Bolivian Political Risk Rising Fast

By Calla Hummel - July 10, 2012 | Tickers: GLEN, HAL, PBR, PKX, REE | 0 Comments

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Few characterize Bolivia as politically or economically stable, but the past three months have seen an unusual upswing in nationalizations and other political moves against established projects, especially foreign mineral extraction projects. Bolivia currently boasts a historically rare bill of macroeconomic health – decent, steady growth of about 4% annually, large foreign reserves, little debt, low inflation – largely due to revenue from the last decade’s commodity boom, according to Dr. Bruno Rojas at the Centro de Estudios para el Desarollo Laboral y Agrario in La Paz. Thus, Bolivia’s nationalization moves are distinct from the Argentinian government’s, which finds itself cash-strapped in a deteriorating economic situation. What is behind the wave and should shareholders of companies with Bolivian operations be worried?

Context

Bolivia has a long history of seizing controversial and strategic operations. In 1952, a miners’ revolution swept the country, bringing a populist government to power that nationalized the country’s tin mines and instituted a land reform. Nationalizations occurred occassionally in later decades but were reversed with privatization policies in the 1990s and 2000s, which in turn ground to a halt in 2006, when the newly-elected President Evo Morales nationalized the entire oil and gas industry.

On May 1^st, Morales announced that the government would take over the few operations that the Spanish-run utility Red Electrica (NYSE ARCA: REE) still controlled. In June, the Morales administration responded to a dispute between miners’ cooperatives by nationalizing Swiss miner Glencore’s (LSE: GLEN) tin mining installation and turning the operation over to nearby cooperatives. The government agreed Sunday to revoke Canadian miner South American Silver’s (CN: SOHAF) mining concession in the face of protests from a very small minority of locals.

Shoring up a Crumbling Base

Unlike many past nationalizations, the Bolivian state gains very little revenue from these moves. Instead, this wave of nationalizations plays to very specific domestic political audiences. Morales came to power on the back of broad-based social movements, and his administration has promised specific deeds and policies to disparate groups. As with most politicians, Morales has delivered on a fraction of promises and erstwhile supporters are becoming disillusioned. Many groups are reiterating old demands and airing new ones through protests that the government has struggled to contain. Morales has developed two particularly unusual tactics for dealing with the most contentious protests: accusing protestors of planning coups and nationalizing controversial projects.

What this Means for Shareholders

During the Glencore and South American Silver debacles, the current administration signaled that it is prepared to demonstrate its power to estranged domestic allies by nationalizing or otherwise stopping controversial projects. Thus, operations that fall into the “controversial” category face a higher political risk. Unfortunately, a project can become controversial quickly and despite due diligence, as in the case of South American Silver, which had signed multiple endorsement and job creation agreements with five out of six local governments before protests and a hostage situation unfolded with the sixth last month.

Korean steelmaker POSCO (NYSE: PKX) recently entered into a lucrative joint venture with the Korean Resources Corporation and the state mining company Comibol to develop Bolivia’s lithium reserves, which make up a staggering half of all known reserves. The deal gives POSCO privileged access to the reserves, but the envious upside could be wiped out if neighboring communities protest and the government nationalizes POSCO’s stake or stalls the project, an all-too-likely scenario.

Both Repsol (OTC: REPYY) and Petrobras (NYSE: PBR) were at the center of the 2006 oil and gas nationalization and saw their shares plunge as a result. The Morales administration renegotiated the companies’ contracts within the year, allowing them to continue to administer fields in joint ventures that they formerly controlled, and take 18% of profits. Petrobras and Repsol administer around 70% of the country’s reserves, which are mostly in the quiet, southern Tarija state but each have multiple smaller projects in more controversial areas.

Halliburton (NYSE: HAL) has helped Santa Cruz state administer its territory and collect taxes since Santa Cruz threatened to secede in 2008. The decision by the Morales government to allow Halliburton to take over some local government functions was very controversial in 2008. With the impending removal of Santa Cruz governor Ruben Costas on corruption charges, the autonomy debate has resurfaced and Halliburton could reenter the spotlight.

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