Corporate Foreign Policy

Some interesting analysis from Seeking Alpha takes a look at how the rising risks of resource nationalism are having an impact on many companies’ share values.

A developing nation’s natural resources are both a source of pride and an important economic asset. Resource nationalism is the term used to describe the policy of governments to assert greater control over its natural resources, mostly from foreign companies that have made the significant and desperately needed investments to make those resources extractable. Once the facilities are complete and extractions are about to begin, governments step in to take a greater share of the cash flow, whether it is through new taxes, export quotas, enlargement of ownership, or outright seizure.

The windfall tax is a particularly popular tactic. It is levied by governments against specific industries during times when those industries experience record profits, such as now for miners when the prices of metals are rising, or for oil companies back when oil peaked.

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Though much of the article contains practical, obvious advice for seasoned investors, Jim Jones has an interesting piece in Business Times on the tactics of managing political risk for mining in Africa.

The choice of country is clearly defined by geology. But, as Leon pointed out, mutual security depends on legal structures. He said Botswana ranks highly in the Fraser Institute’s analysis of jurisdictions that are fair and favourable to foreign investment. Botswana’s mining laws afford little in the way of discretion to ministers or the officials who administer them.

Discretion is the keyword. Ministerial or administrative discretion can (and often does) open the door to corruption.

Smaller companies are particularly vulnerable to demands for bribes or “facilitation fees” to speed up administrative processes.

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Some important information from Mining Weekly on the uptick in acquisitions being made by China in shareholdings of foreign mining firms, including a special interest in precious metals:

Strategic Capital & Intelligence Group (SCIG) CEO Jack Slibar expected the pace of Chinese investment into foreign mining firms to pick up significantly over the next two or three years.

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According to a recent piece published in the Financial Times, oil production in Angola has struggled to keep up pace, dropping to 1.65 million barrels per day, down from 1.85m b/d in 2010.  Although the African nation makes up only 2% of global oil production, back in 2008 Angola became the largest supplier of crude oil to China, marking a major milestone in Beijing’s expansionist foreign policy.

Despite lending Angola nearly $15 billion since 2002 to develop oil production, and purchasing about 45% of the country’s output, some observers believe that Beijing’s political influence, or “soft power,” has failed to gain traction, as the majority of jobs created in the industry were given to imported Chinese workers.

The fall in production, which is apparently due to several offshore blocks going off and failures to get other projects online, has prompted China to pursue larger purchases of Nigerian crude usually exported to Europe, pushing the price of the Brent further up.

This dip in production should be temporary with a number of major projects coming online, but given how active Brazil has become in building ties with Angola, the competition in this market could be heating up, indicating that China’s influence is likely to face a serious challenge in coming years.

It’s become a familiar exercise in many Sub-Saharan resource states – a popular leader comes to power by coup, revolution, and sometimes, by vote, promises sweeping social change and the eradication of poverty by tapping a greater share of the resource wealth, revokes and reissues a variety of licenses and rights, hangs onto power for a number of years while corruption cripples the economy, and is then replaced by another who promises the same.  The underdevelopment and social crises of these countries are genuine, but the balance of resource nationalism to positive investor relations is often tragically mismanaged.  This may sound like an overly cynical appraisal, but there are only a few exceptions of successful public policy and governance in these areas of Africa which have allowed the extractive industry sector to flourish in the long-term, recognizing the long time horizons required for stable conditions for foreign investment, production, and economy to begin gaining traction.

Hopes are high that this pattern of conflict can be broken with the election one month ago in Zambia, when the veteran opposition leader Michael Sata won the election, ousting the incumbent President Rupiah Banda.

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Russian Prime Minister and soon-to-be-President-again Vladimir Putin may be booed as a villain during visits to some countries, but when his plane touches down in Beijing, they roll out the red carpet.  During Putin’s most recent visit to Russia’s looming neighbor to the East, his Chinese hosts expressed confidence in deepening their strategic alliance with Russia, most notably by contributing $1 billion to the state-run Russian Direct Investment Fund, and signing a raft of agreements to expand trade ties, form joint ventures, and establish a special economic zone.

The optimism of the latest state visit builds on what we viewed as the most important event in Chinese-Russian relations from a couple years ago, when Transneft and Rosneft negotiated a $25 billion loan from China in to finish building the first pipeline link to supply Beijing with 300 million tons of crude over 20 years.

No doubt bolstered by their common interests in blocking humanitarian intervention at the United Nations arising out of the Arab Spring (building upon their shared rejection of the Color Revolutions), Chinese President Hu Jintao welcomed Putin as “an old friend of the Chinese people.”  With the two governments pledging to raise bilateral trade to $70 billion annually, this is a relationship that investors cannot afford to ignore.

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Foreign policy used to be a craft practised by diplomats and statesmen.  No longer. In an increasingly globalized economy featuring the disruptive presence of state-owned companies, sovereign wealth, and trends of resource nationalism, the foreign investor finds it necessary to seek out new tools, expanding beyond the traditional set of responses to meet political risk.

This article was originally published last month in the magazine StrategicRISK.

Corporate Foreign Policy (CFP) is comprised of a set of strategies aimed at protecting assets and employees from harmful state intervention, building trust and partnerships with local communities, complying with complex regulatory standards, and creating a network of incentives to gain access to opportunities.  In broad terms, CFP is a values-based methodology that guides the decision-making process when business issues become intertwined with foreign relations among states and companies.

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There’s an interesting post over on GlobalPost regarding a report released by the European Commission that finds an increase in protectionism and trade restrictions in both Brazil and Argentina.  As though there weren’t already enough to fight about during the upcoming G20 Summit.

Emerging economies including Argentina and Brazil are constructing barriers to international trade, the European Union’s executive arm said today.

Rather than removing protectionist measures as their economies have improved, many countries are introducing new restrictions, said the European Commission in a report.

The commission found that the EU’s trading partners had put up 131 new trade barriers in the past year, for a total of 424.

“Protectionism poses a real threat to the economic recovery,” said EU Commissioner Karel De Gucht.

It singled out Argentina, Brazil, China, India and Russia for restricting trade.

TASHKENT – Tuesday, October 18, 2011 – The latest in a series of corruption scandals in Uzbekistan is only a symptom of a much more widespread malaise, experts say.

The state news agency carried a report on Tashkent airport last week, saying some of the staff there had been convicted of extortion and forgery.

Reports on corruption are regularly carried in the Uzbek media, as salutary lessons and proof that the authorities are winning the war against graft declared by President Islam Karimov last December.

In recent months, a number of senior officials have fallen victim to the campaign, among them Tashkent mayor Abdukakhor Tokhtaev, Samarkand regional governor Uktam Barnoev, Tashkent police chief Qobul Naqibov and Marufjon Rahimov, the local government chief in Bulakbashi district in eastern Uzbekistan.

The government also shut down around 100 supermarkets and manufacturing businesses, apparently also as part of the anti-corruption drive.

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During French President Sarkozy’s recent tour of Georgia, Free Democrat party Chairman Irakli Alasania wrote an intriguing editorial published first in Le Monde. In it, the former Georgian Ambassador to the UN described the nation as at a crossroads. After nearly 20 years of turbulent rule following the collapse of the USSR, Mr. Alasania wrote that the country urgently needs to adopt a long-term strategic plan to consolidate its political and economic independence. “With the right policies, Georgia has every chance to become a successful example of democratic transformation and a magnet inducing stability in the Caucasus region. If it is to get there, though, its friends in the West ­ like President Nicholas Sarkozy can help by offering the increasingly authoritarian Georgian President Mikhail Saakashvili a little friendly advice”.

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