Clare Nuttall in Almaty -

This year's "Euromoney Mongolia Investment Forum" opened at a critical juncture in the country's development. On its second day, September 11, Sanjaagiin Bayar was elected prime minister after two months of political negotiations between the Mongolian People's Republican Party and the minority Democratic Party. It is hoped the new coalition government will at last adopt legislation to unlock Mongolia's natural resources.

Even amidst this uncertainty, interest in the resource rich country is growing. Curiosity about the market prompted Alisher Djumanov, managing director of Eurasia Capital Management, to pay his first visit to Ulaan Bataar for last year's conference. This resulted in the creation of the firm's Mongolia Discovery Fund - the world's first Mongolia-dedicated vehicle - in January 2008. This year, Djumanov is back in UB, as the capital is dubbed, to announce the formation of Eurasian Capital Mongolia, which will provide investment banking and brokerage services.

Eurasia is making a large bet on Mongolia because Djumanov believes it has a growth potential greater than any of the other Central Asian or Caucasian economies. With its vast mineral resources and low level of economic development, it is highly likely to achieve similar rapid growth and wealth creation as Kazakhstan has. It isn't often that second chances come along, but investors who failed to back Kazakh assets early on have the opportunity to ride the same wave in Mongolia. "When I first went to Mongolia in September 2007, it reminded me of Kazakhstan seven or eight years ago. UB was like Almaty before it became as affluent as it is now," Djumanov explains. "Mongolia is likely to see the same pace of development as Kazakhstan."

Eurasia's Mongolia Discovery Fund was launched in January with $5m, and has since grown to $20m. Djumanov says the firm is bullish about its ability to grow it further and deploy capital effectively in the country, and expects it to increase in size to over $100m. Since few major Mongolian companies are listed, the firm has taken a multi-asset strategy, and the fund has been invested in a mix of listed equities, private equity and pre-IPO investments, and property. Eurasia plans to add a fourth asset type when it starts investing through its Eurasia Credit Fund in the near future. "At present, assets are relatively cheap, there is limited competition for projects, and the market is not very well capitalized," says Djumanov. "Early investors will likely be rewarded. It's a chance to invest in the ENRCs and PetroKazakhstans of Mongolia."

Eurasia is actively recruiting as it plans to boost its Mongolia team from eight to 20 people within the next six months. The firm's decision to set up an investment bank in Ulaan Bataar follows enquiries from its investors about co-investment opportunities in what is becoming a highly interesting market. Eurasia Capital Mongolia will provide both investment banking- with a focus on sourcing, structure and executing investment transactions - and brokerage services.

However, Eurasia is not the only firm eyeing the market. In addition to local brokers such as BD Sec, and the investment banking division of Trade and Development Bank, international financial services firm ING Group chose the conference week to formally open its Ulaan Bataar office. Timothy Condon, ING Wholesale Banking's managing director and head of research Asia, noted forecasts of GDP in the low-teens for the foreseeable future. Meanwhile, senior executives from Goldman Sachs, JPMorgan Chase and Deutsche Bank were also present at the conference.

Natural attraction

The reason for so much interest in Mongolia is its extremely large - and underdeveloped - natural resources, and its location on China's doorstep. The key question is when and on what terms international companies will be able to exploit these resources.

Reminders of Mongolia's recent history were all around the State Palace where the conference took place. In front of the Ulaan Bataar hotel, the venue for the post-conference cocktail party, is a statue of Lenin (demoted from the central square to make room for national hero Genghis Khan), a reminder of when Mongolia was the de facto 16th republic of the Soviet Union. Today, groups of teenagers playing music on their mobile phones perch on the plinth - a sign of the country's youthful population and nascent consumer culture.

Beside the hotel is the burnt-out headquarters of the Mongolian People's Republican Party, destroyed in early July by protests following the MPRP's surprise success in the elections, which degenerated into riots as poverty stricken Mongolians expressed their anger at the country's lack of economic development.

Today, it is the foreign investors who are starting to get impatient. The election of a new government was expected to pave the way for rapid signature of the new mining laws that would open up the country to foreign investment in the extractive industries. But more than two months after the elections, a new coalition is only now being formed. Meanwhile, Rio Tinto and Ivanhoe Mines, which will be developing the Oyu Togoli deposit, are spending up to $30,000 a day keeping their operations going while they wait for the government go-ahead. Other investors, who were less quick to enter the market, are biding their time.

"Everyone is waiting for the trigger - the signing of the mining contracts," says Djumanov. "When that happens, there will be a sudden flood of investors. There is a window of opportunity to buy cheap assets in the interval between now and when they are signed, but this window won't close after that; the types of project will multiply. The risk for investors coming in now, is that they may be in limbo for a long time, depending on when the agreements are signed."

It is not just natural resources that will take off once mining starts. A multi-billion-dollar mining supplies and services industry will have to develop to serve this sector, and the trickledown effects will be felt throughout the economy. The government will have more revenues to invest in desperately needed infrastructure projects. Even in central Ulaan Bataar, the potholed roads, open manholes and erratic plumbing are evidence of the need for investment - projects will be needed in everything from road repairs to easing the bottlenecks at the Chinese border.

According to Randolph Kappa, CEO of Trade and Development Bank, demand for real estate is equally acute. Kappa estimates that $3bn worth of housing - equivalent to Mongolia's 2007 GDP - is needed in Ulaan Bataar alone. Currently half the capital's population lives in ger shantytowns on the hills around the city.

Foreign direct investment already reached $327m in 2007, up 32% on the previous year. The government has been firmly behind private sector development and international investment. "Mongolia is committed to providing a favourable business environment," Deputy Prime Minister Miyeegombyn Enkhbold stressed in his address to the conference. "In our 2006 tax code, we created the lowest tax levels in Asia, and we want to develop multiple sectors, not just mineral deposits."

Overall, the situation is a good one. Mongolia achieved average annual GDP growth of 8.7% in 2003-2006, which increased to 9.9% in 2007. The government's long-term economic development strategy to 2021 - dubbed "triple 15s" - envisages annual GDP growth of 15% to $15,000 per capita in the next 15 years. The aim of the strategy, adopted earlier this year, is to achieve intensive economic growth, boost skills and technology, create new jobs and develop a private sector based on both exports and domestic markets. However, it is dependent on the development of the natural resources sector.

The sooner the mining decision can be signed, allowing Mongolia to reap the benefits of high global natural resources prices, the better the chances are of achieving this. In the meantime, the mining sector remains dormant, meaning that Mongolia has suffered from the international increases in food and commodity prices without benefiting as a supplier. The spectre of inflation - due both to increasing international prices and to populist handouts such as the "wedding present" for newlyweds - is cause for concern. Inflation reached 15.1% in 2007, and has continued to rise. This will have to be carefully handled if Mongolia is to achieve its undoubted potential.

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