But executives with international mining firms said in interviews that while they believed that Afghanistan’s mineral deposits held great potential, their businesses were not planning to move into the country until the war was over and the country more stable.
“There are huge deposits there,” said David Beatty, chief executive of Rio-Novo Gold, a mining company based in Toronto. “But as chief executive, would I send a team to Kandahar? And then call a guy’s wife after he gets shot? No.”
*****
I was reading an excellent book the other day called “The End of the Free Market: Who Wins the War Between States and Corporations” by Ian Bremmer, and it was quite the read. Basically, if you track the actions of countries like China in places like Iraq, Africa or Afghanistan, you start to get the idea that something is going on here. That state owned companies have the advantage over private industry in these war ravaged and resource rich countries. That reality is what worries me, and in the larger battle over resources in this world, we need to make some adjustments.
The problem is that private industry just does not want to take the risk of entering these places, because there is just too much liability. Besides, a private company does not have the full weight and support of a country behind it, but a Chinese owned company does. That is a huge advantage.
I have talked about clashes before between free markets and state capitalism in the past, and a prime example was the battle between China and Google. Another example was between Chinese companies and all of the privately owned oil companies going after contracts in Iraq. In both examples, China is able to win contracts or do whatever they want to bend the markets to their advantage, all because they have the full strength of a country behind such endeavors. They can absorb risk, do whatever they want to their people, pay whatever they want, etc., and this hybrid machine called state capitalism is definitely a factor to deal with in the market place.
So how do companies compete against such a thing? That is a question that I am not qualified to answer. The book provides some answers, and I highly suggest folks to check it out. All I can provide in this conversation are some ideas to alleviate concerns about risk in these countries. Private security is what private industry (along with free market supporting governments like the US) uses to protect their investments, and that is what I specialize in. In this war between state capitalism and free markets, security contractors are right there on the front lines.
One thing that can happen to help in our fight against state capitalism, is for capitalist countries to empower private security to do their job. If you make it impossible or difficult for us to be effective, then of course the risk will go up for those investors. This is a fine line to walk, but it is necessary to address if you want to benefit from that free markets that capitalism needs in order to flourish.
Now with Afghanistan, we have a deal where Chinese companies are aggressively pursuing these mineral claims and the rest of the world wants nothing to do with the things. They fear the risk due to the war and politics of the region, and rightly so. With that said, all and effort must be made by the coalition to make that market more attractive to private industry and to allow private industry to do what it needs to do in order to alleviate that risk. Because right now, we are losing that war between state capitalism and free markets in the places where the West has done all of the heavy lifting and dying. –Matt
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Afghanistan Moves Quickly to Tap Newfound Mineral Reserves
By ALISSA J. RUBIN and MUJIB MASHAL
June 17, 2010
KABUL, Afghanistan — The Ministry of Mines announced Thursday that it would take the first steps toward opening the country’s reserves to international investors at a meeting next week in London even as Afghans expressed a mixture of hope and doubt about the government’s commitment to develop the country’s newly documented mineral wealth.
The focus of the meeting will be the Hajigak area of Bamian Province, which has major iron ore deposits, the Mines Minister, Wahidullah Shahrani, said at a news conference here.
It was Mr. Shahrani’s first public appearance since news that the country had at least $1 trillion in untapped mineral resources became public after an article appeared Monday in The New York Times that detailed findings of the Pentagon and United States Geological Survey. Afghan officials described the $1 trillion estimate conservative and said their estimates suggested the reserves could be worth as much as $3 trillion.
“This good news has the potential of adding a lot of value to the economy of Afghanistan and it will serve the development of Afghanistan,” Mr. Shahrani said.
The previously unknown deposits include huge veins of iron, copper, cobalt, gold and critical industrial metals like lithium. With so many minerals that are essential to modern industry, Afghanistan could be transformed into one of the most important mining centers in the world, according to American officials.
Two hundred mining investors from around the world have been invited to next week’s meeting in London where they will offer suggestions for how to develop the iron ore deposits at Hajigak, said Craig Andrews, the principal mining specialist for Afghanistan for the World Bank.
Then, the ministry will develop a tender offer for that area. For instance, it is possible that the government would require that the bidder develop both a steel plant and the iron ore mine since there are also nearly deposits of coal, Mr. Andrews said. By September, the government hopes to be able to solicit expressions of interest from mining companies and perhaps by December narrow the number to five or six companies who have the capacity to undertake such a large the project.
Non-governmental western mining experts will be helping the ministry develop the bidding process, said Mr. Andrews. Mr. Shahrani pledged to make the bidding and contracting of mining rights as transparent as possible in order to reduce the possibility of corruption. He said the ministry would post contracts on its Web site and would try to brief reporters, and by extension the public. Copies of the contracts would be made available to members of Parliament and to members of civil society.
Mr. Shahrani and his advisers cautioned against overly high expectations, underscoring that development takes years and that there are many obstacles to overcome not least of all the lack of security in some of the areas with the most minerals and the lack of a transportation infrastructure.
In Kabul, students and shopkeepers alike said they thought the government had the capability to develop mines eventually, but not without help from foreigners.
“The current government does not have the ability to launch such big projects — neither administratively, nor in terms of security,” said Ghulam Hazrat, a shopkeeper who sells spare parts for cars.
Mr. Hazrat held up his right index finger, which was disfigured when he fought the Russians in the 1980s; he pointed to two scars on his leg and one on his chest from the early 1990s when warlords were fighting each other to control the country.
“Thousands have made sacrifices like me in their lifetime. But I am sure I won’t see any benefits from such mines in my life and neither will you in yours. Whether my children will , I don’t know.”
An adviser to the minister, Abdul Rahman Ashraf, struck a similar note when asked by a young reporter at the news conference whether his generation would see the benefit of the mineral reserves. “Your generation should not think that this $3 trillion is an amount you can spend, but, your children, your grandchildren, your great-grandchildren will have the right for this reserves,” he said.
“We need to learn how to use it.”
Faisal Farooqi, a first-year student at Kabul University, studying law and political science, was more optimistic and he said he saw the reserves and the international attention to them as something the country needs to take advantage of.
“It is time we show the will,” to take advantage of such wealth, he said. “It is an opportunity for us to get out of this misery and we should grab it with both hands — even if our hands are shaky.”
Story here.
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World’s Mining Companies Covet Afghan Riches
By JAMES RISEN
June 17, 2010
WASHINGTON — Mining companies around the world are eager to exploit Afghanistan’s newly discovered mineral wealth, but executives of Western firms caution that war, corruption and lack of roads and other infrastructure are likely to delay exploration for years.
A few high-risk investors are sufficiently intrigued by the country’s potential to take an early look. JP Morgan, for instance, has just sent a team of mining experts to Afghanistan to examine possible projects to develop.
“Afghanistan could be one of the leading producers of copper, gold, lithium and iron ore in the world,” said Ian Hannam, a London-based banker and mining expert with JP Morgan. “I believe this has the potential to be transforming for Afghanistan.”
But executives with international mining firms said in interviews that while they believed that Afghanistan’s mineral deposits held great potential, their businesses were not planning to move into the country until the war was over and the country more stable.
“There are huge deposits there,” said David Beatty, chief executive of Rio-Novo Gold, a mining company based in Toronto. “But as chief executive, would I send a team to Kandahar? And then call a guy’s wife after he gets shot? No.”
It has long been known that Afghanistan had significant deposits of gemstones, copper and other minerals, but United States officials say they have discovered and documented major, previously unknown deposits, including copper, iron, gold and industrial metals like lithium.
A Pentagon team, working with geologists and other experts, has shared its data with the Afghan government, and is working with the Afghan Ministry of Mines to prepare information for potential investors in hopes of placing some mineral exploration rights up for auction within the next six months. On Thursday, Afghan officials said they believed that the American estimates of the value of the mineral deposits — nearly $1 trillion — were too conservative, and that they could be worth as much as $3 trillion.
The Ministry of Mines also announced that it would take the first steps toward opening the country’s reserves to international investors at a meeting next week in London. Two hundred investors from around the world have been invited to offer suggestions for how to develop the iron ore deposits at the Hajigak area of Bamian Province, according to Craig Andrews, the principal mining specialist for Afghanistan for the World Bank.
Nongovernment Western mining experts will be helping the ministry develop the bidding process, Mr. Andrews said.
At a news conference in Kabul, Wahidullah Shahrani, the mines minister, pledged to make the bidding and contracting of mining rights as transparent as possible to reduce the possibility of corruption. He said the ministry would post contracts on its Web site.
Mr. Shahrani and his advisers cautioned against overly high expectations, underscoring that development would take years and that there were many obstacles to overcome, not least of all the lack of security in some of the areas with the most minerals and the lack of a transportation infrastructure.
International mining officials and independent experts echoed that view. Jim Yeager, a Colorado-based geologist and former consultant to the Afghan mines ministry, said that poorly written mining regulations could also hamper future development.
Afghan officials have interpreted their mining regulations in such a way that if a company is awarded a concession to explore and then discovers valuable minerals, the government can tender the concession back and rebid it, undermining any incentive for a foreign firm to actually find large deposits, he said.
“They can take it back after you discover something,” Mr. Yeager said. “That needs to be corrected.”
Several mining executives and other experts said that the multibillion-dollar investment required to build a large copper mine, for example, meant that the industry would focus on other deposits in less risky countries before they turned to Afghanistan.
“The industry is going to take a look at Afghanistan, but they will weigh their risks carefully,” said Steve Vaughn, a Canadian lawyer and mining expert. “There is every indication that these deposits are very large. But as political risks increase, they will lay off spending.”
Today, many of the world’s leading mining companies are based in Canada and Australia, but resource-hungry China is rapidly emerging as a major competitor for mineral deposits. A Chinese state-owned firm has already been awarded the concession for a copper mine in eastern Afghanistan.
No, many mining industry executives say they expect the Chinese to bid aggressively on Afghanistan’s newly discovered mineral deposits even as many Western firms sit it out.
Robert Schafer, executive vice president of Hunter Dickinson, an exploration and mining firm based in Vancouver, Canada, which lost the bid for the copper mine concession to the Chinese company, said he believed that the Chinese “have a different perception of the risk” because they see mineral resource development as part of a national strategy.
“Their concern is for the supply of a commodity, so they are willing to do things at a loss,” Mr. Schafer said. “So yes, I could see the Chinese being willing to make investments in areas where we are unwilling to.”
Mining industry executives, as well as American officials, are also concerned about the corruption in the Afghan government, and are uncertain how to avoid turning the discovery of great mineral wealth into nothing more than a windfall for Kabul’s oligarchs.
“I know some people have gone in to kick the tires, and some guys found there was too much risk, too much corruption, and didn’t want to play the game,” observed Mr. Yeager, the Colorado geologist. “They have got to resolve the corruption issue.”
Story here.
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Will Free Markets Give Way to State Capitalism?
By Gregory Scoblete
May 28, 2010
The End of the Free Market: Who Wins the War Between States and Corporations – Ian Bremmer, Portfolio, 2010.
It’s quite likely that the financial crisis that began in 2007 and is, just now, threatening to unravel the European Union represents the final period in a two decade era of the West’s “end of history” hubris. While the wars in Iraq and Afghanistan have sullied the aura of Western military power, the financial crisis has surely cracked the other pillar of Western dominance, free market capitalism.
There is, in no other words, no better time for a challenger to rear its head and take on the “Washington consensus” that free markets and free politics are the true engines of growth, power and prosperity. And such a challenger has arisen in the form of what Ian Bremmer, in his engaging new book The End of the Free Market, dubs “state capitalism.”
State capitalism, Bremmer writes, “is a system in which the state dominates markets primarily for political gain.” From state-owned corporations operating in strategic industries like natural resources or defense, to enormous sovereign wealth funds in the hands of autocrats with opaque operating principles, state capitalism has enabled the world’s autocratic states to reap the benefits of capitalist enterprise while maintaining a vice-grip on political freedom.
In Bremmer’s telling, the world’s autocratic states learned a valuable lesson from the implosion of the Soviet Union: command economies do not work and when they fail, they can bring down the over-arching political system with them. They also watched the post Soviet experiment in crash liberalization with horror. To protect their hides and preserve their privilege, autocratic rulers in China, Russia, Saudi Arabia and elsewhere have created a “hybrid” system that leverages many of the tools of capitalism to generate wealth while the heavy hand of the state ensures that wealth is put to the service of the elites and rulers of each country.
Most of Bremmer’s slim, accessible volume (just 200 pages, excluding end notes) is devoted to a tour of the world’s dominant and emerging state capitalist systems in places such as Malaysia, Brazil, and the United Arab Emirates. Bremmer’s picture of global state capitalism is nuanced – he acknowledges that even free market democracies interfere in markets for political purposes, as is the case with Europe and America’s generous farm subsidies and tariffs. The signature difference is the degree and scope of state interference and the lack of democratic transparency in the countries that practice state capitalism.
According to Bremmer, this hybrid model has serious repercussions for the U.S. and other capitalist democracies. Since economic competition is global, companies with state ownership or state influence can distort markets and harm consumers. They can, for example, pay above market prices for natural resource contracts to lock up long term supplies. They can trade freely with the world’s pariah states, offsetting the impact of sanctions. More than that, as China emerges from the world’s worst recession with 10 percent GDP growth, these state capitalist systems can lure “fence sitting” states like Brazil and India to their brand of government, further tilting the global economic playing field. Goodbye Washington consensus, hello Beijing consensus.
Only not quite.
Despite the dramatic (indeed, misleading) title of the book, there’s no indication that we’ve reached the end of the free market. In fact, Bremmer says so explicitly in his conclusion. Unlike competitors of yore, state capitalism is less an ideology than a methodology. What unites the state capitalist systems of the world is how parochial they are: the leaders are too focused on defending their own skins to worry about world domination or exporting a revolution. What’s more, as Bremmer writes, none of the practioners of state capitalism believe in mercantilism – the notion that there is a finite allotment of wealth and that the only way to grow share is to take share from others. So while their state champions and sovereign wealth funds can distort global markets, the world can escape the beggar-thy-neighbor cycle of economic destruction that marked the Great Depression.
Indeed, it’s clear from the book and from Bremmer’s confidence in free market capitalism, that state capitalist systems contain the seeds of their own destruction. As Bremmer demonstrates, the primary goal of capitalist activity under a state capitalist system is to defend the political interests of the state. But those interests often align quite closely with the material prosperity of the state’s own citizens. China wants to maintain its torrid growth rates not so its president can lounge around in opulence, but to provide the millions of jobs it needs to stave off social unrest. The implicit social contract of state capitalism – you can earn a good living if you don’t care about political freedom – acknowledges the urgent need to provide improved standards of living to its citizens.
That’s a difficult straddle. China has managed it for thirty years and may be able to for thirty more, but the inherent inefficiencies and corruption of state capitalism don’t augur well for its future.
That’s not to argue for complacency. While he mercifully avoids the doom-mongering that often attends discussion of the rise of China or the re-emergence of Russia, Bremmer does make some brief and modest suggestions for U.S. policy in the face of state capitalist competition. Stay verbally committed to free market capitalism, expand free trade agreements, particularly with countries that practice state capitalism, sustain a military lead over potential competitors like Russia and China, and selectively assert American rights and interests with unfair competitors like China. In short: stay calm, and stay true to the principles that made the “Washington consensus” so attractive in the first place.
Sage advice.
Story here.