Political Risk
The risk that government actions, political instability, or policy changes will negatively affect an investment's value.
What is Political Risk?
Political risk is the possibility that political events, government decisions, or instability in a country will adversely impact investment returns. It encompasses a wide spectrum of risks: expropriation (government seizure of assets), nationalization of industries, adverse changes in tax law or regulation, currency controls that prevent repatriation of profits, trade sanctions, civil conflict, terrorism, election-driven policy reversals, and changes in trade agreements. Political risk is especially prominent in emerging and frontier markets where institutional frameworks are weaker and government policy less predictable. Multinational corporations, sovereign debt investors, and global equity investors assess political risk when allocating capital internationally. Specialized insurance products (from agencies like MIGA, the World Bank's Multilateral Investment Guarantee Agency) and political risk insurance provided by private underwriters allow investors to partially transfer this risk. Political risk is distinct from country risk premium, though closely related.
Example
In 2022, Russia's invasion of Ukraine prompted sweeping Western sanctions. Foreign investors holding Russian stocks, bonds, and bank deposits were unable to repatriate funds as the Moscow Exchange halted trading for weeks and assets were frozen. Investors with Russian equity exposure faced near-total losses — a severe political risk materialization that was unhedgeable through conventional financial instruments.
Source: MIGA — Political Risk Insurance