EurasiaNet Business & Economics - Mongolia: Economic Nationalism on the Rise, Western Investors May Take a Hit

BUSINESS & ECONOMICS

MONGOLIA: ECONOMIC NATIONALISM ON THE RISE, WESTERN INVESTORS MAY TAKE A HIT
Ariel Cohen 3/24/08
A EurasiaNet Commentary

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Economic nationalism, a trend that is rapidly gaining strength in Central Asia, appears to be spreading to Mongolia. The Mongolian parliament is set to consider legislation on March 25 that would expand the state’s role in the mining sector, the country’s most important economic sphere.

Under the legislative package, which is virtually assured of passage, the government will be able to obtain a majority stake in any venture undertaken with state funds. The state will also be entitled to at least a 34 percent share in projects involving solely private resources.

While the legislation could potentially fill the state’s coffers with billions of dollars in windfall profits, it marks a troubling turn of events for foreign investors. It comes as especially bad news for Canada-based Ivanhoe Mines Ltd., which had hoped to start developing the Oyu Tolgoi copper and gold development project. Oyu Tolgoi is projected to contain as much as 78 billion pounds of copper and roughly 45 million ounces of gold, making it perhaps the most potentially lucrative undeveloped mining project in the world. Ivanhoe had been ready to commit billions of dollars to infrastructure improvements and other needed investments to develop the deposits over a 30-year period.

However, with the new legislation pending, the government discarded a draft investment agreement that would have governed Ivanhoe’s mining operations at Oyu Tolgoi. Under the 2007 draft agreement, the government would have been entitled to up to a one-third equity stake in the venture. Now, the two sides will have to return to the bargaining table to negotiate a new agreement, in which the Mongolia government will undoubtedly seek a much higher share. The government decision to back out of the draft agreement also raises questions about the sanctity of future bargains.

Ivanhoe, along with its affiliated partner Rio Tinto of Australia, have sunk upwards of $600 million in the venture so far, and is spending tens of millions of dollars every month just to maintain and expand mining infrastructure. For example, getting the mined metals to market will require the construction of a rail spur at least 160 miles in length. Now, the entire investment will languish in a state of limbo while negotiators try to strike a new bargain. Ivanhoe representatives have not publicly commented on the latest developments.

Mongolia’s move to exert greater control over its natural resources mimics similar efforts by governments in Central Asia. Kazakhstan has been especially assertive in recent months in its dealings with foreign investors. [For background see the Eurasia Insight archive]. Not even Russia has proven immune from the Central Asian backlash. [For background see the Eurasia Insight archive].

While Mongolia’s state budget could benefit in the near-term from the likely legislative changes, over the longer term Mongolia’s economy could well suffer, due to investor distaste for the high costs and large risks. A collection of business groups in the capital Ulanbaatar, led by the Mongolian National Mining Association, denounced parliament for not seeking input from the country’s private sector when formulating the legislative change. A statement issued March 18 -- as reported in the UB Post, a local English-language weekly -- accused parliament of acting in "gross ignorance."

It would not appear to be a good bet that the Mongolian people will benefit greatly from the legislative changes, as Mongolia ranked 99th out of the 179 countries surveyed in Transparency International’s 2007 Corruption Perception Index.

Some experts suggest Russian leaders may be working behind with scenes with Prime Minister Sanjaagiin Bayar and his Mongolian People’s Revolutionary Party to scuttle Ivanhoe’s involvement in the Oyu Tolgoi venture. Bayar has strong ties to Russia, having graduated from the prestigious Institute for International Economics and International Relations in Moscow. He also served as Mongolia’s envoy to Russia from 2001-2005.

Russian Technologies -- a state-controlled venture capital outfit purportedly well stocked with ex-members of the security services and headed by Sergei Chemezov, a confidante of outgoing president/incoming Prime Minister Vladimir Putin - supposedly has its eyes on Oyu Tolgoi. Already enjoying a controlling interest in Mongolia’s railroad network, and aware that the price of minerals are skyrocketing, the Kremlin may see Mongolia’s mining sector as an opportunity to make some fast money.

Editor�s Note: Ariel Cohen, Ph.D., is Senior Research Fellow in Russian and Eurasian Studies and International Energy Security at the Heritage Foundation. He is the author of Eurasia in Balance, Ashgate, 2005.

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