THE MULTINATIONALS GET SMARTER ABOUT POLITICAL RISKS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP83M00914R002200160056-4
• Release Decision: RIFPUB
• Original Classification: K
• Document Page Count: 7
• Document Creation Date: December 20, 2016
• Document Release Date: March 15, 2007
• Sequence Number: 56
• Publication Date: March 24, 1980
• Content Type: OPEN SOURCE

by LOUIS KRAAR
Approved For Release 2007/03115: CIA-RDP83M00914R0022Oo1- eO564
Over the past decade, American corpo-
rations have been discovering one suppos-
edly rich foreign market after another
-only to have their hopes dashed or
diminished by unexpected political chang-
es or upheavals. But it remained for the rev-
olutic,n in Iran, which exposed U.S.
companies to potential losses totaling $1
billion, to drive home the lesson in global
survival. Now even the most seasoned
multinationals are looking for better
means to assess-and manage-their po-
litical risks. As Stephen Blank, a political
scientist with the Conference Board (the
leading nonprofit research group for busi-
ness), says: "Many chief executives got
clobbered by winging into Iran without ad-
equately understanding the country, and
they've gone into China the same way.
Now a lot of them want to improve their
grasp of the world."
Like the U.S. government, the nation's
businessmen confront greater turbulence
abroad and wield less power than in the
past. The once-favored stratagems to shape
or even topple a foreign regime-in the
brash tradition of United Fruit in Central
America-are no longer acceptable corpo-
rate practices. In lands where payoffs to
gain leverage or win contracts are custom-
ary, Americans are bound-or at least in-
hibited-by the U.S. Foreign Corrupt
Practices Act. As one executive remarks,
"The time has passed when we could
buy or rent governments."
 Approved For Release 2007/03/15: CIA-RDP83M00914R002200160056-4
After the Iranian bloodbath and other foreign surprises, U.S. corporations are
seeking sharp professional intelligence to warn and guide them.
Instead, the top executives of major cor-
porations are gradually acknowledging
that they need both new skills and fresh in-
sights to thrive overseas. The enjoyment
of cordial, personal relations with a head
of state is no longer, if it ever was, a re-
liable way. to appraise the prospects of his
nation's market. Nor does the penchant of
many c.e.o.'s for flying off to intriguing
places, such as Islamabad or Peking, as-
sure considered judgments back at their
headquarters. Just as senior officers have
long consulted their specialists on market-
ing and finance and law, they now sense
the need for staff expertise toddirect a more
systematic approach to international af-
fairs. Confronting the world these days
cannot be a do-it-yourself job.
Beyond economics
This new political-risk, game requires
anticipating the currents of change abroad,
then plotting how to move with them. To
do this' demands going beyond economic
forecasting to gauge other forces, from re-
ligious movements to nationalistic pas-
sions. If also requires U.S. executives, who
have learned the hard way, to refrain from
plunging into foreign ventures merely on
the strength of Washington's judgments.
The potential for corporate disaster of-
ten lurks in seemingly stable places. A few
years ago Aris Gloves, a division of Con-
solidated Foods, wanted to spread its risks
beyond the Philippines, its only manufac-
turing base. In 1976, the company picked
a spot that its vice president, James Mc-
Corry, says "everyone, including the U.S.
embassy, -described as a happy, sleepy
country." This carelessly promised land
was El Salvador. Within some two years,
political turmoil hit the Aris plant, with
leftist dissidents holding its president and
about 120 local employees as hostages for
nine days-until the company agreed to
wage increases that it couldn't afford. Six
months ago, Aris fled from El Salvador.
Around the globe, the computing of fu-
ture risks remains a tauntingly imprecise
science-as the Philippines themselves.il-
lustrate. Thus one major manufacturer is
Research associate: Grant F. Winthrop
nervously concerned that the martial-law
regime of President Ferdinand Marcos has
made no visible arrangements for succes-
sion after his lifetime. On the other hand,
American Can still finds the Philippines an
attractive place to invest. Here as else-
where, the right course for a company may
depend heavily on its particular kind of
business. In any nation, the gamut of risks
runs from revolution and expropriation to
the more common, but often crucial, prob-
lems of government regulation.
To avoid costly surprises, many major
companies are trying a range of new safe-
guards. Turning to another breed of spe-
cial consultants, Bechtel Corp., a loser in
Iran, checks out the political climates of its
Middle East markets with Richard Helms,
a former director of the Central Intelligence
Agency and ambassador to Iran; his one-
man firm is called Safeer, the Persian word
for ambassador. Varying the formula for
sophisticated counsel, such major manu-
facturers as General Motors and Caterpillar
have formed advisory councils of promi-
nent foreign businessmen and retired gov-
ernment officials. Henry Kissinger serves
as a paid adviser to Merck; Goldman,
Sachs; and Chase Manhattan Bank, where
he sits on the risk committee for foreign
loans. All such moves make c.e.o.'s feel and
look better-without relieving them of the .
ultimate responsibility for risk decisions.
A more direct damage-control device is
buying political-risk insurance, a growth
industry lately. The U.S. government's
Overseas Private Investment Corporation
(OPIC) has long insured investors in
friendly underdeveloped countries against
such perils as war damage and inconvert-
ibility of earnings. A few private under-
writers will fill other gaps for premiums
that start at 0.1 percent for the safest places
and run up to 6 percent or more for the
most dangerous areas. But.no policy can
cover a company's entire foreign exposure.
Some corporations have therefore set up,;
private intelligence systems: Far from us-
ing shadowy operatives with networks of
secret informers, they employ political an-
alysts who work openly. Samuel De Palma,
I.T.T.'s analyst and a former assistant sec-
retary of State, says: "There's plenty of in-
formation available, but the problem is
trying to find out what the hell it could por-
tend for the company." Since executives
tend to talk mostly to like-minded asso-
ciates, De Palma strives to introduce them
to a wider range of foreign views, "even if
they're not from the sort of people we
would normally invite to dinner."
The experience of Gulf Oil has made it
especially sensitive to political assess-
ments, since it was hit harder than any
other oil major by the wave of national-
ization that swept the producing countries
in 1975. Already Gulf's four-man interna-
tional-studies unit has demonstrated its
perceptiveness. Richard Macken, its Mid-
dle East specialist, warned of the Shah's
probable fall four months in advance and
well before it was widely anticipated. Hav-
ing calculated what pressures could under-
mine the ruler, Macken saw the Muslim
demonstrations pushing Iran to a point of
no return. Accordingly, the company be-
gan early its planning to cope with the sub-
sequent loss of Iranian oil, then amounting
to 10 percent of its crude supplies.
Shortly after the Soviet invasion of Af-
ghanistan, the same analyst discounted the
immediate prospect of a broader plot to
seize Pakistan, where Gulf has a risky ex-
ploration venture. Jerry McAfee, Gulf's
chairman, found the report "extremely
useful." And McAfee adds: "Hopefully,
we've helped cover the political risks by
having the World Bank involved along
with the Pakistan government. But we need
good information on the real facts of life
out there-and in the rest of the world."
Spies in the cold
To tell its top management what it should
know, Gulf hired Hoyt Price, a former for-
eign-service officer, eleven years ago. He
recruited the other analysts from govern-
ment and universities to tap sources that
few businessmen have the time or knowl-
edge to pursue-from specialized publica-
tions to area experts. The analysts, who
also visit key countries, are completely re-
moved from Gulf's operations, to ensure
their objectivity. Inescapably, though, this
B O I T I N E Marcn24, 1980 87
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To anticipate political changes that may affect
its business overseas, Eaton Corp. relies on
Thomas Reckford (below), its senior
international. analyst and a former assessment
A officer for the CIA. Gulf Oil gets its information
'--.and insights on the world from John Sassi, who
isan Africa specialist and manager of its
"international studies" team.
insulation'often makes most analysts feel
as lonely as spies out in the cold. "We're
'so'indepeindent," Price says, "that I some-.
times wonder if we're effective."
s -His- team's situation 'reports have en-
r`.eouraged Gulf to make deals in nations that
1=looked forbidding at first glance. As Price
says, "We try to determine whether there's
a government that you can reason with."
`-`Seieial? years ago, he recalls, Gulf Presi-
,t.."derit James Lee responded to a measured
`assessment'of Zaire by remarking: "What
-you re really saying is that if we can get
-along with Mobuto [Sese Seko, the pres-
'ident], then go in." Today Gulf is certainly
'-getting along with. Mobuto, and its pro-
' 'duction in Zaire is being increased.
Good gamble in Angola
".p J.
The company's most daring political de-
cisionhas been to work with the Marxist
regime in Angola, despite Washington's
initial qualms. By following its own intel-
ligence, Gulf survived the transition from
'Portuguese colonial rule and the ensuing
civil=war among three indigenous groups
'in i975. The U.S. opposed-with arms and
'm6hey-the Popular Movement for the
Liberation 'of _.Angola, which was backed
by Cuban troops and appeared to Wash-
ington as a mere tool of the Soviets. But
Gulf, which had men on the scene, drew a
different conclusion. John Sassi, its Afri-
can analyst, correctly foresaw the emer-
gence of a well-organized Marxist group
as both the dominant force and a poten-
tially stable business partner. He explains:
"Its leaders, who were the most consistent
among the Angolans in meaning what they
said, indicated an interest in continuing
the oil arrangements." As things turned
out, Angola has become one of Gulf's larg-
est overseas production sources.
In weighing similar hopes and hazards
Exxon goes a step, further than most cord
porations by integrating its political as'
sessments.into financial plans.''In consid-
ering a possible $1.2-billion expansion of
its copper-mining project in Chile, for in-
stance, Exxon is comparing its vast intel-
ligence with views from a panel of outside
experts on the country. The Chile invest-
ment proposal could include what an ex-
ecutive gingerly calls "an environmental
uncertainty factor." If Exxon detects the
probability of a radical change in govern-
ment or tax policy, the company may add
1 to 5 percent to its required return on in-
vestment. This risk factor is not arbitrari-
ly tacked on, but jointly estimated by
financial planners and political analysts.
So far, Exxon has avoided rude shocks
abroad by getting sophisticated appraisals
through its regional divisions, the hubs of
its corporate intelligence. Esso Eastern in
Houston has already assigned its managers
in Asia an "alert reporting list" of possible
events that can affect future business. Rich-
ard Barham, the company's government-
relations adviser and a fifteen-year veteran
of the U.S. foreign service, says that he an-
alyzes each Asian society in terms of its
"principal influence groups." His col-
leagues in the field maintain regular con-
tact with intellectuals and labor leaders as
well as politicians. "We never accept their
reports at face value," Barham adds, "but
check them with many other sources."
Decisions in a vacuum
This political monitoring has prompted
Exxon to withdraw from refining and mar-
keting in India, Bangladesh, and the Phil-
ippines. Earlier, its analysts dissuaded the
company from carrying out a commitment
to build a refinery in South Vietnam at a
time when other U.S. companies were still
expanding operations there.
Unlike the worldly oil majors, Eaton
Corp. long took its readings of foreign po-
litical climates with what an execu-
tive admits was "a seat-of-the-pants
approach." Its managers, narrowly preoc-
cupied with manufacturing truck compo-
nents, marched blind into some avoidable
pitfalls-such as putting a plant in France's
southern Normandy region, which is no-
table for its troublesome Communist
unions. Three and a half years ago, Eaton's
chairman, E. M. de Windt, decided, as he
now says, that "we can't afford to make far-
reaching decisions in a vacuum." So the
company hired a pair of able CIA veter-
ans. Richard Lethander, a Ph.D. in econom-
ics, is the chief analyst at corporate
headquarters in Cleveland. Thomas Reck-
ford, the senior political analyst, based in
Washington, says: "We try asking the right
questions to help prevent Eaton from be-
ing startled by what happens abroad."
Its department of international informa-
tion and analysis now alerts Eaton exec-
continned
 .To anticipate o