Friday, 07.10.2015, 16:03
There’s an unfortunate tendency among some emerging markets to treat foreign direct investment like a personal or collective slush fund. Investors recognize it’s a risk, and pull out when leaders work in concert with corrupt judges and officials in order to fleece businessmen or change the law to disadvantage them.
What these governments often fail to realize, however, is first that investor confidence isn’t limitless and, second, that no market is indispensable even as new markets consider themselves in the driver’s seat. Russia and Argentina both playedskittles with investor money and property and will be paying the price for decades to come. Recently, major corporations have begun to cut their losses and flee Turkey as confidence in President Recep Tayyip Erdoğan’s stewardship declines.
Now, Iraqi Kurdistan is learning the hard way that spin cannot trump substance, and that corruption and poor management matter to investors. Over at Commentary, I discussed the Kurdistan Regional Government (KRG)’s latest attempt at a bond offering. The KRG sought to tap international debt markets for a five year, $1 billion bond. The market responded with a 12% offer. In comparison, Ivory Coast debt with a much longer maturity — December 2032 — yields 6.43%, and Iraqi government debt with a 2028 maturity trades at 8.2%. The 12% rate for Kurdistan shows a complete and utter lack of confidence in the KRG’s management.
But that was only the start of last week. Now, word has come down that the KRG has lost a major arbitration against Dana Gas. From Platts:
A London court has ruled in favor of a group of international oil and gas companies operating in Iraqi Kurdistan on several key issues in their arbitration case against the Kurdistan Regional Government in a development sure to test the KRG’s reputation for honoring its own contracts.
Dana Gas said Sunday that the London Court of International Arbitration had last week handed down a partial final award ruling confirming production rights claimed by Dana, Crescent Petroleum and the Pearl Petroleum consortium in Kurdistan. Specifically, it confirmed Pearl’s exclusive right to develop and produce gas and liquids from the Khor Mor and untapped Chemchemal gas and condensate fields.
The July 2 ruling also found that the KRG had a contractual obligation to pay the consortium, consisting of Dana, Crescent, MOL and OMV, for produced condensate and LPG at international prices, Dana said in a stock exchange disclosure document.
The total the KRG now must pay will likely exceed $1 billion. Dana Oil is just one example, however. The KRG owes producers about $17 billion, raising questions about where that money has gone. One thing is certain. Investor momentum may be slow to shift but once the tipping point is reached, there is often no going back. The Kurds say they want their independence but after years of financial mismanagement that makes Baghdad look like a Swiss Bank by comparison, they may find themselves following the path of Timor Leste, South Sudan, and Eritrea into state failure should they now pull the trigger without first getting their own house in order.