Resources Boom: Russia and China are Robber Barons At Large

“It looks as if Mount Gibson will become the subject of a battle between Russian and Chinese iron ore powerhouses,” explains Marsha Jacobs in today’s Financial Review. “Share prices of iron or juniors have already benefited from moves by Chinese and Russian interests to back local iron ore projects…During Mt. Gibson’s acrimonious takeover battle for Aztec, large Chinese and Russian-backed companies moved on to their registers in an attempt to take lead roles in consolidating West Australian iron ore minnows.”

Do you think China and Russia view publicly listed stocks on foreign markets as so many Trojan Horses? They can transparently acquire ownership (or at least a claim on cash flow) of many resource companies in resource-rich places like Australia. We suspect it’s the resource base they are after, however, and not current or future cash flows.

It reminds you a little bit of the robber baron capitalism that characterised turn-of-the-century America. We recalled the story of how Cornelius Vanderbilt attempted to corner the exploding railroad market in America  by buying out, by hook or by crook, all the players in the booming industry. Most of it was perfectly legit and all of it was perfectly sensible.

In April of 2001, then-Bank of America CEO Hugh McColl, Jr. speaking to a room full of bankers, previewed what we’re seeing today. “In the 19th century, Jay Gould stopped Commodore Vanderbilt from cornering the railroad market by moving his printing press across the river and circulating new stock certificates for the Erie railroad that no one could tell from the genuine article.

“Vanderbilt replied, ‘I won’t sue you, I’ll crush you,’ or something to that effect. And who can blame him? To be honest, I can’t promise what I wouldn’t do to beat my competitors if I didn’t have to worry about regulators or lawsuits. I can promise you it wouldn’t be pretty.”

“For a contemporary example of what happens when the judicial system breaks down over a prolonged period, take a look at 21st century Russia. There is a country in which there is close to a complete absence of credible regulation of business that would provide a fair, consistent and just framework for commerce. The result is that Russia continues to be an economic wreck.”

That was six years ago, of course. Russia is no longer a wreck. If you go back a few years before that to 1998, when the oil price was US$14, it was looking even worse for Russia. The government defaulted on its debt, which was 96% of GDP at the time.

Now, some $52 dollar later in oil price terms, Russia is an a position to invest abroad too. In 2002, Putin set up the country’s Stablisation Fund, a repository from huge export profits of Russia’s oil and natural gas. As of March, the fund-which amounts to a political war chest for investment projects in Russia or abroad-was flush with about US$108 billion. And that’s just money squirreled away in the Fund.

Dan Denning
Markets and Money

Dan Denning

Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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