Investing in arms trade should be a choice

01:08, Aug 06 2014

Spot the difference: On July 17, Malaysia Airlines flight MH17 is shot down over eastern Ukraine, killing all 298 people on board.

Pro-Russian separatists are blamed for firing a Buk SA-11 missile at the passenger jet. America, Europe and Japan impose sanctions on Russia for supplying weapons to the Ukrainian rebels.

Also in July, four weeks of conflict in Gaza leave more than 1100 people dead. According to figures from the United Nations, as of July 29 those fatalities include 243 children and 131 women. Among all the dead, 830 are innocent civilians. No sanctions are imposed on the suppliers of the weapons doing the killing.

What has this got to do with commerce? Plenty.

Much of the weaponry produced in the world is made by commercial enterprises, whose shareholders can control how they conduct business.

Whether shareholders want to consider such prickly issues as the ethics of weapon supply is another matter but Chalkie reckons they should.


If you consider that whoever supplied Ukrainian rebels with hi-tech anti-aircraft missiles is worthy of international condemnation, then whoever supplied the bombs flung into Gaza must also take the heat.

Lest anyone thinks events in Gaza are the unfortunate result of war's grey area where responsibilities are unclear, here is what the UN secretary-general Ban Ki Moon said on August 3 after 10 civilians were killed outside a UN school: "The attack is yet another gross violation of international humanitarian law, which clearly requires protection by both parties of Palestinian civilians, UN staff and UN premises," he said. "It is a moral outrage and a criminal act."

The Gaza strip is a small piece of coastal land on Israel's southern edge.

It is 41 kilometres long and 6km to 12km wide, about 365 square kilometres in all. That is not much larger than the Wellington City Council's territorial area of 290km2. Wellington City's population is just over 200,000 people.

Gaza has about 1.8 million. To think you can pick off terrorists by firing missiles into such a teeming city without killing civilians is clearly madness.

Indeed, it is more outrageous than shooting down MH17.

Assuming MH17 was destroyed by pro-Russian fire - which is highly plausible - the reckless Ukrainian rebels presumably thought they were shooting a military aircraft.

The Israeli forces shooting on Gaza would have known they could not fail to cause significant civilian harm.

In response to the crisis in Ukraine, the US Government has imposed sanctions on several Russian weapons suppliers including Almaz-Antey, whose main product range includes Buk anti- aircraft missile launchers.

Under executive order 13662, any of Almaz-Antey's assets within US jurisdiction are frozen and no US citizen can do business with the company.

Other sanctioned companies include radio-electronics company JSC Concern Sozvezdie, gun maker Kalashnikov and missile maker MIC Mashinostroyenia.

Since these companies are based in Russia with predominantly Russian customers, the sanctions may have more symbolic than material effect but the implication is they have supplied pro- Russian rebels in Ukraine.

Evidence of which specific weapons are responsible for civilian deaths in the latest Gaza conflict is so far unclear but there is evidence of the weapons used in previous attacks.

A report from Amnesty International in 2009 found a piece of Hellfire missile, evidence of white phosphorus and fragments of US-made bombs.

The companies involved in the manufacture of these weapons included Raytheon, Lockheed Martin, Boeing and Israel Chemicals.

The origin of weapon supplies to Palestinian terrorists is difficult to establish, although the Daily Telegraph has reported North Korea provided rockets and communications equipment to the militant organisation Hamas in Gaza.

Investors who don't want to profit from supplying weapons for attacks on civilians can easily avoid North Korea but some other investments are harder to distinguish.

Boeing, for example, is the world's biggest aviation company whose commercial aircraft are ubiquitous.

However, it is also a huge supplier of military equipment, including the F15-E Strike Eagle fighter and the Apache Longbow strike helicopter used by Israel's air force. The Apache is commonly equipped with Hellfire missiles, which were developed by a joint venture of Boeing and Lockheed Martin, according to media reports.

Hellfire is not mentioned in Boeing's annual report, although there is a cryptic reference to a joint venture agreement "by and among Lockheed Martin Corporation, The Boeing Company and a Delaware LLC".

Hellfire Systems LLC is registered in Delaware. Boeing also supplies the Apache to the military in Britain, Holland, Saudi Arabia, Singapore and Japan. Meanwhile, Israel Chemicals is one of the world's largest fertiliser companies.

According to its website, its engineered materials division makes additives "used in thousands of products to make them safer, more durable and longer lasting".

However, its subsidiary in St Louis, ICL Performance Products, supplies white phosphorus to the Pine Bluff Arsenal in Arkansas, a former chemical weapons facility and the only place in the US where white phosphorus shells are loaded.

White phosphorus is primarily used in shells to produce smokescreens but its incendiary properties cause extreme damage because it ignites on contact with oxygen and burns fiercely. It burns human flesh to the bone.

Protocol three of the UN Convention on Certain Conventional Weapons bans the use of incendiary weapons on civilians and making "any military objective located within a concentration of civilians the object of attack by air- delivered incendiary weapons".

Some see that as meaning Israel's use of white phosphorus weapons in Gaza in 2009 was illegal. Others believe the fact the smokescreen weapons' incendiary effects are "incidental" gives them the all-clear. Still, despite the weirdness of outlawing some weapons while allowing other forms of slaughter, it is pretty easy to argue white phosphorus should not be used in Gaza. The problem for investors wanting exposure to the fertiliser market is whether supplying white phosphorus for incendiary shells is an acceptable sideline.

Similarly, is Boeing's contribution to the killing in Gaza a deal breaker?

After all, its weapons also contribute to the security of large parts of the world. Chalkie reckons shareholders have a role to play.

Some investors want exposure to the defence industry, some don't. Where a company has interests in swords and ploughshares, shareholders can demand a split. Where an agriculture company owns a chemical weapons subsidiary, shareholders can order it be sold.

Stripped of the fig leaf of civilian commerce, the arms trade can do its thing. Investors can then choose whether to back it. Shareholders control companies, not the other way around.

All investment is a choice, even a passive fund investment.

The choice is how much to care.

Chalkie is written by Tim Hunter, the deputy editor of the Fairfax Business Bureau.

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