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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