Clare Nutall in Almaty -

Calm has returned to Ulaanbaatar after the violent protests that shook the Mongolian capital following the June 29 elections. Unrest on this scale - which left five people dead - hasn't been seen since before Mongolia's first democratic elections in 1990. But what made the latest elections different from the previous ones of the last 18 years is that far more was at stake: in the run-up to the polls, both the Mongolian People's Revolutionary Party and the opposition Democratic Party knew that the winner would preside over the parceling out of Mongolia's immense mineral wealth.

The fact that the MPRP, which has ruled during all but four of the last 90 years, gained a clear majority in Mongolia's parliament the Great Hural, should be good news for investors. For the last four years the parliament has been split, with the MPRP holding the narrowest of majorities, and little was achieved from the shifting alliances and coalitions. Successive governments have tried and failed to pass a new mining code.

With the new government, this should change. As well as the mining code, the government is expected to give the go-ahead to major mining projects, including Oyu Tolgoi. Like the code, Oyu Tolgoi has been pending for several years. Meanwhile, its investors Ivanhoe Mines and Rio Tinto have been spending up to $40m a month just to keep the works ticking over while awaiting government approval to start production.

Even the riots hasn't dampened optimism about the future. On the night of July 1, as people took to the streets, the headquarters of the MPRP was set on fire and government offices were looted. That night, President Nambaryn Enkhbayar declared a four-day state of emergency in the capital. However, there has been no further unrest since the state of emergency was lifted, and international observers insist the elections were free and fair - as they have been for the last 18 years. But Alisher Djumanov, managing partner of Eurasia Capital Management, which runs the pioneering Mongolia Discovery Fund, stresses it's important not to over-dramatise those events. "We have been monitoring the situation from our Ulaanbaatar office and are hopeful about the future. A majority in parliament from the MPRP means they will be able to do things - change the law and make agreements with the big mines."

Mine, all mine

Oyu Togloi, Djumanov says, will be a landmark project. According to Ivanhoe, it is the world's largest and highest-grade copper and gold mine development project, and is expected to produce more than 1bn pounds of copper and 330,000 ounces of gold for at least 35 years. Ivanhoe and Rio Tinto, which signed a cooperation agreement to jointly develop the Oyu Togloi complex in 2006, have made a commitment to invest $7.3bn in developing the deposit over a 30-year period.

Oyu Togloi illustrates the sheer size of Mongolia's natural resources. It also indicates what has made this election such a high stakes game despite the broadly similar policies of the MPRP and the Democratic Party. "Both parties have very similar agendas as to how to develop Mongolia's natural resources," says Christopher de Gruben, business development director at property investment firm Mongolian Properties. "The big question is which party would be in power to actually get the benefits from signing concession agreements and so forth. Of course, the party in power now will have enormous gains."

Mongolia has some of the world's largest reserves of copper and coal, and numerous other natural resources. Historically, its mineral wealth has been little known; exploitation of its reserves has barely started. However, it is rapidly coming onto people's radars as soaring commodity prices and worries about shortages have prompted industry to desperately seek out new sources of raw materials.

Even today, the extent of Mongolia's mineral resources - which as well as copper and coal include gold, iron ore, molybdenum, phosphorus, silver, zinc and other sought-after commodities - has only been guessed at. With relatively little exploration carried out, official proven reserves are well below estimates of what probably lies below the Mongolian steppe. Although it has just 20bn tonnes of proven coal reserves, its estimated coal reserves are actually nearer 150bn tonnes, which could make it the world's largest coal exporter once these are developed. Similarly, known uranium reserves are around 60,000 tonnes, but according to a Russian study, total reserves are between 120,000 and 150,000 tonnes. The country also has estimated gold reserves of some 3,000 tonnes. Its known copper reserves are around 45m tonnes, but could be more than twice that. Indeed, it is expected to overtake Chile as the second-largest copper producer once more mines come into operation and production starts to tail off in some of the older Chilean mines.

Laws of the land

Until now, Mongolia's relative obscurity and the lack of clear rules of operation in the mining sector have deterred investment to an extent, though opportunities are so large there has still been some interest. "There has not been tremendous stability in the mining laws because it's a young country that is trying to understand its mining industry and how to regulate it," says Lee Cashell, managing partner of Asia Pacific Investment Partners and Altan San Securities. "Once this is finalized, it will give increased clarity for the future." Even so, Cashell points out that during the six years he's been investing in Mongolia, "every year we have seen a 20-30% increase in foreign investment."

Its location between the markets of Russia and China is an attraction. "Both Russia and China are growing fast, and Mongolia has finally managed to position itself in people's minds as a strategic position between them," says Ganhuyag Hutagt, CEO of XacBank.

Investments have come from Europe and the US, from the mining giants of Australia and Canada, and from countries closer to home such as Kazakhstan and Uzbekistan. The greatest interest, however, has been from Russia and China. Sandwiched between these two giant powers, this is perhaps inevitable. China in particular is desperate to secure new sources of raw materials. "Major Russian companies setting up there, but China will ultimately be the consumer of Mongolia's resources," forecasts Djumanov. "The long-term story is very positive and bullish."

However, after a decade during which Moscow all but ignored Mongolia, Russia has been aggressively moving in on its neighbour. In April, then president Vladimir Putin and his PM, Viktor Zubkov, visited Mongolia, accompanied by business leaders including Rosatom head Sergei Kiriyenko. The trip resulted in a raft of commercial agreements being signed between the two countries.

During the visit, Putin called for an increase in economic cooperation between Russia and Mongolia, saying he was sure that trade turnover between the two countries would soon reach $1bn, Last year, turnover was $790m, an increase of 30% on 2006, though it still lags behind the level when Mongolia was the de facto "16th state" of the Soviet Union.

Deals signed while the Russian delegation was in Ulaanbaatar include an accord on joint uranium exploration, production and processing, a cooperation agreement between Aeroflot and Mongolian Airlines, and the sale of a majority stake in the Ulaanbaatar Railway, a joint venture between Russia and Mongolia, to Russian Railways. At present, Ulaanbaatar Railway and two other Russian-Mongolian joint ventures - mining companies Erdenet Mining Corporation and Mongolros-Tsvetmet - account for 20% of Mongolia's GDP.

Mongolia's other neighbour, China, is even more voracious for its raw materials. "China accounts for between 25 and 30% of global demands for basic raw materials including copper and aluminium," Ivanhoe Chairman Robert Friedland said during the recent Central Asian Mining Congress in Almaty, "The dragon has a fire in its stomach and it's hungry for copper." Once new railways were built, trucks carrying copper from Oyu Tolgoi will just "roll down the hill to China" he predicted; the mine is less than 80 kilometres from the Chinese border.

China is also desperate for fuel, another resource Mongolia can supply. "Coal prices have gone through the roof. The shortage of metallurgical coal in China has caused cutbacks in steel production for the first time," Friedland added.

China has become the largest investor in Mongolia. However, while China and Russia are the most obvious partners given Mongolia's location, Ulan Bator has been careful to promote the country among potential investors from other parts of the world. According to the Foreign Investment and Foreign Trade Agency of Mongolia (FIFTA), the government agency responsible for encouraging inward investment, other major sources of FDI are Canada, the US, South Korea and Japan.

The government of Kazakhstan and Mongolia have also been pushing for stronger trade ties between their countries. In June, Kazyna Capital Management and FIFTA agreed to set up the Kazakh-Mongolian Direct Investments Fund to invest in projects in both countries.

While mining is the obvious reason to invest in Mongolia, money from this sector is starting to trickle down through the economy, stimulating sectors such as real estate, and consumer and business services. "There is a great deal of activity in mining and the related supply chain, which will lead to a broader range of investments. However, there isn't a manufacturing base and there isn't likely to be one with China so close," says Peter Morrow, CEO of Khan Bank.

Indeed, Mongolia is becoming visibly richer, and increased spending power is already helping markets to develop outside the mining sector and the traditional animal-based economy, which still produces meat, hides and cashmere. "The cars are getting bigger every year. Every week new restaurants, bars and shopping centres open, each one more luxurious than the last," says de Gruben. "People are getting very rich, very quickly."

The Mongolian Stock Exchange is doing well. After several years as the world's smallest exchange by market capitalisation, within the last year it has gone up by 600%. New companies are listing, liquidity is improving, and there are no restrictions on foreign investment or repatriation of income.

The real estate market is also developing. "The investment scene has changed a lot over the last couple of years, from small buyers of a $60,000 apartment to hedge funds and other institutional investors doing million-dollar deals," says de Gruben.

Tracking growth in this sector is difficult, because, as de Gruben points out, it is extremely cyclical due to Mongolia's temperature range from -40° Celsius in winter to +40° Celsius in summer. "People make their money in summer, buy a property in September, then hibernate for the winter before selling it in April to free up capital for the summer months. They then buy a bigger property the following September," he explains. High inflation and a freeze on mortgages have shaken the market recently, but September saw a 25% year-on-year increase.

In general, Mongolia's business climate is friendlier and more open to foreign investment than that found in the rest of the CIS. However, it still "suffers from some of the frustrations of this part of the world," notes Morrow. On the World Bank's Doing Business index for 2008, it is ranked 52nd, higher than every CIS country except Armenia and Georgia. "Mongolia has huge untapped resources, GDP growth of over 10% for the foreseeable future, and - what a lot of people have never realized - it's a low tax, free and open economy run by a democratically elected government," says Cashell.

Hutagt agrees that, "Mongolia is a good place to do business; it's easy to be a foreigner here - to own assets and repatriate earnings."

And as a result, investors are coming to look at Mongolia from all corners of the globe. This is unlikely to be upset by the current unrest, people on the ground forecast. As Hutagt points out, "Not a single working day goes by without some people coming to talk to me, looking for opportunities."

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