Diane Francis on Business Issues

Friday, May 19, 2006

Mexicans, Courts and Russians

Diane Francis column Friday Post May 19:

NEW YORK CITY - The President's speech to the nation this week about the Mexican border was purposely ambivalent because it was really about oil and election votes.

Sending National Guards to the border appeases certain elements in U.S. society who are concerned about the flood of cheap labor.

But his proposals to grant amnesty to 11 million illegals already here (on top of 32 million legally here) and to pave the way for more immigration appeases Hispanic-American voters and the Mexican government.

It also sends a signal to Mexicans and others to get into the country illegally because citizenship is eventual. I would speculate a flood in coming months.

Nearly 25% of all Mexicans now live in the U.S. and immigration has been a safety valve for a country that finds it impossible to create enough new jobs every year for its growing population. Besides that, Mexicans in the U.S. send home billions of dollars every year in "remittances" to loved ones, helping bolster its economy.

But Bush's speech, highlighted as an important national address, was also about oil.

Mexico is America's second biggest supplier of oil, after Canada, and any draconian action by Washington to truly seal the border and keep out Mexicans would guarantee that the next President of Mexico to be elected this summer will adopt a very populist, anti-gringo attitude.

He may even be tempted, with an intransigent America, to pull a Hugo Chavez and divert oil production to others such as China.

Too little too late
This week, eBay Inc. won its case at the U.S. Supreme Court which decided to reduce the imposition of injunctions in patent infringement cases.

Unfortunately, the unanimous decision was ten weeks late for Canada's Research in Motion Ltd. That company, faced with a ruinous injunction in a patent infringement dispute, was forced to settle for US$612.5 million.

RIM's lawyers tried but failed to convince the judge to wait for the outcome of this Supreme Court decision but the judge ordered the two sides to strike a deal or have one imposed on them.

RIM paid the huge sum as settlement and also had to sign away any opportunity to benefit from the eBay decision.
Until this unanimous decision, injunctions, such as RIM faced, have been automatic and forced many companies to settle prematurely rather than be driven out of business.

It was legalized extortion in some cases.

This decision directly benefits eBay Inc. which was sued by a competitor in 2001 claiming infringement of a "business method" patent.

The Supreme Court not only changed the rules for patent disputes in this week's long-awaited decision but also restricted the use of injunctions involving rights-holding companies (a non-operating entity which sued RIM) or involving "business method" patents. The court called them at times "vague" patents.

Russia Inc.
This summer the world's biggest IPO, for as much as US$20 billion is expected take place involving OAO Rosneft, Russia's third largest oil giant.

To date, there have been 30 IPOs, raising US$22 billion, in lockstep with the bull market in Russia, thanks to soaring commodity prices. GDP growth in Russia has averaged 7% per year since 1999.

But there is general skepticism about recent Russian IPOs and specific skepticism about Rosneft which this week announced that its proven reserves of oil and natural gas rose by 18% higher in 2005.

(Rosneft is third biggest behind OAO Gazprom and OAO Lukoil. Its new reserves are higher than any oil company outside Russia except Exxon Mobil Corp.)

Rosneft's lead underwriter is Morgan Stanley and there is speculation that this IPO will be postponed until the fall and may only raise US$10 billion. In part, that may be due to higher oil and gas prices and a reduced need to raise money on capital markets on the part of the company.

But that may be an excuse.

Russian IPOs don't have a good reputation these days. For starters, there's OAO Yukos, bankrupted by edict through trumped up charges leveled against its politically ambitious officers for tax evasion.

The concern with a Rosneft IPO is that the company acquired Yukos assets which had been confiscated by the government and are subject to legal challenge.

Another case in point occurred in April when Morgan Stanley suddenly pulled out of an IPO for a Russian meat production company.

Then there is the fact that many newly floated companies have posted disappointing earnings and poor results due to news which had not been disclosed to prospective shareholders.

Russia presents grave political risks for investors. Among them are the levying of unpredictable taxes, government interference, lack of minority shareholder rights, corruption and a strategy by wealthy Russians to liquidate before the 2008 President election. Current President Vladimir Putin is not allowed to run for a third term unless the constitution is ignored.



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