Streetwise Professor

April 1, 2024

Resource Nationalism and Nationalization is the Root of Corruption

Filed under: Commodities,Economics,Energy — cpirrong @ 5:35 pm

Recently major commodity trading firms have plead guilty to, and/or had employees convicted of, violations of the US Foreign Corrupt Practices Act. The companies collectively have paid billions in fines, and the convicted traders face decades in the Club Fed.

Corruption is bad, uhm-kay, but the rather lurid focus on the traders is unbalanced and gives a misleading impression of the real root of this evil. It takes two to tango: in these situations, the briber and the bribe taker. Here the bribe takers are the real drivers, and they derive their power from the simple fact that they are agents of nationalized companies. That is, the “root causes” here are the nationalization of resources, and the creation of national companies that control access to resources. Yet the bribe payers get most of the attention.

The firms that have been charged and plead are not a random selection of trading companies. Instead, they are the biggest oil trading companies–Vitol, Trafigura, Gunvor, and Glencore. Not grain traders or softs traders or even the metals, natural gas, or power trading operations of these companies. Why? Because whereas national oil companies are common, traders dealing outside oil markets are typically not dealing with national companies.

As the DOJ put it in its announcement of a $1.5 billion 2022 plea agreement with Glencore:

Between approximately 2007 and 2018, Glencore and its subsidiaries caused approximately $79.6 million in payments to be made to intermediary companies in order to secure improper advantages to obtain and retain business with state-owned and state-controlled entities in the West African countries of Nigeria, Cameroon, Ivory Coast, and Equatorial Guinea. (Emphasis added.)

The fundamental problem here is that South American and African countries with oil tend to be extremely corrupt. Indeed, they are likely corrupt in large part because they have oil. It is also likely that national oil companies are the norm in such places precisely because they provide a structure that allows elites to appropriate oil resource rents (via bribery and various tunneling schemes).

Levying substantial penalties on trader will reduce these companies’ derived demand for corruption, and this will reduce bribery income of kleptocrats. But if the big guys leave, or sharply reduce their activities in these countries, their place will be taken by dodgier outfits who will pay bribes. The recent experience with Russian and Venezuelan sanctions shows that eliminating illicit transactions in oil is devilish hard.

The incentive is immense. According to the DOJ, Glencore paid about $80 million over 11 years to get access to oil flows that generated hundreds of millions in profit–roughly a 5-to-1 ratio. Basically what will happen is that the dodgier outfits will pay lower bribes to get these benefits, with the lower bribes being a compensating differential for the legal risk.

Nationalization was originally adopted because international oil companies (IOCs) were allegedly exploiting nations with oil resources. Even if that was indeed true, nationalization merely changed the identity of the exploiters from the IOCs to local elites who obtained power by force, or yes corruption, or both. Further, nationalized companies are notoriously inefficient and putting them in charge has reduced the value of oil resources, further reducing the benefits that the citizens of these nations (as opposed to the elites) derive from these resources. (To get an extreme example of the grotesque inefficiency of nationalized companies, look at PDVSA especially starting with Chavez over 20 years ago. But wherever you look, the inefficiencies are manifest.)

In sum, bribery by major oil trading firms is just another symptom of an underlying disease–resource nationalism. The focus on the payers of bribes, rather than on those who demand and receive them, obscures that fundamental truth.

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2 Comments »

  1. For sure there is a place for this kind of enforcement: In aerospace, there are a limited number of (mainly Western) suppliers capable of meeting the needs of customer countries, whether those customers are corrupt or not. Enforcing good behaviour on those companies (recently Airbus, but they are far from alone in being penalised), will enforce good behaviour on the customers and is a net good for the world.

    But as the Prof convincingly argues, this is not going to work for oil… We need more people in power to realise this.

    Comment by HibernoFrog — April 2, 2024 @ 3:22 am

  2. Any transaction involving bribery usually involves extortion as well. They are two sides of the same coin.

    Comment by JOHN L MCCORMACK — April 8, 2024 @ 6:59 pm

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