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Expropriation risk in the BRICs

November 15, 2010

US law firm Robert Wray has published an analysis of expropriation risk in the BRIC economies in its November 2010 political risk insurance newsletter.

Written by Philip Skinner, a consultant at Exclusive Analysis Ltd, it finds a different risk metric in each of the four BRIC economies, with Russia – unsurprisingly – viewed as the country where investors still have most to lose.

Brazil

Although President Lula – and his successor Dilma Rousseff — will continue facing strong pressure from radical left-wing constituencies to nationalise companies operating in sectors deemed strategic, these calls are unlikely to be heeded. The main expropriation risk affects farms alleged to condone the use of slave labour. A bill was originally proposed in 2001 to allow for the seizure, without compensation, of these farms but lawmakers sympathetic to farmers managed to stall the process. They say the bill’s definition of slave work opens the door to arbitrary decisions, and that the supposed slaves are just part of the estimated 59% of Brazilian workers who are unregistered.

Russia

Expropriation risks across all sectors will decline in Russia over the next three years, , says the report with the exception of the extractive industries, for two reasons: First, a division between the Prosecutor General’s Office, controlled by the so-called liberal faction, and the Investigative Committee, controlled by the siloviki, ensures that no single political faction is able to press bogus charges against business entities with the same ease as before.

Second, the Law on Foreign Access to Strategic Sectors that came into effect in May 2008 clarifies the rules of operation in strategic sectors and limits the state’s ability to discriminate against investors. However, because of the highly lucrative nature of extractive projects, indirect pressure on foreign investors holding a majority stake in these will be significant despite legislative changes.

In order to achieve its goal of state dominance in strategic extractive sectors, the Russian government now prefers to exert influence indirectly: by imposing back-taxes, threatening environmental fines or exploiting its powerful presence in the energy sector.

India

The government’s policy of attracting foreign investment means that the risks of government expropriation are minimal. However, foreign investors in India do face issues concerning regulatory uncertainty. The legal system puts a number of restrictions and imposes a stamp tax on the transfer of land. Land titles lack clarity, making it difficult to buy and sell land. Moreover, in India, state governments possess broad regulatory powers and important issues such as zoning, land-use and environment can vary from one state to another.

China

Since 1978, when the country officially launched its so-called ‘open door’ policy, there have been no incidences of expropriation of foreign assets in China.

Chinese law now allows foreign businesses to hold long-term land-use rights. Nevertheless, China still lacks a comprehensive system of real estate registration, and the government only published its first complete registry of ownership in 2004. In addition, as land ownership rests exclusively with the state, it has the legal right to confiscate land on the grounds of national security and public interest. However, the government is again unlikely to confiscate foreign assets unless the asset in question specifically compromises China’s national security.

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