A clash of titans in Indonesia provides a poignant illustration of the potential perils of doing business in emerging markets.
A scion of one of the wealthiest and most powerful families in Europe, Nat Rothschild, is in dispute with Indonesia’s influential Bakrie family. The dispute arises from a joint mining venture in which the Bakries injected lucrative Indonesian coal assets into Rothschild’s financing shell in London, forming Bumi PLC (“Earth” in Indonesian).
The venture went sour. Last month, Rothschild resigned publicly, citing “potential financial and other irregularities” and “other facts not yet in the public domain”, as well as unequal stock reimbursement. Rothschild cites as particularly troubling a $500 million advance to a Bumi board member, and Bumi’s subsequent refusal to recall those funds amid financing difficulties. The Wall Street Journal published Rothschild’s resignation letter here.
Bumi hired a British law firm to conduct an internal investigation into any irregularities. Rothschild and the Bakries have submitted dueling proposals on how to dissolve the joint venture, with the Bakries focusing on reclaiming ownership of coal assets they contributed to the company.
Rothschild said in his board resignation letter that “the vast majority of Indonesian businesspeople are shocked” by the impression the affair would give to potential foreign investors, calling it a “small but high-profile impediment” to the investment Indonesia needs to sustain economic growth.
He’s now reportedly seeking help from potential partners to stop the Bakries from reclaiming certain coal assets, including Prabowo Subianto, a presidential candidate and son-in-law of Indonesia’s long-time ruler, Suharto, who died in 2008.
If Rothschild’s allegations are borne out, the affair will illustrate the danger foreign investors face when they enter emerging markets where transparency does not yet meet international standards. At the same time, Rothschild’s continued pursuit of ownership of Indonesian assets demonstrates that the prize in these resource-rich countries, where uncluttered markets and rising living standards offer tremendous growth potential, may be worth the risk.
Mark Friedman is a 2011 NYU Law graduate and a criminal defense attorney in New York City. He is seeking to transition into FCPA compliance. He can be contacted here.