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.
