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3 China plays long game on
Congo copper By Peter Lee
As
the price of copper approaches a new historic
high, focus is swinging back to Africa ... and
China.
United States Secretary of
State Hillary Clinton took a swipe at China in a
June 11 press conference in Zambia, urging African
nations to resist "new colonialism" and for
foreign investors to practice "good governance".
"We saw that
during colonial times, it is easy to come in,
take out natural resources, pay off leaders and
leave," Clinton said in Lusaka, the Zambian
capital, before flying off to Tanzania. "And
when you leave, you don't leave much behind for
the people
who are there. We don't
want to see a new colonialism in Africa."
Although she didn't mention
China by name, officials traveling with Clinton
said she wanted to stress that African countries
should hold Chinese investors to the same
standards that they apply to Americans and
Europeans. Clinton said the United States didn't
want any foreign governments or investors to
fail in Africa, but wanted to make sure that
they give back to local communities. "We want
them to do well, but also we want them to do
good," she said. [1]
This declaration
appeared at the same time that America's most
conspicuous post-colonial initiative in Africa -
the bombing of Libya - was entering its third
month with a cost approaching US$1 billion and no
end in sight.
It was the same week that the
world got another look at the US exercise of good
governance in Iraq, courtesy of the Special
Inspector General for Iraq Reconstruction. The
George W Bush administration had airlifted $12
billion in cash into post-conquest Iraq. $6.6
billion - more than half - cannot be accounted
for. It is now assumed that it was stolen, perhaps
"the largest theft of funds in [US] national
history".
The LA Times reported:
U.S. officials
often didn't have time or staff to keep strict
financial controls. Millions of dollars were
stuffed in gunnysacks and hauled on pickups to
Iraqi agencies or contractors, officials have
testified.
House Government Reform
Committee investigators charged in 2005 that
U.S. officials "used virtually no financial
controls to account for these enormous cash
withdrawals once they arrived in Iraq, and there
is evidence of substantial waste, fraud and
abuse in the actual spending and disbursement of
the Iraqi funds."
Pentagon officials have
contended for the last six years that they could
account for the money if given enough time to
track down the records. But repeated attempts to
find the documentation, or better yet the cash,
were fruitless. [2]
In the requisite
ironic coda, it turns out that the billions
weren't even American taxpayers' money. The US
government pulled the cash from the Development
Fund for Iraq administered by the Federal Reserve
Bank of New York. The fund accumulated the
proceeds from Iraq's energy exports during the
Saddam Hussein oil-for-food sanctions years for
eventual disbursement for the benefit of its true
owners: the citizens of Iraq.
Tough luck, Iraqi citizens.
If China decides to take the
US fiduciary meltdown in Iraq as precedent for its
overseas activities, the bar for "doing good" and
"giving back" to the local community is going to
be extremely low. For
those keeping score, $6.6 billion is 66 million
$100 bills. It is 72 tons of shrink-wrapped cash.
It is the payload of three C-130 Hercules
transports.
It is also the stated value
of the Sino-Congo lese infrastructure-for-copper
agreement, trumpeted as the "deal of the century".
The much-touted
neo-colonialist Chinese penetration of the
Democratic Republic of Congo , in other words, is
roughly equivalent to an American imperialist
rounding error.
As the Sino-Congo lese mining
agreement - known as Sicomines - grinds on through
rounds of interpretation, renegotiation and
execution, it appears that the defining
characteristic of the evolving venture is not an
economic blitzkrieg mounted against a helpless
Democratic Republic of Congo and paralyzed West by
an unscrupulous Asian adversary.
The
Sicomines story seems to be China's dogged
determination to establish an enduring presence in
Africa's copper belt, despite natural obstacles,
local political and social hazards, its own
misconceptions and inexperience, and the often
self-serving opposition of the traditional
colonial powers.
The unique disadvantages that
China has to labor under as the new colonialist on
the block - and the Democratic Republic of Congo
continues to struggle with as perhaps the world's
most injured victim of Colonialism Classic - were
neatly illustrated by a court case in Hong Kong.
On June 8, 2011, Hong Kong's
Court of Final Appeal ruled on the case of FG
Hemisphere vs the Democratic Republic of Congo,
China Railway Group (Hong Kong) and a variety of
other Hong Kong parties.
FG
Hemisphere LLC is a New York-registered investor
in "distressed assets". In vulgar parlance, FGH is
a "vulture fund" whose only known asset is its
ownership of certain obligations incurred - but
subsequently defaulted on - by the predecessor
government of the territory of the Democratic
Republic of Congo , Mobutu Sese Seko's Zaire.
In
the early 1980s, the government of Zaire and its
state electrical company, Societe Nationale
d'Electricite or SNE, defaulted on about $30
million of a $37.5 million credit that a
Yugoslavian state enterprise, Energoinvest,
extended for construction of a hydropower plant
and some high-voltage power lines.
Under the terms of the
contract, Energoinvest took the matter to
arbitration by the International Chamber of
Commerce in 2001 and won a judgment in 2003. SNE
apparently showed up at the arbitration process;
the successor state to Zaire, the transitional
government of the Democratic Republic of Congo -
which was torn by bloody fighting after
Laurent-Desire Kabila, backed by Ugandan and
Rwandan military forces, overthrew Mobutu in 1997
- did not.
In 2004, in return for an
unknown amount of money, Energoinvest assigned its
interest in the judgment to FG Hemisphere. Through
the magic of compound interest - at a rate of more
than 8.75% - by 2007 the book value of the
judgment was over $100 million and growing by
$24,000 per day.
In 2007, China and Democratic
Republic of Congo signed the famous copper deal. A
feature of the deal was an entry fee of US$350
million, of which $221 million would be paid by
China Rail to the Democratic Republic of Congo and
its parastatal mining company, Gecamines.
Perhaps entertaining visions
of a profitable overseas stock jobbing escapade,
China Rail entered into the agreement - and
obligated itself to pay its entry fee - through
its Hong Kong subsidiary.
FG
Hemisphere saw its opportunity - a significant
Congolese government asset in a friendly legal
jurisdiction - and pounced.
In
2008 it won a judgment enjoining China Rail from
paying $104 million of its entry fee to the
Democratic Republic of Congo. The Democratic
Republic of Congo/China Rail side appealed and the
case finally found its way to the Hong Kong Court
of Final Appeal. The basis
of the appeal was that the government of the
Democratic Republic of Congo enjoyed absolute
immunity from legal proceedings. The FG Hemisphere
case was that the Democratic Republic of Congo
only enjoyed relative sovereign immunity - for
non-commercial dealings. Under Hong Kong common
law and evolving international practice, FGH had a
virtually airtight case.
However, the Democratic
Republic of Congo and China Rail rested their
appeal on the fact that China has a relatively
unambiguous policy of absolute immunity for
sovereign states. This probably has something to
do with the hostility of many capitalist courts to
Chinese communists, and perhaps memories of Marvin
Morris, who was able to parlay some 1913 Yuan
Shih-kai government bonds he bought at a
collectibles fair into a hearing - albeit
unsuccessful - in New York District Court in 2006,
where he applied for a $90 billion judgment
against China. [3]
Supported by letters from the
Hong Kong office of the Chinese Ministry of
Foreign Affairs - and a review of the Hong Kong
Legislative Council's (Legco's) records to show
that the Chinese government had blocked
promulgation of a law affirming relative sovereign
immunity when the Special Administrative Region of
Hong Kong was set up - the Congo/Chinese side
asserted that the issue of absolute immunity fell
under the "defense and foreign affairs" exclusion
in Hong Kong's Basic Law (constitution).
In a
split decision, a majority of the five-judge panel
sided with the Democratic Republic of Congo and
China Rail, and decided that the issue be kicked
upstairs to China's National People's Congress
Standing Committee to decide whether the issue of
sovereign immunity fell within the scope of the
"defense and foreign affairs" exclusion. This was
universally construed as the final defeat for FG
Hemisphere, in Hong Kong at least. [4]
Perhaps because of the
unsavory nature of vulture funds, pro-democracy
legislators in Hong Kong were relatively muted in
their condemnation of the court's at least partial
surrender of Hong Kong's judicial independence.
The FG Hemisphere case
illustrates some of the hazards China can expect
to encounter as it tries to extend its reach into
the world's poorer countries by playing to its
institutional strengths in commercially-tinged
government-to-government deals.
For
reasons of ideology and interest, Western
institutions frown on China's eagerness to
leverage its state financial clout in the service
of commercial transactions - and the willingness
of many African nations to exploit that
resource.
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