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Nationalization and the outright seizure of assets and property belonging to foreign corporations by left-leaning governments has re-emerged as a significant risk in the trade credit markets after lying dormant for more than 20 years, experts say.

The issue is particularly evident in Venezuela and Bolivia, where leftist governments have announced aggressive policies to appropriate assets of corporations operating in the energy and mining sectors.

President Hugo Chavez of Venezuela has announced he will nationalize companies in the telecommunications and electricity industries and is looking to assert more control over natural-gas projects. In Bolivia, President Evo Morales said last year he would nationalize his nation's oil and gas reserves.

In Russia, the government has preferred to negotiate quietly with foreign companies about ownership of oil resources. Thailand, whose democratically elected leader was deposed in a military coup in 2006, has also embarked on an aggressive nationalization campaign. The new government has decreed that no foreign corporation own more than 50 percent of a Thai asset.

Nationalizations aren't new. They happened before, in the 1960s and 1970s. But this time, the cycle comes with a twist. Foreign governments are being a little more generous than in the past and are willing to offer foreign investors some kind of compensation for their loss, said Bryan W. Squibb, managing director with Aon Trade Credit.

What's that mean for corporate buyers doing business abroad? The key for corporate clients, Squibb said, is to find insurance to cover the difference between the "true loss" in the value of a nationalized asset and the compensation a government is willing to give a nationalized industry. "The question is will it be fair?" said Wilkin.

This latest round of nationalizations is making capacity unavailable or very expensive, said Roger Schwartz, senior vice president of Aon Trade Credit. When it comes to nationalization, some industries are more likely targets than others: oil and gas, telecommunications and banking.

"Certain industries have different vulnerabilities," he said. "Every government has different pressure points."

Nationalizations tend to be low-frequency events. When they happen, however, they inflict high-severity losses. The Aon experts predict more nationalizations will follow in 2007. That's due to the return of some of the economic conditions present in the 1970s: high prices for natural resources and the emergence of new global economic players. Those players are now India and China, not Germany and Japan.

While the surge in nationalizations may have risk managers looking for new ways to mitigate the exposure and carriers dusting off old policies, Wilkin said, "If the price of oil were to drop, the value of controlling those resources would drop."

March 1, 2007

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