Gul Berna Ozcan --Do not circulate or quote without the permission of the author

POLITICALLY CONNECTED FIRMS, ELITE TIES AND INTERNATIONALISATION: THE CASE OF ENRC

Working paper to be presented at:

Emerging Multinationals: Outward Investment from Emerging Economies Copenhagen Business School 27-28 October 2016

Gül Berna Özcan, PhD School of Management, Royal Holloway University of Egham, Surrey TW20 OEX Tel : +44 (0)1784 443476 E-Mail: [email protected]

1 Gul Berna Ozcan --Do not circulate or quote without the permission of the author

POLITICALLY CONNECTED FIRMS, ELITE TIES AND INTERNATIONALISATION: THE CASE OF ENRC

Abstract In this paper we argue that location or firm based understanding is insufficient to conceptualize the process of internationalisation. The main argument is that elite ties and political space exert significant influence over corporate activity within and beyond national context. The empirical evidence is based on the internationalisation process of the Eurasian Natural Resources Corporation (ENRC) in the UK’s financial markets. We follow a novel approach: rather than taking internationalisation as a rationalized process of organisational deployment, our analysis shows how individual actors, political connections and financial institutions play a paramount role through complex web of opaque relations. These networks form new geographies and are in constant contact with formal institutions with varying degrees of cooperation and conflict. The preliminary evidence presented here points out that international elite networks override firm boundaries, weave pull dynamics to new locations and help maximize diverse individual benefits at the expense of good governance and the public interest.

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1. INTRODUCTION The dissolution of the USSR’s supranational political structure terminated an era of interconnected enterprises and brought about new strategies for internationalisation. Diverging trade and customs rules, privatisation policies and public finances have deepened the spatial disintegration of former Soviet markets and its inter-connected sectors and enterprises. Throughout this process the ruling elites and oligarchs consolidated their command over large enterprises mostly in mining, energy and heavy industries. In a study of ’s largest oligarchs, Guriev and Rachinsky (2005) illustrate how concentration of ownership of large industrial establishments served a highly corrupt political regime in which neither oligarchs nor the bureaucracy were interested in implementing policies that would open the economic regime to broader participation, fair allocation and competition. Over the past two decades London has became a business base for many Russian oligarchs as they amassed large private and business investments in the city and the UK economy (such as the metals tycoon Oleg Deripaska, oil tycoons Boris Berezovsky and Roman Abramovich, construction and power supplies oligarch Roman Rotenberg, and Andrei Guriev, a fertiliser baron)i. The corporate activity of Russian companies also increased over the years through the stock listings at the London Stock Exchange (LSE). First, Gazprom joined in 1996, followed by Lukoil in 1997, and by 2014, the number of LSE listed companies from Russia reached 29.ii

In a similar pattern, Kazakh energy and mining companies closely linked to the ruling elite began to establish themselves as global players in London in the mid-2000s. This happened in two ways. First, they consolidated their positions in home markets by acquiring additional mining resources. Second, they sought to improve their corporate image and access to new financial assets through mergers and acquisitions and foreign listings. has large reserves of iron ore, coal, gold, chromite, lead, zinc, manganese, titanium, cadmium and uranium; including the world’s second-largest reserves of manganese and chromite ore and 45 per cent of the former Soviet Union’s uranium reserves (estimated to be around 439,000 tones). Its zinc and lead reserves are the 3rd and 4th largest in the world, respectively. The World Coal Institute reports (2009) that Kazakhstan is the 9th largest coal exporter and producer in the world, and there has been further consolidation and expansion of mining operations (Peck, 2003). Kazakhstan’s vast resources, the rapid growth of demand from China and other emerging economies, and favorable global financial markets, prior to the 2008 financial crisis, were the main driving forces for international expansion.

With its direct or indirect control over corporate activity, the Kazakh government has been encouraging its mining companies to get listed in Hong Kong as well as London. The country’s rich resources attracted the appetite of investors around the world. Most Kazakh companies chose to come to London while the relations between Prime Minister Tony Blair’s close circle and the Kazakh government were deepening. The London Stock Exchange listing of Kazakmys 3 Gul Berna Ozcan --Do not circulate or quote without the permission of the author and KazakhGold in 2005, KazMunaiGas (KMG) in 2006 and ENRC in 2007 aroused further interest on initial public offerings (IPO) from investors as well as business groups. Other Kazakh companies followed suit: ShalkiyaZinc, a regional mining company, and two of the three largest banks, Kazkommertsbank and Halyk Bank (2006), three relatively smaller companies, Alliance Bank, a mid-size, retail-oriented bank, Kazakhstan Kagazy, an industrial group, and Chagala, a real estate developer all went public in London. More recently, Central Asia Metals Plc went public and raised $60m in 2010.

In this working paper we examine the internationalisation process of the Eurasian Natural Resources Corporation (ENRC) in the UK’s financial markets. We argue that location or firm based understanding is insufficient to conceptualize the process of internationalisation. The main argument is that political space and elite ties exert significant influence over corporate activity within and beyond the national context. We follow a novel approach: rather than taking internationalisation as a rationalized process of organisational deployment, our analysis shows how individual actors, political connections and the financial institutions play a paramount role in shaping the complex web of opaque relations through a case study approach (Eisenhardt, 1991). In this alternative narrative of internationalisation, we show how elite networks form new geographies and are in constant contact with formal institutions with varying degrees of cooperation and conflict. The preliminary evidence presented here points out that international elite networks (in politics, business and finance) override firm boundaries, weave pull dynamics to new locations and help maximize diverse individual benefits at the expense of good governance and the public interest.

Politically connected firm (PCF) studies offer a starting point for our analysis. A close analysis of ENRC’s entry to and its exit from the LSE displays a range of interesting features on how a politically connected firm internationalizes and how elite ties get re-territorialised through evolving relations among business and political actors, overriding the perceived divisions between host and home geographies and much stressed aspect of liability of foreignness. Instead, London emerges as a nodal point of powerful ties and financial benefits whilst major mining assets lie in Kazakhstan. These findings have important implications for: i) firm internationalization studies; ii) broader wealth/sustainability impact of PCFs in listed companies; iii) searching novel methodologies to examine the nature and impact of ties between business and politics in multiple geographies. Our evidence here comes from business and media reporting, secondary sources and company annual reports. We systematically sieved data from Factiva search engine to develop a repository on ENRC and corroborated the evidence with other sources as listed in relevant discussions.

In the following section we introduce the literature while highlighting the lack of understanding on the significance of political space in internationalization studies. This is followed by an

4 Gul Berna Ozcan --Do not circulate or quote without the permission of the author analysis of ENRC and the ties associated with its entry to London. The paper will end with a discussion of the findings and their implications.

2. THE MISSING LINK IN INTERNATIONALISATION:

POLITICAL SPACE AND ELITE NETWORKS

In the IB literature, the “Uppsala”, “innovation” and “network” models have been the three most influential theoretical perspectives that conceptualize internationalisation as a firm level accumulation of capabilities (Bilkey and Tesar, 1977; Cavusgil, 1980; Johanson and Vahlne, 1977). Based largely on data from western manufacturing firms, the Uppsala and innovation models perceive internationalization as a gradual learning process of evolving capabilities. The network model, in contrast, moves slightly away from the others by emphasizing the significance of relationships between a parent company and its affiliates (Johanson and Mattsson, 1988; Easton, 1992). However, these models have been criticized for their linear, often incremental and deterministic approach. McCann and Mudambi (2004) contend that FDI has made Dunning’s influential ownership, location and internalisation (OLI) formula inappropriate for discussing the spatial behavior of internationalising firms. They conclude that a fusion of traditional economic geography approaches with a focus on the information and organisation aspects of the firm and the region under consideration may be a way forward for both theory and empirical analysis. Cavusgil and Knight (2009) argued that internationalization does not need to be born out of a gradual organisational process of knowledge acquisition.

Scholars examining the internationalization processes of emerging economy firms seek new ways of explaining idiosyncratic trends. Kapur (2009), in a special issue on Chinese and Indian MNEs, argues that Dunning’s influential OLI theory does not fully address internationalization efforts by emerging country MNEs (EMNE) that lack many technology and ownership advantages. Emerging market firms internationalise to gain access to a variety of strategic assets, including brands, technology, new distribution networks and raw materials and resources. Others challenge the view that EMNEs internationalise to acquire capabilities and advantages and that instead they exploit pre-existing capabilities, and use their initial advantages as a ‘springboard’ for internationalization (Luo and Tung, 2007). EMNEs benefit from numerous firm specific advantages such as: i) products more suited to emerging markets such as India’s Tata Motors exporting trucks made for rugged roads to developing countries and Brazil’s Marcopolo exporting high quality buses suited to emerging markets); ii) production and operation excellence through the use of more labor and less capital; iii) privileged access to resources and markets through preferential treatment; iv) advantages stemming from working within a context of challenging conditions such as poor infrastructure, stifling bureaucracy and corruption (Ramamurti, 2008). Their legacy of working under informal institutional environments and the

5 Gul Berna Ozcan --Do not circulate or quote without the permission of the author lack of operational experience in environments with stronger formal institutions create differences for their internationalization efforts (Xu and Hitt, 2012).

This literature tends to rationalize the internationalization process along with an emphasis on the organisational abilities of firms. While the business and economic literature shows that firms get preferential access to a number of value enhancing resources and business opportunities through political connections, internationalisation studies remain mute on such widely studied effects. Scholars have illustrated the positive effects of political ties on businesses performance (Özcan and Gündüz, 2015a), firms’ access to finance (Khwaja and Mian, 2005; Claessens, Feijen and Laeven, 2008) and corporate bailouts (Faccio et al. 2006), government procurement and investment (Dinç and Serdar, 2005; Goldman, Jorg and So., 2013,), privatisation programmes (Özcan and Gündüz, 2015b) and other resources (Goldman, Rocholl and So, 2009). Studies have also provided some insights on welfare effects as reduced economic growth prospects (Jones and Olken, 2005; Claessens et al. 2008), increasing environmental risks (Wang 2015), and welfare transfers from more productive sectors to least productive ones (Amore and Bennedsen, 2013). Volatility and uncertainty in an economy seems to increase when a single leader’s ties grow along with the scale of politically connected firms (see as demonstrated by a number of studies such Fisman, 2001; Jones and Olken, 2005; Johnson and Mitton 2003). Boubakri et al. (2012) show PCF have more volatile earnings and show greater risk-taking in countries where they are rescued in case of turbulence.

Hence, according to the strength of their political exposure, such firms are likely to be susceptible to political interference and also more vulnerable to political power shifts. Characteristics of business and politics ties are shaped through political institutions showing variations between forms of multi-party democratic regimes to the extreme of a single authoritarian leadership (see for example Fisman 2001 on Indonesia and Adly 2009 on Egypt). The findings of Jones and Olken (2005) extend support to leaders’ role in resource allocation and economic growth prospects. This effect is especially strong under autocratic regimes.

This literature deserves attention from IB scholars and internationalisation studies since it offers novel methodologies in identifying political and personal ties. But, PCF studies have some weaknesses as well. They too have an organisational bias and do not capture international expansion as part of the operations of political connections and networked relations of powerful individuals. Non-market actors are not taken into consideration in organisational economics based on transaction cost and agency theory (Boddewyn and Brewer, 1994). PCF studies also do not account the impact of evolving, complex and multi-territorial ties among the global political and business elite from developing as well as mature economies and their interactions. As much as we know from the early revelations, the Panama Papers provide a glimpse of converging interests of global political and economic elites in offshore accounts through de-territorilisation and informalisation of capital to new geographies.

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In the light of this brief theoretical discussion, Kazakhstan presents and interesting case to show the way in which mining assets reached global financial markets. Independent since 1991, the country’s very existence is the product of 19th century Russian colonial expansion and its final engineering by the Soviet Union in the 1920s. The elite networks built into Kazakh political and business system (Cummings, 2005; Junisbai, 2010) has strong influence on corporate behavior with three distinctive features that are also widespread in other post-colonial and Soviet states. These are: i) the legacy of oligarchy; ii) ambiguous firm boundaries; and iii) contested power relations and networks. These three conditions may apply to other geographies where the legitimacy of the state rests on contested but absolute power.

First, the institutional and resource attributes of the firm stem from fundamentally different historical and institutional milieus in the post-Soviet space. The model of the capitalist firm was a transported and implanted concept for the most part in a land that has long been ruled by oligarchies and state monopolies. This is most clearly illustrated in the case of Russia (see Buck, 2003). Central Asia, more starkly, moved from semi-nomadic agrarian and craft traditions to colonial production under Tsarist Russia in the 19th century and later to collectivisation under the Soviets in the 1920s. Although privatisation, new enterprise creation and de-regulation have fostered firm growth in transition to capitalism, the control of the regime’s elite in the ownership structures and allocation regimes of the major economic assets remains strong (Özcan, 2010).

Second, post-Soviet firms lack many fundamental features that are assumed to exist elsewhere. In contrast to assumptions about organisational divisions and boundaries, new capitalist firms constantly negotiate their contested autonomy. Corruption and the influence of oligarchs and the political class over economic activities and key resources make post-Soviet firms establish ambiguous relationships. These are aggravated further by variable property rights regimes and their unstable dependency upon a highly politicized media and financial regimes.

Third, the most critical link among resources, institutions and agency roles is the slippery nature of control and power networks. These are institutionally and spatially shaped. Thus, the post- Soviet firm is the product of fluid and complex polities and competition among controllers. Some studies claim the uniqueness of Russia. McCarty and Puffer (2002), for example, identify those traits of Russian managers that survive from Soviet times, such as a tendency to circumvent laws and directives, low trust in transactions outside personal relationships and the consequent reliance on personal networks to achieve objectives (Krivogorsky, 2000).

3. INTERNATIONALISATION OF ENRCiii

The ENRC is a politically-connected firm (see Faccio et al. 2006 and Özcan and Gündüz, 2015a for definitions) as: i) its owners are closely tied to Kazakh President , ii) 7 Gul Berna Ozcan --Do not circulate or quote without the permission of the author the oligarchs acquired the firm through their political ties, and iii) the Kazakh state retains part ownership in the firm and has board representation. Rooted in privatized state assets in Kazakhstan, and well-connected to the ruling elite, ENRC quickly became a major player in the country’s energy and mining sector (see Table 1). It continued to grow and attract international fame and eventually got listed at the LSE in 2007, joining other Russian and Kazakh firms (see Maps 1 and 2). By 2012, the ENRC was one of the world’s largest mining firms, the source of over 4 percent of Kazakhstan's GDP, its largest electricity provider (accounting for approximately 16.6 % of electricity generated), and the employer of more than 70 thousand people around the world. It was in the spotlight of London’s corporate world with a market capitalisation of roughly $15 billion. ENRC was the 35th largest company listed on the LSE (Standard and Poor’s, ENRC, 2012). The firm’s multi-billion dollar revenues came from ferroalloys and ferrochrome as well as chrome and manganese concentrate (45%, almost $3bn), iron ore (29%, $1.9bn) and from alumina and aluminium (14%, $906m) (ENRC Annual Report, 2010). However, amidst corruption and fraud scandals the firm got delisted from the LSE in 2013.

Our analysis below shows how the firm’s entry and exit was part of the dealings and motivations by a diverse set of actors: This primarily involved the interests of its leading oligarchs and their relations with the establishment figures in the UK as well as in Kazakhstan; the City of London institutions and legal and accounting firms that aided and drew large financial benefits from the process of IPO; leading London-based financiers and business actors who had appetite to unleash enormous assets in mining. i) Oligarchs and their growing network in London: Alexander Machkevitch, Patokh Chodiev and Alijan Ibragimov, under the patronage of Kazakh President Nazarbayev, founded ENRC and have since appeared in the Forbes Magazine list of the 500 richest men in the world. Machkevitch, an academic born in Kyrgyzstan teamed up with the former KGB man, Chodiev, and the Communist Party official, Ibragimov, who rose to power through favorable deals with the Kazakh government. The trio used a web of offshore companies and Swiss bank accounts and, with the support of the Kazakh President Nazarbayev, gained control of the privatized chromium, aluminum, and gas operations in the country in the 1990s. Machkevitch is suspected to be “the money pocket of Nazarbayev”. None of the several fraud charges against them have been fully disclosed and they were not formally charged.

Machkevitch controled 14.59 percent, Chodiev 11.97 percent, and Ibragimov 8.83 percent of ENRC. Kazakhmys had 26 percent and the Kazakh Government Privatisation Committee held 11 percent. Both Choidev and Ibragomov had discretionary shares amounting to a total of 14.59 percent. Thus, the three owners controlled around 45 percent along with the Kazakh government’s 37.65 percent interest (see Table 3 and 4).

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In 2001, when they first reportedly emerged on London’s business scene, rumours suggested that they “owned Kazakhstan” and initially battled with other Soviet billionaires, such as the Reuben brothers, over the assets that made them rich. Already in 2003, despite fraud charges against them, Lord Levy, an envoy from Tony Blair, met Machkevitch in Kazakhstan (Gatton, 2004). In a relatively short span of time Kazakh oligarchs and Nazarbayev’s business minded son-in-law, Timur Kulibayev, developed high profile ties with the UK government and Prince Edward. British press reported these growing ties simplistically as undesirable relations with a distant dictatorial regime. iv

Even after the ENRC disappeared from the limelight of the corporate affairs, the oligarchs and their children remained active in London with diverse business benefits, property investments and a growing art collection. Although Ibragimov seems to be highly disguised, Machkevitch keeps an exuberant profile: he acquired Israeli citizenship and was involved in a range of political campaigns. As a man of the old Soviet KGB network, Chodiev, acquired Belgian citizenship in 1997 without fulfilling the language requirements (Dupont, 2007).

These indicate the resilience of networks built among different interests as reported in 2013 by Simon Goodley and Mark Hollingsworth in The Guardian newspaper:

“Lavish properties in the most exclusive parts of the capital continue to be owned by the businessmen, while among the diverse collection of London names touched by the oligarchs are Miriam Gonzalez, the lawyer and wife of deputy prime minister Nick Clegg; the steel billionaire Lakshmi Mittal; and the British artist Damien Hirst.”v ii) The City institutions, legal and accounting firms: The City of London facilitates the location of firms in their business strategies as it competes against New York and Hong Kong to attract investment in its financial services and stock market. An army of financial advisers, lawyers, public relations experts and many others work for assisting firms’ IPOs. London has an international talent pool. The City offers all forms of advisory services and expertise to firms in need of advisory services. US law firms have been a prominent feature of the London legal sector for many decades. The London Court of International Arbitration (LCIA) is universally recognised as one of the world’s leading arbitral institutions. The regulatory framework in the UK encourages FDI and international business. In 2014, the UK was the fourth-largest recipient of foreign direct investment (FDI) globally, after China, the United States and Indiavi.

However, the London Stock Exchange and the regulator, the UK Listing Authority, are criticized for increasingly ignoring standards of corporate governance in an effort to attract big-money market offerings. The light-touch regulatory approach aimed to enhance London’s position as an international finance centre and pulled investors. As a result, large mining companies from the post-Soviet space and other regions came to London and increased the mining sector’s share of

9 Gul Berna Ozcan --Do not circulate or quote without the permission of the author the FTSE 100 from 3.7 in 2003 to 14 percent in 2011.vii Several analyses suggests that rules were compromised in effort to keep the City of London as global financial hub amid competition from emerging Asian markets (Chazan, 2012; Fortson, 2011a, b; Kleinman, 2011).

Thanks to its ties to British establishment, ENRC had extensive reach to the services that London offered to shake up its corporate image. Its listing, which was co-ordinated by Deutsche Bank, with ABN Amro Rothschild, Credit Suisse and Morgan Stanley as joint book runners, was the second-biggest IPO in London in 2007, after Russian bank VTBviii. also advised ENRC on its primary listing. The company splashed much money around. Following the disputes and allegations facing the firm, the oligarchs spoke about their discontent:

“… the oligarchs are furious at how they believe they have been treated by the City, arguing they have spent millions on lawyers and bankers in order to meet London compliance standards, only for their shares to slump. One close associate says: They've been mugged by the City.”ix iii) Leading London-based financiers and business actors: A growing network of ties among the leading business actors developed an interest in post-Soviet mining. Laksimi Mittal, who supported Tony Blair’s election campaign, reportedly gave $100m to the trio for their help in the purchase of the Karaganda Metallurgical Combinant, the largest Soviet steel plant, also among the largest in the world, in Kazakhstan in 1997. Johannes Sittard was Mittal's number two between 1995-2001. He negotiated Mittal's purchase of the massive Karaganda Metallurgical Combinant steelworks in Kazakhstan for $310m. Sittard told the BBC’s Money Programme that he used the Chodiev group as the go-between with the Kazakh President Nazarbayev, and admitted paying them a huge commission. German born Dr Sittard stated: "We paid a certain commission over a period of time for the service what they have provided on the beginning of the process, because it was very important to get help with the local authorities and the tax issues." x These early ties facilitated access to new resources and capabilities for post-Soviet firms in London. Sittard later became the chief executive of ENRC, polishing its corporate image in London, and served until 2012.

The UK authorities even facilitated this trend by relaxing their own rules – notably on the size of the minimum free float required. Several media reports pointed out how the wealthy financier Nat Rothschild was involved in the listing of mining companies in the UK. As a deal setter of London’s IPOs, Rothschild reportedly promised to “unlock” the value “trapped” in natural resources and was involved in several shaky mining deals replete with corporate governance failures. A mining report at the Financial Times by Chazan (2012) examines corporate governance failures in the Indonesian mining group, Bumi, and Vallar, a cash shell Rothschild established. Rothschild’s links with the aluminium tycoon Oleg Depriska and Lord Mandelson,

10 Gul Berna Ozcan --Do not circulate or quote without the permission of the author the European Commissioner for Trade between 2004 and 2008, have also been reported (O’Murchu and Croft, 2012)xi.

While ENRC’s major mining and production assets remained mostly located in Kazakhstan, its activities spread into Russia, China, Africa and Latin America after its LSE listing (see Table 1; Map 1). The ENRC acquired iron ore in Brazil, copper and cobalt in Zambia, and gained 12.2 percent interest in North Platinum, a South African platinum producer. It also acquired 25 percent of Shubarkol, one of Kazakhstan’s largest thermal coal producers. The company continued to expand in Africa targeting Zambia, the Democratic Republic of Congo, and Mozambique. In some of ENRC’s deals the Kazakh government provided licensing guarantees as it held two seats on the board and acquired between 25-30 percent share in key licenses, such as in the agreement with Democratic Republic of Congo (ENRC, 2010; Standards and Poor’s, ENRC, 2012).

4. THE STRUGGLE FOR CONTROL

The 2010 Annual Report of ENRC portrayed an upbeat global company with an international management team in addition to several . However, ENRC is allegedly engaged in bribery and fraud. These cases include several deals in Kazakhstan, Africa and Australia. ENRC reportedly agreed to pay $1.25bn (£800m) to Canada's First Quantum Minerals to end a long- running dispute over ownership of the Kolwezi project in the Democratic Republic of Congo (Forster, 2011b; Reece, 2012). Lawyers working for the three-man audit committee at ENRC had examined claims that money had been siphoned off from SSGPO, an ENRC offshoot that runs an iron ore business in Kazakhstan. Britain's Serious Fraud Office (SFO) is also reportedly examining over claims of embezzlement (Akin, 2011; Laurence, 2011; Mayne, 2011; Scuffham and Ferreira-Marques, 2011).

The company came to the spotlight when the trio manipulated to sell Shubarkol, a leading Kazakh coal mining operation that they owned to ENRC. Originally they suggested a price at $1.5 billion. Although the shareholders rejected this, ENRC went on and bought a 25 percent stake for $200m in 2009. ENRC announced it would purchase the outstanding 75 percent for $600m. However, this was also rejected at a shareholders' meeting. The oligarchs were to be barred from voting, as they were on both sides of the deal: they controlled Shubarkol and had a dominant stake in ENRC. Nevertheless, securing the deal seemed assured. ENRC issued a statement that it had planned a shareholders' meeting to approve the deal. However, Kazakhmys, declared that it would vote against the agreement. With the oligarchs prevented from voting, that meant the takeover was almost certain to fail. Kazakhmys with its 26 percent stake and has long been looking to extract more value from its equity investment (Laurence, 2011).

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Corporate control was contested between minority shareholders and the Kazakh interests as well as between the trio and the Kazkymys. In 2011, there emerged a severe corporate governance problem for ENRC with the departure of several leading independent board directors. Reports pointed out the undiminished influence of the three founding members in the governance of the company. The same year the trio orchestrated the ouster of the ENRC’s Sir Richard Sykes, the senior independent director (and a former chairman of GlaxoSmithKline), and Ken Olisa, another non-executive director. Departing non-executive director Sykes labelled ENRC “more Soviet than City” and stated that the ENRC was “run by oligarchs” (MacDonald, 2010; Kleinman, 2011). Machkevitch had been seen as a possible contender for the chairman's role, replacing independent incumbent Johannes Sittard, who had been expected to step down. However, this was later withdrawn, due to various objections about his credentials. A seasoned banker and a former London-based hedge fund manager, Mehmet Dalman, was appointed as the new chief executive while Mounissa Chodieva, the daughter of Patokh Chodiev, was given the task of public relations (Reece, 2012). Yet, the corporate performance continued to lag behind (see Table 7).

There have been occasional rumors of a potential takeover of ENRC by Kazakhmys for several years. Vladimir Kim, a Kazakh of Korean descent, who joined the company in the 1990s and eventually raised his stake in Kazakhmys to about 45 percent, is an ambitious player. The Kazakh government currently owned 26 percent of Kazakhmys and the President Nazarbayev has significant undisclosed influence over both Kazakhmys and ENRC. All major business deals go through the President and his close allies, in particular his son-in-law Timur Kulibayev, who developed business and personal ties in London (Mayne, 2011). While getting a foot in the west through stock market listings, the Kazakh government was also keen to build closer ties with Russian mining companies. Polyus Gold, a Russian gold producer, is likely to purchase a 50.1 percent stake in Kazakhgold, the largest gold mining company in Kazakhstan. The company operated three principal mines and was developing eight other properties acquired in 2005. In December 2008, a Russian aluminum giant Rusal agreed to sell a 50 percent stake in a joint venture with Samruk-Energo, a subsidiary of the Kazakhstan state-controlled national welfare fund Samruk-Kazyna ( Capital, 2009).

The international expansion of ENRC was in risky regions and done with shaky deals. The Kazakh government had a strong position on the board along with several key seats (see Table 5). Kazakhmys has been a rival and looking for an opportune time to cash in its assets, reportedly considering its ENRC asset sale, valued at $3.7bn. It was interested in purchasing other assets, including mergers and acquisitions in Asia, in particular with China (MacDonald, 2012). There were numerous contentious issues such as a recent deal Nazarbayev agreed on Chinese financial aid to ENRC (Ferreira-Marques, 2011). Moreover, the controlling stake rested with the three founders who are no longer just some Soviet men. In response of the exit of the ENRC from LSE and continuing investigations: 12 Gul Berna Ozcan --Do not circulate or quote without the permission of the author

“Here is my official statement, the Eurasian Group is not being sold to anyone and it is not going anywhere. We left the stock exchange because we wanted to be a private company. We believe that management of a privately-held company is more efficient.,”xii

Alexander Mashkevich said during a visit to Kazakhstan's electrolytic plant in Pavlodar.

ENRC did poorly for investors despite its lavish expenses in London and investments around the world. At the time of its exit from LSE in 2013, The Financial Times reported that ENRC’s return to shareholders had been below the industry average since 2007 (see Table 5). This meant that anyone who invested £100 at the time of the listing, and having reinvested all subsequent dividends in shares, would receive about £45 back. The miner was among the worst-performing 10 per cent of companies listed in the FTSE All-Share index, and had also one of the worst returns among any mining group that was part of the FTSE 100 index of leading shares during the period, surpassed by its shareholder Kazakhmys and Lonmin, the platinum producer caught up in a police shooting of 34 striking South African miners in 2015.xiii As a result pension funds and other investors were badly affected. John Pelender wrote in the Financial Times when the first boardroom struggles and allegations erupted in 2011xiv:

“… that so many institutional investors are exposed willy nilly to these foreign mining companies through indexed funds. They can see the conflicts of interest, but they cannot sell. And they know their votes cannot influence anything.”

DISCUSSION AND CONCLUSIONS

We offered an alternative narrative of the internationalisation of ENRC and pointed out how personal and political ties played pivotal roles in new territorialisation of the firm activity. Studies on emerging market multinationals have frequently pointed out that EMNEs have a legacy of working under informal institutional environments and the lack of operational experience in environments with stronger formal institutions (Xu and Hitt, 2012). Others suggested that Dunning’s influential OLI theory does not fully address internationalisation efforts by EMNEs that lack many technology and ownership advantages (2009). However, these studies have not explored the influence of individual ties and political connections over the internationalisation process despite the fact that a number of scholars have presented evidence on the significance of informal institutions and personal ties (see for example Filatotchev, et al. 1999abc; Michailova and Worm, 2003; McCarthy and Puffer, 2002). Moreover, EMNE’s do not need to be taken in quarantine. Political ties and elite networks have relevance for all firms. Yet, politics occasionally emerge as part of managerial knowledge and learning in IB literature, hence the term of “political capital”. As far as we have seen so far, this is a superficial approach used

13 Gul Berna Ozcan --Do not circulate or quote without the permission of the author for quantifying numbers and fails to explain the significance and complexity of political and personal control exerted over the firm. The evidence presented here shows the paramount dominance of elite ties and political connections in multiple geographies and their influence on how ENRC was established in London’s corporate scene.

Oligarchy, ambiguous firm boundaries and contested power relations lead to multiple economies for the firm. A simple motivational analysis is not possible but the monetary interests seem to be the leading incentive. The internationalisation process led by oligarchs’ interests but pull factors from London’s corporate stakeholders and the LSE are also part of the process. These high-level connections opened possibilities and reduced liability of foreignness (Ellis, 2000; Elango and Pattnaik, 2007). Contrary to narratives used in the media and business reporting, which tend to externalize corrupt firms as products of distant dictatorial or authoritarian regimes, the advanced institutional hubris of London and its leading actors have been part of the developments. Such networks are multi-locational but driven by a powerful central node, London. This finding has implications on the spatial nature of corporate activity and political ties (Beugelsdijk, McCann, and Mudambi, 2010; Birkenshaw, Brannen, and Tung, 2011). London’s position as a node of corporate positioning and elite networks points out not only multiple spatial embeddedness of corporate activity but also the spatial hierarchy of power and decision-making. We tentatively suggest that such conditions would apply to other firms in energy and mining sector and their IPO in London.

Another dimension that emerges from this analysis is how certain industry conditions are more needy and intricately associated with political patronage and regulatory manoeuvring due to their size, lucrative proceeds and immobile assets. Mining and energy firms seem to be deeply embedded in these structures and show high propensity of political involvement as they control vast revenues that national economies rely on. The ownership of such industries and their internationalisation processes involve a great deal of high-level political capital and geo-political considerations. This is clearly the case for ENRC as seen in the relations between Tony Blair and the Kazakh government as well as other political actors. This involvement facilitates operations but also open multiple channels of political interference in the operations of regulatory institutions and firms. Such ties often carry uncertainty and legitimacy risks, especially when leading powerful actors leave office or clash with their former allies (Özcan and Gündüz, 2015b).

Finally, the ENRC case points out how the listing of a politically connected firm generated individual winners at the expense of the public interest and the reputation and the integrity of regulatory frameworks. ENRC’s poor return hurt pension funds and other institutional investors. Its corporate governance breaches damaged the image of City institutions. At its home market, Kazakhstan, ENRC’s investments in social and environmental sustainably have been negligible, poor work conditions and poverty remained rife. Yet, the firm’s IPO process unleashed large 14 Gul Berna Ozcan --Do not circulate or quote without the permission of the author amounts of money spent on the City firms and their employees (lawyers, accountants, financial advisors etc.), political actors, real-estate investments, and luxury consumption. Despite the on- going corruption and fraud investigation, the oligarchs and their children retained the ownership of their private investments and continued to be based in London with lavish life styles. This hugely polarising effect has local as well as global implications on social, environmental and political conditions.

In the next stage this paper will further develop and refine the role of personal networks and their geography in PCF and IB scholarship. Methodologies and their theoretical underpinning deserve articulation and discussion.

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Tables and Charts Map 1-ENRC’s Global Reach

Source: ENRC, Annual Report, 2010

Map 2- ENRC’s Kazakhstan Operations

Source: ENRC, Annual Report, 2010

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Table 1- The time line of the ENRC’s development

• The ENRC was delisted from all stock exchanges, the Kazakhstan Stock Exchange (KASE) and the London Stock Exchange (LSE). 2013 • The Serious Fraud Office has launched a criminal investigation into the Eurasian Natural Resources Corporation (ENRC) amid allegations of fraud, bribery and corruptionxv. • Kazakhmys loses £1.5 billion as its shares fall by 9% • Corruption allegations first erupted when it emerged that ENRC had bought mining assets in the Democratic Republic of Congo, First Quantum. The concessions had been 2012 sold, allegedly for a lowball price, to the Israeli mining billionaire Dan Gertler. Gertler then sold the assets on to ENRC for an allegedly vast profitxvi. • Boardroom power struggles; oligarchs continue to exert control over the firm. 2011 • Declining performance • Acquires the outstanding 50% interest in Bahia Minerals BV and secures an option to purchase 100% of the outstanding shares of Block V Limited and Caera Minerals Limited, which together own Greystone Mineracao do Brasil Limitada (‘Greystone’). • Acquires a 50.5% of Camrose Resources Limited ('Camrose'). 2010 • Purchase of a 12.2% (currently 14.35%) interest in Northam Platinum Limited, a major platinum producer in South Africa. • Acquires a 90% interest in Chambishi Metals PLC, a smelting facility in Zambia, together with a 100% interest in Comit Resources FZE, a Dubai-based marketing and sales company • Acquires the Central African Mining and Exploration Company (‘CAMEC’), an Africa focused emerging mining company 2009 • Acquires 25% interest in Shubarkol Komir JSC (‘Shubarkol’), a major thermal coal producer in Kazakhstan • Acquires 50% of Bahia Minerals BV (commonly referred to as Bahia Mineracao Limitada or 'BML'), a Brazilian company • Acquires 50% stake in Xinjiang Tuoli Taihang Ferro-Alloy Co. LTD ('Tuoli'), one of 2008 China's largest • Acquires Serov Group, a ferrochrome producer in eastern Russia, and certain related entities. • ENRC becomes a member of the FTSE 100 on the London Stock Exchange. ENRC floats on the London Stock Exchange, with a market capitalisation on 2007 • Admission of approximately £6.8 billion. 2006 • Assets are reorganised into a single group of companies. • Acquires Zhairem GOK, adding to its manganese mining operations. The Ferroalloys 2004 Division also includes the Aktobe and Aksu ferroalloy plants and the Akturbo gas power station. The Logistics Division is established, incorporating a number of freight forwarding 1999 • company, a railway operating company and railway construction and repair businesses. • The Iron Ore Division is established through the acquisition by the Founders of 1996 SSGPO ('Sokolov-Sarbai Mining Production Association') and includes primary mining operations that produce iron ore, ancillary mining operations that produce 22 Gul Berna Ozcan --Do not circulate or quote without the permission of the author

limestone, dolomite and bentonite-clay, an iron ore processing plant and a power plant. • The Alumina and Aluminium Division is established through the merger of several mining and energy-producing enterprises and an alumina refinery, and operated via Aluminium of Kazakhstan. • The Energy Division is established through the acquisitions of Eurasian Energy Corporation ('EEC'), and the open pit coal mine and maintenance business. • The Ferroalloys Division is established as Kazchrome is formed as a joint stock company in accordance with a decree of the and then 1995 acquired by the Founders. Its mining operations initially comprised of Kazchrome’s Donskoy GOK and Kazmarganets Assets are acquired through the participation of the Founders in the privatisation 1994-96 • process in Kazakhstan. Source: Complied by the author from the ENRC Annual Report, 2010 and other sources as indicated.

Table 2- The major shareholders of the ENRC

Source: ENRC, Annual Report, 2012

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Table 3- Directors’ interests in ordinary shares at ENRC

Source: ENRC, Annual Report, 2012

Table 4- The fall of ENRC’s shares (2010-2013)

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Table 5- Industry comparisons of the shareholder return (2012-2013)

.

Source: “ENRC should have set off alarm bells.” by James Wilson, Jonathan Guthrie and David Oakley, Financial Times, 22 Nov. 2013. http://www.ft.com/cms/s/0/1995e548-5368-11e3-b425-00144feabdc0.html#axzz4BIQvKqPP

i See reporting by Luke Harding, “Mega-rich homes tour puts spotlight on London's oligarchs” The Guardian, 4 Feb. 2016. ii http://topforeignstocks.com/foreign-adrs-list/the-full-list-of-russian-adrs-2/ iii This section is based on an analysis of media reporting accessed via the Factiva search engine (2012). Some of the leading sources were listed in the references. iv Numerous media reporting indicates these intricate relations: http://www.independent.co.uk/news/uk/buckingham- palace-prince-andrew-fixer-kazakhstan-a7041186.html http://www.dailymail.co.uk/femail/article-1255972/Goga-Ashkenazi-best-friends-Prince-Andrew-mistress-28m- mansion--badly-peasant-girl-Kazakhstan.html https://www.theguardian.com/uk/2010/nov/29/prince-andrew-kazakh-billionaire v Curious tale of the central Asian oligarchs and the City of London.” by Simon Goodley and Mark Hollingsworth, The Guardian, 22 Nov. 2013. https://www.theguardian.com/business/2013/nov/22/mining-enrc-leaves-london-stock- exchange vi http://www.mollercentre.co.uk/insights/colonising-london/ vii https://next.ft.com/content/37325f3e-9e5f-11e0-8e61-00144feabdc0 viii http://www.ft.com/cms/s/0/7d48c122-a442-11dc-a28d-0000779fd2ac.html#axzz4BP30PCJj ix “Curious tale of the central Asian oligarchs and the City of London.” by Simon Goodley and Mark Hollingsworth, The Guardian, 22 Nov. 2013. https://www.theguardian.com/business/2013/nov/22/mining-enrc-leaves-london-stock- 25 Gul Berna Ozcan --Do not circulate or quote without the permission of the author

exchange x On 24 July 2002, BBC reported Mittal’s donation to the Labour party and relations with Blair http://news.bbc.co.uk/1/hi/business/2146757.stm (accessed on 6 March 2012) xi See also, http://www.telegraph.co.uk/news/politics/labour/3258902/Peter-Mandelson-and-Oleg-Deripaska-what- we-know-so-far.html xii https://en.tengrinews.kz/companies/ENRC-explains-its-delisting-from-LSE-25429/ xiii http://www.ft.com/cms/s/331d51e6-af67-11dc-880f- 0000779fd2ac,Authorised=false.html?siteedition=uk&_i_location=http%3A%2F%2Fwww.ft.com%2Fcms%2Fs%2 F0%2F331d51e6-af67-11dc-880f- 0000779fd2ac.html%3Fsiteedition%3Duk&_i_referer=&classification=conditional_standard&iab=barrier- app#axzz4BP30PCJj xiv https://next.ft.com/content/37325f3e-9e5f-11e0-8e61-00144feabdc0 xv See the reporting by Louise Armitstead. http://www.telegraph.co.uk/finance/newsbysector/industry/mining/10017960/SFO-launches-criminal-investigation- into-ENRC.html xvi See https://www.theguardian.com/business/2012/jun/12/enrc-mining-congo-dan-gertler http://www.independent.co.uk/news/business/analysis-and-features/exclusive-enrc-turns-up-heat-in-media-leaks- claim-against-city-grandee-leaking-9213276.html

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