Political risk and trade credit
In this chapter of our Annual Insurance Review 2023, we look at the main developments in 2022 and expected issues in 2023 for political risk and trade credit.
Key developments in 2022
Last year's version of this chapter, as had the chapters for the years before it, saw trade related issues as the hot topic for the Political Risk and Trade Credit market. We focussed on the Trade Credit market's cautious optimism that the COVID-19 storm may have passed over without the widespread losses expected at the outset, whilst warning that international trading conditions may still lead to some rough seas ahead. We feared that fallout from both COVID-19 and Brexit may continue to exert pressure on traders, with COVID-related buyer defaults eventually finding their way to the market once Government assistance was removed. To the extent that there was concern about political risk or political violence, this too was most likely to be linked to COVID, as populations weary of ongoing restrictions pushed back against Government intervention. Events in China have shown this prediction to be correct where the population's desire to start living with COVID clashed with the Government's zero COVID strategy.
Events during 2022 have however relegated COVID and its effects to the back of the class. Since February 2022 the Russian invasion of Ukraine has dominated the headlines. What may initially have been thought to be a short-lived incursion has instead become a protracted and entrenched conflict with devastating consequences for Ukraine and a global impact. Ten months into the conflict there remains uncertainty about the effect on the Political Risk and Trade Credit market. It may have been expected that Russia's reaction to the UK, EU and US economic sanctions, and its reaction to the resulting exodus of Western companies from Russia, would have been widespread and well publicised expropriations of foreign property. This has not materialised. Similarly, we understand that the Trade Credit market has not seen the volume of claims relating to Ukrainian debt that may have been expected, although inevitably War and Political Violence policies face exposure from damage arising from Russian bombardments. There is always a lag between the geopolitical events hitting the headlines and the resulting claims to the Political Risk and Trade Credit markets, and the effects of the conflict may not be seen until we revisit this chapter at the end of 2023.
Looking forward to 2023
At the time of writing there is no way to tell how long the war in Ukraine may last, or what its lasting consequences may be. Increasing desperation within Russia in the face of unexpectedly successful Ukrainian resistance, and the ramp-up of Western sanctions, may lead to unpredictable developments in the political risk arena.
Turning to trade, the fragile Black Sea grain deal eased global food supply issues but its temporary suspension within days of its initial agreement showed how quickly global food supply could be affected by the conflict. Ongoing sanctions against Russia, including the prohibition on the purchase of certain oil products, will cause knock-on effects in countries already suffering from fuel instability. Many countries – the UK included – are struggling with spiralling debt following COVID. The cost-of-living crisis has seen substantial increases in energy bills and a range of basic raw materials; businesses may be unable to pass their increased production costs on to a population where many are already struggling with limited disposable income. Increasingly unpredictable weather patterns, whilst a natural rather than political phenomenon, are also putting pressure on food production and prices. The wave of defaults feared by the Trade Credit market during COVID may not be too far away.
When the war in Ukraine ends the country will face the uncertain consequences of peace in the coming years. By way of comparison, the Tigray war in Ethiopia reached a partial uneasy ceasefire in November 2023, after two years of fighting. In addition to the humanitarian crisis facing the population, the costs of rebuilding are estimated to run into billions of dollars. Companies thinking of investing in the repair of the country will want protection for their investment. Although there will no doubt be careful risk analyses to be done, this will be a time for the Political Risk market to step up, as it has done so many times before, and support the investment of those seeking to rebuild in areas ravaged by war.
Download our full Annual Insurance Review 2023 for more insights.