Rethinking multinational corporate governance in extractive industries: the Caspian Development Project and the promise of cooperative governance.

• Author: Nick, Matthew

Abstract

The oil and natural gas reserves under the Caspian Sea have sparked the interest of international investors and oil firms. The political, economic, and social turmoil in the five countries bordering the Caspian Sea, however, pose significant challenges for effective regulation of multinational interaction with the five Caspian states. A joint-effort approach to regulation involving the World Bank, multinational enterprises, and the individual Caspian states' governments poses the most functional and efficient means of instituting international oversight. Such a tripartite structure connects the fortunes of all the parties and provides safeguards against default by any single entity. A mutually beneficial relationship may be established whereby Caspian states benefit from receiving loans at below-market interest rates and establishing sound relationships with multinational enterprises and developed economies. This tripartite structure promotes accelerating the sustained development of the Caspian states while introducing international norms of corporate behavior. This Note addresses the benefits, challenges, and potential that this joint-effort approach to regulation of multinational enterprises holds for the Caspian region.

TABLE OF CONTENTS I. INTRODUCTION II. CURRENT POLITICAL AND ECONOMIC CONDITIONS IN THE CASPIAN REGION A. Political and Economic Structures 1. Russia 2. Kazakhstan 3. Azerbaijan 4. Turkmenistan 5. Iran III. THE CHALLENGES OF AND SUGGESTED REFORMS FOR EXISTING POLITICAL AND ECONOMIC CONDITIONS A. Internal Challenges and Suggested Reforms 1. Domestic Political Stabilization 2. Human Rights 3. Corruption 4. Economic Distribution B. Extraterritorial Challenges and Suggested Reforms IV. THE LEGAL STATUS OF THE TERRITORIAL BOUNDARIES OF THE CASPIAN SEA A. Treatment of Oil Rights During the Soviet Period B. Current Treatment: 1991-Present C. Future Direction: Ongoing Conflicts and Anticipated Resolutions V. INTERNATIONAL OVERSIGHT OF MULTINATIONAL CORPORATE INVOLVEMENT IN THE CASPIAN DEVELOPMENT PROJECT A. Sovereignty Versus Stability: Mutually Exclusive Options? B. Multinational Enterprises 1. Current MNE Involvement in the Caspian Development Project 2. Concerns a. Fair Price b. Fair Dealing VI. TRADITIONAL WORLD BANK FINANCING STRUCTURE 1. Efficacy of the World Bank's Traditional Financing Structure VII. RETHINKING THE FINANCING STRUCTURE: MULTILATERAL EFFORTS FOR DEVELOPMENT OF EXTRACTIVE RESOURCES A. The Cooperative Approach: Wishful Thinking.. B. The Joint-Effort Approach: Pragmatic Principles 1. Challenges and Impediments 2. A Functional Alternative VIII. CONCLUSION I. INTRODUCTION

Perhaps no issue in international business excites the passions of multinational enterprises, environmentalists, and human rights activists as much as oil and gas exploration and development. The five Eurasian countries bordering the Caspian Sea (Russia, Kazakhstan, Azerbaijan, Turkmenistan, and Iran) lie at the center of a global energy focus and are attracting interest from multinational oil and gas firms. (1) Long isolated from first-world economies during the Soviet era, the Caspian states, except Iran, now stand on the verge of a major energy development that promises to bring widespread economic and derivative social benefits to their economies and societies from these oil and natural gas reserves, thanks to the Caspian Development Project (CDP). (2)

There is currently no single unified effort among the five Caspian states to develop the oil and natural gas resources in the Caspian seabed. (3) Rather, each state is considering separately developing these resources, to varying degrees, with domestic entities, multinational enterprises, and foreign governments. The term CDP, therefore, is employed in this Note to describe the overall development efforts of the five Caspian states relating to oil and natural gas, and it should not be confused with an overarching, unified development project.

Experts predict that by 2010, the countries of the Caspian Sea region will produce between three and 4.7 million barrels of oil a day, a total exceeding the annual production of South America's largest oil producer, Venezuela. (4) Estimates for natural gas output are even more optimistic, and many experts predict that the region has the potential to produce quantities of natural gas comparable to that of Saudi Arabia. (5) Given the vastly lucrative potential of the Caspian region in these natural resources, it is easy to see why multinational enterprises (MNEs) have been pressing the various Caspian governments for involvement in developing these assets.

MNE investment in the Caspian region's oil and gas reserves poses mutually beneficial prospects for both multinational businesses and local governments alike by solidifying the economic stability in this region. But, MNE involvement also accentuates the problematic gap between profits and economic principles that, to a large degree, characterizes relations between private sector business interests and national governments in the former Soviet states. Specifically, the Caspian states, to varying degrees, have struggled with the implementation of democratic reforms, such as income distribution, human rights laws, and environmental protection. MNEs' combined motivations for quickly maximizing profits and for a quick infusion of capital, jobs, and corporate connections to first-world economies thus create many incentives for shortcuts to be taken in establishing development projects.

Given these pressures, what oversight, if any, is needed to ensure that MNEs appropriately balance their own profit realization with the sustained development of the host countries? This Note suggests that internal oversight by MNEs alone is insufficient to properly safeguard the interests of the citizens of the Caspian states. Similarly, adopting a solely laissez faire attitude toward MNEs and the respective Caspian governments in joint development projects in extractive industries leaves open too great a possibility for corruption and exploitation of the general populations by political elites. Since the Caspian states lack fully democratic legal and social structures, MNEs should be required not only to coordinate their development activities with the Caspian governments, but also to conform with some form of international regulation over MNE behavior. The nonrenewable nature of oil and gas reserves makes international oversight imperative to ensure that the long-term well-being of the various states' citizens and their environmental surroundings are not compromised by MNEs' and current Caspian governments' desires for quick profits.

The success of multinational investment in the oil and gas sectors of the Caspian region depends upon the fulfillment of four criteria. First, entire fairness must be enforced in both the substantive and procedural dimensions of the awarding and structuring of development contracts. Second, guidelines must be established to ensure that funds derived from the CDP are properly distributed among the general populations to further their welfare. Third, labor standards should be adopted that impose requirements upon MNEs to employ as many local workers as possible and to ensure that working conditions meet the standards imposed upon similar projects in first-world economies. Finally, environmental accountability must jointly be borne by MNEs and host nations to ensure that the long-term environmental integrity of this area is not compromised during the CDP. Thus, this Note purports that international oversight is needed to adequately promote sustained socioeconomic development.

A new, non-traditional, and likely controversial form of international oversight would best promote the four goals above. This Note advocates that the World Bank Group (hereinafter, Bank) is the appropriate institution to conduct this oversight. The Bank's current financing scheme, however, must be rethought if it is to hold the Caspian states accountable for their loans. (6) Rather than granting loans directly to Caspian states, the Bank should work in tandem with MNEs when structuring loans for the CDP. Under this revised system, the Bank would grant loans to MNEs instead of the Caspian states. There are a number of benefits to this revised financing structure. First, the net amount of capital available for financing various CDP initiatives would approximate the amount that would be available under traditional Bank financing schemes. Second, the Bank should have recourse against loan defaults by pursuing legal actions against defaulting MNEs in their respective countries of incorporation. Third, in the case of the CDP, which centers upon the extraction and development of lucrative natural resources, MNEs should be permitted to seek collateral from the respective Caspian states in the form of ownership of certain "fields" or development blocks. Under this scheme, the Caspian states would still be responsible for paying to the MNEs the amount of the loan that the MNEs received from the Bank. Coupling the interests of the MNEs and host countries in this manner would provide a powerful incentive for each side both to honor its obligations to the other and to pursue development with the utmost zeal. Most important, however, is that this structure would allow the Bank to condition loans to the MNEs upon fulfillment of the four essential development criteria mentioned above. Under this structure, the twin goals of multinational corporate governance and the sustained development of the Caspian states will be promoted.

Part II of this Note explores the current economic and political conditions in the Caspian region. Part III examines the challenges and suggested reforms for existing political and economic conditions in these states. Part IV addresses the issue of the legal status of territorial boundaries of the Caspian Sea. Part V proposes the importance of international...