Governments that are both cash-strapped and already indebted have always had the odds stacked against them. What is a country supposed to do when it’s rejected by the usual sources of credit, but its expenditures continue to pile up? Traditionally, the only answer has been to seek debt alleviation with private and public creditors. But governments that have the advantage of being resource-rich have always had another potential answer: raising loans against future resource production—loans that don’t count as sovereign debt.
It’s a clever bit of financial engineering that has expanded dramatically over the past 15 years. The Natural Resource Governance Institute calculates that African and Latin American countries contracted at least $164 billion in resource-backed loans, especially oil, between 2004 and 2018. There’s a catch, of course—just not one that applies to the elites who are striking these deals.
Oil-backed loans provide borrowers with money but often carry exorbitant fees for fixers as well as high interest rates. This amounts to a major source of public finance risk for the weakly governed countries that resort to them. It’s not just that they are exposed to the fall in the prices of the commodities backing the loans. Because the oil-backed loans are not recorded as external public debt, the borrowing and spending is highly opaque to outside observers. The money thus rarely goes to savings and investment and is instead siphoned offshore toward international financial hubs. Elites in resource-rich countries seek out these loans because they maximize their personal discretion in spending the money—or, as it were, in stealing it.
The story of the Republic of Congo’s dangerously innovative experience with oil-backed loans over four decades reveals why resource-backed loans have escalated in popularity despite the associated risks, and why this practice will likely continue to prove attractive across the developing world. Congo, Africa’s third-largest oil producer, is led by one of the world’s longest-lasting autocrats, Denis Sassou Nguesso. Under his stewardship, oil-backed finance has evolved from its narrow French links in the 1980s to a globalized and diversified constellation of debt of some $15 billion today that the Congolese elite handsomely profits from. Congo’s official debt of $6.5 billion is shadowed by a larger, though difficult to precisely quantify, dark debt to a plethora of oil traders and Asian financiers of around $8.5 billion. This debt is now a primarily African-led but worldwide phenomenon serviced by professionals in different continents. It provides a blueprint for other resource-rich countries that is already being emulated across Africa.
It all started relatively small. During Sassou Nguesso’s first period of rule, from 1979 to 1992, France’s national oil company, Elf Aquitaine, established a system run through its Gabon-based French Intercontinental Bank (FIBA). It pre-financed (through loans known as préfis) Congo’s budget in exchange for future oil production. Debt from these years prefigured later practices: It was invisible, run from offshore structures, and unaccounted for in the country’s public debt. With the end of the Cold War and the momentary displacement of Sassou Nguesso by his rival, former President Pascal Lissouba, the debt strategy grew and expanded to include others beyond Elf. However, when compared to the massive increase of creditors in later years, the oil-backed debt of $569 million contracted between 1988 and 1994 went to only four entities: two Switzerland-based banks, an insurer, and an oil company.
This debt system suffered a further evolution after Sassou Nguesso’s return to power in a bloody civil war in 1997. Elf Aquitaine’s successor, the French multinational Total, did not play the same pre-financing role. Congo’s new national oil company, the National Petroleum Company of Congo (SNPC), took over the game by starting to sell oil via its London- and Hong Kong-based subsidiary. In the process, it established new relationships with leading oil trading firms that became the biggest sources for Congo’s oil-backed loans. From this point onward, the financial architecture behind oil-backed loans was operated primarily by African expertise. While Elf’s FIBA bank had been a French affair, Congolese and Francophone African personnel with long experience in finance and commodity trading managed its successor, the International Gabonese and French Bank, known as BGFI (created the day after FIBA’s scandal-ridden extinction in 2000). Senior officials with prominent roles in Congo’s debt strategy included Denis Gokana, former head of SNPC, and Denis-Christel Sassou Nguesso, the president’s son and former head of the SNPC trading operation, both of whom orchestrated and benefited from the trading of oil allocated to these loans in the early 2000s.
These are just the most prominent examples of the personal benefits the elite has extracted from oil-backed loans, as evidenced by a long series of authoritative investigations by dogged advocacy groups such as Global Witness and Sherpa. Still, the numerous corruption scandals that were regularly unearthed did nothing to stop this binging on oil-backed loans. Under these conditions, Congolese oil-backed debt accrued in ever more opaque and inventive ways in the following years, a practice that did not prevent Congo from benefiting from the well-meaning 2010 elimination of $1.7 billion in Congolese debt by the International Monetary Fund’s Heavily Indebted Poor Countries initiative.
With such structures in place, the revenue shortfall brought about by the drop in oil prices in mid-2014 could not help but lead to an extraordinary increase in oil-backed loans. Between 2014 and 2021, this would result in a further $8.16 billion owed to a multiplicity of global entities, according to SNPC’s own data regarding the commercialization of the state’s share of oil production. Some debt is owed to banks like Societé Générale in France and ABN AMRO in the Netherlands, reminiscent of the French-brokered, Geneva-based lending that had dominated debt until the late 1990s. The trading arms of oil majors such as Shell and Total are also present. But the biggest creditors by far are oil traders, especially Glencore, Vitol, and Trafigura-linked, Dubai-based Worldwide Energy Marketing and Consulting. (Gunvor was an earlier, scandal-ridden provider of oil-backed financing.) Other key creditors include China-connected Concord Energy, UniCredit, Unipec, and Zhenhua, none of whose loans are included in China’s renegotiation of official Congolese debt owed to China’s Export-Import Bank.
The result is a radically diversified debt that is held offshore, fragmented and globalized to an unprecedented extent. African bankers collaborate with both Western and Asian traders in producing ever more opaque financial engineering. Just as oil-backed loans have gone global, so have the related financial links. SNPC’s hard currency reserves now end up in bank accounts in Dubai and other Asian financial centers rather than in the French Treasury account of the Bank of France. This is despite the French provision of 135 million euros ($165 million) to finance Congo’s budget deficit as part of the latest IMF deal.
This diversification of Congolese borrowing and refinancing beyond sovereign debt shows the creative and unorthodox ways in which countries like Congo deploy their resource wealth to access loans. The IMF criticizes oil-backed finance as “unsustainable,” but it has limited capacity to prevent or sanction its use. At the same time, the Congolese leadership has used the IMF’s concern about “debt distress” to reschedule payments to the likes of Glencore, triangulating between its official creditors and pressures from oil-backed ones.
Indeed, it is only through secondary debt markets, and especially through judicial debt recovery by so-called vulture funds, that the Congolese elite face a sustained threat to their interests. These funds buy Congo’s distressed debt on the secondary market and can use a variety of coercive strategies, including action through courts that includes the seizure of property belonging to Congolese politicians. While this has proved just about navigable until now, the risk of ultimate default would be catastrophic for the state of Congo and could carry legal penalties for the elite actors most implicated in such loans. In theory, a new Congolese regime could deem this “odious,” or illegitimate, debt and renege on it. But Sassou Nguesso’s fraudulent reelection for yet another term as president in March 2021 again showed the adaptability of what has long been one of Africa’s most crisis-ridden and chronically indebted regimes.
The upshot is a “dark debt” strategy over decades that, as Global Witness notes, holds tragic consequences for the Congolese people. It has proved resilient because of the leeway and benefits it affords insiders. The story of Congolese debt and of its shift from French domination to an eventually global cast of African, Asian, and Western operators makes it both a precursor and a highly distilled model for the more recent practices in Mozambique, Chad, Equatorial Guinea, South Sudan, Gabon, and other resource-rich but cash-poor states. The marriage between a state permanently teetering toward bankruptcy and secretive oil-backed arrangements fits both the political needs of incumbents and their strategies of pillage, all at the expense of the people they are supposed to represent. Others are watching and learning.
