Will Mongolia’s hopes lie buried, like its resources?

Mongolia is on the verge of plunging itself into prolonged economic gloom, and its predicament offers telling lessons for external observers about the dangers that arise from the interface between finance and politics.

The country is rich in natural resources: its vast sweeps of plains and rock are rich reserves of coal, iron, uranium, gold and other precious metals. Coal reserves of 175 billion tonnes have been identified.

These and the rest of the country’s natural resources hold the key to Mongolia’s economic future but they remain buried. Politicians wrangle with foreign firms about the manner in which they are to be extracted and what share of the resulting riches belongs to the Government.

Tortuous negotiations between the Government and Ivanhoe Mines over the Oyu Tolgoi precious metals deposits were extended once again in late July. The only thing that has been decided is that there ought to be more negotiations. When Euromoney had met President Tsakhiagiin Elbegdorj in mid-July he promised a resolution soon. However, foreign investors are dubious. Mining firm BHP Billiton has closed its Mongolia office.

The argument revolves mainly around the Mongolian Government’s proposal that it take a 10% to 15% stake in Ivanhoe without investing any capital, and that it receive at least half of the profits generated. Mongolia has been burnt in the past by foreign investors extracting and then exporting its mineral wealth. Now there is a danger of overcompensating drastically by imposing punitive taxes and restrictions that drive away the foreign capital and expertise needed to mine these difficult deposits. Both foreigners and the Government view Oyu Tolgoi as a test case for how these partnerships will work. That is about all the two parties can agree on at the moment.

Mongolia’s financial community, both domestic and foreign, looks on gloomily. A local fund manager points out a half-built luxury hotel from his office window in Ulaanbataar: the cranes stand idle and will continue to do so, he says, until agreement on the mining laws is reached. President Elbegdorj is the first to be elected from the fledgling democracy’s Democratic Party, the main opposition to the ruling MPRP. Although he has spoken out against the existing proposal for the Government to take an equity stake in Ivanhoe, the levels of resentment among many Mongolians towards foreign investors perceived to be ransacking the country’s resources mean that pro-investment decisions are not easily arrived at.

Nor, it appears, do they come speedily. Frustrated mining firms have begun selling their stakes in various projects in Mongolia, and a report from local firm Frontier Securities notes that Ivanhoe might abandon its claim if there is no resolution on a deal by September. The World Bank believes that Mongolia does not have nearly enough capital, expertise or infrastructure to mine its deeply buried coal, iron and precious metals. The few projects it runs by itself are barely profitable.

Mongolia’s fate might not be of immediate interest to the average foreign financial professional, but sandwiched as it is between Russia and China, this vibrant young democracy deserves better than to stagnate while its Government bickers with investors over how much money each ought to make from the riches beneath the steppes.

(The fourth annual Euromoney
Mongolia Investment Forum will be held on 8 and 9 September 2009 in
Ulaanbaatar.)