The traditional corporate toolkit to respond to the risks of resource nationalism is outdated and inadequate. What was once perceived as a wave of economic liberalism, as governments across the globe were pulling back from intervention in the private sector is now a distant memory with the de facto nationalization of large swathes of the banking industry in the United States and across much of Europe. Governments in emerging market countries continue to seek larger shares in the natural resources sectors, leading to partial and total expropriations and aggressive measures against foreign investors, often in unlawful contexts.

International oil, gas, and mining companies are having a difficult time competing with state-controlled companies benefiting from increasing clout provided by the support of state-influenced courts and regulatory authorities. State-backed firms from China, India, and Russia are also gaining a powerful competitive edge thanks to their ability to couple their bids with aid packages or arms sales. The all-too-frequent response from investors to these new challenges is obsequiousness, born from desperation to please the authorities and hold on to any remaining assets. I argue that this not a proper long-term strategy and that foreign investors have rights and recourses that they can and should vigorously defend and pursue.

The good news is that there is a stronger than ever international legal framework for investors, particularly through Bilateral Investment Treaties (BITs) and through options for direct investor-state arbitration under ICSID, NAFTA, the Energy Charter and other measures. This is a growing and improving area of investor protection, and more and more innovative options to bring disputes into rule of law jurisdictions. However, for those investors facing a short time horizon, all of the above can provide only elusive relief, leading to crippling losses and the passing up of other potential local and transnational remedies.

While many of the resource nationalist states are moving away from such investor protections, an advantage of legal regimes, such as those created by BITs, is that they can generate a considerable time lag – for example through a 10-year term – meaning that even when the state shifts policies toward resource nationalism, the legal regime may still provide more protections than the state wants to offer.

Countries do business with each other out of need. Investors often bring in major new technologies and capital improvements which can develop strong local allies. This is part of “becoming invaluable”. If an investor can structure operations in such a way as to be either economically or politically invaluable to the host government, that may buy considerable protection. Particularly in the extractive energy fields, local talent may not be able to operate without foreign know-how and technology. If able to provide such services through the investment, far better protection will result. However, large corporations should never fall into the trap of thinking that a host government would never “do this to us”.

Lastly, investors and major corporations must move toward transparency and best practices in their global conduct as a protective measure. From the lobbying muscle of NGOs, virtue is a necessity. The investment community requires a new outlook and a new modus operandi – a proactive and positive framing of our participation abroad, and an assertion of legally-protected rights of property ownership.

The following checklist represents the thoughts of a practitioner, and is only the start and not the end of a search for a strategic response to today’s challenges.

1. Suitability of host state

CHECKLIST

Respectability Considerations. There are certain countries where the leadership violates international legal norms to such a degree that the dangers for a corporation of even being seen to be in passive complicity are simply too great. For example: today’s junta in Burma.

2. Legal Aspects

  • Administrative Law Considerations. Foreign investors frequently underestimate the innovative tactics used by states to apply pressure to targeted assets – such as the instrumentalisation of bureaucratic technicalities (including everything from immigration/visa issues to operating licenses). Similar to other measures outlined below, the state’s methods will seek to conceal nationalization and expropriation under the guise of legality. Local counsel must be used to advise preemptively on these risks and to monitor for new developments and changes.
  • Criminal Law Considerations. It may not be appealing to many investors to imagine the criminal law risks they could face in certain markets, but a local criminal lawyer should be consulted to audit the risks and devise a strategy to protect the company and its staff.
  • Tax, Regulatory and Compliance Issues. Managing relations with the tax authorities can present high risks as compliance can be ambiguous regardless of good faith. Red tape is nothing new for seasoned emerging market players, but in many countries, regulatory authorities have become the preferred instrument used to influence the operations of foreign investors. Local lawyers should be consulted on the risks posed by everything from environmental to competition regulators, and open channels of communications should be established with these bureaucracies before problems occur.
  • Investment Law Review. In addition to treaties, each market has its own set of investment laws, governing the rules, regulation and practices of foreign investors in certain strategic sectors. A deep familiarity of this legislation is necessary, as well as a constant monitoring of new developments in law and practice.
  • Extra-territorial application of EU/US Law and international criminal law. Any international foray must ensure compliance with international norms including the Foreign Corrupt Practices Act, Sarbanes-Oxley, and the UN Convention on Corruption, as well as competition issues which may arise.
  • Treaties and Pacts. The primary investment security mechanism is the Bilateral Investment Treaty (BIT), an agreement established between two governments pertaining to fair and equitable treatment and the provision of rules regarding alternative dispute resolution. The existence of treaties and trade pacts is only the beginning: formal due diligence needs to be given to the historic precedent of these agreements, enforceability, and conditions. Special attention needs to be given to dispute resolution clauses for private commercial arbitration – freeing the investor of politically connected courts. The existence of a BIT is highly desirable for all foreign investors in emerging markets. Where appropriate, consider dispute resolution clauses that call for international, third party arbitration rather than relying on local courts.
  • Minority Participation. In cases such as Russia it is now necessary for Nationals to have majority ownership in strategic sectors. In addition, certain countries’ empowerment legislation is in effect requiring certain ethnic participation.
  • BRIC Competition. There is no question that since we began this checklist a new competitive landscape has grown in emerging markets with respect to major players from Brazil, Russia, India, china and south Africa, changing the very nature of competition for deals and resources in emerging markets. This new political and economic geography must be accommodated by a focus on restructuring deals with stronger ties to developing infrastructure and leveraging political connections.

3. Operational Aspects

  • Begin with a Political Survey. Ask questions such as the following: What tribe or elite group is the leader from? Is this a federal system? What is the degree of judicial independence? What form do regulatory structures take? What criteria govern market access? Who are the key influencers? Is foreign aid subject to conditionality? What is the role of International Financial Institutions? Who are the domestic and foreign competitors and suppliers? What is state participation in the given sector? Are Chinese and Indian companies present? What is the level of media control by the state? ICSID, NAFTA, ECT
  • Corporate Governance and Tunneling Avoidance. It is very important to structure affairs so that the entire “pipeline” of funding is transparent with respect to all critical constituencies. The myriad ways in which funds may be skimmed or appropriated can never be fully forecast. Careful thought must go into devising offshore structures.
  • Offshore Structures. In order to take advantage of the strongest BITs, the investor should consider structuring the company through a third party state for greater security – i.e., a Canadian company seeking to invest in

Bolivia may choose to establish a shell corporation in Sweden to be afforded the protective measures of a stronger treaty.

  • Political Risk Insurance. There are numerous political risk insurance policies on offer, covering losses incurred by war, revolution, expropriation, and currency – yet many of these policies have a more difficult time taking on the nuanced approach of modern resource nationalism, whereby the state uses seemingly legal methods to drive dow n the value of a foreign investment in order to force the sale of a valuable joint participation. However private insurers are getting more and more innovative and specific with their offerings and it is highly recommended that investors take out a policy following a careful political audit of the environment.
  • OPIC and MIGA. The Overseas Private Investment Corporation (OPIC) and the Multilateral Investment Guarantee Agency (MIGA) are two independent groups which can help provide political risk insurance for markets not covered by big insurers. MIGA, a World Bank-affiliated project, can apply to acquisitions involving the privatization of state enterprises. OPIC, a U.S. government agency, can even provide advanced insurance coverage of “creeping authoritarianism”, with reference to illegal acts by the state which violate the foreign investor’s rights in a project. Neither of these groups can protect against an attack from tax or regulatory authorities, but nevertheless it is wise to establish relationships with OPIC and MIGA and carefully review their offerings before entering a new market.
  • Local Partnering. Many investors are discovering the protective measures afforded by partnering locally in joint ventures with established entities, which often have preferential access to the authorities and an enhanced ability to penetrate the market. “Going local” must go beyond just the stakeholders – there is no substitute for the expertise of hired local counsel to navigate the regulatory environment.
  • Local Accounting. It is necessary to add a strong local accounting firm with knowledge of the practices of the enforcement authorities. In some countries, such as Russia, one cannot have enough on-the-ground advice.
  • Community Liaising. In many resource exporting nations from Africa to Latin America, a process of decentralization is occurring whereby local ethnic or community groups are gaining increasing influence over the capitol, and are in many cases mounting their own independent campaigns against foreign investors working in the region. Effective liaisons can be established within these communities to promote the company’s image, inform on activities, and notify of problems before relations become problematic.
  • Corruption Issues. A general rule of thumb from our experience: never give bribes, never take bribes – despite the temptation and seemingly institutional position of corruption in your market. The willingness of Western foreign investors to perpetuate bribery and corruption in emerging markets never fails to astonish. For example, in Germany, bribery of foreign officials was tax deductible up until 1999. Anwar Shah and Mark Schacter write, “A 2004 World Bank study of the ramifications of corruption for service delivery concludes that an improvement of one place in the International Country Risk Guide corruption index leads to a 29 per cent decrease in infant mortality rates, a 52 per cent increase in satisfaction among recipients of public health care, and a 30-60 per cent increase in satisfaction from improved road conditions. ‘Corruption hurts growth, impairs capital accumulation, reduces the effectiveness of development aid, and increases income inequality and poverty.’”1
  • Structure of operations. Structure operations so that quick expropriation of an integrated network does not result in profits to the host government.
  • Local equity participation. Minimize local equity to the extent possible
  • Corporate Security. It is important to review the voluntary principles on security and human rights. Corporate private security forces are major sources of conflict particularly in the extractive industries. To suggest that this is a “minefield” is not to exaggerate its importance.
  • Environmental Compliance. As mentioned, environmental regulation authorities are often used as instruments of expropriation, however the “green revolution” presents both opportunities and challenges. Compliance needs to be truly transparent and collaborative, and the state cannot be allowed to use green issues as a pretext for nationalization.

4. Reputation Management Aspects

Political Outreach. It is a mistake to assume that direct lobbying is the only activity by which a foreign investor can protect assets in a resource nationalist state. When problems arise, there are several alternative forums where support can be sought and the company’s interests advanced, such as regional multilateral organizations and trade authorities. We strongly advise our clients to adopt coherent political outreach strategies before problems occur, in order to constrain the state’s ability to violate property rights.

  • Embassy relations. Two words: be known.
  • Media relations. Too many foreign investors see public relations activities as being limited to new business development and shareholder perception. However it can be powerfully advantageous to have positive relations with both local and international press, resulting in a high degree of visibility, reputation, and position to further the investor’s perception of the market and tell another side of the story should problems arise.
  •   Corporate Foreign Policy. This new concept has emerged from the shortcomings of corporate social responsibility – whereas CSR is the creation of essentially PR and marketing measures, CFP is a more substantive, transparent principles-based policy guiding the company’s relations with governments and citizens, enforced and practiced by executives and counsel. Most international companies participating in the oil, gas, and mining sectors in emerging markets face risks from human rights groups, NGOs, and other civic movements which may be instrumentalised by competitors and the state. A proactive CFP strategy can help diminish the risks posed by these actors, and turn human rights legislation into a protective measure for the company’s assets.
  • Personal Security. Less is often more. In most countries your greatest danger is from your own local security team. Security should be coordinated by someone experienced in the field.

5. Crisis Management Aspects

  • Preemptive Planning. Often times the very best crisis preparation plans are the ones which never see the light of day. Every extractive industry company working in Africa, Asia, and Latin America should have a strong team pre-assembled and a number of scenario plans prepared before a given crisis is allowed to develop.
  • Sequencing. When a crisis in relations with the hosting government erupts, many foreign investors quickly lose patience and take actions without having a coherent sequence of activities and objectives. The first step is a provision of security measures to staff and executives, examining the weakest points of vulnerability for possible criminal prosecution, deportation, or other harassment. The company should also be aware of areas of vulnerability in terms of operations. The next step is to gain an understanding of the nature of the state’s interference: who ordered it, who is behind it, and who is benefiting from it. Only after covering the company’s basic weak points and identifying the source of the problem can the foreign investor begin to effectively mount a defense.
  • Explore Local Remedies. Although one should be wary of “state capture” of government offices by local competition, it is important to explore local

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remedies to solve the crisis, including backchannels to government, private meetings via influential third parties, and local courts. Many investors are tempted to avoid local courts to depend upon a BIT to solve the dispute, but there are many other legal areas (such as criminal charges) where these kinds of treaties will provide no protection.

  • Default to the Truth. When local remedies are exhausted or perceived to be stalled, coordinated appeals to outside officials, organizations, and the public must begin. The rhetorical strategy in “going public” will vary dramatically from market to market, but the general rule of thumb is to always default to the truth. The crisis team should quickly and consistently get on message with a “corporate narrative” – comprising a series of facts and arguments demonstrating the company’s efforts to comply with the law, contribute to the economy, and the state’s unfair persecution, victimization, and violation of good faith. Be prepared for the media to be flooded with false information and a compromising “official story” from the state.
  • Constitutional Transnational Legal Response. In a political case, it is critical to get to court early, particularly through the power of injunctions. When courts are corrupt or unfair, it is not about winning or losing, as much as it is about shining a light on government behavior. Recourse to litigation may slow aggressive behavior from the state.