Security, terrorism, protests and oil price hikes: The business impacts of contagion - Maplecroft political risk briefing for MENA (update)
Image courtesy of Al Jazeera English
The toppling of Zine El Abidine Ben Ali in Tunisia and Hosni Mubarak in Egypt has encouraged the populations of many Middle East and North Africa (MENA) countries to demand reform and political change. Whilst differences exist between individual countries, unemployment, the high cost of living, corruption, the stifling of political dissent, a lack of freedom and violent security forces are amongst the primary sources of discontentment. The momentum of the protest movement across the region continues to pose a series of risks to business, as outlined below:
Key risks to business:
- The physical and human resources of companies risk being targeted or caught in the cross-fire of violence in countries where bloody clashes between agents of the state and its opponents persist. This risk is most severe in Libya, where Colonel Gaddafi is deploying his loyalists to remain in power and push the rebel movement back to the east. The prospect of a protracted conflict looks increasingly likely. As publicly stated by Saif al-Islam, Gaddafi’s son, the Libyan leader plans to use every last bullet against the anti-establishment movement. In addition to the mass exodus of foreigners from Libya, oil companies such as Italy’s ENI and Spain’s Repsol YPF have closed their offices and evacuated staff from the country due to the extreme level of violence. The outcome of the struggle in Libya is likely to impact the momentum of protest movements elsewhere in the MENA region.
- Companies which are closely associated with autocratic regimes risk being targeted by protestors and individuals fighting against the establishment. They may also be subject to violence by opportunistic criminals seeking to take advantage of the security vacuum. In the second half of February 2011, CNPC, China’s biggest gas and oil producer, confirmed that its facilities had come under attack in Libya and that its employees were being evacuated back to China. Some governments in MENA have nonetheless taken measure to protect vital national interests. Most notably, on 14 March, Bahrain confirmed that it was receiving military assistance from fellow GCC members to protect government facilities.
- Militant groups such as al-Qaeda are seeking to capitalise on the turmoil in North Africa and the Middle East. The internet monitoring service SITE has reported a spike in Islamic extremist groups attempting to ferment chaos in the Middle East during the current period of political turmoil. Days prior to an attack on 5 February 2011 against the Arish-Ashkelon pipeline which delivers gas to Israel from the Sinai, SITE warned that jihadists were discussing plans to target the pipeline. Al-Qaeda has also tried to harness the momentum of demonstrators to achieve its own political ends. At the end of February, Ayman al-Zawahiri, Osama bin Laden’s deputy, released a recorded message calling for the establishment of Islamic states in both Tunisia and Egypt. This is despite the fact that the protests in both countries were propelled primarily by secular youths demanding greater democracy and freedom.
- Whilst many commentators have concluded that the relative silence from extremist groups is a sign of their impotence in relation to the uprising, it should not be forgotten that one of al-Qaeda’s objectives has been the overthrow of ‘western-backed’ MENA regimes. Turmoil in the MENA region and the overthrow of Ben Ali in Tunisia and Mubarak in Egypt arguably demonstrates a partial achievement of these goals, even if the reform movement decries militant Islam.
- Political instability in the MENA region means that the business environment has become less certain. Egypt is a case in point. The country’s Supreme Council of the Armed Forces, which says it is overseeing the transition to a democratic process, has promised that Egypt will honour international agreements. However, concerns persist about the agenda of the Muslim Brotherhood (MB), which enjoys strong grass-roots support and remains the most organised political group in Egypt (apart from Mubarak’s discredited National Democratic Party). Although not monolithic (consisting of liberals and conservatives), fears persist that the Brotherhood may become a powerful political force in the form of the newly established Liberty and Justice Party. The prospect of the MB establishing itself as a strong force in politics has increased by the short time-frame set for elections (6 months). This gives other less experienced political groups and parties less time to organise. Critics fear that the MB may seek to reduce Egypt’s strong political, economic and commercial ties with the West and will shift the balance of power in the Middle East.
- The ability of other MENA countries to honour business contracts and agreements will also depend on the manner in which they emerge from the current crises. Whilst Egypt has a relatively formalised (although corrupt) bureaucratic structure, countries such as Libya face a more acute risk of disruption owing to the influence of powerful tribes and the scale of unrest. Heightened political risk could lead to deteriorating economic conditions and tighter access to credit, raising payment risks for companies dealing with MENA (and, potentially, other emerging markets). Adequate export and political risk insurance cover and safe trade terms, will be key to mitigating risk.
- Sanctions against brutal regimes are also likely to adversely impact business. As the situation continues to worsen in Libya, Reuters reported on the 7 March that Exxon Mobil has stopped trading crude oil with the country in compliance with US sanctions. Oil firms ConocoPhillips and Marathon, which hold stakes in Libyan oil production projects, have also either fully scrapped or reduced dealings with the country. Morgan Stanley, it is reported, has also ceased trading oil with Libya in response to sanctions. At present, the international community has not enforced a ‘no fly zone’ which would implicitly constitute an act of war against Libya. Nevertheless, should military intervention occur by foreign powers, then Western business will likely struggle to re-establish a foothold in Libya. This is particularly if forces loyal to Gaddafi prevail. Irrespective of the outcome, the already idiosyncratic governmental structure of Libya will be undermined as a result of the violence and it will inevitably make conducting business in Libya immeasurably more difficult.
- Protests threaten to disrupt supply chains and business in general over the coming months. Demonstrations by workers and union members in Tunisia and Egypt following the removal of Ben Ali and Mubarak underline the risk that protests will persist in individual states irrespective of the pace of political change and the concessions made by the holders of power. Workers who dared not oppose the status quo under the former regimes now feel that they can demand change both at macro and micro levels (at the workplace). Continuous worker strikes not only make it difficult for individual economies to recover from turmoil and political disruption, but also prevent a recovery of investor appetite. Strikes have also spread to the Gulf, with Oman reporting that workers at Oman Air (the country’s flagship carrier) have gone on strike over pay and conditions. Workers protests have also been seen in the capital Muscat and in the port of Sohar, an industrial hub..
- Distrust of the current holders of power in countries where the head of state has been toppled will also account for persistent demonstrations, although progress has been seen in Egypt and Tunisia. On 7 March, Tunisia’s newly appointed Prime Minister, Beji Caid Essebsi, named a new interim government and disbanded the much loathed State Security Department which had been responsible for many human rights abuses. In Egypt, protestor calls for Prime Minister Shafik to stand down were finally heeded, and he was replaced with the popular Essam Sharaf. On Sunday 6 March, Egypt’s Supreme Military Council also announced new ministers of the interior, foreign affairs and justice which has also gone some way to placating protestors. Nevertheless, fears persist that the old ruling elite will continue to preserve their interests, meaning that political demonstrations could continue well into 2011.
- The risk of complicity in human rights violations for companies with interests in the MENA region is high. The brutal crackdown being witnessed in Libya (and to a lesser degree witnessed in Bahrain, Algeria and Yemen) is not only adding to the combustible atmosphere in the region. It is also leading to high levels of media scrutiny of companies that have business dealings with regimes that are accused of actively suppressing their people. Risk of export licences being reviewed and/or revoked will concomitantly rise and disrupt business. Trade embargoes and sanctions have already been applied to Libya, and this could extend to other countries.
- The high levels of corruption associated with regimes in MENA means that companies are at greater risk from reputational damage should their dealings with corrupt individuals or entities be exposed. Libya and Yemen, for instance, are classified as ‘extreme’ risk countries in Maplecroft’s Business Integrity and Corruption Index. There is also an elevated risk of restrictions being imposed under the United States Foreign Corrupt Practices Act or similar legislation in other countries. Such restrictions could limit the ability of firms that are concerned about maintaining their reputations as responsible businesses from doing business with regimes in the MENA region.
- The susceptibility of MENA countries to food price hikes will continue to act as a trigger for social unrest and pose risks to businesses. Countries in the MENA region are at risk from high global food prices and this has been the cause of much social unrest since prices began to climb at the end of 2010. In March 2011, the Food and Agricultural Organisation (FOA) revealed that world food prices had reached a record the previous month due to a spike in dairy, grain and meat costs. This may stoke further unrest in the MENA region, adding to the sense of frustration amongst the poor and unemployed and increase calls for a more accelerated pace of reform. The need for governments to placate protesters by increasing subsidies for foodstuffs means that there is less money to spend on other areas of pressing need such as health, education and infrastructure.
- The same rationale applies to states in the MENA region that import oil and gas. The level of unrest and bloodshed in Libya, which is the world’s 12th largest exported of oil, forced US Brent Crude to hit US$118 a barrel on 24 February (although as of 14 March it had dropped to US$111.5a barrel largely due to the demand slump expected as a result of the earthquake in Japan). Concerns abound that Saudi Arabia, which sits on close to 20% of the world’s proven reserves according to BP, will face greater contagion. That may cause oil prices to break the 2008 record of US$147 per barrel. Greater contagion in other MENA oil producing states, such as Kuwait (which sits on 7.6% of the world’s proven reserves according to BP), could also place further pressure on supplies. Inflationary pressure from high oil and gas prices will make economic reform more difficult in countries that import the bulk of their fossil fuels and add transportation costs to businesses. Nevertheless, spare capacity in the Organisation of the Petroleum Exporting Countries (OPEC) has reassured investors that lost Libyan oil supply is replaceable. If the conflict worsens, Libyan exports are halted for more than a month, and other oil producers are affected by unrest, then the picture could change.
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