July 05, 2010

This Weekend’s News: Investing in Iraq and Afghanistan

There have been a lot of developments around reconstruction and foreign investments in Afghanistan and Iraq recently, including several reports from The Washington Post and The New York Times over the weekend.

After a 3.5 billion dollar contract in 2007 to develop copper mines at Aynak, China is now the largest foreign investor in Afghanistan, according to a Washington Post report on Saturday. The 2007 contract is just one of the largest examples of the benefits China is reaping from its expanded economic footprint in Afghanistan, which includes investments to develop Afghanistan’s natural resource wealth and a viable market filled with Chinese goods, all while fostering an amicable, long-term political relationship with Kabul.

It’s no secret that China is interested in Afghanistan’s raw materials given its growing appetite for natural resources. As the Post’s Tini Tran noted, “China drew worldwide attention with the $3.5 billion winning bid by the state-owned China Metallurgical Group Corp. tap one of the world's largest unexploited copper reserves.”

And while China has become the largest foreign investor in Afghanistan, its development aid pales in comparison to the United States’ assistance, 180 million dollars versus 12 billion dollars over the last eight years, according to Tran. Instead, what China has done is focused on signature projects built by Chinese workers that are far more visible to the Afghan people than American-funded projects, such as the “Parwan irrigation system in the north, a conference hall for Karzai's presidential palace and the Jamhuriat Hospital in Kabul.” In contrast:

‘America spends billions and billions of dollars, but they give out projects to contractors from different countries - China, India, Pakistan, etc. because the labor costs are low,’ [H.E. Sultan Baheen, Afghan Ambassador to China,] said. So when the average Afghan looks at an American project, ‘How does he know this is American money?’

At the same time, cheaper Chinese goods are starting to populate Afghanistan’s growing market as trade between the two countries continues to flourish. According to the Post, “Trade between the two neighbors has mushroomed over the past decade from $25 million in 2000 to $215 million in 2009, according to Chinese figures.”

And while China benefits economically from its investments and growing relationship with Afghanistan, its amicable ties with Kabul are positioning it to make significant security gains in its Xinjiang province, which borders Afghanistan:

‘Our interest is clear. We need a peaceful neighbor because we have our own problems in Xinjiang,’ [Liu Xuecheng of the China Institute of International Studies, the Chinese Foreign Ministry's think tank] said. ‘If we have a friendly country in Afghanistan, they can help us to manage issues on the separatists, security and territorial integrity. We want Afghanistan to be successful.’

In a slightly related story, The New York Times reported on Sunday that the United States is struggling to fulfill its reconstruction commitments in Iraq. According to the Times, American reconstruction authorities have been focusing on a major sewage treatment system in Falluja since the major battles that unfolded there in 2004.

“After more than six years of work, $104 million spent, and without having connected a single house, American reconstruction officials have decided to leave the troubled system only partly finished, infuriating many city residents,” the Times reported. “Falluja remains dependent upon septic tanks that leak raw waste into streets and down storm drains and eventually into the Euphrates River, a main source of drinking water in Falluja and cities downstream.” (As an aside, see my related post on water as a security issue in Iraq on The Best Defense.)

The sewage treatment system is just one project that has been scaled back as American troops who protect the reconstruction projects prepare to drawdown. Many of the projects are being completed quickly in anticipation of a further scaling back in American troops and other resources. “Even some of the projects that will be completed are being finished with such haste, Iraqi officials say, that engineering standards have deteriorated precipitously, putting workers in danger and leaving some of the work at risk of collapse,” the Times reported.

The laundry list of projects that have yet to be initiated in Falluja include further developing the power and clean water sectors. Electricity generation in particular is one area that could hamper the sewage system from coming online:

As an alternative, American planners said the system might need to rely heavily on backup generators for power, which creates its own set of problems — including that the treatment plant and pumps will require as much as 250 gallons of fuel each hour to operate in a country where fuel shortages remain commonplace.

It is worth noting that as the United States struggles to maintain its reconstruction and investment commitments in Iraq, like in Afghanistan, China is poised reap significant dividends from its investments in Iraq, particularly as the country’s oil sector stabilizes (for more, see this news story in the Post on Friday).

Other Notable Stories in the News


There are a couple of other stories I wanted to flag for you as you head into the week related to energy. The first is from The Washington Post on Saturday reporting that the Department of Defense is preparing to solicit bids for contracts to deliver fuel to forward operating bases at Bagram and Manas, Kyrgyzstan. The story is significant because, as the Post reported, “The proposed Bagram contract stipulates that the jet and diesel fuel to be supplied must be brought in via northern supply routes, like the fuel that goes to Manas. Though much of Bagram's fuel will still be trucked in from the south, the intent is to reduce dependence on that hazardous route, which is frequently the target of militant attacks.”


The second story from the Sunday New York Times reported that loan giants may opt to block clean energy programs. According to the Times, “Two government-chartered mortgage finance companies are unlikely to accept loans on homes that are part of a special program that lets homeowners repay the cost of energy improvements through a surcharge on their property tax bills, according to Energy Department officials.”

This Week’s Events

It looks like a fairly slow week in Washington as Congress is on its Fourth of July break. But there’s at least one Natural Security-related event this week. On Wednesday at 2 PM, CSIS will have an event on the medium-term projections of the natural gas and oil markets. I’ll keep you updated as I hear more about events in Washington throughout the week.