Academic journal article Competition Forum

Seizure: Government and the Nationalization of Corporate Assets

Academic journal article Competition Forum

Seizure: Government and the Nationalization of Corporate Assets

Article excerpt

EXECUTIVE SUMMARY

In recent years foreign direct investment in developing nations has come under threat by government policies seeking to expropriate or nationalize the assets of foreign corporations. A variety of political and economic motivations have given rise to expropriation activities. This paper examines both the political, economic and legal basis underpinning these expropriation activities and outlines a corporate risk management strategy designed to confront these emerging political/economic threats.

Keywords: Nationalization, Expropriation, Risk management, Regulatory expropriation, Eminent domain

INTRODUCTION

The Russian government has readily sought the participation of western energy firms in order to develop oil and natural gas production in Siberia (Parfitt, 2006). However, one of these development projects, Sakhalin 2, became the target of criticism by Russian energy officials in 2006. The Russian Government claimed that western oil companies developing this oil pipeline in eastern Siberia were in gross violation of Russian "environmental regulations." The Russian government subsequently revoked the operating license of the energy companies and froze all future work on the construction project. The suspension of this construction project was satisfactorily resolved in December 2006 when western energy companies agreed to surrender a 51 percent ownership stake in the pipeline to the Russian government (Marlles, 2007).

In the same year, Bolivian President Evo Morales ordered government troops to seize the assets of 56 foreign owned oil and natural gas production facilities. This asset seizure was accompanied by a demand that these companies renegotiate their operating contracts and surrender control of their production facilities to the Bolivian government. Morales intimated that any compliance failure with these demands would be met with the forcible eviction of these firms from Bolivia (Prada, 2006).

The deployment of this environmental "green-mail" strategy by the Russian government and the extortive seizure of oil and gas company assets by Bolivia, constitute a new evolutionary trend in nationalization of assets by sovereign governments. Whether government seizure of corporate assets derives from selective application of bilateral investment treaties, regulatory expropriation or the barrel of a gun, corporations find themselves subject to increased political and financial risks (Marlles, 2007).

Nationalization has been defined as ". . . an act where government takes ownership, by compulsion if necessary, of private property for a public purpose" (Williams, 1975, 263). In this fashion, nationalization represents an extension of government's eminent domain authority (Hunter, 2006) and frequently involves an adversarial taking of privately owned property/assets characteristic of expropriation and/or confiscation activities (Williams, 1975). Internationally, asset nationalization by the governments of developing nations experienced a rapid increase during the period 1956 - 1972. Overall, foreign governments expropriated privately owned corporate assets 121 times during this time interval. Furthermore, (a) corporations were only compensated for these confiscatory actions by government 55 percent of the time; and (b) compensation was not always rendered at a level commensurate with true market valuation (Williams, 1975). Some researchers have speculated that nationalization of corporate owned assets is no longer an option favored by governmental entities. These individuals argue that decreasing economic growth rates in various parts of the developing world have encouraged host governments to provide potential corporate investors with assurances against future confiscation of corporate assets (Dunning, 1998).

However, recent actions by a variety of nations have again raised the specter of these expropriation activities. Both expropriation strategies and economic extortion have been used to support asset seizures and/or change of ownership relationships in Russia, Venezuela, Angola, Bolivia, Ecuador, Czech Republic, and Zimbabwe (Weitzman, 2006; Romero, 2008; Parfitt, 2006; Marlles, 2007; Chinaka, 2007; Singer, 2003). …

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.