Sure, financial risk grabs the headlines -- as well it should, when vertigo-inducing leverage levels can sink a company, not to mention an economy, faster than a battleship could sink a jetski. But political risk is nearly as widespread, and no less dangerous.
We're all too familiar with Venezuela's Hugo Chavez's covetous ways, which have left American oil giants ExxonMobil (NYSE: XOM ) and ConocoPhillips (NYSE: COP ) seeking billions of dollars in restitution in various world courts. If you have a longer memory, you'll recall Royal Dutch Shell (NYSE: RDS-A ) ceding control of the $22 billion Russian Sakhalin-2 project to state gas monopoly Gazprom back in 2006, after months of political pressure.
Political risk isn't the sole domain of emerging economies, totalitarian regimes, or banana republics; it's a very real danger in first-world economies as well. The European Union has already shaken down Microsoft (Nasdaq: MSFT ) for roughly $2 billion in antitrust charges related to its Internet Explorer browser. What's more, there are rumblings the EU is probing similar antitrust cases related to Mr. Softy's Word and Excel programs.
A billion here and a billion there, and soon we're talking about real damage to a company's bottom line. This past Tuesday, Intel (Nasdaq: INTC ) , the world's biggest chipmaker, booked its first loss in more than 20 years, thanks to a $1.45 billion charge related to an EU antitrust fine. In May, the EU fined Intel for allegedly using illegal rebates to thwart competitors, most notably Advanced Micro Devices (NYSE: AMD ) . Intel has vowed to appeal, but for now, the financial damage has been done.
Investors could reason that political risk is simply a cost of being big and successful, and doing business abroad. Unfortunately, they'd be wrong. U.S., state, and local governments might be less rapacious than their European and third-world counterparts, but they're not above extracting their own pounds of flesh, if doing so seems politically feasible. Consider the tribulations of the very legitimate, and formerly very profitable, payday lending business. It's now being slowly strangled to death, state by state, with untenable restrictions on interest charges and fees.
Standard financial risk measures should be an essential part of every investor's due diligence. But Fools should never neglect the very real, but difficult-to-quantify, financial risk posed by politicians and bureaucrats, either.