An expert’s point of view on a current event.
May 21, 2021 at 3:13 PM
Governments that are both cash strapped and already in debt have always had the best of luck. What should a country do when it is rejected by regular sources of credit, but its spending continues to pile up? Traditionally, the only answer has been to seek debt relief from private and public creditors. But governments that have the advantage of being resource-rich have always had another potential response: to raise loans against future resource production – loans that don’t count as sovereign debt.
It is smart financial engineering that has grown tremendously over the past 15 years. The Natural Resource Governance Institute calculates that African and Latin American countries took out at least $ 164 billion in resource-backed loans, especially oil, between 2004 and 2018. There is a catch, of course, but not that which applies to the elites who strike them. offers.
Oil-backed loans provide money to borrowers, but often incur exorbitant fees for repairers as well as high interest rates. This constitutes a major source of public financing risk for the weakly governed countries which resort to it. It is not only that they are exposed to falling commodity prices that are supporting loans. Since oil-backed loans are not recorded as external public debt, borrowing and spending is very opaque to outside observers. The money therefore rarely goes to savings and investment and is instead diverted to international financial centers. Elites in resource-rich countries seek out these loans because they maximize their personal discretion by spending the money – or, so to speak, stealing it.
The story of the Republic of Congo’s dangerously innovative experience with oil-backed lending over four decades reveals why resource-backed lending has grown in popularity despite the associated risks, and why the practice is likely to continue to be attractive. in developing countries. Congo, Africa’s third-largest oil producer, is ruled by one of the world’s oldest autocrats, Denis Sassou Nguesso. Under his leadership, oil-backed finance evolved from its close ties with France in the 1980s to a globalized and diverse constellation of debt of some $ 15 billion today which the Congolese elite largely benefits from. Congo’s official $ 6.5 billion debt is clouded by a larger, though difficult to quantify, grim debt owed to a plethora of Asian oil traders and financiers of around $ 8.5 billion. This debt is now an essentially African but global phenomenon and managed by professionals from different continents. It provides a model for other resource-rich countries that is already being emulated across Africa.
It all started relatively small. During Sassou Nguesso’s first period of reign, from 1979 to 1992, the French national oil company, Elf Aquitaine, set up a system managed by its Gabon-based French Intercontinental Bank (FIBA). He pre-financed (by so-called loans preferred) Congo budget in exchange for future oil production. The debt of those years foreshadowed later practices: it was invisible, issued from offshore structures and not included in the country’s public debt. With the end of the Cold War and the momentary displacement of Sassou Nguesso by his rival, former President Pascal Lissouba, the debt strategy has grown and expanded to include others beyond Elf. . However, compared to the massive increase in creditors in the following years, the $ 569 million oil-backed debt incurred between 1988 and 1994 only went to four entities: two Swiss-based banks, one insurer. and an oil company.
This debt system underwent a new evolution after the return to power of Sassou Nguesso in a bloody civil war in 1997. Elf Aquitaine’s successor, the French multinational Total, did not play the same pre-financing role. Congo’s new national oil company, the National Petroleum Company of Congo (SNPC), has picked up the game by starting to sell oil through its subsidiary based in London and Hong Kong. In the process, he established new relationships with the major oil trading companies which have become the main sources of Congo’s oil-backed loans. From that point on, the financial architecture of oil-backed loans was mainly exploited by African expertise. While Elf’s FIBA bank was a French business, African Congolese and Francophone staff with extensive experience in finance and commodity trading managed its successor, the Gabonese and French International Bank, known as of BGFI (created after the scandalous extinction of FIBA in 2000). . Among the senior officials who played a leading role in Congo’s debt strategy were Denis Gokana, former head of the SNPC, and Denis-Christel Sassou Nguesso, son of the president and former head of the SNPC business operation. , who both orchestrated and benefited from the oil trade allocated to these loans in the early 2000s.
These are just the most prominent examples of the personal benefits the elite have reaped from oil-backed loans, as evidenced by a long line of authoritative investigations by fierce advocacy groups such as Global Witness and Sherpa. . Yet the many corruption scandals that have been regularly exposed have done nothing to stop this oil-backed lending madness. Under these conditions, Congolese oil-backed debt accumulated in an increasingly opaque and inventive manner in the following years, a practice which did not prevent the Congo from benefiting from the well-intentioned elimination in 2010 of 1.7 billion dollars of Congolese debt by the International Monetary Fund. Initiative of the indebted poor countries.
With such structures in place, the income deficit induced by the fall in oil prices in mid-2014 could only lead to an extraordinary increase in oil-backed loans. Between 2014 and 2021, that would translate into an additional $ 8.16 billion due to a multiplicity of global entities, according to SNPC’s own data regarding the marketing of the state’s share in oil production. Part of the debt is owed to banks like Société Générale in France and ABN AMRO in the Netherlands, reminiscent of the loans negotiated in France and based in Geneva that had dominated debt until the late 1990s. The commercial arms of oil majors such as Shell and Total are also present. But the biggest creditors by far are the oil traders, in particular Glencore, Vitol and Trafigura, Worldwide Energy Marketing and Consulting, based in Dubai. (Gunvor was a former supplier of oil-backed finance, which has been the subject of scandals.) Other key creditors include Concord Energy, UniCredit, Unipec and Zhenhua, connected to China, none of whose loans are included. in the renegotiation of the Congolese official debt to China. Export-Import Bank.
The result is radically diversified debt, foreign owned, fragmented and globalized to an unprecedented degree. African bankers are collaborating with Western and Asian traders to produce ever more opaque financial engineering. Just as oil-backed loans have become global, so too have related financial ties. SNPC’s foreign exchange reserves are now found in bank accounts in Dubai and other Asian financial centers rather than in the French Treasury account of the Banque de France. This despite the French provision of 135 million euros (165 million dollars) to finance Congo’s budget deficit under the latest agreement with the IMF.
This diversification of Congolese borrowing and refinancing beyond sovereign debt shows the creative and unorthodox ways in which countries like the Congo deploy their resource wealth to access loans. The IMF criticizes oil-financed finance as “unsustainable”, but its ability to prevent or sanction its use is limited. At the same time, Congolese leaders have used the IMF’s concern over “over-indebtedness” to reschedule payments to companies like Glencore, triangulating between its official creditors and pressure from those who are oil-backed.
Indeed, it is only through secondary debt markets, and in particular through the judicial recovery of debts by so-called vulture funds, that the Congolese elite is faced with a lasting threat to its interests. These funds buy Congo’s troubled debt in the secondary market and can use a variety of coercive strategies, including court action which includes the seizure of property belonging to Congolese politicians. While this has proven to be fairly navigable so far, the risk of ultimate default would be catastrophic for the Congo state and could result in legal sanctions for the elite actors most involved in such loans. In theory, a new Congolese regime could deem this debt “odious” or illegitimate and renounce it. But the fraudulent re-election of Sassou Nguesso to a new presidential term in March 2021 has again shown the adaptability of what has long been one of Africa’s most crisis-stricken and most indebted regimes.
The result is a decades-long “black debt” strategy that, as Global Witness notes, has tragic consequences for the Congolese people. It has proven its resilience due to the leeway and benefits it offers to insiders. The history of the Congolese debt and its passage from French domination to an ultimately global distribution of African, Asian and Western operators makes it both a precursor and a model very distilled from more recent practices in Mozambique and Chad, in Equatorial Guinea and South Sudan. , Gabon and other resource-rich but cash-poor states. The marriage between a state that is permanently teetering towards bankruptcy and secret oil-backed arrangements responds to both the political needs of incumbents and their plundering strategies, all to the detriment of the people they are supposed to represent. Others watch and learn.