Economics News

Hyperinflation Strikes Iran

The world’s next hyperinflation episode appears to be underway in Iran, with potentially far-reaching political consequences. Officially, Iran pegs its currency—the rial—at 12,260 to the dollar. In early 2012, black market exchange rates began to diverge sharply from the 12,260 peg, eventually hovering at nearly double the official rate. Over the last month, the value of the rial has plunged further to about 35,500 rials to the dollar. With a monthly inflation rate now estimated at over sixty-nine percent, Iran has crossed into hyperinflation territory, defined as any monthly inflation rate in excess of fifty percent.

The declining value of the rial makes imported goods of all kinds more expensive, since they must be paid for in foreign currency. As international sanctions severely limit the availability of foreign currency, Iranians face skyrocketing prices. The situation is particularly troublesome since Iran needs to import much of the food and many of the manufactured goods consumed by its populace.

Matters came to a head on Wednesday, when Iranian protesters concerned about the currency collapse clashed with police in Tehran’s Grand Bazaar. Police also took time to shut down several merchants engaging in currency exchange. The protests were notable given that the Grand Bazaar has traditionally been a focus of support for the current regime. On Thursday, the Bazaar remained closed, though it seems a few currency exchanges are once more in operation.

Though the crisis only took off in the last several days, it has been in the making for years. Whereas countries like Saudi Arabia have used oil revenues to amass huge reserves of foreign currency, Iran has spent most of its money on subsidies for individual consumption. Much of the currency it has managed to accumulate is now inaccessible due to sanctions relating to its nuclear program. Maintaining a low exchange rate for years has been possible due to high oil revenues, but falling oil exports have made Iran’s fiscal situation increasingly untenable. Oil exports are down fifty-five percent from last year.

So far the government’s response to the escalating crisis has not inspired hope. Some even blame the regime for allowing hyperinflation, as it reduces the budget deficit. Actions intended to forestall the situation, such as the closing of currency exchanges and capping interest rates, appear to have just led to more panic. Two weeks ago, the government attempted to calm currency traders by opening a “foreign exchange center” that would undercut black market rates. The failure of the exchange convinced many that Iran’s central bank is basically out of options.

In a meeting on Wednesday, President Mahmoud Ahmadinejad and members of the Iranian Parliament all seemed rather confused, and wasted no time in pointing fingers at each other. The speaker of the Iranian Parliament, Ali Larijani, blamed Ahmadinejad’s redistribution policies for “eighty percent” of the problem, while acknowledging a role for the sanctions. Ahmadinejad hinted that Parliament should share in the blame, and later ordered the Intelligence Ministry to investigate twenty-two individuals for causing “overwhelming turbulence” in Iran’s foreign currency market.

Outside Iran, and perhaps within, many hope that the current crisis will lead the country to reconsider its nuclear program. The final magnitude and consequences of the crisis have yet to be determined, but it will likely prove the largest challenge the government has faced in years, if not decades. On Wednesday, Supreme Leader Ayatollah Ali Khamenei vowed, in a somewhat ambiguous context, that Iran “will never surrender to pressure.” At the very least, the crisis promises to be a potentially crippling problem for President Ahmadinejad, who implied in his conversation with Larijani that he might resign sooner rather than later, or in his words, “say goodbye.”

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Honduras Moving Ahead with Private Cities

To most development economists, the key to economic success lies in the creation of good institutions, be they schools, corruption-free agencies, or the like. In 2010, the New York University Business School economist Paul Romer made quite a splash in the field by arguing that in countries where good institutions are lacking, new “charter cities” should be built and run by outside entities under their own laws as semi-sovereign entities. Institutions in the charter cities would be designed for success from day one. Romer could point to the historical success stories of Hong Kong, Macao, and Singapore, but most of his peers regarded the idea as, if not horrible in principle, as a curiosity that would never actually see the light of day.

On September 4, Romer’s theory gained a huge vote of confidence by the government of Honduras, which signed a memorandum of understanding with a group of investors led by Michael Strong, a U.S. libertarian educator. Strong and his associates will be allowed to develop one of Honduras’s new “Regiones Especiales de Desarrollo” (REDs), or “special development regions.” REDs will have their own judicial systems, their own police, their own tax structure, and even the ability to negotiate trade internationally.

Romer himself has been heavily involved in the effort to make REDs a reality in Honduras. President Porfirio Lobo’s economic advisers quickly took note of Romer’s charter cities idea, and in 2011 they invited Romer to Honduras to make his case. Romer spoke with Lobo, who was already sold on the idea, and addressed the Honduran Congress on behalf of a constitutional amendment allowing the creation of REDs. The amendment passed soon after, granting President Lobo the power to negotiate the development of three such regions. A specific site for the first RED has not yet been chosen, though the Caribbean coastal area near Puerto Castilla (pictured above) appears to be the front-runner. Romer, along with several others, has also been appointed to a “Transparency Commission” charged with “oversee[ing] the integrity of governance in the REDs.” The commission, however, remains unofficial pending a Supreme Court decision. In an open letter to President Lobo explaining the group’s legal limbo, Romer and his colleagues state that “we, as individuals, continue to believe strongly in the vision behind the Honduran RED initiative, and we stand ready to be of service when the impediments to the full establishment of the institutional framework of the REDs have been resolved.”

The one legal hurdle remaining to the RED system is the Honduran Supreme Court, which may yet rule the entire enterprise unconstitutional. What the Supreme Court will rule—and when that ruling will come—remain anyone’s guess. In the mean time, many Hondurans have reacted to the RED concept with skepticism and anger. Critics worry that REDs will use their legal status to implement lax environmental and labor regulations, becoming in effect 21st Century banana republics. Concern also arises over the possible loss of Honduran sovereignty. Even indigenous rights’ groups have entered the debate. According to The Guardian, the president of the Fraternal Black Organization of Honduras claims that the Puerto Castilla site proposed for Michael Strong’s RED “would threaten the continuity of the Garifuna people and culture.”

Project backers, government officials, and proponents tend to dismiss “banana republic” concerns, promising higher wages and affordable housing. Even without Supreme Court approval, Strong’s group plans to begin $15 million worth of construction work shortly. According to the government, construction will create 5,000 jobs in the next six months and 200,000 before work is finished. Eventually, Strong imagines the new city as a thriving free trade zone along the lines of Dubai, and believes that it will rank among “the most important transformations in the world.” Regardless of what one thinks of the idea’s merits, the prospect of a new development  theory, a somewhat corrupt central government, libertarian investors from the United States, and thousands of Hondurans people from diverse backgrounds setting out to create a new kind of semi-sovereign entity promises to be a fascinating process to observe.

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Argentina’s Mounting Economic Troubles

Economic pressures and uncertainties are again mounting in Argentina. Moody’s recently downgraded the country’s credit rating, and on September 24 the International Monetary Fund threatened it with sanctions if it does not produce “acceptable” economic data by December. The Argentine government has been accused for the past year of manipulating its economic reports to hide its true rate of inflation. According to its most recent report, annual inflation is running at about 10 percent, whereas independent sources peg it closer to 24 percent. Economic growth in Argentina has slowed down greatly this year, although the central government still expects it to come in at a respectable 3.4 percent for the calendar year. Outside observers, however, doubt that the figure will be reached. Optimists note that Argentina’s trade surplus is strong and growing rapidly, but their opponents counter that this trend stems largely from the government’s restrictions on imports, which have angered key trading partners.

As a result of Argentina’s economic difficulties, the value of its peso has been dropping against other currencies. As Bloomberg reported at the end of August, “In Argentina’s unregulated exchange market, in which investors buy assets locally in pesos and sell them abroad for dollars, the peso has slid 27 percent this year to 6.5247 per dollar.” As a result of the peso slide, Colombia is now reporting that it has surpassed Argentina to become the second largest economy in South America in terms of nominal GDP.

Despite the looming financial problems, Argentine president Cristina Fernández de Kirchner remains unbowed. She notes that the country’s economy boomed after it ignored conventional thinking and defaulted on its bonds after its last economic crisis roughly a decade ago. Argentine prosperity, she contends, demands a degree of autonomy from the global economic system. As she recently argued, “the rich countries don’t want partners or friends; they just want employees and subordinates. And we’re not going to be anybody’s employees or subordinates. We are a free country, with dignity and national pride.”

In a recent Seeking Alpha post, Ulysses de la Torre paints a truly dire picture of the Argentine economy. The following assertions are plucked out of his column verbatim. To the extent that they are true, an impending collapse seems possible:

It is now almost impossible to buy dollars… This difficulty in obtaining foreign exchange has resulted in a de-facto travel ban… Neither domestic nor foreign tourists are traveling south, the former because they are too poor, the latter because it is too expensive at the official exchange rate, spelling economic disaster for the tourism sector… There is a one month waiting list to buy non-domestic light bulbs, which are smuggled in from Chile. Bizarrely, they are cheaper now than previously, when they could be legally imported… Smuggling a laptop into the country could earn enough to just about cover the cost of a flight to the United States… Credit from banks at interest rates considered reasonable by any conventional standard does not exist… The real estate market has effectively ceased functioning since no one is selling and no one buying… Social unrest, protests and crime are all increasing, and there are waiting lists of up to one month to buy burglar alarms. Violent crime is also increasing, which is otherwise relatively unheard of in the provinces.. Power cuts are becoming extremely common and coping with the upcoming summer will become more difficult.

 

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The U.S. Drought and the South American Farming Boom

The drought in the U.S. farm-belt is having major repercussions in South America, as farmers in the region seek to take advantage of high commodity prices. As reported in BloombergBusinessweek, Argentine farmers hope to harvest as much as 31 million tons of corn (maize) in early 2013, which would smash their previous record of 22 million tons. The acreage under soybeans in Brazil, Argentina, Paraguay, and Uruguay will also expand dramatically, perhaps by as much as 30 percent, which will likely allow Brazil to surpass the United States as the world’s leading soy exporter. Soil moisture conditions over most of the South American agricultural heartland are currently good, although that could change as the southern hemisphere passes into its spring and summer growing seasons. Eight months ago, after all, the situation was revered, when Bloomberg reported that “Corn rose, capping the longest rally since August, and soybeans climbed to a one-month high as adverse weather threatens crops in South America, boosting demand for U.S. supplies.”

The South American agricultural export boom, on-going for several years, has resulted a major economic transformation over a broad area. Paraguay, for example, has emerged as the world’s sixth largest soybean producer and fourth largest exporter. The Paraguayan government is currently courting South Korea, hoping that Korean investments will allow further increases in agricultural production. Foreign companies, it stresses, can purchase farmland in the country without restriction. Paraguay is also embracing agricultural genetic engineering. According to a recent Reuters report, “Paraguay will approve Monsanto’s genetically modified Roundup Ready 2 soybean seeds before the end of this year along with new corn technology aimed at improving the country’s competitiveness as a grains exporter…”

Uruguayan agriculture, for its part, has traditionally emphasized beef, and until recently the country produced few soybeans (as can be seen on the map). But soybeans are now the country’s top export item, with the value of the crop in 2012 estimated at $1.1 billion. Yet Uruguayan beef remains extremely important. Over the past few years, the country’s beef industry has sought to capitalize on problems in neighboring Argentina, emphasizing the fact that most of its cattle herds are largely grass-fed and free of hormones. As Argentine farmers have increasingly plowed their pastures for row-crops, the Argentine beef industry has by necessity turned to the U.S.-style of grain-fed, feedlot production, which many experts think produces an inferior product. If Uruguay follows its neighbors in emphasizing corn (maize) and soy exports, its advantage in the beef market may fade.

 

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In Unrecognized Somaliland, Berbera Comes to Life

Today Berbera is a city of about 100,000 located on the coast of Somaliland, an unrecognized state occupying the northern portion of Somalia. As the only sheltered seaport on the South shore of the Gulf of Aden, Berbera’s economic fate is thoroughly entwined with that of Somaliland. Currently, Berbera’s main export is livestock, earning it the name “Aden’s butcher shop”. The port exported 2.5 million cattle in 2010, most of which found their way to Saudi Arabian, Yemeni, or Egyptian dinner tables. The export of livestock provides over half of Somaliland’s GDP and almost all of the currency that allows its internal economy to function. Recently, the money-transfer firm Dahabshiil Group, Somalia and Somaliland’s largest company— and its closest thing to a bank—donated hundreds of livestock to hospitals around the region to encourage philanthropy during the Muslim holy moth of Ramadan.

Berbera has been an important port since at least the first century CE, when a Greek merchant described its wares: “There are imported into this place … drinking-cups, sheets of soft copper in small quantity, iron, and gold and silver coin… There are exported from these places myrrh, a little frankincense, … the harder cinnamon, duaca, Indian copal and macir, which are imported into Arabia; and slaves.” The city’s history is rather hazy, but it eventually succumbed to the Ottoman Empire and later to the British, who described it as “the true key of the Red Sea”. During the Cold War, Berbera’s perceived strategic value led the Soviet Union to build the city’s current port as well as a runway for limited air traffic.

They city’s current port infrastructure is sufficient to ship goats and cattle across the Gulf of Aden, but upgrades will be needed if the port—and the country—is to encourage the development of higher value-added industries. No private investors have stepped up yet, but Somaliland remains optimistic. Coca-Cola recently opened a $17 million bottling plant 54 miles from Berbera, where an underground river affords easy access to freshwater. The Coca-Cola plant is Somaliland’s largest private investment ever, and according to the Guardian relied on half-century old Chinese surveys and the advice of local elders in order to locate the underground water supply.

Pirates remain a problem for Berbera, which has lost two fully laden ships during the last year. The risk of losing everything to a pirate attack constitutes an intolerable amount of uncertainty for many merchants, though there has been a marked decrease in pirate activity since the mid 2000’s. Somaliland takes the problem very seriously, and the Somaliland Counter-Piracy Co-ordination Office is currently working with the United Nations Office on Drugs and Crime to educate citizens about the evils of piracy. The full brunt of its campaign is expected to begin in September. Berbera’s efforts to make its port safer and more attractive to shippers put it in direct competition with nearby Djibouti, which has traditionally hosted a significant share of Somaliland-bound shipping.

The outcome of Somaliland’s quest for diplomatic recognition will likely hinge on the extent to which it can show it has developed the institutions necessary to support a peaceful and prosperous society. Though the political action will be taking place in the capital of Hargeisa, Berbera promises to be vital part of the country’s future.

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The Poor State of Child Services in Nunavut

The far northern Canadian territory Nunavut has recently instituted health and social services reforms in response to high rates of child abuse and mortality. The territorial government has established a new Department of Family Services and will soon begin an ambitious child health monitoring program. Although Canada overall has a high standard of living, sparsely populated and largely Inuit Nunavut is relatively poor and suffers from widespread social problems, especially ones that affect minors. In addition to prevalent alcoholism and a rise in once uncommon diabetes, the territory faces infant mortality rates three times as high as the Canadian average. Nunavut’s troubling child health statistics resemble those of the country’s Inuit areas at large, where child mortality rates are five times higher than average, and youths are 30 times more likely to commit suicide.

Due to limited resources, the territory’s government has had serious difficulties providing adequate childcare. For example, a recent report found that Nunavut’s Health and Social Services Department performed satisfactory criminal background checks on less than half of prospective foster parents. It also revealed that one third of social worker positions are vacant, meaning that some communities have no family councilors at all. Poor childcare has led to high levels of youth crime, an incidence of violent child abuse ten times higher than the rest of Canada, and a high school graduation rate of 40 percent (the national average is 75 percent).

“Our Children,” the territorial government’s new health program, intends to create a youth welfare database useful for future health care policy. Besides tracking health statistics, the program will also collect other related information, such as family income, nutrition, and home life. While other places in Canada have been using such systems for decades, Nunavut’s program will track children for much longer, following them from when they are in the womb until they are school-aged.

However, comments on a news article about the new system cast doubts about the government’s ability to solve Nunavut’s health problems. Some readers, apparently residents of Nunavut, were concerned about privacy, while others worried that the government would be too incompetent to administrate “Our Children” effectively. One reader wrote, “I know that sounds simple but they are talking about Nunavut, it’s like the Bermuda Triangle for information, stuff goes in and gets written down but it never leaves and nobody can ever find it.”

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Kenya’s New Superhighway

In recent years, the crippling traffic congestion around Nairobi has prompted calls for higher capacity roadways to knit the region together. Kenya’s first superhighway, which links Nariobi to the city of Thika 42 kilometers to the Northeast, was recently completed to much fanfare. Formerly a four-lane road, the route now boasts eight lanes of state of the art grade-separated highway. The project serves as a highly visible manifestation of China’s growing ties to Africa, as the Chinese firm Wu Yi Co did much of the engineering and construction work. The highway has already thoroughly transformed many of the towns along its route—some for the better, and some for the worse. Kenyans hope that the highway will serve as an anchor for economic development and make navigation in the country’s budding metropolis easier. At the same time, Kenya may lack the money and expertise necessary to maintain the highway in its current condition, and the costs of automobile-oriented development are certain to pose a significant long-term challenge for the region.

For the residents of Juja, a town roughly halfway between Nairobi and Thika, the highway has been a boon. According to Charles Mwangi, a local real estate agent, “Property values in [Juja] have in some instances witnessed 500 per cent increment with land owners capitalizing on the expected demand when the surrounding areas opens up.” Development around the highway is also surging near its endpoints. Actis, a global private equity firm, has invested $150 million (which buys a lot in Kenya) in a residential and commercial real-estate development near the highway’s entrance to Nairobi dubbed “Garden City”. Garden City will include a four-acre park that Actis hopes will be a gathering place for all of Nairobi’s residents.

Elsewhere, the impact of the new highway has been nothing short of catastrophic. Much of the expense involved in the grade-separations that make modern highways work stems from the need to accommodate various smaller roads that must cross above or below the highway or close. One easy way to save on construction costs—and the way apparently chosen by builders—is to close as many such roads as possible. At least 800 workers (that is only how many have come forward publicly) have been put out of work when their employers were forced out of business after the closing of necessary access roads. The affected companies claim to have been ignored by highway bureaucrats and are taking their case directly to President Mwai Kibaki, claiming “our instructions now are to demand from you […] the immediate provision of a reasonable and adequate access lane or entry for our clients to their respective parcels of land as appropriate.”

Perhaps the greatest fear accompanying the highway is that Kenya won’t prove itself up to the task of maintenance. Drivers are reportedly behaving more recklessly than anticipated, with high levels of drunk driving and speeding killing many and damaging infrastructure. Metal guardrails and poles are routinely stolen or vandalized, the cost of which is preventing the Ministry of Roads from attempting any new projects. Kenya’s swift economic rise makes a complete collapse of the highway a la the Chinese-financed Tazara Railway in Tanzania and Zambia extremely unlikely, but poor maintenance will mean a high death toll for years to come. Moreover, the congestion that will be alleviated on the Nairobi-Thika route is likely to move onto the city streets on either end where roads do not have the capacity to absorb an influx in traffic. The final impact of the highway will not be known for some time, but regardless of the effects, it is clear that Kenya’s heartland is changing very fast.

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A New Panama Canal? Or Two?

During 2010, some 299,803,162 tons of ships and cargo moved between the Atlantic and Pacific Oceans through the Panama Canal. This total would have no doubt astounded the canal’s builders, but to the Panama Canal Authority (ACP), which operates the canal today, it is a sign that canal’s current infrastructure is no longer adequate. Many ships are forced to wait up to ten days to cross the canal, costing shippers about $50,000 per day. Bidding wars often arise between ships, with some paying up to $200,000 to move ahead in line. To ensure that congestion in the canal does not drive away traffic, Panamanians in 2006 overwhelmingly passed a referendum proposed by former president Martín Torrijos authorizing a $5.25 billion expansion project. The project is generally considered a good investment by outside groups, and received A2 investment grade status from the credit rating agency Moody’s. It is expected to be complete around 2014.

Meanwhile, two of Panama’s neighbors—Nicaragua and Costa Rica—are themselves eyeing the inter-oceanic canal game after 98 years on the sidelines. On Monday, Nicaraguan President Daniel Ortega signed a bill passed by the National Assembly that set up a legal framework for construction of the Nicaragua Inter-oceanic Canal, with the explicit goal of competing for Panama Canal traffic. The proposed Nicaraguan canal would stretch some 200 kilometers and could cost upwards of $30 billion, the equivalent of nearly four years worth of Nicaraguan GDP. So far support for the project among western governments and private industry is thin, but both Russia and the United Arab Emirates have expressed interested in financing the canal.

There are several potential routes for a Nicaraguan canal. The most cost-effective of these would run from the mouth of the San Juan River on the Caribbean coast upriver to Lake Nicaragua—the nineteenth largest lake in the world by area. A channel would then be dug across the isthmus of Rivas to allow ships to access the Pacific Ocean. This is not a new idea; in fact the basic outline of the route is over a hundred and fifty years old. During the California Gold Rush of the 1850s, the American shipping and railroad mogul Cornelius Vanderbilt operated a stagecoach line across the isthmus of Rivas, called the Accessory Transit Company, for gold-seekers traveling west. Vanderbilt was soon granted rights to build a canal to the Pacific, though his plans were never carried out. Nevertheless, the notion of a Nicaraguan canal remained potent, as shown in the 1906 map at left (source). A more humble (and realistic) version of the waterway proposed recently, known as the “Ecocanal”, would forgo the costly connection to the Pacific and instead focus on allowing shipping to access the various inland waterways of North America through Lake Nicaragua.

The San Juan River, the linchpin of any practical route to Lake Nicaragua, conveniently lies entirely in Nicaraguan territory, though it does directly border Costa Rica. Tensions along the border have been especially high since 2010, when Nicaragua’s dredging of the San Juan River damaged the environment of the Costa Rican parts of Isla Calero, which sits within the river. The resulting backlash helped to precipitate a small Nicaraguan invasion that became known as the Isla Calero dispute, infamous among Central Americans and geographers as the first armed incursion caused in part by a mistake in Google Maps favoring Nicaragua. Costa Rican President Laura Chinchilla responded by ordering the construction of a new road along the Costa Rica-Nicaragua border, known as the San Juan River border road project. Since the road was part of an emergency decree, it was able to bypass environmental review and avoid a great deal of scrutiny that is only now catching up with it.

Construction of the San Juan River border road project is now mired in scandal. Millions of dollars of construction contracts have been awarded to companies and individuals that possess no construction machinery or expertise. Allegedly, any National Roadway Council employees who spoke up about the corruption were fired. On top of these domestic indignities, Nicaraguans now argue that Costa Rica is building a “dry canal” that would allow high-speed movement of container traffic from one port to another. Dry Canals have in the past been proposed in both Colombia and Nicaragua. Though a Costa Rican conspiracy seems rather farfetched, a dry canal there might, if constructed, be a bargain compared to Nicaragua’s $30 billion vision.

One can easily lose track of the multiplicity of canals proposed in Central America over the years. Both Nicaragua’s Inter-oceanic Canal and Costa Rica’s San Juan River border road will likely join them as historical footnotes and topics of regional bickering while the Panama Canal continues to grease the wheels of the world economy. Then again, construction of the Panama Canal doubtless seemed similarly daunting when Ferdinand de Lesseps, the builder of the Suez Canal, left the region with nothing to show for his efforts but the bodies of 22,000 dead French construction workers strewn about the jungle.

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Mining in Yukon

Yukon, Canada’s westernmost territory, has few people but generates much mining revenue. Protected forest habitats cover large swaths of Yukon, and many people, like those in Canada’s other two territories, trace at least part of their ancestry to the area’s indigenous peoples. Statistics Canada, the Canadian government’s official website for national demography, reports that 25 percent of the territory’s 30,190 people identified as “Aboriginal.”

Though Yukon has the second smallest population of any first order territorial subdivision in Canada and only 0.1 percent of the Canadian population, it has the third highest GDP per capita in the country. A gold rush attracted many prospectors in the late 19th century and mining has for many decades been one of the territory’s major industries. While the government has succeeded mining as the primary employer in Yukon and tourism has become a cornerstone of the territory’s economy, mineral extraction brings in much income, and exploration for gold, silver, copper, nickel, lead, and zinc, among other minerals, remains highly successful.

“Mining Yukon”, a slickly designed website created by the territorial government, touts the many advantages of mineral extraction . According to the website, Yukon boasts “80 mineral deposits…some of which are world class in stature,” as well as 2,600 different known sites of various minerals. It also provides excellent geological and land use maps, such as the one appearing at left.

Mineral exploration continues to create economic optimism in Yukon. Strategic Metals Ltd., the self-described “pre-eminent explorer and claimholder” in the territory, announced in late May the potential for promising gold mines. Many of the potentially mineral-rich sites that the company is exploring are located in eastern Yukon, which already produces large quantities of gold and copper. Strategic Metals generates revenue from 160 land holdings across the territory and owns substantial shares in other Yukon mining firms.

Another mineral extractor in Yukon, Ethos Gold Corp, has found potentially large gold deposits. The CEO of Ethos recently stated, “We are excited to have made several new and substantial gold discoveries during the first drill test program on the Betty Property which is confirmed to have potential to host large gold deposits.” Ethos owns a very substantial 1,020 square kilometers of land in the territory.

The profitability of Yukon’s minerals, along with its highly lucrative tourism—much of it from adventure-seeking Germans—means that the otherwise largely isolated territory receives substantial traffic from the outside. Mining companies rely on highways linking the territory to its neighbors, including Alaska. Flooding in mid June of this year caused consternation for both truckers hauling tungsten and gold and residents who were used to dining at Tim Hortons and eating imported food items.

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Gabon to Drop China as Its Mining Partner?

Sparsely populated Gabon (population 1.5 million) stands out on the map of Africa for its relatively high levels of economic output (with a per capita GDP of $14,400* in 2008) and social welfare. Gabon’s development has been underwritten primarily by oil exports, which account for roughly fifty percent of its GDP and eighty percent of its exports, but oil production is down and reserves are diminishing. Gabonese leaders have therefore set their sights on the country’s other mineral resources. Iron ore in particular beckons. The Belinga deposit, most of which is located in Gabon, contains an estimate one billion tons of iron ore, and thus forms one of the largest untapped reserves in the world.

Exploiting the remote Belinga reserves, however, is not an easy proposition. The government of Gabon has determined that it will cost some three billion Euros to put in a railroad, build a deepwater port, and construct a hydroelectric dam for power. Not surprisingly, Gabon turned to China for financing and technical expertise. An initial 2006 deal with a Chinese mining consortium was renegotiated in 2008, and in 2010 the project was handed over to the state-owned China National Machinery Import and Export Corporation. Progress, however, has been slow: Chinese managers complain about obstruction from the government, and public hostility has been mounting.

Unsatisfied with the current arrangement, Gabon is again in the process of renegotiating with its Chinese partner. Rumor has it, however, that it would like to drop China altogether and instead turn the project over to a major international mining firm, most likely the Anglo-Australian leviathan BHP Billiton. Brazil’s Vale and France’s Eramet are also mentioned as possibilities, but it is significant that Gabon’s President Ali Bongo Ondimba visited BHP Billiton iron-ore facilities in Australia this April. A number of obstacles, however, remain. According to the Financial Times, investors are concerned that Gabon’s pending changes to its mining code will “include a supertax on profits, abolish certain fiscal incentives, and demand new environmental guarantees.”

Environmental concerns are significant. In particular, the proposed dam that would supply power to the mine would inundate part of Ivindo National Park, a preserve famous for Kongou Falls, where the Ivindo River drops fifty-six meters in a three-kilometer-wide cataract. Gabonese environmental activist Marc Ona Essangui has gained a certain degree of global fame—as well as the Goldman Prize—for his campaign to protect Ivindo.

Oil and iron ore are by no means the only valuable mineral resources in Gabon. As the Financial Times article cited above notes:

Gabon is already the world’s second-largest producer of manganese dioxide and aims to overtake South Africa as the largest by 2015. It has reserves of gold, uranium, diamonds and the capacity to produce 15 per cent of the world’s niobium, a rare earth used in steel alloys.

In China, meanwhile, iron ore prices have dropped significantly, no doubt decreasing Chinese interest in Gabon’s reserves. As reported in a recent article in SteelGuru:

MOUNTAINS of iron ore at Chinese ports used to be a sign of a booming Australian resources sector, but it has turned into a source of headaches for Chinese commodity traders who are struggling to find buyers for their stockpiles of red dirt.

(For an excellent overview of the China-Belinga connection written last year, see this EchoGeo article, which is the source of the first map posted above.)

* In Purchasing Power Parity

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Iceland to Export Electricity to Britain?

Iceland is by far the world’s richest country in terms of per capita renewable energy. 81 percent of Iceland’s total energy needs are derived from renewable sources, mostly geothermal and hydroelectric, as is 100 percent of its electricity. As a result of Iceland’s abundant resources, its electrical power is cheaper than anywhere else in Europe. The possibilities for expansion, moreover, are substantial, especially in the areas of hydroelectric power and wind power.

Economically troubled Iceland has been keen to take advantage of its low-cost, renewable energy resources on the international market. It has long engaged in aluminum smelting on a massive scale, a energy-intensive industry that raises environmental concerns of its own. Roughly 80 percent of Iceland’s electricity is currently used in aluminum plants. More recently, Iceland has turned to developing electricity-intensive server farms, an activity that also benefits from the country’s cool climate (computer servers require extensive cooling in warm areas). In February, a firm called Verne Global opened a large server farm on a decommissioned NATO base near the country’s main airport.

More recently, plans have been developed to directly export electricity from Iceland to the U.K. through undersea “interconnector cables.” Transmitting energy by way of High Voltage Direct Current (HVDC), interconnector cables are highly energy efficient, losing only two to three percent of power over 1,000 kilometers. Laying the cables, however, would be a very expensive proposition, owing both to engineering challenges and to the fact that each kilometer will contain roughly 800 metric tons of copper. In late May, however, Iceland and the U.K. agreed to begin working on the project and to cooperate more generally on energy initiatives. The U.K. has limited renewable energy resources of its own, and hence is eager to tap those of other countries. As the Guardian map of existing and proposed interconnector cables posted here indicates, Britain is also interested in Norway’s abundant hydroelectric resources.

Although the electricity-export scheme would have major environmental benefits when analyzed at the regional and global scales, in regard to Iceland it would come at a certain cost. As a result, Icelandic environmental groups remain skeptical. According to a recent article in Utility Products, environmental activists in Iceland argue that “The proposed cables would put pressure on building more power plants, both hydro and geothermal, for exporting energy. These are often located in sensitive wilderness areas which we want to protect. In addition, the Icelandic power transmission system would need much bigger transmission lines with associated visual and other environmental impacts to connect to the undersea cables…”

 

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Debt Issues and Russian Investments in Guyana

Stabroek News recently reported that Russia would write-off $50 million in debt to the government of Guyana. Debt write-offs for the impoverished South American country are nothing new.  In 1999 alone, Guyana successfully negotiated $256 million in debt forgiveness. Almost all of the money owed by the country to the U.S. has been forgiven. Yet repayment burdens remain high. As the Wikipedia reports, “Guyana’s extremely high debt burden to foreign creditors has meant limited availability of foreign exchange and reduced capacity to import necessary raw materials, spare parts, and equipment, thereby further reducing production.”

Although ostensibly aimed at countering the narcotics trade, Russia’s recent debt write-off may be related to its investment activities in the Guyanese bauxite (aluminum ore) industry.  The Russian company UC Rusal, the world’s largest aluminum producer, recently announced plans for a $21 million expansion of its main facility in Guyana. UC Rusal is a highly global firm, operating in nineteen countries. Although based in Moscow, UC Rusal is incorporated on the island of Jersey, where it also maintains its main financial center. A British Crown Dependency, Jersey maintains its own financial laws, which are very favorable for international business operations.

Russian investments in Guyana have often been controversial. In 2011, opposition politicians in the country threatened to expel both Russian and Chinese firms from the bauxite industry due to labor-law violations. As reported by TerraDaily, “Russian aluminium giant UC Rusal has been at loggerheads with the Guyana Bauxite and General Workers Union for more than two years over the controversial layoff of 120 workers who had demanded better pay.”

(Photograph from Guyana Then and Now.)

 

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Alaska’s Energy Economy and the Japan Connection

Alaskan newspapers recently announced that their state had just been surpassed by North Dakota as the second largest oil producer in the United States (after Texas). The announcement sparked discussions about why Alaska’s production is falling while that of North Dakota is booming. Whatever the reasons, the geographical transformation of the U.S. oil industry over the past few years has been pronounced, occurring too rapidly to be noted by many top reference sources. Wiki Answers, for example, still claims that the top oil-producing states are “Alaska, Oklahoma, California, Texas, and Louisiana,” without even mentioning North Dakota. As can be seen in the graph, as recently as one year ago the oil output of both Alaska and California exceeded that of North Dakota.

Although Alaska’s oil production will likely continue to decline, natural gas may be a different matter. Large quantities of gas are derived from oil drilling in the North Slope (the Arctic coastal region), but as bringing the gas to market is currently impossible, it is simply injected back into the oil deposits. Recently, however, the Alaskan legislature voted in favor of building a pipeline to transport natural gas from the North Slope to the southern part of the state. This controversial project will have to clear additional hurdles, but events elsewhere in the world have increased the likelihood of its eventual approval.

The signal event in question is Japan’s shutdown of its entire nuclear power industry. Without the use of its nuclear power plants, Japan has been forced to quickly increase its energy imports. Small quantities of natural gas from southern Alaska have long been liquefied and shipped to Japan; the current plan is to vastly expand this trade by tapping North Slope supplies. As Olga Belogolova, writing for the Homer Tribune, explains:

 Alaska needs Japan as much as Japan needs natural gas. No pipeline transports gas from Alaska to the lower 48, and the economics—near-record-low prices for gas combined with the shale boom across the country—don’t support building one. …
Meanwhile, profits are far higher in Asia than in Europe and the United States. Asian LNG prices hover around $14 to $16 per million British thermal units, while the U.S. surplus has brought domestic prices down to $2 to $3 per MBtu. This stark disparity means that no viable market for Alaska’s gas exists in the rest of the U.S., but the Japanese government is the perfect customer, because it badly needs the fuel and is willing to pay above the market price.

Alaska is by no means the only place seeking to capitalize on Japan’s surging energy demand. Huge gas deposits are also found in the delta of the Mackenzie River in far northwestern Canada; here as well a massive pipeline project has long been on hold, due mainly to environmental concerns. But as Reuters recently reported:

 The native-owned corporation that would control a third of a long-delayed gas pipeline in Canada’s Far North is open to discussing the idea of a liquefied natural gas project that would allow reserves to be shipped to Asia to kickstart development.

Similar processes are also occurring elsewhere in the world. Reuters is also reporting that:

 Western companies announced finds of huge additional quantities of gas off the coast of Mozambique and Tanzania, cementing the future of East Africa as a major new supplier exporting liquefied natural gas (LNG) to energy-hungry Asia.

 

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Recent Initiatives in Russia’s Booming Diamond Business

Rio Tinto, the British-Australian mining giant, recently announced that it would begin investing in Russian diamond extraction, forming a partnership with the Russian firm Alrosa. Alrosa, 90 percent of which is owned by the Russian government, is now the world’s largest diamond miner, having surpassed De Beers in 2011. Rio Tinto’s diamond ventures are also rapidly growing. In Russia, the firm is mostly interested in the Lomonosov deposit, located in Arkhangelsk Oblast in northern European Russia. Most Russian diamond mining, however, takes places in Yakutia (Sakha), in north-central Siberia.

The diamond business is currently surging, due in part to rapidly growing demand from China. Production has traditionally been concentrated in southern Africa, with Botswana occupying the highest position as recently as several years ago. Russia, however, is now the world’s top diamond producer, both in terms of quantity and value. Solid information on global diamond mining, however, is difficult to obtain, as different sources give different rankings.

Over ninety percent of the world’s extracted diamonds are sent to India for rough processing. Russian diamonds are currently exported to India through a variety of intermediary channels. Russia and India, however, are now negotiating for the direct export of rough stones from the diamond fields of Yakutia and Arkhangelsk to the cutting floors of Surat in Gujarat state.

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Problems Surrounding the Oil-Boom in Northwestern North Dakota

North Dakota is a sparsely settled state that has seen its population languish for decades. Home to 680,845 people in 1930, North Dakota held only 672,591in 2010. Currently, however, the state is experiencing a rebound, most notably in its oil-rich northwestern region. Workers are flowing into Williston (population 14,716 in 2010), the main town in Bakken Formation area, which has oil reserves estimated at some 18 to 24 billion barrels.

The recent population surge is resulting in major issues in the Williston area. Workers are arriving faster than they can be accommodated. The lack of local housing has forced oil-field employees to set up “man camps” where they live in recreational vehicles. Many established residents view such settlements with alarm. As a result, the Williston City Commission has recently “introduced an ordinance that would make it illegal to live in a camper within city boundaries. If passed, the law would make living in a home on wheels a misdemeanor punishable by a $500 fine.” Many workers stay in Williston during the work week only, returning home during their off periods. As a result, Williston’s train station is now the fastest-growing Amtrak depot in the country: “The once-sleepy little train station in western North Dakota where the sole ticket agent knew passengers by name is now overflowing with oil workers.”

The booming economy of the region demands other forms of infrastructural investment as well. Communications demands were recently addressed when Midcontinent Communications announced a $3 million plan to extend its fiber optic network to Williston, promising rapid, broadband internet connections.

Rapid growth is also resulting in a crime surge. Although North Dakota still has one of the lowest crime rates in the country, the Williston area is no longer particularly safe. According to a recent article in Boston.com, “Booming oil production in the Northern Plains is spurring law enforcement from the U.S. and Canada to gird for a spike in crimes ranging from drug trafficking to prostitution.”

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