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Intelligence Analysis in the Age of Disinformation.

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Sometimes the US intelligence community gets it wrong, but often, they get it right. And sometimes, they get it really right. We featured the excerpt below in our summary piece on the ODNI threat assessment back in February – highlighting its importance for those who provide analysis and information for decision-makers.

“Future cyber operations will almost certainly include an increased emphasis on changing or manipulating data to compromise its integrity (i.e., accuracy and reliability) to affect decision-making, reduce trust in systems, or cause adverse physical effects. Broader adoption of IoT (internet of things) devices and AI—in settings such as public utilities and health care—will only exacerbate these potential effects… cyber actors, who post disinformation on commercial websites, might seek to alter online media as a means to influence public discourse and create confusion… (pg. 2)” 

As the perfect storm that is the US Presidential election is upon us, we are facing a global problem of how to address veracity and credibility of sources, not just for analysts and researchers but for the general public; who ultimately make voting decisions that set the course for US government foreign policy towards the rest of the world.

The proliferation of information on the internet has given rise to an avalanche of disinformation. At the same time, disparate groups across political, cultural and idealist-driven divides increasingly disagree on what constitutes credible information. This creates problems for analysts and decision makers as we grapple with utilizing the information that most accurately reflects the reality facing our business or organization. Below we outline some thoughts and resources for addressing disinformation within your organization, analysis and decision-making:

Agree on a common understanding credibility.

Like many terms in the geopolitical-security world, we sometimes assume that when we discuss credible information, that we have a common understanding and acceptance of what constitutes a credible source. Even within small organizations, opinions on credibility often vary markedly; informed by each individuals’ life experiences and personal biases. For example, one analyst could be assigning high amounts of credibility to only sources that are politically left leaning, while another may be doing the same with right leaning media. (In reality, we hope analysts are looking at sources across the ideological spectrum to understand what their customers may be reading too). Having team discussions about how your team defines credibility – and even utilizing a simple credibility ratings system for information and human sources – like the one used by the US intelligence community – can go a long way to ensuring good communication, use of high-integrity sources and internal understanding of whats credible and what may not be.

Emphasize the importance of integrity of reporting and information over speed of reporting. 

While there are notable exceptions to this rule, in general, we should rarely be focused on being the first to report breaking news information to our leadership. There are so many free and paid services that do this already – and some that do it really well. The role of the intelligence and analysis function is to make sure that the organization has the most organization specific, relevant, high-integrity information and analysis to ensure high-quality decision making. Some good resources for understanding the integrity of online sources and journalistic guidelines and standards can be found hereherehere and here. Teams can learn a lot through reviewing these materials, both about how they can better assess the integrity of sources, as well as how to evaluate other organizations and the sources of information they provide.

Develop an understanding of disinformation. 

While Russian propaganda is receiving the most attention at present, it should be noted that disinformation campaigns are as old as espionage itself and have been utilized across the world. What has changed is how disinformation is disseminated and its exceptionally wide and quick propagation across the internet – which often makes it difficult to counter before it has become accepted as true. The EU, and increasingly, the US, have been especially affected by propaganda campaigns since sanctions were levied against Russia in 2014 over Ukraine. The EU has even created a task force responsible for educating the public about disinformation and highlighting disinformation in the press.

Exercise extreme caution in utilizing leaked materials of any kind. 

Leaked documents, such as those released by Wikileaks, Edward Snowden and other actors, can provide insight into how individuals and organizations communicate. Unfortunately, it is also exceptionally difficult to identify whether the information in these documents has been tampered with, is outright false or taken out of context. In our work, the most important thing we can do related to leaked materials is ensure that our personnel and organizations are not in danger as a result of information in purported leaked documents.

Understand the WHY of fake information. 

While much of the above-discussed disinformation is designed to sow confusion and divisive politics, there are many types of disinformation and fake information out there today. These do not all serve the same purpose. For example, a large body of fake information is driven by the pursuit of web advertising revenue; fake news sites that publish alarmist headlines in an effort to get readers to click on the story. Many of these are so poorly written that their veracity is easily questioned – but not all. There are also fake news sites that are generally devoted to providing entertainment (also to bring in advertising revenue, but overtly). The most well known among these is The Onion; but lesser known satire sites can get picked up by less savvy readers and quoted as fact. By learning the motives behind fake information, it is often easier for analysts to divine fact vs fiction and good sources vs bad ones.

Stay on top of the changing information landscape

Finally, in an information environment that is changing by the minute, ensure that your team’s remit includes regular reviews of their sourcing choices and an assessment of their personal biases towards information. Keep them focused on utilizing high quality information from credible government sources, think tanks, academia, and news sites with a record of integrity and accurate reporting. Ensure an understanding of best practices in the use of social media and ground-level sources. And insist on independent source verification of all reported information, including that which comes in from information vendors’ everyday. After all, our analysis is only as good as the credibility of the information that it is based upon. 

Don’t wait until October to think about surprises.

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“The world is much more uncertain and volatile than it has ever been before. And that is because of some factors coming together now that have never come together before. And they amplify each other. You have a totally different world order and we struggle with that enormously”  Paul Polman, CEO, Unilever – comments made in interviews for Thinking the Unthinkable; A New Imperative for Leadership in the Digital Age”

 
Intelligence professionals need to be fundamentally forward looking in how we approach our roles as guardians of our organization’s resilience – especially as it relates to major external shocks.  With potentially disruptive US elections approaching and a host of hot button geopolitical issues on the table – the economy and global security environment are ripe for shocks. Excepting political risk created by the elections, most of these issues exist without the US Presidential elections as a factor.  What makes them especially worthy of our attention right now is their potential to catalyze actors to provocative actions with intent to influence outcomes, capitalize on US distraction with domestic politics, or intimidate allies and other foreign actors. All of these may increase political and security risk for multi-national organizations as foreign governments react to or seek to hedge their risk based on candidate’s foreign policy and trade platforms.
 
While it can be hard (and politically touchy) to train leadership attention on strategic impacts of these hot button issues, prepping decision makers for possible shocks and discussing mitigation measures in the event of a major unanticipated event is a key reason our roles exist.  This is an opportunity for risk intelligence to add real value and depth to their organization’s risk management capacity.   
 
With that in mind, here are just a few of the issues we’re addressing with our clients as the fall approaches:
 
Political risk from US elections impacting US multi-nationals overseas
 
For the first time in decades, political scientists and financial markets anticipate substantial political risk associated with the upcoming US elections. For multi-national organizations, the risk associated with foreign government perception, potential sharp changes in US foreign policy, and foreign reaction to perceived risk to their interests is sizable.  From the impact on defense and trade agreements to increasingly punitive regulatory environments to increased anti-American sentiment, it’s important to consider which way the winds are blowing and begin thinking about ways to mitigate these risks in this increasingly unpredictable election year. 
 
Simmering geopolitical challenges
 
Last week China announced it would deploy its first nuclear submarine days after the US announced it was lifting a decades old arms embargo on Vietnam.  In a climate of continual small escalations in the South China Sea, this was not as alarming as perhaps it should’ve been.  Meanwhile, North Korea continues with bellicose rhetoric and aggressive weapons technology development. Russia’s unpredictable foreign policy may also worsen in response to the US missile shield in Europe or in the likely event that sanctions are extended in July. Further agitations designed to provoke response from Presidential candidates shift the general tenor of the election, or in anticipation of a muted response from a distracted US political establishment should be anticipated on at least one of these fronts.  While these are high level geopolitical issues, all of them have real world impacts for the security, political and regulatory environment for US companies operating abroad. 
 
Global economic shocks
 
The 2008 financial crisis completely changed the trajectory of the political conversation ahead of the 2008 election and shifted the fortunes of millions of people around the world.  As the US elections approach, increasingly erratic US and overseas markets may be the norm, depending on who is polling ahead in the race, whose voice is being heard the loudest and how that bodes for economic growth at home and abroad.  With respect to Chinese markets, no matter how we dice it, enormous amounts of the global economy – and as an extension global risk – are wrapped up in a market that is anything but transparent.  Election season could exacerbate this risk OR a market collapse could impact the outcome of the elections.  While the question of how a collapse in the Chinese market would reverberate is an overwhelming one, we need to seriously consider US business resilience to such an event. 
 
Terrorism, extremism, and technology enabled catastrophic events
 
As has occurred in the past, interest in pulling off major coordinated attacks ahead of elections is likely to rise within extremist organizations possibly with intent to influence the outcome.  While the nature of terror attacks makes it hard to plan for, it is worth the time to assess organizational readiness and resilience to catastrophic attacks in the coming months.  Particular attention should be paid to large events  – especially technology enabled events – that would cause disruptions to critical infrastructure such as electricity, water, food supply, or major logistical hubs. A chaotic election year offers a potentially irresistible stage for those who wish to do catastrophic damage and disrupt major economies.
 
Its not what you know, it’s how you analyze it
 
Our approach to these problems – because they so dramatically impact the analytic outcome – is as important as analyzing the issues themselves. Here are a few thoughts on ways to approach what may be a very touchy political topic within your organization.
 
(1) Choose the most relevant issues
 
A critical examination of strategic issues that may impact your organization shouldn’t be an individual scattershot exercise, nor should it be based on gut instinct.  Take a systematic approach to the risks that are most relevant to your short and medium term business model with other company professionals with complimentary roles.  It may be helpful to draw up a list of company relevant issues and actors that are sensitive to major changes in the US electoral environment – including countries that have already weighed in on US elections, extremist actors looking for a high profile stage or with definable interest in seeing one candidate win over the other, or actors with sizable economic interest at stake.
 
(2) Introduce issues gradually
 
Rather than writing a paper on potential shocks with no previous introduction to the issue, start sensitizing potential strategic issues slowly through other mediums first.  A daily or weekly product is a great place to start introducing issues of concern and to briefly highlight potential risks for the organization. Another method is through one on one discussion with others who may have an overlapping area of responsibility and a different point of view on the subject.  Depending on your organization’s receptiveness, you could also conduct an internal poll on how people in your company view risk associated with these issues – gauging both awareness and internal concern.
 
(3) Consider your bias
 lenses
Consider the organization’s and your own bias about potential outcomes and look for ways to correct for it.  On election-related issues, our biggest blind spot may boil down to our inability to be objective about the candidate field.  Beyond personal feelings about the candidates, US-based risk intelligence analysts are often not used to looking at political risk and geopolitical risk associated with US politics.  As a result, our bias may be higher and analysis more inclined to downplaying potential outcomes than it might be if we were looking at a similar issue in another country. The first step is to be aware of it and willing to challenge your own assumptions.  Then, there are many ways to help us reduce bias, including (shameless plug alert!) some that we will be working through at our July mini-training. 
 
(4) Make sure you’re asking the right question 
 
Too often companies approach geopolitical issues with the immediate impact in mind and if they don’t discern a direct impact, they move on.  But there are serious business continuity disruptions and consequences that may not be immediately apparent with the application of the simple question: How does this impact us?  In Asia for example, secondary and tertiary supply chain risks are acute with so many companies’ supply chains inextricably tied to the region.  So what is the right question?  Is it: How would a Chinese economic crash impact our company?  Or is it rather something else, like: How resilient is our supply chain to a major economic crash in China and beyond?  Or: How many single source suppliers do we have in this region and what are the major shocks we need to be thinking about that could impact our business resilience here?
 
Keep your mind in a strategic place
 
Businesses are so busy doing their business, that, without leaders who are intentional about examining strategic risks, many of these issues go unnoticed until mitigation is no longer an option.  Thought leadership on strategic shocks is a perfect role for risk intelligence professionals.  Regardless of other curve balls this election season throws us, it will pay dividends to get ahead of the issues. Now is the time. Our ability to add value through intelligence and analysis will decline as the elections near and the opportunity for building resilience and mitigation strategy disappears altogether. 

Schengen on shaky ground… Five areas of business impact

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Europe

With the refugee crisis and major problems with extremism, EU countries are moving politically closer to anti-immigration and anti-unity agendas leaving the Schengen agreement on shaky ground.

Here are five areas that will be impacted by a long-term breakdown in the Schengen Zone:

Security: Border controls may not make Europe more secure.  While possibly keeping out would-be bad actors without EU passports, much of the terror threat emanates from citizens within its own borders.  Border closures may also push refugees further into the black market – jeopardizing their safety and increasing demand for human-traffickers throughout Europe (which will in turn increase scrutiny of cargo transported across borders = more delays, LONG delays).  With respect to migrants, build-up of refugees at closed bordersheightens the potential for security incidents at border crossings – already a frequent problem.  In an effort to address the border build-up, last weekend the EU and Turkey reached an agreement to send all refugees and migrants arriving via the Greek Islands back to Turkey, in exchange for monetary support for housing them.  To say its not going well is an understatement: Humanitarian organizations are boycotting the measure as an unrealistic solution that will substantially worsen the lot of refugees fleeing Syria.

Trade: Trade among members of the European Union has grown dramatically since the single market was established in the late 80’s – from €800bn in the early 90’s to €2.8 trillion in 2012, according to the European Commission.  Reinstatement of borders, even temporarily, decreases the volume of trade within EU member countries. Businesses incur substantial financial costs that, over time, may result in job losses and increased prices (with businesses passing increased costs on to consumers).  Additionally, as one of the largest trading blocks in the world, the EU has become an economic powerhouse. A break-up of Schengen could unravel the EU’s major trade agreements and progress on the Transpacific Trade Investment Partnership, should it substantially slow exports, imports and businesses’ ability to create and export product.

Logistics: In the last six months temporary border control measures were introduced by Germany, Denmark, Sweden, Austria, France, Hungary, Serbia and Slovakia. This has negatively impacted the transport of goods across borders, slowing supply and distribution channels and raising transportation costs for companies with cross-border supply chains. According to industry estimates, the cost for an hour delay on the border per vehicle is around €55 ($59). The consequences of border delays are even more critical for perishable goods and might include the loss of a whole cargo.  A strike in Calais last summer that led to the closure of the Channel Tunnel could be an indicator of the kind of supply chain disruption that could accompany substantial delays at European borders.

Labor Mobility: According to estimates, 1.7 million Europeans commute across borders daily for work, and trade in labor services has grown considerably with the free travel arrangement within the Schengen zone. Absence of border controls has increased the efficiency potential of labor markets, as Europeans take advantage of employment opportunities in areas and industries outside their home country.  With border controls in place, travel time to work is likely to increase for cross border commuters, and might eventually make working in a neighboring EU country impossible. For companies this wouldincrease recruitment costs and potentially limit access to skilled labor.

Loss of Business: EU experts estimate that the loss of tourism revenues would be substantial. This has already happened in some southern regions of Bavaria, Germany where the country introduced border controls on the Austrian border in September.  Tourism revenues here have dropped 40% since September.   Depending on the outcome of the current EU agreement with Turkey, this may also increase the number of migrants in camps, like Calais and those throughout Greece, where migrants are stuck at border crossings.  In addition to the human toll, this problem has economic ramifications for “host” cities.  In Calais, for example, the city has lost around 40% in trade and tourism revenue since the escalation of the migrant crisis last summer.

Death by 1000 Cuts

Because the EU knows its value, Schengen is unlikely to be officially cancelled anytime soon.  If the bloc does go down, it will be death by a thousand cuts, with each country erecting more border controls based on their own perception of their security and their ability to handle migrants and refugees, etc.  This could lead to a MORE uneven approach to security across countries andfewer mechanisms for oversight and accountability.  And, the bad guys will still probably find a way to slip through.  In the meantime, the EU will need to work hard to regain the public’s confidence in its ability to mitigate problems causing instability, insecurity, and lack of unity over the EU and Schengen.  After all, Europe remains an overwhelmingly safe place to live, visit, and do business.  Businesses, governments, and travelers should keep this front of mind in the coming weeks and months.  To not do so may lead to rash decisions that will only increase political, economic and security risks in the EU.

This post appeared in the Emergent Risk International monthly brief on March 24, 2016.  It is a collaborative piece written by Julia Mitusova and Meredith Wilson for Emergent Risk International.

China: Challenges to Sustainable Growth and Business Implications

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By: Julia Mitusova

China has received a lot of media attention over slowing economic growth, the recent stock market crash and increasing concerns about challenges of doing business in China for foreign companies. So what are the business implications of the slowing economy for foreign investors? What can ensure economic growth in China and benefit investors in the long run?

  • Increasing production costs: A steady increase in labor costs over the past decade makes China less competitive as an outsource destination compared so Southeast Asian countries such as Vietnam and Indonesia, as well as US neighbor – Mexico. With manufacturing moving from China to Vietnam or Indonesia, where average wages for a factory worker are 3.5 times lower than in China closing production facilities lay offs are increasing.  Increased crime rates, strikes, and labor actions against employers are plausible.
  • Increasing security concerns: From a security perspective, the challenges China is currently facing such as economic slowdown, growing inequality and pollution affecting the quality of life, might result in growing public discontent. While protests in China are not happening on a large scale yet, social unrest due to factory lay offs is increasing. Unless social issues such as growing unemployment are addressed, crime rates are likely to increase and China could become a less safe place for foreign business. 
  • Decline in sales: China’s trade partners such as Brazil, Indonesia, Russia and Australia, among others are impacted by the decline in commodity demand in China. If this trend continues companies operating in the commodity trading and export business that have China as their main partner might want to consider expanding the geography of their business. 

Current Structural Challenges in China

Limited transparency, high debt and significant government intervention – all together are increasing turmoil in the markets in China.

Over the past few years the private sector in China accumulated significant amounts of debt due to low interest rates. While the official debt to GDP ratio in China is 41%, which is much lower than for example, the 103% ratio in the US, concerns arise in connection with the reliability of data provided by the Chinese government; and analysts believe that the real debt in China is significantly higher. Moreover, the Government owns the major banks and corporations in China, thus both lenders and borrowers are state owned.

In an environment where the state plays a dominant role in various areas of the economy and corporate transparency is limited, it becomes challenging to react adequately to market fluctuations. Thus, financial markets become volatile as investors make their decisions based on limited and sometimes unreliable market information.

For companies operating in China this means an increase in overall market risk and is a signal to protect investments, which explains $59 bn capital outflows from China in 2015.

Economic Growth in China and New Opportunities

A rapidly aging population is a growing concern for Asia as a whole and for China in particular. According to estimates, by 2050 35% of the Japanese, Hong Kong and South Korean population will be 65 and over, while this number for China will be around 24%. In 2015 the percentage of elderly people in these countries was 10.6% on average. With growing life expectancy figures and increasing numbers of retirees, the burden of an economically inactive population will have strong impacts on Asian economics. From the perspective of the financial sector, aging population means that long-term financial instruments will be shaping the Asian financial structure in the future.

Productivity which is measured by the total productivity factor (TPF) is also an important variable to follow in the context of China’s economic growth. The TPF measures the efficiency of labor and capital in a country. China’s growth since the 1990s has been primarily due to the increase of the work force size and growth of capital investment; according to estimates productivity increased by just 1.5% per year between 1997 and 2012. In the long term, low TPF levels won’t be sufficient to drive sustainable economic growth.

For companies operating in China, increasing capital efficiency and labor productivity by taking advantage of innovative technologies is critical, in order to remain competitive globally. While the slowing economy presents challenges, as China is shifting focus to increasing consumption, new opportunities will emerge in other sectors. For example, industries like entertainment, travel and education will continue to grow despite the general economic slowdown.

In the long run however economic growth in China will still require serious structural reforms. The world is waiting to see if China is up to the task.

Six Global Risk Trends to Watch in 2016

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The landscape of global risks in 2016 is broad and seemingly endless. Here are six (out of many) risk trends that businesses should keep an eye on as we move into the New Year.

Disruptive Technology and Security

The pace of technological development will increase this year, and with it, there will be new associated security challenges, political risks, and needed adaptations.

The battleground between open easy-access technology for the public and government surveillance of the bad guys is expanding after Paris and San Bernardino; renewing the debate over allowing government backdoor access to encryption technology. Expect this to become a key issue in 2016 as tech companies look to protect their customers’ privacy and the integrity of encryption systems designed to protect the public from criminal hacking. They will have to balance these concerns with reputation concerns associated with allowing greater government access, or not allowing it, and later having a product associated with a major terror operation or security incident.

In a similar vein, other types of disruptive technology will continue to upend traditional business models – from payment services to ride-sharing to the introduction of more artificial intelligence in business and beyond. In 2016, we may see movement of more of these technologies into financially promising emerging markets including Sub-Saharan Africa, Myanmar, and Cuba. The upside: an improved marketplace and competition driving better services and greater market access across the board. The complication: some technologies will render more traditional market places obsolete, threaten entrenched interests and disrupt social and regulatory contracts between certain sectors and their governments. This will be especially pronounced in highly regulated, heavily unionized regions of the world, but will also play out anywhere that disruptive technology renders old ways of doing things redundant and undercuts traditional pricing models. In 2015 – in Paris, Mexico City, and other cities, taxicab drivers protested (at times violently) at – what they saw – as an unfair advantage of ride-sharing services. We’ve also seen this to a lesser degree with other online service categories… and we can expect more of it – at a greater intensity – in the coming years as business and society adapts to a rapidly changing world.

Global Political Shifts

If 2015 was a year for landmark elections, 2016 will be a year for seismic shifts in policy and implementation. Myanmar elected its first democratic government, Northern Europe shifted right while Southern Europe (Greece, Portugal, and Spain) shifted left, and Latin America moved substantially right.

Perhaps most remarkable is the shift to the right occurring in South America, largely on the backs of public frustration over mismanaged economies, sky-high inflation, and devalued currency. For Argentina, the shift will bring the country back into the international economic community and eventually lead to an improved economy. But it will take painful readjustments for this to happen. At the same time, Argentina’s ideological shift will chafe some old traditional partners like Bolivia, Ecuador, and Brazil – and influence flagging economic and political prospects of these governments too. Venezuela also saw a definitive shift towards the opposition, who now hold a parliamentary super-majority, setting the stage for a political showdown between President Nicholas Maduro and a newly empowered, but fiscally hamstrung, parliament in 2016. Brazil will see more political drama as the stage is set for a potential impeachment with the 2016 Summer Olympics just around the corner. In these countries political and social turmoil are almost a forgone conclusion while painful readjustments to economic liberalization are made and governments shift away from policies that have ravaged the economy, but provided a social safety net for the poor.

Meanwhile, in Europe, nationalist rhetoric and shifts away from moderate center left and center right parties will drive more political uncertainty. A looming potential referendum on a UK exit from the EU will drive public discourse and increase political risk for companies headquartered there, while political shifts to the left in Portugal and Greece may re-ignite discussion of a Grexit. Alongside this, refugees and terrorism will be central to political debate across the EU, but especially pronounced in France, Germany, the UK, the Netherlands, and Belgium.

In Asia, Myanmar’s new democratically elected government will focus on economic development, and attracting foreign investment, but will have to come to grips with how to eradicate institutionalized human rights problems, reigning in militias, and preparing the population to be a 21st century workforce.  

Global Migration and Increased Nationalism

2015 will be another record-breaking year for refugee flows and internally displaced peoples. In 2014, the UNHCR said over 59.2 million people were displaced by conflict and war across the globe – the highest on record since World War II. 2015 is expected to surpass these numbers. Syrian refugees make up, by far, the largest share of refugees, followed by Afghans, Iraqis, and Eritreans. These displacements – the result of war and insurgency, economic distress, and natural disasters – challenge internal stability of countries where large displacements are occurring, international politics, and overweight social-welfare systems as third-countries cope with the influx of refugees.

2016 offers only dim hope for a settlement of tensions in Syria, with the conflict ever widening. With old alliances in the neighborhood challenged by the complexity of fighting a multi-faceted conflict in which no one can agree definitively on who the good guys are (although most agree that ISIS is one of the bad guys), the potential for increased problems between parties involved is rising. As the conflict widens, we expect the flow of refugees to continue, even amidst new agreements between Turkey and the EU to limit refugee flows into Europe.

Meanwhile, increasing nationalist rhetoric, protectionism, and physical barriers to keep economic migrants and refugees from entering third countries will increase political risk, put the Schengen agreement in jeopardy, and dim prospects for full economic recovery in the EU and Baltic States. We expect legislation to follow the nationalism trend, making it more difficult for migrants and refugees to settle in or to find work in third countries, and increasing regulatory risk for companies whose EU business model is predicated on an open borders policy.

Oil prices and Petro-states

Oil prices continue to drop. OPEC’s last meeting erased any hope that the group would implement measures to stop the free fall of prices, leaving 2016 looking bleak in the oil patch and bleaker for petro-states like Venezuela, Nigeria, Angola, Saudi Arabia and Russia. Add to that, rumors that the US may drop the oil export ban in 2016. Good for the free market, bad for petro-economies who will have increased global competition. In 2016, these countries will need to diversify their economies, drop energy and electricity subsidies taking up too much of the state budget, and will almost certainly see more social and political unrest over dim economic prospects. Most likely among these is Venezuela where a new government is likely to push for substantial market liberalization and/or the ouster of President Nicholas Maduro. Both of these scenarios could bring long-term improvement, but more short-term pain for ordinary Venezuelans. In Russia, continued economic distress may lead to stronger internal state security measures, particularly if Putin’s approval rating drops over the prolonged period of economic malaise.

Prolonged ultra-low oil prices in the US will be good for companies with heavy overland supply chains and high energy costs, but will be hard on states with entrenched oil and gas economies, like North Dakota, Texas, and Colorado. Increasingly, the effects of the downturn will spread out to the industries that service the oil and gas sector, including banks with energy sector heavy portfolios.

With sanctions dropped in early 2016 (assuming IAEA compliance) Iran may be an outlier, adding significant cash flow into the economy as frozen assets are released back to the country and some business resumes with the west.

Impact of sustained Chinese economic slowdown

While we are focused on “global trends” we can’t ignore the potential global implications of slow-growth in China, especially with so many clients with value chains that begin in China. While no one has predicted an outright crash of the Chinese economy in 2016, the opaque and at times – stage-managed – nature of the Chinese economic system leaves us concerned about what we don’t know.   Increased labor unrest is anticipated as employment levels slip and some companies move their operations to cheaper overseas destinations. China’s government can be expected to make liberal use of new security laws that allow the state wide-berth to crack down on unrest and social disruption. These laws may also intensify scrutiny of foreign business in China and increase anti-competitive regulatory practices. A more pronounced slowdown in 2016 would also challenge economic recovery for other countries with heavy investment from China, including many in Sub-Saharan Africa and South America.

US Presidential Elections and Opportunist Actors

Like it or not, US Presidential elections are watched the world over. As the debates ratchet up and the big issues are debated in public, global perceptions of the country ebb and flow with the candidate that is receiving the most airtime. Foreign governments take notice, ordinary people take notice, and so do non-state actors. What this means for global issues is that there will be an added filter on public discourse – and unfortunately, it will mostly serve to oversimplify complex problems and divide the public over how to address these very serious issues. Global issues we expect to see play out on the election debate stage this year and become key election drivers include immigration and migration, technology and security, terrorism, and the Paris Climate Agreement.  

We would not be surprised to see strategically timed power plays from Russia, China, North Korea, or other countries who may feel that the current US administration will have a more predictable response than an incoming President with a harder foreign policy stance. We also anticipate more attempted attacks from terror organizations potentially with timing and location selected to achieve maximum political advantage and capitalize on increased fear of terrorism in the US and Europe.

 

 

Oil Prices: The Winners, the Losers, and Geopolitical Drivers of Change

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The energy industry today is a truly global industry, and crude oil price changes affect companies operating in multiple industries, consumers, international governments and have serious geopolitical and social implications.  With oil prices in decline for over a year, there are some clear beneficiaries to the new reality (oil well below $100), and some clear losers.  What is less clear is what will drive a change in the current situation and when that will occur.  

Who loses?

First, energy companies all over the world are feeling the impact of low oil prices and have been forced to significantly cut down the number of new projects – from an annual average of 50-60 to only a dozen this year (according to Wood Mackenzie). In addition, the International Energy Agency expects a 20% decline in upstream investments in 2015 compared to 2014, which will be the most significant drop in history in terms of money spent. Around 200,000 jobs in the energy industry have been cut globally since the oil prices declined sharply in 2014, according to industry analysts. Recent reports indicate that some companies who cannot afford to cut more jobs are beginning to implement salary cuts for their remaining staff.

Second, countries highly dependent on commodity exports are experiencing an economic downturn. Venezuela, Iran, Nigeria, Brazil and Russia, among others are facing a decline in export revenues, growing inflation and decreasing foreign investments. Significant devaluation of the Russian Ruble, political instability in Brazil and rapid deterioration of the economy in Venezuela – are all linked to low oil prices.

Third, while consumers in the U.S. are enjoying lower gas prices, the recently booming domestic fracking industry is at risk. Capital intensive fracking is economically viable only when oil prices are high: the median full cycle cost per barrel is $51 for U.S. shale oil producers. Thus, oil prices below $51 are not high enough for small and medium-sized companies to continue production. Raising capital for projects has also become a challenge, and in 2015 both Moody’s and S&P have lowered credit ratings for U.S. energy companies.

Who wins?

First, companies that spend a significant part of their resources on transportation benefit from lower oil prices by making considerable savings in the supply chain. So do logistics and shipping companies, because they are able to save directly from lower fuel prices. The airline industry is a winner from the low oil prices with around one third of the industry costs associated with fuel.

Second, net importers of oil, such as European countries, benefit from lower oil prices. Energy imports to the EU cost around $500 billion in 2013 and 75% accounted for oil. With average prices for Brent at around $109/barrel in 2013 compared to the 2015 average of $54/barrel, the EU is experiencing 50% savings. China, the world’s second-largest net importer of oil, is an obvious winner despite the slowdown of the economy. Based on 2013 figures, every $1 drop in the oil price saves an annual $2.1 billion, according to the Economist. While Chinese export prices remain at the same level, in the long run low oil prices will benefit the economy on the whole and enable the government to reduce energy subsidies.

Third, energy intense industries such as the chemical and metal industries, as well as manufacturing benefit from lower oil prices. Thus, companies are able to make significant savings on production costs and reinvest theses savings in developing new technologies and innovation.

Balancing Supply and Demand

The current decline in oil prices is a result of oversupply in the industry and insufficient demand. OPEC countries, as well as other major oil producers are pumping oil at the same rates and the U.S. has increased production in the years following the shale revolution, but demand has not increased at the same rate. China’s economy has slowed down this year, and while the demand for oil has stayed at more or less the same level, it is not sufficient to solve the problem of oversupply.

Moreover, Iran is likely to join the world oil exporters after sanctions that have banned oil exports from the country are lifted in the beginning of 2016 following signing the Iran Deal this year.

Lifting the U.S. oil export ban would increase the world supply of crude oil, contributing to further decline of world prices. However, the Obama administration has been firm in its decision not to support lifting the oil export ban despite the possible domestic economic benefits. While lifting the ban could have significant economic and strategic implications, such as lower gas prices for consumers (resulting from increased domestic production) and national security benefits for key allies around the world, the White House remains against this option for now. While the ban does not appear to be a current administration priority, this issue will probably be revisited after the 2016 Presidential Elections regardless of the political outcome.

On the demand side, as vehicles are becoming more energy efficient and Europe is slowly shifting to alternative energy, the demand for oil will continue to decrease in the long run. From a geopolitical perspective, European countries have been placing significant emphasis on becoming less dependent on fossil fuels imported from Russia and the Middle East. For example, Denmark, which is at the forefront of alternative energy, produced around 40% of its electricity from wind power in 2014 and plans to satisfy 50% the country’s needs for power from renewables by 2020. Germany has similar goals and aims to obtain 45% of its energy from renewables by 2030.

When Will Oil Prices Go “Back to Normal”?

It is not clear what new “normal” for the oil industry is. Prices between $45 and $70 are probably the new reality during the next 12-18 months. At the same time, energy experts predict a price increase in 2017. However, an exact timeline is difficult to estimate. In the long run, current limited investments in oil projects and exploration activities, may lead to less oil produced in the future. Fewer oil production projects in the pipeline and less oil extracted will result in higher energy prices. But key questions remain: How long until oil is not in oversupply – one, two, three, or more years? Will the pace of technology and the increase in cheaper alternative energy options put additional downward pressure on demand to the point that prices top out in the $60 or lower range?

While it is not possible to predict the absolute trajectory of global events and their potential impact on oil prices, below is some food for thought and potential geopolitical triggers for substantial changes in oil prices:

 Potential Triggers for Increased Oil Prices

  • Continued and widening conflict in the Middle East – should the conflict widen to oil producing centers in Iraq, Saudi Arabia, or elsewhere.

  • A major escalation in conflict between Russia and Western allied countries.

  • A significant political event that changes the trajectory of the Iran Deal; reversing plans to drop sanctions in 2016.

  • Increased political uncertainty or a major shift in leadership in Saudi Arabia.

  • An increase on the demand side driven by increased stability in Europe (situation around Ukraine) and accelerating growth in China.

  • Decrease in shale production in the U.S. due to high costs, regulatory changes, or environmental implications.

  • Major shifts in U.S. foreign and domestic policy driven by 2016 Presidential electoral politics.

  • A catastrophic event that impacts global supply chains and global movement of oil cargos.

Potential Triggers for Sustained Low Prices or Price Decline:

  • Substantial decrease in the cost of alternative energy options made available to the public in the US or China (and to a lesser degree: Europe).  (Electric cars, electricity generation.

  • Rapid ramp up of Iranian oil production and entrance of western companies (and their technology) into Iranian oil markets.

  • US drops or significantly relaxes oil export ban.

  • Saudi/ OPEC further increase production in response to market competition from Iran and US.

  • Technology break through that decreases cost of shale and/or oil sands production.

  • Change in political leadership and economic policy that leads to increased political stability and ramped up oil production in Venezuela.

  • Substantial downward shift in Chinese GDP, and/or further market volatility emanating from China.

All views are those of the author and do not necessarily represent the views of Emergent Risk International. 

Increasing intelligence capabilities of non-intelligence security professionals

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As our clients become more sophisticated in their need for business driven approaches to intelligence and security, we’ve seen a strategic shift in how intelligence is being done in their businesses. More chief security officers and managers want to arm their non-intelligence security professionals, and especially their operations center teams with the skills to answer tactical intelligence analysis demands.

This is driven by a number of factors. First, businesses are demanding more business skills from their security leadership and more sophistication from their teams. Additionally, intelligence professionals are being asked to add their analysis to business decision processes based on their geopolitical and risk management knowledge, limiting their time to respond to more immediate tactical concerns. Finally, private sector intelligence teams are often understaffed and need additional bandwidth to assist with research and tactical information gathering.

For all of those reasons and more, building and enhancing intelligence skills of non-intelligence professionals is a great idea. Most security professionals working in non-intelligence roles have a military or police background anyway – meaning they’ve already been taught and used many of these skills. To give these groups more tactical intel responsibilities allows their intelligence team to focus on more strategic issues and creates a professional and symbiotic relationship between the groups. And just as important: it provides career development opportunity for everyone involved, allowing each group to provide higher order intelligence and analysis that will make the security group more effective and valuable to their business or organization.

That said, in addition to developing an intelligence strategy for traditionally non-intel teams, there are a number of additional skills and capabilities that managers need to train their non-intelligence teams on. Here are just a few ways to start moving your teams in this direction:

1) Help your team develop good information and source assessment skills.

There are a lot of pieces to this, but as a starting point, get your non-intelligence security professionals training to develop skills to enhance evaluation of their sources, starting (but not stopping) with developing critical thinking skills around the information they harvest from the web and other sources. With so much information at our fingertips, it’s easy for to get lost in assessing information only from sources slanted towards a certain point of view. Often, it’s not even intentional when this happens. Search engines and popular social media are often designed to provide search results based on what you’ve looked for in the past, what you tend to read, and where you tend to get your information. (As an aside,research and analysis should never stop with a simple Google search – teams need to know how to dive MUCH deeper.) Over time, this can add up to a very lopsided view of what is out there on any given issue. There is also a need to understand what constitutes credible information (and why it is sometimes hard to even determine this). If your team doesn’t understand the best ways to search for and evaluate information that can help them avoid these pitfalls – they may never even see the other side of the story – let alone factor it into their intelligence input and output.

2) Help your team develop better business communication skills

No matter what line of business we are in, our ability to communicate in a language that our customer understands is half the battle when it comes to doing our job well. For security teams this is a perennial issue when working in a private sector environment. Security operations center teams may be some of the last folks to learn these skills, because the channels they communicate in may be mostly within the security group itself – which tends to communicate in security language. However, in order to move to the next level in their organization – these teams also need to understand how their leadership and business communicate. Soft skills like understanding the difference between influence and authority, and the difference between how to secure, protect, and enable in a business environment vs the public sector can be the difference between success and failure.

3) Hire people who know how to write or can be taught to write well

Tactical intelligence analysis and writing does not require a Pulitzer, but it does require writing skills. These skills can be taught, but should also be tested during the hiring process. If you’ve already got your full team onboard, it’s a good idea to start looking for ways to enhance their writing skills and create expectations of how information should be communicated and in what circumstances. Practice and reinforcement of these expectations will help your team improve and develop clean and efficient writing. This, in turn, will help your customers know what to expect (both in quality and output) when they work with your team.

Better Intelligence Skills = Better Value Add for Everyone

Developing and diversifying the tactical intelligence skills of your security team is a worthwhile investment. When personnel are well trained on intelligence research and analysis, these skills can be applied to many functions outside security. This helps the company develop its internal talent, retain employees, and harness the unique strategic insight that intelligence and security professionals can bring to the table. For security professionals, building these skills is especially valuable because the career ladder in a security organization in the private sector offers limited advancement and growth potential (when security is not the employer’s core business). From that perspective, the shift towards developing non-intel security professional’s intelligence capabilities is a positive one when it is done well. To start doing this, define a strategy, train your people well, make your expectations clear and consistent, and insist on high quality information and analysis from your team.