The Limits of Resource Nationalism

Adios, Socialistas

There is a new reality various governments still dreaming of imposing 'windfall taxes' and other measures of this type on companies involved in the extraction of resources will have to face. So-called 'resource nationalism' is a constant threat mining companies have to live with. They are usually sitting ducks, since they cannot simply move their assets elsewhere. Usually a mine (or an oil field) involves very long range planning and a huge upfront capital commitment. As a result it often appears easy to blackmail mining companies. The calculation from the point of view of greedy politicians is that the companies will rather live with a much smaller profit than lose the entire value of their investment.

It becomes a bit more complicated when the investment necessary to build a big mine hasn't been undertaken yet. Ecuador has followed in the footsteps of a few other Latin American countries and has elected a distinctly left-wing government. Similar to Venezuela and Bolivia, the government immediately ripped up all agreements the previous government had made with regard to mining, as the resources of the country are held to belong to that mythical collective, 'the people'. All foreign-owned mine developments ground to a halt consequently. The government at first enacted a new mining law that simply made things impossible for miners. It then promised it would enact reforms that would once and for all clear up the legal fog in which mining has been mired since then and provide a more 'investor-friendly' framework, but it has so far failed to deliver.

Meanwhile, mining companies that were about to develop large projects were engaged in direct negotiations with the government in order to gain clarity on the status of their properties (actually, no longer 'their' properties, but those of the aforementioned 'people').

Now the putative developer of the biggest mining project in the country, Kinross Gold, has walked away after two years of fruitless negotiations, during which the government has played hardball with the company throughout. Specifically, the government would not back down from demanding a 70% 'windfall tax'.

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