RiskMap 2011

Managing Risk | Maximising Opportunity

Published by Control Risks, Cottons Centre, Cottons Lane, London SE1 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, 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 2010. All rights reserved. Reproduction in whole or in part prohibited without the prior consent of the Company.

TAbLE of ConTEnTS
WelcOMe tO RiskMap 2011 1

the GeOpOlitics Of Business

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an uRBan WORld: the secuRity and OpeRatiOnal challenGes Of cities

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the GROWinG cOMpliance BuRden fOR Business

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ReGiOnal OveRvieWs Africa: Election fever Americas : The drugs trade Asia: Competitive neighbours Europe: Geopolitics revived Middle East: In the balance cOntROl Risks’ statistics Kidnap Piracy Risk ratings Risk RatinG fORecast 2011

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WELCoME To RISkMAP 2011
RICHARD fEnnInG, CHIEf ExECUTIvE offICER

If we could see the future, it would be Asian and urban. Since 2008, the majority of the world’s population has been living in a city, and by 2050 only a quarter of us will be clinging to life in the countryside. The rise of the mega-city, particularly in India and China, is one of the most exciting but challenging social transformations of our age. by 2025 there will be 11 cities in Asia with populations over 20m people. The risk consequences are significant. Crime, corruption, chronic poverty and extremism all prosper when rapid urbanisation is not matched by well-planned infrastructure and good governance. The population of the world’s slums is growing by 25m each year. Doing business successfully in these new environments will demand re-thinking all aspects of our business processes; none more so than the management of risk. This year’s RiskMap explores the consequences of long-term shifts in urbanisation. These are by no means confined to Asia, but inevitably India and particularly China seem to have a near monopoly on jaw-dropping statistics. And it is China that figures most prominently in our exploration of how the global geopolitical map is being redrawn. The economic resilience of the rising powers – so key in averting a global catastrophe during the financial crisis – is now reflected in the conduct of international affairs. China, India, Russia, brazil and Turkey are all, to varying degrees, shaping the way the world is run and want to influence how we fix its problems. Much has been written about the perils of this new multi-polar world where newly self-confident powers jostle for strategic advantage over scarce resources. but a better balanced distribution of power, more accurately reflecting global economic gravity, might bring a new perspective and determination to break political logjams. If 54% of the world’s urban population will live in enormous Asian cities by 2050, then fixing carbon emissions, for instance, stops being a multilateral problem and becomes a national imperative for the countries concerned. So there is some room for long-term optimism. but not yet. 2011 will see few – if any – successful resolutions to the most pressing political and security problems. In the Middle East, the uneasy tension stemming from a decade of war, political dislocation, nuclear ambitions and Islamist militancy will continue, and Iran will remain the preoccupation of US foreign policy in the
cOntROl Risks riskmap 2011

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region. Military action against Iran remains unlikely in 2011, but the stakes are high and we should remain vigilant. Iraq still faces political and security challenges, but its longer-term trajectory is positive. Africa is gripped by election fever. national elections in 20 countries are scheduled for 2011. While in some cases this might rightly be a cause for celebration, in others it will increase tension and the possibility of unrest. In nigeria, Goodluck Jonathan’s formal assumption of the presidency in the wake of Umaru Yaradua’s death upset the unwritten agreement whereby the presidency rotated between north and south, so the 2011 elections will be even more highly charged than usual. but nigeria’s resilience and ability to find imperfect short-term fixes to seemingly intractable problems are likely to ensure that a major crisis is averted. In Latin America, Mexico will remain in the grip of its drug wars. The brutality of the violence and its proximity to the US mean that this issue will dominate the headlines. The curse of cocaine affects not just Mexico but the wider Central American and northern South American region, obscuring better news further south. but Mexico remains a stable state and is not about to fail, despite the severity of its problems and the predictions of many analysts. Much of Europe will be gripped by deficit reduction, encouraging national introspection. There will be little scope for intra-EU bonhomie: it will be too tempting for commentators not to portray next year as the prudent Germans imposing some moral rectitude on the profligacy of their southern neighbours and allies. Russia’s improved relations with the US should continue, and by the end of the year we should know the next twist in the Putin-Medvedev psycho-drama and who will be the next president. While conditions for doing business in Russia have undoubtedly improved in certain sectors, and the country continues to present some impressive opportunities for adventurous and resilient investors, companies will still be forced to contend with corruption, weak infrastructure and lumbering bureaucracy. China’s role in the world is the story behind nearly all the major themes for next year and it dominates the thinking of her near neighbours. That China is the regional power is beyond dispute, but relations remain cordial at best and are more often characterised by a persistent prickliness. China’s historic reluctance to take an active foreign policy stance beyond protecting its immediate national and economic interests will start to shift. China will be less passive and ambiguous, and more explicit and assertive in its dealings with us all. Corruption will be the most pervasive operational risk in 2011. The new evangelism with which the foreign Corrupt Practices Act (fCPA) is being enforced in the US is likely to intensify. With stringent laws being enacted elsewhere (the Uk bribery Act, which will come into force in 2011, is the fCPA on steroids), corruption should be emblazoned across all corporate risk registers. Good intentions are not enough; the new global enforcement regime

requires boards to actively demonstrate real compliance through the tangled web of joint ventures, agency agreements and distributors that is the everyday reality of transnational business. It all sounds rather grim. As ever it is important to emphasise that the world is more open for business, more pregnant with opportunity than ever before. Hardly anywhere is beyond the reach of ambitious companies. kim Jong-un’s nervous appearance alongside his ailing father at north korea’s recent military parade might even mark a glimmer of hope that one of the last outposts of totalitarian seclusion could change, perhaps for the better. Like most political leaders, US President barack obama is finding that domestic politics can be a tough trade. With increased constraints on his ability to push through legislation at home, he will seek to regain momentum by chalking up foreign policy successes. The great advantage of international diplomacy over national issues for pressurised leaders is that almost everybody is pleased when you show up and nobody really expects you to succeed. So we should anticipate seeing more of obama on the global stage in the year ahead. There will be plenty for him to do. I hope Control Risks’ RiskMap 2011 provides you with a range of insights into the complex interplay of business and politics for the year ahead. The report demonstrates the considerable academic rigour we apply to shining a light on the world for our clients, which is complemented by our experience of working on the frontline in most of the featured countries.

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THE GEoPoLITICS of bUSInESS
JonATHAn WooD, SEnIoR GLobAL ISSUES AnALYST

intROductiOn The world’s rising powers are increasingly using their economic strength and resilience, starkly revealed during the global financial crisis and recession, to project global power. Their clout is reflected in major reconfigurations of global governance institutions, from the G20 to the IMf. They have become indispensable to tackling major strategic security problems. Yet it is through their intensifying economic relationships in particular that these key states are building and consolidating geopolitical influence, creating a new status quo beyond the influence of Western powers. China is well-known as a strategic investor, but regional powerhouses brazil, Turkey, Russia and India are also leveraging commercial diplomacy in pursuit of their geopolitical agendas. With commercial and strategic interests converging, it is increasingly important for businesses to understand and anticipate the impacts of geopolitical competition and co-operation.

chanGinG tiMes The rapid rebound and strong growth of emerging countries in the last year is fundamentally altering the global balance of power. This is largely – but not exclusively – a function of the rise of China, shown in its emergence as the world’s second-largest economy and the global leader in manufacturing, exports, carbon emissions, energy consumption and vehicle purchases. With China and the other G20 major emerging markets stripped out, the rest of the developing world’s share of GDP has barely budged in 30 years. Another significant factor is shifting global trade directions: the rise of ‘South-South’ trade and investment is fostering an emergent political order outside the institutional and geopolitical frameworks dominated by the West. Predictably, fundamental food, energy, mineral and water security concerns are firm features of the new balance of power. Emerging markets are smartly availing themselves of opportunities in resource-rich countries that mature economies have ignored or marginalised. The new powers are also beginning to contest
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SHARE of WoRLD PPP GDP, 1992 vs 2011

stRateGic diplOMacy and GlOBal secuRity cO-OpeRatiOn The best examples of strategic diplomacy in action come from the arena of global security co-operation. The bilateral, regional and global diplomatic manoeuvres of the last few years are signalling a shift in emphasis away from the decentralised non-state threats, such as terrorism, that have dominated since the September 2001 attacks. The focus is back on state-centred threats: nuclear weapons, cyber-war, regime collapse and territorial disputes. If the ‘war on terror’ was largely driven by the sole superpower cajoling countries to ‘get with the programme’, the emerging, ad-hoc security architecture reflects the growing relevance of new stakeholders. In 2011, for the first time ever, all the bRICS (including South Africa) and most of the world’s leading military powers (see chart below) will be on the Un Security Council at the same time. This will provide a natural experiment to gauge how leading powers approach global security management and, in particular, how the five permanent members will adapt to the critical mass of brazil, Germany and India, all of which are seeking permanent seats.

1992 world GDP $24.27tr

Source: IMf World Economic outlook

ToP TEn MILITARY SPEnDERS 1989-2009

influence in established and frontier production zones alike. The transformation of major emerging countries into urbanised, industrial powerhouses poses significant social, environmental and political challenges, on top of the pressing economic need to fuel growth with an ample supply of natural resources. How established powers respond to the rise of emerging countries will shape the global business environment, both next year and over the long term. The US under President barack obama has set an encouraging example, privileging pragmatic ‘engagement’ with rising powers over ideological, unilateral action. Its foreign policy has been dictated by the need to enlist rising powers in responding to the financial crisis, managing the denouement of wars in Iraq and – soon – Afghanistan, and containing nuclear proliferation. Yet the consensus behind co-operative engagement abroad is under severe strain from economic malaise at home. It could crack under the weight of another downturn, lingering unemployment and a vocal political constituency convinced that globalisation is a zero-sum game. The co-operation and co-ordination that characterised the ‘crisis agenda’ could not last. A G20 that warded off trade protectionism has been less successful at preventing competitive currency devaluations. Well-meaning efforts to address global systemic risks – such as large US deficits, China’s huge surpluses and the failures of transnational banking regulation – have inevitably foundered on domestic political and economic priorities. Instead, we have seen a return to the days when significant decisions, from Greece’s bailout to sanctions on Iran’s nuclear programme, are being made late at night behind closed doors, by leading powers brutally assessing their national interests.

Source: SIPRI

The return to strategic diplomacy is clearest in the US, which has seen its freedom of global action curtailed by a combination of the fallout of the Iraq war, dire economic and fiscal pressures at home, and emerging states with independent agendas. Unparalleled US hard power has been severely curbed by the erosion of its international prestige and moral authority on a range of issues, from human-rights violations during the war on terror to the traumatic implosion of ‘Anglo-American’ finance. However, the obama administration’s engagement offensive has achieved significant diplomatic success on a range of issues, from global governance reform to arms reduction and nuclear nonproliferation. With partisanship in the next Congress likely to paralyse US domestic politics, there is a good chance that obama will become much more of a foreign-policy president for the remainder of his first term. Hard-won victories will encourage continued pragmatism in US foreign policy, but some nuts may prove too tough to crack. Concerns that the planned US and nATo drawdown in

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Afghanistan will embolden the Taleban and other Islamist militants in the region appear increasingly well-founded. outside Pakistan and Iran, few regional or global stakeholders appear interested in engaging (though China’s massive mining investment in Logar province is a potential beachhead). The drumbeat of transnational terrorist plots originating in the Afghanistan-Pakistan border region, affecting the US, Europe, Central Asia and elsewhere, will certainly force the US and nATo to remain engaged for years to come. The odds are also long that the relaunched Israeli-Palestinian peace process will succeed by the self-imposed August 2011 deadline. Even so, obama has invested significant political and diplomatic capital in the talks, and can be expected to keep driving them, though recalibrating expectations will become a feature of the process as the deadline nears. Iran, meanwhile, remains defiant in the face of increasingly harsh international sanctions. While crimping its overall economic performance, the sanctions are likely to be consolidating the control of the Iranian Revolutionary Guards Corp (IRGC) over key industrial sectors. Start-up delays at the controversial bushehr nuclear plant, variously attributed to industrial sabotage or containment problems, are likely to be overcome by early 2011. According to the International Atomic Energy Agency (IAEA), enrichment-related activities continue apace at other locations. While the endgame timeline remains fluid and an eleventh-hour détente is possible, $120bn in planned US military assistance to Gulf Arab countries and increasingly overt discussion of the ‘military option’ sing a different tune. We continue to believe that a US or Israeli strike is unlikely in 2011 – risks outweigh rewards in the absence of confirmed intent to weaponise – but the situation is conducive to abrupt reappraisals. The world’s other major nuclear threat – north korea – presents an entirely different set of issues. The anointment in late 2010 of kim Jong-un as probable successor to Dear Leader kim Jong-il has cast the country’s upcoming political transition into sharp relief. The sinking of a South korean frigate in March 2010, attributed to a north korean mini-sub torpedo, has ratcheted up peninsular tensions to their highest level since the north’s 2009 nuclear test. Consequent joint US-South korean naval exercises have fed into the slow-burning confrontation between China and the US over regional maritime security and freedom of navigation. While north korea can be expected to muddle through – regime collapse is unlikely – it will continue to rattle regional stability and necessitate robust engagement by the six-party powers (north and South korea plus the US, China, Russia and Japan). one of the brightest spots on the global security horizon is the phased withdrawal of US military forces from Iraq, which is expected to conclude with the completion of operation new Dawn by the end of 2011. While Iraq is still racked by periodic bloodshed and enervating political uncertainty, the vicious cycle of violence has been conditionally replaced by an institutional political process backed by massive oil and gas investment. few will tout ‘mission accomplished’ in 2011, but Iraq no longer consumes the geopolitical landscape as it did a few years ago. Conversely, cyber-security has leapt up the national security agenda and will become even more significant in 2011. While

cyber organised criminal groups and malicious hackers continue to pose a major and growing threat to business, governments are increasingly hyping cyber-warfare and cyber-espionage threats from state or state-sponsored actors. Several states – notably the US, China, Russia, france and Israel – are widely believed to possess sophisticated cyber and electronic warfare capabilities, built in part through liaison with patriotic hacker undergrounds. While state capabilities have been developed covertly over many years, the US has led the way in openly militarising national cyber-security with the launch of a dedicated Cyber Command (CYbERCoM) in 2010, reflecting both routine attacks on defence systems and the growing reliance of military platforms and critical infrastructure on digital networks. both the US and the Uk have recently made cyber-security a central element of revised national security strategies. The large-scale cyber attacks on Estonia (2006), Georgia (2008) and Western technology companies (2009) raised thorny questions about how to identify an attacker, determine the level of state involvement and craft an appropriate response. The asymmetrical advantages of cyber-attacks were acutely demonstrated in 2009 when militants in Iraq used a $26 programme to hack the unencrypted video feeds of US surveillance drones. finally, the disclosure in 2010 of sophisticated, ‘military grade’ malware targeting the control systems of critical infrastructure – still unattributed – suggested that cyber-attacks could cause real-world damage to nuclear plants, oil and gas refineries, and water and sewage systems. As these cases suggest, the low cost, global reach and – above all – anonymity of cyber attacks significantly complicate the traditional geopolitical landscape.

the Rise Of cOMMeRcial diplOMacy While the US devotes its efforts to global security, rising powers are rapidly reconfiguring the basis of global economic power. It is increasingly rare to see emerging-country leaders such as Turkey’s President Abdullah Gul without a bevy of investors and corporate executives in tow, or returning from a diplomatic mission without billions in trade deals. The increase in trade and financial ties between emerging economies has clear strategic implications: brazil demurred in late 2010 when asked to be part of a G20 campaign to pressure China on its currency, not wanting to jeopardise relations with its new number one trade partner. In the last ten years the direction of trade among major emerging economies has starkly reversed. Where the US and Europe were once centres of gravity, now China, the UAE, Russia and other emerging powers are the key hubs in the global trading system (see map overleaf). Even where the US, Germany or Japan remains the major trade partner – as in Egypt, Turkey and Indonesia respectively – China, Russia or another fast-growing economy is inexorably nipping at their heels. Such burgeoning South-South economic relations are the building blocks of a new geopolitical agenda, inexorably in competition with Western-dominated institutionalism, founded on commerce, sovereignty and national interest.

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ToP TRADInG PARTnERS of MAJoR EMERGInG MARkETS, 2001 vs 2009

Source: International Trade Centre

Looking at four key examples: Brazil Argentina and brazil may both represent South America in the G20, but the continent’s most populous country and largest economy clearly desires the starring role – and wants to lead the region out of the US’s shadow. outgoing President Luiz Inacio Lula da Silva has been the architect of brazil’s extroverted foreign policy, conspicuously courting anti-US regimes both in the region (venezuela, Cuba) and beyond (Iran). Such moves are in part about commercial ties: the country has become one of Iran’s most significant trade partners, exporting more than $1bn in foodstuffs in 2009. brazil accounted for most of Latin American outward fDI over the last five years and its companies, especially in construction and real-estate industries, are major players throughout the region. flagship oil company Petrobras is investing billions of dollars in Argentina, among other countries. Economic ties with China are also intensifying. A Chinese-financed $2.5bn port complex and $5bn steel foundry at the port of Açu near Rio de Janeiro followed a $10bn oil-supply agreement in 2009. Such mega-deals are a tribute to brazil’s economic growth and geopolitical ambitions, and will help cement relations with other rising states. Turkey The crisis and recession have been pivotal factors in Turkey’s emergence. Gul is reportedly fond of noting that his country has gone from being the ‘sick man of Europe’ to one of its healthiest economies, with bonds in late 2010 rated above those of Spain, Italy and Portugal. This newfound economic

power is a platform for building commercial ties to the Middle East – especially in Syria, Iran and Iraq – while keeping a foot in Western projects like nATo and the EU. Turkish companies have piled into the kurdish region of northern Iraq, dominating both construction, and oil and gas production, and making the region one of Iraq’s most prosperous. In exchange, Ankara gains increased flexibility in dealing with kurdish separatist insurgents in eastern Turkey. Meanwhile, Turkey and Iran have found common ground on kurdish separatism, and are strengthening commercial ties. The US has raised concerns that Turkish banks may be filling the void for Iranian transactions as sanctions curtail traditional financial centres. Turkey has also sought to increase its strategic importance by strengthening its role as a natural gas ‘energy bridge’ to the EU through projects such as nabucco, a multi-country pipeline connecting Central Asian gas to Western Europe, which is expected to reach a final investment decision in early 2011. Russia Russian assertiveness has mellowed after both thwarting a US missile shield and defending its commercial interests in Iran. Its invasion of Georgia in 2008 – the only interstate conflict since the start of the Iraq war in 2003 – faced only rhetorical Western resistance. The disclosure in August 2010 of an anti-aircraft missile battery in Georgia’s breakaway Abkhazia region has been met with studious blasé. Relations are tightening with Central Asia – especially kyrgyzstan – while a pro-Russian government is again installed in Ukraine. The exigencies of firming up the energy-security relationship with Europe have encouraged softer rhetoric on both

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sides and progress on major pipeline projects such as nord Stream. Russia has started to encourage foreign participation in its oil and gas sector after years of hostility, which could further strengthen ties with the US and Europe. India buoyed by years of rapid economic growth, India alternates between confidence that it will gain greater representation on international security and financial organisations, and frustration that progress is not fast enough. India has successfully cultivated its indigenous technology and back-office support industries. Conglomerates such as Tata Group, Reliance, bharti Enterprises and ArcelorMittal are rapidly internationalising, capitalising on successes at home to expand and acquire interests around the world – though they still lag behind their state-backed Chinese counterparts. Similarly, foreign multinationals are eyeing India as one of the largest upwardly-mobile consumer markets in the world. However, problems closer to home might undermine India’s global ambitions. Troubled relations with its neighbours, including but not exclusively Pakistan, are a persistent problem for Delhi, preventing it from tackling serious challenges such as climate change, terrorism and organised crime. India’s quarrels have also allowed China to compete more effectively in its backyard, in Pakistan, Sri Lanka and elsewhere. Equally, India is eyeing every move of the US, whose relations with Pakistan and posture in Afghanistan continue to vex Delhi. Sustaining warmer US relations remains a top priority – periodically advanced by bilateral efforts such as nuclear co-operation and naval training exercises – but India will be anxious to retain its independence. old friends like Russia will not be cast aside, as illustrated by the weakened but still deeply entrenched defence relationship.

‘Middle East of rare earths’, in Deng xiaoping’s phrase. An increasing number of countries are concerned about securing supplies to fuel domestic industry: Germany sees rare-earth scarcity as a long-term vulnerability for national champions like Siemens and bosch; Japan and China clashed in late 2010 over disruption that threatened the supply chains of Toyota’s and Honda’s hybrid-electric vehicle manufacturing. The US Government Accountability office (GAo) has assessed that China’s dominance of rare earths gives it ‘market power’ over major US defence contractors, including Lockheed and General Dynamics. As these examples suggest, access to rare earths is becoming a geopolitical issue in its own right: any export restrictions, price hikes or other disruptions threaten to become sources of bilateral or multilateral tension and fuel simmering trade conflicts. Yet the strategic elevation of rare-earth elements – as well as scarce and concentrated minerals such as lithium, cobalt and coltan – will also drive new exploration worldwide as countries look to diversify and stabilise supply. Germany, for example, has called for Europe to explore and develop prospective resources in Eastern Europe and Central Asia, partly to pip China to the post. Higher prices have also encouraged Australia, vietnam, Malaysia, Canada, brazil and India to develop projects. Greenland even overturned a longstanding ban on uranium mining in 2010 to permit access to a rare-earth deposit. In the coming year, we anticipate new opportunities for miners of rare earths and other unique minerals, which could provide a boon to several mineral-rich countries and help tame geopolitical concerns. South China struggles natural resources are also at the centre of longstanding territorial disputes in the South China Sea. In addition to rich fisheries, there may be substantial energy deposits. Estimates vary widely – the US pegs it at 28bn barrels of oil, while China believes as many as 213bn barrels may be recoverable – but prospects appear promising. brunei and Malaysia have been successfully exploiting offshore oil and natural-gas fields in the adjacent brunei-Sabah basin for more than 30 years. Claims on these potential subsea resources, including those made under the Un Convention on the Law of the Sea (UnCLoS), often include disputed territory, such as the Spratly and Paracel island groups. for years, provocative fishing and offshore exploration activities have tested neighbourly tolerance in efforts to create new facts on the ground, though the overall stalemate has barely budged. With China adopting a more muscular naval posture, however, the stakes are rising. The Association of South-East Asian nations (ASEAn) has tentatively welcomed US intercession on behalf of multilateral solutions to territorial disputes, leveraging its core strategic interests in Taiwan and freedom of navigation in the South China Sea. The extra-regional dimension complicates things: cooler heads are likely to prevent any major naval escalation, but considerable uncertainty will continue to plague exploitation of the sea’s resources. Cash in the Arctic

eMeRGent ResOuRce cOMpetitiOn natural-resource competition is the essential ingredient of classical geopolitics. but one interesting aspect of today’s chief resource contests is that they barely existed 20 years ago. Concerns about access to rare earth minerals are driven by new and growing markets for iPods, computer hard drives and electric car batteries – and the expectation that green technologies will generate future economic growth and jobs. Longstanding maritime territorial disputes in the South China Sea are suddenly more pressing, in part because China’s growing naval power is forcing the issue, but also because innovations in deepwater offshore drilling and mining technology might open up commercial oil, gas and mineral deposits. finally, growing interest in the Arctic is a function of both deepwater technology and the very recent and continuing effects of a warming climate. In all these cases, companies are among the first to be affected by geopolitical confrontation, often becoming proxies of strategic interests. Rare earth The commercial and strategic value of rare-earth minerals, used in a variety of high-technology applications, has surged with China’s moves to curb exports. The country is the largest global supplier – the

Accessing Arctic resources presents a rosier picture. one of the most promising frontiers for energy, minerals, fisheries, water and trade routes, it is slowly – and controversially – being prised open by climate change and geopolitics. The melting of the Arctic
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ARCTIC: MARITIME CLAIMS AnD boUnDARIES, AnD UnDISCovERED oIL

Source: Durham University International boundaries Research Unit; US Giological Sur vey

icecap could unlock historic energy and mineral exploration opportunities: undiscovered resources are estimated at 90bn barrels of oil and 47bn cubic metres (bcm) of natural gas. Countries are already jostling for the day when weather conditions permit long-term projects. Russia provocatively claimed half the Arctic in 2001 and planted a flag on the seabed using a robotic submersible in 2007. Its dispute with Canada and Denmark over

the Lomonosov Ridge is being decided through Un arbitration. The US and Canada, meanwhile, are investing in robotic submersibles, seaplanes, ice-hardened cargo ships and ice breakers, and folding the prospective north-West Passage into long-term military planning. These manoeuvres suggest conflict, but Arctic issues provide one of the most durable patterns of geopolitical co-operation through

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the semi-formal Arctic Council and other multilateral bodies. Russia and norway recently reached an accommodation on sharing the barents Sea, which should facilitate future natural gas projects in the mould of Snohvit and Shtokman. furthermore, nordic countries have long co-operated through the nordic Council, settling many territorial disputes in the 1990s. Canada has become more explicit in its Arctic sovereignty claims, but is making progress on resolving a longstanding territorial dispute in the beaufort Sea with the US. While the Arctic will inevitably become an area of significant competition, the progressive resolution of disputes will help reduce geopolitical risk in the future.

retaliatory attacks. However, few bilateral disputes currently have the potential to lead to a full-scale conflict. Despite increased geopolitical assertiveness, rising powers are acutely sensitive to the sentiments of the global marketplace and are unlikely to allow anything to escalate that may damage investor perceptions. The same calculus does not necessarily apply to situations like Iran and north korea, which are relevant primarily through the impact that any instability or conflict would have on business operations in neighbouring countries. In the case of Iran, a conflict would provoke a sharp increase in regional risk premiums and have a dramatic impact on global oil, currency and equity markets, with significant adverse effects for businesses worldwide. Monitoring security relations between countries is also relevant in the context of trans-border security issues: the strong political and treaty ties between the US and Mexico, for example, are instrumental in reducing the risk of harmful border closures on the back of continuing violence. High-level political risks are equally significant. Growing assertiveness abroad tends to go hand in hand with indigenisation of the business environment at home, both to shore up supportive political constituencies and provide a firm foundation for projecting state power. Such moves are not always overly harmful to the business climate or investor sentiment – brazil’s move from a concessionary to production-sharing oil and gas regime is a good example – but are always worth monitoring for implications that might affect contractual security or lead to creeping or overt expropriation. Such political risks can also be transnational, as when government policies hit international supply-chain integrity and continuity (export bans, restrictions or tariffs) or subject investments to adverse scrutiny or strict conditions (such as mandatory partnerships with state-owned companies). This is particularly the case when investing in sensitive sectors such as oil and gas, mining, aerospace, infrastructure, IT and telecommunications, aviation and a handful of others subject to government review in many countries. Transnational operational risks are often less overt – except in the case of legal sanctions – but also significant. Governments often exert pressure on neighbours and trade partners by slowing customs processing, refusing visas, delaying letters of credit and so on. Many such policies remain unofficial and are rarely articulated, making it essential to get first-hand information about the situation. Even if such activities are not state-directed, a geopolitical dispute may affect business relations: China has acknowledged, for example, that traders incensed at Japan’s detainment of a Chinese fisherman in late 2010 may have independently slowed or delayed exports. The threat or implementation of formal sanctions and extraterritorial legislation, meanwhile, can significantly raise the costs of doing business in affected countries, both in terms of access to financing and complying with controls. Understanding how both the public and private sectors will react to geopolitical events can provide critical early warning to prevent business disruptions.

accOuntinG fOR GeOpOlitical Business Risk business is at the heart of the current geopolitical transformation. key emerging countries are building political capital with their neighbours and around the world through strategic investments and increasingly dense commercial partnerships. State-backed banks, investment vehicles and resource companies are obviously integral to this strategy, and have generally received a warmer welcome in other emerging and developing economies than in Western countries. The private sector has blazed trails of national interest: emerging-market positions on trade policy, climate change and financial reform have been strongly informed by industry imperatives. furthermore, in many contexts there may be little differentiation between private-sector and national interests given the close relationship between political and economic elites. Western investors are supplying much of the capital, skills and technology powering emerging-economy development, increasingly joining their emerging-country peers, including state-owned enterprises, to forge world-class partnerships. The interlocking of state and business naturally creates opportunities and risks for business: on one hand, state interest can secure high-level diplomatic cover, shield companies from adverse regulation, offer recourse to international arbitration and provide access to low-cost financing. Mutual business interests have been a catalyst for geopolitical co-operation, helping to reduce risks for investors across the board in some regions. on the other hand, companies inevitably become tangled in a web of geopolitical manoeuvring. This ranges from reluctance to allow investment in ‘strategic’ assets to outright sanctions and prohibitions on doing business in certain countries. Doing business in many emerging countries often means working directly with the government in one form or another, exposing companies to a range of political, reputational and legal risks. With states increasingly interested in pushing their agendas through commercial channels, it is essential that companies understand the relationships between states and assess their exposure to geopolitical risk. navigating the changing geopolitical risk landscape begins with a clear assessment of transnational security, political and operational exposure. first-order security risks, including war and transnational terrorism, are obvious but not always paramount. Unauthorised border incursions or other territorial violations remain points of tension that can result in border closures, social unrest or

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An URbAn WoRLD: THE SECURITY AnD oPERATIonAL CHALLEnGES of CITIES
JAMES SMITHER, DIRECToR, ConSULTInG PRoJECTS JonATHAn WooD, SEnIoR GLobAL ISSUES AnALYST

More than half of the world’s population lives in cities; by 2050, the figure will reach 75%. for most businesses, the risk landscape of the 21st century will be urban. but the rapid growth of new and old cities has not been orderly. Governments around the world are struggling to provide sufficient security, safety, infrastructure and economic opportunity for citizens and companies alike. To fully capitalise on the colossal opportunities that cities offer, companies need to understand the risks that modern and rapidly expanding cities pose to personnel, assets and investments: from corruption and crime, to natural disasters and power cuts, to terrorism and social unrest.

tijuana Semi-arid and ranged between steep hills and canyons, the city of Tijuana in north-western Mexico highlights many of the challenges and contradictions of the 21st-century city. Its population of around 1.5m rises to more than 5m when combined with the metropolitan area of San Diego, its US twin to the north. Urban settlement in Tijuana only really began in 1889. Its first century had a strong cosmopolitan flavour, with one of the continent’s largest Asian populations and a heavy reliance on tourism from and trade with the US state of California (at its peak, the city sees 300,000 border crossings per day). Growth accelerated exponentially when free-trade agreements signed by the US and Mexico in 1994 catalysed the opening of more than 800 maquiladoras (factories) producing cheap manufactured goods for US consumption, attracting an average of 80,000 new immigrants per year. More recently, the city has become synonymous with the darker side of globalisation and modern urban living. It is notorious for the lawlessness, violent crime and money-laundering associated with the illegal drugs trade. It is suffering unemployment as manufacturing relocates to cheaper markets in Asia, and faces growing vulnerability to rising sea levels and earthquakes as low-income districts sprawl in to increasingly marginal and unprotected areas. Tijuana’s story – in which globalisation’s attractions (cheap labour, lower taxes, proximity to major markets) collide with its drawbacks (insecurity, organised crime, tainted money) – speaks to a wider

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pattern of risk and opportunity that is mirrored throughout the cities of the emerging world. Cities are the main markets, the most obvious headquarter locations, the primary sources of labour and the key drivers of growth for most corporations. They also represent the primary threat environment for businesses to understand and address if they are to protect their assets and reputation, and maximise their revenues in the decades ahead.

Much of this urban population is poor. The Un estimates that by 2035 at the latest, the majority of the world’s poor people will live in cities. The population of the world’s slums is growing by 25m people every year; there could be 2bn slum dwellers by 2040. by 2020, the poor could comprise 45% or even 50% of the world’s urban population. In the poorest areas of Calcutta, the average number of inhabitants per room is 13.4; Mumbai’s Dharavi slum, possibly the world’s most densely populated location, is estimated to contain 18,000 residents per square acre.

a Rapidly uRBanisinG WORld The world’s urban population grows by 1m people a month. Although tempered by deaths and outward migration, around 70m people move from rural to urban areas every year – equivalent to 1.4m every week, 200,000 per day or 130 every minute. London’s population grows by six people per hour, new York’s by 12, Dhaka’s by 50 and Lagos’s by 58. According to the London School of Economics, 86% of more developed and 67% of less developed countries’ populations will live in cities by 2050. That year, 40% of the world’s population will live in cities with more than 1m inhabitants, 10% in cities of 10m or more. In 1950, there were 86 cities in the world with a population above 1m; by 2015 there will be at least 550. With population growth in oECD countries largely stagnant, urbanisation will become an increasingly emerging-market phenomenon. between 2010 and 2050, the urban population in Africa will treble, and in Asia it will more than double. by 2050, 54% of all city-dwellers will live in Asia and 19% in Africa. In 2025, 13 of the world’s 15 biggest cities will be in Asia, Africa or Latin America; Asia may have ten ‘hypercities’ (with populations of more than 20m inhabitants). Dhaka, kinshasa and Lagos are all approximately 40 times larger in 2010 than they were in 1950. The expanding agglomeration of merging cities around Mexico City could reach around 50m by 2050 – equivalent to 40% of the country’s entire population. DISTRIbUTIon of WoRLD URbAn PoPULATIon 1950-2050

São Paulo is already one of the world’s largest cities

GOveRnance challenGes The sobering reality behind the statistics is a monumental governance challenge. Unconstrained urban growth typically outstrips the pace of formal housing supply, creating vast populations of unregistered new inhabitants with no formal property rights, often living in marginal areas. Struggling to cope with the fiscal, logistical and architectural problems of rapid growth, city governments and local business elites find themselves drawn into confrontation. This can be seen in the use of security agencies as agents of social control, rather than citizen protection: for example through slum clearances or a quasi-military approach to law enforcement. More subtly, but equally dangerous to the reputation of investors, local political-business elites and organised crime groups use political power to control votes, manipulate real-estate prices or streamline drug-distribution networks. kingston (Jamaica) and Mumbai provide multiple examples of such collusion in various forms. Mega-cities often account for a sizeable or even majority share of their country’s GDP, but the scale of their formal economies is often dwarfed by their informal markets. Most new economic activity in emerging markets comes from urban employment that is mainly or entirely outside the formal economy. Estimates for the proportion of urban inhabitants operating in this unregulated sphere include more than 50% in Jakarta; 60%-75% in Dhaka, khartoum and cities across Central America; and 75% or more in karachi. kinshasa, where fewer than 5% of residents are estimated to earn a formal salary, is an extreme case. This informal sector generates numerous threats to business. These include rampant counterfeiting and other intellectual property infractions, while poor working conditions or child labour
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Source: Un Department of Economic and Social Affairs

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MEGA-CITIES In 2025

Source: Un Department of Economic and Social Affairs

can pose acute reputational threats to supply chains. Cities’ informal sectors are fertile breeding grounds for serious organised crime gangs; serve as convenient vehicles for money-laundering; and provide ample fuel for nepotism, tribalism and corruption, which also impinge heavily on formal business operations. The combustible juxtaposition of wealth and poverty, absolute power and abject powerlessness helps cities to become fertile grounds for political uprisings. This is not new: the 1979 Iranian revolution is the most dramatic example. but the numbers involved and the government’s lack of control over large areas of the urban space is new. Madagascar’s president was ousted in 2009 by a leader manipulating a marginalised, youthful urban constituency in low-income districts of the sprawling capital. Modern communications and social networking allow unrest to spread quickly across multiple cities, creating dangerous dynamics for those in power. outbursts of violent opposition are more of a threat in cities where democracy is imperfect and formal checks on the exercise of political power, and a vibrant civil society to question its excesses and expose its flaws, are lacking.

systems and the voluntary separation implicit in suburban middle-class living – have fuelled largely unconstrained growth in road construction and traffic. This is taking place just as cities need fewer cars and more use of mass transit to alleviate pollution and congestion and to contribute to public safety. Mexico City’s rate of car ownership is double that of new York, with predictable results for traffic flow and air quality. Asian Development bank studies estimate that Jakarta – the largest city in the world with no subway – loses more than $3bn a year in productivity to traffic delays. Modern urban demographics place tremendous strains on power, water and sanitation. Inadequate sewerage and refuse-collection systems are an unpleasant but almost ubiquitous feature of emerging-market cities. Rubbish collection rates in Jakarta are around 60%, in karachi 40% and in Dar es Salaam as low as 25%. Experts estimate that 90% of Latin America’s sewage output is dumped untreated into streams, rivers or the sea. fewer than 10% of Manila households are connected to the city’s sewerage network, while kinshasa (with a population close to 10m) has no waterborne sewage system at all. Illegal tapping into electricity and potable water supplies in poor areas escalates prices paid by registered businesses and residents, disrupts reliability and quality of supply, and dramatically increases disease risks. The World Health organisation calculates that 30,000 deaths per day worldwide occur as a direct result of diseases stemming from poor sanitation – 75% of all human disease incidence. Around 40% of mortality in emerging markets

OveRBuRdened infRastRuctuRe Rapidly growing cities find their physical and social infrastructure placed under extreme stress. This presents a massive opportunity for construction, but the shortfall can impose serious constraints on day-to-day operations. The topography of the typical modern city – combining slum populations distant from public transport

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such as toxic waste dumping, building collapses, systematic arson and explosions associated with the unsafe management of chemicals. between 1976 and 2000, the incidence of man-made disasters increased tenfold. Although the precise science of climate change remains contested territory, increases in temperatures – and especially sea levels – may have severe effects on many urban regions. of the 33 cities expected to have populations over 8m by 2015, 21 are located in vulnerable coastal regions. Close to 100m people around the world live less than one metre above sea level, with coastal cities such as Cairo, Dhaka, Lagos, Mumbai, Rio de Janeiro, new York and Tokyo seen as especially vulnerable. As the last two of these cities illustrate, this is not just a problem in poor countries: in the Uk, around 15% of urban, built-on land (containing 1.85m homes and 185,000 commercial properties) is known to be at risk of repeated flooding. Reflecting a trend that runs entirely counter to those of the 18th and 19th centuries, many of the world’s mega-cities in Africa and Latin America in particular are deindustrialising rather than industrialising as they grow: urban growth occurs despite negative GDP performance, rather than because of positive growth. The associated destruction of productive agricultural land on cities’ outskirts, to be replaced with unproductive slum housing, is contributing to mounting global food security concerns (50,000 hectares of land per year are removed from food production in India alone), as well as associated social and security risks when food insecurity translates into violent urban unrest. Reinforcing the problem, peripheral land around cities’ fringes that is available for agricultural production is increasingly contaminated by urban toxic waste. Meanwhile, squatters on commercial or government-owned land in business and residential areas of cities will be a growing problem for property development and premises security. Slum clearances (such as those carried out in Harare, burma, Jakarta and beijing in recent years) create their own social, security and reputational problems for affected businesses – particularly where there is an underlying political / social-control agenda, as well as the more commonly voiced ‘beautification’ and ‘crime prevention’ justification.

Cairo exemplifies the operational complexity of the modern mega-city

is attributable to such conditions, with clear implications for the health of workforces in such locations. Less dramatic infrastructure interruptions can have a serious impact on commerce: interruptions to increasingly over-stretched and under-invested electrical power and telecoms infrastructure in urban centres is a key business continuity risk, as financial services companies in new York in 2003 and mining companies in South Africa in early 2009 learnt when those locations experienced massive power cuts (loadshedding).

natuRal and unnatuRal disasteRs Peripheral settlements combine lack of amenities with often perilous (brown-field) locations and may involve deforestation or reclamation of marginal land. They become not only a breeding ground for disease and infestations, but can also serve as catalysts for (and primary victims of) natural disasters such as fires, landslides or serious flooding. between 1974 and 2003, 6,367 natural disasters occurred worldwide, killing more than 2m people and disrupting the livelihoods of 5.1bn others at an estimated cost of $1.38 trillion. The concentration of human, physical and financial capital in cities renders them especially vulnerable to both immediate devastation and lingering disruption to transport, commerce and communications in the aftermath of major disasters. floods brought Mumbai to a standstill in July 2005, their effect exacerbated by antiquated drainage systems and unplanned development. Lima, Tehran and Istanbul are just three major developing-economy cities where earthquakes are expected to wreak major havoc in the next decade. for business, it is essential to consider resilience as well as risk: smaller or poorer cities are generally less able to cope with such incidents and slower to recover. The aftermath to Hurricane katrina’s destruction of large parts of new orleans in August 2005 illustrated the associated security concerns, even in developed countries. The socio-economic impacts of cities also create vulnerabilities to man-made hazards. Anecdotal instances include a Mumbai slum that extends so far into a designated national park that its residents are eaten by leopards (Quito and Istanbul have also spilled into national parks). favelas (slums) in São Paulo have completely surrounded and thoroughly contaminated a reservoir that provides 21% of the city’s water supply, and now requires 17,000 truck-loads of chemicals a year to keep its contents drinkable. outlying districts are also increasingly vulnerable to bhopal-style man-made disasters,

the viciOus ciRcle Of uRBan insecuRity Crime regularly features at, or close to, the top of surveys of city dwellers’ and companies’ primary concerns, and with good reason. According to Un data, 60% of all urban residents around the world were victims of crime of some sort between 2001 and 2006; the figure was 70% in both Africa and Latin America. A key driver of this trend – fuelling insecurity perceptions – is the influx of illegal firearms. The brazilian press estimates that Rio’s organised crime gangs own 1,500 rifles and machine guns, as well as grenades and landmines; the criminal firearms market in the city was in 2000 estimated to be worth $88.4m per year. Pitting such heavily armed criminals against city police forces that are often under-resourced – and almost always underpaid – creates huge potential for endemic corruption and the criminal subversion of law and order structures. This leads to police forces like those in the
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cities of kenya or Mexico, which often feature as perpetrators or protectors of criminal activity, rather than its opponents. In the face of persistent crime and other security concerns, cities have stratified and segregated – a process that generates tensions and risks for business. The extreme end of the spectrum includes cities that are historically divided for political, ethno-religious or other reasons, such as nicosia, beirut and Jerusalem. others are voluntarily dividing: South Africa’s commercial capital Johannesburg is perhaps the most notorious modern symbol of partition, with exclusive suburbs dotted with gated communities and street barricades, and armoured sports-utility vehicles cruising the roads. Its apartheid past and struggle with high levels of crime are extreme, but the trend of self-defence among richer inhabitants is visible in other, less crime-ridden conurbations around the world, including Paris, new York and Los Angeles. one sign of this trend is the prolific growth of the private security market. A study in South Africa suggests that the sector’s workforce increased 150% from 1997 to 2006, during which time police numbers declined 2.2%. Another study estimates that there are more than 35,000 privately owned armoured cars in brazil, a country where expenditure on the private security industry is estimated to be worth 10% of GDP.

present an ideal breeding ground for narcotics-linked organised crime and violence, and associated penetration into wider local political and business structures. organised crime bosses’ housing and social provision in Colombia’s cities amply demonstrates how state functions can be readily, if imperfectly, replaced by powerful criminal enterprises. As well as crime and corruption, the systemic law and order vacuums created by rapid urbanisation can shelter extremism. There is a strong correlation between poverty and urban terrorism: 85% of kenya’s population growth in 1989-99 was absorbed in the slums of nairobi and Mombasa – both of which have experienced terrorist attacks. Media reports following the May 2003 Casablanca terrorist attacks reported that the slum-dwelling perpetrators had never been ‘downtown’ before their suicide mission. Meanwhile, city centres – with highly concentrated populations, vulnerable mass transit systems and iconic buildings – are the favoured targets of such extremists. A form of ‘social Islamism’ is spreading in many parts of the Middle East, tacitly approved by governments and simultaneously a source of extremist activity at its fringes. It can often be seen as stemming from the failures of previous urban responses to poverty – socio-economic unrest, trade unionism and grass-roots community organisation (all often repressed by the states involved). Instead of purely social uplift agendas, these ‘ungoverned’ areas are liable instead to develop alternative and highly informal power and justice structures, and even entire social system counter-cultures – tolerated or even explicitly encouraged by urban governments incapable or unwilling to provide such amenities themselves. Examples include Wahhabi madrassahs educating thousands of children across East Africa and Pakistan, Hamas’ social systems in Gaza and Hizbullah’s in Lebanon. Despite the rhetoric of their informal governors, such districts are rarely ‘pure’, but are instead rife with corruption and nepotism, as well as the persecution of minorities who opt to remain outside the systems on offer. Weak or poor states often choose cohabitation or the de facto abandonment of these ‘grey areas’; others choose to invade them quasi-militarily, usually with mixed results (as seen in brazil and Syria). Either way, government responses that focus only on the symptoms of such ‘ungoverned spaces’ in their major cities (violence, crime, terrorism) rather than the causes (inequality, lack of social provision, social exclusion) will only ever have partial and short-term outcomes. The urban security problems that confront businesses on a daily basis will remain entrenched and could worsen over time, as well as catalysing organic responses such as lynchings and vigilantism, which complicate the overall security and governance environment.

unGOveRned spaces The most worrying trend has been the progressive retreat of government from under-serviced neighbourhoods and its replacement by informal systems of authority. In 2005, the world’s five largest ‘mega-slums’ (areas of continuous low-income housing) were all in Latin America (in Mexico City, Caracas, bogotá and two in Lima). Local sociologists estimate that up to 25% of the geographical area of cities such as Rio de Janeiro, São Paulo, buenos Aires, bogotá and Mexico City constitute zones where control is contested between state and criminal forces. businesses caught in such disputed ‘grey areas’ face clear operational and security challenges. However, even companies firmly ensconced within the ‘safe’ zone of such cities cannot ignore problems that arise in geographically or economically distant margins: such ‘ungoverned spaces’

uRBan Risk ManaGeMent few businesses will be able to ignore the cities of the emerging world – as target markets, manufacturing locations, R&D hubs or back-office destinations (or all of the above). operating in these complex and fast-evolving locations will be a necessity rather than a luxury for most companies. The threats they face also affect their

Slums in cities such as nairobi create complex social and security challenges

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The coping strategies of the inhabitants and architecture of the world’s teeming, growing, ever-changing cities – whether troubled sites like Tijuana or more successful examples – provide perhaps the most appropriate message for business planners: there is no substitute for detailed local understanding, adaptation, evolution and ingenuity if you are to survive and prosper in the face of an often hostile and always complex environment.

Asia’s mega-cities are a magnet for any business

workforce: quality-of-life concerns will have a growing impact on morale and retention for globalising companies. The initial corporate decisions relating to these locations are critical. key steps are: Conducting a detailed, city-specific assessment of potential threats and risks. Even while the business plan is being formulated, the teams involved need to evaluate and understand cities as risk landscapes as well as markets – with their own highly nuanced political/institutional, operational, disaster-propensity and security dynamics. obtaining objective, independent analysis and reliable data, differentiated down to neighbourhood or even street level, is far better than relying on subjective, media-influenced perceptions and generalisations. Equally important is rigorous threat analysis and benchmarking of the operational and security context when making decisions on location of premises and dealing with staff demands for housing. Performing rigorous due diligence on potential business partners, agents and powerbrokers in new cities. This is essential to avoid unwitting involvement in illegal or unethical practices linked to cities’ political/business and criminal/crony elites. Although the right connections can be advantageous in such locations, political allies can rapidly move from apparent assets to heavy liabilities. The most obvious or lowest-cost local service provider could be a front for organised crime and vehicle for money-laundering, the source of intellectual property theft, or a weak link for unethical behaviour in the supply chain and related nGo condemnation. building security and resilience into urban operations through good design and planning. Tailored security design and holistic security planning based on a thorough, forward-looking assessment of the local risk environment are also critical to business protection and success in the urban landscape. Architectural or behavioural amendments resulting from such a process are invaluable, not just to guard against targeted or collateral terrorism or crime threats, but also to build in resilience and a crisis management capability in the event of more general urban threats that are likely to become increasingly commonplace: political and socio-economic unrest, disease outbreaks, natural or man-made disasters and the infrastructure breakdowns that accompany them.
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THE GRoWInG CoMPLIAnCE bURDEn foR bUSInESS
kEITH MARTIn, vICE PRESIDEnT, GLobAL SERvICES

International companies face a daunting array of anti-corruption regimes. The burden is growing: 2010 has seen passage of the Uk bribery Act and some significant measures tucked away in the US’s Dodd-frank Wall Street Reform Act. In addition, US regulators have shown a growing willingness to use all the tools at their disposal to attack corruption. They have unabashedly employed techniques once reserved for organised criminals and stated their clear intent to prosecute individuals. Traditional anti-corruption programmes do not address the expanding risks from aggressive enforcement and a changing regulatory landscape. Companies will need to review and bolster compliance measures. but major national and extraterritorial regulations are often nebulous in their strictures, at times conflicting and unevenly enforced, while companies seeking detailed prescriptions from regulators will continue to be disappointed. All this means that a simple legalistic approach to corruption compliance will never be fully successful. We believe that international companies can continue to operate successfully, even through this period of dynamic change, but to do so requires a principles-based approach. Refining compliance programmes in this manner will help companies to protect their brand and reputation, while still hewing to the bottom line.

the us Gets tOuGheR Anti-corruption nGo Transparency International in July 2010 issued its sixth annual progress report on enforcement of the oECD’s Anti-bribery Convention. The number of nations practising ‘active enforcement’ rose from four to seven of the 38 signatories: Denmark, Germany, Italy, norway, Switzerland, the Uk and the US. Together they represent 30% of world exports, and businesses doubtless feel the deterrent effect of this shift. However, there remains significant room for increased enforcement. Companies must be vigilant even in jurisdictions without a history of aggressive enforcement, including non-oECD nations. The US has set the standard for enforcing its domestic laws extraterritorially against bribery committed abroad over much of the

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neW cOnsideRatiOns fOR 2011 UK Bribery Act: • No exemption for facilitation payments • Covers bribery of private-sector recipients as well as public officials • New offence of corporate failure to prevent bribery • Defence through implementation of adequate procedures Dodd-Frank Wall Street Reform Act includes: • Strengthened protection and greatly increased potential rewards for whistleblowers • Disclosure of payments to governments by resource extraction companies Changes to US Federal Sentencing Guidelines include commentary on: • Compliance function access to board of directors • Compliance programme ability to detect criminal activity • Expeditious voluntary disclosure to government • Post-discovery assessment and modification of ethics and compliance programme

fCPA enforcement since the statute came into force in 1977, but regulators wasted little time setting an even quicker pace in 2010. The DoJ made a bold statement in mid-January. It orchestrated the near-simultaneous arrest of 22 individual employees and executives of several companies in the military and lawenforcement products industry in the US and abroad on charges of conspiring to ‘bribe foreign government officials to obtain and retain business’. It was the department’s largest single investigation and prosecution in the history of fCPA enforcement. The operation involved up to 150 fbI agents, who executed 14 search warrants in multiple locations in the US. In a display of cross-border co-operation, the Uk’s City of London Police executed a further seven search warrants in connection with its own investigation into the indicted companies. This traditional ‘sting’ investigation was the first use in this field of undercover law-enforcement techniques, historically reserved for organised crime. It represents a paradigm shift in the expansion of fCPA enforcement. However, employing such manpower on a regular basis would be likely to tax the limited resources of the DoJ and fbI. As a result, such large-scale operations may prove the exception, not the rule. nevertheless, the case sent a clear message that the DoJ intends to aggressively focus on the prosecution of individuals to deter fCPA violations. In breuer’s words, prison sentences for individuals ‘should make clear to every corporate executive, every board member and every sales agent that we will seek to hold you personally accountable for fCPA violations’.

past 30 years. According to the oECD progress report, at the end of 2009 the US had concluded or had pending 168 enforcement actions under the foreign Corrupt Practices Act (fCPA). Another 100 investigations were in progress and 25 serious allegations under review. During an interview with media outlet Corporate Crime Reporter, Mark Mendelsohn, the former senior US Department of Justice (DoJ) official widely viewed as the architect of modern anti-corruption enforcement in the US, said there were more than 150 active investigations at the time of his departure in April 2010.

sectORs in the spOtliGht The ‘sting’ episode followed Mendelsohn’s appearance at the Global Ethics Summit in new York, where he stated that the US would prosecute corruption in increasingly rigorous ways. He added that this approach underscored a policy shift reflecting a belief that ‘corruption is a national security issue and an impediment to security in combat areas like Iraq and Afghanistan’. He further claimed that many in the DoJ see a clear connection between illicit funds and terrorism. These were not idle statements but a clear warning of a new take on an existing trend: to push forward aggressive enforcement using industry-wide investigations. In early 2010, the Securities and Exchange Commission (SEC) revealed that it was conducting a broad investigation into accounting and disclosure compliance at pharmaceutical and other companies ‘doing business with countries designated as state sponsors of terror’. The purpose was to determine whether any of the target companies’ operations were being used to finance terrorist activities supported by the governments of Cuba, Iran, Sudan or Syria. The investigation is aligned with the DoJ’s efforts to seek information from companies in this sector and is broadly consistent with Treasury Department aims to tighten enforcement of federal export control laws.
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THE fUTURE of U.S. AnTI-CoRRUPTIon EnfoRCEMEnT LookS SET To InvoLvE EvER MoRE AGGRESSIvE AnD SWEEPInG InTERPRETATIon of ExISTInG STATUTES.

The future of US anti-corruption enforcement looks set to involve ever more aggressive and sweeping interpretation of existing statutes. Assistant Attorney-General Lanny breuer, head of the Criminal Division, touted 2009 as the DoJ’s ‘most dynamic year’ in

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inteRnatiOnal cO-OpeRatiOn panalpina: the catalyst fOR industRy-Wide investiGatiOn in the eneRGy sectOR The DoJ in february 2007 noted in connection with an fCPA settlement that Uk’s vetco Grey had paid bribes in nigeria ‘through a major international freight forwarding and customs clearance company to employees of the nigerian Customs Service . . .’ Subsequently, more than ten companies in the oil and gas sector received letters of inquiry from the DoJ and the SEC asking them to ‘detail their relationship with Panalpina’. Settlement actions related to the Swiss logistics behemoth began in late 2010, when reports indicated that it was expected to pay $85m in fines. Panalpina operates through 500 branches in 80 countries, but withdrew from nigeria because of compliance concerns. While investigation into the company and its clients in the oil and gas industry initially focused on nigeria, investigations quickly expanded to other opaque jurisdictions around the world. US regulators in 2009 issued at least 45 Mutual Legal Assistance Treaty letters requesting extraterritorial assistance, underscoring a rise in cross-border co-operation in anti-corruption matters in recent years. US-German co-operation in an investigation into German engineering conglomerate Siemens set a new standard. It was followed by a US-Uk joint effort in 2010 concerning investigations into and eventual settlements of corruption cases involving global defence contractor bAE Systems and speciality chemicals manufacturer Innospec. Meanwhile, IT company Hewlett Packard disclosed in a September 10-Q filing that the SEC had expanded its investigation into possible bribe payments in connection with contracts the company had won in Russia. The investigation began as a collaborative effort between Russian and German prosecutors to review transactions in Russia between 2002 and 2006. However, the SEC’s involvement triggered an expansion of the probe to include review of the company’s activities in the Commonwealth of Independent States dating back to 2000. Enforcement in the Uk by the Serious fraud office (Sfo) looks set to mirror the aggressive US approach. In March 2010, 109 Sfo staff and 44 police officers executed near-simultaneous search warrants at five Uk facilities of french engineering company Alstom and arrested three members of the board of directors on suspicion of bribery and corruption, conspiracy to pay bribes, money-laundering and false accounting. The raids appeared to form part of a larger co-operative effort that has seen cross-border collaboration between Swiss, Polish, british and possibly US authorities.

Just as the Panalpina cases (see box overleaf) ignited a broader look into energy-sector practices, there is no doubt that the pharmaceutical sector is squarely in the crosshairs of the DoJ and SEC. Media accounts since April indicate that at least seven major multinationals in the sector have received inquiries from both regulatory bodies about business practices in a raft of opaque jurisdictions around the world. In another sector-focused initiative, the SEC’s dedicated fCPA unit announced in July that it would target Silicon valley-based companies with operations in China, an area of particular corruption risk. The announcement came soon after a $300,000 settlement reached with veraz networks, Inc., a San Jose-based voice over Internet Protocol company that made improper payments to employees of government-controlled companies in China and vietnam to secure business. In an interesting twist, the SEC disclosed that the investigation was aided by information provided by the US Department of Homeland Security. Recent trends suggest that the DoJ and SEC will use all the tools at their disposal to combat corruption, including applying legal principles not previously employed in fCPA cases. In 2009, the SEC used a provision of the Securities and Exchange Act 1934 to bring bribery charges against individual executives of one company, a first under the fCPA. not to be outdone, the DoJ has used the Travel Act as a prosecutorial tool. This is a federal criminal statute that prohibits interstate or international travel, or use of an interstate facility in the aid or commission of any crime. The act was used to prosecute bribery of private individuals and enterprise, wrongdoing not covered by the fCPA. finally, US regulators are beginning to attack the demand side of bribery – again not covered under the fCPA – by going after government officials who seek bribes through charges such as money-laundering.

leGislative chanGes As well as stronger enforcement, 2010 has seen notable additions to anti-corruption legislation. The passage of the Uk’s bribery Act, which received Royal Assent in April, was a watershed. The legislation overhauled an obsolete anticorruption statute dating to 1889 and brought the Uk into full compliance with the oECD Anti-bribery Convention. The bribery Act potentially has even more teeth than the fCPA: it could be the most robust anti-corruption standard in existence. The legislation will only enter force in April 2011, to allow government consultations with interested parties to formulate guidance on key provisions of the law. These will include comments on the requirement that companies have ‘adequate procedures’ to prevent corporate bribery. The Dodd-frank Wall Street Reform Act, signed into law in July 2010, adds another layer of complexity to the patchwork of legislation on corruption. Among other noteworthy provisions, it introduces significant financial incentives for corporate whistleblowers. In a bid to increase disclosure of violations of securities law (including the fCPA), individuals who provide ‘original information’ leading to successful prosecutions are entitled to between 10% and 30% of monetary penalties worth more than $1m, including fines, disgorgement, restitution and interest.

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The explicit provisions of existing and new anti-corruption legislation are sufficiently punitive to give companies operating in the US and Western Europe good reason to consider recalibrating their approach to compliance. but closer inspection of the major regulatory standards reveals much that is left ambiguous and unstated – or simply unknown. This thwarts a straightforward legalistic approach to satisfying anti-corruption requirements. Insight into this ‘knowledge gap’ should help to inform a review of potential best practice in compliance.

• Helplines (whistleblower hotlines) • Risk assessment • Remedial action where necessary As under the fCPA, companies will be left to fend for themselves in defining specific requirements within these extremely broad parameters. They will gain new insights only through the misfortune – or discovered misdeeds – of other organisations subject to prosecutorial scrutiny. Complicating compliance with the elusive standards of the fCPA and bribery Act are provisions that either conflict or are unique to one regime or the other. facilitation payments of any kind are prohibited under the bribery Act, but the fCPA provides an exception (though corporations often fail to properly record such payments under its books and records requirement). The language of the oECD convention allows reconciliation with respect to the fCPA exception (with caveats), but the bribery Act offers none. Many US-based companies are struggling to make sense of this. As one client put it, trying to harmonise internal procedures to satisfy both standards ‘is a Catch-22’. Similar frustrations are evident among companies grappling with provisions of the bribery Act that criminalise private-to-private bribery and establish a new offence of failure to prevent corporate bribery.

the knOWledGe Gap one of the key problems for companies seeking to develop and implement a compliance programme based solely on the fCPA, Uk bribery Act and other legislative standards is that there is no clear delineation of how to adhere to the rules. Judicial scrutiny often defines the specific contours of legislation in the US and other common-law jurisdictions, but to date this has been lacking. US federal Sentencing Guidelines and the DoJ’s opinion Release programme have, for example, emphasised the need for companies to undertake due diligence on potential counterparties: acquisition targets, partners, agents, suppliers, distributors and consultants. but there is no definition of due diligence – whether in requisite actions, scope or depth. There are clues to possible lines of statutory interpretation in corruption enforcement. In the matter of french services company Technip S.A.’s settlement concerning the bonny Island (nigeria) joint venture involving kbR/Halliburton, Snamprogetti and Japan’s JGC, the SEC complaint charged that: Technip did not adopt due diligence procedures as to agents that were adequate to detect, deter or prevent the payment of bribes by agents. The due diligence procedures adopted by Technip only required that potential agents respond to a written questionnaire, seeking minimal background information about the agent. no additional due diligence was required, such as an interview of the agent, or a background check, or obtaining information beyond that provided by the answers to the questionnaire. Clearly, blind reliance on responses provided by counterparties is insufficient. but even this insight lacks clarity on what might be expected of a ‘background check’. Would review of public records be sufficient for the task? or does the opaque nature of a jurisdiction like nigeria require going further, including inquiries with confidential sources to ascertain the subject’s reputation? The requirement to establish ‘adequate procedures’ to prevent corporate bribery in the bribery Act is also likely to lack a precise definition. To date, the government has published the following guidance: • Clear corporate policy on integrity/anti-corruption • Endorsement by the board/leadership from the top • Training

RepORtinG RequiReMents Adding insult to possible injury is the undetermined import of Dodd-frank. The exact impact of the so-called ‘whistleblower bounty’ provision on fCPA enforcement remains unclear, but it could have a substantial effect on the number of securities law cases triggered by whistleblowers. Companies are already reviewing their helpline protocols to ensure that structures are in place to escalate credible allegations and ensure appropriate analysis and timely action. Companies would also do well to revamp internal messaging to employees concerning this provision through communications and training. Two other sections tucked under ‘Miscellaneous Provisions’ at the end of the 850-page act will have a far-reaching impact on US-listed companies in the extractive sectors. Section 1504 (Disclosure of Payments by Resource Extraction Issuers) will require oil, natural gas and mining companies (including service providers) to report annually to the SEC any payments made to a foreign government, including by subsidiaries or controlled entities. As defined in the law, ‘foreign government’ includes departments, agents and state-owned companies, as well as the central government itself. Turning to human rights, and affecting companies across the extractives and electronics sectors, Section 1502 (Conflict Minerals) requires companies to report annually whether or not any tantalum, tungsten (wolframite), tin (cassiterite) or gold used in their production processes or products have originated in Congo (DRC) or any of nine neighbouring countries (Angola, burundi, Central African Republic, Republic of Congo, Rwanda, Sudan, Tanzania, Uganda a nd Zambia).

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Companies facing either of these disclosure requirements will be inherently more vulnerable to risks that typically fall outside the field of business integrity – and which compliance professionals are not specifically prepared to treat. The law may create a steady supply of information allowing activists to target specific companies, particularly in countries where human rights, corruption and governance concerns are widespread. Consequently, reputational, social and operational risks for reporting companies will increase and could materially affect business decisions to remain in existing markets or enter new ones.

assess both internal and external corruption risks. However, these are often used in isolation, to evaluate jurisdictional, transactional and relationship risks. They are often employed in an effort to make fact-based determinations on risk, to the exclusion of informed value-based judgements. facts are essential in the risk assessment process, but the flexibility of value-based judgement – human interaction and reaction in scenarios – is vital in tailoring compliance efforts to an organisation’s footprint, culture and intent, particularly in complex and opaque markets around the world. A more holistic yet cost-effective approach to risk assessment would include analysis and evaluation of the impact and likelihood of a series of specific risk scenarios that a company may face at various stages of a project or process. The process of developing scenarios customises the assessment to specific sectoral and company vulnerabilities in particular operations. This methodology also enables an organisation to meaningfully analyse the likelihood of a scenario occurring in the context of jurisdiction, transactional and relationship risk, and the potential impact on the organisation in the context of its existing compliance programme. new reporting requirements established under Dodd-frank will broaden exposure to public scrutiny that could exacerbate companies’ operational, political and security risks. Executives and managers who own these risks from across the spectrum – legal, human resources, security, risk management, finance, audit – should be integral to the development, implementation and maintenance of risk assessment methodologies. Due diligence The necessity of performing diligence in meeting anti-corruption objectives is well established across most mature commercial enterprises in the developed world. The vast majority of corruption problems encountered under the fCPA to date have originated with or involved an intermediary or other counterparty. However, the threshold for achieving thoughtful due diligence is open to wide interpretation – regulators to date have set out few detailed requirements. The british Ministry of Justice’s consultation guidance offers clues. It unequivocally indicates that an organisation should have due diligence policies and procedures in place that cover all parties to a business relationship. The guidance further provides that companies consider inquiries into the reputation of business entities and principals with whom an organisation has a commercial relationship. The language in the guidance is important. Many international businesses conduct due diligence on an ad hoc or ‘as deemed necessary’ basis. They do not have formal policies or procedures to establish the thresholds for due diligence or the requirements of what it should entail. Development and implementation of such protocols are an immediate concern. The guidance notes the importance of undertaking inquiries ‘to establish whether individuals or other organisations involved in key decisions, such as intermediaries, consortium or joint-venture partners, contractors or suppliers have a reputation for bribery and whether anyone associated with them is being investigated or prosecuted.’ In opaque jurisdictions, information on corporate or

fillinG in the Blanks Increasingly aggressive enforcement and the tightening web of national and international legislation governing corporate activities have raised anti-corruption compliance to an acute risk. We have seen a range of approaches to harmonising internal procedures to satisfy the ever-stricter regulations, but these are often tied to a very narrow, legal view of compliance. Certain institutions have ratcheted up internal compliance to the strictest standards they must satisfy. others implement a tiered approach, attempting alternately to satisfy jurisdiction-specific or transaction-focused burdens without a coherent approach throughout the entire organisation. Still others are experimenting with dual-track programmes in an effort to satisfy the requirements of both the fCPA and bribery Act without overhauling existing protocols.

THE AbILITY To IMPLEMEnT A CoMPREHEnSIvE, SYSTEMATIC APPRoACH To EvALUATInG AnD MITIGATInG RISk ACRoSS THE EnTIRE oRGAnISATIon MAY SERvE AS THE fAULT LInE bETWEEn oPERATInG SUCCESSfULLY In CoMPLEx JURISDICTIonS AnD bECoMInG EnTAnGLED In A CRISIS THAT THREATEnS boTH REPUTATIon AnD PRofITAbILITY.
In the current environment, these approaches raise a number of challenges. Without further detail on the regulatory front, they may fall short. Instead, companies can make an immediate impact by moving beyond a narrow view of compliance and embracing a principles-based, ethical approach to improved corporate governance. Drawing on three of the ‘Six Principles for bribery Prevention’ as defined under the british Ministry of Justice’s ‘Consultation on guidance about commercial organisations preventing bribery (section 9 of the bribery Act 2010)’, we explore potential improvements to existing programmes. Risk assessment Informed risk assessment helps companies to understand the bribery risks relevant to their sector and markets. Most organisations already employ many of the tools to identify and

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individual reputation, or potential matters of investigation by governmental bodies, is unlikely to be found in the public domain. It may be obtained only through discreet inquiries with confidential sources, which may be required to ensure satisfactory completion of even the most basic due diligence efforts. Historically, the narrow legal view in some circles has been that collection of information that may be deemed hearsay or speculation in a court of law is unhelpful and detrimental to business practice. The reality is that a robust capability to carry out business intelligence to obtain reasoned judgments on reputation is vital to understand true counterparty risk in complex environments. It has become best practice in many jurisdictions. failure to employ such inquiries in select geographies will deny corporations the ability to detect criminal activity, an absolute requirement under amended federal Sentencing Guidelines to merit leniency in enforcement settlements. Clear, practical and accessible policies and procedures The starting point in compliance programme development has been, and will remain the code of conduct, business integrity policy and/or code of ethics. In keeping with a top-down approach to compliance, many organisations have been comfortable with this approach; it provides a written understanding at the corporate level of what will and will not be tolerated. These requirements are exported to business operations, often in the form of policies, procedures and protocols in keeping with the corporate mandate and ethos formulated at the corporate headquarters. Development of policies that conform to legal requirements is merely the first step in the construction of a framework. While this is not the ‘wrong’ approach, it fails to account for a corporate ethos to guide the specific application of internal compliance programmes in the context of nuanced issues of jurisdictional and corporate culture, local political and legal dynamics, language issues and other factors. The ability to articulate and enforce compliance, to develop ‘buy-in’ at all levels of the organisation, requires inclusion of these factors. As a result, the programme development and review process should include many stakeholders: corporate leadership and management, compliance professionals, business process and functional subject matter experts. This approach helps to bring compliance to life in the workplace. new anti-corruption legislation, enhanced disclosure requirements for US-listed companies and continued vigorous enforcement underline the need for companies to continuously appraise their internal compliance architecture. The ability to implement a comprehensive, systematic approach to evaluating and mitigating risk across the entire organisation may serve as the fault line between operating successfully in complex jurisdictions and becoming entangled in a crisis that threatens both reputation and profitability.

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REGIonAL ovERvIEW
AfRICA: ELECTIon fEvER

Africa goes to the polls in 2011: national elections are scheduled in 20 countries. Major states including Congo (DRC) and nigeria will set their medium-term trajectories; Zimbabwe will hope for relief from the paralysing fallout of its last polls; and Côte d’Ivoire may finally showcase the outcome of its post-conflict transition. The sheer volume of elections on the continent also offers the opportunity to assess broader trends in governance and the transfer of power. Recent years have given cause for pessimism about the general direction of democratisation and governance reform in Africa. Controversial power-sharing arrangements were put in place in kenya and Zimbabwe because incumbents refused to accept electoral defeat; they persist despite manifest dysfunction and concerns about their fragility. Successful coups in Madagascar, Mauritania and Guinea in 2008; Guinea-bissau in 2009; and niger in 2010 have refocused attention on the possibility of military intervention – until recently seen as a throwback to the days before the continent’s tentative embrace of multi-party democracy. Perhaps more telling is the fact that, despite two decades of multi-party elections in Africa, instances in which power has freely changed hands through the ballot box remain in single figures.

set in theiR Ways Many of the leaders who have adhered most closely to regular election schedules – and certainly those with the greatest and most sustained electoral success – initially assumed power either in a coup or at the head of an armed movement. The leaders of Cameroon, Equatorial Guinea and Ethiopia have all won five successive polls; their counterparts in Uganda, Chad, burkina faso and Gambia have won three in a row. Most of these countries have reputations for broad political stability and respect for democratic procedure, but have never come close to a genuine electoral contest. The established patterns in these countries are unlikely to alter in the coming year: leaders are likely to retain power in Uganda, Cameroon, Chad and Gambia in 2011. Yet tensions are emerging in these seats of perpetual incumbency. Leaders face little prospect of electoral challenge: state machinery is

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inextricably bound up with ruling-party apparatuses; opposition parties are fragmented, co-opted or starved of resources; security forces can be deployed at the ruling parties’ behest; and in several cases the incumbent clearly intends to micro-manage the succession. but the effective redundancy of the ballot box does not preclude strong popular opposition or fractiousness among elite factions whose opportunities for advancement are frustrated. In the comparatively freer societies of Cameroon and Uganda, significant social unrest is likely during elections, as is systematic manipulation to compensate for rulers’ dwindling legitimacy. In Gambia and the Central African Republic (CAR) – more repressive social environments, which also exhibit greater elite stasis – electoral tensions could boost the likelihood of coup attempts born out of growing elite frustration.

AfRICAn ELECTIonS AnD PoTEnTIAL oUTCoMES

BeyOnd the stRuGGle Southern Africa may not have the problem of leaders in the classic soldier-president mould, but the region has yet to tackle the issue of how to transform liberation movements into civilian structures within multi-party systems. The governments of namibia and botswana have seemed almost apoplectic at the apparent ingratitude of those who wish to contest power on an equal footing – particularly opponents who have broken away from the ruling party. Although both countries have revealed persistent authoritarian tendencies and a residual military mindset, botswana is showing the strongest sign of these characteristics. President Seretse khama Ian khama is making increasing use of repressive agencies and showing a growing predilection for drafting military personnel into government. Still, despite likely further slippage in governance indicators, neither is likely to move any closer to a ‘Zimbabwe’ situation during the course of 2011. The same is true of South Africa, whose recent history illustrates the rapid dissolution of a national movement’s moral authority once generational change severs the direct links between a party and its historical foundations. Increasing rhetoric about nationalisation – and its obvious resonance among large sectors of society – has begun to raise the spectre of ‘Zimbabweanisation’, but there are sufficient countervailing factors to prevent such a shift. nonetheless, 2011 will offer an important indicator of the extent to which a more radical new politics of black economic empowerment, advocated strongly by African national Congress (AnC) youth leader Julius Malema in 2010, gains wider traction. The particular intractability of Zimbabwe’s situation can be explained by a range of factors not present to the same degree elsewhere – not least the excessive power and prominence of the security and intelligence services, and deep elite fear of repercussions for human-rights violations dating back to the consolidation of independent rule. In the absence of the electoral, media and security-sector reforms needed to prevent a repeat of the 2008 crisis, fresh elections are highly unlikely to succeed in surmounting political deadlock and alleviating instability. If they go

Source: Control Risks

ahead next year, polls are likely to be violent and results disputed, culminating in yet another bout of political crisis. The failure of the power-sharing agreement to catalyse economic recovery or attract significant donor funding means that predation against investors will remain a key threat through 2011 and beyond.

sudden chanGe Despite the stifling deadlock of Zimbabwe’s politics, one potential game-changer that cannot be ruled out is 86-year-old President Robert Mugabe’s sudden departure from the scene. Health problems among heads of state have become a governance issue in recent years, with the deaths in office of Zambian president Levy Mwanawasa, omar bongo of Gabon, Guinean leader Lansana Conté and nigeria’s Umaru Yaradua since mid-2008. With doubts over the health of both the kenyan president and prime minister, and the leaders of Cameroon, Zambia, Senegal, Equatorial Guinea and Tanzania, plus the underlying threat of assassination attempts in authoritarian states, an election or two could be added to the list during 2011.
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Guinea and Togo demonstrate that persistent military pre-eminence – even under nominally civilian regimes – is most likely to reveal itself during the scramble to fill a power vacuum. If 2011 were to see the fall of leaders of countries including Zimbabwe, Equatorial Guinea, Uganda, Madagascar and Rwanda, the military would emerge as kingmakers and transition-brokers, if not the actual agents of change. Conversely, the fact that there was little genuine prospect of a military takeover during the power vacuum created by Yaradua’s six-month absence from office until his death in May 2010 is a testament to the evolution of power dynamics and institutional checks and balances in nigeria since the 1990s. With preparations in full swing in nigeria for the 2011 elections, tensions are running high. Yaradua’s death upset the unwritten rotation agreement that ensures a balance of power between north and south. President Goodluck Jonathan’s candidacy consequently faces stiff opposition from northern governors. An unprecedented car-bomb attack in the capital Abuja in october 2010, allegedly carried out by the ethnic-Ijaw militant Movement for the Emancipation of the niger Delta (MEnD), illustrates the potential for insecurity to spread beyond the long-troubled niger delta. nonetheless, the effective discrediting of the military as a political player, allied with nigeria’s typical resilience, is likely to see the country muddle through the polls without the principles of constitutional procedure or civilian pre-eminence being seriously threatened.

President Paul kagame will spend 2011 attempting to re-establish authority after unprecedented levels of dissent from former regime figures surfaced ahead of the 2010 polls. Congo (DRC)’s recent history of conflict and the traditionally strong role of the armed forces in propping up governance often lead observers to suggest that it may be vulnerable to military intervention or destabilisation, with the coming elections a potential weak point. However, overall political stability established during the post-conflict transition has not been eroded, despite disappointed hopes that the 2006 elections would herald a period of quiet progress. Advance towards democratic reform has been lethargic and President Joseph kabila’s election promises are largely unfulfilled. Despite this, consolidation of presidential power, the political system’s underlying corruption and opposition weakness make a kabila victory by far the most likely outcome. The armed forces’ loyalty – in particular that of the presidential guard – will be important for kabila’s long-term survival, but they are not yet powerful enough to pose a threat. Money rather than military might has emerged as the key to power.

tWO heads aRen’t BetteR than One following post-election crises and subsequent power-sharing arrangements in kenya and Zimbabwe, losing opposition candidates have begun to reject election results in the hope of forcing some form of accommodation. A number of such cases are likely in 2011, often leading to a short-term spike in unrest, but in most circumstances they will not gain sufficient traction to force a deal. To date, only a genuine threat of conflict or a protracted security crisis have resulted in fully fledged power-sharing agreements. Watered-down examples – such as offers of government posts to Togolese opposition leader Gilchrist olympio and his allies, and to the losing candidate in the Guinea run-off – are strategies of co-option or neutralisation. Despite opposition leaders’ best efforts, power-sharing depends on specific circumstances. The primary factor is an obdurate losing incumbent or cheated opposition party with the means to wage violence to cling or ascend to power. This presupposes a range of secondary factors. It requires a strong opposition party able not only to create genuine expectations of change, but also to mobilise supporters over a sustained period of time, either actively as in kenya or on the basis of resistance and endurance as in Zimbabwe. The security forces must be largely loyal to the incumbent. It helps if there is either a strong degree of elite homogeneity or major external pressure, and no feasible alternative that is not based entirely on a security solution. The necessary factors are unlikely to combine in many of Africa’s 2011 elections. Côte d’Ivoire’s long-delayed return to democracy is the only clear case where candidates’ resistance to a winner-takes-all outcome, popular frustration and potential for widespread violence

hOW dO yOu cOup A wave of coups or other military intervention is unlikely in the coming year. The number of successful coup attempts over the past two years has been striking, given their general decline in frequency since the late 1990s and complete lull for three years in the mid-2000s. There is no indication that the recent instances were linked, either causally or contagiously, nor that other would-be putschists will be emboldened as a result. various environmental factors are needed to make a coup attempt possible, but they do not coincide strongly in most African states. Prerequisites include limited economic diversification and a socio-economic structure where access to power is the most effective or only route to wealth; the failed or incomplete professionalisation of state institutions; political and resource competition entrenched along ethno-regional lines; and – most importantly – the existence of strong but factionalised militaries. Countries that have experienced a coup are susceptible to counter-coup attempts; this renders Madagascar, niger and Guinea most vulnerable. In all three, the likelihood of further destabilisation depends on the conduct of election campaigns and the complexion of post-election administrations – particularly the extent to which they accommodate influential military and political factions, and address grievances based on perceived marginalisation. Gambia and CAR share a number of the above features, while Rwandan

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make power-sharing plausible. Perhaps the most interesting point is that there is no precedent for a successful transition from a power-sharing government back to competitive politics. Zimbabwe and kenya will both reveal whether power-sharing has alleviated underlying conflict dynamics or whether the fallout has merely been delayed.

aftermath of a coup or under a power-sharing system. In general, there are few implications that are typical to particular governance models: for companies, careful monitoring and assessment of the threat environment where they operate – reflecting both national and local dynamics – will remain essential.

Business iMplicatiOns With governance on the continent presenting such a mixed picture, what implications can businesses draw from unfolding dynamics? Some broad conclusions can be made: regimes prone to coups or other unconstitutional changes of government are likely to see a high degree of personalised decision-making and institutional hollowness. Companies face ‘key person risk’: they need well-connected interlocutors to gain access to decision-makers, but risk the loss of that access in the case of sudden regime change. In regimes vulnerable to political disruption or reliant on repressive governance, business will also face periodic short-term physical and logistical challenges. These could include greater frequency of security incidents; temporary closure of borders; roadblocks and curfews; high levels of local employee absence because of required attendance at ruling-party meetings or fears of heightened ethnic and political discrimination from colleagues; and the obligation to extract expatriate personnel as a security precaution. Assets are generally less secure under regimes with weak democratic credentials, but not always. While regimes with few pillars of legitimacy may turn to lucrative sectors to plunder revenues or patronage resources (Zimbabwe’s agricultural and diamond sectors are the obvious examples), instances of outright expropriation are very rare. The mining-contract review initiated by Congo (DRC)’s new government in 2007 had a credible basis and little outright expropriatory intent, though its shambolic execution and subversion by key political figures did nothing to improve perceptions of political risk. Regulatory enforcement under poorly governed or insecure regimes is likely to be erratic and influenced by short-term interests, but recent examples suggest that settled and legitimate administrations are more likely to make outright regulatory changes. Ghana’s 2009 increase in mining royalties and the remodelling of Zambia’s mining tax and royalty regime in 2008 are good examples of governments seeking to rebalance commercial relationships in their favour – effectively rewarding themselves for having improved their countries’ risk profiles. While power-sharing may be a viable option in only a handful of cases, governments under pressure frequently resort to co-option and patronage – patterns that typically exacerbate governance deficiencies by inserting inappropriately qualified or predatory individuals into politically influential or technocratic posts. Weak parliamentary scrutiny and accountability pressures are characteristic of most systems, but may be magnified in the
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REGIonAL ovERvIEW
AMERICAS: THE DRUGS TRADE

In late August, marines discovered the bodies of 72 migrants at a remote ranch in north-east Mexico. Members of Los Zetas, the cartel that controls the area, are believed to be behind the killing. The massacre was the most shocking example to date of the rising tide of drug-related violence in the country, which has claimed more than 8,000 lives in 2010 and made Mexico the most high-profile front in the war on drugs. but the impact of drug-trafficking extends far beyond Mexico’s borders. from Peru’s remote valleys to the streets of Guatemala City and kingston, shifting patterns in the transnational drugs trade are shaping the political and security environment across the Americas. This has significant consequences for investors. The drugs trade is permeating the fabric of social and political life across the region, and evolving patterns of production and trafficking will present operational and security challenges for companies with interests in the region.

sOuth Of the BORdeR The surge in drug-related violence in Mexico dates back to 2006, when soon after taking office President felipe Calderón introduced a new militarised security strategy aimed at stamping out drug-trafficking. The crackdown has seen more than 45,000 troops and federal police deployed nationwide. It has altered the balance of power between drug-trafficking organisations, and allowed smaller groups to emerge and challenge established cartels. The resulting turf wars have claimed more than 28,000 lives, mostly in the northern states bordering the US. Escalating violence is just one aspect of the cartels’ burgeoning influence: widespread infiltration of state institutions and law-enforcement agencies has fostered corruption and undermined government authority. Mexico’s security environment will continue to deteriorate in 2011. In the absence of a thorough overhaul of the criminal justice system, the capacity of the police and judiciary to tackle crime will remain limited. Calderón remains committed to his hardline approach: his invitation in August for the opposition to join him in a security dialogue was essentially a bid to gain

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MURDERS In MExICo bY STATE (JAn-oCT 2010)

the neW BallOOn effect Since 2006, Mexico has provided a dramatic illustration of the impact of the drugs trade, but it is far from the only country affected. Differing approaches by governments across the region mean that production and trafficking operations have retreated from some locations and expanded into others. A 60% fall in coca production in Colombia over the last decade, for example, has been matched by a rise in production in neighbouring Peru – currently on course to replace Colombia as the world’s largest producer, according to the Un office on Drugs and Crime (UnoDC). This pattern – known as the ‘balloon effect’ – has been visible for some time, and underlines the difficulties of denting overall production levels. Drug production generally has a limited effect on business. In Peru, coca cultivation is confined to remote rural valleys where few foreign companies have any presence. The Shining Path guerrilla group’s dominance of production curbs potential for turf wars. Current trends – and an absence of political and public interest in the issue in Peru – indicate that production in these areas will continue to rise in 2011, but the remoteness of such locations will curb the impact on conditions nationwide, and on foreign business operations. ExTEnT AnD DISTRIbUTIon of CoCA bUSH CULTIvATIon (THoUSAnD HECTARES), 2000–09

KEY
CHIHUAHUA DURANGO MEXICO STATE MICHOACÁN SINALOA TAMAULIPAS JALISCO OTHERS GUERRERO NUEVO LEÓN BAJA CALIFORNIA

Source: Grupo Reforma

backing for his strategy, rather than an admission of failure. With security topping the polls as the primary concern for most Mexicans, the president’s policies face growing scrutiny as the country gears up for the 2012 presidential election, though the opposition Institutional Revolutionary Party (PRI) has yet to propose a better solution. Politically, the country remains stable – despite Pentagon claims to the contrary, Mexico is not in danger of becoming a failed state – but violence, corruption and impunity will persist. Investors in Mexico tend to be primarily concerned about security threats to personnel and assets, with some justification. Drug gangs are unlikely to deliberately attack foreign business personnel, but spiralling violent crime presents a heightened risk of bystanders becoming caught in crossfire. kidnapping is also on the rise as besieged drug-traffickers seek alternative revenue streams, a particular concern for local employees. Deteriorating security increases the financial costs of operating in Mexico. Companies must invest in adequate protection for personnel and assets. However, the impact is also felt less directly, in areas such as logistics. Extortion is common, though smaller businesses are at greater risk than large multinationals. Cartels have also been known to make use of transport and storage facilities belonging to legitimate business operations, particularly along or close to key trafficking corridors. finally, the cartels’ infiltration of political and judicial institutions weakens governance and the rule of law, resulting in a more complex operating environment.

Source: United nations office on Drugs and Crime (UnoDC)

The balloon effect also applies to trafficking. The continuing emergence of new centres of trafficking and transshipment will be a key issue in 2011. one such area is the ‘northern Triangle’ of Central America: Honduras, El Salvador and – in particular – Guatemala. following Calderón’s crackdown in Mexico, the cartels have moved south and established new trafficking routes through the isthmus with the collaboration of Central America’s notorious youth gangs (maras). between 60% and 90% of South America’s cocaine now passes through the northern Triangle en route to the US, compared with 1% three years ago. The area’s emergence as a key trafficking nexus will continue during 2011.
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The northern countries of South America are also emerging as a drugs hotspot. Drug seizures in venezuela fell from 152 tons in 2005 to 60.2 tons in 2009, indicating that efforts to combat trafficking have deteriorated drastically since President Hugo Chávez ceased counter-narcotics co-operation with the US five years ago. Given Chávez’s preoccupation with deepening his ‘bolivarian Revolution’ and consolidating his hold on power ahead of the 2012 presidential election, there is little political will in venezuela for tackling drugs. The authorities’ desultory efforts will deteriorate further during 2011. MAIn DRUG-PRoDUCInG CoUnTRIES AnD SMUGGLInG RoUTES

Mexico, the threat to foreign business operations is largely incidental, but the costs of safeguarding personnel and assets will increase. Moreover, as the influence of the drugs trade on public life grows, corruption will spread, undermining state institutions and the rule of law. In 2011, companies with operations in these new trafficking centres will feel the impact of the deteriorating operating environment. venezuela and Central America have long been among the most complex operating environments in the region; the rising influence of the drugs trade will exacerbate this.

nO MORe paBlO escOBaRs It is not merely the key centres of the drugs trade that are shifting, but also the key players. Apart from Mexico, where figures like Sinaloa boss Joaquin ‘El Chapo’ Guzman continue to hold sway, the old image of cartels led by high-profile capos is outdated. Recent years have seen new groups move in on the trade: guerrillas such as the Revolutionary Armed forces of Colombia (fARC) and the Shining Path now dominate production in Colombia and Peru, while maras collaborate with Mexican cartels along the new trafficking routes through Central America. In 2011, the most significant of these emergent forces will be Colombia’s ‘bacrims’ – newly formed criminal gangs that grew out of right-wing paramilitary groups disbanded under former president Álvaro Uribe (2002-10). The bacrims, which have abandoned their ideological goals in favour of attempting to gain control of the drugs trade, have risen remarkably quickly to establish a presence in 18 of Colombia’s 32 departments. for businesses with interests in Colombia, the continued rise of the bacrims will complicate the security environment. Their emergence has been blamed for a spike in violent crime, most notably in the city of Medellín. With President Juan Manuel Santos’ fledgling administration showing little political will or capability to tackle the threat, the security environment will continue to deteriorate. The rise of the bacrims is a reminder that, as long as the illegal drugs trade remains lucrative, it will offer strong incentives for new groups to seek a share of the profits. The constant rise of new groups has several consequences for investors in the region. In particular, when emerging groups challenge established organisations in an effort to gain control of the trade, the result is often a rapid decline in security; the explosion of violence in Mexico following the government’s crackdown on established cartels and the rise of new challengers was a clear illustration. It is essential for companies operating in the region to closely monitor evolving trends and the emergence of new gangs.

Source: Control Risks

Weak governance and rampant corruption have left both the northern Triangle and venezuela ripe for infiltration by drug gangs. In both areas, the increase in drug-trafficking has fuelled a marked deterioration in security; Guatemala witnessed 6,500 murders during 2009, a rate twice that of Mexico. The rest of Central America and northern South America are experiencing similar trends. As in

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the Way fORWaRd Despite consensus both within and outside the region that the current strategy for tackling the problem of illegal drugs is not working, new initiatives with real potential have been slow to emerge. In 2010, there has been growing recognition among governments in Central America and the Caribbean of the need for a more unified approach, which was given a boost in July by the establishment of a roundtable group aimed at facilitating policy co-ordination and information-sharing. A more eye-catching suggestion was the proposal that drugs be made legal and subject to government regulation. Legalisation has some high-profile advocates, including former Mexican presidents vicente fox and Ernesto Zedillo, as well as Colombia’s César Gaviria and brazil’s fernando Henrique Cardoso, who argue that it would put an end to the violence by cutting off the cartels’ revenues. Discussions about both co-ordination and legalisation will increase in 2011, though we do not expect to see significant progress towards either. Legalisation is unlikely. Governments in the region rely on US funding to combat the drugs trade and are reluctant to adopt policies that would generate tensions with the superpower on their doorstep. US authorities fear that legalisation would only increase the flow of drugs, while implacable opposition from conservative constituencies makes it politically unfeasible. A more likely scenario is that the coming years will see more governments following in the footsteps of Mexico and Argentina by decriminalising possession of small quantities of drugs, leaving security forces free to target producers and traffickers. US drugs policy is unlikely to evolve in the coming year, though there may be changes in US-led regional counter-narcotics initiatives. The expiry of the three-year Mérida Initiative in theory offers an opportunity for US legislators to reassess their approach to combating the drugs trade in Mexico, Central America and the Caribbean. In practice, however, any change will be incremental and will occur within existing policy frameworks. both US and Mexican authorities remain committed to maintaining the Mérida programmes. Despite the US Congress’ ostensible commitment to tackling problems of governance and the rule of law south of the border, the bulk of the funds will go towards equipping Mexico’s security services. The clearest shifts are in the new focus on Central America, which is to receive funding under the new Central American Regional Security Initiative (CARSI), rather than as an adjunct to the Mexico-focused Mérida Initiative. This marks a timely (some would say overdue) recognition of the isthmus’ growing role in the transnational drugs trade. However, the limited funds earmarked for Central America for the next financial year – $100m, compared with $310m for Mexico – mean that 2011 will not see significant progress.

As the Americas look towards 2011, the outlook is mixed. The drugs trade will continue to expand into new areas, affecting security and operating conditions across the region. The worst-affected areas – Mexico, Central America and northern South America – will experience further deterioration in their business environments. Governments will make tentative moves towards a new approach, but neither radical policy change nor a noticeable improvement in the overall situation is on the cards. The main question for investors is whether the benefits of operating in the region outweigh the costs. So far, there has been no mass exodus of major investors; companies remain attracted by the region’s opportunities and are prepared to shoulder the costs. barring a sudden deterioration in the security environment – not likely in current circumstances – this is likely to remain the case.

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REGIonAL ovERvIEW
ASIA: CoMPETITIvE nEIGHboURS

Asia in 2011 will continue to see rampant economic growth in India and China, and the associated challenges; the battle against terrorism, most notably in Afghanistan; persistent political turmoil in Thailand; and regime rumblings and north/South frictions on the korean peninsula. Here, however, we look at two areas in which political risks may cast a shadow over the economic and business environment in the coming year: the mutually reinforcing combination of geopolitical and economic frictions centred on East Asia. To some extent the issues involved are familiar: pressure on China’s currency policy, US/China competition for influence in the region as the latter’s power grows, and longstanding maritime territorial disputes. Several fundamental factors continue to work in favour of stable management of disputes that for years have cycled through periods of confrontation and reconciliation, and a dramatic or lasting crisis in relations between major regional powers still appears to be a low risk. but the outlook is more uncertain going into 2011 than it has been in years. Attitudes and policies of and towards China are changing, and the simultaneous intensification of geopolitical and economic disputes complicates their management. In this environment, a key stabilising rationale in Asia – that interdependence and long-term shared interests mean patience and co-operation must ultimately be preferred to confrontation and coercion – may come under threat from short-term domestic political pressures.

GeOpOlitical tuRBulence Despite periodic diplomatic dramas and some longstanding international flashpoints, East Asia since the end of the Cold War has been a relatively peaceful neighbourhood in geopolitical terms. This is unlikely to change any time soon, but relations between several major states are now arguably more fractious than at any time during the preceding decade. At the root of this is China’s desire to gain – and the reluctance of others to concede – greater influence and reach in the region. The world has wondered and worried for many years about the implications of a powerful China, but hopes have offset fears, and threats have largely been perceived as potential future issues rather than immediate and pressing concerns. This balance of perceptions is shifting.

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The global financial crisis not only boosted China’s relative economic status (it became the world’s second-largest economy in 2010 and is justifiably pushing for a bigger say in global financial affairs) but also emboldened its foreign policy. In the past two years, beijing has become considerably more assertive in pursuing its goals abroad. To China this is a necessary part of resisting US-led containment, regaining its natural great power status and reversing strategic losses suffered during more than a century of weakness and foreign aggression. To the US and many Asian countries it is evidence of a threat to their interests, and of expansionist ambitions hidden behind a friendly façade that survives only until China can get its way by coercion. Whichever interpretation one leans toward, it was inevitable that China would eventually challenge a regional status quo that it views as an unwanted historical legacy and a constraint on its rise. That challenge has begun, and beijing has increasingly departed from its longstanding preference for passive foreign-policy principles that have been influential for 30 years: keeping a low profile, avoiding conflict and prizing external stability to support domestic development. In recent years, China’s international interests have proliferated, and beijing now has the cause, clout and confidence to play a much more active – and assertive – role on the world stage. SoUTH CHInA SEA: DISPUTED ISLAnDS

The law of displacement has always applied to rising powers, and China has begun to make waves, asserting its maritime territorial claims with a new vigour that has disturbed some of its East Asian neighbours and the US. As well as highlighting the risk of an ostensibly trivial maritime incident becoming a serious diplomatic crisis, resurgent territorial disputes have been a catalyst for intensified US engagement and re-engagement in East Asia, deepening China’s containment fears. They have also given occasion for China to flex its ever-growing muscles, exacerbating perceptions of a threat that must be contained.

cOllateRal daMaGe vulnerability to diplomatic clashes is not restricted to the US and those East Asian countries that have recently collided with China over maritime issues. Concern about an assertive China has been a theme of several recent leaders’ meetings of the Association of South-east Asian nations (ASEAn), while Indian officials have been among the most vocal worriers about China, citing bilateral stress-points including border disputes, cyber security, Tibet and Chinese infrastructure investments in India. Even Australia, one of the biggest economic beneficiaries of Chinese industry’s voracious import appetite, has become acutely sensitive to the risks of the business relationship. While diplomatic disputes are often of little practical concern for investors, in the current climate there are potentially serious economic and business consequences for some companies in or exposed to the region. In China, some foreign companies have complained of relations with officials freezing up or contracts being awarded elsewhere when their home governments have incurred beijing’s wrath. During a September 2010 China/Japan row, Japanese officials said that Chinese shipments of rare-earth minerals vital to Japan’s manufacturing sector were delayed. Many also speculated that the arrest of four Japanese workers in China for entering a restricted military area and the fining of a Japanese firm by Chinese authorities for alleged bribery were also intended to put pressure on Tokyo (China denies all these claims). When the nobel Peace Prize was awarded to a Chinese political dissident in october, norway was threatened with an economic backlash. The linking of politics and business in this way is not new, but may become more frequent as diplomatic tensions increase. The prevalent interpretation outside China is that beijing has shot itself in the foot, rattling some investors, scaring neighbours into the arms of the US and undoing years of ‘smile diplomacy’ efforts in South-east Asia. Most regional governments have long hedged and courted China simultaneously despite the smiles, but there is still some truth to this interpretation. China may thus tread more cautiously in 2011. The regional order has not been suddenly turned upside down – despite considerable Chinese advances in military capabilities, particularly relevant to Taiwan Strait scenarios and access denial, the US remains the clear regional maritime
cOntROl Risks riskmap 2011

Source: Control Risks

31

power and is likely to retain that role for decades rather than years. While China has diluted and more frequently departed from its preference for passive, low-profile foreign policy, it has certainly not abandoned the underlying principles – maintaining stable external relations, particularly with the US, remains a key priority. by october, China’s ties with Japan had begun to be repaired, at least temporarily, and top-level military-to-military contact with the US was resumed for the first time in 2010, underlining the often cyclical nature of bilateral tensions. Diplomatic clashes in the region are nothing new, and relationships typically recover as cool heads ultimately prevail. but while this pattern remains the most likely scenario for 2011, the risk of more frequent and damaging disputes, and the difficulty of managing them, is growing (particularly as accusations of being soft on foreign policy could hurt leaders jockeying for position ahead of a once-a-decade leadership succession in 2012). Exacerbating this trend, geopolitical frictions have become closely intertwined with international economic tensions in which Asian countries are heavily involved.

GDP GRoWTH (%) In SELECTED ASIAn nATIonS, 2009-11

Source: World Economic overview, IMf

afteR the ReBOund The economic context going into 2011 is less positive than Asia’s strong 2010 growth suggests. As we forecast in RiskMap 2009, Asia confounded sceptics by weathering and then rebounding strongly from the global financial crisis. Robust growth is likely to continue across most of the region in 2011, especially compared with other regions, but probably not as a smooth continuation of linear recoveries. Stimulus policies were extended in many countries in 2010 and the impact of their withdrawal will start to bite in 2011; growth will slow in most countries and the durability of recoveries will be tested. While Asia’s rebound has justifiably been seen as an impressive achievement, the downside – a theme of our Asia forecast in RiskMap 2010 – is that policy-makers focused on short-term growth and set aside key longer-term challenges. Two years after the worst of the crisis began to fade, reform appetites still look unlikely to return in 2011, as governments worried about growth prospects and the welfare of key constituencies look to postpone the short-term pain involved in tackling issues such as fiscal sustainability (for example in Japan, India and the Philippines), and rebalancing big trade surplus economies (China being the major example). Lingering or resurgent feelings of economic insecurity make reinvigoration of market liberalisation processes unlikely as populist tendencies persist. of even greater short-term concern are growing risks of deterioration in international trade and economic relations. The global financial crisis prompted fears of a wave of protectionism around the world, but these had receded considerably by 2010, with such trends remaining limited.

However, the underlying problem never went away: that governments struggling to drive economic growth amid weak global demand would pursue mutually damaging competitive, rather than co-operative, means of boosting their domestic output. by late 2010, this threat had resurfaced, with the immediate focus on ‘currency wars’ rather than market protectionism. Asia’s major exporters were at the centre of concerns about competitive currency devaluations and could well remain there in 2011.

inteRventiOn GaininG cuRRency US-China dynamics, both domestic and bilateral, are central to the global imbalances that dominate economic debates, but most of Asia’s substantial economies, especially East Asian exporters, are vulnerable to the fallout. In September, Japan intervened for the first time since 2004 to moderate the yen’s rise, while officials in South korea, Taiwan, Thailand and Indonesia also took steps to dampen currency appreciation and capital inflows in the latter half of 2010. Their counterparts in the Philippines said they would follow suit if necessary, and even Indian central bankers indicated they were considering stepping in. Temporary capital controls and exchange rate interventions are of famously dubious utility, as East Asians who recall the region’s 1997-98 financial crisis know better than most. With US domestic fears of ‘turning Japanese’ in debt and deflation terms eclipsing external concerns, low interest rates there will ensure continued large capital flows into Asian economies with limited means to cushion the impact. This will be largely manifest in strengthened currencies and reduced export competitiveness. Resulting fears and diplomatic wrangling may further distract policy-makers from tackling the other side of the rebalancing equation: boosting domestic demand.

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Meanwhile, US/China disputes will probably set the tone, for better or worse. After years of carefully limited and largely symbolic tit-for-tat tariffs and other measures, political support in the US for more serious steps to force Chinese currency appreciation was stronger by october than at any time since China joined the WTo ten years ago. The good news is that beijing remains keen to avoid a collision with an economy with which it cannot win a trade or currency showdown, is aware of the interdependence that makes co-operation so desirable, and understands that domestic rebalancing is vital to its own interests. There are signs that China may make greater concessions to address complaints about its currency policy and trade surplus (which saw its foreign reserves reach $2.65 trillion in the third quarter of 2010), though domestic imperatives, not external pressure, will remain the dominant determinant of policy. In the US, despite the very real hardening of attitudes towards China, the risk of dramatic moves is mitigated by legislative logistics, White House misgivings about unilateral escalation and the difficulty of effectively implementing punitive measures against China. It thus remains unlikely that disputes will get out of hand, to the point of justifying the label trade or currency ‘wars’, which seems to imply a severe and widespread impact on economic growth, and on the activities of businesses and investors. but even so, the risks look considerably more credible going into 2011 than in the past. ASIAn CURREnCY APPRECIATIon InDEx (JAn 2009 = 100)

disputing who was to blame for the world’s economic troubles than seriously contemplating the difficult compromises needed to start fixing them. opinion in the US tends to see perceived Chinese mercantilist manipulation of markets as driving global imbalances – and US unemployment. In China, explanations of the same imbalances tend to emphasise the role of lax monetary policy and under-regulated greed in the US and other advanced economies. beijing remains seriously (and understandably) worried about the potential domestic impact of the accelerated revaluation that it is under pressure to make. This fundamental divergence of views is being reinforced by domestic politics. In the US this was symbolised by legislative electioneering in october, during which some campaign advertisements featured overt China-bashing. Equivalent elections may be absent in China, but populist pressures certainly exist, not least because 2012 will bring the most important leadership changes in the country for a decade. As competition over posts and policies heats up in 2011, concessions to foreign demands could expose leaders to criticism from rivals, while gambling on bold policies with uncertain domestic consequences – such as currency revaluation – would take considerable nerve. With little sign of either of the main protagonists taking the lead in tackling the growing problems of currency and imbalances, there is little reason to anticipate divergent views being reconciled or put aside to forge a co-operative solution. Without one, countries will be increasingly tempted to pursue their own competitive – and ultimately counter-productive – responses. An escalating exchange of trade and investment barriers would complicate business environments and sap regional growth, while a larger - and earlier-than-desired revaluation in China would also carry dangers, with consequences for the wider region and beyond if Chinese growth (accounting for around 15%-20% of global growth) stumbles. Even assuming these scenarios are averted, as is likely, the fractious economic environment will combine with increasing geopolitical frictions to compound the risk of disputes boiling over in 2011. Diplomats and economic officials have a testing year ahead in Asia. Unless they negotiate the challenges with considerable success, businesses may also be in for some trying times.

Source: oAnDA

the Bad neWs Despite the powerful rationale for co-operating to achieve longterm rebalancing goals, which both sides recognise as essential, short-term domestic political pressures in both the US and China mean this logic will not necessarily dominate policy in the year ahead. In late 2010, it still seemed that more time was being spent
cOntROl Risks riskmap 2011

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REGIonAL ovERvIEW
EURoPE: GEoPoLITICS REvIvED

The re-emergence of traditional geopolitics charted in our lead article will be reflected no more clearly in 2011 than in Europe. The region is entering a more complex phase of political and security governance. Greater assertion of national interest, by large and small states alike, will rub uneasily against ever-greater economic interdependence. The recession has generated a strange paradox in the political economy of the Europe/CIS region. In the EU, new voting weights will give greater power to more recent members at the same time as Germany flexes its muscles on financial policy. further east, Russia remains the dominant power, but the political elites of the smaller hydrocarbon-rich states of the Caspian basin feel more secure at home and are learning to gauge more accurately the limits of Russian influence. A third dimension lies in the positive recalibration of Russia’s relationship with the West, driven largely by the government’s belated recognition of the need for more foreign investment and its satisfaction at securing vital geopolitical interests in 2010, most significantly in the election of a pro-Russian government in Ukraine. As a consequence, the idealism that accompanied the end of the Cold War two decades ago has largely dissolved. In some respects we are back to business as usual: states will jockey for position both inside and outside international institutions, with political and security risks fluctuating according to the issues at stake. The outcome is a changing risk landscape for business in 2011: hard-headed realism will prevail over idealism in both the enforcement of domestic fiscal discipline and in foreign policy-making. Thus, while business can expect governments to maximise their self-interest more coherently and systematically, this will lend some degree of predictability for investment and operational planning in the region.

GaMes WithOut fROntieRs: GeRMany and the eu The Lisbon Treaty finally came into force in December 2009 after a tortuous ratification process. Changes to the weighting of votes will hand greater influence to so-called ‘peripheral’ states – newer members from Central and Eastern Europe. However, that shift runs parallel to the growing influence of Germany as the guiding power in reforming eurozone monetary policy and enforcing fiscal

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discipline. With the traditional franco-German axis set to remain strained, new french diplomatic initiatives unlikely to gain much traction and the british government opting to remain on the sidelines, Germany is consolidating its position, somewhat hesitantly, as Europe’s anchor state. The cornerstone of this shift is the German government’s emergence as the cheerleader for greater European fiscal rectitude, even though it has on several occasions violated the EU Growth and Stability Pact, which limits annual budget deficits to 3% of GDP. Economic and market fundamentals have supported Germany’s case. Germany’s huge trade surpluses effectively masked current-account imbalances and gross overleveraging of private lending in other eurozone economies, particularly Portugal, Spain, Ireland and Greece. The enormous spreads between German and many other European sovereign bonds in 2010 speak for themselves. Dealing with the threat of sovereign default in the eurozone will be the EU’s biggest task. It will not be easy. In the absence of a formal fiscal union, the European Central bank (ECb) and European EURoPEAn bonD SPREADS bASIS PoInTS, 10-YEAR bonD SPREAD To GERMAn bonDS

PUbLIC DEbT (PERCEnTAGE of GDP)

Source: IMf (data after 2009 is expected)

france is determined to cut its deficit its own way. Southern EU members with large public sectors and traditions of labour militancy would prefer additional latitude in bringing down public debt. All will push Germany to stimulate its own domestic demand, but the cards they play will be based more on institutional manoeuvring than economic leverage. Germany’s growing assertiveness is based on the knowledge that its financial health and export-oriented economy strongly drive that of the wider eurozone (see map overleaf). Acting as Europe’s principal lender of last resort through the ECb, the government feels entitled to assume the leading voice when rewriting rules on monetary policy and enforcement of medium-term fiscal balances, even though implementation will still be the responsibility of individual governments.

With OR WithOut yOu: eu accessiOn pOlitics Enforcement of the penalties will be a tricky matter, but companies working on infrastructural and agricultural projects supported by EU structural funding may have to factor in an additional layer of political risk should host governments breach the new rules. The threat will be softened by the voluntary commitment of new governments in recent accession states, such as Slovakia and the Czech Republic, to stay in line. baltic governments (if not voters) will be determined not to jeopardise their prospects of early eurozone accession. Ironically, therefore, just as the appetite for further political integration has diminished, the prospect of closer benchmarking of fiscal policy is hoving into view. Germany will remain committed, as it has been since 1949, to the principles of multilateralism in its foreign and security policy. To some extent it will be a reluctant EU leader, but sheer economic weight – it produced 20.9% of the EU27’s entire GDP
cOntROl Risks riskmap 2011

Source: bloomberg

Commission’s direct levers of control remain limited. The new European order likely to emerge in 2011 will entail a range of rules and penalties to enforce fiscal retrenchment and reduce public debt as a proportion of GDP. These are likely to involve threats to suspend structural funding, fines of up to 0.2% of GDP and suspension of voting rights in the Council of Ministers. Strict conditions for access to the 440bn euro European financial Stability facility, established after the bail-out of Greece, will underpin the system. The emphasis on fiscal discipline bears an unmistakable German imprint. nevertheless, with a french-led campaign by southern and eastern member states leading to a significant dilution of the German-inspired commission proposals, Angela Merkel has not got everything quite her own way just yet.

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CoUnTRIES WITH GERMAnY AS THEIR MAIn TRADInG PARTnER

Source: Eurostat

in 2009 – underlines its power. The government has emerged as a vocal commentator on whether applicants have met EU accession criteria, while it has broken cover in seeking the removal of nuclear weapons from German soil (presumably remaining under nATo’s nuclear umbrella). These are clear indications of a material shift away from the passive ‘chequebook diplomacy’ of the past towards a more active projection of its interests as Europe’s pre-eminent civilian power, albeit within the framework of institutional memberships. The implications for business of these recalibrations will be mixed. The direct impact of fiscal retrenchment will continue to temper enthusiasm for adopting the euro in peripheral states. After Croatia manages to squeeze through in 2011, the EU door is likely to be slammed shut on any further short-term accessions. The positive ‘magnetising’ effect of prospective membership on applicant states such as Serbia, Macedonia and Montenegro could fade, and they will lose the impetus to carry out necessary reforms to improve legal capacity, reduce corruption and increase transparency in the business environment.

An important risk calculation affecting business operations in the balkans in the coming year will therefore be whether the EU can strike a balance between offering enough hope to aspirants to stay on the reform path and not expediting accession procedures that may damage the EU’s fragile health. More positively for investors, the EU’s inward focus is likely to be reflected in attention to the internal market, for example in improving labour and product market flexibility and competitiveness, which was a key element of the Lisbon process, and delivery of the long-awaited next stage of energy-market liberalisation.

We’Re Only MakinG plans fOR pipelines: easteRn euROpe and centRal asia Aside from Germany, the other state to watch will be Russia. If Germany’s rise is underpinned by hard economic facts, Russia’s residual influence across its ‘near abroad’ is a product of both perception and reality. Twenty years after the demise of communism, the Soviet political mindsets of long-standing

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RUSSIAn GAS IMPoRTS AS A SHARE of CoUnTRY’S ovERALL EnERGY ConSUMPTIon (%)

Source: Control Risks’ calculations

leaders, particularly in Central Asia, alongside resilient institutional, infrastructural and informal business networks still centred on Russia, will remain powerful drivers of regional diplomacy and business. As in the past, this will often work to the disadvantage of Western commercial interests. Russia’s attempts at formal reintegration of the post-Soviet space have long since died off to be replaced by a far more pragmatic approach based on development of bilateral relationships designed to maximise its national security or commercial interest. Even the much-heralded customs union with belarus and kazakhstan will remain subordinated to Russia’s domestic economic priorities. The corollary of these shifts will be to allow greater free play for individual states, large and small, to make their own political weather. Many East European and post-Soviet states will persist in framing their national security perspectives around the potential response of Russia. At one extreme, Georgia will view Russia with unalloyed hostility, at least until President Mikhail Saakashvili leaves office in 2013. At the other extreme, the

unrecognised states of South ossetia, Abkhazia and Transnistria will continue to operate as Russian quasi-protectorates. belarus, Ukraine and the other former Soviet republics occupy an ambiguous middle ground. Where there are threats from domestic Islamist extremism or ethnic conflict, or where states share borders with potentially hostile powers, these states recognise and sometimes welcome Russia’s self-appointed leadership in the security management of the region. Important structural constraints, for example Central and Eastern Europe’s continued reliance on Russia for natural gas in the short-to-medium term, underpinned by the nordStream pipeline (see map above), also give it continued weight on its western flank. At the same time, the Caspian oil and gas exporting troika of Azerbaijan, kazakhstan and Turkmenistan are quietly making other plans. kazakhstan will be readying itself for the kashagan super-giant oil field to come on stream by working up potential export options both to the West and to China. Should the final investment decision, due in the first quarter of 2011, prove
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favourable for the construction of the nabucco gas pipeline, which would effectively connect the Caspian to Europe’s main gas arteries, Azerbaijan will probably commit gas for westward export. Turkmenistan may follow if some formula can be reached to transit gas across the Caspian Sea and commercial terms can be agreed. In any event, its gas export volumes to China and Iran will ramp up next year. natural resource endowments and/or control of transit routes are now entry passes to playing in, rather than merely spectating on, regional diplomatic games. This growing self-confidence, reinforced by greater domestic regime security, means that the former Soviet energy producer states are able to define their self-interest more clearly and decide on the portfolio of investors they prefer. This will be positive for business in that the overall level of commercial engagement is likely to switch up a gear in 2011. on the other hand, governments that have a clearer idea of what they want are likely to drive a harder bargain with foreign companies and potentially create operational difficulties if things do not go according to plan. This points to the need for greater political risk burden-sharing for large projects on the part of Western companies, either with favoured domestic partners or state-owned foreign investors.

domestic reform to develop the economy. If he wants to stay on, there is a chance that Medvedev will pitch for a second term by pushing a less co-operative line with the West on issues such as sanctions on Iran to burnish his nationalist credentials. However, the more likely scenario is that Russia will calculate that its vital foreign policy interests will be best served over the next year by continuing to develop a more constructive relationship with both the US and key European interlocutors, particularly as the prospects of early US missile shield deployment and nATo expansion to incorporate Ukraine and Georgia have receded. These developments underscore the extent to which commercial activity across the region is being framed by geopolitical risk. They also illustrate how markets are increasingly important geopolitical agents, driving change both within weaker economies, but also – in the case of Greece – at a wider institutional level. The toughness of austerity packages across Western Europe will undoubtedly inhibit business in sectors reliant on capital investment. At the same time, the enlarging web of political and commercial relationships evolving further east ensures that new opportunities will continue to present themselves for businesses prepared to seriously address and factor in complex political risks to their current and planned operations.

hunGRy like the WOlf: Russia’s dRive fOR fOReiGn diRect investMent Russia’s power remains centralised with the leadership, particularly former president and current Prime Minister vladimir Putin. Parliamentary elections scheduled for December 2011 will not tell us too much about the future direction of the country. However, by the end of the year, we will almost certainly know which of the Medvedev-Putin tandem will seek re-election as president. The likelihood that they will stand against each other is small, though rivalry between their respective camps, if not the men themselves, has hardened during Dmitry Medvedev‘s presidential term. The international diplomatic community would prefer Medvedev to stay on, but the odds are that Putin will return to serve at least one more six-year term. In one sense, the fundamentals of doing business in Russia will not change much, whoever is in charge. It is not an easy place to do business: excessive red tape and bureaucracy stifle openness and encourage local companies to circumvent the rules. opacity in ministries and broader industry sectors makes life difficult for international companies, and creates a fertile breeding ground for corruption and grey practices. but all is not doom and gloom. Medvedev is promoting the anti-corruption agenda as never before and Russian companies are starting to embrace higher standards of corporate governance, particularly those in sectors that are open to foreign capital. There is a sense that Medvedev understands more clearly than Putin the need for foreign direct investment, modernisation and

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REGIonAL ovERvIEW
MIDDLE EAST: In THE bALAnCE

The first decade of the 21st century has been a period of significant political and security turmoil for the Middle East, heralding intense instability and inter-regional fractures. In Iraq, Lebanon, Iran, Syria, Yemen, as well as Israel and the Palestinian Territories, military interventions, political tensions, nuclear ambitions and the rising spectre of Islamic militancy have fundamentally shaken hopes for development, leaving investors wary of committing to a region so afflicted by uncertainty. While fDI to the Middle East soared from $3bn in 2000 to nearly $80bn in late 2009, investment was mostly directed towards the Gulf, with other regional states widely viewed as too unstable for significant inflows. ARAb CoUnTRIES fDI InfLoW (% GLobAL fDI InfLoWS)

Source: UnCTAD World Investment Report 2009

However, if the last ten years have been a time of geopolitical discord, the fragile buds of a more stable future are now becoming apparent, with potentially important implications for regional stability and investment opportunities across the broader Middle East. At heart, the last 18 months appear to have marked the beginning of a shift away from the black-and-white confrontational politics of the last decade towards a new spirit of pragmatism aimed at promoting greater political and economic co-operation. new players such as Turkey are actively attempting to build a more
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moderate, region-based axis of countries that cuts across the pro-/anti - US/Iran line that dominated Middle Eastern politics in the 2000s, and which has the potential to lower regional temperatures. This advance represents just the first baby steps of progress. And, of course, the dark clouds of a conflict involving Iran and Israel continue to hover ominously over the region, while other sources of tension still simmer. nonetheless, we believe that 2011 will mark a continuation of this maturing process, bringing a greater degree of stability – and investor confidence – to the political environment. Although solutions to the region’s many problems, from the Israel/Palestine conflict to the nature of the Lebanese state and, above all, the status of Iran’s nuclear programme, are unlikely to materialise, Middle Eastern states are beginning to choose a path of moderation over confrontation.

This climate of instability and division dampened the enthusiasm of both regional and international investors, even as countries such as Iraq and Syria slowly began to emerge as more favourable investment destinations for the first time in decades. for example, souring relations between Saudi Arabia and Syria saw Saudi investment in Syria plummet from around $910m in 2006 to just $13m in 2007. Investors from outside the Middle East, meanwhile, consistently cited these conflicts and geopolitical uncertainties as the main reason for their continued reluctance to invest in the region.

a neW pRaGMatisM In hindsight, Hizbullah’s May 2008 takeover of parts of beirut could perhaps be regarded as the turning point that brought the region back from the brink. Iranian-supplied guns on the streets of the Lebanese capital revived memories of the country’s civil war, sparking fears of a new conflict with the potential to spread across the region and draw in Israel, Syria and Iran. An emergency summit, convened in the Qatari capital Doha in a climate of palpable regional tension, laid the groundwork for a settlement of sorts. Lebanese factions, under pressure from their regional sponsors (most notably Saudi Arabia and Syria) reached a power-sharing deal. Importantly, the US – which until that point had played an important role in backing the pro-Western bloc, thereby polarising the conflict further – was largely left out of the process, facilitating a compromise solution. The agreement gave rise to a new mood of pragmatism that would be strengthened in the months ahead as ‘moderate’ states became increasingly preoccupied with peeling regional players such as Syria away from the influence of Iran. A series of further pragmatic steps over the past 18 months has helped change the regional dynamic, with all players seeking a more sustainable balance of power. Qatar has played a particularly notable role, positioning itself as a facilitator of regional accords despite remaining close to ‘resistance’ states and continuing to host the frequently controversial al-Jazeera television network. Lebanese Prime Minister Saad al-Hariri’s decision in September 2010 to publicly apologise for accusing Syria of involvement in the 2005 assassination of his father, Rafiq Hariri, symbolised the extent of this regional transformation. To many observers, Saad’s statement – which stood in sharp contrast to the vehement accusations that both he and his regional backers had long fired in Syria’s direction – bore the hallmarks of political expediency rather than conviction, reflecting an acknowledgment of the need for compromise. Equally important to the new regional dynamic, however, has been the emergence of a new model for emulation: Turkey. Led by an energetic, mildly Islamist government, Ankara has been building a network of economic co-operation that has overcome many of the hostilities of recent years and has bound regional countries together more closely. In much the same way that European stability since World War Two has often been attributed to closer

a difficult decade Much of the malaise that has afflicted the region over the past decade can be traced back to the events of September 2001, which threw the region into deep unrest as it struggled to adapt to a new ‘zero-sum’ global status quo. With former US president George W bush insisting that countries were either ‘with us or against us’, Middle Eastern states were thrust into a conceptual framework allowing little room for manoeuvre. The region quickly fractured along two axes. on the one side stood those countries that decided to line up firmly behind the US, the so-called ‘moderate’ states represented by Saudi Arabia, Egypt and Jordan; on the other, a self-proclaimed ‘axis of resistance’ linking Iran, Syria and militant groups Hizbullah and Hamas. This binary dynamic of power provoked sharp competition and a dramatic escalation in regional tensions as both sides sought to assert their regional ascendancy. The ‘moderate’ camp in particular viewed ‘resistance’ states as a direct threat to regional stability and voiced fears that Iran was seeking to spread its revolutionary brand of Shia Islam across the region. The 2003 invasion of Iraq and Israel’s military offensives in Lebanon (2006) and the Gaza Strip (2008-09) heightened this sense of instability. In addition to the violence they engendered, the conflicts entrenched regional divisions along these aforementioned lines, with the ‘moderates’ largely supporting the US and Israeli offensives, and the ‘resistance’ axis opposing them. With the competing axes spanning the entire region, growing voices warned of the potential for a devastating regional conflict. Lebanon more than anywhere else emerged as the proxy location for the divide, pitting a ‘moderate’, pro-Western camp against Syria- and Iran-backed Hizbullah. Political battle for control of the state and armed clashes between rival supporters became an almost daily occurrence and culminated in Hizbullah’s May 2008 takeover of western districts of the capital beirut.

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economic ties, growing commercial links between Middle Eastern states could prove a powerful influence in moulding national interests into a broader regional agenda. A series of trade agreements, combined with soaring Turkish investment in Arab states, have consolidated strong bilateral ties between Turkey and many Arab countries. Turkey, which nearly went to war with Syria in the 1990s, now arguably stands as Damascus’s closest regional ally. Likewise, and despite a continuing kurdish insurgency within its borders, Turkey has drawn very close to the government of the northern kurdistan Region (kR) in Iraq. Even Iran, long seen as a rival to Turkey, has drawn closer of late on the back of rapidly improving commercial ties. other countries are starting to follow suit, providing hope for the resolution of other regional tensions. for example, despite regular hiccups, Syria and Iraq are slowly overcoming decades of mutual hostility on the basis of shared economic interests. Syria, which suffers from dwindling oil revenues, sees potential financial windfalls in the redevelopment of Iraq, while the Iraqi authorities, anticipating a new era of economic power once oil revenues increase, stand to gain access to Mediterranean ports and European markets through closer ties to Syria. The Gulf region, boosted by higher oil prices, remains an important investor across the entire Middle East. Popular support for the Turkish approach has now emerged as a powerful alternative to the Iranian model of resistance, while also sidelining traditional powers such as Egypt, which has lost regional oPInIon PoLLS In THE MIDDLE EAST

credibility through its continued support for US policy. Ankara’s willingness to take on Israel – while largely rhetorical – has shown many in the region that a combination of economic development, democracy and Islamic nationalism can go hand-in-hand, negating the perceived superiority of the Iranian model of more militant resistance. While popular support for Iran soared within the more binary politics that the bush administration imposed on the region, the pragmatic incentive of the Turkish model has become far more appealing as regional powers have grown to appreciate the urgent need for greater compromise and economic growth. for foreign investors, signs of a new pragmatism have important ramifications. not only do the growing number of trade agreements and regional free-trade zones signal a growing facilitation of cross-regional business, but, more importantly, they point to the potential for greater stability that has for so long impeded inward investment into the region. Many states in the Arab world remain relatively untouched by global capital despite the rich opportunities on offer. While cumbersome business practices and corruption will continue to act as considerable impediments to new inflows, a sense that the region is no longer perpetually on the brink of conflict may encourage more companies to consider it as a viable option. More than any other country, Iraq may serve as a case study of new hopes on the back of oil contracts signed in early 2010. The associated financial windfall has the potential to act as an economic hub for the entire region, drawing in massive investment flows while serving as a new commercial centre with tentacles across the wider Middle East.

Source: 2010 Arab Public opinion Poll / University of Maryland & Zogby International

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and yet… Even so, it would be naïve to suggest that all is well and that the days of Middle Eastern discord are over. Although the region is witnessing improved ties between states, it has a long way to go before these gains are consolidated. Moreover, while there is certainly a new sense of pragmatism, more comprehensive solutions to underlying issues remain elusive. The region is now at a crossroads. on the one hand, recent steps and growing support for the Turkish model suggests that a vision based on shared commercial interests could provide a powerful incentive for increased regional stability and encourage moves to address core areas of dispute. on the other hand, these very issues could erupt once again, propelling the region into new turmoil. The threat of a conflict involving Iran in particular continues to hang dangerously over the region. With little diplomatic success in recent months in halting the country’s nuclear activities, a potential Israeli or US military strike could create regional turmoil because of Tehran’s strong ties to armed groups in Iraq, Lebanon and the Palestinian Territories. While we continue to believe that a military strike on Iran is unlikely in 2011, the issue will remain a source of considerable regional tension and uncertainty. furthermore, the situation in Iraq could yet unravel, sparking off a new cycle of violence, while underlying issues in Lebanon concerning the nature of the state remain unresolved. Tensions are already rising in beirut (despite renewed Saudi-Syrian efforts to calm the situation) as the Un Special Tribunal on Lebanon moves forward with the possible indictment of Hizbullah figures; meanwhile a renewed conflict between Hizbullah and Israel cannot be discounted. Attempts to revitalise a new regional peace process with Israel are also likely to flounder. Indeed, one of the key impediments to progress will arguably be the perpetuation of a ‘zero-sum’ understanding of regional politics on the part of Israel, the Palestinian Authority and the US. by refusing to engage with Hamas, despite its control of Gaza, and statements suggesting a greater willingness to reach some form of agreement with Israel, these powers are closing the door to the potential gains of growing compromise. While the peace process is likely to continue in some limited form, we do not expect meaningful progress. Even so, the negotiations themselves could still restore a modicum of stability to this particular arena, establishing new channels of communication that in the longer term could help soften hardline attitudes.

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ConTRoL RISkS’ STATISTICS
kIDnAP
Latin America has historically been the global hotspot for kidnapping-for-ransom, but its proportion of the global total has waned in recent years as a result of a reduction in cases in Colombia and an increase in abductions in other parts of the world. nevertheless, venezuela and Mexico continue to see significant levels of kidnapping. kidnaps have risen steadily in Asia and the Pacific following a lull in 2007. The region’s increase has been sustained by a high number of incidents in Pakistan, India and Afghanistan. nigeria accounts for the majority of abductions recorded in Africa.

ToP 20 CoUnTRIES In AbSoLUTE TERMS foR 2010 (AS AT 26 oCTobER)

kIDnAPPInG-foR-RAnSoM IS InCREASInG In GLobAL SCoPE (% SHARE of GLobAL ToTAL, bY REGIon)

kidnap-for ransom is defined as ‘the abduction of a person or persons with the intent of their detention in an unknown location until a demand is met’. This section presents statistics based on information that Control Risks collates on global kidnaps and maritime security to show regional and other trends. It is based on incidents for which Control Risks has been able to acquire reliable information.

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ConTRoL RISkS’ STATISTICS
PIRACY
Maritime piracy, armed robbery and theft are significant threats worldwide. The maps below show the geographic spread of pirate attacks from 1 January to 20 october 2010 in the three main global hotspots. The first shows how pirate attacks have continued to spread further east of Somalia in the Indian ocean, and have notably moved further south along the East African coast. This trend is set to persist into 2011. Piracy in South-East Asia increased marginally in 2010 after several years of gradual decline. Levels remained low in the Malacca Strait, but surged in the South China Sea, reflecting uneven maritime security provision in the area. The niger delta map (next page) underlines the persistent risk of criminal piracy, despite a decline in maritime militancy in 2010. Criminal groups continue to target the offshore oil and gas industry, and the threat has migrated east into Cameroonian waters. PIRACY ATTACkS 1 JAn - 20 oCT 2010: InDIAn oCEAn AnD GULf

PIRACY ATTACkS 1 JAn - 20 oCT 2010: SoUTH-EAST ASIA

These data reflect incidents for which Control Risks has been able to obtain reliable information through Q3 2010.

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The graphs below show the levels and monthly tempo of piracy attacks in the main affected regions. off the Horn of Africa, Somali piracy continues to show a strong seasonal cycle, with activity constrained to the Gulf of Aden during the summer monsoon (late-May to September), but moving into the Indian ocean at other times. Pirate activity is likely to continue following these seasonal trends over 2011. The charts for South-East Asia underline the small year-on-year increase in 2010, while levels in the Gulf of Guinea are on a par with recent years. The final regional chart underlines that the Horn of Africa, South-East Asia and the Gulf of Guinea remain the world’s most significant piracy hotspots, and are set to remain so in 2011. PIRACY ATTACkS 1 JAn - 20 oCT 2010: GULf of GUInEA

MonTHLY PIRATE ACTIvITY, JAn 2008 - SEP 2010: HoRn of AfRICA

MonTHLY PIRATE ACTIvITY, JAn 2008 - SEP 2010: SoUTH-EAST ASIA

MonTHLY PIRATE ACTIvITY, JAn 2008 - SEP 2010: GULf of GUInEA

REPoRTED InCIDEnTS AnD PIRACY, ARMED RobbERY AnD THEfT bY REGIon. 2008 - Q3 2010

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ConTRoL RISkS’ STATISTICS
RISk RATInGS
The following graphs compare our security risk forecasts for 2011 with those of 2001. RiskMap 2001 was prepared in late 2000 – before the September 2001 attacks and the wars in Afghanistan and Iraq. We altered our risk rating definitions in 2003, which accounts for some of the changes (notably the reduction in the number of countries rated ‘insignificant’). The lack of change in the overall totals was at first surprising. However, they conceal some significant movements. of the 27 countries rated at extreme or high in 2001, only two saw their ratings stay the same: Afghanistan and Somalia (extreme). Liberia, in the throes of civil war in 2000, has seen its rating forecast fall from extreme to medium as its slow recovery continues. Iraq has gone in the other direction. kenya, Zimbabwe, Mexico, venezuela and Pakistan have all seen a deterioration in conditions over the decade, while Angola, Montenegro and Serbia, among others, have seen improvements.

SECURITY RATInGS bY REGIon, 2001 vs 2011

note: for countries with areas at a different risk level (for example, benin is rated medium, high on the nigeria border), we have selected the higher rating only in cases where a significant area of the country is included.

RISkMAP SECURITY RATInGS 2001 vs 2011

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RISk RATInG foRECAST foR 2011
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 re-negotiation 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 activity 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 re-negotiation 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, infrastructure is almost entirely deficient or major reputational damage is certain. 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 to companies can 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 lowlevel challenges do not significantly impede business. for example: the authorities provide adequate security, organised crime only marginally affects business and protest activity rarely escalates into threatened or actual violence. Rare but large-scale terrorist attacks may pose indirect threats to personnel or assets, or low-level attacks do not target business and are not aimed at causing casualties. MEDIUM Aspects of the security environment pose challenges to business, some of which may be serious. for example: there are some deficiencies in state protection, organised criminal groups frequently target business through fraud, theft and extortion, domestic terrorist groups stage regular attacks that cause disruption to (but do not target) business or there are infrequent large-scale attacks and/or opportunistic small-scale attacks on foreign or business assets and personnel. HIGH The security environment presents persistent and serious challenges for business; special measures are required. for example: state protection is very limited, insurgents are engaged in a sustained campaign affecting business, kidnap poses a severe and persistent threat to foreign personnel, terrorist groups stage regular attacks against foreign or business assets, or weak security forces are incapable of dealing with the terrorist activity. EXTREME Security conditions are hostile and approaching a level where business is untenable. for example: there is no law and order, there is outright war or civil war, personnel constantly face the threat of targeted and potentially life-endangering violence, a terrorist group (or groups) is staging a sustained, high-intensity campaign that severely hinders business or terrorists frequently target foreign personnel or business activity.
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RISkMAP CoUnTRY ovERvIEWS AnD foRECASTS
The articles and risk tables in this report were produced by our team of global political and security risk analysts. They have been written in conjunction with an examination of both the risks and potential rewards in 173 individual countries looking at the issues that may affect companies and investors over the year ahead. These forecasts and additional expert analysis are delivered via a free-to-access website. The RiskMap website includes: • Comprehensive write-ups of our country risk forecasts and ratings for the year ahead • Briefings on issues our clients are facing around the world • Additional research reports from Control Risks’ PRIME political risk analysis service • An opportunity to sign up for a free trial of our online political and security risk analysis service Country Risk Forecast

siGn up fOR fRee access To request access to the RiskMap site, please contact riskmap@control-risks.com

AboUT ConTRoL RISkS
Control Risks is a global risk consultancy specialising in political, security and integrity risk. We help our clients to understand and manage the risks of operating in complex or hostile environments. our unique combination of services, our geographical reach and the trust our clients place in us, ensures we can help them effectively solve their problems and realise new opportunities across the world. from our 34 offices across five continents, Control Risks provides the following services:

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