A thirtysomething trillionaire at the Zimbabwe Stock Exchange

A thirtysomething trillionaire. Like Wired Magazine predicted Bill Gates would be back in 1999 [you recall how that ended!]. I do not even know how many dollars or euros or francs or rands it took, but the smiling moneychangers at the Zimbabwe - Zambia border posts had more than a few. A trillion is 10.12, a lot of zeroes!

Hyperinflation is what happens when politics believe their own hype, and command the reserve bank and treasury to print money which is not backed by real assets. It ruined the Weimar Republic in Germany in the 1920s, and Latin America in the 1980's. With hyperinflation, confidence is wiped immediately, and the irresistible force of geometric compounding swamps calculators as each unit of currency becomes worth decimals of what it once did. Zimbabwe’s president has bankrupted his country. But being better educated and able to manipulate the levers of power, Mugabe no doubt has his wealth offshore. Not in Switzerland, too close to those who hold him accountable, and as of Friday, a less secret place to stash the cash. No, his money is allegedly further east, probably in Singapore, Malaysia or Kong Kong. But also embarrassingly, Mugabe may have cash in the Isle of Man and land in the UK, according to Harvard Kennedy School Professor Rotberg who has covered the ZIM corruption since 2007.

HK is where Mugabe's daughter is getting her degree. I have never met her and she may be the nicest person. Readers may recall that HK is where his wife allegedly took around USD50k cash - straight from the ZIM Reserve Bank - to go shopping, and where she managed to be famous for punching a photographer [the media is real outside ZIM]. The obliging HK administration declined to press criminal charges. Anyway, I am surprised Mugabe's daughter did not simply have her father order the university to issue her with one. But then, having driven past the University of Harare last week, one understands the head of state’s own family choosing to study elsewhere: it was impossible to see the campus buildings through the head high grass and weeds. Perhaps the student activists who reject the presence of the dictator’s child in class may create more of a challenge to “normal” than the is possible within Zimbabwe itself. If the university is anywhere decent, it will have more freedom of expression, and more accountability, than Zimbabweans have experienced in the past twenty years.

Like opinion polls to politicians or market prices to CEOs and their bankers, a currency’s worth is a relative score on the perceived health of a political economy. Which is why for the first time one may recall, the Chinese premier called upon the US to be fiscally responsible and to guarantee its good credit over the weekend around the G20 summit. Yes, the Obama USD 800 bn rescue package has a price tag, and the low interest rates and trillion-dollar spending will lead to a weaker dollar, just not today. The Economist has its own problems with it. SeekingAlpha website covered the hyperinflation effect for the US. The mighty Swiss france has become too strong for its banking and manufacturing industries, leading the Swiss to devalue their currency by intervening in the forex market. A short term strategy that “beggars-thy-neighbour”, but the CHF is small enough to slip by for now.

So where does “responsible investment” factor into the ZIM situation? In November 2008 when I visited London I recall a furore that Anglo and Barclays were making new investment into their ZIM country operations - ZIM Barclays does have the cleanest buildings. The ZIM regime is despised in a way I would think apartheid South Africa once was. But the convoluted and conflicted behaviour at a country level within the UN system, the lure of ZIM’s mineral wealth, and Mugabe’s “street cred” among African “liberation” politics including his ability to manipulate has kept him around way past his sell-by date. But how many country screens are excluding ZIM?

Few investment policies will even reference ZIM, partly because it is dwarfed by other major investable countries, and by its southern neighbour. Burma receives much more attention in the US, for example, with Chevron [NYSE: CVX] being targeted for action this shareholder season. 

The 2009 resolution seeks greater transparency on how Chevron evaluates its human rights impact, especially in high risk countries like Burma. It calls on the company to report on its criteria for investment, continued operations in, or withdrawal form specific countries. The annual meeting is expected to take place in May 2009.  The resolution was co-filed by the following institutions: Teamsters General Fund, AFL-CIO, Ms. Adelaide Gomer, The Maryknoll Fathers and Brothers, Mercy Investment Program, Newground Social Investment, Ursuline Sisters of Tildonk and the Unitarian Universalist Association. The International Trade Union Confederation (ITUC) and the International Federation of Chemical, Energy, Mine and General Workers' Unions (ICEM) have both endorsed this resolution, as has the Canadian Labour Congress (CLC). 

The unintended consequence of Mugabe bankrupting the country is that it makes a micro-point of any global emerging markets exposure at a country level. Investors into Africa probably only have indirect exposure to ZIM by holding firms that are still ticking over in the country [see Financial Mail’s breakdown of ownership in ZIM brands].


Buy or Sell ZIM?

The investment policy for investors that integrate environmental, social or corporate governance factors [ESG] is the appropriate place to look for the response at a macro level. Major institutional investors now consider ESG factors, and CalPERS has an explicit approach to emerging markets investment. Perhaps the most well-known advocate of ESG in global investment is the Norway Government Pension Fund – Global, with NKr2.275bn [Eu258bn, USD329bn] in AUM. The Norwegian Global Fund, a sovereign wealth pension fund created from North Sea oil revenues, has a investment policy explicitly outlining ethical factors, and practices investment by having an ethical council screen investment opportunities. International investors saw this in action in the pages of the New York Times and Wall Street Journal in 2006/7 when Norway flagged Wal-Mart for exclusion, generating some diplomatic activity, and raising the profile of the ethical council. It also made a useful Harvard Business School case study, Norway Sells Walmart.Later in 2008, the fund published a report on child labour: corporate governance, children and the environment remain primary key issues. In last Monday’s FTfm the fund's "thorny path" was highlighted.

The easiest route is to disregard investment merits and divest immediately, and buy back quietly when the storm has passed. This approach only generates a better investment argument if the accompanying publicity will drag on the share price wherever it is traded. Shareholder activism is a public approach to have the company address the issue. A high profile investor when faced with a high profile problem may need to take this route – the Norwegian fund has addressed the costs of climate in a white paper in response to an NGO asking a pointed question. Environmental NGO Bellona recommended the fund exclude carbon emissions violators in a report to be submitted to Norway’s parliament 26 March. Shareholder activism is not limited to ESG factors, and in each year our experience at Sinclair & Company is that some have greater emphasis than others. In 2009, clearly executive pay has become the lightning rod – just ask Messers Goodwin or Liddey what their majority shareholders [UK or US taxpayers like you] think about fat cat salaries…

Shareholder engagement is an approach by investors “behind closed doors” approach less concerned with shareholder proxies but with suasion, and better explained in hindsight and ex-post facto. The most recent, 2007 SIF report identified increased activity in the USA covered through 31 December 2006. 

The average level of shareholder support for resolutions on social and environmental issues increased 57 percent from 9.8 percent in 2005 to 15.4 percent in 2007, a record high.  The total number of resolutions increased from 360 in 2005 to 367 in 2006.  Institutional investors that filed or co-filed resolutions on social or environmental issues controlled $739 billion in assets in 2007, a more than 5-percent rise over the $703  billion in assets counted in 2005.

Engagement works in smaller, clubby circles of capitalism, where the connection between investors and companies, and the professional circles they move in, is much smaller and the prestige of the matter carries some weight. Some of the more effective conversations have come where advisors put publicly combative parties in a room, and as people and professionals new ways forward were sought. The UK, Brazil or South Africa are examples of these smaller investment circles of influence.

The shareholder activism has practical challenges. Pauline Skypala in today’s FTfm covers the recent handwringing on shareholder rights at the UK's National Association of Pension Funds [NAPF] conference last week. NAPF has been a proponent of integrating ESG factors, and is a conference of investors with a longer-term perspective. The influential Lord Myners, himself renowned to be frank, had institutional investors expressing “a lot of this [corporate governance] is rubbish”. How long investors should stay invested, whether all investors offer the same direction to a company, and when to extract investors from a situation are all practical challenges of implementing an investment strategy that [correctly] integrates governance into the investment equation.

The momentum of actions that seek to target at the country level are unpredictable, and may succeed in direct relation to the publicity, not necessarily the weight of arguments. Tibet is overshadowed by China’s massive bulk. Burma continues to attract attention of human rights activists and the investors that map to that [see GES Investment Services' briefing on Burma this month, March 2009], while countries which also have poor human rights records may feature less. It is so that ZIM attracts almost zero attention in the US while the Sudan/Darfur issue has generated major student, media and investor action. Acolytes of the sage of Omaha, Warren Buffet, have heard him explain his position on China National Petroleum Corp. [HK:0135, CNPC] because of Sudan [see Marc Gunther's 2007 Fortune piece], and they may not even know where ZIM is on a map.

ESG research providers have made available screening products that are not expensive to build and easy to pitch which focus on countries or companies that fail criteria of certain international initiatives or agreements. EIRIS has country sustainability profiles and convention ratings, and Riskmetrics ISS Innovest offers sovereign ratings in their screening boutique. Companies' own dilemna on whether to stay or go is newsworthy material for the media: should they stay or should they go? Divestment is a fairly blunt instrument. Unfortunately for the average ZImbabwean, lovely people, their country does not warrant the attention of the world, despite the country being mis-managed into -40% GDP tailspin. Divestment is a dramatic tool, with much scope for collateral damage. The investment decision is the least of matters.

The Russians Are Coming. Strutting Nuclear Power

We knew it was coming. Then it was refused permission. But now, the Russians have arrived! Tuesday in the late afternoon sunlight it was quayside. Dark, blue, sharp - all latent power, metallic angles and drilled sailors in whites. The Russian nuclear cruiser Pyotr Veliky [Peter the Great], flagship of the Russian Northern Fleet, is tied alongside next to the container channel in Cape Town Harbour with a shiny red star on the bow. Battlecruisers like Pytor are some of the largest warships in the world, second only to aircraft carriers, and are similar in size to a World War 1 battleship.

The South Africa’s National Nuclear Regulator originally refused entry to dock in CPT, with good reason based on the Russian Navy's history, q.v. comment by the Russian Northern Fleet Chief Commander, Admiral Vladimir Kuroedov in 2004 “Pyotr Velikiy's reactor was in an extremely bad condition and could explode ‘at any moment’,” and the disaster of K-141 Kursk nuclear submarine.

The Pyotr Veliky captain’s orders must have been clear – sail to Cape Town, get to the V&A Waterfront, and do some shopping in the January sales. At least that's what we assume because news reports it was “deemed too big to berth at the V&A Waterfront” and I cannot recall other capital ships trying to turn right after entering the harbour... When the Russian Navy wants to strut their stuff, they are very subtle. Next time the Americans send their nuclear-powered aircraft carrier back, they’ll probably want to park it in front of the V&A clocktower! The Americans had the discretion to float gently in the Table Bay gales when the USS Theodore Rossevelt arrived in October 2008. On the other hand, maybe the US Navy was just exhausted having determinedly conducted shock-and-awe against red tape for years to make it happen.

Maybe the Russians saw a few too many Cape tourism photos, or South African parliamentarians are about to make another arms deal that will distract presidents and would-be presidents for years to come…let's hope not like THAT other one, the one Archbishop Tutu has requested an inquiry into. The military ship was being patrolled last night by a SA Navy inshore boat [see it near the stern, above], watching for any protesters or drunken seals. Local NGO The Anti-War Coalition did react to the arrival, as they did to the US carrier in 2008. Note also the Russian Navy flag, looks a bit like the Scots. Unfortunately, I will not be sneaking happy snaps up close.

Are there any other nuclear-powered ships from any other nations of the world that want to dock in CPT to check out the new FIFA WC2010 stadium at Green Point? Guys, maybe just read the WorldCupblog. Perhaps the approval for the visit from Pretoria is the SA government serious about creating jobs [part of the ANC’s election manifesto the past three elections, but…]. The last time a nuclear-powered ship wanted to dock in 2005 but was denied, a storm in a teacup brewed up:

“The ship [US aircraft carrier USS Harry S Truman] eventually sailed past, prompting an outcry from local businesses that would have benefited from the spending power of more than 6000 visiting sailors”.

Well, at least the American sailors in 2008 did play rugby! I wonder how many crew the Russians have ready to buy wine and biltong, how many play rugby, and oh, I would pay to see some Russian sailors try and haggle with a minibus taxi driver, hanging out the window calling destinations with thick Cape Flats accent… Maybe that’s why all hands were on deck astern for at least an hour in the twilight last night getting a briefing from the captain and/or liaisons.

Curious minds that you are, one expects the reader will want to know what it takes for a nuclear ship to dock in SA. The original dates were blocked by NNR for “specific criteria for the refusal related to a safety certificate from the Russian regulatory authority; a liability letter that provided only for international nuclear damage; and an emergency plan that was ‘not comprehensive enough’". Good to know that instructions to evacuate CPT will be issued in Russian. Pyotr Veliky sits in the harbour about 1.5km down the mountain from here – wonder how fast after "dear comrades, we regret to inform you..." I could whip the MTB out and pedal over Devils Peak?!

Nuclear Power

Nuclear-powered ships are really about steam boilers driving pistons. Similarly, nuclear-powered electricity generation remains a tough item in the ongoing debates about responses to climate change. There is a reason no nuclear plant has been built in the US in 30+ years, mostly due to "Not In My Back Yard" [NIMBY] and no financial firms willing to fund the huge capital costs. Nuclear power is under-covered in South Africa. In apartheid SA it had a powerful isolationist, screw-them component. Koeberg, about 50km up the cold West Coast from CPT, is the sole nuclear plant, French-built [Framatome] and commissioned in 1984. New construction on partly SA-developed technology ["pebble bed modular reactor"] was shelved. But in 2009 all bets were back on after ESKOM failed to provide electricity leading to bad waves of brownouts in SA in late 2007/early 2008. And with a large portion of the planet’s uranium, seems to make sense. For investors into the nuclear sector in SA though, about the only direct exposure would be via ESKOM fixed income instruments.

Business Report this morning included a headline “SA's next nuclear power plant to come on stream by 2019” indicating nuclear is back in the mix and moving forward. The SA government is doing it directly because quasi-government ESKOM fumbled so badly, and dropped out. The SA government plans around 6000MW by 2019, which is two years later than original plans. Instead of supporting the ESKOM funding, the SA government is doing its own thing because “government wanted to launch a process that differed from the utility's one-time proposal to ensure it could build up the fleet over time” according to Nelisiwe Magubane, the deputy director-general at the minerals and energy department. It is not clear where the government's energy versus environment trade-off has led, though both nuclear power and Environment Minister Marthinus van Schalkwyk have risen lately, according to BR. Meanwhile, NGOs like Earthlife Africa are trying to keep focus on getting power to poor people in SA.

Nuclear energy remains a challenging item for sustainability investors like Insight Investment, those integrating environmental, social and governance factors into investment policy and practice [ESG], see article "Nuclear in my ethical portfolio please" and typical nuclear screens by EIRIS. The nuclear opportunity has an easy investment vehicle in the US, the Market Vectors Nuclear Energy (ETF) (Public, NYSE:NLR). Also, Barron's had a main feature Blossoming of Nuclear Energy and table of nuclear stocks this week [12 Jan]:

Exelon, Entergy and other nuclear-power giants are set to surge, thanks to the Obama administration's plans for heavy investment in clean energy.

It is just seven days until the Obama inauguration. A friend with a solid global strategy in Boston he developed for State Street knew he would face heat from some sections of investors and stakeholders [Union of Concerned Scientists is based in nerd-heavy Boston] but he was willing to consider it as part of the solution, names like Hitachi, Westinghouse, AREVA. GE pitched nuclear in 2005 as part of ecomagination, with response from the likes of Treehugger.com in 2006 quite equivocal, but fast forward to NEI Notes' response to Obama's plans in 2009. The respected ESG investment house in the US Calvert now has a position of:

"Calvert's two newest funds, the Global Alternative Energy Fund and the International Opportunities Fund, may in select cases invest in companies with existing nuclear power if they are demonstrating leadership in developing alternative energy. Moreover, the Funds will not invest in companies that own or operate new nuclear power plants or do not meet Calvert's safety and security performance standards".

Gov. Schwarzenegger in California says nuclear "has a great future", and recent graduate students will have good nuclear jobs in the industry. The Russian gas cuts via Ukraine to Europe again this northern winter have re-ignited the nuclear option in Europe. The UK mapped a nuclear policy in 2007, which has been criticized for not including government funding. Big, big numbers are involved when constructing nuclear power generation plans. In the US a coalition of socially responsible investors [SRI] and environmental organisations, including Friends of the Earth, Public Citizen and the shareholder activists Interfaith Center Corporate Responsibility (ICCR), in 2007 argued new nuclear power plants cannot be cost-competitive with other electricity generation alternatives [see Why a Future for Nuclear Industry is Risky, 2007].

Where Did All the Nucleons Go?

The issue is the same as for coal or consumerism: what happens to the waste? Between 70 and 90 percent of the world's spent nuclear fuel is of U.S. origin. No doubt, the siting of nuclear plants is the dramatic, as the accidents in Three Mile Island or Chernobyl suggest. Nuclear accidents are as cruel for civilians as Israel/Gaza, just silent and longer-term disfiguring. But the bigger issue, and little reported story, is where the nuclear waste [radioactive for longer than Larry King will by interviewing in suspenders] will end up. Where do all the nucleons go?

After over 20 years of research in the US and billions of dollars of “carefully planned and reviewed scientific field work”, Yucca Mountain located 80 miles northwest of Las Vegas, Nevada, is the only site under consideration for a proposed repository to store 77,000 tons of high-level radioactive waste from U.S. weapons sites and commercial nuclear reactors. But protests about shipping and storing rage on in the litigious capital centre of the world. Opposition is fierce. Senator Reid has flatly refused EVER to let the nuclear waste be stored there. And what does "low-level radioactive emissions" really mean?

Where is all the nuclear waste stored today? The IAEA has been talking about global standards [ironically in CPT in 2007], and nuclear plants even qualify for environmental standards [ISO 14001, who knew?!]. But if France gets 80+% of electricity from nuclear power, is it sitting under the slopes of Chamonix? More research is called for. One immediately wonders about the French Legion heading into the Sahara or why the Paris-Dakar Desert Rally was switched to Argentina in 2009…

Where does radioactive waste go? The current concern with CO2 is important, nuclear may be part of the solution, but building more nuclear plants needs to happen in the context of the outputs. The by-product of coal-fired energy generation is CO2 emissions, and costing outputs may have caused at least one coal deal by Dynegy to flounder. Investors - especially institutional investors - must cost outputs so we have no externalities: pollution is a deferred cost, not an externality. Just like coal-fired power plants. Just like mines. Radioactive waste from mines is a current and present danger in SA, but you would be hard-pressed to find this costed ex-ante. Storing spent fuel at Pelindaba is the SA nuclear waste plan - which implies it is being railroaded or trucked to the hillside outside Pretoria. Mmm. But then Pelindaba allegedly suffered a terrorist raid that was hushed up, according to CBS 60 Minutes [I wonder if the brave manager who foiled the raid ever got his hospital expenses paid?]. Some American administration types included the issue a year ago in an WSJ editorial page article as part of a campaign for nuclear munitions abolition at the Hoover NTI conference, and pitched Bush's call for an international spent fuel and decommissioning facility.

In the US one has some confidence that watchdog NGOs like UCS and Environmental Defense and their nuclear engineers like David Lochbaum are watching the nuclear picture, being:

“vigilant in monitoring the performance of nuclear plants and their regulators—the Nuclear Regulatory Commission”. We continue to find and expose safety and security problems at individual plants, in industry standards, and in the failure of regulators to take effective action”

The “successes” tab on UCS’s website is useful to track their progress, as is the US nuclear plants interactive map that allows users to search for safety issues.

SRI-Extra reported [6 Sept 2008 Hypodermics Overboard] about the critical nuclear leak hidden by an employee, yip, sometimes you just need a Homer Simpson on deck. The only time I want to read “near-miss” is when reading about cricket [see Neil Manthorp's adventures in AUS].

Well, where does this leave nuclear waste in Russia? It does not strike me that the Russian political leadership is open to scrutiny and Duma hearings with NGOs testifying, although Sally Osberg stated at Skoll World Forum, 2008 that “[i]n Russia, we’ve gone from virtually no NGOs eight years ago to more than 400,000 today”. WWF Russia, the Russian branch of the WWF, is active and brave. While at UNEP FI in Geneva I worked with Boris Shevchenko, Evgeny Shvarts and Elizaveta Nikonova and UNEP's Alexander Gudyma in getting the PRI translated for the first time into Russian in 2007/8 as a small engagement. In January 2009 Russian courts are weighing the threat to rare Western Pacific grey whales of the Sakahlin 1 project, litigating ExxonMobil and Rosneft to halt the pipeline. But it was the Italians who had to offer to contribute money to dismantle another Russian ship in 2004. Maybe the Russians are better in 2008 than 1998, but until 1990 nuclear waste disposal included...

“the Soviet Navy routinely dumped radioactive waste in Baltic, the northern Pacific (primarily the Sea of Japan)and Arctic waters, sites on the Kola Peninsula in the Russian North [Siberia], and on the Shkotovo and Kamchatka Peninsulas in the Russian Far East; and by holding radioactive waste on storage ships servicing the Northern and Pacific fleets”.

No wonder the Japanese wanted fresh southern African fish!. Nice. And maybe a reason why Russia claimed the Arctic in 2007? Ten years ago in 1998, around the time of the Russian bond defaults, academics reported

“[e]conomic hardships over the past decade have rendered Russia's radioactive waste handling capabilities inadequate. A severe shortage of radioactive waste storage space, coupled with a lack of funding allocations for new storage sites, has led to a difficult situation for Russia”.

The arguments for nuclear waste treatment are few and far between, lost in the calls to include nuclear power in the investment portfolio for "climate change friendly" power generation options. Lost like actual demonstrated carbon capture and sequestration [CCS] technology, the other "wonder technology". When Pyotr Veliky sails tomorrow, I hope it honours for Cape waters, and for every oceans, what a good few slobs on Table Mountain paths have not lately: when you leave, leave only your footprints.

SRIX.GS