Problems of country risk assessment

The cost of rolled metal in certain regions of Russia almost doubled, and building materials for the production of metal is required; by the end of May, prices increased by about 70% on average, "Coface analysts say. Average prices for metallurgical products in Russia in the first quarter of 2021 increased by 22.6%.To combat the uncontrolled rise in prices, the Russian authorities decided to introduce export tariffs on the export of ferrous and non-ferrous metals, which will come into force on August 1 and will remain in effect until December 31. Nevertheless, the metallurgical industry managed to make good money during the period of increased demand, which was reflected in the increased financial stability and solvency of metal and alloy producers.In addition to metallurgy, economists note the average level of risks in the agro-food industry, the sector of information and communication technologies, the chemical and pulp and paper industries.A high level of risk is observed in seven key sectors of the Russian market out of 13: in the automotive industry, construction industry, energy, retail trade, textile industry, transport sector and woodworking industry.According to the results of the first quarter of 2021, none of the sectors of the national economy received a "very high risk" rating, and a low level of risks is observed only in the pharmaceutical industry, which experts from the Russian branch of Coface previously called the main beneficiary of the pandemic crisis.Two financially oriented rating systems should be mentioned: Institutional Investor's Country Credit Rating and Euromoney's Country Risk Index, covering 109 and 116 countries, respectively. In the Eigotopeu model, the country risk rating is compiled by combining a set of indicators such as London Interbank Offer Rate (LIBOR), primary pricing, interbank loans, etc. Whole groups of variables are used to characterize general economic and political trends, such as the degree of national control over key sectors of the economy, political instability, the international status of a country, changes in the trade balance of government and firms. The quantitative parameters of the indicators used are usually combined with the opinions of experts and form a complex dynamic model that makes it possible to predict the development of the national and international economy. The advantage of indicators is their objectivity and robustness, which allows you to quickly create accurate reports on events. However, the theoretical validity of the indicators remains a major problem.Another problem is the static nature of ratings by definition: they consider past events and conditions that may not have any connection with the future. The most serious criticism of expert systems is for the hidden relationship between socio-economic factors and political risk, which makes it difficult to apply ratings.Along with expert assessments, econometric modeling is used to study internal political instability as a key factor of political risk. The most famous econometric model developed by Syracuse University professors William Collin and Michael O'Leary is based on multiple regression equations. In the Coplin-O'Leary model, political instability is considered as a phenomenon of the political life of a certain country, which is characterized by the widespread use of violence against the government in the form of conspiracies, coups, interethnic conflicts, etc. At the same time, one distinguishes between instability in the ruling elite, associated with the struggle for power within the ruling stratum, and social instability resulting from the vigorous activity of opposition socio-political forces.To assess the personality factor in the analysis of political risk M. O'Leary and V. Koty-nym developed a model called the Prince model. Analyzing the firmness of the positive, neutral or negative position of a particular person, the degree of his influence and the significance for a given question (each criterion is evaluated on a five-point scale, then multiplied and summed up for all participants), the model allows quantitatively (the proportion of positive points in total quantity) to calculate the likelihood of making a decision by the government. At the corporate level, judgments about the level of risk in a country are often nothing more than "a quantitative description of the political environment included in the investment proposal."An example of an extensive embedded model is the Economic, Social and Political system (ESP) developed by Dow Chemical for its Latin American operations. The method involves a preliminary collection of information on a specific country, a visit to this country by a group of experts, verification of information through interviews with employees of the firm's department and local leaders, a final analysis of the information by a group of experts, drawing up scenarios of possible developments. The advantage of this approach is that it is tailored to the specific needs of the company and engages both the grassroots and senior management in the analysis, ensuring that the assessment is taken seriously. However, thismethodisquiteexpensiveandtime-consuming.Another method of analyzing and assessing political risk in practice is to create a rating of countries by risk level based on a structured and standardized list of questions.The tendency to treat socio-political development as an act of providence, which cannot be controlled and to which one can only react when the actions are already becoming visible, has determined the insufficient development of analytical tools in this area. This trend has been redefined by active research to develop suitable social indicators that could be used alongside such widespread economic indicators as gross domestic product (GDP) and consumer price index. Social indicators, such as “objective” indicators such as statistically significant demographic shifts, or “perceptual” (behavioral) ones, such as changes in attitudes toward work, processed and standardized for international comparisons, will undoubtedly become an important part of quantitative and qualitative technical methods for assessing political risk. Selective socio-political indicators are used in some country risk assessment methods as indicators of political stability. R. Rummel and D. Hienen use such indicators as the degree of authoritarianism, transitional stages of the economy, the level of education in relation to unemployment, the balance of power between the military and civilian authorities.Despite the increase in the sovereign rating, the creditworthiness of Russian companies is negatively affected by such factors as uncertainty in the application of laws and regulations, a centralized political system focused on specific individuals, a concentrated structure of the economy, and a weak banking system. These factors are mitigated in part by incentives to increase transparency due to the current strong global demand for debt in emerging markets.The main obstacle to improving the credit ratings of companies remains the weakness of the institutional structure of Russia, which introduces unpredictability in the process of law enforcement, regulation and corporate governance practices and does not allow building a solid foundation for improving the structure of the economy. It is not yet clear whether Russia will continue to move forward or return to an order in which business is hostage to political intrigue, the struggle for personal power and the arbitrariness of an ineffective, parasitic bureaucracy.Quite often, when assessing a business, a spread method of assessing country risk is used. In this case, country risk is calculated as the difference between the yield on US Treasury bonds and the yield on RF debt instruments with a similar maturity (30-year period). According to reports prepared by the IMF, a sharp increase in the spread occurred in August 1998 (from about 1000 to 6000 points).Consequently, up to this point, market expectations of investors were inadequate to reality: the country risk of Russia increased much faster than the premium for it. This testifies not only to the lack of reliable methods for predicting country risk among investors, but also to the significant market orientation towards ratings published by world agencies.Thus, the first reassessment of the level of country risk in Russia (its increase) occurs at the beginning of the summer of 1998. The most significant downgrade of the rating took place in August 1998: a few days before the announcement of the default and immediately after it. This confirms the opinion that the rating agencies "missed" the change in the socio-political and financial-economic situation in Russia and, as a result, did not predict the approach of the financial crisis.As practice shows, many appraisal companies in Russia, in particular in St. Petersburg, recommend using data on the size of the country default spread to quantify Russian country risk.The many approaches described above highlight the complexity and multidimensionality of the problem of country risk analysis and assessment. Expert systems are criticized for the fact that causal relationships are not always clearly traced in them. Econometric modelsoften suffer from the difficulty of providing current data sources with most of the independent variables needed for analysis. Built-in models can be expensive, time-consuming, and geographically limited. It follows that the optimal approach should combine the best aspects of each method and make it possible to measure macro risks and interpret them in relation to the design-specific conditions.In conclusion, it should be noted that the analysis of country risk in Russia has some specific features. First, the political tradition, imperfection of democratic institutions and a turning point in historical development have led to a significant role of the personality factor, which needs to be given additional attention when assessing political risk. Secondly, a significant factor of uncertainty is the presence of many different types of political-territorial formations with different economic potential, heterogeneous in ethnic composition and based on different historical, political, cultural and religious traditions. Regional conflicts have both a direct impact on the general political situation and an indirect impact on the situation in other regions, since the solution of regional problems requires additional subsidies. This usually leads to an increase in the federal budget deficit, changes in tax legislation, a reduction in social spending (and, consequently, an increase in social tensions), an increase in the size of public debt, fluctuations in interest rates and exchange rates, etc. deterioration of the political and investment climate in the country. Insufficient consideration of regional specifics is perhaps the main drawback of existing foreign methods when extrapolating them to Russia.ConclusionThus, the following conclusions can be drawn.In the context of the growing globalization of world financial markets, the ability to take into account country risk is a significant challenge. First of all, such accounting is necessary for the Governments of developing countries and potential investors seeking to these markets in terms of high profits. Often, in developing markets, a potential investor may face instability of the political regime, corruption, inflationary processes, negative attitudes towards private capital and other events in the country that affect economic processes.Therefore, for successful protection in emerging markets, it is necessary to take into account the entire economic and political situation in the general aggregate. For this purpose, the concept of "country risk" was introduced. Understanding the role of country risk in the modern market economy of our country in the activities of commodity producers, exporters in the markets is becoming a reality today. The influence of negative factors of world financial markets can negatively affect the unstable market mechanism of the national economy with negative consequences. The relevance of the problem of risk management by modern methods in the national economy of the country becomes obvious, while in developed countries a certain risk management system has developed, developed in the process of many years of formation of a modern system of market economy, which has been adapted through complex processes of bankruptcy , collapse or rise, depending on objective and subjective factors and conditions. Therefore, in general, for the national economy of Kazakhstan, its regulators, business entities, the issue of risk - management is a new management element, which many are not fully aware of, although a number of business entities, by virtue of their capabilities and initiatives, are quite confidently introducing management processes risks in economic activity.In modern conditions, it is very important to manage country risk using a preventive approach to management, i.e. it is necessary to learn how to react quickly to the changes taking place. It is necessary to form a risk prevention system that can work continuously and will cover all areas of activity. For this, there is a need for the integration of all structural divisions of the company, as well as for a change in the corporate culture of management [14].Here are the main measures that will help prevent and reduce the negative impact of country risk, as well as the risks associated with country risk.In the Country Risk Service rating of country risk, Russia, along with Kazakhstan and Azerbaijan, as of April 1, 2016 had a B grade - the highest among the CIS countries. Over the past two years, this indicator for Russia has decreased by two levels (from BBB to B). A decrease in the numerical estimate occurred for all three components, but the risk indicator of the banking sector fell especially due to the devaluation of the ruble, the growth of debt on loans and a decrease in profitability.At the same time, the assessments of the Russian Federation for all three sub-indices of country risk are the best among the five leading CIS countries, especially the currency risk indicator due to the stabilization of the ruble exchange rate at the beginning of 2016. economies and sanctions of the US and EU countries.Decisions on adjusting the market development policy or the company's activities should be based on a real assessment of risks, negative factors of influence should be minimized, for which it is necessary to take measures to minimize risks, based on the consequences of the influence of country risk.ListofreferencesGureeva M.A. Foreign economic activity: Textbook / M.A. Gureeva - M.: ID FORUM, Research Center INFRA-M, 2016 .-- 288 p.Ermasova N.V. 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