This week’s reading/content links:

Richard Nephew: The wisdom of nuclear carve-outs from the Russian sanctions regime.

An excellent article reminding us of the importance of thinking before acting, in this case with regards to potential sanctions against Rosatom and the Russian civil nuclear industry. Given Russia is a major influence/player across the nuclear fuel cycle and accounts for ~35% of global uranium enrichment (capacity that cannot be replaced overnight), poorly designed sanctions could result in significant energy supply disruption both in the US and other countries. But beyond this issue, which I think is now fairly well covered by the media, there is also a larger nonproliferation problem if countries can no longer rely on the global market for their nuclear fuel cycle activities.

As the author argues, perhaps a better approach with sanctions is to specify that they only cover future contracts and projects, so that “existing fuel supply arrangements and other services associated with nuclear security and safety” can continue unaffected. This would also give Western countries more time to prepare and build out their own capabilities across the nuclear fuel cycle. Thankfully, common sense seems to have prevailed on this particular issue so far, but it is something to watch carefully.

Nikkei Asia: Indonesia coal miners soar over Russia supply concerns.

An update on some of the recent dynamics in the Indonesian coal market. Following the confusion that resulted from the sudden export ban in January, it has been encouraging to hear about the launch of Simbara (a mineral and coal information management system), which should allow for more accurate monitoring of producer compliance with the DMO. This also means intervention can potentially happen at the individual miner level, rather than having to implement blanket export restrictions for all Indonesian coal producers.

Longer term, there has been talk of reforming the DMO, including proposals such as adjusting the amount of coal supplied based on actual domestic needs (vs. the fixed 25% rate) and having domestic sale prices better reflect the coal prices in international markets. This would be positive for miners, but whether these proposals gain any traction remains to be seen.

US Treasury: New guidance issued to continue to blunt [Russian] central bank’s ability to deploy international reserves, including gold.

The Treasury clarified last week that any transaction involving gold related to Russia’s central bank is covered by existing sanctions. According to the WGC, Russia holds more than 2,000 metric tons, worth ~US$140bn, although it is unclear how accurate that number is (there are probably holdings that aren’t part of the official reserves). It seems likely Russia will still be able to find ways to sell their gold, but the sanctions also have carveouts for energy sales that are probably a more important source of foreign currency. Some initial coverage in Bloomberg, WSJ etc. in case of interest.

Livewire Markets: Interview with Tribeca’s John Stover.

John Stover briefly discusses the growth of the Asian credit universe, high yield credit in the context of a rising rate environment and some of the opportunities they find interesting (e.g. Indian renewables, Indonesian real estate, natural resources). Stepping back a bit, I think there’s also an interesting discussion about whether credit might be a better way to invest in Asia vs. equities.

First, given Asian credit is largely USD denominated, you don’t have to manage or hedge local currency exposure, the costs of which reduce returns. Second, a large number of Asian companies are SOEs and family-run enterprises, to whom you would probably prefer to be a lender, with fixed returns and protection structured in, than a minority shareholder.   

WSJ: MBAs market selves as SPACs.

An interesting article on the growing popularity of the search fund as a career choice for students at business schools in the US. I always thought this model had some potential in Asia, particularly in countries with aging demographics and where many businesses may only be focused on their domestic market (e.g. Japan).

The natural opportunity for an acquirer might be to expand the business cross-border into other parts of Asia. I’ve also heard of search funds looking to acquire small craft brands in Europe, with the goal of refocusing and expanding into Asian markets. Easier said than done, however, when it comes to navigating some of the cultural and language barriers in trying to do a deal. I also wonder if the structure sometimes incentivizes searchers to do a “bad” deal over walking away – you end up taking what you can find, perhaps because you may not have an alternative to compare it against, but also because you have spent ~18-24 months mentally committing to this path.

This was a career path I had explored briefly with a friend after business school. Unfortunately, while we felt reasonably well equipped to run a small business, we didn’t have much experience in sourcing opportunities and building a pipeline of potential deals in Asia. There are some accelerators out there that help with this, but I don’t know of any programs with an Asia focus. If any readers know people working in this space in the region, I would love to hear more about it.