Alternative Investments III: The Pirate Stock Exchange

If there’s one thing that the previous installments of the “Alternative Investment” series have taught us, it’s that investors are looking for whatever is going to be the next big thing. Risky, speculative investments in cryptocurrency or NFTs can lead to incredibly lucrative returns, changing lives in a matter of months. Investors, cognizant of the threat of the bubble popping, attempt to enter and exit these markets at the “right” times — therein lies the game of alternative investments. However, for a small fishing town in Somalia, investing was not a game. Instead, their fight for riches and power took place without the safety of hiding behind a computer screen. 

The Pirate Stock Exchange

Financial opportunities were limited for the common Somalian family. An ongoing civil war between the Somali government and Islamic rebel groups cemented the capital in a state of terror. Enter pirates…yes…. pirates. Somalian pirate Mohamed Abdi Hassan, nicknamed “Afweyne”, founded the Hobyo-Harardhere Piracy Network in 2005, headquartered in his home town of Hardardhere, a small fishing town 250 miles northeast of Mogadishu. 

Afweyne centralized the piracy industry and promoted it commercially. The official pirate stock exchange was founded in 2009 at the Harardhare city center. It follows the model of a standard equity market. Open 24 hours a day, the locals could get a cut of ransom spoils by providing money, supplies, or themselves to aid pirate expeditions.

The shares are open to all and everybody can take part, whether personally at sea or on land by providing cash, weapons or useful materials. . . . We've made piracy a community activity." - Former pirate Mohammed 

For example, Sahra Ibrahim was recently divorced and in need of financial stability. She decided to contribute a rocket-propelled grenade that she received as alimony in the divorce settlement to the company. The company returned $75,000 to her as compensation after a successful operation. It is estimated that an RPG-7 costs $2,000 which means she earned a 3650% return on her investment. 

“I have made $75,000 in only 38 days since I joined the ‘company’.” - Sahra Ibrahim

These expeditions could garner up to $10 million profit per successful attack with ransoms increasing up to $4 million because of the new influx of shareholders and risk. Afweyne’s enterprise is estimated to have accrued around $400 million in revenue between 2005 and 2013. The industry transformed Harardhere. Piracy paid for almost everything in the town; the district earned a percentage of every ransom to fund infrastructure like hospitals and schools. With the Somali government occupied with Islamic rebel groups, President Sheikh Sharif Ahmed and his administration let Afweyne and Harardhare thrive without interruption.  

Threats and Risks To The Exchange

The Islamic militia groups in Somalia saw piracy as an unholy sin and threatened to declare a war on piracy. In 2010, Afweyne formally agreed to give 5% of ransom spoils to the al-Qaeda-linked militia as a security fee. With the government locked in a civil war, and the militia groups taken care of, the Pirate Stock Exchange faced virtually no risk from inside the country. Foreign powers, however, were a different story.

Afwuene and his gang had ruffled the feathers of the international markets. Piracy increased the expense of international trade by $12 billion annually. Movies like Captain Phillips (2013) portrayed the modern pirate as terrifyingly brutal, contrasting the heroic adventures of Pirates of the Caribbean. Pirate activity declined by 90% in 2012 as cargo ships began to hire private security, EU and US naval forces got more aggressive, and onshore policing started to develop. In 2013, the Harardhare pirates failed to successfully hijack a single ship, marking the collapse of the piracy industry and its lucrative stock exchange. 

The Question of Morality

Should the question of morality be a factor in financial decisions? Most would say yes, it is indeed not right to be an accomplice in, and profit from, murdering, kidnapping, thievery etc. From the outside point of view, this seems to be the correct answer, but the pirates themselves disagree. Afweyne denies any wrongdoing, claiming to lead a "legitimate self-defense movement" dedicated to protecting Somalia’s marine resources. Piracy turned a small, poor fishing village into an active town with better schools and hospitals. One could argue that it may be even hypocritical. Investors worldwide buy war bonds and invest in weapon manufacturing companies. One of the earliest forms of the modern stock exchange was with the Dutch East India Company which sold shares that relied on how lucrative their voyages were. In a sense, the locals of Harardhere were doing the same. 

Lesson Learned

The case of Harardhere gives insight into the nature of unregulated, alternative markets: how they rise and fall. Risky investments are subject to extreme volatility, high ceilings and low floors. Proponents of speculative markets like cryptocurrencies promise insane returns (Ethereum, for example, has seen a 770% increase in price over the last two years). It is possible for investors to get caught up in the allure of extreme upside and ignore the risk. Harardhere shareholders were shown success, but had it all taken from them. Once the pirates messed with the international market too much, they were eliminated, and shareholders were screwed. Crypto markets currently operate almost completely without regulation. Investors should not forget that the ruling class of financial institutions one day may decide to do something about cryptocurrency if they become too threatening to the systems in place — like US and EU navies cracking down on piracy. All money invested in Afweyne’s company sunk with every unsuccessful hijacking, and I ask that investors hear the story of Harardhere and be cautious moving forward with speculative, alternative investments. 

Sources:

UN: Despite Lull in Attacks, Somali Pirate Threat is Still Real

The Rise and Fall of Somalia's Pirate King – Foreign Policy

The Insanely Lucrative Pirate Stock Exchange In Somalia

Key Facts and Figures | EUNAVFOR

Somali sea gangs lure investors at pirate lair | Reuters

Avi Jorisch: Today's Pirates Have Their Own Stock Exchange - WSJ