Clare Nuttall in Astana -
The new mining law currently under consideration in Mongolia has alarmed foreign investors, who fear it will not only deter investment in the mining sector, but have knock-on effects in other parts of the economy. With parliament due to consider the law in April, just two months before Mongolia's presidential elections, the government has been accused of taking a populist stance to appeal to rising nationalism among the population.
The Mongolian Business Council has written to President Tsakhia Elbegdorj warning of the possible consequences of the draft law for the mining industry - and foreign investment in general - should it be adopted in its current form. Adopting the law is "likely to damage Mongolia's brand as an investment destination," says the letter from the council, which numbers Rio Tinto, General Electric, Mitsubishi and other international firms among its 250 members.
"The impact of the draft law on the minerals industry will be to halt current minerals exploration and development in Mongolia and greatly discourage any future investment," says the letter, which was leaked to the Financial Times. "Collateral damage is likely to include all other sectors of supply, including but not limited to the construction and real estate sectors, imposing a significant chain-reaction burden on the banking and financial institutions which they may not be able to withstand and leading to a deepening crisis." Measures of particular concern in the draft law include a provision allowing local communities to decide whether exploration work can go ahead in their area.
Investors have pointed out that Mongolia's law on foreign investment, adopted in 2011, has already had a negative effect on the investment climate. The law restricts foreign investment in sectors deemed to be strategic, which include the mining sector. The earlier legislation also sparked accusations of populism since it was passed shortly before the June parliamentary elections.
A report published by the US embassy in Ulaan Baatar on January 15 warns that the draft mining law is already impeding investments, as government officials are waiting to find out the new lay-of-the-land before making any decisions. "Officials are reluctant to issue licenses and permits that might eventually become invalid or require alteration. In certain cases, investors report that officials have threatened to revoke valid licenses because they might be illegal under the pending legislation," says the US report.
The report also criticises the 2012 foreign investment law, noting that "both foreign and domestic investors consider Mongolia a riskier place to invest than it once was; and perhaps riskier than similar emerging markets."
Mongolian government officials argue that the proposed mining law will benefit both the economy and the environment. "It is necessary to understand the reality of Mongolia. We need to understand each other well on such issues such as the geopolitics and location, fragile ecology, small population. It is necessary to look at the reality and examine the draft from many angles," presidential adviser Puntsag Tsagaan told a briefing on January 18, Bloomberg reports.
While acknowledging this position, Origo Partners' senior associate Dale Choi warns of a "disconnect" between government and business. "We appreciate the sincerity of the intent of the draft Law to try to solve challenges posed by development of minerals sector, protect the interests of Mongolia and its people from a higher national interests' point of view," Choi writes. "However, we note a significant "disconnect" and misunderstanding between the positions, beliefs and convictions of the taskforce and Mongolian authorities and that of the exploration/mining industry and investors."
At the briefing, Tsagaan also denied any connection with the looming election, but given the timing of the bill there are widespread suspicions that it's a populist move. Foreign exploitation of the country's mineral wealth is a theme that antagonizes many Mongolians, and tapping into these grievances could help Elbegdorj in his bid for re-election. Vidur Jain, an analyst at local brokerage Monet Capital, says the speculation that this is just an election manoeuver is only strengthened by comments from Tsagaan about how "there is no hurry to approve it (the law) before presidential elections".
Another potentially populist move by an MP and member of Elbegdorj's Democratic Party, Jalbasuren Batzandan, was to introduce a draft anti-corruption law on January 15 to the parliament that targets Mongolia's 100 or so high-ranking state officials.
Striking a balance between attracting foreign investment to develop Mongolia's massive natural resources and maintaining social harmony by ensuring the resulting wealth is distributed to the population and helps preserve the environment has been a steadily growing problem for the Mongolian government.
For several years, Mongolia was the world's fastest growing economy, with the rapid expansion driven by the country's nascent mining boom and the multi-billion dollar investments into major projects, in particular the Oyu Tolgoi copper-gold deposit. However, the benefits of this boom have not trickled down to the whole population. Those left behind include the millions of migrants living in gers on the hills surrounding Ulaan Baatar, whose population has more than tripled in the last 20 years. The extreme cold of the 2009-2010 winter, known locally as a "Dzud", accelerated this trend, as millions of livestock died, forcing more former nomads to move to urban areas. The increasingly obvious difference between the haves and have-nots has caused a rise in nationalism, with foreign mining investments being an obvious political target.
MPs have, for example, tried several times to amend the terms of the Oyu Tolgoi investment agreement. In the most recent attempt in September 2011, a group of backbenchers called on the government to enforce a parliamentary resolution to increase the state's share in the project from 34% to a majority. Meanwhile, the world's largest aluminium producer Aluminium Corp of China abandoned an attempt to acquire SouthGobi Resources, after the adoption of the 2011 law on foreign investment introduced new restrictions on foreign ownership of strategic assets.
There have also been signs recently that the boom of the late 2000s will not continue indefinitely, despite the country's undoubted mineral wealth. Falling global coal prices and a slowdown in the Chinese economy caused exports of coal and other minerals to drop in 2012, resulting in a decline in the growth rate - albeit to a still-healthy 12.3%.
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