The economic and political ties between Iran and China are often brought up in the context of geopolitical negotiations, with China’s oil purchases leading the headlines. That’s understandable, given Iran’s importance in the Middle East. Overlooked, however, is another country that is even more important to China’s oil supplies – Angola.

Angola sent 235 million barrels of oil to China last year, or about 640,000 barrels per day. That’s 66 million barrels more than Iran, and only a bit less than the largest supplier, Saudi Arabia. In fact, Angola eclipsed Saudi Arabia as China’s top supplier last month, although that may change as the year goes on. According to Royal Dutch Shell, Angola will produce double the amount that Nigeria does within 10 years – though that prediction hinges as much on Nigerian instability as it does on Angolan development.

Angola emerged from a bloody war of liberation against Portugal and a prolonged struggle between Marxist and anti-Communist factions. Its diamond mines and oil reserves promised both future prosperity and foreign interest or even meddling in its affairs. Though it’s been the fastest-growing economy in Africa with double digit growth from 2006-2008, it’s also plagued by rampant corruption, separatist guerrillas, and millions of landmines. Formerly an agrarian economy and exporter of agricultural products, the countryside was so thoroughly devastated by war that it now imports 90% of its food.

As it exports more oil and discovers more fields, Angola will grow in importance on the global stage. It’s also an important front in the Chinese effort to secure African assets and allies, as China’s largest trade partner on the continent. Estimates of Chinese loans to Angola vary wildly, from $2 billion (the official figure) to as much as $9 billion with confidential, behind-the-scenes loans.

Angola illustrates the complex interplay of sovereign debt, resource extraction, and competing national and extra-national interests in the new global marketplace. Angola has about $19bn in public debt, and recently made amends with the IMF after walking away from the fund in 2007. Its rising oil revenues and strong Chinese financing gave it flexibility in negotiating the terms of its obligations that other African nations do not have.

However, Angola isn’t placing all its chips on China. It is seeking to raise as much as $4bn by issuing debt, its first international debt sale. In order to do so, it must get a credit rating from the big agencies like Moody’s, Standard & Poor’s and Fitch. Obviously, either Chinese lending is insufficient to cover Angola’s needs, or it wants to keep its options and obligations diversified throughout the globe.

Investor sentiment is ambiguous, with analysts predicting that nervousness over sovereign debt will mean that Angola only gets about a quarter of the funding it’s looking for. Nevertheless, there does appear to be demand for sovereign bonds from Africa, according to PIMCO, the world’s largest bond fund.

This might make Angola’s auction an opportunity for emerging market debt investors, though – Angola may be forced to offer more attractive yields to buyers made shy by default scares in Dubai and Greece.  Yields will certainly have to be high given Angola’s history of default, as well as the intractable issue of corruption.

In Transparency International’s Corruption Perception Index for 2009, Angola ranked 162 out of 180, tied with Venezuela and the Congo, among others. In this climate, Chinese firms – which aren’t saddled with inconvenient Western laws about bribery and graft in foreign nations – have a distinct advantage.

On the political front, President Jose Eduardo dos Santos has ruled the country since 1979, and appears to basically be President-for-life. Presidency-for-life hasn’t worked particularly well in oil-rich Venezuela. Furthermore, separatists continue to struggle for the independence of the exclave of Cabinda, a small region separated by a sliver of Congolese territory which produces more than half of Angola’s oil. The rebels hit headlines this January in a recent attack that left several members of the visiting Togolese soccer team dead. A violent flare-up in the region could cripple Angolan exports, with most of the offshore reserves located in this volatile region.

The violence in Cabinda is eclipsed by the chaos in Nigeria’s Delta State, where government troops, oil companies, and their workers are in a state of constant tension and sometimes all-out warfare with rebel groups and separatists. Compared to this conflict, Angola’s is relatively subdued.

Many questions still remain regarding Angola’s ability to service its debt, given its past and corruption. It was in default for years, a fact that bond buyers with short memories are likely to ignore. Having invested in Angolan debt before, I know how important willingness to pay is; different countries have different national characters, and they do not just change overnight.

Some of  the incentives to invest in Angola are there,– a reasonable debt-to-GDP ratio of 16.8%, large oil fields with a high rate of new discoveries, and economic ties to the world’s two biggest economies. The question is whether these facts will be enough to sway investors nervous about the future of sovereign bonds in general and Angolan creditworthiness in particular. In the end, the appeal of an Angolan bond offering will depend on a number of key factors – the credit rating they receive from the major agencies, the state of the global sovereign bond market when the government goes to auction, and the geopolitical stability of the nation and its neighbors.

Robert P. Smith, is the founder of the Boston-based Turan Corp., an investment firm specializing in emerging-market debt, and the author of “Riches Among the Ruins: Adventures in the Dark Corners of the Global Economy.”

Brazil now has two major rivers; the Amazon, which flows out through the northern rainforest, and the even more torrential flow of foreign capital. In an effort to stem the flood, which is driving the value of the Brazilian currency, the real, to record highs, Brazil has instituted two separate taxes on foreign investment. The first was a 2% tax on foreign exchange inflows, and the second, instituted a few months ago, taxes Brazilian stocks traded as American Depository Receipts, or ADRs, in US stock markets.

Obviously, Brazil worries that if its currency continues to appreciate, export-driven businesses will find it difficult to compete. The other concern is that if conditions turn for the worse, investors will scramble to pull their money out of the economy, sending it into free-fall, as happened with many of the Asian economies in 1997.

Perhaps the most important determinant of Brazil’s market and currency is the rate of US Treasuries and Chinese interest rates. With the carry-trade funding so much of Brazil’s recent economic ascent, even a mild uptick in US interest rates could cause significant movements out of Brazilian equities, debt, and the real. As long as it’s cheap to borrow in the US and domestic returns are low, Brazil will continue to soak up a lot of portfolio investment. It is, in many ways, the star of the rush to the BRICs and other emerging-markets – more fully developed and less exposed to geopolitical instability than India, possessed of similar resources and better-governed than Russia, and far more transparent than China.

Despite this, their fates are intertwined – China and Brazil are particularly inextricable, since the latter supplies many of the raw materials for the former’s infrastructure projects. Recent signals that China would trim capital spending and raise rates sent the value of Brazilian assets plummeting along with the real.

Nouriel Roubini has identified a “global carry trade” in emerging market assets. Short-term interest rates in the developed world hover around 0%. Investors, in the US, for instance, are seeking returns that they can’t find domestically. For the past 8 or 9 months, they essentially borrowed for free at home and then bought commodities, emerging market stocks and bonds, and anything else that promised a decent return. The upside has been huge surges in foreign assets; the BOVESPA, Brazil’s main stock index, has doubled since the depths of the crisis in March.

If any doubt remained about Brazil’s new prominence on the financial landscape, it was likely swept away by two pieces of news in the past year. The first was Brazil’s offer to loan almost $10 bn to the IMF. Recall that in 2002, the IMF prepared a $30 bn loan in case the ascension of leftist President Luiz Inacio da Silva somehow caused financial chaos or capital flight. For Brazil, a serial debtor frequently afflicted in the past with crippling inflation, loaning to the IMF is a big step into the room with the world’s economic heavy hitters.

A recent piece of news is the revelation that Citibank approached Brazil during the deepest part of the global meltdown and asked the Brazilian government to buy as much as 30% of the company. The news that Brazil received this offer – and declined it – has shocked quite a few observers around the world.

Did Citi’s directors prefer the political implications of being bought by a foreign government to receiving more federal aid from the US? Do they have more faith in the hands on the tiller in Brasilia than those in private equity? Or were they simply desperate and out of options?

Whatever the reason, Brazil is definitely on track to emerge from its developing nation status. Even its recent protectionism seems to be receding. Brazil’s Minister of Finance, Guido Mantega announced that Brazil was done – for now – with its currency and investment controls. This amounts to an admission of defeat, or at the very least a stalemate. Either the measures proved ineffective at stemming the flow of money into the country, or the government fears that excessive interference with the financial industry will break the nation’s carefully rebuilt reputation for fiscal responsibility and liberalization. It is a sign of the times in Brazil that Henrique Meirelles, Governor of the Central Bank, is dropping hints about a presidential bid in the next election. He would likely take on the centrist Governor of Sao Paulo Jose Serra, and Lula’s hand-picked successor and electoral favorite, Chief of Staff Dilma Roussef.

Brazil’s outlook is generally positive, but the recent correction downwards is not entirely unfounded. Overall, however, it is the best-positioned of the emerging market nations to scramble on to the center of the global economic stage. With the 2014 World Cup and the 2016 Olympics in the pipeline, eyes will be on Brazil for a while yet.

Forbes.com ran an article written by me today, discussing the potential for a bubble in sovereign debt, particularly that of emerging market countries.

When I started trading emerging market sovereign debt in the early 1980s, the big risk was non-payment. The danger of default always loomed over a deal. It was like buying a Japanese car or a transistor radio made in Taiwan in the early 1970s: cheap, substandard goods that would likely fail early and often. However, some countries we still label “emerging markets” have become economic powerhouses: China, India, Brazil and Russia for example, holding foreign exchange reserves respectively of $2,300 billion, $284 billion, $235 billion and $433 billion.

Today, more than $5 billion of emerging market debt (EMD) is traded daily and prices are sky high in both debt and equities. Since Jan. 1, 2009 the MSCI Total Return Emerging Markets Index is up 65.1%, outperforming the S&P 500 Total Return Index, which is up 17%.

Read on…

MarketFolly.com also featured my overview of the EMD market.

Barack Obama’s sudden decision this week to slap a 35% tariff on Chinese tire imports may seem like a sudden bout of irrational protectionism. In fact, it represents yet another act in the endless Kabuki theater of international trade policy (yes, Kabuki is Japanese, not Chinese – but we live in a globalised age).

“These include the assumptions that the markets are perfectly competitive…and that there are no government subsidies or export requirements. If this were a true picture of our trade in tyres with China, then imposing tariffs would truly be harmfully protectionist and not be justified.

But this is not even close to the reality of our trade with China, which far from embracing orthodox free trade has openly adopted a neo-mercantilist, export-led economic growth strategy.” (Financial Times)

Very true. As I mentioned last week, our economic relationship to China is deeply colored by both the artificially cheap RMB and their massive dollar holdings. Every action becomes invested with political significance, symbolizing some larger movement or principle. 

Is it time to write the dollar’s obituary?