Expropriation was the dominant political risk of the 1970s.

Expropriation—the confiscation of privately-owned assets by the government—was the dominant political risk of the 1970s, but has since become confined to a small number of developing countries.

But the instability created by the financial crisis could spark the return of nationalism and expropriation around the world.

Resource nationalism

Not many governments these days would choose to be associated with outright expropriation. But in parts of Latin America resource nationalism remains high on the agenda, and nowhere more so than in Venezuela.

President Hugo Chávez’s populist socialist agenda began by imposing control over the country’s oil resources and now involves seizing control of local and foreign-owned companies in sectors as diverse as mining and agriculture.

“Chavez’s expropriations have been targeted on particular sectors but he’s got to the point now where reputationally, because he has targeted so many different sectors, anything is vulnerable,” says Peter Jenkins, a political risk underwriter at Beazley. “He has targeted ports, the oil sector, agricultural land (that in his mind is under-utilised) and the banks (via board appointees).”

Latin America has a long history of nationalism, much of it stemming from a form of ‘victim culture’. Leaders argue that foreign powers have been stealing Venezuela’s resources for years and they are simply taking back control for the good of the masses.

As well as Venezuela, other countries such as Bolivia, Ecuador and possibly Argentina remain at risk of confiscation of foreign-owned assets.

Deflation and rhetoric

The drop in commodity prices as a result of recession could lead to governments becoming more investor-friendly in the short term.

But ultimately, political rhetoric and any instability created by a long and deep recession are likely to increase expropriation risk.

“Logically you would hope that the drop in commodity prices and the credit crunch would mean governments would be far more sensitive to keeping the existing investors happy and encouraging further investment to help their economies in a difficult period,” says Jenkins. “But obviously there is a clash between real economics and domestic political pressures.”

“Venezuela is a classic case of that,” he continues. “Even with increasing economic problems— particularly the low oil price, which is the main cash cow for the Chávez regime—he’s still carrying on nationalising when anybody looking at it from a pure economic point of view would classify that as hugely counterproductive.”

Creeping expropriation in Africa

More insidious attempts at gaining control of privately-held assets are a bigger problem than outright expropriation in parts of Africa. Here, contract frustration—where governments insist on better prices and terms for previously-agreed contracts—is a bigger risk for investors than confiscation of assets.

The Democratic Republic of Congo boasts vast reserves of natural resources, including metals such as cobalt, copper, gold and precious stones, including diamonds.

The mining industry has suffered due to the politically unstable environment and a six-year civil war, which ended in 2003.

Contract frustration

In theory, falling mineral prices should see the government encouraging foreign investors.

While it has accepted $9bn of investment from China to be spent on mining and infrastructure and intends to privatise some state-owned mining companies, there are also signs of contract frustration.

Congo’s deputy mines minister Victor Kasongo recently rejected contract revisions by six of the biggest mining firms, according to Reuters.

“The whole mining review process in Congo, although it was in part supported by the World Bank, is touching on that sensitive area of resource-nationalisation where people start looking through previously agreed licenses,” says Jenkins. “The Congolese government have been negotiating hard but don’t appear to have stepped over the line yet.”

In Guinea and Nigeria, there have been similar frustrations in the mining sector, although Guinea’s military junta is now promising to tone down its aggressive stance towards foreign mining companies.

Prevalence of resource nationalism

Resource nationalism is not expected to be as prevalent in Africa as it is in Latin America. But instability as a result of recession could lead to political upheaval and the introduction of populist doctrines.

“At the end of the day nationalisation is often about nationalism and that is a political driver which can override conventional economic logic,” says Jenkins.

“That’s what you’ve seen in Guinea, Ecuador, Zimbabwe and Venezuela. That sort of nationalisation is driven by domestic political support bases and becomes more important to the relevant leadership than the actual economic damage that they’re doing in the longer term.”

Lloyd’s 360 on political risk

Lloyd’s new 360 Risk Insight report—“Global recession: the magnifying glass for political instability”—produced in cooperation with Control Risks, will be launched on 10 June at a special breakfast discussion forum.

The forum, in association with the Association of Insurance and Risk Managers (AIRMIC), will look at how the global economic downturn is changing the political risk landscape, with a particular focus on piracy and kidnap, expropriation and civil unrest.