February 18, 2011 / 9:40 AM / in 8 years

Factbox: Key political risks to watch in Libya

RABAT (Reuters) - Violent anti-government protests, with more than 20 reported killed, have come to Libya after street revolts in Tunisia, Egypt and elsewhere in the Arab world.

The wealthiest North African country had began to dig deeper into its pockets to address social grievances, but rioting broke out in the city of Benghazi in mid-February, with human rights activists reporting more than 20 dead in clashes with police.

Despite its vast oil and gas wealth and a relatively small population of 6.5 million, Libya has both the highest demographic growth and unemployment rates in North Africa.

While he has sent mixed signals about the Tunisian revolt, Libyan leader Muammar Gaddafi, the longest-serving Arab ruler, did not say if he would be prepared to embrace reforms advocated by some close members of his entourage.

Media close to his reform-minded son Seif al-Islam have been more vocal about sensitive issues such as the army, the absence of a constitution and public governance.

In the meantime, the fate of succession, suspicion of foreign influence, diplomatic rows and policy uncertainty remain potential risks for investors in Libya.

Here are some risk factors to watch.

SOCIAL UNREST AND THE ISLAMIST THREAT

In rare unrest, hundreds of people clashed with police and government supporters in Benghazi in mid-February, according to a witness and local media. The protesters were angry about the arrest of a human rights campaigner.

After two days of protests which claimed the lives of at least 24 people, according to Human Rights Watch, soldiers were deployed on the streets of Benghazi on Friday.

And coinciding with Tunisia’s popular revolt, Libyan citizens earlier this month occupied hundreds of homes that were still under construction.

Egypt and Tunisia have each seen entrenched heads of state forced out by popular uprisings. That has inspired attempts by exiled members of the Libyan opposition to organize protests via online social networking sites. The government has taken pre-emptive measures, including reducing food prices.

But most analysts say Libya is still unlikely to see an uprising along the lines of Tunisia or Egypt. The government has huge amounts of oil cash which it can use to placate unhappy citizens. Libyan society and public life is built around family and tribal ties, so if there is any challenge to Gaddafi’s rule, it is likely to happen behind the scenes and not in the streets.

Benghazi, with its history of distrust of Gaddafi’s rule is not typical of Libya. The test for Gaddafi now is whether the unrest spreads to the capital and the west of the country.

The population has grown fast and pressure for better living standards has risen. The pardon and release from prison of hundreds of Islamist militants in March shows the government is confident that it has neutralized the threat from the Libyan Islamic Fighting Group (LIFG) that once tried to kill Gaddafi.

What to watch:

— More incidents of people taking their grievances about social conditions on to the streets.

— Any sign that LIFG splinter groups based abroad are attempting to revive the movement’s activity within Libya or join with al Qaeda’s Maghreb wing based in neighboring Algeria.

UNCERTAIN SUCCESSION

Gaddafi has led Libya for more than 40 years, longer than any living African leader. He is in his late 60s, but there is no framework for his succession and he has carefully avoided designating a successor. Analysts say he appears to be in good health but that, when he dies, years of instability could follow as competing groups and relatives struggle for supremacy.

The liberal-leaning Saif al-Islam Gaddafi, who took a central role in ending Libya’s stand-off with the West, has the highest profile among Gaddafi’s sons but lacks any official role and Libya experts say he has little support from the army, whose endorsement is seen as vital if he is to hold power.

Two other sons, Mutassim and Khamis, are thought to have stronger power bases in the military. Their policy views are unknown but Libya watchers see Mutassim — Libya’s National Security Adviser — as close to the old guard that opposes many of the reforms proposed by Saif al-Islam.

The behind-the-scenes power struggle between conservatives and the reform camp flared in November when outlets controlled by Saif al-Islam’s media group published fierce criticism of the government.

What to watch:

— Whether Saif al-Islam becomes head of a body called the Social Popular Leadership, making him the country’s de facto second in command.

— Supporters of Saif al-Islam say he plans to try to have a constitution adopted to set up formal institutions instead of the complex web of informal spheres of influence on which his father’s system is based. If he goes ahead with his plan, that could indicate he is staking a stronger claim to the succession.

— The fluctuating fortunes of Saif al-Islam’s media and other projects. Have his media outlets been cowed or will they keep criticizing his rivals?

BUSINESS OPPORTUNITIES:

As oil money swells the coffers after years of austerity, foreign firms are jostling for billions of dollars of potential deals in energy, housing, transport infrastructure, telecoms and public services. But the environment is fraught with dangers, from bureaucratic lethargy to a captive judiciary and risks tied to land ownership and changing business rules.

Business-friendly reforms are stalled and Libya sits in 146th place out of 178 countries in Transparency International’s 2010 Corruption Perceptions Index, down 16 from last year.

Diplomatic hiccups can have a devastating effect on companies in Libya. Swiss ties with Libya broke down after the brief arrest of another son of Gaddafi, Hannibal, in Geneva in 2008 and the dispute drew in the European Union, United States and major energy firms.

Libya stopped oil exports to Switzerland and withdrew assets from Swiss banks. It imposed a trade and economic embargo on Switzerland, hurting Swiss business interests in Libya. The two governments agreed to patch up relations and a Swiss businessman caught up in the dispute was allowed home after being held for nearly two years in Tripoli.

What to watch:

— Any sign that Saif al-Islam’s reformist camp is weakening might encourage the government to take a more protectionist line on inward investment and tighten terms for foreign business.

— Signs the leadership is trying to forge a coherent vision for the economy.

RISK BY ASSOCIATION

Some Western companies and governments have found that being too closely associated with Libya can be harmful.

A panel of U.S. Senators wants to hold a hearing to establish whether BP had any influence on the British decision to release from prison the convicted Lockerbie bomber, Abdel Basset al-Megrahi. BP said in August it was delaying plans to drill offshore in Libya until later this year. It did not say why.

Italian Prime Minister Silvio Berlusconi came under pressure over his ties to Gaddafi after the Libyan leader, on a visit to Italy, tried to persuade hundreds of Italian women to convert to Islam. Ties to Libya helped contribute to the downfall of Alessandro Profumo, chief executive of Italy’s second-biggest bank, Unicredit.

What to watch:

— Will other international firms come under pressure for doing business with a country with such a checkered past?

— How will politicians in Europe and the United States respond as Libya’s sovereign wealth fund, which controls about $65 billion, ramps up its investments in developed countries.

ENERGY SECTOR

Firms including Exxon Mobil, BP, and ENI are sinking billions into Libya for a share of Africa’s biggest proven oil reserves. Finds have so far disappointed, although a vast area remains to be explored.

Experts say project approvals for drilling new acreage and enhanced oil recovery have been moving at a glacial pace. When Canada’s Verenex announced a big find, Libya bought the company for less than its market price by force.

What to watch:

— A new framework hydrocarbon law, Libya’s first in more than 50 years, is being drafted and the government has not said whether it will alter conditions for foreign oil firms.

— National Oil Corporation Chairman Shokri Ghanem commands respect with foreign energy companies but his authority has been challenged by a new Supreme Council For Energy Affairs. The council is dominated by conservatives who may feel Ghanem is a soft touch for oil firms and call for more resource nationalism.

— Will there be any big new finds? Several international oil companies decided not to renew exploration licenses when they expired because they had not found worthwhile reserves. Many others are still looking.

Writing by Maghreb newsroom; Editing by Giles Elgood

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