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Picking On Multinationals

A supplier and its customer quarrel about prices. Secret meetings are followed by accusations of spying and attempted bribery.

When these things occur in free societies, the disputes usually get resolved privately or in civil court. Sometimes, if there is evidence of crimes like bribery, law enforcement might get involved. The national security apparatus, however, is not drawn into the fray.

Things are different in China.

Four employees of Australia-based mining giant Rio Tinto were detained earlier this month by Chinese authorities on charges of trying to steal state secrets. The employees include one Australian citizen, identified as Stern Hu, and three Chinese nationals.

These “state secrets” were not military or political matters. The Rio Tinto employees reportedly tried to obtain negotiating strategies of the China Iron and Steel Association, a consortium of Chinese steelmakers that has been pressuring Rio Tinto to cut the price of its iron ore exports.

“It is quite clear that the detention and investigation relates strictly to economic or commercial matters relating to iron ore negotiations,” Australian foreign minister Stephen Smith told reporters. “It is also the case that the Chinese have a much broader or wider view of what Australia might describe as state security, state secret or national security matters.”

That ‘wider view’ is a big problem for multinational companies operating in China. The Westerners bring lawyers. The Chinese bring plainclothes security officers.

Russia has a similar ‘wider view’ of when the government should throw its weight behind that nation’s often murky business enterprises. Robert Dudley, the chief executive of BP’s Russian joint venture TNK-BP, recently left Russia after what he called “sustained harassment,” including the denial of his visa application.

Alfa Access Renova, a consortium of Russian investors that holds a significant stake in TNK-BP, was none too sad to see Dudley leave. Lord George Robertson, deputy chairman of TNK-BP, found too much of a coincidence between the Russian businessmen’s interests and the government’s actions. Robertson suggested that the legal hassles faced by Dudley were part of “AAR’s efforts to wrest control of the company through illegitimate means”

Dudley’s experience is reminiscent of how Russian authorities mugged Royal-Dutch Shell in 2006. In the face of legal pressure from Moscow, the Anglo-Dutch company sold a controlling interest in its huge Sakhalin-2 oil and gas project to Gazprom, a publicly traded company that enjoys a state-sanctioned monopoly on Russian gas exports.

Even the most powerful multinational is equipped to fight only commercial rivals, not nuclear powers. But the major industrial democracies have been slow to stand up to economic bullying.

While the Australians have pressed Beijing for a speedy resolution of the Rio Tinto affair, they have little leverage. A country of 21 million that lives off its raw materials exports can ill-afford to offend a trading partner of 1.3 billion resource-hungry customers, especially when that trading partner has the only major world economy not currently stuck in a recession.

The United States has the heft to push back that other nations lack. That may be why the most egregious disputes seem to involve other countries’ companies rather than those based here. But America also might have a difficult time standing up to Chinese or Russian pressure, when you consider the $800 billion that the U.S. Treasury owes China or the approximately $125 billion we owe Russia. It’s difficult to take a hard line when your adversaries also are your creditors.

In the meantime, Rio Tinto has advised all its foreign staff to leave China. While Australia is seeking a swift resolution, Smith said of the situation, “It is not going to be solved by one phone call or one meeting.”

Larry M. Elkin is the founder and president of Palisades Hudson, and is based out of Palisades Hudson’s Fort Lauderdale, Florida headquarters. He wrote several of the chapters in the firm’s book, Looking Ahead: Life, Family, Wealth and Business After 55. His contributions include Chapter 1, “Looking Ahead When Youth Is Behind Us” and Chapter 4, “The Family Business."

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