The main focus of what is going to be a decade of massive change for the Mongolian economy is going to be mining. In fact, the massive reserves that the nation possesses are such that there is talk of a “mining mania” and serious concern about how this young nation can cope with the implications this natural bonanza will bring.
At the two-day Mongolia Economic Forum, the focus was on governance and how to manage this transition. That the transition is going to come as a jolt is understating it. Even now, Mongolia’s largest export sector is agriculture – mainly cashmere wool and animal by-products. Mainly sourced – still rather archaically -- from the nomadic herders, this industry supports hundreds of thousands of Mongolians scattered across all corners of a country the size of Western Europe. Yet a strengthening currency and Chinese competitiveness is squeezing even this most basic of industries. This comes as bad news for the Mongolian nomads who still make up 50 percent of this ancient, yet fiercely proud country.
That aside, it is also home to a variety of quirky expatriate adventurers who have made it home and have found their own niche. From adventure travel operators, to publishers, here is a list of a handful of the brave whose initial forays paid off as adventure investors:
1.         The Australian Cossack who maintains a ranch of 1,000 cattle 50 km outside the capital city, free range, and exports his entire meat production to Australia as a premium product;
2.         The Brit who, wandering through one day, set up a pub and now has the busiest expat hangout in the city;
3.         The Dutchman who makes sausages in Mongolia and exports them to China and Russia;
4.         The Italian who set up a modern equipped cheese factory in the middle of nowhere to access the nomads, and exports full cheeses to Italy and the United States as a premium brand;
5.         The German who runs year-round adventure travel vacations and is currently escorting a group of 10 through the icy wilderness of the far north in temperatures of minus 30;
6.         The Belgian who makes ger kits (Mongolian tents) and sells them throughout Europe;
7.         The Englishman who established Ulaanbaatar’s first English-language college for adults and now operates two schools;
8.         The Canadian, who set up Mongolia’s first property brokerage and is now a multi-millionaire.
I’ll leave you with one last comment. Of all the expatriates I have met in 10 years of traveling to and from Mongolia, I have never met any who didn’t fall in love with it. Praise indeed for an emerging Asian, wolf economy. The opportunities both for the romantics and the heavy industry players are all there, and the country is about to go places. Investors and adventurers should take                          note.
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Yet despite the mining industry being an apparent savior, the global mining multinationals and Mongolia have not always seen eye-to-eye. Mongolians revere their land, and polluting it runs against strong local Buddhist and shamanistic beliefs that can die hard here. The Government, for example, turned down a lucrative proposal to develop a premium Japanese-funded golf course just outside the city when they found out that chemical fertilizers were needed to cultivate the grass. It’s hard to imagine that stoicism in China, where even pristine land can be treated as a convenient dumping ground for toxic waste. Plans for a casino, too, to attract Chinese gamblers, were eventually aborted after it was deemed to be contrary to Mongolian Buddhist principles.
Certain mining operators, meanwhile, have also taken advantage of the country in the past. In a notorious case that shut down foreign investment in mining here for close to a decade, one well-known operator negotiated a 100 percent profit tax breaks for five years in order to allow them to recoup the investment on the equipment needed for extraction. What was supposed to be a project with a 20-year life span and 15 years of tax revenues for the government was then cleaned out in 4 years and 10 months. The Mongolians, quite understandably, felt they had been raped.
However, Mongolia itself does not possess the technology, skills or manpower to mine its own resources. While a careful rapprochement of sorts has been made with some operators, Mongolia has been treading slowly, eager to learn from past mistakes and to take time of their understanding of the implications of exploiting their natural resources. That hasn’t stopped some impressive reserves being put into operation, and Mongolia has learned a lot from these initial ventures. But, in what may come as a shock to the international mining community, the Mongolian President, Mr.Ts. Elbegdorj, told the Mongolian Economic Forum that mining in the country would be under Mongolian standards, and that the entire mining industry would need to change much of its current operational practices in order to be in the country.
Specifically, he stated that amendments to the Minerals Law in Mongolia will be changed, possibly as early as April 30 this year to better regulate the industry and to define the principles of responsible mining. For an industry often used to getting its own way, it is somewhat ironic that it has taken the nomads of Mongolia to stand up, and with their massive reserves, dictate terms. The outcome will be interesting to observe, and you can bet there will be some squealing from the mining community as concerns the inevitable higher extraction and remedial costs that will almost certainly result.
All that said, the industry is in a position where it cannot afford to ignore Mongolia. Already, Mongolian coal reserves are competing with Australia and once oil, gas, and iron ore explorations come on-stream the country will become a global source of both raw and processed minerals for decades. This is now impacting on foreign investment into the country in a big way. In discussions with the Canadian Ambassador, he revealed that about 90 Canadian companies had already invested in Mongolia, with most of them in mining or mining supplies. With a combined investment total of about USD3 billion, that’s an average of USD33 million per business and is hardly small beer. To demonstrate how the mining potential is impacting on a player such as Ivanhoe, just take a look at their corporate web site. It’s all about Mongolia, and what goes on now in the country can impact heavily on Nasdaq’s performance. Such is the extent of the new, global influence that Mongolia can wield.
The Mongolians, though, are serious about reforming the global mining industry, and they can afford to be. In terms of looking at the “Natural Resources Curse,” an interesting statistic crops up. According to the World Bank representative in Ulaanbaatar, countries that have discovered significant natural mineral wealth tend, on average, to perform worse in terms of growth than those without. The “Natural Resource Curse” can be partly a result of corruption, but most significantly can create an industry so domestically powerful that increased wealth, an appreciating currency, and subsequent inflation can single handedly destroy other key industries. It’s happened. Holland lost its shipping industry and had to rethink its entire economy after gas revenues raised prices so high it made the entire country’s manufacturing sector bankrupt in the 1980s.
Mongolia is aware of this, but is laying on top of that another level of insulation. Recognizing that mining can literally create scars, political strife, conflicts and divisions in society as an unwanted legacy, their new laws are likely to focus on leaving a positive footprint providing tangible, long-term benefits and a national source of development and prosperity. That’s all very well said, but it sounds like the environmental implications are going to be huge. That’s another industry sector that needs to be taking a look at Mongolia, as the country insists upon responsible mining as its new mantra.
The Mongolians have also begun doing some serious homework. In working out a development plan for their own country, they’ve been scouring the thoughts of similar sized countries around the world. Ignoring differing political systems, the Mongolians have tried to understand their own position by examining others. Interestingly, the national development plans for both Qatar and Vietnam both came in for particular praise. Such attention to detail augurs well for the country, while MBA students involved with national economic development studies would do well to note the contents.
All that good news said, Mongolia does lack in other key areas. Energy is a problem and Ulaanbaatar is stretched. The Soviet-built coal powered stations are old and polluting, and plans for more efficient, cleaner stations have been delayed due to costs and political wrangling. Democracy and getting long-term plans into place have proven occasionally difficult to manage. The winter smell of burnt coke still hangs over UB like a fine, choking dust. As an alternative, plans to develop Mongolia’s first wind farm are also on the drawing board, although cost remains a prohibitive factor.
Moving out of UB, much of the countryside is entirely without power, and mining operators have to spend huge amounts of money to get energy into their fields. Most Mongolian nomads use solar panels to provide electricity – these can run a TV, a radio, and lighting, and are free. Mongolia’s status as the sunniest country in the world with over 300 days of sunshine each year provides some dividends.
It also goes without saying that Mongolia is very different from anywhere else in this part of Asia. It is passionately democratic, with a free media, no blocking of internet access, with everyone having a vote. While that can make Mongolian politics noisy, it does mean that the government has to watch what they’re doing and have to perform. Inevitably, some cronyism has hung around from the old Soviet days, and questions can be asked as where certain officials obtained their wealth. Yet Mongolia’s Parliament successfully passed a law last year to force officials to reveal their true assets, and the government has signed up to the global Transparency International initiative.
Additionally, with the help of the global community, Mongolia’s civil service and its institutions are being invested in and developed, and these should help keep checks and balances in place. Governments have fallen in the past 20 years of Mongolian democracy due to either incompetence or corruption, and the mechanisms for resisting a subversive attempt to unilaterally gain control of the nation’s assets are being carefully put in place. While the fantastic sums of money that stand to be earned from Mongolia’s mineral wealth are still vulnerable, it seems apparent that an autocratic dictatorship approach is unlikely to succeed – unless, like Peron’s Argentina, he happens to be nationally popular, possibly the only real democratic subversion risk that Mongolia has to watch out for.
As indicated, much of the opportunity for foreign investors lies within the immediate need to exploit the nation’s minerals. Yet along with that, the government is keen to develop secondary industries and technologies and move added-value both up and downstream. If your business can do this, Mongolia should be a destination to consider. With a corporate income tax rate at a high band rate maximum of 25 percent (15 percent for smaller businesses), and tax holidays on offer, the investment and financial environment is positive.
At present though, it still remains an investment destination where you really need to know your industry to succeed, and to be able to train and educate local workers. While mining remains the dominant attraction for now, agriculture remains a key and politically important industry as it reaches right into the hearts, minds and pockets of half of the national population. Mongolia therefore is ripe for mining related businesses, including suppliers, added value and secondary industries, and agriculture and animal husbandry.
The Business Council of Mongolia aims to advocate increased trade and investment in Mongolia and serve as a forum for dialogue on the important business climate issues. Join us at the Business Council Mongolia Official Website
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