The risk is in the relationship (not the country): Political risk management in the uranium industry in Kazakhstan

Abstract

How do we account for multinational energy companies that are able to operate in “risky” political environments? While traditional risk indices may tell us why a country is considered a difficult operating environment, they tell us very little about why some multinationals are neverthelessly able to operate successfully in such countries over long periods of time. In fact, risk indices by their very nature make “success” almost impossible to capture due to their sole focus on country behavior. In reality, when a multinational energy company enters into a given country, the firm establishes relationships with a series of stakeholders, not a single “host country” entity; further, the behaviors of those stakeholders (good or bad) do not exist in a vacuum, but rather are largely influenced by the multinational's own behavior. In other words, the risk is in the relationship between the firm and the country's stakeholders. This article argues that success is therefore a function of the firm's ability to manage relationships among a variety of stakeholders within a given country. A case study of Cameco, a Canadian-based uranium mining multinational which has been operating in the politically “risky” country of Kazakhstan for two decades, bears this out.

Introduction

Since the 1970s, political risk analysis as a discipline has held a single overarching priority: the identification of those political factors in a given country that impact the firm's ability to operate (see for instance Kobrin, 1979, Jarvis and Griffiths, 2007, Henisz, 2000). Impact has been the key word, manifested most prominently in research through the several risk indices that aggregate the various proposed impacting political factors within a country into a single country score. In this way the political risk index can be understood as a rank ordering of “where not to go”—where, ceteris paribus, if a firm has a choice of investing in country A or country B, it should defer to the less risky. This is captured perfectly in the Behre Dolbear Group's annual Ranking of Countries for Mining Investment—what the mining advisory firm short hands as a ranking of where “not to invest” (2011, p. 1; italics in original).

Considerable advances have been made in identifying and measuring those political variables that impact a firm's ability to operate (e.g. Henisz, 2000; for a literature review, see Jarvis and Griffiths, 2007), but an unintended consequence of impact-focused political risk research has been its avoidance of a curious phenomenon: why some firms are able to operate successfully in these so-called “risky” countries. In other words, how do we account for firms that operate as exceptions to the “rules” that political indices relay to us about why a particular country is risky? Research in this vein is important because many firms are not faced with the simplicity of the “country A or country B” question, particularly firms involved in the extractive industries that tend to be guided primarily by the financial feasibility of the resource. And for those firms already operating in a so-called “risky” country, or intending to, the compelling question is one of political risk management: how to manage the non-technical risks that face the firm every day.

The following article applies Eden et al.'s (2004) political bargaining model (PBM) to the uranium industry in Kazakhstan, specifically the Inkai Joint Venture (JV) between Cameco, a publically traded uranium company on the Toronto (TSX) and New York Stock Exchanges (NYSE), and Kazatomprom, a 100% owned subsidiary of the sovereign wealth fund of the Republic of Kazakhstan, Samruk-Kazyna. Although the PBM has never been considered explicitly as a framework for political risk management, it seems a worthy alternative to current political risk analysis because (1) it disaggregates the host country into a series of stakeholders and (2) it recognizes agency among all stakeholders, including the firm. Whereas traditional political risk analysis examines the uncertainties surrounding the host country, bargain-focused political risk analysis, I propose, examines the uncertainties surrounding the relationship between the firm and its stakeholders. The risk is in the relationship, not the country.