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Risk Map 2014 - Contril Risk

The document is a report by Control Risks titled "RiskMap Report 2014" that discusses major risks facing businesses in the coming year. It notes that as companies pursue increasingly complex global structures, they face new vulnerabilities from local issues. Local political and security risks can now rapidly spread and impact companies globally. Several major risks are highlighted for 2014, including slowing growth in emerging markets, ongoing conflicts in the Middle East, and election-related instability in some large economies like India and Brazil. The report argues that local political trends will be difficult for foreign companies to read as economic power shifts in many countries.

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RISKMAP REPORT 2014
Published by Control Risks, Cottons Centre, Cottons Lane, London SE 1 2QG. Control Risks Group Limited (‘the Company’) endeavours to ensure the accuracy of all information supplied. Advice and opinions given represent the best judgement of the Company, but subject to Section 2 (1) Unfair Contract Terms Act 1977, where applicable, the Company shall in no case be liable for any claims, or special, incidental or consequential damages, whether caused by the Company’s negligence (or that of any member of its staff) or in any other way. Copyright: Control Risks Group Limited 2013. All rights reserved. Reproduction in whole or in part prohibited without the prior consent of the Company. Photos on pages: 6 (top/bottom), 14 (top/bottom), 16 (bottom), 23 (top/bottom), 25 (top/bottom), 27 (top/bottom), 30 (bottom), 34 (top/bottom), 40 (top/bottom), 41 (top/bottom), 44 (top/bottom), 50 (top/bottom), 54 (top/bottom), 56 (bottom), 58 (top/bottom), 60 (top/bottom), 61 (top/bottom), 66 (top/bottom), 69 (top/bottom), 72 (top/bottom), 74 (bottom), 79 (top), 84 (top/bottom), 87 (bottom), 90 (top/bottom), 92 (top/bottom) and 100 (top/bottom) © Press Association. All other images are from Shutterstock except those credited in the publication to Control Risks’ employees. Control Risks is an independent, global risk consultancy specialising in political, integrity and security risk. We help some of the most influential organisations in the world to understand and manage the risks and opportunities of operating in complex or hostile environments. We support clients by providing strategic consultancy, expert analysis and in-depth investigations, handling sensitive political issues and providing practical, on-the-ground protection and support. Our unique combination of services, geographical reach and the trust our clients place in us ensure we can help them to effectively solve their problems and realise new opportunities across the world. Working across five continents and with 34 offices worldwide, we provide a broad range of services to help our clients to manage risk.
RISKMAP REPORT 2014 Control Risks is delighted to launch RiskMap 2014, our authoritative guide to business risk in the year ahead. Drawing upon expertise from across our organisation worldwide, we forecast the major challenges and opportunities of doing business in the world’s most complex environments next year. Any publication entitled ‘RiskMap’ is inevitably going to focus on risk, and as we look ahead we see no shortage of traps to snare the unwary. But we also see an abundance of opportunity delivered in part by the most extraordinary advances in living standards and public health. With the media headlines as ever dominated by risk and peril, that is well worth remembering. – Richard Fenning, CEO, Control Risks
The rising expectations of a growing consumer class will challenge governments and bring new risks to business. Page 19 Changing economic realities in 2014 will expose the divide between financially needy countries and their more pragmatic counterparts. Page 37 01 AFRICA 02 AMERICAS A prime location and sizeable natural gas reserves will drive growing investor interest in 2014. Page 31 An end to the civil conflict will shape an election year that will spell continuity for business. Page 47 SPOTLIGHT ON: TANZANIA SPOTLIGHT ON: COLOMBIA The ever more complex structures of global businesses are facing increasingly localised risks, bringing new challenges and vulnerabilities. Page 1 As the hangover from the global financial crisis fades, risk will seem more attractive than ever. Page 7 THE MOUSE THAT ROARS HOW LOCAL ISSUES ACCELERATE INTO MAJOR PROBLEMS THE CHANGING GLOBAL ORDER: THE WORLD IN 2014
Cooling growth will elicit varying responses: some governments will rise to the challenge, others will not. Page 51 After a difficult 2013 for Europe’s economies, 2014 will see, at best, a fragile recovery. Page 67 Transition states face a busy election year, while a breakthrough on Iran remains unlikely. Page 81 03 ASIA-PACIFIC 04 EUROPE The messy outcome of the 2014 elections will dash investor hopes of a return to high growth. Page 63 Events in 2014 will show whether Turkey is on the path to modernisation or is slipping towards authoritarianism. Page 77 The successful reworking of Dubai’s economic model will lay the foundations for sustainable growth in 2014. Page 93 SPOTLIGHT ON: INDIA SPOTLIGHT ON: TURKEY SPOTLIGHT ON: UNITED ARAB EMIRATES MIDDLE EAST AND NORTH AFRICA 05 RISK RATING FORECAST 2014 Page 105 KIDNAP OVERVIEW Page 103 PIRACY OVERVIEW Page 101 TERRORISM OUTLOOK Page 99
Photographs taken by Control Risks’ employees
RiskMap Report 2014 THE MOUSE THAT ROARS 2 When 32 heavily armed terrorists entered the remote In Amenas gas plant in Algeria in the early hours of 16 January 2013, more than 130 foreign workers from nearly 30 countries were on site, representing a multitude of operators, contractors and sub-contractors drawn from nearly 50 companies based around the world. As events unfolded, my colleagues assisted companies on four continents and speaking six languages, helping to co-ordinate a multinational response to the crisis. The attack was also vividly and at times tragically recorded through social media as hundreds of workers hiding in the plant were able to relay events direct to their families and loved ones around the world in real time. Despite its remoteness, the In Amenas attack was inherently a global incident, affecting people, organisations, markets and perceptions worldwide. The number of different nationalities caught up in the In Amenas attack surprised many. But the geographic diversity of the workforce and its employment by companies ranging from major multinationals to small suppliers were not unusual in our globalised world. The oil and gas industry, often in the vanguard of international operations, has long embodied a complex kaleidoscope of inter-connecting contractual relationships. Major oil and gas projects bundle their skills and technologies like Rubik’s Cubes, forming and re-forming into bewildering combinations to suit the specific needs of individual projects. Other sectors have adapted this flexible model and – as we mentioned in last year’s RiskMap – hardly any countries are now off-limits to shape-shifting multinational companies. Companies increasingly need to pursue elaborate, interlocking operational structures to grasp the opportunities on offer in a near-global marketplace. For instance, I am writing this having just left a meeting with a senior executive of a Japanese conglomerate that has a major stake in a US-listed Latin American mining company, which is investing billions of dollars in southern Africa with Russian and Indian co-investors to sell to Chinese customers. And this is a relatively straightforward proposition compared with some of the byzantine structures we encounter. BY RICHARD FENNING CHIEF EXECUTIVE OFFICER CONTROL RISKS THE MOUSE THAT ROARS HOW LOCAL ISSUES ACCELERATE INTO MAJOR PROBLEMS Companies increasingly need to pursue elaborate, interlocking operational structures to grasp the opportunities on offer in a near-global marketplace.
RiskMap Report 2014 THE MOUSE THAT ROARS 3 Organisations clearly cannot take advantage of such opportunities on their own. But new interdependencies create new vulnerabilities, from the liabilities of local partner organisations to the often harsh realities of novel operating climates. As organisations leverage their global reach into ever more convoluted combinations, they leave an ever greater digital footprint – with the attendant risks of a breach of their cyber security. For those mapping growth strategies at multinational and global HQs, this presents a daunting risk management challenge: as business has become global, political, security and integrity risk have become more local. This is one of the key themes we explore in this year’s RiskMap. The competing gravities of localised politics and globalised economics generate friction that plays out in unexpected ways and places. As we saw in the In Amenas attack, the complex local dynamics of terrorism and criminality in the Sahara – amplified by post-Gadhafi anarchy leaching over the border from Libya – have reverberated globally through energy markets, international relations and corporate strategy. This is not just an issue in unstable post-revolutionary contexts. In the US, a grassroots political crusade against ‘big government’ has repeatedly threatened to crash the global economy by forcing an unprecedented sovereign default; it seems bent on more of the same in 2014. Growing US isolationism after a decade of entanglement in Middle Eastern wars, meanwhile, has compromised global security management, leaving – for example – no coherent strategy to contain and curtail the Syria conflict. Across the Atlantic, localised (often fringe) political positions have obtained national prominence in the wake of the financial, sovereign and austerity crises, strengthening centrifugal forces that for the last few years have threatened to blow the European project off course. As challenging as this period has been for industrialised nations, the year ahead may prove particularly challenging in the emerging world. Even though the timing remains at issue, 2014 will probably bring to an end the era of quantitative easing that has sent capital flooding into BRICs, MISTs and other economies still in search of an acronym to join. The ensuing reversal of capital flows – previewed in late summer 2013, when emerging-market currencies dropped precipitously against the US dollar on rumours of US Federal TOP: World national flags. BOTTOM: Petrochemical plant. The competing gravities of localised politics and globalised economics generate friction that plays out in unexpected ways and places.
RiskMap Report 2014 THE MOUSE THAT ROARS 4 Reserve ‘tapering’ – will put enormous strain on economies that failed to make the most of the salad years. Inefficiencies masked by abundant capital may stoke popular unrest and will almost certainly undercut the lifestyles to which many have grown accustomed, especially new graduates to the burgeoning global middle class. A spike in corruption and extortion risk seems likely to result. Not even the largest emerging-market economies will prove immune. In China, the government is attempting far-reaching changes to the economy by tackling some of the vested political interests that dominate certain industrial sectors. Already, the risk of being caught up inadvertently in an anti-corruption campaign or an attempt to influence pricing models has substantially increased. The complexities of local politics, hard to read even at close quarters and in good times, will grow more opaque and often distorted when viewed from foreign HQs. China’s challenges will play out against the backdrop of lower, but still robust, GDP growth (the IMF currently projects 7.25% in 2014, down from consistent double-digit performance in recent decades). Other large emerging economies face even rougher seas. The tapering mini-panic hit India, Turkey and Brazil particularly hard; the latter two suffered significant unrest, largely driven by discontented urban middle classes. Among recent high-fliers, only Mexico appears better placed for solid growth next year, and even there the war between drug cartels and the state continues to disproportionately colour the country’s reputation. Then, of course, there are outright conflict zones. The list is led by the civil war in Syria, with Iran and Russia backing President Bashar al-Assad’s regime, and the Gulf Arab monarchies, Turkey and a lukewarm West backing the rebels. Syria’s local political trends present no cause for optimism. A stalemate has developed whereby the rebels lack the firepower and unity to overthrow the regime, while the regime has demonstrated it has genuine grassroots appeal within the minority Alawite and Christian communities, and enough outside support from Iran and Hizbullah to hold on for the time being. The US-Russia agreement to mount an international effort to remove the Assad regime’s chemical weapons may be a universal good, but its practical effect is to forestall any decision by the US or other powers to intervene on humanitarian grounds. This will encourage both sides in Syria to dig in and perpetuate the risks stalking neighbouring countries harbouring millions of refugees and being drawn, voluntarily or not, into the conflict. As usual, the risks are particularly acute in Lebanon, where Christian and Sunni factions strongly support the rebels, while the country’s most powerful faction,
RiskMap Report 2014 THE MOUSE THAT ROARS 5 Hizbullah, is deeply engaged on behalf of Assad. Egypt, meanwhile, has taken a step back from democracy. The re-imposition of military rule once again tested companies doing business in the Middle East’s largest economy, raising anew complex issues of business continuity, market resilience and, at the most basic level, the safety of local staff. 2014 will not see the return to normality that investors crave. In the Sahel and Yemen, al-Qaida, whose demise was only recently being talked of as a given in some Western capitals, has proved resilient. Indeed, if lawless areas of Iraq, Syria, Pakistan, Somalia and Afghanistan are included, al-Qaida-aligned groups are spread over as much territory as ever before. The centralised entity that perpetrated the 9/11 attack may be in terminal decline thanks to relentless drone strikes, but a shift in the centre of institutional gravity to al-Qaida in the Arabian Peninsula (AQAP), al-Qaida in the Islamic Maghreb (AQIM) and al-Qaida in Iraq (AQI) – among other affiliates – will preserve the network’s lethal ambitions for the foreseeable future. One potential bright spot: progress in mid-late 2013 in talks between the US and Iran over the latter’s nuclear ambitions holds out some hope that the diplomatic logjam may shift. The chances are slim, and these moves may turn out to be no more than a change of tactics rather than strategy on Tehran’s part. As an ancillary boon to the global economy and major importers, progress in these negotiations could pare the geopolitical risk premium underlying oil prices, combining with bumper unconventional production to bring prices down below the $100 per barrel threshold. Outside the Middle East, elections in Indonesia, India and Brazil will command significant attention. In Brazil, slowing growth rates have forced new burdens on the government of President Dilma Rousseff. Although the country will put on a good show hosting the 2014 World Cup and 2016 Olympics, doing business may grow even more complex as the government pushes for more state intervention to boost the economy and the rising costs of doing business continue to erode profit margins – and Brazil’s attractiveness more broadly. In India and Indonesia, corruption and lowered growth expectations will dominate political debate, providing openings for a change in government in Indonesia after a decade of relatively consistent rule by one party. 2014 will not see the return to normality that investors crave.
RiskMap Report 2014 THE MOUSE THAT ROARS 6 In both countries, business risk could emanate from the disruption to vested interests that political change can precipitate. In India, elections will result in another weak central government, portending continued glacial progress on reforms that would revive growth and improve the operating environment. For investors, shifting power – both economic and political – needs to be monitored closely to avoid unwanted entanglement. RiskMap explores how this phenomenon of spikes in risk triggered by changes in the distribution of economic power is repeated in many different markets. As growth slows in many of the recent high-growth economies, political legitimacy is tested and unwary investors may find themselves in suddenly unfamiliar territory. On one level, this is nothing new: globally ambitious companies have always risked becoming embroiled in other people’s problems a long way from home. But what is new is the scale with which this is now happening. RiskMap highlights how many of the drivers of growth – urbanisation, the growth of the middle classes, improvements in public health, increased access to natural resources – transcend national boundaries and encourage investors to enter new markets. In 2014, this tension between opportunity and risk will become more acute as the era of high-growth emerging markets fuelling global GDP growth comes to a close and the complexities of local political tensions impinge more assertively on global operations. Any publication entitled ‘RiskMap’ is inevitably going to focus on risk, and as we look ahead we see no shortage of traps to snare the unwary. But we also see an abundance of opportunity delivered in part by the most extraordinary advances in living standards and public health. With the media headlines as ever dominated by risk and peril, that is well worth remembering. TOP: Protester in Istanbul, Turkey, September 2013. BOTTOM: Hundreds of protesters clashed with police in Rio de Janeiro, Brazil, October 2013.
Kabul, Afghanistan by Edward Smith Control Risks
RiskMap Report 2014 THE CHANGING GLOBAL ORDER 8 All good forecasts, particularly in the complex realm of global political and security risk, have a solid historical foundation and learn from past outcomes. In building our RiskMap 2014 outlook, we have drawn on a decade of risk analysis to identify underlying trends and assess how they are likely to evolve. LOOKING BACK: 2003-13 The ten years from 2003 to 2013 were bracketed by the invasion of Iraq and US withdrawal from Afghanistan, enlargement of the EU and the eurozone crisis, SARS in East Asia and a similar outbreak in the Middle East, the relinquishment of chemical weapons by Libya and their use in Syria, and the decision to build a nuclear bomb in North Korea and renewed negotiations to preclude the possibility in Iran. Along the way, the subprime mortgage collapse nearly destroyed global finance, the Arab spring upended decades of political stagnation in North Africa, BRIC became the watchword of the global economy, the urban population exceeded the rural population for the first time in history, fracking transformed energy geopolitics, and social media technologies revolutionised global communications and laid bare the secret workings of the West’s intelligence agencies. It was a decade of unprecedented opportunity and historic shifts of capital from the advanced to the developing world, tempered by rapidly evolving threats, a new emphasis on transparency and accountability, and rising concern about the sustainability of the post-war liberal democratic world order. With these shifts introducing unprecedented complexity and uncertainty into global affairs, managing security and political risks became more directly relevant to how companies do business. Developments in the Middle East and North Africa dominated global THE CHANGING GLOBAL ORDER: THE WORLD IN 2014 JONATHAN WOOD ASSOCIATE DIRECTOR, GLOBAL RISK ANALYSIS CONTROL RISKS Figure 1: Timeline of key events driving changes in global security and political risk 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 20142003 Arab spring Eurozone crisis EU enlargement NATO withdrawal Arab spring Iraq war SECURITY RISK POLITICAL RISK KEY INCREASING RISK DECREASING RISK
RiskMap Report 2014 THE CHANGING GLOBAL ORDER 9 security risk over the last ten years. The launch of the Iraq war in 2003 spawned increased security risks throughout the Gulf region, influencing evolving terrorist threats in Algeria, Iraq, Saudi Arabia and beyond. The gradual increase in tensions over Iran’s nuclear programme after 2009 added a new layer of strategic security risk – most strongly felt in global oil markets – while the Arab spring revolutions in early 2011 radically altered security environments in North Africa and the Levant, with regional and global spillover impacts. Nuclear sabre-rattling in North Korea, by contrast, had no sustained impact on global security risk, though it remained a sporadic source of regional crisis. The Iraq war and Arab spring also strongly affected global political risk, but resurgent leftism in Latin America, lingering state fragility across Central and West Africa, and the fallout from the global financial crisis – especially in Europe – were equally important. An underlying driver of each of these was the onset of the so-called ‘commodities super-cycle’ in 2003, driven by both increased security threats to oil supply and voracious Chinese demand, which fuelled populism in key energy and mineral exporters and economic stress and occasional unrest in importers. Meanwhile, the political benefits of EU enlargement in 2004 (following the adoption of the euro currency in 2002) were swiftly belied by the acute sovereign risks that emerged during the financial crisis. Despite the fluid security and political environment of the last ten years, business thrived as opportunities appeared in fast-growing emerging and developing economies. Since 2003, emerging and developing countries’ share of nominal global output has doubled, from 20% to 40%. Nominal output in emerging Asia alone, powered by China, has increased by 700%, surpassing that of the eurozone in 2012. As a result, by 2013, the proportion of global output generated by countries that Control Risks rates at medium or high political and security risk had more than doubled (Figures 2 and 3). Our data also suggest that this is largely because of faster growth in medium- and high-risk countries, rather than increased risk in key economies (Figures 4 and 5). These trends are likely to persist in 2014. Correspondingly, risk appetite – renewed after the emerging market crises of the late 1990s – steadily pushed foreign investment up the political and security risk scale. The global carry trade, fuelled by falling interest rates (which hit historic lows in 2003 and again in 2009) and quantitative easing in the US and Europe, poured capital into higher interest currencies, triggering both inflation and capital controls in key emerging markets. As a result, by 2012, the first year in which more FDI flowed to emerging and developing
RiskMap Report 2014 THE CHANGING GLOBAL ORDER 10 Figure 2: Global political risk ratings 2004-14, GDP weighted KEY INSIGNIFICANT LOW MEDIUM HIGH EXTREME 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Figure 3: Global security risk ratings 2004-14, GDP weighted 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Figure 4: Average political risk rating vs average annual GDP 14% 12% 10% 8% 6% 4% 2% 0% -2% Low HighInsignificant Medium Extreme 14% 12% 10% 8% 6% 4% 2% 0% -2% Low HighInsignificant Medium Extreme Figure 5: Average security risk rating vs average annual GDP growth, 2004-14growth, 2004-14 Figure 6: Global political risk ratings 2004-12, FDI weighted KEY INSIGNIFICANT LOW MEDIUM HIGH EXTREME 2004 2005 2006 2007 2008 2009 2010 2011 2012 2004 2005 2006 2007 2008 2009 2010 2011 2012 Figure 7: Global security risk ratings 2004-12, FDI weighted 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%
RiskMap Report 2014 THE CHANGING GLOBAL ORDER 11 countries than advanced countries, about twice as much investment was directed towards countries that Control Risks rates at medium to high security and political risk as in 2003 (Figures 6 and 7). Even countries with the most extreme security and political risk profiles – such as Iraq, Yemen and Somalia – attracted significant investor attention, at least in the oil and gas sector. LOOKING FORWARD: 2014 AND BEYOND These trends place the world in a novel situation. The last time the current set of emerging and developing countries – China, India, Brazil, Turkey and so on – had such weight in the global economy was probably in the late 19th century, under radically different social, political and geopolitical circumstances. Charting the risk landscape ahead therefore requires identifying and assessing how these fundamental economic shifts are likely to play out for security and political risk. We have identified four trends that we believe are particularly important: changing bases of political legitimacy, new demands of the global middle class, emerging global security power vacuums and shifting strategic interests. CHANGING BASES OF LEGITIMACY Emerging markets is increasingly a misnomer. After ten or more years of torrid growth, leading emerging and developing economies are highly globally integrated, and increasingly liberalised and competitive. In short, they have emerged. As their resilience to the global financial crisis showed, many of the problems that plagued emerging markets in the 1990s – high external debt, inflexible exchange rates and erratic macroeconomic policy – have been largely resolved. However, emerging-market growth models are under pressure. Before the financial crisis, they relied on debt-fuelled consumption by the US and other Western countries. Since the crisis, growth has floated on a flood of cheap money, courtesy of rock-bottom interest rates in the US and Europe, and generous fiscal and financial stimulus at home. Moreover, emerging markets are still too reliant on relatively narrow bases of economic activity: manufactured exports, cheap credit and domestic investment in China; high oil and gas prices in the Gulf, Middle East and Russia; and mineral and agricultural commodity demand in South America. These sources of growth are already unsustainable: inflation, asset bubbles and overcapacity are increasingly problematic, the outlook for commodity prices is negative, consumption in the US and Europe is flat, and monetary tightening is inevitable. Indeed, a timely reminder of the inherent dangers of overreliance on cheap capital occurred in late 2013, when mere consideration of US Federal Reserve ‘tapering’ caused emerging-market currencies to plunge, and raised the spectre of crises from TOP: Workmen, Changyang, China, by Harry Koops, Control Risks. BOTTOM: Rajasthan, India.
RiskMap Report 2014 THE CHANGING GLOBAL ORDER 12 India to Indonesia to Brazil. That was a dress rehearsal: tapering will be a reality by the end of 2014. With the pillars of rapid emerging- market growth eroding, political settlements founded on so-called ‘performance legitimacy’ – based on delivering rapid growth and achieving concrete policy objectives – are increasingly brittle. For the last ten years, ruling parties and leaders in major emerging markets have all managed to stay in power thanks in large part to rapid growth. But growth has fallen sharply since 2011 in most major emerging markets and is expected to remain below average next year (Figure 8). Performance legitimacy is also inherently self-limiting: high performance raises expectations, making subsequent goals progressively more difficult to meet. To stay in power, many emerging- market governments will need to both find new ways of delivering growth and cultivate more durable sources of political legitimacy. This is where political risk enters the outlook. It is impossible to restructure a large, complex economy without politicising the process. Many well-intentioned reforms have foundered in the face of well-organised political opposition. There is always an incentive to adopt populist policies or ideological frameworks that deflect attention away from slowing growth. But ideological bases of political legitimacy – such as those instituted across Latin America and in parts of the Middle East over the last ten years – are often bad for business and ruinous for foreign investors. The hunt for Figure 8: Average annual growth, 2004-11 and 2012-14 (projected) Brazil China Turkey India Indonesia Vietnam Russia KEY 2012-14 12% 10% 8% 6% 4% 2% 0% 4.3 10.9 6.6 2004-11 8.2 4.1 4.6 2.6 2.0 5.4 7.5 3.2 5.3 5.75.7 Source: IMF
RiskMap Report 2014 THE CHANGING GLOBAL ORDER 13 growth, meanwhile, has provoked a new wave of trade protectionism and beggar-thy-neighbour policies. In the year ahead, how countries choose to deal with slowing growth will be a critical variable of the political risk landscape for business. RISING MIDDLE CLASSES Emerging-market governments are also facing different kinds of political demands. One of the historic effects of emerging-market growth is the rise of the global middle class – those with annual incomes above $4,000 in purchasing power parity (PPP) terms. The middle class grew to more than 2bn people in the last ten years and is projected to expand to more than 3bn in the next ten. With sheer economic income moving comfortably above poverty levels, emerging middle classes are beginning to focus on a wider range of issues linked to personal freedom, economic opportunity and good governance. These demands invariably clash with entrenched political systems and vested economic interests. Indeed, the mass social protests since 2011 – including the Arab spring, Occupy and Indignados movements, and anti-government unrest in Turkey, Brazil and Bulgaria – reflect how economic change has greatly outpaced political change during the emerging-market era. Rising middle classes, armed with the trappings and ambitions of technological Figure 9: PPP per capita GDP at the time of emerging-market unrest, 2011-13 Bulgaria 2013 Romania 2013 Turkey 2013 Brazil 2013 Argentina 2012 Russia 2011 Tunisia 2011 Egypt 2011 $5,764 $8,227 $14,731 $12,340 $15,578 $14,870 $13,251 $18,200 Political repression, unemployment, corruption Political repression, unemployment, corruption Disputed elections, corruption Inflation, constitutional amendments, corruption Economic inequality, public transport fares, inflation, corruption Political and social repression, police brutality Electricity prices, corruption Working conditions, unemployment Middle-class threshold: $4,000 Key motivations
RiskMap Report 2014 THE CHANGING GLOBAL ORDER 14 modernity, remain saddled with antiquated, opaque, inefficient and frequently corrupt governments and bureaucracies (Figure 9). Rather than simply plaudits from international financial institutions, they expect rapid growth to generate new and better opportunities for them, their families and their communities. The gulf between economic and political change is also replicated in the volatile distance between aspirational middle classes demonstrating in city centres and regimes rooted in conservative rural constituencies. And it is not just government that is targeted: business is also under middle-class scrutiny, on environmental, indigenous rights, workplace safety and economic justice grounds. The risks embedded in the rising global middle class are primarily political: people with tangible assets to lose are unlikely to promote violent insurrection, given the potential for collateral damage. Such social protest movements also rarely topple governments, but often provoke short-term accommodation, from rolling back economic liberalisation to beefing up public spending. Over the longer term, of course, rising middle classes have often been agents of broader – even systemic – political change. Urbanisation itself often provides the anvil on which multilingual, multi-ethnic societies are ultimately forged, removing levers of division that elites have manipulated to hold on to power. What’s more, small entrepreneurs flourish and gain political influence in more densely populated settings as populations must manufacture solutions to the logistical and infrastructure problems that governments fail to deal with. This implies that governments that do not address urban middle-class concerns are increasingly living on borrowed time. POWER VACUUMS Where social unrest led to durable conflict and political instability – namely in Egypt and Syria – it exposed the dysfunction of the current global governance architecture. While growing economic heft has made leading emerging markets indispensable to global governance, formalised by the inauguration of the Group of 20 (G20) leaders’ summit during the financial crisis, it has not yet compensated for the relative decline of the US and Europe, both of which remain consumed with domestic political and economic challenges. Put another way, rising powers may be able to veto the global agenda – on climate change, intervention in Syria or trade liberalisation, to name a few – but still lack the domestic stability, diplomatic maturity, hard power resources and soft power attraction to offer and enforce an alternate agenda. Stable platforms for strategic co-operation are currently few and far between. This has left global governance – especially global security management – at the mercy of bilateral negotiation and ad hoc TOP: Protest in São Paulo, Brazil, October 2013. BOTTOM: G20 Summit in St Petersburg, Russia, September 2013.
RiskMap Report 2014 THE CHANGING GLOBAL ORDER 15 interventions, while making it more prone to disruptive tensions and strategic blunders. The unexpected deal over Syria’s chemical weapons programme – in the absence of any coherent strategy for managing the conflict’s spillover impacts – and sporadic flare-ups along the Line of Control in recent years in disputed Kashmir are cases in point. Meanwhile, the US expects Europe (grappling with the strategic fallout of the Arab spring) and the Gulf Arab states (vying with Iran for regional clout) to assume the mantle, and costs, of their own security. We expect these conditions to develop further in 2014 as the departure of most NATO military forces from Afghanistan more or less completes the strategic withdrawal of the administration of US President Barack Obama from the Muslim world. Much hinges on the ability of the US and China to see past a legacy of distrust and co-operate pragmatically on shared interests, such as nuclear non-proliferation and the containment of militancy in the Middle East and Central Asia. A global power vacuum poses both security and political risks to business. The security risks are perhaps more obvious, given that the diminishing war on terrorism – which requires collaboration and information sharing to function – will remit fewer resources and less training to countries already struggling to contain militancy. Pakistan, in particular, is about to get rather less strategic for the US in the absence of the need to sustain a large footprint in Afghanistan, while persistent capacity deficits in East Africa and the Sahel region continue to create permissive operating environments for militants. A primary concern is that militant groups – whether linked to jihadist ideology, organised crime, or both – will avail themselves of any breathing room to regroup, recruit and potentially reorient. Political risks, meanwhile, will continue to manifest primarily in trade and investment. The vaunted US ‘pivot’ to Asia, for example, incorporates a trade agreement – the Trans-Pacific Partnership, slated for completion in 2014 – that pointedly excludes China, the world’s second-largest trading nation. This may, in the short term, increase the threat of politicised tit-for-tat trade disruptions in certain sectors, and in some quarters is perceived as an assault on the global trading system itself. However, if it spurs a new wave of trade liberalisation outside the WTO’s moribund Doha round – tackling the thorniest non-tariff barriers, such as import quotas and export subsidies – opportunities for business could flourish, even without a truly global deal. SHIFTING INTERESTS Geopolitical uncertainty owes, in part, to rapid but fundamental shifts in strategic interests. Shale fracking has already dramatically reduced oil imports to the US from West Africa, and will gradually change US incentives
RiskMap Report 2014 THE CHANGING GLOBAL ORDER 16 in the Middle East over the next decade. Simultaneously, China’s ravenous energy and mineral consumption over the last ten years has bestowed strong strategic imperatives in sub-Saharan Africa, as have the burgeoning food needs of water-scarce but cash-rich Gulf emirates. Moreover, further strategic change is queued up for 2014 and beyond, as cargo volumes increase along newly ice-free Arctic shipping routes and liquefied natural gas (LNG) export projects come online in Australia and – eventually – the US and East Africa. Many of these shifts have only materialised over the last five years, and countries are still trying to identify and determine how to manage their strategic implications. Across a range of indicators, economic realities are complicating the status quo and threatening to rewrite geopolitics (Figure 10). Both the US and China, for example, are beginning to chafe at US security and freedom of navigation guarantees in the Middle East. Indeed, China overtook the US for the first time in late 2013 as the world’s biggest net oil importer. Its ‘string of pearls’ strategy in the Indian Ocean – viewed in part as a hedge against US dominance of global sea lines of communication – is fast becoming a reality, with major commercial port developments up and running in Pakistan and Sri Lanka. Meanwhile, US allies Japan and South Korea – anticipating China’s influence over their own energy supply – increasingly perceive a need to underwrite commercial relationships with military and diplomatic power. Shifting interests will generate new opportunities for business as developing geopolitical relationships forge pathways for investment. Markets that have long been closed or dominated by trade with major powers are being relentlessly prised Figure 10: Shift of key exports away from US and Europe to Asia, 2003-12 20% 15% 10% 5% 0% -5% -10% -15% -20% Middle Eastern oil South American agriculture African extractives Russian extractives KEY DECREASE IN EXPORTS TO US AND EUROPEINCREASE IN EXPORTS TO ASIA TOP: Arctic shipping routes will be increasingly ice-free. BOTTOM: US President Barack Obama, March 2012.
RiskMap Report 2014 THE CHANGING GLOBAL ORDER 17 open by geopolitical competition – as true for some advanced countries such as Canada as for emerging markets such as Ukraine and Nigeria. But they will also be attended by collateral political risks, given the institutional and regulatory immaturity of many frontier investment destinations and the plausible assumption that diplomatic attention should bring commercial benefits. Company nationality has always been a factor, but is likely to play an increasing role in political risk. A similar condition can be applied to security risks, in cases where local communities reject an influx of foreign capital, foreign workers or both. The security profile of established firms can also change in line with geopolitical realities, as US and European companies have experienced in North Africa since the Arab spring. LOOKING AHEAD Over the last ten years the global economy has shifted up the political and security risk scales, changing the types of threats companies are likely to face today and in the future. A decade of rapid growth in the emerging world has fundamentally altered social arrangements and is beginning to put pressure on political systems, particularly in terms of how governments justify their authority. In certain regions, such as the Middle East and North Africa, this has provoked change that the current global power balance is ill-equipped to manage, introducing security threats that will cast a shadow over the coming year. These developments are coinciding with fundamental and long- term shifts in strategic incentives, often linked to resources, that are likely to rewrite the global distribution of power as much as economic change has revised the global balance of power. These factors put upward pressure on both global political and security risks in 2014. But this comes at a time when opportunities for business are diverse and improving in some fundamental ways. Ten years ago, HIV/AIDS threatened economic and social coherence in much of the developing world. Today, access to treatment has expanded exponentially and annual new infections have fallen by 25%. Over the same timeframe, extreme poverty fell by more than 400m people, even as the global population rose by nearly 1bn, sending poverty rates to historic lows. Meanwhile, over the next year more people in developing countries will access broadband on mobile devices than there were global internet users in 2003, and more children will have access to education than ever before. The hangover of the global financial crisis is fading, even in the US and Europe, Japan is at its most bullish in 20 years, and emerging markets in general are much better equipped to face economic challenges than during the 1990s. In this light, risk seems more attractive than ever.
REGIONAL OVERVIEWS This regional overview section looks at how the global themes we have identified will play in to political and security dynamics over the coming year in sub-Saharan Africa, the Americas, Asia, Europe, and the Middle East and North Africa. In addition, we spotlight five countries that merit a closer look in 2014 and examine some of the big questions they face. For more detailed analysis on more than 220 countries, please visit our Country Risk Forecast online service. To sign up for a free trial of Country Risk Forecast, please visit: www.controlrisks.com 01 AFRICA SPOTLIGHT ON: TANZANIA 02 AMERICAS SPOTLIGHT ON: COLOMBIA 03 ASIA-PACIFIC SPOTLIGHT ON: INDIA 04 EUROPE SPOTLIGHT ON: TURKEY MIDDLE EAST AND NORTH AFRICA SPOTLIGHT ON: UNITED ARAB EMIRATES 05
MALTA CYPRUS SYRIALEBANON JORDAN ISRAEL PALESTINIAN TERRITORIES EGYPT L I B Y A TUNISIA A L G E R I A MOROCCO Western Sahara MAURITANIA Canary Islands (SPAIN) Madeira (PORTUGAL) CAPE VERDE SENEGAL GAMBIA GUINEA-BISSAU GUINEA SIERRA LEONE LIBERIA CÔTE D'IVOIRE GHANA TOGO BENIN BURKINA FASO M A L I N I G E R N I G E R I A C H A D S U D A N SOU TH SU D AN CENTRAL AFRICAN REPUBLIC CAMEROON EQUATORIAL GUINEA SÃO TOMÉ AND PRINCIPE GABON CONGO CONGO (DEMOCRATIC REPUBLIC OF) RWANDA BURUNDI UGANDA TANZANIA KENYA A N G O L A Z A M B I A MALAWI MOZAMBIQUE ZIMBABWE BOTSWANA NAMIBIA SOUTH AFRICA HIGH security in deprived urban areas LESOTHO SWAZILAND ERITREA E T H I O P I A DJIBOUTI Somaliland SOMALIA Y E M E N S A U D I A R A B I A OMAN UAE QATAR BAHRAIN KUWAIT MADAGASCAR COMOROS SEYCHELLES MAURITIUS Réunion (FRANCE) I R A Q I R A N Zanzibar Cabinda (ANGOLA) ATLANTIC OCEAN Athens Kandahar K Tehran Baghdad Basra Erbil Amman Cairo Alexandria Tripoli TunisAlgiers Annaba Oran Rabat Casablanca Muscat Abu Dhabi Dubai Al Khobar Riyadh Jeddah Port Sudan SanaaAsmara Hargeisa Khartoum Addis Ababa NdjamenaKano Lagos Port Harcourt Niamey OuagadougouBamako Nouakchott Dakar Bissau Conakry Freetown Monrovia Yamoussoukro Abidjan Accra Cotonou Lomé Malabo Douala Yaoundé Libreville Bangui Kampala Nairobi Mogadishu Kismayo Mombasa Dar es Salaam Dodoma Lilongwe Blantyre Mbuji-Mayi Lubumbashi Lusaka Luanda Kinshasa Brazzaville Windhoek Harare Bulawayo Beira Gaborone Pretoria Johannesburg Maputo Durban Cape Town Antananarivo Port Louis Damascus Beirut Abuja Kurdistan Region AFGHANISTAN
RiskMap Report 2014 AFRICA 20 POLITICAL RISK 2004-14 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 KEY INSIGNIFICANT LOW MEDIUM HIGH EXTREME SECURITY RISK 2004-14 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 AFRICA Against a backdrop of faltering growth and weakening currencies in major emerging markets, a number of sub-Saharan African countries have been bucking the trend with spirited debuts of sovereign bonds. Angola, Kenya, Nigeria, Rwanda, Senegal, Tanzania and Zambia have all raised during 2013 – or plan to raise in early 2014 – hundreds of millions of dollars this way, bringing the continent further into the fold of global capital markets. This symbolises the transformation in Africa’s fortunes over the past decade, which has seen buoyant commodity prices fuel sustained economic growth and poverty reduction. But it has not all been luck: prudent macroeconomic management, enhanced political stability and incremental operational improvements have played their part. Now, as the global boom in commodity prices eases, attention has turned towards a new growth story – the African consumer. Hopes are riding high that Africa’s so-called ‘youth bulge’ – nearly half of sub-Saharan Africa’s population are between 15 and 29 years of age – coupled with a burgeoning middle class concentrated in urban centres around the continent will provide a more sustainable economic path, as well as myriad investment JEAN DEVLIN ASSOCIATE DIRECTOR, AFRICA CONTROL RISKS SUB-REGIONAL RISK AVERAGES Southern Africa Central Africa West Africa Pol Sec Pol Sec Pol Sec Pol Sec East Africa 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 K
RiskMap Report 2014 AFRICA 21 opportunities. There are substantial grounds for optimism. The continent’s current trajectory compares well both to its past performance and to other developing regions further up the convergence curve. The IMF predicts that by 2017 more than half of the 20 fastest-growing economies in the world will be in Africa. At the same time, there is significant divergence: Africa also holds the majority of the world’s least competitive economies. Underperformance in the key areas of job creation, reducing inequality and infrastructure development further tempers optimism. With the African Development Bank (AfDB) estimating that 10m people enter the workforce each year, governments face serious challenges, both economic – in terms of improving employment opportunities – and political, in coping with the demands of a younger, more educated and more informed electorate. Frustration with the stagnation of living standards and lack of services for large swathes of the population is also shaping domestic political debate, and is likely to translate into more regular unrest and differing patterns of political competition and violence in many places. This mix makes for an attractive but complicated environment for investors in 2014. RISE OF THE URBANITES The African consumer story hinges on the growth of the continent’s mega cities: Lagos and Abidjan in the west; Kinshasa and Luanda in Central Africa; and Nairobi, Dar es Salaam and Johannesburg in the east and south. The continent is rapidly urbanising, and half of all Africans are Source: World Bank Doing Business report, 2014 TOP 5 BOTTOM 5 5 3 RWANDA 52 in the world 67 in the world GHANA 2 1 1 MAURITIUS 20 in the world 2 3 RWANDA 32 in the world 4 BOTSWANA 56 in the world 5 ERITREA 184 in the world 4 185 in the world REP. OF CONGO 3SOUTH SUDAN 186 in the world 2 41 in the world SOUTH AFRICA 188 in the world CAR CHAD 189 in the world The best and the rest: Africa’s Doing Business rankings, 2014
RiskMap Report 2014 AFRICA 22 TOP: Lagos, Nigeria. BOTTOM: Nairobi, Kenya. expected to live in cities by 2040. In the most populous country, Nigeria, that proportion has already been reached. Amid the sprawl and congestion, a new breed of urbanites has become established. Affluent, well-educated and brand conscious, these consumers are being targeted as a lucrative market segment, with ever more shopping centres (malls) being built to cater to tastes in consumer retail, coffee and fast-food chains, supermarkets, consumer electronics, banking and leisure. Urbanisation and a growing middle class bring opportunities to diversify growth into consumer sectors and lower transaction costs, improving service delivery and encouraging innovation. The most striking example in the past decade is the rapid expansion of mobile technology in Africa, which has seen advances beyond those in many developed countries. An estimated 35% of Kenyan and 25% of Tanzanian GDP now flows through mobile payments and online banking. The development of ‘Silicon Savannah’ – Nairobi’s tech innovation hub – and the regional expansion of South African supermarket chains such as Shoprite demonstrate the diversity of opportunities on the continent outside the extractives sector, where FDI has traditionally been concentrated. Moreover, the most dynamic commercial developments are not coming from new investors, but are driven by those already doing business Source: Population Division of the Department of Economic and Social Affairs of the UN Secretariat, World Population Prospects: The 2010 Revision and World Urbanisation Prospects: The 2011 Revision Africa is urbanising: projected population split to 2050 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 KEY URBAN 60% 50% 40% 30% 100% 90% 80% 70% 20% 10% 0% RURAL
RiskMap Report 2014 AFRICA 23 on the continent. This includes African-owned businesses, often with a concentration within one market and now looking to expand beyond their region. Nigerian and South African banks, and telecoms companies such as Kenya’s Safaricom are just some examples of a growing trend of targeting mainly urban dwellers across sub-Saharan Africa. GREAT EXPECTATIONS While the expectations of Africa’s urban elites have so far been broadly accommodated within existing political systems, the weight of expectations of those further down the income ladder has become more pressing. How the spoils of newfound prosperity are shared matters greatly to continued stability. Africa is less equal than it was ten years ago, and is second only to Latin America in terms of the proportion of wealth controlled by the top 10% of the population. To ensure long-term stability, some governments have realised that they must spread the benefits of growth beyond a narrow elite. But this has not always resulted in the implementation of effective policies to achieve more equitable results. Unlike Europe and North America, or more established emerging markets such as Brazil or Turkey that have seen social upheaval driven mainly by the middle classes, the key actors in Africa are less affluent urbanites: the so-called ‘floating middle class’ (those spending between $2 and $4 per day) and the urban poor (those living on less than $2 per day). Poverty, high levels of youth unemployment and frustrations over living standards will remain the main drivers of protests and social unrest. Over recent years, unrest has tended to erupt in response to unpopular reforms, such as removal of subsidies, utility tariff increases and other service delivery issues or, in countries where organised labour is strong, wage negotiations. Protests over the removal of fuel subsidies of the kind that paralysed Nigeria in early 2012 and fractious labour disputes such as those in South Africa in 2013 will become more common as administrations struggle to tackle difficult issues that disproportionately affect lower-income groups. In Sudan, the protests that have been a notable feature of the past three years are likely to recur in the coming year should the government move ahead with the removal of subsidies on wheat and other food commodities. Meanwhile, access to information and means to mobilise can be a force to drive accountability, but can also cause unrest to escalate, posing a concomitant risk of business disruption. Aside from the increased risk of operational disruption, near-jobless growth combined with rising inequality presents a deeper challenge to the legitimacy of governments and their leaders, as events in North Africa over recent TOP: Sasolburg protest, South Africa, January 2013. BOTTOM: The Lukasrand Tower, Pretoria, South Africa, August 2012.
RiskMap Report 2014 AFRICA 24 years amply demonstrate. The structural factors that have for decades driven instability in Africa have not disappeared. Strong economic growth in the past ten years has improved long-term prospects for stability, but the twin pressures of urbanisation and growing youth unemployment over the next decade will weigh on those prospects. Such pressures are most acutely evident in countries with weak state institutions and recent histories of violence, such as the member states of the Mano River Union (Guinea, Liberia and Côte d’Ivoire), which saw some of the worst conflicts of the turn of the millennium. They now face the daunting challenge of providing sufficient numbers of stable jobs for their growing youth populations. Source: World Bank, GINI index The GINI coefficient measures income inequality; higher numbers indicate greater inequality 63.9 63.1 57.5 56.3 52.5 51.5 50.8 50.8 50.5 50.1 48.8 47.7 47.3 47.3 45.7 45.5 44.4 44.3 44.1 43.9 42.8 65.8 41.5 41.5 40.5 40.3 39.8 39.8 39.4 39.3 38.9 38.638.2 37.6 35.5 35.4 35.3 34.6 33.6 33.3 33.0 42.7 64.3 N/A N/A N/A N/A N/A N/A 30 - 39 50 - 59 60 + 40 - 49 KEY An unequal continent: income inequality as measured by GINI coefficients
RiskMap Report 2014 AFRICA 25 POWER TO THE PEOPLE Many governments have put development of infrastructure, and in particular power, at the top of the agenda, both to provide a boon to business and to respond to popular demands for improved standards of living. Much of the financing raised through bond issuances has been earmarked for projects in these areas. Even Nigeria, which has long suffered from debilitating power shortages stemming from its notoriously inefficient power sector, in 2013 finalised its drawn-out privatisation of the sector, paving the way for long-term improvements. Meanwhile, US President Barack Obama in July 2013 made the announcement of a $7bn ‘Power Africa’ initiative to improve access to electricity over the next five years in East Africa the cornerstone of his trip to the region. However, operational barriers such as dilapidated power transmission grids, outdated regulatory frameworks and vested interests clinging to the dysfunctional status quo will mean that improvements to the business environment stemming from new investment and reforms such as those in the energy sector will remain slow and patchy. One of the biggest infrastructure projects on the continent, the $80bn Grand Inga dam in Congo (DRC), which would supply more than 500m people with renewable energy, is unlikely to be operational before the 2030s, hampered by financing constraints and uncertainty about the government’s commitment to the project. Job creation is a second area of focus, underlined by a growing emphasis, at least at the policy level, on economic diversification, fiscal incentives for labour-intensive industries and a reinvigorated agenda on agricultural development. However, as with infrastructure, effects on living standards will only be felt in the long term. ACCOUNTABILITY FOR SOME… Frustrations over difficult reforms and stagnant living standards are feeding into a wider campaign for accountability in Africa. As in other emerging markets such as India, corruption has become a rallying point for civil society to demand greater accountability and transparency from governments. This has also been on the agenda of international donors, which maintain significant, if declining, influence in Africa. Debt relief and budgetary support over the past decade have had ‘performance indicators’ attached, including greater accountability of governments to their citizens. Failure to meet these has been backed up by the withdrawal of assistance, such as the removal of donor funding in Zambia in 2011 following high-level corruption scandals, or blacklisting of the worst TOP: Madagascar President Andry Rajoelina, December 2012. BOTTOM: Congo (DRC) President Joseph Kabila, September 2013.
RiskMap Report 2014 AFRICA 26 offenders, such as Madagascar’s Andry Rajoelina or Guinea-Bissau’s Gen Antonio Indjai, the leader of an April 2012 coup. In Congo (DRC), although donors turned a blind eye to the questionable circumstances surrounding President Joseph Kabila’s re-election in 2011, the IMF in late 2012 suspended $240m in planned loans over the government’s failure to publish dubious mining contracts. The financial impact of the decision appears to have prompted some improvements in transparency in the country’s mining sector, as it tries to win back compliant member status of the Extractive Industries Transparency Initiative (EITI). Nonetheless, as leading donors – largely in Europe and North America – reorient towards a model of ‘economic diplomacy’ to defend their commercial interests on the continent against the inflow of money and interest from rising powers such as Brazil, China, India and Turkey, their leverage to influence African governments is likely to decline. These new partners, with different historical ties and objectives informing their engagement, take their own unique approach to Africa. China in particular, which has become the continent’s largest trading partner in recent years, has generated much debate over its approach, though commentators often fail to appreciate the multitude of actors and interests that make up the story of ‘China in Africa’. Source: OECD Factbook 2011: Economic, Environmental and Social Statistics China, now Africa’s largest trading partner: as a percentage of total trade 1992 2000 2005 2009 KEY GERMANY 16% 14% 12% 10% 8% 6% 4% 2% 0% CHINA UKRUSSIA BRAZIL US INDIAFRANCE JAPAN
RiskMap Report 2014 AFRICA 27 The main result of these shifts is that civil society organisations and local media will gain a more prominent role as advocates for better governance. Local civil society and vibrant local media in many countries are furthering the momentum of international accountability campaigns. Liberia’s President Ellen Johnson-Sirleaf, long a darling of the country’s international partners, has faced mounting domestic criticism of public appointments favouring family connections, likely contributing to the September 2013 resignation of her son as head of the National Oil Company of Liberia. …BUT NOT FOR OTHERS Nonetheless, progress in the area of accountability will remain slow. Countries with entrenched leaderships, though not immune to the momentum generated over the past decade, will take longest to change. A steadfast contingent of ageing presidents continues to cling to power, from the continent’s record holder, Equatorial Guinea’s Teodoro Obiang, to Angola’s José Eduardo dos Santos, Robert Mugabe in Zimbabwe, Paul Biya in Cameroon and Uganda’s Yoweri Museveni. While such gerontocrats will eventually cede power to new generations, the continued dominance of former liberation movements in southern Africa in particular is likely to remain strong. These have a superficially stabilising but ultimately corrosive effect on governance in what is the continent’s youngest region in terms of independence. Angola remains one of the continent’s most unequal societies, with a poor reputation for tackling corruption, though it provides relatively high levels of predictability, particularly for the offshore oil sector. Similarly, in Mozambique the ruling Frelimo party presents the country as a stable and attractive investment destination, though discontent continues to bubble up regularly, driven by dashed hopes of socio-economic development. Weak bureaucracies and pervasive corruption across African countries will continue to blight the business environment. Moreover, sudden or fundamental shocks in systems lacking accountability can prompt stability to quickly dissolve, as seen in North Africa. INCREASED CONTESTATION Nonetheless, outright conflict has become less of a headline risk for business in Africa than at the turn of the millennium. Outside Somalia and Central Africa, sustained large-scale armed opposition has largely disappeared from the political landscape. Politicians and parties have become more likely to appeal against unfavourable results or mobilise protests than to launch an armed campaign against the government, particularly in countries with large urban populations well connected through social media. Threats since mid-2013 by TOP: Liberian President Ellen Johnson-Sirleaf, November 2012. BOTTOM: Zimbabwe President Robert Mugabe, September 2013.
RiskMap Report 2014 AFRICA 28 opposition party and former rebel movement Renamo to trigger a renewed civil war in Mozambique are an exception, but serve primarily to underline its desperation to remain relevant in a post-conflict environment dominated by Frelimo. This is not to say that political violence is fading as a risk to business. Rather, it will present more nuanced and manageable risks across different geographies. As competition at the ballot box has increased, so too has the potential for unrest, with upsurges in electoral violence likely to become increasingly common. 2013 saw violence around Contestation increasing at the ballot box Sep 13 Guinea legislative Yes, UN envoy called for disputes to be settled in court Violent riots pre-election Feb 13 Djibouti legislative By opposition Yes, but late Post-election protestNo Mar 12 Guinea-Bissau presidential Military coup seized former PM Carlos Gomes (front-runner) and interim President Raimundo Pereira Jul 12 Congo legislative Limited clashes in districts with opposition supporters Aug 12 Angola legislative By 4 parties and 5 coalitions Yes No Nov 12 Sierra Leone presidential and legislative By opposition By opposition - - - - - - - Yes Dec 12 Ghana presidential and legislative By opposition, NNP Yes No No No Mar 13 Kenya presidential By defeated candidate Raila Odinga Yes Post-election violence in stronghold of defeated candidate No Jul 13 Zimbabwe legislative and presidential By opposition Yes Yes Ruling pending Very limited reports of voter intimidation No No No No Very limited reports May 13 Equatorial Guinea parliamentary By opposition No Sep 13 Rwanda parliamentary No Two grenade attacks couple of days before election Small-scale protests in capital Lomé Jul 13 Togo legislative Opposition denounced irregularities and fraud but election observers said process was fair and transparent Date Appeal accepted Appeal lodged Results disputed Country/ Election Incidence of violence No No Source: IFES Election Guide
RiskMap Report 2014 AFRICA 29 legislative elections in Guinea, while despite the relatively peaceful polls in Kenya and Zimbabwe, both retain an explosive mix of ingredients that will complicate future elections. 2014 should be comparatively quiet, with voters in Namibia, Mozambique and South Africa going to the polls. However, 2015 holds greater prospects for unrest as voters turn out in traditionally more volatile Guinea, Nigeria and South Sudan. Meanwhile, political friction will increase in Tanzania ahead of a constitutional referendum in 2014 and general elections in 2015. Politics is also becoming more factionalised, with different groups competing for political influence to promote their own agendas and favour their own members, whether on ethnic or other grounds. The extent and nature of such factions varies across the continent. In Kenya, for example, political parties are more akin to highly personalised vehicles created solely for election purposes and with a narrow focus on promoting the specific interests of their respective leader’s ethnic group. Even in de facto one- party states such as South Sudan, deep rifts between competing ethnic groups and political alliances within the ruling elite are becoming more visible. This is detrimental to building a common agenda and, as is clear from the factional struggles that have divided Nigeria’s ruling People’s Democratic Party (PDP) in 2013, complicates policymaking to the point where essential reforms to improve competitiveness are continually deferred. POLITICAL GAMES Resource nationalism, which has garnered significant investor attention amid a slew of contract reviews, new legislation and regulatory changes across the continent, should be viewed in the light of these shifting political dynamics. Provisions for greater local content are often a slightly awkward government response to popular expectations that ordinary citizens are entitled to the proceeds of the commodity boom. Higher royalty payments, more stringent tax regimes and local content legislation all featured in reviews of legal and regulatory frameworks for mining and oil and gas from Côte d’Ivoire to Equatorial Guinea in 2013. Meanwhile, public concerns over environmental degradation and destruction of local livelihoods are gaining traction with governments under growing popular pressure. Governments aim to manage public expectations in these areas without unduly compromising relations with investors. Although South Africa’s ruling African National Congress will base its campaign for the April 2014 elections on a long-term economic development plan, the party is expected to push through reforms to the mining code ahead of the polls in a bid to placate calls for economic transformation
RiskMap Report 2014 AFRICA 30 from its core constituency. The possible introduction of export controls on a group of yet to be determined ‘strategic minerals’ will further dampen investor sentiment and scupper government plans for robust economic growth. THE LIMITS OF REGIONALISATION Diverse political and in some cases security challenges have begun to test the fledgling conflict resolution mechanisms of regional organisations, with the African Union struggling to take a leading role in the Mali crisis in 2013 and the UN stepping up to the plate in Central African Republic and Congo (DRC). Sub-regional bodies, most notably the Southern African Development Community (SADC), which has been key to facilitating the 2013 elections in Zimbabwe and mediating the crisis in Madagascar, have played a more significant role. Increased regional integration will continue to be touted as one of the key tools for Africa to develop: on paper, the benefits are self-evident. However, such optimism has so far outstripped the operational capabilities of these organisations to decisively resolve conflicts. As Chinese, Indian and Brazilian engagement in Africa expands and US interest in the continent has waned with Obama’s ‘pivot’ towards Asia, the question of who underwrites security, particularly in parts of the continent of little strategic significance such as Central African Republic, will weigh on the outlook for long-term stability. BUCKLE UP The growing complexity of risk in Africa underlines the need for risk management tailored to specific business activities in the local context. The fostering of a greater number of consumers through more inclusive growth by governments is a key strategic growth area for non-resource investors, and while this sector is less susceptible to classic political interference, it is affected in other ways. The corrosive effect of poor governance and insecurity in large, mainly remote areas mean that transnational threats of smuggling and terrorism pose risks to businesses dependent on extended supply chains, for example. Exposure to corruption, the large presence of counterfeit goods and lack of enforcement against organised crime also present serious challenges for these sectors. Africa’s boom is far from over: growth rates are forecast to outstrip most other regions over the next ten years. If the continent’s governments can overcome the challenges of diversifying economies, managing expectations and building flexible labour markets, the picture will be positive. But for those looking to jump on the bandwagon, be sure to buckle up: it’s going to be a bumpy ride. TOP: Oil and gas refinery. BOTTOM: Central African Republic rebels, March 2013.
Dar es Salaam Tanzania
RiskMap Report 2014 SPOTLIGHT ON: TANZANIA 32 RiskMap Report 2014 SPOTLIGHT ON: TANZANIA 32 RWANDA BURUNDI TANZANIA KENYA Zanzibar Kampala Nairobi Kismayo Mombasa Dar es Salaam DodomaMbuji-Mayi Lubumbashi SPOTLIGHT ON: TANZANIA LOOKING AHEAD Buoyed by its sizeable natural gas reserves, strategic location, and relatively benign security and political environment, Tanzania’s international profile will continue to rise in 2014. A constitutional referendum should pass off peacefully, while planned infrastructure developments will start to bear fruit in the coming years, enabling the country to maximise its investment potential. Nonetheless, corruption and unrest stemming from rising popular expectations will continue to temper investor optimism. Tanzania will attract more investor interest in 2014 – and with good reason. Although its 40 trillion cubic feet (tcf) of proven natural gas reserves are its prime attraction, the country also offers a relatively benign political and security environment (by regional standards), and a strategic location. Growth of 7% is forecast for 2014 on the back of anticipated expansion in the energy and mining sectors. Meanwhile, international investors are likely to respond positively to the finance ministry’s August 2013 request for a syndicated loan of up to $700m, and the government’s plans to issue a $1bn sovereign bond in 2014. Nigeria, South Africa and Kenya have been the traditional entry points and operational bases for investors in Africa. However, each has its drawbacks: political tensions and challenging industrial relations in South Africa, and high-profile security threats in Kenya and Nigeria – given added prominence by the September 2013 attack by Somali extremist group al-Shabab on the Westgate shopping centre SIMISO VELEMPINI ANALYST, AFRICA CONTROL RISKS
RiskMap Report 2014 SPOTLIGHT ON: TANZANIA 33 (mall) in the Kenyan capital Nairobi. Risk-averse investors will increasingly look to more stable, peripheral countries that can provide similar advantages at lower risk. In a nod to its rising international profile in 2013, Tanzania welcomed both Chinese President Xi Jinping and US President Barack Obama. During Xi’s first visit to Africa as an elected official, he unveiled an $800m infrastructure development package. Meanwhile, Obama announced that the country will be one of the first beneficiaries of the US government’s $7bn Power Africa initiative to reform the continent’s energy sector. FINAL FRONTIER Compared with the three African powerhouses, Tanzania is a frontier market with a rapidly urbanising population. Its overlapping membership of two regional organisations – the East African Community (EAC) and the Southern African Development Community (SADC) – means that it is well positioned to give investors access to a high-growth market with roughly 400m residents. EAC moves towards harmonising investment incentives and the SADC’s removal of almost all tariff barriers underscore both regions’ commitment to leveraging their natural resources and human Projected GDP growth in selected African markets, 2012-16 6% 5% 4% 3% 10% 9% 8% 7% 2% 1% 0% 2012 2013 2015 2016 KEY KENYAGHANATANZANIA ZAMBIA NIGERIA SOUTH AFRICA 2014 Source: IMF
RiskMap Report 2014 SPOTLIGHT ON: TANZANIA 34 TOP: Dar es Salaam port. BOTTOM: President Jakaya Kikwete and Chinese President Xi Jinping, March 2013. capital to ensure collective sustainable growth. Increased global interest in gas-to-power projects and demand from South-east Asian countries seeking to diversify their energy sources will drive development of Tanzania’s nascent gas sector. Japan’s Sumitomo Corporation in May 2013 signed a $414m deal with the government to build a 240MW natural gas-fired power plant, signalling strong Asian interest in Africa’s aspiring entrant into the continent’s select group of gas exporters. Regional power deficits will give the government further impetus to meet its target of exporting gas to other African countries by 2015. Elsewhere, a move from subsistence to commercial agriculture provides opportunities for export to neighbouring countries. The Southern Africa Growth Corridor of Tanzania initiative aims to equip subsistence farmers seeking to make the transition to commercial farming. However, land rights remain a contentious issue, while bureaucratic bottlenecks and multiple land claims from locals will delay both agriculture and mining projects. Although it will continue to attempt to attract investment in the aforementioned areas, the government is also likely to concentrate its efforts on boosting investment in tourism, FMCG, construction and pharmaceuticals. GREAT EXPECTATIONS Inadequate infrastructure will remain one of the primary challenges facing investors in the coming years. The government is highly likely to allocate a significant proportion of the proceeds of the $1bn sovereign bond to improving power and transport infrastructure. Various initiatives outlined in the government’s ‘Vision 2025’ development plan underline its commitment to facilitating infrastructure investment to unlock Tanzania’s economic potential. The government plans to complete a $211m upgrade to bring Dar es Salaam’s port up to the standard of that in Mombasa (Kenya) by 2015, galvanised by World Bank estimates that inefficiencies at the port cost Tanzania $1.8bn in revenue annually. A planned upgrade of the TAZARA railway line – the infrastructural backbone of the EAC and SADC – is also slated for completion by 2015. Public-sector corruption and weak institutional capacity will undermine the government’s ability to effectively manage the country’s resources. But tentative moves towards improving transparency are encouraging. The draft Natural Gas Policy – likely to be enacted in late 2014 – takes a strong line on transparency, and is likely to lead to a long-term reduction in corruption in the sector. However, the deep systemic reforms needed to plug revenue leakages and ensure the efficient deployment and use of capital across line
RiskMap Report 2014 SPOTLIGHT ON: TANZANIA 35 ministries will not be forthcoming in 2014, given the distraction of the general elections looming in 2015. Nonetheless, sustained progress is likely thereafter. Meanwhile, socio-economic pressures are rising in tandem with development of the gas sector. The majority of the population lacks access to electricity and running water. Public expectations of the government’s ability to create new jobs and improve access to basic services are high at a time when it has limited means of addressing them. These issues will exacerbate latent sectarian tensions and drive localised unrest, primarily directed at the government, in the medium term. CONTINUITY NOT CHANGE A constitutional referendum set for April 2014, and presidential and legislative elections in 2015 will cause limited political upheaval. The referendum has contributed to an escalation in sectarian violence since early 2013 both in Zanzibar and on the mainland. Zanzibari demands for greater autonomy stem from the prospective economic impact of the development of offshore gas reserves. Planned infrastructure projects, 2013-18 Improvement of TAZARA line Construction of freight station Mbeya Kapri Mposhi Isaka Kigali Mtwara Tanga Bagamoyo Dar es Salaam KENYA CONGO (DRC) ZAMBIA MOZAMBIQUE MALAWI BURUNDI RWANDA KEY Port under construction Port upgrade Railway under construction Railway Construction of natural gas pipeline Terminal under construction Airport under construction Source: Tanzania Five Year Development Plan 2011/12 - 2015/16, President’s Office, Planning Commission
RiskMap Report 2014 SPOTLIGHT ON: TANZANIA 36 Nonetheless, the demands of a small but vocal separatist group for a dissolution of the union and the creation of an independent Zanzibari state are unlikely to be realised. Instead, with an eye towards the 2015 polls, the ruling Chama Cha Mapinduzi (CCM) party is likely to agree to a revised revenue-sharing deal that will pave the way for more offshore exploration off the coast of Zanzibar. The overall impact of the various ballots on the broader security environment will be limited, with violence on the scale of that seen around the elections in Kenya in 2007-08 highly unlikely. Meanwhile, the likely victory of the CCM and its presidential candidate in 2015 will also ensure broader policy continuity and stability in the longer term. COMING IN FROM THE COLD Kenya and Mozambique have grabbed international headlines and stoked investor interest in East Africa in recent years, relegating Tanzania to third place. However, as the operational environment becomes increasingly complex in neighbouring countries, Tanzania’s stable outlook, strategic location and pro-investment climate will become ever more appealing. Proven natural gas reserves and reported discoveries in East Africa, 2013 0.88 ETHIOPIA KENYA TANZANIA MOZAMBIQUE UGANDA 0 0.5 0.23 4.5 Ogaden basin: 2.7 tcf in Calub and 1.3 tcf in Halila Discovery of gas in Mbawa 1 block L8 but no proven reserve 32-65 tcf of recoverable gas in Area 1, 87 tcf in Area 4 10-13 tcf in block 2; 11-21 tcf in blocks 1,3 and 4 Albertine Region KEY 0.0 - 0.4 1.0 + 0.5 - 0.9 Proven reserves (tcf) Source: US Energy Information Administration (May 2013) and UK Trade & Investment
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RiskMap Report 2014 AMERICAS 38 2014 will see the effects of the likely tapering of quantitative easing in the US take hold across Latin America. The region’s assets have been magnets for capital in recent years, and logic has it that an eventual US stimulus withdrawal will increase US bond yields and prompt a reversal in the flow of funds – out of Latin America. That will weaken local currencies, cause interest rates to rise and threaten countries such as Brazil that have heftier financing needs. To paraphrase Warren Buffett, only when the tide goes out do you discover who’s been swimming naked. 2014 will expose the divide between these countries and their more pragmatic cousins, led by the likes of Chile, whose more solid economic fundamentals will better insulate them from market volatility. These countries enjoy the protection afforded by low current account deficits, higher reserve levels and less dollar-denominated debt. They also have more margin for currency depreciation. TAPER TANTRUM The panicked reaction to the US Federal Reserve’s initial tapering announcement in May 2013 means that the withdrawal of stimulus is likely to be modest in its initial stages. NICHOLAS WATSON HEAD OF ANALYSIS, AMERICAS CONTROL RISKS AMERICAS POLITICAL RISK 2004-14 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 KEY INSIGNIFICANT LOW MEDIUM HIGH EXTREME SECURITY RISK 2004-14 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 SUB-REGIONAL RISK AVERAGES South America Central America North America Pol Sec Pol Sec Pol Sec Pol Sec Caribbean 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
RiskMap Report 2014 AMERICAS 39 We do not expect a repeat of 1994’s so-called ‘Tequila crisis’, when sudden Fed tightening caused a sharp devaluation of the peso in Mexico, with impacts across the region. If tapering advances, it would signify that a sustainable recovery is under way in the US. Although China is now the leading trade partner for the likes of Brazil, Chile and Peru, the US remains Latin America’s pre-eminent trade partner. For Mexico, which sends more than 80% of its exports to its northern neighbour, measured tapering should be seen as a boon, not a blow, because it represents a vote of confidence in the US’s economic recovery. But the economic climate will be less benign for Latin America than it has been for many years. Prices for commodities, on which many countries relied in the boom years, are on a downward trend as China’s growth slows and in all likelihood enters a new phase of development – a steady clip of 7% rather than the 9% gallop of the last decade. Studies show that for every percentage point the Chinese economy slows, the Latin American countries with the closest ties to China decelerate by 1.2%. Nobody is saying Latin America will catch a cold because China sneezes, but the likes of Brazil and Peru may have a case of the sniffles in 2014. Nonetheless, the picture is far from uniform. Mexico is more of a competitor in manufactured goods markets than a supplier of commodities, and its labour cost advantage is likely to continue in 2014 as near-shoring comes back into vogue. Annual GDP growth, selected Latin American markets and China, 2010-14 6% 4% 12% 10% 8% 2% 0% 2010 2011 2013 2014 KEY CHILEBRAZIL MEXICO PERU CHINA 2012 Source: IMF
RiskMap Report 2014 AMERICAS 40 TOP: A member of YoSoy132, Mexico City, June 2012. BOTTOM: Oil workers’ protest, Rio de Janeiro, Brazil, October 2013. GOVERNING GETS HARDER While the Mexico-Brazil reversal of fortunes will not be as pronounced as the markets sometimes make out, Brazil’s problems point to a failure to address key issues during the boom years. Faced with a cooling of both domestic and international markets, Brazil will struggle to switch swiftly to an investment-led growth model because of the failure of recent governments to tackle the infamous ‘Brazil cost’ – the umbrella term for the burdens of doing business there, covering poor infrastructure, high borrowing costs, a complex tax regime and archaic labour legislation, among others. President Dilma Rousseff’s record of state intervention limits reasons for optimism, and suggests she is more likely to address the symptoms of Brazil’s declining competitiveness than the causes. To top it off, Brazil faces a presidential election in October 2014 that will limit the scope for much-needed reforms, including a tax overhaul and an update of the labour code. Brazil is not the only country where trickier economic conditions will make governing more difficult and reduce the political appetite for reform. Approval ratings for Peruvian President Ollanta Humala are likely to remain low in 2014, though this does not presage a political crisis: his predecessor but one, Alejandro Toledo (2001-06), governed with single-digit approval ratings for much of his presidency. Possible routes to overcome tougher economic conditions will not always be exploited. Peru’s massive Conga mining project is likely to remain hostage to regional elections in 2014, and will therefore remain stalled. In neighbouring Argentina, dwindling support for President Cristina Fernández following a setback in the 2013 legislative elections is unlikely to herald any U-turn on state intervention in the economy or a concerted effort to tackle inflation. The economy is therefore likely to remain weak. Nonetheless, Fernández will continue to defer dealing with problems beyond 2014. LATIN SPRING? The 2013 protests in Brazil prompted concern that Latin America may be vulnerable to further outbursts of middle-class unrest. After all, the inequality, corruption and poor public services that triggered the Brazilian protests are problems across much of Latin America. But this does not necessarily herald the onset of a wider ‘Latin spring’, despite the economic frailties and public frustration evident in some countries. Latin America has long endured high levels of unrest, and it would be wrong to see every strike and protest as foreshadowing the eruption of major social upheaval. Not only were Brazil’s newly prosperous middle classes frustrated with crushing commutes, but gathering inflation, insipid economic performance and,
RiskMap Report 2014 AMERICAS 41 most significantly, conspicuous expenditure ahead of the 2014 football World Cup created the conditions for mass protests. The Brazilian middle class – and expectations of its rights and dues – has grown more significantly than that of any other country in the region in recent years, while public spending ahead of the 2014 World Cup and 2016 Olympics is a unique double-barrelled catalyst for unrest. The phenomenon of middle-class frustration certainly exists beyond Brazil. A decade of growth across most of the region has forged new social demands that those in government have not always kept up with. In Chile, frustration has crystallised around the costs and unfairness of the education system. In Mexico, the YoSoy132 movement, mainly comprising middle-class students, has denounced what it sees as President Enrique Peña Nieto’s too-cosy relationship with the mainstream media. The Mexican middle class will also continue to grumble about tax rises – especially the 16% value-added tax on home mortgages that Peña Nieto hopes to levy from 2014 – and the opacity of government spending. Both here and in Chile, urban middle classes increasingly compare their countries to far-flung peers in the OECD, to which they both belong, rather than their immediate neighbours. But this does not portend mass protests that transcend class or sector interests. Mexican teachers will remain restive in 2014 and the left’s losing presidential candidate in 2006 and 2012, Andrés Manuel López Obrador, will whip up opposition to energy reform, but neither of these movements will rock Mexico’s political foundations. Similarly, a steady background hum of protest will be evident in Venezuela as frustration simmers at government mismanagement of the economy, crime and shortages of basic goods. But this is unlikely to coalesce into a national movement or social explosion in 2014, barring a significant drop in the price of oil. Venezuela will instead remain acutely polarised amid economic confusion, not crisis. The new demands of emerging and emerged middle classes, and the disconnect between their aspirations and the ‘old’ way of doing politics, will not bring sudden or dramatic political change. The ‘old’ politics is less sclerotic than it is sometimes given credit for, and most demands centre on the problems of daily life, not a desire for revolutionary change. If she runs, anti-establishment presidential candidate Marina Silva in Brazil – who might be expected to pick up a sizeable protest vote – would be likely to win fewer votes in 2014 than she did in 2010. Rousseff will win re-election, even though a self-serving Congress will dilute a political reform expressly designed to appease the disillusioned. In Colombia, where major protests took place across the TOP: Brazil’s Marina Silva, February 2013. BOTTOM: Mexican President Enrique Peña Nieto, October 2013.
RiskMap Report 2014 AMERICAS 42 country in August 2013, the establishment incumbent – or possibly his protégé – will win the 2014 presidential election. In Chile, independent Marco Enríquez-Ominami’s political high-water mark is likely to have been 2010, not 2013, and former president Michelle Bachelet (2006-10) will return to power at the beginning of 2014. Bachelet’s pledge to undertake constitutional reform reflects the need for an update of the social contract, which in turn reflects the changes wrought on society by economic growth. Ironically, the need to tweak the underlying settlement between people and politicians will generate outbursts of social strife as Bachelet challenges social conservatives. She will also face pressures on her left Source: IMF GREENLAND PERU COLOMBIA GUYANA VENEZUELA JAMAICA CUBA BOLIVIA CHILE 5.7% 4.2% 5.8% 1.7% 5% 4.5% PANAMA 6.9% EL SALVADOR 1.6% 1.2% 2.8% HONDURAS 2.8% KEY Booming markets Bypassed markets Booming and bypassed markets, projected growth rates 2014
RiskMap Report 2014 AMERICAS 43 flank: she is likely to enact some kind of education reform in 2014, but it will be a watered down measure that will not end protests. Where discontent translates into protest in the region, it will not always be led by the middle classes, still less by the tech-savvy or urban ‘Twitterati’. Latin America may now be more urban than rural, but traditional sectors with long-standing grievances remain potent actors. In many cases, protests will not represent the phenomenon of the ‘emerged market’, but rather the enduring reality of the ‘bypassed market’: the swathe of Latin America that believes the benefits of stellar growth have not trickled down to them. So mining projects in Peru will remain entangled in locally driven protests amid rising frustration that Humala is failing to deliver socially inclusive growth. In Colombia, concerns over the impact of free trade on local agriculture and the poor state of infrastructure will remain sore points outside the cities. And in Mexico, protests against energy reform will attract NEETS (not in education, employment or training) and retired government employees. LOCAL VACUUMS For decades Latin America complained about the overweening presence of the US in its affairs. In the early 2000s, as US foreign policy turned overwhelmingly to the Middle East and elsewhere, the tables turned and some regional policymakers grumbled about US ‘neglect’ in the face of a leftist tide across Latin America. They would argue that Latin America has suffered the effects of a power vacuum for years already. Others seized the opportunity to diversify their trade relations, embracing China as a voracious new consumer of the region’s raw materials. Those countries – led by Brazil, Peru and Chile – must now adjust to a slower rate of Chinese growth, which, if far from representing a vacuum, poses challenges to the commodity export-led model. Overall, the most significant power vacuums across the region will be local, and none more so than that triggered by Venezuela’s slow-burn diplomatic and economic retreat following the death in 2013 of its larger-than-life former president Hugo Chávez (1999-2013). The parlous state of the economy – held aloft largely by the price of oil – means Venezuela can no longer afford to punch above its weight on the regional (or world) stage. Most significantly, the retrenchment of Venezuela’s regional oil subsidies is likely to gather pace in 2014, with the Caribbean beneficiaries – apart from Cuba – most likely to face interest rate rises and stiffer conditions from state oil company PDVSA. The likely curtailing of Venezuelan largesse in the Caribbean highlights the region’s most unreported and
RiskMap Report 2014 AMERICAS 44 disconcerting vacuum, where high debt levels, weak external demand and financial-sector vulnerabilities will persist in 2014. The economies of Belize, St Kitts and Nevis, and Jamaica are in particularly poor shape, with the last remaining under IMF tutelage. In Cuba, the risk of vacuum has become permanent. Putative presidential successor Miguel Díaz- Canel will quietly continue his apprenticeship to Raúl Castro, but were the latter to die in 2014 (he will be 83), Díaz-Canel would preside over a transition marked by deep uncertainty. Frustration over the government’s cautious approach to economic reform will be ever present, though social control will remain tight, and emigration as ever will provide a neat escape valve. Honduras represents a more immediately worrying case: political tensions will remain high and the fiscal situation precarious, hindering the fight against rampant crime and the penetration of drug trafficking into the country’s institutional fabric. While there is no power vacuum in Brazil, 2014 is likely to throw into relief the gulf between the country’s projected image and reality. The sporting prowess and cultural vitality highlighted by the World Cup will underline Brazil’s already well- established soft power credentials. But failure to make headway on political reform, the lag in realising oil projects and continued corruption – which will remain under intense scrutiny – point to the limitations that continue to hold back Brazil’s global power pretensions. Brazil’s quest for the elusive UN Security Council seat will therefore remain unfulfilled in 2014, even if its relationship with the US is likely to recover after the bumps of late 2013. REJECTION OF DEFECTION The broad-brush division between left-leaning governments and more pragmatic centrists will persist in 2014. There will be no ‘defections’ from one group to another, though the political momentum in Argentina will continue its drift away from Fernández’s heterodox model, even if this will not culminate until 2015. El Salvador – already highly pragmatic under President Mauricio Funes – is likely to switch to the right in the March 2014 election. Venezuelan leadership of the Bolivarian Alliance for the Peoples of Our Americas (ALBA) will remain muted as domestic woes and economic imbalances limit its ability to shell out oil dollars as liberally as it did under Chávez. Ecuador’s President Rafael Correa will continue to hustle and bustle on the world stage as Chávez’s would-be heir, but his impact will remain limited. One of the most significant developments in 2014 will be the continuing evolution of the Pacific Alliance – comprising Mexico, Colombia, Peru and Chile, which TOP: Chile’s Michelle Bachelet, October 2013. BOTTOM: Venezuelan President Nicolas Maduro and a framed image of deceased former president Hugo Chavez, October 2013.
RiskMap Report 2014 AMERICAS 45 together account for 35% of Latin American GDP – not just as a counterpoint to the ALBA, but as an enhanced platform for increased engagement outside the region. With little fanfare, 2014 could feasibly see the Pacific Alliance ripen into a far more effective alternative to the Southern Common Market (Mercosur) trade bloc, which will continue down the path of gradual obsolescence. The business environments in the Pacific Alliance countries are among the most attractive in the region, with predictable policy frameworks, fewer protectionist tendencies, independent central banks and higher productivity levels. The cementing and expansion of the Pacific Alliance will consolidate Latin BRAZIL VENEZUELA MEXICO COLOMBIA PERU CHILE URUGUAY PARAGUAY ARGENTINA KEY Mercosur Pacific Alliance Members of Mercosur and the Pacific Alliance
RiskMap Report 2014 AMERICAS 46 America’s growing links with the Asia-Pacific region outside China. For example, the reinvigoration of free-trade talks between Mexico and South Korea is likely in 2014. Outside the alliance, the consolidation of Venezuelan oil flows to India will continue and Trans-Pacific Partnership negotiations will conclude, benefiting Mexico, Peru and Chile. Colombia already has a free-trade agreement with South Korea, but is struggling to fully exploit it while its own Pacific region remains retarded by years of government neglect and conflict. A peace agreement should mark the beginning of a regeneration process in the area, even if tangible improvements in port and road infrastructure will only materialise after 2014. Oil pipelines to Colombia’s Pacific coast from Venezuela will have to wait until after 2014, though with Asia set to account for most of the expected growth in oil consumption in coming years, the stage is set for further geopolitical shifts affecting the region. China will remain a key player, even if its growth rates drop down a gear, remaining a prime creditor for Ecuador and continuing to take 80% of Chile’s copper. China will be a growing oil buyer for Venezuela as the latter continues to decouple commercially from the US. If Venezuela is to maintain Chinese trust, President Nicolás Maduro needs to deliver on oil deals – proof, if ever it was needed, that Chinese interest in Latin America is not ideological but highly practical. China’s interest in Latin America will not detract from the fact that the region’s geostrategic relations will continue to hinge largely on the US, which will retain strong economic and security interests in the region in 2014. NO HARD LANDING Latin America faces more challenging conditions in 2014 amid reduced global liquidity and increased market volatility. But the risk of a hard landing is lower than in the past thanks to the trade diversification and reforms put in place across much of the region in recent years. Where reform has been lacklustre, vulnerabilities will be more pronounced, but those most affected will in all likelihood muddle through and avoid painful adjustments. Social protests stemming from historic problems and newer challenges that have arisen from growth and economic success will persist, but are highly unlikely to coalesce into movements that threaten stability.
Bogotá Colombia
RiskMap Report 2014 SPOTLIGHT ON: COLOMBIA 48 RiskMap Report 2014 SPOTLIGHT ON: COLOMBIA 48 NICARAGUA PANAMA ARUBA CURAÇAO BONAIRE ST VINCENT AND GRENADINES SURIN GUYANA COLOMBIA ECUADOR VENEZUELA San José Panama City Colón Cali Bogotá Medellín Caracas Guayaquil Manta Quito BRAZIL SPOTLIGHT ON: COLOMBIA LOOKING AHEAD With an end to the long-running civil conflict in sight, long-term improvements to the security environment are on the cards. However, security in rural areas will see a short-term dip, while the challenges of implementing any peace agreement will use up much of the political capital of the new government elected in 2014. Incumbent President Juan Manuel Santos is likely to be at the head of that government, spelling policy continuity for investors. 2014 will be a decisive year for Colombia. With an end to more than 50 years of internal armed conflict finally in sight, it has never looked so attractive to investors. Already offering one of the most stable political environments in the region, the government is working hard to improve the country’s global competitiveness and deepen economic links with countries in Europe, North America and Asia. The largest-ever investments by a Colombian government in infrastructure, ambitious programmes to stimulate industrial productivity and growth, and burgeoning domestic demand will make the country an increasingly attractive market for industries ranging from extractives to construction and consumer goods. PEACE DIVIDENDS Talks between the government and leftist guerrilla groups are likely to succeed in reaching a peace agreement in 2014, bringing with it the prospect of an end to much of the violence that has haunted the country for decades. Such a deal OLIVER WACK ANALYST, AMERICAS CONTROL RISKS
RiskMap Report 2014 SPOTLIGHT ON: COLOMBIA 49 would bring about significant long-term improvements in the overall security environment. However, in the short term it would see security in rural areas deteriorate as various groups seek to fill the power vacuum left by the cessation of guerrilla activity. Regions bordering Ecuador and Venezuela, which have long been strategic areas for illegal activity, will remain beset by conflict as the economic attractiveness of drug trafficking, illegal mining and extortion prompts the emergence of new groups to replace guerrilla forces. Nonetheless, continuing pressure by the security forces will mean that such criminal activities will not undermine overall stability, and their impact on foreign investments is likely to be limited. A gradual cessation of ideologically motivated guerrilla attacks on infrastructure, particularly in the energy sector, will allow companies to make considerable savings in security spending. MUDDLING THROUGH The complex challenges of implementing any peace agreement will be at the top of the in tray for the government that emerges from the 2014 legislative and presidential elections. It will have to oversee the demobilisation of up to 8,000 guerrilla fighters, and ensure their reintegration into civilian life. Curbing the drugs trade and promoting rural development as a means of creating alternate livelihoods for former guerrillas will also be daunting tasks. President Juan Manuel Santos remains the likeliest victor at the presidential poll. The most formidable rival candidate, his former housing minister German Vargas Lleras, comes from within his own political movement, and would be likely to refrain from running if Santos decides to stand. Viable opposition candidates are unlikely to emerge either on the political right or left. Broad policy Colombia’s shifting security risk landscape 2011 2012 2013 2014 Medellín Cali Bogotá COLOMBIA Cali Bogotá Medellín COLOMBIA COLOMBIA Cali Bogotá Medellín Medellín Cali Bogotá COLOMBIA
RiskMap Report 2014 SPOTLIGHT ON: COLOMBIA 50 TOP: President Juan Manuel Santos, September 2013. BOTTOM: Agricultural protest, Bogotá, August 2013. continuity is therefore likely after the elections, and the current positive attitude towards the private sector and foreign investment will be maintained. Nonetheless, a general continuation of the government’s policies will also mean that many of the challenges facing investors, such as inefficient bureaucratic procedures, remain unresolved. The government is unlikely to attempt major reforms ahead of the elections for fear of alienating its supporters and giving political ammunition to opponents, while implementing a peace agreement will tie up much of the next government’s political capital. The government will muddle through 2014 without tackling significant problems, in particular those facing the extractives industry, such as lack of clarity in the legislative framework for mining operations, and uncertainty over environmental protection standards and investment limits. RELATIONSHIP MANAGEMENT Santos’s government has succeeded in addressing some of the main social issues facing the country, and has created more than 2m jobs in the last three years. Although levels of inequality remain high, poverty has declined significantly and the middle class has more than doubled in size over the past decade, creating considerable potential for further growth in the consumer market. Continued FDI-driven expansion of the retail sector is likely to be a major contributor to overall GDP growth in 2014. However, social tensions persist, and managing relations with local communities will remain one of the main challenges facing foreign companies in 2014. Companies with operations in rural areas can expect to see further community protests in the run-up to the elections. A successful peace agreement and the subsequent strengthening of the political left would be likely to provide further momentum to social and environmental campaigns, and protest movements. Meanwhile, inadequate infrastructure, in particular transport networks, will continue to prevent growth levels from reaching their full potential. The government’s ambitious $24bn plan to improve the connectivity and quality of roads will improve matters, but it is unclear when the first contracts will be assigned or when construction will begin. Given that heavy goods vehicle traffic is increasing, the situation is likely to become worse before it gets better. WATERSHED YEAR 2014 will mark a watershed for Colombia, with the long-hoped for end to the internal armed conflict likely to buoy recent slow but steady improvements in the investment environment. While complex challenges for business will persist, companies prepared to tackle them stand to reap the benefits offered by one of the region’s most attractive markets.
MYANMAR Guam N. Mariana Is. MALDIVES SRI LANKA PAKISTAN AFGHANISTAN UZBEKISTAN TAJIKISTAN KYRGYZSTAN I N D I A NEPAL BHUTAN BANGLADESH THAILAND LAOS CAMBODIA VIETNAM M A L A Y S I A BRUNEI I N D O N E S I A PHILIPPINES EAST TIMOR Papua PAPUA NEW GUINEA A U S T R A L I A C H I N A Taiwan J A P A N SOUTH KOREA NORTH KOREA M O N G O L I A SINGAPORE Aceh Sumatra Java Sulawesi Maluku Kalimantan Sulu archipelago INDIAN OCEAN PACIFIC OCEAN Kashmir Ashgabat Tashkent Bishkek Almaty Dushanbe Kabul Kandahar Islamabad Lahore Karachi Delhi Ahmedabad Mumbai Hyderabad Bangalore Chennai Jaffna Colombo Kolkata Chittagong Dhaka Kathmandu Yangon Vientiane Hanoi Kunming Bangkok Phnom Penh Ho Chi Minh City Kuala Lumpur Penang Jakarta Surabaya Manila Cebu Darwin Cairns Brisbane Port Moresby Lae Guangzhou Taipei Fuzhou Shanghai Wuhan Chongqing Chengdu Xi’an Zhengzhou Tianjin Beijing Dalian Changchun Harbin Vladivostok Sapporo Tokyo NagoyaOsaka Fukuoka Seoul Pyongyang Hangzhou Shenyang Urumqi Muscat Hong Kong Shenzhen TURKMENISTAN KAZAKHSTAN
RiskMap Report 2014 ASIA-PACIFIC 52 The Thilawa Special Economic Zone is an interesting place. Located 16 miles (25km) south of Yangon, the former capital of Myanmar, it currently comprises 2,000 hectares of scrapings and foundations. But when finished it will be the country’s largest industrial estate, with a power plant, adjacent deep water port and capacity to host high-tech assembly plants, textile factories and other labour-intensive industries. It’s a Japanese thing. Mitsubishi, Marubeni and Sumitomo are building Thilawa, the Japan International Co-operation Agency (JICA) is providing soft loans for much of the infrastructure and the majority of its tenants will be Japanese. Japanese Prime Minister Shinzo Abe in May 2013 felt the project was sufficiently symbolic for him to attend the ground-breaking ceremony, becoming the first Japanese prime minister to visit Myanmar in 35 years. Thilawa symbolises Japan Inc.’s decision to dominate Myanmar’s return to the global economy after decades of sanctions and isolation. Japan is advising Myanmar on the reform of its central bank and currency regime, the restructuring of its commercial banking sector and the development of its equity market. It is also building most of Myanmar’s key infrastructure requirements, which are legion in a country with sub-Saharan ASIA-PACIFIC POLITICAL RISK 2004-14 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 KEY INSIGNIFICANT LOW MEDIUM HIGH EXTREME SECURITY RISK 2004-14 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 SUB-REGIONAL RISK AVERAGES Pacific Southeast Asia South Asia Pol Sec Pol Sec Pol Sec Pol Sec East Asia 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 STEVE WILFORD DIRECTOR, ASIA CONTROL RISKS ANDREW GILHOLM HEAD OF ANALYSIS, ASIA CONTROL RISKS
RiskMap Report 2014 ASIA-PACIFIC 53 levels of human development. Yes, the cash-rich trading companies and manufacturers of Tokyo, Osaka and Nagoya believe there is a commercial opportunity, but their government is also prodding them very hard to steal a strategic march on China. Until 2011, the Chinese built most big things in Myanmar, mainly because Myanmar’s status as an international pariah precluded anyone else from doing so. Then, in September of that year, Myanmar’s President Thein Sein halted construction of the giant, Chinese-invested Myitsone dam. Ostensibly taken on environmental grounds, the decision was also intended to defuse increasingly vociferous popular criticism of the government’s cosy and corrupt relationship with Chinese business, and a widespread sense that Myanmar was ceding sovereignty to its dominant neighbour. The decision rapidly, and quite unexpectedly, was followed by freedom for Aung San Suu Kyi, engagement with the US and a stampede of interested investors. Japan has become a central part of this story, while China is scrambling to reset its image and role in the country. CHINA NORTH KOREA SOUTH KOREA JAPAN Longjing/Asunaro Tianwaitian/Kashi Location of Diaoyu/Senkaku Islands Duanqiao/Kusunoki Chunxiao/Shirabaka RUSSIA EEZ border claimed by Japan EEZ border claimed by China Oil and gas fields (Chinese name in black, Japanese name in white) Disputed area KEY Territorial disputes, East China Sea
RiskMap Report 2014 ASIA-PACIFIC 54 TOP: Japanese Prime Minister Shinzo Abe and Myanmar President Thein Sein, May 2013. BOTTOM: Japan’s coastguard warning activists away from Diaoyu/Senkaku Islands, August 2013. TAKING ATOLL If Sino-Japanese rivalry is an indirect, low-key affair in Myanmar, in the East China Sea it is anything but. Beijing’s dispute with Tokyo over a set of islets there, known as Diaoyu in China and Senkaku in Japan, will remain an open sore in bilateral relations. With both sides continuing to send vessels and aircraft into disputed areas with unprecedented frequency, and the blogosphere on both sides of the East China Sea full of nationalistic vitriol that leaves leaders little room for concessions, there is substantial scope for miscalculation and virtually no prospect of resolution. It has long been assumed that sparring over atolls or fighting for the hearts and minds of the region’s emerging economies were CHINA LAOS VIETNAM MALAYSIA CAMBODIA PHILIPPINES Scarborough Shoal Spratly Islands Macclesfield Bank Paracel Islands Diaoyu/Senkaku Islands KEY UNCLOS’s 200 nautical mile EEZ China’s ‘nine dotted lines’ claims Hotspots Maritime disputes, South China Sea
RiskMap Report 2014 ASIA-PACIFIC 55 disconnected from China’s and Japan’s more serious business of being two of the world’s largest direct trading partners. But for many Japanese manufacturers, the fallout from their country’s geopolitical rivalry with China is giving pause for thought when it comes to investment decisions. The 2012 anti-Japan protests in China over Tokyo’s ‘nationalisation’ of the Senkakus saw vandalism of Japanese retail outlets, disruption at manufacturing facilities, government harassment including customs delays, and a material impact on bilateral trade and sales by some Japanese companies in China. According to provisional figures from the Japanese Ministry of Finance, Japanese FDI in China fell by 31% year-on-year in the first half of 2013, a trend that probably reflects more than just China’s rising cost base and slowing growth. It is not just Japan that is struggling to deal with Beijing. China’s seizure of effective control over Scarborough Shoal, 125 miles (200km) off the coast of Luzon, may not have involved any direct military force, but was one of the most striking indications yet of China’s intent. Vietnam’s dispute with China over the Paracel Islands will remain another potential trigger of volatility in relations in 2014. Although most countries are less directly affected, the problem nonetheless vexes most of China’s neighbours, which are uneasy about Beijing’s increased willingness to subjugate its declared emphasis on stable, win-win relations to its pursuit – backed by economic and military clout – of poorly defined territorial claims. Having long been little more than a talking point in think tanks, these issues now have profound influence on several governments’ strategic thinking, and have the potential to significantly affect intra-regional trade and investment. FOREIGN INVESTORS UNDER PRESSURE As if all that wasn’t bad enough, domestically China has greatly stepped up regulatory scrutiny of major foreign businesses operating in the country. High-profile corruption probes, raids and the detention of foreign executives in 2013 have particularly targeted the pharmaceutical sector, but numerous industries are affected. This is not, as most commentators tend to suggest, a national campaign to hound foreigners out of crowded sectors of the economy (even if some local players would cheer such a move). Those analysts who like to posit a unified theory of growing Chinese bellicosity towards foreigners at home and abroad are, for the most part, grossly over simplifying. The complex and opaque combination of factors behind recent developments includes economic nationalist considerations, but probably a more important driver is determination by China’s new leaders to address major public grievances by tackling
RiskMap Report 2014 ASIA-PACIFIC 56 BRIBERY INVESTIGATIONS IN CHINA’S PHARMACEUTICAL AND MEDICAL SECTOR, 2013 • Sep: Chinese state television alleged that Dumex, Danone’s baby nutrition unit, had bribed 116 medical workers at 85 hospitals and health agencies to promote its infant formula milk. Tianjin municipal government launched an investigation and disciplined 13 hospital employees for accepting bribes. Dumex announced that it would take full responsibility and disciplinary action against the employees involved. Danone’s advanced medical nutrition unit, Nutricia, started an internal investigation after state media alleged that it had bribed more than 100 doctors at 14 hospitals in Beijing to increase sales. • Sep: Swiss pharmaceutical company Novartis opened an internal inquiry after Chinese media accused its Alcon eye care division of using a middleman to bribe doctors at more than 200 hospitals in China. Novartis stated that it would take swift corrective measures if any inappropriate behaviour was identified. • Aug: Chinese health authorities began to investigate French pharmaceutical company Sanofi for allegedly paying bribes totalling around RMB 1.69m ($276,000) to 503 doctors at 79 hospitals in the country. Sanofi said that it would co-operate with a review of its business in China. • Jun: Chinese police authorities launched an investigation into pharmaceutical multinational GlaxoSmithKline for allegedly bribing government officials and doctors. Several senior executives and sales employees were detained during the probe. GlaxoSmithKline announced that it would co-operate and dismissed more than 100 Chinese sales representatives. TOP: Shanghai, China. BOTTOM: Anti-Japan protests, Beijing, China, September 2012.
RiskMap Report 2014 ASIA-PACIFIC 57 corruption and lowering prices for key products and services, notably in the pharmaceutical, medical, food, consumer goods and energy sectors. Foreign companies have actually received remarkably little attention from regulators on corruption in the past. Given how pervasive non-compliance is in some sectors, investigations into foreign companies over the years have if anything been notable for their rarity. But as FDI has become less important to China’s growth, the government now appears more comfortable with going after foreigners, and the negative investor perceptions this might imply. Although many more Chinese companies have been subject to corruption and pricing investigations than foreign ones, targeting a high-profile multinational is a relatively easy way for regulators to show they are serious about enforcement. It also protects officials from accusations that such companies get off more lightly than domestic firms, and shows the public that quality issues and corruption are not only problems for Chinese companies, potentially boosting Chinese brands striving to compete with international ones. Adding confusion to the picture for multinationals trying to make sense of the changing environment is the involvement of multiple agencies at both national and local levels. These range from the Ministry of Public Security (which has undergone its own leadership changes) to the National Development and Reform Commission, and the Administration of Industry and Commerce. Yet the notion that these and other organisations are all following a script minutely co-ordinated in Beijing is almost certainly false. Meanwhile, although high-level corruption investigations within the ruling party, in contrast to those affecting multinationals, are about intra-elite politics, they also have implications for many foreign investors. The fall from grace of well-connected individuals with whom companies have had close ties poses growing risks, while such ties are even coming under scrutiny from regulators in the West. In short, while there is far more to the 2013 crackdowns than just foreigner- bashing, the bottom line is clear: operationally in 2014, things are going to remain a lot harder for foreign companies in China than in the past. Companies that still believe in the long outdated precept that ‘it’s just the way things are done in China’ have a big problem. The rules of the game are changing, and doing things ‘the China way’ will leave foreign investors seriously vulnerable. The problem is that stamping out the practices that accompany these old attitudes is much easier said than done. Although official crackdowns are becoming more systematic and make increasing reference to laws and regulations, they ultimately tackle the symptoms rather than the roots of the problem. Most of the dynamics that have made bribery and
RiskMap Report 2014 ASIA-PACIFIC 58 kickbacks so common in so many sectors are still there, even as the risk of punishment is growing. Some mitigation options also carry their own serious risks: some companies trying hard to ‘do things right’ and reduce exposure by severing ties with suspect staff, agents, vendors or partners have faced threats ranging from whistle-blowing and loss of business to outright intimidation. LEADING THE WAY However, the first year of China’s new leadership was certainly not all doom and gloom. President Xi Jinping and Premier Li Keqiang appear to have grasped that China now needs leadership, not just management and ‘tinkering’, if its economy is to confront the challenges of coming down from the credit binge – one that allowed their predecessors to postpone structural reforms that were touted for a decade. Xi and Li have already made material progress in tackling some key areas with increased urgency, somewhat boosting prospects for long-term economic stability. However, 2014 will bring major tests of their resolve, and their short-term reward for passing them will be continued pain and strain, including localised crises in local government finances, and business failures in sectors plagued by overcapacity. Abe too understands that just ‘managing’ Japan’s economy is not enough. His 2013 efforts to dragoon the central bank into radical monetary easing to spur a sustainable escape from deflation, counter yen (currency) strengthening and propose a highly controversial rise in consumption tax in April 2014, not to mention his emphasis on aggressive Japanese expansion into emerging markets such as Myanmar, also lay the ground for assaults on other previously unassailable areas of the economy. The coming year may well see attempts to open up the protected agriculture sector and loosen labour regulation. Abe is trying to put Japan on notice that avoiding these hard choices has become an existential threat. This forthright gambit, coupled with a tougher stance towards China, is proving popular with the electorate. However, as in China, 2014 will bring major tests of the new leadership’s ability to follow through. Prospects for substantive, positive reforms are arguably better than at any time since the days of former prime minister Junichiro Koizumi (2001-06) but, like Koizumi, Abe will struggle to make many fundamental breakthroughs. WIDER RAMIFICATIONS China and Japan’s strategic and economic imperatives will present opportunities and challenges for other economies in the region. In many respects, China’s stimulus binge funded Indonesia’s extractive industry boom. China’s thirst for Indonesian coal, nickel, bauxite, timber and palm oil fed the longest period of high growth TOP: Chinese President Xi Jinping, October 2013. BOTTOM: Chinese Premier Li Keqiang, October 2013.
RiskMap Report 2014 ASIA-PACIFIC 59 since the fall of former president Suharto (1967-98). President Susilo Bambang Yudhoyono’s administration essentially used this as a political free pass, and squandered an opportunity to fix an economy riddled with corruption and bureaucratic inertia, oligopolistic and often predatory local business groups, and a rigid labour market. His successor, who must be chosen in mid-2014, will have to tackle all of these challenges at a time when Xi and Li’s structural reforms are already having an impact in the form of greatly reduced growth in demand for Indonesia’s natural resources. The much needed shifts in China’s economy will make achieving the much needed shifts in Indonesia’s economy all the more challenging. Voters will be looking for a leader who takes on vested interests and tackles corruption. The only politician doing this is the wildly popular mayor of the capital Jakarta, Joko Widodo (better known as Jokowi), but he has yet to declare his intentions. Other contenders, such as Golkar chairman Aburizal Bakrie, and tycoon and former general Prabowo Subianto, are status quo players who will not provide the leadership Indonesia needs. Ironically, one antidote to the hangover from the Chinese-led resource export boom would be to create an operating environment that provides for a Chinese-led direct investment boom, with both Chinese and Japanese manufacturers keen to diversify production from China’s eastern seaboard. But while labour in Indonesia might be ostensibly cheaper, industrial action, over-regulation, poor infrastructure and policy uncertainty hardly makes the move cost-effective for many. Even if Indonesia gets what its electorate appears to want – a clean president, committed to anti-corruption efforts, sitting above a parliament with the professionalism to derive and review laws that actually work for the country – the nexus between business and politics, and extensive administrative decentralisation will militate against deep structural reform. CLEANING UP Filipinos appear to have the type of leadership that Indonesians are looking for, in the form of President Benigno ‘Noynoy’ Aquino III. Anticipated GDP growth of 6.75% for 2013, achievement of investment-grade status in October 2013 and a general shift in perception of the country from the ‘sick man of South-east Asia’ to one with significant potential are largely down to Noynoy. His mantra of anti-corruption and good governance, slavishly regurgitated by an adoring media, has changed public attitudes towards bad behaviour by bureaucrats and propelled a new optimism. This has been accompanied by a few ‘big wins’ in infrastructure development, such as the extension of the capital Metro Manila’s light rail system, and construction of a series of ports and highways.
RiskMap Report 2014 ASIA-PACIFIC 60 Aside from Japan, the Philippines is likely to take Beijing’s prize for the region’s most annoying neighbour. Noynoy’s move to internationalise its dispute with China over Scarborough Shoal by asserting its claim under the UN Convention on the Law of the Sea flies in the face of Chinese demands that territorial disputes are a bilateral affair. Japan is exploiting this with offers of second-hand coastguard vessels and military aid in a way that would have been unthinkable in the recent past. The Philippines can afford to be somewhat less circumspect about antagonising China than its neighbours, given its relative economic autarchy: the dispute with China has choked off an investment flow that was of limited importance in the first place. Although manifestations of the ‘old Philippines’ – such as the September 2013 occupation of Zamboanga by Muslim separatists and persistent attacks by the communist New People’s Army – will continue, they are unlikely to shake this optimism. Such developments are largely peripheral to the economic good news that is likely to see the Philippines match Chinese levels of GDP growth in 2014. Noynoy’s greatest challenge will be to embed his agenda more deeply so the gains outlive his presidency, which ends in 2016. The legacy of the Philippines’ two other great reforming presidents, Ramon Magsaysay (1953-57) and Fidel Ramos (1992-98), suggests his chances of success will be partial at best. FACTION FIGHTING Those seeking a China-style paradigm shift in industrial policy in Vietnam or the type of dynamic leadership on show in the Philippines will search in vain. The slow-burn banking-sector crisis and property meltdown triggered by bureaucrat- businessmen gorging themselves on debt shows little sign of resolution. The country is just shy of bankrupt, and the bloated state-owned enterprises (SOEs) that absorbed much of the debt will not receive the rationalisation they need, largely because of the Shakespearean drama unfolding in elite circles in the run-up to the Communist Party of Vietnam (CPV) leadership transition in 2016. This is, to say the least, unfortunate at a time when Japanese and Western businesses are actively reviewing their ‘China+1’ diversification plans. Having failed to oust Prime Minister Nguyen Tan Dung in 2013, President Truong Tan Sang is preparing for a fresh confrontation with Dung in 2014-15 as other members of the politburo align and re-align accordingly. Although the CPV is not about to implode, the politburo’s descent into warring groups, the extremely strong nexus between business and politics at the peak of government, and the lack of coherent macroeconomic policy are all reasons why Vietnam is not the ‘little China’ that many foreign investors imagine it to be. Practices that shield SOEs, crowd out private TOP: Indonesian President Susilo Bambang Yudhoyono, October 2013. BOTTOM: Philippines President Benigno Aquino III, October 2013.
RiskMap Report 2014 ASIA-PACIFIC 61 and foreign investment, and create the economic imbalances that trigger high inflation will persist. LOOKING INWARD Malaysia’s Prime Minister Najib Razak will govern as a diminished leader after the opposition coalition almost took power in 2013 from the United Malays National Organisation (UMNO)-led Barisan Nasional government. The charitable will say his abandonment of pre-election promises to untangle the web of preferential treatment for the ethnic-Malay majority stems from the narrowness of his victory and a reassertion of power by UMNO’s conservative wing. The cynical will assert that it was all just an election stunt. But if the parties did not change in 2013, the electoral calculus did, and in ways that will affect the country far beyond Najib’s current term. The ethnic-Chinese and -Indian political arms of ‘the Barisan’ were shattered at the polls, exposing the pretence that UMNO governs as part of a tri-racial coalition/consensus. With its latest round of preferential treatment for its Malay vote bank, and worrying signs of racism in social and religious policy, racial politics are becoming ever more polarised. These will provide a canvas for repeated mass protests, particularly by a middle class frustrated by rising crime and perceptions of growing government corruption. Malaysia’s growing fractiousness is now ‘a factor’ in foreign investment decisions in a way it has arguably never been before. DEEP DIVIDES Japanese and Chinese economic policymaking will loom large over Thailand in 2014: the two respectively consumed 10% and 12% of all Thai exports in 2012-13. Their demand for Thai vehicles, electronics, electrical equipment and rice will flatten in the year ahead, producing probably the weakest growth among the region’s industrialising economies. Economic stress can quickly transform into mass protests, and Thailand’s unique social tensions exacerbate the threat. ‘Yellow shirts’ (royalist, conservative) and ‘red shirts’ (supporters of former prime minister Thaksin Shinawatra (2001-06)) have caused bouts of sometimes violent disruption to the capital since Thaksin was deposed in a 2006 coup. The tensions reflect a conflict between a direct, populist political modus operandi that circumvents traditional elite groups, and one that respects the traditional highly conservative social order that its yellow-shirt supporters see, along with Buddhism, as the essence of being Thai. Despite the faltering economy, Prime Minister Yingluck Shinawatra is proving to be more than simply Thaksin’s little sister. She will continue to take a highly cautious approach to everything from constitutional change TOP: Thai Prime Minister Yingluck Shinawatra, February 2013. BOTTOM: Malaysian Prime Minister Najib Razak, October 2013.
RiskMap Report 2014 ASIA-PACIFIC 62 and military reshuffles to the return of her exiled brother. Meanwhile, the very real possibility that the 84-year- old king could pass away in 2014 has prompted speculation around scenarios as extreme as this triggering descent into civil war. It would not. Far more likely would be a period of self-reflection and a fading of palace and military from the political foreground. THE REWARDS OF NEGLIGENCE One thing is certain in the coming year: resting on your laurels and hoping the good times will continue to roll is not an option. China’s self-imposed cooling alone has made sure of that. Some Asian leaders will grasp this and make it an imperative (the Philippines and Japan). Others will recognise the need but attempt to defer the pain, constrained by vested interests keen to maintain the status quo (Malaysia and Thailand). Some laggards will miss the importance of the regional and global changes afoot altogether, and pursue a parochial agenda (Vietnam and probably India). Ironically, the state that has managed to put off key structural changes the longest is likely to see the most profound progress in 2014. After opening the Thilawa industrial estate, Abe announced the cancellation of Myanmar’s $1.8bn debt to Japan ‘to support the country’s new commitment to reform’. No doubt money well spent if it keeps Japan at the forefront of foreign business in ‘the new Myanmar’. Destinations for Thai exports, Jan-Aug 2013 REST OF THE WORLD 56% CHINA 12% US 10% JAPAN 10% MALAYSIA 6% HONG KONG 6% Source: Thai Ministry of Commerce
Jodhpur, India by Andrew Pickford Control Risks
RiskMap Report 2014 SPOTLIGHT ON: INDIA 64 RiskMap Report 2014 SPOTLIGHT ON: INDIA 64 MYANMAR OMAN UAE SRI LANKA PAKISTAN AFGHANISTAN I N D I A NEPAL BHUTAN BANGLADESH D LAOS CAMBODIA V C H I N A Kashmir Ashgabat Kabul Kandahar Islamabad Lahore Karachi Delhi Ahmedabad Mumbai Hyderabad Bangalore Chennai Jaffna Kolkata Chittagong Dhaka Kathmandu Yangon Vientiane Hanoi Kunming Ho C Chon Chengdu Muscat Abu Dhabi Dubai I R A N SPOTLIGHT ON: INDIA LOOKING AHEAD Fiercely contested general elections in 2014 will not return the decisive government that investors have been hoping for. Although the opposition Bharatiya Janata Party (BJP) should improve on its lacklustre performance in 2009, the growing strength of region-based parties will ensure that neither of the main parties achieves a majority. Convoluted and piecemeal policymaking will prevail as key pieces of legislation continue to fall victim to centre/state squabbles. India may seem to offer many opportunities, but investors are not convinced: FDI inflows fell by 21% in 2012-13 compared with the previous year. The fall underlines the government’s lacklustre performance in attracting FDI in recent years, in large part a consequence of its haphazard policymaking. Investors will hope that general elections in May 2014 will herald the return of a more decisive, pro-investment government that can return the economy to higher growth. Such hopes look set to be disappointed. ONLY THE VOTERS DECIDE The elections will not produce a strong and decisive government. Neither the Indian National Congress (Congress), which leads the governing United Progressive Alliance (UPA) coalition, nor the main opposition Bharatiya Janata Party (BJP) will even come close to securing a simple majority. The BJP will, to some extent, benefit from the UPA’s numerous governance faux pas, and will be boosted by the popularity of its prime ministerial candidate, the controversial chief JAN ZALEWSKI ANALYST, SOUTH ASIA CONTROL RISKS
RiskMap Report 2014 SPOTLIGHT ON: INDIA 65 minister of the western state of Gujarat, Narendra Modi. But although it is likely to capitalise on an underwhelming electoral performance by Congress to improve on its showing at the 2009 polls, this alone will not directly translate into success. As Indian voters become increasingly disenchanted with the two main national parties, so region-based parties – the Trinamool Congress in West Bengal, the Samajwadi and Bahujan Samaj Parties in Uttar Pradesh, to name but a few – have increasingly become a political force to be reckoned with. Such parties are often perceived as better able to respond to local demands. But their policy stances often contradict those of the main parties, including an often more critical approach to foreign investment. This paralyses the ability of the big two to implement their party programmes. The growing popularity of region-based parties will be on prominent display in 2014. Regional parties will make a particularly strong showing in Uttar Pradesh, Tamil Nadu, West Bengal and Bihar, which together account for 201 of the 543 seats in the Lok Sabha (lower house). IN A STATE A direct consequence of the rise of regional parties and the waning importance of federal politics has been constant fierce bargaining over legislation, particularly on investment-related matters. The tortuous passage of the UPA’s FDI policy on multi-brand retail in 2011-12 is a case in point. The cabinet passed the policy before withdrawing it amid widespread opposition. It was Productive time in the Lok Sabha (% of scheduled time) 8th LS (1985-89) 9th LS (1989-91) 10th LS (1991-96) 11th LS (1996-97) 12th LS (1998-99) 13th LS (1999-04) 14th LS (2004-09) 15th LS (2009-12*) 120% 140% 100% 80% 60% 40% 20% 0% 111% 115% 100% 108% 109% 91% 87% 70% Source: PRS Legislative Research* ongoing
RiskMap Report 2014 SPOTLIGHT ON: INDIA 66 finally passed in heavily watered down form. Such uncertainty in policymaking will remain a constant under any new government. A government led by either Congress or the BJP would continue to seek increases in FDI, but would face sometimes hostile opposition, including by region-based coalition partners. Lengthy negotiations that delay and dilute legislative processes and policymaking are highly likely. Government initiatives to raise FDI ceilings will continue to evoke strong opposition from regional parties, particularly in sectors such as retail, where such moves would be perceived to infringe on local livelihoods. Numerous pieces of draft legislation pending before parliament are likely to fall victim to the detrimental effect of centre/state tussles. These include most prominently a bill aimed at implementing a new Goods and Services Tax (GST) to simplify India’s complex web of central, state and local taxes. The bill will continue to face significant opposition from states that fear the resultant revenue losses. FRUSTRATE AND PREVARICATE The piecemeal policymaking that has characterised recent years is therefore likely to continue. This is not to say that there will be no windows of opportunity. The UPA has shown that even weak administrations can at times get their act together to pass useful laws and regulations. Despite the retail policy debacle, the policy formed part of a larger array of reforms that subsequently saw FDI ceilings raised without significant opposition, including in civil aviation. The government in August 2013 also passed the Companies Act, strengthening corporate regulation. Yet such successes are only as good as the government’s ability to implement them. And this boils down to the intrinsic difficulties that Indian governments face in satisfying demands for improved governance while safeguarding stability by protecting old power structures. Decisive attempts to address the key challenges facing investors – inadequate infrastructure, difficulties in acquiring land and obtaining environmental clearances, and corruption – would tread on the toes of many vested interests, and constitute a tall order even for a strong government. India will therefore continue to frustrate investor expectations over the coming year and beyond. The elections will not produce a government strong enough to tackle the issues undermining growth prospects. Policy flip-flops are most likely in controversial sectors that evoke nationalist sentiment: multi- brand retail, but also sectors such as pharmaceuticals and defence, where changes to FDI ceilings are mooted. Whether or not the government changes in 2014, little else will. TOP: BJP prime ministerial candidate Narendra Modi, September 2013. BOTTOM: Trinamool Congress meeting, Delhi, October 2012.
ANDORRA Faeroe Islands (DENMARK) Northern Ireland (UK) IRELAND NORWAY FINLAND DENMARK PORTUGAL SPAIN FRANCE Corsica (FRANCE) SWITZERLAND LIECHTENSTEIN NETHERLANDS BELGIUM LUXEMBOURG GERMANY MALTA ITALY GREECE ALBANIA MACEDONIA KOSOVO MONTENEGRO BOSNIAAND HERZEGOVINA BULGARIA CROATIA SLOVENIA SERBIA AUSTRIA HUNGARY CZECH REP. SLOVAKIA P O L A N D ROMANIA MOLDOVA U K R A I N E BELARUS LITHUANIA LATVIA ESTONIA T U R K E Y GEORGIA ARMENIA AZERBAIJAN Nakhchivan (AZERBAIJAN) CYPRUS SYRIALEBANON ISRAEL PALESTINIAN TERRITORIES TUNISIA MOROCCO I R A Q SWEDEN UNITED KINGDOM MEDIUM security in deprived urban areas Zürich Dublin London Amsterdam Brussels Berlin Oslo Gothenburg Aarhus Copenhagen Stockholm Helsinki Tallinn Riga VilniusKaliningrad (RUSSIA) Minsk Warsaw St Petersburg Prague Bratislava Vienna Berne Geneva Paris Barcelona Madrid Lisbon Rome Budapest Ljubljana Zagreb Sarajevo Podgorica Tirana Athens Thessaloniki Istanbul Ankara Kiev Tbilisi Yerevan Baku Rostov on Don Atyrau Samara Moscow Nizhniy Novgorod Tehran Baghdad Basra Erbil Amman Cairo Alexandria Tripoli TunisAlgiers Annaba Oran Rabat Casablanca Belgrade Bucharest Skopje Sofia Chisinau Damascus Beirut Kurdistan Region ALGERIA R U S S I A N F E D E R A T I O N
RiskMap Report 2014 EUROPE 68 European economies experienced another difficult year in 2013. Both emerging and developed markets faced headwinds that threatened to blow their nascent recoveries from the global financial crisis off course. Nowhere was this more evident than in Turkey. Anticipated growth of just under 4% in 2013 may have been an improvement on the three-year low of 2.1% in 2012, but is a far cry from the stellar years of 2010-11, when GDP expanded by an annual average of around 9%. Turkey’s economy has long been driven by large capital inflows, themselves partly supported by the programme of quantitative easing in the US. But the US announcement in mid-2013 that tapering of quantitative easing was on the cards had a negative impact on capital flows and the lira (currency), and brought the questionable sustainability of Turkey’s model into stark relief. The US’s decision in September 2013 to delay tapering offered momentary respite, but a fundamental rebalancing of Turkey’s economy away from risky capital inflows and towards more sustainable sources of growth will be essential if it is to weather the eventual withdrawal of monetary stimulus in the US. This is unlikely in 2014. Neither of the regions ANNA WALKER HEAD OF ANALYSIS, EUROPE CONTROL RISKS EUROPE POLITICAL RISK 2004-14 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 KEY INSIGNIFICANT LOW MEDIUM HIGH EXTREME SECURITY RISK 2004-14 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 SUB-REGIONAL RISK AVERAGES Central Asia Western Europe Northern Europe Pol Sec Pol Sec Pol Sec Pol Sec Central & Eastern Europe 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 T
RiskMap Report 2014 EUROPE 69 TOP: German Chancellor Angela Merkel, October 2013. BOTTOM: Former Italian prime minister Silvio Berlusconi, October 2013. on Turkey’s borders – the EU and the Middle East – are likely to buy enough Turkish exports to support growth in 2014, while domestic investment and consumption are unlikely to prove major catalysts. COMMODITY CRUNCH Weaker commodity prices, driven partly by slower growth in China, will continue to hit economies across Europe, particularly resource- dependent emerging markets in the east. Russia is experiencing increasing difficulty sustaining the rapid growth of the pre-crisis years, partly because of its lack of progress in diversifying away from oil and gas into non-resource sectors. Growth is unlikely to accelerate significantly in 2014 from below 2% in 2013, while the longer-term economic trajectory of 3%-4% annual growth is notably slower than the 7% average registered in the run-up to the crisis year of 2009. Although eurozone countries would happily trade their bailouts for growth this rapid, for Russia this marks a new reality. Kazakhstan, another resource- dependent economy, is also seeing much slower growth than pre-2008, at around 5%, down from an average of 10% in the previous seven years. In both countries, economic diversification and industrial innovation have long been buzzwords. However, concrete progress in achieving these goals has been limited and is likely to remain so while deficiencies in the business environment – ranging from corruption and red tape to unattractive tax regimes – remain unaddressed, deterring investment. TWILIGHT ZONE The eurozone is in no position to offer much comfort or stimulus to emerging markets. The eurozone crisis has bottomed out, but 2014 will not mark the start of a more dynamic recovery, with stagnation or sluggish growth across the region the best-case scenario. The run-up to the German parliamentary elections in September 2013 saw the eurozone’s problems slide down the agenda. Although the strong result for Chancellor Angela Merkel – her party narrowly missed securing an outright majority – has greatly enhanced her personal political authority, the resultant coalition government will not have any quick fixes to the eurozone’s troubles. On the contrary, Germany is likely to remain wary of assuming the role of eurozone leader if this means further financial support for – in the eyes of German taxpayers – profligate eurozone members that have already benefited far too much from the country’s largesse. Support for bailouts will remain contingent on the maintenance of austerity measures. Talk of new bailouts (Greece, Portugal, Slovenia) or the revision of existing packages (Cyprus) will continue to dominate the headlines in 2014. Meanwhile, the combination of a Greek
RiskMap Report 2014 EUROPE 70 and Italian presidency of the EU Council in the first and second half of the year respectively is unlikely to foster much confidence in the EU’s capacity to address its internal problems or provide the political space for strong leadership in tackling the region’s economic sclerosis. Italy in September 2013 narrowly avoided yet another political crisis when former prime minister Silvio Berlusconi (1994-95, 2001-06, 2008-11) failed to persuade his party to withdraw from the coalition government in protest at moves by the Senate (upper house) to ban him from holding public office. However, Berlusconi has demonstrated on countless occasions that he is easily capable of rebounding from such setbacks: further antics are likely in 2014, perpetuating the risk of instability. Yet despite the eurozone’s unresolved financial and economic issues, Latvia’s adoption of the single currency in January 2014 demonstrates the euro’s continued appeal to smaller countries in the region. Although accession to the eurozone is a condition of membership for all new entrants to the EU, countries in Central and Eastern Europe have exhibited varying degrees of enthusiasm for swapping their currencies for the euro, depending on the size of their economies. Latvia’s small, open economy lends itself to the euro anchor more easily GDP growth, selected eurozone countries, 2008-14 6% 4% 2% 0% -2% -4% -6% -8% -10% 2008 2009 2010 2011 2012 2013 2014 KEY FRANCE GERMANY ITALY SPAINGREECE IRELAND Source: IMF, World Economic Outlook, October 2013
RiskMap Report 2014 EUROPE 71 than that of Poland, for example. In the latter, euro adoption is unlikely before 2020 because of the government’s lack of public support and hence absence of a mandate to push through the required constitutional changes. Lithuania, in contrast, looks set to follow Latvia by adopting the euro in 2015, having narrowly failed to meet the inflation convergence criteria during its previous attempt in 2007. Adoption of the euro and the push for convergence will continue to drive structural and economic reforms across Central and Eastern Europe, increasing policy predictability and stability for investors. MIDDLE-CLASS AMBITIONS – AND FEARS While the smaller countries in the region have hastened to anchor themselves to the euro, appetite for EU membership in Europe’s third-largest country by population, Turkey, is looking decidedly weak – as is the desire of many already sceptical EU members to admit Turkey into the union. As well as the difficulties discussed above, a weakening of investor sentiment following large protests in Istanbul and other cities in mid-2013 compounded Turkey’s economic woes. Sparked off in May by government plans to develop a park in central Istanbul, the protests swiftly gathered momentum, uniting thousands of mainly young, middle- class demonstrators expressing a range of political and social grievances against Prime Minister Recep Tayyip Erdogan. The violence used to disperse the protests tarnished Erdogan’s image as a democratic reformer. A package of reforms to enhance the rights of religious conservatives and ethnic minorities announced in September 2013 can be seen as an attempt to re-burnish that image. More pragmatically, the democratisation package is aimed at consolidating Erdogan’s position ahead of local, presidential and possibly parliamentary elections in 2014, and furthering his goal of becoming president. Achieving the latter will become increasingly challenging as the conflict in neighbouring Syria persists, and as pressure grows to increase political and social freedoms for Turkey’s ethnic Kurdish population – whose support is essential to Erdogan’s presidential ambitions – in the face of nationalist opposition. Further east, middle-class ambitions to add political freedom to the economic opportunities they increasingly enjoy remain circumscribed, as do protests aimed at furthering these ambitions. Their most significant manifestation came in Russia in 2012, when members of the urban middle classes staged protests in the wake of the flawed December 2011 parliamentary elections. These lost momentum in 2013, but the underlying political grievances remain unaddressed and are likely to resurface during the Moscow city elections in 2014.
RiskMap Report 2014 EUROPE 72 More generally across the Commonwealth of Independent States (CIS, the members of the former Soviet Union bar the Baltic states and Georgia), a recognisable middle class remains a largely urban phenomenon, usually small in number, and limited to the capital and main cities. In some areas, development appears to have jumped the middle-income stage, with boutique shops selling luxury brands to a tiny segment of the population situated a stone’s throw from small kiosks selling cheap cigarettes, chewing gum and the ‘yellow’ press. Protests are rare across the region. Those that take place are poorly attended and tend to express local grievances rather than being directed at the central authorities. The unprecedentedly large-scale labour unrest seen at several state-owned oil companies in western Kazakhstan in 2011 has not been repeated, partly because of pressure from the government on companies to ensure that workers’ grievances are addressed before they escalate. In the west, falling real wages and household incomes have accompanied economic woes. Expressing empathy for ‘the squeezed middle’ has become a popular political mantra in the UK, where the opposition Labour Party has used the slogan to connect with the frustrated segment of the electorate that the party under former leader and prime minister Tony Blair (1997-2007) successfully wooed away from the Conservatives in the early 2000s. In Spain, allegations of high-level corruption related to political party funding and opposition to the government’s austerity measures have fuelled public protests. Job insecurity, rising taxes and warnings that the younger generation will be the first in decades that has lower living standards than their parents are common refrains across the EU, with most countries in the region entering their sixth consecutive year of austerity in 2014. A lurch in support to the political far right, with its focus on curbing immigration as the main lever for addressing unemployment, has not yet materialised, though far-right parties have campaigned on this issue and made political gains in countries such as Austria, Norway, Sweden and the Netherlands. Elections to the European Parliament in May 2014 are likely to reflect this trend. SOFT AND HARD POWER The eurozone’s problems will leave it inward-looking in 2014, focused on resolving economic imbalances. But EU membership remains an attractive goal for those countries in South- Eastern Europe that are not part of the club, ensuring that enlargement will remain the union’s most important tool of ‘soft’ power. Even countries as far from Brussels’ political reach as Georgia hold on to the prospect of joining one day. TOP: Demonstrators outside the Hall of Justice, Ankara, Turkey, October 2013. BOTTOM: Russian President Vladimir Putin, October 2013.
RiskMap Report 2014 EUROPE 73 In the Balkans, EU membership will continue to act as a powerful anchor for governments, guiding decisions and policies to ensure that legislation conforms to the 35 broad policy chapters of the acquis communautaire – the body of EU laws, regulations and other decisions to which all members must sign up before they are admitted. Croatia became the 28th member of the EU in July 2013 and, provided that the process of normalising ties with Kosovo remains on track, Serbia is likely to be invited to start EU accession negotiations in January 2014, with Montenegro likely to follow suit. Nonetheless, transposing EU legislation on to domestic statute books and then implementing it are major challenges. The benefits for investors in terms of more transparent and open business environments remain some way off. Closer political and economic ties with the EU remain a potent attraction even further east. Initiatives aimed at bringing more far-flung countries into a closer political and economic relationship had until recent years made only hesitant progress, partly because these programmes have not held out the carrot of full membership. The EU has gained more traction over the past year, with the conclusion in November 2013 of free-trade and association agreements with Moldova and Georgia. Even if full membership remains distant, the formalisation of closer institutional ties with these countries is irreversible and helps to provide a concrete framework for a westward political trajectory. Yet despite EU soft power, Russia-led initiatives in what the country views as its sphere of influence hold ever greater sway. Ukraine in November 2013 announced that it no longer intended to conclude free-trade and association agreements with the EU, just one week before it was due to do so. Two months earlier Armenia performed a similar about-turn, when it announced that it intended to join the Customs Union between Russia, Kazakhstan and Belarus instead of consolidating its EU integration process by signing free-trade and association agreements. Although neither Ukraine nor Armenia directly cited Russian opposition to their plans to integrate more closely with the EU as the reason for their abrupt change of course, Russian economic pressure undoubtedly played a direct role. Tactics included moves to increase gas export prices (in the case of Armenia) and wide-reaching trade and credit restrictions (in the case of Ukraine). These proved instrumental in reversing hard-fought progress towards EU integration virtually overnight. SHIFTING INTERESTS Russia is also rebuilding its position in Central Asia, where it continues to emphasise its capacity to lead the region’s response to external
RiskMap Report 2014 EUROPE 74 security threats, real or perceived. This is likely to become even more apparent in 2014 and beyond, with the withdrawal of US and international forces from Afghanistan. US policy in former Soviet Central Asia shifted some years ago from promoting democracy to a closer focus on ‘hard’ security issues, with the Department of Defense displacing the State Department as the driver of policy. The withdrawal of international forces from Afghanistan in 2014 will mark the end of Central Asia’s role at the front line of the war on terror, and is just one example of how shifting global strategic interests will affect this easternmost part of Europe. The decision by Central Asian governments in September 2001 to open up their airspaces, and in some cases land-based facilities, to the US military began a period of unprecedented co-operation with the US and Russia (whose permission was essential for US engagement with Central Asia). Countries across Central Asia and the South Caucasus, and as far north and west as those on the Baltic and the Black Seas, have also participated in the Northern Distribution Network, which has provided an alternative supply route for non-military goods being shipped to Afghanistan, particularly when routes through Pakistan were blocked. This further cemented their importance to the US military and peacekeeping efforts in Afghanistan. Kyrgyzstan has played a pivotal role in this relationship, and for more than a decade has been the only country in the world to host both a Russian and a US military base, with their respective facilities at Kant and Manas just a few miles apart. Thousands of US troops have passed through Manas each month on their way to and from Afghanistan. Yet the base – renamed a ‘transit centre’ in 2009 – will revert to civilian use in 2014, when Kyrgyz President Almazbek Atambayev makes good on an election pledge to end the US presence. The decision is popular domestically, but the loss of rental payments from mid-2014 will compound an already difficult economic situation, exacerbated by growing nationalism in the mining sector, the country’s main revenue earner. As the troop withdrawal approaches, the potential for instability to spill over from Afghanistan into Central Asia has risen to the top of the region’s security agenda. Successive conferences of regional bodies such as the Collective Security Treaty Organisation (CSTO, the security arm of the CIS) and the Shanghai Co-operation Organisation (SCO), of which China is a founding member, have focused on the security implications of the withdrawal, though without yet formulating a cohesive region-wide response. The potential for the spread of Islamist militancy and intensification of cross-border criminal activity have long been the focus of security rhetoric TOP: Moscow, by Steven Eke, Control Risks. BOTTOM: Kazakhstan President Nursultan Nazarbayev, April 2013.
RiskMap Report 2014 EUROPE 75 in the region, with leaderships citing these threats as justification for their harsh treatment of domestic manifestations of dissent. This is not to dismiss the threat entirely. Kazakhstan in 2011 experienced its first suicide attack, and other incidents, predominantly targeting the security forces, have followed. Youth radicalisation remains a genuine concern. But the withdrawal of international forces alone appears unlikely to precipitate a significant deterioration in the security environment. Internal issues such as political legitimacy, corruption and income inequalities will remain far greater threats to stability over the longer term. NOT IN MY BACKYARD Russia in 2013 added renewed global geopolitical clout to its regional successes, playing a leading role in securing a deal on Syria’s chemical weapons. Since returning to the presidency in 2012, Vladimir Putin has increasingly sought to position Russia as an influential actor on the global diplomatic stage as part of broader efforts to reinstate the KEY Truck Rail Water Air Northern Distribution Network
RiskMap Report 2014 EUROPE 76 country’s ‘great power’ status and to counter US influence. Russia fiercely opposed growing Western pressure for military strikes on Syria, on the back of vocal opposition more generally to the West’s response to events in the Middle East. Its role in securing the deal will reinforce Russia’s belief that its ambitions to be a heavyweight on the global diplomatic stage are justified. Nevertheless, as it reasserts itself internationally, Russia will in 2014 face growing competition in countries that it still considers its own backyard from an increasingly influential regional player: China. China’s voracious demand for natural resources and proximity to Central Asia make it an obvious export market for the region and, importantly, a ready source of investment for new projects. Chinese President Xi Jinping in September 2013 announced more than $30bn in investment during a visit to Central Asia. China is now by far Turkmenistan’s largest export market, displacing Russia, and Chinese companies account for an increasingly large share (more than 20%) of Kazakhstan’s oil production. This represents a remarkable about-turn from just a few years ago, when Kazakhstan tried to limit China’s participation, and reflects an acceptance that China offers what Western or even Russian companies cannot: a direct export market, investment and credit on soft terms, and the promise of no interference in domestic political affairs. China is not only active in Central Asia, but is also among the largest sources of investment in other CIS countries, notably Belarus and Ukraine. It is also entering hitherto untrodden – and controversial – territory. Turkey in September 2013 announced that it intended to develop a new missile defence system with China. Although Turkey’s NATO allies are likely to put pressure on it to step back from the proposed move, the fact that a project of this nature was even mooted reflects the shift in strategic interests driven by China’s growing global economic status. OLD PROBLEMS, NEW SOLUTIONS The challenges facing Europe in 2014 are not new, but require new solutions if swifter growth is to take hold. Leaders across the region need to develop more innovative ways to foster more rapid economic expansion. In the case of Western Europe, addressing the root causes of the financial sector crises remains paramount. Further east, making good on long-standing diversification and innovation programmes to reduce dependence on traditional, commodity-based sources of growth will head the agenda. However, progress across the region will be slow.
Istanbul Turkey
RiskMap Report 2014 SPOTLIGHT ON: TURKEY 78 RiskMap Report 2014 SPOTLIGHT ON: TURKEY 78 BULGARIA T U R K E Y GEORGIA ARMENIA AZERBAIJAN Nakhchivan (AZERBAIJAN) CYPRUS SYRIALEBANON ISRAEL PALESTINIAN TERRITORIES I R A Q Athens Thessaloniki Istanbul Ankara Tbilisi Yerevan Baghdad Basra Erbil Amman Cairo Alexandria Bucharest Sofia Damascus Beirut Kurdistan Region . SPOTLIGHT ON: TURKEY LOOKING AHEAD As Turkey prepares for its first direct presidential election in 2014, all eyes will be on the ruling Justice and Development Party (AKP)’s choice of candidates. Despite being bruised by the Gezi Park protests in mid-2013, Prime Minister Recep Tayyip Erdogan is likely to realise his presidential ambitions. Campaigning will see protests recur, but at a lower intensity. Meanwhile, despite the looming threat of US ‘tapering’, the government will push on with large-scale infrastructure developments. 2013 was a year of emerging questions in Turkey. In 2014, the answers will go a long way towards determining whether the Turkey of a generation from now will have continued to modernise and liberalise, or taken an authoritarian, inward turn. ELECTION SEASON The key question is the line-up with which the governing Justice and Development Party (AKP) intends to contest the forthcoming ‘election season’. A presidential poll, probably in August 2014, will mark the first time that the presidency is directly elected, while parliamentary elections are scheduled for June 2015. Prime Minister Recep Tayyip Erdogan is reaching the end of his third term in parliament, and AKP rules prohibit him from seeking a fourth. Erdogan could change these rules, but has refrained from doing so because he is intent on moving into the president’s office in 2014. While 2013 dashed his hopes that a new constitution providing for an executive presidency would be enacted in time for the DAVID LEA SENIOR ANALYST, EUROPE CONTROL RISKS
RiskMap Report 2014 SPOTLIGHT ON: TURKEY 79 election, he is very likely to win, ensuring that he remains Turkey’s pre-eminent political personality. This prompts the question of who takes over as prime minister. A Russia-style ‘job swap’ is most likely, with President Abdullah Gül moving into Erdogan’s seat. However, tensions between the two men and their factions within the AKP increased in 2013, and Erdogan may prefer a less senior and more pliable individual. A job swap would give the impression of continuity, but the tensions between Erdogan and Gül would be likely to intensify, with clear potential for Erdogan’s abrasive personality to create sparks. AFTER GEZI That personality, and Erdogan’s perceived authoritarian drift, were key motivating factors in the protests that drew the world’s attention to Istanbul’s Taksim Square in May and June 2013. The election campaign is likely to see renewed protests by the young, urban, Western-facing demographic that defended Gezi Park, but these will be neither as disruptive, nor as persistent, as those in 2013. Another question asked after Gezi was whether a political force could emerge from outside the AKP, able to challenge Erdogan and his party. This one did get an answer – a resounding no. The opposition is too fragmented, and has too little in common with the Gezi protesters, for a credible new movement to coalesce. The AKP’s strength in Anatolia ensures that concerns over its increasingly authoritarian and Islamist direction in Istanbul and other large cities in Turkey’s west are only likely to translate into significant change at the ballot box if the opposition can unite. The most credible threat to the AKP’s dominance is internal: the widening split between Erdogan and the faction of the party that follows the moderate Islamist ideology of US-based imam Fethullah Gülen, most of whom would side with Gül in any head-to-head. TURKEY AND TAPERING Economic strength and stability have been the major success of Erdogan’s tenure, earning him the leeway that he has enjoyed in other policy areas in recent years. Although Turkey has avoided a ‘hard landing’, it remains vulnerable to internal and external shocks. In particular, the ‘tapering’ of the US Federal Reserve’s bond-buying programme in 2014 would threaten significant economic headwinds, in the form of higher interest and inflation rates, and a weaker lira (currency). For that reason, 2014 will see Turkey continue to make hay while the sun shines. Large-scale investment in infrastructure projects will continue, particularly in the energy sector, with construction activity at two planned nuclear power stations set to escalate, the Trans-Anatolian Gas Pipeline (TANAP) breaking ground and the oil pipeline from Iraq’s Kurdistan Region opening. TOP: Prime Minister Recep Tayyip Erdogan, November 2013. BOTTOM: Taksim Square, Istanbul.
RiskMap Report 2014 SPOTLIGHT ON: TURKEY 80 Meanwhile, coal, gas and renewable infrastructure development will move forward as the government seeks to prevent a projected energy shortfall from becoming a significant limiting factor on the economy. Outside the energy sector, major projects including highways, large-scale urban mixed use developments, a new Bosphorus bridge and Istanbul’s planned new airport will all progress as the government seeks to remedy the infrastructure shortfalls that it increasingly recognises have long held Turkey back. The construction arms of the country’s major conglomerates – particularly those that have consistently demonstrated enthusiasm towards the AKP government – will be in pole position to benefit, but demand for expertise will ensure continued opportunities for international business. Domestic companies with more rocky relationships with Erdogan’s administration may find themselves out in the cold. PROJECTING POWER Turkey’s newfound economic strength has been a major factor in its increasing projection of power beyond its borders as ambitions of EU membership grow ever more distant. The conflict in Syria, the potential gradual reopening of Iran to international business and Turkey’s developing symbiotic relationship with Iraq’s Kurdistan Region will create both threats and opportunities. However, this power abroad is likely to count for little if Turkey cannot maintain improvements to the security environment at home. The tentative progress made in the Kurdish peace process will be tested significantly in 2014, with potential for renewed terrorist action, particularly in the south-east, if these advances cannot be consolidated. Turkey’s developing infrastructure - on the drawing board and on the ground Ankara Sinop nuclear plant Akkuyu nuclear plant Hydroelectric plant Hydroelectric plant Erzerum energy hub Ceyhan energy hub Istanbul new airport TANAP pipeline New KRG pipeline Istanbul IRAQSYRIA GEORGIA
FRANCE Corsica (FRANCE) SWITZERLAND LIECHTENSTEIN MALTA ITALY GREECE ALBANIA MACEDONIA KOSOVO MONTENEGRO BOSNIAAND HERZEGOVINA BULGARIA CROATIA SLOVENIA SERBIA AUSTRIA HUNGARY ROMANIA T U R K E Y GEORGIA ARMENIA AZERBAIJAN Nakhchivan (AZERBAIJAN) CYPRUS SYRIALEBANON JORDAN ISRAEL PALESTINIAN TERRITORIES EGYPT L I B Y A TUNISIA A L G E R I A TOGO BENIN N I G E R N I G E R I A C H A D S U D A N SOUTH SUDAN CENTRAL AFRICAN REPUBLIC CAMEROON EQUATORIAL GUINEA SÃO TOMÉ AND PRINCIPE GABON CONGO CONGO (DEMOCRATIC REPUBLIC OF) UGANDA KENYA ERITREA E T H I O P I A DJIBOUTI Somaliland SOMALIA Y E M E N S A U D I A R A B I A OMAN UAE QATAR BAHRAIN KUWAIT I R A Q I R A N TURKMENISTAN MEDIUM security in deprived urban areas Zürich Bratislava Berne Geneva Barcelona Rome Budapest Ljubljana Zagreb Sarajevo Podgorica Tirana Athens Thessaloniki Istanbul Ankara Tbilisi Yerevan Baku Rostov on Don Atyrau Ashgabat Tehran Baghdad Basra Erbil Amman Cairo Alexandria Tripoli TunisAlgiers Annaba Oran Muscat Abu Dhabi Dubai Al Khobar Riyadh Jeddah Port Sudan SanaaAsmara Hargeisa Khartoum Addis Ababa NdjamenaKano Lagos Port Harcourt Niamey Cotonou Malabo Douala Yaoundé Libreville Bangui Kampala Mogadishu Kismayo Belgrade Bucharest Skopje Sofia Chisinau Damascus Beirut Abuja Kurdistan Region UZBEKISTAN ANDORRA M A L I
RiskMap Report 2014 MIDDLE EAST AND NORTH AFRICA 82 2014 promises to be a notable year, even by Middle East standards. The region’s festering conflicts and faltering transitions are familiar to investors, but the next 12 months will be critical to many of their outcomes. Several states are scheduled to undergo transfers of power whose outcomes could decide whether transitions progress, regress or collapse entirely. The fate of the Egyptian military’s roadmap, and the completion or collapse of Tunisia’s transitional phase are just some of the events that will shape the region’s political frameworks and security environment for years to come. Conflict in Syria will continue to breed insecurity and uncertainty at the heart of the region. But 2014 also brings the intriguing prospect of a permanent shift in relations between the US and Iran that could open up previously unthinkable diplomatic possibilities. A peaceful solution to the Syrian civil war is out of reach in the next 12 months, but – in a best-case scenario – progress in talks with Iran would reduce the likelihood of a broader regional conflagration and enable Iran to play a constructive role in bringing the conflict to a close further down the line. LUCY JONES SENIOR ANALYST, MIDDLE EAST AND NORTH AFRICA CONTROL RISKS MIDDLE EAST AND NORTH AFRICA POLITICAL RISK 2004-14 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 KEY INSIGNIFICANT LOW MEDIUM HIGH EXTREME SECURITY RISK 2004-14 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 SUB-REGIONAL RISK AVERAGES Arabian Gulf North Africa Pol Sec Pol Sec Pol Sec Levant 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
RiskMap Report 2014 MIDDLE EAST AND NORTH AFRICA 83 STRATEGIC RECALIBRATIONS The resumption of talks on the Iranian nuclear file offers the prospect of a broader reconfiguration of regional alliances that may bring greater possibilities for co-operation and flexibility. Simplistic categorisations of Middle Eastern countries as belonging to the ‘resistance’ camp led by Iran or ‘conservative’ camp dominated by Saudi Arabia were always problematic, but may become outdated. States do not deal with their counterparts on this basis, instead adjusting foreign policy to reflect their interests in different issues. There is growing acceptance of the need for collaboration to resolve regional crises. Although regional forums will continue to have limited success in resolving disputes, the fact that states are talking to each other will help to keep tensions in check in 2014. Likewise, pigeon-holing governments as being in pro- or anti-US camps will be even less helpful over the coming year than it has been previously. Political developments have complicated relations between long- time US allies and the administration of US President Barack Obama. Relations with the Egyptian military have soured since the removal of Islamist president Mohammed Morsi (2012-13), while US criticism of the July 2013 coup has further strained ties with Saudi Arabia, which strongly backed the military’s intervention. US relations with both countries will endure despite these disagreements, but its ties in the region are in flux. Youth unemployment rates, 2008-18 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 KEY MIDDLE EAST 35% 30% 25% 20% 15% 5% 10% 0% WORLD NORTH AFRICA Source: International Labour Organization
RiskMap Report 2014 MIDDLE EAST AND NORTH AFRICA 84 The US withdrawal from Afghanistan, scheduled to be completed by the end of 2014, will have limited direct impact on the Middle East, with the possible exception of insecurity spilling over into Iran. But following its exit from Iraq in December 2011 and clear reluctance to intervene in Syria, the drawdown contributes to a sense that US penetration of the region is receding, its ability to influence events is greatly reduced and it is leaving a power vacuum in its wake. The absence of an alternative superpower means states will continue to look to the US for action on a host of issues, but will find it far less willing to act. In turn, this will put greater onus on regional states to take more responsibility for regional affairs. IRAN-US THAW? Bilateral talks between Iran and the US can bring about a more constructive role for Iran in the region. However, this will require Iran and the international community to convert the success of their interim deal over Iran’s nuclear programme into a permanent agreement. The interim deal creates space and opportunity for negotiations over the first half of 2014, and is surely an improvement over the distrust and outright hostility that has characterised Iran’s relations with the West for decades. However, this is just the first step in a lengthy process; a permanent, comprehensive deal is unlikely in 2014, but neither do we see negotiations simply collapsing when the interim deal expires. The first half of 2014 will probably demonstrate the practical and political utility of further negotiations. There is political will in the Iranian and the US administrations for some reconciliation. However, successfully institutionalising the progress made in late 2013 is not solely in the hands of these administrations. The process is vulnerable to a broad range of obstacles. Political and security crises in the Middle East, and political developments in Iran or the US could scupper the interim deal, let alone a permanent agreement. President Hassan Rowhani’s outreach is not a one-man campaign; it reflects a shift in strategic thinking within the Iranian establishment, including by Supreme Leader Ayatollah Ali Khamenei. Khamenei is known to occasionally loosen the reins on the presidency to alleviate domestic pressures. His support is unlikely to represent acceptance of a wholesale change in foreign policy: it is more likely to be a tactical concession, given the perceived threat to Iran’s political system from damage to both the economy and the elite’s commercial interests. There are important limits to Iranian leaders’ room for manoeuvre. For example, delays in bringing relief from sanctions at a time when Iran’s government is expected to make further subsidy cuts could provoke a popular backlash against the authorities that would make it difficult TOP: Iranian President Hassan Rowhani, August 2013. BOTTOM: US President Barack Obama, October 2013.
RiskMap Report 2014 MIDDLE EAST AND NORTH AFRICA 85 to talk. Negotiations may also deepen factional infighting if they are seen as pushing Iran into making unjustified and embarrassing concessions. In the most extreme case, spoilers could attempt to torpedo the talks by engineering attacks on US interests in the region that could be traced back to Iran. Finally, the Israeli administration and the US political right is deeply opposed to the rapprochement and will use their leverage in US politics to try to undermine it. The interim deal does not fundamentally alter the politics of the region, but is potentially a gateway to a range of possibilities. First, it could help restore official US-Iranian relations that were severed in 1979, thereby diversify US regional engagement, potentially at the risk of unsettling existing relationships. Second, it would alleviate the geopolitical risk premium added to regional investment and oil prices for the past several years. Finally, it could bring Iran into a more constructive role on a range of regional political and security challenges. SYRIAN VORTEX Nowhere is this possibility more urgent than Syria, well into its third year of grinding civil war. We expect some overlap between the interests of the US, Russia and Iran in 2014 that could allow less obstructive discussions over the best way to tackle the conflict. All three players now believe the least worst outcome is a transition in which parts of the regime of Bashar al-Assad survive to avoid the state’s total breakdown. But while increased co-operation between these players would be positive, it would not end the fighting. The primary drivers of Syria’s conflict are domestic, while none of the external parties involved have the willingness, or in some cases the ability, to significantly shift the conflict’s trajectory. 2014 will see conflict persist, a worsening of infighting among rival opposition groups and greater territorial fragmentation. Despite having lost control of much of the country, Assad continues to lead the most cohesive and best-armed bloc in the conflict. Divisions within the opposition mean he could do so for years to come. Outside Syria, the most concrete impact will be felt in neighbouring countries. As in recent years, Lebanon will feel the effects most acutely. Clashes in border areas will frequently spill over into Lebanese villages, the troubled northern city of Tripoli will remain a flashpoint and Sunni militants will attempt periodic attacks against Hizbullah targets that foster the sense of a country on the edge. The presence of hundreds of thousands of refugees will place additional strain on the struggling economy, which had one of the region’s lowest growth rates in 2013. Yet while political violence will escalate, Lebanon is unlikely to descend into full-blown civil conflict in TOP: Beirut, Lebanon. BOTTOM: Aleppo, Syria.
RiskMap Report 2014 MIDDLE EAST AND NORTH AFRICA 86 2014. None of the main political factions want this, and neither do their external backers. But political violence and paralysis – itself linked to events in Syria – will prevent the normalisation of the political environment. This is likely to cause further delays in completing the regulatory framework for the offshore gas industry and preclude general reforms to the investment environment. Jordan and Iraq also face heightened security threats and political instability as a result of the Syrian conflict. In Jordan, fighting occasionally spills over the border, refugee numbers are growing and trade routes have been heavily disrupted. But although these pressures come on top of a steady rise in opposition to the king in recent years and continuing subsidy cuts, we do not expect a tipping point to be reached in 2014. The Islamist opposition has been alarmed by the Muslim Brotherhood’s spectacular downfall in Egypt and is unlikely to seek confrontation with the palace in the coming months. The Syrian conflict has also exacerbated sectarian tensions in neighbouring Iraq. 0% - 4% 10% + 5% - 9% KEY 0.67% TURKEY SYRIA IRAQ JORDAN EGYPT LEBANON 0.59% 8.31% 0.16% 17.48% Data compiled from UNHCR, UNDP Number of registered refugees as percentage of population, 2013 (UNHCR)
RiskMap Report 2014 MIDDLE EAST AND NORTH AFRICA 87 The remobilisation of Shia militias to join hostilities in Syria is a major concern and could have a significant impact on the Iraqi security environment in 2014, in the worst-case scenario igniting Sunni-on-Shia militia violence. More broadly, the conflict will continue to affect investors’ perceptions of the region as a whole. The reactions of stock markets as far away as the UAE to speculation that US strikes were imminent in September 2013 underlined the extent to which investors fear that Syria contagion could infect the whole region, even in countries where the likelihood of physical security incidents related to the conflict are low. Developments on the diplomatic front have greatly reduced the potential for an air campaign by an international coalition, but this remains feasible in 2014 in response to a range of potential circumstances, including Syria’s failure to uphold the agreement to dismantle its chemical weapons stockpile. The likely media focus around Iran and the Syrian war means that the Israel/Palestine conflict may all but disappear from the headlines. However, this does not mean that progress will not be made: low-profile talks in many ways have better prospects for success, providing that the US has capacity to maintain pressure on the parties to keep talking. TRANSITIONAL MILESTONES A third theme will be a series of milestones in the region’s complex political transitions. The Middle East has a busy electoral calendar in 2014, with presidential elections due in Algeria, Egypt and even Syria. Parliamentary polls are due in Egypt, Iraq and Lebanon; Tunisia and Yemen may also hold full spectrum elections in 2014, depending on the progress of political talks; and Libya plans to move ahead with voting for a constitutional committee. Many of the polls are critical junctures. All the transitions are under threat in different ways. Egypt is at risk of a return to autocracy cheered on by self-proclaimed liberals, Tunisia’s ‘success story’ is being held to ransom by non-Islamist parties, and Libya’s transition is being stalled by post-conflict state-building and an institutional vacuum. Many of the elections provide scope for genuine political competition at a time when public opinion is fluctuating at lightning speed in sometimes surprising directions. Electoral outcomes will be unpredictable, but are almost certain to produce fractured assemblies requiring coalition building. This will slow decision-making and anger populations that are impatient for results, leaving significant scope for further spikes in social unrest and political violence. TOP: Jibab, Syria. BOTTOM: Anti-military protest, Cairo, Egypt, October 2013.
RiskMap Report 2014 MIDDLE EAST AND NORTH AFRICA 88 ROADMAP RUMBLES ON Developments in Egypt will be particularly important. They will affect attitudes towards political mobilisation, the calculations of regional governments towards their own populations and Islamist attitudes towards peaceful politics. The military will push through its roadmap, bringing parliamentary and then presidential elections by the middle of 2014. The process is likely to be heavily compromised by the constraints placed on the former ruling Muslim Brotherhood, with the polls representing barely visible window dressing over a return to autocracy. Ironically this is likely to happen with the enthusiastic backing of the public, which may elect another military strongman in sunglasses as president before the year is out. However, the new president’s popularity will likely be short lived. The political environment is more polarised and less productive than it has been at any point since the overthrow of former president Hosni Mubarak (1981-2011). The government is less capable of channelling demands and grievances than its predecessors, and public opinion is likely to turn against it once it becomes clear that it does not have answers for any of the failures of government that resulted in the 2011 uprising. TRANSITION TEETERS The downfall of the Muslim Brotherhood in Egypt has contributed to the faltering of the Arab spring’s most promising democratic transition. Tunisia was the first country to rise up against an autocrat, and until mid-to-late 2013 Presidential Parliamentary Constitutional Committee Referendum on new constitution KEY A busy election year ahead: countries going to the polls in 2014
RiskMap Report 2014 MIDDLE EAST AND NORTH AFRICA 89 had made remarkable progress debating a new political framework through consensus-building and compromise. Non-Islamist parties reacted opportunistically to the clampdown against the Brotherhood in Egypt, derailing the constitutional drafting process just before it was due to be completed. Political factions are eventually likely to find a path out of the crisis, but the experience has deepened divisions and mistrust, with negative implications for governance and policy in 2014. There may be some movement on investment code reforms, but overall the process of stabilisation will be slow and subject to frequent interruptions. STILL IN TRANSIT Libya and Yemen face perhaps the most complex transitions of all the Arab spring states. They must not just deal with heavily contested political processes, but must do so in the absence of functioning institutions or cohesive security forces. The Libyan transition plan is being threatened by a range of interest groups, though it will proceed gradually with minor adjustments. A new licensing round in the energy sector is unlikely, but construction and infrastructure projects should trickle back online. The security environment will remain extremely problematic, with none of the drivers of insecurity likely to be addressed in 2014. The schedule for Yemen’s transitional phase is very likely to be delayed, with negotiations over federalism and the status of the south set to be the most dangerous sticking points. Security threats to foreign companies will remain acute. SUCCESS(ION) STORY The presidential election in Algeria has great significance for longer-term stability in a country facing many of the same challenges as its North African neighbours. The factional struggles over the succession were clear in 2013, with the president and his rivals using corruption investigations and security-sector restructuring to attempt to cement their influence. Such tried and tested means of elite politicking will be the public face of this competition in 2014. However, we believe that behind-the-scenes negotiations to find consensus over a successor to President Abdelaziz Bouteflika will succeed. A temporary extension to the presidential mandate is less likely, but would be the stopgap solution should consensus not be reached. Regardless, the identity of the next president will be less important than the fact that Bouteflika has been replaced after 15 years at the helm. A smooth transition should add impetus to an easing of terms for foreign investors and new opportunities in the energy sector, and continue the gradual improvement in the security
RiskMap Report 2014 MIDDLE EAST AND NORTH AFRICA 90 environment that has prompted us to reduce Algeria’s security risk rating from high to medium this year. Conditions in Libya will influence security risks in the south-east, but the lack of incidents following the January 2013 terrorist attack at In Amenas shows that security will not be beholden to conditions beyond Algeria’s borders. The state has appeared increasingly capable of handling the domestic terrorism threat. GULF STATES – SMOOTH SAILING In contrast with the rest of the region, the outlook for the Gulf Co-operation Council (GCC) states suggests a largely calm year ahead. Although there are serious questions over the sustainability of the region’s political models in the longer term, Gulf economies are likely to stay sufficiently healthy in 2014 to allow spending on areas that will minimise the potential for unrest to escalate. In the longer term, events in the transitional states discussed above will have a bearing on whether there are any successful stories to emulate or cautionary tales to avoid, but major political upheaval of the type seen in other parts of the region is unlikely in the next 12 months. There is certainly scope for further unrest in Bahrain, where communal tensions continue to simmer, hampering economic recovery and denting investor confidence. However, most protests are low-level and directed at the security forces, and we expect the government to remain firmly in the saddle. Kuwait may also see a return of popular protest in 2014 if action is not taken on economic reforms and government accountability, though this will not escalate into a mass mobilisation against the government. The UAE – and particularly Dubai – will remain the region’s beating commercial heart in 2014, especially as its political and security environment offers stability in a region fraught with conflict and unrest. Meanwhile, after Emir Hamad bin Khalifa al-Thani’s handover to his son Tamim in 2013, which was accompanied by a reshuffle in the cabinet and key state-owned entities, 2014 is likely to be marked by greater continuity in Qatar. Although Tamim may tread more carefully on the foreign policy front than his father, a far-reaching shift in Qatar’s strategic interests is unlikely. As a rising regional and global power, Qatar is likely to continue to have a hand in the Middle East’s countries in transition. In pursuing its foreign policy goals, Qatar will continue to come up against its regional rival, Saudi Arabia. Both have significant interests in shaping the Middle Eastern political order, but these often diverge. Indeed, the interest of Gulf Arab states in regional developments, particularly around issues such as the trajectory of the Syrian crisis and Iranian nuclear talks, reflects the interconnection of TOP: Algerian President Abdelaziz Bouteflika, July 2013. BOTTOM: Qatari Emir Sheikh Tamim Bin Hamad al-Thani, December 2012.
RiskMap Report 2014 MIDDLE EAST AND NORTH AFRICA 91 the Gulf with the rest of the region. This is not just driven by concerns of a spread of popular uprisings to the Gulf, but also by intra-Gulf rivalries and regional interests. Saudi Arabia has historically been at the centre of these rivalries. Although its neighbours will continue to challenge its seemingly natural leadership position, its role in maintaining global oil supply and the sheer size of its economy (the biggest in the Middle East) mean that the kingdom will remain a force to be reckoned with. Although the perennial question of whether the royal family can manage a succession shock – the answer in 2014 is almost definitely ‘yes’ – will continue to be the most talked about issue in relation to political stability, often neglected but equally important questions relate to the kingdom’s economic diversification policies; ability to satisfy an ever expanding ‘middle class’; and capacity to further increase non-oil private-sector growth. The kingdom will not find solutions to its long-term economic challenges in 2014, but further tightening of labour regulations and investments into higher education will tell us something about the path ahead. RISK AND REALITY The region’s festering conflicts and security vacuums, shifting and flexible alliances, and forthcoming transitional milestones will create an environment in which external perceptions of risk will be understandably high over 2014. Nonetheless, parts of the region will be attractive for investors, with such perceptions – particularly on security and terrorism issues – often exceeding the reality. Among the lessons that investors have learnt in the past three years of turmoil are that each jurisdiction and opportunity should be judged on its own merits, and that politics is the root cause of some of the most significant downside threats to return. The Middle East and North Africa in 2014 promises to be no different.
RiskMap Report 2014 MIDDLE EAST AND NORTH AFRICA 92 THE MIDDLE EAST MIDDLE CLASS The millions of people who participated in the Arab spring protests defy neat categorisation. The diversity of the crowds in Cairo, Tunis and elsewhere reflected the range of grievances against governments and their failure to meet basic expectations. Nevertheless, the role of thwarted middle-class ambitions stands out. Relatively well educated, arguably middle-class youths motivated many of the initial protests, and have been very visible in foreign media both at the time and since. However, over the past two years it has become evident that the middle class is stuck in a limiting trap. On the one hand, fear of the potential power of the middle classes drives governments across the region to pursue expensive and unsustainable economic spending plans. On the other, the middle classes’ high expectations and dependence on the state limit their willingness to push for change. Indeed, the assumption that a growing middle class is good for both economic growth and political development is skewed in the Middle East because the middle class depends on the government for employment. Graduates have historically prized jobs in the public sector, with education systems geared accordingly. The Arab spring appears to have exacerbated this trend: governments across the region have created more public-sector posts to keep their populations happy. Many have granted pay rises and other benefits to existing employees, likely perpetuating the dynamic in which many members of the middle classes are more likely to protect existing systems than to break them down. But the story does not end there. Governments too have cornered themselves by expanding the public sector. The slow pace of private-sector job creation means that many younger people outside the public sector are unable to find the kinds of jobs that would pull them up into the middle class. No regional governments have articulated – let alone implemented – workable policies to absorb this constituency into the political and economic system. Although the demands of the middle class remain critical, it is the future of the vulnerable and politically important youth that is of most consequence to the region’s future stability. A common narrative of thwarted ambitions and government inability to meet expectations runs through the experience of both social groups, signalling further instability driven by socio-economic frustrations in 2014. TOP: Oil facility, Khurais, Saudi Arabia, June 2008. BOTTOM: Protest march, Tunis, Tunisia, October 2013.
Dubai United Arab Emirates
RiskMap Report 2014 SPOTLIGHT ON: UNITED ARAB EMIRATES 94 S A U D I A R A B I A OMAN UAE QATAR BAHRAIN KUWAIT I R A N Basra Muscat Abu Dhabi Dubai Al Khobar Riyadh SPOTLIGHT ON: UNITED ARAB EMIRATES LOOKING AHEAD The 2008-09 financial crisis may have exposed the flaws in Dubai’s government-led free-market model, but subsequent improvements in governance and transparency will provide the foundations for more sustainable growth in 2014 and beyond. Despite a new slew of mega-projects, another bubble is unlikely. The emirate’s interaction with oil-rich Abu Dhabi will be key to determining growth prospects for the wider UAE. Dubai’s heady growth rates in the mid-2000s made its bold model of government-led free-market capitalism seem the answer to the Gulf states’ big challenge: how to reform oil-dependent economies and ensure the long-term satisfaction of their small but politically important populations. But the global downturn exposed the fragility of a formula that was heavily based on speculation and risk-taking. Dubai’s sudden fall sent a warning around the region about the risks of unsound policymaking. The crisis has had a silver lining, triggering growing awareness among Dubai’s political establishment of the need to strengthen governance and transparency. A successful reworking of its economic model is now paving the way for more tempered but more sustainable growth in 2014. GHOSTS FROM THE PAST When the downturn hit in 2008, Dubai was caught off guard. Inflated real-estate prices that were propping up ambitious construction projects collapsed, and government-backed investment companies were COLINE SCHEP ANALYST, MIDDLE EAST AND NORTH AFRICA CONTROL RISKS
RiskMap Report 2014 SPOTLIGHT ON: UNITED ARAB EMIRATES 95 UAE and regional growth rates, 2002-17 overextended. Many projects were cancelled. Towards the end of 2009 the oil-rich emirate of Abu Dhabi stepped in to help Dubai World, one of the worst-affected government- owned entities, and its property and real-estate investment arm Nakheel to restructure their debt and protect them from default. The IMF estimates that Dubai still has $142bn of debt (102% of GDP), $60bn of which is to be restructured by 2017. The fund has pointed out that further improvements to the legal framework and transparency of Dubai’s debt management remain necessary, but the emirate appears to be on track. While Dubai entities may yet have some of their debts to the UAE’s central bank and Abu Dhabi government rolled over, the risk of another debt crisis is low: the political establishment has responded to fears of another ‘bubble’ with significant fiscal reforms, a closer regulatory finger on the economy’s pulse and prompter policy responses. LESSONS LEARNT The 2008-09 crisis has brought sounder economic management, a more cautious development strategy and more modest government spending, even if a fresh slew of construction and infrastructure mega-projects – alongside trade and tourism – once again constitute one of Dubai’s biggest draws. KEY UAE 2002 2003 2004 2005 2006 2007 2008 2009 2010 2012 2011 2013 2014 2015 2016 2017 14% 12% 10% 8% 6% 4% 2% 0% -2% -4% MIDDLE EAST AND NORTH AFRICA Source: Economist Intelligence Unit
RiskMap Report 2014 SPOTLIGHT ON: UNITED ARAB EMIRATES 96 In late 2009, ruler Mohammed bin Rashid al-Maktoum reshuffled the leadership of two of Dubai’s largest holding companies, removing board members suspected of being at the helm of the debt-driven building boom. In 2010 the government restructured the higher levels of ‘Dubai Inc.’ by creating five committees to oversee government policy on the economy and infrastructure, among other areas, streamlining decision-making and improving internal controls. The regulatory environment, which previously allowed significant opacity and risk-taking, has been strengthened since 2008, with increased oversight and disclosure obligations for government-related entities and financial institutions. Data availability still leaves something to be desired, but government-related entities have made progress in supplying information about their financial health. And where many Levant: conflict affects regional trade, but redirects capital, business to UAE Egypt: instability redirects business, capital to UAE Iran: sanctions affect UAE trade Iran: oil prices increase at times of heightened tension Global economic shocks can destabilise MENA economies Bahrain: instability curbed the rise of Bahrain as a finance hub Qatar: gas wealth enables Qatar’s rise as business, construction hub Abu Dhabi: capital bolsters UAE growth with hydrocarbons and investments abroad Dubai IRAQ EGYPT SAUDI ARABIA OMAN UAE YEMEN IRAN KEY Positive effect Negative effect External influences on UAE economy
RiskMap Report 2014 SPOTLIGHT ON: UNITED ARAB EMIRATES 97 long-term government-backed projects prior to 2008 relied on short-term loans, recent years have seen a shift in lending to longer-term maturities, while government-linked entities also face more layers of approval before they can borrow. The political establishment’s responsiveness to investor fears and market rumours has improved, demonstrated in September 2013 by the government’s doubling of the registration fee levied on real-estate transactions to curb speculation. This came months after the IMF warned of the danger of another property bubble forming. Investor confidence has steadily picked up as past issues have been rectified. Government forecasts now estimate that Dubai’s annual growth rate will reach 4.6% on average between 2012 and 2015, which is solid, if significantly slower than the 10% average between 2000 and 2010. Dubai’s potential win of EXPO 2020 would not only help to propel the newly self-confident emirate back on to the world stage, but according to official estimates would boost its economy by another 0.5% in the run-up to the event and by 2% in 2020 by generating tourism and jobs. Construction industry statistics – Dubai 16% 14% 12% 10% 8% 6% 4% 2% 0% 2007 2008 2009 2010 2011 2012 KEY CONTRIBUTION TO GDP GROWTH RATE % 30% 20% 10% 0% -10% -20% -30% Source: Government of Dubai
RiskMap Report 2014 SPOTLIGHT ON: UNITED ARAB EMIRATES 98 THE BIGGER PICTURE Dubai’s politics and economy cannot be seen in isolation. The dynamic between business-oriented Dubai and oil-rich Abu Dhabi is a key determinant of the emirates’ growth. Dubai attracts trade, tourism and real-estate investment, but the 2009 bailout was a stark demonstration that Abu Dhabi’s 100bn barrels of proven oil reserves and $800bn in sovereign wealth assets provide indispensable stability and clout both in the wider region and within the federation. And although Dubai will remain the ambitious, progressive sibling, Abu Dhabi is upping the ante on its own diversification, with its Economic Vision 2030 and the creation of new free zones and industrial areas, such as the Global Marketplace Abu Dhabi (GMAD) and Khalifa Industrial Zone Abu Dhabi (KIZAD). This has helped the UAE’s overall growth stay on track with that of Dubai, at 3.9% in 2013. The wider region’s current volatility is having a complex effect on the emirate’s investment climate. Conflict and instability may temporarily deter some investors from entering the region as a whole, while sanctions on Iran and Syria have curtailed important sources of trade for Dubai. However, Dubai’s stable political and security environment has attracted an influx of business and capital from instability-hit countries such as Egypt, Syria, Lebanon and, to a lesser extent, Bahrain. Dubai is facing more competition from regional peers than during its previous ‘golden era’ – thanks to the rise of Qatar as a business hub – but it remains the most diversified, well-connected and streamlined business environment in the Gulf. Its relatively positive economic outlook is enhancing its regional reputation as a centre of sound decision-making. As policy advances have reduced the likelihood of another bursting bubble (at least for the foreseeable future), Dubai and the wider UAE look set for a sunny 2014. TOP: Dubai. BOTTOM: Abu Dhabi.
RiskMap Report 2014 TERRORISM OUTLOOK 99 The threat from al-Qaida will remain fractured but persistent in 2014. Although the network may be better represented geographically than ever before, this is not necessarily the sign of strength assumed in some quarters: the ability of al-Qaida’s senior leadership to plan and direct the deadly ‘spectaculars’ that were once seen as its hallmark is now greatly constrained. The mantle of carrying out such strikes appears largely to have passed to the group’s affiliates – notably al-Qaida in the Arabian Peninsula (AQAP) – though none has yet succeeded. Most affiliates and emerging associated factions are likely to remain focused on domestic or regional struggles in the coming year, though security vacuums – in many cases attributable to limited or diminishing political resolve – will ensure some enjoy considerable room for manoeuvre. SYRIA SPILLOVER Although jihadists still represent a small minority of the rebels in Syria, groups associated with al-Qaida such as the Islamic State of Iraq and al-Sham (ISIS) and Jabhat al-Nusra have established significant and growing footholds in the country. Insecurity in Syria will continue to drive escalating terrorist threats to its neighbours. ISIS claims to have encroached on the Turkish border and exploited its freedom of movement between Syria and Iraq to push sectarian violence in the latter to levels not seen since 2008. Meanwhile, Lebanese Shia Muslim movement Hizbullah’s efforts to bolster the regime of Syrian President Bashar al-Assad have placed Lebanon squarely on the radar of Sunni jihadists. Levels of violence in Iraq and Lebanon will remain heightened for as long as the Syrian conflict endures. OLD STOMPING GROUNDS As NATO forces prepare to withdraw from Afghanistan, the stable democracy pursued over a decade of nation-building is highly unlikely to materialise any time soon. But neither will Afghanistan re-emerge as a safe haven and operational launch pad for al-Qaida. Rather, without the gravitational pull of NATO forces as a target for the ‘Afghan jihad’, militants may well resume the pursuit of old causes in other parts of South and Central Asia, with Pakistan – and the volatile Kashmir region – most likely to bear the brunt. MERGING THREAT In both the Sahel and East Africa, militant groups will remain a persistent threat to stability and security, having survived concerted international offensives against them. Al-Qaida-linked factions in northern Mali have regrouped after being disrupted by the French-led intervention in early 2013. They will TERRORISM OUTLOOK JOHN NUGENT ASSOCIATE ANALYST, STRATEGIC ANALYSIS CONTROL RISKS
RiskMap Report 2014 TERRORISM OUTLOOK 100 continue to pose a threat to assets and personnel in Mali, Niger, Algeria, Mauritania and Libya from their desert redoubts, underlined by near-simultaneous attacks in mid-2013 on a uranium mine and military base in Niger. The merger of the militia led by Mokhtar Belmokhtar – believed to have planned the January 2013 attack on the In Amenas gas facility in Algeria – with the Movement for Unity and Jihad in West Africa (MUJWA) in August 2013 to form al-Murabitun, poses a particular threat, given the new entity’s stated goal of targeting Western, and especially French, assets across the region. Equally, the southern wing of al-Qaida in the Islamic Maghreb (AQIM) will continue to pose a kidnap threat to foreign nationals. On the opposite side of the continent, Somali Islamist group al-Shabab’s lethal September 2013 assault on the Westgate shopping centre (mall) in Nairobi (Kenya) underscored the persistent terrorism threat in East Africa emanating from Somalia. Further mass-casualty attacks in the region – potentially seeking to replicate the ‘Mumbai-style’ tactics and global media coverage of the Westgate attack – are plausible in 2014, with Kenya, Tanzania and Uganda at greatest risk. WESTERN FRONT For Western countries, the twin threats of radicalisation at home and targeting abroad will persist. NATO’s withdrawal from Afghanistan may alleviate one inducement to radicalisation, but drone strikes, provocative films and cartoons, and other foreign military interventions will continue to fuel jihadist sentiment. As in 2013, 2014 will see a handful of successful, small-scale homegrown attacks, as well as the thwarting of a number of overly ambitious plots. Overseas, Western assets, personnel and interests will remain attractive targets for jihadist and extremist groups lacking the means to operate transnationally, or simply looking to make a name for themselves among the broader jihadist community, particularly in the fluid political and security environments of North Africa and the Middle East. A major transnational spectacular against a Western country remains a remote possibility. Although the elevation in 2013 of AQAP leader Nasir al-Wuhayshi, a clear proponent of attacks against Western countries, to a more prominent role within the global al-Qaida network could galvanise the atrophied transnational ambitions of regional affiliates, these aspirations are highly unlikely to be realised. TOP: Weapons recovered in northern Mali, March 2013. BOTTOM: NATO Secretary-General Anders Fogh Rasmussen and Afghan President Hamid Karzai, June 2013.
RiskMap Report 2014 PIRACY OVERVIEW 101 Maritime piracy, kidnapping, armed robbery and theft are global threats. The chart below outlines significant global trends since 2008. The map outlines developments in a key area of activity: the Gulf of Guinea. Reported incidents of piracy, armed robbery and theft by region, Jan 2008 – mid-Nov 2013 300 350 250 200 150 100 50 0 KEY 2008 2009 2010 2011 2012 2013 East Asia South-east Asia South Asia East Africa West Africa Horn of Africa Gulf of Guinea Sub-Saharan Africa South America Central America Caribbean Middle East TOTAL 376 536 630 628 482 336 PIRACY OVERVIEW HORN OF AFRICA Somali piracy is at its lowest point in six years. Fewer attacks were registered in 2013 than during the same period in 2007, the year before the crime first began to grab international headlines. According to Control Risks’ statistics, the number of incidents recorded between 1 January and 1 October 2013 represented a 90% reduction compared with the corresponding period in 2012. The reduction can be attributed to a range of factors: adherence to best management practices by crews and vessel operators; a significant naval presence offshore; and the continued use of armed security on board vessels. Additional onshore factors, such as the development of local security forces, have also played a part. The decline in incidents does not necessarily imply a reduction in the threat to vessels transiting through the Horn of Africa in 2014. Although some of those involved in financing and leading pirate attacks have moved on to other ventures, pirate groups remain operational. Suspicious approaches continue to be reported in the Arabian Sea, the Indian Ocean, the southern Red Sea, the Gulf of Aden and the Gulf of Oman. Somali pirates retain the capability to target vessels at great distance from the Somali coast, highlighting the importance of continued caution, not complacency. Activity in 2014 is likely to remain at a relatively low level, with periodic spikes. The crucial question will be whether naval forces can maintain counter-piracy operations while the shipping industry maintains vigilance through this uncertain period.
RiskMap Report 2014 PIRACY OVERVIEW 102 GULF OF GUINEA The threat of piracy in the Gulf of Guinea remained high in 2013, with more than 100 reported incidents between 1 January and 1 October, a 30% increase from the same period in 2012. Vessels and crews operating in the region are exposed to a wide range of threats, including kidnap-for-ransom, hijacking, robbery, and port and anchorage crime such as theft. Under-reporting of incidents continues to be a critical issue in the region. A worrying trend for maritime operators in 2013 has been the persistence of kidnapping-for-ransom off the Niger delta. Attacks have been reported more than 100 nautical miles (185km) off the south-eastern coast of Nigeria, involving vessels transiting between neighbouring states in the region. Abductors have targeted a wide range of commercial vessel types, including tankers, oilfield supply vessels and general cargo vessels. Closer to the coast and on some internal waterways, local passenger and fishing vessels have continued to experience attacks, with some fishing trawlers being used as mother ships to support attacks on larger commercial vessels further offshore. Groups involved in hijacking for cargo theft targeting product and chemical tankers also continued to expand their operational range in 2013. Incidents were reported off Côte d’Ivoire, Togo and Nigeria, while groups also significantly expanded their range south of Nigeria, moving to waters off Gabon for the first time. Levels of activity in the Gulf of Guinea are likely to remain constant in 2014, despite the Nigerian maritime authorities taking a more active role in curtailing domestic criminal syndicates. Across the region, anchorage crime will remain a persistent threat, and product and chemical tankers will continue to be vulnerable to hijacking for cargo theft. NIGERIA GHANACÔTE D’IVOIRE BENINTOGO CAMEROON EQ. GUINEA SAO TOME AND PRINCIPE Attempt Hijack Kidnap Robbery KEY
RiskMap Report 2014 KIDNAP OVERVIEW 103 Kidnapping-for-ransom is increasing in global scope (% share of global total by victim numbers, as at 30 September 2013) KEY 60% 50% 40% 30% 20% 10% 0% 2004 2005 2006 2007 2008 2009 2010 2012 20132011 LATIN AMERICA MIDDLE EAST AFRICA ASIA AND THE PACIFIC EUROPE AND CIS US, CANADA AND CARIBBEAN Asia and the Pacific accounted for the majority of recorded kidnaps-for-ransom in 2013, rising from 31% of global cases in 2012 to 35%. The region dominated the top ten high-risk kidnapping countries in 2013, with India, Pakistan, Afghanistan and the Philippines all recording high numbers of kidnaps. While all four countries suffer from varying degrees of militancy, criminal kidnap-for-ransom gangs also contribute to the trend. The risk also continued to be substantial in Africa. Nigeria retained first place in the Africa kidnap risk ranking in 2013, with the overwhelming majority of incidents taking place in the oil-producing Niger delta. Further north, Sahel-based Islamist militant groups continued to constitute a significant threat, particularly to foreign nationals in Mali, Niger and southern Algeria. Kenya also featured prominently in the rankings this year, with organised criminal gangs and the Somali Islamist group al-Shabab targeting both foreign and local nationals. The proportion of kidnaps recorded in Latin America has halved since 2005, representing 23% of global kidnaps in 2013. Nevertheless this decline does not represent a reduced threat; Mexico, Venezuela and Colombia still have significant kidnapping problems. The highest number of kidnaps-for-ransom recorded worldwide was in Mexico. A large number of cases continued to be reported in the Middle East, fuelled by the unstable security environment created by the Syrian civil war. Kidnapping-for-ransom has become a common problem in Syria and Lebanon, with Lebanon ranking sixth in Control Risks’ global top ten in 2013. Few cases were registered in North America and the Caribbean, Europe and the Commonwealth of Independent States (CIS), in line with previous trends. KIDNAP OVERVIEW
RiskMap Report 2014 KIDNAP OVERVIEW 104 Top 20 countries for kidnap-for-ransom in absolute terms for 2013 (as at 30 September) MEXICO 01 LEBANON 06 SYRIA 11 BRAZIL 16 INDIA 02 PHILIPPINES 07 GUATEMALA 12 KENYA 16 NIGERIA 03 AFGHANISTAN 08 YEMEN 13 NEPAL 18 PAKISTAN 04 COLOMBIA 09 LIBYA 14 MALAYSIA 19 VENEZUELA 05 IRAQ 10 EGYPT 15 SOUTH AFRICA 19
RiskMap Report 2014 RISK RATING FORECAST 2014 105 RISK RATING DEFINITIONS RISK RATING FORECAST 2014 POLITICAL RISK Political risk evaluates the likelihood of state or non-state political actors negatively affecting business operations in a country through regime instability or direct/indirect interference, and also evaluates the influence of societal and structural factors on business. State actors can include domestic and foreign governments, parliament, the judiciary, regulatory bodies, state and local administrations and the security forces. Non-state actors can include insurgent groups, labour forces, campaign groups, lobbies, other companies, organised criminal groups and international organisations. Societal and structural factors can include corruption, infrastructure, ease of establishing and maintaining a functioning business, and bureaucratic and business culture. The impact on companies can include judicial insecurity, corruption, reputational damage, expropriation and nationalisation, contract uncertainty, international sanctions, bureaucratic delay, partiality in contract and tender awards, campaigns and protests. Political risk may vary for companies and investment projects according to factors such as industry sector and investor nationality. INSIGNIFICANT The environment for business is benign. For example: political stability is assured, investor-friendly policies are entrenched, there is no threat of contract renegotiation or repudiation, and infrastructure for business is excellent. LOW Political and operating conditions are broadly positive. Occasional and/or low-level challenges do not significantly impede business. For example: government policies are investor-friendly with some exceptions, contracts are generally respected, non-state actors have little adverse influence over government decisions, infrastructure is generally robust or there is little risk of reputational damage. MEDIUM While the environment provides generally sound conditions for business, significant challenges can and do emerge. For example: hostile lobby groups exert disproportionate influence over government policy, political instability delays essential reforms, contracts are subject to uncertainty or occasional change, elements of the infrastructure are deficient, or the activities of unions or protest groups impede operations. HIGH The political and operating environment presents persistent and serious challenges for business. For example: there is a credible risk of contract repudiation or renegotiation by state actors, political instability threatens fundamental alterations to the nature of the state, government policy is capricious or harmful to business, corruption is endemic across all levels of officialdom, or regulations are onerous and their implementation is capricious. EXTREME Conditions are hostile for business. For example: direct intervention such as nationalisation or expropriation of assets is likely, systemic political instability leads to the absence of rule of law, the nature of the regime brings severe reputational risks, government structures are inadequate or infrastructure is almost entirely deficient.
RiskMap Report 2014 RISK RATING FORECAST 2014 106 RISK RATING DEFINITIONS SECURITY RISK Security risk evaluates the likelihood of state or non-state actors engaging in actions that harm the financial, physical and human assets of a company, and the extent to which the state is willing and able to protect those assets. Actors that may pose a security risk include political extremists, direct action groups, the security forces, foreign armies, insurgents, petty and organised criminals, protesters, workforces, local communities, indigenous groups, corrupt officials, business partners, and in-country company management and staff. The impact of security risk on companies can include war damage, theft, injury, kidnap, death, destruction of assets, information theft, extortion, fraud, loss of control over business, and disruption to operations caused by damage or denial of access to buildings or vital infrastructure caused by terrorist attacks, threats or official responses. Security risk may vary for companies and investment projects according to factors such as industry sector, investor nationality and geographic location. INSIGNIFICANT The security environment for business is benign. For example: the authorities provide effective security, there is virtually no political violence, public disorder is rare and there are no known active domestic groups or issues likely to fuel terrorism. LOW Security conditions are broadly positive and occasional and/or low-level challenges do not significantly impede business. For example: the authorities provide adequate security, organised crime only marginally affects business and protest activity rarely escalates into threatened or actual violence. Rare but large-scale terrorist attacks may pose indirect threats to personnel or assets, or low-level attacks do not target business and are not aimed at causing casualties. MEDIUM Aspects of the security environment pose challenges to business, some of which may be serious. For example: there are some deficiencies in state protection, organised criminal groups frequently target business through fraud, theft and extortion, domestic terrorist groups stage regular attacks that cause disruption to (but do not target) business or there are infrequent large-scale attacks and/or opportunistic small-scale attacks on foreign or business assets and personnel. HIGH The security environment presents persistent and serious challenges for business; special measures are required. For example: state protection is very limited, insurgents are engaged in a sustained campaign affecting business, kidnap poses a severe and persistent threat to foreign personnel, terrorist groups stage regular attacks against foreign or business assets, or weak security forces are incapable of dealing with the terrorist activity. EXTREME Security conditions are hostile and approaching a level where business is untenable. For example: there is no law and order, there is outright war or civil war, personnel constantly face the threat of targeted and potentially life-endangering violence, a terrorist group (or groups) is staging a sustained, high-intensity campaign that severely hinders business, or terrorists frequently target foreign personnel or business activity.
RiskMap Report 2014 RISK RATING FORECAST 2014 107 COUNTRY POLITICAL RISK SECURITY RISK AFRICA Angola M M; H in Lunda Sul, Lunda Norte provinces, north-east of Cabinda exclave Botswana L L Cape Verde L L Burundi H M; H in north-western provinces Chad H M; H in Borkou-Ennedi-Tibesti (BET), Wadi Fira, Ouaddaï regions, on CAR, Cameroon borders Benin M L; M on Nigerian border Burkina Faso M M; H in areas bordering northern Mali Central African Republic E H Cameroon M M; H in Bakassi peninsula, Extreme North region Congo M M Comoros H L; M in Anjouan, Moroni Congo (DRC) H H; M in Kinshasa, southern Katanga; E in North Kivu, Ituri district, central Katanga Côte d'Ivoire H M; H in Abidjan, west, north Ethiopia M M; H in Afar region (north of Semera), Somali region, areas bordering Eritrea, Kenya, South Sudan, Sudan Equatorial Guinea H M Djibouti M M Eritrea H M; L in Asmara; H on borders Gabon M L Gambia H L Ghana M L; M on south-eastern border with Togo, border with Côte d'Ivoire, areas around Gushiegu in Northern Region, Bawku in Upper East Region Guinea H M
RiskMap Report 2014 RISK RATING FORECAST 2014 108 COUNTRY POLITICAL RISK SECURITY RISK Liberia M M Madagascar H M Malawi M L; M in major urban centres Kenya M M; H in Nairobi, Mombasa, northern and eastern areas Lesotho M M Security risks will remain a primary concern for investors in 2014, driven by high crime rates in urban centres, banditry and communal violence in remote areas, and the persistent terrorist threat stemming from Islamist extremist group al-Shabab and its affiliates. Several factors will undermine the security environment in the coastal city of Mombasa. Arbitrary arrests and extrajudicial killings by security forces following the September 2013 attack on the Westgate shopping centre in the capital Nairobi are likely to exacerbate already heightened tensions and trigger repeated localised unrest, posing incidental security risks to assets and personnel. Niger H M; H on Mali, Nigeria borders, Agadez region, northern half of Tahoua region Mauritius L L Mali H M; H on border with Mauritania, Mopti, northern Ségou, Gao, Kidal, Timbuktu Mozambique M L; M in Maputo Namibia L L Nigeria H H; E in Borno Rwanda M L; M on border with Congo (DRC) São Tomé M L Guinea-Bissau H M Security rating for Mombasa up from M Seychelles L L Sierra Leone M M Senegal M L; M in Casamance Somalia E; H in Somaliland E; H in north-western regions of Somaliland, Mogadishu, Kismayo; M in Hargeisa South Africa M M; H in Johannesburg, deprived urban areas
RiskMap Report 2014 RISK RATING FORECAST 2014 109 COUNTRY POLITICAL RISK SECURITY RISK AFRICA continued AMERICAS Zambia M L; M in Lusaka, parts of Copperbelt Zimbabwe H L; M in Harare, Bulawayo, diamond-mining areas Anguilla I I Antigua and Barbuda L L Argentina H L; M in Buenos Aires Aruba L L Bahamas I L South Sudan H H Swaziland M M Sudan E M; H in South Kordofan, Blue Nile states; E in Darfur Tanzania M M Togo M M Uganda M M; H in northern, north-eastern areas, border with Congo (DRC) Security threats stemming from the precarious political environment will continue to dissipate in the aftermath of the peaceful 2013 elections, at which President Robert Mugabe and his Zimbabwe African National Union – Patriotic Front (ZANU-PF) secured a resounding victory. Opposition parties do not pose a credible threat to the ruling party and the military remains closely aligned to ZANU-PF, reducing the threat of a coup. The involvement of senior military officials in commercial dealings in the diamond sector and documented instances of human rights abuses contribute to heightened security threats in these areas. Security rating down from M President Cristina Fernández’s defeat at the 2013 legislative elections ended her plans to run for a third consecutive presidential term, but will not bring long-awaited policy changes to address systemic flaws such as inflation and capital flight. State intervention is therefore likely to continue. Unpopular temporary policies such as currency controls will become permanent as economic deterioration continues to limit the government’s room for manoeuvre. Furthermore, the continuing judicial dispute in the US with bondholders excluded from the 2005 and 2010 debt-restructuring plans could trigger a technical default on approximately $24bn of debt. Political rating raised from M Barbados I L
RiskMap Report 2014 RISK RATING FORECAST 2014 110 COUNTRY POLITICAL RISK SECURITY RISK El Salvador M M; H in San Salvador, La Libertad French Guiana L L Grenada L L Belize L L; M in Belize City Bermuda I I Bolivia H M Bonaire L L Brazil M M British Virgin Islands I I Chile L L Cayman Islands I L Colombia M M; H in border areas with Venezuela and Ecuador, areas affected by guerrilla activity Canada L L Costa Rica L L; M on Nicaraguan border, Limón Cuba M L Curaçao L L Dominican Republic M M Ecuador H M; H in Colombian border areas Ratings unchanged The nationwide protests in urban centres in June 2013 – which are likely to continue in 2014 – may not have assumed an overtly anti-government stance, but they caused a political earthquake. An unexpected nosedive in President Dilma Rousseff’s approval rating pointed to growing fatigue with the ruling Workers’ Party (PT). Although Rousseff remains the narrow favourite to secure re-election at the October 2014 presidential poll, she will face a strong challenge from two rivals, including a former coalition ally, and her victory will be hard fought. e Dominica I I Guatemala M M; H in Guatemala, Zacapa, Petén, Chiquimula, Izabal departments Guadeloupe I L
RiskMap Report 2014 RISK RATING FORECAST 2014 111 COUNTRY POLITICAL RISK SECURITY RISK AMERICAS continued Jamaica L M; H in West Kingston, Spanish Town Mexico M M; H in Chihuahua, Coahuila, Nuevo León, Tamaulipas, Sinaloa, Durango, Jalisco, Guerrero, Michoacán and Morelos states Martinique I L Panama L M; H in Darién province on Colombian border Nicaragua H M Peru M M; H in Ene, Apurímac and Mantaro valleys (VRAEM) Paraguay M L; M in eastern border, tri-border area Sint Maarten L L Puerto Rico L M St Lucia I L St Kitts and Nevis I L Suriname M L St Vincent and Grenadines I L Trinidad and Tobago L M; L in Tobago; H in Laventille, Beetham (Port of Spain) Guyana L M Haiti H H Honduras M H Security rating raised from M in Morelos Unprecedented co-operation from the three major political parties in advancing President Enrique Peña Nieto’s structural reform agenda saw major changes approved in 2013 in the labour market, and the education, finance and telecom sectors. Energy and fiscal reforms will lay the groundwork for boosting economic activity in 2014 and beyond. Security policy will remain focused on detaining organised crime leaders, paired with a long-term prevention strategy focused on social spending programmes. Nonetheless, the security environment will remain challenging, with a gradual reduction in the murder rate offset by rising levels of extortion and kidnapping. Turks and Caicos L I United States L L
RiskMap Report 2014 RISK RATING FORECAST 2014 112 COUNTRY POLITICAL RISK SECURITY RISK Venezuela H M; H in Caracas, major urban centres, Colombian border states US Virgin Islands I L ASIA-PACIFIC Cambodia M M China M; L in Hong Kong L; M in non-central districts of cities in Guangdong Province, remote border areas, Xinjiang’s south-western prefectures Bangladesh M M; H in Chittagong Hill Tracts Bhutan L L Brunei L L East Timor M M India M M; H in Assam, Kashmir, Manipur, Nagaland, Tripura, Bihar, Jharkhand, Chhattisgarh, border districts of Orissa, northern areas of Andhra Pradesh, western districts of West Bengal and eastern districts of Maharashtra Fiji M M Afghanistan E; H in Kabul E Australia L L Indonesia M M; H in Papua, Maluku Uruguay L L Ratings unchanged Ratings unchanged The security environment is worsening. We expect a marked increase in violent opposition protests in the run-up to general elections slated to be held by January 2014, while polling is unlikely to proceed smoothly. The opposition is likely to claim fraud if the government continues to resist its demands to reinstate a caretaker government system that has in the past overseen elections. There is a moderate threat of a military coup if the law and order situation deteriorates significantly. With President Susilo Bambang Yudhoyono due to step down after the 2014 elections, Indonesia is preparing to transition to only its third democratically elected president since independence. Although its democratic institutions are strong and appear resilient, it is unclear how well they will withstand adverse influence from old-style ‘crony’ interests, particularly with an unappealing slate of candidates and business moguls leading the presidential race. Even if led by a reformist, the new administration will face significant challenges in embedding the hard-won gains of the last decade. is of
RiskMap Report 2014 RISK RATING FORECAST 2014 113 COUNTRY POLITICAL RISK SECURITY RISK North Korea E L ASIA-PACIFIC continued Pakistan H H; E in FATA, Khyber-Pakhtunkhwa, north-east Baluchistan Philippines M M; H in western, south-western Mindanao Singapore I L Solomon Islands M M Papua New Guinea M H South Korea L L Taiwan L L Sri Lanka M M; H in north, north-east Thailand M M; H in southern three provinces Tonga L L Vanuatu L L Vietnam M L Malaysia L L; M in Sabah Maldives M L Mongolia M M Nepal H M; H in south Myanmar H M; H on borders, insurgency affected areas New Caledonia L L New Zealand I L Ratings unchanged The political crisis is likely to continue to prompt occasionally violent protests in the capital Malé, and to a lesser extent in larger towns on other atolls. Democratic advances since the country’s first multi-party elections in 2008 are likely to continue to be undermined. The judiciary and security forces are politicised, and will further fuel antagonism between the opposition Maldivian Democratic Party (MDP) of former president Mohamed Nasheed (2008-12) and other parties.s.. Laos M L Japan L L
RiskMap Report 2014 RISK RATING FORECAST 2014 114 COUNTRY POLITICAL RISK SECURITY RISK Czech Republic LM Denmark I I; L in Copenhagen, Aarhus Estonia LL Finland I I Andorra I I Armenia M M; H in Azerbaijani border areas Austria L L Belgium LL Belarus H L Bosnia and Herzegovina M L Azerbaijan M M; H in Armenian border regions, Nagorno-Karabakh Croatia LM Cyprus L; M in TRNC L Bulgaria M L Security rating down from M Belarus is a stable society ruled by an entrenched, authoritarian government. Security service involvement in maintaining social order is ubiquitous. Although periodic political protests will continue, these will not affect foreign business or the overall security environment, given overall low support for the opposition, highly restrictive laws on rallies and demonstrations, and harsh security force intervention. There are no domestic sources of terrorism and no extremist political or religious groups. Political rating raised from L Government instability increased during 2013, with the centre-right government led by the Civic Democrats resigning in June over wiretapping and corruption scandals. The resulting political instability was exacerbated by the weakness of the interim government, which failed to win a confidence vote in parliament. Despite a new government taking office after snap elections in October, the political situation is likely to remain unstable in 2014, delaying the implementation of key austerity measures and necessary structural reforms. France L; M in deprived urban areasL Albania M L; M in north EUROPE
RiskMap Report 2014 RISK RATING FORECAST 2014 115 COUNTRY POLITICAL RISK SECURITY RISK Norway I I Netherlands L L Poland L L Portugal L I Greece MM Georgia M; H in Abkhazia, South Ossetia M; H in Abkhazia, South Ossetia Germany LL Hungary LM Iceland L I Kosovo M L; M in Mitrovica, surrounding areas Kyrgyzstan H H Latvia L L Kazakhstan M L Liechtenstein I I Lithuania L L Ireland L L Italy L L; M in southern regions Luxembourg I I Macedonia M L Malta I I Moldova M; H in Transnistria L; M in Transnistria Monaco I I Montenegro M L EUROPE continued Romania M L
RiskMap Report 2014 RISK RATING FORECAST 2014 116 COUNTRY POLITICAL RISK SECURITY RISK San Marino I I Russia M; H in North Caucasus M; E in Dagestan; H in rest of North Caucasus Serbia M L; M in Sandžak, Preševo Valley Slovakia M L Slovenia M I Spain L L Tajikistan H H Sweden I I; L in Stockholm and surroundings, Gothenburg, Malmö Switzerland I I Ukraine M M Turkey M L; M in south-eastern cities; H on Syrian border, rural areas of south-east Turkmenistan M M United Kingdom L L Algeria H M; H in rural areas of north-central and north-eastern provinces, non-oil- and gas-producing areas of southern provinces MIDDLE EAST AND NORTH AFRICA Istanbul security rating down from M; Syrian border up from M Istanbul has not seen a major terrorist attack since 2003, while the security forces’ counter-terrorism capabilities have increased. Although it will remain an attractive target for attacks, businesses are unlikely to be directly affected. Security risks on the Syrian border are rising as spillover violence from Syria combines with increased civil unrest risks stemming from large numbers of Syrian refugees. Security rating down from H The turmoil seen by its neighbours is unlikely to affect Algeria in 2014. However, uncertainty about President Abdelaziz Bouteflika’s intentions and probable successor will build as the 2014 presidential election approaches. Elite interest groups have sufficient shared interests to encourage consensus-building over whether Bouteflika stays or goes, but failure to manage the process would be destabilising. p Bahrain M M Egypt H M; H in North Sinai
RiskMap Report 2014 RISK RATING FORECAST 2014 117 COUNTRY POLITICAL RISK SECURITY RISK MIDDLE EAST AND NORTH AFRICA continued Political instability will rise around the 2014 elections, directly affecting the operating environment. Sunni Arab and Kurdish factions are strongly opposed to Prime Minister Nuri al-Maliki, and other Shia Arab leaders have also begun to mobilise against him. There is little chance of a smooth transition of power, and another Maliki-led government would prompt growing unrest and calls for devolution. Iraq E E; M in Kurdistan Region; H in Kurdistan Region borders, south Israel L L, M on Sinai, Syrian borders Lebanon M M; H in Tripoli, Bekaa, northern border with Syria Libya H H Mauritania M M; H in eastern desert areas Kuwait M L Morocco L; H in Western Sahara L; M in Western Sahara Jordan M L; M on Syrian border Palestinian Territories H in West Bank; E in Gaza M in West Bank; E in Gaza Saudi Arabia L L; M in Qatif Qatar L L Syria E E Oman L L Yemen H H Tunisia M L; M in Sfax, Sidi Bouzid, Jendouba, Kasserine, Gafsa, Gabès, Tozeur, Kebili, Medenine, Tataouine United Arab Emirates L L Iran H L; M in Sistan-e Baluchistan, Khuzestan, 100km from Turkish, Iraqi, Afghan borders Political rating raised from H
www.controlrisks.com NEED DAILY UPDATES? Scan QR Code or visit our website to sign up for a free trial of our daily Country Risk Forecast service • Proven rating system for comparing political, operational, security and terrorism risks. • Provides actionable advice for dealing with short- and long-term business risks. • Compiled by experts. Delivered by a team of 50 country analysts with extensive, on-the-ground experience of the countries they cover. abudhabi@controlrisks.com alkhobar@controlrisks.com algiers@controlrisks.com amsterdam@controlrisks.com baghdad@controlrisks.com basra@controlrisks.com beijing@controlrisks.com berlin@controlrisks.com bogota@controlrisks.com copenhagen@controlrisks.com delhi@controlrisks.com dubai@controlrisks.com erbil@controlrisks.com hongkong@controlrisks.com houston@controlrisks.com islamabad@controlrisks.com jakarta@controlrisks.com johannesburg@controlrisks.com lagos@controlrisks.com london@controlrisks.com losangeles@controlrisks.com mexicocity@controlrisks.com moscow@controlrisks.com mumbai@controlrisks.com nairobi@controlrisks.com newyork@controlrisks.com panamacity@controlrisks.com paris@controlrisks.com saopaulo@controlrisks.com shanghai@controlrisks.com singapore@controlrisks.com sydney@controlrisks.com tokyo@controlrisks.com washington@controlrisks.com Control Risks’ offices FREE TRIAL Keep up to date with our thinking on the latest political, security, kidnap and maritime developments. Twitter: @Control_Risks LinkedIn: www.linkedin.com/company/control-risks YouTube: www.youtube.com/controlrisks

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Risk Map 2014 - Contril Risk

  • 1.
  • 2.
    Published by ControlRisks, Cottons Centre, Cottons Lane, London SE 1 2QG. Control Risks Group Limited (‘the Company’) endeavours to ensure the accuracy of all information supplied. Advice and opinions given represent the best judgement of the Company, but subject to Section 2 (1) Unfair Contract Terms Act 1977, where applicable, the Company shall in no case be liable for any claims, or special, incidental or consequential damages, whether caused by the Company’s negligence (or that of any member of its staff) or in any other way. Copyright: Control Risks Group Limited 2013. All rights reserved. Reproduction in whole or in part prohibited without the prior consent of the Company. Photos on pages: 6 (top/bottom), 14 (top/bottom), 16 (bottom), 23 (top/bottom), 25 (top/bottom), 27 (top/bottom), 30 (bottom), 34 (top/bottom), 40 (top/bottom), 41 (top/bottom), 44 (top/bottom), 50 (top/bottom), 54 (top/bottom), 56 (bottom), 58 (top/bottom), 60 (top/bottom), 61 (top/bottom), 66 (top/bottom), 69 (top/bottom), 72 (top/bottom), 74 (bottom), 79 (top), 84 (top/bottom), 87 (bottom), 90 (top/bottom), 92 (top/bottom) and 100 (top/bottom) © Press Association. All other images are from Shutterstock except those credited in the publication to Control Risks’ employees. Control Risks is an independent, global risk consultancy specialising in political, integrity and security risk. We help some of the most influential organisations in the world to understand and manage the risks and opportunities of operating in complex or hostile environments. We support clients by providing strategic consultancy, expert analysis and in-depth investigations, handling sensitive political issues and providing practical, on-the-ground protection and support. Our unique combination of services, geographical reach and the trust our clients place in us ensure we can help them to effectively solve their problems and realise new opportunities across the world. Working across five continents and with 34 offices worldwide, we provide a broad range of services to help our clients to manage risk.
  • 3.
    RISKMAP REPORT 2014 Control Risksis delighted to launch RiskMap 2014, our authoritative guide to business risk in the year ahead. Drawing upon expertise from across our organisation worldwide, we forecast the major challenges and opportunities of doing business in the world’s most complex environments next year. Any publication entitled ‘RiskMap’ is inevitably going to focus on risk, and as we look ahead we see no shortage of traps to snare the unwary. But we also see an abundance of opportunity delivered in part by the most extraordinary advances in living standards and public health. With the media headlines as ever dominated by risk and peril, that is well worth remembering. – Richard Fenning, CEO, Control Risks
  • 4.
    The rising expectations ofa growing consumer class will challenge governments and bring new risks to business. Page 19 Changing economic realities in 2014 will expose the divide between financially needy countries and their more pragmatic counterparts. Page 37 01 AFRICA 02 AMERICAS A prime location and sizeable natural gas reserves will drive growing investor interest in 2014. Page 31 An end to the civil conflict will shape an election year that will spell continuity for business. Page 47 SPOTLIGHT ON: TANZANIA SPOTLIGHT ON: COLOMBIA The ever more complex structures of global businesses are facing increasingly localised risks, bringing new challenges and vulnerabilities. Page 1 As the hangover from the global financial crisis fades, risk will seem more attractive than ever. Page 7 THE MOUSE THAT ROARS HOW LOCAL ISSUES ACCELERATE INTO MAJOR PROBLEMS THE CHANGING GLOBAL ORDER: THE WORLD IN 2014
  • 5.
    Cooling growth will elicitvarying responses: some governments will rise to the challenge, others will not. Page 51 After a difficult 2013 for Europe’s economies, 2014 will see, at best, a fragile recovery. Page 67 Transition states face a busy election year, while a breakthrough on Iran remains unlikely. Page 81 03 ASIA-PACIFIC 04 EUROPE The messy outcome of the 2014 elections will dash investor hopes of a return to high growth. Page 63 Events in 2014 will show whether Turkey is on the path to modernisation or is slipping towards authoritarianism. Page 77 The successful reworking of Dubai’s economic model will lay the foundations for sustainable growth in 2014. Page 93 SPOTLIGHT ON: INDIA SPOTLIGHT ON: TURKEY SPOTLIGHT ON: UNITED ARAB EMIRATES MIDDLE EAST AND NORTH AFRICA 05 RISK RATING FORECAST 2014 Page 105 KIDNAP OVERVIEW Page 103 PIRACY OVERVIEW Page 101 TERRORISM OUTLOOK Page 99
  • 6.
    Photographs taken by ControlRisks’ employees
  • 7.
    RiskMap Report 2014 THEMOUSE THAT ROARS 2 When 32 heavily armed terrorists entered the remote In Amenas gas plant in Algeria in the early hours of 16 January 2013, more than 130 foreign workers from nearly 30 countries were on site, representing a multitude of operators, contractors and sub-contractors drawn from nearly 50 companies based around the world. As events unfolded, my colleagues assisted companies on four continents and speaking six languages, helping to co-ordinate a multinational response to the crisis. The attack was also vividly and at times tragically recorded through social media as hundreds of workers hiding in the plant were able to relay events direct to their families and loved ones around the world in real time. Despite its remoteness, the In Amenas attack was inherently a global incident, affecting people, organisations, markets and perceptions worldwide. The number of different nationalities caught up in the In Amenas attack surprised many. But the geographic diversity of the workforce and its employment by companies ranging from major multinationals to small suppliers were not unusual in our globalised world. The oil and gas industry, often in the vanguard of international operations, has long embodied a complex kaleidoscope of inter-connecting contractual relationships. Major oil and gas projects bundle their skills and technologies like Rubik’s Cubes, forming and re-forming into bewildering combinations to suit the specific needs of individual projects. Other sectors have adapted this flexible model and – as we mentioned in last year’s RiskMap – hardly any countries are now off-limits to shape-shifting multinational companies. Companies increasingly need to pursue elaborate, interlocking operational structures to grasp the opportunities on offer in a near-global marketplace. For instance, I am writing this having just left a meeting with a senior executive of a Japanese conglomerate that has a major stake in a US-listed Latin American mining company, which is investing billions of dollars in southern Africa with Russian and Indian co-investors to sell to Chinese customers. And this is a relatively straightforward proposition compared with some of the byzantine structures we encounter. BY RICHARD FENNING CHIEF EXECUTIVE OFFICER CONTROL RISKS THE MOUSE THAT ROARS HOW LOCAL ISSUES ACCELERATE INTO MAJOR PROBLEMS Companies increasingly need to pursue elaborate, interlocking operational structures to grasp the opportunities on offer in a near-global marketplace.
  • 8.
    RiskMap Report 2014 THEMOUSE THAT ROARS 3 Organisations clearly cannot take advantage of such opportunities on their own. But new interdependencies create new vulnerabilities, from the liabilities of local partner organisations to the often harsh realities of novel operating climates. As organisations leverage their global reach into ever more convoluted combinations, they leave an ever greater digital footprint – with the attendant risks of a breach of their cyber security. For those mapping growth strategies at multinational and global HQs, this presents a daunting risk management challenge: as business has become global, political, security and integrity risk have become more local. This is one of the key themes we explore in this year’s RiskMap. The competing gravities of localised politics and globalised economics generate friction that plays out in unexpected ways and places. As we saw in the In Amenas attack, the complex local dynamics of terrorism and criminality in the Sahara – amplified by post-Gadhafi anarchy leaching over the border from Libya – have reverberated globally through energy markets, international relations and corporate strategy. This is not just an issue in unstable post-revolutionary contexts. In the US, a grassroots political crusade against ‘big government’ has repeatedly threatened to crash the global economy by forcing an unprecedented sovereign default; it seems bent on more of the same in 2014. Growing US isolationism after a decade of entanglement in Middle Eastern wars, meanwhile, has compromised global security management, leaving – for example – no coherent strategy to contain and curtail the Syria conflict. Across the Atlantic, localised (often fringe) political positions have obtained national prominence in the wake of the financial, sovereign and austerity crises, strengthening centrifugal forces that for the last few years have threatened to blow the European project off course. As challenging as this period has been for industrialised nations, the year ahead may prove particularly challenging in the emerging world. Even though the timing remains at issue, 2014 will probably bring to an end the era of quantitative easing that has sent capital flooding into BRICs, MISTs and other economies still in search of an acronym to join. The ensuing reversal of capital flows – previewed in late summer 2013, when emerging-market currencies dropped precipitously against the US dollar on rumours of US Federal TOP: World national flags. BOTTOM: Petrochemical plant. The competing gravities of localised politics and globalised economics generate friction that plays out in unexpected ways and places.
  • 9.
    RiskMap Report 2014 THEMOUSE THAT ROARS 4 Reserve ‘tapering’ – will put enormous strain on economies that failed to make the most of the salad years. Inefficiencies masked by abundant capital may stoke popular unrest and will almost certainly undercut the lifestyles to which many have grown accustomed, especially new graduates to the burgeoning global middle class. A spike in corruption and extortion risk seems likely to result. Not even the largest emerging-market economies will prove immune. In China, the government is attempting far-reaching changes to the economy by tackling some of the vested political interests that dominate certain industrial sectors. Already, the risk of being caught up inadvertently in an anti-corruption campaign or an attempt to influence pricing models has substantially increased. The complexities of local politics, hard to read even at close quarters and in good times, will grow more opaque and often distorted when viewed from foreign HQs. China’s challenges will play out against the backdrop of lower, but still robust, GDP growth (the IMF currently projects 7.25% in 2014, down from consistent double-digit performance in recent decades). Other large emerging economies face even rougher seas. The tapering mini-panic hit India, Turkey and Brazil particularly hard; the latter two suffered significant unrest, largely driven by discontented urban middle classes. Among recent high-fliers, only Mexico appears better placed for solid growth next year, and even there the war between drug cartels and the state continues to disproportionately colour the country’s reputation. Then, of course, there are outright conflict zones. The list is led by the civil war in Syria, with Iran and Russia backing President Bashar al-Assad’s regime, and the Gulf Arab monarchies, Turkey and a lukewarm West backing the rebels. Syria’s local political trends present no cause for optimism. A stalemate has developed whereby the rebels lack the firepower and unity to overthrow the regime, while the regime has demonstrated it has genuine grassroots appeal within the minority Alawite and Christian communities, and enough outside support from Iran and Hizbullah to hold on for the time being. The US-Russia agreement to mount an international effort to remove the Assad regime’s chemical weapons may be a universal good, but its practical effect is to forestall any decision by the US or other powers to intervene on humanitarian grounds. This will encourage both sides in Syria to dig in and perpetuate the risks stalking neighbouring countries harbouring millions of refugees and being drawn, voluntarily or not, into the conflict. As usual, the risks are particularly acute in Lebanon, where Christian and Sunni factions strongly support the rebels, while the country’s most powerful faction,
  • 10.
    RiskMap Report 2014 THEMOUSE THAT ROARS 5 Hizbullah, is deeply engaged on behalf of Assad. Egypt, meanwhile, has taken a step back from democracy. The re-imposition of military rule once again tested companies doing business in the Middle East’s largest economy, raising anew complex issues of business continuity, market resilience and, at the most basic level, the safety of local staff. 2014 will not see the return to normality that investors crave. In the Sahel and Yemen, al-Qaida, whose demise was only recently being talked of as a given in some Western capitals, has proved resilient. Indeed, if lawless areas of Iraq, Syria, Pakistan, Somalia and Afghanistan are included, al-Qaida-aligned groups are spread over as much territory as ever before. The centralised entity that perpetrated the 9/11 attack may be in terminal decline thanks to relentless drone strikes, but a shift in the centre of institutional gravity to al-Qaida in the Arabian Peninsula (AQAP), al-Qaida in the Islamic Maghreb (AQIM) and al-Qaida in Iraq (AQI) – among other affiliates – will preserve the network’s lethal ambitions for the foreseeable future. One potential bright spot: progress in mid-late 2013 in talks between the US and Iran over the latter’s nuclear ambitions holds out some hope that the diplomatic logjam may shift. The chances are slim, and these moves may turn out to be no more than a change of tactics rather than strategy on Tehran’s part. As an ancillary boon to the global economy and major importers, progress in these negotiations could pare the geopolitical risk premium underlying oil prices, combining with bumper unconventional production to bring prices down below the $100 per barrel threshold. Outside the Middle East, elections in Indonesia, India and Brazil will command significant attention. In Brazil, slowing growth rates have forced new burdens on the government of President Dilma Rousseff. Although the country will put on a good show hosting the 2014 World Cup and 2016 Olympics, doing business may grow even more complex as the government pushes for more state intervention to boost the economy and the rising costs of doing business continue to erode profit margins – and Brazil’s attractiveness more broadly. In India and Indonesia, corruption and lowered growth expectations will dominate political debate, providing openings for a change in government in Indonesia after a decade of relatively consistent rule by one party. 2014 will not see the return to normality that investors crave.
  • 11.
    RiskMap Report 2014 THEMOUSE THAT ROARS 6 In both countries, business risk could emanate from the disruption to vested interests that political change can precipitate. In India, elections will result in another weak central government, portending continued glacial progress on reforms that would revive growth and improve the operating environment. For investors, shifting power – both economic and political – needs to be monitored closely to avoid unwanted entanglement. RiskMap explores how this phenomenon of spikes in risk triggered by changes in the distribution of economic power is repeated in many different markets. As growth slows in many of the recent high-growth economies, political legitimacy is tested and unwary investors may find themselves in suddenly unfamiliar territory. On one level, this is nothing new: globally ambitious companies have always risked becoming embroiled in other people’s problems a long way from home. But what is new is the scale with which this is now happening. RiskMap highlights how many of the drivers of growth – urbanisation, the growth of the middle classes, improvements in public health, increased access to natural resources – transcend national boundaries and encourage investors to enter new markets. In 2014, this tension between opportunity and risk will become more acute as the era of high-growth emerging markets fuelling global GDP growth comes to a close and the complexities of local political tensions impinge more assertively on global operations. Any publication entitled ‘RiskMap’ is inevitably going to focus on risk, and as we look ahead we see no shortage of traps to snare the unwary. But we also see an abundance of opportunity delivered in part by the most extraordinary advances in living standards and public health. With the media headlines as ever dominated by risk and peril, that is well worth remembering. TOP: Protester in Istanbul, Turkey, September 2013. BOTTOM: Hundreds of protesters clashed with police in Rio de Janeiro, Brazil, October 2013.
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    Kabul, Afghanistan by EdwardSmith Control Risks
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    RiskMap Report 2014 THECHANGING GLOBAL ORDER 8 All good forecasts, particularly in the complex realm of global political and security risk, have a solid historical foundation and learn from past outcomes. In building our RiskMap 2014 outlook, we have drawn on a decade of risk analysis to identify underlying trends and assess how they are likely to evolve. LOOKING BACK: 2003-13 The ten years from 2003 to 2013 were bracketed by the invasion of Iraq and US withdrawal from Afghanistan, enlargement of the EU and the eurozone crisis, SARS in East Asia and a similar outbreak in the Middle East, the relinquishment of chemical weapons by Libya and their use in Syria, and the decision to build a nuclear bomb in North Korea and renewed negotiations to preclude the possibility in Iran. Along the way, the subprime mortgage collapse nearly destroyed global finance, the Arab spring upended decades of political stagnation in North Africa, BRIC became the watchword of the global economy, the urban population exceeded the rural population for the first time in history, fracking transformed energy geopolitics, and social media technologies revolutionised global communications and laid bare the secret workings of the West’s intelligence agencies. It was a decade of unprecedented opportunity and historic shifts of capital from the advanced to the developing world, tempered by rapidly evolving threats, a new emphasis on transparency and accountability, and rising concern about the sustainability of the post-war liberal democratic world order. With these shifts introducing unprecedented complexity and uncertainty into global affairs, managing security and political risks became more directly relevant to how companies do business. Developments in the Middle East and North Africa dominated global THE CHANGING GLOBAL ORDER: THE WORLD IN 2014 JONATHAN WOOD ASSOCIATE DIRECTOR, GLOBAL RISK ANALYSIS CONTROL RISKS Figure 1: Timeline of key events driving changes in global security and political risk 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 20142003 Arab spring Eurozone crisis EU enlargement NATO withdrawal Arab spring Iraq war SECURITY RISK POLITICAL RISK KEY INCREASING RISK DECREASING RISK
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    RiskMap Report 2014 THECHANGING GLOBAL ORDER 9 security risk over the last ten years. The launch of the Iraq war in 2003 spawned increased security risks throughout the Gulf region, influencing evolving terrorist threats in Algeria, Iraq, Saudi Arabia and beyond. The gradual increase in tensions over Iran’s nuclear programme after 2009 added a new layer of strategic security risk – most strongly felt in global oil markets – while the Arab spring revolutions in early 2011 radically altered security environments in North Africa and the Levant, with regional and global spillover impacts. Nuclear sabre-rattling in North Korea, by contrast, had no sustained impact on global security risk, though it remained a sporadic source of regional crisis. The Iraq war and Arab spring also strongly affected global political risk, but resurgent leftism in Latin America, lingering state fragility across Central and West Africa, and the fallout from the global financial crisis – especially in Europe – were equally important. An underlying driver of each of these was the onset of the so-called ‘commodities super-cycle’ in 2003, driven by both increased security threats to oil supply and voracious Chinese demand, which fuelled populism in key energy and mineral exporters and economic stress and occasional unrest in importers. Meanwhile, the political benefits of EU enlargement in 2004 (following the adoption of the euro currency in 2002) were swiftly belied by the acute sovereign risks that emerged during the financial crisis. Despite the fluid security and political environment of the last ten years, business thrived as opportunities appeared in fast-growing emerging and developing economies. Since 2003, emerging and developing countries’ share of nominal global output has doubled, from 20% to 40%. Nominal output in emerging Asia alone, powered by China, has increased by 700%, surpassing that of the eurozone in 2012. As a result, by 2013, the proportion of global output generated by countries that Control Risks rates at medium or high political and security risk had more than doubled (Figures 2 and 3). Our data also suggest that this is largely because of faster growth in medium- and high-risk countries, rather than increased risk in key economies (Figures 4 and 5). These trends are likely to persist in 2014. Correspondingly, risk appetite – renewed after the emerging market crises of the late 1990s – steadily pushed foreign investment up the political and security risk scale. The global carry trade, fuelled by falling interest rates (which hit historic lows in 2003 and again in 2009) and quantitative easing in the US and Europe, poured capital into higher interest currencies, triggering both inflation and capital controls in key emerging markets. As a result, by 2012, the first year in which more FDI flowed to emerging and developing
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    RiskMap Report 2014 THECHANGING GLOBAL ORDER 10 Figure 2: Global political risk ratings 2004-14, GDP weighted KEY INSIGNIFICANT LOW MEDIUM HIGH EXTREME 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Figure 3: Global security risk ratings 2004-14, GDP weighted 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Figure 4: Average political risk rating vs average annual GDP 14% 12% 10% 8% 6% 4% 2% 0% -2% Low HighInsignificant Medium Extreme 14% 12% 10% 8% 6% 4% 2% 0% -2% Low HighInsignificant Medium Extreme Figure 5: Average security risk rating vs average annual GDP growth, 2004-14growth, 2004-14 Figure 6: Global political risk ratings 2004-12, FDI weighted KEY INSIGNIFICANT LOW MEDIUM HIGH EXTREME 2004 2005 2006 2007 2008 2009 2010 2011 2012 2004 2005 2006 2007 2008 2009 2010 2011 2012 Figure 7: Global security risk ratings 2004-12, FDI weighted 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%
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    RiskMap Report 2014 THECHANGING GLOBAL ORDER 11 countries than advanced countries, about twice as much investment was directed towards countries that Control Risks rates at medium to high security and political risk as in 2003 (Figures 6 and 7). Even countries with the most extreme security and political risk profiles – such as Iraq, Yemen and Somalia – attracted significant investor attention, at least in the oil and gas sector. LOOKING FORWARD: 2014 AND BEYOND These trends place the world in a novel situation. The last time the current set of emerging and developing countries – China, India, Brazil, Turkey and so on – had such weight in the global economy was probably in the late 19th century, under radically different social, political and geopolitical circumstances. Charting the risk landscape ahead therefore requires identifying and assessing how these fundamental economic shifts are likely to play out for security and political risk. We have identified four trends that we believe are particularly important: changing bases of political legitimacy, new demands of the global middle class, emerging global security power vacuums and shifting strategic interests. CHANGING BASES OF LEGITIMACY Emerging markets is increasingly a misnomer. After ten or more years of torrid growth, leading emerging and developing economies are highly globally integrated, and increasingly liberalised and competitive. In short, they have emerged. As their resilience to the global financial crisis showed, many of the problems that plagued emerging markets in the 1990s – high external debt, inflexible exchange rates and erratic macroeconomic policy – have been largely resolved. However, emerging-market growth models are under pressure. Before the financial crisis, they relied on debt-fuelled consumption by the US and other Western countries. Since the crisis, growth has floated on a flood of cheap money, courtesy of rock-bottom interest rates in the US and Europe, and generous fiscal and financial stimulus at home. Moreover, emerging markets are still too reliant on relatively narrow bases of economic activity: manufactured exports, cheap credit and domestic investment in China; high oil and gas prices in the Gulf, Middle East and Russia; and mineral and agricultural commodity demand in South America. These sources of growth are already unsustainable: inflation, asset bubbles and overcapacity are increasingly problematic, the outlook for commodity prices is negative, consumption in the US and Europe is flat, and monetary tightening is inevitable. Indeed, a timely reminder of the inherent dangers of overreliance on cheap capital occurred in late 2013, when mere consideration of US Federal Reserve ‘tapering’ caused emerging-market currencies to plunge, and raised the spectre of crises from TOP: Workmen, Changyang, China, by Harry Koops, Control Risks. BOTTOM: Rajasthan, India.
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    RiskMap Report 2014 THECHANGING GLOBAL ORDER 12 India to Indonesia to Brazil. That was a dress rehearsal: tapering will be a reality by the end of 2014. With the pillars of rapid emerging- market growth eroding, political settlements founded on so-called ‘performance legitimacy’ – based on delivering rapid growth and achieving concrete policy objectives – are increasingly brittle. For the last ten years, ruling parties and leaders in major emerging markets have all managed to stay in power thanks in large part to rapid growth. But growth has fallen sharply since 2011 in most major emerging markets and is expected to remain below average next year (Figure 8). Performance legitimacy is also inherently self-limiting: high performance raises expectations, making subsequent goals progressively more difficult to meet. To stay in power, many emerging- market governments will need to both find new ways of delivering growth and cultivate more durable sources of political legitimacy. This is where political risk enters the outlook. It is impossible to restructure a large, complex economy without politicising the process. Many well-intentioned reforms have foundered in the face of well-organised political opposition. There is always an incentive to adopt populist policies or ideological frameworks that deflect attention away from slowing growth. But ideological bases of political legitimacy – such as those instituted across Latin America and in parts of the Middle East over the last ten years – are often bad for business and ruinous for foreign investors. The hunt for Figure 8: Average annual growth, 2004-11 and 2012-14 (projected) Brazil China Turkey India Indonesia Vietnam Russia KEY 2012-14 12% 10% 8% 6% 4% 2% 0% 4.3 10.9 6.6 2004-11 8.2 4.1 4.6 2.6 2.0 5.4 7.5 3.2 5.3 5.75.7 Source: IMF
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    RiskMap Report 2014 THECHANGING GLOBAL ORDER 13 growth, meanwhile, has provoked a new wave of trade protectionism and beggar-thy-neighbour policies. In the year ahead, how countries choose to deal with slowing growth will be a critical variable of the political risk landscape for business. RISING MIDDLE CLASSES Emerging-market governments are also facing different kinds of political demands. One of the historic effects of emerging-market growth is the rise of the global middle class – those with annual incomes above $4,000 in purchasing power parity (PPP) terms. The middle class grew to more than 2bn people in the last ten years and is projected to expand to more than 3bn in the next ten. With sheer economic income moving comfortably above poverty levels, emerging middle classes are beginning to focus on a wider range of issues linked to personal freedom, economic opportunity and good governance. These demands invariably clash with entrenched political systems and vested economic interests. Indeed, the mass social protests since 2011 – including the Arab spring, Occupy and Indignados movements, and anti-government unrest in Turkey, Brazil and Bulgaria – reflect how economic change has greatly outpaced political change during the emerging-market era. Rising middle classes, armed with the trappings and ambitions of technological Figure 9: PPP per capita GDP at the time of emerging-market unrest, 2011-13 Bulgaria 2013 Romania 2013 Turkey 2013 Brazil 2013 Argentina 2012 Russia 2011 Tunisia 2011 Egypt 2011 $5,764 $8,227 $14,731 $12,340 $15,578 $14,870 $13,251 $18,200 Political repression, unemployment, corruption Political repression, unemployment, corruption Disputed elections, corruption Inflation, constitutional amendments, corruption Economic inequality, public transport fares, inflation, corruption Political and social repression, police brutality Electricity prices, corruption Working conditions, unemployment Middle-class threshold: $4,000 Key motivations
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    RiskMap Report 2014 THECHANGING GLOBAL ORDER 14 modernity, remain saddled with antiquated, opaque, inefficient and frequently corrupt governments and bureaucracies (Figure 9). Rather than simply plaudits from international financial institutions, they expect rapid growth to generate new and better opportunities for them, their families and their communities. The gulf between economic and political change is also replicated in the volatile distance between aspirational middle classes demonstrating in city centres and regimes rooted in conservative rural constituencies. And it is not just government that is targeted: business is also under middle-class scrutiny, on environmental, indigenous rights, workplace safety and economic justice grounds. The risks embedded in the rising global middle class are primarily political: people with tangible assets to lose are unlikely to promote violent insurrection, given the potential for collateral damage. Such social protest movements also rarely topple governments, but often provoke short-term accommodation, from rolling back economic liberalisation to beefing up public spending. Over the longer term, of course, rising middle classes have often been agents of broader – even systemic – political change. Urbanisation itself often provides the anvil on which multilingual, multi-ethnic societies are ultimately forged, removing levers of division that elites have manipulated to hold on to power. What’s more, small entrepreneurs flourish and gain political influence in more densely populated settings as populations must manufacture solutions to the logistical and infrastructure problems that governments fail to deal with. This implies that governments that do not address urban middle-class concerns are increasingly living on borrowed time. POWER VACUUMS Where social unrest led to durable conflict and political instability – namely in Egypt and Syria – it exposed the dysfunction of the current global governance architecture. While growing economic heft has made leading emerging markets indispensable to global governance, formalised by the inauguration of the Group of 20 (G20) leaders’ summit during the financial crisis, it has not yet compensated for the relative decline of the US and Europe, both of which remain consumed with domestic political and economic challenges. Put another way, rising powers may be able to veto the global agenda – on climate change, intervention in Syria or trade liberalisation, to name a few – but still lack the domestic stability, diplomatic maturity, hard power resources and soft power attraction to offer and enforce an alternate agenda. Stable platforms for strategic co-operation are currently few and far between. This has left global governance – especially global security management – at the mercy of bilateral negotiation and ad hoc TOP: Protest in São Paulo, Brazil, October 2013. BOTTOM: G20 Summit in St Petersburg, Russia, September 2013.
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    RiskMap Report 2014 THECHANGING GLOBAL ORDER 15 interventions, while making it more prone to disruptive tensions and strategic blunders. The unexpected deal over Syria’s chemical weapons programme – in the absence of any coherent strategy for managing the conflict’s spillover impacts – and sporadic flare-ups along the Line of Control in recent years in disputed Kashmir are cases in point. Meanwhile, the US expects Europe (grappling with the strategic fallout of the Arab spring) and the Gulf Arab states (vying with Iran for regional clout) to assume the mantle, and costs, of their own security. We expect these conditions to develop further in 2014 as the departure of most NATO military forces from Afghanistan more or less completes the strategic withdrawal of the administration of US President Barack Obama from the Muslim world. Much hinges on the ability of the US and China to see past a legacy of distrust and co-operate pragmatically on shared interests, such as nuclear non-proliferation and the containment of militancy in the Middle East and Central Asia. A global power vacuum poses both security and political risks to business. The security risks are perhaps more obvious, given that the diminishing war on terrorism – which requires collaboration and information sharing to function – will remit fewer resources and less training to countries already struggling to contain militancy. Pakistan, in particular, is about to get rather less strategic for the US in the absence of the need to sustain a large footprint in Afghanistan, while persistent capacity deficits in East Africa and the Sahel region continue to create permissive operating environments for militants. A primary concern is that militant groups – whether linked to jihadist ideology, organised crime, or both – will avail themselves of any breathing room to regroup, recruit and potentially reorient. Political risks, meanwhile, will continue to manifest primarily in trade and investment. The vaunted US ‘pivot’ to Asia, for example, incorporates a trade agreement – the Trans-Pacific Partnership, slated for completion in 2014 – that pointedly excludes China, the world’s second-largest trading nation. This may, in the short term, increase the threat of politicised tit-for-tat trade disruptions in certain sectors, and in some quarters is perceived as an assault on the global trading system itself. However, if it spurs a new wave of trade liberalisation outside the WTO’s moribund Doha round – tackling the thorniest non-tariff barriers, such as import quotas and export subsidies – opportunities for business could flourish, even without a truly global deal. SHIFTING INTERESTS Geopolitical uncertainty owes, in part, to rapid but fundamental shifts in strategic interests. Shale fracking has already dramatically reduced oil imports to the US from West Africa, and will gradually change US incentives
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    RiskMap Report 2014 THECHANGING GLOBAL ORDER 16 in the Middle East over the next decade. Simultaneously, China’s ravenous energy and mineral consumption over the last ten years has bestowed strong strategic imperatives in sub-Saharan Africa, as have the burgeoning food needs of water-scarce but cash-rich Gulf emirates. Moreover, further strategic change is queued up for 2014 and beyond, as cargo volumes increase along newly ice-free Arctic shipping routes and liquefied natural gas (LNG) export projects come online in Australia and – eventually – the US and East Africa. Many of these shifts have only materialised over the last five years, and countries are still trying to identify and determine how to manage their strategic implications. Across a range of indicators, economic realities are complicating the status quo and threatening to rewrite geopolitics (Figure 10). Both the US and China, for example, are beginning to chafe at US security and freedom of navigation guarantees in the Middle East. Indeed, China overtook the US for the first time in late 2013 as the world’s biggest net oil importer. Its ‘string of pearls’ strategy in the Indian Ocean – viewed in part as a hedge against US dominance of global sea lines of communication – is fast becoming a reality, with major commercial port developments up and running in Pakistan and Sri Lanka. Meanwhile, US allies Japan and South Korea – anticipating China’s influence over their own energy supply – increasingly perceive a need to underwrite commercial relationships with military and diplomatic power. Shifting interests will generate new opportunities for business as developing geopolitical relationships forge pathways for investment. Markets that have long been closed or dominated by trade with major powers are being relentlessly prised Figure 10: Shift of key exports away from US and Europe to Asia, 2003-12 20% 15% 10% 5% 0% -5% -10% -15% -20% Middle Eastern oil South American agriculture African extractives Russian extractives KEY DECREASE IN EXPORTS TO US AND EUROPEINCREASE IN EXPORTS TO ASIA TOP: Arctic shipping routes will be increasingly ice-free. BOTTOM: US President Barack Obama, March 2012.
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    RiskMap Report 2014 THECHANGING GLOBAL ORDER 17 open by geopolitical competition – as true for some advanced countries such as Canada as for emerging markets such as Ukraine and Nigeria. But they will also be attended by collateral political risks, given the institutional and regulatory immaturity of many frontier investment destinations and the plausible assumption that diplomatic attention should bring commercial benefits. Company nationality has always been a factor, but is likely to play an increasing role in political risk. A similar condition can be applied to security risks, in cases where local communities reject an influx of foreign capital, foreign workers or both. The security profile of established firms can also change in line with geopolitical realities, as US and European companies have experienced in North Africa since the Arab spring. LOOKING AHEAD Over the last ten years the global economy has shifted up the political and security risk scales, changing the types of threats companies are likely to face today and in the future. A decade of rapid growth in the emerging world has fundamentally altered social arrangements and is beginning to put pressure on political systems, particularly in terms of how governments justify their authority. In certain regions, such as the Middle East and North Africa, this has provoked change that the current global power balance is ill-equipped to manage, introducing security threats that will cast a shadow over the coming year. These developments are coinciding with fundamental and long- term shifts in strategic incentives, often linked to resources, that are likely to rewrite the global distribution of power as much as economic change has revised the global balance of power. These factors put upward pressure on both global political and security risks in 2014. But this comes at a time when opportunities for business are diverse and improving in some fundamental ways. Ten years ago, HIV/AIDS threatened economic and social coherence in much of the developing world. Today, access to treatment has expanded exponentially and annual new infections have fallen by 25%. Over the same timeframe, extreme poverty fell by more than 400m people, even as the global population rose by nearly 1bn, sending poverty rates to historic lows. Meanwhile, over the next year more people in developing countries will access broadband on mobile devices than there were global internet users in 2003, and more children will have access to education than ever before. The hangover of the global financial crisis is fading, even in the US and Europe, Japan is at its most bullish in 20 years, and emerging markets in general are much better equipped to face economic challenges than during the 1990s. In this light, risk seems more attractive than ever.
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    REGIONAL OVERVIEWS This regionaloverview section looks at how the global themes we have identified will play in to political and security dynamics over the coming year in sub-Saharan Africa, the Americas, Asia, Europe, and the Middle East and North Africa. In addition, we spotlight five countries that merit a closer look in 2014 and examine some of the big questions they face. For more detailed analysis on more than 220 countries, please visit our Country Risk Forecast online service. To sign up for a free trial of Country Risk Forecast, please visit: www.controlrisks.com 01 AFRICA SPOTLIGHT ON: TANZANIA 02 AMERICAS SPOTLIGHT ON: COLOMBIA 03 ASIA-PACIFIC SPOTLIGHT ON: INDIA 04 EUROPE SPOTLIGHT ON: TURKEY MIDDLE EAST AND NORTH AFRICA SPOTLIGHT ON: UNITED ARAB EMIRATES 05
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    MALTA CYPRUS SYRIALEBANON JORDAN ISRAEL PALESTINIAN TERRITORIES EGYPT L IB Y A TUNISIA A L G E R I A MOROCCO Western Sahara MAURITANIA Canary Islands (SPAIN) Madeira (PORTUGAL) CAPE VERDE SENEGAL GAMBIA GUINEA-BISSAU GUINEA SIERRA LEONE LIBERIA CÔTE D'IVOIRE GHANA TOGO BENIN BURKINA FASO M A L I N I G E R N I G E R I A C H A D S U D A N SOU TH SU D AN CENTRAL AFRICAN REPUBLIC CAMEROON EQUATORIAL GUINEA SÃO TOMÉ AND PRINCIPE GABON CONGO CONGO (DEMOCRATIC REPUBLIC OF) RWANDA BURUNDI UGANDA TANZANIA KENYA A N G O L A Z A M B I A MALAWI MOZAMBIQUE ZIMBABWE BOTSWANA NAMIBIA SOUTH AFRICA HIGH security in deprived urban areas LESOTHO SWAZILAND ERITREA E T H I O P I A DJIBOUTI Somaliland SOMALIA Y E M E N S A U D I A R A B I A OMAN UAE QATAR BAHRAIN KUWAIT MADAGASCAR COMOROS SEYCHELLES MAURITIUS Réunion (FRANCE) I R A Q I R A N Zanzibar Cabinda (ANGOLA) ATLANTIC OCEAN Athens Kandahar K Tehran Baghdad Basra Erbil Amman Cairo Alexandria Tripoli TunisAlgiers Annaba Oran Rabat Casablanca Muscat Abu Dhabi Dubai Al Khobar Riyadh Jeddah Port Sudan SanaaAsmara Hargeisa Khartoum Addis Ababa NdjamenaKano Lagos Port Harcourt Niamey OuagadougouBamako Nouakchott Dakar Bissau Conakry Freetown Monrovia Yamoussoukro Abidjan Accra Cotonou Lomé Malabo Douala Yaoundé Libreville Bangui Kampala Nairobi Mogadishu Kismayo Mombasa Dar es Salaam Dodoma Lilongwe Blantyre Mbuji-Mayi Lubumbashi Lusaka Luanda Kinshasa Brazzaville Windhoek Harare Bulawayo Beira Gaborone Pretoria Johannesburg Maputo Durban Cape Town Antananarivo Port Louis Damascus Beirut Abuja Kurdistan Region AFGHANISTAN
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    RiskMap Report 2014 AFRICA 20 POLITICALRISK 2004-14 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 KEY INSIGNIFICANT LOW MEDIUM HIGH EXTREME SECURITY RISK 2004-14 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 AFRICA Against a backdrop of faltering growth and weakening currencies in major emerging markets, a number of sub-Saharan African countries have been bucking the trend with spirited debuts of sovereign bonds. Angola, Kenya, Nigeria, Rwanda, Senegal, Tanzania and Zambia have all raised during 2013 – or plan to raise in early 2014 – hundreds of millions of dollars this way, bringing the continent further into the fold of global capital markets. This symbolises the transformation in Africa’s fortunes over the past decade, which has seen buoyant commodity prices fuel sustained economic growth and poverty reduction. But it has not all been luck: prudent macroeconomic management, enhanced political stability and incremental operational improvements have played their part. Now, as the global boom in commodity prices eases, attention has turned towards a new growth story – the African consumer. Hopes are riding high that Africa’s so-called ‘youth bulge’ – nearly half of sub-Saharan Africa’s population are between 15 and 29 years of age – coupled with a burgeoning middle class concentrated in urban centres around the continent will provide a more sustainable economic path, as well as myriad investment JEAN DEVLIN ASSOCIATE DIRECTOR, AFRICA CONTROL RISKS SUB-REGIONAL RISK AVERAGES Southern Africa Central Africa West Africa Pol Sec Pol Sec Pol Sec Pol Sec East Africa 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 K
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    RiskMap Report 2014 AFRICA 21 opportunities.There are substantial grounds for optimism. The continent’s current trajectory compares well both to its past performance and to other developing regions further up the convergence curve. The IMF predicts that by 2017 more than half of the 20 fastest-growing economies in the world will be in Africa. At the same time, there is significant divergence: Africa also holds the majority of the world’s least competitive economies. Underperformance in the key areas of job creation, reducing inequality and infrastructure development further tempers optimism. With the African Development Bank (AfDB) estimating that 10m people enter the workforce each year, governments face serious challenges, both economic – in terms of improving employment opportunities – and political, in coping with the demands of a younger, more educated and more informed electorate. Frustration with the stagnation of living standards and lack of services for large swathes of the population is also shaping domestic political debate, and is likely to translate into more regular unrest and differing patterns of political competition and violence in many places. This mix makes for an attractive but complicated environment for investors in 2014. RISE OF THE URBANITES The African consumer story hinges on the growth of the continent’s mega cities: Lagos and Abidjan in the west; Kinshasa and Luanda in Central Africa; and Nairobi, Dar es Salaam and Johannesburg in the east and south. The continent is rapidly urbanising, and half of all Africans are Source: World Bank Doing Business report, 2014 TOP 5 BOTTOM 5 5 3 RWANDA 52 in the world 67 in the world GHANA 2 1 1 MAURITIUS 20 in the world 2 3 RWANDA 32 in the world 4 BOTSWANA 56 in the world 5 ERITREA 184 in the world 4 185 in the world REP. OF CONGO 3SOUTH SUDAN 186 in the world 2 41 in the world SOUTH AFRICA 188 in the world CAR CHAD 189 in the world The best and the rest: Africa’s Doing Business rankings, 2014
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    RiskMap Report 2014 AFRICA 22 TOP:Lagos, Nigeria. BOTTOM: Nairobi, Kenya. expected to live in cities by 2040. In the most populous country, Nigeria, that proportion has already been reached. Amid the sprawl and congestion, a new breed of urbanites has become established. Affluent, well-educated and brand conscious, these consumers are being targeted as a lucrative market segment, with ever more shopping centres (malls) being built to cater to tastes in consumer retail, coffee and fast-food chains, supermarkets, consumer electronics, banking and leisure. Urbanisation and a growing middle class bring opportunities to diversify growth into consumer sectors and lower transaction costs, improving service delivery and encouraging innovation. The most striking example in the past decade is the rapid expansion of mobile technology in Africa, which has seen advances beyond those in many developed countries. An estimated 35% of Kenyan and 25% of Tanzanian GDP now flows through mobile payments and online banking. The development of ‘Silicon Savannah’ – Nairobi’s tech innovation hub – and the regional expansion of South African supermarket chains such as Shoprite demonstrate the diversity of opportunities on the continent outside the extractives sector, where FDI has traditionally been concentrated. Moreover, the most dynamic commercial developments are not coming from new investors, but are driven by those already doing business Source: Population Division of the Department of Economic and Social Affairs of the UN Secretariat, World Population Prospects: The 2010 Revision and World Urbanisation Prospects: The 2011 Revision Africa is urbanising: projected population split to 2050 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 KEY URBAN 60% 50% 40% 30% 100% 90% 80% 70% 20% 10% 0% RURAL
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    RiskMap Report 2014 AFRICA 23 onthe continent. This includes African-owned businesses, often with a concentration within one market and now looking to expand beyond their region. Nigerian and South African banks, and telecoms companies such as Kenya’s Safaricom are just some examples of a growing trend of targeting mainly urban dwellers across sub-Saharan Africa. GREAT EXPECTATIONS While the expectations of Africa’s urban elites have so far been broadly accommodated within existing political systems, the weight of expectations of those further down the income ladder has become more pressing. How the spoils of newfound prosperity are shared matters greatly to continued stability. Africa is less equal than it was ten years ago, and is second only to Latin America in terms of the proportion of wealth controlled by the top 10% of the population. To ensure long-term stability, some governments have realised that they must spread the benefits of growth beyond a narrow elite. But this has not always resulted in the implementation of effective policies to achieve more equitable results. Unlike Europe and North America, or more established emerging markets such as Brazil or Turkey that have seen social upheaval driven mainly by the middle classes, the key actors in Africa are less affluent urbanites: the so-called ‘floating middle class’ (those spending between $2 and $4 per day) and the urban poor (those living on less than $2 per day). Poverty, high levels of youth unemployment and frustrations over living standards will remain the main drivers of protests and social unrest. Over recent years, unrest has tended to erupt in response to unpopular reforms, such as removal of subsidies, utility tariff increases and other service delivery issues or, in countries where organised labour is strong, wage negotiations. Protests over the removal of fuel subsidies of the kind that paralysed Nigeria in early 2012 and fractious labour disputes such as those in South Africa in 2013 will become more common as administrations struggle to tackle difficult issues that disproportionately affect lower-income groups. In Sudan, the protests that have been a notable feature of the past three years are likely to recur in the coming year should the government move ahead with the removal of subsidies on wheat and other food commodities. Meanwhile, access to information and means to mobilise can be a force to drive accountability, but can also cause unrest to escalate, posing a concomitant risk of business disruption. Aside from the increased risk of operational disruption, near-jobless growth combined with rising inequality presents a deeper challenge to the legitimacy of governments and their leaders, as events in North Africa over recent TOP: Sasolburg protest, South Africa, January 2013. BOTTOM: The Lukasrand Tower, Pretoria, South Africa, August 2012.
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    RiskMap Report 2014 AFRICA 24 yearsamply demonstrate. The structural factors that have for decades driven instability in Africa have not disappeared. Strong economic growth in the past ten years has improved long-term prospects for stability, but the twin pressures of urbanisation and growing youth unemployment over the next decade will weigh on those prospects. Such pressures are most acutely evident in countries with weak state institutions and recent histories of violence, such as the member states of the Mano River Union (Guinea, Liberia and Côte d’Ivoire), which saw some of the worst conflicts of the turn of the millennium. They now face the daunting challenge of providing sufficient numbers of stable jobs for their growing youth populations. Source: World Bank, GINI index The GINI coefficient measures income inequality; higher numbers indicate greater inequality 63.9 63.1 57.5 56.3 52.5 51.5 50.8 50.8 50.5 50.1 48.8 47.7 47.3 47.3 45.7 45.5 44.4 44.3 44.1 43.9 42.8 65.8 41.5 41.5 40.5 40.3 39.8 39.8 39.4 39.3 38.9 38.638.2 37.6 35.5 35.4 35.3 34.6 33.6 33.3 33.0 42.7 64.3 N/A N/A N/A N/A N/A N/A 30 - 39 50 - 59 60 + 40 - 49 KEY An unequal continent: income inequality as measured by GINI coefficients
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    RiskMap Report 2014 AFRICA 25 POWERTO THE PEOPLE Many governments have put development of infrastructure, and in particular power, at the top of the agenda, both to provide a boon to business and to respond to popular demands for improved standards of living. Much of the financing raised through bond issuances has been earmarked for projects in these areas. Even Nigeria, which has long suffered from debilitating power shortages stemming from its notoriously inefficient power sector, in 2013 finalised its drawn-out privatisation of the sector, paving the way for long-term improvements. Meanwhile, US President Barack Obama in July 2013 made the announcement of a $7bn ‘Power Africa’ initiative to improve access to electricity over the next five years in East Africa the cornerstone of his trip to the region. However, operational barriers such as dilapidated power transmission grids, outdated regulatory frameworks and vested interests clinging to the dysfunctional status quo will mean that improvements to the business environment stemming from new investment and reforms such as those in the energy sector will remain slow and patchy. One of the biggest infrastructure projects on the continent, the $80bn Grand Inga dam in Congo (DRC), which would supply more than 500m people with renewable energy, is unlikely to be operational before the 2030s, hampered by financing constraints and uncertainty about the government’s commitment to the project. Job creation is a second area of focus, underlined by a growing emphasis, at least at the policy level, on economic diversification, fiscal incentives for labour-intensive industries and a reinvigorated agenda on agricultural development. However, as with infrastructure, effects on living standards will only be felt in the long term. ACCOUNTABILITY FOR SOME… Frustrations over difficult reforms and stagnant living standards are feeding into a wider campaign for accountability in Africa. As in other emerging markets such as India, corruption has become a rallying point for civil society to demand greater accountability and transparency from governments. This has also been on the agenda of international donors, which maintain significant, if declining, influence in Africa. Debt relief and budgetary support over the past decade have had ‘performance indicators’ attached, including greater accountability of governments to their citizens. Failure to meet these has been backed up by the withdrawal of assistance, such as the removal of donor funding in Zambia in 2011 following high-level corruption scandals, or blacklisting of the worst TOP: Madagascar President Andry Rajoelina, December 2012. BOTTOM: Congo (DRC) President Joseph Kabila, September 2013.
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    RiskMap Report 2014 AFRICA 26 offenders,such as Madagascar’s Andry Rajoelina or Guinea-Bissau’s Gen Antonio Indjai, the leader of an April 2012 coup. In Congo (DRC), although donors turned a blind eye to the questionable circumstances surrounding President Joseph Kabila’s re-election in 2011, the IMF in late 2012 suspended $240m in planned loans over the government’s failure to publish dubious mining contracts. The financial impact of the decision appears to have prompted some improvements in transparency in the country’s mining sector, as it tries to win back compliant member status of the Extractive Industries Transparency Initiative (EITI). Nonetheless, as leading donors – largely in Europe and North America – reorient towards a model of ‘economic diplomacy’ to defend their commercial interests on the continent against the inflow of money and interest from rising powers such as Brazil, China, India and Turkey, their leverage to influence African governments is likely to decline. These new partners, with different historical ties and objectives informing their engagement, take their own unique approach to Africa. China in particular, which has become the continent’s largest trading partner in recent years, has generated much debate over its approach, though commentators often fail to appreciate the multitude of actors and interests that make up the story of ‘China in Africa’. Source: OECD Factbook 2011: Economic, Environmental and Social Statistics China, now Africa’s largest trading partner: as a percentage of total trade 1992 2000 2005 2009 KEY GERMANY 16% 14% 12% 10% 8% 6% 4% 2% 0% CHINA UKRUSSIA BRAZIL US INDIAFRANCE JAPAN
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    RiskMap Report 2014 AFRICA 27 Themain result of these shifts is that civil society organisations and local media will gain a more prominent role as advocates for better governance. Local civil society and vibrant local media in many countries are furthering the momentum of international accountability campaigns. Liberia’s President Ellen Johnson-Sirleaf, long a darling of the country’s international partners, has faced mounting domestic criticism of public appointments favouring family connections, likely contributing to the September 2013 resignation of her son as head of the National Oil Company of Liberia. …BUT NOT FOR OTHERS Nonetheless, progress in the area of accountability will remain slow. Countries with entrenched leaderships, though not immune to the momentum generated over the past decade, will take longest to change. A steadfast contingent of ageing presidents continues to cling to power, from the continent’s record holder, Equatorial Guinea’s Teodoro Obiang, to Angola’s José Eduardo dos Santos, Robert Mugabe in Zimbabwe, Paul Biya in Cameroon and Uganda’s Yoweri Museveni. While such gerontocrats will eventually cede power to new generations, the continued dominance of former liberation movements in southern Africa in particular is likely to remain strong. These have a superficially stabilising but ultimately corrosive effect on governance in what is the continent’s youngest region in terms of independence. Angola remains one of the continent’s most unequal societies, with a poor reputation for tackling corruption, though it provides relatively high levels of predictability, particularly for the offshore oil sector. Similarly, in Mozambique the ruling Frelimo party presents the country as a stable and attractive investment destination, though discontent continues to bubble up regularly, driven by dashed hopes of socio-economic development. Weak bureaucracies and pervasive corruption across African countries will continue to blight the business environment. Moreover, sudden or fundamental shocks in systems lacking accountability can prompt stability to quickly dissolve, as seen in North Africa. INCREASED CONTESTATION Nonetheless, outright conflict has become less of a headline risk for business in Africa than at the turn of the millennium. Outside Somalia and Central Africa, sustained large-scale armed opposition has largely disappeared from the political landscape. Politicians and parties have become more likely to appeal against unfavourable results or mobilise protests than to launch an armed campaign against the government, particularly in countries with large urban populations well connected through social media. Threats since mid-2013 by TOP: Liberian President Ellen Johnson-Sirleaf, November 2012. BOTTOM: Zimbabwe President Robert Mugabe, September 2013.
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    RiskMap Report 2014 AFRICA 28 oppositionparty and former rebel movement Renamo to trigger a renewed civil war in Mozambique are an exception, but serve primarily to underline its desperation to remain relevant in a post-conflict environment dominated by Frelimo. This is not to say that political violence is fading as a risk to business. Rather, it will present more nuanced and manageable risks across different geographies. As competition at the ballot box has increased, so too has the potential for unrest, with upsurges in electoral violence likely to become increasingly common. 2013 saw violence around Contestation increasing at the ballot box Sep 13 Guinea legislative Yes, UN envoy called for disputes to be settled in court Violent riots pre-election Feb 13 Djibouti legislative By opposition Yes, but late Post-election protestNo Mar 12 Guinea-Bissau presidential Military coup seized former PM Carlos Gomes (front-runner) and interim President Raimundo Pereira Jul 12 Congo legislative Limited clashes in districts with opposition supporters Aug 12 Angola legislative By 4 parties and 5 coalitions Yes No Nov 12 Sierra Leone presidential and legislative By opposition By opposition - - - - - - - Yes Dec 12 Ghana presidential and legislative By opposition, NNP Yes No No No Mar 13 Kenya presidential By defeated candidate Raila Odinga Yes Post-election violence in stronghold of defeated candidate No Jul 13 Zimbabwe legislative and presidential By opposition Yes Yes Ruling pending Very limited reports of voter intimidation No No No No Very limited reports May 13 Equatorial Guinea parliamentary By opposition No Sep 13 Rwanda parliamentary No Two grenade attacks couple of days before election Small-scale protests in capital Lomé Jul 13 Togo legislative Opposition denounced irregularities and fraud but election observers said process was fair and transparent Date Appeal accepted Appeal lodged Results disputed Country/ Election Incidence of violence No No Source: IFES Election Guide
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    RiskMap Report 2014 AFRICA 29 legislativeelections in Guinea, while despite the relatively peaceful polls in Kenya and Zimbabwe, both retain an explosive mix of ingredients that will complicate future elections. 2014 should be comparatively quiet, with voters in Namibia, Mozambique and South Africa going to the polls. However, 2015 holds greater prospects for unrest as voters turn out in traditionally more volatile Guinea, Nigeria and South Sudan. Meanwhile, political friction will increase in Tanzania ahead of a constitutional referendum in 2014 and general elections in 2015. Politics is also becoming more factionalised, with different groups competing for political influence to promote their own agendas and favour their own members, whether on ethnic or other grounds. The extent and nature of such factions varies across the continent. In Kenya, for example, political parties are more akin to highly personalised vehicles created solely for election purposes and with a narrow focus on promoting the specific interests of their respective leader’s ethnic group. Even in de facto one- party states such as South Sudan, deep rifts between competing ethnic groups and political alliances within the ruling elite are becoming more visible. This is detrimental to building a common agenda and, as is clear from the factional struggles that have divided Nigeria’s ruling People’s Democratic Party (PDP) in 2013, complicates policymaking to the point where essential reforms to improve competitiveness are continually deferred. POLITICAL GAMES Resource nationalism, which has garnered significant investor attention amid a slew of contract reviews, new legislation and regulatory changes across the continent, should be viewed in the light of these shifting political dynamics. Provisions for greater local content are often a slightly awkward government response to popular expectations that ordinary citizens are entitled to the proceeds of the commodity boom. Higher royalty payments, more stringent tax regimes and local content legislation all featured in reviews of legal and regulatory frameworks for mining and oil and gas from Côte d’Ivoire to Equatorial Guinea in 2013. Meanwhile, public concerns over environmental degradation and destruction of local livelihoods are gaining traction with governments under growing popular pressure. Governments aim to manage public expectations in these areas without unduly compromising relations with investors. Although South Africa’s ruling African National Congress will base its campaign for the April 2014 elections on a long-term economic development plan, the party is expected to push through reforms to the mining code ahead of the polls in a bid to placate calls for economic transformation
  • 35.
    RiskMap Report 2014 AFRICA 30 fromits core constituency. The possible introduction of export controls on a group of yet to be determined ‘strategic minerals’ will further dampen investor sentiment and scupper government plans for robust economic growth. THE LIMITS OF REGIONALISATION Diverse political and in some cases security challenges have begun to test the fledgling conflict resolution mechanisms of regional organisations, with the African Union struggling to take a leading role in the Mali crisis in 2013 and the UN stepping up to the plate in Central African Republic and Congo (DRC). Sub-regional bodies, most notably the Southern African Development Community (SADC), which has been key to facilitating the 2013 elections in Zimbabwe and mediating the crisis in Madagascar, have played a more significant role. Increased regional integration will continue to be touted as one of the key tools for Africa to develop: on paper, the benefits are self-evident. However, such optimism has so far outstripped the operational capabilities of these organisations to decisively resolve conflicts. As Chinese, Indian and Brazilian engagement in Africa expands and US interest in the continent has waned with Obama’s ‘pivot’ towards Asia, the question of who underwrites security, particularly in parts of the continent of little strategic significance such as Central African Republic, will weigh on the outlook for long-term stability. BUCKLE UP The growing complexity of risk in Africa underlines the need for risk management tailored to specific business activities in the local context. The fostering of a greater number of consumers through more inclusive growth by governments is a key strategic growth area for non-resource investors, and while this sector is less susceptible to classic political interference, it is affected in other ways. The corrosive effect of poor governance and insecurity in large, mainly remote areas mean that transnational threats of smuggling and terrorism pose risks to businesses dependent on extended supply chains, for example. Exposure to corruption, the large presence of counterfeit goods and lack of enforcement against organised crime also present serious challenges for these sectors. Africa’s boom is far from over: growth rates are forecast to outstrip most other regions over the next ten years. If the continent’s governments can overcome the challenges of diversifying economies, managing expectations and building flexible labour markets, the picture will be positive. But for those looking to jump on the bandwagon, be sure to buckle up: it’s going to be a bumpy ride. TOP: Oil and gas refinery. BOTTOM: Central African Republic rebels, March 2013.
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    RiskMap Report 2014 SPOTLIGHTON: TANZANIA 32 RiskMap Report 2014 SPOTLIGHT ON: TANZANIA 32 RWANDA BURUNDI TANZANIA KENYA Zanzibar Kampala Nairobi Kismayo Mombasa Dar es Salaam DodomaMbuji-Mayi Lubumbashi SPOTLIGHT ON: TANZANIA LOOKING AHEAD Buoyed by its sizeable natural gas reserves, strategic location, and relatively benign security and political environment, Tanzania’s international profile will continue to rise in 2014. A constitutional referendum should pass off peacefully, while planned infrastructure developments will start to bear fruit in the coming years, enabling the country to maximise its investment potential. Nonetheless, corruption and unrest stemming from rising popular expectations will continue to temper investor optimism. Tanzania will attract more investor interest in 2014 – and with good reason. Although its 40 trillion cubic feet (tcf) of proven natural gas reserves are its prime attraction, the country also offers a relatively benign political and security environment (by regional standards), and a strategic location. Growth of 7% is forecast for 2014 on the back of anticipated expansion in the energy and mining sectors. Meanwhile, international investors are likely to respond positively to the finance ministry’s August 2013 request for a syndicated loan of up to $700m, and the government’s plans to issue a $1bn sovereign bond in 2014. Nigeria, South Africa and Kenya have been the traditional entry points and operational bases for investors in Africa. However, each has its drawbacks: political tensions and challenging industrial relations in South Africa, and high-profile security threats in Kenya and Nigeria – given added prominence by the September 2013 attack by Somali extremist group al-Shabab on the Westgate shopping centre SIMISO VELEMPINI ANALYST, AFRICA CONTROL RISKS
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    RiskMap Report 2014 SPOTLIGHTON: TANZANIA 33 (mall) in the Kenyan capital Nairobi. Risk-averse investors will increasingly look to more stable, peripheral countries that can provide similar advantages at lower risk. In a nod to its rising international profile in 2013, Tanzania welcomed both Chinese President Xi Jinping and US President Barack Obama. During Xi’s first visit to Africa as an elected official, he unveiled an $800m infrastructure development package. Meanwhile, Obama announced that the country will be one of the first beneficiaries of the US government’s $7bn Power Africa initiative to reform the continent’s energy sector. FINAL FRONTIER Compared with the three African powerhouses, Tanzania is a frontier market with a rapidly urbanising population. Its overlapping membership of two regional organisations – the East African Community (EAC) and the Southern African Development Community (SADC) – means that it is well positioned to give investors access to a high-growth market with roughly 400m residents. EAC moves towards harmonising investment incentives and the SADC’s removal of almost all tariff barriers underscore both regions’ commitment to leveraging their natural resources and human Projected GDP growth in selected African markets, 2012-16 6% 5% 4% 3% 10% 9% 8% 7% 2% 1% 0% 2012 2013 2015 2016 KEY KENYAGHANATANZANIA ZAMBIA NIGERIA SOUTH AFRICA 2014 Source: IMF
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    RiskMap Report 2014 SPOTLIGHTON: TANZANIA 34 TOP: Dar es Salaam port. BOTTOM: President Jakaya Kikwete and Chinese President Xi Jinping, March 2013. capital to ensure collective sustainable growth. Increased global interest in gas-to-power projects and demand from South-east Asian countries seeking to diversify their energy sources will drive development of Tanzania’s nascent gas sector. Japan’s Sumitomo Corporation in May 2013 signed a $414m deal with the government to build a 240MW natural gas-fired power plant, signalling strong Asian interest in Africa’s aspiring entrant into the continent’s select group of gas exporters. Regional power deficits will give the government further impetus to meet its target of exporting gas to other African countries by 2015. Elsewhere, a move from subsistence to commercial agriculture provides opportunities for export to neighbouring countries. The Southern Africa Growth Corridor of Tanzania initiative aims to equip subsistence farmers seeking to make the transition to commercial farming. However, land rights remain a contentious issue, while bureaucratic bottlenecks and multiple land claims from locals will delay both agriculture and mining projects. Although it will continue to attempt to attract investment in the aforementioned areas, the government is also likely to concentrate its efforts on boosting investment in tourism, FMCG, construction and pharmaceuticals. GREAT EXPECTATIONS Inadequate infrastructure will remain one of the primary challenges facing investors in the coming years. The government is highly likely to allocate a significant proportion of the proceeds of the $1bn sovereign bond to improving power and transport infrastructure. Various initiatives outlined in the government’s ‘Vision 2025’ development plan underline its commitment to facilitating infrastructure investment to unlock Tanzania’s economic potential. The government plans to complete a $211m upgrade to bring Dar es Salaam’s port up to the standard of that in Mombasa (Kenya) by 2015, galvanised by World Bank estimates that inefficiencies at the port cost Tanzania $1.8bn in revenue annually. A planned upgrade of the TAZARA railway line – the infrastructural backbone of the EAC and SADC – is also slated for completion by 2015. Public-sector corruption and weak institutional capacity will undermine the government’s ability to effectively manage the country’s resources. But tentative moves towards improving transparency are encouraging. The draft Natural Gas Policy – likely to be enacted in late 2014 – takes a strong line on transparency, and is likely to lead to a long-term reduction in corruption in the sector. However, the deep systemic reforms needed to plug revenue leakages and ensure the efficient deployment and use of capital across line
  • 40.
    RiskMap Report 2014 SPOTLIGHTON: TANZANIA 35 ministries will not be forthcoming in 2014, given the distraction of the general elections looming in 2015. Nonetheless, sustained progress is likely thereafter. Meanwhile, socio-economic pressures are rising in tandem with development of the gas sector. The majority of the population lacks access to electricity and running water. Public expectations of the government’s ability to create new jobs and improve access to basic services are high at a time when it has limited means of addressing them. These issues will exacerbate latent sectarian tensions and drive localised unrest, primarily directed at the government, in the medium term. CONTINUITY NOT CHANGE A constitutional referendum set for April 2014, and presidential and legislative elections in 2015 will cause limited political upheaval. The referendum has contributed to an escalation in sectarian violence since early 2013 both in Zanzibar and on the mainland. Zanzibari demands for greater autonomy stem from the prospective economic impact of the development of offshore gas reserves. Planned infrastructure projects, 2013-18 Improvement of TAZARA line Construction of freight station Mbeya Kapri Mposhi Isaka Kigali Mtwara Tanga Bagamoyo Dar es Salaam KENYA CONGO (DRC) ZAMBIA MOZAMBIQUE MALAWI BURUNDI RWANDA KEY Port under construction Port upgrade Railway under construction Railway Construction of natural gas pipeline Terminal under construction Airport under construction Source: Tanzania Five Year Development Plan 2011/12 - 2015/16, President’s Office, Planning Commission
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    RiskMap Report 2014 SPOTLIGHTON: TANZANIA 36 Nonetheless, the demands of a small but vocal separatist group for a dissolution of the union and the creation of an independent Zanzibari state are unlikely to be realised. Instead, with an eye towards the 2015 polls, the ruling Chama Cha Mapinduzi (CCM) party is likely to agree to a revised revenue-sharing deal that will pave the way for more offshore exploration off the coast of Zanzibar. The overall impact of the various ballots on the broader security environment will be limited, with violence on the scale of that seen around the elections in Kenya in 2007-08 highly unlikely. Meanwhile, the likely victory of the CCM and its presidential candidate in 2015 will also ensure broader policy continuity and stability in the longer term. COMING IN FROM THE COLD Kenya and Mozambique have grabbed international headlines and stoked investor interest in East Africa in recent years, relegating Tanzania to third place. However, as the operational environment becomes increasingly complex in neighbouring countries, Tanzania’s stable outlook, strategic location and pro-investment climate will become ever more appealing. Proven natural gas reserves and reported discoveries in East Africa, 2013 0.88 ETHIOPIA KENYA TANZANIA MOZAMBIQUE UGANDA 0 0.5 0.23 4.5 Ogaden basin: 2.7 tcf in Calub and 1.3 tcf in Halila Discovery of gas in Mbawa 1 block L8 but no proven reserve 32-65 tcf of recoverable gas in Area 1, 87 tcf in Area 4 10-13 tcf in block 2; 11-21 tcf in blocks 1,3 and 4 Albertine Region KEY 0.0 - 0.4 1.0 + 0.5 - 0.9 Proven reserves (tcf) Source: US Energy Information Administration (May 2013) and UK Trade & Investment
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    U N IT E D S T A T E S O F A M E R I C A M E X I C O BELIZE GUATEMALA EL SALVADOR HONDURAS NICARAGUA COSTA RICA PANAMA CAYMAN ISLANDS (UK) JAMAICA CUBA BAHAMAS TURKS AND CAICOS BERMUDA (UK) HAITI DOMINICAN REPUBLIC PUERTO RICO BRITISH VIRGIN ISLANDS ANGUILLA (UK) SINT MAARTEN DOMINICA US VIRGIN ISLANDS ARUBA CURAÇAO BONAIRE ANTIGUA AND BARBUDA GUADELOUPE MARTINIQUE (FRANCE) BARBADOS ST VINCENT AND GRENADINES GRENADA ST LUCIA ST KITTS-NEVIS TRINIDAD AND TOBAGO FRENCH GUIANA SURINAME CHILE A R G E N T I N A PARAGUAY URUGUAY B R A Z I L GUYANA COLOMBIA ECUADOR P E R U B O L I V I A VENEZUELA CAPE VERDE PACIFIC OCEAN ATLANTIC OCEAN Córdoba Vancouver Seattle San Francisco Los Angeles Tijuana Phoenix Minneapolis Chicago Detroit Toronto Montréal Ottawa Quebec New York Philadelphia Washington (DC) St Louis Atlanta Houston Dallas Hermosillo Monterrey Tampico Guadalajara Mexico City Acapulco Cancún Miami Havana Kingston Port-au-Prince Santo Domingo Belmopan Guatemala City San Salvador San Pedro Sula Tegucigalpa Managua San José Panama City Colón Cali Bogotá Medellín Caracas Georgetown Paramaribo Cayenne Belém Guayaquil Manta Quito Lima Arequipa La Paz Santa Cruz Asunción Santiago Buenos Aires Montevideo Recife Belo Horizonte São Paulo Rio de Janeiro Brasília Salvador da Bahia Boston New Orleans
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    RiskMap Report 2014 AMERICAS 38 2014will see the effects of the likely tapering of quantitative easing in the US take hold across Latin America. The region’s assets have been magnets for capital in recent years, and logic has it that an eventual US stimulus withdrawal will increase US bond yields and prompt a reversal in the flow of funds – out of Latin America. That will weaken local currencies, cause interest rates to rise and threaten countries such as Brazil that have heftier financing needs. To paraphrase Warren Buffett, only when the tide goes out do you discover who’s been swimming naked. 2014 will expose the divide between these countries and their more pragmatic cousins, led by the likes of Chile, whose more solid economic fundamentals will better insulate them from market volatility. These countries enjoy the protection afforded by low current account deficits, higher reserve levels and less dollar-denominated debt. They also have more margin for currency depreciation. TAPER TANTRUM The panicked reaction to the US Federal Reserve’s initial tapering announcement in May 2013 means that the withdrawal of stimulus is likely to be modest in its initial stages. NICHOLAS WATSON HEAD OF ANALYSIS, AMERICAS CONTROL RISKS AMERICAS POLITICAL RISK 2004-14 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 KEY INSIGNIFICANT LOW MEDIUM HIGH EXTREME SECURITY RISK 2004-14 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 SUB-REGIONAL RISK AVERAGES South America Central America North America Pol Sec Pol Sec Pol Sec Pol Sec Caribbean 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
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    RiskMap Report 2014 AMERICAS 39 Wedo not expect a repeat of 1994’s so-called ‘Tequila crisis’, when sudden Fed tightening caused a sharp devaluation of the peso in Mexico, with impacts across the region. If tapering advances, it would signify that a sustainable recovery is under way in the US. Although China is now the leading trade partner for the likes of Brazil, Chile and Peru, the US remains Latin America’s pre-eminent trade partner. For Mexico, which sends more than 80% of its exports to its northern neighbour, measured tapering should be seen as a boon, not a blow, because it represents a vote of confidence in the US’s economic recovery. But the economic climate will be less benign for Latin America than it has been for many years. Prices for commodities, on which many countries relied in the boom years, are on a downward trend as China’s growth slows and in all likelihood enters a new phase of development – a steady clip of 7% rather than the 9% gallop of the last decade. Studies show that for every percentage point the Chinese economy slows, the Latin American countries with the closest ties to China decelerate by 1.2%. Nobody is saying Latin America will catch a cold because China sneezes, but the likes of Brazil and Peru may have a case of the sniffles in 2014. Nonetheless, the picture is far from uniform. Mexico is more of a competitor in manufactured goods markets than a supplier of commodities, and its labour cost advantage is likely to continue in 2014 as near-shoring comes back into vogue. Annual GDP growth, selected Latin American markets and China, 2010-14 6% 4% 12% 10% 8% 2% 0% 2010 2011 2013 2014 KEY CHILEBRAZIL MEXICO PERU CHINA 2012 Source: IMF
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    RiskMap Report 2014 AMERICAS 40 TOP:A member of YoSoy132, Mexico City, June 2012. BOTTOM: Oil workers’ protest, Rio de Janeiro, Brazil, October 2013. GOVERNING GETS HARDER While the Mexico-Brazil reversal of fortunes will not be as pronounced as the markets sometimes make out, Brazil’s problems point to a failure to address key issues during the boom years. Faced with a cooling of both domestic and international markets, Brazil will struggle to switch swiftly to an investment-led growth model because of the failure of recent governments to tackle the infamous ‘Brazil cost’ – the umbrella term for the burdens of doing business there, covering poor infrastructure, high borrowing costs, a complex tax regime and archaic labour legislation, among others. President Dilma Rousseff’s record of state intervention limits reasons for optimism, and suggests she is more likely to address the symptoms of Brazil’s declining competitiveness than the causes. To top it off, Brazil faces a presidential election in October 2014 that will limit the scope for much-needed reforms, including a tax overhaul and an update of the labour code. Brazil is not the only country where trickier economic conditions will make governing more difficult and reduce the political appetite for reform. Approval ratings for Peruvian President Ollanta Humala are likely to remain low in 2014, though this does not presage a political crisis: his predecessor but one, Alejandro Toledo (2001-06), governed with single-digit approval ratings for much of his presidency. Possible routes to overcome tougher economic conditions will not always be exploited. Peru’s massive Conga mining project is likely to remain hostage to regional elections in 2014, and will therefore remain stalled. In neighbouring Argentina, dwindling support for President Cristina Fernández following a setback in the 2013 legislative elections is unlikely to herald any U-turn on state intervention in the economy or a concerted effort to tackle inflation. The economy is therefore likely to remain weak. Nonetheless, Fernández will continue to defer dealing with problems beyond 2014. LATIN SPRING? The 2013 protests in Brazil prompted concern that Latin America may be vulnerable to further outbursts of middle-class unrest. After all, the inequality, corruption and poor public services that triggered the Brazilian protests are problems across much of Latin America. But this does not necessarily herald the onset of a wider ‘Latin spring’, despite the economic frailties and public frustration evident in some countries. Latin America has long endured high levels of unrest, and it would be wrong to see every strike and protest as foreshadowing the eruption of major social upheaval. Not only were Brazil’s newly prosperous middle classes frustrated with crushing commutes, but gathering inflation, insipid economic performance and,
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    RiskMap Report 2014 AMERICAS 41 mostsignificantly, conspicuous expenditure ahead of the 2014 football World Cup created the conditions for mass protests. The Brazilian middle class – and expectations of its rights and dues – has grown more significantly than that of any other country in the region in recent years, while public spending ahead of the 2014 World Cup and 2016 Olympics is a unique double-barrelled catalyst for unrest. The phenomenon of middle-class frustration certainly exists beyond Brazil. A decade of growth across most of the region has forged new social demands that those in government have not always kept up with. In Chile, frustration has crystallised around the costs and unfairness of the education system. In Mexico, the YoSoy132 movement, mainly comprising middle-class students, has denounced what it sees as President Enrique Peña Nieto’s too-cosy relationship with the mainstream media. The Mexican middle class will also continue to grumble about tax rises – especially the 16% value-added tax on home mortgages that Peña Nieto hopes to levy from 2014 – and the opacity of government spending. Both here and in Chile, urban middle classes increasingly compare their countries to far-flung peers in the OECD, to which they both belong, rather than their immediate neighbours. But this does not portend mass protests that transcend class or sector interests. Mexican teachers will remain restive in 2014 and the left’s losing presidential candidate in 2006 and 2012, Andrés Manuel López Obrador, will whip up opposition to energy reform, but neither of these movements will rock Mexico’s political foundations. Similarly, a steady background hum of protest will be evident in Venezuela as frustration simmers at government mismanagement of the economy, crime and shortages of basic goods. But this is unlikely to coalesce into a national movement or social explosion in 2014, barring a significant drop in the price of oil. Venezuela will instead remain acutely polarised amid economic confusion, not crisis. The new demands of emerging and emerged middle classes, and the disconnect between their aspirations and the ‘old’ way of doing politics, will not bring sudden or dramatic political change. The ‘old’ politics is less sclerotic than it is sometimes given credit for, and most demands centre on the problems of daily life, not a desire for revolutionary change. If she runs, anti-establishment presidential candidate Marina Silva in Brazil – who might be expected to pick up a sizeable protest vote – would be likely to win fewer votes in 2014 than she did in 2010. Rousseff will win re-election, even though a self-serving Congress will dilute a political reform expressly designed to appease the disillusioned. In Colombia, where major protests took place across the TOP: Brazil’s Marina Silva, February 2013. BOTTOM: Mexican President Enrique Peña Nieto, October 2013.
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    RiskMap Report 2014 AMERICAS 42 countryin August 2013, the establishment incumbent – or possibly his protégé – will win the 2014 presidential election. In Chile, independent Marco Enríquez-Ominami’s political high-water mark is likely to have been 2010, not 2013, and former president Michelle Bachelet (2006-10) will return to power at the beginning of 2014. Bachelet’s pledge to undertake constitutional reform reflects the need for an update of the social contract, which in turn reflects the changes wrought on society by economic growth. Ironically, the need to tweak the underlying settlement between people and politicians will generate outbursts of social strife as Bachelet challenges social conservatives. She will also face pressures on her left Source: IMF GREENLAND PERU COLOMBIA GUYANA VENEZUELA JAMAICA CUBA BOLIVIA CHILE 5.7% 4.2% 5.8% 1.7% 5% 4.5% PANAMA 6.9% EL SALVADOR 1.6% 1.2% 2.8% HONDURAS 2.8% KEY Booming markets Bypassed markets Booming and bypassed markets, projected growth rates 2014
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    RiskMap Report 2014 AMERICAS 43 flank:she is likely to enact some kind of education reform in 2014, but it will be a watered down measure that will not end protests. Where discontent translates into protest in the region, it will not always be led by the middle classes, still less by the tech-savvy or urban ‘Twitterati’. Latin America may now be more urban than rural, but traditional sectors with long-standing grievances remain potent actors. In many cases, protests will not represent the phenomenon of the ‘emerged market’, but rather the enduring reality of the ‘bypassed market’: the swathe of Latin America that believes the benefits of stellar growth have not trickled down to them. So mining projects in Peru will remain entangled in locally driven protests amid rising frustration that Humala is failing to deliver socially inclusive growth. In Colombia, concerns over the impact of free trade on local agriculture and the poor state of infrastructure will remain sore points outside the cities. And in Mexico, protests against energy reform will attract NEETS (not in education, employment or training) and retired government employees. LOCAL VACUUMS For decades Latin America complained about the overweening presence of the US in its affairs. In the early 2000s, as US foreign policy turned overwhelmingly to the Middle East and elsewhere, the tables turned and some regional policymakers grumbled about US ‘neglect’ in the face of a leftist tide across Latin America. They would argue that Latin America has suffered the effects of a power vacuum for years already. Others seized the opportunity to diversify their trade relations, embracing China as a voracious new consumer of the region’s raw materials. Those countries – led by Brazil, Peru and Chile – must now adjust to a slower rate of Chinese growth, which, if far from representing a vacuum, poses challenges to the commodity export-led model. Overall, the most significant power vacuums across the region will be local, and none more so than that triggered by Venezuela’s slow-burn diplomatic and economic retreat following the death in 2013 of its larger-than-life former president Hugo Chávez (1999-2013). The parlous state of the economy – held aloft largely by the price of oil – means Venezuela can no longer afford to punch above its weight on the regional (or world) stage. Most significantly, the retrenchment of Venezuela’s regional oil subsidies is likely to gather pace in 2014, with the Caribbean beneficiaries – apart from Cuba – most likely to face interest rate rises and stiffer conditions from state oil company PDVSA. The likely curtailing of Venezuelan largesse in the Caribbean highlights the region’s most unreported and
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    RiskMap Report 2014 AMERICAS 44 disconcertingvacuum, where high debt levels, weak external demand and financial-sector vulnerabilities will persist in 2014. The economies of Belize, St Kitts and Nevis, and Jamaica are in particularly poor shape, with the last remaining under IMF tutelage. In Cuba, the risk of vacuum has become permanent. Putative presidential successor Miguel Díaz- Canel will quietly continue his apprenticeship to Raúl Castro, but were the latter to die in 2014 (he will be 83), Díaz-Canel would preside over a transition marked by deep uncertainty. Frustration over the government’s cautious approach to economic reform will be ever present, though social control will remain tight, and emigration as ever will provide a neat escape valve. Honduras represents a more immediately worrying case: political tensions will remain high and the fiscal situation precarious, hindering the fight against rampant crime and the penetration of drug trafficking into the country’s institutional fabric. While there is no power vacuum in Brazil, 2014 is likely to throw into relief the gulf between the country’s projected image and reality. The sporting prowess and cultural vitality highlighted by the World Cup will underline Brazil’s already well- established soft power credentials. But failure to make headway on political reform, the lag in realising oil projects and continued corruption – which will remain under intense scrutiny – point to the limitations that continue to hold back Brazil’s global power pretensions. Brazil’s quest for the elusive UN Security Council seat will therefore remain unfulfilled in 2014, even if its relationship with the US is likely to recover after the bumps of late 2013. REJECTION OF DEFECTION The broad-brush division between left-leaning governments and more pragmatic centrists will persist in 2014. There will be no ‘defections’ from one group to another, though the political momentum in Argentina will continue its drift away from Fernández’s heterodox model, even if this will not culminate until 2015. El Salvador – already highly pragmatic under President Mauricio Funes – is likely to switch to the right in the March 2014 election. Venezuelan leadership of the Bolivarian Alliance for the Peoples of Our Americas (ALBA) will remain muted as domestic woes and economic imbalances limit its ability to shell out oil dollars as liberally as it did under Chávez. Ecuador’s President Rafael Correa will continue to hustle and bustle on the world stage as Chávez’s would-be heir, but his impact will remain limited. One of the most significant developments in 2014 will be the continuing evolution of the Pacific Alliance – comprising Mexico, Colombia, Peru and Chile, which TOP: Chile’s Michelle Bachelet, October 2013. BOTTOM: Venezuelan President Nicolas Maduro and a framed image of deceased former president Hugo Chavez, October 2013.
  • 50.
    RiskMap Report 2014 AMERICAS 45 togetheraccount for 35% of Latin American GDP – not just as a counterpoint to the ALBA, but as an enhanced platform for increased engagement outside the region. With little fanfare, 2014 could feasibly see the Pacific Alliance ripen into a far more effective alternative to the Southern Common Market (Mercosur) trade bloc, which will continue down the path of gradual obsolescence. The business environments in the Pacific Alliance countries are among the most attractive in the region, with predictable policy frameworks, fewer protectionist tendencies, independent central banks and higher productivity levels. The cementing and expansion of the Pacific Alliance will consolidate Latin BRAZIL VENEZUELA MEXICO COLOMBIA PERU CHILE URUGUAY PARAGUAY ARGENTINA KEY Mercosur Pacific Alliance Members of Mercosur and the Pacific Alliance
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    RiskMap Report 2014 AMERICAS 46 America’sgrowing links with the Asia-Pacific region outside China. For example, the reinvigoration of free-trade talks between Mexico and South Korea is likely in 2014. Outside the alliance, the consolidation of Venezuelan oil flows to India will continue and Trans-Pacific Partnership negotiations will conclude, benefiting Mexico, Peru and Chile. Colombia already has a free-trade agreement with South Korea, but is struggling to fully exploit it while its own Pacific region remains retarded by years of government neglect and conflict. A peace agreement should mark the beginning of a regeneration process in the area, even if tangible improvements in port and road infrastructure will only materialise after 2014. Oil pipelines to Colombia’s Pacific coast from Venezuela will have to wait until after 2014, though with Asia set to account for most of the expected growth in oil consumption in coming years, the stage is set for further geopolitical shifts affecting the region. China will remain a key player, even if its growth rates drop down a gear, remaining a prime creditor for Ecuador and continuing to take 80% of Chile’s copper. China will be a growing oil buyer for Venezuela as the latter continues to decouple commercially from the US. If Venezuela is to maintain Chinese trust, President Nicolás Maduro needs to deliver on oil deals – proof, if ever it was needed, that Chinese interest in Latin America is not ideological but highly practical. China’s interest in Latin America will not detract from the fact that the region’s geostrategic relations will continue to hinge largely on the US, which will retain strong economic and security interests in the region in 2014. NO HARD LANDING Latin America faces more challenging conditions in 2014 amid reduced global liquidity and increased market volatility. But the risk of a hard landing is lower than in the past thanks to the trade diversification and reforms put in place across much of the region in recent years. Where reform has been lacklustre, vulnerabilities will be more pronounced, but those most affected will in all likelihood muddle through and avoid painful adjustments. Social protests stemming from historic problems and newer challenges that have arisen from growth and economic success will persist, but are highly unlikely to coalesce into movements that threaten stability.
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    RiskMap Report 2014 SPOTLIGHTON: COLOMBIA 48 RiskMap Report 2014 SPOTLIGHT ON: COLOMBIA 48 NICARAGUA PANAMA ARUBA CURAÇAO BONAIRE ST VINCENT AND GRENADINES SURIN GUYANA COLOMBIA ECUADOR VENEZUELA San José Panama City Colón Cali Bogotá Medellín Caracas Guayaquil Manta Quito BRAZIL SPOTLIGHT ON: COLOMBIA LOOKING AHEAD With an end to the long-running civil conflict in sight, long-term improvements to the security environment are on the cards. However, security in rural areas will see a short-term dip, while the challenges of implementing any peace agreement will use up much of the political capital of the new government elected in 2014. Incumbent President Juan Manuel Santos is likely to be at the head of that government, spelling policy continuity for investors. 2014 will be a decisive year for Colombia. With an end to more than 50 years of internal armed conflict finally in sight, it has never looked so attractive to investors. Already offering one of the most stable political environments in the region, the government is working hard to improve the country’s global competitiveness and deepen economic links with countries in Europe, North America and Asia. The largest-ever investments by a Colombian government in infrastructure, ambitious programmes to stimulate industrial productivity and growth, and burgeoning domestic demand will make the country an increasingly attractive market for industries ranging from extractives to construction and consumer goods. PEACE DIVIDENDS Talks between the government and leftist guerrilla groups are likely to succeed in reaching a peace agreement in 2014, bringing with it the prospect of an end to much of the violence that has haunted the country for decades. Such a deal OLIVER WACK ANALYST, AMERICAS CONTROL RISKS
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    RiskMap Report 2014 SPOTLIGHTON: COLOMBIA 49 would bring about significant long-term improvements in the overall security environment. However, in the short term it would see security in rural areas deteriorate as various groups seek to fill the power vacuum left by the cessation of guerrilla activity. Regions bordering Ecuador and Venezuela, which have long been strategic areas for illegal activity, will remain beset by conflict as the economic attractiveness of drug trafficking, illegal mining and extortion prompts the emergence of new groups to replace guerrilla forces. Nonetheless, continuing pressure by the security forces will mean that such criminal activities will not undermine overall stability, and their impact on foreign investments is likely to be limited. A gradual cessation of ideologically motivated guerrilla attacks on infrastructure, particularly in the energy sector, will allow companies to make considerable savings in security spending. MUDDLING THROUGH The complex challenges of implementing any peace agreement will be at the top of the in tray for the government that emerges from the 2014 legislative and presidential elections. It will have to oversee the demobilisation of up to 8,000 guerrilla fighters, and ensure their reintegration into civilian life. Curbing the drugs trade and promoting rural development as a means of creating alternate livelihoods for former guerrillas will also be daunting tasks. President Juan Manuel Santos remains the likeliest victor at the presidential poll. The most formidable rival candidate, his former housing minister German Vargas Lleras, comes from within his own political movement, and would be likely to refrain from running if Santos decides to stand. Viable opposition candidates are unlikely to emerge either on the political right or left. Broad policy Colombia’s shifting security risk landscape 2011 2012 2013 2014 Medellín Cali Bogotá COLOMBIA Cali Bogotá Medellín COLOMBIA COLOMBIA Cali Bogotá Medellín Medellín Cali Bogotá COLOMBIA
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    RiskMap Report 2014 SPOTLIGHTON: COLOMBIA 50 TOP: President Juan Manuel Santos, September 2013. BOTTOM: Agricultural protest, Bogotá, August 2013. continuity is therefore likely after the elections, and the current positive attitude towards the private sector and foreign investment will be maintained. Nonetheless, a general continuation of the government’s policies will also mean that many of the challenges facing investors, such as inefficient bureaucratic procedures, remain unresolved. The government is unlikely to attempt major reforms ahead of the elections for fear of alienating its supporters and giving political ammunition to opponents, while implementing a peace agreement will tie up much of the next government’s political capital. The government will muddle through 2014 without tackling significant problems, in particular those facing the extractives industry, such as lack of clarity in the legislative framework for mining operations, and uncertainty over environmental protection standards and investment limits. RELATIONSHIP MANAGEMENT Santos’s government has succeeded in addressing some of the main social issues facing the country, and has created more than 2m jobs in the last three years. Although levels of inequality remain high, poverty has declined significantly and the middle class has more than doubled in size over the past decade, creating considerable potential for further growth in the consumer market. Continued FDI-driven expansion of the retail sector is likely to be a major contributor to overall GDP growth in 2014. However, social tensions persist, and managing relations with local communities will remain one of the main challenges facing foreign companies in 2014. Companies with operations in rural areas can expect to see further community protests in the run-up to the elections. A successful peace agreement and the subsequent strengthening of the political left would be likely to provide further momentum to social and environmental campaigns, and protest movements. Meanwhile, inadequate infrastructure, in particular transport networks, will continue to prevent growth levels from reaching their full potential. The government’s ambitious $24bn plan to improve the connectivity and quality of roads will improve matters, but it is unclear when the first contracts will be assigned or when construction will begin. Given that heavy goods vehicle traffic is increasing, the situation is likely to become worse before it gets better. WATERSHED YEAR 2014 will mark a watershed for Colombia, with the long-hoped for end to the internal armed conflict likely to buoy recent slow but steady improvements in the investment environment. While complex challenges for business will persist, companies prepared to tackle them stand to reap the benefits offered by one of the region’s most attractive markets.
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    MYANMAR Guam N. Mariana Is. MALDIVES SRILANKA PAKISTAN AFGHANISTAN UZBEKISTAN TAJIKISTAN KYRGYZSTAN I N D I A NEPAL BHUTAN BANGLADESH THAILAND LAOS CAMBODIA VIETNAM M A L A Y S I A BRUNEI I N D O N E S I A PHILIPPINES EAST TIMOR Papua PAPUA NEW GUINEA A U S T R A L I A C H I N A Taiwan J A P A N SOUTH KOREA NORTH KOREA M O N G O L I A SINGAPORE Aceh Sumatra Java Sulawesi Maluku Kalimantan Sulu archipelago INDIAN OCEAN PACIFIC OCEAN Kashmir Ashgabat Tashkent Bishkek Almaty Dushanbe Kabul Kandahar Islamabad Lahore Karachi Delhi Ahmedabad Mumbai Hyderabad Bangalore Chennai Jaffna Colombo Kolkata Chittagong Dhaka Kathmandu Yangon Vientiane Hanoi Kunming Bangkok Phnom Penh Ho Chi Minh City Kuala Lumpur Penang Jakarta Surabaya Manila Cebu Darwin Cairns Brisbane Port Moresby Lae Guangzhou Taipei Fuzhou Shanghai Wuhan Chongqing Chengdu Xi’an Zhengzhou Tianjin Beijing Dalian Changchun Harbin Vladivostok Sapporo Tokyo NagoyaOsaka Fukuoka Seoul Pyongyang Hangzhou Shenyang Urumqi Muscat Hong Kong Shenzhen TURKMENISTAN KAZAKHSTAN
  • 57.
    RiskMap Report 2014 ASIA-PACIFIC 52 TheThilawa Special Economic Zone is an interesting place. Located 16 miles (25km) south of Yangon, the former capital of Myanmar, it currently comprises 2,000 hectares of scrapings and foundations. But when finished it will be the country’s largest industrial estate, with a power plant, adjacent deep water port and capacity to host high-tech assembly plants, textile factories and other labour-intensive industries. It’s a Japanese thing. Mitsubishi, Marubeni and Sumitomo are building Thilawa, the Japan International Co-operation Agency (JICA) is providing soft loans for much of the infrastructure and the majority of its tenants will be Japanese. Japanese Prime Minister Shinzo Abe in May 2013 felt the project was sufficiently symbolic for him to attend the ground-breaking ceremony, becoming the first Japanese prime minister to visit Myanmar in 35 years. Thilawa symbolises Japan Inc.’s decision to dominate Myanmar’s return to the global economy after decades of sanctions and isolation. Japan is advising Myanmar on the reform of its central bank and currency regime, the restructuring of its commercial banking sector and the development of its equity market. It is also building most of Myanmar’s key infrastructure requirements, which are legion in a country with sub-Saharan ASIA-PACIFIC POLITICAL RISK 2004-14 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 KEY INSIGNIFICANT LOW MEDIUM HIGH EXTREME SECURITY RISK 2004-14 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 SUB-REGIONAL RISK AVERAGES Pacific Southeast Asia South Asia Pol Sec Pol Sec Pol Sec Pol Sec East Asia 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 STEVE WILFORD DIRECTOR, ASIA CONTROL RISKS ANDREW GILHOLM HEAD OF ANALYSIS, ASIA CONTROL RISKS
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    RiskMap Report 2014 ASIA-PACIFIC 53 levelsof human development. Yes, the cash-rich trading companies and manufacturers of Tokyo, Osaka and Nagoya believe there is a commercial opportunity, but their government is also prodding them very hard to steal a strategic march on China. Until 2011, the Chinese built most big things in Myanmar, mainly because Myanmar’s status as an international pariah precluded anyone else from doing so. Then, in September of that year, Myanmar’s President Thein Sein halted construction of the giant, Chinese-invested Myitsone dam. Ostensibly taken on environmental grounds, the decision was also intended to defuse increasingly vociferous popular criticism of the government’s cosy and corrupt relationship with Chinese business, and a widespread sense that Myanmar was ceding sovereignty to its dominant neighbour. The decision rapidly, and quite unexpectedly, was followed by freedom for Aung San Suu Kyi, engagement with the US and a stampede of interested investors. Japan has become a central part of this story, while China is scrambling to reset its image and role in the country. CHINA NORTH KOREA SOUTH KOREA JAPAN Longjing/Asunaro Tianwaitian/Kashi Location of Diaoyu/Senkaku Islands Duanqiao/Kusunoki Chunxiao/Shirabaka RUSSIA EEZ border claimed by Japan EEZ border claimed by China Oil and gas fields (Chinese name in black, Japanese name in white) Disputed area KEY Territorial disputes, East China Sea
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    RiskMap Report 2014 ASIA-PACIFIC 54 TOP:Japanese Prime Minister Shinzo Abe and Myanmar President Thein Sein, May 2013. BOTTOM: Japan’s coastguard warning activists away from Diaoyu/Senkaku Islands, August 2013. TAKING ATOLL If Sino-Japanese rivalry is an indirect, low-key affair in Myanmar, in the East China Sea it is anything but. Beijing’s dispute with Tokyo over a set of islets there, known as Diaoyu in China and Senkaku in Japan, will remain an open sore in bilateral relations. With both sides continuing to send vessels and aircraft into disputed areas with unprecedented frequency, and the blogosphere on both sides of the East China Sea full of nationalistic vitriol that leaves leaders little room for concessions, there is substantial scope for miscalculation and virtually no prospect of resolution. It has long been assumed that sparring over atolls or fighting for the hearts and minds of the region’s emerging economies were CHINA LAOS VIETNAM MALAYSIA CAMBODIA PHILIPPINES Scarborough Shoal Spratly Islands Macclesfield Bank Paracel Islands Diaoyu/Senkaku Islands KEY UNCLOS’s 200 nautical mile EEZ China’s ‘nine dotted lines’ claims Hotspots Maritime disputes, South China Sea
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    RiskMap Report 2014 ASIA-PACIFIC 55 disconnectedfrom China’s and Japan’s more serious business of being two of the world’s largest direct trading partners. But for many Japanese manufacturers, the fallout from their country’s geopolitical rivalry with China is giving pause for thought when it comes to investment decisions. The 2012 anti-Japan protests in China over Tokyo’s ‘nationalisation’ of the Senkakus saw vandalism of Japanese retail outlets, disruption at manufacturing facilities, government harassment including customs delays, and a material impact on bilateral trade and sales by some Japanese companies in China. According to provisional figures from the Japanese Ministry of Finance, Japanese FDI in China fell by 31% year-on-year in the first half of 2013, a trend that probably reflects more than just China’s rising cost base and slowing growth. It is not just Japan that is struggling to deal with Beijing. China’s seizure of effective control over Scarborough Shoal, 125 miles (200km) off the coast of Luzon, may not have involved any direct military force, but was one of the most striking indications yet of China’s intent. Vietnam’s dispute with China over the Paracel Islands will remain another potential trigger of volatility in relations in 2014. Although most countries are less directly affected, the problem nonetheless vexes most of China’s neighbours, which are uneasy about Beijing’s increased willingness to subjugate its declared emphasis on stable, win-win relations to its pursuit – backed by economic and military clout – of poorly defined territorial claims. Having long been little more than a talking point in think tanks, these issues now have profound influence on several governments’ strategic thinking, and have the potential to significantly affect intra-regional trade and investment. FOREIGN INVESTORS UNDER PRESSURE As if all that wasn’t bad enough, domestically China has greatly stepped up regulatory scrutiny of major foreign businesses operating in the country. High-profile corruption probes, raids and the detention of foreign executives in 2013 have particularly targeted the pharmaceutical sector, but numerous industries are affected. This is not, as most commentators tend to suggest, a national campaign to hound foreigners out of crowded sectors of the economy (even if some local players would cheer such a move). Those analysts who like to posit a unified theory of growing Chinese bellicosity towards foreigners at home and abroad are, for the most part, grossly over simplifying. The complex and opaque combination of factors behind recent developments includes economic nationalist considerations, but probably a more important driver is determination by China’s new leaders to address major public grievances by tackling
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    RiskMap Report 2014 ASIA-PACIFIC 56 BRIBERYINVESTIGATIONS IN CHINA’S PHARMACEUTICAL AND MEDICAL SECTOR, 2013 • Sep: Chinese state television alleged that Dumex, Danone’s baby nutrition unit, had bribed 116 medical workers at 85 hospitals and health agencies to promote its infant formula milk. Tianjin municipal government launched an investigation and disciplined 13 hospital employees for accepting bribes. Dumex announced that it would take full responsibility and disciplinary action against the employees involved. Danone’s advanced medical nutrition unit, Nutricia, started an internal investigation after state media alleged that it had bribed more than 100 doctors at 14 hospitals in Beijing to increase sales. • Sep: Swiss pharmaceutical company Novartis opened an internal inquiry after Chinese media accused its Alcon eye care division of using a middleman to bribe doctors at more than 200 hospitals in China. Novartis stated that it would take swift corrective measures if any inappropriate behaviour was identified. • Aug: Chinese health authorities began to investigate French pharmaceutical company Sanofi for allegedly paying bribes totalling around RMB 1.69m ($276,000) to 503 doctors at 79 hospitals in the country. Sanofi said that it would co-operate with a review of its business in China. • Jun: Chinese police authorities launched an investigation into pharmaceutical multinational GlaxoSmithKline for allegedly bribing government officials and doctors. Several senior executives and sales employees were detained during the probe. GlaxoSmithKline announced that it would co-operate and dismissed more than 100 Chinese sales representatives. TOP: Shanghai, China. BOTTOM: Anti-Japan protests, Beijing, China, September 2012.
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    RiskMap Report 2014 ASIA-PACIFIC 57 corruptionand lowering prices for key products and services, notably in the pharmaceutical, medical, food, consumer goods and energy sectors. Foreign companies have actually received remarkably little attention from regulators on corruption in the past. Given how pervasive non-compliance is in some sectors, investigations into foreign companies over the years have if anything been notable for their rarity. But as FDI has become less important to China’s growth, the government now appears more comfortable with going after foreigners, and the negative investor perceptions this might imply. Although many more Chinese companies have been subject to corruption and pricing investigations than foreign ones, targeting a high-profile multinational is a relatively easy way for regulators to show they are serious about enforcement. It also protects officials from accusations that such companies get off more lightly than domestic firms, and shows the public that quality issues and corruption are not only problems for Chinese companies, potentially boosting Chinese brands striving to compete with international ones. Adding confusion to the picture for multinationals trying to make sense of the changing environment is the involvement of multiple agencies at both national and local levels. These range from the Ministry of Public Security (which has undergone its own leadership changes) to the National Development and Reform Commission, and the Administration of Industry and Commerce. Yet the notion that these and other organisations are all following a script minutely co-ordinated in Beijing is almost certainly false. Meanwhile, although high-level corruption investigations within the ruling party, in contrast to those affecting multinationals, are about intra-elite politics, they also have implications for many foreign investors. The fall from grace of well-connected individuals with whom companies have had close ties poses growing risks, while such ties are even coming under scrutiny from regulators in the West. In short, while there is far more to the 2013 crackdowns than just foreigner- bashing, the bottom line is clear: operationally in 2014, things are going to remain a lot harder for foreign companies in China than in the past. Companies that still believe in the long outdated precept that ‘it’s just the way things are done in China’ have a big problem. The rules of the game are changing, and doing things ‘the China way’ will leave foreign investors seriously vulnerable. The problem is that stamping out the practices that accompany these old attitudes is much easier said than done. Although official crackdowns are becoming more systematic and make increasing reference to laws and regulations, they ultimately tackle the symptoms rather than the roots of the problem. Most of the dynamics that have made bribery and
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    RiskMap Report 2014 ASIA-PACIFIC 58 kickbacksso common in so many sectors are still there, even as the risk of punishment is growing. Some mitigation options also carry their own serious risks: some companies trying hard to ‘do things right’ and reduce exposure by severing ties with suspect staff, agents, vendors or partners have faced threats ranging from whistle-blowing and loss of business to outright intimidation. LEADING THE WAY However, the first year of China’s new leadership was certainly not all doom and gloom. President Xi Jinping and Premier Li Keqiang appear to have grasped that China now needs leadership, not just management and ‘tinkering’, if its economy is to confront the challenges of coming down from the credit binge – one that allowed their predecessors to postpone structural reforms that were touted for a decade. Xi and Li have already made material progress in tackling some key areas with increased urgency, somewhat boosting prospects for long-term economic stability. However, 2014 will bring major tests of their resolve, and their short-term reward for passing them will be continued pain and strain, including localised crises in local government finances, and business failures in sectors plagued by overcapacity. Abe too understands that just ‘managing’ Japan’s economy is not enough. His 2013 efforts to dragoon the central bank into radical monetary easing to spur a sustainable escape from deflation, counter yen (currency) strengthening and propose a highly controversial rise in consumption tax in April 2014, not to mention his emphasis on aggressive Japanese expansion into emerging markets such as Myanmar, also lay the ground for assaults on other previously unassailable areas of the economy. The coming year may well see attempts to open up the protected agriculture sector and loosen labour regulation. Abe is trying to put Japan on notice that avoiding these hard choices has become an existential threat. This forthright gambit, coupled with a tougher stance towards China, is proving popular with the electorate. However, as in China, 2014 will bring major tests of the new leadership’s ability to follow through. Prospects for substantive, positive reforms are arguably better than at any time since the days of former prime minister Junichiro Koizumi (2001-06) but, like Koizumi, Abe will struggle to make many fundamental breakthroughs. WIDER RAMIFICATIONS China and Japan’s strategic and economic imperatives will present opportunities and challenges for other economies in the region. In many respects, China’s stimulus binge funded Indonesia’s extractive industry boom. China’s thirst for Indonesian coal, nickel, bauxite, timber and palm oil fed the longest period of high growth TOP: Chinese President Xi Jinping, October 2013. BOTTOM: Chinese Premier Li Keqiang, October 2013.
  • 64.
    RiskMap Report 2014 ASIA-PACIFIC 59 sincethe fall of former president Suharto (1967-98). President Susilo Bambang Yudhoyono’s administration essentially used this as a political free pass, and squandered an opportunity to fix an economy riddled with corruption and bureaucratic inertia, oligopolistic and often predatory local business groups, and a rigid labour market. His successor, who must be chosen in mid-2014, will have to tackle all of these challenges at a time when Xi and Li’s structural reforms are already having an impact in the form of greatly reduced growth in demand for Indonesia’s natural resources. The much needed shifts in China’s economy will make achieving the much needed shifts in Indonesia’s economy all the more challenging. Voters will be looking for a leader who takes on vested interests and tackles corruption. The only politician doing this is the wildly popular mayor of the capital Jakarta, Joko Widodo (better known as Jokowi), but he has yet to declare his intentions. Other contenders, such as Golkar chairman Aburizal Bakrie, and tycoon and former general Prabowo Subianto, are status quo players who will not provide the leadership Indonesia needs. Ironically, one antidote to the hangover from the Chinese-led resource export boom would be to create an operating environment that provides for a Chinese-led direct investment boom, with both Chinese and Japanese manufacturers keen to diversify production from China’s eastern seaboard. But while labour in Indonesia might be ostensibly cheaper, industrial action, over-regulation, poor infrastructure and policy uncertainty hardly makes the move cost-effective for many. Even if Indonesia gets what its electorate appears to want – a clean president, committed to anti-corruption efforts, sitting above a parliament with the professionalism to derive and review laws that actually work for the country – the nexus between business and politics, and extensive administrative decentralisation will militate against deep structural reform. CLEANING UP Filipinos appear to have the type of leadership that Indonesians are looking for, in the form of President Benigno ‘Noynoy’ Aquino III. Anticipated GDP growth of 6.75% for 2013, achievement of investment-grade status in October 2013 and a general shift in perception of the country from the ‘sick man of South-east Asia’ to one with significant potential are largely down to Noynoy. His mantra of anti-corruption and good governance, slavishly regurgitated by an adoring media, has changed public attitudes towards bad behaviour by bureaucrats and propelled a new optimism. This has been accompanied by a few ‘big wins’ in infrastructure development, such as the extension of the capital Metro Manila’s light rail system, and construction of a series of ports and highways.
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    RiskMap Report 2014 ASIA-PACIFIC 60 Asidefrom Japan, the Philippines is likely to take Beijing’s prize for the region’s most annoying neighbour. Noynoy’s move to internationalise its dispute with China over Scarborough Shoal by asserting its claim under the UN Convention on the Law of the Sea flies in the face of Chinese demands that territorial disputes are a bilateral affair. Japan is exploiting this with offers of second-hand coastguard vessels and military aid in a way that would have been unthinkable in the recent past. The Philippines can afford to be somewhat less circumspect about antagonising China than its neighbours, given its relative economic autarchy: the dispute with China has choked off an investment flow that was of limited importance in the first place. Although manifestations of the ‘old Philippines’ – such as the September 2013 occupation of Zamboanga by Muslim separatists and persistent attacks by the communist New People’s Army – will continue, they are unlikely to shake this optimism. Such developments are largely peripheral to the economic good news that is likely to see the Philippines match Chinese levels of GDP growth in 2014. Noynoy’s greatest challenge will be to embed his agenda more deeply so the gains outlive his presidency, which ends in 2016. The legacy of the Philippines’ two other great reforming presidents, Ramon Magsaysay (1953-57) and Fidel Ramos (1992-98), suggests his chances of success will be partial at best. FACTION FIGHTING Those seeking a China-style paradigm shift in industrial policy in Vietnam or the type of dynamic leadership on show in the Philippines will search in vain. The slow-burn banking-sector crisis and property meltdown triggered by bureaucrat- businessmen gorging themselves on debt shows little sign of resolution. The country is just shy of bankrupt, and the bloated state-owned enterprises (SOEs) that absorbed much of the debt will not receive the rationalisation they need, largely because of the Shakespearean drama unfolding in elite circles in the run-up to the Communist Party of Vietnam (CPV) leadership transition in 2016. This is, to say the least, unfortunate at a time when Japanese and Western businesses are actively reviewing their ‘China+1’ diversification plans. Having failed to oust Prime Minister Nguyen Tan Dung in 2013, President Truong Tan Sang is preparing for a fresh confrontation with Dung in 2014-15 as other members of the politburo align and re-align accordingly. Although the CPV is not about to implode, the politburo’s descent into warring groups, the extremely strong nexus between business and politics at the peak of government, and the lack of coherent macroeconomic policy are all reasons why Vietnam is not the ‘little China’ that many foreign investors imagine it to be. Practices that shield SOEs, crowd out private TOP: Indonesian President Susilo Bambang Yudhoyono, October 2013. BOTTOM: Philippines President Benigno Aquino III, October 2013.
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    RiskMap Report 2014 ASIA-PACIFIC 61 andforeign investment, and create the economic imbalances that trigger high inflation will persist. LOOKING INWARD Malaysia’s Prime Minister Najib Razak will govern as a diminished leader after the opposition coalition almost took power in 2013 from the United Malays National Organisation (UMNO)-led Barisan Nasional government. The charitable will say his abandonment of pre-election promises to untangle the web of preferential treatment for the ethnic-Malay majority stems from the narrowness of his victory and a reassertion of power by UMNO’s conservative wing. The cynical will assert that it was all just an election stunt. But if the parties did not change in 2013, the electoral calculus did, and in ways that will affect the country far beyond Najib’s current term. The ethnic-Chinese and -Indian political arms of ‘the Barisan’ were shattered at the polls, exposing the pretence that UMNO governs as part of a tri-racial coalition/consensus. With its latest round of preferential treatment for its Malay vote bank, and worrying signs of racism in social and religious policy, racial politics are becoming ever more polarised. These will provide a canvas for repeated mass protests, particularly by a middle class frustrated by rising crime and perceptions of growing government corruption. Malaysia’s growing fractiousness is now ‘a factor’ in foreign investment decisions in a way it has arguably never been before. DEEP DIVIDES Japanese and Chinese economic policymaking will loom large over Thailand in 2014: the two respectively consumed 10% and 12% of all Thai exports in 2012-13. Their demand for Thai vehicles, electronics, electrical equipment and rice will flatten in the year ahead, producing probably the weakest growth among the region’s industrialising economies. Economic stress can quickly transform into mass protests, and Thailand’s unique social tensions exacerbate the threat. ‘Yellow shirts’ (royalist, conservative) and ‘red shirts’ (supporters of former prime minister Thaksin Shinawatra (2001-06)) have caused bouts of sometimes violent disruption to the capital since Thaksin was deposed in a 2006 coup. The tensions reflect a conflict between a direct, populist political modus operandi that circumvents traditional elite groups, and one that respects the traditional highly conservative social order that its yellow-shirt supporters see, along with Buddhism, as the essence of being Thai. Despite the faltering economy, Prime Minister Yingluck Shinawatra is proving to be more than simply Thaksin’s little sister. She will continue to take a highly cautious approach to everything from constitutional change TOP: Thai Prime Minister Yingluck Shinawatra, February 2013. BOTTOM: Malaysian Prime Minister Najib Razak, October 2013.
  • 67.
    RiskMap Report 2014 ASIA-PACIFIC 62 andmilitary reshuffles to the return of her exiled brother. Meanwhile, the very real possibility that the 84-year- old king could pass away in 2014 has prompted speculation around scenarios as extreme as this triggering descent into civil war. It would not. Far more likely would be a period of self-reflection and a fading of palace and military from the political foreground. THE REWARDS OF NEGLIGENCE One thing is certain in the coming year: resting on your laurels and hoping the good times will continue to roll is not an option. China’s self-imposed cooling alone has made sure of that. Some Asian leaders will grasp this and make it an imperative (the Philippines and Japan). Others will recognise the need but attempt to defer the pain, constrained by vested interests keen to maintain the status quo (Malaysia and Thailand). Some laggards will miss the importance of the regional and global changes afoot altogether, and pursue a parochial agenda (Vietnam and probably India). Ironically, the state that has managed to put off key structural changes the longest is likely to see the most profound progress in 2014. After opening the Thilawa industrial estate, Abe announced the cancellation of Myanmar’s $1.8bn debt to Japan ‘to support the country’s new commitment to reform’. No doubt money well spent if it keeps Japan at the forefront of foreign business in ‘the new Myanmar’. Destinations for Thai exports, Jan-Aug 2013 REST OF THE WORLD 56% CHINA 12% US 10% JAPAN 10% MALAYSIA 6% HONG KONG 6% Source: Thai Ministry of Commerce
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    Jodhpur, India by AndrewPickford Control Risks
  • 69.
    RiskMap Report 2014 SPOTLIGHTON: INDIA 64 RiskMap Report 2014 SPOTLIGHT ON: INDIA 64 MYANMAR OMAN UAE SRI LANKA PAKISTAN AFGHANISTAN I N D I A NEPAL BHUTAN BANGLADESH D LAOS CAMBODIA V C H I N A Kashmir Ashgabat Kabul Kandahar Islamabad Lahore Karachi Delhi Ahmedabad Mumbai Hyderabad Bangalore Chennai Jaffna Kolkata Chittagong Dhaka Kathmandu Yangon Vientiane Hanoi Kunming Ho C Chon Chengdu Muscat Abu Dhabi Dubai I R A N SPOTLIGHT ON: INDIA LOOKING AHEAD Fiercely contested general elections in 2014 will not return the decisive government that investors have been hoping for. Although the opposition Bharatiya Janata Party (BJP) should improve on its lacklustre performance in 2009, the growing strength of region-based parties will ensure that neither of the main parties achieves a majority. Convoluted and piecemeal policymaking will prevail as key pieces of legislation continue to fall victim to centre/state squabbles. India may seem to offer many opportunities, but investors are not convinced: FDI inflows fell by 21% in 2012-13 compared with the previous year. The fall underlines the government’s lacklustre performance in attracting FDI in recent years, in large part a consequence of its haphazard policymaking. Investors will hope that general elections in May 2014 will herald the return of a more decisive, pro-investment government that can return the economy to higher growth. Such hopes look set to be disappointed. ONLY THE VOTERS DECIDE The elections will not produce a strong and decisive government. Neither the Indian National Congress (Congress), which leads the governing United Progressive Alliance (UPA) coalition, nor the main opposition Bharatiya Janata Party (BJP) will even come close to securing a simple majority. The BJP will, to some extent, benefit from the UPA’s numerous governance faux pas, and will be boosted by the popularity of its prime ministerial candidate, the controversial chief JAN ZALEWSKI ANALYST, SOUTH ASIA CONTROL RISKS
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    RiskMap Report 2014 SPOTLIGHTON: INDIA 65 minister of the western state of Gujarat, Narendra Modi. But although it is likely to capitalise on an underwhelming electoral performance by Congress to improve on its showing at the 2009 polls, this alone will not directly translate into success. As Indian voters become increasingly disenchanted with the two main national parties, so region-based parties – the Trinamool Congress in West Bengal, the Samajwadi and Bahujan Samaj Parties in Uttar Pradesh, to name but a few – have increasingly become a political force to be reckoned with. Such parties are often perceived as better able to respond to local demands. But their policy stances often contradict those of the main parties, including an often more critical approach to foreign investment. This paralyses the ability of the big two to implement their party programmes. The growing popularity of region-based parties will be on prominent display in 2014. Regional parties will make a particularly strong showing in Uttar Pradesh, Tamil Nadu, West Bengal and Bihar, which together account for 201 of the 543 seats in the Lok Sabha (lower house). IN A STATE A direct consequence of the rise of regional parties and the waning importance of federal politics has been constant fierce bargaining over legislation, particularly on investment-related matters. The tortuous passage of the UPA’s FDI policy on multi-brand retail in 2011-12 is a case in point. The cabinet passed the policy before withdrawing it amid widespread opposition. It was Productive time in the Lok Sabha (% of scheduled time) 8th LS (1985-89) 9th LS (1989-91) 10th LS (1991-96) 11th LS (1996-97) 12th LS (1998-99) 13th LS (1999-04) 14th LS (2004-09) 15th LS (2009-12*) 120% 140% 100% 80% 60% 40% 20% 0% 111% 115% 100% 108% 109% 91% 87% 70% Source: PRS Legislative Research* ongoing
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    RiskMap Report 2014 SPOTLIGHTON: INDIA 66 finally passed in heavily watered down form. Such uncertainty in policymaking will remain a constant under any new government. A government led by either Congress or the BJP would continue to seek increases in FDI, but would face sometimes hostile opposition, including by region-based coalition partners. Lengthy negotiations that delay and dilute legislative processes and policymaking are highly likely. Government initiatives to raise FDI ceilings will continue to evoke strong opposition from regional parties, particularly in sectors such as retail, where such moves would be perceived to infringe on local livelihoods. Numerous pieces of draft legislation pending before parliament are likely to fall victim to the detrimental effect of centre/state tussles. These include most prominently a bill aimed at implementing a new Goods and Services Tax (GST) to simplify India’s complex web of central, state and local taxes. The bill will continue to face significant opposition from states that fear the resultant revenue losses. FRUSTRATE AND PREVARICATE The piecemeal policymaking that has characterised recent years is therefore likely to continue. This is not to say that there will be no windows of opportunity. The UPA has shown that even weak administrations can at times get their act together to pass useful laws and regulations. Despite the retail policy debacle, the policy formed part of a larger array of reforms that subsequently saw FDI ceilings raised without significant opposition, including in civil aviation. The government in August 2013 also passed the Companies Act, strengthening corporate regulation. Yet such successes are only as good as the government’s ability to implement them. And this boils down to the intrinsic difficulties that Indian governments face in satisfying demands for improved governance while safeguarding stability by protecting old power structures. Decisive attempts to address the key challenges facing investors – inadequate infrastructure, difficulties in acquiring land and obtaining environmental clearances, and corruption – would tread on the toes of many vested interests, and constitute a tall order even for a strong government. India will therefore continue to frustrate investor expectations over the coming year and beyond. The elections will not produce a government strong enough to tackle the issues undermining growth prospects. Policy flip-flops are most likely in controversial sectors that evoke nationalist sentiment: multi- brand retail, but also sectors such as pharmaceuticals and defence, where changes to FDI ceilings are mooted. Whether or not the government changes in 2014, little else will. TOP: BJP prime ministerial candidate Narendra Modi, September 2013. BOTTOM: Trinamool Congress meeting, Delhi, October 2012.
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    ANDORRA Faeroe Islands (DENMARK) Northern Ireland (UK) IRELAND NORWAY FINLAND DENMARK PORTUGAL SPAIN FRANCE Corsica (FRANCE) SWITZERLAND LIECHTENSTEIN NETHERLANDS BELGIUM LUXEMBOURG GERMANY MALTA ITALY GREECE ALBANIA MACEDONIA KOSOVO MONTENEGRO BOSNIAAND HERZEGOVINA BULGARIA CROATIA SLOVENIA SERBIA AUSTRIA HUNGARY CZECHREP. SLOVAKIA P O L A N D ROMANIA MOLDOVA U K R A I N E BELARUS LITHUANIA LATVIA ESTONIA T U R K E Y GEORGIA ARMENIA AZERBAIJAN Nakhchivan (AZERBAIJAN) CYPRUS SYRIALEBANON ISRAEL PALESTINIAN TERRITORIES TUNISIA MOROCCO I R A Q SWEDEN UNITED KINGDOM MEDIUM security in deprived urban areas Zürich Dublin London Amsterdam Brussels Berlin Oslo Gothenburg Aarhus Copenhagen Stockholm Helsinki Tallinn Riga VilniusKaliningrad (RUSSIA) Minsk Warsaw St Petersburg Prague Bratislava Vienna Berne Geneva Paris Barcelona Madrid Lisbon Rome Budapest Ljubljana Zagreb Sarajevo Podgorica Tirana Athens Thessaloniki Istanbul Ankara Kiev Tbilisi Yerevan Baku Rostov on Don Atyrau Samara Moscow Nizhniy Novgorod Tehran Baghdad Basra Erbil Amman Cairo Alexandria Tripoli TunisAlgiers Annaba Oran Rabat Casablanca Belgrade Bucharest Skopje Sofia Chisinau Damascus Beirut Kurdistan Region ALGERIA R U S S I A N F E D E R A T I O N
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    RiskMap Report 2014 EUROPE 68 Europeaneconomies experienced another difficult year in 2013. Both emerging and developed markets faced headwinds that threatened to blow their nascent recoveries from the global financial crisis off course. Nowhere was this more evident than in Turkey. Anticipated growth of just under 4% in 2013 may have been an improvement on the three-year low of 2.1% in 2012, but is a far cry from the stellar years of 2010-11, when GDP expanded by an annual average of around 9%. Turkey’s economy has long been driven by large capital inflows, themselves partly supported by the programme of quantitative easing in the US. But the US announcement in mid-2013 that tapering of quantitative easing was on the cards had a negative impact on capital flows and the lira (currency), and brought the questionable sustainability of Turkey’s model into stark relief. The US’s decision in September 2013 to delay tapering offered momentary respite, but a fundamental rebalancing of Turkey’s economy away from risky capital inflows and towards more sustainable sources of growth will be essential if it is to weather the eventual withdrawal of monetary stimulus in the US. This is unlikely in 2014. Neither of the regions ANNA WALKER HEAD OF ANALYSIS, EUROPE CONTROL RISKS EUROPE POLITICAL RISK 2004-14 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 KEY INSIGNIFICANT LOW MEDIUM HIGH EXTREME SECURITY RISK 2004-14 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 SUB-REGIONAL RISK AVERAGES Central Asia Western Europe Northern Europe Pol Sec Pol Sec Pol Sec Pol Sec Central & Eastern Europe 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 T
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    RiskMap Report 2014 EUROPE 69 TOP:German Chancellor Angela Merkel, October 2013. BOTTOM: Former Italian prime minister Silvio Berlusconi, October 2013. on Turkey’s borders – the EU and the Middle East – are likely to buy enough Turkish exports to support growth in 2014, while domestic investment and consumption are unlikely to prove major catalysts. COMMODITY CRUNCH Weaker commodity prices, driven partly by slower growth in China, will continue to hit economies across Europe, particularly resource- dependent emerging markets in the east. Russia is experiencing increasing difficulty sustaining the rapid growth of the pre-crisis years, partly because of its lack of progress in diversifying away from oil and gas into non-resource sectors. Growth is unlikely to accelerate significantly in 2014 from below 2% in 2013, while the longer-term economic trajectory of 3%-4% annual growth is notably slower than the 7% average registered in the run-up to the crisis year of 2009. Although eurozone countries would happily trade their bailouts for growth this rapid, for Russia this marks a new reality. Kazakhstan, another resource- dependent economy, is also seeing much slower growth than pre-2008, at around 5%, down from an average of 10% in the previous seven years. In both countries, economic diversification and industrial innovation have long been buzzwords. However, concrete progress in achieving these goals has been limited and is likely to remain so while deficiencies in the business environment – ranging from corruption and red tape to unattractive tax regimes – remain unaddressed, deterring investment. TWILIGHT ZONE The eurozone is in no position to offer much comfort or stimulus to emerging markets. The eurozone crisis has bottomed out, but 2014 will not mark the start of a more dynamic recovery, with stagnation or sluggish growth across the region the best-case scenario. The run-up to the German parliamentary elections in September 2013 saw the eurozone’s problems slide down the agenda. Although the strong result for Chancellor Angela Merkel – her party narrowly missed securing an outright majority – has greatly enhanced her personal political authority, the resultant coalition government will not have any quick fixes to the eurozone’s troubles. On the contrary, Germany is likely to remain wary of assuming the role of eurozone leader if this means further financial support for – in the eyes of German taxpayers – profligate eurozone members that have already benefited far too much from the country’s largesse. Support for bailouts will remain contingent on the maintenance of austerity measures. Talk of new bailouts (Greece, Portugal, Slovenia) or the revision of existing packages (Cyprus) will continue to dominate the headlines in 2014. Meanwhile, the combination of a Greek
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    RiskMap Report 2014 EUROPE 70 andItalian presidency of the EU Council in the first and second half of the year respectively is unlikely to foster much confidence in the EU’s capacity to address its internal problems or provide the political space for strong leadership in tackling the region’s economic sclerosis. Italy in September 2013 narrowly avoided yet another political crisis when former prime minister Silvio Berlusconi (1994-95, 2001-06, 2008-11) failed to persuade his party to withdraw from the coalition government in protest at moves by the Senate (upper house) to ban him from holding public office. However, Berlusconi has demonstrated on countless occasions that he is easily capable of rebounding from such setbacks: further antics are likely in 2014, perpetuating the risk of instability. Yet despite the eurozone’s unresolved financial and economic issues, Latvia’s adoption of the single currency in January 2014 demonstrates the euro’s continued appeal to smaller countries in the region. Although accession to the eurozone is a condition of membership for all new entrants to the EU, countries in Central and Eastern Europe have exhibited varying degrees of enthusiasm for swapping their currencies for the euro, depending on the size of their economies. Latvia’s small, open economy lends itself to the euro anchor more easily GDP growth, selected eurozone countries, 2008-14 6% 4% 2% 0% -2% -4% -6% -8% -10% 2008 2009 2010 2011 2012 2013 2014 KEY FRANCE GERMANY ITALY SPAINGREECE IRELAND Source: IMF, World Economic Outlook, October 2013
  • 76.
    RiskMap Report 2014 EUROPE 71 thanthat of Poland, for example. In the latter, euro adoption is unlikely before 2020 because of the government’s lack of public support and hence absence of a mandate to push through the required constitutional changes. Lithuania, in contrast, looks set to follow Latvia by adopting the euro in 2015, having narrowly failed to meet the inflation convergence criteria during its previous attempt in 2007. Adoption of the euro and the push for convergence will continue to drive structural and economic reforms across Central and Eastern Europe, increasing policy predictability and stability for investors. MIDDLE-CLASS AMBITIONS – AND FEARS While the smaller countries in the region have hastened to anchor themselves to the euro, appetite for EU membership in Europe’s third-largest country by population, Turkey, is looking decidedly weak – as is the desire of many already sceptical EU members to admit Turkey into the union. As well as the difficulties discussed above, a weakening of investor sentiment following large protests in Istanbul and other cities in mid-2013 compounded Turkey’s economic woes. Sparked off in May by government plans to develop a park in central Istanbul, the protests swiftly gathered momentum, uniting thousands of mainly young, middle- class demonstrators expressing a range of political and social grievances against Prime Minister Recep Tayyip Erdogan. The violence used to disperse the protests tarnished Erdogan’s image as a democratic reformer. A package of reforms to enhance the rights of religious conservatives and ethnic minorities announced in September 2013 can be seen as an attempt to re-burnish that image. More pragmatically, the democratisation package is aimed at consolidating Erdogan’s position ahead of local, presidential and possibly parliamentary elections in 2014, and furthering his goal of becoming president. Achieving the latter will become increasingly challenging as the conflict in neighbouring Syria persists, and as pressure grows to increase political and social freedoms for Turkey’s ethnic Kurdish population – whose support is essential to Erdogan’s presidential ambitions – in the face of nationalist opposition. Further east, middle-class ambitions to add political freedom to the economic opportunities they increasingly enjoy remain circumscribed, as do protests aimed at furthering these ambitions. Their most significant manifestation came in Russia in 2012, when members of the urban middle classes staged protests in the wake of the flawed December 2011 parliamentary elections. These lost momentum in 2013, but the underlying political grievances remain unaddressed and are likely to resurface during the Moscow city elections in 2014.
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    RiskMap Report 2014 EUROPE 72 Moregenerally across the Commonwealth of Independent States (CIS, the members of the former Soviet Union bar the Baltic states and Georgia), a recognisable middle class remains a largely urban phenomenon, usually small in number, and limited to the capital and main cities. In some areas, development appears to have jumped the middle-income stage, with boutique shops selling luxury brands to a tiny segment of the population situated a stone’s throw from small kiosks selling cheap cigarettes, chewing gum and the ‘yellow’ press. Protests are rare across the region. Those that take place are poorly attended and tend to express local grievances rather than being directed at the central authorities. The unprecedentedly large-scale labour unrest seen at several state-owned oil companies in western Kazakhstan in 2011 has not been repeated, partly because of pressure from the government on companies to ensure that workers’ grievances are addressed before they escalate. In the west, falling real wages and household incomes have accompanied economic woes. Expressing empathy for ‘the squeezed middle’ has become a popular political mantra in the UK, where the opposition Labour Party has used the slogan to connect with the frustrated segment of the electorate that the party under former leader and prime minister Tony Blair (1997-2007) successfully wooed away from the Conservatives in the early 2000s. In Spain, allegations of high-level corruption related to political party funding and opposition to the government’s austerity measures have fuelled public protests. Job insecurity, rising taxes and warnings that the younger generation will be the first in decades that has lower living standards than their parents are common refrains across the EU, with most countries in the region entering their sixth consecutive year of austerity in 2014. A lurch in support to the political far right, with its focus on curbing immigration as the main lever for addressing unemployment, has not yet materialised, though far-right parties have campaigned on this issue and made political gains in countries such as Austria, Norway, Sweden and the Netherlands. Elections to the European Parliament in May 2014 are likely to reflect this trend. SOFT AND HARD POWER The eurozone’s problems will leave it inward-looking in 2014, focused on resolving economic imbalances. But EU membership remains an attractive goal for those countries in South- Eastern Europe that are not part of the club, ensuring that enlargement will remain the union’s most important tool of ‘soft’ power. Even countries as far from Brussels’ political reach as Georgia hold on to the prospect of joining one day. TOP: Demonstrators outside the Hall of Justice, Ankara, Turkey, October 2013. BOTTOM: Russian President Vladimir Putin, October 2013.
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    RiskMap Report 2014 EUROPE 73 Inthe Balkans, EU membership will continue to act as a powerful anchor for governments, guiding decisions and policies to ensure that legislation conforms to the 35 broad policy chapters of the acquis communautaire – the body of EU laws, regulations and other decisions to which all members must sign up before they are admitted. Croatia became the 28th member of the EU in July 2013 and, provided that the process of normalising ties with Kosovo remains on track, Serbia is likely to be invited to start EU accession negotiations in January 2014, with Montenegro likely to follow suit. Nonetheless, transposing EU legislation on to domestic statute books and then implementing it are major challenges. The benefits for investors in terms of more transparent and open business environments remain some way off. Closer political and economic ties with the EU remain a potent attraction even further east. Initiatives aimed at bringing more far-flung countries into a closer political and economic relationship had until recent years made only hesitant progress, partly because these programmes have not held out the carrot of full membership. The EU has gained more traction over the past year, with the conclusion in November 2013 of free-trade and association agreements with Moldova and Georgia. Even if full membership remains distant, the formalisation of closer institutional ties with these countries is irreversible and helps to provide a concrete framework for a westward political trajectory. Yet despite EU soft power, Russia-led initiatives in what the country views as its sphere of influence hold ever greater sway. Ukraine in November 2013 announced that it no longer intended to conclude free-trade and association agreements with the EU, just one week before it was due to do so. Two months earlier Armenia performed a similar about-turn, when it announced that it intended to join the Customs Union between Russia, Kazakhstan and Belarus instead of consolidating its EU integration process by signing free-trade and association agreements. Although neither Ukraine nor Armenia directly cited Russian opposition to their plans to integrate more closely with the EU as the reason for their abrupt change of course, Russian economic pressure undoubtedly played a direct role. Tactics included moves to increase gas export prices (in the case of Armenia) and wide-reaching trade and credit restrictions (in the case of Ukraine). These proved instrumental in reversing hard-fought progress towards EU integration virtually overnight. SHIFTING INTERESTS Russia is also rebuilding its position in Central Asia, where it continues to emphasise its capacity to lead the region’s response to external
  • 79.
    RiskMap Report 2014 EUROPE 74 securitythreats, real or perceived. This is likely to become even more apparent in 2014 and beyond, with the withdrawal of US and international forces from Afghanistan. US policy in former Soviet Central Asia shifted some years ago from promoting democracy to a closer focus on ‘hard’ security issues, with the Department of Defense displacing the State Department as the driver of policy. The withdrawal of international forces from Afghanistan in 2014 will mark the end of Central Asia’s role at the front line of the war on terror, and is just one example of how shifting global strategic interests will affect this easternmost part of Europe. The decision by Central Asian governments in September 2001 to open up their airspaces, and in some cases land-based facilities, to the US military began a period of unprecedented co-operation with the US and Russia (whose permission was essential for US engagement with Central Asia). Countries across Central Asia and the South Caucasus, and as far north and west as those on the Baltic and the Black Seas, have also participated in the Northern Distribution Network, which has provided an alternative supply route for non-military goods being shipped to Afghanistan, particularly when routes through Pakistan were blocked. This further cemented their importance to the US military and peacekeeping efforts in Afghanistan. Kyrgyzstan has played a pivotal role in this relationship, and for more than a decade has been the only country in the world to host both a Russian and a US military base, with their respective facilities at Kant and Manas just a few miles apart. Thousands of US troops have passed through Manas each month on their way to and from Afghanistan. Yet the base – renamed a ‘transit centre’ in 2009 – will revert to civilian use in 2014, when Kyrgyz President Almazbek Atambayev makes good on an election pledge to end the US presence. The decision is popular domestically, but the loss of rental payments from mid-2014 will compound an already difficult economic situation, exacerbated by growing nationalism in the mining sector, the country’s main revenue earner. As the troop withdrawal approaches, the potential for instability to spill over from Afghanistan into Central Asia has risen to the top of the region’s security agenda. Successive conferences of regional bodies such as the Collective Security Treaty Organisation (CSTO, the security arm of the CIS) and the Shanghai Co-operation Organisation (SCO), of which China is a founding member, have focused on the security implications of the withdrawal, though without yet formulating a cohesive region-wide response. The potential for the spread of Islamist militancy and intensification of cross-border criminal activity have long been the focus of security rhetoric TOP: Moscow, by Steven Eke, Control Risks. BOTTOM: Kazakhstan President Nursultan Nazarbayev, April 2013.
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    RiskMap Report 2014 EUROPE 75 inthe region, with leaderships citing these threats as justification for their harsh treatment of domestic manifestations of dissent. This is not to dismiss the threat entirely. Kazakhstan in 2011 experienced its first suicide attack, and other incidents, predominantly targeting the security forces, have followed. Youth radicalisation remains a genuine concern. But the withdrawal of international forces alone appears unlikely to precipitate a significant deterioration in the security environment. Internal issues such as political legitimacy, corruption and income inequalities will remain far greater threats to stability over the longer term. NOT IN MY BACKYARD Russia in 2013 added renewed global geopolitical clout to its regional successes, playing a leading role in securing a deal on Syria’s chemical weapons. Since returning to the presidency in 2012, Vladimir Putin has increasingly sought to position Russia as an influential actor on the global diplomatic stage as part of broader efforts to reinstate the KEY Truck Rail Water Air Northern Distribution Network
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    RiskMap Report 2014 EUROPE 76 country’s‘great power’ status and to counter US influence. Russia fiercely opposed growing Western pressure for military strikes on Syria, on the back of vocal opposition more generally to the West’s response to events in the Middle East. Its role in securing the deal will reinforce Russia’s belief that its ambitions to be a heavyweight on the global diplomatic stage are justified. Nevertheless, as it reasserts itself internationally, Russia will in 2014 face growing competition in countries that it still considers its own backyard from an increasingly influential regional player: China. China’s voracious demand for natural resources and proximity to Central Asia make it an obvious export market for the region and, importantly, a ready source of investment for new projects. Chinese President Xi Jinping in September 2013 announced more than $30bn in investment during a visit to Central Asia. China is now by far Turkmenistan’s largest export market, displacing Russia, and Chinese companies account for an increasingly large share (more than 20%) of Kazakhstan’s oil production. This represents a remarkable about-turn from just a few years ago, when Kazakhstan tried to limit China’s participation, and reflects an acceptance that China offers what Western or even Russian companies cannot: a direct export market, investment and credit on soft terms, and the promise of no interference in domestic political affairs. China is not only active in Central Asia, but is also among the largest sources of investment in other CIS countries, notably Belarus and Ukraine. It is also entering hitherto untrodden – and controversial – territory. Turkey in September 2013 announced that it intended to develop a new missile defence system with China. Although Turkey’s NATO allies are likely to put pressure on it to step back from the proposed move, the fact that a project of this nature was even mooted reflects the shift in strategic interests driven by China’s growing global economic status. OLD PROBLEMS, NEW SOLUTIONS The challenges facing Europe in 2014 are not new, but require new solutions if swifter growth is to take hold. Leaders across the region need to develop more innovative ways to foster more rapid economic expansion. In the case of Western Europe, addressing the root causes of the financial sector crises remains paramount. Further east, making good on long-standing diversification and innovation programmes to reduce dependence on traditional, commodity-based sources of growth will head the agenda. However, progress across the region will be slow.
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    RiskMap Report 2014 SPOTLIGHTON: TURKEY 78 RiskMap Report 2014 SPOTLIGHT ON: TURKEY 78 BULGARIA T U R K E Y GEORGIA ARMENIA AZERBAIJAN Nakhchivan (AZERBAIJAN) CYPRUS SYRIALEBANON ISRAEL PALESTINIAN TERRITORIES I R A Q Athens Thessaloniki Istanbul Ankara Tbilisi Yerevan Baghdad Basra Erbil Amman Cairo Alexandria Bucharest Sofia Damascus Beirut Kurdistan Region . SPOTLIGHT ON: TURKEY LOOKING AHEAD As Turkey prepares for its first direct presidential election in 2014, all eyes will be on the ruling Justice and Development Party (AKP)’s choice of candidates. Despite being bruised by the Gezi Park protests in mid-2013, Prime Minister Recep Tayyip Erdogan is likely to realise his presidential ambitions. Campaigning will see protests recur, but at a lower intensity. Meanwhile, despite the looming threat of US ‘tapering’, the government will push on with large-scale infrastructure developments. 2013 was a year of emerging questions in Turkey. In 2014, the answers will go a long way towards determining whether the Turkey of a generation from now will have continued to modernise and liberalise, or taken an authoritarian, inward turn. ELECTION SEASON The key question is the line-up with which the governing Justice and Development Party (AKP) intends to contest the forthcoming ‘election season’. A presidential poll, probably in August 2014, will mark the first time that the presidency is directly elected, while parliamentary elections are scheduled for June 2015. Prime Minister Recep Tayyip Erdogan is reaching the end of his third term in parliament, and AKP rules prohibit him from seeking a fourth. Erdogan could change these rules, but has refrained from doing so because he is intent on moving into the president’s office in 2014. While 2013 dashed his hopes that a new constitution providing for an executive presidency would be enacted in time for the DAVID LEA SENIOR ANALYST, EUROPE CONTROL RISKS
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    RiskMap Report 2014 SPOTLIGHTON: TURKEY 79 election, he is very likely to win, ensuring that he remains Turkey’s pre-eminent political personality. This prompts the question of who takes over as prime minister. A Russia-style ‘job swap’ is most likely, with President Abdullah Gül moving into Erdogan’s seat. However, tensions between the two men and their factions within the AKP increased in 2013, and Erdogan may prefer a less senior and more pliable individual. A job swap would give the impression of continuity, but the tensions between Erdogan and Gül would be likely to intensify, with clear potential for Erdogan’s abrasive personality to create sparks. AFTER GEZI That personality, and Erdogan’s perceived authoritarian drift, were key motivating factors in the protests that drew the world’s attention to Istanbul’s Taksim Square in May and June 2013. The election campaign is likely to see renewed protests by the young, urban, Western-facing demographic that defended Gezi Park, but these will be neither as disruptive, nor as persistent, as those in 2013. Another question asked after Gezi was whether a political force could emerge from outside the AKP, able to challenge Erdogan and his party. This one did get an answer – a resounding no. The opposition is too fragmented, and has too little in common with the Gezi protesters, for a credible new movement to coalesce. The AKP’s strength in Anatolia ensures that concerns over its increasingly authoritarian and Islamist direction in Istanbul and other large cities in Turkey’s west are only likely to translate into significant change at the ballot box if the opposition can unite. The most credible threat to the AKP’s dominance is internal: the widening split between Erdogan and the faction of the party that follows the moderate Islamist ideology of US-based imam Fethullah Gülen, most of whom would side with Gül in any head-to-head. TURKEY AND TAPERING Economic strength and stability have been the major success of Erdogan’s tenure, earning him the leeway that he has enjoyed in other policy areas in recent years. Although Turkey has avoided a ‘hard landing’, it remains vulnerable to internal and external shocks. In particular, the ‘tapering’ of the US Federal Reserve’s bond-buying programme in 2014 would threaten significant economic headwinds, in the form of higher interest and inflation rates, and a weaker lira (currency). For that reason, 2014 will see Turkey continue to make hay while the sun shines. Large-scale investment in infrastructure projects will continue, particularly in the energy sector, with construction activity at two planned nuclear power stations set to escalate, the Trans-Anatolian Gas Pipeline (TANAP) breaking ground and the oil pipeline from Iraq’s Kurdistan Region opening. TOP: Prime Minister Recep Tayyip Erdogan, November 2013. BOTTOM: Taksim Square, Istanbul.
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    RiskMap Report 2014 SPOTLIGHTON: TURKEY 80 Meanwhile, coal, gas and renewable infrastructure development will move forward as the government seeks to prevent a projected energy shortfall from becoming a significant limiting factor on the economy. Outside the energy sector, major projects including highways, large-scale urban mixed use developments, a new Bosphorus bridge and Istanbul’s planned new airport will all progress as the government seeks to remedy the infrastructure shortfalls that it increasingly recognises have long held Turkey back. The construction arms of the country’s major conglomerates – particularly those that have consistently demonstrated enthusiasm towards the AKP government – will be in pole position to benefit, but demand for expertise will ensure continued opportunities for international business. Domestic companies with more rocky relationships with Erdogan’s administration may find themselves out in the cold. PROJECTING POWER Turkey’s newfound economic strength has been a major factor in its increasing projection of power beyond its borders as ambitions of EU membership grow ever more distant. The conflict in Syria, the potential gradual reopening of Iran to international business and Turkey’s developing symbiotic relationship with Iraq’s Kurdistan Region will create both threats and opportunities. However, this power abroad is likely to count for little if Turkey cannot maintain improvements to the security environment at home. The tentative progress made in the Kurdish peace process will be tested significantly in 2014, with potential for renewed terrorist action, particularly in the south-east, if these advances cannot be consolidated. Turkey’s developing infrastructure - on the drawing board and on the ground Ankara Sinop nuclear plant Akkuyu nuclear plant Hydroelectric plant Hydroelectric plant Erzerum energy hub Ceyhan energy hub Istanbul new airport TANAP pipeline New KRG pipeline Istanbul IRAQSYRIA GEORGIA
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    FRANCE Corsica (FRANCE) SWITZERLAND LIECHTENSTEIN MALTA ITALY GREECE ALBANIA MACEDONIA KOSOVO MONTENEGRO BOSNIAAND HERZEGOVINA BULGARIA CROATIA SLOVENIA SERBIA AUSTRIA HUNGARY ROMANIA T UR K E Y GEORGIA ARMENIA AZERBAIJAN Nakhchivan (AZERBAIJAN) CYPRUS SYRIALEBANON JORDAN ISRAEL PALESTINIAN TERRITORIES EGYPT L I B Y A TUNISIA A L G E R I A TOGO BENIN N I G E R N I G E R I A C H A D S U D A N SOUTH SUDAN CENTRAL AFRICAN REPUBLIC CAMEROON EQUATORIAL GUINEA SÃO TOMÉ AND PRINCIPE GABON CONGO CONGO (DEMOCRATIC REPUBLIC OF) UGANDA KENYA ERITREA E T H I O P I A DJIBOUTI Somaliland SOMALIA Y E M E N S A U D I A R A B I A OMAN UAE QATAR BAHRAIN KUWAIT I R A Q I R A N TURKMENISTAN MEDIUM security in deprived urban areas Zürich Bratislava Berne Geneva Barcelona Rome Budapest Ljubljana Zagreb Sarajevo Podgorica Tirana Athens Thessaloniki Istanbul Ankara Tbilisi Yerevan Baku Rostov on Don Atyrau Ashgabat Tehran Baghdad Basra Erbil Amman Cairo Alexandria Tripoli TunisAlgiers Annaba Oran Muscat Abu Dhabi Dubai Al Khobar Riyadh Jeddah Port Sudan SanaaAsmara Hargeisa Khartoum Addis Ababa NdjamenaKano Lagos Port Harcourt Niamey Cotonou Malabo Douala Yaoundé Libreville Bangui Kampala Mogadishu Kismayo Belgrade Bucharest Skopje Sofia Chisinau Damascus Beirut Abuja Kurdistan Region UZBEKISTAN ANDORRA M A L I
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    RiskMap Report 2014 MIDDLEEAST AND NORTH AFRICA 82 2014 promises to be a notable year, even by Middle East standards. The region’s festering conflicts and faltering transitions are familiar to investors, but the next 12 months will be critical to many of their outcomes. Several states are scheduled to undergo transfers of power whose outcomes could decide whether transitions progress, regress or collapse entirely. The fate of the Egyptian military’s roadmap, and the completion or collapse of Tunisia’s transitional phase are just some of the events that will shape the region’s political frameworks and security environment for years to come. Conflict in Syria will continue to breed insecurity and uncertainty at the heart of the region. But 2014 also brings the intriguing prospect of a permanent shift in relations between the US and Iran that could open up previously unthinkable diplomatic possibilities. A peaceful solution to the Syrian civil war is out of reach in the next 12 months, but – in a best-case scenario – progress in talks with Iran would reduce the likelihood of a broader regional conflagration and enable Iran to play a constructive role in bringing the conflict to a close further down the line. LUCY JONES SENIOR ANALYST, MIDDLE EAST AND NORTH AFRICA CONTROL RISKS MIDDLE EAST AND NORTH AFRICA POLITICAL RISK 2004-14 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 KEY INSIGNIFICANT LOW MEDIUM HIGH EXTREME SECURITY RISK 2004-14 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 SUB-REGIONAL RISK AVERAGES Arabian Gulf North Africa Pol Sec Pol Sec Pol Sec Levant 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
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    RiskMap Report 2014 MIDDLEEAST AND NORTH AFRICA 83 STRATEGIC RECALIBRATIONS The resumption of talks on the Iranian nuclear file offers the prospect of a broader reconfiguration of regional alliances that may bring greater possibilities for co-operation and flexibility. Simplistic categorisations of Middle Eastern countries as belonging to the ‘resistance’ camp led by Iran or ‘conservative’ camp dominated by Saudi Arabia were always problematic, but may become outdated. States do not deal with their counterparts on this basis, instead adjusting foreign policy to reflect their interests in different issues. There is growing acceptance of the need for collaboration to resolve regional crises. Although regional forums will continue to have limited success in resolving disputes, the fact that states are talking to each other will help to keep tensions in check in 2014. Likewise, pigeon-holing governments as being in pro- or anti-US camps will be even less helpful over the coming year than it has been previously. Political developments have complicated relations between long- time US allies and the administration of US President Barack Obama. Relations with the Egyptian military have soured since the removal of Islamist president Mohammed Morsi (2012-13), while US criticism of the July 2013 coup has further strained ties with Saudi Arabia, which strongly backed the military’s intervention. US relations with both countries will endure despite these disagreements, but its ties in the region are in flux. Youth unemployment rates, 2008-18 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 KEY MIDDLE EAST 35% 30% 25% 20% 15% 5% 10% 0% WORLD NORTH AFRICA Source: International Labour Organization
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    RiskMap Report 2014 MIDDLEEAST AND NORTH AFRICA 84 The US withdrawal from Afghanistan, scheduled to be completed by the end of 2014, will have limited direct impact on the Middle East, with the possible exception of insecurity spilling over into Iran. But following its exit from Iraq in December 2011 and clear reluctance to intervene in Syria, the drawdown contributes to a sense that US penetration of the region is receding, its ability to influence events is greatly reduced and it is leaving a power vacuum in its wake. The absence of an alternative superpower means states will continue to look to the US for action on a host of issues, but will find it far less willing to act. In turn, this will put greater onus on regional states to take more responsibility for regional affairs. IRAN-US THAW? Bilateral talks between Iran and the US can bring about a more constructive role for Iran in the region. However, this will require Iran and the international community to convert the success of their interim deal over Iran’s nuclear programme into a permanent agreement. The interim deal creates space and opportunity for negotiations over the first half of 2014, and is surely an improvement over the distrust and outright hostility that has characterised Iran’s relations with the West for decades. However, this is just the first step in a lengthy process; a permanent, comprehensive deal is unlikely in 2014, but neither do we see negotiations simply collapsing when the interim deal expires. The first half of 2014 will probably demonstrate the practical and political utility of further negotiations. There is political will in the Iranian and the US administrations for some reconciliation. However, successfully institutionalising the progress made in late 2013 is not solely in the hands of these administrations. The process is vulnerable to a broad range of obstacles. Political and security crises in the Middle East, and political developments in Iran or the US could scupper the interim deal, let alone a permanent agreement. President Hassan Rowhani’s outreach is not a one-man campaign; it reflects a shift in strategic thinking within the Iranian establishment, including by Supreme Leader Ayatollah Ali Khamenei. Khamenei is known to occasionally loosen the reins on the presidency to alleviate domestic pressures. His support is unlikely to represent acceptance of a wholesale change in foreign policy: it is more likely to be a tactical concession, given the perceived threat to Iran’s political system from damage to both the economy and the elite’s commercial interests. There are important limits to Iranian leaders’ room for manoeuvre. For example, delays in bringing relief from sanctions at a time when Iran’s government is expected to make further subsidy cuts could provoke a popular backlash against the authorities that would make it difficult TOP: Iranian President Hassan Rowhani, August 2013. BOTTOM: US President Barack Obama, October 2013.
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    RiskMap Report 2014 MIDDLEEAST AND NORTH AFRICA 85 to talk. Negotiations may also deepen factional infighting if they are seen as pushing Iran into making unjustified and embarrassing concessions. In the most extreme case, spoilers could attempt to torpedo the talks by engineering attacks on US interests in the region that could be traced back to Iran. Finally, the Israeli administration and the US political right is deeply opposed to the rapprochement and will use their leverage in US politics to try to undermine it. The interim deal does not fundamentally alter the politics of the region, but is potentially a gateway to a range of possibilities. First, it could help restore official US-Iranian relations that were severed in 1979, thereby diversify US regional engagement, potentially at the risk of unsettling existing relationships. Second, it would alleviate the geopolitical risk premium added to regional investment and oil prices for the past several years. Finally, it could bring Iran into a more constructive role on a range of regional political and security challenges. SYRIAN VORTEX Nowhere is this possibility more urgent than Syria, well into its third year of grinding civil war. We expect some overlap between the interests of the US, Russia and Iran in 2014 that could allow less obstructive discussions over the best way to tackle the conflict. All three players now believe the least worst outcome is a transition in which parts of the regime of Bashar al-Assad survive to avoid the state’s total breakdown. But while increased co-operation between these players would be positive, it would not end the fighting. The primary drivers of Syria’s conflict are domestic, while none of the external parties involved have the willingness, or in some cases the ability, to significantly shift the conflict’s trajectory. 2014 will see conflict persist, a worsening of infighting among rival opposition groups and greater territorial fragmentation. Despite having lost control of much of the country, Assad continues to lead the most cohesive and best-armed bloc in the conflict. Divisions within the opposition mean he could do so for years to come. Outside Syria, the most concrete impact will be felt in neighbouring countries. As in recent years, Lebanon will feel the effects most acutely. Clashes in border areas will frequently spill over into Lebanese villages, the troubled northern city of Tripoli will remain a flashpoint and Sunni militants will attempt periodic attacks against Hizbullah targets that foster the sense of a country on the edge. The presence of hundreds of thousands of refugees will place additional strain on the struggling economy, which had one of the region’s lowest growth rates in 2013. Yet while political violence will escalate, Lebanon is unlikely to descend into full-blown civil conflict in TOP: Beirut, Lebanon. BOTTOM: Aleppo, Syria.
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    RiskMap Report 2014 MIDDLEEAST AND NORTH AFRICA 86 2014. None of the main political factions want this, and neither do their external backers. But political violence and paralysis – itself linked to events in Syria – will prevent the normalisation of the political environment. This is likely to cause further delays in completing the regulatory framework for the offshore gas industry and preclude general reforms to the investment environment. Jordan and Iraq also face heightened security threats and political instability as a result of the Syrian conflict. In Jordan, fighting occasionally spills over the border, refugee numbers are growing and trade routes have been heavily disrupted. But although these pressures come on top of a steady rise in opposition to the king in recent years and continuing subsidy cuts, we do not expect a tipping point to be reached in 2014. The Islamist opposition has been alarmed by the Muslim Brotherhood’s spectacular downfall in Egypt and is unlikely to seek confrontation with the palace in the coming months. The Syrian conflict has also exacerbated sectarian tensions in neighbouring Iraq. 0% - 4% 10% + 5% - 9% KEY 0.67% TURKEY SYRIA IRAQ JORDAN EGYPT LEBANON 0.59% 8.31% 0.16% 17.48% Data compiled from UNHCR, UNDP Number of registered refugees as percentage of population, 2013 (UNHCR)
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    RiskMap Report 2014 MIDDLEEAST AND NORTH AFRICA 87 The remobilisation of Shia militias to join hostilities in Syria is a major concern and could have a significant impact on the Iraqi security environment in 2014, in the worst-case scenario igniting Sunni-on-Shia militia violence. More broadly, the conflict will continue to affect investors’ perceptions of the region as a whole. The reactions of stock markets as far away as the UAE to speculation that US strikes were imminent in September 2013 underlined the extent to which investors fear that Syria contagion could infect the whole region, even in countries where the likelihood of physical security incidents related to the conflict are low. Developments on the diplomatic front have greatly reduced the potential for an air campaign by an international coalition, but this remains feasible in 2014 in response to a range of potential circumstances, including Syria’s failure to uphold the agreement to dismantle its chemical weapons stockpile. The likely media focus around Iran and the Syrian war means that the Israel/Palestine conflict may all but disappear from the headlines. However, this does not mean that progress will not be made: low-profile talks in many ways have better prospects for success, providing that the US has capacity to maintain pressure on the parties to keep talking. TRANSITIONAL MILESTONES A third theme will be a series of milestones in the region’s complex political transitions. The Middle East has a busy electoral calendar in 2014, with presidential elections due in Algeria, Egypt and even Syria. Parliamentary polls are due in Egypt, Iraq and Lebanon; Tunisia and Yemen may also hold full spectrum elections in 2014, depending on the progress of political talks; and Libya plans to move ahead with voting for a constitutional committee. Many of the polls are critical junctures. All the transitions are under threat in different ways. Egypt is at risk of a return to autocracy cheered on by self-proclaimed liberals, Tunisia’s ‘success story’ is being held to ransom by non-Islamist parties, and Libya’s transition is being stalled by post-conflict state-building and an institutional vacuum. Many of the elections provide scope for genuine political competition at a time when public opinion is fluctuating at lightning speed in sometimes surprising directions. Electoral outcomes will be unpredictable, but are almost certain to produce fractured assemblies requiring coalition building. This will slow decision-making and anger populations that are impatient for results, leaving significant scope for further spikes in social unrest and political violence. TOP: Jibab, Syria. BOTTOM: Anti-military protest, Cairo, Egypt, October 2013.
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    RiskMap Report 2014 MIDDLEEAST AND NORTH AFRICA 88 ROADMAP RUMBLES ON Developments in Egypt will be particularly important. They will affect attitudes towards political mobilisation, the calculations of regional governments towards their own populations and Islamist attitudes towards peaceful politics. The military will push through its roadmap, bringing parliamentary and then presidential elections by the middle of 2014. The process is likely to be heavily compromised by the constraints placed on the former ruling Muslim Brotherhood, with the polls representing barely visible window dressing over a return to autocracy. Ironically this is likely to happen with the enthusiastic backing of the public, which may elect another military strongman in sunglasses as president before the year is out. However, the new president’s popularity will likely be short lived. The political environment is more polarised and less productive than it has been at any point since the overthrow of former president Hosni Mubarak (1981-2011). The government is less capable of channelling demands and grievances than its predecessors, and public opinion is likely to turn against it once it becomes clear that it does not have answers for any of the failures of government that resulted in the 2011 uprising. TRANSITION TEETERS The downfall of the Muslim Brotherhood in Egypt has contributed to the faltering of the Arab spring’s most promising democratic transition. Tunisia was the first country to rise up against an autocrat, and until mid-to-late 2013 Presidential Parliamentary Constitutional Committee Referendum on new constitution KEY A busy election year ahead: countries going to the polls in 2014
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    RiskMap Report 2014 MIDDLEEAST AND NORTH AFRICA 89 had made remarkable progress debating a new political framework through consensus-building and compromise. Non-Islamist parties reacted opportunistically to the clampdown against the Brotherhood in Egypt, derailing the constitutional drafting process just before it was due to be completed. Political factions are eventually likely to find a path out of the crisis, but the experience has deepened divisions and mistrust, with negative implications for governance and policy in 2014. There may be some movement on investment code reforms, but overall the process of stabilisation will be slow and subject to frequent interruptions. STILL IN TRANSIT Libya and Yemen face perhaps the most complex transitions of all the Arab spring states. They must not just deal with heavily contested political processes, but must do so in the absence of functioning institutions or cohesive security forces. The Libyan transition plan is being threatened by a range of interest groups, though it will proceed gradually with minor adjustments. A new licensing round in the energy sector is unlikely, but construction and infrastructure projects should trickle back online. The security environment will remain extremely problematic, with none of the drivers of insecurity likely to be addressed in 2014. The schedule for Yemen’s transitional phase is very likely to be delayed, with negotiations over federalism and the status of the south set to be the most dangerous sticking points. Security threats to foreign companies will remain acute. SUCCESS(ION) STORY The presidential election in Algeria has great significance for longer-term stability in a country facing many of the same challenges as its North African neighbours. The factional struggles over the succession were clear in 2013, with the president and his rivals using corruption investigations and security-sector restructuring to attempt to cement their influence. Such tried and tested means of elite politicking will be the public face of this competition in 2014. However, we believe that behind-the-scenes negotiations to find consensus over a successor to President Abdelaziz Bouteflika will succeed. A temporary extension to the presidential mandate is less likely, but would be the stopgap solution should consensus not be reached. Regardless, the identity of the next president will be less important than the fact that Bouteflika has been replaced after 15 years at the helm. A smooth transition should add impetus to an easing of terms for foreign investors and new opportunities in the energy sector, and continue the gradual improvement in the security
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    RiskMap Report 2014 MIDDLEEAST AND NORTH AFRICA 90 environment that has prompted us to reduce Algeria’s security risk rating from high to medium this year. Conditions in Libya will influence security risks in the south-east, but the lack of incidents following the January 2013 terrorist attack at In Amenas shows that security will not be beholden to conditions beyond Algeria’s borders. The state has appeared increasingly capable of handling the domestic terrorism threat. GULF STATES – SMOOTH SAILING In contrast with the rest of the region, the outlook for the Gulf Co-operation Council (GCC) states suggests a largely calm year ahead. Although there are serious questions over the sustainability of the region’s political models in the longer term, Gulf economies are likely to stay sufficiently healthy in 2014 to allow spending on areas that will minimise the potential for unrest to escalate. In the longer term, events in the transitional states discussed above will have a bearing on whether there are any successful stories to emulate or cautionary tales to avoid, but major political upheaval of the type seen in other parts of the region is unlikely in the next 12 months. There is certainly scope for further unrest in Bahrain, where communal tensions continue to simmer, hampering economic recovery and denting investor confidence. However, most protests are low-level and directed at the security forces, and we expect the government to remain firmly in the saddle. Kuwait may also see a return of popular protest in 2014 if action is not taken on economic reforms and government accountability, though this will not escalate into a mass mobilisation against the government. The UAE – and particularly Dubai – will remain the region’s beating commercial heart in 2014, especially as its political and security environment offers stability in a region fraught with conflict and unrest. Meanwhile, after Emir Hamad bin Khalifa al-Thani’s handover to his son Tamim in 2013, which was accompanied by a reshuffle in the cabinet and key state-owned entities, 2014 is likely to be marked by greater continuity in Qatar. Although Tamim may tread more carefully on the foreign policy front than his father, a far-reaching shift in Qatar’s strategic interests is unlikely. As a rising regional and global power, Qatar is likely to continue to have a hand in the Middle East’s countries in transition. In pursuing its foreign policy goals, Qatar will continue to come up against its regional rival, Saudi Arabia. Both have significant interests in shaping the Middle Eastern political order, but these often diverge. Indeed, the interest of Gulf Arab states in regional developments, particularly around issues such as the trajectory of the Syrian crisis and Iranian nuclear talks, reflects the interconnection of TOP: Algerian President Abdelaziz Bouteflika, July 2013. BOTTOM: Qatari Emir Sheikh Tamim Bin Hamad al-Thani, December 2012.
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    RiskMap Report 2014 MIDDLEEAST AND NORTH AFRICA 91 the Gulf with the rest of the region. This is not just driven by concerns of a spread of popular uprisings to the Gulf, but also by intra-Gulf rivalries and regional interests. Saudi Arabia has historically been at the centre of these rivalries. Although its neighbours will continue to challenge its seemingly natural leadership position, its role in maintaining global oil supply and the sheer size of its economy (the biggest in the Middle East) mean that the kingdom will remain a force to be reckoned with. Although the perennial question of whether the royal family can manage a succession shock – the answer in 2014 is almost definitely ‘yes’ – will continue to be the most talked about issue in relation to political stability, often neglected but equally important questions relate to the kingdom’s economic diversification policies; ability to satisfy an ever expanding ‘middle class’; and capacity to further increase non-oil private-sector growth. The kingdom will not find solutions to its long-term economic challenges in 2014, but further tightening of labour regulations and investments into higher education will tell us something about the path ahead. RISK AND REALITY The region’s festering conflicts and security vacuums, shifting and flexible alliances, and forthcoming transitional milestones will create an environment in which external perceptions of risk will be understandably high over 2014. Nonetheless, parts of the region will be attractive for investors, with such perceptions – particularly on security and terrorism issues – often exceeding the reality. Among the lessons that investors have learnt in the past three years of turmoil are that each jurisdiction and opportunity should be judged on its own merits, and that politics is the root cause of some of the most significant downside threats to return. The Middle East and North Africa in 2014 promises to be no different.
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    RiskMap Report 2014 MIDDLEEAST AND NORTH AFRICA 92 THE MIDDLE EAST MIDDLE CLASS The millions of people who participated in the Arab spring protests defy neat categorisation. The diversity of the crowds in Cairo, Tunis and elsewhere reflected the range of grievances against governments and their failure to meet basic expectations. Nevertheless, the role of thwarted middle-class ambitions stands out. Relatively well educated, arguably middle-class youths motivated many of the initial protests, and have been very visible in foreign media both at the time and since. However, over the past two years it has become evident that the middle class is stuck in a limiting trap. On the one hand, fear of the potential power of the middle classes drives governments across the region to pursue expensive and unsustainable economic spending plans. On the other, the middle classes’ high expectations and dependence on the state limit their willingness to push for change. Indeed, the assumption that a growing middle class is good for both economic growth and political development is skewed in the Middle East because the middle class depends on the government for employment. Graduates have historically prized jobs in the public sector, with education systems geared accordingly. The Arab spring appears to have exacerbated this trend: governments across the region have created more public-sector posts to keep their populations happy. Many have granted pay rises and other benefits to existing employees, likely perpetuating the dynamic in which many members of the middle classes are more likely to protect existing systems than to break them down. But the story does not end there. Governments too have cornered themselves by expanding the public sector. The slow pace of private-sector job creation means that many younger people outside the public sector are unable to find the kinds of jobs that would pull them up into the middle class. No regional governments have articulated – let alone implemented – workable policies to absorb this constituency into the political and economic system. Although the demands of the middle class remain critical, it is the future of the vulnerable and politically important youth that is of most consequence to the region’s future stability. A common narrative of thwarted ambitions and government inability to meet expectations runs through the experience of both social groups, signalling further instability driven by socio-economic frustrations in 2014. TOP: Oil facility, Khurais, Saudi Arabia, June 2008. BOTTOM: Protest march, Tunis, Tunisia, October 2013.
  • 98.
  • 99.
    RiskMap Report 2014 SPOTLIGHTON: UNITED ARAB EMIRATES 94 S A U D I A R A B I A OMAN UAE QATAR BAHRAIN KUWAIT I R A N Basra Muscat Abu Dhabi Dubai Al Khobar Riyadh SPOTLIGHT ON: UNITED ARAB EMIRATES LOOKING AHEAD The 2008-09 financial crisis may have exposed the flaws in Dubai’s government-led free-market model, but subsequent improvements in governance and transparency will provide the foundations for more sustainable growth in 2014 and beyond. Despite a new slew of mega-projects, another bubble is unlikely. The emirate’s interaction with oil-rich Abu Dhabi will be key to determining growth prospects for the wider UAE. Dubai’s heady growth rates in the mid-2000s made its bold model of government-led free-market capitalism seem the answer to the Gulf states’ big challenge: how to reform oil-dependent economies and ensure the long-term satisfaction of their small but politically important populations. But the global downturn exposed the fragility of a formula that was heavily based on speculation and risk-taking. Dubai’s sudden fall sent a warning around the region about the risks of unsound policymaking. The crisis has had a silver lining, triggering growing awareness among Dubai’s political establishment of the need to strengthen governance and transparency. A successful reworking of its economic model is now paving the way for more tempered but more sustainable growth in 2014. GHOSTS FROM THE PAST When the downturn hit in 2008, Dubai was caught off guard. Inflated real-estate prices that were propping up ambitious construction projects collapsed, and government-backed investment companies were COLINE SCHEP ANALYST, MIDDLE EAST AND NORTH AFRICA CONTROL RISKS
  • 100.
    RiskMap Report 2014 SPOTLIGHTON: UNITED ARAB EMIRATES 95 UAE and regional growth rates, 2002-17 overextended. Many projects were cancelled. Towards the end of 2009 the oil-rich emirate of Abu Dhabi stepped in to help Dubai World, one of the worst-affected government- owned entities, and its property and real-estate investment arm Nakheel to restructure their debt and protect them from default. The IMF estimates that Dubai still has $142bn of debt (102% of GDP), $60bn of which is to be restructured by 2017. The fund has pointed out that further improvements to the legal framework and transparency of Dubai’s debt management remain necessary, but the emirate appears to be on track. While Dubai entities may yet have some of their debts to the UAE’s central bank and Abu Dhabi government rolled over, the risk of another debt crisis is low: the political establishment has responded to fears of another ‘bubble’ with significant fiscal reforms, a closer regulatory finger on the economy’s pulse and prompter policy responses. LESSONS LEARNT The 2008-09 crisis has brought sounder economic management, a more cautious development strategy and more modest government spending, even if a fresh slew of construction and infrastructure mega-projects – alongside trade and tourism – once again constitute one of Dubai’s biggest draws. KEY UAE 2002 2003 2004 2005 2006 2007 2008 2009 2010 2012 2011 2013 2014 2015 2016 2017 14% 12% 10% 8% 6% 4% 2% 0% -2% -4% MIDDLE EAST AND NORTH AFRICA Source: Economist Intelligence Unit
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    RiskMap Report 2014 SPOTLIGHTON: UNITED ARAB EMIRATES 96 In late 2009, ruler Mohammed bin Rashid al-Maktoum reshuffled the leadership of two of Dubai’s largest holding companies, removing board members suspected of being at the helm of the debt-driven building boom. In 2010 the government restructured the higher levels of ‘Dubai Inc.’ by creating five committees to oversee government policy on the economy and infrastructure, among other areas, streamlining decision-making and improving internal controls. The regulatory environment, which previously allowed significant opacity and risk-taking, has been strengthened since 2008, with increased oversight and disclosure obligations for government-related entities and financial institutions. Data availability still leaves something to be desired, but government-related entities have made progress in supplying information about their financial health. And where many Levant: conflict affects regional trade, but redirects capital, business to UAE Egypt: instability redirects business, capital to UAE Iran: sanctions affect UAE trade Iran: oil prices increase at times of heightened tension Global economic shocks can destabilise MENA economies Bahrain: instability curbed the rise of Bahrain as a finance hub Qatar: gas wealth enables Qatar’s rise as business, construction hub Abu Dhabi: capital bolsters UAE growth with hydrocarbons and investments abroad Dubai IRAQ EGYPT SAUDI ARABIA OMAN UAE YEMEN IRAN KEY Positive effect Negative effect External influences on UAE economy
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    RiskMap Report 2014 SPOTLIGHTON: UNITED ARAB EMIRATES 97 long-term government-backed projects prior to 2008 relied on short-term loans, recent years have seen a shift in lending to longer-term maturities, while government-linked entities also face more layers of approval before they can borrow. The political establishment’s responsiveness to investor fears and market rumours has improved, demonstrated in September 2013 by the government’s doubling of the registration fee levied on real-estate transactions to curb speculation. This came months after the IMF warned of the danger of another property bubble forming. Investor confidence has steadily picked up as past issues have been rectified. Government forecasts now estimate that Dubai’s annual growth rate will reach 4.6% on average between 2012 and 2015, which is solid, if significantly slower than the 10% average between 2000 and 2010. Dubai’s potential win of EXPO 2020 would not only help to propel the newly self-confident emirate back on to the world stage, but according to official estimates would boost its economy by another 0.5% in the run-up to the event and by 2% in 2020 by generating tourism and jobs. Construction industry statistics – Dubai 16% 14% 12% 10% 8% 6% 4% 2% 0% 2007 2008 2009 2010 2011 2012 KEY CONTRIBUTION TO GDP GROWTH RATE % 30% 20% 10% 0% -10% -20% -30% Source: Government of Dubai
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    RiskMap Report 2014 SPOTLIGHTON: UNITED ARAB EMIRATES 98 THE BIGGER PICTURE Dubai’s politics and economy cannot be seen in isolation. The dynamic between business-oriented Dubai and oil-rich Abu Dhabi is a key determinant of the emirates’ growth. Dubai attracts trade, tourism and real-estate investment, but the 2009 bailout was a stark demonstration that Abu Dhabi’s 100bn barrels of proven oil reserves and $800bn in sovereign wealth assets provide indispensable stability and clout both in the wider region and within the federation. And although Dubai will remain the ambitious, progressive sibling, Abu Dhabi is upping the ante on its own diversification, with its Economic Vision 2030 and the creation of new free zones and industrial areas, such as the Global Marketplace Abu Dhabi (GMAD) and Khalifa Industrial Zone Abu Dhabi (KIZAD). This has helped the UAE’s overall growth stay on track with that of Dubai, at 3.9% in 2013. The wider region’s current volatility is having a complex effect on the emirate’s investment climate. Conflict and instability may temporarily deter some investors from entering the region as a whole, while sanctions on Iran and Syria have curtailed important sources of trade for Dubai. However, Dubai’s stable political and security environment has attracted an influx of business and capital from instability-hit countries such as Egypt, Syria, Lebanon and, to a lesser extent, Bahrain. Dubai is facing more competition from regional peers than during its previous ‘golden era’ – thanks to the rise of Qatar as a business hub – but it remains the most diversified, well-connected and streamlined business environment in the Gulf. Its relatively positive economic outlook is enhancing its regional reputation as a centre of sound decision-making. As policy advances have reduced the likelihood of another bursting bubble (at least for the foreseeable future), Dubai and the wider UAE look set for a sunny 2014. TOP: Dubai. BOTTOM: Abu Dhabi.
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    RiskMap Report 2014 TERRORISMOUTLOOK 99 The threat from al-Qaida will remain fractured but persistent in 2014. Although the network may be better represented geographically than ever before, this is not necessarily the sign of strength assumed in some quarters: the ability of al-Qaida’s senior leadership to plan and direct the deadly ‘spectaculars’ that were once seen as its hallmark is now greatly constrained. The mantle of carrying out such strikes appears largely to have passed to the group’s affiliates – notably al-Qaida in the Arabian Peninsula (AQAP) – though none has yet succeeded. Most affiliates and emerging associated factions are likely to remain focused on domestic or regional struggles in the coming year, though security vacuums – in many cases attributable to limited or diminishing political resolve – will ensure some enjoy considerable room for manoeuvre. SYRIA SPILLOVER Although jihadists still represent a small minority of the rebels in Syria, groups associated with al-Qaida such as the Islamic State of Iraq and al-Sham (ISIS) and Jabhat al-Nusra have established significant and growing footholds in the country. Insecurity in Syria will continue to drive escalating terrorist threats to its neighbours. ISIS claims to have encroached on the Turkish border and exploited its freedom of movement between Syria and Iraq to push sectarian violence in the latter to levels not seen since 2008. Meanwhile, Lebanese Shia Muslim movement Hizbullah’s efforts to bolster the regime of Syrian President Bashar al-Assad have placed Lebanon squarely on the radar of Sunni jihadists. Levels of violence in Iraq and Lebanon will remain heightened for as long as the Syrian conflict endures. OLD STOMPING GROUNDS As NATO forces prepare to withdraw from Afghanistan, the stable democracy pursued over a decade of nation-building is highly unlikely to materialise any time soon. But neither will Afghanistan re-emerge as a safe haven and operational launch pad for al-Qaida. Rather, without the gravitational pull of NATO forces as a target for the ‘Afghan jihad’, militants may well resume the pursuit of old causes in other parts of South and Central Asia, with Pakistan – and the volatile Kashmir region – most likely to bear the brunt. MERGING THREAT In both the Sahel and East Africa, militant groups will remain a persistent threat to stability and security, having survived concerted international offensives against them. Al-Qaida-linked factions in northern Mali have regrouped after being disrupted by the French-led intervention in early 2013. They will TERRORISM OUTLOOK JOHN NUGENT ASSOCIATE ANALYST, STRATEGIC ANALYSIS CONTROL RISKS
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    RiskMap Report 2014 TERRORISMOUTLOOK 100 continue to pose a threat to assets and personnel in Mali, Niger, Algeria, Mauritania and Libya from their desert redoubts, underlined by near-simultaneous attacks in mid-2013 on a uranium mine and military base in Niger. The merger of the militia led by Mokhtar Belmokhtar – believed to have planned the January 2013 attack on the In Amenas gas facility in Algeria – with the Movement for Unity and Jihad in West Africa (MUJWA) in August 2013 to form al-Murabitun, poses a particular threat, given the new entity’s stated goal of targeting Western, and especially French, assets across the region. Equally, the southern wing of al-Qaida in the Islamic Maghreb (AQIM) will continue to pose a kidnap threat to foreign nationals. On the opposite side of the continent, Somali Islamist group al-Shabab’s lethal September 2013 assault on the Westgate shopping centre (mall) in Nairobi (Kenya) underscored the persistent terrorism threat in East Africa emanating from Somalia. Further mass-casualty attacks in the region – potentially seeking to replicate the ‘Mumbai-style’ tactics and global media coverage of the Westgate attack – are plausible in 2014, with Kenya, Tanzania and Uganda at greatest risk. WESTERN FRONT For Western countries, the twin threats of radicalisation at home and targeting abroad will persist. NATO’s withdrawal from Afghanistan may alleviate one inducement to radicalisation, but drone strikes, provocative films and cartoons, and other foreign military interventions will continue to fuel jihadist sentiment. As in 2013, 2014 will see a handful of successful, small-scale homegrown attacks, as well as the thwarting of a number of overly ambitious plots. Overseas, Western assets, personnel and interests will remain attractive targets for jihadist and extremist groups lacking the means to operate transnationally, or simply looking to make a name for themselves among the broader jihadist community, particularly in the fluid political and security environments of North Africa and the Middle East. A major transnational spectacular against a Western country remains a remote possibility. Although the elevation in 2013 of AQAP leader Nasir al-Wuhayshi, a clear proponent of attacks against Western countries, to a more prominent role within the global al-Qaida network could galvanise the atrophied transnational ambitions of regional affiliates, these aspirations are highly unlikely to be realised. TOP: Weapons recovered in northern Mali, March 2013. BOTTOM: NATO Secretary-General Anders Fogh Rasmussen and Afghan President Hamid Karzai, June 2013.
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    RiskMap Report 2014 PIRACYOVERVIEW 101 Maritime piracy, kidnapping, armed robbery and theft are global threats. The chart below outlines significant global trends since 2008. The map outlines developments in a key area of activity: the Gulf of Guinea. Reported incidents of piracy, armed robbery and theft by region, Jan 2008 – mid-Nov 2013 300 350 250 200 150 100 50 0 KEY 2008 2009 2010 2011 2012 2013 East Asia South-east Asia South Asia East Africa West Africa Horn of Africa Gulf of Guinea Sub-Saharan Africa South America Central America Caribbean Middle East TOTAL 376 536 630 628 482 336 PIRACY OVERVIEW HORN OF AFRICA Somali piracy is at its lowest point in six years. Fewer attacks were registered in 2013 than during the same period in 2007, the year before the crime first began to grab international headlines. According to Control Risks’ statistics, the number of incidents recorded between 1 January and 1 October 2013 represented a 90% reduction compared with the corresponding period in 2012. The reduction can be attributed to a range of factors: adherence to best management practices by crews and vessel operators; a significant naval presence offshore; and the continued use of armed security on board vessels. Additional onshore factors, such as the development of local security forces, have also played a part. The decline in incidents does not necessarily imply a reduction in the threat to vessels transiting through the Horn of Africa in 2014. Although some of those involved in financing and leading pirate attacks have moved on to other ventures, pirate groups remain operational. Suspicious approaches continue to be reported in the Arabian Sea, the Indian Ocean, the southern Red Sea, the Gulf of Aden and the Gulf of Oman. Somali pirates retain the capability to target vessels at great distance from the Somali coast, highlighting the importance of continued caution, not complacency. Activity in 2014 is likely to remain at a relatively low level, with periodic spikes. The crucial question will be whether naval forces can maintain counter-piracy operations while the shipping industry maintains vigilance through this uncertain period.
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    RiskMap Report 2014 PIRACYOVERVIEW 102 GULF OF GUINEA The threat of piracy in the Gulf of Guinea remained high in 2013, with more than 100 reported incidents between 1 January and 1 October, a 30% increase from the same period in 2012. Vessels and crews operating in the region are exposed to a wide range of threats, including kidnap-for-ransom, hijacking, robbery, and port and anchorage crime such as theft. Under-reporting of incidents continues to be a critical issue in the region. A worrying trend for maritime operators in 2013 has been the persistence of kidnapping-for-ransom off the Niger delta. Attacks have been reported more than 100 nautical miles (185km) off the south-eastern coast of Nigeria, involving vessels transiting between neighbouring states in the region. Abductors have targeted a wide range of commercial vessel types, including tankers, oilfield supply vessels and general cargo vessels. Closer to the coast and on some internal waterways, local passenger and fishing vessels have continued to experience attacks, with some fishing trawlers being used as mother ships to support attacks on larger commercial vessels further offshore. Groups involved in hijacking for cargo theft targeting product and chemical tankers also continued to expand their operational range in 2013. Incidents were reported off Côte d’Ivoire, Togo and Nigeria, while groups also significantly expanded their range south of Nigeria, moving to waters off Gabon for the first time. Levels of activity in the Gulf of Guinea are likely to remain constant in 2014, despite the Nigerian maritime authorities taking a more active role in curtailing domestic criminal syndicates. Across the region, anchorage crime will remain a persistent threat, and product and chemical tankers will continue to be vulnerable to hijacking for cargo theft. NIGERIA GHANACÔTE D’IVOIRE BENINTOGO CAMEROON EQ. GUINEA SAO TOME AND PRINCIPE Attempt Hijack Kidnap Robbery KEY
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    RiskMap Report 2014 KIDNAPOVERVIEW 103 Kidnapping-for-ransom is increasing in global scope (% share of global total by victim numbers, as at 30 September 2013) KEY 60% 50% 40% 30% 20% 10% 0% 2004 2005 2006 2007 2008 2009 2010 2012 20132011 LATIN AMERICA MIDDLE EAST AFRICA ASIA AND THE PACIFIC EUROPE AND CIS US, CANADA AND CARIBBEAN Asia and the Pacific accounted for the majority of recorded kidnaps-for-ransom in 2013, rising from 31% of global cases in 2012 to 35%. The region dominated the top ten high-risk kidnapping countries in 2013, with India, Pakistan, Afghanistan and the Philippines all recording high numbers of kidnaps. While all four countries suffer from varying degrees of militancy, criminal kidnap-for-ransom gangs also contribute to the trend. The risk also continued to be substantial in Africa. Nigeria retained first place in the Africa kidnap risk ranking in 2013, with the overwhelming majority of incidents taking place in the oil-producing Niger delta. Further north, Sahel-based Islamist militant groups continued to constitute a significant threat, particularly to foreign nationals in Mali, Niger and southern Algeria. Kenya also featured prominently in the rankings this year, with organised criminal gangs and the Somali Islamist group al-Shabab targeting both foreign and local nationals. The proportion of kidnaps recorded in Latin America has halved since 2005, representing 23% of global kidnaps in 2013. Nevertheless this decline does not represent a reduced threat; Mexico, Venezuela and Colombia still have significant kidnapping problems. The highest number of kidnaps-for-ransom recorded worldwide was in Mexico. A large number of cases continued to be reported in the Middle East, fuelled by the unstable security environment created by the Syrian civil war. Kidnapping-for-ransom has become a common problem in Syria and Lebanon, with Lebanon ranking sixth in Control Risks’ global top ten in 2013. Few cases were registered in North America and the Caribbean, Europe and the Commonwealth of Independent States (CIS), in line with previous trends. KIDNAP OVERVIEW
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    RiskMap Report 2014 KIDNAPOVERVIEW 104 Top 20 countries for kidnap-for-ransom in absolute terms for 2013 (as at 30 September) MEXICO 01 LEBANON 06 SYRIA 11 BRAZIL 16 INDIA 02 PHILIPPINES 07 GUATEMALA 12 KENYA 16 NIGERIA 03 AFGHANISTAN 08 YEMEN 13 NEPAL 18 PAKISTAN 04 COLOMBIA 09 LIBYA 14 MALAYSIA 19 VENEZUELA 05 IRAQ 10 EGYPT 15 SOUTH AFRICA 19
  • 110.
    RiskMap Report 2014 RISKRATING FORECAST 2014 105 RISK RATING DEFINITIONS RISK RATING FORECAST 2014 POLITICAL RISK Political risk evaluates the likelihood of state or non-state political actors negatively affecting business operations in a country through regime instability or direct/indirect interference, and also evaluates the influence of societal and structural factors on business. State actors can include domestic and foreign governments, parliament, the judiciary, regulatory bodies, state and local administrations and the security forces. Non-state actors can include insurgent groups, labour forces, campaign groups, lobbies, other companies, organised criminal groups and international organisations. Societal and structural factors can include corruption, infrastructure, ease of establishing and maintaining a functioning business, and bureaucratic and business culture. The impact on companies can include judicial insecurity, corruption, reputational damage, expropriation and nationalisation, contract uncertainty, international sanctions, bureaucratic delay, partiality in contract and tender awards, campaigns and protests. Political risk may vary for companies and investment projects according to factors such as industry sector and investor nationality. INSIGNIFICANT The environment for business is benign. For example: political stability is assured, investor-friendly policies are entrenched, there is no threat of contract renegotiation or repudiation, and infrastructure for business is excellent. LOW Political and operating conditions are broadly positive. Occasional and/or low-level challenges do not significantly impede business. For example: government policies are investor-friendly with some exceptions, contracts are generally respected, non-state actors have little adverse influence over government decisions, infrastructure is generally robust or there is little risk of reputational damage. MEDIUM While the environment provides generally sound conditions for business, significant challenges can and do emerge. For example: hostile lobby groups exert disproportionate influence over government policy, political instability delays essential reforms, contracts are subject to uncertainty or occasional change, elements of the infrastructure are deficient, or the activities of unions or protest groups impede operations. HIGH The political and operating environment presents persistent and serious challenges for business. For example: there is a credible risk of contract repudiation or renegotiation by state actors, political instability threatens fundamental alterations to the nature of the state, government policy is capricious or harmful to business, corruption is endemic across all levels of officialdom, or regulations are onerous and their implementation is capricious. EXTREME Conditions are hostile for business. For example: direct intervention such as nationalisation or expropriation of assets is likely, systemic political instability leads to the absence of rule of law, the nature of the regime brings severe reputational risks, government structures are inadequate or infrastructure is almost entirely deficient.
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    RiskMap Report 2014 RISKRATING FORECAST 2014 106 RISK RATING DEFINITIONS SECURITY RISK Security risk evaluates the likelihood of state or non-state actors engaging in actions that harm the financial, physical and human assets of a company, and the extent to which the state is willing and able to protect those assets. Actors that may pose a security risk include political extremists, direct action groups, the security forces, foreign armies, insurgents, petty and organised criminals, protesters, workforces, local communities, indigenous groups, corrupt officials, business partners, and in-country company management and staff. The impact of security risk on companies can include war damage, theft, injury, kidnap, death, destruction of assets, information theft, extortion, fraud, loss of control over business, and disruption to operations caused by damage or denial of access to buildings or vital infrastructure caused by terrorist attacks, threats or official responses. Security risk may vary for companies and investment projects according to factors such as industry sector, investor nationality and geographic location. INSIGNIFICANT The security environment for business is benign. For example: the authorities provide effective security, there is virtually no political violence, public disorder is rare and there are no known active domestic groups or issues likely to fuel terrorism. LOW Security conditions are broadly positive and occasional and/or low-level challenges do not significantly impede business. For example: the authorities provide adequate security, organised crime only marginally affects business and protest activity rarely escalates into threatened or actual violence. Rare but large-scale terrorist attacks may pose indirect threats to personnel or assets, or low-level attacks do not target business and are not aimed at causing casualties. MEDIUM Aspects of the security environment pose challenges to business, some of which may be serious. For example: there are some deficiencies in state protection, organised criminal groups frequently target business through fraud, theft and extortion, domestic terrorist groups stage regular attacks that cause disruption to (but do not target) business or there are infrequent large-scale attacks and/or opportunistic small-scale attacks on foreign or business assets and personnel. HIGH The security environment presents persistent and serious challenges for business; special measures are required. For example: state protection is very limited, insurgents are engaged in a sustained campaign affecting business, kidnap poses a severe and persistent threat to foreign personnel, terrorist groups stage regular attacks against foreign or business assets, or weak security forces are incapable of dealing with the terrorist activity. EXTREME Security conditions are hostile and approaching a level where business is untenable. For example: there is no law and order, there is outright war or civil war, personnel constantly face the threat of targeted and potentially life-endangering violence, a terrorist group (or groups) is staging a sustained, high-intensity campaign that severely hinders business, or terrorists frequently target foreign personnel or business activity.
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    RiskMap Report 2014 RISKRATING FORECAST 2014 107 COUNTRY POLITICAL RISK SECURITY RISK AFRICA Angola M M; H in Lunda Sul, Lunda Norte provinces, north-east of Cabinda exclave Botswana L L Cape Verde L L Burundi H M; H in north-western provinces Chad H M; H in Borkou-Ennedi-Tibesti (BET), Wadi Fira, Ouaddaï regions, on CAR, Cameroon borders Benin M L; M on Nigerian border Burkina Faso M M; H in areas bordering northern Mali Central African Republic E H Cameroon M M; H in Bakassi peninsula, Extreme North region Congo M M Comoros H L; M in Anjouan, Moroni Congo (DRC) H H; M in Kinshasa, southern Katanga; E in North Kivu, Ituri district, central Katanga Côte d'Ivoire H M; H in Abidjan, west, north Ethiopia M M; H in Afar region (north of Semera), Somali region, areas bordering Eritrea, Kenya, South Sudan, Sudan Equatorial Guinea H M Djibouti M M Eritrea H M; L in Asmara; H on borders Gabon M L Gambia H L Ghana M L; M on south-eastern border with Togo, border with Côte d'Ivoire, areas around Gushiegu in Northern Region, Bawku in Upper East Region Guinea H M
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    RiskMap Report 2014 RISKRATING FORECAST 2014 108 COUNTRY POLITICAL RISK SECURITY RISK Liberia M M Madagascar H M Malawi M L; M in major urban centres Kenya M M; H in Nairobi, Mombasa, northern and eastern areas Lesotho M M Security risks will remain a primary concern for investors in 2014, driven by high crime rates in urban centres, banditry and communal violence in remote areas, and the persistent terrorist threat stemming from Islamist extremist group al-Shabab and its affiliates. Several factors will undermine the security environment in the coastal city of Mombasa. Arbitrary arrests and extrajudicial killings by security forces following the September 2013 attack on the Westgate shopping centre in the capital Nairobi are likely to exacerbate already heightened tensions and trigger repeated localised unrest, posing incidental security risks to assets and personnel. Niger H M; H on Mali, Nigeria borders, Agadez region, northern half of Tahoua region Mauritius L L Mali H M; H on border with Mauritania, Mopti, northern Ségou, Gao, Kidal, Timbuktu Mozambique M L; M in Maputo Namibia L L Nigeria H H; E in Borno Rwanda M L; M on border with Congo (DRC) São Tomé M L Guinea-Bissau H M Security rating for Mombasa up from M Seychelles L L Sierra Leone M M Senegal M L; M in Casamance Somalia E; H in Somaliland E; H in north-western regions of Somaliland, Mogadishu, Kismayo; M in Hargeisa South Africa M M; H in Johannesburg, deprived urban areas
  • 114.
    RiskMap Report 2014 RISKRATING FORECAST 2014 109 COUNTRY POLITICAL RISK SECURITY RISK AFRICA continued AMERICAS Zambia M L; M in Lusaka, parts of Copperbelt Zimbabwe H L; M in Harare, Bulawayo, diamond-mining areas Anguilla I I Antigua and Barbuda L L Argentina H L; M in Buenos Aires Aruba L L Bahamas I L South Sudan H H Swaziland M M Sudan E M; H in South Kordofan, Blue Nile states; E in Darfur Tanzania M M Togo M M Uganda M M; H in northern, north-eastern areas, border with Congo (DRC) Security threats stemming from the precarious political environment will continue to dissipate in the aftermath of the peaceful 2013 elections, at which President Robert Mugabe and his Zimbabwe African National Union – Patriotic Front (ZANU-PF) secured a resounding victory. Opposition parties do not pose a credible threat to the ruling party and the military remains closely aligned to ZANU-PF, reducing the threat of a coup. The involvement of senior military officials in commercial dealings in the diamond sector and documented instances of human rights abuses contribute to heightened security threats in these areas. Security rating down from M President Cristina Fernández’s defeat at the 2013 legislative elections ended her plans to run for a third consecutive presidential term, but will not bring long-awaited policy changes to address systemic flaws such as inflation and capital flight. State intervention is therefore likely to continue. Unpopular temporary policies such as currency controls will become permanent as economic deterioration continues to limit the government’s room for manoeuvre. Furthermore, the continuing judicial dispute in the US with bondholders excluded from the 2005 and 2010 debt-restructuring plans could trigger a technical default on approximately $24bn of debt. Political rating raised from M Barbados I L
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    RiskMap Report 2014 RISKRATING FORECAST 2014 110 COUNTRY POLITICAL RISK SECURITY RISK El Salvador M M; H in San Salvador, La Libertad French Guiana L L Grenada L L Belize L L; M in Belize City Bermuda I I Bolivia H M Bonaire L L Brazil M M British Virgin Islands I I Chile L L Cayman Islands I L Colombia M M; H in border areas with Venezuela and Ecuador, areas affected by guerrilla activity Canada L L Costa Rica L L; M on Nicaraguan border, Limón Cuba M L Curaçao L L Dominican Republic M M Ecuador H M; H in Colombian border areas Ratings unchanged The nationwide protests in urban centres in June 2013 – which are likely to continue in 2014 – may not have assumed an overtly anti-government stance, but they caused a political earthquake. An unexpected nosedive in President Dilma Rousseff’s approval rating pointed to growing fatigue with the ruling Workers’ Party (PT). Although Rousseff remains the narrow favourite to secure re-election at the October 2014 presidential poll, she will face a strong challenge from two rivals, including a former coalition ally, and her victory will be hard fought. e Dominica I I Guatemala M M; H in Guatemala, Zacapa, Petén, Chiquimula, Izabal departments Guadeloupe I L
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    RiskMap Report 2014 RISKRATING FORECAST 2014 111 COUNTRY POLITICAL RISK SECURITY RISK AMERICAS continued Jamaica L M; H in West Kingston, Spanish Town Mexico M M; H in Chihuahua, Coahuila, Nuevo León, Tamaulipas, Sinaloa, Durango, Jalisco, Guerrero, Michoacán and Morelos states Martinique I L Panama L M; H in Darién province on Colombian border Nicaragua H M Peru M M; H in Ene, Apurímac and Mantaro valleys (VRAEM) Paraguay M L; M in eastern border, tri-border area Sint Maarten L L Puerto Rico L M St Lucia I L St Kitts and Nevis I L Suriname M L St Vincent and Grenadines I L Trinidad and Tobago L M; L in Tobago; H in Laventille, Beetham (Port of Spain) Guyana L M Haiti H H Honduras M H Security rating raised from M in Morelos Unprecedented co-operation from the three major political parties in advancing President Enrique Peña Nieto’s structural reform agenda saw major changes approved in 2013 in the labour market, and the education, finance and telecom sectors. Energy and fiscal reforms will lay the groundwork for boosting economic activity in 2014 and beyond. Security policy will remain focused on detaining organised crime leaders, paired with a long-term prevention strategy focused on social spending programmes. Nonetheless, the security environment will remain challenging, with a gradual reduction in the murder rate offset by rising levels of extortion and kidnapping. Turks and Caicos L I United States L L
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    RiskMap Report 2014 RISKRATING FORECAST 2014 112 COUNTRY POLITICAL RISK SECURITY RISK Venezuela H M; H in Caracas, major urban centres, Colombian border states US Virgin Islands I L ASIA-PACIFIC Cambodia M M China M; L in Hong Kong L; M in non-central districts of cities in Guangdong Province, remote border areas, Xinjiang’s south-western prefectures Bangladesh M M; H in Chittagong Hill Tracts Bhutan L L Brunei L L East Timor M M India M M; H in Assam, Kashmir, Manipur, Nagaland, Tripura, Bihar, Jharkhand, Chhattisgarh, border districts of Orissa, northern areas of Andhra Pradesh, western districts of West Bengal and eastern districts of Maharashtra Fiji M M Afghanistan E; H in Kabul E Australia L L Indonesia M M; H in Papua, Maluku Uruguay L L Ratings unchanged Ratings unchanged The security environment is worsening. We expect a marked increase in violent opposition protests in the run-up to general elections slated to be held by January 2014, while polling is unlikely to proceed smoothly. The opposition is likely to claim fraud if the government continues to resist its demands to reinstate a caretaker government system that has in the past overseen elections. There is a moderate threat of a military coup if the law and order situation deteriorates significantly. With President Susilo Bambang Yudhoyono due to step down after the 2014 elections, Indonesia is preparing to transition to only its third democratically elected president since independence. Although its democratic institutions are strong and appear resilient, it is unclear how well they will withstand adverse influence from old-style ‘crony’ interests, particularly with an unappealing slate of candidates and business moguls leading the presidential race. Even if led by a reformist, the new administration will face significant challenges in embedding the hard-won gains of the last decade. is of
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    RiskMap Report 2014 RISKRATING FORECAST 2014 113 COUNTRY POLITICAL RISK SECURITY RISK North Korea E L ASIA-PACIFIC continued Pakistan H H; E in FATA, Khyber-Pakhtunkhwa, north-east Baluchistan Philippines M M; H in western, south-western Mindanao Singapore I L Solomon Islands M M Papua New Guinea M H South Korea L L Taiwan L L Sri Lanka M M; H in north, north-east Thailand M M; H in southern three provinces Tonga L L Vanuatu L L Vietnam M L Malaysia L L; M in Sabah Maldives M L Mongolia M M Nepal H M; H in south Myanmar H M; H on borders, insurgency affected areas New Caledonia L L New Zealand I L Ratings unchanged The political crisis is likely to continue to prompt occasionally violent protests in the capital Malé, and to a lesser extent in larger towns on other atolls. Democratic advances since the country’s first multi-party elections in 2008 are likely to continue to be undermined. The judiciary and security forces are politicised, and will further fuel antagonism between the opposition Maldivian Democratic Party (MDP) of former president Mohamed Nasheed (2008-12) and other parties.s.. Laos M L Japan L L
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    RiskMap Report 2014 RISKRATING FORECAST 2014 114 COUNTRY POLITICAL RISK SECURITY RISK Czech Republic LM Denmark I I; L in Copenhagen, Aarhus Estonia LL Finland I I Andorra I I Armenia M M; H in Azerbaijani border areas Austria L L Belgium LL Belarus H L Bosnia and Herzegovina M L Azerbaijan M M; H in Armenian border regions, Nagorno-Karabakh Croatia LM Cyprus L; M in TRNC L Bulgaria M L Security rating down from M Belarus is a stable society ruled by an entrenched, authoritarian government. Security service involvement in maintaining social order is ubiquitous. Although periodic political protests will continue, these will not affect foreign business or the overall security environment, given overall low support for the opposition, highly restrictive laws on rallies and demonstrations, and harsh security force intervention. There are no domestic sources of terrorism and no extremist political or religious groups. Political rating raised from L Government instability increased during 2013, with the centre-right government led by the Civic Democrats resigning in June over wiretapping and corruption scandals. The resulting political instability was exacerbated by the weakness of the interim government, which failed to win a confidence vote in parliament. Despite a new government taking office after snap elections in October, the political situation is likely to remain unstable in 2014, delaying the implementation of key austerity measures and necessary structural reforms. France L; M in deprived urban areasL Albania M L; M in north EUROPE
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    RiskMap Report 2014 RISKRATING FORECAST 2014 115 COUNTRY POLITICAL RISK SECURITY RISK Norway I I Netherlands L L Poland L L Portugal L I Greece MM Georgia M; H in Abkhazia, South Ossetia M; H in Abkhazia, South Ossetia Germany LL Hungary LM Iceland L I Kosovo M L; M in Mitrovica, surrounding areas Kyrgyzstan H H Latvia L L Kazakhstan M L Liechtenstein I I Lithuania L L Ireland L L Italy L L; M in southern regions Luxembourg I I Macedonia M L Malta I I Moldova M; H in Transnistria L; M in Transnistria Monaco I I Montenegro M L EUROPE continued Romania M L
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    RiskMap Report 2014 RISKRATING FORECAST 2014 116 COUNTRY POLITICAL RISK SECURITY RISK San Marino I I Russia M; H in North Caucasus M; E in Dagestan; H in rest of North Caucasus Serbia M L; M in Sandžak, Preševo Valley Slovakia M L Slovenia M I Spain L L Tajikistan H H Sweden I I; L in Stockholm and surroundings, Gothenburg, Malmö Switzerland I I Ukraine M M Turkey M L; M in south-eastern cities; H on Syrian border, rural areas of south-east Turkmenistan M M United Kingdom L L Algeria H M; H in rural areas of north-central and north-eastern provinces, non-oil- and gas-producing areas of southern provinces MIDDLE EAST AND NORTH AFRICA Istanbul security rating down from M; Syrian border up from M Istanbul has not seen a major terrorist attack since 2003, while the security forces’ counter-terrorism capabilities have increased. Although it will remain an attractive target for attacks, businesses are unlikely to be directly affected. Security risks on the Syrian border are rising as spillover violence from Syria combines with increased civil unrest risks stemming from large numbers of Syrian refugees. Security rating down from H The turmoil seen by its neighbours is unlikely to affect Algeria in 2014. However, uncertainty about President Abdelaziz Bouteflika’s intentions and probable successor will build as the 2014 presidential election approaches. Elite interest groups have sufficient shared interests to encourage consensus-building over whether Bouteflika stays or goes, but failure to manage the process would be destabilising. p Bahrain M M Egypt H M; H in North Sinai
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    RiskMap Report 2014 RISKRATING FORECAST 2014 117 COUNTRY POLITICAL RISK SECURITY RISK MIDDLE EAST AND NORTH AFRICA continued Political instability will rise around the 2014 elections, directly affecting the operating environment. Sunni Arab and Kurdish factions are strongly opposed to Prime Minister Nuri al-Maliki, and other Shia Arab leaders have also begun to mobilise against him. There is little chance of a smooth transition of power, and another Maliki-led government would prompt growing unrest and calls for devolution. Iraq E E; M in Kurdistan Region; H in Kurdistan Region borders, south Israel L L, M on Sinai, Syrian borders Lebanon M M; H in Tripoli, Bekaa, northern border with Syria Libya H H Mauritania M M; H in eastern desert areas Kuwait M L Morocco L; H in Western Sahara L; M in Western Sahara Jordan M L; M on Syrian border Palestinian Territories H in West Bank; E in Gaza M in West Bank; E in Gaza Saudi Arabia L L; M in Qatif Qatar L L Syria E E Oman L L Yemen H H Tunisia M L; M in Sfax, Sidi Bouzid, Jendouba, Kasserine, Gafsa, Gabès, Tozeur, Kebili, Medenine, Tataouine United Arab Emirates L L Iran H L; M in Sistan-e Baluchistan, Khuzestan, 100km from Turkish, Iraqi, Afghan borders Political rating raised from H
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