Water and the Future of Global Conflict

It is hardly news that water is precious. Despite the planet being 70% water, only 2.5% is fresh and of that only 0.007% is available for human use. It should also not come as a surprise then that as societies get richer and develop their water needs grow to match industrial and personal consumption, making water not simply an essential resource for nations, but also between nations.

As nations in Africa and Asia continue to make great leaps forward in economic prosperity, water needs are putting those countries at odds with one another. Very few places are like Canada or Indonesia, self sufficient in water and not relying on shared water basins. Most nations share water with multiple other countries, necessitating treaties for its use. But even then, the changing economic fates of nations may mean that treaties become useless and fall out of date.

Farming along the Nile

In 1959 Egypt and Sudan signed a treaty to regulate water use between them ensuring that Egypt would receive the bulk of the Nile’s water, but the world’s longest river flows through 10 other countries, many thousands of kilometers away, all of whom need that water to economically develop. In the past few years, as African nations have grown and stabilized following the 1990s, their own economic goals have started to clash with the older and more established economy of Egypt. In 2010 Ethiopia, Rwanda, Tanzania, Uganda, and Kenya signed an agreement aimed at stripping Egypt’s water rights from the 1959 agreement. It would create a new “Nile Basin Commission” to manage water sharing. In 2011 Burundi signed as well, and so far three of the countries have ratified the agreement.

In Asia water represents one potential flashpoint among many between China and any number of countries. Since Tibet was annexed by China in the 1950s the Chinese have secured the source of water to more nations than any other country, and today the most water that flows across borders from one country to another flows from China. Chinese actions to control water has meant that nations as diverse as India, Cambodia, Vietnam and Russia have all filed international grievances over shared water use. Water is also a flashpoint between Pakistan and India. The largely empty high altitude land of Kashmir, contested land that has been the source of three wars (two with Pakistan and one with China), is home to much of the tributaries that feed the Indus, which remains the primary source of water for agriculture in Pakistan.

An Indian soldier stands guard at the border with China in Kashmir

Sharing water isn’t simply an issue between nations, but an issue within nations too. In 2016, the Indian the states of Karnataka and Tamil Nadu ended up rioting over shared access to water, resulting in burning trucks identified as coming from the other state. Water rights are hotly contested not just in developing nations, but in the West as well. In California, which is a experiencing its worst drought in 1200 years, water rights have farmers fighting with cities. Orange groves, almond farms and avocados are all water thirsty crops that compete with other local needs for water.

The price of Almonds has continued to climb for years as water needs have made the crop more expensive

In the last few years issues around water have revolved around cities facing water shortages, most notably in Cape Town, South Africa, which got dangerously close to “day zero”, at which point the city would be officially out of water. Though rains finally returned before a full-blown crisis emerged, citizens of Cape Town spent months operating under water rationing while wealthier citizens paid for water to be delivered from other cities. Farmers were simply denied water for their crops, until finally they received a normal amount of rain for the rainy season (the first in four years).

But the ability to prioritize domestic and urban water concerns depends on a global order that is robust and sufficiently engaged to head off water conflicts between nations before they become more dangerous. But that world is eroding and with it the order that constrains nations.

It should not be a surprise that the decline of American global leadership coincides with increasing global tensions. India and China, having already fought one war, are currently engaged in ongoing military standoffs. Despite only sharing a few borders in largely remote places (in Jammu and Kashmir there exists only a frontier between China and India and there have been regular skirmishes in the past) Chinese and Indian military patrols regularly run into each other. Due to a treaty previously signed soldiers on either side are prevented from using guns to avoid escalation when two patrols meet (leading to some hilarious recounting of soldiers yelling, throwing punches and hurling rocks), but recently the response has been an increasing build up of military presence by both nations forcing an official diplomatic responses. The issue is not that China and India are about to go to war, but that the potential for war is increasing.

Far from heading into a period of increasing prosperity and international cooperation; something practically essential for tackling climate change, terrorism or pandemics, the global order is failing. Even before the age of Donald Trump and populist nativism it took enormous effort to corral nations into agreeing to restrictions on water use. The 1997 UN Convention on the Law of Non-Navigational Uses of International Watercourses, which aimed at establishing “equitable and reasonable use” of shared water systems and prohibited nations from using water access to impose significant harm on another state only ever had sixteen nations agree to it. In the current climate it is unlikely that any new nations would even consider such a binding restriction.

The 21st century continues to throw new challenges at a global order that seems, at best, sclerotic. That breakdown in the international order is putting new risks on the table, leaving countries, sub-sovereign states, cities and farmers to fight their battles with less support, and more vulnerable to actors with military or diplomatic muscle to flex. China is one such nation that has a great deal of its future connected to the control of water, both through access to waterways in the South China Seas, and to the very water that irrigates crops and powers industry to its neighbours. A resource so precious and important deserves a great deal more attention than its currently getting.

Information in this commentary is for informational purposes only and not meant to be personalized investment advice. The content has been prepared by Adrian Walker from sources believed to be accurate. The opinions expressed are of the author and do not necessarily represent those of ACPI.

Russia’s Entire Stock Market is Worth Less Than Apple Computers

Let's just call this what it is. Awkward.
Let’s just call this what it is. Awkward.

A few days ago a bizarre inversion took place. A single company was suddenly worth more than the entire investable market size of a major economy. While I like Apple a lot and applaud the incredible profitability of the company, this is more a story about how badly the Russian economy is doing.

Back when Russia was first inciting dissent inside the Ukraine following the ouster of the quasi-dictator running the country, it had banked on the idea that it’s continued escalation inside the borders of a sovereign nation would go unchallenged as few countries would wish to risk a military skirmish over a single, marginal country in Europe.

Vladimir Putin miscalculated however when he didn’t realize how precarious the Russian economy was. Sanctions were implemented and what followed was a largely hollow trade war that did more to identify Russia’s weakness than strength. But the most recent blow to Russia has been the change in the price of oil.

Screen Shot 2014-11-21 at 12.31.04 PMNow that the price of oil is under $80, Russia is suffering severely. Like many oil rich nations, oil exports substitute for taxes. This frees autocratic rulers to both pursue generous social programs while not having to answer to citizen complaints about high taxes. It’s how countries like Saudi Arabia  and Iran get by with little democratic input and a relatively passive population with little to no public disobedience about democratic rights (mostly).

This relationship though means that there are actually two prices for oil. First the breakeven price for extracting oil from the ground, and second break breakeven social price of oil. Those prices are different in every country. In Alberta for instance, tar sand oil is usually quoted at $70 a barrel for breakeven. But to cover the costs of running the government the price is much higher. For Russia the slide in price from $109 a barrel to $80 has meant wiping out it’s current account surplus.

Combined with the falling rouble (now 30% lower than the beginning of the year) and the growth of corporate debt sector, Russia is now in a very precarious situation. I’m of the opinion that energy, and energy companies have been oversold and a rise in price would not be unexpected. But whether the price of energy will bounce back up to its earlier highs from this year seems remote.

This is a stock photo of a guy thinking. Could he be thinking about where to invest his money? He could be. It's hard to tell because he was actually paid to stand there and look like this and we can't ask him.
This is a stock photo of a guy thinking. Could he be thinking about where to invest his money? He could be. It’s hard to tell because he was actually paid to stand there and look like this and we can’t ask him.

Over the last few months I’ve been moving away from the Emerging Markets, and while the reasons are not specifically for those listed above, Russia’s problems are a good example of the choices investors face as other markets continue to improve their health. If you had a dollar today that could be invested in the either the United States or Russia, who would you choose? The adventurous might say Russia, believing they could outlast the risk. But with more Canadians approaching retirement the more sensible option is in markets like the US, where corporate health is improved, debt levels are lower and markets are not subject to the same kind of political, economic and social instability that plagues many emerging economies.