Troubled Waters

Egypt and Ethiopia are at loggerheads over a plan to dam the Nile River.

Egypt's musical-chairs government faces enough challenges. So why is a construction project almost 1,800 miles from Cairo provoking fears over Egypt's national survival?

Egypt and Ethiopia are butting heads over the Great Ethiopian Renaissance Dam, a $4 billion hydroelectric project that Ethiopia is building on the headwaters of the Blue Nile, near the border between Ethiopia and Sudan.

Cairo worries that the megaproject, which began construction in 2011 and is scheduled to be finished by 2017, could choke the downstream flow of the Nile River right at a time when it expects its needs for fresh water to increase. Brandishing a pair of colonial-era treaties, Egypt argues that the Nile's waters largely belong to it and that it has veto power over dams and other upstream projects.

Ethiopia, for its part, sees a chance to finally take advantage of the world's longest river, and says that the 6,000 megawatts of electricity the dam will produce will be a key spur to maintaining Africa's highest economic growth rate and for growth in energy-starved neighbors. The hydroelectric plant will provide triple the amount of electricity generating capacity in all of Ethiopia today. But the spat threatens to poison relations between two of Africa's biggest countries.

"The construction of [the dam] could propel a new era of regional cooperation, but past history suggests it will more likely result in continued sniping between Egypt and Ethiopia," David Shinn, a former U.S. ambassador to Ethiopia, told Foreign Policy.

The dispute has heated up again, after a fresh effort to iron out the differences at the negotiating table collapsed. Egypt has sought to get the United Nations to intervene, and reportedly asked Ethiopia to halt construction on the dam until the two sides can work out an agreement, which Ethiopian officials rebuffed.

"The upper riparian states have the right to use the Nile for their development as far as it doesn't cause any significant harm on the lower riparian countries, and that is why Ethiopia is building the Grand Ethiopian Renaissance Dam," Ethiopian Foreign Ministry spokesperson Dina Mufti told reporters in late February.

A former Egyptian irrigation minister said March 5th that Egypt is doing too little to forestall the dam, and highlighted the risks to the country's water supply. Italy's ambassador to Egypt has reportedly offered Italian help in mediating the showdown; an Italian firm is constructing the dam.

The dam has been a glimmer in Ethiopia's eye since U.S. scientists surveyed the site in the 1950s. A lack of cash and Egypt's strength forestalled any development -- but that appears to have changed in the wake of the Arab Spring and Egypt's three years of domestic political upheaval.

For most of the twentieth century, Egypt and Sudan divvied up the Nile's water between them. A 1929 treaty with British African colonial possessions gave Egypt the right to more than half the river's flow; a 1959 treaty upped Egypt's share to about 66%. The rest was allocated to Sudan -- while Ethiopia, whose highlands are the fount of most of the Nile's waters, was excluded from discussions.

"It is only Egypt and the Republic of Sudan that consider the 1929 and 1959 agreements as legally binding on all the Nile River riparian states," John Mbaku of the Brookings Institute Africa Growth Initiative, told FP.

"The Ethiopians may have undertaken what appears to be unilateral action because of Cairo's unwillingness to join other riparian states in renegotiating" those accords, he said.

Ethiopia began pushing back seriously after concluding its own water rights deal with other upstream nations, such as Kenya, Uganda, and Tanzania, in 2010. The protests in Egypt, the collapse of the Mubarak regime, and Egypt's three years of domestic turmoil provided a key opening for Ethiopia. It laid the first stone on the construction project in the spring of 2011 and says the dam is now about one-third complete.

"With all of the chaos in Egypt, Ethiopia caught a break. It has clearly benefited from the distractions of the government in Cairo," Shinn said. In 2012, Sudan threw its weight behind the project, driving a wedge between the two downstream users of the river and complicating Cairo's hopes to block construction.

The dispute over the Blue Nile dam is hardly the only case of water-driven tensions. Chinese control over the headwaters of major rivers in Asia, and ambitious plans for hydroelectric development, has sparked concern among a dozen downstream neighboring countries. Brazil and Paraguay locked horns for years over the massive Itaipu dam. Even Western U.S. states are squabbling over water rights to the dwindling Colorado River, especially important now that the region suffers a prolonged drought.

But Egypt sees the Ethiopian project as an existential threat. A government study concluded, "Water security is the gravest threat facing post-revolution Egypt." Former Egyptian president Mohammed Morsi vowed last summer that Egypt would not lose "one drop" of Nile water to the Ethiopian dam, proclaiming, "Our blood is the alternative." Egyptian politicians were caught on camera last June urging Morsi to back armed rebels to sabotage the dam's construction. Abdel Fattah al-Sisi, Egypt's putative next president, warned Ethiopia last summer the country might resort to military action to stop the dam, and earlier this month he discussed the dam's threats in a visit with Russian president Vladimir Putin.

Egypt's fears stem from the dam's possible impacts on the Nile as it flows downstream through Sudan and eventually to the Mediterranean. The Nile provides both water for Egyptian agriculture, and also electricity through Egypt's own Aswan dam.

The big problem: There has been no public discussion of the downstream impacts of the Ethiopian project. An international panel of experts, including representatives from Egypt, Sudan, and Ethiopia, presented a report last summer to the three governments, but it has not been made public.

Leaks of the report suggested that Egyptian power generation could indeed suffer -- but the lack of clarity muddies the issue even for water experts, because it is unclear just how quickly Ethiopia might move to fill the dam's reservoir after construction is finished. Filling it sooner would definitely choke water flows downstream, but would enable power generation more quickly; filling it gradually would push back the potential benefits of the dam for decades. Ethiopia has spoken publicly of filling the dam's reservoir in five or six years.

"There's a suggestion (in the panel report) that the electricity generation at the Aswan Dam could be affected quite significantly," Michael Hammond, a water engineer at the University of Exeter, told FP.

"However, it's inherently uncertain because we don't know whether we'll have ten wet years or ten dry years during the filling process," he said.

Jennifer Veilleux, a PhD candidate at Orgeon State University who has done extensive field work on the impacts of the Blue Nile dam, notes that Egyptian fretting about the dam's impact on agriculture tend to focus on poor farmers. But Egypt has used the abundant Nile waters to become a major exporter of water-thirsty crops, such as cotton, which in turn has given Egypt the highest level of economic development among all Nile Basin countries.

"Why does Egypt have the right to use the Nile for economic development, yet the Ethiopians don't?" she asks.


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Caught in the Crossfire

Russian threats of economic reprisals could hurt U.S. firms -- and Russia itself.

If Russia and the United States really launch the economic war both countries are threatening, American companies operating in Russia could find themselves caught in the crossfire. But Russia itself might end up being the biggest victim, scaring away would-be investors in its crucial energy sector and making it a far less appealing destination for the Western business leaders who have long seen it as a lucrative but largely untapped market.

U.S. companies have invested billions of dollars in Russia in recent years in industries ranging from food production to oil exploration. General Motors rolls out nearly 100,000 SUVs a year from factories in St. Petersburg and Togliatti. Coca-Cola Co. is part owner of a bottling company that employs 13,000 people and produces Coke products as well as local brands like Fruktime from Moscow to Vladivostok. PepsiCo gets about 7 percent of its overall revenue from Russia and spent more than $5 billion in 2010 to buy Russian dairy company Wimm-Bill-Dann Foods. Boeing plans to spend more than $20 billion in Russia over the next seven years securing much-needed supplies of titanium, among other investments.

Those American firms, some of the world's biggest, now have to worry about being squeezed at both ends. Washington is threatening to impose sanctions that could limit U.S. firms' business in Russia. The companies could also be hit by the Russian government in retaliation. Goldman Sachs chief executive officer Lloyd Blankfein warned Wednesday that the rising tensions between the United States and Russia threatened to ignite a "vicious circle" that could damage the global economy.

"Actions invite counter-reactions," Blankfein said in an interview on CNN Wednesday. "We want to make sure that people understand the context and how severe those ramifications could be."

The U.S. companies that would feel the pain of Russian retaliation most directly, and most strongly, would be the energy companies that have poured billions of dollars into oil and gas production projects across Russia. The firms, including U.S. giant Exxon Mobil Corp., hope to spend billions more tapping virgin fields in the Black Sea, Arctic, and off the Pacific Coast.

U.S. officials have been threatening sanctions after Russian troops moved into Ukraine's Crimea region over the weekend, but it's still unclear what shape they would take. Many analysts see the U.S. starting with a small symbolic step such as revoking visas, like it did with Ukrainian officials allegedly responsible for a violent crackdown on protesters. If Russia is unresponsive, the U.S. could ramp up the pressure by freezing the assets of Russian individuals, companies, and banks that are close to the government of Russian strongman Vladimir Putin.

Russian lawmakers seem poised to strike back. According to Russian news reports, members of Russia's parliament are considering legislation that would allow them to seize the assets of American and European companies in Russia if the U.S. moves ahead with sanctions. The threats ring hollow to many experts, who point out that punishing American firms has the potential of devastating the fragile Russian economy. Trade lawyer Doug Jacobson, with Jacobson Burton law firm, said that moderate American sanctions on Russian firms would be merely a shot over the bow, but seizing the assets of American companies would be the economic equivalent of using a nuclear weapon.

"When you do something like that you lose the confidence of the entire global economy," Jacobson said. "No one wants to invest in a country where you have the potential to be nationalized."

To be sure, numerous countries have seized the assets of foreign firms, usually as part of a domestic economic program rooted in socialism or communism. Russia itself nationalized swathes of foreign industry in the wake of the 1917 revolution. Cuba famously nationalized big chunks of the island's economy, including iconic brands such as Bacardi, after its own revolution. More recently, countries including Venezuela, Bolivia, and Argentina have incurred the wrath of foreign investors by expropriating businesses, especially in the energy sector.

For Russia, though, striking back at the U.S. by hitting American energy firms could be a double-edged sword. Exxon has a 30 percent stake in Sakhalin-1, a major Russian oil and gas project. Sakhalin is at the heart of Russia's plans to become a bigger gas supplier to Japan, which has been desperately in need of new sources of energy since shutting down its nuclear plants after the 2011 Fukushima accident.

More recently, Exxon teamed up with Rosneft, Russia's largest oil company, to invest billions of dollars into efforts to find oil in the Arctic and in the Black Sea. Exxon calls the scheduled startup of a big offshore oil and gas platform in Russia one of its most significant projects of 2014.

The reason Moscow may have to tread carefully when dealing with energy firms? It needs the technology and expertise Western, and especially U.S., firms have in coaxing oil and gas out of challenging environments, such as offshore or from shale formations. Oil production in Russia plummeted for a decade after the fall of the Soviet Union. While it has steadily crept upward in recent years, aging oil fields put a premium on using the latest technology to tap the country's potential hydrocarbon riches.

As Rosneft boss Igor Sechin made clear when he signed the Siberian deal with Exxon, "Developing tight oil reserves in Western Siberia is becoming increasingly important for the company and the country in general, as it will boost oil production volumes in Russia." He especially highlighted the use of "Exxon Mobil's experience and technologies" in tight-oil production.

An Exxon spokesman declined to comment about Russia or the possibility of sanctions complicating its business there.

To be sure, energy companies are used to a little political drama wherever they operate. Argentina, for example, just lured Chevron back even before the country resolved the expropriation fight with Spain's Repsol. Shell was undeterred by Russian hardball tactics and last year signed a new deal for Arctic exploration with Gazprom.

For now, even as the rhetoric escalates, executives can do little but wait and see.

"We're watching the situation very closely on all fronts to be prepared to act," GM President Dan Amman told Bloomberg. "It's a big market for us."

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