Mongolia walking a tightrope

Mongolia is treading cautiously as it taps its huge mineral wealth, aiming to ward off fears of resource overdependence and the dominance of powerful foreign miners, but its moves don't scare off investors.

Official forecasts from the landlocked nation, sandwiched between China and Russia, suggest coal production will double, gold output treble and copper quadruple in the next five years, but a wary Mongolia appeared to hit the brakes last month.

The country's leaders said they wanted to cancel an auction for the world's biggest coking coal mine at Tavan Tolgoi, which had drawn bids from Russia, China and Japan.

Prime Minister Sukhbaatariin Batbold told Reuters in an interview that Mongolia was still talking with foreign companies about the project, and one potential investor, China's Shenhua Group, said it was unaware of any decision to cancel the auction and was still planning to bid.

The uncertainty over Tavan Tolgoi reflects Mongolia's ambivalence towards foreign investment, and investors could be facing a process every bit as lengthy as that surrounding Oyu Tolgoi, a copper-gold mine which was finally offered to Ivanhoe Mines and Rio Tinto last October after six years of difficult negotiations. "That dispute with Ivanhoe over such a protracted period of time obviously slowed down investment and put off some of the smaller investors," said Roland Nash, an analyst with Renaissance Capital who follows government policy in Ulan Bator.

"But it was healthy – they debated and got the public involved and finally reached an agreement, and that has now opened the floodgates for more investment."

For a factbox on Mongolia's measures to exploit its huge mineral resources, click Mongolia is right to try to ensure its own interests are served by mining development, Prime Minister Batbold said.

"People were asking questions – why were foreigners privileged and why do we not equally support domestic investors so there is a fair and competitive environment" he said.

But Mongolia has slowly begun to change its thinking as the global financial crisis kicked in, cutting off overseas investment and gouging a large hole in the country's finances.

Last August, Mongolia decided to cancel the windfall tax, signalling a turning point as it sought to close a huge revenue gap caused by falling commodity prices.

Two months later, it finally agreed to grant a 66-per cent stake in Oyu Tolgoi to Ivanhoe and Rio Tinto after years of haggling. "The fact that the government really needs foreign investment is beyond a doubt and we should not rush to the conclusion that the whole mining sector is now closed to equity participation," said Alisher Ali Djumanov, Chief Executive of Eurasia Capital.

He said there would still be plenty of room for foreign mining firms even if Mongolia kept hold of strategic projects.

Resource curse

The government has been walking a tightrope as it looks for the revenues required to solve its crushing economic problems while at the same time trying to avoid the "resource curse".

Far from spurring sustainable economic growth, too much natural wealth can lead to stagnation, pushing up a country's exchange rates at best, and fostering "rent-seeking" elites and social conflict at worst, economists say. It remains unclear how Mongolia will handle the huge inflows of foreign investment coming its way – the $4 billion (Dh14.68bn) in capital brought in by the Oyu Tolgoi project alone over the next nine years is equivalent to the country's entire 2009 GDP.

With just 1.75 people per square kilometre, Mongolia is chronically undermanned. It is also underdeveloped with a per capita GDP rate of $1,960 and a critical infrastructure gap.

The investment boom will require the building of new towns, bring a massive influx of migrant workers, as well as a transport network to ship raw materials into major markets like China. Oyu Tolgoi alone will create 80,000 new jobs, and towns near the remote mine site need to be built from scratch.

There are few high-quality roads and the country's only major rail project remains the old Trans-Siberian route tying the capital to Moscow and Beijing.

"At this point, infrastructure is a necessity," Zashdorj Zorigt, Mineral Resources and Energy Minister, told Reuters.

"Foreign investors who come and say yes, we'd like to invest in the necessary infrastructure, would have a competitive edge."

China – The elephant in the room

Some say Mongolia's biggest challenge will be its complete economic dependence on its powerful neighbour China. "They have to be cautious – it is a very difficult geopolitical position to be in and they have to manage the investments in order to balance the geopolitics," said Nash.

But Ulan Bator cannot defy economic trends. Last year, Chinese demand for imported copper surged 119 per cent even amid the global downturn, helping push prices up 140 per cent on the London Metals Exchange and easing the pressure on Mongolia's finances.

And while Oyu Tolgoi will be developed by Canadian and Australia miners, all the copper it produces will cross the Chinese border less than 100 kilometres away. "Chinese investment is treated with suspicion but the reality is that China is already the largest trading partner, the largest consumer of Mongolian resources and the largest investor," said Djumanov. (Reuters)


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