RISKMAP REPORT

2013

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 33 offices worldwide, we provide a broad range of services to help our clients to manage risk.

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 2012. All rights reserved. Reproduction in whole or in part prohibited without the prior consent of the Company. Photos on pages: 3 (top/bottom), 5 (top), 32 (top), 40 (top), 44 (bottom), 49 (top), 56 (top), 62 (top), 68 (top), 72 (top) and 78 (top) © Press Association. All other images are from Shutterstock except those credited in the publication to Control Risks’ employees.

RISKMAP REPORT

2013
Control Risks is delighted to launch RiskMap 2013, our authoritative guide to business risk in the year ahead. Drawing upon expertise from across our business worldwide, we forecast what will be the major challenges and opportunities of doing business in some of the world’s most complex environments next year.

Globalisation and political change have created unprecedented complexity and volatility, making countries – and companies – harder to run than ever before. Success in 2013 requires a new style of nimble, crisis-oriented leadership.
– Richard Fenning, CEO, Control Risks

power hAs never been More probleMAtic A complex and volatile world will continue to pose a plethora of challenges to business leaders, requiring a nimble, crisis-oriented approach.

Mission iMpossible? Achieving security in A volAtile world Corporate security will be asked to do ever more, in more challenging environments, with fewer resources. But there are ways to succeed.

integrAting integrity risk MAnAgeMent Companies that align risk management with business development will remain at the forefront of integrity risk management.

01
view FroM: new york Despite regulatory uncertainty, a weak global economy and partisan politics, Wall Street will retain the edge over European competitors.

02
view FroM: beiJing China’s new leaders must push through major structural reforms but will face inertia and resistance, complicating the longer-term outlook.

03
view FroM: berlin Efforts to preserve the eurozone will face further tests, but Germany will remain committed regardless of who wins September’s federal elections.

04
view FroM: Moscow The president will retain his strong grip, despite some dissatisfaction. Only limited improvements to the business environment are likely.

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pirAcy overview

05
view FroM: cAiro The political scene should begin to stabilise in 2013, but economic gains will be fragile and structural problems will persist.

06
view FroM: JohAnnesburg Investors will be wary amid labour activism, mining-sector uncertainty and socio-economic challenges, but there are reasons for cautious optimism too. Page 51

07
view FroM: lAgos The commercial promise of Lagos belies a bleaker national picture; expect little progress on oil-sector reform or the northern security crisis.

08
view FroM: rio de JAneiro The city’s dynamism and large infrastructure projects will lure investors, but Brazil’s business environment will remain complex and challenging.

09
view FroM: JAkArtA The leading candidates for the 2014 presidential poll will establish themselves as investor concerns over resource nationalism grow.

10
view FroM: yAngon After the excitement of 2012, a more realistic picture of the country’s challenges and the obstacles to investment will emerge.

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kidnAp overview Page 83

risk rAting ForecAst 2013 Page 69 Page 75 Page 85

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Lalibela market, Ethiopia, Richard Holmes, Control Risks

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RiskMap Report 2013 POWER HAS nEvER BEEn MORE PROBLEMATIC

power hAs never been More probleMAtic
by RichaRd Fenning chieF executive OFFiceR cOntROl Risks The world in 2013 ‘nothing comes to my desk that is perfectly solvable. otherwise, someone else would have solved it’, explained US President Barack obama to a journalist in 2012. he said this in a moment of candour before the presidential campaign got underway in earnest, when such frank insights are replaced by the blunt certainties required by electioneering. he went on to explain that to be president you need to feel comfortable about making decisions when there is a 30% to 40% chance that the choice will be the wrong one. Of all the millions of words spoken by politicians around the world, these remarks are probably the most instructive in describing the nature of modern leadership. As the world’s two main powers – the US and China – go through the process of renewing their leadership, Obama’s comments encapsulate the main theme of this year’s RiskMap: being powerful has never been more problematic. Globalisation and political change have made what were once distant dreams much more readily accessible. But they have also created unprecedented complexity and volatility, making countries – and companies – harder to run than ever before. Success requires a new style of nimble, crisis-oriented leadership. The last two years have shown how susceptible a highly interconnected world is to rapid political change (the Arab spring), economic crisis (turmoil in the eurozone) and natural disasters (the earthquake/tsunami/reactor meltdown in Japan). These types of disturbances are not new – the world has long suffered from political, economic and natural upheaval – but the taut connectivity of supply chains and communication networks means that the velocity with which local problems become global issues has increased substantially. It means that running countries or managing companies has as much to do with your ability to react to rapidly shifting circumstances as with the execution of strategy or implementation of policy. Sir Howard Stringer, the outgoing CEO of Sony, described how the task of running the electronics giant was made all the more complicated by having to deal, in a few short months in 2011, with the hacking of Sony’s online video game network, the impact of the Japanese earthquake and tsunami, a Sony distribution centre being burnt down in the London riots and floods in Thailand wiping out production just before Christmas. Add in the collapse of Lehman Brothers, the global financial crisis and the soaring yen, and you can see why CEOs like Stringer must feel that they live their lives in a wind tunnel trying to stay upright in the face of a constant barrage of unpredicted events.

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RiskMap Report 2013 POWER HAS nEvER BEEn MORE PROBLEMATIC

The coming year promises to compound the sense in which the best laid plans get thrown off track by both a series of major economic and political challenges, and by clusters of seemingly unforeseeable events. The major challenges can be clearly mapped. the eurozone crisis goes beyond questions of macroeconomic management. EU members will continue to struggle to find the common political will necessary to stave off the disintegration of the euro. Although the outlines of a banking union are fitfully taking shape, the fact that the union was only ever a partially completed project – currency union without fiscal or political union – now prevents fundamental reform. Few European voters will be prepared to endorse plans to deepen a system that many now see as profoundly flawed. german voters are deeply sceptical about the prospect of bankrolling what they see as the profligacy of their southern neighbours. But German industry – both the multinational giants and the Mittelstand (small and medium-sized enterprises responsible for 60% of German jobs) – understands the huge boost that the euro has provided to German exports by making them more globally competitive. The success of Chancellor Angela Merkel’s campaign for re-election in 2013 will hinge on whether she can persuade the German people that economic pragmatism must prevail over national sentiment. Even if she is defeated, the euro seems set to limp on, just.

Oil and gas revenues have enabled russia to overcome the economic downturn that continues to plague its European neighbours. But the year ahead will see more warning signs flashing for President vladimir Putin. The protests against the regime that sprang up in Moscow and St Petersburg in 2012 may reflect the views of only a minority of Russians. Yet, as the Kremlin well knows, Russian history tends to be made in these two cities. Putin has to give rein to those willing to push through deep structural reforms sooner rather than later or take the consequences. The reckoning may not come this year or next, but the regime’s techniques to calm growing impatience with corruption in key sectors are increasingly unsustainable. An extended period of oversupply in the oil and gas markets that hits prices and then Russia’s export revenues could be a tipping point. china faces the difficult confluence of a political transition that has been more complicated and public than the regime would have liked with an economic slowdown that has been more pronounced than planned. In the last few years China has prompted over-exuberant optimism among investors giddy with China fever, which in some cases has been replaced by irrational pessimism. In the same way that it would have been naïve to imagine that China was a one-way bet for trouble-free economic supremacy, it is equally wrong to see the whole house of cards as fundamentally

TOP: Russian President vladimir Putin,

Manmohan Singh, August 2012.

BOTTOM: Indian Prime Minister

October 2012.

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RiskMap Report 2013 POWER HAS nEvER BEEn MORE PROBLEMATIC

unstable. What is indisputable is that China is going through the most complex economic transformation on such a scale in modern times. As the economy adjusts to slower rates of growth, the investment landscape will suffer intermittent jolts. There will be no serious breakdown in the political order, but it should be no surprise that, at times, it is a distinctly uncomfortable ride. The US’s much-discussed pivot towards Asia reflects the changed nature of the global balance of power. The region still enjoys heady levels of economic growth compared with Europe, but the slowdown in China and clunky relations between the main regional powers – a number of which are experiencing upsurges in nationalism – mean that investors will need to be wary of the potential for an escalation in tensions, not least between China and Japan. As Warren Buffet remarked during the 2008 financial crisis, ‘when the tide goes out, we find out who is not wearing swimming trunks’. Chinese bathers have been swimming in the deep end for as long as many can remember. The consequence of the slowdown will be that a number of deals that looked good when the economy was growing above 10% and credit was cheap will seem less pretty in the year ahead. Expect a number of investment scandals, some linked to murky local politics, to hit the headlines in 2013.

india has watched China’s economic growth with envy in recent years. At the same time, its own growth has stagnated as its reform programme has spluttered, then stalled. Bold attempts to restart the programme in 2013, particularly by opening up the retail sector to more foreign competition, are likely to be frustrated by the factionalism of Indian politics and the absence of a leader to succeed Prime Minister Manmohan Singh with the necessary power base and vision. For all its wonderful potential, India will not grasp the opportunity. In the Middle east, it is hard not to conclude that the heady optimism of the Arab spring has been replaced by the grim reality of civil war, violent extremism and brinkmanship over Iran. But the north African protagonists – Tunisia, Egypt and Libya – may prove to have made more progress than currently seems the case. The changes occurring in the region will take years to play out. Shifting demographics, growing space for Islamism in mainstream politics and the start of the move away from external dependence on the region’s hydrocarbons could in combination lead to a more stable and prosperous Middle East. But not yet. The Arab spring raised unrealistic expectations locally as well as internationally, and for the next few years the region will be subject to bouts of instability until a more stable new order emerges.

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RiskMap Report 2013 POWER HAS nEvER BEEn MORE PROBLEMATIC

As the new administration takes office in the us, and assuming that the fiscal cliff is successfully avoided, it will be tempted to accelerate the pace of disengagement from the Middle East. The prospect of the US becoming more self-sufficient in the production of hydrocarbons goes beyond economics. Less dependence on Middle East imports – and therefore less need to intervene politically and militarily to preserve security of supply and price stability – is a beguiling prospect for a country weary of playing global policeman. But it is a false – or at least a premature – promise. The US still has too many strategic political and energy interests in the region. Threatening Iran, avoiding entanglement in Syria and deploying drones not troops to hunt down local al-Qaida franchises might make for flashy pre-election politics, but they do not constitute a coherent policy. Investors in the Middle east will continue to experience operational disruption as disputes within and between nations continue. While conflict over Iran’s nuclear ambitions is still on balance unlikely, the febrile atmosphere means that an incident – the sinking of an Iranian vessel, for instance – could trigger some kind of military clash. Similarly the spillover from an increasingly complex and protracted conflict in Syria will continue to cause disruption in neighbouring countries. Full-scale regional conflict remains unlikely, but contingency plans should allow for a serious security breakdown in vulnerable countries.

TOP: US President Barack Obama, BOTTOM: Damascus, Syria.

november 2012.

latin America epitomises the contradictions of volatility and complexity, despair and optimism that currently characterise the global scene. Colombia has the historic possibility of peace after nearly half a century of conflict, while the Mexican government struggles to contain endemic narco-violence across its northern marches. The maddening curse of crude populism and internecine politicking continues to afflict Argentina, venezuela, Ecuador and Bolivia. Take the long view though, and it becomes clear that over the last decade the region’s broad security situation has improved, civilian-led politics are increasingly entrenched and living standards for most have improved. Despite itself, Latin America will, in 2013, continue to come in from the global periphery. Brazil exemplifies this trend. Its growth fundamentals are solid and its political system stable. Yet complex and expensive new hydrocarbon projects with long lead times do not conceal the drags on growth stemming from inflated bureaucracy, corruption and weak infrastructure. The region will take its time getting to the next stage, but it will do it. sub-saharan Africa remains, to some extent, insulated from the developing world’s dominant austerity agendas. A prolonged supply overhang in the commodities sector, leading to a decline in Chinese demand, will cause short-term pain, but the region represents a genuine global renewal opportunity to feed

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RiskMap Report 2013 POWER HAS nEvER BEEn MORE PROBLEMATIC

the structural rise in Asian demand. As the US pivots to Asia, so will China pivot towards shielding its commodity supply lines. new oil and gas finds in East Africa mean that the landmass and sea lanes between the Gulf of Aden and Mozambique Channel are poised to acquire new significance, both as a source of opportunity and vulnerability. The upside for Africans will be increased scrutiny of the continent’s internal geopolitics. Africa has been beset by conflict since the wave of decolonisation 50 years ago. Other than fighting nasty proxy wars during the Cold War, the stakes for external intervention were simply not sufficient for global powers to be deeply involved. The increasing assumption of responsibility for conflict resolution by Africans, the rise of Chinese investment and the potential the region holds both as global supplier and consumer will ensure that Africa’s importance will only increase in 2013 and beyond. As this happens, the need for investors to structure their operations wisely increases and, correspondingly, the reputational and regulatory risks become more acute. ConfronTing The Challenge In describing some of the fault lines that are likely to run through the world in 2013, it is easy to sink into a trough of despondency at the number of major political, security and economic challenges we face. Seeing risk is easier than finding opportunity, and that is what consumes business leaders confronted by the sheer

volume of conflicting opinion and confused data about what is happening in the world and in their business. Add in the demands of tighter – but sometimes contradictory – regulation and a rise in aggravated shareholder activism, and you can see why global CEOs often talk of being caught in a maelstrom. This sense of unease is only heightened by the asymmetric threat from cyber-attacks and the vulnerability of data-dependent organisations unable to patrol their virtual perimeters effectively. Many companies find themselves managing their affairs on twin tracks. On the one hand, they have teams of their best people aggressively seeking new opportunities in complex and opaque new markets, while separately they are devoting ever greater resources to avoiding reputational or governance crises. The result is often paralysis by risk management, whereby the organisation – gripped by existential angst – fails to find the right degree of creative tension between the two imperatives of risk reduction and risk taking. Contrary to the pessimistic tone of much news reporting, there are numerous examples of markets abundant with opportunity: Colombia, Myanmar, Indonesia, Iraq and much of sub-Saharan Africa, for example. And behind the headline talk of austerity, many of the lead indicators continue to point in the right direction: infant mortality, public

health (particularly for women), the spread of democracy and education, and the number of conflict casualties are all heading the right way, albeit in a patchy fashion. The number and influence of global outliers – such as north Korea, Cuba, Zimbabwe, Iran and venezuela – is also arguably diminishing. Yet notwithstanding their ailing leaders and dysfunctional governance, such regimes may be dangerous even in their death throes. It is hard to imagine that the Chinese and US leaders taking office in 2013 do not occasionally wake up in the middle of the night and wish they were doing something else. Maybe not: it is probably in the nature of political ambition to eradicate those agitated moments of self-doubt. But even if they sleep soundly in their beds at night, the challenges they face are significant, not because the world is more at risk than ever before, but because the pace of events and the speed with which the local becomes global is unprecedented. Jeff Immelt took over from Jack Welch at the helm of GE Corporation a few days before the 9/11 attacks. He sums up the demands of leadership very well: ‘I was chairman for two days when I had an airplane with my engines hit a building I insured covered by a network I owned and I still had to increase earnings by 11%.’ He also said, less helpfully: ‘There are 24 hours in a day and you can use all of them.’

Pinnacle@Duxton, Singapore, Debesh Sharma, Control Risks

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RiskMap Report 2013 MISSIOn IMPOSSIBLE? ACHIEvInG SECURITY In A vOLATILE WORLD

Achieving security in A volAtile world
by JOnny gRay diRectOR, glObal client seRvices, aMeRicas cOntROl Risks hot on the heels of the latest Bond instalment, Skyfall, rumour is rife in hollywood that Tom Cruise and his studio backers are turning their attention to developing Mission: impossible 5. Perhaps it should be called The CSo Protocol: Your mission, should you choose to accept it, is to do more, in more challenging places, with fewer resources, in a climate of increasing regulation and scrutiny. good luck, chief security officer. This message will self-destruct in five seconds... nonsense, you say? We polled 100 senior risk and security directors in October 2012 in our Future Risk survey to see how outlandish this ‘mission statement’ really is. The findings throw light on the state of corporate security functions and the forces shaping the industry as we move into 2013, giving insights into the shape of things to come. higher reward: higher riSK The IMF projects that emerging markets will grow by 5.6% in 2013, with the fastest rates found in developing Asia and sub-Saharan Africa. Compare that with the 1.5% growth forecast for advanced
Corporate risk appetite 2013
MORE RISK TAKING

economies in 2013, and it is not hard to see why many companies view emerging markets as ‘open for business’ and want in. Great opportunities, for sure. But the issue for corporate security directors is that emerging markets and developing economies bring with them greater security risks that need time and resources to adequately manage. Resources they don’t necessarily have. This will be a common problem in 2013: the Future Risk survey indicates that 38% of corporate resilience directors believe their organisations will take on more risk in the coming year, with some seeing themselves as under-resourced.

Matthew hORROx diRectOR, secuRity Risk cOnsulting, euROPe and aFRica cOntROl Risks

38%
NO CHANGE

51%

LESS RISK TAKING

11%
Source: Control Risks, Future Risk survey, October 2012

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RiskMap Report 2013 MISSIOn IMPOSSIBLE? ACHIEvInG SECURITY In A vOLATILE WORLD

Inherent points of tension for corporate security
PROVIDE ASSURANCE, REPORTING CHECKS AND BALANCES

COMPLIANCE AND CONTROL ENABLE WELL THOUGHT-THROUGH RISK TAKING WITHOUT HOLDING BACK THE BUSINESS

ENABLE RISK TAKING

MAKE EFFICIENCY SAVINGS

PRESSURE TO REDUCE HEADCOUNT AND BUDGETS

EFFECTIVELY MANAGE VOLATILITY TIMELY INTERVENTIONS TO EFFECT BUSINESS RESILIENCE – CRISIS MANAGEMENT, BUSINESS CONTINUITY, DISASTER RECOVERY

CUTS, BUMPS and red TaPe Security risk functions are operating in an increasingly regulated and scrutinised environment. new regulations, codes and standards governing corporate conduct and duty of care are emerging each year. But it is not only governments and regulators casting their beady eyes over business operations, particularly in emerging markets. nGOs and news-hungry global media continue to hunt for even the whiff of a good corporate scandal. History has taught us that reputational risks can be the most damaging, with the power to bring down a company in short order. The upshot: security directors are being asked to simultaneously adopt compliance-oriented risk management strategies providing control and assurance across multiple jurisdictions, while acting as nursemaid to deliver business in complex and/or potentially hostile environments. A tricky balancing act at the best of times, this is made more challenging by the climate of austerity leading to resource tightening, and global instability throwing out all kinds of unexpected challenges. Following the economic downturn, many organisations went through painful restructuring and rounds of redundancies in search of efficiency savings. In many cases corporate security, like other support organisations, was targeted for headcount reductions and budget cuts. At the same time, the number of reported security incidents in most organisations went up either as a direct result of redundancies and financial hardship, or due to unprecedented turmoil in north Africa.

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RiskMap Report 2013 MISSIOn IMPOSSIBLE? ACHIEvInG SECURITY In A vOLATILE WORLD

Survey participants: headquarters by region
AMERICAS

fUTUre ConVergenCe Our Future Risk survey shows that global instability (both geopolitical and financial) and the associated security ramifications (such as the anti-austerity riots and protests seen in many cities in 2012) weigh heavily on the minds of security directors as we go into 2013. Most believe the world is becoming more complex and dangerous, with emergent risks such as cyber terrorism ranking high on the risk perceptions index.
EUROPE

40%

reductions since the economic slowdown and some are now underfunded, making it difficult to satisfy all their stakeholders’ requirements. For a large minority there remains a gap between the security function’s mission and the organisation’s objectives. This can result in the function being seen as an overhead and make it difficult to demonstrate real organisational value. For others, cuts in budgets and forced headcount reduction have accelerated the convergence of enterprise risk management and corporate security – a silver lining to an otherwise gloomy cloud.
AEROSPACE AND DEFENCE

ASIA

16%

44%
Source: Control Risks, Future Risk survey, October 2012

While the majority of corporate security risk functions report themselves to be adequately resourced, a significant proportion have had to make headcount
Survey participants: sector
TRANSPORT TECHNOLOGY

5%

4%
BANKING AND FINANCE

7%
REAL ESTATE

18%
CONSUMER GOODS

4%
PROFESSIONAL SERVICES AND CONSULTING

4%
ENERGY

13%

OIL AND GAS

2%
NGO

8%
EVENT SERVICES

2%
FOOD AND BEVERAGE GOVERNMENT

4%
MINING AND METALS

11%

LOGISTICS

LIFESTYLE

2%

7% 5%

INTERNATIONAL ORGANISATION

2%

2%

Source: Control Risks, Future Risk survey, October 2012

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RiskMap Report 2013 MISSIOn IMPOSSIBLE? ACHIEvInG SECURITY In A vOLATILE WORLD

nearly all respondents confirmed that the number of security incidents has been increasing, and that the security function is coming under closer senior management scrutiny. However, with that comes another silver lining: most security directors now perceive that they have greater ability to influence the organisation and make a difference. The survey also makes clear that the process of professionalising the security risk function continues, moving it closer to the enterprise risk management function and bringing in facets of the organisational resilience apparatus such as business continuity. It is becoming ever more
Most significant risks for survey respondents
REGULATORY CHANGES

important for professionals in this space to hold formal qualifications in their field, and to have a good grasp of international standards and ‘best practice’ methods, and increasingly less important to have had a previous career in law enforcement or the military. Corporate resilience is becoming a profession in its own right. Despite these silver linings and positive trends, it is certainly true that risk and security directors are being asked to do more, in more challenging places, sometimes with fewer resources, in a climate of increasing regulation and scrutiny. But is this a Mission: Impossible?

DATA BREACH

1%
WAR - ISRAEL

LOCALISATION

1%

1%
WAR - SYRIA

1%
INTEGRITY BREACH

4%
TERRORISM

CRIME

1%
FINANCIAL INSTABILITY

5%

6%
PROTESTS AND RIOTS

25%

10%
WAR - IRAN

GEOPOLITICAL INSTABILITY

18%
CYBER TERRORISM

10%

17%
Source: Control Risks, Future Risk survey, October 2012

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Risk perception 2013
THE WORLD IS BECOMING MORE COMPLEX THERE IS MORE POLITICAL RISK THERE ARE MORE NATURAL DISASTERS 2% THERE ARE MORE WARS AND REVOLUTIONS THERE ARE MORE TERRORISM INCIDENTS THERE IS MORE CRIME THE WORLD IS BECOMING MORE DANGEROUS 4% COMPANIES ARE SUFFERING MORE BUSINESS DISRUPTIONS 4% 10% 6% 52% 36% 33% 43% 59% 13% 27% 61% 38% 55% 40% 33% 44% 17% 4% 61% 54% 33% 26% 19% 4% 12% 6% 4%

KEY
DISAGREE NO CHANGE AGREE STRONGLY AGREE

The impact of the financial crisis and economic downturn
THE ORGANISATION IS WILLING TO ACCEPT RISK SECURITY FUNCTION'S INFLUENCE 15% 8% 58% 62% 36% 28% 68% 36% 44% 68% 34% 34% 28% 28% 28% 17%

MANAGEMENT SCRUTINY 4% BUDGET HEADCOUNT NUMBER OF SECURITY INCIDENTS 4%

KEY
LESS NEUTRAL MORE

The impact of recent geopolitical volatility
THE ORGANISATION IS WILLING TO ACCEPT RISK SECURITY FUNCTION'S INFLUENCE MANAGEMENT SCRUTINY 2% BUDGET HEADCOUNT NUMBER OF SECURITY INCIDENTS 11% 9% 66% 17% 55% 76% 70% 72% 34% 58% 45% 22% 19% 19% 25%

KEY
LESS NEUTRAL MORE Source: Control Risks, Future Risk survey, October 2012

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RiskMap Report 2013 MISSIOn IMPOSSIBLE? ACHIEvInG SECURITY In A vOLATILE WORLD

The corporate security function in 2013 is
WELL RESOURCED INTEGRATED WITH RISK MANAGEMENT OBJECTIVES ARE ALIGNED WITH BUSINESS OBJECTIVES A TACTICAL FUNCTION TO PROTECT ASSETS A STRATEGIC ENABLER SUPPORTING BUSINESS GROWTH THE ORGANISATION'S POLICE FORCE 28% 57% 51% 57% 87% 94% 68% 45% 43% 13% 4% 2% 4% 43% 4%

KEY
AGREE DISAGREE DON'T KNOW

REPORTS TO

24%

6%

12%

9%

15%

2% 7% 4%4% 2% 4%

9% 2%

KEY
BOARD LEGAL ADMIN NA RISK FINANCE EXCO ADMIN/FACILITIES CEO/COO REGIONAL VP HR HSSE OPERATIONS

MILITARY / POLICE BACKGROUND KNOWLEDGE AND APPLICATION OF STANDARDS 2% 15%

49% 83% 85%

45%

6%

PROFESSIONAL SECURITY QUALIFICATIONS 2% 13%

KEY
LESS IMPORTANT NEUTRAL MORE IMPORTANT

CSO or similar reporting to the board
NO

21%
YES - CHIEF SECURITY OFFICER

54%

YES - CHIEF RISK OFFICER

25%
Source: Control Risks, Future Risk survey, October 2012

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RiskMap Report 2013 MISSIOn IMPOSSIBLE? ACHIEvInG SECURITY In A vOLATILE WORLD

enTerPriSe SeCUriTY riSK ManageMenT

We should aim to lead our friends and allies in building a world of security and opportunity. Hillary Clinton

The coming together of enterprise risk management and corporate security is a good thing because it forces a change in the way both security and risk professionals think about their role. Functionally, it helps to align the activities of security and protection with risk and opportunity management. It prevents security from holding back the organisation by forcing risk-commensurate security responses that directly support business objectives and enable opportunities in areas that previously may have been instantly discounted as being too risky. It helps to bring risk – sometimes an abstract function – closer to the day-to-day operational challenges of emerging market business. One-size-fits-all security prescriptions give way to nuanced risk-based decisions; risk avoidance gives way to risk management. And, of course, cost savings through shared headcount and resources can also be achieved. The result: better outcomes and real value added to the organisation. And by thinking about the business and the processes underpinning the success of that business, it is possible for security to make a real net contribution to profits. For example, one leading mining firm has reconfigured its site operations to minimise the potential for workers to steal precious gems, with tremendous results for the company’s bottom line. Although led by the security

department, the changes to effect loss reduction were not traditionally ‘security’ as such – they did not involve cameras or guards – but instead involved reengineering the way in which gems are extracted from the ground. By introducing higher-tech gemstone recovery methods, the company has been able to minimise loss, improve yield and reduce headcount. dYnaMiC reSilienCe In the globalised era, businesses need programmes of ‘resilience’ to underpin operations and give others confidence that their outsourced operations are in safe hands. Businesses need the ability to withstand shocks in a dynamic way to give them real flexibility. This cannot be achieved simply through sometimes haphazard application of traditional or static security measures, plans that sit on shelves collecting dust, or isolated pockets of IT continuity planning. Yes, good crisis management is essential, but if it is not underpinned by great business continuity planning, nimbleness and clarity of thought, and logistical elasticity, the organisation will be brittle and susceptible to operational disruption. Hurricane Sandy was a reminder of how natural hazards can paralyse economies and disrupt supply chains over a large area. However, the 2010 eruptions of Eyjafjallajökull in Iceland had a global impact, costing the airline industry $1.7bn and forcing slowdowns in production from

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RiskMap Report 2013 MISSIOn IMPOSSIBLE? ACHIEvInG SECURITY In A vOLATILE WORLD

Germany to Japan. If historic performance is a guide to future results, the more powerful Katla is due to erupt in the near future. Geopolitical upheavals can also have significant impacts. According to the IMF, disruption to Libyan oil exports saw African exports tumble 8% in 2011. But the greatest potential for trouble comes from global reliance on certain supply chain chokepoints. nearly 35% of the world’s maritime-traded oil passes through the Strait of Hormuz each year, while more than 60,000 vessels pass through the Strait of Malacca annually. Any blockage of these routes would have massive consequences for global trade. For all our technological and logistical sophistication, we remain surprisingly vulnerable. Businesses need to be able to react quickly to changed circumstances and deal with the immediate crisis, but then realign their processes and resources to achieve efficient continuity of operations. Companies that have done this well have found it a marketable attribute that gives them an edge over competitors. Security cannot achieve this alone, nor can any other function for that matter. To get this right, business continuity, crisis management, risk and security must all come together with core business operations to provide coherent and timely responses to the unexpected. Again, convergence. A joined-up response not only offers

financial efficiency, but also yields better outcomes in times of crisis, enabling a company to sail on through choppy waters when others founder. The Q faCTor Just as 007 relies on Q to get him out of sticky situations with the latest gadgets and gizmos, so too the security director of the 21st century enjoys the option of deploying an ever more exciting array of technologies to manage security in a cost-effective and timely manner. Technology and ‘thinking smarter’ can be the antidote to slashed budgets and the key to doing more with less. Modern security technology, such as remote personnel tracking through PDAs, CCTv video analytics and networked IP infrastructure, offers means to centrally administer the security function in a way previous generations could only dream of. Such technologies can not only bring savings through fewer control room operators around the world, but can also dramatically improve the quality of day-to-day security service provision and deliver a central 24/7 operations centre capable of responding quickly to crises and incidents around the world. To achieve these savings, investment is required upfront in terms of design and determining the ‘right level’ of residual risk for your organisation. But in Control Risks’ experience, the return on this investment can be significant.

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RiskMap Report 2013 MISSIOn IMPOSSIBLE? ACHIEvInG SECURITY In A vOLATILE WORLD

MiSSion: aChieVaBle Those companies best able to manage risks and respond to unexpected challenges will be most capable of navigating the realities of doing business in emerging markets, and ultimately will come out ahead of the competition by cornering the fastest-growing markets. Application of business resilience strategies is achievable, and makes managing a crisis a controlled endeavour with more predictable and positive outcomes. Those that can embrace technology and keep innovating to achieve continuous improvement will be able to deliver better, more efficient security solutions and achieve lower operating costs year-on-year. But to really crack it, those that integrate security with the needs of the business can unlock the full potential of their organisations. Forget James Bond and Ethan Hunt, the new breed of corporate resilience directors who can work with the business to realise those opportunities will be the real heroes. And they’ll probably be driving Aston Martins too.

TOP: Servers in a technology data centre. BOTTOM: Satellite dish antennas.

Afghanistan, Caroline Brooks, Control Risks

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RiskMap Report 2013 InTEGRATInG InTEGRITY RISK MAnAGEMEnT

integrAting integrity risk MAnAgeMent
by chaRles heckeR diRectOR, eMea, cORPORate investigatiOns cOntROl Risks There is a certain thrill in the discussion and debate that give rise to new business ventures – the intense, engaging meetings that throw off heat, generate sparks and ultimately forge new ideas. if you help set company strategy or drive tactical initiatives, you walk out of those meetings thinking ‘this is why i work here’. As exhilarating as those sessions are, they have a tipping point. no one exactly knows where that point sits, but you know how it feels once you cross it. Brainstorming deteriorates into bickering. Debate and discussion descend into argument and discord. Creative tension spirals into, well, tension. Some meetings are more prone to crossing this tipping point than others. You have been to them before. So have we. These are the meetings that discuss integrity risk. An increasingly interconnected world presents an exponentially more challenging investment environment. In that intricate matrix of risk and opportunity, side-stepping the hazards to integrity and reputation requires almost gravity-defying dexterity. As the regulatory collar of international acronyms (FCPA, UKBA) grows ever more uncomfortable, the frequency and complexity of these decisions will only intensify. Yet at far too many companies, every investment decision or partner acceptance process pits a conservative, risk-averse compliance department against an aggressive, bonus-driven business unit. Colleagues fume at each other – sometimes for hours, sometimes for months – over whether to proceed with complex deals in difficult but seductive jurisdictions. After each of these fractious meetings we ask ourselves: do these teams work for the same company? Is there a more productive way to discuss integrity risk? And, most importantly, how often do companies lose ground to competitors because their approach to risk is not only behind best practice, but also painfully, glacially slow? The topics will be familiar to any company deep in the jaws of the globalisation process. Should we do that joint venture in Uzbekistan? Are we really contemplating a greenfield site in nigeria? How many permits do we need to open a plant in Romania? A sample of the dialogue: Compliance: This deal is never going to happen. We know how people get things done in that country, and I do not want our CEO hauled off to prison. Business development: There is nothing wrong with this guy. I’ve been to his daughter’s wedding!

steve wilFORd diRectOR, cORPORate investigatiOns, sOuth east asia cOntROl Risks

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RiskMap Report 2013 InTEGRATInG InTEGRITY RISK MAnAGEMEnT

We have seen the process work well. We have seen it fail spectacularly. We have witnessed how clients equivocate for what seems like an eternity over compliance issues attached to large transactions, yet still cannot reach consensus on whether – on a broad, institutional level – they can tolerate a deal. The difference between a process that works and one that frustrates typically emerges from a common misperception of how to manage integrity risk. Companies that by design or, more often, by default maintain an adversarial relationship between risk management and business development think they have the perfect defence against missteps in high-risk markets. Crucially, this may not always be the case. Companies that align risk management and business development toward the common purpose of growing their business safely – built on an agreed understanding of their company’s risk appetite – are at the forefront of integrity risk management. In these cases, compliance isn’t a pushover, nor is it labelled with that tainted word, ‘pragmatic’. Similarly, there is no need to regard the business units as cowboys who have never met a deal they didn’t like. Instead, compliance and the business units jointly calibrate a yardstick to measure and manage integrity risk.

In these companies, the conversation moves from ‘are we proposing a deal that compliance can’t stomach?’ to ‘are we proposing a deal that sits within the company’s appetite for risk?’. This is how organisations move forward in a world fraught with integrity threats. So how doeS one CoMPanY BeCoMe The oTher? Talk it out. Herd your emerging markets teams and your legal/ security/compliance teams into structured conversations and resolve your differences. The process works in both directions – understand the restrictions your company works under, as well as the size of the opportunity in new places. Listed company? Give your compliance team a break: they answer to a higher authority. Privately held globe-hopper? Brief your sales force on the business environment that waits beyond the arrivals hall. Start early. Some companies commission integrity due diligence days before closing a transaction. Others vet their pipeline. Guess which companies get more deals done more smoothly? Starting the due diligence process earlier in the investment decision cycle almost always leads to a more balanced approval process – there is more time to consider and implement remedial action if required. This will have cost implications: you may not want to spend money assaying

Companies that align risk management and business development toward the common purpose of growing their business safely – built on an agreed understanding of their company’s risk appetite – are at the forefront of integrity risk management.

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RiskMap Report 2013 InTEGRATInG InTEGRITY RISK MAnAGEMEnT

deals that won’t go through. Still, there is no reason to leave a crucial link in the risk management chain until the last minute. Every other type of due diligence starts earlier in the decision-making process. It is no longer acceptable for integrity due diligence to remain an afterthought. This may sound self-serving written by a Control Risks director. But it is true. Don’t scare easily. Or if you do, don’t pretend otherwise. Know your institutional pain threshold. Want a slice of the Russian middle class (or its caviar-crunching mega-rich)? You’ll need more than a good winter coat to protect yourself. Get everyone in your organisation to understand that doing almost anything in an emerging market bears a higher level of risk – and not just on the integrity front. Conversely, do not underestimate the risk from the occasional over-zealous regulator in a developed market, keen to make their mark. The effect can be transformative. Consider the following: Company One is examining an extremely high-value transaction in a strategically important sector in Asia. Fully aware of its obligation to conduct due diligence in a high-risk country – particularly as this transaction relies on a politically connected middleman – Company One initially commissions a due diligence report using material strictly

from the public record. This information ticks a few boxes but raises a few red flags, prompting the company to seek greater clarity by commissioning further enquiries. The second report delivers findings that would drain the blood from the most seasoned investor. Two things follow. First, the company is unable to digest these explosive findings. The team can only agree that the findings are indeed explosive, so second, war breaks out between the business development and legal departments. The merits of the transaction and the role of the middleman are debated for months. People join and leave the two departments – a couple of employees give birth – in the course of this debate, a further sign of how long it is taking to find consensus. By month six of deliberations, it’s too late. Company One has not settled on whether to proceed with the transaction. By then, the purchaser has selected another vendor and moved on. Compare that with the following scenario: Company Two is rooting out potential corruption among partners in Russia. This means enacting a comprehensive due diligence programme designed to screen, quite literally, every party with which the company conducts

TOP: Kremlin, Moscow. BOTTOM: Hong Kong.

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RiskMap Report 2013 InTEGRATInG InTEGRITY RISK MAnAGEMEnT

business. To further complicate matters, all of Company Two’s business partners are required to fill out a ‘partner qualification questionnaire’, knowing that this process may end with their disqualification as a vendor or a distributor. Striking off suppliers is one thing – someone will always hustle to fill the gap. Striking off customers is an entirely different matter. The process cleaves Company Two in half. Sales is terrified – surely the partner qualification programme can only destroy Company Two’s leading market share. But the legal team has the US Department of Justice looming ominously. There is absolutely no way the company can continue doing business in Russia and not screen its business partners. Timidly at first, Company Two launches its partner qualification programme. The market freezes in suspense. What is this programme? How do you win? What happens if you lose? For a brief period, Company Two seizes up, waiting for its market to flee to competitors less selective about their business partners. With time, something strange starts to happen. Certainly, a high percentage of partner companies fail the qualification process. Separating from those businesses is painful. But a higher percentage pass. Once those companies learn of their success, they celebrate – approved

companies wear their status as a seal of approval and start to brag about their probity in the market. Suddenly, companies are cleaning themselves up before queuing up to do business with Company Two. Company One is still searching for its centre of gravity on integrity risk. Its divisions remain riven by disputes over where and how to do business. Company Two is managing integrity risk in a country where that is widely considered impossible. Globalisation has created far more Company Ones than Company Twos. Too few organisations know their gut on risk. Against that backdrop, the number of truly new business destinations is shrinking. Emerging markets are yesterday’s adventure; now we are chasing so-called ‘frontier’ markets. In the coming years, integrity risk will challenge the most resilient organisation. are you a Company one or a Company Two?

Emerging markets are yesterday’s adventure; now we are chasing so-called ‘frontier’ markets. In the coming years, integrity risk will challenge the most resilient organisation.

vIEWS FROM

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view FroM: new york

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view FroM: beiJing

03
view FroM: berlin

04
view FroM: Moscow

05
view FroM: cAiro

06
view FroM: JohAnnesburg

07
view FroM: lAgos

08
view FroM: rio de JAneiro

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view FroM: JAkArtA

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view FroM: yAngon

This views From section has been written by our analysts to show the perspective from some of the cities where they are based or travel to regularly, and that have an interesting local or national story to tell. They look at some of the big questions being asked there, and examine important dynamics in the business environment for 2013. For more detailed analysis on over 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

Brooklyn Bridge and Lower Manhattan, new York City

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RiskMap Report 2013 vIEW FROM: nEW YORK

view FroM: new york
looKing ahead Obama’s re-election means Wall Street reform is not going anywhere, but regulatory uncertainty remains the key political Boston risk for the financial sector. The eurozone crisis and Chinese growth prospects are lingering concerns, but the US economy is in decent shape and will improve further in 2013 (assuming it does not fall off the ‘fiscal cliff’). With so much spare cash, banks and corporates are in a good position to invest when the business cycle turns.
Miami

Minneapolis Toronto Detroit

Montréal Ottawa

Chicago

New York Philadelphia St Louis Washington (DC)

UNITED STATES OF AMERICA
MEDIUM security in deprived urban areas Atlanta Dallas

Phoenix

Houston Hermosillo

New Orleans

Monterrey

JOnathan wOOd assOciate diRectOR, stRategic analysis cOntROl Risks

First the good news: Midtown’s spirits are a bit brighter since the US Federal Reserve in late 2012 committed to open-ended monetary support of the economy and low interest rates into 2015. The US economy continues to grow modestly, unlike Europe’s, and the all-important housing market is recovering. A domestic energy boom – a good chunk of it on Manhattan’s doorstep – is rewriting the rules of US energy security and industry, putting the country on a path to becoming the world’s largest oil producer within five years. Best of all, PATH service has been restored in

the wake of Hurricane Sandy and construction on JFK’s Terminal 4 will finally wrap up in the spring. now the bad: The IMF and WTO have cut global growth and trade forecasts for 2013, particularly for emerging market and developing economies exposed through trade and investment to slow growth in Europe and north America. Meanwhile, anyone hoping for a reprieve from the commodity price volatility of 2012 is bound to be disappointed. China’s growth trajectory, Middle Eastern security

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RiskMap Report 2013 vIEW FROM: nEW YORK

and political stability, and a changing climate are all considerable ‘known unknowns’ in this regard. The vaunted commodity ‘supercycle’ is taking a breather, but has probably yet to run its course. And even if the European Central Bank (ECB) can paper over the eurozone’s structural economic cracks for a while longer, the roadmap for political cohesion is decidedly unclear. In other words, new York’s banks face an uncertain macro environment in 2013. Tale of The (red) TaPe More regulation, by contrast, is as certain as death and taxes. President Barack Obama’s re-election cements the ponderous rulemaking process of the 2010 Dodd-Frank Wall Street

Reform and Consumer Protection Act as the central regulatory risk next year. Indeed, the assured prospect of tighter regulation is likely to be one reason why financial equities fell sharply after the election. Swathes of regulation governing banking, derivatives, consumer protection, mortgage reform and systemic risk remain to be determined in 2013 and beyond, some of which – especially the volcker Rule (aimed at restricting proprietary trading by US banks) – carry compliance, accounting and tax costs. Yet the size of these potential costs remains highly uncertain while the law is still being written. There are also concerns that Dodd-Frank could disarticulate global finance as foreign banks reduce regulatory exposure by paring back activities in the US.

Progress of Dodd-Frank rulemaking in select areas at 1 October 2012 (number of rules)
% overdue SYSTEMIC RISK SECURITIES LAW INVESTMENT ADVISERS LIQUIDATION AUTHORITY MORTGAGE CORPORATE GOVERNANCE DERIVATIVES CREDIT RATING AGENCIES CONSUMER PROTECTION BANKING ASSET-BACKED SECURITIES 60 40 20 0 20 40 61% 18% 0% 29% 0% 57% 50% 5% 0% 89% 86% 60

KEY
FINALISED PROPOSED NOT PROPOSED
Source: Adapted from Davis Polk, Dodd-Frank Progress Report, October 2012

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RiskMap Report 2013 vIEW FROM: nEW YORK

Regulatory populism is also in the offing. More viscerally for many corporate executives, Obama has pledged to pursue further compensation reforms. It seems likely that the election result will vindicate further attacks on the 1%, both through the ‘bully pulpit’ and the tax code. The Occupy movement may be largely off the streets, but clearly still resonates in the White House, which perceives its fairly close win as a mandate to hinge US growth prospects on upper income tax increases. US regulators are likely to persist in their hard line on enforcement of fraud, sanctions, anti-corruption and anti-money-laundering statutes, armed with moral suasion, stiff financial penalties and lots of subpoenas. The fledgling Consumer Finance Protection Bureau (CFPB) – now safe from the deregulatory and defunding knives for a few more years – will become increasingly prominent on financial compliance issues as regulation regarding student loans, debt collection and credit reporting comes onstream over the next year. Taking a lead from the Securities and Exchange Commission (SEC)’s aggressive, high-profile enforcement of the Foreign Corrupt Practices Act (FCPA), the agency made an early splash with a $210m settlement with Capital One in mid-2012. And in addition to a major patron in the White House, the CFPB has a particularly staunch defender in the Senate following its creator Elizabeth Warren’s election in Massachusetts.

2013 will also see the introduction of Basel III banking standards, for which US and global banks have been steadily preparing over the last two years. Like Dodd-Frank, Basel III substantially boosts bank capital requirements and restricts leverage in an effort to make the global banking system more crisis-resilient. Also like Dodd-Frank, there is some political wrangling over how to implement the regulations, with key members of the Senate Banking Committee calling for simpler but tougher capital requirements. Banks, needless to say, are pushing back against the raft of Basel III risk reduction measures, arguing that they will reduce lending, liquidity and economic growth. And with some cause: OECD economists estimated in 2011 that Basel III would reduce GDP by up to 0.15% if not offset by looser monetary policy. But under Obama, against whom the banking sector bet heavily during the election, such complaints are likely to fall on deaf ears. ParTiSan ParalYSiS Given that all the time, energy and money expended on the election cycle ($2.6bn on the presidential election alone) simply reproduced the political status quo, we expect partisan paralysis to plague markets in 2013 as it has for the last two years. The ‘fiscal cliff’ – the combination of tax increases and spending cuts set to hit in the new year – naturally looms large over US economic prospects. If post-election posturing is any guide,

TOP: 9/11 Memorial Weehawken

Waterfront, new York, Mark Tomlin, Control Risks. BOTTOM: Capitol Building, Washington DC.

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RiskMap Report 2013 vIEW FROM: nEW YORK

there is no sign that Democrats and Republicans are suddenly going to start to see eye to eye on taxes and spending, despite post-election ‘soul searching’ and much lip service to a ‘grand bargain’. There are big fiscal problems on the horizon, but don’t hold your breath for a solution in 2013. If there are silver linings to the situation, one must be that the 113th (next) Congress will have a hard time being less productive than its ‘do nothing’ predecessor, most notable for needlessly sinking the US sovereign credit rating during a debt ceiling showdown in 2011. Setting the stage for a repeat performance, Congress will need to raise the debt ceiling again in early 2013, probably in February. Even if Congress manages to punt fiscal reckoning further into the future through stop-gap compromises or a budgetary ‘bridge’, as appears increasingly likely, it simply ensures more fiscal uncertainty. Moody’s and Fitch are poised to join S&P in downgrading the US’s sovereign credit rating if they do not like the contours of any deal, even though going over the ‘fiscal cliff’ would actually radically strengthen the US’s credit position by cutting the deficit in half in 2013 and reducing government debt by 15% of GDP over the next decade. (Preventing the ‘fiscal cliff’, by contrast, would take US government debt to 90% of GDP – the same level as Portugal today – over the next ten years.) Politics, not economics, are driving risk.

SilVer lining With uncertainty comes opportunity. It helps that 2013 front-loads some of the global risk events, such as the ‘fiscal cliff’ and Italian elections: we will know sooner rather than later if economic carnage is in the offing. The end of the Chinese and US leadership transitions also augurs a retreat from politicised trade disputes, and potentially policy space for, among other things, further stimulus in both economies. Successful navigation of these political processes would improve corporate confidence, and could help to unleash a wave of pent-up foreign investment and deal-making. US corporates are hugely cash-rich, sitting on up to $5 trillion in liquid assets globally as of mid-2012. Foreign enterprises, especially state-owned enterprises and sovereign wealth funds in Asia and the Middle East, also have piles of money to spend thanks to record high oil prices and sustained trade surpluses. The lengthy outlook for low US interest rates, matched by those in Europe and Japan, will keep financing costs low and increase the attractiveness of depressed productive assets, especially in commodities, energy, retail, agriculture and other key sectors – particularly in emerging markets and developing economies. Indeed, the Un Conference on Trade and Development (UnCTAD) foresees a modest 12% increase in FDI activity in 2013, with the obvious eurozone caveat.

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RiskMap Report 2013 vIEW FROM: nEW YORK

And, like new York’s subway fares and tunnel tolls, global M&A activity can only go one direction in 2013 from current depressed levels: up. new York has a few particular advantages going into 2013. Thanks to early and forceful government intervention, bank balance sheets in the US are much cleaner than in Europe; US banks are poised to seize opportunities that European banks are not. Hostile political and policy climates in London and Paris are making the vagaries of Dodd-Frank look possibly benign, especially in light of the continued clout of financial industry lobbyists. The US economy is proving fairly resilient. Deleveraging
100 80 60 40 20 0 -20 -40 -60 ENERGY, MINING TECHNOLOGY

since the crisis has reduced the household debt overhang to 2004 levels, and it is still correcting. The US energy boom is fuelling an industrial renaissance in the Midwest. The housing market has turned, abetted by ultra-cheap mortgages: good for builders and families alike. State and local government balance sheets have been brought into line. In the grand scheme of things, 2013 probably won’t be the best year on the books, but never underestimate the ability or proclivity of the US political system to muddle through. If it does, next year just might chart the way to greater economic certainty and stability.

Global mergers and acquisitions, % change in total value by sector

TELECOMS

FINANCIAL SERVICES

BUSINESS SERVICES

REAL ESTATE

INDUSTRIALS

CONSUMER

PHARMA

LEISURE

MEDIA

CONSTRUCTION

TRANSPORTATION

AGRICULTURE

KEY
2011 2012 YTD
Source: Financial Times, based on Thomson Reuters and mergermarket, September 2012.

DEFENCE

Beijing

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RiskMap Report 2013 vIEW FROM: BEIJInG

view FroM: beiJing
Shenyang

looKing ahead The annual NORTH KOR legislative

Beijing Tianjin Dalian

Pyongyang

Xian

Zhengzhou

session in March 2013 will see key portfolios assigned Seoul and may show whether real SOUTH KO bureaucratic restructuring starts to emerge. Key reform barometers will include monetary-policy and financial-sector liberalisation, exposing SOEs to greater market discipline, and tackling the roots rather than the symptoms of corruption. Regional disputes will be a litmus test of whether China, its neighbours and the US will search for constructive ways to handle maritime and trade rows.
Fukuoka

C H I N A
Chengdu Wuhan Shanghai Hangzhou

L BHUTAN

Chongqing

Fuzhou

BANGLADESH
Dhaka Kolkata Chittagong

Kunming Guangzhou

Taipei Taiwan

Shenzhen Hong Kong

MYANMAR LAOS

Hanoi

andRew gilhOlM head OF asia analysis cOntROl Risks

The Communist Party of China (CPC)’s ‘fourth generation’ leadership, which has ruled for the last ten years, in 2012 began handing power to incoming president Xi Jinping’s ‘fifth generation’, which by convention should preside over the next ten. By the end of that tenure their country could be the world’s largest economy (in purchasing-power parity terms). Yet jitters over political and economic stability multiplied in 2012, as the succession began amid dramas that even included spurious coup rumours. Alongside this farreaching political transition, China’s economic development is also entering

a new era. It still has plenty of potential to grow rapidly and has successfully navigated tough transitions before, but chances are that the next decade will bring slower, more volatile growth than the last, and very possibly more political upheaval too. noT So faST A slowing economy in 2012 proved unusually unresponsive to central government efforts to reinvigorate it. Many local governments, banks and businesses are struggling to fund investment, weakened by a 2009-10

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RiskMap Report 2013 vIEW FROM: BEIJInG

stimulus extravaganza that history may judge to have been the last hurrah for China’s erstwhile economic model – a model in which very high investment rates delivered double-digit growth, and Beijing could overpower a downturn with fiscal and monetary brawn. The huge benefits of demographics and ‘catch-up’ growth – whereby shifting surplus rural labour to more advanced sectors fuelled furious GDP expansion and ballooning trade surpluses – will probably start to diminish under the new leadership. Meanwhile, a shortage of higher-end jobs for a swelling pool of graduates reflects another pressure: a generation of young Chinese with sky-high expectations facing an increasingly tough economic reality.

Chinese policymakers have long known that the ‘growth at all costs’ model could not last. The fourth generation made all the right noises about balanced, sustainable growth and made some positive moves towards rebalancing, but overall has presided over a major slowing of structural reforms. It has done nothing comparable in magnitude to the state-owned enterprise (SOE) shake-up and WTO entry pushed through – over vociferous internal opposition – by ‘third generation’ leaders Jiang Zemin and Zhu Rongji. The most politically difficult and fundamental structural problems that faced the fourth generation have largely been bequeathed to the fifth.

Investment and consumption as a % of GDP, 1995-2030
70 60 56 47 49 42 40 38 36 34 63 66

60

50

30

20

10

0 1995-2010 2011-15 2016-20 2021-25 2025-30

KEY
INVESTMENT CONSUMPTION

Source: Development Research Center of the State Council and World Bank (2012). 2011-30 data forecasts.

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RiskMap Report 2013 vIEW FROM: BEIJInG

The fifth generation cannot get away with trying to muddle through for a decade like their predecessors. If they try, they will very probably fall victim to the same forces of economic gravity that brought other ‘miracle’ economies down to earth. To avoid that, they must unleash new sources of growth and engineer better institutions, but the fundamental structural reforms required to do this imply significant political, economic and social upheaval. This dilemma is epitomised by the conundrum facing the government in 2013: a repeat of the epic credit incontinence of 2009-10 would exacerbate longer-term financial risks, but restraint means accepting a cyclical downturn, painful deleveraging and the associated social, political and economic strains. MiSleading MiSlaBelling The fourth generation tentatively started trying to point the juggernaut economy in a safer direction. Whether or not the fifth generation will generate more substantial reform momentum has been hotly debated. For several weeks leading up to the CPC’s november 2012 national congress, more and more pundits began touting prospects for a new wave of reform, only for pessimism to take over when a relatively conservative CPC Politburo Standing Committee (PSC – the country’s most powerful decision-making body) was unveiled. Such extraordinary swings between positive and

negative expectations during 2012 reflect how much less predictable China’s course has become. Given the rare drama that livened up Beijing’s grey political scene in 2012, and the power wielded by the PSC, it is hardly surprising that so much attention has focused on its seven members. But this focus has led to some misleadingly simplistic conclusions about reform prospects. When ‘reformist’ CPC leaders Wang Yang and Li Yuanchao were rumoured – wrongly, as it turned out – to be in line to join the PSC, predictions of sweeping changes proliferated; when ‘conservatives’ such as Liu Yunshan and Zhang Dejiang were promoted, many observers declared that hope for reform had been snuffed out. But the reality does not fit black-and-white ideological labels, and these personnel choices were never going to produce radically different policy outcomes. Wang Yang and Li Yuanchao are seen as reformers mainly because of their positions on political rather than economic issues, but neither envisions reforms that would cede CPC political supremacy, and real political liberalisation was not in prospect anyway. Meanwhile, political conservatives are not necessarily economic conservatives. The last time China implemented really major, market-oriented reforms was under the 1997-2002 PSC, which – like the one unveiled in 2012 – contained several political conservatives with links to Jiang. China’s political system

TOP: Xi Jinping (L) and Li Keqiang, BOTTOM: Xinhua Gate, Zhongnanhai

november 2012.

(CPC headquarters), Beijing.

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RiskMap Report 2013 vIEW FROM: BEIJInG

is not primarily about ideology and clear-cut factions, but about vested interests and, as Harold Lasswell famously defined politics, about ‘who gets what, when and how’. ParTY-STaTe CaPTUre? Despite the relatively conservative look of the new PSC, the new leadership is likely to push forward some positive economic policy changes. But the fifth generation must eventually take on reforms that go to the very roots of the CPC ‘party-state’ system. Further key leadership changes in 2017 may bring a more reformist line-up (most of the PSC chosen in 2012 will retire
The new Politburo Standing Committee

in five years), but even leaders inclined to contemplate major changes will face an uphill battle to implement them. The capacity for structural reforms that directly threaten the political status quo is in doubt not because of who sits on the PSC, but because of systemic trends. Top-level decision-making has increasingly emphasised consensus, government remains highly compartmentalised and many key regulators are too weak to do their job. At the same time, vested interests in the economy have proliferated and grown more powerful since the era of Jiang and Zhu. Almost all leaders

PSC member Xi Jinping

Key portfolios and/or expected state positions General secretary of CPC, chairman of Central Military Commission and next state president. Will oversee foreign, military and party affairs. Next premier of State Council (cabinet), will oversee economic and development policy. Chairman of National People’s Congress (legislature). Chairman of Chinese People's Political Consultative Conference (high-level advisory and ‘united front’ body). Secretary of CPC Secretariat; will oversee CPC bureaucracy and administration. Chairman of the Central Commission for Discipline Inspection (anti-corruption body). Next executive vice premier; responsible for finance and economics.

Li Keqiang Zhang Dejiang Yu Zhengsheng Liu Yunshan Wang Qishan Zhang Gaoli

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RiskMap Report 2013 vIEW FROM: BEIJInG

and factions, branches of government and SOEs have major stakes in the web of practical interests involved, for example, in allocation of fiscal resources, access to credit and capital markets, and the state-owned sector. With this shift in the distribution of political and bureaucratic power, it is unclear whether determined top leaders can still overcome inertia and resistance to big reforms. Signs of willingness to rationalise bureaucratic

empires and challenge the privileges of powerful SOEs are encouraging. But the stakes are far higher than during the last bout of SOE reform, not least because many of the top firms owned by the central government – once loss-making – are now highly profitable cash cows, among the largest companies in the world. The financial sector will be a similarly tough nut to crack despite signs of modest progress. As for political reforms, these will surely be limited to strengthening ‘intra-party’

The changing environment for Chinese companies

Last decade Revenue Fast growth as most markets in early stage of development Limited competition due to structural undersupply All firms have pricing power Costs Plentiful supply of labour at low prices Low and undifferentiated real interest rates

Next decade Growth in sales volume slows as markets mature More competition as capacity catches up to demand Pricing power falls Restricted labour supply; high and rising wages Higher and more differentiated cost of capital

Winners

Fast-growing markets reward those who can enter first and expand capacity most quickly

Slower-growing, more crowded markets reward those who can control costs and develop durable competitive advantages
Source: GK Dragonomics

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RiskMap Report 2013 vIEW FROM: BEIJInG

accountability (though this could bring substantial benefits if implemented more seriously than hitherto). whaT goT YoU here won’T geT YoU There Of course, China has successfully navigated wrenching structural transitions before, and may well do so again. Looking beyond 2013 in our five-year country risk scenarios for China, our most likely scenario remains one in which broad stability and rapid growth (averaging above 7%) are sustained despite growing volatility and challenges. As well as the signs of reform outlined above, this expectation is based on longstanding fundamentals, notably:
• The CPC’s track record of able

preventing the emergence of any broad-based, organised opposition. However, after many years of pointing out such strengths, it is easy to fall into the trap of thinking that these are permanent features inherent in the system. They are not. Many of these ‘systemic’ advantages are contingent on rapid economic growth from impermanent sources and the effectiveness of the leadership; they have little formally institutionalised or constitutional foundation. Focusing on the phenomenon of China since Deng Xiaoping, it may seem that the CPC has invented a new model of politics and economics, but zoom out to a wider historical perspective and this ‘model’ still looks semi-formed. Its strengths could yet prove transitory:
• That crucial capacity for major

economic management and demonstrated capacity to make major, politically difficult structural reforms when needed – as they are now – to unleash new sources of growth or avert crises.
• The fact that China still has

structural adaptation has not been demonstrated for many years. Despite hopeful signs, there are real questions over whether the fifth generation will recapture it.
• Demographic and other shifts

powerful potential drivers for future growth, buying Beijing time and resources to stay one step ahead of looming threats, as it did under Jiang and Zhu in the 1990s and early 2000s.
• The CPC’s post-1989 success in

show that time and resources will soon peak and start to diminish. The fifth generation already has less fiscal room for manoeuvre than the fourth – and things will only get tighter from here on.
• The economic strengths of China’s

limiting the scope for political instability by prioritising elite unity, maintaining sufficient intra-party controls to limit misgovernance and

authoritarian state and powerful SOEs – so apparent when growth came from mobilising capital, moving people and building

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RiskMap Report 2013 vIEW FROM: BEIJInG

infrastructure – may prove ill-suited to fostering efficiency, competitiveness, innovation and private consumption.
• Politically, the system is highly

resilient as long as elite unity is maintained, but potentially brittle if it is not. Fissures within the CPC could widen under pressure, while the price of consensus may be too little reform, too late. The in-BeTweenerS The polarisation of views between China-boosters and China-bashers, and preoccupation with scenarios like the Arab spring and collapse of the Soviet Union, have created a binary debate, as if the country’s only two possible scenarios are dramatic collapse or a continuation of the status quo at somewhat slower growth rates. The latter is indeed a likely scenario for the next few years, but ‘in-between’ scenarios, which could involve a substantial deterioration in business conditions, will be more likely over the next decade than they were during the last. This is not a doom-and-gloom forecast. We have remained firmly in the sanguine camp on China for many years, consistently pouring cold water on periodically popular ‘collapse’ predictions, holding in late 2008 to the minority view that Chinese growth would not plummet in 2009, and continuing through political turmoil in 2012 to forecast a

basically stable leadership transition. But as the era of the fifth generation begins, the game has changed and is getting more complicated. Businesses and investors – and their long-standing assumptions about China – will need to keep up.

TOP: Beijing skyline. BOTTOM: Central Business

District, Beijing.

Berlin

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RiskMap Report 2013 vIEW FROM: BERLIn

view FroM: berlin
DENMARK
Aarhus Copenhagen

LAT The LITHUANIA focus on the eurozone
crisis will fade as the electionV looms, but the Kaliningrad (RUSSIA) euro will remain a key election issue.

looKing ahead

NETHERLANDS Amsterdam Brussels BELGIUM Paris

Berlin

GERMANY
LUXEMBOURG

POLAND
CZECH REP.
Vienna Prague

The divide between the two main parties on euro Warsaw policy is likely to be minimal, with little deviation from existing policies. Elections in September will dominate the European news agenda. The pattern of occasional violence by left-wing extremists in Berlin, Hamburg and other cities will continue.

B

SLOVAKIA

Zürich LIECHTENSTEIN Berne SWITZERLAND SLOVENIA Geneva Ljubljana FRANCE EDIUM security in
david lea seniOR analyst, euROPe cOntROl Risks

AUSTRIA

Bratislava Budapest

HUNGARY
Zagreb CROATIA

N
continue to dominate the city centre skyline, as they have since reunification. There is a sense that Berlin may never be finished. In the latter stages of the journey, the fast-gentrifying inner eastern suburbs come into view. Considered edgy a decade ago, these areas are now highly sought after by a younger demographic, despite the continued decay that surrounds them – the city’s finances remain parlous, even if private-sector wealth is flooding in. To the east, the ring line spurs to Ostkreuz, where an arson attack in May 2011

The traveller arriving at Schönefeld airport unwittingly receives an excellent lesson in the current state of Berlin. The plane taxis past the city’s flagship new airport – or at least the building site that should be the city’s flagship new airport, were it not for a series of delays. The journey to the city begins from the shabby and soon-to-beabandoned rail station, first transiting through the outer eastern suburbs, where park homes and prefabricated blocks are in demand for conversion more than ever before as years of population decline are reversed. Out of the left-hand window, tower cranes

39
RiskMap Report 2013 vIEW FROM: BERLIn

by a far-left group opposing this transformation in the city caused travel chaos – a reminder that gentrification is not to everyone’s taste. Berlin is somewhat distanced from the country that it serves as capital. This is true of many key world destinations: it is said of London, Rome, new York, Buenos Aires and dozens of others. But even in Germany, where large cities are dotted throughout the country, Berlin feels less German than the rest. Obviously, its history of division has a major role in this sense of difference. But there is a political and cultural element to it too. Berlin consistently votes several shades to the left of the generally conservative nation. The irony of Chancellor Angela Merkel advocating austerity across Europe from her office in Berlin, whose city government has been struggling for more than a decade with a huge debt and deficit burden, is not lost on anyone, inside Berlin or out. If anything, Berlin is an example of the benefits that can be derived from a ‘transfer union’, a concept
Key political milestones for the EU
April 2013 ECB publishes annual report

much derided on all sides in German politics when applied to the eurozone. walK The line Although the eurozone crisis will remain the key day-to-day issue for most of Europe, in 2013 it will have to share time in Germany with the federal election scheduled for September. Merkel has recovered from her critically weak position a year ago and now stands a credible chance of winning a third term as chancellor, but several factors continue to weigh against her. Incumbency has proven a disadvantage in elections throughout the Western world since the onset of the financial crisis (the US being the most notable exception to this trend). While Merkel remains popular, her Christian Democratic Union (CDU) party is less so. Her coalition partner, the Free Democratic Party (FDP), is struggling to even reach the threshold for representation this time round. Moreover, her campaign will have to speak to both domestic and

1 January 2013 Ireland assumes rotating EU Council presidency

1 July 2013 Croatia accedes to EU membership; Lithuania assumes EU Council presidency

27 October 2013 Last day by which German federal election must be held

24 February 2013 Likely date for Italian general election

May 2013 $16.8bn debt repayment deadline for Greece, its largest monthly instalment since May 2012

September 2013 Likely date of Austrian federal election

1 January 2014 Greece assumes EU Council presidency

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RiskMap Report 2013 vIEW FROM: BERLIn

international audiences, even if it is only Germans who will be voting. She will have to tread a fine line between appearing a ‘responsible European’ and convincing German taxpayers that she will be responsible with their money. This is not a new message for her – it is the one that she has been trying to convey throughout her current term – and that carries the risk of a lacklustre campaign. gaMe on Efforts to preserve the eurozone in more or less its current shape have been quietly boosted in the second half of 2012, and this seems likely to continue into 2013. European Central Bank (ECB) governor Mario Draghi’s July line that ‘we will do whatever it takes to preserve the euro’ still follows him round everywhere he goes, but is beginning to look more like a garland than an albatross. His more active efforts to boost the ECB’s role by establishing the maximum version of the bond buy-back scheme that European and national law would allow have boosted confidence, as has the more convincing tone being struck by other EU figures, such as commission president José Manuel Barroso and council president Herman van Rompuy. Perhaps most significantly of all, Merkel’s visit to Athens in October 2012 ended the impression that she – and by extension the EU – had given up on Greece. The eurozone is far from out of the woods, but it is at least talking a better game.

However, there will be tests of this new attitude in 2013. The proposed ECB Single Supervisory Mechanism (SSM) over euro-area banks will come into force in 2013, but is simply a stop-gap measure. Banking union entails a complete retooling of the sector’s policy framework to the European level. To operate it requires some form of fiscal union, and the transfer of regulatory and enforcement powers to existing or new European institutions. That in turn requires a shift to political union, which is as electorally unacceptable in Berlin as it is in Athens or Rome. What Europe needs to complete the job will not, at least in 2013, be freely given by Europeans. Increasingly, every major treaty change or power shift requires a suite of referendums, and referendums on EU issues are becoming difficult to win. On balance, we believe that a Social Democratic Party (SPD)-Green coalition remains the most likely outcome of the election, though anyone expecting a radical policy shift away from austerity and towards Keynesian spending has probably been reading the wrong signals. Like President François Hollande in France, the German centre left will look to offer leadership and take more active measures to boost growth, without abandoning the austerity framework. As a result, we caution against putting too much credence in the inevitable ‘re-elect Merkel to save the euro’ articles that will appear in the non-German media. In fact, the biggest change in Berlin next autumn may be that the new airport will open, at last.

TOP: German Chancellor Angela Merkel, november 2012. BOTTOM: Potsdamer Platz, Berlin.

Moscow

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RiskMap Report 2013 vIEW FROM: MOSCOW

view FroM: Moscow
looKing ahead WTO entry will hit some large employers by curtailing and eventually ending protectionist measures, exposing them as inefficient and uncompetitive. Some important regulatory and import-export regimes will be cleaned up under the WTO. Companies exporting to Russia can expect some simplification of customs procedures. There are signs of growing Islamist activity in Tatarstan, whose constitutional arrangements will be revised if the region’s leadership fails to assert control over Islamist elements.
Khabarovsk Vladivostok

ND

R
St Petersburg

U

S

S

I

A

N

F

E

D

E

R

A

T

I

O

N

A
Moscow

Yekaterinburg Nizhniy Novgorod Novosibirsk Minsk

Tomsk

ARUS

Samara

Astana Kiev

UKRAINE
inau

MOLDOVA

Rostov on Don

Atyrau

KAZAKHSTAN

Ulaanbaatar

M O N G O L I A
charest Almaty Urumqi

Harbin

Changchun

GEORGIA
Istanbul Ankara Tbilisi

Bishkek

ARMENIA
Yerevan

AZERBAIJAN
Baku Nakhchivan (AZERBAIJAN)

UZBEKISTAN TURKMENISTAN
Ashgabat

Tashkent

KYRGYZSTAN
Beijing Tianjin

Shenyang

T U R K E Y

TAJIKISTAN
Dushanbe

Dalian

Pyongyang Seoul

NORTH KOREA

CYPRUS

Erbil Kurdish region

Tehran

SOUTH KOREA

J

Osaka

Tok Nagoy

steven eke seniOR analyst, euROPe cOntROl Risks

Mounting tensions and systemic contradictions will shape the political climate in Moscow in 2013, but will bring little immediate change. President vladimir Putin’s continued efforts to preserve the political and economic status quo are sure to fuel further dissatisfaction among the growing urban middle class. However, the prerequisites for any significant upheaval are lacking, and Putin will remain very much in control. The president retains his popularity among the large rural population and consolidated his power over the regions at the October 2012 gubernatorial

elections. He will continue to carefully balance the interests of the political and business elite, carving up lucrative assets and dispensing rewards among them to ensure their support and loyalty. We anticipate little change in the business environment in 2013. Most of the concerns of foreign investors will remain unresolved, whether they be the ever-pending privatisation of state-owned assets, widespread corruption, potential tax increases as a result of lower oil prices, or the potential spill-over of instability from the north Caucasus.

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RiskMap Report 2013 vIEW FROM: MOSCOW

diSSaTiSfaCTion SiMMering (on low heaT) Middle-class Muscovites – well travelled and social media-savvy – may give Putin due credit for Russia’s revival in the 2000s, but he cannot fulfil their aspirations for a more modern political system that would allow them wider political and social freedoms. With the president unlikely to acquiesce to such expectations, dissatisfaction will grow in the next year, though opportunities to express it will be minimal. The opposition will be able to galvanise periodic street demonstrations, bringing together a wide range of often disparate protest groups, but will fail to develop a coherent message beyond demanding that Putin step down. With no major elections to provide a rallying point, and government measures in place to discourage political protests, such demonstrations are unlikely to be on the scale of those surrounding the 2012 presidential election. They will pose little threat to either Putin and his government, or the overall security environment in Moscow and other major cities. no PriVaTiSaTion, no ModerniSaTion The headline development influencing investor sentiment in 2013 will be the government’s progress in carrying out its privatisation plan. There are deep ideological disagreements at the top of the Russian leadership over which path it should take. Putin

and his entourage – dominated by members of the siloviki (current and former members of the security services) – do not share the view of Prime Minister Dmitry Medvedev and his pro-Western deputy, Arkady Dvorkovich, that Russia needs to open up its strategic industries to greater foreign ownership and investment. It is unthinkable that Putin will fail to get his way, despite the need to modernise the economy and reduce state ownership. Shifting goalposts and continuing lack of clarity will disappoint investors. Tangible progress in privatising state-owned corporations will remain notable by its absence. Although some modernisation measures such as e-government, improved internet access and new 4G telephony networks are likely to take effect throughout 2013, the process will stop short of bringing about any substantive change. Driven by its desire to preserve the status quo, the government will be unwilling to implement measures that would facilitate an eventual shift in its economic model. The economy will therefore continue to mirror the political system, with influence and ownership divided among intersecting, often informal networks of personal patronage. It will remain fundamentally dependent on the export of hydrocarbons and other natural resources, metal, timber and agricultural produce. nonetheless, many potential investors are likely to welcome new supply-side opportunities

44
RiskMap Report 2013 vIEW FROM: MOSCOW

when a large-scale campaign of government investment and upgrading of the defence industry gets under way in 2013. SoMe STePS forward Businesses will continue to face familiar problems in 2013 – red tape, corruption and the threat of direct intervention in the key energy sector. But some have expressed optimism about a new government drive to force greater transparency in officials’ dealings with business. From the beginning of January 2013, officials at local and regional level will have to submit data to the central government on a wide range of criteria assessing their openness to business. This unprecedented level of scrutiny is likely to help to reduce corruption in the longer term, especially at the regional level. For its part, the government will be looking for an explanation of why some regions are prospering more than others, and making an effort to bring them more into line with Moscow’s expectations. For foreign investors dealing with antiquated practices and attitudes in the regions far removed from the much improved levels of corporate governance seen in Moscow and other big cities, this is likely to be a welcome development. MUSCle flexing aT The PeriPherY Meanwhile, the north Caucasus, and particularly Dagestan, will remain a conflict zone in 2013, propelling the

region back to the top of the government’s – and Putin’s – priority list. The year ahead is likely to see renewed federal military operations and a more concerted anti-terrorist crackdown in Dagestan in response to an increase in inter-clan strife and Islamist extremist violence that has brought the region to the verge of civil war. The central government is also likely to focus its security agenda on measures to prevent a potential escalation of the terrorist threat stemming from gradual radicalisation among the Muslim population in Tatarstan, one of Russia’s most prosperous and investor-friendly regions. These security campaigns will provide Putin with a means of reconfirming his image as a strongman leader, and allow the authorities to demonstrate that they are making all possible efforts to ensure the smooth running of the 2014 Winter Olympics in the Black Sea resort of Sochi. all QUieT on The eaSTern fronT 2013 will be a quiet year in Russia. nonetheless, the outcome of various developments – from the trajectory of political protests to progress with privatisation and the resurgence of conflict in the north Caucasus – will define the medium-to-longer term stability of Putin’s government and whether Russia progresses towards political and economic liberalisation.

BOTTOM: ‘March of the Millions’,

Steven Eke, Control Risks.

TOP: Moscow,

Moscow, September 2012.

Cairo

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RiskMap Report 2013 vIEW FROM: CAIRO

view FroM: cAiro
Athens

T U R K E Y
Kurdistan Region Erbil

looKing ahead Egypt will be more assertive in regional and international bodies, and will seize on emerging regional issues with a new enthusiasm and legitimacy. An IMF loan will signal confidence that politics is KUWAIT stabilising and facilitate further external financing, though non-payment risks in the energy sector will Al Khobar B remain a fact of life for QAT operators and traders. Riyadh

MALTA

CYPRUS

LEBANON SYRIA
Beirut

ISRAEL
Alexandria Cairo

Damascus Amman

Baghdad

IRAQ

PALESTINIAN TERRITORIES

JORDAN

LIBYA

EGYPT SAUDI ARABIA

Jeddah Port Sudan

The end of the divisive constitutional process will give structure to political engagement. Participatory politics will show signs of growing sophistication.

henRy sMith analyst, Middle east and nORth aFRica cOntROl Risks

Despite the turmoil of the past couple of years, little has visibly changed in Cairo, the Arab world’s most populous city. It certainly smells the same. There are undoubtedly exceptions – choice graffiti and charred buildings around Tahrir Square spring to mind – but the nile still winds north carrying Cairo’s dubious detritus, while residents and visitors continue to lament the daily slog of traffic. Yet Cairenes still have hope of better things to come, though consensus about what these are and who will bring them is sorely lacking. Most

are weary of the street protests of 2011 and 2012, and particularly the associated economic damage, though many will not hesitate to take to the streets to air their frustrations. Strikes and sit-ins are almost a daily feature of life for investors, and show few signs of abating. Despite this, Egypt’s political scene, with Cairo at its core, should tentatively stabilise in 2013. The end of the divisive constitutional process will give structure to political engagement. Participatory politics will show signs of growing sophistication

47
RiskMap Report 2013 vIEW FROM: CAIRO

as parties’ economic and political manifestos mature around further legislative (and potentially presidential) elections. Executive power will be consolidated around the president’s office, but significant vested interests in the state bureaucracy, judiciary and security forces will block any presidential dominance, particularly with the presidency likely to remain occupied by a Muslim Brother. reaSonS (noT) To Be fearfUl Foreign investors should not fear the Muslim Brotherhood’s influential role in political and commercial life. With a number of seasoned businesspeople in its ranks and a pragmatic approach to politics, the Muslim Brotherhood is at least as favourable to foreign investment as its chief opponents from across the political spectrum. Representatives stress to Control Risks and other foreign visitors that they are ‘open for business’, stating that investors will be judged on a meritocratic basis rather than evaluated by their political associations – a claim that should at least partly hold true. Established domestic investors have more reason to be fearful. The Muslim Brotherhood is more likely than other political forces to tackle the rampant corruption and cronyism that characterised former president Hosni Mubarak’s time in office (1981-2011). Other forces that draw support from beneficiaries of the Mubarak era and anti-Brotherhood elements of the bureaucracy, judiciary and security

forces are unlikely to jeopardise their constituents’ interests by shining light on misdeeds and malpractice. Although scrutiny of privatisations and land sales made in Mubarak’s final decade is likely to continue, the military’s commercial interests are likely to mark a red line, even for the Brotherhood. The unspoken rapprochement between the military and the Brotherhood – the twin poles of political power in 2012 – should prevent destabilising gestures that would undermine the environment for investors. end of an era nevertheless, the deep venality of Mubarak’s final days appears to be over. Attempts to trim the bureaucracy will reduce opportunities for graft, though vested interests in the political establishment will handicap progress. The trappings of office may also tempt new occupants to emulate their predecessors’ self-enrichment. In many respects, doing business in Cairo is likely to smell much the same as it did before, with complicated relationships, piecemeal policy formation and obstructive decision-making procedures leaving many investors feeling nauseous. Cairo’s bankers and financiers expect Egypt’s economy to be slightly rosier in 2013, but improvements will remain tentative and subject to sudden reversals in the face of any political crises. An IMF loan will signal confidence that politics is stabilising and facilitate further external financing.

TOP: ‘There’s a martyr in me’ graffiti,

Mohamed Mahmoud St, Cairo, James Fallon, Control Risks. BOTTOM: Mural with Koranic verses, Mohamed Mahmoud St, Cairo, James Fallon, Control Risks.

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RiskMap Report 2013 vIEW FROM: CAIRO

Regional neighbours (particularly the Gulf Arab monarchies), international governments and multilateral agencies are keen to establish goodwill and influence with political elites both new and old through financial assistance. But all expect Egypt’s structural problems to persist: subsidy reform will be piecemeal, the bureaucracy will remain bloated and investor confidence will be sensitive to political shocks. GDP growth is likely to be stunted at around 3.3%, according to the IMF, and will not return to pre-uprising levels of 5%. non-payment risks in the energy sector will remain a fact of life for operators and traders. hoMe and awaY Cairo’s residents will expect accountable governance to bring

greater assertiveness in regional politics and more independence from US interests – always a cause of consternation during conversations with Egyptians. However, the country’s international orientation is unlikely to shift radically: fears of a drift towards an ‘anti-Western’ or ‘pro-Iranian’ orbit are misplaced. The government will try to reclaim Egypt’s position at the centre of regional affairs, primarily through efforts to mediate the civil conflict in Syria and encourage unity between Palestinian factions. Egypt will be more assertive in regional and international bodies, such as the Arab League, and will seize on emerging regional issues with an enthusiasm and legitimacy unseen in decades. However, the need for foreign

GDP (%) for selected north African countries 2009-17
7 6 5 4 3 2 1 0 -1 -2
2009 2010 2011 2012 2013 2014 2015 2016 2017

KEY
EGYPT ALGERIA MOROCCO TUNISIA Source: IMF, World Economic Outlook, October 2012. 2012-17 data forecasts.

49
RiskMap Report 2013 vIEW FROM: CAIRO

investment and external financial assistance will ensure a pragmatic approach, meaning staunch ideological and religious commitments will be absent. Greater independence in foreign policy will allow incumbents to curry favour with a domestic audience that will prove difficult to please. Structural obstacles to improving socio-economic conditions – a principal driver of unrest in Cairo and further afield – will encourage politicians to look beyond Egypt’s borders for quick wins, such as condemning the Syrian regime and questioning the peace treaty with Israel. However, Israel need not fear that political developments in Egypt will increase direct security threats, even with a review of the 1979 Camp David Accords. The government will continue to co-operate with Tel Aviv on

counter-terrorism initiatives and tackling instability in Sinai. The northern Sinai will remain problematic for Egypt, Israel and Hamas, with the government’s twin tactics of engagement and crackdown unlikely to significantly stem militancy against targets associated with the government and Israel. However, security concerns – principally criminality and labour militancy – outside Sinai, including in Cairo, will remain manageable for investors. Continuity not upheaval is likely in Cairo over 2013. But the outlook is not one of stagnation – that will be left for the nile. Politics is tentatively maturing, with growing accountability slowly improving the challenging conditions faced by investors. However, broader, deep-rooted change is not on the cards for 2013. The smell is going to linger.

TOP: President Mohammed Morsi,

September 2012. BOTTOM: Cairo.

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RiskMap Report 2013 vIEW FROM: CAIRO

Locations at higher risk of labour unrest

Alexandria Mahalla al-Kubra Sadat City

Port Said

I

10th of Ramadan City

Cairo

Helwan

Suez
Ain Sukha

Asyut

0

25

50

100

150

200 Km

© Collins Bartholomew and Control Risks 2012

Luxor

Johannesburg

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RiskMap Report 2013 vIEW FROM: JOHAnnESBURG

view FroM: JohAnnesburg
MOZAMBIQUE ZIMBABWE NAMIBIA
Windhoek Beira

looKing ahead Illegal strikes in the mining sector will reverberate across other sectors, affecting labour relations in the public and private sector.

BOTSWANA
Gaborone Pretoria Johannesburg

SWAZILAND

Maputo

LESOTHO
HIGH security in deprived urban areas

South Africa will show more activism in regional and international policymaking, taking a leading role in conflict resolution in Zimbabwe and Madagascar. The ruling party will not initiate major policy changes, but its lack of policy direction during public debates about changing industrial relations will raise concern among investors.

S O U T H AF R I C A

Durban

Cape Town

siMisO veleMPini analyst, aFRica cOntROl Risks

On the last Friday of every month, a growing group of Joburg residents ditch their cars and take to the streets on their bikes. It has taken 20 years for Critical Mass – a cycling event that originated in San Francisco in 1992 – to take root in the city. The fact that it takes place in the central area of Braamfontein and not the leafy suburbs of Sandton is a testament to the success of the city’s urban renewal programme. The proliferation of galleries, creative studios and retail spaces reflects a gradual improvement in the security environment in the central business district.

The offices of international mining companies loom large as you ride through the city. Joburg owes its origins to the 1886 gold rush, which transformed it from a dusty village into a metropolis within a few decades. The centrality of mining to the development of the city – and the country as a whole – persists to this day. The sector contributed roughly 8% to GDP in 2012, but has a disproportionate psychological impact on investor sentiment and public confidence in the government’s ability to transform the economy.

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RiskMap Report 2013 vIEW FROM: JOHAnnESBURG

In this context, fatal clashes between striking workers and police at Lonmin’s Marikana mine, and the wildcat strikes that swept the mining sector in mid-to-late 2012, caused deep disquiet for investors, not just in the mining sector but also in other parts of the economy. UPhill Challenge Julius Malema – the former leader of the ruling African national Congress (AnC)’s Youth League, now expelled from the party – has given vocal support to the striking miners and has led calls for the sector to be

nationalised. Throughout AnC history, the youth wing has often been instrumental in prompting the party to re-evaluate its policies, meaning that Malema’s demands sent shudders through mining company offices. Although the AnC tried to regain control over the discussion in February 2012, releasing a report entitled State Intervention in the Minerals Sector, labour unrest in the sector has put the party on the defensive again. Malema reminded both local and foreign investors that the state’s role in the mining sector remains undecided.

Contribution of the mining sector to the South African economy since 2001 (expressed in 2011 real rand terms), bn rand
3,000 2,500 2,000 1,500 1,000 500 0 SALES REVENUE EXPORT EARNINGS GDP EMPLOYEE REMUNERATION FIXED INVESTMENT

Royalties paid by the mining sector

2010 R4.4bn

2011 R5.5bn

Source: South African Chamber of Mines

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RiskMap Report 2013 vIEW FROM: JOHAnnESBURG

Until the government adopts – and implements – a clear policy, foreign investors will remain cautious. Clarity on this front is unlikely before at least 2014, with the AnC distracted by national elections that year and its electoral conference in December 2012. In the meantime, the government will look to more closely monitor companies’ compliance with the mining charter, and will push for more beneficiation – transforming minerals into higher-value products for domestic consumption or export – in an effort to accelerate broad-based black economic empowerment. Changing gear The Critical Mass route passes close to where some of the key decisions on these issues will be

taken: Luthuli House, headquarters of the AnC. The party celebrated its centenary at the start of 2012 – an occasion for great pride, but one that did little to heal the factional divisions that have been growing over the past five years. One of the most bitter rifts is between President Jacob Zuma and Malema. Once an ardent supporter, Malema has become a fierce critic of the president in recent years. Factions opposed to a second term for Zuma have capitalised on Malema’s visceral attacks on the president to weaken his re-election chances ahead of the national elective congress in December. Speculation about whether Deputy President Kgalema Motlanthe will challenge and even unseat Zuma has further fuelled factionalism.

Annual GDP growth (%) of selected African countries, 2006-14
10 8 6 4 2 0 -2 -4
2006 2007 2008 2009 2010 2011 2012 2013 2014

KEY
SOUTH AFRICA KENYA MOZAMBIQUE NIGERIA ZAMBIA Source: World Bank. 2012-14 data forecasts

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RiskMap Report 2013 vIEW FROM: JOHAnnESBURG

The 2014 national elections will force ruling party members to briefly set aside old rivalries and work together to ensure victory. These are the first polls when the ‘born frees’ – children born after 1994 – will cast their vote. Having grown up in a democratic South Africa, their allegiance to the ruling party is not guaranteed. In the not too distant future, the AnC will have to step up and deliver, or experience a gradual decline of its dominance in national politics. BUilding CriTiCal MaSS Moving through the creative hub of newtown and past the Bree taxi rank – haven to informal traders and favourite haunt of pickpockets – it is
GDP growth by sector, 2008-11
20 15 10 5 0 -5 -10 -15 -20
2008 2009

evident that the socio-economic challenges that the government faces are as high as public expectations that it will deliver on its promise of ‘a better life for all’. Frustration over the slow pace of economic reform will simmer, manifesting in periodic strike action in the public and private sectors throughout 2013. The labour unrest and wage demands seen in the mining sector in 2012 will spill over into productive sectors such as manufacturing, though financial services and agriculture will remain largely insulated. Strikes will cause significant operational disruption, and occasionally result in violent confrontations between police and protesters.

2010

2011

KEY
AGRICULTURE MINING MANUFACTURING CONSTRUCTION TERTIARY SECTOR Source: World Bank

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RiskMap Report 2013 vIEW FROM: JOHAnnESBURG

The violence – and the international reaction – witnessed during wildcat strikes at Marikana not only alarmed investors, it caused many in the AnC to sit up and take note. Together with the impact of rising social pressure and a vocal civil society, momentum is building to force the government to take decisive action to address issues of domestic and international investor concern. The administration will boost efforts to improve service delivery, tackle employment and bring down crime levels. And despite the pressures of the 2014 elections, the government will forego populist changes such as nationalising mines. The challenges are daunting but not insurmountable. South Africa’s forecast 2013 GDP growth rate will exceed that of Brazil. And while Mozambique and nigeria will undoubtedly outpace South Africa’s performance in 2013, the Rainbow nation’s far more developed and diversified economy will attract a much wider range of investors. ‘eGoli’ (‘place of gold’) – as Joburg is commonly known by local residents – will remain an attractive destination for human and financial capital, and a springboard to the rest of the continent into the medium term. This steady stream of foreign capital has bolstered the impact of the city’s urban renewal programme. The vibrancy of the city, and juxtaposition of old and new, are best seen crossing over the nelson Mandela bridge from newtown back to

Braamfontein. Exposed brick walls in new York-style loft apartments that cater for the young and upwardly mobile stand side by side with thoroughly dilapidated buildings, while Afro-chic restaurants mix with local food trucks. Income disparities are evident, but so is the positive impact of urban renewal. From outside the country, the view can be skewed by the 24-hour news cycle, but looking on to the city from nelson Mandela bridge gives a more hopeful perspective. There is reason for cautious optimism.

TOP: President Jacob Zuma, BOTTOM: nelson Mandela bridge,

July 2012.

Johannesburg.

Lagos river, Lagos

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RiskMap Report 2013 vIEW FROM: LAGOS

view FroM: lAgos
looKing ahead

M A L I NIGER
Niamey

CHAD
Kano Ndjamena

Islamist militancy in the Sahel region and northern nigeria will persist, creating evolving security risks for foreign operators. The Petroleum Industry Bill will face further disputed revisions before its passage; implementation will be slow and uneven. Political interference and corruption will undermine reform initiatives. The government will show willingness to expose graft, but will lack the means or inclination to prosecute.

URKINA FASO GHANA

adougou

BENIN N I G E R I A

Abuja

TOGO
Cotonou Lomé Accra Lagos Port Harcourt Malabo

CENTRAL AFRICAN REPUBLIC CAMEROON
Douala Yaoundé Bangui

EQUATORIAL GUINEA
SÃO TOMÉ AND PRINCIPE

ROddy baRclay analyst, aFRica cOntROl Risks

As the gateway to sub-Saharan Africa’s most populous nation and second-largest economy, the sense of commercial promise and entrepreneurial drive in Lagos is palpable. Around 20% of nigeria’s GDP is concentrated in this teeming metropolis, where private enterprise in a range of non-oil sectors has been driving growth of late. Of course, the city has its challenges: debilitating traffic jams, power cuts, armed criminal activity and local government scandals. But despite these hurdles, the green shoots of commercial dynamism, responsible governance

and infrastructure improvement have turned the former capital into a symbol of the potential that lurks beneath the surface of nigeria’s fraught business environment. Yet the comparative success of the Lagos city-state model belies a bleaker national picture. Institutional inertia and bureaucracy, corruption, chronic insecurity and poor infrastructure have continually shackled growth. These issues have entangled successive governments, not least that of President Goodluck Jonathan, which has emerged

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RiskMap Report 2013 vIEW FROM: LAGOS

battered and bruised from 2012 after enduring a mounting militant campaign in the north of the country and corruption scandals that struck at the heart of the political oil economy. Although 2013 will see its fair share of high-profile security incidents and public scandals, Jonathan is likely to face a less turbulent ride than last year as his administration settles into the middle of its term, gradually reins in spectacularly wasteful public spending and makes moderate progress in containing some pressing crises. Two issues will dominate the investment landscape in the coming year. The first is the passage and implementation of reforms that will determine the long-term business climate in key sectors. The second is how the government handles the

growing gulf between north and south, which underpins the northern security crisis. Slow ProgreSS On the first issue, we anticipate sluggish progress, continuing the trend of the first two years of Jonathan’s administration. After half a decade of haggling and redrafting, the landmark Petroleum Industry Bill (PIB) is likely to pass in 2013, changing the operating terms for oil companies. But while this will bring much-needed clarity to the fiscal, contractual and regulatory environment, the law will be heavily watered down from its initial drafts. This will limit its ability to address the dysfunction, corruption and structural inefficiencies that have

Business constraints due to electricity shortages, 2010
30 27 25

20

15 9

10

5 2 0 Average power outages per month Value lost to power outages (% of sales) 1

KEY
NIGERIA SOUTH AFRICA Source: International Finance Corporation nigeria Enterprise Survey

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RiskMap Report 2013 vIEW FROM: LAGOS

undermined growth in the oil sector. Moreover, implementation of certain aspects of the law will be patchy and slow, especially where vested interests resist changes. Similar issues will hinder crucial power-sector reforms, though the long-delayed privatisation plan executed in 2012 will speed up progress on developing production, transmission and distribution systems in the year ahead. nevertheless, such is the gap between current production capacity and market demand that foreign investors will not feel the
Wealth by state (GDP PPP $bn)

benefits of this progress for several years. Costly private power generation will remain a necessity for most operators for some time to come. griM UP norTh The north’s perceived marginalisation under Jonathan – a southerner – will feed into both elite and grassroots tensions in 2013, putting considerable strain on nigeria’s social and political fabric. Jonathan’s ruling People’s Democratic Party (PDP) has provided a national vehicle for accommodating elite ethno-regional interests since

CHAD NIGER SOKOTO KATSINA ZAMFARA KEBBI BENIN KADUNA NIGER
Abuja

JIGAWA KANO

YOBE

BORNO

BAUCHI

GOMBE ADAMAWA

PLATEAU NASSARAWA

KWARA OYO OSUN OGUN LAGOS EKITI ONDO EDO ANAMBRA DELTA BAYELSA
© Control Risks and Collins Bartholomew 2012

TARABA KOGI BENUE CAMEROON KEY >20 15 - 19 10 - 14 5-9 0-4

ENUGU EBONYI

IMO ABIA CROSS RIVER AKWA IBOM RIVERS

Source: Canback Dangel C-GIDD, 2007

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RiskMap Report 2013 vIEW FROM: LAGOS

democracy was restored in 1999. Its importance should not be underestimated: in the past, ethno-regional competition had a destabilising influence under a system in which political control is the key to accessing economic resources. The PDP will experience increased internal friction and disunity in 2013 as interest groups begin repositioning themselves with one eye on the 2015 elections. But such behind-the-scenes manoeuvring will have little immediate impact on business operators. Boko Haram’s militant campaign in the north will persist, representing just
Boko Haram threat zone

one symptom of a wider social, economic and political problem that is finding its outlet in religious radicalism. Despite improving counter-terrorism capabilities, northern militancy will remain a prominent feature of the security environment in 2013. Boko Haram’s sustained campaign in the north-east will be punctuated by isolated high-profile attacks in the capital Abuja, and potentially even further south. Attacks that occur in locations with a large Christian minority will trigger periodic spasms of localised ethno-religious violence, but the security forces are better equipped to contain this unrest

NIGER

CHAD SOKOTO KATSINA ZAMFARA KEBBI Kano KANO JIGAWA BORNO YOBE Maiduguri

BENIN NIGER

Kaduna KADUNA Jos

GOMBE BAUCHI Bauchi ADAMAWA PLATEAU

KWARA OYO Ibadan OGUN Lagos LAGOS OSUN EKITI ONDO

Abuja NASSARAWA KOGI

TARABA BENUE KEY

CAMEROON

ENUGU Benin City EDO ANAMBRA EBONYI DELTA BAYELSA IMO ABIA CROSS RIVER AKWA IBOM RIVERS

Core area of Boko Haram networks and attacks Peripheral area of Boko Haram networks and attacks Occasional activity by Boko Haram cells Operations launched from core area

© Control Risks and Collins Bartholomew 2012

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RiskMap Report 2013 vIEW FROM: LAGOS

than they were in the past. Such violence is unlikely to trigger nationwide instability. The real test will be how Jonathan’s administration responds politically to the drivers of militancy and the wider sense of marginalisation in the north. In this respect, we expect limited progress: the president leans more towards appeasing his southern support base than extending the olive branch to the north. The northern political apparatus is likely to remain paralysed, incapable or unwilling to mediate a ceasefire. Equally damaging, neither federal nor local governments are likely to display real commitment to improving governance, boosting development and addressing social grievances in the north, leaving the root causes of the crisis unresolved. down SoUTh Jonathan will be able to claim more success in his own backyard, sustaining the security gains made since the niger delta militant amnesty was launched in 2009. We believe that a return to regional militancy in 2013 is highly unlikely, with the government having effectively ‘bought off’ a generation of militants. The more benign security environment will ensure that oil production is at least sustained at its current level (approximately 2.5m barrels per day). But the issues that underpin militancy in the region remain unaddressed. Lucrative

incentives for criminal activities persist, meaning the niger delta will remain an extremely hostile and complex area in which to operate. And with reforms recasting the industry yet failing to fully address some of its structural flaws, the flood of new investment the PIB has promised to unleash will be more subdued than anticipated. CaVeaT inVeSTor Our sobering assessment of nigeria’s outlook rests both on Jonathan’s underwhelming record to date and on the many challenges and pitfalls ahead – particularly as the 2015 elections approach. It is easy to get carried away by the economic potential seen in upmarket districts of Lagos, but the socio-economic and political challenges of holding together such a diverse, vibrant but volatile nation are vast. Still, if the multiple crises of recent years have taught investors anything, it is that the political system is remarkably durable and adaptable. Investors must show similar alacrity in responding to changing circumstances as we move towards 2015. In the meantime, 2013 is likely to be another year of ‘muddling through’ adversity.

TOP: President Goodluck Jonathan, BOTTOM: River in Lagos.

April 2012.

Financial centre of Rio de Janeiro

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RiskMap Report 2013 vIEW FROM: RIO DE JAnEIRO

view FroM: rio de JAneiro
GUYANA
Bogotá Cali Paramaribo

FRENCH GUIANA SURINAME

Cayenne

looKing ahead Despite having a nominal two-thirds majority in Congress, the government will struggle to implement its reform agenda because of internal disputes within the ruling coalition. The government will show a positive attitude to foreign investment, but persist with a protectionist trade policy for a handful of selected industries. new regulation for oil and mining activities will increase state presence in those sectors, but bring much-needed private investment to develop the offshore pre-salt oil fields. discoveries off its coast. In part, it reflects massive investment ahead of the sporting showpieces that will see the city’s landscape transformed by huge infrastructure projects – a $10bn face-lift that will reinvent airports, ports, roads and the public transport system. As an illustration of the government’s desire to attract much-needed private investment, public-private partnerships will carry out most infrastructure work. Lastly, the deployment of police pacification units (UPPs) in Rio’s slums, from which drug gangs have been expelled, has reduced the rates of most violent crimes.

COLOMBIA
Quito Manta

ECUADOR
Guayaquil

Belém

Recife

PERU
Lima

B R A Z I L
Arequipa La Paz Brasília

Salvador da Bahia

BOLIVIA

Santa Cruz Belo Horizonte

PARAGUAY

Rio de Janeiro São Paulo

CHILE

Asunción

thOMaz FavaRO analyst, aMeRicas cOntROl Risks

Rio de Janeiro will spend the next four years in the global spotlight. As the last fireworks exploded over London, attention was already turning to its readiness to stage the 2016 Olympic Games. Before then, Rio will also host the 2014 FIFA World Cup final. There is a palpable sense of optimism in the city as the preparations swing into action. Rio’s newfound dynamism owes much to its recent economic surge. For decades eclipsed by São Paulo, Rio is making a comeback as a prime location for foreign investors. In part, this has been driven by the large oil

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RiskMap Report 2013 vIEW FROM: RIO DE JAnEIRO

growing aTTraCTion Foreign investors are coming to Rio – and Brazil more widely – to tap the benefits of recent economic growth. The country weathered the 2008-09 global financial crisis remarkably well, though 2012 was a reminder that Brazil is not isolated from uncertainty surrounding the global economy. The cooling of both external demand and domestic spending, coupled with a ‘too little, too late’ government response, meant that 2012’s sluggish growth rate will be one statistic most Brazilians would prefer to forget. However, all available evidence suggests that growth is likely to pick up in 2013, and Brazil will remain a strategic imperative for most global companies. Unlike most of its
GDP growth (%)
8 7 6 5 4 3 2 1 0 2010 2011 7.5%

neighbours in South America, there are opportunities in several economic sectors: from agriculture to pharmaceuticals, from oil to consumer goods. Government officials expect to hold the long-awaited bidding round for the pre-salt oil fields by 2013, the kick-off for an ambitious oil and gas exploration programme intended to make Brazil the world’s sixth-largest oil producer by 2020. STaBle BUT CoMPlex Brazil’s recent success is largely down to increased political and macroeconomic stability, which has made the country a safer, more predictable place in which to invest. FDI has risen fourfold since 2005, totalling $661bn in 2011. Furthermore, a mix of economic

4%

2.7%

1.6%

2012

2013

Source: Central Bank (2011). 2012-13 data forecast estimates

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RiskMap Report 2013 vIEW FROM: RIO DE JAnEIRO

growth and social policies focused on the poorest has created a powerful domestic market – 55% of the population is now considered middle class – that has made the country less vulnerable to external economic shocks. All these positive trends are likely to persist in 2013 and beyond. The ruling centre-left coalition and the opposition agree on the need for a more liberal economy, with an emphasis on attracting foreign investment and controlling inflation, as the basis for sustainable long-term growth. Yet despite all its allure and charm, succeeding in Latin America’s largest economy requires companies to understand and manage a broad array of business risks. Despite the feel-good factor, several challenges remain,
FDI inflow per sector (%)
16 14 12 10 8 6 4 2 0 8.5% 15.1%

including rampant corruption, high crime rates – even by Latin American standards – and an inefficient bureaucracy. Successive government efforts to tackle security issues in the past ten-to-15 years have had limited success, though there has been a partial displacement of the most violent crimes from São Paulo and Rio de Janeiro to other areas, such as the north-eastern states. CUTTing The CUSTo President Dilma Rousseff’s government seems keen to tackle the so-called ‘Brazil cost’: structural problems that afflict all businesses in the country, such as high tax and interest rates, deficient infrastructure and a poorly educated labour force. This is typified by Rio’s poor public

7.9%

6.9%

6.2% 5% 5% 4.6%

MINING

FINANCE

OIL AND GAS

BEVERAGE INDUSTRY

TELECOMS

RETAIL

METALS

Source: Central Bank (2011)

AUTOMOBILE

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RiskMap Report 2013 vIEW FROM: RIO DE JAnEIRO

transport. The city has only 30 miles (47km) of metro (subway) track, completely insufficient for the 11m inhabitants of the metropolitan area. A high volume of air traffic means that flight delays are frequent at the city’s two airports, which suffer from overcrowding in both passenger areas and plane berths. The huge investment programme in Rio will make a difference, but elsewhere progress on improving the operating environment has been slow. It is likely to remain so for the remainder of Rousseff’s administration. After all, running a ruling coalition of ten political parties with only loose ideological affinities means that compromise is key. Support for government policies from allies is conditional on issues such as political appointments to ministries and the approval of other pieces of legislation, making the passage of important measures both time-consuming and inefficient. Furthermore, although investment opportunities are growing, the domestic market is not necessarily becoming more liberalised. The government has already indicated that it plans to increase its presence in strategic sectors, notably oil and mining, and its protectionist tendencies were brought to the fore during the economic slowdown. Sectors affected by foreign competition – in particular labourintensive sectors – were rewarded with higher import tariffs and other non-tariff barriers to trade. The

government has also established stiffer local-content requirements designed to create a supply chain for state-owned company Petrobras, which holds a virtual monopoly of the pre-salt oil fields. leading The waY Rousseff is likely to maintain an outward-looking foreign policy of openly promoting Brazil as a leader in Latin America while more quietly increasing its clout in the developing world as a whole. Brazil has become an important player in global forums such as the G20, and has fostered new arenas such as the BRICS Forum and the Union of South American nations (Unasur). Brazil’s leadership within Latin America will be tested during 2013 as venezuela joins the Common Market of the South (Mercosur), a regional trade bloc that also includes Argentina and Uruguay (Paraguay was suspended in June, but should return in April 2013). While venezuela has so far acquiesced to more than disputed Brazil’s regional leadership, its membership alters Mercosur’s political balance. For Argentina, venezuela may represent a counterweight to Brazil within the bloc. Brazil is set to continue its rise as the region’s economic powerhouse, extending its influence through trade ties and new investments: development bank BnDES is now a larger lender than the World Bank.

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RiskMap Report 2013 vIEW FROM: RIO DE JAnEIRO

However, its support for controversial major infrastructure projects – such as a hydroelectric dam in Ecuador or a highway crossing a Bolivian national park – has generated tensions and grassroots opposition throughout the region. no gUaranTeeS With public finances in relatively good order and a low risk of radical state intervention, many investors take Brazil’s new-found stability as a guarantee of a successful venture. Others point to persistent problems in the local business environment to sustain their sceptical view. The country’s slow but steady approach to economic development is likely to prove both sides wrong, and reward those with a more balanced interpretation of its potential, while the open arms of Rio’s landmark statue are a reminder of the city’s willingness to welcome newcomers.
TOP: President Dilma Rousseff,

BOTTOM: Rio de Janeiro,

november 2012.

Fiona Perera, Control Risks.

Jakarta

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RiskMap Report 2013 vIEW FROM: JAKARTA

view FroM: JAkArtA
looKing ahead The battle to succeed President Susilo Bambang Yudhoyono in 2014 will hot up, though there may still be no clear frontrunner. Policymaking will show nationalist and protectionist tendencies ahead of 2014 elections. Despite some progress, reforma momentum will Papu continue to falter as vested interests stifle efforts to overhaul the legal system and bureaucracy. Regulatory uncertainty will remain a source of real concern for investors, though pragmatism is likely to temper populism. Yet positive momentum and investor sentiment can be rapidly reversed. Heading into 2013, two related areas of uncertainty stand out as a source of doubt among many businesses: perceptions of increased resource nationalism and the absence of a clear favourite to replace Yudhoyono. TheY CoUld Be ConTenderS Prabowo Subianto could make considerable progress in 2013 in establishing himself as the man to beat for the presidency. A former army general, his strategy is to

Penang

Kuala Lumpur

BRUNEI M A L A Y S I A
SINGAPORE

Sulu archipelago

Kalimantan Sulawesi Maluku

Sumatra

Jakarta Java Surabaya

I N D O N E S I A
EAST TIMOR

Darwin

antOn aliFandi analyst, indOnesia cOntROl Risks

The 2014 presidential and parliamentary elections will loom over Indonesia’s political landscape in 2013 as leading candidates jockey for position to replace President Susilo Bambang Yudhoyono (who cannot seek a third term). Despite some problems, Yudhoyono has presided over a period in which Indonesia has emerged as one of the region’s success stories – a large, basically stable and functioning Muslim democracy, with greatly improved economic fundamentals and growth rates.

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RiskMap Report 2013 vIEW FROM: JAKARTA

present himself as the ‘anti-Yudhoyono’ – a strong, decisive, populist leader. His image contrasts sharply with the incumbent, seen as a man of caution and compromise. After more than seven years in power, these qualities look increasingly to many voters like weakness and dithering. Prabowo’s populist appeals are unnerving many foreign business leaders in Jakarta, who are concerned that he could pursue protectionist policies such as banning gas exports and rice imports. 2013 could also see the emergence of a new candidate for the presidency. Taking office in October 2012, Jakarta governor Joko Widodo
70

– better known as ‘Jokowi’ – is gaining popularity in the capital with bureaucratic reforms, attention to practical local issues and the easy informality of his leadership style. voters searching for a fresh face may clamour for him to run for the presidency. Although he lacks the backing of a political party, one would happily accommodate him if his stock were to continue to rise, with popularity and vote-winning power counting more than party affiliation. A more established candidate, Golkar party leader Aburizal Bakrie, will use his party’s extensive network and his own media empire to compensate for his lack of personal appeal. The power of this political

Exports of goods and services; household consumption as % of GDP, 2007-11

60

50

40

30

20

10

0
2007 2008 2009 2010 2011

KEY
EXPORTS HOUSEHOLD CONSUMPTION Source: World Bank

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TOP: Presidential hopeful Prabowo

machine should not be underestimated, but Golkar’s membership of Yudhoyono’s governing coalition means that Bakrie will struggle to convince voters looking for change that his presidency will be very different from the current one. Bakrie’s candidacy could also be jeopardised by the poor performance of his business empire, which weakens his ability to dole out patronage to party loyalists. The crown jewel of the business, the mining group Bumi Resources, posted losses of $334m in the first half of 2012. On top of that, the company is saddled with a $1.3bn debt to China Investment Corp at an eye-watering 19% interest rate. There were murmurs of discontent among some Golkar grandees, including former leader Akbar Tanjung, when in 2012 Bakrie was ‘hastily’ endorsed as the party’s candidate. These murmurs could turn into vociferous calls for another candidate if party heavyweights sense that Bakrie’s hold on Golkar is slipping. Bad ViBeS There may very well still be no clear favourite for the presidency at the end of 2013, but pre-election politicking could bring further signs of resource nationalism – a topic of growing concern among investors. Yudhoyono in February 2012 instructed his ministers to renegotiate long-standing mining contracts with some of the biggest foreign operators in Indonesia, including Freeport-

McMoran. In Freeport’s case, the government is asking – among other things – that the company divest part of its 90% stake in its Indonesian subsidiary and pay a higher royalty rate. negotiations are expected to be concluded in 2013. Freeport and others are likely to partially accede to government demands. The fact that they agreed to revise their contracts despite holding Contracts of Work (CoWs) that were considered unalterable suggests that they see government demands as something they need to accommodate if they want their contracts extended. Freeport would like to extend its current contract, which expires in 2021, to 2041 before committing to a multi-billion-dollar investment to replace its Grasberg mine, which is scheduled to be closed in 2016. In another sign of resource nationalism, the government in 2012 issued a regulation requiring foreign mining companies to divest 51% of their stake in operations to Indonesian entities by the tenth year of commercial production. This replaced a regulation that only came into effect two years earlier stipulating that foreign mining companies must divest 20% of their shares by the sixth year of production. The divestiture requirement covers companies operating under licences issued following the enactment of the 2009 Mining Law, known by its Indonesian acronym as IUP, not those working under the older tailor-made CoWs and Coal CoWs.

Subianto, August 2012. BOTTOM: Jakarta, Martin Brown, Control Risks.

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RiskMap Report 2013 vIEW FROM: JAKARTA

The contract renegotiations and new divestiture requirements reflect an increasingly uncertain regulatory environment, but are unlikely to herald an era of FDI-deterring economic nationalism. A 51% divestiture requirement is not unprecedented: newmont and Sumitomo were required to divest their 51% stake in their Indonesian gold mine project under their 1986 CoW. Freeport was also required to divest 51% of its shares under its 1991 CoW, but the requirement was relaxed by a 1994 government regulation. Regulatory uncertainty is an issue that often confronts foreign companies in Indonesia, but the government is likely to act pragmatically when the need arises.
FDI inflows ($bn), 2004-11
25

PragMaTiSM To PreVail An evolving policy on exports of raw minerals, which the government plans to ban in 2014 in a bid to promote domestic processing industries, is likely to provide one example of how pragmatism can temper populism. The 20% export tax introduced in 2012 on 65 raw minerals is already exacerbating the impact on mining companies of soft demand and falling prices. However, struggling local mining companies will argue that a 2014 export ban threatens business closures and large-scale job losses, and that sufficient processing capacity cannot be built fast enough or supplied with electricity. The overall policy goal of capturing more of the value chain means the commitment to promoting

20

19.2

15

13.8

10

8.3 6.9
5

9.3

4.9 1.9

4.9

0 2004 2005 2006 2007 2008 2009 2010 2011 Source: OECD

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RiskMap Report 2013 vIEW FROM: JAKARTA

domestic processing will continue, but the government will probably conclude that the 2014 deadline is not feasible. The possibility of a Prabowo presidency has already triggered fears that his populist rhetoric would translate into nationalist policies. However, the precedent set by former president Megawati Sukarnoputri (2001-04) – who promised nationalisation, but once in office privatised state companies – suggests that pragmatism reigns in government. Prabowo would be likely to follow the same path. His father was a prominent economist and European-style social democrat, and his brother-in-law was an orthodox central bank governor under former president Suharto (1968-98). Prabowo’s background and the realities of governing suggest that his presidency would bring a change of tone, but no dramatic change of substance.
TOP/ BOTTOM: Jakarta, Martin Brown, Control Risks.

Sule pagoda, Yangon

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RiskMap Report 2013 vIEW FROM: YAnGOn

view FroM: yAngon
Xian

looKing ahead Emerging political institutions are still weak, and the personal health of President Thein Sein and opposition leader Aung San Suu Kyi will remain critical to the reform programme’s success. The momentum of foreign Ta investment will accelerate, but actual disbursement of funds will continue to lag behind promises. International competition combined with still-limited local governance capacity will tempt investors to cut M corners. A Western company will be the focus of a major extraterritorial PH bribery investigation. The iConograPhY of Change Both within the country and abroad, commentators have marvelled at the speed with which the impossible became commonplace. One experienced Burmese journalist told Control Risks that for her the key moment came with Aung San Suu Kyi’s meeting with President Thein Sein in August 2011. The two leaders posed in front of a portrait of another historic figure: Aung San Suu Kyi’s father, Gen Aung San, who led the country to independence but had in recent years been expunged from the

C H I N A
Chengdu

NEPAL
Kathmandu

Chongqing

BHUTAN
Kunming Guangzhou

BANGLADESH
Dhaka Kolkata Chittagong

I N D I A

MYANMAR LAOS

Hanoi

Hyderabad

Vientiane Yangon

THAILAND
Bangkok Chennai

Phnom Penh Jaffna

CAMBODIA

VIETNAM

Ho Chi Minh

JOhn bRay diRectOR, analysis cOntROl Risks

2012 was the year when everything seemed possible in Myanmar. In 2013 it will become clearer that it is not. By now, it is far too late simply to reverse the country’s recent reforms: too many people’s expectations have been raised. However, although there is near-consensus on the need to move forward, there is little agreement on the destination. Myanmar has a better chance of political and economic recovery than it has had for half a century, and further changes are certain. But nothing else is guaranteed, least of all profit.

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RiskMap Report 2013 vIEW FROM: YAnGOn

regime’s iconography. For the journalist, the inclusion of this picture showed that the president’s talk of reform was real. Within months the same journalist was shouting herself hoarse outside the local office of the opposition national League for Democracy (nLD) as news came in of the party’s victories in the April 2012 parliamentary by-elections. Aung San Suu Kyi’s image was printed on thousands of t-shirts, key rings and electoral kitsch freely sold on the streets of Yangon. Since then, Aung San Suu Kyi has

been able to travel to Thailand, Europe and the US, and return home without obstacle as a recognised political leader. While the official daily paper, the staid new Light of Myanmar, still faithfully reports the government line, it now competes with dozens of garish new print publications and – for those who can afford satellite dishes – foreign news broadcasts. Censorship has been lifted. The mood is completely different. Yet even amid this early euphoria, Yangon citizens have been asking tough practical questions: political change is welcome, but what about

The VolaTile PoliTiCS of land Parliament in July 2012 passed a new law authorising public demonstrations provided that the organisers seek police permission beforehand. Within days, 200 farmers from Mingaladon, just north of Yangon, staged a protest claiming they had received inadequate compensation for land acquired by Zaykabar, a private development company planning a new industrial zone. In light of Myanmar’s recent history, the fact that the protest took place at all is remarkable. The focus of the protest – a dispute over land acquisition – is certain to recur with increasing frequency. In principle, the newly enacted Farmland Law reintroduces the concept of land-tenure rights that can be sold or mortgaged. However, all rural land remains the property of the state, and many farmers are unable to document their rights. Skyrocketing land values increase the temptations for well-connected companies and individuals to acquire land by unscrupulous means. Equally, Myanmar’s new political freedoms increase the potential for protests and court battles. For international investors hoping to lease land for development, the message is clear: careful due diligence is essential.

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RiskMap Report 2013 vIEW FROM: YAnGOn

the electricity cuts? And if all this foreign investment is flowing into the country, how will it improve their lives? Recent public demonstrations in Yangon against the beleaguered Rohingya Muslim minority in western Myanmar serve as a reminder of the multifaceted and often ill-focused anger that underlies much of the country’s politics. These are not the kinds of problem that are susceptible to quick fixes. The new PoliTiCS In retrospect, the pace of change may come to seem less surprising than the effectiveness with which the highly centralised military junta suppressed Myanmar’s clamorous political debate for so long. The central question – going beyond the fate of individual political leaders – is how far the country is capable of building the political and bureaucratic institutions needed to manage change.
leader Aung San Suu Kyi (L), poses with President Thein Sein, August 2011. BOTTOM: Yangon.
TOP: Myanmar’s pro-democracy

and international expectations and because the 2015 national parliamentary elections represent a clear political deadline. He was able to strengthen his position in August by removing a series of ‘conservative’ former generals from his cabinet. He may be hoping that by 2015 the economic reform process will have brought sufficient fruit for him or his successors to avoid electoral annihilation. That remains a tough aspiration to achieve. Meanwhile, Aung San Suu Kyi has to strike a balance between supporting reforms that are in the interests of her country and her party, while avoiding giving too much credit to a political opponent. Otherwise, it would seem that all she has to do is steer clear of obvious mistakes, and wait. But she too will be under pressure from followers who seek more rapid action and more substantive results. BUSineSS ChoiCeS – harder Than TheY SeeM Myanmar’s business community is certainly not waiting. The select group who were able to build up businesses without depending on regime connections are now besieged by potential investors looking for partnerships. The rather larger group of businesspeople who depended on military patronage, and therefore found themselves on international sanctions lists, are now seeking to reposition themselves.

The fact that there is a political process at all is a cause for celebration. However, as shown by the delayed passage of the proposed new foreign investment law in mid-2012, it is also a source of frustration. Top-down politics does not work any more. Consultation and bargaining require new kinds of political skill that are still in short supply. For now, Thein Sein recognises the need to keep up the momentum of change, both to satisfy rising national

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RiskMap Report 2013 vIEW FROM: YAnGOn

Would-be foreign investors are having to make tough judgement calls when seeking potential partners, much as they did in the early years of post-Soviet Russia: what degree of association with the previous regime is acceptable? In the case of Myanmar, they face the additional challenges of far closer scrutiny from international nGOs than they ever faced in Russia, and the potential taint of drugs money. While Yangon’s hotels are full and promises of investment are rife, actual disbursements are slower than Thein Sein and his reformists would wish. The challenges not only relate to the difficulty of finding the right partner, but also the appalling infrastructure. The View BeYond Yangon For a full appreciation of the scale of the problems that the country faces, it is essential to travel outside Yangon, and not just to the new capital in naypyidaw. Yangon may suffer from an energy shortage, but you do not need to drive far from the city to find villages that have no power cuts because they have no electricity at all. The shortage of educated personnel may be a source of frustration in government ministries, but the situation is even more dire in regional and township offices, courts and schools. One of the greatest tragedies of military rule was the withering of the education system at every level, not just the universities, but also the primary schools.

It is likewise at the regional level that the clearest evidence emerges of continuing tensions between the once all-dominant armed forces and the new political dispensation. Gen Min Aung Hlaing, the commander-in-chief, appears to support Thein Sein’s reform agenda. It is still an unanswered question whether the army will be prepared to accept an nLD-dominated government after 2015. Already there are frictions involving local and regional commanders who are reluctant to surrender their commercial privileges to the new political leaders. Finally, and crucially, Myanmar is far from resolving the dilemmas that have plagued it since independence concerning the political and economic relationship between the majority Burman population and the ethnic minorities who between them control many of the most important natural resources. In the north, the army is still at war with the Kachin Independence Organisation (KIO). Ceasefires with other groups fall far short of a constitutional settlement. Myanmar’s reform process is only just beginning. The most favourable prospect is cumulative progress based on a series of messy political and economic compromises. In light of the country’s polarised and violent past, messy compromises look rather attractive, but they will not bring instant riches.

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RiskMap Report 2013 vIEW FROM: YAnGOn

Myanmar’s ethnic minorities may be concentrated in border areas, but together they make up around 30% of the population (no one knows for sure – there has been no reliable census since 1931). Their fate is central to the country’s future. The democratisation process offers the prospect of a series of negotiated settlements within a new constitutional framework. But the country’s changing style of politics will bring fresh hazards as well as new opportunities. Many of Myanmar’s most valuable natural resources lie in minority areas, but international companies aspiring to operate there will need more than the usual skill and diplomacy to be successful. The government has signed ceasefires with ten out of the 11 main armed groups, but these have frozen rather than resolved conflicts. The key question – how to create a constitutional framework that respects local interests within the wider national union – remains unresolved. If all goes well, development will reinforce the multiple peace processes. But, if competition to control scarce resources that have suddenly become much more profitable grows, this could reinforce existing conflicts.

81
RiskMap Report 2013 PIRACY OvERvIEW

pirAcy overview
Maritime piracy, kidnapping, armed robbery and theft are global threats. The maps below outline the developments in two key areas of activity: the horn of africa and the gulf of guinea. The accompanying chart outlines the significant trends globally since 2008. horn of afriCa Levels of piracy off the Horn of Africa dropped dramatically in 2012. According to Control Risks’ statistics, the number of incidents recorded between January and november represented a 60% reduction compared with the corresponding period in 2011. A combination of factors are likely to have influenced the trend: an increased awareness and implementation of best management practices by vessel owners and operators, a more robust naval strategy in the form of disruption and deterrence, and the increased use of private armed security and vessel protection detachments. A decline in the number of reported incidents does not reflect a substantial improvement in the security dynamic, and Somali piracy will continue to constitute a threat to shipping in 2013. Significantly, pirate attack groups continued to expand their operational range in 2012, in particular penetrating farther into the Arabian Sea and northwards into the Gulf of Oman. As anticipated, groups remained active in the southern Red Sea and Gulf of Aden during both monsoon periods. Meanwhile, a notable decline in activity was registered off East Africa, in the vicinity of Kenya, Tanzania and Mozambique.
QATAR UAE SAUDI ARABIA OMAN IRAN PAKISTAN KEY Attempt Hijack Robbery

NEPAL

SUDAN INDIA ERITREA YEMEN

DJIBOUTI

ETHIOPIA SRI LANKA MALDIVES SOMALIA

82
RiskMap Report 2013 PIRACY OvERvIEW

gUlf of gUinea Piracy in the Gulf of Guinea continued unabated in 2012. nigeria accounted for the majority of activity, representing 66% of incidents in the Gulf, according to Control Risks’ records, with a broad range of attacks taking place. nigerian groups expanded their operational range, in some cases perpetrating attacks in excess of 100 nautical miles from the coast. In addition, the hijacking for cargo phenomenon was extended to the waters off Togo and Côte d’Ivoire, with groups deliberately targeting product tankers for the purpose of offloading the cargo. While such activity has been commonplace (and often under-reported) in the Gulf of Guinea for a number of years, the increasing range and westward expansion of nigerian criminal groups represents a worrying trend that has served to undermine the maritime security of neighbouring states such as Benin, Togo, Ghana and Côte d’Ivoire.
TOGO BENIN CÔTE D’IVOIRE GHANA NIGERIA

CAMEROON KEY Attempt Hijack Kidnap Robbery

Reported incidents of piracy, armed robbery and theft by region, Jan 2008 – mid nov 2012
350 250 200 150 100 50 0 East Asia South Asia South-east Asia 2009 East Africa 2010 Gulf of Guinea Horn of Africa 2011 Sub-Saharan Africa West Africa 2012 South America Central America Caribbean Middle East 412

EQ. GUINEA
409

SAO TOME AND PRINCIPE
621

619

TOTAL

531

GABON

KEY
2008

83
RiskMap Report 2013 KIDnAP OvERvIEW

kidnAp overview
asia and the Pacific accounted for the majority of recorded kidnaps-for-ransom in 2012 for the third year in a row as a result of large numbers of cases in Pakistan, afghanistan and india. The risk also remained substantial in africa and latin america. There was a significant increase in the number of cases reported in the Middle east as a result of the fluid situation in much of the region that followed the arab spring in 2011. Sporadic cases continued to be registered in north america and the Caribbean, europe and the CiS.
Kidnapping-for-ransom is increasing in global scope (% share of global total by victim numbers, as at 3 December 2012)
60% 55%

50%

40%

40% 38%

31% 30% 25% 22% 20% 15% 15% 14% 19%

10%

8% 4% 3% 4% 2% 2008 MIDDLE EAST AFRICA ASIA AND THE PACIFIC 2% 2% 2012 EUROPE AND CIS 1%

0%

KEY

2004 LATIN AMERICA

US, CANADA AND CARIBBEAN

Kidnapping-for-ransom, once a crime commonly associated with Latin America, has emerged as a threat to business operations globally. The proportion of kidnaps recorded in Latin America has fallen from 55% in 2004 to 25% in 2012, with Africa and Asia Pacific accounting for 53% of kidnaps recorded worldwide in 2012, up from just 18% in 2004. A significant rise in kidnapping levels in the Middle East accounts for the jump from a 4% share in 2008 to 19% in 2012. The declining percentage of abductions recorded in Latin America does not indicate a reduced threat: venezuela, Colombia and Mexico remained among the top ten countries for absolute numbers of abductions recorded by Control Risks in 2012. Rather, the decline is representative of the proliferation of kidnapping-for-ransom across the globe. Most susceptible to increases in the crime have been those countries destabilised by conflict or where increases in foreign investment have not been supported by an enhanced security infrastructure.

84
RiskMap Report 2013 KIDnAP OvERvIEW

Top 20 countries in absolute terms for 2012 (as at 3 December)

01 02 03 04

Nigeria Mexico India Pakistan

05 06 07 08

Venezuela Afghanistan Iraq Lebanon

09 10 11 12

Colombia Guatemala Syria Philippines

13 14 15 16

Brazil Turkey Honduras Malaysia

17 18 19 20

Yemen Kenya Egypt Ecuador

85
RiskMap Report 2013 RISK RATInG FORECAST 2013

risk rAting ForecAst 2013
riSK raTing definiTionS 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.

86
RiskMap Report 2013 RISK RATInG FORECAST 2013

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.

87
RiskMap Report 2013 RISK RATInG FORECAST 2013

COUNTRY AFRICA
Angola Benin Botswana Burkina Faso Burundi Cameroon Cape Verde Central African Republic Chad Comoros Congo Congo (DRC) Côte d'Ivoire Djibouti Equatorial Guinea Eritrea Ethiopia Gabon Political risk raised from M

POLITICAL RISK

SECURITY RISK

M M L H H M L H H H M H H M H H M H

M; H in north-east of Cabinda exclave L; M on Nigerian border L M; H in areas bordering northern Mali M; H in north-western provinces, outskirts of Bujumbura M; H in Bakassi peninsula, Extreme North region L H M; H in Borkou-Ennedi-Tibesti (BET), Wadi Fira, Ouaddaï regions, on CAR, Cameroon borders L; M in Moroni, Mutsamudu M H; M in Kinshasa; E in North Kivu province H M M M; L in Asmara; H on borders M; H in Afar region (north of Semera), Somali region, areas bordering Eritrea, Kenya, South Sudan, Sudan L

Opposition to President Ali Bongo within the ruling party is mounting, while a multi-party opposition coalition was formed in September 2012, but political stability is unlikely to come under threat. Political interference is likely to rise in the oil sector as the government uses the planned adoption of a new hydrocarbons code to augment fiscal pressure on foreign operators. Trade union pressure for more stringent local content policies is also set to grow. However, the security environment will remain relatively benign and easily manageable for foreign companies. Gambia H L

88
RiskMap Report 2013 RISK RATInG FORECAST 2013

COUNTRY
Ghana Guinea Guinea-Bissau Kenya Lesotho Liberia Madagascar Malawi Mali Political risk raised from M

POLITICAL RISK
M H H M L M H M H

SECURITY RISK
L; M on south-eastern border with Togo, border with Côte d'Ivoire, areas around Gushiegu in Northern Region, Bawku in Upper East Region M M M; H in Nairobi, northern, eastern areas L M; H on border with Côte d'Ivoire M L; M in major urban centres M; H on border with Mauritania, Mopti, northern Ségou; E in Gao, Kidal, Timbuktu

Islamist rebels and jihadists control the northern desert regions and democratic institutions are reeling from the March 2012 coup. Addressing the northern crisis will require a variety of stakeholders to put aside differences to oversee a concerted political-military strategy to restore state integrity and achieve political normalisation. The international community’s influence and support will be a key determinant of the initiative’s effectiveness, but the resolution process will be fraught and marked by setbacks and pitfalls. Mauritius Mozambique Namibia Niger Nigeria L M L H H L L; M in Maputo L M; H on Mali, Nigeria borders, Agadez region, northern half of Tahoua region H; E in Borno, Yobe

Political risk raised from M; security raised from M; H in south-south, south-east, north-east, Plateau state, Lagos Democratic institutions have proved remarkably resilient in the face of crises and security challenges, but the government’s policies of military containment and patronage distribution to suppress threats to national stability only partially ease structural sources of instability. Investors face prominent challenges: powerful vested interests continue to weigh over licensing and public procurement, leaving investors exposed to corruption and interference. The progress of the long-delayed Petroleum Industry Bill will remain slow; even when passed, this will not achieve all that it set out to do because of uneven and slow implementation. Rwanda M L; M on borders with Burundi, Congo (DRC)

89
RiskMap Report 2013 RISK RATInG FORECAST 2013

COUNTRY AFRICA continued
São Tomé Senegal Seychelles Sierra Leone Somalia South Africa Swaziland Tanzania Togo Uganda Zambia Zimbabwe

POLITICAL RISK

SECURITY RISK

M M L M E; H in Somaliland M M M M M M H

L L; M in Casamance L M E; H in Somaliland M; H in Johannesburg, deprived urban areas M L; M in Dar es Salaam, Zanzibar, borders with Rwanda, Burundi M M; H in northern, north-eastern areas, border with Congo (DRC) L; M in Lusaka, parts of Copperbelt M

AMERICAS
Anguilla Antigua and Barbuda Argentina Aruba Bahamas Barbados Belize Bermuda Bolivia Bonaire Brazil British Virgin Islands I L M L I I L I H L M I I L L; M in Buenos Aires L L L M; H in Belize City I M L M I

90
RiskMap Report 2013 RISK RATInG FORECAST 2013

COUNTRY
Canada Cayman Islands Chile Colombia Ratings unchanged

POLITICAL RISK
L I L M

SECURITY RISK
L L L M; H in Cali, remote rural areas, border areas with Venezuela, Ecuador

The security situation is likely to remain broadly unchanged in 2013. Illegal armed groups are still able to challenge the security forces and stage attacks against economic infrastructure in their remote strongholds. However, a significant deterioration is unlikely and the government will not lose its overall grip on security. Even if peace talks between the government and the FARC progress, disaffected units and paramilitary successor groups will remain involved in illegal activities. Although the peace talks are a gamble, their failure would not threaten political stability. Costa Rica Cuba Curaçao Dominican Republic Dominica Ecuador El Salvador French Guiana Grenada Guadeloupe Guatemala Guyana Haiti Honduras Jamaica Martinique L M L M I H M L L I M L H M L I L; M on Nicaraguan border L L M I M; H in Colombian border areas M; H in San Salvador, La Libertad L L L M; H in Guatemala City and San Marcos, Escuintla, Petén, Izabal departments M H M; H in San Pedro Sula, Tegucigalpa M; H in West Kingston, Spanish Town L

91
RiskMap Report 2013 RISK RATInG FORECAST 2013

COUNTRY AMERICAS continued
Mexico

POLITICAL RISK

SECURITY RISK

M

M; H in Chihuahua, Coahuila, Nuevo León, Tamaulipas, Jalisco, Sinaloa, Durango, Guerrero, Michoacán, San Luis Potosí, Veracruz states

Security rating raised from M in Jalisco, San Luis Potosí, Michoacan
The crackdown on drug trafficking has disrupted cartels’ operations, leading to a rise in high-impact crimes as cartels seek alternative sources of revenue to offset drug-related losses. Smaller-scale organised criminal groups have exploited the focus on drug trafficking to operate lucrative kidnapping and extortion rackets. Despite President Enrique Peña Nieto’s ambitious pledge to reduce the homicide and kidnapping rate by 50%, security threats will persist.

Nicaragua Panama Paraguay Peru Puerto Rico Sint Maarten St Kitts and Nevis St Lucia St Vincent and Grenadines Suriname Trinidad and Tobago Turks and Caicos United States Uruguay US Virgin Islands Venezuela Ratings unchanged

H L M M L L I I I M L L L L I H

M M; H in Darién province on Colombian border L; M in eastern border, tri-border area M; H in Upper Huallaga, Apurímac, Ene valleys L; M in San Juan L L L L L M; L in Tobago; H in Laventille, Beetham (Port of Spain) I L; M in deprived urban areas L L M; H in Caracas, major urban centres, Colombian border st states

The security environment is likely to continue deteriorating in the face of a corrupt, politicised and ill-equipped police and judiciary. Caracas and other urban areas will bear the brunt of the security problems. President Hugo Chávez will maintain his is statist vision of political and economic development, but plans to implement a communal system of political organisation are e unlikely to get off the ground swiftly. Economic mismanagement, bureaucratic corruption and poor security will persist in 2013. 13.

92
RiskMap Report 2013 RISK RATInG FORECAST 2013

COUNTRY ASIA
Afghanistan Australia Bangladesh Bhutan Brunei Cambodia China East Timor Fiji India

POLITICAL RISK

SECURITY RISK

E; H in Kabul L M L L M M; L in Hong Kong M M M

E L M; H in Chittagong Hill Tracts L L M L; M in non-central districts of cities in Guangdong Province, remote border areas, Xinjiang’s south-western prefectures M 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, rn eastern districts of Maharashtra

Ratings unchanged
Reform-hungry investors face more disappointment as the ruling Indian National Congress looks to preserve its ‘pro-poor’ credentials. The government’s prospects in elections due by 2014 are dim, but this is unlikely to provide a fillip to reform, even though Congress arguably has nothing to lose. On the security side, religious extremism lurks as a persistent threat, as do unresolved and serious Naxalite (extreme leftist) and separatist conflicts. Cybercrime is a growing problem and confidence in government responses to security problems is low.

Indonesia Japan Laos Malaysia Maldives Mongolia Myanmar Nepal

M L M L M M H H

M; H in Papua, Maluku L L L L M M; H on borders M; H in south

93
RiskMap Report 2013 RISK RATInG FORECAST 2013

COUNTRY ASIA continued
New Caledonia New Zealand North Korea Pakistan Ratings unchanged

POLITICAL RISK

SECURITY RISK

L I E H

L L L H; E in Afghan border areas

An election year coincides with the scheduled retirement of the powerful army chief and chief justice, making for heightened uncertainty at a critical juncture. State finances are in dire condition, the important relationship with the US is teetering and NATO’s drawdown from Afghanistan poses a threat to stability. Terrorism continues to pose a significant threat that may intensify if militants refocus attention on Pakistan as NATO exits Afghanistan. Sectarian strife is growing. Lawlessness persists in Karachi, where targeted killings have surged.

Papua New Guinea Philippines Singapore Solomon Islands South Korea Sri Lanka Taiwan Thailand Tonga Vanuatu Vietnam

M M I M L M L M L L M

H; M in New Ireland, East New Britain West New Britain Manus Britain, Britain, M; H in western, south western Mindanao L M L M; H in north, north-east L M; H in southern three provinces L L L

EUROPE
Albania Andorra Armenia Austria M I M L L; M in north I M; H in Azerbaijani border areas L

94
RiskMap Report 2013 RISK RATInG FORECAST 2013

COUNTRY
Azerbaijan Belarus Belgium Bosnia and Herzegovina

POLITICAL RISK
M H L M

SECURITY RISK
M; H in Armenian border regions, Nagorno-Karabakh M L L

Security rating lowered from M The security situation has been improving. Despite political deadlock and 16 months of talks to form the central government, the security situation has not deteriorated. Ethnic violence is very rare; the continued NATO and EU security presence ensures that small-scale incidents do not escalate, though h these forces have not had to intervene to prevent violence for several years. Levels of both violent and d petty crime have also been decreasing and rates are lower than in other countries in the region. Bulgaria Croatia Cyprus Czech Republic Denmark Estonia Finland France Georgia Germany Greece M L L; M in TRNC L I L I L M; H in Abkhazia, South Ossetia L M L L L L I; L in Copenhagen, Aarhus L I L; M in deprived urban areas M; H in Abkhazia, South Ossetia L M

Security rating raised from L; M in Athens, Thessaloniki The continuing crisis has seen security threats manifest outside the traditional hotspots of Athens and Thessaloniki. While major violent protests and the use of explosive devices remain largely confined to those two cities, increased crime is affecting the country more widely, as are the effects of the increased popularity of extremist politics. Hungary Iceland M L L I

95
RiskMap Report 2013 RISK RATInG FORECAST 2013

COUNTRY EUROPE continued
Ireland Italy Kazakhstan Kosovo Kyrgyzstan Latvia Liechtenstein Lithuania Luxembourg Macedonia Malta Moldova Monaco Montenegro Netherlands Norway Poland Portugal Romania Russia San Marino Serbia Slovakia Slovenia Spain

POLITICAL RISK

SECURITY RISK

L L M M H L I L I M I M; H in Transnistria I M L I L L M M; H in north Caucasus I M M L L

L L; M in southern regions L L; M in Mitrovica, surrounding areas H L I L I L I L; M in Transnistria I L L I L I L M; H in north Caucasus I L; M in Sandžak, Preševo Valley L I L

96
RiskMap Report 2013 RISK RATInG FORECAST 2013

COUNTRY
Sweden Switzerland Tajikistan Turkmenistan Ukraine Security rating raised from L

POLITICAL RISK
I I H M M

SECURITY RISK
I; L in Stockholm and surroundings, Gothenburg, Malmö I H M M

The threat of serious and petty crime is high, with the situation aggravated considerably by corruption in government and the law-enforcement organisations. There has been a significant increase in the numbers of thefts, burglaries and frauds, as well as hate crimes against non-Slavic and religious minorities (especially Jews), since 2010. Four explosions blamed on political extremists in the eastern city of Dnepropetrovsk in April 2012 injured more than two dozen people, and highlighted deficient counter-terrorism legislation and responses. United Kingdom Uzbekistan L H L M; H in Kyrgyz,Tajik border areas, Fergana Valley

MIDDLE EAST AND NORTH AFRICA
Algeria Bahrain Egypt Iran H M M H H; M in main urban centres, southern oil-producing areas M M; H in North Sinai L; M in Sistan-e Baluchistan, Khuzestan, Kordestan, Kermanshah, West Azerbaijan provinces E; M in Kurdistan region; H in Kurdistan region borders, south L, M on Sinai border L; M on Syrian border L M; H in Tripoli, Bekaa, northern border with Syria H H; E on border with northern Mali L; M in Western Sahara

Iraq Israel Jordan Kuwait Lebanon Libya Mauritania Morocco

H L M M M H M L; M in Western Sahara

97
RiskMap Report 2013 RISK RATInG FORECAST 2013

COUNTRY

POLITICAL RISK

SECURITY RISK

MIDDLE EAST AND NORTH AFRICA continued
Oman Palestinian Territories Qatar Saudi Arabia L H in West Bank; E in Gaza L L L M in West Bank; E in Gaza L L; M in Qatif

Security rating lowered from M The security environment has improved gradually over the past several years, resulting from the government’s response to homegrown terrorist groups and, more recently, threats stemming from neighbouring Yemen and Bahrain. Nevertheless, while external threats, particularly from Yemen-based militants, will persist, Saudi Arabia will also face continued unrest in the Shia-majority Eastern Province, particularly Qatif, where social unrest increased in 2012 and is likely to persist in 2013. South Sudan Sudan Syria Security rating raised from H The Syrian crisis has evolved into a full-blown civil war that is set to intensify in 2013. The Assad regime may hold on to power for some time, but will not be able to restore stability or lead a resolution to the conflict. Absent the ability or willingness of any external forces to engage constructively in the conflict, the state will continue to fragment. The disintegration of the security environment and emergence of local power vacuums will see the continued proliferation of competing interest groups and armed militias vying for control over territory and strategic infrastructure. Tunisia Turkey United Arab Emirates Yemen M M L H L; M in Sfax, Sidi Bouzid, Jendouba, Kasserine, Gafsa, Gabès, Tozeur, Kebili, Medenine, Tataouine L; M in Istanbul, south-eastern cities; H in eastern rural, border areas L H; E in southern provinces H E E M; H on Sudan border M; H in South Kordofan, Blue Nile states; E in Darfur E

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