How did the environment/culture surrounding the buyer (Russian company) impact t

Question

How did the environment/culture surrounding the buyer (Russian company) impact the risks that were identified on this project?

How did the environment/culture surrounding the buyer (Russian company) impact the choices available for risk responses?

Considering the risks and the responses made by the buyer, would you have made the same choices? If not, what choices would you have made? Explain and defend your choices.

RUSSIAN FROZEN CHICKEN

We can gain a more in-depth understanding of risk management by illustrating it for an international project. Expropriation Risk A company had a project to export frozen chicken by oceangoing vessels from Virginia and North Carolina to St. Petersburg, Russia. The company planned to load 60- to 80-pound boxes on pallets for the ocean voyage. A problem arose because the Port of St. Petersburg had no shoreside refrigeration to allow the quick unloading of an expensive reefer vessel. The company would incur significant demurrage charges (extra costs resulting from a vessel delay) if the ship wasted time in port while it waited for containers or railroad cars. One option was to build a warehouse, but the risk manager identified an expropriation risk. She spotted an action involving the Hotel Europa in St. Petersburg, which was partly owned by European investors. In the mid-1990s, the hotel opened a foreign bank account to handle dollar transactions. Russian banking laws prohibited such accounts. When the government learned of the account, a government agency levied a heavy fine on the hotel, causing the foreigners to lose their entire investment. Effectively, the government confiscated the hotel. The risk manager knew she could obtain insurance from an agency of the U.S. government to reimburse the company for expropriation. At the same time, was it really an expropriation? Insurance did not seem to be the answer. Thus, the company considered buying an old (and relatively inexpensive) reefer vessel and using it for storage. It could build a refrigeration facility on a barge that could be moved if the situation became sticky. Alternatively, it could find a strong Russian partner with high-level government connections and allow the partner to accept the expropriation and storage exposure. The company found such a Russian partner. Lesson Learned: Investigate all options for risk mitigation. Do not assume that the traditional insurance approach is the answer.

Credit Risk So good news. The company exporting frozen chicken to Russia had a partner. This was also the bad news because it created a credit risk. How would the U.S. company ensure payment from the Russian partner? It was not realistic to demand payment in advance or to obtain a letter of credit to guarantee a future payment. The Russian partner was not able to pay for a cargo for 30 or so days after receiving it. To deal with the credit exposure, the parties agreed that the Russian partner would have to pay for one cargo before it could receive a subsequent cargo. How did this mitigate the exposure? The stream of profits from a series of cargos was significantly larger than the funds from a default on payment for a single cargo. If the Russian partner did not deposit funds in a Western bank account by day 45 after receipt of a cargo, the ship carrying the next cargo would be diverted from Russia to a northern European port. Lesson Learned: Give other parties, in this case the Russian partner, incentives to help your organization mitigate risk.

Physical Security Risk Once the Russian partner accepted the chicken in St. Petersburg, it shipped the chicken by railroad to Moscow, Yekaterinburg, and beyond. The cargo was placed in refrigerated containers that were locked and then loaded on flat railcars. On the fifth journey, one of the containers was empty when it arrived in Moscow after the three-day trip from St. Petersburg. At this point, the partner was facing a risk management problem. Two strategies were discussed. The first was to purchase insurance, an idea that was quickly eliminated. Who would insure a cargo with a high chance of loss? If a Russian insurance company agreed to provide coverage, the premiums would be prohibitively high. The second was door-to-door container placement. The railroad company would place the containers on the flatbed railcars so the doors could not be opened if the locks were broken. This was the chosen strategy. The story continues. Sometimes a risk mitigation solution does not actually solve the problem. Several journeys later, another container arrived empty. The partner realized that someone had a crane on a siding when the train stopped in the middle of the night. What else should be tried? The problem was finally solved by placing a boxcar on the back of the train. The car was fitted with heaters and cots. It carried guards with Kalashnikov weapons. Whenever the train stopped, guards stepped out to protect the containers. It was a simple but effective risk management strategy. Lesson Learned: Stay with it until a risk management strategy works. Sometimes it takes a few tries to get it right.

Upside of Risk The story of guards on the train can be used to illustrate the upside of risk. The railroad security situation in Russia has improved significantly since the 1990s, when the story unfolded. Prior to the improvement, a business opportunity arose. Once the cargo was being protected by armed guards, the Russian partner could offer insurance services to third parties to protect their cargoes as well as the chicken. The partner would incur small costs for the guards but could be confident that the train would experience no losses. We do not know whether this opportunity was ever pursued.

Explanation / Answer

The environment sorrounding the buyer impacted the risks that were involved in this project in the following ways:

-Expropriation risk- there was no proper refrigeration facility at the shoreside to unload the reefer vessel quickly. the ship could not waste time at the shore waiting for containers or railroad cars. Building a warehouse identified expropriation risks. An insurance company could not identify it as expropriation risk

-Credit Risk- To eradicate the above mentioned problem, the company emerged with a Russian partner who had ties with the government and dealt with the expropriation and storage issues. But with it came the credit risk. Ensuring that the russian comany would manke the payment in full was uncertain and payment could also not be taken in advance for it.

- Physical security risk- When the russian partner arranged to accept the delivery at the port, it sent the shipment further by railroad. The goods went through different cities in the process. A container was found empty when it reached the destination.

The environment impacted on the choices avalaible for the risk responses in the following way:

Expropriation risk- This risk could be dealt with by considering to buy an old reefer vessel and using it for storage. it could be useful as a refrigeration facility. another way to respond to the risk was finding a russian partner who could use government connections and solve the expropriation and storage issues.

Credit risk- The recieving of payment from the russian partner was the issue which was solved by giving them a certain time period to make the payment. If the payment was not made within 45 days after the receipt of the cargo, the ship carrying the next shipment was diverted from Russia to Europe.

Physical secuirty risk: taking an insurance was a problem as the insurance copmany would not cover the risk in this process which was too high. Evn if they would cover it the premium would be big. The problem was solved by attaching a boxcar at the back of the train. This boxcar had secuirty gaurds carrying weapons. They gaurded the train when it stopped in the middle of the night. This was a cheap solution that solved the issue of physical security risk.

Being in place of the buyer I would have made the same choices for solving the risks involved in the process. This risks inolved were all unavoidable and big. They were not the ones to be considered easily by the insurance companies for a cover. Even if covered by the insurance companies, they would seem expensive as premium cost would be high. So the buyer resolved the problems in the best way possible economically also. And the problems arising with the ways to resolve the initial problem were also solved in an effective way. They found out the resolution that was least risk and expensive.

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