[Editor’s note: the following is a fictional scenario.]

It was 4:30 a.m. and the phone must have just rung five times, probably waking up everyone in the house. Bleary-eyed, I could see that the call was coming in from Jimmy Callaghan, chief operating officer of my company’s Latin America division, who had promised me an update on a $40 million payment owed by a key Brazilian customer that was more than a month overdue.

Marc Wagman

Marc Wagman

The previous day, that division’s credit manager told me that this customer was being evasive in its response to our demand for payment. “How totally uncharacteristic of this particular customer,” I thought to myself. They always pay their bills within sales terms, we know their credit quality very well, and we’ve had a longstanding relationship with the customer’s management team for well over 10 years.

I went to bed feeling pretty stressed, and it took a long time for me to fall asleep.

We’re a $2 billion manufacturer that is well-capitalized and profitable, but a $40 million customer default would be painfully impactful to our EBITDA. As the company’s CFO, I didn’t relish the conversations I’d have to have with my CEO, private-equity sponsor, bank lender, and Wall Street bond analysts.

Clearing the cobwebs from my brain, I heard Jimmy say, “Brazil’s Ministry of Finance has suspended external dollar payment transactions to foreign creditors until further notice. Without the express written consent of Brazil’s central bank, no Brazilian companies can convert reals into U.S. dollars, or any other hard currency for that matter. What do you want me to do?”

I could feel my blood pressure rising. How was it that one of the world’s largest countries with such vast natural resources could be so grossly mismanaged and treat my company, an important trading partner, so poorly?

It was always my deepest fear of doing business in emerging markets. I often worried that many developing countries simply don’t have a tradition or a business culture that protects property rights or enforces contract law, especially when it comes to foreign creditors and investors.

That keep-me-up-at-night worry just became a reality. Now what?

So as not to disturb my sleeping wife and kids, I grabbed the cordless phone, went downstairs to my office, and closed the door. “Jimmy,” I said, “I want you to hire counsel down there immediately and draw up an agreement with the customer whereby they will immediately deposit the Brazilian real equivalent of the $40 million payment into an escrow account to be managed by our new local lawyer in Sao Paolo at Banco do Brasil. Do it now and make that happen by the close of business today. You have 12 hours. We’ll worry about the currency risk shortly thereafter and then figure out next steps from there.”

I hung up and went to the kitchen. Time for strong coffee. How did I not see that handwriting on the wall? The warning signs had been there for at least four years as commodity prices collapsed globally.

Brazil was everyone’s darling in the mid-to-late 2000s go-go days of high oil and agricultural commodity prices, but once that bubble burst, direct foreign investment began to dry up.

I had seen it all and did nothing to act on it. The endemic corruption. The gross mismanagement of public-sector finances at both the federal and state levels in Brazil. The political expediency of expanding government entitlements designed to placate Brazil’s poor and working class masses, even in the face of massive budget deficits.

This was nothing new in emerging markets. I had seen this happen in Argentina three times since 1980, in Russia in the late 1990s, and then again in Venezuela and Ecuador within the last five years. In every case, all of these factors had crowded out more efficient private-sector investment, to one degree or another — but in those cases too, my response was that of an ostrich.

In fact, at our quarterly corporate risk management meetings we had ruminated, on several occasions, over the various political risks that we face globally, particularly since we have manufacturing facilities in some other developing countries. In China, for example, we have a joint venture with a Japanese company whose name is recognizably Japanese.

We’ve seen numerous instances over the years where local mainland Chinese have destroyed Japanese corporate assets in anger over long-simmering issues dating prior to World War II. Given what happened to us just now in Brazil, my mind began running a bit wild. What if Japan’s next prime minister paid another visit to a memorial shrine honoring Japanese veterans of the war, and local Chinese residing near our manufacturing facility in Dongguan decided to storm the grounds and raze our facility in a fit of rage?

Finally, I was moved to begin considering risk-mitigation strategies. I had heard that there is insurance coverage for such events, and a Google search revealed that it’s called “Political Violence.”

Further search results revealed that for my current situation in Brazil, we could have purchased “Currency Inconvertibility Coverage” had we done it weeks or months ago. Okay, I thought to myself, at least I can potentially address this risk for our other emerging-market credit exposures going forward.

My brain still racing and bracing for the next round of random scenarios, my next thought was: What if China unexpectedly changes course and decides, in an anti-foreigner, anti-bourgeois spasm, to expropriate or nationalize certain foreign-owned companies or assets which it feels are vital to its national interests? What if Chinese authorities decide tomorrow that a Japanese/American joint venture in our business on their soil is inimical to the state?

Last year I read a book about how it’s inevitable that because of its long and unstable history, China’s borders will likely change radically again during the 21st century. According to this fairly plausible thinking, the restive western provinces like Tibet and Xinjiang will eventually spin out from Beijing’s orbit and possibly revolt. If that happens, especially with Chinese President Xi eerily once again touting all of the “great” lessons of Chairman Mao, the risks would be enormous for unprotected foreign investors and creditors.

Continuing on my research quest, I learned that there is insurance for this type of political risk, known as “Confiscation, Expropriation, Nationalization, and Forced Divestiture” coverage. The historical record shows that currency inconvertibility, political violence, and asset-confiscation events all over the world dating back to the 1950s have imposed hundreds of billions of dollars of losses on American and British companies.

Looking out the window, I caught sight of a very pretty summer sunrise. At least now I had some answers for my board and risk management committee. I resolved to formalize a risk-mitigation strategy that I would propose the next time I met with them.


The above was a fictionalized portrayal of some of the all-too-real political risks that multinational companies face. Note that while Brazil has not instituted hard currency controls, the other, past scenarios mentioned — in Argentina, China, Ecuador, Russia, and Venezuela — are historically accurate.

In full disclosure, the parent of the firm I work for is an insurance brokerage that is paid both fees and commissions, both of which are customary in our industry. However, this article is intended solely as a thought-leadership piece.

Incidents similar to those discussed above have occurred several times in the past decade, to not only very prominent companies like Honda and Toyota, but middle-market companies like the one where our fictional CFO works.

Why, some may wonder, would the CFO of a $2 billion, multinational company know that the company is subject to political risks, and also know that there are ways to mitigate those risks, and not look into it further? Well, it happens all the time. It’s commonplace.

In part, it’s a classic 21st century problem: information and work overload; there’s not enough time in the day. Perhaps more importantly, American CFOs are far less risk-averse than their European or Asian counterparts. They are much more likely to find ways to self-insure risks and/or choose to ignore them outright, because ours is a risk-taking culture and always has been. It’s just the way it is.

Marc Wagman is executive vice president, trade credit and political risk, for Arthur J. Gallagher Risk Management Services.

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One response to “A Foreign Government Blocks a Huge Customer Payment. Now What?”

  1. So I had a real problem in Brazil which ended in disaster. In 2001 I was CFO of the international division of a major, public utility. I foresaw the potentional of a major currency devaluation in 2002 and wanted to hedge the risk. The cost was about $35 mm, while the Corporate CFO agreed with my recommendation, the Division CEO did not and he decided not to hedge the Reis to the Dollar. In Q12002 there was a devaluation and the Division had to take a $125 mm write down. Even though there were multiple memos on the issue on the record, when the Board decided to look for a person to shoot I was fired and the CEO kept his job. So much for informed decision making!

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