Weekly coverage of the issues surrounding state expropriation Expropriation News Russia Repsol board mulls $5bn YPF offer NOVEMBER 26, 2013 tags: compensation, Expropriation, PEMEX, Repsol, YPF With shares in Repsol soaring after the announcement that the Spanish oil company had reached an initial agreement with Argentina over compensation for its seizure of local affiliate YPF, it’s clear that investors see the outcome as positive. The Repsol board is meeting on Wednesday 27th to give its verdict on YPF’s offer of $5 billion for the expropriation of the YPF unit, which holds large reserves of unconventional oil and gas. Expectations are such that it will approve the offer, brokered by Mexico’s powerful state oil company Pemex. Repsol’s management, under pressure from the Spanish oil company’s largest shareholders, has in principle agreed to settle the bitter legal battle over Argentina’s seizure of a majority holding in YPF, but still demands guarantees over how the $5bn will be paid, Reuters reported insiders saying Under terms of the proposal, Repsol would get the money in Argentine bonds denominated in US dollars. In return, it would drop legal action against Argentina for expropriating Repsol’s controlling stake without payment, said one source. But as the FT notes, there are some obstacles to overcome. The deal is essentially one between governments, not companies. And the $5bn is half the amount that Repsol had sought. An earlier compensation proposal for exactly this amount had been rejeted by the firm’s board as recently as June. What’s more, Argentine paper – the conduit for most of the payments due to Repsol is not exactly prized by international investors. Argentina is being pursued by creditors, so the Spanish firm will need copper-bottomed guarantees that the payments are enforceable. LEAVE A COMMENT from → News and Comment Argentine cabinet changes signal – no change NOVEMBER 21, 2013 tags: Argentina, Moreno, PEMEX, Repsol, YPF The resignation of the controversial Argentinian Commerce Secretary – and de facto economy minister — Guillermo Moreno has prompted much rejoicing among the country’s embattled business community, given his reputation for bullying companies over eight years in power. But the popping of champagne corks may be premature; the promotion of deputy minister Alex Kicillof to economy minister – after he oversaw the nationalisation of Repsol’s YPF unit last year – suggests that President Cristina Fernandez is not about to rein back the worst excesses of her economic management. In the view of one economist quoted by the Financial Times, instead of interventionism in the form of bullying, threats and phone calls, there will be interventionism with rules, regulations and controls. “Not much to celebrate.” According to the FT, there are concerns that outgoing economy minister Hernán Lorenzino’s tentative moves towards Argentina’s so-called “external financial normalisation” may now also take a back seat. Meanwhile, YPF’s expropriated former owner Repsol appears to be the subject of media speculation suggesting that Mexican state oil company Pemex is looking to team up with telecoms billionaire Carlos Slim to buy 10% of the Spanish oil company – on top of Pemex’s existing 9.3% holding – as part of a bid to oust Repsol chief Antonio Brufau. Online news site El Confidencial has talked of a “plot” and was lining up bankers and lawyers to call an extraordinary shareholders’ meeting to oust Brufau. Pemex has strenuously denied the claims. But concerns have been raised that Pemex is playing a mediating role in seeking to bring an end to the dispute between Repsol and YPF, which Brufau has played a key role in. Pemex knows all too well that Repsol wants to expand operations in Mexico. If it won’t stop the legal campaign against Buenos Aires, many believe it will wield its own mix of carrot and stick against the Spanish oil company. For nationalised Latin American oil companies, blood may be thicker than water. LEAVE A COMMENT from → News and Comment Repsol holds out for YPF deal NOVEMBER 13, 2013 tags: Chevron, Expropriation, Repsol, shale, YPF Tensions are resurfacing between Argentina’s state-owned oil company YPF and Repsol, the Spanish company from whom it seized its majority interest in the local affiliate in April 2012. The Buenos Aires Herald notes that YPF is keeping information from Repsol representatives on its board, amid reports in the Spanish press that the Spanish company will be more than doubling its request for compensation to EUR 15 billion in its lawsuit before the World Bank arbitration unit the International Centre for the Settlement of Investment Disputes (ICSID). In an analyst call last week, Repsol chief financial officer Miguel Martinez said the two sides have yet to agree on out of court compensation. Though the Spanish firm is open to such a deal, it is continuing to purse all legal options to secure full compensation. Repsol executive chairman Antonio Brufau last year rejected a proposal that would have handed a 47% interest in a joint venture to develop the Vaca Muerta shale field, in return for a commitment to invest more to develop the asset. The latest twist follows the alleged refusal of YPF to hand over details to Repsol on a $1.2bn shale oil contract it signed in July of this year with US supermajor Chevron. The newspaper reports that Repsol’s board members had requested a copy of the contract, amid claims that it contains secret clauses. Repsol aims to get a clearer view of the real value of the Vaca Muerta play. Suggestions in the Spanish newspaper El Economista indicate it could be worth an additional EUR 5 billion. Though Repsol’s 51% holding in YPF was expropriated by Argentina last year, it still has a representative on the YPF board as a consequence of its 12% remaining holding. YPF is clearly unhappy at Repsol over its efforts. In a news release issued on 8th November, YPF is reported stating that “the attitude of Repsol’s directors shows the true objectives of this company that is pursuing, by any means possible, actions to provide obstacles to any type of association between YPF and other companies, and, in particular, the execution of the agreement sealed on July 16, 2013 with Chevron.” One possibility is that Mexico’s state-owned giant oil company Pemex will be called in to help smooth a deal between YPF and Repsol. Certainly that appears to be the ambition of YPF leaders, who claim a close relationship with the Mexican company – and know that Repsol is looking to expand in Mexico and therefore needs Pemex’s help. But YPF’s hopes of getting Repsol to somehow sweep the expropriation under the carpet look unlikely to be met. LEAVE A COMMENT from → News and Comment Orban’s misguided battle with investors NOVEMBER 7, 2013 tags: Hungary, nationalisation, Orban, utilities Hungarian populist prime minister Victor Orban’s war on private business draws a stinging rebuke from ex-PM Gordon Bajnaj, in a timely beyondbrics comment that follows the call in September to nationalise utility companies privatized in the 1990s. On 20 September, it was revealed that Hungary was in talks to nationalise six or seven utility companies as part of a drive to lower energy prices. Orban said if his government was re-elected, the public utility system in Hungary could become “community-owned” within the next one or two years. This could affect a series of foreign companies active in the Hungarian utility sector including Germany’s E.ON and RWE, France’s EDF and GDF Suez and Italy’s Eni. Bajnaj notes that by dressing up his political desires as “freedom fights” against supposed modern-day foreign oppressors, Orban has “enacted legislation that tramples on fundamental European norms – for example, destroying the independence of numerous institutions, the separation of powers, the right to the protection of property, all of which, naturally, have a negative impact on business sentiment.” According to the former PM, the irrational dream that Hungary will enjoy consumption-led growth on the basis of personal income tax reductions mixed with a fierce, ideologically driven and brutally managed war against primarily foreign companies has resulted in artificially low utility prices to all households (primarily benefiting high-income families) and additional sectoral taxes worth hundreds of billions of forint. Such an economic set-up, he argues, is contrary to the basic fundamentals of modern Europe: a competitive, free-trade economic community based on strong common cultural and legal grounds (eg the inviolability of private property) and behavioural standards of mutual recognition, understanding and dialogue. “The isolationist, state-dominated regime that Orban has been building, in continual conflict with its natural allies, can never find stability in such a community,” says Bajnaj. Such policies, he warns. will result in further economic contraction – certainly in relation to Hungary’s regional competitors – a deepening social and income gap between the few better off and the millions worse off, and more dramatic demographic and financial consequences as the better educated youth flee the country seeking a normal, prosperous life abroad. Whether Orban is attuned to such concerns seems doubtful; nationalist populism, this time of a right-leaning rather than leftist bent, seems to be the order of the day in Budapest. Ordinary Hungarians may be the ones to feel the ramifications. LEAVE A COMMENT from → News and Comment State interference stymies EM investor appetite NOVEMBER 1, 2013 tags: BofA, Emerging markets, Petrobras, Rosneft, SOEs State tampering is causing asset manager to steer clear of government controlled companies in emerging markets, warns an Asia-Pacific equity strategist at Bank of America-Merrill Lynch in a newly issued research note. Warning that investors are taking “inordinate risks with respect to emerging market equities”, Ajay Singh Kapur, Asia-Pacific equity strategist at BofA Merrill Lynch notes that global and dedicated investors are exceptionally underweight in the unpopular state capitalist sector (SOEs). Though cash has poured into ‘growth-oriented’ consumer/internet/telecoms names, investors are causing a massive concentration risk, says Kapur. Major SOEs like Petrobras or Petrochina are trading close to a 50% discount to their private sector peers – a predicament directly connected to state ownership, says Kapur. Kapur’s point is that investors need to reconsider this prejudice; Public frustration with rising wealth inequality and perceptions of state capitalist corruption, coupled with deteriorating economic fundamentals provides the rationale and need for multiple-enhancing reforms in the EM state capitalist sector, he says. But investors know that state-backed entities are often inimical to minority to investors’ interests, as the negative reaction to Rosneft’s treatment of minority shareholders recently demonstrated. Governments too often instruct companies to support government policy. As the FT notes, Petrobras provides an unofficial fuel subsidy in order to tame local inflation. For these companies, state policy overrides shareholder returns. So long as this sitiuatoin sustains, EM investors will continue to fight shy of SOEs. LEAVE A COMMENT from → News and Comment Guinea probe adds pressure on mining groups OCTOBER 23, 2013 tags: Guinea, Mining, Rio Tinto, Simandou, Steinmetz A probe by Guinea’s elected government into mining deals struck by past dictatorships has restarted a tussle for some of the planet’s most coveted mineral stocks, notes the Financial Times in a new investigation into the West African country. The former president, Lansana Conté, expropriated the rights to the northern half of Guinea’s Simandou concession from resources giant Rio Tinto back in 2008. These were subsequently acquired by Benny Steinmetz’s BSG Resources, who is now facing charges of bribery in the deal. Last week, the Israeli billionaire was interviewed by Swiss prosecutors as part of a wider probe backed by the current Guinean president Alpha Condé. The prospect of the government taking back BSG’s rights to Simandou is now real, though the billionaire investor is expected to fight legal proceedings to the hilt. Condé has sought to undo some of the damage wrought to Guinea’s reputation among investors by convening a special committee to review past mining deals, and this last year warned BSG that its rights could be cancelled if it failed to answer corruption allegations satisfactorily. If the committee decides against BSG, he could, says the FT, seize its half of Simandou (which is shared with Brazilian miner Vale). The danger facing Condé is that he could then find himself portrayed as another African asset-snatcher. However, since the main expropriation was of Rio Tinto’s assets five years ago, of which the main beneficiary was Steinmetz, there would at least be a certain sense of karma about the whole sorry proceeding. LEAVE A COMMENT from → News and Comment Navalny sentence suspended, but no change for secretive Russian state firms OCTOBER 16, 2013 tags: Navalny, Rosneft, Russia, transparency A Russian court’s decision on 16th October to suspend a five-year prison sentence given to Russian opposition leader Alexei Navalny will do little to reassure investors about the country’s investment climate, the decision looking more like a damage limitation exercise than a genuine attempt to encourage transparency in its business affairs. Navalny has garnered an international reputation as a campaigner against corruption, particularly focused on the business sector – with Russian oil majors such as Rosneft and Transneft coming in for frequent criticism. In April of this year, Navalny’s attempt to obtain the minutes of Rosneft’s board meetings relating to its 20-year supply contract with China that ended in 2009 was rejected by the Supreme Arbitration Court in Moscow – spelling further bad news for minority shareholders in Russian firms. Navalny is still to be banned from standing for election. But it seems that the Kremlin is embarrassed about the damage being done to its reputation by throwing bloggers into jail. The secretive state-owned Russian oil companies can be rest assured that Navalny – whether in or out of jail – is unlikely to stop airing dirty laundry. LEAVE A COMMENT from → News and Comment Miners still under nationalisation threat OCTOBER 10, 2013 tags: Centerra, Kyrgyzstan, mines, nationalisation, Zambia The global clamour to nationalise mining assets persists, despite mounting evidence that state control of resources rarely delivers on its promise. In the central Asian republic of Kyrgyzstan, President Almazbek Atambayev is under pressure from opposition calls to nationalise the country’s flagship mine venture with Centerra Gold, the Canadian resources group. According to a Reuters report on 9th October, the Kumtor mine is Kyrgyzstan’s major foreign exchange earner and accounted for 12% of 2011 GDP in the impoverished nation of 5.5 million which has seen two presidents deposed by popular revolts since 2005. It has been the focus of violent riots over ownership of the mine flared up again this week, and Atambayev’s government has passed its deadline to renegotiate or cancel its agreements with Centerra, signed in 2009 under President Kurmanbek Bakiyev, who fled after an uprising in April 2010. The opposition says a deal last month struck between Atambayev’s government and Centerra Gold signed a memorandum of understanding, which paves the way for Kyrgyzstan to swap its 32.7% stake for a 50% interest in a joint venture that would own Kumtor, does not go far enough. The opposition wants to either boost Kyrgyzstan’s share to at least two-thirds, nationalise Kumtor or pass a no-confidence vote in the government. So far, Atambayev is holding steady, rejecting nationalisation as being fraught with risks. He would do well to stay the course; other resource holders Africa also appear to have learned the lesson. For example, earlier this week Zambian authorities announced plans to cede control of a company that holds minority stakes in the country’s mines as Africa’s biggest copper producer pulled the plug on its nationalisation policy that began in the 1970s. Mines Minister Christopher Yaluma said on 7th October that the country would likely cut its 87.6% stake in ZCCM Investment Holdings to less than 50%. “We have gone past nationalisation and we are not going back,” he told Bloomberg news agency. ZCCM once dominated the Zambian copper industry as the state mining company following the nationalisation of Anglo American PLC assets in the 1970s. But nationalisation cost the country an estimated $45 billion in potential income, according to a report by Eunomix, a research company, issued earlier this year. Zambia’s mines lost more than $1 million a day under government ownership, according First Quantum, the country’s biggest copper producer. Output of the metal fell 65% to 263,000 tons in 1997 from 1973, chamber of mines figures show, before rebounding to more than 800,000 tons last year. LEAVE A COMMENT from → News and Comment Kremlin faces up to uncomfortable facts about investment climate OCTOBER 3, 2013 tags: Khodorkovsky, Kremlin, Magnitzky, Putin, VTB Russia’s President Vladimir Putin has laid bare the economic challenges confronting Russia in comments at a forum hosted by VTB Capital in Moscow on 2nd October, noting that the crisis of the current economic model had a structural, long-term character. In Putin’s view, Russia has to focus on “coordinated steps and new sources of [economic] development.” In order to increase productivity and the effectiveness of budgetary spending. He acknowledged that the country’s industry and technology production volumes are half the size of most developed countries, accepting that the wide gap between consumption and production levels was dangerous. The Russian president may have identified the problem, but given the Kremlin’s track record in dealing with investors, it seems unlikely that it has the wherewithal to improve the situation materially. As one expert from investment group PPF told the forum, in order to increase production output and reduce reliance on the natural resources industry, the country needed to find a way to encourage skilled nationals to stay in Russia and keep their money here. “It appears that Russian people are either afraid or do not believe in the country’s future. Many skilled professionals choose to leave Russia, buy properties overseas and send their children to Western universities. Just in case [something unpredictable happens in Russia]. They do not want to build their lives here,” the Moscow Times quoted the unnamed official as saying. That unpredictability reflects the disregard for the rule of law and investor rights going back many years. If Putin were serious about resolving the structural flaws in Russia’s economy, he would do well to address such perceptions. The Magnitzky affair and Mikhail Khodorkovsky’s treatment are symptomatic of a compromised investment climate that will continue to prompt more of the best Russians to send themselves and their capital abroad. LEAVE A COMMENT from → News and Comment Rosneft pays $1.8bn for ex-Yukos assets SEPTEMBER 26, 2013 tags: Arctic, auction, Eni, Rosneft, Yukos Russian oil company Rosneft’s acquisition of a near 20% stake in the Siberia-focused gas producer SeverEnergia, from Italy’s Enel, adds a further twist to the unseemly on-sale of former assets held by Yukos – the Russian company bankrupted under a rigged auction 10 years ago, in which Rosneft itself emerged as a prime instigator and benefactor. Under CEO Igor Sechin, Rosneft has embarked on a spending spree as it ramps up its domestic natural gas capability with a target of reaching 100 billion cubic metres by 2020 – competing with Russian giant Gazprom for the mantel of top independent gas producer. Its latest transaction, reported on 24th September, will see it shell out $1.8 billion for the 19.6% interest in the asset that was acquired in 2007 by Enel and fellow Italian company Eni, the only international energy firms to buy assets in auctions that took place in 2007 following Yukos’ liquidation. Gazprom took a 51% stake, which it sold to Novatek and Gazpromneft. Eni now holds 60% in the joint venture, and will team up with Rosneft team on plays in Yamal-Nenets – binding the Italian oil producer in a tight embrace with the state-owned player, in order to get its much-prized foothold in the Russian Arctic upstream. At the expense of further aggravating Rosneft’s rising debt pile, Sechin is ready to spend big to bolster his company’s domestic oil and gas position. But taking it off Enel’s hands should not suggest this is an ordinary, run-of- the-mill asset transfer from one oil major to another. These interests were once the legitimate holdings of Yukos. As the lawyer Robert Amsterdam noted at the time of the 2007 liquidation, any oil companies that did participate in the auctions only came in as “a form of reputation laundering that some Western companies make themselves available for.” LEAVE A COMMENT from → News and Comment Jakarta forced to water down resource nationalism SEPTEMBER 20, 2013 tags: Indonesia, Maplecroft, Mining, resource nationalism Financial troubles may be forcing Indonesia to backtrack from its resource nationalist approach, with the proposed easing of rules that were threatening to reduce mining exports from January and pile further pressure on a current account deficit that was nearly $10bn in the second quarter. Regulations initially passed more than a year ago to allow Indonesia to seize more control over its natural resources are being reviewed as the government looks to bolster exports to offset a bulging import bill, reports Reuters. The Energy and Mineral Resources Ministry has initiated talks with lawmakers to revise the 2009 law that requires mineral ores to be processed domestically before export, starting from January. The proposed changes come just one month after the government scrapped its 2013 export quota system for minerals to increase overseas sales and encourage mining investment. In a further retreat, the ministry earlier in September indicated it would relax a rule forcing foreign miners to sell majority stakes within 10 years of the start of production. The ministry is also looking at loosening regulations that would increase royalties on coal production for mining permit holders and a new tax on all coal shipments next year. Risk consultancy Maplecroft notes that the Indonesian business-climate remains a challenge to investors in the long term with resource nationalist policies being of particular concern. It noted in June that the government was preparing a draft oil and gas bill that will introduce further resource nationalist measures, among them a change to the domestic market obligations that would make the current 25% ceiling a minimum. LEAVE A COMMENT from → News and Comment Minority shareholders hit back at Rosneft SEPTEMBER 16, 2013 tags: Rosneft, Sechin, TNK-BP, Yukos Rosneft chief executive Igor Sechin is facing a charge of corporate misconduct from TNK-BP Holding minority shareholders, Russian business daily Vedomosti reported on 13th September. At issue is the refusal by Rosneft, following its acquisition of a 95% stake in TNK-BP Holding in March 2013, to buy out the minority shareholders and deny them dividends due from the previous year. One minority shareholder, Gennady Osorgin, is of the view that Sechin’s infamous statement in October 2012 that “all the money is ours” and that there was no obligation to TNK-BP minority shareholders contravened the Russian Charter on Corporate and Business Ethics. In a complaint filed to the Russian Union of Industrialists and Entrepreneurs (RSPP) lobby group, Osorgin accuses Sechin of destroying the shareholder value of the company over the past eight months, estimating that the value of his shares had been slashed by 55% over this period. TNK-BP minority shareholders are also pursuing Rosneft at the Moscow arbitration court, where two cases against the state-owned oil company are due to be heard in October. Over the past few weeks, Sechin himself – a close confidante of President Vladimir Putin – has been busy buying up shares in Rosneft, spending a cool $65m for a near 1% stake in the company in August. The state owns 69.5% of Rosneft shares via the Rosnefetgaz holding company that is coincidentally chaired by Sechin. Few expect the TNK-BP minority shareholders to get anywhere with their depositions to the RSPP, given Sechin’s powerful status in the Russian business landscape. As one banker quoted in the Financial Times says, “Obviously Sechin behaved unethically. But a lot of people are terrified of him.” Ten years on from the Yukos expropriation, which saw Rosneft acquired the largest part of the oil company at a knockdown price, the state-owned firm once again finds itself at the centre of allegations that expose the weakness of Russia’s corporate governance standards. Potential minority investors in state-owned firms that are primed for privatisation will no doubt be taking note of their likely future treatment. LEAVE A COMMENT from → News and Comment Southern Africa warning for mining firms SEPTEMBER 11, 2013 tags: Bolivia, Maplecroft, resource nationalism, South Africa, Zimbabwe Southern Africa figures strongly in two recent reports on resource nationalism. Zimbabwe tops a new survey ranking the world’s least attractive mining destinations. Canadian public policy research firm the Fraser Institute puts Zimbabwe in the bottom ten nations, along with other perennial nationalisers Bolivia and Kyrgyzstan, as the least enticing places for foreign mining companies to fund projects. Meanwhile, South Africa’s international reputation as an investment destination has been seriously dented by widespread labour unrest and cuts to the country’s sovereign credit rating, notes risk consultancy Maplecroft. While expropriation has been ruled out, increasing ‘soft’ resource nationalism – including additional tax burdens – remain likely, says Maplecroft, compounding regulatory uncertainty and further weakening investor confidence, especially within the mining sector. Higher taxation, increased local content requirements and greater beneficiation are possible, as well as an increasing presence of state-owned enterprises. In combination with growing labour costs, increased burdens on mining conglomerates would potentially contribute to investment being deferred and even divestment. LEAVE A COMMENT from → News and Comment Fernandez finds a new target SEPTEMBER 6, 2013 tags: Argentina, Chile, Fernandez, Lan, Repsol Argentina’s president Cristina Fernandez’s reputation goes before her, so no surprise that she has become involved in another unseemly dispute involving an attempt to evict a Chilean company from a Buenos Aires airport. According to the FT, her government has it in for Lan Airlines, which serves almost a third of domestic fliers in Argentina. Buenos Aires wants give the struggling state airline Aerolíneas Argentinas a monopoly over domestic flights, having lost some $1bn last year. Lan in contrast is seen as an efficient and profitable operator. As Beyondbrics acidly notes, ivestors could be forgiven for drawing the conclusion that the Lan affair betrays her government’s willingness to trample on them whenever it feels like it. Repsol and others can attest to that. LEAVE A COMMENT from → News and Comment Mexican energy reform spells end of state control AUGUST 29, 2013 tags: gas, Mexico, nationalisation, oil, PEMEX, Protectionism After numerous false starts, Mexico finally looks to be on the road to energy sector reform after president Enrique Peña Nieto earlier this month introduced proposals to open up the country’s underperforming oil and gas sector – and end 75 years of protectionism. Mexico’s energy sector remains perhaps the most closed of its kind in the world. Private investment in the exploration, production, and distribution of hydrocarbons is prohibited, giving state-owned oil company Pemex control of the entire production and supply chains. As the US-based Center for Strategic and International Studies (CSIS) notes, absent other firms to learn from and to share risks with, Pemex faces technology and knowledge gaps and the company is falling behind international parameters of innovation and productivity. The past decade has seen a 20% decrease in Mexico’s national oil production, and its reserves have plummeted by 41% in the same period. If nothing is done, at the current rate of decline Mexico will become a net oil importer by 2019. Nieto seems serious about scaling back the state from the energy sector, in calling for amendments to Mexico’s constitution that could grant the changes performance. The ruling Institutional Revolutionary Party’s (PRI) five-point proposal calls for reform of Articles 27 and 28 of the constitution to allow the state to enter into profit-sharing agreements with private companies. The president has sweetened the pill for ardent Mexican resource nationalists by only proposing that foreign firms enter into profit-sharing deals, rather than the full monty of production sharing contracts. And Nieto’s party, the PRI, is expected to pull back from steps to break the state-owned monopoly, given the unpopularity of such a move among the wider public. But Nieto’s plan still intends to open up exploration and development to foreign investors, while leaving Pemex ensconced in state hands, a significant change in the context of Mexico’s energy sector. Pemex is trying to sell the reform on the basis that it will increase productivity and create half a million jobs by 2018. But the hard part is to convince the likes of ExxonMobil and Shell that the proposed profit sharing terms are worth their salt, given that Pemex will not cede a barrel of its 115 billion of estimated booked crude reserves. Clearly Nieto expects they will be won over as profit sharing would allow companies to report them in their financial statements as assets with cash flows. This makes them bankable, according to Pemex CEO Emilio Lozoya. The next weeks and months will see some political horse-trading as the three main political parties (the PRI, PAN and the PRD) hammer out a compromise that will stick. Last week, the left of centre PRD announced its own proposals to overhaul Pemex, but it proposes leaving the constitution intact. In time, Nieto’s changes are likely to succeed, thanks to tacit backing from the conservative PAN. This heralds significant changes that could see Mexico punching above its weight again as a major oil and gas producing area. Not before time; 99% of the Gulf of Mexico’s output is derived from the US portion of the basin. State control has done little to serve the economic interests of Mexicans, even if they cling sentimentally to Pemex as a symbol of national pride. LEAVE A COMMENT from → News and Comment Zim election spells grim news for investors AUGUST 5, 2013 tags: Africa, MDC, Mugabe, Tsvangirai, Zanu PF, Zimbabwe Robert Mugabe’s disputed election victory in Zimbabwe has rehearsed familiar concerns about the veteran president’s somewhat carefree attitude to investor rights. The 89-year old’s victory over Morgan Tsvangirai of the MDC is likely to undermine investor confidence Zimbabwe – fragile at the best of times — despite the country’s strong attractions, which include relatively robust infrastructure by African standards, and a decent labour pool (and most important, proximity to the South African market). Zanu PF’s willingness to seize key economic assets for political purposes has done much to wreck investment prospects in Zimbabwe over the last 15 years. For example, plans to partially nationalise the mining sector were announced in 2011, doing little to improve prospects for this key sector. As the Washington-based Brookings Institution notes, the Mugabe regime’s experiment in land distribution – a byword for expropriation – suggests a dismal outlook in store for foreign investors in Zimbabwe. In 2000, the Zimbabwean government seized 110,000 square km of land from white farmers and “redistributed” them to black farmers. Most of this land, particularly the parcels located in good farming areas, ended up in the hands of members of ZANU-PF, or in the hands of loyal army officials. Everyone else was given inferior farming land, if any at all. Following this infamous “reform,” the Zimbabwean economy tanked, notes Brookings. Maybe Mugabe will have learned lessons. But don’t be surprised if land seizures and mine nationalisation rear back up the agenda. LEAVE A COMMENT from → News and Comment Chevron steps into legal unknown with shale deal JULY 23, 2013 tags: Argentina, Chevron, gas, Shale gas, Vaca Muerta, YPF More than a year after Argentina’s government expropriated the local unit of Spanish oil company Repsol, YPF has secured its first international partner – US supermajor Chevron, which is to invest $1.24bn in developing the Vaca Muerta shale formation. Chevron will share investment and proceeds on a 50:50 basis with YPF. The deal, announced on 17th July, comes just days after Buenos Aires announced new rules allowing tariff free exports on 20% of production for companies that invest more than $1bn over five years. They will also have the right to keep profits on those sales abroad. At first sight, all this suggests a change in attitude form Cristina Fernandez’s regime; according to Barclays Capital, the authorities have brought carrots to the bargaining table instead of the usual sticks. But caution is needed here. Barclays also notes that the government will have to strike a deal with Repsol over the nationalisation of 51% of YPF, with no compensation. Until now it has been notably reluctant to negotiate. Repsol has wisely rejected a $5bn non-cash offer from Argentina that included both it and YPF becoming partners in a shale joint venture. The ostrich position may no longer work for YPF. Earlier in July, Repsol showed progress in its legal campaign against Argentina, after a Madrid court ruled that it was competent to judge a case brought by the Spanish oil group against the companies that it says benefited illegally from the move. As the FT notes, this is bad news for YPF and Chevron, since Repsol held a majority stake in Vaca Muerta. The court ruling will increase the pressure on the Argentine company to agree a full compensation for Repsol, which is seeking some €10.5bn. It also carries risks for any other firms that seek to do a deal with Buenos Aires on Vaca Meruata, who face being sued in Spain if they do. Chevron is stepping into the unknown with its Vaca Muerta deal, confronting a potential legal minefield. Other potential investors in Argentina’s rich shale reserves will be watching and waiting. The new terms offered to oil companies in Argentina suggest a more realistic approach to foreign investors, but when push comes to shove, the Fernandez administration will revert to resource nationalist strategies to get its way. LEAVE A COMMENT from → News and Comment Dutch bank expropriation challenged JULY 16, 2013 tags: Banks, Legal cases, Netherlands, SNS Shareholders and bondholders fighting the expropriation by the Dutch government of SNS Reaal bank may be in line for compensation, after a court ruling in the Netherlands on 11th July highlighted serious concerns about the vigorous nationalising approach of Finance Minister Jeroen Dijsselbloem. SNS, the Netherlands’ fourth-largest bank, was nationalised in February 2013 after Dijsselbloem’s order. The bank received a Euros 750m bailout in 2008, as its finances came under strain amid a steep decline the value of the bank’s real estate portfolio. The minister nationalised the bank on the basis that its condition had deteriorated to such an extent that it posed an immediate and serious danger to the stability of the Dutch financial system. The decision to nationalise SNS without compensation for shareholders or junior creditors was part of a policy to force creditors to pay in bank bailouts. But the move has been bitterly opposed, for showing scan regard for investor rights. Several hundred parties, including Investors Association VEB and Trade Union Federation FNV, lodged an appeal against the expropriation. The objections were diverse in nature, but included: –– the expropriation violated Article 1 of the First Protocol to the European Convention on Human Rights (ECHR); –– it violated Article 6 ECHR (the right to a fair trial); and –– was in conflict with the EC Merger Regulation, as the Dutch State already owns ABN AMRO. Most objections were raised against the extent of the expropriation, notes law firm Allen & Overy; the argument being that the expropriation of the subordinated debt of SNS Bank was deemed unnecessary and therefore a violation of the so-called proportionality principle. The Enterprise Chamber, a special business court in Amsterdam, ruled last week that the finance ministry had failed to justify its claim that SNS Reaal’s shares and junior securities were worthless. The court will appoint a committee of experts to determine how much compensation the government should pay. The ruling is bad news for other European governments that take a hard line on creditors and shareholders when they bail out banks, as they will face blowback from national courts. However, new Europe-wide bank resolution rules could eliminate national courts’ jurisdiction when the legislation comes into effect in 2018. The Dutch authorities’ acknowledgement that compensation was due for some creditors suggest a reverse is in the works. The next phase will see SNS bondholders taking their case to the ECHR. LEAVE A COMMENT from → News and Comment State creeps back as Kremlin privatisation plans fall apart JULY 5, 2013 tags: BRICs, Medvedev, oil, Privatisation, Putin, Rosneft, Russia, Sechin, Yukos No surprises here; the Russian government’s recent announcement that its privatisation target for 2014 would be halved suggests that the limited market opening seen under Dmitry Medvedev’s presidency is being unwound. The State Property Agency slashed its 2014 privatisation revenue forecast to Rb 180bn ($5.5bn), down from around Rb 350bn, with similar cuts in 2015 and 2016. Under Putin, the state is creeping back into the Russian economy and reining in growth, which slowed to a four–year low of 1.8% in the January-May 2013 period. As a Reuter’s report notes, the biggest deal since Putin’s return to the Kremlin has been a de facto nationalisation – state oil major Rosneft’s $55 billion takeover of Anglo-Russian oil venture TNK-BP. Rosneft itself was formed out of the embers of the expropriated assets of Yukos some 10 years ago, and is more than two-thirds state-owned to this day. Big hitters like Rosneft chief Igor Sechin are intrinsically opposed to privatisation. His influence is telling as the revised privatisation programme contains no firm dates for sell-offs, reduces the size of stakes to be put on the block and ensures that the state will keep majority control of most of its prized assets, notes Reuters. Some of the failure to advance privatisation can no doubt be attributed to investor wariness in light of the underperformance of the Russian stock market. Few sales of state assets have met their projected returns. Yet that tells only part of the story. According to the Financial Times’ BeyondBrics column, the fact is that investors have a list of Russia-specific concerns which Putin has not addressed, mostly to do with corruption, a lack of transparency and the weakness of the rule of law. These are the structural challenges that Russia’s economy will eventually have to deal with – but so long as the likes of Putin and Sechin hold sway, don’t hold your breath. LEAVE A COMMENT from → News and Comment Familiar faces top the protectionist league table JUNE 28, 2013 tags: Argentina, BRICs, Emerging markets, Protectionism, Russia, YPF, Yukos Argentina and Russia, via their respective seizures of oil companies YPF and Yukos, have earned a reputation for expropriation in recent years. And according to recent research produced by France’s export credit agency Coface, the two countries are also guilty of trade protectionism. In its assessment of the radical transformation of risks in emerging countries, Coface highlights a series of measures taken in emerging countries during the last two years concerning preferential access to public markets for domestic businesses (Brazil, India, South Africa), import quotas (Argentina, Brazil, Russia) and taxes on imports (China, Argentina). In terms of existing protectionist measures by country, Coface’s data show that Argentina and Russia are by far the most protectionist states (respectively 180 and 136 measures each). The agency says the current rise in protectionism has its origin in the changes in emerging countries’ growth strategies: after undergoing a contraction in world trade in 2009, some emerging countries decided to favour sectors related to their domestic demand. From this perspective, protectionist decisions are aimed at protecting these developing sectors. The two most protectionist states have a generalized animus towards foreign investors. In Argentina’s case, says Coface, foreign investments are tiny (just 1.4% of GDP), as investors have been put off by the government’s interventionist policy, which led to the expropriation of the Repsol subsidiary, YPF, in 2012. The seizure of YPF, and the introduction of protectionist measures have led to complaints being lodged by various countries with the World Trade Organisation. There is now, warns Coface, a risk of a breakdown in relations with the IMF and expulsion from the G20 group of industrialised countries. In Russia, it says the weakness of the legal framework and of that of property rights protection curbs investment. Governance suffers from a lack of transparency (particularly in terms of shareholdings). Corruption is widespread, notes Coface, leading to Russia being ranked 133rd (out of 176) according to the Transparency International’s Corruption Perceptions Index. LEAVE A COMMENT from → News and Comment Guinea leadership split over Rio Tinto mine plan JUNE 19, 2013 tags: Africa, Guinea, Rio Tinto, West Africa Is the message that aggressive manifestations of resource nationalism does little for the holders of mineral rights finally getting through? Not yet, it seems. There are distinctly mixed messages emerging from Rio Tinto’s ongoing engagement with the Guinea authorities, in which the international resources giant is seeking to revive production of iron ore at the Simandou mine – from which it was unceremoniously evicted in 2008 when the government of the time decided to sell half the permit (the northern part) to Israeli investor Benny Steinmetz’s BSGR group. Rio’s decision to spend $700 million in 2011 to safeguard it claim to the Simandou deposit gave it back te chance to get the project underway, with a production target of 2015 earmarked. However, nothing seems that simple in the West African country. Speaking to journalists in London last week, President Alpha Condé appeared to overrule his Mines Minister Mohamed Lamine Fofana, who had earlier officially for the first time that the $20 billion Simandou iron ore project would miss that 2015 target, as the two sides attempt to work out issues such as the financing of costly infrastructure. The president didn’t seem to take on board Rio’s contention that meeting that 2015 target would be a challenge, given all that has gone on in recent years. “2015 remains our objective. The minister has spoken in his own name, he didn’t speak in Guinea’s name, and I told him so,” said President Condé at a roundtable with journalists in London on the 14th June. The danger in all this is that Guinea’s president may be in danger repeating the mistakes of his predecessors, seeing Rio Tinto as a cash cow that he can direct at will. Whatever his intentions, it’s clear that the two sides are still some way from reconciling the 2011 settlement with the original investment agreement on Simandou. Fofana’s view appears the more realistic. “We are in open discussions with Rio, taking into account the complexity of this project – technically, financially and in order to come up with an acceptable [timetable] for implementation,” he told a briefing in London on Guinea’s amended mining code on 12th June. Condé should listen to his minister; the current conditions for global mining are not clement, and the weakness has eroded the negotiating strength of resource holders. The industry is in cost-contanment mode, and risk aversion is the order of the day. Attempting to get tough with major investors like Rio Tinto, who have spent hundreds of millions of dollars in the impoverished country, looks a poor way to deal with the situation.
Posted on: Wed, 04 Dec 2013 03:11:55 +0000
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