Warren Buffett and Darfur
Sudan divestment movement targets Berkshire Hathaway's China oil holdings, reports Fortune's Marc Gunther.
NEW YORK (Fortune) -- Could Warren Buffett's Berkshire Hathaway be helping to support genocide in Darfur?
The Sudan divestment movement, which has persuaded dozens of universities and state governments to sell holdings of companies doing business in Sudan, says Berkshire (Charts, Fortune 500) should do the same. Buffett is resisting. The legendary investor will tangle with his critics over the issue on May 5 at the company's annual meeting in Omaha.
It should be a fascinating debate. Berkshire has become a target of the divestment campaign because it owns 2.3 billion shares of PetroChina Co. (Charts), a subsidiary of the state-controlled China National Petroleum Corp. (CNPC). CNPC has extensive operations in Sudan; it owns a major stake in Sudan's national oil consortia.
China and Sudan are engaged in a marriage of convenience. For its part, China gets oil - Beijing purchased more than half of Sudan's oil exports in 2005. China's growing demand for energy has led the Chinese to cultivate close relationships with many oil-rich African nations.
In return, Sudan gets money, weapons and political backing from China. Because about 70 to 80 percent of Sudan's oil revenue is funneled into its military, China's oil assets in Sudan are "an undeniable and well-documented enabler of Khartoum's genocidal policy in Darfur," according to the Sudan Divestment Task Force.
As a member of the United Nations Security Council, China has also blocked efforts by the U.S. and Britain to apply stricter sanctions against Sudan. Between 200,000 and 400,000 people have been killed in Darfur, and millions more have been thrown out of their homes.
Divestment activists say "targeted divestment" - aimed at companies like CNPC that have a business relationship with the government and have not taken a stand against the genocide - can help influence Sudan. The logic of this argument persuaded universities including Harvard, Yale and Stanford, the states of California, Illinois, New Hampshire and Iowa, and numerous religious institutions, to adopt divestment policies. (To see the state of the divestment movement, visit the Sudan Divestment Task Force's excellent Web site.) So-called socially responsible mutual funds also have sold their holdings in PetroChina. The Calvert family of funds went further, creating an online report aimed at helping people stop the violence in Darfur.
Harvard's decision to divest PetroChina is particularly significant because its $30 billion endowment fund rarely takes such action. Explaining its decision, The Harvard Corporation said:
"Although Harvard maintains a strong presumption against the divestment of stock for reasons unrelated to investment purposes, we believe that the case for divestment in this instance is persuasive."
Harvard said oil production is essential to the government's capacity to fund military operations. The university also looked at PetroChina, and its parent company, CNPC, and found considerable overlap. You can read the Harvard Corporation's statement here.
To his credit, Buffett has responded publicly (his response is available for download here, as a PDF file) to the divestment campaign and he has welcomed debate at the annual meeting - although he is under no obligation to do so. This is in contrast to Fidelity Investments, which remains a target of a divestment drive.
In Buffett's response, he argues, first, that PetroChina itself has no holdings in Sudan and that it does not control CNPC. "Subsidiaries have no ability to control the policies of their parent," he says.
He goes on to say that CNPC cannot "withdraw" its assets from Sudan since its assets consist of oil in the ground and the fixed infrastructure to transport and refine it. Should China sell those assets to the Sudanese government, the government would still be able to sell its oil on the world market. "Proponents of the Chinese government's divesting should then ask the most important question in economics, 'And then what?'" Buffett writes.
It's a fair question. Here are two possible answers. The first is that Sudan would try to buy out the Chinese, although the Khartoum government is already in deep debt. A second possibility is that other major investors in Sudan's oil, the state-owned oil companies of Malaysia and India, would step in. Either way, severing the economic ties between China and Sudan would have a significant benefit. As the Sudan Divestment Task Forces writes in response to Berkshire's response:
"The sale of CNPC's Sudan assets would remove China's economic incentive to enable Sudan's ongoing genocide. Even short of forcing divestiture of its Sudan assets, pressure on CNPC is likely to change China's approach towards Sudan diplomacy, especially given how highly China prizes its Sudan oil assets."
In truth, China is unlikely to divest, even under pressure from Berkshire. But the Chinese have shown lately that they may be vulnerable to pressure. A high-ranking Chinese official recently traveled to Darfur and urged the Sudanese government to accept a United Nations peacekeeping force. He appears to have done so after Hollywood activists - notably Mia Farrow - threatened to link the 2008 Beijing Olympics to the genocide. Film director Steven Spielberg, who is an artistic advisor to the Olympics, also condemned the genocide in a letter to President Hu Jintao of China. (See correction.)
So Buffett could, at a minimum, engage in discussions with PetroChina. He could ask that PetroChina and CNPC to use their influence to ask Sudan to allow in peacekeepers. He could speak to the Indians and the Malaysians and ask them to work with him. If all of that fails, he could then sell the stock - noisily.
Warren Buffett is, after all, much more than one of the world's great investors. He is a decent, generous man of unquestioned integrity. When he speaks, much of the world listens. He now has a platform to speak on behalf of victims of genocide. Why not take it?