Category Archives: Emerging Markets

Blame discredited elites for the decline and fall of the West in 2016

“The more I practice the luckier I get.”

–Golfing great Gary Player

In essence, Political Risk Analysis is like nothing so much as American baseball: there is an undoubted element of chance to the game and even the best player strikes out with soul-destroying regularity.

Saying this, it is not dumb luck that the legendary Ted Williams is the last man to hit .400, and that Yankee great Joe DiMaggio accomplished the unmatched feat of hitting safely in 56 straight games. The immortals in both political risk and baseball invariably do the best over time; there is a lot more skill than randomness driving both fields.

If the soothsaying perfection of the mythical Merlin is out of the question, mastering political risk–and putting it to use for the businesses and governments in today’s world–assuredly is not.

And yet I can say with no little amount of schadenfreude that the epoch-changing year of 2016 has confounded most of my competitors. Whether it is Niall Ferguson’s extraordinary mea culpa over Brexit (‘I left my analytical brain at the door to help my friends David Cameron and George Osborne’) or the perpetual shock of the Financial Times (‘We are surprised about the Dutch referendum on Ukraine, Brexit, Trump, the Italian referendum and everything else…’), one thing is for certain. Foreign policy and risk analysts have not covered themselves in glory this past year.

The reason for this is simple enough: 2016 was a year when the world actually and fundamentally changed. In other words, it was a year that will enter historical shorthand, like 1848, 1918, 1945, and 1989.

In this case, the obvious new global structure—a multipolarity, of a world of many powers—became clear. It is a world where the EU unspooled (Brexit, the Italian referendum), America stopped being the ordering power (the Trump phenomenon), Russia emerged as wounded (its GDP is now only the size of the state of Texas) but dangerous, and regional powers were more and more left to their own devices (Erdogan’s authoritarianism following the botched coup against him in Turkey, China’s naval build up) as there was no one about to restrain them.

All these dots on the map are part and parcel of the same phenomenon; the fully justified discrediting of the old, deeply flawed, and blithely unware Western elite. The decline of the West as the world’s ordering power came to fruition in 2016, but is the direct result of elite’s catastrophic failures to see how badly they had been discredited strategically (by the disastrous Iraq war) and economically (by the Lehman and euro crises), when they ran the world geopolitically and financially into a ditch and then walked away, seemingly scot free, leaving the rest of us to suffer.

Their fitting epitaph is what F. Scott Fitzgerald’s said of his villains, Tom and Daisy Buchanan, in The Great Gatsby, “They were careless people, Tom and Daisy—they smashed up things and creatures and then retreated back into their money or their vast carelessness or whatever it was that kept them together, and let other people clean up the mess they made.” Their demise, and that of the world they made, should not be lamented.

And what of my record? All in all, this column and my firm have had a pretty good year. We called Brexit correctly (unlike every single other major political risk firm), along with the Dutch referendum, the Italian referendum, the Farc vote, the radicalisation of Turkey and the victory of shale over the Saudis.

On the one big one we got wrong—the Trump victory—we still gave him a thirty percent chance (reportedly about what his campaign staff allowed for) and were told we were mad to do so. Even so, thirty percent is not fifty percent so it is a miss; we underestimated (if not nearly so much as our competitors) what a powerful force populism has been in the world this year. But, in American baseball terms, it has been a very good season.

In thinking about the reason for this—as my firm is having its end of the year analytical review—one thing stood out. The very first of our columns for City AM for the year was entitled, “The end of the West: 2016 is the year a new order begins to emerge.” And that is what has happened. In political risk, as in American baseball, if you get the big picture right, you will win a lot of games.

Happy holidays, everyone.

Published in City AM, December 19, 2016

Saudi Arabia has surrendered control of the global oil market to US shale


“Ending wars is very simple if you surrender.”

–P.J. O’Rourke

The new OPEC deal to cut oil output—its first since 2008—amounts to nothing less than Saudi Arabia’s surrender to the power of American shale.

It has come about due to Riyadh’s belated, horrified understanding that it has utterly lost control over the energy market, running through its capital reserves in the process. Rather than young, feckless Deputy Crown Prince Mohammed bin Salman using Saudi Arabia’s John D. Rockefeller strategy to permanently drive US shale out of the energy market, the exact opposite result has occurred. Unwittingly, the Saudis have made the Americans the new global energy swing producer, the permanent ceiling for the global price of oil.

This, in its way, is as momentous a shift in global power as the stunning recent Brexit and Donald Trump votes. Whereas Brexit showed Europe to be in absolute decline, while the election of Trump brings to an abrupt end 70 years of the US as the global ordering power, the Saudi’s meek surrender brings to a close the long age of the OPEC domination of the world’s energy market. 2016 truly has seen the death of one world order, along with the uncertain birth of another.

The details of the new OPEC pact make it clear that even this belated effort to quell the self-imposed bleeding brought on by Saudi attempts to drive US shale out of the energy market—by, in Rockefeller style, over-producing to drive down prices and eradicate their competitors—is problematic at best.

OPEC as a whole agreed to cut 1.2 million barrels per day (bpd) from production from the beginning of the new year, with the Saudis themselves bearing the brunt of the cuts with a personal reduction agreed to at just under 500,000 bpd. But as OPEC now accounts for less than half of all energy output in the world, it is a very weakened cartel, now dependent on the kindness of strangers to survive.

Externally, this means Russia. The new global energy reality has been forthrightly addressed in the accord, as the interim deal is contingent on securing a further 600,000 bpd in cuts from non-OPEC members, with Russia expected to contribute a 300,000 bpd to this total.

Unsurprisingly, the Kremlin is less than enthused, as Russian oil minister Alexander Novak blandly said that at best his country would only cut its production gradually, due to ‘technical problems’. OPEC isn’t much of a cartel if it is utterly dependent on major (and generally unwilling) outside players such as Russia to make its internal agreements work.

While the Saudis are hoping to persuade the Russians to go along with their fragile deal, to reach even this stage meant Riyadh wholly giving way to their hated enemy within the cartel, Iran.

Just recovering from years of sanctions due to its nuclear programme, all this past year as the Saudis have frantically tried to reach an OPEC-wide deal to cut its ruinous losses, Iran has held firm that it has no intention of hurting its just unbound economy to take one for the team. In the end, the Saudis had to meekly acquiesce, allowing Iran to continue to ramp up production, helping their sworn enemy in a way that must have put the House of Saud’s teeth on edge.

So even after surrendering to Iran, and assuming the Russians can be generally corralled to accept cuts of their own, there is a final problem with the Saudi inspired OPEC accord. The cuts are estimated to leave global oil production at 32.5m bpd, a historically high rate of supply unlikely to lead to much of a rise in the price of energy at all.

Even should prices sustainably drift upwards, all this will do is make American shale—far more price sensitive and far more capable of being quickly brought on line than the fixed rigs of the OPEC member countries—turn the spigots back on, with its production rising and the price consequently falling.

The Saudis, having utterly lost the plot, are now—as the problems inherent in this deal make all too clear—trapped in a world where they no longer control the global energy scene. It seems even the surrender terms the OPEC deal represents will not be accepted by Riyadh’s competitors. And they have no one to blame for this state of affairs but themselves.

Along with Europe as a great power, and America as the world’s ordering power, the myth of Saudi energy dominance is the third great dinosaur to be felled by the asteroid that is 2016.

Published in City AM London, December 5, 2016.

US is sleepwalking into disaster in tinderbox Asia

Give him his due. At the very least, Filipino President Rodrigo Duterte is never dull.

Beyond calling Barack Obama names that would naturally lead in another setting to a brawl behind the schoolyard, the canny if vulgar Duterte is surprisingly effectively at doing what smaller powers are supposed to do in a multipolar setting: Playing larger powers off one another.

With the Philippines long seen as being comfortably in the pocket of Washington, the country’s new leader has initiated a policy of strategic drift away from the US, moving to a more equidistant position between America and China.

Duterte being Duterte, he has done so with the subtlety of a mallet. Proclaiming (in Beijing no less) that America has lost its rivalry in East Asia with China, the Filipino President offered to immediately leave Beijing and jet off to Moscow to confer with anti-American champion, Vladimir Putin, and to definitively ally the Philippines within a China-Russia-Iranian axis. As he memorably put it, “America has lost now. I’ve realigned myself in your (China’s) ideological flow.” Was it my imagination or did the smiles at the usual diplomatic banquet in Beijing seem unusually broad that night?

But Duterte’s buffoonish facade masks a cunning Machiavellian thinker; while his strategic hedging is real, he has not moved (and does not want to move) from America’s pocket into China’s. The whole goal of the exercise is to re-assert the Philippines’ strategic independence and the material benefits that flow from it.

Proving he is crazy like a fox, Duterte’s rewards were not long in coming. During his diplomatic visit to Beijing, Chinese President Xi Jinping offered the loud-mouthed Philippine leader $9 billion in loan credits, also agreeing to $13.5 billion in trade deals, as a reward for Duterte’s ‘shift’ and for agreeing to renew bilateral talks (effectively setting aside a pro-Manilla Hague tribunal ruling) resolving boundary disputes in the South China Sea. Given that Manilla is desperately in need of such funds (particularly regarding infrastructure investment) to keep its booming economy going, Duterte’s sea change makes eminent realist strategic sense.

But there is a deeper problem lurking beneath the atmospherics here, one that does actually endanger America’s heretofore dominant strategic position in the region; a real questioning by Asian allies of Washington’s strategic dependability. Even before his shocking trip, Duterte wondered aloud whether a feckless and self-involved America would honour its 1951 Mutual Defence Treaty with the Philippines, and come to the country’s assistance in the event of an attack by China.

Obama’s feckless announcement of a red line in Syria (and then his correct decision not to enter that hellhole) has surely damaged US credibility around the world. If America’s strategic word is not to be trusted than Duterte’s strategy of strategic hedging between the US and China becomes the only sensible policy for the region as a whole to adopt.

But far worse looms ahead, a true geostrategic disaster in the making. The Obama White House has rightly called completion of the Trans-Pacific Partnership (TPP) trade deal the lynchpin of America’s Pivot to Asia, as it binds America and its allies economically to each other in the new era just as it sets regional trade rules which China must ultimately accept or be excluded (as it now is) from such a desirable club.

America’s failure to follow through on such a beneficial agreement will have doleful geostrategic consequences. And here the US is sleepwalking toward disaster. Hillary Clinton, the likely new President, has already cynically disavowed an agreement she helped negotiate, trying to fend off the clear protectionist bent of a majority of her party. Given Donald Trump’s characteristically shrill and mindless denunciation of the pact, its only hope is passage in the lame duck session of Congress, between November 2016 and January 2017. For the horrifying news is that, after that, large free trade pacts of any kind will be dead on arrival.

Imagine the US having to go back to its East Asian allies after all the laborious TPP negotiations, telling them America was just kidding about the whole thing. The very next day, China will whisper in America’s nervous Asian friends’ ears that obviously Washington can no longer be trusted. Here poisonous American domestic politics will have directly contributed to increased global risk, with Duterte amounting to just a very shrewd canary in the coal mine. For the real risk to America’s Pivot to Asia isn’t Duterte, or even China. It lies in the mirror.

Published in City AM London, October 31, 2016.