Note: Today is the first in a series of posts that detail Eurasia Group's Top Risks for 2013.
Since the onset of the financial crisis in 2008, investors and companies have focused mainly on risks in developed world markets. But as conditions in the U.S. and Europe continue to improve in 2013, the most worrisome risks will again come from emerging market countries. These countries are fundamentally less stable than their developed world counterparts, and some of their governments used a period of favorable commodities prices and the benefits from earlier reform to avoid the tough choices needed to reach the next stage of their political and economic development.
Some of these emerging market nations face more difficult challenges than others, and much depends on the degree of political capital each leader will have in order to make unpopular but necessary changes. These countries can be divided into three broad categories according to the complexity and immediacy of the risks they face and the longer-term upside they offer.
The first category includes the best bets:
The second category of emerging market economies are at risk of considerable volatility.
Lastly, there are the underperformers, those countries where risks will overshadow returns.
On Friday, we'll profile Risk #2: China vs Information.
HOANG DINH NAM/AFP/Getty Images
Eurasia Group's weekly selection of essential reading for the political risk junkie-presented in no particular order. As always, feel free to give us your feedback or selections @EurasiaGroup or @IanBremmer.
Must-Reads1. "South Korea's Presidential Election: A Homecoming"
Banyan Asia blog, The Economist
On Wednesday, Park Geun-hye was named president of South Korea by a small margin, making her the first woman to hold the post in the nation's history. How will her presidency differ from Lee Myung-bak's? What are the implications for North-South relations?2. "The Importance of Shinzo Abe"
Sanjaya Baru, The Hindu
A much more momentous Asian election took place this past weekend, as Shinzo Abe and the LDP returned to power. Many are focusing on the possible conflicts that the election could provoke between China and Japan, but this piece asks: Are Japan and India the "natural partners in Asia?" In light of the conflict over the Senkaku/Diaoyu islands, it seems Japan is pursuing an ABC policy (Anybody But China). Why not India?3. "Pakistan: Mullahs and Militants Keep Polio Alive"
Sami Yousafzai, The Daily Beast
The eradication of polio has been tantalizingly within reach, as its presence has dwindled to just a handful of countries. But wiping the disease out of Pakistan comes with substantial risks. This piece focuses on the dangers to the anti-polio mission in the wake of Bin Laden's death and the role that vaccinations played in gathering intelligence for the operation.4. "Slavery's Global Comeback"
J.J. Gould, The Atlantic
Another atrocity that hasn't disappeared: human trafficking and forced labor. These are new terms for what Gould still dubs 'slavery.' Even by conservative estimates, there are more people enslaved today than at any point in history. This is an epidemic that needs global attention.5. "The Putin Show"
Brian Whitmore, Power Vertical Blog
If there were a foreign-policy edition of People magazine, Putin would fill the pages. Why all the hype for his most recent press conference? Consider analysis of his performance as our guilty pleasure political risk story.
Longer Reads6. "Utopia for Beginners: an amateur linguist loses control of the language he invented"
Joshua Foer, The New Yorker
This piece is not political per se, but the treatment of language as an art -- communicable and easily repurposed the world over -- has global as well as philosophical implications. Foer follows a man who spent 34 years inventing a language designed to more precisely mirror reality. The story of who ended up co-opting it -- for political purposes no less -- makes for a fascinating read.
By Carroll Colley
Washington is on the verge of completing an improbable trifecta in U.S.-Russian relations. In August, the Obama administration helped guide Russia across the finish line for World Trade Organization membership. Congress is now fast tracking an end to the Jackson-Vanik amendment, a piece of Cold War-era legislation that ties trade policy to human rights, and one that has remained a bone of contention between Moscow and Washington for more than twenty years. Finally, Congress is also about to establish "permanent normalized trade relations" with Russia.
So why are relations on the verge of a potentially serious turn for the worse-and perhaps a reassessment of the "reset" in U.S.-Russian relations? Because this legislation will also include the so-called Magnitsky Act, which publicly rebukes the Kremlin for its poor human rights record.
Sergei Magnitsky, an attorney investigating a corruption case involving tax fraud charges against a UK-based investment firm, announced he had uncovered evidence of collusion among police, organized crime figures, bankers, and the Russian judiciary to push the company out of business. In November 2008, Magnitsky was arrested on corruption charges and held for 11 months without trial. He then died in prison under disputed circumstances. An independent human rights organization, Moscow Helsinki Group, has accused Russian security of torturing him. Magnitsky's death provoked international criticism, but a defiant Russian government continues with a posthumous criminal case against him.
The Magnitsky Act will publicly name and shame Russian officials involved in the case, bar them from receiving US visas, and freeze any assets they hold in the United States. Moscow, as you might imagine, is incensed. The Kremlin sees the bill as evidence of continued anti-Russian sentiment in the United States - -Mitt Romney's campaign comments about Russia were grist for this mill -- and as an intrusion by the U.S. into Russia's domestic affairs. The House looks set to vote on the legislation tomorrow, the third anniversary of Magnitsky's death. The Kremlin promises to respond to the bill's passage by retaliating in kind.
The Magnitsky Act won't damage President Vladimir Putin inside Russia. He remains Russia's dominant political figure, his approval numbers are strong, and few Russians closely followed details of this case. Yet, Moscow remains extremely sensitive to international charges of human rights abuses and corruption of government officials. That leaders of Russia's nascent opposition movement have endorsed the Magnitsky Act aggravates the Kremlin even more.
Moscow has already floated suggestions for a 'black list' of US officials, including those connected with the extradition and trial of convicted arms dealer Viktor Bout or with the prison at Guantanamo Bay. Of more concern is the likelihood of increased pressure on U.S. industry operating in Russia, including, for example, unannounced tax inspections of U.S. companies, delayed or denied licensing or registration procedures, and other bureaucratic complications.
While the Magnitsky Act will punish those involved in the case, it won't do much to improve Russia's human rights regime in the near term. Several incidents since Putin's inauguration in May demonstrate that the state continues to use force to weaken the political opposition. Russian officials recently announced the arrest of political activist Leonid Razvozzhayev on charges of orchestrating a series of riots. Razvozzhayev insists that Russian security officials kidnapped him in Ukraine where he was applying for political asylum, transported him back to Russia, and gained a confession from him by torturing him and threatening his children. Politically connected murders of journalists and human rights activists are no closer to being resolved.
U.S.-Russian relations are now likely to enter a period of strain and recrimination, though pragmatism on both sides will prevent a total collapse. The U.S.-Russian "reset" was a good idea at the time and produced significant results, but there is only so much it can accomplish with so much continuing mistrust on both sides.
Carroll Colley is an analyst in Eurasia Group's Eurasia practice.
By Carroll Colley
The story grabbing most of the headlines in Russia the last two weeks has a racy hook, but it's not the story the international community should be watching. Sure, the criminal trial against feminist/garage band Pussy Riot has its share of political intrigue. But that trial is more about church-state relations than the political repression of the women involved. Criminal charges against opposition leader and blogger extraordinaire Alexey Navalny, however, are far more serious, and they provide a window into the Kremlin's current strategy of zero tolerance for political opponents. If Navalny is convicted and jailed, the opposition would be weakened, but it could well provoke even larger protests and greater political uncertainty.
First, the more colorful case. The state is prosecuting Pussy Riot for the band's performance of a musical rant against President Vladimir Putin in Moscow's largest cathedral, and the case exposes the dark underbelly of the Russian judicial system: incompetent prosecutors, questionable witnesses, and a highly politicized judge. Instead of pursuing administrative charges -- which many Russians favor -- the government is throwing down the gauntlet by pursuing a criminal case, though some legal scholars claim that the charges themselves are outside the scope of Russian law.
While a corrupt judicial system creates problems of its own, allegations of incompetence and corruption in Russia's court system are nothing new, and the state's position in this case is more a product of the Putin regime's wish to reward the Orthodox Church's political loyalty than to punish a little-known feminist punk band. Putin, the first Russian ruler since the era of the tsars to be a practicing Orthodox, wants to support one of the political system's most stalwart supporters which called on its members to vote for him in the March presidential election.
The three women face up to seven years in prison for "hooliganism" for performing an "anti-Putin hymn" ("Holy Mother, Drive Putin Out"). After meeting with British Prime Minister David Cameron last week in London, Putin said the women have already been punished enough -- they have been held in pre-detention for five months -- and should not be judged too harshly. The use of the legal system to prosecute Pussy Riot may be clumsy-and it has backfired by turning the band into an international cause celebre -- but in the end, it's little more than a colorful footnote to a worrisome trend.
On the other hand, the renewed criminal charges of embezzlement against Navalny (he was previously investigated on similar charges but cleared) should be recognized for what they are -- increased pressure against out-of-system opposition leaders that will grow under a third Putin presidential term.
Navalny has used his blog to wage a successful anti-corruption campaign against the government for several years, making him a major irritant for the ruling elite. He is the face of the opposition movement and has demonstrated that he can send a crowd of protestors into Moscow's streets. Most recently, he exposed that the head of Russia's Investigative Committee -- the Russian equivalent of the FBI -- violated Russian law by owning property in the Czech Republic and holding a Czech residence permit. The Investigative Committee responded quickly with these most recent charges.
Interestingly, Navalny remains free, which suggests that the Kremlin is making him an offer: Stop the anti-government shenanigans or risk 10 years in prison. If his past actions are a good indicator, Navalny won't take this deal; he has been playing this cat-and-mouse game with authorities for some time and has yet to blink. Among the opposition, Navalny appears to be the most charismatic and ambitious figure, one who could possibly rally Russia's disparate opposition movement and mount a credible political career. A potential show trial -- if the standard set with Pussy Riot is to be followed -- and subsequent prison sentence would create yet another political martyr and drastically underscore the authoritarianism of Russia's political dynamic.
If Navalny's case goes to court, he can't expect the leniency that Pussy Riot may ultimately receive. He'll probably get prison time, a verdict that would enrage the opposition (the upper-middle classes in Moscow and a handful of other major cities) and probably provoke greater unrest. But the outcome would be largely supported as a sign of strength by Russia's majority, the working middle and lower classes that support the current system. It will also send yet another signal that the Kremlin's patience with the democratic opposition has reached its limit.
Carroll Colley is an analyst in Eurasia Group's Eurasia practice.
Alexey SAZONOV/AFP/Getty Images
By Alexander Kliment
Vladimir Putin thinks that Russia's elections are over, and that it's time to move on with business as usual. The trouble for him -- and the system of "managed democracy" he has built -- is that Russia's season of elections is just beginning.
In his final address as Prime Minister to Russia's State Duma (the lower house of parliament) on Wednesday, Putin, who will return to the presidency on May 7, explained that in a "mature democracy, after elections are concluded there begins a more important phase of work." He called for unity and an end to the "heightened emotions" that have recently taken hold of Russia's politics.
So much for that. A few minutes later, the entire faction of the left-leaning Kremlin-created opposition party A Just Russia walked out of the hall in response to Putin's defiantly tin-eared response to a question about the disputed mayoral election in Astrakhan. In that city, the largest administrative center in Russia's Caspian littoral, A Just Russia member Oleg Shein has now entered the third week of a widely-publicized hunger strike to protest well-documented fraud in a mayoral vote that he lost on March 4, the very day that Putin was returned to the Kremlin.
The battle in Astrakhan, which anti-corruption crusader Alexey Navalny and other opposition figures have joined, follows a mayoral election in the northern city of Yaroslavl, where a former member of Putin's United Russia (UR) party ran as an independent, built unified support from several opposition groups, shrugged off scathing coverage from local media, and trounced the government's preferred candidate. More than a thousand election observers, mainly from Moscow, arrived to monitor the vote.
The controversies in Astrakhan and Yaroslavl have mainly to do with local issues, and Putin still has pre-eminent control of the country. United Russia, however tarnished by its new sobriquet as the "party of crooks and thieves," maintains its chokehold on the legislative and executive branches at all levels of Russian politics. But these local episodes underscore an emerging national reality: Opposition politics is taking root in Russia, and the regions will be the most fertile ground.
Despite Putin's wishful thinking, election season is far from finished. Later this year, regional legislative elections will be held in a half dozen localities. A similar number will vote in 2013 and 2014. By then, Russia's opposition forces may well have coalesced into a coherent national force, and voters will choose a new city council for Moscow, a city that Putin actually lost in last month's election.
Moreover, the Duma is expected to approve a bill in coming weeks that will reintroduce direct election of regional governors, though the president can still "filter" the candidates. Several regions could elect new leaders as early as this fall.
These elections will take place at a moment of unprecedented civil society activism, a trend that will cast a bright light on Russia's brand of democracy. Candidates for posts ultimately beholden to the Kremlin for their authority and resources must court an electorate increasingly skeptical of the prevailing power elite. Putin's "vertical of power," the system he has used to maintain political control across the country, already brittle thanks to the weakness of Russia's governing institutions, could begin to show real signs of stress as an increasingly restive public watches election results with new interest.
If so, the country's nascent opposition will have to begin to build a much broader infrastructure to help its leaders speak to a national audience about local problems. Change won't come quickly. Putin's approval rating stands at 68 percent, and Russia's economy is performing reasonably well. Moreover, few key regions face legislative or possible gubernatorial elections in coming months. But at the regional level, increased activism and attention from civil society and opposition groups, coupled with a threatening crisis of legitimacy for United Russia, could introduce a new element of unpredictability into local politics and, by extension, into center-regional relations.
Russia's opposition has a lot of building to do, but at least it now knows that a growing number of Russians are paying attention.
Alexander Kliment is an analyst in Eurasia Group's Eurasia practice.
ALEXEY DRUZHININ/AFP/Getty Images
By Jenia Ustinova
Before the December 4th, 2011 elections in Russia, no one could have imagined an anti-government rally in Moscow could attract tens of thousands of mainstream middle class students and professionals to march alongside socialists and nationalists. But the election results and the perception of fraud and irregularities spurred massive demonstrations. Those protests have brought politics back into the open after a decade in which President-elect Vladimir Putin was granted almost complete political freedom by Russians who wanted little more in return than stability and rising standards of living. Criticism of the turnout at the March 10 opposition rally (20,000 attended) underscores the dramatic shift in the Russian political context over the last three months.
It was inevitable that the turnout at the opposition rallies would decline from the estimated peak of more than 100,000 who showed up on February 4 in subfreezing temperatures. With Putin scoring a clear win in the March 4 presidential election, the protests lost momentum. After the initial outburst it's hard to maintain enthusiasm, especially when most protesters are asking for greater accountability and transparency, and less corruption. These people want an evolution not a revolution that will disrupt their lives. Like it or not, these are people who have other plans for the weekend than attending protests.
Putin's calculus on how to govern Russia for the next six years will in part assume that the opposition will once again be marginalized as protest numbers dissipate and the Kremlin adopts a divide and conquer strategy. Putin may consider some concessions on electoral reform (for the middle class), and will likely provide additional social spending (for the poor and the regions) before hoping to return to business as usual in Moscow.
But the genie is out of the bottle. The opposition will continue to challenge Putin and the regime. The rallies have already raised questions about Putin's legitimacy that will linger with the general public and with the political elite, weakening Putin. Opposition leaders meanwhile have grown stronger and can now attempt to channel their support into formal organizations and challenge system's hold on power at the local and regional levels.
Meanwhile, the Kremlin's room for maneuver has shrunk considerably. It will attempt to shore up its declining popularity with additional pension and salary hikes, but discontent is now sufficiently strong that any policy misstep or miscalculation by the authorities could spark a powerful public reaction. Any number of events from a national tragedy (such as the sinking of the nuclear submarine Kursk) to prolonged economic dislocation (like the recent financial crisis) could set off new protests.
Jenia Ustinova is an analyst with Eurasia Group's Russia practice.
KIRILL KUDRYAVTSEV/AFP/Getty Images)
Today, The Call presents our top risks for 2012. Click HERE for Eurasia Group's complete report.
1. The End of the 9/11 Era -- It was a truism of globalization: economics drives markets, and national security drives geopolitics. No longer. Following the 2008 financial crisis, the killing of Osama bin Laden, the withdrawal of U.S. troops from Iraq, and an end date for the war in Afghanistan, politics and economics will overlap almost entirely in 2012. Political officials around the world will worry mainly over economic risks -- the eurozone crisis, the strength of U.S. recovery, and China's evolving role in the global economy in 2012. Market players, in turn, are anxious mainly about political decisions, especially those that will be made in Europe, America, and China this year, as shortsighted leadership from virtually all the major geopolitical players generates policy stalemate and uncertainty.
2. G-Zero and the Middle East -- The inability/unwillingness of major powers to bolster the region's balance of force will generate greater turbulence across North Africa and the Middle East as unresolved religious, sectarian, and ethnic tensions threaten more unrest. The lack of a viable regional security framework, continuing protests, autocracies at risk, and enormous challenges facing newly democratic regimes will add to the potential turmoil. As this dynamic plays out in Syria, Egypt, Iraq, Libya, Yemen and Bahrain, regional heavyweights -- Saudi Arabia, Iran, and Turkey -- will generate friction as they vie for proxy influence.
3. Eurozone: the rollercoaster ride rolls on -- In Europe, it's not the breakup of the Eurozone we need to fear in 2012 but the "reactive incrementalism" that could spin beyond the control of political officials. The uncertainty and volatility we saw in 2011 has only just begun.
4. United States: right after elections -- Once the votes are counted in November, lawmakers will take up the $5 trillion worth of tax and savings decisions that must be taken in the final nine weeks of the year. Investors face uncertainty about their taxes and government contracts as well as about the broader impact of lawmakers' choices on economic growth.
5. North Korea: implosion or explosion -- The world's most opaque nuclear-armed state enters a year of uncertainty as the battle for power and influence within the regime gathers force.
6 - Pakistan: turmoil, spillover -- The end of the 9/11 era threatens neglect of other hotspots, and none is more combustible than Pakistan, a terrorism-plagued, nuclear-armed power burdened with an unpopular civilian government, a meddlesome military, politically motivated judges and an increasingly dangerous security environment. The expected withdrawal of thousands of U.S. troops from Afghanistan this year will fuel regional competition for new influence.
7. China: trouble in the neighborhood -- The Obama administration's recent emphasis on Asia will embolden China's neighbors to take more assertive positions with Beijing. Rising nationalism in China, its ongoing political transition, and the leadership's unwillingness -- perhaps inability -- to resolve internal debates about the country's role in the world suggest Beijing is especially likely to meet provocation with provocation in months to come with both naval and economic muscle.
8. Egypt: a transition in trouble -- Egypt faces the risk of political disintegration this year as anger builds between military and civilian political forces, both Islamist and secular. Egypt's base-line stability, its economic recovery, and its broader regional influence will suffer.
9. South Africa: populism ascendant -- The struggle for leadership of the ruling African National Congress will slow the pace of both policy and economic growth at a time when the eurozone crisis already weighs heavily on South Africa's trade and currency.
10. Venezuela: a no-win election -- The country's big political story this year is October's presidential election, which incumbent Hugo Chavez, if healthy enough for a vigorous campaign, is likely to narrowly win. But the outlook for economic and political stability is bad no matter the election result. Should Chavez die or abandon the race, the deep fissures between the Chavista movement and the opposition could stoke violence.
In addition, Eurasia Group identifies four red herrings, the big stories we don't believe will happen in 2012.
Fallout from the 2012 political transitions -- In 2012, we'll see political transitions in the U.S., China, Russia, and France, countries that together represent nearly half of global GDP and four-fifths of the UN Security Council. But there's surprisingly little at stake in the outcomes for geopolitics and the global economy.
This is probably the single most overrated risk of 2012. The political will to
maintain the eurozone remains strong among all the major political parties in
the core Eurozone states, almost across the board in the European periphery
and, just as importantly, among eurocrats in the ever-growing European
bureaucracy. And there's no effective political mechanism for a Eurozone
China's hard landing -- There are signs of overheated growth in China, but the state has the tools and resources to manage short-term trouble, and it will pull out every stop to prevent a serious slowdown, especially during a major political transition.
Mayan apocalypse -- Just isn't happening. And if it does, well, sorry.
Over the next three weeks, we'll be posting more ideas and information on each of these risks.
By Jenia Ustinova
The Occupy Wall Street campaign is spreading from New York to other American cities, Europe, and Asia. But Vladimir Putin says there will be no Occupy Moscow. Speaking this month to foreign investors, the presumptive president elect of Russia downplayed the likelihood of protests emerging in his country. His argument was simple: such protests develop when citizens don't feel the impact of government largesse in their everyday lives, and Moscow will maintain ample spending on pensions, salaries, and social welfare to keep its people off the streets. The state's already burgeoning social expenditures -- typically about one third of the budget is allocated for social welfare-are therefore set to go up by 20% year-on-year, nearing $125 billion in 2012.
Putin's argument makes some sense. Judging by independent opinion polls, the government is genuinely popular, likely due in no small part to the trickling down of oil wealth to the masses. Average per capita monthly income rose by more than 700 percent in the past decade, from $81 to more than $614.
The problem with Putin's socio-economic arithmetic is that the budget is growing unwieldy and there's no clear path back to the modest pre-crisis days, when the country posted a surplus every year. The draft budget that Moscow just approved for 2012 assumes that global oil prices of more than $100 per barrel will hold steady, and so it will only balance if oil prices average higher than $117 per barrel. Given that the average per barrel price of oil was only $60 or so over the last 10 years and hit a low of $34 per barrel in December 2008, Moscow is entering risky territory. If the eurozone crisis magnifies and a second global downturn ensues, the country's leaders will have to make some tough choices.
Worse yet, last month's budget spat between Russia's ruling tandem and the fiscally conservative then-finance minister Alexei Kudrin culminated in Kudrin's ouster. The well-respected former minister, who oversaw the country's economic renaissance, had been railing against record-high spending, taking particular aim at benefits for civil and military employees. Despite his departure, his argument remains salient: Where will Russia turn if the price of oil plummets and risk-averse markets withhold credit from emerging market economies? When asked whether Moscow would be able to right its economic course before it was too late, Kudrin replied: "fifty-fifty."
Maybe he was being too brazen, failing to factor in the risk of an Occupy Moscow movement, which Russia's leadership is of course all too aware of. As Putin's comments to foreign investors illustrate, the government still courts public opinion (authoritarian tendencies notwithstanding), and there's a deep-seated fear among officials at all levels of a public backlash that would undermine the system. But the likelihood of such an uprising is very low, particularly without Kudrin to keep spending in check. And with the premium Moscow is paying for social stability, Kudrin's concern -- the health of the Russian economy -- is the more worrisome one.
Jenia Ustinova is an analyst in Eurasia Group's Eurasia practice.
NATALIA KOLESNIKOVA/AFP/Getty Images
By Alex Brideau
President Viktor Yanukovych's government will face negative political, diplomatic, and economic effects from the Aug. 5 arrest of former Prime Minister Yulia Tymoshenko and the accompanying legal proceedings. Tymoshenko was detained on contempt of court charges during her trial for overstepping her authority as prime minister in concluding the 2009 gas import agreement with her Russian counterparts, and for pressing the local gas company Naftohaz Ukrainy to sign the contract. She could face up to ten years in prison if convicted.
Protests against the arrest and trial won't represent a threat to the government's short-term stability, but the arrest will help the opposition unify ahead of next year's parliamentary elections. It will also reinforce EU and U.S. views that the cases against Tymoshenko and her allies are politically motivated.
Tymoshenko's arrest is symbolically important because of the strong political overtones of the charges. Despite government claims to the contrary, investigations over the past year into corruption and misuse of government power have overwhelmingly targeted members of Tymoshenko's government, some of whom are still important opposition figures. Yanukovych's Regions of Ukraine party, which saw its support in June sink to only 11.7 percent in one poll and 16 percent in another, remains concerned that Tymoshenko could lead the opposition against them in the October 2012 parliamentary elections. If convicted, Tymoshenko would be automatically disqualified by law from running in the election.
Ongoing protests could grow if Tymoshenko is convicted and sentenced to prison. Yet protests are unlikely to grow to a size that would threaten order in the capital. Opposition parties do not appear to have the strength to sustain protests against the detention, and Tymoshenko's popularity -- polls show her support between 10 percent and 16 percent -- do not guarantee a large turnout. Furthermore, many of the capital's residents are on their summer vacation.
The arrest will nonetheless provide a rallying point for opposition parties ahead of next year's election campaign. Opposition parties aligned with supporters of the 2004 Orange Revolution have been divided since the 2007 parliamentary election, but local sources hint that they may work to overcome their differences and the arrest would make it easier.
The Russian Foreign Ministry's reaction may have the biggest impact in the short term. Moscow is unlikely to be overly critical of the Yanukovych government. But Russian officials do appear worried that the Tymoshenko trial is also an attempt to delegitimize the 2009 gas contract, and part of efforts to force its renegotiation.
Tymoshenko's trial is proceeding quickly, and it could end within the next month. With political figures and foreign governments believing that the case against her is politically motivated, the verdict in her trial will be viewed as a barometer of the trajectory of the Yanukovych government. A conviction could further strain ties with the West (and with Russia -- depending on how the government uses the verdict in gas talks). Yanukovych's supporters, on the other hand, might see acquittal as a sign that the president's power is weakening, which would hurt internal cohesion in the Regions party.
Alex Brideau is an analyst with Eurasia Group's Russia practice.
GENYA SAVILOV/AFP/Getty Images
By Scott Rosenstein
Saving lives is an easy policy to defend. And advocating saving lives is an easy way to roll out policies that might otherwise be considered opportunistic. The ongoing E. coli outbreak in northern Germany is no exception. To be sure, the situation is grave. To date, 24 people have died and more than 2,400 have gotten sick. The outbreak has also destroyed livelihoods: Spanish cucumber farmers, wrongly identified as the source of the outbreak, have estimated losses of $280 million per week, while vegetable sales throughout Europe have plunged. The source of the outbreak has yet to be identified, spawning further anxiety and economic dislocation. But official responses to the crisis may be more self-serving than well-guided.
On 2 June, Russia announced that it was banning imports of fresh vegetables from the entire EU region. The Russian ambassador to the EU defended the move, saying: "I can certainly understand the grievances of EU farmers and I sympathize, but you can certainly understand no material loss is comparable to the loss of human life." His plea is hard to bicker with, but from an epidemiological standpoint the ban is provocative. All the E. coli cases recorded in the past month can be traced to northern Germany, suggesting that the contaminated food (regardless of where it originated) has been confined to that region.
So why is Russia taking such an aggressive stance? While health
concerns may be part of the story, the primary drivers are likely economic
Russia's ban may or may not work itself. The country's vegetable trade imbalance with the EU is partly attributable to the generous agricultural subsidies that EU farmers enjoy and that stifle competition from abroad. The ban will do little to convince EU policymakers to rethink those subsidies, and in fact, may reinforce support for them. The EU just announced a $210 million aid package for farmers affected by the E. coli outbreak, and more money may get passed around if farmers continue to suffer. Moreover, if the outbreak is past its peak, as some German officials are cautiously suggesting, and if Russia's ban threatens to distract from the upcoming Russia-EU summit, starts to jeopardize Russia's hopes of joining the WTO, or bumps up the price of vegetables at home, Moscow will likely backtrack.
Nevertheless, the world's convoluted food supply chain will continue to create complicated, costly, and sometimes deadly food safety scandals. And while some responses will be grounded in caution and scientific rigor, officials will also continue to take the opportunity to curry favor with domestic constituencies. In the coming weeks, particularly if the outbreak continues spreading, both tactics will likely be on display. Keep an eye on:
Scott Rosenstein is an analyst in Eurasia Group's global health practice.
Jorge Guerrero/AFP/Getty Images
By Ian Bremmer and David Gordon
A wave of money flooding into emerging markets has lifted many boats. But when the tide goes out, certain countries -- and the investors betting on them -- may be left high and dry.
There are very different risk profiles among emerging markets, and even beyond the increasingly turbulent Middle East, not all are going to perform well this year. The risks facing these countries include negative economic policies (fiscal imbalances in some, premature austerity in others) as well as more purely political risks (including contentious elections and political violence). As these problems play out in 2011, they will contribute to poor investment outcomes, ranging from adverse regulatory changes to asset bubbles to weak stock market performance.
The most notable underperformers are Argentina, Hungary, Peru, South Africa, Sri Lanka, and Thailand.
In Argentina, investors appear overly optimistic that policy will improve -- either as a result of President Cristina Kirchner losing her re-election bid or a change in direction if she wins. In fact, she is likely to win, but policy is unlikely to change, leading to higher inflation and more populism.
In Hungary, markets have recently turned south, but still do not seem to be pricing in the scope of the potential impending crisis as the Fidesz government attacks asset holders across a range of classes. Hungary may once again have to turn to the IMF, but Prime Minister Viktor Orban has walked himself into a political corner with his vitriolic anti-IMF rhetoric.
Investors in Peru underestimate the potential for populist candidate Ollanta Humala to make a serious run at the presidency. He's a decided underdog to be sure, but it's too early to write him off. Even if the more market-friendly Alejandro Toledo wins, we're likely to see more resource nationalism -- and mild capital controls if the Peruvian sol continues to appreciate.
Despite its aspirations, South Africa won't improve its investment climate in 2011. Growing political pressure on President Jacob Zuma ahead of municipal elections in April-May and the ruling party leadership contest in 2012 will increase the risk of government inertia and erratic policy-making and reinforce the African National Congress (ANC)'s "single party rule" mentality."
Many people have become overconfident that the end of Sri Lanka's civil war will usher in a period of political stability. But President Mahinda Rajapakse, insecure in his position, is centralizing power while failing to address the country's structural challenges. That's a recipe for resurgent political and ethnic tension, and it will dampen growth prospects.
Finally, 2011 promises to be a year of political tension in Thailand, especially given the king's failing health. Allies of former Prime Minister Thaksin Shinawatra remain popular in much of the country, raising the risks of a violent, flawed election or a military intervention. There's real potential for serious and sustained unrest involving Thailand's incumbent elites and the pro-Thaksin "red-shirt" movement.
Ian Bremmer is president of Eurasia Group. David Gordon is the firm's head of research.
By Alex Brideau
It looked, at first blush, like the final, ignominious end of Ukraine's Orange Revolution, the people power movement that swept aside Kyiv's authoritarian government in 2005 and ushered in democracy. Last week, Ukraine's constitutional court annulled changes to the country's system of government passed in 2004 that had weakened the powers of the executive. Now President Viktor Yanukovych -- the same man whose fraudulent election triggered the 2004 Orange Revolution, but who won a legitimate contest this year and was inaugurated in February -- plans to use the court ruling to expand his prerogatives at the expense of the legislature. People power, it seems, is dead, and a strongman is back in charge of Ukraine. At least, that's how the opposition is spinning it.
But don't be so sure -- the storyline isn't nearly quite that neat. For one thing, in the short term, the court ruling won't actually change much in terms of the distribution of power in Ukraine. Since their commanding victory early this year, Yanukovych and his Regions of Ukraine party have already dominated the presidency, the cabinet, and parliament. For another, investors hope the change will bring some badly needed political stability to a country that has seen precious little in the past ten years -- and that this stability will improve the business climate.
Then there's the fact that Ukraine's current political system -- the one that the court just overturned --wasn't one the Orange Revolution's leaders really wanted. While they accepted the current setup in 2004 as a compromise after the revolution, it was former President Leonid Kuchma (whose strong-armed rule triggered the uprising) that, facing term limits, decided to weaken his own office and bequeath the current diminished version on his democratic successors. The result was a government that politicians across the spectrum complain has become increasingly unworkable.
The main problem is with how the government is formed. Parliament currently has the power to appoint the prime minister, which has allowed it to influence nominations for most cabinet posts. As a result, Yanukovych's predecessor, President (and Orange Revolution leader) Viktor Yushchenko, had to contest with prime ministers foisted on him by an unfriendly legislature. This led to gridlock even when Yushchenko and the prime minister agreed on policy, as well as battles for control that blurred lines of authority. The conflict slowed the response to the economic crisis that cut Ukraine's GDP by 15 percent in 2009.
If Ukraine's new system was so dysfunctional, why didn't anyone change it before now? The problem was that no faction in the country's bitterly divided political system trusted any other faction to change the setup, fearing that reform would benefit one political group at the expense of all others. Thus when Yulia Tymoshenko, currently an opposition leader, proposed changes as prime minister, the attempts foundered.
The move back to a presidential system now will give Yanukovych powers Yushchenko lacked, allowing him to hire and fire ministers with far less interference from parliament.
By promoting calm, this could benefit all of Ukraine, though whether stability ultimately improves or not will depend on how Yanukovych follows up on the court's ruling. He has two options. He can either work with parliament to change the constitution -- the more promising path. Or he can unilaterally declare the previous 1996 constitution in effect, an approach guaranteed to fire up the opposition and estrange his coalition partners in parliament.
As for the opposition's charges that the court's ruling could usher in a new era of authoritarianism, these should not be taken lightly. For one thing, Ukraine has a history of government abuse, and it was opposition to such behavior under Kuchma that helped drive Ukrainians into the streets in 2004-2005. For another, accusations since February of media repression, NGO intimidation, and politically motivated investigations -- denied by the government -- are a cause for concern. If such tactics continue, Ukraine could once more be rocked by destabilizing protests.
But don't expect Ukrainians to start manning the barricades simply in response to last week's court decision. The public -- and Orange Revolution supporters in particular -- are exhausted after five years of constant political infighting and are disillusioned by the failures of their leaders to govern. So while opposition leaders may scream that Yanukovych is undermining their revolution, it's not clear that Ukrainians agree -- or are ready to join them once more.
Alex Brideau is an analyst specializing in Ukraine, Russia, and Central Asia, at Eurasia Group.
JOHN THYS/AFP/Getty Images
The most obvious clue that Alexander Lukashenko's MySpace page is a fake is that it claims he has 315 friends. The Belarusian President has no friends -- at least none that can help him maintain his political footing. It's nice to have pals in Venezuela and Iran, but Hugo Chavez and Mahmoud Ahmadinejad have moribund economies of their own to manage. That's why Belarus could become the latest former Soviet republic to face an economic and political storm.
Elections are coming in Belarus sometime in the next six months, and it doesn't take a crystal ball to know who's going to win. The opposition remains badly divided, and Lukashenko still controls the levers of power. He probably didn't need to rig the polls in 2006, yet he did it anyway. The need for a boost is more obvious this time, and he's likely to cheat again. In 2006, the fraudulent result triggered large public protests and scattered violence on the streets of Minsk. This time it's likely to be worse, and Moscow, the only valuable ally Lukashenko has ever had, is highly unlikely to throw him a life preserver.
In fact, the Russian government has had it with Lukashenko because it considers him a freeloader and an ingrate. The Belarusian president has scored political points at home by criticizing Moscow. Belarus has provided asylum to ousted Kyrgyz leader Bakiev, another authoritarian president who has antagonized neighboring Russia. Lukashenko has held up establishment of a customs union with Russia and Kazakhstan with demands for continuation of cheap oil and gas supplies from Russia.
The Belarusian economy is vulnerable. The economic slowdown among major trading partners in Europe and the former USSR has stalled the country's growth. Its current account deficit stands at 13 percent of GDP. Rising energy costs add to the problem as Gazprom, Russia's state-owned gas monopoly, pushes Belarus closer to market prices for gas.
With elections looming, Lukashenko's government is highly unlikely to cut state spending. He's right to wonder how long he would remain popular if he cut subsidies to help consumers buy fuel, froze wage and pension increases, and ended state spending that protects jobs.
And in response to the phony election of 2006 and the state crackdown on demonstrations that followed, the United States and the EU imposed sanctions. There's little reason to think they won't do it again if Lukashenko turns to the same old tricks.
Moscow won't shed any tears as Lukashenko flounders. Russian media have opened up on him in recent weeks, portraying him as an obnoxious, narcissistic thug. Prime Minister Putin doesn't work very hard to disguise his contempt.
Moscow is in best position to make Lukashenko more uncomfortable. As his relations with Moscow have worsened, Russia has moved to sharply reduce the energy subsidies that fuel the Belarusian refining industry -- and the broader economy. This year, Russia imposed full oil export duties on supplies and threatened to charge netback parity prices for gas next year. When Russia cut gas deliveries by 60 percent, Belarus threatened to up the stakes by passing the pain onto Europe. Russia supplies a quarter of the European Union's gas demand and pumps about 20 percent of the total through Belarus. The Russians, who can simply reroute those supplies through Ukraine, were not impressed. The two sides reached a compromise on Moscow's terms.
Russian-Belarusian energy supply and transit contracts must be renegotiated by the end of this year. A fight over energy is likely, and Belarus may face more supply cuts and damage to trade relations in other sectors that could generate turmoil throughout the Belarusian economy -- in the dead of winter and the middle of an election campaign.
If Russia really wants to punish the Belarusian president, it could refuse to recognize the election results. Moscow is highly unlikely to push that hard, but Belarus certainly looks like the next former Soviet state that could see some dangerous upheaval in coming months.
JUAN BARRETO/AFP/Getty Images
What makes a country stable?
Political stability is a measure of the ability of a country and its government to withstand shock. Poland suffered a tremendous shock last weekend with news of the plane crash that killed the country's president, his wife, several leading political, military and religious leaders, and more than one hero of the country's Soviet-era resistance movement.
Yet, despite the horror of the event and the pain it inflicted on Poles at home and abroad -- including on some who would never have voted for Lech Kaczynski -- no event could better have demonstrated the underlying strength and durability of Poland's political system.
The legitimacy of the transition of presidential power is beyond question. In accordance with the country's constitution, speaker of the lower house of parliament Bronislaw Komorowski now serves as interim president. Poland's next presidential election, scheduled for this fall, will take place even sooner. It was highly likely even before the crash killed Kaczynski and another candidate, Jerzy Szmajdzinski, that Komorowski would win. His Civic Platform party will probably quicken the pace of existing economic reforms.
So as we wait to see the details on the latest effort to stabilize Greece, to see if Kurmanbek Bakiyev will publicly accept that he is no longer president of the Kyrgyz Republic following his violent ouster last week, and to see if Thailand's irresolute government, reluctant military and ailing king can figure out how to move increasingly aggressive protesters off Thailand's streets, let's give Poland its due. The country will mourn and move forward.
Ian Bremmer is president of Eurasia Group and author of The End of the Free Market: Who Wins the War Between States and Corporations? (Portfolio, May 2010)
JOE KLAMAR/AFP/Getty Images
Remember the "colored revolutions," the mostly peaceful uprisings that were said to mark a turning point in the history of the post-Soviet space? In 2003, we had Georgia's Rose Revolution, which replaced President (and former Soviet foreign minister) Edvard Shevardnadze with a young U.S.-educated lawyer named Mikhail Saakashvili. In 2004, a fraudulent presidential election result was overturned by popular outrage in Ukraine, lifting Viktor Yushchenko past Viktor Yanukovych. In 2005, Kyrgyzstan's Tulip Revolution elevated Kurmanbek Bakiyev to the presidency. Georgia and Ukraine have since talked of joining NATO. Kyrgyzstan continues to allow American forces to use an air force base in its territory as a line of resupply for troops in Afghanistan.
Western media celebrated these events as victories for democracy, and the Kremlin fumed over what it considered further Western encroachment into Russia's sphere of influence.
Since then, Saakashvili has stumbled into a brief but costly war with Russia, and he faces a rising chorus of complaints at home. Yushchenko left the presidency with a single-digit approval rating, and Ukrainian voters have elected Yanukovych president. And now Kyrgyzstan's Bakiyev has come face to face with a depth of fury he was not prepared to handle.
We shouldn't be surprised by the trouble in the Kyrgyz Republic. Half the population lives below the poverty line. Remittances from Kyrgyz working abroad, a vital source of revenue, have not recovered from the global slowdown. Rising fuel and utility prices, a crackdown on media, and public anger over widespread corruption and nepotism add to the list of grievances. Bakiyev won elections widely considered fraudulent in 2007 and again in 2009. In 2007, he claimed his party had won every seat in parliament.
Whatever the cause of this latest bout of post-Soviet turmoil, we've reached an important point: The last of the colored revolutions has gone south, and Russia may soon regain more of its lost influence across this strategically important region.
Ian Bremmer is president of Eurasia Group and author of The End of the Free Market: Who Wins the War Between States and Corporations? (Portfolio, May 2010)
VYACHESLAV OSELEDKO/AFP/Getty Images
My conversation with colleague and friend Nouriel Roubini continues today on our political and economic expectations for key regions in the year ahead. Today, we talk about Europe.
Bremmer: We're seeing the return of political risk to the Eurozone in a big way, as the line between developed and developing states becomes a little less distinct. Member states' coordination on fiscal policy has been breaking down for awhile, but a sharp economic slowdown has made matters worse. Markets may be underestimating risks of default among the most vulnerable; EU support is something less than a sure thing. Even without a default, governments will respond to economic stagnation with spending meant to prop up vulnerable sectors. As in the United States and China, it's all about jobs, jobs, jobs, and jobs.
In fact, stubbornly high unemployment is an especially serious problem in Eastern Europe, where a host of elections in 2010 could heighten tension and stoke unrest. Upcoming elections in a number of key countries materially increase the likelihood of instability. Nervous policymakers and legislators will face the temptations of channeling the frustration and anger of the unemployed with protectionist, populist, even xenophobic policy plans. Ukraine, Hungary, and Latvia are especially vulnerable, but even Poland could hit some turbulence.
Another issue to worry about: If one of the big Western European banks active in Eastern Europe finds itself in trouble, rescue efforts could become a mess.
Roubini: The recovery of the Eurozone and the rest of the advanced economies in Europe will also be anemic and below trend for several reasons: Potential growth in the Eurozone (2 percent) is lower than in the United States (closer to 3 percent). Most Eurozone economies could not do much counter-cyclical fiscal stimulus as they started -- even before the crisis -- with large fiscal deficits, large stocks of public debt, and financial systems that are both too big to fail and too big to save, because the sovereign does not have the resources to bail them out in case of a systemic crisis. Indeed, sovereign risk is rising in the Eurozone -- currently in Greece and Ireland but soon enough in Spain and other periphery economies. The European Central Bank has followed a tighter monetary policy than the Fed and may exit from low rates and QE sooner, thus hampering the economic recovery. Financial institutions in Europe have not fully recognized the losses on their toxic assets and have large exposure to Central and Eastern Europe, where the economic and financial crisis are not yet over. Moreover, the strength of the euro is hampering the recovery of the Eurozone economies, and the Club Med economies have both a competitiveness and a public debt problem, as nominal wages rising faster than productivity have led to rising unit labor costs, real appreciation, and large external imbalances. Thus, even the viability of the European Monetary Union may be challenged over the next few years.
Ian Bremmer is president of Eurasia Group. Nouriel Roubini is a professor of economics at New York University's Stern School of Business and chairman of RGE Monitor.
DAMIEN MEYER/AFP/Getty Images
By Ian Bremmer and David Gordon
Now for the red
herrings, the places and problems where
we think there is less risk than meets the eye.
In Iraq, elections in March will spark violence as foreign militants try to undermine the transition to Iraqi national sovereignty. A U.S. troop withdrawal beginning right after the elections will invite more violence. We could see a Sunni election boycott. But compared to what we've seen before, and what might have happened, the overall story is remarkably positive. For the markets, Iraq is suddenly an opportunity. The institutions are becoming legitimate (even with the unresolved Kurdish issue), the army is starting to work, and most importantly, political leaders from all communities are beginning to recognize the value of Iraq's tremendous natural resource base from which all can benefit if they make the compromises to maintain stability in the country. For all their basic governance problems, there's very little chance of Iraq actually becoming a failed state at this point -- a meaningful risk even a year ago. It's not a place we're ready to vacation in, but we're bullish on Iraq.
Iraq is also moving in a positive geopolitical direction. Ties with Turkey have grown particularly quickly -- not just in the Kurdish region in the north, but in Baghdad. That's one of the few positive stories for Ankara this year. Arab states in the region are still hesitant to build ties with Iraq as they wait for clarity on its next government. Maliki hasn't been a popular figure with neighboring gulf Arabs, but they recognize that Iraq's economic consolidation won't wait for another four years, and they'll start making political overtures to Baghdad if Maliki's mandate is extended. And if the Iraqi prime minister isn't returned (which is certainly plausible), we'll see a stream of head of state visits to place relations with a new leader on a more solid footing. So whatever the electoral outcome in March, we're likely to see Iraq on a faster path to integration with regional political and economic infrastructure next year. Meanwhile, Iran's role in Iraq has quietly receded. Iran's controversial presidential election and subsequent state violence did nothing to improve Tehran's influence among Iraq's Shia population, where Iraqi nationalism has been steadily growing.
The headlines for Iraq next year will undoubtedly be the timing/delays/pace of the US troop withdrawal. But the real story is going to be a moderate government, growing geopolitical influence, and the most exciting new investment opportunities the region has seen in a decade.
AHMAD AL-RUBAYE/AFP/Getty Images
By Kim Iskyan
There's a reason for the popular perception that Russians like their drink: The average Russian citizen consumes 18 liters of pure alcohol per year, compared with about 11 liters per year in Western Europe. But if President Dmitry Medvedev's new anti-drinking campaign is a success, Russians will be toasting a lot less often.
Russian history is littered with failed attempts by imperious leaders with a social engineering streak to interfere in Russians' tippling habits. The most recent effort, the mid-1980s anti-drinking campaign spearheaded by Mikhail Gorbachev, was abandoned in part because it was hugely unpopular.
But the Kremlin has good reason to try again. Russia's drinking problem, which Medvedev has called a "national disaster," has long been cited as a key cause of Russia's ongoing demographic collapse. Alcohol abuse is a key reason why Russian men have a life expectancy of just 60 years, on par with North Korea and Papua New Guinea. In no small part due to alcohol abuse, the U.N. forecasts that Russia's population will fall from the current 142 million to 131 million by 2025, endangering economic growth and national security over the long term.
Medvedev has charged the government with developing an anti-drinking strategy by Dec. 1. Media reports suggest it may include new restrictions on advertising for alcoholic beverages; tightened regulations for low-alcohol content beverages; limitations on the times and locations at which alcoholic beverages can be sold; and price floors for and increased taxes on vodka. The plan will include additional measures to reduce Russia's gray alcohol market. The government is also contemplating whether to re-establish its monopoly on distilled spirits used to make vodka.
The campaign's chances of success may be better than previous Russian battles with the bottle. Some polls have suggested broad support for a temperance campaign. From a fiscal perspective, the relative contribution to the federal budget of alcohol taxation is a small fraction today of what it was during previous attempts to crack down on alcohol consumption, ensuring that lower consumption wouldn't dramatically decrease government revenue. It might even boost government coffers via higher taxes. Finally, the apparent success in the government's effort to eradicate legalized gambling -- as of July 1, all casinos and slot machine parlors operating outside four specified zones were closed -- reflects considerable political will to engineer positive social change, which could be channeled into an anti-alcohol effort.
Russia's anti-alcohol campaign is still in its very early stages. The politically powerful alcohol lobby, wary of higher taxes, could dilute the effort. And there are a lot more Russians drinking than gambling.
Kim Iskyan is a Europe and Eurasia analyst at Eurasia Group
ALEXANDER NEMENOV/AFP/Getty Images
By Ian Bremmer
It looks like we're headed for another political showdown in Turkey, where the ruling Justice and Development Party, known by its Turkish acronym AKP, has taken a series of actions that will (yet again) antagonize the country's secular establishment in general, and the military in particular.
Secular critics, particularly among the business, media, and military elites, charge that Prime Minister Recep Tayyip Erdogan's AKP means to undermine Turkey's constitution by gradually replacing secularism with Islamism. AKP supporters insist that the party champions religious freedom but poses no threat to Turkey's constitution or its secularist principles.
Following a landslide election victory in 2007, the AKP moved last year to lift a ban on the wearing of headscarves in Turkey's universities. A public prosecutor charged the move violated the constitution's secularist foundation and launched a legal challenge to shut the party down. The case moved to the Constitutional Court, where the AKP government survived by one vote.
Far from chastened, the ruling party is now moving more decisively to assert political authority over the military. On June 26, a late-night legal maneuver without support from the opposition led to passage of a law that will allow army personnel to face trial in civilian (rather than military) courts. There was no debate prior to the vote, and the main opposition party promises to ask the Constitutional Court to strike the law down.
On July 21, the government's Higher Education Board adopted a new rule that will make it easier for graduates of religious schools to gain admission to universities, a hot-button issue for secularists who argue that these schools are incubators of religious extremists.
But the biggest news came earlier this week, when 56 people accused of plotting to overthrow the AKP-led government, including two retired four-star generals, went on trial in the next phase of the so-called Ergenekon investigation. The generals are the most senior military officers ever to stand trial in modern Turkey. Keep in mind, this is a country where the army has overthrown four governments since 1960-though on each occasion, the military has withdrawn relatively quickly and allowed for the restoration of civilian rule.
Since the Ergenekon investigation began two years ago after police discovered a box of grenades in the Istanbul home of a junior military officer, more than 140 people have been charged with membership in the "Ergenekon armed terrorist organization." Eighty-six suspects have been on trial for the past nine months. Fifty-two more were indicted this week.
Prosecutors claim Ergenekon is a nationwide network of people dedicated to destroying the twice-elected AKP government and that it has engaged in terrorist attacks, extortion, and drug trafficking. Many AKP critics charge that Ergenekon doesn't exist and that the ongoing probe is a political stunt meant to intimidate and discredit the secularist opposition. The ongoing arrests and prosecutions are pushing Turkey's politics from simmer toward boil, and the risk is growing that an uneasy truce between the AKP and the military is in jeopardy -- and that another legal attempt to close the party might follow.
All this at a moment when Turkish officials should be focused on stabilizing the domestic economy, undertaking much-needed economic reforms, managing relations with the IMF to ensure external financial support, and putting the country's bid to join the European Union back on track. It's a bad time for an all-out fight, but that's exactly what appears to be brewing.
MUSTAFA OZER/AFP/Getty Images
By Eurasia Group analyst Alexander Kliment
On July 9, Aman Tuleyev did a remarkable thing. The governor of Kemerovo province in central Russia sent a telegram to global steelmaker ArcelorMittal, which operates three coal mines in the region, demanding that the company continue to operate the mines even if they lose money -- or surrender them to the regional government with zero compensation. This story underlines an important emerging trend for foreign investors in Russia: fear among Russian public officials of rising unemployment has reached a level of urgency that is pushing some of them to extraordinary lengths to stop it.
Faced with dwindling demand for coal this year, ArcelorMittal wanted to cut production and headcount at the mines, which employ about 6,000 people. But in his telegram, Governor Tuleyev warned that his first responsibility was to local workers and that he would not allow closure of the mines under any circumstances. Tuleyev, well known in Russian political circles as a volatile and outspoken crusader for workers, has called in the past for the prosecution of factory owners and the nationalization of their assets. Two days before his warning to Arcelor Mittal, his government seized control of a shuttered electrochemical company after unpaid workers asked for his help.
But this is not a story about one populist governor determined to play the role of friend to the working man. Tuleyev can't do anything with ArcelorMittal mines without (at least) implicit support from Russia's top leadership, and Federal authorities haven't yet weighed in on this issue. In the end, outright expropriation of foreign-owned assets remains unlikely; it would do too much damage to Russia's investment reputation. But the risk for investors in some areas -- especially labor intensive sectors like metals, mining, manufacturing, and automotive -- is becoming increasingly obvious: to preserve social stability, they may be pushed to operate factories or enterprises at a loss under threat of takeover by local authorities. Similar risks could arise even for regional retail and consumer-oriented sectors.
But these governors are responding to increasing political pressure coming from Moscow. Prime Minister Vladimir Putin and President Dmitry Medvedev have pushed governors to deal with rising unemployment and unpaid wages within their provinces without asking federal authorities for help. They can't afford more episodes like the one that took place last month in Pikalyovo, a beleaguered monogorod (a town in which one company employs virtually the entire workforce), where Putin arrived in person to rebuke the owners of shuttered local factories. The prime minister made a show of standing up for the workers and demanding that the factories reopen... before the central government quietly cut the owners -- including well-known oligarch Oleg Deripaska -- a sizable bailout check.
Federal officials can't afford to stage the same show in hundreds of towns and cities and doesn't want responsibility for local economic performance. It's also important to remember that Russia's regional governors are not elected by their constituents. They're appointed by the Kremlin. If a local official like Tuleyev wants to keep his job, he must first please his political masters in Moscow.
Beyond the risks for foreign investors, the seizure of businesses and factories would be bad news for the efficient operations of the companies concerned -- since regional bureaucrats don't usually make effective business managers -- but also potentially for the federal budget. Regional budget revenues, particularly in the regions hardest hit by economic recession, are in freefall this year. Cash-strapped local officials can squeeze regional banks and oligarchs only for so long. Eventually, they will have to turn to Moscow for the money they'll need to keep workers in their jobs. With the fall in prices for oil, gas, and other commodities and the global credit crunch, Russia's economy contracted by about 10 percent over the first half of 2009, and federal budget revenues are falling sharply. More demands from the regions will exacerbate an annual budget deficit already projected at about 8 percent for 2009.
Broadly, Moscow's key political objective of maintaining social stability despite dwindling revenues could begin to place regional officials between a fiscal rock and a political hard place. As that pressure mounts, foreign investors may be among the first to feel the squeeze.
ALEXEY NIKOLSKY/AFP/Getty Images
The Call, from Ian Bremmer, uses cutting-edge political science to predict the political future -- and how it will shape the global economy.