Why existing investors are unenthusiastic about Zimbabwe sanctions
Posted by CM on July 10, 2008
by Chido Makunike
The international diplomatic pressure by Britain for some kind of sanctions to be imposed on Zimbabwe is currently at fever pitch. It will be interesting to find out today if the sanctions resolution that is scheduled to be voted on at the UN Security Council will carry the day as British officials have been confidently predicting or be vetoed by Russia or China, as some reports suggest could happen.
But it is interesting that the proposed sanctions being called for are primarily a tightening up of the ‘targeted sanctions’ against Mugabe and his closest lieutenants, rather than an open, generalised embargo of the whole Zimbabwean economy . Only time will tell why such tightening is thought to have a chance of bringing Mugabe’s government to heel when it has been completely impervious to them before. They have almost become a badge of honor among the rulers, a way of showing anti-Western stripes that are currently highly valued in Mugabe’s circles, but not materially changing their lives much at all.
Globalization and the rise of a mostly friendly and sympathetic-to-Africa Asia have assured that travel and business bans imposed by the West on Mugabe and his close aides have been nothing more than a minor nuisance.
It is interesting that as newly determined to act against Mugabe as Gordon Brown’s government is, it has not called for the outright pull-out of the many British companies operating in Zimbabwe. In the last week have been reports of some of those British companies saying they are getting very mixed signals from the British establishment when they ask for clarification on what the government would like them to do with regards to their Zimbabwean operations.
In late june Brown warned British: “‘Where businesses are helping the Zimbabwe regime, they should consider their position now,” before making any investments in Zimbabwe. Some commentators thought that this was in direct response to reports that mining conglomerate Anglo American had plans to spend £200 million on a platinum mine there. The pressure forced the company to say it was “deeply concerned about the current political situation in Zimbabwe,” and that it was “reviewing all options” surrounding the development of the Unki platinum project.
One of the many reports about sanctions pointed out that Brown did not directly order British firms to withdraw operations from Zimbabwe. He is specifically said to have cautioned that any sanctions must be balanced against harming ordinary Zimbabweans by being targeted at the country’s leadership.
But perhaps there is more to this seemingly contradictory caution than concern about not worsening ordinary peoples’ hardships.
Investments are not a one way street. Asking British firms to stop doing business with or pull out of Zimbabwe will have negative consequences for those companies as well as effects on Zimbabwe’s economy. It is sometimes portrayed as if the continuation of those companies’ business in Zimbabwe is out of the kindness of their hearts, a sort of favor to poor helpless Zimbabwe, and that they would actually be relieved to leave such a poorly performing economy.
The truth is even if their operations are barely ticking along now, many of these companies have substantial long-term investments that they risk being expropriated by the Mugabe government should they pull out. Mugabe has on several occasions mentioned his willingness to do just that if pushed into a corner or ‘provoked’ enough. It is true that particularly in the current environment, there is no reason to believe the government would run those mines and other investments any better or profitably than the companies themselves. This would be especially so without access to the kind of international money required for capital-intensive things like mining. But at that stage the considerations would mostly be hot-headed political ones, as we saw with farm take-overs, not necessarily cool-headed economic ones.
Such takeovers would in the short-term be largely non-performing assets for the government, in the same way they are poorly performing assets for their current private owners. So any losses due to expropriation, fire-sale shedding of the assets or forced (by sanctions) pull-outs would not necessarily bite the investors hard in in the short term by the investors, since their assets are performing minimally now. But for the capital and long-term opportunity losses would be major.
Many companies in Zimbabwe, local and foreign, have barely held on for many years in the hope of positive political change and a quick turn-around. They continue to do business there not so much for present day profits, but in the expectation of future gains if they can hang on until “normality” is restored. It would be much harder to close shop or pull out completely now and then try to re-enter when many other investors will be competing to for choice opportunities. So an important reason for many companies hanging on is to have an advantageous, competitive position when things start to work again and Zimbabwe is once again one of Africa’s hottest economies. This will happen because of the vast advantages over most Africa the country has in the basic economic fundamentals that have been hidden by the current crisis.
And it is not just sitting investors who see opportunity in Zimbabwe’s future. A recent Reuters report discussed how the ‘Zimbabwe contagion’ is not likely to significantly affect business and investment in the rest of Africa. The article, with the heading Hardier investors undeterred by Zimbabwe is dated July 1st, so is not ancient news from another time, but was written smack dab in the midst of the current crisis.
Here is a brief excerpt that bolsters the point I am making, that companies are cautious about their Zimbabwe portfolio but they are not exactly in a stampede to leave the country:
Zimbabwe itself has also seen something of an investment boom this year, with an estimated $150-250 million coming into the country from investors keen to buy cheap assets and position themselves for an eventual recovery.
Enthusiasm has since altered but those who have gone in say they are staying put and probably the largest investment fund, London listed LonZim says it still intends to raise another up to $100 million to fund new purchase.
“I’ve had no nervous phone calls from investors,” said LonZim executive chairman David Lenigas. “Quite the contrary. There is a loss of enthusiasm for what LonZim is doing in Zimbabwe. But it is a very long-term exercise.”
It must not be forgotten that the “collapse” of Zimbabwe has been written about for close to 10 years now. That the Somalia-like breakdown of all formal systems has not taken place is a sign of the little economy’s enduring strength in terms of the basic infrastructure, systems and skills, even though all these have taken a battering in the years of steep decline. But many still believe a resolution of the politics would result in a fairly rapid recovery of many sectors.
Therefore no company with long term investments in Zimbabwe is going to be in a hurry to walk away from them. Doing so would almost certainly mean forfeiting them to the state or the favored elite for nothing, or selling them off for a fraction of their value. It also means much greater difficult re-entering what may still be revived to be southern Africa’s most robust economy after South Africa.
Brown & Co. would have taken all this into consideration, and it must be one reason why they have not called for a total withdrawal of British companies: there is an awful lot for those companies to lose.
Bloomberg had a very good article about some of the big companies with a stake in the Zimbabwean economy on March 27, two days before the ‘harmonised’ election in which Tsvangirai outpolled Mugabe. The article was essentially about how the mining industry remained confident that recovery of the sector would be quick with positive political reform.
“The (mining) industry and investors are betting that better times lie ahead. The key: the political future of President Robert Mugabe,” wrote Anthony Sguazzin.
“There are investment funds waiting in the wings” should Zimbabwe’s leadership change and the economic outlook improve, said Mark Wellesley-Wood, chief executive officer of Johannesburg-based Metallon Corp., Zimbabwe’s biggest gold producer. “We are hunkered down. It’s been survival and preparation.”
“Metallon and Impala Platinum Holdings Ltd. already are prepared to expand. Zimbabwe has some of Africa’s best roads and best-educated workforce, and the remnants of a manufacturing industry that once lagged behind only South Africa in the continent’s southern region.”
“Economic progress might come rapidly should Mugabe lose, or win and be pushed out. “I am certain that if there is political change, the turnaround will be quick,” said Greg Hunter, chief executive officer of Central African Gold Plc, which bought two Zimbabwean gold mines last year and is considering expansion.
“Relatively little investment is needed to rehabilitate the industry, Hunter said. Power production could be ramped up at Zimbabwe’s coal-fired plant at Hwange in the northwest and the Kariba South Hydropower plant with minor equipment replacements. Many of the country’s gold mines aren’t closed. Instead, they have been maintained even while they were idled or had production cut.
For now, Impala Platinum is delaying portions of an expansion plan in Zimbabwe valued at $750 million in 2005. As recently as 1999, Anglo American Plc planned to boost its gold production 10-fold in Zimbabwe. Instead, it has sold ferrochrome smelters and nickel mines.
In December 2006, Zimbabwe’s government sent police to seize a diamond concession from African Consolidated Resources Ltd., and last week Mugabe said the government may “act against” British companies to retaliate for U.K.-imposed sanctions, said the state-controlled Sunday Mail newspaper. London-based Rio Tinto Group owns a diamond mine in Zimbabwe.
“They have the mineral resources; it’s only the presence of Mugabe that makes the West uncomfortable,” said Sebastian Spio-Garbrah, an analyst at Eurasia Group, a New York political- risk firm. “Once he has gone, there will be a sense of relief.”
You get the drift.
The current loud talk of a type of sanctions which will not make much additional difference to the ‘targeted sanctions’ that are already in place is mainly just that, talk, for show. “Real” sanctions will not be imposed because some of those calling for them most loudly would have as much to lose as Zimbabwe’s already battered economy.