Dead Russian Lawyer: Understanding Risk in Emerging Markets
This entry was posted on 11/19/2009 12:10 PM and is filed under uncategorized.
A lawyer in Russia just died in prison.
Sergei Magnitsky was just 37 years old. He had represented the $4
billion Hermitage Fund, one of the largest foreign portfolio investors in
Russia. He wasn’t even convicted of anything. He died in pretrial detention.
So why should emerging market investors
care? Human rights abuses are not exactly uncommon in many emerging markets.
Lawyers for various plaintiffs are routinely harassed and imprisoned in China,
Russia and elsewhere. Yet these economies seem to be growing as if there was no
global melt down. Why should investors care about some lawyer when there is
money to be made? It’s simple. Just because the economy is growing and some
people are making money does not mean that the foreign investor will make
money.
Foreign investors think nothing of
buying ETFs and ADRs for stocks listed on foreign exchanges. Private equity has
poured billions into investments in these countries. Banks and pension funds
have purchased huge quantities of bonds from emerging market firms. These
investments are routinely flogged as a no lose opportunity. After all, every
economist and analyst of note has looked at the growing populations and
economies. They have made projections ten years out and come to the conclusion
that all of these economies are taking off and will grow at break neck speed.
But there is a problem. A dead lawyer.
All of these investments are
represented by instruments. Whether they are stocks, contracts, private equity
deals, mergers and acquisitions, or bonds, they share one major problem. They
are just pieces of paper. Pieces of paper are not property. For these bits of
cellulose to actually represent property that can actually make money, you have
to have a legal infrastructure where your property can be defended by your
lawyer. Otherwise, what you think is your property can vanish overnight leaving
you with nothing but a piece of paper. So before you invest in an emerging
market give a thought to Sergei Magnitsky and the real risks involved.
