MONGOLIA PREPARES FOR THE NEXT STEP IN THE MINING INDUSTRY

I.Otgonjargal

Mongolia has vast natural resources, is located in a very favorable geographical and geopolitical region, and can access  major markets in Europe and Asia, So it has great potential for foreign direct investment (FDI) in the medium to long term.

Despite being a relatively small market with a population of 3.5 million, Mongolia is a perennial neighbor to the powerful global economies of China and Russia.. In addition, third markets such as Japan and South Korea are very close. The country is a member of the Belt and Road and the Central Asian Economic Cooperation Corridor. There are advantages such as a developing industry and infrastructure, a highly educated young population, a mineral resource base capable of high value-added processing, and a developing public-private partnership.

In addition, according to the World Bank’s “Doing Business” survey, Mongolia ranked 33rd among 211 countries with the lowest tax burden. It was also included in the list of 16 countries with the lowest VAT rate and named one of the six  countries with the lowest corporate income tax (CIT).

In addition, it has the right to supply more than 10,600 products on preferential tariff terms to the markets of Asia-Pacific Agreement member countries, i.e. Korea, China, India, Bangladesh and Laos. In 2016, Mongolia and Japan signed an economic partnership agreement that reduced tariffs on 5,700 Mongolian and 9,300 Japanese goods. Mongolia can supply 7,200 products to European Union countries on preferential tariff terms.

Today, both the government and the private sector are focusing on and discussing increasing foreign direct investment (FDI) and improving the legislative framework for the mining industry.

As of the third quarter of 1990-2023, Mongolia received  $42.4 billion in foreign investment. Of this, 73% was in the mining sector, 11% in wholesale and retail trade, 4% in banking, 3% in services, 2% in construction and 7% in other sectors.

This means that foreign investment coming into Mongolia is concentrated in only one sector and there is little diversification. It is necessary to correct the situation and attract foreign investment to other sectors. The mining sector alone accounts for 24% of GDP, 29% of budget revenues and 85-90% of all export earnings.

Foreign direct investment in Mongolia peaked in 2011 and 2012, and about 40% of the FDI that entered our country since 1990 was investment in Oyu Tolgoi alone. As of 2023, FDI amounted to $1.87 billion of which 80% of FDI was in the mining sector. Looking at mining FDI by country, the Netherlands accounts for 45% and China for 15%.  

Legal framework and land use

The mining industry in Mongolia has developed intensively over the past 30 years. However, according to private sector representatives, academics and mining experts, the time has come for a completely new policy to develop the industry, improve competitiveness and attract foreign investment in the next 20-30 years. There are also discussions on how to adopt environmental, social and corporate governance standards (ESG) in Mongolia. It is necessary to develop and utilize minerals in the direction of high-tech exploration, extraction and processing, not only for exporting raw materials.

In the next 25-30 years, Mongolia should become  a $30-40 billion economy.  Mining industry experts argue that  government funds for mining  development  and donor  investments attracted  should both be increased several fold compared to the past. Such a policy will make it possible to achieve significant results in a short period of time.

Thus, it is time for Mongolia to take the next step in the mining sector. To start, the legal framework for the sector must be improved. Following the transition to a free economy, Mongolians adopted the Law on Minerals in 1994, which was then revised in 1997. The current law was revised and adopted in 2006. The wait for reforms to this law has lasted for 17 years.

In order to improve conditions for foreign investment, protect investments and restore investor confidence, the Ministry of Economy and Development, with the participation of other government organizations and the private sector, developed a revised draft Investment Law and submitted it to Parliament. According to the bill, the land will be owned and used by foreign investors for up to 60 years, and after this period, it can be extended again for another 40 years. However, citizens are opposing this clause, which is delaying discussion of the law.

In addition, in 2019, the following changes were made to the provision on the utilization of natural resources contained in Articles 6.1 and 6.2 of the Constitution of Mongolia: “The state policy on use of natural wealth aims to fairly and equitably distribute benefits from land subsoil wealth by accumulating them into the National/Sovereign Wealth Fund. The exploitation of  mineral deposits of strategic importance shall be in compliance with the principle, under which natural wealth is to be subject to the people’s control/power, and the legal basis to allot a majority of the benefits gained from it to the people shall be determined by laws”.

Finally, there is a growing perception that exploration and mining have negative impact on the environment and nomadic livestock production. Therefore, industry experts are promoting a new concept around Mongolia’s Strategic Vision 2050, to reach a common understanding and establish partnerships among stakeholders.