By Katherine Young

April 15, 2007

With resources in so-called ‘safe’ countries becoming increasingly scarce, and pressure from growing economies increasing the demand for commodities, resource companies, including juniors, are forced to look further afield for the next big thing. In the current economy, situations and environments that may have seemed too risky in the past have to be considered.

Katherine Young of the Resourcex Investor spoke to Stephen Bailey, Senior Vice President of Frontier Strategy Group - a global research and advisory firm that specializes in analyzing above-ground risks in natural resources industries - about what juniors can do to reduce political risk to their projects.

Resourcex Investor: What are the key factors a junior resource company should consider in assessing the political risk to their project?

Stephen Bailey: The first issue that should be considered is macro stability in terms of the safety of its workers both on the exploration side as well as the operations side. Is this the type of country where we feel safe, where we feel confident our workers could be safe?

Once that threshold is crossed then junior companies should consider other issues such as can we do business here while also maintaining sound legal and moral practices with respect to issues such as corruption, as well as issues such as the use of security forces to maintain the safety of assets and workers.

In a lot of environments it’s important for companies, and in particular junior companies, to think, given my size, what type of leverage can I bring to bear to ensure that I can be successful here even if conditions in the country deteriorate from a political perspective? Are there partnerships I can develop with NGOs and important government actors or international institutions that would help me to continue to operate if things were to deteriorate?

RI: You mentioned some key strategies like partnering with NGOs and developing relationships in governments. What would you outline as the other main strategies for reducing political risk?

SB: Before you can do anything, an essential prerequisite is to have a very firm understanding of where the environment you are operating in is likely to head…so what I mean by that is: if you’re in a country where there’s been significant civil conflict, like for example the Democratic Republic of the Congo, developing signposts such as: What is the percentage of members of the military that have been demobilized that continue to be armed? How have the elections played out and what have those elections meant for the positions of the key opposition leaders? By tracking those types of variables and signposts you are able to get a sense of where the environment is likely to head over time so that you can be on the proactive side rather than the reactionary side.

RI: What do you think junior companies can do to maximize leverage that they may have?

SB: The most important thing you can do to maximize leverage is, first from a governmental relations perspective, identify the key actors within the government who are likely to maintain their influence over time, those actors being technocrats or individuals within the government who are very well-respected [and are] unlikely to ever lose influence within the country…. Because if one administration is toppled by another or one administration is ushered out, you don’t want to be in a position where the administration that’s coming into power ushers you out in an attempt to remove any vestige of influence that the previous administration might have had.

The other thing is, in the communities where you operate it’s very important for junior mining companies to create very strong partnerships with NGOs both at the local and national levels - or I should say international levels - to make sure that their presence is sustainable by the people who are most affected by it. Through those partnerships, [junior companies are] able to extend and expand on a limited amount of resources [they] have to devote to these social issues. It’s really outsourcing some of the responsibility that you have in a way that allows your presence to be sustainable and politically popular.

RI: If a company was going to join with a joint venture partner as a strategy to reduce political risk, what are some of the downsides of that strategy?

SB: Joint venture partnerships comprise different types: partnerships with western companies that largely share your values, your operational practices and your interests; partnerships with other actors that are likely to have influence in a particular country or geography….

The main challenge comes with respect to the latter group, where those companies might not necessarily share the same legal obligations that western companies have and also might have different interests than western companies have, and in those cases it’s very important to recognize the reputational challenges that exist. If those companies do engage in corruption, or if their labour practices or environmental practices are not sound, part of that responsibility is ultimately going to be transferred to you as a joint venture partner.

It’s also important to recognize that the security of your assets is something that has to be protected. If you partner with a Russian or a Chinese company in an area where you don’t have influence it’s important to understand how you can maintain a long term alignment of incentives between the joint venture partner and yourself. It’s not enough just to bring money or technical skills to the table, because once that money and technical skill has been transferred to the joint venture partner you no longer have any use to them. So coming up with ways to maintain your leverage throughout the joint venture partnership [is important] and if you can’t do that, don’t enter the partnership.

RI: You suggested earlier that having another project in another country where the partner doesn’t have close ties, and you do, might be a good way to create incentive for the partner.

SB: Exactly. I think it’s very important for western companies to think outside of the box in terms of the joint venture projects of the future. When you’re operating in an area where you partner with [for example] a Chinese or a Russian company, the rules that apply to traditional partnerships with western companies may not apply. You have to be very creative in terms of creating an alignment of incentives, and one way to do that is by entering a more grand strategic partnership in which you give access in a country where you have significant influence in exchange for access in a country where they have significant influence. The benefit of that is that the country you partner with is less likely to expropriate or impair your asset because they recognize that would have ramifications for them in the country where they have less leverage.

RI: A balance of power.

SB: Exactly.

RI: How effective is political risk insurance?

SB: It’s really difficult to talk about it in broad terms. It really needs to be done on a case by case basis. In some countries it probably would be something that’s essential, in other countries it’s probably in the range of optional, and a lot of it depends on what type of risk an individual company is willing to bear.

If a company wants to have a greater upside it might forgo political risk insurance because the premiums are going to decrease their annual return rate. It’s also important to remember that there are other tool kits that companies have to limit their exposure, such as non-recourse debt financing that provides the company with capital foreign investment but does not leave them on the hook for those loans if the political situation deteriorates.

So, political risk insurance, non-recourse debt-financing, and joint-venture partnerships that spread risk across the partners are options you can use that limit your exposure. But it’s hard to talk about which ones should be used without talking about a particular environment.

RI: Are there any downsides to partnering with the World Bank?

SB: I think the World Bank is an excellent organization to partner with. One place where things can go wrong is if a company thinks that a partnership with the World Bank can solve all its problems. It’s important to have a broad array of partners on the national political level, the local level and the international level that minimize geopolitical risk exposure no matter what direction the country takes. If you put all your eggs in the World Bank basket, and the country decides they are going to take money from the Chinese [for example], then kicks the World Bank out, suddenly you’re left without a significant partner with influence in the country. So while it’s important to use the World Bank as a resource and a very important point of leverage in a lot of countries, it’s also essential that you diversify your partnership base to allow you to succeed no matter how the environment changes.

RI: One last question: if there’s a mine operating in a given country and they’ve run into problems either on the government level or the community level, and then another company wants to open a similar mine in that country, how can that second company protect itself from the problems the first company encountered and perhaps created?

SB: That’s a very good question and once again, it’s difficult to talk about that in generalities. Sometimes it’s because it’s not possible to operate there. For example a company could end up getting kicked out because the government has a new policy of nationalizing all assets and in that case it doesn’t really matter which company you are, it’s going to be difficult to come in…I think cases where there has been a company that has been essentially kicked out because the government has decided it wants to nationalize the asset, or is unhappy with western investors, the best thing you can do, or really the only chance you have of success, is to provide the government or the community or both with a new and long-term economic incentive to accommodate your presence. And that can be through partnering with the national company of the government such that they have a vested interest in having you operate there if they don’t have the technical skills to do it themselves, or one very innovative method that’s been used by some companies is to provide the community or the government, oftentimes the regional government or sometimes the national government, with an equity stake in the project and then to publicly float an entity as the subsidiary of the main company such that if the government does anything to impair the asset then it’s also going to be impairing the value of the equity that you’ve given to the government so it creates a clear long term alignment of incentives.

RI: Does that work on the small scale as well for junior companies?

SB: Absolutely. Let’s say you’re a company that only has one asset, if you’re open, and this is obviously on a case-by-case basis, but if you’re open to making the junior entity public and you give the government some stake in that public entity the same principle applies—to the extent that they do anything to impair your asset, the market value of whatever stake they have is going to be impaired as well.

Katherine Young
http://www.articlesbase.com/investing-articles/how-resource-companies-reduce-political-risk-in-volatile-areas-of-the-world-an-interview-with-stephen-bailey-140138.html

Lynn Visson’s “Wedded Strangers” explains:’

“For Russians, the ultimate sin is being stingy. Americans are viewed as being tight fisted.”

Russians and Americans have vastly different views of money. This is understandable considering that Russians were raised under the Soviet system and Americans were raised under a capitalist system.

Under the Soviet system, Russians had money in their pocket, but no place to spend it. Jobs, medical care, apartments, pensions the basic necessities that one needed for life were provided by the state.

The problem was that the State decided what to produce. Choice in goods was unavailable. That was if the product was even available. Goods were scarce. You couldn’t comparison shop even if you wanted to.

You didn’t have to worry about spending too much money because there weren’t too many goods to spend money on.

There are stories to illustrate life during the Soviet times. When you walked down the street and you saw a line of people, you got in line, even though you didn’t know why the line was forming and what you were waiting for.

Whatever it was, it was scarce and people wanted it, so it was better to get in line before you missed out.

Conversely, Americans have more money, but they have a thousand choices on how to spend that money. The whole American consumption system is designed to get you to spend money on whatever product is advertised. They supplement the myriad choices with easy credit.

The trick in the American system is to figure out what it is that is really important to you. It becomes important to make wise choices because there are so many choices available. Shopping for bargains and good value becomes imperative to survive American capitalism. Your choices are virtually unlimited. You could spend hundreds of thousands times your income in America without giving it a second thought.

The problem is that you would soon find yourself wallowing in consumer debt.

Americans value their ability to negotiate a good deal and to find a bargain. They brag about the great deals they get. They are proud of their ability to get the most for their money. To live at the highest standard of living possible is the goal of America’s consumer society.

For that same reason, American men are proud of their success and the assets they have accumulated. They think that they can attract a Russian woman by telling her about their ability to provide for her.

They brag about their income and their wealth to impress her and then they turn around and tell her about what a good negotiator they are in exacting the best price for things.

These traits are valuable in American society. But all that talk about money makes them sound like Ebenezer Scrooge to the Russian woman they are trying to impress.

To a Russian, who earns one dollar for every fifty dollars an American earns, an American sounds incredibly cheap when they talk about what a hard bargain they have driven to buy something.
You sound more like a miser to them.

When you talk about how you got a great price on the airline tickets to see her, it takes the romance right out of the picture, as far as she is concerned. Your meeting takes on the air of a commercial transaction rather than a romantic interlude.

To a Russian, you either have the money or you don’t. You can either afford something or you can’t. You don’t brag about how you whittled someone down in price. You don’t talk about money. It’s considered bad taste.

“First, they brag about how much money they have and then they complain about the prices,” the Russian women say. “How they count their money!”

America is a merchant society. Talking about money is normal to them.

Russians know that Americans make much more money than them. But they don’t understand anything about the types of expenses that the typical American has.

Russians have monthly expenses of rent, food, telephone, hot water, and heat in the winter. These expenses maybe cost them fifty to one hundred dollars per month.

When you tell them you make three thousand dollars per month, for example, they mentally subtract one hundred dollars for expenses, and they think they have twenty nine hundred dollars to spend money on the things they want.

Russians have no idea about the types of payments that Americans make every month. They don’t understand that recurring payments like mortgages, car payments, insurance, cable, telephone, and other expenses add up to a large portion of their monthly check.

The average American family has a standard of living, which is accessible to only the top income class in Russia.

Russians don’t pay personal income taxes and they don’t realize that you must pay as much as twenty five to thirty five percent of your income for income tax, plus property taxes, sales tax, and other excise taxes.

A Russian woman is definitely interested in your financial situation. She want to know that you have a stable job and are able to take care of her and any children you may have. Tell her that you own your own home. Tell her that you can take good care of her and her children.

Tell her about the shopping and cultural amenities where you live. Tell her about the restaurants and cafes. Tell her about the weather and the local recreational facilities. Tell her about television, movies, and other lifestyle considerations.

Tell her about the schools. Tell her what you like about your job, your family, your home, and the community where you live. Tell her why she will like it too.

Just don’t go into a lot of financial details. No matter how much you try to explain, she just won’t understand. Don’t talk about money unless you have to.

John Kunkle
http://www.articlesbase.com/marriage-articles/russian-attitudes-toward-money-62916.html

Russian brides are helpful and attractive but before asking your darling to marry you it is good idea to know her family. Money sometimes can cause dramatic changes in your perfect unpretentious world.

Russians depend on each other. They have passed through serious troubles during the last years and in the long run their life was not easy either. Due to many economic problems and bad political and social practice and reforms, Russia was almost destroyed between 1990 until today. Some things are starting to get better, but unemployment in many regions today is forcing people who live there, literally to share their bread with the other members of the community.

Russian women are traditionalists. They come from society where uncertainty is not well accepted and they feel insecure when they do not have strong men around. They respect their father and mother, ask advice from their aunts and at younger age listen very carefully to their grandmothers. They know that their family will need them when they grow old and get retired.

Unfortunately pensions in Russia are very low and people rarely manage to pay even for utility services like water or heating. Brides are always having this in mind, when they start a relationship with a foreigner. If your sweetheart is not discussing her family’s problems, you can always ask a few delicate questions.

To know a little more about your father and mother in law is good and may save you problems in the future. To know how their life is going is better than to wake up one day with your wife sitting next to you saying that she is leaving you because her mother is ill and needs her for the next few weeks or few years, who knows.

Then you may read that all Russian bride marriages are a result of cruel manipulations. If course this is fiction as much as the legend that the Cold War is not over. Indeed many ladies say that they are happy with their foreign husbands, because their lives have improved since the very moment they started their relationship; but that is just one side of the story. The other is that people are constantly looking for love and they know that it exists not only within the limits of the streets you walk every day or offices where you work.

However, Russians still have those oldie traditions of supporting the family and respect your husband. Finances are usually shared and savings are considered “ours”.

In Russian tradition it is typical wives to work but there still exists a kind of sexism which will never allow a woman to stay at the top of big company or institution or have as big salaries as men do.

Peter Finch
http://www.articlesbase.com/dating-articles/russian-bride-marriage-just-bride-or-a-whole-family-too-127264.html

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