Sanctions bite

Economist Intelligence Unit

In May 2007, when the US tightened its economic sanctions on Sudan in response to the ongoing humanitarian crisis in Darfur, few observers thought the move would have much effect. Years of US sanctions—originally imposed during the previous north-south civil war—meant that bilateral trade and investment were already almost non-existent. Six months on, the Sudanese economy is still booming—in the capital, Khartoum, at least. Nevertheless, the effects of the stepped-up sanctions are starting to show.

The US “upgrade” of its existing measures had two main aspects. First, sanctions were imposed on around 30 local companies (in addition to the 100 already proscribed) and three individuals, resulting in the freezing of a number of foreign bank accounts. Second, existing constraints on trade with Sudan by US firms and individuals were tightened. The first move has had a mixed effect on the named companies—although arguably these exclude the actors of the most economic importance, such as foreign-backed firms trading in oil and key raw materials, notably gum arabic. Sanctions were imposed on five local petroleum sector firms (including the Advanced Petroleum Company and the Hi-Tech Group, in which a brother of the president, Omar al-Bashir, plays a senior role), with little appreciable impact. Similarly, Sudatel, the majority state-owned fixed-line telecommunications operator, which was also proscribed by the US, has continued to dominate the Khartoum Stock Exchange and expand its regional operations into West Africa.

In contrast, the sanctions on the Al-Sunut Development Company—a joint venture between Dal Group (one of Sudan’s largest holding companies), the national government, the Khartoum state government and the National Social Insurance Fund—has caused plans for the expansion of the flagship Al-Mogran property development (a massive US$4bn real estate project located near the confluence of the Blue and White Niles in Khartoum) to grind to a halt, pending a review. Although some of the companies that have bought plots have begun to build, the second-phase development of a 1,420-acre residential district has been put on hold, as local banks have asked Al-Sunut to close its accounts—at least under that name.

Dollar deficit

Beyond the named companies, the tightening of existing sanctions has had a more pervasive effect, complicating Sudan’s access to international financial markets. Almost all of the country’s export revenue comes from crude oil, priced in US dollars, and through much of 2007 the Sudanese currency was also effectively pegged to the dollar. In late September the central bank decided to convert all of its foreign reserves into euros and other denominations, and this operation is now almost complete (except for a few working balances). The central bank has also advised the government to limit its dollar transactions. However, this has not had much effect on the use of dollars in the economy, which remains widespread.

Most of the liabilities of local commercial banks are in dollars, and must be converted by going through another currency, which leads to higher transaction costs. As the US has continued to seek to eliminate loopholes, the banking sector as a whole is having increasing difficulty managing US dollar transactions. Formerly, much of this market went to a French bank, BNP Paribas, but that institution has now closed its accounts and is moving out. Even the banks from Arab countries which initially sought to take its place, such as Dubai Islamic Bank, Byblos Bank of Lebanon and Bahrain’s ABC Islamic Bank, are said to be showing increasing caution.

Foreign fears

As well as the response to existing US sanctions, some foreign firms are moving out of the country because of concerns about an ongoing popular divestment campaign and the possibility that other countries might also impose new restrictions. Although UN sanctions remain unlikely Sudanese officials are nervous about the mood in Europe, and the UK in particular. Two major UK-based firms, Hilton Hotels and Rolls-Royce, announced that they were withdrawing from Sudan in 2007, as did Siemens of Germany. French firms such as Total, which has exploration rights to Block B in Southern Sudan, and Schlumberger, an oil services company, are also being targeted by the divestment campaign. More seriously, in mid-November the trade ministry of Japan—which bought more than half of Sudan’s oil by value in 2006—was said to be studying the possible effects of an end to Sudanese oil imports owing to public pressure over human-rights issues.

There is no imminent danger of foreign investment in Sudan drying up—interest from the Gulf Arab countries, in particular, is rising rapidly. China and India, as well as expanding their involvement in the oil sector, are becoming involved in a number of infrastructural projects as Asian firms build roads, dams and power stations funded by loans from their respective governments. American sanctions and divestment campaigns driven by Western non-governmental organisations are a boon to these firms, which face much less competition for business. By the same token, however, they put a further indirect burden on Sudan, limiting the country’s scope to negotiate favourable deals.

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