Political Risk Report 2022

Political risk at sea

Most focus on inland water, such as hydropower projects, which could ignite interstate conflicts over transnational river basins in Africa or contribute to sovereign debt distress.

Fishing vessels on a calm sea in good weather

Water-related projects planned or underway around the world exceed US$185 billion in value.^[1] Most focus on inland water, such as hydropower projects, which could ignite interstate conflicts over transnational river basins in Africa or contribute to sovereign debt distress. Water may also be channeled to serve manufacturing facilities and mining operations, thus increasing social unrest and contract frustration risks as water scarcity is perhaps the most socially unifying threat across the planet. Oceans represent one of the most promising frontiers for meeting the growing demand for food, raw materials, and even space to expand.

The “blue acceleration” refers to the unprecedented surge in economic activity in the ocean, with its immense potential for exploration. Much of the activity occurs in exclusive economic zones (EEZs), areas of the sea that generally extend 200 nautical miles (230 miles) beyond a nation's territorial sea, within which a coastal nation has jurisdiction over both living and non-living resources. When an overlap occurs between contested EEZs it is up to each state to decide the actual maritime boundary, which generates further areas of tension. The exploration and mapping of these resources is the first step towards extracting economic value, and also serves to guide patrols in these areas to help create favorable environments for domestic companies and international trade (see Figure 1). By extending jurisdictions, EEZs have the potential to increase political tensions.

^[1] Source: Fitch Solutions, calculation by Marsh

^[2] ASEAN members are: Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam.

Figure 1:

Extent of seabed mapping in countries’ exclusive economic zones varies considerably

Source: GEBCO - The General Bathymetric Chart of the Oceans, 2020

The likely shift towards the diversification of supply chains resulting from the crisis in Ukraine — for example, towards Australia, India or Indonesia to substitute imports from Russia — could increase the focus on already congested sea areas, particularly in the Indo-Pacific region. Tense confrontation in the South China Sea adds to growing disturbances in coastal states’ domestic environments. This area has become a flashpoint for the region, as US$3.4 trillion of goods pass each year through Beijing’s “nine-dash line,” a boundary unrecognized internationally that China has drawn around 85% of these waters. There is growing frustration with the slow pace of talks between the Association of Southeast Asian Nations (ASEAN) and China on a code of conduct for the South China Sea, as ASEAN countries fear losing EEZs and rights to map and explore, ultimately leading to an increase of revenues and geostrategic influence to the benefit of China.[2] Due to the pandemic, there were no in-person negotiations in 2020-21, although virtual meetings resumed last year. ASEAN membership has helped members reduce frictions and seek common ground, even though ASEAN coastal members reject the nine-dash line.

The Organisation for Economic Co-operation and Development (OECD) estimates that the largest sector of the ocean economy is the offshore oil and gas industry, which generates one-third of the value added by all economic activities in the ocean. About 70% of the major hydrocarbon deposits discovered between 2000 and 2010 are located under the sea, and, as fields in shallow waters (less than 400 meters) become depleted, production is moving to greater depths. While greenfield offshore exploration is concentrated in developing countries, a new study led by Duke University shows that multinational offshore companies that generate the most revenue from the ocean are generally headquartered in high-income countries. Offshore extraction is generally more expensive, but is also less affected by political tensions within individual countries. If the energy transition to a low carbon economy were to bring a reduction in offshore activities, the impact on host countries’ revenues and consequent political tensions would be significant.

The blue acceleration towards ocean resources is fueling tensions and geopolitical ambitions.

Indonesia lost 25 islands as a result of exporting sand to Singapore, bringing about border demarcation talks. Singapore’s population has doubled in the last 30 years, so it is stockpiling sand as its building areas would otherwise be saturated. Singapore’s reclamations have increased landmass by 20%, inducing Indonesia, Malaysia (2018), and Cambodia (2017) to stop sand sales to selected countries. Procurement and marketing of sand has also unleashed criminal cartel activity — crime syndicates procuring Indian sand control several illegal mining sites, adding to security risks in the region.
France has accumulated the largest EEZ in the world. The EEZ from French overseas territories and departments is about 8% of the world’s total, while France represents less than 0.45% of the world’s land area. Even though EEZs are not considered to be part of the territory of a state, they grant special rights to resources, such as fishing and mineral extraction, in an area extending 200 nautical miles (370km) from a country’s coast. This incentivized France in 2018 to become the first European nation to articulate its own Indo-Pacific strategy, with a dedicated defense strategy completed in 2019. More than 7,000 French troops and several vessels are deployed permanently to the region.

Exclusive economic zones expand areas of intersection between countries, potentially heightening political tension

Source: Flanders Marine Institute (2019). Maritime Boundaries Geodatabase, version 11. Available online at https://www.marineregions.org/.

In the leading countries by EEZ extension, the risks of war and expropriation are relatively low, but the risks of terrorism, violence, and war itself have increased significantly on a relative basis (see Figure 2).

Marsh’s risk ratings are generated monthly by a proprietary, algorithm-based modelling system incorporating over 200 international indices across 197 countries. For each peril, countries are scored on a scale from 0.1 to 10.0, with intervals of one decimal; 0.1 represents the lowest risk score, 10.0 the highest. Five risk bands are identified within the scale, correspond to distinct risk environments.

Figure 2:

Political risk ratings for selected countries with large EEZs

Source: Marsh

The Northern Sea Route (NSR) is another maritime area where frictions between countries could spark wider conflicts and disrupt international trade (see Figure 3). The entire route lies in Arctic waters and within Russia's EEZ, meaning that the Russian State Atomic Energy Corporation (Rosatom) oversees transits of all ships. The risk of confiscation or expropriation remains high in Russia, including its territorial waters. In August and September of 2021, up to 85 vessels contemporarily navigated these waters. With maritime traffic at large, the flag that a ship flies does not generally reflect the prevailing economic interest of its cargo. This adds elements of uncertainty and tension should retaliatory measures be implemented as well as additional controls over cargos, considering that 40% of vessels transiting the NSR in 2021 carried the flags of Liberia, Portugal, or the Marshall Islands. Russia continues to carefully monitor transits through its territorial waters. Potential retaliation against third countries’ vessels and cargos, including a full blockade, could disrupt trade flows and divert attention from the fragile environmental situation along the route.

Figure 3:

Number of transit voyages along the Northern Sea Route continues to increase

Source: Northern Sea Route Information Office

Report

Political risk at sea

Figure 1:

Extent of seabed mapping in countries’ exclusive economic zones varies considerably

Exclusive economic zones expand areas of intersection between countries, potentially heightening political tension

Figure 2:

Political risk ratings for selected countries with large EEZs

Figure 3:

Number of transit voyages along the Northern Sea Route continues to increase

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Political risk at sea

Figure 1:

Extent of seabed mapping in countries’ exclusive economic zones varies considerably

Exclusive economic zones expand areas of intersection between countries, potentially heightening political tension

Figure 2:

Political risk ratings for selected countries with large EEZs

Figure 3:

Number of transit voyages along the Northern Sea Route continues to increase

Political Risk Report 2022

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