Second Quarter 2011

Eurasia Group Global Trends Quarterly glob

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Executive Summary
In collaboration with PricewaterhouseCoopers, Eurasia Group is monitoring and assessing
major trends shaping the global business environment. This document summarizes the findings
of five white papers. The extraordinary breadth and depth of the current worldwide economic
turmoil and its gradual stabilization create new uncertainties in international and local political
environments. Now, more than ever, it is crucial to understand emerging global trends.

New Energy Boom Creates New Challenges

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Evolving Outlook for Businesses in Central and Eastern Europe
The Business of China’s 12th Five Year Plan
The Middle East in Transition: Business Implications
Financial Regulation in a G-Zero World

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eurasia group
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New Energy Boom Creates New Challenges
Key points
Until recently, shale gas and tight oil resources were con-
sidered uneconomic due to the high cost of extraction. En-
ergy markets are now adjusting to the commercialization
of these resources on a massive scale due to a perfect storm
of higher energy prices and lower costs (brought about by
technological advancement). The initial and now familiar
unconventional resource booms in mega-plays such as the
Barnett and Marcellus shale formations are just the begin-
ning. Recovery technologies continue to evolve, and new
applications are being employed internationally for both
oil and gas. With the price of oil settling in above $100
per barrel, however, and US gas prices moribund at $4 per
million British thermal units, the North American drill-
ing industry is focusing on oil and other liquids over gas,
while looking at unconventional gas resources in non-US
markets with favorable oil-linked pricing. Technological
advances include the optimization and extension of ex-
isting technologies, most notably for horizontal drilling,
hydraulic fracturing, thermal recovery, and enhanced oil
recovery. In the US, advancements in horizontal drilling
and hydraulic fracturing have already transformed the
country from a major demand center for liquefied natural
gas to a potentially significant natural gas exporter. Now,
those same technologies are unlocking new so-called light
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and tight oil potential.
Business implications
• Opportunities are increasing to export technolo-
gies and oil services: There is growing interest in
countries such as China, India, and Argentina in
studying and employing North American technolo-
Key considerations for North American unconventional oil and gas development
Key technology
Key states/provinces
Shale gas
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Horizontal drilling, fracking
Louisiana, Oklahoma, Pennsylvania, Texas,
Wyoming, British Columbia, Alberta
Break-even price ~$4–6 per mmbtu
Challenges Environmental concerns, supply glut, new
sources of demand, transport infrastructure
for NGLs
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Second Quarter 2011
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gies to develop shale gas and tight oil resources. This
interest is evident in the investments made by com-
panies such as CNPC and Reliance Energy in US
shale plays, as well as in the efforts by supermajors
and global oil service companies to bring uncon-
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ventional production techniques to overseas mar-
kets. The shift from North America will be gradual,
however. Key challenges include concerns about the
safety of intellectual property for key processes such
as well completion. Also, for small-to-medium-sized
players, sourcing sufficient skilled labor and manage-
ment to oversee the massive North American uncon-
ventional resource play as well as global opportunities
could prove difficult.
• Tight oil could increasingly compete with oil sands
production in Alberta: Increased production of tight
oil and a focus on light and tight assets in both Can-
ada and the US could jeopardize the outlook for Al-
berta’s oil sands. First, the emerging tight oil plays
will compete for labor, materials, and services capac-
ity in an already-strained market. Second, the growth
of light oil production will complicate refinery plan-
ning and the differentials between the prices of light
and heavy crude oil grades. Heavy oil production
has already been rising on the back of the Alberta oil
sands, and light barrels from the Bakken and other
tight oil plays are also poised to rise. Both types of
oil are being directed primarily to the land-locked
US Midwestern refining market. In the short term,
cheaper light barrels will displace demand for heavier
barrels among refiners. By 2013, however, more re-
fineries will complete already scheduled conversions
to process heavy oil, which could reverse the trend
and lead to a surplus of light barrels.
Tight oil
Horizontal drilling, fracking, steam flooding, CO2
Colorado, North Dakota, Texas, Alberta,
Saskatchewan
~$50 per barrel
Competition for materials/labor, pipeline
infrastructure, competition with oil sands
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 Second Quarter 2011

Evolving Outlook for Businesses in Central and Eastern Europe glob

Key points Business implications
In the aftermath of the global financial crisis and amid the
• Despite the slipped timetable for euro adoption,
sovereign debt crisis afflicting a number of EU countries,
CEE economies offer distinct advantages for for-
companies doing business in central and eastern Europe
eign businesses: CEE economies are among the most
(CEE) can find rewarding opportunities. Economic growth
open in Europe (as measured by trade as a share of

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in the region, although uneven from country to country,
GDP) and most productive (in terms of their unit
has rebounded strongly from the global downturn on the
labor costs). Moreover, their macroeconomic and
heels of fiscal reform. CEE economies are among the most
regulatory environments (including favorable tax
open in Europe, and the region still offers highly competi-
regimes, opening financial markets, and upgrading
tive wage rates relative to other EU countries. Favorable
physical infrastructure) continue to improve as more
tax regimes, improving infrastructure, and efficient supply
economic development funds flow in from the EU.
chains have also improved the investment environment.
Nonetheless, some important risks for businesses remain. • Cross-border supply chains will expand trade in
In particular, the delayed timeline for euro adoption due to services: Businesses are increasingly comfortable
the EU sovereign debt crisis removes a critical incentive for with having their supply chains based in multiple
structural reforms across CEE. As a result, austerity pro- parts of the EU. As firms locate more operations in
grams in countries such as Poland and Hungary have had CEE to take advantage of the region’s low-cost envi-
setbacks. In addition, growth in CEE is to a certain extent ronment, and as governments push to liberalize the
dependent on a broader euro-area recovery. Uncertainty services sector, another important source of growth
about some of the single currency’s weaker economies, could open up in the medium term.
including Greece, Ireland, and Portugal, combined with
conservative outlooks for some of the larger western Euro-
pean economies, could slow the pace of growth in CEE. As
such, and in light of the positive growth story in Germany,
improving CEE-German economic ties, particularly trade

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and supply chain integration, will be an important driver
of CEE growth and business opportunities.

The CEE business environment

Wage rates Competitive
Trade policies Generally open
Political environment Generally stable
Tax regimes Business-friendly
Infrastructure Improving

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Trade relations with Germany Expanding
Cross-border supply chain integration Growing
Euro adoption prospects Delayed
Pace of economic reform Slowing

2 eurasia group
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The Business of China’s 12th Five Year Plan
Key points
China’s 12th Five Year Plan represents an ambitious new
path for the country and its economic growth trajectory.
The plan will create a host of risks and opportunities for
companies doing business in the country. More than any
other five year plan, this one focuses on quality of life over
quantity of GDP. It stresses the need to boost domestic
consumption, develop the country’s interior, and promote
clean energy. The government will make considerable
headway in shifting the locus of growth and investment
inland and promoting urbanization, which will open up
important opportunities for businesses servicing China’s
countryside. Likewise, higher wages and better benefits for
workers will encourage more household spending across
the country, which could lead to consumption windfalls
for foreign firms that are appropriately positioned. In oth-
er areas, firms will face a more challenging environment.
Labor and production costs can be expected to rise in the
coming years, as can energy prices. Higher costs will be
particularly steep along the country’s more affluent eastern
seaboard. In addition, a major part of the new plan is the
promotion of seven emerging industries: alternative ener-
gy, biotechnology, new information technology, high-end
equipment manufacturing, advanced materials, alternative
fuel vehicles, and energy and environmental conservation
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technologies. Chinese firms in these industries will receive
preferential treatment, meaning that foreign companies
will face a skewed competitive landscape.
The 12th FYP (2011–2015): Ups and downs for business
Ups:
• Urbanization, rising wages, and a wider social safety net
will fuel private consumption growth, especially in health
care products and services.
• The expansion of China’s service sector will generate
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new market opportunities and new possibilities for
foreign firms to collaborate with domestic companies.
• $1.5 trillion in “emerging industry” industrial spending
will create new opportunities for foreign firms.
• Tax incentives and other preferential policies will be
rolled out in the interior to attract foreign investment.
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Second Quarter 2011
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Business implications
• Low-skilled labor will accumulate in the interior:
Low-skilled and cheap labor will become more con-
centrated in China’s central provinces, given contin-
ued rapid development in the east and government
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incentives for corporate investment in the interior.
As jobs are created away from the prosperous coast
and wages rise throughout the country, there will be
fewer incentives for workers to migrate to the tradi-
tional coastal manufacturing hubs in provinces such
as Guangdong. Recent policy changes allowing mi-
grant workers to transfer pension benefits more easily
should also facilitate a greater willingness on the part
of workers to avoid China’s megacities.
• Inflation will persist: The 12th FYP calls for higher
energy costs and better pay for workers. As the gov-
ernment pursues these aims, the cost of producing
goods in China will increase and eventually be passed
on to consumers. Inflation is already worrying the
government, and the central bank is promoting high-
er reserve requirements for banks and will ultimately
raise interest rates further in order to tame it. But
over the 12th FYP period, authorities will have to
become more tolerant of inflation given that it is an
unavoidable consequence of the structural reforms
Beijing hopes to effect. For companies, continued
inflation will drive wage-hike pressure and make pro-
duction in China more expensive.
Downs:
• Industrial and “indigenous innovation” policies will
push Chinese firms up the value chain and create new
competitors for international firms, especially in high-tech
sectors such as aviation and electric vehicles.
• The mounting cost of labor, energy, and other inputs will
make some manufacturing in China more expensive or
drive it inland.
• The lack of financial liberalization will limit the growth of
small and medium-sized enterprises and create barriers
for foreign insurance companies and financial institutions.
• The growing political clout of state-owned and state-
backed companies will reinforce the unequal playing
field for foreign businesses.
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 Second Quarter 2011

The Middle East in Transition: Business Implications glob

Key points Business implications
The wave of unrest that has swept through the Middle East is
• Local partners will have to be reevaluated: Many
unlikely to abate for the remainder of 2011 and may persist
businesses will have to develop new relationships.
into 2012. Continued instability will create sustained risks
for the business community. Each country, however, should Arctic
Throughout the Middle East, strong charismatic lead-

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ers have dominated ineffective institutions, and per-
be considered individually; each faces a unique set of circum- Ocean
sonal relationships have been the key to conducting
stances that will determine its degree of vulnerability. While
business. As the leadership
Laptev Seain many countries changes,
most countries in the region are led by authoritarian regimes,
such relationships will shift in turn, and it will take
they are not equally vulnerable, and the pace of change and
time to build effective institutions. Investors will need
the implications for the region’s economies
Greenlandand business en- Kara Sea
to analyze the emerging political and economic struc-
vironments are uneven. Three types of business environments
Canada tures and to identify who the main players are.
will likely emerge: A high-risk setting in which insecurity is
prohibitive for most local and foreign businesses; a medium- Barents Seabe important to assess regulatory and tax
• It will
risk Labrador
setting inSea
which security risks are significant but not pro- changes: A number of regimes may use the regulatory
hibitive and in which governments
Iceland are likely Norwegian
to backtrack on structure to pursue populist policies, although specific
Russia
unpopular economic liberalization policies; andSeaa low-risk measures will vary by sector. Governments will exam-
Sweden
setting in which governments face few challenges and policies ine their leverage in individual sectors, as well as their
Finland
remain relatively unchanged. Libya, Bahrain, and Yemen fall
Norway institutional capacity to introduce new measures. Such
into the high-risk classification, while Egypt, Tunisia, Oman, Mo
environments could nevertheless present opportuni-
North Sea
Jordan, Syria, and Morocco currentlyDenmark fit into the medium- Estonia ties for firms that assess and manage risk adequately.
North Ireland
risk category. Oil-producing states such as Saudi Arabia, Qa- Latvia
United Businesses should reevaluate their current and poten-
Atlantic tar, and the United Arab Emirates can be classified as low risk.
Kingdom
Neth.Germany
Lithuania
tial investments in individual countries based on these
Ocean The geopolitical environment will also grow more complex
Belgium Poland as Belarus emerging trends.
Bosnia
regional and international alliances shift.Lux. Over the medium
Croatia
Slovenia
Czech Rep.
& Herz. Romania
Moldova Kazakhstan
term, a Turkish-style model ofFrancedemocracy could emerge in

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Serbia
Slovakia
Mont. Ukraine
Switz. Liech. Austria
post-authoritarian regimes in Egypt, Tunisia, and elsewhere. Kos.
HungaryMac. Kyrgyzstan
Islamist Portugal
extremists will likely be sidelined in the process. Uzbekistan

Tajikistan
Italy Bulgaria Black Sea Georgia
Spain Azerb. Turkmenistan
Albania Armenia
Greece

Turkey Afghanistan
Morocco
Syria Iran
estern Sahara Tunisia Mediterranean Sea Lebanon
by Morocco) Israel
Iraq Pakistan

Algeria Jordan Kuwait

Bahrain

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Libya Qatar
Egypt
Saudi Arabia U.A.E. Oman Arabian
enegal Mali Sea
ambia
Political and
Bissau Niger business risk
Red
Guinea Low
Sea
Medium Chad Yemen
asoLeone
rra High Eritrea
Benin
Togo Liberia Sudan Djibouti
Ghana Nigeria
Somalia
4 Ethiopia eurasia group
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Cameroon Central Africa Republic

Equatorial Guinea

Financial Regulation in a G-Zero World
Key points
As countries grapple with the task of reforming the financial
sector in the wake of the 2008–2009 financial crisis, domes-
tic interests will likely trump global coordination, resulting
in a divergent and haphazard set of policy responses. In a G-
Zero world, domestic interest groups, populism, and a ten-
dency to favor homegrown institutions will lead to deep dis-
agreements among countries, despite nominal agreements
reached in forums such as the G20. As a result, financial
firms and products will face far higher transaction, disclo-
sure, and compliance costs. While legislators and regulators
in the US and the UK place blame for the financial crisis on
large banks, eurozone countries blame market speculation
and capital market products and institutions. Regulation in
the eurozone is therefore aimed at specific market activities,
derivatives, and alternative investment vehicles. In contrast,
emerging market (EM) governments, given the strong de-
mand for banking services expected in their countries, will
be reluctant to introduce strict banking regulations. Even
where international frameworks—such as the Basel III ac-
cords—exist, implementation will be uneven. Finally, while
London and New York will not be replaced as the capitals of
finance, countries such as China, Singapore, and even Rus-
sia see the heightened regulatory stringency in the US and
Europe as a way of attracting Western banks and creating
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strong capital markets locally.
Assessment of selected G20 regulatory commitments
G20 commitments Major ongoing disagreements
Creation of systemic • Power of newly created pan-EU regulators
regulators • Implementation of Dodd-Frank provisions
• The UK’s approach to its big banks
Derivatives • How to exempt corporate end-users from
clearing requirements
• Level of regulatory burdens
• Ability to ban short-selling products
• Commodities position limits
Hedge fund and private
equity regulations
• Level of regulatory oversight GLOBAL
Sources: EU Commission, Eurasia Group, G20 and FSB documents
Photo credit: Reuters
This material was produced by Eurasia Group in collaboration with PricewaterhouseCoopers.This is intended as general background research and is not
intended to constitute advice on any particular commercial investment or trade matter or issue and should not be relied upon for such purposes.
© 2011 Eurasia Group
Second Quarter 2011
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Business implications
• Costs for financial firms will rise: The cost impact
of regulatory reform will be considerable. Standard &
Poor’s estimates that the Dodd-Frank Act will reduce
the largest US institutions’ aggregate revenue by $18
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billion to $22 billion over the next two to three years.
Reforms in the EU and the UK will have similar re-
percussions. And while the global impact of the Basel
III accords is still being debated, it will mean significant
costs for financial institutions. Moreover, both the US
and European governments will tax the financial sector
in order to recoup the costs of state intervention at the
height of the crisis.
• EMs will become more important for banking: With
fewer profits to be made in the developed world, West-
ern financial firms will increasingly look to the less-reg-
ulated EMs. The emergence of vibrant middle classes
there will lead to more retail banking, while aging popu-
lations in places such as China could increase demand
for insurance and pension funds. Asia will assume a
more prominent role in global banking as its share of
the world’s economic activity increases, and EM banks
will eventually gain a somewhat larger role in the West,
especially as EM banks begin acquiring Western institu-
tions. Chinese banks are already lending for intra-EU
business activities.
Implications
• The US and the UK will move to limit too-big-to-fail banks
• EU regulators may protect weak EU banks
• Heavier burdens for large banks in developed countries
• Derivatives will be more expensive to trade
• Differences in details could create uneven playing field between the US and the EU
• France will try to draw derivatives business away from London
• EMs may move to attract derivatives business with lax rules
• Some countries will want to limit commodities speculation at the G20 meeting in Cannes
• Clearinghouses and exchanges to benefit
• EU regulations will be far tougher than those in the US and Asia
• Hedge funds and private equity shops could grow significantly in the US and Asia
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