How can a multinational corporation operating in the Middle East minimize the risk to its operations?  

1 Answer | Add Yours

kipling2448's profile pic

kipling2448 | (Level 3) Educator Emeritus

Posted on

There are limitations to what multinational corporations operating in the Middle East, or in any other politically unstable region, can do to protect themselves from the risks of crises like war and revolution.  Recognizing this, Lloyds of London, the principal insurer of many high-risk business enterprises, for example, shipping in the Persian Gulf, sets rates according to the level of assessed risk at any given time.  If Lloyds assesses the level of risk to be high, then insurance rates associated with oil tanker traffic in the Gulf and the narrow Straits of Hormuz will increase dramatically.  When that happens, corporations have to make decisions regarding the value in continuing the enterprise versus shutting down until the political situation in the country or countries in question subsides.  The increased insurance premiums will both be passed along to the consumer (i.e., the public) and will negatively affect the profit margin for the shipping company.

A good example of how companies assess risk are the tens of billions of dollars in contracts for the exploration and drilling of oil and natural gas in Iranian parts of the Persian Gulf.  Many oil companies around the world have signed contracts with the Government of Iran to exploit vast tracts of the seabed where large deposits of oil and gas have been located.  The problem for these companies is two fold.  First, the United States maintains a broad set of economic and financial sanctions on Iran that penalize non-Iranian companies that seek to do business with it.  Second, Iran's suspected nuclear weapons programs have resulted in an increased risk of war, which would almost certainly badly damage some of that country's energy infrastructure (e.g., pipelines, operating stations, drilling platforms).  That the aformentioned contracts are going largely, but not completely, unfulfilled is a product of the risk associated with doing business with Iran.

Companies that do business in politically turbulent countries or regions do so in the full knowledge that operations can be adversely affected by political and/or military developments.  The profits to be made in the energy sector, in particular, however, are sufficiently high to make the risk worth taking in many cases.  

We’ve answered 318,918 questions. We can answer yours, too.

Ask a question