Highlights
– Economic downturn likely to have severe political fallout in Europe and Latin America
– Ukraine, as chokepoint between West and East, likely to face largest backlash
– Bolivian resource redistribution could trigger conflict in the region
– International operations likely primary targets of protestors
Eastern Europe and Latin America face the greatest prospects of political instability as the economic downturn settles in both the developed and developing world. Ideological extremism, irredentist movements, and inter-regional conflicts will feed regional political uncertainty. The Ukraine and Bolivia may become flashpoints for regional conflict in the medium term. International businesses will experience more intense backlash in these regions for operations locals view as exploitive and alien to personal concerns.
Current Situation
The World Bank warned, this weekend, global GDP would decline for the first time since World War II. The government’s of Iceland and Latvia have fallen from the economic crisis. South Africa, Pakistan, much of Eastern Europe, Central Asia, and Latin America either has or will head hat-in-hand to the International Monetary Fund (IMF) in search of loans. The IMF has called for countries around the world to offer an extra $150 Billion to replenish its dwindling reserves.
Four key factors will determine which countries experience a political crisis in conjunction with the economic hardship: the duration of the economic crisis; the size and exposure of a country’s economy to this crisis; the level and availability of a social safety net for that country’s citizens; and the ability of the government to steer resentment toward outside targets. Measuring these factors, we believe Eastern Europe and Latin America are the regions most likely to experience economically inspired political turmoil in the near to medium term.
Eastern Europe
The European Union’s refusal to create an organization-wide stimulus plan left countries in its east, and along its borders, in a financial lurch. Austria, Hungary, Romania, Bulgaria, the Ukraine, Estonia, Latvia, and Lithuania confront budget and current account deficits they cannot hope to manage without international support. Of these countries, Latvia has already lost its governing coalition. All others will likely suffer the same fate in the near or medium-term.
The Ukraine inspires the greatest concern due to its size, disastrous relations with Russia, inherent political instability, and the prospect of civil conflict between its Russian and Ukrainian peoples. Kiev’s government already experienced internal dislocation before the onset of the international economic crisis. Now that the country’s currency reserves have been depleted, credit rating slashed, and current account negated, it is highly susceptible to political crisis. Russia can be counted on to continue pressuring Kiev to increase payments for energy resources. As ethnic Russians in Ukraine’s east and Crimean suffer economic hardship they will increasingly look to Russia to protect their interests. The opportunity for political crisis between Russia and the Ukraine will continue to increase as long as this economic situation endures.
Latin America
The governments of Bolivia, Venezuela, Colombia, Argentina, Ecuador, Nicaragua, and Mexico will face political upheaval as citizens in these countries express their displeasure with those who led them to this crisis. Colombia, Mexico and Argentina have strong enough political systems and social safety nets to carry them through, albeit with difficulty. Bolivia, and to a lesser extent Ecuador, Nicaragua and Venezuela will have a hard time finding political stability during this economic crisis and may bring the region to the verge of war.
Bolivia’s resource endowed eastern provinces have expressed frustration at being forced to subsidize their western compatriots, especially after the fall in commodity prices. In the event those in the east declare official independence, they would spark a civil war in which other countries in the region have a tremendous stake. The ideology of Bolivia’s President Morales, a westerner of Amerindian decent and protégé of Venezuela’s Hugo Chavez, puts at risk natural resources in which neighboring countries have a large stake. A conflict over these regions holds the potential to pull in Venezuela, Colombia, Ecuador and potentially Brazil or the United States, depending on the level of intensity.
Threats to Business Operations
International companies with business operations in any of the countries experiencing economic crises, particularly the Ukraine and Bolivia, will be targets of anti-trade and anti-foreigner backlash. These companies will come under pressure to hire local staff rather than import workers from abroad. If a company conducts, funds, or supports resource extraction operations in one of these countries its facilities and personnel could be targets for physical attack, persecution, and/or kidnapping, particularly in Latin America. These risks will increase as the economic crisis deepens and politicians in the affected countries attempt to target public resentment away from political leadership.