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Amid the biggest boom in the history of the copper market, the country with the richest reserves heads to the polls in two days with almost nothing but misery to show for it.
Monday’s election in the Democratic Republic of Congo (DRC) should be a joyful event: It is only the country’s second democratic election since 1960, and the first that is being run without massive support from the international community.
Unfortunately, the DRC remains a test case for a country that has failed to benefit from its tremendous natural resources. Despite an estimated US$24-trillion of mineral wealth, poverty is still at unacceptable levels: The Congo recently ranked last among 187 countries in a human-development report from the United Nations. Sectarian violence and rape remain commonplace in the eastern part of the country, and the government has come under fire for alleged corruption and mismanagement. The election has shone a light on these issues, but analysts worry about violent outbreaks no matter who wins.
Amid the turmoil of the campaign, a shocking new report came to light this week that detailed the government’s resource dealings and made fresh allegations of corruption. It has thrown a surprising wrench in the proceedings.
The anonymous report alleges that the Congolese people have lost more than $5-billion, along with thousands of jobs, because the government sold prized resource assets to offshore shell companies at laughably cheap prices. The shells then sold some of the assets to outside companies at much higher premiums, allowing insiders to profit instead of the people of the DRC. The report provides hundreds of pages of supporting documents to make its case.
These shell companies have a few things in common, according to the report: They are based in the British Virgin Islands (BVI) or Gibraltar, they have no expertise in resource development, and many of them are linked to an Israeli businessman named Dan Gertler, who has close ties to Congolese President Joseph Kabila.
“Particularly over the last couple of years, the Congolese state has sold assets at incredibly undervalued prices that were then sold at much higher prices on international markets. And the beneficiaries of these sales have been a small clique of businessmen,” said Congo analyst and author Jason Stearns.
Mr. Gertler is well-known to Canadian investors. After the DRC expropriated First Quantum Minerals Ltd.’s US$750-million Kolwezi project in 2009, a majority stake was passed on to one of Mr. Gertler’s BVI subsidiaries called the Highwind Group. Highwind then sold the majority of that stake for just US$145-million to Eurasian Natural Resources Corp. (ENRC), a London-listed company.
The Kolwezi transaction is documented in the report, along with a few others that are just as irregular.
Perhaps the most bizarre is a smaller deal involving a mining joint venture called SMKK, which was half-owned by Eurasian Natural and half-owned by state mining firm Gécamines. The report alleges that the state-owned company sold its share of SMKK to a shell controlled by Mr. Gertler for just US$15-million. Even though Eurasian Natural appeared to have a right of first refusal, it let the deal go through. It then bought the stake from Mr. Gertler’s company for US$75-million, according to the report. That suggests the government either valued the stake at only one-fifth of its market value or Eurasian Natural paid five times too much for it.
For the rest of this article, please go to the National Post/Financial Post website: http://business.financialpost.com/2011/11/25/congos-plethora-of-resources-translates-only-to-misery/