Apollo Investment Management

Dollar hegemony: the beginning of the end?
Apollo Asia Fund: the manager's report for 3Q17

Apollo Asia Fund's NAV crept up by 0.2% in the third quarter to US$2,234.63 - a new high, but only just, and in the last quarter lagging the regional index.

The shock to our long-held investment in CSE Global, a US$12m payment to the US government imposed by OFAC, was reported on our news page. The company was threatened with an even larger penalty of US$38m, for the mistake of conducting perfectly legal business in US$, and the eventual settlement was 7% of shareholders' funds, which wiped out the last twelve months' earnings. Fortunately the balance sheet remains strong, and the loss merely reduced the retained cash set aside for acquisitions - but perhaps that visible cash may have made it vulnerable to the raid: the US is known to employ game theory in evaluating the expected returns on its targets. CSE joins our holding Pure Circle¹ in suffering from US risks that we had never contemplated, let alone tried to quantify. These give us a new appreciation for resilient business models, and for leaders who dust themselves off after such setbacks and determine to prosper regardless. CSE's price fell 21% over the quarter: the interim dividend was maintained² so the net decline was 19%.

Geographical breakdown
by listing; 30 Sep 17
% of assets
Hong Kong
21 
India
Indonesia
Japan
Malaysia
Singapore
Thailand
13 
Vietnam
12 
Other
15 
Net cash & receivables
 
100 

Many years ago I received a letter from a major bank in Hong Kong, notifying all customers of a change in their standard terms. Henceforth, customers giving remittance instructions in US$ would be deemed to accept that the US government could confiscate up to 100% of the remittance without needing to give any reason, that the banks would be powerless in any such situation, and that we could not expect the bank to provide any assistance or to guarantee receipt. It was recommended that we consider alternative currencies for remittance.

This gave pause, but the US$ is so entrenched as a trading and accounting currency in Asia that dollar remittances continued, and when most payments went through without problems the fear gradually receded and was largely forgotten. Banking transactions that used to be straightforward have however become increasingly cumbersome and time-consuming, and payments subject to previously unknown hassles and delays, as a result of the enormous volume of regulations originated in the US and imposed internationally, huge penalties imposed on the banks, and the banks' consequent fear. When the system worked smoothly, few non-bankers paid much attention to remittance mechanisms, but frustrations are mounting. Economists puzzling over sluggish productivity should surely examine the friction cost of banking.

OFAC's ruling on CSE highlighted that the US deems all remittances made in US$ to be subject to US laws and regulations, even when there is no other connection with the US. OFAC's ruling on ExxonMobil shows that the US currently reserves the right to reinterpret its regulations retrospectively.³

The US has benefitted from the multi-decade acceptance of the US$ as an accounting and settlement system for international trade. Imperial caprice and over-reach are now undermining that position. China and Russia are working on alternative international payment systems to break the market dominance of SWIFT. Large thefts and attempted thefts from the SWIFT system suggest that competition might be a good thing. Confidence in a generally-benevolent superpower and its fair enforcement of a rule-based international order has been remarkably persistent and takes time to erode, but each confiscation and delay which is seen as both unfair and attributable to the US will foster a resentment of its dominance, encouraging customers to be receptive to eventual alternatives. Russia's Mir card, an alternative to Visa and MasterCard (which will interconnect with these systems, and with UnionPay etc) is now said to be running smoothly within the country, with domestic market takeup still a fraction of total card issuance but ensured by a phased transfer of government payments. Meanwhile, China's gradual moves towards monetary autonomy seem to be gaining significant momentum, set in context by Alasdair Macleod: 'Oil for gold - the real story'.

With political turmoil in much of the world, traditional media under financial pressure, and media-savvy warriors recognising the negotiating/propaganda value of captives, no-go zones are spreading and some important stories receive less international coverage than they may deserve. Tensions between the US and North Korea, and the flight of a half-million refugees from Rakhine state in Myanmar, have correctly commanded much attention. The battle for Marawi city in the Philippines has received rather less. The battle now seems to be drawing to a close, with attention turning to the cost of rebuilding. Shipping companies are still being advised to avoid the whole of the Sulu-Celebes Sea and the eastern coast of Sabah.4 Mindanao has long been unsettled, but the loss of control over a whole city for five months came as a surprise, and the new links between indigenous rebels and ISIS/Daesh are of regional concern. These developments have had no significant impact on our portfolio companies or asset allocation, but it may be worth bearing in mind that there seem to be a growing number of potential flashpoints.

Claire Barnes, 16 Oct 2017


  1. Pure Circle was shut out of its largest market for over seven months, and incurred great disruption and costs, as a result of apparently unsupported allegations by an anonymous whistleblower, as noted in our 4Q16 report entitled 'Company management and the unforeseen'.
  2. Boards considering their dividend policies may wish to consider confiscation risks, as well as the other disadvantages of over-capitalised balance sheets.
  3. ExxonMobil had sought guidance at the highest level before acting, describes OFAC's reinterpretation as fundamentally unfair, and has filed an appropriately punchy legal challenge. We await the court ruling with interest.
  4. 'Is this the most dangerous backwater in the world?', March 2017. Malaysia, Indonesia and the Philippines launched a joint patrol programme in June, and no incidents have been reported in that area by ReCAAP since (instead there have been attacks on oil and gas tankers off the Malay peninsula), but the regional organisation continues to warn that 'there is no room for complacency'.

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