Thursday, June 24, 2010

Minerals-Related "Game Changer" in Afghanistan? If So Will Extraction Firms be Able to Operate in Midst of Turmoil?

Afghanistan may have upwards of $1 trillion in previously unknown deposits of minerals according to a new U.S. government report. According to a recent story in The New York Times, "U.S. Identifies Vast Mineral Riches in Afghanistan" (June 13, 2010), "...Afghanistan could eventually be transformed into one of the most important mining centers in the world..."

The graphic, from The Times' article, in the left-hand corner of this posting, shows where the minerals are located.

According to the article, Gen. David Patraeus, the Pentagon's lead officer in the region, said, "There is stunning potential here. There are a lot of ifs, of course, but I think potentially it is hugely significant."

Setting aside the enormous problems associated with actually mining the minerals, what could this mean for the country? A recent posting by UCLA Political Science Professor Michael L. Ross on the Foreign Policy blog addresses the political realities of the report's conclusion and considers whether the country will be beset by the "resource curse:"
"Unfortunately, governments that resemble Afghanistan's -- where corruption is high, and the rule of law and government performance are weak -- typically squander a large portion of these [minerals-related] windfalls. Billions have gone missing from the treasuries of Angola, Cameroon, the Congo, Nigeria, and other African countries that have considerable mineral wealth but weak and ineffective governance. Some is lost to corruption, some to political patronage, and some to well-intentioned projects that are poorly planned, poorly built, or poorly maintained."

The minerals include huge deposits of cobalt, copper, gold, and iron.

Currently a firm associated with the Chinese government is developing a copper mine south of Kabal. Having said that, however, no other large projects are currently underway.

This new report raises all types of questions including:

  1. What investor-owned firms will be willing to face the political uncertainty and invest in Afghanistan?
  2. To what extent will the Chinese government be willing to overlook political uncertainty and invest in any case?
  3. What are the strategic consequences for any firm that decides to operate in Afghanistan? Will they have to raise they own militia or security force to protect their interests? Or will NATO forces take that on (if they are still in the country)?
  4. If Afghanistan's treasury is filled with mineral-related revenues, will the future course of the country change?

The concept of an extraction company making large investments in a country riddled by on-going war and an unstable government may not be new. But it does raise huge questions about what risks these companies might be willing to take in order to participate in such a huge opportunity. Or will this turn out to be a situation where only companies that are not faced with quarter-to-quarter performance (e.g., Chinese-government related firms) are the only ones who really invest here?

Stay tuned. This could turn out to be an exceptionally fascinating -- if not entirely predictable -- story.

--Don Smith

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