India and the ‘problem’ of resource nationalism

Armed conflicts flaring in settings that are rich in natural resources – Maoist insurgents in Orissa for example – are a well-known trend and a challenge to both democracy and the free market. One instrument for governments to contain such violence (apart from its law and order machinery) is to try and dig into the cake by taxing corporations and then plough some of the money back into the local community.

Whether or not money is going into these mostly-impoverished rural communities is debatable, but when commodity prices are high, the temptation to tax is hard to resist. There’s a term for it – resource nationalism. It’s not the purpose of this blog to dig into the etymology of it – but it’s a fair guess that those who work in assessing risks to democracies and free markets may have had something to do with coining the term.

It’s nothing new, but taxes on commodities it seems are now so high that the heads of the planet’s leading mining companies held a secret meeting at the World Economic Forum (WEF) in Davos last week in order to throw a challenge to governments. According to The Times, the companies included Anglo American, Riot Tinto, Glencore, Codelco and Rusal.

Together, these head honchos are known as The Governors. Nevertheless, they were unable to come up with a united response or collective action. But they hope that if each one of these companies put the same argument to governments, they may yet get their way.

What’s the point they want to make? “We have to tell these people that we have other alternatives. We can go elsewhere. We have to choose where to put our capital,” a participant, who was not named, told the paper.

The threat sounds familiar – naughty bank bosses have been telling governments that they will simply up and leave if there are any moves to regulate bonuses.

The point they are making is that whether they leave or, alternatively, return more cash to investors through buybacks and dividends, the result will be the same: there will be less mining, which will lead to higher prices, which will slow down economic growth. Enter doomsday.

No one’s spelling it out yet, but the threat seems clearly directed at developing countries, including India. Although rich and poor governments across the world have imposed high taxes on mining, those in large developing countries (except Brazil) lead the field, according to the following table published by The Times:

There’s nothing new about resource nationalism. After all, what is Opec but an organisation aimed at safeguarding the economic interests of its 12 oil-producing member-countries.

Last year, the British government raised the supplementary tax on North Sea oil from 20% to 32%, saying the revenues that are generated (estimates range from £2b to £10b) would be used to fund a proposed 1p cut in the duty on petrol. Revenues from the tax on North Sea oil in Scotland have long had Scottish nationalists drooling.

Now that they are the ruling party in Scotland, the Finance Minister John Swinney said recently: “Scotland is attracting more inward investment jobs than anywhere else in the UK, including London, and independence will see Scotland become the sixth wealthiest country per head in the OECD. Scotland will have a £1 trillion asset base in the form of Scotland’s North Sea oil and gas reserves – at the same time as the UK is now £1 trillion in debt.”

China’s fierce control over its rare earth resources is another case in point.

But apparently the ‘problem’ of resource nationalism is now endemic – Maplecroft, the British-based global risk and strategic consulting firm, says it will be a major risk factor in 2012. But it qualifies the risk, saying it will be highest in countries where mining accounts for a large percentage of GDP and which have poor or inadequate levels of democracy.

The “resource nationalism hotspots” in Maplecroft’s Political Risk Atlas for 2012 include DR Congo, South Sudan, Myanmar, Turkmenistan, Iran, Guinea, Zimbabwe, Venezuela, Iraq, Bolivia, Russia, Kazakhstan, Angola, Nigeria and Libya.

“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,” says Maplecroft director Anthony Skinner. “They could lose control or possession of assets, as well as individual property, or face higher taxes. This is likely to result in heavy financial costs affecting the economic viability of reserves.”

It’s obvious that this warning is as relevant to globalizing Indian companies as to anyone else.

Of course, nothing is quite black and white in the world of risk perception. Ironically, companies may find it easier to predict changes in non-democratic countries such as DR Congo and Venezuela (because you know what their regimes are up to). “However, other instances of resource nationalism, such as the introduction of the 30 percent tax on coal and iron ore in Australia, are harder to anticipate,” the report says.

One final thought: the Times report about the meeting of the mining “Governors” confirms a view that some of the most significant meetings in Davos – a forum that is meant to be open and transparent – are actually held on the fringes of the W.E.F and in secret.

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