Category Archives: Foreign Exchange Market

Political Risk to Investment in Iran: Sanctions, Inflation, Protectionism, War, Bonyads, and the IRGC

Journal of Political Risk, Vol. 1, No. 7, November 2013.

Figure 1: Foreign Investment in Iran and its Neighboring Countries, March 19, 2012-March 19, 2013. Data Source: The Government of the Islamic Republic of Iran News.

Figure 1: Foreign Investment in Iran and its Neighboring Countries, March 19, 2012-March 19, 2013. Data Source: The Government of the Islamic Republic of Iran News.

By Reza Yeganehshakib

Despite a tumultuous recent political history that includes revolution, war and sanctions, relations between Iran and the West are improving and Western investors are increasingly interested. But, Iran’s politics cause sanctions, and the economy suffers from inflation. Protectionist laws are on the books, and in some cases economic crimes are punishable by death. Regardless of warming relations with the West, Iran has in the past reneged on its agreements, and war is still a risk with non-Western bordering countries and regional powers. The Iranian Revolutionary Guard Corps (IRGC) has nationalized foreign investments in the recent past, and the politically powerful revolutionary foundations known as Bonyads control large segments of the most lucrative investment sectors.

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Stalemate in Egypt: Expect Years of Insurgency vs. Autocracy

Journal of Political Risk, Vol. 1, No. 6, October 2013.

Map of Egypt. Source: University of Texas.

Map of Egypt. Source: University of Texas.

By Anders Corr, Ph.D.

Egypt is on the verge of being engulfed by a long-term insurgency. After a brief period of democratization following the Arab Spring, the world’s most populous Arab country has returned to a popular military dictatorship. General Sisi will likely lead the country, either as power behind the President, or as President himself. The primary difference between the Egypt of Sisi and the Egypt of the pre-Arab-Spring Mubarak will be a function of the overthrow of the democratic Islamism of President Morsi. A new outraged minority with pro-democracy and pro-Islamist beliefs fielded popular protests, and was repressed with lethal force. A significant minority of that minority will now divert their energy towards terrorism and organized insurgency. Continue reading

Political Risk in The Gambia: Crime, Terrorism, Monetary Instability, Small Business Flight, and Protectionism

Journal of Political Risk, Vol. 1, No. 4, August 2013.

Figure 1: Comparison of Gambia and Sierra Leone on the Ease of Doing Business in 2013. Data Source: World Bank. [1]

Figure 1: Comparison of Gambia and Sierra Leone on the Ease of Doing Business in 2013. Data Source: World Bank. [1]

By Anders Corr, Ph.D., and Naheed Vadsaria

Political risk in the tiny West African state of “The Gambia” is high.  Named after the small river around which its borders fluctuate, the country hosts a dictatorship established in a 1994 coup. The country also hosts Hizbollah operatives who conduct international financial transactions, and is one of the top African cocaine transshipment points to Europe. Local businesses are considering fleeing to Sierra Leone to escape a raft of seemingly arbitrary and protectionist laws promulgated by the President for potentially personal reasons. Continue reading

Effect of European political disunity on the Euro and global economy

Today, France joined the UK in publicly threatening to rupture a common approach to European Union (EU) foreign policy by sending arms to Syrian rebels (Bloomberg). This, on the heels of the January 11 unilateral French intervention in Northern Mali. Since the May 2012 election of French President François Hollande, France has increased its political independence with respect to the EU. This distresses Germany, which wants closer political union. Without seeing gains in political unity, Germany could decrease its financial support to the European project (Council on Foreign Relations). This augurs poorly for European monetary union, the value of the Euro, and global economic stability.

Lack of German financial support to Europe would increase the probability that Portugal, Italy, Ireland, Greece, or Spain would be forced out of the Euro. Were this to happen without prior agreement from the rest of the eurozone, the cost to the dropout would be catastrophic in terms of trust and with it, access to money markets. The cost to the remaining eurozone countries would be an increase in eurozone per capita money supply and resulting inflation of the Euro. Confidence in the Euro would fall, and the chance of further dropouts would be reflected in the foreign exchange market. Decreasing confidence and loss of value increases incentives for other EU countries to be the next to leave the Euro, with spiraling downward effects on its value. The massive investment in the Euro — and the amount that could be lost given failure — explains why Germany is willing to prop up the currency through stabilization of economically ailing eurozone members. Ailing eurozone countries milk their wealthier neighbors with the threat of Euro collapse.

Euro collapse is not just a European problem. It would have a disastrous effect on the global economy, including major European trading partners such as the United States and China. Thus, all trading partners with Europe have — at least for economic reasons — a stake in the success of a European common foreign policy. This should be considered when jockeying for short-term diplomatic goals such as arming the opposition in Syria.

Increasing European political integration and unity should give the investor increased confidence in the Euro; decreased integration and unity will have downward effects.  In part because of understandable historical differences based on the subjective experience of World War II, Germany is profoundly leery of military intervention. France and Britain frequently see intervention as an obligation to stop massacre, genocide, and civil war, especially when such intervention involves ancillary benefits such as removing a rogue or terrorist threat. Increased institutional power to overcome foreign policy differences in Europe would assist common foreign policymaking, and thereby improve market confidence in the Euro. Public pronouncements of Britain and France asserting foreign policy independence from the EU are geared towards influencing Germany and other recalcitrant EU states to take the UK-France-Italy approach on Syria. They show that for the moment at least, short-term foreign policy goals are trumping aspirations of a common EU foreign policy, stability of the Euro, and mitigation of risk to the international economy.

Watch for any hedge by the German government against the Euro, which will precede rapid loss of confidence in the Euro and a decrease in German monetary support to the currency union.