Political risk analysis
Published on: Mar 4, 2016
Transcripts - Political risk analysis
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This is a memo from Sino-gas ( fictitious company ). Sino-gas is a state-hold Chinese corporation
which has a significant market share in Chinese natural gas market. As the Chinese government is
moving to a greener economy, natural gas, which is a cleaner source of energy, is expected to
increase sharply in demand. Being a forward looking corporation, Sino-gas is considering building
a gas pipeline from Russia to China. The pipeline will start from west Siberia , pass through
Xinjiang province and send the gas to densely populated Eastern region of China. The entire project
will be carried out solely by Sino-gas, including the pipeline on the Russian territory. Sino-gas CEO
wish to sign the contract with Russian government at the end of 2015, and the construction is
expected to be completed in 5 years.
Political risks in the project
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1. Civil Strife Damage and Terrorism
As the pipeline route passes through Xinjiang, it is under high risk of being sabotaged at the event
of protest or riots. Two major riots broke out in Xinjiang in the past seven years. Xinjiang is still in
high political and social instability because of the ethnic confrontation between the Uyghur and the
Han ethnic group. The riots in 20091 and 20132 have shown the pipeline will become an easy target
for mobs. Construction workers’s personal safety is also at risk.
Sino-gas is strongly advised to seek military support at Xinjiang area to protect its assets and
workers. Sino-gas should leverage on its advantage of being a state-hold corporation and persuade
the government to provide security. It should also invest in public relations to promote a good
image among the local Uyghur, to soften the tension between the locals and the central government.
Sino-gas may buy insurance for the pipeline to avoid economic losses.
2. Process Deterioration
The gas supply can be interrupted even after the pipeline is completed as Russia controls the source
supply. If there is dispute between china and Russia, Russia is highly likely to leverage on the
pipeline and threatens to terminate the construction or cut the supply. Russia has repeatedly applied
this strategy to the EU when a dispute with Ukraine escalated in 20093 and 2015. Although Russian
and Chinese government have kept a close and friendly relationship in the past 15 years, Chinese
growing economic as well as military strength in the East Asia may be a concern for Russia.
Furthermore, Russia will held its presidential election in 2018. The new government’s attitude
towards the project is unforeseeable.
The July 2009 Ürümqi riots were a series of violent riots over several days that broke out on 5 July 2009 in
Ürümqi. A total of 197 people died, with 1,721 others injured and many vehicles and buildings destroyed
On 24 April 2013, ethnic clashes occurred between social workers and police in Bachu (Marelbexi) County,
Xinjiang, China. The violence left at least 21 people dead, including 15 police and officials.
Russia cut gas exports to Europe by 60 per cent, plunging the continent into an energy crisis. Bulgaria,
Greece, Macedonia, Romania, Croatia and Turkey all reported a halt in gas shipments from Russia through
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Sino-gas is advised to form alliance with other corporations in the industry to increase lobby effort
in both Russian and Chinese government. Lobbyist groups will hopefully lower the risk of process
deterioration by influencing government’s key decisions. As the main provider of natural gas in the
industry, Sino-gas should not rely on this pipeline and keep seeking alternative sources of supply,
such as natural gas from Australia and Canada.
3. Issue Group Campaigns and Reputational Risk
The key issues associated with the installation of new cross-country pipelines vary between projects
but often relate to land-take, biodiversity, heritage, pollution control, disruption of livelihoods,
community safety, traffic management, loss of remoteness, communicable diseases and
employment and trade opportunities4 (Dr Janet Swan, September 2009). Potential pipeline leakage
or failure and fracking waste will become a huge issue, as the project spans across Europe and Asia.
Its route also goes through some of the world’s most fragile ecosystems, such as the Gobi Dessert
of Xinjiang. NGO such as Greenpeace has similar protests against the oil pipeline in 20135 and they
will probably protested against this project. Protests and bad public image will lower Sino-gas stock
price and even lead to boycotts.
Sino-gas is advised to provide a detailed,feasible and sustainable environmental protection plan to
the public. It will ensure the environment concerning public that the pipeline will do minimum harm
to the environment. The company need to invest extra manpower and funds in the pipeline
maintenance, which will be difficult considering the span of the pipeline.
Dr Janet Swan, September 2009, Assessing the environmental impacts of pipelines, Pipelines
Greenpeace activists hang a large banner off of one of the oil storage containers at the Kinder Morgan
facility as they paint “Stop Tar Sands” on the other in Burrard Inlet in Burnaby, B.C. Wednesday, Oct. 16,
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4. Contact repudiation
Unstable economic condition in Russia may lead to contract repudiation. The Rubles exchange rate
is volatile, and Russia’s economic condition is worsened by economic sanction imposed by western
countries. Investors have low confidence in the Russian economy6 and its currency is expected to
depreciate further in the future. At extreme cases, Russian government may repudiate the contract
and renegotiate the gas price.Therefore, Sino-gas is suggested to purchase a insurance against
5. Process Deterioration/Bureaucratic Sluggishness
The cost of construction may far exceed the budget and the project may take longer time than
planned due to bureaucracy and systemic corruption in Russian government. Russia is ranked 136
out of 175 countries in corruption perception index 20147. Lack of cooperation with the local
government official or deliberate delay of the project, such as slow licensing and permissions
decisions, will drive jeopardise the project. The Russian central government cannot be counted to
supervise the entire project.
Sino-gas is suggested to send its representatives who understand Russian culture to facilitate good
relationships with the local government officials. However, appropriate measures should be taken
within the realm of local and domestic law.
6. Expropriation or Nationalisation
In the near term, Browder expects Russia to impose currency and capital controls to stem the
Ruble's decline, a drawdown in foreign reserves and the flight of cash out of the country. Those
capital controls will only spur Russians to send more money abroad. This will in turn cause Putin,
Elena PopinaYe Xie, Investors Flee Russia as Morgan Stanley Sees Long Market Chill , Bloomberg
Business, July 27, 2015
Data from www.transparency.org
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with no money left in the country, to find ways of expropriating and nationalising more
companies.(Tom DiChristopher, 2015)8
Although China and Russia is expected to keep good relationships, Chinese corporations should not
be complacent. There is possibility that Russia threaten to expropriate the project in order to
negotiate more favourable trading terms or political gains. Sino-gas is advised to buy insurance to
minimise its economic loss and build good relationship with the Russian government.
The above six risks should be investigated further before moving ahead on the project. This is a
massive and complex project which needS delicate cooperation between the government and
company. A great amount of money and time will be invested in the project, and high economic
benefits will be reaped after the construction. Therefore, any one of these risk may lead to huge
loss of profit, or even bankrupt the company. Sino-gas should evaluate the risks carefully and not
rush into the business.
Risks identified weights / %
Civil Strife Damage and Terrorism 25
Process Deterioration 5
Issue Group Campaigns and Reputational
Contact repudiation 10
Tom DiChristopher, 2015, Putin on track to nationalize companies: Expert, CNBC.com
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Risks identified weights / %
Expropriation or Nationalisation 5