By Shaun Read
An edited version of this article was published in the Financial Mail in the 8 to 14 April 2021 edition
The Australian government’s recent refusal to permit the sale by WBHO of its stake in its subsidiary, Probuild, is proof once again that South African companies need a foreign policy when investing offshore.
According to Australian media reports, WBHO was close to consummating a transaction with a Chinese construction company when it received word that the Australian government would not approve the transactions “for security reasons”. The board of WBHO appeared to have found themselves in the middle of the recent fallout between Australia and China over criticism by Australia of China’s handling of the Covid 19 pandemic and resulting tariff war. The result is a failed transaction that would have returned R3 billion in value to WBHO.
The reality is that globalisation has meant that countries are now more economically dependent on each other as their domestic industries are outsourced to cheaper geographies and new markets open up for their producers. This has created the opportunity to “weaponise” trade. Sanctions are now a more potent weapon that an aircraft carrier parked off the coast of an enemy state. Countries no longer have to invade other countries to assert their dominance, they simply have to prevent their own economic participants from dealing with their enemies or deny their enemies access to their markets.
Aside from using tariffs and sanctions as a weapon, many states, including South Africa, have introduced legislation to allow the state to veto private commercial transactions that are regarded as contrary to the perceived economic or security interests of the state. In 2006, the US government blocked the sale of the management of 6 USA ports to Dubai Ports for security reasons. In 2010, Canada blocked the acquisition by BHP Billiton of the Potash Corporation, citing the lack of a net benefit for Canada required under the Investment Canada Act. As WBHO found out to its detriment in Australia, this pattern continues.
In a Harvard Business Review (HBR) article, published in 2016, author John Chipman, points out that companies that fail to understand geo-political risks can end up self-sabotaging. As an example, Chipman cites MTN’s failure to adhere to the Nigerian legislation to cut off service to unregistered sim cards aimed at preventing anti-government groups, such as Boko Haram, from communicating using untraceable phones. As Chipman points out, not only did MTN fail to appreciate Nigeria’s domestic political situation, but it also failed to appreciate the thinly veiled resentment towards companies from South Africa, its biggest economic rival on the continent. The net result was a massive fine and the requirement for MTN to undertake a secondary listing on the Nigerian Stock Exchange.
MTN’s investment in Nigeria is not its only experience with the vagaries of geo-politicals. The decision to invest in the long troubled Middle East region has also arguably had negative consequences for MTN. As a result of US sanctions on Iran, MTN has reported in 2020 that approximately R3 billion of loans and profits are trapped in that country. Its investment in Afghanistan has given rise to a class action from families of US soldiers killed by roadside bombs. The claimants in that matter claim MTN paid protection money to the Taliban and that its network was used in co-ordinating such killings, an accusation which MTN strongly denies. Syria and Yemen, in which MTN is invested, are both in a state of civil war, fuelled by foreign proxy forces. Early in March this year, MTN Syria was placed under judicial guardianship following allegations that the company was in breach of its license conditions, which allegations are again denied by MTN.
It is no wonder therefore that in late 2020, MTN announced its intention to exit its investments in the Middle East and cited “the political instability and sanctions in the MENA region” as one of its top risks in its 2019 Integrated Report.
But it is not just the troubled areas of the world where geo-politics matters. Many banks and large companies in the UK were taken by surprise when the UK voted for Brexit. Arguably, they failed to appreciate the anti-European sentiments (and widespread ignorance of the meaning of Brexit) outside of cosmopolitan London where they were headquartered and interact.
China, the world’s first or second largest economy (depending on which media you subscribe to) is also now centre stage in the world of geo-politics. The trade war with the USA mirrors the fight for dominance in the South China Sea, a major commercial shipping route. China is also the base of some of the world’s largest tech stocks, with Tencent having a market capitalisation of approximately $900 billion. Those looking to invest in these Chinese tech success stories need to understand that Beijing is not New York. According to the Wall Street Journal, the growth of these tech stocks has been facilitated by the restrictions imposed on western companies such as Google and Amazon, which otherwise dominate outside of China. The Chinese government is also concerned at the unique insight which the data collection systems of these tech companies, has given them. As a result, China has recently imposed anti-trust and internet regulations designed retake control of such data. Likewise these tech companies are constantly facing regulatory delays and having to adjust content to avoid offending the Chinese state, all of which impacts their share price. Hong Kong, one of the world’s financial hubs is also in serious danger of losing its status through the recent Chinese mainland crackdown, partly because it has ceased to be a major contributor to the Chinese economy, falling from a contribution of 27% in the 1990’s to just 3% today. International currencies, in which South African companies trade internationally, are a further geo-political battlefield. As countries seek to revive their economies, they may manipulate their currencies to variously increase or decrease the price of exported and imported goods. Such currency wars can materially affect foreign currency earnings of South African companies. Even trading in a foreign currency could have foreign policy considerations. For instance, it is a little known fact that the US Federal Government claims jurisdiction over any dealings in US Dollars where they flow through US financial institutions. Almost all dealings in US dollars will at some point flow through the Federal Reserve Bank even if it is for a millisecond of currency trade. Given the impact of geo-politics on trade, why do foreign policy considerations seem to feature so low on the list of priorities for most South Africa companies investing offshore?
Part of the problem is that South African companies still believe they are welcome everywhere because of the “miracle of 1994” and that they are immune from geo-political considerations when investing offshore. The reality is that any goodwill towards South Africa, for is its peaceful transition to majority rule, has long since been squandered. Thanks to the Zuma regime we are seen by many as just another corrupt African state heading the way of many others.
The other part of the problems is that South Africa’s foreign policy is virtually non-existent and seems to be based on “do nothing/say nothing” principles. We are a nominal member of the G20, but with no ability to influence its decisions. Our membership of the African Union is as irrelevant as the African Union itself, and who knows what has happened to the BRICS forum. Ironically, because of the fact that South Africa is not centre stage in world politics, South African companies often believe that they can go about their business unnoticed.
How should a company go about developing a foreign policy for its international dealings? Chipman in his article, suggests that companies do so in the same way that countries approach foreign policy. In the first instance and perhaps obviously, do not assume that your company is immune from geo-political events. The world has moved on from the post-cold war era where companies seek to remain apolitical. Such stance will not protect against sanctions or civil war, as many have discovered.
Secondly companies should define their interests. In doing so it is important not to be seen as an extension of the nation state where they are headquartered. Huawei’s attempts to expand its 5G operations in the US and UK has run into opposition as it is seen as too closely linked to the Chinese government. In Canada, Huawei’s CFO and daughter of its founder, is under house arrest and is facing extradition to the US in respect of allegations that she facilitated the circumvention of US sanctions against Iran. In a tit-for-tat response, China has detained 2 Canadian businessmen on charges of espionage, bringing home the personal cost of geo-politics.
In like vein, proclaiming yourself to be “proudly South African”, may work against you when your host nation’s citizens are subject to xenophobic attacks in your home country. To avoid too closely identifying with your home country, Chipman suggests companies adopt a transnational character by localising management and workforces and identifying regionally, rather than by country of origin. MTN’s forced listing on the Nigerian Stock Exchange (NSE) could, ironically, work to its benefit. MTN is now the second largest company, by market capitalisation, on the NSE after the Dangote Group. The Nigerian government may hesitate to act again so harshly against a localised company.
Companies must also maintain diversified political relationships, without opening the door for corrupt activities. Maintaining links only to the current ruling regime may work against you when such regime changes (peacefully or otherwise) or they become an international pariah. Similarly, companies should not ignore other stakeholders such as local business and civil society, who may serve as allies in the face of governmental overreach. Companies should also perform a proper due diligence of the country into which they wish to invest. Just like you would do when buying a house, companies need to look at the neighbourhood into which they want to invest. This is because regional politics is just as important as domestic politics. Investing in a country surrounded by hostile neighbours is bound to have ramifications.
There may also be conflicts within the intended target country. For instance, ignoring the Sunni and Shiite divide in the Middle East or the militant uprising in northern Mozambique is not likely to end well for an investor in those territories.
It is important to also employ the services of foreign policy experts. Simply reading a country report is not enough, says Chipman. However, care must be taken to ensure the experts are neutral and not simply advocates for political interest groupings or intelligence operations, as is the case with some of the “think tanks” offering such services.
At the end of the day, geo-political considerations are just another risk factor which companies need to consider when investing offshore. Like any other risk factor, ignoring geo-political risks can prove costly to any company.
An edited version of this article was published in the Financial Mail in the 8 to 14 April 2021 edition
The Australian government’s recent refusal to permit the sale by WBHO of its stake in its subsidiary, Probuild, is proof once again that South African companies need a foreign policy when investing offshore.
According to Australian media reports, WBHO was close to consummating a transaction with a Chinese construction company when it received word that the Australian government would not approve the transactions “for security reasons”. The board of WBHO appeared to have found themselves in the middle of the recent fallout between Australia and China over criticism by Australia of China’s handling of the Covid 19 pandemic and resulting tariff war. The result is a failed transaction that would have returned R3 billion in value to WBHO.
The reality is that globalisation has meant that countries are now more economically dependent on each other as their domestic industries are outsourced to cheaper geographies and new markets open up for their producers. This has created the opportunity to “weaponise” trade. Sanctions are now a more potent weapon that an aircraft carrier parked off the coast of an enemy state. Countries no longer have to invade other countries to assert their dominance, they simply have to prevent their own economic participants from dealing with their enemies or deny their enemies access to their markets.
Aside from using tariffs and sanctions as a weapon, many states, including South Africa, have introduced legislation to allow the state to veto private commercial transactions that are regarded as contrary to the perceived economic or security interests of the state. In 2006, the US government blocked the sale of the management of 6 USA ports to Dubai Ports for security reasons. In 2010, Canada blocked the acquisition by BHP Billiton of the Potash Corporation, citing the lack of a net benefit for Canada required under the Investment Canada Act. As WBHO found out to its detriment in Australia, this pattern continues.
In a Harvard Business Review (HBR) article, published in 2016, author John Chipman, points out that companies that fail to understand geo-political risks can end up self-sabotaging. As an example, Chipman cites MTN’s failure to adhere to the Nigerian legislation to cut off service to unregistered sim cards aimed at preventing anti-government groups, such as Boko Haram, from communicating using untraceable phones. As Chipman points out, not only did MTN fail to appreciate Nigeria’s domestic political situation, but it also failed to appreciate the thinly veiled resentment towards companies from South Africa, its biggest economic rival on the continent. The net result was a massive fine and the requirement for MTN to undertake a secondary listing on the Nigerian Stock Exchange.
MTN’s investment in Nigeria is not its only experience with the vagaries of geo-politicals. The decision to invest in the long troubled Middle East region has also arguably had negative consequences for MTN. As a result of US sanctions on Iran, MTN has reported in 2020 that approximately R3 billion of loans and profits are trapped in that country. Its investment in Afghanistan has given rise to a class action from families of US soldiers killed by roadside bombs. The claimants in that matter claim MTN paid protection money to the Taliban and that its network was used in co-ordinating such killings, an accusation which MTN strongly denies. Syria and Yemen, in which MTN is invested, are both in a state of civil war, fuelled by foreign proxy forces. Early in March this year, MTN Syria was placed under judicial guardianship following allegations that the company was in breach of its license conditions, which allegations are again denied by MTN.
It is no wonder therefore that in late 2020, MTN announced its intention to exit its investments in the Middle East and cited “the political instability and sanctions in the MENA region” as one of its top risks in its 2019 Integrated Report.
But it is not just the troubled areas of the world where geo-politics matters. Many banks and large companies in the UK were taken by surprise when the UK voted for Brexit. Arguably, they failed to appreciate the anti-European sentiments (and widespread ignorance of the meaning of Brexit) outside of cosmopolitan London where they were headquartered and interact.
China, the world’s first or second largest economy (depending on which media you subscribe to) is also now centre stage in the world of geo-politics. The trade war with the USA mirrors the fight for dominance in the South China Sea, a major commercial shipping route. China is also the base of some of the world’s largest tech stocks, with Tencent having a market capitalisation of approximately $900 billion. Those looking to invest in these Chinese tech success stories need to understand that Beijing is not New York. According to the Wall Street Journal, the growth of these tech stocks has been facilitated by the restrictions imposed on western companies such as Google and Amazon, which otherwise dominate outside of China. The Chinese government is also concerned at the unique insight which the data collection systems of these tech companies, has given them. As a result, China has recently imposed anti-trust and internet regulations designed retake control of such data. Likewise these tech companies are constantly facing regulatory delays and having to adjust content to avoid offending the Chinese state, all of which impacts their share price. Hong Kong, one of the world’s financial hubs is also in serious danger of losing its status through the recent Chinese mainland crackdown, partly because it has ceased to be a major contributor to the Chinese economy, falling from a contribution of 27% in the 1990’s to just 3% today. International currencies, in which South African companies trade internationally, are a further geo-political battlefield. As countries seek to revive their economies, they may manipulate their currencies to variously increase or decrease the price of exported and imported goods. Such currency wars can materially affect foreign currency earnings of South African companies. Even trading in a foreign currency could have foreign policy considerations. For instance, it is a little known fact that the US Federal Government claims jurisdiction over any dealings in US Dollars where they flow through US financial institutions. Almost all dealings in US dollars will at some point flow through the Federal Reserve Bank even if it is for a millisecond of currency trade. Given the impact of geo-politics on trade, why do foreign policy considerations seem to feature so low on the list of priorities for most South Africa companies investing offshore?
Part of the problem is that South African companies still believe they are welcome everywhere because of the “miracle of 1994” and that they are immune from geo-political considerations when investing offshore. The reality is that any goodwill towards South Africa, for is its peaceful transition to majority rule, has long since been squandered. Thanks to the Zuma regime we are seen by many as just another corrupt African state heading the way of many others.
The other part of the problems is that South Africa’s foreign policy is virtually non-existent and seems to be based on “do nothing/say nothing” principles. We are a nominal member of the G20, but with no ability to influence its decisions. Our membership of the African Union is as irrelevant as the African Union itself, and who knows what has happened to the BRICS forum. Ironically, because of the fact that South Africa is not centre stage in world politics, South African companies often believe that they can go about their business unnoticed.
How should a company go about developing a foreign policy for its international dealings? Chipman in his article, suggests that companies do so in the same way that countries approach foreign policy. In the first instance and perhaps obviously, do not assume that your company is immune from geo-political events. The world has moved on from the post-cold war era where companies seek to remain apolitical. Such stance will not protect against sanctions or civil war, as many have discovered.
Secondly companies should define their interests. In doing so it is important not to be seen as an extension of the nation state where they are headquartered. Huawei’s attempts to expand its 5G operations in the US and UK has run into opposition as it is seen as too closely linked to the Chinese government. In Canada, Huawei’s CFO and daughter of its founder, is under house arrest and is facing extradition to the US in respect of allegations that she facilitated the circumvention of US sanctions against Iran. In a tit-for-tat response, China has detained 2 Canadian businessmen on charges of espionage, bringing home the personal cost of geo-politics.
In like vein, proclaiming yourself to be “proudly South African”, may work against you when your host nation’s citizens are subject to xenophobic attacks in your home country. To avoid too closely identifying with your home country, Chipman suggests companies adopt a transnational character by localising management and workforces and identifying regionally, rather than by country of origin. MTN’s forced listing on the Nigerian Stock Exchange (NSE) could, ironically, work to its benefit. MTN is now the second largest company, by market capitalisation, on the NSE after the Dangote Group. The Nigerian government may hesitate to act again so harshly against a localised company.
Companies must also maintain diversified political relationships, without opening the door for corrupt activities. Maintaining links only to the current ruling regime may work against you when such regime changes (peacefully or otherwise) or they become an international pariah. Similarly, companies should not ignore other stakeholders such as local business and civil society, who may serve as allies in the face of governmental overreach. Companies should also perform a proper due diligence of the country into which they wish to invest. Just like you would do when buying a house, companies need to look at the neighbourhood into which they want to invest. This is because regional politics is just as important as domestic politics. Investing in a country surrounded by hostile neighbours is bound to have ramifications.
There may also be conflicts within the intended target country. For instance, ignoring the Sunni and Shiite divide in the Middle East or the militant uprising in northern Mozambique is not likely to end well for an investor in those territories.
It is important to also employ the services of foreign policy experts. Simply reading a country report is not enough, says Chipman. However, care must be taken to ensure the experts are neutral and not simply advocates for political interest groupings or intelligence operations, as is the case with some of the “think tanks” offering such services.
At the end of the day, geo-political considerations are just another risk factor which companies need to consider when investing offshore. Like any other risk factor, ignoring geo-political risks can prove costly to any company.