Business & Finance

Christopher Jackson graduated from York University with a 1st Class Honours Degree in Politics with International Relations, BA and now works for the Marine and Energy division of Jardine Lloyd Thompson.

He writes a regular Blog called The View from Lawrence Street which we will be reproducing under the heading of GEO-POLITICS in our Business and Investment Section of The Vintage Magazine.

Please note that the views expressed in this Blog are those of the author and do not necessarily reflect the views of The Vintage Magazine.

Robert Jarman

Editor

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POSTED September 15th 2014 – 5 unanswered questions for Scotland

by Christopher Edward Jackson

 

With only a few days left to go in the Scottish Referendum campaign, there are a lot of unanswered questions that still surround the one crucial question: what happens if Scotland does actually vote for independence?
As such I thought I would put forward my opinion of the only 5 questions that really matter and which as yet have not really been answered:

1. Who is Scottish and who is British (and would anyone choose not to be both)?

Possibly a very simple question, yet one that hasn’t been answered. If an individual defines themselves as Scottish but not British, not only will they no longer be eligible for automatic entry into the UK and EU, as they fall outside of the agreed terms of the EU’s Schengen treaty on borders, but they would also be unable to benefit from free access to UK schools and hospitals as well. This may all sound ridiculous, but if Scotland becomes independent the European Union has already told Scotland that they would join the back of the queue for membership (partly to deter other European separatist movements). As a result, what happens to all those in Scotland who currently use and rely on these essential rights of being a British citizen?

Following from this problem though, if every member of an independent Scotland becomes a “dual – citizen”, would it necessarily be in the UK interest to allow everyone in Scotland to be a dual national?  Such a deal could in theory encourage Scots to receive all the benefits of being British but without the UK receiving any of their tax receipts for providing those services.  Another interesting thought to consider would be whether Scots would then be allowed to have dual nationality and vote in the UK as well (including standing for seats in parliament if they hold dual nationality).

2. How would Scotland create a “wealth fund” from the North Sea?

A key piece of the nationalist campaign has been the creation of a Norwegian-esque sovereign wealth fund, but few in Scotland have actually asked how this would happen.  Firstly it is forgotten that the North Sea tax revenues are already used by the UK government to fund social services and so to create a wealth fund would either require the Scottish government to spend less money for a few years (in order to save) or to raise more money from the North Sea itself.

Considering that the North Sea revenues have continued to decline, as production levels have fallen, development costs have risen and international oil prices have started to stabilise over the last 5 years, it appears that “spending less” is not exactly the top choice for an independent Scotland.  However raising taxes is unlikely to help either. In fact the current Chancellor of the Exchequer already learned the folly of raising North Sea taxes, after the North Sea recorded its two largest production declines in history (in 2012 and then 2013) when the government raised taxes by 2.5% and North Sea investment crashed (the tax was then abandoned less than 2 years later).

3. How would Scotland defend itself as an independent nation?

There are two immediate issues unanswered here currently: If the UK does not formally “share the pound” with Scotland and the SNP repudiates their share of the UK’s current national debt, would Scotland be entitled to any UK government assets?  If they are not, then theoretically Scotland would start its life as a nation with no army, navy or airforce or any military assets. If Scotland does share assets with the UK how would this be divided?  If by a hybrid of their economic and population proportions of the UK, then Scotland would receive less than 10 Tornadoes, 4 Apache helicopter, 2 Type 23 frigates, 5-10 Eurofighters, less than 20 Challenger 2 tanks, less than 40 APCs of various forms and maybe a handful of mobile artillery pieces.  For a nation which by land mass is well over 20% of the UK currently, this would essentially render Scotland incapable of acting in any global capacity at all.

In addition, if Scotland became an avowedly anti-nuclear weapon nation (with perhaps a clause in its new constitution?) then it would also be ineligible to join NATO which is an avowedly “Nuclear Alliance”. Interestingly Scottish airspace is also the most common air of contention between the UK and Russia, which under an independent Scotland may mean that Scotland would have to invite the UK to protects its own airspace or acknowledge that it would be unable to do so.  Both of which seem highly embarrassing to a newly (and supposedly sovereign) nation.

4. What happens to all the UK Government supported jobs?

Across Scotland there are 100s of 1,000s of workers employed directly and indirectly through the UK public sector including personnel on Armed Forces bases, BAE shipworker’s building the UK’s new aircraft carriers, HMRC staff, NHS staff, Civil Service support staff, Teachers, Police, Firemen and more.  All of these currently have UK Public sector pension schemes, job contracts and are monitored and regulated by departments predominantly based in Whitehall (though a notable number are also controlled by Holyrood under the devolved powers signed by New labour).

Many of these jobs would stay, but a large number would also go, with employment in the Defence sector and civil servants employed in UK wide roles (such as tax or back-office support) being the clearest examples. This in turn may lead either to large job losses or relocating these staff out of Scotland back into the UK.  Not only have the consequences of such actions not been discussed for the individuals directly involved and their families, but the consequences for their communities have also been unexplored.

5. Would Scotland have a constitution?

No newly independent state for nearly 100 years has begun life without first seeking to establish a Constitution of some form.  But for Scotland the process of how such a document would be developed and what it would incorporate has not been discussed at all.

For example would Scotland incorporate the European Human Rights Act into its constitution?  Would Scotland devolve power to each region of Scotland or maintain control centrally?  Would Scotland place the Queen as the Head of State guaranteed within the constitution (and does this then mean the UK would need a governor general for Scotland)?

On none of these issues are there any clear answers and returning perhaps to the first of my five questions: who would be entitled to decide and vote on a “Scottish constitution” anyway?  Would a vote on a Scottish constitution be under the same rules as the referendum, which would allow every over 16 to vote and prevent Scots living outside of Scotland from voting, or would it be different?  Regardless of the decision made, would the answer inevitably be subject to legal challenges anyway and how would these then be resolved?

Closing comments:

Ultimately there are many unanswered questions around Scotland’s referendum this week, but to my mind one answer we do know is that Scotland will not vote to leave the Union. The pledges from Westminster this week on further devolved powers for Scotland and the profile that the SNP have been given by this referendum has already given Alex Salmond and his party everything they could want, without the risk of actually having to answer the fundamental questions about what an independent Scotland would really look like.
The economic factors alone are coming clearly to the fore, with major announcements and actions from banks, retailers, the IMF and global investors acting as a stark illustration of the economic destruction that an independent Scotland would face.  No country that has banks which have an exposure valued at over 13 times the country’s GDP can be considered as safe and reliable as an investment choice and neither can an ageing population rely exclusively on declining North Sea revenues to fund increasingly expensive medical and clinical care.

So while this has been an interesting period to muse on what challenges a mythical “independent Scotland” would face, it remains a myth and Scotland this week will vote No to independence.

 

Posted 13th April 2014 -Why going Green is no longer the best choice, it is the only one for global future of energy

The American Shale story is a myth.  Well, maybe a myth is strong, but the story of Shale in the US is certainly not what it seems.

For one, this was never anything new.  Fracking, or hydraulic fracturing, is over 60 years old in the United States and has occurred in over 1 million conventional Oil & Gas wells during that time. It’s not just the US though.  In fact the UK has been hydraulically fracturing for over 30 years as well, including in areas of outstanding natural beauty, with barely a squeak of publicity until documentaries like “Gasland” in the US.

Next, the “discovery” that Shale contains large quantities of oil & gas isn’t new either.  In fact it’s been known for a very long time but what is new is figuring out how to get it out of the ground commercially.  I repeat: commercially.

So what?  Why does this matter and why does this make the US Shale story “a myth”.

Firstly Shale gas is a loss making enterprise.  In fact, the only money that is profitable in the vast majority of US Shale plays is where they are after Oil. Not gas. The write downs by Shell and BHP Billiton on their Shale concessions in 2013 were just the start of what’s coming, but the sale of prime real estate by Chesapeake energy to avoid liquidation is one of the best pieces of evidence that the gas these companies are extracting is a loss making endeavour.

The next issue is that Shale gas is already requiring more land rigs than the rest of the world’s rotary rig fleet combined simply to cover the US declines in conventional gas production and this is the real story: US gas fields are ageing with no obvious replacements while demand from domestic consumers and industry is growing.  Furthermore the pace of decline is rapid and only the staggering level of capital investment in Shale extraction in the US will delay this process.

The US Shale “phenomenon” in short has been driven by two critical and correlating factors – large domestic demand for energy and a lack of significant import or export capability for natural gas. The lack of a natural gas market of the scale and interconnectivity of the Oil market is a key element in this, reducing the natural market forces which would have made the notion of US gas prices below $4 per MMBtu against over $12 per MMBtu in Japan, unfathomable.

In short, forget US “Energy independence”, the US will be importing again in less than 10 years and countries like Iran, Iraq, Nigeria and Mozambique are part of the reason why.

Conventional natural gas is actually very cheap in many places in the world, in part as it has no natural market in many economies where it can be produced in (hence why Nigeria has been estimated to flare over $2.5 Billion of potential gas revenues every year). But more importantly, natural gas can be very cheap to produce but it is expensive to store and transport unless the economies of scale grow enough to bring those costs down. Enter Europe, with LNG Terminal import capacity that is large enough to add another Norway of gas to Europe on a fleet of new LNG vessels, currently in hot demand from Asian yards (and conveniently mostly European owned too).

This injection of demand into Global LNG will accelerate the economies of scale required for natural gas to expand into a truly international trade and help to reduce the need for long term locked-in prices, thus allowing countries to purchase gas more on the spot market. Thus declining gas prices will not be an issue for gas producers sitting on fields like South Pars in Iran (estimated as the world’s largest natural gas field), where the well can be capped for a period if prices are atrocious. It is and will however be a major issue for any shale company that will be require to drill repeatedly and regularly to stimulate the well concessions they have that are producing shale gas/oil, at a cost of between $4-8 million per well to drill.

Taking aside this soon to be regained advantage of natural gas production against the distorted US Shale gas market however, the simpler problem is that continued investment into resource extraction is not a smart long term investment.

The scope of global renewable potential presents a range of fantastic options for a smart grid system, with integrated battery technology helping to stabilise the variable power production levels of renewable energy sources while reducing the barriers to entry for new energy companies. This model also increases system survivability by diversifying the power production sources so that a natural, man-made or terrorist action against a piece of energy infrastructure is less dramatic that it is currently.

This infrastructure therefore is not only a national investment into systems that will last well over 20 years, but also into advanced technology which provides solutions for providing energy to a highly diverse range of consumers. From the military applications, to off-grid settlements, mega cities and small towns – renewable energy integrated into a smart grid system with battery capability is scalable to any level.

Thus Shale gas will not and cannot be the long term answer to the US and the world’s energy challenges. Rather, it is an artificially stimulated hiccup in the broader gas and oil production landscape.

Shell, ExxonMobil, BG and others have labelled this century the Gas Century and for now they are right, but for our future they need to be proven wrong. There may well be vast stores of gas whether conventionally or Unconventionally (Shale, Coal Bed Methane, Methane Hydrates), but this is not a future for our world either economically, ecologically or politically.

It’s hard to see what needs to be happen for people to join the dots and make the integrated smart grids which the technology of today is so close to being ready to deliver, but my bet for where it may happen first would be to look in unexpected places: I particularly liked this photo from rural Myanmar as a sign of encouragement for the future, so feel free to share on:

Rural Myanmar

Posted 29th July 2013 – The day when Europe’s elite finally showed the world what they truly intend as the future for the EU – The Federal States of Europe.

 

Drones. Catherine Ashton. EU Intelligence Agency.

If the above combination doesn’t do the following:

  1. Explain this blog title and,
  2. Terrify you

Then allow me to explain very briefly.

On the 26th of July this year, the Telegraph ran with the latest announcement from the European Commission, that the EU want to establish a surveillance and intelligence agency arm that would be part of Catherine Ashton’s European External Action Service (read EU Foreign Office).

The theory according to sources within the EU was that this measure would help reduce the widely perceived US dominance in NATO which France has so long detested and it would help to counterbalance the power of the US NSA and British Intelligence services (which is odd as we are meant to be allies sharing aircraft, naval vessels and other military materiel but whatever….).

Now why is this move a declaration of EU political elites towards a “Federal Europe”?:

The dividing lines between a State and a supranational body (such as the UN, IMF, World Bank, etc) have often been blurred within the EU, which has been part of the point. In particular the difference appears to have been this cleverly constructed façade of a “democratic heart” to the EU, otherwise known as the European Parliament.

Of course as most followers of EU politics are aware, this “democratic heart” is a convenient cover for the fact that it is the EU Commission[1] and EU commissioners[2] who in reality draft and decide all legislation within the EU. But this has in many respects helped to strengthen some elements of the EU’s offerings.

The key benefit (there are few in my opinion) of EU membership has been the creation of a “free market” which has allowed European companies and people to grow and develop beyond the limitations that had existed before. In this respect a civil service with little to no accountability to an electorate has been a very convenient way of bypassing issues which national politicians would have been unable to implement but which needed to happen in order to create a functioning (albeit imperfect) free market.

As a result it had been largely accepted by European citizens and the British public that some EU legislation had to hurt as part of the quid pro quo for other gains, but then came the 2008 recession and people finally began to realise the power that the EU had to determine the fates of its member’s citizens.

Again, this should perhaps be unsurprising for seasoned EU watchers. After all, Europe has often ignored or attempted to deny people a vote on their future. Examples include ignoring a French and Dutch “No” at the 2005 referendum for an EU constitution which then was changed to the Lisbon Treaty to bypass national laws that would have required referendums and asking the Irish to vote twice on Lisbon after they first voted “No”.

The main reason why an Intelligence Agency with an Air Force (and make no mistake, modern air power will be drone operated), is such a clear declaration of the intent of EU to become a federal state is in the very definition of a modern day state.

Derived from the legacy of European wars, the Treaty of Westphalia defined states through the concept of Sovereignty which at its core has been defined subsequently as “The monopoly of the Legitimate use of Force”.

The rationale behind this is clear: for a state to enforce its laws it must have the ability to implement them and if necessary to use force to do so.

Herein lies the crux. If the EU has the power to exercise military and security apparatus, when EU members are already NATO members and retain their own police and security forces (coordinated often by Interpol and UNODC for trans-national criminal threats), then what is its purpose?

If the EU develops security forces and capabilities, it will only be a matter of time before the EU asks (or a diplomatic norm) is created that no EU member will use military force without the consent of the relevant EU organs. Once member states lose their absolute monopoly on the “Legitimate use of Force”, we have a Federal Europe. End of.

So why is this scary?

Exempting the fact that no opinion poll (at least to my knowledge) has ever has shown a single member state where they have indicated a majority who wish to be part of a “Federal States of Europe”, my two main points centre on the challenge this poses to NATO and the current competencies of The European External Action Service.

So first to NATO. The world’s oldest continuous military alliance in history and born from the ashes of Europe and the fires that covered the world. For better or for worse NATO has been the key compliment to the European Coal and Steel Community for establishing security within Europe since 1945.

NATO not only is the most efficiently staffed, managed and most experienced multi-national security agency in the world, but also one which continues to grow with members the world over seeing its benefits including old enemies such as Turkey and Greece.

The establishment of a rival organisation to NATO, which we must be under no illusions is exactly what the new EEAS Intelligence Agency would develop to be (a modern day “Trojan Horse” if you will), would not only increase the administrative costs on member states of retaining their armed forces but further hamstring their ability to deploy during a crisis. Thus a rival institution to NATO not only challenges its existence but its reduces its capability to operate effectively and challenges the US willingness to cooperate in European security matters.

The logistical difficulties that NATO experienced in the Libyan air campaign is systematic of the fact the Europe is still heavily dependent on US materiel support (The UK nuclear deterrent and F35 are entirely dependent on the US), yet the difficulty that Europe has experienced in intervening in Rwanda, Bosnia, Syria, Mali and any number of failed or failing states is systematic of the difficulties of group consensus in the EU.

The French and British decision to remove the EU arms embargo to rebels in Syria despite Austrian and other member reluctance or France’s refusal to support the Iraq war in contrast to the UK shows exactly why consensus in the EU on military matters is so complex. At least in NATO the structure allows Europeans the diplomatic security of devolving decisions to the Americans to avoid any domestic backlash from NATO’s actions.

Lastly on NATO let us remember that as the world’s pre-eminent super power, the US military is second to none in materiel and combat experience and at over 40% of global defence spending, the EU would have far less competencies at its disposal for any deployments they planned than NATO can offer.

Now lets turn to the EEAS.

Currently only 5 European states contribute even 2% of GDP to defence. With Italy, Spain, Greece and Portugal all in recession still, funding increases to support a new bureaucracy would seem like a hard sell to me, but assuming it can be raised the EEAS spending record is fairly awful.

The EEAS has failed every spending audit it has had since its creation and was designated the worst performing EU department within an EU External review. The European Court of Auditors and the FT slammed the EEAS for its performance in Egypt this year as well where they both argued over 1 Billion euros had been spent for little to no tangible benefit.

As if this wasn’t bad enough, its leader Catherine Ashton, has never been elected to any position ever, was never even heard of until David Miliband turned down the position of Head of the EEAS which allowed her to be elected. The body has also been widely criticised for its slow responses to international crises and its duplication of what many see as a sovereign role (in particular setting up embassies abroad).

Perhaps more than any of this though, the EEAS has no business running a Security Agency because there is  no clear mandate or purpose behind what it should achieve. The NATO defence pact (Article 5) and the common currency have already reduced the likelihood of a continental war to near non-existent, whilst national security agencies already work together to resolve common threats such as Al Qaeda or else pursue threats specific to their nation.

So in conclusion:

The battle for Europe which has been long in its coming is reaching the surface quicker and quicker by the day. The EU cannot survive in its current form, a fact that both those in the pro and anti lobby have recognized and thus the question is what comes next.

The creation of an Intelligence Agency in the EEAS is a game-changing moment in the discourse for the future of Europe. One where the EU becomes a Federal European State.

For those of you who like me shudder at that thought, now is your time to show it.

[1] All members are appointed civil servants.

[2] Appointed by the respective governments of EU members.

Posted 3oth June 2013 – The Nigerian plan for “Securing Development” – Analysing Ngozi Okonjo-Iweala’s plans for Nigeria’s future.

 

For those of you who have never had the pleasure of hearing the Nigerian Finance Minister, Dr Ngozi Okonjo-Iweala speak, you have certainly missed a treat. As the former head of the World Bank and with a raft of accolades from Time and Forbes as well as a highly regarded series of books and publications on global economics, she is truly an inspirational story for Africa’s potential, but it is her vision for Nigeria and sub-Saharan Africa which I wish to discuss in this article.

On the 19th of June 2013, Dr Ngozi Okonjo-Iweala gave a speech at the IISS in London where she expanded on the phrase by the current Head of the World Bank, namely “Securing Development”. I have attached the link to the text from that speech here if you would like to read, but for this article I want to look at the issues and solutions for Nigeria that were highlighted in her speech and my further reading to see if I can boldly suggest any further ideas for consideration.

 

The Challenges:

First and foremost it is important to highlight the incredible range of challenges facing Nigeria and to avoid creating a vast list I will draw attention to those that should be seen as core issues:

  1. Unemployment (and underemployment),
  2. Poor infrastructure (particularly in respect of Energy),
  3. Poor Governance (specifically corruption),
  4. Demographics (namely young with a high birth rate) and,
  5. Education (or rather appropriate linkages between skills taught and skills required).

In respect of unemployment, as Dr Okonjo-Iweala highlighted in her talk, unemployment in Nigeria currently stands at 23.9% as a national average, with that figure even higher in certain states and almost certainly higher during the non-agricultural months of the year. Almost inherently linked to this however are the issues of demographics and education, with poor governance and infrastructure providing a further inhibitor to improvements in this space.

Furthermore, according to Dr Okonjo-Iweala, the African continent has the lowest average age of anywhere in the world, with over 70% being below 25, though the figure in Nigeria is marginally higher at 63% under 25. Combine this with a high fertility rate and it is very clear to see that the educational institutions and the employment market have to work extraordinarily hard even to maintain the current status quo, let alone achieve improvements.

Of course linked to all these challenges is the “Resource Curse” and in Nigeria this has been of particular significance due to its status as the largest producer of oil in Africa and 6th largest worldwide producer (According to NNPC). The problem here was aptly termed and summarised by Dr Okonjo-Iweala as the story of “Jobless Growth”, where the state may derive significant wealth from resources, but it does not lead to significant employment and more specifically because it has little effect on employment, the wealth is concentrated to a smaller band of people.

In fact the story of growing inequality in Nigeria is closely linked the story of poor historic governance, where the reliance on kinship and networking has been the key to accessing the patronage which the Nigerian state can offer. This in turn has made foreign investment more difficult and less attractive which in turn has harmed the development of the Nigerian economy, particularly in respect of developing the nation’s infrastructure.

The Solutions and the Opportunities:

Now of course many of these current weaknesses are in fact potential opportunities for Nigeria’s development. A large, young population who are not highly skilled provides an environment to develop lower skilled manufacturing and textiles which underpinned the growth and development of Asia’s “Tiger Economies” and would play a key role in helping to develop the infrastructure and manufacturing base in Nigeria to “Secure Development”.

Large natural resources also provide the opportunity to develop much of the country’s infrastructure and reduce inequality, such as the Bolsa Famille projects in Brazil or the Social Security system in Norway. They can also help to even improve governance if they lead to higher basic wages which may dis-incentivise corrupt activities, a model practised in Singapore.

So what is Nigeria doing to address these problems as well as maximise on these opportunities and furthermore are their methods the correct ones?

At the core of Dr Dr Okonjo-Iweala’s speech was the lack of access to finance which all of Sub-Saharan Africa struggles from, even in her country of reference, Nigeria. To address this she outlined that Nigeria is currently following the following strategies:

  • The creation of a Nigerian Development bank (assisted by Brazil and others),
  • The Privatisation of the Nigerian Power Market,
  • De-regulating the structures around creating private oil refineries,
  • Publishing in the papers where state revenues from oil are being spent,
  • A large housing campaign  to boost home ownership and stimulate new jobs,
  • Developing raw material exports further, such as milling rice and refining Oil so that they can “Add Value” to the products and maximise their returns,
  • Creating linked apprenticeships and training programmes to get people working in industry and learning the skills they need and,
  • The creation of a significant entrepreneur fund for anyone with a business idea, where candidates are trained in business and if successful will receive large state grants to start their business.

Now while this list of ideas are very impressive and (to coin a questioner from the IISS) appear to come from “The World Bank playbook”, they appear to be glossing over the most fundamental areas of concern to accessing finance: Transparency and the Rule of Law.

In China today we are already seeing the damage that a lack of transparency can have on market confidence and frankly it’s not hard to understand why investors don’t like not knowing the reasons why decisions are made and why a lack of confidence in the validity of economic data, reduces the incentive to invest.

Furthermore, Africa as well as Latin America has a long historic legacy of amending the rule of law when the need for populist policies has arisen which has in turn led to frequent nationalisations of foreign assets, discriminatory policies against foreigners and currency controls which make it harder for investors to realize the returns on projects to their shareholders.

All of this therefore would lead me to make the following suggestions to help Nigeria succeed in its current strategies and to “Secure its Development”.

  1. Use a combination of performance related pay increases within the Public Sector, with a review of government expenditure to be audited by an external 3rd party (or group of 3rd parties) and made publicly available.
  2. Improve the security of foreign investor’s assets by reducing the degree of protectionism involved in purchasing Insurance in Nigeria, and by agreeing to allow International Arbitration on any major project whose life spans over a period of 10 years.

In the first instance, a greater domestic and international confidence in State institutions is critical to the future development of Nigeria. Thus, by combining a “Carrot & Stick” methodology to the Public Sector, which simultaneously generates confidence from the general public (due to 3rd party presence) and undermines criticisms of the audit by Trade Unions (by increasing pay), Nigeria will be able to further enhance its Public Sector image and create a better partner for International Organisations and Businesses to work with.

In the second argument, the current Insurance framework in sub-Saharan Africa (and Nigeria is no different), sees the remittances of Insurance Premium out of the respective country as lost investment, thus the country tries to arbitrarily force a proportion of each risk (and therefore Insurance Premium) to be retained locally.

Excluding the fact that most Insurance companies in Nigeria cannot afford to pay the higher end of claims in full even when they happen, this is a disaster for Foreign Investment because not only does it add an additional cost burden to investing in projects, but it also complicates the process of actually having a claim paid. In short if financial products which are designed to help facilitate Risk Mitigation cannot be effectively utilised in Nigeria, then many investors (Particularly low-risk funds such as pensions) will be unable to invest.

So those are my humble suggestions to Dr Okonjo-Iweala and even if, as I strongly suspect, my idea’s do not become government policy (one can only try right?) then I still wish Nigeria the best of luck with its latest reforms. As a country with aspirations to take on a leadership role for Africa and the wider International community, we could all do with a strong successful Nigeria at the heart of Africa.

 

Posted 16th June 2013 – Water Politics and the basics of Statecraft

As if being the President of a nation that has just emerged from a nearly uninterrupted period of autocratic rule with 40% of the nation below the poverty line and an Armed Forces who spent 30 years trying to remove you wasn’t hard enough? For those who are lost, I am of course referring to Mohammed Morsi, the current president of Egypt.

The story of The Muslim Brotherhood’s performance in government since the start of the Arab Spring may be about the only real consolation for the ex-Mubarak era officials, but the recent crisis with Ethiopia is one where few Egyptian’s would want to gloat about. Again you may be asking what I am talking about….

The Renaissance Dam project which was unanimously approved by the Ethiopian government today marks the beginning of a $4.7 Billion project to divert the course of the Blue Nile. The members of the Upper Nile states say that the project, which will generate 6,000MW of energy (10 times the current usage in Ethiopia), will be good for regional economies and that delaying water into the Egyptian part of the Nile will in fact improve water flow over the year and reduce water loss through evaporation. Needless to say the Egyptians don’t seem to be persuaded.

In fact, the Egyptian government is so upset and uncertain about how to react that the most senior members of government have even been suggesting directly bombing the dam, arming rebels in the country and a wide plethora of malicious acts against another Sovereign nation.

But how do we know this I hear you ask? Well for that thank the wonderful media relations staff of the Muslim Brotherhood who decided, at late notice, to broadcast the discussions of a high level meeting of senior Egyptian members of government…and not tell them it was being broadcast…..I’m genuinely serious  (See the following link.)

Now admittedly this could be a lot worse for Morsi.

1. He personally didn’t agree with violence whilst being broadcast and

2. The country they threatened is Ethiopia….

As you can see the list of good points in this scenario is fairly thin on the ground, so I am going to boldly suggest a few points here to President Morsi on basic statecraft:

  1. It is always easier to stop something from happening if you get involved before it begins. Egypt could have offered to send its own assistants to help structurally survey the sight and in return for help on the project they could use the leverage to negotiate the water they get. Failing that they could simply have galvanised the international community by calling for a moratorium to the project on the grounds of a required Environmental survey along the length of the Blue Nile. Both of these options now would be difficult at best to implement.
  2. If your character and credibility is questioned by the comments of an individual, distance is a powerful thing. Statements of intent also help and firing the individuals (even if they didn’t know and thought it was a free forum) sends a message of good faith to try the negotiation tactic once again.
  3. Exerting power through soft means: economic, quiet words with friends in the diplomatic community, leaning on organisations with influence, is often far more effective than threatening to drop a bomb. As one of the largest and wealthiest states in Africa with a significant amount of military capability (important for the development of the AU) and a leader for many in the Muslim and Arab world (not to mention their leading role in the Non Aligned Movement), Egypt has tremendous soft power leverage and again this should have been exercised earlier in the projects lifespan.
  4. Divide and Conquer. It is an age old, tried and tested technique, but with the water from the Nile being so vital to the survival of the states along the Blue Nile delta, it would seem that the failure to break-away some of the 7 nations who agreed to the Dam deal with the Ethiopian government is the sign of pretty poor statecraft.

So now we wait and see the outcome of the latest debacle. Will Morsi recover and be able to offer a compromise that at least publically spares him face with the Egyptian people or will he be humiliated in front of the entire nation (as well as humiliating the Brotherhood on the global stage)….or will the Egyptians carry out a military response and what would the consequences of that be……well ok admittedly consequences  in a truly lightning and exciting manor may be difficult for Ethiopia in this particular context, but at least politically the fall-out could have wide-ranging implications for Egypt’s standing both internationally and at home.

All of this however simply underscores a more fundamental point though which is that when the chips are down it appears, at least in Egypt, that having water in your rivers is more important than electricity to charge your iPod.

Posted 8th June – Being a British ’20 Something’ – And why perhaps we should be learning a thing or two from the Europeans.

Forgive me for breaking with convention but I thought I would write an article for fun. I hope you enjoy!

Another fine Sunday morning, another rather unpleasant groggy feeling and dry mouth. The combination of which will be familiar with anyone who has experienced a night out of drinking, albeit it is not exactly one that people remember fondly….

For some time I have always wondered why it is, that since I hit 18 (and my friends and acquaintances included), we go out every week (or second), spend a disproportionately large share of our income (either pre, during or post evening), to essentially poison ourselves, put on weight, feel rubbish and (depending on the individual) act like a total idiot.

And yet we do it again….and again….and again…..

Now I know every country in the world (legally or not) drinks to a certain extent and parties (some pretty damn hard), but what I don’t really understand is why it seems so consistent in the UK that the end game (or nearly always final result) of a night out for a 20 something in the UK ends up with them “sh*t-faced”…..again the question I ask is WHY??

So I thought I might take a punt and a speculation on why this is the case (and why this perhaps is very similar in certain countries in the world but not others). In essence I think it’s because of this:

“The reason why a large proportion of 20 something’s in the UK go out so consistently and get so hammered is because, whether they know it or admit it, we are all really f*cking terrified about everything”

That’s right. I think we are all really, really, really scared. And not just about one or two things but about everything:

As I see it by the time you hit 20 and before you clear 30 you seem to be stuck in this weird scenario for which nothing in your life to that point has prepared you for: namely full individual accountability for every aspect of your life and secondly full freedom to decide your own course in life (with no “Right” answer to follow).

Whether it is jobs, moving from home (or in my case trying to!), relationships (or lack thereof, whether intentional or other), lifestyle (work/life balance), choosing where home is (especially difficult if you don’t feel you can work where you have spent your life living or have never had a fixed home before).

What is also scary I think, and I believe most people will sympathise to various extents, is probably best explained by my analogy below:

“From birth to 18, life is like a ship sailing from the mouth of a river to the sea, with a fixed rudder and a firm wind in the breeze. Those on the boat may not like the route or the journey but it is a clear one they must follow none the less. Then suddenly, as the boat finally reaches the sea, the rudder relaxes and the wind dies. The boat is now cast adrift with no clear direction and the crew now have to decide what to do next.”

Cliched?…probably. But the point I still believe is pertinent. We all go through school and through childhood with certain socially imposed constraints that channel us to a fixed point in our lives: Nursery – pre-school – prep school – secondary school – …….

For some the decision gets kicked back longer. This is what is euphemistically called “Higher Education” or more accurately “Cr*p I am not ready for the real word! Lets learn something vaguely productive, hopefully meet some cool people and somehow earn more money than we would have done before hand when we leave. After all I can decide my career for the next 30-50 years in 3 years of studying right???”

This is why I think we all drink. We drink on dates because we are nervous (it loosens our guard), we drink with friends (it makes it easier for us to talk about what we are really interested in with a cover if the other party is unimpressed by content), we drink with family (that may be habit or awkwardness or higher alcohol quality related….all are valid) and we drink with work colleagues (because getting a straight answer from a sober work colleague is usually enough to drive you to drink).

Of course I do not mean by this that we would all be tee-total if we didn’t drink. Far from it. But I do think if we can learn one thing from our counterparts in Southern Europe (and many Latin origin states as well), it is that drinking can actually be enjoyed without being hammered at the end of it.

Now do people from southern Europe and Latin states get drunk? Obviously yes they do! But the mentally appears at least to my mind to be subtly different.

The pace of life I believe is the key.

In our 20s we feel a huge amount of pressure to start jobs, find a life partner (Or at least be looking), find a new home (flat, house, etc) and all of these things, things that will define our lives, we have to decide before we have even past what by most modern estimates will be only slight more than the ¼ life mark in our existence (Latest figures are we will claim working pensions in the UK when we are 75…).

So I want to propose an idea for those who want to stop the “Binge Drinking” culture (which by any other historical reference should be more accurately referred to as “Drinking”!), which is to actually start to talk to people about what really is important to them in life as a fundamental part of our education.

It is remarkably consistent that regardless of age or nationality, this is a question that truly unites all 20 something’s worldwide. The only difference is on how we respond to it. In Europe (especially the South) people seem to have more time to decide and to move at their own pace. In the UK we seem to have to move from home and have a job the minute we finished studying (often at a much earlier age than in Europe) and then be married or on our way by 30…..That seems pretty terrifying.

So to end this long rant here is my simple thought encapsulated:

20 something’s often drink so much and so hard because we are all so scared about not knowing what we want, what’s expected of us and most importantly perhaps is how we get there.

If maybe we spent as much time learning about “skills needed for life” on actually thinking about what it is that people want from life then maybe we would all be a bit happier, a bit more sober and the alcohol companies a little poorer.

Posted 16th May – Disruptive Forces in the 21st Century – What’s the worst that could happen?

Two months ago Lloyd’s Register, QinetiQ and The University of Strathclyde published an extensive and far-sighted report that outlined trends and patterns from 2013-2030 that will be of great interest to all stakeholders in the Maritime sphere. Within this report however the authors decided to articulate the 6 major “Disruptive Forces” that it believed would be “Game Changers” between now and 2030, which I have listed below:

  1. Russia joins NATO.
  2. The Dollar loses its reserve currency status.
  3. Major Pollution accident in the Arctic.
  4. Rise of the Green Crescent.
  5. Disruptive Technologies.
  6. Global Collapse.

Exempting the fact that these phrases are fairly vague and unhelpful by themselves (and personally, not well explained in the report either), the report did raise a key question:

What would constitute a Game Changing event for the World in the next 30 years?

In light of this I thought I would venture my own list of 6 “Game Changers” and put them up for public consumption. So here it is, my list of 6 (bit arbitrary I know) Games Changing events that could happen in the next 30 years:

  1. The world (China) masters Nuclear Fusion.
  2. A new Bird-Fluesque virus comes from China
  3. The Euro collapses.
  4. Radical Islam takes over Pakistan.
  5. The Internet collapses.
  6. A Manamamax class vessel sinks in the Suez Canal.

The World (China) masters Nuclear Fusion:

The Holy Grail of Energy, Nuclear Fusion would re-write the Global Economy and balance of power in a way that few can even begin to understand. If Fusion lives up to its promise (a big IF!), it is a limitless, clean, highly efficient Energy source which can continually supply Energy at a consistent price. This not only therefore would give businesses a massive advantage if they had access to Nuclear Fusion, but it would also re-write the trade patterns in the Energy sector which accounts for 10-15% of Global GDP.

If Nuclear Fusion is successful then it is unquestionable that the world oil and gas prices will fall dramatically and with a collapse in price, the loss of commercial viability will destroy many of the current fields being developed. It will also economically challenge a wide variety of Energy exporting nations, in particular the members of OPEC where some members like Russia are dependant for over 40% of the state’s revenues on Energy exports.

That’s before we even begin on the potential upside effects on climate change and downside effects of Nuclear proliferation and enhanced threats of Nuclear terrorism, both prompted by increased global demand for nuclear fuel and technology.

A new Bird-Fluesque virus comes from China:

While perhaps clichéd it should be worrying to many how often threats of pandemics have started in China, not just in recent memory but even as far back as the Black Death, Asia has been the source of major global pandemics.

For those of you who haven’t viewed foreign Policies coverage of the latest one, this is a pretty scary prospect as well….

The Euro collapses:

Again it may be clichéd but it is undeniable that a wholesale collapse of the Euro would truly be a game changing event. Not only does the Euro-zone make up the world’s largest single currency block (Est $16 Trillion), but it also represents 3 of the World’s Top 10 largest economies, the world’s second largest exporter and the world’s largest consumer market that has underpinned the growth of Asia’s (and now Africa’s) so termed “Tiger” economies.

The Collapse of the Euro due to lack of political leadership, public hostility to austerity or a disorderly collapse due perhaps to an attack on government bond yields may also lead to a default(s) large enough to trigger another global recession.

More fundamentally perhaps is the challenge to the concept of Europe that the Euro’s collapse would have, and if those who believe that the existence of the EU has prevented another major war on the European continent for over 60 years…..

Radical Islam takes over Pakistan:

This is again a very frightening event which is certainly not outside the realms of possibility. It has long been the subject of discussion as to how involved the ISI (Pakistan intelligence) are with the various assortments of Jihadist movements in the Tribally Administered territories of North West Pakistan, but the Mumbai terror attacks and the discovery of Bin Laden in Abbottabad however would appear to highlight that at best incompetence and at worst a degree of collusion happens at the highest levels in Pakistan’s state security network.

On a civil society side, we can look at the assassinations and violence against those accused of Blasphemy and several high profile incidents of acid attacks on women, all of which serve to underscore the deeply Conservative nature of many within the Pakistani system. The fact that the most recent election is the first in history as well that marks a transition from one democratic party to another, is a reminder that democracy is not a deeply embedded concept in Pakistan yet, thus while the recent election is a good sign, there is no guarantee that this is a precedent that will continue.

Of course the “Why does all this matter” is that Pakistan not only has Nuclear weapons capability and in fact exported this to North Korea and Iran through the Haqqani network (albeit unintentionally for the State of Pakistan!), but it also maintains one of the most tense and fragile borders in the world with India which has frequently threatened to spill over into violence (see the Mumbai attack aftermath). That’s before we even touch on what an Islamist run Pakistan might do for stability in Afghanistan (admittedly they aren’t great now but this could be far worse!).

The Internet collapses……Well at least in the form we know it:

Contrary to popular belief the internet isn’t invulnerable per se, more just difficult to permanently bring down globally. Whether they be Politically motivated groups, anarchists or perhaps even a state sanctioned attack, the internet will always be vulnerable in any country in the world, as witnessed by both Libya and Syria both losing internet in the entire country during the last 12 months.

Of course the other issues to the internet’s stability rest on traffic and the ability to coordinate volumes of traffic, a point which raised concern when a European internet regulation consultancy organisation was the recipient of a vast cyber-attack which was said to have slowed down the internet for certain European users.

Other issues to consider of course are what would happen to the internet if its control fell to specific nation states, a move that is being actively pursued by countries with a history of poor human rights records such as China, Russia and Saudi Arabia (the full list is fairly long). If the internet is anything, many would argue that at its core it’s about freedom and moreover it is a tool to break the information monopoly held by stronger actors and allow minorities to have their say. If the internet became regulated by the respective state that an individual lived in then would it be too far a stretch to say that the internet as we know it today would have been destroyed? (granted this is very subjective rather than a factual “System Error” crash.)

A Manamamax class vessel sinks in the Suez Canal:

What is a Manamamax vessel? Good question. Currently this is a conceptual vessel size, though to be honest I could use the Triple E Maersk Class as a current one, but it isn’t as big as the planned Manamamax.

Feel like you need a dictionary for that last bit? Well to explain it simply, Maersk Triple E Class are the largest containership vessels that have ever begun construction and when completed they will be able to carry 18,000 Twenty foot Units (Imagine the largest boxes you see on lorries, though technically these are mostly 40X40). The idea of a Manamamax vessel is one that could go up to 30,000 Twenty foot Unit equivalents (TEU).

Now why does this matter? Well for two main reasons: how do you salvage a vessel that big? What would the cost implications of a salvage for a vessel that big in such a crucial part of the world as the Suez Canal be?

I have written before about the difficulties of recovering the Costa Concordia and the challenges being faced, but perhaps this envisaged scenario is even worse. Not only can the containers only be removed by machine if the vessel hasn’t listed (turned to the side), but with the sheer weight of the vessel, any unplanned movements of water or failure of the ballast system could lead to significant structural pressures and collapse of the vessel structure. This just makes the removal even harder, more time consuming and expensive.

As to the cost….Vessel + 30,000 Containers + salvers fee’s + loss of use + P.R. company to protect brand + fines from Egyptian government (+potential legal fees for the crew) + loss of transit through the Suez Canal + loss of hire and delay for other vessels who can’t use Suez + loss of earnings for those who needed goods that were supposed to transit via Suez……..I am not sure I can quantify that, but I suspect you have some idea of what that might do for many in the global economy and what the lasting implications on the world Maritime and trade space maybe.

Oh and last year the largest Maersk vessel in the world (14,000 TEU ish, Emma Maersk), got pulled into port near Panama with 9 metres of water in its engine room…

Concluding Remarks:

This is not intended to be a list of events that will certainly happen nor is it meant to be exhaustive, but I do feel that it perhaps represents a more realistic list of potential game changing events than the one posited by the author of report I cited at the start of this article.

There may be many significant challenges to the world as we know it in the next few decades, but perhaps the greatest challenge is the most clichéd of all: Getting mankind to actually work together for a global, common interest.

Now that really would be a game-changing event.

Posted 15th April – The legacy of Margaret Thatcher and why Britain’s political left have never recovered from it.

Like many individuals in the UK I have found that the death of Thatcher has been one of the most revealing events in recent British history. Rarely has Britain’s inherent political and ideological divides been more apparent among friends, politicians, celebrities and the press than since it was announced that Mrs Thatcher had tragically passed away in her room at the Ritz on the 8th of April 2013.

I want to try and avoid repeating what so many commentators have done so far (and no doubt historians will continue to do), and avoid talk of Thatcher’s specific policies, because while I am technically a child of Thatcher, as I do not remember her policies as they occurred I feel out of place to pass judgement on them (instead I’ll leave that to unemployed morons between 18-30 who “celebrated” her death in Brixton amongst other venues). Instead I would like to talk about her real legacy and by that I mean her ideology.

With the advent of New Labour Ideology has become an ugly word since 1997 and it is not so hard to understand why.  Following Thatcher the old belief system of Britain’s political left had been thoroughly discredited with the Unions in tatters and the appeal of Nationalism and Socialism destroyed following the collapse of the Soviet Union and the increasing affluence of the British people (particularly in the South but also in Scotland due to the booming North Sea oil).  With that in mind Tony Blair sought to re-write the play book on British politics and move away from any overtly “Ideological” policies, most famously removing clause 4 (Labour’s Nationalization policy) from the party constitution.

The consequence of this was the creation of “The Third way” where New Labour attempted to use the power of the free market that Mrs Thatcher had unleashed to achieve the social re-balancing that Labour had previously sought to achieve through the State.  The result was a legacy of debt and further division of the country as the South grew increasingly affluent and the North became increasingly reliant on subsidies from Whitehall.

But why does this all matter and what does Mrs Thatcher have to do with it?

The answer is that the birth of New Labour, David Cameron’s Conservatives and the rise of UKIP are all because Mrs Thatcher essentially re-wrote the play book for British politics and most importantly because she installed the principles that shattered Britain’s post-war consensus that so closely mirrored that of Europe.

Her belief in individualism and in personal accountability undoubtedly are why she is so fondly remembered by the Political Right and hated by the Political left, but the legacy of that ideology has also caused deep divisions in Britain’s political parties today that are still unresolved.

For the Conservatives those on the party left remember the hatred on the street and the loss of party support in the North and Scotland, a legacy that still afflicts the party to this day.  As a result they are reluctant to make many of the cuts which those on the traditional party right have clamoured for during the coalition.  Defence has been cut, policing has been cut, NHS spending has been ring-fenced, elderly welfare mostly ring-fenced, foreign aid ring-fenced.  These are all policies that are a direct consequence of Thatcher’s “Nasty party” image and reflect a desire by the Conservative political left to re-brand themselves.

The irony of course is that Thatcher’s vehement belief in the free market, personal accountability and individualism have never been more popular on Britain’s political right.  The defections from the Conservatives to UKIP owe far more to the popularity of Thatcher’s ideals and a rejection of “The politics of the Political centre”, or in other words Blair’s “Third way”.  A rejection of excessive European regulation, a more simplified taxation system, a move away from a “Benefits culture” to one that rewards the entrepreneurs and risk-takers lies at the heart of this divide on the Political right which is tearing the Conservatives apart and fuelling the rise of UKIP.

For the Political Left the problem is no less acute, a fact that David Miliband and his brother know all too well.  The victory of Ed Miliband, despite the Labour spin, is a sign of a rejection of the centrist agenda promoted by Blair and reflects a desire by the party’s main financiers and ideologues (Socialists and Trade Unionists) to move away from the free market and to involve the state more in the regulation of the economy.  In particular it represents a move away from the support of the City to one where the City of London is “The enemy of the Proletariat and a symbol of Capitalism”….Or so many of the Labour party’s main support base would like it to be.

The fact is that the belief in the state and personal accountability are popular in the UK now and that simple fact is at the heart of the Labour party divide (and to an extent the Lib Dems).  How can the free market be used to create a more balanced society in an ever more competitive world which lets not just finance, but people move easily from country to country?  In many senses the Political Left know what they would like in an ideal world, a world where people asked for smaller salaries and paid higher taxes to help others.  Sadly they also realise that is not likely to happen any time soon, perhaps again a legacy of Thatcher some might say, people who achieve success without the help of the state perhaps feel less inclined to give back to the state.

The base line however about Thatcher’s ideological legacy however is this: It is not the Political Right that was most affected by Thatcher, but rather the Political Left in Britain and hence why she is so despised by them.  Thatcher more than anyone else put the nail in the coffin for the idea of a Socialist party running the UK, not just through embedding the Free Market into the British political mainstream, but also by making the concept of personal accountability a key component of how British people perceive fairness in our society.  Perhaps no better example of this is the struggle that the current Labour party is with opposing Conservative cuts to the so-termed “Welfare Scroungers”.  Thatcher’s legacy that individuals should not live off the state but rather they should be accountable for their own destinies has strong resonance in the UK and until the Political Left can reconcile this national consciousness into its vision for the future, the party will always be a contradiction between its desires and its actions.

Thatcher’s legacy I believe is a truly great one and one all British people should be grateful for. The belief in Personal accountability and Individualism is what made this country great and it is only when the UK rediscovers this that we will be truly able to survive and compete in the New world.

R.I.P Mrs Thatcher, this country will never be the same without you.

 

Posted 17th March –

When Economies of Scale fail

Oversized shipping in the 21st Century:

So as a relative neophyte in the world of Maritime studies I thought I might share some of my recently imparted observations and knowledge to those with even less experience and in particular what I want to share is what “Too big to fail” means in the shipping world.

You see, when we say “Too big to fail” in the context of banks, what we really mean is “The cost of them collapsing is more expensive than the cost of us rescuing them”.  In shipping “Too big to fail” really means “If this happens we are so f***ed”.

Two particular cases in point for this are as follows: The Costa Concordia and the Emma Maersk:

The Costa Concordia:

The Titanic may have had the great romance and mythical status that no other Cruise ship has had, but the honour for the most expensive mistake (financially just to clarify) is without question the Costa Concordia.  Firstly the vessel itself is a right off or in Insurance terms “A Total Loss”.  Secondly you have compensation claims to the families of the 30 individuals who tragically died and lastly you have the cost of cleaning the whole thing up.

Currently it is estimated that if the latest salvage attempt works and then compensation is paid out in the manner that is currently anticipated, then the total direct cost to the Protection and Indemnity clubs (Ship Owners Mutual Insurance Companies), will be just shy of $2 billion.  If…….

The salvage of the Costa Concordia is the most ambitious Salvage attempt ever made of a vessel that size.  To understand the scale of this project look no further than the description from the salvers of what they plan to do:

  • The vessel will have an entire underwater support structure built onto the seabed with cables attached from the Costa all along the support structure underwater.
  • The vessel will then be pulled upright onto this structure with float supports on either side to prevent the vessel from tilting.
  • Once on the platform the vessel will then have all the damage to its hull re-welded by teams of underwater divers and when that is finished, the water will be pumped from the vessel.

If all those stages go to plan, the vessel will then be floated into port on the Italian mainland and broken up.  Oh and this will take two years, cost $400 million and they have one attempt.  One.  If it doesn’t work, they start again…..

Then there is the implications for Insurance as a whole.  The world’s largest Insurance programme for the Non-Energy, Marine sector had its toughest renegotiation and renewal in memory for many brokers and the insurance companies have increased their fees for this year between 5-15%.  This not only hits the bottom line of cruise companies and their affordability but it also has ramifications for the design and training of all new cruise vessels potentially costing millions more.

The Emma Maersk:

For some photos of the vessel check out this site  http://www.emma-maersk.com/photo/gallery/

The Emma Maersk is the latest addition to the Danish giant’s arsenal and can carry an estimated 13,000 Teu (twenty foot unit equivalent containers).  It is currently the largest container vessel in existence but will be surpassed in the next 3-4 years by the Maersk C-Class vessels which are planned to be capable of carrying 18,000 Teu.

So what’s the problem with this? Where do we even start!

Lets start with the vessel herself.  In less than 1 full year of service the vessel has had numerous engineering faults and structural failures, most spectacular of which (and chronically under-reported!), was the fact that the Emma Maersk was towed into port in Panama (not the canal) with 9 metres of sea water in her engine room.  Yes that’s right, 9 METRES!

Now in this case the vessel is safely in port and undergoing repairs but lets imagine for a moment that either of those two alternative (and highly plausible scenarios) had occurred:

  1. The sea water had caused the vessel to list (Marine term for tilt), to either side.
  2. The vessel had lost power while taking on water in the middle of a major waterway: i.e. the Malacca straits, the straights of Gibraltar or the English channel.

In scenario 1 we have a serious problem. The modern design of containerships is that their structure allows cranes in a port terminal to easily access and remove the containers, which are neatly stacked, at a highly efficient level.  For this to work effectively however the vessel has to be balanced for the cranes to work.  Now when the vessel is tilted the containers have to be removed manually, a process that can be as slow as 6 per hour.  On a vessel with 13,000 containers that is a problem.  Not only may any perishable goods be long gone before they are emptied, but the cost in man hours to extract all those containers would also be staggering.

Next let’s look at scenario 2.  Under old international laws a vessel did not have to be recovered provided that it did not sink in an international waterway and therefore provide a danger to other vessels on that route. That law has now (or imminently will have) changed and exempting a vessel sinking in the middle of the Atlantic or Pacific it will have to be recovered from the sea (or the company will have to prove it is technically impossible to do so).

The problem of course in this is scale.  We mentioned the cost and technical difficulties of removing the Costa Concordia in relatively shallow water, where at least 40% of the vessel was out of the water and there were no container units.  Conceptually even trying to gauge the cost in environmental damage, loss of goods, increased Insurance premiums, delays in trade, etc, etc of a “Emma Maersk”-esque vessel sinking in a key strategic waterway is an example of how these vessels have become “Too big to fail”.

The most ridiculous thing however in my personal perception is that vessels of the scale we are seeing under construction, The Emma Maersk to name just one, are actually the final nail in the coffin of many players in the shipping industry.  The shipping industry is currently experiencing one of its toughest periods in memory, with former ship-finance banking giants like Commerzbank leaving the industry entirely (though still with huge loans on its books).  The key problem of course being an oversupply of vessels and insufficient demand, which as every Business Studies and Economics student can tell you: When supply outstrips demand, prices will fall and fall they have.

Whether its OSX (World’s 6th largest fleet), filing for chapter 6 in the USA or the comments by Maersk’s CEO that they will scale back their shipping services due to poor returns, the industry is in the doldrums over this supply side problem.  And its about to get worse.   Even if older, smaller vessels are scaled out (which is already happening) you then have accessibility problems.  Few ports can handle these vessels currently and to do so requires significant (if not cost-inefficient) investment.

Concluding Comments:

The old cliché that size matters still holds significant weight in the Maritime world, as long as the cost-per-unit declines or cost per passenger declines, then the “Economies of Scale” will seem irresistible. The concerns of course are also enormous but the problem is people are only beginning to realise this now.

Gordon Gekko is often cited for his phrase “Greed is Good”, but perhaps on this particular scenario businesses in the maritime sector should consider more the implications of an RDS (Realistic Disaster Scenario) actually occurring, rather than focusing on the “Cost per unit” side.

Posted 3rd March – Much Ado About Nothing

Why the results of the Eastleigh by-election don’t matter.

Last week the results of the hotly contested by-election finally came in, and to no-one’s surprise the Liberal Democrats won.  Well, not everyone thought it was so clear cut, but that is  more a reflection on political commentators and pundits than it was a reflection of facts on the ground.  You see the key thing about the Eastleigh by-election was how nothing did really change as opposed to the Nick Clegg narrative of a “Stunning Victory” or David Cameron’s “Disappointing” Result for the Conservatives.

Firstly let’s remember the facts:

Eastleigh was a Liberal Democrat held seat in 2010 with nearly a 4,000 vote majority on a 69% turnout, totalling 46% of the vote.  Furthermore, of Eastleigh’s 44 Councillors, 40 are Liberal Democrat and 4 were Conservative.

Next let’s remember the time and tested rule of British politics:

During the mid-term of an unpopular government the governing party will always do worse than in a General Election.  Except in Eastleigh the only two major parties were both in government.

So in summary:

The party with the overwhelming local support base won the election. The only other major party who could have taken votes was also in government and therefore took a relatively equal share of the blame. Recognising then that the Labour party only took 9% in 2010 and actually received 1,000 less votes in 2013 than in 2010 made it almost certain that the only party who would benefit from the so-called “Protest vote” had to be UKIP, who duly did benefit (albeit better than was initially expected).

The key therefore from Eastleigh is to recognise the message of a “No change” vote rather than look for changes to provide that meaning. What the Eastleigh by-election did, which has been poorly reported, is to show that the UK public do not see any significant differences in the 3 main parties and they do not think that their votes can make a real difference.

Since 1997 the UK general election voter turnout has never passed the 70% mark that had always existed before the creation of “New Labour”. In Eastleigh this was the real story.  Nearly every major UK politician and news outlet canvassed the public incessantly for weeks and yet at vote time the turnout was 52.7%.  52.7% of people in the middle of a parliament, with all the media coverage, attention and with a Lib Dem cabinet seat up for grabs decided to vote.  47.3% didn’t even bother.  In fact in 3 years the number of registered voters in Eastleigh who felt their vote could make a difference fell from 69.3% to 52.7%.

In short Eastleigh is not a Lib Dem win, a Tory disappointment, a UKIP breakthrough or a Labour set back.  What Eastleigh does show us is a warning.  A warning that the UK electorate do not see a difference in voting.  They do not see a party or group with ideas they will vote for and they are not happy with any of the offers they are being presented with.  In short Eastleigh was a vote for the status quo (in light of any alternatives).

If Eastleigh told us anything then surely Eastleigh’s message was: Go back to the drawing board and come back with something different.  The challenge is to the parties in Westminster now is how to do that.

Posted 1st March 2013 – The Myth of “The United Petrostates of America”

On Monday the well-known US publication, Foreign Policy, published an article on how the US would be transformed by the advent of Shale gas and become The United Petrostates of America (for the link click here). Of course this assertion is absolutely laughable.

Firstly the advent of US Shale will not lead to massive exports of Oil and Gas from the US because other domestic US energy sources (Coal, traditional oil + gas wells) are declining and also because other developing nations like China, India and Brazil have a plethora of other less politically sensitive sources of Petroleum products they can access.

Secondly, the US Petroleum industry primarily exists to service the production of US goods for US consumers and whether that is for transport needs (in a vast territory with poor public transport) or heavy industry like Chemical manufacturing, Ship building, Car building, etc. In short the US does not export what it needs at home and so does not get the boost in its trade figures with other states.

Lastly is the assertion that the export of Shale produce, (assuming the author is by some miracle correct), is not the reason why the US dollar is strong against other currencies, it is because it is the world’s currency reserve. The value of the US dollar is high because in times of insecurity people put their money in Dollars because of the long held belief that the US will not default on its debts. Excluding those who write about the decline of the US from a position of desire not knowledge, and the mythical “Credit-ratings agencies” (if they even still deserve that name) people trust the US to pay and are almost blind to any other considerations, see the decline in US 10yr bond yields when the US had its Triple A rating cut for the first time.

In addition the US debt (now in excess of USD$14 Trillion) is, contrary to popular belief, largely held by Americans. The citizens of the US and global investors now the US will pay its debts because over $9 Trillion of that debt is owed to fellow Americans. Thus the incentive to default on citizens and institutions of the state itself is, in essence, non-existent.

All of these things combine to a very simple point that seems to be missed in the US discussions of Shale gas, what is the US net increase in Energy supplies? If we look at the historic growth in US natural gas over a 20 year period, we see that consumption of gas in the US rose from 19.17 TcF in 1990 (from all Sources) to 24.09 TcF in 2010. To put it more simply, between 1990 and 2010 US gas demand grew by 25%, yet over the same period the US production of natural gas only grew at 21% (17.81 TcF to 21.58 TcF). To add to this even further, the growth in US gas supply between 2012 and 2032 is predicted to increase at an even slower level of 15% over the whole period.

Thus the key point is that US Shale Gas is not a “Bonus” to US energy supplies, rather it is the critical lifeline preventing them from a huge collapse. According to the EIA the US is expected to increase its supply of gas (as mentioned above) from 23.65 TcF of gas (from all sources) in 2012, to 27.27TcF from all sources by 2032 but if the growth in gas demand increases by the same factor as it did between 1990 and 2010 then there will be a net deficit.

Last thoughts to add here: if the US population grows by 15% between 2015 and 2035 (prediction from US Census) and Obama and Republicans want to see the US boost domestic manufacturing to boost their exports (despite the growth in gas demand occurring during a decline in US industry), will the US still have to import gas even with Shale?

 

WHY HAVEN’T WE MONETIZED TRANSPARENCY YET?

In a world short on trust, perhaps making things more open is the best way forward.

It perhaps seems like a question with an obvious answer; “why hasn’t everybody invested in transparency?”.  Why don’t companies report how much their employees are paid?  Why don’t government departments, schools, hospitals, police stations and all state institutions make their financial accounts public?

Of course there are many current reasons given why to these questions such as personal privacy rights of individuals to not disclose their salary and the belief voiced by people in positions of responsibility that they are undermined by a system which allows the public to see every decision they make without the context behind those decisions.  But conceptually, to not need Transparency requires Trust.  And if we are all honest, trust is more than just a little lacking these days.

Whether its MP’s expenses, Leveson inquiry, the Catholic church’s now almost annual child molestation stories, the Libor scandal, the latest tax avoidance scandal by Google, Amazon and Starbucks……there aren’t too many people left that still inspire trust to the British public.  And this is why “Transparency Branding” is so interesting.

Trust is now at a price-premium and the consumer demand has never been higher for services both private and public that people can depend on.  For the private sector all employees could gain from an open pay system which would force employees and staff to acknowledge and prove that their remuneration was justified and would be a powerful force against discrimination based on gender, ethnicity or age.  A more open set of accounts would also put to bed any suggestions of tax avoidance and could help in certain cases, like that of supermarkets, to demonstrate that suppliers were being given a fair deal.

For government the results could be a greater public trust in the political system.  By making many details transparent from the public sector such as the financial details of schools and hospitals, it will be easier to have open debates and discussions because the facts are commonly established.  By creating an equal knowledge playing field politicians would be able to ask the public and get responses in a far more effective manner because the facts are commonly established.  This would also help to take away the necessity for people to trust politicians when they make decisions and instead allow the facts to speak for themselves in certain cases.

The emphasis thus moves from asking what people would like in an ideal world to what people can have from the current system and thus increased perception of the realities the public sector faces is healthy for democracy.  If the public can see for themselves where money is short and where it is being spent this may facilitate a more reasoned and cooperative framework for discussions with dissatisfied pressure groups and public figures.

To put this concept in practise I want to elucidate a quick image and leave it open for you to decide if my conclusions are correct or not:

Imagine 2010 and the coalition enter government office and before spending adjustments or tax cuts are made, the true financial situation of each government department was made public.  Just imagine that and how powerful that would have been.  Not only would it have levelled the Labour party’s credibility as a fiscally prudent party but it would also have forced any opponents of austerity to argue based on facts in the public knowledge which they could be held accountable against.  Take it even further, when councils first made cuts and local services were reduced and members of the public began to complain, then with an open set of accounts the government and civil service could very reasonably ask the disaffected groups to suggest alternatives and then return the argument to one of raw facts, thus undermining the ability of opposition groups to play on pure emotions.

By becoming more transparent government and businesses become stronger not weaker.  It is easy to mobilise public sentiment against large organisations by stirring up people’s emotions with little evidence, actual facts or reasoned argument because they can play on the narrative that secrets are being kept from the public.  The more transparent government and companies get, the harder it will be to make those arguments and with that will become a greater public trust in these institutions once more.  After all, if you don’t believe the government or a company but everything is transparent then you can always check the facts yourself.

 

MILITARISED MULTINATIONALS

Why the decline in State Security forces is leaving the private sector to provide its own security.

Since the 1990’s Immanuel Kant’s perpetual peace thesis, nowadays better known as the Democratic Peace Theory, has returned with a vengeance.  The theory, for those who were spared having to actually read Kant (a good save there) is that democracies do not fight democracies and so as the world has become more democratic it has become less violent.

Now admittedly this topic has primarily stayed as a bitter debate in the academic world of International Relations, but what is important for those without MAs and PhDs in Political Theory is that the nature of warfare and violence has been changing.

Since the 1990s (and well before too) there has unquestionably been a dramatic rise in violence conducted by non-state actors, with the most famous contemporary group being probably Al Qaeda (with the IRA, FARC, MEND and ETA all being close contenders too).  But the problem with saying the world is less violent because less states fight each other is that this argument becomes a political cover for politicians to cut defence spending, and contrary to popular belief this is a problem.

Taking aside the ridiculously expensive F-35 programme (at over $200 million a jet on current estimates) and the Trident nuclear submarine project (at £100 Billion for 4 submarines over 25 years), the British armed forces has never been smaller.  By 2015 the Air force and Navy will number under 70,000 on current estimates with only 120 fighter jets (the same number as Belgium) and 80,000 members of the army across all disciplines (engineers, artillery, infantry, armour) and Britain is not alone.

Only 5 members in NATO managed to keep to the charters 2% of GDP on defence spending in 2012 and this may fall even lower in 2013.

So why is this relevant and how does it fit into this articles premise?  Quite simply, I want to argue that as governments reduce their ability to provide physical security against the threats of violence by non-state actors, businesses will take their personal security into their own hands and in fact this is already happening.

Marine Piracy and the Private Sector:

Piracy since 2007 has largely been internationally associated with one word, “Somalia”.  In a country where the state has not technically had an Armed Forces since 1991 and where the UN and USA have been forced to pledge commitments of around $390 Million to the African Union Mission in Somalia (AMISOM), it is perhaps not surprising that piracy has been able to flourish. What had been so surprising was its success.

With certain vessels like the Samho Dream being released after the payment of $9.5 million (2011) and an estimated $135 million being netted in ransom payments in 2011, it is hardly surprising that piracy groups proliferated and became so well equipped at such a fast level.  Combine that with an area of over 3.4 Million km2 at risk (IISS) and the fact that round 22,000 vessels pass through the Gulf of Aden each year and it’s not hard to see why 802 people had been taken hostage by pirates in 2011 on the East and West coasts of Africa.

In fact between 2008 and 2010, NATO claim that 131 vessels were hijacked and 315 vessels were physically attacked by pirates.  As a direct consequence of this an estimated $7.5 billion is now being spent by navies from across the world under 3 separate multinational missions, which would seem to emphasise that the issue is being taken pretty seriously.

Sadly though it is not the response of governments that seem to have led to the much lauded reductions since 2012.  According to data from Lloyd’s List there was nearly a 65% reduction in piracy attacks in 2012 and what people are saying behind the scenes (and seeing in the budget sheets) is that this change all comes down to one main reason, Armed Guards.

Unofficially Insurance Brokers have been reporting figures in the range of an 80% drop in K&R premiums since the advent of Armed Guards and then you have Typhoon. Typhoon is a private security firm that provides close quarter support for convoys of vessels travelling through the Gulf of Aden and is being rolled out in collaboration with Glencore.  The firm aims to replicate the tactics of pirates by using smaller fast response, armed patrol boats, launched from mother ships to counter the pirates using their own tactics.  By using this method Typhoon believe they can deliver a more robust and effective deterrent to would-be attackers in a far cheaper and more advantageous way than the Royal Navy can.

In effect, the private sector has the flexibility to adapt rapidly to demand where there is a personal financial gain.  Armed forces and certainly naval forces cannot.

Whilst Typhoon is just limited to the Gulf of Aden it is important to note that the highest region in the world for piracy historically and in 2012 is actually Indonesia.  In addition West Africa and many of the Littoral South-East Asian states experience significant piracy threats, in particular in the Malacca Straits.  With an increasing amount of global trade going through more politically insecure areas and the value of vessels increasing (think of the ransom on an 18,000 TEU Maersk C-Class vessel) the relative success of Typhoon will be watched closely and almost certainly emulated in some form.

Most significantly in this rise of privatised security arrangements are the terms of engagement these new actors adhere to.  Yet again the lead in this respect has been left to a variety of non-governmental bodies like the International Maritime Bureau to listen to the concerns of their members (shipping companies largely) and then recommend best practises.  The reality however is very complicated.

As the demand for armed guards has soared, the cost and quality for these Private Military Security Providers ( PMSCs) has continued to diverge and the lack of reporting when arms have been discharged is a growing concern for those maritime forces operating in the region.  In essence the issue is becoming one of which the PMSCs are able to decide what is a legitimate target and what is an appropriate level of response and may hide behind flags of convenience and the legal ambiguity of combat in the high seas. The lesson being taken is clearly that if security is left to private actors then private actors will also take the lead on establishing how they provide their own security.

BP Oil Field

 

Figure: Courtesy of Statoil

 

 

 

Oil and Gas – Africa and the Middle East

As the recent situation in Algeria has demonstrated, Oil and Gas workers are always a high value target regardless of their location.  The very fact that this particular BP facility was so far from the Mali border, where Al Qaeda in the Islamic Maghreb ( AQIM) are said to operate, is merely a further reminder that private sector actors in even relatively secure developing nations cannot rely exclusively on state protection for their security.

But the recent flurry around Algeria is just the tip of the global issue of kidnapping the employees of oil and gas businesses.  Whether it is Shell employees and their families in Nigeria or BP, Shell, Exxon staff facing threats to security in places like Iraq or the high kidnapping rate in Venezuela and Colombia, there has been a long growing trend for multinational firms to seek their own security arrangements.

On the face of it again this pattern is inherently logical.  A states armed forces and police cannot anticipate and protect every employee of a foreign national effectively and often the state may not have the resources to do this anyway.  By contrast, Multinational companies like Shell may use their provision of private security staff to re-assure their employees and contractors to work for them in high risk areas instead of their rivals.  How staff are treated in high risk areas is increasingly becoming a very significant factor within the Oil and Gas industry, with the various different levels of response to Oil and Gas firms in Libya, where Russian and Chinese nationals were effectively abandoned by their respective national industries, being a case in point.  That sort of care towards staff matters.

The problem again though of relegating the security of these employees to the firms themselves is perhaps best explained by the controversy of private military contractors in Iraq.  If a PMSC kills or injures a foreign national (assuming they can carry some form of weaponry, or is particularly adept with his/her hands), then how does the host state respond?  If they prosecute the individuals due to public pressure then multinational firms whose investment is so desperately sought and required may not feel able to ensure it employee’s security and so may restrict their operations in that region or pull them entirely.  On the other side, if individuals are not subject to local laws though this can lead to a back-lash against the government for being seen as under “foreign influences”.

General Issues:

Further highlighting these issues is the basic fact that across all industries operating in developing nations, establishing which individuals are threats and which are not is incredibly difficult.  With regards to piracy, the vessels used by pirates are often identical to local fishing vessels and in certain cultures the carrying of weapons in public is not an uncommon occurrence, thus how do you distinguish between those who are carrying weapons for personal security and those carrying weapons to threaten others?

Even more worryingly many people are realising that the local state security forces may even be part of the risk themselves.  The “Green-on-Blue” incidences in Afghanistan are the most high profile of these, but actual involvement by local state police with would-be-kidnappers is certainly not unheard of.  Is it not perhaps un-surprising then that multinational companies are beginning to turn to the private sector for their security?

The private sector itself now provides comprehensive risk mitigation methods to enhance the security of Multinational firm’s people and assets.  Whether this is in the form of better knowledge of market risks by using ControlRisks or bespoke products like the WorldRiskReview, the purchasing of Political risk insurance and Kidnap and Ransom policies or at the first (or last) stage, directly hiring PMSCs.

Concluding remarks:

In 2004 the BBC suggested the global private security industry was globally worth $100 Billion, would anyone even be able to truly guess its value today?  I doubt it. Companies like G4S and Blackwater now employee 100s of thousands of employees each and even in combat location like Iraq the number of PMSCs has risen from 1 in every 100 soldiers in 1991 to around 1 in 4 soldiers in 2011.  The increasing use of the private sector is here to stay, and the private sector is responding to this.

As States have gradually allowed the private sector to take responsibility for their own security, the private sector has gradually started to shape the rules and behaviour that govern their use of Private Security Providers.  Furthermore, as attacks against firm continue (with a 300% increase in kidnapping’s in Mexico between  2005-2011 being just one example), the speed of these changes and the move away from the traditional reliance on the State for their security will decline.

If States do not begin to respond much quicker and more robustly to the changing threats faced by companies then there will inevitably be either a move away from the state as the sole legal source of security to a system were the private sector begins to define what is necessary for its security not the state.

This is not just un-democratic and lacking transparency. This is a genuine concern for all states and their claim to the “Monopoly on the legitimate use of Violence” which has underpinned the modern state we live in.  Governments need to start being creative or risk being outflanked on this issue.


THE DIGITAL AYATOLLAH

Did Iran really take down 4 US drones?

So let me just see if I can clarify the crazy that is the Iranian government press department for a second:

According to the Iranian government, a nation that is reduced to bartering tankers filled with crude oil for tankers of grain, Iran has “allegedly” captured 4 US drones in a year……Not just the same design either, but 3 separate drone designs……

Now here’s the thing, the RQ170 sentinel, the first one Iran allegedly “captured” I could just about at a distant push believe. I mean at least the US government admitted it had actually gone down in the right geographical vicinity. (The fact that the drone was then shown without a scratch would suggest there is a story there but that is beyond the remit of this blog and into the world of conspiracy theorists and university Model UN attendees.) What seems utterly absurd though is the idea that Irani managed to capture 3 other drones on 3 separate occasions when the US navy who operates them say the USA have not lost a single unmanned drone in the area…..

Now I am not a military technology expert but while I can accept the argument, put forward by more learned folks, that the US GPS system on drones is “feasible” to hack (….that sentence is worrying enough), what seems implausible is that the US armed forces upon realising they had lost the ability to direct the drones would leave it there.

Now let’s add the next bit. The two latest drones, quoted by Reuters have a range of 10km’s…..That’s right, an aircraft carrier launched jet managed to get hijacked and land successfully in a perfect 10km location that was close enough to land on Iranian soil and yet far enough away that on at least two occasions the Americans A.) Couldn’t self-detonate the drone, a separate function to navigation, and B.) Couldn’t shoot the thing down themselves…..

I am all for stories that make the American armed forces show some hubris, but I’m sorry Iran, this time, even you guys have gone a bit too crazy.

 

RUSSIA 2020 – GAME OVER PUTIN?

Since 1990 Russia has experienced something of an escalator ride in the nation’s fortunes. From near bankruptcy the Russian economy has bounced back since the beginning of the Putin years, largely on the back of a vast overhaul of its oil and gas industry which has fuelled the increasing spending demands of Putin’s various administrations. Yet are we about to see the Russian state experiencing another rollercoaster drop in the next decade? Here are a few humble suggestions why Russia is facing a perfect storm in 2020:

“It’s the Economy Stupid” – or more accurately it’s the Oil Price.

For most of Russia’s history its economy has been primarily driven by its primary industries which have exported the vast resources at the states disposal. But in recent years the dependency of the current Russian economy on oil and gas exports has become truly staggering. Not only does Russia’s oil and gas industry now account for 49% of the state’s revenues, but Russia also requires over 2/3rds of its gas production simply to service its own economies internal requirements.

The situation when we start to examine Russia’s much discussed export of oil and gas products gets far worse (if you are Russian). Of Russia’s 600BcM of gas produced every year, around 140BcM is exported to Europe but of that 140 BcM exported to Europe, Germany and Ukraine account for 70BcM of exports combined (at 30BcM and 40BcM respectively. To re-phrase this, Russia relies on Germany and Ukraine for around 34% of its gas sales, whilst Ukraine accounts for nearly 19% of all Russia’s gas exports. Compounding even this terrifying over-reliance, the pipelines that provide Russia’s gas to the rest of its EU markets all currently use Ukraine as a transit nation. Thus for anyone who remembers the 2009 gas crisis in Europe, this is why Russian planners are so concerned about their gas position.

Even if Russia is able to construct its South Stream project to reduce its reliance on Ukraine as a transit hub it is not only competing against the EU machine, which has aggressively tried to challenge Russian gas hegemony, but also the alternative gas pipeline, Nabucco West.

Taking aside the above issues however the baseline concern for the Russian economy is to do with the price of oil. With the US explosion of Shale gas, estimated to increases the US gas production by 25% by 2020, there will be an inevitable decline in demand for oil related products on the international market, especially as other BRIC nations seek their own domestic means of energy production. In addition, the climate change agenda and the effects of air pollution in major cities is leading developing nations like China to increasingly seek gas as an alternative to oil. The problem for Russia however is that, simply put, it gets such a good price from Europe that it won’t accept the terms China and others are offering.

The implication of this fall in the oil price is an inevitable decline in the Russian state revenues. If the price of oil and gas declines then Russia will face a choice: to reduce its current output of oil and gas to maintain the price level (assuming the rest of OPEC will do likewise) or to maintain its output but at a reduced profit (and in some cases certain projects will become close to loss making). All of which is disastrous for the Russian government’s spending pledges, including its $800 billion armed forces modernisation programme….

The energy crisis however is not just linked to the state revenues from oil and gas however. The World Bank’s latest report on the ECA and FSU states has indicated that they will need to invest $1.5 trillion into maintain and modernising its energy infrastructure within the next 20 years, yet to do this will require a large increase in the price of electricity. This then leads to the next problem of the Russian economy: a large proportion of high energy intensity industries whose main advantage is price competitiveness, in no small part due to low energy prices. So the question here is: if faced with a decline in global oil and gas prices will Russia reduce its supply of oil and gas and sell its products purely on the basis of the highest bidder in Europe and at home, or will it maintain its output levels and use its oil and gas industry to subsidize its domestic manufacturing industries?

The net result of any of these variables above will mean less revenue for the Russian state and hence the problems below:

Increasing domestic instability and declining state security resources:

The re-election of Vladimir Putin was considered by many competitors to be an academic exercise. He was too strong, too popular or too well connected to lose so commentators said. And sure enough they were right, except this time Russia’s voters didn’t lie down and play dead. The scale of protests was unprecedented under Putin’s rule and provides a glimmer of the hostility ordinary people feel towards the current government.

It is true that for many Putin is still deeply popular but the same is certainly not true of his lieutenants and it is their increasingly public misdemeanours that are starting to significantly chip-away at the regimes support base. The sense of insecurity felt by Putin was perhaps best displayed by the obscene levels of attention and media coverage that was generated by the Russian punk rock band “Pussy Riot” whose 30 seconds of fame generated world-wide news coverage.

Now whilst Russia has often suppressed riots and domestic violence, it is the impact of declining state revenues that will suddenly start to lead to difficult strategic decisions on where Russia spends its resources. If the state continues to focus its funding on internal suppression then it will inevitably have to reduce its spending on its planned military modernisation programme, something which will surely reduce the global reach of the Russian military and certainly the extent it can intimidate its neighbours.

Furthermore, if Russia does retrench domestically, will this lead to more aggressive actions by those states that have territorial disputes with Russia currently? Any increased belligerence by states like Georgia and Azerbaijan would be increasingly embarrassing for Moscow, whose people would demand a response. Will the Russian state be able to in the future? Even the latest Russian fighter jet project, a symbol of its super-power aspirations, could be threatened if it fails to find suitable export partners and its numbers drop below its already low order number, (expected to be initially 100 or less).

Demographic issues:

Inherently linked in Russia with domestic security concerns is population issues and immigration. The Russian state has always incorporated a large number of ethnic minorities and different faiths, but notice the word minorities. The modern Russia today is facing a marked decline in the birth rate of European, orthodox Russians, whilst its minority populations, notably those who follow Islam, continue to grow, as does the number of immigrants from central Asian states.

This again will start to stir domestic tensions where the state has historically under invested in the East and often concentrated its investments into a few key cities like Moscow. Furthermore, regional hot-spots like Chechnya may become emboldened to push for further regional autonomy if the region’s population continues to grow whilst the typically more Slavic and European population of western Russia declines.

Linking this all back in again. Under-investment in regions with high birth rates which will require greater state resources for health care and education as well as state and/or private investment to create job opportunities for a rapidly increasing young workforce will create a policy headache for a state with limited alternatives than state spending or careers in the oil and gas sector. Both of which seem certain to decline.

Squaring the Circle – concluding remarks:

So what does all this mean? In effect Russia is facing a perfect storm by the end of this decade and the only possible solutions to its problems still look as distant as ever.

The Russian state cannot generate internal investment without an end to the rampant corruption that eats away at public confidence in the state bureaucracy and decimates the ability of financial institutions to invest sensibly into growth prospects. But more fundamentally what Russia really lacks is a functioning rule of law.

No company today can invest in Russia without the concern of expropriation or state interference and those that have tried have often been burnt badly in the process, whether BNP-TNK or Shell and its development of Sakhalin island. This hampers any serious private sector investment and again places the onus of investment squarely on the Russian state.

With declining state revenues and increasing demands on its budget, does Russia have many options left open? Can it cut spending and if so what? Can it increase its level of government debt and if so for how long and at what cost? All of these questions leave Russian policy planners feeling uneasy and with Putin’s grand ambitions so publically stated what would be the political damage if the policies failed or perhaps even worse, they were cancelled?

So while for now Russia may be having its moment in the spotlight as a super-power in Syria, it’s worth waiting to see what happens next. My suspicion? Russia may just start getting that bit quieter and quieter as this decade progresses.

So keep an eye on Russia and 2020. The Russian roller coaster may just be about to drop.

Christopher Jackson

 

 

 

 

 

Christopher Jackson graduated from York University with a 1st Class Honours Degree in Politics with International Relations, BA and now works for the Marine and Energy division of Jardine Lloyd Thompson.

 

 

 

 
Thursday, January 10th, 2013