Web of Relationships Helps Rangoon by Roberto Herrera-Lim Analyst, Asia

INSIGHTS FROM EURASIA GROUP politics and the perspectives markets November 2007

s the US attempts to pressure Burma to implement political reforms, most Asian countries will for now give nothing more than token cooperation. The strate- Agic and financial value of their relationships with the unpopular junta in Rangoon outweighs any reputa- tional risks garnered from being associated with Burma’s recent violence. Unless the US can get help from China, India and the Association of Southeast Asian Nations, the generals are likely to survive this crisis. Regional Global Political behavior will only change substantially if protests Risk Index return, which is possible, and a severe humanitarian The GPRI, which is produced by Eurasia catastrophe results. Group, measures a country’s ability to Economic relationships are the major force block- absorb political shocks. The higher the number, the more stable the country. ing Western efforts to pressure the regime, mainly because countries in the region are competing for access HUNGARY 79 SOUTH KOREA 77 to Burma’s hydrocarbon, mineral and timber resources. POLAND 75 Much criticism has centered on China (primarily) and BULGARIA 70 India (secondarily). Both countries have historic ties to MEXICO 68 Burma and are trying to buy the output from the Shwe BRAZIL 66 gas fields, where South Korea’s Daewoo is the lead opera- TURKEY 66 CHINA 65 tor. (Rumors are circulating that the Chinese have already ARGENTINA 64 been selected.) SOUTH AFRICA 64 Ties to Burma are spread throughout the region. RUSSIA 63 Thailand is Burma’s largest trading partner, mainly INDIA 62 EGYPT 61 due to gas purchases—about one-third of their fuel THAILAND 60 supply is obtained from the Yadana and Yetagun gas COLOMBIA 58 fields in Burma. Yadana is operated by a consortium ALGERIA 57 that includes the French firm Total, Thailand’s PTT PHILIPPINES 57 INDONESIA 56 Exploration and Production Public Company Limited government SAUDI ARABIA 55 subsidiary and the US oil firm Chevron. The Yetagun UKRAINE 55 society operation includes Malaysia’s state-owned oil and gas VENEZUELA 53 security giant Petronas, Japan’s Nippon Oil and PTT-EP. IRAN 51 NIGERIA 47 economy PAKISTAN 45

Courtesy of Citi Private Bank Opponents of the junta claim that Singapore’s financial system is the CLOSE-UP: Poland primary conduit for Burma’s financial election results encouraging for politics and business transactions and serves as a haven for the regime’s cronies. However, Sin- stability Spotlight The convincing win by the pro-business gapore is mindful of the damage that Civic Platform, or PO, in the Oct. 21 parliamen- Rangoon has caused to ASEAN’s rela- tary election improves Poland’s political stability tionship with the US and European 75 and is positive for markets. The results of the Union. For this reason, the city-state is election offer a resounding victory for good gov- the likeliest among countries with major rating forecast ernment in Poland, derailing the Law and Justice ties to Burma to cooperate with tighter Party’s, or PiS’s, tactics of threats and intimida- US sanctions. tion. Along with its partner, the Polish People’s Neighboring countries also see Party, the PO will be able to construct a new strategic value in their relationships coalition that will have a substantial and stable with Burma. India wants to retain Bur- majority in parliament, giving it considerable mese cooperation to capture separatist policymaking latitude. Indian rebels from northeast Nagaland The incoming PO government is expected to who often seek refuge in Burma. China improve the legal environment almost immedi- is reportedly trying to gain Burmese ately. (The outgoing PiS government had created approval for a base, which would give it a climate of fear in this realm by engaging in a access to the Indian Ocean, and for an range of activities to harass its opponents.) Relations with the Euro- oil and gas pipeline that would allow its pean Union and Poland’s neighbors, in particular Germany and Russia, energy imports to bypass the Malacca should also recover dramatically, ending two years of tense interaction. Other Strait. Vietnam, Cambodia and Laos This will put the timeline for euro adoption back on track. are reluctant to criticize the Burmese The business and investor climate also are likely to receive a strong League of Polish Families regime because they do not want to boost. The incoming government should improve the tax and regula- compromise their view that ASEAN tory environment and ensure that public finances remain on track for Self Defense should not interfere in its member euro adoption (probably by 2013). Polish People's Party countries’ domestic affairs. Another concern is that such interference could Left and Democrats eventually expose them to similar criticism about their political systems. Law and Justice Party The primary risk for China, India, Poland’s Parliamentary Election Results † Thailand and others in the region is that (460 seats at stake) Civic Platform strong cooperation with the US could % of vote hurt their ties with the Burmese gener- 41.5% Civic Platform als who, unless real political reform is 32.1% Law and Justice implemented, appear likely to stay in 166 power for the foreseeable future. In this 13.2% Left and Democrats case, non-cooperating countries would 209 53 8.9% Polish People's Party have the upper hand to tap Burmese 31 resources and develop strategic relation- 1.3% League of Polish Families* ships. For now, Asian countries appear 1.5% Self Defense* willing to ride out the risk to their 1.5% Other* reputations in exchange for maintain- ing a toehold in Burma—each thinking †The German Minority party won one seat. that the other nations’ complicity in *Parties that do not exceed the 5% vote threshold do not receive the regime’s actions protects their own seats in parliament. involvement. Data Source: Polish election committee, as of 29 October 2007 ➪ Legend: Positive change Negative change No rating ➪

2 politics and the markets I nside the Index election results encouraging for politics and business In the following briefs, Eurasia Group analysts highlight the connections between stability and key political issues in important emerging markets.

LEGEND UKRAINE government HUNGARY society TURKEY security CHINA ALGERIA economy

Algeria GPRI 57

Security worsens Algeria’s worsening security situation has prompted some foreign companies to reduce their number of personnel. The young leaders who are and impose regulations Ukraine companies’ decision has loyal to Hu’s agenda. The concerning EU funds. not yet had a commercial president’s allies and proté- GPRI 55 impact, but the moves are gés are now a major force Turkey Government to face reminiscent of the 1990s in the Central Committee GPRI 66 opposition when violence caused and the Politburo. However, companies to close their A new coalition govern- Xi Jinping, a young leader Controversial start operations entirely. The ment, comprising the close to a Hu competitor, for AKP decisions were made in has edged out Hu’s favorite former partners in the Despite its emphatic elec- response to a series of Li Keqiang as the most Orange Revolution, will tion victory, the Justice attacks on foreigners since likely successor. make limited progress on September and calls by Al and Development Party, or reforms and could gener- AKP, government has been Qaeda to cleanse North Hungary ate fresh tensions with Africa of French and Span- on the defensive early in Russia. The coalition’s ish citizens. The state GPRI 79 its second term, mainly effectiveness will be hin- has struggled to improve because of its proposal dered by its very slim Government weakening security, but new terrorist for a new constitution. In majority in parliament and techniques have caught The public-funds scandal addition to sparking public the presence of a strong security services off guard. involving the Socialist controversy, the proposed and united opposition. Party has now eroded constitutional process Likely Prime Minister Yulia China public trust in the govern- poses a more mundane Tymoshenko, who has ment and could damage problem for Turkey: it previously been unpopu- GPRI 65 Prime Minister Ferenc could become a major lar with Moscow, could Gyurcsany. Janos Zus- distraction, reducing the Hu makes modest gains raise new tensions in the chlag, a former Socialist time and political capital Russia-Ukraine bilateral At the 17th Party member of parliament, or available for other impor- relationship, particularly Congress in late October, MP, was arrested for the tant reforms. over the gas trade. a reshuffle of China’s top embezzlement of public party members tipped the funds used for Hungarian political balance in Presi- Socialist Party campaigns dent Hu Jintao’s favor. Of from 2002 to 2003. Other course, Hu will continue to high-profile Socialist MPs share power with other fac- may be implicated as well. tions in the all-important Gyurcsany will try to use Politburo Standing the events to reform party Committee, but the Party and campaign financing, Congress elevated more scrutinize MP’s income

Legend: Positive change Negative change No change

politics and the markets 3 The Outlook Key issues and possible outcomes for the coming month. country GPRI* outlook what to watch for Algeria 57 Government agencies will continue trying to manage the security situation and assuage concerns about long-term instability. Argentina 64 New problems are likely to emerge in the electricity sector as demand increases due to summer air-conditioning usage. Brazil 66 Congressional renewal of the financial transaction tax, or CPMF, set to expire in December, will not be easy. Bulgaria 70 Political parties will be consumed with the aftermath of local elections in October. China 65 Hu will pursue his socially and environmentally conscious agenda with a stronger hand. Colombia 58 The ruling U party will begin to collect signatures to trigger a referendum and help President Uribe run for a third term. Egypt 61 International financial institutions praise Egypt’s economic policies, bolstering Prime Minister Ahmad Nzif’s government. Hungary 79 The scandal surrounding MSZP’s involvement in embezzling public funds will continue to weaken the government. India 62 Uncertainty over the India-US nuclear deal will continue until the multiparty panel concludes its deliberations. Indonesia 56 PKB, PDIP, Golkar and PAN may unite in the 2009 elections, but this unity does not yet pose a threat to President Yudhoyono. Iran 51 Iran’s defiance regarding its nuclear program and its meddling in Iraq will expose it to external pressure. Mexico 68 A likely legislative consensus on how to choose new electoral authorities will improve trust for future elections. Nigeria 47 The judicial invalidation of some controversial gubernatorial races from April 2007 elections will revive opposition parties. Pakistan 45 President Musharraf will cooperate with Benazir Bhutto, despite court challenges and opposition criticism. Philippines 57 Recent controversies surrounding President Arroyo will decline, but her lame-duck status is cemented. Poland 75 The promarket Civic Platform will form a stable parliamentary majority coalition and improve regional relations. Russia 63 With party lists set, campaigning will begin in earnest for the Dec. 2 State Duma elections. Saudi Arabia 55 Independent commercial courts may curtail the influence of sharia judges over business transactions. South Africa 64 The rule of law is tested by the suspension of and inquiry into the director of public prosecutions. South Korea 77 Scandal and a consolidation around a single progressive candidate will diminish Conservative Lee Myung-bak’s presidential lead. Thailand 60 The king’s recent hospitalization will raise speculation about his health and the country’s overall stability. Turkey 66 The government’s failure to make a dynamic start in its second term in office will cause continued distraction. Ukraine 55 The new coalition government will take shape but will be weakened by strong opposition in parliament. Venezuela 53 The government will ramp up social spending to build support ahead of December’s referendum on a new constitution.

Legend: Positive outlook Negative outlook Neutral outlook *The GPRI, which is produced by Eurasia Group, measures a country’s ability to absorb political shocks. The higher the number, the more stable the country.

Citi Private Bank has retained Eurasia Group to offer political analysis and insight. The opinions expressed in this report are solely those of Eurasia Group and do not necessarily reflect the opinions of Citi Private Bank or other business units of Citigroup Inc. Eurasia Group developed the first qualitative comparative political-and-economic-stability index, which Citi Private Bank has licensed, called the Global Political Risk Index, or GPRI. The index is designed to measure a country’s ability to absorb external or internal political shocks. Although the timing of such events cannot be predicted, the GPRI is meant to gauge how well particular nations would be able to withstand them.

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