Country Risk
The risk that political, economic, or social instability in a foreign country will negatively affect an investment.
What is Country Risk?
Country risk encompasses all the risks associated with investing in or doing business in a foreign country, beyond the normal risks of the investment itself. It has several components: political risk (government instability, expropriation, sanctions), economic risk (inflation, recession, currency crises), sovereign risk (government default on debt), regulatory risk (sudden legal or tax changes), and transfer risk (inability to repatriate profits due to capital controls). Country risk is typically highest in emerging and frontier markets. It is assessed by agencies like the Economist Intelligence Unit (EIU), PRS Group (ICRG), and Euromoney. Investors demand a country risk premium on top of the risk-free rate to compensate for these additional uncertainties.
Example
When Russia invaded Ukraine in February 2022, foreign investors faced immediate country risk materialization: Russian stocks became virtually untradeable as Western exchanges suspended ADRs, capital controls prevented profit repatriation, and sanctions froze assets. MSCI removed Russia from all indexes in March 2022. Investors holding Russian equities suffered near-total losses despite the underlying companies potentially still operating.
Source: MSCI — Russia Index Removal