Alliance Notes: BLM Statement of Support, From Debt Relief to Debt Sustainability, Oil Spill at Norilsk Nickel Power Plant

Monday, June 15, 2020

This Week at the Alliance

 

BLM Statement of Support

As an advocacy and social impact organization, the Alliance supports the Black Lives Matter movement. We condemn police violence, systemic injustice and all forms of racial discrimination. We are deeply saddened and disturbed by the murder of George Floyd, and so many before him. The heightened calls for racial justice and expressions of communal pain that have followed his death implore us to recognize that racism pervades all aspects of life in the United States. Responsible investing requires that we examine injustice and inequality whenever we invest in emerging markets, but the pandemic has shown how interconnected we are, and we should not underestimate the toll of discriminatory systems that linger in the United States, where many of us live. 

As the US reckons with its racist systems, similar soul-searching and protests have erupted across the world. Antiracist demonstrations over George Floyd’s murder taken place not only in places like France and Germany, but also in Mexico, South Africa, Brazil, and Kenya. In these countries, like in the US, entrenched injustice and racism have given rise to violence, socioeconomic rifts, and collective exhaustion. As an organization that aims to improve governance and support sustainable development throughout the world, we are conscious that there are countless more George Floyds, Breonna Taylors, and Nina Pops in the countries in which we invest. 

In Brazil, Rio de Janeiro’s favelas are regularly raided by police, who are known to drive tanks through the neighborhoods and shoot at and torture black and brown residents. In South Africa, refugees from Somalia, the Democratic Republic of Congo, and elsewhere encounter formidable xenophobia. They are ostracized and face deadly attacks, with little to no help from police. The Philippines, India, and many other emerging market countries also grapple with some form of systematic color-related discrimination.

In 2015, the Alliance was formed so that institutional investors could listen, ask questions, learn and act together to effect change. We believe that investors have an important role to play in helping to repair an imperfect world because investment decisions can be a powerful form of social action. At the Alliance, our commitment to improving governance, transparency and to effecting change in the countries in which we invest is foundational and ongoing. Now, more than ever, investors should demand better answers and work together to fight racism wherever it exists.  – Ashok Parameswaran and Asha Meagher

Places to donate to:

Black Lives Matter

Black Visions Collective

The Bail Project

NAACP Legal Defense and Education Fund

The Loveland Foundation

Easy actions:

Master list of petitions

Black-owned restaurants to support, by city

Announcements

Next Thursday, June 18 at 10am EDT, the Extractive Industries Working Group will host Johnny West, a leader in the field known as “public policy financial modeling.” Johnny is director of OpenOil, a Berlin-based consultancy that models extractive projects around the world, advises public agencies, and hosts the largest collection of published financial models in the extractives space. Johnny will share some takeaways based on a recent analysis of Lebanon's offshore gas sector, where a combination of Covid-19, a structural glut of liquid natural gas, and a fast-evolving European energy policy have shut out the possibility of a super-giant field driving major exports. So is that all there is to the story? Or would it be viable to develop a discovery to solve the country's power crisis? How would such a deal be structured with international investors? And are we likely to see this pattern emerging in other places? (Hint: the answer is yes.)

Taken from the main road between Deri el Ahmar and Mchaitiye, Lebanon. © Peripitus under a GNU Free Documentation license.

From Debt Relief to Debt Sustainability: 

Questions Beyond 2020

Given the significant strain that the Covid-19 pandemic is exerting on public health systems and government budgets, the G20 is advocating for a suspension of interest payments for the world’s poorest countries. The initiative would provide some much needed fiscal space for countries to respond to the immediate crisis, but it doesn’t go far enough to mitigate the broader economic consequences and heightened systemic risk. There is increasing concern that the current, pandemic-driven recession will lead to a cascade of emerging market defaults and debt restructurings. If this transpires, countries will be forced to turn to the IMF and other multilaterals for a bail-out, requiring colossal financial resources to stabilize their economies. In preparation for this scenario, the Alliance believes that any fiscal relief should be paired with clear structural reforms aimed at improving sustainability.  

The Alliance’s chief concern is that the terms of new bail-outs will be modeled too closely on prior debt relief frameworks, which failed to address underlying vulnerabilities sufficiently in order to achieve durable economic stability. For example, both the Baker Plan and the Highly Indebted Poor Countries (HIPC) Initiative, despite their good intentions, did not put defaulting governments on a path toward sustainable debt policies. Instead these initiatives acted as bandaids, providing temporary relief without addressing underlying problems. Hence we are back where we started within the space of two decades; only this time, the debt problem is much worse in terms of debt service liability, private creditor involvement, and the number of countries at risk.

The Alliance believes that a key reason why previous bail-outs failed is that the terms of bail-outs for sovereigns lacked conditionality around governance and sustainability. Instead conditionality has focused exclusively on economic and financial factors, ignoring factors linked to transparency, anti-corruption and environmental sustainability. To strengthen debt sustainability and economic sustainability effectively, the Alliance believes that debt relief and future loans and grants to governments must be conditioned on a broader set of factors that include governance and environmental considerations. – Ken Colangelo

Oil Spill at Norilsk Nickel Power Plant

Extracting resources from deep within the earth, often in remote and hostile locations, is no easy task. This may explain why the global mining industry has seen its share of environmental disasters over the years. These can take a wide range of forms, encompassing mine collapses, explosions, water contamination and mining waste spills resulting from the collapse of tailing dams (as has happened twice in Brazil over the past four years). These disasters have resulted in huge losses of human life, long-lasting environmental damage, and billions of dollars in cleanup-related liabilities charged to the mining operators. 

The oil spill has polluted the Ambarnaya River and has now made its way upstream towards Lake Pyasino. © European Space Agency, CC BY-SA IGO 3.0. Contains modified Copernicus Sentinel data 2020.

Last week brought news of yet another major accident associated with a mining group, this one deep in Siberia at the site of emerging markets mining giant Norilsk Nickel. This time, the problem was not a mine but rather a power station operated by Norilsk, where a fuel storage depot collapsed and spilled over 20,000 tons of diesel fuel into the watershed, much making its way into the Ambarnya river. 

In an investor call last Tuesday (see presentation here), Norilsk management stated that the accident was likely caused by the thawing of permafrost, which destabilized the fuel storage container. This seems credible, given that Siberia is experiencing its hottest spring on record, with temperatures nearly 40 degrees fahrenheit above average.  

The company announced that the clean-up will take two weeks and cost $150 million—not particularly onerous for a company that earned $4.9 billion in free cash flow last year. However, potential penalties could add to the cost: the Environment Supervision Agency is expected to complete its initial investigation by the end of the month. Given the vocal criticism coming from senior members of the government, including President Vladimir Putin, and the filing of criminal charges against the Mayor of Norilsk for mishandling the incident, the eventual price paid by the company could be more significant.  

In last week’s presentation, the company took steps to defend its actions to date, claiming that: 1) It reported the accident swiftly after becoming aware of it 2) It has successfully contained the spill on the Ambarnya river, preventing its leakage into Pyasino Lake and 3) It has successfully removed some of the fuel (the company claims to have collected 23k cubic meters of contaminated soil, 1.5k cubic meters of water-fuel mixture by the power station, and 5.2k cubic meters of water-fuel mixture from the Ambarnaya river). However, more recent media reports suggest that some oil has seeped into the lake

Is Norilsk Nickel a responsible and safe operator? In its recently published 2019 sustainability report, the company reported 1299 workplace accidents/injuries in 2019, which equates to 95 accidents/injuries per $1 billion in revenue, a 20% improvement over the previous three years. A related measure, Norilsk Nickel’s  fatal injury frequency rate, was 0.08 in 2019 and 0.05 in 2018, worse than the numbers reported by Anglogold Ashanti (0 in 2019 and 0.03 in 2018).  

The coming weeks are likely to bring a clearer picture as to whether 1) the company faces significantly greater liability and 2) this event could lead to broader reforms to environmental policies and controls in Russia, which would be a positive development. – Andrew Howell

The Emerging Markets Investors Alliance is a 501(c)(3) non-profit organization
that enables institutional emerging market investors to support good governance, promote sustainable development, and improve investment performance in the
governments and companies in which they invest.

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