Is a wave of sovereign defaults on the way?

The sovereign debtor that would win hands down a nomination as “most likely to fail” is surely Greece, which has just threatened to default on its next payment to the IMF. But Greece could be a distraction – history suggests sovereign default risk is rising elsewhere, and that a wave of such defaults could be on the way. Contemplate for a moment the following graph produced by Oxford Analytica, as part of the publicity materials for their new online tool that prices political risk. The graph tracks three indicators over time: oil prices, expropriations of foreign direct investment, and sovereign defaults. The relationship between oil prices and these two types of country risk is strikingly apparent. When oil prices rise, governments move to expropriate. High oil prices mean that natural resource investments are suddenly spectacularly profitable, and seizing these investments therefore becomes increasingly attractive. In the 2000’s, regimes from Kazakhstan to Chad to Russia to Bolivia indulged this temptation, and not only in oil – some mining investments, also with soaring profitability, were similarly nationalized. High oil prices also give cover to governments wishing to pursue extremely unorthodox economic policies. Venezuela, which seized not only oil but much foreign investment in the country, stands out as a recent example. On the graph, the link between oil prices and expropriation is obvious in the mid-1970s: expropriations peaked just after oil prices surged. The link is apparent again in the 2000’s, as a second surge in oil prices triggered another wave of expropriations, albeit with a less dramatic peak. The relationship between oil prices and sovereign defaults is precisely the opposite....

Can Russia change direction?

Venezuelan President Hugo Chavez and I go way back. In the late 1990s, as a young political risk analyst, I traveled down to Houston to talk to one of the oil majors about a large investment they were planning to make in Venezuela. “Venezuela is risky,” I confidently informed them. “Hugo Chavez has a radical agenda.” Meanwhile, my colleague cooked up various disaster scenarios involving political violence or the loss of assets. The oil company’s project team, several of them Venezuelans, sat through our presentation in stony silence. Walking us to the elevator, though, they had something to get off their chests. “You don’t know anything about Venezuela,” they said. “Hugo Chavez is a pragmatist, not a radical.” “And,” they continued, “you don’t even know how to pronounce Chavez. It’s ‘TCHA-VEZ’!” In the long term, I was right (except about pronunciation). I wouldn’t, of course, be telling this story otherwise. The assets of most foreign oil companies operating in Venezuela were indeed expropriated, with limited compensation, on the orders of Chavez. But I admit it was the oil company’s project team that had the better grasp of the situation in Venezuela. Chavez was indeed a pragmatist. He did not jump right in and start nationalizing things, as I had predicted. At first, his economic policies were relatively moderate. But over time, he began to change direction. Not necessarily because he had planned to. But Chavez had made a lot of promises he could not keep. “So much riches,” he had said, “the largest petroleum reserves in the world, the fifth-largest reserves of gas…and 80 percent of our people live...

Why a federal Ukraine is a worst-case scenario

Ahead of US-EU-Russia talks on the future of Ukraine on Thursday, pro-Russian protesters – possibly assisted by Russian special forces – have escalated their disruptions in Eastern Ukraine beyond Crimea. While media coverage is understandably alarmist, these disruptions are not necessarily worrying signs. Ahead of negotiations there is always a rush by the negotiating parties to establish facts on the ground to support their positions. This is why Israel inevitably pushes forward with building settlements just ahead of negotiations with Palestine; is why both sides in Sudan’s conflict ramp up hostilities each time peace talks are scheduled. It does not mean the talks are falling apart before they have started. It’s just good strategy. The fact on the ground that Russian President Vladimir Putin hopes to establish prior to talks is the destabilization of more of Eastern Ukraine. This way he will have something to give up, in exchange for what he wants: a federal Ukraine. This is what Russia has been proposing as an acceptable compromise for Ukraine even before it invaded and annexed Crimea. Is also very worrying, as a federal solution is a worst-case scenario for Ukraine. Some may feel that it is a small price to pay in exchange for peace. Russia, the EU, and the US can play their games of influence in a federal Ukraine, jockeying for the sympathies of individual provinces, rather than playing the higher-stakes games of sanctions and energy threats, which have the potential to disrupt the fragile recoveries now emerging in the EU and underway in the US. The problem with the federal solution is that it undermines the...

Ukraine is Europe’s struggle, and it is likely to win

There has been a great deal of commentary regarding alleged blunders that have led us to the current position in Ukraine (as I write this, the Ukrainian province of Crimea has voted to join Russia, and Russia has recognized Crimea’s independence, which could be a prelude to annexation). In reality, the only serious blunder was committed by the new, interim government of Ukraine immediately after taking power, when it declared that Russian would no longer be an official language of the country. This gave Putin to a pretext to act. Chalk it up to inexperience. The old hands at the table – Russia, the EU, and the US – have played their positions well. First Russia. Many say Putin is a reckless gambler; and indeed that is true. But he has had no choice but to gamble. Losing Ukraine so soon after asserting Russia’s position on the world stage via the Sochi Olympics was a humiliating blow. Invading Crimea while pretending the troops involved are not Russian and offering Crimea a referendum on secession are awkward ways to cover up a violation of international law. (Perhaps he will next offer Chechnya a referendum on secession from Russia? This is the kind of precedent Putin presumably would rather not have established.) That said, it appears that Putin may succeed in turning his humiliating loss in Ukraine into a partial victory, by gaining Crimea in some form, with little blood on Russian hands. Once the government of Yanukovych had fallen, that is probably the best outcome Putin could have hoped for. It is thus a bad hand played well, although Crimea...