Revealed: TXF Data Country Risk Review Q1 2018

When beginning to assess the risk on any deal, political risk has often proven to be the most difficult to predict. TXF Data’s Country Risk Review Q1 2018 - which reviews 49 countries - tracks and uses key trade indicators as a determinant of political risk. For example, an increase in the import and manufacturing of weapons would generate a high risk rating if aligned with a range of other trade indicators that point to impending conflict.

TXF Essentials subscribers can access the full country risk profiles here every quarter. Not a subscriber? Contact us at subscriptions@txfmedia.com or call (0)203 735 8183 to find out more.

Executive Summaries:

North America

Risks within North America have increased in the first quarter of 2018 and look to be increasing into the second quarter as well. The greatest threat to stability is clearly the worsening of relations with Russia. The use of chemical weapons in Syria led President Trump to blame Russia and Iran for supporting Assad. He vowed that “missiles will be coming” while Russia warned against any military action. This is a serious and rapidly developing situation.

Relationships between Canada, the US and Mexico are strained by the unilateral approach that President Trump has taken towards the North America Free Trade Area: the imposition of tariffs on iron and steel was applied initially to Canada and Mexico, its largest trading partners and regional allies, as well to other countries and specifically China. The US granted an exemption but tied that exemption in to NAFTA negotiations which are now more likely to follow US interests on intellectual property and government procurement.

The US continues to present risks within the region and to the region because of its foreign policy approach. What President Trump says on Twitter one day may be corrected or clarified by the administration the next and this gives the region, and the US in particular, the appearance of a lack of cohesion in foreign policy terms. The conflict between Mexico and the US over the border wall came to a head at the start of April when the National Guard was deployed by the State of Texas to secure the border with Mexico. Construction has started on the wall and this makes strategic negotiations about trade at best difficult and at worst impossible. Canada and the US continue to cooperate on arms sales to Ukraine, but this is arguably stoking the potential of conflict in the Crimea given the build-up of troops by Russia in Donbas and beyond. Mexico’s continued battle against drugs cartels threatens its elections in July 2018 and the potential for internal conflict in the country is high.

South America

South America’s drugs cartels were found to have links with Hezbollah and terrorism by the US Drug Enforcement Administration and Colombian intelligence. The challenges faced by the region in terms of drugs cartels, drugs trafficking and poverty are manifest and there is no sign that these will abate in the coming months. While Argentina and Brazil are currently relatively stable, the threat of domestic conflict as a result of poverty and drugs elsewhere in the region are substantial.

The US approach to China is forcing the region to make a choice between China as a strategic partner, especially in trade terms, and the US. If, for example, a trade war breaks out, then US soya beans will be more expensive for Chinese consumers. This potentially gives agricultural producers in the region an opportunity to fill the gap. The fact that the US is increasing sanctions on businesses and members of the elite suspected of involvement with drugs trafficking may potentially push countries towards China which, in turn could increase the risk of domestic conflict.

Europe

The most serious risk in Europe is the worsening of relations with Russia after the poisoning of Sergei Skripal in the United Kingdom. It was concluded that Russia had played a direct role in the poisoning and twenty-three, mostly European, countries rallied together to expel around 150 Russian diplomats. The rising tensions will be of particular concern for Scandinavian and Baltic nations who have long been concerned by Russian aggression.

Elections in Italy produced a victory for the anti-establishment 5 Star Movement and Far Right League which makes an anti-immigration and Eurosceptic government likely. One month on, the government has still not been formed, however, and while Italy is accustomed to unstable politics, the economics of high borrowing, tax evasion and a bankrupt banking system may lead to a situation akin to that of Greece in 2012 and 2014. This has obvious political and economic risks for the Eurozone which may be strained again in the coming months. Elections in Hungary also produced a swing to a populist and anti-immigration agenda and, combined with hardline anti-immigration policies in Poland, this puts a heavy strain on the principles of European unity.

That said, the EU has begun the process of putting into law the framework for a transition arrangement with the UK as it leaves the EU. The UK has made concessions to enable this to happen and the political cohesion of the bloc’s remaining 27 has been demonstrated with no country dissenting from the rules laid down in previous European Treaties.

Germany was able to form a government during the first quarter of the year and prospects for the new Grand Coalition are largely for business as usual. This has pushed Angela Merkel back into the centre of Europe’s foreign relations in particular with Emanuel Macron taking a quieter role alongside her now that her position is secure for the next four years.

The biggest test for Europe and its post-Brexit cohesion came in the form of the nerve-agent attack in the UK. The UK asked its allies in Europe, NATO and the US for support which was unequivocal. Russia may well have wanted to test this resolve, particularly in Europe, after the UK’s exit. If so the answer was clear: Europe will retain its aligned security strategies.

Asia-Pacific

North Korea has presented the greatest risk to the Asia Pacific region for some months now and this is likely to remain the case as we move towards the summit between President Trump and Kim Jong Un scheduled for May. North Korea, by attending the Winter Olympics and by developing its relationship with South Korea has either shown itself willing to negotiate or, equally likely, attempted to put a wedge between South Korea and the US. At the same time, reports during March that China had reduced its energy exports to North Korea by more than was required by the United Nations, meant that in April, Kim Jong Un travelled to Beijing to reaffirm his commitment to a negotiated settlement.

The combination of these moves by regional players means that China and South Korea retain their influence over the hurriedly arranged Summit between North Korea and the US. It also means that the US is in a weaker position going into the Summit as it has to accept a nuclear capable North Korea’s influence in order to negotiate a position where North Korea no longer develops that capability. This will be unpalatable for the US and the stakes are high for this summit. On the surface, this looks like the risks of confrontation have moderated for the time being, but the Summit in May will be difficult.

The US has ramped up its Trade War rhetoric with China. The South China Sea is emblematic of the importance of trade in the region and during the last quarter, there has been increased military activity by China and the US in the South China Sea and this sabre-rattling is to some extent a show of strength that illustrates that China will fight (literally and figuratively) any trade war.

MENA

The risks associated with the Middle East are increasing. The defeat of ISIS means that fighters are returning to their European countries radicalised which may increase the likelihood of terrorism outside of the region.

However, the biggest risk is the escalating conflict in Syria. While the tensions between Saudi Arabia and Iran remain, and are being bitterly contested in Yemen, it is the role of Russia and Iran in supporting the Syrian regime that has the potential to grow into a broader conflict. Russia and President Assad have denied any use of chemical weapons in Eastern Ghouta and Iran condemned the attacks at the beginning of April. At the time of writing, the US was deciding on its course of action but its hands are to some extent tied: if it launches an air attack unilaterally then it runs the risk of expanding the Syrian war into a direct conflict between Russia and the US. If it does not act, it will confirm Russia’s suspicion that the US is “all talk”.

It is difficult to understate how fragile and dangerous this situation is in the region. It has the potential to affect the whole world because of Russia’s role which is implicit rather than explicit. Russia’s approach, “implausible deniability” means that there is no clear-cut case for intervention, yet failure to do so diminishes the military power and influence that the US has in the region.

SSA

Sub-Saharan Africa, after a series of elections and regime changes is relatively stable. It has recovered well from the collapse in oil prices and the reforms in South Africa and Zimbabwe in particular bode well for the future policy directions of both countries. Kenya is the notable exception – the election results are still disputed despite the fact that a truce between President Kenyatta and his rival Mr. Odinga has alleviated the sense of political crisis. There is growing evidence of social media interference in the campaign.

Terrorism, particularly Boko Haram, remains the biggest risk in the region. Nigeria’s economy was badly hit by the downturn in commodity prices and by withdrawal of investment because of a perceived terror threat. The administration is exploring negotiations with the terrorist insurgent group, Boko Haram. It has been nine years since counter-insurgency activity started and the process has cost the country 20,000 lives. Although there may be attempts to resolve the conflict, and although the conflict is now contained, violence in the northeast region of the country is still rife and the specific geographical risk in this part of Nigeria remains high.