles Keville, director of Aon Crisis Management in London. �The growth of nationalism is also becoming a major issue, especially for some of the world�s multinational energy companies�.

Oil producing countries are seizing local resources that were once owned by or shared with international oil companies. This could be a blanket country action, such as Bolivia�s outright nationalisation of the oil & gas industry as happened in May 2006, or more targeted action, possibly through arbitrarily imposed regulations and interference against individual projects, such as Russia�s recent moves against Sakhalin II or BP�s TNK-BP. �Such events, along with other geopolitical problems in other regions of the world, will likely keep oil prices high for at least the next year,� said Keville. Venezuela last week announced its intention to target its power and telecoms industries for nationalisation. Those two sectors were privatised in the early 1990s.

Russia was in the headlines in January 2006, having turned off the gas supply taps to Ukraine unless they agreed to increase the prices paid for Russian gas. Ukraine will need to agree to pay even higher prices during 2007 to avoid that happening again, and the recent events between Russia and Belarus have served to highlight the increasing political and economic sensitivities of oil and gas supplies.

Greater reliance on overseas sourced goods, with increasingly tighter �just-in-time� production demands, means that companies� global supply chains are under threat from political and non-political trade disruption risks such as embargoes or even bird flu.

�The magnitude and complexity of risk is increasing for companies around the world,� said Keville. �Companies need to carry out far more detailed and diverse analysis of the risks they face in foreign territories and these issues need to be constantly monitored, whether they be macro or micro in nature.

�In addition, companies are facing greater scrutiny from both internal and external bodies, including non-governmental organisations. There are severe corporate governance and reputational risks. Companies need to be aware that pressures from their own government or country might just as easily be the root of their problems. It is not always the foreign government or country that creates the risk, Keville added.

�The types of risks shown on Aon�s map have serious consequences for business, which accounts for the map�s continued popularity year after year,� according to Oxford Analytica Senior Consultant Sam Wilkin. �This is doubly true in the era of Sarbanes-Oxley, and now that companies are increasingly held to account for labour practices at even distant points of their global supply chains.� Oxford Analytica collaborates with Aon Trade Credit on the annual political risk analysis for the map.

About Aon

Aon Corporation is a leading provider of risk management services, insurance and reinsurance brokerage, human capital and management consulting, and specialty insurance underwriting. There are 46,000 employees working in Aon’s 500 offices in more than 120 countries. Backed by broad resources, industry knowledge and technical expertise, Aon professionals help a wide range of clients develop effective risk management and workforce productivity solutions.