Resource nationalism surges in 2020, Covid-19 worsens outlook

This insight is part of our Political Risk Outlook 2021, which explores five key themes we’re tracking for our clients this year. You can find the other themes at our #PRO21 hub, as well as related webinars.

34 countries

have witnessed a significant increase in risk in our Resource Nationalism Index

In the last year, 34 countries have witnessed a significant increase in risk on our Resource Nationalism Index (RNI). Reasons for the recent surge vary but one thing is clear – the economic impact of Covid-19 has aggravated an already growing tendency for government interventionism in the natural resource sector. With 18 of these countries dependent on the minerals and hydrocarbons they export, we expect the threat to expand over the next two years as their governments try to claw back the financial losses of the pandemic. The mining industry will be lined up to take the brunt of new measures.

Signs of another mining supercycle will only intensify the situation. As Figure 1 shows, mining jurisdictions in Africa and Latin America, including some of the top producers of copper and iron ore, dominate the list of countries with the highest resource nationalism risks.

Interventionism becoming more subtle, but equally disruptive

The usual suspects shown in Figure 1 are of no surprise. These are countries most likely to resort to the bluntest instruments in the resource nationalism toolbox, such as direct expropriations with no, or inadequate, compensation.

As Figure 2 shows, resource nationalism is evolving differently in many of the African and Latin American countries that saw the most acute increases in risk on the index. Here, we are seeing state interventionism, creeping expropriation and indigenisation emerge as the key mechanisms. The countries to watch closest are the mining jurisdictions characterised by both a painful Covid-related economic contraction and a rise in these less explicit forms of resource nationalism. The governments in these countries are becoming more willing to intervene in the economy, use indirect expropriation, or demand increases in local content requirements – opening the door to a more sophisticated, but still disruptive, resource nationalism path.

The countries undergoing some of the most pronounced increases in risk in the ‘less blunt’ indicators captured by the RNI are where risks will intensify most in the post-pandemic drive to plug fiscal gaps. In 2020, these included major mineral producers such as Mexico (ranked 14^th highest risk globally for resource nationalism), Liberia (41^st), Colombia (44^th), Mauritania (74^th), Mali (85^th), Chile (97^th), and Canada (140^th). But going back to the tail end of 2019, we also witnessed this happen in Brazil (53^th) and Peru (117^th).

In Latin America, greater pushes towards resource nationalism generally hinge on two factors. In Mexico and Argentina, for instance, ideology is the main driving force, while in Colombia and Chile pressure comes from communities – both those hosting mining projects and civil society more generally. In Africa, motivations are much more diverse. For example, the interventionism seen in Liberia and Mauritania is driven by structural governance shortcomings, not nationalist sentiment. In Mali, the political concerns of the transitional government are the issue, while in Guinea it is the need to maximise revenue from bauxite – both countries are looking to review existing contracts.

When social pressure is the main impetus behind resource nationalism, policy paths tend to be more nuanced – albeit not less disruptive for miners. Indeed, the upcoming constitutional reform in Chile will debate the extension of formal political roles to indigenous communities and also water rights – including the potential ban of mining in glacial and periglacial areas and the state’s ownership of water desalinated by private mining companies. Property and concession rights remain a far-off possibility, but changes to water rights are likely to increase the regulatory burden and operating costs over the coming decade.

Miners will need to stay on top of a much more nuanced ESG landscape to keep ahead of the resource nationalism curve

Miners to pay for populist response to new social demands

The economic effects of Covid alone cannot explain last year’s hike in resource nationalism, but it did undoubtedly exacerbate a pre-existing trend we’ve seen in the index since 2017. It is over the next two years that its impact will bubble up sharply though. Price cycles also remain an important factor, but miners will need to stay on top of a much more nuanced ESG (environmental, social and governance) landscape to keep ahead of the resource nationalism curve. Issues around income distribution, poverty, access to education and healthcare – to name but a few – can trigger socio-political processes that demand more from the state.

In rentier mining economies, turning to the industry to ask for (or take) more has become almost a knee-jerk reaction. But in more diversified, emerging markets, the demands will almost always be more subtle and come in different forms. Operators must prepare for the latter to overtake classic methods of resource nationalism as the more common type of state interventionism over the coming decade.

By detecting the signals early on, miners can adapt investment strategies and exploration portfolios...

Calls for greater environmental, social and economic protection will not only come from communities hosting projects, but also from the country at large and from international stakeholders – including investors and other countries.

Regardless of Covid-19, the trend of rising resource nationalism would have continued deepening in 2021 anyway, particularly in jurisdictions where interventionism delivers a political dividend. By detecting the signals early on, miners can adapt investment strategies and exploration portfolios to mitigate future exposure to countries where resource nationalism trends are growing fastest. They will also be able to prioritise investment commitments in jurisdictions where the industry can be part of the solution, working with local stakeholders to find a balance between community needs and industry profitability to secure long-term supply.