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The impact will vary depending on both a country’s exposure and its response

With asset prices collapsing, credit in short supply and conflicts smouldering in several regions, many investors view 2009 as a year to retrench and regroup.

Emerging markets that have posted rapid growth rates over the last five or ten years – and even some mature, industrialised countries – suddenly look economically and politically fragile.

Equity and commodity markets continue their rollercoaster rides, while fixed-income assets seem increasingly vulnerable to default.

All in all, companies see a much more precarious business environment, and are understandably wary.
 
But the impact of the financial turmoil will vary, depending on both a country’s exposure and its government’s response.

Attractive investment opportunities can still be found, with the crisis likely to generate new prospects for mergers and acquisitions, market entry and operational partnerships.

However, there will be a premium on closer monitoring and evaluation of the changing operational environment, and a strategic attitude to complex emerging security and political risks.

Rather than punishing investors generally, 2009 will reward those companies poised to capitalise on effective risk management and seize good deals.
 
Against a backdrop of geopolitical tectonics in 2009, including a demonstrably assertive Russia, a changing US military posture in Iraq and continued negotiations over global climate and trade policy, the impact of the financial crisis on a given country will be a combination of its exposure and of its willingness and capacity to respond effectively.

The most risky countries are not necessarily those that are most exposed – a group that certainly includes the US and UK, for instance – but rather those that have fewest options to respond.

For businesses looking to maintain or make international investments, it is more important than ever to choose deals carefully and undertake comprehensive risk assessments of their prospects.
 
In this vein, it is important to note that many countries are much better off today than during previous crises.

Countries in East Asia, mindful of the debilitating consequences of the 1997-98 regional crisis, stockpiled around $4 trillion in foreign exchange reserves, largely in the last five years.

Most oil-exporting countries in the Middle East also recall the devastating aftershock of prices collapsing in the mid-1980s and have been prudent in managing record surpluses from recent high oil prices, working to diversify both their economic bases and their reserve portfolios.

Finally, countries in Latin America have taken some hard lessons from banking crises in the 1990s and early 2000s and acted to harden economic policy-making against political interference.

A steady, if often uneven, improvement in institutional capacity in many emerging markets is likely to offset some of the risks historically associated with financial crisis.
 
Markets, furthermore, are learning to respond much more rapidly to political risks.

In the wake of its military invasion of Georgia, for example, global investors withdrew more than $25bn from Russia on perceptions of increased political risk and the prospect of US or European retaliatory measures.

Russia, however, remains open for business: the financial crisis is actually removing some impediments to investment as the government learns from the pitfalls of perception and seeks to incentivise foreign capital, including offering better contract terms and paving the way for some international acquisitions.

If political risks seemed inconsequential during the asset boom years, when markets appeared to defy gravity, the Georgia crisis suggests they will be decisive in an era of collapsing asset prices and more savvy markets.

But it also indicates a need for fine-tuning risk assessment, so that good deals do not fall by the wayside under a generic mantra that a particular region is becoming more risky.
 
By way of fine-tuning, some tips for successful risk assessments in the coming year:

Don’t ignore due diligence. With capital outlays under severe stress, it’s important to make each investment count. Thorough due diligence investigations of prospective partners, suppliers and customers is essential.
 
Be sector specific. Countries that are very bad at managing their power utilities may be very efficient when it comes to oil and gas, even during an economic downturn.

Similarly, risks and opportunities will differ between strategic sectors, which may be subjected to high-level political risks like expropriation, and non-strategic sectors, where routine business risks like fraud and corruption will predominate.
 
Drill down to local politics. Dealing directly with central government ministries is great, until you realise that their power ends at the city limits and all practical decisions are actually made in the provincial governor’s office.

Similarly, while the official license to operate may reside with the department of industry, the social license to operate sits with the local community – a fact that is all the more relevant as economic growth slows.

Pull aside the curtain of surface risks. Underlying drivers of political and operational risk are as important to understand as the specifics.

Piracy around Somalia is a perfect example: while the day-to-day focus is on offshore security threats, it is economic and political collapse onshore that enables piracy.

Without addressing the underlying issues, it is very unlikely that the superficial situation will improve on its own. 

Fears that the financial crisis augurs an era of intensive nationalism and protectionism are overwrought: the global economy has always been shot through with national interests and some of the greatest successes of globalisation, including emerging-market growth, resulted when states prudently tended their economies by facilitating investment, improving the quality of rules and regulations, and providing incentives to foreign companies.

These trends are set to continue, and even accelerate, in the wake of the credit crunch.

While belligerent regimes are unlikely to reform overnight, or populist governments throw open their arms to foreign investment, the financial crisis has – if anything – demonstrated that the global economy remains deeply interconnected and dependent on forging compromises between domestic politics and international capital.
 
Jonathan Wood is a Global Issues Analyst