Russia winning the Mongolian "Great Rail Game"

By bne IntelliNews September 23, 2010

bne -

Analogies to the 19th century's "Great Game" are becoming a bit tired as they get applied to almost all projects in Central Asia, but another one has been playing out close to the hills where Rudyard Kipling's characters Kim and his horse-trading friend Mahbub Ali roamed. Except this time the Russians are winning.

For companies developing Mongolia's raft of mining projects that will start coming on line next year, the biggest problem is not finding the coal and other minerals, but getting them to the markets of Russia and China, as Mongolia is about as far away from anywhere in the world as it's possible to be.

Currently, the only major rail route that runs through the country is the Irkutsk-Beijing spur of the legendary Trans-Siberian express. Even so, Mongolians, terrified of becoming little more than a raw materials appendage to China, have been resisting Chinese proposals to build a rail line straight south over the border to China's underdeveloped northeast districts. Instead, they have plumped for a longer route across the country towards Russia's Vladivostok in the Far East, which has a spur that turns back into China from Russia.

In June, Mongolia's parliament said priority would be given to a rail link from the 40-year-old Tavan Tolgoi coalmine to an as-yet uncompleted industrial park in Sainshand, where the coal can be processed before being shipped north to Russia. The proposed route makes little economic sense, as the direct route south to China's hungry markets is far cheaper. However, the longer route hands Mongolia invaluable geopolitical choices: like building expensive oil and gas pipelines, rail links suffer from the same problem that once they are finished, you can only cut off your customers by cutting off your revenues. The Russian route allows the government in Ulaanbaatar to play the two emerging superpowers off against each other.

Railroaded

And the rail link is a big project. Mongolia's vice-minister of transport, Amarjargal Gansukh, told Reuters in an interview in September that the country would need to spend $8.8bn to build 5,600 kilometres of critical railway infrastructure over the next few years to deliver its surging mineral output to foreign markets, instead of the shorter 1,500 km route to the nearest Chinese port.

Still, some critics say that Mongolia is sacrificing too much to improve its political hand in the game. Graeme Hancock, senior mining specialist with the World Bank, told reporters that the margins on exports of raw materials could be slashed by a 10th if goods are sent out via Chinese ports instead of Russian ports. According to a World Bank report, coal shipment costs via a rail link to the Chinese city of Baotou cost $33 per tonne, whereas the same cost to transport it to the Russian border is $95. To ease the pain (and to get the job), Russian Railways have already offered a 65% discount on transport tariffs.

Still, parliament is not totally unmindful of commerce: a direct route to China is still on the cards, but only once the Russian route has been built.

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