Oct 3, 2019

Beware investing in autocracies

Illustration of an oil rig in the Saudi desert casting a shadow in the shape of a dollar sign

Illustration: Sarah Grillo/Axios

Aramco, Saudi Arabia's state-owned oil company, promised this week that it would set a dividend of at least $75 billion through 2024 — or, that non-government shareholders would receive at least $750 million in dividends for every 1% of the company that they own, from 2020 through 2024.

Why it matters: Because the Saudi royal family controls Aramco, it doesn't need the company to pay any dividends at all. If they need to extract money from Aramco, they can always raise the company's tax rate, or simply expropriate what they need.

  • Foreign shareholders could be stuck with worthless shares paying zero dividends.

Between the lines: In many ways the Aramco situation is similar to that of Fannie Mae and Freddie Mac. The U.S. government controls the agencies and their profits. Private shareholders, who own 20% of the equity in the companies, have received nothing from them for over a decade.

  • If the U.S. government allowed Fannie and Freddie to start paying a dividend, shares would rise. But so long as the government holds the reins, shareholders know that their cashflows can always revert to zero at any time.
  • The bull case for Aramco shares is that the Saudi government wants to see a multitrillion-dollar valuation for the company. If that fact ever changes, then it's hard to see foreign shareholders being able to extract much value.

Why you’ll hear about this again: Investing in autocracies is part of modern capitalism. In China, for instance, PayPal is buying Gopay, a local payments provider.

  • It's easy to see why PayPal wants exposure to the massive Chinese market — but at the same time the company knows there's always a risk of the government turning against it and nullifying the deal.
  • If that happens, PayPal has no real recourse. (It's not going to sue the Chinese government in Chinese courts.)

The bottom line: In countries with robust civil societies, shareholders have significant legally enforceable rights, and those rights underpin the value of their shares. In countries like China and Saudi Arabia, by contrast, foreign shareholders only win insofar as it behooves the local government to keep them happy.

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