Insight and Analysis

July 2017

By Tamar Gegechkori

Georgia, located in the South Caucasus region on the East Coast of the Black Sea, has been steadily emerging on the international stage. The country is becoming more and more attractive to outside investors due to its strategic location at the crossroads of Europe and Asia and the potential to become a unique regional hub for both East-West and North-South transits.

The EU/Georgia Association Agreement, which went into force in July 2016 helped propel this development further and has increasingly introduced Georgia as a strong destination for large foreign investments. The agreement provided foreign access not only to Georgia’s internal market of four million residents but also to a wider regional reach as a direct result of the new absence of customs and import tariffs. Since withdrawing from the Commonwealth of Independent States in 2008, Georgia now has access to a market of 900 million people through a number of bilateral and regional Free Trade Agreements (FTAs) and Generalized Trade Preferences (GSP) regimes, including with the United States, Canada, Japan, Norway, and Switzerland.

As international investors consider their market entry strategies in Georgia, four key sectors are seen as being of particular interest due to their recent reform and development as well as the Georgian government’s efforts to facilitate their growth:

Energy

The Ministry of Energy of Georgia is making concerted efforts to transform the country’s energy sector. Not only is Georgia on a path to becoming an energy exporter, but it is also on track to establish itself as a hub of transmission in the South Caucasus. Seventy-five percent of the country’s energy potential remains underutilized, creating a huge market that with an abundance of untapped hydro resources.

Local consumption has been growing hand in hand with increasing GDP, and with a well-developed transmission grid now in place, the Ministry of Energy is on a constant lookout for foreign investments in hydro, thermal, and wind power plants.

Hospitality

In a country internationally renowned for its generosity towards visitors and where every guest is considered to be a ‘gift from God’, it only makes sense that the hospitality and real estate sectors would become among the leading markets in the economy. The number of annual international visitors has increased six-fold over the past decade leading up to 2015 and is projected to grow by eight to 10 percent by 2020. Georgia has a visa free regime with citizens of 94 countries.

Twenty-two different micro-climates within the country provide an ample opportunity for a wide range of infrastructure and real estate investment–from beach developments to ski resorts and four season retreats. Gaming is also legal in Georgia and the country’s location attracts visitors for these activities, including tourists from Turkey, Russia, Azerbaijan, Armenia, and the Middle East.

Manufacturing

Georgia offers competitive labor and energy costs and with its Deep and Comprehensive Free Trade Area agreement (DCFTA) with the EU as well as its trade agreements with Turkey and post-Soviet countries, the potential for export is considered limitless. The country’s relatively high domestic unemployment rate keeps labor costs low and is extremely attractive to foreign investors, while an abundance of new hydro power plant (HPPs) construction guarantees that electricity prices remain competitive.

Agriculture and food processing

Due to its particular climate, Georgia has a long harvesting season and a wide range of agricultural conditions. This has made Georgia a historically agricultural society with a majority of its population living in rural areas. The country has a strong reputation as a source of healthy and quality produce and consumer goods.

Agribusiness accounts for 9.2 percent of domestic GDP and 17.5 percent of trade volumes. The Georgian government encourages investment through grants of up to $USD 250,000 (maximum 40 percent of project value) through the Georgia National Agriculture Projects Management Agency (APMA).

Opportunities for investment in Georgia span a wide range of market sectors. In particular, energy, hospitality, manufacturing, and agriculture have enjoyed a strategic importance for this developing country with high hopes for closer relations with the West. With strong support and encouragement by the Georgian government for foreign investment, global firms are increasingly considering opportunities to enter the Georgian market.

Sally Painter joins Atlantic Council delegation at Baltic Forum in Latvia

June 2017

By Jeremiah J. Baronberg

When it comes to relations between Russia and the West, the debate over whether, and how, to engage with Russia has ebbed and flowed over the years.

While bilateral engagement between Russia and the West has occurred at the government level, and with varying degrees of success, perhaps less well-known have been nongovernmental "Track II" diplomatic efforts to open new channels to bridge the gap between Russia and the West by enabling opportunities for cooperative dialogue and increased understanding.

In the midst of rising tensions between Russia and the West, the annual Baltic Forum in Latvia has institutionalized this form of regular dialogue aimed at promoting trust between Latvia and its allies in the Baltic region together with attendees from Russia, the European Union, and the United States.

This year, high-level delegates from policy institutions, academia, media, the private sector, and government officials met together in Riga to discuss a range of topics, including security and economic issues such as nuclear arms reduction, combatting terrorism and narcotics trafficking, infrastructure development, relations in Asia, and the conflicts in Syria and Ukraine, among others.

Sally Painter joined an official delegation this year sent by the U.S. Atlantic Council, led by former Member of Congress The Honorable Ellen Tauscher, Ambassador John Herbst, and Damon Wilson. Former U.S. Ambassador to the Soviet Union Jack Matlock and Igor Levitin, State Council Secretary of the Russian Federation and aide to President Putin also attended, adding a significant dimension and perspective to the gathering.

Without ignoring real differences among those in attendance and the countries they come from, the 2017 Baltic Forum was seen by many of its participants as a particularly unique opportunity to "cushion some of the current tensions" and to gain insight into the views of "the other side." Examples included contributing research and analysis from leading Russian analysts such as Igor Yurgens of the Institute of Contemporary Development, which offer an otherwise unseen window into such views.

While the discussions were not always easy and included a fair amount of controversy regarding the major issues, participants expressed optimism and appreciation for the open, honest, and frank dialogue afforded by the gathering to both tackle and call for effective management of the many critical issues, including differences, facing Russia and the West. 

The Baltic Form itself takes its inspiration from the famous Chautauqua Conferences on U.S.–Soviet Relations of the mid-1980s that were held in upstate New York and in Latvia, which enabled participants to engage in a more relaxed combination of "diplomacy by day and culture by night." The gatherings were credited with helping to relieve tensions and address such difficult issues as the nuclear arms race.

June 2017

By Lucinda Creighton

Ms. Creighton is Former Irish Minister for European Affairs and CEO of Vulcan Consulting, a Dublin/Brussels advisory firm.

As the one year anniversary of the United Kingdom’s decision to leave the European Union quickly approaches, the implications of Britain’s departure are now beginning to materialise. Although Brexit was a blow to the EU, the political fallout envisaged by many has not spread to the remaining 27 members of the Union. This is evidenced by Emmanuel Macron’s recent victory in the French Presidential Election and German Chancellor Angela Merkel’s continued rise in opinion polls. Rather, it is Britain’s economy and particularly its financial services sector that is now facing the harsh reality of life outside the EU.

Britain’s exit from the EU will result in the UK no longer being able to access the Single European market. This means that any UK-based financial services company will lose the EU financial ‘’passport’’ and therefore be unable to sell their services throughout the bloc. The EU passport is the legal mechanism that permits banks and other financial services companies based in one EU country to do business in other member states purely on the basis on their home state authorisation.

With British-based banks and other financial services companies set to lose their financial passport, many are looking elsewhere in the EU to set up subsidiaries or relocate altogether to ensure continued access to the single European market. This poses immense challenges for these international companies but presents lucrative opportunities for rival financial hubs across the EU, such as Paris, Frankfurt, and Amsterdam.

However, it may well be the smaller Irish city of Dublin that is set to benefit the most as several London-based global financial firms view the Irish capital as a highly appealing destination to relocate to.

Already a leading financial hub in Europe, Dublin boasts huge strengths in the administration and management of funds, cross-border insurance, and specialist finance such as aviation leasing and asset finance. As a result, the city is home to almost 250 of the world’s leading financial services firms, including half of the world’s top banks.

Dublin stands above its European rivals as a favoured alternative hub to London for a wealth of reasons. The 90 minute plane journey between the two capitals signifies the geographical proximity of these two financial services hubs. Both have a similar regulatory regime and law-based system. The two countries have strong cultural ties going back centuries and Ireland is the only other English speaking country in the EU–soon to be the only one.

In addition to the favourable tax regime of 12.5% and use of the Euro currency, Dublin is beginning to emerge as the #1 destination for UK-based companies relocating due to Brexit. Already, a number of international firms such as JP Morgan and Barclays are set to increase their presence in Dublin and expand on their workforce. With Ireland on course to be the fastest growing economy in the Eurozone for a fourth straight year, Dublin stands to reap the benefits presented by Brexit and enhance its reputation and position as a leading global financial services centre.

We are already feeling the optimism and buoyancy in Dublin and Brexit is still two years away.

June 2017

By Pero Jolevski

Last Friday, a few hours after President Trump announced that the U.S. would pull out of the Paris climate agreement, Burisma Group, in partnership with the Prince Albert II of Monaco Foundation and Adam Smith Conferences, held a forum in Monaco on Energy Security for the Future: New Vision, Strategy, and Innovation.

Featured participants at the conference included HSH Prince Albert II of Monaco, Deputy Prime Minister of Ukraine Volodymyr Kistion, former President of Poland Aleksander Kwasniewski, former President of Slovenia Danilo Turk, and former Prime Minister of Belgium Guy Verhofstadt. Those attending the conference included European and American leaders from both the private and government sectors, ambassadors, and several global “thought leaders” from nongovernmental organizations.

The discussion ranged from European energy security and global challenges, to innovation in new renewable energy sources. Other presentations addressed investment in a clean energy supply, how best to share knowledge and insights within the transatlantic community, and the many challenges the globe is facing, including China’s growing role in global geopolitics and President Trump’s decision to withdraw from the Paris Climate Accord. Should President Trump’s withdrawal be ratified, the U.S. would become the third country, along with Syria and Nicaragua, to withhold support for this global effort. Participants expressed hope that the U.S. is able to renegotiate terms and rejoin the accord, considered crucial for combatting climate change and key to the success of the initiative.

The forum's participants noted Europe's own challenges too. While acknowledgement was paid to the significance of Russia as a supplier of gas, participants discussed the opportunities to decrease dependence through investment in natural gas production. One example that was highlighted is the fact that the Mediterranean Sea around Greece, Egypt, Cyprus, Israel, Lebanon, and Turkey has the same amount of gas deposits as Norway. In countries such as Ukraine that have deep reserves, the capacity for domestic production should be encouraged using tax incentives to stimulate exploration and production rather than expanding tax and other financial burdens on private sector producers.

In the EU, participants noted a critical need for common energy legislation to boost investment in green energy in all member states. Investment in high capacity batteries was seen as the future for renewables due to energy storage needs. Development and investment in new liquefied natural gas (LNG) terminals was also noted as an immediate option for the diversification of energy supplies. Finally, participants extolled policies such as tax breaks and financial incentives for the development and use of clean energy sources to stimulate the switch to clean power.

Overall, leaders at the conference agreed that establishing priorities and a long-term vision, with possible short term impacts, is crucial for ensuring a sustainable future for the planet.

May 2017

By James Le Grice

This article is a contribution from our UK network partner firm Four Communications based in London.

It’s rare these days to have an election with such a certain outcome.

Such is the current state of UK politics that Prime Minister Theresa May called a snap General Election fully certain that her Conservative Party could substantially increase its Parliamentary majority. Mrs May claims this is necessary to strengthen her hand in the Brexit negotiations; critics call it political opportunism. What is less discussed is that Brexit will require the Prime Minister to make some tough, potentially unpopular decisions on public spending and foreign policy, decisions that will require electoral confidence.

The political opportunity for the Conservatives is historic. The opposition Labour Party is fiercely divided under the leadership of Jeremy Corbyn, a champion of the party’s hard left socialist faction. Corbyn’s views on the role of the state, nuclear disarmament, and combatting terrorism, in particular, have isolated many Labour MPs and party members. Labour’s image has also been tainted over the past year by an anti-Semitism scandal involving members of Corbyn’s faction. This all comes on top of a decline that began prior to Mr Corbyn’s leadership, which saw Labour lose its traditional support base in Scotland to the Scottish National Party (SNP) and support amongst northern working class voters dwindle.

As a result, the Conservatives are enjoying their highest lead over Labour in the opinion polls for nearly a decade. A recent YouGov poll indicated that nearly half of those who voted for Labour in the 2015 General Election could now desert the party. This election could very well mean a reverse of what happened 20 years ago, when Tony Blair won a landslide victory for Labour reducing the number of Conservative seats in Parliament to 165 (versus 418 for Labour, 46 for the Liberal Democrats and 30 for other parties).

The Conservatives have struggled in an uphill battle to regain numbers since this. Even in the 2010 election, when the Conservatives gained an extra 100 seats–their best performance since the 1970s–they still lacked the numbers for a Parliamentary majority forcing David Cameron to enter into a coalition with the Liberal Democrats in order to form a government. The 2017 election could likewise shut Labour out of government for over a decade.

Since Theresa May took over as Prime Minister last July, political commentary has been rife with speculation that she would seize the opportunity and call an early election. Mrs May has always emphatically ruled this out, even as recently as late March.

What has changed? It is perhaps resignation to the unavoidably unpopular decisions that will need to be made to deliver Brexit.

Foremost is the issue of cost. When the Prime Minister revealed her intention to pursue a ‘hard Brexit’, leaving both the Single Market and Customs Union, she negated threats made by EU leaders up to that point that Britain could not remain in the Single Market while rejecting freedom of movement. Since then, attention has turned to the ‘divorce bill’ that EU leaders are demanding Britain to pay in order to leave the EU. This could be as high as €100bn.

For the past month, Theresa May’s government has quarrelled with Brussels over the amount that must be paid and whether trade talks can even begin before the bill has been settled. It appears unlikely that Britain will be able to dodge the bill. Even ex-Prime Minister David Cameron has weighed in to say that the divorce bill needs to be settled before trade talks can begin.

This will come on top of significant longer term costs associated with Brexit, such as extra skills and infrastructure investment to boost business resiliency and the need to fill the void of existing EU funds to the UK. EU agricultural subsidies account for roughly 55 per cent of UK farmers’ incomes, representing a major challenge to the viability of the agricultural sector if this funding dries up. UK universities benefit from around £1 billion a year in EU research grants and Scotland is a significant recipient of money from the European Structural Fund programmes for reducing poverty and social exclusion, boosting skills and increasing employment. Covering the costs of the latter will be a particular priority to counter renewed calls for Scottish independence.

The question of where the money will come from to meet these costs has yet to be answered. It could mean tax hikes, something that Conservative voters will not take kindly to. It could mean increased borrowing, reversing the priority of the past seven years to bring the UK deficit down. Or it could mean very substantial cuts to public spending in other areas. None of these options are vote winners.

Then there is the issue of foreign policy. Theresa May has prioritised Britain’s Transatlantic alliance with the United States as a way of maintaining the UK’s high profile in world affairs post Brexit. Much of the British public have been wary of this due to scepticism about Donald Trump. Supportive words may soon need to be backed up by supportive action. Foreign Secretary Boris Johnson recently said that it would be difficult to deny the U.S. assistance in future airstrikes against the Assad regime and that the Government could take action without a Parliamentary vote. This drew a backlash from MPs.

It is easy to see why so few Conservative MPs were eager to take David Cameron’s job last summer and why those who were quickly gave up the fight. The decision-making that Brexit requires is arguably tougher than any prime minister has faced since Churchill and certainly requires a larger Parliamentary majority than the Conservatives’ current majority of 17. The slim majority currently leaves the Government vulnerable to internal party rebellions and to losses at the next election. By pursuing a large majority, Theresa May is seeking a clear mandate to take decisive and difficult actions and the right numbers to protect the Conservative Party from potential fall-out resulting from those actions.

However, as much as this election’s outcome may seem set in stone, the longer term impacts are less certain. The EU membership referendum caused a political earthquake which saw the majority of the public reject a position advocated by the mainstream political parties. It has also created a situation in which many pro-EU Conservative MPs and Blairite Labour MPs share more in common ideologically with each other than they do with their own parties’ leadership.

Since the referendum there has been speculation over whether a new centrist political party might emerge formed of pro-EU defectors from the Conservative, Labour, and Liberal Democrat parties. That hasn’t materialised yet, but a resounding defeat of Labour in this election could prove to be the catalyst.

May 2017

By Gabriella Ippolito

This April, President of Argentina Mauricio Macri visited the United States for an official working visit with his U.S. counterpart President Donald Trump at the White House. President Macri also met with U.S. Congressional leadership, including Senate Majority Leader Mitch McConnell and Speaker of the House Paul Ryan and gave a public address at the Center for Strategic and International Studies. The topics under discussion included bilateral trade, the crisis in Venezuela, combating narcotics trafficking in the region, and the further declassification of documents relevant to the Argentine military dictatorship.1

President Macri is the second Latin American leader to meet with President Trump, who earlier met with Peruvian President Pedro Pablo Kuczynski. This was a break from the past as typically the first Latin American leader new U.S. presidents meet with is the president of Mexico, which is the United States’ largest trade partner after Canada. Some observers have suggested that this speaks to the fact that presidents Macri and Trump have known each other personally since the 1980s through their business ties. President Macri was accompanied by Foreign Minister Susana Malcorra, Minister of Production Francisco Cabrera, Minister of Energy and Mines Juan José Aranguren, and First Lady Juliana Awada.

The visit was primarily viewed as an effort to strengthen the U.S.-Argentina bilateral relationship, which had weakened during the term of Mr. Macri’s predecessor Christina Fernandez de Kirchner but which was reinvigorated by President Obama’s visit to Argentina in 2016. After their meeting, President Trump called Mr. Macri a “regional leader.” The two presidents issued a joint statement about the “deteriorating situation in Venezuela” and committed to working “closely together to preserve democratic institutions in that country.” In addition, they pledged to strengthen efforts to “combat narcotics trafficking, money-laundering, terrorist financing, corruption and other illicit finance activities” through a recently-established Argentina-United States Dialogue on Illicit Finance and announced a new bilateral Cyber Working Group.

The discussions also touched on tricky bilateral trade issues. Lemon exports, a major production and export sector for Argentina, have been banned from entry to the U.S. for the past 16 years. Before President Obama left office, the two countries had negotiated lifting the ban but President Trump suspended implementation of the rule soon after his inauguration. In their meeting, President Trump said he was “favorably disposed” to unblocking the freeze on lemon imports and on May 1 the U.S. Department of Agriculture announced that lemon imports from Argentina would be permitted into the northeastern U.S. after the current stay expires on May 26, a win for Mr. Macri.

President Macri emphasized the improving economic situation in Argentina and cited recent market-oriented reforms needed for the country’s economic recovery. He focused on key areas for deepening Argentina-U.S. ties in sectors such as agriculture, energy, and technology and expressed confidence that President Trump was interested in this kind of cooperation. He described his meeting at the White House as “amazing” and very friendly and that it gave him “high hopes” for the bilateral relationship. 

While the two countries’ relationship has ebbed and flowed over the years, the apparent success of this visit by Mr. Macri suggests the potential for further opening and deepening of cooperation. Observers will be watching closely to decipher whether the relationship can continue to move in this positive direction.

May 2017

By Rafael Molina

Mr. Molina is a partner with Newstate Partners providing specialised debt management services to sovereign governments and central banks, particularly during times of economic distress.

For one weekend every fall and spring, the International Monetary Fund and the World Bank Group come together in Washington, DC to discuss a variety of topics, including the global economy, financial markets, developments among member countries, and the organizations' initiatives and programs being carried out around the world.

Each member country is represented by its minister of finance and central bank governor, whose governance decisions can have significant consequences for global economic developments. Also in attendance are numerous government officials and technocrats as well as representatives of global banks, think tanks, media, nongovernmental organisations, and other interested observers.

While these biannual gatherings serve many purposes, none is as important as serving as an unofficial barometer of global sentiment beyond what economic data releases and media reports on geopolitical developments may be signalling. These meetings provide a unique opportunity to understand first hand distinct global, regional, and local concerns through “water cooler” discussions with the individuals and representatives responsible for implementing economic policies across the globe.

Officially, the IMF confirmed that global growth is indeed picking up, supported by a rise in global business sentiment and increasing commodity prices. However, the improvement in global output remains fragile and subject to significant financial risks and increasing geopolitical challenges. Maurice Obstfeld, Director of Research at the IMF, cautioned that while global growth forecasts have been upgraded, financial challenges are very global in nature due to rising U.S. interest rates, shifting political forces, and new challenges arising from a combination of global terrorism and adverse weather conditions—all of which require multilateral cooperation to find workable solutions.

Unofficially, technocrats and market participants fretted about the growing fragility in the global outlook in sharp contrast to previous years, citing increasing concerns about the implications of unpredictable U.S. policies beyond the Federal Reserve’s move towards monetary normalisation. There are rising concerns about shifting political forces in the U.S. and a retrograde step away from multilateral cooperation and global international trade. Many officials from emerging economies expressed deep anguish about their ability to deal with such risks in isolation. Multilateral leadership will be required to help mitigate the risks from continued international economic integration.

There also seems to be consensus among emerging market officials that sustainable global growth and international stability require multilateral collaboration across a growing range of challenges, beyond just trade and capital flows. These challenges include financial regulation and supervision, securing international payment systems, dealing with climate change, terrorist activity, and refugee and human rights policies, to name just a few.

Many emerging market governments are already formulating policies to foster domestic economic activity and manage fiscal expenditures in the face of lower revenues and rising debt burdens, in addition to distinct local challenges. However, for many of these governments, the lack of global leadership to tackle growing international challenges may lead to altogether new problems that will be difficult to manage in isolation.

At the moment, there are real concerns that the new U.S. administration may not be prepared to provide the necessary leadership to create coalitions to mitigate the multitude of global challenges that lie ahead. A withdrawal from international trade and the consequent slowdown in global output was seen as a relatively small concern in the mind of many emerging market officials in attendance; more palpable was the fear of potential breakdown in multilateral cooperation, leading to greater economic dislocation and global conflict.

These are likely to be the themes of the discussions that will be in the minds of the governors and attendees of the next annual meetings, which will take place in six months’ time in Washington, DC.

April 2017

By Jeremiah J. Baronberg

Government regulation is increasingly in the headlines in the United States today, as the new Trump administration and Republican majority Congress has made regulatory reform and a key part of its governing philosophy.

As part of this approach, one regulation that was recently rolled back was a 2010 bipartisan Congressional effort to address corruption around the world—particularly in undemocratic and poorer, developing countries—by bringing greater transparency to the impact of international private sector energy exploration.

Named for its Senate co-authors, the Cardin-Lugar amendment was passed under Section 1504 of the Dodd-Frank Act and is known as “Publish What You Pay.” It required any extractive industry company (oil, gas, mining, etc.) listed on the U.S. stock exchange, including non-U.S. firms to publicly disclose all payments, such as taxes and royalties paid to foreign governments for the licenses and permits to conduct energy exploration projects in their host countries— on a project-by-project basis.

Soon after taking office, the disclosure rule mandated by Cardin-Lugar was effectively repealed when President Trump signed a joint Congressional “resolution of disapproval.” This effort was accomplished on strict party lines through a simple majority of 51 Senate votes, rather than the normal 60 needed to overcome a filibuster—by using a parliamentary procedure under the Congressional Review Act (CRA) that allows for the disapproval of a rule within a specified period of time following its adoption.

Inspired by a 2006 resolution introduced by Republican Representative Chris Smith, proponents of Cardin-Lugar argued that its approach was particularly helpful in combating the resource curse or “Dutch disease,” the failure of less developed—and often undemocratic nations—to translate vast mineral wealth into wider prosperity for its citizens. Autocratic leaders in poor countries have essentially been able to pocket royalty and tax payments as part of agreements reached with foreign energy firms that were intended for, though never reached, their states’ public budgets to support wider social development initiatives and infrastructure projects.

By shining a light and following the money, Cardin-Lugar was designed to tackle corruption, waste, and mismanagement and to enable citizen oversight in an arena that was previously beyond its domain. Former Republican Senator Richard Lugar envisioned the law as a means to leverage America’s soft power impact so that U.S. corporations and foreign aid efforts would not be “seen as largely benefiting a corrupt ruling class, but society at large.”

The measure was endorsed by a wide range of U.S. stakeholders, including industry, investors, civil society, and governments. In addition to sparking a global trend towards disclosure, proponents argue that “increased transparency resulting from disclosures required under section 1504 lowers the cost of capital for covered U.S.-listed firms by up to $12.6 billion.” Cardin-Lugar is credited with having spurred a virtuous circle of similar reporting requirements in up to 30 other Western countries, including across the European Union and in resource-savvy places with leading oil exploration firms such as the UK, France, Norway, and Canada. Some laws are even more stringent than Cardin-Lugar, all of which remain on the books today.

Opposing Cardin-Lugar were several major U.S. energy companies and associations, including Exxon Mobil and its former CEO and current Secretary of State Rex Tillerson, who argued that the disclosure requirement was too onerous and would put U.S. firms at a competitive disadvantage globally and that reporting such payments to foreign governments already came under the umbrella of the Foreign Corrupt Practices Act of 1977 (FCPA).

Proponents, including the measure’s co-authors countered that these concerns were largely unfounded and inflated, with many countries now operating under the same or similar disclosure systems, including 84 of the world’s 100 major oil and gas companies.

Outside the United States, energy investment disclosure requirements remain in effect such as for companies with European and Canadian listings and those party to the Extractive Industries Transparency Initiative (EITI) as well as many members of the International Council on Mining and Metals (ICMM).

Still, while the U.S. rule itself was scrapped, the actual Cardin-Lugar amendment and the Dodd-Frank Act remain as law. As a result, the SEC is technically required to re-issue a new disclosure rule to replace the one that has been voided.

However, some observers have doubts that this may actually occur as the CRA requires the creation of a new rule that is not “substantially similar” to the original one.

With the Trump administration and Congress working to overhaul Dodd-Frank, observers will be closely watching the evolving parameters of U.S. leadership in this arena.

April 2017

By Jesica Dobbins Lindgren

As the European Union turns 60 years old this year, both pundits and detractors are looking at the shape and fate of the post-World War II experiment. Now comprising 28 member countries, what we now call “the EU” began with the signing of the two Treaties of Rome on March 25, 1957. One of the treaties, the European Economic Community (EEC), laid the foundation geographically and philosophically for the current framework and ideals of the European Union.

Although most of the EU countries in the decades since World War II have seen unprecedented prosperity, disparities exist and inequalities are widening in some places. What continues to bind them together, however, is the reason for the EU’s creation: the desire to work together for economic and military security against the threat of outside forces, particularly from the East. Yet as EU member countries have sought to integrate and enlarge with the admission of new member countries, the block’s political aspirations and common values are no longer “givens”. 

Perhaps like the Roman Empire itself, whose capital is named in the EU’s founding treaty, critics argue that the European Union has grown too quickly and failed to keep pace with the complex political, economic, and social changes not just beyond the EU’s borders but within its own foundation. To consider that the United Kingdom—a founding EU member and the second largest economy in the bloc—just initiated its withdrawal from the EU, is as much of a shock to the global nervous system as was the election of a reality television personality and real estate baron to be U.S. president. Both events are starkly and profoundly challenging our ways of doing business—and ways of life—but where there is uncertainty, there is also opportunity.

Today the landscape of the EU stretches from the northern tip of Finland near the Barents Sea, to the eastern shores of Romania and Bulgaria on the Black Sea, to the southern Greek isles in the Mediterranean, to the western edge of the continent along Portugal’s rugged coastline. Within those boundaries, the EU experiment continues to strive for peace and prosperity, growth and expansion, and engaging political discourse.

While the EU was not yet envisioned when Irish poet William Butler Yeats penned The Second Coming, his famous lines that “the falcon cannot hear the falconer; things fall apart; the centre cannot hold;” were portentous. Six decades into the EU framework, we are at an inflection point. Whether one sides with the plaudits of the societal successes of EU integration or with EU detractors pointing at the UK’s withdrawal or “Brexit” as an example of the bloc’s fraying edges, we should take stock of what has been achieved to date. Whatever the perspective, the center will continue to hold so long as we value, preserve, and protect democratic institutions wherever they exist.

Despite their imperfections, both the EU and U.S. are experiments in democracy worth preserving and protecting.

The alternative we have seen, and with it, atrocities not to be repeated.

April 2017

By Norman Rozenberg

Around the world, international institutions and regulators are increasingly pressuring global banks to implement tougher measures to govern illicit financial flows and crimes, such as money laundering and financing for terrorism. In response, and particularly in volatile and smaller countries with limited financial markets and where local banks may be unable to meet these requirements, their global bank partners are increasingly cutting business ties with local affiliates and departing the market altogether.

In this trend to “de-risk” by exiting volatile markets, large banks may be exposing host countries to a new category of risks.

First, many economies rely on remittances received through banks from abroad. Global banks act as a middle man for remittances flows by providing dollar-clearing and conversion services for their local affiliates. A massive $1.9 billion fine levied by U.S. regulators on HSBC for failure to comply with anti-money laundering regulations caused many global banks to re-evaluate their presence in Mexico, making it difficult for cash sent by migrant workers to reach their families.

Second, de-risking can reduce transparency in the system by forcing legitimate customers into the informal sector and unregulated channels, where money is not easily tracked and may benefit illicit activities. Hawala, a popular method of transferring money across the Middle East, North Africa, and India, operates outside of government regulations and could move funds for money launderers or even terrorists.

Third, when large banks exit a market, governments and foreign lenders lose important insights from correspondent banks on the ground. These relationships provide a deeper understanding of a nation’s economic and political environment.

Finally, de-risking can also negatively impact a government’s ability to implement effective governance and enforce laws. Without a viable alternative to the shadow economy or the presence of banks with a reputation of transparency backed by multinational financial institutions, consumers and local banks have little incentive to follow the rules.

The de-risking trend underscores a pressing issue for global financial markets. Due-diligence standards, such as Know Your Customer (KYC) put pressure on global banks to demand more of their local partners in terms of client verification. However, local banks may not be able to fully comply due to opaque regulations and lack of government oversight in many of these markets.

De-risking has created significant concern among international institutions and developing countries. The World Bank has placed de-risking at the top of its agenda by regularly convening banking leaders and regulators to come to a compromise in order to help struggling developing countries access the international financial market. A consensus is forming among regulators and banking leadership that a compromise is indeed needed. For example, loosening some AML regulations and providing governance assistance to developing countries may help big banks remain in underserved markets.

Fortunately, it is widely agreed that more cooperation between local stakeholders, government regulators, and global banks is needed to solve a problem that can negatively impact much of the developing world.