P&C the October 2013 issue

Hotbeds of Unrest

As long-simmering conflicts boil over across the globe, the road to stability presents a daunting journey.
By Maureen Brody Posted on September 30, 2013

Unrest is a worldwide phenomenon. Russia’s ability to support its allies militarily is weak. European and Eurasian nations struggle with economic and ethnic conflicts. A vast disparity of wealth between nations in the region causes tensions. Commercial interests contribute to political conflict. Muslim-controlled governments fall. Rivals vie for power, causing instability. The United States is suffering from two serious convulsions in the stock market. The Federal Reserve enters new territory with its interventionist authority. In Austria, the death of one man sparks an outbreak of regional warfare with global implications.

Thankfully, 1914 is long over.

So why is today’s geopolitical world a reflection of what it looked like 99 years ago? Because things that start small tend to agitate and grow. Albert Einstein, that perennial pacifist, not only cautioned of the dangers of the world, he left us with one prophetic little sentence: E=mc2. Translation: A small amount of matter can generate a large amount of energy.

Einstein’s theory can be reflected in a tiny tweet—a 140-character communication that has led to mob-style attacks and region-wide revolutions. It can be as inconspicuous as a tattered Koran, as light as a gram of white powder or as invisible as a job offer that never materializes. Worldwide, these modest particles are forming covalent bonds and producing exponential increases in energy—much of it aimed at busting up long-standing nuclei of power.

We once talked of “haves” and “have-nots” as the core problem creating civil unrest, but today’s conflicts are more complicated. Where we see major crises—the ones that threaten economic systems or critical supplies or that lead to general mayhem or the death or molestation of innocent people—unrest is almost universally related to many factors. These included:

  • religious or ethnic extremism;
  • rule by criminal mobs;
  • the breakdown of unsustainable social welfare systems; and
  • high youth unemployment.

Understanding the roots of unrest is critical to protecting our interests. But that’s difficult in the West, where the issues driving the turmoil are culturally misunderstood and often ignored.

“Our culture is so secular that we have difficulty understanding the role of religion and ethnic divides and the depth of their roles,” says Robert O’Sullivan, an adjunct professor of political risk from Georgetown University’s School of Law.

“Look at how we were mystified by the genocide in Rwanda. In Sierra Leone, there was an insurgent group that was doing horrible things, and nobody in Washington understood even why they were doing them.”

“Our culture is so secular that we have difficulty understanding the role of religion and ethnic divides and the depth of their roles.”
Bob O'Sullivan, adjunct professor of political risk, Georgetown University School of Law

Order, the antithesis of unrest, thrives when tyrannical governments suppress dissent and activism. The concept is anathema in the developed West, but it is reality in the rest of the world, and when hegemonic powers—both domestic and global—ease up on their authority or are undercut or overthrown, unrest is the result.

Stephen Kay, leader of the U.S. Political Risk Practice at Marsh, likens the phenomenon to that described by Ian Bremmer, president of the political risk consulting firm Eurasia Group, in his 2006 book The J Curve: A New Way to Understand Why Nations Rise and Fall (Simon & Schuster). The title refers to a graph in which the y-axis measures stability and the x-axis measures openness.

“The machinery of government in some societies keeps the lid on social actors who would make noise,” Kay says. “The government monitors the Internet and does all sorts of things to keep order—not by eliminating the factors that cause dissent but by stopping their effects.

“North Korea, for instance, is very stable but very closed. You have a low level of political incidence, demonstrations. Are they being suppressed? Yes. To get from North Korea, Saudi Arabia, China on the far left side of the J to the upper right side of the J, where the U.S. and other Western nations are, you’ve got to go through the dip in the J. That’s where the instability is.”

Today, there is an obvious human toll on the ground in conflicted regions, but there are also broader interests at stake. Multinational corporations stand to lose real property, finished product, transportation fleets, and stored inventory and materials. Investors are at risk as weak legal systems fail to protect property rights and as new governments institute new rules that change the playing field, sometimes to the detriment of foreign businesses. Attacks that destroy lucrative tourism and hospitality revenue are of concern, as are kidnappings, expropriation of industrial or financial holdings, changes in currency convertibility, and loss of leased property.

A World of Pain

Recent headlines reveal a world of unrest. They include political assassinations, mob attacks, disappearances of prominent political leaders, mass graves, large-scale jailbreaks and uncontrolled criminal activity. Terrorist explosions, human mutilation and aggressive nonviolent actions complement strikes, riots and murder. Spillover of civilian refugees into neighboring countries causes instability and violence in border regions.

Judicial systems in many unsettled countries don’t work, allowing murderers and marauders to operate with impunity. Protests over government austerity programs quickly give way to vandalism and violence against civilians and government forces.

Political assassinations this year in Tunisia, Libya, Pakistan and South Africa are symptomatic of systemic political instability—a likely indicator that democracy as the West understands it is not achievable in the near term. The United States’ recent foray into nation building seems to have proven that Western-style democracy just isn’t sustainable in these countries, say several U.S. intelligence sources who asked not to be named.

In Tunisia, Libya, Pakistan, Syria, Iraq and parts of Africa, violence has been perpetrated by opposing sects of Islam, while in Sri Lanka and Myanmar (formerly Burma) Buddhist mobs have been attacking Muslims. Much of the violence in the latter two countries stems from ethnic differences.

In Ethiopia, security forces have clashed with protesting anti-government Muslims, sometimes violently. The Muslims accuse the Ethiopian government of encouraging a moderate sect of Islam called Al-Ahbash.

In Egypt, police have gunned down civilians following the military coup that removed Mohammed Morsi, the Muslim Brotherhood leader who was elected after the toppling of Hosni Mubarak’s government in 2011. The coup followed massive demonstrations, many orchestrated by the Tamarod (Rebel) youth movement, demanding Morsi’s departure.

Syria is also a hotbed of violent religious activity. Opponents to strongman Bashar al-Assad are not the democratic force Western governments had hoped for. Instead, they are a blend of Sunni extremists, Salafist militants, and mercenaries from all over the region backed by local foreign governments. That leaves the United States and its Western allies a tough decision about choosing sides.

Syria’s once active economy is in shambles, and its conflict is harming neighboring Lebanon and Turkey, the latter of which is experiencing its own urban anti-government protests.

Syria’s effects on Lebanon highlight the problem of spillover. The small Mediterranean coastal country, bordered on the north and east by Syria (and on the south by Israel), once earned 20% of its gross domestic product from tourism. Some 60% of its tourism revenue came from residents of Gulf Cooperation Council (GCC) countries. In early June, the GCC issued a travel alert advising its citizens to avoid Lebanon.

Lebanon relied heavily on Syria for export revenue, with about 40% of Lebanese exports traveling through its unstable neighbor. Expensive alternatives, such as ferrying goods destined for regional trade partners through the Suez Canal, raised prices on the country’s exports, hurt its competitiveness and established a transportation chokepoint for its goods.

Foreign direct investment in Lebanon plummeted to $2.4 billion in 2012, down from $12 billion in 2009. The country’s gross domestic product plunged 12% from 2011 to 2012, when its economy entered a recession.

Religious Fanaticism

In many places in Africa and Asia, stories abound of beheadings, shootings of women and children, violent attacks, rapes and economic crime. Amnesty International chronicled widespread attacks in Bangladesh against Hindus and their homes and temples.

“The Hindu community in Bangladesh is at extreme risk…. It is shocking that they appear to be targeted simply for their religion,” Amnesty International said in March.

Survivors of attacks told the human rights watchdog that the attackers took part in rallies organized by the Islamist Jamaat-e-Islami party, which has also called for strikes and mass protests to condemn findings that the party’s leaders committed war crimes during the 1971 war of independence.

There is undeniably a serious problem with violent religious fanaticism in Africa and Asia, and grappling with the next areas of turmoil will require understanding the different sects involved.

Drugenomics

Religion might not have turned out to be the opiate of the people after all, but opium has. Its popularity, along with a healthy market for marijuana, coca and its derivatives, and many other natural and synthetic drugs, drives a $400 billion annual underworld economy. The brutality behind the drug industry gets press, but its deep insinuation into cultures, governments and economies is what is most systemically threatening.

In Mexico, for example, officials estimate 3% to 4% of the nation’s gross domestic product comes from the drug trade. The Brookings Institution says between 40% and 50% of the Mexican population works for the drug industry in some capacity.

Since 2006, more than 47,000 people have been killed in drug-related violence in Mexico, according to government figures. More than 20 sitting mayors have been murdered in Mexico, many politicians and others have disappeared, mass graves have been discovered and beheadings and torture are not uncommon. Mexico is the eighth deadliest country for journalists, and traditional Mexican media outlets don’t report on drug cartels anymore, although some U.S. media still do.

Human Rights Watch said in a November 2011 report that Mexico’s war on traffickers, “rather than strengthening public security in Mexico…has exacerbated a climate of violence, lawlessness and fear in many parts of the country.”

And Mexico is one of many countries heavily compromised by drugs. Algeria has identified drug trafficking as its top national security problem, bumping terrorism to second place. The government has assigned its military as lead in combatting the cross-border problem, which has ties to Al-Qaida and arms traffickers.

In the Americas, the Organization of American States said in July that drug trafficking and use are some of the most important challenges in the region, bringing with them a public health toll, violence and governmental corruption. The consumption of drugs within the United States is cited again and again as the nucleus of the problem.

Drug traffickers control the economy of many local areas and bring enough cash into the countries where they operate to make the loss of their business a serious threat to some nations’ financial well-being. Cartels armed with high-powered weapons have become domestic and international security concerns.

Drug trafficking affects small towns and big-league resorts, from Las Vegas, Acapulco and Montego Bay to the tropical beaches of Thailand. Future trafficking hotspots include a number of emerging market economies. South Africa’s production and export of amphetamine-type substances are on the rise, according to the U.S. State Department. Drug-related crime in South Africa jumped about 11% from 2010 to 2011.

Venezuela continues to be a major transit depot by air, land and sea, and the government refuses to participate in the U.S. Coast Guard’s International Port Security Program or cooperate on container inspections at its principal port. The country is rife with governmental corruption, and drug traffickers and organized crime have established a stronghold.

Uruguay is another long-term concern. Although it doesn’t have a homegrown narcotics industry, its porous borders with Brazil and Argentina make it an attractive thoroughfare.

As for Europe and the Mideast, traditional Balkan trade routes have been overused, so traffickers are looking for fresh channels of transport and distribution, according to the U.S. State Department. The standard culprits—Afghanistan, Pakistan and Iran—are still active, and non-producing countries, such as the United Arab Emirates, are increasingly a focal point for transshipment.

The future includes increasing public health problems due to drug use and addiction, and crime and terrorism syndicates can be expected to expand their arms and human trafficking alongside their drug dealing. Those who govern waterways, ports, border crossings, resorts and nations can expect this war to be the most pervasive and persistently dangerous activity they will face.

The difficulty is insuring commercial interests for losses due to drug-related unrest. “What is political versus criminal?” asks Marsh’s Stephen Kay. “It’s tricky for political risk insurers to cover actions by gangs and cartels. It’s kind of a gray area.”

Trafficking, Kidnapping, Ransom

Organized crime isn’t restricted to drugs, of course. Arms trafficking, piracy, and kidnapping and extortion are also part of international criminals’ curriculum vitae. There’s also crossover between disciplines. Networks of terrorists, arms traffickers, drug runners, human traffickers, pirates and extortionists can be compared to a three-dimensional Venn diagram, with many overlapping areas of interest and expertise. Money laundering figures prominently in all of them, and any industry that handles large sums of cash can expect to be penetrated by these bad actors and their dirty dollars. Legitimate businesses can be drawn into the fray through business transactions, by crimes against their executives or other employees or by members of the company.

For international businesses, the threats to personnel are serious. Michal Gnatek, Lockton’s vice president for technology, aerospace and defense, says kidnapping, ransom and extortion are growing as exposures for multinational businesses and internationally active non-governmental organizations.

“Ransom is the prevailing cause of kidnapping, though in some countries, like Somalia, for example, they kidnap to kill,” Gnatek says. “There are certain countries where it is a major industry. Colombia and Venezuela come to mind. In Mexico, you have a significant kidnapping risk, though it’s more a crime of opportunity than an organized effort. In much of Latin America, the focus is on locals, but foreign nationals are increasing as a target.”

Yemen is a very dangerous spot for foreigners, as are Egypt, Libya, Syria and other nations in the midst of what amounts to civil war, Gnatek says. As fiscal pressures have grown, he says, companies operating abroad have increasingly had to provide their own security services and protection. That’s a step beyond the old kidnap and ransom coverage. “The policy [today] is a backup for the services that are provided under the coverage,” Gnatek says. “The services are the principal benefit of a K&R policy.”

Those services are provided by professional specialty organizations, such as Control Risks, Ackerman, Unity and others, which offer soup-to-nuts risk management and response.

“They provide left-of-boom help,” Gnatek says. “They tell you who you do and don’t do business with.” But they go beyond prevention. “They provide negotiators. They know the groups that commit the crimes. They walk the company through the process, help manage the message, and help with victims’ transition to normal life. The odd thing is risk assessment is offered as part of a purchased policy but often not utilized.”

“The odd thing is risk assessment is offered as part of a purchased policy but often not utilized.”
Michal Gnatek, vice president of technology, aerospace and defense, Lockton

Economic Black Hole

The third main cause of political and civil unrest worldwide is not an organized group of activists or criminals or zealots. It is really a systemic collapse under the weight of an unsustainable mass.

Once the world economy went into its 2008 free-fall, governments began implementing new policies to retain their economic sovereignty and appease creditors. That meant cutting back on public expenditures—a very unpopular policy in places where vast numbers of people were net recipients instead of net contributors.

Protests in Argentina, Ireland, England, Greece, and Sweden were emblematic of a deeper, septic wound—employability. Unemployment and the loss of hope of ever being employed persist, particularly for the young, throughout the world. In July, unemployment among workers under age 25 exceeded 50% in Greece (62.9%), Spain (56.1%) and Croatia (55.4%), according to Eurostat, the statistical office of the European Union.

Youth unemployment may be the greatest destabilizing economic factor facing the world over the next 20 years. The World Economic Forum’s 2013 report on youth unemployment says people aged 15 to 24 comprise 17% of the world’s population and 40% of its unemployed. The vast majority of unemployed young people are not attending school or undergoing job training. That bodes ill for the future—both for wealth producers and public policy makers.

Economic instability and unemployment is like the chicken and the egg conundrum—one begets the other, and vice versa. Unemployment that generates political unrest persists because the business community is unwilling to spend, merge or expand in the uncertainty of global markets. Businesses are concerned about physical insecurity, changing regulations and the potential loss of assets to violence, confiscation or currency exchange problems.

Ranks of unemployed youth—educated and uneducated—are more susceptible to chronic drug abuse, depression and violent, mob-type outbursts such as vandalism, arson and fanaticism.

“An entire generation risks…succumbing to the siren songs of populism and extremism,” a group of labor and finance ministers from France, Germany and Spain wrote in a joint editorial published this spring.

Unrest from systemic economic problems looms on the horizon worldwide. “What people fail to appreciate is that emerging markets have been benefiting from a tailwind of high liquidity in markets—especially as interest rates dropped to about zero,” Kay says. “The low rates have masked economic failings. During these ‘good times,’ governments haven’t gotten their houses in order. They are still bloated and inefficient, and that will come home to roost. They will have to cut back on government largesse, and that is not popular. Brazil is a really good example. There was a great amount of tolerance for low levels of per capita income and opportunity because, in a relative sense, things were improving. But now growth is anemic, and the frustrations that were kept in check by the rising tide are coming to the surface.”

Global business is at risk as well. “Corporations and investors who went into emerging markets thinking those markets were the holy grail had a little bit of myopia,” Kay says. “There is now increased risk to those invested or operating in emerging markets.”

Free Speech

A mighty flame may burst from a tiny spark, Dante said in Paradiso. How true when it comes to free speech. The unbridling of communications may be the single most important source of energy for global unrest.

“The supremely most interesting part of political unrest is how technology is influencing the scene,” Kay says.

Free speech has led to revolutions in Egypt, Libya and Syria, and it has the potential to explode in Iran and in Turkey, where clashes between Islam and Western society have erupted and been quashed in the two major cities for many months.

Ironically, the radical “969” campaign against Islam in Myanmar developed after the country ousted its military dictatorship in favor of a quasi-civilian government in 2011. Restrictions against “peaceful assembly” were relaxed, and censorship has been curtailed. These days free speech is being used to rally groups that were hitherto suppressed in Myanmar, and through public speaking radicals are cultivating and unleashing the power of mobs.

Free speech is in its nascent stages in China, Vietnam and other Asian countries as well, though too much outspokenness can still get you in hot water—or jail. Vietnam is moving incrementally into the global economy with new insurance and investment laws while at the same time cracking down on public dissent regarding graft, state management of the economy, land confiscation and even the Chinese navy’s ramming of a Vietnamese trawler in the South China Sea. The government understands the propensity of small protests to spiral into uncontrolled revolt.

Russia has also reestablished gates on communications. A 2012 Russian Duma (parliament) law primarily concerned with shutting down child pornography and terrorism on the Web permits the government to force Internet service providers to block individual Web pages as well as entire websites. The law could allow Russian authorities to clip Twitter’s wings or choke other business websites if they have objectionable content.

No matter what, though, governments are going to have a monstrously difficult time closing Pandora’s box. The free flow of video, photos, messages, sound clips and music will be almost impossible to cap.

“The supremely most interesting part of political unrest is how technology is influencing the scene.”
Stephen Kay, U.S Political Risk leader, Marsh

“In open societies, having a million people march in the capital isn’t really a threat to the political structure. It’s kind of a sign of a pretty healthy culture,” Kay says. “The clashes in countries that have been closed to dissent are much more problematic. Information technology is perceived as a threat by the government, so you get a reaction that makes things worse.”

The Prize: Stability

In the end, public policy makers will have to find a way to either mollify malcontents or suppress unrest if they want stability. St. Augustine, a fourth-century bishop in North Africa, defined peace as the tranquility of order. That’s still the essential definition of peace in most of the world.

Only in westernized nations have we commingled the idea of harmony with peace. The French Revolution’s tripartite motto liberté, égalité, fraternité  (the brotherhood of man) just doesn’t translate well in most cultures. Nor does the concept of give-and-take negotiations. Appeasement is a sign of weakness, and unwavering dominance keeps the peace.

Only in westernized nations have we commingled the idea of harmony with peace.

That’s an ugly reality that the world must face if we want to identify stability and prevent or respond to volatile forces simmering in the next hotbeds around the world.

Read More The Threat Factor
Political risk maps pinpoint the most unstable nations around the globe. Insurers Bring Holistic Approach to Political Risk
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Maureen Brody News & Copy Chief Read More

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