Nigeria: The Common Polemics of Petrostates

Yesterday I had the great pleasure of visiting the Petroleum Club of Houston to give a short presentation on the comparative investment environments of Venezuela and Nigeria for the World Affairs Council. It turned out to be a fortuitous day to be talking about the latter country, as the Financial Times just published a very important interview with Nigeria’s President Umaru Yar’Adua (I include some excerpts below). Nigeria has played an important and continuous role in my life ever since my first visit in the 1970s. Having been gratefully taken in by a friend’s family in Lagos, I had never felt like a stranger there. Further, in those difficult years, I witnessed firsthand the immense suffering of the Nigerian people through the paradoxical deprivations brought about by the resource curse, and lack of rights under the tribalist-dominated system. Yet despite my enthusiasm for comparative approaches to seemingly unrelated regions, I have always kept my work experience in Nigeria segregated from my work and experience in Russia, which began around the same time. However in reading this Yar’Adua interview and discussing the difficult polemics of his leadership of a petro-state, I was struck by several resonant similarities experienced in Russia.

The most obvious point of departure is the fact that both countries have a robust endowment of oil – which in recent years has caused many troubles as solutions. As it has been elegantly argued in this article by Sergei Guriev, Anton Kolotilin, and Konstantin Sonin, there is a statistical relationship between resource nationalism (as judged by the number of expropriations) and the price of oil – something which has affected not only Russia (see my last post) but may also be coming home to roost in Nigeria despite its “weak state” status: just today Bloomberg is reporting the government is demanding that Royal Dutch Shell and Exxon Mobile to pay $1.9 billion in back taxes.April was also one of the worst months with regard to attacks from the rebel group Movement for the Emancipation of the Nigerian Delta (MEND), whose leader Henry Okah is currently on trial. The extraordinary violence, mayhem, and political instability currently occurring in Nigeria has severely cut down oil production – a market whose 2.0 million of barrels a day makes a big impact on global prices. Nevertheless, Goldman Sachs has just recently revised their forecasts upward to predict that the country’s export revenue would rise to $90 billion this year.Politically, it is important to understand that Nigeria is a fractious Federation at best. The forced amalgamation of the Muslim North with the largely Christian/Animist South by the colonial British government was one of the worst decisions taken in the sad, sordid history of Western European rule over that benighted continent. From an initial configuration of 4 main regions (plus Lagos, then Federal Capital), at the time of independence in 1960, Nigeria is now made up of 36 states (plus the present Federal Capital of Abuja). Most of these states were created by successive military dictatorships, and in many instances, the rationale for creating particular states was either ill-thought out, or was merely to satisfy the political aspirations of elites in the various regions.As a result, Nigeria’s young democracy has been ruled by a crude confederation of state-based fiefdoms, or “unarmed warlords”, a term that has been used half in jest, and half seriously by some observers of the politics of the country. The ruling party, the PDP, is arguably a successor to the ruling party of the second republic (1979 -1984), the NPN. Not unlike United Russia, the party is characterized by an utter disdain for any definable political ideology. The sole aim is the acquisition (or seizure) of power at each state level, which then allows for sharing of the spoils at the ludicrously powerful Federal center.This model was superbly put to play in last year’s laughably corrupt elections (making the Russian contest look like Sweden), where the immensely unpopular ruling party was “swept” back to power even in states where some of their leaders would not even dare to visit for fear of their lives. The unarmed warlords merely had to use guile and violence to “deliver” their states to the ruling party. During Obasanjo’s eight-year Presidency, he showed his pedigree as a strict military strongman. He manipulated the local chieftains brilliantly and in many respects wielded power much the same way as Putin has in Russia. However Obasanjo never had the influence and popularity of Putin, nor did he ever attempt to deploy some sort of nationalistic narrative of cohesion. Instead, he maintained his position of power by playing local factions against each other. In particular, he was notoriously vicious in putting down the restive Niger Delta militants. And yet, lo and behold, in last year’s elections Obasanjo’s PDP once again won in all of the Niger Delta states! Sound familiar yet…?But Nigeria’s new president Yar’Adua, who has spent one year in office, may offer a glimpse of a possible future in Russia. He was also brought into power in a disputed election, and perceived to be an instrument of the outgoing strongman. Despite facing the non-transparent influence of the Army (just as Russia has the siloviki), Yar’Adua has succeeded in achieving some independence from Obasanjo – though he still refuses to authorize legal probes. Both countries are similar in that their new leaders must carefully navigation of clan-like/tribe-like structures of power in order to pursue their platforms. There is a similar narrative happening in both Nigerian and Russian politics with regard to rule of law, as you will see in the interview below.The challenges facing the president of Nigeria are far more daunting than those facing Medvedev. But one lesson the Russian president could take from his Nigerian colleague is that the hesitance to act that Yar’Adua has displayed represents a very dangerous path for a leader who wishes to assert the independence of his leadership.Excerpt from the FT: Interview transcript: Umaru Yar’Adua

FT: One of the things that investors have been asking about on this theme is very much the sanctity of contracts. A lot of privatisations that were conducted by the last government have been reversed or re-examined. What assurances can you give to foreign investors that Nigeria is indeed a safe place to invest?YAR’ADUA: The effort by the government to ensure compliance with the rule of law, that will govern all forms of business relations…whether it is government or between corporations themselves…In the courts, whether it is business disputes, or arbitrations, everybody will know and be certain about their clear position. When people say that privatisations conducted were reversed, they don’t give examples.Many privatisations have taken place in the past. When it comes to the notice of government that a particular privatisation has taken place in violation of existing laws, and other people who have competed now write petitions, government is duty bound to examine that particular transaction and find if they are correct and then take action…There is the case of Mittal, Ajaokuta Steel…If the transaction was carried out, in violation of due process, but even then this administration allowed the transaction to go on, until Mittal itself violated the terms of the transactions….If you take the asset and then violate the terms of the agreement entered, and this is brought to the attention of government, now government has the duty to look into this and see. If it is established that yes, truly the other party has violated the terms of the agreement, it should just not hold back and sit back, because we want to observe the sanctity of agreements; you observe the sanctity of all agreements entered if they are in conformity with the law and they are being implemented and executed in conformity with the lawful agreement signed. Where there are violations, government is duty bound when these violations are brought to its attention to look into it and take action.FT: So what’s your message to foreign investors who may be feeling nervous about committing to Nigeria?YAR’ADUA: I think they should disregard all negative propaganda. When people come to say that the sanctity of contracts is being violated because of a few reversal, let them check case by case. They will found out that in fact, Nigeria now, the efforts the government is making to ensure absolute adherence to the rule of law and to ensure that all contractual agreements and all covenants entered by government according to law are totally and absolutely respected. This has never happened in this country, and in fact it’s the greatest challenge the nation is facing.By the time we succeed in ensuring this absolute respect for the rule of law in this country, Nigeria will be among the nations that will have the highest sanctity for investors, and it will be a nation where investors are certain of what they are doing, and there will be no uncertainty whatsoever. And they will know that if they do business they have to do business sincerely and honestly and in accordance with the laws. And they will know — those who come to do business and would want to abuse the processes and the laws to get an advantage — they will also know that will also not be possible in Nigeria. This is the greatest battle this nation is fighting today.FT: One of the other issues that some investors are asking about is fiscal discipline. There’s some concern in the markets that the large influx of oil wealth coupled with the pressure from state governments to spend that money is going to put big pressure on inflation and threaten Nigeria’s economic stability. What are you going to do to ensure that Nigeria’s progress in managing it’s finances is defended?YAR’ADUA: Sometimes I get amazed, I have heard some of these questions. Revenues and the sharing of revenues in Nigeria, like in any other country, are governed by laws. And the sharing of revenues is controlled by existing laws which are even constitutional, and some financial regulations. Now the way and manner we go about sharing this revenue, we follow the law, we do not violate the law. We are duty bound to observe and respect the constitutional provision, which we do. In terms of the management of the economy, because that is the case, the constitution of this nation clearly spells out in no uncertain terms, what to do with the national revenue, how to share it.We meet with all stakeholders, I meet with the governors, all those who have a stake in the federation account, the minister of finance and the governor of central bank, and try to agree. Because where the law says this is what you do, you cannot do anything outside it unless you reach an agreement with all stakeholders, because any one of them who disagrees with what you are doing will go to court and get a ruling…For this year, for example…we determine the minimum amount, or the maximum amount, that will go to the tiers of government to provide a balance between keeping inflation low, interest rates low, having a stable macro-economic environment, and also providing funds to go into infrastructural development, because you must strike a balance…One of the problems the nation is facing…is the serious gap in terms of infrastructure. And without some critical infrastructure, power, and energy, mass transportation infrastructure, railways, waterways…the cement sector…iron and steel, these are critical infrastructure.Without actually sorting them out there is no way the nation can develop and the economy will grow at a rate we are targeting, above 10 percent per annum.FT: But you’ve got senior officials warning that this pressure for spending is imperilling the reform process, isn’t it up to you to really rein in those demands and protect what’s been achieved?YAR’ADUA: This is what I am telling you, that we are striking a balance. Inflation is still at single-digit. There has been no time during this administration that inflation has risen above a single-digit. That is because of the tight monetary control, that is because we strike a balance between spending by governments and the macro-economic stability. This is what I am telling you…We are not sharing all the revenue. In fact, we have a benchmark (oil price). We have said ’okay, above the benchmark, all funds go to the excess crude account.’…From the excess crude account, for the entire year, we saved one trillion naira from it. We take one trillion naira out, this is a figure we have determined for this year, that will ensure macro-economic stability.That amount will not be pumped into the economy. And the remaining excess crude funds we keep it to stabilise the budget. If the benchmark for any reason in a month becomes lower than that budgeted, we take from the excess crude and then balance it, so that for all the budgets in the federation, there will be no shortfall. At the end of that, in case for instance crude price has not fallen, that means the volume will be more than we anticipated, then all stakeholders will now meet again. Apart from the one trillion naira, this is what is left in the excess crude. What percentage of it can we share without affecting macro-economic stability?When that is determined, then the rest joins the savings. We are now trying to establish a national reserve by law, and this we are doing to ensure that we always have this balance, and build a national reserve. All these things are being done as a mechanism to stabilise the macro-economy. At no time during this administration has the macro-economy been out of gear. This is because we keep the spending within limits not to affect macro-economic stability…We sent a budget to the national assembly, a benchmark of $53 dollars, and we had serious quarrels with the national assembly when they hijacked it to $59 dollar a barrel. The benchmark we have is now the current going price is about 50 percent. The remaining 50 percent goes into the reserve. (…)FT: But isn’t Nigeria designed though to have a strong central president. Shouldn’t you be a bit tougher on your government? Aren’t you delegating too much?YAR’ADUA: We have a federal constitution, a federation of states and three arms of government at the federal level, and three arms of government at the state level. Because of our history, the long time we have had in our history of military government, which is really a centralised, and unitary form of government, so we are used to that culture of centralising power. I have also directed that all laws be examined that go against the federal system so that they will be amended to be in conformity with the federal system of government. See the federal system of government does not centralise power like the military government…It is for me a great achievement to recognise the federal system, and have the patience and the restraint not to interfere with other arms of government. Now look at what is happening in the judiciary, look at what they are doing, because there is no interference from the executive.FT: Will you step down if the Supreme Court overthrows your election?YAR’ADUA: Of course, I will, willingly, and without any qualms at all.FT: You’re not enjoying being president?YAR’ADUA: It’s not I’m not enjoying, it’s a great responsibility. But I am aware, and I believe passionately that in this country we must respect law and order. And that having allowed respect law and order to break down is what is responsible for most of our national problems. No president should come here and do what he likes, the president should come here and conduct himself according to laws, to the constitution, governing the conduct of this office. Unless we have that, we can never progress as a nation, there will always be corruption, there will always be indiscipline, we can never have the discipline to plan, we can never be able to develop as a nation, and we can never create the right environment for investment to take place.