Expropriation of foreign-owned assets—ruled passé just a decade ago—is again very much en vogue as the race to control national energy supplies and gain market share prompts an increasing number of governments to nationalize or renationalize strategic assets. The rise in economic nationalism in such countries as Argentina and Russia is good evidence of this and has resulted in negative consequences for many international businesses, which succumb to host nations forcibly taking extraordinary stakes in their business.
These and other governments have demonstrated an increasing propensity to renege on contracts, which international law gives them the right to do, as long as compensation is fair, prompt, and adequate. As the Spanish company Repsol learned earlier this year, when its ownership stake in Argentine oil company YPF was expropriated, a decade of profitable operation is no guarantee of future success, and it can take years to reach an accommodation on compensation. In the meantime, companies are left to wonder when or if they will ever be paid, while bearing the cost of expensive negotiations and laboring under the burden of a cessation of revenue-generating activities.
If one or two governments were taking such actions, they would be labeled "rogue" and simply avoided in the future by investors. But the rise in economic nationalism is occurring in tandem with the institutionalization of "democratic" elections in many developing countries, lending legitimacy to government actions. Venezuela and Bolivia—both "democracies"—are perfect examples. Presidents Hugo Chàvez and Evo Morales have enforced multiple expropriatory actions of foreign-owned businesses in the natural resource sector in the name of "the people."
The spread of democracy over the past decade is also now coinciding with the rise of extreme political movements on the left and right, with particularly negative consequences for international businesses in strategic sectors of a given economy. Companies operating in mining, power, petrochemicals, telecoms, and high technology are particularly prized by governments inclined toward expropriatory activity for their perceived strategic value.
Impact of Decentralization
This is occurring at the same time that the "devolution" process is taking hold in an increasing number of developing countries. As central governments grant greater political and economic rights to provincial governments, the rules under which contracts were originally negotiated may change, leaving many businesses with little option but to forcibly renegotiate or unilaterally accept the changes imposed on them. This is being seen in the coal industry in Indonesia, for example, with greater frequency. The quest for political equality on a local level has thus come to transcend borders, with national and international implications.
In some cases, regional autonomy has increased to such a degree that would-be investors must contemplate the possibility that they may commence operation in one country today that may ultimately become two countries later on. Some good examples are Nigeria, which is threatened by ethnic and religious strife between its northern and southern regions, and Iraq, which remains at risk of breaking apart. The forces unleashed by the Arab Awakening will continue to threaten the sanctity of existing borders in the Middle East.
For foreign-owned businesses operating in strategic sectors of developing economies, the implications are clear. Economic nationalism, rising commodity prices, global competition, extremist political movements, and the propensity to expropriate foreign-owned assets all add up to the potential for an even more challenging international investment climate in the future. Yet, saturation in developed markets makes the desire to invest abroad—even in risk-prone countries and sectors—inevitable.
But, the risks associated with doing so exist for companies headquartered in developed as well as developing countries. With the rise of emerging market titans, such as Petrobras, Arcelor-Mittal, and Cemex, international companies of all sizes and degrees of sophistication must become smarter about investing overseas, especially given the rise in south/south and east/west investment. In some respects, emerging market multinationals are better equipped to deal with the multitude of challenges associated with operating in developing countries, given their experience in maneuvering through complex bureaucracies and addressing issues associated with corruption. Their challenge is to understand that operating abroad will, by definition, involve new and different norms and standards, with different rules for achieving success.
Strategic Planning Is Key
To maintain their footing, managers must place renewed emphasis on strategic planning and forward-looking risk management—at all phases of the trade and investment process. Being "reactive" is no longer sufficient. Corporate managers must consider how to reevaluate existing activities and analyze new opportunities in light of the rapidly changing global investment climate. The best way to address these risks is to establish risk management procedures that ask the right questions and establish effective methods for managing risk—before it becomes an issue. The ability to conduct realistic and effective scenario planning and stress testing are essential for any international business.
Given that 2013 looks to be another challenging year for the global economy, the propensity of natural resource-rich nations to lash out at foreign investors is likely to grow. The world is only going to become a riskier and more complex place in which to do business in the medium- and long-term, and there is plenty of scope for trouble. If your company does not have a risk management program in place to deal with the realities of international investing, now would be a good time to put one in place.
Dante Disparte is managing director of partner solutions with Clements Worldwide, based in Washington, DC. Daniel Wagner is chief executive officer of Country Risk Solutions, a cross-border risk advisory firm based in Connecticut, director of global strategy with the PRS Group, and author of the new book Managing Country Risk.
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