Geopolitical Issues Ahead

9/28/2018

GEOPOLITICAL ISSUES AHEAD:

A Monthly Assessment

Introduction

[Text to come from George]

East Asia/Oceania

China

With three months left before the Olympics, China continues to ramp up domestic security measures, often with little or no notice to local or foreign citizens. Some measures are planned and are being pushed forward while others are simply reactions to unexpected events. Travel regulations (such as visa rules) will continue to shift and new internal disciplines will continue to be imposed -- with a high potential for disruptions to local and foreign business operations. Although the Olympic torch is about to head into the mainland, the threat of activist actions and disruptions targeting the flame and its corporate sponsors remains.

Beijing appears to be continuing to experiment with new ways of dealing with inflation. Ultimately, a significant yuan revaluation is the only solution that has a chance of solving the problem at its root, but Beijing’s hand continues to be held back by the bankruptcies this could trigger for thousands of small and medium-sized businesses in China’s textile and other labor-intensive export sectors.Rather than risk the mass unemployment and unrest this cold unleash, Beijing will continue to make small adjustments through a variety of means to combat inflation without significantly changing the exchange rate. The latest idea being discussed by China’ State Tax Administration is another rise in the national income tax threshold (the last one was in March). Those under the threshold do not have to pay income tax, and the measure would help alleviate inflation-related pressure on the poor.

Beijing is extending its “go outward” strategy -- under which domestic businesses venture into foreign markets to acquire assets and equity stakes in key sectors like energy and aviation -- to include agricultural commodities. An official from China’s Ministry of Agriculture recently said Beijing is pursuing a policy of incentives to encourage its local agricultural players to shop overseas for resources to close demand-supply gaps in key agricultural commodities at home. An example given was the New Skies Group, a Chinese company planning to expand its existing agricultural investments in Cuba and Mexico to the former Soviet Union with the express goal of strengthening China’s national food security. Although China’s domestic food consumption, for the most part, is currently served by domestic production (such as wheat and rice), foreign imports are still necessary to satisfy local needs. The continued spiral in global grain prices -- coupled with the risk of an unexpected disaster (such as a severe drought) that could wipe out the next few national harvests of key commodities -- has sent food security shooting to the top of the Chinese government’s list of concerns.

South Korea

The South Korea-U.S. free trade agreement (KORUS) may be about to hit a new iceberg. Though agreed in principle, KORUS has yet to be ratified by either government. A key condition for Washington’s ratification of KORUS had been the resumption of South Korean imports of U.S. beef, which was finally agreed to on April 18. But the recent discovery of banned cattle parts in U.S. beef shipments to Tokyo may trigger not only a renewed Japanese ban on U.S. beef but also a South Korean ban. Countless South Korean interest groups have been battling against the ratification of KORUS, which is already looking highly dubious in South Korea (and even less likely in the United States) in light of the many domestic challenges the new government in Seoul is facing. This latest Japanese-U.S. beef incident will give these groups additional ammunition in their fight and increase the chances that KORUS will be derailed.

Thailand

The incumbent government is still in power and battling for its life as it anticipates a court ruling against it for electoral fraud. If this happens, current Prime Minister Samsak Sundaravej will likely dissolve the government and call fresh elections, in which case the same government will likely be voted back in. The ruling People’s Power Party (PPP), led by former Prime Minister Thaksin Shinawatra, will likely succeed in stopping the Election Commission from ruling against it (possibly by revising the constitution). With plenty of cash and political favors in hand, the PPP will barter and negotiate with political factions to win them over.

Eurasia

Russia

Russian President-Elect Dmitri Medvedev will be inaugurated May 7 and the following day current President Vladimir Putin will become Russian premier. Although little change in governance is expected, many within the Russian energy majors see the figurehead change as a shift in Gazprom’s favor, since Medvedev was chairman of Gazprom’s board. There have already been shifts in Gazprom and its rival Rosneft, with some pro-Gazprom businessmen being placed on Rosneft’s board. This trend is expected to continue in May and subsequent months, all part of Putin’s plan to have the companies work better together instead of vie as vicious competitors. It also could destroy both companies from within or, at the very least, impede their daily business operations.

Unified Energy Systems (UES), Russia’s electricity monopoly, has been undergoing a sell-off of its assets since 2000, a process that is supposed to wrap up by July. Some of the UES crown jewels were supposed to be auctioned during the last week of April, but the auctions were postponed and are rumored to be scheduled for sometime in May. Fighting the hardest to gain control over the most strategic chunks of UES is Gazprom, which is going up against energy majors from Italy, Germany, Finland and other countries. The Russian government has been allowing foreign companies purchase many of UES’s assets in order to have those foreign companies pay for the massive investments needed to modernize Russia’s decaying electricity infrastructure. However, many of those foreign companies know that in just three more years, Russia is planning to deregulate electricity prices — of which only the 20 percent of the market in Russia is currently.[?] This means that the foreign companies could run prices through the ceiling as soon as the deregulation goes through -- that is, if the government ends up deregulating after all foreign companies pump cash into the system.

Energy talks resumed April 28 between Ukrainian Prime Minister Yulia Timoshenko and Russian Prime Minister Viktor Zubkov. No new deal is expected from the talks, which will continue in May between subordinate technocrats.

On April 23, the Russian Federation demanded approximately $250 million in back taxes from the holding company for the Russian-British joint-venture energy company TNK-BP. The company has long been considered the next target in Russia’s renationalization of its energy sector. Now the Kremlin has officially launched its attack. Pressure on TNK-BP is expected to continue throughout May and the months following.

Turkmenistan

Turkmenistan was been busy in April following Turkmen President Gurbanguly Berdimukhammedov’s appearance at the NATO summit April 2-4 in Bucharest.

Berdimukhammedov met with EU Commissioner for External Relations Benita Ferrero-Waldner in the Turkmen capital of Ashgabat on April 9, during which the two agreed to have 10 billion cubic meters of natural gas available for export to Europe by 2009. If Turkmenistan is serious, the deal will be hugely beneficial for Europe, but it will require Turkmenistan to leave at least one of its three natural gas customers in the lurch. Turkmenistan and Iran reached an agreement April 24 under which Turkmenistan will resume natural gas deliveries to Iran. In making this deal, Iran likely is hoping that Turkmenistan will serve as a middleman in talks with the United States over the Nabucco natural gas project. And, finally, Berdimukhammedov visited Afghanistan on April 28.

All the moves are signs of the current Turkmenistan government’s break from its predecessor’s isolationist policies. As Turkmenistan begins to get involved in international political and economic dealings, it is examining the leverage it can use in international affairs.

The Turkmen government keeps its agenda fairly quiet, although it will certainly continue its moves as winter ends and the negotiation season warms up.

United Kingdom

A 48-hour strike over pensions at the Grangemouth refinery in Scotland April 29 was expected to last through May[but it lasted only 48 hours? Or is it still going on?]. Grangemouth supplies about 95 percent of the fuel used in Scotland's central belt, including its capital, Edinburgh, and biggest city, Glasgow. Rare for such a developed country, the strike is damaging Scotland’s economy and pinching the treasury, which gets a hefty amount from tax revenue from the refinery. Ineos, the company in charge of the workers, is receiving the brunt of public ire over the strike, which has temporarily closing the refinery and caused British Petroleum to cut its 700,000-barrel-per-day (bpd) pipeline from the North Sea that feeds into Grangemouth. The strike, refinery shutdown and pipeline cutoffs are one of the larger causes of the oil-price surge to more than $120 a barrel. Despite the fuel shortages, the Grangemouth strike has caused no civil unrest in Scotland.

Latin America

Argentina

One can expect Argentina’s energy squeeze to escalate to a higher and more noticeable level in May. Brazil has made it clear that it cannot continue to export electricity to Argentina unless the latter improves its infrastructure. No major upgrades are underway; even if there were, Argentina would not be able to catch up very quickly. Argentina has promised to meet Chilean demand for natural gas, but rising demand and smaller supplies suggest that promise may not be fulfilled. Factor in the arrival of winter, which will cause demand and shortages to shoot up. Over the near term, the government’s current policies and conflicts with farmers will mean these energy problems will be underappreciated. Government and agrarian officials have buckled down to negotiations, though with little inclination to compromise, and the truce ends May 2. Farmers have not ruled out renewed strikes and blockades, since severely disrupting trade and transportation has proved to be useful leverage against the government. The government has already started taking legal action to try to ensure continued food supplies in the event of another strike.

Bolivia

Power struggles between Bolivia’s national government and the energy-producing lowland provinces will continue after the May 4 referendum, in which Santa Cruz Province sought autonomy[update with result of referendum?]. It can be expected that the provinces will enjoy silent but understood support from Brazil. The latter will take the necessary steps to ensure that business goes on as usual, which will include opening bidding on May 12 for contracts to construct a new hydroelectric facility along the Brazil-Bolivia border and overseeing the planned drilling of new oil wells in Santa Cruz.[update April 30energy deal between government and Andina, Chaco and Pan American Energy?]

Brazil

The discovery [when?] by Brazilian oil producer Petrobras of a huge oil reserve [where?] could triple the country’s reserve supply. Along with the company’s continuing acquisitions, investment and new projects, the discovery not only could give Brazil the ability to dominate the region’s energy sector but it could also make it a global energy player -- provided Brazil dedicated the time and money to develop the required infrastructure. Brazil has already started moving into the Asian market with joint ventures and foreign investment. Meanwhile, Brazil will continue to assert its dominance in the region’s energy sector. Paraguayan President-elect Lugo wants to renegotiate the price at which it sells power to Brazil from a jointly owned hydroelectric dam. Brazil has dismissed the idea, knowing that it doesn’t have to worry about any real action by Paraguay until Lugo takes office in August. Internally, talk will continue about changing laws to raise government take from oil concessions, but any changes would affect only future contracts.

Colombia

FARC activities -- hostage exchange talks, isolated acts of violence, engaging Venezuela -- will continue to dominate Colombian news in May. No major changes are expected in the government–FARC dynamic in the coming month. In April, U.S. President George W. Bush sent the pending Free Trade Agreement with Colombia to Congress, although consideration of the agreement and its possible passage will likely not occur until after the new administration is in place in January (the Democrat-led House eliminated a rule forcing a vote on the deal within 60 legislative days).

Ecuador

The mining industry took center stage in Ecuador in April. The government has suspended large numbers of mining concessions and begun redrafting legislation that will give Ecuador more royalties and impose tougher environmental controls over mining firms operating and exploring within the country. The new legislation is scheduled for completion before the end of May. These newlaws are one example of how Ecuador is taking small steps to gain control of its own affairs and not be so influenced by outside powers. Other steps include pledging[the government’s pledge?] to force U.S. troops off coastal bases and to build up military and surveillance capabilities on the Colombian border.

Mexico

In the coming month, all eyes will be on the debates and reactions surrounding Mexican President Felipe Calderon’s newly released plans for energy reform, which would allow foreign companies to participate in Pemex operations via service contracts. Congressional debate is expected to last throughout May and most of June. Meanwhile, the left-leaning opposition will likely continue its protests and take actions that will interfere with the legislature and Pemex operations. A sharp rise in such activities can be expected May 21 when there will be a march against NAFTA and to promote energy sovereignty. Foreign investment and participation in the Mexican oil industry is becoming imminent[essential?] for the survival of Pemex. Violence by drug cartels also will continue to affect the region in the coming month, [can we elaborate here a bit?].

Venezuela

Venezuelan President Hugo Chavez will immerse himself in regional political issues in the coming month, including the autonomy movement in Bolivia, to distract from pressing economic woes domestically, such as nagging food shortages. Chavez will also continue nationalizing businesses; he has already suggested that Alimentos Polar, Venezuela’s largest food distributor, will be next. Venezuela’s new windfall tax took effect in April, though its relatively reasonable parameters will not drive aware[away?] major foreign investors operating in the country. The new tax gives the state 50 percent of the difference between the average and final sale price of every barrel of oil when benchmark Brent crude prices sit at about $70 a barrel. When Brent crude surpasses $100 a barrel, on average, the rate goes up to 60 percent.

Middle East/South Asia

Israel and Lebanon

In our last monthly assessment, we noted that Israel is making the case for war against Hezbollah -- the possibility of which was heightened because of a series of strange developments involving Syria and Israel. But with the acknowledgement by both Israel and Syria [in late April?] that they are engaged in behind-the-scenes parleys toward a peace agreement mediated by Turkey, the threat of conflict in the Levant has subsided.

Persian Gulf States

Elsewhere, despite the recent incident involving a U.S. vessel firing warning shots at Iranian naval boats, the situation in Iraq precludes the possibility of any flare-up in the Persian Gulf. [why?] Furthermore, U.S. President George W. Bush will be making another visit to the region when he travels to Egypt, Israel, and Saudi Arabia May 13-18, which will further reduce the likelihood of any major escalation. There are also reports that the fourth-round of U.S.-Iranian security talks on Iraq could take place next month[in May?], especially in light of the international security meetings held in April in Syria and Kuwait. In spite of all these developments, the price of oil continues to climb, and Qatari Energy Minister Abdullah bin Hamad al-Attiyah warned that the price of oil could hit $200 a barrel by year’s end.

Egypt

While the price of oil continues to rise, it is interesting to note that there is no shortage in oil supplies. But there are shortages in worldwide food supplies, which is having a growing impact on the Middle East. There have been riots in Egypt because of wheat shortages, and rice shortages have been reported in Israeli supermarkets. Considering that most of the countries in the region import most of their food, a shortage in the supply of essential grains could create social unrest in the weak economies of the region.