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Political risk? Watch out for these countries

All five of the emerging market BRICS countries face increased political risk in 2014, according to a new report, which also warned that the recent unrest in Ukraine had wide-ranging repercussions.

In its annual Political Risk Map, Aon Risk Solutions warned of a greater likelihood of risk in the countries known as the BRICS: Brazil, Russia, India, China and South Africa.

It comes just two days after the International Monetary Fund (IMF) warned in its latest world economic outlook that while the recovery broadened in advanced economies, risks were rising for emerging markets.

Read MoreUS-led bull market in 2014? Not so fast, says Jim O'Neill

Political risk in China had increased, according to Aon, and was now "moderately high." This revision was driven by an increase in the risk of political violence, it said, amid a "mutually reinforcing" deadlock in economic policy and slowing economic growth.

Recent events in Ukraine – resulting in the annexation of Crimea to Russia – saw Aon also warn on a deteriorating risk rating for Russia.

A pro-Russian activist in eastern Ukraine
Genya Savilov | AFP | Getty Images
A pro-Russian activist in eastern Ukraine

"Political strains and focus on geopolitical issues have exacerbated an already weak operating environment for business and exchange transfer risks have increased following the risk of new capital controls," the report said about Russia.

Ukraine's risk rating, meanwhile, was revised from "high risk" to "very high risk," given the recent unrest and government collapse. This volatility also weighed on other former Soviet states, Aon said, including Armenia, Belarus, Georgia and Moldova.

India was considered more risky because of heightened legal and regulatory risks, according to Aon, which were "elevated by ongoing corruption." It warned that that territorial disputes, terrorism, and regional and ethnic conflicts also weighed on the country's outlook.

With regards to Brazil, political risks increased as economic weakness weighed, according to Aon. It warned this was "of particular concern" given that the country is hosting this year's World Cup and the 2016 Olympics.

Read MoreEmerging markets back in the game?

Recurring strikes heightened political risk in South Africa. Industrial action, particularly in the mining industry, has hit the outlook for business in the country by affecting immediate output and resulting in higher wages, which raise costs.

Taper tantrum?

It has been a tumultuous year for emerging markets – which, until recently, had benefited from stimulus measures like record-low interest rates and the U.S. Federal Reserve's massive bond-buying program.

Quantitative easing on this scale boosted risk sentiment, causing investors to turn their back on so-called "safe havens" and pile into assets seen as riskier, such as emerging market stocks, bonds and currencies.

When the Fed began tapering off its bond-buying program in January, concerns about an outflow of funds from emerging markets hit their currencies hard.

Not everyone is downbeat on emerging markets, however. Last week, economist and former chairman of Goldman Sachs Asset Management Jim O'Neill told CNBC that emerging markets were in pretty good shape at the start of the second quarter.

O'Neill – who first coined the term BRIC in 2001 – added that if there was a global bull market this year, it would be led by larger emerging markets - and China in particular.

Outflow concerns

But Aon warned that as economic recoveries took hold in developed markets, and interest rates returned to more normal levels, capital would be pulled out of emerging markets.

"This adds pressure to countries with weak external balances," the report said.

Read MoreGlobal risk shifts to emerging markets: IMF

It warned that one result of a drop-off in foreign direct investment could be the introduction of measures to retain capital, "that will impede transfers of funds/repatriation of assets."

The IMF also warned that risks could arise from the "unexpectedly rapid" normalization of U.S. monetary policy. It cut its emerging market growth forecast to 4.9 percent for this year and 5.3 percent for 2015 on Tuesday. Its forecast was down by 0.2 percent for 2014 and 0.1 percent for 2015 from its previous report in January.

Aon, which looked at the political risk in 163 countries and territories, analysed exposure to factors including legal and regulatory risk, political interference, political violence and the introduction of capital-retention measures.

Contact World Economy

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