Global risk outlook 2004

Regional hot spots

Iraq dominates the risk chart in almost all categories. Political progress has been made there but, starting in 2004, Exclusive Analysis expects the US to withdraw (the parlance will be to ‘Iraqi-ise’ the conflict). The high and rising risk will decrease within the one-year timeframe but only very slowly, since Iraqi-on-Iraqi fighting will continue. The main emerging threat will be Shi’a-on-Shi’a attacks that will bring higher risks to the hitherto more benign environment in southern Iraq.

Saudi Arabia is now making determined and unambiguous attempts to crack down on terrorists but delays in doing this may have a negative impact on effectiveness. The money laundering countermeasures that have been implemented are not yet appropriate to intercept the small quantities needed to mount major terrorist operations.

Land reform in South Africa is a ticking time bomb under the predominantly white farm-owning classes. It is not likely this risk will affect assets in the one-year timeframe but it is more likely in three years. Recent remarks by President Thabo Mbeki in Zimbabwe suggest that he will progressively cave into pressure from the African National Congress’s more militant wing.

Exclusive Analysis is aware that Sunni extremists have attempted to move in on the diamond trade that is dominated by Shi’a Lebanese. The attempt will be repeated and in the coming year we expect that some of the conflict in West Africa may acquire a Christian (South) vs Islamic (North) character, as has already begun in Liberia, Nigeria and to the east in Sudan.

In comparison to the present conditions Exclusive Analysis assesses that the following ‘hot spots’ may lead to risk increases:

Colombia: President Uribe’s anti-terror policies are not credible;

Venezuela: President Chavez faces recall which will lead to civil unrest;

Bolivia: the country’s problems appear intractable and will not be solved by regime change;

India/Pakistan: Exclusive Analysis expects that normal low-level hostilities will resume in 2004 but they will be confined to the border region. Despite India’s relatively benign approach to Pakistan, the former is becoming aggressive over the latter’s policies in Afghanistan, where the presence of Indian troops, particularly if they move to Pashtun areas, will be very explosive. There is no movement of any substance on either side on the main issue of Kashmir;

Azerbaijan: President Ilhum Aliyev will be

challenged and will likely not remain in power;

France: deficit problems will lead to budget cuts leading to civil unrest;

Ivory Coast: the ceasefire will not hold and attacks on property will increase;

Ethiopia: is becoming more belligerent toward Eritrea and limited fighting is likely to ensue; and

United Arab Emirates: extremist networks are active and there is much to offend more conservative Muslims. Exclusive Analysis sees the UAE as the Bali of the Middle East - unaffected by terrorism so far but at risk.

Drivers for the global outlook - the war on terror

There are two players in the global war on terrorism: Sunni extremists and the US. There are several regional wars on terror, in which each side is attempting to be counted as a player. However, in most cases (for example Indonesia) the connection is largely spurious. Shi’a extremists, generally inactive so far, have the capability to join in at short notice if they are provoked in Iran, Iraq or Lebanon.

In relation to its present requirements, the US military possesses a vast surplus of heavy equipment but too few personnel. Current operations in Iraq are very manpower-intensive. Two-thirds of US personnel deployed there ‘consume their own security’ - in other words, their very presence generates bases, logistic facilities, military airports and seaports, all of which need to be guarded as the first priority. Few people remain for more proactive tasks such as guarding newly repaired power stations or oil facilities and even these are essentially defensive tasks.

The need for static manpower explains why the US wants more international participation in Iraq and in the wider ‘War on Terror’ - but extra manpower will not be forthcoming. This leaves only the US National Guard and the Reserves to be called out - but this is expensive and therefore unpopular with Congress and the US public. Exclusive Analysis’ risk-relevant conclusions are mostly negative. Primarily, the situation will force each US soldier, on aggregate, to serve longer and less willingly in outposts in the ‘war on terror’.

Equally interesting will be the consequences of the determination to maintain a peaceful posture on the wider ‘war on terror’. Exclusive Analysis sees no impact should the US confront North Korea militarily. Such a move would require underused naval forces with some air power. Even if there were a doomsday scenario and North Korea collapsed, the task of nation-building would fall to South Korea. Exclusive Analysis has never thought that the US would use ground troops against Iran - doing so now is even less likely. The US will tiptoe quietly away from Afghanistan, leaving it to NATO troops mostly of indifferent quality in such an environment. The task may even fall to a fledgling European force, for which such an initial deployment would represent a challenge. Risks will arise there.

There will also be less appetite for ground operations in places such as Yemen, where Sunni extremists are likely coalescing. Governments in the Philippines and Colombia, who depend on US forces, will likely moderate their anti-terrorism policies if they feel beleaguered and abandoned because the US lacks troops. Political and military, rather than economic factors will constrain US military adventurism. Exclusive Analysis contends that, despite much commentary to the contrary, the US can afford its present levels of security spending.

The US presidential election will probably moderate adventurism in the name of the war on terrorism. Exclusive Analysis doubts that the terrorists are sophisticated enough to exploit this.

On the other side of the coin are the capabilities of Sunni extremists and of the al-Qaeda network. Exclusive Analysis assesses that this network is severely disrupted: Osama bin Laden is most likely dead and the Western/Allied intelligence services are doing a great job. Therefore, Sunni extremist operatives are largely on their own and reliant on their own local networks. This means that ‘spectaculars’ are more likely in other regions - the Middle East, South East Asia and East Africa - than the US or UK. Two such scenarios that cause concern are a dirty bomb attack in Russia and an aircraft being shot down in the Middle East.

Industry-specific risks

Significant risks are inherent in the European Growth and Stability Pact - if it is rigorously enforced. It is more likely that it will be enforced on the smaller countries that are in breach - such as Ireland and Portugal - rather than on the larger countries. Breaches risk fines and, more relevantly, budget cuts. These will be unpopular and are likely to lead to riots, strikes and civil unrest.

Oil production - the key variables

Russia is steadily increasing a reliable supply stream of oil.

West Africa - Chad, for example - is bringing new supplies into the world market but not yet in globally significant quantities.

The Caspian supply is likely to increase in the three-year term unless Armenia and Azerbaijan renew hostilities over Nagorno-Karabakh. This will have no impact in the one-year timeframe. Exclusive Analysis does not share the generally held assumption that the majority of Caspian oil will reach world markets via a variety of western routes. It is just as likely that in 10 years’ time a greater share of Caspian oil, especially gas, may be piped to fuel continued Chinese industrial expansion - particularly in West China.

The major variable is Iraqi oil which, if it came on stream, would have a major impact on prices. Already the production capacity is above pre-Operation ‘Iraqi Freedom’ levels but the ability to ship and pipe it out remains the supply limiter. Pipelines are impossible to defend so, given the nihilist objectives of the anti-coalition forces in Iraq, Exclusive Analysis doubts that Iraqi oil will come on-stream in sufficient quantities to depress the world oil price. The only major improvement is that the Iraqis will quickly learn rapid pipeline repair techniques from the Colombians and the Russians. The benefit of this will not affect world supply

levels, however.

Another cycle of unrest is imminent in Venezuela with the opposition’s attempts to force Chavez into a call-back referendum, which he will resist. As before, the key battle ground will be the labour unions in the oil sector. This will affect global supply and force an upward pressure on price.

The Straits of Hormuz are a trump card for Iran in the unlikely event of a major confrontation between Iran and the US or United Nations over the nuclear issue. It would not take much media attention to generate concern that the Straits could be blocked. Exclusive Analysis takes a different view. First, it expects Iran to be moderate in its approach. Second, it is very confident that the US Navy, if the situation demanded, could suppress and destroy any Iranian assets that threaten the Straits (for example, its Silkworm missiles and only partially functioning Kilo-class submarines).

Acknowledging that oil price forecasting is not its core business, Exclusive Analysis concludes that it does not see any major shock or risk globally coming from disruption to the oil supply.

2004 Olympic Games

The Athens Olympics represent a spectacular concentration of global terror risk. It is a unique opportunity for a range of global terrorist groups to bring their causes to public attention (for example, Chechens on Russians, Tamil Tigers on Sri Lankans, Kashmiri Muslims on Indians, Palestinians on Israelis). Exclusive Analysis is not confident that Greece has been secure in recent months, assumes that perpetrators and planners have already visited the country and is not confident that the security preparations will be adequate - or indeed that the construction will be complete.

Aviation security

There are many weaknesses in airport security. Personnel without clearance still gain access airside, which remains a problem at UK airports; low-grade screening staff are working excessive hours and paying too little attention to the task; and there is no way to communicate concerns between the on-average 14 airport/airline and security staff who come into contact with a passenger before they board.

It is particularly anomalous that much is spent on security at major airports, while at small regional airports, passengers and bags can often be checked in (for example, in Thailand) with very little security at all. These same passengers and bags can then transfer internally, without further checks, to some major routes.

Nevertheless, Exclusive Analysis doubts that another 11 September 2001-style attack is likely in the US or UK, since anti-hijacking measures and shooting down aircraft are more likely to occur before the terrorists could complete the attacks.

The lack of small aircraft security on local airfields remains a weakness in the US, the UK and particularly in less developed regions. Exclusive Analysis notes a number of insecure airfields in Indonesia very near to Singapore.

The greatest threat is from man-portable air defence systems (MANPADS). Exclusive Analysis thinks an attack is most likely to occur in the region where the missile is procured. This suggests that it will be East Africa, the Middle East or Thailand - where there is a ready trade in these weapons.

Simon Sole is director of Exclusive Analysis. He is an experienced intelligence analyst who has extensive knowledge of the Middle East, Central and South Asia. He holds a masters degree in International Relations from Downing College, Cambridge and is a graduate of the Pakistan War College