Market Transparency Works

Posted: Jul 03, 2001 12:00 AM
It isn't often that a corporate decision not to bring a stock offering to market generates news. So it was no great surprise that the Financial Times of London gave only a few paragraphs to the announcement by the Russian oil conglomerate, Lukoil, that it would forego its expect offer on the New York Stock Exchange of a share issue valued at roughly $680 million. Yet this development is of momentous significance. It marks the second time in recent months that a major borrower engaged in dubious international activities has declined to try to secure funds from the U.S. capital markets. In [May], Communist China decided to offer a sovereign bond it had long planned to issue in New York in Asian and European financial markets only. Now, Lukoil has chosen to follow suit, pursuing a "full listing on the London Stock Exchange." Lukoil vice president Leonid Fedun explained the reasoning behind his company's action -- a logic that likely applied to the Chinese transaction as well: According to the FT, Fedun said the "move on to the London market was made 'in order to avoid the political risk that exists [in the U.S.].' He cited sanctions against Iraq, where Lukoil has been involved in oil-for-food contracts, and other countries such as Sudan and Iran where it has business." Fedun added, "It is completely possible that [U.S. officials] could ban companies carrying out an issue from working in those regions, so we have decided to work in a better political environment" -- namely, in the London exchange. Translation: Bad actors in Moscow and Beijing and other capitals around the world are waking up to a stunning new fact of life. It is no longer possible for them to exploit the lack of transparency that has heretofore enabled their ilk to solicit funds from unsuspecting American investors in U.S. capital markets without disclosing where their companies, their parent firms and subordinates are doing business - and with whom. This sea-change in the American stock and bond markets has come about as a result of changes adopted on May 8 by the Securities and Exchange Commission affecting the filing requirements and other procedures that apply to foreign would-be borrowers. These changes were catalyzed by one of the leading congressional champions of human rights and national security, Rep. Frank Wolf, Republican of Virginia, and the William J. Casey Institute's Roger W. Robinson. Lukoil had even more reason to fear a financial debacle had it brought its share offering to Wall Street in the aftermath of the House of Representatives' adoption two weeks ago of the Sudan Peace Act. That legislation, passed by a [422 to 2] margin, includes a provision introduced by Rep. Spencer Bachus, Republican of Alabama, that would bar access to the U.S. capital markets to foreign oil firms involved in Sudan, as well as trading of the securities of those firms already listed on U.S. exchanges. It seems reasonable to believe that opponents of the Bachus amendment to the Sudan Peace Act -- and, indeed, of the SEC's efforts to ensure that American lenders understand fully the risks associated with prospective investments -- will seize upon the placement in foreign markets of the Lukoil share and Chinese bond offerings to oppose such legislative and/or regulatory initiatives. Wall Street firms and those responsive to their well-heeled lobbying in the Bush Administration and in the Senate will raise the specter of capital controls, engendering massive capital flight and lost business opportunities, unless such measures are spurned. This is, of course, utter nonsense. The only foreign governments, firms and other entities who have anything to fear from the kind of transparency long required of American borrowers -- and that is now being sought from foreign ones, as well -- are those doing business in countries subjected to U.S. sanctions. Even if the Sudan Peace Act were to be adopted unchanged by the Senate, however, they could still do business in every rogue state on the planet except for Sudan, although informed investors may not respond to such offerings once it is clear that the ultimate beneficiaries of the dollars thus generated could include countries like Iran, Iraq, Libya. Rather than seek to undo the laudable American market transparency initiatives that are currently frustrating Lukoil executives, Chinese sovereign borrowers and the U.S. investment houses hoping to garner lucrative fees from hawking their stock and bond offerings, the Bush Administration and legislators would be well advised to encourage foreign exchanges to ensure that their investors are afforded comparable risk-relevant information. Just as the right answer to inequitable application of national security-minded export controls is not to dumb down ours to the lowest common denominator applied by others, our approach on capital markets transparency ought to be to bring others' exchanges up to our new, high standard. If the only result of these developments in the U.S. capital markets is to make it more difficult for global bad actors to get the funds with which to finance their odious operations around the world, the effort would be worthwhile. If it is has the added effect of bringing greater transparency and discipline to financial markets worldwide though, the upshot could be far greater: It might just create powerful incentives for nations and companies to eschew deals with those engaged in genocide, slave-trading, terrorism, proliferation and other unsavory activities - a choice they haven't had to make to date and that would be very much in the interests of all freedom-loving to ensure they must make from now on.