Vietnam, ASEAN Well Positioned as Investors Relocate from China

January 28, 2015

Share

 

China’s meteoric rise as an economic superpower in recent decades has transformed the fundamental structures of international economic activity.  China’s economic expansion helped to usher in a transformational shift in a global economy once dominated by the United States, Europe, and Japan – in essence, the developed world – to the rapidly emerging markets of Asia.  It also lifted hundreds of millions of Chinese out of poverty and contributed to historic improvements in social and other economic development indicators across China.  Propelled by China’s incremental turn toward a centrally-planned to market-based economic system, the world’s economic center of gravity has gradually shifted to the vast geographic space that lies roughly between India and East Asia.  This trend is best illustrated by China’s emergence as the world’s preeminent hub for global manufacturing.  Having successfully leveraged its massive pool of low-wage labor, growing openness to international investment, increasingly urbanized demographics, and vastly improved infrastructure, China positioned itself as an attractive location for foreign investors.  While initially centered on low-cost, labor-intensive manufacturing, China’s manufacturing sector has since evolved to produce high technology and other advanced goods.  This has elevated China as the world’s largest manufacturing economy.  China’s comparative advantage was further bolstered by its large consumer base and growing network of indigenous suppliers.  But a confluence of factors resulting from China’s very success, including higher wages demanded by Chinese laborers, the increasing value of Chinese currency, and growing competition with Chinese-owned and -operated enterprises, has caused foreign investors to look elsewhere for their manufacturing needs.  Owing to numerous factors, Association of Southeast Asian Nations (ASEAN) members such as Vietnam have become increasingly attractive to foreign investors looking to recapture their competitive advantage in the manufacturing sector.

A number of high-profile multinational corporations, including Samsung, Microsoft, and Nike have scaled back their presence in China in favor of what they have determined to be the more competitive operating climate of Vietnam.  While lagging behind China in a number of important areas, Vietnam has implemented numerous regulatory reforms governing foreign investment that have been designed to facilitate the influx of foreign capital.  Vietnam has also devoted greater attention toward improving transparency and labor codes while also instituting tax-friendly frameworks for investors.  Moreover, Vietnam’s infrastructure capacity continues to expand and progress.  Major concerns from around the globe, including the United States, Europe, India, South Korea, and Japan, have taken notice.  On the surface, it is Vietnam’s comparatively lower-cost labor that has drawn the most attention.  Equally important, foreign investors are also keen to circumvent competition from China’s increasingly capable and competitive vendors and distributors.  Some investors are also finding it increasingly difficult to operate in China due to incidences of labor unrest and China’s declining reliance on export-driven economic activity.  In December 2014 U.S. technology giant Microsoft announced that its Nokia division plans to relocate over 12,000 factory and professional jobs previously based in China for Vietnam in 2015.  Most of these jobs will involve assembly and production operations and will be situated in the capital Hanoi.  In November 2014 South Korea’s Samsung was awarded a license to expand its current presence in Vietnam.  Samsung reportedly plans to invest about $3.4 billion toward the construction of a second factory in Vietnam’s Thai Nguyen Province for producing and assembling smartphones and associated products, doubling its overall investment in the country.  A recent survey of Japanese producers conducted by the Japan External Trade Organization found that a growing number of Japanese producers have considered establishing operations in ASEAN markets, including Vietnam, the Philippines, Indonesia, Laos, Myanmar, and Malaysia.  The same poll found that other Japanese concerns are rethinking their approach to investment in China in the context of new regional opportunities.

 

Risks to Consider

Even as it appears to be losing some of its competitive edge to ASEAN members such as Vietnam, China remains the world’s largest manufacturing hub for good reason.  Leaving the issue of wage competitiveness aside, the productivity of the Chinese labor force relative to its ASEAN counterparts in the manufacturing sector remains superior in many facets.  The notable improvements in China’s infrastructure and other aspects critical to sustaining an efficient supply chain is not easily replicated elsewhere.  China’s success in these areas is the product of decades of experience and billions of dollars in investments.  These realities are widely acknowledged by multinationals that continue to retain a major presence in China even as they shift some aspects of their operations elsewhere.  The general political stability witnessed in China in recent years has likewise instilled a sense of confidence that may be absent in comparatively less stable or otherwise insecure political climates found in some ASEAN member states.

To better understand the latest trends affecting China and ASEAN, or if you would like to be added to our distribution list to receive future editions of World Trends Watch, contact us. To learn more about Helios Global, visit us at our website.  You can also follow World Trends Watch on Twitter at (@HGI_World Trends).


Helios Global authorizes the republication or reprinting of this analysis as long as it is accompanied with the following citation and hyperlink: “Vietnam, ASEAN Well Positioned as Investors Relocate from China’ has been reproduced with the permission of Helios Global, Inc.  Copyright 2015 Helios Global, Inc.”

Permanent link to this article: http://www.heliosglobalinc.com/world-trends-watch/?p=336

Republic of Congo-Brazzaville Invites Foreign Investment in Agriculture, but Risks Remain

January 19, 2015

Share

 

Beset by a legacy of civil war, high poverty, and widespread underdevelopment, the tiny west central African nation of Republic of Congo-Brazzaville (herein referred to as Congo-Brazzaville) is courting foreign investors to enter its agriculture sector.  With a population of around 4 million people and location between the Democratic Republic of Congo, Cameroon, Gabon, the Central African Republic, and the Angolan enclave of Cabinda, Congo-Brazzaville is traditionally known for its relative wealth in oil and diamonds.  Congo-Brazzaville is the world’s 34th largest producer of oil and one of sub-Sahara Africa’s largest and oldest oil producers.  Over 70 percent of Congo-Brazzaville’s gross domestic product (GDP) is derived from oil-related industry.  Current oil production levels have dipped below a peak of around 310,000 barrels per day (bpd) in 2010 to around 270 bpd in 2013.  An influx of billions of dollars committed to a series of upstream and downstream projects in 2014 by energy powerhouses such as France’s Total, Italy’s Eni, and U.S.-based Chevron promise to turn Congo-Brazzaville into sub-Sahara Africa’s third largest producer in crude by 2017, with some estimates projecting future oil production to top 500 bpd.  A series of economic reforms characterized by a more business-friendly regulatory framework and tax regime has also helped entice foreign investment from global energy majors with an established foothold in Africa’s energy sector.  A commitment to issue tenders for the licensing of both offshore and onshore development blocks to foreign energy majors is another sign of Congo-Brazzaville’s growing openness to foreign capital.

Yet the specter of declining global oil prices has prompted many traditional oil producers to diversify their sources of income.  Despite the centrality of hydrocarbons to the functioning of the global economy, a structural change in the pricing of oil due to the emergence of new supply from places such as the United States and elsewhere is a cause of consternation in many oil-producing nations.  A 2013 World Bank report echoed these concerns for Congo-Brazzaville.  In doing so, it highlighted Congo-Brazzaville’s untapped agricultural capacity as a potential source of sustainable and lucrative income to compensate for what is likely to be a drop in oil-generated revenues.  In terms of developing the agriculture sector, Congo-Brazzaville’s favorable climate, arable land, and abundant water resources has been largely ignored in favor of an emphasis on hydrocarbons, diamonds, and various services.  To date, only about 3 percent of Congo-Brazzaville’s GDP is derived from agriculture.  It is estimated that about 10 percent of Congo-Brazzaville’s 10 million hectares of arable land is being utilized for agriculture.  Congo-Brazzaville is well placed to produce cassava, sugar, rice, cocoa, peanuts, corn, coffee, and other fruits, vegetables, and forestry products.

A November 2014 visit by Indian diplomatic officials and representatives of India’s farming sector is emblematic of Congo-Brazzaville’s effort to expand its agriculture sector.  The Indian farming and food processing industry has been aggressively expanding into Africa and other parts of the globe, usually in the form of long-term leasing agreements arranged with local governments to farm and otherwise utilize arable land.  Indian producers are keen to satisfy domestic demand for food and other agricultural staples among India’s growing population.  Indian investors also view opportunities such as those being offered by Congo-Brazzaville as a means to expand their capacity to export a variety of food products into regional and international markets.

 

Risks to Consider

Congo-Brazzaville’s attempt to court international investment in its agriculture sector presents numerous challenges.  Despite ongoing improvements, Congo-Brazzaville’s underdeveloped infrastructure, including lack of adequate roads and bridges and electricity, inhibits domestic development.  Business dealings in Congo-Brazzaville are also heavily marked by corruption, mismanagement, and inefficiency.  Investors entering into the agriculture sector also face a series of political and reputational risks.  The growing trend of agricultural land being leased by foreign investors is a source of growing controversy.  While the influx of investment capital, technology, and expertise is widely cited as a benefit of foreign investment in agriculture, a growing and increasingly vocal opposition to this practice in activist and civil society circles cite the perceived negative impact of this trend – often referred to as “land grabbing” – on local communities.  The lack of transparency and local participation among affected communities is cited as perpetrating an already difficult situation in impoverished and underdeveloped countries such as Congo-Brazzaville.  The impact on the local economy, especially in regards to its affect on local food security, also draws the ire of local and international opponents of these practices.  For example, arable land that was previously used by subsistence farmers to grow food for local consumption may (and is generally) utilized to produce different products, often for re-importing or other export markets.  This can lead to inflationary pressures on local food markets and impact food security in other ways.  It can also negatively impact the local environment.  Popular protests, labor unrest, and even international boycotts of companies engaged in these kinds of practices are becoming increasingly common.

To learn more about investment trends and opportunities in Congo-Brazzaville, or if you would like to be added to our distribution list to receive future editions of World Trends Watch, contact us. To learn more about Helios Global, visit us at our website.  You can also follow World Trends Watch on Twitter at (@HGI_World Trends).

 

Helios Global authorizes the republication or reprinting of this analysis as long as it is accompanied with the following citation and hyperlink:‘Republic of Congo-Brazzaville Invites Foreign Investment in Agriculture, but Risks Remain has been reproduced with the permission of Helios Global, Inc.  Copyright 2015 Helios Global, Inc.”

 

Permanent link to this article: http://www.heliosglobalinc.com/world-trends-watch/?p=322

Kosmos Energy Inflames Western Sahara Imbroglio with Offshore Drilling Venture, Invites Risk

January 19, 2015

Share

 

On the surface, the December 2014 announcement by U.S.-based Kosmos Energy that it is prepared to initiate a long anticipated oil drilling project off the Atlantic waters of Western Sahara in northwestern Africa seems of little consequence.  The oil platform dubbed “Atwood Achiever” is in place to begin operations.  Indeed, the project – the first of its kind involving Western Sahara’s offshore oil reserves – does not seem out of place in the larger context of oil exploration operations around Africa by global energy majors.  Yet due to Western Sahara’s unresolved sovereignty status, Kosmos Energy’s activities in Western Sahara are fraught with controversy and notable geopolitical, reputational, and business risks.

With over two-thirds of its territory effectively under Moroccan control, Western Sahara – a remote, arid, and resource-rich territory bordering Morocco, Algeria, Mauritania, and the Atlantic Ocean – is the world’s only Non-Self Governing Territory without a legal administrating body.  Spain relinquished its claim to the region in 1975 and subsequently transferred administrative authority over the territory known as “Spanish Sahara” to Morocco and Mauritania.  This ushered in the Sahara War (1975-1991) between the region’s indigenous ethnic Sahrawi population and Morocco (Mauritania would eventually revoke its claims to the region).

The resident population of ethnic Sahrawis has agitated for independence over the years against what they view as Morocco’s illegitimate and occupying presence through violent resistance led by the Popular Front for the Liberation of Saguia al-Hamra and Rio de Oro (known by its Spanish acronym POLISARIO, herein referred to as Polisario) and a multifaceted campaign of grassroots political activism.  The ethnic Sahrawi cause is encapsulated through the Sahrawi Arab Democratic Republic (SADR), the self-proclaimed political representative of Western Sahara’s Sahrawi population.  For its part, Morocco has proposed an autonomy plan that would essentially formalize the region’s status as a sovereign part of the country.  Outside of specialist and diplomatic circles, the issues surrounding the situation in Western Sahara tend to be ignored.  Nevertheless, the plight of the Sahrawis has drawn the attention of international human rights and civil society organizations along with independent activists determined to highlight what they perceive as Morocco’s position as an unlawful occupier.

Western Sahara is rich in phosphates, a naturally occurring resource critical to a wide range of products and industrial uses, including fertilizer, building materials, batteries, and water treatment.  The phosphate mine at Bou Craa, located southeast of the Western Saharan capital Laayoune, produces millions of tons of phosphate rock per year and is illustrative of the scale of Morocco’s dependence on the phosphate industry.  The yield at Bou Craa is transported via the world’s longest automated conveyor belt, stretching over 60 miles to the coast in preparation for export.  Indeed, Morocco is the world’s top exporter of phosphate rock and phosphoric acid and is often cited as possessing up to 75 percent of the world’s stock of known phosphate deposits.

The waters off of Western Sahara’s shores are also rich in fishery stocks that help sustain one of the world’s most vibrant coastal and high seas fishing industries.  Morocco is a leading provider of a range of fish and seafood products to global markets, including consumer staples such as sardines, mackerel, and anchovies as well as octopus and squid.  For example, Morocco is the world’s top exporter of sardines.  Western Sahara’s phosphate and fishery industries represent key sources of export-earned foreign currency.  As exemplified by Kosmos Energy’s presence in the region, Western Sahara’s offshore waters are increasingly touted as a potential source of crude oil.  Along with Kosmos Energy, French oil major Total and British Cairn Energy, among others, are actively involved in Western Saharan energy initiatives.

Morocco’s effective control of Western Sahara’s natural resources and its concomitant business dealings with international investors raise an important set of issues that warrant careful consideration for companies that choose to operate in the region.  In essence, ethnic Sahrawis and advocates of their cause often accuse Morocco of plundering Western Sahara’s natural resources while leaving the region’s relatively small population impoverished and subject to oppression.  Ethnic Sahrawi activists see ownership of Western Sahara’s natural resources as an indispensible component of their drive toward achieving self-determination and sustaining an independent state.  Equally important, supporters of Western Sahara’s independence frequently accuse foreign companies of being complicit in the perceived subjugation of ethnic Sahrawis to Morocco.  This has undermined foreign companies’ ability to do business both in the region and beyond due to consumer boycotts and related divestment campaigns, to accusations of flouting international law.

 

Risks to Consider

Given the delicate climate surrounding Western Sahara’s unresolved sovereignty status, investors that choose to operate in the region should be cognizant of the existing risks.  Advocates for the ethnic Sahrawi cause have singled out Kosmos Energy (and other energy concerns) over their activities in the region.  Many have called for coordinated boycott and divestment campaigns in an attempt to pressure companies to abandon their investments.  Boycott and divestment campaigns modeled after those implemented to pressure Apartheid-era South Africa to change course and similar efforts targeting Israel over its continued occupation of Palestinian land in the West Bank, Gaza, and East Jerusalem have already impacted foreign companies operating in Western Sahara.

While foreign investors generally aim to steer clear of diplomatic disputes, the reality of the situation in Western Sahara makes it difficult to avoid politics.  For example, foreign concerns that operate in Western Sahara, in the energy sector or otherwise, negotiate the parameters of their activities with Morocco.  The highly personalized nature of Moroccan politics, as illustrated by King Mummamed VI’s widely acknowledged business interests – the Moroccan royal family directly controls major financial and industrial sectors – exacerbates an already tense situation.  Ethnic Sahrawis and their advocates argue that such dealings represent a form of recognition of Morocco’s claims to the territory and an endorsement of Morocco’s harsh treatment of ethnic Sahrawis.

Kosmos Energy has acknowledged the controversy surrounding its activities in Western Sahara.  At the same time, Kosmos Energy also cites international law – in essence, Morocco’ status as a de facto administrative power – as a source of legitimacy for its business in the region.  Nevertheless, barring a major diplomatic breakthrough, the festering situation in Western Sahara will remain fluid in the near-to medium-terms, exposing foreign investors to a myriad of risks.

While the threst of armed uprisings and violent resistance have waned among ethnic Sahrwai nationalists led by the Polisario, the potential for popular unrest remains.  The regional capital Laayoune was the scene of widespread protests and violence in 2010 in response to actions by the Moroccan security forces.  Led by Algeria, regional supporters of the ethnic Sahrawi cause also continue to impact what amounts to a highly fluid geopolitical environment.  Algeria’s longtime support for the ethnic Sahrawi cause continues to represent a major obstacle in better relations between Algeria and Morocco.

To understand the fluctuating situation in Western Sahara, or if you would like to be added to our distribution list to receive future editions of World Trends Watch, contact us. To learn more about Helios Global, visit us at our website.  You can also follow World Trends Watch on Twitter at (@HGI_World Trends).


Helios Global authorizes the republication or reprinting of this analysis as long as it is accompanied with the following citation and hyperlink: “‘Kosmos Energy Inflames Western Sahara Imbroglio with Offshore Drilling Venture, Invites Risk’ has been reproduced with the permission of Helios Global, Inc.  Copyright 2015 Helios Global, Inc.”

 

Permanent link to this article: http://www.heliosglobalinc.com/world-trends-watch/?p=305

Open for Business: Assessing Somaliland’s Investment Prospects

January 13, 2014

Share

 

Although unrecognized as a sovereign state by the international community, the self-declared Republic of Somaliland is drawing attention as a target of foreign direct investment (FDI) in East Africa. An autonomous region of northern Somalia that is home to approximately 3.5 million people, Somaliland has operated as a de facto independent political entity since the 1991 collapse of the authoritarian Siad Barre regime in Mogadishu and the breakdown of order that ushered in Somalia’s civil war. Home to Hargeisa, Somalia’s second largest city, and the strategically relevant Gulf of Aden port of Berbera, Somaliland, unlike the rest of Somalia, has enjoyed relative peace and stability, allowing it to charter its own path toward a relatively promising and prosperous future.

Somaliland has established a functioning government body, with a ministerial cabinet led by President Ahmed Muhammed Mahmoud, and has committed itself to implementing the prerequisite economic and regulatory reforms needed to create a more favorable investment climate for foreign capital. To date, a number of foreign concerns have established a presence in Somaliland, including Coca-Cola Company, which entered the market in 2012. Estimated at around $17 million, Coca-Cola’s stake in Somaliland represents the single-largest foreign investment in the territory. Somaliland Beverage Industries (SBI) operates a Coca-Cola-licensed bottling plant for producing soft drinks for domestic and regional export markets. Soft drinks produced by SBI are sold to consumers in Somali-proper, as well as Ethiopia and Djibouti. While modest even by regional standards, Coca-Cola’s entry into the Somaliland market and its successful partnership with a local company reflect Somaliland’s potential to attract FDI. Not surprisingly, the opening of SBI’s state of the art facilities attracted much fanfare, including the presence of Somaliland’s president and other senior officials.

Somaliland continues to tout potential FDI opportunities through initiatives such as the online-based Somaliland Investment Portal, and has explored the possibility of establishing a free trade zone (FTZ). A November 2013 announcement by Somaliland’s Air and Transport Ministry that the region’s two international airports have successfully implemented internationally recognized security standards further attests to Somaliland’s efforts to showcase itself as an attractive destination for FDI.

Diplomatic engagement on numerous, overlapping levels is central to Somaliland’s approach to foreign affairs. In a quest to strengthen its regional and international position, Somaliland maintains active contact with a number of foreign states and organizations in Africa and beyond at the consulate-level and in other bilateral and multilateral venues. Somaliland’s network of foreign relationships extends to the United States, China, the United Arab Emirates (UAE), Saudi Arabia, Oman, Turkey, Sweden, and the European Union (EU). Somaliland maintains particularly strong ties with neighboring Ethiopia, and active diplomatic contact with the governments of the regional neighbors of the Federal Republic of Somalia (FRS), including Djibouti, Kenya, Uganda, and with the African Union (AU).

Ethiopia’s support for Somaliland, while stopping short of officially recognizing the region as a sovereign and independent state, is considerable, and represents perhaps Somaliland’s most important foreign relationship. For geopolitical reasons, Ethiopia is a major proponent of Somaliland’s political and economic development: Addis Ababa seeks to develop transportation infrastructure projects in Somaliland to facilitate the development of the port at Berbera as the major access point for land-locked Ethiopia’s international trade and for distributing international humanitarian aid to Ethiopia. Commonly referred to as the Berbera Corridor Project, this initiative enjoys the financial support of the EU and has the potential to dramatically impact regional communication and economic relations. Ethiopia has also declared military support for Somaliland.

Several international firms are also seeking to partner with the Somaliland and Ethiopian governments to modernize and expand the port at Berbera. The Omani Raysut Cement Company (RCC) plans to invest $24 million to build a new cement terminal in Berbera port in 2014. Further enhancing the capacity of Berbera port, the French global investment firm Bollore SA, through its subsidiary Bollore Logistics Africa, intends to open a shipping terminal in Berbera in the near future. With its political and economic footprint expanding across Africa, China is also making its presence felt in Somaliland. In November 2013, Chinese officials representing the Afro-China Commerce Industry Group (ACCIG) concluded a series of agreements with their Somalilander counterparts outlining plans to facilitate more Chinese investment in Somaliland. As part of the agreement, ACCIG will finance the construction of 20 factories in Somaliland while also supporting other ventures. China’s interests in East Africa are widely known. Yet China’s inroads into Somaliland are relatively modest. At this point, China continues to prioritize relations with Somalia-proper. China remains committed to Somalia’s stabilization and long-term development and has agreed to reopen its embassy in Mogadishu. Consequently, China is wary of upsetting its burgeoning relationship with the government in Mogadishu over its ties with Somaliland. In particular, China is also keen to ensure that its larger interests in East Africa are protected. Nevertheless, China’s activities in Somaliland reflect the region’s importance in the context of wider economic developments in East Africa.

Somaliland’s potential as a source of crude oil is also drawing attention from global oil majors. UK-based Genel Energy and the Omani state-owned Oman Oil Company (OOC), are currently conducting oil exploratory operations. Accurate figures on the extent of Somaliland’s oil reserves do not yet exist. Energy companies are hopeful that the region contains oil reserves comparable to those of Yemen across the Gulf of Aden, which is estimated to have around 3 billion barrels of proven oil reserves. Somaliland’s potential as an oil producer is considered to be modest in comparison to other major producers in the region. Given a consensus of projections pointing to a sustained increase in global aggregate demand for oil in the foreseeable future, even a modest amount of oil reserves can make an impact on Somaliand’s economy.

Somaliland’s diaspora community is furthering the region’s economic development, contributing an estimated $1.2 billion in remittances to the Somaliland economy from host nations in North America, Europe, and the Persian Gulf. Through initiatives such as the Somaliland Diaspora Agency (SDA), Somaliland is actively seeking to entice Somalilanders abroad to invest in their homeland. Furthermore, Somaliland signed a bilateral security agreement with the United Kingdom in May 2013. As a result, the UK subsequently agreed to drop a travel ban for UK citizens seeking to travel to Somaliland. The UK also agreed to provide the Somaliland Interior Ministry with training for its police force, coast guard, immigration, and criminal investigation services, and to provide data systems to better coordinate the work of these forces. Somaliland’s Interior and Defense ministries are trying to position the region as a security partner for regional and international actors in combating radical Islamist militancy, transnational organized crime, and piracy.

At the same time, numerous obstacles continue to hinder Somaliland’s goal of official independence, and its tenuous political situation undermines its image as a safe destination for foreign capital. Somalia’s central authorities in Mogadishu have historically rejected Somaliland’s secessionist ambitions, and have used military force to prevent it from breaking away from the FRS. Regional and international organizations such as the United Nations (UN) and the AU have voiced disapproval over Somaliland’s demand for independence on the grounds that it would establish a precedent for secession throughout the African continent.

Somaliland’s prospects are also hampered by an array of lingering conflicts with other parts of Somalia, including the neighboring breakaway regions of Puntland and the Khatumo State: Somaliland is enmeshed in disputes relating to land use and access to potential energy and other natural resource deposits, particularly with Puntland. These disputes led to intermittent armed conflict between the Somaliland and Puntland regions from 2007 to 2009, and have yet to be resolved to the satisfaction of either region. Somaliland also faces internal secessionist challenges in the northeastern area of Sanaag, a region that also borders Puntland, and in the northwestern area of Awdalland, bordering Djibouti. Basic infrastructure challenges remain, including the need for more paved roads; reliable electricity; greater telecommunications coverage (including reliable access to the Internet); confronting desertification and ensuring access to potable water for the vital agricultural and animal husbandry industries; the expansion and modernization of airports at Hargeisa and Berbera; and the need to modernize the port at Berbera.

Somaliland’s energy exploration efforts are complicated by the unresolved legality of the Somaliland government granting exploration licenses that override those granted by the government of Somalia under the authority of Siad Barre in the 1980s to different companies such as Conoco, Amoco, Chevron, and Phillips. The civil war and continuing instability in Somalia suspended oil exploration activity in the northern region of the country, now Somaliland, before the old contracts could be honored. Meanwhile, Somaliland’s crucial livestock sector – Somaliland is the largest supplier of livestock to Saudi Arabia, and the livestock industry is estimated to contribute $250 million annually to the region’s economy – is threatened by encroaching desertification and environmental degradation.

 

Outlook

Somalia’s reputation as a failed state, and the continuing threat of violent instability in Somalia-proper, negatively impacts Somaliland’s image as a viable destination for FDI. Somaliland will continue to be associated with the violence and instability typical of the rest of Somalia in the foreseeable future. Moreover, foreign investors are likely to remain wary of injecting substantial amounts of capital into Somaliland while Somaliland’s sovereignty remains a point of dispute. On the political front, as the international community continues to make inroads into stabilizing the situation in Somalia, major actors with a vested interest in stability in the Horn of Africa are also likely to pay close attention to Mogadishu’s position toward Somaliland. In this regard, Somaliland’s demands for independence and other advantages may be overlooked in favor of achieving a Somalia-wide solution that contributes to regional peace and stability in the FRS and the Horn of Africa.

However, other territories engaged in ongoing disputes over sovereignty, including Taiwan, Kosovo, and the Kurdish Regional Government (KRG) in Iraq, have successfully attracted FDI while also developing formidable diplomatic, economic, and defense portfolios. Somaliland is likely to pursue some of the strategies adopted by these entities as it continues to make its case to the international community.

 

Risks

The greatest risk to investment in Somaliland is the region’s lack of official recognition as a distinct political entity with sovereignty over the resources located in its territory, and questions over its ability to make and honor contracts with interested investors without the approval of Mogadishu.

On the domestic front, the persistence of high unemployment leading to out-migration, especially among Somaliland’s youth, many of whom head to Europe as illegal migrant workers, present long-term challenges to the vitality of Somaliland’s economy. This trend also impacts the future of Somaliland’s domestic market. Somaliland’s troubled domestic economy makes it difficult for its government to collect sufficient tax revenue to provide effective public services and address the infrastructural inadequacies of the region.

The threat of instability caused by militant groups in neighboring Somalia; the possibility of the resumption of piracy activities in the Gulf of Aden maritime zone; border disagreements over land use, maritime and airspace access; disputes over potential energy resources between Somaliland and the FRS; and Somaliland’s disputes with its neighboring break-away regions and from secessionist areas within its territory all present security risks. These internal disputes in particular, caused mainly by ethnic and tribal disagreements, are continuing challenges to the Somaliland government, and present another difficulty as it tries to position Somaliland as the safest and most stable region of Somalia.

 

Opportunities

In lieu of international recognition of its sovereignty, Somaliland maintains an aggressive approach in its international engagement, seeking partnerships with a wide range of global actors in government, the private sector, and from Somaliland’s diaspora in order to improve the region’s long-term economic viability and importance to international commerce.

Somaliland has demonstrated its commitment to attracting FDI in a variety of industries in order to reduce its economic dependence on remittances and animal husbandry. While the extraction of potential energy resources in the region presents obvious opportunities for investment, Somaliland’s desire to make Berbera port a premier shipping hub in the East African and Gulf of Aden region also provides emerging opportunities for investment. Berbera port offers a particularly strong opportunity. Somaliland authorities are trying to position Berbera port as a vital trade node for the rapidly growing economies of the Horn of Africa and the wider region of East Africa, serving as a logistical route for imports to reach key emerging markets in Ethiopia, Kenya, and Uganda. Investment in the development of the port to handle a greater capacity of cargo, and improving Somaliland’s transportation infrastructure in order to facilitate the shipment of goods from the port are all areas of opportunity.

The marketing of Somaliland as a safe tourist destination, primarily cultural and eco-tourism, could also emerge as an important segment of the Somaliland economy. The ancient rock art at Las Gaal (some of the best preserved examples of ancient human art in the entire world), could soon receive UNESCO World Heritage site status, making it a rising tourism destination. Extensive coral reefs in the Gulf of Aden west of Berbera and highland forests in the Caal Madow mountain range also have the potential to attract significant eco-tourism.

 

To understand the opportunities and risks inherent to operating in Somaliland, or if you would like to be added to our distribution list to receive future editions of World Trends Watch, contact us. To learn more about Helios Global, visit us at our website.  You can also follow World Trends Watch on Twitter at (@HGI_World Trends).

 

Helios Global authorizes the republication or reprinting of this analysis as long as it is accompanied with the following citation and hyperlink: “‘Open for Business: Assessing Somaliland’s Investment Prospects’has been reproduced with the permission of Helios Global, Inc.  Copyright 2014 Helios Global, Inc.”


Share

Permanent link to this article: http://www.heliosglobalinc.com/world-trends-watch/?p=289

Syria’s Implosion Shakes Jordan

January 13, 2014

Share

 

In a previous installment of World Trends Watch, Helios Global examined the impact of the Syrian conflict on Lebanon.  As part of our effort to provide readers with a better understanding of the numerous and evolving risks related to the conflict in Syria on the wider Levant, we now shine a light on the evolving situation in Jordan.

 

Pushed to the Breaking Point

The ongoing conflict in Syria is impacting the Hashemite Kingdom of Jordan in numerous ways.  Jordan tends to present an image of political stability and social cohesiveness in an otherwise turbulent region.  In reality, the situation inside Jordan is far more complex.  In many respects, Jordan’s alliance with the United States conceals a climate of political fragility, communal strains, and economic weakness.  Led by King Abdullah II ibn al-Hussein, Jordan is ruled by an authoritarian regime that presides over an increasingly agitated populace eager for political reform.  The ruling monarchy has watched nervously as Arabs have taken to the streets to demand the freedom, democracy, and justice that have eluded them for so long – demands that are being vocalized by more and more Jordanians from all walks of life – while its erstwhile allies in countries such as Tunisia and Egypt were toppled by unprecedented displays of people power.  Jordan is now being confronted with severe social, political, economic, and security challenges as a result of the ongoing tragedy in neighboring Syria.  Consequently, the eruption of political unrest in Syria followed by the ensuing militarization of the Syrian uprising that has plunged Syria into a civil war presages a period of extended uncertainty in Jordan.

In tangible terms, the crisis in Syria has presented Jordan with a major economic burden to its already weak economy.  Jordan also faces a series of threats to domestic peace and stability stemming from the potential spillover of fighting into its territory.  The dominant role being played by radical Islamist militants in the Syrian insurgency and the notable increase of Jordanian militants fighting among the opposition also raises concerns about the potential for blowback within Jordan down the line.  The rise of groups such as Jabhat al-Nusrah (The Support Front) and the Islamic State of Iraq and the Levant (ISIL), among others, which have come at the expense of Free Syrian Army (FSA)-affiliated movements, is a case in point.  Importantly, Jordan is located adjacent to Syria’s southwestern province of Deraa, a locus of political and violent opposition to the ruling Ba’athist regime that is widely seen as the cradle of the Syrian uprising against.  Since the start of the armed uprising, violent insurgents, including radical Islamist militants, have been accused of using Jordanian territory just over the Syrian-Jordanian border to organize and launch operations inside Syria.  Jordan was also quickly ensnared in the conflict on the diplomatic stage.  Throughout the duration of the conflict, Jordan has conveyed a confused and inconsistent message about its position.  For example, Jordan has sought to portray itself as a neutral actor in the events in Syria despite its history of acrimony with the Ba’athist regime.  Officially, Jordan advocates a peaceful resolution to the conflict.  While King Abdullah II was the first Arab leader to call on President Bashar al-Assad to relinquish power, he later offered to mediate talks between the Ba’athist regime and the rebels.  And during the anticipated U.S. military strike on Syria during the summer 2013, King Abdullah II announced that Jordan would not be used as a staging ground for U.S. action.  At the same time, Jordan has lent its support to political opposition bodies such as the Syrian National Coalition (SNC) that are themselves attached to numerous insurgent detachments.  Jordan is also reported to be serving as a conduit for arms and other logistical supplies being provided to insurgents over the border by way of Saudi Arabia and other prominent backers of the opposition.  From Syria’s perspective, Jordan’s close ties with fellow monarchy Saudi Arabia, a leading force behind the political and armed opposition in Syria and a vocal advocate for foreign military intervention to topple the Ba’athist regime, places the Hashemite regime firmly on the side of the opposition.  Reports that U.S. and other foreign intelligence services have also provided various levels of training and other support to insurgent groups in Jordan further complicate the Hashemite Kingdom’s position, especially its claim to neutrality.

A series of major battles between Syrian security forces and insurgents along the Syrian-Jordanian border since the start of the armed uprising places the region into its proper strategic perspective and sheds important light on Jordan’s vulnerabilities.  Syrian security forces continue to make notable gains against the armed opposition in parts of northern and eastern Syria near Syria’s borders with Turkey and Iraq, respectively, as well as along the Syrian-Lebanese frontier in western Syria.  Deraa province, and other areas in southern Syria that extend to the Syrian-Jordanian border and that have since fallen under the control of the armed opposition, will most likely draw the attention of Syrian security forces in the weeks and months to come.  By virtue of its geography, the disposition of Deraa province greatly affects the security of Damascus and, by extension, the survivability of the Ba’athist regime.  Given its proximity to Deraa Province and other critical areas in southern Syria and its role in facilitating – directly and indirectly – the armed insurrection, Syrian efforts to retain control of the critical southern front will likely be calibrated to shape Jordan’s behavior toward the conflict.

The influx of Syrian refugees has also contributed to a heightening of social tensions in Jordan.  Jordan continues to contend with significant population of Iraqi refugees who fled the conflict in their homeland and the longtime presence of Palestinian refugees.  The presence of large numbers of refugees in Jordan exacerbates longstanding social tensions that threaten to undermine already precarious interpretations of Jordanian national identity.  While Palestinians make up the majority of Jordan’s population, the Hashemite monarchy has tended to derive much of its support and legitimacy from the local Bedouin (who are often referred to as “East Bankers”) population.  The influx of Iraqis also threatened Jordan’s delicate balance of social and cultural identities.  With the exception of Lebanon, Jordan hosts more Syrian refugees than any other country. According to the United Nations High Commissioner on Refugees (UNHCR), over 550,000 Syrian refugees have streamed into Jordan since March 2011.  Jordanian officials place the figure above one million, as not all refugees have registered with the UNHCR.  The majority of Syrian refugees in Jordan live near Jordanian-Syrian border in northern Jordan.  Seventy percent of the UNHCR-registered refugees are situated in the Aljun, Balqa, Irbid, Jarash, Mafraq, and Zarqa Governorates of northern Jordan.  Approximately one-quarter of all Syrian refugees reside in the tent city of Zaatari, located eight miles south of the Syrian-Jordanian border.  Since July 2012, Zaatari has been transformed from a barren desert village with a population of 12,000, into a three-square-mile tent city where over 140,000 Syrian refugees are estimated to dwell.  Twenty-one thousand Syrian refugees in Zaatari are below the age of five.  To date, Zaatari is Jordan’s fourth-largest population center and the world’s second largest refugee camp.

The influx of Syrian refugees into Jordan, with a population of fewer than 6.5 million, exerts significant pressure on the economy and exacerbates the resource-poor country’s energy challenges.  The cost of operating services at Zaatari alone approaches $500,000 per day, and the daily water demand is 1.1 million gallons.  Amman underscored its priorities during the beginning of June 2013 by ordering its military to seal off its border with Syria to stanch the flow of refugees.  Jordan’s sluggish economy, energy shortages, and water crisis will compel Amman to make difficult decisions with respect to resource allocation in the coming years if the refugee crisis causes Jordan’s population to continually grow at a rate which the economy cannot sustain.  So far, the Syrian crisis has led to an eight-percent increase in Jordan’s population since March 2011.  Relatedly, competition over disappearing jobs has increased as Jordanian employers tap into the large pool of Syrian labor that is willing to work for lower wages.  Moreover, with a growing number of Syrian refugees migrating to the cities, the rental housing market has tightened, particularly in Amman and Mafraq.  According to some estimates, rental rates for the cheapest apartments have increased upwards of 50 to 100 percent as more refugees move into basements and storage areas within apartments.

The Syrian crisis has underscored deep political and ideological rifts within Jordan, as different factions maintain diverse stances toward Amman’s role in the conflict.  Such divisions were highlighted in August 2013, when hundreds of liberal and Arab nationalist groups held demonstrations in Amman to protest an anticipated U.S. military strike against Syria.  These political currents are inclined to view any Western military strike against Damascus within the context of imperialist efforts to undermine the Arab world and destroy Islam.  In April 2013, demonstrators in Amman protested against the deployment of 200 U.S. troops in Jordan along the Syrian-Jordanian border.

 

Risks

In the absence of an end to the conflict in Syria, Jordan faces a series of serious risks.  In the immediate future, Jordan’s economy will continue to bear the brunt of the Middle East’s gravest refugee crisis since 1948 while existing social tensions over the influx hundreds of thousands of refugees continue to percolate across the country.  In particular, the long-term of implications of permanent refugee camps residing on Jordanian soil threaten to unsettle the delicate demographic makeup that has allowed the Hashemite monarchy to retain control and survive over the years.  As the influence of radical Islamist militants grows within the armed opposition, including groups that advocate hardline Salafist ideologies or otherwise associate with al-Qaeda, the threat of blowback will also increasingly be felt in Jordan as Jordanian fighters (and others militants) seek out new targets in the region.

 

To stay abreast of the situation in Jordan in light of developments in Syria, or if you would like to be added to our distribution list to receive future editions of World Trends Watch, contact us. To learn more about Helios Global, visit us at our website.  You can also follow World Trends Watch on Twitter at (@HGI_World Trends).

 

Helios Global authorizes the republication or reprinting of this analysis as long as it is accompanied with the following citation and hyperlink: “’Syria’s Implosion Shakes Jordan’has been reproduced with the permission of Helios Global, Inc.  Copyright 2014 Helios Global, Inc.”

Share

Permanent link to this article: http://www.heliosglobalinc.com/world-trends-watch/?p=265

Small Arms and Light Weapons Proliferation from Libya Threatens Stability in the Sahel and Northwest Africa

August 12, 2013

Share

 

The 2011 fall of Libyan leader Muammar al-Gaddafi and the subsequent breakdown in order in Libya has been a major contributor to the instability plaguing large swaths of the Sahel region and Northwest Africa.  In particular, the flow of weapons, such as a multitude of small arms and light weapons (SALW) and explosives, from liberated Libyan military stockpiles into the surrounding countries has galvanized existing political opposition currents, separatist movements, and transnational militant groups.

Much of the concern regarding the impact of weapons proliferation out of Libya emphasizes the potential threat of man-portable air defense systems (MANPADS) falling into the hands of radical Islamist militant groups such as al-Qaeda or one of its regional or international affiliates.  In light of the persistent threat of international terrorism as it relates to commercial air travel, such concerns remain valid.  Yet it has been the residual impact of the proliferation of SALW and explosives on regional stability and security that has posed the most immediate threats to what is an already precarious political and security environment.

Mali, which has experienced severe unrest since January 2012 – including ethnic Tuareg-led insurrections, radical Islamist insurgency, and a military-led coup d’état – has been the most dramatic example of the region’s post-al-Gaddafi volatility; Chad and Niger have also been forced to deal with fallout from the Libyan revolt.  Algeria has experienced a noticeable uptick of violence, including the January 2013 attack against the Tigantourine natural gas facility in Amenas in eastern Algeria along the Algerian-Libyan border.  The attack at Amenas was orchestrated by militants associated with an offshoot of al-Qaeda’s North African affiliate, al-Qaeda in the Islamic Maghreb (AQIM), known as the al-Mulathameen (The Masked Ones).  Nigeria believes that radical Islamist militants affiliated with Boko Haram have also been emboldened by their access to Libyan arms.  While lying outside of the geographic space that is the subject of this analysis, the increase in violence in Egypt’s Sinai region is also being partially attributed to the influx of smuggled Libyan arms into Egyptian territory.

To date, the proliferation of Libyan weapons has further militarized numerous existing political opposition and radical movements and afforded opportunities for other violent and irregular actors to pursue their own objectives.  Al-Gaddafi’s fall was followed by a troubled political transition that remains marred by violence between rival factions and militias, resulting in a power vacuum in one of the region’s most militarized states.  As Libya struggles to consolidate its domestic political institutions and establish some semblance of law and order, SALW and explosives proliferation stemming from within its borders will continue unabated.  Consequently, the countries lying within the Sahel and Northwest Africa will continue to have their security undermined by developments in Libya.

 

Libyan Weapons: Galvanizing Violence

Despite the concerns surrounding the disposition of Libya’s arsenal of MANPADS, there is no concrete evidence that any militants present in the region – radical Islamist or otherwise – have procured the weapons systems. Nevertheless, the potential threats associated with MANPADS continue to attract much of the attention in regards to proliferation.  These worries were exacerbated by documents discovered in Libya in September 2011 indicating that Russia had provided al-Gaddafi with several hundred advanced – and unaccounted for – SA-24 “Grinch” surface-to-air missiles.  In March 2011, Chad’s President Idriss Deby claimed that Libyan MANPADS had entered Chad and Niger.  Malian officials echoed Deby’s claims.  A number of unconfirmed reports circulated in regional media outlets claimed that various North African regional militant groups had acquired MANPADS in 2012 and 2013.  Algerian officials reported in February 2013 that they confiscated numerous Russian surface-to-air missile systems in Algeria’s southern regions.

But it is the proliferation of more prosaic weapons systems – essentially a diverse array of SALW and explosives – that have most actively contributed to the recent wave of unrest and instability in the Sahel and Northwest Africa.  An assortment of Libyan weapons started entering neighboring countries soon after the outbreak of civil war in Libya.  In early 2011, assault rifles, ammunition, mortars, mines, and plastic explosives began crossing Libya’s borders into Algeria, Egypt, Niger, and Mali.  In April 2011, regional media reports claimed that pickup trucks carrying arms, ammunition, and explosives from eastern Libya had crossed into Mali via Chad and Niger.

Since 2011, concerned officials have repeatedly claimed that Libyan weapons and stockpiles of plastic explosives are being distributed to militants in Niger, Algeria, Nigeria, and elsewhere.  Established organized criminal and illicit trafficking networks traversing the Sahel’s ancient East-West trade routes, and associated networks that link the North to the South, are facilitating this trend.  The porous borders throughout the territories in question also help ensure that the relative free flow of illicit trade continues unimpeded.  The increasing availability of arms has also provided aspiring militants with the opportunity to establish their own fringe factions.  Weapons traffickers are also benefiting from the additional sources of supply and increasingly diverse selections of arms.

This is most evident in Mali.  The political leadership in Bamako has long disenfranchised Mali’s Tuaregs, a nomadic population that is related to the indigenous Berber peoples of North Africa and the Sahel region.  Al-Gaddafi employed thousands of Tuareg mercenaries from Mail, Niger, and Chad to bolster the Libyan military while fortifying his own power base within the Libyan security apparatus.  Following the collapse of his regime, the repatriation of these generally well trained, heavily armed, often battle hardened, and politicized Tuaregs remains a major challenge.  In January 2012, a separatist Tuareg rebellion broke out in northern Mali.  In March 2012, Malian military officers launched a coup against the government of President Amadou Toumani in response to what they claimed was the mismanagement of the military response to the rebellion.  By April 2012, Tuareg rebels, allied with a variety of Islamist militants, had gained control of most of northern Mali, prompting a joint French-Malian military campaign to recapture the north in January 2013.

Despite French and Malian efforts, northern Mali remains a militant stronghold.  Tuareg separatist groups such as the National Movement for the Liberation of Azawad (MNLA), the Arab Movement of Azawad (MAA), and the Islamic Movement of Azawad (MIA) exist alongside – and increasingly clash with – regional Islamist extremist groups such as AQIM, the AQIM-affiliated Movement of Jihad and Oneness in West Africa (MUJAO), Ansar al-Dine (AAD), among others.  For instance, MIA is a splinter group of AAD.  MIA broke from AAD in January 2013 and subsequently renounced its tactics and ties to AQIM.  Similarly, MAA was formed as a secular alternative to the more Islamist-oriented MNLA.  These groups – all of whom have benefitted from the influx of weapons from liberated Libyan caches – have created an atmosphere of ongoing violence in Mali, complicating the region’s prospects for stability.

The specter of anti-government violence also haunts Chad.  The Union of Resistance Forces (UFR) threatened in March to renew its militant campaign against the Deby regime despite having agreed to lay down its arms in 2010.  There has been speculation that arms from Libya have encouraged the UFR’s saber rattling, and Deby – who has survived multiple coups, including an alleged attempt by two generals and two legislators to take over the country this past May – has accused Libya of harboring UFR rebels.

Niger also faces an uncertain future in the wake of the Libyan collapse.  In May, MUJAO militants launched a suicide bombing – the first attack of its kind in Niger – against a Nigerien army base and French uranium mine operated by Areva in northern Niger.  The group claimed that the operation was designed to punish Niamey for deploying a contingent of peacekeepers to Mali.  The attacks, which Niger claimed were launched from Libya, raised concerns in both Niger and Europe about the safety of Niger’s uranium deposits; France, which derives the majority of its electricity from nuclear power, receives about forty percent of its uranium from Niger.  Niger is also reported to possess significant oil deposits, and has a history of rebel-led violence directed at its uranium and oil sector.  Since 2007, the Tuareg-based Niger Movement for Justice (MNJ) has threatened to attack oil and uranium operations in the country unless Niamey provides the MNJ with a greater share of national energy revenues.  MNJ has kidnapped Chinese and French workers at oil and uranium facilities, and many fear that the instability in Libya will provide the MNJ with additional resources and an increased operational capacity.

 

Organized Crime and Regional Smuggling Networks

As the number of militant groups in the region grows, the demand for weapons increases, bolstering the illicit trade networks that have existed alongside legitimate trade relationships in the region for years.  The Sahel and Northwest Africa are focal points of arms trafficking since the 1990s, and since the early 2000s, narcotics trafficking – especially of cocaine and cannabis resin – has been on the rise.  The region in question is widely touted as a global hub of narcotics trafficking that encompasses links to Latin America and the Caribbean, Sub-Saharan Africa, and Europe.  Organized criminal networks, which often incorporate networks of underpaid and corrupt government officials and regional security personnel, have exploited the growing instability to expand their operations, assisted by the flood of Libyan weapons into the region.

 

Risks

The current Tuareg separatist and radical Islamist-led violence in the Sahel and Northwest Africa is unlikely to recede in the near-term. The desperate poverty of the region, where drought and expanding desertification have ravaged the agrarian economy and frequent kidnappings have decimated the foreign tourist trade, provides few legitimate and viable employment opportunities to Tuareg mercenaries returning from years of service – and employment – in Libya.  These populations have been ignored and marginalized by their governments for decades, resulting in extreme resentment and a steady process of politicization.

Al-Gaddafi was in power for over 40 years, and his absence is being felt on many levels.  Despite his government’s isolation from the larger Arab and Western worlds, the former Libyan army colonel actively cultivated close ties with his African neighbors to the south, using Libya’s considerable oil wealth to promote infrastructure development projects, broker peace deals, and provide employment to impoverished and disenfranchised minority groups.  Libya’s new provisional government is unlikely – and largely unable – to continue al-Gaddafi’s policies towards Libya’s African neighbors, policies on which many of those neighbors had come to depend economically, politically, and socially.  This, combined with the influx of Libyan SALW and explosives into the region and the subsequent strengthening of numerous anti-government and separatist militant groups, clouds the security, political, and economic outlook for the Sahel and Northwest Africa.

To understand the multiplicity of risks inherent to political stability and security in the Sahel and Northwest Africa, or if you would like to be added to our distribution list to receive future editions of World Trends Watch, contact us. To learn more about Helios Global, visit us at our website.  You can also follow World Trends Watch on Twitter at (@HGI_World Trends).

 

Helios Global authorizes the republication or reprinting of this analysis as long as it is accompanied with the following citation and hyperlink: Small Arms and Light Weapons Proliferation from Libya Threatens Stability in the Sahel and Northwest Africa’ has been reproduced with the permission of Helios Global, Inc.  Copyright 2013 Helios Global, Inc.”

Share

Permanent link to this article: http://www.heliosglobalinc.com/world-trends-watch/?p=232

Identifying the Pitfalls and Potential Rewards in the Georgian Market

August 12, 2013

Share

 

Following Georgia’s October 2012 elections, the Georgian Dream (GD) coalition confounded most expectations and won a strong parliamentary majority.  The first peaceful, constitutional transfer in the modern era unseated the United National Movement (UNM), which had enjoyed a virtual political monopoly since the 2003 Rose Revolution.  GD’s sudden rise to power, despite a demonstrably unfair playing field favoring the UNM, shocked all but a few watchers.  GD, led by the Forbes-listed philanthropist Bidzina Ivanishvili, was a virtual unknown.  Its hastily assembled coalition, drawn together mainly by a shared antipathy for the UNM, was an amalgam of Westernizers, social democrats, and reactionaries.  And despite the election, the UNM retained the presidency, creating an uneasy cohabitation.

Since the Rose Revolution, Georgia has been lauded as an enthusiastically pro-Western, modernizing country, despite its Soviet legacy and Russia’s traditional suzerainty over the region.  When ex-president Eduard Shevardnadze abdicated in 2003, Georgia was a broken state. Georgia’s central institutions were weak, its authority and legitimacy challenged by local strongmen, and corruption was endemic.  After coming to power, the UNM instituted reforms that helped reestablish order, combat corruption, and develop infrastructure.  As a result, Georgia today has virtually eliminated petty corruption, the economy has grown rapidly, and the country consistently rates highly within a number of international indices.  One of Georgia’s landmark achievements was police reform, in which the Shevardnadze-era force was liquidated and rebuilt.  Living wages for government personnel were paired with anti-graft measures, helping to stamp out petty corruption and cut crime.  The previous government was particularly aggressive in attracting and accommodating foreign direct investment (FDI), making liberal use of free investment zones, a business-friendly labor code, and a simple tax regime.  While the reforms’ implementation has been uneven – state-sanctioned monopolies and brutal prison abuses exposed severe shortcomings – even strident critics acknowledge the ‘mental revolution’ that reforms have helped facilitate.

Between reforms and an emerging democratic culture, underscored by the peaceful transfer of power, Georgia has other assets that could position it as a breakout economy should the government successfully navigate domestic and foreign risks.  Geographically, Georgia links Turkey and Europe to Caspian energy via the only route not controlled by Russia.  While Georgia does not have significant hydrocarbons reserves of its own, the expectation of exports from Turkmenistan makes Georgia a long-term export route.  The recently chosen Trans-Adriatic Pipeline, for example, will bring Shah Deniz 2 natural gas to Southern European markets via the Baku-Tbilisi-Erzurum pipeline (which transits Georgia) and the under-development Trans-Anatolian Pipeline.  At the meeting point of Turkey, Russia, Armenia, and Azerbaijan, Georgia is also well positioned as a bridge between European markets and emerging markets in Central Asia, the Middle East, and Russia.

Georgia’s tourism potential is also significant.  While narrow swaths of Georgian territory have been redeveloped for tourism purposes, much of the country’s natural and cultural wonders remain largely inaccessible to most non-Georgian visitors.  Although major Western hotel chains like Marriott, Sheraton, Radisson, and Kempinski have opened in the capital, Tbilisi, and the Black Sea resort city of Batumi, other emerging destinations like Kutaisi, Mtskheta, and Borjomi remain underserved.  Georgia’s wine regions – the apparent birthplace of winemaking – continue to be underexploited.  Georgian wine has found increased success among oenophiles and in export markets, counterintuitively buoyed by a recently lifted 2006 Russian embargo, as ancient winemaking techniques and unique grape varieties make it a potentially compelling niche product.

However, the change in power has heightened concerns over political stability.  Recently, the government has arrested and charged ex-regime members for abuses of power.  Although the allegations are credible and the arrests have popular backing, they are an unhelpful signal to potential investors, despite assurances that the rule of law is being observed.  Macroscopically, Georgia’s ongoing tensions with Russia and the Moscow-backed separatist regions of South Ossetia and Abkhazia, while somewhat lessened since the ascension of the GD government,, remain a fixture in Georgian foreign relations.  Georgia is also proximate to a number of other simmering conflicts with serious propensities for spillover.

 

Outlook

Concerns, largely telegraphed by the UNM, that the GD government would kowtow to Moscow and undo the UNM’s investment-friendly reforms have not borne out.  Fears that the ‘carrot’ of Euro-Atlantic membership would be undermined by a pro-Moscow turn have not materialized. On the contrary, GD appears focused on bolstering the rule of law and has strongly maintained Georgia’s Euro-Atlantic integration as the centerpiece of its foreign policy.  According to some Western officials, Georgia’s new government has even more strongly pushed its bid for NATO membership.  More near-term, a Deep and Comprehensive Free Trade Agreement (DCFTA) and visa liberalization with the European Union (EU) is expected within the next 12 to 18 months.  While this would be a major symbolic victory, the practical effects of the DCFTA are likely to be muted until Tbilisi better develops and articulates an industrial policy to seize the opportunity.  Georgian wine, mineral water, tea, and potentially textiles are best positioned to benefit from a DCFTA if planning is undertaken.

Georgia’s new government, though making a number of worthwhile reforms, has yet to articulate a credible policy vision. While it has professed to focus on economic development, details on specifics continue to be scarce.  However, Tbilisi’s détente with Moscow has had the effect of significantly mitigating the possibility for renewed conflict (such as the August 2008 war) and has restarted exports to the Russian market.

With presidential elections this fall, political tensions are sure to be apparent.  However, a recent constitutional change accords the new president significantly less power.  Georgian politics over the next year could stabilize as political forces adapt to the emergence of an active, multiparty system.

 

Risks

Georgia’s greatest near-term risks stem from its divisive internal politics.  Though the outlook appears to favor GD, the UNM should continue to be able to muster a robust, if diminished, opposition.  Mikheil Saakashvili’s departure from the presidency will profoundly change the UNM’s operational dynamics.  And Prime Minister Ivanishvili has repeatedly stated his desire to leave politics after the elections, making the future of GD equally uncertain.

Georgian institutions remain a work-in-progress.  While the UNM made major strides in developing credible institutions, development heavily favored Tbilisi and showcase enclaves. Outside of these areas, capacity is seriously limited.  Investors looking to explore opportunities in-country still need to approach national authorities for regional projects as most municipalities do not have the capability or legal authority to serve as effective interlocutors.  However, decentralization initiatives should address this issue to some extent.

Geopolitically, Georgia has good relations with all of its neighbors except Russia.  Tbilisi’s interests – such as sovereignty over the breakaway territories and NATO membership – clash with Russia’s interest in reestablishing regional hegemony.  However, GD’s more diplomatic tone has been helpful.  Though a recent provocation by Russian troops on the South Ossetia border highlights the situations’ fragility, the government’s appears able to manage them.

 

Opportunities

Despite the potential risks, Georgia’s Western orientation and integration make its long-term prospects bright as an FDI location.  While Georgia’s small size makes it largely unable to compete globally in terms of volume, its biodiversity positions Georgia as a possible purveyor of high quality, niche goods.  Its wine industry, for example, cannot compete by price point.  But distinctive winemaking techniques, native grape varieties, and an ancient viticulture heritage offer a different but compelling value proposition.  Its tea industry, only now being revived in the coastal province of Guria, also once held a global reputation.  Likewise, Georgian mineral waters continue to enjoy a reputation throughout Eurasia as synonymous with purity and health.  Indeed, the country overall still has a strong residual ‘brand’ throughout the former Soviet Union.

Georgia’s risk is also further mitigated by the continued aid being allocated to the country from Western and international organizations.  Symbolically, this can be seen as a vote of confidence in the country’s future.  More practically, this aid is often packaged to mitigate risk for would-be investors.

To better grasp the array of risks and opportunities associated with doing business in Georgia or other emerging markets, or if you would like to be added to our distribution list to receive future editions of World Trends Watch, contact us. To learn more about Helios Global, visit us at our website.  You can also follow World Trends Watch on Twitter at (@HGI_World Trends).

 

Helios Global authorizes the republication or reprinting of this analysis as long as it is accompanied with the following citation and hyperlink: ‘Identifying the Pitfalls and Potential Rewards in the Georgian Market’ has been reproduced with the permission of Helios Global, Inc.  Copyright 2013 Helios Global, Inc.”
Share

 

Permanent link to this article: http://www.heliosglobalinc.com/world-trends-watch/?p=216

As Regional Stability Crumbles, Risk of Conflict Engulfing Syria’s Neighbors Grows: A Look at Lebanon

June 30, 2013

Share

 

With the conflict in Syria now well into its third year, it is important to take stock of some of the broader trends that are being driven by this unfolding tragedy in the Middle East.  An informed understanding of the situation in Syria is critical toward mitigating a range of risks – political, economic, or security – for investors, decision-makers, and analysts alike.

The conflict in Syria has already confirmed fears of its potential to engulf Syria’s immediate neighbors.  To different degrees, Lebanon, Turkey, Jordan, Iraq, and Israel have all been impacted directly (and indirectly) by the popular uprising and subsequent outbreak of a full-blown civil war in Syria.  In many respects, Lebanon, Turkey, Jordan, Iraq, and Israel are all part of the broader social, political, ideological, and kinetic battlespace that is being leveraged by a resilient and emboldened Ba’athist regime headed by Syrian President Bashar al-Assad and his supporters, as well as the numerous armed opposition factions seeking al-Assad’s ouster.  The web of domestic and foreign interests that underlie Syria’s civil war are also being directly shaped by (or are themselves a product of) the peculiarities – social, political, demographic, economic, and geopolitical – unique to the Levant’s societies and politics.

In the weeks ahead, Helios Global’s World Trends Watch is offering readers a snapshot of some of the most pressing risks stemming from the conflict in Syria today, specifically as they relate to regional stability in the Levant.  Our first installment examines some of the factors impacting stability in Lebanon as a result of the conflict in Syria.  Subsequent analyses will examine the situations in analogous contexts in Turkey, Jordan, Iraq, Israel, and the numerous Palestinian refugee camps situated throughout the region.

 

The Incremental Destabilization of Lebanon

To date, the heightened state of tensions in Lebanon represents the clearest example of the potential risks to neighboring countries resulting from Syria’s implosion.  In comparative terms, Lebanon has borne the brunt of the regional pressures and stresses emanating from the conflict in Syria.  Initial social and economic pressures are giving way to heated political fights between rival factions that are playing themselves out through outbursts of violence.  So long as the conflict in Syria persists, the incremental destabilization of Lebanon will continue.

Due to its geographic proximity to Syria, Lebanon has become overwhelmed with Syrian refugees streaming into the country in order to flee the fighting at home.  Lebanon is reported to officially host around 550,000 Syrian refugees, the most of any of Syria’s neighbors.  Yet Lebanese and other international observers claim the actual figure to be much higher, as most official estimates fail to account for the number of refugees who have not registered with the United Nations (UN) or Lebanese government bodies.  Some estimates suggest that up to 1,000,000 Syrian refugees may have in fact entered Lebanon.

Politics aside, the toll of this refugee flood into a country of around 4.3 million people has left Lebanon in a very dire position.  The massive influx of Syrians has taxed Lebanon’s already meager humanitarian and infrastructure capacity to the breaking point.  International commitments to help Lebanese authorities cope with the wave of refugees have fallen well short of delivering the scale of relief required to alleviate the situation.  Persistent shortages of adequate housing for the most desperate refugees, as well as access to sufficient food and proper medical care, are among the most pressing immediate concerns.

A host of longer-term worries stemming from Lebanon’s inadequate institutional and infrastructure capacity are also presenting a host of burdens.  Syrian children are having trouble enrolling into Lebanese schools.  As foreigners, the prospects for Syrian refugees finding stable employment in Lebanon outside of what is often a highly exploitative and insecure informal labor sector are also grim in an already weak economic climate.  Popular resentment toward the Syrian presence in Lebanon is also growing, even in communities that are generally sympathetic to the refugees’ plight and aligned politically and ideologically with the Ba’athist regime.  This is the case despite the fact that many Lebanese share close cultural and familial ties with Syrians, and Syrian guest workers already figure prominently in the Lebanese labor sector.  These problems are exacerbated by Lebanon’s dire economic situation.  Inflation is rampant and the costs of fuel, food, and other vital consumer goods continue to rise for Lebanese consumers.  The conflict in Syria has also decimated Lebanon’s lucrative tourism sector.  Lebanon’s vital trade relations with Syria and its neighbors have also taken a major hit due to the conflict.

On the domestic political front, a climate of hostilities between Lebanese opponents of Syria’s Ba’athist regime – led by the March 14 bloc of political parties and associations headed by former Lebanese Prime Minister Saad al-Hariri’s Future Movement and its hardline Salafist affiliates – and Syria’s Lebanese allies – namely, the March 8 bloc of political parties and associations that includes Hizballah – is increasingly translating into violence.  This period of tensions contributed to Najib Mikati’s decision to resign as prime minister in March, a move that escalated tensions in the country even further.

Due to its social, political, economic, cultural, demographic, and geographic conditions, Lebanon is especially sensitive to the current circumstances in Syria.  Lebanon remains a fractured and divided polity riven by political and sectarian factions that were themselves shaped by years of civil war.  In many respects, the fault lines that have emerged in Syria since the start of the anti-Ba’ath uprising are very much apparent in Lebanon.

The March 14 bloc and its allies, which includes adherents of Lebanon’s growing radical Sunni Salafist current, have been among the most vocal in terms of lending support to the political and armed opposition in Syria.  For these factions, the civil war in Syria has provided them with an opportunity to challenge their local rivals, namely, the March 8 bloc led by Shi’a Hizballah.  Lebanese militants have figured prominently among the armed opposition in Syria.  Towns and villages that tend to sympathize with the armed opposition, such as the northern town of Arsal, which lies just inside Lebanon along the Lebanese-Syrian border in the Bekaa Valley and hosts a largely Sunni population, are serving as logistical and operational hubs for the armed opposition in Syria.  As a result, Syrian forces have launched a series of attacks against suspected insurgent positions located in and around Arsal in recent months.  Skirmishes between armed opposition factions and Syrian security forces are increasingly being fought inside Lebanese territory.  Radical ideologues based in the traditional bastions of hardline Salafist influence in Lebanon, including the cities of Tripoli in the north and Sidon in the south, are increasingly challenging al-Assad’s allies in Lebanon through open and often violent confrontations, while simultaneously imploring their followers to travel to Syria and take up arms alongside the armed opposition.  The recent exploits of the radical Salafist cleric Sheikh Ahmed al-Assir in Abra, a suburb of Sidon, are illustrative of the scale of the crisis confronting Lebanon.  Al-Assir’s loyalists attacked Lebanese security forces in the area.  The clashes left 12 Lebanese soldiers dead and scores injured.  Al-Assir’s reliance on sectarian invective targeting Hizballah, Shi’a Muslims in general, and Iran is raising fears of further destabilization and even civil war.

Growing evidence of Hizballah’s involvement in the Syrian conflict in places such as al-Qusayr in Homs Province, a stronghold of the Syrian opposition that has since fallen to Damascus, and towns and villages in its immediate vicinity, ostensibly on the side of the Ba’athist regime, has also exacerbated tensions in Lebanon.  Al-Qusayr and its surrounding areas are strategically important because they lie between Damascus and Syria’s Mediterranean coast.  Hizballah justified its actions by claiming to protect a network of towns and villages located around al-Qusayr whose diverse collection of inhabitants – including Shi’a, Sunnis, Christians, and Alawites – assert Lebanese nationality in a heavily contested area located along the Lebanese-Syrian frontier.  Hizballah’s growing profile in Syria, combined with the Ba’athist regime’s continued resilience, likely portends a steady intensification of Sunni-Shi’a hostilities in Lebanon in the weeks and months ahead.

As Syria’s Ba’athist regime endures, Salafist-dominated armed opposition elements (and their foreign benefactors, such as Saudi Arabia and Qatar) are likely to direct their attention toward destabilizing Lebanon by attacking pro-Syrian factions inside the country.  For Saudi Arabia and Qatar, the destabilization of Lebanon would put Hizballah on the defensive, diminishing its ability to operate in Syria.  Armed opposition elements struggling against the Ba’athist regime are also issuing threats against Hizballah and its allies in Lebanon due to their involvement in Syria.  In light of the numerous gains secured by Syrian security forces on the battlefield in recent weeks in regions once regarded as insurgent strongholds, growing threats issued by the Syrian armed opposition against Hizballah in Lebanon may reflect a sign of weakness on their part.  As armed opposition factions fail to make gains against Syrian security forces, some groups may choose to expand their area of operations by striking the Ba’athist regime’s Lebanese allies.  This strategy also signals an attempt to weaken Iran, a key supporter of the Ba’athist regime and Hizballah.  For example, Dahiyah, the southern suburb of Beirut whose inhabitants are largely Shi’a and sympathetic to Hizballah, was targeted in a rocket attack in late May.  As a result, sectarian clashes and displays of popular unrest are becoming more frequent across Lebanon.  In the context of wider regional developments, incendiary incidents such as these have the potential to explode quickly and without notice, leaving Lebanon increasingly unstable and insecure for its residents, as well as visitors and investors.

 

Risks

The ongoing conflict in Syria will continue to threaten to destabilize Lebanon in the weeks and months ahead.  The potential risks affecting Lebanon encompass social, political, economic, as well as security arenas.  Just as important, the prospect of what appears to be an increasingly emboldened and resilient Ba’athist regime in Syria raises the level of risk associated with visiting and operating in Lebanon.  Armed opposition factions (and their foreign supporters) are more likely to attempt to target Syria’s allies in Lebanon in order to compensate for their inability to achieve substantive victories on Syrian soil.

To learn more about the myriad risks affecting Lebanon as a result of the conflict in Syria, or if you would like to be added to our distribution list to receive future editions of World Trends Watch, contact us. To learn more about Helios Global, visit us at our website.  You can also follow World Trends Watch on Twitter at (@HGI_World Trends).

 

Helios Global authorizes the republication or reprinting of this analysis as long as it is accompanied with the following citation and hyperlink: “‘As Regional Stability Crumbles, Risk of Conflict Engulfing Syria’s Neighbors Grows: A Look at Lebanon‘ has been reproduced with the permission of Helios Global, Inc.  Copyright 2013 Helios Global, Inc.”
Share

Permanent link to this article: http://www.heliosglobalinc.com/world-trends-watch/?p=190

Prospects and Challenges for North Africa-Europe Solar Energy Initiatives

June 29, 2013

Share

 

The search for new and alternative sources of energy remains one of the world’s most pressing challenges.  To make an impact, these energy sources must be economically feasible, industrially viable, plentiful, practical, and easily accessible.  In this regard, a number of trends involving solar energy demand in Europe, and North Africa’s potential to meet that demand, warrant a closer look.

Recent years have seen an increased interest in North Africa’s potential to provide solar energy to Europe.  This trend is driven by a number of factors, including the growing concern over the environmental and economic impacts of fossil fuel dependence, and post-Fukushima worries surrounding the safety of nuclear power.  Solar energy is renewable and clean.  Advances in solar-derived electricity production, utilizing both photovoltaic (PV) generators – in which the sun’s rays are converted to electricity using solar cell panels – and concentrated solar power (CSP) plants – in which the sun’s rays are used to heat water to power steam turbine generators – have enhanced solar power’s profile as a valuable complement to petroleum and natural gas.

Additionally, traditional challenges to solar power’s viability as a reliable, marketable source of electricity on a regional or even global scale are closer than ever to being overcome.  High voltage direct current (HVDC) power lines can transmit electricity over great distances with little volume loss, while breakthroughs in solar energy storage (using molten salt in heat transfer systems, for instance) make it possible to use solar energy collected during the day at night, when it is often needed most.

Given its geographic peculiarities and proximity to Europe, North Africa appears well placed to serve as a source of solar energy for Europe.  The largest trading partners for North African countries such as Morocco, Algeria, Tunisia, and Libya, among others, are European.  North Africa has enormous solar energy generating capacity, with vast portions of sparsely inhabited or uninhabited desert areas providing an attractive setting for large-scale solar energy infrastructure projects.  European-directed initiatives like DESERTEC and Nur-Energie promise to harness the power of the plentiful North African sun, converting solar energy into electricity and then transmitting that electricity to Europe via HVDC lines.  By connecting North African solar energy production plants to European energy grids, the DESERTEC Industrial Initiative aims to provide 15% of Europe’s electricity by 2050, producing 100 gigawatts – the equivalent of 100 nuclear power plants – of electrical power through a combination of solar, wind, and natural gas.

 

Outlook

Despite the theoretical advantages of a robust North Africa-Europe solar energy relationship, serious challenges have emerged.  For a number of reasons, renewable energy projects often cost far more to implement than fossil fuel energy projects.  The global economic crisis has also resulted in reduced enthusiasm for projects such as DESERTEC.  European countries central to the effort to transmit electricity generated at North African solar power plants to Europe, such as Spain, have been hesitant to commit funds to the projects in an era of painful austerity.  In late 2012, two of the most prominent private sector sponsors of DESERTEC, the German industrial firms Siemens and Bosch, pulled out of the $515 billion initiative.  The withdrawal of major German partners is of particular interest, given the fact that Germany is one of the world’s largest investors in solar and other alternative energy projects.

From a technical standpoint, large-scale solar energy projects can be difficult and expensive to maintain, especially in the desert.  For instance, the mirrors that are crucial to CSP plant operations can be easily damaged or polluted by sand and debris in the windy environment. These mirrors must be cleaned, and the CSP plants themselves must be cooled, requiring thousands of gallons of water a day.  Given that water is a rare commodity in the desert, this raises economic and political questions concerning the practicality of solar energy production in North Africa, and the extent to which regional governments and local residents will be willing to have precious water resources diverted to the maintenance of energy production facilities.

Energy security concerns may also impact North Africa-Europe solar energy partnerships.  The wave of popular unrest and residual political instability that has gripped the region may make Europe reluctant to depend on North Africa for significant portions of its electricity due to worries over sudden shifts in the regional political climate.  That said, robust trade between North Africa and Europe continues, and North African suppliers continue to supply Europe with critical deliveries of oil and natural gas.  Should North African countries establish solar energy relationships with their northern neighbors, the risk that these relationships would be disrupted is low, regardless of who gains political control of the solar energy production facilities.  Just as the flow of energy resources between Venezuela and the United States has never been seriously disrupted despite political and ideological tensions, the North Africa-Europe solar energy trade would likely be insulated from any emerging diplomatic quarrels.

 

Risks

The key risks for investors in large-scale North Africa-Europe solar energy initiatives lie in their high cost, the technical difficulties inherent in the projects, and the political uncertainties currently surrounding their implementation.  Though advances in long distance energy transmission and solar energy generation and storage have been made in recent years, these technologies and methods remain expensive and unwieldy.  The start-up and maintenance costs of solar energy projects far exceed those related to fossil fuel projects, and at this point, fossil fuels continue to provide greater, and more reliable, energy outputs.  This, combined with the ongoing economic crisis in Europe and the persistence of varying degrees of political instability in North Africa, makes the near-term prospects of large-scale solar energy trade between North Africa and Europe uncertain.

 

Opportunities

But despite near-term uncertainties, solar energy in North Africa has a promising future. The interest in Europe (and other developed and developing countries) in new and alternative sources of energy, including solar power, is genuine.  Due to sustained global demand for oil and, increasingly, natural gas, the price for hydrocarbons will likely remain high.  This has been the case even amid the global economic downturn.

The environmental concerns regarding continued reliance on fossil fuels is also affecting strategic-level decisions on energy security.  The politics and controversy surrounding the nuclear sector also elevates the prospects for solar power.  Germany, for instance, is proceeding to phase-out all of its 17 nuclear power plants by 2022.  China has surpassed the United States as the world’s top investor in new and alternative energies, with a sizeable percentage of this investment earmarked toward solar power:  In late 2012, China’s State Grid Corporation power company expressed interest in joining the DESERTEC Industrial Initiative.

The coming years will see advances in renewable energy transmission and storage, making solar and wind generation initiatives more attractive to foreign investors and suppliers alike.

 

To learn more about the prospects and challenges surrounding the solar energy sector in North Africa and related issues, or if you would like to be added to our distribution list to receive future editions of World Trends Watch, contact us. To learn more about Helios Global, visit us at our website.  You can also follow World Trends Watch on Twitter at (@HGI_World Trends).

 

Helios Global authorizes the republication or reprinting of this analysis as long as it is accompanied with the following citation and hyperlink: ‘Prospects and Challenges for North Africa-Europe Solar Energy Initiatives‘ has been reproduced with the permission of Helios Global, Inc.  Copyright 2013 Helios Global, Inc.”
Share

Permanent link to this article: http://www.heliosglobalinc.com/world-trends-watch/?p=179

Change in Venezuela Yields Political and Economic Uncertainty

April 29, 2013

Share

 

Nicholas Maduro’s narrow electoral triumph over opposition leader Henrique Capriles Radonski in Venezuela’s April 14 elections to serve out the remainder of the late president Hugo Chavez’s current presidential term signifies a turning point in Venezuelan politics.  Maduro’s victory has also reverberated beyond Venezuela’s borders.  Due to its role as a major source of oil, the course of political events in Venezuela also has important implications for the world economy.  The death of Hugo Chavez has also raised concerns about the prospects of social, political, and economic stability in Venezuela.  The victory of Chavez’s heir apparent – Chavez and his supporters went to great lengths to ensure the survival of the Bolivarian Revolution launched by Chavez’s United Socialist Party of Venezuela (known by its Spanish acronym PSUV) – in a politically charged and polarized climate has already resulted in unrest and violence between Maduro’s supporters and his opponents.  Venezuela’s increasingly dire economic predicament has further exacerbated tensions across the country.

Despite a contentious bilateral relationship, Venezuela remains the fourth-largest supplier of imported oil to the United States.  Given the peculiarities of its oil, namely, the category of relatively low quality heavy crude oil that represents the bulk of its oil capacity, Venezuela relies heavily on U.S. refineries located in the Gulf of Mexico that were designed to refine oil from Venezuela (and Mexico).  Roughly forty-percent of Venezuela’s oil exports are delivered to the United States.  Consequently, the United States is Venezuela’s top trade partner.  This is the case even as U.S. imports of Venezuelan oil have steadily declined in recent years.  In 1997, the United States imported about 1.7 million barrels of oil per day (bpd) from Venezuela.  In contrast, only about 1 million bpd of Venezuelan oil makes its way to the United States today.  Venezuela also boasts major natural gas reserves, possibly the second-largest natural gas reserves in the Western Hemisphere.  At the same time, Venezuela’s oil production capacity continues to deteriorate due to mismanagement, corruption, and antiquated infrastructure.

With its emphasis on South-South cooperation, Latin American integration, and opposition to what it refers to as U.S. imperialism, Venezuela’s foreign policy has largely reflected its Bolivarian Revolutionary principles.  Even as it has continued to serve as a major source of crude oil to the United States, Venezuela has also devoted significant diplomatic and economic resources toward checking U.S. influence in the Americas.  Initiatives such as its Bolivarian Alliance for the Americas (known by its Spanish acronym ALBA) have served to expand Venezuela’s influence across the region.  This support has come in the form of diplomatic and, especially, economic assistance to governments led by leftist political parties and movements that are often enmeshed in their own disputes with the United States, including Cuba, Nicaragua, and Bolivia.  Venezuela has also supported a number of militant groups in the region, most notably, the leftist Revolutionary Armed Forces of Colombia (known by its Spanish acronym FARC) in neighboring Colombia.  Venezuela has also engaged closely with other left-leaning governments across the region, including Brazil, a rising regional and geopolitical power in its own right that is slowly emerging as a challenger to the United States.

 

Outlook

Chavez’s appointment of Nicolas Maduro, a trusted loyalist, as Vice President was emblematic of efforts by the incumbent regime to ensure ideological and political continuity in any post-Chavez scenario.  At the same time, despite its popularity among a sizable segment of the Venezuelan populace, it is unclear whether the PSUV will be able to retain its dominant role in Venezuelan politics without Chavez in the long-term.  Maduro’s narrow victory in this month’s elections – Maduro is reported to have defeated his opponent by less than 2 percent of the total vote – reflects a shift in Venezuelan public sentiment.

The removal of Chavez from the political equation will also have an important geopolitical impact that will be felt beyond Venezuela’s borders.  Venezuela remains an important supplier of discounted oil for its regional partners and a source of other vital economic support.  On the surface, Maduro’s decision to travel to Cuba for his first foreign trip in late April reflects his determination to continue the populist and activist foreign policy forged by his late predecessor.  Venezuelan largesse in the form of discounted oil and other benefits has helped sustain Cuba’s Communist Party.  Yet it appears that Maduro is operating under a weaker popular mandate.  This raises important questions about his ability to maintain his late predecessor’s approach to foreign affairs, especially given the presence of an increasingly organized and emboldened opposition.

 

Risks

Operating under a weaker popular mandate and in a politically charged and polarized climate raises the specter of widespread disturbances in Venezuela.  Capriles announced on April 25 that his movement plans to boycott an official audit of the election results due to concerns relating to voter registration irregularities.  He has also called for a new presidential vote.  Capriles and his supporters seem determined to step up pressure on the fledgling Maduro presidency.

Countries that depend on Venezuelan largesse to support their economies through the receipt of subsidized oil and preferential trade access to the Venezuelan market, including Cuba, Nicaragua, and Bolivia, among others, stand to lose a great deal should Maduro choose to shift Venezuelan foreign policy, however slightly, from the Bolivarian Revolutionary ideals enshrined during Chavez’s rule.  Having to contend with their own economic troubles, the loss of subsidized oil or other benefits provided by Venezuela, for example, can destabilize fragile polities, impoverishing millions in the process.  This raises the potential of social, political, and economic instability throughout the region.

 

Opportunities

Despite his declared commitment to toe his predecessor’s ideological line, the gravity of the economic problems affecting Venezuela may force Maduro to depart from some of Chavez’s policies, especially those governing foreign direct investment (FDI) in Venezuela.  Maduro may elect to liberalize certain sectors of the Venezuelan economy and institute other economic reforms in a possible bid to cater to his more moderate opponents, undercutting segments of the opposition and bolstering his own credentials in the process.

The potential loss of a Venezuelan benefactor will also present new opportunities in countries previously dependent on Caracas.  Eager to adapt to an evolving geopolitical order, countries previously reliant on Venezuela will seek out new partners and, potentially, sources of FDI.

To learn more about how political change in Venezuela will impact politics, business, security, and society across Latin America and the Caribbean, or if you would like to be added to our distribution list to receive future editions of World Trends Watch, contact us. To learn more about Helios Global, visit us at our website.  You can also follow World Trends Watch on Twitter at (@HGI_World Trends).

 

Helios Global authorizes the republication or reprinting of this analysis as long as it is accompanied with the following citation and hyperlinks:Change in Venezuela Yields Political and Economic Uncertainty has been reproduced with the permission of Helios Global, Inc.  Copyright 2013 Helios Global, Inc.”

 

Share


Permanent link to this article: http://www.heliosglobalinc.com/world-trends-watch/?p=152

Older posts «