COUNTRY RISK 2008: Yemen
By John | July 24, 2008
Yemen, one of the poorest countries in the Arab world, reported average annual growth in the range of 3-4% from 2000 through 2007. Its economic fortunes depend mostly on declining oil resources, but the country is trying to diversify its earnings. However, the country poses significant risk for businesses and could present adverse macro level problems should governance deteriorate.
In 2006 Yemen began an economic reform program designed to bolster non-oil sectors of the economy and foreign investment. As a result of the program, international donors pledged about $5 billion for development projects. In addition, Yemen has made some progress on reforms over the last year that will likely encourage foreign investment. Oil revenues probably increased in 2007 as a result of higher prices.
North Yemen became independent of the Ottoman Empire in 1918. The British, who had set up a protectorate area around the southern port of Aden in the 19th century, withdrew in 1967 from what became South Yemen. Three years later, the southern government adopted a Marxist orientation. The massive exodus of hundreds of thousands of Yemenis from the south to the north contributed to two decades of hostility between the states. The two countries were formally unified as the Republic of Yemen in 1990. A southern secessionist movement in 1994 was quickly subdued. In 2000, Saudi Arabia and Yemen agreed to a delimitation of their border. Located in the Middle East, it borders the Arabian Sea, Gulf of Aden, and Red Sea, between Oman and Saudi Arabia
Looking at the WBI Governance Indicators for the country, it trails the regional averages for all countries in North Africa and the Middle East. The most significant disparity is in its political stability.
As the Energy Information Administration notes in this regard:
Though the government of Yemen is fairly stable following the re-election of President Ali Abdullah Saleh in 2006, security remains a concern of foreign firms doing business in Yemen. Since the attacks on the USS Cole in 2000, several other foreign interests, specifically oil interests, have been attacked-these include the bombing of the Limburg oil tanker off the coast of Yemen, causing a massive fire and the leakage of 150,000 barrels of oil into the Gulf of Aden; an unsuccessful firing of a surface-to-air missile at an oil company helicopter in 2002; the 2006 foiled suicide bomb attempt against two oil facilities just prior to the elections; and the more recent attacks on oil company personnel near the border between Marib and Shabwa governorates. In addition, there have been reports of violence in rural areas, attacks on oil company personnel and kidnappings.
Political stability in Yemen is vitally important to regional oil producers, given that Yemen sits at the entrance to the Bab el Mandab strait, which links the Red Sea to the Indian Ocean. The strait is one of the most strategic shipping lanes in the world, with an estimated 3 million barrels per day (bbl/d) oil flow (please see our World Oil Transit Chokepoints report for more information). Disruption to shipping in the Bab el-Mandab could prevent tankers in the Persian Gulf and the Gulf of Aden from reaching the Suez Canal/Sumed pipeline complex, instead diverting them at great cost around the southern tip of Africa.
“In spite of reforms, the government continues to fight the perception of weakness. The civil service is overstaffed and underpaid. Private foreign investment, apart from the petroleum sector, has been negligible, largely because of governance issues. The situation is complicated further by the political and military strength of the tribes, which are not always on good terms with the central government,” notes the World Bank Group. The WBG further notes that “[t]he sustainability of development efforts depends on the willingness of those in Yemen, from the national government to local communities, to maintain the investments and operate the systems put in place. So far, the record is not good, largely because of the low level of governance.”
The country’s major trading partners include China 31.5%, India 17.5%, Thailand 16.7%, South Korea 7%, US 6.8% and the UAE 4.1% with oil being the primary export to these countries. Investors should pay particular attention to businesses operation in Yemen, particularly those companies in the extractive industries engaged in transactions with the Yemeni government.
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Trade Union Killings in Colombia
By John | July 23, 2008
Business as Usual for Trade Unionists in the Most Dangerous Place on Earth
The Inter Press Service published an article on July 22nd that describes in some grizzly detail the slaying of Guillermo Rivera, a trade unionist in Colombia who turned up missing some weeks ago. Constanza Vieira writes that witnesses to Rivera’s disappearance noted that he was abducted by state security forces. His body revealed that he had been tortured prior to dying. So far this year, 28 trade unionists have been killed, mostly by the government and its related paramilitary forces. Unfortunately, these facts go largely unnoticed in the U.S. press as the faltering debate continues about the proposed Fair Trade Agreement between the two countries is bandied about by the pro-free trade forces in both countries.
While free trade agreements can be a positive step in economic development, the situation in Colombia demonstrates the need for such agreements to address labor rights concerns as a condition for implement of such agreements.
As was noted in the IPS article, most extrajudicial killings in Colombia go uninvestigated. Virtually none of the killings result in the perpetrators being brought to justice. Implementation of the Colombia FTA will validate the injustice.
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COUNTRY RISK 2008: Zimbabwe
By John | July 23, 2008
Last week, we described the 16 worst countries in the world for business activity based upon an assessment of several factors developed by the World Bank Institute. Today, we begin to look at specific countries, focusing on the factors that lead us to our conclusions.
We begin by focusing our attention on Zimbabwe, a country in the news because of the political turmoil stemming from rigged elections by its current leader, Robert Mugabe. While those unfamiliar with conditions in Zimbabwe might think that reported events in Zimbabwe are a recent phenomenon, the facts on the ground reveal that conditions in that country have been long standing and reflect institutional neglect of the basic requirements of a properly functioning government.
The chart below compares six factors developed by the WBI for assessing governance. This chart compares these factors for Zimbabwe against a regional average of other countries in sub-Saharan Africa. While the regional average for the comparison countries is poor, compared to the world as a whole, Zimbabwe rates dramatically lower for all of these factors.
In practical terms, these factors translate into a country in crisis. In its 2007 Human Rights Report, the U.S. State Department notes in its understated manner the following observations about the country and its current government:
Zimbabwe, with a population of approximately 11.6 million, is constitutionally a republic, but the government, dominated by President Robert Mugabe and his Zimbabwe African National Union-Patriotic Front (ZANU-PF) since independence, was not freely elected and was authoritarian. The last two national elections, the presidential election in 2002 and the parliamentary elections in March 2005, were not free and fair. Although the constitution allows for multiple parties, the ruling party and security forces intimidated and committed abuses against opposition parties and their supporters and obstructed their activities. Civilian authorities generally maintained control of the security forces, but often used them to control opposition to the ruling party.
The government engaged in the pervasive and systematic abuse of human rights, which increased significantly during the year. The ruling party’s dominant control and manipulation of the political process through intimidation and corruption effectively negated the right of citizens to change their government. Unlawful killings and politically motivated abductions occurred. State-sanctioned use of excessive force increased, and security forces tortured members of the opposition, student leaders, and civil society activists. Prison conditions were harsh and life threatening. Security forces, who often acted with impunity, arbitrarily arrested and detained the opposition, members of civil society, labor leaders, journalists, demonstrators, and religious leaders; lengthy pretrial detention was a problem. Executive influence and interference in the judiciary were problems. The government continued to evict citizens and to demolish informal marketplaces. The government continued to use repressive laws to suppress freedoms of speech, press, association, academic freedom, assembly, and movement. Government corruption remained widespread. High-ranking government officials made numerous public threats of violence against demonstrators. The following human rights violations also continued to occur: harassment of human rights and humanitarian nongovernmental organizations (NGOs) and interference with their attempts to provide humanitarian assistance; violence and discrimination against women; trafficking of women and children; discrimination against persons with disabilities, ethnic minorities, homosexuals, and persons living with HIV/AIDS; harassment and interference with labor organizations critical of government policies; child labor; and forced labor, including of children.
From a business perspective, doing business in Zimbabwe is extremely risky. As we have noted in previous articles on ZImbabwe, companies that continue to do business in the country face a variety of challenges. It was recently reported in the media that Tesco, a U.K. based retailer has halted the purchase of agricultural products from the country. However, as we noted last week, CAMEC, a regional mining company has entered into an agreement with the government to step up its mining operations. Fallout from the international outcry about the recent elections in Zimbabwe has included a call by several governments, most notably the U.K., for businesses to withdraw from Zimbabwe. In response, ZImbabwe’s current president, Robert Mugabe, has threatened to nationalize the country assets of any company who halts its current business activities there.
Regardless of what the proper business or human rights response should be, the fact remains that this is an extrememely risky place to do business. In assessing a public company from an investment perspective, we believe that business operations in that country pose serious risks to the overall performance of companies with operations in Zimbabwe.
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Demand for Labor Screening on the Rise
By John | July 22, 2008
The traditional “sin stocks” were the first companies getting screened out of investment portfolios by investors hell-bent on making money without compromising personal values. As the below graph depicts, the rise of “SRI” investing has jumped dramatically over the years.
Two decades later, the typical “screens” of investment portfolios have broadened beyond just cutting out entire industries (i.e. tobacco, gaming and pornography) to now include a more company-centric approach for monitoring investments. In today’s global marketplace, labor and environmental factors are becoming more and more commonplace in the research of the investment management community.
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Unilever Calls for Moratorium on Deforestation in Indonesia
By Sabina | July 21, 2008
This past April, Greenpeace activists launched a protest against Unilever for the production of palm oil, a primary ingredient in its soaps and shampoos. The activists, dressed as orangutans, were up in arms over the unsustainable development of palm oil plantations that has wiped out precious forest ecosystems in both Malaysia and Indonesia, rich in biodiversity, where orangutans and other animals live. These countries have among the highest deforestation rates in the world, due largely to the establishment of palm oil plantations. In Malaysia, the development of these plantations was responsible for 87% of the country’s deforestation between 1985 and 2000. Indonesia’s forests have been reduced by nearly 70% since 1950.
In May, Unilever, the Netherlands-based consumer products manufacturer, called for an immediate moratorium on deforestation in Indonesia, one of its principle producers of palm oil, and has announced its intention to have all of its palm oil certified sustainable by 2015. Even though decisions like these are rarely proactive and autonomous, and almost always spurred by grassroots activism, this decision is a monumental one and has secured an industry leadership role not only for Unilever, but for other companies that have joined the Roundtable on Sustainable Palm Oil (RSPO)—L’Oreal, Lion Corporation and Ferrero.
As demand for oils grow in all forms of consumption—food, fuel, cosmetics—corporations must find new solutions for their extractive practices. Sustainable production will ensure not only better land management, but also equitable working conditions and respect for customary law, especially in regards to land rights issues.
Kudos Unilever!
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