Mummy, what is that man Thomas Friedman for?


Getting the wrong end of the stick would seem to be the correct answer. In his column in the New York Times, Thomas "Airmiles" Friedman, tells us that:

Banks, multinationals and hedge funds often hire foreign policy experts to do “political risk analysis” before they invest in places like, say, Kazakhstan or Argentina. They may soon have to add the United States to their watch lists.

He then goes on to say that this political risk analysis is all about how inflation might return, the currency crash, competitiveness Tom, that's not political risk, that's economic risk. Political risk is something entirely different.

Say, you invest in an oil and gas project in the Far East of Siberia, billions upon billion of dollars worth, and when you've started to pump out the fuels which will pay for it all then the government comes along and changes the rules on you. As happened to Shell on Sakhalin. Or similarly to BP with TNK. You sink hundreds of millions into a copper mining project having agreed the royalties you will pay and then when you've spent the money, when you're committed, the government decides to tear up the contract and impose higher royalties. As recently happened in Zambia. Or you spend $80 million prospecting for gold and are then told you can't lift it for "environmental reasons"....and when you try to claim back your $80 million under the original contract the government reneges. As is happening in El Salvador now.

That's political risk: that politicians will abrogate the rule of law, will violate the contracts they themselves signed.

As to why people might add the US to lists where they have to worry about such things how about this?

In 1995, when oil prices were very low, Congress tried to encourage deep-water drilling in the Gulf of Mexico by giving oil companies relief from some of the royalties they incur for producing oil and gas on public land.......Representative Edward Markey of Massachusetts hopes to put things right with a bill that would clarify the law and prevent companies from signing new leases in the gulf until they renegotiate the old ones and pay royalties that are due.

Now that BP has spent those billions and found oil 6 miles deep the politicians have them over a barrel (umm, sorry) and wish to renege on the deal. Or in our own sweet England, where we invented the very concept of the rule of law:

In an extraordinary ultimatum that has shocked some of the City's biggest companies, the Financial Services Authority (FSA) told bank bosses that 60pc of all pay must be deferred, with no exceptions, even for those whose contracts conflicting with the edict.

We're not even bothering with Parliament, just allowing a bureaucrat to provide that political risk.

Why might people be considering the political risk of investing in the US or the UK? Because the politicians in both countries have recently shown that political risk is something that has to be considered in those countries. The result being that just like every other country where there are such risks incoming investment will be lower and thus the people poorer.