FOREIGN AFFAIRS AND POLITICAL RISK
GUINEA-BISSAU: HOW WE GOT HERE IS THE POLITICAL RISK
Coups never go as planned and neither do the transition from coup to legitimizing the government. Once the Coup happens the level of caution by any foreign investor must be very high.
No matter what the deal, how good it may look or what the treaties say, in the end ask how the government charged with adhering to the rule of law and protecting that investment came to power. Even in a situation as fluid as Greece, you still have lower risk overall because democracies (even unstable ones) are somewhat predictable whereas a coup driven political risk is not predictable.
Five weeks after a military coup in Guinea-Bissau, the country is preparing for the installation of the new transitional government and the arrival of regional peacekeepers, scheduled for Friday.
Yes this is a positive signal, but not a clear sign that the violence will stop. Property is the largest single political risk in Guinea-Bissau at this time. Any investment in businesses or real estate is a substantial political risk due to the fighting.
Obviously the political risk directly harm the people of Guinea-Bissau. These political risks include a lack of foreign investment in energy projects and agriculture. Another reason to look long and hard is the lack of institutional concern for the welfare of the general population. Coups expose religious, social and ethnic risks that no amount of political risk insurance can cure.
What is driving and should raise the level of political risk concern is the fact that there are competing factions even within the new government set to take office.
Secondly is the likely change in policy even if the new interim government headed by parliamentary speaker Manuel Serifo Nhamadjo takes office without a shot being fired.
The coup has opened the Pandora ’s Box of political risks associated with a coup. Unless it takes hold and is the product of a grassroots movement designed to remove a dictator then you will not have immediate international support. This means a lack of policy to govern, protect and regulate foreign direct investment.
Businesses and foreign direct investors need the comfort of knowing that the government they are dealing with is stable and that polices adverse to them will simply not just pop up. Coups never can provide such a comfort zone even if they are driven by the desire for democracy.
The answer is that these situations are very risky because there is internal infighting whether concealed or obvious. Coups do not foster a democratic approach to building a stable government. If anything they legitimize the very tactic of taking of power that may be used against the original coup leaders by their underlings.
Guinea-Bissau is no different. Even though heads of state in the West African bloc ECOWAS are sending a peacekeeping force which is due to arrive in the capital of Bissau on Friday, this still does not remove how the new government came to be. In this end how we got here is the most destabilizing political risk in Guinea-Bissau.
2012 EGYPTIAN ELECTIONS
Let me first say that in no way am I against democracy. In fact in my opinion democracy is the keystone to low political risk.
All countries that either have true democracies or pseudo democracies have a method to block certain candidates. The United States has 50 states and 50 ballot access methods. In other countries it is decided by religious leaders. In Egypt ballot access is dictated by the Supreme Presidential Electoral Commission (SPEC).
The SPEC excluded 10 of 23 candidates seeking to run for President of Egypt. Rhis was not due to any issue commonly seen in the United States such as not enough signatures on a petition. This prohibition was born out of the history of Egypt. A history that has seen a succession of faux elections and leaders all from the same “party” and same military background.
Now this election is a road map to continued political risk due to the fact that there is no real historical precedent for elections of this nature and now you have excluded candidates with military ties, thus placing them on the outside looking in.
Could this be wrong, yes and I hope so, however Egypt’s past since 1952 including the strong support of the military as an institution and an unorganized multifaceted political coalition do not a strong election make.
In fact the situation after this election will be so unstable internally that it may take decades to resolve the internal political risks. Many of which are rooted in 60 years of power being passed from Nasser, Sadat and Mubarak loyalist to the winner of this election.
This continued reliance on patronage stemming from the 1952 coup through generations of Egyptians is the single largest political risk to conducting business in Egypt.
In effect nothing has changed and any meaningful change would require people who have never had he benefits of political patronage in their families life. This is very difficult after 60 years.
Another wild card are those who would in fact be the change. Human nature is not going to tamp down the desire for revenge and this will destabilize the Egyptian government by causing even more factions to develop.
In essence a true democracy is possible in Egypt, but the elimination of certain candidates by what is perceived by them as giving in to extremist is not the answer. A primary system would have worked for the same reasons given by the SPEC. Namely that these individuals were prohibited because they are first and foremost political baggage from Hosni Mubarak.
Political attacks are not an American institution or invention and would have been effective particularly with the young and poor who feel disenfranchised by the former regime. In other words elimination by ballot is preferable even to the losers than elimination by bureaucrat, which is what occurred in Egypt.
The same people who have amassed power and positions during the former regime are still going to be there for at least 20 to 25 years and one election is not going to root them out. As long as the previous method of conducting business remains at the lowest levels of government, your going to have a on going political risk.
True a democracy will exist on paper with elections, but policy changes at the level of permits and other documents that are subject to corruption in the form of bribes will not be changed by one election. The structure has been built around a cult of personality for 60 years and it will take at least 20 years of elections and policy changes to impact the political risks left by those still loyal to the former regime.
PAPUA NEW GUINEA CORRUPTION RAISES FCPA RED FLAGS
The Foreign Corrupt Practices Act of 1977 (FCPA) (15 U.S.C. §§ 78dd-1, et seq.) is a United States federal law known primarily for two of its main provisions, one that addresses accounting transparency requirements under the Securities Exchange Act of 1934 and another concerning bribery of foreign officials.
This act prohibits corrupt acts by those in this country. Specifically acts such as bribery which would give an unfair advantage to a U.S. company over a foreign one. More than just a concept, this law is the actual application of the anti corruption polices being touted as part of U.S. foreign policy to other nations.
It is clear that the current corruption issues plaguing Papua New Guinea raise the prospect that major energy contracts and Return on Investment (ROI) potential raise the prospect of tempting the FCPA. However the government of Papua New Guinea is actively and publicly investigating itself which raises the risk of being exposed if a bribe were offered or paid.
The FCPA is a law that is vigorously enforced and can lead to jail time. The bottom line is that it is least effective when the market in question has low ROI or potential. In the case of Papua New Guinea two industries, Mining and Petroleum have great potential ROI and market value for foreign direct investors and companies.
Attempts to grease the wheels of bureaucracy with a bribe are never a good idea and are illegal for any U.S. citizen or company. Industries such as energy are very tempting due to the pay off to those who can get pass the road blocks of foreign government regulation.
However, it because these industries are so valuable and because the government of Papua New Guinea is publicly engaged in a corruption investigation, that make any violation of the FCPA beyond foolish in Papua New Guinea at this time.
The biggest political risk is a lack of insurance and documentation that can exonerate any firm or investor that falls under U.S. suspicion of violating the FCPA in Papua New Guinea.
Two words come to mind when dealing with any business deal or foreign direct investment in Papua New Guinea at this time, documentation and insurance. Specifically political risk insurance and multiple copies of all contracts and bank records.
Even honest companies and people can be ensnared by being unable to prove that no bribe was paid, particularly when you have a situation like Papua New Guinea where a false accusation by a bureaucrat against a foreign investor or company is possible if such an accusation will mean leniency for that person.
There is far too much at stake diplomatically and economically for Papua New Guinea. This explains their crackdown on corruption. One I personally applaud, but still advise political risk clients to use as a reason to review and implement internal practices to avoid even the hint of a FCPA violation.
UNCERTAINTY IN GREECE
What if Greece does not stick with the austerity plan? A reasonable guess is that at a minimum it will need to be tweaked and this in the end may be the saving grace that avoids a total collapse of the Greek economy. A reasonable guess is fraught with uncertainty which equals political risk.
The bailout has caused domestic issues ranging from civil unrest to the inevitable hate groups appearing and blaming immigrants. The elections held this weekend have caused major uncertainty and by default exasperating political risk.
Greece's conservative party has been unable to form a government and it now falls to the leftist party that came in second to give it a go. If they fail then the mantle of leadership falls to the third place party.
Until a government is formed you have uncertainty. Depending on who forms the next government you have uncertainty as to policy. Until you see written proof that an agreement satisfactory to the new Greek government and the EU is in place you have uncertainty as to the austerity plans.
Even if there is a hybrid plan of austerity that is less stringent approved by all you will still have a segment of Greek society that will cause civil unrest. However the worse threat is the dangerous undercurrent of anti-immigrant sentiment that could lead to violence and actions by future governments that would jeopardize Greece’s standing even further.
JUST DO IT
I have always been astounded by companies that leap before they look at the total picture in foreign countries. Not only are there local issues and sensitivities to be researched and observed before investing capital in a foreign project, but investors and consumers here in the U.S. need to have their concerns considered also.
NIKE was recently forced to pay Indonesian workers $1 million in unpaid overtime. How could they not be aware that Indonesian factory workers are among the lowest-paid in Asia?
Are they not familiar with the fact that Indonesian factory workers who make between $100 to $200 a month are paid less than workers in China, India, Malaysia and Thailand?
The reason I focus on NIKE is because it is a worldwide brand, has the infrastructure and research capabilities to set up shop in any country on earth yet as mighty as it is, NIKE was tone deaf to the plight of Indonesian workers.
A fine for failure to pay over time to people already making the lowest rates in the region has the potential to increase scrutiny in other places thus causing increased compliance spending on doing the obvious (paying what they should) and damaging the brand in the U.S.
Full disclosure, in college I ran Cross-Country and Track and until I switched to NIKE shoes I suffered 4 stress fractures running in high school. Not only do I swear by the brand I would not wear another running shoe.
Even with this, people like myself can have an impact by not investing in NIKE due to their conduct overseas. This is more of a problem than not buying a pair of running shoes. Investors who are upset that NIKE appeared to be cheating these workers will not invest in the company and this harms it at home and abroad long term.
A little research, paying more than average and touting this fact would increase investment in NIKE by people like me who use their product but are not willing to invest in them due to their foreign labor practices.
Looking before you get involved in a foreign nation requires taking the steps necessary to do the right thing by the foreign workers. When you look, see, understand and act on these moral impulses you secure your home base.
Let’s face facts, a pair of running shoes is going to cost less than one share of NIKE stock and you’re not going to buy just one share. The larger the investors who refuses to open their wallet because of moral concerns about the practices of any company the more these companies will pay attention to and adjust their conduct overseas.
My question is why risk losing the investment for even a minute by cutting corners in a foreign country? You’re going to get caught, it’s going to be above the fold of the New York Times and it is going to hurt at home and abroad.
The best way to conduct business legally and fairly overseas can be summed up best by NIKE themselves, “Just Do It”.
ANGOLA IS NOT THE SAVIOR OF PORTUGAL OR FOREIGN INVESTORS
OPPORTUNITY KNOCKS?
Portugal has a 14% unemployment rate compared to a 10% growth rate for Angola.
This explains two trends between the former colony (Angola) and Colonizer (Portugal). One trend is young Portuguese moving to Angola to work and the second is the sell off of Portuguese assets to Angolan companies and investors.
Angola represents the third biggest source of money sent back home to Portugal. This is clearly money being sent back by people who have moved there seeking work or those with strong ties that have no reason to leave.
Add to this Portugal's state and private companies doing business in Angola are selling property to raise money. The purchases are being made by Angolan companies and investors. Portuguese companies including an electricity supplier and the company that runs the power grid have also been sold off.
Many Portuguese are uneasy with the Human rights record of Angola, but the necessity to conduct business and even move abroad is overriding any moral concerns. But it should not for moral and common sense reasons.
What should concern Portuguese moving to Angola is not only the human rights record, but the possibility of being in the wrong place at the wrong time. The poor human rights record of the Angolan government is a red flag of latent problems that signify political risk. Losing a job is one thing, but what about losing a job and being trapped in a country moving toward a civil war?
Not as crazy as one might think. Angola is no panacea for Portuguese seeking jobs or investors seeking opportunities in Portuguese firms located in Angola.
DIRECT FOREIGN INVESTMENT IN PORTUGUESE COMPANIES IN ANGOLA IS A RISK
Angola “on paper” has a low level of political risk due to its stability under President Dos Santos, but in my opinion the risk is much higher. An attempted assassination in 2010, elections not called, 33 years in power and protest by young people are signs that Dos Santos is not the sure bet that many believe.
Given the risk by what I see as lurking an “Angolan Spring”, those buying up Portuguese assets may whish they had not in the not so near future.
Any purchase or investment in Portuguese companies in Angola at this time is risky not only due to the assets being sold off from under the investor, but also because of the uncertainty of the Dos Santos Presidency.
What if there is a successful assassination or a rival within his own ruling party? Can anyone truly say these events are out of the question? Policy changes are not out of the question, civil unrest and repatriation of property also are possible.
My point is simple, investing in Portuguese companies doing business in Angola is a much higher risk than what many believe it to be. So is moving there to work. One day you have a job you did not have in Portugal the next your hold up in the embassy waiting for a helicopter to evacuate you.
Nothing is certain as one thinks and even with the problems of unemployment in Portugal a reliance on Angola as the savior I believe is too risky.
BRICS AS COMPETITOR TO WORLD BANK
The obvious question is what type if any political risk does a new development bank started by the BRICS (Brazil, Russia, India, China and South Africa) create for the U.S. economy and investors?
Long term political risk would occur if the U.S. Economy falters. This is due to the fact that the BRICS must trade among themselves in order to establish credibility and build up a reserve. Once this is accomplished then they would have to have major nations adopt their currency as a reserve.
As a long term political risk it can be seen as a strategy of at least Russia and China to weaken the U.S. economy. As for Brazil it will follow the lead of China and Russia due to the fact that there is already tension between the U.S. and Brazil about the effect of expansionary monetary policies of richer countries on developing countries like Brazil.
Brazil believes that continued U.S. monetary polices are leading to the devaluation of the Brazilian currency. If for no other reason Brazil would join China and Russia to retaliate against U.S. monetary policies.
India and South Africa are more likely to view a BRICS bank as a useful tool that enhances their political and economic stability and not as a weapon to be used against the United States for political reasons.
It took decades for the U.S. dollar to replace the Pound as the reserve currency of choice and any currency from a BRIC’s bank is not going to replace the dollar over night if at all.
The major political risk would occur if the U.S. used sanctions in retaliation against Brazil, Russia and China for policies designed to destabilize the U.S. economy and devalue the dollar. These sanctions could be on the order of those the U.S. has pushed into place through the U.N. on Iran, but they would be on a nation to nation basis outside of the U.N.
Still they could bite and by law the U.S. could prohibit certain transactions in excess of what already is in place to adversely impact the trade relationship between the U.S., Brazil, Russia and China.
However all in all this is unlikely for many reasons including the time it would take to take advantage of a massive economic down turn in the U.S. by a BRICS currency. And clearly creating a down turn through policies publicly designed to do this would have repercussions on the BRICS above and beyond what the U.S. would and could dish out on its own in the form of sanctions.
Any political risk is long term, in the future and based upon the infighting that would occur between these nations (particularly India and South Africa facing off against Brazil, China and Russia) a uniformed policy to achieve the goal of a BRICS global reserve currency is low.
UIGHURS HAD TO BE RESETTLED IN A THIRD COUNTRY
Two members of China's Muslim Uighur minority have been released from the Guantanamo Bay prison camp and resettled in El Salvador. By not sending them back to China the U.S. kept its foreign policy stance against human rights abuses in tact.
It is well known that the Uighur’s (pronounced WAY GERS) are a group that is not in favor with the Chinese government. The men would have faced certain persecution in China.
The Uighurs are a Turkic-speaking, mainly Muslim ethnic group living in far western China. Beijing accuses some Uighurs of involvement in Islamist terrorism. Chinese officials have also blamed Uighur groups for several violent uprisings in the Xinjiang region.
Uighurs and Han Chinese clashed in ethnic rioting in 2009, resulting in the deaths of 197 people.
As a practical matter the United States can not send people in our custody off to a foreign nation where it is known that they will face human rights violations and still maintain the moral high ground required in diplomacy.
This is particularly true in situations where the U.S. would be critical of China on human rights issues. A door would have been swung open that the Chinese could have walked through with the truthful comment that it can’t be that bad in China if you ( the U.S.) sent the Uighurs back. The resettlement in El Salvador avoids this potential foreign policy mess.
AS CLOSE TO A SURE THING AS YOU CAN GET
China is expected to change monetary policy. Usually this means a political risk particularly if the changes are unexpected and contractionary. However the goal of the Chinese government is to boost lending which will fund and increase the rate of new construction projects as well as provide credit for real estate development. Additionally manufacturing will play a key role in the increases to growth in these areas.
Agriculture will grow as monetary policy creates more jobs and stimulates domestic consumption. This is something that China has been trying to do for approximately a year now and it seems that the expansionary monetary policies will have the desired effect.
All of these goals lead down the road of an expansionary change to monetary policy that will pump more money into the economy thus spurring growth.
Little or no risk of an abrupt change from an expansionary to a contractionary policy exist due to the need of the Chinese government to stop the slowing of economic growth.
There are no guarantees when it comes to dealing with political risks particularly in China, however in this case an abrupt change would not be politically beneficial to the Chinese government, domestically or internationally.
One must keep in mind that China is a nation filled with consumers and people looking to make deals with foreign investment. Abrupt changes that contract consumption and foreign investment at moment that the economy is slowing down would be politically unpalatable at home and would create a domestic political risk that the Chinese government does not want.
As stated before there are no guarantees in political risk analysis, but if there were such a sure bet it would be that China will change its monetary policy in an expansionary manner as opposed to contractionary at this time.
THAT DOOR IS OPEN, FOR NOW
As expected the U.S. has eased sanctions on Burma to permit non-governmental U.S. groups into the country for humanitarian and development work.
If this policy remains in place then it will eventually lead to new economic markets and opportunities, however these opportunities will be fraught with the political risk of unknowns.
Will the government policies change in favor or become adverse to U.S. foreign investors? Will the policies change often without notice? Will the democratic changes hold and for how long?
So far so good, but the historical back ground including the voiding of elections by the ruling Military junta must be taken into account before one dime is invested. Substantial amounts of political risk insurance and research should be a part of any investment or business ventures in Burma for at least a decade.
The decade in question must have multiple uninterrupted elections, steady and reliable economic policies and a more vibrant multiparty electoral process not based solely on the name of Aung San Suu Kyi.
In fact a good indicator of how far and stable Burma will be in the next 10 years is how the opposition weathers internal political strife. Does it evolve into multiple parties? Does it try to tamp down splinter parties?
The attitude of the “new power” toward their own will reflect on the long term stability and lack of fear that the military will take over. When you have time to fight among yourselves in the political sense you are likely secure enough that physical force will not be used on you or those who you are debating.
Again this is great news for Burma and a great opportunity, but one that has so many unknowns that the political risk will remain high for years to come.