Previous Quarterly Editions
Expropriation Risk: 70 73 67 67 ►Political Violence Risk:48 48 48 48 ►Terrorism Risk:50 52 50 48 ▼Exchange Transfer and Trade Sanction Risk: 64 64 64 63 ►Sovereign Default Risk:66 47 66 56 ▼
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Geopolitical alignmentEast 1 2 3 4 5 West
Alignment five years agoEast 1 2 3 4 5 West
Degree of contestationSettled 1 2 3 Contested
Algeria’s political and military leaders value non-alignment. In practice, this entails close ties to Russia, with Algeria relying on Russia for most of its military equipment, while keeping strong ties with former colonial power France and other European powers, as well as the United States.
There are planned Algeria-Russia military exercises in November, but these could embarrass Algeria given the Russian/Ukraine crisis in February and raise questions about how effective Russian military equipment and collaboration really is, given Ukrainian forces’ recent territorial reacquisitions.
Algeria is one of several Middle Eastern countries that have not criticised Russia over Ukraine. Nonetheless, Algeria is concerned by the Russian mercenary Wagner Group’s activities in the Sahel and Russia’s growing security influence. Algeria will not become a Russian ally – the Algeria-France relationship is important, though at times contentious for historical reasons, and there is strong appetite among younger Algerians for mastering English, suggesting a turn away from France but a Western orientation, nonetheless.
Algeria will also seek to capitalise on European nations’ search for alternative sources of natural gas, after the Russia/Ukraine crisis meant it stopped or reduced using Russian gas exports. Algeria is being courted for this purpose, though it will take years for the country to expand its gas exporting capacity.
Looking east, China has developed its commercial and investment relations with Algeria,
with mixed results. China is the largest source of imports (16%, followed by France at 8%) and is involved in several major infrastructure and industrial projects. However, progress in most of these has been glacial. China will continue to pursue major investments in Algeria, focusing on natural resources and logistics. However, like other investors, Chinese companies will face obstacles from local vested interests.
Looking east, China has developed its commercial and investment relations with Algeria, The recent boost to Algeria’s finances has provided some encouragement for China, and there have been efforts to try to revive some stalled projects. The largest are an estimated USD7 billion integrated phosphate and port project in the east and a major port project at El Hamdania, west of Algiers.
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Government and oil industry circles recognize closer co-operation with, and better commercial terms for, foreign companies is essential for investment. The positive turnaround in Algeria’s financial position because of the surge in energy prices following the Russia/Ukraine crisis provides added incentive to lock in new investment, in oil and gas and in sectors geared towards economic diversification, including renewables.
There is a risk the government overplays its hand, given the increased interest of foreign companies in investing. However, the government should also be aware of the opportunity it has to improve its dire reputation as a destination for investment. Italy’s Eni and France’s TotalEnergies are pushing particularly hard to build up their presence in Algeria, to guarantee increased natural gas flows. This has included a deal for Eni to take over the assets of BP, a major gas producer. BP has been seeking to exit Algeria for years, reflecting frustration with operating conditions. A smooth exit would be a positive sign – foreign companies have faced difficulty divesting, as the authorities have pursued complicated tax claims while threatening to exercise the state’s right of first refusal.
Spanish companies are facing increased difficulty operating in Algeria, owing to the perception that Spain’s policy on the Western Sahara issue has tilted in favour of Morocco. Relations have worsened since Spain has started providing electricity and gas to Morocco to compensate for the October 2021 closure of the pipeline running to Spain via Morocco.
More broadly, the politicised, wide-ranging anti-graft campaign against Bouteflika-era officials and businessmen has damaged Algeria’s already weak industrial sector and deterred new investment. In a gesture to foreign investors, the government has effectively abolished the rule that local partners must hold at least 51% equity in joint ventures, but there remains little clarity about how this change should occur. Businesses report that applications to form new ventures with majority foreign ownership are mired in bureaucracy.
Political tensions will remain high, reflecting deep-seated economic grievances, widespread resentment at the nature of Algeria’s power structure, and the Kabyle minority’s frustrations. However, the political violence risk is mitigated by the government and opposition’s wish to avoid returning to Algeria’s bloody 1990s conflict.
The Hirak movement, which arose in early 2019 in protest at efforts by former President Abdelaziz Bouteflika to seek a fifth term, staged a revival in the first half of 2021, as COVID-19 restrictions were eased. However, the movement could not prevent the June general election, and some figures associated with Hirak even stood. The fading of Hirak could mean more radical forms of protest, but there is little sign of this.
The government is now in a better position to ease social tensions through providing financial support, through subsidies, benefits, and higher salaries. However, this may be insufficient to address discontent over rising inflation, high unemployment, and poor provision of public services.
The Kabyle issue remains a potent source of tension, though civil society could be a moderating factor. There is also the risk of armed conflict between Algeria and Morocco, but prospects of escalation remain slim – the main area of bilateral contention is the Western Sahara. There is also rivalry between the two neighbours with respect to Mali, where Algeria is seeking to play a more prominent political and security role following the withdrawal of French troops.
The security forces have largely succeeded in countering armed Islamist groups. Extreme Islamism also has diminished appeal for younger Algerians today.
Foreign exchange risk has diminished because of the increase in Algeria’s oil and gas export revenue since mid-2021. This has made minimal the risk of further restrictions on trade, in the short term at least. Algeria’s oil and gas revenue rose 70% year-on-year in 2021, reaching about USD34.5 billion, thanks to higher prices and increased volumes. Although import costs rose in the first half of 2022, the trade surplus reached about USD6 billion, given higher export revenues.
The central bank has used its stronger reserve position to engineer an appreciation of the dinar against the U.S. dollar and, even more so, against the euro since mid-2022. This marks a shift from a policy of gradual depreciation since 2020. The revaluation provides a means for the central bank to control imported inflation. The gap between the official and the black-market rate has remained at about 25%. The shift came after the end-May appointment of a new central bank governor, Salah Eddine Taleb, who had been head of the monetary and credit council. His predecessor, Rostom Fadli, was dismissed, reportedly for lack of progress in state-owned banks opening branches abroad.
With external debt now near zero, the government has some leeway for foreign borrowing, but the government has opted over the past few years to draw down reserves to cover its external deficit. Reserves peaked at almost USD200 billion in 2014, before falling rapidly to about USD50 billion by end-2020. Since mid-2021, reserves have stabilised at about USD45 billion and they will increase in 2022 to over USD50 billion as a result of the surge in oil and gas revenue.
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