Volvo in North Korea - A salutary lesson in political risk

Understanding Political Risk and How Exporters Can Mitigate It

For exporters, political risk is a constant threat that can undermine deals and disrupt operations. Recent global events, from wars and sanctions to sudden policy shifts, have amplified these risks for businesses seeking opportunities in international markets. The consequences can be severe: unpaid debts, lost investments, frozen assets, and halted operations. To succeed, exporters must understand the nature of political risk and adopt strategies to protect their businesses.

The Volvo Cars Deal with North Korea: A Classic Example of Political Risk

One of the most fascinating and enduring examples of political risk is Sweden’s 1974 Volvo cars deal with North Korea. This case highlights how political and economic instability can turn an ambitious trade agreement into a decades-long headache for exporters. Despite being almost 50 years old, the unpaid debt from this deal remains a cautionary tale for companies engaging in high-risk markets.

The Deal: Sweden’s Push for Trade with North Korea

In the early 1970s, Sweden sought to strengthen diplomatic and trade relations with North Korea as part of a broader effort to expand its presence in the Asian market. In 1974, Volvo signed an agreement to export 1,000 Volvo 144 sedans to North Korea. The cars were meant to modernize the country’s transportation infrastructure and signal growing cooperation between the two nations.

The deal was worth approximately 70 million USD (around 700 million USD in today’s money). The agreed terms were that North Korea would make payments over time for the cars. Confident in the potential of this new trade relationship, Volvo delivered the vehicles to North Korea.

What Went Wrong: North Korea’s Failure to Pay

Despite receiving and using the cars, North Korea never made a single payment. Sweden repeatedly attempted to collect the debt, but North Korea simply ignored the demands. Over the years, the unpaid debt has accumulated interest, turning the initial $70 million into what is now estimated to be more than $300 million.

The cars, however, didn’t just disappear. They became part of everyday life in North Korea. Volvo 144s can still be seen on the streets of Pyongyang, decades after they were delivered. These vehicles are a rare sight in the secretive country and serve as a lasting reminder of Sweden’s failed deal.

Sweden’s Efforts to Collect the Debt

Sweden has never written off the debt. It still formally appears on Swedish national accounts as an unpaid receivable. Over the years, Swedish diplomats and trade officials have raised the issue in discussions with North Korea, but no progress has been made. The political situation and lack of a functioning legal framework in North Korea make it nearly impossible to enforce payment.

Despite the debt being unresolved, Sweden has maintained diplomatic relations with North Korea, partly in the hope of a future resolution. However, given North Korea’s economic isolation and chronic financial difficulties, repayment seems highly unlikely.

Why the Volvo Deal Matters for Exporters

The Volvo case is more than just a quirky anecdote; it is a powerful example of how political and economic risks can disrupt even well-intentioned trade agreements. The deal illustrates several key lessons for exporters:

• Market Due Diligence: Understanding the political and economic environment is critical before entering high-risk markets. In this case, the risks of doing business with North Korea were severely underestimated.

• Non-Payment Risk: Exporters must carefully evaluate payment terms and consider upfront payments or secure financial instruments such as letters of credit in high-risk markets.

• Long-Term Consequences: An unpaid debt can persist for decades, tying up financial resources and complicating diplomatic relations.

While historical examples like Sweden’s Volvo deal with North Korea in 1974 remain relevant, recent global events highlight how political risk continues to impact exporters.

Recent Examples of Political Risk Affecting Businesses

1. Russia-Ukraine War (2022–Present)

The conflict between Russia and Ukraine disrupted trade across Europe and led to unprecedented sanctions on Russian businesses. Companies with operations in Russia saw their assets frozen or expropriated. Multinationals like BP, McDonald’s, and Shell lost billions by exiting the Russian market, while smaller exporters were caught in the crossfire with unpaid contracts and blocked funds.

2. US-China Trade War (2018–Ongoing)

The trade war between the United States and China led to sudden tariffs on billions of dollars’ worth of goods, forcing exporters to absorb higher costs or lose market share. Many businesses had to rapidly adjust supply chains or exit certain markets to avoid heavy losses. The uncertainty caused by shifting tariffs continues to pose a risk to exporters in both countries.

3. Sri Lanka’s Economic Crisis (2022)

Sri Lanka’s severe economic meltdown left the country unable to pay for imports, leading to widespread shortages and unpaid debts to foreign suppliers. Exporters dealing with Sri Lankan buyers were left with significant financial losses as the country defaulted on its sovereign debt.

4. Turkey’s Currency Crisis (2018–Present)

Turkey’s currency volatility, driven by political interference in monetary policy, led to the rapid devaluation of the Turkish lira. Exporters were exposed to currency risk, and many saw the value of their receivables plummet as local buyers struggled to pay in foreign currencies.

5. Lebanon’s Financial Collapse (2019–Present)

Lebanon’s banking sector imploded in 2019, trapping billions of dollars in deposits. Foreign exporters were unable to retrieve payments for goods delivered, and businesses operating in Lebanon faced substantial write-offs.

6. Myanmar’s Military Coup (2021)

After Myanmar’s military seized power in 2021, sanctions were imposed by multiple countries, cutting off foreign businesses from the market. Exporters faced contract cancellations, frozen funds, and legal restrictions on doing business in the region.

7. Afghanistan’s Regime Change (2021)

The abrupt withdrawal of Western forces and the Taliban’s return to power caused major losses for businesses operating in Afghanistan. Frozen assets, sanctions, and political uncertainty effectively shut the country off from international trade.

8. Argentina’s Currency and Debt Crisis (2018–Present)

Ongoing economic instability and currency devaluation have made it difficult for foreign exporters to receive payments in hard currencies. Argentina’s recurring debt crises continue to pose risks for companies operating in the country.

9. Nigeria’s Dollar Shortages (2020–Present)

Nigeria’s foreign exchange crisis has made it increasingly difficult for local companies to access U.S. dollars to pay international suppliers. Exporters to Nigeria have faced delays and defaults due to the scarcity of foreign currency.

10. Ethiopia’s Civil War (2020–2022)

The civil war in Ethiopia disrupted supply chains and left exporters dealing with businesses in the conflict zones unable to fulfill contracts or make payments. The instability affected key industries, including textiles and agriculture.

How Exporters Can Mitigate Political Risk

With political risk an ever-present challenge, exporters must take proactive measures to protect their business interests. Here are some proven strategies:

1. Political Risk Insurance

Political risk insurance covers losses from expropriation, currency inconvertibility, war, and other political events. Export Credit Agencies (ECAs) like UK Export Finance (UKEF) and private insurers offer policies that help reduce the financial impact of these risks.

2. Diversify Markets and Customers

Avoid relying too heavily on a single country or customer. Diversifying across multiple markets spreads risk and reduces the impact of political instability in any one location.

3. Secure Payment Methods

Use letters of credit, export factoring, or escrow services to protect against non-payment. For high-risk markets, consider requiring advance payments.

4. Monitor Country Risk

Stay informed about the political and economic situation in your target markets. Regularly consult country risk assessments from organizations like the OECD, World Bank, and ECAs.

5. Build Local Partnerships

Trusted local partners can help you navigate regulatory changes and provide insights into emerging risks. These relationships are particularly valuable in markets with high political volatility.

6. Currency Hedging

Protect against currency fluctuations by using hedging strategies such as forward contracts and currency options, especially in markets with unstable exchange rates.

7. Incorporate Protective Clauses in Contracts

Include force majeure and arbitration clauses in your contracts to protect against unexpected events and ensure disputes are resolved fairly.

8. Use Export Credit Agencies (ECAs)

ECAs provide financial support, loan guarantees, and political risk insurance to help exporters mitigate risks and access new markets safely. For UK exporters, UKEF offers a range of services tailored to protect against political and commercial risks.

Balancing Risk and Reward

The global business landscape is filled with opportunity, but political risk is a reality exporters must face. By understanding and managing these risks, businesses can protect their investments and thrive even in volatile markets.

Ultimately, the key to success in exporting lies not just in identifying new opportunities but also in developing the tools and strategies to mitigate risk. With a proactive approach, exporters can reduce uncertainty and turn high-risk markets into profitable ventures.