Scenario Planning as Part of Strategy Development

In my daily work, I hear the phrase “strategic planning” with such frequency that it has become by now a signal for “switching off”, i.e. stop paying attention…here we go again…not another strategy…and not the same strategy with different words, please! What a relief to read something actually intelligently written, like Conway’s article “Scenario Planning: An Innovative Approach to Strategy Development“, in which he makes a distinction between strategic planning and strategic thinking. Sure, it’s a piece dense with “management-speak”, but given the quality of ideas, one doesn’t mind the odd “innovative approach” or “setting direction”, or “immersion in foresight concepts”.

Conway argues that traditional strategic planning, based on deductive reasoning falls short of being effective in a complex, interdependent and highly uncertain environment in that it focuses more on past experience, data and fact driven thought processes. I’d like to call this the microscope-focused approach. What he advocates instead, or rather, in addition to, is “strategic thinking” as part of the planning process, or in other words, the ability to develop foresight capacity, a “big picture” view that is less concerned with the here and now of the details and the particular but adjusts the aperture to provide a universal, telescopic view. Of course, he doesn’t say “universal” vs. “particular”, which is how a philosopher might phrase the concept; nor does he use the microscope-telescope analogy, which would be more at home in the fields of myth, anthropology and psychology. Writing for a corporate audience, global vs. local is what one might expect to hear.

I think an interesting conclusion can be drawn from this observation. I believe Conway himself reaches this conclusion even if he doesn’t explicitly say so. In an environment of growing complexity and interdependence, strategic thinking implies being able to see connections that one might not do if he/she adheres to linear logic, and what’s more, one might never see by him/herself without the contribution of others. The crisscrossing of concepts from traditionally different disciplines and the fusion of individual brains into one collective intelligence is what strategic thinking for the 21st century seems to be all about.

I concur with Conway’s take on scenario planning as a way of creating alternative future narratives, and was happy to see the Dave Snowden reference on page 12. Although Snowden has become in the past few years a household brand name in (knowledge) management and a quote by him adorns the annual or centennial  corporate strategy paper of every Tom, Dick and Harry organization that likes to talk about “innovative approaches”, Snowden does often provide food for thought. [In my capacity as CKO, I once attended a presentation of his, which sparked enough interest to add his Cognitive Edge website/blog to my RSS feeds and read a number of articles he provides there under a creative commons license.] Conway outlines Snowden’s thoughts on the irrationality of human decision processes as a way of stressing the influence of human agency in strategy development. However, the quote ends too quickly. Elsewhere, when discussing the assumption of rational choice, Snowden goes through great pains to distinguish between “objective” reality and perceptions of reality. He argues that understanding these different perceptions or perspectives of reality can lead to strategic advantages and he sees narrative techniques (scenarios for our purposes) as a way to gain greater exposure to different perspectives:

The assumption of rational choice
Relaxing this assumption means that context and perspective become as important as rationality. This is an important reason that the Cynefin framework is not about “objective” reality but about perception and understanding; it helps us to think about the ways in which different people might be perceiving the same situation. For example, there is an old folk tale from India in which a wise man decides that in order to escape an impossible royal demand, he will fake insanity in the king’s court. He is operating in complex space because he is using cultural shorthands to provoke predictable reactions but is gambling that his ruse will seed the pattern he wants to create. He knows that from the perspective of his audience, who are operating in the space where things are bound by tradition and thus known, he appears to be acting chaotically, because they can conceive of no other reason for him to act this way in front of the king (who would surely behead him if he was faking). Thus by proving that he cannot be faking, he pulls off the fake. Understanding not only that there are different perspectives on an event or situation, but that this understanding can be used to one’s advantage, is the strategic benefit of relaxing this assumption. Narrative techniques are particularly suited to increasing one’s exposure to many perspectives on a situation. In management, there is much to be gained by understanding that entrained patterns determine reactions. This realization has major implications for organizational change and for branding and marketing. Our own work on narrative as a patterning device is gaining presence in this and other areas. Speculating, one of the most significant possible applications of this understanding is a move away from incentive-based targets and formal budgeting processes—both of which, we contend, produce as much negative as positive behavior. It is a truism to say that any explicit system will always be open to “gaming.” Paradox and dialectical reasoning are key tools for managers in the un-ordered domains.

C. F. Kurtz, D. J. Snowden, IBM SYSTEMS JOURNAL, VOL 42, NO 3, 2003, http://www.research.ibm.com/journal/sj/423/kurtz.pdf

Back to Conway, the scenario planning process he outlines is the same as that of Project Horizon. I wonder if the people responsible for managing that project did so intentionally, following Conway’s model or it was more of a Snowdean serendipity moment. I also wonder if the Project Horizon team answered the model questions from the decision tree for scenario planning that Conway provides. I must confess, I put the tree to test in terms of my own work and found it extremely difficult to answer the questions with “yes” and “no”. The reason for this is that it is often impossible to speak about an organization with one voice. There are, individuals, teams, silos, middle management, senior management – all open to change and dialogue to different degrees. Should one engage in scenario planning if the staff are open to change and dialogue but management isn’t and vice versa? If I attempt to answer this question, another point Conway makes comes to mind: “The organization will need to focus its foresight work – is it about helping the organization develop its preferred future and documenting that in a plan, or is it about considering all potential futures, whether possible, plausible or probable.” (p.21) From the point of view of management, I would say the focus tends to be on the former – developing your preferred future. From the point of view of staff – considering all options. How feasible is it then to apply scenario planning in a government organization, where both planning and decisions are more likely than not to be strictly top down? It takes a certain entrepreneurial spirit, of which government institutions are devoid almost by default, to engage in this type of exercise. Strategic or visionary thinkers are hardly welcome in such environments. At best, their boldest big picture strategy is dismissed as day-dreaming; at worst, it is seen as a threat to the managing body. In this respect, I find it commendable of the US government to support a project such as Horizon and would be very curious to know at what stage the project is two years after publishing the preliminary report. In particular, it would be interesting to know the progress on the Global Hazards Planning and Response capability, the US Government Partnership framework and the Global Affairs Learning Consortium since all these are sub-projects I am also trying to pursue in my work.

Scenario planning and the national security issue I’m working on (Russia and the Balkans):

I had already considered using scenarios prior to reading Conway and the project Horizon report, however, I’m not sure if scenario planning is appropriate when developing a situation assessment, which is the overarching analytical technique I’m applying to my project. In my view, a situation assessment should be limited to objective capabilities rather than alternative futures. I don’t think a situation assessment is or should be concerned with forecasting; rather it should be based on what Conway refers to as “traditional strategic planning” – deductive not inductive.

Still, had I chosen the same topic but a different method, I would apply scenario planning to examine potential “new” alliance formations on the Balkans. Bulgaria is a particularly interesting case due to its membership in both NATO and the EU, and its historical ties to Russia. Alternative scenarios could throw light on what role the country is going to play in terms of energy security in Europe. With four planned major pipeline routes transiting the country – 2 Russian projects and 2 EU/US-sponsored ones, it would be interesting to develop a scenario exercise to determine if Bulgaria will choose to “bandwagon” to the EU/US greater powers or become a Trojan horse by strengthening its ties with Russia. Other countries in the region (Romania and Serbia for instance) are less problematic because they have expressively stronger affinities to one camp or the other, hence the relatively low uncertainty would not merit the use of scenario planning. Greece could be another potential wild card despite its long history of NATO/EU membership. Dissatisfaction with some EU policies and a prospect of becoming a regional energy power through closer alliance with Russia, Greece’s behavior will be anything but predictable. Throw in Turkey’s contested EU application and the event that it actually succeeds, and a reshuffle of alliances and spheres of influence is sure to experience some major shifts. Cyprus, for one, will open its arms toward Russia even wider than it currently does.

To sum up, I would not apply scenario planning to my national security issue as long as I’m doing a situation assessment. However, I do believe scenario planning as a technique could be a valuable addition to long-term strategic analysis, especially when used to challenge assumptions about rational choice whether on an individual or a collective level.

 

 

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Crisis Alert for Zimbabwe, Tibet and Kosovo; Conflict Resolution Opportunities for Comoros Islands, Cyprus, Pakistan, Taiwan Strait

Eight actual or potential conflict situations around the world deteriorated in March 2008, and four improved, according to the new issue of CrisisWatch. Controversial early results of Zimbabwe’s 29 March presidential, parliamentary and municipal elections have put President Mugabe under pressure to resign. Protests in Tibet turned violent on 14 March and unrest spread to Tibetan-populated areas of neighbouring provinces, prompting the deployment of thousands of police. In Kosovo, violence in Mitrovica and Belgrade’s push for partition underscored the fragility of the post-independence situation.

The situation improved in Comoros Islands, Cyprus, Pakistan, Taiwan Strait, pointing to conflict resolution opportunities for these countries.

For April 2008, Crisis Watch predicts Zimbabwe and Nepal as both Conflict Risk Alerts and Conflict Resolution Opportunities. It also identifies Cyprus and Uganda as Conflict Resolution Opportunities.

Crisis alerts for Armenia, deteriorating situation in Darfur, conflict resolution opportunity for Cyprus

The new Crisis Watch report was just released, identifying 12 actual or potential conflict situations around the world that deteriorated in February.

Among those is Armenia, where 11 days of protests after allegedly rigged presidential elections have resulted in a violent crackdown, a declared state of emergency and mobilization of the armed forces. 

Timor-Leste saw attacks on the president and prime minister, including the killing of former head of military police, who was himself instrumental in the attack on the president.

Rebel attacks on the Chad capital N’Djamena resulted in the killing of hundreds and the displacement of thousands of people while in Darfur, the Sudanese government attacked three towns and an IDP camp from both ground and air, marking the worst violence in the region in months.

Other places where the situation is reported to have deteriorated are: Cameroon, Comoros Islands, DR Congo, Ethiopia/Eritrea, Israel/Occupied Territories, Philippines, Serbia, and Somalia.

Perhaps contrary to many expectations, the situation in Kosovo is said to have improved since the declaration of independence on 17 February. Power-sharing negotiations in Kenya are giving a glimmer of hope for potential political stabilization. Pakistan’s elections proceeded relatively peacefully, with opposition parties sweeping to power. And in Cyprus, President-elect is committed to engaging in reunification talks with his Turkish-Cypriot counterpart.

Conflict risk alerts for March 2008 point toward Armenia, Comoros Islands and Kenya while Cyprus, Pakistan, Timor-Leste and Uganda are likely to see conflict resolution opportunities.

Joint LFAR: Energy Security in the Former Soviet Union

Read joint LFAR here: energy-security-fsu.pdf

Authors: Aimee Blanchard, Shelly Downes, Yana Feldman, Linda Popova

With an enormous sigh of relief and satisfaction, I’m happy to announce that I’ve just finished my second intel course. The course focused on written communication in intelligence and explored various reporting formats: INTSUMs (intelligence summaries), SFARs (short form analytical reports), writing under crisis, cable writing, and LFARs (long form analytical reports. The final project for the course was a joint LFAR, which focused on energy security in the Former Soviet Union.

There were four of us, who worked literally day and night for the past couple of weeks to produce this LFAR. I’m incredibly proud and happy with the final product, not least because our team of 4 showed a great work ethic, and collaboration simply seemed to flow. What makes the collaboration even more special is that it was an example of how working virtually has really begun to change our very concept of work and collaborative work in particular: one team member was located in the southwest of the U.S., one on the U.S. east coast, one in Austria, and one in Switzerland. While the U.S. part of the team was taking a rest, the European counterpart took over the shift, with an approx.7-10 hour difference in time, and vice versa.

This has been a great practical experience in virtual collaboration and communication and I would like to thank both my team and the Mercyhurst College Institute for Intelligence Analysis for the opportunity to work on producing something as conservative as an intelligence product in a most creative way.

LFAR: Energy Security and the “New Great Game” in Central Asia: the Case of Kyrgyzstan

pipelines1.jpg Executive Summary: The interest of the great powers and emerging competitors such as China and India in the resource rich Central Asian states are very likely to continue and increase over the next 12 months. Kyrgyzstan is likely to benefit from increased interest in its hydroelectric sector, attracting foreign direct investment from Russia, China, the Middle East, Japan, as well as indirect support from the U.S. Russia will all but certain remain Kyrgyzstan’s main trading partner. The U.S. is likely to seek India’s assistance to get back some of its lost influence in the region. China will intensify cooperation with Kyrgyzstan in financing new hydroelectric power stations along its Western border under the aegis of the SCO. Kyrgyzstan is likely better positioned than its energy producing neighbors to circumvent resource curse and Dutch disease. End Summary. 

Discussion: 

Background 

In the last decade, the Great Powers have once again turned their eyes on land-locked Central Asia, turning the region into one of the world’s most coveted areas for the extraction of natural resources, the securing of politico-economic alliances, and a fierce battleground for gaining strategic spheres of influence. Not undeservedly, Central Asia has been labeled with terms like “black whole” or “Asia’s Balkans”, placing enormous gravity on the region as one of the central nodes in the complex system of global energy security. 

As in the fairytale, Central Asia has been kissed awake from a century of slumber and emerged from sleep as a strategic focus in “the new great game”. Not since the 19th c., when Tsarist Russia and the British Empire flexed muscles to gain influence in the area, has Central Asia had so many eyes set on it. Yet the economic growth and the raised political profile come with an expensive price tag: authoritarian governments, stalled reforms, lack of transparency, high levels of corruption, media censorship, human rights violations, and not least of all, shivery winters for the majority of the local population. 

The emergence of Central Asia as a major actor on the geopolitical scene is largely due to a growing world energy demand. As stated in a report by the U.S. National Intelligence Council: “Growing demand for energy – especially by the rising powers – through 2020 will have substantial impacts on geopolitical relations.” Both the Clinton and the Bush administrations have actively sought means to gain influence in the area. According to analysts from the U.S. Energy Information Agency, the world’s unproven oil reserves are expected to double in the next two decades, with former Soviet states accounting for a projected fourfold increase. Based on this statement, there can be little doubt that Central Asia will continue to spiral up in geopolitical influence. The stakes are high and they affect not only the interests of super powers like the U.S. and Russia, but also neighboring Afghanistan, China, Iran, Pakistan, Turkey, and the Ukraine, as well as the more distant European Union, India and Japan. 

Energy is not the only reason that drives geopolitical relations in the region. The Taliban regime, which came into power in 1996, triggered a wave of fear of radical Islamic revival throughout Central Asia, prompting local governments to increase their security cooperation with Russia, the U.S. and China. In the aftermath of 11 September 2001, this cooperation has expanded, with the U.S. and Russia setting up military bases in the region, and China even conducting joint military exercises with Kyrgyzstan under the framework of the Shanghai Cooperation Organization (SCO), which, at least on paper, is not a military alliance. 

The Role of Kyrgyzstan 

Even if we ignore the Putin-Medvedev precedent in Russia, it is hardly surprising that Kyrgyz President Kurmanbek Bakiyev appointed former Energy Minister Igor Chudinov as new Prime Minister in early Jabuary 2008, following the hotly disputed December 2007 elections. Chudinov, and ethnic Russian with no knowledge of Kyrgyz, has already been criticized domestically for allegedly not having the experience to lead the government as well as for his inability to challenge Bakiyev, since constitutionally the president must speak Kyrgyz. Once a high-ranking Komsomol official, Chudinov has been the director –general of the Kyrgyz state gas company Kyrgyzgaz since 2005. Yet despite his background in the industry, he is not placing too much weight on boosting development in the energy sector; rather, he has stated that he will focus on improving core sectors such as agriculture, minerals and tourism, and only secondary, the exploitation of energy resources. 

It is true that Kyrgyzstan has neither the oil nor the natural gas resources of its neighbors Kazakhstan, Uzbekistan and Turkmenistan, however with an annual volume of 2,450 km3, it possesses considerable water resources. Kyrgyzstan is considered the third largest hydroelectric power in the CIS after Russia and Tajikistan. It has sufficient amounts of energy but is in dire need of developing its electric lines which are overloaded (they transfer around 5.5 GW but have the capacity of 4 GW) and have deteriorated due to neglect and lack of investment since the 1990s. Privatization of the electricity sector started as early as 1998 but has been slow until recently. Bakieyev’s government has been keen to push privatization of the sector as first priority and it is very likely that more concrete results will be seen by the summer of 2008. 

Out of an estimated potential of 26,000 MW, the Kyrgyz installations are currently only capable of producing around 3,000 MW, of which 80% is from hydro electricity and 20% from thermal stations. The country’s 17 hydroelectric and two thermal stations have enough electricity to fulfill local consumption needs and produce enough surplus for export. Yet regional energy trade relations are strained. 

The Regional Actors 

The theoretical compatibility (3 gas and oil producing states and two hydroelectricity producing ones) has proved unsustainable in practice. There have been ongoing negotiations to exchange water for oil, but Kyrgyzstan has usually been on the losing side of those, with strong over-reliance on energy from Kazakhstan and Uzbekistan. Uzbek pricing demands have had significant repercussions in Kyrgyzstan. While in 2006 Bishkek was paying Tashkent US 55 per thousand cubic meter, at the end of December 2007, Uzbekistan hiked up prices between US 100-115 and US 145/tcm. Kyrgyzstan is not the only one being bullied by Tashkent. Tajikistan is suffering a similar fate, and even Russia has agreed to a sizable price for the Uzbek gas. “The Kyrgyz economy is bearing the price rise of Uzbek gas with difficulty,” reported the Gazeta.kz website on 3 January 2008. “The people of Tajikistan will bear the most substantial losses. The poverty rate, which is already high, may increase.” 

From this and other similar instances we can deduce that it is very likely that Karimov’s administration is puppeting Russia in strengthening its political influence over Kyrgyzstan and Tajikistan by controlling the gas taps. 

The five Central Asian states continue to be divided over issues of how to use the water resources: for irrigation in the summer or for heating in the winter. There is currently no reason to believe that the negotiations will move forward in the next 12 months. Since the June 2001 agreement between Kazakhstan, Kyrgyzstan and Uzbekistan to pay off their mutual energy debts through energy barter rather than by cash payment, Kyrgyzstan has been grudgingly delivering more than a billion kwh of hydroelectricity to both countries annually. While it would be Kyrgyzstan’s preference to receive cash for such transactions, it has had to contend with 700 million cubic meters of gas and 20,000 tons of petrol from Tashkent and 800,000 tons of coal and 20,000 tons of oil from Astana.

In June 2007, the Bishkek Institute for Public Policy hosted a roundtable for local experts and government officials on the challenges and opportunities for energy security in Kyrgyzstan. Participants in the discussion concluded that energy security in the country depends on the uninterrupted increase of generating power and the decrease of dependence from imports from neighboring countries. In this light, it is very likely that the current administration will attempt to speed up the privatization process and attract foreign capital for construction and exploitation of the hydroelectric stations. But even if construction of these stations, most notably the Kambarata stations, goes according to plan, and they are fully operational in 5-7 years, it is difficult to predict if that will have a desired impact on energy security. With a lack of institutional oversight and high levels of corruption, it is likely that a tariffs policy on electricity will be extremely difficult to implement and regulate. One major consequence of such a scenario is likely to be that the bulk of electricity would be exported at the expense of the local population and the Kyrgyz economy. This is currently the case in Uzbekistan and Turkmenistan, where the benefits reaped from energy exports have largely been appropriated by the political elites and shady businessmen, leaving residents to “burn whatever they can get their hands on in order to stay warm”, according to local media sources. 

Russia 

Russia’s interests in Central Asia have naively been attributed (mostly by Western analysts) to a hegemonic lust to reclaim its “lost” empire. Russia’s decades-long control of the region has indeed far more complex long-term geopolitical implications. It is highly unlikely that Russian foreign policy toward Central Asian countries is driven by hopes of recapturing great oil wealth. A far more likely scenario is Russia’s desire for geopolitical dominance of the region. Russia’s likeliest ambition in the area is not the possession of oil and gas resources, but control over the pipelines. As one expert has put it: “Whoever controls the lifeline of oil transportation controls the oil resources of Central Asia, and by extension will dominate the politics of Central Eurasian states as well. 

With energy as a means rather than an end in Russian foreign policy, it is not difficult to perceive Russia’s motivation in participating actively in the privatization of the Kyrgyz electricity sector. Currently Russia imports cheap Kyrgyz hydroelectricity to supply parts of Siberia. To reinforce its position, Moscow wants to develop transmission lines connecting north and south Kazakhstan and some inter-connecting lines between Tajik and Kyrgyz networks. The Russian state-run Unified Energy System (RAO-UES) is likely to use this network as a “North-South energy bridge” to export via the Central Asian grid to dynamic markets in the Far East. 

The United States 

According to a U.S. senior research fellow, Ariel Cohen, U.S. interests in Central Asia are threefold: security, energy and democracy. While a key U.S. national security concern is the diversification of energy resources, and Central Asia, despite its geographic distance and difficult accessibility, provides just such a lukewarm alternative to more turbulent markets in the Middle East, the U.S. has nonetheless achieved only marginal success in the region. 

So far U.S. involvement in Kyrgyzstan as well as the greater region, can be characterized by a “win some lose some” track record. Despite supporting local projects to increase and diversify non-Russian energy transit routes for Central Asia and setting up two military bases: one in Uzbekistan (now defunct since the 2005 riff with Karimov over criticism of human rights violations in the Andijan case) and one in Kyrgyzstan, reception of the U.S. alleged benign intentions on Cenral Asian soil has failed to produce the “winning of hearts and minds” it did perhaps intended. Nominal cooperation between local authorities and the U.S. in the war on terror, has helped the U.S. keep its airbase at Manas for the annual price tag in rent of about US 150 million, but has been an annoyance to the authoritarian governments of the region in its encouragement of reforms, modernization and democratization. 

It is highly unlikely that the U.S. will become a dominant power in Central Asia in the foreseeable future. What is likely, however, is that it will try to leverage its good relations with India to gain benefits indirectly. As both a stable democracy and a partner in the fight against terrorism, India will likely be used as a foreign policy tool to maintain and possibly expand U.S. influence. By providing an alternative corridor for energy exports to the Central Asian countries, India could be instrumental in breaking up the Russian monopoly, which in turn would contribute to economic growth, stability, and improved relations among the pipeline transit countries of India, Pakistan, and Afghanistan, which is all in U.S. interest. 

China 

China has been an importer of petroleum products from Central Asia since the April 1994 visit of Chineses Premier Li Peng to Kazakhstan, Uzbekistan, Kyrgyzstan and Turkmenistan. However, Beijing’s interests at that time were border security concerns (the 3,300 km western border with Kazakhstan, Kyrgyzstan and Tajikistan) as well as insurgency fears from Uighur separatists in Xingjiang rather than energy politics. Just little more than a decade later, China’s energy strategy is keeping eyes fixed on its western neighbors. Not only is close energy relationship with Central Asia very likely to further boost Chinese economic growth, but it can play a positive role on China’s self-confidence as an emerging great power, able to compete and possibly outperform geopolitical rivals such as Russia, the U.S. and Japan. By far the largest impact that China is likely to make on the energy market in Central Asia is its ability and willingness to provide new oil pipelines and diversify options and opportunities for the land-locked states, thus acting as a balancing force between Washington and Moscow. 

Specifically to Kyrgyzstan, Chinese-Kyrgyz energy cooperation has taken off significantly since 2005 and shows no likelihood of slowing down in the near future. A proposed investment of US 900 million to Bishkek in 2005 is now in the implementation stage of constructing a hydroelectric station, two blast furnaces, and the construction of a railway track and two roads in exchange for Kyrgyz electricity, iron and precious metals. It is all but certain that China will participate in the construction of the Kambarata I and II stations, although the Kyrgyz authorities will likely tread lightly on the deal so as not to undermine the authority of Gazprom and other Russian companies with big stakes in the construction. Further cooperation can be expected in Oriental Tian-Shan, in the region of Lake Issyk-Koul on the border with China, where privately-owned company Sarydjaz-Energo plans to begin construction of a cascade of five stations with the help of Chinese financing. 

“Resource Curse” or Blessing and the “Dutch Disease” 

A common problem that has emerged in Central Asia (as well as Russia) as a result of the oil and natural gas boom, the increase in energy prices and heightened international interest in the region is the so-called “resource curse”, whereby energy rich countries waste their income in corruption and spending on security forces, while failing to diversify their economies, build effective institutions or stable democracies. 

The “resource curse” is one of the main ingredients in the correlation between natural resources and violent conflict, and Central Asia is certainly not immune in this respect. Studies show that oil producing areas often suffer poverty, repression, environmental degradation and labor tensions, with the populations not being privy to benefits from the wealth that is created. Uzbekistan and Turkmenistan are one of the more extreme examples of this tendency. They, along with other resource giant Kazakhstan, also run a much higher risk of “Dutch disease”, in which increased natural resource revenue causes a currency to appreciate rapidly, making other exports less competitive. “Dutch disease” and “resource curse” contribute to a higher risk of internal conflict, to which many Central Asian governments and Russia have responded by strengthening their domestic security structures to a point that a basis for the development of democracy has eroded or been killed in infancy. The abundance of valuable resources creates opportunities for government corruption and rentier states, whose political and economic goal is getting a share of the spoils and self-perpetuation, with little or no regard for economic and social development. 

In this regard, Kyrgyzstan’s lack of substantial oil and natural gas resources may actually turn out to be a blessing in disguise. Alan Rousso, Lead Counsellor at the European Bank for Reconstruction and Development (EBRD), provides some valuable insights on the connection between market reform and political governance in the resource rich countries of Eurasia, which unlike other former Soviet states in transition such as the Central European and the Baltic states, have so far lagged behind with respect to adoption and effective implementation of structural and economic reforms that support markets. He claims that within the CIS, some of the most reluctant economic reformers have been the oil and gas producing countries such as Russia, Azerbaijan, Kazakhstan, Turkmenistan and Uzbekistan (RAKTU), showing that since 1992, the non-energy producing countries in CIS (Kyrgyzstan falls under this category) have outperformed the energy producers in early phase liberalizing reforms (price and trade liberalization, small scale privatization) and in later phase institutional reforms (financial sector, governance and enterprise restructuring, infrastructure and large scale privatization). An EBRD study from 2005 shows that the non-energy producers had an average transition score in early phase reforms of around 3.8 out of a total 4.3 (4+), compared to an average score of around 3.2 for energy producers. In the second phase reforms, this ratio is 2.4 to 2.1. 

While Kyrgyzstan is far from being a developed democracy, it has certainly been more open and tolerant to reform processes and democratization, such as greater tolerance to political opposition, greater freedom of the press, better development of civil society and NGOs, greater respect for human rights, greater cooperability with the international community, and greater efforts toward the diversification of its economy. 

If Kyrgyzstan is able to take advantage of its resource disadvantage by focusing on institutional and market reforms, it is very likely that it will emerge healthier and better positioned in the global geopolitical game, opening doors for itself, where other energy producing countries have shut the blinds and bolted the gates. Given the country’s currently weak political and economic institutions, its chances of avoiding the resource trap will be entirely dependent on the partnerships it decides to pursue and the extent to which the present administration will be able to reduce energy dependency on Uzbekistan and Kazakhstan, as well as over-reliance on Russian investment. It is unlikely that any major shifts will occur on the chess board of energy security politics in the next 12 months with respect to Kyrgyzstan. But whatever changes do affect the current spheres of influence configuration, they are more likely to be blown by the south and east winds, not the north and the west. 

Comment: This report makes no mention of the role of the European Union and its relations and possible impact on energy security cooperation between the EU and Central Asia, So far the EU has had little or no impact in the energy politics of the region even though it is painfully aware that its failure to do so is detrimental to its energy interests. It can be acknowledged that in the Euro-Atlantic framework, the U.S. has been faster and smarter at seeking a stronger foothold in the region in order to minimize Russian monopolization of sources and routes. While the EU realizes that Russia is using its stakes in Central Asia as a political tool in EU-Russia relations, the EU is yet to develop a common energy strategy. 

Source Reliability: 9

Analytic Confidence: 8  

INTSUM: Privatization of the Kyrgyz Electricity Industry Likely to Hit Hardest the Poor

kyrg_water.jpg IWPR (Bishkek) 25 January 2008

Plans to privatize Kyrgyzstan’s electricity industry are under way, after President Bakiyev’s statement that the only way to bring more money into the sector is through privatization. He and his officials believe that Kyrgyzstan can become self-sufficient in energy as privatization would help with renovating derelict Soviet equipment and with the building of new plants. However, while those who support privatization as the only way of salvaging a loss-making industry, opponents say the privatization process has been anything but fair and transparent, expressing a low degree of trust in the way the government handles potential bids.

Analysis:

It is very likely that privatization of the electricity industry will continue rapidly, with several major investment deals likely to close by summer 2008. While Russia, and Gazprom in particular, are highly likely to be favored as investment partners, it is also likely that Kyrgyz authorities will be open to other bidders, including Kazakhstan, Uzbekistan, China, some Middle East countries, and possibly even the US.

As private investors move in, the prices for electricity and heating are very likely to increase by about 30%, which will have the most severe effects on the Kyrgyz poor, and especially on the retired segment of the population.

Source reliability: 8

Analytic Confidence: 8

WEF Global Risks 2008 Report Adopts Vocabulary from Complexity and Systemics

wef.jpg WEF is convening its annual session in Davos next week (24-26Jan), and have just put online their 2008 risk assessment report, which covers the topics that will be discussed at the various panels.

The report is very interesting, not least because of the 2nd appendix, which features a table of predicted risks and their likelihood and severity in numerical terms – a topic of central concern to my last two courses in intelligence analysis. Further, what I personally find rather fascinating is the emergence (sic) of a homogenized vocabulary to talk about what we label these days “new risks”. This vocabulary, stems entirely from subjects like complexity and network sciences, as well as some of the more metaphysical parts of physics and mathematics. Now, I’m no financial risk specialist, nor do I have any knowledge other than popular explanations of Physics and Math theories, but when I read a report, whose audience is primary in the finance sector, make repeated use of words  such as emergence, uncertainty, aggregation, resilience, systemic finacial risk, interconnectedness, diffusion, complexity, “tail events”, etc., etc., a bell goes off in my ears. Is this current mania toward homogenuity, assimilation, the universal, and big picture telescopization not blinding us to what lies immediately before our eyes? I find something grotesque and almost cannibalistic in this process.

Nonetheless, the report is well worth reading, if not for its linguistic “anomalities” than for its forecasting methodology (complete with a  fashionable SNA -social network analysis). This is not to say that I dislike WEF’s assessments. On the contrary, I find many of the observations and the parallels drawn between finacial risk evaluation and geopolitical risk assessment, as well as the discussions on food security, supply chains, and the role of energy, highly informative. In fact, I buy a large part of the arguments. I’m slightly surprised but pleased to read such humble conclusions (contrary to conventional wisdom, which looks at two aspects of risk – likelihood and severity and traditional prevention and mitigation measures of countering them)  as acknowledgements that in the face of “new risks”, which are entirely unforseeable, such strategies fail.

It is refreshing to read a report produced mainly by financial analysts (notoriously conservative) that: “It may not make sense to attempt to eliminate risks which ultimately represent a source of opportunity as well as hazard. Rendering the global financial system as flexible and resilient (my emphasis) as possible by improving early indicators, enforcing more stress testing, enhancing understanding of tail risk and requiring better contigency planning may be more effective.

Ultimately, strategies to deal with systemic financial risk must reflect the fundamental shift in the global financial system to a market-driven model. There is considerable scope for increased public and private sector collaboration on stress testing, liquidity management, risk assessment and prevention.”

I welcome such initiatives from the private sector as I truly share their opinion in the value such collaborations can bring. The question is, has the public sector woken up to the idea that this might be its most viable strategy in fullfilling what its ultimate purpose is supposed to be: duty to its electorate?

I’ll be covering more news from the 3 day WEF session in Davos on my blog next week.