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Two oil majors face trial over a controversial deal in Nigeria

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RESOURCE-RICH Nigeria has long ignited interest from oil firms, but it can be a dangerously combustible environment when it comes to the risk of corruption. Two firms caught up in scandals are Royal Dutch Shell and Eni, Italy’s state-backed energy group. In 2010 both entered into deferred-prosecution agreements with America’s Department of Justice after being implicated in separate Nigerian bribery schemes. But those pale beside a case involving the two companies that is set to go to trial in Milan on March 5th.

The case centres on the purchase of a big offshore oil field known as OPL 245, and touches the top ranks of both firms. In the dock will be, among others, Eni’s current CEO, Claudio Descalzi, and Shell’s former exploration chief, Malcolm Brinded. Also on trial are the firms themselves, charged with failing to prevent bribery. The individuals face jail if convicted; the companies face fines. All deny wrongdoing.

In 2011 Shell and Eni jointly paid the Nigerian government $1.3bn for OPL 245. Prosecutors allege they knew the government would pass $1.1bn of the funds to a shell company called Malabu, controlled by Dan Etete, a former oil minister. They claim the companies had reason to believe Mr Etete would use much of what he received to pay off officials, including Nigeria’s president at the time, Goodluck Jonathan. They also suspect that more than $50m may have gone to Shell and Eni executives as kickbacks. Mr Jonathan has denied involvement. Mr Etete faces charges in Nigeria; his whereabouts are unknown.

Shell says that based on the case files, “we do not believe there is a basis to convict Shell or any of its former employees. If the evidence ultimately proves that improper payments were made by Malabu or others…it is Shell’s position that none of those payments were made with its knowledge, authorisation or on its behalf.” Eni says it acted with “correctness and integrity” throughout. Its board says it has full confidence in the firm and its boss.

International investors are particularly vexed about the alleged involvement of Shell, a blue-chip oil major. Last year, after e-mails were leaked, it admitted that executives had known that much of the purchase price would go to Mr Etete, a convicted money-launderer. In the e-mails, they speculated that funds might flow on to Mr Etete’s political friends. One investor says that Shell, by emphasising for so long who the contract was with, not where the money was going, honoured the letter but not the spirit of good governance—“and that’s not good enough anymore”.

Dutch investigators, too, are on Shell’s back. They raided its offices in The Hague in 2016 and tapped the phone of Ben van Beurden, Shell’s current chief executive. Mr van Beurden was not in the job when the oil block was bought and faces no charges. A sizeable team of Dutch investigators is still working on the case, though the Italians have been given the lead.

There has also been disquiet over Eni’s treatment of inquisitive board members. Luigi Zingales, who teaches at the University of Chicago’s Booth School of Business, was an independent director until 2015, when he left the board citing “irreconcilable differences” over how Eni tackled corruption risks. Another non-executive director with solid governance credentials, Karina Litvack, was removed in 2016 from a board risk committee that had access to OPL 245 files. The reason, Eni said, was that she had been implicated in a case of alleged defamation against the firm that was being investigated by a prosecutor in Sicily. Mr Zingales was also targeted: the prosecutor signed a notification that he was under investigation just days after Mr Zingales had informed Eni that America’s FBI, which was following the OPL 245 money trail, had contacted him about testifying.

To many outsiders the defamation claims, always vague, looked like part of a dirty-tricks campaign to discredit two free-thinking board members. Eni denies trying to silence anyone or pervert the course of justice. It has confirmed that Massimo Mantovani, its general counsel at the time (now head of the gas division), is a suspect in a probe by Milan prosecutors into how the defamation case came about. Mr Mantovani declined to comment. The defamation claims have been dropped. Investors nonetheless kicked up a stink. In response, Eni has reinstated Ms Litvack to the risk committee, but tensions remain high. One large investor calls the committee, the board’s most important, “dysfunctional”.

Winning the case would help the two firms restore confidence. Losing would be expensive. Eni would have to replace Mr Descalzi, who is highly regarded by industry analysts. Both firms would face fines not only in Europe but possibly also in America, whose crime-busters could use the deferred-prosecution agreements from 2010 to brand Shell and Eni repeat offenders, calculating their fines accordingly.

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Japan still has great influence on global financial markets

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IT IS the summer of 1979 and Harry “Rabbit” Angstrom, the everyman-hero of John Updike’s series of novels, is running a car showroom in Brewer, Pennsylvania. There is a pervasive mood of decline. Local textile mills have closed. Gas prices are soaring. No one wants the traded-in, Detroit-made cars clogging the lot. Yet Rabbit is serene. His is a Toyota franchise. So his cars have the best mileage and lowest servicing costs. When you buy one, he tells his customers, you are turning your dollars into yen.

“Rabbit is Rich” evokes the time when America was first unnerved by the rise of a rival economic power. Japan had taken leadership from America in a succession of industries, including textiles, consumer electronics and steel. It was threatening to topple the car industry, too. Today Japan’s economic position is much reduced. It has lost its place as the world’s second-largest economy (and primary target of American trade hawks) to China. Yet in one regard, its sway still holds.

This week the board of the Bank of Japan (BoJ) voted to leave its monetary policy broadly unchanged. But leading up to its policy meeting, rumours that it might make a substantial change caused a few jitters in global bond markets. The anxiety was justified. A sudden change of tack by the BoJ would be felt far beyond Japan’s shores.

One reason is that Japan’s influence on global asset markets has kept growing as decades of the country’s surplus savings have piled up. Japan’s net foreign assets—what its residents own abroad minus what they owe to foreigners—have risen to around $3trn, or 60% of the country’s annual GDP (see top chart).

But it is also a consequence of very loose monetary policy. The BoJ has deployed an arsenal of special measures to battle Japan’s persistently low inflation. Its benchmark interest rate is negative (-0.1%). It is committed to purchasing ¥80trn ($715bn) of government bonds each year with the aim of keeping Japan’s ten-year bond yield around zero. And it is buying baskets of Japan’s leading stocks to the tune of ¥6trn a year.

Tokyo storm warning

These measures, once unorthodox but now familiar, have pushed Japan’s banks, insurance firms and ordinary savers into buying foreign stocks and bonds that offer better returns than they can get at home. Indeed, Japanese investors have loaded up on short-term foreign debt to enable them to buy even more. Holdings of foreign assets in Japan rose from 111% of GDP in 2010 to 185% in 2017 (see bottom chart). The impact of capital outflows is evident in currency markets. The yen is cheap. On The Economist’s Big Mac index, a gauge based on burger prices, it is the most undervalued of any major currency.

Investors from Japan have also kept a lid on bond yields in the rich world. They own almost a tenth of the sovereign bonds issued by France, for instance, and more than 15% of those issued by Australia and Sweden, according to analysts at J.P. Morgan. Japanese insurance companies own lots of corporate bonds in America, although this year the rising cost of hedging dollars has caused a switch into European corporate bonds. The value of Japan’s holdings of foreign equities has tripled since 2012. They now make up almost a fifth of its overseas assets.

What happens in Japan thus matters a great deal to an array of global asset prices. A meaningful shift in monetary policy would probably have a dramatic effect. It is not natural for Japan to be the cheapest place to buy a Big Mac, a latté or an iPad, says Kit Juckes of Société Générale. The yen would surge. A retreat from special measures by the BoJ would be a signal that the era of quantitative easing was truly ending. Broader market turbulence would be likely. Yet a corollary is that as long as the BoJ maintains its current policies—and it seems minded to do so for a while—it will continue to be a prop to global asset prices.

Rabbit’s sales patter seemed to have a similar foundation. Anyone sceptical of his mileage figures would be referred to the April issue of Consumer Reports. Yet one part of his spiel proved suspect. The dollar, which he thought was decaying in 1979, was actually about to revive. This recovery owed a lot to a big increase in interest rates by the Federal Reserve. It was also, in part, made in Japan. In 1980 Japan liberalised its capital account. Its investors began selling yen to buy dollars. The shopping spree for foreign assets that started then has yet to cease.

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