Political risk management: A guide

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Political risk is the possibility that your business, assets, contracts, or investments may be affected or disrupted due to political events within a country or shifts in the international environment. Political risk can manifest in various forms, including armed conflicts, civil unrest, changes in regimes or governments, and alterations in international policies or diplomatic relations among countries.

Organizations also face political risk as a result of changes in a country's internal policies, business laws, currency restrictions, or investment regulations that can impact the operating environment. Other contributing factors include economic influences such as commodity price volatility, liquidity crises, tariffs, and sector-specific downturns. All these factors and more can impact a country’s economic stability and, consequently, the risks faced by businesses operating within it.

As the political risk landscape evolves and new complexities emerge, understanding and managing political risk has become increasingly important for companies seeking to protect their operations, workforce, assets, reputation, and growth potential no matter where in the world they operate.

What is political risk management?

Political risk management involves anticipating, identifying, mitigating, and responding to political changes that may affect a business's operations.

Given the unpredictable and rapidly changing nature of political risks, adopting a proactive approach to political risk management enables organizations to better anticipate potential threats and prepare accordingly. This can help minimize disruptions, safeguard a company’s operational continuity and financial performance, as well as allow for the pursuit of new opportunities.

Examples of political risk

Here are some examples of political risks that can affect a business:

Political violence. This includes war, civil unrest, sabotage, strikes and riots, and terrorism. Such events can cause physical damage to assets, force businesses to abandon operations, and disrupt normal business activities, leading to significant loss of business income. The 2025 flare-up in the century-old border dispute between Thailand and Cambodia cost Thai businesses more than US$3 billion. Japanese, Chinese, and Malaysian companies operating on both sides of the border also experienced several months of supply chain disruptions and additional logistics costs.
Government interference. This risk involves government actions such as expropriation or nationalization, where assets, investments, or operations are seized without warning or compensation. In 2025, Burkina Faso completed the transfer of five gold mining assets to its state-owned company, and Niger nationalized its sole industrial gold mine and a uranium mine operated by a foreign company. Meanwhile, proposed South African legislation would have allowed government seizure of private land without compensation.
Embargoes and sanctions. Trade restrictions imposed by governments or international bodies can prohibit or limit business dealings with specific countries, entities, or individuals. For example, China has imposed sanctions on US drone firms to restrict their operations. Violating such measures can result in legal penalties, loss of market access, and reputational damage. Sanctions on Russia since the 2022 invasion of Ukraine have disrupted global supply chains and financial transactions, as well as severely strained domestic industries in Russia, including aviation.
Geopolitical factors. These include changes in trade policies, tariffs, regulations, and currency controls that can alter the business environment unpredictably. For example, a new wave of tariffs in 2025 prompted some companies to adjust their supply chains and pricing strategies, while other companies filed for bankruptcy.
Currency controls and restrictions on fund transfers. Governments may restrict the conversion of local currency into foreign currency or limit the transfer of funds offshore, affecting the ability to repatriate profits, service debt, or remit dividends. For instance, Argentina imposed currency controls aimed at stabilizing its economy, which limited companies’ ability to convert pesos into US dollars and to transfer funds abroad, complicating financial planning for multinational firms.
Arbitration award defaults. When a government entity fails to honor contractual obligations or arbitration awards, businesses face the risk of non-payment or prolonged legal disputes. A July 2024 Russian Supreme Court ruling effectively prohibited enforcing awards rendered by arbitrators from "unfriendly" countries, which has resulted in a greater number of Russian government refusals to comply with international arbitration rulings.
Credit risks. This refers to the risk of a government defaulting on its debt obligations, which can affect businesses exposed to sovereign bonds or dependent on government contracts.

How to develop a political risk mitigation strategy

Developing a robust political risk mitigation strategy is essential for businesses operating in or expanding to international markets where political uncertainty can threaten investments, operations, and profitability. A well-crafted strategy enables organizations to identify, assess, and manage political risks proactively, minimizing potential losses and ensuring business continuity.

Here are five key steps to developing an effective political risk mitigation strategy:

Identify and assess political risks. Begin by thoroughly identifying the political risks relevant to your business and target markets. These may include political violence, government interference, regulatory changes, sanctions, currency controls, and (geo)political tensions. A combination of qualitative and quantitative approaches — such as expert consultations, country risk reports, scenario analysis, and historical data — can help to evaluate the likelihood and potential impact of these risks on your operations. Tools like Marsh’s World Risk Review, which monitors economic, political, and security risk trends across 197 countries, can provide country risk analysis to guide and safeguard your business and risk management strategies. Sentrisk can help you identify the most vulnerable sites, suppliers, components, and products within your supply chain.
Be proactive and prepared. Once risks are identified and assessed, boards and senior management must take proactive steps to manage them effectively. This includes developing robust risk management strategies, frameworks, and contingency plans tailored to potential political challenges. Collaboration across teams is essential to implementing measures such as diversifying supply chains, reducing dependencies on high-risk regions, or establishing alternative sourcing options to avoid overreliance on any single country or political environment. Where reasonable, operational flexibility — such as the ability to shift production or sourcing to alternative locations — can help reduce the impact of localized political disruptions.
Evaluate legal and contractual protections. Enhance your regulatory compliance and risk management frameworks to adhere to evolving trade regulations and sanctions regimes. In addition, you may consider, with your counsel, incorporating stronger legal protections into contracts, including stabilization clauses, arbitration agreements, and guarantees against expropriation or breach of contract.
Consider insurance solutions. Political risk insurance can provide protection for businesses and their stakeholders against financial losses resulting from adverse government actions. While the scope of coverage varies by policy, coverage typically includes risks such as expropriation, political violence, and currency inconvertibility. Marine hull war coverage can protect vessels against physical damage caused by piracy, terrorism, and acts of war. Trade credit insurance is designed to address the risk of non-payment for goods or services, which may include defaults arising from customers in politically unstable countries affected by sanctions or currency inconvertibility. As with all insurance policies, understanding policy specifics and effective loss control measures remain important.
Embed political risk analysis into risk management. Assign clear responsibility for political risk management to promote comprehensive risk identification, assessment, and mitigation. Because political risk can span multiple functions and business units within an organization, there should be clear ownership, accountability, and connectivity structures. In addition, given the dynamic nature of political risks, boards and senior management should establish continuous monitoring systems to track developments, policy changes, and emerging trends.

The difference between political risk insurance and trade credit insurance

Political risk insurance generally safeguards companies against losses caused by political events or government actions in foreign countries that disrupt business operations or investments. Coverage typically includes risks such as expropriation (government seizure of assets), political violence (war, terrorism, civil unrest), currency inconvertibility or transfer restrictions, breach of contract by a government entity, and sanctions or embargoes. Political risk insurance is designed to protect against risks that arise from the political environment in a host country.

Trade credit insurance generally protects businesses, including financial institutions, against losses arising from the failure of a buyer or debtor to fulfil its payment obligations. This type of insurance covers risks such as customer insolvency, protracted default, or non-payment due to commercial reasons. It is primarily focused on mitigating financial losses related to credit transactions and trade receivables, helping companies manage the risk of unpaid invoices and maintain a stable cash flow in the context of unstable trade costs.

Protecting your business

Risk managers and senior leaders will likely need to make strategic decisions to navigate potentially volatile political risks in the coming years.

To enhance resilience, risk managers should understand and regularly reassess political risks and their potential impact on operations, supply chains, and markets. Engaging with political risk specialists and leveraging advanced technologies can provide valuable insights into emerging trends, regional dynamics, and scenarios that may affect employees, revenue, and growth. In addition, establishing strong local networks and relationships with government officials, industry associations, and local partners can help gain timely insights into political developments.

Marsh’s global political risk team can provide specialist advice and solutions to companies seeking to improve investment returns, protect their assets, and unlock opportunities for growth — fostering effective risk management amid today’s unprecedented uncertainty. Our annual Political Risk Report is essential reading for risk managers and leaders engaged in strategic planning and risk mitigation, providing insights to help safeguard your organization's interests in an increasingly volatile political world.

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