Newsroom Online Sets Parameters For Global Debate On Efficacy Of Capital Markets Sanctions

(Washington, D.C.): A subtle, yet significant shift has taken place with respect to the Casey Institute’s five-year initiative to alert policy-makers and the public to the growing challenge represented by “bad actors” raising funds in the U.S. debt and equity markets: The question is no longer whether “bad actors” are attempting to take advantage of access to this country’s capital markets. Policy-makers have correctly concluded this is the case. Increasingly they are wrestling with the how effective capital markets sanctions or leverage would prove to be in impeding such activity, if not actually halting it — and the malevolent behavior it is making possible — and, thereby, advancing the vital security interests of this Nation.

As an important and comprehensive article by Stacey Mattingly published on 10 April by Newsroom Online makes clear, the immediate focus for such deliberations is the Bush Administration’s review of U.S. policy toward Sudan. The article implicitly confirms the Casey Institute’s longstanding conviction — namely, that the term “bad actor” applies to more than certain foreign governments — and companies — directly participating in activities harmful to U.S. interests (e.g., proliferators, intelligence and technology-theft front companies, etc.) It also includes those firms that aid and abet the egregious human rights and national security violations of rogue regimes. Talisman Energy and China National Petroleum Company (and its subsidiary, PetroChina) are two prime examples insofar as they are energy development firms operating in Sudan properly identified by Mattingly as she frames the “bad actor” debate. Both firms are listed on the New York Stock Exchange.

While the national dialogue regarding the effectiveness of leveraging the globally- dominant U.S. capital markets to advance foreign policy goals gains momentum, a telling indicator was provided by a recent Financial Times/Africa Analysis report regarding Talisman. According to the FT article, Talisman is considering the sale of its 25% stake in Sudan’s Greater Nile Petroleum Operating Company. The article goes on to report, “[Most] Western oil companies would be wary of investing in Sudan while the human rights row rages. They are also aware that there exists the prospect of legislation in the United States that would make it impossible for oil companies operating in Sudan to raise funds in U.S. capital markets.”

The attached Newsroom Online article should be considered “must reading” for those Executive Branch and congressional officials currently seeking to end the human catastrophe in Sudan.

As the spotlight on Sudan’s gruesome 18-year civil war continues to intensify, debate over United States policy toward the country’s Islamic regime increasingly includes talk of using U.S. capital markets to discourage foreign oil companies from investing in Sudan’s recently developed oil reserves.

In a U.S. House of Representatives Africa subcommittee hearing on Sudan last month, Congressman Donald Payne, a Democrat from New Jersey, announced that he would introduce a resolution calling for the exclusion of foreign companies developing Sudan’s oil sector from U.S. capital markets. The House passed similar legislation last October, but there was insufficient time before the legislative session ended for a conference committee of the two houses of Congress to resolve differences with the Senate version, passed 11 months earlier. The United States Commission on International Religious Freedom (USCIRF) recommended such sanctions for the second time in 10 months in a report on Sudan issued in March.

Proponents argue that oil revenue enables the government in Khartoum to inflict human rights abuses on the citizens with whom it is at war in the south. They refer to Sudanese petroleum as “blood oil” and argue that Khartoum’s actions – including the bombing of civilian and humanitarian targets, slave raids, and the manipulation of humanitarian assistance – justify the use of America’s coveted capital markets to hobble the regime.

USCIRF commissioner Michael Young of the George Washington University Law School testified before the Africa subcommittee that targeting Sudan’s oil sector by getting at the companies responsible for its development is “a fairly simple equation.”

U.S. Committee for Refugees executive director Roger Winter, who also testified, called the oil being tapped in Sudan “genocide’s life blood.” The 43-year-old organization, based in Washington, D.C., works to increase understanding of the plight of the world’s refugees.

Sudan began developing its oil resources in 1998, an enterprise that activists maintain has entailed mass expulsions of civilians from areas surrounding the oil fields and human rights abuses. In 2000, oil brought the regime $500 million. Oil production is expected to double over the next two years, according to a February report released by the Center for Strategic and International Studies, a Washington, D.C.-based think tank. If predictions are accurate, the report argues, Sudan could become a “new medium-scale oil exporter” during the Bush administration.

At the same time Khartoum’s acknowledged military expenditures have doubled since 1998, as shown in an International Monetary Fund report last fall. By contrast, the report noted, Sudan’s agricultural sector remains undercapitalized. Indeed, the United Nations World Food Program has stepped up warnings that a large-scale famine, potentially affecting some 3 million people in southern and western Sudan, is imminent.

Meanwhile, Sudanese officials have been quoted by various media and human rights groups as announcing outright that the country’s newfound oil wealth will go toward beefing up its military.

“How do we put this all together?” offered Eric Reeves, an English professor at Smith College in Northamption, Massachusetts, and Sudan activist. “This is a grotesque mismanagement of revenues that is callous in the extreme.”

According to Reeves, who testified before the Africa subcommittee, U.S. capital market sanctions would have an immediate effect on the targeted oil companies – in particular, Lundin Oil of Sweden, Talisman Energy of Canada, and PetroChina, a subsidiary of Chinese National Petroleum Corp. – by instantly devaluing their shares. The hope is that these companies then would pressure Khartoum to move toward ending the war. Additionally, Reeves argued, the sanctions would signal oil companies contemplating going into Sudan -most notably TotalElfFina of France – that they risk being delisted from American stock exchanges. President Bill Clinton barred American companies from doing business with Sudan in a 1997 executive order establishing U.S. trade sanctions that remain in force.

Incorporating U.S. capital market sanctions into foreign policy is unprecedented, although the idea of using capital market leverage is not new. Last year, Senators Fred Thompson, a Republican from Tennessee, and Robert Torricelli, a Democrat from New Jersey, introduced legislation that would have used U.S. capital markets to discourage the proliferation activities of certain Chinese companies and government-controlled entities. The legislation did not pass, but prompted a series of unfavorable comments by Federal Reserve Chairman Alan Greenspan before the Senate Banking Committee in July. President Clinton addressed the issue at the end of last year in a letter to the U.S. Commission on International Religious Freedom, which was considering a recommendation that the United States use capital market discipline to curtail human rights and religious freedom violations in China. The remarks of both men have served to help frame the emerging debate.

Greenspan and Clinton made similar points, though addressing different concerns. Both argued that capital market deterrents likely would not produce the desired results in affected companies due to the global nature of economic markets.

Greenspan remarked that he did not see how such deterrents would work from a technical standpoint. “For example,” he testified, “if we were to block China, or anybody else, from borrowing in the United States, they could very readily borrow in London and be financed by American investors. Or if not in London – if London weren’t financed by American investors, London could be financed, for example, by Paris investors, and we finance the Paris investors In other words, there are all sorts of mechanisms that are involved here, and so the presumption that somehow we can block the capability of China or anybody else borrowing at essentially identical terms abroad as here, in my judgment, is a mistake.”

Keeping companies out of the U.S. market also could work to the detriment of the American people, Clinton stated in his letter to USCIRF. “(O)ur commitment to the free flow of capital would be undermined, with adverse consequences for our economy.”

Greenspan touched on potential adverse domestic effects, too: “(T)he remarkable evolution of the American financial system, especially in recent years, has undoubtedly been a major factor in the extraordinary economy we’ve experienced. And it’s the openness and the lack of political pressures within the system which has made it such an effective component of our economy and, indeed, has drawn foreigners generally to the American markets for financing as being the most efficient place where they can, in many cases, raise funds. . (T)o the extent that we block foreigners from investing, for raising funds in the United States, we probably undercut the viability of our own system.”

But supporters of capital market sanctions urge lawmakers to look at the results of various divestment campaigns to gauge the actual potential in using capital market leverage. Most striking is the example of PetroChina, whose parent company is a 40 percent partner in Sudan’s Greater Nile Petroleum Operating Company (GNPOC). Originally seeking to raise $10 billion in its New York/Hong Kong initial public offering last year, PetroChina only raised $2.89 billion, which is attributed largely to a campaign levied against the offering by a broad coalition in the non-governmental sector. The informal coalition, which lobbied against the public offering, included groups such as Friends of the Earth, Freedom House’s Center for Religious Freedom, the American Anti-Slavery Group, the AFL-CIO, and the International Campaign for Tibet.

“The results suggest that this kind of pressure is effective and that U.S. capital markets are exceedingly important to a company’s success in raising the large-scale amounts of capital required to sustain one of the largest energy companies in the world,” according to Adam Pener, senior analyst at the Washington, D.C.-based William J. Casey Institute of the Center for Security Policy, which helped coordinate the campaign.

Canada’s Talisman Energy affords another example, according to Reeves of Smith College. A campaign to discourage investing in the company, spearheaded by Reeves, has resulted in the divestment of Talisman shares by entities including the Teachers Insurance and Annuity Association – College Retirement Equities Fund (TIAA-CREF), the investment vehicle for American higher education and the largest private pension plan in the world; the state of New Jersey; the state of New York; the city of New York; the Texas Teachers Retirement System; and the California Public Employees Retirement System.

Additionally, a report issued last week by Africa Analysis, part of Financial Times Information, suggested that Talisman now is seeking to divest its stake in Sudan’s GNPOC. According to the report, PetroChina and Petronas of Malaysia – both partners with Talisman and Lundin Oil in GNPOC – seem to be the only potential buyers. The report mentions the pressure on Talisman from the human rights community and speculates that the U.S. capital markets sanctions prospect may be keeping Western buyers at bay.

What the PetroChina and Talisman sagas demonstrate, sanctions proponents argue, is that companies cannot just go to another market and find all the cash they need to sustain themselves. “Such an argument does not adequately account for the nuances of dealing with thinner volume markets elsewhere,” contended Pener of the Casey Institute, whose chairman addressed the issue with the USCIRF. “U.S. capital markets sanctions would likely increase the cost of raising funds elsewhere. When seeking multi-billion dollar borrowings, even a modest increase in interest rates can prove problematic. Foreign equity markets are thinner than those of the U.S. and more likely to get ‘booked up’ over time for foreign firms with annual, large-scale funding requirements.”

Further damaging to companies cut out of U.S. capital markets would be what Pener calls the “demand effect.” Specifically, he said, “were a company to be denied access to the U.S. capital markets due to national security or human rights considerations, what U.S. public pension fund would buy the stock, even if the company successfully listed on the Hong Kong or Frankfurt exchanges?”

But J. Stephen Morrison, co-chair of the Center for Strategic and International Studies’ Sudan Task Force, argued that while such sanctions may prove an “innovative instrument,” there are too many uncertainties surrounding their use to proceed without detailed groundwork being laid. CSIS is a Washington, D.C., public policy research institute. Morrison speculated that with an anti-sanctions, anti-regulations, pro-business administration like the one in office, vibrant counter arguments to meddling with U.S. markets will emerge. “This issue matters, but not at a strategic level, they may say; so why potentially damage other things if you’re not confident you’ll get the results you want?”

He added that if the government were to begin wielding the American market as a foreign policy weapon in this way, it might be hard to the draw the line when considering the option down the road.

But Reeves contended the sanctions proposed in this case were so targeted that he could not imagine them being used indiscriminately. “They are extremely focused, targeting only the shares of only the foreign oil companies in Sudan. We’re talking about an extraordinary set of circumstances with an extremely high threshold which ensures they will not be used often.” Additionally, he argued, the unusual circumstances that prescribe the use of such sanctions would prevent them from damaging the U.S. economy.

Even if capital market leverage were to become something the government would consider using in the future, the Casey Institute’s Pener posited, “Is this a bad precedent? I argue that Americans should not be unwittingly underwriting companies if they are helping bankroll genocide, slavery, and terrorism.”

Advocates for capital markets sanctions concede the measure would have to be part of a broad strategy that involves international partners. Commissioner Young of USCIRF told Newsroom that the commission’s most important recommendation in its Sudan report of last month urges the U.S. to develop a multilateral coalition to put economic and diplomatic pressure on Sudan. “Effectiveness would diminish without a coalition,” he insisted. “But even so, the sanctions are worth doing from a moral and tactical standpoint first and foremost.”