geopolitical risk ratings firm

PRL Volume XXXII, Number 10 October 2010


Elections Set for 2011
The second round of presidential and legislative elections since the six-year civil war ended in 2003 is scheduled for November 2011. President Joseph Kabila is favored to win another term, as he will be able to exploit the financial and institutional advantages of incumbency to shore up his support among key sectors of the electorate and the business community. Nonetheless, there is ample evidence of discontent with Kabila’s leadership, and a challenger who managed to secure the united backing of a cross-regional alliance of opposition parties could give the president a run for his money.

Heightened levels of localized political violence and increasingly overt government intimidation of the opposition can be expected in the coming months. However, domestic tensions are not expected to reach a level that would raise questions about the stability of central government.
Kabila has faced growing criticism from both within and outside of the governing AMP coalition, which is headed by Kabila’s PPRD. Since the PPRD controls just 111 of the 500 National Assembly seats, it depends on backing from other parties for a majority, the most important of these being Prime Minister Adolphe Muzito’s PALU. Kabila might stand as the presidential candidate of the broader coalition or might run instead under the banner of the PPRD, but for now, he is focusing his energies on holding the AMP coalition together.


Reforms Advance
President Raúl Castro has confirmed his intention to launch a significant shakeup of the state sector by announcing a plan to ease hiring restrictions on small private businesses and to issue more permits for new private enterprises. The announcement signaled plans to move forward with a long-anticipated program to cut loose hundreds of thousands of state employees, the first 500,000 by March 2011.
A central principle of Cuba’s socialist economic model is to ensure full employment, which the Communist Party has accomplished with uncontrolled public-sector hiring. The state now employs fully 85% of the labor force, thereby producing a bloated, inefficient, unmanageable bureaucracy, impeding efforts to boost the productivity of state enterprises, and creating an unsustainable drain on the government’s financial resources.
Layoffs will begin in the state bureaucracy—with public school officials expected to be among the first to receive pink slips—before being extended to public-sector business enterprises. An additional 500,000 jobs will be eliminated by the end of 2015.
The government is fully aware that doing this in such a short period of time is a risky endeavor. This was evident from its careful preparations for launching the reform, including several months of close consultations with unions, youth, and various other economic and social interest groups. The fact the unions have been identifying workers that will be laid off first, a strategy that will reduce the danger of igniting generalized unrest.
Officials count on the easing of private-sector business restrictions to spur a large and rapid expansion of new job openings for displaced state workers. The government has set a very ambitious targets of issuing 250,000 new business permits to create 465,000 jobs in 2011. The types of businesses permitted to date, mostly personal service, cannot expand at such a pace without creating intense competition that drives down wages and threatens business survival. Probably for that reason, the government has discussed the possibility of transferring responsibility for delivering some state services to the private sector.
The regime has also stepped up efforts to attract foreign investment in key economic sectors, especially tourism, where a significant rise in investment would generate rapid growth of construction jobs in the near term, while also creating the potential for many permanent jobs in a variety of enterprises catering to foreign travelers. Toward that end, President Castro issued a decree extending the maximum length of leases for state land to 99 years (from 50), and the Ministry of Tourism is preparing to initiate negotiations with foreign property developers to construct more than a dozen golf courses with luxury housing facilities.
The scope of the reforms and the numerous personnel changes have added to the appearance that a momentous transition is about to get under way. However, President Castro has taken pains to dispel any notions that the changes represent either the embrace of capitalism or a first step in the dismantling of the socialist system. Rather, they have been presented as steps to “modernize” the socialist model, with the aim of ensuring its survival.
All of which suggests that the government will closely control the process, and is prepared to reverse course if the reforms unleash social pressures that threaten the position of the PCC. That said, if the private sector proves capable of absorbing laid off state workers, can offer its workers wages that generate increased demand for more private services, and the taxes collected from private businesses and their employees become a reliable revenue stream, the government would have a clear incentive to create additional room for market-based institutions.


Oil Politics
In September 2009, US oil giant ExxonMobil signed an agreement to buy a 23.5% stake in Ghana’s Jubilee field from Kosmos Energy, an independent oil explorer. However, the government of Ghana blocked the deal, claiming that Kosmos had violated the country’s petroleum law by shutting the state-owned oil company (GNPC) out of the discussion and by sharing information about the Jubilee field without the government’s permission.
In mid-August 2010, the GNPC announced a proposal for China’s National Offshore Oil Corporation (CNOOC) to purchase a 10.1% stake in Jubilee from Kosmos, while the GNPC would take a 3% share. Another “credible technical partner” is to purchase the remaining 10.4%. As part of the deal, the GNPC is to receive a $5 billion bridging loan from CNOOC to finance infrastructure expansion.
ExxonMobil officially abandoned its own effort to purchase Kosmos’ interest in Jubilee. The scuttled deal provides insight into the political hazards on the investment landscape, especially in oil and gas sector. The incumbent NDC regime headed by President John Atta Mills based its objections to the Kosmos-ExxonMobil deal on the contention that Kosmos had obtained its share in Jubilee on very favorable terms. Government officials also questioned how Kosmos managed to secure more favorable terms on another offshore block than oil majors operating in adjacent fields.
The government concluded that Kosmos had benefited from its close association with a minor shareholder in Jubilee, the owners of the EO Group, who are closely connected to former President John Kufuor. Kufuor headed the government when Kosmos won its Jubilee concession in 2002. The EO Group partners, George Owusu and Kwame Bawuah Edusei, purportedly stood to receive compensation of up to $300 million had Kosmos sold its stake to ExxonMobil. Leaders of the NDC feared that a substantial portion of that sum would end up in the political campaign coffers of Kufuor’s NPP.
All of the oil companies with an interest in Ghana’s offshore reserves will be on their guard for any hostile moves by the government, especially toward any that might be seen as having benefited unfairly from a good relationship with the previous regime. That said, the government is aware that realizing the potential of its oil wealth will require more than Chinese capital, and officials can be expected to take care to avoid alienating the primarily western oil companies that possess the technical know-how to successfully exploit deepwater reserves.
The government will be less gentle in its handling of foreign investors in the mining sector, however, as a committee has been established to determine whether there is reason to revise the stability agreements of mining companies. Stability agreements are designed to provide investors with protection against unpredictable increases in royalties or taxes, usually for a period of up to 15 years. But Mills’ government has decided that agreements signed by previous regimes have denied the state a fair share of Ghana’s mineral wealth.
The scrutiny of stability agreements follows a revision of the royalty structure for mining operations. The government’s budget proposal for 2010 called for replacing the existing royalty, ranging from 3%–6%, with a flat rate of 6%. But in response to strong opposition from the mining companies, the government reduced the rate to 5% and gave exemptions to firms with stability agreements.


Security Risks Are Key
Although Guatemalans seem disillusioned with politics in general, public support for President Alvaro Colom has risen since the beginning of 2010. Unfortunately for his UNE party, Colom is not eligible to stand for re-election in 2011 and his party does not appear to be locating a successor.
The uncertainty is highlighted by the continued circulation of rumors that the first lady, Sandra Torres de Colom, will be presented as the UNE’s nomination. Unlike Colom, Torres enjoys strong support among the urban population, in no small part owing to her involvement in the management of several programs designed to ease the hardships of the poor. Although the constitution bars any relative of a sitting president from running for the office, Torres has asserted that she is not legally married to Colom, a revelation reinforced the assumption that she intends to make a run in 2011.
In the absence of any firm evidence to that effect, however, the presumed frontrunner for 2011 is Otto Pérez Molina, who finished second to Colom in 2007 as the candidate of the Patriot Party. A former general who briefly served as head of security in the administration of President Oscar Berger, Pérez Molina will once again campaign on the failure of successive governments to combat crime, an issue that is perennially among the top concerns of voters.
Colom remains quite popular, which is somewhat surprising, given his lack of accomplishments as president, particularly with regard to domestic security. By some estimates, the cartels already effectively control as many as seven of the 22 provinces and have bought the support of the local populace by financing social services the state cannot afford, a strategy employed by Colombia’s Medellin cartel in the 1990s.
All indications are that the problem is going to get worse before it gets better. Three Mexican drug cartels—Sinaloa, Gulf, and La Familia—have joined forces to destroy the Zetas, a rival drug ring that reportedly operates training camps and has smuggling routes in Guatemala. But even if Guatemala does not become the battleground of a turf war among Mexican gangs, the fact remains that the country’s police force is both outmanned and outgunned by the cartels.
A string of natural disasters – a volcanic eruption, Tropical Storm Agatha, and then torrential rains in September – has only added to Colom’s woes.
Beyond the direct economic effects of the natural disasters, which are expected to weaken an already sluggish recovery, the destruction of agricultural staples has contributed to inflationary food shortages.


A New Constitution
The country’s democracy took an important step forward in August, when voters endorsed a new constitution. It will change the distribution of executive and legislative powers and also requires the reform of several state institutions. Implementation will carry a risk of renewed instability, as parties and factions position themselves to gain political advantage under the new arrangement.
Kenya’s previous constitution was drafted by the British at independence in 1963, and past attempts to rework the document invariably led to an impasse. President Mwai Kibaki was elected in 2002 in part on his pledge to complete the process of constitutional reform. His first draft, completed in 2005, took years longer than promised and was then rejected by a majority of voters.
Most delays were the result of unresolved disagreements over the scope of the changes, the locus of executive power being the most contentious. Kibaki’s insistence on retaining executive control in the office of the president led to the end of his alliance with Raila Odinga, who had spearheaded the campaign against the 2005 draft constitution. The competing ambitions of the two were at the center of the unrest that erupted following the disputed 2007 presidential election, which was resolved temporarily through a power-sharing agreement.
The 2010 referendum was a very different affair, as voters overwhelmingly approved of the draft. Both Kibaki’s PNU and Odinga’s ODM supported it enthusiastically, and the vote was not marred by violence.
The near-term outlook for having a smooth process of executing the provisions of the new constitution is not terribly promising. The oversight committee has had a good deal of infighting among PNU members, and land reform opponents have warned that proceeding on that front will revive the tensions that led to deadly violence in the Rift Valley in early 2008. The Roman Catholic Church played a leading role in the “No” campaign ahead of the referendum, based on its objections to provisions permitting abortion and recognizing (Muslim) Kadhi courts.
The potential for instability is heightened by the simultaneous struggles taking place to decide who will lead the main parties into the December 2012 elections. Recent by-election losses by both of the main parties have only added to the intensity of competition for the top jobs.


Haunted by the Past
An eight-year effort by Libya to normalize its relations with the international community has suffered a setback in recent months, amid growing suspicions that Tripoli somehow pulled off an elaborate scam that enabled Abdelbaset al-Megrahi, the convicted mastermind of the 1988 bombing of Pan Am Flight 103 over Lockerbie, Scotland, to escape justice. Megrahi was granted release from a Scottish prison in July 2009, after doctors confirmed that he was suffering from prostate cancer and would be dead in just a few months. However, a year after arriving in Libya to a hero’s welcome, Megrahi is not only still alive, but, according to some accounts, is actually recovering.
The anniversary was marked in the west with news coverage that focused on Libya’s role in the bombing (which Tripoli continues to deny) and various other misdeeds committed by the regime of Col. Muammar al-Qaddafi, which led to Libya’s status as a “pariah” state. In general, the Megrahi case has generated renewed doubts about the sincerity of Qaddafi’s rehabilitation and given renewed exposure to a shady past that the Libyan leader has been trying very hard to bury since late 2002.
The fact that the anniversary coincided with intense international coverage of the massive oil spill created by an explosion at a BP well in the Gulf of Mexico serve to increase the negative glare surrounding Megrahi’s release. In 2007, BP and the National Oil Corporation (NOC) reached an exploration and production-sharing agreement (EPSA) that is now valued at about $1.2 billion. However, startup of exploratory drilling for gas in the onshore Ghadames block and the offshore Sirte Basin was delayed by a string of bureaucratic obstacles, and BP has admitted that it lobbied the British government to facilitate a prisoner transfer that might help to clear the way for initiation of the much-publicized Libyan project.
Britain’s former Labour Party government denied that it sought Megrahi’s release at BP’s behest—noting that the Libyan was freed on compassionate grounds—and the company insists that it did not mention any specific prisoner. But BP, already in the crosshairs of US lawmakers investigating its culpability for the Gulf oil spill, also came under scrutiny over its relationship with Libya and its possible role in securing Megrahi’s release.
Four US senators announced in July their intention to open an official probe, citing possible violations of anti-corruption laws. A hearing scheduled for late July was cancelled when British witnesses communicated that they would not appear to testify, but members of the Senate have assured that they will continue to conduct an investigation, and the new British government headed by Prime Minister David Cameron has not ruled out the possibility of a separate investigation in the UK.
Much of the negative attention has been focused on BP and top members of the former Labour Party government in the UK. Even so, the affair has highlighted the fact that Libya’s international rehabilitation is far from complete, and firms doing business there can still become caught up in political disputes that create a risk of legal or other difficulties.
The Libyan government has expressed its confidence in BP’s ability to safely drill in the Sirte Basin, where the seabed is some 200 meters deeper than the now-capped well in the Gulf of Mexico, but environmentalists in Europe do not share that faith in the firm. In late August, BP announced a delay in the start of offshore exploration, amid calls from Italian and EU officials for a moratorium on deep-water drilling in the Mediterranean. The future of the project is uncertain, as the company has begun scaling back its global ambitions in the wake of the spill in the Gulf of Mexico.
A broader program of economic diversification has gained some momentum in Libya since the beginning of the year. In late March, the government approved a raft of legislation aimed at bringing greater certainty and efficiency to the investment process. How effective the reforms might be remains to be seen, but there are certainly reasons for skepticism, chief among them the fact that Qaddafi will continue to be the ultimate arbiter of which state policies are implemented, regardless of any legislation that is on the books.


Stronger EU Ties
A longstanding dispute with Spain over ownership of two enclaves located along the Mediterranean coast of North Africa heated up in August 2010, when reports of the mistreatment of Moroccan citizens by authorities in Spanish-controlled Melilla triggered protest demonstrations and road blockades that temporarily prevented deliveries of food into the territory. A visit by Spanish Foreign Minister Miguel Angel Moratinos to Rabat helped to defuse the situation before it became a full-blown crisis, but the issue is politically sensitive in both Morocco and Spain, and will continue to simmer.
The risk of a renewed escalation of tensions in the near term was highlighted in September when Mariano Rajoy, leader of the political opposition in Spain, paid a visit to Melilla. Moroccan Prime Minister Abbas El Fassi denounced the move as a provocation, and Spain’s governing Socialist Party derided it as a political stunt designed to create problems for that country’s beleaguered prime minister, José Luís Rodríguez Zapatero. Even so, while the issue of the disputed territories may occasionally strain bilateral relations, the two countries are likely to work together in pursuit of numerous core common interests.
Nor will tensions with Spain adversely affect relation with the EU, the country’s main export market and the source of remittances that are vital to Morocco’s economic health. In September, the EU proposed a new trade agreement with Morocco that would permit duty-free trade in agricultural, food, and fisheries goods. The basic terms of the deal call for 70% of the EU’s agricultural exports to enter Morocco duty-free within 10 years, in return for which Morocco would enjoy improved market access for goods such as unprocessed fruit and vegetables, despite protests from Spanish farmers. The deal represents precisely the closer commercial relationship the Moroccan government had hoped to achieve since being given “advanced” partnership status by the EU in 2008.
It is quite likely that Rabat’s angry reaction to the reports of abuses in Melilla was partly the result of lingering resentment over Spain’s criticism of Morocco’s human rights record in another disputed region, Western Sahara. Morocco has asserted its sovereignty over the territory, which was a Spanish colony until 1975, and continues to reject the demands of the indigenous Sahrawi population for a status referendum agreed to under a 1991 agreement brokered by the UN.
Moroccan officials were no doubt pleased by the UN Security Council’s approval of a resolution extending the deployment of a peace-keeping force in the territory until May 2011. The resolution ensures the maintenance of Morocco’s de facto rule of Western Sahara.
The UN resolution stopped short of calling for the monitoring of human rights violations in the territory, an omission that infuriated Western Saharan groups, who excoriated the UN for lacking the will to force Morocco to honor the terms of the 1991 agreement. However, there is little danger of a renewal of the armed conflict as long as UN forces remain on the ground, and further extensions of the UN mandate can be expected going forward.
Over the past six months, the Moroccan government has conducted targeted police operations against suspected militant Islamist cells, in the process dismantling two groups accused of planning to carry out assassinations and acts of domestic sabotage, as well as recruiting for operations in Afghanistan, Iraq, Somalia, and the Sahel region. The numbers of arrests and confiscated weapons suggests that extremist groups operating inside Morocco are small and the threat they pose to domestic order relatively low. While capable of conducting isolated acts of violence, the cells do not have the capacity to mobilize significant sections of the population.
Al Qaeda in Islamic Maghreb (AQIM), the main terrorist organization in the region, has over the past two years been moving its operations deeper into the desert regions of the Sahel, particularly Mali and Mauritania, focusing on kidnapping foreign tourists. However, the risk posed by extremists could increase over the medium term if the government’s anti-terror efforts, which have been criticized repeatedly by human rights organizations, focus too heavily on moderate Islamist organizations. The chief danger stems from the possibility that supporters of non-violent organizations, such as the Party for Justice and Development, the third largest party in the Parliament, and Justice and Charity, a non-political charity organization that is viewed with suspicion by the monarchy owing to its popularity among large sections of the urban population, could become radicalized if those groups become targets of repression.


Moving beyond current opinions, a seasoned look into the most pressing issues affecting geopolitical risk today.


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