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Diamond (Mines) Are Not Forever

In the last week of February, Zimbabwe’s President Robert Mugabe announced that all privately owned diamond mines would be nationalized and taken over by the newly created state-owned Zimbabwe Consolidated Diamond Co. The move affected six primarily Chinese companies. This decision is in keeping with the larger nationalization plan for mines that the President announced in 2012, when he denounced foreign miners and multinationals for “leaving holes in [his] country,” which is the eighth largest producer of diamonds in the world.

The Indigenization Act was the beginning of Zimbabwe’s current policy trajectory. Enacted in 2008, the Indigenization Act purportedly seeks to further the economic empowerment of black Zimbabweans by requiring that “at least 51 per centum of the shares of every public company and any other business shall be owned by indigenous Zimbabweans.” Mines and Mining Development minister Walter Chidakwa is quoted early last year saying that “[t]he 51-49% threshold is … not negotiable.” In the years since enactment, the policy has led to cronyism and stealth nationalization of foreign-owned property.

Then, the government decided to change the mechanisms of enforcing the law by devolving to line Ministries the responsibility for approving indigenization plans, presumably, in order to facilitate more foreign investment in the flailing economy. In August 2015, contrary to the previous statement of Chidakwa, there were even reports that the government had decided to abandon the policy altogether in the face of the continuing economic crisis. This is why diamond miners may have held out hopes of a policy shift away from nationalization instead of Mugabe’s latest, albeit unsurprising, move.

Legal Recourse. However, diamond miners are not leaving quietly. Many of the privately held companies still operating in Zimbabwe prior to Mugabe’s February announcement were Chinese owned. Mbada Diamonds, largest diamond miner in Marange, sued the government in the High Court. Though local courts have not traditionally been thought of as an effective option for recourse in such situations, the company resumed control of its mining assets after this move. Chinese-run company Anjin also filed suit against the government ban in the same court last Wednesday.

Furthermore, Zimbabwe, though not a party to many bilateral treaties (“BIT’), did enter into a BIT with China in 1996 that entered into force in 1998. This BIT may protect the interests of Chinese companies even further, as it prohibits a contracting party from expropriating or nationalizing “investments of investors of the other Contracting Party in its territory, unless the following conditions are met: (a) for the public interest; (b) under domestic legal procedure; (c) without discrimination; and (d) against compensation.” It’s unlikely that the Zimbabwean government would be able to establish these four elements necessary to permit the taking of the diamond mines under the BIT, but this still may not lead to a happy ending for investors. Pursuing an arbitral order and award may not offer much hope, as Zimbabwe has a reputation for refusing to pay such awards or appear in foreign proceedings to attach assets.

Political Recourse. Chinese investors may have political recourse, if nothing else. China-Zimbabwe trade was worth $1.2 billion in 2014, and Zimbabwe recently announced that the Chinese Yuan would now be accepted as legal tender in the country. The Chinese President, whom Mugabe referred to as a “true and dead friend,” visited Harare in December, signing 12 agreements for deals between the countries involving sectors such as telecommunications and power in the process. As a result, the Chinese diamond miners may be able to depend on diplomatic channels stressing the importance of this friendship between countries to mitigate or reverse some of the negative consequences of being forced to leave their mines. The Chinese Ambassador to Zimbabwe, Huang Ping, has already responded to Mugabe’s move by stating, “[w]e hope that the Zimbabwean side would earnestly safeguard the legitimate rights of the Chinese companies and employees, according to the local laws and the ‘Agreement on the encouragement and reciprocal protection of investments between China and Zimbabwe.”

Khadijah Robinson is the author of this article. 

© 2019 Covington & Burling LLP

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