Report

Afghanistan Escapes Blacklist

Afghan banks dodged an international black mark Friday when a watchdog organization gave the government another shot at cleaning up its corrupt banking system.

Afghanistan narrowly missed being cut off from the global financial system Friday, after rushing through last-minute laws to crack down on criminal use of its banks. The near-miss underscores how the U.S. withdrawal from Afghanistan could undercut the security of Afghanistan’s fragile economy, as its notoriously corrupt banks can no longer hide from international scrutiny behind an American shield.

The country was on the verge of being blacklisted -- along with Iran and North Korea -- by an intergovernmental organization that pressures countries to properly oversee banks to keep them from being used by terrorists, drug cartels, and corrupt politicians. The Financial Action Task Force (FATF) on Friday deemed Afghanistan's eleventh-hour legislating sufficient to escape the blacklist -- for now. But it warned that Kabul should make progress on implementing the laws before the group's next meeting in October.

Although FATF doesn't have the power to sanction banks, a black mark from the organization essentially has the same effect, as most international banks won't work with countries on the list. Losing the few global financial institutions still willing to work with Afghan banks would have been a major blow to the shaky Afghan economy as it weans itself from the foreign aid that has sustained the country for the last 13 years.

In February, FATF, which sets standards for financial-crimes law, moved Afghanistan to the gray list of countries "not making sufficient progress." FATF threatened to move Afghanistan to the blacklist if it didn't criminalize money laundering, establish a system to trace terrorist money, and track the cash flowing back and forth across the country's porous borders. Outgoing President Hamid Karzai, who opposed those measures, reversed course at the last minute and signed a package of anti-money-laundering laws Wednesday. Although it forestalled harsher FATF action, the organization said it hasn't evaluated the legislation yet.

The rampant corruption of and interconnectedness of the Afghan government and financial system complicated U.S. efforts in the Afghanistan war. The collapse of Kabul Bank in 2010 forced the United States to make a tough call between upholding law and order and accomplishing its military mission.

Kabul Bank shareholders, including Karzai's brother, reportedly used $900 million of institutional money to buy houses in Dubai and fund Karzai's presidential campaign. With U.S. help and encouragement, Afghan authorities investigated but then, under pressure from Karzai's government, gave up the chase. The United States initially pushed a broad anti-corruption strategy but the urgency of securing the country and conflicting agendas stymied the good-government push. The United States stopped supporting the investigators and prosecutors and tabled its anti-corruption priorities, as Sarah Chayes, former civilian advisor to U.S. forces in Afghanistan, detailed in an earlier article for Foreign Policy.

Chayes, who now studies kleptocracy at the Carnegie Endowment for International Peace, says the new law shows that international pressure can move Karzai.

"Too often international partners of kleptocratic or criminalized states blink too soon," Chayes said. "Kabul's reaction to the threat of a FATF blacklist shows that setting clear standards and sticking to them delivers results."

Despite the progress, past corruption crackdowns have shown they are only as good as the government enforcing them. Many are hopeful that a new leader can usher in real changes but the outcome of a June 14 run-off presidential election, which was mired in accusations of fraud, is still unknown.

BAY ISMOYO/ AFP/ GETTY

Report

In Mexico, Old Habits Die Hard

Mexico's president threw open the door to reforming the energy sector, potentially reversing 75 years of revolutionary legacy. Now the ambitious overhaul is colliding with messy political reality.

Politics, the same force that drove Mexico's energy nationalization on the eve of World War II, is threatening to trip up the country's efforts to join the energy revolution that has already turned the United States into an oil and gas powerhouse.

Energy firms have long eyed Mexico's abundant reserves, so the industry cheered when President Enrique Peña Nieto pushed through a constitutional amendment late last year to allow foreign investment in the energy sector for the first time since 1938. But now that Mexico's legislature is hashing out the nitty-gritty reform details -- including big questions such as what role state behemoth Petróleos Mexicanos, or Pemex, will play, and what kind of terms will be offered to foreign companies -- tricky politics have intervened, quashing hopes that foreign investment could begin flowing as soon as next year.

Originally in agreement to roll back some of the actions taken decades ago that led to the seizure of energy fields owned by outside corporations, Mexico's three main political parties are squabbling over exactly how and to what extent.

Peña Nieto's ruling Institutional Revolutionary Party, or PRI, secured the needed support of the center-right National Action Party, or PAN, to push through the constitutional amendment. But the PAN wants to secure its own goals first -- namely, political reform to end the PRI's decades-long stranglehold on power, especially outside the capital. As a result, it held up energy reform debate this month, likely pushing back passage of the key legislation until later this year.

Meanwhile, the leftist Party of the Democratic Revolution, or PRD, is leery of the whole notion and wants a national referendum to challenge Peña Nieto's plan. PRD heavyweights tell anyone who will listen in Washington that the energy reform is on thin ice, warning investors to steer clear of the sector.

It's not an arcane issue of energy policy. For many Mexicans, especially left-leaning voters, state control of the energy sector is synonymous with the country's revolutionary heritage. State control of natural resources, embedded in its constitution and crystallized in the 1938 nationalization, was long considered one of the revolution's signal achievements.

The other big question is whether the government will use reform to keep money flowing into government coffers -- oil wealth underpinned Mexico's economic development for the second half of the 20th century but oil exports have been steadily declining, in part because of a dearth of foreign capital and expertise -- or whether it will unleash nimble, private-sector firms that could rejuvenate an underperforming economy long-term.

The proposals so far seek to extract "the most revenues possible at the earliest possible stage of the industry" through upfront fees, royalties, profit-sharing, and tougher new tax rules, said Jose Valera, co-head of the oil and gas practice at Mayer Brown law firm in Houston, which analyzed the legislation. Proposed changes would tax the earnings of foreign oil and gas workers -- who pioneered the fracking revolution -- if they spend as little as one month in Mexico.

"That's another example of how they want to maximize revenues now at the expense of huge benefits down the road," he said.

Trying to chart a middle ground between the business-friendly right and a left skeptical of seeing foreign firms snatch up Mexican natural resources and wealth, the PRI risks disappointing everyone.

"This PRI proposal is not using fully the opening that the constitution gave it," Valera continued. "It is still too rent-seeking, and too Pemex-centric. They can and should go a lot farther than this in the final legislation."

Some observers see worrisome parallels with Brazil, which hoped to turn massive new oil finds into a bonanza for the government by setting stiff terms for foreign firms, giving a prominent role to the state-owned oil company, and mandating the use of locally built gear. All of this discourages foreign interest in Brazil's offshore oil sector, overburdens Petróleo Brasileiro, or Petrobras, and slows down the country's anticipated oil boom.

The Mexican government seems on track to make similar mistakes, such as reserving a huge preserve of oil and gas wealth for Pemex -- thereby essentially maintaining much of the status quo. That's why outside observers are watching Mexico's preliminary steps, known as "round zero," so carefully.

"Round zero is very, very important," Valera said. "We're either going to have an 800-pound gorilla in Mexico or we're going to have a more fragmented industry that allows for the participation of more players in more areas in Mexico."

If the market truly opens up, the small and midsized American oil and gas firms that unleashed the shale boom in the United States should be well poised to jump in. The huge Eagle Ford deposit in Texas, for instance, extends right across the border into northern Mexico. That means that companies well-versed in hydraulic fracturing techniques should be able to quickly tap Mexico's reserves. And geographic proximity should give smaller firms and advantage too.

But for all the upside of opening a nearly virgin market, there are plenty of downsides. The dire security situation, especially in northern Mexico, poses huge challenges. The geology, while similar, is not necessarily identical to what foreign companies know so well; basins in the United States that seemed like carbon copies of Eagle Ford, for example, have proved trickier to tap. And the U.S. oil and gas boom, with a safer environment and stable regulation, still has plenty of life left in it.

"Smaller companies have a lot more to lose than larger companies, so they will be holding their cards close but looking at their opportunities" in Mexico, said Fred Lawrence, the international liaison for the Independent Petroleum Association of America, a trade group.

As for what the Mexican government hopes to achieve through reform, turning around slumping production and quickly unleashing a lucrative energy boom can be undercut by the combination of political friction, few changes at Pemex, and lower-than-expected levels of foreign investment.

Fluvio Ruiz Alarcón, a board member of Pemex, said this week in Washington that the state-owned oil giant can't possibly meet the government's ambitious production targets before 2020.

"It may not be until the next decade that the current energy sector reforms have any material impact on Mexican production and on global oil supplies," concluded Energy Aspects, a consultancy, this month.

Yuri Cortez - AFP - Getty