Creeping Expropriation (also known as Indirect Expropriation) is the slow, subtle, and often legalistic process by which a host government gradually strips a foreign-owned asset of its economic value, without resorting to an outright seizure. Unlike a direct Expropriation or Nationalization, where the government formally takes ownership of a property, creeping expropriation is death by a thousand cuts. It can involve a series of seemingly independent government actions—such as punitive tax hikes, the revocation of essential licenses, or the imposition of crippling regulations—that, taken together, have the effect of making the investment unprofitable or worthless. For an investor, the result is the same: the loss of their property. This tactic is particularly insidious because each individual government measure might appear to be a legitimate exercise of regulatory power, making it difficult to challenge legally until the damage is already done. It is a paramount political risk for anyone investing directly in foreign countries, especially in emerging markets with a history of government intervention.
Imagine you own a profitable mine in a foreign country. Suddenly, the government doesn't take over your mine with soldiers; instead, it suffocates your business over time. This is the essence of creeping expropriation. The methods are varied but share a common goal: to make your investment untenable. Common tactics include:
For a value investing practitioner, understanding this risk is non-negotiable. Companies operating in politically unstable jurisdictions can often look tantalizingly cheap on paper, but this “value” can be an illusion.
You might find a company trading at a rock-bottom P/E ratio with a mouth-watering dividend yield. It seems like a classic bargain. However, the market isn't always foolish. This low valuation could be the market's way of pricing in the high probability of creeping expropriation. The government's slow erosion of the company's earning power can destroy shareholder value year after year, turning your brilliant bargain into a devastating value trap. The assets are real, but your claim on their future profits is not.
Thorough due diligence is your only defense. This goes far beyond analyzing a company’s balance sheet.
Before investing, you must become a student of the country's political landscape.
The story of foreign oil companies in Venezuela during the 2000s is a textbook example. It didn't start with a single act of seizure. First, the government unilaterally increased royalty rates and taxes on foreign oil producers, taking a bigger slice of the pie. Then, it forced them into minority partnerships with the state oil company, PDVSA, effectively ceding control. Companies that refused these new terms had their assets confiscated. This gradual, step-by-step process, which began with what looked like simple tax adjustments, was a classic case of creeping expropriation that ultimately led to direct expropriation, wiping out billions in foreign investment.