Home' Trinidad and Tobago Guardian : September 25th 2014 Contents BG28 | THE ECONOMIST
BUSINESS GUARDIAN www.guardian.co.tt SEPTEMBER 2014 • WEEK FOUR
The Islamic State in Iraq and
Syria may be a geopolitical
threat, but it has not yet
posed much of a danger to
A day s drive from the fighting, in Kurdish-
run Iraq, three Western oil firms, Genel Energy,
DNO and Gulf Keystone, continue to pump
out crude that is piped or sent by road to
Turkey. Their combined market value plunged
after ISIS seized the city of Mosul in June, but
has recovered to $8.3 billion, down 29 per cent
from the start of the year -- a hefty fall, but
not so bad for firms on the front line of fanati-
"We ve gone from a place that was a bit
tricky in terms of security to a full-on war,"
the chief of one firm said.
Still, he was confident that the Kurdish
region s well-armed militia will protect his
business. So far investors have tweaked their
financial models, not run for the door. Analysts
now assume a cost of capital of 15 per cent,
up from 12.5 per cent before ISIS struck, he
That mix of instability and business as usual
is true of the world at large. In a new book
Henry Kissinger, the doyen of foreign-policy
strategists, describes a world in which disorder
threatens, and violence in Ukraine and the
Middle East and tensions in the South China
Sea vindicate him.
In theory, after 20 years of global expansion,
multinationals are more vulnerable than ever.
Listed Western firms have as much as 30 per
cent of their sales in emerging markets, about
double the level in the mid-1990s. It is not
only oilmen but also tech wizards and sellers
of fancy handbags who face political risk. That
risk can range from currency instability, vin-
dictive regulation, curbs on remitting cash back
home and production disturbances to sanctions
or even nationalization.
Even so, none of the recent geopolitical tur-
moil has had much impact on firms or financial
There have been yelps of pain. Adidas, Carls-
berg, Société Générale and others have had
share-price falls or made write-offs due to
Russia. Overall Russian losses by Western firms
amount to US$35 billion, based on announced
write-offs and the value of a basket of 10 com-
panies most exposed to Russia.
That is a drop in the multinational ocean,
however. An index of political risk calculated
by Dun & Bradstreet, an analysis firm, is at its
highest level since 1994, partly as a result of
the euro-zone crisis. Nonetheless, the Vix
index, which measures the implied volatility
of America s stock market and also is known
as the "fear gauge," is near a 20-year low.
One explanation is obvious: The places suf-
fering conflict are politically important but
economically small. The Middle East, northern
Africa, Russia and Ukraine together produce
only 7 per cent of the world s economic output.
They are mere "flesh wounds," the head of a
Wall Street bank said. Only 2 per cent of the
stock of foreign investment by American, Japan-
ese and British firms is in these places.
Many bosses are more worried by American
lawyers than by jihadis. Multinationals central
nervous systems, their financial operations and
computer servers, typically still are based in
the West, Japan or Singapore. In 1973, 1979
and 1990 oil prices transmitted unrest in the
Middle East across the world, but the world s
energy mix has shifted away from oil since
then, and America has lots of shale gas. Loose
monetary policy also has buoyed markets.
So far companies have proven better than
expected at absorbing risk. This has little to
do with the advice of political pundits and a
great deal to do with common sense. One boss
said that there is no substitute for getting direc-
tors to visit operations.
"You get a sense of what is going on," he
explained. "It s a lot better than sitting in a
boardroom with nice charts and the latest 30-
year-old analyst telling you what is happening
For a start, it is possible to grind out profits
in troubled places. Lafarge, a French cement
giant, has operations across the Middle East
and north Africa. Sales there have risen slightly
since 2009, and gross operating profits are
now US$1.5 billion a year. MTN, a South African
mobile-telecommunications firm with a thirst
for danger, has a division in Syria---and in
Sudan and Iran---where gross operating profits
rose by 56 per cent in the first six months of
Most multinationals have reduced their risks.
The subprime and euro-zone crises inadver-
tently helped: Big firms typically carry more
cash than before, making them less exposed
to a credit-market freeze. General Electric has
twice as much cash as it had in 2006.
Most big firms also have pursued a policy
of geographic diversification. An excessive con-
centration on one country is a classic mistake.
After China s revolution in 1949, HSBC, then
a purely Asian bank, lost half its business. Iran s
nationalisation in 1951 of the Anglo-Iranian
Oil Company s assets devastated the firm, a
precursor of B.P.
There are modern echoes of these episodes.
Repsol, a Spanish oil firm, fell in love with
Argentina, leaving it vulnerable when YPF, the
firm it bought there, was nationalised in 2012.
First Quantum, of Canada, had made a third
of its profits from a single mine that the Dem-
ocratic Republic of Congo nationalised in 2009.
As they have expanded during the past two
decades, however, multinationals have spread
themselves more. Only a dozen big, global,
listed firms have more than a tenth of their
sales in Russia. BP is the country s largest
foreign investor, but gets only about 10 per
cent of its value from its stake in Rosneft, a
Russian oil giant. McDonald s Moscow outlets,
once a symbol of détente, are temporarily shut,
victims of a diplomatic tit-for-tat. Even so,
the burger giant makes less than 5.0 per cent
of its profits in Russia.
This picture is true in other hotspots. Tele-
Profits in a time of war
Continued on Page 29
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