Expert Briefing on Economic Security, Investment and Judicial Risks


There is a trend rarely discussed but highly influential that appears to be amplified by the COVID-19 virus affecting investment in countries that have traditionally attracted investors interested in minerals and rare earths.

There has always been an open process for corrupt parliaments, dictators, and authoritarian governments, but today it is taking a turn for the worse for companies investing billions of dollars in long-term institutions, according to Cipher Brief Norm Roule. And the ramifications are enormous.

The question now is what should be done about bad governance without intimidating the resources from developing countries, and how to ensure that the environmental impact of these investments is recognized and addressed.

Cipher briefed with Roule to better understand the general impact of this issue.

Crypto Brief Expert Norm Rolls He served for 34 years in the CIA, managing many programs related to Iran and the Middle East. He held the position of Director of National Intelligence of Iran (NIM-I) in the office of the Director of National Intelligence. He regularly consults on energy-related issues in the region.

Cipher Brief: What are the risks of jurisdiction and how does it affect investment?

RolledImagine investing in a multi-billion dollar mining project in another country over a decade. Your investment is based on an agreement with the host country in which your share of the project proceeds is guaranteed for a specified period of time. If the project is successful, it will be one of the largest sources of income for the host country. Now, imagine that when the project is complete, the host government changes its laws and declares that you must pay a larger share of the profits. Additionally, you can only renew the license that allows you to work if you accept a smaller share of revenue and pay large new taxes, license fees, etc. Or, you can abandon the project and lose your investment. Most companies end up complying with the new demands, albeit after lengthy negotiations and lawsuits.

In the past decade, it has become customary for governments to exert greater control over the strategic extractive resources and associated revenue streams to increase national budgets or to maintain their grip on power.

The encroachment on jurisdiction and the nationalization of resources should be considered an inevitable component of any extraction process in those countries that lack a transparent judicial system, strong anti-corruption laws, a stable legislative system, and a diversified economic base. Conditions like these are often common in countries dominated by authoritarian, corrupt, or populist leadership. The failure of the international community to respond to these measures created a sense of normalization with the confiscations. This trend does not mean that foreign operations will not be profitable, but rather investors should be aware that profits are likely to erode over the life of the project.

Cipher Brief: What are the benefits for countries that practice this practice?

Rolled: Complete or progressive dispossession provides a steady stream of revenue that can be used to achieve political goals, garner popular support, build patronage networks, and maintain the loyalty of influential business leaders. At the same time, the risks are surprisingly low, especially if the expropriation process is well managed. There is no good reason to believe that countries will face more than bilateral political difficulties and here, states – and companies, often – are reluctant to risk breaching relationships that could end in total dispossession.

Cipher Brief: Are there features in which such events are more common?

RolledI can think of five that tend to come up most often:

  • A resource from which the host country derives or from which a significant portion of its annual revenue can be derived.
  • Host countries dominated by authoritarian or populist leadership who exploit compliant legislative bodies and social media to facilitate demands for new revenue or outright expropriation.
  • The absence of well-established legal traditions of the host country, regulatory ambiguities, and national requirements for transparency in business operations.
  • Multinational corporations with no constituency in the host country.
  • Countries where there is a perception that short or medium-term economic benefits outweigh the need to provide legal guarantees to foreign investors or financial predictability.

Cipher Brief: Are American investors the only groups targeted by such measures? Can you cite some examples and how they were implemented?

Rolled: not at all. In recent years, companies located in the United States, Canada, Europe and China have been the target of infringement of jurisdiction.

Let me review a handful of examples over the past decade:

  • Where 2011, Indonesia required foreign companies to sell increasingly large quantities of their domestic operations to local investors, and banned ore exports to force the development of domestic mineral processing, increasing royalties, Taxes, And fees.
  • In 2011, the populist Bolivian government ordered a review of the country’s mining law to increase revenue from this sector. In April 2012, its government confiscated a huge zinc and tin mine from the giant Swiss group, which has been running the project since 2005. The Swiss company claimed that the confiscation occurred after it agreed to equally increase government ownership of the company. 79 percent. During this same time, Bolivia took Controlling Of the electrical grid operations owned by a Spanish company, in which the Spanish government has a 20% stake.
  • In 2013, the Dominican Republic informed miners that it had sought a “more appropriate” review of the 2009 contract for a gold and silver mine two weeks after the $ 3.7 billion project reached commercial production. Soon after, the government halted mine shipments due to allegations Defective customs papers. Work resumed once the mine operator agreed that the latter’s share of total profits would grow from 37 to 51 percent, and that the company would increase local tax payments.
  • In 2017, the Tanzanian President John Magufuli He declared an “economic war” against the miners, claiming that they had failed to pay royalties and taxes of up to $ 190 billion in interest and fines. The Magufuli government has also put in place legislation that requires contract renegotiation and an end to international arbitration in disputes. Mining operations were halted and only resumed in 2019, after the company was reported to have supplied Tanzania $ 300 million, It shared ownership of its three local mines, half of the mine royalties and cash dividends.
  • In January 2018, the Democratic Republic of the Congo authorized An instant 50% tax on super profits. It also allowed the government to raise mineral royalties from 2 percent to 10 percent if the government decided that the metal was a “strategic material.”
  • Kyrgyzstan is a great example of this challenge. In 2009, Kyrgyz officials forced a Canadian company to withdraw a third of its shares in one of the largest deposits of gold in the world. Two years later, Kyrgyz officials demanded an increase in mine revenue, resulting in a special revenue of $ 33 million for the government. In September 2017, the government increased its annual environmental fees tenfold. Successfully Student $ 6 million a year for the Comtor Rehabilitation Fund, an additional $ 50 million for the Nature Development Fund, and $ 10 million for the Cancer Research Development Fund. Around 2019, the Canadian operator also agreed to make millions of dollars in contributions to various social and development funds in Kyrgyzstan.
  • For several years, Papua New Guinea and a Canadian mining company have been locked in a dispute over a 30-year-old process that miners have called “nationalization without due process”. Version expired with an agreement That the government would get a large stake in the operation while foreign companies would operate the mine.
  • Over the past few years, Bostwana, Mali, Mongolia and Zambia have also paid for a larger share of local mining revenue. There have been several incidents of this nature this year. Just last month, China Cancel their purchase Of a gold mine in Ghana, claiming that its current Australian owner failed to inform it of Accra’s decision to terminate the mine lease.

Cipher Brief: Is it possible to predict when these procedures will take place?

Rolled: In the beginning, companies are already realizing that they operate in a world where such demands are likely to be inevitable. Increasing international competition for rare earths, gold and other rare metals will exacerbate this trend. However, it would not be surprising that the threat of resource nationalization tends to rise once potential revenues are guaranteed. The steps for partial or complete nationalization begin with a narrative that wealthy multinationals have unfairly gained an unreasonable share of revenue from national strategic resources. Such issues may arise during elections, periods of rising populism, or environmental or social protests by distressed citizens of resource-rich regions. Host governments are easily weaponizing the message on social media and in party campaign narratives alleging environmental concerns or the theft of national resources by multinational corporations.

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At the same time, high commodity prices are not always a driving factor. During periods of high prices, host governments are likely to order a more important piece of a bigger pie. However, interventions do not end when resource prices fall. Instead, leaders in financial squeeze will inevitably seek to maintain revenue streams at the expense of foreign investors. Finally, extractive resources are also non-renewable in nature, and over time, extraction becomes more expensive. Collectively, these considerations inevitably encourage local leaders to demand contractual concessions, especially when the project’s production reaches, or is about to reach, its full potential.

Cipher Brief: How are companies responding?

Rolled: Outside investors have few helpful tools to thwart resource nationalization. Unlike traditional industries, strategic resource opportunities are few. It cannot be recreated in other jurisdictions, which limits the risk of investors withdrawing in search of geography with a more compliant government. Extractive industries also inherently include capital-intensive projects that must be expropriated if a foreign owner separates from the host country. Increasingly, it appears that the best thing companies can do is engage in negotiations or litigation, with the hope that the host country will reduce demands for continuing operations or avoid damage to reputation in other sectors.

Thus, the question becomes, how do companies overcome this risk?

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