Ones to Watch, 29 July 2019

Americas: Bilateral US-Venezuela tensions to remain high despite Chevron’s license renewal

Sectors: oil and gas
Key Risks: business risks; expropriation; sanctions

In Venezuela, the three-month extension to Chevron’s license to continue operating its four joint ventures on Venezuelan oil temporarily dispelled fears of an expropriation of its assets amid heightened bilateral tensions and sanctions. On 26 July the US Treasury Department granted the three-month sanctions waiver, now valid until 25 October 2019. President Nicolas Maduro had threatened to expropriate Chevron’s assets should the license not be extended. The waiver was initially granted on 28 January to allow Chevron and four other oil services companies to continue operating with state-owned oil company PDVSA. On 25 July the US imposed sanctions against 13 entities and ten individuals linked to a Venezuelan food subsidy scam. Erratic policy decisions against the US and its assets on behalf of Maduro’s administration remain a high risk amid mounting US sanctions.

 

Asia-Pacific: Mongolia to revise contract for expansion of Oyu Tolgoi copper mine

Sectors: mining
Key Risks: business risks; frustration of process

Reports emerged on 20-21 July that Mongolia is attempting to “rip up” some of the terms of the 2015 Oyu Tolgoi Underground Mine Development and Financing Plan (UDP) that secured Rio Tinto’s 2016 commitment to the expansion project at the Oyu Tolgoi copper mine. Parliament is expected to vote on recommendations that “would end the agreement” in August and it is likely that they will be approved. The terms of the UDP have proven a bone of contention since they were signed in May 2015. The reports come after Rio Tinto announced significant delays and cost overruns. The recommendations will involve bringing forward the date of dividend payments and demand more transparency on copper export prices. This would shift potential profits on the project in Mongolia’s favour.

 

Eurasia: Political connections remain key in Russian business, Moscow protests escalate 

Sectors: all
Key Risks: business; civil unrest; political stability

On 25 July Russia’s state-owned gas giant Gazprom sold a 2.9 stake in the firm, which had been held by subsidiaries as quasi-treasury shares, to an anonymous Russian buyer for 139bln rubles (US$2.2bln), a 5 per cent discount to their previous close. Some rumours claimed Arkady Rotenberg, a sanctioned billionaire and childhood friend of President Vladimir Putin, bought the stake, but reputable independent outlets denied this. Nonetheless, the shares – the largest single domestic share offering since 2012 – is sure to have gone to a politically-connected partner, and political connections will remain at the core of Russia’s energy sector, as well as wider business. Elsewhere protests have continued in Moscow over the controversial disqualification of opposition candidates on the weekend with 1,300 detained. There is a risk of a further violent crackdown as additional protests are expected.

 

Europe: Italy, Spain and UK all face high risk of snap elections 

Sectors: all
Key Risks: political stability; trade disruption; project cancellation

Early elections in Italy could be called as soon as this week, with a number of recent reports hinting that the government’s two coalition partners, the far right League and the populist Five Star Movement (M5S) considering them as strains continue to emerge in their coalition. The government faces a controversial vote to approve the Lyon-Turin rail project, which M5S has long opposed and which it vowed to block in its 2018 election manifesto, though the League will need opposition votes to do so. Spain also could head back to the polls after Prime Minister Pedro Sanchez failed to gain backing for his minority government in two key parliamentary votes last week, though if the centrist Ciudanos party opens talks with Sanchez’s Socialists this could be avoided. Meanwhile the installation of Boris Johnson as British prime minister last week has raised the risk of a no-deal Brexit substantially as well as the chance of early elections.

 

MENA: Turkey cuts interest rates, as Erdogan establishes control over the central bank

Sectors: all
Key Risks: lira depreciation; financial crisis

On 25 July Turkey’s central bank slashed interest rates 425 basis points, to 19.75 per cent. The move follows the removal of central bank governor Murat Cetinkaya, who reportedly refused to cut interest rates despite demands by President Recep Tayyip Erdogan. The cut was larger than initially expected, but the impact on the lira was therefore relatively muted. While inflation has come down since the end of 2018, it  still remains around 15 per cent, three times the bank’s target. Erdogan has called for further cuts by the end of the year, although they are likely to be gradual. Monetary policy is now strongly influenced by the president, and the central bank is likely to target growth over controlling inflation. The degradation of institutions will increase concerns over the lira and financial stability over the medium term.

 

Sub-Saharan Africa: Court grants permission to declare Nigerian Shi’ah group a terrorist organisation

Sectors: all
Key Risks: civil unrest; internal conflict; terrorism

A court has granted the Nigerian government permission to designate the Islamic Movement of Nigeria (IMN) as a terrorist organisation. The Shi’ah group, which emerged in the late 1970s and was inspired by the Iranian revolution, has claimed that more than 20 of its supporters have been killed in clashes with security forces in Abuja over the past few weeks. IMN members have been demanding the release of their leader, Ibrahim Zakzaky, who has been in detention since 2015 and is reportedly in ill health. The court’s ruling will likely lead to a harsh crackdown on IMN supporters, raising the risk of further clashes in the coming days. The IMN’s designation as a terrorist organisation could feasibly prompt radical factions within the group to wage a low-level terrorist campaign against the government in the coming years.