EDA: Sudan’s economy balances on Chinese investment

EDA: Sudan’s economy balances on Chinese investment

EXTERNAL DEPENDENCIES ANALYSISSudan’s economy lies in the hands of its Chinese trading partners, who have invested billions of dollars in the East African nation’s oil industry. As the conflict in South Sudan continues to unfold, Sudan must work to maintain its portfolio with China while strengthening new trade alliances.

Nearly two decades after the United States levied sanctions against the regime of President Omar Al-Bashir, Sudan continues to find itself tangled in a web of economic woes and armed conflict, made worse by the ongoing war in its young southern neighbor.

South Sudan, which gained independence from Sudan in 2011 after a lengthy civil war, has been mired in a nine-month internal power struggle between President Salva Kiir and his former vice president Riek Machar. The crisis highlights the instability greater Sudan has faced since the 1990s, when the United States first levied sanctions in response to Sudan’s “continued support for international terrorism” and “prevalent human rights violations.”

While much of the world observed the US embargo, China continued with its oil and infrastructure investments in Sudan. Even as a civil war raged on in Darfur, the Chinese National Petroleum Corporation became Sudan’s largest foreign investor. According to GRI’s External Dependencies Analysis, these investments helped pave the way for $6.3 billion in Sudanese crude exports to China in 2011.

China is by and large Sudan’s largest trading partner, accounting for more than 70% of the African nation’s exports in 2011. To ensure the vitality of its foreign investment, China invested billions in pipelines, refineries and oil terminals to transport crude from the south up to the Port of Sudan on the Red Sea. In the process, Sudan gained a reliable new stream of state revenue from an investor with a seemingly boundless thirst for energy.

But Sudan is not just reliant upon China for the solvency of its crude portfolio. Sudan depends on China for 22% of its imports as well, ranging from iron ore to electrical appliances to military equipment. And although Sudan does not boast the most impressive electrical grid, what little infrastructure it has is heavily dependent upon Chinese machinery, metal, and electric equipment.

As one of the world’s fastest growing economies, China’s import/export portfolio is far more robust and diverse than Sudan’s, creating a truly asymmetrical relationship. China only imported 2.3% of its crude from Sudan in 2011, though this figure makes up the overwhelming majority of Sudan’s exports.

With so much of Sudan’s revenue in the hands of one customer, China could demonstrate unparalleled diplomatic and financial leverage over its east African trading partner. Today, as the world watches the crisis in South Sudan rapidly unfold, Sudan must carefully manage its strained relations with the South while ensuring the resilience of its Chinese export market.

When South Sudan gained independence in 2011, it took with it more than three quarters of the formerly united country’s oil production. Although the South now controls one of Africa’s largest oil fields, Sudan controls the pipelines and refining equipment to bring the crude to market.

With the majority of production out of its control, Sudan relies on oil transit fees paid by South Sudan to improve its infrastructure and fuel state budgets. In 2012, Sudan demonstrated its power over the South by closing down its pipelines for over a year while the two nations negotiated transit fees. Throughout the dispute, Chinese diplomats visited both countries to help find a solution to their disagreement.

While China has typically favored “non-interference” as a way to maintain business-friendly foreign policy, its involvement in Sudanese political affairs demonstrates its willingness to increase engagement to secure its investments. As fighting continues to rage in South Sudan, Sudan, which owns and operates Chinese-made weapons and aircraft, is likely to act in accordance with Chinese interest to ensure the strength of its export and import markets.

Sudan’s balancing act with its largest trading partner and its southern neighbor, fortunately, gains some relief from a growing bilateral trade portfolio with the Gulf. While often a point of international contention, Sudan’s gold mining industry has become the basis of a mutually beneficial relationship with the United Arab Emirates. According to GRI’s External Dependencies Analysis, trade with the UAE accounted for 10.5% of Sudanese exports in 2011.

Saudi Arabia has also developed a sizeable portfolio with Sudan, exporting over $800 million in plastics, petroleum, and agricultural materials the nation in 2011. Unlike China and the UAE, Saudi Arabia does show some dependency on Sudan’s export market. The Kingdom, which imports almost a third of its sheep and goats from Sudan, has invested more than $13 billion in Sudanese agriculture, food, and mining products over the past decade.

With exports to China expected to decline by over 11% over the next five years, Sudan must strengthen and diversify its trade portfolio with the Gulf to strengthen its economy and secure foreign direct investment. With US sanctions still in place, however, a true break from Sudan’s dependency on China is likely many years away.

The External Dependencies Analysis (EDA) project makes country vulnerabilities stemming from their main trading relations explicit, and shows to what extent these might impact their current and future behaviour. With the EDA, GRI provides a new comprehensive tool for businesses, analysts and investors to grasp dynamics that are key to political risk analysis.

Note: Trade Data comes from GRI’s External Dependency Analysis based on data derived from the International Trade Center.

About Author

Rami Ayyub

Rami is an analyst with a US Defense and Space firm, where he works in strategic planning and finance for Civil and Defense programs. He holds Bachelor degrees in Finance and Classical Music from the University of Maryland, College Park.