From March 30th until April 10th Myanmar will conduct its first census since 1983. On the surface this would appear to be a reasonable action as a great deal has changed in the last thirty plus years, not the least of which has been the country's emergence from isolation. The problem is that the census is likely to enflame ethnic tensions. The instability that the census could provoke will be one of the most significant challenges that Myanmar has encountered since it has begun re-engaging with the international community. Therefore, it is important to monitor how Naypyidaw handles this potential unrest. A good performance would send a very positive signal to investors. A poor handling of the situation could see investors hold back and would likely see the Chinese attempt to regain some of the leverage that Beijing has lost as the West has begun to reengage with Myanmar.
Ethnic insurgency has long been a key concern in Myanmar. After the assassination of independence hero Aung San many ethnic groups, such as the Karen, launched armed insurgencies. These struggles have been going on for decades and the census could potentially undo some of the progress that Naypyidaw has made in pursuing peace talks with the rebels. A key problem with the census is that significant ethnic minority groups such as the Karen, Shan and Chin were not consulted in the development of the census questions, thus, the census has a variety of subgroups for minorities, such as the Chin, which the groups in question do not recognize. The suspicion is that the format of the census will make these groups appear divided and thus undermine their interests. Though, census takers, especially those of mixed ethnicity, have the option of clarifying their background there are concerns that this will result in them being grouped under a catchall "foreigners" tag. In addition to this the Muslim minority Rohingyas of Rakhine State will not be included. Essentially, the census looks like it only supports the interests of the majority Burmens.
If the census results in heightened political instability it is likely that Beijing will try to exploit the situation to its advantage. China’s interests in Myanmar are both strategic and economic. The country provides Beijing with energy resources and access to the Indian Ocean, the latter of which is essential for the development of parts of China’s interior such as Yunnan Province. For this reason Beijing will invest in Myanmar even if the country is experiencing a degree of political instability. In fact China was Myanmar’s only significant investor from the 1980s until the country began reforms in 2011. Beijing feels that Washington is pursuing a containment strategy against China and will likely seize the opportunity to cement its interests in the country if the United States and other western powers temporarily back off due to political instability. For these reasons we should monitor both how Naypyidaw addresses the ethnic tensions which the census is likely to provoke as well as China’s (and to a lesser degree India’s) actions if political instability causes western powers to back off. The reality is that Myanmar is poor due to decades of poor governance not a lack of resources. The country could develop relatively quickly if given the chance. How it will develop will be influenced by foreign investors so knowing who is investing and what their interests are is essential for forecasting how Myanmar will develop.
Friday, March 28, 2014
Friday, March 14, 2014
Will Uganda's Anti-Gay Law Benefit Tanzania?
On February 24th, 2014 Uganda passed a law which included sentences of life in prison for certain homosexual acts (the original draft called for the death sentence) as well as prison terms for people who support the gay community. Not surprisingly the international community and global markets have not viewed this law favorably:
Though Tanzania has seen a great deal of investment in recent years (Chinese direct investment went from $700 million in 2011 to $2.1 billion in 2013) infrastructure in Kenya has historically attracted more capital than Tanzania. For example, in August of 2013 Kenya signed deals worth $5 billion from the Chinese in order to improve infrastructure with $2.5 being spent on the construction of railroads and $1.25 billion to be spent on trains. If Kenya and Uganda want to develop their manufacturing bases investments such as these are essential yet Uganda’s anti-gay law will impact investment in Uganda which in turn will impact Kenya as the two countries are key trading partners and Ugandan goods often pass through Kenya en route to the port of Mombassa (Ugandan infrastructure is heavily integrated with Kenyan infrastructure). Suffice it to say a variety of parties in both Kenya and Uganda want to see the law repealed or at least weakened as it goes against their economic interests.
Ultimately, two key things that many investors in East Africa want are access to Central African resources and commodities from the fertile lands around Lake Victoria. They do not necessarily need multiple routes to obtain these goods so if investment ends up in Tanzania Kenya and Uganda might struggle to attract capital at a later time and the funds that they might be able to raise could be on less favorable terms. As things stand now the Chinese are investing in the Tanzanian port of Bagamoyo with the intent of making into the largest and most modern port in Africa. We are also seeing the potential development of the Port of Maruhubi in Zanzibar. In February the China Harbour Engineering Company (CHEC) signed a Memorandum of Understanding pledging $230 million dollars to the develop the port (its is important to note that a Memorandum of Understanding is not a concrete deal so CHEC presumably has a way out of the agreement). These port developments combined with improvements in rail and customs procedures would likely result in major improvements to Tanzania's competitiveness. As of now railways only transport about 10% of Tanzanian goods despite the fact that moving goods by rail take half the time that road transport takes.
It is important to remember that there is a political element to this law. When President Yoweri Museveni signed the bill he made a point of stressing that his actions showed that Ugandans would not be bullied by foreign powers. This helped stoke nationalist sentiment which will be important if he is to run for re-election in Uganda’s 2016 election. For this reason Museveni is unlikely to weaken or repeal the law unless Nairobi and the Ugandan business community puts pressure on him and if he can back off in manner that saves face. Due to this reality it is important to monitor how forcefully Nairobi and the Ugandan business community lobbies against the law. Time could be of the essence as once significant investment has been put into Tanzanian infrastructure there is no guarantee that an investment in developing Uganda's roads, railways, and ports will be worthwhile.
- Since October 3rd, 2013 the Uganda Shilling has fallen from 2,553 to the dollar to 2,513 as of March 14th, 2014.
- Standard & Poor’s has reduced Uganda's credit rating to B.
- The World Bank has suspended a $90 Million loan to improve the country’s health system.
- Denmark and Norway have suspended aid. They likely will not be the last countries to do this.
Though Tanzania has seen a great deal of investment in recent years (Chinese direct investment went from $700 million in 2011 to $2.1 billion in 2013) infrastructure in Kenya has historically attracted more capital than Tanzania. For example, in August of 2013 Kenya signed deals worth $5 billion from the Chinese in order to improve infrastructure with $2.5 being spent on the construction of railroads and $1.25 billion to be spent on trains. If Kenya and Uganda want to develop their manufacturing bases investments such as these are essential yet Uganda’s anti-gay law will impact investment in Uganda which in turn will impact Kenya as the two countries are key trading partners and Ugandan goods often pass through Kenya en route to the port of Mombassa (Ugandan infrastructure is heavily integrated with Kenyan infrastructure). Suffice it to say a variety of parties in both Kenya and Uganda want to see the law repealed or at least weakened as it goes against their economic interests.
Ultimately, two key things that many investors in East Africa want are access to Central African resources and commodities from the fertile lands around Lake Victoria. They do not necessarily need multiple routes to obtain these goods so if investment ends up in Tanzania Kenya and Uganda might struggle to attract capital at a later time and the funds that they might be able to raise could be on less favorable terms. As things stand now the Chinese are investing in the Tanzanian port of Bagamoyo with the intent of making into the largest and most modern port in Africa. We are also seeing the potential development of the Port of Maruhubi in Zanzibar. In February the China Harbour Engineering Company (CHEC) signed a Memorandum of Understanding pledging $230 million dollars to the develop the port (its is important to note that a Memorandum of Understanding is not a concrete deal so CHEC presumably has a way out of the agreement). These port developments combined with improvements in rail and customs procedures would likely result in major improvements to Tanzania's competitiveness. As of now railways only transport about 10% of Tanzanian goods despite the fact that moving goods by rail take half the time that road transport takes.
It is important to remember that there is a political element to this law. When President Yoweri Museveni signed the bill he made a point of stressing that his actions showed that Ugandans would not be bullied by foreign powers. This helped stoke nationalist sentiment which will be important if he is to run for re-election in Uganda’s 2016 election. For this reason Museveni is unlikely to weaken or repeal the law unless Nairobi and the Ugandan business community puts pressure on him and if he can back off in manner that saves face. Due to this reality it is important to monitor how forcefully Nairobi and the Ugandan business community lobbies against the law. Time could be of the essence as once significant investment has been put into Tanzanian infrastructure there is no guarantee that an investment in developing Uganda's roads, railways, and ports will be worthwhile.
Friday, March 7, 2014
The Impact of Russian Demographics on the Crisis in Ukraine
There are numerous driving factors for Russia's involvement in Ukraine. These include the strategic imperative to retain a malleable border state, the need to ensure Russia's ability to maintain military bases in the country (especially the warm water naval base in Sevastopol), and the capcity to use Ukraine as a transit state for Russia oil and natural gas. A pro-Western administration in Kiev complicates these demands. All of these issues explain Moscow's actions, however, there is another factor in play here. The unfavorable demographic trajectory which Russia's faces and the need to make economic and security arrangements during at time when Moscow is relatively strong.
Russia is seeing a declining population. The CIA’s 2013 estimate for population growth was -0.02%. In fact population growth has usually been negative since the end of the Cold War and 1988 was the last time that the country has the replacement fertility rate of 2.1. These unfavorable trends will complicate Moscow's ability to project its authority in the future. Despite this challenge the country is relatively strong at the moment. For this reason it makes sense for the Moscow to try to cement deals while it is in a position of strength. The reality is that Crimea is of strategic importance to Russia and it is of much less significance to Europe and the Untied States. Of course Western leaders will condemn any effort to annex the territory of another country but they will not back their words with actions, as it is not in their interest. The United States has no stomach to become involved in another foreign conflict and forbidding US firms from conducting business in Russia is unlikely to say the least. Many European powers are dependent upon Russia for energy and trade and have made it clear that though they disapprove of Russia’s actions business will continue as normal. Moscow’s history of shutting off energy flows when it has a dispute has also demonstrated that Putin is willing to hurt the Russian economy in order to advance the country’s political and security interests. In short Russia knows that the West is all talk and no action and the West knows that Russia has no problem with acting on its threats.
By annexing Crimea Moscow will solve a potential security problem. Russia will presumably compensate Ukraine as such an action is necessary as it will add a degree of credibility to whatever form of treaty ends this impasse. The compensation would also make a Ukrainian default less likely. Though the Russian economy has taken a hit since the conflict began Moscow can afford the bill now far more easily than it might be able to in the future. Preventing Ukraine from defaulting is essential as it could lead to the spread of financial contagion into the European, Russian and global banking systems (this is also why the US offered Kiev a billion dollars in loans. That wasn’t altruism. That was self-interest). The situation in Ukraine also sends a message to country's in Russia's Near Abroad who harbor designs for greater integration with Europe. Moldova and Georgia certainly come to mind here. The likelihood of anymore countries in Russia’s Near Abroad joining NATO and the European Union is less likely. After all if Russia were to invade a member of NATO or the EU concrete action would need to be taken. Neither Brussels nor Moscow has a interest in allowing stakes to rise that high. Negotiations will continue between the EU and countries seeking greater integration but as long as Russia is capable of protecting its interests these talks will come to nothing.
The US has threatened consequences for Russian actions. Though military operations or bans on US businesses working in Russia are highly unlikely it is possible that the US will try to aid other powers in diversifying away from Russia energy. We might see increased activity in developing shale reserves in countries such as Poland where, after initial excitement, major energy firms pulled out as unfavorable geology made fracking uneconomical. Promoting Western interests by subsidizing such operations is not an impossible course of action, though it remains to be seen what form such a policy would take. The cooperation between Turkey, Georgia and Azerbaijan will likely be encouraged though that approach will encounter challenges due to Russian pressure on Georgia and Azerbaijan and current political tensions in Turkey. US-Iranian détente could also see the development of pipelines which transverse Iran. Russia of course understands these threats and for the time being is capable of countering them. In the long term unfavorable demographic trends will likely see Moscow lose a great deal of influence. However, for the time being we can expect Moscow to bully the weaker powers in its Near Abroad while trying to strike a more conciliatory tone with more powerful states. The intent will be to secure treaties which can help protect Russian interests while it is relatively weak. One way or another the situation in Crimea will be resolved in a manner which will be favorable to Russia. In the coming years it is likely that we will see some form of resolution to conflicting territorial claims in the Arctic between Russia and countries such as Norway and Canada. Moscow will also use a combination of threats and economic incentives to try and enlarge Russia’s Customs Union. In the meantime the political and social instability will continue in Ukraine while global markets remain vigilant of the financial contagion that could result if Kiev defaults on its debts.
Russia is seeing a declining population. The CIA’s 2013 estimate for population growth was -0.02%. In fact population growth has usually been negative since the end of the Cold War and 1988 was the last time that the country has the replacement fertility rate of 2.1. These unfavorable trends will complicate Moscow's ability to project its authority in the future. Despite this challenge the country is relatively strong at the moment. For this reason it makes sense for the Moscow to try to cement deals while it is in a position of strength. The reality is that Crimea is of strategic importance to Russia and it is of much less significance to Europe and the Untied States. Of course Western leaders will condemn any effort to annex the territory of another country but they will not back their words with actions, as it is not in their interest. The United States has no stomach to become involved in another foreign conflict and forbidding US firms from conducting business in Russia is unlikely to say the least. Many European powers are dependent upon Russia for energy and trade and have made it clear that though they disapprove of Russia’s actions business will continue as normal. Moscow’s history of shutting off energy flows when it has a dispute has also demonstrated that Putin is willing to hurt the Russian economy in order to advance the country’s political and security interests. In short Russia knows that the West is all talk and no action and the West knows that Russia has no problem with acting on its threats.
By annexing Crimea Moscow will solve a potential security problem. Russia will presumably compensate Ukraine as such an action is necessary as it will add a degree of credibility to whatever form of treaty ends this impasse. The compensation would also make a Ukrainian default less likely. Though the Russian economy has taken a hit since the conflict began Moscow can afford the bill now far more easily than it might be able to in the future. Preventing Ukraine from defaulting is essential as it could lead to the spread of financial contagion into the European, Russian and global banking systems (this is also why the US offered Kiev a billion dollars in loans. That wasn’t altruism. That was self-interest). The situation in Ukraine also sends a message to country's in Russia's Near Abroad who harbor designs for greater integration with Europe. Moldova and Georgia certainly come to mind here. The likelihood of anymore countries in Russia’s Near Abroad joining NATO and the European Union is less likely. After all if Russia were to invade a member of NATO or the EU concrete action would need to be taken. Neither Brussels nor Moscow has a interest in allowing stakes to rise that high. Negotiations will continue between the EU and countries seeking greater integration but as long as Russia is capable of protecting its interests these talks will come to nothing.
The US has threatened consequences for Russian actions. Though military operations or bans on US businesses working in Russia are highly unlikely it is possible that the US will try to aid other powers in diversifying away from Russia energy. We might see increased activity in developing shale reserves in countries such as Poland where, after initial excitement, major energy firms pulled out as unfavorable geology made fracking uneconomical. Promoting Western interests by subsidizing such operations is not an impossible course of action, though it remains to be seen what form such a policy would take. The cooperation between Turkey, Georgia and Azerbaijan will likely be encouraged though that approach will encounter challenges due to Russian pressure on Georgia and Azerbaijan and current political tensions in Turkey. US-Iranian détente could also see the development of pipelines which transverse Iran. Russia of course understands these threats and for the time being is capable of countering them. In the long term unfavorable demographic trends will likely see Moscow lose a great deal of influence. However, for the time being we can expect Moscow to bully the weaker powers in its Near Abroad while trying to strike a more conciliatory tone with more powerful states. The intent will be to secure treaties which can help protect Russian interests while it is relatively weak. One way or another the situation in Crimea will be resolved in a manner which will be favorable to Russia. In the coming years it is likely that we will see some form of resolution to conflicting territorial claims in the Arctic between Russia and countries such as Norway and Canada. Moscow will also use a combination of threats and economic incentives to try and enlarge Russia’s Customs Union. In the meantime the political and social instability will continue in Ukraine while global markets remain vigilant of the financial contagion that could result if Kiev defaults on its debts.
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