The latest round of foreign power competition in Africa has arrived in Kenya, by rail. In Africa, as elsewhere in the world, global powers provide investment and military support. But these factors alone do not adequately explain the competition that arises, and how it affects the strategic considerations of both foreign powers and African states. What does it look like when global heavyweights like China, Russia and the United States project their power into Africa – and what ability do other actors have to stop them? A contract in Kenya may shed some light on the strategic implications of how and where foreign competition unfolds in Africa, particularly as competition in the periphery increases.

In overseas investment, China has shown a tendency to exploit its lending ability by negotiating onerous loan terms to desperate borrowers. The latest example of this trend is in Kenya, where China made a loan for the construction of a railway connecting the port of Mombasa to Nairobi. The leaked loan contract revealed what many have decried as egregious, pro-China terms that appear to put major Kenyan infrastructure at risk of seizure – and other global powers are taking note.

The Railway Deal

In 2014, the Chinese Export-Import Bank lent Kenya $2.2 billion for the construction of the Mombasa-Nairobi Standard Gauge Railway. Details of the loan agreement were leaked to the Daily Nation, Kenya’s leading news outlet. The terms appear to pledge the revenue and assets of the Kenya Port Authority as collateral for the loan. If China diverts enough of that revenue, which would go into an escrow account it controls, it will effectively take over the agency that manages some of Kenya’s critical infrastructure, namely the Port of Mombasa, should Kenya default. The loan contract also includes a waiver of sovereign immunity for Kenyan assets. The provision implies that, if Kenya defaults, any of its assets or natural resources would be vulnerable to Chinese seizure as collateral. Further, the contract is governed by Chinese law and stipulates that arbitration, should it become necessary, will take place not in a neutral third-party location (a standard practice in such agreements), but in the China International Economic and Trade Arbitration Commission in Beijing. A secrecy clause required that these terms remain confidential – not unusual for Chinese infrastructure loans.

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The leaked terms caused an uproar, but they were hardly surprising. It’s not the first time China has used debt to try to take control over foreign infrastructure with strategic value. After Sri Lanka defaulted on the Chinese loan it used to build the Hambantota Port, for example, China took possession of the port under a 99-year lease. And last year, reports surfaced that the government of Zambia was negotiating a loan from China, using its national electricity supplier as collateral. The details of the Kenyan railway deal add another data point to a growing body of evidence that China is making a habit of requiring loan recipients to put up major infrastructure as collateral for development loans.

The Mombasa-Nairobi railway loan, then, is likely representative of the kinds of deals China is making across Africa, including in strategic spots like Djibouti and Eritrea, on the Red Sea. China has worked to keep the terms of such deals quiet, knowing that public opinion would look askance at them – particularly when borrowing African countries are putting up their sovereignty up as collateral.

What is surprising, however, is the timing of the leak to the Daily Nation. The loan agreement is five years old – why leak the terms now? It may be that Kenya is starting to see China as a threat and is looking for ways to ensure that, if it defaults, it won’t have to hand over its assets. Publicly exposing the agreement’s conditions could also be an attempt by Kenya to get the United States’ attention and solicit better deals with the U.S. and its allies. Most African countries lack leverage on the world stage, but they know who the global rivals are – and, often, how to benefit from their rivalries.

Kenya’s Strategic Role

Kenya plays an important role as a partner in the United States’ strategies in Africa. It first established diplomatic relations with the United States in 1964, shortly after gaining independence from the United Kingdom. The relationship has strengthened during the U.S. war on terrorism. The U.S. has provided security aid to Kenya, which is a key local partner in the fight because of its proximity to Somalia, the base of jihadist group al-Shabab.

The United States has economic interests in Kenya, too. Kenya has one of the largest economies in East Africa, and it’s also one of the more stable countries in the region. (Even so, al-Shabab has targeted the country several times in attacks, including one last week in Nairobi that left 21 people dead, and mass protests over a contested election in 2007-2008 killed hundreds and displaced thousands more.) Combined with Kenya’s location on the coast of the Indian Ocean, these factors make the country a logical hub for U.S. economic involvement in East Africa at a time when the region is gaining strategic importance. Kenya, in fact, was rumored to be an “anchor state” – a partner the United States would use to expand its regional influence – in the new U.S. policy on Africa, which national security adviser John Bolton unveiled in December. (Bolton didn’t mention anchor states in his address to the Heritage Foundation detailing the new strategy.) China’s acquisition of major assets in Kenya could threaten U.S. interests there.

And the U.S. isn’t the only one concerned: India is worried that China’s expanding maritime and naval presence in the Indian Ocean basin will encircle it. India needs to maintain the flow of maritime traffic in the area. While China’s projects in Africa may not pose as immediate a threat as those in Sri Lanka, the continent’s eastern coast and its outlying islands are important enough that India has gotten involved in domestic political affairs. In the 1980s, for example, it intervened in Mauritius to stop a coup, and in 2015 it struck an agreement with the Seychelles to jointly develop an airstrip and a jetty. (Public opinion later torpedoed the deal.) If India can limit Chinese maritime power in the Indian Ocean, it can more easily cut China off at the Strait of Malacca using its military bases in the Andaman and Nicobar islands. If, on the other hand, China establishes a naval presence west of those bases, India would have to divide its forces in the event of a conflict to simultaneously reinforce the Strait of Malacca and defend its rear.

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Power Plays

As China seeks to enlarge its sphere of influence, and as its competitors watch its every move, what power do its debtors and their allies have to resist possible default proceedings, and what can China do to enforce its terms?

In a default, Kenya could refuse to hand over its assets. But doing so would be risky: The move could threaten Kenya’s future access to capital markets and credit, particularly since the International Monetary Fund refused to extend a $1.5 billion standby program after the country failed to implement certain reforms. As Kenya’s current account deficit puts pressure on its foreign reserves and its tax revenues continue to decline, reduced access to credit could pose serious problems for its financial and political stability.

The United States, meanwhile, has a military that’s already overextended, and it probably won’t want to open a new front of military competition in Africa. It would be more likely to counter China by economic means. The U.S. could, for example, encourage multilateral institutions like the IMF to provide funding to a Chinese debtor even if that country failed to implement desired reforms. The U.S. could also provide alternatives to Chinese loans, but that would require offering economically and politically competitive terms – a tall order when China doles out loans with below-market interest rates.

China, for its part, is unlikely to use military force to seize foreign assets, since doing so would undermine its carefully crafted image as an apolitical development partner. It could, however, use financial mechanisms, such as revenue diversion through the Export-Import Bank of China, to choke off funding to the Kenya Port Authority until Kenya acceded to its demands.

Kenya’s not the only country in this predicament; China is funding major infrastructure projects across Africa. For states facing growing debt balances and a current account deficit, there are strong incentives to plug the gap with debt that adds as little to the debt service as possible, even if low interest rates come at a high cost elsewhere. (At present, more than 50 percent of Kenya’s budget is allocated toward debt service.) And, given just how pro-China the terms of the Mombasa-Nairobi railway deal appear to be, it’s likely that officials in Kenya and other recipient countries stand to gain financially from these agreements. Strong political and personal incentives are driving these states to keep borrowing from China – despite the risks to their sovereignty.

If China is indeed regularly demanding sovereign assets as collateral, the locations it chooses for such agreements could indicate where competition with the United States is likely to develop next. In the last decade, China has helped finance some 35 ports around the world, several of which increased its access to the Indian Ocean or to the Bab el-Mandeb strait.

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It has become a common trope that China differentiates itself from Western creditors through apolitical lending. But requiring a country to concede territorial control, especially of strategic infrastructure, in exchange for funding is an inherently political act – and one that draws outside attention. It is in this ambiguous realm between finance and politics that a new era of competition is taking shape in Africa.

Xander Snyder
Xander Snyder is an analyst at Geopolitical Futures. He has a diverse theoretical and practical background in economics, finance and entrepreneurship. As an investment banker, Mr. Snyder worked in corporate debt origination and later in a consumer-retail industry group at Guggenheim Securities, participating in transactions ranging from mergers and acquisitions, equity and debt capital raises, spin-offs and split-offs to principal investing and fairness opinions. He has worked on more than $4 billion worth of transactions. He subsequently co-founded and served as CFO for Persistent Efficiency, an energy efficiency company that used cutting-edge technology to create a new type of electricity sensor for circuit breakers and related data services. In his role, he was responsible for raising more than $1.5 million in seed capital and presented to some 70 venture capital and angel investors in the process. He also signed four Fortune 500 companies as customers, managed all aspects of company accounting, budgeting and cash flow, investor relations, and supply chain and inventory management. In addition to setting corporate strategy, he helped grow the company from two people to a 12-person team. As an independent financial consultant, Mr. Snyder wrote an economics publication for a financial firm that went out to more than 10,000 individuals and assisted in deal sourcing for a real estate private equity fund. He is an active real estate investor and an occasional angel investor. Mr. Snyder received his bachelor’s degree, summa cum laude, in economics and classical music composition from Cornell University.