Mongolia’s Balancing Act PDF Print E-mail
News - Economy
Tuesday, 12 January 2010 21:54



As most people, who are even remotely connected to Mongolia know, the much publicised (and long overdue) Mongolian economic boom is set to start in earnest. World analysts have now jumped in and tried to predict the shape of things to come.

Mr. MacNamara, a journalist from the Financial Times has recently written an article about Mongolia’s third neighbour policy, while today the news about Mongolia seems to be all about the pre-IPO road-show of South Gobi Energy trying to raise $400m in HK for its Mongolia projects.  Before that it was the agreement between Areva and Mitsubishi to develop Uranium deposits in Mongolia together. Not a week goes by that Mongolia does not make the international business headlines with a new deal or story about its upcoming growth, it is clear that the world media’s are slowly catching up to the “Mongolia story” but where is that story heading?

Principally, it seems that the main questions asked by analysts are:

  • How will Mongolia juggle its appetite for foreign investments while maintaining national and political integrity?
  • How will Mongolia play its formidable neighbours to its advantage yet retain a real independence from both?
  • Will the much flaunted “third neighbor policy” work and be efficient or is it merely an elaborate trap for foreign investors?

While the Mongolian economy and its democratic movement are notoriously wild and unpredictable, all the signs seem to point towards a real desire from the political class to move in the right direction. All the ingredients for Mongolia to become this decade’s success story are present, now it is simply a case of blending the right mix of ingredients together to obtain a performing economy. This is actually a lot trickier than it sounds. Thankfully, Mongolia is still a functioning democracy and its elected representatives are still answerable to the people of Mongolia, if only through a system of fair elections and a generally free press.

The will to move in the right direction is clearly demonstrated by the new generation of Mongolia’s politicians who are fast becoming a formidable force, Mr. Zorig, the minister for Mineral Resources, has already accomplished much; he not only achieved the completion of the OT agreement but he has also restored Mongolia’s tainted reputation with Foreign Investors. Mrs. Oyun from the Civil Will Party seems to be one of the political shooting starts and also one of the finest and most driven politicians I have ever seen.

Mongolia’s main weakness has always been its isolation, landlocked between two enormous powers. With the correct exploitation of its resources, Mongolia now has the opportunity to turn that weaknesses into a strength and take full advantage of both neighbours. To achieve this, Mongolia will need to thread a fine line and play a tricky political game if it is to come out on top. Mongolia’s position is not an easy one; it is likely to become the setting of the clash of the titans over its resources. Russia’s agenda for Mongolia seems to be more a question of political dominance while China seems to be primarily concerned with securing easy and cheap access to the resources Mongolia is so abundant in and that China so desperately needs. The country itself seems locked in a love / hate relationship with China while it still has ambiguous feelings about Russia.

Concerning Russia, Mongolia seems uncertain as to where its relationship now stands and worries that Russia will increasingly use the carrot and stick method to obtain what it wants from Mongolia, this was demonstrated with the opposition to the Millennium Challenge railway funds as well as the timely reminders of Mongolia’s supposed outstanding debt to Russia. Russia has notoriously used threats, blackmail and occasional symbolic rewards in dealing with its own internal affairs as well as its previous (Soviet) area of influence; the pressure from Russia is likely to come from the Public sector and will be aimed squarely at the Mongolian Government. China on the other hand is more likely to play a more subtle game, using discrete methods of cajoling, bribery, corruption and its own economic dominance to ascertain its power over Mongolia but this is unlikely to be done by the state but rather led by private Chinese entities.

The best way for Mongolia to leverage its enormous resources against its neighbours is to use what has now been termed “The Third Neighbour Policy”, essentially a loose understanding that whenever possible and advantageous, Mongolia will deal with countries or entities that are neither Chinese nor Russian. This policy has a number of clear advantages, the most obvious of which is that Mongolia should be able to retain a greater independence from either of its neighbours but should also be able to obtain greater transparency and accountability from the  “third neighbour” companies such as Rio Tinto, BHP, Peabody and so forth than from its geographic neighbours.

Mongolia’s favoured third neighbours have traditionally been considered to be Japan, Korea, India, the USA and sometimes a few of the European countries. The policy allows them to indiscriminately pick and choose the  most  suitable partner for each project. The next mega project in the pipeline is the famed Tavan Tolgoi project, the huge coal deposit in the South Gobi. It is too big for a single company to exploit and so will have to be divided and its licenses allocated accordingly. The way this will be done will really settle the question of Mongolia’s foreign policy and its use and abuse of the third neighbour policy. Mr. Zorig has announced that they will announce the shape of things to come regarding Tavan Tolgoi early in 2010 and choose its companies soon thereafter. If Oyu Tolgoi was the appetizer, the amuse-bouche even, Tavan Tolgoi will be the main course.

But, for the policy to have any chance of success it is not simply sufficient to wish it so, Mongolia must become an attractive destination for foreign investments. While some progress has certainly been made, it still needs to improve its offering; the corner stones of foreign investments in Mongolia will be the introduction of effective measures against the rising problems of corruption and the creation of a strong, independent, judicial system. The business environment of Mongolia is still good but can be further strengthened with more comprehensive, transparent and accessible information to foreign investors. Improving political stability is a longer term goal but is part of the greater understanding required on the part of Mongolia as to what is essential for the country to remain competitive in an increasingly globalised world.

Mongolia has already learned much with the debacle of the 68% windfall tax, it must carefully manage its fiscal and foreign policies, a too obvious show of greed on the part of the government will force foreign investors to seek their fortunes elsewhere while a too lenient policy will mean that Mongolia gets taken advantage of and will not receive its fair share of revenues.

On the flip side of the coin, if the third neighbour policy becomes truly effective, it may well anger its two very large and powerful neighbours who feel that they are missing out and see their influence diminish within Mongolia. Mongolia depends on those neighbours for its survival as they are (China in particular) Mongolia’s majority trading partners. Furthermore, Mongolia could be perceived as setting a bad example for its neighbours; a democratic and successful economy on their doorstep might set a dangerous precedent, in particular for the inner Mongolian region of China. It does not take a big stretch of the imagination to understand that both Russia and China have every interest to see Mongolia’s democracy and its third neighbour policy fail. A strong Mongolia is the last thing they want to see. How Mongolia handles this potential political and economical backlash from both countries is the most interesting of questions.

In the end it might well be the case that Mongolia’s abundant availability of minerals might end up being  the catalyst that will lead the country to its very own demise. As many other ex-Soviet, resource rich, central Asian countries have already demonstrated, the tightrope balancing act of democracy and good governance is hard to achieve, leaving very little room for errors. It would only be too easy for Mongolia to become a failed state, ruled by despots and only concerned with the well being of its ruling class.

Most people are confident that Mongolia will manage this difficult balancing act well, it will of course make mistakes along the way but as long as it retains a fair system of checks and balances, it will be able to recover from those mistakes and forge ahead. I look forward to seeing Mongolia develop into one of the most successful economies of this decade and will continue to be an avid spectator of this fantastic story.

This article was written by Christopher de Gruben.

More articles by this author available here.

Last Updated on Wednesday, 13 January 2010 16:06
The Business Council of Mongolia Updates Web Presence PDF Print E-mail
News - Economy
Tuesday, 05 January 2010 22:29

Business Council of MongoliaThe Business Council of Mongolia announce that their bilingual website has been upgraded for the New Year.

The categories have been reorganized in order to improve usability and make it easier for visitors to find and access information. We created a new category named "Resources". Here you can find regular reports and other resource documents on Mongolia. We continue to upload issues of the BCM NewsWire to the Archives one-month after distribution to members. 

Other new features include the calendar, reports, presentations and interviews as well as easier access to the Mining Supply Chain Database via a direct link on our home page.

Feel free to surf on our website at
Last Updated on Tuesday, 05 January 2010 22:29
Is Mongolia now open for business? PDF Print E-mail
News - Economy
Thursday, 15 October 2009 05:53

mongolian_economyThis article was written by Christopher de Gruben.

We have recently witnessed an historic moment; the long awaited ratification of the Oyu Tolgoi Investment Agreement. It is widely expected that this agreement will have a strong impact on all aspects of the Mongolian economy. It is meant by the Mongolian Government to send a strong signal to foreign institutional investors that the country is once again open for business as an attractive foreign investment destination.

Is that really the case? What is the investment climate now and how is it likely to change?

Mongolia has always been an attractive investment destination; it is a fast growing economy with easy access to its importing client’s base. It is one of the very few functioning democracies in the region, with an attractive tax regime coupled with few restrictions placed on foreign investors. Mongolia boasts high literacy rates, a young dynamic population and an openness to the outside world seldom seen in other Asian countries.

Mongolia’s economy is centered on agriculture and mining. It has rich mineral resources, and copper, coal, molybdenum, tin, tungsten, and gold account for a large part of industrial production, GDP per capita in 2006 was $2,100. It’s GDP has risen steadily since 2002 at a mean rate of 7.5% according to an official 2006 estimate.

When I first arrived in Mongolia, the signs of transition from a centrally planned economy to a market driven system were obvious for all to see, the cars were getting bigger (and shinier), the clothes more colourful, the shops were being filled with exotic products, skirts were getting smaller (and still are) and property prices were exploding.

Mongolia has moved incredibly fast in terms of progress since then but despite it being less exotic now, it is still the country of all opportunities, the start up costs to business are still very low, the cost of corruption is relatively small and the absence of organized crime is welcomed. The quality of services and the availability of products have improved immeasurably, I currently have Dutch cheeses, Perrier water and Spanish ham in my fridge, the restaurants are world class and international 5 star hotel chains such as Shangri-La are being established in Ulaanbaatar. Louis Vuitton is opening this month its flagship store while Ferragamo is getting ready to move in, Mongolia has finally joined the globalization game, albeit with some reluctance.

This breakneck speed of progress is being sustained by wide ranging speculations in the upcoming mining boom. Mining itself is a very capital intensive operation with large start up costs and high political and commodity risks (but with high potential returns). Smaller investors such as myself, find the supply chain more interesting. This was equally evident to the 49?ers (1849) from the Californian gold rush and all subsequent mining booms, it is the sale of picks and shovels, the operation of saloons and brothels that were consistently considered to be the most stable and profitable businesses.

The $5bn investment amount promised by Rio Tinto and Ivanhoe Mines for the Oyu Tolgoi project will be part of this profitable Mongolian supply chain; this is only one of many large upcoming projects which are expected to contribute to it. It is easily conceivable that this service sector will become a multibillion dollar industry within the next few years.

Over the last five years, I have myself tried to take every opportunity I could and have made small strategic investments, my initial forays have been in residential property, followed by the establishment of a “subway style” restaurant called Sub’baatar and the incorporation of a small consulting firm, Mad & Dysfunctional, post-trauma consulting, dedicated to assisting foreign investors setting up in Mongolia.

All of those investments are based towards taking advantage of the developing supply chain and making the most of the growing economy, some of my investments have been hugely profitable while for others the verdict is still out. I have made many mistakes during that time but have by and large recovered, Mongolia is still a forgiving environment and as long as you are willing to work hard, it is still possible to succeed.

Working in developing countries has its own generic problems; red stamp bureaucracy, lack of basic infrastructure, poor skill sets amongst the domestic labour force, low levels of services, difficulty of enforcing regulations, unstable regulatory environment to name but a few. In Mongolia, this is balanced with a vast pool of opportunities for those willing to take the risk. The country is being revolutionized by the return of many young Mongolians to their home country with new skill sets and the increasing arrivals of young expats keen to establish themselves. The business environment is improving fast, new ventures are started daily, and improvements are visible on a daily basis, it is this fast paced change that constitutes the excitement of working in emerging markets.

For Mongolia to continue moving forward, it will be obliged to have increased interaction with the mega power that China is fast becoming, it not only represents an increasingly important trade partner for imports and exports but also a strong potential political and economical ally. As the influence of China grows, Mongolia needs to rise along with it. At the moment I have the distinct feeling that Mongolia “loves to hate” China, while an element of self preservation is understandable, greater co-operation will be essential in the future. The third neighbor policy, which is currently being  pursued by Mongolia, is an innovative way to hedge the risks of being landlocked between two superpowers while taking full advantage of trade potential with its neighbours, an excellent political strategy that will pay off in the long term.

The future of Mongolia is never the less fraught with dangers; corruption might quickly become the source of its downfall, it is therefore important to effectively restrict the opportunities for temptation. This has to start with a true and real separation between public servants (at all levels) and their own business interests.

Corruption is not an emerging market particularity but a global phenomenon, not a week goes by without an international scandal hitting the world medias; but the presence of those scandals and its associated public outcry is an important indicator of a functioning democratic system. Mongolia is currently lacking in large scale corruption scandals.

The foundation of creating a strong and powerful Mongolia will be established through reforms towards a more powerful independent judicial system and the greater enforcement of its law. It is my impression that while the judicial system has a good legal grounding (despite its often contradictory and confusing laws) the enforcement of those regulations are haphazard at best.

The future of Mongolia is bright, a new chapter in its history has just started, we can only hope that its ruling class will make the right reforms to make sure this process continues while making the most of current opportunities for growth.

More articles by this author available here.

Last Updated on Monday, 19 October 2009 06:12
TDB Pays Back Usd31.5 Million To Investors In Corporate Bonds PDF Print E-mail
News - Economy
Sunday, 04 October 2009 22:45

Trade and Development Bank has repaid 42% of its corporate bonds worth USD31.5 million, including coupons, to 96 investors in 13 countries, before maturity. The bank believes this will reassure international investors on Mongolian financial institutions’ sense of responsibility.
Three-year bonds carrying an annual interest of 8.625% were offered in January 2007 in international financial markets. The sale amounted to USD75 million. The repayment indicates that TDB is recovering well from the recession and financial crisis.


Last Updated on Sunday, 04 October 2009 22:45
Central Bank Lowers Rates To “Help Sustain Growth” PDF Print E-mail
News - Economy
Sunday, 04 October 2009 18:43

The Central Bank has lowered its policy rate to 10 percent effective September 30. This 1.5 percent cut, the Bank’s first since June 12, has been taken as the inflation rate has been steadily declining, and is expected to help sustain the revival of growth in some economic sectors. Along with this, the repo rate has been cut by 3.5 percent, the interest rate of non-standing facilities by 2.5 percent, and the overnight interest rate by 2.5 percent. The Bank hopes all this will help lower the cost of short-term funding.
The Bank has said in a statement announcing the changes that certain positive conditions have marked the state of the economy in the third quarter of 2009. The inflation rate has been steadily declining and was 3.9 percent in Ulaanbaatar in September. Gross international reserves have exceeded USD1 billion, and the exchange rate has been stabilized.


Business Council of Mongolia

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

Last Updated on Sunday, 04 October 2009 18:43
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