Among white swans

On estimating political risk in India

India is the only Asian country outside the East Asian region to be included in the Political & Economic Risk Consultancy’s (PERC) Asian Risk Prospects for 2009 report. According to PERC, India is the riskiest country among those analysed, and it’s risk rating is to increase for the coming financial year. The executive summary says:

India faces some of the biggest risks in 2009 because of uncertainties surrounding the coming general election, rising communal violence and terrorism incidents. The global financial crisis is not an entirely bad thing. The economy needs to take a breather and certain sectors like real estate need to experience sharp price corrections in order to restore India’s competitiveness. India’s underlying attractions to foreign investors should remain no matter who wins the next election. The biggest risk is that a deterioration in political and economic conditions in neighboring Pakistan could aggravate social unrest in India further and hurt national security.[PERC]

General elections, communal violence, terrorism—these are neither new nor too much of a bother for foreign investors. It is perhaps the possibility of the Singur type of public agitations that should be more of a concern. Even so, the geographical variation of political risk among Indian states makes a national level risk assessment neither too accurate nor too meaningful. The analytic framework must focus on estimating political risk in India, than that of India.

So is the case with the Pakistan factor: in addition to the geographic factor, unless the channels by which the turmoil in Pakistan is transferred to India are understood and analysed, the conclusion that it will aggravate social unrest in India is too general to be of much use.

Moreover, the risk factors PERC cites in India’s case are well-known and well-understood. The real issues are of the Black Swans that might turn up among the ostensibly less risky, but considerably more opaque East Asian economies.

Turkish delight

India should welcome the proposal to secure Central Asian gas through Turkey and Israel

Indrani Bagchi reports on an exciting new development. Ali Babacan, Turkey’s foreign minister, has proposed a plan to deliver Central Asian oil and gas through a combination of supertankers and overland pipelines in Turkey and Israel.

(Oil) from Central Asian countries like Kazakhstan, Azerbaijan and even Georgia be transported through Turkey’s massive pipeline infrastructure to Ceyhan port. Traveling through the Mediterranean Sea in super tankers, the oil will then be fed into Israel’s Ashkelon-Eilat pipeline, while super tankers pick it off from the Gulf of Aqaba port of Eilat and back again on super tankers to India.

Turkish officials pointed out that none of the pipelines will have to be built. They are already in existence. The Ashkelon-Eilat pipeline is a functioning one, as is the Baku-Tbilisi-Ceyhan pipeline which started work in 2006. Tel Aviv and Ankara have announced plans to carry water, electricity, natural gas and oil to Israel by way of a proposed Ceyhan-Ashkelon-Eilat passage. So, its not difficult to imagine gas coming through this passage, though this will need liquefaction and gasification terminals, which are a longer term investment. [TOI]

The supply chain involves multiple links, but is likely to be less risky compared to overland pipelines through Afghanistan and Pakistan. (The headline writers at the Times have been a little too excited—this project need not be an ‘alternative’ to buying gas from Iran. And a pipeline is not the only way to buy Iranian gas.)

Now, promoters of this Central Asia-Turkey-Israel project are bound to claim that it will lead to cheaper supplies—be that as it may, what is important is that having access to fuel supplies via this route is consistent with a strategy of diversification of supply sources. As advocated by this blog, India’s energy security lies in competitive markets.

India should take up Turkey’s offer and commence exploratory negotiations forthwith. And while this deal is worked out, the central government should lose no time in announcing a policy of investing in several oil & gas processing terminals along its seaboards. For Turkey’s proposal shows that there are more such projects in the pipeline.

Related Links: On Israel’s Eilat-Ashkelon project; and the Baku-Tbilisi-Ceyhan pipeline