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After South Stream: a equitable approach to funding Eastern Europe’s energy infrastructure

imageOver the past ten days, there have been two particular positive announcements in respect of the future of energy provision in Eastern Europe.

The first was the commitment issued in the new Ukrainian Government’s Coalition Agreement to work towards instituting a statutory cap of 30% of national energy mix per provider and the second was Russian Government’s confirmation that the South Stream project would be terminated.

In the first case, this will force Ukraine to move away from its dependence on Russian gas to keep the lights on – a factor which has significantly impeded successive governments from pursuing internal reforms without first obtaining “permission” from Moscow. Russian gas will remain an important component of the country’s energy mix – but not the only component. In the latter, the cancellation of South Stream will ensure that the Kremlin is unable to mask an aggressive attempt to expand political influence in Eastern in the form of pipelines. The short term, negative impacts upon Bulgaria and Serbia – the two states who had counted upon receiving economic benefits from the scheme – would easily have been negated by the consummate loss of sovereignty and economic latitude incurred by the presence of hundreds of kilometres of expensive, a Russian-owned infrastructure on their territory.

With the Ukrainian and South Stream developments in mind, my mind was drawn to the positive case of the new Liquid Natural Gas (LNG) terminal that stated operating in Lithuania in October. As news reports explain, the terminal gives the country the ability to import “up to four billion cubic metres of gas per year from sources like Norway’s Statoil – well above the 2.7 billion cubic metres it bought from Russia last year… [leaving] extra capacity for its Baltic neighbours Latvia or Estonia”.

In effect, this development has broken Russia’s stranglehold on energy provision to the entire Baltic region and ensured stability of supply going forward.

While the Baltic states have now been EU members for a decade and possess the financial resources to make such a policy a reality, this is not the case elsewhere. In Ukraine, Prime Minister Yatsenyuk has already expressly outlined his desire to see the construction of a similar facility in the Black Sea port of Odessa that could provide for 10 billion cubic meters of gas annually (roughly a third of Ukraine’s current imports from Russia). BP, Total and Kogas have already expressed their willingness to send supplies to such a terminal but, despite talks between Ukraine’s Government and Spain’s Enagas, the funding for the project has yet to be signed off.

The time has now come to consider how crucial infrastructure projects such as the Lithuanian LNG terminal, as well as the physical pipeline infrastructure required to bring gas to business and domestic customers, can be financed. It is clear that the national exchequers – whether in Sofia and Kyiv – will not have the means to provide this.

The United States and Western Europe need to be both serious and realistic about energy supply issues. That requires a financial commitment.

As such, it is crucial that the United States and Western European countries concerned with securing the geopolitical reorientation of fragile states such as Ukraine pool financial resources in order to provide low-cost loans or securitisation guarantees for strategically-important energy projects – the Odessa LNG terminal being one such example.

Rather than allow funds to be lost in an inefficient black hole of poorly-defined and weakly-administered European Union funds, it would be my proposal that a specially ring-fenced fund be independently and expertly administered by the European Bank of Reconstruction and Development (EBRD). The EBRD could have a role in both providing loans for the actual construction of infrastructure or, in cases where the private sector was able to offer loans at a more preferable rate, securitisation guarantees to give lenders peace of mind. Loans could additionally be matched with contributions from national treasuries or the private sector.

Part of the appeal for many states of Gazprom’s proposed South Stream projects was the infrastructure benefits they would bring. A new form of EBRD loan that offers the prospect of infrastructure gains without Moscow’s political preconditions would be a tangible and attractive solution that guaranteed the continuation of the region’s democratic pro-western reorientation.

Moldova’s parliamentary elections: what the results mean

imageThe results of yesterday’s Moldovan parliamentary elections are now in. Here are some initial observations about the results and what they mean for internal governance and the country’s future political orientation.

Pro-Moscow Socialists set to be largest party in Parliament – On the basis of initial numbers, it appears that the pro-Kremlin Socialist Party of Igor Dodon will be the largest group in Parliament. Dodon, whose campaign posters featured images of Vladimir Putin and made explicit pledges to rip up the Association Agreement with the European Union, will be heartened by his showing – but his politically toxic nature makes him irrelevant to the governing process.He has no scope to form a coalition and will, instead, sit in splendid isolation.One thing to watch, though, is the Socialist Party’s strong performance in the capital city Chisinau where they captured up to a third of the vote in some districts. Civil unrest at the hands of Socialist supporters cannot be ruled out.

…but continuation of pro-west coalition likely – Put simply: they’ve got the numbers to make it work. Overall, a coalition of the PLDM (Liberal Democrats), Liberals (PL) and Democrats (PDM) will have a three or four seat majority in the 101-seat Parliament on the basis of a 56% turnout. The government won’t enjoy an overwhelming majority in Parliament but, given the politically polarised, east/west nature of politics in the country, it ought to be stable.While nothing can be ruled out, an MP elected on a PLDM ticket is unlikely to suddenly discover an affinity for Dodon’s policy orientation, even if they dramatically fall out with Filat and Leanca.Furthermore, when it comes to hugely contentious votes, the coalition may even be able to extract some concessions fromVoronin’s Communists – a move that would guarantee the easy passage of legislation.

No role for Vladimir Voronin or the Communist Party – In the early stages of the vote count, it appeared as former President Vladimir Voronin’s Communist Party would come in second behind Igor Dodon’s Socialist Party. Despite the rather arcane name of his political party, Voronin and his political movement represent a more nuanced strain of pro-Russian thought than Dodon’s Socialists – favouring reform of the European Association Agreement to allow Chisinau greater energy links and agricultural export ties with Russia than presently envisaged.On a policy level, Voronin is very much a man of the left but has long since left Marxism behind; retaining the “Communist” label in order to appeal to elderly voters for whom the name still holds some attractions. Given the cordon sanitaire that exists between Dodon and pro-western parties, a second-placed finish for Voronin and his party may have seen the creation of a bizarre coalition of Communists and pro-western parties, forging a government under his leadership.In the end, results put Leanca and Filat’s Liberal Democrats in second place – and pole position to form a government.Having been a fixture of Moldovan politics since the late 80s, will the ageing Voronin now retire?

Gagauzia looks east – and to an uncertain future – Having suffered months of provocation at the hands of a Moscow-funded public relations campaign designed to sow ethnic tensions between the ethnic Turkic Gagauz community and the country’s majority ethnic Romanian community, it was no surprise to see the area strongly align itself with pro-Russian parties. Igor Dodon’s Socialist Party got their best result in the country here, capturing roughly 60% of the vote.In contrast, the ruling Liberal Democrats – who are on course to lead coalition negotiations – scored less than 2%.

The depth of the polarisation between Gagauzia and the rest of Moldova puts the region precisely where Moscow wants it. Following a bogus referendum earlier this year in which the Gagauz were asked to express a preference for either EU or Eurasian Union membership, Russian Foreign Minister Sergei Lavrov delivered a rather predictable meme about the wish for Moscow to defend the right of “self-determination” in the region.While it is unlikely that Russia would send troops onto Moldovan territory in order to push its point, Gagauzia will continue to be placed under the most intense pressure in the coming months as both Moscow and Chisinau seek to curry favour with its residents.

Quite apart from any external meddling in the province by Russia, the Moldovan Constitution is clear that the status of Gagauzia would be reviewed in the case of the country opting to alter its “neutral” state and adopt EU or NATO membership. This issue is only just beginning to heat up – but may become one of the major foreign policy questions in Eastern Europe in 2015.

…while the diaspora looks west – Unsurprisingly, Moldova’s largest diaspora communities overwhelmingly favoured pro-western political parties. These voters, after all, have the most to gain from visa liberalisation measures and the prospect of ultimate European Union membership.Nationally, the combined vote for the incumbent pro-west coalition stood at roughly 60% while it was close to 90% amongst diaspora voters.Pro-Russian parties captured around 10% of the vote, which much of this likely to have come from Moldovans working in Russia that fear the implications of the country’s pro-western shift for their future job prospects.

Moldova’s general election – “do or die” time for pro-western forces

imageVoters in Moldova are today heading to the polls to vote in the most important general election for the country since the collapse of the Soviet Union.

Despite the country’s small size, the poll is arguably also the most important one to take place in any European country since the outbreak of Euromaidan movement in Kyiv in November last year.

While the identity of particular leaders and portfolios they secured may have been decided in Presidential and Parliamentary elections in Ukraine earlier this year, a pro-western political orientation was assured by all the major candidates. This is not the case in Moldova, where political debate is split down the middle between pro-western parties favouring closer ties with the European Union and powerful, Moscow-aligned factions that favour signing up to the Eurasian Customs Union.

Opinion polls in the country show a lack of faith in the west or Moscow. The final pre-election poll conducted for the International Republican Institute showed, if given the choice between EU membership and Eurasion Union membership, 46% would side with Brussels and 42% with Moscow. 31% support membership of NATO and 31% are opposed.

Going into Election Day, polls showed a painfully close race with the pro-west coalition of the Democratic Party, the Liberal Democratic Party and the Liberal Party fairly finely balanced with the pro-Moscow Communists and Socialists.

For those who favour Moldova’s pro-western path and wish to see the current governing coalition returned to office, this is a “do or die” moment.

imageThe issue motivating Moldovan voters are predictable. 34% mentioned tackling unemployment as a key factor, 32% cited corruption and more than half combined (52%) mentioned low incomes, high prices, inflation and poverty. It is for voters to decide whether Moscow or the west has the solutions to these challenges

Fuelled by the groundbreaking political orientation taking place in Ukraine, there is both the appetite and willingness to see Moldova complete the same journey. Western decision makers are wisely not making the same mistake as they did following the abortive Orange “Revolution” in Ukraine in 2004, where initial, grandiose promises from the EU and Washington DC were not matched by practical political support measures such as development loans (40% describe the poor quality of roads as “the” key issue facing their town or village) and visa free facilitation.

Despite the ongoing Russian occupation of the Transnistria province in the east of the country, western decision makers have abandoned their usual timidity towards Russia and instead worked with Prime Minister Iurie Leanca and his predecessor Vlad Filat to sign the initial chapters of an Association Agreement and Deep and Comprehensive Free Trade Agreement (DCFTA). They now await implementation.

The risk to the continuation of Moldova’s political reorientation comes in the form of former President Vladimir Voronin’s Communist Party or Igor Dodon’s Socialists. Both men favour a radical departure from the government’s current path, with Voronin wishing to renegotiate some provisions of the Association Agreement and DCFTA related to energy supply and anti-discrimination measures while Dodon would readily abandon it in its entirety.

imageThe Moldovan Government rightly moved last month to shut down transmitters carrying broadcasts from Russian-based television networks which were aimed at spreading conspiracy theories and suspicion about developments in Ukraine and the west’s motivations in Eastern Europe. Domestic Russian language networks funded from Moscow do, however, continue to operate from within Moldova and have pursued a strongly pro-Dodon editorial line.

Russia has also been pursing an aggressive programme of misinformation amongst the country’s ethnic Turkic Gauguz minority, alleging that closer EU links would lead to Moldova federation with Romania and the loss of their minority language and education rights. These charges are entirely baseless, yet have been exacerbated by an unofficial referendum held in Gauguz areas rejecting western ties funded by Yuri Yakubov, a close associate of the Russian Defence Minister Sergei Shoigu.

Shoigu’s tactic of seeking to unsettle ethnic minorities in former Soviet states and politically pit them against the “ultra-nationalist” majority population while positioning Moscow as the guarantor of their rights is nothing new. Indeed, he has successfully implemented similar manoeuvres in the Georgian provinces of Abkhazia and South Ossetia and Ukraine’s Donbas. Regrettably, it appears have been a success in Moldova and an overwhelming proportion of ethnic Russians and Gauguz will back the Socialist Party.

Despite the campaign of lies and misinformation being waged from Moscow, pro-western sentiment remains strong.

47% believe that Moscow is to blame for the blockade of Moldovan agricultural exports to Russia, while 18% believe the problems originated in Chisinau. In response to the trade embargoes, 44% believe Chisinau should seek alternative markets for the country’s goods while 37% believe the government should reason with Moscow to reopen markets. Only 12% favour aligning Moldovan foreign policy with that of Russia in order to reopen trade routes.

imageOn the issue of occupied Transnistria, Moldovans remain bullish. 60% see the territory’s future as integrated with Moldova with no special autonomy, while 15% would grant the region autonomy in order to bring it back into the fold. Only 8% wish for it to join the Russian Federation.

The choice Moldovans need to make today isn’t, in either case, an easy one.

The pro-western path offers few immediate, tangible benefits to the country other that opaque promises such as visa-liberalisation and the prospect of free trade in a country that has few exports of any value. The vision advocated by Voronin and Dodon would, for sure, see the immediate delivery of higher pensions and lower energy costs funded by Russia – but with no long-term certainty and at the cost of the country’s political and economic independence in the future.

If, as I hope, pro-western forces prevail, the closeness of the result should be seen as a wake-up call to all those in Brussels and Washington DC who have for too long been intransigent when it comes to the future of Moldova. We need to match Moscow’s incentives with promises of actual progress rather than just theoretical treaties.

When it comes to building trade and political links with Chisinau, it’s time to hit the accelerator.

Ukraine’s Coalition Agreement and energy security: a step forward for investment and independence

gasssI have just had a chance to sit down and have a glance over the Coalition Agreement signed on Friday afternoon between the political movements of President Poroshenko, Prime Minister Arseniy Yatsenyuk and three smaller parties in order to form a new Ukrainian Government.

The challenges for the new government are many and numerous – from implementing wide-ranging political reforms in order to guarantee the independence of the country’s governing structures from Russia to rebuilding the country’s shattered economy.   The challenge that appears to have gained the most attention over the past months has been that of ensuring energy security.

In this respect, the Coalition Agreement strikes a pragmatic and reasonable tone: recognising the necessity of importing energy from external sources (read: Russia) alongside the need to put in place a framework that reduces over-reliance upon individual suppliers and reforms designed to ensure the right kind of regulatory framework is in place to provide for competition and investment in the sector.

The whole document can be read here but there are some particularly noteworthy segments that are worth paying particular attention to.

1.1.1 – “Conducting comprehensive NAK Naftogaz restructuring and GTS operator certification in order to separate natural gas extraction, transportation, storage and supply activities and provide transparent and uninterrupted access to gas transportation infrastructure” and 1.1.3. – “ensuring natural gas transportation and distribution separation from other activities conducted on gas market”

This step will provide for the separation of the country’s gas supply and gas extraction sectors, reducing the power of either entity to pursue policies designed to either favour or disadvantage particular sectors.  By separating the two functions, it will be far more difficult for corruption in the energy sector to flourish in comparison to the single supplier/extractor model which was hugely vulnerable to malign political intervention.

2.1. – “Gradual cross-subsidizing elimination (multi-level tariff system) by setting prices and tariffs for all consumers, including population, on commercially grounded level at the same time shifting to targeted subsidies to vulnerable layers of population… Imposing, by law, moratorium on offering new reduced electricity and gas prices and tariffs for certain industries and consumers”

A sensible move that ensures the central government is not able, as it was during the Yanukovych era, to target unreasonable subsidies at businessmen and business sectors favourable to the President and his cronies, while still protecting the ability of the country’s many millions of poor and elderly citizens to receive energy supplies at favourable rates.

3.1.“Ensuring, by passing respective law, energy industry regulator’s independence in accordance with Third Energy Package requirements to ensure relevant level of transparency on monopoly markets and effective monitoring of compliance with competition rules”

A clear statement of intent that the government will seek to integrate the country’s energy markets with those of the European Union.  While the Third Energy Package is far from perfect, it is the regulatory framework with which the twenty-eight EU member states must work with and the background to the bulk of strategic investment decisions that are taken.  If Ukraine’s large energy sector is to continue growing and achieve its full potential, it will need to be compatible with the EU’s own regulatory framework in respect of both energy and financial regulations.  This brings it closer to that goal.

3.4.“Performing inventory of oil and gas extraction industry joint activity agreements with state companies’ participation and performing comprehensive audit of subsoil use licenses application by both state-owned and private oil and gas extraction application in order to cancel those licenses that are not fully applied in terms of work program execution”

A sensible piece of due diligence that ought to ensure that contracts previously awarded on corrupt terms are terminated.  This could also bring significant benefits in respect of the country’s overall tax-take, with the true value and profitability of certain contracts finally bring brought out into the open.

4.1. – “Ensuring fiscal regime stability and permanence for hydrocarbon production industry to attract significant foreign investments under Tax Code of Ukraine” and 5.1.2. – “Formalize, by law, exhaustive list of the reasons for suspending or canceling licenses, as well as natural resources explorer’s priority right on production… simplification of land allocation procedure for the purposes of geological exploration activities, field development and completion, laying pipelines and power lines… increasing initial license price calculation transparency, namely introducing diversified approach depending on the target work designation (exploration or production), geological data reliability degree (reserves or resources) and type of deposit depending on the difficulty of production (conventional or unconventional)

These provisions are all about stability and ensuring investor confidenceUnder the Yanukovych, Yushchenko and Kuchma Presidencies, there was a “make it up as you go along” approach towards issues such as the awarding of licences for energy exploration (or indeed anything else), while taxation arrangements were left purposefully opaque.  This should provide international businesses wishing to invest in Ukraine with greater confidence that their operations are on a solid legal footing, as opposed to being personal cash cows for politicians.  The requirement for greater use of data and assessments when identifying areas for energy exploration and production should also be welcomed.  How, after all, is it possible for the state to extract or plan for appropriate tax revenues from energy producers if statistical data as to the likely amounts of deposits does not exist? 

7.1. – “Increase gas import from EU by increasing North-South European gas transportation corridor technical capabilities

This is little more than a restatement of the new government’s general geopolitical reorientation away from Russia and pursuit of stronger links with European Union countries.  The expansion of North-South gas corridors ought to allow for Ukraine’s state gas firm Naftogaz to more easily receive supplies from more reliable partners such as Norway’s Statoil, as opposed to being solely reliant upon Russian gas.  This does not appear to be an attempt to replace Russia as a supplier (which is, regrettably, impossible) but a move towards diversification.

7.3. – “Gradual implementation of the requirement that the amount of natural gas, oil/oil products and coal import to Ukraine by a single source cannot exceed 30%”

Pure common sense.  For too long, Ukraine has been far too reliant upon Russia for its energy supplies.  While part of this is a legacy of the Soviet Union, in which central planning procedures did not foresee the need for Ukraine to be anything other than reliant upon neighbouring Russia for its energy, Moscow has actively disincentivised Ukraine’s post-independence leaders from pursuing this path via a mixture of providing cheap loans for public spending and making explicit political threats.   The result of this reliance upon Russia as a single energy supplier has made Ukraine, a country of 45 million, economically and politically dependent upon Moscow while Georgia, a country with a tenth of the population, has been far freer due to its pursuit of hydro-electricity projects independent of Kremlin interference.   Mandating, by law, that no one single source can provide for more than 30% of a certain energy type ought to provide the government with the benefits of both political independence and free market deal-making.

Subverting democracy in Ukraine: full list of pro-Kremlin “election observers”

imageTomorrow, the terrorist-controlled “Donetsk People’s Republic” (DNR) and “Luhansk People’s Republic” (LNR) in Eastern Ukraine will hold “elections” supervised by the Russian military. The outcome of the polls is not in any doubt: the rigged ballots will show overwhelming support for Vladimir Putin’s plans to dismember Ukraine and undermine its viability as a state.

Rather predictably, Putin’s pro-western allies have managed to cobble together a quixotic rag-bag of communists, racists and fascist hard-liners in order to attempt to give the “elections” a whiff of credibility. An “election” observation mission has been organised by Luc Michel, a hard-line Belgian fascist who is leader and founder of the notorious Parti Communautaire National-Européen and a former member of the neo-Nazi Fédération d’action nationaliste et européenne. Over the next few days he will, however, masquerade as the head of a pro-Kremlin front group called the Eurasian Observatory of Democracy and Elections (EODE).

A friend in Ukraine has passed me the full list of EODE’s “observers”:

  • Frank Abernathy – EFS Investment Partners LLC (USA)
  • Fabrice Beaur – Parti communautaire national-européen (extreme right/National Bolshevik) / EODE (Belgium)
  • Fabrizio Bertot – Forza Italia and former Member of the European Parliament (Italy)
  • Anatoliy Bibelov – “Parliament” of South Ossetia” (Russian-backed separatist movement occupying the South Ossetia province of Georgia)
  • Aleksandr Brod – Civic Control Association, a pro-Kremlin front group (Russia)
  • Frank Creyelmam – Vlaams Belang (Belgium)
  • Stevica Dedjanski – Centre for International Corporation (Serbia)
  • Aleksey Didenko – Liberal-Democratic Party of Russia, controlled by Vladimir Zhirinovsky (Russia)
  • Vladimir Djukanovic – Serbian Progressive Party
  • Jaroslav Doubrava (Czech Republic)
  • Márton Gyöngyösi – Jobbik (Hungary)
  • Vladimir Krshlyanin – Movement for Serbia (extreme right)
  • Georgios Lambroulis – Communist Party of Greece (extreme left/Stalinist)
  • Viliam Longauer – Union of Fighters against Fascism (Slovakia)
  • Max Lurie – Curson Info, a Russian language website (Israel)
  • Alessandro Musolino – Forza Italia
  • Manuel Ochsenreiter – Zuerst!, a far right magazine (Germany)
  • Slobodan Samardzija (Serbia)
  • Jean-Luc Schaffhauser – Rassemblement bleu Marine (France)
  • Georgi Singalevich (Bulgaria)
  • Ewald Stadler – Die Reformkonservativen and former Member of the European Parliament (Austria)
  • Adrienn Szaniszli – Jobbik (Hungary)
  • Magdalena Tasheva – Ataka, controlled by Volen Siderov (Bulgaria)
  • Srđa Trifković (USA)
  • Aleksandr Yushchenko – Communist Party of the Russian Federation (ultranationalist/Stalinist)
  • Sotirios Zarianopoulos – Communist Party of Greece (extreme left/Stalinist)
  • Ladislav Zemánek (Czech Republic)
  • Aleksey Zhuravlyov – Russian Motherland (extreme right)

It would not be an exaggeration to say that the individuals above are guilty of giving succour to the activities of terrorists. Both the DNR and LNR are guilty of both the forced expulsion of ethnic Ukrainians opposed to the Russian occupation of the east of their country and attempts to overthrow a democratically elected government by violent means.

While some of the above individuals belong to political movements that can already be considered persona non grata, the list also includes representatives of “respectable” and “mainstream” political movements.

I have forwarded the above list to Members of the European Parliament suggesting that the individuals in question are barred from entering EU premises. In the case of several of the above individuals, I am aware of them having attended or had involvement in parliamentary events in Brussels – something which should not be permitted in future.

Do share the list as widely as possible.

Dilma Rousseff re-elected: a missed chance to tackle corruption, cronyism and economic malaise

anev

Yesterday evening, Brazilian President Dilma Rousseff was re-elected to a second term in office. In a close race, the Workers’ Party incumbent defeated the pro-business Senator Aécio Neves by a 51.64% to 48.36% margin.

Amidst the Workers’ Party euphoria at having clung to power, some important questions need to be asked about the impact the election will have upon both the country’s economy and international standing. On both counts, the outlook is negative.

Observers of Brazilian politics often keenly note that the country is a tremendously polarised one. Yesterday’s results leave it more polarised still. By squeaking back into office by the narrowest of margins, Rousseff has unwittingly exploited divisions which run far deeper than traditional rich/poor sentiments but extend to a regional divide between the North and South of the country, the urban and the rural, the middle class and the impoverished.

Dilma Rousseff’s victory has a rather hollow feel to it and is a world away from the outpouring of optimism brought about by former President Lula’s victory in 2002. Lula, a master of the spoken word and the product of a spectacular political transformation from militant trade unionist to soothing social democrat, built his victories on a coalition of the working poor, aspirational middle classes and ambitious manufacturers. Instead, Dilma took a purely transactional approach; pledging generous social benefits to her base and deriding her pro-business opponents as aloof and uncaring. (Neves, of course, firmly pledged to protect cherished benefits programmes such as Bolsa Familia, ProUni and Minha Casa from any cuts).

In some respects, the Workers’ Party’s (PT) welfare policies have been a victim of their own success. It is indisputable that they have played a big part in lifting millions of people out of poverty and creating a burgeoning middle class that is better educated, better travelled and more socially mobile. With that, though, came problems for the PT: these people wanted more than the welfare state and the “old politics” of cronyism and corruption.

The first moment it because clear that Dilma would face a tough race was back in April of this year when thousands of mainly young, mainly middle class Brazilians took to the streets to protest at widespread corruption and excessive spending on the World Cup and Olympics. Rather than seek to provide this sector of the public – who overwhelmingly backed Neves – with an olive branch, she instead revered to an aggressive core vote, 50%+1 strategy. With the root of their concerns unaddressed, trouble will undoubtedly spill over again soon.

On an economic level, Rousseff’s re-election is nothing short of a catastrophe.

Trade protectionism is widespread – and will remain so under Dilma. In a country as poor as Brazil, it is plainly ridiculous that the most basic of electronic goods – from fridge freezers to cheap televisions – cost more than they do in the United Kingdom. How can it be logical that members of the country’s emerging middle class increasingly find it cheaper to board a budget flight to Miami to shop for clothes rather than heading for domestic shops? How much longer can industry sustain crippling import tariffs for critical machinery?

Brazil’s public spending is a mess. Under the Workers’ Party – and, more precisely, the Rousseff Presidency – the country’s deficit has grown to a gaping chasm, with a tax base unable to fund the state’s generous spending programmes.

Around 90% of the entire spending the state does each year is mandated by a range of arcane laws, many of which are hangovers from the 1980s. With Dilma having pledged to increase social welfare spending on the poorest Brazilians, she will have little room inside the budget to make economisations elsewhere to provide such funds. The Brazilian Congress, a famously dysfunctional body that is dominated by former footballers, telenovela actors and other assorted egotists, has no appetite to change this construct.

In order to keep her base happy, the Rousseff administration has adopted policies designed to keep gas and electricity prices artificially low. While this may have proved to be a clever pre-election trick that has kept inflation at a relatively comfortable level, the state lacks the financial resources to sustain such a policy. Prices will have to rise – and so will inflation.

Despite is reputation in recent years as a hard-charging growing economy, Brazil remains a dire place to do business. Even the most basic of tasks requires multiple, costly government permits. The risk of a government agency deciding to level crippling retrospective taxes is ever-present. What this system does is sustain a state bureaucracy – but it doesn’t bring about private sector growth. While Aecio Neves had made the elimination of red tape a key plank of his campaign, Dilma has remained tight-lipped on the issue.

The days when Brazil’s poor fiscal climate and red tape-saddled regulatory structure, underpinned by external demand and global growth, could sustain growth rates of more than 7% are long gone. This year, the economy will grow by little more than 1% – and that’s an optimistic calculation. A credit downgrade now looms.

On a foreign policy level, the Rousseff Government has adopted an at times bizarre “hear no evil, see no evil, speak no evil” policy which has involved the expansion of cultural links with Iran and propping up machismo-fuelled administrations in Venezuela and Ecuador with economic aid. Such activities have been bitterly at odds with Brazil’s own domestic focus on the expansion of social and political rights, campaigns to eliminate racism and a liberal line on sexuality issues. While Aecio Neves had pledged to discontinue the Workers’ Party’s more recherché international projects, a second Rousseff administration will likely continue to build links with openly anti-American governments around the world – a dangerous position to be in, given the country’s precarious economic state.

There’s an old saying that “Brazil is the country of the future – and always will be”. I’ve never believed that – but I do struggle to see much hope for one as long as Dilma Rousseff remains President of the Republic.

Brazilian Presidential election – what to look out for as the results come in

imageAfter months of campaigning – and one of most unpredictable races in living history – it is finally time for the second round run-off in the 2014 Brazilian Presidential election. What had looked like a likely coronation for the incumbent Dilma Rousseff eighteen months ended up being a late-breaking political firestorm involving the tragic death of charismatic challenger Eduardo Campos, a temporary surge for the ecologist outsider Marina Silva and a late resurgence for the establishment choice, Aecio Neves.

The first round saw the incumbent Dilma outpace Aecio by a 42% to 34% margin – a much closer margin than any poll had foreseen. Since that time, polls have fluctuated wildly – putting Aecio ahead by as much as sixteen points and the incumbent Dilma up by as little as six. The only valuable conclusion we can draw from polling is that the race is close – and very close at that.

Due to the electronic voting system used in Brazil, the final results will be clear by around 23:00 UK time. Even if the result comes down to a few thousand votes across the country, the scope for recounts is extremely limited – so we should not expect even a very close result to impede the final declaration.

Keep the “75% rule in mind” – Taking into account the results of the first round, Aecio needs to capture roughly 75% of the votes that were cast for third-place finisher Marina Silva on a state-by-state basis in the first round in order to cross the magic 50% line. We should be able to tell relatively early on if this has been the case and how Marina’s support is splitting between Aecio and Dilma. In order to win, Aecio needs to meet or exceed the following percentages in most (or all) of the early-declaring states:

* Roraima – 53%
* Amapa – 40%
* Tocantins – 43%
* Federal District – 53%
* Mato Grosso do Sul – 56%
* Bahia – 32%
* Para – 40%

This rule doesn’t work perfectly – for example, such a calculation would require Aecio to carry the impoverished state of Acre with 60% of the vote given Silva’s strong performance there in the first round. As such, the states chosen above have been chosen in on order to provide a geographic split and filter out any abnormally high votes for Silva in the first round.

Aecio’s home and “Brazil’s Ohio” – While Aecio’s national performance in the first round of voting was strong, his grossly under-performed in his home state of Minas Gerais where currently serves as a Senator and had been a very popular Governor. Indeed, Dilma actually beat him here by 43-40 margin. If he is going to be the next President of Brazil, he needs to win what has become known in psephological circles as “Brazil’s Ohio”. Since the return of directly-elected Presidents in 1989, the victorious candidate in every race has carried Minas.

In 2010, Dilma Rousseff defeated Jose Serra in Minas by a 58/42 margin – just slightly more than her 56/44 national victory margin. Aecio needs to hit 50%+1 here if he is to stand any chance of victory nationally.

How high can Aecio go in São Paulo? - In order to win the Presidency, Aecio needs to absolutely blow Dilma out if the water in the country’s largest (and richest) state of São Paulo. To give you an idea of scale, São Paulo’s 44 million population makes the state roughly the same size as Ukraine and equal to the entire size of the smallest sixteen of the country’s twenty-seven states combined. In the first round, the recorded 44% (10.1 million) of the votes in the state to Dilma’s 26% (5.9 million) and third-place finished Marina Silva’s 25% (5.7 million). If he can make it above 65% in São Paulo (2010 challenger Jose Serra managed 55%), he will be the next President.

In a close race, Rio de Janeiro could hold up the final result - As one would expect, the smaller states will be faster to declare their results by virtue of the simple fact they have less results to tally. In the first round, the two largest states São Paulo and Minas Gerais were mercifully quick to declare their results yet we had to wait right until the end of the count for the results from Rio de Janeiro (which includes more than just Rio itself but a number of other 500,000+ resident cities like São Conçalo, Nova Igassu and Niteroi). The Federal Government was severely critical of the amount of time it took Rio to tally its first round results – so things may have improved this time around. However, in the case of a very closely contested race and a slow count, everything may hinge in Rio. This may come as late as 00:00 UK time.

The morning after the night before: observations on the 2nd round of the Brazilian Presidential election

dilmassLate yesterday evening, the results of the first round of the Brazilian Presidential election became clear.

After a tough campaign, the incumbent President Dilma Rousseff of the Workers’ Party scored a first-round victory with 42% of the vote.  In second place was the centre-right Minas Gerais Senator and former Governor Aecio Neves with 34%, followed by the ecologist Marina Silva. Rousseff and Neves will now advance to a second-round run-off on Sunday October 26th.

The campaign was one of the most exciting in Brazilian political history, with Neves surging in the last few days to overtake Silva for the run-off spot against Dilma.   With his campaign having been written off as doomed several weeks ago, his recovery is testament to his political skills and the discipline of his campaign operation.

This will be a close-fought race.  At this stage – the morning after the night before – here are some key observations…

Aecio’s second place finish wasn’t actually a big surprise – I have seen many tweets and media comments this morning describing Aecio’s second place finish as a “big surprise” or a “slap in the face for opinion pollsters”.  This isn’t actually true.   It is fair to say that the emphatic margin over third-place finisher and one-time favourite Marina Silva was surprising (he beat her 34% to 21%) but, as I noted on Saturday, Aecio’s surge at Marina’s expense had been clear for the past two weeks.  In a poll published early last week, Datafolha showed Marina Silva’s support down from its high of 34% on August 29th to 24%, with Dilma and Neves increasing their support from 34% to 40% and 15% to 21% respectively – both at her direct expense. By the eve of poll, both Ibope and Datafolha were recording narrow leads for Neves over Marina.

A “traditional” run-off – A run-off between Dilma Rousseff and Marina Silva would have been terrific political theatre.  The contempt the two women have for one another was palpable throughout the campaign, with wicked scowls and finger-pointing abounding in their final debate performance.  It would also have been fascinating from a political perspective, with the middle-class (and now painfully bourgeois) former Marxist guerrilla Dilma being forced to defend her “socialist” record to a doughty mix-raced lady who didn’t learn to read until she was sixteen.   It was not to be.

Dilma and Aecio are both solidly establishment choices representing solidly establishment parties.  Both are wealthy, both are well educated and neither is particular exciting.  Dilma gives lip-service to the trade union movement but has never really been part of it.  Instead, she made her name as a left-aligned civil servant. Aecio talks about business and enterprise but was elected to Congress when he was 25 after his grandfather, a former President, stitched him up with a seat.

After an era when Lula, a former shoe shine boy, could be elected President, the country has return to an era of elitism in its politics.   Is this contest one between “left” and “right”?   Not really.  It’s a debate over slushy centrism.  Personalities, rather than ideas, will be at the heart of the campaign over the next three weeks.

Don’t apply “European” norms to Marina’s voters – It would be easy to look at Marina Silva’s personal background story and at times bellicose rhetoric anti-business rhetoric and conclude that her votes were almost certain to transfer en masse to Dilma in the second round.  Marina’s political appeal has long been built around an ecologist image (she served as a Green Party Senator) and this community has long shown itself to be more favourable to candidates of the Brazilian social democratic to centre-right than the Workers’ Party.  Green-inclined voters in Brazil are largely highly-educated people of a moderate to high income, living in affluent urban areas whose main preoccupation is with transparency, education standards and better governance rather than what we in Europe would think of as “green” issues.  They do not make natural bedfellows with the trade union movement-aligned Workers’ Party.

A poll conducted two weeks ago showed that 70% of Aecio Neves’ supporters would have voted for Marina in a second-round run-off.  Frustratingly, the expectation at that time of a Marina/Dilma run-off meant that comparative figures for what Marina’s backers would do in the case of a Dilma/Aecio contest are not available.  However, polling does show that self-described “right-wing” voters stated they would have backed Marina over Dilma by a 49% to 35% margin, “centre-right” voters would have broken 50% to 38% for Marina and “centrists” 48% to 43%.

Dilma has the clear advantage – The basic fact is that, with 42% of the national vote, Dilma has a much easier path to 50%+1 than Aecio Neves does.  In order to win, he would now need to secure roughly three-quarters of Silva’s votes, as well as those of the left-leaning Luciana Genro and Pastor Everaldo who got 3% between them.   It’s not impossible – but it is unlikely.

As usual, the centre-right was under polled – This was the third consecutive cycle in which the strength of the pro-business, centre-right candidate was underestimated in the first round.  In 2010, the final pre-election polls showed José Serra on 26% when he actually received 32% while in 2006 Geraldo Alckmin’s support was underestimated by 13% – 29% to 42%.  Last night, Neves received 34% of the first-round vote, when final polls from the country’s two leading pollsters Datafolha and Ibope showed him on 24% and 27%.  One can debate the reasons for this under-sampling until the cows come home but I put part of this down to the disproportionately strong showing the centre-right nominee always scores on the largest state Sao Paulo (Neves received 44% of the vote– and roughly a third of his entire votes nationally there), whose 44 million population is larger than the smallest sixteen of the country’s twenty-seven states combined.  The weighting simply doesn’t take into account the “Sao Paulo factor”.

Who would you like to have a cerveja with? – Dilma is a “known quantity”.  Very few people in Brazil like her; even fewer love her.  Her supporters do, however, respect her competence and sincerity while admitting she is unable to put on the same oratorical fireworks or issue the same raw emotional appeals as her predecessor Lula.  People’s views about Dilma are not going to change in the next few weeks and nor will her political presentation – she’ll be solid, combative and sharp.  She won’t be likeable, though.   Aecio Neves remains a political unknown in many parts of the country, yet has shown a likability and fluidity on the campaign trail that marked him out from the other candidates.  If voters were asked who they wanted to have a “cerveja” with, he’d win.  That likeability could well translate into votes.

For 2018 candidates, look to Sao Paulo – Just as Sao Paulo played a decisive role in propelling Aecio Neves to a strong second-place finish, the state also produced a couple of notable results which those taking a longer look at the 2018 Presidential contest should not ignore.  The state’s popular Governor Geraldo Alckmin scored a landslide re-election victory, with 57% and more than 12 million votes.  Simultaneously, voters sent former Health Secretary, Mayor and Governor Jose Serra to the Federal Senate with 58% of the vote, defeating a veteran Senator and popular former Mayor in the process.  Sao Paulo is where the political power and money is in Brazil.  If Neves doesn’t manage to pull off a victory on October 26th, expect the two men to reach an accommodation as to which of them becomes the Sao Paulo centre-right’s standard bearer in 2018.

Brazilian Presidential election – things to look out for tomorrow

imageBrazilians will tomorrow go to the polls to vote in the country’s Presidential election. With voting compulsory, a total of almost 120,000,000 votes will be cast; from the lush Amazonas in the North West the to rocky, wind-swept plains of Rio Grande do Sul in the South.

As we approach the final hours of the campaign, there are a few observations that can be made…

Dilma Rousseff is likely to be re-elected – Since the very start of the campaign, the incumbent President Dilma Rousseff has led in the opinion polls. Aside from a brief period at the start of September, polling has shown her with a comfortable lead in the second round run-off with either the centre-right challenge Aécio Neves or ecologist candidate Marina Silva. 45% of voters are currently set to hand her their first round vote – not far off what she needs for an absolute majority. She won’t clear that hurdle tomorrow but she is likely to on October 26th.

For Marina Silva, an expectations/capabilities gap¿ – The main centre-left challenge to the incumbent Rousseff was supposed to come from Eduardo Campos, the popular and telegenic Governor of the northern state of Pernambuco. On 13th August, his plane tragically crashed in poor weather when coming in to land for a campaign stop in the city of Santos in São Paulo state, killing Campos and several campaign ads. Following several days of national mourning that took place across Brazil for the loss of this promising, young political leader, he was replaced as Socialist Party nominee by his Vice-Presidential candidate Marina Silva.

The two individuals could not be more different. While Campos had sought to cultivate a solidly (or even slavishly) pro-business record alongside the expansion of social programmes for the working poor, Silva was a radical environmentalist and feminist Senator with a habit of attacking the establishment. While Campos was part of Brazil’s wealthy political aristocracy (his grandfather also served as Governor of Pernambuco), Silva is one of eleven mixed-race children who grew up working on a rubber plantation and only learned to read when she was sixteen.

A mixture of sympathy for Campos’ death and a genuine excitement amongst many sections of Brazilian society about Silva’s life story saw her shoot into a dramatic poll lead in the days following his funeral. While, on August 6th, Campos had been polling well behind both Dilma and Neves on 9% she was tied with the incumbent on 34% by August 29th.

Since then, there has been a considerable degree of “unwind” in her support. The respected polling firm Datafolha has shown her support down from a high of 34% on August 29th to 24% today, with Dilma and Neves increasing their support from 34% to 40% and 15% to 21% respectively – both at her direct expense.

A “traditional” run-off? - While the media narrative has, for the past weeks, pointed at a run-off between Marina Silva and Dilma Rousseff, this is now in serious doubt. Neves has clawed back significant ground since Campos’s death – to the point where one could claim he now has “momentum” – and his campaign has both a very strong infrastructure in the biggest states across the country and institutional support from a string of powerful Senators and Governors. Silva’s campaign remains a disorganised and renegade effort – despite her strong standing nationally. The final poll of registered voters that were “certain” to go to the polls, showed Dilma ahead on 45% with Silva on 27% and Neves on 24% – effectively too close to call in respect of who will go through to the second round. We may yet see a “traditional” left/right run-off.

Will the debates damage Dilma and Silva? - Thursday night’s televised debate between the seven (yes, seven) candidates for President was one of the most poorly-natured and caustic events in Brazilian political history. The downright contempt Silva and Rousseff have for one another was palpable with both candidates firing rhetoric bombs at one another and repeatedly invading in each other’s personal space in a manner reminiscent of Rick Lazio’s disastrously aggressive attack on Hillary Clinton in the 2000 New York Senate race. Neither of the two women covered themselves in glory. Behind in the polls, Aécio Neves needed do little more than smile, sound constructive and drive up his positive ratings – which post-debate polls show he did effectively.

Will the centre-right be under-polled again? – Brazilian opinion polls have a habit of slightly understating the support for centre-right candidates. The reason for this, I believe, is that right-leaning candidates have disproportionate strength in wealthy and populous São Paulo and its surrounding states and can therefore be diluted by (ordinarily sensible) efforts to weight polls to reflect the country’s average make-up. In 2010, for example, final first round polls showed José Serra on 26% when he actually received 32% while in 2006 Geraldo Alckmin’s support was underestimated by 13% – 29% to 42%. If this polling anomaly occurs again, it could see Neves surging into a surprise second-place finish.

An unholy coalition? – Despite Marina Silva’s background as a radical environmentalist, there is an increasing feeling amongst many on the Brazilian centre-right that a Silva Presidency may well be preferable to the continuation of Workers’ Party rule under Dilma Rousseff. Firstly, despite Silva’s background story, she has been relatively light on policy specifics. Her life story has been her political appeal, not her pledges. Secondly, if she was to be elected, Silva would lack almost any party political supporters in the Federal Congress and Senate. This has led to some, such as the former President Fernando Henrique Cardoso, to hint that centrist to centre-right forces could do a deal with Silva to provide her with a workable majority in Parliament. Polling shows that up to 70% of Neves supporters would be “open” to backing Silva over Rousseff in a second round run-off. We could yet see the intriguing prospect of the two, left-leaning women scrambling to set out pro-market policies in order to secure support from the quarter or so of the population that favour Neves.

Expect a quick count - Voting in Brazil is carried out electronically, with voters entering the numeric code of their candidate (i.e. 40 for Marina Silva) in order to make their choice. After entering the number, a photo of the candidate and their name appears and a confirmation button is then pressed to record the vote. With the process being fully automated, hundreds of millions of votes can be tallied within a couple of hours of the polls closing. As such, first round results should be clear by before midnight GMT tomorrow evening.

Impressions from Scotland and the independence referendum campaign

scotlandI have spent the last few days in Edinburgh and Glasgow supporting the efforts of the “no” campaign to receive the right result – the rejection of Scottish independence – in the referendum that will take place this Thursday.

I have been asked by several friends and colleagues to share some observations about my perceptions of how things really stand on the ground; beyond the partisan comments of politicians and the newspaper front pages.

The below are my perceptions; not the formal view of any campaign…

* The referendum is all everyone is talking about. Turnout will be colossal - Nobody could possibly accuse Scots of not taking an interest in the referendum. Everywhere I went – from the train from Edinburgh to Glasgow to grabbing a cup of tea in a Leith café to buzzing West End of Edinburgh boozers – was buzzing with people talking about the poll and what they thought of an independent Scotland. The lapels of every third person bore stickers in support or opposition to independence, while Saltires and Union Jacks (and sometimes both) hung from private homes and tenement blocks. The strength of interest and feeling on both sides of the debate is palpable and one can expect a bumper turnout on Thursday. I would not be remotely surprised to see turnout exceed 90% or for there to be widespread problems with excessive queues still waiting to vote at polling stations at 22:00. In order to prevent low-level civil unrest in the case of a close vote, I hope the national returning officer Mary Pitcaithly issues orders to polling stations to allow all of those present before 22:00 to cast their ballots.

* On the ground the campaign is (mostly) good natured - Edinburgh and Glasgow are both hives of activity for the “yes” and “no” teams. One only needs to walk a couple of hundred metres from the intersection of one busy road to another to find street stalls and groups of earnest leafleters thrusting referendum material into your hands. For most part, both campaign teams as well as the supporters of the two campaigns are polite and amiable towards those they disagree with. Manning a street stall in Leith on Saturday morning, the greatest opposition we encountered from “yes” supporters was the odd playful comment shouted from a passing car or a firm – yet friendly – “I’m “yes”, mate” from opponents I was attempting to ply with literature. I picked up several rumours of violent exchanges between groups of “yes” activists and the “no” team but these appear to be isolated incidents involving hot-headed renegades.

* The cross-party nature of the “no” campaign is holding up - I found it a little bizarre – but not remotely uncomfortable – to campaign alongside those I have spent my political lifetime opposing. I could see from the assembled Labour activists I spoke with that they were also a little bemused to find themselves campaigning alongside Tories. Nevertheless, when one was pounding the pavements and chatting inside the confines of the “no” HQ, party politics was entirely set aside. For these few weeks, there are more important issues at hand.

* The “no” campaign is attracting support from those of all parties and none – From my point of view, one of the most surprising things about the campaign is the vast numbers of people taking part in the campaign that have no prior track record of political involvement. I would estimate that roughly two thirds of those I went out campaigning with on Saturday and Sunday were pretty much apolitical when it came to party politics and had most certainly never delivered a piece of political literature before. They were a diverse social, educational and ethnic mix, including a Polish-born taxi driver, a travel writer specialising in sub-Saharan Africa, an art student, a resplendently-dressed elderly couple from wealthy Balerno and a former dock worker. This is a campaign that defies traditional political logic. (I am sure the same is also true of the “yes” campaign).

* Random acts of kindness abound – Ordinarily, political activists are viewed by members of the public as, at best, irritants and, at worst, pond life. It was astonishing, therefore, to encounter vast numbers of people who thanked us for being out on the streets and went out of their way to offer cups of tea and coffee to those manning street stalls around the city. In one case, a young couple that had travelled up from London to help the campaign were offered dinner and bed for the night by a couple of passing strangers. As we headed out for dinner on Saturday evening, our taxi driver heard we were “no” activists and declined our £8 fare, declaring to be “on me!”. (I am sure “yes” activists have also been shown similar kindness by their supporters).

* A social divide is evident – Travelling around Edinburgh, Glasgow and the rural environs of Paisley, it was noticeable that a social divide exists in terms of willingness to support either side of the campaign. “Yes” posters were highly visible in tenement blocks in poorer areas of both cities, while more well-heeled districts were fairly sparsely covered by either campaigns. Posters were visible in rural areas, yet were by no means prominently displayed.

* “No” voters are more timid than “yes” supporters – The “yes” campaign are clearly winning the poster campaign. That’s not surprising. After all, in the minds of “yes” voters, they are voting for what they (misguidedly, in my view) view as an exciting vision for the future of their country whereas “no” voters are articulating a small-C conservative message of maintaining stability and a status quo that has delivered handsomely for Scotland. Both sides possess passion – but it is the insurgent “yes” campaign that are putting on more of a show of it. The knock-on impact of the “yes” campaign’s visible posters and, at times, irresponsibly fiery rhetoric (i.e. former SNP MP Jim Sillars’ call for a post-referendum “day of reckoning” for those who opposed independence in the event of a “yes”) vote has led to some – mainly elderly – voters being reluctant to publicly declare their hand in favour of a “no” vote.

* Finally, a political issue young people care about – Canvassing in a Leith back-street, I noticed a group of children of no more than twelve writing “no” in big letters on the pavement. I stood at a bus stop and heard a group of teenagers that must have been no older than seventeen intently discussing how they were planning to vote. More young people under the age of 30 were wearing “yes” or “no” stickers than any other age group. Sure, young people may feel alienated by party politics – but this campaign has seized their political attention.

* Things are close. But “no” are narrowly ahead – What is going on in Scotland at the moment is a political circus; the type of which the United Kingdom has never seen. Over the next seventy-two hours, we can expect tempers to fray even further, rhetorical bombs to be deployed by both campaigns and the “yes” and “no” machines to go into over-drive as they attempt to turn out their supporters (attempts to persuade the small number of “undecided” voters appear to have been shelved). National opinion polls show the race to be close; the “yes” poster campaign would suggest they are going to secure a landslide. However, on the basis of those I spoke to in the streets, the raw numbers on the canvass cards I completed and a powerful impression that there is a “silent majority” sceptical of independence, I’d say the “no” campaign have a narrow advantage.