Friday, January 14, 2011

Russia: What Russia has in Common with Pakistan and Somalia?

Photo Credit: Maplecroft

By Ramesh Jaura


IDN-InDepth NewsAnalysis

BERLIN (IDN) - What does Russia have in common with countries such as strife-torn post-war Iraq, unpredictable North Korea, crisis-ridden Pakistan and the failed state called Somalia?

A new report says that along with those four and six others caught in either internecine warfare or considered as pariahs by the international community, the descendant of one-time superpower, is an "extreme risk" country.

Though Russia is gaining economic muscle, it is like those ten countries "most affected by fast-changing, dynamic political risks", says the third annual Political Risk Atlas, released by risk analysis and mapping firm Maplecroft.

'Dynamic political risks' constitute immediate threats to business and include areas such as conflict, terrorism, the rule of law as well as the regulatory and business environment. The term 'dynamic' is used by the UK-based risk analyst to describe risks that can change rapidly as a result of actions by government, regional authorities or politically-motivated groups.

A significant aspect of the Political Risk Atlas is that "the emerging economy of Russia has moved up five places from fifteenth to enter the top ten for the first time, whilst Pakistan has also moved two places up the ranking to ninth".

Somalia tops the 11 'extreme risk' countries, followed by Democratic Republic of the Congo (DR Congo), Sudan, Myanmar, Afghanistan, Iraq, Zimbabwe, North Korea, Pakistan, Russia and the Central African Republic.

A brief on three countries in Africa and Pakistan underscores the critical nature of Russia's rating.

Somalia is a failed state split into the self-declared 'Republic of Somaliland' in the northwest and the semi-autonomous state of 'Puntland' in the northeast.

DR Congo, the third largest country in Africa by area and a population of 67 million has been at the centre of what the London 'Economist' terms as "Africa's world war" that claimed some three million lives and "left it in the grip of a humanitarian crisis".

Sudan in north-eastern Africa -- the largest country in Africa and the Arab world and tenth largest in the world – has been ruled by Omar al-Bashir since 1989. On March 8, 2008, the International Criminal Court (ICC) issued an arrest warrant for al-Bashir on charges of war crimes and crimes against humanity, the first sitting head of state ever indicted by the ICC.

On July 12, 2010, the ICC issued a second arrest warrant for the Sudanese President, adding the charge of genocide. The International Criminal Court's judges charged him with orchestrating a bloody campaign of genocide against Darfur's three main ethnic groups. "There are reasonable grounds to believe that Mr. al-Bashir acted with specific intent to destroy in part the Fur, Masalit and Zaghawa ethnic groups," the judges concluded.

The landlocked Central African Republic (CAR) -- one of the poorest countries in the world and among the ten poorest countries in Africa -- has been unstable since independence from France in 1960. It borders Chad in the north, Sudan in the east, DR Congo and the Republic of the Congo in the south, and Cameroon in the west. It has suffered several coups and a notorious period under a self-declared emperor, Jean-Bedel Bokassa, who headed a brutal regime.

Pakistan continues to be destabilised by the cross-border Taliban insurgency, which is concentrated around the country's north-western regions, says Maplecroft, adding: "Whilst the number of terrorist attacks covered in this year's Terrorism Risk Index has decreased in comparison to last year, their lethality has increased." An average of 1.6 persons died per terrorist attack between June 2009 and June 2010.

The country is also categorised as 'extreme risk' in the Regime Stability Index because "the government has struggled to quell violent clashes between Urdu-speakers and the Pashtun ethnic group". Both communities vie for political control over Karachi and this has contributed to political instability within the country.

RISK INDICES

The Political Risk Atlas 2011 includes 41 risk indices evaluating 196 countries. It provides not only a comprehensive assessment of traditional or 'dynamic' political risk areas, but also focuses on "emerging risk areas and structural political risk affecting longer term regime stability, such as resource security, human rights, climate change, infrastructure readiness, education and poverty".

The authors of the Political Risk Atlas say: "Russia's increased risk profile reflects both the heightened activity of militant Islamist separatists in the Northern Caucasus and their ambition to strike targets elsewhere in the country. Russia has suffered a number of devastating terrorist attacks during 2010, including the March 2010 Moscow Metro bombing, which killed 40 people.

"Such attacks have raised Russia’s risk profile in the Terrorism Risk Index and Conflict and Political Violence Index. The country’s poor performance is compounded by its 'extreme risk' ratings for its business environment, corporate governance and the endemic nature of corruption, which is prevalent throughout all tiers of government."

According to the risk analysts, challenges for companies operating in Russia also stem from an ineffective legal and regulatory system, which includes a lack of judicial independence from the government.

"This was seen most recently in the politicised case against jailed Yukon oil tycoon Mikhail Khodorkovsky, which most commentators dubbed a show trial. Russia is rated 'high risk' in Maplecroft’s Rule of Law Index, and companies should monitor the increasing risk of poor contract enforcement and expropriation."

Anthony Skinner, an Associate Director at Maplecroft, explains: "An appreciation of the dynamic aspects of political risk is vital to ensuring uninterrupted business operations. Short-term factors such as regime stability or political violence play an essential role in informing business decisions. Dynamic risk must factor in the calculations of businesses that are either seeking to invest or expand their business presence in target markets such as the BRICs -- Brazil, Russia, India and China -- and N11."

The N11 (Next Eleven) are eleven countries -- Bangladesh, Egypt, Indonesia, Iran, Mexico, Nigeria, Pakistan, Philippines, South Korea, Turkey, and Vietnam -- identified by Goldman Sachs investment bank as having a high potential of becoming the world's largest economies in the 21st century along with the BRICs. The bank chose these states, all with promising outlooks for investment and future growth, in December 2005.

The criteria used were macroeconomic stability, political maturity, openness of trade and investment policies, and the quality of education as criteria. The N11 paper is a follow-up to the bank's 2003 paper on the four emerging 'BRIC' economies, which have been joined by South Africa in the new year at the invitation of China.

According to the World Bank, foreign direct investment in the main emerging economies is expected to rise by 17 percent over 2011, with the BRIC nations accounting for half of this increase. "However, significant challenges for investors remain as risks such as an absence of the rule of law and a prevalence of corruption and conflict prohibit business and societies from flourishing," the risk analysts say.

This is especially true of the resource rich nations in which the BRICs are heavily investing, such as Sudan and Yemen which are rated 'extreme risk' by Maplecroft because of their "economic integration with China".

From a long-term viewpoint, the BRICs countries are witnessing increasingly worse structural political risk trends for 2011. China ranks 25th in the rating, India 32nd and Russia 51st. They are considered 'high risk'. Brazil ranking 97th is 'medium risk'. All these countries have seen 'risks increase' compared to scores from last 2010 Atlas.

"Structural political risk cannot be overstated," says Professor Alyson Warhurst, the Maplecroft CEO, adding:. "Levels of education determine the qualifications and skills of a population from which a corporation will draw its employees. A country's resource security may determine how successful a corporation is in obtaining the raw products it needs. All of these factors have a profound impact on the sustainability and profitability of business over the long term. They may be as crucial as the threats posed by terrorism and coups d'├ętat. Structural political risk is also a leading indicator of dynamic political risk and requires monitoring."

China, for instance, is categorised as 'extreme risk' across several areas, including: civil and political rights, judicial independence, democratic governance, labour rights, and human rights violations committed by members of the security forces.

Companies which are deemed in any way to be supporting a government or its agents in stifling democracy, liberty and human rights may suffer reputational damage, which will ultimately impact the bottom line.

Professor Warhurst adds: "China’s economic modernisation and a strong position in the global economy have reduced its exposures to specific structural risks, which requires monitoring. This is reflected by its 'medium risk' ratings for resource security, infrastructure and economic diversification."