A V Rajwade: Economic nationalism

WORLD MONEY

There seems to be a growing anti-foreigner sentiment in different parts of the world.

Even as we debate questions about foreign investments in retail, insurance and other sectors, there seems to be a growing anti-foreigner sentiment in different parts of the world. Some recent cases:

Bolivia, after a change in government, nationalised its natural gas industry and has reached agreements with the foreign investors about the new ownership pattern and roles, increasing the government's share from $200 million to $4 billion, a huge sum for a small country.

Venezuela is increasing state control on oil-fields and has nationalised power and telecom utilities. It has promised fair value compensation.

The Thai military government has tightened laws and plugged the ambiguities in foreign ownership of Thai companies "" utilisation of the loopholes by foreigners was being winked at so far. The Thais have also tightened land ownership laws against foreigners. One particular target seems to be Temasek, the giant Singapore holding company, which bought the previous prime minister's telecom business allowing him to make a tax free profit of $1.9 billion. Services companies may not be affected by the new rules.

A Canadian oil company's investment in oil exploration in Indonesia, has now ended up in court because of various problems and disputes with the government and regulator. The Canadian company alleges that bullying by the authorities and their unwillingness to abide by the terms of the contract, have harmed its interests significantly.

As Indian companies become increasingly multinational, they too are facing economic nationalism. Videocon is having problems in the takeover of Daewoo Electronics in Korea; Jindal Steel and Power is still waiting to sign a proper contract for a mine it took over in Bolivia; and Vedanta is facing problems in Zambia, a case which has now gone for arbitration.

Some of these disputes with foreign investors seem to be the direct fallout of the rise in oil prices. Contracts with foreigners negotiated when the oil price was much lower, now look much less fair to the host country. The positive sign is that, in most of these cases, there has been no outright and unilateral takeover of assets. Agreements have been renegotiated but, in many cases, the foreign investors are staying on under the revised terms.

Even advanced and supposedly more mature countries are not immune to economic nationalism. Some time back, the US Congress vetoed CNOOC's takeover bid for UNOCAL (CNOOC is a Chinese oil company), and Dubai's proposed takeover of east coast US ports. European opposition to Mittal's takeover of Arcelor has also been well publicised.

The backlash against Anglo-Saxon finance capitalism in the form of private equity, seems to be growing. Tokyo recently tightened rules to make it more difficult for foreigners to take over Japanese companies. The Korean authorities are angry at the profits made by western investors who took over Korean companies and assets after the BoP crisis in 1998. Particularly bitter was the reaction about Lone Star, a private equity fund, which took over the Korea Exchange Bank and was making a $4 billion tax free profit in just four years. Cases like this are leading to some private equity funds being criticised as "vulture funds".

France recently declared a biscuit manufacturer (Danone) to be strategically important to the country. Does such economic nationalism make sense? Not much, to my mind. In an era of globalisation, discriminating against foreign investors is not a wise policy "" whatever their colour!

In perhaps the most striking example, Russia has flexed its muscles against foreign investors like Exxon and Shell in the Sakhalin I and II oil fields (incidentally, Sakhalin I represents the single largest Indian investment overseas so far). It has also had a series of disputes about pricing of oil and gas with neighbouring countries, which were formerly part of the USSR. These disputes had led to temporary suspension of oil and gas supplies to western Europe, creating questions about Russia's reliability as a supplier. To be sure, the Russians do seem to have a case for insisting on renegotiation of terms or prices. For instance, the costs of both Sakhalin I and II have gone up very sharply, thus delaying receipt of any return by the Russians as the foreign operator is entitled to first recover the total capital cost. The problems with countries like Ukraine and Belarus arose because of Russian demands that they pay market prices for the oil and gas they are buying from the Russians. A big confrontation is also building up in the oil and gas rich countries in central Asia, with the US trying to bring the former Soviet countries under its influence, and the Russians trying equally hard to keep them under the Russian thumb.

Tailpiece: As one anxiously awaits the central bank's moves later this week, one is puzzled by the increase in the limit on external commercial borrowings. Does this indicate that the RBI would like to encourage foreign currency borrowings, but restrict rupee loans?

avrajwade@gmail.com