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Mongolia: dancing between the bear and the dragon

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Since the establishment of a democracy in Mongolia following the collapse of the Soviet Union, foreign interests have attempted to reassert control over the landlocked piece of steppe between China and Russia.

Mongolia’s position, located between two ambitious powers, means that it is the target of Chinese and Russian influence, often to the detriment of the fledgling democracy and its people. Historically Mongolia’s geographical position and nomadic inhabitants (of which there are still many) has made it vulnerable to the influence of its neighbors. Mongolia was subjugated to both Beijing and Moscow at different times and still struggles with the political influence of both powers.

Economics further complicates Mongolia’s diplomatic issues; vast amounts of mineral wealth have been discovered in Mongolia since the early 90’s including large reserves of copper, gold, and coal. Previously Mongolia’s weak economy, based on pastoral products such as beef and cashmere production, meant that it provided very little potential wealth for powers seeking to control it. These discoveries have led to serious interest from a resource-hungry China, which accounts for 89% of Mongolia’s exports, as well as Russia, which faces more competition for resources in an ever more hostile Europe.

Despite the renewed interest from its neighbors, most foreign companies involved in the Mongolian mining sector have been Canadian or Australian, of the 11 foreign companies invested in copper production, 9 of them were Australian or Canadian. In most sectors the primary owners of the mining companies have been Canadian or Australian, with a few from Hong Kong or the UK. These firms often own and operate mines in conjunction with the Mongolian Government, which creates friction when the negotiations go sour, such as with the massive Oyu Tolgoi mine that has seen constant delays from shareholder disputes and concerns over the operating cost.

The access to fossil fuels and raw minerals have given some measure of control over Mongolian politics and makes government corruption all the more dangerous to the Mongolian people. On February 26th the president of Mongolia pardoned 3 foreign nationals involved in the mining industry who had been convicted of tax evasion. The foreign nationals were accused of evading 6.8 Billion USD, a sum so ridiculous that the arrests shook foreign confidence and caused complaints in the UN over human rights violations. The simultaneous state of unprecedented economic growth and unrelenting economic exploitation have left the Mongolian authorities and people with as much resentment for foreigners as gratitude. A former member of Mongolian parliament and minister of foreign affairs stated “It is no secret that small Chinese, Korean, and Vietnamese investors are commonly robbed, threatened, and slandered in cases brought on false charges.” An ineffectual and divided Mongolian Government coupled with widespread corruption enables foreign interests to undermine the welfare of the state over the acquisition of its resources.

Submitting to foreign nations for political reasons over economic ones often holds serious financial consequences for Mongolian taxpayers. In 2009 the Mongolian government passed a nuclear energy law, and, under Russian pressure, revoked the uranium licenses of Khan Resources, a Canadian company that owned the Dornod Uranium property. The government then seized Khan Resources’ assets with no compensation, resulting in a lengthy legal battle between the company and the government. On March 2nd an international arbitration tribunal determined an award of 100 million USD to be paid by the Mongolian government to Khan Resources. It is speculated that Russian companies were interested in entering the uranium sector in Mongolia and pressured the government to pass the nuclear energy law and attack the competition, especially since the law came right on the heels of an announced joint venture to mine uranium between the Russians and Mongolians.

The Chinese are also muscling in on foreign companies, especially ones that produce the construction materials that China needs to power its real estate boom. The Canadian mining company, Turquoise Hill Resources, recently sold its entire stake in SouthGobi Resources to Novel Sunrise Investments. Novel Sunrise and its affiliated groups intend to use their logistics and marketing experience to leverage their way into procuring raw materials for construction, iron ore and coal, that companies such as SouthGobi produces. Many of the mining firms in Mongolia are based in Hong Kong and seek a larger share of the untapped mineral wealth.

While most mining companies in Mongolia are not owned by either the Chinese or the Russians, the local geography means that nearly all imports and exports come from those two countries. The next 3 biggest importers, South Korea, Japan, and The United States, account for about 19% of imports combined, nearly 10% less than Russia alone and less than half of China’s imports. These are all major regional players whose imports have been impeded by Mongolia’s dependence on the rail systems through China or Russia to transport goods to and from the pacific. This level of dependency has upset Mongolia, which claims that China takes advantage of its isolation by buying Mongolian coal for less than it’s worth. There is very little competition for Mongolian exports, even Russia only makes up 1.5% of Mongolian export value, preferring to export to, rather than from, Mongolia. Mongolian officials have tried to reach out to other nations, most recently Japan and the DPRK, but the government can only do so much to escape the limitations of its physical location.

Foreign investment in the mining sector has spurred serious economic growth; for a period of time Mongolia had the world’s fastest growing economy, the mines provided better jobs for Mongolians and fostered urbanization to replace the pastoral nomadic lifestyle that remained pervasive throughout the country. However, this massive influx of investment now represents the vast majority of the economy; so in recent times where commodity prices have slumped for Mongolians and international confidence in the Mongolian government is low, growth has been significantly stunted. In response the Mongolian government formed a super-coalition last December consisting of members from all major parties attempting to deal with the economic problems. The main policy goals of the coalition were to alleviate the economic downturn by reducing the government restrictions on mining to get foreign investment back on track while continuing to pursue economic ties with nations outside China and Russia.

This series of policies gets to the root of the Mongolian problem: Mongolia cannot prosper without foreign investment and by opening itself up to political and economic influence from interests that have very little concern for the welfare of Mongolia or its inhabitants. Mongolia’s vulnerability to the economic interests of its neighbors means that its needs from Russia and China translate into political capital that undermines Mongolia’s economic and political independence.

First published by the International Policy Digest under the title Mongolia: Between a Rock and a Hard Place

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