Country risk refers to the factors that influence how a transaction or business develops. The risk is beyond the scope of the parties involved or falls outside their responsibility, but depends on the situation and the nature of the country in which they are operating. It could lead to default.
The factors that determine the country risk are diverse:
Firstly, there are traditional “political risks”, which encompass transfer and convertibility risk, government default risk, and the risk of war, revolution or civil disorder.
- Transfer risk: the risk of revocation by the buyer’s government of the buyer’s legal right to make payment, despite having funds, in an invoiced currency that is different from the currency of the buyer country. It may be due to lack of reserves, to special restrictions on business operations or capital, to a macro-devaluation…
- Risk of default by government-owned buyer:the risk that a government buyer fails to meet payment obligations in time.
- War, revolution or civil disorder risks.
Catastrophic and extraordinary risks
Secondly, there are catastrophic and extraordinary risks. They mainly refer to natural disasters (earthquakes, floods, etc.) and nuclear accidents.
Finally, we find an increasingly important group of factors that shape the situation and development of a country. They can also affect the success of a business transaction as they may impact on the creditworthiness of private debtors.
This risk is known as systemic risk, which completes the definition of country risk.
Some of these factors include the stability and solvency of the financial system, sensitivity to international market changes, economic policy stability and legal system reliability.
Purchases under FCA and FOB delivery terms, and CIP/CIF sales provide greater control over transport and insurance, and thus over the risks associated with delivery.
Despite being a specific form of commercial risk, fraud risk has its own features. It is a deliberate wrongful or criminal deception intended to secure unfair or unlawful gain. The lack of experience of companies that are newcomers in the world of international trade makes them targets for criminals in search of easy profits.
The greater the distances covered in international trade, the more complex the transport used. The chances of cargo handling and transhipment carried out by carriers increase significantly. In addition, the use of systems that are not common in domestic trade, such as aircraft or ships, or the combination of different means of transport, requires different transport contracts. The shipper and the consignee must understand, assess, and minimise the risks posed by these factors.
A financial risk that exists when a transaction is denominated in a currency other than that of the base currency of a company. The risk of changes in the exchange rate arises when prices are set. From then on, possible fluctuations in the exchange rate will affect the expected profits of the transaction, not only to a greater or lesser extent, but also favourably or unfavourably. Even using its own currency, a company cannot hold the foreign exchange risk back, it simply side-steps it, but it will eventually impact on competitiveness (prices will increase or decrease).
When conducting transactions abroad, the differences between the legal systems and their potential impact on the transaction success must be thoroughly analysed. The applicable law, the legal systems, the existence of international agreements on specific issues or the costs of litigation abroad are aspects to take into account: sometimes they may be trivial, but under other circumstances they may make the transaction inadvisable.
Although it could be included within the legal risks, documentary risk has specific features. It arises from missing or incorrectly prepared customs documentation required to dispatch the cargo, complete the transaction and/or make payment.