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RiskMap 2011

Managing Risk | Maximising Opportunity


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Table of contents

Welcome to RiskMap 2011 1

The Geopolitics of Business 3

An urban world: the security and operational challenges of cities 10

The growing compliance burden for business 16

Regional overviews 22

Africa: Election fever 22

Americas
: The drugs trade 26

Asia: Competitive neighbours 30

Europe: Geopolitics revived 34

Middle East: In the balance 39

control risks’ statistics 43

Kidnap 43

Piracy 44

Risk ratings 46

Risk rating forecast 2011 47


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

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region. Military action against Iran remains unlikely in 2011, but the requires boards to actively demonstrate real compliance through
stakes are high and we should remain vigilant. Iraq still faces political the tangled web of joint ventures, agency agreements and
and security challenges, but its longer-term trajectory is positive. distributors that is the everyday reality of transnational business.

Africa is gripped by election fever. National elections in 20 countries It all sounds rather grim. As ever it is important to emphasise that
are scheduled for 2011. While in some cases this might rightly be a the world is more open for business, more pregnant with
cause for celebration, in others it will increase tension and the opportunity than ever before. Hardly anywhere is beyond the
possibility of unrest. In Nigeria, Goodluck Jonathan’s formal reach of ambitious companies. Kim Jong-un’s nervous
assumption of the presidency in the wake of Umaru Yaradua’s appearance alongside his ailing father at North Korea’s recent
death upset the unwritten agreement whereby the presidency military parade might even mark a glimmer of hope that one of the
rotated between north and south, so the 2011 elections will be last outposts of totalitarian seclusion could change, perhaps for
even more highly charged than usual. But Nigeria’s resilience and the better.
ability to find imperfect short-term fixes to seemingly intractable
problems are likely to ensure that a major crisis is averted. Like most political leaders, US President Barack Obama is finding
that domestic politics can be a tough trade. With increased
In Latin America, Mexico will remain in the grip of its drug wars. constraints on his ability to push through legislation at home, he
The brutality of the violence and its proximity to the US mean that will seek to regain momentum by chalking up foreign policy
this issue will dominate the headlines. The curse of cocaine affects successes. The great advantage of international diplomacy over
not just Mexico but the wider Central American and northern national issues for pressurised leaders is that almost everybody is
South American region, obscuring better news further south. But pleased when you show up and nobody really expects you to
Mexico remains a stable state and is not about to fail, despite the succeed. So we should anticipate seeing more of Obama on the
severity of its problems and the predictions of many analysts. global stage in the year ahead. There will be plenty for him to do.

Much of Europe will be gripped by deficit reduction, encouraging I hope Control Risks’ RiskMap 2011 provides you with a range of
national introspection. There will be little scope for intra-EU insights into the complex interplay of business and politics for the
bonhomie: it will be too tempting for commentators not to portray year ahead. The report demonstrates the considerable academic
next year as the prudent Germans imposing some moral rectitude rigour we apply to shining a light on the world for our clients, which
on the profligacy of their southern neighbours and allies. Russia’s is complemented by our experience of working on the frontline in
improved relations with the US should continue, and by the end of most of the featured countries.
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

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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
1992
world GDP
attacks. The focus is back on state-centred threats: nuclear weapons,
$24.27tr 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.

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.
Source: SIPRI
It could crack under the weight of another downturn, lingering
unemployment and a vocal political constituency convinced that The return to strategic diplomacy is clearest in the US, which has
globalisation is a zero-sum game. seen its freedom of global action curtailed by a combination of the
fallout of the Iraq war, dire economic and fiscal pressures at home,
The co-operation and co-ordination that characterised the ‘crisis and emerging states with independent agendas. Unparalleled US
agenda’ could not last. A G20 that warded off trade protectionism hard power has been severely curbed by the erosion of its
has been less successful at preventing competitive currency international prestige and moral authority on a range of issues,
devaluations. Well-meaning efforts to address global systemic from human-rights violations during the war on terror to the
risks – such as large US deficits, China’s huge surpluses and the traumatic implosion of ‘Anglo-American’ finance. However, the
failures of transnational banking regulation – have inevitably Obama administration’s engagement offensive has achieved
foundered on domestic political and economic priorities. Instead, significant diplomatic success on a range of issues, from global
we have seen a return to the days when significant decisions, from governance reform to arms reduction and nuclear non-
Greece’s bailout to sanctions on Iran’s nuclear programme, are proliferation. With partisanship in the next Congress likely to
being made late at night behind closed doors, by leading powers paralyse US domestic politics, there is a good chance that Obama
brutally assessing their national interests. 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 cyber organised criminal groups and malicious hackers continue
in the region appear increasingly well-founded. Outside Pakistan to pose a major and growing threat to business, governments are
and Iran, few regional or global stakeholders appear interested in increasingly hyping cyber-warfare and cyber-espionage threats
engaging (though China’s massive mining investment in Logar from state or state-sponsored actors. Several states – notably
province is a potential beachhead). The drumbeat of transnational the US, China, Russia, France and Israel – are widely believed to
terrorist plots originating in the Afghanistan-Pakistan border possess sophisticated cyber and electronic warfare capabilities,
region, affecting the US, Europe, Central Asia and elsewhere, built in part through liaison with patriotic hacker undergrounds.
will certainly force the US and NATO to remain engaged for While state capabilities have been developed covertly over many
years to come. The odds are also long that the relaunched years, the US has led the way in openly militarising national
Israeli-Palestinian peace process will succeed by the self-imposed cyber-security with the launch of a dedicated Cyber Command
August 2011 deadline. Even so, Obama has invested significant (CYBERCOM) in 2010, reflecting both routine attacks on defence
political and diplomatic capital in the talks, and can be expected systems and the growing reliance of military platforms and critical
to keep driving them, though recalibrating expectations will infrastructure on digital networks. Both the US and the UK have
become a feature of the process as the deadline nears. recently made cyber-security a central element of revised
national security strategies.
Iran, meanwhile, remains defiant in the face of increasingly harsh
international sanctions. While crimping its overall economic The large-scale cyber attacks on Estonia (2006), Georgia (2008)
performance, the sanctions are likely to be consolidating the and Western technology companies (2009) raised thorny questions
control of the Iranian Revolutionary Guards Corp (IRGC) over key about how to identify an attacker, determine the level of state
industrial sectors. Start-up delays at the controversial Bushehr involvement and craft an appropriate response. The asymmetrical
nuclear plant, variously attributed to industrial sabotage or advantages of cyber-attacks were acutely demonstrated in 2009
containment problems, are likely to be overcome by early 2011. when militants in Iraq used a $26 programme to hack the
According to the International Atomic Energy Agency (IAEA), unencrypted video feeds of US surveillance drones. Finally, the
enrichment-related activities continue apace at other locations. disclosure in 2010 of sophisticated, ‘military grade’ malware
While the endgame timeline remains fluid and an eleventh-hour targeting the control systems of critical infrastructure – still
détente is possible, $120bn in planned US military assistance to unattributed – suggested that cyber-attacks could cause real-world
Gulf Arab countries and increasingly overt discussion of the ‘military damage to nuclear plants, oil and gas refineries, and water and
option’ sing a different tune. We continue to believe that a US or sewage systems. As these cases suggest, the low cost, global
Israeli strike is unlikely in 2011 – risks outweigh rewards in the reach and – above all – anonymity of cyber attacks significantly
absence of confirmed intent to weaponise – but the situation is complicate the traditional geopolitical landscape.
conducive to abrupt reappraisals.

The world’s other major nuclear threat – North Korea – presents The rise of commercial diplomacy
an entirely different set of issues. The anointment in late 2010 of
Kim Jong-un as probable successor to Dear Leader Kim Jong-il While the US devotes its efforts to global security, rising powers
has cast the country’s upcoming political transition into sharp are rapidly reconfiguring the basis of global economic power. It is
relief. The sinking of a South Korean frigate in March 2010, increasingly rare to see emerging-country leaders such as Turkey’s
attributed to a North Korean mini-sub torpedo, has ratcheted up President Abdullah Gul without a bevy of investors and corporate
peninsular tensions to their highest level since the North’s 2009 executives in tow, or returning from a diplomatic mission without
nuclear test. Consequent joint US-South Korean naval exercises billions in trade deals. The increase in trade and financial ties
have fed into the slow-burning confrontation between China and between emerging economies has clear strategic implications:
the US over regional maritime security and freedom of navigation. Brazil demurred in late 2010 when asked to be part of a G20
While North Korea can be expected to muddle through – regime campaign to pressure China on its currency, not wanting to
collapse is unlikely – it will continue to rattle regional stability and jeopardise relations with its new number one trade partner.
necessitate robust engagement by the six-party powers (North
and South Korea plus the US, China, Russia and Japan). In the last ten years the direction of trade among major emerging
economies has starkly reversed. Where the US and Europe were
One of the brightest spots on the global security horizon is the once centres of gravity, now China, the UAE, Russia and other
phased withdrawal of US military forces from Iraq, which is emerging powers are the key hubs in the global trading system
expected to conclude with the completion of Operation New Dawn (see map overleaf). Even where the US, Germany or Japan
by the end of 2011. While Iraq is still racked by periodic bloodshed remains the major trade partner – as in Egypt, Turkey and Indonesia
and enervating political uncertainty, the vicious cycle of violence respectively – China, Russia or another fast-growing economy is
has been conditionally replaced by an institutional political process inexorably nipping at their heels. Such burgeoning South-South
backed by massive oil and gas investment. Few will tout ‘mission economic relations are the building blocks of a new geopolitical
accomplished’ in 2011, but Iraq no longer consumes the agenda, inexorably in competition with Western-dominated
geopolitical landscape as it did a few years ago. institutionalism, founded on commerce, sovereignty and
national interest.
Conversely, cyber-security has leapt up the national security
agenda and will become even more significant in 2011. While

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Top trading partners of major emerging markets, 2001 vs 2009

Source: International Trade Centre

Looking at four key examples: power is a platform for building commercial ties to the Middle
East – especially in Syria, Iran and Iraq – while keeping a foot
Brazil in Western projects like NATO and the EU. Turkish companies
have piled into the Kurdish region of northern Iraq, dominating
Argentina and Brazil may both represent South America in the both construction, and oil and gas production, and making the
G20, but the continent’s most populous country and largest region one of Iraq’s most prosperous. In exchange, Ankara
economy clearly desires the starring role – and wants to lead the gains increased flexibility in dealing with Kurdish separatist
region out of the US’s shadow. Outgoing President Luiz Inacio Lula insurgents in eastern Turkey.
da Silva has been the architect of Brazil’s extroverted foreign policy,
conspicuously courting anti-US regimes both in the region (Venezuela, Meanwhile, Turkey and Iran have found common ground on
Cuba) and beyond (Iran). Such moves are in part about commercial Kurdish separatism, and are strengthening commercial ties.
ties: the country has become one of Iran’s most significant trade The US has raised concerns that Turkish banks may be filling
partners, exporting more than $1bn in foodstuffs in 2009. the void for Iranian transactions as sanctions curtail traditional
financial centres. Turkey has also sought to increase its
Brazil accounted for most of Latin American outward FDI over the strategic importance by strengthening its role as a natural gas
last five years and its companies, especially in construction and ‘energy bridge’ to the EU through projects such as Nabucco, a
real-estate industries, are major players throughout the region. multi-country pipeline connecting Central Asian gas to Western
Flagship oil company Petrobras is investing billions of dollars in Europe, which is expected to reach a final investment decision
Argentina, among other countries. Economic ties with China are in early 2011.
also intensifying. A Chinese-financed $2.5bn port complex and
$5bn steel foundry at the port of Açu near Rio de Janeiro followed Russia
a $10bn oil-supply agreement in 2009. Such mega-deals are a
tribute to Brazil’s economic growth and geopolitical ambitions, and Russian assertiveness has mellowed after both thwarting a US
will help cement relations with other rising states. missile shield and defending its commercial interests in Iran. Its
invasion of Georgia in 2008 – the only interstate conflict since the
Turkey start of the Iraq war in 2003 – faced only rhetorical Western resistance.
The disclosure in August 2010 of an anti-aircraft missile battery in
The crisis and recession have been pivotal factors in Turkey’s Georgia’s breakaway Abkhazia region has been met with studious
emergence. Gul is reportedly fond of noting that his country blasé. Relations are tightening with Central Asia – especially
has gone from being the ‘sick man of Europe’ to one of its Kyrgyzstan – while a pro-Russian government is again installed in
healthiest economies, with bonds in late 2010 rated above Ukraine. The exigencies of firming up the energy-security
those of Spain, Italy and Portugal. This newfound economic relationship with Europe have encouraged softer rhetoric on both

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sides and progress on major pipeline projects such as Nord ‘Middle East of rare earths’, in Deng Xiaoping’s phrase. An increasing
Stream. Russia has started to encourage foreign participation in its number of countries are concerned about securing supplies to
oil and gas sector after years of hostility, which could further fuel domestic industry: Germany sees rare-earth scarcity as a
strengthen ties with the US and Europe. long-term vulnerability for national champions like Siemens and
Bosch; Japan and China clashed in late 2010 over disruption that
India threatened the supply chains of Toyota’s and Honda’s hybrid-electric
vehicle manufacturing. The US Government Accountability Office
Buoyed by years of rapid economic growth, India alternates (GAO) has assessed that China’s dominance of rare earths gives it
between confidence that it will gain greater representation on ‘market power’ over major US defence contractors, including
international security and financial organisations, and frustration Lockheed and General Dynamics.
that progress is not fast enough. India has successfully cultivated
its indigenous technology and back-office support industries. As these examples suggest, access to rare earths is becoming a
Conglomerates such as Tata Group, Reliance, Bharti Enterprises geopolitical issue in its own right: any export restrictions, price hikes
and ArcelorMittal are rapidly internationalising, capitalising on or other disruptions threaten to become sources of bilateral or
successes at home to expand and acquire interests around the world multilateral tension and fuel simmering trade conflicts. Yet the
– though they still lag behind their state-backed Chinese counterparts. strategic elevation of rare-earth elements – as well as scarce and
Similarly, foreign multinationals are eyeing India as one of the concentrated minerals such as lithium, cobalt and coltan – will also
largest upwardly-mobile consumer markets in the world. drive new exploration worldwide as countries look to diversify and
stabilise supply. Germany, for example, has called for Europe to
However, problems closer to home might undermine India’s global explore and develop prospective resources in Eastern Europe and
ambitions. Troubled relations with its neighbours, including but not Central Asia, partly to pip China to the post. Higher prices have also
exclusively Pakistan, are a persistent problem for Delhi, preventing encouraged Australia, Vietnam, Malaysia, Canada, Brazil and India to
it from tackling serious challenges such as climate change, develop projects. Greenland even overturned a longstanding ban on
terrorism and organised crime. India’s quarrels have also allowed uranium mining in 2010 to permit access to a rare-earth deposit. In
China to compete more effectively in its backyard, in Pakistan, Sri the coming year, we anticipate new opportunities for miners of rare
Lanka and elsewhere. Equally, India is eyeing every move of the earths and other unique minerals, which could provide a boon to
US, whose relations with Pakistan and posture in Afghanistan several mineral-rich countries and help tame geopolitical concerns.
continue to vex Delhi. Sustaining warmer US relations remains a
top priority – periodically advanced by bilateral efforts such as South China struggles
nuclear co-operation and naval training exercises – but India will
be anxious to retain its independence. Old friends like Russia will Natural resources are also at the centre of longstanding territorial
not be cast aside, as illustrated by the weakened but still deeply disputes in the South China Sea. In addition to rich fisheries, there may
entrenched defence relationship. 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
Emergent resource competition Malaysia have been successfully exploiting offshore oil and natural-gas
fields in the adjacent Brunei-Sabah basin for more than 30 years.
Natural-resource competition is the essential ingredient of
classical geopolitics. But one interesting aspect of today’s chief Claims on these potential subsea resources, including those made
resource contests is that they barely existed 20 years ago. under the UN Convention on the Law of the Sea (UNCLOS), often
Concerns about access to rare earth minerals are driven by new and include disputed territory, such as the Spratly and Paracel island
growing markets for iPods, computer hard drives and electric car groups. For years, provocative fishing and offshore exploration
batteries – and the expectation that green technologies will generate activities have tested neighbourly tolerance in efforts to create new
future economic growth and jobs. Longstanding maritime territorial facts on the ground, though the overall stalemate has barely budged.
disputes in the South China Sea are suddenly more pressing, in part With China adopting a more muscular naval posture, however, the
because China’s growing naval power is forcing the issue, but also stakes are rising. The Association of South-East Asian Nations
because innovations in deepwater offshore drilling and mining (ASEAN) has tentatively welcomed US intercession on behalf of
technology might open up commercial oil, gas and mineral multilateral solutions to territorial disputes, leveraging its core strategic
deposits. Finally, growing interest in the Arctic is a function of both interests in Taiwan and freedom of navigation in the South China Sea.
deepwater technology and the very recent and continuing effects The extra-regional dimension complicates things: cooler heads are
of a warming climate. In all these cases, companies are among the likely to prevent any major naval escalation, but considerable
first to be affected by geopolitical confrontation, often becoming uncertainty will continue to plague exploitation of the sea’s resources.
proxies of strategic interests.
Cash in the Arctic
Rare earth
Accessing Arctic resources presents a rosier picture. One of the
The commercial and strategic value of rare-earth minerals, used in most promising frontiers for energy, minerals, fisheries, water and
a variety of high-technology applications, has surged with China’s trade routes, it is slowly – and controversially – being prised open
moves to curb exports. The country is the largest global supplier – the 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 the Lomonosov Ridge is being decided through UN arbitration.
opportunities: undiscovered resources are estimated at 90bn The US and Canada, meanwhile, are investing in robotic
barrels of oil and 47bn cubic metres (bcm) of natural gas. submersibles, seaplanes, ice-hardened cargo ships and ice
breakers, and folding the prospective North-West Passage into
Countries are already jostling for the day when weather conditions long-term military planning.
permit long-term projects. Russia provocatively claimed half the
Arctic in 2001 and planted a flag on the seabed using a robotic These manoeuvres suggest conflict, but Arctic issues provide one
submersible in 2007. Its dispute with Canada and Denmark over of the most durable patterns of geopolitical co-operation through

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the semi-formal Arctic Council and other multilateral bodies. retaliatory attacks. However, few bilateral disputes currently have
Russia and Norway recently reached an accommodation on sharing the potential to lead to a full-scale conflict. Despite increased
the Barents Sea, which should facilitate future natural gas projects geopolitical assertiveness, rising powers are acutely sensitive to
in the mould of Snohvit and Shtokman. Furthermore, Nordic countries the sentiments of the global marketplace and are unlikely to allow
have long co-operated through the Nordic Council, settling many anything to escalate that may damage investor perceptions.
territorial disputes in the 1990s. Canada has become more explicit
in its Arctic sovereignty claims, but is making progress on resolving The same calculus does not necessarily apply to situations like
a longstanding territorial dispute in the Beaufort Sea with the US. Iran and North Korea, which are relevant primarily through the
While the Arctic will inevitably become an area of significant impact that any instability or conflict would have on business
competition, the progressive resolution of disputes will help reduce operations in neighbouring countries. In the case of Iran, a conflict
geopolitical risk in the future. 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.
Accounting for geopolitical business risk Monitoring security relations between countries is also relevant in
the context of trans-border security issues: the strong political and
Business is at the heart of the current geopolitical transformation. treaty ties between the US and Mexico, for example, are
Key emerging countries are building political capital with their instrumental in reducing the risk of harmful border closures on the
neighbours and around the world through strategic investments back of continuing violence.
and increasingly dense commercial partnerships. State-backed
banks, investment vehicles and resource companies are High-level political risks are equally significant. Growing
obviously integral to this strategy, and have generally received a assertiveness abroad tends to go hand in hand with indigenisation
warmer welcome in other emerging and developing economies of the business environment at home, both to shore up supportive
than in Western countries. The private sector has blazed trails of political constituencies and provide a firm foundation for projecting
national interest: emerging-market positions on trade policy, state power. Such moves are not always overly harmful to the
climate change and financial reform have been strongly informed business climate or investor sentiment – Brazil’s move from a
by industry imperatives. Furthermore, in many contexts there may concessionary to production-sharing oil and gas regime is a good
be little differentiation between private-sector and national example – but are always worth monitoring for implications that
interests given the close relationship between political and might affect contractual security or lead to creeping or overt
economic elites. Western investors are supplying much of the expropriation. Such political risks can also be transnational, as
capital, skills and technology powering emerging-economy when government policies hit international supply-chain integrity
development, increasingly joining their emerging-country peers, and continuity (export bans, restrictions or tariffs) or subject
including state-owned enterprises, to forge world-class partnerships. investments to adverse scrutiny or strict conditions (such as
mandatory partnerships with state-owned companies). This is
The interlocking of state and business naturally creates particularly the case when investing in sensitive sectors such as oil
opportunities and risks for business: on one hand, state interest and gas, mining, aerospace, infrastructure, IT and
can secure high-level diplomatic cover, shield companies from telecommunications, aviation and a handful of others subject to
adverse regulation, offer recourse to international arbitration and government review in many countries.
provide access to low-cost financing. Mutual business interests
have been a catalyst for geopolitical co-operation, helping to Transnational operational risks are often less overt – except in the
reduce risks for investors across the board in some regions. case of legal sanctions – but also significant. Governments often
exert pressure on neighbours and trade partners by slowing
On the other hand, companies inevitably become tangled in a web customs processing, refusing visas, delaying letters of credit and
of geopolitical manoeuvring. This ranges from reluctance to allow so on. Many such policies remain unofficial and are rarely
investment in ‘strategic’ assets to outright sanctions and articulated, making it essential to get first-hand information about
prohibitions on doing business in certain countries. Doing the situation. Even if such activities are not state-directed, a
business in many emerging countries often means working directly geopolitical dispute may affect business relations: China has
with the government in one form or another, exposing companies acknowledged, for example, that traders incensed at Japan’s
to a range of political, reputational and legal risks. With states detainment of a Chinese fisherman in late 2010 may have
increasingly interested in pushing their agendas through independently slowed or delayed exports. The threat or
commercial channels, it is essential that companies understand implementation of formal sanctions and extraterritorial legislation,
the relationships between states and assess their exposure to meanwhile, can significantly raise the costs of doing business in
geopolitical risk. affected countries, both in terms of access to financing and
complying with controls. Understanding how both the public and
Navigating the changing geopolitical risk landscape begins with a private sectors will react to geopolitical events can provide critical
clear assessment of transnational security, political and operational early warning to prevent business disruptions.
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 Much of this urban population is poor. The UN estimates that by
cities of the emerging world. Cities are the main markets, the most 2035 at the latest, the majority of the world’s poor people will live
obvious headquarter locations, the primary sources of labour and in cities. The population of the world’s slums is growing by 25m
the key drivers of growth for most corporations. They also people every year; there could be 2bn slum dwellers by 2040. By
represent the primary threat environment for businesses to 2020, the poor could comprise 45% or even 50% of the world’s
understand and address if they are to protect their assets and urban population. In the poorest areas of Calcutta, the average
reputation, and maximise their revenues in the decades ahead. 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 São Paulo is already one of the world’s largest cities
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. Governance challenges

With population growth in OECD countries largely stagnant, The sobering reality behind the statistics is a monumental
urbanisation will become an increasingly emerging-market governance challenge. Unconstrained urban growth typically
phenomenon. Between 2010 and 2050, the urban population in Africa outstrips the pace of formal housing supply, creating vast
will treble, and in Asia it will more than double. By 2050, 54% of all populations of unregistered new inhabitants with no formal
city-dwellers will live in Asia and 19% in Africa. In 2025, 13 of the property rights, often living in marginal areas. Struggling to cope
world’s 15 biggest cities will be in Asia, Africa or Latin America; Asia with the fiscal, logistical and architectural problems of rapid
may have ten ‘hypercities’ (with populations of more than 20m growth, city governments and local business elites find themselves
inhabitants). Dhaka, Kinshasa and Lagos are all approximately 40 times drawn into confrontation. This can be seen in the use of security
larger in 2010 than they were in 1950. The expanding agglomeration agencies as agents of social control, rather than citizen protection:
of merging cities around Mexico City could reach around 50m by for example through slum clearances or a quasi-military approach
2050 – equivalent to 40% of the country’s entire population. 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,
Distribution of world urban population 1950-2050
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
Source: UN Department of Economic and Social Affairs property infractions, while poor working conditions or child labour

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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’ systems and the voluntary separation implicit in suburban
informal sectors are fertile breeding grounds for serious organised middle-class living – have fuelled largely unconstrained growth in
crime gangs; serve as convenient vehicles for money-laundering; road construction and traffic. This is taking place just as cities
and provide ample fuel for nepotism, tribalism and corruption, need fewer cars and more use of mass transit to alleviate pollution
which also impinge heavily on formal business operations. and congestion and to contribute to public safety.

The combustible juxtaposition of wealth and poverty, absolute Mexico City’s rate of car ownership is double that of New York,
power and abject powerlessness helps cities to become fertile with predictable results for traffic flow and air quality. Asian
grounds for political uprisings. This is not new: the 1979 Iranian Development Bank studies estimate that Jakarta – the largest city
revolution is the most dramatic example. But the numbers in the world with no subway – loses more than $3bn a year in
involved and the government’s lack of control over large areas productivity to traffic delays.
of the urban space is new. Madagascar’s president was ousted
in 2009 by a leader manipulating a marginalised, youthful Modern urban demographics place tremendous strains on power,
urban constituency in low-income districts of the sprawling water and sanitation. Inadequate sewerage and refuse-collection
capital. Modern communications and social networking allow systems are an unpleasant but almost ubiquitous feature of
unrest to spread quickly across multiple cities, creating emerging-market cities. Rubbish collection rates in Jakarta are
dangerous dynamics for those in power. Outbursts of violent around 60%, in Karachi 40% and in Dar es Salaam as low as
opposition are more of a threat in cities where democracy is 25%. Experts estimate that 90% of Latin America’s sewage output
imperfect and formal checks on the exercise of political power, is dumped untreated into streams, rivers or the sea. Fewer than
and a vibrant civil society to question its excesses and expose 10% of Manila households are connected to the city’s sewerage
its flaws, are lacking. network, while Kinshasa (with a population close to 10m) has no
waterborne sewage system at all.

Overburdened infrastructure Illegal tapping into electricity and potable water supplies in poor
areas escalates prices paid by registered businesses and
Rapidly growing cities find their physical and social infrastructure residents, disrupts reliability and quality of supply, and dramatically
placed under extreme stress. This presents a massive opportunity increases disease risks. The World Health Organisation calculates
for construction, but the shortfall can impose serious constraints that 30,000 deaths per day worldwide occur as a direct result of
on day-to-day operations. The topography of the typical modern diseases stemming from poor sanitation – 75% of all human
city – combining slum populations distant from public transport disease incidence. Around 40% of mortality in emerging markets

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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
Cairo exemplifies the operational complexity of the modern mega-city
vulnerable coastal regions. Close to 100m people around the world
live less than one metre above sea level, with coastal cities such as
is attributable to such conditions, with clear implications for the Cairo, Dhaka, Lagos, Mumbai, Rio de Janeiro, New York and Tokyo
health of workforces in such locations. 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
Less dramatic infrastructure interruptions can have a serious urban, built-on land (containing 1.85m homes and 185,000
impact on commerce: interruptions to increasingly over-stretched commercial properties) is known to be at risk of repeated flooding.
and under-invested electrical power and telecoms infrastructure in
urban centres is a key business continuity risk, as financial Reflecting a trend that runs entirely counter to those of the 18th
services companies in New York in 2003 and mining companies in and 19th centuries, many of the world’s mega-cities in Africa and
South Africa in early 2009 learnt when those locations Latin America in particular are deindustrialising rather than
experienced massive power cuts (loadshedding). 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’
Natural and unnatural disasters outskirts, to be replaced with unproductive slum housing, is
contributing to mounting global food security concerns (50,000
Peripheral settlements combine lack of amenities with often hectares of land per year are removed from food production in
perilous (brown-field) locations and may involve deforestation or India alone), as well as associated social and security risks when
reclamation of marginal land. They become not only a breeding food insecurity translates into violent urban unrest.
ground for disease and infestations, but can also serve as
catalysts for (and primary victims of) natural disasters such as Reinforcing the problem, peripheral land around cities’ fringes that
fires, landslides or serious flooding. Between 1974 and 2003, is available for agricultural production is increasingly contaminated
6,367 natural disasters occurred worldwide, killing more than by urban toxic waste. Meanwhile, squatters on commercial or
2m people and disrupting the livelihoods of 5.1bn others at an government-owned land in business and residential areas of cities
estimated cost of $1.38 trillion. will be a growing problem for property development and premises
security. Slum clearances (such as those carried out in Harare,
The concentration of human, physical and financial capital in cities Burma, Jakarta and Beijing in recent years) create their own
renders them especially vulnerable to both immediate devastation social, security and reputational problems for affected businesses
and lingering disruption to transport, commerce and – particularly where there is an underlying political / social-control
communications in the aftermath of major disasters. Floods agenda, as well as the more commonly voiced ‘beautification’ and
brought Mumbai to a standstill in July 2005, their effect ‘crime prevention’ justification.
exacerbated by antiquated drainage systems and unplanned
development. Lima, Tehran and Istanbul are just three major
developing-economy cities where earthquakes are expected to The vicious circle of urban insecurity
wreak major havoc in the next decade. For business, it is essential
to consider resilience as well as risk: smaller or poorer cities are Crime regularly features at, or close to, the top of surveys of city
generally less able to cope with such incidents and slower to dwellers’ and companies’ primary concerns, and with good
recover. The aftermath to Hurricane Katrina’s destruction of large reason. According to UN data, 60% of all urban residents around
parts of New Orleans in August 2005 illustrated the associated the world were victims of crime of some sort between 2001 and
security concerns, even in developed countries. 2006; the figure was 70% in both Africa and Latin America. A key
driver of this trend – fuelling insecurity perceptions – is the influx of
The socio-economic impacts of cities also create vulnerabilities to illegal firearms. The Brazilian press estimates that Rio’s organised
man-made hazards. Anecdotal instances include a Mumbai slum crime gangs own 1,500 rifles and machine guns, as well as
that extends so far into a designated national park that its residents grenades and landmines; the criminal firearms market in the city
are eaten by leopards (Quito and Istanbul have also spilled into was in 2000 estimated to be worth $88.4m per year.
national parks). Favelas (slums) in São Paulo have completely
surrounded and thoroughly contaminated a reservoir that provides Pitting such heavily armed criminals against city police forces that
21% of the city’s water supply, and now requires 17,000 truck-loads are often under-resourced – and almost always underpaid – creates
of chemicals a year to keep its contents drinkable. Outlying districts huge potential for endemic corruption and the criminal subversion of
are also increasingly vulnerable to Bhopal-style man-made disasters, 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 present an ideal breeding ground for narcotics-linked organised
protectors of criminal activity, rather than its opponents. crime and violence, and associated penetration into wider local
political and business structures. Organised crime bosses’
In the face of persistent crime and other security concerns, cities housing and social provision in Colombia’s cities amply
have stratified and segregated – a process that generates tensions demonstrates how state functions can be readily, if imperfectly,
and risks for business. The extreme end of the spectrum includes replaced by powerful criminal enterprises.
cities that are historically divided for political, ethno-religious or
other reasons, such as Nicosia, Beirut and Jerusalem. Others are As well as crime and corruption, the systemic law and order
voluntarily dividing: South Africa’s commercial capital vacuums created by rapid urbanisation can shelter extremism.
Johannesburg is perhaps the most notorious modern symbol of There is a strong correlation between poverty and urban terrorism:
partition, with exclusive suburbs dotted with gated communities 85% of Kenya’s population growth in 1989-99 was absorbed in
and street barricades, and armoured sports-utility vehicles the slums of Nairobi and Mombasa – both of which have
cruising the roads. Its apartheid past and struggle with high levels experienced terrorist attacks. Media reports following the May
of crime are extreme, but the trend of self-defence among richer 2003 Casablanca terrorist attacks reported that the slum-dwelling
inhabitants is visible in other, less crime-ridden conurbations perpetrators had never been ‘downtown’ before their suicide
around the world, including Paris, New York and Los Angeles. mission. Meanwhile, city centres – with highly concentrated
populations, vulnerable mass transit systems and iconic buildings
One sign of this trend is the prolific growth of the private security – are the favoured targets of such extremists.
market. A study in South Africa suggests that the sector’s
workforce increased 150% from 1997 to 2006, during which time A form of ‘social Islamism’ is spreading in many parts of the Middle
police numbers declined 2.2%. Another study estimates that there East, tacitly approved by governments and simultaneously a
are more than 35,000 privately owned armoured cars in Brazil, a source of extremist activity at its fringes. It can often be seen as
country where expenditure on the private security industry is stemming from the failures of previous urban responses to
estimated to be worth 10% of GDP. 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 spaces ‘ungoverned’ areas are liable instead to develop alternative and
highly informal power and justice structures, and even entire social
The most worrying trend has been the progressive retreat of system counter-cultures – tolerated or even explicitly encouraged
government from under-serviced neighbourhoods and its by urban governments incapable or unwilling to provide such
replacement by informal systems of authority. In 2005, the world’s amenities themselves. Examples include Wahhabi madrassahs
five largest ‘mega-slums’ (areas of continuous low-income housing) educating thousands of children across East Africa and Pakistan,
were all in Latin America (in Mexico City, Caracas, Bogotá and two Hamas’ social systems in Gaza and Hizbullah’s in Lebanon.
in Lima). Local sociologists estimate that up to 25% of the Despite the rhetoric of their informal governors, such districts are
geographical area of cities such as Rio de Janeiro, São Paulo, rarely ‘pure’, but are instead rife with corruption and nepotism, as
Buenos Aires, Bogotá and Mexico City constitute zones where well as the persecution of minorities who opt to remain outside the
control is contested between state and criminal forces. Businesses systems on offer.
caught in such disputed ‘grey areas’ face clear operational and
security challenges. Weak or poor states often choose cohabitation or the de facto
abandonment of these ‘grey areas’; others choose to invade them
However, even companies firmly ensconced within the ‘safe’ zone quasi-militarily, usually with mixed results (as seen in Brazil and
of such cities cannot ignore problems that arise in geographically Syria). Either way, government responses that focus only on the
or economically distant margins: such ‘ungoverned spaces’ 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.

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
Slums in cities such as Nairobi create complex social and security challenges a luxury for most companies. The threats they face also affect their

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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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FCPA enforcement since the statute came into force in 1977, but
regulators wasted little time setting an even quicker pace in 2010.
New considerations for 2011

The DoJ made a bold statement in mid-January. It orchestrated


UK Bribery Act: the near-simultaneous arrest of 22 individual employees and
• No exemption for facilitation payments executives of several companies in the military and law-
• Covers bribery of private-sector recipients as well as enforcement products industry in the US and abroad on charges
public officials of conspiring to ‘bribe foreign government officials to obtain and
retain business’. It was the department’s largest single
• New offence of corporate failure to prevent bribery investigation and prosecution in the history of FCPA enforcement.
• Defence through implementation of adequate procedures The operation involved up to 150 FBI agents, who executed 14
search warrants in multiple locations in the US. In a display of
Dodd-Frank Wall Street Reform Act includes: cross-border co-operation, the UK’s City of London Police
• Strengthened protection and greatly increased potential executed a further seven search warrants in connection with its
rewards for whistleblowers own investigation into the indicted companies.

• Disclosure of payments to governments by resource


This traditional ‘sting’ investigation was the first use in this field of
extraction companies
undercover law-enforcement techniques, historically reserved for
organised crime. It represents a paradigm shift in the expansion of
Changes to US Federal Sentencing Guidelines include
FCPA enforcement. However, employing such manpower on a
commentary on:
regular basis would be likely to tax the limited resources of the DoJ
• Compliance function access to board of directors and FBI. As a result, such large-scale operations may prove the
• Compliance programme ability to detect criminal activity exception, not the rule. Nevertheless, the case sent a clear message
that the DoJ intends to aggressively focus on the prosecution of
• Expeditious voluntary disclosure to government
individuals to deter FCPA violations. In Breuer’s words, prison
• Post-discovery assessment and modification of ethics sentences for individuals ‘should make clear to every corporate
and compliance programme 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 Sectors in the spotlight
actions under the Foreign Corrupt Practices Act (FCPA). Another
100 investigations were in progress and 25 serious allegations The ‘sting’ episode followed Mendelsohn’s appearance at the
under review. During an interview with media outlet Corporate Global Ethics Summit in New York, where he stated that the US
Crime Reporter, Mark Mendelsohn, the former senior US would prosecute corruption in increasingly rigorous ways. He
Department of Justice (DoJ) official widely viewed as the architect added that this approach underscored a policy shift reflecting a
of modern anti-corruption enforcement in the US, said there were belief that ‘corruption is a national security issue and an
more than 150 active investigations at the time of his departure in impediment to security in combat areas like Iraq and Afghanistan’.
April 2010. 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
The future of U.S. anti-corruption
on an existing trend: to push forward aggressive enforcement
enforcement looks set to using industry-wide investigations. In early 2010, the Securities
involve ever more aggressive and Exchange Commission (SEC) revealed that it was conducting
and sweeping interpretation of a broad investigation into accounting and disclosure compliance
existing statutes. 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
The future of US anti-corruption enforcement looks set to involve governments of Cuba, Iran, Sudan or Syria. The investigation is
ever more aggressive and sweeping interpretation of existing aligned with the DoJ’s efforts to seek information from companies
statutes. Assistant Attorney-General Lanny Breuer, head of the in this sector and is broadly consistent with Treasury Department
Criminal Division, touted 2009 as the DoJ’s ‘most dynamic year’ in aims to tighten enforcement of federal export control laws.

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International co-operation
Panalpina: The catalyst for industry-wide
US regulators in 2009 issued at least 45 Mutual Legal Assistance
investigation in the energy sector
Treaty letters requesting extraterritorial assistance, underscoring a
The DoJ in February 2007 noted in connection with an rise in cross-border co-operation in anti-corruption matters in
FCPA settlement that UK’s Vetco Grey had paid bribes in recent years. US-German co-operation in an investigation into
Nigeria ‘through a major international freight forwarding German engineering conglomerate Siemens set a new standard. It
and customs clearance company to employees of the was followed by a US-UK joint effort in 2010 concerning
Nigerian Customs Service . . .’ investigations into and eventual settlements of corruption cases
involving global defence contractor BAE Systems and speciality
Subsequently, more than ten companies in the oil and gas chemicals manufacturer Innospec.
sector received letters of inquiry from the DoJ and the
SEC asking them to ‘detail their relationship with Meanwhile, IT company Hewlett Packard disclosed in a
Panalpina’. Settlement actions related to the Swiss September 10-Q filing that the SEC had expanded its investigation
logistics behemoth began in late 2010, when reports into possible bribe payments in connection with contracts the
indicated that it was expected to pay $85m in fines. company had won in Russia. The investigation began as a
collaborative effort between Russian and German prosecutors to
Panalpina operates through 500 branches in 80 countries, review transactions in Russia between 2002 and 2006. However,
but withdrew from Nigeria because of compliance the SEC’s involvement triggered an expansion of the probe to
concerns. While investigation into the company and its include review of the company’s activities in the Commonwealth of
clients in the oil and gas industry initially focused on Independent States dating back to 2000.
Nigeria, investigations quickly expanded to other opaque
jurisdictions around the world. 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
Just as the Panalpina cases (see box overleaf) ignited a broader at five UK facilities of French engineering company Alstom and
look into energy-sector practices, there is no doubt that the arrested three members of the board of directors on suspicion of
pharmaceutical sector is squarely in the crosshairs of the DoJ and bribery and corruption, conspiracy to pay bribes, money-laundering
SEC. Media accounts since April indicate that at least seven major and false accounting. The raids appeared to form part of a larger
multinationals in the sector have received inquiries from both co-operative effort that has seen cross-border collaboration
regulatory bodies about business practices in a raft of opaque between Swiss, Polish, British and possibly US authorities.
jurisdictions around the world.

In another sector-focused initiative, the SEC’s dedicated FCPA unit Legislative changes
announced in July that it would target Silicon Valley-based
companies with operations in China, an area of particular As well as stronger enforcement, 2010 has seen notable
corruption risk. The announcement came soon after a $300,000 additions to anti-corruption legislation. The passage of the UK’s
settlement reached with Veraz Networks, Inc., a San Jose-based Bribery Act, which received Royal Assent in April, was a
Voice over Internet Protocol company that made improper watershed. The legislation overhauled an obsolete anti-
payments to employees of government-controlled companies in corruption statute dating to 1889 and brought the UK into full
China and Vietnam to secure business. In an interesting twist, the compliance with the OECD Anti-Bribery Convention. The Bribery
SEC disclosed that the investigation was aided by information Act potentially has even more teeth than the FCPA: it could be
provided by the US Department of Homeland Security. the most robust anti-corruption standard in existence. The
legislation will only enter force in April 2011, to allow government
Recent trends suggest that the DoJ and SEC will use all the consultations with interested parties to formulate guidance on
tools at their disposal to combat corruption, including applying key provisions of the law. These will include comments on the
legal principles not previously employed in FCPA cases. In 2009, requirement that companies have ‘adequate procedures’ to
the SEC used a provision of the Securities and Exchange Act prevent corporate bribery.
1934 to bring bribery charges against individual executives of
one company, a first under the FCPA. Not to be outdone, the The Dodd-Frank Wall Street Reform Act, signed into law in
DoJ has used the Travel Act as a prosecutorial tool. This is a July 2010, adds another layer of complexity to the patchwork
federal criminal statute that prohibits interstate or international of legislation on corruption. Among other noteworthy
travel, or use of an interstate facility in the aid or commission of provisions, it introduces significant financial incentives for
any crime. The act was used to prosecute bribery of private corporate whistleblowers. In a bid to increase disclosure of
individuals and enterprise, wrongdoing not covered by the violations of securities law (including the FCPA), individuals
FCPA. Finally, US regulators are beginning to attack the demand who provide ‘original information’ leading to successful
side of bribery – again not covered under the FCPA – by going prosecutions are entitled to between 10% and 30% of
after government officials who seek bribes through charges monetary penalties worth more than $1m, including fines,
such as money-laundering. disgorgement, restitution and interest.

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• Helplines (whistleblower hotlines)
The explicit provisions of existing and new anti-corruption
legislation are sufficiently punitive to give companies operating in • Risk assessment
the US and Western Europe good reason to consider recalibrating • Remedial action where necessary
their approach to compliance. But closer inspection of the major
regulatory standards reveals much that is left ambiguous and As under the FCPA, companies will be left to fend for themselves
unstated – or simply unknown. This thwarts a straightforward in defining specific requirements within these extremely broad
legalistic approach to satisfying anti-corruption requirements. parameters. They will gain new insights only through the
Insight into this ‘knowledge gap’ should help to inform a review of misfortune – or discovered misdeeds – of other organisations
potential best practice in compliance. subject to prosecutorial scrutiny.

Complicating compliance with the elusive standards of the FCPA


The knowledge gap and Bribery Act are provisions that either conflict or are unique to
one regime or the other. Facilitation payments of any kind are
One of the key problems for companies seeking to develop and prohibited under the Bribery Act, but the FCPA provides an
implement a compliance programme based solely on the FCPA, exception (though corporations often fail to properly record such
UK Bribery Act and other legislative standards is that there is no payments under its books and records requirement). The language
clear delineation of how to adhere to the rules. Judicial scrutiny of the OECD convention allows reconciliation with respect to the
often defines the specific contours of legislation in the US and FCPA exception (with caveats), but the Bribery Act offers none.
other common-law jurisdictions, but to date this has been lacking. Many US-based companies are struggling to make sense of this.
US Federal Sentencing Guidelines and the DoJ’s Opinion Release As one client put it, trying to harmonise internal procedures to
programme have, for example, emphasised the need for satisfy both standards ‘is a Catch-22’. Similar frustrations are
companies to undertake due diligence on potential counterparties: evident among companies grappling with provisions of the Bribery
acquisition targets, partners, agents, suppliers, distributors and Act that criminalise private-to-private bribery and establish a new
consultants. But there is no definition of due diligence – whether in offence of failure to prevent corporate bribery.
requisite actions, scope or depth.

There are clues to possible lines of statutory interpretation in Reporting requirements


corruption enforcement. In the matter of French services company
Technip S.A.’s settlement concerning the Bonny Island (Nigeria) Adding insult to possible injury is the undetermined import of
joint venture involving KBR/Halliburton, Snamprogetti and Japan’s Dodd-Frank. The exact impact of the so-called ‘whistleblower
JGC, the SEC complaint charged that: bounty’ provision on FCPA enforcement remains unclear, but it
could have a substantial effect on the number of securities law
Technip did not adopt due diligence procedures as to cases triggered by whistleblowers. Companies are already
agents that were adequate to detect, deter or prevent reviewing their helpline protocols to ensure that structures are in
the payment of bribes by agents. The due diligence place to escalate credible allegations and ensure appropriate
procedures adopted by Technip only required that analysis and timely action. Companies would also do well to
potential agents respond to a written questionnaire, revamp internal messaging to employees concerning this provision
seeking minimal background information about the through communications and training.
agent. No additional due diligence was required, such
as an interview of the agent, or a background check, Two other sections tucked under ‘Miscellaneous Provisions’ at
or obtaining information beyond that provided by the the end of the 850-page act will have a far-reaching impact on
answers to the questionnaire. US-listed companies in the extractive sectors. Section 1504
(Disclosure of Payments by Resource Extraction Issuers) will
Clearly, blind reliance on responses provided by counterparties is require oil, natural gas and mining companies (including service
insufficient. But even this insight lacks clarity on what might be providers) to report annually to the SEC any payments made to
expected of a ‘background check’. Would review of public records a foreign government, including by subsidiaries or controlled
be sufficient for the task? Or does the opaque nature of a entities. As defined in the law, ‘foreign government’ includes
jurisdiction like Nigeria require going further, including inquiries departments, agents and state-owned companies, as well as
with confidential sources to ascertain the subject’s reputation? the central government itself.

The requirement to establish ‘adequate procedures’ to prevent Turning to human rights, and affecting companies across the
corporate bribery in the Bribery Act is also likely to lack a extractives and electronics sectors, Section 1502 (Conflict
precise definition. To date, the government has published the Minerals) requires companies to report annually whether or not
following guidance: any tantalum, tungsten (wolframite), tin (cassiterite) or gold used in
their production processes or products have originated in Congo
• Clear corporate policy on integrity/anti-corruption (DRC) or any of nine neighbouring countries (Angola, Burundi,
• Endorsement by the board/leadership from the top Central African Republic, Republic of Congo, Rwanda, Sudan,
• Training Tanzania, Uganda a nd Zambia).

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riskmap 2011
Companies facing either of these disclosure requirements will be assess both internal and external corruption risks. However, these
inherently more vulnerable to risks that typically fall outside the field of are often used in isolation, to evaluate jurisdictional, transactional
business integrity – and which compliance professionals are not and relationship risks. They are often employed in an effort to make
specifically prepared to treat. The law may create a steady supply of fact-based determinations on risk, to the exclusion of informed
information allowing activists to target specific companies, particularly value-based judgements. Facts are essential in the risk assessment
in countries where human rights, corruption and governance concerns process, but the flexibility of value-based judgement – human
are widespread. Consequently, reputational, social and operational interaction and reaction in scenarios – is vital in tailoring
risks for reporting companies will increase and could materially affect compliance efforts to an organisation’s footprint, culture and intent,
business decisions to remain in existing markets or enter new ones. particularly in complex and opaque markets around the world.

A more holistic yet cost-effective approach to risk assessment


Filling in the blanks would include analysis and evaluation of the impact and likelihood
of a series of specific risk scenarios that a company may face at
Increasingly aggressive enforcement and the tightening web of various stages of a project or process. The process of developing
national and international legislation governing corporate activities scenarios customises the assessment to specific sectoral and
have raised anti-corruption compliance to an acute risk. We have company vulnerabilities in particular operations. This methodology
seen a range of approaches to harmonising internal procedures to also enables an organisation to meaningfully analyse the likelihood
satisfy the ever-stricter regulations, but these are often tied to a of a scenario occurring in the context of jurisdiction, transactional
very narrow, legal view of compliance. Certain institutions have and relationship risk, and the potential impact on the organisation
ratcheted up internal compliance to the strictest standards they in the context of its existing compliance programme.
must satisfy. Others implement a tiered approach, attempting
alternately to satisfy jurisdiction-specific or transaction-focused New reporting requirements established under Dodd-Frank will
burdens without a coherent approach throughout the entire broaden exposure to public scrutiny that could exacerbate
organisation. Still others are experimenting with dual-track companies’ operational, political and security risks. Executives
programmes in an effort to satisfy the requirements of both the and managers who own these risks from across the spectrum – legal,
FCPA and Bribery Act without overhauling existing protocols. human resources, security, risk management, finance, audit – should
be integral to the development, implementation and maintenance
of risk assessment methodologies.
The ability to implement a
comprehensive, systematic Due diligence
approach to evaluating and
The necessity of performing diligence in meeting anti-corruption
mitigating risk across the
objectives is well established across most mature commercial
entire organisation may serve enterprises in the developed world. The vast majority of
as the fault line between corruption problems encountered under the FCPA to date have
operating successfully in originated with or involved an intermediary or other counterparty.
complex jurisdictions and However, the threshold for achieving thoughtful due diligence is
becoming entangled in a crisis open to wide interpretation – regulators to date have set out few
detailed requirements.
that threatens both reputation
and profitability. 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
In the current environment, these approaches raise a number of a business relationship. The guidance further provides that
challenges. Without further detail on the regulatory front, they may companies consider inquiries into the reputation of business
fall short. Instead, companies can make an immediate impact by entities and principals with whom an organisation has a
moving beyond a narrow view of compliance and embracing a commercial relationship. The language in the guidance is
principles-based, ethical approach to improved corporate important. Many international businesses conduct due diligence
governance. Drawing on three of the ‘Six Principles for Bribery on an ad hoc or ‘as deemed necessary’ basis. They do not have
Prevention’ as defined under the British Ministry of Justice’s formal policies or procedures to establish the thresholds for due
‘Consultation on guidance about commercial organisations diligence or the requirements of what it should entail. Development
preventing bribery (section 9 of the Bribery Act 2010)’, we explore and implementation of such protocols are an immediate concern.
potential improvements to existing programmes.
The guidance notes the importance of undertaking inquiries ‘to
Risk assessment establish whether individuals or other organisations involved in key
decisions, such as intermediaries, consortium or joint-venture
Informed risk assessment helps companies to understand the partners, contractors or suppliers have a reputation for bribery and
bribery risks relevant to their sector and markets. Most whether anyone associated with them is being investigated or
organisations already employ many of the tools to identify and prosecuted.’ In opaque jurisdictions, information on corporate or

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riskmap 2011
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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riskmap 2011
AFRICAN ELECTIONS AND POTENTIAL OUTCOMES
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.

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. Source: Control Risks

The same is true of South Africa, whose recent history illustrates ahead next year, polls are likely to be violent and results disputed,
the rapid dissolution of a national movement’s moral authority culminating in yet another bout of political crisis. The failure of the
once generational change severs the direct links between a party power-sharing agreement to catalyse economic recovery or attract
and its historical foundations. Increasing rhetoric about significant donor funding means that predation against investors
nationalisation – and its obvious resonance among large sectors of will remain a key threat through 2011 and beyond.
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 Sudden change
extent to which a more radical new politics of black economic
empowerment, advocated strongly by African National Congress Despite the stifling deadlock of Zimbabwe’s politics, one potential
(ANC) youth leader Julius Malema in 2010, gains wider traction. game-changer that cannot be ruled out is 86-year-old President
Robert Mugabe’s sudden departure from the scene. Health
The particular intractability of Zimbabwe’s situation can be problems among heads of state have become a governance issue
explained by a range of factors not present to the same degree in recent years, with the deaths in office of Zambian president
elsewhere – not least the excessive power and prominence of the Levy Mwanawasa, Omar Bongo of Gabon, Guinean leader
security and intelligence services, and deep elite fear of Lansana Conté and Nigeria’s Umaru Yaradua since mid-2008.
repercussions for human-rights violations dating back to the With doubts over the health of both the Kenyan president and
consolidation of independent rule. In the absence of the electoral, prime minister, and the leaders of Cameroon, Zambia, Senegal,
media and security-sector reforms needed to prevent a repeat of Equatorial Guinea and Tanzania, plus the underlying threat of
the 2008 crisis, fresh elections are highly unlikely to succeed in assassination attempts in authoritarian states, an election or two
surmounting political deadlock and alleviating instability. If they go could be added to the list during 2011.

23
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riskmap 2011
Guinea and Togo demonstrate that persistent military pre-eminence President Paul Kagame will spend 2011 attempting to re-establish
– even under nominally civilian regimes – is most likely to reveal authority after unprecedented levels of dissent from former regime
itself during the scramble to fill a power vacuum. If 2011 were to figures surfaced ahead of the 2010 polls.
see the fall of leaders of countries including Zimbabwe, Equatorial
Guinea, Uganda, Madagascar and Rwanda, the military would Congo (DRC)’s recent history of conflict and the traditionally
emerge as kingmakers and transition-brokers, if not the actual strong role of the armed forces in propping up governance often
agents of change. Conversely, the fact that there was little genuine lead observers to suggest that it may be vulnerable to military
prospect of a military takeover during the power vacuum created intervention or destabilisation, with the coming elections a
by Yaradua’s six-month absence from office until his death in May potential weak point. However, overall political stability established
2010 is a testament to the evolution of power dynamics and during the post-conflict transition has not been eroded, despite
institutional checks and balances in Nigeria since the 1990s. disappointed hopes that the 2006 elections would herald a period
of quiet progress. Advance towards democratic reform has been
With preparations in full swing in Nigeria for the 2011 elections, lethargic and President Joseph Kabila’s election promises are
tensions are running high. Yaradua’s death upset the unwritten largely unfulfilled. Despite this, consolidation of presidential power,
rotation agreement that ensures a balance of power between the political system’s underlying corruption and opposition
north and south. President Goodluck Jonathan’s candidacy weakness make a Kabila victory by far the most likely outcome.
consequently faces stiff opposition from northern governors. An The armed forces’ loyalty – in particular that of the presidential
unprecedented car-bomb attack in the capital Abuja in October guard – will be important for Kabila’s long-term survival, but they
2010, allegedly carried out by the ethnic-Ijaw militant Movement are not yet powerful enough to pose a threat. Money rather than
for the Emancipation of the Niger Delta (MEND), illustrates the military might has emerged as the key to power.
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 Two heads aren’t better than one
see the country muddle through the polls without the principles
of constitutional procedure or civilian pre-eminence being Following post-election crises and subsequent power-sharing
seriously threatened. 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
How do you coup 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 wave of coups or other military intervention is unlikely in the a deal. To date, only a genuine threat of conflict or a protracted
coming year. The number of successful coup attempts over the security crisis have resulted in fully fledged power-sharing
past two years has been striking, given their general decline in agreements. Watered-down examples – such as offers of
frequency since the late 1990s and complete lull for three years in government posts to Togolese opposition leader Gilchrist Olympio
the mid-2000s. There is no indication that the recent instances and his allies, and to the losing candidate in the Guinea run-off – are
were linked, either causally or contagiously, nor that other would-be strategies of co-option or neutralisation.
putschists will be emboldened as a result. Various environmental
factors are needed to make a coup attempt possible, but they do Despite opposition leaders’ best efforts, power-sharing depends
not coincide strongly in most African states. Prerequisites include on specific circumstances. The primary factor is an obdurate
limited economic diversification and a socio-economic structure losing incumbent or cheated opposition party with the means to
where access to power is the most effective or only route to wage violence to cling or ascend to power. This presupposes a
wealth; the failed or incomplete professionalisation of state range of secondary factors. It requires a strong opposition party
institutions; political and resource competition entrenched along able not only to create genuine expectations of change, but also to
ethno-regional lines; and – most importantly – the existence of mobilise supporters over a sustained period of time, either actively
strong but factionalised militaries. as in Kenya or on the basis of resistance and endurance as in
Zimbabwe. The security forces must be largely loyal to the
Countries that have experienced a coup are susceptible to incumbent. It helps if there is either a strong degree of elite
counter-coup attempts; this renders Madagascar, Niger and Guinea homogeneity or major external pressure, and no feasible
most vulnerable. In all three, the likelihood of further destabilisation alternative that is not based entirely on a security solution.
depends on the conduct of election campaigns and the complexion
of post-election administrations – particularly the extent to which The necessary factors are unlikely to combine in many of Africa’s
they accommodate influential military and political factions, and 2011 elections. Côte d’Ivoire’s long-delayed return to democracy is
address grievances based on perceived marginalisation. Gambia the only clear case where candidates’ resistance to a winner-takes-all
and CAR share a number of the above features, while Rwandan outcome, popular frustration and potential for widespread violence

24
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riskmap 2011
make power-sharing plausible. Perhaps the most interesting point aftermath of a coup or under a power-sharing system. In general,
is that there is no precedent for a successful transition from a there are few implications that are typical to particular governance
power-sharing government back to competitive politics. Zimbabwe models: for companies, careful monitoring and assessment of the
and Kenya will both reveal whether power-sharing has alleviated threat environment where they operate – reflecting both national
underlying conflict dynamics or whether the fallout has merely and local dynamics – will remain essential.
been delayed.

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

26
Control Risks
riskmap 2011
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
KEY
in Peru – indicate that production in these areas will continue to rise
CHIHUAHUA SINALOA GUERRERO
in 2011, but the remoteness of such locations will curb the impact
DURANGO TAMAULIPAS NUEVO LEÓN
on conditions nationwide, and on foreign business operations.
MEXICO STATE JALISCO BAJA CALIFORNIA
extent and distribution of coca bush cultivation
MICHOACÁN OTHERS
(thousand hectares), 2000–09
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 Source: United Nations Office on Drugs and Crime (UNODC)
streams, a particular concern for local employees.
The balloon effect also applies to trafficking. The continuing
Deteriorating security increases the financial costs of operating in emergence of new centres of trafficking and transshipment will be a
Mexico. Companies must invest in adequate protection for key issue in 2011. One such area is the ‘Northern Triangle’ of Central
personnel and assets. However, the impact is also felt less directly, America: Honduras, El Salvador and – in particular – Guatemala.
in areas such as logistics. Extortion is common, though smaller Following Calderón’s crackdown in Mexico, the cartels have moved
businesses are at greater risk than large multinationals. Cartels have south and established new trafficking routes through the isthmus
also been known to make use of transport and storage facilities with the collaboration of Central America’s notorious youth gangs
belonging to legitimate business operations, particularly along or (maras). Between 60% and 90% of South America’s cocaine now
close to key trafficking corridors. Finally, the cartels’ infiltration of passes through the Northern Triangle en route to the US, compared
political and judicial institutions weakens governance and the rule of with 1% three years ago. The area’s emergence as a key trafficking
law, resulting in a more complex operating environment. nexus will continue during 2011.

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riskmap 2011
The northern countries of South America are also emerging as a Mexico, the threat to foreign business operations is largely incidental,
drugs hotspot. Drug seizures in Venezuela fell from 152 tons in but the costs of safeguarding personnel and assets will increase.
2005 to 60.2 tons in 2009, indicating that efforts to combat Moreover, as the influence of the drugs trade on public life grows,
trafficking have deteriorated drastically since President Hugo corruption will spread, undermining state institutions and the rule of
Chávez ceased counter-narcotics co-operation with the US five law. In 2011, companies with operations in these new trafficking
years ago. Given Chávez’s preoccupation with deepening his centres will feel the impact of the deteriorating operating
‘Bolivarian Revolution’ and consolidating his hold on power ahead environment. Venezuela and Central America have long been among
of the 2012 presidential election, there is little political will in the most complex operating environments in the region; the rising
Venezuela for tackling drugs. The authorities’ desultory efforts will influence of the drugs trade will exacerbate this.
deteriorate further during 2011.

Main drug-producing countries and smuggling


No more Pablo Escobars
routes
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
Source: Control Risks
crackdown on established cartels and the rise of new challengers
Weak governance and rampant corruption have left both the was a clear illustration. It is essential for companies operating in
Northern Triangle and Venezuela ripe for infiltration by drug gangs. In the region to closely monitor evolving trends and the emergence
both areas, the increase in drug-trafficking has fuelled a marked of new gangs.
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 As the Americas look towards 2011, the outlook is mixed. The
drugs trade will continue to expand into new areas, affecting
Despite consensus both within and outside the region that the security and operating conditions across the region. The
current strategy for tackling the problem of illegal drugs is not worst-affected areas – Mexico, Central America and northern
working, new initiatives with real potential have been slow to South America – will experience further deterioration in their
emerge. In 2010, there has been growing recognition among business environments. Governments will make tentative moves
governments in Central America and the Caribbean of the need towards a new approach, but neither radical policy change nor a
for a more unified approach, which was given a boost in July by noticeable improvement in the overall situation is on the cards.
the establishment of a roundtable group aimed at facilitating The main question for investors is whether the benefits of
policy co-ordination and information-sharing. A more eye-catching operating in the region outweigh the costs. So far, there has been
suggestion was the proposal that drugs be made legal and no mass exodus of major investors; companies remain attracted
subject to government regulation. Legalisation has some by the region’s opportunities and are prepared to shoulder the
high-profile advocates, including former Mexican presidents costs. Barring a sudden deterioration in the security environment – not
Vicente Fox and Ernesto Zedillo, as well as Colombia’s César likely in current circumstances – this is likely to remain the case.
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.

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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 The law of displacement has always applied to rising powers, and
economic status (it became the world’s second-largest economy China has begun to make waves, asserting its maritime territorial
in 2010 and is justifiably pushing for a bigger say in global financial claims with a new vigour that has disturbed some of its East Asian
affairs) but also emboldened its foreign policy. In the past two neighbours and the US. As well as highlighting the risk of an
years, Beijing has become considerably more assertive in pursuing ostensibly trivial maritime incident becoming a serious diplomatic
its goals abroad. To China this is a necessary part of resisting US-led crisis, resurgent territorial disputes have been a catalyst for
containment, regaining its natural great power status and reversing intensified US engagement and re-engagement in East Asia,
strategic losses suffered during more than a century of weakness deepening China’s containment fears. They have also given
and foreign aggression. To the US and many Asian countries it is occasion for China to flex its ever-growing muscles, exacerbating
evidence of a threat to their interests, and of expansionist perceptions of a threat that must be contained.
ambitions hidden behind a friendly façade that survives only until
China can get its way by coercion.
Collateral damage
Whichever interpretation one leans toward, it was inevitable that
China would eventually challenge a regional status quo that it views Vulnerability to diplomatic clashes is not restricted to the US and
as an unwanted historical legacy and a constraint on its rise. That those East Asian countries that have recently collided with China
challenge has begun, and Beijing has increasingly departed from its over maritime issues. Concern about an assertive China has been
longstanding preference for passive foreign-policy principles that a theme of several recent leaders’ meetings of the Association of
have been influential for 30 years: keeping a low profile, avoiding South-east Asian Nations (ASEAN), while Indian officials have
conflict and prizing external stability to support domestic been among the most vocal worriers about China, citing bilateral
development. In recent years, China’s international interests have stress-points including border disputes, cyber security, Tibet and
proliferated, and Beijing now has the cause, clout and confidence to Chinese infrastructure investments in India. Even Australia, one of
play a much more active – and assertive – role on the world stage. the biggest economic beneficiaries of Chinese industry’s voracious
import appetite, has become acutely sensitive to the risks of the
South China Sea: Disputed islands
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
Source: Control Risks and access denial, the US remains the clear regional maritime

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GDP growth (%) in selected Asian nations, 2009-11
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. Source: World Economic Overview, IMF

However, the underlying problem never went away: that


After the rebound governments struggling to drive economic growth amid weak
global demand would pursue mutually damaging competitive,
The economic context going into 2011 is less positive than Asia’s rather than co-operative, means of boosting their domestic output.
strong 2010 growth suggests. As we forecast in RiskMap 2009, By late 2010, this threat had resurfaced, with the immediate focus
Asia confounded sceptics by weathering and then rebounding on ‘currency wars’ rather than market protectionism. Asia’s major
strongly from the global financial crisis. Robust growth is likely to exporters were at the centre of concerns about competitive
continue across most of the region in 2011, especially compared currency devaluations and could well remain there in 2011.
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 Intervention gaining currency
bite in 2011; growth will slow in most countries and the durability of
recoveries will be tested. US-China dynamics, both domestic and bilateral, are central to the
global imbalances that dominate economic debates, but most of
While Asia’s rebound has justifiably been seen as an impressive Asia’s substantial economies, especially East Asian exporters, are
achievement, the downside – a theme of our Asia forecast in vulnerable to the fallout. In September, Japan intervened for the
RiskMap 2010 – is that policy-makers focused on short-term first time since 2004 to moderate the yen’s rise, while officials in
growth and set aside key longer-term challenges. Two years after South Korea, Taiwan, Thailand and Indonesia also took steps to
the worst of the crisis began to fade, reform appetites still look dampen currency appreciation and capital inflows in the latter half
unlikely to return in 2011, as governments worried about growth of 2010. Their counterparts in the Philippines said they would
prospects and the welfare of key constituencies look to postpone follow suit if necessary, and even Indian central bankers indicated
the short-term pain involved in tackling issues such as fiscal they were considering stepping in.
sustainability (for example in Japan, India and the Philippines), and
rebalancing big trade surplus economies (China being the major Temporary capital controls and exchange rate interventions are of
example). Lingering or resurgent feelings of economic insecurity famously dubious utility, as East Asians who recall the region’s 1997-98
make reinvigoration of market liberalisation processes unlikely as financial crisis know better than most. With US domestic fears of
populist tendencies persist. Of even greater short-term concern ‘turning Japanese’ in debt and deflation terms eclipsing external
are growing risks of deterioration in international trade and concerns, low interest rates there will ensure continued large capital
economic relations. flows into Asian economies with limited means to cushion the
impact. This will be largely manifest in strengthened currencies and
The global financial crisis prompted fears of a wave of reduced export competitiveness. Resulting fears and diplomatic
protectionism around the world, but these had receded wrangling may further distract policy-makers from tackling the other
considerably by 2010, with such trends remaining limited. side of the rebalancing equation: boosting domestic demand.

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Meanwhile, US/China disputes will probably set the tone, for disputing who was to blame for the world’s economic troubles
better or worse. After years of carefully limited and largely than seriously contemplating the difficult compromises needed to
symbolic tit-for-tat tariffs and other measures, political support in start fixing them. Opinion in the US tends to see perceived
the US for more serious steps to force Chinese currency Chinese mercantilist manipulation of markets as driving global
appreciation was stronger by October than at any time since imbalances – and US unemployment. In China, explanations of the
China joined the WTO ten years ago. The good news is that same imbalances tend to emphasise the role of lax monetary
Beijing remains keen to avoid a collision with an economy with policy and under-regulated greed in the US and other advanced
which it cannot win a trade or currency showdown, is aware of economies. Beijing remains seriously (and understandably)
the interdependence that makes co-operation so desirable, and worried about the potential domestic impact of the accelerated
understands that domestic rebalancing is vital to its own interests. revaluation that it is under pressure to make.
There are signs that China may make greater concessions to
address complaints about its currency policy and trade surplus This fundamental divergence of views is being reinforced by
(which saw its foreign reserves reach $2.65 trillion in the third domestic politics. In the US this was symbolised by legislative
quarter of 2010), though domestic imperatives, not external electioneering in October, during which some campaign
pressure, will remain the dominant determinant of policy. advertisements featured overt China-bashing. Equivalent elections
may be absent in China, but populist pressures certainly exist, not
In the US, despite the very real hardening of attitudes towards least because 2012 will bring the most important leadership
China, the risk of dramatic moves is mitigated by legislative changes in the country for a decade. As competition over posts
logistics, White House misgivings about unilateral escalation and and policies heats up in 2011, concessions to foreign demands
the difficulty of effectively implementing punitive measures against could expose leaders to criticism from rivals, while gambling on
China. It thus remains unlikely that disputes will get out of hand, to bold policies with uncertain domestic consequences – such as
the point of justifying the label trade or currency ‘wars’, which currency revaluation – would take considerable nerve.
seems to imply a severe and widespread impact on economic
growth, and on the activities of businesses and investors. But even With little sign of either of the main protagonists taking the lead
so, the risks look considerably more credible going into 2011 than in tackling the growing problems of currency and imbalances,
in the past. there is little reason to anticipate divergent views being
reconciled or put aside to forge a co-operative solution. Without
Asian currency appreciation index (Jan 2009 = 100)
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 long-


term 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

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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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Public debt (percentage of GDP)
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


Source: IMF (data after 2009 is expected)
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 France is determined to cut its deficit its own way. Southern EU
members with large public sectors and traditions of labour
European Bond Spreads
militancy would prefer additional latitude in bringing down public
Basis points, 10-year bond spread to German bonds
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
Source: Bloomberg
additional layer of political risk should host governments breach
Commission’s direct levers of control remain limited. The new the new rules. The threat will be softened by the voluntary
European order likely to emerge in 2011 will entail a range of rules commitment of new governments in recent accession states,
and penalties to enforce fiscal retrenchment and reduce public such as Slovakia and the Czech Republic, to stay in line. Baltic
debt as a proportion of GDP. These are likely to involve threats to governments (if not voters) will be determined not to jeopardise
suspend structural funding, fines of up to 0.2% of GDP and their prospects of early eurozone accession. Ironically, therefore,
suspension of voting rights in the Council of Ministers. Strict just as the appetite for further political integration has
conditions for access to the 440bn euro European Financial diminished, the prospect of closer benchmarking of fiscal policy
Stability Facility, established after the bail-out of Greece, will is hoving into view.
underpin the system. The emphasis on fiscal discipline bears an
unmistakable German imprint. Nevertheless, with a French-led Germany will remain committed, as it has been since 1949, to
campaign by southern and eastern member states leading to a the principles of multilateralism in its foreign and security policy.
significant dilution of the German-inspired commission proposals, To some extent it will be a reluctant EU leader, but sheer
Angela Merkel has not got everything quite her own way just yet. economic weight – it produced 20.9% of the EU27’s entire GDP

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riskmap 2011
Countries with Germany as their main trading partner

Source: Eurostat

in 2009 – underlines its power. The government has emerged An important risk calculation affecting business operations in the
as a vocal commentator on whether applicants have met EU Balkans in the coming year will therefore be whether the EU can
accession criteria, while it has broken cover in seeking the strike a balance between offering enough hope to aspirants to stay
removal of nuclear weapons from German soil (presumably on the reform path and not expediting accession procedures that
remaining under NATO’s nuclear umbrella). These are clear may damage the EU’s fragile health. More positively for investors,
indications of a material shift away from the passive the EU’s inward focus is likely to be reflected in attention to the
‘chequebook diplomacy’ of the past towards a more active internal market, for example in improving labour and product
projection of its interests as Europe’s pre-eminent civilian market flexibility and competitiveness, which was a key element of
power, albeit within the framework of institutional memberships. the Lisbon process, and delivery of the long-awaited next stage of
energy-market liberalisation.
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 We’re only making plans for pipelines: Eastern
manages to squeeze through in 2011, the EU door is likely to be Europe and Central Asia
slammed shut on any further short-term accessions. The positive
‘magnetising’ effect of prospective membership on applicant Aside from Germany, the other state to watch will be Russia. If
states such as Serbia, Macedonia and Montenegro could fade, Germany’s rise is underpinned by hard economic facts, Russia’s
and they will lose the impetus to carry out necessary reforms to residual influence across its ‘near abroad’ is a product of both
improve legal capacity, reduce corruption and increase perception and reality. Twenty years after the demise of
transparency in the business environment. 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, unrecognised states of South Ossetia, Abkhazia and Transnistria
infrastructural and informal business networks still centred on will continue to operate as Russian quasi-protectorates. Belarus,
Russia, will remain powerful drivers of regional diplomacy and Ukraine and the other former Soviet republics occupy an
business. As in the past, this will often work to the disadvantage of ambiguous middle ground.
Western commercial interests.
Where there are threats from domestic Islamist extremism or
Russia’s attempts at formal reintegration of the post-Soviet space ethnic conflict, or where states share borders with potentially
have long since died off to be replaced by a far more pragmatic hostile powers, these states recognise and sometimes welcome
approach based on development of bilateral relationships Russia’s self-appointed leadership in the security management of
designed to maximise its national security or commercial interest. the region. Important structural constraints, for example Central
Even the much-heralded customs union with Belarus and and Eastern Europe’s continued reliance on Russia for natural gas
Kazakhstan will remain subordinated to Russia’s domestic in the short-to-medium term, underpinned by the NordStream
economic priorities. pipeline (see map above), also give it continued weight on its
western flank.
The corollary of these shifts will be to allow greater free play for
individual states, large and small, to make their own political At the same time, the Caspian oil and gas exporting troika of
weather. Many East European and post-Soviet states will persist Azerbaijan, Kazakhstan and Turkmenistan are quietly making
in framing their national security perspectives around the other plans. Kazakhstan will be readying itself for the Kashagan
potential response of Russia. At one extreme, Georgia will view super-giant oil field to come on stream by working up potential
Russia with unalloyed hostility, at least until President Mikhail export options both to the West and to China. Should the final
Saakashvili leaves office in 2013. At the other extreme, the investment decision, due in the first quarter of 2011, prove

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riskmap 2011
favourable for the construction of the Nabucco gas pipeline, which domestic reform to develop the economy. If he wants to stay on,
would effectively connect the Caspian to Europe’s main gas there is a chance that Medvedev will pitch for a second term by
arteries, Azerbaijan will probably commit gas for westward export. pushing a less co-operative line with the West on issues such as
Turkmenistan may follow if some formula can be reached to transit sanctions on Iran to burnish his nationalist credentials. However,
gas across the Caspian Sea and commercial terms can be the more likely scenario is that Russia will calculate that its vital
agreed. In any event, its gas export volumes to China and Iran will foreign policy interests will be best served over the next year by
ramp up next year. Natural resource endowments and/or control continuing to develop a more constructive relationship with both
of transit routes are now entry passes to playing in, rather than the US and key European interlocutors, particularly as the
merely spectating on, regional diplomatic games. prospects of early US missile shield deployment and NATO
expansion to incorporate Ukraine and Georgia have receded.
This growing self-confidence, reinforced by greater domestic
regime security, means that the former Soviet energy producer These developments underscore the extent to which commercial
states are able to define their self-interest more clearly and decide activity across the region is being framed by geopolitical risk. They
on the portfolio of investors they prefer. This will be positive for also illustrate how markets are increasingly important geopolitical
business in that the overall level of commercial engagement is agents, driving change both within weaker economies, but also – in
likely to switch up a gear in 2011. On the other hand, governments the case of Greece – at a wider institutional level. The toughness
that have a clearer idea of what they want are likely to drive a of austerity packages across Western Europe will undoubtedly
harder bargain with foreign companies and potentially create inhibit business in sectors reliant on capital investment. At the
operational difficulties if things do not go according to plan. This same time, the enlarging web of political and commercial
points to the need for greater political risk burden-sharing for large relationships evolving further east ensures that new opportunities
projects on the part of Western companies, either with favoured will continue to present themselves for businesses prepared to
domestic partners or state-owned foreign investors. 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 This climate of instability and division dampened the enthusiasm
pro-/anti - US/Iran line that dominated Middle Eastern politics in of both regional and international investors, even as countries
the 2000s, and which has the potential to lower regional temperatures. such as Iraq and Syria slowly began to emerge as more
favourable investment destinations for the first time in decades.
This advance represents just the first baby steps of progress. And, For example, souring relations between Saudi Arabia and Syria
of course, the dark clouds of a conflict involving Iran and Israel saw Saudi investment in Syria plummet from around $910m in
continue to hover ominously over the region, while other sources 2006 to just $13m in 2007. Investors from outside the Middle
of tension still simmer. Nonetheless, we believe that 2011 will mark East, meanwhile, consistently cited these conflicts and
a continuation of this maturing process, bringing a greater degree geopolitical uncertainties as the main reason for their continued
of stability – and investor confidence – to the political environment. reluctance to invest in the region.
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 A new pragmatism
materialise, Middle Eastern states are beginning to choose a path
of moderation over confrontation. 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
A difficult decade Lebanese capital revived memories of the country’s civil war,
sparking fears of a new conflict with the potential to spread across
Much of the malaise that has afflicted the region over the past the region and draw in Israel, Syria and Iran. An emergency summit,
decade can be traced back to the events of September 2001, convened in the Qatari capital Doha in a climate of palpable regional
which threw the region into deep unrest as it struggled to adapt to tension, laid the groundwork for a settlement of sorts. Lebanese
a new ‘zero-sum’ global status quo. With former US president factions, under pressure from their regional sponsors (most notably
George W Bush insisting that countries were either ‘with us or Saudi Arabia and Syria) reached a power-sharing deal. Importantly,
against us’, Middle Eastern states were thrust into a conceptual the US – which until that point had played an important role in
framework allowing little room for manoeuvre. The region quickly backing the pro-Western bloc, thereby polarising the conflict further
fractured along two axes. – was largely left out of the process, facilitating a compromise
solution. The agreement gave rise to a new mood of pragmatism
On the one side stood those countries that decided to line up that would be strengthened in the months ahead as ‘moderate’
firmly behind the US, the so-called ‘moderate’ states represented states became increasingly preoccupied with peeling regional
by Saudi Arabia, Egypt and Jordan; on the other, a self-proclaimed players such as Syria away from the influence of Iran.
‘axis of resistance’ linking Iran, Syria and militant groups Hizbullah
and Hamas. This binary dynamic of power provoked sharp A series of further pragmatic steps over the past 18 months has
competition and a dramatic escalation in regional tensions as both helped change the regional dynamic, with all players seeking a more
sides sought to assert their regional ascendancy. The ‘moderate’ sustainable balance of power. Qatar has played a particularly
camp in particular viewed ‘resistance’ states as a direct threat to notable role, positioning itself as a facilitator of regional accords
regional stability and voiced fears that Iran was seeking to spread despite remaining close to ‘resistance’ states and continuing to host
its revolutionary brand of Shia Islam across the region. the frequently controversial al-Jazeera television network. Lebanese
Prime Minister Saad al-Hariri’s decision in September 2010 to
The 2003 invasion of Iraq and Israel’s military offensives in publicly apologise for accusing Syria of involvement in the 2005
Lebanon (2006) and the Gaza Strip (2008-09) heightened this assassination of his father, Rafiq Hariri, symbolised the extent of this
sense of instability. In addition to the violence they engendered, regional transformation. To many observers, Saad’s statement – which
the conflicts entrenched regional divisions along these stood in sharp contrast to the vehement accusations that both he
aforementioned lines, with the ‘moderates’ largely supporting the and his regional backers had long fired in Syria’s direction – bore the
US and Israeli offensives, and the ‘resistance’ axis opposing them. hallmarks of political expediency rather than conviction, reflecting an
With the competing axes spanning the entire region, growing acknowledgment of the need for compromise.
voices warned of the potential for a devastating regional conflict.
Lebanon more than anywhere else emerged as the proxy location Equally important to the new regional dynamic, however, has been
for the divide, pitting a ‘moderate’, pro-Western camp against the emergence of a new model for emulation: Turkey. Led by an
Syria- and Iran-backed Hizbullah. Political battle for control of the energetic, mildly Islamist government, Ankara has been building a
state and armed clashes between rival supporters became an network of economic co-operation that has overcome many of the
almost daily occurrence and culminated in Hizbullah’s May 2008 hostilities of recent years and has bound regional countries
takeover of western districts of the capital Beirut. together more closely. In much the same way that European
stability since World War Two has often been attributed to closer

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economic ties, growing commercial links between Middle Eastern credibility through its continued support for US policy. Ankara’s
states could prove a powerful influence in moulding national willingness to take on Israel – while largely rhetorical – has shown
interests into a broader regional agenda. many in the region that a combination of economic development,
democracy and Islamic nationalism can go hand-in-hand,
A series of trade agreements, combined with soaring Turkish negating the perceived superiority of the Iranian model of more
investment in Arab states, have consolidated strong bilateral militant resistance. While popular support for Iran soared within
ties between Turkey and many Arab countries. Turkey, which the more binary politics that the Bush administration imposed on
nearly went to war with Syria in the 1990s, now arguably stands the region, the pragmatic incentive of the Turkish model has
as Damascus’s closest regional ally. Likewise, and despite a become far more appealing as regional powers have grown to
continuing Kurdish insurgency within its borders, Turkey has appreciate the urgent need for greater compromise and
drawn very close to the government of the northern Kurdistan economic growth.
Region (KR) in Iraq. Even Iran, long seen as a rival to Turkey,
has drawn closer of late on the back of rapidly improving For foreign investors, signs of a new pragmatism have important
commercial ties. ramifications. Not only do the growing number of trade
agreements and regional free-trade zones signal a growing
Other countries are starting to follow suit, providing hope for the facilitation of cross-regional business, but, more importantly, they
resolution of other regional tensions. For example, despite regular point to the potential for greater stability that has for so long
hiccups, Syria and Iraq are slowly overcoming decades of mutual impeded inward investment into the region. Many states in the
hostility on the basis of shared economic interests. Syria, which Arab world remain relatively untouched by global capital despite
suffers from dwindling oil revenues, sees potential financial the rich opportunities on offer. While cumbersome business
windfalls in the redevelopment of Iraq, while the Iraqi authorities, practices and corruption will continue to act as considerable
anticipating a new era of economic power once oil revenues impediments to new inflows, a sense that the region is no longer
increase, stand to gain access to Mediterranean ports and perpetually on the brink of conflict may encourage more
European markets through closer ties to Syria. The Gulf region, companies to consider it as a viable option. More than any other
boosted by higher oil prices, remains an important investor across country, Iraq may serve as a case study of new hopes on the
the entire Middle East. back of oil contracts signed in early 2010. The associated
financial windfall has the potential to act as an economic hub for
Popular support for the Turkish approach has now emerged as a the entire region, drawing in massive investment flows while
powerful alternative to the Iranian model of resistance, while also serving as a new commercial centre with tentacles across the
sidelining traditional powers such as Egypt, which has lost regional wider Middle East.
Opinion polls in the 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: Monthly pirate activity, JAN 2008 - sep 2010:
sOUTH-eAST asia gulf of guinea

reported incidents and piracy, armed robbery and theft by region. 2008 - q3 2010

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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 Security risk

Political risk evaluates the likelihood of state or non-state political Security risk evaluates the likelihood of state or non-state actors
actors negatively affecting business operations in a country through engaging in actions that harm the financial, physical and human
regime instability or direct/indirect interference, and also evaluates assets of a company, and the extent to which the state is willing and
the influence of societal and structural factors on business. State able to protect those assets. Actors that may pose a security risk to
actors can include domestic and foreign governments, parliament, companies can include political extremists, direct action groups, the
the judiciary, regulatory bodies, state and local administrations and security forces, foreign armies, insurgents, petty and organised
the security forces. Non-state actors can include insurgent groups, criminals, protesters, workforces, local communities, indigenous
labour forces, campaign groups, lobbies, other companies, groups, corrupt officials, business partners, and in-country company
organised criminal groups and international organisations. Societal management and staff. The impact of security risk on companies
and structural factors can include corruption, infrastructure, ease of can include war damage, theft, injury, kidnap, death, destruction of
establishing and maintaining a functioning business, and assets, information theft, extortion, fraud, loss of control over
bureaucratic and business culture. The impact on companies can business, and disruption to operations caused by damage or denial
include judicial insecurity, corruption, reputational damage, of access to buildings or vital infrastructure caused by terrorist
expropriation and nationalisation, contract uncertainty, international attacks, threats or official responses. Security risk may vary for
sanctions, bureaucratic delay, partiality in contract and tender companies and investment projects according to factors such as
awards, campaigns and protests. Political risk may vary for industry sector, investor nationality and geographic location.
companies and investment projects according to factors such as
industry sector and investor nationality. INSIGNIFICANT
The security environment for business is benign. For example: the
INSIGNIFICANT authorities provide effective security, there is virtually no political
The environment for business is benign. For example: political violence, public disorder is rare and there are no known active
stability is assured, investor-friendly policies are entrenched, there domestic groups or issues likely to fuel terrorism.
is no threat of contract re-negotiation or repudiation and
infrastructure for business is excellent. LOW
Security conditions are broadly positive and occasional and/or low-
LOW level challenges do not significantly impede business. For example:
Political and operating conditions are broadly positive. Occasional the authorities provide adequate security, organised crime only
and/or low-level challenges do not significantly impede business. For marginally affects business and protest activity rarely escalates into
example: government policies are investor-friendly with some threatened or actual violence. Rare but large-scale terrorist attacks
exceptions, contracts are generally respected, non-state actors have may pose indirect threats to personnel or assets, or low-level attacks
little adverse influence over government decisions, infrastructure is do not target business and are not aimed at causing casualties.
generally robust or there is little risk of reputational damage.
MEDIUM
MEDIUM
Aspects of the security environment pose challenges to business, some
While the environment provides generally sound conditions for of which may be serious. For example: there are some deficiencies in
business, significant challenges can and do emerge. For example: state protection, organised criminal groups frequently target business
hostile lobby groups exert disproportionate influence over through fraud, theft and extortion, domestic terrorist groups stage
government policy, political instability delays essential reforms, regular attacks that cause disruption to (but do not target) business or
contracts are subject to uncertainty or occasional change, there are infrequent large-scale attacks and/or opportunistic small-scale
elements of the infrastructure are deficient, or the activity of unions attacks on foreign or business assets and personnel.
or protest groups impede operations.
HIGH
HIGH
The security environment presents persistent and serious
The political and operating environment presents persistent and challenges for business; special measures are required. For
serious challenges for business. For example: there is a credible example: state protection is very limited, insurgents are engaged in
risk of contract repudiation or re-negotiation by state actors, a sustained campaign affecting business, kidnap poses a severe
political instability threatens fundamental alterations to the nature and persistent threat to foreign personnel, terrorist groups stage
of the state, government policy is capricious or harmful to regular attacks against foreign or business assets, or weak
business, corruption is endemic across all levels of officialdom, or security forces are incapable of dealing with the terrorist activity.
regulations are onerous and their implementation is capricious.
EXTREME
EXTREME
Security conditions are hostile and approaching a level where
Conditions are hostile for business. For example: direct business is untenable. For example: there is no law and order,
intervention such as nationalisation or expropriation of assets is there is outright war or civil war, personnel constantly face the
likely, systemic political instability leads to the absence of rule of threat of targeted and potentially life-endangering violence, a
law, the nature of the regime brings severe reputational risks, terrorist group (or groups) is staging a sustained, high-intensity
government structures are inadequate, infrastructure is almost campaign that severely hinders business or terrorists frequently
entirely deficient or major reputational damage is certain. 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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