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 by tweeting at us via @EurasiaGroup or @ianbremmer.
Makes It: A Transformed Society, Economy, and Government"
Shannon K. O'Neil, Foreign Affairs
There are plenty of underappreciated bright spots in Mexico. This piece gives a compelling recent economic history of the country and spells out the risks and opportunities Mexico faces today.
Kurdistan the Taiwan of the Middle East?"
Kevin Sullivan, RealClearWorld
Is Kurdistan a rare winner in an ever-turbulent Middle East?
Oil and Gas"
Elisabeth Rosenthal, New York Times
How does energy use differ around the world? A staggering fact: New York State's 19.5 million residents consume as much energy as the 800 million residents in sub-Saharan Africa (excluding South Africa).
Kingdom's Problem with Religion"
Simon Scott Plummer, Standpoint
In 2011, there were an estimated 67 million Chinese Christians and rising. Some predict that in a few decades, Chinese Christians could outnumber those in the US (there are currently 170 million and falling). How will China's religion demographics affect its development?
Just Declare War on Apple? Sure Looks Like It"
Gordon Chang, Forbes
China: Unparalleled arrogance, undisclosed agenda"
Real People's Daily"
Jonathan Dehart, The Diplomat
It seems like an anti-Apple campaign is brewing in China-but who is behind it? What's the motive? Apple CEO Tim Cook's January prediction that China will become the company's largest market looks inauspicious in hindsight. One thing is for sure: social media is exploding in China and Weibo is upending the calculus of information flow and control.
By Risa Grais-Targow
With Venezuelan President Hugo Chavez gravely ill and the Castro brothers in their twilight years, debate has begun to focus on the future of Chavez's brand of leftist politics in Latin America. There is widespread speculation as to which leader might assume Chavez's role in the region, even though his influence has arguably been on the decline. Among the possibilities bandied about is Ecuador's President Rafael Correa. Correa easily won a third term in the Feb. 17 elections, beating his closest opponent, Guillermo Lasso, by more than 30 percentage points. Correa also expanded his base of support in the National Assembly, where his Alianza Pais looks likely to achieve an absolute majority. Correa, like Bolivia's Evo Morales and Nicaragua's Daniel Ortega, owes much to Chavez, who served as a model for socialist policies, anti-imperialist rhetoric, and doled out hundreds of millions of dollars to his regional allies. While Correa may aspire to use his strong mandate to assume leadership of the Chavez-created Bolivarian Alliance for the Americas, his ability to do so will be limited.
First and foremost, Correa simply lacks the resources. Ecuador is a relatively small country (its GDP is about 20 percent of Venezuela's), and while it is a major oil producer, it does not boast the quantity of oil that can sustain Chavez-like regional "petro-diplomacy" and aid programs. Moreover, in the likely event that Chavez's chosen successor, Vice President Nicolas Maduro, wins a new election, there is no evidence to suggest that he doesn't want to fill Chavez's regional leadership role himself. So far, Maduro's actions suggest that he will represent policy continuity. He is close with the Cuban regime and has imitated Chavez's playbook thus far, including cracking down on the private sector and suggesting that foreign agents were planning an assassination attempt against him.
That doesn't mean that Correa won't try. He boasts much of Chavez's charisma, and has taken every opportunity to vault himself, and Ecuador, onto the international stage, typically at the expense of US policy interests. This has been particularly true since Chavez first became ill in June 2011. Correa boycotted last year's Summit of the Americas in protest of Cuba's absence, and more recently made headlines by granting Julian Assange political asylum. While Venezuela grapples with its internal transition challenges, rather than its regional agenda, Correa could heighten his anti-imperialist rhetoric. Regardless, however, Correa's decisive victory-along with the endurance of Morales in Bolivia, Ortega in Nicaragua, and more center -- left governments in Peru and Brazil -- suggests that the left in Latin America has staying power, with or without Chavez.
Risa Grais-Targow is an associate in Eurasia Group's Latin America practice.
RODRIGO BUENDIA/AFP/Getty Images
Among the fallout from the stagnant economy in OECD nations has been the effect on the development of alternative technologies. The lure of so-called green-collar jobs remains an attractive way to win support for expensive clean energy subsidies. But it is a move that can leave governments open to criticism when jobs fail to appear. In fact, pursuing the idea that clean technologies will create jobs poses risks to the alternative energy industry in at least two areas. The first is that governments could scale back support if the number of new jobs falls short of lofty hopes. Secondly, the pressure to create jobs could trigger protectionist policies that may be challenged by other countries.
In the United States, for example, Solyndra's bankruptcy has meant the Obama administration's boasts about green-collar job creation have come under intense scrutiny (along with federal financing mechanisms for renewable energy projects). Obama administration critics maintain that the government risked taxpayer dollars on projects using unproven technologies. The critique is amplified by the faltering economic recovery in the United States and dismal job creation statistics from recent months.
The media have latched on to the Obama administration's pledges for jobs growth as part of clean technology support and how these numbers are reported, resulting in more negative headlines for the U.S. alternative energy industry. But the media has overlooked the critical role that federal financing mechanisms have played in providing investment for the sector. Investment in solar photovoltaic power has become much more competitive in recent years, resulting in a lower cost for end users.
There are plenty of examples, however, of governments withdrawing support for green technology, especially when costs rise and the promise of jobs remains unfilled. In 2010, Germany accounted for half of the solar panels installed worldwide, but solar power's role is greatly diminished in the new energy policy formulated after the Fukushima disaster. Instead of trying to compete in this sector, the German government has swung its support to offshore wind. A lingering question is whether Germany will be more protective of its offshore wind sector than it was of its solar industry.
The ongoing emphasis on spurring the creation of green-collar jobs and domestic manufacturing capacity also exposes the renewable energy industry to WTO challenges, which could result in incentive programs being ended. The United States is reportedly preparing to lodge a complaint against China's solar industry subsidy program only a few years after filing a case against Chinese wind power companies. Other cases are also ongoing. Japan's complaint to the WTO last October against the Canadian province of Ontario is currently under consideration, while the European Union submitted a similar complaint to the WTO in August. In July, the U.S. wind company, Mesa Power, submitted a NAFTA complaint against Ontario for the same reason.
Paul Chinn-Pool/Getty Images
By Daniel Kerner
Venezuela's President Hugo Chávez faces the real possibility that he may lose the 2012 presidential election after more than a decade in office, in part because of his administration's failure to ensure adequate power supplies. Venezuela was forced to implement strict rationing in 2010, which thwarted the country's economic recovery. But while last year's problems were caused mostly by shortfalls in rain that stressed hydropower reservoirs, the problems are now the result of the government's failure to meaningfully address capacity and transmission problems.
The recent measures to address the situation are unlikely to solve the sector's problems. On June 13, the government announced it will offer up to 50% reduction in rates to households who reduce their consumption by up to 20%, but will also fine consumers 200% of their bill if they increase consumption by over 20% from a 2009 baseline. In addition, commercial users have been asked to install their own generating capacity, and face surcharges or electricity cuts if they do not. Finally, illuminated billboards will be shut off after midnight. The measures could contain demand, but do not address the fact that the system cannot meet peak demand.
The government has promised to increase generation capacity, the only real solution to the current structural problems. But it is unlikely to deliver given financial and logistical challenges, and Venezuela will still face transmission bottlenecks. The country is estimated to have around 24,000 MW of installed capacity; effective capacity, however, is around 17,000 MW. The government claims it installed 1,250 MW of new capacity in 2010 and will install an additional 2,568 MW in 2011, but the data's reliability is suspect -- the government stopped publishing data on Venezuela's power system last year, a tacit admission that the problems are severe. The government has also promised to invest some $21 billion in the sector over the next several years, but a long list of spending commitments and the government's proven inability to manage the electricity sector means these promises are hard to take seriously.
The shortages are likely to have a dramatic impact on an economy that is only now slowly recovering -- it grew by 4.5% in the first quarter, the first positive figure in a year and a half. Similar measures in 2009 and 2010 helped cut industrial activity by 6.4% in 2009 and 3.4% in 2010. Energy saving measures could limit industrial production, and blackouts could disrupt oil output.
Higher energy prices and electricity shortages, however, pose a serious political liability for Chávez's hopes of reelection, especially if they affect economic growth. In 2009, power shortages helped reduce his approval ratings from 61% to around 50%. A variety of opinion polls show that Chávez has lost support. The government has done its best to protect Caracas from the power shortages as a means of avoiding the political costs. But the state of Zulia, which recently suffered a day-long blackout, is home to the country's second largest city, Maracaibo.
Chávez will still likely have an edge over the opposition, however. He does have a strong group of core supports among the rural poor who are over represented in the legislature and he is gearing up to expand debt-fueled spending on social programs. But the election is shaping up to be the tightest of his decade-long run as president and Chávez is more vulnerable than ever before to economic and social problems.
Daniel Kerner is an analyst in Eurasia Group’s Latin America practice
JUAN BARRETO/AFP/Getty Images
By DIVYA REDDY
Last month, an Eastern European criminal band pulled off a roughly $60 million heist with no masks and no guns. How'd they do it? Well, the bandits were hackers, and the goods they stole -- carbon credits -- only exist electronically. The culprits penetrated registries in five European Union countries, prompting the European Commission to suspend spot trading at all 30 of the region's national registries until it could track down the missing credits. Spot trading resumed at several registries earlier this month, but some of the largest exchanges remain inactive and volumes are thin. While the feat highlights the kinks in the relatively new carbon market, as well as the growing importance of cyber security as more and more of the (especially clean) energy landscape goes digital, it won't slow the EU's cap-and-trade program.
The market for E.U. Emissions Trading System (ETS) credits has steadily grown in value from its inception in 2005, reaching $118.5 billion in 2009. The ETS is now the world's largest compliance emissions trading program. That expansion and the scheme's weak IT standards likely made it an attractive target for the engineers of this latest attack, who reportedly sold the credits they'd snatched. The January theft follows a scandal last March, in which used credits were re-traded, prompting a temporary halt to spot trades on two exchanges. As the European Union continues to pursue a low-carbon future, establishing more stringent IT security measures will be essential. Smart grids, crucial for the use of renewable energy and electric vehicles, are also vulnerable to hackers.
Part of the challenge for the ETS is the nature of carbon credits themselves. Unlike markets for traditional commodities such as wheat and oil, markets for pollution allowances aren't based on hard assets. The credits are essentially a measure of avoided emissions -- established by government decree and identified by a numerical code -- so settling a trade doesn't involve the delivery of a physical product. Cap-and-trade naysayers in the US have used terms like "subprime carbon" to highlight the risk that these allowances could create a vast new commodities bubble. And tracking down stolen credits can certainly be trickier than locating lost barrels of oil.
But is the ETS in danger of losing political and public backing? Not at all. The actual disruption to trading was limited, as the spot trade only accounts for about a fifth of the total market. And the European Union remains committed to its program, so regulatory responses will be restricted primarily to cyber security. In particular, the European Commission is pushing for a centralized clearinghouse for emissions allowances rather than the current system of national registries run by individual member states. (As with all harmonization in the European Union, though, the process will be slow moving and could be held up over opposition from even one member state.)
The potentially bigger ripple effect could be felt in the United States. While the last nail has effectively been hammered into the U.S. cap-and-trade coffin, if and when the debate resurfaces, the theft could provide additional ammunition to skeptics.
Divya Reddy is an analyst in Eurasia Group's Global Energy and Natural Resources practice.
By David Bender
Remember when Iraq was all about the oil?
Bush administration officials predicted that a post-war spike in Iraq's oil production would pay for both the conflict and ease the country's transition to democracy. Anti-war protesters countered that the war itself was little more than an oil grab. Now that the American combat mission is officially over, where is all that oil, and how will it change Iraq and the world?
It seemed for years that violent chaos inside Iraq made a big increase in oil production entirely unrealistic; but now there are growing signs that oil project work could begin on several fields in the south over the next six months. If these projects move ahead, over the next decade, Iraq could begin to contribute enough production to significantly influence the global oil market, providing enough supply to undermine assumptions that energy demand from emerging Asia and increasing production costs will squeeze energy markets and add serious upward pressure on prices in the mid 2010s.
Iraq is now producing about 2.4 million barrels per day. The 12 contracts signed with some of the world's largest oil companies fuel hopes that Iraq can increase production nearly fivefold by 2020. That target is unrealistic, but even the likelier tripling of production levels will have important implications for the global economy and raise interesting questions about regional political dynamics. For the moment, Saudi Arabia is the only producer with enough spare capacity to single-handedly move prices. How will the Saudis respond if Iraq can produce enough oil to usurp some of that market power? How will Iran react if a surge in Iraqi production drives down oil prices, depriving Tehran of badly needed revenue? Globally, will Iraqi oil power Chinese and Indian growth? Will it kill the electric car? Iraqi oil production increases will have widespread effects-if they happen.
But Iraq will be a politically volatile and potentially unstable place to do business for the foreseeable future, and a spike in the country's oil production is anything but a sure thing. Nearly six months after parliamentary elections, U.S. combat troops leave behind a country without a government. Vote winner Iyad Allawi, incumbent Prime Minister Nouri al Maliki, an array of Shia sectarian leaders (including firebrand cleric Muqtada al Sadr), and the Kurds remain locked in a seemingly endless battle of diplomatic nerves, holding fruitless rounds of negotiations, forming and breaking alliances, and making declarations of principle with little bearing on political realities.
ALI YUSSEF/AFP/Getty Images
The 11 people arrested and accused of spying for Russia have titillated the tabloids and reminded Cold War veterans of the good old days. But they won't do much damage to U.S.-Russian relations. In fact, the two governments are getting along much better at the moment. There are three major reasons for this, and all of them have to do with the view from the Kremlin.
recently ailing economy is now feeling much better. The financial crisis
inflicted more damage on Russia
than on most other emerging markets, in part because of a steep drop in oil
prices. When Obama first proposed a "reset" in U.S.-Russian relations, Moscow was hemorrhaging
reserves, and Kremlin officials hadn't arrived at any clear idea on what to do
about it. Prime Minister Vladimir Putin was traveling the country assuring local workers
that complacent oligarchs, not state officials, were to blame for the
volatility, and that their government would ensure that all would again be
well. President Dmitry Medvedev and his more western-oriented advisors were
beginning to look like convenient scapegoats should the public become restive
and Putin run out of businessmen to punish.
Things have changed. The economy has picked up thanks to some skillful economic management and a rise in oil prices out of the danger zone.
is feeling much better about its neighborhood. The Orange Revolution is now a
distant memory. In 2004, a presidential election in Ukraine lifted the Putin-endorsed
Viktor Yanukovych over Viktor Yushchenko. But Ukrainian nationalists and
several Western governments charged fraud, and the race was re-run. Yushchenko
won the do-over, fueling suspicion and hostility in Moscow. But his leadership earned little
public confidence during his five-year tenure, and Ukraine's latest election elevated
Yanukovych, who has now taken his country's bid to join NATO off the table for the foreseeable future.
Alex Wong/Getty Images
Hugo Chavez will hold his congressional majority in September's legislative elections in Venezuela. His support base remains strong. His government still exerts plenty of influence in rural regions of the country that are disproportionately represented in congress. A new electoral law will maximize the value of every pro-government vote. Majority control of congress will allow Chavez to dominate the legislative agenda in the run-up to a presidential election in December 2012.
But beneath the surface, his popularity across the country is headed downhill as Venezuela's economy buckles beneath the weight of its internal contradictions and an overloaded electricity grid leaves much of the country in the dark.
Venezuela's GDP shrank by 3.3 percent in 2009 -- and by 5.8 percent in the last quarter of the year -- according to latest central bank estimates. The country remains mired in recession while its Latin American peers have begun to recover. The government is spending freely on the back of higher oil prices in a bid to stimulate the economy, but growth prospects are limited by supply-side bottlenecks and strong disincentives for private investment. Venezuela's mix of heavy government spending with strict price and foreign exchange controls continues to feed inflation, which hit 26.2 percent on an annual basis in March. To keep a lid on the problem, the government has taken over or threatened to nationalize retailers that pass higher import costs to consumers. This strategy will probably make scarce goods still scarcer and prove unsustainable.
But the single biggest challenge to Venezuela's economic health may well come from strains on the country's power grid. Power demand has risen 6 percent a year over the past decade, outstripping the rate of expansion in generation capacity. Officials began rationing power at the end of 2009 and implemented a plan in February to cut electricity for up to four hours every other day across the country (with the exception of Caracas). Nationwide outages will weigh heavily on the country's ability to recover from recession by slowing production for the manufacturing and service industries, which together account for more than 25 percent of GDP and more than 30 percent of jobs in the formal sector. A state takeover of the last three privately run power generation companies in 2007 has reduced incentives to add capacity.
Hard times are already taking a political toll on the president. According to respected local pollster Datanalisis, Chavez's popularity slipped from 61 percent following his February 2009 referendum victory to 43 percent in February 2010. More than 65 percent of respondents in the latest monthly poll think that Venezuela is in a "critical situation." Chavez's approval ratings remain well above the lows of 2003, when he survived a coup attempt and his support dipped to around 30 percent. But with Venezuela's economy running on fumes and the government unable to turn things around, Chavez's numbers will probably sink further.
Chavez still has formidable political advantages. He holds a virtual monopoly on Venezuela's resources and will take advantage of both higher oil prices and the fiscal boost provided by January's devaluation of the country's massively overvalued currency to increase government spending in ways that limit the economic pain for low-income voters. His government has a formidable patronage-based reach into Venezuela's sparsely populated rural areas, which are disproportionately represented in congress. The government approved an electoral law last year that favors Chavez by weakening the proportional representation system and allowing the largest single group to effectively sweep the elections. Meanwhile, the government-dominated national election council recently redrew electoral boundaries to maximize the impact of government supporters' votes and limit potential opposition gains.
After the September elections, Chavez and his United Socialist Party of Venezuela will no longer have the full control of congress they've enjoyed for the last five years. In 2005, the opposition boycotted legislative elections. With Chavez weakened, his rivals won't make that mistake again, and if they can present a (more or less) unified front this time, they will probably make some limited headway at the ballot box. But they're unlikely to win more than 35 percent of seats. Even a weakened majority in congress will allow Chavez to run the government with few checks or balances, but his political standing will become steadily more precarious as the recession drags on.
The country's oil wealth won't help as much as it used to. Production, now between 2.2 million and 2.3 million barrels per day, will likely stagnate or continue to decline in the next several years as state-owned oil company Petróleos de Venezuela, S.A. (PDVSA) sinks under the burdens of its spending obligations and poor management. In addition to transferring a growing share of its revenues to the government in royalties, transfers, and direct social payments, PDVSA is being tasked with buying and distributing food to combat shortages, on top of financing recent power infrastructure upgrades.
Given Chavez's tendency toward confrontation with foreign oil companies, multinationals are unlikely to make major investment commitments, despite the Venezuelan government's latest efforts to court these firms to develop new projects in the Orinoco region. With the country's oil production in decline, price hikes will yield diminishing returns. In 2006, the government needed to spend about $2.5 billion to generate a single percentage point increase in GDP growth. By 2008, it needed to spend more than $13 billion to generate the same increase.
With less revenue to dull the economic pain, a rising cost of living, and shortages of vital goods, apathetic voters who support neither the government nor the opposition -- and who make up half the electorate -- could step off the sidelines and return to the polls for the first time in years. Chavez will resort to authoritarianism as his popularity sinks, setting the stage for a volatile 2012 election campaign.
It will be harder than ever for Chavez to control what happens next.
Patrick Esteruelas is an analyst in Eurasia Group's Latin America practice.
PABLO COZZAGLIO/AFP/Getty Images
What will oil wealth do for (or to) these countries? It's hard to say, but maybe Ghana, Uganda, and Sierra Leone can break the resource curse--at least they have clear models not to follow across the continent.
By Eurasia Group analyst Greg Priddy
Are the United States and Saudi Arabia on the verge of serious tensions? They might be … if the Saudis continue to worry that U.S. energy policy could undermine their economy over the long-term.
Saudi officials are beginning to realize that the Obama administration is serious about gradual diversification away from U.S. dependence on oil and fossil fuels -- a direct threat to Saudi Arabia’s “demand security.” That explains, at least in part, Saudi Oil Minister Ali al Naimi’s uncharacteristically hawkish comments on crude oil prices at the most recent OPEC meeting held late last month -- comments that amounted to a warning shot directed at the U.S. ahead of President Obama’s visit.
Despite serious recent Saudi efforts to diversify its economy away from dependence on crude oil exports, the certainty that large-scale use of hydrocarbon alternatives remains years away, and conservative budgeting that ensures the Saudis are hurt less than most energy exporters by lower prices, the Saudis fear that substantial U.S. investment in ideas like plug-in hybrids and electric vehicles could undermine demand growth in oil, which they had assumed would remain strong, at least in the developing world. The fear is that if they continue investing in oil production capacity, they could end up overshooting demand.
What tools do the Saudis have to show their displeasure? They could delay near-term increases in oil production that will complicate the U.S. path out of recession. The prospect of OPEC inaction in the face of rising prices will drive anxiety in Washington, where an aggressively expansionary monetary policy adopted to shock the economy back to life -- including large purchases of treasury securities -- already threatens to create strong inflationary pressures during the recovery. In the longer term, they could hold back on planned upstream investments -- though this would not include the current round of expansions that will bring Saudi capacity to 12.5 million barrels per day (bpd) by the end of 2009.
Since the 1940s, the U.S. and Saudi governments have had a mutually beneficial commercial relationship based on crude oil, as well as a security relationship, grounded largely in mutual concerns first about the Soviet Union and later about revolutionary Iran. There have been plenty of tensions between the U.S. and Saudi governments over the years, particularly in the aftermath of 9/11, but these common interests have always helped resolve them. Now, the seriousness with which the Obama administration appears to be approaching the goal of reducing U.S. oil dependency and promoting an eventual transition toward electric vehicles is stoking fears among Saudi officials that there is at least a modest chance that their economy could eventually be fundamentally undermined.
The Saudis have made no moves to hold back on upstream oil projects already underway, and they’re likely to wait a couple of years before making big decisions on longer-term investment plans. The first big decision beyond the current projects will be on the 900,000 bpd expansion at Manifa, which is now slated to come onstream in 2013. The Saudis probably calculate that the Obama administration will soon face practical and political obstacles at home and will have to back down from some of its more ambitious goals.
But official caution also reflects a baseline assumption among management of Saudi Aramco (the Saudi state-owned oil company and the largest energy company in the world) that demand growth in China, India, and across the developing world will offset any gradual demand decline in the United States. The Obama administration’s recent decision to accelerate the timetable for the new CAFE standards will accelerate that decline, but the larger Saudi worry is probably that technology developments spurred by the shift in U.S. policy -- like plug-in hybrids or even viable electric cars -- will be adopted widely in the developing world and will more fundamentally undermine the long-term viability of an economy dependent on oil exports.
The Call, from Ian Bremmer, uses cutting-edge political science to predict the political future -- and how it will shape the global economy.