Tunisia, Egypt, Libya...Pakistan?

Tunisia, Egypt and now Libya. Now the markets are watching Yemen, Bahrain, Oman and Saudi Arabia for signs of emerging geopolitical risk.


Could the Davis Affair blow up the emerging markets risk trade?
Good investors know that one way to make money is to find a story on page 12 that eventually get on page 1. While I am concerned about the consequences of further unrest in the aforementioned countries, the page 12 story that I am watching is the potentially explosive nature of the Raymond Davis Affair* and the potential fallout on the emerging markets risk-on trade. The New York Times recaps the episode:

According to Pakistani police accounts, Mr. Davis was driving a white rental car on the congested Jail Road in Lahore on Thursday when two men on a motorcycle tried to rob him.

The American shot the two men, police officials said. Police accounts initially differed on whether the two assailants were armed, but according to the official police report released Friday, the police found weapons on the dead men. Mr. Davis did not have a license to carry a weapon, the law minister said.

Mr. Davis called the consulate for help during the episode, and a four-wheel-drive vehicle that tried to come to his aid hit and killed a third man, said a senior police official, Faisal Rana.

This seems to be the story of a caper gone wrong. Raymond Davis appears to be an intelligence operative who shot two Pakistanis, who are believed to be working for ISI, Pakistan's intelligence service. The backup team on the way to the rescue hit and killed an innocent bystander, panicked and left the scene.
 
The dispute between the US and Pakistani government is whether Davis had diplomatic immunity and could stand trial for murder in Pakistan. There is a further dispute whether Davis was acting in self-defense as some accounts indicate that he was not being robbed and in fact had shot one of the victims in the back while the victim was fleeing.

Here is the convential inside the Beltway view of the Davis Affair from Stratfor:

Pakistani officials have corroborated Davis’ version of events and, according to their preliminary report, Davis appears to have acted in self-defense. From a tactical perspective, the incident appears to have been (in tactical security parlance) a “good shoot,” but the matter has been taken out of the tactical realm and has become mired in transnational politics and Pakistani public sentiment. Whether the shooting was justified or not, Davis has now become a pawn in a larger game being played out between the United States and Pakistan.

When one considers the way similar periods of tension between the Pakistanis and Americans have unfolded in the past, it is not unreasonable to conclude that as this current period plays out, it could have larger consequences for Davis and for American diplomatic facilities and commercial interests in Pakistan. Unless the Pakistani government is willing and able to defuse the situation, the case could indeed provoke violent protests against the United States, and U.S. citizens and businesses in Pakistan should be prepared for this backlash.

In a separate comment, Stratfor wrote that operating in places in Pakistan is dangerous and therefore security officers like Davis are needed to run intelligence operations. Moreover, foreign intelligence services are not to be trusted in their entirety:

It is important to remember that in the intelligence world there is no such thing as a friendly intelligence service. While services will cooperate on issues of mutual interest, they will always serve their own national interests first, even when that places them at odds with an intelligence service they are coordinating with.

Remember Johnthan Pollard?


The alternative view
For some alternative views of the Davis Affair, consider this account from FB Ali (Brigadier, Pakistan Army, retired):

The facts of the incident that sparked all this are now fairly clear. Davis, in a rental car, was driving around in Lahore in areas where foreigners scarcely ever venture, tailed by two ISI auxiliaries on a motorbike. After an hour or more of trying to shake them off, they both came abreast at a stoplight. He pulled out a gun and, firing through his windscreen, shot them both. Accounts differ as to whether they made any threatening gesture, but one was killed as he was trying to run away.

The backup van that Davis called for came roaring up the wrong way on a one-way street, ran over a cyclist, killing him, then turned around and roared off. Davis was arrested, and weapons, ammo and other paraphernalia were found in the car. On his cell phone were numbers that were later traced to phones in the tribal belt where the Taliban operate, while his camera had pictures of religious schools and military sites.

For more analysis and discussion of the Davis Affair, see blog posts at Fabius Maximus here, here and here.


Why the Davis Affair matters
It appears that the Pakistani government would love to find a face saving way to let Davis go home, but the incident has become a cause celebre in Pakistan and has the potential to become a spark for unrest much like the Mohamed Bouazizi story did in Tunisia. In the book of analysts, Pakistan is at serious risk of becoming another Egypt as food price inflation rampages through their economy.

Should the Pakistani street go up in flames, what happens? How will it affect investor perception of India next door, a mainstay of the BRIC economies and emerging markets?


Could it be the spark for investors to de-risk their emerging market exposure? Stay tuned.




* Consider this following thought experiment. How would Americans have reacted if a British intelligence operative had been caught shooting FBI auxiliaries on the streets of Boston during the height of The Troubles on a mission against Provisional IRA terrorists? Would the State Department allow the British to claim diplomatic status retroactively for the intelligence officer? How much leeway should Americans allow the intelligence services of staunch allies to operate on thier own soil?