The Maplecroft Political Risk Atlas is always a good read at this time of year, detailing the company’s predictions for what perils might lurk beneath the shifting sands of geopolitics in the months ahead. But this year, among potential wars and social upheaval, a new threat was listed: resource nationalism. The relationship between states and business has been changed by the financial crisis worldwide, and protectionism is growing.

Resource nationalism is stated as the number one strategic risk facing mining and metals companies, according to Ernst & Young. “Around the world there has been an attack on the ideology of the free market,” says Robert Amsterdam, a Canadian attorney specialising in defending multinational clients. According to Amsterdam, the rapidly rising cost of many commodities has been the driver for governments in resource-rich nations to seize a greater share of the profits.

Maplecroft cites as examples action by Venezuelan president Hugo Chavez to nationalise the country’s gold industry in August 2011 and in 2010 by the Guinean authorities to renegotiate all mining contracts to give them a minority stake. Hotspots for future activity include DR Congo, South Sudan, Myanmar, Turkmenistan, Iran, Zimbabwe, Bolivia, Russia, Angola, Nigeria - and Libya.

“Governments are finding themselves with a much narrower internal tax base due to the financial crisis,” Amsterdam says. “They are so weak, so in need of funds that they are feeding on assets they would have never even considered before.

“We are seeing the rise of state capitalism and in many cases nationalised companies acting in direct competition with multinationals,” he adds.

Losing your grip
Maplecroft director Anthony Skinner says: “Oil, gas and mining companies should be aware of the political and regulatory challenges that they may face when investing in territories with a high risk of resource nationalism.” If not, he says companies risk losing control or possession of assets, as well as property, or face higher taxes.

But despite the scale of the threat, few companies have truly got to grips with the rapidly changing landscape. Says Amsterdam: “It’s incredible to me how non-engaged many multinationals are. So often there is something I call ‘the presumption of regularity’, where companies make the mistake of assuming that emerging economies are built like our own. They are not. They couldn’t be more different. That’s just not how it works.

Hire local law firms. Don’t use the big multinational outfits. I often advise companies to hire an old, local criminal lawyer, someone who really knows what’s going on”

Robert Amsterdam, attorney

“There has been a shift in many that has not been good for the rule of law. Their courts are different, their politicians respond to different incentives. In petrostates [like Nigeria], the state is living on rent, so there is no need to be accountable to the people; the judiciary, the legislature, the entire federal structure is subservient to powers within the state. That power is not formed through election but through the history of a particular class, clique or other group that dominates power.”

Different rules here
Amsterdam says multinationals should talk to a range of interests within a country, and not just the state. “That will help provide an early warning system, and an opportunity to get a better sense of what is happening in politics. Typically, businesses see NGOs as hostile to business, but in many cases they can be a great allies, and they are often fighting for things like fair trials and greater transparency.”

Risk managers must also embrace politics as a core part of their risk assessment. Katoen Natie chief risk officer Carl Leeman says: “The first thing is to actually treat politics as an internal part of risk assessment, rather than something external. Too often political risk assessment is seen as an academic exercise and not a key part of the investment decision; this is completely wrong.

“Businesses tend to see the world as one big market, making their decisions based on an analysis of population, demographics; they just look at things technically. They see things in completely the opposite way to the regional and local authorities they have to deal with … Investment decisions are frequently taken too quickly.

“Potentially, there can be an even bigger impact on SMEs. Multinationals have the resources to advise them and lobby on their behalf, while SMEs don’t.”

But there is plenty that all businesses can do to better insulate their investment. “You need to understand who has the ear of power,” Amsterdam says. “Hire local law firms. Don’t use the big multinational outfits. I often advise companies to hire an old, local criminal lawyer, someone who really knows what’s going on. You need people who are close to the action rather than people that look like you. Having been to Harvard isn’t much help in La Paz, Bolivia.”

And having your ear to the ground can make all the difference, he says. “In Venezuela, having the right attorney helped provide early warning of an attempt to arrest an employee I was representing on some phony charges. Because w≥ knew what was going on, we were able to fly them out before the police came.”