03.04.2012
By Simon Miller
Last year saw potentially epoch-making events in the Middle East, the continuing growth of the Bric regions and the continued decline in western economies especially in Europe.
With socio-economic concerns possibly coming to the fore, along with territorial and military tensions, both the internal and external politics of nation states play a heavy factor in making a risk assessment for investing or competing in these territories.
“2011 was the year where everybody talked about risk but actually not that many things blew up. And I now worry that we are a bit more complacent in thinking that this isn’t as bad as we thought. But fundamentally what is coming up in 2012 is worse than what we had last year so it is almost a perverse situation where we are now lulled into a greater sense of safety than we were last year when actually the risks are greater,” says Mal Bosnik of Aegis Advisory.
So what are the likely themes and territories in the spotlight for 2012?
People
The spark of the Arab Spring began with the self-immolation of street trader Mohammed Bouazizi in Tunisia which spread throughout North Africa taking in Egypt, Algeria, Yemen, Jordan and Bahrain among others. The uprisings led to the fall of Egypt’s Mubarak, Tunisia’s President Zine el-Abindine Bann Ali and the death of Colonel Gadaffi in Libya. At the time of writing Syria’s government is under intense international pressure as it brutally cuts down its protestors.
With youth unemployment averaging around 12 per cent over the past two decades, a growing poverty gap and ever-rising food prices, to some analysts the spark of the uprisings was all too obvious.
Political Risk consultant Maplecroft’s CEO Alyson Warhurst said Egypt illustrated how a country that was growing incredibly well was able to bring about its own demise.
“We hear about societal unrest on the news but that also translates into labour unrest and business discontinuity. There is a lack of distribution due to interruption and due to poor developments of institutions in those countries leading to a lack of resources for business,” she comments, adding: “Then you have a disenchanted youth, people feeling they haven’t got the job prospects that they feel they deserve after the education they have undergone, so you are talking about countries that are in a semi-developed stage.”
And this unrest extends to other countries such as Iran and China.
Head of Middle East and North Africa (Mena) at Maplecroft Anthony Skinner noted that in Iran, domestic political unrest had been met with a crackdown by the state and religious leaders.
“The crackdowns and controls have featured very heavily. We saw in the last elections, where the green movement had the greatest force in the street but the security forces managed to control their movement and managed to control communications between members of the opposition by and large,” he says.
Skinner continues: “I think this strategy of controlling the physical territory – urban centres, in particular Tehran – and also communication, and the threat of using force and actual use of force, in combination have managed to significantly weaken the Green movement apart from the fact that the green movement does not have a particularly strong figurehead who can really push with charisma forward and inspire a larger segment of the middle class to join in.”
Indeed, middle class discontentment and support appears to be crucial in developing a successful uprising.
“I would almost use Russia here as an example. The reason we don’t think the Russians are going to have a revolution is that the middle classes don’t die for these ideals, they are not up against the wall. And this is what I think about the Chinese as well,” says Bosnik.
He adds: “There’s too much to lose, so really you might push it a little bit, you may push it on twitter and have a couple of little demos but really, if you are required to stand in front of a tank? You probably won’t do it if you’ve become accustomed to an apartment with air conditioning, children in after-school training, that sort of lifestyle. “
It may be surprising but China has more protests and “unrest” than any other country in the world. Official sources state that 127,000 so-called ‘mass incidents’ took place in 2010 while last year has seen riots in Inner Mongolia. However, many are of a “not in my back yard” type of protest against development or local official corruption and away from western media eyes, the acceptance of protests by the authorities is not as benign as many think.
Bosnik comments: “It [protests] does let off some steam but if you look at what happened in Dalian [a protest by more than 12,000 people led to the closure of a polluting chemical factory], but there were other things going on in the same province which they [the authorities] smashed and it didn’t make the news.”
Patrick Bury, senior analyst at Aegis adds: “I think in terms of being agile the Chinese have been responsive so far but it is a case of whether they keep the wheels on the wagon. So you’ve seen them being responsive at the fiscal level — obviously the response to the 2008 crisis was really straight in there and doing it but you are coming to the end of that now and the question is what next?”
One of the major pressures that could lead to societal unrest in China is the division between city and countryside.
There are more than 200 million internal migrant workers in China with a lack of basic social rights which urbanites are more used to.
As a result, the government is moving, albeit slowly, to shift factories towards rural areas and have been opening areas in some different cities and given them access to this basic social health insurance but they haven’t expanded this out to the rural areas.
“So it is a very clever process and you see protests all the time but you see other things such as the moving of coastal economic zones, manufacturing centres, massive ones, out to the rural areas. “ says Warhurst. “So instead of migrant workers coming in, it is moving this manufacturing out to the migrant worker areas so to reduce the tensions of having migrant populations in Cities where they can cause unrest.“
And with the Arab Spring, food prices will continue to, for want of a better word, feed the bitterness of populations around the world.
Warhurst pointed out that rising commodity prices and speculation over commodities gaves rise to local food price hikes which means people on their current wages cannot buy food - a trend that started last year.
She continues: “And so you have in these growth economies where they have had education and they have got themselves jobs but then their wages aren’t enough to buy food and they have been educated alongside people who went into the army and they know the army and that it is not going to shoot them for protesting about not having enough food on the whole.”
And the eurozone crisis will also potentially see a crisis in Eastern Europe. With hardly any national banks left in the likes of Hungary, money is being starved from businesses and people.
“Even at 25 per cent unemployment, Spain is unlikely to engage in civil
war. I don’t know if Hungary could not claim the same nor could Romania, ”says Bosnik. “As banks cut their losses, they are cutting the money supply to Eastern Europe. And what we are seeing behind the scenes is the International Monetary Fund coaxing these banks not to kill Eastern Europe. We do not want to see an arc of instability.”
Power
Power, who has it and who gets it has been a fundamental basic of politics since men first formed tribes and the events of last year has seen the issue of a power vacuum arising in Arab Spring areas.
Instead of the rise of a more ‘liberal’ style political environment that had been hoped for by commentators and politicians alike, a more islamist, hostile environment appears to be arising – even in places like Turkey.
Bosnik comments: “What happened in the Middle East, we got excited by people that looked and thought like us, and they were the spokespeople. They’re three per cent, now the heartland is voting in the islamists and everyone is saying ‘oh we thought it would be the dawn of the rights of women in Egypt’.”
Referring to Turkey, he continues: “So from an investment point of view, consumer democracy may just come up against ideology. Try buying beer in Anatolia, there are already government-level rules about constraining it so I do not take this lightly at all. Not even in the model of so-called Islamic democracy let alone the likes of Tunisia and Egypt.”
And yet, Skinner believes that the ruling Justice and Development party was not monolithic. And despite the fears of secularists, the party is very pragmatic and pro-business.
“Turkey has positioned itself very pragmatically; on the one hand it wants to portray itself as very essential as a partner to the west, preferably as part of the club. On the other, there have been initiatives that have reflected its more conservative orientation such as banning alcohol in municipal areas, trying to put an end to the ban of headscarves in universities. So all of these initiatives are being taken by parties intent to push forwards a more conservative society and this is the underlying fear of the secularist Turkey,” he says.
However, the issue is that the control of power now rests with the government and not the military – which had seen itself as the defender of Atatürk’s secularist state - after years of probes and counter-probes over alleged coups that have left the military with its wings clipped.
Skinner comments: “So the dynamic has shifted in so far that the military has been significantly weakened, that party has managed to strengthen its position and its grip on power and it has been accused of monopolising the State organs and weakening the state as a structure and weakening the military which portrays itself as defender of the secular republic – appointed guardians effectively.”
Bosnik agrees: “I do not think that there is capacity for an ‘Atatürkist’ coup in Turkey. In my mind it is a Putin-style slide towards managed democracy that is more likely.”
Indeed, Russia has been something of a tempestuous ride for the western investor. From an initial ‘wild east’ after the fall of the Soviets, the temperature swung round and the state became increasingly hostile to what it saw as the west taking advantage of its naivety and just-born capitalist system.
However, with Putin now a shoo-in for president – vote-rigging not withstanding – there is a new type of power issues that faces him, and westerners alike.
The issue for the country is essentially who actually has the power? After years of crackdowns and confiscations in Russia, there is a question of which is the more powerful – the state or non-state players? For western business, after facing a hostile Putin in his first term as president, it may now be in their interests to support him reasserting control over the country.
“Back when he was hostile to western interests you would say it made sense from a western perspective to wish for his grip to be loosened a bit. Now that he has come back around that he is in favour or at least consistent with western business interest he seems to be weakening. Investors would probably prefer stability under Putin than the uncertainty of an imperfect transition,” says Bosnik.
He points out that a conflict is occurring where local champions come up against total free market players. As a result, the risk to intellectual property rights – as it is in China – is a key concern but one that should be looked at for monetising rather than worrying about.
“Sometimes there are issues over being joint partners for five years in that once they extract our knowledge, we are out. But even it it’s only for five years, it is still pretty lucrative,” says Bosnik.
And yet there are still concerns about the conflict between local players and state actors.
While the government acknowledges the concerns over the likes of cyber terrorism, with the opening of a new centre of excellence in Tallin, no-one is quite sure how this would percolate down to the business level.
In investigations into the centres of cyber-terrorism, fingers point towards Russia and China but cyber-criminals may have made an error. Increasingly the state itself is finding itself under threat which adds to the political will to shut cyber-criminals down.
So with the political will co-inciding with the business needs of the west, Warhurst agrees that there are large growth opportunities in Russia: “What people forget about Russia is that the long-term growth prospects are very good they’ve got an awful lot in their favour in terms of education, infrastructure, and the talent that you need for a growth environment. “
Iran
The final obvious short-term danger that is in analysts’ sights is, of course Iran, and the continuing dispute over its nuclear ambitions.
And yet despite the threat to close the Straits of Hormuz, it appears unlikely that the two main players – Iran and the US – want to escalate the situation.
Skinner comments: “So long as Tehran rattles its sabre so the political risk environment will remain elevated. The question is of course will it escalate into conflict? The US and Tehran have no interest in a military engagement which could escalate so this is a key consideration moving ahead.”
And of course if the sabre rattling gets louder, with the Arab world reliant on the Straits to get their oil out to the rest of the world, we could soon see another spike in oil prices leading to increased commodity prices and further civil unrest as food and energy prices rise. However, greater prices could also be the spur for social improvements in the area.
“On the one hand this is putting upwards pressure on commodity prices so from the perspective of oil producers in Mena this increases buck per barrel which gives them greater room to increase things like social services to offset some of the main drivers of the Arab spring,” says Skinner.
Whatever happens this year, one thing that is certain is that wherever there is risk there is opportunity and if this is any guide there will be plenty of opportunities in 2012.
