Ferrexpo shows that investing overseas imports foreign problems
By Tim Worstall
15:12, 3 January 2023
If a UK company, working in the UK, under the usual UK ideas and strictures, found that the majority owner, one of the non-exec directors, had been arrested for nicking $100m from a bank, the shares would collapse.
This is not what has happened at Ferrexpo (FXPO). The arrest has, but the share collapse hasn't – things in foreign are in foreign, d'ye see?
As the Telegraph says: “ The billionaire majority owner of London-listed iron ore pellet producer Ferrexpo has been arrested at a ski resort over $100m [£83m] embezzlement allegations in Ukraine.” So the arrest part is indeed true. But why hasn't that share price moved?
Ferrexpo (FXPO) share price chart
Numbers of reasons come to mind. We've known about the allegations for a long time. There's a war on and this isn't as important as that. It's not the CEO, which makes a difference. This is not, not at all, to comment on any particular case you understand, but allegations of criminality don't have quite the same meaning in some foreign places.
There are places where such allegations – even to the point of the issuance of an arrest warrant – are merely the local business manner of fluffing your hair and wishing you a good morning. The no-smoke-without-fire equation doesn't work the same way.
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Corporate cultural differences
This being the actual point of this piece here. We cannot – well, cannot and still make money – judge business actions elsewhere by our own cultural standards. This also means that any particular set of profits needs to be judged by those local standards, not by ours. Because these foreigners have their own ways, see?
I've mentioned before how Petropavlovsk (POG) has been terminally shafted by this. As a London listed company it had to play by London rules. But doing so drove it into bankruptcy. Sanctions meant it couldn't pay its bank loan by delivering gold, also it couldn't pay off the loan so it didn't have to deliver gold. Err? Hello Mr. Receiver, Sir. The rules didn't allow any other outcome although a certain more foreign attitude to rules could have done.
Polymetal (POLY) doesn't have that problem but suffers from a slightly different interaction of the rules. But we've still got to value POLY on the basis of those rules, don't we?
It's also possible to run this the other way around. Those rules create arbitrages which we may or may not be able to cross. The one that really irritates me is Norilsk (MNOD). The listed ADR isn't trading right now but it might be possible to find some on the grey market. For the Moscow price is vastly higher, multiples.
But as a foreigner you can't sell Russian shares in Russia. Also, it's not even possible to get ownership recognised for many – the share registration systems no longer talk to each other. I know corrupt people in Russia and also bankers in Russia – to the extent that I'm not repeating myself – and I can't work out a way around that either. Sigh. That idea of being a criminal mastermind does seem to fail at the intelligence level rather than the moral.
That’s just the way it’s done here
The point here though is not to try to suggest trades. It is, rather, to point out that the rules elsewhere are not what we might expect at home. British law used to state that bribery here at home was appalling, jail for you, Sir. Bribery abroad, well, it depended where. If it was a normal part of business there then off you go. It might even be tax-deductible. I checked this once and really, it used to be.
There was, for example, a case of a London listed company with a mine way out wherever. The company was found to be paying the university fees (somewhere expensive in the US) of the son of the local police chief. In order to ensure that there were no local problems.
This caused a scandal when revealed. Everyone who knew the country, me included, was thinking, well, umm, yes, and? That's just the way it's done here. I've even been known to mutter that it's colonialism to insist that everyone else run their world the way we do.
But again, the domestic politics is not really the point here. What matters is that London is an international market. So, many of the shares will be involved in foreign activities. We know, after all, that 75% of the FTSE 100 revenue comes from outside the British economy. So, 75% of the business must be being done under those foreign rules.
What this means is that when something happens in foreign it might not have the same effect as something that was alleged, or happened, domestically.
To be silly about this: drug dealing in the UK is a crime, yet Britain – twice – went to war so that a British company could continue to deal drugs in foreign. No, really.
Investment strategy clouded
The point we should draw from this is that news of something in foreign doesn't have the same effect it might do if the same thing were alleged at home.
It does depend upon which foreign country, of course. So, when we get some news of something that has happened out there then we need to think about where it has come from. And, well, what does this mean out there, by their standards?
If the domestic issue is, by those domestic standards, no big thing, then perhaps we'd best not consider it large by our investing standards?
Of course, it's also possible to view that entirely the other way around. If we think of what some places do think of the local business manner of fluffing your hair and welcoming you to the morning then perhaps those are places we simply don't want to be involved.
But the same basic point remains. Foreign is foreign, they do things different there. So, how much different are we happy with is an important point to consider.
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