Region

Copper and Peace: Afghanistan’s China dilemma


President Ghani in China. Photo c/o Khaama Press.

President Ghani in China. Photo c/o Khaama Press.

Facing what is now more than a two year delay in the opening of the Ainak copper mine, the Afghan government has indicated that it is considering re-advertising the contract for the project which had been won by a consortium of Chinese state-own companies. This turnaround has the potential to grow into a major foreign policy embarrassment and could put the government in a dilemma. On the one hand, it needs (and has already accepted) China’s role as a mediator in enabling peace talks with the Taleban and cannot afford to challenge China’s major investments in the country. On the other hand, it urgently needs the income to turn around the on-going decline of the Afghan economy – in order to implement President Ghani’s core political aim: “self-reliance.” AAN’s co-director and senior analyst Thomas Ruttig looks at the constellation.

Like a bolt out of the blue, Afghanistan’s new mining minister Daud Shah Saba – a geologist and nominee of President Ashraf Ghani – has put the major Sino-Afghan project of economic cooperation into question. In an under-reported statement in the Wolesi Jirga on 3 June 2015 he said that the way in which the copper mine project in Ainak in Logar province, to the south of the capital Kabul, has been managed by its Chinese contractors was “not in the interest of the country.” The tender for a 30-year lease for the exploitation of the Ainak copper mine – potentially the world’s second-largest open copper pit – had been won by a consortium of Chinese state-owned enterprises: the China Metallurgical Group Corporation (abbr. MCC) and the Jiangxi Copper Company Limited, in May 2008. (1) The Consortium subsequently set up an operating company called MCC-JCL Aynak Minerals (MJAM) to manage the project.

Saba’s statement was not widely reported. The only publicly available report about it came from the Afghan news agency Khaama Press and did not use direct quotes. But the gist of what Saba said was confirmed by observers of the Wolesi Jirga session, among them AAN and other Afghan media. Politicians who supported the Ghani presidential campaign also confirmed privately to AAN that this issue is under discussion.

Any assumption that Saba’s statement was a one-off slip of the tongue were dispelled by the minister himself. Less than one week later, on 10 June 2015, when he presented his working plan for the first 100 days in parliament, he reiterated his intentions to re-evaluate the Ainak contract but he avoided criticising the Chinese directly on this occasion.

However, what the problem is exactly was laid out in his first statement. According to the Khaama report, he listed the following criticisms:

He said there have [sic] been no progress in preliminary works of the project despite seven years have passed since the project was signed. Saba further added that the Chinese company (…) which was awarded the project, has sent the feasibility study draft to the Ministry of Mines and Petroleum five and half years after the project was awarded. According to Saba, the company has not considered the environmental and social effects of the project in their assessment. He said the company has also stated that most of the commitments are not achievable based on their feasibility study. Saba also added that [the CMG] does not have an office in Kabul.

(The Chinese embassy in Kabul seems to be handling the issue, an indication that the Ainak project is also politically important; see here.)

Production in Ainak was supposed to start within five years of the contract being signed, but that moment passed more than two years ago. There are also no signs of the planned 400 Megawatt power station needed to run the copper smelter and a local industrial park, nor of the railway line (it has only been surveyed). Only a few of the 3,500 to 4,000 jobs foreseen in the mine for local Afghans have been created so far. By 31 March 2012, only about 260 Afghans were employed on full-time contracts (see here). An AAN colleague who has visited the area repeatedly also reported that local residents of villages who have been forcefully resettled have been compensated only in part and that the necessary infrastructure is lacking for those who have agreed to settled elsewhere (see AAN reporting here).

While Saba said there would be “further talks” with the consortium about the project, he also hinted that the Afghan government might look for a new project partner. (2)

Security and other delays

One reason for delay that cannot be laid on the Chinese side is the precarious security situation in the area. Around the mine, and along the planned tracks for a railway that is supposed to transport the ore abroad, there are still landmines from the 30 years of war, as well as increased insurgent activity. In the year the contract was signed, the US defence ministry ranked Logar, where Ainak is situated, amongst the eight most insecure provinces in the country. A local tribal elder told AAN in 2012 that 80 per cent of the province was controlled by the Taleban (see AAN’s first report from 2012). They attacked the camp with the Chinese engineers’ advance team in 2008 for the first time. A team of deminers was attacked in the area for the first time in June 2012. The Chinese engineers and technicians temporarily left their police-protected container camp after repeated rocket attacks and a Taleban ambush which killed 15 Afghan policemen; find a photo of the camp in this Global Witness report.

This is somewhat a repetition of history since the Soviets, during their time of occupation of Afghanistan in the 1980s, had tried to develop the Ainak copper deposit that they had explored first in 1974–76 and again in 1978–79. But they saw themselves unable to develop it due to the strong mujahedin activity in the area. The district of Chahrasyab, halfway between the mine and the capital Kabul, was then the headquarters of Hekmatyar’s Hezb-e Islami, the strongest mujahedin organisation at that time.

In the summer of 2013, Beijing intervened directly with President Karzai and demanded he strengthen security measures further in Ainak. As a result, the provincial government established 20 more police posts in the area – in addition to the already existing 1,700 Afghan Local Police and army soldiers. Reportedly, the Chinese consortium also has its own security service. (3)

The situation deteriorated further. On 27 September 2014, Taleban fighters attacked a clinic in Ainak’s district centre Muhammad Agha in broad daylight and killed one patient and two staff members, as AAN heard when visiting the area. A few days earlier, Taleban had abducted two young men from a local mosque during evening prayer and executed them as alleged government spies. Muhammed Agha is situated along a route the insurgents use when they move from their safe havens in Kurram Agency in Pakistan on their way to Kabul. Several villages which AAN had been able to visit in 2013 were not accessible one year later because of the Taleban activity.

A Taleban spokesman justified the attacks on Ainak by saying they opposed the Chinese investment because a government that they consider illegitimate had awarded the concession; as the government was corrupt, the revenue generate would not benefit “our nation.” He suggested that the Chinese consortium should negotiate instead with the Taleban about a licence and protection. Although the Chinese government has kept contact with the Taleban (see for example here) – through their Pakistani allies – though it is unlikely that this would be acceptable to Beijing.

In addition, the exploitation of the Ainak copper is hampered by the need to protect a Buddhist monastery that flourished 1,500 years ago and rivals Bamyan in importance. After some hesitation, the Chinese contractors finally allowed French and Afghan archaeologists to secure the finds (actually the monastery already was discovered in the 1960s). Apparently, they were not unhappy about this as it added to their argument as to why the mine had not opened on time.

Ainak’s economic importance

Saba’s statement regarding one of the key projects deemed essential for generating revenues for Afghanistan’s economy, while the country is chronically dependent on external resources, is quite different in tone from how President Ghani has previously related to the Ainak project. Ghani, while visiting the mine area in March this year, called it “an important economic resource for the country.” In his speech before the US Congress in March 2015, he had reiterated that he aspires for Afghanistan to be “self-reliant” by the end of the 10-year “transformation period” in 2024.

According to the presidential website, Ghani seemed to put the main responsibility for solving the issues of the delays in Ainak on the Afghan side, saying that “the friendly country of China who [sic] has won the contract is concerned about security of the mine” and that, in order “to start the mine’s extraction at the soonest time possible, it is necessary for Afghan security forces to ensure protection of this key mine.”

Together with the iron mine of Hajigak (4), the Ainak copper deposit is one of two major mining projects that are supposed to generate domestic revenues from Afghanistan’s immense mineral resources. These resources have been estimated by the US government’s Geological Survey (USGS) in 2010 at a value of 908 billion US dollars. They include not only copper of copper and iron but also coal (also in Hajigak, among other places), oil, gas, gold, cobalt, chromium and so-called ‘rare earth’ metals like lithium. (The Karzai government’s mining minister Wahidullah Shahrani, during one of his marketing tours abroad, finding the USGS’s estimates too “conservative”, singlehandedly tripled the estimate to three billion USD worth of minerals.)

From Ainak and its estimated 6 to 13 million metric tonnes of mineable copper with an estimated value of up to 43 billion US dollars, according to the Afghan mining ministry (quoted here; original not accessible any more), the Afghan government had hoped to gain revenues of 300 to 400 million US dollars annually once the mine reached top output. The Chinese consortium had agreed to three up-front payments of together 808 million US dollars to the Afghan government (80.8 million upon award of the contract; 161.6 million when the feasibility study was approved – these have already been paid – and 565.6 million when commercial copper production starts; see here: p 54) and promised 2.9 billion US dollars of investment, including funds for a railway line that is supposed to link Ainak – via the Khaibar Pass – to what is called a “new silk road” of roads, railways and pipelines with the markets of the region and the wider (see my take on the silk road follies here). The World Bank estimated that the mine could generate an annual revenue of 250 million dollars and create more than 70,000 jobs in supply and services and 5,000 directly at the mine.

Afghanistan needs revenues from Ainak urgently. The country still belongs to the category of the Least Developed Countries (LLDC) despite an average annual economic growth of nine per cent between 2002 and 2012 and a climb on the UN Human Development Index from 192 (third last) to 169 (2013). It remains overly dependent on external financial resources. In 2010, the World Bank estimated that foreign aid constituted 97 percent of the Afghan GDP.

Growth stopped and the economy started to deflate during the withdrawal of western combat troops. The large contracts handed out by the western militaries on services from security provision, to construction, and logistics have ended. The overall volumes of aid have slumped – mainly due to the main donor US halving its contributions twice, from 4.5 to 1.8 billion dollars between 2010 and 2012. Also, countries like Australia, Denmark and the Netherlands have cut their Afghanistan budgets. The ‘growth’ rate slumped to 3.4 per cent in 2013, and with only 1.5 per cent (according to the International Monetary Fund; the World Bank has 2.0 per cent) in 2014 sunk below the population growth rate, which amounts to a decline.

As a result, domestic revenues have dropped. The 2014 target for their collection has not been met. According to the finance ministry, of the 132 billion Afghanis envisaged, only 109 billion were collected. This represents a shortfall of eight percent. The World Bank, in its economic update on Afghanistan for the third quarter 2014, talked of a “sluggish revenue performance,” indirectly indicating that the problem is in the system and is caused not so much by the political and security situation. (5)

After a further drop over the first three months of this fiscal year (6) when the Ministry of Finance reported that revenue collection was still lagging behind its original projections by seven percent (2 billion Afghani, around 34.5 million US dollars), the minister, Eklil Hakimi, claimed in parliament in early June that the trend has been reversed: “Our domestic revenues have increased by five per cent in the first month of the current financial year”. This would mean that revenue collection must have been improved drastically in April and May, making good also on the drops between January and March.

Nevertheless, the government has faced insolvency several times (read for example here). Parts of the public sector remained without pay over months. The same was true for many units of the 30,000-strong Afghan Local Police. This has undermined its resolve to fight the Taleban and induced some to sell their weapons to the Taleban or even to change sides. Only emergency transfers (see here and here) from some western donors kept the regular armed forces at least paid and most of them loyal to the government.

The long-winded counting process after the April 2014 election and the cabinet-building process paralysed the government for a full year and has further undermined trust in the country’s stability. This, too, exacerbated the negative economic trend. Businessmen brought out their money to the Gulf or Turkey, and figures of those migrating to Europe climbed up again.

According to the latest World Bank economic update, from April 2015, the Afghan government was “still grappling with containing a fiscal crisis,” while the “growth outlook for 2015 remains weak.” Meanwhile, the Afghan government had based its economic programme over the 2014-24 “decade of transformation” on the optimistic assumption that revenues would increase by 25 per cent from 2014 onwards.

Copper and peace

A controversy about the Ainak project has been on the horizon for years. The media had reported shortfalls as early as in 2012 (see, for example, here and here). Actually, the Chinese consortium itself had requested a renegotiation of the deal in 2013 citing not only the security situation and the need to safeguard the archaeological finds, but also the lack of local phosphate which is needed for the ore melting process, meaning that substitute imports need to be brought in from China at increased costs. Reportedly, it furthermore aimed to drop the planned power plant and smelter and postpone the start of copper production to 2019 whilst halving the royalties to the Afghan government.

The renegotiation – which had also been a topic during Ghani’s October 2014 visit to China – had not come to any agreement. Reuters reported a “deadlock” in April 2015 and quoted mining minister Saba as saying: “We have our position. They have their position.” If Kabul now pushes for a general renewal of the tender, this could develop into a major foreign policy embarrassment. This is because mining Ainak is about more than just an Afghan-Chinese business deal.

President Ghani has courted China actively for support in possible peace talks with the Taleban during the first months of his tenure. In short, his plan is to persuade the leadership in Beijing to persuade Pakistan, its main South Asian ally, to persuade its intelligence service to persuade the Taleban to sit down and talk with the Afghan government. In order to achieve this, Ghani made important concessions to China during his visit there in October 2014 (more AAN background here). In a security agreement signed during this visit, the Afghan government adopted Beijing’s “One China Policy” (ie, the claims over Taiwan and Tibet) and committed to support the Chinese leadership’s fight against the “three evils, terrorism, separatism and [religious] extremism“ (7) as The New York Times reported on 11 June 2015 (see here).

[over] the past year, Afghanistan’s main intelligence agency, the National Directorate of Security, has persistently flagged to Beijing each and every one of the dozens of Uighurs who it says were caught by Afghan forces fighting inside the country. And Afghan and Western officials familiar with the effort say that the intelligence agency has painstakingly prepared dossiers for Chinese officials, laying out evidence tracing the militants back to Islamist training camps inside Pakistan.

The subject was atop the agenda last month when Rahmatullah Nabil, the acting director of the Afghan intelligence agency, quietly visited Beijing before President Ashraf Ghani’s first state trip to China, officials familiar with the negotiations said.

According to a later report, some alleged Uighur fighters already had been arrested and handed over to China by the Afghan authorities (see here).

Beijing’s interest – as most China observers agree (see, for example, here and here) – lies in counter-acting Afghanistan’s “potential spoiler role” for its own version of a ‘new Silk Road’ called the “One Belt, One Road” initiative. This includes a land-based “New Silk Road Economic Belt” linking China through Central Asia, Russia, Iran with the Middle East and Europe with a side project stretching from Kashgar to Gwadar in the form of the China-Pakistan Economic Corridor (CPEC) – this alone is a 45.6 billion dollar project. (8) As China watcher Andrew Small stated in a testimony in the US Congress:

China’s fear of a messy aftermath to the US withdrawal has become its principal concern. With the terrorism threat in China escalating in the period since 2008, particularly in the last eighteen months, which have seen attacks moving beyond Xinjiang and into major Chinese cities, the importance of containing extremist influences in the Chinese periphery has grown significantly.

During a ministerial meeting of the Istanbul process following immediately after Ghani’s October 2014 visit, the Chinese leadership suggested establishing a so-called “peace and reconciliation forum” with the participation of Afghanistan, Pakistan, China and the Taleban. Beijing had already appointed in July 2014 a special representative for Afghanistan; in 2014 it twice received Taleban delegations and, in December 2014, Chinese, Afghan and US officials held private talks in London to seek ways to achieving peace in Afghanistan.

Although Kabul’s first reaction was hesitant, the recent meeting in Urumchi between Kabul’s chief peace envoy Massum Stanakzai (still candidate for the defence ministry) and representatives of the Taleban, as well as of Pakistan’s intelligence service, reflected exactly the format proposed by Beijing. (More in my latest analysis here.)

If Kabul now really does revoke the Ainak contract with the Chinese consortium and gives the new contract to someone else, Beijing, for sure, will not be amused and this could lead to China becoming more reluctant in its role on promoting Taleban talks again. Even if Saba’s Ainak foray in parliament is part of a ‘poker game’ aimed at getting new and better conditions from the Chinese consortium, this would be a risky approach, possibly putting some of Ghani’s central political aims at stake. (On China’s interest in the region also see here and this interview with AAN’s Borhan Osman.)

At least for the time being, though, this problem seems not to have affected current attempts toward peace as the presence of Chinese observers during the Pakistan-hosted first direct talks between Afghan government representatives and a Taleban delegation on 7 and 8 July showed. But there is no guarantee that this will not change if the Afghan government reopens the Ainak tender.

 

(1) The consortium also is often called the MCC.

(2) Another factor of conflict over the Ainak mine is that there are other strong interests at play. CMG/MCC’s initial reluctance to allow the archaeological exploration of the remains of a vast Buddhist monastery at Ainak added ammunition to those in the US who were generally unhappy about the fact that the exploration rights for this core piece of Afghanistan’s mineral wealth went to China, and not to companies from the US (this position has changed meanwhile, possibly partially as it provides an excuse for delays). Robert Kaplan, one of the leading neo-con commentators argued in an op-ed for the New York Times in 2009: “The problem is that, while America is sacrificing its blood and treasure, the Chinese will reap the benefits.” Particularly engaged was the Alliance for the Restoration of Cultural Heritage (ARCH), a non-profit organisation, with four directors: Zalmay Khalilzad, the US special envoy and later ambassador to the US, his spouse Cheryl Benard, their son Alexander Benard and Eli Sugarman. The latter two even accused the Pentagon’s Task Force on Business and Stability Operations (TFBSO), that helped the Afghan government to get Chinese deals in the mineral and petroleum sectors, of jeopardising US interests in Afghanistan, as it placed these “resources under the effective control of the Chinese government” (on the Foreign Policy website, 4 October 2011, here). There was, however, pushback. “None of the four ARCH directors has a background in cultural heritage,” the British Guardian commented, but “several have connections to a US energy company interested in Afghan contracts.” Khalilzad, Alexander Benard (not on board anymore) and Sugarman were co-founders of Gryphon Partners, a consulting company that advised US firms like Tethys Petroleum in its (failed) bid for an oil field in northern Afghanistan, which, again, a Chinese company won. Should the Afghan-Chinese Ainak contract be scrapped and, as Saba said, a new partner come in, it will be interesting to see which companies will bid.

(3) The Global Witness report speaks about “internal police” recruited by the consortium among the local population (here: p 73). AAN received information that an Afghan private security company was hired, the “Afghan Tower Co-operation Company.”

(4) For background on the project, refer to this report by the NGO Integrity Watch Afghanistan; on current problems see this Afghan media report.

(5) The overall figures were given in this 11 June 2015 World Bank report:

Since 2002, [customs collections] have grown dramatically, rising from some $50 million in 2002-03 to more than $1 billion in 2012, and contributing more than 35 per cent of revenues in 2014-15. Since 2012, however, the unprecedented political, security, and economic transition have affected Afghanistan’s economic growth. Domestic revenues, which had risen from 3 per cent of Gross Domestic Product (GDP) in 2002 to 11.6 per cent in 2011, fell to 8.5 per cent in 2014; customs collections too stagnated over the last few years.

 

In this report, it was also announced that the bank has approved an additional grant of 21.5 million US dollars “to improve the effectiveness of customs clearance at border crossings and inland clearance depots (ICDs) in Afghanistan.”

(6) The Afghan financial year starts exactly on 22 December.

(7) This concept, on Chinese initiative, was also made part of the China-led regional Shanghai Cooperation Organisation’s security doctrine, see here.

(8) The same China in Central Asia report says:

The ‘One Belt, One Road’ initiative is meant to drastically increase the movement of capital, humans, goods, speed up cultural exchanges and even start to harmonize governmental policies across Eurasia; by constructing two separate, but complementary routes, that both start from China and then stretch westward. The ‘New Silk Road Economic Belt’ goes through Central Asia, Russia, Iran, and Arabia before finally reaching Europe; the ‘Maritime Silk Road’ passes through Malacca Strait, Indian Ocean, Persian Gulf and ultimately reaches the Mediterranean Sea. The ‘One Belt, One Road’ initiative includes thousands of miles of proposed high-speed railway and highway, seaports and airports, oil and gas pipelines, even nuclear power stations that will cost trillions of U.S. dollars and decades to build. It would conclude with the development of massive trade and economic corridors bringing Chinese products to the world, and opening China even further. It would also have the ancillary effect of redeveloping a large swathe of China’s immediate periphery, something that has led to some prominent Chinese commentators, like Dingding Cheng, to describe it as ‘China’s Marshall Plan’ (…).

Given this map, Afghanistan is not directly situated on this version of the new Silk Road, but rather at its periphery.

Thematic Category: Region