Sudan's Gold Sector: Opportunities and Risks
The Sudanese gold industry presents a great opportunity for foreign direct investment. However, as indicated by the unrest caused by socially irresponsible gold mining in Sudan’s peripheral regions, there are several reputational and regulatory risks for potential international investors. They can be summarised as follows:
Risk 1 – Conflict gold: Militia control – particularly the Rapid Support Forces - of Sudanese gold mines increases the likelihood of Sudanese gold funding human rights atrocities. Even responsible buyers such tech giant Apple are exposed to these reputation risks, as the UAE’s relaxed gold import regulation enable Sudanese gold to enter the global market.
Risk 2 – Regulatory risks: Uncertainty over the implementation of Sudanese legal frameworks poses risks for international investment. As well as lacking transparency, the Sudanese judicial system also lacks the capacity and resources enforce laws or regulatory reforms. As it is also subject to political interference, corruption risks are enhanced.
Risk 3 - Corruption and Political interference: Omar al-Bashir’s deep-state remains powerful in Sudan, holding strategic political positions that leaves it poised to consolidate its dominance over the Sudanese economy, particularly the gold sector. Political interference in the gold sector is heightened by the importance of gold in securing much-needed foreign currency reserves, creating an investment playing-field in which political connections are a crucial competitive advantage. In addition, political interference in the gold industry has also contributed to economic obstacles for international investment such as currency risk and high inflation. These issues contributed to al-Bashir’s ouster, and enhance the fragility of the current transitional government.
Opportunities
Why is investing in Sudanese gold attractive?
With progress being made towards sanctions being lifted from Sudan[1], pre-existing private sector attention towards Sudan’s relatively untapped gold mining industry may intensify.
High supply
The opportunities for international investors are visible – Sudan is the second largest gold producer in Africa [2]. Sudan is also projected to become the ninth largest gold producer in the world, as well as remaining one of the 20 countries producing 38% of the world’s gold supply.[3]
Increasing demand
Increasing global demand for gold makes the prospect of investment into Sudanese gold attractive. The annual volume of gold bought by investors has increased by at least 235% over the last three decades [4]. Central banks globally are expected to increase gold purchasing that has steadily intensified over the past decade. In an era of political instability and market shocks, gold is viewed as an integral part of multi-asset portfolios that protect purchasing power and minimise losses. Global trade tensions saw central banks purchase a record $15.7bn of gold in the first six months of 2019, in efforts to diversify their reserves away from the US dollar [5]. The global technological revolution also increases gold demand, due to its centrality to innovations in technology that is driving new uses in medicine, engineering and environmental management. [6]
However, recent developments in Sudan’s gold sector have highlighted the issues which serve as obstacles to international investment.
Recent development: What is happening in Sudan’s gold mines?
Recent developments in South Kordofan and Darfur, gold-rich areas in Sudan’s peripheries, signify concerns about the investment climate of Sudan’s gold sector.
The chaotic practices of local mining firms linked to the security apparatus have resulted in socially irresponsible environmental damage and societal unrest. This highlights political, reputational and environmental risks. Meanwhile, the judiciary and civilian politicians have proven themselves powerless in attempting to regulate gold mining activities, reflecting regulatory risks.
What happened?
In early September, various localities in the peripheral region of South Kordofan witnessed almost daily mass protests and sit-ins against the use of toxic substances such as cyanide in gold mining, following reports of environmental and health disasters in the region, including genetic deformities, and human and animal deaths [7].
The Rapid Support Forces militia and its associated company El Juneid refused to implement the governor of South Kordofan’s orders to halt gold mining operations [8]. South Kordofan locals called for the dismissal of the South Kordofan governor due to his inability to get the RSF to halt their activities [9]. Sudanese human rights organisations called on the transitional government to hold RSF commander Himedti accountable for the environmental degradation [10]. Himedti personally owns various gold mining companies active in Sudan, and has acquired immense wealth by using his troops to take control of mines [11].
What have the authorities done?
Mohammed El Taayshi, a civilian member of the Sovereign Council which Himedti also sits on, joined residents in calls for the halting of gold mining operations [12]. However, his calls for those responsible for the environmental damage to be brought to trial and pay compensation remain unheeded.
The powerlessness of civilian politicians led South Kordofan’s locals to take matters into their own hands, attacking an RSF base and killing one of its members
They torched the offices of various gold-mining companies, including those of El Junaid [13]. Mining plans belonging to members of Sudan’s intelligence services were also attacked. [14]. Arriving in 27 vehicles, the RSF retaliated - attacking locals and detaining six men [15].
Although Sudan’s cabinet has now outlawed the use of mercury and cyanide in mining, locals doubt whether gold mining companies can be regulated [16]. This is a result of the limited capacity of both government departments and the judiciary, which will be further explored in risk 2.
As a result, Sudan’s gold sector is dominated by the RSF, described by Sudan expert Alex de Waal as “the ruthless mercenaries who run [Sudan] for gold.” [17]
Investment Risks
Risk 1 - Conflict gold:
Sudan’s main conflict zones, Darfur, South Kordofan and the Blue Nile state, are gold mining hotspots.
The RSF controls much of Sudan’s gold
Particularly concerning is gold coming from Jebel Amir in North Darfur, which is estimated to produce 17% of Sudan’s gold [18]. Himedti wrestled control of the area from tribal rival Musa Hilal in 2012. In doing so, the RSF killed over 800 people from the Bani Hussein ethnic group, before proceeding to get rich by mining and selling gold. [19]
Himedti’s owns or has interests in several gold mining companies active in Darfur, via his holding company El Juneid [20], with the profits financing the RSF’s campaign of terror across Sudan. The RSF is also involved in two other countries where there is an active civil war: Yemen and Libya [21].
How does Sudan’s conflict gold enter the global market?
Relaxed regulations and inadequate due diligence procedures – both in Sudan and the UAE, where it is “almost exclusively sold” [22] – enables Sudan’s conflict gold to enter the international market. This exposes businesses at the other end of the supply chain exposed to reputational risk.
75% of Sudanese gold is smuggled out of Sudan [23], with the remainder bought by the Sudanese Central Bank, at prices higher than the black market rate due to Sudanese desperation to mitigate its foreign currency shortages by selling gold to the UAE.[24]
Relaxed UAE regulations allow facilitate the entry of Sudanese gold to the global market.
The UAE is an attractive destination for Africa’s illicit gold trade, as reflected in the share of African gold in the UAE’S gold imports increasing from 18% to nearly 50% between 2006 and 2016 [25]. Not only does trading in gold account for nearly one-fifth of the UAE’s GDP, but limited regulation means that informally mined gold can be legally imported, tax-free, without documentation requirements [26]. The UAE is also a major receiver of the 75% of gold that is smuggled out of Sudan, due to the ease with which smugglers can carry gold in their hand-luggage on commercial planes. [27]
In 2012 alone, it was estimated that about 57 tons of Sudanese gold were said to have been received without conducting proper due diligence as to whether it had come from a conflict zone. [28]
Even entities that do not do business with Sudan are exposed to reputational risks.
In 2016, UK consultancy giant Ernst & Young had a reputational issue, over its relationship with UAE gold refiner Kaloti Group [29]. Kaloti allegedly categorised Sudan’s conflict gold as scrap or already refined, a technique used to avoid enhanced due diligence of freshly mined gold. [30]
From the UAE, Sudanese gold is frequently traded with Swiss-based gold refiners, which in turn supply major multinationals, many of which are based in the west and are subject to strict responsible buying regulations [31]. Tech giant Apple was almost implicated in a reputational crisis due to third-party association with Sudanese conflict gold.
Evidence and publicly accessible information shows that in 2012, Kaloti transacted with Swiss-based company Valcambi, which as of 2016, was a supplier to companies like Apple [32]. Apple’s supplier disclosure documents said that a third-party consultant was commissioned to conduct an independent investigation on potential links between Kaloti and refiners that have been reported in Apple’s supply chain. [33]
The wider risk of investment into Sudan’s gold industry, as well as indirect involvement in conflict gold that is funded atrocities, is further heightened by the challenges in ensuring that Sudanese gold can be verifiably traced to a conflict-free mine to avoid being red-flagged and therefore excluded from responsible buyers supply chains.
Red-flagging Sudan’s conflict gold is challenging
Firstly, although the Dubai Multi Commodities Center requires its members to conduct due diligence on their supply chains for connections to conflict and use conflict-free auditing systems [34], the UAE lacks any incentive to enforce strict regulations on gold imports from Sudan, including requirements that imports are documented and removing the hand-carry rule that allows smugglers to carry in large amounts of gold with limited scrutiny. Should the UAE do so, it may incur financial losses in an industry that its one-fifth of its GDP.
Secondly, responsibility lies with the Sudanese Central Bank. Despite detailed OECD due diligence guidance with regard to gold from conflict-affected areas, Sudan has been able to ensure that its conflict-gold enters the global market by ensuring that gold is centrally refined in the Central Bank owned Sudan Gold Refinery Co. [35] Although it is not technically challenging to red-flag gold prospected in conflict zones by stamping gold bars to indicate the mine of origin, this has not been done. Given Sudan’s need to trade gold for foreign currency with the UAE, it too would suffer financial losses if it red-flags its own gold – particularly as it much of the proven gold reserves are in conflict-affected areas where the RSF militia is active.
This also highlights the weak capacity of Sudan’s regulatory system, which reflects an investment climate characterized by legal uncertainty and low confidence in the rule of law.
Risk 2 – Regulatory risks
The Sudanese government and the judiciary lack the capacity to enact or enforce laws and regulatory reforms. As indicated by 75% of Sudanese gold being smuggled, Sudan has been unable to curb smuggling due to the same factors which create an unfavourable international investment climate: inconsistent policies regulating the gold mining sector, corruption, militia control of gold mines, weak enforcement of regulations, and a lack of coordination between government departments responsible for implementing regulations.
The aforementioned factors meant that the governor of South Kordofan, as well as the civilian technocrats at the Sudanese cabinet and the sovereign council, were unable to prevent the RSF’s associated mining companies from using cyanide in their extraction operations – despite local opposition.
No legal clarity
The Sudanese legal system lacks the legal clarity to assure international investors, with inconsistent policies and laws being passed that have not been enforced. For example, between 1999 and 2015, six laws were passed to regulate the gold mining industry, ranging from provisions to protect the environment and forbid child labour, to promoting private sector investment. Yet poor coordination between ministries, and federal, provincial and local governments and different departments means that regulations are rarely enforced. [36].
Weak judiciary
Sudan’s regulatory system lacks the transparency and political impartiality needed to deliver objective rulings. Despite possessing robust laws, the judicial system lacks independence, and is subject to political interference, as well as being undermined by the lack of resources, inadequate training and low salaries that increase corruption risks.[37]
An example of how corruption impacted the gold industry was when Russian company Siberian Golden Stone went unpunished for breaching an investment contract, in which it promised to pay a $5 billion-dollar investment guarantee. The deal was previously orchestrated at government level. [38]
It would be a mistake the assume that the fall of Omar al-Bashir has seen the development of an independent Sudanese legal system. Al-Bashir’s deep-state has maintained its political and economic power, and by extension, its institutional power over the judiciary.
Risk 3 – Corruption and political interference
Prior to understanding the political risks involved in investing in Sudan’s gold, the political make-up of post-uprising Sudan must be understood.
The “new” Sudan?
The terms of Sudan’s post-Bashir power-sharing agreement means that ultimate authority in Sudan lies with the 11-member sovereign council – of which five members are from al-Bashir’s security apparatus [39]. In the Cabinet, the military retains the key ministries of Defence and the Interior [40]. Military control of those ministries strategically protects their interests in gold mining, given that the influence of the security apparatus in the gold sectors supersedes that of political and economic bodies. This is reflected in leaked emails which revealed that Sudan’s Intelligence and Security Services (NISS) precedence above the Ministry of Minerals and the Sudanese Central Bank when it came to decision making in the sector [41]. With regards to the Interior Ministry, its then-minister, Ismat Abdulrahman criticised the RSF’s dominance of the Jebel Amir mines [42], after which he was forced to resign. [43]
Al-Bashir’s deep-state and its dominance of the gold sector
As reflected in the environmental crisis in Sudan’s peripheries, al-Bashir’s deep-state retain power and influence in Sudan’s transitional authorities, and its allies in the private sector have consolidated their dominance in the gold sector.
With the RSF militias and NISS both possessing gold mines in Sudan, Sudan’s Sudan’s other big mining companies are those linked to al-Bashir’s National Congress Party – such as the Mam Group for Mining and MINAS [44], GIAD Industrial Group [45], the Red Rock Mining Company and Eyat Mining and Exploration [46].
Gold industry corruption is institutionalised by the absence of enforcement of financial disclosure regulations for government officials and the lack of laws that provide for public access to government information. Investors who are not politically active also find it hard to access credible information available regarding the daily market price of gold. This has seen those hesitant to sell their gold detained by security authorities. [47]
The dominance of al-Bashir’s deep-state in the gold sector suggests that investments in Sudan’s gold industry who are not politically connected will be unable to fairly compete with well-connected private enterprises. In addition, there is also a heightened risk of business engagements with politically exposed persons, or socially irresponsible actors in the industry.
Has the uprising limited the deep-state’s monopoly on the gold industry?
Given the Sudan’s current economic situation, it is unlikely that the gold sector will be free of interference. After South Sudan’s independence took 75% of Sudan’s oil reserves, gold increased in importance, representing 40% of Sudanese exports [48]. The Sudanese Central Bank continues buying gold above black market rates in its desperation to exchange gold for foreign currency in the UAE. This process also highlights the economic risks for investors in Sudanese gold.
In efforts to continue buying gold above its market value to obtain foreign currency, the Sudanese Central Bank has printed money more money, causing massive injections of liquidity that led to the inflation [49] and economic crisis which contributed to the fall of al-Bashir. [50]
The consequences are that firstly, the yet-to-be resolved economic problems and their associated social problems also make the transitional government fragile, thereby increasing the risk of another debilitating political crisis.
Secondly, investors are likely to note that Sudan’s continued hard-currency shortages will result in further devaluations of the Sudanese pound, particularly as the currency weakens on the black market [51].
References
1. Sudan Tribune – Sudan’s Hamdok, U.S. Mandelker discuss combating terrorism financing: https://www.sudaninthenews.com/september-27/sudan-news-alert-sudan-tribune-sudans-hamdok-us-mandelker-discuss-combating-terrorism-financing | 27/9/19
2. France 24 - Sudan's gold rush driven by high-risk, unregulated mining: https://www.france24.com/en/20181204-focus-sudan-unregulated-gold-rush-high-risk-artisanal-mining-africa | 4/12/18
3. Corporate Foreign Policy – Will Sudan Become Africa’s Next Investment Hot Spot: https://corporateforeignpolicy.com/will-sudan-become-africas-next-investment-hot-spot-2ae94db01513 | 20/7/18
4. World Gold Council: https://www.gold.org/about-gold/gold-demand/sectors-of-demand
5. Financial Times - Central banks make record $15.7bn gold purchases: https://www.ft.com/content/b62ebb1a-b3a6-11e9-bec9-fdcab53d6959 | 1/8/19
6. World Gold Council: https://www.gold.org/about-gold/gold-demand/sectors-of-demand
7. Sudan In The News: https://twitter.com/SudanInTheNews/status/1181366363153154049?s=20 ? | 7/10/10
8. Radio Dabanga - Demonstrators at sit-in at Sudan gold mining company demand dismissal of governor: https://www.dabangasudan.org/en/all-news/article/demonstrators-at-sit-in-at-sudan-gold-mining-company-demand-dismissal-of-governor | 20/9/19
9. Ibid
10. Ibid
11. [ARABIC] Ayin Network – How do the Rapid Support Militias fund themselves?: https://3ayin.com/%D9%83%D9%8A%D9%81-%D8%AA%D9%85%D9%88%D9%84-%D9%85%D9%84%D9%8A%D8%B4%D9%8A%D8%A7%D8%AA-%D8%A7%D9%84%D8%AF%D8%B9%D9%85-%D8%A7%D9%84%D8%B3%D8%B1%D9%8A%D8%B9-%D9%86%D9%81%D8%B3%D9%87%D8%A7/ | 23/10/18
12. Radio Dabanga – Protests against gold mining in Sudan’s Northern State continue: https://www.dabangasudan.org/en/all-news/article/protest-against-gold-mining-in-sudan-s-northern-state-continues | 24/9/19
13. Radio Dabanga - South Kordofan anti-mining protesters clash with security forces: https://www.dabangasudan.org/en/all-news/article/south-kordofan-anti-mining-protesters-clash-with-security-forces | 6/10/19
14. Ibid
15. Radio Dabanga - Sudan paramilitaries attack, detain public after anti-mining protests: https://www.dabangasudan.org/en/all-news/article/sudan-paramilitaries-attack-detain-public-after-anti-mining-protests | 8/10/19
16. Radio Dabanga - Sudanese govt’s decision on gold mining met with mixed reactions: https://www.dabangasudan.org/en/all-news/article/government-s-decision-on-gold-mining-met-with-mixed-reactions || 14/10/19
17. BBC – Sudan crisis: The ruthless mercenaries who run the country for gold: https://www.bbc.co.uk/news/world-africa-48987901 | 20/7/19
18. Sudan Transparency Initiative – The Politics of Mining and Trading of Gold in Sudan
https://www.dabangasudan.org/uploads/media/5a0c5fb1b2e7d.pdf
19. BBC – Sudan crisis: The ruthless mercenaries who run the country for gold: https://www.bbc.co.uk/news/world-africa-48987901 | 20/7/19
20. [ARABIC] Ayin Network – How do the Rapid Support Militias fund themselves?: https://3ayin.com/%D9%83%D9%8A%D9%81-%D8%AA%D9%85%D9%88%D9%84-%D9%85%D9%84%D9%8A%D8%B4%D9%8A%D8%A7%D8%AA-%D8%A7%D9%84%D8%AF%D8%B9%D9%85-%D8%A7%D9%84%D8%B3%D8%B1%D9%8A%D8%B9-%D9%86%D9%81%D8%B3%D9%87%D8%A7/ | 23/10/18
21. [ARABIC] Al Quds – Rapid Support Forces for rent in Libya after Yemen: https://www.alquds.co.uk/%D8%AF%D8%B9%D9%85-%D8%B3%D8%B1%D9%8A%D8%B9-%D8%B3%D9%88%D8%AF%D8%A7%D9%86%D9%8A-%D9%84%D9%84%D8%A5%D9%8A%D8%AC%D8%A7%D8%B1-%D9%81%D9%8A-%D9%84%D9%8A%D8%A8%D9%8A%D8%A7-%D8%A8%D8%B9%D8%AF/ | | 8/8/19
22. African Business - Sudan’s gold: Hemedti’s untold power: https://africanbusinessmagazine.com/sectors/commodities/sudanese-gold-hemedtis-untold-power/ | 8/7/19
23. Sudan Tribune - 75% of Sudan’s gold production is smuggled: official: https://sudantribune.com/spip.php?article51288 | 10/6/14
24. Enough Project – Fool’s Gold: The Case for Scrutinizing Sudan’s Conflict Gold Trade: https://enoughproject.org/files/Sudan%20Fools%20Gold%20Report.pdf | March 2015
25. Reuters - Gold worth billions smuggled out of Africa: https://www.reuters.com/investigates/special-report/gold-africa-smuggling/ | 24/4/19
26. ibid
27. ibid
28. Mail and Guardian - Illegal 'blood gold' - from war-torn Sudan to your phone: https://mg.co.za/article/2016-05-11-the-missing-paper-trails-of-sudans-gold | 11/5/16
29. Guardian – Whistelblower suing Ernst & Young over gold dealings with Dubai firm https://www.theguardian.com/business/2018/jan/21/ernst-young-whistleblower-suing-gold-audit-dubai | 21/1/18
30. Mail and Guardian - Illegal 'blood gold' - from war-torn Sudan to your phone: https://mg.co.za/article/2016-05-11-the-missing-paper-trails-of-sudans-gold | 11/5/16
31. ibid
32. Panama Papers reveal dubious behaviour by DRC’s gold traders: https://panamapapers.investigativecenters.org/drc/
33. Apple Specialized Disclosure Report 2016: https://web.archive.org/web/20160914150023/https://www.apple.com/supplier-responsibility/pdf/Conflict_Minerals_Report_2016.pdf
34. Dubai Multi Commodities Center - Responsible Sourcing: http://www.dpmc.ae/dpmc2013/Presentation/3Masterclass_Responsble_sourcing_Chirag_Sharma_DMCC.pdf
35. Sudan Transparency Initiative – The Politics of Mining and Trading of Gold in Sudan
https://www.dabangasudan.org/uploads/media/5a0c5fb1b2e7d.pdf
36. ibid
37. GAN Business Anti-Corruption Portal – Sudan Corruption Report: https://www.ganintegrity.com/portal/country-profiles/sudan/
38. Sudan Transparency Initiative – The Politics of Mining and Trading of Gold in Sudan
https://www.dabangasudan.org/uploads/media/5a0c5fb1b2e7d.pdf
39. Sudan In The News – The New Sudan: https://www.sudaninthenews.com/report-the-new-sudan | 26/8/19
40. Ibid
41. Sudan Transparency Initiative – The Politics of Mining and Trading of Gold in Sudan
https://www.dabangasudan.org/uploads/media/5a0c5fb1b2e7d.pdf
42. HSBA Issue Brief for Sudan and South Sudan: http://www.smallarmssurveysudan.org/fileadmin/docs/issue-briefs/HSBA-IB-27-Sudanese-paramilitary-forces.pdf | April 2017
43. ibid
44. [ARABIC] Alshorooq – Mam and Minas excavating gold in Jebel Amir and the North: www.ashorooq.net/index.php?option=com_content&view=article&id=38588:qq-qq-&catid=35:2008-07-30-07-04-03&Itemid=1191 | 8/4/17
45. [ARABIC] Al Quds – Sudan: The Civilian government faces the deep-state and the counter-revolution: https://www.alquds.co.uk/%D8%A7%D9%84%D8%B3%D9%88%D8%AF%D8%A7%D9%86-%D8%A7%D9%84%D8%AD%D9%83%D9%88%D9%85%D8%A9-%D8%A7%D9%84%D9%85%D8%AF%D9%86%D9%8A%D8%A9-%D8%AA%D9%88%D8%A7%D8%AC%D9%87-%D8%AF%D9%88%D9%84%D8%A9-%D8%B9%D9%85/ | 5/10/19
46. Sudan Transparency Initiative – The Politics of Mining and Trading of Gold in Sudan
https://www.dabangasudan.org/uploads/media/5a0c5fb1b2e7d.pdf
47. Ibid
48. BBC – Sudan crisis: The ruthless mercenaries who run the country for gold: https://www.bbc.co.uk/news/world-africa-48987901 | 20/7/19
49. Enough Project – Fool’s Gold: The Case for Scrutinizing Sudan’s Conflict Gold Trade: https://enoughproject.org/files/Sudan%20Fools%20Gold%20Report.pdf | March 2015
50. BBC - Omar al-Bashir ousted: How Sudan got here: https://www.bbc.co.uk/news/world-africa-47892742 | 11/4/19
51. Reuters – Sudanese pound slips on black market after devaluation: https://www.reuters.com/article/sudan-economy/sudanese-pound-slips-on-black-market-after-devaluation-idUSL8N1WP4VF | 9/10/19