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....

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...

Intervention in Ukraine reflects Russia’s weakness, not strength

Following Russia’s de facto ‘invasion’ of Crimea there has been a great deal of navel-gazing commentary regarding the “weakness” of the West. Some say the EU is impotent; others say the US lost Ukraine; others that the Obama administration is weak. These comments reflect an astonishing lack of even short-term memory. The most obvious point first: it is not the US or EU that has lost Ukraine, it is Russia. Until protesters toppled Ukraine’s government, the contest for Ukraine was in the main a soft-power contest. The EU offered Ukraine a trade agreement (a Deep and Comprehensive Free Trade Area, DCFTA, in the jargon); Russia offered a Customs Union as an alternative. (Admittedly, Russia’s approach was not 100% soft, as the Customs Union offer was coupled with threats of goods embargoes and energy price hikes.) Until recently, it appeared that Russia had won. The Customs Union was indeed an attractive package. Signing it would probably have been economically beneficial for Ukraine (although, over the long term, the EU deal would have been much better). Yet Ukrainian premier Yanukovych, after a good deal of wavering, announced that he would sign the Russian deal. Perhaps his oligarch backers (reportedly including men such as Rinat Akhmetov, Dmitry Firtash, and Andriy Klyuyev) feared the legal and governance reforms that would accompany the EU deal. Perhaps Russia’s economic threats and bailout offer were persuasive given Ukraine’s precarious economic position. That moment, in early 2014, when Yanukovych sided with Russia, was the high point of Putin’s success. But then Ukraine’s (relatively small) middle-class rose up in the “Euromaidan” people power protest movement that toppled the...

Could the crisis in Ukraine transform Russia?

Most of the commentary surrounding the extraordinary “euromaidan” demonstrations and fall of Ukraine’s government has focused on Russia’s influence on Ukraine, and in particular, the question of Russian intervention to support the now-deposed Yanukovich government. But we might find, in the final analysis, that Ukraine’s influence on Russia is far more profound. In the spring of 2013, the French export credit insurer Coface produced an intriguing risk index of “people power” movements. Such uprisings have become an epidemic in recent years. The most recent round of uprisings arguably began with the 2003 “Rose Revolution” that deposed the government of post-Soviet Georgia, followed by Ukraine’s 2004 “Orange Revolution”, a series of attempted “green revolutions” in Iran, and then, perhaps most unexpectedly, the “Arab Spring” that toppled the governments of Egypt and Tunisia in 2011. While very different in causes and results, these “people power” revolutions do have a few factors in common. Notably, they are the result of an increasingly educated middle-class taking to the streets, usually empowered by technology. The mobile phone (and particularly, the ability to broadcast text messages) played a large role in the Philippines, just as the photocopier had been crucial in Iran’s 1979 revolution and the fax machine played a role in the toppling of the USSR. In the Arab Spring, the Internet and even social media reportedly were crucial. These technologies, wielded by educated people, make it easier for popular movements to coordinate mass protest actions, and much harder for governments to control the flow of information (and the Blackberry-wielding London rioters are a further example). One implication of this analysis is that “people...