I don't usually agree with Anne Applebaum, a hawkish, right-wing foreign policy thinker, but she brings up an interesting point about the London Stock Exchange listing of Rosneft, back in 2006.  The LSE offered legitimacy to a company built by Putin's expropriation of Yukos, a company run by a Russian oligarch who probably wasn't quite the white hat he's been made out to be since running afoul of Russia's elected strong man.

It is the case, by the way, that some investors large and small look to LSE, NYSE and NASDAQ exchange membership when investing in companies from corruption-riddled countries.  The thinking seems to be that an LSE listing won't stop Putin from outright seizing assets on Russian soil but that the exchange might be able to combat blatant stock manipulation and trading irregularities.  Also, many investment funds including mutual funds and pensions have rules about whether or not they can own stocks not traded on an exchange so a major exchange listing can broader the potential investor base for any company.  That means more demand for stock, higher pricers and ultimately better access to the capital markets.

The problem is, Rosneft was a company born out of fraud.  The problem is that the New York Stock Exchange, which had merged with Euronext and was then bought by the Intercontinental Exchange, lends legitimacy to scores of companies headquartered in China that have questionable financial statements and business models.  One very common ruse, for example, is for Chinese herbal medicine companies to pass themselves off to Western investors as sophisticated biotechnology companies.

This has long been a problem with stock exchanges.  They make their money by listing company stocks for trade.  They charge a fee for this and, of course, make a lot of money based on trading volume.  The main incentive for an exchange is to list as many companies as possible and within the limits of credibility, to present those stocks to investors as legitimate investment opportunities.  For a long time the American Stock Exchange (since bought by NYSE) was known as the "Scam-Ex" because it listed all sorts of smaller fly-by-night companies, many of which turned out to be frauds.  Exchanges in Canada had similar credibility issues for listing one too many mining and timber related Ponzi schemes.

Now, it's one thing that we leave investors on their own in this sea of potential fraud.  The investment community seems to accept and even cherishes the risks.  They like shopping at a Wal-Mart where none of the products have been safety checked.

But what about the political angle?  Few totalitarian or authoritarian governments exist without the collaboration of the local business elite.  By allowing U.S. and Euro zone exchanges to list stocks issued by their companies ultimately supports the entire system.  Fascism is, after all, government and business working together to run things (often in the name of the people though often without consent).  The stock exchanges might well be a giant funding mechanism for human rights abuses in the emerging markets.  Not only have we ignored this but we have allowed cross-border mergers between exchanges (NYSE and Euronext, NASDAQ and OMX Group) that have made the exchanges more difficult for any one government to regulate.

It might not be the problem in global power and finance, but it's a  problem that isn't often discussed.