It's what's being dubbed 'the FTSKI affair'. This is short hand for the fear that the eagerness to get a London listing for shares in resources companies operating in dodgy parts of the world is bringing dodgy business practices with them, which will undermine London's reputation as a top-class financial centre. It is most obviously reflected in the case of Eurasian Natural Resources Corporation (ENRC), a metals miner operating primarily in Russia, Kazakhstan and The Congo. ENRC, whose shares are in the FTSE 100 index, is being investigated by the UK's Serious Fraud Office for fraud, bribery and corruption. It's also seen in the suspension from trading of shares in another recently-arrived resources company, Indonesian coal miner Bumi (BUMI), where $38m of unaccounted payments have surfaced.
From the specifics of these two, it is easy to imagine the emanating ripples lapping up against other London-listed resources companies operating on the boundaries where the rule of law is swamped by the rule of power - the likes of copper miner Kazakhmys (KAZ), Russian gold miner Polymetal International (POLY) or Iraqi oil producer Genel Energy (GENL).
There is no getting away from it, most of these companies operate in some nasty places. For example, ENRC has 46 per cent of its £16.6bn of assets in Kazakhstan and 32 per cent in the country euphemistically named the Democratic Republic of The Congo; and it generates almost a third of its £6bn of revenue from Russia. According to Transparency International, a pressure group, out of 174 countries monitored, Kazakhstan and Russia shared 133rd place for the countries with the worst perceptions of corruption and The Congo was 160th. Similarly, according to data from The World Bank, the proportion of companies that needed to make 'informal' payments to civil servants in order to do business (ie, to bribe them) was 82 per cent in The Congo, 40 per cent in Russia and 34 per cent in Kazakhstan.
For us, the question is not so much whether these companies should play dirty if they are to compete in the bad lands; rather it is whether their shares should have anything to do with well-regulated financial markets where what you see is assumed to be what you get?
If the answer to that is 'no', then the indictment of the bankers, brokers, auditors, regulators and non-executive directors who got these companies their London listing is a severe one. And they will deserve any restrictions coming their way, however much it cramps new business.
The answer 'no' prompts another question: should readers of Investors Chronicle even contemplate buying shares in such companies? The unstated - and cynical - reply is that's okay simply because it will make money; retail investors will follow a smart bunch of rich, well-connected risk takers who are putting capital - mostly other people's - into these companies. Sure, the elite will make the big bucks; in relative terms our readers will only pick up nickels and dimes, but that'll do them nicely.
The trouble is that argument assumes there is one rule for how companies should conduct their affairs in developed countries, where the rule of law means something, and another for how they should behave in places where everything is controlled by rent-extracting oligarchs. When a reputable company has to do business in a disreputable place, then it's okay to play by the local standards; when in Rome etc.
That may be a reasonably accurate description of the realpolitik of how companies claiming developed world standards actually do business in the developing world. If it is, it should be no surprise. After all, it is how European governments behaved when they built their 19th century empires; how they behaved well into the 20th century; and how much of the post-colonial world still behaves. Why should companies be different? In the days of the empire, The East India Company wasn't; Cecil Rhodes's British South Africa Company wasn't. Today, why should we assume that, say, Genel Energy can rise above the exigencies of getting by in war-ravaged Iraq, 168th on the Transparency International's Corruption Perceptions Index.
Yet, even if that is fair description of companies' behaviour, it does not make it right; nor does it make it good business sense. The smart, the rich and those with an exaggerated sense of self-entitlement will try to get away with what they can; and they'll have their camp-following investors. But, when push comes to shove, even they should conclude it's better to be connected to companies and markets operating to the highest standards. It's what falls under the heading of 'enlightened self interest'. It's why any wrong-doing in Eurasian Natural Resources should be pursued as ruthlessly as possible and why far-sighted investors should not give FTSKI companies the benefit of the doubt. Tough maybe; but that's smarter over the long haul.
