A Khartoum boom, courtesy of China

(Fortune Magazine) -- Late last year Adam Ibrahim Ali and his two teenage sons fled their ravaged village in Darfur and headed for Sudan's capital, Khartoum, riding on trucks and walking for days under the blistering desert sun. When they arrived in this dusty city on the Nile, Ali fashioned a small mud shelter on the riverbank and hung up his most cherished possession, a small transistor radio.

His escape from the four-year war in western Sudan turned out to be a smart financial decision. As the 115-degree heat eases in the evenings, Ali and his sons make bricks and bake them in the kiln next to their shelter to sell during the broiling afternoons. On good days they can earn about $12 - enough for them, Ali's two wives and his 11 other children languishing in Darfur's biggest refugee camp. "We lost everything in the fighting," says Ali, 35. "Here we can sell bricks. People need them to build."

One glance at the city beyond Ali's makeshift home shows why he's doing a brisk trade. Thousands of miles from the tough talk in Washington about sanctions and peacekeeping troops, and from Hollywood's celebrity campaign to save Darfur, Sudan is booming. Cranes loom over Khartoum's cityscape while bulldozers roar down below, churning up the earth to make way for multilane roads and tall office buildings.

Think of Sudan these days and you're likely to envision janjaweed militia in Darfur rampaging through villages on horses and camels, killing and raping, or shallow desert graves and refugees in a scorched landscape. Those images have filled newspapers and television screens for more than four years. Yet during those same years billions of dollars have poured into Sudan - a rural country the size of Western Europe - thanks to a nascent oil industry whose production soared just as oil prices hit record highs and energy needs rocketed for Sudan's main customer, China.

The realization in the West that China's investment in Sudan might be financing the Darfur massacres has transformed a small activist organization on U.S. campuses into the biggest divestment push since the 1980s, when a similar campaign helped end white rule in South Africa. So fast has the political wave hit that without an international deal, it could cause the boom in Africa's largest country to wobble and overshadow China's biggest event in years, the 2008 Beijing Olympics. That has caused jitters in both Beijing and Khartoum.

"They are starting to wonder, 'How far can this go?'" says John Prendergast, a divestment activist and former director of African affairs at the National Security Council. "Sudan totally dismissed sanctions nine months ago. Now it is a different ball game."

Sudan's boom - not its anxieties - is obvious the moment one lands at Khartoum International Airport. The airy new hall opened a few months ago and is filled with foreign oil workers and business consultants. (A sprawling new $500 million airport is scheduled to open in 2011.)

Just beyond the airport perimeter a showroom for Toyota SUVs opened this year, as did Khartoum's first Western-style luxury hotel, built by Abu Dhabi's Rotana hotel group. Guests at the hotel, now three-quarters full, can sip $5 cappuccinos in deep Italian sofas in the marble lobby or watch movies on large-screen TVs in air-conditioned rooms.

"There's a lot of cash and investment coming in," says Imad Elias, Rotana's executive vice president, at a cocktail party in the ballroom one evening. "Sudan is a place we want to be."

Downtown, construction crews are finishing an even more sumptuous hotel. Weeks from opening, the 19-story Al Fatih Tower on the riverfront is already Khartoum's most stunning landmark, with a soaring, curved façade in the shape of a dhow. It is a rough imitation of Dubai's iconic Burj Al Arab - a telling reflection of Khartoum's grand ambitions. The owners are racing to open the $80 million hotel, financed by the Libyan government, on the Sept. 1 anniversary of Muammar Qaddafi's revolution.

The top-floor restaurant offers a bird's-eye view of the transformation of Khartoum, which stands at the confluence of the White Nile and Blue Nile. Across the street stands a half-completed suspension bridge that will span both rivers. On a huge plot of land a new economic district with office buildings, villas and hotels is being constructed from scratch.

Real estate prices in Khartoum have skyrocketed: Studios rent for $1,000 a month, more than the yearly income of an average Sudanese. Sudan inked a peace deal in 2005 with non-Muslim rebels in southern Sudan - site of most oil reserves - ending a 21-year civil war and turning the city of Juba into a boomtown too, with a new airport, hotels and banks.

"We are still very underdeveloped compared with places like Kuwait and Cairo," says Mujtaba Muhammed, a young Sudanese architect working on the Libyan hotel. "With all this construction, there is a lot of work for me."

This was not supposed to happen. Sudan was once a haven for Islamic extremists, including Osama bin Laden, who lived here until the government expelled him under U.S. pressure in 1996. The State Department declared the country a state sponsor of terrorism in 1993.

Then, in 1997, President Clinton ordered sanctions, pushing out Chevron (Charts, Fortune 500), General Motors (Charts, Fortune 500) and other U.S. companies. The relationship hit its lowest point in 1998, when American jets strafed a Khartoum pharmaceutical factory, believing it to be an al Qaeda training camp. Officials frequently cite that attack as evidence of Western belligerence, and the hard-line Islamic government has left the bomb damage untouched.

Sudan aimed to break out of its isolation when it signed the peace deal with southern rebels. Officials repeatedly cast their country as a beacon of peace - a jolt for visitors. "We are a model for Africa and the world for being able to resolve our disputes," Vice President Ali Osman Taha told African intelligence directors at a Khartoum conference in June.

But the Darfur crisis has shelved the possibility of resumed Western trade, especially since U.S. officials first declared the massacres a genocide in 2004. Congress passed new sanctions legislation last year. And in late May, President Bush and the U.S. Treasury banned 31 Sudanese companies from American and international financial systems. They include petroleum and telecommunications companies as well as the DAL Group, Sudan's largest private consortium, which bottles Coca-Cola and distributes European-made Caterpillar trucks, and whose construction company is building Khartoum's new economic district.

So far the European Union hasn't imposed similar sanctions. Yet that hardly matters to most European executives, who fear being tainted as supporting an abusive regime. "Sudan is politically radioactive for multinational companies," says Philippe de Pontet, Africa analyst for Eurasia Group, a U.S. risk consultancy. "The reputational risk outweighs any benefits."

That is likely to remain the case as long as reports of Darfur's killings persist. The conflict began as a local rebellion in 2003 that quickly scored victories against poorly equipped government forces. With patchy control over his vast country, President Omar Hassan Al Bashir backed Darfur militia groups to put down the insurgency.

Now Khartoum says it cannot rein in the fighters. In July, U.S. officials said, it resumed aerial bombing of Darfur. The UN estimates that more than 200,000 people have died and 2.4 million have been rendered refugees. (Sudan's government puts the death toll at about 9,000.) After decades of civil wars and Al Bashir's tough rule, Sudan ranked No. 1 on this year's "failed states" list compiled by the Carnegie Endowment for International Peace in Washington - above disaster zones like Iraq and Zimbabwe.

Yet by some measures this most-failed state is a big success. Its economy grew about 9 percent last year, and foreign investment rose to about $5 billion, the second highest for an African country. The growth is overwhelmingly driven by oil, which accounts for most of the nation's GDP. Production has risen from 160,000 barrels a day in 2000 to about 480,000 barrels now.

Sudan earned more than $4 billion last year from petroleum exports - about 80 percent to China. With oil trading above $70 a barrel, residents say sanctions are hurting the West more than Sudan. "America is the loser," says Muhammed, the architect for the Libyan-built hotel. "They've given a great chance to Chinese companies."

The oil boom has lured home from the U.S. and Europe some Sudanese émigrés whose families had left a seemingly dead-end economy. Most days you can find some returnees at Khartoum's hippest café, OZone, which serves cinnamon muffins and iced caffe lattes. Ahmed Badawi, a British economist of Sudanese parentage, arrived last year to start a business and risk consultancy.

Two years ago Waleed Babiker quit his job in Minneapolis and returned to his native Khartoum, from which his family had emigrated ten years before. "My parents felt there was no possibility of making money," he says. Babiker now runs a travel agency, betting that Sudan's ancient pyramids will draw tourists once sanctions are lifted. His latest venture is a guide to Khartoum, which has advertisements for new cafés, Asian restaurants, and in June - get this - a pop concert in Khartoum to aid Darfur's victims. "We think this is a good time to make money here," says Babiker.

That underplays the boom's big weakness: Sudan's fortunes depend heavily on a single customer, China. Its other partnerships, with Malaysia's Petronas and India's ONGC Videsh, are far smaller than the one with China National Petroleum Corp., which owns more than 40 percent of the Greater Nile Petroleum Operating Co., Sudan's largest oil firm.

Desperate to fuel its galloping economy, China has moved through Africa underwriting multibillion-dollar contracts for oil, gold, copper and other minerals. Unlike Western oil giants, it has also built power grids, telecommunications towers, highways and railway networks across the continent, ensuring its place as a major African benefactor.

Sudan is still only Africa's sixth-largest oil producer, far smaller than Nigeria and Angola. But China has a unique deal here: It faces no competition from Chevron or Royal Dutch Shell (Charts). As a result, China seems to be everywhere. CNPC's headquarters on Nile Street sits between grand government mansions built by Sudan's old British rulers and a hotel where Winston Churchill stayed.

Indeed, China's presence has the feel of a new colonial power. In the hotel lobby, next to a Christmas tree gathering dust in the blazing June heat, an eight-foot sign proclaims EVERGREEN FRIENDSHIP BETWEEN THE PEOPLES OF SUDAN AND CHINA. Nearby is the Chinese-built Friendship Hall conference center. Khartoum now has a school for Chinese workers' children and Chinese-language classes for Sudanese.

At dawn near the Rotana hotel, hundreds of Chinese construction workers clamber off buses to begin 12-hour shifts building a new headquarters building for Sudapet, Sudan's national petroleum company. Many of them gather Thursday nights at CNPC's headquarters for karaoke or to play in the Chinese basketball league. The Zijing Center, a Chinese travel agency and supermarket, is stocked with produce flown in weekly from Beijing.

"I go to the airport about three times a day to take Chinese people to flights or meet others arriving," says Jiang Lei, director of the travel agency. Air China plans to begin direct flights to Khartoum, which Jiang predicts will fill up quickly.

After years of clashes with U.S. politicians, officials are thrilled. "We are getting support without conditions from China," says Finance Minister Elzubair Ahmed Elhassan in his office late one night in June. "There is a feeling of fraternity and equality with them."

When Chinese President Hu Jintao visited in February, hundreds of people lined the route from the airport to greet him, and a camel was slaughtered in his honor. While Hu pledged $5.2 million in aid for Darfur refugees, he avoided scolding Al Bashir for the conflict in Darfur, wrote off $80 million in debt and offered $13 million in interest-free loans - including for a new palace for his host.

China, in fact, is digging in. In June, CNPC signed a 20-year concession for offshore drilling. In 2004 it spent $1.4 billion building a 1,000-mile pipeline from southern Sudan's oil fields to Port Sudan on the Red Sea, where there is also a new Chinese-built refinery. China's biggest project yet is the $2 billion Merowe dam north of Khartoum, which will more than double Sudan's power supply when it opens next summer.

An hour's drive out of the capital is a refinery, built in 1998 by Chinese workers in a joint venture between Sudan and CNPC. It looms over an arid plain amid camels and adobe villages and produces about 100,000 barrels a day of liquid gas and jet fuel. Inside the signs are in Chinese, and Chinese workers in blue overalls cycle around the facility. "We have a very strong relationship with Sudan," says Zhao Yujun, the refinery's technical manager. "And now that Sudan is booming, we are pleased to be contributing."

Yet for all the talk of friendship, officials concede they would readily swap China's affections for the West's. "It was not our choice to look East," says Hamed Elneel Abdel Gadeir, deputy secretary general of the Ministry of Energy and Mining. "But when we looked West, all the doors were closed." That has cost Sudan dearly, despite China's generosity and political allegiance.

The oil industry operates far below capacity, with imperfect equipment, according to oil analysts and government officials. "America has the largest oil companies in the world, with the expertise and experience," says Mahdi Ibrahim, former ambassador to Washington and a ruling-party leader.

Bashir Badawi, an advisor to the energy ministry who began his career as a Chevron geologist, says production would soar without sanctions. "We would hit three million barrels a day within eight to ten years," he says. "If U.S. sanctions don't lift, we will ultimately see declining production."

Sanctions bite in smaller ways too. Sudan is a cash-only country, with no credit cards or ATMs. And since no one can legally import U.S. goods, companies sneak in American products via third countries at higher cost.

That could be slow to change, given the furor over Darfur. In the past year 13 U.S. states have passed divestment laws, pledging to sell stock in PetroChina (Charts), whose parent company is CNPC. Last month Fidelity Investments offloaded most of its PetroChina stock, worth billions of dollars. And Warren Buffett, PetroChina's second-biggest investor after the Chinese government, survived a shareholders' divestment challenge in May.

The campaign has hit China hard and rippled as far as Khartoum. Sitting in the Zijing travel agency, Liu Wugue, director of Chinese Petroleum Logistics in Sudan, says fear is growing among the Chinese that politics will spoil the Beijing Games. "Please don't link the Olympics to politics," he says. "It is our big chance. Until now the world knows China only from its products."

China is scrambling to control the damage. It dispatched a special envoy to Sudan to coax Al Bashir into accepting international peacekeepers for Darfur - a bottom-line demand from Western negotiators. After months of outright rejection, Al Bashir said yes to China.

Divestment alone might not be enough to end the killing in Darfur and bring millions of refugees home to their villages. That is likely to take long negotiations and thousands of UN troops. But if peace comes and the sanctions movement unravels, Sudan will finally open to Western business. Officials say they are eagerly awaiting that day.

And Adam Ibrahim Ali, the Darfur refugee baking bricks on Khartoum's riverfront, says he and his sons also have plans. "As soon as there is peace," he says, "we are going home to Darfur." Until then he will listen to the roar of bulldozers erecting bridges and office buildings across the capital.