It’s not likely that any of Pennsylvania’s public school teachers paid attention to it, but a brief announcement in early 2018 held some unwelcome news for their retirement savings.
Public pension funds have a reputation for being conservative investors. Yet, on March 19, 2018, a terse corporate notice alerted the Pennsylvania Public School Employees’ Retirement System to the fact that its latest investment was anything but bland. “We hereby inform you,” the notice began, “that as a result of the independence referendum held by Kurdistan Regional Government on 25th September 2017, KRG’s exports have decreased by almost 50% due to the takeover of Kirkuk oilfields.”
A sliver of the teachers’ retirement savings had been directed to one of the most febrile regions of the Middle East. They weren’t alone. In South Carolina, the savings of over 600,000 police officers, judges, and other public sector workers had been funneled into the same investment. So had the savings of the teachers, firefighters, and police officers of West Virginia.
If the pensioners had looked at the annual reports of their funds, they probably wouldn’t have been any the wiser. Buried in the list of investments held by their funds, they would have seen the name “Oilflow SPV 1 DAC.” Digging a little deeper, they would have found that Oilflow SPV 1 DAC was an Irish company whose address was a nondescript, four-story building in central Dublin where some 200 other companies were also formally incorporated.
The most unusual element of Oilflow SPV 1 DAC was how good an investment it looked to be. In a world of ultra-low interest rates, its notes, registered on the Cayman Islands Stock Exchange, promised to pay 12% annually over five years. Of course, the high yield reflected the fact that the investment product carried a significant risk. For the pension funds, it was a relatively small investment—less than .1% of the Pennsylvania teachers’ total holdings. But it was also one that pulled them into the Middle East’s power struggles over oil riches.
For Oilflow SPV 1 DAC was not just some anonymous investment vehicle. It was controlled by none other than Glencore, the world’s largest commodity trading company. We are all customers of trading houses like Glencore. We take for granted the ease with which we can fill up our cars, buy a new smartphone or order a cup of Colombian coffee. But underpinning almost all of our consumption is a frenetic international trade in natural resources. And underpinning that trade, from their offices in sleepy towns in Switzerland or New England, are the commodity traders.
Little noticed and little scrutinized, the commodity traders have become essential cogs in the global economy. To grasp the interplay of money and power in the modern world, to see how oil and metals flow out of resource-rich countries and cash flows into the pockets of tycoons and kleptocrats, it is essential to understand the commodity traders. They thrive through a mixture of ruthlessness and personal charm, willing to do business where other companies don’t dare set foot.
Kurdistan was just such a place. Numbering about 30 million people spread across Iraq, Syria, Turkey, and Iran, the Kurds are often described as the world’s largest ethnic group without its own country. After the fall of Saddam Hussein, they spent more than a decade lobbying the international community to recognize their push for independence in northern Iraq.
By 2014, through geological good fortune and an audacious military campaign, the Kurds had secured several oil fields in northern Iraq, including a giant deposit near Kirkuk. But to convert their oil into money, they needed to find a way to sell it. That was not an easy task: The central government of Iraq in Baghdad had threatened legal action against buyers of the crude, considering it stolen property of the Iraqi state. The warning deterred many, but the commodity traders weren’t so easily intimidated.
Nonetheless, the threat of legal action hung over every deal they did. “The early business was: Can you take some crude oil and help us find homes for it? Because, obviously, it was more of a disputed commodity at the time,” says Ben Luckock, head of oil at Trafigura, a major commodity trader that helped to organize some of the shipments. “It was really very difficult.”
Eventually, with the help of traders, the regional government of Kurdistan was shipping almost 600,000 barrels a day at the peak. Yet the Kurds were still short of money, so they again turned to the commodity traders. Would they lend the government some money in exchange for future oil shipments? Vitol, Trafigura, and Glencore—the world’s three top oil traders—together with the Russian oil company Rosneft and another, smaller trader, advanced the Kurdistan Regional Government as much as $3.5 billon.
Some traders enlisted the help of their banks to provide the money, but Glencore took the most unusual route: The trading house decided Kurdistan was too risky for its own money, so it turned to international investors for $500 million in cash, selling them an oil-backed bond that paid a high rate of interest. That note, in turn, would fund Glencore’s advances to the Kurds. Oilflow SPV 1 DAC was born. The investor presentation for the notes laid out their numerous risks, including civil wars and border disputes. Glencore declined to comment.
The cash from the oil deals did a lot more than pay the salaries of Kurdish civil servants. The petrodollars also emboldened Kurdistan’s independence movement. Before its deals with the commodity traders, the Kurdish government had had little source of income other than handouts from Baghdad. Now, for the first time, local politicians felt that true independence from Baghdad was within reach.
In September 2017, only a few months after Glencore had raised money for the region through Oilflow SPV 1 DAC, the politicians of Kurdistan held an independence referendum, and 93% of the population voted to part ways with the rest of Iraq. But if the Kurds had hoped that the international community would welcome a new nation, they had miscalculated. Washington and other Western governments had warned the Kurds against holding a referendum. The last thing they wanted was another fragile nation in an already volatile region. Now, they did little to deter Baghdad’s response.
Within days of the referendum, Baghdad sent the federal army north to recapture the city of Kirkuk and its oilfields. The Kurdish region’s hope of independence was in tatters. The economic autonomy that might have been possible now seemed like a fantasy. For the commodity traders, who had helped the independence movement with billions of dollars, it was a worrying development. That’s when Oilflow SPV 1 DAC started posting notices about the military maneuvers in Iraq to the Cayman Islands Stock Exchange.
Glencore had set up the vehicle with plenty of leeway to manage either a drop in exports or in oil prices, and its ability to repay investors that had bought the notes wasn’t immediately affected when Baghdad took over the Kirkuk oil fields. But when, in 2020, oil prices also tumbled, even the headroom Glencore had built into Oilflow SPV 1 DAC wasn’t sufficient. The vehicle was no longer able to meet its commitments, and its investors had to agree to a delayed repayment schedule.
The investment in Oilflow SPV 1 DAC by Pennsylvania’s Public School Employees’ Retirement System, or PSERS, was part of a wide portfolio of emerging-market debt holdings that was managed for it by Franklin Templeton, according to a spokesman. “PSERS’ investment professionals and consultants are well aware of the risks involved with this type of emerging market investment, as well as the pros and cons involved in all its investment strategies and portfolios,” the spokesman wrote in an email. By June 2020, the last time PSERS filed a disclosure on its holdings, the value of its investment in Oilflow SPV 1 DAC had fallen by more than a fifth.
Commodity traders like to say they are apolitical—they’ll make any trade that’s legal and profitable. But even if political influence isn’t their goal, that doesn’t mean that they are not influential. In a world where commodities are a direct route to money and power, the traders have the ability to change the course of history. A few weeks after the independence referendum, Ian Taylor, the then head of Vitol, was asked whether the traders had been instrumental in pushing Kurdistan over the line. After a pause, he acknowledged: “We were, yeah.” They may not have realized it, but so were the teachers of Pennsylvania. Excerpted from The World for Sale, to be published by Random House Business in the U.K. on Feb. 25 and Oxford University Press in the U.S. on March 1.
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