POLITICAL RISK
system that lent itself to massive corruption. As global prices rose bakers resold subsidised flour and bread into the black market, where they could get five or more times the subsidised rate, pushing up the price of bread for consumers. The US contributed to the “democracies of bread”
through the provision of cheap wheat. Egypt’s Hosni Mubarak was the main recipient along with Iraq’s Saddam Hussein who received billions of dollars’ worth of surplus American wheat through grants and loan guarantees during the Cold War, while Jordan, Yemen, and other Middle Eastern countries got lesser amounts. The funding of this ‘social safety net’ was seen as a cheap way of keeping friendly regimes in power. This cheap wheat was to come at a high price, with
long-term repercussions; lack of investment in domestic agricultural production and a dangerous dependence on cheap imports from overseas. Bread subsidies also failed to lift the recipients out of poverty. The Middle East is the only region outside sub-Saharan Africa where the number of malnourished people has risen since the early 1990s with Egypt and Tunisia experiencing declines in the standard of living for all income groups outside of the top 20%, despite rises in GDP. In 2008 when the price of bread soared, a wave
of bread riots broke out across the MENA region. Governments intervened by raising wages, cash handouts and increased subsidies. These were short term remedies that proved unsustainable and had the unintended consequence of making more people dependent on subsidised bread. Over the next two years a combination of factors – changing consumption patterns among the developing
Political Risk Premium for Energy Commodities
Politically charged events in energy producing countries or risks to energy transit routes, have an important influence on perceptions of supply availability and on oil & gas commodity prices. Russia, which supplies 44 percent of the natural gas imported by the European Union, has sent shockwaves through the energy markets on an annual basis, as Moscow uses its vast energy reserves to exert control over former Soviet bloc states.
Disagreements
between Russia and Ukraine over gas supply and charges in January 2009 resulted in supply disruptions in many European nations, with eighteen European countries reporting major drops in or complete cut-offs of their gas supplies transported through Ukraine from Russia, sending gas prices soaring.
Likewise, in December 2011, the political confrontation with Iran and efforts by the international community to put pressure on the Iranian government to stop its nuclear programme through an embargo on sales of Iranian oil caused a two percent rise in oil prices. Iran responded by threatening to close the Strait of Hormuz, the transit route for one third of globally traded oil. While any closure of the Straits could be expected to last a few days at most, due to the capabilities of western navies, Tehran’s rhetoric sent shockwaves through energy markets, causing oil prices to rise.
world’s middle class, drought, poor harvests, bio fuels and export embargoes - pushed food prices to an all- time high. The United Nations’ Food and Agriculture Organisation announced in early 2011 that food prices had surpassed 2008 levels. The regimes in the region responded in the way
they always had – with subsidies. Egypt, Yemen and Jordan increased food subsidies, Algeria, Tunisia and Morocco lifted customs duties and import tariffs on food, while Saudi Arabia unveiled a multi-billion dollar spending plan. Paradoxically, grain subsidies, like export embargoes and price fixing, actually push up the cost of bread overall. Subsidies create inelastic demand for a product when in normal market conditions demand rises and falls in response to prices. States that use food subsidies as a device
to maintain political control
are contributing to high prices that are causing malnutrition and food shortages in other areas of the world. While
these environment in trends created
the which the Arab
uprisings occurred, it was the self- immolation of a Tunisian vegetable seller, Mohamed Bouazizi, in protest at the confiscation of his wares and the humiliation inflicted by officials that provided the trigger. He became a catalyst for the Tunisian Revolution that was the inspiration for protests in several other MENA states. The uprisings impacted commodity
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