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Geopolitical risk: Is your business ready to respond to capital controls?

April 3, 2016

The rise of capital controls in an era of economic stagnation and low commodity prices.

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As Head of Specialties for Zurich Canada, Greg Irvine leads a team focused on delivering innovative... About this expert

Capital control

Since 2009, several countries have begun implementing measures to reduce capital flight. Russia, Argentina, Greece, Cyprus, India and Iceland have all endorsed varying forms of capital controls in light of a global economic slowdown and negative domestic growth. More recently, and not surprisingly, commodity prices have taken centre stage as the current period of low pricing may have far-reaching effects for emerging markets. Those effects can also spill over to Canadian companies that invest in, sell to, or get supplies from developing countries.

The effects may also lead to heightened trade risk due to capital controls. A narrow economy that is highly dependent on commodity exports can feel the pinch when commodity prices decline. In an attempt to control capital from flowing out of a country, Bloomberg’s Ye Xie notes that “a government can restrict withdrawals from banks, limit foreign-exchange transactions or tax the purchase of stocks and bonds.” When many countries enact capital controls at the same time, however, they can add to the already tough geopolitical risk scenario that companies face.

More countries may use capital controls

As an economic policy option during this period of low commodity prices, something new may emerge: more countries enacting capital controls. For instance, the Wall Street Journal recently reported that Saudi Arabia disallowed certain shorts against its currency. That development may be of some concern to Canadian investors as Saudi Arabia shared CDN $3.4 billion in trade with Canada in 2015. Meanwhile, Nigeria halted imports of some foods and furniture, and imposed spending limits on foreign-currency credit and debit cards. As Nigeria accounted in 2015 for roughly CDN $1 billion in trade with Canada, including CDN $500 million in imports, Canadian investors may have cause for concern about the flow of capital with Nigeria. In the credit and political risk insurance marketplace, Zurich has even seen some governments and state-owned enterprises delay their own payments to lenders and suppliers because of extended low commodity prices.

Implications for Canadian suppliers and lenders

Taken together, the policy changes enacted by Saudi Arabia, Nigeria, and other nations may adversely affect Canadian suppliers and lenders. If enacted for short periods, such changes may not produce significant effects. But it’s also possible that, if enacted, capital controls could lead to more harmful, market related, domino effects, such as civic upheaval or a shortage of food and other necessities in such countries. In short, Canadian suppliers and lenders to emerging markets would be wise to pay close attention to the various risk scenarios, especially while commodity prices are low.  

How long is the current period likely to last?

A key risk issue is the unknown duration of the current low commodity price period. The World Bank recently cut its price forecast for 80% of the world’s commodities. Oil prices, which fell by 47% in 2015, are expected to fall another 27% this year. The International Energy Agency predicts oil to be at only US $80/barrel by 2020, and their “Low Price Scenario” contemplates US $50-$60/barrel “well into the 2020s.” In light of the possibility of such prolonged effects, countries dependent on oil exports or other commodities may have to make choices about how to minimize the damage to their economies.

The information in this publication was compiled from sources believed to be reliable for informational purposes only. All sample policies and procedures herein should serve as a guideline, which you can use to create your own policies and procedures. We trust that you will customize these samples to reflect your own operations and believe that these samples may serve as a helpful platform for this endeavour. Any and all information contained herein is not intended to constitute legal advice and accordingly, you should consult with your own lawyers when developing programs and policies. We do not guarantee the accuracy of this information or any results and further assume no liability in connection with this publication and sample policies and procedures, including any information, methods or safety suggestions contained herein. Moreover, Zurich Insurance Company Ltd (Canadian Branch) (“Zurich” or “Zurich Canada”) reminds you that this cannot be assumed to contain every acceptable safety and compliance procedure or that additional procedure might not be appropriate under the circumstances. The subject matter of this publication is not tied to any specific insurance product nor will adopting these policies and procedures ensure coverage under any insurance policy.

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