Terrence Edwards in Ulaanbaatar -

Young democracies such as Mongolia's, which this year celebrates a quarter of a century since holding its first free election, face enormous challenges in maintaining government stability, improving the living standards of its population and battling institutional corruption. Growing the economy can help achieve these goals, but it's a difficult feat balancing the wants of a constituency with that of investors – something Mongolia is finding to its cost.

Mongolia appears unable to establish political stability long enough to agree the development of multi-billion-dollar projects with foreign investors that could open the door to another mining boom for this country rich in copper and coal. The latest setback came on August 5, when Prime Minister Chimed Saikhanbileg’s Democratic Party removed a party from the grand coalition government that some felt was the source of conflict, but political infighting within the Democratic Party’s own ranks remains.

A bill passed by the parliament will see Saikhanbileg retain his post under the reformed government, but, for now, remaining members of his cabinet will take on the duties of the six ousted Mongolian People's Party (MPP) ministers. The reshuffle will inevitably result in some loss of voting power for the Saikhanbileg government. The grand coalition now includes 47 out of the 76 lawmakers in the parliament, including 35 members from his Democratic Party.

A split with the MPP from what was a five-party grand coalition had been expected in the lead-up to the parliamentary election scheduled for July 2016, but came sooner than expected. Parliament still has not decided on crucial mining projects that Saikhanbileg was counting on to give the economy a boost before the election. “Whatever little political and national consensus there was on major projects... we argue that there will be even less with MPP becoming the opposition,” Dale Choi wrote in a note to subscribers for his research company Mongolian Metals & Mining.

Choi worries the government break-up could hurt Mongolia's investment position by signaling to investors a return to instability. Mongolia's president, Tsakhia Elbegdorj, has a similar opinion, writing in a letter to the government that the change up could result in a “negative impact on society, economy, and the country’s reputation in the international arena.”

Investors began to lose interest in Mongolia after numerous disputes over mining projects made the authorities appear too difficult to cooperate with. Consistent declines in foreign investment from 2012 to 2014 were followed by slowing growth from 12.3% to 7.8%, respectively.

Friend or foe?

The MPP, which will be the Democrats' main rival in the election next year, joined the government after Saikhanbileg took over from ousted prime minister Norov Altankhuyag late last year. However, the Democrats in recent months had begun calling for the removal of the MPP, arguing they were undermining the government and acting as a roadblock to passing legislation. 

Getting deals such as an investment agreement worth $4bn for the Tavan Tolgoi coal mine – the country's largest, which is owned by the government – will be harder in the lead-up to the July 2016 election. Mining deals with investors are often unpopular with voters, who see mineral deposits as a form of public wealth to be shared among citizens. In the last election in 2012, many politicians campaigned on resource nationalism platforms. Saikhanbileg hoped that the grand coalition government would hold every party equally accountable for mining deals and ease worries of attacks once the campaign season kicked off.

Toronto-listed Centerra Gold is also waiting on a decision from parliament after it twice rejected deals for the Gatsuurt gold mine. Labelled a strategically important mine to Mongolia, the government is entitled to at least 34% ownership, but it can choose a smaller stake in the project in return for higher royalty payments to the state. 

Own worst enemy

Although the Democrats may have rooted out some disobedient lawmakers from the MPP, there is growing disharmony amongst themselves. Although Saikhanbileg is head of the government, it is Parliamentary Speaker Zandaakhuu Enkhbold who leads the Democratic Party's executive committee. Since they agreed to the arrangement last year, the two politicians have often been at odds with one another. Enkhbold went over Saikhanbileg's head earlier this year by blocking at the last moment the investment deal for Tavan Tolgoi with a private consortium led by China's Shenhua Energy.

So when the Democrat's executive committee led by the speaker agreed that the MPP had to go, Saikhanbileg had no choice but to tear apart the government that he had so painstakingly put together. “[The] PM appears to have had no choice but to follow instruction of DP, led by Parliament Speaker Z. Enkhbold,” wrote Choi.

This kind of inflighting has made the public even more cynical about government. Mongolia's transition to a democracy from a Soviet satellite state was followed by a decade of economic stagnation and the collapse of industry that had been maintained by the Soviet regime.

Many had hoped mining would bring about social change, but others feel it has only widened income disparity and made government officials more corrupt. “The challenge is how to make the politicians more accountable to the citizens and the politics transparent,” says Erdene Bat-Uul, mayor of the capital Ulaanbaatar and one of the original leaders of the 1990 Democratic Revolution. “We need to follow the letter and the spirit of the constitution.”