Coffee, anyone? Multinationals take risks in war-torn South Sudan

Coffee, anyone? Multinationals take risks in war-torn South Sudan

Uganda is withdrawing its troops from South Sudan. This will heighten political risks for investors and businesses across South Sudan in the short and medium term. In the long-term, high risks could mean high returns.

On July 9, 2011, South Sudan became an independent state.  By December 2013, civil war had broken out.

On December 15, 2013, Vice President Riek Machar announced his plans to challenge President Salva Kiir in the 2015 elections. As a result, ethnic Dinka elements of the Presidential Guard, loyal to Kiir, disarmed Nuer counterparts loyal to Machar, alleging that they were planning a coup. Following this, Nuer were targeted across Juba by Dinka factions of the Sudan People’s Liberation Army (SPLA), the ruling party of South Sudan.

Salva Kiir (left), Riek Machar (right)

Salva Kiir (left), Riek Machar (right)

The political crisis spread rapidly across South Sudan, opening up ethnic divisions. War has persisted relentlessly, despite peace deals and interventions. The death toll is thought to stand at 50,000, and over 2 million people have been displaced.

The conflict is largely fueled by economic greed. Political elites on both sides seek to gain control of the state and benefit from oil revenues – with South Sudan holding the third largest reserves in sub-Saharan Africa.

So far, peace deals have sought to negotiate power-sharing agreements. These have collapsed several times as rebels and government forces seek to renegotiate the terms through violence.

Uganda’s exit

On October 12, 2015, it was announced that Uganda’s troops would be leaving South Sudan. This will have a decisive impact on the course of the conflict, as a large part of the SPLA’s ability to undermine the rebels has been through support from the 2,000 to 3,000 Ugandan troops.

Uganda’s withdrawal will heighten tensions. The rebels will likely seize the opportunity to put further pressure on the Government of South Sudan (GoSS) as they become more vulnerable. At the same time, government forces are likely to crack down on rebel forces.

The conflict is set to escalate. To prevent a return to conflict, the international community is threatening to use sanctions but, counterproductively, this is likely to enhance prospects of war.

In the face of depleting economic resources, it is in the interests of both sides to return to conflict for relative gains and increased internal cohesion within both sides. The SPLA and rebels rely on financing to maintain internal cohesion, and conflict is the chief means to make relative gains against the opposition.

Bread and butter

Oil fields have become key strategic points for rebels to control. While they cannot control oil production, capturing the fields gives them the opportunity to undermine the government’s revenue source, extort the government, and increase their own bargaining powers in power sharing negotiations.

Owing to these political dynamics, investors have already had to use extensive mitigation efforts. For example, China sent 700 troops to defend China National Petroleum Corporation (CNPC) oil fields in Upper Nile and Unity states. In support, China has also contributed over $38 million in ammunition to the GoSS.

International Oil Companies (IOCs) have a vested interested in supporting and stabilising the government. As Uganda exits, this will become a more challenging role as the GoSS position is jeopardised.

The government also has a strong interest in partnering with IOCs to ensure a consistent flow of revenue, as Luke Patey highlights: “Oil is South Sudan’s bread and butter;” it funds political stability.

Coffee and drinks

Until now, there has been nothing to accompany the ‘bread and butter,’ as it comprises around 99.8% of government revenue. But now there is coffee.

In 2011, Nespresso partnered with Technoserve to establish a new coffee exporting industry in South Sudan. They aim to diversify South Sudan’s economy away from oil. This is no small aspiration. Technoserve CEO William Warshauer stated, “We believe coffee can become the second-biggest export from South Sudan after oil.”

Nespresso plan to invest $2.6 million by the end of 2016 and seeks to increase coffee bean yields to 15,000 tonnes per annum. The aim is to restore an industry destroyed by war. However, the main problem with this is that the war is not over, and may in fact escalate.

The producing region is in southwest Yei, near Uganda, and is not immediately affected by war. Nonetheless, political risks are high. George Clooney, the face of Nespresso, is an activist in South Sudan and is hostile to the government. Thus the government is unlikely to be overly supportive of Nespresso unless revenues are substantial.

Foreshadowing Nespresso’s challenges, SABMiller, a multinational drinks company, has found it highly challenging to deal with the political-commercial environment in South Sudan. The war has caused a lack of foreign exchange reserves, resulting in high inflation rates (59% in August) and stifled demand, meaning than SABMiller have failed to make a profit since 2009.

SABMiller and Nespresso are ‘committed’ to maintaining operations in hope of securing profit. But such profit will rely on the success of peace talks and entrenched stability. Unfortunately the conflict is likely to worsen, cause further inflation, drain foreign exchange reserves and leave the economy in pieces.

Doom and gloom?

Peace is unlikely to be secured in the short or medium term. The continued inadequate regulatory environment leaves in its vacuum a highly politicized environment vulnerable to the course of the conflict.

Multinationals like CNPC, Nespresso, and SABMiller operating in South Sudan will need to ensure pragmatic political coordination with local and national level authorities to navigate high political and corruption risks. In the long-term, when and if peace finally arrives in South Sudan, companies that have a foot in the market are set to enjoy high returns if they can deal with the unrelenting storm preceding it.

About Author

Elliot Kratt

Elliot is a Freelance Analyst with The Economist Intelligence Unit. Prior to this, he held positions in a number of risk consultancies and has worked in East and West Africa. He has been quoted by journalists with the Financial Times and Wall Street Journal. Elliot holds a first class BA (Hons) in International Relations from the University of Leeds. All views expressed are his own.