Unrecognised states attract only the most hardened of investors
Few investors are brave enough to go public on their interests in so-called pariah states. Countries such as Burma, Uzbekistan and even Libya and South Africa have all, at various points in history, offered opportunities to the far-sighted investor. But the risks of dealing with unrecognised, or pariah, states—both to a company's reputation and the physical safety of its employees—can often outweigh any financial gain.
A corporation that publicly declares its involvement in a pariah state may also be boycotted by its customers and other companies. It may become the subject of public criticism and political enquiry. Premier Oil, the largest British investor in Myanmar (modern-day Burma), for example, suffered an unprecedented public relations assault from supporters of democracy. It decided to withdraw and sold off its $200m stake in a project to pipe gas to Thailand from Burma's vast Yetagun offshore field.
"The demise and fall of Premier is a warning to any company thinking about investing in Burma," says John Jackson, director of the lobby group, Burma Campaign UK. "It's more trouble than it's worth." Premier's withdrawal was only one battle in a lengthy war, and Jackson vows to increase pressure on other oil firms, such as Total, that operate in the region.
Similar opprobrium continues to be directed at those investing in Northern Cyprus. Cyprus has been divided since 1974, when the Turkish army invaded the north in response to an Athens-backed military coup. This led to a partition, with 250,000 Turkish Cypriots living in the northern third and 750,000 Greek Cypriots in the south. The Turkish Republic of Northern Cyprus (TRNC) was declared by Turkey in 1983, but remains unrecognised internationally.
Some Greek Cypriots pressure investors who seek to break a United Nations embargo by trading with the TRNC. David Lewis, owner of the River Island clothing chain, is rumoured to be investing tens of millions in a new hotel complex—but perhaps understandably, refuses to confirm or deny any involvement.
Another investor, speaking on condition of anonymity, says Greek Cypriot pressure almost forced him out. "No sooner had we started to examine the prospect of an investment in North Cyprus, than the Greeks heard about it—they were onto us like a shot. We received phone calls and letters warning us about the risks of buying land there, about the political insecurity and even about the business practices of the Turks. Some of our staff were alarmed and wanted to pull out. But we persevered and built a good business."
Pressure is brought to bear on every aspect of the TRNC's relations with the outside world. So an academic who did no more than announce he was attending a conference at the Near East University in Nicosia was sent a communication seeking to dissuade him, according to Dr Hüseyin Gökçekus, the university's chief executive.
"The academic received a letter advising him of the illegality of the state of North Cyprus," recalls Gökçekus, "and the risk he was facing if he attended the conference. He ignored the letter."
But many take the threats seriously. "[Some] people say they are coming to our events and strangely decline on the day they are expected," says Gökçekus. "We strongly suspect that they may have been influenced by the Greeks."
Agencies assisting potential investors advise them to adopt a cloak of anonymity. "Because of pressure from the Greek side, British citizens don't want to use their names. They are worried about retaliation," says Ayse Donmezer, director of the North Cyprus Investment Development Agency (NCIDA). "There are psychological pressures. The Greek side is always blocking our efforts to market and promote the country."
North Cyprus lawyer Peyman Erginel says that it makes financial as well as political sense to establish a local company instead of using a UK name. "You can only buy significant amounts of land and make serious investments here if you have a Turkish Cypriot company and a local joint partner." She says the process for buying these companies is straightforward.
Ian Smith, a Mancunian estate agent based in Kyrenia, North Cyprus, says that despite some reports to the contrary, there is little to fear over issues of land rights or security. But he warns that ventures are not as cheap as they once were. "Investors are required to show the government of North Cyprus [the equivalent of] £50,000 in their local Cyprus bank account. The money can be in company overheads and not in the investment itself.
Every Tom, Dick and Harry was investing here, and the government wants to weed out some of the smaller, more fly operators." Indeed, some UK criminals have taken refuge here, as they are out of reach of international law and enforcement agencies.
Even experienced global investors may baulk at the risks and costs of going into pariah states. It may be a promising market. But the question remains: can your company withstand intense moral scrutiny—and will your conscience allow it?
Under pressure
Companies should prepare the ground with care before investing in a pariah state, says Derek Tonkin, chairman of Network Myanmar. This may involve hiring consultants to test the attitude of locals. Any hostility may be placated by some support for local charities. An assessment of opponents' claims of human rights abuse is essential before labour is hired.
Tonkin counsels companies to note the potential risk to reputation.
"Pressure groups will seek to approach customers of companies that have investments in pariah states. They will also aim to influence shareholders to bring motions at annual meetings. If you were able to have a rational discussion quietly, you could persuade them of the sense of making the investment. But invariably, discussions with lobbyists are emotional and heated and get you nowhere."
