July 17, 2012

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TSG IntelBrief: The Arab Spring Evolves: Business Opportunities and Political risks

As of mid-July 2012, the Arab Spring appears to have reached a strategic inflection point for foreign investors. Tunisia, Egypt and Libya have held-democratic elections to form new governments, which in each case appears to bode well for long-term business opportunities. Despite this progress, foreign commercial enterprises will have to navigate a distinct and evolving set of political and security risks in each of these countries.

During the violence and political instability that accompanied the outbreak of the Arab Spring, many foreign companies severely curtailed their operations within the affected countries. In Tunisia, for example, 153 foreign investment entities left the country during 2011. During the same period in Libya, Foreign Direct Investment (FDI) fell precipitously from close to US $4 billion to just several million. In Egypt, meanwhile, FDI fell from US $1.6 billion in the third quarter of 2010 to US $440.1 million in the same period of 2011.
 
But with the green shoots of democracy emerging, foreign companies are set to return to these countries in pursuit of attractive — and relatively safe — investments. In Libya, buoyed by the comparatively peaceful transition and recent elections, the oil and gas sector is increasing daily production. In Egypt, newly elected President Mohamed Morsi said he expected $200 billion in foreign investment in Egypt over an unspecified "coming period." In January 2012, the vice president for ENI, the Italian energy company, said it aimed to invest $600 into Tunisia during the course of the year.

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Foreign Investment: Political and Security risks

In Libya, national elections took place in early July — with only scattered incidents of violence — an outcome that few analysts predicted. Nonetheless the country remains exceptionally risky for foreign investment, and the reasons are manifold. The security and military forces are weak, with many parts of the country operating beyond the government's control, particularly the resource-filled east of the country. There is also a strong likelihood of continued intercommunal violence between rival tribes, which based on recent weeks events, could extend into Tripoli. Over the coming months, likely focal points for violence and instability include the writing of a new constitution and high levels of unemployment. There is also a significant threat to foreign interests, particularly in Benghazi. Over the past month, militants attacked a convoy carrying the United Kingdom's Ambassador; a bomb exploded outside the United States diplomatic mission in Benghazi and assailants attacked the Red Cross office.
 
In Egypt, the long-term political and security forecast is more positive, with fewer existential risks to the government. The leader of Muslim Brotherhood, Mohammed Morsi, won the recent elections and is already serving as the new president. After a less than a week in power, however, Morsi has fallen out with the military after he opposed its instruction and called for a reinstatement of the lower house of parliament, which the military had closed prior to the election. With military leaders seemingly determined to maintain sweeping powers — particularly over the budget, national security and foreign affairs — it seems probable that there will be a prolonged power struggle between civil and military leaders. This is most likely to manifest itself through large and possibly violent protests in Cairo and elsewhere, but might also lead to political paralysis. Other looming issues of instability include protests over high levels of unemployment and energy shortages. Meanwhile, there has been a recent spike in terrorist attacks across the Sinai Peninsula, which some analysts attribute to a weakened military.

Tunisia — Ground Zero for the Arab Spring movement — was the first country to elect a new government. The ruling coalition government led by the Islamist Ennahda party has made steady if not spectacular progress and has actively sought to protect foreign interests. The main security risks there are from the violent radical Salafist groups who believe that the government has become secular; high unemployment rates, which have led to violent protests in Tunis and elsewhere, and disputes between different political factions of the ruling coalition. Despite these obstacles, the country's overall trajectory is manifestly positive.

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Investing in Volatile Countries: Lessons learned from the Arab Spring

The outbreak of the Arab Spring last year caught foreign companies by surprise. Neither government nor private intelligence services could have predicted that a fruit seller setting himself on fire would spark a revolution in Tunisia. But there was a widespread misjudgment across the Middle East and North Africa that failed to appreciate that the social, cultural and political conditions were conducive to supporting revolutions, which spread from Tunisia to Libya, Egypt and elsewhere.

As a consequence of this, many large multinational companies were not prepared. In some instances this led to substantial business disruptions and costly evacuations that were poorly planned and executed. In Libya, the situation was particularly chaotic; within days of the uprising starting, violence spread from Benghazi to areas of Tripoli. Because large sections of the country were too violent to travel through, the evacuation of foreign and expatriate staff became not only difficult, but also truly dangerous. Some large multinational companies were forced to hire ships and aircraft at large expense to transport their staff to safety. Anecdotal reports suggest in the milieu companies transported some of the wrong employees home and left others behind. Other companies had difficulty gaining visas to facilitate their employees travel to international transit points such as the UK.

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Establishing Indicators to Guide Timely Decisions

In the aftermath of the revolutions, many corporate security teams have set up more rigorous evacuation plans. But some teams report that considerable gaps remain, particularly in identifying the conditions — and especially early and reliable indicators — that would determine if an evacuation is necessary.

Along with accurate and timely intelligence, an important means of facilitating investment in volatile countries is to establish tripwires or indicators. This helps to benchmark the shifting political and security environment. Although indicators are most often country-specific, as one example, the transition from a high to severe risk country could include increasing lapses in the the government's ability to provide or control basic services and security; large protests turning violent in capital cities; or a mass-casualty terrorist attack against foreign government or commercial interests within the country. More generally, soft indicators are also useful to monitor: a deteriorating political situation often results in the closing of foreign embassies, international airlines curtailing flights, and the disruption of key roadways. All of these issues help companies make early — and hopefully prescient — decisions that will protect their interests.

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