Free Online Course in International BusinessCountry-Related RisksBoth the seller’s country and the buyer’s country have laws governing cross-border trade. These laws may address:• the need for export and import licenses • customs and import duties • limitations on sending money out of the country (currency control laws and regulations) • embargos. There are transnational rules and agreements that may also affect trade: • protocols and common practices for banking transactions that may be found in International Chamber of Commerce publications for collections, letters of credit and SWIFT (Society for Worldwide Inter-bank Telecommunications systems) procedures to execute payments and to communicate on collections and letters of credit • terms of sale as defined in Incoterms, another International Chamber of Commerce publication that details when the costs, risks and responsibilities for transporting goods transfer from seller to buyer. Some examples of country-related risks illustrate payment risk issues in cross-border transactions. Sovereign or country-related risks stem from the actions of one or more governments and government agencies or by civil war, civil unrest and strikes. A seller has a contract to deliver perishable goods to a buyer in another country. There are actions by the government that could prevent the delivery and the completion of the transaction. War by a third country with either the buyer’s or seller’s country could cause the goods not to be transported and/or delivered by one of the warring countries. An embargo or blockade could bar the delivery of the goods. A strike in the logistic pipeline could also stop the goods from being delivered. Purely political actions like transfer and convertibility risks must also be considered as a part of sovereign risk. Transfer and convertibility risks arise as the result of issues with currency used by the buyer, seller, or other parties involved in the transaction. It should be kept in mind that transfer and convertibility risks are not the same as foreign exchange risk which will be discussed later. It is imperative to evaluate the potential level of risk by using several different approaches and techniques, which range from relying on experts to making your own judgments. Additional risks may arise in the course of international or cross- border transactions. These risks fall into several general and common categories: sovereign, documentary, foreign exchange, and cultural. Political RiskSovereign or country-related risks fall into several major subcategories: political, transfer and convertibility. Political risks are those risks that arise from the legal and foreign relations actions of the national governments of a seller, a buyer and sometimes third countries, especially third countries through which cargo may travel. Transfer and convertibility risks also relate to the buyer and seller’s countries, but more specifically in terms of the management of the currency and the availability of foreign currencies, also known as foreign reserves.Sometimes when a country, usually through its central bank, needs to ration the foreign currency it has available to it, it will place controls on transfer currency, sometimes even its own currency out of the country. This situation is called transfer risk. The buyer or debtor is willing and able to pay, but restrictions have been instituted that prevent the payment from taking place. Convertibility risk is somewhat similar. The buyer or debtor is willing and able to pay with local currency and the currency may be transferred out of the country; however, there is no ready market to convert it to a currency the seller or creditor can use. The buyer or debtor may be prevented from legally exchanging the currency in his own country because of currency controls imposed by his own country, usually through the central bank. If the buyer sends his local currency to the seller, the seller could be faced with having to exchange it for a usable currency at deep discount or not being able to exchange the currency at any rate of exchange. Foreign currency exchange under a free-floating environment can be very volatile over time and should be hedged by the inexperienced.
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