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Bilateral relations

Afghan mining deal with China facing failure

Afghan natural resources are valued at $3 trillion. But for security reasons, a multibillion-dollar mining deal between Kabul and Beijing is now in jeopardy. Its failure would have a big impact on the Afghan economy.

It was meant to be the largest foreign investment in the history of Afghanistan. In 2007, the state-owned China Metallurgical Group Corporation (MCC) acquired the extraction rights to the Mes Aynak mine in Logar province for $3.5 billion (2.6 billion euros). The mine, located in eastern Afghanistan, is believed to sit on one of the largest unexploited copper deposits in the world. The Chinese put its current value at $10 billion, but the ambitious project is now on the brink of failure. Not a single gram of copper has been extracted in almost five years.

The Afghan Minister of Mines and Petroleum, Wahidullah Shahrani, blames the "precarious security situation" for the delay. But he also stresses that the site is home to 1,500-year-old Buddhist temples, which must first be secured by archeologists. "To be very upfront with you, the MCC doesn't seem to be that active," Shahrani said, adding that he would meet the Chinese sometime soon to talk about the project's future.

The Afghan Minister of Mines and Petroleum, Wahidullah Shahrani, (Photo: dpa)

Schahrani: 'The MCC doesn't seem to be that active'

So far, the Chinese have failed to fulfill their obligations with the Afghan government. Alongside the payment for the mining rights, the contract includes an $808 million bonus as well as the construction of a railway line and a 400-megawatt power plant.

Protection money

Zarghona Rassa, from the Afghanistan Extractive Industries Transparency Initiative (EITI), therefore believes that the Afghans will seek to review the agreement. "The government of Afghanistan is not happy with the way the Chinese are dealing with the contract," Rassa told DW, adding that a cancellation of the deal was no longer off the table.

But it seems that it's not only the Afghans, but also the Chinese who are unhappy with the current state of affairs. Jawed Noorani, from the Afghan NGO Integrity Watch Afghanistan, says the MCC no longer regards the deal as profitable and is therefore using the Buddhist temples as an excuse to gain time for new negotiations.

On top of that, a third player is now demanding protection money. "The security situation has worsened dramatically," said Noorani. The Chinese had already agreed to invest in the railway line, the gas project and the power plant to get the electricity for extracting the copper. "Now the Taliban want a slice of the pie and that's simply too much for the Chinese. This is why they want to renegotiate."

Wang Lian, professor at the School of International Studies at Peking University, considers the lack of security and the impending withdrawal of ISAF troops to be the main reasons for the possible failure of the project. "Several political forces in Afghanistan are fighting for power, so it is understandable that the MCC is not particularly active."

Wang says he is confident that the corporation will press ahead with its investment projects as soon as the security situation in Afghanistan stabilizes. "An economically stronger Afghanistan is also in China's interest," he adds.

'Big impact on investments'

The Chinese were not the only ones competing for the mining rights to Mes Aynak. Kazakhstan, for instance, had a fair chance, but refused to construct the railway line. However, Stephen Carter, from the international NGO Global Witness warns that Afghanistan would be in a much weaker position should it decide to re-commission the project.

"The Chinese company has now put the Afghan government in a delicate position. If the current contract fails, it is not clear whether another company will offer the same terms as before," Carter told DW. The expert is of the opinion that the possible failure of the largest foreign investment project to date could have a big impact on future investments.

Big hopes on mining

Minister Shahrani is keen on relying on mining as an engine for economic growth. "Our goal is for the country to be able to stand on its own feet by the end of 2014. The mining industry should be able by then to provide the state with $4 billion in revenue every year."

Afghan security forces keep watch as smoke rises from the site of an attack in Kabul, July 2, 2013.(Photo: Reuters)

The dire security situation is jeopardizing the mining deal

Currently, 90 percent of Afghanistan's budget is supported by foreign donors. According to Afghan authorities, the country is in possession of over 2.3 trillion euros worth of natural resources, including rare earth minerals, lithium, iron, tungsten, copper, lead, zinc, among others.

It is especially lithium and rare earths which interest Germany as an industrial country. They can be used in the manufacturing of turbines for wind energy. Mining is a welcome source of income for the war-torn country, but without the Chinese or similar investment partners, this dream could shatter.