RiskMap 2010

Published by Control Risks, Cottons Centre, Cottons Lane, London SE1 2QG. Control Risks Group Limited ('the Company') endeavours
to ensure the accuracy of all information supplied. Advice and opinions given represent the best judgement of the Company, but
subject to Section 2 (1) Unfair Contract Terms Act 1977, the Company shall in no case be liable for any claims, or special, incidental
or consequential damages, whether caused by the Company's negligence (or that of any member of its staff) or in any other way.
Copyright: Control Risks Group Limited 2009. All rights reserved. Reproduction in whole or in part prohibited without the prior consent
of the Company. All maps are copyrighted by Control Risks Group Limited and Collins Bartholomew 2009.
RiskMap: 2010
Introduction 1
Risk and the recovery 3
Background: Not a normal recession 3
Sovereign debt 5
Jobs and bread 7
Protectionism 9
Lingering external risks 10
Key issues for investors 11
Leadership transitions: Family fortunes 12
Through a glass, darkly 12
Potential tinderboxes: Algeria, Cameroon, Iran, Yemen, Zimbabwe 14
Elite power struggles: Angola, Equatorial Guinea, Libya, Tunisia, Uzbekistan 15
Continuity and change: Egypt and Burma versus Cuba and North Korea 16
Moving towards mitigation 17
Mapping the new terrain of global Islamist terrorism 18
What is al-Qaida now? 18
Al-Qaida under pressure 18
Outsourcing and localisation 19
Implications and mitigation 21
International anti-corruption laws: are they really working? If so, how? 24
Enforcement from the US… 24
…and the rest 25
Developing and transition economies: tackling the ‘demand side’? 26
Get me a compliance programme! 28
Dealing with business partners 28
Just say ‘no’, from a safe distance? 29
The way forward: moving beyond compliance to real engagement 30
China’s latest, greatest leap – out into the world 31
Going out 31
Seeking stable supply 33
Pursuit of profit, or ‘grand strategy’? 33
Not all plain sailing 34
Testing the limits 35
Eyes on Asia 35
Money talks 36
Regional overviews 37
Africa 37
Americas 40
Asia 44
Europe and the CIS 47
Middle East and North Africa 50
Risk rating forecasts for 2010 54
Risk rating definitions 54
 Introduction

2010 will be a year of uncertain transition for business. The causes of the global recession are
now well understood. The contours of the economic recovery, by contrast, are far from clear, and
are likely to vary widely by country and region in developed and emerging markets alike.

Although G20 members have not challenged the fundamentals of free trade and the movement
of goods, labour and capital, the return to growth will be partial and protracted, and over-dependent
on governmental stimulus measures, which may not last indefinitely. Our lead article pinpoints
how a structural rise in unemployment will represent a key macro-political and security risk in
2010, even in states such as China, where growth has remained relatively solid. Insecure
governments may target business, particularly foreign investors, to cover the unemployment lag
through official pressure to assist state-owned partners or to keep uneconomic production lines
open. Companies will need to ensure that their political intelligence is second to none to anticipate
any potentially unwelcome trends.

Effective planning and security management more essential than ever

Other emerging risks are slow-burning. The possible departure from office of ageing leaders in
authoritarian states can be among the more difficult to navigate. Certain regions may face multiple
leadership transitions in 2010. Where there is no clear precedent for succession, or where
institutional frameworks are underdeveloped or contested, businesses may suffer collateral damage
in the competition for influence between elite factions. In such cases, there is no substitute for
thorough preparation. Investors must ensure that they map out relations between key players
before any succession struggle and, most importantly, receive constantly updated analysis to
avoid being caught cold when the music stops. Where a tradition of civil protests or military
intervention further complicates the landscape, business should incorporate a hard security
dimension to its scenario planning.

Effective security management is also central to mitigating the threat from terrorism. In this year’s
RiskMap, we analyse how evolving recruitment, organisational and financing patterns in jihadi
networks are changing threat location and target selection. As the direction provided by al-Qaida’s
central leadership becomes increasingly confined to propaganda, and its sanctuaries potentially
diminish, we argue that the growth of home-grown networks poses a new form of threat to business,
requiring a recalibration of counter-terrorism policy and security management.

Evolving policy frameworks

Policy developments will also be at the heart of transitions in the business regulatory environment.
It remains unclear whether a substantive agreement can be reached at the December 2009 UN
Framework Convention on Climate Change summit in Copenhagen. Assuming an 11th-hour
compromise is stitched together, enforcement of tighter environmental regulations will fall to
national governments, which may then use them as part of separate resource nationalist agendas
to target foreign investors.

Meanwhile, there will be developments in anti-corruption legislation, with the centrepiece in 2010
likely to be the passage of the British government’s anti-bribery bill. Although tighter legislation
and better enforcement is critical to reducing corruption, we argue that formal compliance is
insufficient to mitigate risks generated by local business partners, commercial agents and
consultants working with customs agencies. Businesses will need to strengthen their integrity
programmes to raise professional standards and ensure that there is a culture of honest business,
rather than simple adherence to often imperfectly enforced laws.

Meanwhile, China will continue its game-changing rise. Although still a modest foreign investor in
terms of volume, the scale of Chinese ambition is necessitating its adoption of a more sophisticated
and nuanced foreign policy to match its growing commercial reach. The Chinese business offer –
based on personal ties, inter-governmental agreements and respect for national sovereignty –
will also need to evolve to accommodate growing diversification beyond the extractive sectors,
and the requirement to adopt a more granular business approach to secure maturing infrastructure
projects on the ground.

RISKMAP 2010 PAGE 1

 Global recovery de-sychronised

While continuing demand in China and its regional ambitions have propped up the prices of
major industrial commodities, vital to the stability of many emerging markets, our regional
overviews underline the de-synchronisation of the global recovery. Latin America has confounded
many sceptics with its political and economic resilience. Political institutions have proven to be
more firmly moored than was thought, and there has been no substantial lurch to populism as
many feared. However, while ‘hard’ political risks may be less acute, graft, crime and the tradition
of labour activism present enduring project-specific risks in many sectors.

Despite its embedded deficiencies of security, governance and infrastructure, Africa has also
proven to be less negatively affected by the recession than was forecast. Nevertheless, key
investment destinations face moments of truth in 2010: the truce agreed between the Nigerian
government and Niger delta militants will shape the trajectory of the domestic oil sector; the
states of the Great Lakes region are on the cusp of creating a zone of regional economic co-operation
out of a security nightmare; and South Africa’s hosting of the football World Cup is an opportunity
to showcase the continent’s potential.

Much of the Middle East and North Africa was also shielded from the worst effects of the recession.
Here economic stability will, in many cases, continue to be bound up with movements in global
oil prices, with the prospects of a comprehensive breakthrough over Israel/Palestine still remote.
The odds are still stacked against Iran reaching an accommodation with the international community
over its nuclear ambitions, but those odds shortened somewhat in 2009 as the US administration’s
policy of blending pressure and incentives became more refined. Crucially, key international players,
particularly Germany and Russia, may be more willing to come into alignment, though China’s
long-term Iran strategy remains opaque. Moreover, the Iranian regime is a past master at delay
and obfuscation, partially reflecting disagreements inside the system. However, were a deal to be
struck, Iran would undoubtedly represent a truly significant global renewal opportunity for international
oil companies, with a domestic market of huge potential.

A multitude of political, security and operational risks converge in Asia. The Afghanistan-Pakistan
border region will remain central not only to the region’s security, but to global counter-terrorism
initiatives. A successful military offensive in Pakistan’s tribal regions is still unlikely to shift the
government’s calculus on the need for strategic depth, even with the elimination or decanting of
foreign terrorist elements.

China aside, many of the region’s economies rebounded well from the crisis, though the new
Japanese administration faces a particularly tough challenge in re-gearing the economy into
recovery. The stable political transitions in India and Japan in 2009 will stand in stark contrast to
those in the Philippines, Sri Lanka and, possibly, North Korea, all of which could become turbulent,
albeit for widely differing reasons. Meanwhile, with its new-found political stability, vast domestic
market and natural resource endowment, Indonesia is the Asian player to watch in 2010.

In Europe, political discourse has centred on the role of the state after the crisis. Paradoxically,
the traditionally interventionist Russian state will look to divest itself of non-strategic assets, creating
new opportunities for investors with higher risk appetites, while in Western Europe even those
governments moving solidly into growth may grudgingly continue to shoulder distressed assets
on sovereign balance sheets.

Therein lies the complexity of the post-crisis business environment: the variable rate and shape
of the unfolding recovery presents diverse challenges to businesses. Confronted by tightening
regulatory regimes, unsettled social environments, weak governance and changing security
threats, it has never been more vital for investors to get a grip on political, security and operational
risk. Time and again history has proven that political instability comes not at the depths of the
economic cycle, but during the initial upswing, when political and economic expectations are not
met by reality.

Michael Denison, Research Director

London, November 2009

PAGE 2 RISKMAP 2010

 Risk and the recovery

After a year consumed with avoiding a ‘second Great Depression’, the post-crisis outlook seems
rather anti-climactic. Capitalism remains intact, and major developed and emerging economies
still embrace globalisation, free trade and foreign investment. The world is preoccupied with
long-standing threats like nuclear proliferation, transnational terrorism and pandemics. As we
anticipated, the financial crisis did not implode economies, topple governments and foment
social unrest. Glimmers of positive growth are on the horizon.

But don’t count your chickens just yet: the economic, political and security consequences of the
recession are still developing. As we shift from weathering the crisis to restructuring and rebuilding,
underlying changes in the business environment will surface. Opportunities will undoubtedly
emerge as governments strive to attract foreign investment, nurture new industries and streamline
inefficient enterprises. But changing risks, from new regulatory requirements to underlying
changes in social stability, will continue to pose strategic and operational challenges for business.

Climbing out of the so-called Great Recession will not be easy. Global trade and investment are
anaemic, core financial institutions remain fragile, and unemployment and poverty will continue to
rise in 2010. Growth still relies heavily on government intervention, putting politics at the heart of
any recovery. As fiscal and monetary pressures continue to mount next year, so too will social
and political trade-offs that could increase the risks of default, unrest and political instability.
Furthermore, the sheer interconnectedness of the global economy, acutely demonstrated by the
financial crisis, means that no country can simply ‘go it alone’. Even as emerging markets look
poised to rebound rapidly, weak demand in the US and Europe will undermine traditional
commodity and manufacturing export sectors, as well as vital remittance flows. The robust
international co-operation forged during the crisis could also come under strain from protectionism
and efforts to rebalance the global economy. Finally, economies will remain vulnerable to any
other potential blow – whether financial crisis, natural disaster, oil-price shock, military conflict or
major terrorist attack. Despite the economic trauma, however, the world remains open for business.

Global exports and FDI, 2007-09 ($bn)

5,000 1,000

4,000 800

Global exports
3,000 600

2,000 400

Global FDI

1,000 200

0 0
2007 Q1 2008 Q1 2009 Q1

Source: WTO, UNCTAD

Background: Not a normal recession

Recessions – contractions in economic activity – can be produced by several kinds of economic

shock. The oil crises of the 1970s, for instance, caused particularly sharp downturns worldwide,
while emerging markets (and the UK) were the main victims of debt and currency crises in the
1980s and 1990s. Even geopolitical events contribute to recessions: the September 2001 terrorist
attacks exacerbated the collapse of the dotcom bubble in 2001. The most serious recessions and

RISKMAP 2010 PAGE 3

 weakest recoveries, however, tend to follow banking and financial crises, while synchronised
recessions are on average even longer and more severe. Financial crises combined with synchronous
recessions, not surprisingly, have the worst track record. As record declines in output, trade, asset
values and investment over the last year attest, this recession is no exception: it is being felt
more widely and more deeply than any in the last 80 years.

Postwar global recessions in perspective

Output Production Consumption Investment

-1
Annual % change

-2

-3

-4

-5

-6

-7
1975 1982 1991 2009

Source: Kose et al, Finance and Development, 2009

The financial crisis that sparked off the recession marked a convergence of global trends. One is
a sizeable shift in global output from wealthy countries to developing countries. G7 countries
produced more than two-thirds of world GDP in the 1980s and 1990s, but today produce around
half. The underlying reason is that growth rates for developed and developing countries – though
still correlated – diverged widely in the last decade as emerging markets took off. China and
India alone more than doubled their share of world GDP. Concurrently, globalisation has knit
nearly all economies more tightly together, allowing a consumer debt crisis in the US mortgage
market to infect banking in Europe, collapse trade in Asia and Latin America, and sink commodity
exports from Africa and the Middle East. Finally, the recession was spurred on by an unprecedented
peak in oil prices. Unlike previous oil crises created by geopolitics, the 2008 spike largely reflected
demand outstripping supply – itself a consequence of rapid emerging-market growth.

The crisis was unique for another important reason: the size, speed and international co-ordination
of government interventions. Massive monetary injections and co-ordinated interest-rate cuts are
credited with preventing a banking implosion in core economies and keeping credit channels at
least partly open. Many countries – notably the US and UK – also guaranteed bank assets and
even purchased toxic securities, taking private risk on to the sovereign balance sheet. Dramatic
increases in IMF and development bank financing helped to stabilise economies on the brink of
collapse, especially in Central and Eastern Europe. G20 commitments to free trade largely
deflected knee-jerk protectionism. Many governments also expanded social safety nets and
launched economic stimulus measures (totalling around $2 trillion globally), shoring up domestic
demand, bolstering key industries and taking over as the economic engine.

PAGE 4 RISKMAP 2010

G20 discretionary fiscal stimlus spending, 2008-10

4.5
2008 2009 2010
4

3.5

3 2

2.5
% of GDP

1.5

0.5

-0.5
BRA

FRA

ITA
IDN

SAF

US
AUS

CAN

CHN

GER

IND

JPN

RUS

SAU

TUR

UK
ARG

KOR

MEX

-1

Source: IMF

Sovereign debt

Having rescued the global economy, governments are now at its mercy. Spending rose dramatically to
confront the crisis even as tax receipts fell sharply on declining trade, commodity prices, household
incomes and corporate profits. To meet financing needs, local and national governments borrowed
heavily, both at home and abroad. Others drained reserves and sovereign wealth funds. Debt levels
soared. Given a strong recovery, governments could safely withdraw stimulus spending and begin to
restore fiscal balance. During a weak recovery, however, governments will be unwilling to cut spending
for fear of slowing growth or fomenting social unrest. Neither will many find it easy to boost exports or
borrow abroad to meet short-term financing needs. A weak recovery, therefore, compounds the risk of
a sovereign default, restructuring or revaluation – and not just for the usual suspects.

Number of debt crises, currency crises and preceding bank crises

24

22 Bank
20
Debt
1975 1982 1991
18
Currency
16
Global recession
14

12
10

0
1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007

Source: US Energy Information Administration (EIA)

RISKMAP 2010 PAGE 5

 The debt overhang is worst in developed countries. Debt rose more during the recession than at
any time since the Second World War, now exceeding GDP by 15%. The US anticipates a $3
trillion combined budget deficit for 2009-10, about half stemming from increased spending on
social programmes, a $787bn stimulus package and cash injections into the financial system.
Europe ramped up spending by about €400bn, with 20 member states set to breach the EU’s 3%
statutory cap on budget deficits. The EC raised particular concern about the UK’s deficit, which
more than doubled during the crisis. Nonetheless, the US, UK and other large European
economies can still borrow abroad and have relatively good track records of fiscal management.
Deficit reduction remains a medium-term concern, but one that depends substantially on the
progress of efforts to ‘rebalance’ the global economy.

More pressing are hard-hit emerging economies in Eastern Europe, Central Asia and Latin
America, many of which were bailed out by the EU, IMF and World Bank after capital inflows
dried up. In some of these countries, financing went to support social programmes and state
pensions. This creates a basic problem: countries are expected to cut deficits as part of a loan
agreement, but this often collides with domestic political and economic priorities. For example,
trade unions and opposition parties in Ukraine rallied against IMF-recommended cuts in
public-sector wages. As a result, deficit-reduction plans will not be articulated until after the
2010 elections. As well as political hurdles to cutting spending, emerging economies face
problems raising external finance, with massive sovereign-debt issues from the G7 ‘crowding
out’ small economies from international bond markets. For many emerging markets, debt
servicing will prove increasingly difficult, but cutting spending poses the alternative risk of
stoking social unrest and degrading public services, both of which would worsen the operating
environment for business.

Reversing a multi-year trend of debt reduction, several low-income countries in sub-Saharan

Africa are at increased risk of debt distress in the short term. Many will require expanded support
from the IMF and development banks, and some further debt relief. While large emerging markets
such as China, Saudi Arabia and South Africa spent around 50% of crisis funding on long-term
infrastructure investment, poor developing countries tend to devote resources to immediate
needs – wages, subsidies, tax cuts and cash transfers. This reflects both limited capacity to
manage large public investments and prioritisation of social safety nets as a hedge against
extreme poverty, food insecurity and unrest. A weak recovery is a particular problem for commodity
exporters and other single-sector economies, which went rapidly from significant surplus to
severe deficit with the collapse in tourism and oil and metals prices. As a result, many low-income
countries – or those with high poverty rates – will face problems with fiscal and political stability.

While the market for credit default swaps (CDS) halved during the financial crisis to $30 trillion,
the world’s largest derivatives clearing house, Depository Trust and Clearing Corporation (DTCC),
still records around $1.5 trillion in outstanding insurance against government default. Even a minor
debt crisis could force payment on a portion of these contracts, undermining the apparently
‘healthy’ firms that underwrite them and prompting another round of government intervention
and borrowing: a sovereign default in even a small economy could easily transmit instability to
the heart of global finance.

PAGE 6 RISKMAP 2010

G7 fiscal balances

2008 2009 2010

US Germany France Italy Japan UK Canada

0

-2

-4
% of GDP

-6

-8

-10

-12

-14

Source: IMF

Jobs and bread

Unemployment exploded during the recession. The OECD reported 15m lost jobs between late
2007 and mid-2009, nearly half in the US. Emerging markets also suffered: employment growth
in China fell by 60% from 2007-08, while unemployment leapt more than 80% in Russia, 50% in
Turkey and 20% in Ukraine. Significant age and gender gaps in unemployment also emerged, with
men disproportionately affected by declining construction activity and women hit by falling textile
exports. Even with a strong recovery, it could take more than three years before the employment
gap returns to its pre-crisis trend, according to the International Labour Organisation (ILO).

A weak recovery will clearly not create enough jobs to absorb all those looking for work. Many
companies were forced to consolidate, close or relocate. Manufacturing and export-orientated
industries were hit especially hard as global trade collapsed. Indeed, many workers in developing
and emerging countries were forced back into informal, unwaged labour. Furthermore, structural
changes in consumption are underway in the US and Europe: savings rates jumped dramatically
as households pared back spending and focused on paying off debt, suggesting a hangover for
export-dependent economies. Construction bubbles fuelled by easy credit have burst from Spain to
Dubai, depressing demand for steel, cement and other basic goods. Put starkly, many jobs will not
come back in the wake of the recession, and the private sector will be unable to drive job creation
in a weak recovery. Unemployment is set to rise further in 2010, and could remain high for several
years as economies recalibrate.

RISKMAP 2010 PAGE 7

 Unemployment increases by region, 2007-09

30% East Asia

25%
Developed economies
and EU
20%

15% Latin America and Caribbean

South-east Asia
10%
Europe (non-EU)
and CIS
South Asia
5%
Sub-Saharan Africa
North Africa
0%
Middle East
2007 2008 2009
-5%

Source: ILO

With governments under intense fiscal pressure, the politics of public spending have become largely
about employment. Worldwide, public spending funded a range of job-creation and job-protection
programmes. Many will continue to pay dividends in 2010, especially multi-year infrastructure projects,
small-business subsidies, job training and direct public-sector employment. Others, such as
unemployment benefits and tax rebates, have a shorter lifespan; without more funding, these
programmes will begin to expire in late 2009-early 2010. Combined with rising unemployment,
funding shortages or the expiry of some employment and welfare programmes could create risks
for business.

The crisis provided a taste of these: in the most extreme examples, managers were held ‘hostage’
by workers slated for redundancy, while employees protested over the shuttering of factories.
Companies had to invest in executive protection and business continuity planning to safely wind
down unprofitable investments. In certain instances, host governments pressured companies to
keep operating, freeze lay-offs and help to bail out state-owned partners. Similar security and
operational issues could emerge as unemployment lags behind the recovery. In particular, organised
labour movements could increasingly exert influence over the political process, while anti-immigrant
or anti-migrant sentiment – already raw in many places – could intensify amid competition for
scarce employment.

A second area of concern for business will be state intervention in the labour market and its impact
on social and political stability. On one hand, governments are likely to face strikes and demonstrations
from public-sector employees as they defer wage increases. On the other, showdowns over
cutbacks at state-owned enterprises could drag private investors into domestic politics. This is the
case both where governments pressure foreign investors to support inefficient operations, as with
Russia’s AvtoVAZ carmaker, and where governments-as-shareholders dictate operational parameters,
as in the US or British banking sectors. Nonetheless, opportunities are likely to emerge from
government intervention: developed countries will eventually look to extricate themselves from
managing private companies, while privatisation may end the fiscal burden of supporting
state-owned enterprises.

Finally, unemployment and other livelihood issues will continue to present security and operational
risks in 2010. For developing countries, the unemployment shock has sharply reduced remittance
flows and forced more workers to rely on low-paid jobs in the informal economy. According to the
World Bank and UN, the recession drove around 100m people worldwide below the $2/day poverty

PAGE 8 RISKMAP 2010

threshold, making a similar number food insecure. Ominously, food prices remain well above long-term
averages and oil prices could rise further in 2010 as the recovery takes off, implying greater social
vulnerability. However, the increase in global spare capacity, especially through new supply addi-
tions in Saudi Arabia, and accumulation of stocks should cushion against price spikes in 2010. As in
the past, rising commodity prices and diminished welfare will put extractive companies under the
spotlight, both by international NGOs and local communities. Petty crime, worksite theft and opera-
tional disruption could increase during the recovery, requiring solid security management and sus-
tained and direct engagement between companies and local stakeholders.

Oil supply, demand and spare capacity, 2004-10

World oil demand growth (% change year on year) World oil supply growth (% change year on year)

OECD commercial stock growth (% change year on year) OPEC surplus capacity (% global supply)

Forecasts
2
%

-2

-4

-6
2004 2005 2006 2007 2008 2009 2010

Source: US EIA

Protectionism

Global trade collapsed in 2009 in the greatest contraction since the Second World War. Export-orientated
emerging economies – encompassing much of Asia – were hit particularly hard, seeing 25%-40%
year-on-year declines in export volumes. So too were countries that depend on global supply
chains, such as Egypt (Suez tolls) and Singapore (container trans-shipment). Despite early signs
of a recovery by mid-2009, countries will find it difficult to export their way out of the recession.
Credit conditions – though improved in 2009 – are worse than before the crisis and international
traders remain risk averse, often demanding cash in advance and higher margins. Moreover,
there are concerns that rising unemployment could generate irresistible pressures for protectionism.

So far, fear has greatly outstripped reality. One broad reason for restraint is that the WTO provided
a stable, durable framework for trade liberalisation. Nearly every major trading economy is bound
by the organisation and – crucially – its method of resolving trade disputes is supported and used
by key emerging markets such as China and Brazil. The G20 agreed in November 2008 to refrain
from protectionism and reiterated this commitment throughout 2009. The group also lubricated the
global economy with more than $250bn of trade finance to overcome adverse credit conditions.
Both measures showed that general commitment to free trade is increasingly entrenched at the
highest levels of global policy-making.

RISKMAP 2010 PAGE 9

 However, the consensus on free trade depends on the speed and strength of the recovery. Protectionism
is clearly creeping into trade policy worldwide. The trade monitor Global Trade Alert found nearly
200 policies implemented since late 2008 that favoured domestic companies over foreign investors
– almost two-thirds in the G20 – and uncovered others in the pipeline. Indeed, G20 members often
hit each other with discriminatory trade policies, with China, the US, Japan and the EU being most
targeted. Protectionist manoeuvres are more subtle than in the past: instead of simply hiking import
tariffs, countries launch anti-dumping investigations against trade partners, provide export subsidies
to domestic firms, put local content requirements on stimulus spending, and raise bureaucratic
obstacles to trade licences. As the WTO notes, narrow-minded protectionism risks undermining the
broad agenda to rebuild and rebalance global demand, which is central to recovery prospects.

Unsurprisingly, many trade actions cater to specific domestic constituencies: exporters in China, steel
workers in the US, farmers in India and so on. The crisis and recession provided a perfect opportunity
for powerful interests to push for protection. As the recovery unfolds – and stimulus spending runs out –
further protectionism could be viewed as increasingly cost-effective and politically expedient. Although
major trading countries will strive to avoid a debilitating trade war, tensions could fracture the co-operation
that characterised the response to the crisis and undermine the global policy agenda. On climate
change, for example, the US and European countries are strongly considering a form of carbon tax on
imports from emerging and developing countries. Similarly, should ‘temporary’ crisis protectionism become
more entrenched, it could change the playing field for the Doha development round of WTO negotiations.

Lingering external risks

As the weakness of 2008’s Indian monsoon season and the ensuing famine threat demonstrate,
climate change is starting to have a real and significant impact on government finances and economic
growth. Developing countries, in particular, are more vulnerable to climate change. According to the
World Bank, climate change mitigation and adaptation costs for developing countries could reach
$500bn or more annually over the next 20 years. Wealthy countries are expected to chip in, but
funding commitments to date are less than 5% of projected needs. There will also be costs to the
private sector: financial liabilities associated with carbon output, higher project costs to cope with
more extreme weather and sea levels, and operational impacts stemming from water scarcity,
social unrest and migration. Natural disasters – especially droughts and floods – can also derail
recovery prospects, especially at the local level. Typhoons that hit the Philippines in mid-to-late
2009 caused significant property, infrastructure and crop damage, forcing the government to
unexpectedly increase rice imports and leaving small businesses to absorb huge losses.

A major security incident – geopolitical or local – could similarly inhibit the recovery. As we note elsewhere,
terrorism is becoming more localised, and building on insurgencies and other conflict dynamics. Just
when countries are most in need of foreign investment, a major security incident such as a terrorist
attack could undermine the investment climate. Simultaneously, the potential remains for a major
geopolitical threat to materialise. The most visible candidate is a military confrontation with Iran, which
would have profound impacts on global oil markets, regional stability and investment in the Middle East.

Financial regulation
One major outcome of government intervention is serious efforts to reform global finance. A
handful of economic zones dominate this arena: the US, UK and eurozone currently account
for more than two-thirds of international capital flows. Add in China and Japan, and the
so-called ‘systemic five’ represents around 80% of global money supply. Nonetheless,
reform affects everyone, from tax havens in the Caribbean and Europe to new financial
centres and bank subsidiaries in the Middle East and Asia. Geo-politicisation of the issue
was inevitable: the US browbeat Switzerland with a threat of sanctions to force revisions
to its tax laws, while the UK and US fought France and Germany over banking bonuses
and systemic risk surveillance. China, India and other G20 emerging markets hinged their
support for financial reform on greater say in global governance institutions, particularly the IMF
and World Bank. Emerging markets and developing countries, however, may yet decide that
the safest course of action is to focus on domestic finance and reduce exposure to foreign
capital. Even with broad consensus on the need for reform, disputes indicate that the
co-operation that characterised the initial response will fray as national interests take over.

PAGE 10 RISKMAP 2010

Key issues for investors

Advanced, emerging and developing countries will recover in different ways and at different rates.
Flexibility is essential: companies that have conditioned their operations with ethics and compliance
best practice will find it easier to navigate a tightening regulatory environment. Companies that
embed security risk management at every stage of planning and implementation should prove
resilient in the face of familiar or novel threats. Companies that recognise the reputational, financial
and operational benefits of social and environmental accountability can thrive in a business
environment recalibrated by climate change. If history is any guide, recovery is a long-term
process during which business-as-usual is re-evaluated. Those companies out in front in identifying
and responding to changes in the risk environment will be best positioned to seize opportunities
in the budding economic order.

Businesses can manage each of the risks posed by the recovery process. As new legislation is
enacted and existing regulations tightened, financial companies are likely to face new disclosure
and compliance requirements, greater public scrutiny and possibly higher transaction costs.
Increased emphasis on regulatory compliance will reward those companies with comprehensive
risk management and disclosure structures already in place. Companies should also not lose
track of corporate social responsibility trends, especially increased prosecution of fraud and
corruption, emphasis on stakeholder engagement and scrutiny of environmental impact.

In addition, companies must account for the progress of pre-crisis reforms in countries where they operate,
and whether or not these have been derailed by the recession. In some cases, regulations or legislation
that might improve the business climate have stalled in the face of more pressing policies or political
reconfiguration. In others, countries will court much-needed investment with more business-friendly policies.
Finally, many aspects of country risk will not be dramatically affected by the crisis and recession.
Underlying political, security, social and environmental issues will persist, and could even intensify during
the recovery.

Jonathan Wood, Global Issues Analyst

RISKMAP 2010 PAGE 11

 Leadership transitions: Family fortunes

In June 2009, after more than 42 years as president of oil-rich Gabon, Omar Bongo died in a
Spanish clinic. Rumours, denials and confusion surrounded his illness and death, and similar
uncertainty clouded his country’s future after many years of stability. Investors and observers
feared the worst: the collapse of Bongo’s carefully balanced coalition of elites; the eruption of
long-suppressed resentment over mismanaged oil wealth; or even civil war and military intervention.
But despite violent protests, Bongo’s son Ali Ben secured power in presidential elections in
August and in October appointed a cabinet with many familiar faces from his father’s regime.

The case raises wider questions about leadership transitions in authoritarian regimes – particularly
where power is concentrated in the hands of long-standing and ageing rulers, and where the
business environment is highly personalised and politicised. Successions in such states have real
significance for investors. They bring a possibility of social unrest, political crisis, contractual and
regulatory uncertainty, a sudden loss of influence and being dragged into inter-elite posturing. Here,
we look at the different ways that looming successions will play out in 14 countries, their potential
implications for business and possible measures to mitigate the risks, focusing on the impact of
factors such as potential for popular mobilisation, the ruling elite’s level of coherence and involvement
in business, preparations for a smooth succession and the influence of external powers.

Through a glass, darkly

While the workings of such regimes tend to be opaque, the lack of visibility thickens when it
comes to succession. Uncertainty shrouds not only the identity of possible successors, but even
the institutional framework governing the transition. Only in Egypt and Burma are the identity of
the successor and the manner in which they will take power almost certain. In general, there are
three reasons for this:

• No precedent: Many of the incumbents arrived in power years ago. Eisenhower was in the
White House when Fidel Castro seized office, Jimmy Carter when Eduardo José dos Santos
assumed the presidency in Angola. Having taken power through military or palace coups, they
founded their own regime and abrogated the previous order. With leaders in no hurry to leave
office, no predictable framework for succession has evolved, let alone a constitutional formula with
a realistic chance of being respected.

• No rules: The political context has often changed enormously since the incumbent took office.
Abdelaziz Bouteflika won Algeria’s presidency with military backing during a civil war against
Islamist insurgents. Islam Karimov was appointed president of Uzbekistan by the Communist
Party of the Soviet Union in 1990, maintaining power through a questionable election after
declaring independence in 1991. The format of the next succession will be very different.

• No obvious successors: In a number of countries – Angola, Cameroon, Cuba, Libya and

Tunisia being good examples – rulers have removed any potential challengers, deterring other
possible candidates from too obviously throwing their hats into the ring.

The uncertainty raises the possibility that the sudden death of a dominant ruler will allow long-subdued
rivalries to erupt into power struggles. Counter-intuitively, however, it may work in favour of the
establishment. Rulers often maintain suspense to prevent the emergence of organised opposition
to an heir apparent or support for an alternative. The constitutional time span between the leader’s
departure and the installation of his successor – for example through elections that can be easily
manipulated – in most cases is no more than a few weeks, impeding the ability of opposition forces
to mobilise support (as in Gabon). Even where rifts in the ruling elite emerge during the succession
process, key groups will often form alliances to support a common candidate, thereby safeguarding
their interests.

PAGE 12 RISKMAP 2010

 Transition scenarios in authoritarian states

Algeria Tunisia Libya Uzbekistan

RISKMAP 2010
Incumbent: Abdelaziz Bouteflika, 72 Incumbent: Zine el-Abidine Ben Ali, 73 Incumbent: Muammar al-Gadhafi, 67 Incumbent: Islam Karimov, 71
Next elections: 2014
Time in power: 22 years Time in power: 40 years Time in power: 19 years
Time in power: 10 years
Next elections: 2014 Next elections: - Next elections: 2014
Potential successor: Not yet clear; younger Potential successor: No obvious ones yet Potential successor: No obvious ones yet – possible Potential successor: No obvious ones yet;
brother Said Bouteflika rumoured to have ambitions candidates include Gadhafi’s second and fourth sons speculation about Karimov’s elder daughter Gulnara
Saif al-Islam and Muatasim
Cameroon
North Korea
Incumbent: Paul Biya, 76
Incumbent: Kim Jong-il, 68
Time in power: 27 years
Time in power: 15 years
Next elections: 2011 (Biya may stand again)
Next elections: -
Potential successor: No obvious candidates
Potential successor: Youngest son Kim Jong-un
Cuba
Incumbent: Officially, Raúl Castro, 78, but Burma
Fidel Castro, 83, continues to exert significant
influence Incumbent: General Than Shwe, 76

Time in power: 1 year (Raúl); 49 years (Fidel) Time in power: 17 years

Next elections: - Next elections: No date set

Potential successor: No obvious candidates Potential successor: General Thura Shwe Mann, 62

Equatorial Guinea Iran

Incumbent: Teodoro Obiang Nguema Mbasogo, 67
Time in power: 30 years
Next elections: 2010 (Obiang likely to stand)
Potential successor: Teodorin and Gabriel
Obiang, the president’s eldest sons from his
first and second marriages respectively
Angola
Incumbent: José Eduardo dos Santos, 67
Time in power: 30 years
Next elections: Repeatedly delayed;
no date set
Potential successor: Several possible,
including Sonangol president Manuel Vicente
Incumbent: Aytatollah Ali Khamenei, 70
Time in power: 20 years
KEY
Managed succession:‘rules Succession contested Succession contested
of the game’ understood at elite level at elite and popular level Next elections: Successor to be appointed following
Khamenei’s death
Potential successor: No obvious ones yet –
Khamenei rumoured to be grooming his son Mojtaba
Zimbabwe
Incumbent: Robert Mugabe, 85 – in power-sharing Egypt Yemen
agreement with Prime Minister Morgan Tsvangirai since
February 2009 Incumbent: Hosni Mubarak, 81 Incumbent: Ali Abdullah Saleh, 67
Time in power: 29 years Time in power: 28 years Time in power: 31 years
Next elections: Elections to be held by September Next elections: 2011 Next elections: 2013 – unclear whether Saleh will stand
2010, though they could be delayed Potential successor: Mubarak’s son Gamal (likely Potential successor: No obvious ones yet – eldest son
Potential successor: No obvious ones yet – to be elected in 2011) Ahmed Ali Saleh is often named as
though rival Tsvangirai will be a leading contender a likely option, though there are others

Source: Control Risks

PAGE 13
 Potential tinderboxes: Algeria, Cameroon, Iran, Yemen, Zimbabwe

Leadership transitions in these five countries are likely to spark off, or provide a focal point for,
power struggles that go beyond the elite and bring broader popular mobilisation. All share track
records of mass mobilisation and anti-regime agitation, as well as deep rifts within the political
elite, though degrees of stability vary significantly. In Algeria and Cameroon, tightly controlled politics
continue to suppress social tensions. In contrast, the transition is already under way in Iran and
Zimbabwe, and elite groups are engaged in open power struggles. In the latter, the installation of
a transition government under external pressure has been part and parcel of a protracted
succession process as President Robert Mugabe’s grip on power is slowly prised loose. In
Yemen, the state is in an advanced process of disintegration, and the transition will provide a
focal point for vigorous fissiparous tendencies.

In all these countries, the power struggles will be about more than Machiavellian ambition: they
will be about the nature of the state. In Algeria, Iran and Zimbabwe, this involves fundamental
questions about the ideological basis of state power, the role of the security establishment and
the extent of democratic participation in politics. In Cameroon and Yemen, it is about the balance
of power between the state and tribal, ethnic or regional elites; the issues at stake range from the
influence of ethnic communities over the central government in Cameroon, to the possibility of
southern secession and the outright defiance of state power in Yemen’s restive northern provinces.

Up in flames?

In Algeria, Iran and Zimbabwe, we anticipate protracted power struggles between the main elite
groups and political forces. These are likely to result in a prolonged period of unstable governments
or a weakening of decision-making authority. In all three, these struggles have the potential to
trigger sustained, widespread protests. Broader popular mobilisation is also likely in Cameroon,
which, like Algeria and Iran, has a legacy of turbulent street politics.

Cameroon and, particularly, Yemen have the greatest potential for such unrest to turn violent.
In both, succession struggles will be defined in tribal, ethnic or regional terms, and will take
place in a context where small arms are widespread. In a worst-case scenario for Yemen, violent
unrest could lead to an attempted southern secession and permanent loss of control over some
northern provinces.

The role of the military and security establishments will be crucial. Violent unrest will force them
to take an active – even heavy-handed – role in power struggles, and may even trigger open
intervention to save the status quo. But neither the incumbents nor their favoured successors can
afford to take the loyalty of the security apparatus for granted. This is particularly true if successors
attract widespread popular opposition, or if their imposition would threaten the republican order,
as could be the case with Bouteflika’s brother Said in Algeria and Ayatollah Ali Khamenei’s son
Mojtaba in Iran.

Not business as usual

The consequences for businesses operating in these countries extend far beyond the practical
impact of prolonged unrest on security and operational continuity. Struggles over the nature of
the state have the greatest potential to result in wholesale revision of the regulatory and fiscal
framework for foreign investment. Weakened government authority and volatile policy-making
would erode investor confidence and contractual security.

In their extreme form, power struggles can provoke the profound and drawn-out institutional
paralysis seen in Zimbabwe, leaving investors mired in uncertainty and giving free rein to the
predatory behaviour of corrupt officials. The tug-of-war between reformist and hardline forces in
Iran and Zimbabwe has direct consequences for foreign relations and openness to foreign
investment. A hardline victory in Iran would increase the likelihood of persistent and additional
sanctions, while in Zimbabwe it would imply the continuation of predatory practices that have
deterred investors.

PAGE 14 RISKMAP 2010

Meanwhile, a military coup is generally pretty much a guarantee of international isolation, and
brings with it a high risk of contract cancellations or renegotiations, as investors in Guinea have
recently experienced. Regionalist movements – most likely in Yemen – could contest investors’
rights, or hamper their ability to operate in certain areas. Repression or military coups can also
increase companies’ exposure to potential reputational damage.

Elite power struggles: Angola, Equatorial Guinea, Libya, Tunisia, Uzbekistan

Where the ruling elite is relatively cohesive and threats to the regime from popular mobilisation or
foreign power are insignificant or kept in check, successions are less likely to unleash widespread
or protracted unrest. However, this does not preclude fierce elite competition to influence the outcome.

Succession struggles in check

In countries where long-ruling incumbents preside over growing political and economic inequalities,
succession can be a trigger for latent discontent to pour out on to the streets. But as the
Gabonese succession highlights, unfocused anger can quickly burn itself out without organised
channels for expression (such as coherent opposition parties, civil-society movements or churches).
In each of these countries, such popular organisations do not exist – or have been forbidden –
independently of the state. Moreover, elite pretenders to the throne have few incentives to exploit
popular discontent in support of their claims, perhaps aware that this could undermine their
collective ability to monopolise access to state resources.

It is no coincidence that three of these countries – Angola, Equatorial Guinea and Libya – are
petro-states, where oil rents dominate government revenues: there is no need to cultivate popular
legitimacy. A similar case could be made for extractives-dominated Uzbekistan. While Tunisia
may appear an exception, given its more diversified economic base, closer inspection reveals
extensive elite penetration of the private sector, particularly in areas dependent on the central
allocation of operating licences.

Papering over the cracks

Nonetheless, authoritarian ruling elites – however small – are rarely homogenous. They may
unite in the face of external threats, but in the absence of such threats internal splits develop,
based on the way in which the elites were formed. There are examples in each of these regimes:
the contested status of uncles and sons in Equatorial Guinea’s clan-based system; rivalries
between in-laws in Tunisia’s wider ruling family; conflicts among Angola’s old creole families and
with the younger black Angolan elite; splits between sons of very different temperament in Libya;
and regional clan rivalries in Uzbekistan.

The presidents of these regimes are past-masters at effectively managing these divisions, carefully
balancing different groups to prevent any one from becoming too powerful. The ruler’s exit
inevitably raises the spectre that tensions will burst into the open. The continuing succession
process in Gabon attests to this, with the grand ethno-regional coalition so carefully constructed
by Omar Bongo the first casualty of his departure.

Existing battle lines can be redrawn when the succession struggle commences, usually on the
basis of reassessments of the relative strength of potential rivals. Prior to Bongo’s death, the
most significant internal conflict pitted his son Ali against his daughter Pascaline – the heads of
the two most influential ruling-party factions. Early assessments that this conflict would define the
succession proved fanciful when Pascaline threw her weight behind Ali’s bid, presumably conscious
of the need to protect family interests against the threat from rival elites drawn from stronger
ethno-regional groups. This sheds similar doubt on the rivalry in Libya between Saif al-Islam and
Muatasim al-Gadhafi in the event of their father’s sudden death in office. On the other hand, the
bloody family history of Equatorial Guinea’s ruling clan – Obiang overthrew and executed his
uncle – shows that blood ties need not be a deterrent to conflict.

RISKMAP 2010 PAGE 15

 Business in the firing line

While such high-level struggles present a less immediately apparent threat than broader social and
political conflict, inter-elite competition over successions can prove highly destabilising for foreign
investors – particularly where previous elite consensus has been founded on mutual business
interests. Conflicts triggered by the succession process may well play out in the commercial as well
as the political arena. Many businesses have to associate themselves with influential individuals
or factions to succeed under such regimes. As a result, even a minor shift in the centre of gravity
among elite factions can affect access to the political protection essential to operating in such countries.
Having an operating licence or investment linked to the wrong side of the elite can provoke difficulties
ranging from malicious tax investigations to wholesale expropriation.

Continuity and change: Egypt and Burma versus Cuba and North Korea

For every rule, there is of course an exception. In Egypt and Burma, the succession has been
pre-determined to such an extent that its derailment is highly unlikely. In that notorious bastion of
secrecy North Korea, the lack of preparation and level of opacity surrounding the succession is
such that uncertainty is total. The looming Cuban succession lies somewhere in between: change
is certain, but the chances of a stable transition are good.

Control freaks

In both Egypt and Burma, rulers have enthusiastically set about protecting their legacy. Elaborate
constitutional frameworks have been established to predetermine the course of events. To prevent
the emergence of organised opposition to the chosen heir, political adversaries have been sidelined,
allies placed in key positions and the political landscape tightly controlled. And in both countries,
the regime has deliberately avoided relying on an ideological basis for state legitimacy, realising
that the arrival of a new generation of leadership could expose its obsolescence.

As a result, the smooth transition in Burma from Gen Than Shwe to Gen Thura Shwe Mann (most
likely following Than Shwe’s rebranding as a civilian president) is all but certain. Similarly, the transition
from Hosni Mubarak to his son Gamal in Egypt will take place in formally competitive but actually tightly
controlled elections. This also means continuity and further development for the extensive business
interests of oligarchs allied with Gamal and cronies associated with Burma’s Tatmadaw military junta.

However, elite-managed successions have the potential for the most divergent implications for
business. They may offer outward continuity, but they are the only scenario in which the succession
process leaves inherent contradictions of authoritarian and highly personalised regimes largely
unresolved. There are few guarantees that the successor will possess the necessary acumen to
hold the regime together, increasing the likelihood of more fundamental change at a later date.

Keeping it in the family

The case of North Korea illustrates the crucial role of sufficient preparation for a controlled
succession. The 26-year-old Kim Jong-un only emerged in 2009 as Kim Jong-il’s heir apparent – a
development very probably brought forward because of the deterioration in his father’s health.
Moreover, just months after succession planning became apparent, propaganda efforts to glorify
Kim Jong-un within official circles appeared to be suddenly halted, raising further questions about
the situation in Pyongyang.

While his father had more than 20 years to prepare for leadership, Kim Jong-un could find himself in
this situation at a moment’s notice. In a regime of old men with decades of shared military and
leadership experience, and a society that places great emphasis on age and seniority, Kim Jong-un’s
takeover in the current situation could trigger fierce power struggles within the regime, and increase
the chances of its gradual erosion and eventual demise. By contrast, with sufficient leeway to
prepare the ground for Kim Jong-un’s takeover, the regime could yet prove surprisingly resilient.
This is one of the lessons to be learned from the Syrian case, where Bashar al-Asad – who only
emerged as heir apparent after his brother Basil’s death in a car crash in 1994 – would probably
have failed in his bid for the presidency had his father Hafez died in 1995, rather than in 2000,
after key rivals had been sidelined and Bashar’s allies promoted into key positions.

PAGE 16 RISKMAP 2010

North Korea’s international isolation, ailing economy and obsolete ideology are also features of
pre-succession Cuba, though there they are much less pronounced. The lack of visibility in Cuba
is even greater than in North Korea, as the younger generation of party cadres and officers are
still eclipsed by the Castros and their ageing military comrades. But while the North Korean
regime would be unlikely to survive even a cautious opening up of society and the economy, the
Cuban state’s institutional and ideological foundations are strong enough for a transition to a stable
civil-military regime with a more liberal approach to economic management and foreign investment
to be conceivable.

In both cases, however, the influence of foreign powers will be crucial for the ability of successors
to cement their power. The lifting of US sanctions would provide the Castros’ successor with a
significant economic boost, while Kim Jong-Il’s successor will be heavily dependent on China’s
economic and diplomatic support to assert his power.

Moving towards mitigation

Confronted with the uncertainties of an unfolding succession, companies tend to adopt a reactive
approach, dealing directly with the most immediate risks – typically security considerations – and
waiting for the dust to settle before addressing any political concerns. But where leadership
transitions are likely to have direct ramifications for business, as in the cases discussed here,
mitigation strategies should be built into a project at its outset, and implemented throughout its
duration. Such a preventative approach includes a diversified government relations strategy that
avoids overly heavy reliance on individual power-brokers and steers clear of intra-elite cleavages.
Clear anti-corruption policies are also crucial to reduce the risk of punitive actions framed as
anti-corruption measures by the successor (whether justified or not). Buy-in from local communities,
built through good community relations strategies, also helps to reduce the potential impact of
succession or regime change. Finally, advance succession scenario planning is equally vital. It
may not be possible to identify with certainty how a succession process will affect a project’s
security of tenure, but scenario planning will at least identify major potential risks and highlight
areas of greatest vulnerability.

As succession draws nearer, rapid adaptation is often required as companies seek to assess the
contours of the new political landscape and scramble to identify new project champions. Strong
intelligence-driven analysis is a crucial component of this exercise, but by no means a solution.
Where the fortunes of potential candidates for succession are subject to sudden boosts and
reversals, close and constant analysis of dynamics within the elite can provide crucial pointers –
but in most cases, investors are well-advised to hedge their bets and avoid siding overtly with the
perceived frontrunner. Much the same applies to companies’ adaptation to the successor government:
a thorough and constantly updated understanding of developments within the regime – including
the ups and downs of individual players, possible shifts in policies towards investment, and the
influence of foreign powers over the new government – is a crucial basis for a communication
strategy that minimises the negative fallout from the succession, and maximises its benefits.

Christopher Melville, Senior Africa Analyst

Wolfram Lacher, Senior North Africa Analyst

RISKMAP 2010 PAGE 17

 Mapping the new terrain of global Islamist terrorism

Patterns of Islamist extremist activity are changing. The threat presented by the global jihadist (armed
struggle) movement has shifted since September 2001 and will further evolve in 2010 and beyond.
Recruitment, organisational and financing patterns have shifted amid a wider strategic context
characterised by fluid and possibly diminishing terrorist sanctuaries. Reconfigured networks are
arising as al-Qaida leadership’s command and control are disrupted or loosen. This, in turn, is affecting
terrorist capacity to plan, fund and conduct operations, with a resulting impact on the selection of targets.

Counter-terrorism measures are being recalibrated to adapt to this reality, with, for example, a
greater emphasis on domestic preventative measures as more attacks are perpetrated by
‘home-grown’ terrorists. Business also needs to understand these trends if it is to mitigate risk
and apply effective prevention techniques. Here, we chart what is happening on the so-called
‘new frontiers of jihad’. By understanding the changing threat landscape, companies can more
effectively assemble and apply tools and techniques for sound security risk management.

What is al-Qaida now?

Setting aside the threat posed by the myriad of purely regional terrorist groups, whose motivations
derive from very specific ethnic, territorial and religious grievances, our focus is on the global jihadist
movement either supported or inspired by al-Qaida. What al-Qaida currently is continues to be the
subject of intense debate among policy-makers and academics. The most persuasive explanation is
that the hierarchical structure that operated in Sudan and then Afghanistan in the 1990s has been
replaced by a more fluid and amorphous model. This puts the al-Qaida central leadership (‘al-Qaida
Central’), currently sitting in the border regions of Afghanistan and Pakistan, at the core of three
concentric circles. The middle layer consists of a network of activists with growing autonomy, while
a loose and somewhat nebulous social movement of sympathisers lies along the outer edge.

The decline in al-Qaida Central’s ability to fund and direct operations – laid bare in October 2009
by credible reports of a severe cash shortage – and the serious erosion of popular support at the
outer edge in the wider Muslim community have required the middle circle of networked activists
to be increasingly self-recruited, self-directed and self-financed. Despite this fragmentation, jihadi
networks linked to or inspired by al-Qaida are still sustained by a broadly common aim and
programme. This centres on the liberation of Palestine, the removal of Western influence – both
hard security power and ‘soft’ cultural power – from Muslim lands, the creation of a pan-Islamic
caliphate and the imposition of Sharia (Islamic law) as widely as possible.

Abu Musab al-Suri, one of al-Qaida’s leading strategists, states that al-Qaida is effectively a system
whose philosophical foundation is relatively constant, deriving from a confluence of Salafist and
Wahhabist thinking, and activated by violent struggle. While this is true, the global jihadi vision is
being increasingly coloured and moulded by more specific grievances as al-Qaida Central’s grip
over local networks and cells weakens. Not all of these local influences are entirely in keeping with
‘classical’ al-Qaida strategy, as demonstrated by Abu Musab al-Zarqawi’s al-Qaida in Iraq (Tawhid
wal-Jihad) and al-Qaida in the Islamic Maghreb (QIM – formerly the Salafi Group for Preaching
and Combat (GSPC)) in Algeria.

Al-Qaida under pressure

Since the truce agreed in 2004 between former Pakistani president Pervez Musharraf and tribal leaders
in the Federally Administered Tribal Areas (FATA), al-Qaida Central has operated out of the border
region of Pakistan and Afghanistan. However, this sanctuary began to be threatened in 2009 when
the Pakistani army began an operation to clear the Swat Valley in North-West Frontier Province
(NWFP) of the Islamist militant Tehreek-e-Nafaz-e-Shariat-e-Mohammadi (TNSM). The operation
was, at best, only partially successful (TNSM leaders are still at large and insurgent attacks continue
in NWFP), but a further offensive was launched in mid-October 2009 to root out al-Qaida, Pakistani
Taleban (Tehrik-e-Taleban – TTP) and other assorted militants in FATA. The long-term success of this
operation cannot be taken for granted: public support is brittle and elements of the Pakistani security
establishment are reluctant to forego a useful ‘ungoverned space’ from which it can project informal
influence in a deniable form into Afghanistan, while using it as a base for insurgents operating in
Kashmir.

PAGE 18 RISKMAP 2010

Whatever the ultimate fate of the FATA offensive, al-Qaida Central will find itself under pressure
both from the Pakistani military and, possibly, from its FATA tribal hosts, who might consider it
expendable in any negotiations with the Pakistani leadership. Authoritative intelligence sources
suggest that, in such an eventuality, al-Qaida Central is preparing to decamp to other ‘ungoverned
spaces’ in northern Yemen and Somalia. These boltholes are likely to create new logistical and
operational difficulties. Al-Qaida has functioned most effectively when it has had a semi-official
sponsor with a local monopoly on violence – as in Sudan and later Afghanistan. But the security
situation in both Yemen and Somalia is so unsettled that al-Qaida may find its activities disrupted
by predatory local warlords or internecine clan strife. Aside from the risk of being mugged, local
infrastructure deficits will make the establishment of training camps and the creation of supply,
communication and financing chains more problematic. In other words, Somalia and northern
Yemen may simply be too ‘failed’ for al-Qaida Central to operate successfully.

Outsourcing and localisation

The decline in permissive environments, allied to current cash shortages and falling support in
the wider Muslim world over recent years, has necessitated a change of tactics in the global
jihadist movement. Al-Qaida has increasingly channelled support to groups fighting against the
so-called ‘near enemy’ – governments of Muslim states rather than the US or its allies. Tactical
alliances with Iraqi, Libyan, Algerian, Indonesian and Uzbek groups have had decidedly mixed
success. The threat posed to foreign businesses and individuals in these states is largely indirect:
for example, the kidnapping of tourists and business personnel for ransom inside Mali, the bombing
of soft targets in South-east Asia designed to destabilise governments, and the corrosive effect
on state authority of terrorist involvement in organised criminal networks trafficking in narcotics or
other illicit goods.

While public morale would inevitably be sapped should incidents such as the Jakarta bombings of
July 2009 recur frequently, Indonesian society has proven itself resilient in the face of violent extremism
– as was India following the Mumbai attacks in 2008. Partly as a consequence, conflicts have arisen
within local terrorist groups over the value of tactical alliances with al-Qaida. The benefits of short-term
accrual of funds and know-how are counter-balanced by local and international opprobrium, and the
likelihood of greater security pressure resulting from international counter-terrorism co-ordination on
intelligence-sharing and asset-tracing designed to degrade al-Qaida-allied groups.

The second reconfiguration has been in the recruitment, organisational and financing patterns of
those groups and individuals operating in Europe and North America. Research undertaken by
Control Risks into the major terrorist incidents and plots in these regions since September 2001
reveals several key trends that should be used to inform clients’ counter-terrorism planning.

1. Recruitment

As terrorism expert Peter R Neumann has pointed out, recruitment in the West is shifting from
points of congregation, notably radical mosques and bookshops, which have either been closed
or are now much better policed, to points of vulnerability, particularly prisons, detention facilities
or welfare centres for immigrants and the socially disadvantaged. Radical imams, such as Abu
Hamza in the UK, Mohamed el-Maghribi in France and Abdul Jabbar van de Ven in the
Netherlands, who acted as propagandists and spurious religious authorities to Muslim youth
groups in the mid-2000s, have either been prosecuted or subjected to more aggressive deportation
policies. Their influence is waning.

There is also a steady decline in the number of jihadi recruits who have been through training camps
in Afghanistan and Pakistan. Instead, senior cell recruiters such as Redoune al-Irsa (Hofstad Group
in the Netherlands), Mohamed Siddique Khan (7 July 2005 London bomber) and Qayyum Abdul
Jamal (Ottawa bomb plotter) have acted more as local entrepreneurs capitalising on the personal
problems of younger, impressionable and often socially marginalised individuals. As the binding
agents of the cell, group leaders provide lifestyle discipline, and an explanation and focus for anger
and resentment. As a consequence, the average age (now a mere 20), social class and levels of
educational attainment of new jihadi follower-recruits are rapidly falling, and with them the technical
capacity to conduct sophisticated operations. The graph overleaf illustrates the falling age profile of
jihadi recruits at the time of their arrest for plots and attacks in the West since 2001.

RISKMAP 2010 PAGE 19

 Average age at time of arrest of jihadi plotters prosecuted in Europe, North America and Australia,
2001-09

2001-05 2006-09

34

32

30

28
Age

26

24

22

20
Leaders Followers Lone plotters

Source: Control Risks. Data set 171 individuals

At the same time, the internet is assuming greater importance as a gateway into activism for
home-grown terrorists. Although evidence collected from convicted terrorists suggests that jihadi
websites reinforce existing extremist opinions rather than act as radicalising instruments in their
own right, the emergence of dedicated chat-rooms can often normalise extreme views, flatten out
hierarchies through the anonymity of postings, and, as the cases of the Glostrop network in
Denmark and Irfan Raja in the UK illustrate, serve as a transnational connecting point for terrorist
cells. It is noteworthy that whereas the Los Angeles millennium plot (2000), the Singapore plot
(2001), and the Istanbul (2003) and Madrid (2004) bombings were all principally the result of
face-to-face interactions, the later Toronto (2006), German train bomb (2006) and Glasgow/London
West End (2007) plots were largely driven by online connections.

2. Group organisation

The newly formed groups are characterised by their close-knit dynamics, and their increasing
separation from the rest of the Muslim community, including local mosques, which are now perceived
by cell leaders to be moderating rather than radicalising influences. This suggests that more
rather than less religious education might help to prevent future attacks. Many cells also reflect a
fall-back to existing local and kinship networks. More than 80% of the new wave (post-2003) of
jihadi plotters in the West either became active in a country where they were not raised, or were
first- or second-generation immigrants, usually brought together by social networks from their
country of origin. Half of the terrorist suspects detained in France since September 2001 originated
in or near Oran in Algeria. The Hofstad group came from al-Hociema in Morocco and the
Montreal plotters from Algiers, while a significant proportion of convicted British jihadists are
linked by family ties to the Mirpur region of Pakistan. Importantly, these groups are bringing with
them not only the dislocation caused by immigration, but political grievances imported from their
countries of origin, both of which act as motivations for the turn to violence and provide potential
transnational connections to technical expertise and training.

A significant development in 2008 and 2009, likely to persist in 2010 and beyond, is the growing
number of young, self-starting ‘lone wolves’. The failed 2008 plots of Andrew Ibrahim (Bristol, UK)
and Nicky Reilly (Exeter, UK), and the arrests in 2009 in the US of Michael Finton (Springfield,
Illinois), Najibullah Zazi (Denver, Colorado) and Maher Hussein Smadi (Dallas, Texas) are

PAGE 20 RISKMAP 2010

examples of maladjusted individuals with little formal terrorist training, aiming to cause maximum
civilian casualties by attacking soft targets such as mass transit systems, hotels and shopping
centres (malls).

An important dynamic both in these new cells and among the lone wolves is their lack of formal
religious instruction. Most, in fact, have had secular upbringings. For them, rudimentary versions
of Islam provide a comprehensible framework enabling disordered lives to be structured. However,
without exposure to official religious authority, these can be easily distorted into violent interpretations
of militant Islam.

The obvious decline in sophistication and capacity accompanying these shifts is counter-balanced by
much greater organisational resilience. Smaller, local and self-isolating home-grown networks are
harder for intelligence agencies to penetrate, while self-radicalised ‘bedroom’ jihadists can be extremely
difficult to detect unless their public behaviour raises concern, as was the case with the Bristol plotter,
Andrew Ibrahim.

Al-Qaida Central has facilitated rather than orchestrated this organisational transformation. If terrorism
is propaganda by deed, the two are now becoming increasingly discrete, with al-Qaida Central
providing the propaganda both before and after the event, while leaving autonomised cells to
take care of the deed.

3. Financing

The decline of al-Qaida Central as a source of training, organisation and direction for transnational
jihadi networks is having an impact on the financing of terrorist operations. Regionally entrenched
terrorist movements such as the Revolutionary Armed Forces of Colombia (FARC), the TTP (Pakistan),
Hamas (Palestinian Territories) and Hizbullah (Lebanon) have all traditionally had sophisticated and
widely varied transnational funding networks, ranging from drug-trafficking to relatively developed
mineral extraction operations. Al-Qaida has in the past also profited from semi-licit business lines in,
for example, real estate (Safa Group), construction (Hijra group) and food (Al Nur Honey and Al
Hamati Sweet Bakeries). Diaspora communities have been the life support of the Liberation Tigers of
Tamil Eelam (LTTE) in Sri Lanka, and ‘deep pocket’ individual donors from the Gulf Arab states were
instrumental in the growth of al-Qaida. Bogus charities such as the Global Relief Foundation, Mercy
International and the Koranic Literacy Institute channelled funds to al-Qaida and Hamas. In areas
controlled by terrorist groups, ‘revolutionary taxes’ are imposed on small businesses and, in areas
of Afghanistan and South-east Asia, on opium-growers. Tactical alliances with organised crime groups
to smuggle narcotics, people and resources such as tanzanite, gemstones and oil have also been
important revenue streams.

The new wave of home-grown jihadists does not control territory, nor does it have direct access
to corporate or charity front entities. The exploitation of unregulated informal value transfer systems,
such as hawala, a trust-based international monetary transfer system used widely in Asia and
Africa, has traditionally been an important source of terrorist funding, and is likely to remain so
despite the strengthening of counter-terrorism financing regimes. Regional counter-terrorism
financing regimes, such as the Middle East and North African Financial Action Task Force and
the Asia-Pacific Group on Money-Laundering, have underpinned legislative initiatives at national
level enacted since the mid-2000s in core terrorist source and funding states. Nevertheless,
problems of domestic enforcement, use of non-traditional and criminal financing methods, and
the sheer inexpensiveness of funding high-impact operations are all likely to remain difficult to
resolve in the short-to-medium term.

Implications and mitigation

The continuing reconfiguration of jihadi recruitment, organisation and financing carries several
implications for business. The first is that declining capability, alongside enhanced security
procedures in place in embassies, government buildings, military facilities and airports, means
that new jihadist cells will go after softer targets, preferably those with symbolic value. This is not
new. Shopping centres, nightclubs, hotels, transport infrastructure and sporting events have all
been consistent targets since 2001. However, they increasingly represent the only viable Western
targets, rather than simply being one option among several.

RISKMAP 2010 PAGE 21

 Secondly, home-grown terrorism is, by its nature, geographically constrained. With limited transnational
sponsorship or direction, plotters themselves, their planning and their targets are all less likely to
cross jurisdictional boundaries. Improvements in border-management practice, such as iris-scanning
and biometric passports, have also played a part, though they clearly add time costs to business
and cut against the grain of economic liberalisation that inspired the Schengen Agreement and
the North American Free Trade Agreement. Government resources are starting to be shifted towards
home-grown terrorism. The British government’s ‘Prevent’ strategy is an indicator of this strategic
reorientation. While the firm direction provided to the Mumbai terrorists from Pakistan appears to
contradict this pattern, this attack was bound up more with local inter-state dynamics over the
Kashmir conflict and domestic ethno-communal relations than orthodox transnational jihadism.

The third implication is that, with the decline in funding and training from al-Qaida Central, and
the consequent lack of operational sophistication, terrorist attacks in Europe and North America
will be conducted ever more cheaply. The Madrid and London bombings cost a combined total of
$25,000, demonstrating that spectacular attacks need not be expensive affairs. Low-cost, high-impact
operations are virtually impossible to trace through anti-money-laundering mechanisms such as
the Financial Action Task Force on Money-Laundering. Unless detectable criminal fundraising
methods – such as credit and ATM fraud, or petty trafficking in illicit goods or drugs – are used to
raise cash, the money found for home-grown terrorist attacks can be exceptionally difficult to
trace and interdict.

The final implication is more positive. The absence of formal training, experienced leadership or
the sort of resources that enabled an attack on the scale of September 2001, together with the
declining age and quality of recruits, means that terrorist plots are more likely to fail. Apart from
the failed operation at Glasgow airport in 2007, there have been no substantive terrorist attacks
in Europe and North America since the London bombings in July 2005.

Cumulative total of jihadi terrorist plots versus attacks in Europe, North America and Australia,
2001-09

40
Plots

35

30

25

20

15

Attacks
10

0
01/09/2001 01/09/2003 01/09/2005 01/09/2007 01/09/2009

Source: Control Risks

This is the result of a number of factors: improved intelligence-gathering and sharing, better urban
security design and increased vigilance, and the extension of ‘dataveillance’ and cutting-edge
face recognition technology at international airports. An expansion of CCTV networks with automated
number plate recognition has built on lessons learned from previous terrorist campaigns, for
example the IRA bombings in the City of London in the early 1990s, which led to the creation of
the ‘ring of steel’ security and surveillance cordon around the City and the subsequent revolution
in commercial building security.

PAGE 22 RISKMAP 2010

Of possibly greater importance from a preventative standpoint, however, has been the substantive
buy-in of Europe and North America’s Muslim community leaders to more nuanced counter-terrorism
strategies on the part of Western governments. This has led to increasing vigilance in the community,
particularly of new converts, who form a disproportionately large percentage (though only 7% in
overall terms) of terrorist plotters in the West.

The evolving nature of terrorist threats will still require the security directors to revisit trusted situational
prevention techniques to increase the effort and risks involved in undertaking attacks against a
business, while reducing the rewards and provocations. Terrorist attacks cannot be predicted or
wholly designed out, but they can be anticipated. A key element will be recognition that perpetrators
are increasingly likely to deliver the mode of threat on their person, placing a premium on surveillance
and entry screening.

Lastly, the failure of recent plots has also been the result of defective planning and elementary mistakes
made by the terrorists themselves. This poor track record should not lead to complacency on the
part of security directors. The new wave of terrorists may be less smart, but they are also less
predictable. As the Provisional IRA stated after the 1984 Brighton bomb failed to kill then British
prime minister Margaret Thatcher: ‘Today we were unlucky, but we only have to be lucky once. You
have to be lucky every time.’

Michael Denison, Research Director

Additional research by Mira Comara

RISKMAP 2010 PAGE 23

 International anti-corruption laws: are they really working? If so, how?

The US Foreign Corrupt Practices Act (FCPA) is now more than 30 years old, and the 1997 OECD
Anti-Bribery Convention is well into its second decade. All the leading industrialised nations now
have laws against bribery of foreign officials, and – if the growing number of conferences and seminars
on anti-corruption compliance is an indicator – they appear to be having an impact. But what sort
of impact? Will these laws make the task of international entrepreneurs easier? Or is the net result
a growth in bureaucracy that merely adds to the burdens on investors?

Here we look at how international anti-corruption laws will work in the year ahead and beyond.
These laws have largely positive effects, but can deter good companies from operating in high-risk
– and potentially profitable – markets. Against a background of tighter international enforcement
in 2010, it is important for companies to follow the letter of the law. But to operate successfully in
high-risk countries, they need strategies that go beyond the demands of narrow legal compliance.

Enforcement from the US…

For more than three decades the US has taken the lead in calling for stronger action against
corruption. It has by far the strongest record of enforcing its own laws against foreign bribery,
and this will continue into 2010 and beyond. In September 2009, senior Department of Justice
(DoJ) official Mark Mendelsohn reported that his team was conducting as many as 120 criminal
investigations into suspected FCPA violations. Both the DoJ and the Securities and Exchange
Commission (SEC), which shares responsibility for enforcing the act, can point to an upward
trend in the number of FCPA cases compared with the early 2000s.

Total number of SEC FCPA enforcement actions, 2000-09

25

22

20

15

11

10
8 8 8
7

5
5 4

2 2

0
2000 2001 2002 2003 2004 2005 2006 2007 2008 To Aug
2009

Source: SEC

Moreover, the net is widening. In recent years there has been a particular focus on the natural resources,
infrastructure and pharmaceutical sectors. The latest cases include the conviction in August 2009 of former
congressman William Jefferson, who in 2005 was found to have hidden $90,000 in cash in his freezer,
and had been accused of paying bribes to Nigerian officials. In September 2009, two Hollywood producers
were convicted for paying $1.8m to Thai officials to win the right to manage a Bangkok film festival.

The record fine for a US-based company is held by oil services company KBR, which in February
2009 paid a total financial penalty of $579m as a result of bribes paid in Nigeria. Companies that
fall foul of the SEC and the DoJ frequently have to submit to the supervision of an external monitor
to ensure that their compliance programmes come up to standard. The DoJ has also shown an
increased propensity to pursue individuals, as well as companies, and to send them to prison.
There is no doubt that the FCPA has bite.

PAGE 24 RISKMAP 2010

…and the rest

US businesspeople still complain that the FCPA puts them at a competitive disadvantage against
rivals from countries where the law is less strictly enforced. Two factors will mitigate this in 2010.

First, the SEC and DoJ target lists will include a number of foreign companies. The FCPA grants
the US jurisdiction over foreign companies listed in the US or that make use of US financial services
in pursuit of corrupt activities, and the two agencies have been making full use of these provisions.
The most notable recent case concerns Siemens, which in 2007-08 paid $1.6bn to the US and
German authorities on account of foreign bribery offences, while fees to lawyers and accountants
related to the case amounted to a further $1bn.

Secondly, 38 countries have now introduced laws similar to the FCPA under the terms of the
1997 OECD Anti-Bribery Convention, though the extent to which they publicise the laws and
prosecute offenders will continue to vary wildly. The most remarkable change in recent years
comes from Germany, which according to anti-corruption NGO Transparency International (TI)
has accumulated 110 international corruption cases.

Foreign bribery cases in selected OECD countries to December 2008

140

120
120
110

100

80

60

40

20 17 16
13
9
7 5 4 3 2
0
Netherlands

Norway

UK

Belgium

Japan
Switzerland

Denmark

Korea
US

France
Germany

Source: OECD Anti-Bribery Convention Progress Report 2009

One of the countries to watch in 2010 will be the UK. Nettled by accusations of cynicism and
hypocrisy from their OECD counterparts, the authorities have diverted greater resources to the
investigation of foreign bribery cases. In a landmark case in September 2009, a British court
sentenced engineering company Mabey & Johnson to a total penalty of £6.6m ($10.5m) on
charges of bribing foreign officials in six countries, as well as breaching UN sanctions in Iraq.
The UK’s Bribery Bill will come into force in the course of 2010, and the Serious Fraud Office
(SFO), which currently has a case list of around 15 companies, will take full advantage to launch
further prosecutions.

RISKMAP 2010 PAGE 25

 The UK sharpens its act
The Bribery Bill amounts to a wholesale revision of the country’s anti-corruption legislation,
parts of which date back to 1889. Key features include:
• A new corporate liability offence of ‘negligently failing to prevent bribery’.
• Companies convicted of bribery face an unlimited fine. Individuals could face a prison
sentence of up to ten years and/or an unlimited fine.
• The proposed law is stronger than the FCPA in that it covers private-to-private corruption
as well as bribery of foreign officials.
• Unlike the FCPA, the law’s definition of corruption does not exclude small ‘facilitating
payments’ to speed up routine governmental actions such as customs clearances.

Clarifications to the law will make it easier for the British authorities to pursue bribery cases,
both at home and internationally.

In Japan, too, there are signs of change. Tokyo has been criticised for its dilatory performance
in following up the OECD convention. However, in early 2009 courts sentenced four Pacific
Consultants International (PCI) executives to suspended prison sentences and imposed a ¥70m
($774,000) fine on the company for paying bribes to Vietnamese officials in return for construction
contracts. This was the first foreign bribery case that had come to trial in Japan. The next may
already be in the pipeline. However, there have been no recent foreign bribery prosecutions in
many other leading OECD states.

A major concern for many companies is the prospect of intensified competition from rivals based
in countries that have yet to sign the convention and have no laws against foreign bribery. TI’s
Bribe Payers Index ranks 22 leading exporting countries according to the frequency with which
their companies pay bribes. The four countries with the worst rankings in the most recent index
are India, Mexico (which unlike the other three is a signatory to the OECD convention), China
and Russia.

China’s expanding international role – especially in Africa – means that its companies have come
under particular scrutiny. Prime Minister Wen Jiabao has called on Chinese companies operating
abroad to ‘forbid inappropriate deals and reject corruption and kickbacks’. However, in January
2009 the World Bank debarred four Chinese construction companies from Bank-sponsored projects
after they were accused of conspiring to rig tenders in the Philippines. In July 2009, a major
Chinese company was caught up in a bribery investigation in Namibia. Next year, the Chinese
government will expand its current crackdown against bribery, but the main focus will be on
crimes committed within China rather than abroad.

Developing and transition economies: tackling the ‘demand side’?

The FCPA and its equivalents are intended to combat the ‘supply side’ of international corruption:
prosecutions are always directed against companies and individuals that pay bribes, not the
officials who receive them. This raises the question of what host governments are doing to
improve the governance environment for foreign investors. Again, the picture is highly uneven,
and the combination of good and not-so-good news will continue in 2010.

Since the late 1990s, the World Bank Institute (WBI) has published a set of six Worldwide
Governance Indicators, one of which is ‘control of corruption’ (see www.govindicators.org). These
provide a broad basis for comparison, both between different countries and over time. In a recent
essay, Daniel Kaufmann, who helped to design the indicators, noted that there was no clear
indication of a global trend towards higher standards of governance, but that it was possible to
detect significant trends in individual countries, both for better and for worse.

PAGE 26 RISKMAP 2010

Changes in ‘control of corruption’ in selected countries, 1998-2009

1998 2008

1.5

1.0

0.5

0.0

-0.5

-1.0

-1.5
South Korea

South Africa

Botswana

Hong Kong
Indonesia

Serbia

Georgia
Russia

Zimbabwe
Gabon

2.0

Source: Kraay and Mastruzzi, Worldwide Governance Indicators. Control Risks’ selection.

A common theme in the countries with declining standards in our selection is the entrenched position
of political elites with an interest in resisting transparency. Gabon is rich in petroleum, but poor in
government transparency; the French chapter of TI brought a case against former president Omar
Bongo (who died in 2009) over alleged use of state funds to purchase property in France. In Russia,
President Dmitry Medvedev has promised to tackle corruption, but with few short-term results, while
Zimbabwe’s sharp decline is linked to the wider political crisis arising from President Robert Mugabe’s
clinging to power.

On a more positive note, three countries that had previously rated particularly poorly show definite
signs of improvement. This can be attributed to political change: the departure of presidents Suharto
and Slobodan Milosevic from Indonesia and Serbia, and the reforms initiated since the 2003 ‘Rose
Revolution’ in Georgia. However, all are still on the ‘poor governance’ side of the ranking. Continued
progress depends on their ability to consolidate institutional reforms regardless of who is in power:
this will be particularly difficult against the current background of political turbulence in Georgia.

Those countries that already had positive ratings have improved further, though it would be rash
to discount the possibility of future reversals. Concerns have been raised in South Africa by the
government’s decision to disband the ‘Scorpions’, an effective but at times controversial anti-corruption
investigative team. Incoming President Jacob Zuma narrowly escaped corruption charges before
coming to power, raising questions about the depth of his commitment to future enforcement.

While the lack of evidence of an overall global shift to higher standards of governance is
disappointing, the indicators suggest grounds for hope. Corruption is a long-term problem, but
governments that pursue the anti-bribery agenda can – over time – make real progress. The key
factor is not wealth or even administrative capacity (though both are important), but political will.
This depends on a range of other factors, such as the strength of local civil society and media.
It is in every country’s interest to combat corruption, not least because this makes it easier to
attract high-quality foreign investors and in the long term increase national prosperity. However,
substantive anti-corruption campaigns are not necessarily in the personal interests of the national
elites who decide policy, or of the mid-ranking bureaucrats who grant licences, administer customs
clearances, and monitor real and imaginary traffic violations. Most governments are strong on
anti-corruption rhetoric, and many have well-drafted laws, but effective implementation will remain
all too rare.

RISKMAP 2010 PAGE 27

 Get me a compliance programme!

The FCPA has a clear impact on US company behaviour in that almost all major US-based
international companies – and many smaller ones – now have compliance programmes of some
kind. Increasingly, their counterparts in other OECD countries and further afield are following suit.
Nevertheless, major challenges arise from the disconnect between the way the world should be –
if all laws were rigorously observed – and the way business is really done.

The first generation of compliance programmes tends to be strong on codes of conduct, typically
couched in off-the-shelf legal jargon. Often this is because they are created to fill a perceived
legal gap and to have something to put on the corporate website. But they fail to engage the
interests of – or create incentives for – the people who matter: the frontline executives who do
deals and are judged on their successes and failures.

One of the most damning indictments of Siemens came from a Frankfurt prosecutor who complained
that its compliance programme existed ‘only on paper’. Siemens claims to have learnt its lesson,
and now presents its state-of-the-art programme as a commercial advantage. It includes a greatly
expanded network of compliance officers, extensive training, tighter due diligence requirements
before taking on new business partners and the establishment of a compliance help desk. The
company argues that, on top of the legal and ethical benefits, tighter management controls mean
that it is better placed to withstand the downturn.

One significant weakness of early compliance programmes, often only partly addressed even
today, is that they tend to focus on the letter of the law rather than the ethical principles that
underlie it. For example, it is often written that it is especially difficult to comply with the FCPA in
China because there are so many state-owned enterprises that it is difficult to identify who is and
who is not a ‘foreign official’. The implication is that avoiding bribery of officials is all that matters,
and that bribery of private businesses is somehow acceptable. A narrow legal approach does not
always provide all the answers.

Dealing with business partners

Even with the best-designed compliance programme, companies find themselves facing
repeated dilemmas at both strategic and tactical levels. In our recent experience working with
clients in high-risk countries, many of the most intractable challenges concern business partners:

• First, the hazards of employing commercial agents to win business in return for large commissions
are clear. It is not a defence to claim ignorance if the agent passes on part of his commission
as a bribe: this has been made clear both in FCPA enforcement and – for instance – in the
Mabey & Johnson case. Despite all this experience, we still frequently come across cases
where international companies pay bribes through commercial agents and representatives; this
is clearly unacceptable.

• A second, related question concerns the standards expected of business partners. If a company
has overall control of a joint venture, the answer is clear: the joint venture should follow best
practice as defined by the majority owner. However, minority owners naturally have less influence,
particularly over day-to-day management matters. Suppliers raise even more questions: as one
client put it, ‘We know we need to be sure of our major suppliers, but what about the dozens –
or even hundreds – of minor suppliers? And what about our suppliers’ suppliers?’

• A third issue concerns consultants and fixers who arrange visas or help to pass goods through
customs. The US authorities have recently prosecuted a series of companies that paid customs
officers through intermediaries to reclassify goods to reduce the amount of duty. At a minimum,
companies should ensure they are paying the correct duty, though it is difficult to achieve this in
jurisdictions where the rules are unclear (probably deliberately). Even when companies pay
freight forwarders the accepted commercial rate for their services, it is often impossible to be
absolutely sure that their consultants do not pay off customs officers in one form or another.

PAGE 28 RISKMAP 2010

At a minimum, companies need to be able to demonstrate that they have not knowingly broken
the law, or deliberately closed their eyes to malfeasance. In practice, they often find themselves
making judgments based on imperfect knowledge, and this means that they have little option but
to carry a residual element of risk.

Just say ‘no’, from a safe distance?

The risks associated with high levels of corruption and the heavy penalties for failure to control it
raise the question of whether it is better for companies that wish to avoid bribery to stay away
from high-risk countries.

Research conducted by Control Risks and Simmons & Simmons suggests that this is an approach
adopted by a significant proportion of Western companies. After questioning 350 international
business development directors from seven jurisdictions, we found that 35% of their companies
had been deterred from otherwise attractive commercial opportunities by the host country’s reputation
for corruption, with the highest percentages coming from the UK, Germany and the US. The lowest
percentages come from Hong Kong and Brazil: this may reflect the greater challenge of operating
in these companies’ home regions.

Percentage of companies deterred from an otherwise attractive business opportunity on account

of a country’s reputation for corruption

60%

52%
50%

42%
40% 38%
36%
32%
30%
30%

20% 18%

10%

0%
UK Germany US Netherlands France Hong Kong Brazil

Source: Facing up to Corruption: A Practical Business Guide, Control Risks and Simmons & Simmons, 2007

US lawyer Andrew Brady Spalding has compared the impact of anti-corruption legislation to
economic sanctions, arguing that the FCPA and similar laws deprive emerging markets of
much-needed investment by companies with high standards. From a governance perspective,
the consequences are particularly perverse, in that responsible companies are replaced by what
Spalding calls ‘black knights’ – companies from countries with no legislation against foreign
bribery that are likely to ‘pay what it takes’ to win contracts. Citizens of these countries lose out
because they have fewer, more expensive and poorer-quality public works projects and because
fewer companies with high standards of corporate responsibility are prepared to invest.

RISKMAP 2010 PAGE 29

 The way forward: moving beyond compliance to real engagement

Spalding’s argument appears to be an accurate description of what does happen. It raises the
broader question what should happen. We share Spalding’s view that simply staying away from
high-risk countries is not the best answer. But if that is the case, governments, companies and
citizens need to be involved in finding solutions that work better.

First, the emphasis on improving and tightening enforcement of national and international legal
instruments needs to be strengthened. Key items on the agenda include the implementation by
all signatories of the OECD anti-bribery convention, and the strengthening of regional anti-corruption
initiatives such as that of the Organization of American States. Well-run international companies
have a clear interest in ensuring that both their own governments and those of their competitors
operate to the same standards.

Secondly, host governments need to build up their defences. In the domestic as in the international
arena, laws are important, but not sufficient. ‘Technical’ solutions are also vital: for example,
internet-based means of paying taxes have reduced the scope for corruption in India and many
other countries. More importantly, governments must engage their own citizens, for instance by
demonstrating support for civil-society organisations that combat corruption and promote higher
corporate standards. Ultimately, the reward for reform should be more investment by better companies.

However, all this will take time. Both at the national and the international levels, the impact of
initiatives to raise governance standards will be slow and cumulative, with no major break-
throughs expected in 2010. So does that mean that ethical companies should simply sit on the
sidelines while Spalding’s ‘black knights’ seize all the commercial opportunities in high-risk countries?

We think not. Our view is that international companies can operate successfully in high-risk countries,
but it requires moving beyond a narrow emphasis on legal compliance or problem-avoidance –
though compliance with local and international law is of course essential – to develop effective
means of engagement that focus on positive incentives:

• Business integrity programmes should be founded on ethical principles, not simply on legal
interpretations of regulations. The objective of integrity training should be to support front-line
managers, and to empower them to make the right judgments, even under stress.

• In choosing and working with partners and suppliers, companies should put the emphasis as
much on quality and professionalism as on avoiding legal malfeasance. The issue is not just
that bribery is wrong: it is expensive, legally dangerous and ultimately unsustainable. Well-run
companies should be able to offer their local partners commercial incentives, in the form of
long-term business relationships, to raise professional standards.

• In designing business integrity programmes, companies should focus on two different levels. On
the one hand, they need to ensure that everyone in the company understands its fundamental
ethical principles. On the other, they need to focus on areas of greatest risk. These typically
involve specific transactions, such as applying for licences or dealing with customs, rather than
entire countries.

• Finally, honest business in high-risk countries demands more skill, but is more sustainable than
turning to bribery. The skills include knowing how to find the right partners and how to resist
demands for bribery, even when backed by a form of extortion. It is essential to prepare for
these kinds of threat in advance through proper training.

International anti-corruption laws are ‘working’ in that they have placed corruption squarely on the
corporate agenda. But this is only the first stage. To succeed, business development directors
must find ways of going beyond compliance to real engagement, even with – or especially with –
high-risk countries.

John Bray, Director Analysis

PAGE 30 RISKMAP 2010

 China’s latest, greatest leap – out into the world

The first decade of what was supposed to be the ‘Asian century’ has been dominated by the chain
of global events that followed the 11 September 2001 terrorist attacks on the US. But even as the
US and its policies in Iraq, Afghanistan and elsewhere remain a leading focus of world attention
in 2010, developments taking place further east will be the primary portents of change in the global
political and economic landscape. While the notion of ‘Asia’s rise’ often involves vague future-gazing
into a world beyond 2050 where several Asian countries may or may not have surpassed Western
powers, in many ways it is very much about current or looming realities.

Business leaders are typically more aware of this than most – Asia’s rapid economic growth has
already changed the world economic, investment and business landscape in many sectors, and much
more is to come. In 2010 and for many years thereafter, what will be felt above all will be the rise
not of Asia, but of China, which will surpass another Asian country, Japan, to become the world’s
second-largest economy. The IMF expects China to contribute 28% of world economic growth in 2010.

GDP forecasts for selected economies, 2015-50 (US$bn)

80,000

China
70,000

60,000

50,000

US
40,000

India
30,000

20,000

Brazil
10,000 Russia
Japan
Germany
0
2015 2020 2025 2030 2035 2040 2045 2050

Source: Goldman Sachs

China is still frequently spoken of in the same breath as India and the BRIC countries, but this fails to
recognise both its status as the only country besides the US that might genuinely warrant the ‘superpower’
label in the foreseeable future, and its unique importance in economic terms. China’s economy is now
larger than the other three BRICs combined (roughly three times as large as Russia and Brazil, and
almost four times as large as India), and is still growing 50% faster than the next fastest, India.

Going out

The global financial crisis and subsequent economic slump have amplified the trend of China’s
increasing clout, and accelerated the shift into another phase of its rise. From the 1980s until quite
recently, the story resulting from China’s open-door policy was one of the world going to China. As
we enter the second decade of what China sees as its own century rather than an Asian one, the
story is increasingly becoming one of China going into the world – the open door swings both ways.

China’s growing role on the world stage is about more than economic growth and energy, but these
certainly lie at the heart of the shift into the more global era of the country’s emergence. China’s overseas
investments are driven mainly by three aims: resource-seeking, strategic asset-seeking and market-
seeking. The first of these is where China’s ‘going out’ began and, together with the second aim (seeking
the know-how to operate internationally, but also tangible assets such as advanced proprietary technology),
is causing most concern. The scale and speed of economic growth has seen the country go from a net
exporter to one of the world’s leading importers of energy, particularly oil, in a relatively short space of
time. This imperative for Chinese activity abroad will remain strong for the foreseeable future.

RISKMAP 2010 PAGE 31

 China’s oil production and consumption, 1990-2010

Forecast
9,000

8,000

Consumption
Thousands of barrels per day 7,000

6,000 Net imports

5,000

Production
4,000

3,000

2,000

1,000

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

Source: EIA International Energy Annual 2006; Short-Term Energy Outlook (July 2009)

Meanwhile, over the past few years China has accumulated massive foreign exchange reserves,
and resurrected its state-owned enterprise (SOE) sector to spawn several large, profitable and
ambitious companies (leading private companies are also looking abroad, but most of the big,
active firms are SOEs). Both developments have facilitated outward FDI and mergers and acquisitions
by Chinese entities. According to the UN Conference on Trade and Development (UNCTAD)’s
2009 World Investment Report, Chinese outward FDI rose to $52bn in 2008, up by about 150%
on 2006 and 2007 figures, and rising at a far faster rate for years than inward FDI. Had multi-billion-
dollar bids like Chinalco’s attempt to up its stake in Rio Tinto succeeded, outward FDI flows in 2009
might have exceeded inflows for the first time.

Foreign exchange reserves, Aug 2009 (US$bn)

China
Japan
Russia
Saudi Arabia
Taiwan
India
South Korea
Hong Kong
Brazil
Singapore
Germany
Algeria
US
France
UK

0 500 1,000 1,500 2,000 2,500

Source: IMF. China, South Korea figures September; Saudi Arabia, May; Algeria, April.

PAGE 32 RISKMAP 2010

Seeking stable supply

Resources companies are certainly no longer the only players involved, but remain key actors in
moves abroad. China sees world markets for energy and some other resources as dauntingly
volatile and unreliable, and as overly influenced by Western powers, mainly the US. As a result,
Beijing has felt that it has no choice but to get serious fast about securing supply from overseas,
to mitigate the risk of being unable to feed its economy. This has taken Chinese diplomacy and
investment all over the world. From oil and gas to copper and coal, and from neighbouring
Russia, Kazakhstan and Mongolia to further afield in the Middle East, Africa and Latin America,
China’s efforts to secure resources will continue to make waves in 2010.

This in itself need not be seen in the threatening light that it often is. China’s leaders would be incompetent
if they were not actively seeking to secure long-term sources of energy security, and their unease with
the idea of relying on markets and regions over which they have little influence is not difficult to
understand. By taking ownership stakes in foreign energy reserves and mineral deposits, securing
long-term supply agreements and developing or maintaining close ties with governments in producing
countries, Beijing hopes to reduce the risk of suffering the kind of supply shock that could prompt
economic and political crisis at home. Meanwhile, as in other areas of industry, China hopes to develop
national champions that can eventually compete as world-class players in global markets, a goal shared
by the companies themselves. For China’s national oil companies (NOCs), with insufficient reserves and
deposits at home, this inevitably means going abroad, while leading Chinese firms in other industries
are looking to overseas investments for their own development – for example in autos, banking and IT.

China’s crude oil imports by source, January-May 2009 (thousands barrels per day)

Others, 582
Saudi Arabia, 740

Libya, 93

Kazakhstan, 97

Congo, 115

Kuwait, 171
Iran, 544

Sudan, 217

Oman, 275
Angola, 451

Russia, 299

Source: FACTS Global Energy

Pursuit of profit, or ‘grand strategy’?

What makes all this worrying for foreign governments and companies is that most of the Chinese
entities making investments and acquisitions are state-owned or partly state-owned – with the
state in question an authoritarian one. This naturally creates the suspicion that they are acting
not out of pure commercial interest, but also in pursuit of political or national strategic goals that
may conflict with the interests of foreign companies and governments. Insofar as Chinese companies
are seen as mere tools of a monolithic ‘China Inc’ directed by top leaders in Beijing according to
a co-ordinated grand strategy for world domination, this is very misleading. Compared with Japan
and Korea, China has actually struggled to effectively control industrial development according to
a clear central plan, and leading SOEs are typically subject to all sorts of competing bureaucratic
interests, as well as having their own preferences.

RISKMAP 2010 PAGE 33

 Nonetheless, the fact is that most big SOEs, especially in the extractive sectors, are clearly subject
to substantially greater political influence than private companies. Heads of big SOEs are appointed
by the Communist Party of China (CPC) personnel department, and usually have held government
and party positions in the past. The lack of transparency surrounding the status, control, motives and
decision-making processes of SOEs exacerbates suspicions. So too does the fact that Chinese
entities often play by different rules. For example, in addition to claims about higher levels of corruption
and lower standards of corporate social responsibility, Western firms often complain that Chinese
competitors overpay, and secure resources deals via big government-to-government agreements
including incentives such as easy loans and help to build infrastructure. There can be little question
that, where China and its NOCs and other SOEs are concerned, the interests, decision-making and
actions of government and business are more closely intertwined than in most developed countries.

Western companies had better get used to dealing with the Chinese approach. Chinese firms
face a still-steep learning curve, and feel that they have to use different tactics to compete against
more advanced and better-established international competitors for the relatively few opportunities
that come up for big, attractive deals. Particularly in the resources sectors of the developing world,
this will continue to pose problems for competitors finding that China’s presence is handing
increased bargaining power to producer governments and reducing pressure on them to improve
operating environments. China will often be seen not only as a convenient alternative investor or
buyer to play off against others and raise prices, but also as a key future source of demand.

In case there was any doubt that China will sometimes make big, bold bids that step directly on
the toes of Western majors, reports in September 2009 indicated that China National Offshore Oil
Corporation (CNOOC) was looking to take 49% equity in more than 20 oil concessions in Nigeria,
at a time when the government there has been locked in negotiations with Western oil multinationals
over contract terms. From a purely political perspective, too, China will continue to represent a
counterbalance to US influence and give greater leverage and manoeuvrability to states from
‘anti-US’ Latin American regimes such as Venezuela and Ecuador, to the likes of Burma
(Myanmar), Sudan and, perhaps most importantly in 2010, Iran.

Not all plain sailing

Chinese support of such countries, and the big deal-making of its leading SOEs and sovereign
wealth fund, China Investment Corporation (CIC), will continue to make news in 2010. To get this
in perspective, Chinese outward FDI is still small compared with many Western countries – in
2008 it was about one-sixth that of the US, and still less than Belgium and the Netherlands.
Chinese energy companies remain quite minor international players compared with Western
majors and the national companies of major producers. China’s energy deals and ‘raids’ on
developed markets in particular cause a splash disproportionate to their size in commercial
terms. They will also continue to face serious challenges, as demonstrated by the hurdles faced
by Chinese mining companies seeking in 2009 to invest in Australia – a country basically open to
foreign investment and with much better relations with China (at least until quite recently) than
many other potential target countries.

Concerns about reputation and image will also complicate China’s ventures out in the world. It is
often suggested that Beijing is impervious to international opinion and disregards issues of peace
and stability if it can gain economically or strategically. There is certainly an element of truth in
this perception, but these issues are a growing factor – albeit not a dominant one – in Chinese
thinking about their overseas activities. Human-rights-related criticism of its presence in places
like Sudan and Guinea has been seriously discussed in Beijing, while anti-Chinese sentiment in
several countries where Chinese economic influence is significant is a current and future source
of problems for China. As well as handling local governments’ concerns, such as over the impact
of cheap Chinese imports, the problems of being a big overseas player were highlighted in 2009
by threats, protests and even violence against Chinese people and interests in countries including
Pakistan, Nigeria, Turkmenistan and the Solomon Islands.

Dealing with such issues is demanding a more nuanced and sophisticated foreign policy and is a
learning process for China’s government. Chinese firms face an even steeper one. Problems completing
deals (including in the US and Australia), the disappointing results of non-resources deals (such as
Lenovo and IBM, and SAIC and Korean automaker Ssangyong) and the much-criticised losses CIC

PAGE 34 RISKMAP 2010

has made on some of its investments all reflect barriers to and weaknesses of leading Chinese
enterprises that will not be quickly overcome. But with Chinese entities likely to have some of the
deepest pockets around in 2010, they will adapt their tactics and target other areas rather than give
up, forcing some difficult decisions in developed countries about allowing or blocking investments.

Non-Chinese businesses involved in such deals will have to weigh the benefits of Chinese
financial resources against the likelihood that their prospective partners may want more control
and take a more intrusive approach than typical investors. At least where state-controlled entities
are involved, opacity and uncertainty will often exist. The other side of the great 2009 Sino-Australian
mining saga – the detention of four Rio Tinto employees in Shanghai on charges including
commercial bribery – highlighted a feature of dealing with China that applies both inside and
outside its borders: the blurred lines between the commercial sphere and the realms of politics
and national interest.

Testing the limits

A likely test of China’s intentions in 2010 will be how it deals with its major headache over Iran.
China benefits from Iran’s isolation in that it helps China to access its vast oil and gas fields, free
of competition from Western firms. The Iran relationship also fits with China’s wider goals of
balancing against perceived US hegemony in general, and its control of supply routes in particular.
But another crucial pillar of China’s foreign policy for decades has been avoiding confrontation
with the US. Chinese analysts see the overstretch of the Soviet Union, including in the Middle
East, as a key reason for its downfall, and do not wish to repeat that mistake.

One reason that China has been so active in Africa is that it views the continent as more easily
navigable without clashing with US interests. China never wants to be in the position of having to
go head-to-head with the US on core national security issues, and also has its own strong interest
in averting military conflict in the Middle East, from where it gets about half of its oil supplies. On
both North Korea and Iran, China has so far been able to avoid being forced into a ‘final choice’
at the UN Security Council. It will hope to continue avoiding one in 2010, but if it cannot, its
response will be a notable indicator of where its priorities lie.

This is one of many examples of how China’s foreign policy challenges are becoming increasingly
complex. Its long-standing principle of non-interference in the affairs of sovereign states has
already been greatly compromised over the past decade, as reflected in the fact that it currently
has troops and police participating in nine UN peacekeeping missions around the world. But as
China’s interests proliferate and it looks to protect them, it is being forced to become an ever
more active player. Beijing still prizes the goal of maintaining a stable external environment to
facilitate domestic stability and development, but the policy of keeping a low profile and avoiding
confrontation (‘hiding claws’ as former paramount leader Deng Xiaoping is famously supposed to
have put it) is becoming more and more impractical.

Eyes on Asia

In the cases of the dilemmas over Iran and North Korea, China’s influence poses it some awkward
problems, and much of the time Chinese leaders are still keen to play down their country’s power.
But the overall trend visible on several occasions in 2009 is towards selectively asserting its
authority more robustly and more frequently. This will be seen again in 2010, particularly within
Asia, where, in contrast to the Middle East and Africa, China has far greater capability and intent
to test the limits of its growing power.

This will still mainly take the form of economic power – trade with China is currently more
important to most Asian countries than trade with the US, and China’s role as a crucial market
and investor gives it substantial clout. It will continue to increase and use this leverage to maximum
effect. A few notable examples are its relations with countries like Burma, which give it access to
the Indian Ocean as well as energy resources; its deals in Central Asia, including Kazakhstan
and Turkmenistan, which have agreed to provide China with natural gas; its ties through Pakistan
to Iran, in what is becoming known as ‘the new energy Silk Road’; and even its relations with
cash-strapped Russia, to which China has extended substantial loans and with which it is trying
to sign large gas deals.

RISKMAP 2010 PAGE 35

 With China already engaging in active foreign policy close to home, areas that it has always seen
as its core sphere of influence will yield important clues to how it intends to wield its growing
power. Economic and commercial means will remain at the centre of China’s approach, but it is
not always averse to more robust methods. More frequent Chinese incursions across part of the
disputed border with India have been reported in 2009, and great pressure has been exerted on
Vietnam, with which China has maritime border disputes in the South China Sea (it has fought
wars with both countries within the past 50 years).

A further ratcheting of tensions with India is quite conceivable in 2010 – India is China’s leading
long-term competitor for influence in Asia, along with Japan and the US, and Beijing has shown
strong signs of upping the ante ever since India moved closer to the US under former US
president George W Bush. China will continue to see co-operation between those three states
and others as a US-led attempt to encircle it and stifle its rise – a genuinely-held fear that can
sometimes inform Chinese interpretations of foreign actions ranging from commodity price and
supply issues, to Western media coverage of ethnic unrest in Xinjiang and Tibet.

In this context, little-noticed but particularly interesting (albeit not unprecedented) signs of China’s
growing determination and confidence in asserting itself close to home came in March 2009,
when Chinese vessels harassed a US surveillance ship off Hainan, a Chinese island off its south
coast that is home to a new submarine base. Then in June 2009, a Chinese submarine collided
with an underwater sonar device being towed by a US vessel in waters off the Philippines. China
will remain utterly unwilling to consider serious confrontation with the US in all but the most
extreme circumstances, but it would not take much for a mishap in some similar incident to spark
off a major diplomatic dispute and nationalist backlash in China.

Money talks

On balance, and important though the above areas will be as clues of Chinese intent, it is in the
economic sphere that China’s increasingly active global presence will probably be felt most in
2010. High-profile investments abroad are one part of this, but most will be primarily significant
as symbolic indicators and test cases rather than having huge global consequences. Where
China will matter most in the next few years will be in its wider role in the world economy. This
includes the question of its massive holdings of US debt. Fears that Beijing will use this as a
weapon to hold the US to ransom, or wreak havoc by selling off dollar assets on a huge scale,
are highly unlikely to play out. Beijing’s 2009 noises about moving away from the dollar as the
world’s reserve currency do not portend China’s emergence as an irresponsible and destabilising
influence at the top table of world economic affairs. Leaders in Beijing are obsessed with stability,
but also with rebalancing an international system and institutions it considers skewed to favour
the interests of rich Western powers. China will certainly continue to demand – and sooner or
later will probably get – a much bigger voice in institutions like the IMF, and in bilateral talks with
the US. Meanwhile, Beijing’s handling of its domestic economy, with big decisions looming over
currency and monetary policy pressures, and potentially painful reforms to unleash domestic private
demand will have repercussions that echo far beyond its borders, not least in Washington.

Andrew Gilholm, Senior China Analyst

PAGE 36 RISKMAP 2010

 Regional overviews

Africa

2010 heralds mixed prospects across sub-Saharan Africa. The implications of the global economic
downturn have varied widely, and the path to recovery will likewise not be uniform. The continent
in general is likely to be out of step with the prevailing international trajectory. While a handful of
countries – among them Congo (DRC) and Nigeria – will begin to feel some relief in 2010, many
others may find themselves suffering a second wave of recessionary after-effects. Increased
unemployment or underemployment, state spending cuts, high consumer prices and the slow
recovery of remittance rates from abroad will all have political and socio-economic consequences.

Weathering the storm

Through 2008, the general sense among Africa’s finance ministers and central bank governors
was that the continent was and would remain relatively insulated from the effects of the global
financial crisis. By and large, they appear to have been right: growth on the continent has generally
been steady, though it is likely to have fallen to below 3% in 2009 – about half the average annual
rate seen since 2000. Most countries are expecting to see the beginnings of an upturn in 2010.

These figures, though, do not tell the whole story. There is evidence of increased structural
resilience across Africa’s markets to the types of challenge thrown up by the economic crisis.
However, there are clearly limitations to the role that governments can play in guiding the
post-slump recovery. With their export-led growth models, most countries will have little choice
but to wait for global recovery to buoy them in its slipstream.

This generalisation is to some degree challenged in the continent’s two largest economies, South
Africa and Nigeria. Both have been disproportionately affected by the downturn, but at the same
time have a wider range of resources to deploy, and greater room for manoeuvre, in managing
their recoveries. The implications of the downturn are perceived to have been more pronounced
for South Africa, given its neater integration into global markets. Meanwhile, the crisis has also
provided a sharp reminder that even the most sophisticated economy on the continent is still
hugely exposed by its reliance on primary commodities, having been badly buffeted by the
vagaries of world metal prices. The country is set to run its first budget deficit since 2006, while
the financing requirements of its counter-cyclical capital-spending programme stand to heighten
debt-financing pressures to levels not witnessed since the late 1990s. The 2010 football (soccer)
World Cup tournament will undoubtedly provide a stimulus effect, while moderate concessions to
business during the crisis have demonstrated a degree of adaptive capacity on the part of
government. However, overall the crisis has only accentuated the political challenge of managing
the economy and emboldened the left’s demands for change – a dynamic that will reverberate
throughout President Jacob Zuma’s term of office.

Nigeria’s commodity vulnerability has also been made even more apparent, with the slump
in oil prices bringing a close to 40% dip in the value of its 2009 exports and threatening the
long-term viability of oil windfall savings. Signs of stabilisation in oil prices will be welcome. But
the feasibility of a government amnesty plan for Niger delta militant groups – which were
responsible for attacks on oil facilities that saw production levels plunge by 30% in 2009 –
could be called into question as politicians position themselves for a boisterous campaign in
2010 ahead of the 2011 polls. Moreover, the government’s frantic search for deficit-financing
sources and talk of more borrowing to sustain infrastructure investment will test adherence to
improved levels of fiscal discipline.

Continuing commodity dependence

Elsewhere, the crisis has shone a spotlight on continued primary commodity dependency in almost
all other sub-Saharan countries. It has reinforced long-standing obstacles to diversification, both
by hampering efforts to raise domestic revenues and by reducing the prospect of FDI inflows into
non-traditional economic areas such as labour-absorbing manufacturing and services, as well as
the commercial exploitation of previously untapped primary commodities.

Moreover, attempts to stimulate investment have to rely predominantly on measures such as tax
cuts or periods of tax exemption, or the subsidisation of energy to industrial or commercial consumers.

RISKMAP 2010 PAGE 37

 In light of such measures, even when investment inflow figures start to look healthier, it is questionable
to what extent governments will be in a position to extract benefits from them, particularly in the
form of revenues or employment guarantees.

Thus, despite pre-crisis perceptions of Africa as the last frontier for investors of all shapes
and sizes, commodities are set to remain the primary – if not sole – determinant of African
markets’ relevance and direction. The continent-wide balance of power and balance of interests
between governments and foreign investors has barely altered, despite some positive trends in
individual countries.

Open for business

The continent’s traditional attractions are still the main draw for investors from China and other
emerging markets, despite their increased sensitivity to the need to pay lip-service to the economic
aspirations of domestic governments. State-backed Chinese companies acquired oil reserves in
Cameroon, Gabon and Nigeria in 2009, and will be looking to make headway into Uganda and
Ghana, as well as offshore reserves off Liberia and Sierra Leone, in 2010. They are also likely to
seek to consolidate major mining deals in Guinea, and acquire additional mining assets in countries
from Liberia to Zambia.

Notably, the model that Chinese interests initially used to break into sub-Saharan extractive
opportunities – whereby infrastructure construction and loans were exchanged for access to mineral
resources – shows signs of being replaced by more traditional deal structures, supported by local
banks that are also increasingly being bought into by Chinese interests. The change of approach
is likely to enable a wider breadth of Chinese penetration across sectors.

At the same time, 2010 will see the stepping up of interest in Africa from other emerging market
players. The free-trade agreement (FTA) between India, Brazil and the countries of the Southern
Africa Customs Union is likely to finally be cemented. Meanwhile, Russia’s hastening of debt
forgiveness, along with President Dmitry Medvedev’s tour of oil- and mineral-producing countries
in mid-2009, is expected to foreshadow enhanced strategic investment from that quarter.

No more no go

The entry of new players, and the expansion of the interests of China and other emerging markets
are increasingly coming to mean that no part of the continent is off-limits in terms of investment
potential. Even in Somalia, oil companies are waiting impatiently for the chance to begin exploring
long-held blocks in its somewhat less anarchic semi-autonomous regions. Beyond that, the Horn
of Africa’s variable security climate has proved no deterrent to business, illustrated by the volume
of Chinese investment in Ethiopia in recent years.

In the continent’s other principal problem area, the Great Lakes region, increased investor interest
is having a positive effect on the security situation. The unexpected rapprochement between
Rwanda and Congo (DRC) at the start of 2009 is being consolidated largely on the back of a shift
in emphasis from Rwanda. Kigali has ambitious plans for the development of a methane-extraction
and energy-generation industry around Lake Kivu on the shared border, as well as wider economic
goals. These were not being aided by continued international perceptions of Rwanda as a
destabilising influence in eastern Congo.

Equally, an improvement in relations between Uganda and Congo (DRC) is largely being driven
by mutual pragmatism over the need to create conditions that will facilitate the development of a
viable oil sector on both sides of the Albertine Graben. Further assets are likely to be confirmed
in the area in 2010, adding to already significant oil finds there.

Although the spike in piracy in the Gulf of Aden has eclipsed maritime insecurity in the Gulf of
Guinea during 2009, the region will remain a hotspot for pirate activity in 2010. Attacks will be
especially prevalent in Nigerian waters and, increasingly, offshore Cameroon. However, the
ever-evolving tactics of Niger delta-based militant groups and copycat pirate gangs mean that
areas as far west as Sierra Leone, where prospective oil finds have recently come to light, and
as far south as Equatorial Guinea may not be immune to insecurity.

PAGE 38 RISKMAP 2010

Infrastructure deficiencies to hold back progress

One risk that will re-emerge as recovery kicks in is infrastructure deficiency, which has been in
many cases slightly – but only temporarily – alleviated by crisis-related falls in the use of port and
other transport facilities, and in demand for energy. Major upgrade projects, including Botswana’s
Morupule B coal-fired power plant and power-generation facilities in South Africa and Zambia,
have been delayed – in some cases due partly to temporary reductions in consumption, but
largely because of a shortage of finance. In the Morupule case, insufficient funding is allied with
the obstacle of South African power utility ESKOM’s stalling over signing a power-purchasing
agreement, despite the country’s critical need for new capacity to support existing as well as
new investment.

Given the suspension of new projects and the simultaneous falling off in maintenance spending,
much key but already overstretched infrastructure will be in a worse state of dilapidation post-crisis
than it was two or three years ago. The consequent lack of spare capacity to support an economic
upturn will once again impose an unbreachable ceiling on growth and expansion prospects pending
progress in key upgrades. South Africa is an important exception; the 2010 World Cup infrastructure
budget has provided generous resources for infrastructure ancillary to the tournament, as well as
for more general projects such as port upgrades.

Feeling the strain

The state of infrastructure supporting economic activity, however inadequate, is still vastly superior
to the utterly abject state of the services provided to many ordinary people. Where demand is
stretched, it is the general public that tends to lose out as scarce resources are channelled to
investors. The continuing infrastructure deficit, along with resurgence in demand, is likely to see
increasingly regular electricity and fuel shortages (and therefore increased transport costs).
These stresses are likely to be accompanied during the course of 2010 by recovery-linked rises
in food prices.

Such circumstances, in tandem with the reduced ability of governments to spend to appease
fractious public opinion and mask their limited legitimacy, will increase the likelihood of outbreaks
of popular volatility across many parts of the continent. Countries including South Africa,
Senegal, Kenya and Mozambique are particularly at risk. With potential orchestrating forces –
notably labour unions – seeing their influence and bargaining power considerably dampened by
the continuing effects of the crisis on availability and security of employment, discontent is likely
to manifest itself in less focused ways, such as spontaneous civil unrest and sabotage.

Kenya in particular is one to watch. The extent of disorder seen in response not only to economic
conditions, but also events such as the publication of census results early in 2010 and any
prosecutions of senior political figures by the International Criminal Court, will provide a useful
indicator of the atmosphere that will surround preparations for the next elections, due in 2012.

Governments not under threat

However, neither unrest nor any wider effects of the financial crisis are likely to materially undermine
the legitimacy or survival prospects of incumbent governments. In all looming elections, inherent
and usually long-standing domestic factors will be key in determining outcomes. Presidential
elections due in Burundi, Burkina Faso, Guinea, Togo and Tanzania in 2010 will each showcase
a different dominant dynamic in the spectrum of familiar sub-Saharan themes.

The sudden death of a long-standing authoritarian leader in Guinea has exposed the hollowness
of state structures, and the extreme weakness of the foundations for democratic and civilian
governance. In Burundi, an externally mediated and imperfectly executed post-conflict transition
has left a country that may be able to weather the test of an election, but where the zero-sum
logic of war is only slowly being softened. In Burkina Faso, Togo and Tanzania, to varying degrees,
the failings of dominant parties may result in popular disenfranchisement and disenchantment,
but incumbents are vulnerable primarily to internal machinations rather than opposition threats. In
none will the fallout from domestic or international economic events genuinely alter the electoral
playing field. In all, the incumbent is likely to remain in office.

RISKMAP 2010 PAGE 39

 Put away the red flags

We see relatively few red flags marking the broad political risk landscape for investors in Africa in
2010. By and large, most countries have stayed the economic liberalisation course and resisted
the temptation of knee-jerk responses to the financial crisis. No African country save for the
Seychelles has been in real danger of sovereign-debt default despite the financial crisis, testifying
to improved domestic economic management in recent years and a broader international refusal
to allow vulnerable countries to fail.

While rhetoric on resource-nationalisation and ‘use it or lose it’ ultimatums has become more
common, this has generally been aimed at appeasing a domestic audience. Governments by and
large appreciate that they have neither the expertise or credibility – nor probably the desire – to
run key economic sectors. In cases where the government intervened directly in investment projects
in 2009, notably in Congo (DRC) and Guinea, drivers were more political and strategic than
economic. All provide positive indications that governments generally continue to recognise the
need to maintain consistency for investors regardless of short- and medium-term pressures.

Americas

When the financial crisis took a turn for the worse with Lehman Brothers’ collapse in October
2008, many analysts were quick to forecast economic and political mayhem in Latin America.
The pessimism seemed well founded: 25% of all financial crises since 1970 have taken place in
the region. Capital flight was a serious problem for much of the 1980s and historically high debt
levels made the region vulnerable to shifts in the economic mood – it was hard hit by the 1998
Asian crisis.

A year on, most analysts have turned out to be wrong. Of course, local economies were affected,
but the stereotype of a populism-prone, commodity-dependent region has been shattered. Many
Latin American countries have benefited from sustained reforms and greater political maturity.
But the region’s performance during the recession may generate complacency that allows
reforms to run out of steam. The new optimism might be as misplaced as earlier pessimism.

Confounding expectations

Latin America’s performance during the recession is partly because its governments have
become much savvier at managing their resources and adopting prudent macroeconomic policy.
Even in countries with a more anti-market bias – such as Argentina, Venezuela and Ecuador –
governments have been smarter than expected. Despite a sharp fall in oil prices, Venezuelan
President Hugo Chávez managed resource windfalls better than his critics expected and kept his
popularity afloat. In Argentina, predictions of renewed financial collapse have proved far-fetched
so far. While the methods are at times questionable – nationalisation of pension funds in
Argentina and of foreign assets in Venezuela – the populists have recognised the limits of some
of their anti-market policies. The long-term sustainability of these methods is also questionable:
high levels of state involvement and public spending risk leaving an overburdened economy for
the next administrations.

Progress is undeniable where moderate governments have been in power. Brazil, Chile,
Uruguay, Colombia and Peru have all suffered to varying degrees, but will continue to respond
with a high level of political stability and sound economic policy. With a few exceptions, the resolution
cost of financial crises for governments in the region has progressively diminished over the
years, suggesting that decision-makers have learnt the lessons of past catastrophes and
improved their policy frameworks.

PAGE 40 RISKMAP 2010

Financial crises in Latin America and their costs since 1970

Argentina 2001
Nicaragua 2000
Colombia 1998
2 1
2 1 1
Ecuador 1998
Argentina 1995 2
Paraguay 1995
1 1 1
Brazil 1994
Venezuela 1994 2
2
Mexico 1994
Argentina 1989
Colombia 1982
Uruguay 1981
1
2
Chile 1981 1
Argentina 1980

0 10 20 30 40 50 60 2
Resolution costs as percentage of GDP 4 1

Number of crises
25% of systemic banking crises globally since 1970
have occurred in Latin America

Source: IMF, World Bank

Expectations of a shift towards populism have also been confounded. Electorates appear to have
greater trust in democratic institutions – or at least are learning to be sceptical of radical promises.
Populism has its successes, but the Kirchners’ dwindling popularity in Argentina shows that it is
no longer seen as a bargain: they are heading for a fall in 2011. However, institutions are not
strengthening as quickly as is desirable: Colombian President Álvaro Uribe is struggling to resist
the lure of a third term; Chávez, Ecuadorian President Rafael Correa and Bolivian President Evo
Morales remain addicted to constitutional referendums; and Nicaraguan municipal elections were
tainted by fraud allegations.

But the image of Latin America as riddled by coups and caudillos is no longer accurate. The ousting
of Honduran President Manuel Zelaya in June 2009 bucks a long-term trend of decline in such
overthrows. The radicals grab the headlines, but are the minority. For every Chávez, there are
numerous moderate counterparts: Luiz Inácio ‘Lula’ da Silva in Brazil, Michelle Bachelet in Chile,
Tabaré Vázquez in Uruguay, Felipe Calderón in Mexico. All are based around the centre-left or
centre-right of the political spectrum, and will continue to favour economic austerity and welcome
foreign investment. With the exceptions of Venezuela and Argentina, arbitrary state intervention
and political instability have generally been restricted to smaller economies, such as Nicaragua,
Bolivia, Guatemala and Honduras. And while the likes of Nicaragua are likely to persist in this
trend, others – notably Argentina – seem to be heading towards a more market-friendly shift in
the medium term.

RISKMAP 2010 PAGE 41

 Successful coups in Latin America since 1960

14

12

10

0
1960s 1970s 1980s 1990s 2000s

Honduras 2009

Source: SEC

Running out of steam

The region’s success to date in dealing with the crisis will influence the kind of threats that
investors face in the years ahead. In the past, multinationals have worried about nationalisation
and creeping expropriation, but we believe the greatest political risk in the next few years will be
immobility. There is a risk that governments in Latin America will lose the motivation to persist
with much-needed reforms, such as fixing inefficient and distorted tax systems and reforming
inflexible labour markets. The difficulties Calderón has faced in his efforts to reform Pemex in
Mexico and Lula’s inability to deliver on the government’s promise of a tax overhaul reveal some
of the political failures overshadowed by the financial crisis. It is no longer a case of proving to
investors that policy can be competently implemented or that decision-makers care about
macroeconomic stability. As a maturing region, Latin America needs reforms that facilitate private
investment and make companies’ lives easier, ultimately ensuring sustainable economic growth.

Despite successes in macro policy, the region still suffers from problems that hamper its
attractiveness to investors. The broadly successful handling of the financial crisis may generate
complacency, softening the political will to push for greater change. Tax and labour reforms,
streamlining of the public sector and other crucial overhauls require hard-won consensus in
parliaments and great efforts to win over public opinion – particularly in Latin America, where
multi-party systems with proportional representation are common. Corruption – both in the private
and public sector – also remains a significant concern, with the region’s three major economies
(Brazil, Argentina and Mexico) showing no improvement in international surveys such as TI’s
Corruption Perceptions Index (CPI). Without strong commitment, governments will not be able to
pass such reforms. These types of reform also require taking away entitlements from those who
benefit from current distortions. Europeans and Americans can attest to the difficulties of
implementing such measures when gains are widespread and costs concentrated (hence lobbies’
potential for obstructing spending cuts and other kinds of restructuring).

The risk of immobility may not seem as drastic as expropriation or nationalisation, but if acute it
could stall growth potential in the medium-to-long term. In a worst-case scenario, this could breed
social discontent, causing future complications for private companies in the form of social unrest.

PAGE 42 RISKMAP 2010

Spending and unions

Part of the standard government response to the financial crisis has been strong fiscal stimulus
measures, used to prop up social programmes and public-sector employment. Spending packages
aimed at boosting infrastructure investment have also been common, with Brazil, Argentina and
Colombia leading the way. However, as the recovery progresses, governments will find it hard to
cut these new entitlements from their beneficiaries, particularly given the strength of public-sector
lobbies around the region. Elections will be held in 2010 in Brazil, Colombia, Peru and Costa
Rica, and no incumbent will be willing to significantly reduce state assistance in this context.
Indeed, electoral spending might have the perverse effect of consolidating some of the measures
taken during the crisis, making it even harder to reduce assistance beyond next year. Badly timing
the withdrawal of government support could equally leave economies exposed at the wrong moment,
sowing the seeds of future unrest.

Within this new regional context, project-specific risk will become especially important for companies.
While ‘hard’ political risks such as expropriation are likely to continue to become less acute in
most states, ‘soft’ political risks – such as community activism and labour relations – will almost
certainly gain in importance. Companies’ relationships with labour unions, for example, will have
to be thoroughly monitored because these groups are gaining leverage. Even where governments
have broadly accepted market-friendly principles, unions such as the Petroleum Workers’ Union
in Mexico or the Main Central Union for Workers (CUT) in Brazil are powerful. Community activists
– whether indigenous groups, environmentalists or human rights advocates – will also become
increasingly organised and co-ordinated, and cause business interruption when they see fit.

The US factor

The Latin American region’s growing commercial links to non-traditional markets, especially
China, are another reason why much of the region could handle the downturn once the US economy
plummeted. Mexico, hugely dependent on its northern neighbour, was a clear exception.

The shift was partly a result of being ignored by the George W Bush administration. Although
most leaders welcomed the arrival of President Barack Obama, he will not substantially alter his
predecessor’s policy. Rhetoric aside, Latin America remains a low priority on Obama’s foreign
policy agenda and he is unlikely to engage comprehensively with the hemisphere.

In 2010 the status quo is likely to prevail in north-south relations. The US continues to focus its
attention on conflicts in the Middle East and on its relationship with Russia and Asia. Trade pacts
are likely to remain in limbo and the withdrawal of US agricultural subsidies that would open up
the market for Latin American commodities seems an unlikely prospect. Despite hints of concern
over growing Chinese involvement in the region, the US administration is unlikely to take concrete
action to counter the trend.

One specific case where US policy could have a significant impact is Cuba, a state that has
always followed a course of its own. A lifting of the economic embargo imposed on the island
could have significant positive economic repercussions, though its political effect is less clear.
Raúl Castro has kept a firm grip on power since taking over from his brother Fidel and has
shown an expected degree of pragmatism, combining a heavily authoritarian stance with a slow,
gradual opening of the economy – a trend we expect to continue.

Security: lagging behind

One area where the region is lacking is the failure of improved wealth distribution and economic
growth to translate into greater security. In many cases, companies continue to face the same
kind of threats that they faced five or ten years ago, and significant improvements are unlikely.

With the clear exception of Colombia, where the security environment has significantly improved
during Uribe’s tenure, security conditions in most Latin American countries have remained broadly
unchanged, or deteriorated. Mexico has grabbed the headlines, with battles between drug gangs
and government forces and the continuing rise in kidnapping. Even though the press exaggerates
the impact on businesses (and the wider threat to the state), the government’s lack of success in

RISKMAP 2010 PAGE 43

 fighting organised crime is troubling. In Central America, Guatemala and Honduras present an
even worse scenario, with the additional risk of becoming failed states in the medium-to-long
term. Crime continues to plague Brazil’s urban centres, while once-tranquil Buenos Aires has
seen a rise in both common and organised crime. Perhaps the worst deterioration of all has
happened in Venezuela, a country that ten years ago was relatively safe, but that now tops the
charts in terms of crime rates.

There is little prospect of improvement over the course of 2010. Governments have not been
able to implement the structural changes needed and an effective long-term strategy would entail
costly public policies that lack the short-term benefits that might endear them to politicians. In
some countries, insecurity has become so ingrained that it is no longer a political issue at election
time: there is no value in addressing it. Security has barely been mentioned in early phases of
campaigning for Brazil’s 2010 presidential election. Neither the ruling Workers’ Party (PT) nor its
main adversary, the Brazilian Social Democratic Party (PSDB), seem to believe that they can
extract political benefits by campaigning on the issue. Even though this is somewhat specific to
the Brazilian context, it nevertheless highlights what can happen in other countries once the
problem goes unaddressed for too long.

While Latin America does deserve some praise for weathering the storm so well, the road ahead
will be anything but easy for both governments and investors. The relatively successful handling
of the financial crisis was a turning point for the region, but one that will bring new challenges,
especially the implementation of microeconomic reforms. Governments have yet to show the
political will that such reforms demand, and are unlikely to do so in the year ahead. In our view,
while opportunities in several sectors – for example oil and gas, telecommunications and the
banking industry – will inevitably arise in the context of an economic recovery, progress will be
slower than many expect. Investors will have to be careful in 2010 not to be caught again by a
herd mentality, this time an optimistic one.

Asia

Asia came through the worst of the recent global financial and economic turmoil better than most
people expected, to end the year as the brightest spot on a very gloomy map of the world economy.
The region’s rebound will strengthen in 2010, reinforcing Asia’s stand-out status as the leading
destination for businesses and investors in search of growth. India, and above all China, will remain
the key to this outlook, growing at rates above 6% and 8% respectively.

The economic performance and relative political stability of Asia’s leading economies will sustain
resurgent excitement about the ‘Asian century’ as it enters its second decade. Underlying this
cliché is a very real long-term trend, visible in the business, economic, political and security
spheres, and amplified by the financial crisis. The year ahead will bring more manifestations of
Asia’s rise, and above all China’s, but the accompanying hype threatens to mask the fact that, as
well as growth and opportunity, there are also plenty of political, economic, security and business
risks ahead for Asia in 2010.

Growth and risk

In the second half of 2008, the atmosphere of near-panic about the global economy caused most
pundits to rush into excessively gloomy predictions about Asia’s 2009 prospects. In the second
half of 2009, with the mood dominated by Asia’s striking resilience compared with other regions,
the temptation instead is towards excessive optimism.

Overall, the outlook is certainly relatively bright, and not only because of China and India. Japan,
still Asia’s largest economy, will remain anaemic, but should manage to shake off further recession.
Indonesia will continue to impress on both the economic and political fronts, and the ‘Asian tigers’
(South Korea, Taiwan, Hong Kong and Singapore), Thailand and Malaysia are all set to rebound
from sharp recessions in 2009 to post significant positive growth in 2010. Among smaller economies,
countries like Vietnam and Bangladesh continued to grow rapidly despite the crisis and are expected
to expand at rates well over 5% in 2010, while countries as diverse as Mongolia and Papua New
Guinea may be moving towards greater realisation of long-recognised resource potential.

PAGE 44 RISKMAP 2010

Stimulant addiction

This outlook is the cause of justifiable optimism, but is only part of the 2010 story. Asia’s resilience
has been a reminder that healthy developing economies, especially in the region, have strong
underlying growth beyond exports, but it is certainly not evidence of some sudden new self-reliance.
Export demand and capital supply from developed Western economies are still major factors for
most, especially East Asian, economies. Asia’s resilience is mainly explained not by an explosion
of demand and trade within the region, but by the more straightforward factors we highlighted in
RiskMap 2009: relatively sound financial systems and balance sheets, little exposure to ‘toxic
assets’ going into the crisis, and governments willing and able to launch swift and aggressive
stimulus responses.

But sooner or later, that stimulus will have to be phased out. It remains far from clear that private
investment and consumption will soon recover to support rapid growth without large-scale stimulus.
Millions of Asians have lost their jobs, exports will make no rapid return to pre-crisis levels, and
most economies are plagued by over-capacity. So, while GDP growth rates are picking up strongly,
job creation, and private investment and consumption could prove more elusive. Asia’s policy-makers
are well aware of the risks to recovery, but face serious dilemmas. Fear of another slump will
bring great caution in tightening fiscal and monetary policies, but too much caution could see inflation
problems return. Countries such as China could see a return of worrying asset-price inflation, while
consumer price inflation may rise in India, Pakistan and Vietnam, where concerns over food prices
are never far away. Continued aggressive stimulus spending could also put pressure on the healthy
balance sheets and financial systems that made Asia resilient to the crisis in the first place.

Political pressures

Most countries are likely to manage these dilemmas reasonably well and achieve solid growth as
expected. However, If the US and EU recoveries falter or further financial shocks occur, Asia’s
rebound could look less assured by late 2010. China is the only Asian economy that really offers
a substantial demand buffer and it is more vital than ever before to the performance of its neighbours.
But China is itself a prime example of some of the challenges facing regional governments. It must
rebalance its economy to derive more growth from private domestic sources rather than government
spending and exports, and must reduce industrial over-capacity and undertake major financial
reforms; all these tasks entail major social and political costs.

In China and elsewhere, rather than celebrating their recovery, leaders will be feeling strong domestic
political pressures to address short-term concerns about supporting growth and employment. The
widely recognised long-term need for rebalancing and reform will often come second, and protectionist
tendencies will be a persistent risk. Yet the region will prove a mixed bag of reform and resistance,
and some countries will manage to implement some liberalising steps in an attempt to boost
growth. Examples of this in 2009 have included South Korea’s free-trade agreement (FTA) with
the EU and Malaysia’s services sector liberalisation. Such moves will create further opportunities
for foreign investors in 2010, including in the key markets of China, India and Indonesia. The
prospect of growth in local markets, and relatively cash-rich Asian players (not least governments)
looking for bargains in developed markets, will also mean the region remains a key player in
mergers and acquisitions activity in 2010.

In most major economies, relative political stability remains an important pillar of continuing strong
economic prospects. The emergence of governments with strengthened mandates in India and
Indonesia in 2009 has paved the way for a period of greater political stability and policy consistency,
while in Japan the Democratic Party of Japan (DPJ)’s election victory after decades of almost
unbroken Liberal Democratic Party (LDP) rule could bring new impetus for reform. But at the
other end of the scale, a few countries face far more fundamental and severe challenges than
managing incremental economic policy adjustments and reforms.

Notably, in Pakistan – a key stability concern for the coming year – the urgency of finding solutions
to more serious problems will be particularly acute, given the fragility of the economy, and the
potential implications for an equally brittle political and security environment. The outlook for
President Asif Ali Zardari is uncertain given his isolation and unpopularity; the opposition will continue
to position itself to benefit from further blows to government credibility, but an overt military
takeover is not expected in the near term.

RISKMAP 2010 PAGE 45

 Testing transitions

Indeed, if 2009 was the year of stable political transitions among Asia’s major democracies (India,
Japan and Indonesia), then 2010 brings the prospect of less secure change among some of the
region’s more troubled and intransigent states. Burma (Myanmar) and Afghanistan will be
undergoing unstable political transitions, with parliamentary elections in both states likely to be
marred by allegations of voter intimidation, electoral manipulation and, certainly in the latter case,
violence. The Philippines and Sri Lanka are also set for political turbulence in the coming year:
the current administration in Manila must be replaced (with presidential, parliamentary and local
elections scheduled to take place in May), while the incumbent government in Colombo faces
parliamentary elections by April, and possibly a presidential election thereafter.

Meanwhile, the political scene in Malaysia and Bangladesh will remain precarious amid the
increasingly heated and confrontational relationships between ruling and opposition groups, with
the latter actively attempting to undermine the former through coalition defections and popular
unrest. In Bangladesh, this friction will put persistent pressure on efforts to consolidate the country’s
return to democracy in 2009, and cast doubt on its ability to fulfil its considerable economic
potential. In Malaysia, with the main opposition leader preoccupied with a legal battle, Prime
Minister Najib Razak may feel strong enough to call an early election in late 2010, but this could
bring a fierce and unpredictable contest. Elsewhere, Nepal will struggle to meet a deadline to draft
a new constitution by May as disputes continue between Maoist insurgents-turned-politicians and
the ruling multi-party coalition, putting the peace process under way since 2006 under strain.

Finally, while 2010 may very well pass with both men still firmly on the scene, the deteriorating
health of North Korean leader Kim Jong-il and Thailand’s king will be a considerable source of
political uncertainty – and potential instability – for their respective countries. Kim Jong-il has
recovered for now from serious health problems, but were he to become unable to lead, the risks
of destabilisation would greatly increase, while succession planning is a highly tense and uncertain
process. Similarly, rumours about succession and the king’s health will persist in Thailand in
2010, generating jitters over economic and political security and the prospect of another military
coup. While the military is satisfied with indirect influence for now, it would almost certainly step
in should supporters of deposed former premier Thaksin Shinawatra seek to exploit instability in
a succession scenario.

Persistent insurgencies, intractable conflicts

Advances by extremists in Afghanistan and Pakistan will continue to alarm in 2010, with implications
reaching far beyond the borders of each state. Authorities in Pakistan face a battle to contain Islamist
extremists in safe havens in the tribal areas of the north-west and to prevent a further intensification
of their hold on parts of Sindh and Punjab, as well as Baluchistan. The state is not under threat,
but militants will continue to challenge its authority and trouble the US administration that has made
stabilising this region a top priority. In Afghanistan, a larger presence of foreign troops will not silence
insurgent groups. Operating from a position of strength, they have no incentive to take part in
negotiations. But militant safe havens on the Afghanistan-Pakistan border have a limited direct impact
on insurgencies elsewhere in Asia, despite their role as sites and exporters of training, expertise,
planning, motivation and recruitment to militants with a multitude of backgrounds and objectives.

While there is evidence of some communication between, for example, the regional extremist
Jemaah Islamiyah (JI) in Indonesia, Muslim separatists in southern Thailand and the Philippines,
and al-Qaida, militant and insurgent activity will remain in most cases local in motivation and execution.
Fears that the separatist insurgency in Thailand could morph into an Islamist jihad are dwarfed
by the reality that in the near term the campaign will remain first and foremost a struggle for
self-representation, with a limited impact on the national business environment. All the same, the
potency of a brand of Islamist extremism with widespread appeal means the spectre of terrorist
attack continues to hang over key cities across the region. While it is striking that India has
escaped a major terrorist incident since the Mumbai attacks of November 2008, carnage returned
to the Indonesian capital in mid-2009 with the first terrorist strike in the country since 2005. Both
remain vulnerable to being hit again in the immediate term.

Confidence in state-led counter-terrorism initiatives across the region is limited. In Indonesia, the
authorities have, with a flurry of action since the Jakarta hotel bombings of July 2009, begun to

PAGE 46 RISKMAP 2010

re-earn the plaudits won in recent years for effective efforts to defeat the numerous splinter cells
and offshoots of JI prior to the strikes. But such successes belie a longer-term challenge to stay
on top of well-entrenched terrorist networks that, as the Jakarta attacks showed, have in some
areas far greater support than was initially understood.

Improvements in Indian security infrastructure can only partially account for the absence of a major
terrorist attack on Indian soil in 2009. Hosting the Commonwealth Games in Delhi in 2010 will be
a key test for India’s authorities, under pressure to improve problems related to intelligence-sharing
and rapid response capacity. And while increasing radicalisation among its millions of Muslims
poses a genuine threat to stability, an extreme leftist insurgency also threatens to deepen and widen.

The fluidity of militant identities will complicate government efforts to counter terrorism. Difficulties
are illustrated by claims of responsibility for attacks from little-known or obscure groups such as the
Indian Mujahideen/Deccan Mujahideen in India or the Baluchistan Liberation United Front (BLUF)
in Pakistan, or by the provision of a safe haven by one group for another, as in the case of the Moro
fronts and the Abu Sayyaf group in the southern Philippines. There too, the communist New People’s
Army faces disassembly from the edges, but remains a threat in rural areas beyond state control. The
Sri Lankan government will hope that its military defeat of the separatist guerrilla Liberation Tigers of
Tamil Eelam (LTTE) sets a precedent for states battling insurgent groups. But the all-out military effort
was costly in lives and funds, and has produced unsatisfactory results in that its treatment of Tamils
has created the conditions for further conflict. The struggle for self-rule is likely to continue in
some form.

The Asian century turns ten

Amid all these problems and risks, growth and opportunities will persist and the fundamental
challenges for foreign business leaders in Asia remain the same. They face intense pressure to
stay ahead of trends, adjust to and profit from the region’s rise, and compete in very different
operating environments, while upholding global corporate standards to manage potentially severe
risks. As the ‘Asian century’ turns ten, most local markets are no longer so alien, and many leading
foreign businesses are already well established. But for new entrants and veteran Asia players
alike, the balancing act required for long-term success in the increasingly complex, competitive
markets is getting more, not less, difficult. Distinguishing between hype and reality, risk and
opportunity will continue to demand strong understanding and attention.

Europe and the CIS

As the world shifts back into positive growth and a number of significant economies follow suit –
France and Germany saw their recessions end in mid-2009 – it appears that recovery is ahead.
Governments across the region have used bailouts, stimulus packages and other measures to
maintain a semblance of normality, and the extent of this state intervention will be a key issue for 2010.

West put to the test

Western Europe’s post-crisis economy is unlikely to differ greatly from its pre-crisis economy in
terms of state involvement. Talk of ‘new economic paradigms’ is largely superficial, used by politicians
to suggest that they represent change at a time when the status quo is bad. The region will not
desert the pattern of liberal market economics with varying degrees of social support that has
developed over the last 30 years.

But whether they like it or not – and most do not – a number of governments have been left with
significant chunks of equity in key sectors, notably banking. In all but the most extreme cases
(Iceland and Ireland), we believe that governments will make little use of these stakes, and in
many cases downplay their significance entirely. Even examples with a newly heavy state presence
like the British banking sector are unlikely to see the government insist on day-to-day policy
direction. Hints and persuasion will have a greater role than the government’s representative in the
boardroom, if there is one.

In countries with struggling centre-left administrations, such as Spain and the UK, the opposition
is talking up concern over the size and persistence of public debt forecasts. The British Conservatives,
set to come to power in May/June 2010, are particularly keen both to pay down this debt and to

RISKMAP 2010 PAGE 47

 reduce the state’s role in the economy. They will seek to divest government holdings as soon as
is practical, and will brush off concerns that holding on for longer or taking a more active role in
banks’ futures might represent better value.

Elsewhere, satisfaction at the supposed failure of the ‘Anglo-Saxon economic model’ is of scant
consolation when the likes of Fortis, Dexia and Hypo Real Estate have had to be taken into partial
or total state ownership. These institutions will work hard to move out of government ownership
in the early years of the recovery, and governments will be broadly happy to let them. State
involvement will be muted, understated and as short-lived as possible.

The exception will be the hardest-hit countries, where the question is not so much about the
state’s role in the economy, but about the economy’s role in the state. Iceland, with its total bank
bailout, and Ireland, with its ‘bad bank’, have no choice but to have greater state involvement.
Because of its balance sheet – and increasing disenchantment with the IMF – Iceland will have
to go it alone for some time, even if it secures EU membership by 2013, and this means the state
will remain involved. Ireland needs property prices to rise across the board by 10% from current
levels within ten years to come close to breaking even on its bad bank plan. Both countries face
a long – and interventionist – haul.

CEE-ing it through

In Central and Eastern Europe (CEE), governments intervened rather less than further west,
largely because they could not afford to. Their pre-crisis fiscal positions were generally weaker,
particularly in the cases of Hungary and Romania. Lower credit ratings and higher risk profiles
relative to Western European countries (that were also issuing huge quantities of debt) reduced
access to capital markets. The region survived without large-scale bank bailouts, though
governments tried to support banks through regulatory measures.

The increase in the state’s economic share has been more a result of a shrinking private sector
than increased intervention. The long-awaited expansion in small and medium-sized enterprises
seen in the second half of the 2000s came to a juddering halt, with an unprecedented number of
bankruptcies and defaults. But the state’s role in the economy is as strong as ever. Few governments
have used the crisis as an opportunity to restructure their oversized and inefficient public sectors,
which remain a chronic burden in countries such as Croatia, Hungary or even Poland. Secondly,
in most CEE countries domestic business groups have strong state links – often through control
of the local public administration – and are able to obtain undue benefits and preferential contracts.
The state is there to stay, and will continue to affect business operations both directly and indirectly,
though less than in places further east.

Baltic blues

Latvia may have attracted most headlines, but all three Baltic states have been hit hard. Buoyed
by years of double-digit growth, their economies developed structural imbalances that translated
into severe recessions once the crisis hit. But despite dire economic and fiscal conditions,
governments have gritted their teeth and maintained their currency pegs to the euro in the hope
of joining the eurozone as soon as possible. The involvement of the IMF and/or the EU – traditionally
forces for privatisation rather than nationalisation – in their recovery plans will limit the potential
for state intervention, while ensuring that fiscal policies will be carefully managed and regulated.

The Baltic states have already shown that they are willing to risk unpopularity by favouring austerity
over a loosening of fiscal policy, but 2010 will test their commitment. Latvia, whose government
toppled in February amid social discontent over anti-crisis measures, again faces a period of
political instability after the largest party in the governing coalition reneged on promises to raise
taxes, threatening the IMF bail out. In Estonia, the government is struggling to cut spending to
reduce the budget deficit in line with eurozone requirements, with aggressive cuts pushing public
support towards leftist parties with less enthusiasm for stringent fiscal policy. Lithuania appears
best off, with a popular president seemingly able to keep the country’s focus on the euro prize.

PAGE 48 RISKMAP 2010

Russia and Ukraine

Despite being one of the hardest hit of the G20, Russia has maintained basic economic and political
stability by drawing on its large reserve funds, aided by the recession’s short duration. But the
crisis has thrown into greater relief long-standing structural weaknesses: a high dependency on
energy exports, widespread corruption and unreliable rule of law. The greatest shortcoming – and
key to all the others – is the state’s dominant role in politics and the economy, which allows
bureaucrats, politicians, courts and the security services to operate with minimal accountability.

The use of the oil reserve fund to support business and society through the recession has only
increased reliance on this paternalistic system. This will continue into 2010, though funds may
run out at some point during the year, with the peak oil prices that fed the reserve long gone; the
government has provided for tax increases and international borrowing when this happens.

The business environment will remain characterised by the familiar problems mentioned above,
but without pre-crisis growth rates to sugar the pill. State-loyal oligarchs will continue to dominate
the economy. The state has not used the crisis as a pretext to continue expanding its presence in
lucrative sectors – notably energy and mining – but equally it has not pushed market principles.
Much of the anti-crisis strategy has involved subsidising poor performers (such as car-maker
AvtoVAZ) in an attempt to contain unemployment and prevent social problems: the government
has favoured social stability over the more radical option of allowing inefficient enterprises to go
under to encourage longer-term competitiveness.

The Ukrainian state’s fundamental weakness is more an issue than its economic activities.
Constitutional reforms enacted after the Orange Revolution created ambiguity between the roles
and powers of the presidency and the government. Combined with internecine factional struggles,
this reduced the country to a state of political paralysis throughout 2009, hindering any systematic
response to the recession. It even prompted serious talk in the EU and Russia of the Ukrainian
state handing management of its gas transit network to an EU-Russia consortium, a rare example
of a European state potentially disempowered by the crisis.

There is potential for the presidential election due in January 2010 to unblock the system, reset
relations with Russia and enable a co-ordinated approach to tackling the steep decline that
brought Ukraine to the brink of sovereign default in 2009. The outcome remains in the balance,
causing further delays to essential reforms as the government turns to short-term pre-election
populism. A tight, disputed result would prolong the gridlock and hamper economic recovery.

Centralising or ceding control

Governments and state entities across Central Asia and the South Caucasus intervened to stabilise
their economies, either through loosening monetary policy, increasing benefits and public-sector
wages, or devaluing currency. However, particularly in hydrocarbons-rich countries, the crisis also
resulted in an acceleration and deepening of the state’s reassertion of power in key sectors. As
countries emerge from the crisis, this trend is unlikely to reverse.

In Kazakhstan, high oil prices in the pre-crisis years enabled the state to claw back influence in the
oil and gas sector by increasing the role of national champion KazMunayGaz (KMG). While the
government has drawn back from a plan to impose a massive duty on oil exports, for fear of investors
closing off production on cost grounds, the trend of maximising revenue from natural resources will
persist. Foreign companies will be forced to accept a large role for KMG in all future projects; other
natural-resource sectors, such as mining, will see similar developments. The government has made
no secret of the fact that state involvement is part of its long-term industrial development policy.

A similar trend is likely in Azerbaijan, with the government taking an increasingly bold line with
investors, and political and economic power continuing to concentrate in fewer and fewer hands.
As in Kazakhstan, the role of state oil and gas champion SOCAR is gradually expanding, while
even nominally private companies are owned by politically connected individuals, resulting in a
highly uncompetitive investment climate.

RISKMAP 2010 PAGE 49

 The crisis has had little discernible impact on state-business relations in Turkmenistan. Official
recognition that foreign investment was necessary to develop the country’s technically challenging
hydrocarbons fields came as early as 2007, though the state will continue to favour government-
to-government contracts, complicating conditions for private companies. Similarly, in Uzbekistan
much foreign investment comes from state-owned entities, while private companies have long
resented aggressive and intrusive state practices.

For smaller countries with few resources, the downturn reinforced government reliance on external
support. Armenia, Kyrgyzstan and Tajikistan all received large inflows of foreign multilateral and
bilateral assistance: the Chinese and Russian states have acquired key roles in the economy as
a result. In Georgia, the war with Russia will continue to overshadow the financial crisis in terms
of impact on business. Georgia has largely weathered the economic storm thanks to a $4.5bn
donor assistance package that will enable the authorities to retain their emphasis on ‘small
government’. Problems of implementation will persist, partly stemming from the sheer number of
regulatory and legal changes that have been approved in a relatively short space of time.

The EU – still in search of a role

The EU has made ambitious noises throughout the crisis, seeing the chance for a role in
shaping the future European economy. But nobody seems sure what that role will be. The
G20 has largely supplanted it in terms of multilateral ‘thought leadership’, and much of the
energy that could have been devoted to generating consensus on issues such as banking
reform or remuneration has gone into ensuring ratification of the Lisbon Treaty.
With markets and fiscal positions far removed from the relative stability of the mid-2000s,
the EU’s functions of competition regulator and fiscal overseer are in a quandary. The
Stability and Growth Pact’s budget deficit limit of 3.0% of GDP has long been the cornerstone
of Europe’s fiscal architecture, but has been quietly, if temporarily, forgotten as tax revenues
have fallen and stimulus packages have kicked in.
German state aid to troubled car-maker Opel and its new owner, parts-maker Magna, will
test EU effectiveness. The government plans to support Magna’s operation with up to
€4.5bn, on condition that German jobs are first in line to be protected from likely wide-ranging
cuts. If re-elected German Chancellor Angela Merkel sends such a package to the EU for
consideration, the new competition commissioner will face a tough baptism: either reject
German demands and risk alienating the largest member state, or fudge a solution and
potentially alienate several others. As ever, the EU will be far too busy with its internal battles
to go looking for new wars to fight.

Middle East and North Africa

While the rest of the world has been preoccupied with the global recession, politics has remained
the primary focus in the Middle East. Developments across the region in recent years have
emphasised the primacy of political over purely economic issues in generating large-scale political
instability. For example, incidents of economically inspired unrest in Iran in recent years pale into
insignificance compared with the protests in 2009 against the perceived fraudulent re-election of
President Mahmoud Ahmadinejad.

This trend will continue in 2010, with elections in Iraq in January and Sudan in April potentially
providing a focal point for already significant political tensions at the local, regional and national
levels. In southern Sudan’s heavily militarised environment, electoral rivalry is likely to translate
into localised violence; given the central and southern governments’ attempts to manipulate the
ballot, results are likely to be contested, raising the risk of a serious post-election political crisis.
In Iraq, meanwhile, extremists are likely to use the country’s parliamentary elections to stoke tensions
among ethnic groups, particularly in northern Iraq, Baghdad and disputed territories bordering the
northern Kurdistan Region, by carrying out a renewed campaign against ‘soft’ – particularly
civilian – targets. The spike in violence will be aimed at derailing the political process, which is
currently limiting foreign extremists’ room for manoeuvre, and compromising the US military’s
commitment to withdraw from the country under the terms of the Status of Forces Agreement.

PAGE 50 RISKMAP 2010

Escaping the crisis

Much of the region appears to have emerged from the global economic crisis comparatively
unscathed, in many cases shielded from the worst effects by the conservatism of regional banking
systems. Major oil-producers in particular escaped significant damage because of a swift rebound
in oil prices and, while non-oil producers fared less well, they have largely avoided significant
downturn-inspired political instability or serious socio-economic unrest. However, central banks
and sovereign wealth funds in the Gulf were forced to disburse large surpluses to save less cautious
neighbours such as Dubai, which had over-leveraged itself in its frenzied race for development,
and the effects of the downturn will continue to reverberate in the coming year.

Resource-poor…

Governments in resource-poor countries that attempted to follow the West in using expansive –
and expensive – fiscal policy to counter the effects of the downturn will, in common with many
other countries, have to start reining in spending in 2010 or face serious sustainability questions.
Turkey’s government in particular faces a tough choice between spooking international markets
or restoring fiscal discipline and potentially alienating voters ahead of parliamentary elections in
2011. The government has already announced plans for cuts, some of which will affect international
companies which rely on government projects and spending, though it remains to be seen whether
these will be sufficiently swift or wide-ranging to quell investors’ doubts. The government risks
satisfying no one, potentially opening itself up to further attacks by the secularist establishment.

Although boosted by a return to co-operation with the international community and the likely unfreezing
of foreign aid, Mauritania will also have to take steps to reverse populist spending rises introduced
in the wake of the country’s 2008 military coup; according to the IMF, these have resulted in a
serious deterioration in public finances. Elsewhere, both Morocco and Egypt will suffer from lower
export and tourism revenues, and also their persistent inability to eliminate wide-ranging subsidies,
in large part because of unrest generated by past attempts to reform their subsidy systems.
Jordan, which the IMF expects to experience a 3% contraction in GDP in 2009, is likely to continue
to pursue expansionary fiscal policies to offset the impact of the slowdown, though the lifting of
fuel subsidies during the boom years should help to reduce its vulnerability to external shocks.

Lebanon appears to have successfully weathered two separate storms, namely the global economic
downturn and persistent political instability, and bucked global trends in 2008 and 2009 with two
years of stellar economic growth. In addition, the banking sector has attracted investment
because of state backing and a reputation for conservative practices that have helped to shield it
from external shocks. However, the long-term threat of renewed conflict between Shia movement
Hizbullah and Israel, which the economy would not be able to shake off so easily, or protracted
clashes between domestic armed groups, will remain a latent concern in 2010.

...and resource-rich

Oil-rich countries face different dynamics. This is particularly the case in Iraq, where global oil
prices and developments in the security environment will be the two key drivers of the economy.
The qualified rebound of the oil price, should it be sustained in 2010, will enable Prime Minister
Nuri al-Maliki’s government to continue to invest in security, though at the expense of much-
needed investment in areas such as infrastructure. The continued withdrawal of US forces in
2010 will present a significant challenge to the government, particularly if groups affiliated with
unsuccessful political coalitions are excluded from power once January’s scheduled parliamentary
elections have been held, leaving them with little option other than to revert to violence.

The next government will have to divert considerable resources to develop the capacity of the
country’s intelligence and security services to meet a sustained spike in political violence.
Diverting resources towards security provision will mean that funds intended for other sectors,
including infrastructure, health and education, will dry up. Businesses operating in these sectors
may experience an increase in political risks in 2010 as issues such as contract frustration and
non-payment become more frequent, while gaps in security provision may appear in other areas
of the country, heightening the overall level of threat facing foreign businesses.

RISKMAP 2010 PAGE 51

 The financial crisis has not shaken the legitimacy or stability of the Gulf states, where governments
swiftly and actively reacted to the downturn, rapidly bailing out banks and real-estate developers.
Nonetheless, the downturn highlighted latent but intrinsic weaknesses in the region’s business
environment, which are likely to have an impact on investor confidence in 2010, regardless of the
benefits that remain to be reaped. For example, a scandal involving two prominent Saudi Arabian
family-owned conglomerates in 2009 crudely exposed the absence of transparency and regulation
in the banking system, while also pointing to the inefficient and corrupt system of money-borrowing
by family businesses in the region. Further repercussions, in the form of difficulties in accessing
capital for similar conglomerates and possibly further major insolvencies are likely in 2010.

Coming in from the cold?

US policy will be key in determining which regional countries move towards shedding their status
as international ‘pariahs’ in 2010. While Obama’s emphasis on engagement and diplomacy has
raised hopes across the board, more hawkish voices within the US administration are likely to
prevail on Iran and Sudan, exacerbating political, operational and reputational risks for foreign
business. There is, however, greater room for a thaw in relations between Syria and the US.

Sanctions likely to replace engagement in Iran

Despite encouraging signs in October 2009 in the form of a mooted deal to remove stocks of
low-enriched uranium from Iran, an eventual failure of negotiated efforts to resolve the dispute
over the country’s nuclear programme remains the most likely scenario. Much will depend on
whether the Obama administration is willing to allow Iran to continue enriching uranium without
interruption (given that it appears very unlikely to stop) and whether or not Iran will permit a far
more intrusive inspections regime. Both are possible, but on balance both boxes are unlikely to
be ticked.

Obama is likely to feel that he has little choice but to let ‘liberal hawks’ pursue their aggressive
sanctions agenda from mid-2010 onwards. However, while he has managed to marshal a significantly
more unified international front against Iran’s nuclear programme than in previous years, Russia
and China are unlikely to sign up for anything like ‘crippling’ sanctions, and a significant
intensification of current UN sanctions consequently remains unlikely in 2010. A coalition of
largely Western countries is likely to seek to intensify bilateral sanctions, but few will be willing to
go as far as the US, threatening international unity over Iran. Although Obama seems sceptical
about the utility of sanctions, he is likely to be forced to allow Congress to put forward at least
some additional unilateral sanctions in 2010 in the absence of a major breakthrough.

Sudan out, Syria in?

Although new measures such as additional sanctions are not on the horizon, we do not expect
US ties with Sudan to improve in 2010. As the Sudanese government remains unmoved in the
absence of genuine incentives, the US administration’s attitude is likely to harden, reducing
already limited prospects for an easing of sanctions- and divestment-related risks to business.
By diminishing the central government’s willingness to co-operate and encouraging grandstanding
by the southern regional government, a colder US approach would risk exacerbating north/south
tensions, potentially reversing mediation progress made by US envoy Scott Gration. However,
with little real fighting currently occurring in Darfur, additional pressure looks unlikely.

Despite speculation that Obama has already grown weary of trying to engage Syria and that
relations are souring, we believe that the US remains committed to engagement, though as
an adjunct to the Israel/Palestine conflict and, most importantly, the Iranian nuclear dispute,
rather than a priority in itself. Nevertheless, even if Iran-US dialogue fails – our most likely
scenario – we believe that progress will be made in some areas in 2010, specifically over
matters of intelligence-sharing and securing the border between Syria and Iraq. In exchange,
the US is likely to review sanctions against Syria with a view to lifting some of the more
obtrusive measures.

PAGE 52 RISKMAP 2010

No breakthrough on Israel/Palestine

While there is a chance of talks and possibly even progress or agreement on a number of secondary
issues in 2010, prospects for a comprehensive and implementable Israel-Palestine peace deal
will remain as remote as ever. With a right-wing coalition in power in Israel and the Fatah-led
Palestinian Authority (PA) worried about being outflanked by Hamas, US efforts to force the two
sides together will remain pivotal if progress is to be achieved, as Obama appears keenly aware.

Having seen his initial efforts run into trouble early on, with Israel more or less rebuffing his
demand for a settlement freeze, Obama is likely to take a different approach in 2010. This could
see him push for immediate final-status negotiations despite PA President Mahmoud Abbas’s
insistence on a settlement freeze first. However, this would make Abbas look weaker still and
limit his room to make concessions. Israel’s government also looks unlikely to make significant
concessions of its own free will, and is likely to be less fearful of major US pressure following the
settlement dispute. With battles over health care and US congressional elections looming
towards the end of the year, the US is likely to become increasingly distracted from the issue.
Meanwhile, Arab governments will see little reason to make conciliatory gestures towards Israel
in the absence of wider progress on the peace process.

Militant threats

The merger of Saudi and Yemeni militants announced at the beginning of 2009 will continue
to have serious implications for the security environment in the Gulf. The presence of Islamist
extremism in Yemen is not new, but the latest generation of militants, operating under the
umbrella of al-Qaida in the Arabian Peninsula (AQAP), will continue to prove a sophisticated
adversary with regional ambitions and evolving regional capabilities. However, despite the
region’s reputation as a hotbed of conflict and terrorism, security problems will remain a
moderate or minor threat in most countries.

Growing political instability and insecurity in Yemen during 2010 may increase militants’ room for
manoeuvre. This will enable AQAP to plan increasingly complex operations both in Yemen and
also against a widening array of targets across the Gulf. In Yemen, AQAP will continue to target
government, security force and foreign interests; in the wider region, attacks are likely to be
aimed at both official and foreign targets, with the numerous prestige construction projects in the
Gulf providing a range of potentially spectacular targets. A complicating factor might be the arrival
of al-Qaida’s core leadership from the Afghanistan-Pakistan border should the Pakistani
government’s military offensive in the country’s tribal regions be successful. Nevertheless, the
threat will remain largely manageable, and attacks are unlikely to have a lasting effect on the
business environment.

Elsewhere, al-Qaida in the Islamic Maghreb (QIM), while continuing to pose a serious threat in
certain mountainous areas of northern Algeria, remains under constant pressure from the security
forces, which is likely to prevent any significant expansion in the group’s activity. The group also
faces a more hostile security environment in most of Algeria’s North African neighbours – in contrast
to the more permissive environment offered by the Sahel states, and notably Mauritania. In the
latter, extremism has become a pressing problem since 2008, and will continue to pose a threat
in 2010, with the emergence of local QIM cells in the country demonstrating the potential for new
regional threats to evolve.

RISKMAP 2010 PAGE 53

 Risk rating forecasts for 2010
Risk rating definitions
Political risk
Political risk evaluates the likelihood of state or non-state political
actors negatively affecting business operations in a country through
regime instability or direct/indirect interference, and also evaluates
the influence of societal and structural factors on business. State
actors can include domestic and foreign governments, parliament,
the judiciary, regulatory bodies, state and local administrations and
the security forces. Non-state actors can include insurgent groups,
labour forces, campaign groups, lobbies, other companies, organised
criminal groups and international organisations. Societal and structural
factors can include corruption, infrastructure, ease of establishing and
maintaining a functioning business, and bureaucratic and business
culture. The impact on companies can include judicial insecurity,
corruption, reputational damage, expropriation and nationalisation,
contract uncertainty, international sanctions, bureaucratic delay,
partiality in contract and tender awards, campaigns and protests.
Political risk may vary for companies and investment projects according
to factors such as industry sector and investor nationality.
INSIGNIFICANT
The environment for business is benign. For example: political stability
is assured, investor-friendly policies are entrenched, there is no threat
of contract re-negotiation or repudiation and infrastructure for business
is excellent.
LOW
Political and operating conditions are broadly positive. Occasional and/or
low-level challenges do not significantly impede business. For example:
government policies are investor-friendly with some exceptions, contracts
are generally respected, non-state actors have little adverse influence
over government decisions, infrastructure is generally robust or there is
little risk of reputational damage.
MEDIUM
While the environment provides generally sound conditions for
business, significant challenges can and do emerge. For example:
hostile lobby groups exert disproportionate influence over government
policy, political instability delays essential reforms, contracts are
subject to uncertainty or occasional change, elements of the
infrastructure are deficient, or the activity of unions or protest
groups impede operations.
HIGH
The political and operating environment presents persistent and
serious challenges for business. For example: there is a credible
risk of contract repudiation or re-negotiation by state actors, political
instability threatens fundamental alterations to the nature of the
state, government policy is capricious or harmful to business,
corruption is endemic across all levels of officialdom, or regulations
are onerous and their implementation is capricious.
EXTREME
Conditions are hostile for business. For example: direct intervention
such as nationalisation or expropriation of assets is likely, systemic
political instability leads to the absence of rule of law, the nature of
the regime brings severe reputational risks, government structures
are inadequate, infrastructure is almost entirely deficient or major
reputational damage is certain.
PAGE 54
Security risk
Security risk evaluates the likelihood of state or non-state actors
engaging in actions that harm the financial, physical and human
assets of a company, and the extent to which the state is willing and
able to protect those assets. Actors that may pose a security risk to
companies can include political extremists, direct action groups, the
security forces, foreign armies, insurgents, petty and organised
criminals, protesters, workforces, local communities, indigenous
groups, corrupt officials, business partners, and in-country company
management and staff. The impact of security risk on companies
can include war damage, theft, injury, kidnap, death, destruction of
assets, information theft, extortion, fraud, loss of control over business,
and disruption to operations caused by damage or denial of access
to buildings or vital infrastructure caused by terrorist attacks, threats
or official responses. Security risk may vary for companies and
investment projects according to factors such as industry sector,
investor nationality and geographic location.
INSIGNIFICANT
The security environment for business is benign. For example: the
authorities provide effective security, there is virtually no political
violence, public disorder is rare and there are no known active
domestic groups or issues likely to fuel terrorism.
LOW
Security conditions are broadly positive and occasional and/or low-
level challenges do not significantly impede business. For example:
the authorities provide adequate security, organised crime only
marginally affects business and protest activity rarely escalates into
threatened or actual violence. Rare but large-scale terrorist attacks
may pose indirect threats to personnel or assets, or low-level attacks
do not target business and are not aimed at causing casualties.
MEDIUM
Aspects of the security environment pose challenges to business,
some of which may be serious. For example: there are some
deficiencies in state protection, organised criminal groups frequently
target business through fraud, theft and extortion, domestic terrorist
groups stage regular attacks that cause disruption to (but do not target)
business or there are infrequent large-scale attacks and/or opportunistic
small-scale attacks on foreign or business assets and personnel.
HIGH
The security environment presents persistent and serious challenges
for business; special measures are required. For example: state
protection is very limited, insurgents are engaged in a sustained
campaign affecting business, kidnap poses a severe and persistent
threat to foreign personnel, terrorist groups stage regular attacks
against foreign or business assets, or weak security forces are
incapable of dealing with the terrorist activity.
EXTREME
Security conditions are hostile and approaching a level where
business is untenable. For example: there is no law and order,
there is outright war or civil war, personnel constantly face the
threat of targeted and potentially life-endangering violence, a terrorist
group (or groups) is staging a sustained, high-intensity campaign
that severely hinders business or terrorists frequently target foreign
personnel or business activity.
RISKMAP 2010
 AFRICA

COUNTRY POLITICAL RISK SECURITY RISK

Angola M M; H in north-east of Cabinda exclave

Benin M L; M on Nigerian border

Botswana L L

Burkina Faso M M

Burundi H M; H in north-western provinces

Cameroon M M; H in Bakassi peninsula, Douala, Yaoundé, Bamenda, far north

Cape Verde L L

Central African Republic H M; H in north-western, north-eastern prefectures, Congo-Sudan

tri-border area

Chad H H; E on Sudan border

Comoros H L; M in Moroni, Mutsamudu

Congo (Brazzaville) M M

Congo (DRC) H H; M in Kinshasa, southern Katanga province; E in Ituri district,

Orientale province, North Kivu province (excluding Goma), South Kivu
province (excluding Bukavu)

Côte d’Ivoire H H

Djibouti M M; H in Eritrean border region

Equatorial Guinea H M

Eritrea H M; L in Asmara; H on Ethiopian, Sudanese, Djiboutian borders

Ethiopia M M; H in regions bordering Eritrea, Somalia, Kenya, Sudan

Gabon M L

Gambia H L

Ghana L M

Guinea-Bissau H M

Guinea (Conakry) H H

Kenya M M; H in north, areas bordering Sudan

Lesotho M M

Liberia M M; H in Monrovia, on border with Côte d’Ivoire

Madagascar H M

Malawi M L; M in major urban centres

Mali L L; M in north-east, including Gao and Timbuktu

Mauritius L L

Mozambique M M

Namibia L L

Niger H M; H in northern Agadez region, on borders with Chad, Libya, Nigeria

Nigeria M M; H in Niger delta, Lagos

Rwanda L L: M on borders with Burundi, Congo (DRC)

São Tomé M L

Senegal M L; M in Casamance region

Seychelles I I

Sierra Leone M M; H in Freetown

Somalia E; H in Somaliland E; H in Somaliland

RISKMAP 2010 PAGE 55

 AFRICA contd

COUNTRY POLITICAL RISK SECURITY RISK

South Africa L M; H in deprived urban areas

Swaziland M M

Tanzania L; M in Zanzibar M
archipelago

Togo H M

Uganda M M; H in northern and north-eastern areas, border areas with Congo (DRC)

Zambia M L; M in Lusaka and parts of the Copperbelt

Zimbabwe H H; M for central Harare, Bulawayo

AMERICAS
Anguilla I I

Antigua and Barbuda L L

Argentina M L; M in Buenos Aires, tri-border area

Aruba L L

Bahamas I L

Barbados I L

Belize L L

Bermuda I L

Bolivia H M

Brazil M M

British Virgin Islands I I

Canada I L

Cayman Islands I L

Chile L L

Colombia M M; H in rural areas

Costa Rica L L; M on Nicaraguan border

Cuba M L

Dominica I I

Dominican Republic M L; M in Santo Domingo, Santiago

Ecuador H L; M in Quito, Guayaquil, Manta; H in Colombian border areas

El Salvador M M

French Guiana L L

Grenada L L

Guadeloupe I L

Guatemala M M; H in Guatemala City, Mexican border area

Guyana L M

Haiti H H

Honduras H M

Jamaica L M; H in West Kingston, Spanish Town

Martinique I L

Mexico M M; H in US border area

Netherlands Antilles L L

PAGE 56 RISKMAP 2010

 AMERICAS contd
COUNTRY POLITICAL RISK SECURITY RISK
Nicaragua H L; M in Managua, North Atlantic Autonomous Region (RAAN)

Panama L M; H in Darién province on Colombian border

Paraguay M L; M in eastern border, tri-border area with Brazil, Argentina

Peru M M; H in Upper Huallaga, Apurímac and Ene valleys

Puerto Rico L L

St Kitts and Nevis I L

St Lucia I L

St Vincent and the I L

Grenadines

Suriname L L

Trinidad and Tobago L M; L in Tobago

Turks and Caicos Islands I I

United States L L; M in deprived urban areas

Uruguay L L

US Virgin Islands I L

Venezuela H M; H in Caracas, major urban centres, Colombian border states and

Bolivar state

ASIA
Afghanistan E H; E in south, east

Australia I L

Bangladesh M M; H in Chittagong Hill Tracts

Bhutan L L

Brunei L L

Burma (Myanmar) H L; H on borders with China, Bangladesh, Thailand

Cambodia M M

China M L; M in non-central districts of cities in Guangdong Province, remote border

areas, Xinjiang’s south-western prefectures and regional capital Urumqi

East Timor M M

Fiji H M

India M M; H in Assam, Manipur, Tripura, Nagaland,Tripura, Kashmir, Bihar, Jharkhand,

Chhattisgarh, southern districts of Orissa, northern districts of Andhra Pradesh,
western districts of West Bengal, eastern districts of Maharashtra

Indonesia M M; H in Papua, Central Sulawesi, Maluku

Japan L L

Laos M M

Malaysia L L

Maldives L L

Mongolia M M

Nepal H M; H for south

New Caledonia L L

New Zealand I L

North Korea E L

RISKMAP 2010 PAGE 57

 ASIA contd
COUNTRY POLITICAL RISK SECURITY RISK
Pakistan H H; E in FATA , Afghan border areas

Papua New Guinea M H

Philippines M M; H in south-west Mindanao, Sulu archipelago

Singapore I L

Solomon Islands M M

South Korea L L

Sri Lanka M M; H in north, north-east

Taiwan L L

Thailand M M; H in Narathiwat, Yala, Pattani

Tonga L L

Vanuatu L L

Vietnam M L

EUROPE/CIS
Albania M L; M in north

Andorra I I

Armenia M L; H in Azerbaijani border areas

Austria L L

Azerbaijan M M; H in Armenian border areas, Nagorno-Karabakh

Belarus H M

Belgium L L

Bosnia and Herzegovina M L

Bulgaria M L

Croatia L L

Cyprus L; M in Turkish L
Republic of Northern
Cyprus (TRNC)

Czech Republic L L

Denmark I I; L in Copenhagen

Estonia L L

Finland I I

France L L

Georgia M; H in Abkhazia, M; H in Abkhazia, South Ossetia, Pankisi Gorge beyond Akhmeta

South Ossetia,
Pankisi Gorge
beyond Akhmeta

Germany L L

Greece L L; M in Athens, Thessaloniki

Hungary L L

Iceland L I

Ireland L L

Italy L L; M in southern regions

Kazakhstan M L

Kosovo M M

PAGE 58 RISKMAP 2010

 EUROPE/CIS contd
COUNTRY POLITICAL RISK SECURITY RISK
Kyrgyzstan M H

Latvia M L

Liechtenstein I I

Lithuania L L

Luxembourg I I

Macedonia M M

Malta L I

Moldova M; H in Transdniestr L; M in Transdniestr

Monaco I L

Montenegro M L

Netherlands L L

Norway I I

Poland L L

Portugal L L

Romania M L
Russia M; H in North M; H in North Caucasus
Caucasus
San Marino I I

Serbia M L; M in Sandzak, Presevo Valley

Slovakia M L

Slovenia L L

Spain L L; M in Basque Country

Sweden I I

Switzerland L I; L in Geneva, Zürich, Berne

Tajikistan H H

Turkmenistan M M

Ukraine M M

United Kingdom L L

Uzbekistan H M; H in Tajik border areas, Fergana Valley

MIDDLE EAST AND NORTH AFRICA

Algeria M H, M in main urban centres, southern-oil producing areas

Bahrain L L

Egypt L L

Iran H L: M in Sistan-e Baluchistan, north-western border areas

Iraq H E; H in south; M in Kurdish Region

Israel L L

Jordan L L; M on Iraqi border

Kuwait L L

Lebanon M M

Libya M L

Mauritania H M; H in eastern desert areas

RISKMAP 2010 PAGE 59

 MIDDLE EAST AND NORTH AFRICA contd
COUNTRY POLITICAL RISK SECURITY RISK
Morocco L; M in Western L; M in Western Sahara
Sahara

Oman L L

Palestinian Territories H in Gaza; M in H in Gaza; M in West Bank

West Bank

Qatar L L

Saudi Arabia L M

Sudan H H; E in Darfur, L in northern states

Syria M L; M on Iraqi border

Tunisia L L

Turkey M L; M in Istanbul, south-eastern cities; H in rural and border areas of east

United Arab Emirates L L

Yemen H H; E in Saada, northern Amran province

PAGE 60 RISKMAP 2010

RiskMap website
The articles and risk tables in this report were produced by our team of global political risk analysts.
They have been written in conjunction with an examination of both the risks and potential rewards
in 173 individual countries looking at the issues that may affect companies and investors over the
year ahead. These forecasts and additional expert analysis are delivered via a free-to-access website.

The RiskMap website includes:

• Country risk forecasts and ratings for the year ahead
• Briefings on issues our clients are facing around the world
• Additional research reports from Control Risks' PRIME political risk analysis service
• An opportunity to sign up for a free trial of our online political and security risk analysis service
Country Risk Forecast

Sign up for free access

To request access to the RiskMap site, please contact riskmap@control-risks.com

About Control Risks

Control Risks is one of the world’s leading global business risk consultancies. As a trusted adviser
to almost three-quarters of the Fortune Global 500, we enable our clients to succeed in complex
and hostile environments. We provide the information, advice and practical support they need to
manage the political, security and integrity risks that come with doing business internationally.

Control Risks provides advice and support at every stage of a client’s investment. Our holistic
risk management services are detailed below:
Pre-investment - identifying and
validating business opportunities
Market exit support

6
Pre-entry risk assessment
Pre-exit risk assessment
Regional analysis and expertise
Reputational due diligence
Scenario planning
Scenario and crisis management planning
Strategic risk management
Executive protection

1
Ongoing support
Daily updated political, security and
travel risk analysis and advice Pre-investment -
On-the-ground security managers identifying
and co-ordinators 5 2 business partners
Business intelligence
24-hour operations support centre
Confidential kidnap response services Due diligence
Business continuity and Political risk assessment
evacuation planning

Implementation
Protection of assets (reputation,
people, physical security)
Project set-up
Corporate social responsibility considerations 4 3 Strategic planning
Security advice and review
Crisis management planning Stakeholder assessment
Strategic security review

Control Risks is unique in being able to bring together the expertise of our regional political risk
analysts, business intelligence and corporate investigations experts and experienced security
consultants to offer a fully integrated, information-led approach to the solutions we deliver our clients.
Control Risks’ offices

Algiers Jakarta Sydney

cralgiers@control-risks.com crjakarta@control-risks.com crsydney@control-risks.com

Amsterdam Kabul Tokyo

cramsterdam@control-risks.com crkabul@control-risks.com crtokyo@control-risks.com

Baghdad Lagos Washington

crbaghdad@control-risks.com crlagos@control-risks.com crwashington@control-risks.com

Beijing London
crbeijing@control-risks.com crlondon@control-risks.com

Berlin Los Angeles

crberlin@control-risks.com crlosangeles@control-risks.com

Bogotá Mexico City

crbogota@control-risks.com crmexicocity@control-risks.com

Copenhagen Moscow
crcopenhagen@control-risks.com crmoscow@control-risks.com

Delhi New York

crdelhi@control-risks.com crnewyork@control-risks.com

Dubai Paris
crdubai@control-risks.com crparis@control-risks.com

Erbil São Paulo

crerbil@control-risks.com crsaopaulo@control-risks.com

Hong Kong Shanghai

crhongkong@control-risks.com crshanghai@control-risks.com

Houston Singapore
crhouston@control-risks.com crsingapore@control-risks.com

www.control-risks.com