Policy continuity — government policies creating confidence that taxes, regulations and the like will not be capriciously changed — is one of the most important drivers of investment. Taken for granted in most high-income economies, the uncertainty created by its absence in emerging markets can have a devastating impact on investment flows as foreigners worry about contract abrogation or, in the worst case, nationalization.

But after decades of improvement in governance, uncertainty is on the rise in Africa, propelled by political expediency, corruption and populist ideology. Export restrictions, higher taxes, increased local content requirements and contract “reviews” have mostly taken the place of outright nationalization, as governments amend agreements mid-stream in the hope of gaining a greater share of the pie in resource-extraction operations.

This new wave of what’s been dubbed “resource nationalism,” which gained strength following a 2017-18 spike in key commodity prices, is understandable in terms of short-term domestic interests — and, given the long, checkered history of neo-colonial exploitation, should temper inclinations toward righteous indignation. But there’s good reason to believe that it is not always the best method of mobilizing resources for a country’s long-run benefit. And this seems a particularly inopportune moment in light of fears concerning the pandemic.

Indeed, this seems to be the case for both the Democratic Republic of the Congo and neighboring Zambia. These two major African mineral producers illustrate the spectrum of methods employed, as well as the risks incurred, when countries engage in resource nationalism.

The Democratic Republic of the Congo 

The desperately poor DRC (formerly known as Zaire) produces around 70 percent of the world’s cobalt. The country is also Africa’s biggest producer of commercial copper (and, at least in 2019, the 5th largest in the world) thanks to ores that are two to three times as rich as the average ores mined elsewhere. Finally, there is gold, now extracted at the $2.7 billion state-of-the-art mining operation at Kibali, which since its completion in 2018 has become one of the world’s top 10 producers.

The 2017-18 commodity boom boosted the value of all three minerals, especially cobalt and copper, because of increased demand for high-tech applications. Cobalt prices reached a 10-year high of $89,000 per ton in March 2018, a four-fold increase over 2016. Copper rose by a still impressive one-third in the same period, prompting international mining companies to increase the DRC’s output by 7 percent in 2017 and 13 percent in 2018. For their part, gold prices, which march to a different drummer that other minerals, grew by a more modest (but not insignificant) 20 percent between January 2016 and 2018.

Under pressure to raise revenues quickly amid deepening social unrest after contested elections, President Joseph Kabila’s government proposed a new Mining Code in late 2017. The code closed loopholes that previously allowed companies to avoid taxes on profits (for example, through accelerated depreciation), added an additional 50 percent tax on unexpected windfall profits and tacked on a host of fees that further ratcheted up the government’s claims on revenues.

The most controversial provisions allowed royalties on “strategic substances” to be increased by up to 10 percent at times of high global demand, as well as mandating that DRC citizens hold a one-tenth share in mining companies and a greater than 50 percent share in outside contracting companies. In addition, the stabilization clause (which was supposed to shield firms from unexpected changes) was retroactively reduced from 10 to 5 years, by no accident making incumbent permit holders immediately subject to the new terms. Despite fierce opposition from the investment community, President Kabila signed it into law in June 2018 — just as the commodity boom began to wane.

In mid-2019, the price of cobalt dropped by a whopping 70 percent, the result of falling Chinese demand and dumping by speculators. Copper production as well as that of cobalt has since slowed dramatically. In August 2020, the British company Glencore announced that it was shutting down operations at its Mutanda copper-cobalt mine entirely while it disputed the new mining code.

Zambia

In September 2018, Zambia, Africa’s second largest copper producer, announced that it was also increasing mining duties — for the 16th time in 10 years. In Zambia’s case, the increase was an attempt to cope with the country’s massive debt without cutting the populist spending programs on which President Edgar Lungu’s government depended for support. Then, in May 2019, Lungu announced that the government was considering withdrawing the mining license of Konkola Copper Mines, a subsidiary of India’s Vedanta, for alleged environmental and financial breaches. Copper production fell by 12 percent in 2019 as worsening relations between the government and international mining firms resulted in the scaling back of operations by KCM, as well as Glencore subsidiary Mopani Copper Mines.

Zambia entered 2020 with dwindling foreign exchange reserves, debt equivalent to a whopping 92 percent of GDP and a rare refusal by the International Monetary Fund to consider the country’s request for assistance. Vedanta sought arbitration in South Africa to stop the KCM liquidation, which the Zambian government countered by announcing that a foreign-court ruling would be non-binding.

Investor uncertainty provoked by the KCM dispute, combined with the new mining duties, could result in an ownership shake-up in Zambia’s mineral sector as Western companies reportedly are looking to sell their assets to Chinese state-owned firms. But only if they get there first: this development comes amid reports that the government is considering giving not only the expropriated KCM but also Glencore’s Mopani copper mine to China to settle outstanding debts to the Chinese government and China’s state-owned banks.

Resource Nationalism in the Age of Covid-19

Resource nationalism may no longer be routinely countered with mercenary armies, but it is always risky. Now, with the onset of the coronavirus-induced global recession causing the prices of most commodities to tank and corporations to stampede for liquidity, the risks of adding nationalism to the cost of doing business are all too apparent. No one knows how long it will take for commodity prices to come back — and for the most daring investors to return to places where angels usually fear to tread. But the auguries are not good for much of resource-export-dependent Africa. Post-crisis, the daunting risk premiums needed to attract capital will surely linger, as investment gravitates to places where the rules of the game are more predictable.

In countries with illiquid investments in extraction and refining operations, production will slow, with firms mining only the most profitable shafts and larger companies in some cases abandoning marginal projects that tend to depress their stock market caps. With prices and revenues for most commodities likely to remain in the cellar as the economic impact of the pandemic plays out, look for rising sovereign debt levels, possible defaults and prolonged recessions in countries unwilling or politically unable to unwind their resource nationalization policies.