Two decades of geopolitical analysis

[UPDATED JULY 2018] I’ve been employed to analyze geopolitics and the world economy for about twenty years now, which means, alarmingly, I’ve got a track record. (Most of my publicly-available articles are now posted on this blog.) What did I get wrong, and what did I get right? The worst calls 1. Turkey My worst call has been Turkey. In a 2004 editorial, I contended that Turkey was on the path traveled by so many Eastern European states: convergence with Western Europe. I even invested in Turkey, I was so sure of this call. To be fair to myself, the problem arguably wasn’t with Turkey: to my surprise, the EU got cold feet. But even after that I doubled down on Turkey with another article predicting a turnaround. This is an example of what Daniel Kahneman would call irrational decision-making based on “loss aversion.” C’mon Turkey! This is your year! 2. China Starting with my 2003 book The Kimchi Matters, co-authored with Marvin Zonis and Dan Lefkovitz, I’ve continually been predicting trouble in China. But, China just keeps on booming. I did get some things right: in a 2004 editorial, I predicted that China would get into trouble by stimulating its economy too much if it faced a downturn. That is indeed what happened during the 2007-8 global slowdown, and China now faces a severe debt problem as a result. So I doubled down on this prediction as well. But there’s no denying that, blithely disregarding my sniping from the sidelines, China is still booming today. Good for you, China. The best calls 1. Venezuela In 2004, I wrote an...

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...

Venezuela, oil prices and political risk

Following the extraordinary people power uprising that toppled the government of Ukraine, and after weeks of protests in Caracas, Venezuela’s capital, many are asking, “will Venezuela be the next Ukraine”? There are asking the wrong question. The question is, will Venezuela be the next Iran? Resource prices and political risk have long been correlated. When resource prices go up, governments tend to seize the assets of natural resource investors, whether through expropriation or extreme levels of taxation. The oil price boom of the 2000’s was accompanied by seizures of foreign-owned oil investments in, for instance, Venezuela, Bolivia, Russia, and Kazakhstan. This was by no means a new pattern. In the 1970s, the same phenomenon occurred: oil prices skyrocketed following the Arab oil embargo. Within a few years, nearly every major Western-owned oil and gas (and mining) investment in the emerging world had been seized – expropriated or nationalised – by host governments. There is another lesson to learn from the 1970s resource-price surge. That is that eventually, resources prices will fall. And when they do, a new type of risk emerges. Regimes that have become dependent on oil revenues suddenly find they are desperately short of money. If these regimes have been relying on measures such as seizures of the assets of foreign investors to stay afloat, chances are their macroeconomic management is not very good. The result is that when oil prices fall, the hitherto fast-rising incomes in these countries tend to crash (bad economic policy is procyclical), just when the fast-rising flow of resources available to the government to pay off supporters comes to a sudden stop....

A new wave of expropriations?

With oil prices near $60/barrel, it seems like the best of times for oil companies. But it easily could be the worst of times. Recall the tumultuous sequence of events that followed the last global surge in commodity prices, during the 1960s and 70s. In the mid-1960s, copper prices jumped by more than 50 percent and then kept on rising. 1968 was the best year yet for Anaconda Copper’s Gran Mineria mine in Chile. Profits had more than doubled. US-based Anaconda contended for the title of the world’s largest metal producer; and in Chile, Anaconda owned the world’s largest open-cast copper mine. Then, in 1969, the Chilean government announced it was revising Anaconda’s concession. Two years after that, the government seized the mine, paying Anaconda little compensation. Following this political risk loss in Chile, Anaconda Corporation suffered a financial meltdown. By 1977, Anaconda had ceased to exist, its remaining assets snapped up by Atlantic Richfield. The demise of Anaconda was only one among many such incidents. During the 1960s and 70s, host-country seizures of foreign direct investments claimed a staggering one-fifth of the value of US investment in the developing world. Well over 1,500 foreign affiliates of multinational firms were taken, many with little or no compensation. It is widely assumed this could never happen again. The conventional wisdom has it that these expropriations were driven by ideology – communism and post-colonial nationalism. The incidents most remembered today are the seizures of private property that accompanied upheavals like the Cuban revolution. These were complete, indiscriminate, uncompensated and clearly political. But the conventional wisdom is wrong. The number of such...